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FORM 10-Q

Commission File Number 000-50025

GUILFORD MILLS, INC.

(Exact name of Registrant as specified in its charter)

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

(Address of principal executive offices)(Zip Code)

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 (  )

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes (  ) 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 (  )

Number of shares of the Registrant’s common stock, par value $.01 per share, outstanding as of February 6, 2004: 5,501,053

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GUILFORD MILLS, INC.
Form 10-Q
December 28, 2003

INDEX

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PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

Guilford Mills, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS

See accompanying notes to condensed consolidated financial statements.

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Guilford Mills, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes to condensed consolidated financial statements.

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Guilford Mills, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes to condensed consolidated financial statements.

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GUILFORD MILLS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 28, 2003
(Unaudited)

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 has manufacturing facilities in the U.S. and U.K. and primarily serves customers in the U.S., Mexico, U.K. and Western Europe. 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 28, 2003 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 28, 2003.

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 2003 have been reclassified to conform to the fiscal 2004 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 industry and other matters.

3.     Fiscal Period End

The Company’s fiscal year ends on the Sunday nearest to September 30. The Company’s first quarter in fiscal 2004 and fiscal 2003 ended on December 28, 2003 and December 29, 2002, respectively. Each quarter includes the results of operations for 13 weeks.

4.     Bankruptcy Reorganization and Fresh-Start Reporting

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 $274,000,000 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 $274,000,000 was discharged, and was replaced with new senior secured notes, due October 4, 2005, totaling $135,000,000.
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 $70,000,000 in cash and property to trusts and its senior lenders, as partial consideration for the debt reduction described above.
4.		The Company’s $30,000,000 Debtor-In-Possession Credit Agreement, dated as of March 13, 2002, with Wachovia Bank was cancelled and the Company entered into a $25,000,000 revolving credit facility.
5.		The Company began paying in cash approximately $15,600,000 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 were restated to reflect their reorganization value, which approximated their fair value at the Effective Date. The Company recorded the effects of the Plan and Fresh Start Reporting as of September 29, 2002.

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 $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 was 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 Altamira 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’ pre-petition 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 first quarter of fiscal 2004, the Altamira Trust paid $3,000,000 in partial satisfaction of the Altamira Trust 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 December 28, 2003 related to the Altamira Trust as none is currently anticipated. The Company’s receipt of any 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.

5.     Stock Compensation

The Company has a stock option plan for non-employee directors, pursuant to which 60,000 shares of common stock have been authorized. The Company issued stock options to non-employee directors of the Company in December 2002, and October 2003, covering 36,000 shares and 24,000 shares, respectively. Under the terms of the plan, the purchase price of shares subject to the option granted was the fair market value at the date of grant. Options granted to non-employee directors under the plan vest or become exercisable in equal annual one-third increments commencing on the first anniversary of the grant date and such options have a 10-year term.

The Company also has a stock option plan for certain employees, pursuant to which 550,000 shares of common stock have been authorized. In June 2003, the Company issued stock options covering 111,000 shares to certain employees of the Company. The purchase price of shares subject to the employee options granted was $4.00, while the fair market value of the stock at the date of grant was $8.60. Options granted to employees under the plan vest or become exercisable in equal annual one-third increments commencing on the first anniversary of the grant date and such options have a 10-year term. The Company is accordingly recognizing compensation expense over the vesting period of the grant for the difference in the exercise price and fair market price of the stock at the date of grant. Compensation expense associated with the stock option plans for the first quarter of fiscal 2004 was approximately $52,000.

The Company measured compensation expense for its stock-based employee compensation plans using the intrinsic value method prescribed by Accounting Principles Board (“APB”) Opinion No. 25 “Accounting for Stock Issued to Employees”.

The following table illustrates the effect on net income and net income 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 December 29, 2002 and December 28, 2003 (dollars in thousands except per share data):

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6.     Per Share Information

Basic net income per share information has been computed by dividing net income 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 per share for the thirteen weeks ended December 29, 2002 and December 28, 2003 were 5,501,000.

Diluted net income per share information also considers the dilutive effect of stock options. The weighted average shares used in computing diluted net income per share for the thirteen weeks ended December 29, 2002 and December 28, 2003 were 5,501,000 and 5,599,000, respectively. During the period ended December 29, 2002, there were 36,000 antidilutive options outstanding. For the period ended December 28, 2003, there were no antidilutive options outstanding. During the periods ended December 29, 2002 and December 28, 2003, outstanding stock options were 36,000 and 171,000, respectively.

7.     Receivables

Receivables at September 28, 2003 and December 28, 2003 consisted of the following (dollars in thousands):

8.     Inventories

Inventories at September 28, 2003 and December 28, 2003 consisted of the following (dollars in thousands):

9.     Comprehensive Income

For the thirteen weeks ended December 29, 2002 and December 28, 2003, total comprehensive income was as follows (dollars in thousands):

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10.     Financial Instruments

The Company’s financial instruments include cash and cash equivalents, receivables, accounts payable, short-term borrowings and foreign currency exchange contracts. Because of their short maturity, the carrying amount of cash, receivables and accounts payable approximates fair value. Fair value of short-term borrowings is estimated based on current rates offered for similar debt.

Forward foreign currency exchange contracts - On September 28, 2003, the Company held foreign currency forward contracts with a fair value of $45,900,000 and a notional value of $45,400,000 that expire in less than one year. On December 28, 2003, the Company held foreign currency forward contracts with a fair value of $48,800,000 and a notional value of $48,500,000 that expire in less than one year.

Related party debt - Pursuant to the Plan, the Company issued to the secured lenders on the Effective Date term notes in the aggregate principal amount of $135,000,000 (the “Notes”) in partial satisfaction of the lenders’ pre-petition claim against the Company. Also, in connection with the Plan, the Company issued to such lenders, or their affiliates, shares of the Company’s common stock. As of December 28, 2003, the Company’s related party debt, i.e., the principal amount of Notes held by the lenders who received shares of common stock under the Plan, was approximately $109,600,000.

11.     Derivative Financial Instruments

The Company accounts for derivative contracts and hedging activities under the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” as amended by SFAS No. 137 and SFAS No. 138. SFAS No. 133 establishes the accounting and reporting requirements for derivative instruments and hedge transactions. The Company does not enter into derivative financial instruments for trading purposes.

The Company’s use of derivatives relates to its use of currency forward contracts to hedge balance sheet and income statement currency exposures. These foreign currency forward contracts qualify and have been designated as cash flow hedges under the guidelines of SFAS No. 133. The changes in fair value of the derivatives are recognized in other comprehensive income until the hedged item is recognized in earnings. Any ineffective portion of the derivative’s change in fair value is immediately recognized in earnings. The fair value of the Company’s foreign currency forward contracts outstanding at December 28, 2003 was $48,800,000 with a notional value of $48,500,000. The deferred gain of $300,000 is included in other current assets.

12.     Segment Information

For fiscal 2004 and 2003, the Company has identified three reportable segments based on market sectors: Automotive, Industrial and Apparel.

Fabrics produced in the Automotive segment are sold to suppliers of original equipment manufacturers (“OEMs”). These fabrics are then used in the production of seats and headliners and other interior components of passenger cars, sports utility vehicles, conversion vans and light and heavy trucks. Guilford is a major producer and supplier 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 had an automotive fabric manufacturing operation in Mexico City, a business which it sold in December 2003. Guilford will continue to service Mexican automotive customers pursuant to the supply agreement entered into in connection with the sale. See Note 13 for more information regarding the sale of such business.

Fabrics produced in the Industrial segment are sold for use in window fashions and in a broad range of specialty applications, including geotextiles, medical products and water filtration systems. The Company’s fiber operation, which manufactures and supplies fibers internally and to other external textile manufacturers, is also included in this segment.

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The Apparel segment fabrics have historically been used predominantly in women’s intimate apparel, ready-to-wear, swimwear garments, 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. The current focus of this segment is on team sportswear, cap and gown and performance activewear.

The Company accounts for intersegment sales and transfers as if the sales or transfers were to third parties at current market prices. The Company neither allocates to the segments nor bases segment decisions on the following:

•		Interest expense
•		Other income and expense
•		Income tax expense or benefit
•		Reorganization costs

The tables below set forth segment data for the Company’s principal business segments for the thirteen weeks ended December 29, 2002 and December 28, 2003: