AVONDALE INC - 10-Q Quarterly Report

Former name, former address and former fiscal year, if changed since last report: N/A

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


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			Reference
PART I - FINANCIAL INFORMATION (Unaudited)

	Item 1:	Financial Statements
		Condensed Consolidated Balance Sheets at August 29, 2003 and November 28, 2003		2
		Condensed Consolidated Statements of Income for the Thirteen Weeks Ended November 29, 2002 and November 28, 2003		3
		Condensed Consolidated Statements of Cash Flows for the Thirteen Weeks Ended November 29, 2002 and November 28, 2003		4
		Notes to Condensed Consolidated Financial Statements		5
	Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
	Item 3:	Quantitative and Qualitative Disclosures about Market Risk		19
	Item 4:	Controls and Procedures		20

PART II - OTHER INFORMATION

	Item 1:	Legal Proceedings		21
	Item 2:	Changes in Securities and Use of Proceeds		21
	Item 3:	Defaults upon Senior Securities		21
	Item 4:	Submission of Matters to a Vote of Security Holders		21
	Item 5:	Other Information		21
	Item 6:	Exhibits and Reports on Form 8-K		22
	Signature			23

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


								Nov. 28,
					Aug. 29,			2003
					2003			(unaudited)

ASSETS
Current Assets
		Cash and cash equivalents			$	13,769		$	6,799
		Accounts receivable, less allowance for doubtful accounts of $1,867 at Aug. 29, 2003 and $1,456 at Nov. 28, 2003				29,157			41,656
		Inventories				82,887			87,318
		Prepaid expenses				1,980			1,223
		Income taxes refundable				2,825			1,929

			Total current assets			130,618			138,925
Assets held for sale						2,640			843
Property, plant and equipment Land						6,484			6,484
		Buildings				79,647			79,661
		Machinery and equipment				497,213			498,677

						583,344			584,822
		Less accumulated depreciation				(367,759	)		(377,273	)

						215,585			207,549
Other assets						7,712			8,045
Goodwill						2,951			2,951

					$	359,506		$	358,313

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
	Accounts payable				$	18,724		$	21,352
	Accrued compensation, benefits and related expenses					9,280			9,689
	Accrued interest					2,726			6,290
	Other accrued expenses					9,785			9,789
	Long-term debt due in one year					4,325			4,325

				Total current liabilities		44,840			51,445
Long-term debt						163,512			162,431
Deferred income taxes and other long-term liabilities						35,203			33,146
Shareholders’ equity
	Preferred stock
		$.01 par value; 10,000 shares authorized				—			—
	Common stock
		Class A, $.01 par value; 100,000 shares
			authorized, 11,402 issued and outstanding			114			114
		Class B, $.01 par value; 5,000 shares
			authorized, 979 issued and outstanding			10			10
		Capital in excess of par value				39,194			39,194
		Accumulated other comprehensive loss				(151	)		—
		Retained earnings				76,784			71,973

				Total shareholders’ equity		115,951			111,291

					$	359,506		$	358,313

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

AVONDALE INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share data)


			Thirteen Weeks Ended

			Nov. 29,		Nov. 28,
			2002		2003

Net sales			$	167,182	$	131,340
Operating costs and expenses
	Cost of goods sold			141,088		117,771
	Depreciation			10,867		9,524
	Selling and administrative expenses			7,705		6,462

		Operating income (loss)		7,522		(2,417	)
Interest expense, net				4,527		4,830
Discount and expenses on sales of receivables				712		628
Other, net				9		(2,372	)

	Income (loss) before income taxes			2,274		(5,503	)
Provision for (benefit of) income taxes				865		(1,930	)

		Net income (loss)	$	1,409	$	(3,573	)


Per share data:
		Net income (loss)-basic	$	.11	$	(.29	)

		Net income (loss)-diluted	$	.11	$	(.29	)

		Dividends declared	$	.10	$	.10

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

AVONDALE INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)


				Thirteen Weeks Ended

				Nov. 29,			Nov. 28,
				2002			2003

Operating activities
	Net income (loss)			$	1,409		$	(3,573	)
	Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
		Depreciation and amortization			10,919			9,633
		Benefit of deferred income taxes			(393	)		(1,958	)
		Gain on disposal of property, plant and equipment and assets held for sale			—			(2,310	)
		Sale of accounts receivable, net			(7,771	)		(7,448	)
		Changes in operating assets and liabilities			11,412			(1,614	)

