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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 ~~February~~May 2527, 2005


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

For the Transition Period From to ____________________to _______________________

Commission file number 33-68412

AVONDALE INCORPORATED

(Exact name of registrant as specified in its charter)

Georgia (State or other jurisdiction of incorporation or organization)		58-0477150 (I.R.S. employer identification no.)
506 South Broad Street Monroe, Georgia (Address of principal executive offices)		30655 (Zip code)
506 South Broad Street Monroe, Georgia		30655 (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	~~April~~July 1, 2005	11,394,160 Shares
Class B Common Stock	~~April~~July 1, 2005	978,939 Shares

INDEX TO FORM 10-Q

AVONDALE INCORPORATED

	Page			~~Page~~
	Reference			~~Reference~~
PART I - FINANCIAL INFORMATION (Unaudited)
	Item 1:		Financial Statements
Item 1: Financial Statements
			Condensed Consolidated Balance Sheets at August 27, 2004 and February 25, 2005		2
Condensed Consolidated Balance Sheets at August 27, 2004 and May 27, 2005		2
			Condensed Consolidated Statements of Operations for the Thirteen Weeks Ended February 27, 2004 and February 25, 2005		3
Condensed Consolidated Statements of Operations for the Thirteen Weeks Ended May 28, 2004 and May 27, 2005		3
			Condensed Consolidated Statements of Operations for the Twenty-Six Weeks Ended February 27, 2004 and February 25, 2005		4
Condensed Consolidated Statements of Operations for the Thirty-Nine Weeks Ended May 28, 2004 and May 27, 2005		4
			Condensed Consolidated Statements of Cash Flows for the Twenty-Six Weeks Ended February 27, 2004 and February 25, 2005		5
Condensed Consolidated Statements of Cash Flows for the Thirty-Nine Weeks Ended May 28, 2004 and May 27, 2005		5
Notes to Condensed Consolidated Financial Statements		6	~~Notes to Condensed Consolidated Financial Statements~~		6
	Item 2:		Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
	Item 3:		Quantitative and Qualitative Disclosures About Market Risk		30
Item 3: Quantitative and Qualitative Disclosures About Market Risk		30
	Item 4:		Controls and Procedures		31
Item 4: Controls and Procedures		31
PART II - OTHER INFORMATION
	Item 1:		Legal Proceedings		32
Item 1: Legal Proceedings		32
	Item 2:		Unregistered Sales of Equity Securities and Use of Proceeds		32
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds		32
	Item 3:		Defaults upon Senior Securities		32
Item 3: Defaults upon Senior Securities		32
	Item 4:		Submission of Matters to a Vote of Security Holders		33
Item 4: Submission of Matters to a Vote of Security Holders		32
	Item 5:		Other Information		33
Item 5: Other Information		32
	Item 6:		Exhibits		33
Item 6: Exhibits		32
Signature	~~Signature~~	34			34
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO

PART I —- FINANCIAL INFORMATION

Item 1. Financial Statements.

AVONDALE INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

				Feb. 25,
				May 27,
	Aug. 27,			2005
	2004			(unaudited)
ASSETS
Current Assets
Current assets
Cash and cash equivalents	$	5,481		$	412,~~811~~900
Accounts receivable, less allowance for doubtful accounts of $1,015 at August 27, 2004 and $885 at February 25, 2005		50,975			46,323
Accounts receivable, less allowance for doubtful accounts of $1,015 at August 27, 2004 and $900 at May 27, 2005.		50,975			60,240
Inventories		78,282			8481,~~761~~321
Prepaid expenses		1,275			1,~~830~~438
Insurance claim receivable		—			2,856
Income taxes refundable		506			—
Income taxes refundable		506			187
Total current assets		136,519			155,899
Total current assets		136,519			140,768
Assets held for sale		1,037			734
Property, plant and equipment
Land		6,289			6,~~273~~271
Buildings		75,771			75,~~896~~986
Machinery and equipment		465,647			~~467~~464,~~843~~734
		547,707			~~550~~546,~~012~~991
Less accumulated depreciation		(365,755	)		(~~381~~383,~~182~~113	)
		181,952			~~168~~163,~~830~~878
Goodwill		2,951			2,951
Other assets		6,023			5,~~999~~656
	$	328,482		$	~~319~~329,~~282~~118
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	24,167		$	2327,~~886~~477
Accrued compensation, benefits and related expenses		10,440			1011,~~111~~971
Accrued interest		2,403			24,~~188~~564
Other accrued expenses		9,340			810,~~962~~745
Income taxes payable		—			567
Long-term debt due in one year		4,325			4,325
Total current liabilities		50,675			4959,~~472~~649
Long-term debt		141,039			~~138~~137,~~702~~620
Deferred income taxes and other long-term liabilities		29,439			2726,~~089~~815
Shareholders’ equity
Preferred stock $.01 par value; 10,000 shares authorized		—			—
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 February 25, 2005		114			114
Class A, $.01 par value; 100,000 shares authorized; issued and outstanding – 11,394 shares at August 27, 2004 and May 27, 2005		114			114
Class B, $.01 par value; 5,000 shares authorized; issued and outstanding – 979 shares at August 27, 2004 and February 25, 2005		10			10
Class B, $.01 par value; 5,000 shares authorized; issued and outstanding – 979 shares at August 27, 2004 and May 27, 2005		10			10
Capital in excess of par value		39,170			39,170
Retained earnings		68,035			6465,~~725~~740
Total shareholders’ equity		107,329			~~104~~105,~~019~~034
	$	328,482		$	~~319~~329,~~282~~118

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

AVONDALE INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In thousands, except per share data)

	Thirteen Weeks Ended
	Feb. 27,			Feb. 25,
	May 28,			May 27,
	2004			2005
Net sales	$	~~129~~151,~~582~~345		$	~~124~~156,~~306~~570
Operating costs and expenses
Cost of goods sold		~~117~~138,~~578~~043			~~110~~135,~~962~~787
Depreciation		9,~~343~~149			8,~~538~~225
Selling and administrative expenses		6,~~227~~658			6,~~652~~671
Operating loss		(3,566	)		(1,846	)
Facility restructuring charges		2,250			—
Interest expense, net		4,334			3,832
Operating income (loss)		(4,755	)		5,887
Discount and expenses on sales of receivables		615			534
Interest expense, net		4,346			3,816
Other, net		(177	)		(578	)
Discount and expenses on sales of receivables		631			662
Loss before income taxes		(8,338	)		(5,634	)
Gain on extinguishment of debt		(1,321	)		—
Benefit of income taxes		(2,965	)		(2,125	)
Other, net		110			(266	)
Net loss	$	(5,373	)	$	(3,509	)
Income (loss) before income taxes		(8,521	)		1,675
Provision for (benefit of) income taxes		(3,080	)		660
Net income (loss)	$	(5,441	)	$	1,015
Per share data:
Net loss-basic	$	(.43	)	$	(.28	)
Net income (loss)-basic	$	(.44	)	$	.08
Net loss-diluted	$	(.43	)	$	(.28	)
Net income (loss)-diluted	$	(.44	)	$	.08
Dividends declared	$	~~.10~~—		$	—

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

AVONDALE INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In thousands, except per share data)

	Twenty-Six Weeks Ended
	Thirty-Nine Weeks Ended
	Feb. 27,			Feb. 25,
	May 28,			May 27,
	2004			2005
Net sales	$	~~260~~412,~~922~~267		$	~~275~~431,~~396~~966
Operating costs and expenses
Cost of goods sold		~~235~~373,~~349~~392			~~243~~379,~~366~~153
Depreciation		1828,~~867~~016			1725,~~155~~380
Selling and administrative expenses		1219,~~689~~347			1219,~~794~~465
Operating income (loss)		(5,983	)		2,081
Facility restructuring charges		2,250			—
Interest expense, net		9,164			7,589
Operating income (loss)		(10,738	)		7,968
Discount and expenses on sales of receivables		1,243			1,115
Interest expense, net		13,510			11,405
Gain on extinguishment of debt		—			(162	)
Discount and expenses on sales of receivables		1,874			1,777
Other, net		(2,549	)		(1,151	)
Gain on extinguishment of debt		(1,321	)		(162	)
Loss before income taxes		(13,841	)		(5,310	)
Other, net		(2,439	)		(1,417	)
Benefit of income taxes		(4,895	)		(2,000	)
Loss before income taxes		(22,362	)		(3,635	)
Net loss	$	(8,946	)	$	(3,310	)
Benefit of income taxes		(7,975	)		(1,340	)
Net loss	$	(14,387	)	$	(2,295	)
Per share data:
Net loss-basic	$	(1.7216	)	$	(.2719	)
Net loss-diluted	$	(1.7216	)	$	(.2719	)
Dividends declared	$	.20		$	—

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

AVONDALE INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)

	Twenty-Six Weeks Ended
	Thirty-Nine Weeks Ended
	Feb. 27,			Feb. 25,
	May 28,			May 27,
	2004			2005
Operating activities
Net loss	$	(814,~~946~~387	)	$	(32,~~310~~295	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		1928,~~103~~384			1726,~~593~~028
Benefit of deferred income taxes		(58,~~035~~072	)		(12,~~983~~144	)
Gain on disposal of property, plant and equipment and assets held for sale		(~~2,633~~867	)		(~~971~~1,145	)
Gain on extinguishment of debt		—(1,321	)		(162	)
Sale of accounts receivable, net		(46,~~932~~442	)		(115,~~072~~033	)
Changes in operating assets and liabilities		(52,~~087~~200	)		41,~~156~~271
Net cash provided by (used in) operating activities		(74,~~530~~905	)		416,~~251~~520
Investing activities
Purchases of property, plant and equipment		(24,~~833~~540	)		(47,~~188~~486	)
Proceeds from sale of property, plant and equipment and assets held for sale		45,~~597~~447			1,~~430~~629
Net cash provided by (used in) investing activities		~~1,764~~907			(25,~~758~~857	)
Financing activities
Reduction in long-term debt		(23,~~163~~244	)		(23,~~163~~244	)
Purchase and retirement of treasury stock		(60	)		—
Dividends paid		(2,476	)		—
Net cash used in financing activities		(45,~~639~~780	)		(23,~~163~~244	)
Decrease in cash and cash equivalents		(10,405	)		(670	)
Increase (decrease) in cash and cash equivalents		(9,778	)		7,419
Cash and cash equivalents at beginning of period		13,769			5,481
Cash and cash equivalents at end of period	$	3,~~364~~991		$	412,~~811~~900

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

AVONDALE INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

~~February~~May 2527, 2005

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 ~~twenty~~thirty-~~six~~nine weeks ended ~~February~~May 2527, 2005 are not ~~necessarily~~ 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,			~~Feb.~~May 2527,
	2004			2005
Finished goods	$	29,187		$	3331,~~467~~100
Work in process		33,047			3433,~~666~~000
Raw materials		8,173			7,~~194~~617
Dyes and chemicals		4,096			4,~~459~~475
Inventories at FIFO		74,503			7976,~~786~~192
Adjustment of carrying value to LIFO basis, net of market adjustment		(1,645	)		(~~645~~295	)
		72,858			7975,~~141~~897
Supplies at average cost		5,424			5,~~620~~424
	$	78,282		$	8481,~~761~~321

AVONDALE INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) ~~February~~May 2527, 2005

The Company’s inventories at ~~February~~May 2527, 2005 under the last-in, first-out (“LIFO”) ~~method~~ method and the related impact on the statement of operations for the ~~twenty~~thirty-~~six~~nine weeks then ended ~~have~~ 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~~ these estimates, the inventory amounts at ~~February~~May 2527, 2005 and the operating results for the ~~twenty-six~~ thirty-nine weeks ended ~~February~~May 2527, 2005 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				~~Twenty~~Thirty-~~Six~~Nine Weeks Ended
	Feb. 27,		Feb. 25,		Feb. 27,		Feb. 25,
	May 28,		May 27,		May 28,		May 27,
	2004		2005		2004		2005
Weighted average shares outstanding – basic		12,~~381~~376		12,373		12,~~381~~379		12,373
Effect of employee stock options		—		—		—		—
Weighted average shares outstanding – diluted		12,~~381~~376		12,373		12,~~381~~379		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						~~Twenty~~Thirty-~~Six~~Nine Weeks Ended
	Feb. 27,			Feb. 25,			Feb. 27,			Feb. 25,
	May 28,			May 27,			May 28,			May 27,
	2004			2005			2004			2005
Net loss as reported	$	(5,373	)	$	(3,509	)	$	(8,946	)	$	(3,310	)
Net income (loss) as reported	$	(5,441	)	$	1,015		$	(14,387	)	$	(2,295	)
Pro forma stock-based compensation, net of income taxes		(9	)		(9—	)		(1827	)		(9	)
Pro forma net loss	$	(5,382	)	$	(3,518	)	$	(8,964	)	$	(3,319	)
Pro forma net income (loss)	$	(5,450	)	$	1,015		$	(14,414	)	$	(2,304	)
Per share data:
Net loss-basic as reported	$	(.43	)	$	(.28	)	$	(.72	)	$	(.27	)
Net income (loss)-basic as reported	$	(.44	)	$	.08		$	(1.16	)	$	(.19	)
Net loss-basic pro forma	$	(.43	)	$	(.28	)	$	(.72	)	$	(.27	)
Net income (loss)-basic pro forma	$	(.44	)	$	.08		$	(1.16	)	$	(.19	)
Net loss-diluted as reported	$	(.43	)	$	(.28	)	$	(.72	)	$	(.27	)
Net income (loss)-diluted as reported	$	(.44	)	$	.08		$	(1.16	)	$	(.19	)
Net loss-diluted pro forma	$	(.43	)	$	(.28	)	$	(.72	)	$	(.27	)
Net income (loss)-diluted pro forma	$	(.44	)	$	.08		$	(1.16	)	$	(.19	)

AVONDALE INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) ~~February~~May 2527, 2005

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

	Thirteen Weeks Ended						~~Twenty~~Thirty-~~Six~~Nine Weeks Ended
	Feb. 27,			Feb. 25,			Feb. 27,			Feb. 25,
	May 28,			May 27,			May 28,			May 27,
	2004			2005			2004			2005
Revenues:
Apparel fabrics	$	94112,~~367~~601		$	86117,~~168~~692		$	~~194~~307,~~729~~330		$	~~200~~318,~~948~~640
Yarns		4547,~~974~~714			4945,~~454~~183			87135,~~373~~087			91136,~~106~~289
Other		1416,~~065~~203			68,~~366~~049			2844,~~788~~991			1422,~~794~~843
		154,406			141,988			310,890			306,848
		176,518			170,924			487,408			477,772
Less inter-segment sales		2425,~~824~~173			1714,~~682~~354			4975,~~968~~141			3145,~~452~~806
Total	$	~~129~~151,~~582~~345		$	~~124~~156,~~306~~570		$	~~260~~412,~~922~~267		$	~~275~~431,~~396~~966
Income (loss):
Apparel fabrics	$	~~479~~1,821		$	(24,~~879~~074	)	$	24,~~881~~702		$	~~(31~~4,043	)
Yarns		~~470~~301			4,~~542~~877			(~~848~~547	)		712,~~522~~399
Other		~~880~~1,417			~~397~~1,126			13,~~923~~340			12,~~612~~738
Unallocated		(5,395	)		(3,906	)		(9,939	)		(7,022	)
Facility restructuring charges		(2,250	)		—			(2,250	)		—
Total operating income (loss)		(3,566	)		(1,846	)		(5,983	)		2,081
Unallocated		(6,044	)		(4,190	)		(15,983	)		(11,212	)
Interest expense, net		4,334			3,832			9,164			7,589
Total operating income (loss)		(4,755	)		5,887			(10,738	)		7,968
Discount and expenses on sale of receivables		615			534			1,243			1,115
Interest expense, net		4,346			3,816			13,510			11,405
Gain on extinguishment of debt		—			—			—			(162	)
Discount and expenses on sale of receivables		631			662			1,874			1,777
Other, net		(177	)		(578	)		(2,549	)		(1,151	)
Gain on extinguishment of debt		(1,321	)		—			(1,321	)		(162	)
Loss before income taxes	$	(8,338	)	$	(5,634	)	$	(13,841	)	$	(5,310	)
Other, net		110			(266	)		(2,439	)		(1,417	)
Income (loss) before income taxes	$	(8,521	)	$	1,675		$	(22,362	)	$	(3,635	)

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 (amounts in thousands).

	Thirteen Weeks Ended						Twenty-Six Weeks Ended
							Thirty-Nine Weeks
	Feb. 27,			Feb. 25,			Feb. 27,			Feb. 25,
	Thirteen Weeks Ended						Ended
	May 28,			May 27,			May 28,			May 27,
	2004			2005			2004			2005
Components of net periodic benefit cost (benefit):
Service cost	$	26		$	—		$	5278		$	—
Interest cost		114			53			~~228~~342			~~106~~159
Amortization of prior service cost		83			(127	)		~~166~~249			(~~254~~381	)
Amortization of loss		(15	)		—			(3045	)		—
Net periodic benefit cost (benefit)	$	208		$	(74	)	$	~~416~~624		$	(~~148~~222	)

Payment of post retirement benefits for the ~~twenty~~thirty-~~six~~nine weeks ended ~~February~~May 2728, 2004 and ~~February~~ May 2527, 2005 amounted to $~~720~~780,000 and $~~384~~514,000, respectively, and is forecasted to be ~~approximately~~ approximately $~~600~~625,000 for the full fiscal year ending August 26, 2005. The reduction in current year expense reflects the elimination of medical benefits for certain retired participants effective August 1, 2004, including a deadline for claims submission of December 31, 2004.

AVONDALE INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) ~~February~~May 2527, 2005

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 No. 123R prospectively for new stock-based compensation arrangements and the unvested portion of existing arrangements. The Company does not believe the adoption of Statement No. 123R will have a material impact on the Company’s consolidated financial statements.

In December 2004, the Financial Accounting Standards Board issued Statement No. 153, Exchange of ~~nonmonetary~~Nonmonetary ~~assets~~Assets, an amendment to APB No. 29. The guidance in APB No. 29 included certain exceptions to the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Statement No. 153 amends APB No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of this statement are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company is currently evaluating the impact of this statement, but does not believe the adoption of Statement No. 153 will have a material impact on the Company’s consolidated financial statements.

7.In May ~~January 6~~2005, ~~2005~~the ~~Train~~Financial ~~Derailment:~~Accounting OnStandards ~~Thursday,~~Board ~~January~~issued Statement No. 6154, ~~2005~~Accounting Changes and Error Corrections, a ~~Norfolk~~replacement ~~Southern~~of APB Opinion No. 20 and FASB Statement No. 3. This ~~freight~~statement ~~train~~applies ~~collided~~to ~~with~~the aaccounting ~~stationary~~and ~~Norfolk~~reporting ~~Southern~~of ~~train~~all ~~parked~~voluntary onaccounting aprinciple ~~railroad~~changes, and ~~spur~~requires ~~near~~such changes be retrospectively applied to financial statements from previous periods unless such application is impracticable, as defined. This statement also addresses the reporting ~~Company’s~~of ~~manufacturing~~a ~~and~~correction ~~administrative~~of ~~facilities~~an inerror ~~Graniteville,~~by ~~South~~restating ~~Carolina~~previously issued financial statements. InUnder the ~~ensuing~~statement, ~~derailment~~changes in depreciation, ~~rail~~amortization, ~~cars~~or ~~ended~~depletion upfor onlong-lived, ~~the~~nonfinancial ~~Company’s~~assets must ~~property~~be ~~and~~accounted for as a ~~tanker~~change ~~car~~in ~~was~~accounting ~~breached,~~estimate effected by a change in accounting ~~releasing~~principle. ~~chlorine~~Statement ~~gas~~No. 154 ~~Due~~carries toforward ~~the~~many ~~release~~provisions of ~~the~~Opinion ~~toxic~~20 and ~~corrosive~~FASB ~~chlorine~~3 ~~gas, the surrounding~~without ~~area~~change, including ~~the~~those ~~Company’s~~provisions ~~adjacent~~related ~~facilities~~to reporting a change in accounting estimate, ~~was~~a ~~evacuated.~~change in ~~Nine~~reporting ~~individuals~~entity, ~~six~~correction of ~~whom~~an error and reporting accounting changes in interim financial ~~were~~statements. ~~associates~~Statement No. 154 is effective for accounting changes and corrections of ~~the~~errors made in fiscal years beginning after December 15, 2005. The Company is currently evaluating the impact of this statement, ~~were~~but ~~killed~~does bynot ~~chlorine~~believe ~~gas~~the ~~inhalation~~adoption ~~and~~of ~~many~~Statement ~~others~~No. 154 ~~were hospitalized~~will ashave a ~~result~~material ofimpact on ~~their~~the ~~injuries~~Company’s consolidated financial statements.

~~Local,~~7. Gain ~~state~~on ~~and~~Extinguishment ~~federal~~of ~~authorities~~Debt: ~~restricted~~On ~~access~~May 27, to2004, the Company’s ~~facilities~~recorded ~~near~~a ~~the~~$1.3 ~~collision~~million ~~site~~net ~~for~~gain on early extinguishment of debt related to a ~~period~~partial exchange of ~~approximately~~its ~~eight~~101/4% ~~days.~~Senior Subordinated ~~Due~~Notes todue 2013 (the “2013 Notes”). The Company’s ~~product~~executed ~~flow~~the ~~and~~private transaction, ~~interdependence~~exchanging $4.0 million of the ~~Company’s~~2013 ~~manufacturing~~Notes ~~facilities~~for ~~within~~$2.6 million ~~and~~of ~~outside~~new ~~the~~senior, ~~evacuation~~unsecured ~~zone,~~Floating Rate ~~productive~~Notes ~~capacity~~due ~~representing~~2012 ~~more~~(the ~~than~~“2012 ~~50%~~Notes”). ofInterest on the ~~Company’s~~2012 ~~sales~~Notes ~~was~~is ~~effectively~~due ~~shutdown~~quarterly asin aarrears ~~result~~commencing ofJuly 1, ~~these~~2004, ~~events.~~and Asis calculated based on the ~~chlorine~~three ~~gas~~month ~~dissipated~~LIBOR rate (subject to a minimum of 1.75% and ~~removal~~a maximum of ~~the~~4.5%) ~~wrecked~~plus ~~rail~~7.0%. ~~cars~~After ~~began~~July 1, 2005, the 2012 Notes are redeemable at the Company’s ~~was~~option, ~~allowed~~in towhole ~~access~~or ~~portions~~in ofpart, ~~the~~at ~~affected~~a ~~facilities~~redemption ~~and~~price ~~initiated~~of ~~steps~~104.0%, towhich ~~determine~~declines ~~the~~in ~~extent~~intervals ofto ~~damage~~100.0% ~~and~~in ~~resume~~2009 ~~operations~~and thereafter. The ~~Company’s~~2012 ~~computer~~Notes ~~systems,~~have ~~communication~~substantially the same ~~systems~~covenants, ~~electronic~~events ~~and~~of ~~electrical~~default ~~systems, compressors~~ and other ~~machinery~~terms inand ~~affected~~conditions ~~facilities were~~as ~~damaged~~the by2013 ~~corrosion~~Notes. ~~induced~~In byconnection ~~chlorine~~with the ~~gas~~exchange, ~~exposure.~~the InCompany ~~addition,~~received ~~boilers~~a ~~servicing finishing~~waiver ~~operations~~of ~~were~~certain ~~damaged~~restrictions byprovided ~~fire~~under ~~because~~the ~~necessary~~GECC revolving ~~life~~credit ~~saving~~facility ~~evacuation~~pertaining ~~precluded orderly~~to ~~shutdown~~the reduction of ~~those~~subordinated ~~units~~debt.

AVONDALE INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) ~~February~~May 2527, 2005

~~The~~8. Facility ~~Company~~Restructuring: ~~focused~~In ~~all~~response ~~available~~to ~~resources~~highly oncompetitive ~~the~~market ~~recovery~~conditions and ~~effort.~~continued ~~Temporary~~imbalance ~~boilers have~~of ~~been~~global ~~installed,~~supply and ~~replacement~~demand ~~electrical~~for ~~distribution,~~textile ~~compressors~~ and ~~computers~~apparel ~~are~~products, in May 2004, ~~place~~the ~~and~~Company ~~operational.~~closed ~~Repairs~~an toopen-end ~~textile~~yarn ~~processing~~manufacturing ~~facilities~~facility ~~and~~located ~~machines~~in ~~are~~North onCarolina ~~going.~~and the ~~Operations~~weaving inoperation ~~all~~of ~~facilities~~an ~~have~~integrated ~~been~~greige ~~resumed~~fabric manufacturing facility located in anGeorgia. ~~orderly~~These actions ~~manner~~to rationalize excess manufacturing capacity, ~~taking~~following ~~place~~the inrelocation ~~stages~~of ~~during~~certain ~~January~~equipment, improved capacity utilization of the Company’s remaining facilities and ~~February~~lowered costs per unit produced. ~~Normal~~No ~~levels~~reduction ofin ~~production~~net ~~are~~sales ~~being~~resulted ~~generated,~~from ~~with~~this ~~the~~capacity ~~exception~~rationalization. Flexibility of the Company’s manufacturing facilities to shift production from one product line to ~~coated~~another and the Company’s ability to source additional yarns and greige fabrics ~~operation,~~from ~~although~~outside vendors ~~full~~to ~~remediation~~increase production of ~~the~~its ~~chlorine~~finished ~~damage~~products ~~has~~in ~~yet~~reaction to beadded ~~completed.~~demand were ~~Due~~maintained. Certain equipment was relocated from these two operations to ~~the~~other ~~progressive~~facilities ~~nature~~located in ofAlabama, ~~damage~~Georgia ~~resulting~~and ~~from~~South ~~chlorine~~Carolina ~~gas~~to ~~exposure~~retain certain specialized manufacturing capabilities and replace older, ~~further~~less efficient equipment ~~failures~~. ~~will~~Other ~~occur~~excess ~~over~~equipment ~~time~~was sold, ~~with~~generating a ~~corresponding~~gain ~~reduction~~of approximately in$0.9 million. ~~productive~~In ~~efficiency~~connection ~~and~~with these actions, the Company recorded facility ~~temporary~~restructuring ~~loss~~charges, and other non-operating costs, net of ~~capacity~~the gain on equipment sold, of approximately $2.3 million ~~Shipments~~during the third quarter of ~~finished~~fiscal ~~goods~~2004. ~~from~~At ~~all~~May 28, 2004, approximately $80,000 of minor property disposal costs remained unpaid and was included in other accrued expenses in the Company’s ~~distribution centers~~consolidated ~~have~~financial ~~resumed~~statements.

~~The~~9. January 6, ~~Company~~2005 ~~maintains~~Train ~~property~~Derailment: ~~damage~~On ~~and~~January 6, ~~business~~2005, ~~interruption~~a ~~insurance~~Norfolk toSouthern ~~provide~~freight ~~reimbursement~~train ofcollided ~~losses~~with ~~stemming~~a ~~from~~stationary anNorfolk ~~incident~~Southern oftrain ~~this~~parked ~~nature.~~on Ina ~~addition,~~railroad ~~Norfolk~~spur ~~Southern~~near ~~has acknowledged responsibility to~~ the Company’s ~~for~~manufacturing ~~the incident~~ and ~~has~~administrative ~~provided~~facilities ~~temporary~~in ~~clean~~Graniteville, ~~up assistance~~South Carolina. ~~Near~~In the ensuing ~~end of March 2005~~derailment, ~~Norfolk~~rail ~~Southern~~cars ~~terminated~~ended ~~its~~up ~~clean~~on upthe ~~efforts~~Company’s property and ~~the~~a tanker car was breached, ~~Company~~releasing ischlorine ~~taking~~gas. ~~steps~~Due to ~~proceed~~the ~~with~~release of the ~~required~~toxic ~~cleanup~~ and ~~remediation~~corrosive ofchlorine gas, the ~~chlorine~~surrounding ~~induced~~area, ~~damage.~~including ~~The~~the Company’s isadjacent ~~utilizing~~facilities, ~~appropriate~~was ~~resources~~evacuated. toNine ~~identify~~individuals, ~~and~~six ~~document~~of ~~losses~~whom ~~incurred~~were asassociates ~~a result~~ of the ~~incident~~Company, ~~and~~were ~~will~~killed ~~pursue~~by ~~claims~~chlorine ~~under~~gas ~~its~~inhalation ~~property~~and ~~damage,~~many ~~business~~others were ~~interruption~~hospitalized ~~and~~as ~~other~~a ~~insurance~~result ~~policies~~of ~~and~~their ~~against third parties~~injuries.

~~Disruption~~Local, ofstate and federal authorities restricted access to the Company’s ~~operations~~facilities ~~and~~near ~~loss~~the collision site for a period of ~~production~~approximately ~~volume~~eight asdays. aDue ~~result~~to ofthe ~~this incident~~Company’s ~~negatively~~product ~~impacted~~flow ~~results~~and interdependence of ~~operations~~the ~~for~~Company’s ~~the~~manufacturing ~~thirteen~~facilities within and ~~twenty-six~~outside ~~weeks~~the ~~ended February 25~~evacuation zone, productive ~~2005.~~capacity ~~The~~representing ~~Company~~more ~~will~~than ~~continue~~50% toof ~~suffer~~the ~~losses~~Company’s ~~caused~~sales bywas ~~this~~effectively ~~incident~~shutdown inas ~~future~~a ~~periods.~~result ~~The~~of ~~Company~~these isevents. ~~assessing~~As the ~~extent~~chlorine ofgas ~~losses~~dissipated ~~that~~and ~~will~~removal beof ~~incurred~~the ~~due~~wrecked torail ~~this~~cars ~~incident~~began, ~~but~~the isCompany ~~unable~~was allowed to ~~estimate~~access atportions ~~this~~of ~~time~~ the ~~full~~affected ~~amount~~facilities and initiated steps to determine the extent of ~~loss~~damage and resume operations. The Company’s ~~expects~~computer ~~that~~systems, ~~all losses~~communication ~~incurred~~systems, ~~will~~electronic beand ~~recovered~~electrical ~~through~~systems, ~~insurance~~compressors and ~~third~~other ~~party~~machinery ~~claims.~~in ~~Any~~affected ~~differences between~~facilities ~~amounts~~were ~~ultimately~~damaged ~~received~~by ~~from~~corrosion ~~insurance~~induced ~~and~~by ~~third~~chlorine ~~parties~~gas ~~and~~exposure. ~~losses~~In ~~incurred~~addition, boilers servicing finishing operations were damaged by ~~the~~fire ~~Company~~because ~~may negatively~~necessary ~~impact~~life ~~future~~saving ~~results~~evacuation precluded orderly shutdown of ~~operations~~those units.

InThe ~~connection~~Company ~~with~~focused ~~the~~all ~~incident,~~available ~~the~~resources ~~Company~~on ~~has~~the ~~incurred~~recovery ~~labor~~effort. ~~continuation~~Temporary ~~costs~~boilers ofhave ~~approximately~~been ~~$2.3 million~~installed, and ~~various~~replacement ~~clean~~electrical updistribution, compressors and ~~repair~~computers ~~costs~~are ofin ~~approximately~~place ~~$5.6 million~~and ~~during~~operational. ~~the~~Repairs ~~thirteen~~to ~~weeks~~textile ~~ended~~processing ~~February 25,~~facilities ~~2005.~~and ~~The~~machines ~~Company~~are ~~has~~ongoing. ~~recorded~~Operations ~~these~~in ~~costs,~~all facilities ~~net~~and shipments of ~~a $5.0 million~~finished ~~advance~~goods ~~received~~ from all of the Company’s ~~property~~distribution ~~damage~~centers ~~insurance~~were resumed ~~provider,~~in as an ~~insurance~~ ~~claim~~orderly ~~receivable~~manner, ~~within~~taking ~~current~~place ~~assets~~in atstages ~~February 25,~~during ~~2005.~~January ~~The~~and ~~Company~~February. ~~expects~~Normal tolevels of ~~request~~production ~~additional~~are ~~advances~~being asgenerated, ~~the~~although ~~recovery~~full ~~progresses~~remediation ~~and~~of ~~additional~~the ~~costs~~chlorine ~~are~~damage ~~incurred. The Company~~ has ~~not~~yet ~~recognized~~to ~~gains~~be completed. ~~relating~~Due to ~~recovery~~the progressive nature of ~~lost~~damage ~~profits,~~resulting ~~involuntary~~from ~~conversions~~chlorine ofgas exposure, further ~~assets~~equipment orfailures ~~other~~may ~~such~~occur ~~recoveries~~over ~~for~~time, ~~the~~with ~~thirteen~~a corresponding reduction in productive efficiency and temporary ~~twenty-six~~loss ~~weeks~~of ~~ended~~capacity. ~~February 25,~~The ~~2005,~~Company ~~as such~~also ~~amounts~~anticipates ~~are~~temporary ~~contingent~~reduction ~~upon~~in ~~final~~productive capacity ~~settlement~~during ~~with~~the ~~respective~~restoration ~~insurers~~of ~~and~~equipment ~~third~~to ~~parties~~fully remediated, pre-loss condition.

~~8. Contingencies:~~ The Company ismaintains ~~involved~~property indamage ~~certain environmental matters~~ and ~~claims.~~ ~~The~~business ~~Company~~interruption ~~has~~insurance ~~identified~~to ~~those environmental matters where it is probable that~~provide ~~expenditures~~reimbursement ~~will~~of belosses ~~required,~~stemming ~~including~~from aan ~~pond~~incident ~~with~~of ~~certain~~this ~~contamination~~nature. ~~and~~In ~~land previously used as a landfill~~addition, ~~both~~Norfolk ~~acquired~~Southern ~~in a 1996 transaction, and various other minor environmental matters~~has ~~that~~acknowledged ~~are~~responsibility ~~expected~~ to bethe ~~resolved~~Company byfor ~~much~~the ~~smaller expenditures~~incident. ~~Based~~The onCompany ~~discussions~~is ~~with~~utilizing ~~outside~~appropriate ~~consultants~~resources ~~and regulatory authorities, the Company believes that the costs~~ to ~~provide~~identify ~~full remediation of these items will be between $2.0 million~~ and ~~$3.0 million.~~document ~~Accordingly,~~losses ~~the~~incurred ~~Company has~~as ~~established~~ a ~~reserve~~result of ~~$2.5 million to cover~~ the ~~costs to investigate~~incident, ~~monitor~~ and ~~remediate these~~will ~~environmental conditions. If more costly remediation measures are necessary than those~~pursue ~~believed~~claims tounder beits ~~probable~~property ~~based~~damage, onbusiness ~~current~~interruption ~~facts~~ and ~~circumstances,~~other ~~actual~~insurance ~~costs~~policies ~~may~~and ~~exceed the~~against ~~reserves~~third ~~provided~~parties. ~~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) ~~February~~May 2527, 2005

OnDisruption ~~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,’s ~~among~~operations ~~others, negligently~~ and~~/or~~ ~~wantonly~~loss ~~caused or permitted the discharge and disposal~~ of ~~sewage~~production ~~sludge~~volume ~~and~~as ~~contaminants into the lake adjacent to the plaintiffs’ properties, which allegedly interfered with the plaintiffs’ use of the properties. As~~ a result of ~~these~~this incident ~~alleged~~negatively ~~actions,~~impacted ~~the~~results ~~plaintiffs claim that the values~~ of ~~their~~operations 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 its motion for ~~summary judgment. After an initial series of actions,~~ the ~~case~~thirteen ~~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 cothirty-~~plaintiffs’~~nine ~~counsel~~weeks onended ~~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~~27, ~~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~~2005. 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. In response to motions filed by the Company ~~and Russell~~will ~~Corporation,~~continue ~~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~~suffer ~~been~~losses caused by ~~the~~this ~~defendants~~incident atin ~~any~~future ~~time since January 1998~~periods. The Company ~~ceased~~is ~~all~~assessing ~~dyeing operations at its Alexander City plant in April 1999. In addition,~~ the ~~Court~~extent ~~found~~of ~~that~~losses ~~the plaintiffs have no evidence~~ that ~~would~~will ~~entitle~~be ~~them~~incurred due to ~~recover damages for mental anguish in~~ this ~~case~~ ~~and~~incident ~~made~~but ais ~~number of other specific evidentiary rulings in the defendants’ favor. In response~~unable to aestimate ~~motion~~at ~~filed~~this bytime ~~plaintiffs’ counsel for reconsideration of all aspects of~~ the ~~Court’s~~full ~~order,~~amount ~~a hearing was held on December 10, 2004 and the Court allowed the parties until December 23, 2004 to submit additional briefing. Subsequently, the Court retained the core~~ of ~~its rulings but clarified that plaintiffs may be permitted to seek certain damages and present certain evidence during the trial~~loss. The ~~Court~~Company ~~rescheduled~~expects ~~the trial date on this matter to September 19, 2005 and ruled~~ that ~~the plaintiffs~~all ~~must~~losses ~~provide~~incurred ~~specific damage claims and calculations one month prior to the trial date. A pre-trial conference, the date of which has not been set,~~ will be ~~held~~recovered tothrough ~~resolve~~insurance ~~final evidentiary issues~~ and ~~scheduling~~third ~~matters~~party ~~in advance of trial~~claims. ~~The~~Any ~~Company~~differences ~~intends~~between toamounts ~~vigorously~~ultimately ~~defend~~received ~~this~~from ~~case~~insurance and ~~believes~~third ~~that~~parties itand ~~has~~losses aincurred ~~number~~by ~~of defenses available to it. While~~ the ~~outcome of this case cannot be predicted with certainty, the~~ Company ~~does~~may ~~not~~negatively ~~believe that it will have a~~impact ~~material~~future ~~adverse effect on the Company’s financial condition or~~ results of operations.

9In connection with the incident, the Company has incurred labor continuation costs of approximately $2.3 ~~Consolidating~~million ~~Guarantor~~and various clean up and ~~Non-guarantor~~repair ~~Financial~~costs ~~Information:~~of ~~The~~approximately ~~following~~$16.1 million ~~consolidating~~during ~~financial~~the ~~information~~thirty-nine ~~presents~~weeks ~~balance~~ended ~~sheets~~May 27, ~~statements~~2005. ofThe ~~operations~~Company ~~and~~has received advances totaling $20.0 ~~statements~~million ofduring ~~cash~~the ~~flows~~thirty-nine ofweeks ended May 27, 2005 from the Company’s ~~and~~property ~~its~~damage insurance ~~subsidiaries~~provider. ~~Avondale~~The ~~Incorporated,~~Company has included the ~~parent company~~net ~~and~~balance ~~sole~~of ~~shareholder~~advances received in excess of expenses ~~Avondale~~incurred ~~Mills,~~of ~~has~~$1.6 million ~~fully~~in ~~and~~other ~~unconditionally~~accrued ~~guaranteed~~expenses ~~the~~at ~~2013~~May 27, 2005. The Company expects to ~~Notes~~request ~~and~~additional advances as the ~~2012~~recovery ~~Notes~~progresses ~~issued~~and byadditional ~~Avondale~~costs ~~Mills~~are incurred. ~~Avondale~~The Company ~~Mills~~has ~~Graniteville~~not ~~Fabrics,~~recognized ~~Inc.,~~gains ~~a wholly~~relating ~~owned~~to ~~subsidiary~~recovery of ~~Avondale~~lost ~~Mills~~profits, ~~and~~involuntary ~~non-guarantor~~conversions of assets or other such recoveries for the ~~Notes~~thirty-nine weeks ended May 27, ~~operates~~2005, aas ~~denim~~such amounts are ~~manufacturing~~contingent ~~facility~~upon ~~and~~final ~~warehouse~~settlement ~~operation~~with ~~located~~respective ininsurers ~~South~~and ~~Carolina~~third parties.

10. Contingencies: The Company is involved in certain environmental matters and claims. The Company has identified those environmental matters where it is probable that expenditures will be required, including a pond with certain contamination and land previously used as a landfill, both acquired in a 1996 transaction, and various other minor environmental matters that are expected to be resolved by much smaller expenditures. Based on discussions with outside consultants and regulatory authorities, the Company believes that the costs to provide full remediation of these items will be between $2.0 million and $3.0 million. Accordingly, the Company has established a reserve of $2.5 million to cover the costs to investigate, monitor and remediate these 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 Part I, Item 3 “Legal Proceedings” in the Company’s Annual Report on Form 10-K for the fiscal year ended August 27, 2004 and Part II, Item 1 “Legal Proceedings” in the Company’s Quarterly Report on Form 10-Q for the quarter ended February 27, 2005. There have been no significant changes in the matters reported. 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.

11. Consolidating Guarantor and Nonguarantor Financial Information: The following consolidating financial information presents balance sheets, statements of operations 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 nonguarantor of the Notes, operates a denim manufacturing facility and warehouse operation located in South Carolina.

AVONDALE INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) ~~February~~May 2527, 2005

AVONDALE INCORPORATED CONSOLIDATING BALANCE SHEETS ~~February~~May 2527, 2005 (In thousands)

							Non-
							Guarantor
							Avondale
							Mills
				Guarantor			Graniteville
	Avondale			Avondale			Fabrics,
	Mills, Inc.			Incorporated			Inc.			Eliminations			Consolidated
ASSETS
Current Assets
Current assets
Cash and cash equivalents	$	412,~~811~~900		$	—		$	—		$	—		$	412,~~811~~900
Accounts receivable		4660,~~320~~237			—			3			—			4660,~~323~~240
Inventories		8481,~~761~~321			—			—			—			8481,~~761~~321
Prepaid expenses		1,~~830~~438			—			—			—			1,~~830~~438
Insurance claim receivable		2,856			—			—			—			2,856
Total current assets		155,896			—			3			—			155,899
Income taxes refundable		187			—			—			—			187
Total current assets		140,765			—			3			—			140,768
Assets held for sale		734			—			—			—			734
Property, plant and equipment
Land		6,~~077~~075			—			196			—			6,~~273~~271
Buildings		64,~~146~~236			—			11,750			—			75,~~896~~986
Machinery and equipment		~~429~~426,~~908~~791			—			37,~~935~~943			—			~~467~~464,~~843~~734
		500,131			—			49,881			—			550,012
		497,102			—			49,889			—			546,991
Less accumulated depreciation		(~~350~~351,~~041~~049	)		—			(3132,~~141~~064	)		—			(~~381~~383,~~182~~113	)
		150,090			—			18,740			—			168,830
		146,053			—			17,825			—			163,878
Goodwill		2,951			—			—			—			2,951
Investment in subsidiaries		6,~~889~~277			9394,~~596~~554			—			(100,~~485~~831	)		—
Other assets		5,~~999~~656			—			—			—			5,~~999~~656
	$	~~307~~317,~~428~~567		$	9394,~~596~~554		$	1817,~~743~~828		$	(100,~~485~~831	)	$	~~319~~329,~~282~~118
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Current liabilities
Accounts payable	$	2326,~~048~~393		$	—		$	~~838~~1,084		$	—		$	2327,~~886~~477
Accrued compensation, benefits		9,989			—			122			—			10,111
Accrued compensation, benefits and related expenses		11,742			—			229			—			11,971
Accrued interest		24,~~188~~564			—			—			—			24,~~188~~564
Other accrued expenses		810,~~961~~745			—			1—			—			810,~~962~~745
Income taxes payable		567			—			—			—			567
Long-term debt due in one year		4,325			—			—			—			4,325
Total current liabilities		4858,~~511~~336			—			~~961~~1,313			—			4959,~~472~~649
Long-term debt		~~138~~137,~~702~~620			—			—			—			~~138~~137,~~702~~620
Deferred income taxes and other long term liabilities		2726,~~089~~815			—			—			—			2726,~~089~~815
Due to (from) subsidiaries		~~(470~~242	)		(10,~~423~~480	)		10,~~893~~238			—			—
Shareholders’ equity		9394,~~596~~554			~~104~~105,~~019~~034			6,~~889~~277			(100,~~485~~831	)		~~104~~105,~~019~~034
	$	~~307~~317,~~428~~567		$	9394,~~596~~554		$	1817,~~743~~828		$	(100,~~485~~831	)	$	~~319~~329,~~282~~118

AVONDALE INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) ~~February~~May 2527, 2005

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
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
Current liabilities
Accounts payable	$	23,051		$	—		$	1,116		$	—		$	24,167
Accrued compensation, benefits		10,333			—			107			—			10,440
Accrued compensation, benefits and related expenses		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) ~~February~~May 2527, 2005

AVONDALE INCORPORATED CONSOLIDATING STATEMENTS OF OPERATIONS For the Thirteen weeks ended ~~February~~May 2527, 2005 (In thousands)

							Non-
							Guarantor
							Avondale
							Mills
				Guarantor			Graniteville
	Avondale			Avondale			Fabrics,
	Mills, Inc.			Incorporated			Inc.			Eliminations			Consolidated
Net sales, including intercompany transfers and charges	$	~~124~~156,~~306~~570		$	2891		$	2225,~~661~~380		$	(2225,~~689~~471	)	$	~~124~~156,~~306~~570
Operating costs and expenses
Cost of goods sold		~~110~~135,~~958~~729			—			2225,~~667~~438			(2225,~~663~~380	)		~~110~~135,~~962~~787
Depreciation		7,~~607~~301			—			~~931~~924			—			8,~~538~~225
Selling and administrative expenses		6,~~678~~762			—			—			(2691	)		6,~~652~~671
Operating income (loss)		~~(937~~6,778	)		2891			(~~937~~982	)		—			(15,~~846~~887	)
Interest expense, net		3,~~832~~816			—			—			—			3,~~832~~816
Discount and expenses on sales of receivables		~~534~~662			—			—			—			~~534~~662
Other, net		(~~578~~266	)		—			—			—			(~~578~~266	)
Income (loss) before income taxes		(42,~~725~~566	)		2891			(~~937~~982	)		—			(51,~~634~~675	)
Provision for (benefit of) income taxes		~~(1,784~~996	)		1034			(~~351~~370	)		—			~~(2,125~~660	)
Equity in loss of subsidiary		(586	)		(3,527	)		—			4,113			—
Equity in income (loss) of subsidiary		(612	)		958			—			(346	)		—
Net loss	$	(3,527	)	$	(3,509	)	$	(586	)	$	4,113		$	(3,509	)
Net income (loss)	$	958		$	1,015		$	(612	)	$	(346	)	$	1,015

AVONDALE INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) ~~February~~May 2527, 2005

AVONDALE INCORPORATED CONSOLIDATING STATEMENTS OF OPERATIONS For the Thirteen weeks ended ~~February~~May 2728, 2004 (Inamounts in thousands)

							Non-Guarantor
							Non-
							Avondale Mills
							Guarantor
							Avondale
							Mills
				Guarantor			Graniteville
	Avondale			Avondale			Fabrics,
	Mills, Inc.			Incorporated			Inc.			Eliminations			Consolidated
Net sales, including intercompany transfers and charges	$	~~129~~151,~~582~~345		$	2532		$	2230,~~348~~941		$	(2230,~~373~~973	)	$	~~129~~151,~~582~~345
Operating costs and expenses
Cost of goods sold		~~117~~139,~~996~~615			—			2129,~~928~~370			(2230,~~346~~942	)		~~117~~138,~~578~~043
Depreciation		8,~~406~~217			—			~~937~~932			—			9,~~343~~149
Selling and administrative expenses		6,~~254~~689			—			—			(2731	)		6,~~227~~658
Operating income (loss)		(3,074	)		25			(517	)		—			(3,566	)
Facility restructuring charges		2,250			—			—			—			2,250
Interest expense, net		4,334			—			—			—			4,334
Operating income (loss)		(5,426	)		32			639			—			(4,755	)
Discount and expenses on sales of receivables		615			—			—			—			615
Interest expense, net		4,346			—			—			—			4,346
Other, net		(177	)		—			—			—			(177	)
Discount and expenses on sales of receivables		631			—			—			—			631
Income (loss) before income taxes		(7,846	)		25			(517	)		—			(8,338	)
Gain on extinguishment of debt		(1,321	)		—			—			—			(1,321	)
Provision for (benefit of) income taxes		(2,786	)		9			(188	)		—			(2,965	)
Other, net		110			—			—			—			110
Equity in loss of subsidiary		(329	)		(5,389	)		—			5,718			—
Income (loss) before income taxes		(9,192	)		32			639			—			(8,521	)
Net loss	$	(5,389	)	$	(5,373	)	$	(329	)	$	5,718		$	(5,373	)
Provision for (benefit of) income taxes		(3,325	)		11			234			—			(3,080	)
Equity in earnings (loss) of subsidiary		405			(5,462	)		—			5,057			—
Net income (loss)	$	(5,462	)	$	(5,441	)	$	405		$	5,057		$	(5,441	)

AVONDALE INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) ~~February~~May 2527, 2005

AVONDALE INCORPORATED CONSOLIDATING STATEMENTS OF OPERATIONS For the ~~Twenty~~Thirty-~~Six~~Nine weeks ended ~~February~~May 2527, 2005 (In thousands)

							Non-Guarantor
							Non-
							Avondale Mills
							Guarantor
							Avondale
							Mills
				Guarantor			Graniteville
	Avondale			Avondale			Fabrics,
	Mills, Inc.			Incorporated			Inc.			Eliminations			Consolidated
Net sales, including intercompany transfers and charges	$	~~275~~431,~~396~~966		$	59150		$	5075,~~097~~477		$	(5075,~~156~~627	)	$	~~275~~431,~~396~~966
Operating costs and expenses
Cost of goods sold		~~243~~379,~~707~~436			—			4975,~~756~~194			(5075,~~097~~477	)		~~243~~379,~~366~~153
Depreciation		1522,~~293~~594			—			12,~~862~~786			—			1725,~~155~~380
Selling and administrative expenses		1219,~~853~~615			—			—			(59150	)		1219,~~794~~465
Operating income (loss)		310,~~543~~321			59150			(12,~~521~~503	)		—			27,~~081~~968
Interest expense, net		711,~~589~~405			—			—			—			711,~~589~~405
Discount and expenses on sales of receivables		1,~~115~~777			—			—			—			1,~~115~~777
Gain on extinguishment of debt		(162	)		—			—			—			(162	)
Other, net		(1,~~151~~417	)		—			—			—			(1,~~151~~417	)
Income (loss) before income taxes		(31,~~848~~282	)		59150			(12,~~521~~503	)		—			(53,~~310~~635	)
Provision for (benefit of) income taxes		(~~1,452~~456	)		2256			(~~570~~940	)		—			(21,~~000~~340	)
Equity in loss of subsidiary		(~~951~~1,563	)		(32,~~347~~389	)		—			43,~~298~~952			—
Net loss	$	(32,~~347~~389	)	$	(32,~~310~~295	)	$	(~~951~~1,563	)	$	43,~~298~~952		$	(32,~~310~~295	)

AVONDALE INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) ~~February~~May 2527, 2005

AVONDALE INCORPORATED CONSOLIDATING STATEMENTS OF OPERATIONS For the ~~Twenty~~Thirty-~~Six~~Nine weeks ended ~~February~~May 2728, 2004 (Inamounts in thousands)

							Non-Guarantor
							Non-
							Avondale Mills
							Guarantor
							Avondale
							Mills
				Guarantor			Graniteville
	Avondale			Avondale			Fabrics,
	Mills, Inc.			Incorporated			Inc.			Eliminations			Consolidated
Net sales, including intercompany transfers and charges	$	~~260~~412,~~922~~267		$	5183		$	4475,~~360~~301		$	(4475,~~411~~384	)	$	~~260~~412,~~922~~267
Operating costs and expenses
Cost of goods sold		~~236~~376,~~583~~198			—			4372,~~125~~495			(4475,~~359~~301	)		~~235~~373,~~349~~392
Depreciation		1625,~~992~~209			—			12,~~875~~807			—			1828,~~867~~016
Selling and administrative expenses		1219,~~741~~430			—			—			(5283	)		1219,~~689~~347
Operating income (loss)		(5,394	)		51			(640	)		—			(5,983	)
Facility restructuring charges		2,250			—			—			—			2,250
Interest expense, net		9,164			—			—			—			9,164
Operating income (loss)		(10,820	)		83			(1	)		—			(10,738	)
Discount and expenses on sales of receivables		1,243			—			—			—			1,243
Interest expense, net		13,510			—			—			—			13,510
Other, net		(2,549	)		—			—			—			(2,549	)
Discount and expenses on sales of receivables		1,874			—			—			—			1,874
Income (loss) before income taxes		(13,252	)		51			(640	)		—			(13,841	)
Gain on extinguishment of debt		(1,321	)											(1,321	)
Provision for (benefit of) income taxes		(4,679	)		19			(235	)		—			(4,895	)
Other, net		(2,439	)		—			—			—			(2,439	)
Equity in loss of subsidiary		(405	)		(8,978	)		—			9,383			—
Income (loss) before income taxes		(22,444	)		83			(1	)		—			(22,362	)
Net loss	$	(8,978	)	$	(8,946	)	$	(405	)	$	9,383		$	(8,946	)
Provision for (benefit of) income taxes		(8,004	)		30			(1	)		—			(7,975	)
Equity in loss of subsidiary		—			(14,440	)		—			14,440			—
Net loss	$	(14,440	)	$	(14,387	)	$	—		$	14,440		$	(14,387	)

AVONDALE INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) ~~February~~May 2527, 2005

AVONDALE INCORPORATED CONSOLIDATING STATEMENTS OF CASH FLOWS For the ~~Twenty~~Thirty-~~six~~Nine weeks ended ~~February~~May 2527, 2005 (In thousands)

							Non-Guarantor
							Non-
							Avondale Mills
							Guarantor
							Avondale
							Mills
				Guarantor			Graniteville
	Avondale			Avondale			Fabrics,
	Mills, Inc.			Incorporated			Inc.			Eliminations			Consolidated
Operating activities
Net loss	$	(32,~~347~~389	)	$	(32,~~310~~295	)	$	(~~951~~1,563	)	$	43,~~298~~952		$	(32,~~310~~295	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		1523,~~731~~242			—			12,~~862~~786			—			1726,~~593~~028
Benefit of deferred income taxes		(12,~~983~~144	)		—			—			—			(12,~~983~~144	)
Gain on disposal of property, plant and equipment and assets held for sale		(~~971~~1,145	)		—			—			—			(~~971~~1,145	)
Gain on extinguishment of debt		(162	)											(162	)
Sale of accounts receivable, net		(115,~~072~~033	)		—			—			—			(115,~~072~~033	)
Changes in operating assets and liabilities		52,~~009~~485			(3794	)		(~~816~~1,120	)		—			41,~~156~~271
Equity in loss of subsidiary		~~951~~1,563			32,~~347~~389			—			(43,~~298~~952	)		—
Net cash provided by operating activities		416,~~156~~417			—			95103			—			416,~~251~~520
Investing activities
Purchase of property, plant and equipment		(47,~~093~~383	)		—			(95103	)		—			(47,~~188~~486	)
Proceeds from sale of property, plant and equipment and assets held for sale		1,~~430~~629			—			—			—			1,~~430~~629
Net cash used in investing activities		(25,~~663~~754	)		—			(95103	)		—			(25,~~758~~857	)
Financing activities
Net payments on long term debt		(2,163	)		—			—			—			(2,163	)
Reductions in long term debt		(3,244	)		—			—			—			(3,244	)
Net cash used in financing activities		(23,~~163~~244	)		—			—			—			(23,~~163~~244	)
Decrease in cash and cash equivalents		(670	)		—			—			—			(670	)
Increase in cash and cash equivalents		7,419			—			—			—			7,419
Cash and cash equivalents at beginning of period		5,481			—			—			—			5,481
Cash and cash equivalents at end of period	$	412,~~811~~900		$	—		$	—		$	—		$	412,~~811~~900

AVONDALE INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) ~~February~~May 2527, 2005

AVONDALE INCORPORATED CONSOLIDATING STATEMENTS OF CASH FLOWS For the ~~Twenty~~Thirty-~~Six~~Nine weeks ended ~~February~~May 2728, 2004 (Inamounts in thousands)

							Non-Guarantor
							Non-
							Avondale Mills
							Guarantor
							Avondale
							Mills
				Guarantor			Graniteville
	Avondale			Avondale			Fabrics,
	Mills, Inc.			Incorporated			Inc.			Eliminations			Consolidated
Operating activities
Net loss	$	(814,~~978~~440	)	$	(814,~~946~~387	)	$	~~(405~~—	)	$	914,~~383~~440		$	(814,~~946~~387	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		1725,~~228~~577			—			12,~~875~~807			—			1928,~~103~~384
Benefit of deferred income taxes		(58,~~035~~072	)		—			—			—			(58,~~035~~072	)
Gain on disposal of property, plant and equipment and assets held for sale		(~~2,633~~867	)		—			—			—			(~~2,633~~867	)
Sale of accounts receivable, net		(4,932	)		—			—			—			(4,932	)
Gain on extinguishment of debt		(1,321	)		—			—			—			(1,321	)
Changes in operating assets and liabilities		(3,594	)		(32	)		(1,461	)		—			(5,087	)
Sale of accounts receivable, net		(6,442	)		—			—			—			(6,442	)
Changes in operating assets and liabilities		590			7			(2,797	)		—			(2,200	)
Dividends from subsidiary		—			2,476			—			(2,476	)		—
Equity in loss of subsidiary		~~405~~—			814,~~978~~440			—			(914,~~383~~440	)		—
Net cash provided by (used in) operating activities		(74,~~539~~975	)		2,~~476~~536			910			(2,476	)		(74,~~530~~905	)
Investing activities
Purchase of property, plant and equipment		(24,~~824~~530	)		—			(910	)		—			(24,~~833~~540	)
Proceeds from sale of property, plant and equipment and assets held for sale		45,~~597~~447			—			—			—			45,~~597~~447
Net cash provided by (used in) investing activities		~~1,773~~917			—			(910	)		—			~~1,764~~907
Financing activities
Net payments on long-term debt		(2,163	)		—			—			—			(2,163	)
Reductions in long-term debt		(3,244	)		—			—			—			(3,244	)
Purchase and retirement of treasury stock		—			(60	)		—			—			(60	)
Dividends paid		(2,476	)		(2,476	)		—			2,476			(2,476	)
Net cash used in financing activities		(45,~~639~~720	)		(2,~~476~~536	)		—			2,476			(45,~~639~~780	)
Decrease in cash and cash equivalents		(109,~~405~~778	)		—			—			—			(109,~~405~~778	)
Cash and cash equivalents
At beginning of period		13,769			—			—			—			13,769
Cash and cash equivalents
At end of period	$	3,~~364~~991		$	—		$	—		$	—		$	3,~~364~~991

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 trade accounts receivable, at a discount and without recourse, to a special purpose subsidiary established to facilitate the acquisition and subsequent resale by that subsidiary of certain undivided interests in trade 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. Generally, risks of ownership pass to customers when goods are shipped, or in circumstances where risk of ownership passes upon delivery, all such shipments are made under fixed price and delivery terms. 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. All international sales are denominated in U. S. dollars. All amounts billed to customers for shipping and handling are included in net sales in accordance with EITF 00-01.

Contingencies: The Company is involved in certain environmental matters and claims. The Company has identified those environmental matters where it is probable that expenditures will be required, including a pond with certain contamination and land previously used as a landfill, both acquired in a 1996 transaction, and various other minor environmental matters that are expected to be resolved by much smaller expenditures. Based on discussions with outside consultants and regulatory authorities, the Company believes that the costs to provide full remediation of these items will be between $2.0 million and $3.0 million. Accordingly, the Company has established a reserve of $2.5 million to cover the costs to investigate, monitor and remediate these 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 part I, Item 3 “Legal Proceedings” in the Company’s Annual Report on Form 10-K for the fiscal year ended August 27, 2004~~. There~~ ~~have~~and ~~been~~Part II, noItem 1 ~~changes~~“Legal Proceedings” in the ~~matters~~Company’s ~~reported~~Quarterly ~~other~~Report ~~than~~on asForm ~~set~~10-Q ~~forth~~for the inquarter ~~Part II.~~ended ~~Item~~February 227, 2005. ~~Legal~~ ~~Proceedings~~There ~~included~~have ~~elsewhere~~been inno ~~this~~significant ~~Quarterly~~changes ~~Report~~in ofthe ~~Form 10-Q~~matters reported. 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 ~~February~~May 2527, 2005 Compared to Thirteen Weeks Ended ~~February~~May 2728, 2004

Net Sales. Net sales ~~decreased~~increased 43.15% to $~~124~~156.36 million for the thirteen weeks ended ~~February~~May 2527, 2005 from $~~129~~151.63 million for the thirteen weeks ended ~~February~~May 2728, 2004. The ~~Company experienced~~increase ~~significant improvement~~ in net sales ~~during~~for the ~~previous~~thirteen ~~two fiscal quarters and the first few~~ weeks ofended ~~the current reporting period~~May 27, ~~reflecting~~2005 ~~improved~~primarily ~~unit~~reflected ~~sales~~generally ~~for~~higher ~~the Company’s~~shipment volume of apparel fabrics and yarns ~~operations~~as ~~and~~the ~~higher~~overall ~~average~~improvement ~~invoice~~in ~~price~~market demand for the Company’s ~~apparel~~ ~~fabrics~~products ~~operation~~continued. ~~This~~While ~~positive~~overall ~~trend~~unit ~~was~~sales ~~negatively~~increased impacted when on January 6, 2005 a Norfolk Southern freight train collided with a stationary Norfolk Southern train parked on a railroad spur near the Company’s manufacturing and administrative facilities located in Graniteville, South Carolina4.8% Infor the ~~resulting~~thirteen ~~derailment,~~weeks ~~rail cars~~ ended ~~up on the Company’s property and a tanker~~May 27, ~~car~~2005 ~~was~~compared ~~breached, releasing chlorine gas. Due~~ to the ~~release~~thirteen ofweeks ~~the~~ended ~~toxic and corrosive chlorine gas~~May 28, ~~productive capacity representing more than 50% of the Company’s sales was effectively shutdown. In addition~~2004, the Company’s ~~computer~~anticipated ~~systems,~~a ~~communications systems, electronic and~~larger ~~electrical~~improvement ~~systems,~~prior ~~compressors and other equipment in affected facilities were damaged by corrosion induced by chlorine gas exposure. The Company focused all available resources on its recovery efforts and was able~~ to ~~resume~~the ~~operations~~effects ~~in an orderly manner with recovery~~ of ~~a substantial portion of its productive capacity and shipments of finished goods from all of~~ the ~~Company’s~~ ~~distribution centers. However, sales and production volumes were dramatically reduced during~~ January ~~and February~~ 6, 2005 ~~while~~train ~~these recovery efforts were underway~~derailment, ~~resulting~~as inplant ~~the~~operations are ~~decline~~periodically ininterrupted ~~net~~by ~~sales~~clean ~~for~~up ~~the thirteen weeks ended February 25, 2005~~projects. See further discussion under the caption January 6, 2005 Train Derailment included under Part 1, Item 2 of this Quarterly Report on Form 10-Q.

The domestic textile industry continues to face difficult challenges, including significant growth in imported apparel, ~~the~~ elimination of ~~all~~quotas ~~import~~on ~~quotas~~imports ~~effective~~received ~~December 31,~~from ~~2004~~World asTrade ~~set~~Organization ~~forth~~member bycountries ~~the~~effective ~~World~~December 31, ~~Trade Organization~~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~~The ~~legislation~~Company expects these difficult conditions to continue into the foreseeable future. Recent actions by the U.S. government to impose ~~tariffs~~safeguard relief on ~~imports~~certain categories of imported garments from China are expected to ~~offset~~provide ~~China’s~~positive benefits ~~undervalued~~to ~~currency~~domestic suppliers of those products, and ~~petitions~~indirectly ~~filed~~improve ~~by industry~~demand ~~trade~~and ~~organizations~~pricing ~~seeking~~for ~~safeguard~~the Company’s ~~relief~~products ~~through~~for ~~action~~a bylimited ~~the~~period Uof time.S. ~~government~~Other ~~may~~pending legislation to impose tariffs on imports from China to offset China’s undervalued currency may provide ~~some~~additional ~~assistance~~relief, 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 ~~loss~~income of ($15.8) 9 million for the thirteen weeks ended ~~February~~May 2527, 2005 compared to an operating loss of ($34.68) million for the thirteen weeks ended ~~February~~May 2728, 2004. The ~~reduction~~improvement in operating ~~loss~~income reflected improved unit sales for the Company’s ~~yarns~~apparel ~~operation,~~fabrics ~~higher~~and ~~average~~yarns ~~invoice~~operations, ~~price for the Company’s apparel fabrics operation~~ and favorable LIFO inventory adjustment. Raw material costs per unit ~~increased slightly~~declined, as ~~increased~~generally lower market prices of cotton offset higher market prices for synthetic fibers and higher costs associated with increased purchases of yarns and greige fabrics following the May 2004 closure of a yarn manufacturing facility in North Carolina and a weaving operation in Georgia ~~offset generally lower market prices of cotton~~. Conversion costs per unit increased slightly, due largely to ~~lower unit~~plant ~~cost~~disruptions ~~absorptions resulting from the loss in production volumes~~ associated with the January 6, 2005 train derailment and increases in chemical and energy costs. Additionally, the Company recorded a ~~non-cash~~noncash benefit of $0.54 million to adjust the carrying value of inventories to LIFO basis for the thirteen weeks ended ~~February~~ May 2527, 2005 compared to a ~~non-cash~~noncash charge of $2.0 million for the thirteen weeks ended ~~February~~May 2728, 2004.

Cost of goods sold, which includes all direct manufacturing costs, inbound freight charges, inspection and warehousing costs and internal transfer costs, decreased 51.6% to $~~111~~135.08 million for the thirteen weeks ended ~~February~~May 2527, 2005 from $~~117~~138.60 million for the thirteen weeks ended ~~February~~May 2728, 2004, primarily reflecting the ~~decreased~~ ~~unit~~impact ~~volume~~of ~~and~~ lower raw material costs and favorable LIFO inventory adjustment. Cost of goods sold as a percentage of net sales decreased to 8986.37% for the thirteen weeks ended ~~February~~May 2527, 2005 from 9091.72% for the thirteen weeks ended ~~February~~May 2728, 2004, also reflecting the impact of lower raw material costs and ~~higher~~favorable ~~average invoice~~LIFO ~~prices~~inventory adjustment.

Selling and administrative expenses, ~~increased~~which ~~8.1%~~include compensation and benefits, office expenses, travel and entertainment expenses and computer expenses of all administration and support functions not directly related to the production of product, were $6.7 million for both the thirteen weeks ended ~~February~~May 2527, 2005 ~~from~~and ~~$6.2 million for~~ the thirteen weeks ended ~~February~~May 2728, 2004~~, primarily reflecting increased accrual of certain performance based incentives~~. Selling and administrative ~~expenses~~ expenses as a percentage of net sales were 5.4.3% for the thirteen weeks ended ~~February~~May 2527, 2005 versus 4.84% for the thirteen weeks ended ~~February~~May 2728, 2004~~, largely reflecting lower net sales due to the January 6, 2005 train derailment~~.

Segment Performance. Apparel fabric sales increased 4.5% to $117.7 million for the thirteen weeks ended May 27, 2005 from $112.6 million for the thirteen weeks ended May 28, 2004, reflecting a 5.8% increase in yards invoiced and a 1.2% decrease in average invoice price. The apparel fabrics operation produced an operating income of $4.1 million for the thirteen weeks ended May 27, 2005 compared to an operating income of $1.8 million for the thirteen weeks ended May 28, 2004, largely due to the improved unit volume and lower raw material costs.

~~Segment~~Yarn ~~Performance.~~sales, ~~Apparel~~including ~~fabric~~intra-company sales to the Company’s fabric operations, decreased 85.72% to $8645.2 million for the thirteen weeks ended ~~February~~May 2527, 2005 from $9447.47 million for the thirteen weeks ended ~~February~~May 2728, 2004. Total pounds invoiced increased 9.6%, primarily reflecting the conversion of a 13greige fabric operation closed in May 2004 into a yarn manufacturing facility.6% The decrease in yarn ~~yards~~requirements ~~invoiced,~~and ~~largely~~associated ~~due~~internal transfers of yarns to the Company’s apparel fabrics operation following the January 6, 2005 train derailment, ~~and~~was largely mitigated by a 5redirection of certain yarn production to outside sales. Average invoice price decreased 13.5% ~~increase~~as inlower ~~average~~raw material costs impacted outside invoice ~~price.~~prices ~~The~~as ~~apparel~~well ~~fabrics~~as intra-company transfer prices. The yarns operation produced an operating ~~loss~~income of ($24.9) million for the thirteen weeks ended ~~February~~May 2527, 2005 compared to an operating ~~profit~~income of $0.53 million for the thirteen weeks ended ~~February~~May 2728, 2004, primarily ~~largely~~ due to the ~~lower~~ improved unit volume ~~resulting~~and ~~from~~reduced ~~the~~raw ~~January 6,~~material ~~2005 train derailment~~costs.

~~Yarn~~Other sales, ~~including~~which ~~intra-company~~include sales toof greige and coated fabrics, initial sales of an apparel sourcing operation and revenues from the Company’s ~~fabric~~trucking ~~operations~~operation, ~~increased~~decreased 750.6% to $498.5 0 million for the thirteen weeks ended ~~February~~May 2527, 2005 from $4616.02 million for the thirteen weeks ended ~~February~~ May 2728, 2004. ~~Total~~The ~~pounds~~decrease ~~invoiced~~in ~~increased~~other ~~17.4%,~~sales was primarily ~~reflecting~~attributable to the ~~conversion~~ ~~of a greige fabric operation closed in~~ May 2004 ~~into~~shutdown aof the ~~yarn~~greige ~~manufacturing~~weaving ~~facility. Decreased~~operation ~~yarn~~in ~~requirements~~Georgia and ~~associated~~lower ~~internal~~unit ~~transfers~~volume ofresulting ~~yarns~~from to the ~~Company’s apparel fabrics operation following the~~ January 6, 2005 train derailment, ~~were~~principally ~~largely~~in ~~mitigated~~coated byfabrics. ~~a redirection~~Operating ofincome ~~this~~from ~~production~~other ~~to outside~~ sales. ~~Average invoice price~~ decreased 821.4% ~~as lower raw~~, ~~material~~from ~~costs impacted outside invoice prices as well as intra-company transfer prices. The yarns operation produced operating income of~~ $41.54 million for the thirteen weeks ended ~~February~~May 2528, ~~2005 compared~~2004 to ~~an operating income of~~ $01.51 million for the thirteen weeks ended ~~February~~May 27, ~~2004~~2005, ~~primarily~~ ~~due~~largely toreflecting the ~~improved~~lower unit volume ~~and~~resulting ~~reduced~~from ~~raw~~the ~~material~~January 6, ~~costs~~2005 train derailment.

