AVONDALE INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


[x]		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended February 27, 2004


[ ]		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Transition Period From _____________ to ___________

Commission file number 33-68412

AVONDALE INCORPORATED

(Exact name of registrant as specified in its charter)


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

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

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

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 [ ]

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]

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


Description	As Of	Shares Outstanding
Class A Common Stock	April 1, 2004	11,401,737 Shares
Class B Common Stock	April 1, 2004	978,939 Shares

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

AVONDALE INCORPORATED

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


				Feb. 27,
	Aug. 29,			2004
	2003			(unaudited)
ASSETS
Current Assets
Cash and cash equivalents	$	13,769		$	3,364
Accounts receivable, less allowance for doubtful accounts of $1,867 at Aug. 29, 2003 and $1,090 at Feb. 27, 2004		29,157			35,125
Inventories		82,887			90,432
Prepaid expenses		1,980			2,477
Income taxes refundable		2,825			494

Total current assets		130,618			131,892
Assets held for sale		2,640			682
Property, plant and equipment
Land		6,484			6,484
Buildings		79,647			79,630
Machinery and equipment		497,213			498,661

		583,344			584,775
Less accumulated depreciation		(367,759	)		(385,264	)

		215,585			199,511
Other assets		7,712			8,581
Goodwill		2,951			2,951

	$	359,506		$	343,617

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	18,724		$	22,996
Accrued compensation, benefits and related expenses		9,280			8,863
Accrued interest		2,726			2,402
Other accrued expenses		9,785			8,923
Long-term debt due in one year		4,325			4,325

Total current liabilities		44,840			47,509
Long-term debt		163,512			161,349
Deferred income taxes and other long-term liabilities		35,203			30,079
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			65,362

Total shareholders’ equity		115,951			104,680

	$	359,506		$	343,617

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

AVONDALE INCORPORATED

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


	Twenty-Six Weeks Ended
	Feb. 28,			Feb. 27,
	2003			2004
Operating activities
Net income (loss)	$	1,067		$	(8,946	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		21,958			19,103
Provision for (benefit of) deferred income taxes		112			(5,035	)
Gain on disposal of property, plant and equipment and assets held for sale		(12	)		(2,633	)
Sale of accounts receivable, net		(14,950	)		(4,932	)
Changes in operating assets and liabilities		3,623			(5,087	)

Net cash provided by (used in) operating activities		11,798			(7,530	)
Investing activities
Purchases of property, plant and equipment		(8,049	)		(2,833	)
Proceeds from sale of property, plant and equipment and assets held for sale		1,238			4,597

Net cash provided by (used in) investing activities		(6,811	)		1,764
Financing activities
Net payments on long-term debt		(4,025	)		(2,163	)
Purchase and retirement of treasury stock		(1,181	)		—
Dividends paid		(2,506	)		(2,476	)

Net cash used in financing activities		(7,712	)		(4,639	)

Decrease in cash and cash equivalents		(2,725	)		(10,405	)
Cash and cash equivalents at beginning of period		2,859			13,769

Cash and cash equivalents at end of period	$	134		$	3,364

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

AVONDALE INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
February 27, 2004

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 twenty-six weeks ended February 27, 2004 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):


	Aug. 29,		Feb. 27,
	2003		2004
Finished goods	$	26,579	$	32,315
Work in process		33,176		36,221
Raw materials		9,072		10,227
Dyes and chemicals		4,593		4,825

Inventories at FIFO		73,420		83,588
Adjustment of carrying value to LIFO basis, net of market adjustment		3,565		1,065

		76,985		84,653
Supplies at average cost		5,902		5,779

	$	82,887	$	90,432

AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
February 27, 2004

The Company’s inventories at February 27, 2004 under the last-in, first-out (LIFO) method and the related impact on the statement of operations for the thirteen and twenty-six 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 February 27, 2004 and the operating results for the twenty-six weeks ended February 27, 2004 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):


	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	Feb. 28,		Feb. 27,		Feb. 28,		Feb. 27,
	2003		2004		2003		2004
Weighted average shares outstanding – basic		12,493		12,381		12,512		12,381
Effect of employee stock options		—		—		94		—

Weighted average shares outstanding – diluted		12,493		12,381		12,606		12,381

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						Twenty-Six Weeks Ended
	Feb. 28,			Feb. 27,			Feb. 28,			Feb. 27,
	2003			2004			2003			2004
Net income (loss) as reported	$	(342	)	$	(5,373	)	$	1,067		$	(8,946	)
Pro forma stock-based compensation, net of income taxes		(9	)		(9	)		(18	)		(18	)

Pro forma net income (loss)	$	(351	)	$	(5,382	)	$	1,049		$	(8,964	)

Per share data:
Net income (loss)-basic as reported	$	(.03	)	$	(.43	)	$	.09		$	(.72	)

Net income (loss)-basic pro forma	$	(.03	)	$	(.43	)	$	.08		$	(.72	)

Net income (loss)-diluted as reported	$	(.03	)	$	(.43	)	$	.08		$	(.72	)

Net income (loss)-diluted pro forma	$	(.03	)	$	(.43	)	$	.08		$	(.72	)

AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
February 27, 2004

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


	Thirteen Weeks Ended						Twenty-Six Weeks Ended
	Feb. 28,			Feb. 27,			Feb. 28,			Feb. 27,
	2003			2004			2003			2004
Revenues:
Apparel fabrics	$	123,698		$	105,623		$	266,220		$	213,046
Yarns		41,833			45,974			89,529			87,373
Other		17,050			14,064			33,961			28,788

		182,581			165,661			389,710			329,207
Less inter-segment sales		40,963			36,079			80,910			68,285

Total	$	141,618		$	129,582		$	308,800		$	260,922

Income (loss):
Apparel fabrics	$	6,149		$	479		$	17,758		$	2,881
Yarns		561			470			2,112			(848	)
Other		1,541			880			2,134			1,923
Unallocated		(3,551	)		(5,395	)		(9,782	)		(9,939	)

Total operating income (loss)		4,700			(3,566	)		12,222			(5,983	)
Interest expense, net		4,563			4,334			9,090			9,164
Discount and expenses on sale of receivables		705			615			1,417			1,243
Other, net		(21	)		(177	)		(12	)		(2,549	)

Income (loss) before income taxes	$	(547	)	$	(8,338	)	$	1,727		$	(13,841	)

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):


	Thirteen Weeks Ended						Twenty-Six Weeks Ended
	Feb. 28,			Feb. 27,			Feb. 28,		Feb. 27,
	2003			2004			2003		2004
Net income (loss)	$	(342	)	$	(5,373	)	$	1,067	$	(8,946	)
Change in fair value of interest rate swaps, net of income taxes		144			—			242		151

Comprehensive income (loss)	$	(198	)	$	(5,373	)	$	1,309	$	(8,795	)

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 twenty-six weeks ended February 27, 2004.

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 mandatorily 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 the impact of Statement No. 150 on the consolidated financial statements.

AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
February 27, 2004

In December 2003, the Financial Accounting Standards Board amended and reissued Statement No. 132, Employers’ Disclosures about Pensions and Other Postretirement Benefits, which now requires companies to provide additional disclosures about retirement plan assets, benefit obligations, cash flows, benefit costs and other relevant information. In addition to extended annual disclosures, companies will be required to report the various elements of pensions and other postretirement benefit costs on a quarterly basis. Statement No. 132, as revised, is effective for fiscal years ending after December 15, 2003, and for interim periods beginning after December 15, 2003. The Company is currently evaluating the impact of Statement No. 132 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 will have a material adverse effect on the Company’s financial condition or results of operations.

The Company received a grand jury subpoena issued by the U. S. District Court for the Eastern Division of North Carolina on January 20, 2004. The subpoena concerns the production of documents and records in connection with an investigation being conducted by the Antitrust Division of the U. S. Department of Justice relating generally to the manufacture, sale, purchase and distribution of open-end spun yarns. Based on the information currently available, management does not believe that the outcome of this matter will have a material adverse effect on the Company’s financial condition or results of operation. The Company is fully cooperating with the U. S. Department of Justice in its investigation.

9. Subsequent Events: In response to the highly competitive market conditions and continued imbalance of global supply and demand for textile and apparel products, in March 2004, the Company announced the closing of an open-end yarn manufacturing facility located in North Carolina and the weaving operation of an integrated greige fabric manufacturing facility located in Georgia. These actions to rationalize excess manufacturing capacity, following the relocation of certain equipment, are expected to improve capacity utilization of the Company’s remaining facilities and lower costs per unit produced. No reduction in net sales is anticipated as a result of this capacity rationalization. Flexibility of the Company’s manufacturing facilities to shift production from one product line to another and the Company’s ability to source additional yarns and greige fabrics from outside vendors to increase production of its finished products in reaction to added demand are expected to be maintained. Certain equipment will be relocated from these two operations to other facilities located in Alabama, Georgia and South Carolina to retain certain specialized manufacturing capabilities and replace older, less efficient equipment. In connection with these actions, the Company anticipates recording restructuring and other non-operating costs of approximately $3.5 million during the third quarter of fiscal 2004.

10. 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)
February 27, 2004

AVONDALE INCORPORATED
CONSOLIDATING BALANCE SHEETS
February 27, 2004
(amounts in thousands)


							Non-
							Guarantor
							Avondale
							Mills
				Guarantor			Graniteville
	Avondale			Avondale			Fabrics,
	Mills, Inc.			Incorporated			Inc.			Eliminations			Consolidated
ASSETS
Current Assets
Cash and cash equivalents	$	3,364		$	—		$	—		$	—		$	3,364
Accounts receivable		35,122			—			3			—			35,125
Inventories		90,432			—			—			—			90,432
Prepaid expenses		2,477			—			—			—			2,477
Income taxes refundable		494			—			—			—			494

Total current assets		131,889			—			3			—			131,892
Assets held for sale		682												682
Property, plant and equipment
Land		6,288			—			196			—			6,484
Buildings		67,880			—			11,750			—			79,630
Machinery and equipment		460,840			—			37,821			—			498,661

		535,008			—			49,767			—			584,775
Less accumulated depreciation		(357,847	)		—			(27,417	)		—			(385,264	)

		177,161			—			22,350			—			199,511
Other assets		8,581			—			—			—			8,581
Investment in subsidiaries		7,797			94,272			—			(102,069	)		—
Goodwill		2,951			—			—			—			2,951

	$	329,061		$	94,272		$	22,353		$	(102,069	)	$	343,617

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	21,833		$	—		$	1,163		$	—		$	22,996
Accrued compensation, benefits		8,784			—			79			—			8,863
Accrued interest		2,402			—			—			—			2,402
Other accrued expenses		8,921			—			2			—			8,923
Long-term debt due in one year		4,325			—			—			—			4,325

Total current liabilities		46,265			—			1,244			—			47,509
Long-term debt		161,349			—			—			—			161,349
Deferred income taxes and other long term liabilities		30,079			—			—			—			30,079
Due to (from) subsidiaries		(2,904	)		(10,408	)		13,312			—			—
Shareholders’ equity		94,272			104,680			7,797			(102,069	)		104,680

	$	329,061		$	94,272		$	22,353		$	(102,069	)	$	343,617

AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
February 27, 2004

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)
February 27, 2004

AVONDALE INCORPORATED
CONSOLIDATING STATEMENTS OF OPERATIONS
For the Thirteen weeks ended February 27, 2004
(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	$	129,582		$	25		$	22,348		$	(22,373	)	$	129,582
Operating costs and expenses
Cost of goods sold		117,996			—			21,928			(22,346	)		117,578
Depreciation		8,406			—			937			—			9,343
Selling and administrative expenses		6,254			—			—			(27	)		6,227

Operating income (loss)		(3,074	)		25			(517	)		—			(3,566	)
Interest expense, net		4,334			—			—			—			4,334
Discount and expenses on sales of receivables		615			—			—			—			615
Other, net		(177	)		—			—			—			(177	)

Income (loss) before income taxes		(7,846	)		25			(517	)		—			(8,338	)
Provision for (benefit of) income taxes		(2,786	)		9			(188	)		—			(2,965	)
Equity in loss of subsidiary		(329	)		(5,389	)		—			5,718			—

Net loss	$	(5,389	)	$	(5,373	)	$	(329	)	$	5,718		$	(5,373	)

AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
February 27, 2004

AVONDALE INCORPORATED
CONSOLIDATING STATEMENTS OF OPERATIONS
For the Thirteen weeks ended February 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	$	141,618		$	32		$	20,354		$	(20,386	)	$	141,618
Operating costs and expenses
Cost of goods sold		120,269			—			19,500			(20,354	)		119,415
Depreciation		9,826			—			1,025			—			10,851
Selling and administrative expenses		6,684			—			—			(32	)		6,652

Operating income (loss)		4,839			32			(171	)		—			4,700
Interest expense, net		4,563			—			—			—			4,563
Discount and expenses on sales of receivables		705			—			—			—			705
Other, net		(21	)		—			—			—			(21	)

Income (loss) before income taxes		(408	)		32			(171	)		—			(547	)
Provision for (benefit of) income taxes		(147	)		10			(68	)		—			(205	)
Equity in loss of subsidiary		(103	)		(364	)		—			467			—

Net loss	$	(364	)	$	(342	)	$	(103	)	$	467		$	(342	)

AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
February 27, 2004

AVONDALE INCORPORATED
CONSOLIDATING STATEMENTS OF OPERATIONS
For the Twenty-Six weeks ended February 27, 2004
(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	$	260,922		$	51		$	44,360		$	(44,411	)	$	260,922
Operating costs and expenses
Cost of goods sold		236,583			—			43,125			(44,359	)		235,349
Depreciation		16,992			—			1,875			—			18,867
Selling and administrative expenses		12,741			—			—			(52	)		12,689

Operating income (loss)		(5,394	)		51			(640	)		—			(5,983	)
Interest expense, net		9,164			—			—			—			9,164
Discount and expenses on sales of receivables		1,243			—			—			—			1,243
Other, net		(2,549	)		—			—			—			(2,549	)

Income (loss) before income taxes		(13,252	)		51			(640	)		—			(13,841	)
Provision for (benefit of) income taxes		(4,679	)		19			(235	)		—			(4,895	)
Equity in loss of subsidiary		(405	)		(8,978	)		—			9,383			—

Net loss	$	(8,978	)	$	(8,946	)	$	(405	)	$	9,383		$	(8,946	)

AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
February 27, 2004

AVONDALE INCORPORATED
CONSOLIDATING STATEMENTS OF OPERATIONS
For the Twenty-Six weeks ended February 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	$	308,800		$	57	$	45,939	$	(45,996	)	$	308,800
Operating costs and expenses
Cost of goods sold		262,582			—		43,860		(45,939	)		260,503
Depreciation		19,665			—		2,053					21,718
Selling and administrative expenses		14,414			—		—		(57	)		14,357

Operating income		12,139			57		26		—			12,222
Interest expense, net		9,090			—		—		—			9,090
Discount and expenses on sales of receivables		1,417			—		—		—			1,417
Other, net		(12	)		—		—		—			(12	)

Income before income taxes		1,644			57		26		—			1,727
Provision for income taxes		633			20		7		—			660
Equity in earnings of subsidiary		19			1,030		—		(1,049	)		—

Net income	$	1,030		$	1,067	$	19	$	(1,049	)	$	1,067

AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
February 27, 2004

AVONDALE INCORPORATED
CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Twenty-Six weeks ended February 27, 2004
(amounts in thousands)


							Non-Guarantor
							Avondale Mills
				Guarantor			Graniteville
	Avondale			Avondale			Fabrics,
	Mills, Inc.			Incorporated			Inc.			Eliminations			Consolidated
Operating activities
Net loss	$	(8,978	)	$	(8,946	)	$	(405	)	$	9,383		$	(8,946	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		17,228			—			1,875			—			19,103
Benefit of deferred income taxes		(5,035	)		—			—			—			(5,035	)
Gain on disposal of property, plant and equipment and assets held for sale		(2,633	)		—			—			—			(2,633	)
Sale of accounts receivable, net		(4,932	)		—			—			—			(4,932	)
Changes in operating assets and liabilities		(3,594	)		(32	)		(1,461	)		—			(5,087	)
Dividends from subsidiary		—			2,476			—			(2,476	)		—
Equity in loss of subsidiary		405			8,978			—			(9,383	)		—

Net cash provided by (used in) operating activities		(7,539	)		2,476			9			(2,476	)		(7,530	)
Investing activities
Purchase of property, plant and equipment		(2,824	)		—			(9	)		—			(2,833	)
Proceeds from sale of property, plant and equipment and assets held for sale		4,597			—			—			—			4,597

Net cash provided by (used in) investing activities		1,773			—			(9	)		—			1,764
Financing activities
Net payments on long-term debt		(2,163	)		—			—			—			(2,163	)
Dividends paid		(2,476	)		(2,476	)		—			2,476			(2,476	)

Net cash used in financing activities		(4,639	)		(2,476	)		—			2,476			(4,639	)

Decrease in cash and cash equivalents		(10,405	)		—			—			—			(10,405	)
Cash and cash equivalents
At beginning of period		13,769			—			—			—			13,769

Cash and cash equivalents
At end of period	$	3,364		$	—		$	—		$	—		$	3,364

AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
February 27, 2004

AVONDALE INCORPORATED
CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Twenty-Six weeks ended February 28, 2003
(amounts in thousands)


							Non-Guarantor
							Avondale Mills
				Guarantor			Graniteville
	Avondale			Avondale			Fabrics,
	Mills, Inc.			Incorporated			Inc.			Eliminations			Consolidated
Operating activities
Net income	$	1,030		$	1,067		$	19		$	(1,049	)		$	1,067
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		19,905			—			2,053			—				21,958
Benefit of deferred income taxes		112			—			—			—				112
Gain on sale of property, plant and equipment		(12	)												(12	)
Sale of accounts receivable, net		(14,950	)		—			—			—				(14,950	)
Changes in operating assets and liabilities		4,448			1,144			(1,969	)		—				3,623
Dividends from subsidiary		—			2,506			—			(2,506	)			—
Equity in income of subsidiary		(19	)		(1,030	)		—			1,049				—

Net cash provided by operating activities		10,514			3,687			103			(2,506	)			11,798
Investing activities
Purchase of property, plant and equipment		(7,946	)		—			(103	)		—				(8,049	)
Proceeds from sale of property, plant and equipment and assets held for sale		1,238													1,238

Net cash used in investing activities		(6,708	)		—			(103	)		—				(6,811	)
Financing activities
Net payments on revolving line of credit		(4,025	)		—			—			—				(4,025	)
Purchase and retirement of treasury stock		—			(1,181	)		—			—				(1,181	)
Dividends paid		(2,506	)		(2,506	)		—			2,506				(2,506	)

Net cash used in financing activities		(6,531	)		(3,687	)		—			2,506				(7,712	)

Decrease in cash		(2,725	)		—			—			—				(2,725	)
Cash at beginning of period		2,859			—			—			—				2,859

Cash at end of period	$	134		$	—		$	—		$	—			$	134

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

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 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.

RESULTS OF OPERATIONS

Thirteen Weeks Ended February 27, 2004 Compared to Thirteen Weeks Ended February 28, 2003

Net Sales. Net sales decreased 8.5% to $129.6 million for the thirteen weeks ended February 27, 2004 from $141.6 million for the thirteen weeks ended February 28, 2003. The decline in net sales in the thirteen weeks ended February 27, 2004 primarily reflected lower unit volume for all segments, as imported apparel continued to capture market share of domestic retail sales and weak employment and economic conditions within the United States impacted consumer demand. Selling prices remained very competitive reflecting the significant uncertainties presented by the economic and political environment, the imbalance of global supply and demand for textile and apparel products and the financial distress experienced by many of the Company’s domestic competitors. In addition, the manipulation of the Chinese yuan and currencies of other Asian countries relative to the U.S. dollar and other trade distorting practices employed by those countries create competitive advantages which continue to promote the importation of goods from those countries by U.S. retailers, exacerbating the already highly competitive market conditions. The Company expects these conditions to continue into the foreseeable future.

Operating Income (Loss). Company operations produced an operating loss of ($3.6) million for the thirteen weeks ended February 27, 2004 compared to an operating income of $4.7 million for the thirteen weeks ended February 28, 2003. 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. In addition, due to the increase in raw material costs, the Company incurred a non-cash charge of $2.0 million to adjust the carrying value of inventories to LIFO basis, net of market adjustment, for the thirteen weeks ended February 27, 2004 compared to a charge of $0.2 million for the thirteen weeks ended February 28, 2003. Consumption of internally produced yarns and greige fabrics in the production of finished apparel fabrics in lieu of outside purchases continued to provide higher overall capacity utilization. Cost of goods sold decreased 1.5% to $117.6 million for the thirteen weeks ended February 27, 2004 from $119.4 million for the thirteen weeks ended February 28, 2003, reflecting the overall decrease in unit volume. Cost of goods sold as a percentage of net sales increased to 90.7% for the thirteen weeks ended February 27, 2004 from 84.3% for the thirteen weeks ended February 28, 2003.

Selling and administrative expenses decreased 7.5% to $6.2 million for the thirteen weeks ended February 27, 2004 from $6.7 million for the thirteen weeks ended February 28, 2003, 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 4.8% for the thirteen weeks ended February 27, 2004 from 4.7% for the thirteen weeks ended February 28, 2003.

Segment Performance. Apparel fabric sales decreased 14.6% to $105.6 million for the thirteen weeks ended February 27, 2004 from $123.7 million for the thirteen weeks ended February 28, 2003, reflecting a 14.7% decrease in yards invoiced, while average invoice price remained flat for the respective periods. Operating income for

apparel fabrics decreased 91.8% to $0.5 million for the thirteen weeks ended February 27, 2004 from $6.1 million for the thirteen weeks ended February 28, 2003, primarily due to higher raw material costs and the reduced unit volume.

Yarn sales, including intra-company sales to the Company’s fabric operations, increased 10.0% to $46.0 million for the thirteen weeks ended February 27, 2004 from $41.8 million for the thirteen weeks ended February 28, 2003. Pounds invoiced declined 16.0%, primarily reflecting the reduced yarn requirements of the Company’s apparel fabric operations. Average invoice price increased 30.8% as improved market demand for certain yarn products and higher raw material costs helped increase both outside invoice prices and intra-company transfer prices. The yarns operation produced operating income of $0.5 million for the thirteen weeks ended February 27, 2004 compared to operating income of $0.6 million for the thirteen weeks ended February 28, 2003, as the higher average invoice price nearly offset the higher raw material costs.

Other sales, which include sales of greige and specialty fabrics and revenues from the Company’s trucking operation, decreased 17.5% to $14.1 million for the thirteen weeks ended February 27, 2004 from $17.1 million for the thirteen weeks ended February 28, 2003. 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 decreased 40.0%, from $1.5 million for the thirteen weeks ended February 28, 2003 to $0.9 million for the thirteen weeks ended February 27, 2004, primarily due to higher raw material costs and reduced volume within the greige fabric operation.

Inter-segment sales decreased 12.0% to $36.1 million for the thirteen weeks ended February 27, 2004 from $41.0 million for the thirteen weeks ended February 28, 2003, 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 decreased 6.5% to $4.3 million for the thirteen weeks ended February 27, 2004 from $4.6 million for the thirteen weeks ended February 28, 2003. This decrease reflected lower average outstanding borrowings, and lower market interest rates applicable to those borrowings, during the thirteen weeks ended February 27, 2004.

Discount and Expenses on Sale of Receivables. Discount and expenses on sales of receivables were $0.6 million for the thirteen weeks ended February 27, 2004 compared to $0.7 million for the thirteen weeks ended February 28, 2003, primarily reflecting a net decrease in accounts receivable sold under the securitization facility.

Benefit of Income Taxes. An income tax benefit of $3.0 million was recorded for the thirteen weeks ended February 27, 2004, reflecting the Company’s loss before income taxes, compared to a tax benefit of $0.2 million for the thirteen weeks ended February 28, 2003.

Twenty-Six Weeks Ended February 27, 2004 Compared to Twenty-Six Weeks Ended February 28, 2003

Net Sales. Net sales decreased 15.5% to $260.9 million for the twenty-six weeks ended February 27, 2004 from $308.8 million for the twenty-six weeks ended February 28, 2003. The decline in net sales in the twenty-six weeks ended February 27, 2004 primarily reflected lower unit volume for all segments, as imported apparel continued to capture market share of domestic retail sales and weak employment and economic conditions within the United States impacted consumer demand. Selling prices remained very competitive reflecting the significant uncertainties presented by the economic and political environment, the imbalance of global supply and demand for textile and apparel products and the financial distress experienced by many of the Company’s domestic competitors. In addition, the manipulation of the Chinese yuan and currencies of other Asian countries relative to the U.S. dollar and other trade distorting practices employed by those countries create competitive advantages which continue to promote the importation of goods from those countries by U.S. retailers, exacerbating the already highly competitive market conditions. The Company expects these conditions to continue into the foreseeable future.

Operating Income (Loss). Company operations produced an operating loss of ($6.0) million for the twenty-six weeks ended February 27, 2004 compared to an operating income of $12.2 million for the twenty-six weeks ended February 28, 2003. 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. In addition, due to the increase in raw material costs, the Company incurred a non-cash charge of $2.5 million to adjust the carrying value of inventories to LIFO basis, net of market adjustment, for the twenty-six weeks ended February 27, 2004 compared to a charge of

$0.3 million for the twenty-six weeks ended February 28, 2003. Consumption of internally produced yarns and greige fabrics in the production of finished apparel fabrics in lieu of outside purchases continued to provide higher overall capacity utilization. Cost of goods sold decreased 9.7% to $235.3 million for the twenty-six weeks ended February 27, 2004 from $260.5 million for the twenty-six weeks ended February 28, 2003, reflecting the overall decrease in unit volume. Cost of goods sold as a percentage of net sales increased to 90.2% for the twenty-six weeks ended February 27, 2004 from 84.4% for the twenty-six weeks ended February 28, 2003.

Selling and administrative expenses decreased 11.8% to $12.7 million for the twenty-six weeks ended February 27, 2004 from $14.4 million for the twenty-six weeks ended February 28, 2003, 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 twenty-six weeks ended February 27, 2004 from 4.7% for the twenty-six weeks ended February 28, 2003.

Segment Performance. Apparel fabric sales decreased 20.0% to $213.0 million for the twenty-six weeks ended February 27, 2004 from $266.2 million for the twenty-six weeks ended February 28, 2003, reflecting a 19.9% decrease in yards invoiced, while average invoice price remained flat for the respective periods. Operating income for apparel fabrics decreased 83.7% to $2.9 million for the twenty-six weeks ended February 27, 2004 from $17.8 million for the twenty-six weeks ended February 28, 2003, primarily due to higher raw material costs and the reduced unit volume.

Yarn sales, including intra-company sales to the Company’s fabric operations, decreased 2.3% to $87.4 million for the twenty-six weeks ended February 27, 2004 from $89.5 million for the twenty-six weeks ended February 28, 2003. Pounds invoiced declined 17.8%, primarily reflecting the reduced yarn requirements of the Company’s apparel fabric operations. Average invoice price increased 18.7% as improved market demand for certain yarn products and higher raw material costs helped increase both outside invoice prices and intra-company transfer prices. The yarn operations produced an operating loss of ($0.8) million for the twenty-six weeks ended February 27, 2004 compared to an operating income of $2.1 million for the twenty-six weeks ended February 28, 2003 as the higher average invoice price nearly offset the higher raw material costs.

Other sales, which include sales of greige and specialty fabrics and revenues from the Company’s trucking operation, decreased 15.3% to $28.8 million for the twenty-six weeks ended February 27, 2004 from $34.0 million for the twenty-six weeks ended February 28, 2003. The decrease in other sales was primarily attributable to reduced intra-company sales of greige fabrics to the apparel fabric operations. Operating income from other sales decreased 9.5% to $1.9 million for the twenty-six weeks ended February 27, 2004 from $2.1 million for the twenty-six weeks ended February 28, 2003, primarily due to higher raw material costs and reduced volume within the greige fabric operation.

Inter-segment sales decreased 15.6% to $68.3 million for the twenty-six weeks ended February 27, 2004 from $80.9 million for the twenty-six weeks ended February 28, 2003, primarily reflecting the decrease in consumption of internally produced yarns and greige fabrics within the Company’s apparel fabrics operation.

Interest Expense, Net. Net interest expense increased 1.1% to $9.2 million for the twenty-six weeks ended February 27, 2004 from $9.1 million for the twenty-six weeks ended February 28, 2003. 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. This charge to interest expense, net was partially offset by lower average outstanding borrowings and lower market interest rates applicable to those borrowings during the twenty-six weeks ended February 27, 2004. 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 $1.2 million for the twenty-six weeks ended February 27, 2004 compared to $1.4 million for the twenty-six weeks ended February 28, 2003, primarily reflecting a net decrease in accounts receivable sold under the securitization facility

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 twenty-six weeks ended February 27, 2004.

Provision for (Benefit of) Income Taxes. An income tax benefit of $4.9 million was recorded for the twenty-six weeks ended February 27, 2004, reflecting the Company’s loss before income taxes, compared to a provision for income taxes of $0.7 million for the twenty-six weeks ended February 28, 2003.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities was $7.5 million for the twenty-six weeks ended February 27, 2004. Principal working capital changes included a $1.0 million increase in accounts receivable, a $4.9 million decrease in accounts receivable sold under the securitization facility, a $7.5 million increase in inventories, and a $2.7 million increase in accounts payable and accrued expenses. Investing activities were predominantly equipment purchases and related costs of $2.8 million made in connection with the ongoing maintenance of the Company’s manufacturing facilities and proceeds of $4.6 million from the sale of two tracts of land not utilized in operations and certain items of retired equipment. Financing activities included repayment of $2.2 million of long-term debt and payment of $2.5 million in dividends on outstanding common stock.

The Company’s capital expenditures, aggregating $2.8 million for the twenty-six weeks ended February 27, 2004, were used primarily to complete routine maintenance projects. Management estimates that capital expenditures for the balance of fiscal 2004 will be approximately $5.2 million.

At February 27, 2004, the Company had no borrowings outstanding under its revolving line of credit, and $32.2 million of borrowing availability as determined using prescribed advance rates against qualified inventory collateral, less outstanding letters of credit and required minimum availability.

On February 24, 2004, the Company executed an amendment to certain financial covenants contained in the equipment note in anticipation of the impact of the Company’s reduced results of operation and cash flows. An amendment fee of 0.25% of the outstanding balance of the note was paid to The CIT Group.

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.

The indenture, under which the 2013 Notes were issued, includes, among other provisions, covenants restricting the Company’s payment of dividends and purchase of its capital stock. In general, the amount of dividends and capital stock purchases may not exceed an amount equal to $20 million plus 50% of net income, or less 100% of net losses, all calculated on an accumulative basis subsequent to the date of the indenture. With the loss reported for the thirteen weeks ended February 27, 2004, the covenants of the indenture prohibit further payment of dividends or purchases of capital stock until such time as sufficient earnings are reported to eliminate the restriction.

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.

SUBSEQUENT EVENTS

In response to the highly competitive market conditions and continued imbalance of global supply and demand for textile and apparel products, in March 2004, the Company announced the closing of an open-end yarn manufacturing facility located in North Carolina and the weaving operation of an integrated greige fabric manufacturing facility located in Georgia. These actions to rationalize excess manufacturing capacity, following the relocation of certain equipment, are expected to improve capacity utilization of the Company’s remaining facilities and lower costs per unit produced. No reduction in net sales is anticipated as a result of this capacity rationalization. Flexibility of the Company’s manufacturing facilities to shift production from one product line to another and the Company’s ability to source additional yarns and greige fabrics from outside vendors to increase production of its finished products in reaction to added demand are expected to be maintained. Certain equipment will be relocated from these two operations to other facilities located in Alabama, Georgia and South Carolina to retain certain specialized manufacturing capabilities and replace older, less efficient equipment. In connection with these actions, the Company anticipates recording restructuring and other non-operating costs of approximately $3.5 million during the third quarter of fiscal 2004.

FORWARD LOOKING STATEMENTS

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:

• 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.

OTHER DATA - NON-GAAP FINANCIAL MEASURE

Adjusted EBITDA is a supplemental non-GAAP financial measure. EBITDA is commonly defined as net income (loss) plus (a) interest expense, (b) provision for (benefit of) income taxes and (c) depreciation and amortization. The Company’s definition of adjusted EBITDA differs due to the further addition to net income (loss) of (a) discount and expenses on sale of receivables and (b) adjustment of carrying value of inventories to LIFO basis, net of market adjustments. Adjusted EBITDA is presented because management believes that it is a widely accepted indicator of a company’s ability to service its indebtedness and is used by investors and analysts to evaluate companies within the textile and apparel industry. In addition, adjusted EBITDA is used to determine compliance with certain covenants under the Company’s receivables securitization, revolving credit facility, equipment note and indenture governing the 2013 notes.

Adjusted EBITDA as calculated by the Company is not necessarily comparable to similarly titled measures used by other companies. Adjusted EBITDA (a) does not represent net income (loss) or cash flow from operations as defined by generally accepted accounting principles; (b) is not necessarily indicative of cash available to fund cash requirements; and (c) should not be considered an alternative to operating income, net income (loss) or net cash provided by operating activities as determined in accordance with generally accepted accounting principles.

The following table reconciles adjusted EBITDA on a consolidated basis to the line on the Company’s consolidated statement of operations entitled net income (loss) for the periods presented:


	Twenty-Six Weeks Ended
	Feb. 28,		Feb. 27,
	2003		2004
Net income (loss)	$	1,067	$	(8,946	)
Interest expense, net		9,090		9,164
Provision for (benefit of) income taxes		660		(4,895	)
Depreciation and amortization		21,958		19,103

EBITDA		32,775		14,426
Discount and expenses on sale of receivables		1,417		1,243
Adjustment of carrying value of inventories to LIFO basis, net of market adjustment		300		2,500

Adjusted EBITDA	$	34,492	$	18,169

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

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.

Item 4. Controls and Procedures.

As required by Securities and Exchange Commission rules, the Company has evaluated the effectiveness of the design and operation of its 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 Company management, including the principal executive officer and principal financial officer. Based on this evaluation, these officers have concluded that the design and operation of the Company’s disclosure controls and procedures are effective. There were no changes to the Company’s internal controls during the period covered by this quarterly report that materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

Disclosure controls and procedures are the Company’s controls and other procedures designed to ensure that information required to be disclosed by the Company in the reports that the Company files or submits 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 the Company in the reports that the Company files or submits under the Exchange Act are accumulated and communicated to the Company’s management, including the Company’s principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

AVONDALE INCORPORATED

PART II - OTHER INFORMATION

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 other than as described below.

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.

None

Item 3. Defaults upon Senior Securities.

None

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

None

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, filed June 7, 1996, File No. 333-05455-01).

			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. 33-68412).

			4.3	Indenture dated as of June 30, 2003 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, filed August 29, 2003, File No. 333-108353-01).

			4.5	Registration Rights Agreement, dated as of June 30, 2003, among Avondale Mills, Inc., Avondale Incorporated and Wachovia Securities, LLC (incorporated by reference to Exhibit 4.5 to Avondale Incorporated’s Registration Statement on Form S-4, filed August 29, 2003, File No. 333-108353-01).

			10.47	Wavier and Amendment No. 1 to Credit Agreement, dated as of November 7, 2003, among Avondale Mills, Inc., Avondale Mills Graniteville Fabrics, Inc. and General Electric Capital Corporation, GECC Capital Markets Group, Inc., and from time to time various Lenders, dated January 22, 2004.

			10.48	Amendment No. 4 to Receivables Purchase and Servicing Agreement, dated as of August 30, 2002, by and among Avondale Mills, Inc., Avondale Funding, LLC and General Electric Capital Corporation, dated January 22, 2004.

			10.49	Amendment No. 1 to Master Security Agreement, dated July 30, 2002, between Avondale Mills, Inc. and The CIT Group/Equipment Financing, Inc., dated February 24, 2004.

			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
	None


			Page
			Reference
PART I - FINANCIAL INFORMATION (Unaudited)
	Item 1:	Financial Statements
		Condensed Consolidated Balance Sheets at August 29, 2003 and February 27, 2004		2
		Condensed Consolidated Statements of Operations for the Thirteen Weeks Ended February 28, 2003 and February 27, 2004		3
		Condensed Consolidated Statements of Operations for the Twenty-Six Weeks Ended February 28, 2003 and February 27, 2004		4
		Condensed Consolidated Statements of Cash Flows for the Twenty-Six Weeks Ended February 28, 2003 and February 27, 2004		5
		Notes to Condensed Consolidated Financial Statements		6
	Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
	Item 3:	Quantitative and Qualitative Disclosures about Market Risk		24
	Item 4:	Controls and Procedures		25
PART II - OTHER INFORMATION
	Item 1:	Legal Proceedings		26
	Item 2:	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities		26
	Item 3:	Defaults upon Senior Securities		26
	Item 4:	Submission of Matters to a Vote of Security Holders		26
	Item 5:	Other Information		26
	Item 6:	Exhibits and Reports on Form 8-K		27
	Signature			28
EX-10.47 AMENDMENT NO.1 TO CREDIT AGREEMENT
EX-10.48 AMENDMENT NO.4 TO RECEIVABLES PURCHASE
EX-10.49 AMENDMENT NO.1 TO MASTER SECURITY
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO
EX-32.2 SECTION 906 CERTIFICATION OF THE CFO


				AVONDALE INCORPORATED

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

				Jack R. Altherr, Jr.
				Vice Chairman and Chief Financial Officer

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