SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
[X] OF THE SECURITIES EXCHANGE ACT OF 1934 [ ] OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 29, 2002 For the transition period from _____ to ______
Commission File No. 000-50025
-------------------
GUILFORD MILLS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 13-1995928
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6001 WEST MARKET STREET
GREENSBORO, NORTH CAROLINA 27409
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (336) 316-4000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.01 par value
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 twelve (12) months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [ ] No [X]
Aggregate market value of the voting and non-voting common equity (which
consists solely of shares of Old Common Stock) held by non-affiliates of the
registrant at March 28, 2002 (a total of 16,953,379 shares of Old Common
Stock), computed by reference to the average of the last reported bid and ask
price ($0.26) of the Registrant's Old Common Stock on the Over the Counter
Bulletin Board on such date: $4,407,878. (Solely for purposes of the foregoing
calculation, affiliates are considered to be Directors, Officers and greater
than 10% beneficial owners of the Registrant's common equity.) Old Common Stock
refers to the common stock, par value $.02 per share, of the Registrant prior to
the Registrant's emergence from bankruptcy protection, which Old Common has been
cancelled and replaced as of the date of the Registrant's emergence from
bankruptcy protection by New Common Stock, par value $.01 per share, of the
Registrant, as described in further detail in this Annual Report.
Number of shares of the Registrant's New Common Stock, par value $.01 per share,
outstanding as of December 15, 2002: 5,501,053.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [X] No [ ]
IMPORTANT INFORMATION REGARDING THIS FORM 10-K
Readers should consider the following information as they review this Form 10-K:
FRESH START ACCOUNTING
The Company has applied Fresh Start Reporting (as defined herein) to its
consolidated balance sheet as of September 29, 2002 in accordance with Statement
of Position No. 90-7, "Financial Reporting by Entities in Reorganization Under
the Bankruptcy Code" as promulgated by the AICPA. Under Fresh Start Reporting, a
new reporting entity is considered to be created and the recorded amounts of
assets and liabilities are adjusted to reflect their estimated fair values at
the date Fresh Start Reporting is applied. On October 4, 2002, the Debtors
emerged from bankruptcy. For financial reporting purposes, September 29, 2002
was considered the emergence date and the effects of the reorganization have
been reflected in the accompanying financial statements as if the emergence
occurred on that date. As a result of the application of Fresh Start Reporting,
the financial statements of the Successor Company are not comparable to the
Company's financial statements of prior periods.
SAFE HARBOR-FORWARD-LOOKING STATEMENTS
From time to time, the Company may publish forward-looking statements relative
to such matters as anticipated financial performance, business prospects,
technological developments, new products, research and development activities
and similar matters. The Private Securities Litigation Reform Act of 1995
provides a safe harbor for forward-looking statements. Forward-looking
statements are generally accompanied by words such as "estimate," "project,"
"predict," "believe," "expect," "anticipate," "plan," "forecast," "budget,"
"goal" or other words that convey the uncertainty of future events or outcomes.
Various statements contained in this report, including those that express a
belief, expectation or intention, as well as those that are not statements of
historical fact, are, or may be deemed to be, forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Those forward-looking statements appear: in
Item 1 "Business," Item 2 "Properties" and Item 3 "Legal Proceedings" in Part I
of this report; in Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations," Item 7A "Quantitative and Qualitative
Disclosures About Market Risk" and in the Notes to the Company's Consolidated
Financial Statements incorporated into Item 8 of Part II of this report; and
elsewhere in this report. These forward-looking statements speak only as of the
date of this report; the Company disclaims any obligation to update these
statements and cautions against any undue reliance on them. These
forward-looking statements are based on current expectations and assumptions
about future events. While management considers these expectations and
assumptions to be reasonable, they are inherently subject to significant
business, economic, competitive, regulatory and other risks, contingencies and
uncertainties, most of which are difficult to predict and many of which are
beyond the Company's control.
Important factors that could cause actual results to differ materially from
those discussed in such forward-looking statements include:
o general economic factors including, but not limited to, changes in interest
rates, foreign currency translation rates, consumer confidence, trends in
disposable income, changes in consumer demand for goods produced, and
cyclical or other downturns
o the overall level of automotive production and the production of specific
car models
o information and technological advances
o cost and availability of raw materials, labor and natural and other
resources
o domestic and foreign competition
o changes in purchasing practices of automotive customers, including price
pressures and sourcing of products in Asia
o domestic and foreign governmental regulations, trade policies and tariff
structures
o reliance on major customers
o success of marketing, advertising and promotional campaigns
o inability to achieve cost reductions through consolidation and
restructuring
o inability to maintain sufficient liquidity to finance the Company's
operations
FISCAL YEAR END
The Company's fiscal year ends on the Sunday nearest to September 30. Fiscal
year 2002 ended September 29, 2002, fiscal year 2001 ended September 30, 2001
and fiscal year 2000 ended October 1, 2000. Each year includes the results of
operations for 52 weeks.
2
PART I
ITEM 1. BUSINESS
GENERAL
Guilford Mills, Inc. was incorporated under the laws of Delaware in August 1971,
and is the successor by merger to businesses previously conducted since 1946.
Guilford Mills, Inc. and its subsidiaries are referred to as the "Company" or
"Guilford", unless the context indicates otherwise.
Historically, Guilford operated as a diversified textile manufacturer and
participated in a broad range of markets and segments. During 2001 and 2002, the
Company restructured and reorganized its operations, exiting many markets and
concentrating its resources and energies in areas which it believes are stable
and provide opportunities for profitable growth. As a result, Guilford is now
primarily a supplier of automotive textile products. The Company currently
participates in the following segments: Automotive, Industrial and Apparel.
Fabrics produced in the Automotive segment are sold to original equipment
manufacturers ("OEMs") and their suppliers. These fabrics are then used in the
production of seats and headliners of passenger cars, sports utility vehicles,
conversion vans and light and heavy trucks. Guilford is a major producer of
bodycloth and headliner fabric in the United States and Europe and continues to
be the leading headliner fabric manufacturer in both markets. Guilford also has
an automotive fabric operation in Mexico.
Fabrics produced in the Industrial segment are sold for use in a broad range of
specialty applications, including geotextiles, medical and water filtration
devices. The Company's fibers operations are also included in this segment.
The Apparel segment fabrics have historically been used predominantly in women's
intimate apparel, ready-to-wear and swimwear garments. Other end uses included
team sportswear and linings. Since the fourth quarter of fiscal 2000, the
Company has effected the strategic realignment of its apparel operations
resulting in the closing of facilities and a substantial decrease in
manufacturing capacity. Following these restructuring actions, the Company
expects that revenues in its Apparel segment will be approximately 10% of total
revenue in fiscal 2003.
The Company previously participated in the Direct-to-Retail Home Fashions market
and produced window curtains, knit and/or lace comforters, sheets, shower
curtains, pillowcases and bedskirts sold directly to department stores, discount
retailers and catalog houses. The Company also produced upholstery fabrics for
use in office and residential furniture. The Company no longer manufactures and
distributes products in this line of business.
Reference is made to Notes 22 and 23 to the Consolidated Financial Statements
under Item 8 "Financial Statements and Supplementary Data" of this Report, for
certain financial information regarding the Company's segments and the
geographic areas in which the Company conducts business.
BANKRUPTCY REORGANIZATION
On March 5, 2002, the Company reached an agreement in principle with its senior
lenders on a restructuring of the Company's approximately $274 million senior
indebtedness. To conclude the restructuring as quickly as possible, the Company
and its domestic subsidiaries (collectively, the "Debtors") filed voluntary
petitions under Chapter 11 of the U.S. Bankruptcy Code (the "Bankruptcy Code")
with the United States Bankruptcy Court for the Southern District of New York
(the "Bankruptcy Court") on March 13, 2002 (the "Filing Date"). The Chapter 11
cases were jointly administered under case no. 02-40667 (BRL) and, pursuant to
the Bankruptcy Court's approval of the Plan as defined below, were substantively
consolidated for the purpose of consummating the Plan. During the period from
the Filing Date until October 4, 2002 (the "Effective Date"), the Debtors
operated their business as debtors-in-possession under Chapter 11 of the
Bankruptcy Code. The Company's non-U.S. subsidiaries did not file voluntary
petitions and were therefore not Debtors.
As a result of these Chapter 11 filings, actions to collect pre-petition
indebtedness were stayed. In addition, under the Bankruptcy Code, the Debtors
had the right to assume or reject executory contracts, including real estate
leases, employment contracts, personal property leases, service contracts and
other unexpired, executory pre-petition contracts, subject to Bankruptcy Court
approval. Parties affected by these rejections were permitted to file claims
with the Bankruptcy Court in accordance with the Bankruptcy Code. The Company
has estimated that the aggregate amount of the liability that may result from
the filing of claims for certain contracts that were rejected is approximately
$934,000, which the Company has reflected in its consolidated financial
statements.
The Company's amended joint plan of reorganization (the "Plan"), dated August
15, 2002, was confirmed by the Bankruptcy Court on September 20, 2002, and on
October 4, 2002, the Debtors emerged from their bankruptcy proceedings.
3
On or about the Effective Date, the following transactions or events occurred:
1. The Company's senior secured debt of approximately $274 million was
discharged, and was replaced with new senior notes, due October 4, 2005,
totaling $135 million.
2. All of the Company's old common stock was cancelled and replaced with
5,501,053 shares of new common stock. Of these new shares, approximately
90% (4,950,000) were issued to the Company's senior lenders as partial
consideration for the debt reduction described above. The remaining shares
were issued to the holders of the Company's old common stock in a ratio of
one new share for every 34.776338 old shares, subject to rounding.
3. The Company transferred approximately $70 million in cash and property to
trusts and its senior lenders, as partial consideration for the debt
reduction described above.
4. The Company's $30 million Debtor-In-Possession Credit Agreement, dated as
of March 13, 2002, with Wachovia Bank was cancelled and the Company entered
into a $25 million revolving credit facility.
5. The Company began paying in cash approximately $15.6 million in
pre-petition liabilities to its vendors, payment of which had been stayed
during the bankruptcy proceedings.
6. The new members of the board of directors began serving as directors.
FRESH START REPORTING
The Company has applied Fresh Start Reporting to its consolidated balance sheet
as of September 29, 2002 in accordance with Statement of Position No. 90-7,
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code"
("Fresh Start Reporting" or "SOP 90-7") as promulgated by the AICPA. Under Fresh
Start Reporting, a new reporting entity is considered to be created and the
recorded amounts of assets and liabilities are adjusted to reflect their
estimated fair values at the date Fresh Start Reporting is applied. On October
4, 2002, the Debtors emerged from bankruptcy. For financial reporting purposes,
September 29, 2002 was considered the emergence date and the effects of the
reorganization have been reflected in the accompanying financial statements as
if the emergence occurred on that date.
PRODUCT DEVELOPMENT
Working closely with its customers, the Company conducts research and
development in the U.S., U.K., and Mexico. Such activities involve approximately
90 associates, who are primarily responsible for the creation of new fabrics and
styles. Sample machinery and equipment are used to develop new fabrics which can
be placed into production after customer acceptance. Total expenditures for
research and development for fiscal years 2002, 2001 and 2000 were approximately
$7.8 million, $11.5 million and $18.3 million, or 1.5%, 1.8% and 2.2% of sales,
respectively.
The Company has numerous trademarks, trade names, patents and certain licensing
agreements that it uses in connection with the advertising and promotion of its
products across segments. Management believes that the loss or expiration of
such trademarks, trade names and licensing agreements would not have a material
adverse effect on the Company's operations.
WORKING CAPITAL PRACTICES
The Company generally knits, dyes and finishes fabric based on customer orders
and, therefore, significant amounts of inventory are not needed to meet rapid
delivery to the Company's customers or to assure a continuous allotment of goods
from suppliers. Customers are permitted to return or request allowances for
goods that are off-quality. To minimize the credit risk on such accounts and to
obtain larger credit lines for many customers, the Company maintains credit
insurance covering $18.1 million of certain outstanding accounts receivable as
of September 29, 2002. In addition, as of that date, approximately 20% of
accounts receivable were factored without recourse. The Company has the ability
to borrow against such factored receivables (subject to certain limitations),
and did borrow against them during fiscal 2002 and fiscal 2001. The Company
generally takes advantage of discounts offered by vendors.
The Company has a large number of customers. During fiscal 2002, two of the
Company's customers, Johnson Controls, Inc. and Lear Corporation, each of which
are suppliers to OEMs, accounted for 14.1% and 10.3% of the Company's sales,
respectively. No customer accounted for 10% or more of total net sales during
fiscal 2001 or 2000. The Company's net sales reflect substantial indirect sales
to certain OEMs. In the Automotive segment, the Company's direct and indirect
customers generally provide regular release information which the Company uses
to purchase raw materials and plan its manufacturing process.
4
The following data summarizes the Company's 2002 net direct and indirect sales
to OEMs (amounts in thousands of dollars):
--------------------------------------------- ------------------------
Manufacturer Sales
--------------------------------------------- ------------------------
Ford $ 108,797
General Motors 65,724
Honda 32,207
Toyota 29,980
Nissan 26,760
Daimler Chrysler 14,065
All Other 60,552
--------------------------------------------- ------------------------
Total $ 338,085
--------------------------------------------- ------------------------
The backlog of orders believed to be firm as of the end of the current and
preceding fiscal years is not considered by management to be material for an
understanding of the Company's business as most orders are deliverable within a
few weeks.
EXPORT SALES
U.S. export sales, as a percentage of total worldwide sales of the Company, were
approximately 1.9% in fiscal 2002, 4.4% in fiscal 2001 and 7.0% in fiscal 2000.
RAW MATERIALS
Fabrics in all of the Company's segments are constructed primarily of synthetic
yarns: nylon and polyester, the prices of which are generally sensitive to
changes in petroleum prices. In fiscal 2002, the Company internally produced
approximately 15% to 20% of all yarns used. The Company purchases its remaining
yarns from several fiber producers. In fiscal 2002 all yarns were readily
available throughout the year and either were or could be purchased from
numerous sources. Management believes that an adequate supply of yarns is
available to meet the Company's requirements.
The chemicals and dyes used in the dyeing and finishing processes in all
segments are available in large quantities from various suppliers. The foam
backing used in the automotive fabric lamination process is purchased from three
suppliers in the United States and three suppliers in Europe. During fiscal
2002, there was an adequate supply of foam.
ENVIRONMENTAL MATTERS
The production processes, particularly dyeing and finishing operations, involve
the use and discharge of certain chemicals and dyes into the air and sewage
disposal systems. The Company installs pollution control devices as necessary to
meet existing and anticipated national, state and local pollution control
regulations. The Company, including its non-U.S. subsidiaries, does not
anticipate that compliance with national, state, local and other provisions
which have been enacted or adopted regulating the discharge of materials into
the environment, or otherwise relating to the protection of the environment,
will have a material adverse effect upon its capital expenditures, earnings or
competitive position.
Reference is made to Note 16 to the Consolidated Financial Statements under Item
8 "Financial Statements and Supplementary Data" of this document, for
information regarding certain other environmental matters.
COMPETITION
In all of the Company's segments, the principal methods of competition are
pricing, styling and design, customer service and quality. In Direct-to-Retail
Home Fashions, distribution channels were an additional principal method of
competition. The weight of each competitive factor varies by product line. In
the past few years, the Apparel and Direct-to-Retail Home Fashions segments have
been significantly impacted by imports of garments, window curtains and
sheeting.
In the Automotive segment, the Company has two major domestic competitors and
other smaller competitors. Guilford's automotive subsidiary in Europe competes
with seven warp knitters in Europe. It also competes with many producers of
circular knit and flat woven fabrics. The Industrial fabrics market is highly
fragmented, with many textile manufacturers selling products to meet individual
customer specifications. The Company's operations in Mexico compete primarily
with four warp knitters in the Apparel segment and one warp knitter in the
Automotive segment. None of the Company's competitors is deemed to be dominant
with respect to its markets.
5
EMPLOYEES
As of December 15, 2002, the Company employed 3,523 full-time employees
worldwide. Approximately 1,140 employees (including 210 in the U.S., 468 in
Europe and 462 in Mexico) are represented by collective bargaining agreements.
ITEM 2. PROPERTIES
Set forth below is a listing of facilities owned and leased by the Company as of
December 15, 2002:
- ------------------------------------ ----------------------- ----------------------------------- ------------------------
FACILITY LOCATION SEGMENT(S) LEASED/OWNED (A)
- ------------------------------------ ----------------------- ----------------------------------- ------------------------
Sales and Administrative Offices Michigan (1) Automotive Leased
- ------------------------------------ ----------------------- ----------------------------------- ------------------------
North Carolina (2) Apparel, Automotive, Industrial Owned (1), Leased (1)
- ------------------------------------ ----------------------- ----------------------------------- ------------------------
Germany (1) Automotive Leased
- ------------------------------------ ----------------------- ----------------------------------- ------------------------
Spain (1) Automotive Leased
- ------------------------------------ ----------------------- ----------------------------------- ------------------------
Manufacturing North Carolina (5) Automotive, Industrial Owned (3), Leased (2)
- ------------------------------------ ----------------------- ----------------------------------- ------------------------
Pennsylvania (2) Apparel, Automotive, Industrial Owned
- ------------------------------------ ----------------------- ----------------------------------- ------------------------
Mexico (2) Apparel, Automotive, Industrial Owned
- ------------------------------------ ----------------------- ----------------------------------- ------------------------
United Kingdom (3) Automotive Owned
- ------------------------------------ ----------------------- ----------------------------------- ------------------------
Warehouses North Carolina (1) Industrial Leased
- ------------------------------------ ----------------------- ----------------------------------- ------------------------
Mexico (6) Apparel, Automotive, Industrial Leased
- ------------------------------------ ----------------------- ----------------------------------- ------------------------
(A) Substantially all of these properties have been mortgaged to secure the
Company's obligations under its new senior loan agreements. See Note 12 to
the Consolidated Financial Statements under Item 8 "Financial Statements
and Supplementary Data" of this document. Properties listed do not include
assets in the Altamira Trust.
Management believes the facilities and manufacturing equipment are in generally
good condition, well maintained, suitable and adequate for present production,
based on the Company's previously announced restructuring actions. Reference is
made to Note 5 to the Consolidated Financial Statements under Item 8 "Financial
Statements and Supplementary Data" of this document for information regarding
the restructuring actions. Some of the Company's manufacturing facilities are
utilized by more than one segment. Utilization of the facilities fluctuates from
time to time due to the seasonal nature of operations and market conditions. The
Company defines full utilization primarily as five-day, three-shift production.
On that basis, the manufacturing facilities are generally utilized approximately
80%. Fibers spinning generally operates on a continuous seven days per week.
ITEM 3. LEGAL PROCEEDINGS
From time to time and currently, the Company is involved in litigation relating
to claims arising out of its operations in the normal course of business. The
Company maintains insurance coverage against certain potential third-party
claims in amounts that the Company believes to be adequate. As a result of the
bankruptcy proceedings described above, holders of litigation claims that arose
prior to March 13, 2002 retain all rights to proceed against the Company, but
only to the extent and limit of applicable insurance coverage. Such claim
holders have no direct claim against the Company post-confirmation of bankruptcy
including any deductible under an insurance policy or any excess over the policy
coverage limits. Although the final outcome of these legal and environmental
matters cannot be determined, and therefore no assurances can be given, based on
the facts presently known, it is management's opinion that the final resolution
of these matters will not have a material adverse effect on the Company's
financial position or future results of operations. Reference is made to Note 16
to the Consolidated Financial Statements under Item 8 "Financial Statements and
Supplementary Data" of this document for information regarding contingencies.
6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company solicited from creditors and stockholders acceptances or rejections
of the Plan. Pursuant to the Plan, votes were solicited from beneficial owners
of the Old Common Stock, as defined in Item 5 (Class 8), and holders of the
Company's senior secured notes due 2008 (Class 1(b)). Set forth below is a
tabulation of the votes:
- ------------------- ------------------------ ----------------------- ------------------------ --------------------------
Amount Accepting Amount Rejecting Number Accepting Number Rejecting
(% of Amount Voted) (% of Amount Voted) (% of Amount Voted) (% of Amount Voted)
- ------------------- ------------------------ ----------------------- ------------------------ --------------------------
Class 8 (shares) 6,839,492.90 71,885.69 915 73
(99.0%) (1.0%) (92.6%) (7.4%)
Class 1 (A) $264,537,069.91 $ 0 7 0
(100.0%) (0.0%) (100.0%) (0.0%)
- ------------------- ------------------------ ----------------------- ------------------------ --------------------------
(A) Class 1 included both secured bank claims (Class 1(a)) and secured
noteholder claims (Class 1(b)).
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
RECENT SALES OF UNREGISTERED SECURITIES
As described in more detail elsewhere herein, the Company issued on the
Effective Date an aggregate of 5,501,053 shares of common stock, par value $.01
per share (the "New Common Stock"), in connection with the implementation of the
Plan. In addition, upon the Effective Date, all outstanding shares of common
stock, par value $.02 per share (the "Old Common Stock"), were cancelled and
deemed null, void and of no further force or effect. Of the shares of New Common
Stock issued on the Effective Date, 90% was issued to the Company's secured
lenders in partial satisfaction of their prepetition debt of approximately $274
million. See Note 3 to the Consolidated Financial Statements under Item 8
"Financial Statements and Supplementary Data" of this document for a complete
description of the distributions made to the secured lenders in connection with
the Plan. The remaining 10% of the shares of New Common Stock was issued to
persons holding shares of Old Common Stock as of October 3, 2002 (the record
date established for determining distributions of New Common Stock under the
Plan) at a ratio of one share of New Common Stock for every 34.776338 shares of
Old Common Stock, subject to rounding. The issuance of shares of New Common
Stock on the Effective Date was exempt from the registration requirements of the
Securities Act of 1933, as amended, and equivalent provisions of state
securities laws, in reliance upon Section 1145(a) of the Bankruptcy Code. Such
Section generally exempts from registration the issuance of securities if the
following conditions are satisfied: (i) the securities are issued by a debtor
under a plan of reorganization, (ii) the recipients of the securities hold a
claim against, an interest in, or a claim for an administrative expense against
the debtor and (iii) the securities are issued entirely in exchange for the
recipient's claim against or interest in the debtor, or are issued principally
in such exchange and partly for cash or property.
MARKET FOR THE REGISTRANT'S COMMON EQUITY
On December 21, 2001, the Company announced that the New York Stock Exchange
(the "NYSE"), which was the principal market for the Old Common Stock, had
informed the Company that the Company was not in compliance with certain NYSE
continued listing standards. Specifically, the average closing price of the
Company's Old Common Stock, which was traded under the ticker symbol "GFD", had
fallen below $1.00 per share, and the Company's market capitalization had fallen
below $15 million, over a consecutive 30-trading day period.
On February 11, 2002, as a result of the continuation of such non-compliance,
the NYSE suspended trading of the Company's Old Common Stock. Prices for the
Company's Old Common Stock commenced quotation on February 14, 2002 on the
Over-the-Counter Bulletin Board ("OTCBB"), under the ticker symbol "GFDM". Such
over the counter market quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily reflect actual
transactions.
On September 20, 2002, the Bankruptcy Court confirmed the Plan. On September 24,
2002 the Company's ticker symbol was temporarily changed to "GFDMQ". On October
4, 2002, the Company emerged from bankruptcy and issued New Common Stock as
described above. The ticker symbol for the New Common Stock is "GMIL".
7
The following table contains information about the high and low sales price
(during the period that the stock was listed on the NYSE) or bid price (during
the time the Company stock was listed on the OTCBB) per share of the Old Common
Stock before the Plan became effective on October 4, 2002. As the Old Common
Stock was cancelled on October 4, 2002, the prices set forth on the following
table are not relevant to or indicative of the present or future value of the
New Common Stock. On September 29, 2002 there were 626 stockholders of record.
FISCAL 2002
------------------------- ----------------------------------------
QUARTER HIGH LOW
------------------------- ----------------- --- ------------------
First $0.80 $0.32
Second 0.68 0.10
Third 0.28 0.16
Fourth 0.35 0.14
Year $0.80 $0.10
FISCAL 2001
------------------------- ----------------------------------------
QUARTER HIGH LOW
------------------------- ----------------- --- ------------------
First $2.00 $1.00
Second 2.25 1.45
Third 2.44 1.51
Fourth 2.25 0.60
Year $2.44 $0.60
DIVIDEND POLICY
The Company currently does not anticipate paying dividends on its New Common
Stock. The covenants in its senior debt prohibit, without the consent of the
lenders, the payment of dividends on the Company's New Common Stock. Unless the
Company prepays borrowings under its senior debt, it will have borrowings
outstanding under such debt instruments until October 4, 2005. Any determination
to declare or pay dividends out of funds legally available for that purpose
after termination, expiration or modification of the senior secured debt will be
at the discretion of the board of directors and will depend on future earnings,
results of operations, financial condition, capital requirements, future
contractual restrictions and other factors the board of directors deems
relevant. No cash dividends have been declared or paid during the two most
recent fiscal years.
8
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial information is derived from the
Company's Consolidated Financial Statements for periods both before and after
emerging from bankruptcy protection on October 4, 2002. For accounting purposes,
the financial statements reflect the reorganization as if it was consummated on
September 29, 2002. Therefore, the consolidated balance sheet data at September
29, 2002 is labeled "Successor Company," and reflects the effects of the
reorganization and the principles of Fresh Start Reporting. Periods presented
prior to September 29, 2002 have been designated "Predecessor Company." Note 3
to the Consolidated Financial Statements under Item 8 "Financial Statements and
Supplementary Data" of this document, provides a reconciliation of the
Predecessor Company's consolidated balance sheet as of September 29, 2002 to
that of the Successor Company which presents the adjustments that give effect to
the reorganization and Fresh Start Reporting. The data should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operations and the Company's Consolidated Financial Statements and
Notes thereto. Certain amounts have been reclassified in prior years to conform
to the current year presentation.
The consolidated balance sheet information at September 29, 2002 reflects the
financial position after the effect of the Plan and the application of the
principles of Fresh Start Reporting in accordance with the provisions of SOP
90-7. Accordingly, such financial information is not comparable to the
historical financial information before September 29, 2002.
Predecessor Company
----------------------------------------------------------------------------------------
FISCAL Fiscal Fiscal Fiscal Fiscal
(In thousands except per share data) 2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Results of Operations
Net sales $ 513,173 $ 643,519 $ 814,226 $ 856,838 $ 894,534
Net (loss) income (123,313) (160,757) (20,974) 10,230 30,206
Per Share Data
Net (loss) income
Basic (6.66) (8.48) (1.11) 0.47 1.32
Diluted (6.66) (8.48) (1.11) 0.47 1.20
Cash dividends 0.00 0.00 0.33 0.44 0.44
SUCCESSOR
COMPANY Predecessor Company
---------------- -----------------------------------------------------------------------
Balance Sheet Data
Working capital $ 112,805 $ (150,451)(1) $ 213,110 $ 127,660 $ 211,278
Total assets 339,497 541,849 724,212 753,431 794,500
Long-term debt 136,939 262,845 146,137 176,872
1,542(1)
Stockholders' investment 55,000 141,509 309,772 340,945 385,177
(1) Long-term debt of $239,842 was classified as current liabilities in fiscal
2001. See Note 12 to the Consolidated Financial Statements under Item 8
"Financial Statements and Supplementary Data" of this document for further
information regarding classification of the Company's debt.
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") should be read in conjunction with the Consolidated
Financial Statements of the Company for the years ended September 29, 2002,
September 30, 2001 and October 1, 2000 and the related Notes to Consolidated
Financial Statements herein.
BANKRUPTCY REORGANIZATION
On March 5, 2002, the Company reached an agreement in principle with its senior
lenders on a restructuring of the Company's approximately $274 million senior
indebtedness. To conclude the restructuring as quickly as possible, the Debtors
filed voluntary petitions under the Bankruptcy Code with the Bankruptcy Court on
the Filing Date. The Chapter 11 cases were jointly administered under case no.
02-40667 (BRL) and, pursuant to the Bankruptcy Court's approval of the Plan,
were substantively consolidated for the purpose of consummating the Plan. During
the period from the Filing Date until the Effective Date, the Debtors operated
their business as debtors-in-possession under Chapter 11 of the Bankruptcy Code.
The Company's non-U.S. subsidiaries did not file voluntary petitions and were
therefore not Debtors.
As a result of these Chapter 11 filings, actions to collect pre-petition
indebtedness were stayed. In addition, under the Bankruptcy Code, the Debtors
had the right to assume or reject executory contracts, including real estate
leases, employment contracts, personal property leases, service contracts and
other unexpired, executory pre-petition contracts, subject to Bankruptcy Court
approval. Parties affected by these rejections were permitted to file claims
with the Bankruptcy Court in accordance with the Bankruptcy Code. The Company
has estimated that the aggregate amount of the liability that may result from
the filing of claims for certain contracts that were rejected is approximately
$934,000, which the Company has reflected in its consolidated financial
statements.
The Plan was confirmed by the Bankruptcy Court on September 20, 2002, and on
October 4, 2002, the Debtors emerged from their bankruptcy proceedings.
On or about the Effective Date, the following transactions or events occurred:
1. The Company's senior secured debt of approximately $274 million was
discharged, and was replaced with new senior notes, due October 4, 2005,
totaling $135 million.
2. All of the Company's old common stock was cancelled and replaced with
5,501,053 shares of new common stock. Of these new shares, approximately
90% (4,950,000) were issued to the Company's senior lenders as partial
consideration for the debt reduction described above. The remaining shares
were issued to the holders of the Company's old common stock in a ratio of
one new share for every 34.776338 old shares, subject to rounding.
3. The Company transferred approximately $70 million in cash and property to
trusts and its senior lenders, as partial consideration for the debt
reduction described above.
4. The Company's $30 million Debtor-In-Possession Credit Agreement, dated as
of March 13, 2002, with Wachovia Bank was cancelled and the Company entered
into a $25 million revolving credit facility.
5. The Company began paying in cash approximately $15.6 million in
pre-petition liabilities to its vendors, payment of which had been stayed
during the bankruptcy proceedings.
6. The new members of the board of directors began serving as directors.
FRESH START REPORTING
The Company has applied Fresh Start Reporting to its consolidated balance sheet
as of September 29, 2002 in accordance with SOP 90-7. Under Fresh Start
Reporting, a new reporting entity is considered to be created and the recorded
amounts of assets and liabilities are adjusted to reflect their estimated fair
values at the date Fresh Start Reporting is applied. On October 4, 2002, the
Debtors emerged from bankruptcy. For financial reporting purposes, September 29,
2002 was considered the emergence date and the effects of the reorganization
have been reflected in the accompanying financial statements as if it occurred
on that date.
The effect of the reorganization and the implementation of Fresh Start Reporting
on the Company's consolidated balance sheet as of September 29, 2002 are
discussed in detail in "Item 8 - Financial Statements and Supplementary Data".
As a result of the implementation of Fresh Start Reporting, the financial
statements of the Successor Company are not comparable to the Company's
financial statements of prior periods.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires the appropriate
application of certain accounting policies, many of which require the Company to
make estimates and assumptions about future events and their impact on amounts
reported in the financial statements and related notes. Since future events and
10
their impact cannot be determined with certainty, the actual results will
inevitably differ from the estimates. Such differences could be material to the
financial statements. A critical accounting policy is one which is both
important to the portrayal of the Company's financial condition and results and
requires management's most difficult, subjective or complex judgments, often as
a result of the need to make estimates about the effect of matters that are
inherently uncertain. The Company believes that the following accounting
policies fit this definition:
Fresh Start Reporting - Upon emerging from Chapter 11 proceedings, the Company
adopted Fresh Start Reporting in accordance with SOP 90-7. For financial
reporting purposes, the Company was required to value assets and liabilities at
fair value. With the assistance of financial advisors and use of various
valuation methods, including discounted projected cash flow analysis and other
applicable methods, the Company determined a reorganization value of its new
equity of $55 million. The reorganization value was allocated to the assets and
liabilities based upon fair value.
The Company's reorganization value of its new equity of $55 million was
approximately $16 million less than the fair value of the net assets. In
accordance with the purchase method of accounting, the excess of the revalued
net assets over the reorganization value was allocated to reduce proportionately
the value assigned to applicable noncurrent assets. The calculated
reorganization value of the company was based on a variety of estimates and
assumptions about future circumstances and events. Such estimates and
assumptions are inherently subject to significant economic and competitive
uncertainties beyond the Company's control.
The determination of fair value of assets and liabilities required significant
estimates and judgments made by management, particularly as it related to the
fair market value of inventory and property. The fair value of inventory was
estimated based on selling price less costs to complete, cost of disposal and a
reasonable profit margin. The fair value of property was determined based on
current market rates and building values with the assistance of outside
valuation experts. Results may differ under different assumptions or conditions.
Revenue Recognition - Revenue is recognized at the time goods are shipped.
Allowance for sales returns, a component of net sales, is recorded in the period
in which the related sales are recorded. An allowance of $2.5 million has been
recorded as of September 29, 2002 for such returns.
Benefit Plans - The Company has pension costs and obligations which are
dependent on assumptions used by actuaries in calculating such amounts. These
assumptions include discount rates, inflation, salary growth, long-term return
on plan assets, retirement rates, mortality rates and other factors. While the
Company believes that the assumptions used are appropriate, significant
differences in actual experience or significant changes in assumptions would
affect its pension costs and obligations.
Income Taxes - The Company is subject to the tax laws of many jurisdictions. The
Company is subject to tax audits in each of these jurisdictions, which could
result in changes in income taxes. For financial statement purposes, the income
tax benefit of net operating loss and credit carryforwards is recognized as a
deferred tax asset, subject to appropriate valuation allowances when it is
determined that recovery of the deferred tax asset does not meet a "more likely
than not" criteria. The Company evaluates the tax benefits of net operating loss
and credit carryforwards on an ongoing basis. These assumptions could be
affected by changes in future taxable income and its sources and changes in U.S.
and non-U.S. tax laws and rates. The effective tax rate of the Company could be
impacted by changes in these assumptions.
The above listing is not intended to be a comprehensive list of all of the
Company's accounting policies. In many cases, the accounting treatment of a
particular transaction is specifically dictated by generally accepted accounting
principles, with no need for management's judgment in their application. There
are also areas in which management's judgment in selecting any available
alternative would not produce a materially different result. See the audited
Consolidated Financial Statements and notes thereto, which contain accounting
policies and other disclosures required by generally accepted accounting
principles.
GENERAL
Historically, Guilford operated as a diversified textile manufacturer and
participated in a broad range of markets and segments. During 2001 and 2002, the
Company restructured and reorganized its operations, exiting many markets and
concentrating its resources and energies in areas which it believes are stable
and provide opportunities for profitable growth. As a result, Guilford is now
primarily a supplier of automotive products. The Company also participates in
certain industrial and apparel markets.
Fabrics produced in the Automotive segment are sold to OEMs and their suppliers.
These fabrics are then used in the production of seats and headliners of
passenger cars, sports utility vehicles, conversion vans and light and heavy
11
trucks. Guilford is a major producer of bodycloth and headliner fabric in the
United States and Europe and continues to be the leading headliner fabric
manufacturer in both markets. Guilford also has an automotive fabric operation
in Mexico.
Fabrics produced in the Industrial segment are sold for use in a broad range of
specialty applications, including geotextiles, medical and water filtration
devices. The Company's fibers operations are also included in this segment.
The Apparel segment fabrics have historically been used predominantly in women's
intimate apparel, ready-to-wear and swimwear garments. Other end uses included
team sportswear and linings. Since the fourth quarter of fiscal 2000, the
Company has effected a strategic realignment of its apparel operations resulting
in the closing of facilities and a substantial decrease in manufacturing
capacity
The Company previously participated in the Direct-to-Retail Home Fashions market
and produced window curtains, knit and/or lace comforters, sheets, shower
curtains, pillowcases and bedskirts sold directly to department stores, discount
retailers and catalog houses. The Company also produced upholstery fabrics for
use in office and residential furniture. The Company no longer manufactures and
distributes products in this line of business.
Guilford's business has undergone significant changes over the last decade and
especially in the last four years. Guilford had for many years been known
primarily as a producer of fabrics for apparel applications. While Guilford had
diversified into automotive fabrics in the 1970's, sales of apparel fabrics
remained dominant through most of the 1990's. Guilford, along with substantially
all other domestic textile manufacturers, was dramatically impacted by
staggering increases in imported fabrics and garments during the late 1990's.
The Company announced in July 2000 a strategic realignment of its apparel
operations designed to improve the Company's cost structure and increase
profitability. As conditions worsened, the Company expanded and accelerated its
apparel realignment plan in fiscal 2001. By the end of fiscal 2001, the Company
had closed or committed to close all but one of its domestic apparel dyeing and
finishing facilities. The Company further de-emphasized its apparel business in
2002, closing one of its manufacturing facilities in Mexico and another in the
U.S. The Company has continued to participate in the apparel segment, but on a
much smaller scale. Following these restructuring actions, the Company expects
that revenues in its Apparel segment will be approximately 10% of total revenue
in fiscal 2003.
Early in 2002, it became necessary for the Company to exit the Direct-to-Retail
Home Fashions business as a result of continued weakness in sales and declining
margins and the Company announced its intent to sell certain of its assets and
its business. As the impact of all these factors accumulated, it became clear
that the Company needed to undergo a significant financial restructuring, and on
March 13, 2002, the Company and its domestic subsidiaries filed voluntary
petitions under Chapter 11 of the U.S. Bankruptcy Code. The bankruptcy
proceedings are discussed in greater detail elsewhere herein.
The Company currently produces goods in the United States, the United Kingdom
and Mexico. Historically, approximately 80% of the Company's net sales
originated from the United States. Guilford's non-U.S. operations are subject to
fluctuations in foreign exchange rates that affect the Company's operating
results and financial position due to translation gains and losses recognized in
converting such activity to local currency and to U.S. dollars.
The Successor Company expects to continue to allocate its resources primarily to
its Automotive business. This business, because of its highly technical
specifications, research and development requirements and critical logistics, is
believed by management to be less susceptible to competition from foreign
imports than apparel and home fashions fabrics, although there can be no
assurance that such business segment will not be negatively impacted from such
imports in the future.
RESULTS OF OPERATIONS
2002 Compared to 2001 - Consolidated net sales for fiscal 2002 were $513.2
million, a decrease of 20.2% from net sales in fiscal 2001 of $643.5 million.
Sales declines in the Apparel and Direct-to-Retail Home Fashions segments
accounted for the largest amount of the decrease.
The Automotive segment represented 69.1% of consolidated net sales in fiscal
2002, an increase from 51.8% in fiscal 2001. Automotive segment sales were
$354.7 million in fiscal 2002 and increased 6.4% from $333.5 million in fiscal
2001. This primarily resulted from a 10.0% increase in sales by the Company's
U.S. automotive operation. North American car build increased approximately 4.4%
during fiscal 2002 to approximately 16.4 million units compared to car build
during fiscal 2001 of approximately 15.7 million units. The Company also
improved its market share of both headliner and bodycloth fabric. Sales by the
Company's U.K. automotive group grew 7.0% in fiscal 2002 compared to fiscal 2001
12
due to new program rollouts at two major auto manufacturers. Automotive fabric
sales in Mexico decreased by approximately $3.6 million primarily due to the
loss of certain programs during fiscal 2002. Sales in Brazil comprised only 1.3%
of Guilford's Automotive segment sales in fiscal 2002 and declined over 40%
compared to 2001, as a result of the Company's decision to cease production in
Brazil.
Sales in the Apparel segment decreased 61.8% to $72.8 million in fiscal 2002
from $190.6 million in fiscal 2001 and accounted for 14.2% of consolidated net
sales in fiscal 2002. As a result of the continued declines in this segment and
the Predecessor Company's financial difficulties, the Company has substantially
exited the production of apparel fabrics in the United States. The Company has
closed all but one of its apparel facilities in the U.S., and has also closed
its dyeing and finishing plant in Altamira, Mexico. The Company expects apparel
sales to account for approximately 10% of its consolidated sales in fiscal 2003.
Sales in the Industrial segment fell 13.1% to $52.4 million in fiscal 2002 from
$60.3 million in fiscal 2001. The Industrial segment represented 10.2% of
consolidated net sales in fiscal 2002. Growing sales of the Company's industrial
fabrics used in air and water filtration processes have been more than offset by
declines in other industrial products sales, which have been negatively impacted
by the slowing economy.
The Direct-to-Retail Home Fashions segment accounted for 6.5% of consolidated
net sales in fiscal 2002 and sales decreased 43.7% from fiscal 2001. Sales for
fiscal 2002 were $33.3 million versus $59.1 million in fiscal 2001. During
fiscal 2002, the Company decided to exit this business and sold all of its
direct-to-retail operations. As a result, the Company will not operate in this
segment during fiscal 2003.
Gross margin decreased by $4.7 million to $26.1 million or 5.1% of net sales in
fiscal 2002, from $30.8 million, or 4.8% of net sales in fiscal 2001. The
Company has exited the Direct-to-Retail Home Fashions segment and significantly
decreased its participation in the Apparel segment, incurring approximately
$21.2 million for inventory impairment and other charges related to plant
closings. These declines were partially offset by improved margins in both the
U.S. and U.K. automotive businesses, primarily as a result of increased sales.
The industrial fabrics business also improved its margin in fiscal 2002 with
increased capacity utilization.
Selling and administrative expenses decreased 20.5% to $65.4 million, or 12.7%
of sales, in fiscal 2002 from $82.3 million, or 12.8% of sales, in fiscal 2001.
The decrease from fiscal 2001 was due primarily to headcount reductions in
apparel and at corporate. The Company further reduced the number of selling and
administrative employees by more than 70 during fiscal 2002.
As described in greater detail in Note 5 to the Consolidated Financial
Statements, the Company closed its manufacturing facilities in Altamira, Mexico
and in Brazil, and sold its operations in Herkimer, New York and Portugal. The
Company recorded $71.0 million in restructuring costs, consisting primarily of
asset impairments. In addition, the Company recorded $15.5 million of inventory
impairments related to these actions in fiscal 2002. The Company filed for and
subsequently emerged from Chapter 11 bankruptcy protection during fiscal 2002,
as described in greater detail elsewhere herein. The Company retained the
services of attorneys, financial advisers and other professionals to assist with
the bankruptcy process. The Company incurred $14.4 million, primarily related to
fees for those professionals, as reorganization costs during fiscal 2002.
The Company's operating loss was $124.7 million in fiscal 2002 compared to
$122.8 million in fiscal 2001. The change of $1.9 million consisted of selling
and administrative expense decreases of $16.9 million, partially offset by lower
gross margin of $4.7 million in fiscal 2002 and the inclusion in fiscal 2002 of
$14.4 million of reorganization costs. Operating income in the Automotive
segment declined to $6.1 million in fiscal 2002 from $13.2 million in fiscal
2001 as a result of a $4.8 million increase in restructuring expenses in fiscal
2002. Included in such restructuring expenses in fiscal 2002 were losses and
asset impairments associated with the closure and sale of the Company's
automotive operations in Brazil and Portugal, respectively. Operating profit
before such restructuring expenses declined by $2.3 million as a result of price
reductions granted to automotive customers and excess freight costs, offset by
margin on the increased level of sales. The Apparel segment experienced a
significant operating loss of $66.3 million in fiscal 2002 compared to $119.6
million in fiscal 2001. The majority of this loss was the result of the
Company's restructuring actions, as well as decreased sales and soft pricing.
Operating loss in the Direct-to-Retail Home Fashions segment rose to a loss of
$48.2 million in fiscal 2002, compared with a fiscal 2001 loss of $7.9 million
due primarily to $18.8 million of restructuring charges in fiscal 2002. This
decline was due to the lower fabric sales volume, weak pricing, and the effect
of the decision to exit this business. The Industrial segment's operating loss
was $2.0 million in fiscal 2002, compared to the $8.5 million loss in the
previous year. This improvement is the result of the reorganization and
downsizing of the Pine Grove facility, and improved efficiencies in the
Company's fiber operations.
Interest expense decreased $11.2 million to $14.1 million in fiscal 2002 from
$25.3 million in fiscal 2001. In connection with the Company's bankruptcy
reorganization, the Company was not required to pay the interest on the senior
13
debt during the period that the Company was under Chapter 11 protection. The
average per annum short-term interest rate was approximately 8% in fiscal 2002
and 9% in fiscal 2001. In addition, the average debt outstanding decreased to
$281.3 million in fiscal 2002 from $283.3 million in fiscal 2001.
Other income was $3.0 million in fiscal 2002 compared to $0.9 million of expense
in fiscal 2001. Fiscal 2002 included $3.8 million of income related to death
benefits from life insurance policies that the Company received covering
associates who died during the year, partially offset by other losses of $0.8
million. Fiscal 2001 included $2.8 million in equity investee losses, partially
offset by a $1.2 million gain from shares returned to the Company related to a
1996 acquisition of a business and $0.7 million of casualty insurance proceeds.
The effective income tax rate for fiscal 2002 was 11.7% compared to 2.7% for
fiscal 2001. These low effective rates are the result of valuation allowances
recorded in fiscal 2001 and fiscal 2002. These valuation allowances were
necessary because the Company has net operating loss and tax credit
carryforwards that, due to restructuring actions and other factors, could expire
unused. Management's assessment is that the character and nature of future
taxable income may not allow the Company to realize certain tax benefits of net
operating losses and tax credits within the prescribed carryforward period. In
addition, as a result of a change in the tax laws during 2002, the Company
carried back net operating losses to prior years, generating refunds of
approximately $15.8 million in fiscal 2002.
Net loss in fiscal 2002 was $123.3 million or 24.0% of sales, compared to fiscal
2001's net loss of $160.8 million or 25.0% of sales. Loss per share was $6.66
and $8.48 per basic and diluted share for fiscal years 2002 and 2001,
respectively. Average shares outstanding remained essentially unchanged from
fiscal 2001 to fiscal 2002.
2001 Compared to 2000 - Consolidated sales for fiscal 2001 were $643.5 million,
a decrease of 21.0% from fiscal 2000's $814.2 million. Sales declined in all
business segments during fiscal 2001, with the Apparel segment accounting for
the largest amount of the decrease.
The Automotive segment accounted for 51.8% of consolidated net sales in fiscal
2001, an increase from 46.7% in fiscal 2000. Sales were $333.5 million in fiscal
2001 and decreased 12.4% from $380.6 million in fiscal 2000. This primarily
resulted from the decrease in the North American car build in fiscal 2001 to
15.7 million units compared to the car build in fiscal 2000 of a record 17.4
million units. Although Guilford increased its U.S. market share of the
headliner business in fiscal 2001 and continued to penetrate the New Domestics
OEMs bodycloth market, the significantly lower car build resulted in decreased
U.S. automotive segment sales in fiscal 2001 compared to fiscal 2000. Sales by
the Company's U.K. automotive group fell 22.3% in fiscal 2001 compared to fiscal
2000 due to the loss of market share of one of the Company's major customers and
lower build levels of another major customer. Automotive fabric sales in Mexico
increased by more than 11% in fiscal 2001 due to the strength of the car build
during the first half of fiscal 2001. Sales in Brazil more than doubled in
fiscal 2001 but comprised only 2% of Guilford's Automotive segment sales.
Apparel segment sales decreased 34.3% to $190.6 million in fiscal 2001 from
$290.3 million in fiscal 2000 and accounted for 29.6% of consolidated net sales
in fiscal 2001. Sales declined in all major product lines during fiscal 2001, as
U.S. apparel manufacturers were significantly impacted by the slowing economy,
worldwide apparel overcapacity and low-priced imports. Intimate apparel fabric
sales were impacted by the decline of mass-market programs by a major customer
and vertical customers opting to utilize their own manufacturing facilities.
Swimwear fabric sales were also impacted during fiscal 2001 when one of the
Company's largest swimwear customers filed for bankruptcy protection. Fierce
price competition from foreign suppliers caused most of the decline in
ready-to-wear fabric sales.
The Direct-to-Retail Home Fashions segment accounted for 9.2% of consolidated
net sales in fiscal 2001. Sales for fiscal 2001 were $59.1 million versus $63.3
million in fiscal 2000. Sales declined by 6.6% from fiscal 2000 as department
stores and discounters alike saw their sales impacted by the weakened economy.
Sales in the Industrial segment fell 24.6% to $60.3 million in fiscal 2001 from
$80.0 million in fiscal 2000. The Industrial segment represented 9.4% of
consolidated net sales in fiscal 2001. Sales growth in fabrics used in reverse
osmosis filtration, as well as increases in fibers sales, were more than offset
by declines in hook and loop closure sales, which have been negatively impacted
by the slowing economy.
Gross margin decreased by $74.6 million to $30.8 million or 4.8% of net sales in
fiscal 2001, from $105.4 million, or 12.9% of net sales in fiscal 2000. The
single most significant impact to gross margin in fiscal 2001 was the sales
volume decline and corresponding capacity underutilization in all segments which
caused nearly $60 million of the margin decrease. Gross margin was also
negatively impacted in fiscal 2001 by the apparel strategic realignment related
actions which resulted in an aggregate $28.0 million of expenses in fiscal 2001
- - plant closing/run-out inefficiencies of $3.4 million, start-up of the
Company's new facility in Altamira, Mexico of $15.6 million and exited product
line inventory write-downs of $9.0 million. The Company was forced to lower its
sales prices in the Apparel, Direct-to-Retail Home Fashions and fibers
14
businesses during fiscal 2001 as a result of fierce foreign and domestic
competition, customer financial difficulties and a slowing economy. Currency
devaluation in Brazil during fiscal 2001 offset margin improvements from
increased sales volume in Brazil. Manufacturing inefficiencies in the UK
automotive operations during fiscal 2001 were more than offset by improvements
in the U.S. operating facilities. The Company reduced fixed manufacturing
overhead costs by exiting underutilized capacity throughout fiscal 2001, the
fiscal year impact of which was approximately $35 million.
Selling and administrative expenses decreased 15.3% to $82.3 million, or 12.8%
of sales, in fiscal 2001 from $97.2 million, or 11.9% of sales, in fiscal 2000.
The decrease from fiscal 2000 was due primarily to headcount reductions in
apparel and at corporate. The Company reduced the number of selling and
administrative employees by more than 100 during fiscal 2001. The Company also
reduced discretionary expenses such as advertising and travel.
In conjunction with Guilford's strategic realignment of its apparel operations,
the Company closed 4.5 domestic facilities, relocated certain equipment and
severed approximately 1,725 associates during fiscal 2001. The Company closed
two knitting and dyeing and finishing plants in Greensboro, NC and two knitting,
dyeing and finishing plants in Cobleskill, NY. The Company also downsized its
operations in Pine Grove, PA. With these actions, Guilford substantially ceased
apparel and home fashions warp knit fabric production in the U.S. and exited
stretch knit intimate apparel and swimwear fabrics and lace, home fashions lace
fabrics, certain apparel ready-to-wear products and certain home fashion and
other fabric products. The Company transferred production of its circular knit
fabrics from facilities in the U.S. to Altamira, Mexico where it services the
women's ready-to-wear sector. The Pine Grove facility is expected to continue to
produce industrial fabrics. Guilford's facility in Mexico City, which produces
many of the same apparel and home fashions fabrics as previously produced in
Pine Grove, has capacity to service existing customers which cut and sew in
Mexico. The Company has recorded restructuring and impaired asset charges of
$71.4 million in fiscal 2001 and $28.6 million in fiscal 2000 to affect this
strategic realignment.
The Company's operating loss increased to $122.8 million in fiscal 2001 from
$20.4 million in fiscal 2000. The decline of $102.4 million consisted of the
gross margin decrease of $74.6 million and incremental restructuring charges of
$42.8 million offset by selling and administrative expense decreases of $14.9
million. Operating income in the Automotive segment declined to $13.2 million in
fiscal 2001 from $23.2 million in fiscal 2000 as a result of sales decreases in
both the U.S. and the U.K. The Apparel segment experienced a significant
increase in operating loss, to $119.6 million in fiscal 2001 from $38.2 in
fiscal 2000. The majority of this decline was the result of the Company's
restructuring actions, as well as decreased sales and soft pricing. Operating
loss in the Direct-to-Retail Home Fashions segment rose to a loss of $7.9
million in fiscal 2001, compared with a fiscal 2000 loss of $3.1 million. This
decline was due to lower sales volume, impacted by a weak economy. The
Industrial segment's operating loss was $8.5 million, compared to $2.4 million
in the previous year, as a result of lower hook and loop closure sales and weak
internal demand and soft pricing for fiber.
Interest expense increased $6.4 million to $25.3 million in fiscal 2001 million
from $18.9 million in fiscal 2000, as the Company was required to pay
significantly higher interest rates on its amended debt. The average short-term
interest rate was approximately 9% in fiscal 2001 and 8% in fiscal 2000. In
addition, the average debt outstanding increased to $283.3 million in fiscal
2001 from $265.5 million in fiscal 2000.
Other expense was $0.9 million in fiscal 2001 compared to other income of $6.3
million in fiscal 2000. Fiscal 2001 included $2.8 million in equity investee
losses, partially offset by a $1.2 million gain from shares returned to the
Company related to a 1996 acquisition of a business and $0.7 million of
insurance proceeds. Fiscal 2000 other income consisted primarily of $7.1 million
in gains which occurred when two insurance mutuals, of which the Company was a
member as a policyholder, underwent demutualizations and converted to stock
enterprises, and $2.9 million in gains on foreign currency hedging, partially
offset by a $3.7 million loss from an equity investee.
The effective income tax rate for fiscal 2001 was 2.7% versus 36.4% for fiscal
2000. This reduction in the effective rate relates primarily to valuation
allowances recorded during fiscal 2001. These valuation allowances were
necessary because the Company has net operating loss and tax credit
carryforwards that, due to restructuring actions taken during the current year
and other factors, could expire unused. Management's assessment is that the
character and nature of future taxable income may not allow the Company to
realize certain tax benefits of net operating losses and tax credits within the
prescribed carryforward period.
Net loss in fiscal 2001 was $160.8 million or 25.0% of sales. Loss per share was
$8.48 per basic and diluted share, compared to fiscal 2000's net loss of $21.0
million or 2.6% of sales and $1.11 per basic and diluted share. Average shares
outstanding remained essentially unchanged from fiscal 2000 to fiscal 2001.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity for operations and expansion are
funds generated internally and borrowings under its Revolving Credit Facility,
as defined herein. In connection with the reorganization, on October 4, 2002,
the Company entered into a new Credit, Security, Guaranty and Pledge Agreement,
which expires October 4, 2005, with a group of lenders. The new facility
15
provides for a revolving credit loan facility and letters of credit (the
"Revolving Credit Facility") in a maximum principal amount equal to the lesser
of (a) $25 million or (b) a specified borrowing base, which is based upon
eligible receivables and eligible inventory. The Revolving Credit Facility
restricts investments (including investments in non-U.S. subsidiaries), capital
expenditures, acquisitions, dividends and the incurrence of additional debt. The
Revolving Credit Facility contains customary financial covenants relating to
minimum levels of EBITDA, minimum net worth, minimum fixed charge coverage
ratios and a maximum leverage ratio, all as defined therein. The Revolving
Credit Facility is secured by a first lien on substantially all of the assets of
the Company and its domestic subsidiaries, as well as on the stock of all of the
Company's subsidiaries (with the latter, in the case of the Company's non-U.S.
subsidiaries, being limited to 65% of the capital stock) (collectively, the
"Collateral"). Upon the Company's receipt of proceeds from certain transactions,
such as certain asset sales, the Company is required to prepay with such
proceeds any loans then outstanding under the Revolving Credit Facility. The
Company is currently in compliance with all of the restrictions and covenants of
its new Revolving Credit Facility. All loans outstanding under the Revolving
Credit Facility bear interest at the Base Rate plus applicable interest margin
or the LIBOR rate plus an applicable interest margin based upon the Company's
debt to EBITDA ratio. As of October 4, 2002, the Company had no outstanding
borrowings and had approximately $18.8 million available for borrowing under the
Revolving Credit Facility.
The Company's U.K. and Mexico City operations each have separate secured bank
and credit arrangements which are available to finance operations in those
locations. These credit facilities are considered by management to be adequate.
However, the Company's Mexico City operation has incurred operating losses over
the last several quarters. Operating management has taken a number of steps to
improve production and sales in this subsidiary. The current business plan
envisions that the Mexico City operations will return to positive earnings and
cash flow by the end of fiscal 2003. There can be no assurances that such a
turnaround will be achieved. In the event that these operations continue to
generate losses, or should these losses steepen, the Company would need to seek
additional sources of operating capital or financing, or seek other strategic
alternatives for its Mexican operations.
Cash provided by operations totaled $41.7 million in fiscal 2002, compared to
$7.2 million in fiscal 2001. Although the Company sustained significant losses
in fiscal 2002, cash was generated through reductions of receivables and
inventory.
Working capital was $112.8 million at September 29, 2002 compared to negative
working capital of $150.5 million at September 30, 2001. Negative working
capital in fiscal 2001 was the result of the classification of $239.8 million of
long-term debt as current. The increase in fiscal 2002 is due to the effect of
the bankruptcy reorganization, combined with effects of significant reductions
in receivables and inventory, which were the result of lower levels of business
and the restructuring actions described elsewhere herein. In addition, the
Company repaid $27.3 million in short-term borrowings and increased cash and
cash equivalents by $19.4 million during fiscal 2002.
Cash provided by investing activities totaled $36.0 million in fiscal 2002,
compared to cash used in investing activities of $43.7 million in fiscal 2001.
Capital expenditures declined to $7.3 million in fiscal 2002 from $53.2 million
in fiscal 2001. The Company reduced such capital spending in fiscal 2002 in an
effort to preserve cash and capital resources during its financial
reorganization. Proceeds from dispositions of property totaled $29.0 million
during fiscal 2002, compared to $2.7 million in fiscal 2001. Such dispositions
were primarily the sale of idle plant and machinery from closed facilities.
Cash used in financing activities totaled $58.1 million in fiscal 2002, compared
to cash provided by financing activities of $18.4 million in fiscal 2001. The
Company repaid short-term borrowings of $27.3 million during fiscal 2002 and, in
connection with the bankruptcy reorganization, paid $32.3 million in cash to the
Company's senior lenders.
Based upon the ability to generate working capital through its operations, cash
on hand and its new Revolving Credit Facility, the Company believes that it has
the financial resources necessary to fund its capital expenditures, which are
primarily for process improvement, cost reduction and maintenance and are
expected to be approximately $12 million in fiscal 2003, and to implement its
business plan.
INFLATION
The Company believes that the relatively moderate inflation rate of the past
decade has not significantly impacted its operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations,"
which was effective for business combinations initiated after June 30, 2001. The
Company did not acquire any entity subsequent to June 2001, however the
principles of SFAS No. 141 were applied in accordance with Fresh Start
Reporting.
16
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 142 provides for cessation of amortization of goodwill and
other intangible's considered to have indefinite lives and includes requirements
for periodic tests of goodwill and indefinitely lived intangible assets for
impairment. The Company adopted SFAS 142 as part of its Fresh Start Reporting.
The impact of adopting this pronouncement was not material to the Company's
financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 requires that one accounting model
be used for impairments of long-lived assets to be either used in a business or
disposed of by sale, and broadens the presentation of discontinued operations to
encompass more discrete components of a business enterprise than were included
under previous standards. The Company adopted SFAS No.144 as part of its Fresh
Start Reporting. The impact of adopting this pronouncement was not material to
the Company's financial statements.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements 4, 44
and 64, Amendment to FASB Statement 13, and Technical Corrections. One of the
major changes of this statement is to change the accounting for the
classification of gains and losses from the extinguishment of debt. Upon
adoption, the Company will follow APB 30, Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions in
determining whether such extinguishments of debt may be classified as
extraordinary. The provisions of this statement related to the rescission of
FASB Statement 4 shall be applied in fiscal years beginning after May 15, 2002
with early application encouraged. The Company adopted SFAS No. 145 as part of
its Fresh Start Reporting. As a result, the Company has classified gains and
losses from debt restructuring as a component of other expense in the
accompanying consolidated statements of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities", which requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. The provisions of this
Statement are effective for exit or disposal activities that are initiated after
December 31, 2002. The impact of adopting this pronouncement was not material to
the Company's financial statements.
CONTINGENCIES
The Company is involved in various litigation and environmental matters arising
in the ordinary course of business. These are discussed in Note 16 to the
Consolidated Financial Statements which are included herein under Item 8
"Financial Statements and Supplementary Data" of this document. The Company
maintains insurance coverage against certain potential claims in amounts that
the Company believes to be adequate. As a result of the bankruptcy proceedings
described above, holders of litigation claims that arose prior to March 13, 2002
retain all rights to proceed against the Company, but only to the extent and
limit of applicable insurance coverage. Such claim holders have no direct claim
against the Company post-confirmation of bankruptcy including any deductible
under an insurance policy or any excess over the policy coverage limits.
Although the final outcome of these legal and environmental matters cannot be
determined, based on the facts presently known, it is management's opinion that
the final resolution of these matters will not have a material adverse effect on
the Company's financial position or future results of operations.
OUTLOOK
The Company has undergone substantial changes over the last two years,
substantially exiting or downsizing its unprofitable lines of business,
including Direct-to-Retail Home Fashions and Apparel, culminating in the
financial reorganization in bankruptcy. Although this reorganization was
difficult, traumatic and expensive, it resulted in a more viable capital
structure for Guilford.
Guilford is and will continue to be a company focused on serving its primary
customer base, the automotive industry. While participation in the industrial
and apparel markets is important to balance manufacturing capacity and to
generate positive earnings, the Company will dedicate substantially all of its
efforts and resources towards its Automotive segment.
A key component in the continued profitability of the Automotive segment will be
the number of vehicles built by auto manufacturers in Guilford's markets (North
America and Europe). Many analysts project car build rates in both markets to be
relatively flat in 2003 compared with 2002. Many analysts, however, also
acknowledge that many negative factors exist in the economy and the auto markets
which may lead to softness in consumer demand for new vehicles and therefore a
decline in build rates later in 2003 or 2004.
The Company's Automotive segment has historically not seen significant
competitive threats from foreign textile manufacturers. Auto manufacturers and
their suppliers have typically desired their sources of supply locally situated
in order to have greater confidence in the supply chain and to avoid the
complexities and issues associated with importing fabrics or components from
foreign countries. The Company, however, has seen recent indications from one
17
major auto manufacturer that it will import fabric from Asia for one of its
programs that Guilford currently supplies and that it may be considering
expanding this sourcing channel in an effort to reduce its costs. The impact of
the actions to date is not expected to have a material impact on the financial
position or future results of operations. It is currently unclear whether the
significant logistical problems associated with sourcing fabric in Asia can be
economically resolved by the auto manufacturers. If, however, importation of
fabric or components were to become a trend among auto manufacturers, such a
trend could materially adversely impact the Company's business, and the Company
would need to determine how to respond to this new competitive threat.
Because the Company's reorganization in bankruptcy was completed relatively
quickly, Guilford believes it was generally able to preserve its strong customer
and supplier relationships. Guilford is a well-established, technically superior
and essential supplier to the automotive industry with substantial market share,
and expects to continue to grow and improve its profitability in the future.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk for changes in interest rates and foreign
currency exchange rates. Guilford has limited exposure to commodity price risk.
The Company does not hold or issue any financial instruments for trading or
other speculative purposes.
Interest Rate Risk: The Company's obligations under the Revolving Credit
Facility bear interest at floating rates and therefore, the Company is impacted
by changes in prevailing interest rates. However, the senior notes bear fixed
interest coupons and therefore are not subject to the risk of interest rate
fluctuations. A 10% change in market interest rates that affect the Company's
financial instruments would impact earnings during fiscal 2003 by less than $0.1
million before taxes.
Foreign Currency Risk: The Company is subject to foreign currency risk primarily
related to sales and expenditures and other transactions denominated in foreign
currencies and investments in non-U.S. subsidiaries. The Company manages the
exposure related to capital expenditures and other firm commitments denominated
in foreign currencies primarily through forward exchange contracts with
durations of generally less than 12 months. The Company enters into these
contracts in the normal course of business. The changes in market value of such
contracts have a high correlation to the price changes in the currency of the
related hedged transactions. On September 29, 2002, the Company had no
outstanding foreign currency forward contracts.
Effective in fiscal 2000, the Company adopted a policy to manage the exposure
related to sales denominated in foreign currencies through the use of forward
exchange contracts. In fiscal 2000, these forward exchange contracts covered
approximately 75% of the Company's anticipated sales in the Euro, which
represented the majority of the Company's foreign currency sales. The duration
of these contracts was less than 12 months and matched the anticipated
receivable collections. The Company determined that its anticipated sales in the
Euro for fiscal 2001 and 2002 were naturally hedged by anticipated Euro
payables, and therefore did not enter into any forward exchange contracts.
18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
GUILFORD MILLS, INC.
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
As of September 29, 2002 and September 30, 2001 and for the years ended
September 29, 2002, September 30, 2001 and October 1, 2000.
Page
Statement of Management's Responsibility............................ 20
Reports of Independent Public Accountants........................... 21
Consolidated Balance Sheets......................................... 24
Consolidated Statements of Operations............................... 25
Consolidated Statements of Stockholders' Investment................. 26
Consolidated Statements of Cash Flows............................... 27
Notes to the Consolidated Financial Statements...................... 28
Quarterly Information (Unaudited)................................... 53
Schedule II - Analysis of Valuation and Qualifying Accounts......... 54
19
STATEMENT OF MANAGEMENT'S RESPONSIBILITY
----------------------------------------
The management of Guilford Mills, Inc. has the responsibility for the
preparation and integrity of all information contained in the Annual Report. The
accompanying financial statements, including footnotes, have been prepared in
accordance with accounting principles generally accepted in the United States of
America and include amounts that are based on management's best estimates and
judgments.
The Company maintains an internal accounting control system designed to provide
reasonable assurance of the safeguarding and accountability of Company assets,
and to ensure that its financial records provide a reliable basis for the
preparation of financial statements and other data. The system includes an
appropriate division of responsibility and is documented by written policies and
procedures that are communicated to employees with significant roles in the
financial reporting process and updated as necessary. In addition, the
achievement of effective operations is promoted by this system. There are limits
inherent in all systems of internal control based on the recognition that the
cost of such systems should not exceed the benefits derived and the likelihood
of achievement of objectives can be affected by human judgment, failure or
circumvention. Management believes the Company's system of internal controls
provides an appropriate balance.
The control environment is complemented by an internal auditing program,
comprised of internal and external business advisors who independently assess
the effectiveness of the internal controls and report findings to management
throughout the year. The group delivers increased value by aligning with the
business objectives to reduce risk and create cost efficiencies. The Company's
accompanying financial statements have been audited by independent public
accountants who have expressed their opinion with respect to the fairness of the
presentation of these statements in conformity with accounting principles
generally accepted in the United States of America. They objectively and
independently review the performance of management in carrying out its
responsibility for reporting operating results and financial condition. Their
opinion is based on procedures which they believe to be sufficient to provide
reasonable assurances that the financial statements contain no material errors.
Management has made available to the independent public accountants all of the
Company's financial records and related data, as well as the minutes of the
stockholders' and directors' meetings. Recommendations by both internal and
external auditors concerning internal control deficiencies are considered and
are implemented with an appropriate urgency by management.
The Audit Committee of the Board of Directors, which is formally chartered, is
comprised solely of non-employee directors who meet periodically with the
independent auditors, management and the Company's internal auditors to review
the work of each and to evaluate the accounting, auditing, internal controls and
financial reporting matters. The independent auditors and the Company's internal
auditors have free access to the Audit Committee, without the presence of
management.
/s/ David H. Taylor
- ---------------------------
David H. Taylor
Chief Financial Officer
20
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
Stockholders and Board of Directors
Guilford Mills, Inc.:
We have audited the accompanying consolidated balance sheet of Guilford Mills,
Inc. (a Delaware corporation) and subsidiaries as of September 29, 2002
(Successor Company) and the related consolidated statements of operations,
stockholders' investment and cash flows for the year then ended (Predecessor
Company). These financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audit. The
consolidated financial statements of Guilford Mills, Inc. and subsidiaries as of
September 30, 2001 (Predecessor Company) and for each of the two years in the
period then ended (Predecessor Company) were audited by other auditors who have
ceased operations. Those auditors expressed an unqualified opinion on those
Predecessor Company financial statements in their report dated January 14, 2002.
Their report also included an explanatory paragraph that the Predecessor
Company's substantial losses from operations in fiscal 2001 and debt covenant
violations raised substantial doubt about the Predecessor Company's ability to
continue as a going concern.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
As discussed in Notes 1 and 3 to the Consolidated Financial Statements, on March
13, 2002, Guilford Mills, Inc. and its domestic subsidiaries filed voluntary
petitions under Chapter 11 of the U.S. Bankruptcy Code in New York. On September
20, 2002, the Bankruptcy Court entered an order confirming the plan of
reorganization, which became effective on October 4, 2002. The plan was deemed
to be effective as of September 29, 2002 for financial reporting purposes.
Accordingly, the Company changed its basis of financial statement presentation
to reflect the adoption of fresh start reporting in accordance with American
Institute of Certified Public Accountants Statement of Position 90-7, "Financial
Reporting for Entities in Reorganization Under the Bankruptcy Code". As a
result, the consolidated financial statements for periods subsequent to the
reorganization (Successor Company financial statements) are not comparable to
the consolidated financial statements for the prior periods (Predecessor Company
financial statements).
In our opinion, the consolidated balance sheet presents fairly, in all material
respects, the financial position of Guilford Mills, Inc. and subsidiaries as of
September 29, 2002 (Successor Company) in conformity with accounting principles
generally accepted in the United States of America. Further, in our opinion, the
consolidated financial statements for the year ended September 29, 2002
(Predecessor Company) present fairly, in all material respects, the results of
the Predecessor Company's operations and its cash flows for the year ended
September 29, 2002, in conformity with accounting principles generally accepted
in the United States of America.
As discussed above, the consolidated financial statements of Guilford Mills,
Inc. and subsidiaries as of September 30, 2001 and for each of the two years in
the period then ended were audited by other auditors who have ceased operations.
As described in Note 2, the loss from debt restructuring originally presented as
an Extraordinary Item has been presented as a component of Other Expense in the
fiscal 2001 Predecessor Company consolidated financial statements in connection
with the Company's adoption of Statement of Financial Accounting Standards
("SFAS") No. 145, "Rescission of FASB Statements 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections". As described in Note 2, the
fiscal 2001 Predecessor Company consolidated financial statements have been
revised to reclassify certain income tax balances within the consolidated
balance sheet as of September 30, 2001. Also, as described in Note 2, the
Company changed the composition of its reportable segments in fiscal 2002, and
the amounts in the fiscal 2001 and fiscal 2000 (Predecessor Company)
consolidated financial statements relating to reportable segments have been
restated to conform to the fiscal 2002 composition of reportable segments. We
audited the adjustments described in Note 2 that were applied to reclassify the
loss from debt restructuring and to reclassify certain deferred income tax
balances in the fiscal 2001 Predecessor Company consolidated financial
statements, and we audited the adjustments described in Note 2 that were applied
to restate the disclosures for reportable segments reflected in the fiscal 2001
and fiscal 2000 Predecessor Company consolidated financial statements. In our
opinion, such adjustments are appropriate and have been properly applied.
However, we were not engaged to audit, review, or apply any procedures to the
fiscal 2001 and fiscal 2000 Predecessor Company consolidated financial
statements of the Company other than with respect to such adjustments and,
accordingly, we do not express an opinion or any other form of assurance on the
fiscal 2001 or fiscal 2000 Predecessor Company consolidated financial statements
taken as a whole.
21
Our audit was made for the purpose of forming an opinion on the fiscal 2002
consolidated financial statements taken as a whole. The schedule listed in Item
15(a)(2) of this form 10-K is the responsibility of the Company's management and
is presented for the purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. The
information included in this schedule for the year ended September 29, 2002 has
been subjected to the auditing procedures applied in the audit of the basic
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole. The financial statement schedules for the
years ended September 30, 2001 and October 1, 2000 were audited by other
auditors who have ceased operations. Those auditors expressed an unqualified
opinion on the financial statement schedules in their report dated January 14,
2002.
/s/ GRANT THORNTON LLP
----------------------
Greensboro, North Carolina
January 10, 2003
22
THE FOLLOWING IS A COPY OF A REPORT PREVIOUSLY ISSUED BY
ARTHUR ANDERSEN LLP AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Stockholders and Board of Directors of Guilford Mills, Inc.:
We have audited the accompanying consolidated balance sheets of Guilford Mills,
Inc. (a Delaware corporation) and subsidiaries as of September 30, 2001 and
October 1, 2000, and the related consolidated statements of operations,
stockholders' investment and cash flows for each of the three years in the
period ended September 30, 2001. These financial statements and the schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Guilford Mills, Inc. and
subsidiaries as of September 30, 2001 and October 1, 2000 and the results of
their operations and their cash flows for each of the three years in the period
ended September 30, 2001, in conformity with accounting principles generally
accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered substantial losses from
operations, its lenders have waived covenant violations only through January 18,
2002 and it is uncertain if they will continue to waive their right to
accelerate the due date of the debt or enter into a new long-term debt
agreement. These facts raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule titled "Schedule II - Analysis of
Valuation and Qualifying Accounts" in Item 8 is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ ARTHUR ANDERSEN LLP
-----------------------
Arthur Andersen LLP
Greensboro, North Carolina
January 14, 2002
23
GUILFORD MILLS, INC.
CONSOLIDATED BALANCE SHEETS
September 29, 2002 and September 30, 2001
(In thousands)
SUCCESSOR Predecessor
COMPANY Company
- ------------------------------------------------------------------- ----------------- ------------------
2002 2001
- ------------------------------------------------------------------- ----------------- ------------------
ASSETS
Cash and cash equivalents $ 25,074 $ 5,645
Receivables, net 91,614 103,484
Inventories 62,341 90,937
Prepaid income taxes -- 460
Other current assets 13,169 14,212
- ------------------------------------------------------------------- ----------------- ------------------
Total current assets 192,198 214,738
Property, net 114,981 267,833
Altamira trust assets 22,000 --
Other assets 10,318 59,278
- ------------------------------------------------------------------- ----------------- ------------------
Total assets $ 339,497 $ 541,849
- ------------------------------------------------------------------- ----------------- ------------------
LIABILITIES
Short-term borrowings $ 6,199 $ 33,724
Current maturities of long-term debt 417 21,501
Long-term debt classified current -- 239,842
Accounts payable 41,952 41,468
Accrued payroll and related benefits 14,701 12,362
Deferred income taxes 1,210 --
Other current liabilities 14,914 16,292
- ------------------------------------------------------------------- ----------------- ------------------
Total current liabilities 79,393 365,189
- ------------------------------------------------------------------- ----------------- ------------------
Long-term debt 136,939 1,542
Altamira trust notes 22,000 --
Deferred income taxes 1,247 2,617
Other liabilities 44,918 30,992
- ------------------------------------------------------------------- ----------------- ------------------
Total long-term liabilities 205,104 35,151
- ------------------------------------------------------------------- ----------------- ------------------
COMMITMENTS AND CONTINGENCIES (NOTES 16 & 18)
STOCKHOLDERS' INVESTMENT
Old common stock, including capital in excess of par
(32,750,094 shares issued; 18,627,076 outstanding) -- 120,639
New common stock, including capital in excess of par
(5,501,053 shares issued and outstanding) 55,000 --
Retained earnings -- 175,748
Accumulated other comprehensive loss -- (24,548)
Unamortized stock compensation -- (805)
Treasury stock (14,123,018 shares), at cost -- (129,525)
- ------------------------------------------------------------------- ----------------- ------------------
Total stockholders' investment 55,000 141,509
- ------------------------------------------------------------------- ----------------- ------------------
Total liabilities and stockholders' investment $ 339,497 $ 541,849
- ------------------------------------------------------------------- ----------------- ------------------
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
24
GUILFORD MILLS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Fiscal Years ended September 29, 2002, September 30, 2001 and October 1,
2000 (In thousands except per share data)
- -------------------------------------------------------------- --------------------------------------------------------------
PREDECESSOR COMPANY
- -------------------------------------------------------------- --------------------- ------------------- --------------------
2002 2001 2000
- -------------------------------------------------------------- --------------------- ------------------- --------------------
NET SALES $ 513,173 $ 643,519 $ 814,226
- -------------------------------------------------------------- --------------------- ------------------- --------------------
COSTS AND EXPENSES:
Cost of goods sold 487,114 612,707 708,813
Selling and administrative 65,380 82,274 97,192
Reorganization costs 14,350 -- --
Restructuring and impaired asset charges 71,050 71,375 28,643
- -------------------------------------------------------------- --------------------- ------------------- --------------------
637,894 766,356 834,648
- -------------------------------------------------------------- --------------------- ------------------- --------------------
OPERATING LOSS (124,721) (122,837) (20,422)
- -------------------------------------------------------------- --------------------- ------------------- --------------------
OTHER EXPENSE:
Interest expense 14,080 25,292 18,882
Fresh start adjustments 16,393 -- --
(Gain) loss on debt restructuring (20,588) 4,725 --
Impaired investments 8,063 11,451 --
Other expense (income), net (2,963) 911 (6,322)
- -------------------------------------------------------------- --------------------- ------------------- --------------------
14,985 42,379 12,560
- -------------------------------------------------------------- --------------------- ------------------- --------------------
LOSS BEFORE INCOME TAX BENEFIT (139,706) (165,216) (32,982)
INCOME TAX BENEFIT (16,393) (4,459) (12,008)
- -------------------------------------------------------------- --------------------- ------------------- --------------------
NET LOSS $ (123,313) $ (160,757) $ (20,974)
- -------------------------------------------------------------- --------------------- ------------------- --------------------
NET LOSS PER SHARE:
Basic $ (6.66) $ (8.48) $ (1.11)
Diluted (6.66) (8.48) (1.11)
- -------------------------------------------------------------- --------------------- ------------------- --------------------
The accompanying notes to consolidated financial statements are an integral part
of these statements.
25
GUILFORD MILLS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
For the Fiscal Years ended September 29, 2002, September 30, 2001 and October 1,
2000 (In thousands, except per share data)
- -----------------------------------------------------------------------------------------------------------------------------------
Current Year Common Stock Capital in
Comprehensive -------------------- Excess of Retained
Income (Loss) Shares $ Amount Par Earnings
- -----------------------------------------------------------------------------------------------------------------------------------
PREDECESSOR COMPANY BALANCE, OCTOBER 3, 1999 32,750 $ 655 $ 120,532 $ 363,812
Comprehensive income:
Net Loss $ (20,974) (20,974)
Other comprehensive loss, net of tax:
Foreign currency translation loss (5,274)
Pension equity adjustment 389
--------------
--------------
Total comprehensive loss $ (25,859)
--------------
Vesting of shares under the restricted stock
plan, less return of shares to treasury stock
to satisfy recipients' individual tax obligations
Compensation under restricted stock plan
U.S. income tax expense from restricted stock (161)
Cash dividends ($.33 per share) (6,333)
- -----------------------------------------------------------------------------------------------------------------------------------
PREDECESSOR COMPANY BALANCE, OCTOBER 1, 2000 32,750 655 120,371 336,505
Comprehensive income:
Net Loss $ (160,757) (160,757)
Other comprehensive loss, net of tax:
Foreign currency translation loss (2,251)
Pension equity adjustment (5,133)
--------------
--------------
Total comprehensive loss $ (168,141)
--------------
Vesting of shares under the restricted stock
plan, less return of shares to treasury stock
to satisfy recipients' individual tax obligations
Compensation under restricted stock plan
Cancellation of grants of shares under the
restricted stock plan (35)
U.S. income tax expense from restricted stock (123)
Return of shares by former owner
of Hofmann Laces
Issuance of treasury stock to retiring members of
the Board of Directors under phantom stock plan (229)
- -----------------------------------------------------------------------------------------------------------------------------------
PREDECESSOR COMPANY BALANCE, SEPTEMBER 30, 2001 32,750 655 119,984 175,748
Comprehensive income:
Net Loss $ (123,313) (123,313)
Other comprehensive loss, net of tax:
Foreign currency translation gain 3,451
Pension equity adjustment (16,657)
--------------
--------------
Total comprehensive loss $ (136,519)
==============
Cancellation of grants of shares under the
restricted stock plan
Compensation under restricted stock plan
Effect of Reorganization:
Cancellation of old common stock (32,750) (655)
Fresh start adjustments (119,984) (52,435)
New common stock issued in reorganization 5,501 55 54,945
- -----------------------------------------------------------------------------------------------------------------------------------
SUCCESSOR COMPANY BALANCE, SEPTEMBER 29, 2002 5,501 $ 55 $ 54,945 $ -
- -----------------------------------------------------------------------------------------------------------------------------------
** TABLE CONTINUED.... **
- -----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Other Unamortized Treasury Stock
Comprehensive Stock ---------------------- Total
Loss C