AVONDALE INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended November 26, 2004

oTransition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Transition Period From to

Commission file number 33-68412

AVONDALE INCORPORATED

(Exact name of registrant as specified in its charter)


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

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

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

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

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

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

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


Description	As Of	Shares Outstanding
Class A Common Stock	January 3, 2005		11,394,160	Shares
Class B Common Stock	January 3, 2005		978,939	Shares

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

AVONDALE INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)


				Nov. 26,
	Aug. 27,			2004
	2004			(unaudited)
ASSETS
Current Assets
Cash and cash equivalents	$	5,481		$	2,183
Accounts receivable, less allowance for doubtful accounts of $1,015 at August 27, 2004 and $870 at November 26, 2004		50,975			58,839
Inventories		78,282			83,325
Prepaid expenses		1,275			1,384
Income taxes refundable		506			156

Total current assets		136,519			145,887
Assets held for sale		1,037			734
Property, plant and equipment
Land		6,289			6,286
Buildings		75,771			75,821
Machinery and equipment		465,647			467,090

		547,707			549,197
Less accumulated depreciation		(365,755	)		(374,363	)

		181,952			174,834
Goodwill		2,951			2,951
Other assets		6,023			5,881

	$	328,482		$	330,287


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	24,167		$	24,978
Accrued compensation, benefits and related expenses		10,440			10,391
Accrued interest		2,403			4,442
Other accrued expenses		9,340			9,527
Long-term debt due in one year		4,325			4,325

Total current liabilities		50,675			53,663

Long-term debt		141,039			139,783
Deferred income taxes and other long-term liabilities		29,439			29,313
Shareholders’ equity
Preferred stock
$.01 par value; 10,000 shares authorized		—			—
Common stock
Class A, $.01 par value; 100,000 shares authorized; issued and outstanding - 11,394 shares at August 27, 2004 and November 26, 2004		114			114
Class B, $.01 par value; 5,000 shares authorized; issued and outstanding - 979 shares at August 27, 2004 and November 26, 2004		10			10
Capital in excess of par value		39,170			39,170
Retained earnings		68,035			68,234

Total shareholders’ equity		107,329			107,528

	$	328,482		$	330,287

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

AVONDALE INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)


	Thirteen Weeks Ended
	Nov. 28,			Nov. 26,
	2003			2004

Operating activities
Net income (loss)	$	(3,573	)	$	199
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization		9,633			8,839
Provision for (benefit of) deferred income taxes		(1,958	)		131
Gain on disposal of property, plant and equipment and assets held for sale		(2,310	)		(406	)
Gain on extinguishment of debt		—			(162	)
Sale of accounts receivable, net		(7,448	)		(8,052	)
Changes in operating assets and liabilities		(1,614	)		(1,979	)


Net cash used in operating activities		(7,270	)		(1,430	)

Investing activities
Purchases of property, plant and equipment		(1,493	)		(1,501	)
Proceeds from sale of property, plant and equipment and assets held for sale		4,112			714


Net cash provided by (used in) investing activities		2,619			(787	)

Financing activities
Reduction in long-term debt		(1,081	)		(1,081	)
Dividends paid		(1,238	)		—


Net cash used in financing activities		(2,319	)		(1,081	)


Decrease in cash and cash equivalents		(6,970	)		(3,298	)

Cash and cash equivalents at beginning of period		13,769			5,481


Cash and cash equivalents at end of period	$	6,799		$	2,183

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

AVONDALE INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

November 26, 2004

1. Basis of Presentation: The accompanying unaudited condensed consolidated financial statements include the accounts of Avondale Incorporated and its wholly owned subsidiary, Avondale Mills, Inc. (“Avondale Mills”) (collectively, the “Company”). Avondale Funding LLC (“Funding”), a special purpose subsidiary of Avondale Mills, provides financing through the sale of accounts receivable generated by the Company. The Company accounts for its investment in Funding using the equity method of accounting. All significant intercompany accounts and transactions have been eliminated. Certain prior year amounts have been reclassified to conform with the current year’s presentation. The August 27, 2004 balance sheet has been derived from the audited financial statements at that date. The accounting policies and basis of presentation followed by the Company are presented in Note 1 to the August 27, 2004 audited consolidated financial statements.

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

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

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, including normal recurring accruals, necessary for a fair presentation. Operating results for the thirteen weeks ended November 26, 2004 are not necessarily indicative of the results that may be expected for the fiscal year ending August 26, 2005.

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


	Aug. 27,			Nov. 26,
	2004			2004

Finished goods	$	29,187		$	32,242
Work in process		33,047			34,776
Raw materials		8,173			7,769
Dyes and chemicals		4,096			4,116

Inventories at FIFO		74,503			78,903

Adjustment of carrying value to LIFO basis, net of market adjustment		(1,645	)		(1,145	)

		72,858			77,758
Supplies at average cost		5,424			5,567


	$	78,282		$	83,325

AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
November 26, 2004

The Company’s inventories at November 26, 2004 under the last-in, first-out (“LIFO”) method and the related impact on the statement of operations for the thirteen weeks then ended have been recorded using estimated quantities and costs as of August 26, 2005, the end of fiscal 2005. As actual inventory quantities and costs at August 26, 2005 could differ significantly from these estimates, the inventory amounts at November 26, 2004 and the operating results for the thirteen weeks ended November 26, 2004 are not necessarily indicative of the inventory amounts at August 26, 2005 and operating results for fiscal 2005 to be recorded using the final LIFO calculations.

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


	Thirteen Weeks Ended
	Nov. 28,		Nov 26,
	2003		2004

Weighted average shares outstanding — basic		12,381		12,373
Effect of employee stock options		—		—

Weighted average shares outstanding — diluted		12,381		12,373

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


	Thirteen Weeks Ended
	Nov. 28,			Nov. 26,
	2003			2004

Net income (loss) as reported	$	(3,573	)	$	199
Pro forma stock-based compensation, net of income taxes		(9	)		(9	)

Pro forma net income (loss)	$	(3,582	)	$	190


Per share data:
Net income (loss)-basic as reported	$	(.29	)	$	.02


Net income (loss)-basic pro forma	$	(.29	)	$	.02


Net income (loss)-diluted as reported	$	(.29	)	$	.02


Net income (loss)-diluted pro forma	$	(.29	)	$	.02

AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
November 26, 2004

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


	Thirteen Weeks Ended
	Nov. 28,			Nov. 26,
	2003			2004

Revenues:
Apparel fabrics	$	100,362		$	114,780
Yarns		41,399			41,652
Other		14,723			8,428

		156,484			164,860
Less inter-segment sales		25,144			13,770

Net sales	$	131,340		$	151,090


Income (loss) before income taxes:
Apparel fabrics	$	2,402		$	2,848
Yarns		(1,318	)		2,980
Other		1,043			1,215
Unallocated		(4,544	)		(3,116	)

Total operating income (loss)		(2,417	)		3,927
Interest expense, net		4,830			3,757
Discount and expenses on sale of receivables		628			581
Gain on extinguishment of debt		—			(162	)
Other, net		(2,372	)		(573	)

Income (loss) before income taxes	$	(5,503	)	$	324

5. Post Retirement Benefits: The estimated cost of post retirement 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 which were granted in 1964 to a closed group of associates, the majority of whom are now retired. The table below details the estimated net period cost of the Company’s post retirement benefits.


	Thirteen Weeks Ended
	Nov. 28,			Nov. 26,
	2003			2004

Components of net periodic benefit cost (benefit):
Service cost	$	26		$	—
Interest cost		114			53
Amortization of prior service cost		83			(127	)
Amortization of loss		(15	)		—

Net periodic benefit cost (benefit)	$	208		$	(74	)

Payment of post retirement benefits for the thirteen weeks ended November 28, 2003 and November 26, 2004 amounted to $163,000 and $283,000, respectively, and is forecasted to be approximately $600,000 for the full fiscal year ended August 26, 2005.

AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
November 26, 2004

6. New Accounting Pronouncements: In November 2004, the Financial Accounting Standards Board issued Statement No. 151, Inventory Costs as an amendment of ARB No. 43, chapter 4, clarifying the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage) in the determination of inventory carrying costs. The statement requires such costs to be treated as a current period expense, and is effective for inventory costs incurred during fiscal years beginning after July 15, 2005. The Company is currently evaluating the impact of this statement, but does not believe the adoption of Statement No. 151 will have a material impact on the Company’s consolidated financial statements.

In December 2004, the Financial Accounting Standards Board issued Statement No. 123R, Share-Based Payments, which requires that companies record the fair value of their stock-based compensation arrangements on the date they are granted to employees, as a liability or as a component of equity, depending on whether the obligations can be settled in cash or stock. Regardless of treatment as liabilities or equity, these amounts must be expensed over the vesting period of the compensation arrangements. For non-public equity companies such as the Company, Statement No. 123R is effective for the first annual reporting period beginning after December 15, 2005. Non-public equity companies that used the minimum value method of measuring stock options, for either recognition or pro forma disclosure under earlier applicable statements, will apply Statement 123R prospectively for new stock-based compensation arrangements and the unvested portion of existing arrangements. The Company is currently evaluating the impact of this statement, but does not believe the adoption of Statement No. 123R will have a material impact on the Company’s consolidated financial statements.

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

For discussion of certain legal proceedings to which the Company is a party, see Item 3 “Legal Proceedings” in the Company’s Annual Report on Form 10-K for the fiscal year ended August 27, 2004. There have been no significant changes in the matters reported other than as described below. The Company is also a party to other litigation incidental to its business from time to time. The Company is not currently a party to any litigation that management, in consultation with legal counsel, believes will have a material adverse effect on the Company’s financial condition or results of operations.

AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
November 26, 2004

On January 13, 2000, a complaint against Russell Corporation, Alabama Power Company and the Company was filed in the Circuit Court of Jefferson County, Alabama (the “Court”) by Larry and Cynthia Locke, and the owners of twenty-three other residences in the Raintree subdivision of Lake Martin. 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’ properties, which allegedly interfered with the plaintiffs’ use of the properties. As a result of these alleged actions, the plaintiffs claim that the value of their properties have been diminished and that they suffered other damages. The complaint seeks compensatory and punitive damages in an undisclosed amount. The Court subsequently dismissed Alabama Power as a defendant in the case, based on motion for summary judgment. After an initial series of actions, the case was stayed by the Court pending resolution of an appeal in the case of Sullivan versus Russell Corporation, the Company and others (the “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, plaintiffs’ counsel, which includes attorneys who acted as co-plaintiffs’ counsel on the Sullivan case, presented arguments in a hearing before the Court 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 Court allowed the case to proceed to the discovery phase. Ten plaintiffs voluntarily dismissed their claims on August 29, 2001 and five more plaintiffs did so on October 31, 2001. On April 25, 2002, the Court held a hearing on summary judgment motions and, on May 22, 2002, entered judgment as a matter of law in the defendants’ favor on all counts except the narrow legal theory involving public nuisance tort. Recently, in response to motions filed by the Company and Russell Corporation, the Court entered an order reducing testimony that can be given by plaintiffs’ proposed experts and held that plaintiffs can only recover damages arising from a nuisance proven to have been caused by the defendants at any time since January 1998. The Company ceased all dyeing operations at its Alexander City plant in April 1999. In addition, the Court found that the plaintiffs have no evidence that would entitle them to recover damages for mental anguish in this case and made a number of other specific evidentiary rulings in the defendants’ favor. Plaintiffs’ counsel moved for reconsideration of all aspects of the Court’s recent order and a hearing was held on that motion on December 10, 2004. After the hearing, the Court allowed the parties until December 23, 2004 to submit additional briefing. A final ruling on these matters is expected from the Court in early 2005. A pre-trial conference has been scheduled for January 14, 2005, and the trial is expected 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.

8. Consolidating Guarantor and Non-guarantor Financial Information: The following consolidating financial information presents balance sheets, statements of operation and statements of cash flows of the Company and its subsidiaries. Avondale Incorporated, the parent company and sole shareholder of Avondale Mills, has fully and unconditionally guaranteed the 2013 Notes and the 2012 Notes issued by Avondale Mills. Avondale Mills Graniteville Fabrics, Inc., a wholly owned subsidiary of Avondale Mills and non-guarantor of the Notes, operates a denim manufacturing facility and warehouse operation located in South Carolina.

AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
November 26, 2004

AVONDALE INCORPORATED
CONSOLIDATING BALANCE SHEETS
November 26, 2004
(In thousands)


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

ASSETS

Current Assets
Cash and cash equivalents	$	2,183		$	—		$	—		$	—		$	2,183
Accounts receivable		58,836			—			3			—			58,839
Inventories		83,325			—			—			—			83,325
Prepaid expenses		1,384			—			—			—			1,384
Income taxes refundable		156			—			—			—			156

Total current assets		145,884			—			3			—			145,887
Assets held for sale		734												734
Property, plant and equipment
Land		6,090			—			196			—			6,286
Buildings		64,071			—			11,750			—			75,821
Machinery and equipment		429,184			—			37,906			—			467,090

		499,345			—			49,852			—			549,197
Less accumulated depreciation		(344,154	)		—			(30,209	)		—			(374,363	)

		155,191			—			19,643			—			174,834
Goodwill		2,951			—			—			—			2,951
Investment in subsidiaries		7,475			97,123			—			(104,598	)		—
Other assets		5,881			—			—			—			5,881

	$	318,116		$	97,123		$	19,646		$	(104,598	)	$	330,287


LIABILITIES AND SHAREHOLDERS’ EQUITY

Current Liabilities
Accounts payable	$	23,852		$	—		$	1,126		$	—		$	24,978
Accrued compensation, benefits		10,179			—			212			—			10,391
Accrued interest		4,442			—			—			—			4,442
Other accrued expenses		9,526			—			1			—			9,527
Long-term debt due in one year		4,325			—			—			—			4,325

Total current liabilities		52,324			—			1,339			—			53,663
Long-term debt		139,783			—			—			—			139,783
Deferred income taxes and other long term liabilities		29,313			—			—			—			29,313
Due to (from) subsidiaries		(427	)		(10,405	)		10,832			—			—
Shareholders’ equity		97,123			107,528			7,475			(104,598	)		107,528

	$	318,116		$	97,123		$	19,646		$	(104,598	)	$	330,287

AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
November 26, 2004

AVONDALE INCORPORATED
CONSOLIDATING BALANCE SHEETS
August 27, 2004
(In thousands)


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

ASSETS
Current Assets
Cash and cash equivalents	$	5,481		$	—		$	—		$	—		$	5,481
Accounts receivable		50,973			—			2			—			50,975
Inventories		78,282			—			—			—			78,282
Prepaid expenses		1,275			—			—			—			1,275
Income taxes refundable		506			—			—			—			506

Total current assets		136,517			—			2			—			136,519
Assets held for sale		1,037			—			—			—			1,037
Property, plant and equipment
Land		6,093			—			196			—			6,289
Buildings		64,021			—			11,750			—			75,771
Machinery and equipment		427,807			—			37,840			—			465,647

		497,921			—			49,786			—			547,707
Less accumulated depreciation		(336,477	)		—			(29,278	)		—			(365,755	)

		161,444			—			20,508			—			181,952
Goodwill		2,951			—			—			—			2,951
Investment in subsidiaries		7,840			96,943			—			(104,783	)		—
Other assets		6,023			—			—			—			6,023

	$	315,812		$	96,943		$	20,510		$	(104,783	)	$	328,482


LIABILITIES AND SHAREHOLDERS’ EQUITY

Current Liabilities
Accounts payable	$	23,051		$	—		$	1,116		$	—		$	24,167
Accrued compensation, benefits		10,333			—			107			—			10,440
Accrued interest		2,403			—			—			—			2,403
Other accrued expenses		9,339			—			1			—			9,340
Long-term debt due in one year		4,325			—			—			—			4,325

Total current liabilities		49,451			—			1,224			—			50,675
Long-term debt		141,039			—			—			—			141,039
Deferred income taxes and other long term liabilities		29,439			—			—			—			29,439
Due to (from) subsidiaries		(1,060	)		(10,386	)		11,446			—			—
Shareholders’ equity		96,943			107,329			7,840			(104,783	)		107,329

	$	315,812		$	96,943		$	20,510		$	(104,783	)	$	328,482

AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
November 26, 2004

AVONDALE INCORPORATED
CONSOLIDATING STATEMENTS OF OPERATIONS
For the Thirteen weeks ended November 26, 2004
(In thousands)


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

Net sales, including intercompany transfers and charges	$	151,090		$	31	$	27,436		$	(27,467	)	$	151,090
Operating costs and expenses
Cost of goods sold		132,749			—		27,089			(27,434	)		132,404
Depreciation		7,686			—		931			—			8,617
Selling and administrative expenses		6,175			—		—			(33	)		6,142

Operating income (loss)		4,480			31		(584	)		—			3,927
Interest expense, net		3,757			—		—			—			3,757
Discount and expenses on sales of receivables		581			—		—			—			581
Gain on extinguishment of debt		(162	)		—		—			—			(162	)
Other, net		(573	)		—		—			—			(573	)

Income (loss) before income taxes		877			31		(584	)		—			324
Provision for (benefit of) income taxes		332			12		(219	)		—			125
Equity in earnings (loss) of subsidiary		(365	)		180		—			185			—

Net income (loss)	$	180		$	199	$	(365	)	$	185		$	199

AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
November 26, 2004

AVONDALE INCORPORATED
CONSOLIDATING STATEMENTS OF OPERATIONS
For the Thirteen weeks ended November 28, 2003
(In thousands)


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

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

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

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

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

AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
November 26, 2004

AVONDALE INCORPORATED
CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Thirteen weeks ended November 26, 2004
(In thousands)


							Non-
							Guarantor
							Avondale
							Mills
				Guarantor			Graniteville
	Avondale			Avondale			Fabrics,
	Mills, Inc.			Incorporated			Inc.			Eliminations			Consolidated
Operating activities
Net Income (loss)	$	180		$	199		$	(365	)	$	185		$	199
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		7,908			—			931			—			8,839
Benefit of deferred income taxes		131			—			—			—			131
Gain on disposal of property, plant and equipment and assets held for sale		(406	)		—			—			—			(406	)
Gain on extinguishment of debt		(162	)		—			—			—			(162	)
Sale of accounts receivable, net		(8,052	)		—			—			—			(8,052	)
Changes in operating assets and liabilities		(1,460	)		(19	)		(500	)		—			(1,979	)
Equity in earnings of subsidiary		365			(180	)		—			(185	)		—

Net cash provided by (used in) operating activities		(1,496	)		—			66			—			(1,430	)

Investing activities
Purchase of property, plant and equipment		(1,435	)		—			(66	)		—			(1,501	)
Proceeds from sale of property, plant and equipment and assets held for sale		714			—			—			—			714

Net cash used in investing activities		(721	)		—			(66	)		—			(787	)

Financing activities
Net payments on long-term debt		(1,081	)		—			—			—			(1,081	)

Net cash used in financing activities		(1,081	)		—			—			—			(1,081	)


Decrease in cash and cash equivalents		(3,298	)		—			—			—			(3,298	)
Cash and cash equivalents At beginning of period		5,481			—			—			—			5,481

Cash and cash equivalents At end of period	$	2,183		$	—		$	—		$	—		$	2,183

AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
November 26, 2004

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


							Non-
							Guarantor
							Avondale
							Mills
				Guarantor			Graniteville
	Avondale			Avondale			Fabrics,
	Mills, Inc.			Incorporated			Inc.			Eliminations			Consolidated
Operating activities
Net loss	$	(3,589	)	$	(3,573	)	$	(76	)	$	3,665		$	(3,573	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		8,695			—			938			—			9,633
Benefit of deferred income taxes		(1,958	)		—			—			—			(1,958	)
Gain on disposal of property, plant and equipment and assets held for sale		(2,310	)		—			—			—			(2,310	)
Sale of accounts receivable, net		(7,448	)		—			—			—			(7,448	)
Changes in operating assets and liabilities		(745	)		(16	)		(853	)		—			(1,614	)
Dividends from subsidiary		—			1,238			—			(1,238	)		—
Equity in loss of subsidiary		76			3,589			—			(3,665	)		—

Net cash provided by (used in) operating activities		(7,279	)		1,238			9			(1,238	)		(7,270	)

Investing activities
Purchase of property, plant and equipment		(1,484	)		—			(9	)		—			(1,493	)
Proceeds from sale of property, plant and equipment and assets held for sale		4,112			—			—			—			4,112

Net cash provided by (used in) investing activities		2,628			—			(9	)		—			2,619

Financing activities
Net payments on long term debt		(1,081	)		—			—			—			(1,081	)
Dividends paid		(1,238	)		(1,238	)		—			1,238			(1,238	)

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

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

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

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

CRITICAL ACCOUNTING POLICIES

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

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

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

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

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

Inventories: Inventories are stated at the lower of cost or market value. Except for certain supply inventories valued on an average cost basis, the costs of the Company’s inventories are determined on a last-in, first-out (“LIFO”) basis. Under LIFO, current material and conversion costs are charged to cost of goods sold while inventories 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.

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 that is available for sale, the risks of ownership of the goods have passed to the customer, and the remittance terms and collection experience on the related invoicing is consistent with all other sales by the Company.

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

For discussion of certain legal proceedings to which the Company is a party, see Item 3 “Legal Proceedings” in the Company’s Annual Report on Form 10-K for the fiscal year ended August 27, 2004. There have been no changes in the matters reported other than as described below. The Company is also a party to other litigation incidental to its business from time to time. The Company is not currently a party to any litigation that management, in consultation with legal counsel, believes will have a material adverse effect on the Company’s financial condition or results of operations.

RESULTS OF OPERATIONS

Thirteen Weeks Ended November 26, 2004 Compared to Thirteen Weeks Ended November 28, 2003

Net Sales. Net sales increased 15.1% to $151.1 million for the thirteen weeks ended November 26, 2004 from $131.3 million for the thirteen weeks ended November 28, 2003. The increase in net sales for the thirteen weeks ended November 26, 2004 primarily reflected improved unit volume for the Company’s apparel fabrics operation and generally higher average invoice prices for all of the Company’s operations, as the development of new and enhanced products enabled the Company to increase its sales with existing customers and the overall improvement in market demand for the Company’s products continued from the previous fiscal quarter. However, the domestic textile industry continues to face difficult challenges, including significant growth in imported apparel, the elimination of all import quotas under the WTO effective December 31, 2004, 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. Pending legislation to impose tariffs on imports from China to offset China’s undervalued currency and petitions filed by industry trade organizations seeking safeguard relief through action by the U.S. government may provide some assistance, but there can be no assurance that any of these proposals will be implemented, and if so, in a timely manner. The Company expects these difficult conditions to continue into the foreseeable future.

Operating Income (Loss). The Company produced an operating income of $3.9 million for the thirteen weeks ended November 26, 2004 compared to an operating loss of ($2.4) million for the thirteen weeks ended November 28, 2003. The improvement in operating income reflected the increases in average invoice prices and better unit cost absorptions achieved through the increased unit volume and the Company’s capacity rationalization programs. Additionally, the Company recorded a non-cash benefit of $0.5 million to adjust the carrying value of inventories to LIFO basis for the thirteen weeks ended November 26, 2004 compared to a charge of $0.5 million for the thirteen weeks ended November 28, 2003. Cost of goods sold increased 12.4% to $132.4 million for the thirteen weeks ended November 26, 2004 from $117.8 million for the thirteen weeks ended November 28, 2003, primarily reflecting the increased unit volume and higher raw material costs. Cost of goods sold as a percentage of net sales decreased to 87.6% for the thirteen weeks ended November 26, 2004 from 89.7% for the thirteen weeks ended November 28, 2003 reflecting the impact of the higher average invoice prices and improved unit cost absorptions.

Selling and administrative expenses decreased 6.2% to $6.1 million for the thirteen weeks ended November 26, 2004 from $6.5 million for the thirteen weeks ended November 28, 2003, primarily reflecting the Company’s ongoing cost reduction programs. Selling and administrative expenses as a percentage of net sales were 4.1% for the thirteen weeks ended November 26, 2004 versus 4.9% for the thirteen weeks ended November 28, 2003.

Segment Performance. Apparel fabric sales increased 14.3% to $114.8 million for the thirteen weeks ended November 26, 2004 from $100.4 million for the thirteen weeks ended November 28, 2003, reflecting a 10.4% increase in yards invoiced and a 3.6% increase in average invoice price. Operating income for apparel fabrics increased 16.7% to $2.8 million for the thirteen weeks ended November 26, 2004 from $2.4 million for the thirteen weeks ended November 28, 2003, primarily due to the improved unit volume and higher average invoice price.

Yarn sales, including intra-company sales to the Company’s fabric operations, increased 0.7% to $41.7 million for the thirteen weeks ended November 26, 2004 from $41.4 million for the thirteen weeks ended November 28, 2003. Total pounds invoiced declined 13.2%, primarily reflecting the May 2004 closure of a yarn manufacturing facility in North Carolina and a greige weaving operation in Georgia. Average invoice price increased 15.8% as improved market demand for certain yarn products and higher raw material costs helped increase outside invoice prices as well as intra-company transfer prices. The yarns operation produced operating income of $3.0 million for the thirteen weeks ended November 26, 2004 compared to a loss of ($1.3) for the thirteen weeks ended November 28, 2003, primarily due to the increase in average invoice price.

Other sales, which include sales of greige and specialty fabrics, initial sales of a new apparel sourcing operation and revenues from the Company’s trucking operation, decreased 42.9% to $8.4 million for the thirteen weeks ended November 26, 2004 from $14.7 million for the thirteen weeks ended November 28, 2003. The decrease in other sales was primarily attributable to decreased intra-company sales of greige fabrics to the apparel fabric operations following the shutdown of the greige weaving operation in Georgia and subsequent realignment of certain manufacturing facilities. Operating income from other sales increased 20.0%, from $1.0 million for the thirteen weeks ended November 28, 2003 to $1.2 million for the thirteen weeks ended November 26, 2004, primarily reflecting improved income of the specialty fabrics operation.

Inter-segment sales decreased 45.0% to $13.8 million for the thirteen weeks ended November 26, 2004 from $25.1 million for the thirteen weeks ended November 28, 2003, reflecting the capacity rationalization actions and corresponding reduction in transfers of internally produced yarns and greige fabrics.

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

Interest Expense, Net. Net interest expense declined 20.8% to $3.8 million for the thirteen weeks ended November 26, 2004 compared to $4.8 million for the thirteen weeks ended November 28, 2003. Net interest expense for the thirteen weeks ended November 28, 2003 included the write-off of approximately $400,000 of unamortized debt issue costs following execution of a new senior secured revolving credit facility with GECC in November 2003. In addition, net interest expense for the thirteen weeks ended November 26, 2004 reflected lower average borrowings outstanding following the Company’s exchange of approximately $60 million of its 2013 Notes for approximately $42 million of its Floating Rate Notes due 2012.

Discount and Expenses on Sale of Receivables. Discount and expenses on sales of receivables were $0.6 million for both the thirteen weeks ended November 26, 2004 and the thirteen weeks ended November 28, 2003.

Provision for (benefit of) Income Taxes. A provision for income taxes of $0.1 million was recorded for the thirteen weeks ended November 26, 2004, reflecting the Company’s income before income taxes, compared to an income tax benefit of $1.9 million for the thirteen weeks ended November 28, 2003.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities was $1.4 million for the thirteen weeks ended November 26, 2004. Principal working capital changes included an $8.1 million decrease in accounts receivable sold under the securitization facility, a $5.0 million increase in inventories and an $2.9 million increase in accounts payable and accrued expenses. Investing activities were predominantly equipment purchases and related costs of $1.5 million made in connection with ongoing maintenance of the Company’s manufacturing facilities and proceeds of $0.7 million from the sale of a tract of land and certain excess equipment. Financing activities included repayment of $1.1 million of long-term debt.

The Company’s capital expenditures, aggregating $1.5 million for the thirteen weeks ended November 26, 2004, were used primarily to complete routine maintenance projects. Management estimates that capital expenditures for the balance of fiscal 2005 will be approximately $8.5 million.

At November 26, 2004, the Company had no borrowings outstanding under its revolving line of credit, and $26.1 million of borrowing availability as determined using prescribed advance rates against qualified inventory collateral, less outstanding letters of credit and required minimum availability.

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 November 26, 2004, combined excess availability under these two facilities was approximately $65 million.

Covenants of 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 adjusted net income, or less 100% of adjusted net loss, 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.

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

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

FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q 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 our business outlook, anticipated financial and operating results, strategies, contingencies, working capital requirements, expected sources of liquidity, estimated amounts and timing of capital expenditures, estimated environmental compliance costs and other expenditures, and expected outcomes of litigation.

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

•   cyclical and competitive nature of the textile industry;

•   pressures on selling prices due to competitive and economic conditions;

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

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

•   changes in trade policies, including textile quotas and tariffs, 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.

OTHER DATA — NON-GAAP FINANCIAL MEASURE

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):


	Thirteen Weeks Ended
	Nov. 28,			Nov. 26,
	2003			2004

Net income (loss)	$	(3,573	)	$	199
Interest expense, net		4,830			3,757
Provision for (benefit of) income taxes		(1,930	)		125
Depreciation and amortization		9,633			8,839


EBITDA		8,960			12,920
Discount and expenses on sale of receivables		628			581
Gain on extinguishment of debt		—			(162	)
Adjustment of carrying value of inventories to LIFO basis, net of market adjustment		500			(500	)


Adjusted EBITDA	$	10,088		$	12,839

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

For discussion of certain market risks related to the Company, see Part II, Item 7A. “Quantitative and Qualitative Disclosures about Market Risk” in the Company’s Annual Report on Form 10-K for the fiscal year ended August 27, 2004.

Item 4. Controls and Procedures.

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

Disclosure controls and procedures are the Company’s controls and other procedures designed to ensure that information required to be disclosed by the Company in the reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that the Company files under the Exchange Act are accumulated and communicated to the Company’s management, including the Company’s principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

AVONDALE INCORPORATED

PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

There have been no significant changes in the matters reported under Part I, Item 3 “Legal Proceedings” in the Company’s Annual Report on Form 10-K for the fiscal year ended August 27, 2004 other than as described below.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3.Defaults Upon Senior Securities.

None

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

(a) The Company held its Annual Meeting of Shareholders on November 18, 2004.

(b) Nine directors were elected at the Annual Meeting to serve until the Annual Meeting of Shareholders in 2005. The names of these Directors are as follows:

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

(c) The Company had outstanding shares of Class A Common Stock and Class B Common Stock having an aggregate of 30,972,940 votes entitled to be cast at the Annual Meeting. Of such aggregate outstanding votes, 414,190 votes were not represented at the Annual Meeting in person or by proxy. The remaining 30,558,750 outstanding votes were represented at the Annual Meeting in person or by proxy, with all votes cast for all nine directors that were elected at the Annual Meeting. There were no broker non-votes and no votes were withheld.

Item 5. Other Information.

None

Item 6. Exhibits.


			3.1			Restated and Amended Articles of Incorporation of Avondale Incorporated (incorporated by reference to Exhibit 3.1 to Avondale Incorporated’s Registration Statement on Form S-4, filed June 7, 1996, File No. 333-05455-01).

			3.3			Amended and Restated Bylaws of Avondale Incorporated, adopted as of January 17, 2000 (incorporated by reference to Exhibit 3.3 to Avondale Incorporated’s Quarterly Report on Form 10-Q for the period ended February 25, 2000, File No. 33-68412).

			4.3			Indenture dated as of June 30, 2003 for the 101/4% Senior Subordinated Notes due 2013 among Avondale Incorporated, Avondale Mills, Inc. and Wachovia Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.3 to Avondale Incorporated’s Registration Statement on Form S-4, filed August 29, 2003, File No. 333-108353-01).

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

			4.18			Form of Registration Rights Agreement among Avondale Mills, Inc., Avondale Incorporated and each of the holders from time to time of the Senior Floating Rate Notes due 2012.

			10.55			Avondale Incorporated Stock Option Plan for Non-Employee Directors, Dated November 18, 2004.

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

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


	Page
	Reference
PART I — FINANCIAL INFORMATION (Unaudited)

Item 1: Financial Statements

Condensed Consolidated Balance Sheets at August 27, 2004 and November 26, 2004		2

Condensed Consolidated Statements of Operations for the Thirteen Weeks Ended November 28, 2003 and November 26, 2004		3

Condensed Consolidated Statements of Cash Flows for the Thirteen Weeks Ended November 28, 2003 and November 26, 2004		4

Notes to Condensed Consolidated Financial Statements		5

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations		16

Item 3: Quantitative and Qualitative Disclosures About Market Risk		21

Item 4: Controls and Procedures		22

PART II — OTHER INFORMATION

Item 1: Legal Proceedings		23

Item 2: Unregistered Sales of Equity Securities and Use of Proceeds		23

Item 3: Defaults upon Senior Securities		23

Item 4: Submission of Matters to a Vote of Security Holders		24

Item 5: Other Information		24

Item 6: Exhibits		24

Signature		25
EX-4.18 FORM OF REGISTRATION RIGHTS AGREEMENT
EX-10.55 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO


	AVONDALE INCORPORATED
	By:	/s/ JACK R. ALTHERR, JR.
		Jack R. Altherr, Jr.
		Vice Chairman and Chief Financial Officer

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	•	cyclical and competitive nature of the textile industry;

	•	pressures on selling prices due to competitive and economic conditions;

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

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

	•	changes in trade policies, including textile quotas and tariffs, 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.

	(a)	The Company held its Annual Meeting of Shareholders on November 18, 2004.

	(b)	Nine directors were elected at the Annual Meeting to serve until the Annual Meeting of Shareholders in 2005. The names of these Directors are as follows: