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 ~~May~~November 2725, 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.)
Georgia		58-0477150
506 South Broad Street Monroe, Georgia		30655 (Zip code)
(State or other jurisdiction of incorporation or organization)		(I.R.S. employer identification no.)
(Address of principal executive offices)
506 South Broad Street Monroe, Georgia (Address of principal executive offices)		30655 (Zip code)

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~~by ~~number~~check ofmark ~~shares~~whether ~~outstanding~~the ofregistrant ~~each~~is ofa ~~the~~shell ~~issuer’s~~company ~~classes~~(as ofdefined ~~common~~in ~~stock,~~Rule 12b-2 as of the ~~latest~~Securities ~~practicable~~Exchange ~~date~~Act of 1934). YES o NO þ

Description	As Of	Shares Outstanding
Class A Common Stock	July 1, 2005	11,394,160 Shares
Class B Common Stock	July 1, 2005	978,939 Shares

As of January 6, 2006, the registrant had 11,394,160 and 978,939 shares of Class A Common Stock and Class B Common Stock outstanding, respectively.

INDEX TO FORM 10-Q

AVONDALE INCORPORATED

	~~Page~~			Page
	~~Reference~~			Reference
PART I - FINANCIAL INFORMATION (Unaudited)
PART I — FINANCIAL INFORMATION (Unaudited)
Item 1: Financial Statements
	Item 1:		Financial Statements
Condensed Consolidated Balance Sheets at August 27, 2004 and May 27, 2005		2
			Condensed Consolidated Balance Sheets at August 26, 2005 and November 25, 2005		2
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 Thirteen Weeks Ended November 26, 2004 and November 25, 2005		3
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 Thirteen Weeks Ended November 26, 2004 and November 25, 2005		4
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		5
Notes to Condensed Consolidated Financial Statements		6
	Item 2:		Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
	Item 3:		Quantitative and Qualitative Disclosures About Market Risk		31
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
PART II - OTHER INFORMATION
	Item 1:		Legal Proceedings		32
Item 1: Legal Proceedings		32
	Item 1A:		Risk Factors		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		32
	Item 4:		Submission of Matters to a Vote of Security Holders		32
Item 5: Other Information		32
	Item 5:		Other Information		33
Item 6: Exhibits		32
	Item 6:		Exhibits		34
~~Signature~~	Signature	34			35
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.1 SECTION 302, CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
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)

				May 27,
				Nov. 25,
	Aug. 27,			2005
	Aug. 26,			2005
	2004			(unaudited)
	2005			(unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	54,~~481~~933		$	123,~~900~~664
Accounts receivable, less allowance for doubtful accounts of $1,015 at August 27, 2004 and $900 at May 27, 2005.		50,975			60,240
Accounts receivable, less allowance for doubtful accounts of $809 at August 26, 2005 and $851 at November 25, 2005		65,170			27,960
Inventories		7883,~~282~~194			8189,~~321~~722
Prepaid expenses		~~1,275~~535			1,~~438~~749
Income taxes refundable		506			—
Insurance claims receivable		5,266			13,409
Total current assets		136,519			155,899
Income taxes refundable		144			76
Assets held for sale		1,037			734
Total current assets		159,242			136,580
Assets held for sale		700			2,458
Property, plant and equipment
Land		6,~~289~~262			6,~~271~~263
Buildings		7576,~~771~~068			7576,~~986~~068
Machinery and equipment		~~465~~461,~~647~~931			~~464~~418,~~734~~829
		547,707			546,991
		544,261			501,160
Less accumulated depreciation		(~~365~~386,~~755~~646	)		(~~383~~356,~~113~~253	)
		181,952			163,878
		157,615			144,907
Goodwill		2,951			2,951
Other assets		65,~~023~~374			5,~~656~~436
	$	~~328~~325,~~482~~882		$	~~329~~292,~~118~~332
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	2431,~~167~~588		$	2718,~~477~~294
Accrued compensation, benefits and related expenses		1011,~~440~~825			1110,~~971~~470
Accrued interest		2,~~403~~322			4,~~564~~514
Other accrued expenses		98,~~340~~781			108,~~745~~498
Income taxes payable		—			567
Long-term debt due in one year		4,325			4,325
Total current liabilities		5058,~~675~~841			5946,~~649~~101
Long-term debt		~~141~~136,~~039~~539			~~137~~135,~~620~~458
Deferred income taxes and other long-term liabilities		2925,~~439~~742			2617,~~815~~920
Shareholders’ equity
Preferred stock
$.01 par value; 10,000 shares authorized		—			—
Common stock
Class A, $.01 par value; 100,000 shares authorized; issued and outstanding – 11,394 shares at August 27, 2004 and May 27, 2005		114			114
Class A, $.01 par value; 100,000 shares authorized; issued and outstanding – 11,394 shares at August 26, 2005 and November 25, 2005		114			114
Class B, $.01 par value; 5,000 shares authorized; issued and outstanding – 979 shares at August 27, 2004 and May 27, 2005		10			10
Class B, $.01 par value; 5,000 shares authorized; issued and outstanding – 979 shares at August 26, 2005 and November 25, 2005		10			10
Capital in excess of par value		39,170			39,170
Retained earnings		6865,~~035~~466			6553,~~740~~559
Total shareholders’ equity		~~107~~104,~~329~~760			~~105~~92,~~034~~853
	$	~~328~~325,~~482~~882		$	~~329~~292,~~118~~332

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
	May 28,			May 27,
	Nov. 26,			Nov. 25,
	2004			2005
Net sales	$	151,~~345~~090		$	~~156~~98,~~570~~890
Operating costs and expenses
Cost of goods sold		~~138~~132,~~043~~404			~~135~~95,~~787~~366
Depreciation		98,~~149~~617			87,~~225~~447
Selling and administrative expenses		6,~~658~~142			65,~~671~~922
Facility restructuring charges		~~2,250~~—			—4,800
Operating income (loss)		(43,~~755~~927	)		5(14,~~887~~645	)
Interest expense, net		43,~~346~~757			3,~~816~~774
Discount and expenses on sales of receivables		~~631~~581			~~662~~493
Gain on extinguishment of debt		(~~1,321~~162	)		—
Other, net		~~110~~(573	)		~~(266~~130	)
Income (loss) before income taxes		~~(8,521~~324	)		1(19,~~675~~042	)
Provision for (benefit of) income taxes		~~(3,080~~125	)		~~660~~(7,135	)
Net income (loss)	$	~~(5,441~~199	)	$	1(11,~~015~~907	)
Per share data:
Net income (loss)-basic	$	(.4402	)	$	(.0896	)
Net income (loss)-diluted	$	(.4402	)	$	(.0896	)
Dividends declared	$	—		$	—

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)

	Thirty-Nine Weeks Ended
	May 28,			May 27,
	2004			2005
Net sales	$	412,267		$	431,966
Operating costs and expenses
Cost of goods sold		373,392			379,153
Depreciation		28,016			25,380
Selling and administrative expenses		19,347			19,465
Facility restructuring charges		2,250			—
Operating income (loss)		(10,738	)		7,968
Interest expense, net		13,510			11,405
Discount and expenses on sales of receivables		1,874			1,777
Gain on extinguishment of debt		(1,321	)		(162	)
Other, net		(2,439	)		(1,417	)
Loss before income taxes		(22,362	)		(3,635	)
Benefit of income taxes		(7,975	)		(1,340	)
Net loss	$	(14,387	)	$	(2,295	)
Per share data:
Net loss-basic	$	(1.16	)	$	(.19	)
Net loss-diluted	$	(1.16	)	$	(.19	)
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)

	Thirty-Nine Weeks Ended
	Thirteen Weeks Ended
	May 28,			May 27,
	Nov. 26,			Nov. 25,
	2004			2005
Operating activities
Net loss	$	(14,387	)	$	(2,295	)
Net income (loss)	$	199		$	(11,907	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
Depreciation and amortization		288,~~384~~839			267,~~028~~628
Benefit of deferred income taxes		(8,072	)		(2,144	)
Provision for (benefit of) deferred income taxes		131			(7,209	)
Gain on disposal of property, plant and equipment and assets held for sale		(867	)		(1,145	)
Loss (gain) on disposal of property, plant and equipment, facility restructuring and assets held for sale		(406	)		4,446
Gain on extinguishment of debt		(~~1,321~~162	)		~~(162~~—	)
Sale of accounts receivable, net		(68,~~442~~052	)		(513,~~033~~387	)
Changes in operating assets and liabilities		(21,~~200~~979	)		1(5,~~271~~590	)
Net cash provided by (used in) operating activities		(41,~~905~~430	)		~~16,520~~755
Investing activities
Purchases of property, plant and equipment		(41,~~540~~501	)		(71,~~486~~203	)
Proceeds from sale of property, plant and equipment and assets held for sale		~~5,447~~714			~~1,629~~260
Net cash provided by (used in) investing activities		907			(5,857	)
Net cash used in investing activities		(787	)		(943	)
Financing activities
Reduction in long-term debt		(31,~~244~~081	)		(31,~~244~~081	)
Purchase and retirement of treasury stock		(60	)		—
Net cash used in financing activities		(1,081	)		(1,081	)
Dividends paid		(2,476	)		—
Decrease in cash and cash equivalents		(3,298	)		(1,269	)
Net cash used in financing activities		(5,780	)		(3,244	)
Cash and cash equivalents at beginning of period		5,481			4,933
Increase (decrease) in cash and cash equivalents		(9,778	)		7,419
Cash and cash equivalents at end of period	$	2,183		$	3,664
Cash and cash equivalents at beginning of period		13,769			5,481
Cash and cash equivalents at end of period	$	3,991		$	12,900

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

AVONDALE INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

~~May~~November 2725, 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~~to the current year’s presentation. The August 2726, ~~2004~~2005 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 2726, ~~2004~~2005 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 ~~thirty-nine~~thirteen weeks ended ~~May~~November 2725, 2005 are not necessarily indicative of the results that may be expected for the fiscal year ending August 2625, ~~2005~~2006.

2. ~~Inventories~~January 6, 2005 Train Derailment: ~~Components~~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 in Graniteville, South Carolina. In the ensuing derailment, rail cars ended up on the Company’s property and a tanker car was breached, releasing toxic and corrosive chlorine gas. Nine individuals, six of ~~inventories~~whom ~~are~~were Company associates, were killed by chlorine gas inhalation and many others were hospitalized as ~~follows~~a ~~(amounts~~result inof their ~~thousands):~~injuries. In addition, Company facilities suffered substantial damage from the highly corrosive properties of the chlorine gas.

	Aug. 27,			May 27,
	2004			2005
Finished goods	$	29,187		$	31,100
Work in process		33,047			33,000
Raw materials		8,173			7,617
Dyes and chemicals		4,096			4,475
Inventories at FIFO		74,503			76,192
Adjustment of carrying value to LIFO basis, net of market adjustment		(1,645	)		(295	)
		72,858			75,897
Supplies at average cost		5,424			5,424
	$	78,282		$	81,321

Initial recovery efforts focused on restarting equipment and production of goods for customers. These early efforts included installation of temporary boilers, replacement of electrical distribution, compressors and computers, and repairs to damaged facilities and machinery. As a result, operations in all facilities and shipments of finished goods from all of the Company’s distribution centers were resumed in an orderly manner. However, early efforts to halt the corrosive effects of the chlorine exposure were not successful and equipment failures continue to be experienced.

Current recovery efforts, using protocols developed during the past several months in concert with the Company’s property insurer, are focused first on the cleaning and restoration of affected buildings, and secondly on the cleaning and restoration of affected equipment within those buildings. To the extent that the protocols prove unable to adequately restore the equipment to pre-loss condition, the equipment will be replaced. These actions cannot be completed without the systematic, temporary shut down of the affected equipment. The Company intends to schedule the restoration and replacement process to minimize the amount of equipment offline at any given time. However, full remediation to pre-loss condition will result in continued, significant disruption of the Company’s business operations and in reduction of the Company’s productive capacities and efficiencies.

The Company continues to assess the extent of losses due to the January 6, 2005 train derailment and chlorine spill but at this time is unable to estimate the full amount of loss. The significant disruption to the Company’s business caused by the resulting equipment failures and ongoing recovery efforts adversely impacted the Company’s operating results for fiscal 2005 and the thirteen weeks ended November 25, 2005. The Company will continue to suffer losses caused by this incident in future periods.

AVONDALE INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (CONTINUED)

November 25, 2005

The Company maintains property damage and business interruption insurance to provide reimbursement of losses stemming from an incident of this nature and 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 have a material adverse effect on the Company’s financial condition and future results of operations.

In connection with the incident, the Company incurred payroll continuation costs of approximately $2.8 million and various clean up, restoration and replacement costs of approximately $52.5 million during fiscal 2005, and additional clean up and restoration costs of approximately $28.1 million during the thirteen weeks ended November 25, 2005. As part of the ongoing adjustment of its insurance claims, the Company received interim payments from its insurer totaling $50.0 million during fiscal 2005, and $20.0 million during the thirteen weeks ended November 25, 2005. The Company recorded an insurance claims receivable of $13.4 million at November 25, 2005, equal to the excess of these costs incurred over the interim insurance payments received. Other costs incurred but not specifically recoverable under the provisions of the Company’s insurance policies, including policy deductibles, were expensed in the periods incurred, and amounted to $956,000 during fiscal 2005 and $676,000 during the thirteen weeks ended November 25, 2005. The Company expects to request additional interim payments from its insurer as the recovery progresses and additional costs are incurred. However, the Company must continue to provide funding of the clean up, restoration and replacement costs incurred in advance of the interim insurance payments as well as funding of the substantial costs and losses incurred as a result of the significant disruption to the Company’s operations. If the Company experiences delays in collecting the existing insurance claims receivable or future amounts due from insurance claims, its financial condition and results of operations could be materially adversely affected and clean up, restoration and replacement efforts could be delayed.

The insurance claims receivable noted above does not include the substantial costs and losses incurred as a result of the significant disruption to the Company’s operations. The Company expects to recover these higher operating costs and lost profits under its business interruption insurance coverage and by third party claims. The Company has not recognized gains relating to recovery of lost profits, involuntary conversions of assets or recovery of other such losses since the incident, as such amounts are contingent upon final settlement with respective insurers and third parties. There can be no assurance that the Company will be able to recover the full amount of these costs and losses from insurers and third parties.

See discussion concerning a related lawsuit filed against Norfolk Southern in Part I, Item 3 “Legal Proceedings” in the Company’s Annual Report on Form 10-K for the fiscal year ended August 26, 2005. Also, see further discussion of damage to manufacturing facilities and resulting rationalization of productive capacity in Note 8 Facility Restructuring in these condensed consolidated financial statements.

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


	Aug. 26,		Nov. 25,
	2005		2005
Finished goods	$	34,891	$	38,115
Work in process		31,855		33,910
Raw materials		6,702		8,138
Dyes and chemicals		4,147		4,035

Inventories at FIFO		77,595		84,198

Adjustment of carrying value to LIFO basis, net of market adjustment		—		—

		77,595		84,198
Supplies at average cost		5,599		5,524


	$	83,194	$	89,722

AVONDALE INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) ~~May 27, 2005~~

~~The Company’s inventories at May~~November 2725, 2005 under the last-in, first-out (“LIFO”) method and the related impact on the statement of operations for the thirty-nine weeks then ended have been recorded using estimated quantities and costs as of August 26, 2005, the end of fiscal 2005. As actual inventory quantities and costs at August 26, 2005 could differ significantly from these estimates, the inventory amounts at May 27, 2005 and the operating results for the thirty-nine weeks ended May 27, 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.The Company’s inventories at November ~~Earnings~~25, ~~Per~~2005 ~~Share:~~under ~~Earnings~~the ~~per~~last-in, ~~share~~first-out is(“LIFO”) method ~~calculated~~and bythe ~~dividing~~related impact on the ~~reported~~statement ~~net income~~of ~~(loss)~~ operations for the ~~period~~thirteen byweeks ~~the~~then ~~appropriate~~ended ~~weighted~~have been ~~average~~recorded ~~number~~using estimated quantities and costs as of ~~shares~~August 25, 2006, the end of ~~common~~fiscal ~~stock~~2006. ~~outstanding~~As actual inventory quantities and costs at August 25, as2006 ~~shown~~could ~~below~~differ (significantly from these estimates, the inventory amounts inat ~~thousands):~~November 25, 2005 and the operating results for the thirteen weeks ended November 25, 2005 are not necessarily indicative of the inventory amounts at August 25, 2006 and operating results for fiscal 2006 to be recorded using the final LIFO calculations.

	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	May 28,		May 27,		May 28,		May 27,
	2004		2005		2004		2005
Weighted average shares outstanding – basic		12,376		12,373		12,379		12,373
Effect of employee stock options		—		—		—		—
Weighted average shares outstanding – diluted		12,376		12,373		12,379		12,373

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

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


	Thirteen Weeks Ended
	Nov. 26,		Nov. 25,
	2004		2005
Weighted average shares outstanding — basic		12,373		12,373
Effect of employee stock options		—		—

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

	Thirteen Weeks Ended					Thirty-Nine Weeks Ended
	May 28,			May 27,		May 28,			May 27,
	2004			2005		2004			2005
Net income (loss) as reported	$	(5,441	)	$	1,015	$	(14,387	)	$	(2,295	)
Pro forma stock-based compensation, net of income taxes		(9	)		—		(27	)		(9	)
Pro forma net income (loss)	$	(5,450	)	$	1,015	$	(14,414	)	$	(2,304	)
Per share data:
Net income (loss)-basic as reported	$	(.44	)	$	.08	$	(1.16	)	$	(.19	)
Net income (loss)-basic pro forma	$	(.44	)	$	.08	$	(1.16	)	$	(.19	)
Net income (loss)-diluted as reported	$	(.44	)	$	.08	$	(1.16	)	$	(.19	)
Net income (loss)-diluted pro forma	$	(.44	)	$	.08	$	(1.16	)	$	(.19	)

If the Company had elected to record stock-based compensation in accordance with the fair value method and the provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, reported net income and earnings per share would be adjusted to the pro forma amounts as shown below (amounts in thousands, except per share data):


	Thirteen Weeks Ended
	Nov. 26,			Nov. 25,
	2004			2005
Net income (loss) as reported	$	199		$	(11,907	)
Pro forma stock-based compensation, net of income taxes		(9	)		—

Pro forma net income (loss)	$	190		$	(11,907	)


Per share data:
Net income (loss)-basic as reported	$	.02		$	(.96	)


Net income (loss)-basic pro forma	$	.02		$	(.96	)


Net income (loss)-diluted as reported	$	.02		$	(.96	)


Net income (loss)-diluted pro forma	$	.02		$	(.96	)

AVONDALE INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) ~~May 27, 2005~~

4.November ~~Segment~~25, ~~Information: Condensed segment information is as follows (amounts in thousands):~~ 2005

	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
	May 28,			May 27,			May 28,			May 27,
	2004			2005			2004			2005
Revenues:
Apparel fabrics	$	112,601		$	117,692		$	307,330		$	318,640
Yarns		47,714			45,183			135,087			136,289
Other		16,203			8,049			44,991			22,843
		176,518			170,924			487,408			477,772
Less inter-segment sales		25,173			14,354			75,141			45,806
Total	$	151,345		$	156,570		$	412,267		$	431,966
Income (loss):
Apparel fabrics	$	1,821		$	4,074		$	4,702		$	4,043
Yarns		301			4,877			(547	)		12,399
Other		1,417			1,126			3,340			2,738
Facility restructuring charges		(2,250	)		—			(2,250	)		—
Unallocated		(6,044	)		(4,190	)		(15,983	)		(11,212	)
Total operating income (loss)		(4,755	)		5,887			(10,738	)		7,968
Interest expense, net		4,346			3,816			13,510			11,405
Discount and expenses on sale of receivables		631			662			1,874			1,777
Gain on extinguishment of debt		(1,321	)		—			(1,321	)		(162	)
Other, net		110			(266	)		(2,439	)		(1,417	)
Income (loss) before income taxes	$	(8,521	)	$	1,675		$	(22,362	)	$	(3,635	)

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

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
	Nov. 26,			Nov. 25,
	2004			2005
Revenues:
Apparel fabrics	$	118,584		$	81,939
Yarns		46,909			30,538
Other		8,428			9,273

		173,921			121,750
Less inter-segment sales		22,831			22,860

Total	$	151,090		$	98,890

Income (loss):
Apparel fabrics	$	2,848		$	(5,733	)
Yarns		2,980			(448	)
Other		1,215			638
Facility restructuring charges		—			(4,800	)
Unallocated		(3,116	)		(4,302	)

Total operating income (loss)		3,927			(14,645	)
Interest expense, net		3,757			3,774
Discount and expenses on sale of receivables		581			493
Gain on extinguishment of debt		(162	)		—
Other, net		(573	)		130

Income (loss) before income taxes	$	324		$	(19,042	)

							Thirty-Nine Weeks
	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		$	—		$	78		$	—
Interest cost		114			53			342			159
Amortization of prior service cost		83			(127	)		249			(381	)
Amortization of loss		(15	)		—			(45	)		—
Net periodic benefit cost (benefit)	$	208		$	(74	)	$	624		$	(222	)

6. 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 periodic benefit of the Company’s post retirement benefits (amounts in thousands).

Payment of post retirement benefits for the thirty-nine weeks ended May 28, 2004 and May 27, 2005 amounted to $780,000 and $514,000, respectively, and is forecasted to be approximately $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.


	Thirteen Weeks Ended
	Nov. 26,			Nov. 25,
	2004			2005
Components of net periodic benefit:
Service cost	$	—		$	—
Interest cost		53			45
Amortization of prior service cost		(127	)		(127	)
Amortization of loss		—			10

Net periodic benefit	$	(74	)	$	(72	)

Payment of post retirement benefits for the thirteen weeks ended November 26, 2004 and November 25, 2005 amounted to $283,000 and $110,000, respectively, and is forecasted to be approximately $460,000 for the full fiscal year ending August 25, 2006.

AVONDALE INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) ~~May 27, 2005~~

~~6. New Accounting Pronouncements: In~~ November ~~2004~~25, 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.

7. New Accounting Pronouncements: In ~~December~~November 2004, the Financial Accounting Standards Board issued Statement No. ~~123R~~151, ~~Share-Based~~ ~~Payments~~Inventory Costs, ~~which~~as ~~requires~~an ~~that~~amendment ~~companies record the fair value~~ of ~~their~~ARB ~~stock-based compensation arrangements on the date they are granted to employees~~No. 43, ~~as a liability or as a~~chapter ~~component of equity~~4, ~~depending~~clarifying ~~on whether~~ the ~~obligations~~accounting ~~can~~for beabnormal ~~settled~~amounts ~~in cash or stock. Regardless~~ of ~~treatment~~idle asfacility ~~liabilities~~expense, ~~or equity~~freight, ~~these~~handling ~~amounts~~costs and ~~must~~wasted bematerial ~~expensed~~(spoilage) in ~~over~~ the ~~vesting period~~determination of ~~the~~inventory ~~compensation~~carrying ~~arrangements~~costs. ~~For~~The ~~non~~statement requires ~~public-equity~~such ~~companies~~costs ~~such~~to be treated as ~~the~~a ~~Company~~current period expense, ~~Statement~~ ~~No. 123R~~and is effective for ~~the~~inventory ~~first~~costs incurred ~~annual~~during ~~reporting~~fiscal ~~period~~years beginning after ~~December~~July 15, 2005. ~~Non~~The ~~public-equity~~adoption ~~companies~~of ~~that used~~ the ~~minimum~~provisions ~~value method~~ of ~~measuring stock options,~~ ~~for either recognition or pro forma disclosure under earlier applicable statements, will apply~~ Statement No. ~~123R~~151 ~~prospectively~~ for ~~new stock-based compensation arrangements and~~ the ~~unvested portion~~thirteen ofweeks ~~existing~~ended ~~arrangements. The Company does not believe the adoption of Statement No.~~November ~~123R will~~25, ~~have~~2005 ahad ~~material~~no impact on the Company’s condensed consolidated financial statements.

In December 2004, the Financial Accounting Standards Board issued Statement No. ~~153~~123R, ~~Exchange~~ ofShare-Based ~~Nonmonetary Assets~~Payments, anwhich ~~amendment~~requires tothat ~~APB~~companies ~~No. 29.~~record ~~The~~the ~~guidance~~fair invalue ~~APB~~of ~~No. 29~~their ~~included certain~~stock-based ~~exceptions~~compensation toarrangements on the ~~principle~~date ~~that~~they ~~exchanges~~are ofgranted ~~nonmonetary~~to ~~assets~~employees, ~~should~~as bea ~~measured~~liability ~~based~~or onas ~~the~~a ~~fair~~component ~~value~~ of ~~the~~equity, ~~assets~~depending ~~exchanged.~~on ~~Statement~~whether ~~No. 153~~the ~~amends~~obligations ~~APB~~can ~~No. 29~~be tosettled ~~eliminate~~in ~~the~~cash ~~exception~~or stock. ~~for~~Regardless ~~nonmonetary~~of ~~exchanges~~treatment ofas ~~similar~~liabilities ~~productive~~or ~~assets~~equity, ~~and~~these ~~replaces~~amounts itmust ~~with~~be aexpensed ~~general~~over ~~exception~~the ~~for~~vesting ~~exchanges~~period of ~~nonmonetary~~the ~~assets~~compensation ~~that~~arrangements. doStatement ~~not have commercial substance~~No. 123R Ais ~~nonmonetary~~effective ~~exchange~~for ~~has commercial substance if~~ the ~~future~~first ~~cash~~annual reporting ~~flows~~period ofbeginning ~~the~~after ~~entity~~December 15, ~~are~~2005. ~~expected~~Non topublic-equity ~~change~~companies ~~significantly~~that asused the aminimum ~~result~~value method of ~~the~~measuring ~~exchange.~~stock ~~The~~options, ~~provisions~~for ofeither ~~this~~recognition ~~statement~~or ~~are~~pro ~~effective~~forma ~~for nonmonetary asset~~disclosure ~~exchanges~~under ~~occurring~~earlier inapplicable ~~fiscal~~statements, ~~periods~~will ~~beginning~~apply ~~after~~Statement ~~June~~No. ~~15,~~123R ~~2005.~~prospectively ~~The~~for ~~Company~~new stock-based iscompensation ~~currently evaluating~~arrangements and the ~~impact~~unvested portion of ~~this~~existing ~~statement,~~arrangements. ~~but~~The Company does not believe the adoption of Statement No. ~~153~~ 123R will have a material impact on the Company’s condensed consolidated financial statements.

In ~~May~~December ~~2005~~2004, the Financial Accounting Standards Board issued Statement No. ~~154~~153, ~~Accounting~~Exchange ~~Changes~~of ~~and~~Nonmonetary ~~Error Corrections~~Assets, aan ~~replacement~~amendment ofto APB ~~Opinion~~ No. 2029. ~~and~~The ~~FASB~~guidance ~~Statement~~in APB No. 3.29 ~~This~~included certain ~~statement~~exceptions ~~applies~~ to the ~~accounting~~principle ~~and~~that ~~reporting~~exchanges of ~~all~~nonmonetary ~~voluntary~~assets ~~accounting~~should ~~principle changes, and requires such changes~~ be ~~retrospectively~~measured ~~applied~~based toon ~~financial~~the fair ~~statements~~value ~~from~~of ~~previous~~the ~~periods unless~~assets ~~such~~exchanged. ~~application~~Statement isNo. 153 ~~impracticable,~~amends asAPB ~~defined~~No. 29 ~~This~~to ~~statement~~eliminate ~~also addresses~~ the ~~reporting~~exception offor anonmonetary ~~correction~~exchanges of ansimilar ~~error~~productive byassets ~~restating~~and ~~previously~~replaces ~~issued~~it ~~financial~~with ~~statements.~~a ~~Under~~general ~~the statement,~~exception ~~changes in depreciation, amortization, or depletion~~ for exchanges ~~long-lived,~~of ~~nonfinancial~~nonmonetary assets ~~must~~ bethat ~~accounted~~do ~~for~~not ashave acommercial ~~change~~substance. inA ~~accounting~~nonmonetary ~~estimate~~exchange ~~effected by a change in accounting~~has ~~principle.~~commercial ~~Statement~~substance ~~No. 154~~if ~~carries~~the ~~forward~~future ~~many~~cash ~~provisions~~flows of ~~Opinion~~the 20entity ~~and~~are ~~FASB~~expected ~~3 without change, including those provisions related~~ to ~~reporting a~~ change insignificantly ~~accounting estimate,~~ as a ~~change in~~result ~~reporting entity, correction~~ of anthe ~~error~~exchange. ~~and~~The ~~reporting~~provisions ~~accounting~~of ~~changes~~this instatement ~~interim~~are ~~financial statements. Statement No. 154 is~~ effective for ~~accounting~~nonmonetary ~~changes~~asset exchanges ~~and~~occurring ~~corrections of errors made~~ in fiscal ~~years~~periods beginning after ~~December~~June 15, 2005. The ~~Company~~adoption ~~is currently evaluating~~ the ~~impact~~provisions of ~~this~~Statement ~~statement,~~No. 153 ~~but~~for ~~does not believe~~ the ~~adoption~~thirteen ofweeks ~~Statement~~ended ~~No.~~November ~~154~~25, ~~will~~2005 ~~have~~had ano ~~material~~ impact on the Company’s condensed consolidated financial statements.

7.In May ~~Gain~~2005, onthe ~~Extinguishment~~Financial ofAccounting ~~Debt:~~Standards OnBoard ~~May~~issued Statement No. 27154, ~~2004,~~Accounting Changes ~~the~~and ~~Company~~Error ~~recorded~~Corrections, a ~~$1.3 million~~replacement ~~net~~of ~~gain~~APB onOpinion ~~early~~No. 20 ~~extinguishment~~and ofFASB ~~debt~~Statement ~~related~~No. 3. This statement applies to athe ~~partial~~accounting ~~exchange~~and reporting of ~~its~~all ~~101/4%~~voluntary ~~Senior~~accounting principle changes, ~~Subordinated~~and ~~Notes~~requires ~~due~~such ~~2013~~changes ~~(the~~be ~~“2013~~retrospectively ~~Notes”).~~applied ~~The~~to ~~Company~~financial ~~executed~~statements ~~the~~from ~~private~~previous ~~transaction,~~periods ~~exchanging~~unless ~~$4.0 million~~such ofapplication ~~the~~is ~~2013~~impracticable, ~~Notes~~as ~~for $2~~defined.~~6 million~~ ofThis ~~new~~statement ~~senior,~~also ~~unsecured~~addresses ~~Floating~~the ~~Rate~~reporting ~~Notes~~of ~~due~~a ~~2012~~correction ~~(the~~of ~~“2012~~an ~~Notes”).~~error ~~Interest~~by onrestating ~~the~~previously ~~2012~~issued ~~Notes~~financial isstatements. ~~due~~Under ~~quarterly~~the statement, changes in ~~arrears commencing July 1~~depreciation, ~~2004~~amortization, ~~and~~or isdepletion ~~calculated~~for ~~based~~long-lived, onnon-financial ~~the~~assets must ~~three~~be ~~month~~accounted ~~LIBOR~~for ~~rate~~as ~~(subject~~a tochange ~~a minimum~~in ofaccounting ~~1.75%~~estimate ~~and~~effected by a ~~maximum~~change ofin 4accounting principle.~~5%)~~ ~~plus~~Statement 7No.~~0%.~~ 154 ~~After~~carries ~~July 1,~~forward ~~2005,~~many ~~the~~provisions ~~2012~~of ~~Notes~~Opinion ~~are redeemable~~20 atand ~~the~~FASB ~~Company’s~~3 ~~option~~without change, inincluding ~~whole~~those orprovisions inrelated ~~part,~~to atreporting a ~~redemption~~change ~~price~~in ofaccounting ~~104.0%~~estimate, ~~which declines~~a change in ~~intervals~~reporting ~~to 100.0% in 2009 and thereafter. The 2012 Notes have substantially the same covenants~~entity, ~~events~~correction of ~~default~~an error and ~~other~~reporting ~~terms~~accounting ~~and~~changes ~~conditions~~in asinterim ~~the~~financial statements. ~~2013~~Statement ~~Notes~~No. 154 Inis ~~connection~~effective ~~with the~~for ~~exchange,~~accounting ~~the~~changes ~~Company~~and ~~received~~corrections ~~a waiver~~ of ~~certain~~errors ~~restrictions~~made ~~provided under the GECC~~in ~~revolving~~fiscal ~~credit~~years ~~facility~~beginning ~~pertaining~~after toDecember 15, ~~the reduction of subordinated debt~~2005.

AVONDALE INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) ~~May 27, 2005~~

8.November ~~Facility Restructuring: In response to highly competitive market conditions and continued imbalance of global supply and demand for textile and apparel products~~25, in May 2004, the Company closed an open-end yarn manufacturing facility located in North Carolina and the weaving operation of an integrated greige fabric manufacturing facility located in Georgia. These actions to rationalize excess manufacturing capacity, following the relocation of certain equipment, improved capacity utilization of the Company’s remaining 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 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 $0.9 million. In connection with these actions, the Company recorded facility restructuring charges, and other non-operating costs, net of the gain on equipment sold, of approximately $2.3 million during the third quarter of fiscal 2004. At May 28, 2004, approximately $80,000 of minor property disposal costs remained unpaid and was included in other accrued expenses in the Company’s consolidated financial statements. 2005

98. ~~January 6,~~Facility ~~2005~~Restructuring: ~~Train~~As ~~Derailment:~~described Onin Note 2, the January 6, 2005, ~~a Norfolk Southern freight~~ train derailment ~~collided~~and ~~with~~chlorine aspill ~~stationary~~have ~~Norfolk~~resulted ~~Southern~~in ~~train~~significant ~~parked~~disruption onto ~~a railroad spur near~~ the Company’s ~~manufacturing~~business operations. ~~and~~The ~~administrative~~Company ~~facilities~~attempted into ~~Graniteville,~~maintain ~~South~~pre-loss ~~Carolina.~~production Inschedules ~~the ensuing~~and ~~derailment~~output, ~~rail~~but ~~cars~~the extent ~~ended~~and upconsequences onof the ~~Company’s~~damage ~~property~~were ~~and~~too agreat ~~tanker~~to ~~car~~continue ~~was~~to ~~breached, releasing~~do ~~chlorine gas~~so. ~~Due~~To toaccommodate ~~the~~full remediation ~~release~~ of ~~the~~its ~~toxic and corrosive chlorine gas~~facilities, the ~~surrounding area, including the~~ Company’s ~~adjacent~~reduced ~~facilities,~~productive ~~was evacuated~~capacity. ~~Nine~~Due ~~individuals,~~to ~~six~~product offlow ~~whom~~and ~~were~~interdependence ~~associates~~ of the Company,’s ~~were~~manufacturing ~~killed~~facilities, bythis ~~chlorine~~reduction ~~gas~~impacted ~~inhalation~~operations ~~and many others were~~of ~~hospitalized~~several ~~as a result of their injuries~~facilities.

~~Local~~In October 2005, ~~state and federal authorities restricted access to~~ the Company’s ~~facilities~~reduced ~~near~~ the ~~collision~~ ~~site~~capacity ~~for~~of a ~~period~~major offabric ~~approximately~~finishing ~~eight~~facility ~~days. Due to the Company’s product flow and~~located ~~interdependence~~in ~~of the Company’s manufacturing facilities within and outside the evacuation zone~~Graniteville, ~~productive~~ ~~capacity~~South ~~representing~~Carolina ~~more~~by ~~than~~approximately 50%. ofAlong ~~the~~with ~~Company’s~~this ~~sales~~reduction ~~was~~in ~~effectively shutdown as a~~finishing ~~result~~capacity ofand ~~these~~corresponding ~~events.~~reduction Asin ~~the~~internal ~~chlorine~~greige ~~gas~~fabric ~~dissipated~~requirements, ~~and~~weaving ~~removal~~production of an ~~the~~integrated ~~wrecked~~manufacturing ~~rail~~facility ~~cars~~located ~~began, the~~in ~~Company~~Graniteville was ~~allowed~~consolidated tointo ~~access~~two ~~portions of the affected facilities and initiated steps to~~other ~~determine~~weaving ~~the~~operations ~~extent~~located ofin ~~damage and resume operations~~Graniteville. ~~The Company’s computer systems~~Furthermore, ~~communication systems,~~with ~~electronic~~the ~~and~~reduction ~~electrical~~in ~~systems,~~weaving ~~compressors~~ production and ~~other~~corresponding ~~machinery~~reduction in ~~affected~~internal ~~facilities were~~yarn ~~damaged~~requirements, bythe ~~corrosion~~open-end ~~induced~~spinning byproduction ~~chlorine~~of ~~gas exposure. In addition, boilers servicing~~an ~~finishing~~integrated ~~operations~~manufacturing ~~were~~facility ~~damaged~~located byin ~~fire~~Graniteville ~~because~~was ~~necessary~~shut ~~life saving evacuation precluded orderly shutdown of those units~~down.

~~The~~In ~~Company~~connection ~~focused~~with ~~all~~these ~~available~~actions, ~~resources~~the onCompany ~~the~~recorded ~~recovery~~facility ~~effort.~~restructuring ~~Temporary~~charges ~~boilers~~of ~~have~~$4.8 ~~been~~million ~~installed,~~during ~~and~~the ~~replacement~~thirteen ~~electrical~~weeks ~~distribution~~ended November 25, ~~compressors~~2005, ~~and~~including ~~computers~~non-cash ~~are~~charges ~~in place and~~of ~~operational~~approximately $4.5 million ~~Repairs~~ to ~~textile~~write ~~processing~~down ~~facilities~~the ~~and~~excess ~~machines~~equipment ~~are~~created ~~ongoing.~~by ~~Operations~~the inrestructuring ~~all~~to ~~facilities~~estimated ~~and~~net ~~shipments~~realizable ofvalue ~~finished~~and ~~goods~~approximately ~~from~~$300,000 ~~all~~to ofaccrue ~~the~~minor ~~Company’s~~disposal ~~distribution~~and ~~centers were~~other ~~resumed~~non-operating incosts. anAs ~~orderly~~the ~~manner,~~Company ~~taking~~plans ~~place~~to insell ~~stages~~the ~~during~~excess ~~January~~equipment, ~~and~~the ~~February.~~estimated ~~Normal~~net realizable ~~levels~~value of ~~production~~ ~~are~~approximately ~~being~~$1.8 million ~~generated,~~was ~~although~~reclassified ~~full~~to ~~remediation~~assets ofheld for sale in the Company’s ~~chlorine~~condensed ~~damage~~consolidated ~~has~~balance ~~yet~~sheet toat ~~be completed~~November 25, 2005. ~~Due~~The Company expects to complete the ~~progressive~~restructuring ~~nature~~and sale of ~~damage~~excess ~~resulting~~equipment ~~from~~by ~~chlorine~~the ~~gas~~end ~~exposure,~~of ~~further~~the Company’s second quarter ~~equipment~~of ~~failures~~fiscal ~~may~~2006. ~~occur~~At ~~over~~November 25, ~~time~~2005, ~~with~~approximately a$135,000 ~~corresponding~~of ~~reduction~~minor indisposal ~~productive~~costs ~~efficiency~~remained unpaid and ~~temporary~~ ~~loss~~was ofincluded ~~capacity.~~in ~~The~~other ~~Company~~accrued ~~also~~expenses ~~anticipates temporary reduction~~ in ~~productive capacity during~~ the ~~restoration~~Company’s ofcondensed ~~equipment~~consolidated ~~to fully remediated, pre-loss condition~~balance sheet.

9. Contingencies: The Company ~~maintains~~is ~~property~~involved ~~damage~~in certain environmental matters and claims. ~~business~~The ~~interruption~~Company ~~insurance~~has toidentified ~~provide~~those environmental matters where it is probable that ~~reimbursement~~expenditures ofwill ~~losses~~be ~~stemming~~required, ~~from~~including ana ~~incident~~pond ofwith ~~this~~certain ~~nature.~~contamination Inand ~~addition~~land previously used as a landfill, ~~Norfolk~~both ~~Southern~~acquired ~~has~~in a 1996 transaction, and various other minor environmental matters ~~acknowledged~~that ~~responsibility~~are expected to ~~the~~be ~~Company~~resolved ~~for~~by ~~the~~much ~~incident~~smaller expenditures. ~~The~~Based ~~Company~~on isdiscussions ~~utilizing~~with ~~appropriate~~outside ~~resources~~consultants and regulatory authorities, the Company believes that the costs to ~~identify~~provide full remediation of these items will be between $1.5 million and ~~document~~$2.5 million ~~losses~~and, ~~incurred~~accordingly, ashas established a ~~result~~reserve of $2.1 million to cover the ~~incident~~costs to investigate, monitor and ~~will~~remediate these ~~pursue~~environmental conditions. If more costly remediation measures are necessary than those ~~claims~~believed ~~under~~to ~~its~~be ~~property~~probable ~~damage,~~based ~~business~~on ~~interruption~~current facts and ~~other~~circumstances, ~~insurance~~actual ~~policies~~costs ~~and~~may ~~against~~exceed the ~~third~~reserves ~~parties~~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 26, 2005. There have been no significant changes in the matters reported, other than as disclosed under the caption “Legal Proceedings” included under Part II, Item 1 of this Quarterly Report of Form 10-Q. 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.

10. Subsequent Events: In anticipation of the impact of the Company’s reduced operating results and cash flows and the ongoing funding of the clean up and restoration expenditures related to the January 6, 2005 train derailment and chlorine spill, the Company initiated discussions in November 2005 with The CIT Group to request an amendment of the financial covenants contained in the equipment note and with GE Capital Corporation (“GECC”) to increase availability under the revolving credit facility and the receivables securitization facility as well as to amend the financial covenants contained in those facilities. At November 25, 2005, the balance outstanding on the equipment note was $8.1 million. No balance was outstanding against the revolving credit facility and $30.3 million of investments by GECC under the receivables securitization were outstanding at November 25, 2005.

~~AVONDALE~~ On ~~INCORPORATED~~December 28, 2005, the Company executed an amendment to the fixed charge coverage ratio and ~~NOTES~~minimum TOtangible ~~CONDENSED~~net ~~CONSOLIDATED~~worth ~~FINANCIAL~~financial ~~STATEMENTS~~covenants contained in the equipment note. In particular, the ~~(UNAUDITED)~~fixed charge coverage ratio (~~CONTINUED~~defined at the ratio of Adjusted EBITDA less dividends for the preceding four fiscal quarters to the sum of consolidated interest expense, discount and expenses on sales of receivables and current portion of long term debt for the same period) was reduced from ~~May 27~~1.50 to 1.25 for the first quarter of fiscal 2006, ~~2005~~to 1.00 for the second, third and fourth quarters of fiscal 2006 and to 1.25 for the first quarter of fiscal 2007. In addition, the minimum tangible net worth covenant was reduced from $100 million to $85 million for the first quarter of fiscal 2006 and to $75 million for each quarter beginning with the second quarter of 2006 through the second quarter of fiscal 2007. As amended, the Company is in compliance with these covenants. An amendment fee of $30,000 was paid to The CIT Group, the holder of the equipment note.

~~Disruption~~The ofCompany is continuing to pursue its discussions with GECC to amend the ~~Company’s~~revolving ~~operations~~credit facility and ~~loss~~the ofreceivables ~~production~~securitization ~~volume~~facility, asand ahas ~~result~~received ofpreliminary ~~this~~approval which ~~incident~~will ~~negatively~~enhance ~~impacted~~availability ~~results~~under ofthe ~~operations~~receivables securitization facility, eliminate the availability block under the revolving credit facility, decrease the minimum excess availability threshold for applicability of the ~~thirteen~~financial covenants, and ~~thirty-nine~~revise ~~weeks~~the ~~ended~~fixed ~~May~~charge coverage and minimum EBITDA ~~27,~~financial ~~2005~~covenants. ~~The~~If final approval is obtained, the Company ~~will~~expects ~~continue~~the amendments to ~~suffer~~be effective ~~losses~~from ~~caused~~the byfirst ~~this~~quarter ~~incident~~of infiscal ~~future~~2006 ~~periods~~through the second quarter of fiscal 2007. The Company is ~~assessing~~in ~~the~~compliance ~~extent~~with ofthe ~~losses~~current ~~that~~covenants ~~will~~of bethese ~~incurred~~facilities. ~~due~~However, toat this ~~incident~~time, ~~but is unable~~the toCompany ~~estimate~~cannot atbe ~~this~~certain ~~time~~that the ~~full~~requested ~~amount~~amendments ofto ~~loss.~~the ~~The~~revolving ~~Company~~credit ~~expects~~facility ~~that~~and ~~all~~the receivables ~~losses~~securitization ~~incurred~~facility will be ~~recovered~~obtained ~~through~~on ~~insurance~~favorable ~~and~~terms, ~~third~~or ~~party~~at ~~claims~~all. ~~Any~~Failure ~~differences~~to obtain ~~between~~the ~~amounts~~requested ~~ultimately received~~amendments ~~from~~could ~~insurance~~result ~~and~~in ~~third~~failure ~~parties~~to ~~and~~comply ~~losses~~with ~~incurred~~one byor ~~the~~more ~~Company~~of ~~may~~these covenants ~~negatively~~in ~~impact~~ future ~~results~~periods ofand ~~operations~~could have a material adverse effect on the Company’s financial condition.

~~In connection with the incident, the Company has incurred labor continuation costs of approximately $2~~11.3 ~~million~~Consolidating ~~and~~Guarantor ~~various clean up~~ and ~~repair~~Nonguarantor ~~costs~~Financial ofInformation: ~~approximately~~The ~~$16.1 million~~following ~~during~~condensed ~~the~~consolidating ~~thirty-nine~~financial ~~weeks~~information ~~ended~~presents ~~May 27~~balance sheets, ~~2005.~~statements ~~The~~of ~~Company~~operations ~~has received advances totaling $20.0~~and ~~million~~statements ~~during~~of ~~the~~cash ~~thirty-nine~~flows ~~weeks~~of ~~ended May 27, 2005 from~~ the Company’s ~~property~~and ~~damage insurance~~its ~~provider~~subsidiaries. ~~The~~Avondale ~~Company~~Incorporated, ~~has included~~ the ~~net~~parent company ~~balance~~and ofsole ~~advances~~shareholder ~~received in excess~~ of ~~expenses~~ ~~incurred~~Avondale ofMills, ~~$1.6 million~~has infully ~~other~~and ~~accrued~~unconditionally ~~expenses~~guaranteed atthe ~~May 27, 2005. The Company expects to~~2013 ~~request~~Notes ~~additional~~and ~~advances as~~ the ~~recovery~~2012 ~~progresses~~Notes ~~and~~issued ~~additional~~by ~~costs~~Avondale ~~are incurred~~Mills. ~~The Company~~Avondale ~~has~~Mills ~~not~~Graniteville ~~recognized~~Fabrics, ~~gains~~Inc., ~~relating~~a wholly toowned ~~recovery~~subsidiary of ~~lost~~Avondale ~~profits,~~Mills ~~involuntary~~and ~~conversions~~nonguarantor of ~~assets~~ ~~or other such recoveries for~~ the ~~thirty-nine weeks ended May 27~~Notes, ~~2005,~~operates asa ~~such amounts are~~denim ~~contingent~~manufacturing ~~upon~~facility ~~final~~and ~~settlement~~warehouse ~~with~~operation ~~respective~~located ~~insurers~~in ~~and~~South ~~third parties~~Carolina.

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) ~~May 27, 2005~~

~~AVONDALE INCORPORATED CONSOLIDATING BALANCE SHEETS May~~November 2725, 2005 ~~(In thousands)~~

							Non-
							Guarantor
							Avondale
							Mills
				Guarantor			Graniteville
	Avondale			Avondale			Fabrics,
	Mills, Inc.			Incorporated			Inc.			Eliminations			Consolidated
ASSETS
Current assets
Cash and cash equivalents	$	12,900		$	—		$	—		$	—		$	12,900
Accounts receivable		60,237			—			3			—			60,240
Inventories		81,321			—			—			—			81,321
Prepaid expenses		1,438			—			—			—			1,438
Total current assets		155,896			—			3			—			155,899
Assets held for sale		734			—			—			—			734
Property, plant and equipment
Land		6,075			—			196			—			6,271
Buildings		64,236			—			11,750			—			75,986
Machinery and equipment		426,791			—			37,943			—			464,734
		497,102			—			49,889			—			546,991
Less accumulated depreciation		(351,049	)		—			(32,064	)		—			(383,113	)
		146,053			—			17,825			—			163,878
Goodwill		2,951			—			—			—			2,951
Investment in subsidiaries		6,277			94,554			—			(100,831	)		—
Other assets		5,656			—			—			—			5,656
	$	317,567		$	94,554		$	17,828		$	(100,831	)	$	329,118
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	26,393		$	—		$	1,084		$	—		$	27,477
Accrued compensation, benefits and related expenses		11,742			—			229			—			11,971
Accrued interest		4,564			—			—			—			4,564
Other accrued expenses		10,745			—			—			—			10,745
Income taxes payable		567			—			—			—			567
Long-term debt due in one year		4,325			—			—			—			4,325
Total current liabilities		58,336			—			1,313			—			59,649
Long-term debt		137,620			—			—			—			137,620
Deferred income taxes and other long term liabilities		26,815			—			—			—			26,815
Due to (from) subsidiaries		242			(10,480	)		10,238			—			—
Shareholders’ equity		94,554			105,034			6,277			(100,831	)		105,034
	$	317,567		$	94,554		$	17,828		$	(100,831	)	$	329,118

AVONDALE INCORPORATED
CONDENSED CONSOLIDATING BALANCE SHEETS

November 25, 2005

(In thousands)


							Non-
							Guarantor
							Avondale
							Mills
				Guarantor			Graniteville
	Avondale			Avondale			Fabrics,
	Mills, Inc.			Incorporated			Inc.			Eliminations			Consolidated
ASSETS
Current assets
Cash and cash equivalents	$	3,664		$	—		$	—		$	—		$	3,664
Accounts receivable		27,957			—			3			—			27,960
Inventories		89,722			—			—			—			89,722
Prepaid expenses		1,749												1,749
Insurance claims receivable		13,409												13,409
Income taxes refundable		76			—			—			—			76

Total current assets		136,577			—			3			—			136,580
Assets held for sale		2,458			—			—			—			2,458
Property, plant and equipment
Land		6,067			—			196			—			6,263
Buildings		64,318			—			11,750			—			76,068
Machinery and equipment		380,919			—			37,910			—			418,829

		451,304			—			49,856			—			501,160
Less accumulated depreciation		(322,429	)		—			(33,824	)		—			(356,253	)

		128,875			—			16,032			—			144,907
Goodwill		2,951			—			—			—			2,951
Investment in subsidiaries		5,012			82,374			—			(87,386	)		—
Other assets		5,436			—			—			—			5,436

	$	281,309		$	82,374		$	16,035		$	(87,386	)	$	292,332

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	17,334		$	—		$	960		$	—		$	18,294
Accrued compensation, benefits and related expenses		10,289			—			181			—			10,470
Accrued interest		4,514			—			—			—			4,514
Other accrued expenses		8,495			—			3			—			8,498
Long-term debt due in one year		4,325			—			—			—			4,325

Total current liabilities		44,957			—			1,144			—			46,101
Long-term debt		135,458			—			—			—			135,458
Deferred income taxes and other long term liabilities		17,920			—			—			—			17,920
Due to (from) subsidiaries		600			(10,479	)		9,879			—			—
Shareholders’ equity		82,374			92,853			5,012			(87,386	)		92,853

	$	281,309		$	82,374		$	16,035		$	(87,386	)	$	292,332

AVONDALE INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) ~~May~~November 2725, 2005

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

							Non-
							Guarantor
							Avondale
							Mills
				Guarantor			Graniteville
	Avondale			Avondale			Fabrics,
	Mills, Inc.			Incorporated			Inc.			Eliminations			Consolidated
ASSETS
Current assets
Cash and cash equivalents	$	5,481		$	—		$	—		$	—		$	5,481
Accounts receivable		50,973			—			2			—			50,975
Inventories		78,282			—			—			—			78,282
Prepaid expenses		1,275			—			—			—			1,275
Income taxes refundable		506			—			—			—			506
Total current assets		136,517			—			2			—			136,519
Assets held for sale		1,037			—			—			—			1,037
Property, plant and equipment
Land		6,093			—			196			—			6,289
Buildings		64,021			—			11,750			—			75,771
Machinery and equipment		427,807			—			37,840			—			465,647
		497,921			—			49,786			—			547,707
Less accumulated depreciation		(336,477	)		—			(29,278	)		—			(365,755	)
		161,444			—			20,508			—			181,952
Goodwill		2,951			—			—			—			2,951
Investment in subsidiaries		7,840			96,943			—			(104,783	)		—
Other assets		6,023			—			—			—			6,023
	$	315,812		$	96,943		$	20,510		$	(104,783	)	$	328,482
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	23,051		$	—		$	1,116		$	—		$	24,167
Accrued compensation, benefits 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

August 26, 2005
(In thousands)


							Non-
							Guarantor
							Avondale
							Mills
				Guarantor			Graniteville
	Avondale			Avondale			Fabrics,
	Mills, Inc.			Incorporated			Inc.			Eliminations			Consolidated
ASSETS
Current assets
Cash and cash equivalents	$	4,933		$	—		$	—		$	—		$	4,933
Accounts receivable		65,167			—			3			—			65,170
Inventories		83,194			—			—			—			83,194
Prepaid expenses		535			—			—			—			535
Insurance claims receivable		5,266			—			—			—			5,266
Income taxes refundable		144			—			—			—			144

Total current assets		159,239			—			3			—			159,242
Assets held for sale		700			—			—			—			700
Property, plant and equipment
Land		6,067			—			195			—			6,262
Buildings		64,318			—			11,750			—			76,068
Machinery and equipment		424,036			—			37,895			—			461,931

		494,421			—			49,840			—			544,261
Less accumulated depreciation		(353,727	)		—			(32,919	)		—			(386,646	)

		140,694			—			16,921			—			157,615
Goodwill		2,951			—			—			—			2,951
Investment in subsidiaries		5,668			94,299			—			(99,967	)		—
Other assets		5,374			—			—			—			5,374

	$	314,626		$	94,299		$	16,924		$	(99,967	)	$	325,882

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	30,662		$	—		$	926		$	—		$	31,588
Accrued compensation, benefits and related expenses		11,720			—			105			—			11,825
Accrued interest		2,322			—			—			—			2,322
Other accrued expenses		8,779			—			2			—			8,781
Long-term debt due in one year		4,325			—			—			—			4,325

Total current liabilities		57,808			—			1,033			—			58,841
Long-term debt		136,539			—			—			—			136,539
Deferred income taxes and other long term liabilities		25,742			—			—			—			25,742
Due to (from) subsidiaries		238			(10,461	)		10,223			—			—
Shareholders’ equity		94,299			104,760			5,668			(99,967	)		104,760

	$	314,626		$	94,299		$	16,924		$	(99,967	)	$	325,882

AVONDALE INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) ~~May~~November 2725, 2005

AVONDALE INCORPORATED CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS ~~For the Thirteen weeks ended May 27, 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	$	156,570		$	91	$	25,380		$	(25,471	)	$	156,570
Operating costs and expenses
Cost of goods sold		135,729			—		25,438			(25,380	)		135,787
Depreciation		7,301			—		924			—			8,225
Selling and administrative expenses		6,762			—		—			(91	)		6,671
Operating income (loss)		6,778			91		(982	)		—			5,887
Interest expense, net		3,816			—		—			—			3,816
Discount and expenses on sales of receivables		662			—		—			—			662
Other, net		(266	)		—		—			—			(266	)
Income (loss) before income taxes		2,566			91		(982	)		—			1,675
Provision for (benefit of) income taxes		996			34		(370	)		—			660
Equity in income (loss) of subsidiary		(612	)		958		—			(346	)		—
Net income (loss)	$	958		$	1,015	$	(612	)	$	(346	)	$	1,015

For the Thirteen Weeks Ended November 25, 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	$	98,890		$	29		$	15,830		$	(15,859	)	$	98,890
Operating costs and expenses
Cost of goods sold		95,216			—			15,976			(15,826	)		95,366
Depreciation		6,542			—			905			—			7,447
Selling and administrative expenses		5,955									(33	)		5,922
Facility restructuring charges		4,800			—			—			—			4,800

Operating income (loss)		(13,623	)		29			(1,051	)		—			(14,645	)
Interest expense, net		3,774			—			—			—			3,774
Discount and expenses on sales of receivables		493			—			—			—			493
Other, net		130			—			—			—			130

Income (loss) before income taxes		(18,020	)		29			(1,051	)		—			(19,042	)
Provision for (benefit of) income taxes		(6,751	)		11			(395	)		—			(7,135	)
Equity in loss of subsidiary		(656	)		(11,925	)		—			12,581			—

Net loss	$	(11,925	)	$	(11,907	)	$	(656	)	$	12,581		$	(11,907	)

AVONDALE INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) ~~May~~November 2725, 2005

AVONDALE INCORPORATED CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS ~~For the Thirteen weeks ended May 28, 2004 (amounts in thousands)~~

							Non-
							Guarantor
							Avondale
							Mills
				Guarantor			Graniteville
	Avondale			Avondale			Fabrics,
	Mills, Inc.			Incorporated			Inc.		Eliminations			Consolidated
Net sales, including intercompany transfers and charges	$	151,345		$	32		$	30,941	$	(30,973	)	$	151,345
Operating costs and expenses
Cost of goods sold		139,615			—			29,370		(30,942	)		138,043
Depreciation		8,217			—			932		—			9,149
Selling and administrative expenses		6,689			—			—		(31	)		6,658
Facility restructuring charges		2,250			—			—		—			2,250
Operating income (loss)		(5,426	)		32			639		—			(4,755	)
Interest expense, net		4,346			—			—		—			4,346
Discount and expenses on sales of receivables		631			—			—		—			631
Gain on extinguishment of debt		(1,321	)		—			—		—			(1,321	)
Other, net		110			—			—		—			110
Income (loss) before income taxes		(9,192	)		32			639		—			(8,521	)
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	)

For the Thirteen Weeks Ended November 26, 2004

(In thousands)


						Non-
						Guarantor
						Avondale
						Mills
				Guarantor		Graniteville
	Avondale			Avondale		Fabrics,
	Mills, Inc.			Incorporated		Inc.			Eliminations			Consolidated
Net sales, including intercompany transfers and charges	$	151,090		$	31	$	27,436		$	(27,467	)	$	151,090
Operating costs and expenses Cost of goods sold		132,749			—		27,089			(27,434	)		132,404
Depreciation		7,686			—		931			—			8,617
Selling and administrative expenses		6,175			—		—			(33	)		6,142

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

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

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

AVONDALE INCORPORATED ~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) May 27, 2005~~

~~AVONDALE~~NOTES ~~INCORPORATED CONSOLIDATING~~TO ~~STATEMENTS~~CONDENSED OFCONSOLIDATED ~~OPERATIONS~~FINANCIAL STATEMENTS ~~For~~(UNAUDITED) ~~the Thirty-Nine weeks ended May~~(CONTINUED) November 2725, 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	$	431,966		$	150		$	75,477		$	(75,627	)	$	431,966
Operating costs and expenses
Cost of goods sold		379,436			—			75,194			(75,477	)		379,153
Depreciation		22,594			—			2,786			—			25,380
Selling and administrative expenses		19,615			—			—			(150	)		19,465
Operating income (loss)		10,321			150			(2,503	)		—			7,968
Interest expense, net		11,405			—			—			—			11,405
Discount and expenses on sales of receivables		1,777			—			—			—			1,777
Gain on extinguishment of debt		(162	)		—			—			—			(162	)
Other, net		(1,417	)		—			—			—			(1,417	)
Income (loss) before income taxes		(1,282	)		150			(2,503	)		—			(3,635	)
Provision for (benefit of) income taxes		(456	)		56			(940	)		—			(1,340	)
Equity in loss of subsidiary		(1,563	)		(2,389	)		—			3,952			—
Net loss	$	(2,389	)	$	(2,295	)	$	(1,563	)	$	3,952		$	(2,295	)

AVONDALE INCORPORATED
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

For the Thirteen Weeks Ended November 25, 2005

(In thousands)


							Non-
							Guarantor
							Avondale
							Mills
				Guarantor			Graniteville
	Avondale			Avondale			Fabrics,
	Mills, Inc.			Incorporated			Inc.			Eliminations			Consolidated
Operating activities
Net loss	$	(11,925	)	$	(11,907	)	$	(656	)	$	12,581		$	(11,907	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		6,723			—			905			—			7,628
Benefit of deferred income taxes		(7,209	)		—			—			—			(7,209	)
Loss on disposal of property, plant and equipment, facility restructuring and assets held for sale		4,446			—			—			—			4,446
Sale of accounts receivable, net		13,387			—			—			—			13,387
Changes in operating assets and liabilities		(5,339	)		(18	)		(233	)		—			(5,590	)
Equity in loss of subsidiary		656			11,925			—			(12,581	)		—

Net cash provided by operating activities		739			—			16			—			755

Investing activities
Purchase of property, plant and equipment		(1,187	)		—			(16	)		—			(1,203	)
Proceeds from sale of property, plant and equipment and assets held for sale		260			—			—			—			260

Net cash used in investing activities		(927	)		—			(16	)		—			(943	)
Financing activities
Reductions in long term debt		(1,081	)		—			—			—			(1,081	)

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

Decrease in cash and cash equivalents		(1,269	)		—			—			—			(1,269	)

Cash and cash equivalents at beginning of period		4,933			—			—			—			4,933

Cash and cash equivalents at end of period	$	3,664		$	—		$	—		$	—		$	3,664

AVONDALE INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) ~~May~~November 2725, 2005

AVONDALE INCORPORATED CONDENSED CONSOLIDATING STATEMENTS OF ~~OPERATIONS For~~CASH ~~the Thirty-Nine weeks ended May 28, 2004~~FLOWS ~~(amounts in thousands)~~

							Non-
							Guarantor
							Avondale
							Mills
				Guarantor			Graniteville
	Avondale			Avondale			Fabrics,
	Mills, Inc.			Incorporated			Inc.			Eliminations			Consolidated
Net sales, including intercompany transfers and charges	$	412,267		$	83		$	75,301		$	(75,384	)	$	412,267
Operating costs and expenses
Cost of goods sold		376,198			—			72,495			(75,301	)		373,392
Depreciation		25,209			—			2,807			—			28,016
Selling and administrative expenses		19,430			—			—			(83	)		19,347
Facility restructuring charges		2,250			—			—			—			2,250
Operating income (loss)		(10,820	)		83			(1	)		—			(10,738	)
Interest expense, net		13,510			—			—			—			13,510
Discount and expenses on sales of receivables		1,874			—			—			—			1,874
Gain on extinguishment of debt		(1,321	)											(1,321	)
Other, net		(2,439	)		—			—			—			(2,439	)
Income (loss) before income taxes		(22,444	)		83			(1	)		—			(22,362	)
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	)

For the Thirteen Weeks Ended November 26, 2004
(In thousands)


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

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

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

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

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

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

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

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

~~AVONDALE~~Item 2. ~~INCORPORATED NOTES~~Management’s TODiscussion ~~CONDENSED~~and ~~CONSOLIDATED~~Analysis ~~FINANCIAL~~of ~~STATEMENTS (UNAUDITED)~~Financial ~~(CONTINUED) May 27,~~Condition ~~2005~~and Results of Operations.

~~AVONDALE~~CRITICAL ~~INCORPORATED CONSOLIDATING~~ACCOUNTING ~~STATEMENTS OF CASH FLOWS~~POLICIES ~~For the Thirty-Nine weeks ended May 27, 2005 (In thousands)~~

							Non-
							Guarantor
							Avondale
							Mills
				Guarantor			Graniteville
	Avondale			Avondale			Fabrics,
	Mills, Inc.			Incorporated			Inc.			Eliminations			Consolidated
Operating activities
Net loss	$	(2,389	)	$	(2,295	)	$	(1,563	)	$	3,952		$	(2,295	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		23,242			—			2,786			—			26,028
Benefit of deferred income taxes		(2,144	)		—			—			—			(2,144	)
Gain on disposal of property, plant and equipment and assets held for sale		(1,145	)		—			—			—			(1,145	)
Gain on extinguishment of debt		(162	)											(162	)
Sale of accounts receivable, net		(5,033	)		—			—			—			(5,033	)
Changes in operating assets and liabilities		2,485			(94	)		(1,120	)		—			1,271
Equity in loss of subsidiary		1,563			2,389			—			(3,952	)		—
Net cash provided by operating activities		16,417			—			103			—			16,520
Investing activities
Purchase of property, plant and equipment		(7,383	)		—			(103	)		—			(7,486	)
Proceeds from sale of property, plant and equipment and assets held for sale		1,629			—			—			—			1,629
Net cash used in investing activities		(5,754	)		—			(103	)		—			(5,857	)
Financing activities
Reductions in long term debt		(3,244	)		—			—			—			(3,244	)
Net cash used in financing activities		(3,244	)		—			—			—			(3,244	)
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	$	12,900		$	—		$	—		$	—		$	12,900

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

Significant estimates: 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 condensed 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 on customer credit evaluations, which include the customer’s financial position, past payment history, cash flows, management capability and other factors, as well as broader trends affecting the textile, apparel and retail industries, which may include historical loss experience and other economic or trade related conditions impacting, or projected to impact, the industry. The Company evaluates delinquent balances of accounts receivable based on the contractual terms of each sale. Accounts receivable are written off when determined to be uncollectible based on a careful review of each delinquent account on a customer specific basis.

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

Derailment related expenditures and insurance claims receivable: The Company recognizes a liability for costs related to the clean up, restoration and replacement of facilities and equipment damaged by the January 6, 2005 train derailment and chlorine spill, generally at the time materials are received or services are rendered. While the Company anticipates that significant costs associated with the restoration efforts will continue for the foreseeable future, the amount and timing of such costs cannot be predicted, since continued expenditures are dependent upon the corrosive nature of the chlorine spilled and the success of specific restoration efforts. The Company establishes a receivable for those costs incurred which are recoverable from its insurance provider. The Company has received interim insurance payments from its insurer, and expects to request additional interim insurance payments as the recovery progresses and additional costs are incurred. Other costs which are not specifically recoverable from insurers, including policy deductibles, are expensed in the period incurred. Gains related to recovery of business interruption losses caused by the significant disruption to the Company’s operations, involuntary conversions of assets and other such losses are recognized upon settlement of claims with insurers or third parties. For related discussion, see the caption “January 6, 2005 Train Derailment” included under Part I, Item 2 of this Quarterly Report on Form 10-Q.

~~AVONDALE~~ Inventories: ~~INCORPORATED~~Inventories are stated at the lower of cost or market value. Except for certain ~~NOTES~~supply TOinventories ~~CONDENSED~~valued ~~CONSOLIDATED~~on ~~FINANCIAL~~an ~~STATEMENTS~~average cost basis, the costs of the Company’s inventories are ~~(UNAUDITED)~~determined on a last-in, first-out (~~CONTINUED~~“LIFO”) basis. Under LIFO, current material and conversion ~~May 27~~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, ~~2005~~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.

~~AVONDALE~~ Government ~~INCORPORATED~~Cotton Support Programs: The Company receives payments from the U.S. Department of ~~CONSOLIDATING~~Agriculture ~~STATEMENTS~~to OFreimburse ~~CASH~~the ~~FLOWS~~difference between domestic and world prices of cotton. These payments ~~For~~are calculated weekly based on published price differences and pounds of qualifying cotton consumed. Accordingly, the ~~Thirty-Nine~~Company ~~weeks~~treats ~~ended~~the ~~May 28~~weekly reimbursements as a price adjustment of the cost of cotton consumed. The cash price paid for cotton, ~~2004~~inbound freight costs and these price ~~(amounts~~adjustments are used in ~~thousands)~~the determination of raw material cost and are recorded within the caption “Cost of Goods Sold” with other manufacturing costs. The Company’s disclosures of changes in the market price of cotton include the impact of these adjustments.

							Non-
							Guarantor
							Avondale
							Mills
				Guarantor			Graniteville
	Avondale			Avondale			Fabrics,
	Mills, Inc.			Incorporated			Inc.			Eliminations			Consolidated
Operating activities
Net loss	$	(14,440	)	$	(14,387	)	$	—		$	14,440		$	(14,387	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		25,577			—			2,807			—			28,384
Benefit of deferred income taxes		(8,072	)		—			—			—			(8,072	)
Gain on disposal of property, plant and equipment and assets held for sale		(867	)		—			—			—			(867	)
Gain on extinguishment of debt		(1,321	)		—			—			—			(1,321	)
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		—			14,440			—			(14,440	)		—
Net cash provided by (used in) operating activities		(4,975	)		2,536			10			(2,476	)		(4,905	)
Investing activities
Purchase of property, plant and equipment		(4,530	)		—			(10	)		—			(4,540	)
Proceeds from sale of property, plant and equipment and assets held for sale		5,447			—			—			—			5,447
Net cash provided by (used in) investing activities		917			—			(10	)		—			907
Financing activities
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		(5,720	)		(2,536	)		—			2,476			(5,780	)
Decrease in cash and cash equivalents		(9,778	)		—			—			—			(9,778	)
Cash and cash equivalents
At beginning of period		13,769			—			—			—			13,769
Cash and cash equivalents
At end of period	$	3,991		$	—		$	—		$	—		$	3,991

The Company participates in the U.S. Department of Agriculture program under the terms of an agreement executed between the Company and the U.S. Department of Agriculture. The U.S. Department of Agriculture conducts regular audits to determine the Company’s compliance with the terms of this agreement. Each week, the actual reimbursement value is calculated under the terms of the agreement and a claim is submitted with the U.S. Department of Agriculture. Cash receipts normally are received approximately four weeks following the date of each week’s claim for reimbursement. Based on the contractual agreement supporting the program, the fixed value of each week’s claim and the Company’s successful audit experience, the claims are accrued and the corresponding reduction in cotton costs are recorded within each accounting period.

Long-Lived Assets: The Company periodically reviews the values assigned to long-lived assets, such as property, plant and equipment and assets held for sale. The associated depreciation and amortization periods are reviewed on an annual basis. Estimated recoverability of long lived assets is based on the anticipated undiscounted and discounted cash flows from operations, as appropriate, or in the case of assets held for sale, the lower of historical carrying cost or estimated net realizable value. Goodwill is not amortized, but is tested for impairment on an annual basis, or as significant events or changes in conditions affecting its value occur. Management believes that long-lived assets included in the accompanying condensed consolidated balance sheets are appropriately valued.

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 Emerging Issues Task Force Statement No. 00-10.

Income Taxes: The Company evaluates its income tax benefits and obligations, including estimates of tax payments currently due, future tax benefits and future tax obligations arising from differing treatment of items for tax and accounting purposes, and benefits of net operating loss carry forwards, when preparing its condensed consolidated financial statements. These future benefits and future obligations result in income tax assets and liabilities, which are recorded after careful consideration of the likelihood that these benefits and obligations will be realized and settled. To the extent that recovery of future tax benefits cannot be considered “more likely than not”, a valuation allowance is established. Management believes that future tax benefits included in the accompanying condensed consolidated balance sheets are appropriately recorded.

~~Item~~ Contingencies: 2The Company is involved in certain environmental matters and claims. ~~Management’s~~The Company ~~Discussion~~has identified those environmental matters where it is probable that expenditures will be required, including a pond with certain contamination and ~~Analysis~~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 ~~Financial~~these items ~~Condition~~will be between $1.5 million and ~~Results~~$2.5 million and, accordingly, has established a reserve of $2.1 million ~~Operations~~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.

~~CRITICAL~~ For ~~ACCOUNTING~~discussion ~~POLICIES~~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 26, 2005 and Item 1 “Legal Proceedings” in Part II of this Quarterly Report on Form 10-Q. The Company is not currently a party to litigation that management, in consultation with legal counsel, believes would have a material adverse effect on the Company’s financial condition or results of operations.

~~The Company’s analysis and discussion of its financial condition and results of operations are~~20 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.

TheTable 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. Contents

~~The~~RESULTS ~~Company~~OF ~~believes the following accounting policies are critical to the presentation and~~OPERATIONS 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~~Thirteen ~~Receivable~~Weeks ~~and~~Ended ~~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~~November 25, ~~collateral~~2005 isCompared ~~not required~~ to ~~support~~Thirteen ~~such~~Weeks ~~credit~~Ended ~~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~~November 26, ~~historical payment~~2004 ~~trends and other information.~~

~~The~~Net ~~Company~~Sales. ~~generates~~Net ~~funds~~sales ~~through~~decreased ~~the~~34.5% ~~sale~~to of$98.9 million ~~trade~~for ~~accounts~~the ~~receivable~~thirteen weeks ended November 25, at2005 afrom ~~discount~~$151.1 million ~~and~~for the thirteen weeks ended November 26, 2004. The decrease ~~without~~in ~~recourse~~net sales for the thirteen weeks ended November 25, to2005 areflected ~~special~~the ~~purpose~~substantial ~~subsidiary~~disruption ~~established~~of operations tothroughout ~~facilitate~~the Company caused by the ~~acquisition~~January 6, 2005 train derailment and chlorine spill ~~subsequent~~and ~~resale~~resulting byequipment ~~that~~failures ~~subsidiary~~and ofongoing ~~certain~~recovery ~~undivided~~efforts, ~~interests~~and inthe ~~trade~~subsequent ~~accounts~~reduction ~~receivable~~of tothe ~~General~~Company’s ~~Electric~~productive ~~Capital~~capacities ~~Corporation~~to ~~(“GECC”)~~accommodate full remediation. ~~The~~In ~~discount~~addition, ~~rate~~markets onfor the Company’s ~~accounts~~products ~~receivable purchased~~softened ~~from~~during the ~~Company~~thirteen isweeks ~~established~~ended ~~periodically~~November 25, 2005 as domestic demand was adversely affected by the ~~subsidiary~~impact ~~based~~of onhurricanes ~~the~~and ~~fair~~increased ~~market value~~fuel ofcosts ~~the~~experienced ~~receivables~~during this period. ~~The~~Overall ~~Company~~unit ~~includes~~sales indecreased ~~accounts~~34.5% ~~receivable~~for inthe ~~its~~thirteen ~~consolidated~~weeks ~~balance~~ended November 25, 2005 compared ~~sheets~~to the ~~portion~~thirteen ofweeks ~~accounts~~ended ~~receivable~~November 26, ~~sold~~2004. toSee further discussion under the ~~subsidiary~~captions ~~which~~January 6, ~~have~~2005 ~~not~~Train ~~been~~Derailment ~~resold~~and toFacility Restructuring included under Part I, Item 2 of this Quarterly ~~GECC~~Report on Form 10-Q.

~~Inventories:~~The ~~Inventories~~domestic ~~are~~textile ~~stated~~industry atcontinues ~~the~~to ~~lower~~face ofdifficult ~~cost~~challenges, orincluding ~~market value. Except for certain~~significant ~~supply~~growth ~~inventories~~in ~~valued~~imported onapparel, anelimination ~~average~~of ~~cost~~import ~~basis,~~quotas ~~the~~by ~~costs of~~ the ~~Company’s~~World ~~inventories~~Trade ~~are~~Organization effective ~~determined~~December 31, ~~on a last-in~~2004, ~~first-out~~uncertainties ~~(“LIFO”)~~presented ~~basis.~~by ~~Under~~the ~~LIFO,~~economic ~~current material~~ and ~~conversion costs~~political ~~are~~environment, ~~charged~~imbalance ~~to cost~~ of global ~~goods~~supply ~~sold~~and ~~while~~demand ~~inventories~~for ~~remain~~textile ~~valued~~and ~~using~~apparel ~~costs~~products ~~incurred in the initial~~ and ~~subsequent~~financial ~~fiscal~~distress ~~years~~experienced ~~following~~by many ~~election~~ of the ~~LIFO~~Company’s ~~method~~domestic competitors. In ~~periods of declining prices~~addition, ~~LIFO~~manipulation ~~values~~of ~~may~~the ~~exceed~~Chinese ~~current~~yuan ~~replacement market values~~ and ~~require downward adjustment.~~ ~~Estimates,~~currencies ~~including~~of ~~the~~other ~~estimated~~Asian ~~costs~~countries relative to ~~complete~~the ~~work~~U.S. indollar ~~process inventories~~ and ~~the~~other ~~estimated~~trade distorting ~~realizable~~practices ~~values~~employed ofby ~~all~~those ~~inventories,~~countries ~~are~~create ~~used~~competitive inadvantages ~~determining~~which ~~the~~continue ~~lower~~to ofpromote ~~LIFO cost or market.~~the ~~During~~importation ~~periods~~of ~~when~~goods ~~current~~from ~~costs~~those orcountries ~~inventory~~by ~~quantities~~U.S. ~~fluctuate significantly~~retailers, ~~use~~exacerbating of the ~~LIFO~~already highly ~~method~~competitive ~~may~~market ~~yield~~conditions. ~~cost~~The ofCompany ~~goods~~expects ~~sold~~these ~~that~~difficult ~~differs~~conditions ~~significantly~~to ~~from~~continue ~~that~~into ~~which would result under~~the ~~other~~foreseeable ~~inventory methods~~future.

~~Long-Lived~~Recent ~~Assets:~~actions ~~The~~by ~~Company periodically reviews~~ the ~~values~~U.S. ~~assigned~~government to ~~long-lived~~extend ~~assets, such~~quotas ~~as property, plant~~ and ~~equipment,~~impose ~~assets~~safeguard ~~held~~relief ~~for~~on ~~sale~~certain categories ~~and~~of ~~goodwill.~~imported ~~The~~garments ~~associated depreciation~~from ~~and~~China ~~amortization periods~~ are ~~reviewed~~expected onto anprovide ~~annual~~positive ~~basis.~~benefits ~~Estimated~~to ~~recoverability~~domestic suppliers of ~~long-lived~~ ~~asset~~those ~~values~~products. isAs ~~based~~the oncategories ~~anticipated~~cover ~~undiscounted~~most ~~and~~of ~~discounted~~the ~~cash~~Company’s ~~flows from operations~~products, asthese ~~appropriate,~~actions should orhave ina ~~the~~favorable ~~case~~impact ofon ~~assets~~the ~~held~~Company’s ~~for~~business. ~~sale,~~Other ~~the~~pending ~~lower~~legislation ofto ~~historical~~impose ~~carrying~~tariffs ~~amount~~on orimports ~~estimated~~from ~~net~~China ~~realizable~~to ~~value.~~offset ~~Management~~China’s ~~periodically~~undervalued ~~reviews~~currency ~~the~~may ~~values assigned~~provide toadditional ~~these~~relief, but ~~assets~~there ~~and~~can ifbe ~~additional~~no ~~information~~assurance ~~becomes~~that ~~available~~any ~~which~~of ~~indicates~~these aproposals ~~decline in~~will ~~value~~be implemented, ~~makes~~and ~~adjustments~~if so, in ~~that~~a timely ~~period~~manner.

20 Operating Income (Loss). The Company produced an operating loss of ($14.6) million for the thirteen weeks ended November 25, 2005 compared to an operating income of $3.9 million for the thirteen weeks ended November 26, 2004. The decline in operating results reflected the significant reduction in unit sales for the Company’s apparel fabrics and yarns operations. Raw material costs per unit declined, reflecting generally lower market prices of cotton and reduced purchases of yarns and greige fabrics following the rationalization of productive capacity, partially offset by the significant increases in polyester prices as higher oil costs were passed along by polyester manufacturers under contract provisions for force majeure. Conversion costs per unit increased due to higher energy costs, unfavorable unit cost absorptions and operating inefficiencies resulting from the clean up and restoration of facilities damaged by the January 6, 2005 train derailment and chlorine spill. Operating results for the thirteen weeks ended November 26, 2004 included a non-cash benefit of $0.5 million to adjust the carrying value of inventories to LIFO basis while no adjustment to the carrying value of inventories to LIFO basis was recorded for the thirteen weeks ended November 25, 2005.

~~Table~~ Cost of ~~Contents~~goods sold, which includes all direct manufacturing costs, inbound freight charges, inspection and warehousing costs and internal transfer costs, decreased 27.9% to $95.4 million for the thirteen weeks ended November 25, 2005 from $132.4 million for the thirteen weeks ended November 26, 2004, primarily reflecting the impact of lower raw material costs and reduced unit volume. Cost of goods sold as a percentage of net sales increased to 96.4% for the thirteen weeks ended November 25, 2005 from 87.6% for the thirteen weeks ended November 26, 2004, reflecting the reduced volumes, unfavorable unit cost absorptions and operating inefficiencies caused by the January 6, 2005 train derailment and chlorine spill.

~~Revenue~~Selling ~~Recognition:~~and ~~The~~administrative ~~Company records revenues principally when products are shipped to customers. Generally~~expenses, ~~risks~~which ofinclude ~~ownership~~compensation ~~pass~~and ~~to customers when goods are shipped~~benefits, oroffice inexpenses, ~~circumstances~~travel ~~where~~and ~~risk~~entertainment ofexpenses ~~ownership~~and ~~passes~~computer ~~upon~~expenses ~~delivery,~~of all ~~such~~administration ~~shipments are made under fixed price~~ and ~~delivery~~support ~~terms. Consistent with recognized practice in the textile industry, the Company~~functions ~~also~~not ~~records~~directly ~~revenues~~related to ~~a lesser extent throughout~~ the ~~fiscal~~production ~~year~~of ~~on a bill and hold basis~~product, ~~invoicing~~ ~~goods~~were ~~that have been produced, packaged and made ready for shipment~~$5.9 million ~~These goods are effectively segregated from inventory that is available~~ for ~~sale,~~ the ~~risks~~thirteen ofweeks ~~ownership of the~~ended ~~goods~~November 25, ~~have~~2005 ~~passed~~compared to ~~the~~$6.1 million ~~customer,~~for ~~and~~ the ~~remittance~~thirteen ~~terms~~weeks ~~and~~ended ~~collection~~November 26, ~~experience~~2004. ~~on the~~Selling ~~related~~and ~~invoicing~~administrative isexpenses ~~consistent~~as ~~with~~a ~~all~~percentage ~~other~~of net sales bywere ~~the Company~~6.0% ~~All~~for ~~international~~the ~~sales~~thirteen ~~are~~weeks ended ~~denominated~~November 25, in2005 U.versus S4.1% ~~dollars.~~for ~~All~~the ~~amounts~~thirteen ~~billed~~weeks toended ~~customers~~November 26, ~~for~~2004, ~~shipping~~reflecting ~~and~~the ~~handling are~~impact ~~included~~of inthe ~~net~~decline ~~sales~~ in ~~accordance with EITF 00-01~~sales.

~~Contingencies: The Company is involved in certain environmental matters and claims. The~~21 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.

ForTable 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. Contents

21 Segment Performance. Apparel fabric sales decreased 30.9% to $81.9 million for the thirteen weeks ended November 25, 2005 from $118.6 million for the thirteen weeks ended November 26, 2004, reflecting a 27.2% decrease in yards invoiced and a 5.1% decrease in average invoice price. The apparel fabrics operation produced an operating loss of ($5.7) million for the thirteen weeks ended November 25, 2005 compared to an operating income of $2.8 million for the thirteen weeks ended November 26, 2004, largely due to the impact of the substantial disruption caused by the clean up and restoration efforts and reduced fixed cost absorption, as well as softening of domestic demand.

~~Table~~ Yarn sales, including intra-company sales to the Company’s fabric operations, decreased 35.0% to $30.5 million for the thirteen weeks ended November 25, 2005 from $46.9 million for the thirteen weeks ended November 26, 2004. Total pounds invoiced decreased 27.4%, reflecting reduced yarn demand from denim customers and reduced internal yarn transfers following the rationalization of the ~~Contents~~Company’s productive capacities. Average invoice price decreased 10.3% as lower cotton costs impacted outside invoice prices as well as intra-company transfer prices. The yarns operation produced an operating loss of ($0.4) million for the thirteen weeks ended November 25, 2005 compared to an operating income of $3.0 million for the thirteen weeks ended November 26, 2004, primarily due to the reduced unit volume.

~~RESULTS~~ Other sales, OFwhich ~~OPERATIONS~~include sales of greige and coated fabrics, sales by an apparel sourcing operation and revenues from the Company’s trucking operation, increased 10.7% to $9.3 million for the thirteen weeks ended November 25, 2005 from $8.4 million for the thirteen weeks ended November 26, 2004. The increase in other sales was primarily attributable to increased sales in the developing apparel sourcing operation, partially offset by a reduction in greige and coated fabrics sales resulting from the plant disruptions associated with the January 6, 2005 train derailment and chlorine spill. Operating income from other sales decreased 50.0%, from $1.2 million for the thirteen weeks ended November 26, 2004 to $0.6 million for the thirteen weeks ended November 25, 2005, largely reflecting the lower unit volume.

~~Thirteen~~ Inter-segment ~~Weeks~~sales ~~Ended~~were ~~May~~nearly flat, increasing 0.4% to $22.9 27million for the thirteen weeks ended November 25, 2005 ~~Compared~~from to$22.8 million ~~Thirteen~~for ~~Weeks~~the ~~Ended~~thirteen ~~May~~weeks ended November 2826, 2004, as an increase in transfers of internally produced greige fabrics offset the decline in yarn transfers.

~~Net~~Unallocated ~~Sales.~~amounts ~~Net~~included ~~sales increased 3.5% to $156.6 million for the thirteen weeks ended May 27, 2005 from $151.3 million for the thirteen weeks ended May 28, 2004. The increase~~ in ~~net sales~~operating ~~for~~income ~~the~~represent ~~thirteen~~general ~~weeks ended May 27, 2005 primarily reflected generally higher shipment volume of apparel fabrics~~ and ~~yarns as the overall improvement in market demand for the Company’s~~administrative ~~products continued. While overall unit sales increased 4.8% for the thirteen weeks ended May 27~~expenses, ~~2005~~ ~~compared~~certain toassociate ~~the~~benefits ~~thirteen~~and ~~weeks~~performance ~~ended~~based ~~May 28~~incentives, ~~2004,~~and ~~the~~adjustments ~~Company anticipated a larger improvement prior to the effects~~ of the ~~January 6, 2005 train derailment, as plant operations are~~ ~~periodically~~carrying ~~interrupted~~value byof ~~clean~~inventories upto ~~projects.~~LIFO ~~See further discussion under the caption January 6~~basis, ~~2005~~ ~~Train~~net ~~Derailment included under Part 1, Item 2~~ of ~~this~~market ~~Quarterly Report on Form 10-Q~~adjustments.

~~The~~Facility ~~domestic~~Restructuring: ~~textile~~As ~~industry~~described ~~continues~~under tothe ~~face~~caption ~~difficult challenges~~“January 6, ~~including~~2005 ~~significant~~Train ~~growth~~Derailment” inincluded ~~imported~~within ~~apparel~~Part I, ~~elimination~~Item 2 of ~~quotas~~this onQuarterly ~~imports~~Report ~~received~~on ~~from~~Form ~~World Trade Organization member countries effective December 31~~10-Q, ~~2004, uncertainties presented by~~ the ~~economic and political environment~~January 6, 2005 ~~imbalance~~train ofderailment ~~global supply~~ and ~~demand~~chlorine ~~for~~spill ~~textile~~have ~~and~~resulted ~~apparel~~in ~~products~~significant ~~and~~disruption ~~financial distress~~to ~~experienced by many of~~ the Company’s business ~~domestic competitors~~operations. InThe ~~addition,~~Company ~~manipulation~~attempted ~~of the~~to ~~Chinese~~maintain ~~yuan~~pre-loss ~~and~~production ~~currencies~~schedules ofand ~~other~~output, but ~~Asian countries relative to~~ the ~~U.S.~~extent ~~dollar~~ and ~~other trade~~consequences ~~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~~damage ~~competitive~~were ~~market~~too ~~conditions.~~great ~~The~~to ~~Company~~continue ~~expects these difficult conditions~~ to ~~continue~~ ~~into~~do ~~the foreseeable future~~so. ~~Recent~~To ~~actions by the U.S. government to impose safeguard~~accommodate ~~relief~~full onremediation ~~certain categories~~ of ~~imported~~its ~~garments from China are expected to provide positive benefits to domestic suppliers of those products~~facilities, ~~and indirectly improve demand and pricing for~~ the Company’s ~~products~~reduced ~~for~~productive ~~a limited period of time~~capacity. ~~Other~~Due ~~pending legislation~~ to ~~impose~~product ~~tariffs on~~flow ~~imports~~and ~~from~~interdependence ~~China~~of tothe ~~offset China~~Company’s ~~undervalued~~manufacturing ~~currency may provide additional relief~~facilities, ~~but~~this ~~there can~~reduction beimpacted ~~no assurance that any~~ operations of ~~these~~several ~~proposals will be implemented, and if so, in a timely manner~~facilities.

~~Operating~~In ~~Income~~October 2005, ~~(Loss).~~the ~~The~~ Company ~~produced~~reduced anthe ~~operating~~capacity ~~income~~ of ~~$5.9 million for~~a ~~the~~major ~~thirteen~~fabric ~~weeks~~finishing ~~ended~~facility ~~May 27~~located in Graniteville, ~~2005~~South ~~compared~~Carolina toby anapproximately ~~operating loss of ($4~~50%.8) ~~million~~Along ~~for~~with ~~the thirteen~~this ~~weeks~~reduction ~~ended May 28, 2004. The improvement~~ in ~~operating income reflected improved unit~~finishing ~~sales~~capacity ~~for the Company’s apparel fabrics~~ and ~~yarns~~corresponding ~~operations,~~reduction ~~and~~in ~~favorable~~internal ~~LIFO~~greige ~~inventory adjustment.~~fabric ~~Raw material costs per unit declined~~requirements, asweaving ~~generally~~production ~~lower market prices~~ of ~~cotton~~ ~~offset~~an ~~higher~~integrated ~~market~~manufacturing ~~prices~~facility ~~for~~located ~~synthetic~~in ~~fibers~~Graniteville ~~and~~was ~~higher~~consolidated ~~costs~~into ~~associated~~two ~~with increased~~other ~~purchases~~weaving ofoperations ~~yarns~~located ~~and greige fabrics following the May 2004 closure of a yarn manufacturing facility~~ in ~~North Carolina and a weaving operation in Georgia~~Graniteville. ~~Conversion costs per unit increased slightly~~Furthermore, ~~due largely to plant disruptions associated~~ with the ~~January 6,~~reduction ~~2005~~in ~~train~~weaving ~~derailment and~~production ~~increases~~and incorresponding ~~chemical~~reduction ~~and~~in ~~energy~~internal ~~costs.~~yarn ~~Additionally~~requirements, the ~~Company~~open-end ~~recorded~~spinning aproduction ~~noncash benefit~~ of ~~$0.4 million~~ ~~to adjust the carrying value of inventories to LIFO basis for the thirteen weeks ended~~an ~~May 27,~~integrated ~~2005~~manufacturing ~~compared~~facility tolocated ain ~~noncash~~Graniteville ~~charge~~was ofshut $2down.~~0 million for the thirteen weeks ended May 28,~~ ~~2004.~~

~~Cost~~In ofconnection ~~goods~~with ~~sold~~these actions, ~~which~~the ~~includes~~Company ~~all~~recorded ~~direct~~facility ~~manufacturing~~restructuring ~~costs, inbound freight~~ charges~~, inspection~~ ~~and~~of ~~warehousing costs and internal transfer costs, decreased 1.6% to~~ $~~135~~4.8 million ~~for~~ during the thirteen weeks ended ~~May~~November 2725, 2005, ~~from~~including non-cash charges of approximately $~~138~~4.05 million ~~for~~to ~~the~~write ~~thirteen~~down ~~weeks~~the ~~ended~~excess ~~May 28, 2004,~~equipment ~~primarily~~created ~~reflecting~~by the ~~impact~~restructuring ofto estimated ~~lower~~net ~~raw~~realizable ~~material~~value ~~costs~~ and ~~favorable~~approximately ~~LIFO~~$300,000 ~~inventory~~to accrue minor disposal and other ~~adjustment~~non-operating costs. ~~Cost~~As ofthe ~~goods~~Company ~~sold~~plans asto asell ~~percentage~~the ofexcess equipment, the estimated net realizable ~~sales~~value ~~decreased~~of toapproximately 86$1.7%8 million was reclassified to assets held for ~~the~~sale ~~thirteen~~in the ~~weeks~~Company’s ~~ended~~condensed ~~May~~consolidated balance sheet at November 2725, 2005. ~~from~~The ~~91.2%~~Company ~~for~~expects to complete the ~~thirteen~~restructuring ~~weeks~~and ~~ended~~sale ~~May 28,~~of ~~2004,~~excess ~~also~~equipment ~~reflecting~~by the ~~impact~~ end of ~~lower~~the ~~raw~~Company’s ~~material~~second quarter of fiscal 2006. At November 25, 2005, approximately $135,000 of minor disposal costs remained unpaid and ~~favorable~~were ~~LIFO~~included ~~inventory~~in ~~adjustment~~other accrued expenses in the Company’s condensed consolidated balance sheet.

~~Selling~~Interest ~~and administrative expenses~~Expense, ~~which~~Net. ~~include~~Net ~~compensation~~interest ~~and~~expense ~~benefits,~~was ~~office expenses, travel and entertainment expenses and computer expenses of all administration and support functions not directly related to the production of product, were~~ $63.78 million for both the thirteen ~~weeks~~ weeks ended ~~May~~November 2725, 2005 and the thirteen weeks ended ~~May~~November 2826, 2004., ~~Selling~~as ~~and~~lower ~~administrative expenses~~average asborrowings aoutstanding ~~percentage~~offset ofslightly ~~net~~higher ~~sales~~interest ~~were~~rates ~~4.3%~~ for the thirteen weeks ended ~~May 27~~November 25, 2005 ~~versus 4~~.~~4% for~~ ~~the thirteen weeks ended May 28, 2004.~~

~~Segment Performance. Apparel fabric sales increased 4.5% to $117.7 million for the~~22 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.

22 Table of Contents

~~Table~~ Discount and Expenses on Sale of ~~Contents~~Receivables. Discount and expenses on sales of receivables were $0.5 million for the thirteen weeks ended November 25, 2005 compared to $0.6 million for the thirteen weeks ended November 26, 2004, reflecting a reduction in average amount of accounts receivable sold under the securitization facility during the thirteen weeks ended November 25, 2005.

~~Yarn~~Provision ~~sales,~~for ~~including~~(benefit ~~intra-company~~of) ~~sales~~Income toTaxes. ~~the~~An ~~Company’s~~income ~~fabric~~tax ~~operations,~~benefit ~~decreased~~of ~~5.2% to~~ ($457.2 1) million was recorded for the thirteen weeks ended ~~May~~November 2725, 2005 ~~from~~compared $47.7 million for the thirteen weeks ended May 28, 2004. Total pounds invoiced increased 9.6%, primarily reflecting the conversion of a greige fabric operation closed in May 2004 into a yarn manufacturing facility. The decrease in yarn requirements and associated internal transfers of yarns to ~~the Company’s apparel fabrics operation following the January 6, 2005 train derailment was largely mitigated by~~ a ~~redirection~~provision ~~of certain~~for yarn production to outside sales. Average invoice price decreased 13.5% as lower raw material costs impacted outside invoice prices as well as intra-company transfer prices. The yarns operation produced operating income oftaxes of $40.91 million for the thirteen weeks ended ~~May~~November 2726, ~~2005 compared~~2004, toreflecting anthe ~~operating~~net ~~income~~loss ofbefore ~~$0.3 million~~income taxes for the thirteen weeks ended ~~May~~November 2825, ~~2004, primarily due to the improved unit volume and reduced raw material costs~~2005.

~~Other sales, which include sales of greige and coated fabrics, initial sales of an apparel~~23 sourcing operation and revenues from the Company’s trucking operation, decreased 50.6% to $8.0 million for the thirteen weeks ended May 27, 2005 from $16.2 million for the thirteen weeks ended May 28, 2004. The decrease in other sales was primarily attributable to the May 2004 shutdown of the greige weaving operation in Georgia and lower unit volume resulting from the January 6, 2005 train derailment, principally in coated fabrics. Operating income from other sales decreased 21.4%, from $1.4 million for the thirteen weeks ended May 28, 2004 to $1.1 million for the thirteen weeks ended May 27, 2005, largely reflecting the lower unit volume resulting from the January 6, 2005 train derailment.

Inter-segmentTable sales decreased 42.9% to $14.4 million for the thirteen weeks ended May 27, 2005 from $25.2 million for the thirteen 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 yarn production to outside sales following the January 6, 2005 train derailment. Contents

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

~~Facility~~Net ~~Restructuring:~~cash Inprovided ~~response~~by tooperating ~~highly~~activities ~~competitive~~was ~~market~~$0.8 million ~~conditions~~for ~~and~~the thirteen weeks ended ~~continued~~November 25, ~~imbalance~~2005. ofPrincipal ~~global~~working ~~supply~~capital ~~and~~changes ~~demand~~included ~~for~~a ~~textile~~$23.9 million ~~and~~decrease ~~apparel~~in ~~products~~accounts receivable, ina ~~May~~$13.4 ~~2004,~~million increase in accounts receivable sold under the securitization facility, ~~Company~~a ~~closed~~$6.5 million increase in inventories, an ~~open-end~~$8.1 million ~~yarn~~increase ~~manufacturing~~in ~~facility~~insurance ~~located~~claims receivable and a $12.7 million decrease in ~~North~~accounts ~~Carolina~~payable and ~~the~~accrued ~~weaving operation~~expenses. ofThe andecrease ~~integrated~~in ~~greige~~accounts receivable ~~fabric~~primarily ~~manufacturing~~reflected ~~facility~~the ~~located~~reduction in ~~Georgia.~~sales ~~These~~for ~~actions to~~the ~~rationalize~~thirteen ~~excess~~weeks ~~manufacturing~~ended ~~capacity~~November 25, 2005 ~~following~~compared to the ~~relocation~~thirteen ofweeks ~~certain~~ended ~~equipment~~August 26, ~~improved~~ ~~capacity~~2005, ~~utilization~~in ofaddition to the ~~Company’s~~net ~~remaining~~increase ~~facilities~~in accounts ~~and~~receivable ~~lowered~~sold ~~costs~~under ~~per~~the ~~unit produced~~securitization facility. NoThe ~~reduction~~increase in ~~net~~accounts ~~sales~~receivable sold ~~resulted~~under ~~from~~the ~~this~~securitization ~~capacity~~facility ~~rationalization.~~reflected ~~Flexibility of~~ the Company’s ~~manufacturing~~funding ~~facilities~~of expenditures to ~~shift~~clean ~~production~~up and ~~from~~restore ~~one~~the ~~product~~damages ~~line~~caused toby ~~another~~the January 6, 2005 train derailment and ~~the Company’s~~chlorine ~~ability~~spill, toas ~~source~~well as ~~additional~~the ~~yarns~~substantial costs and ~~greige~~losses ~~fabrics~~incurred ~~from~~as ~~outside~~a ~~vendors~~result of the significant disruption to ~~increase~~the ~~production~~Company’s operations, in advance of ~~its~~interim ~~finished~~insurance ~~products~~payments. inThe ~~reaction~~increase toin ~~added~~inventories reflected ~~demand~~a ~~were~~slow ~~maintained.~~down ~~Certain~~in ~~equipment was~~shipment ~~relocated~~instructions from ~~these~~apparel ~~two~~fabric ~~operations~~customers compared to ~~other~~projected delivery ~~facilities~~schedules ~~located~~during inthe ~~Alabama,~~thirteen ~~Georgia~~weeks ~~and~~ended ~~South Carolina~~November 25, to2005. ~~retain~~The ~~certain~~increase ~~specialized~~in ~~manufacturing~~insurance claims ~~capabilities~~receivable ~~and~~resulted ~~replace~~from ~~older,~~the ~~less~~incurrence ~~efficient equipment.~~of ~~Other~~clean ~~excess~~up ~~equipment~~and ~~was~~restoration ~~sold~~expenditures of approximately $28.1 million, ~~generating~~offset aby ~~gain~~receipt of ~~approximately~~ $020.90 million. ~~In connection~~in ~~with~~interim ~~these~~payments ~~actions,~~from the Company’s ~~recorded~~insurer, ~~facility~~during ~~restructuring~~the ~~charges~~thirteen weeks ended November 25, ~~and~~2005. ~~other~~The decrease in accounts ~~non-operating~~payable ~~costs,~~and ~~net~~accrued ofexpenses reflected the ~~gain~~reduction onin ~~equipment~~operations ~~sold,~~and ofdecline ~~approximately~~in ~~$2.3 million~~unit volume experienced during the ~~third~~ ~~quarter~~thirteen ofweeks ~~fiscal~~ended ~~2004. At May~~November 2825, ~~2004,~~2005. ~~approximately~~Investing ~~$80,000~~activities ofwere predominantly ~~minor~~equipment ~~property~~purchases ~~disposal~~ and related costs ~~remained~~of ~~unpaid~~$1.2 million and ~~was~~proceeds ~~included~~of in$0.3 million from ~~other~~the ~~accrued~~sale ~~expenses~~of incertain ~~the~~excess ~~Company’s~~equipment. ~~consolidated~~Financing activities included repayment of $1.1 million ~~financial~~of ~~statements~~long-term debt.

~~Interest~~The ~~Expense,~~Company’s ~~Net.~~capital ~~Net~~expenditures, ~~interest~~aggregating ~~expense declined 11.6% to~~ $31.82 million for the thirteen weeks ended ~~May~~ November 2725, 2005, ~~compared~~primarily included purchases to complete routine maintenance projects. Management estimates that capital expenditures for the balance of fiscal 2006 will be approximately $46.30 million. ~~for~~The Company is unable to estimate at this time the ~~thirteen~~amount ~~weeks~~of ~~ended~~equipment ~~May~~damaged in connection with the January 286, 2005 train derailment and chlorine spill that will require ~~2004~~replacement, ~~primarily~~but ~~reflecting~~expects ~~lower~~such ~~average~~expenditures ~~borrowings~~to ~~outstanding~~be ~~following~~funded ~~the~~by ~~Company’s~~insurance ~~exchange~~and ~~of approximately~~third ~~$60 million~~party ofclaims. ~~its~~Any differences ~~2013~~between ~~Notes~~amounts ~~for~~ultimately ~~approximately~~received ~~$42 million~~from ofinsurance ~~its~~and ~~Floating~~third ~~Rate~~parties and losses ~~Notes~~incurred ~~due~~by ~~2012~~the ~~during~~Company ~~fiscal~~may ~~2004~~have a material adverse effect on the Company’s financial condition and future results of operations.

~~Discount~~At ~~and~~November 25, ~~Expenses~~2005, onthe ~~Sale~~Company ofhad ~~Receivables.~~no ~~Discount~~borrowings ~~and~~outstanding ~~expenses~~under onits ~~sales~~revolving line of ~~receivables~~credit, ~~were~~and $027.78 million ~~for~~of ~~the~~borrowing ~~thirteen~~availability ~~weeks~~as ~~ended~~determined ~~May 27,~~using ~~2005~~prescribed ~~compared~~advance ~~to $0.6 million~~rates ~~for~~against ~~the~~qualified ~~thirteen~~inventory ~~weeks ended May 28~~collateral, ~~2004,~~less ~~primarily~~outstanding ~~reflecting~~letters ~~the impact~~ of ~~higher~~credit ~~market interest~~and ~~rates~~required ~~on discounts associated with accounts receivable sold under the securitization~~minimum ~~facility~~availability.

~~Provision~~Covenants ~~for~~of ~~(benefit~~the ~~of)~~revolving ~~Income~~credit ~~Taxes.~~facility Arequire ~~provision~~the ~~for~~Company ~~income~~to ~~taxes~~maintain ofcertain ~~$0.7~~minimum ~~million~~cash ~~was~~flow ~~recorded~~amounts ~~for~~and fixed charge coverage ratios in the ~~thirteen~~event ~~weeks~~that ~~ended~~combined ~~May 27,~~excess ~~2005~~availability under ~~compared~~the torevolving ancredit ~~income~~facility ~~tax~~and ~~benefit~~the ~~of ($3.1)~~receivables securitization facility falls below $20 million for ~~the~~a ~~thirteen~~period of four consecutive weeks. ~~ended~~At ~~May~~November 2825, ~~2004~~2005, ~~reflecting~~combined ~~improved~~excess ~~operating~~availability under ~~income~~these two facilities was approximately $40.3 million.

23 In anticipation of the impact of the Company’s reduced operating results and cash flows and the ongoing funding of the clean up and restoration expenditures related to the January 6, 2005 train derailment and chlorine spill, the Company initiated discussions in November 2005 with The CIT Group to request an amendment of the financial covenants contained in the equipment note and with GE Capital Corporation (“GECC”) to increase availability under the revolving credit facility and the receivables securitization facility as well as to amend the financial covenants contained in those facilities. At November 25, 2005, the balance outstanding on the equipment note was $8.1 million. No balance was outstanding against the revolving credit facility and $30.3 million of investments by GECC under the receivables securitization were outstanding at November 25, 2005.

~~Table~~ On December 28, 2005, the Company executed an amendment to the fixed charge coverage ratio and minimum tangible net worth financial covenants contained in the equipment note. In particular, the fixed charge coverage ratio (defined as the ratio of ~~Contents~~Adjusted EBITDA less dividends for the preceding four fiscal quarters to the sum of consolidated interest expense, discount and expenses on sales of receivables and current portion of long term debt for the same period) was reduced from 1.50 to 1.25 for the first quarter of fiscal 2006, to 1.00 for the second, third and fourth quarters of fiscal 2006, and to 1.25 for the first quarter of fiscal 2007. In addition, the minimum tangible net worth covenant was reduced from $100 million to $85 million for the first quarter of fiscal 2006 and to $75 million for each quarter beginning with the second quarter of fiscal 2006 through the second quarter of fiscal 2007. As amended, the Company is in compliance with these financial covenants. An amendment fee of $30,000 was paid to The CIT Group, the holder of the equipment note.

~~Thirty-nine Weeks Ended May 27, 2005 Compared to Thirty-nine Weeks Ended May 28, 2004~~24

NetTable Sales. Net sales increased 4.8% to $432.0 million for the thirty-nine weeks ended May 27, 2005 from $412.3 million for the thirty-nine weeks ended May 28, 2004. The increase in net sales for the thirty-nine weeks ended May 27, 2005 primarily reflected higher average invoice prices for 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 3.0% for the thirty-nine weeks ended May 27, 2005 compared to the thirty-nine weeks ended May 28, 2004, the Company anticipated a 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 in January and February 2005 during initial recovery efforts, and 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. Contents

The ~~domestic~~Company ~~textile~~is ~~industry~~continuing ~~continues~~ to ~~face~~pursue ~~difficult~~its ~~challenges,~~discussions ~~including~~with ~~significant growth~~GECC into ~~imported~~amend ~~apparel,~~the ~~elimination~~revolving ofcredit facility ~~quotas~~and onthe ~~imports~~receivables ~~received~~securitization ~~from~~facility, ~~World~~and ~~Trade~~has ~~Organization member~~received ~~countries~~preliminary ~~effective~~approval ~~December 31,~~which will ~~2004,~~enhance ~~uncertainties~~availability ~~presented~~under by the ~~economic~~receivables ~~and~~securitization ~~political environment~~facility, ~~imbalance~~eliminate ofthe ~~global~~availability block ~~supply~~under ~~and~~the ~~demand~~revolving ~~for~~credit ~~textile~~facility, ~~and~~decrease ~~apparel~~the ~~products~~minimum ~~and~~excess ~~financial distress~~availability ~~experienced~~threshold byfor applicability ~~many~~ of the ~~Company’s~~financial ~~domestic competitors. In addition~~covenants, ~~manipulation of the Chinese yuan~~ and ~~currencies~~revise ofthe ~~other~~fixed ~~Asian~~charge ~~countries~~coverage ~~relative~~and tominimum ~~the~~EBITDA financial Ucovenants.S. ~~dollar~~If ~~and~~final ~~other trade~~approval ~~distorting~~is ~~practices~~obtained, ~~employed~~the byCompany ~~those~~expects ~~countries~~the ~~create~~amendments ~~competitive~~to ~~advantages which continue~~be toeffective ~~promote~~from the ~~importation~~first quarter of ~~goods~~fiscal ~~from~~2006 ~~those~~through ~~countries by U.S. retailers, exacerbating~~ the ~~already~~ ~~highly~~second ~~competitive~~quarter ~~market~~of ~~conditions~~fiscal 2007. The Company ~~expects~~is ~~these~~in ~~difficult~~compliance ~~conditions~~with ~~to continue into~~ the ~~foreseeable~~current ~~future.~~covenants ~~Recent~~of ~~actions~~these ~~by the U~~facilities.S. ~~government~~However, toat ~~impose~~this ~~safeguard~~time, the ~~relief~~Company oncannot be certain ~~categories~~that ofthe ~~imported~~requested ~~garments~~amendments ~~from China are expected~~ to ~~provide~~the ~~positive benefits~~revolving tocredit ~~domestic~~facility ~~suppliers of those products,~~ and ~~indirectly~~the receivables ~~improve~~securitization ~~demand~~facility ~~and~~will ~~pricing~~be ~~for~~obtained ~~the Company’s~~on ~~products~~favorable ~~for~~terms, aor ~~limited~~at ~~period of time~~all. ~~Other~~Failure ~~pending~~to obtain ~~legislation~~the torequested ~~impose~~amendments ~~tariffs~~could ~~on imports~~result ~~from~~in ~~China~~failure to ~~offset~~comply ~~China’s~~with ~~undervalued~~one ~~currency~~or ~~may~~more ~~provide~~of ~~additional relief, but there~~these ~~can~~covenants bein nofuture ~~assurance~~periods ~~that~~and ~~any~~could ofhave ~~these~~a ~~proposals~~material ~~will~~adverse beeffect ~~implemented,~~on ~~and~~the ifCompany’s ~~so, in a timely manner~~financial condition.

~~Operating~~Covenants ~~Income~~of ~~(Loss).~~the ~~The~~indenture ~~Company~~under ~~produced~~which anthe ~~operating~~2013 ~~income~~Notes were issued, and provisions of ~~$8.0 million~~the ~~for~~senior ~~the~~floating ~~thirty-nine~~rate ~~weeks~~notes ~~ended~~due ~~May 27~~2012, ~~2005~~include, ~~compared~~among other things, certain restrictive covenants applicable to anincurrence ~~operating~~of ~~loss~~additional indebtedness, payment of ~~($10.7)~~dividends, ~~million~~retirement ~~for~~of capital ~~the~~stock ~~thirty-nine~~or ~~weeks~~indebtedness, ~~ended~~purchase ~~May 28~~of investments, ~~2004.~~sales ~~The~~or ~~improvement~~transfers inof ~~operating~~assets, ~~income~~certain consolidations ~~reflected~~or ~~higher average~~mergers ~~invoice~~and ~~prices~~certain ~~for~~transactions ~~the~~with ~~Company’s~~affiliates. ~~apparel~~In ~~fabrics~~general, ~~operations~~the amount of dividends and ~~generally~~capital ~~lower~~stock ~~raw material~~purchases ~~costs.~~may ~~Raw~~not ~~material~~exceed ~~costs~~an ~~per~~amount ~~unit~~equal ~~decreased~~to ~~significantly,~~$20 million ~~reflecting~~plus ~~significant~~50% of ~~decline~~adjusted innet ~~the~~income, ~~market~~or ~~price~~less 100% of ~~cotton,~~adjusted ~~partially~~net ~~offset~~loss, byall ~~higher~~calculated ~~market~~on ~~prices~~an ~~for~~accumulative ~~synthetic~~basis ~~fibers~~subsequent ~~and~~to ~~increased~~the ~~purchases~~date of ~~yarns~~the ~~and~~indenture. ~~greige~~With ~~fabrics~~the ~~following~~accumulative loss reported through the ~~May~~thirteen weeks ended November ~~2004~~25, ~~closure~~2005, the covenants of athe ~~yarn manufacturing~~indenture ~~facility~~prohibit inpayment ~~North~~of ~~Carolina~~dividends and purchases ~~weaving~~of ~~operation~~capital instock ~~Georgia.~~until ~~Conversion~~such ~~costs~~time as sufficient earnings are reported to eliminate the ~~increased~~restriction. ~~significantly~~In addition, ~~primarily~~the ~~reflecting~~Company ~~higher~~is ~~energy~~restricted ~~costs~~from ~~and~~incurring ~~reduced~~additional ~~unit~~indebtedness, ~~cost absorptions~~other ~~associated~~than ~~with~~specified ~~the~~categories ~~January 6~~of permitted debt, ~~2005~~in ~~train~~the ~~derailment.~~event ~~Additionally~~that after giving pro forma effect to the additional indebtedness, the Company’s ~~recorded~~interest acoverage ~~noncash benefit~~ratio of(defined ~~$1.4 million~~as tothe ~~adjust~~ratio of Adjusted EBITDA for the ~~carrying~~preceding ~~value~~four offiscal ~~inventories~~quarters to ~~LIFO~~consolidated ~~basis~~interest expense for the same period) ~~thirty-nine~~is ~~weeks~~less ~~ended~~than ~~May~~2.0. As the Company’s interest coverage ratio at November 2725, 2005 ~~compared~~was toless athan ~~noncash~~2.0, the ~~charge~~Company is generally prohibited from incurring additional indebtedness other than under its existing credit facilities until such interest coverage ratio is in excess of $42.~~5 million~~0, ~~for~~which ~~the~~cannot ~~thirty-nine~~occur ~~weeks~~prior ~~ended~~to ~~May~~the end of the fiscal quarter ending February 28, ~~2004~~2006.

~~Cost~~The ofreceivables ~~goods~~securitization ~~sold,~~facility ~~which~~is ~~includes~~the ~~all~~Company’s ~~direct~~only ~~manufacturing~~off-balance ~~costs,~~sheet ~~inbound freight charges,~~financing ~~inspection~~arrangement. ~~and~~The ~~warehousing~~Company ~~costs~~generates ~~and~~funds ~~internal~~through ~~transfer~~the ~~costs,~~sale ~~increased~~of ~~1.6%~~accounts receivable to ~~$379.2 million for~~Avondale ~~the~~Funding, ~~thirty-nine~~Inc. ~~weeks ended May 27~~(“Funding”), ~~2005~~whose ~~from~~sole ~~$373.4 million~~business ~~for~~purpose is the ~~thirty-nine~~ongoing ~~weeks~~acquisition ~~ended~~and ~~May~~subsequent ~~28,~~resale ~~2004,~~of ~~primarily~~certain ~~reflecting~~undivided ~~the~~interests ~~slight increase~~ in ~~sales~~trade ~~unit~~accounts ~~volume,~~receivable ~~offset~~generated by ~~lower~~the ~~raw~~Company. ~~material~~Funding ~~costs~~retains ~~and~~no ~~favorable~~interest ~~LIFO~~in ~~inventory~~the ~~adjustments.~~investment ~~Cost~~in ofthe ~~goods~~accounts receivable sold asto aGECC, ~~percentage~~and ofhas ~~net~~not ~~sales~~experienced ~~decreased~~any togains ~~87.8%~~or ~~for~~losses on the ~~thirty-nine~~sale ~~weeks~~of ~~ended~~the ~~May 27,~~investment ~~2005~~in ~~from~~accounts 90receivable.6% ~~for~~The ~~the~~Company ~~thirty-nine~~believes ~~weeks~~minimal ~~ended~~counter ~~May 28,~~party ~~2004,~~risk ~~reflecting~~exists ~~the~~due ~~impact~~to ofthe ~~higher~~financial ~~average~~strength ~~invoice~~of ~~prices, lower raw material costs and favorable LIFO inventory adjustments~~GECC.

~~Selling~~Management ~~and~~believes ~~administrative~~that ~~expenses,~~cash ~~which~~generated ~~include~~from ~~compensation and benefits~~operations, ~~office~~anticipated ~~expenses, travel~~insurance and ~~entertainment~~third ~~expenses and computer expenses of all administration and support functions~~party ~~not~~claims ~~directly~~relating ~~related~~ to the ~~production of product, were $19.5~~January ~~million for the thirty-nine weeks ended May 27~~6, 2005 ~~compared~~train toderailment, ~~$19.3 million~~borrowings ~~for~~available under the ~~thirty-nine~~revolving line ~~weeks~~of ~~ended~~credit ~~May 28, 2004. Selling~~ and ~~administrative~~proceeds ~~expenses~~from assales aof ~~percentage~~trade ofreceivables ~~net~~will ~~sales~~be ~~were~~sufficient ~~4.5%~~to ~~for~~meet the Company’s ~~thirty-nine~~working ~~weeks~~capital ~~ended May 27,~~and ~~2005~~capital ~~versus~~expenditure ~~4.7%~~needs for the ~~thirty-nine~~next ~~weeks~~twelve ~~ended May 28, 2004~~months.

2425

~~Segment~~JANUARY ~~Performance. Apparel fabric sales increased 3.7% to $318.~~6 ~~million for the thirty-nine weeks ended May 27~~, 2005 ~~from~~TRAIN ~~$307.3 million for the thirty-nine weeks ended May 28,~~DERAILMENT 2004, reflecting a 1.3% increase in yards invoiced and a 2.4% increase in average invoice price. The apparel fabrics operations produced an operating income of $4.0 million for the thirty-nine weeks ended May 27, 2005 compared to an operating income of $4.7 million for the thirty-nine weeks ended May 28, 2004, largely due to production disruptions and higher associated costs resulting from the January 6, 2005 train derailment.

~~Yarn~~On ~~sales~~January 6, ~~including~~2005, ~~intra-company~~a ~~sales~~Norfolk toSouthern ~~the~~freight ~~Company’s~~train ~~fabric~~collided ~~operations,~~with ~~increased~~a ~~0.9%~~stationary Norfolk toSouthern ~~$136.3 million~~train ~~for~~parked ~~the~~on ~~thirty-nine~~a ~~weeks~~railroad ~~ended~~spur ~~May 27,~~near ~~2005~~the ~~from~~Company’s ~~$135.1 million~~manufacturing ~~for~~and ~~the~~administrative ~~thirty-nine~~facilities ~~weeks~~in ~~ended May 28~~Graniteville, ~~2004.~~South ~~Total pounds invoiced increased 4~~Carolina.~~4%.~~ ~~The~~In ~~decrease~~the inensuing ~~yarn requirements~~derailment, ~~and~~rail ~~associated~~cars ~~internal~~ended ~~transfers~~up ofon ~~yarns to~~ the Company’s ~~apparel~~property ~~fabrics~~and ~~operation following~~a ~~the~~tanker ~~January 6,~~car ~~2005 train derailment~~ was ~~largely~~breached, ~~mitigated~~releasing bytoxic aand ~~redirection~~corrosive ofchlorine ~~this~~gas. Nine ~~production~~individuals, tosix ~~outside~~of ~~yarn~~whom ~~sales.~~were ~~Average~~Company ~~invoice~~associates, ~~price~~were ~~decreased~~killed ~~3.3%~~by aschlorine ~~lower~~gas ~~raw~~inhalation ~~material~~and ~~costs~~many ~~impacted~~others ~~outside~~were ~~invoice~~hospitalized ~~prices~~ as ~~well~~a asresult ~~intra-company~~of ~~transfer~~their ~~prices~~injuries. ~~The~~In ~~yarns operation produced operating income of $12.4 million for the thirty-nine weeks ended May 27~~addition, ~~2005~~Company ~~compared~~facilities tosuffered asubstantial ~~loss~~damage offrom ~~($0.5) million for~~ the ~~thirty-nine~~highly ~~weeks~~corrosive ~~ended~~properties ~~May 28,~~of ~~2004, primarily due to~~ the ~~increase~~ inchlorine ~~unit sales and lower raw material costs~~gas.

~~Other~~Initial ~~sales,~~recovery ~~which~~efforts ~~include~~focused ~~sales~~on ofrestarting ~~greige~~equipment and ~~coated~~production ~~fabrics, initial sales~~ of angoods ~~apparel~~for ~~sourcing~~customers. ~~operation~~These ~~and~~early ~~revenues~~efforts ~~from~~included ~~the~~installation ~~Company’s~~of ~~trucking~~temporary ~~operation~~boilers, ~~decreased~~replacement ~~49.3% to $22.8~~of ~~million~~electrical ~~for~~distribution, ~~the~~compressors ~~thirty-nine~~and ~~weeks ended May 27~~computers, ~~2005~~and ~~from~~repairs ~~$45.0 million~~to ~~for~~damaged ~~the~~facilities ~~thirty-nine weeks~~and ~~ended~~machinery. ~~May 28,~~As ~~2004.~~a ~~The~~result, ~~decrease~~operations in ~~other~~all ~~sales~~facilities ~~was~~and ~~primarily~~shipments ~~attributable to the May 2004 shutdown~~ of ~~the~~finished ~~greige~~goods ~~weaving operation in Georgia and lower unit volume resulting~~ from ~~the~~all of ~~January 6,~~the ~~2005~~Company’s ~~train~~distribution ~~derailment.~~centers ~~Operating~~were ~~income~~resumed ~~from~~in ~~other~~an ~~sales~~orderly ~~decreased 18~~manner.2% However, ~~from $3.3 million for~~ the ~~thirty-nine~~early ~~weeks~~efforts ~~ended May 28, 2004~~ to halt ~~$2.7 million for~~ the ~~thirty-nine~~corrosive ~~weeks ended~~effects ~~May 27,~~of ~~2005, largely reflecting~~ the ~~lower~~chlorine ~~unit~~exposure ~~volume~~were ~~resulting~~not ~~from~~successful ~~the~~and ~~January 6,~~equipment ~~2005~~failures ~~train~~continue ~~derailment~~to be experienced.

~~Inter-segment~~Current ~~sales~~recovery ~~decreased~~efforts, ~~39.0%~~using toprotocols ~~$45.8 million~~developed ~~for~~during the ~~thirty-nine~~past ~~weeks~~several ~~ended~~months ~~May 27~~in concert with the Company’s property insurer, are focused first on the cleaning and restoration of affected ~~2005~~buildings, ~~from~~and ~~$75~~secondly on the cleaning and restoration of affected equipment within those buildings.~~1 million~~ ~~for~~To the ~~thirty-nine~~extent ~~weeks~~that ~~ended~~the ~~May 28,~~protocols ~~2004,~~prove ~~reflecting~~unable to adequately restore the ~~previous~~equipment to ~~capacity~~pre-loss ~~rationalization~~condition, the equipment will be replaced. These actions ~~and~~cannot ~~corresponding~~be ~~reduction~~completed inwithout ~~transfers~~the systematic, temporary shut down of ~~internally~~the ~~produced~~affected equipment. The Company intends to schedule the ~~yarns~~restoration and ~~greige~~replacement ~~fabrics~~process asto ~~well~~minimize as the ~~redirection~~amount of ~~certain~~equipment ~~yarn~~offline ~~production~~at any given time. However, full remediation to ~~outside~~pre-loss ~~sales~~condition will result in continued, significant disruption of ~~following~~the Company’s business operations and in reduction of the ~~January 6,~~Company’s ~~2005~~productive ~~train~~capacities ~~derailment~~and efficiencies.

~~Unallocated~~The ~~amounts~~Company ~~included~~continues into ~~operating~~assess ~~income~~the ~~represent~~extent ~~general~~of losses caused by the January 6, 2005 train derailment and ~~administrative~~chlorine spill but at this time is unable to estimate the full amount of loss. The ~~expenses,~~significant ~~certain~~disruption ~~associate~~to ~~benefits~~the ~~and~~Company’s ~~performance~~business ~~based~~caused ~~incentives,~~by the resulting equipment failures and ongoing ~~adjustments~~recovery ofefforts adversely impacted the Company’s operating results for the thirteen weeks ~~carrying~~ended ~~value~~November 25, of2005. ~~inventories~~The Company will continue to ~~LIFO~~suffer ~~basis,~~losses ~~net~~caused ofby ~~market~~this ~~adjustments~~incident in future periods.

~~Facility~~The ~~Restructuring: In response to highly competitive market conditions and continued imbalance of global supply and demand for textile and apparel products, in May 2004, the~~ Company ~~closed~~maintains anproperty ~~open-end~~damage ~~yarn manufacturing facility located in North Carolina~~ and ~~the~~business ~~weaving operation~~interruption ofinsurance ~~an integrated greige fabric manufacturing facility located in Georgia. These actions~~ to ~~rationalize excess manufacturing capacity, following the relocation of certain equipment,~~provide ~~improved~~reimbursement ~~capacity utilization~~ of ~~the~~losses ~~Company’s~~stemming ~~remaining facilities and lowered costs per unit produced. No reduction in net sales resulted~~ from ~~this~~an ~~capacity~~incident ~~rationalization. Flexibility~~ of ~~the~~ ~~Company’s~~this ~~manufacturing~~nature ~~facilities~~and toexpects ~~shift~~that ~~production~~all ~~from one product line to another and the~~losses ~~Company’s~~incurred ~~ability~~will tobe ~~source~~recovered ~~additional~~through ~~yarns~~insurance and ~~greige~~third ~~fabrics~~party ~~from~~claims. ~~outside~~Any ~~vendors~~differences ~~to increase~~between ~~production~~amounts ofultimately ~~its~~received ~~finished products in reaction to added demand were maintained. Certain equipment was relocated~~ from ~~these~~insurance ~~two operations to other facilities located in Alabama, Georgia~~ and ~~South Carolina~~third toparties ~~retain certain specialized manufacturing capabilities~~ and ~~replace~~losses ~~older,~~incurred ~~less~~by ~~efficient equipment. Other excess equipment was sold, generating a gain of approximately $0.9 million. In connection with these actions,~~ the Company ~~recorded facility restructuring charges, and other~~may ~~non-operating~~have ~~costs,~~a ~~net~~material ofadverse ~~the~~effect ~~gain~~ on ~~equipment sold, of approximately $2.3 million during~~ the ~~third~~ ~~quarter~~Company’s offinancial ~~fiscal~~condition ~~2004.~~and Atfuture ~~May 28,~~results ~~2004, approximately $80,000~~ of ~~minor property disposal~~ ~~costs remained unpaid and was included in other accrued expenses in the Company’s consolidated financial statements~~operations.

~~Interest~~In ~~Expense~~connection with the incident, ~~Net~~the Company incurred payroll continuation costs of approximately $2.8 million ~~Net~~and ~~interest~~various ~~expense~~clean ~~declined~~up, 15restoration and replacement costs of approximately $52.6%5 million toduring fiscal 2005, and additional clean up and restoration costs of approximately $1128.41 million ~~for~~during the ~~thirty-nine~~ thirteen weeks ended ~~May~~November 2725, 2005. ~~compared~~As topart of the ongoing adjustment of its insurance claims, the Company received interim payments from its insurer totaling $1350.50 million during fiscal 2005, and $20.0 million ~~for~~during the ~~thirty-nine~~thirteen weeks ended ~~May 28~~November 25, ~~2004~~2005. The ~~Net~~Company ~~interest~~recorded ~~expense~~an ~~for~~insurance ~~the~~claims ~~thirty-nine~~receivable ~~weeks~~of ~~ended~~$13.4 million ~~May~~at November 2825, ~~2004~~2005, ~~included~~equal to the ~~write-off~~ excess of ~~approximately~~these ~~$400,000~~costs ofincurred ~~unamortized~~over ~~debt~~the ~~issue~~interim insurance payments received. Other costs incurred ~~following~~but ~~execution~~not specifically recoverable under the provisions of athe ~~new~~Company’s ~~senior~~insurance policies, ~~secured~~including ~~revolving~~policy ~~credit~~deductibles, ~~facility~~were ~~with~~expensed ~~GECC~~ in ~~November 2003.~~the Inperiods ~~addition~~incurred, ~~net~~and ~~interest~~amounted ~~expense~~to ~~for~~$956,000 during fiscal 2005 and $676,000 during the ~~thirty-nine~~thirteen weeks ended ~~May~~November 2725, 2005. ~~reflected~~The ~~lower~~Company expects ~~average~~to ~~borrowings~~request ~~outstanding~~additional ~~following~~interim payments from its insurer as the recovery progresses and additional costs are incurred. If the Company’s ~~exchange~~experiences ofdelays ~~approximately~~in ~~$60 million~~collecting ofthe ~~its~~existing insurance ~~2013~~claims ~~Notes~~receivable ~~for~~or ~~approximately~~future ~~$42 million~~amounts due from insurance claims, its financial condition and results of ~~its~~operations ~~Floating~~could ~~Rate~~be ~~Notes~~materially ~~due~~adversely ~~2012~~affected ~~during~~and ~~fiscal~~clean ~~2004~~up, restoration and replacement efforts could be delayed.

~~Discount~~The insurance claims receivable noted above does not include the substantial costs and ~~Expenses~~losses incurred onas ~~Sale~~a result of ~~Receivables~~the significant disruption to the Company’s operations. ~~Discount~~The Company expects to recover these higher operating costs and ~~expenses~~lost onprofits ~~sales~~under ofits business interruption insurance ~~receivables~~coverage ~~were~~and ~~$1.8 million~~by ~~for~~third ~~the~~party ~~thirty-nine~~claims. ~~weeks~~The ~~ended~~Company ~~May 27,~~has ~~2005~~not ~~compared~~recognized gains relating to ~~$1.9 million~~recovery of ~~for~~lost ~~the~~profits, ~~thirty-nine~~involuntary ~~weeks~~conversions ~~ended~~of ~~May 28,~~assets ~~2004~~or recovery of other such losses since the incident, ~~primarily~~as ~~reflecting~~such aamounts ~~net~~are ~~decrease~~contingent inupon ~~accounts~~final settlement with respective insurers and third ~~receivable~~parties. ~~sold~~There ~~under~~can be no assurance that the ~~securitization~~Company ~~facility~~will be able to recover the full amount of these costs and losses from its insurers and third parties.

2526

~~Provision~~See ~~for~~discussion ~~(benefit~~concerning ~~of)~~a ~~Income~~related ~~Taxes.~~lawsuit Anfiled ~~income~~against ~~tax~~Norfolk ~~benefit~~Southern ofunder ~~($1.~~Part I, Item 3), ~~million~~Legal ~~was recorded~~Proceedings, ~~for~~in the ~~thirty~~Company’s Annual Report on Form 10-~~nine~~K ~~weeks~~for the fiscal year ended ~~May 27~~August 26, 2005. ~~compared~~Also, see further discussion of damage to anmanufacturing ~~income~~facilities ~~tax~~and ~~benefit~~resulting rationalization of ~~($8.0) million~~productive ~~for~~capacity under the ~~thirty-nine~~caption ~~weeks~~“Facility ~~ended~~Restructuring” ~~May~~included under Part 28I, ~~2004,~~Item 2 ~~reflecting~~of ~~reduced~~this ~~operating~~Quarterly ~~losses~~Report on Form 10-Q.

~~LIQUIDITY AND CAPITAL RESOURCES~~27

NetTable cash provided by operating activities was $16.5 million for the thirty-nine 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 $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 improved sales trend during the thirteen weeks ended May 27, 2005 compared to the thirteen 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 management needs. The increase in inventories reflects quantity adjustments to support the improved level of sales. The increase in accounts payable and accrued expenses is the result of normal fluctuations in the timing of invoice due dates in relation to the end of the respective reporting period and timing of interest payments on the senior and subordinated notes. Additionally, the increase in accounts payable and accrued expenses includes a $1.6 million increase in net insurance claim advances related to the January 6, 2005 train derailment, resulting from the receipt of $20.0 million in advances from the Company’s insurance carrier, offset by recovery expenditures incurred of approximately $18.4 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. Contents

~~The~~FORWARD ~~Company’s~~LOOKING ~~capital expenditures, aggregating $7.5 million for the thirty-nine weeks ended~~STATEMENTS May 27, 2005, included purchases of approximately $3.1 million to replace equipment damaged as a result of the January 6, 2005 train derailment, with the balance used primarily to complete routine maintenance projects. Management estimates that capital expenditures for the balance of fiscal 2005 will be approximately $3.0 million. The 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.

AtThis ~~May 27~~Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. Statements that are not historical facts, ~~2005~~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 ~~Company~~words ~~had~~“believe,” no“expect,” “anticipate,” ~~borrowings~~“plan,” ~~outstanding~~“estimate” ~~under~~or ~~its~~similar ~~revolving~~expressions. ~~line~~These ofstatements ~~credit~~include, among others, statements regarding our business outlook, anticipated financial and ~~$24.7 million~~operating results, strategies, contingencies, working capital requirements, expected sources of ~~borrowing~~liquidity ~~availability~~(including asanticipated insurance ~~determined~~and ~~using~~third ~~prescribed~~party ~~advance~~claims ~~rates~~arising ~~against~~from the January 6, 2005 train derailment), amendments to ~~qualified~~our ~~inventory~~revolving ~~collateral~~credit facility and our receivables securitization facility, ~~less~~estimated ~~outstanding~~amounts ~~letters~~and timing of ~~credit~~capital expenditures, estimated environmental compliance costs and ~~required~~other ~~minimum~~expenditures, ~~availability~~and expected outcomes of litigation.

~~Covenants~~Forward-looking statements reflect our current expectations and are not guarantees of performance. ~~the~~These ~~revolving~~statements ~~credit~~are ~~facility~~based ~~require~~on ~~the~~our ~~Company~~management’s beliefs and assumptions, which in turn are based on currently available information. Important assumptions relating to ~~maintain~~these forward-looking ~~certain~~statements ~~minimum~~include, among others, assumptions regarding product demand, selling ~~cash~~prices, ~~flow~~raw ~~amounts~~material costs, timing and ~~fixed~~cost ~~charge~~of ~~coverage~~capital ~~ratios~~expenditures, incontinued reimbursement from insurers for losses stemming from the ~~event~~January 6, ~~that~~2005 ~~combined~~train ~~excess~~derailment ~~availability~~and chlorine spill, cost of ~~under~~environmental ~~the~~compliance, ~~revolving~~outcomes ~~credit~~of ~~facility~~pending litigation, competitive conditions and ~~the~~general economic ~~Receivables~~conditions. ~~Securitization~~These ~~Facility~~assumptions ~~falls~~could ~~below~~prove ~~$20~~inaccurate. Forward-looking statements also ~~million~~involve ~~for~~risks aand ~~period~~uncertainties, which could cause actual results to differ materially from those contained in any forward-looking statement. Many of ~~four~~these ~~consecutive~~factors ~~weeks~~are beyond our ability to control or predict. AtSuch ~~May 27~~factors include, ~~2005~~but are not limited to, ~~combined~~all ~~excess~~of ~~availability~~the risks described under the ~~these~~heading ~~two~~“Risk ~~facilities~~Factors” ~~was~~in ~~approximately~~the ~~$55.7~~Company’s Current Report on Form 8-K dated June ~~million.~~20, 2003 and the following:

~~Covenants~~• cyclical and competitive nature of the ~~indenture~~textile ~~under~~industry; ~~which~~• ~~the~~pressures ~~2013~~on ~~Notes~~selling ~~were~~prices ~~issued,~~due ~~and~~to ~~provisions~~competitive ofand ~~the senior~~economic ~~floating~~conditions; ~~rate~~• ~~notes~~deterioration ~~due~~of ~~2012,~~relationships ~~include~~with, ~~among~~or ~~other~~loss ~~things~~of, ~~certain~~significant ~~restrictive~~customers; ~~covenants applicable~~• tostrength ~~issuance~~ of ~~additional~~the ~~debt,~~U.S. ~~payment~~dollar ofversus ~~dividends,~~the ~~retirement~~currencies of ~~capital~~other ~~stock~~textile ~~or indebtedness~~producing countries; • changes in trade policies, ~~purchase~~including oftextile ~~investments~~quotas and tariffs, ~~sales~~and orthe ~~transfers~~elimination of ~~assets~~import quotas under the World Trade Organization effective December 31, ~~certain~~2004; ~~consolidations~~• ~~or mergers~~ability to identify and ~~certain~~respond ~~transactions~~to ~~with~~fashion ~~affiliates.~~trends; In• ~~general~~availability and pricing of cotton and other raw materials; • changes in government policies affecting raw material costs, including the ~~amount~~impact of ~~dividends~~World ~~and~~Trade ~~capital stock~~Organization ~~purchases~~rulings ~~may~~against ~~not~~the ~~exceed~~U.S. anagricultural ~~amount~~support ~~equal~~programs; to• ~~$20 million~~availability ~~plus~~and ~~50%~~desirability of ~~adjusted~~technological ~~net~~advancements; ~~income,~~• ~~or less~~retention ~~100%~~of key management personnel; • continued availability of ~~adjusted~~financial ~~net~~resources; ~~loss~~• changes in environmental, ~~all~~health ~~calculated~~and onsafety anregulations; ~~accumulative~~• ~~basis~~political ~~subsequent~~or military responses to ~~the~~terrorist ~~date~~activities; ~~of the~~and ~~indenture.~~• ~~With~~our ~~the~~ability ~~accumulative~~to ~~loss~~recover ~~reported~~claims ~~through~~from ~~the~~insurance ~~thirteen~~and ~~weeks~~third ~~ended~~parties ~~May 27~~related to the January 6, 2005~~, the~~ ~~covenants~~train ofderailment ~~the~~in ~~indenture~~amounts ~~prohibit~~sufficient ~~further~~to ~~payment~~compensate ofour ~~dividends~~losses and ~~purchases~~to oftimely ~~capital~~reimburse ~~stock until~~our ~~such~~clean ~~time~~up, asrestoration ~~sufficient~~and ~~earnings~~replacement ~~are~~expenditures ~~reported~~without negatively impacting our liquidity; and • our ability to ~~eliminate~~obtain ~~the~~requested ~~restriction~~amendments to our revolving credit facility and receivables securitization facility.

~~The~~You ~~receivables~~should ~~securitization~~not ~~facility~~place isundue ~~the~~reliance ~~Company’s~~on ~~only~~any ~~off~~forward-~~balance~~looking ~~sheet financing arrangement. The Company generates funds through the sale of accounts receivable to Avondale Funding LLC~~statements, ~~whose~~which ~~sole~~are ~~business~~based ~~purpose is the ongoing acquisition and subsequent resale of~~on ~~certain~~current ~~undivided interests in trade accounts receivable generated by the Company~~expectations. ~~Funding~~Further, ~~retains no~~forward-looking ~~interest~~statements inspeak ~~the~~only ~~investment~~as inof the ~~accounts~~date ~~receivable~~they ~~sold~~are ~~to GECC~~made, and ~~has~~we ~~not~~undertake ~~experienced~~no ~~any gains~~obligation orto ~~losses~~update onpublicly ~~the~~any ~~sale~~ of ~~the~~them ~~investment~~ in ~~accounts~~light ~~receivable.~~of ~~The~~new ~~Company~~information ~~believes~~or ~~minimal~~future ~~counter party risk exists due to the financial strength of GECC~~events.

~~Management believes that cash generated from operations, anticipated insurance and third party~~28 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.

26 Table of Contents

~~Table~~OTHER ofDATA — NON-GAAP ~~Contents~~FINANCIAL MEASURE

~~JANUARY~~ The 6Company presents EBITDA and Adjusted EBITDA 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, ~~2005~~(b) provision ~~TRAIN~~for ~~DERAILMENT~~(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 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 floating rate notes due 2012 and senior 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 2006, 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 a fixed charge coverage ratio (defined as Adjusted EBITDA less the sum of capital expenditures, dividends, income tax payments and stock purchases for the preceding four fiscal quarters to the sum of consolidated interest expense, discount and expenses on sales of receivables and current portion of long term debt for the same period) of 1.50, and minimum adjusted EBITDA of $50 million for the preceding four fiscal quarters. See further discussion regarding the Facilities and respective covenants in Note 10 Subsequent Events of the Company’s condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q and under the caption “Liquidity and Capital Resources” in Part I, Item 2 of this Quarterly Report on Form 10-Q.

OnAs ~~January 6,~~defined ~~2005,~~in athe ~~Norfolk~~Facilities, ~~Southern~~discount ~~freight~~and ~~train~~expenses ~~collided with a stationary Norfolk Southern train parked~~ on asales ~~railroad~~of ~~spur~~receivables ~~near~~are ~~the~~to ~~Company’s~~be ~~manufacturing~~treated as ~~and~~interest ~~administrative facilities~~expense in ~~Graniteville,~~calculating ~~South~~the ~~Carolina~~financial covenants. In ~~the ensuing derailment~~addition, ~~rail~~noncash ~~cars~~items ~~ended~~such ~~up on the~~as ~~Company’s~~gains ~~property~~or ~~and~~losses aon ~~tanker~~extinguishment ~~car~~of ~~was breached~~debt, ~~releasing~~restructuring ~~chlorine~~charges ~~gas. Due to the release of the toxic~~ and ~~corrosive~~equipment ~~chlorine gas~~disposals, ~~the surrounding area, including the Company’s adjacent~~and ~~facilities,~~adjustments ~~was evacuated. Nine individuals, six~~ of ~~whom~~carrying ~~were~~value ~~associates~~ of ~~the~~inventories ~~Company,~~to ~~were killed~~LIFO bybasis ~~chlorine~~are ~~gas~~to ~~inhalation~~be ~~and~~excluded ~~many~~in ~~others~~the ~~were~~calculation ~~hospitalized as a result~~ of Adjusted ~~their injuries~~EBITDA.

~~Local,~~Adjusted ~~state~~EBITDA ~~and~~as ~~federal~~calculated ~~authorities~~in ~~restricted~~accordance ~~access~~with to the ~~Company’s~~Facilities ~~facilities~~is ~~near~~not ~~the~~necessarily comparable ~~collision~~to ~~site~~similarly ~~for~~titled ameasures ~~period~~used ofby ~~approximately~~other ~~eight days~~companies. ~~Due~~Adjusted toEBITDA ~~the~~(a) does ~~Company’s~~not ~~product~~represent ~~flow and~~net ~~interdependence~~income of(loss) or ~~the~~cash ~~Company’s~~flow ~~manufacturing~~from ~~facilities~~operations ~~within~~as ~~and~~defined ~~outside~~by ~~the~~generally ~~evacuation~~accepted ~~zone, productive~~accounting ~~capacity representing more than 50% of the Company’s sales was effectively shutdown as a~~principles; ~~result~~(b) is ofnot ~~these~~necessarily ~~events.~~indicative ~~As the chlorine gas dissipated and removal~~ of ~~the~~cash ~~wrecked~~available ~~rail cars began, the Company was allowed~~ to ~~access~~fund ~~portions~~cash ofrequirements; ~~the affected facilities~~ and ~~initiated~~(c) should ~~steps to~~not ~~determine~~be ~~the~~considered ~~extent~~an ofalternative ~~damage~~to ~~and~~operating ~~resume operations. The Company’s computer systems~~income, ~~communication systems,~~net ~~electronic~~income ~~and~~(loss) or ~~electrical~~net ~~systems,~~cash ~~compressors~~provided ~~and other machinery in affected facilities were damaged~~ by ~~corrosion induced by chlorine gas exposure. In addition, boilers servicing~~ ~~finishing~~operating ~~operations~~activities ~~were~~as ~~damaged~~determined byin ~~fire~~accordance ~~because~~with ~~necessary life saving evacuation precluded orderly shutdown of those units~~GAAP.

~~The Company focused all available resources on the recovery effort. Temporary boilers have~~29 been installed, and replacement electrical distribution, compressors and computers are in place and operational. Repairs to textile processing facilities and machines are ongoing. Operations in all facilities and shipments of finished goods from all of the Company’s distribution centers were resumed in an orderly manner, taking place in stages during January and February. Normal levels of production are being generated, 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 may occur over time, with a corresponding reduction in productive efficiency and temporary loss of capacity. The Company also anticipates temporary reduction in productive capacity during the restoration of equipment to fully remediated, pre-loss condition.

TheTable 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. Contents

~~Disruption~~The offollowing ~~the~~table ~~Company’s~~reconciles ~~operations~~Adjusted ~~and~~EBITDA ~~loss~~on ~~of production volume as~~ a ~~result~~consolidated ofbasis ~~this incident~~to ~~negatively impacted results of operations for~~ the ~~thirteen~~line ~~and~~on ~~thirty-nine weeks ended May~~the ~~27, 2005. The~~ Company’s ~~will~~consolidated ~~continue~~statement ~~to suffer losses caused by this incident in future periods. The Company is assessing the extent~~ of ~~losses~~operations ~~that~~entitled ~~will~~net beincome ~~incurred~~(loss) for ~~due to this incident but is unable to estimate at this time~~ the ~~full~~periods ~~amount of loss. The Company expects that all losses incurred will~~presented bein ~~recovered through insurance and third party claims. Any differences between amounts ultimately received from insurance and third parties and losses incurred by~~ the ~~Company~~table ~~may negatively impact~~above: ~~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.


	Thirteen Weeks Ended
	Nov. 26,			Nov. 25,
	2004			2005
Net income (loss)	$	199		$	(11,907	)
Interest expense, net		3,757			3,774
Provision for (benefit of) income taxes		125			(7,135	)
Depreciation and amortization		8,839			7,628


EBITDA		12,920			(7,640	)
Discount and expenses on sale of receivables		581			493
Gain on extinguishment of debt		(162	)		—
Facility restructuring non cash charges		—			4,525
Adjustment of carrying value of inventories to LIFO basis, net of market adjustment		(500	)		—


Adjusted EBITDA	$	12,839		$	(2,622	)


Net cash provided by (used in) operating activities	$	(1,430	)	$	755

Net cash used in investing activities	$	(787	)	$	(943	)

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

2730

~~FORWARD~~Item 3. ~~LOOKING~~Quantitative ~~STATEMENTS~~and Qualitative Disclosures About Market Risk.

~~This~~For ~~Quarterly~~discussion ~~Report~~of oncertain ~~Form~~market ~~10-Q~~risks ~~contains~~related ~~forward-looking~~to ~~statements within~~ the ~~meaning of the federal securities laws. Statements that are not historical facts~~Company, ~~including~~see ~~statements about our beliefs and expectations~~Part II, ~~are forward-looking statements~~Item 7A. ~~Forward-looking statements include~~ ~~statements generally preceded by, followed by or that include the words~~ “~~believe,”~~Quantitative ~~“expect,” “anticipate,” “plan,” “estimate” or similar expressions. These statements include, among others, statements regarding our business outlook, anticipated financial~~ and ~~operating~~Qualitative ~~results,~~Disclosures ~~strategies, contingencies,~~about ~~working~~Market ~~capital~~Risk” ~~requirements,~~in ~~expected~~the ~~sources~~Company’s ofAnnual ~~liquidity~~Report ~~(including~~on ~~anticipated~~Form ~~insurance~~10-K ~~and~~for ~~third~~the ~~party~~fiscal ~~claims~~year ~~arising~~ended ~~from the January~~August 626, 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~~Item 4. ~~These~~Controls ~~statements are based on our management’s beliefs~~ and ~~assumptions, which in turn are based on currently available information~~Procedures. ~~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:

• As ~~cyclical~~required by Securities and ~~competitive~~Exchange ~~nature~~Commission ofrules, the ~~textile~~Company ~~industry;~~has •evaluated ~~pressures~~the effectiveness onof ~~selling~~the ~~prices~~design ~~due to competitive~~ and ~~economic~~operation ~~conditions; • deterioration~~ of ~~relationships~~the ~~with,~~Company’s ordisclosure ~~loss~~controls ~~of,~~and ~~significant~~procedures ~~customers;~~as ~~• strength~~ of the ~~U.S.~~end ~~dollar~~of ~~versus~~ the ~~currencies~~period ofcovered ~~other~~by ~~textile~~this ~~producing~~report. ~~countries;~~This •evaluation ~~changes~~was incarried ~~trade~~out ~~policies,~~under ~~including~~the ~~textile quotas~~ supervision and ~~tariffs,~~with ~~and~~ the ~~elimination~~participation of ~~import quotas under~~ the ~~World~~Company’s ~~Trade Organization effective December 31~~management, ~~2004;~~including •the ~~ability~~Company’s toprincipal ~~identify~~executive officer and ~~respond~~principal tofinancial ~~fashion~~officer. ~~trends;~~Based •on ~~availability~~this ~~and~~evaluation, ~~pricing~~the ofprincipal ~~cotton~~executive officer and ~~other~~principal ~~raw~~financial ~~materials;~~officer •have ~~changes~~concluded inthat ~~government~~the ~~policies~~design ~~affecting~~and ~~raw~~operation ~~material costs, including the impact~~ of ~~World Trade Organization rulings against~~ the ~~U.S.~~Company’s disclosure ~~agricultural~~controls ~~support programs; • availability~~ and ~~desirability~~procedures ofare ~~technological~~effective. ~~advancements;~~There •were ~~retention~~no ofchanges ~~key~~to ~~management~~the ~~personnel;~~Company’s •internal control ~~continued~~over ~~availability of~~ financial ~~resources;~~reporting •during ~~changes~~the inperiod ~~environmental,~~covered ~~health~~by ~~and~~this ~~safety~~quarterly ~~regulations;~~report •that ~~political~~materially affected, or ~~military~~are ~~responses~~reasonably tolikely ~~terrorist activities; and • our ability~~ to ~~recover~~materially ~~claims~~affect, ~~from insurance and third parties related to~~ the ~~January~~Company’s 6,internal ~~2005~~control ~~train~~over financial ~~derailment~~reporting.

~~You~~Disclosure ~~should~~controls ~~not~~and ~~place~~procedures ~~undue~~are ~~reliance~~the onCompany’s ~~any~~controls ~~forward-looking~~and ~~statements,~~other ~~which~~procedures ~~are~~designed ~~based on~~to ~~current~~ensure ~~expectations.~~that ~~Further,~~information ~~forward-looking~~required ~~statements~~to ~~speak~~be ~~only~~disclosed asby ofthe Company in the ~~date~~reports ~~they~~filed or submitted under the Exchange Act are ~~made~~recorded, processed, summarized and reported, within the time periods specified in the Securities and weExchange ~~undertake~~Commission’s norules ~~obligation~~and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ~~update~~ensure ~~publicly~~that ~~any~~information required ofto ~~them~~be disclosed by the Company in ~~light~~the ofreports ~~new~~that ~~information~~the orCompany ~~future~~files under the Exchange ~~events.~~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.

2831

~~OTHER~~AVONDALE ~~DATA - NON-GAAP FINANCIAL MEASURE~~INCORPORATED

~~EBITDA~~PART ~~and~~II ~~Adjusted~~— ~~EBITDA~~OTHER ~~are presented as management believes these measures to be widely~~INFORMATION 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 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 May 27, 2005, the Company was in compliance with each of these financial covenants. Failure to comply with one or more of 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~~Item 1. InLegal addition, 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 excluded in the calculation of Adjusted EBITDAProceedings.

~~Adjusted~~For ~~EBITDA~~discussion asof ~~calculated~~certain inlegal ~~accordance~~proceedings ~~with~~to which the ~~Facilities~~Company is ~~not necessarily comparable to similarly titled measures used by other companies. Adjusted EBITDA (~~a~~) does~~ ~~not~~party, ~~represent~~see ~~net~~Part ~~income~~I, ~~(loss)~~Item or3 ~~cash~~“Legal ~~flow~~Proceedings” ~~from~~in ~~operations~~the asCompany’s ~~defined~~Annual byReport ~~generally~~on ~~accepted~~Form ~~accounting~~10-K ~~principles;~~for the ~~(b) is~~fiscal ~~not~~year ~~necessarily~~ended ~~indicative of cash available to fund cash requirements; and (c)~~August ~~should~~26, ~~not be~~2005. ~~considered~~Other anthan ~~alternative~~as todiscussed ~~operating income~~below, ~~net~~there ~~income~~have ~~(loss) or~~been ~~net cash provided by~~no ~~operating~~significant ~~activities~~changes ~~as determined~~ in ~~accordance~~the ~~with~~matters ~~GAAP~~reported.

29In separate actions initiated by private parties based on the public disclosure of an investigation by the U.S. Department of Justice, which was closed on October 11, 2005 without any action taken against the Company, the Company and various other defendants have been named in a consolidated class action complaint pending in the Middle District of North Carolina. The Company is also a defendant in a class action complaint filed in the Circuit Court or Shelby County, Tennessee. These complaints seek, under federal or state antitrust laws, various damages and injunctive relief related to the pricing and sale of open-end cotton yarns. On February 14, 2005, the Company, along with the other defendants named in the federal lawsuits, moved to dismiss the federal consolidated complaint based on arbitration agreements with certain of the named plaintiffs and moved to stay the court proceedings as to all plaintiffs. On November 9, 2005, the court denied the defendants’ motion and ordered the case to go forward. On December 7, 2005, the Company filed its notice of appeal to the Fourth Circuit Court of Appeals seeking to reverse the trial court’s order. On January 24, 2005, the Company also moved to dismiss the Tennessee state case for failure to state a claim; this motion is not fully briefed. The Company intends to vigorously defend these cases and believes it has a number of defenses available to it. While the outcome of these cases cannot be predicted with certainty, the Company does not believe that the resolution of these cases will have a material adverse effect on the Company’s financial condition or results of operations.

~~Table~~Item 1A. ofRisk ~~Contents~~Factors.

~~The~~Not ~~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:~~ applicable.

	Thirty-Nine Weeks Ended
	May 28,			May 27,
	2004			2005
Net loss	$	(14,387	)	$	(2,295	)
Interest expense, net		13,510			11,405
Benefit of income taxes		(7,975	)		(1,340	)
Depreciation and amortization		28,384			26,028
EBITDA		19,532			33,798
Discount and expenses on sale of receivables		1,874			1,777
Gain on extinguishment of debt		(1,321	)		(162	)
Facility restructuring non cash charges		2,829
Adjustment of carrying value of inventories to LIFO basis, net of market adjustment		4,500			(1,350	)
Adjusted EBITDA	$	27,414		$	34,063
Net cash provided by (used in) operating activities	$	(4,905	)	$	16,520
Net cash provided by (used in) investing activities	$	907		$	(5,857	)
Net cash used in financing activities	$	(5,780	)	$	(3,244	)

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

~~Item 3~~None. ~~Quantitative and Qualitative Disclosures About Market Risk.~~

~~For discussion of certain market risks related to the Company, see Part II,~~ Item 7A3. ~~“Quantitative~~ ~~and~~Defaults ~~Qualitative~~Upon ~~Disclosures~~Senior ~~about Market Risk” in the Company’s Annual Report on Form 10-K for the fiscal year ended August 27, 2004~~Securities.

30None

~~Table~~Item 4. Submission of ~~Contents~~Matters to a Vote of Security Holders.

Item 4. Controls and Procedures.

	(a)		The Company held its Annual Meeting of Shareholders on November 17, 2005.

	(b)		Nine directors were elected at the Annual Meeting to serve until the Annual Meeting of Shareholders in 2006. The names of these Directors are as follows:

AsG. ~~required~~Stephen ~~by Securities and Exchange Commission rules, the Company has evaluated the~~Felker ~~effectiveness~~Jack ~~of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report~~R. ~~This evaluation was carried out under the supervision and with the participation of the Company’s management~~Altherr, ~~including the Company’s principal executive~~Jr. ~~officer~~Dale ~~and principal financial officer~~J. ~~Based on this evaluation, the principal executive officer~~Boden ~~and~~Robert ~~principal~~B. ~~financial officer have concluded that the design and operation of the Company’s~~Calhoun ~~disclosure~~Kenneth ~~controls and procedures are effective~~H. ~~There were no changes to the Company’s internal~~Callaway ~~control~~Harry ~~over~~C. ~~financial reporting during the period covered by this quarterly report that materially~~Howard ~~affected,~~C. orLinden ~~are reasonably likely to materially affect~~Longino, ~~the~~Jr. James ~~Company’s~~A. ~~internal control over~~Rubright ~~financial~~John ~~reporting~~P. Stevens

~~Disclosure controls and procedures are the Company’s controls and other procedures designed to~~32 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.

31 Table of Contents

~~Table~~(c) The Company had outstanding shares of ~~Contents~~Class A Common Stock and Class B Common Stock having an aggregate of 30,972,940 votes entitled to be cast at the Annual Meeting. Of such aggregate outstanding votes, 583,681 votes were not represented at the Annual Meeting, in person or by proxy. The remaining 30,389,259 outstanding votes were represented at the Annual Meeting, in person or by proxy, with all votes cast for all nine directors that were elected at the Annual Meeting. There were no broker non-votes and no votes were withheld.

~~AVONDALE~~Item 5. ~~INCORPORATED~~Other Information.

~~PART II — OTHER INFORMATION~~None

~~Item 1. Legal Proceedings.~~33

ForTable 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. Contents

Item 26. ~~Unregistered Sales of Equity Securities and Use of Proceeds~~Exhibits.

None.

	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).

	4.10		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.

~~Item 3. Defaults Upon Senior Securities.~~34

None Table of Contents

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

~~None~~ 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.

~~Item 5~~AVONDALE INCORPORATED By: /S/ JACK R. ~~Other~~ALTHERR, ~~Information~~JR. Jack R. Altherr, Jr. Vice Chairman and Chief Financial Officer

~~None~~Date: January 9, 2006

~~Item 6. Exhibits.~~35

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.

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

Date: July 8, 2005

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