UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

(Mark One)

Commission file number 33-68412

AVONDALE INCORPORATED

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

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

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

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

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

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

     The aggregate market value of the Class A Common Stock held by non-affiliates of the registrant as of November 3, 2004 (based upon the book value per share of Class A Common Stock as of August 29, 2004) was $13,200,000.

     As of November 3, 2004, the registrant had 11,394,160 and 978,939 shares of Class A Common Stock and Class B Common Stock outstanding, respectively.

     Documents incorporated by reference: None.

INDEX TO FORM 10-K

AVONDALE INCORPORATED

PART I

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

ITEM 1. BUSINESS

General

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

     The Company’s predecessor was founded in 1895 by the family of G. Stephen Felker, the current chairman, president and chief executive officer. Avondale Incorporated was incorporated as a Georgia Corporation in 1965. The Company currently operates seventeen manufacturing facilities with locations in Alabama, Georgia, North Carolina and South Carolina. The facilities and equipment are modern and efficient, reflecting the significant investment made in recent years to enhance productivity, operating efficiencies and manufacturing flexibility, and to reduce unit costs.

Description of the Business

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

Products

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

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

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

     The Company is one of the largest domestic manufacturers and marketers of cotton and cotton-blend workwear fabrics used in the production of uniforms, career apparel and other workwear (shirts, slacks, jackets and other garments). Customers of the Company’s workwear fabrics require durable fabrics characterized by long wear

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and easy care. The Company works closely with its customers to develop fabrics with these and other enhanced performance characteristics.

     Apparel fabrics sales accounted for 78%, 80% and 75%, respectively, of the Company’s net sales in fiscal 2002, 2003 and 2004.

     Yarns. The Company is a leading domestic manufacturer and marketer of cotton and cotton-blend yarns, which are used internally in the production of woven apparel fabrics or marketed to knitters or weavers of apparel fabrics. The Company’s customers use these yarns in the manufacture of a broad range of items, including apparel (T-shirts, underwear, socks and hosiery, knitted shirts, shorts and slacks, denim jeans, woven khaki slacks, and fleece sweatshirts, pants and jackets), and home furnishings. The Company’s yarn sales accounted for approximately 29%, 28% and 32%, respectively, of the Company’s net sales in fiscal 2002, 2003 and 2004.

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

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

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

     The Company’s other sales accounted for 11%, 11% and 10%, respectively, of the Company’s net sales in fiscal 2002, 2003 and 2004.

     Intersegment Sales. Intersegment sales represent the transfer of yarns and greige fabrics among the three business segments. These items ultimately are consumed in the production of finished products, and therefore are eliminated from net sales. Intersegment sales accounted for (18%), (19%) and (17%), respectively, of the Company’s net sales in fiscal 2002, 2003 and 2004.

Sales and Marketing

     During fiscal 2004, the Company sold apparel fabrics, greige and specialty fabrics, and yarns to approximately 500, 200 and 250 customers, respectively, or approximately 800 customers in total after eliminating duplications. The Company is one of the leading suppliers of denim to Flynn Enterprises, Inc., a private label apparel manufacturer, and V.F. Corporation (the maker of Lee®, Rider®, Wrangler®, Rustler®, Brittania®, Red Kap®, Timbercreek®, Chic®, and HealthTex® brands), with total sales to each of these two customers accounting for approximately 10% of the Company’s net sales in fiscal 2004. The Company believes that it has a strong working relationship with Flynn Enterprises, Inc. and V.F. Corporation. None of the Company’s other customers individually accounted for 10% or more of the Company’s net sales in fiscal 2004. The Company’s sales billed to customers domiciled outside the U.S. accounted for 7%, 8% and 16%, respectively, of the Company’s net sales in fiscal 2002, 2003 and 2004.

     The Company targets customers who demand a high level of customer service. The Company’s nine sales offices are generally located near the headquarters or manufacturing facilities of key customers. Sales associates visit their customers on a regular basis and are primarily responsible for interpreting customers’ needs, processing customer orders and interacting with the Company’s production scheduling personnel. The Company’s sales associates are paid a base salary plus sales incentives to the extent certain performance targets are met. The Company’s independent sales representatives are paid on a commission basis.

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Manufacturing

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

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

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

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

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

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

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

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2000 – Completed replacement of earlier generation air jet looms with new, high speed air jet looms in November 1999 for production of greige fabrics to be piece-dyed for sportswear and workwear end uses;

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2000 – Completed modernization of an existing ring spinning facility in August 2000, including the replacement of earlier generation roving, ring spinning and winding equipment with technologically advanced linked ring spinning;

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2001 – Completed expansion of an existing piece-dyed finishing facility in January 2001, for the production of additional finished piece-dyed fabrics for sportwear and workwear end uses;

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2001 – Completed expansion and modernization of an existing greige weaving facility in May 2001, including the construction of a new building addition and the installation of modern air jet looms for the production of additional greige fabrics;

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2001 – Completed expansion and modernization of an existing integrated denim weaving facility in May 2001, including the installation of modern air jet looms for the production of additional denim fabrics;

•

2001 – Completed expansion of linked ring spinning facility which was modernized in August 2000;

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2002 – Completed replacement of earlier generation winding equipment at an existing ring spinning facility in September 2001 with technologically advanced, fully automated winders;

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2002 – Completed modernization of existing spinning operation within integrated fabric weaving facility in October 2001, including installation of technologically advanced linked ring spinning equipment;

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2002 – Completed construction of a new ring spinning facility using existing manufacturing floor space, in October 2001, including installation of technologically advanced linked ring spinning equipment;

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2003 – Completed installation of an automated dye mixing and dispensing system in May 2003 at a fabric finishing facility in South Carolina; and

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2003 – Completed installation of new roving equipment in May 2003 at an existing ring spinning facility in Alabama.

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Raw Materials

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

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

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

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

     On September 8, 2004, a dispute settlement panel of the World Trade Organization (“WTO”) ruled that the payments made by the U.S. Department of Agriculture, representing the differential between domestic cotton prices and world cotton prices, as adjusted, are prohibited export subsidies in violation of WTO global trade rules. The U.S. appealed this ruling to the Appellate Body of the WTO on October 15, 2004. If the ruling by the dispute settlement panel is upheld, suspension of the U.S. agricultural support programs may be required to avoid economic retaliation against the U.S. by WTO member countries. Such action could result in an increase in the Company’s raw material costs, making the Company’s products less competitive.

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

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

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

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

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

Seasonality

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

Backlog

     The Company’s order backlog was approximately $171 million at August 27, 2004, as compared to approximately $200 million at August 29, 2003, primarily reflecting lower unit volume in the Company’s apparel fabrics operation. Orders on hand are not necessarily indicative of total future sales. Substantially all of the orders outstanding at August 27, 2004 are expected to be filled by the end of fiscal 2005.

Competition

     The textile industry is highly competitive, and no single company is dominant. Management believes that the Company is one of the largest domestic manufacturers of indigo-dyed denim, piece-dyed fabrics for workwear and sportswear, and cotton and cotton-blend yarns. The Company’s competitors include large, vertically integrated textile companies and numerous smaller companies. There has been a general trend toward consolidation within certain markets of the textile industry and, within the Company’s markets, some increases in manufacturing capacity. However, the resulting excess manufacturing capacity and an increase in the U.S. importation of textiles and apparel from countries employing trade distorting tactics to benefit their industries have created intensely competitive market conditions leading to severe financial difficulties of several domestic yarn and apparel fabric manufacturers, and the accompanying closure of domestic manufacturing capacity.

     The primary competitive factors in the textile industry are price, product styling and differentiation, quality, manufacturing flexibility, delivery time and customer service. The importance of these factors is determined by the needs of particular customers and the characteristics of particular products. The failure of the Company to compete

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effectively with respect to any of these key factors or to keep pace with rapidly changing markets could have a material adverse effect on the Company’s results of operations and financial condition.

Trade Regulation

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

     The extent of import protection afforded by the U.S. government to domestic textile producers has been, and is likely to remain, subject to considerable domestic political deliberation and foreign considerations. In January 1995, the WTO, a multilateral trade organization, was formed by the members of the General Agreement on Tariffs and Trade (“GATT”) to replace GATT. The WTO has set forth the mechanisms by which world trade in textiles and clothing will be progressively liberalized with the elimination of quotas and the reduction of duties. The implementation began in January 1995 with the phasing-out of quotas and the reduction of duties to take place over a 10-year period. The selection of products at each phase is made by each importing country and must be drawn from each of the four main textile groups: yarns, fabrics, made-up textiles and apparel. The elimination of all quotas effective December 31, 2004 and the reduction of tariffs under the WTO may result in increased imports of certain textile products and apparel into North America. These factors could make the Company’s products less competitive against low cost imports from third world countries.

     The North American Free Trade Agreement (“NAFTA”) among the United States, Canada and Mexico, which became effective on January 1, 1994, has created the world’s largest free-trade zone. The agreement contains safeguards sought by the U.S. textile industry, including a rule of origin requirement that products be processed in one of the three countries in order to benefit from NAFTA. In addition, NAFTA requires, with limited exception, merchandise to be made from yarns and fabrics originating in North America in order to avoid trade restrictions. Thus, not only must apparel be made from North American fabric but the fabric must also be woven from North American spun yarn. A limited exemption to the rules of origin requirement for certain apparel assembled in Mexico from yarns and fabrics made outside of North America is scheduled to expire in December 2004. Certain importers have requested that the exemption be extended, while certain U.S. textile producers have argued for the exemption to expire, as continuation of the exemption would effectively provide Chinese and other Asian producers duty-free access to the U.S. market, at a time when they will also gain quota-free access to the U.S. market following the December 31, 2004 elimination of all quotas. Based on experience to date, NAFTA has had a favorable impact on the Company’s business.

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

     The Andean Trade Promotion and Drug Eradication Act was passed on August 6, 2002 to renew and enhance the Andean Trade Preference Act (ATPA). Under the enhanced ATPA, apparel manufactured in Bolivia, Columbia, Ecuador and Peru using yarns and fabrics produced in the United States may be imported into the United States duty and quota free through September 30, 2007. This legislation effectively grants these four countries the

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favorable trade terms afforded Mexico and the Caribbean region. Management believes this legislation further enhances the attractiveness of U.S. textiles and will have a favorable impact on the Company.

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

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

Governmental Regulation

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

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

     Many of the Company’s manufacturing facilities have been in operation for several decades, with some operations originating in the 1800s. Historical management of hazardous substances and waste disposal practices may have resulted in on-site and off-site unknown remediation liability for which the Company may be responsible. In addition, certain operations, including wastewater treatment facilities and air emission sources may have to be upgraded to meet more stringent environmental requirements in the future. The Company has established reserves for certain significant environmental projects which it anticipates will be completed within the next two to three years to address certain known potential environmental issues (including the two Graniteville issues discussed in

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further detail below). The Company cannot with certainty assess at this time the impact of future emission or discharge or other regulatory standards or enforcement practices under the foregoing environmental laws and regulations and, in particular, under the 1990 Clean Air Act, upon its operations or capital expenditure requirements. The Company believes it is currently in compliance in all material respects with the foregoing environmental and health and safety laws and regulations.

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

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

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

Associates

     At August 27, 2004, the Company had approximately 4,300 associates. None of the Company’s associates is covered by a collective bargaining agreement, and management believes that the Company’s relations with its associates are good.

ITEM 2. PROPERTIES

     The Company currently operates seventeen manufacturing facilities in the U.S., of which six are located in Alabama, three are located in Georgia and eight are located in South Carolina. The Company owns all seventeen of these facilities. Of the Company’s manufacturing facilities, ten produce yarn, four manufacture fabrics, three are dyeing facilities and four are engaged in fabric finishing. Additionally, the Company operates six warehouses, including one leased facility.

     The Company’s plants generally operate 24 hours a day, five to seven days a week throughout the year. The Company considers its plants and equipment to be in good condition and adequate for its current operations. The Company’s principal executive offices are located in Monroe, Georgia in a building owned by the Company. The

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Company also has executive offices in Sylacauga, Alabama and Graniteville, South Carolina, which are located in buildings owned by the Company. All of the Company’s sales offices are leased from unrelated third parties.

ITEM 3. LEGAL PROCEEDINGS

     On January 13, 2000, a case was filed in the Circuit Court of Jefferson County, Alabama by Larry and Cynthia Locke and the owners of fourteen other residences in the Raintree subdivision of Lake Martin, against Russell Corporation, Alabama Power and the Company. The Court subsequently dismissed Alabama Power as a defendant in the case, based on their motion for summary judgement. The complaint alleges that the Company, among others, negligently and/or wantonly caused or permitted the discharge and disposal of sewage sludge and contaminants into the lake adjacent to the plaintiffs’ property, which allegedly interfered with the plaintiffs’ use of the property. As a result of these alleged actions, the plaintiffs claim that the value of their property has been diminished and that they suffered other damages. The complaint seeks compensatory and punitive damages in an undisclosed amount. After an initial series of actions, the case was stayed by the trial court pending resolution of an appeal in the case of Sullivan versus Russell Corporation, the Company and others (“Sullivan case”), which also involved the Raintree subdivision. On January 12, 2001, the Alabama Supreme Court issued a final order in the Sullivan case rendering that case in favor of the defendants. Subsequent to the Alabama Supreme Court’s actions with regard to the Sullivan case, plaintiff’s counsel, which includes attorneys who acted as co-plaintiff’s counsel on the Sullivan case, presented arguments in a hearing before the trial judge on May 4, 2001 based on a narrow legal theory that the nuisance claimed in this action is sufficiently different from the Sullivan case, and therefore, that this case should be allowed to proceed in spite of the fact that the Sullivan case was ultimately decided in favor of the defendants. The trial court allowed the case to proceed to the discovery phase. On April 25, 2002, the trial court held a hearing on summary judgment motions and, on May 22, 2002, entered judgement as a matter of law in the Company’s favor on all counts except the narrow legal theory involving public nuisance tort. All parties are awaiting the court’s decision on certain evidentiary motions filed in anticipation of the trial, which if granted, could reduce the scope of the plaintiffs’ claims in the case. The trial has been scheduled to begin in February 2005. The Company intends to vigorously defend this case and believes that it has a number of defenses available to it. While the outcome of this case cannot be predicted with certainty, the Company does not believe that it will have a material adverse effect on the Company’s financial condition or results of operations.

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

     In separate actions initiated by third parties based upon the public disclosure of the investigation by the U.S. Department of Justice, the Company and various other defendants have been named in three class action complaints filed in the U. S. District Court for the Middle and Western Districts of North Carolina on May 12, May 28 and May 25, 2004, respectively, and one class action complaint filed in the Circuit Court for Shelby County, Tennessee on April 21, 2004. On August 26, 2004, two of the District Court cases were consolidated in the Middle District of North Carolina. The Western District of North Carolina case was voluntarily dismissed and re-filed in the Middle District of North Carolina. The Company anticipates the third case will be consolidated with the other two. All complaints seek, under antitrust laws, various damages and injunctive relief related to the pricing and sale of open-end yarns. These complaints are in preliminary procedural stages and do not have scheduled trial dates. The Company has moved to dismiss one of the District Court cases on the basis of a binding arbitration provision in the parties’ sales agreement. The Company intends to vigorously defend these cases and believes it has a number of defenses available to it. While the outcome of these cases cannot be predicted with certainty, the Company does not believe that the resolution of these cases will have a material adverse effect on the Company’s financial condition or results of operations.

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

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

     Not applicable.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

     There is no established public trading market for the Company’s Class A Common Stock or Class B Common Stock (collectively, “Common Stock”). As of August 27, 2004 there were 128 and one holders of record of Class A Common Stock and Class B Common Stock, respectively. The Company paid dividends aggregating $3.8 million, $5.0 million and $2.5 million in respect of its outstanding Common Stock during fiscal 2002, 2003 and 2004, respectively.

     The Company has issued and outstanding $90.7 million aggregate principal amount of 101/4% Senior Subordinated Notes due 2013 (the “2013 Notes”) under an Indenture dated as of June 30, 2003 among the Company, Avondale Mills and Wachovia Bank, National Association, as trustee (the “Indenture”). The Indenture contains certain covenants that limit the Company’s ability to pay dividends.

     The Company has issued and outstanding $41.2 million aggregate principal amount of Senior Floating Rate Notes due 2012 (the “2012 Notes”). The 2012 Notes contain certain covenants that limit the Company’s ability to pay dividends.

     The Company maintains a secured five-year installment equipment note, executed July 30, 2002, with a balance outstanding of $13.5 million at August 27, 2004. The equipment note contains certain covenants that limit the Company’s ability to pay dividends.

     At August 27, 2004 there was no balance outstanding, other than obligations relating to three letters of credit issued in the aggregate amount of $1.6 million, under a $40 million revolving credit facility executed November 7, 2003 among Avondale Mills, its subsidiary Avondale Mills Graniteville Fabrics, Inc. and General Electric Capital Corporation. The revolving credit facility contains certain covenants that limit the Company’s ability to pay dividends.

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ITEM 6. SELECTED FINANCIAL DATA

     The following table sets forth selected consolidated statement of operations data and selected consolidated balance sheet data of the Company for each of the five fiscal years in the period ended August 27, 2004. Such data were derived from the audited consolidated financial statements of the Company. The selected consolidated financial data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and Notes thereto of the Company included elsewhere in this Annual Report.

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

(2)

The ratio of earnings to fixed charges is computed by dividing income before income taxes plus fixed charges, by fixed charges. Fixed charges include interest, whether expensed or capitalized, amortization of deferred financing costs, loss on extinguishment of debt, discount and expenses on sale of receivables and the portion of capital lease payments that is representative of interest or financing charges. For fiscal 2002, 2003 and 2004, earnings were insufficient to cover fixed charges by $0.4 million, $12.2 million and $7.9 million, respectively.

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

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

Overview

     The Company is a leading domestic manufacturer and marketer of cotton and cotton-blend fabrics and yarns used in the production of casual apparel and, to a lesser extent, home furnishings and industrial products. The Company designs, manufactures and markets a broad line of indigo-dyed denim for both branded and private label apparel producers of denim jeans, slacks, shorts, skirts and jackets as well as non-apparel producers of denim luggage, bags and other products. The Company also designs and manufactures an extensive line of piece-dyed sportswear and workwear fabrics. The Company’s sportswear fabrics are marketed to both branded and private label producers of casual, or khaki, slacks, shorts and skirts. The Company’s workwear fabrics are marketed to producers of uniforms, career apparel and other workwear (shirts, slacks and jackets) that are distributed through either the rental or retail channels. The Company manufactures cotton and cotton-blend yarns, which are sold to knitters and weavers of apparel fabrics. The Company also manufactures greige and specialty fabrics, which are sold to the apparel, home furnishings and industrial markets. In fiscal 2004, the Company sold fabrics and yarns to approximately 800 customers, including many of the world’s leading apparel companies.

     General business conditions in the textile industry have been very challenging. The Company believes the strength of the U.S. dollar in comparison to the Chinese yuan and currencies of other Asian countries continues to promote the importation of goods from those countries by United States retailers, exacerbating the already highly competitive market conditions resulting from the imbalance of global supply and demand for textile and apparel products. In fiscal 2004, the Company had net sales and a net loss of $564.8 million and ($6.2) million, respectively.

     The Company believes many of the factors affecting its operating performance during fiscal 2004, including global over-supply of textile and apparel products and the relative strength of the U.S. dollar compared to the Chinese yuan and currencies of other Asian countries, will continue into fiscal 2005. In addition, the elimination of all import quotas under the WTO effective December 31, 2004 adds to the uncertainties facing the domestic textile industry. However, increases in sales volumes and reductions in raw material costs are expected to yield improvement in margins and operating cash flow during fiscal 2005. The Company remains focused on cost reduction initiatives, new product development and working capital management.

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Results of Operations

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

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

Fiscal 2004 Compared to Fiscal 2003

     Net Sales. Net sales decreased 4.4% to $564.8 million for fiscal 2004 from $590.9 million for fiscal 2003, as the Company experienced intensely competitive conditions in its markets. The decline in net sales in fiscal 2004 primarily reflected lower unit volume for all segments, as imported apparel continued to capture market share of domestic retail sales and weak employment and economic conditions within the United States impacted consumer demand. Selling prices remained very competitive reflecting the significant uncertainties presented by the economic and political environment, the imbalance of global supply and demand for textile and apparel products and the financial distress experienced by many of the Company’s domestic competitors. In addition, the manipulation of the Chinese yuan and currencies of other Asian countries relative to the U.S. dollar and other trade distorting practices employed by those countries create competitive advantages which continue to promote the importation of goods from those countries by U.S. retailers, exacerbating the already highly competitive market conditions

     Operating Income. Company operations produced an operating loss of ($10.9) million for fiscal 2004 compared to an operating income of $12.6 million for fiscal 2003. The operating loss reflected a significant increase in raw material costs, partially offset by improved unit cost absorption generated through the Company’s capacity rationalization programs. In addition, largely due to the increase in raw material costs, the Company incurred a non-cash charge of $5.2 million to adjust the carrying value of inventories to LIFO basis, net of market adjustment, for fiscal 2004 compared to a charge of $1.3 million for fiscal 2003. Consumption of internally produced yarns and greige fabrics in the production of finished apparel fabrics in lieu of outside purchases continued to provide higher overall capacity utilization. Cost of goods sold increased 0.7% to $511.3 million for fiscal 2004 from $507.8 million for fiscal 2003, reflecting the significant increase in raw material costs. Cost of goods sold as a percentage of net sales increased to 90.5% for fiscal 2004 from 86.0% for fiscal 2003.

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Results of Operations (continued)

     Selling and administrative expenses decreased 0.8% to $25.9 million for fiscal 2004 from $26.1 million for fiscal 2003. Selling and administrative expenses increased to 4.6% of net sales for fiscal 2004 from 4.4% for fiscal 2003, primarily due to the decline in net sales.

     Segment Performance. Apparel fabric sales decreased 10.6% to $420.3 million for fiscal 2004 from $470.2 million for fiscal 2003. The decline in sales reflected a 10.5% decrease in yards sold as demand for denim and other bottom-weight fabrics weakened, while average selling price remained relatively flat over the respective periods. Operating income for apparel fabrics decreased 83.5% to $4.7 million for fiscal 2004 from $28.5 million for fiscal 2003, primarily due to higher raw material costs and the reduced unit volume.

     Yarn sales, including intra-company sales to the apparel fabric operation, increased 6.6% to $178.6 million for fiscal 2003 from $167.5 million for fiscal 2003. Pounds invoiced declined 12.6%, primarily reflecting the closure of a yarn manufacturing facility in North Carolina and reduced yarn requirements of the apparel fabrics operation. Average invoice price increased 22.0% as improved market demand for certain yarn products and higher raw material costs helped increase both outside invoice prices and intra-company transfer prices. Yarn operating income was $1.1 million for fiscal 2004 compared to an operating income of $46,000 for fiscal 2003, as the increase in average invoice price offset the higher raw material costs.

     Other sales, which include sales of greige and specialty fabrics and revenue from the Company’s trucking operation, decreased 9.5% to $59.8 million for fiscal 2004 from $66.1 million for fiscal 2003. The decrease in other sales was primarily attributable to decreased intra-company sales of greige fabrics to the apparel fabric operations. Operating income for other sales increased 11.4% to $4.9 million for fiscal 2004 from $4.4 million for fiscal 2003, reflecting improved market demand for certain higher margin specialty fabrics products.

     Intersegment sales decreased 16.8% percent to $93.9 million for fiscal 2004 from $112.9 million for fiscal 2003, primarily reflecting the decrease in consumption of internally produced yarns and greige fabrics by the apparel fabrics operation.

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

     Interest Expense, Net. Interest expense, net decreased 6.3% to $17.8 million for fiscal 2004 from $19.0 million for fiscal 2003, due to lower average outstanding borrowings and lower market interest rates applicable to those borrowings.

     Discount and Expenses on Sale of Receivables. Discount and expenses on sale of receivables decreased 7.7% to $2.4 million for fiscal 2004 compared to $2.6 million for fiscal 2003, primarily reflecting a net decrease in accounts receivable sold under the securitization facility.

     Gain on Extinguishment of Debt. In the third and fourth quarters of fiscal 2004, the Company recorded a $17.0 million net gain on early extinguishment of debt related to a partial exchange of its 2013 Notes, net of the write-off of $1.1 million of unamortized financing costs related to the original issuance of the 2013 Notes. The Company executed a series of private transactions, exchanging $59.3 million of the 2013 Notes for $41.2 million of the 2012 Notes as further described under “Senior Notes” in Liquidity and Capital Resources.

     Provision for Income Taxes. An income tax benefit of ($4.9) million was recorded for fiscal 2004 compared to an income tax benefit of ($4.5) million for fiscal 2003. The Company’s effective tax rate for fiscal 2004 was 44.1% of the pre-tax loss, compared to 36.7% of the pre-tax loss for fiscal 2003. The fiscal 2004 effective tax rate reflected permanent differences generated from charitable contribution deductions of the appreciated value of certain donated property.

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Results of Operations (continued)

     Restructuring Charges, net. In response to the highly competitive market conditions and continued imbalance of global supply and demand for textile and apparel products, in May 2004, the Company closed an open-end yarn manufacturing facility located in North Carolina and the weaving operation of an integrated greige fabric manufacturing facility located in Georgia. These actions to rationalize excess manufacturing capacity, following the relocation of certain equipment, have improved capacity utilization of the Company’s remaining facilities and lowered costs per unit produced. No reduction in net sales is anticipated as a result of this capacity rationalization. Flexibility of the Company’s manufacturing facilities to shift production from one product line to another and the Company’s ability to source additional yarns and greige fabrics from outside vendors to increase production of its finished products in reaction to added demand have been maintained. Certain equipment has been relocated from these two operations to other facilities located in Alabama, Georgia and South Carolina to retain certain specialized manufacturing capabilities. Other excess equipment has been sold, generating a gain of approximately $1.8 million. In connection with these actions, the Company recorded restructuring charges and other non-operating costs of approximately $1.7 million, net of the gain on equipment sold, during the third and fourth quarters of fiscal 2004.

     At August 27, 2004, a North Carolina yarn plant closed in January 2002, an Alabama yarn plant closed in May 2003 and the North Carolina yarn plant closed in May 2004 remain unsold and are included at estimated net realizable values in assets held for sale in the Consolidated Balance Sheets included in Item 8 of this Annual Report on Form 10-K.

Fiscal 2003 Compared to Fiscal 2002

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

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

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

     Segment Performance. Apparel fabrics sales decreased 9.0% to $470.2 million for fiscal 2003 from $516.9 million for fiscal 2002. The decline in sales reflected a 8.3% decrease in yards sold as demand for denim and other bottom-weight fabrics weakened, while average selling price decreased slightly. Operating income for apparel fabrics decreased 28.8% to $28.5 million for fiscal 2003 from $40.0 million for fiscal 2002, primarily due to the reduced unit volume.

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Results of Operations (continued)

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

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

     Intersegment sales decreased 3.4% percent to $112.9 million for fiscal 2003 from $116.9 million for fiscal 2002, primarily reflecting a decrease in consumption of internally produced yarns by the apparel fabrics operation.

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

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

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

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

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Results of Operations (continued)

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

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Liquidity and Capital Resources

General

     The Company has funded its working capital requirements and capital expenditures with cash generated from operations, borrowings under its revolving credit facility and equipment note, and proceeds received in connection with sales of trade receivables and issuance of equity and debt securities. At August 27, 2004, the Company had no borrowings outstanding under the revolving credit facility and $28.0 million of borrowing availability as determined using prescribed advance rates against qualified inventory collateral, less outstanding letters of credit and required minimum availability. In addition, at August 27, 2004, $13.5 million of the equipment note, $41.2 million aggregate principal amount of the 2012 Notes and $90.7 million aggregate principal amount of the 2013 Notes (the 2012 Notes and 2013 Notes are fully and unconditionally guaranteed by the Company) were outstanding.

Revolving Credit Facility

     The Company maintains a senior secured revolving credit facility, which was executed with General Electric Capital Corporation (“GECC”) on November 7, 2003, replacing a revolving credit facility previously provided by a group of lenders. The revolving credit facility provides aggregate borrowing availability up to $40 million, including letter of credit availability up to $10 million, based on levels of qualified inventory collateral and certain required minimum availability.

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

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

     Covenants of the revolving credit facility require the Company to maintain certain minimum cash flow amounts and fixed charge coverage ratios in the event that combined excess availability under the revolving credit facility and the Receivables Securitization Facility falls below $20 million for a period of four consecutive weeks. At August 27, 2004, combined excess availability under these two facilities was approximately $53 million. These covenants limit the Company’s ability to pay dividends.

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Liquidity and Capital Resources (continued)

Swap Agreements

     The Company has used interest rate swap agreements to effectively fix the interest rate with respect to the borrowings outstanding under the revolving credit facility, which otherwise bear interest at floating rates. Such agreements involve the receipt of floating rate amounts in exchange for fixed rate interest payments during the term of such agreements without an exchange of the underlying principal amounts. The differential to be paid or received is accrued as interest rates change and recognized as an adjustment to interest expense related to the borrowings outstanding under the revolving credit facility. The related amount payable to or receivable from counterparties is included in other liabilities or assets. There have been no such swap agreements outstanding since November 2003.

Equipment Note

     The equipment note, a secured five-year installment loan, was executed with The CIT Group/Equipment Financing, Inc. (“CIT”) on July 30, 2002 in the amount of $20.0 million. The equipment note is to be repaid in 53 monthly payments of approximately $360,000 commencing March 1, 2003 and a final payment of approximately $896,000 on August 1, 2007. Interest accrues on the unpaid principal balance of the equipment note at a rate established annually on August 1 at LIBOR plus a specified number of basis points, and is paid monthly commencing September 1, 2002 through the final payment date. The Company may, at its one time option, elect a fixed interest rate for the remaining term of the equipment note based on the Federal Reserve “Interest Rate Swap” rate of interest, as quoted for the term closest to the remaining term of the equipment note, plus a specified number of basis points. The equipment note is secured by a senior lien on substantially all of the equipment of two plant locations, which had a carrying value of approximately $29.6 million at August 27, 2004. The equipment note contains customary covenants, including requirements to maintain certain financial covenants, and includes provisions relating to cross acceleration to other debt obligations of the Company.

Receivables Securitization Facility

     Established on August 30, 2002 and as subsequently amended, the Company and its wholly-owned, special purpose subsidiary, Avondale Funding, LLC (“Funding”), maintain an arrangement (“Receivables Securitization Facility”) with GECC, an independent issuer of receivables-backed commercial paper, to provide financing of up to $75 million through the sale of undivided interests in certain trade receivables (“Receivables”) originated by the Company. The receivables securitization facility extends until the earlier of 90 days before the specified final purchase date, August 29, 2007, or certain specified termination dates. The Receivables Securitization Facility replaced a previous receivables securitization facility with a bank. The Company has been engaged by Funding and GECC to service the receivables.

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

     Pursuant to the Receivables Securitization Facility, the Company sells, or transfers as a contribution of capital, the Receivables, at a discount and without recourse, to Funding, whose sole business is the acquisition and financing of the Receivables. Funding sells an undivided interest in a specified portion of the Receivables to GECC to provide the funds required by Funding to purchase the Receivables from the Company. Proceeds from the collection of the Receivables are used by Funding to purchase additional Receivables from the Company, repay GECC in the event that sufficient additional Receivables are not available to maintain GECC’s investment, or pay fees and expenses. At August 27, 2004, the outstanding amount of GECC’s investment in the Receivables was $42.0 million.

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Liquidity and Capital Resources (continued)

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

     The Receivables Securitization Facility contains customary covenants, including requirements to maintain certain financial ratios, and includes provisions relating to cross defaults to other debt obligations of the Company. In conjunction with the execution of the senior secured revolving credit facility with GECC on November 7, 2003, the Company executed an amendment to the Receivables Securitization Facility adopting the same financial covenants as provided in the revolving credit facility.

Senior Notes

     In the third and fourth quarters of fiscal 2004, Avondale Incorporated and its wholly-owned subsidiary, Avondale Mills, Inc., executed a series of privately negotiated transactions, exchanging $59.3 million of the 2013 Notes for $41.2 million of the 2012 Notes. The 2012 Notes are unsecured, but are ranked pari pasu in right of payment with other senior indebtedness of the Company. Interest on the 2012 Notes is due quarterly in arrears commencing October 1, 2004, and is calculated based on the applicable three month LIBOR rate (subject to a minimum of 1.75% and a maximum of 4.5%) plus 7.0%.

     After July 1, 2005, the 2012 Notes are redeemable at the Company’s option, in whole or in part, at a redemption price of 104.0%, which declines in intervals to 100.0% in 2009 and thereafter. The 2012 Notes contain certain provisions substantially identical to the 2013 Notes, including, among other things, certain restrictive covenants applicable to issuance of additional debt, payment of dividends, retirement of capital stock or indebtedness, purchase of investments, sales or transfers of assets, certain consolidations or mergers and certain transactions with affiliates. From time to time, the Company may enter into additional exchange offers and/or purchase its 2013 Notes in privately negotiated or open market transactions or by tender offer.

     In connection with the exchanges, the Company received waivers of certain restrictions provided under its revolving credit facility with GECC and amended certain covenants provided under its equipment loan with CIT. The Company also entered into a trustee agreement with Wachovia Bank, N.A. (“Wachovia”) whereby Wachovia agreed to act as trustee for the 2012 Notes.

     The securities offered in the exchanges have not been registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

Senior Subordinated Notes

     The Company has $90.7 million of the 2013 Notes outstanding, after the partial exchange of notes during fiscal 2004 discussed below. The Company originally issued $150.0 million of the 2013 Notes at par in a private placement to qualified institutional buyers on June 30, 2003. On October 21, 2003, the Company completed an offer to exchange the unregistered notes for new notes with substantially identical terms that are registered under the securities act. The 2013 Notes, which mature on July 1, 2013, are unsecured and subordinated to all existing and future senior indebtedness of the Company. Interest on the 2013 Notes is due semiannually, on January 1 and July 1, commencing January 1, 2004. Proceeds from the sale of the 2013 Notes were used to redeem the 2006 Notes, to repay indebtedness outstanding under the revolving credit facility and for general corporate purposes.

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Liquidity and Capital Resources (continued)

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

     On or after July 1, 2008, the 2013 Notes are redeemable at the Company’s option, in whole or in part, at a redemption price of 105.125%, which declines in intervals to 100% in 2011 and thereafter.

     The indenture under which the 2013 Notes were issued contains, among other things, certain restrictive covenants applicable to issuance of additional debt, payment of dividends, retirement of capital stock or indebtedness, purchase of investments, sales or transfers of assets, certain consolidations or mergers and certain transactions with affiliates. In general, the amount of dividends and capital stock purchases may not exceed an amount equal to $20 million plus 50% of net income, or less 100% of all net losses, all calculated on an accumulative basis subsequent to the date of the indenture. With the loss reported for fiscal 2004, the covenants of the indenture prohibit further payment of dividends or purchases of capital stock until such time as sufficient earnings are reported to eliminate the restriction.

Covenant Compliance

     At August 27, 2004, the Company was in compliance with the covenants of the revolving credit facility, equipment note, 2012 Notes, indenture of the 2013 Notes and the Receivables Securitization Facility.

Capital Expenditures and Cash Flows Analysis

     The Company’s capital expenditures aggregated $6.3 million for fiscal 2004. These expenditures were used primarily to complete routine maintenance projects. Management estimates that capital expenditures for fiscal 2005 will be approximately $10.0 million, and that such amounts will be used primarily for general maintenance of facilities and equipment.

     Net cash used by operating activities was $2.0 million in fiscal 2004. Principal working capital changes included a $10.9 million increase in accounts receivable and $11.0 million decrease in accounts receivable sold under the securitization facilities, a $4.6 million reduction in inventories, and a $5.8 million increase in accounts payable and accrued expenses. The Company’s investing activities were primarily the capital improvements described above and proceeds from the disposal of manufacturing equipment of approximately $6.9 million. Net cash used by financing activities aggregated $6.9 million, including a net decrease in long term debt of $4.3 million and payment of $2.5 million in dividends on outstanding common stock.

     Net cash provided by operating activities was $35.3 million in fiscal 2003. Principal working capital changes included a $35.4 million decrease in accounts receivable and $21.3 million decrease in accounts receivable sold under the securitization facilities, a $4.1 million reduction in inventories, and a $15.2 million decrease in accounts payable and accrued expenses. The Company’s investing activities were primarily the capital improvements of $16.7 million and proceeds from the disposal of manufacturing equipment of approximately $3.9 million. Net cash used by financing activities aggregated $11.6 million, including the issuance of senior subordinated notes due 2013 of $150.0 million, redemption of senior subordinated notes due 2006 of $127.1 million, including prepayment premium, a net decrease in the revolving credit facility and other long term debt of $27.2 million, payment of $5.0 million in dividends on outstanding common stock and the purchase and retirement of treasury stock of $2.3 million.

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Liquidity and Capital Resources (continued)

     Net cash provided by operating activities was $71.7 million in fiscal 2002. Principal working capital changes included a $9.1 million increase in accounts receivable and $12.4 million increase in accounts receivable sold under the securitization facilities, a $12.7 million reduction in inventories, and a $2.6 million increase in accounts payable and accrued expenses. The Company’s investing activities were primarily capital improvements of $13.0 million. Net cash used by financing activities aggregated $59.4 million, including issuance of the equipment note of $20.0 million, a net decrease in the revolving credit facility and other long term debt of $80.2 million and $3.8 million used to pay dividends on common stock.

     The table below summarizes the Company’s outstanding contractual obligations as of August 27, 2004, and the effect such obligations are expected to have on liquidity and cash flow in future periods (amounts in thousands).

     For discussion related to contractual obligations, see “Note 10 Long-Term Debt” and “Note 13 Commitments and Contingencies” in the Notes to Consolidated Financial Statements included in Item 8, Financial Statement and Supplemental Data of this Annual Report on Form 10-K.

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

Off-Balance Sheet Financing Arrangements

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

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Critical Accounting Policies

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

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

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

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

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

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

     Long-Lived Assets: The Company periodically reviews the values assigned to long-lived assets, such as property, plant and equipment, assets held for sale and goodwill. The associated depreciation and amortization periods are reviewed on an annual basis. Estimated recoverability of long-lived asset values is based on anticipated undiscounted and discounted cash flows from operations, as appropriate, or in the case of assets held for sale, the lower of historical carrying amount or estimated net realizable value. Management periodically reviews the values assigned to these assets and if additional information becomes available which indicates a decline in value, makes adjustments in that period.

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

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

     For discussion of certain legal proceedings to which the Company is a party, see Item 3 “Legal Proceedings” of this Annual Report on Form 10-K for the fiscal year ended August 27, 2004. The Company is not currently a party to litigation that management, in consultation with legal counsel, believes would have a material adverse effect on the Company’s financial condition or results of operations.

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New Accounting Standards

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

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

     In May 2003, the Financial Accounting Standards Board issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity, which requires certain financial instruments that were previously presented on the consolidated balance sheets as equity or temporary equity to be presented as liabilities. Such instruments include mandatorily redeemable preferred and common stock, and certain options and warrants. Statement No. 150 is generally effective for the first fiscal interim period beginning after December 15, 2003. The adoption of the provisions of Statement No. 150 had no impact on the Company’s consolidated financial statements.

     In December 2003, the Financial Accounting Standards Board amended and reissued Statement No. 132, Employers’ Disclosures about Pensions and Other Postretirement Benefits, which requires companies to provide additional disclosures about retirement plan assets, benefit obligations, cash flows, benefit costs and other relevant information. In addition to extended annual disclosures, companies are required to report the various elements of pensions and other postretirement benefit costs on a quarterly basis. The Company has adopted amended Statement No. 132 effective with the third fiscal quarter ended May 28, 2004, and the required disclosures are included in Note 11 of the Company’s consolidated financial statements under Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. As Statement No. 132 only provides for additional disclosures and does not impact the accounting for the Company’s post retirement benefit plans, the adoption of this Statement had no impact on the reported amounts in the Company’s consolidated financial statements.

     In May 2004, the Financial Accounting Standards Board issued Staff Position No. 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003. Staff Position No. 106-2 requires an employer to initially account for any subsidy received under the Medicare Prescription Drug, Improvement and Modernization Act of 2003 as an actuarial experience gain to the accumulated postretirement benefit obligation, which would be amortized over future service periods. Future subsidies would reduce service cost each year. The provisions of Staff Position No. 106-2 are generally effective for fiscal interim periods beginning after July 15, 2004. The Company is currently evaluating the impact of Staff Position No. 106-2 on its consolidated financial statements.

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Forward Looking Statements

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

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

•

cyclical and competitive nature of the textile industry;

•

pressures on selling prices due to competitive and economic conditions;

•

deterioration of relationships with, or loss of, significant customers;

•

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

•

changes in trade policies, including textile and apparel tariffs, and the elimination of import quotas under the WTO effective December 31, 2004;

•

ability to identify and respond to fashion trends;

•

availability and pricing of cotton and other raw materials;

•

changes in government policies affecting raw material costs, including the impact of WTO rulings against the U.S. agricultural support programs;

•

availability and desirability of technological advancements;

•

retention of key management personnel;

•

continued availability of financial resources;

•

changes in environmental, health and safety regulations; and

•

political or military responses to terrorist activities.

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

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Other Data

     Adjusted EBITDA is a supplemental non-GAAP financial measure. Adjusted EBITDA is presented because management believes that it is a widely accepted indicator of a company’s ability to service its indebtedness and is used by investors and analysts to evaluate companies within the textile and apparel industry. In addition, Adjusted EBITDA is used to determine compliance with certain covenants under the Company’s receivables securitization, revolving credit facility, equipment note, the 2013 Notes and the 2012 Notes, and is calculated by the Company as follows (amounts in thousands):

     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.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Upward or downward changes in market interest rates and their impact on the reported interest expense of the Company’s variable rate borrowings may affect the Company’s earnings. Assuming the revolving credit facility and 2012 Notes outstanding at August 27, 2004 remain in effect throughout fiscal 2005, a 10% change in the effective average interest rate would not have a material effect on the Company’s pretax earnings for fiscal 2005. In addition, a 10% change in interest rates would not have a material effect on the fair value of the Company’s 2012 Notes.

     Increases or decreases in the market price of cotton may affect the valuation of the Company’s inventories and fixed purchase commitments and, accordingly, the Company’s earnings. The potential decline in fair value of these inventories and fixed purchase commitments resulting from a 10% decline in market prices is estimated to be approximately $7.1 to $8.6 million.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

AVONDALE INCORPORATED

CONSOLIDATED FINANCIAL STATEMENTS

Years Ended August 30, 2002, August 29, 2003
and August 27, 2004

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To Avondale Incorporated:

     We have audited the accompanying consolidated balance sheets of Avondale Incorporated and subsidiaries as of August 27, 2004 and August 29, 2003, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the years in the three-year period ended August 27, 2004. These consolidated financial statements and the schedule referred to below are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

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

     In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Avondale Incorporated and subsidiaries as of August 27, 2004 and August 29, 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended August 27, 2004 in conformity with accounting principles generally accepted in the United States of America.

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

DIXON HUGHES PLLC

Atlanta, Georgia
October 8, 2004

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AVONDALE INCORPORATED

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

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

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AVONDALE INCORPORATED

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

AVONDALE INCORPORATED

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

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

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AVONDALE INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

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

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AVONDALE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 27, 2004

     1. Basis of Presentation: The accompanying consolidated financial statements include the accounts of Avondale Incorporated and its wholly owned subsidiary, Avondale Mills, Inc. (“Avondale Mills”) and, prior to its dissolution on August 30, 2002, Avondale Receivables Company, a special purpose subsidiary of Avondale Mills, (collectively, the “Company”). All significant intercompany accounts and transactions have been eliminated. Certain prior year financial statement amounts have been reclassified to conform to the current year’s presentation. Unless otherwise stated, all references to years relate to the Company’s fiscal year, which ends on the last Friday in August, rather than calendar years, and may contain 52 or 53 weeks.

     Avondale Funding, LLC (“Funding”), a special purpose subsidiary of Avondale Mills, was established to provide financing through the sale of accounts receivable generated by the Company. The Company accounts for its investment in Funding using the equity method of accounting.

     Avondale Incorporated is a holding company and has no operations, liabilities or assets other than those related to its investment in Avondale Mills.

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

     Cash and Cash Equivalents: The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents.

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

     Property, Plant and Equipment: Property, plant and equipment is stated at cost and depreciated over the estimated useful lives of the related assets, which range from three to thirty years. Depreciation is calculated primarily using the straight-line method.

     Long-Lived Assets: The Company periodically reviews the values assigned to long-lived assets, such as property, plant and equipment, assets held for sale and goodwill. The associated depreciation and amortization periods are reviewed on an annual basis. Estimated recoverability of long lived assets is based on the anticipated undiscounted and discounted cash flows from operations, as appropriate, or in the case of assets held for sale, the lower of historical carrying cost or estimated net realizable value. Management believes that long-lived assets included in the accompanying balance sheets are appropriately valued.

     Associate Benefit Plans: The Company has a discretionary profit sharing plan covering substantially all associates. Annual contributions by the Company are made to the plan in amounts determined by the board of directors. In addition, the plan has 401(k) savings options that are available to all associates. Prior to October 1, 2003, the Company matched 25% of the first 3% of compensation contributed by each associate. The Company also has a deferred compensation plan for certain key personnel. The related expense for these profit sharing and deferred

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compensation plans is charged to operations currently and totaled $0.4 million for fiscal 2003 and $22,000 for fiscal 2004. Due primarily to a decline in vested values under provisions of the deferred compensation plan, these plans yielded a net credit or reversal of expense of $0.8 million for fiscal 2002.

     Self-insurance Programs: The Company maintains self-insurance programs, which provide workers’ compensation benefits, long-term disability benefits for claims incurred prior to January 1, 2001, and medical and dental benefits for its associates. Workers’ compensation insurance is purchased to provide coverage up to statutory limits, in excess of a self-insurance retention of $350,000 per occurrence. Long-term disability benefits for claims incurred subsequent to January 1, 2001 through the termination of the plan on December 31, 2003, are covered by a purchased insurance policy.

     Self-insurance reserves for workers’ compensation benefits are recorded based on actuarial estimates. Self-insurance reserves for long-term disability benefits relating to claims incurred prior to January 1, 2001 and medical and dental benefits are recorded based on the estimates of management taking into consideration claims payment experience and current conditions which may affect future experience. Actual experience may differ from those estimates.

     Other Assets and Other Long-Term Liabilities: Other assets consist primarily of unamortized loan fees and capitalized software costs. Loan fees are amortized on a straight line basis over the outstanding term of the related debt. Other long-term liabilities consist of accrued postretirement and workers’ compensation benefits and deferred compensation for certain key management personnel.

     Fair Value of Financial Instruments: The carrying values of cash, accounts receivable, certain other assets, accounts payable and accrued expenses approximate reasonable estimates of their fair values at August 29, 2003 and August 27, 2004. See Notes 6 and 10 for disclosures related to the fair values of interest rate swap agreements and long-term debt.

     Earnings Per Share: Earnings per share is calculated by dividing the reported net income for the period by the appropriate weighted average number of shares of common stock outstanding. For fiscal 2002, 2003 and 2004, employee and director options are not considered due to their antidilutive effect. Share information is summarized as follows (in thousands):

     Stock Based Compensation: The Company adopted the provisions of Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, during fiscal 2003, electing to continue its use of the intrinsic value method. Accordingly, no stock-based compensation has been recorded, as the exercise price of each option granted under the existing plan equals the market value of the underlying common stock on the date of grant. See Note 12 for disclosure related to the expiration of the employee Stock Option Plan, and the effect on results of operations had the Company computed compensation in accordance with the fair value method as provided in Statement No. 123, Accounting for Stock-Based Compensation.

     Revenue Recognition: The Company records revenues principally when products are shipped to customers. Consistent with recognized practice in the textile industry, the Company also records revenues to a lesser extent throughout the year (7%, 7% and 6% of total revenues in fiscal 2002, 2003 and 2004, respectively) on a bill and hold basis, invoicing goods that have been produced, packaged and made ready for shipment. These goods are effectively segregated from inventory which is available for sale, the risks of ownership of the goods have passed to the

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customer, and the remittance terms and collection experience on the related invoicing are consistent with all other sales by the Company.

     The credit status of each customer is approved and monitored by the Company. Sales to Flynn Enterprises, Inc. represented 7% of net sales for fiscal 2002, 8% of net sales for fiscal 2003 and 10% of net sales for fiscal 2004. Sales to V.F. Corporation and its affiliates represented 20% of net sales for fiscal 2002, 16% of net sales for fiscal 2003 and 10% of net sales for fiscal 2004. None of the Company’s other customers individually accounted for 10% or more of the Company’s net sales in fiscal 2002, 2003 or 2004.

     Recent Accounting Pronouncements: In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, Consolidation of Variable Interest Entities, which requires the accounts of a variable interest entity to be included in the consolidated financial statements of a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities, is entitled to receive a majority of the entity’s residual returns, or both. Interpretation No. 46 also requires certain disclosures regarding a variable interest entity in which a company has a significant variable interest but is not required to include its accounts in the company’s consolidated financial statements. The consolidation requirements of Interpretation No. 46 apply immediately to variable interest entities created after January 31, 2003 and in the first fiscal year or interim period beginning after June 15, 2003 for entities existing on or before January 31, 2003. Certain of the disclosure requirements apply to financial statements issued after January 31, 2003, regardless of the date on which the variable interest entity was created. The Company has evaluated the provisions of this interpretation and concluded that the interpretation has no effect on the consolidated financial statements of the Company since Funding, as discussed in Note 7, is a qualified special purpose entity.

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

     In May 2003, the Financial Accounting Standards Board issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity, which requires certain financial instruments that were previously presented on the consolidated balance sheets as equity or temporary equity to be presented as liabilities. Such instruments include mandatorily redeemable preferred and common stock, and certain options and warrants. Statement No. 150 is generally effective for the first fiscal interim period beginning after December 15, 2003. The adoption of the provisions of Statement No. 150 had no impact on the reported amounts in the Company’s consolidated financial statements.

     In December 2003, the Financial Accounting Standards Board amended and reissued Statement No. 132, Employers’ Disclosures about Pensions and Other Postretirement Benefits, which requires companies to provide additional disclosures about retirement plan assets, benefit obligations, cash flows, benefit costs and other relevant information. In addition to extended annual disclosures, companies are required to report the various elements of pensions and other postretirement benefit costs on a quarterly basis. The Company has adopted amended Statement No. 132 effective with the third fiscal quarter ended May 28, 2004, and the required disclosures are included in Note 11. As Statement No. 132 only provides for additional disclosures and does not impact the accounting for the Company’s post retirement benefit plans, the adoption of this Statement had no impact on reported amounts in the Company’s consolidated financial statements.

     In May 2004, the Financial Accounting Standards Board issued Staff Position No. 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003. Staff Position No. 106-2 requires an employer to initially account for any subsidy received under the Medicare Prescription Drug, Improvement and Modernization Act of 2003 as an actuarial experience gain to the accumulated postretirement benefit obligation, which is amortized over future service periods. Future subsidies reduce service cost each year. The provisions of Staff Position No. 106-2 are generally effective for fiscal interim periods beginning

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after July 15, 2004. The Company is currently evaluating the impact of Staff Position No. 106-2 on its consolidated financial statements.

     2. Restructuring Charges, net: In response to highly competitive market conditions and continued oversupply of open-end yarns, in January 2002, the Company completed the closing of two separate open-end yarn manufacturing facilities located in North Carolina. In connection with these closings, the Company recorded restructuring charges and other non-operating costs of approximately $5.8 million during fiscal 2002. Additionally, the Company implemented reductions in certain manufacturing overhead costs and selling, general and administrative expenses in September 2001. In conjunction with these actions and the two plant closings, the Company recorded expense of approximately $1.2 million related to the termination of approximately 70 associates holding manufacturing, marketing and administrative positions.

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

     In response to the highly competitive market conditions and continued imbalance of global supply and demand for textile and apparel products, in May 2004, the Company closed an open-end yarn manufacturing facility located in North Carolina and the weaving operation of an integrated greige fabric manufacturing facility located in Georgia. These actions to rationalize excess manufacturing capacity, following the relocation of certain equipment, have improved capacity utilization of the Company’s remaining facilities and lowered costs per unit produced. No reduction in net sales is anticipated as a result of this capacity rationalization. Flexibility of the Company’s manufacturing facilities to shift production from one product line to another and the Company’s ability to source additional yarns and greige fabrics from outside vendors to increase production of its finished products in reaction to added demand have been maintained. Certain equipment has been relocated from these two operations to other facilities located in Alabama, Georgia and South Carolina to retain certain specialized manufacturing capabilities. Other excess equipment has been sold, generating a gain of approximately $1.8 million. In connection with these actions, the Company recorded restructuring charges and other non-operating costs of approximately $1.7 million, net of the gain on equipment sold, during the third and fourth quarters of fiscal 2004.

     At August 27, 2004, a North Carolina yarn plant closed in January 2002, the Alabama yarn plant closed in May 2003 and the North Carolina yarn plant closed in May 2004 remain unsold and are included at estimated net realizable values in assets held for sale in the consolidated balance sheets.

     3. Loss (Gain) on Extinguishment of Debt: During the fourth quarter of fiscal 2003, the Company recorded a loss on early extinguishment of debt of $3.2 million related to the redemption of $125 million of 10.25% Senior Subordinated Notes Due 2006 (“2006 Notes”). The loss consisted of a $2.1 million prepayment premium and the write-off of $1.1 million of unamortized financing costs related to the original issuance of the notes. Funding of the redemption was provided through the issuance at par of $150 million of 101/4% Senior Subordinated Notes due 2013 (“2013 Notes”) as described in Note 10.

     In the third and fourth quarters of fiscal 2004, the Company recorded a $17.0 million net gain on early extinguishment of debt related to a partial exchange of its 2013 Notes, net of the write-off of $1.1 million of unamortized financing costs related to the original issuance of the 2013 Notes. The Company executed a series of private transactions, exchanging $59.3 million of the 2013 Notes for $41.2 million of new senior Floating Rate Notes due 2012 (the “2012 Notes”) as further described in Note 10.

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     4. Segment Information: The Company operates principally in three segments: apparel fabrics, yarns and other sales. Apparel fabrics manufactures and markets cotton and cotton-blend fabrics used in the manufacture of jeans, sportswear and workwear. Yarns manufactures and markets cotton and cotton-blend yarns to customers in the knitting and weaving industries. Other sales include the manufacturing and marketing of a variety of greige and specialty fabrics to apparel, home furnishings, industrial, military and recreational product manufacturers, and revenues from the Company’s trucking operation. The unallocated amounts shown below reflect expenses, assets and capital expenditures for centralized transportation, warehouse and administrative services (in thousands).

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

     6. Derivatives: The Company has adopted Financial Accounting Standards Board Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, which requires that derivative instruments be recorded in the balance sheet as either assets or liabilities measured at fair value, and that changes in the fair value of the derivative instruments be recorded as unrealized gains or losses in either operating results or other comprehensive income depending on whether specific hedge accounting criteria are met. For the fiscal years ended August 30, 2002, August 29, 2003 and August 27, 2004, increases (declines) in fair value of approximately ($328,000), $738,000 and $151,000, respectively, net of income taxes, were recorded as unrealized gains (losses) in other comprehensive loss.

     7. Receivables Securitization Facilities: Established on August 30, 2002 and as subsequently amended, the Company and its wholly owned, special purpose subsidiary, Funding, maintain an arrangement (“Receivables Securitization Facility”) with General Electric Capital Corporation (“GECC”), an independent issuer of receivables-backed commercial paper, to provide financing of up to $75 million through the sale of undivided interests in certain trade receivables (“Receivables”) originated by the Company. The Receivables Securitization Facility extends until the earlier of 90 days before the specified final receivables purchase date, August 29, 2007, or certain specified termination events. The Receivables Securitization Facility replaced a previous securitization facility with a bank. The Company has been engaged by Funding and GECC to service the receivables.

     The Company sells, or transfers as a contribution of capital, the Receivables, at a discount and without recourse, to Funding, whose sole business purpose is the acquisition and financing of the Receivables. Funding sells an undivided interest in a specified portion of the Receivables to GECC to provide the funds required to purchase the Receivables from the Company. Proceeds from the collection of the Receivables are used by Funding to purchase additional Receivables from the Company, repay GECC in the event that sufficient additional Receivables are not available to maintain its investment, or pay fees and expenses. Funding retains no interest in the investment in the Receivables sold to GECC, and has experienced no gains or losses on such sales. Funding is a separate corporate

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

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

     The Receivables Securitization Facility contains customary covenants, including requirements to maintain certain financial ratios, and includes provisions relating to cross defaults to other debt obligations of the Company. In conjunction with the execution of the senior secured revolving credit facility with GECC on November 7, 2003, the Company executed an amendment to the Receivables Securitization Facility adopting the same financial covenants as provided in the revolving credit facility.

     In accordance with the provisions of Financial Accounting Standards Board Statement No. 140, Accounting for Transfers and Servicing of Financial Assets, the Company includes in accounts receivable in its consolidated balance sheets the portion of Receivables sold to Funding which have not been resold by Funding to GECC.

     At August 29, 2003 and August 27, 2004, the outstanding amount of investments by GECC or the issuer of commercial paper under the agreements was $52.9 million and $42.0 million, respectively. Accounts receivable in the consolidated balance sheets have been reduced by approximately $53.2 million and $42.3 million at August 29, 2003 and August 27, 2004, respectively, representing the face amount of the outstanding receivables sold at those dates. During fiscal 2003 and 2004, the Company received approximately $550 million and $485 million, respectively, from sales of receivables under the facilities. The cost to service the receivables is remitted weekly and therefore no servicing asset or liability has been recorded.

     Under the securitization agreements, discounts of $1.1 million, $2.6 million and $2.4 million for fiscal years 2002, 2003, and 2004, respectively, have been included in discounts and expenses on sales of receivables in the consolidated statements of income.

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

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     9. Income Taxes: Provision for (benefit of) income taxes is composed of the following (in thousands):

     The following table shows the reconciliation of federal income taxes (benefits) at the statutory rate on loss before income taxes to reported income tax benefit, (in thousands):

     At August 27, 2004, the Company had available net operating loss carryforwards for federal income tax purposes of approximately $5.0 million, expiring in 2018, and certain state net operating loss carryforwards, expiring at various dates beginning in 2016, which have been recorded in deferred tax assets. The Company believes that it is more likely than not that all of the net operating loss carryforwards will be utilized prior to expiration.

     The Company made no income tax payments during fiscal 2002 and 2003, and made payments of $172,000 during fiscal 2004. The Company received a refund of approximately $5.0 million during fiscal 2002 relating to payment of estimated fiscal 2001 income taxes, a refund of approximately $3.6 million during fiscal 2003 resulting from carryback of the fiscal 2002 income tax operating loss and a refund of approximately $2.3 million during fiscal 2004 resulting from carryback of the fiscal 2001 and 2002 income tax operating losses.

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     Deferred income taxes are provided for temporary differences in financial and income tax reporting. Significant components of the Company’s year-end deferred tax liabilities and assets are as follows (in thousands):

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

     10. Long-term Debt: Long-term debt consists of the following (in thousands):

     The Company maintains a senior secured revolving credit facility, which was executed with GECC on November 7, 2003, replacing a revolving credit facility previously provided by a group of lenders. The revolving credit facility provides aggregate borrowing availability up to $40 million, including letter of credit availability up to $10 million, based on levels of qualified inventory collateral and certain required minimum availability.

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

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

     Covenants of the revolving credit facility require the Company to maintain certain minimum cash flow amounts and fixed charge coverage ratios in the event that combined excess availability under the revolving credit facility and the Receivables Securitization Facility falls below $20 million for a period of four consecutive weeks. At August 27, 2004, combined excess availability under these two facilities was approximately $53 million. These covenants limit the Company’s ability to pay dividends.

     The Company has used interest rate swap agreements to effectively fix the interest rate with respect to the borrowings outstanding under the revolving credit facility, which otherwise bear interest at floating rates. Such agreements involve the receipt of floating rate amounts in exchange for fixed rate interest payments during the term of such agreements without an exchange of the underlying principal amounts. The differential to be paid or received is accrued as interest rates change and recognized as an adjustment to interest expense related to the borrowings outstanding under the revolving credit facility. The related amount payable to or receivable from counterparties is included in other liabilities or assets. There have been no such swap agreements outstanding since November 2003.

     The equipment note, a secured five-year installment loan, was executed on July 30, 2002 in the amount of $20.0 million. The equipment note is to be repaid in 53 monthly payments of approximately $360,000 commencing March 1, 2003 and a final payment of approximately $896,000 on August 1, 2007. Interest accrues on the unpaid principal balance of the equipment note at a rate established annually on August 1 based on the Eurodollar rate plus a specified number of basis points, and is paid monthly commencing September 1, 2002 through the final payment date. The Company may, at its one time option, elect a fixed interest rate for the remaining term of the equipment note based on the Federal Reserve “Interest Rate Swap” rate of interest, as quoted for the term closest to the remaining term of the equipment note, plus a specified number of basis points. The equipment note is secured by a senior lien on substantially all of the equipment at two plant locations, which had a carrying value of approximately $29.6 million at August 27, 2004. The equipment note contains customary covenants, including requirements to maintain certain financial covenants, and includes provisions relating to cross acceleration to other debt obligations of the Company.

     The Company has $90.7 million of the 2013 Notes outstanding, after the partial exchange of notes during fiscal 2004 discussed below. The Company originally issued $150.0 million of the 2013 Notes at par in a private placement to qualified institutional buyers on June 30, 2003. On October 21, 2003, the Company completed an offer to exchange the unregistered notes for new notes with substantially identical terms that are registered under the Securities Act. The 2013 Notes, which mature on July 1, 2013, are unsecured and subordinated to all existing and future senior indebtedness of the Company. Interest on the 2013 Notes is due semiannually, on January 1 and July 1, commencing January 1, 2004. Proceeds from the sale of the 2013 Notes were used to redeem the 2006 Notes, to repay indebtedness outstanding under the revolving credit facility and for general corporate purposes.

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     On or after July 1, 2008, the 2013 Notes are redeemable at the Company’s option, in whole or in part, at a redemption price of 105.125%, which declines in intervals to 100% in 2011 and thereafter.

     The indenture under which the 2013 Notes were issued contains, among other things, certain restrictive covenants applicable to issuance of additional debt, payment of dividends, retirement of capital stock or indebtedness, purchase of investments, sales or transfers of assets, certain consolidations or mergers and certain transactions with affiliates. In general, the amount of dividends and capital stock purchases may not exceed an amount equal to $20 million plus 50% of net income, or less 100% of all net losses, all calculated on an accumulative basis subsequent to the date of the indenture. With the loss reported for fiscal 2004, the covenants of the indenture prohibit further payment of dividends or purchases of capital stock until such time as sufficient earnings are reported to eliminate the restriction.

     In the third and fourth quarters of fiscal 2004, Avondale Incorporated and its wholly-owned subsidiary, Avondale Mills, Inc., executed a series of privately negotiated transactions, exchanging $59.3 million of the 2013 Notes for $41.2 million of the 2012 Notes. The 2012 Notes are unsecured, but are ranked pari pasu in right of payment with other senior indebtedness of the Company. Interest on the 2012 Notes is due quarterly in arrears commencing October 1, 2004, and is calculated based on the applicable three month LIBOR rate (subject to a minimum of 1.75% and a maximum of 4.5%) plus 7.0%.

     After July 1, 2005, the 2012 Notes are redeemable at the Company’s option, in whole or in part, at a redemption price of 104.0%, which declines in intervals to 100.0% in 2009 and thereafter. The 2012 Notes contain certain provisions substantially identical to the 2013 Notes, including, among other things, certain restrictive covenants applicable to issuance of additional debt, payment of dividends, retirement of capital stock or indebtedness, purchase of investments, sales or transfers of assets, certain consolidations or mergers and certain transactions with affiliates. From time to time, the Company may enter into additional exchange offers and/or purchase its 2013 Notes in privately negotiated or open market transactions or by tender offer.

     In connection with the exchanges, the Company received waivers of certain restrictions provided under its revolving credit facility with GECC and amended certain covenants provided under its equipment loan with CIT. The Company also entered into a trustee agreement with Wachovia Bank, N.A. (“Wachovia”) whereby Wachovia agreed to act as trustee for the 2012 Notes.

     The securities offered in the exchanges have not been registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

     At August 27, 2004, the Company was in compliance with the covenants of the revolving credit facility, equipment note, 2012 Notes, indenture of the 2013 Notes and the Receivables Securitization Facility.

     At August 27, 2004, the carrying value of the Company’s equipment note approximates fair value. At August 27, 2004, the market values of the 2012 Notes and the 2013 Notes were approximately $37 million and $54 million, respectively. The Company does not anticipate settlement of the 2012 Notes and the 2013 Notes at fair value and currently expects the 2012 and the 2013 Notes to remain outstanding through maturity.

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     Aggregate maturities of long-term debt are as follows (in thousands):

     In connection with the Company’s borrowings, no interest has been capitalized. The Company paid interest on revolving credit, long-term debt and interest rate swap agreements of approximately $18.8 million, $18.5 million and $18.6 million in fiscal 2002, 2003 and 2004, respectively.

     11. Postretirement Benefits: The estimated cost of postretirement benefits is recorded ratably over the service lives of the associates expected to receive such benefits. The Company provides certain life and medical insurance benefits granted in 1964 to a closed group of associates, the majority of whom have retired and who were in designated positions of management and met certain age requirements at the time of grant. Certain medical benefits are also provided to three closed groups of early retirees as a result of the acquisition of the textile business of Graniteville Company in fiscal 1996 (the “Graniteville Retirees”). In addition, current associates (and their covered dependents) that retire on or after age 55 with at least 15 years of service are eligible for continued medical coverage through age 65 (the “Early Retirees”). Benefits are paid from the general assets of the company.

     Changes in the accumulated postretirement benefit obligation were as follows (in thousands):

     Components of the accrued postretirement benefit obligation included in other long-term liabilities in the accompanying consolidated balance sheets were as follows (in thousands):