Back to GetFilings.com

Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Commission file number 33-68412

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 [ü]  NO [   ]

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

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). YES [   ]  NO [ü]

     The aggregate market value of the Class A Common Stock held by non-affiliates of the registrant as of November 3, 2003 (based upon the book value per share of Class A Common Stock as of August 29, 2003) was $14,200,000.

     As of November 3, 2003, the registrant had 11,401,737 and 978,939 shares of Class A Common Stock and Class B Common Stock outstanding, respectively.

Table of Contents

INDEX TO FORM 10-K

AVONDALE INCORPORATED

Table of Contents

PART I

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

ITEM 1. BUSINESS

General

     The Company is a leading domestic manufacturer and marketer of cotton and cotton-blend fabrics and yarns used in the production of casual apparel and, to a lesser extent, home furnishings and industrial products. The Company designs, manufactures and markets a broad line of indigo-dyed denim for both branded and private label apparel producers of denim jeans, slacks, shorts, skirts and jackets as well as non-apparel producers of denim luggage, bags and other products. The Company also designs and manufactures an extensive line of piece-dyed sportswear and workwear fabrics. The Company’s sportswear fabrics are marketed to both branded and private label producers of casual, or khaki, slacks, shorts and skirts. The Company’s workwear fabrics are marketed to producers of uniforms, career apparel and other workwear (shirts, slacks and jackets) that are distributed through either the rental or retail channels. The Company manufactures cotton and cotton-blend yarns, which are sold to knitters and weavers of apparel fabrics. The Company also manufactures greige and specialty fabrics, which are sold to the apparel, home furnishings and industrial markets.

     The Company’s predecessor was founded in 1895 by the family of G. Stephen Felker, the current chairman, president and chief executive officer. The Company currently operates nineteen manufacturing facilities with locations in Alabama, Georgia, North Carolina and South Carolina. The facilities and equipment are modern and efficient, reflecting the significant investment made in recent years to enhance productivity, operating efficiencies and manufacturing flexibility, and to reduce unit costs.

Description of the Business

     The Company operates principally in three segments: apparel fabrics, yarns and other sales. Financial information relating to these segments is presented in Note 4. to the consolidated financial statements.

Products

     Apparel fabrics. The Company’s apparel fabrics consist of cotton and cotton-blend denim, sportswear and workwear fabrics and are generally manufactured to fill specific customer orders.

     The Company is a leading domestic manufacturer and marketer of indigo-dyed denim used in the production of branded and private label denim jeans, slacks, shorts, skirts, jackets and other denim garments. The Company designs, often in conjunction with customers, and manufactures a broad range of high quality, value-added denim with new and innovative colors, textures, weaves and finishes.

     The Company is one of the largest domestic manufacturers and marketers of cotton sportswear fabrics used in the production of khaki slacks, shorts, skirts and other sportswear garments. The Company produces fabrics in a wide variety of styles, colors, finishes, textures and weights according to individual customer specifications, including, for example, fabrics with water and stain repellant finishes.

     The Company is a leading domestic manufacturer and marketer of cotton and cotton-blend workwear fabrics used in the production of uniforms, career apparel and other workwear (shirts, slacks, jackets and other garments). Customers of the Company’s workwear fabrics require durable fabrics characterized by long wear and easy care. The Company works closely with its customers to develop fabrics with these and other enhanced performance characteristics.

2

Table of Contents

     Apparel fabrics sales accounted for 81%, 84% and 85%, respectively, of the Company’s net sales in fiscal 2001, 2002 and 2003.

     Yarns. The Company is one of the largest domestic manufacturers of cotton and cotton-blend yarns, which are used internally in the production of woven apparel fabrics or marketed to knitters or weavers of apparel fabrics. The Company’s customers use these yarns in the manufacture of a broad range of items, including apparel (T-shirts, underwear, socks and hosiery, knitted shirts, shorts and slacks, denim jeans, woven khaki slacks, and fleece sweatshirts, pants and jackets), and home furnishings. The Company’s yarn sales accounted for approximately 31%, 29% and 28%, respectively, of the Company’s net sales in fiscal 2001, 2002 and 2003.

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

     The Company produces undyed, unfinished cotton and cotton-blend greige fabrics that the Company markets to manufacturers of apparel, home furnishings and industrial products. The Company works with customers to create new fabric styles and constructions and can alter the Company’s overall product mix to meet changing customer requirements. In addition, the Company can maintain production levels and efficiencies by manufacturing greige fabrics for use in the apparel fabrics operation.

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

     The Company’s other sales accounted for 10%, 11% and 11%, respectively, of the Company’s net sales in fiscal 2001, 2002 and 2003.

     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 (22%), (24%) and (25%), respectively, of the Company’s net sales in fiscal 2001, 2002 and 2003.

Sales and Marketing

     During fiscal 2003, the Company sold apparel fabrics, greige and specialty fabrics, and yarns to approximately 600, 200 and 300 customers, respectively, or approximately 1,000 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 16% of the Company’s net sales in fiscal 2003. 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 2003. The Company’s sales billed to customers domiciled outside the U.S. accounted for 6%, 7% and 8%, respectively, of the Company’s net sales in fiscal 2001, 2002 and 2003.

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

3

Table of Contents

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 nineteen manufacturing facilities in the U.S. Of the Company’s manufacturing facilities, eleven produce yarn, five manufacture fabrics, four are dyeing facilities and four are engaged in fabric finishing.

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

     In response to the deterioration of domestic and regional demand for heather and stock-dyed open-end yarns, in May 2003, the Company completed the closing of an open-end yarn manufacturing facility located in Alabama. Continued operation of this facility could not be justified given the diminished demand and pricing for these products. Production of stock-dyed yarns for internal production was shifted to another open-end yarn manufacturing facility within the Company.

     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:

	•		1998 – Completed construction of a new denim weaving facility 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 workwear end uses;

4

Table of Contents

	•		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 workwear end uses;
	•		2000 — Completed modernization of an existing ring spinning facility in August 2000, including the replacement of earlier generation roving, ring spinning and winding equipment with technologically advanced linked ring spinning;
	•		2001 — Completed expansion of an existing piece-dyed finishing facility in January 2001, for the production of additional finished piece-dyed fabrics for sportwear and workwear end uses;
	•		2001 — Completed expansion and modernization of an existing greige weaving facility in May 2001, including the construction of a new building addition and the installation of modern air jet looms for the production of additional greige fabrics;
	•		2001 — Completed expansion and modernization of an existing integrated denim weaving facility in May 2001, including the installation of modern air jet looms for the production of additional denim fabrics;
	•		2001 — Completed expansion of linked ring spinning facility which was modernized in August 2000;
	•		2002 — Completed replacement of earlier generation winding equipment at an existing ring spinning facility in September 2001 with technologically advanced, fully automated winders;
	•		2002 — Completed modernization of existing spinning operation within integrated fabric weaving facility in October 2001, including installation of technologically advanced linked ring spinning equipment;
	•		2002 — Completed construction of a new ring spinning facility using existing manufacturing floor space, in October 2001, including installation of technologically advanced linked ring spinning equipment;
	•		2003 – Completed installation of an automated dye mixing and dispensing system in May 2003 at a fabric finishing facility in South Carolina; and
	•		2003 – Completed installation of new roving equipment in May 2003 at an existing ring spinning facility in Alabama.

5

Table of Contents

Raw Materials

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

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

     The Federal Agricultural Improvement and Reform Act of 1996 established certain support programs that, among other things, continued through the year 2002 the three-step competitiveness program established under the 1990 Trade Act. Under these support programs, the Company received 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 by the Company of the assets and certain of the liabilities of Graniteville Company (“Graniteville”)

6

Table of Contents

during fiscal 1996, the Company entered into an agreement (the “Supply Agreement”), extending through March 2006, with C.H. Patrick & Co., Inc. which was subsequently acquired by B.F. Goodrich (“Goodrich”). In 2000, Goodrich sold the chemical portion of their business to Noveon, Inc. (“Noveon”), formerly B.F. Goodrich PMD Group and the textile dye portion of their business to C.H. Patrick & Co, Inc. (“Patrick”), formerly CHP Acquisition Group, Inc. On February 28, 2001, the Company executed an assignment of the Supply Agreement whereby the Company will purchase textile dyes from Patrick and chemicals from Noveon. This Supply Agreement generally stipulates that Patrick and Noveon (the “Suppliers”) will have the opportunity to provide certain dyes and chemicals utilized by the Company if the Suppliers meet certain conditions, including competitive pricing and the ability to provide the applicable dyes and chemicals in accordance with the Company’s specifications and delivery requirements. The Supply Agreement is terminable by the Company prior to the end of the original 10-year term in the event of a pattern of repeated, material failures by the Suppliers to satisfy their obligations with respect to product specifications, delivery schedules or other material terms. Under the Supply Agreement, a default by one supplier will not constitute a default by the other supplier.

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

Competition

     The textile industry is highly competitive, and no single company is dominant. Management believes that the Company is one of the largest domestic manufacturers of indigo-dyed denim, piece-dyed fabrics for workwear and sportswear, and cotton and cotton-blend yarns. The Company’s competitors include large, vertically integrated textile companies and numerous smaller companies. There has been a general trend toward consolidation within certain markets of the textile industry and, within the Company’s markets, some increases in manufacturing capacity. However, the resulting excess manufacturing capacity, 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 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.

Trade Regulation

     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

7

Table of Contents

reduction of duties. The implementation began in January 1995 with the phasing-out of quotas and the reduction of duties to take place over a 10-year period. The selection of products at each phase is made by each importing country and must be drawn from each of the four main textile groups: yarns, fabrics, made-up textiles and apparel. As it implements the WTO mechanisms, the U.S. government is negotiating bilateral trade agreements with developing countries (which generally are exporters of textile products) that are members of the WTO for the purpose of reducing their tariffs on imports of textiles and apparel. The elimination of quotas and reduction of tariffs under the WTO may result in increased imports of certain textile products and apparel into North America. These factors could make the Company’s products less competitive against low cost imports from third world countries.

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

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

     The Andean Trade Promotion and Drug Eradication Act was passed on August 6, 2002 to renew and enhance the Andean Trade Preference Act (ATPA). Under the enhanced ATPA, apparel manufactured in Bolivia, Columbia, Ecuador and Peru using yarns and fabrics produced in the United States may be imported into the United States duty and quota free through September 30, 2007. This legislation effectively grants these four countries the favorable trade terms afforded Mexico and the Caribbean region. Management believes this legislation further enhances the attractiveness of U.S. textiles and will have a favorable impact on the Company.

     The growing U.S. trade deficit with China and decline in U.S. manufacturing jobs has resulted in numerous recent proposals to restrict imports from China. Critics of the U.S. government’s China trade policy have focused on the Chinese government’s policy of pegging its currency, the yuan, to the dollar, rather than letting it float freely and having its value determined by market forces. These critics have estimated that the yuan is undervalued by as much as 40 percent relative to the dollar, which enhances the competitiveness of Chinese exports in the United States. Pending legislation, such as S. 1586, introduced on September 5, 2003, would impose tariffs on imports from China to offset China’s undervalued currency. Industry groups such as the American Textile Manufacturers Institute (“ATMI”) and the National Association of Manufacturers (“NAM”) are lobbying the U.S. government to initiate dispute settlement proceedings in the WTO which, if successful, would require China to allow the value of its currency to be determined by market forces. An increase in the value of the Chinese yuan vis-à-vis the U.S. dollar would make the Company’s products more competitive with imports from China. However, the Company cannot predict at this time whether legislation will be adopted or the WTO lobbying efforts will be successful.

     In addition, the ATMI and other textile and apparel manufacturing trade associations have requested that the U.S. government take the following actions in response to recent increases in imports from China and Vietnam to enhance the competitiveness of U.S. textile and apparel manufacturers: (1) invoke the special China textile safeguard that was enacted into law when China joined the WTO against products for which quotas have been lifted, such as knit fabrics, brassieres and dressing gowns; (2) maintain U.S. tariff levels in the Doha Round and require U.S. trading partners to reduce their tariffs to U.S. levels and remove non-tariff barriers; and (3) require a NAFTA-type yarn forward rule of origin, with no tariff preference levels, in future trade agreements such as the Central American Free Trade Agreement (“CAFTA”) and the Free Trade Area of the Americas (“FTAA”). There can be no assurance that any of these proposals will be implemented.

8

Table of Contents

Backlog

     The Company’s order backlog was approximately $200 million at August 29, 2003, as compared to approximately $294 million at August 30, 2002, reflecting lower unit volume in all segments, as domestic retail sales of apparel continue to reflect weak consumer demand. Orders on hand are not necessarily indicative of total future sales. Substantially all of the orders outstanding at August 29, 2003 are expected to be filled by the end of fiscal 2004.

Governmental Regulation

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

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

     Many of the Company’s manufacturing facilities have been in operation for several decades, with some operations originating in the 1800s. Historical management of hazardous substances and waste disposal practices may have resulted in on-site and off-site unknown remediation liability for which the Company may be responsible. In addition, certain operations, including wastewater treatment facilities and air emission sources may have to be upgraded to meet more stringent environmental requirements in the future. The Company has established reserves for certain significant environmental projects which it anticipates will be completed within the next two to three years to address certain known potential environmental issues (including the two Graniteville issues discussed in further detail below). The Company cannot with certainty assess at this time the impact of future emission or discharge or other regulatory standards or enforcement practices under the foregoing environmental laws and regulations and, in particular, under the 1990 Clean Air Act, upon its operations or capital expenditure requirements. The Company believes it is currently in compliance in all material respects with the foregoing environmental and health and safety laws and regulations.

     In 1987, Graniteville was notified by the South Carolina Department of Health and Environmental Control (“DHEC”) that it had discovered certain contamination of a pond near Graniteville, South Carolina and that Graniteville may be one of the responsible parties. In 1990 and 1991, Graniteville provided reports to DHEC summarizing its required study and investigation of the alleged pollution and its sources which concluded that pond sediments should be left undisturbed and that other remediation alternatives either provided no significant benefit or themselves involved adverse effects. In 1995, Graniteville submitted a proposal regarding periodic monitoring of the site, to which DHEC responded with a request for additional information. Graniteville provided such information to DHEC in February 1996. 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.

9

Table of Contents

     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 29, 2003, the Company had approximately 5,000 associates. None of the Company’s associates is covered by a collective bargaining agreement, and management believes that the Company’s relations with its associates are good.

ITEM 2. PROPERTIES

     The Company currently operates nineteen manufacturing facilities in the U.S., of which six 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 nineteen of these facilities. Of the Company’s manufacturing facilities, eleven produce yarn, five manufacture fabrics, four are dyeing facilities and four are engaged in fabric finishing. Additionally, the Company operates six warehouses, including one leased facility.

     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.

     In May 2003, the Company completed the closing of an open-end yarn manufacturing facility located in Alabama. Continued operation could not be justified given the diminished demand and pricing for heather and stock-dyed open-end yarns produced at this facility.

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

ITEM 3. LEGAL PROCEEDINGS

     On January 13, 2000, a case was filed in the Circuit Court of Jefferson County, Alabama by Larry and Cynthia Locke and the owners of fourteen other residences in the Raintree subdivision of Lake Martin, against Russell Corporation, Alabama Power and the Company. The Court subsequently dismissed Alabama Power as a

10

Table of Contents

defendant in the case, based on their motion for summary judgement. The complaint alleges that the Company, among others, negligently and/or wantonly caused or permitted the discharge and disposal of sewage sludge and contaminants into the lake adjacent to the plaintiffs’ property, which allegedly interfered with the plaintiffs’ use of the property. As a result of these alleged actions, the plaintiffs claim that the value of their property has been diminished and that they suffered other damages. The complaint seeks compensatory and punitive damages in an undisclosed amount. After an initial series of actions, the case was stayed by the trial court pending resolution of an appeal in the case of Sullivan versus Russell Corporation, the Company and others (“Sullivan case”), which also involved the Raintree subdivision. On January 12, 2001, the Alabama Supreme Court issued a final order in the Sullivan case rendering that case in favor of the defendants. Subsequent to the Alabama Supreme Court’s actions with regard to the Sullivan case, plaintiff’s counsel, which includes attorneys who acted as co-plaintiff’s counsel on the Sullivan case, presented arguments in a hearing before the trial judge on May 4, 2001 based on a narrow legal theory that the nuisance claimed in this action is sufficiently different from the Sullivan case, and therefore, that this case should be allowed to proceed in spite of the fact that the Sullivan case was ultimately decided in favor of the defendants. The trial court allowed the case to proceed to the discovery phase. On April 25, 2002, the trial court held a hearing on summary judgment motions and, on May 22, 2002, entered judgement as a matter of law in the Company’s favor on all counts except the narrow legal theory involving public nuisance tort. A trial on this single count, scheduled to begin in October 2003, has been continued indefinitely based on a motion by the plaintiffs. The Court granted the continuance to allow additional time for summary judgement practice and the production of additional material information in the case. 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.

11

Table of Contents

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 29, 2003 there were 129 and one holders of record of Class A Common Stock and Class B Common Stock, respectively. The Company paid dividends aggregating $5.0 million, $3.8 million and $5.0 million in respect of its outstanding Common Stock during fiscal 2001, 2002 and 2003, respectively.

     The Company has issued and outstanding $150 million aggregate principal amount of 10 1/4% Senior Subordinated Notes due 2013 (the “2013 Notes”) under an Indenture dated as of June 30, 2003 among the Company, Avondale Mills and Wachovia Bank, National Association, as trustee (the “Indenture”). The Indenture contains certain covenants that limit the Company’s ability to pay dividends.

     The Company maintains a secured five-year installment equipment note, executed July 30, 2002, with a balance outstanding of $17.8 million at August 29, 2003. The equipment note contains certain covenants that limit the Company’s ability to pay dividends.

     At August 29, 2003 there was no balance outstanding, other than obligations relating to three letters of credit issued in the aggregate amount of $1.4 million, under a $62 million revolving credit facility executed March 28, 2003 among Avondale Mills and three lenders. The revolving credit facility was replaced on November 7, 2003 by a new revolving credit facility executed among Avondale Mills, its subsidiary Avondale Mills Graniteville Fabrics, Inc. and General Electric Capital Corporation. See “Note 14. Subsequent Events” in the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. The new revolving credit facility contains certain covenants that limit the Company’s ability to pay dividends.

12

Table of Contents

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 29, 2003. 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 29, 2003 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.

13

Table of Contents

		However, EBITDA: (a) does not represent net income or cash flow from operations as defined by generally accepted accounting principles; (b) is not necessarily indicative of cash available to fund the Company’s cash flow needs; (c) should not be considered as an alternative to operating income, net income or cash flows from operating activities as determined in accordance with generally accepted accounting principles; and (d) should not be construed as a measure of the Company’s operating performance, profitability or liquidity. EBITDA as calculated by the Company is not necessarily comparable to similarly titled measures reported by other companies.
		The following table reconciles EBITDA on a consolidated basis to the line on our consolidated statement of income entitled net income (loss) for the periods presented in the table above:

(2)

The ratio of earnings to fixed charges is computed by dividing income before income taxes plus fixed charges, by fixed charges. Fixed charges include interest, whether expensed or capitalized, amortization of deferred financing costs, loss on extinguishment of debt, discount and expenses on sale of receivables and the portion of capital lease payments that is representative of interest or financing charges. For fiscal 2002 and 2003, earnings were insufficient to cover fixed charges by $0.4 million and $12.2 million, respectively.

14

Table of Contents

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.

Overview

     The Company is a leading domestic manufacturer and marketer of cotton and cotton-blend fabrics and yarns used in the production of casual apparel and, to a lesser extent, home furnishings and industrial products. The Company designs, manufactures and markets a broad line of indigo-dyed denim for both branded and private label apparel producers of denim jeans, slacks, shorts, skirts and jackets as well as non-apparel producers of denim luggage, bags and other products. The Company also designs and manufactures an extensive line of piece-dyed sportswear and workwear fabrics. The Company’s sportswear fabrics are marketed to both branded and private label producers of casual, or khaki, slacks, shorts and skirts. The Company’s workwear fabrics are marketed to producers of uniforms, career apparel and other workwear (shirts, slacks and jackets) that are distributed through either the rental or retail channels. The Company manufactures cotton and cotton-blend yarns, which are sold to knitters and weavers of apparel fabrics. The Company also manufactures greige and specialty fabrics, which are sold to the apparel, home furnishings and industrial markets. In fiscal 2003, the Company sold fabrics and yarns to approximately 1,000 customers, including many of the world’s leading apparel companies.

     General business conditions in the textile industry continue to be challenging, reflecting weak consumer demand and a general decline in consumer confidence reflective of the uncertainties presented by the current economic and political environment. In addition, the Company believes the strength of the United States dollar in comparison to the Chinese yuan and currencies of other Asian countries continues to promote the importation of goods from those countries by United States retailers, exacerbating the already highly competitive market conditions resulting from the imbalance of global supply and demand for textile and apparel products. In fiscal 2003, the Company had net sales, EBITDA and net loss of $590.9 million, $60.3 million and ($7.7) million, respectively. See “Selected Consolidated Financial and Other Data” for a discussion of EBITDA and the reconciliation of EBITDA to net income (loss).

     The Company believes many of the factors affecting its operating performance during fiscal 2003, including weak retail sales of apparel, global over-supply of textile and apparel products and the relative strength of the U.S. dollar compared to the Chinese yuan and currencies of other Asian countries, will continue into fiscal 2004. Raw material costs are also expected to increase during fiscal 2004. While the Company remains focused on cost reduction initiatives, new product development and working capital management, it does not expect near term improvement in the highly competitive market conditions or resulting net sales or EBITDA.

15

Table of Contents

Results of Operations

     The Company operates principally in three segments: apparel fabrics, yarns and other sales.

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

Fiscal 2003 Compared to Fiscal 2002

     Net Sales. Net sales decreased 10.4% to $590.9 million for fiscal 2003 from $659.7 million for fiscal 2002, as the Company experienced intensely competitive conditions in its markets. The decline in net sales in fiscal 2003 primarily reflected lower unit volume in all segments, as domestic retail sales of apparel continued to reflect weak consumer demand. Selling prices remained very competitive reflecting the significant uncertainties presented by the economic and political environment, the imbalance of global supply and demand for textile and apparel products and the financial duress experienced by many of the Company’s domestic competitors. In addition, the manipulation of the Chinese yuan and currencies of other Asian countries relative to the U.S. dollar and other trade distorting practices employed by those countries create competitive advantages which continue to promote the importation of goods from those countries by U.S. retailers, exacerbating the already highly competitive market conditions

     Operating Income. Operating income decreased 32.6% to $12.6 million for fiscal 2003 from $18.7 million for fiscal 2002. The decrease in operating income primarily reflected the decline in unit volume and corresponding reductions in unit cost absorption and operating efficiencies, as well as the $2.5 million facility restructuring charge recorded in the third quarter of fiscal 2003. The effects of the reduced volume were partially offset during the first three fiscal quarters of 2003 by lower raw material costs. However, raw material costs trended upward late in fiscal 2003, contributing to substantially lower operating income in the fourth quarter. Consumption of internally produced yarns and greige fabrics in the production of finished apparel fabrics in lieu of outside purchases continued to provide higher overall capacity utilization. Cost of goods sold decreased 9.5% to $507.8 million for fiscal 2003 from $560.8 million for fiscal 2002, primarily reflecting the reduction in unit sales. Cost of goods sold as a percentage of net sales increased to 86.0% for fiscal 2003 from 85.0% for fiscal 2002, primarily reflecting the diminished unit cost absorption.

16

Table of Contents

Results of Operations (continued)

     Selling and administrative expenses decreased 7.8% to $26.1 million for fiscal 2003 from $28.3 million for fiscal 2002 reflecting a reduction in certain associate benefits and performance based incentives. Selling and administrative expenses increased to 4.4% of net sales for fiscal 2003 from 4.3% for fiscal 2002, primarily due to the decline in net sales.

     Segment Performance. Apparel fabric sales decreased 9.4% to $502.9 million for fiscal 2003 from $555.0 million for fiscal 2002. The decline in sales reflected a 9.8% decrease in yards sold as demand for denim and other bottom-weight fabrics weakened, while average selling price increased slightly reflecting an enhanced product mix. Operating income for apparel fabrics decreased 28.8% to $28.5 million for fiscal 2003 from $40.0 million for fiscal 2002, primarily due to the reduced unit volume.

     Yarn sales, including intra-company sales to the apparel fabric operation, decreased 11.4% to $167.5 million for fiscal 2003 from $189.1 million for fiscal 2002. This reflects a 10.0% decrease in pounds sold and a 1.6% decrease in average selling price. Market pricing for sales yarns remained very competitive, reflecting continued excess production capacity within the domestic industry and importation of yarns and knitted apparel, predominately from Asia. Yarn operating income was $46,000 for fiscal 2003 compared to an operating loss of ($4.3) million for fiscal 2002, primarily due to lower raw material costs in the first three fiscal quarters of fiscal 2003 and a reduction in sales of commodity open-end yarns following the closure of yarn manufacturing facilities during fiscal 2002 and 2003.

     Other sales, which include sales of greige and specialty fabrics and revenue from the Company’s trucking operation, decreased 6.5% to $66.1 million for fiscal 2003 from $70.7 million for fiscal 2002. The decrease in sales reflected a 3.4% decrease in units sold, a 3.4% decrease in average selling price, primarily reflecting weakened demand in the greige and specialty fabrics markets, and the impact of reduced yarn and fabric volume on the Company’s trucking operation. Operating income for other sales increased 7.3% to $4.4 million for fiscal 2003 from $4.1 million for fiscal 2002, reflecting lower raw material costs in the first three fiscal quarters of fiscal 2003.

     Intersegment sales decreased 6.0% percent to $145.7 million for fiscal 2003 from $155.0 million for fiscal 2002, primarily reflecting a decrease in consumption of internally produced yarns by the apparel fabrics operation.

     Interest Expense, Net. Interest expense, net increased 3.3% to $19.0 million for fiscal 2003 from $18.4 million for fiscal 2002. Although average outstanding borrowings were lower during the majority of fiscal 2003, the increase reflected higher average interest rates applicable to the revolving credit agreement, as amended, and additional interest incurred in July 2003 while the 10.25% Senior Subordinated Notes due 2006 (the “2006 Notes”) and the 2013 Notes were both outstanding. For discussion, see “Note 10. Long-term Debt” in the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. In addition, net interest expense for fiscal 2002 was reduced by $1.7 million for interest received in conjunction with a refund of income taxes. For discussion of the income tax refund, see “Note 9. Income Taxes” in the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

     Discount and Expenses on Sale of Receivables. Discount and expenses on sale of receivables were $2.6 million for fiscal 2003 compared to $1.1 million for fiscal 2002. This increase was attributable to higher interest rates and enhanced eligibility under the securitization facility, as amended.

     Loss on Extinguishment of Debt. During the fourth quarter of fiscal 2003, the Company recorded a loss on early extinguishment of debt of $3.2 million related to the redemption of its 2006 Notes. The loss consisted of a $2.1 million prepayment premium and the write-off of $1.1 million of unamortized financing costs related to the original issuance of the notes. Funding of the redemption was provided through the issuance at par of the 2013 Notes.

     Provision for Income Taxes. An income tax benefit of ($4.5) million was recorded for fiscal 2003 compared to an income tax benefit of ($0.2) million for fiscal 2002, reflecting the increased loss before income taxes. The Company’s effective tax rate for fiscal 2003 was 36.7% of the pre-tax loss, compared to 63.6% of the pre-

17

Table of Contents

Results of Operations (continued)

tax income for fiscal 2002. The fiscal 2002 effective tax rate reflected minor permanent differences affecting the fiscal 2002 provision for income taxes and the nominal level of the fiscal 2002 operating loss.

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

     At August 29, 2003, one of the North Carolina yarn plants closed in January 2002 and the Alabama yarn plant closed in May 2003 remain unsold and are included at estimated net realizable values in assets held for sale in the Consolidated Balance Sheets included in Item 8 of this Annual Report on Form 10-K.

Fiscal 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 continued 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.

     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 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 14.2% 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 11.1% to $555.0 million for fiscal 2002 from $624.1 million for fiscal 2001. The decline in sales reflected a 9.0% decrease in yards sold and a 2.3% 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 20.1% 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

18

Table of Contents

Results of Operations (continued)

yarn plants in North Carolina were closed, and an 8.3% decrease in average selling price. 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 10.1% 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 price, primarily reflecting weakened demand in the greige and specialty fabrics markets, and the impact of reduced yarn and fabric volume on the Company’s trucking operation. Operating income for other sales increased 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 7.1% percent to $155.0 million for fiscal 2002 from $166.8 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 “Note 9. Income Taxes” in the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

     Discount and Expenses on Sale of Receivables. Discount and expenses on sale of receivables were $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. The fiscal 2002 effective rate reflected minor permanent differences affecting the fiscal 2002 provision for income taxes and the nominal level of the fiscal 2002 operating loss.

     Facility Restructuring. In response to highly competitive market conditions and continued oversupply of open-end yarns, in January 2002, the Company completed the closing of two separate open-end yarn manufacturing facilities located in North Carolina. In connection with these closings, the Company recorded 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.

19

Table of Contents

Liquidity and Capital Resources

General

          The Company has funded its working capital requirements and capital expenditures with cash generated from operations, borrowings under its revolving credit facility and equipment note, and proceeds received in connection with sales of trade receivables and issuance of equity and debt securities. At August 29, 2003, the Company had no borrowings outstanding under the revolving credit facility and $60.6 million of borrowing availability thereunder. In addition, at August 29, 2003, $17.8 million of the equipment note and $150 million aggregate principal amount of the 2013 Notes (which are fully and unconditionally guaranteed by the Company on a senior subordinated basis) were outstanding.

Revolving Credit Facility

          On March 28, 2003, the Company completed a restructuring of its senior secured revolving credit facility, which provided aggregate borrowing availability of a maximum of $62 million through March 27, 2006. Borrowings under the revolving credit facility included revolving loans provided by a group of lenders and up to $10 million of revolving swing loans provided by Wachovia Bank, National Association. With respect to revolving loans, the Company could designate an interest rate tied to the Eurodollar rate (adjusted for any reserves) plus a specified number of basis points or the base rate (which is the higher of Wachovia’s prime rate or one-half of one percent over the overnight federal funds rate) plus a specified number of basis points. Interest accrued on revolving swing loans at the Company’s option at either the base rate plus a specified number of basis points or at an interest rate to be mutually determined by the Company and Wachovia at the time such loan was made. A commitment fee was payable quarterly on the average daily unused portion of the revolving credit commitment. The revolving credit facility was secured by substantially all of the Company’s assets. The Company was required to pay certain administration and funding fees relating to the revolving credit facility. Covenants of the revolving credit facility, among other things, required that the Company maintain a minimum cash flow and certain financial ratios, and contained restrictions on payment of dividends.

          The Company did not expect to meet the minimum cash flow requirement of the revolving credit facility as of August 29, 2003 and therefore initiated discussions with several lenders to amend or replace the facility. As a result, a new senior secured revolving credit facility was executed with General Electric Capital Corporation (“GECC”) on November 7, 2003. See “Note 14. Subsequent Events” in the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. The new revolving credit facility has less restrictive financial covenants than the previous facility, requiring certain minimum cash flows and fixed charge ratios only in the event that unused availability under the new facility falls below a specified level.

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 29, 2003, the Company had swap agreements with notional amounts aggregating $35 million, providing an effective weighted average interest rate of 5.3%. These swap agreements mature in November 2003.

20

Table of Contents

Liquidity and Capital Resources (continued)

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 $ 33.6 million at August 29, 2003. The equipment note contains customary covenants, including requirements to maintain certain financial covenants, and includes provisions relating to cross acceleration to other debt obligations of the Company.

Receivables Securitization Facility

          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 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. On July 3, 2003, GECC purchased Redwood’s investment and agreed to continue the funding of the receivables securitization facility until the earlier of 90 days before the specified final purchase date, August 29, 2007, or certain specified termination dates. The Receivables Securitization Facility replaced a previous receivables securitization program with Bank One. The Company has been engaged by Funding and GECC to service the receivables.

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

          Pursuant to the Receivables Securitization Facility, the Company sells, or transfers as a contribution of capital, the Receivables, at a discount and without recourse, to Funding, whose sole business is the acquisition and financing of the Receivables. Funding sells an undivided interest in a specified portion of the Receivables to GECC to provide the funds required by Funding to purchase the Receivables from the Company. Proceeds from the collection of the Receivables are used by Funding to purchase additional Receivables from the Company, repay GECC in the event that sufficient additional Receivables are not available to maintain GECC’s investment, or pay fees and expenses. At August 29, 2003, the outstanding amount of GECC’s investment in the Receivables was $52.9 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 GECC from Funding is tied to GECC’s commercial paper rate plus a specified number of basis points. Funding is required to pay certain unused availability fees under the Receivables Securitization Facility.

          The Receivables Securitization Facility contains customary covenants, including requirements to maintain certain financial ratios, and includes provisions relating to cross defaults to other debt obligations of the Company. In conjunction with the execution of a new senior secured revolving credit facility with GECC on November 7, 2003, the Company executed an amendment to the Receivables Securitization Facility adopting the same financial covenants as provided in the new revolving credit facility. In addition, the amendment to the Receivables Securitization Facility also reduced the size of the facility from $90 million to $75 million. See “Note 14. Subsequent Events” in the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

21

Table of Contents

Liquidity and Resources (continued)

Senior Subordinated Notes

          On June 30, 2003, the Company issued at par $150 million of 2013 Notes in a private placement to qualified institutional buyers. The 2013 Notes, which mature on July 1, 2013, are unsecured and subordinated to all existing and future senior indebtedness of the Company. Interest on the 2013 Notes is due semiannually, on January 1 and July 1, commencing January 1, 2004. Proceeds from the sale of the 2013 Notes were used to redeem the Company’s 2006 Notes, to repay indebtedness outstanding under the revolving credit facility and for general corporate purposes.

          The Company in agreement with Wachovia Securities, LLC, the original purchaser of the 2013 Notes, filed a registration statement with the Securities and Exchange Commission on September 16, 2003, with respect to an offer to exchange the unregistered notes for freely tradable notes that have substantially identical terms. All unregistered notes were tendered for exchange prior to expiration of the exchange offer on October 21, 2003.

          The 2013 Notes contain a redemption feature allowing the Company, at any time prior to July 1, 2006, to redeem up to an aggregate of $52.5 million of the principal amount of the 2013 Notes with the proceeds of one or more public equity offerings, at a redemption price of 110.25% plus accrued interest to the redemption date, provided that at least $97.5 million aggregate principal amount of the 2013 Notes remains outstanding after such redemption. On or after July 1, 2008, the 2013 Notes are redeemable at the Company’s option, in whole or in part, at a redemption price of 105.125%, which declines in intervals to 100% in 2011 and thereafter.

          The indenture under which the 2013 Notes were issued contains, among other things, certain restrictive covenants applicable to issuance of additional debt, payment of dividends, retirement of 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 $16.7 million for fiscal 2003. These expenditures were used primarily for the installation of an automated dye mixing and dispensing system at a fabric finishing facility in South Carolina, the purchase of new roving equipment for a ring spinning facility in Alabama, and general maintenance of facilities and equipment. Management estimates that capital expenditures for fiscal 2004 will be approximately $12.0 million, and that such amounts will be used primarily for general maintenance of facilities and equipment.

          Net cash provided by operating activities was $35.3 million in fiscal 2003. Principal working capital changes included a $35.4 million decrease in accounts receivable and $21.3 million decrease in accounts receivable sold under the securitization facilities, a $4.1 million reduction in inventories, and a $15.2 million decrease in accounts payable and accrued expenses. The Company’s investing activities were primarily the capital improvements described above and proceeds from the disposal of manufacturing equipment of approximately $3.9 million. Net cash used by financing activities aggregated $11.6 million, including the issuance of senior subordinated notes due 2013 of $150.0 million, redemption of senior subordinated notes due 2006 of $127.1 million, including prepayment premium, a net decrease in the revolving credit facility and other long term debt of $27.2 million, payment of $5.0 million in dividends on outstanding common stock and the purchase and retirement of treasury stock of $2.3 million.

          Net cash provided by operating activities was $71.7 million in fiscal 2002. Principal working capital changes included a $9.1 million increase in accounts receivable and $12.4 million increase in accounts receivable sold under the securitization facilities, a $12.7 million reduction in inventories, and a $2.6 million increase in accounts payable and accrued expenses. The Company’s investing activities were primarily capital improvements of $13.0 million. Net cash used by financing activities aggregated $59.4 million, including issuance of the equipment

22

Table of Contents

Liquidity and Capital Resources (continued)

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.

          The table below summarizes the Company’s outstanding contractual obligations as of August 29, 2003, 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 “Note 10. Long-Term Debt” and “Note 13. Commitments and Contingencies” in the Notes to Consolidated Financial Statements included in Item 8, Financial Statement and Supplemental Data of this Annual Report on Form 10-K.

          Management believes that cash generated from operations, together with borrowings available under the new senior secured revolving credit facility (See “Note 14. Subsequent Events” in the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K) 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.

23

Table of Contents

Liquidity and Capital Resources (continued)

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 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 was recorded as an addition to the balance of retained earnings at August 27, 1999.

Off-Balance Sheet Financing Arrangements

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

Seasonality

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

Critical Accounting Policies

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

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

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

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

24

Table of Contents

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

          Inventories: Inventories are stated at the lower of cost or market value. Except for certain supply inventories valued on an average cost basis, the costs of the Company’s inventories are determined on a last-in, first-out (“LIFO”) basis. Under LIFO, current material and conversion costs are charged to cost of goods sold while inventories 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 or market. During periods when current costs or inventory quantities fluctuate significantly, use of the LIFO method may yield cost of goods sold that differs significantly from that which would result under other inventory methods.

          Long-Lived Assets: The Company periodically reviews the values assigned to long-lived assets, such as property, plant and equipment, assets held for sale and goodwill. The associated depreciation and amortization periods are reviewed on an annual basis. Estimated recoverability of long-lived asset values is based on anticipated undiscounted 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.

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

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

          For discussion of 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 29, 2003. 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.

New Accounting Standards

          The Company adopted the provisions of Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets, effective August 31, 2002, and ceased amortization of goodwill on that date. The Company completed the transitional goodwill impairment test as required by Statement No. 142 during the thirteen weeks ended November 29, 2002 and determined that no impairment of goodwill should be recorded. In accordance with the provisions of Statement No. 142, the adoption of this accounting policy is reflected prospectively. Had the Company accounted for goodwill in accordance with this policy in fiscal 2001 and 2002, net income would have been $1.5 million or $.12 per share-basic and $.12 per share-diluted for fiscal 2001 and $0.1 million or $.01 per share-basic and $.01 per share-diluted for fiscal 2002.

25

Table of Contents

          Effective August 31, 2002, the Company adopted the provisions of Statements of Financial Accounting Standard No. 141 - Business Combinations, No. 143 - Accounting for Asset Retirement Obligations, No. 144 - Impairment or Disposal of Long-lived Assets, No. 145 - Rescission of Statements No. 4, 44, and 64, Amendment of Statement No. 13, and Technical Corrections, and No. 146 - Accounting for Costs Associated with Exit or Disposal Activities. Statement No. 145 requires gains and losses on extinguishment of debt to be classified as income or loss from continuing operations rather than as extraordinary items as previously required. See “Note 3. Loss on Extinguishment of Debt” in the Notes to Consolidated Financial Statements included in Item 8, Financial Statements and Supplemental Data of this Annual Report on Form 10-K, for discussion related to loss on extinguishment of debt in fiscal 2003. The adoption of these Statements, other than Statement No. 145, had no impact on the Company’s consolidated financial statements.

          In December 2002, Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, established accounting and disclosure requirements pertaining to a change from the intrinsic value method to the fair value method of accounting for stock-based compensation, and revised disclosure requirements for companies continuing to apply the intrinsic value method. The Company adopted the provisions of this statement during the third quarter of fiscal 2003, electing to continue its use of the intrinsic value method. Accordingly, no stock-based compensation has been recorded, as all options granted under the existing plan have an exercise price equal to the market value of the underlying common stock on the date of grant.

          In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, Consolidation of Variable Interest Entities, which requires the accounts of a variable interest entity to be included in the consolidated financial statements of a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities, is entitled to receive a majority of the entity’s residual returns, or both. Interpretation No. 46 also requires certain disclosures regarding a variable interest entity in which a company has a significant variable interest but is not required to include its accounts in the company’s consolidated financial statements. The consolidation requirements of Interpretation No. 46 apply immediately to variable interest entities created after January 31, 2003 and in the first fiscal year or interim period beginning after June 15, 2003 for entities existing on or before January 31, 2003. Certain of the disclosure requirements apply to financial statements issued after January 31, 2003, regardless of the date on which the variable interest entity was created. The Company has evaluated the provisions of this interpretation and concluded that the interpretation will have no effect on the consolidated financial statements of the Company since Funding is a qualified special purpose entity.

          In April 2003, the Financial Accounting Standards Board issued Statement No. 149, Amendments of Statement No. 133 on Derivative Instruments and Hedging Activities, which requires certain contracts to be treated as either derivatives or hybrid instruments, on a consistent basis. Statement No. 149 is effective for contracts and hedging transactions executed or modified after June 30, 2003. The adoption of the provisions of Statement No. 149 in the fourth quarter of fiscal 2003 had no impact on the Company’s consolidated financial statements.

          In May 2003, the Financial Accounting Standards Board issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity, which requires certain financial instruments that were previously presented on the consolidated balance sheets as equity or temporary equity to be presented as liabilities. Such instruments include mandatory redeemable preferred and common stock, and certain options and warrants. Statement No. 150 is effective for mandatory redeemable financial instruments of nonpublic entities for fiscal periods beginning after December 15, 2003. The Company is currently evaluating the impact of Statement No. 150 on its consolidated financial statements.

26

Table of Contents

Forward Looking Statements

          This Annual Report on Form 10-K contains forward-looking statements within the meaning of the federal securities laws. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements include statements generally preceded by, followed by or that include the words “believe,” “expect,” “anticipate,” “plan,” “estimate” or similar expressions. These statements include, among others, statements regarding business outlook, anticipated financial and operating results, strategies, contingencies, working capital requirements, expected sources of liquidity, estimated amounts and timing of capital expenditures, estimated environmental compliance costs and other expenditures, and expected outcomes of litigation.

          Forward-looking statements reflect management’s current expectations and are not guarantees of performance. These statements are based on management’s beliefs and assumptions, which in turn are based on currently available information. Important assumptions relating to these forward-looking statements include, among others, assumptions regarding product demand, selling prices, raw material costs, timing and cost of capital expenditures, cost of environmental compliance, outcomes of pending litigation, competitive conditions and general economic conditions. These assumptions could prove inaccurate. Forward-looking statements also involve risks and uncertainties, which could cause actual results to differ materially from those contained in any forward-looking statement. Many of these factors are beyond our ability to control or predict. Such factors include, but are not limited to, all the risks described under the heading “Risk Factors” in the Company’s Current Report on Form 8-K dated June 20, 2003 and the following:

	•		cyclical and competitive nature of the textile industry;
	•		pressures on selling prices due to competitive and economic conditions;
	•		deterioration of relationships with, or loss of, significant customers;
	•		strength of the U.S. dollar versus the currencies of other textile producing countries;
	•		changes in trade policies, including textile quotas and tariffs;
	•		ability to identify and respond to fashion trends;
	•		availability and pricing of cotton and other raw materials;
	•		changes in government policies affecting raw material costs;
	•		availability and desirability of technological advancements;
	•		retention of key management personnel;
	•		continued availability of financial resources;
	•		changes in environmental, health and safety regulations; and
	•		political or military responses to terrorist activities.

          You should not place undue reliance on any forward-looking statements, which are based on current expectations. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update publicly any of them in light of new information or future events.

27

Table of Contents

Other Data

          EBITDA is a supplemental non-GAAP financial measure. EBITDA is presented because management believes that it is a widely accepted financial indicator of a company’s ability to service indebtedness and is used by investors and analysts to evaluate companies in this industry. EBITDA is also used as a measure for certain covenants under the Company’s receivables securitization facility, revolving credit facility, equipment note and the indenture governing the notes, and is calculated by the Company as follows (amounts in thousands):

          However, EBITDA: (a) does not represent net income or cash flow from operations as defined by generally accepted accounting principles; (b) is not necessarily indicative of cash available to fund the Company’s cash flow needs; (c) should not be considered as an alternative to operating income, net income or cash flows from operating activities as determined in accordance with generally accepted accounting principles; and (d) should not be construed as a measure of the Company’s operating performance, profitability or liquidity. EBITDA as calculated by the Company is not necessarily comparable with similarly titled measures presented by other companies.

Subsequent Event

          On November 7, 2003, Avondale Mills, Inc. and its subsidiary Avondale Mills Graniteville Fabrics, Inc. entered into a new senior secured revolving credit facility with GECC, as agent and sole lender. The new revolving credit facility provides aggregate borrowing availability up to $40 million, including letter of credit availability up to $10 million. The new revolving credit facility replaced the revolving credit facility previously provided by a group of lenders.

          The term of the new revolving credit facility extends through the earlier of August 29, 2007, or the date at which the Receivables Securitization Facility terminates, unless replaced by another securitization facility with GECC or an affiliate of GECC. Borrowing availability under the new revolving credit facility is based on specified percentages of Avondale Mills’ raw material, work in process, greige fabric and finished good inventories, less applicable reserves. The new revolving credit facility is secured by the Company’s inventories, equipment other than that securing the equipment note, accounts receivable (not sold under the Receivables Securitization Facility), certain of the Company’s deposit and investment accounts, and the capital stock and limited liability company interests of all

28

Table of Contents

subsidiaries of the Company. The Company and Avondale Mills Graniteville Fabrics, Inc. have guaranteed the obligations of Avondale Mills under the revolving credit facility.

          With respect to advances drawn under the new revolving credit facility, the Company can designate interest rates equal to the Eurodollar rate (adjusted for reserves) plus a specified number of basis points or the reported prime rate plus a specified number of basis points. A commitment fee is payable monthly on the average unused portion of the new revolving credit facility. The Company is required to pay certain audit and administrative fees relating to the new revolving credit facility, and is subject to specified prepayment premiums if the facility commitment is reduced or terminated prior to the second anniversary of the closing date.

          Covenants of the new revolving credit facility require the Company to maintain certain minimum cash flow amounts and fixed charge coverage ratios in the event that average unused borrowing availability falls below $20 million for a period of four weeks. These covenants limit the Company’s ability to pay dividends.

          In conjunction with the execution of the new revolving credit facility, the Company also executed an amendment to the Receivables Securitization Facility adopting the same financial covenants as provided in the new revolving credit facility and reducing the size of the Receivables Securitization Facility from $90 million to $75 million.

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 29, 2003 remain in effect throughout fiscal 2004, a 10% change in the effective average interest rate would not have a material effect on the Company’s pretax earnings for fiscal 2004. 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 $6.0 to $9.2 million.

29

Table of Contents

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

AVONDALE INCORPORATED

CONSOLIDATED FINANCIAL STATEMENTS

Years Ended August 31, 2001, August 30, 2002
and August 29, 2003

30

Table of Contents

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Avondale Incorporated:

          We have audited the accompanying consolidated balance sheets of Avondale Incorporated and subsidiaries as of August 29, 2003 and August 30, 2002, and the related consolidated statements of income, shareholders’ equity and cash flows for the years 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 audits. The consolidated statements of income, shareholders’ equity and cash flows and the schedule referred to below for the year ended 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 9, in their report dated October 9, 2001.

          We conducted our audits 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 audits provide a reasonable basis for our opinion.

          In our opinion, the 2003 and 2002 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Avondale Incorporated and subsidiaries as of August 29, 2003 and August 30, 2002, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

          Our audits were made for the purpose of forming an opinion on the 2003 and 2002 basic consolidated financial statements taken as a whole. The schedule listed in the Index at Item 15(a) has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the 2003 and 2002 information set forth therein.

          As discussed above, the consolidated financial statements for the year ended August 31, 2001 were audited by other auditors who have ceased operations. As described in Note 9, retained earnings at August 25, 2000 and August 31, 2001 have been restated from the original amounts reported upon by such other auditors. We audited the adjustments to those balances of retained earnings as described in Note 9. 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 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 2001 consolidated financial statements taken as a whole.

CRISP HUGHES EVANS LLP

Atlanta, Georgia
October 3, 2003, except for note 14 as to which
          the date is November 7, 2003

31

Table of Contents

          The report that appears below is a copy of the report issued by the Company’s previous independent accountants, Arthur Andersen, LLP (“Andersen”) and the report has not been reissued by Andersen. That firm has discontinued performing auditing and accounting services. The Andersen report refers to financial statements as of August 25, 2000 and August 31, 2001 and for the two fiscal years ending August 25, 2000, which are no longer included in the accompanying financial statements. Further, the Andersen report refers to the schedule listed in the Index at Item 14(a), such schedule is included as Item 15(a) in this Annual Report on Form 10-K.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Avondale Incorporated:

          We have audited the accompanying consolidated balance sheets of Avondale Incorporated as of August 25, 2000 and August 31, 2001, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three 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 25, 2000 and August 31, 2001, and the consolidated results of their operations and their cash flows for each of the three 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

32

Table of Contents

AVONDALE INCORPORATED

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

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

33

Table of Contents

AVONDALE INCORPORATED

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

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

34

Table of Contents

AVONDALE INCORPORATED

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