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FORM 10-Q

Commission File Number 000-50025

GUILFORD MILLS, INC.

6001 West Market Street, Greensboro, N.C. 27409

Registrant’s telephone number, including area code — (336) 316-4000

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

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).   Yes o   No x

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 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 o

Number of shares of common stock outstanding
at August 5, 2003 – 5,501,053

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GUILFORD MILLS, INC.
Form 10-Q
June 29, 2003

INDEX

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PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

Guilford Mills, Inc.

See accompanying notes to condensed consolidated financial statements.

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Guilford Mills, Inc.

See accompanying notes to condensed consolidated financial statements.

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Guilford Mills, Inc.

See accompanying notes to condensed consolidated financial statements.

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GUILFORD MILLS, INC.

1. The Company

Historically, Guilford Mills, Inc. (“Guilford” or the “Company”) 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.

2. Basis of Presentation

The condensed consolidated financial statements included herein have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. The Condensed Consolidated Balance Sheet as of September 29, 2002 has been taken from the audited financial statements as of that date. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s latest annual report on Form 10-K for the year ended September 29, 2002.

The condensed consolidated financial statements included herein reflect all adjustments (none of which is other than normal recurring accruals) which are, in the opinion of management, necessary for a fair presentation of the information included. For comparative purposes, certain amounts for fiscal 2002 have been reclassified to conform to the fiscal 2003 presentation.

Results for any portion of a year are not necessarily indicative of the results to be expected for a full fiscal year due to the seasonal aspects of the automotive and textile industries.

3. Fiscal Period End

The Company’s fiscal year ends on the Sunday nearest to September 30. The Company’s third quarter in fiscal 2003 and fiscal 2002 ended on June 29, 2003 and June 30, 2002, respectively. Each of the quarters is comprised of 13 weeks.

4. Reorganization and Fresh-Start Reporting

Reorganization — On March 5, 2002, the Company reached an agreement in principle with its senior lenders on a restructuring of the Company’s approximately $274,000,000 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 businesses 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 estimated the aggregate amount of the liability that may result from the filing of claims for certain contracts that were rejected and reflected such amount in its fiscal 2002 financial statements.

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The Company’s amended joint plan of reorganization dated August 15, 2002 (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 secured 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 shares) 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 — Upon emergence from Chapter 11, the Company adopted the provisions of 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. Accordingly, all assets and liabilities have been restated to reflect their reorganization value, which approximates their fair value at the Effective Date. The Company recorded the effects of the Plan and Fresh Start Reporting as of September 29, 2002. The consolidated balance sheets and related information at September 29, 2002 and financial statements as of June 29, 2003 and for the thirteen weeks and thirty-nine weeks then ended are referred to as Successor Company, and reflect the effects of the reorganization and the principles of Fresh Start Reporting. Financial statement amounts prior to September 29, 2002 reflect operations prior to the Company’s emergence from Chapter 11 proceedings, and are referred to as Predecessor Company.

In adopting the requirements of Fresh Start Reporting as of September 29, 2002, the Company was required to value its assets and liabilities at fair value as of September 29, 2002. The reorganization value of the Company’s new common equity of approximately $55,000,000 was determined based on an independent valuation by financial specialists after consideration of several factors and by using various valuation methods including appraisals, cash flow multiples, price/earnings ratios and other relevant industry information. The reorganization value of the Company has been allocated to various asset categories pursuant to Fresh Start Reporting principles.

Altamira Trust — Pursuant to the Plan, on the Effective Date, the Company transferred to a newly created trust certain assets relating to the Company’s discontinued operations located in Altamira, Mexico (the “Altamira Trust”). Such assets, which had an estimated fair market value of $22,000,000 at the time the trust was established, include (among other items) the Company’s 50% equity interest in a joint venture which owns certain infrastructure assets in an Altamira industrial park as well as stock of the Company’s wholly-owned Mexican subsidiaries which (until the fourth quarter of the Company’s 2002 fiscal year) had operated in such park. The Altamira Trust issued notes to the secured lenders in the aggregate principal amount of $22,000,000 (the “Altamira Trust Notes”) in connection with the implementation of the Plan and in partial satisfaction of such lenders’ prepetition claim against the Company. The Altamira Trust Notes are secured by liens on all of the Altamira Trust assets, bear interest at the annual rate of 10%, are payable on October 4, 2005, and are payable only from the Altamira Trust assets. The trustee of the Altamira Trust is required to pay all liabilities and obligations of the Altamira Trust from the Altamira Trust assets. The Company is not a guarantor of, nor otherwise responsible for, the payment of the Altamira Trust Notes or other liabilities of the Altamira Trust. The Company is, however, the sole beneficiary of the Altamira Trust and, therefore, is entitled to receive the Altamira Trust assets remaining, if any, after the payment in full of the Altamira Trust Notes and of all other liabilities and obligations of the Altamira Trust. Under the provisions of SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities — A Restatement of FASB Statement No. 125” (SFAS No. 140), the Company has recognized the assets and liabilities of the Altamira Trust in its consolidated financial statements.

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During the thirteen weeks ended June 29, 2003, the Altamira Trust paid $1,200,000 in partial satisfaction of the Altamira Notes. The trustee of the Altamira Trust continues to liquidate assets to satisfy the Altamira Trust Notes and other liabilities and obligations of the Altamira Trust. While the Company is sole beneficiary of the Altamira Trust, all Altamira Trust Notes and other liabilities and obligations of the Altamira Trust must be paid in full before the Company can receive any benefit. The Company has recorded no benefit as of June 29, 2003 related to the Altamira Trust. The Company’s receipt of net cash proceeds relating to the Company’s beneficial interest in the Altamira Trust will trigger prepayment obligations under the Company’s senior loan agreements. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Requirements”.

5. Factors Affecting Comparability of Financial Information

As a consequence of the implementation of Fresh Start Reporting effective September 29, 2002, the financial information presented in the unaudited consolidated statements of operations and the corresponding statements of cash flows for periods prior to September 29, 2002 are not comparable to financial results for subsequent periods. Any financial information herein labeled “Predecessor Company” refers to periods prior to the adoption of Fresh Start Reporting, while those labeled “Successor Company” refer to periods from and after September 29, 2002.

The lack of comparability in the accompanying unaudited consolidated financial statements relates primarily to the Company’s capital structure (outstanding shares used in earnings per share calculations) and capital costs (interest, depreciation and amortization), as well as debt restructuring and reorganization costs.

6. Stock Compensation

At June 29, 2003, the Company had stock options outstanding covering 36,000 shares to non-employee directors of the Company. At June 30, 2002, the Predecessor Company had approximately 1,300,000 stock options outstanding under a stock option plan to key employees and directors. The Company accounts for these plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The Predecessor Company’s stock options were cancelled on the Effective Date, in conjunction with the Company’s emergence from bankruptcy and cancellation of all previously outstanding old common stock. The following tables illustrate the effect on net income (loss) and net income (loss) per share if the Company had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based compensation expense.

For the thirteen weeks ended June 30, 2002 and June 29, 2003, the effect on net income (loss) and net income (loss) per share would be as follows (dollars in thousands except per share data):

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For the thirty-nine weeks ended June 30, 2002 and June 29, 2003, the effect on net income (loss) and net income (loss) per share would be as follows (dollars in thousands except per share data):

7. Per Share Information

Basic net income (loss) per share information has been computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the periods presented. The weighted average shares used in computing basic net income (loss) per share for the Predecessor Company for the thirteen weeks and thirty-nine weeks ended June 30, 2002 were 18,507,000 and 18,492,000, respectively. The weighted average shares used in computing basic net income (loss) per share for the Successor Company for the thirteen weeks and thirty-nine weeks ended June 29, 2003 were 5,501,000. As described in Note 4, on or about October 4, 2002 all of the Company’s old common stock was cancelled and replaced with 5,501,053 shares of new common stock.

Diluted net income (loss) per share information also considers the dilutive effect of stock options and restricted stock grants. The weighted average shares used in computing diluted net income (loss) per share for the thirteen weeks ended June 29, 2003 and June 30, 2002 were 5,507,000 and 18,507,000, respectively. The weighted average shares used in computing diluted net income (loss) per share for the thirty-nine weeks ended June 29, 2003 and June 30, 2002 were 5,503,000 and 18,492,000, respectively. During the period ended June 30, 2002, outstanding stock options and shares of restricted stock of 1,465,000 were antidilutive and not included in the calculation of diluted net income (loss) per share.

8. Receivables

Receivables at September 29, 2002 and June 29, 2003 consisted of the following (dollars in thousands):

During the thirty-nine weeks ended June 29, 2003, the Company reversed approximately $1,400,000 of accounts receivable reserves that were established in fiscal 2002. Such reversals were the result of collections and recoveries being better than anticipated and favorable settlements of certain claims, $500,000 of which related to one bankrupt customer.

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9. Inventories

Inventories at September 29, 2002 and June 29, 2003 consisted of the following (dollars in thousands):