			Net cash provided by (used in) operating activities		15,576			(7,270	)
Investing activities
	Purchases of property, plant and equipment				(3,464	)		(1,493	)
	Proceeds from sale of property, plant and equipment and assets held for sale				—			4,112

			Net cash provided by (used in) investing activities		(3,464	)		2,619
Financing activities
	Net payments on long term debt				(12,675	)		(1,081	)
	Dividends paid				(1,253	)		(1,238	)

			Net cash used in financing activities		(13,928	)		(2,319	)

Decrease in cash and cash equivalents					(1,816	)		(6,970	)
Cash and cash equivalents at beginning of period					2,261			13,769

Cash and cash equivalents at end of period				$	445		$	6,799

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

AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
November 28, 2003

1. Basis of Presentation: The accompanying unaudited condensed consolidated financial statements include the accounts of Avondale Incorporated and its wholly owned subsidiary, Avondale Mills, Inc. (“Avondale Mills”) (collectively, the “Company”). Avondale Funding LLC (“Funding”), a special purpose subsidiary of Avondale Mills, provides financing through the sale of accounts receivable generated by the Company. The Company accounts for its investment in Funding using the equity method of accounting. All significant intercompany accounts and transactions have been eliminated. The August 29, 2003 balance sheet has been derived from the audited financial statements at that date. The accounting policies and basis of presentation followed by the Company are presented in Note 1 to the August 29, 2003 audited consolidated financial statements.

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

These statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States for complete financial statements.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, including normal recurring accruals, necessary for a fair presentation. Operating results for the thirteen weeks ended November 28, 2003 are not necessarily indicative of the results that may be expected for the fiscal year ending August 27, 2004.

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

AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
November 28, 2003

The Company’s inventories at November 28, 2003 under the last-in, first-out (LIFO) method and the related impact on the statement of income for the thirteen weeks then ended have been recorded using estimated quantities and costs as of August 27, 2004, the end of fiscal 2004. As actual inventory quantities and costs at August 27, 2004 could differ significantly from these estimates, the inventory amounts at November 28, 2003 and the operating results for the thirteen weeks ended November 28, 2003 are not necessarily indicative of the inventory amounts at August 27, 2004 and operating results for fiscal 2004 to be recorded using the final LIFO calculations.

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

The Company adopted the provisions of Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure, during fiscal 2003, electing to continue its use of the intrinsic value method. Accordingly, no stock-based compensation has been recorded, as the exercise price of each option granted under the existing plan equals the market value of the underlying common stock on the date of grant. If the Company had elected to record stock-based compensation in accordance with the fair value method and the provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, reported net income and earnings per share would be adjusted to the pro forma amounts as shown below (amounts in thousands, except per share data):


		Thirteen Weeks Ended

		Nov. 29,			Nov. 28,
		2002			2003

Net income (loss) as reported		$	1,409		$	(3,573	)
Pro forma stock-based compensation, net of income taxes			(9	)		(9	)

Pro forma net income (loss)		$	1,400		$	(3,582	)

Per share data:
	Net income (loss)-basic as reported	$	.11		$	(.29	)

	Net income (loss)-basic pro forma	$	.11		$	(.29	)

	Net income (loss)-diluted as reported	$	.11		$	(.29	)

	Net income (loss)-diluted pro forma	$	.11		$	(.29	)

AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
November 28, 2003

4. Segment Information: Condensed segment information is as follows (amounts in thousands):


			Thirteen Weeks Ended

			Nov. 29,			Nov. 28,
			2002			2003

Revenues:
	Apparel fabrics		$	142,522		$	107,423
	Yarns			47,696			41,399
	Other			16,911			14,724

				207,129			163,546
	Less inter-segment sales			39,947			32,206

		Total	$	167,182		$	131,340

Income (loss):
	Apparel fabrics		$	11,609		$	2,402
	Yarns			1,551			(1,318	)
	Other			593			1,043
	Unallocated			(6,231	)		(4,544	)

		Total operating income (loss)		7,522			(2,417	)
	Interest expense, net			4,527			4,830
	Discount and expenses on sale of receivables			712			628
	Other expense (income), net			9			(2,372	)

		Income (loss) before income taxes	$	2,274		$	(5,503	)

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

6. Gain on Disposal of Property, Plant and Equipment and Assets Held for Sale: In November 2003, the Company sold two tracts of land unrelated to its manufacturing facilities and not utilized in the operation of its business. The related gain on disposal of these properties, approximately $2.3 million, is included in Other, net on the consolidated statement of income for the thirteen weeks ended November 28, 2003.

AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
November 28, 2003

7. New Accounting Pronouncements: 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 generally effective for the first interim period beginning after December 15, 2003. The Company is currently evaluating impact of Statement No. 150 on the consolidated financial statements.

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

For discussion of certain legal proceedings to which the Company is a party, see Item 3 “Legal Proceedings” in the Company’s Annual Report on Form 10-K for the fiscal year ended August 29, 2003. The Company is also a party to other litigation incidental to its business from time to time. The Company is not currently a party to any litigation that management, in consultation with legal counsel, believes would have a material adverse effect on the Company’s financial condition or results of operations.

9. Consolidating guarantor and non-guarantor financial information: The following consolidating financial information presents balance sheets, statements of income and statements of cash flows of the Company and its subsidiaries. Avondale Incorporated, the parent company and sole shareholder of Avondale Mills, has fully and unconditionally guaranteed the 10-1/4% Senior Subordinated Notes due 2013 (“Notes”) issued by Avondale Mills. Avondale Mills Graniteville Fabrics, Inc., a wholly owned subsidiary of Avondale Mills and non-guarantor of the Notes, operates a denim manufacturing facility and warehouse operation located in South Carolina.

AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
November 28, 2003

AVONDALE INCORPORATED
CONSOLIDATING BALANCE SHEETS
November 28, 2003
(amounts in thousands)


											Non-Guarantor
											Avondale Mills
								Guarantor			Graniteville
					Avondale			Avondale			Fabrics,
					Mills, Inc.			Incorporated			Inc.			Eliminations			Consolidated

ASSETS
Current Assets
	Cash				$	6,799		$	—		$	—		$	—		$	6,799
	Accounts receivable					41,654			—			2			—			41,656
	Inventories					87,318			—			—			—			87,318
	Prepaid expenses					1,223			—			—			—			1,223
	Income taxes refundable					1,929			—			—			—			1,929

				Total current assets		138,923			—			2			—			138,925
Assets held for sale						843												843
Property, plant and equipment
		Land				6,288			—			196			—			6,484
		Buildings				67,911			—			11,750			—			79,661
		Machinery and equipment				460,856			—			37,821			—			498,677

						535,055			—			49,767			—			584,822
		Less accumulated depreciation				(350,794	)		—			(26,479	)		—			(377,273	)

						184,261			—			23,288			—			207,549
Other assets						8,045			—			—			—			8,045
Investment in subsidiaries						8,126			100,899			—			(109,025	)		—
Goodwill						2,951			—			—			—			2,951

					$	343,149		$	100,899		$	23,290		$	(109,025	)	$	358,313


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
			Accounts payable		$	20,185		$	—		$	1,167		$	—		$	21,352
			Accrued compensation, benefits			9,551			—			138			—			9,689
			Accrued interest			6,290			—			—			—			6,290
			Other accrued expenses			9,787			—			2			—			9,789
			Long- term debt due in one year			4,325			—			—			—			4,325

				Total current liabilities		50,138			—			1,307			—			51,445
Long-term debt						162,431			—			—			—			162,431
Deferred income taxes and other long term liabilities						33,146			—			—			—			33,146
Due to (from) subsidiaries						(3,465	)		(10,392	)		13,857			—			—
Shareholders’ equity						100,899			111,291			8,126			(109,025	)		111,291

					$	343,149		$	100,899		$	23,290		$	(109,025	)	$	358,313

AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
November 28, 2003

AVONDALE INCORPORATED
CONSOLIDATING BALANCE SHEETS
August 29, 2003
(amounts in thousands)


											Non-Guarantor
											Avondale Mills
								Guarantor			Graniteville
					Avondale			Avondale			Fabrics,
					Mills, Inc.			Incorporated			Inc.			Eliminations			Consolidated

ASSETS
Current Assets
	Cash				$	13,769		$	—		$	—		$	—		$	13,769
	Accounts receivable					29,155			—			2			—			29,157
	Inventories					82,887			—			—			—			82,887
	Prepaid expenses					1,980			—			—			—			1,980
	Income taxes refundable					2,825			—			—			—			2,825

				Total current assets		130,616			—			2			—			130,618
Assets held for sale						2,640												2,640
Property, plant and equipment
		Land				6,288			—			196			—			6,484
		Buildings				67,897			—			11,750			—			79,647
		Machinery and equipment				459,401			—			37,812			—			497,213

						533,586			—			49,758			—			583,344
		Less accumulated depreciation				(342,217	)		—			(25,542	)		—			(367,759	)

						191,369			—			24,216			—			215,585
Other assets						7,712			—			—			—			7,712
Investment in subsidiaries						8,202			105,726			—			(113,928	)		—
Goodwill						2,951			—			—			—			2,951

					$	343,490		$	105,726		$	24,218		$	(113,928	)	$	359,506


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
			Accounts payable		$	17,675		$	—		$	1,049		$	—		$	18,724
			Accrued compensation, benefits			9,203			—			77			—			9,280
			Accrued interest			2,726			—			—			—			2,726
			Other accrued expenses			9,784			—			1			—			9,785
			Long-term debt due in one year			4,325			—			—			—			4,325

				Total current liabilities		43,713			—			1,127			—			44,840
Long-term debt						163,512			—			—			—			163,512
Deferred income taxes and other long term liabilities						35,203			—			—			—			35,203
Due to (from) subsidiaries						(4,664	)		(10,225	)		14,889			—			—
Shareholders’ equity						105,726			115,951			8,202			(113,928	)		115,951

					$	343,490		$	105,726		$	24,218		$	(113,928	)	$	359,506

AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
November 28, 2003

AVONDALE INCORPORATED
CONSOLIDATING STATEMENTS OF INCOME
For the Thirteen weeks ended November 28, 2003
(amounts in thousands)


									Non-Guarantor
									Avondale Mills
						Guarantor			Graniteville
			Avondale			Avondale			Fabrics,
			Mills, Inc.			Incorporated			Inc.			Eliminations			Consolidated

Net sales, including intercompany transfers and charges			$	131,340		$	26		$	22,012		$	(22,038	)	$	131,340
Operating costs and expenses
	Cost of goods sold			118,587			—			21,197			(22,013	)		117,771
	Depreciation			8,586			—			938			—			9,524
	Selling and administrative expenses			6,487			—			—			(25	)		6,462

		Operating income (loss)		(2,320	)		26			(123	)		—			(2,417	)
Interest expense, net				4,830			—			—			—			4,830
Discount and expenses on sales of receivables				628			—			—			—			628
Other, net				(2,372	)		—			—			—			(2,372	)

		Income (loss) before income taxes		(5,406	)		26			(123	)		—			(5,503	)
Provision for (benefit of) income taxes				(1,893	)		10			(47	)		—			(1,930	)
Equity in loss of subsidiary				(76	)		(3,589	)		—			3,665			—

		Net loss	$	(3,589	)	$	(3,573	)	$	(76	)	$	3,665		$	(3,573	)

AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
November 28, 2003

AVONDALE INCORPORATED
CONSOLIDATING STATEMENTS OF INCOME
For the Thirteen weeks ended November 29, 2002
(amounts in thousands)


						Non-Guarantor
						Avondale Mills
				Guarantor		Graniteville
		Avondale		Avondale		Fabrics,
		Mills, Inc.		Incorporated		Inc.		Eliminations			Consolidated

Net sales, including intercompany transfers and charges		$	167,182	$	25	$	25,585	$	(25,610	)	$	167,182
Operating costs and expenses
	Cost of goods sold		142,313		—		24,360		(25,585	)		141,088
	Depreciation		9,839		—		1,028					10,867
	Selling and administrative expenses		7,730		—		—		(25	)		7,705

	Operating income		7,300		25		197		—			7,522
Interest expense, net			4,527		—		—		—			4,527
Discount and expenses on sales of receivables			712		—		—		—			712
Other, net			9		—		—		—			9

	Income before income taxes		2,052		25		197		—			2,274
Provision for income taxes			780		10		75		—			865
Equity in earnings of subsidiary			122		1,394		—		(1,516	)		—

	Net income	$	1,394	$	1,409	$	122	$	(1,516	)	$	1,409

AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
November 28, 2003

AVONDALE INCORPORATED
CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Thirteen weeks ended November 28, 2003
(amounts in thousands)


											Non-Guarantor
											Avondale Mills
								Guarantor			Graniteville
					Avondale			Avondale			Fabrics,
					Mills, Inc.			Incorporated			Inc.			Eliminations			Consolidated

Operating activities
Net loss					$	(3,589	)	$	(3,573	)	$	(76	)	$	3,665		$	(3,573	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
	Depreciation and amortization					8,695			—			938			—			9,633
	Benefit of deferred income taxes					(1,958	)		—			—			—			(1,958	)
	Gain on disposal of property, plant and equipment and assets held for sale					(2,310	)		—			—			—			(2,310	)
	Sale of accounts receivable, net					(7,449	)		—			—			—			(7,449	)
	Changes in operating assets and liabilities					(744	)		(16	)		(853	)		—			(1,613	)
	Dividends from subsidiary					—			1,238			—			(1,238	)		—
	Equity in loss of subsidiary					76			3,589			—			(3,665	)		—

				Net cash provided by (used in) operating activities		(7,279	)		1,238			9			(1,238	)		(7,270	)
Investing activities
			Purchase of property, plant and equipment			(1,484	)		—			(9	)		—			(1,493	)
			Proceeds from sale of property, plant and equipment and assets held for sale			4,112			—			—			—			4,112

				Net cash provided by (used in) investing activities		2,628			—			(9	)		—			2,619
Financing activities
		Net payments on long term debt				(1,081	)		—			—			—			(1,081	)
		Dividends paid				(1,238	)		(1,238	)		—			1,238			(1,238	)

				Net cash used in financing activities		(2,319	)		(1,238	)		—			1,238			(2,319	)

Decrease in cash and cash equivalents						(6,970	)		—			—			—			(6,970	)
Cash and cash equivalents at beginning of period						13,769			—			—			—			13,769

Cash and cash equivalents at end of period					$	6,799		$	—		$	—		$	—		$	6,799

AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
November 28, 2003

AVONDALE INCORPORATED
CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Thirteen weeks ended November 29, 2002
(amounts in thousands)


											Non-Guarantor
											Avondale Mills
								Guarantor			Graniteville
					Avondale			Avondale			Fabrics,
					Mills, Inc.			Incorporated			Inc.			Eliminations			Consolidated

Operating activities
Net income					$	1,394		$	1,409		$	122		$	(1,516	)	$	1,409
Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation and amortization					9,891			—			1,028			—			10,919
	Benefit of deferred income taxes					(393	)		—			—			—			(393	)
	Sale of accounts receivable, net					(7,771	)		—			—			—			(7,771	)
	Changes in operating assets and liabilities					12,543			(15	)		(1,116	)		—			11,412
	Dividends from subsidiary					—			1,253			—			(1,253	)		—
	Equity in income of subsidiary					(122	)		(1,394	)		—			1,516			—

				Net cash provided by operating activities		15,542			1,253			34			(1,253	)		15,576
Investing activities
			Purchase of property, plant and equipment			(3,430	)		—			(34	)		—			(3,464	)

				Net cash used in investing activities		(3,430	)		—			(34	)		—			(3,464	)
Financing activities
		Net payments on revolving line of credit				(12,675	)		—			—			—			(12,675	)
		Dividends paid				(1,253	)		(1,253	)		—			1,253			(1,253	)

				Net cash used in financing activities		(13,928	)		(1,253	)		—			1,253			(13,928	)

Decrease in cash						(1,816	)		—			—			—			(1,816	)
Cash at beginning of period						2,261			—			—			—			2,261

Cash at end of period					$	445		$	—		$	—		$	—		$	445

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 for interim financial information in the United States of America (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

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

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

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

The Company generates funds through the sale of accounts receivable, at a discount and without recourse, to a special purpose subsidiary established to facilitate the acquisition and subsequent resale of certain accounts receivable to General Electric Capital Corporation (“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 is consistent with all other sales by the Company.

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

For discussion of certain legal proceedings to which the Company is a party, see Item 3 “Legal Proceedings” in the Company’s 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 future results of operations or financial condition.

Thirteen Weeks Ended November 28, 2003 Compared to Thirteen Weeks Ended November 29, 2002

Net Sales. Net sales decreased 21.5% to $131.3 million for the thirteen weeks ended November 28, 2003 from $167.2 million for the thirteen weeks ended November 29, 2002. The decline in net sales in the thirteen weeks ended November 28, 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. The Company expects these conditions to continue into the second quarter of fiscal 2004.

Operating Income. Company operations produced an operating loss of ($2.4) million for the thirteen weeks ended November 28, 2003 compared to an operating income of $7.5 million for the thirteen weeks ended November 29, 2002. The operating loss reflected a significant increase in raw material costs and reduced unit cost absorption and operating efficiencies resulting from the lower unit volume. 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 16.5% to $117.8 million for the thirteen weeks ended November 28, 2003 from $141.1 million for the thirteen weeks ended November 29, 2002, reflecting the overall decrease in unit volume. Cost of goods sold as a percentage of net sales increased to 89.7% for the thirteen weeks ended November 28, 2003 from 84.4% for the thirteen weeks ended November 29, 2002.

Selling and administrative expenses decreased 15.6% to $6.5 million for the thirteen weeks ended November 28, 2003 from $7.7 million for the thirteen weeks ended November 29, 2002, reflecting staffing reductions and a decrease in certain associate benefits and performance based incentives corresponding to the decline in operating income. Selling and administrative expenses as a percentage of net sales increased to 4.9% for the thirteen weeks ended November 28, 2003 from 4.6% for the thirteen weeks ended November 29, 2002.

Segment Performance. Apparel fabric sales decreased 24.6% to $107.4 million for the thirteen weeks ended November 28, 2003 from $142.5 million for the thirteen weeks ended November 29, 2002, reflecting a 24.6% decrease in yards sold, while average selling price remained flat for the respective periods. Operating income for apparel fabrics decreased 79.3% to $2.4 million for the thirteen weeks ended November 28, 2003 from $11.6 million for the thirteen weeks ended November 29, 2002, primarily due to higher raw material costs and the reduced unit volume.

Yarn sales, including intra-company sales to the fabric operations, decreased 13.2% to $41.4 million for the thirteen weeks ended November 28, 2003 from $47.7 million for the thirteen weeks ended November 29, 2002. Pounds sold declined 19.4% primarily reflecting the reduced yarn requirements of the apparel fabric operations. Average selling price increased 7.7% as higher raw material costs were reflected in both outside invoice prices and intra-company transfer prices. However, market pricing for sales yarns remained very competitive, reflecting continued excess productive capacity within the domestic industry and continued importation of yarns and knitted apparel into the domestic market from Asia. The yarn operations produced an operating loss of ($1.3) million for the thirteen weeks ended November 28, 2003 compared to an operating income of $1.6 million for the thirteen weeks ended November 29, 2002, primarily as a result of higher raw material costs and the reduced unit volume.

Other sales, which include sales of greige and specialty fabrics and revenues from the Company’s trucking operation, decreased 13.0% to $14.7 million for the thirteen weeks ended November 28, 2003 from $16.9 million for the thirteen weeks ended November 29, 2002. The decrease in other sales was primarily attributable to decreased intra-company sales of greige fabrics to the apparel fabric operations. Operating income from other sales increased 66.7% to $1.0 million for the thirteen weeks ended November 28, 2003 from $0.6 million for the thirteen weeks ended November 29, 2002, primarily due to reduced production costs within the specialty fabric operation and improved operating revenues within the trucking operation.

Inter-segment sales decreased 19.5% to $32.2 million for the thirteen weeks ended November 28, 2003 from $40.0 million for the thirteen weeks ended November 29, 2002, primarily reflecting the decrease in consumption of internally produced yarns and greige fabrics within the Company’s apparel fabrics operation.

Unallocated amounts included in operating income reflect general and administrative expenses, certain associate benefits and performance based incentives, and adjustments of the carrying value of inventories to LIFO basis, net of market adjustments.

Interest Expense, Net. Net interest expense increased 6.7% to $4.8 million for the thirteen weeks ended November 28, 2003 from $4.5 million for the thirteen weeks ended November 29, 2002. Following execution of a new senior secured revolving credit facility with GECC on November 7, 2003, the Company wrote off approximately $400,000 of unamortized debt issue costs related to the previous revolving credit facility, causing the increase in net interest expense for the thirteen weeks ended November 28, 2003. See Note 14. “Subsequent Event” in the Consolidated Financial Statements in Item 8 of the Company’s Annual Report on Form 10-K for the fiscal year ended August 29, 2003 for further discussion of the new revolving credit facility.

Discount and Expenses on Sale of Receivables. Discount and expenses on sales of receivables were $0.6 million for the thirteen weeks ended November 28, 2003 compared to $0.7 million for the thirteen weeks ended November 29, 2002.

Other, Net. In November 2003, the Company sold two tracts of land unrelated to its manufacturing facilities and not utilized in the operation of its business. The related gain on disposal of these properties, approximately $2.3 million, is included in Other, net for the thirteen weeks ended November 28, 2003.

Provision for (Benefit of) Income Taxes. An income tax benefit of $1.9 million was recorded for the thirteen weeks ended November 28, 2003, reflecting the Company’s loss before income taxes, compared to a provision for income taxes of $0.9 million for the thirteen weeks ended November 29, 2002.

Net cash used in operating activities was $7.3 million for the thirteen weeks ended November 28, 2003. Principal working capital changes included a $5.1 million increase in accounts receivable, a $7.4 million decrease in accounts receivable sold under the securitization facility, a $4.4 million increase in inventories, and a $6.6 million increase in accounts payable and accrued expenses. Investing activities were predominantly equipment purchases and related costs of $1.5 million made in connection with the ongoing maintenance of the Company’s manufacturing facilities and proceeds from the sale of property, plant and equipment and assets held for sale of $4.1 million. Financing activities included repayment of $1.1 million of long term debt and payment of $1.3 million in dividends on outstanding common stock.

At November 28, 2003, the Company had no borrowings outstanding under its revolving line of credit and $31.1 million of borrowing availability thereunder.

The Company’s capital expenditures, aggregating $1.5 million for the thirteen weeks ended November 28, 2003, were used primarily to complete routine maintenance projects. Management estimates that capital expenditures for the balance of fiscal 2004 will be approximately $7.0 million.

The receivables securitization facility is the Company’s only off-balance sheet financing arrangement. The Company generates funds through the sale of accounts receivable 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 accounts receivable sold to GECC, and has not experienced any gains or losses on the sale of the

investment in accounts receivable. The Company believes minimal counter party risk exists due to the financial strength of GECC.

Management believes that cash generated from operations, together with the borrowings available under its revolving line of credit and proceeds from sales of trade receivables, will be sufficient to meet the Company’s working capital and capital expenditure needs in the foreseeable future.

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. In addition, management may from time to time make forward looking statements in reports and other documents we file with the Securities and Exchange Commission, or in connection with oral statements made to the press, potential investors and others. 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 our 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 our current expectations and are not guarantees of performance. These statements are based on our 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 of 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:

•

strength of the U.S. dollar versus the currencies of other textile producing countries;

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.

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):


	Thirteen Weeks Ended

	Nov. 29,		Nov. 28,
	2002		2003

Net income (loss)	$	1,409	$	(3,573	)
Interest expense, net		4,527		4,830
Discount and expenses on sale of receivables		712		628
Provision for (benefit of) income taxes		865		(1,930	)
Depreciation and amortization		10,919		9,633
Adjustment of carrying value of inventories to LIFO basis, net of market adjustment		150		500

EBITDA	$	18,582	$	10,088

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.

For discussion of certain market risks related to the Company, see Part II, Item 7A. “Quantitative and Qualitative Disclosures about Market Risk” in the Company’s Annual Report on Form 10-K for the fiscal year ended August 29, 2003.

As required by Securities and Exchange Commission rules, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. This evaluation was carried out under the supervision and with the participation of our management, including our principal executive officer and principal financial officer. Based on this evaluation, these officers have concluded that the design and operation of our disclosure controls and procedures are effective. There were no changes to our internal controls during the period covered by this quarterly report that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Disclosure controls and procedures are our controls and other procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act are accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.


Item 1.	Legal Proceedings

	There have been no significant changes in the matters reported under Part I, Item 3 “Legal Proceedings” in the Company’s Annual Report on Form 10-K for the fiscal year ended August 29, 2003

Item 2.	Changes in Securities and Use of Proceeds

	None

Item 3.	Defaults upon Senior Securities

	None

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

	(a)	The Company held its Annual Meeting of Shareholders on November 13, 2003.

	(b)	Nine directors were elected at the Annual Meeting to serve until the Annual Meeting of Shareholders in 2003. The names of these Directors are as follows:

		G. Stephen Felker
		Jack R. Altherr, Jr.
		Dale J. Boden
		Robert B. Calhoun
		Kenneth H. Callaway
		Harry C. Howard
		C. Linden Longino, Jr.
		James A. Rubright
		John P. Stevens

	(c)	The Company had outstanding shares of Class A Common Stock and Class B Common Stock having an aggregate of 30,980,517 votes entitled to be cast at the Annual Meeting. Of such aggregate outstanding votes, 290,916 votes were not represented at the Annual Meeting in person or by proxy. The remaining 30,689,601 outstanding votes were represented at the Annual Meeting in person or by proxy, with 27,191,861 votes cast for all nine directors that were elected at the Annual Meeting and 3,497,740 votes abstaining. There were no broker non-votes and no votes were withheld.

Item 5.	Other Information

	None

Item 6.

Exhibits and Reports on Form 8-K

(a)

Exhibits

3.1

Restated and Amended Articles of Incorporation of Avondale Incorporated (incorporated by reference to Exhibit 3.1 to Avondale Incorporated’s Registration Statement on Form S-4, File No. 333-5455-01)

3.3

Amended and restated bylaws of Avondale Incorporated, adopted as of January 17, 2000 (incorporated by reference to Exhibit 3.3 to Avondale Incorporated’s Quarterly Report on Form 10-Q for the period ended February 25, 2000, File No. 333-5455-01)

4.3

Indenture for the 10-1/4 Senior Subordinated Notes due 2013 among Avondale Incorporated, Avondale Mills, Inc. and Wachovia Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.3 to Avondale Incorporated’s Registration Statement on Form S-4, File No. 333-108353)

4.5

Registration Rights Agreement, dated as of June 30, 2003, among Avondale Mills, Inc., Avondale Incorporated and Wachovia Securities, LLC. Trustee (incorporated by reference to Exhibit 4.3 to Avondale Incorporated’s Registration Statement on Form S-4, File No. 333-108353)

31.1

Certificate of Chief Executive Officer, pursuant to Rule 13a — 14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certificate of Chief Financial Officer, pursuant to Rule 13a — 14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certificate of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Certificate of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b)

Reports on Form 8-K

On October 16, 2003, the Company furnished a current report on Form 8-K regarding its press release announcing sales and earnings for the fiscal year ended August 29, 2003.

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


x		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		For the Quarterly Period Ended November 28, 2003

or

o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		For the Transition Period From _______________ to _______________


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

506 South Broad Street Monroe, Georgia		30655 (Zip code)
(Address of principal executive offices)


Description	As Of	Shares Outstanding

Class A Common Stock	January 5, 2004	11,401,737 Shares
Class B Common Stock	January 5, 2004	978,939 Shares


PART I — FINANCIAL INFORMATION
	Item 1. Financial Statements
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures about Market Risk.
	Item 4. Controls and Procedures.
PART II — OTHER INFORMATION
	SIGNATURE
SECTION 302 CERTIFICATION OF THE CEO
SECTION 302 CERTIFICATION OF THE CFO
SECTION 906 CERTIFICATION OF THE CEO
SECTION 906 CERTIFICATION OF THE CFO


	Aug. 29,		Nov. 28,
	2003		2003

Finished goods	$	26,579	$	30,211
Work in process		33,176		32,886
Raw materials		9,072		10,680
Dyes and chemicals		4,593		4,632

Inventories at FIFO		73,420		78,409
Adjustment of carrying value to LIFO basis, net of market adjustment		3,565		3,065

		76,985		81,474
Supplies at average cost		5,902		5,844

	$	82,887	$	87,318

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		AVONDALE INCORPORATED

	By:	/s/ JACK R. ALTHERR, JR.

		Jack R. Altherr, Jr. Vice Chairman and Chief Financial Officer
Date: January 9, 2004