~~Other~~Inter-segment sales, ~~which include sales of greige and coated fabrics, initial sales of a new apparel sourcing operation and revenues from the Company’s trucking operation,~~ decreased 5442.69% to $614.4 million for the thirteen weeks ended ~~February~~May 2527, 2005 from $1425.12 million for the thirteen weeks ended ~~February~~May 2728, 2004., ~~The~~reflecting ~~decrease in other sales was primarily attributable to~~ the ~~May 2004~~previous capacity ~~shutdown~~rationalization ofactions ~~the~~and ~~greige~~corresponding ~~weaving~~reduction ~~operation~~ in ~~Georgia~~transfers ~~and~~of ~~lower~~internally ~~unit~~produced ~~volume~~yarns ~~resulting from the~~and ~~January 6,~~greige ~~2005~~fabrics ~~train~~as ~~derailment.~~well ~~Operating~~as ~~income from other sales decreased 55.6%, from $0.9 million for~~ the ~~thirteen~~redirection ~~weeks~~of ~~ended~~yarn ~~February 27,~~production ~~2004~~ to ~~$0.4 million~~outside ~~for~~sales ~~the~~following ~~thirteen weeks ended February 25, 2005, largely reflecting~~ the ~~lower unit volume resulting from the~~ January 6, 2005 train derailment.

Inter-segment sales decreased 28.6% to $17.7 million for the thirteen weeks ended February 25, 2005 from $24.8 million for the thirteen weeks ended February 27, 2004, reflecting the previous capacity rationalization actions and corresponding reduction in transfers of internally produced yarns and greige fabrics as well as the redirection of yarn production to outside sales following the January 6, 2005 train derailment.

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~~Facility ~~Expense,~~Restructuring: ~~Net.~~In ~~Net~~response ~~interest~~to ~~expense~~highly ~~declined~~competitive ~~11.6%~~market toconditions ~~$3.8 million~~and continued imbalance of global supply and demand for ~~the thirteen~~textile ~~weeks~~and ~~ended~~apparel ~~February~~products, in May 252004, ~~2005~~the Company ~~compared~~closed toan ~~$4.3 million~~open-end ~~for~~yarn manufacturing facility located in North Carolina and the ~~thirteen~~weaving operation ~~weeks~~of ~~ended~~an integrated greige fabric manufacturing facility located in Georgia. These actions ~~February 27~~to rationalize excess manufacturing capacity, ~~2004~~following the relocation of certain equipment, improved ~~primarily~~capacity ~~reflecting~~utilization ~~lower~~of ~~average~~the ~~borrowings~~Company’s ~~outstanding~~remaining ~~following~~facilities and lowered costs per unit produced. No reduction in net sales resulted from this capacity rationalization. Flexibility of the Company’s manufacturing facilities to shift production from one product line to another and the Company’s ~~exchange~~ability to source additional yarns and greige fabrics from outside vendors to increase production of its finished products in reaction to added demand were maintained. Certain equipment was relocated from these two operations to other facilities located in Alabama, Georgia and South Carolina to retain certain specialized manufacturing capabilities and replace older, less efficient equipment. Other excess equipment was sold, generating a gain of approximately $600.9 million. In connection with these actions, the Company recorded facility restructuring charges, and other non-operating costs, net of ~~its~~the ~~2013~~gain ~~Notes~~on ~~for~~equipment sold, of approximately $422.3 million during the third quarter of fiscal 2004. At May 28, 2004, approximately $80,000 of minor property disposal ~~its~~costs ~~Floating~~remained ~~Rate~~unpaid ~~Notes~~and ~~due~~was ~~2012~~included ~~during~~in ~~fiscal~~other ~~2004~~accrued expenses in the Company’s consolidated financial statements.

~~Discount~~Interest ~~and~~Expense, ~~Expenses on Sale of Receivables~~Net. ~~Discount~~Net ~~and~~interest ~~expenses~~expense ondeclined ~~sales~~11.6% ~~of receivables~~to ~~were~~ $03.58 million for the thirteen weeks ended ~~February~~May 2527, 2005 compared to $04.6 3 million for the thirteen weeks ended ~~February~~May 2728, 2004, primarily reflecting alower ~~net~~average ~~decrease~~borrowings inoutstanding following the Company’s exchange of ~~accounts~~approximately ~~receivable~~$60 million ~~sold~~of ~~under~~its ~~the~~2013 ~~securitization~~Notes ~~facility~~for approximately $42 million of its Floating Rate Notes due 2012 during fiscal 2004.

~~Provision~~Discount ~~for~~and ~~(benefit~~Expenses ~~of)~~on ~~Income~~Sale ~~Taxes~~of Receivables. AnDiscount ~~income~~and ~~tax~~expenses ~~benefit~~on sales of receivables (were $20.1) 7 million ~~was recorded~~ for the thirteen weeks ended ~~February~~May 2527, 2005 compared to ~~an income tax benefit of (~~$3.0) .6 million for the thirteen weeks ended ~~February~~May 2728, 2004, primarily reflecting ~~reduced~~the ~~operating~~impact ~~losses~~of higher market interest rates on discounts associated with accounts receivable sold under the securitization facility.

Provision for (benefit of) Income Taxes. A provision for income taxes of $0.7 million was recorded for the thirteen weeks ended May 27, 2005 compared to an income tax benefit of ($3.1) million for the thirteen weeks ended May 28, 2004, reflecting improved operating income.

~~Twenty~~Thirty-~~six~~nine Weeks Ended ~~February~~May 2527, 2005 Compared to ~~Twenty~~Thirty-~~six~~nine Weeks Ended ~~February~~May 2728, 2004

Net Sales. Net sales increased 54.68% to $~~275~~432.40 million for the ~~twenty~~thirty-~~six~~nine weeks ~~ended~~ ~~February~~ended May 2527, 2005 from $~~260~~412.93 million for the ~~twenty~~thirty-~~six~~nine weeks ended ~~February~~May 2728, 2004. The ~~increase~~ increase in net sales for the ~~twenty~~thirty-~~six~~nine weeks ended ~~February~~May 2527, 2005 primarily reflected higher ~~average~~ average invoice prices for ~~all of~~ the Company’s apparel fabrics 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. While overall unit sales increased 23.0% for the ~~twenty~~thirty-~~six~~nine weeks ended ~~February~~May 2527, 2005 compared to the ~~twenty~~thirty-~~six~~nine weeks ~~ended~~ ~~February~~ended May 2728, 2004, the Company anticipated a ~~much~~ larger improvement prior to the January 6, 2005 train derailment, which effectively shut down productive capacity representing more than 50% of the Company’s sales. Sales and production volumes were dramatically reduced ~~during~~in January and February 2005 ~~while~~during initial recovery efforts, ~~were~~and ~~underway~~continue to be impacted as plant operations are periodically interrupted by clean up projects. See further discussion under the caption January 6, 2005 Train Derailment included under Part 1, Item 2 of this Quarterly Report on Form 10-Q.

Operating Income (Loss). The Company produced an operating income of $28.10 million for the ~~twenty~~thirty-~~six~~nine weeks ended ~~February~~May 2527, 2005 compared to an operating loss of ($610.07) million ~~for~~ for the ~~twenty~~thirty-~~six~~nine weeks ended ~~February~~May 2728, 2004. The improvement in operating income reflected ~~higher~~ higher average invoice prices for ~~all of~~ the Company’s apparel fabrics operations and generally lower raw material costs. Raw material costs per unit decreased significantly, reflecting a significant decline in the market ~~prices~~ price of cotton, partially offset by higher market prices for synthetic fibers and increased purchases of yarns and greige fabrics following the May 2004 closure of a yarn manufacturing facility in North Carolina and weaving operation in Georgia. Conversion costs increased significantly, primarily reflecting higher energy costs and reduced unit cost absorptions ~~resulting from the loss in production volume~~ associated with the January 6, 2005 train derailment. Additionally, the Company recorded a ~~non-cash~~ noncash benefit of $1.0 4 million to adjust the carrying value of inventories to LIFO basis for the ~~twenty~~ thirty-~~six~~nine weeks ended ~~February~~ May 2527, 2005 compared to a ~~non-cash~~noncash charge of $24.5 million for the ~~twenty~~ thirty-~~six~~nine weeks ended ~~February~~ May 2728, 2004.

Cost of goods sold, which includes all direct manufacturing costs, inbound freight charges, inspection and warehousing costs and internal transfer costs, increased 31.46% to $~~243~~379.42 million for the ~~twenty~~thirty-~~six~~nine weeks ended ~~February 25~~May 27, 2005 from $~~235~~373.34 million for the ~~twenty~~thirty-~~six~~nine weeks ended ~~February 27~~May 28, 2004, primarily reflecting the ~~increased~~slight increase in sales unit volume, ~~and~~offset ~~higher~~by ~~raw~~lower raw material costs and favorable LIFO inventory adjustments. Cost of goods sold as a percentage of net sales decreased to 8887.48% for the ~~twenty~~thirty-~~six~~nine weeks ended ~~February~~May 2527, 2005 from 90.26% for the ~~twenty~~thirty-~~six~~nine weeks ended ~~February~~May 2728, 2004, reflecting the impact of ~~the~~ higher average invoice prices, lower raw material costs and ~~improved~~favorable ~~unit~~LIFO ~~cost~~inventory ~~absorptions~~adjustments.

Selling and administrative expenses, ~~were~~which ~~largely~~include ~~unchanged~~compensation atand benefits, office expenses, travel and entertainment expenses and computer expenses of all administration and support functions not directly related to the production of product, were $1219.85 million for the ~~twenty~~thirty-~~six weeks~~nine weeks ended ~~February~~May 2527, 2005 compared to $1219.73 million for the ~~twenty~~thirty-~~six~~nine weeks ended ~~February~~May 2728, 2004. Selling and administrative expenses as a percentage of net sales were 4.65% for the ~~twenty~~thirty-~~six~~ nine weeks ended ~~February~~ May 2527, 2005 versus 4.97% for the ~~twenty~~thirty-~~six~~nine weeks ended ~~February~~May 2728, 2004.

Segment Performance. Apparel fabric sales increased 3.2% to $201.0 million for the twenty-six weeks ended February 25, 2005 from $194.7 million for the twenty-six weeks ended February 27, 2004, reflecting a 1.2% decrease in yards invoiced, largely due to the January 6, 2005 train derailment, and a 4.5% increase in average invoice price. The apparel fabrics operations produced an operating loss of ($31,000) for the twenty-six weeks ended February 25, 2005 compared to an operating income of $2.9 million for the twenty-six weeks ended February 27, 2004, largely due to the lower unit volume resulting from the January 6, 2005 train derailment.

~~Yarn~~Segment ~~sales,~~Performance. ~~including~~Apparel ~~intra-company~~fabric sales ~~to the Company’s fabric operations,~~ increased 43.27% to $91318.16 million for the ~~twenty~~ thirty-~~six~~nine weeks ended ~~February~~May 2527, 2005 from $87307.43 million for the ~~twenty~~ thirty-~~six~~nine weeks ended ~~February~~May 2728, 2004., ~~Total~~reflecting ~~pounds~~a ~~invoiced increased 2~~1.03%. ~~Decreased~~increase ~~yarn requirements~~in ~~and~~yards ~~associated~~invoiced ~~internal~~and ~~transfers of yarns to the Company’s apparel fabrics operation following the January 6, 2005 train derailment were largely mitigated by~~ a ~~redirection of this production to outside sales. Average invoice price increased~~ 2.34% ~~as improved market demand for certain yarn products helped~~ increase ~~outside~~in average invoice ~~prices~~price. The ~~yarns~~apparel ~~operation~~fabrics operations produced an operating income of $74.50 million for the ~~twenty~~thirty-~~six~~ nine weeks ended ~~February~~May 2527, 2005 compared to ~~a loss~~an operating income of ($04.9) 7 million for the ~~twenty~~thirty-~~six~~nine weeks ended ~~February~~May 2728, 2004, ~~primarily~~largely due to ~~the increase~~production indisruptions ~~average~~and ~~invoice~~higher ~~price~~associated ~~and~~costs ~~lower~~resulting from ~~raw~~the ~~material~~January 6, ~~costs~~2005 train derailment.

~~Other~~Yarn sales, ~~which~~including ~~include~~intra-company sales ofto ~~greige and coated fabrics, initial sales of a new apparel sourcing operation and revenues from~~ the Company’s ~~trucking~~fabric ~~operation~~operations, ~~decreased~~increased 480.69% to $14136.8 3 million for the ~~twenty~~thirty-~~six~~nine weeks ended ~~February~~May 2527, 2005 from $28135.81 million for the ~~twenty-six~~ thirty-nine weeks ended ~~February~~May 2728, 2004. ~~The~~Total ~~decrease~~pounds ininvoiced ~~other~~increased ~~sales~~4.4%. ~~was~~The ~~primarily~~decrease ~~attributable~~in ~~to the May~~yarn ~~2004~~requirements ~~shutdown~~and ofassociated ~~the~~internal ~~greige~~transfers ~~weaving~~of ~~operation~~yarns into ~~Georgia~~the ~~and~~Company’s ~~lower~~apparel ~~unit~~fabrics ~~volume~~operation following ~~resulting from~~ the January 6, 2005 train derailment. ~~Operating~~was ~~income~~largely ~~from~~mitigated ~~other~~by a redirection of this production to outside yarn sales. Average invoice price decreased 153.83%, ~~from~~as $1lower raw material costs impacted outside invoice prices as well as intra-company transfer prices.9 The yarns operation produced operating income of $12.4 million for the ~~twenty~~thirty-~~six~~nine weeks ended ~~February~~May 27, ~~2004~~2005 compared to a loss of ($10.6 5) million for the ~~twenty~~thirty-~~six~~nine weeks ended ~~February~~May 2528, ~~2005~~2004, ~~largely~~primarily ~~reflecting~~due to the increase ~~lower~~in unit ~~volume~~sales ~~resulting~~and ~~from~~lower ~~the~~raw ~~January 6, 2005~~material ~~train derailment~~costs.

~~Inter-segment~~Other sales, which include sales of greige and coated fabrics, initial sales of an apparel sourcing operation and revenues from the Company’s trucking operation, decreased 3749.03% to $3122.5 8 million for the ~~twenty~~thirty-~~six~~nine weeks ended ~~February 25~~May 27, 2005 from $5045.0 million for the ~~twenty~~thirty-~~six~~nine weeks ended ~~February~~May 2728, 2004,. ~~reflecting~~The decrease in other sales was primarily attributable to the May 2004 ~~previous~~shutdown ~~capacity~~of ~~rationalization~~the ~~actions~~greige weaving operation in Georgia and ~~corresponding~~lower ~~reduction~~unit involume ~~transfers~~resulting offrom ~~internally~~the ~~produced~~January 6, ~~yarns~~2005 ~~and~~train ~~greige~~derailment. ~~fabrics~~Operating asincome ~~well~~from asother sales decreased 18.2%, from $3.3 million for the ~~redirection~~thirty-nine ofweeks ~~yarn~~ended ~~production~~May 28, 2004 to ~~outside~~$2.7 million ~~sales~~for the thirty-nine weeks ~~following~~ended May 27, 2005, largely reflecting the lower unit volume resulting from the January 6, 2005 train derailment.

Inter-segment sales decreased 39.0% to $45.8 million for the thirty-nine weeks ended May 27, 2005 from $75.1 million for the thirty-nine weeks ended May 28, 2004, reflecting the previous capacity rationalization actions and corresponding reduction in transfers of internally produced yarns and greige fabrics as well as the redirection of certain yarn production to outside sales following the January 6, 2005 train derailment.

~~Interest~~Facility ~~Expense,~~Restructuring: ~~Net.~~In ~~Net~~response ~~interest~~to ~~expense~~highly ~~declined~~competitive ~~17.4%~~market toconditions ~~$7.6 million~~and continued imbalance of global supply and demand for textile and apparel products, in May 2004, the ~~twenty~~Company closed an open-~~six~~end ~~weeks~~yarn ~~ended~~manufacturing ~~February 25,~~facility ~~2005~~located ~~compared~~in toNorth ~~$9.2 million~~Carolina ~~for~~and the ~~twenty-six~~weaving operation ~~weeks~~of ~~ended February 27,~~an ~~2004.~~integrated ~~Net~~greige ~~interest~~fabric ~~expense~~manufacturing ~~for~~facility ~~the~~located ~~twenty-six~~in ~~weeks~~Georgia. ~~ended~~These ~~February 27~~actions to rationalize excess manufacturing capacity, ~~2004~~following ~~included~~ the ~~write-off~~relocation of ~~approximately~~certain ~~$400~~equipment,~~000~~ improved capacity utilization of ~~unamortized~~the ~~debt~~Company’s ~~issue~~remaining facilities and lowered costs ~~following~~per ~~execution~~unit produced. No reduction in net sales resulted from this capacity rationalization. Flexibility of the aCompany’s manufacturing facilities to shift production from one product line to another and the ~~new~~Company’s ~~senior~~ability ~~secured~~to ~~revolving~~source ~~credit~~additional ~~facility~~yarns ~~with~~and ~~GECC~~greige fabrics from outside vendors to increase production of its finished products in ~~November 2003~~reaction to added demand were maintained. InCertain ~~addition~~equipment was relocated from these two operations to other facilities located in Alabama, ~~net~~Georgia ~~interest~~and South ~~expense~~Carolina ~~for~~to ~~the~~retain ~~twenty-six~~certain ~~weeks~~specialized ~~ended~~manufacturing ~~February 25~~capabilities and replace older, ~~2005~~less ~~reflected~~efficient equipment. ~~lower~~Other ~~average~~excess ~~borrowings~~equipment was sold, generating a gain of approximately $0.9 million. In ~~outstanding~~connection ~~following~~with these actions, the Company’s ~~exchange~~recorded facility restructuring charges, and other non-operating costs, net of the gain on equipment sold, of approximately $602.3 million during the third quarter of ~~its~~fiscal ~~2013~~2004. ~~Notes~~At ~~for~~ May 28, 2004, approximately $~~42 million~~80,000 of ~~its~~minor ~~Floating~~property ~~Rate~~disposal costs ~~Notes~~remained ~~due~~unpaid ~~2012~~and ~~during~~was ~~fiscal~~included ~~2004~~in other accrued expenses in the Company’s consolidated financial statements.

~~Discount~~Interest ~~and~~Expense, ~~Expenses on Sale of Receivables~~Net. ~~Discount~~Net ~~and~~interest ~~expenses~~expense ondeclined ~~sales~~15.6% ~~of receivables~~to ~~were~~ $111.14 million for the ~~twenty~~ thirty-~~six~~nine weeks ended ~~February~~May 2527, 2005 compared to $113.2 5 million for the ~~twenty~~thirty-~~six~~nine weeks ended ~~February~~May 28, 2004. Net interest expense for the thirty-nine weeks ended May 2728, 2004 included the write-off of approximately $400,000 ~~primarily~~of ~~reflecting~~unamortized debt issue costs following execution of a ~~net~~new ~~decrease~~senior secured revolving credit facility with GECC in November 2003. In addition, net interest expense for ~~accounts~~the ~~receivable~~thirty-nine ~~sold~~weeks ~~under~~ended May 27, 2005 reflected lower average borrowings outstanding following the ~~securitization~~Company’s ~~facility~~exchange of approximately $60 million of its 2013 Notes for approximately $42 million of its Floating Rate Notes due 2012 during fiscal 2004.

~~Provision~~Discount ~~for~~and ~~(benefit~~Expenses ~~of)~~on ~~Income~~Sale ~~Taxes~~of Receivables. AnDiscount ~~income~~and ~~tax~~expenses ~~benefit~~on sales of receivables (were $21.0) 8 million ~~was recorded~~ for the ~~twenty~~thirty-~~six~~nine weeks ended ~~February~~May 2527, 2005 compared to ~~an income tax benefit of (~~$41.9) million for the ~~twenty~~thirty-~~six~~nine weeks ended ~~February~~May 2728, 2004, primarily reflecting ~~reduced~~a ~~operating~~net decrease in accounts ~~losses~~receivable sold under the securitization facility.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities was $4.3 million for the twenty-six weeks ended February 25, 2005. Principal working capital changes included a $15.7 million decrease in accounts receivable, an $11.1 million decrease in accounts receivable sold under the securitization facility, a $6.5 million increase in inventories, a $2.9 million increase in net insurance claim receivable relating to the January 6, 2005 train derailment and a $1.2 million decrease in accounts payable and accrued expenses. The decrease in accounts receivable and accounts receivable sold primarily reflect the reduced sales in January and February relating to the January 6, 2005 train derailment. The increase in inventories reflects normal seasonal buildup of inventories during the Company’s second fiscal quarter, when the Company’s customers shutdown for the holidays and the Company produces goods against orders to be delivered during the strong Spring shipping season. The fluctuation in accounts payable and accrued expenses is the result of normal differences in the timing of invoice due dates in relation to the end of the respective reporting periods as well as the timing of interest payments on the senior and subordinated notes. Investing activities were predominantly equipment purchases and related costs of $4.2 million and proceeds of $1.4 million from the sale of several small tracts of land and certain excess equipment. Financing activities included repayment of $2.2 million of long-term debt.

~~The~~Provision ~~Company’s~~for ~~capital~~(benefit ~~expenditures,~~of) ~~aggregating~~Income $4Taxes.~~2 million~~ ~~for~~An ~~the~~income ~~twenty-six~~tax ~~weeks~~benefit ~~ended February 25, 2005, included purchases~~ of ~~approximately~~ ($1.3 ) million towas recorded ~~replace~~for ~~equipment~~the ~~damaged~~thirty-nine ~~as a~~weeks ~~result~~ended ~~of the January~~May 627, 2005 ~~train~~compared ~~derailment, with the balance used primarily~~ to ~~complete routine~~an ~~maintenance~~income ~~projects.~~tax ~~Management~~benefit ~~estimates that capital expenditures for the balance~~ of ~~fiscal~~ ~~2005 will be approximately~~ ($78.0 ) million, ~~excluding~~for ~~purchases~~the tothirty-nine ~~replace~~weeks ~~additional~~ended ~~equipment damaged as a result of the January~~May 628, ~~2005~~2004, ~~train~~reflecting ~~derailment.~~reduced ~~The~~operating ~~Company is unable to estimate at this time the amount of damaged equipment that will require replacement but expects such expenditures to be funded by insurance and third party claims~~losses.

AtLIQUIDITY ~~February 25,~~AND ~~2005,~~CAPITAL ~~the Company had no borrowings outstanding under its revolving line of~~RESOURCES ~~credit, and $27.8 million of borrowing availability as determined using prescribed advance rates~~ ~~against qualified inventory collateral, less outstanding letters of credit and required minimum~~ ~~availability.~~

~~Covenants~~Net ofcash provided by operating activities was $16.5 million for the ~~revolving~~thirty-nine ~~credit~~weeks ended May 27, 2005. Principal working capital changes included a $4.2 million increase in accounts receivable, a $5.0 million decrease in accounts receivable sold under the securitization facility, a ~~require~~$3.0 million increase in inventories and an $8.4 million increase in accounts payable and accrued expenses. The increase in accounts receivable primarily reflects the ~~Company~~improved sales trend during the thirteen weeks ended May 27, 2005 compared to ~~maintain~~the ~~certain~~thirteen ~~minimum~~weeks ended August 27, 2004, in addition to the net decrease in accounts receivable sold under the securitization facility. The reduction in accounts receivable sold reflects normal fluctuations in day-to-day cash ~~flow~~management needs. ~~amounts~~The increase in inventories reflects quantity adjustments to support the improved level of sales. The increase in accounts payable and ~~fixed~~accrued ~~charge~~expenses ~~coverage~~is ~~ratios~~the result of normal fluctuations in the ~~event~~timing ~~that~~of ~~combined~~invoice ~~excess~~due ~~availability under~~dates in relation to the ~~revolving~~end ~~credit~~of ~~facility~~the respective reporting period and timing of interest payments on the ~~Receivables~~senior ~~Securitization~~and ~~Facility~~subordinated ~~falls~~notes. ~~below~~Additionally, ~~$20~~the increase in ~~million~~accounts ~~for~~payable aand ~~period~~accrued ofexpenses ~~four~~includes ~~consecutive~~a ~~weeks~~$1.6 million Atincrease ~~February~~in net insurance claim advances related to the January 256, 2005 train derailment, ~~combined~~resulting ~~excess~~from ~~availability~~the receipt of $20.0 ~~under~~million ~~these~~in ~~two~~advances ~~facilities~~from ~~was~~the Company’s insurance carrier, offset by recovery expenditures incurred of approximately $5118.4 million. Investing activities were predominantly equipment purchases and related costs of $7.5 million and proceeds of $1.6 million from the sale of several small tracts of land and certain excess equipment. Financing activities included repayment of $3.2 million of long-term debt.

~~Covenants~~The ofCompany’s ~~the~~capital ~~indenture~~expenditures, ~~under~~aggregating ~~which~~$7.5 million for the ~~2013~~thirty-nine ~~Notes~~weeks ~~were~~ended May 27, ~~issued include~~2005, ~~among~~included ~~other~~purchases ~~things, certain~~of ~~restrictive~~approximately ~~covenants~~$3.1 million ~~applicable~~ to ~~issuance~~replace ofequipment ~~additional~~damaged ~~debt,~~as ~~payment of dividends,~~a ~~retirement~~result of ~~capital~~the ~~stock or indebtedness~~January 6, ~~purchase~~2005 oftrain ~~investments~~derailment, ~~sales~~with orthe ~~transfers~~balance ofused ~~assets, certain~~primarily ~~consolidations~~to orcomplete ~~mergers~~routine maintenance ~~and certain transactions with affiliates~~projects. InManagement ~~general,~~estimates ~~the~~that ~~amount of dividends and~~ capital ~~stock~~expenditures ~~purchases~~for ~~may~~the ~~not~~balance ~~exceed~~of anfiscal 2005 ~~amount~~will ~~equal~~be toapproximately $203.0 million. ~~plus~~The ~~50%~~Company ~~of adjusted~~is ~~net~~unable ~~income, or less 100% of adjusted net loss, all calculated on an accumulative basis subsequent~~ to ~~the~~estimate ~~date~~at ofthis ~~the~~time ~~indenture. With~~ the ~~accumulative loss reported through the thirteen~~amount ~~weeks ended February 25, 2005, the covenants~~ of ~~the~~damaged ~~indenture~~equipment ~~prohibit~~that ~~further~~will ~~payment~~require ofreplacement ~~dividends or~~but ~~purchases~~expects ~~of capital stock until~~ such ~~time~~expenditures asto ~~sufficient~~be ~~earnings~~funded ~~are~~by insurance ~~reported~~and tothird ~~eliminate~~party ~~the restriction~~claims.

At May 27, 2005, the Company had no borrowings outstanding under its revolving line of credit, and $24.7 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 May 27, 2005, combined excess availability under these two facilities was approximately $55.7 million.

Covenants of the indenture under which the 2013 Notes were issued, and provisions of the senior floating rate notes due 2012, include, 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 accumulative loss reported through the thirteen weeks ended May 27, 2005, the covenants of the indenture prohibit further payment of dividends and 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 Avondale Funding LLC, whose sole business purpose is the ongoing acquisition and subsequent resale of certain undivided interests in trade accounts receivable 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, anticipated insurance and third party claims relating to the January 6, 2005 train derailment, 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 for the next twelve months.

JANUARY 6, 2005 TRAIN DERAILMENT

On Thursday, January 6, 2005, a Norfolk Southern freight train collided with a stationary Norfolk Southern train parked on a railroad spur near the Company’s manufacturing and administrative facilities in Graniteville, South Carolina. In the ensuing derailment, rail cars ended up on the Company’s property and a tanker car was breached, releasing chlorine gas. Due to the release of the toxic and corrosive chlorine gas, the surrounding area, including the Company’s adjacent facilities, was evacuated. Nine individuals, six of whom were associates of the Company, were killed by chlorine gas inhalation and many others were hospitalized as a result of their injuries.

Local, state and federal authorities restricted access to the Company’s facilities near the collision site for a period of approximately eight days. Due to the Company’s product flow and interdependence of the Company’s manufacturing facilities within and outside the evacuation zone, productive capacity representing more than 50% of the Company’s sales was effectively shutdown as a result of these events. As the chlorine gas dissipated and removal of the wrecked rail cars began, the Company was allowed to access portions of the affected facilities and initiated steps to determine the extent of damage and resume operations. The Company’s computer systems, communication systems, electronic and electrical systems, compressors and other machinery in affected facilities were damaged by corrosion induced by chlorine gas exposure. In addition, boilers servicing finishing operations were damaged by fire because necessary life saving evacuation precluded orderly shutdown of those units.

~~The~~JANUARY ~~Company focused all available resources on the recovery effort. Temporary boilers have been installed~~6, ~~and~~2005 ~~replacement~~TRAIN ~~electrical distribution, compressors and computers are in place and~~DERAILMENT ~~operational. Repairs to textile processing facilities and machines are on going. Operations in all~~ ~~facilities have been resumed in an orderly manner, taking place in stages during January and~~ ~~February. Normal levels of production are being generated, with the exception of the coated fabrics~~ operation, although full remediation of the chlorine damage has yet to be completed. Due to the progressive nature of damage resulting from chlorine gas exposure, further equipment failures will occur over time, with a corresponding reduction in productive efficiency and temporary loss of capacity. Shipments of finished goods from all of the Company’s distribution centers have resumed.

~~The~~On ~~Company~~January 6, ~~maintains~~2005, ~~property~~a ~~damage~~Norfolk ~~and~~Southern ~~business~~freight ~~interruption~~train ~~insurance~~collided towith ~~provide reimbursement~~a ofstationary ~~losses~~Norfolk Southern ~~stemming~~train ~~from~~parked anon ~~incident~~a ofrailroad ~~this~~spur ~~nature.~~near ~~In addition, Norfolk Southern has acknowledged responsibility to~~ the Company’s ~~for~~manufacturing ~~the incident~~ and ~~has~~administrative facilities ~~provided~~in ~~temporary~~Graniteville, ~~clean~~South ~~up assistance~~Carolina. ~~Near~~In the ~~end~~ensuing ~~of March 2005~~derailment, ~~Norfolk~~rail ~~Southern~~cars ~~terminated~~ended ~~its clean~~ up ~~efforts~~on ~~and~~ the Company’s isproperty ~~taking~~and ~~steps~~a totanker ~~proceed~~car ~~with~~was ~~the~~breached, ~~required~~releasing ~~cleanup~~chlorine ~~and~~gas. ~~remediation~~Due to the release of the toxic and corrosive chlorine ~~induced~~ ~~damage.~~gas, ~~The~~the ~~Company~~surrounding isarea, ~~utilizing~~including ~~appropriate~~the ~~resources~~Company’s toadjacent facilities, ~~identify~~was ~~and~~evacuated. ~~document~~Nine ~~losses incurred~~individuals, assix aof ~~result~~whom were associates of the ~~incident~~Company, ~~and~~were killed ~~will~~by ~~pursue~~chlorine ~~claims~~gas ~~under~~inhalation ~~its~~and ~~property~~many ~~damage,~~others ~~business interruption~~were ~~and~~hospitalized ~~other~~as ~~insurance~~a ~~policies~~result ~~and~~of ~~against~~their ~~third parties~~injuries.

The Company maintains property damage and business interruption insurance to provide reimbursement of losses stemming from an incident of this nature. In addition, Norfolk Southern has acknowledged responsibility to the Company for the incident. The Company is utilizing appropriate resources to identify and document losses incurred as a result of the incident, and will pursue claims under its property damage, business interruption and other insurance policies and against third parties.

Disruption of the Company’s operations and loss of production volume as a result of this incident negatively impacted results of operations for the thirteen and thirty-nine weeks ended May 27, 2005. The Company will continue to suffer losses caused by this incident in future periods. The Company is assessing the extent of losses that will be incurred due to this incident but is unable to estimate at this time the full amount of loss. The Company expects that all losses incurred will be recovered through insurance and third party claims. Any differences between amounts ultimately received from insurance and third parties and losses incurred by the Company may negatively impact future results of operations.

In connection with the incident, the Company has incurred labor continuation costs of approximately $2.3 million and various clean up and repair costs of approximately $16.1 million during the thirty-nine weeks ended May 27, 2005. The Company has received advances totaling $20.0 million during the thirty-nine weeks ended May 27, 2005 from the Company’s property damage insurance provider. The Company has included the net balance of advances received in excess of expenses incurred of $1.6 million in other accrued expenses at May 27, 2005. The Company expects to request additional advances as the recovery progresses and additional costs are incurred. The Company has not recognized gains relating to recovery of lost profits, involuntary conversions of assets or other such recoveries for the thirty-nine weeks ended May 27, 2005, as such amounts are contingent upon final settlement with respective insurers and third parties.

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 (including anticipated insurance and third party claims arising from the January 6, 2005 train derailment), 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 World Trade Organization 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 World Trade Organization 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.; and • our ability to recover claims from insurance and third parties related to the January 6, 2005 train derailment.

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

EBITDA and Adjusted EBITDA are presented as management believes these measures to be widely accepted indicators of a company’s ability to service its indebtedness and are used by investors and analysts to evaluate companies within the textile and apparel industry. EBITDA is commonly defined as net income (loss) plus (a) interest expense, (b) provision for (benefit of) income taxes and (c) depreciation and amortization. Adjusted EBITDA, as defined by the Company, differs due to the further addition to net income (loss) of (a) discount and expenses on sales of receivables, (b) gain on extinguishment of debt, (c) restructuring ~~non-cash~~noncash charges and (d) adjustment of carrying value of inventories to LIFO basis. Adjusted EBITDA is also presented because it is a defined value used in the calculation of certain financial covenants, including an interest coverage ratio, a fixed charge coverage ratio and minimum Adjusted EBITDA, under the Company’s revolving credit facility, accounts receivable securitization facility, equipment note, senior notes due 2012 and subordinated notes due 2013 (the “Facilities”). The Company presents Adjusted EBITDA to facilitate verification, by its lenders and noteholders, of the Company’s compliance with these financial covenants. If the Company is unable to comply with these financial covenants, incurrence of additional indebtedness may be limited and events of default may be triggered. Under the most restrictive of these financial covenants applicable to fiscal 2005, 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, the Company must maintain an interest coverage ratio greater than 2.0, a fixed charge coverage ratio greater than 1.50 and minimum annual Adjusted EBITDA of greater than $45.0 million. As of ~~February~~May 2527, 2005, the Company ~~was~~ was in compliance with each of these financial covenants. Failure to comply with one or more of ~~these~~ these covenants could have a material adverse effect on the Company’s financial condition.

As defined in the Facilities, discount and expenses on sales of receivables are to be treated as interest expense in calculating the financial covenants. In addition, ~~non-cash~~noncash items such as gains or losses on extinguishment of debt, restructuring charges and equipment disposals, and adjustments of carrying value of inventories to LIFO basis are to be ~~included~~excluded in the calculation of Adjusted EBITDA.

Adjusted EBITDA as calculated in accordance with the Facilities 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 GAAP.

The following table reconciles Adjusted EBITDA on a consolidated basis to the line on the Company’s consolidated statement of operations entitled net loss for the periods presented in the table above: .

	Twenty-Six Weeks Ended
	Thirty-Nine Weeks Ended
	Feb. 27,			Feb. 25,
	May 28,			May 27,
	2004			2005
Net loss	$	(814,~~946~~387	)	$	(32,~~310~~295	)
Interest expense, net		913,~~164~~510			711,~~589~~405
Benefit of income taxes		(47,~~895~~975	)		(21,~~000~~340	)
Depreciation and amortization		1928,~~103~~384			1726,~~593~~028
EBITDA		1419,~~426~~532			1933,~~872~~798
Discount and expenses on sale of receivables		1,~~243~~874			1,~~115~~777
Gain on extinguishment of debt		—(1,321	)		(162	)
Adjustment of carrying value of inventories to LIFO basis, net of market adjustment		2,500			(1,000	)
Facility restructuring non cash charges		2,829
Adjusted EBITDA	$	18,169		$	19,825
Adjustment of carrying value of inventories to LIFO basis, net of market adjustment		4,500			(1,350	)
Net cash provided by (used in) operating activities	$	(7,530	)	$	4,251
Adjusted EBITDA	$	27,414		$	34,063
Net cash provided by (used in) investing activities	$	1,764		$	(2,758	)
Net cash provided by (used in) operating activities	$	(4,905	)	$	16,520
Net cash used in financing activities	$	(4,639	)	$	(2,163	)
Net cash provided by (used in) investing activities	$	907		$	(5,857	)
Net cash used in financing activities	$	(5,780	)	$	(3,244	)

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 control over financial reporting during the period covered by this quarterly report that materially affected, or are reasonably likely to materially affect, the Company’s internal control 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 is 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~~For ~~have~~discussion ~~been~~of nocertain ~~significant~~legal ~~changes~~proceedings into which the ~~matters~~Company ~~reported~~is ~~under~~a party, see 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~~and ~~than~~Part II, asItem 1 ~~described~~“Legal ~~below~~Proceedings” in the Company’s Quarterly Report on Form 10-Q for the quarter ended February 27, 2005. There have been no significant changes in the matters reported.

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 values 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 its 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. 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. In response to a motion filed by plaintiffs’ counsel for reconsideration of all aspects of the Court’s order, a hearing was held on December 10, 2004 and the Court allowed the parties until December 23, 2004 to submit additional briefing. Subsequently, the Court retained the core of its rulings but clarified that plaintiffs may be permitted to seek certain damages and present certain evidence during the trial. The Court rescheduled the trial date on this matter to September 19, 2005 and ruled that the plaintiffs must provide specific damage claims and calculations one month prior to the trial date. A pre-trial conference, the date of which has not been set, will be held to resolve final evidentiary issues and scheduling matters in advance of trial. 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.

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.

None

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).
4.10		Exchange Agreement, dated as of May 27, 2004, by and among Avondale Mills, Inc., Avondale Incorporated and Cohanzick Management, L.L.C., as agent for Cohanzick Credit Opportunities Master Fund, Ltd., Gabriel Capital, L.P. and Ariel Fund Limited (incorporated by reference to Exhibit 4.10 to Avondale Incorporated’s Current Report on Form 8-K, dated August 26, 2004, File No. 33-68412).
4.11		Exchange Agreement, dated as of July 1, 2004, by and among Avondale Mills, Inc., Avondale Incorporated and Allstate Life Insurance Company, Allstate Insurance Company, Allstate Plans’ Master Trust and Allstate Investments, LLC (incorporated by reference to Exhibit 4.11 to Avondale Incorporated’s Current Report on Form 8-K, dated August 26, 2004, File No. 33-68412).
4.12		Exchange Agreement, dated as of July 30, 2004, by and among Avondale Mills, Inc., Avondale Incorporated and Cohanzick Management, L.L.C., as agent for Cohanzick Credit Opportunities Master Fund, Ltd., and Gabriel Capital, L.P. (incorporated by reference to Exhibit 4.12 to Avondale Incorporated’s Current Report on Form 8-K, dated August 26, 2004, File No. 33-68412).
4.13		Exchange Agreement, dated as of August 26, 2004, by and among Avondale Mills, Inc., Avondale Incorporated and 3V Capital Master Fund Ltd. (incorporated by reference to Exhibit 4.13 to Avondale Incorporated’s Current Report on Form 8-K, dated August 26, 2004, File No. 33-68412).
4.14		Exchange Agreement, dated as of August 26, 2004, by and among Avondale Mills, Inc., Avondale Incorporated and Deutsche Asset Management Inc. and Deutsche Investment Management Americas, Inc. (incorporated by reference to Exhibit 4.14 to Avondale Incorporated’s Current Report on Form 8-K, dated August 26, 2004, File No. 33-68412).

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).

4.10

Exchange Agreement, dated as of May 27, 2004, by and among Avondale Mills, Inc., Avondale Incorporated and Cohanzick Management, L.L.C., as agent for Cohanzick Credit Opportunities Master Fund, Ltd., Gabriel Capital, L.P. and Ariel Fund Limited (incorporated by reference to Exhibit 4.10 to Avondale Incorporated’s Current Report on Form 8-K, dated August 26, 2004, File No. 33-68412).

4.11

Exchange Agreement, dated as of July 1, 2004, by and among Avondale Mills, Inc., Avondale Incorporated and Allstate Life Insurance Company, Allstate Insurance Company, Allstate Plans’ Master Trust and Allstate Investments, LLC (incorporated by reference to Exhibit 4.11 to Avondale Incorporated’s Current Report on Form 8-K, dated August 26, 2004, File No. 33-68412).

4.12

Exchange Agreement, dated as of July 30, 2004, by and among Avondale Mills, Inc., Avondale Incorporated and Cohanzick Management, L.L.C., as agent for Cohanzick Credit Opportunities Master Fund, Ltd., and Gabriel Capital, L.P. (incorporated by reference to Exhibit 4.12 to Avondale Incorporated’s Current Report on Form 8-K, dated August 26, 2004, File No. 33-68412).

4.13

Exchange Agreement, dated as of August 26, 2004, by and among Avondale Mills, Inc., Avondale Incorporated and 3V Capital Master Fund Ltd. (incorporated by reference to Exhibit 4.13 to Avondale Incorporated’s Current Report on Form 8-K, dated August 26, 2004, File No. 33-68412).

4.14

Exchange Agreement, dated as of August 26, 2004, by and among Avondale Mills, Inc., Avondale Incorporated and Deutsche Asset Management Inc. and Deutsche Investment Management Americas, Inc. (incorporated by reference to Exhibit 4.14 to Avondale Incorporated’s Current Report on Form 8-K, dated August 26, 2004, File No. 33-68412).

4.15

Exchange Agreement, dated as of August 26, 2004, by and among Avondale Mills, Inc., Avondale Incorporated and T. Rowe Price Associates, Inc. (incorporated by reference to Exhibit 4.15 to Avondale Incorporated’s Current Report on Form 8-K, dated August 26, 2004, File No. 33-68412).

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 (incorporated by reference to Exhibit 4.18 to Avondale Incorporated’s Quarterly Report on Form 10-Q for the period ended November 26, 2004, File No. 33-68412).

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.

4.15		Exchange Agreement, dated as of August 26, 2004, by and among Avondale Mills, Inc., Avondale Incorporated and T. Rowe Price Associates, Inc. (incorporated by reference to Exhibit 4.15 to Avondale Incorporated’s Current Report on Form 8-K, dated August 26, 2004, File No. 33-68412).
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 (incorporated by reference to Exhibit 4.18 to Avondale Incorporated’s Quarterly Report on Form 10-Q for the period ended November 26, 2004, File No. 33-68412).
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.

SIGNATURE

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


		AVONDALE INCORPORATED

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

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

35Date: July 8, 2005

AVONDALE INCORPORATED

Date: April 6, 2005

/S/ JACK R. ALTHERR, JR.

Jack R. Altherr, Jr.

Vice Chairman and Chief Financial Officer

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