UNIFI INC - Quarter Report: 2006 September (Form 10-Q)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 24, 2006

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

UNIFI, INC.

(Exact name of registrant as specified in its charter)

New York		11-2165495
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
P.O. Box 19109 — 7201 West Friendly Avenue Greensboro, NC (Address of principal executive offices)		27419 (Zip Code)

Registrant’s telephone number, including area code: (336) 294-4410

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o      Accelerated filer þ      Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ

The number of shares outstanding of the issuer’s common stock, par value $.10 per share, as of November 1, 2006 was 52,208,467.

 

 

Part. I Financial Information
Item 1. Financial Statements

UNIFI, INC.
Form 10-Q for the Quarterly Period Ended September 24, 2006

INDEX

		Page
Part I Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at September 24, 2006 and June 25, 2006			3
Condensed Consolidated Statements of Operations for the Quarters Ended September 24, 2006 and September 25, 2005			4
Condensed Consolidated Statements of Cash Flows for the Quarters Ended September 24, 2006 and September 25, 2005			5
Notes to Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			23
Item 3. Quantitative and Qualitative Disclosures about Market Risk			33
Item 4. Controls and Procedures			34
Part II Other Information
Item 1. Legal Proceedings			36
Item 1A. Risk Factors			36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			36
Item 6. Exhibits			37
Ex-31.1
Ex-31.2
Ex-32.1
Ex-32.2

Part. I Financial Information

Item 1. Financial Statements

UNIFI, INC.

Condensed Consolidated Balance Sheets

		September 24,				June 25,
		2006				2006
		(Unaudited)
		(Amounts in thousands)
ASSETS
Current assets:
Cash and cash equivalents		$	29,516			$	35,317
Receivables, net			90,958				93,236
Inventories			115,513				116,018
Deferred income taxes			12,774				11,739
Assets held for sale			15,419				15,419
Other current assets			7,319				9,229
Total current assets			271,499				280,958
Property, plant and equipment			914,538				916,337
Less accumulated depreciation			(684,829	)			(676,641	)
			229,709				239,696
Investments in unconsolidated affiliates			187,444				190,217
Other noncurrent assets			22,805				21,766
Total assets		$	711,457			$	732,637
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	55,788			$	68,916
Accrued expenses			25,525				23,869
Income taxes payable			2,619				2,303
Current maturities of long-term debt and other current liabilities			5,563				6,330
Total current liabilities			89,495				101,418
Long-term debt and other liabilities			203,980				202,405
Deferred income taxes			44,710				45,861
Commitments and contingencies
Shareholders’ equity:
Common stock			5,220				5,220
Capital in excess of par value			1,969				929
Retained earnings			371,029				382,082
Accumulated other comprehensive loss			(4,946	)			(5,278	)
			373,272				382,953
Total liabilities and shareholders’ equity		$	711,457			$	732,637

See accompanying notes to condensed consolidated financial statements.

UNIFI, INC.

Condensed Consolidated Statements of Operations

(Unaudited)

		For the Quarters Ended
		September 24,				September 25,
		2006				2005
		(Amounts in thousands, except per share data)
Net sales		$	169,944			$	183,102
Cost of sales			160,904				174,699
Selling, general & administrative expenses			11,289				10,487
Provision for bad debts			1,610				527
Interest expense			6,065				4,777
Interest income			(444	)			(1,281	)
Other (income) expense, net			(479	)			(853	)
Equity in (earnings) losses of unconsolidated affiliates			1,949				(1,824	)
Write down of long-lived assets			1,200				1,500
Restructuring charges			—				29
Loss from continuing operations before income taxes and extraordinary item			(12,150	)			(4,959	)
Benefit for income taxes			(1,133	)			(152	)
Loss from continuing operations before extraordinary item			(11,017	)			(4,807	)
Income (loss) from discontinued operations, net of tax			(36	)			1,929
Extraordinary loss — net of taxes of $0			—				(208	)
Net loss		$	(11,053	)		$	(3,086	)
Earnings (losses) per common share (basic and diluted):
Net loss — continuing operations		$	(.21	)		$	(.09	)
Net income (loss) — discontinued operations			—				.03
Extraordinary loss			—				—
Net loss — basic and diluted		$	(.21	)		$	(.06	)
Weighted average outstanding shares of common stock (basic and diluted)			52,198				52,127

See accompanying notes to condensed consolidated financial statements.

UNIFI, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

		For the Quarters Ended
		September 24,				September 25,
		2006				2005
		(Amounts in thousands)
Cash and cash equivalents at the beginning of period		$	35,317			$	105,621
Operating activities:
Net loss			(11,053	)			(3,086	)
Adjustments to reconcile net loss to net cash used in continuing operating activities:
(Income) loss from discontinued operations			36				(1,929	)
Net (earnings) losses of unconsolidated equity affiliates, net of distributions			1,949				(694	)
Depreciation			11,124				12,357
Amortization			276				321
Net (gain) loss on asset sales			240				(319	)
Non-cash write down of long-lived assets			1,200				1,500
Non-cash portion of restructuring charges			—				29
Deferred income tax			(2,597	)			(1,200	)
Provision for bad debt			1,610				527
Other			807				1,647
Change in assets and liabilities, excluding effects of acquisitions and foreign currency adjustments			(7,944	)			(10,146	)
Net cash used in continuing operating activities			(4,352	)			(993	)
Investing activities:
Capital expenditures			(1,480	)			(3,903	)
Acquisition			—				(15,331	)
Investment in foreign restricted assets			—				167
Collection of notes receivable			116				110
Change in restricted cash			—				2,766
Proceeds from sale of capital assets			3				2,239
Return of capital from equity affiliates			229				—
Other			—				(197	)
Net cash used in investing activities			(1,132	)			(14,149	)
Financing activities:
Payment of long-term debt			—				(24,407	)
Other			(417	)			461
Net cash used in financing activities			(417	)			(23,946	)
Cash flows of discontinued operations:
Operating cash flow			63				574
Investing cash flow			—				22,937
Net cash provided by discontinued operations			63				23,511
Effect of exchange rate changes on cash and cash equivalents			37				700
Net decrease in cash and cash equivalents			(5,801	)			(14,877	)
Cash and cash equivalents at end of period		$	29,516			$	90,744

     See accompanying notes to condensed consolidated financial statements.

UNIFI, INC.

Notes to Condensed Consolidated Financial Statements

1.		Basis of Presentation
		The Condensed Consolidated Balance Sheet at June 25, 2006, has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles (“U.S. GAAP”) for complete financial statements. Except as noted with respect to the balance sheet at June 25, 2006, the information furnished is unaudited and reflects all adjustments which are, in the opinion of management, necessary to present fairly the financial position at September 24, 2006, and the results of operations and cash flows for the periods ended September 24, 2006 and September 25, 2005. Such adjustments consisted of normal recurring items necessary for fair presentation in conformity with U.S. GAAP. Preparing financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from these estimates. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended June 25, 2006. Certain prior year amounts have been reclassified to conform to current year presentation.
		The significant accounting policies followed by the Company are presented on pages 57 to 62 of the Company’s Annual Report on Form 10-K for the fiscal year ended June 25, 2006. These policies have not materially changed from the disclosure in that report.
2.		Inventories
		Inventories were comprised of the following (amounts in thousands):

		September 24,				June 25,
		2006				2006
Raw materials and supplies		$	46,804			$	48,594
Work in process			6,899				10,144
Finished goods			61,810				57,280
		$	115,513			$	116,018

3.		Accrued Expenses
		Accrued expenses were comprised of the following (amounts in thousands):

		September 24,				June 25,
		2006				2006
Payroll and fringe benefits		$	7,727			$	11,112
Severance			310				576
Interest			7,343				1,984
Utilities			2,976				3,225
Property taxes			2,535				1,722
Other			4,634				5,250
		$	25,525			$	23,869

4.		Income Taxes
		The Company’s income tax benefit for the quarter ended September 24, 2006 resulted in an effective tax rate of 9.3% compared to the quarter ended September 25, 2005 which resulted in an effective tax rate of 3.1%. The primary differences between the Company’s income tax benefit and the U.S. statutory rate for the quarter ended September 24, 2006 were nondeductible statutory stock option expense, losses from certain foreign operations taxed at a lower effective rate, and an increase in the valuation allowance for North Carolina income tax credit carryforwards. The primary differences between the Company’s income tax benefit and the U.S. statutory rate for the quarter ended September 25, 2005 were income tax expense associated with a plan to repatriate foreign earnings, foreign income tax on currency related transactions, and an increase in the valuation allowance for North Carolina income tax credit carryforwards.
		Deferred income taxes have been provided for the temporary differences between financial statement carrying amounts and the tax basis of existing assets and liabilities. The Company has established a valuation allowance against its deferred tax assets relating primarily to North Carolina income tax credit carryforwards. The valuation allowance increased $0.5 million in the quarter ended September 24, 2006 compared to $0.4 million in the quarter ended September 25, 2005. The increases in the valuation allowance were due to lower estimates of future utilization of North Carolina income tax credit carryforwards.
5.		Comprehensive Income (Loss)
		Comprehensive loss amounted to $10.7 million for the first quarter of fiscal year 2007 compared to comprehensive income of $8.1 million for the first quarter of fiscal year 2006. Comprehensive loss is comprised of net losses of $11.0 million for the first quarter of fiscal year 2007 and foreign translation gains of $0.3 million. Comparatively, comprehensive income for the corresponding period in the prior year was derived from $3.1 million of net losses and $11.2 million of foreign translation gains. The Company does not provide income taxes on the impact of currency translations as earnings from foreign subsidiaries are deemed to be permanently invested.
6.		Recent Accounting Pronouncements
		In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”) which is an interpretation of Statement of Financial Accounting Standards (“SFAS”) No. 109 “Accounting for Income Taxes”. The pronouncement creates a single model to address accounting for uncertainty in tax positions. FIN 48 clarifies the accounting for income taxes, by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company will adopt FIN 48 as of the first day of fiscal year 2008 and it has not determined the impact of FIN 48 on its results of operations and financial condition.
		In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans”. SFAS No. 158 amends SFAS No. 87, “Employers’ Accounting for Pensions”, SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits”, SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other than Pensions” and SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits”. The amendments retain most of the existing measurement and disclosure guidance and will not change the amounts recognized in the Company’s statements of operations. SFAS No. 158 requires companies to recognize a net asset or liability with an offset to equity relating to post retirement obligations. This aspect of SFAS No. 158 is effective for fiscal years ending after December 15, 2006. The Company currently does not expect SFAS No. 158 will have a material effect on its consolidated balance sheet.

		In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. This new standard provides guidance for measuring the fair value of assets and liabilities and is intended to provide increased consistency in how fair value determinations are made under various existing accounting standards. SFAS No. 157 also expands financial statement disclosure requirements about a company’s use of fair value measurements, including the effect of such measures on earnings. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. While the Company is currently evaluating the provisions of SFAS No. 157 it has not determined the impact it will have on its results of operations or financial condition.
7.		Segment Disclosures
		The following is the Company’s selected segment information for the quarters ended September 24, 2006 and September 25, 2005 (amounts in thousands):

		Polyester				Nylon				Total
Quarter ended September 24, 2006:
Net sales to external customers		$	130,471			$	39,473			$	169,944
Intersegment net sales			2,429				1,828				4,257
Depreciation and amortization			6,821				3,498				10,319
Segment operating loss			(1,645	)			(604	)			(2,249	)
Total assets			353,869				127,077				480,946
Quarter ended September 25, 2005:
Net sales to external customers		$	134,167			$	48,935			$	183,102
Intersegment net sales			1,682				1,178				2,860
Depreciation and amortization			7,705				3,704				11,409
Write down of long-lived assets			—				1,500				1,500
Restructuring charges (recovery)			47				(18	)			29
Segment operating loss			(1,197	)			(2,416	)			(3,613	)
Total assets			420,934				147,246				568,180

The following table represents reconciliations from segment data to consolidated reporting data (amounts in thousands):

		For the Quarters Ended
		September 24,				September 25,
		2006				2005
Reconciliation of segment operating loss to net loss from continuing operations before income taxes and extraordinary item:
Reportable segments operating loss		$	(2,249	)		$	(3,613	)
Provision for bad debts			1,610				527
Interest expense, net			5,621				3,496
Other (income) expense, net			(479	)			(853	)
Equity in (earnings) losses of unconsolidated affiliates			1,949				(1,824	)
Write down of long-lived assets			1,200				—
Loss from continuing operations before income taxes and extraordinary item		$	(12,150	)		$	(4,959	)

		For purposes of internal management reporting, segment operating loss represents net sales less cost of sales and allocated selling, general and administrative expenses. Certain indirect manufacturing and selling, general and administrative costs are allocated to the operating segments based on activity drivers relevant to the respective costs. Intersegments sales of the Company’s polyester partially orientated yarn (“POY”) business are recorded at market whereas all other intersegment sales are recorded at cost.
		The primary differences between the segmented financial information of the operating segments, as reported to management and the Company’s consolidated reporting relate to intersegment sales of yarn and the associated fiber costs, the provision for bad debts, and certain unallocated selling, general and administrative expenses.
		Fiber costs of the Company’s domestic operating divisions are valued on a standard cost basis, which approximates first-in, first-out accounting. For those components of inventory valued utilizing the last-in, first-out (“LIFO”) method, an adjustment is made at the segment level to record the difference between standard cost and LIFO. Segment operating loss excluded the provision for bad debts of $1.6 million and $0.5 million for the current and prior year first quarter periods, respectively.
		The total assets for the polyester segment decreased from $359.2 million at June 25, 2006 to $353.9 million at September 24, 2006 due primarily to decreases in fixed assets, inventory, other current assets, accounts receivable, and deferred income taxes of $4.7 million, $2.3 million, $1.9 million, $0.8 million, and $0.3 million, respectively. These decreases were offset by increases in cash and other assets of $3.5 million and $1.2 million, respectively. The total assets for the nylon segment decreased from $128.2 million at June 25, 2006 to $127.1 million at September 24, 2006 due primarily to decreases in fixed assets and accounts receivable of $3.4 million and $0.4 million, respectively. These decreases were offset by increases in inventory, deferred income taxes, cash, and other current assets of $1.8 million, $0.7 million, $0.1 million, and $0.1 million, respectively.
8.		Stock-Based Compensation
		During the fourth quarter of fiscal year 2006, the Board authorized the issuance of one hundred fifty thousand options from the 1999 Long-Term Incentive Plan. During the first half of fiscal year 2005, the Board authorized the issuance of approximately 2.1 million stock options from the 1999 Long-Term Incentive Plan to certain key employees. The stock options granted in fiscal years 2006 and 2005 vest in three equal installments: the first one-third at the time of grant, the next one-third on the first anniversary of the grant and the final one-third on the second anniversary of the grant.
		On July 26, 2006, the Board authorized the issuance of approximately 1.1 million stock options from the 1999 Long-Term Incentive Plan to certain key employees. With the exception of the immediate vesting of three hundred thousand options granted to the CEO, the remaining options vests in three equal installments: the first one-third at the time of grant, the next one-third on the first anniversary of the grant and the final one-third on the second anniversary of the grant. As a result, the Company incurred $1.0 million in stock-based compensation charges which were recorded as selling, general, and administrative expense with the offset to additional paid-in-capital.
9.		Derivative Financial Instruments
		The Company accounts for derivative contracts and hedging activities under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”) which requires all derivatives to be recorded on the balance sheet at fair value. If the derivative is a hedge, changes in the fair value of derivatives are either offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings. The Company does not enter into derivative financial instruments for trading purposes nor is it a party to any leveraged financial instruments.

		The Company conducts its business in various foreign currencies. As a result, it is subject to the transaction exposure that arises from foreign exchange rate movements between the dates that foreign currency transactions are recorded (export sales and purchase commitments) and the dates they are settled (cash receipts and cash disbursements in foreign currencies). The Company utilizes some natural hedging to mitigate these transaction exposures. The Company also enters into foreign currency forward contracts for the purchase and sale of European, Canadian, Brazilian and other currencies to hedge balance sheet and income statement currency exposures. These contracts are principally entered into for the purchase of inventory and equipment and the sale of Company products into export markets. Counterparties for these instruments are major financial institutions.
		Currency forward contracts are entered into to hedge exposure for sales in foreign currencies based on specific sales orders with customers or for anticipated sales activity for a future time period. Generally, 60 to 80% of the sales value of these orders is covered by forward contracts. Maturity dates of the forward contracts attempt to match anticipated receivable collections. The Company marks the outstanding accounts receivable and forward contracts to market at month end and any realized and unrealized gains or losses are recorded as other income and expense. The Company also enters currency forward contracts for committed or anticipated equipment and inventory purchases. Generally, 50 to 75% of the asset cost is covered by forward contracts although 100% of the asset cost may be covered by contracts in certain instances. Forward contracts are matched with the anticipated date of delivery of the assets and gains and losses are recorded as a component of the asset cost for purchase transactions when the Company is firmly committed. The latest maturity date for all outstanding purchase and sales foreign currency forward contracts is November 2006 and December 2006, respectively.
		The dollar equivalent of these forward currency contracts and their related fair values are detailed below (amounts in thousands):

		September 24,				June 25,
		2006				2006
Foreign currency purchase contracts:
Notional amount		$	1,116			$	526
Fair value			1,121				535
Net (gain) loss		$	(5	)		$	(9	)
Foreign currency sales contracts:
Notional amount		$	774			$	833
Fair value			821				878
Net (gain) loss		$	47			$	45

		For the quarters ended September 24, 2006 and September 25, 2005, the total impact of foreign currency related items on the Condensed Consolidated Statements of Operations, including transactions that were hedged and those that were not hedged, was a pre-tax loss of $0.0 million and $0.1 million, respectively.
10.		Investments in Unconsolidated Affiliates
		On June 10, 2005, Unifi and Sinopec Yizheng Chemical Fiber Co., Ltd. (“YCFC”) entered into an Equity Joint Venture Contract (the “JV Contract”), to form Yihua Unifi Fibre Company Limited (“YUFI”) to manufacture, process and market polyester filament yarn in YCFC's facilities in Yizheng, Jiangsu Province, Peoples Republic of China. Under the terms of the JV Contract, each company owns a 50% equity interest in the joint venture. The joint venture transaction closed on August 3, 2005, and accordingly, the Company contributed to YUFI its initial capital contribution of $15.0 million in cash on August 4, 2005. On October 12, 2005, the Company transferred an additional $15.0 million to YUFI to complete the capitalization of the joint venture. For the quarter ended September 24, 2006, the Company recognized equity losses relating to YUFI of $1.5 million. Since YUFI reports its financial results on a one month lag the September 25,

		2005 quarter equity loss of $0.1 million would not be comparable. The Company records revenues from the joint venture under a licensing agreement for certain proprietary information including technical knowledge, manufacturing processes, trade secrets, commercial information and other information relating to the design, manufacture, application testing, maintenance and sale of products. For the quarter ending September 24, 2006 the Company recorded $0.4 million in revenues from the licensing agreement. In addition, the Company recognized $1.1 million in operating expenses for the first quarter of fiscal year 2007, which were primarily reflected on the “Cost of sales” line item in the Condensed Consolidated Statements of Operations. These expenses are directly related to providing technological support in accordance with the JV Contract.
		In June 1997, the Company and Parkdale Mills, Inc. entered into a contribution agreement whereby both companies contributed all of the assets of their spun cotton yarn operations utilizing open-end and air jet spinning technologies to create Parkdale America, LLC (“PAL”). In exchange for its contributions, the Company received a 34% ownership interest in the joint venture. PAL is a producer of cotton and synthetic yarns for sale to the textile and apparel industries primarily within North America. PAL has 14 manufacturing facilities primarily located in central and western North Carolina. During the first quarter ended September 24, 2006, the Company had equity losses relating to PAL of $0.3 million, compared to earnings of $2.1 million for the corresponding periods in the prior year. PAL distributed $0.2 million in distributions in the first quarter of fiscal year 2007.
		In September 2000, the Company and SANS Fibres of South Africa formed a 50/50 joint venture (UNIFI-SANS Technical Fibers, LLC or “USTF”) to produce low-shrinkage high tenacity nylon 6.6 light denier industrial (“LDI”) yarns in North Carolina. The business is operated in a plant in Stoneville, North Carolina which is owned by the Company. The Company receives annual rental income of $0.3 million from USTF for the use of the facility. Unifi manages the day-to-day production and shipping of the LDI produced in North Carolina and SANS Fibres handles technical support and sales. Sales from this entity are primarily to customers in the Americas. The Company has a put right under the joint venture agreement to sell its entire interest in the joint venture at fair market value and the related Stoneville, North Carolina manufacturing facility for $3.0 million (or fair market value if the sale is consummated after March 2011) in cash back to SANS Fibres. Per the agreement, after December 31, 2006, the Company must give one year’s prior written notice of its election to exercise the put option. Management is currently evaluating its right to exercise this option. SANS Fibres has a call right upon the same terms as the Company’s put right.
		In September 2000, Unifi and Nilit Ltd., located in Israel, formed a 50/50 joint venture named U.N.F. Industries Ltd (“UNF”). The joint venture produces nylon partially oriented yarn (“POY”) at Nilit’s manufacturing facility in Migdal Ha — Emek, Israel. The nylon POY is utilized in the Company’s nylon texturing and covering operations. The nylon segment has a supply agreement with UNF which expires in April 2008.
		Condensed balance sheet information as of September 24, 2006, and income statement information for the quarter ended September 24, 2006, of the combined unconsolidated equity affiliates was as follows (amounts in thousands):

		As of
		September 24, 2006
Current assets		$	151,397
Noncurrent assets			209,745
Current liabilities			47,307
Noncurrent liabilities			13,214
Shareholders’ equity and capital accounts			300,621

		For the Quarter Ended
		September 24, 2006
Net sales		$	157,186
Gross profit			1,458
Loss from operations			(3,898	)
Net loss			(4,396	)

11.		Severance and Restructuring Charges
		On April 20, 2006, the Company re-organized its domestic business operations, and as a result, recorded a restructuring charge for severance of approximately $0.8 million in the fourth quarter of fiscal year 2006. Approximately 45 management level salaried employees were affected by this reorganization.
		The table below summarizes changes to the accrued severance and accrued restructuring accounts for the three-months ended September 24, 2006 (amounts in thousands):

		Balance at																Balance at
		June 25, 2006				Charges				Adjustments				Amounts Used				September 24, 2006
Accrued severance		$	576			$	—			$	90			$	(356	)		$	310
Accrued restructuring		$	3,550			$	—			$	59			$	(250	)		$	3,359

12.		Impairment Charges
		On October 26, 2006 the Company announced its intent to sell a manufacturing facility that the Company has been leasing to a tenant since 1999. The lease expires in October 2006 and the Company decided to sell the property upon expiration of the lease. Pursuant to this determination, the Company received appraisals relating to the property and performed an impairment review in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”). The Company evaluated the recoverability of the long-lived asset and determined that the carrying amount of the property exceeded its fair value. Accordingly, the Company recorded a non-cash impairment charge of $1.2 million, which included $0.1 million in estimated selling costs that will be paid from the proceeds of the sale when it occurs.
		During the quarter ended September 25, 2005 management decided to consolidate the domestic nylon operations to improve overall operating efficiencies. This initiative included closing Plant 1 in Mayodan, North Carolina and moving its operations and offices to Plant 3 in Madison, North Carolina which is the Nylon division’s largest facility with over one million square feet of production space. As a part of the consolidation plan, three nylon facilities were vacated and classified as held for sale later in fiscal year 2006. The Company received appraisals on the three properties, and after reviewing the reports, determined that one of the facilities carrying value exceeded its appraised value. As a result of this determination, the Company recorded a non-cash impairment charge of $1.5 million in the first quarter of fiscal year 2006 which included $0.2 million of estimated selling costs.

13.		Assets Held for Sale
		The Company announced in the quarter ended September 25, 2005 that the nylon division decided to consolidate its operating facilities in Mayodan and Madison, North Carolina. As a result, Plant 1, Plant 5, Plant 7, and the central distribution center (the “CDC”) were completely vacated as of March 2006 and listed for sale. In addition, unrelated to the nylon restructuring plan, the Company decided to market other properties in Yadkinville, North Carolina and Staunton, Virginia as well as related idle machinery and equipment. The listing contract for real property was signed in December 2005 and expires December 2006. Management intends to renew the listing contract on the expiration date. The sale of the CDC and the Staunton, Virginia properties were closed in the fourth quarter of fiscal year 2006.
		The following table summarizes by category assets held for sale (amounts in thousands):

		September 24,				June 25,
		2006				2006
Land		$	612			$	612
Building			10,052				10,052
Machinery and equipment			4,238				4,238
Leasehold improvements			517				517
		$	15,419			$	15,419

14.		Retirement Plan
		The Company’s subsidiary in Ireland had a defined benefit plan (the “DB Plan”) that covered substantially all of its employees and was funded by both employer and employee contributions. The DB Plan provided defined retirement benefits based on years of service and the highest three year average of earnings over the ten year period preceding retirement. During the first quarter of fiscal year 2005, the Company announced plans to close its operations in Europe (the “European Division”), and as a result, recognized a previously unrecognized net actuarial loss of $9.4 million. As of June 26, 2005, the subsidiary had terminated substantially all of its employees. During fiscal year 2006 the Company’s Irish subsidiary made its final contribution of $6.1 million and the remaining accumulated benefit obligation of $32.5 million was paid in full through the purchase of annuity contracts for all participants in the DB Plan. See Note 16 “Discontinued Operations” for further discussion of the closure.
		The net periodic pension expense recognized in the first quarter of fiscal years 2007 and 2006 is as follows (amounts in thousands):

		For the Quarters Ended
		September 24, 2006				September 25, 2005
Pension expense:
Interest costs		$	—			$	612
Expected return on plan assets			—				(612	)
Net periodic pension expense		$	—			$	—

15.		Long-Term Debt
		In May 2006, the Company amended its asset-based revolving credit facility with a senior secured asset-based revolving credit facility (the “Amended Credit Agreement”) to provide a $100 million revolving borrowing base (with an option to increase borrowing capacity up to $150 million), to extend its maturity from 2006 to 2011, and to revise some of its other terms and covenants. The Amended Credit Agreement is secured by first-priority liens on the Company’s and its subsidiary guarantors’ inventory, accounts

		receivable, general intangibles (other than uncertificated capital stock of subsidiaries and other persons), investment property (other than capital stock of subsidiaries and other persons), chattel paper, documents, instruments, supporting obligations, letter of credit rights, deposit accounts and other related personal property and all proceeds relating to any of the above, and by second-priority liens, subject to permitted liens, on the Company’s and its subsidiary guarantors’ assets securing the notes and guarantees on a first-priority basis, in each case other than certain excluded assets. The Company’s ability to borrow under the Company’s amended revolving credit facility is limited to a borrowing base equal to specified percentages of eligible accounts receivable and inventory and is subject to other conditions and limitations.
		As of September 24, 2006, the Company had no outstanding borrowings and had availability of approximately $93.5 million under the terms of the Amended Credit Agreement. Borrowings under the amended Credit Agreement bear interest at rates selected periodically by the Company of LIBOR plus 1.50% to 2.25% and/or prime plus 0.00% to 0.50%. The interest rate matrix is based on the Company’s excess availability under the amended revolving credit facility. The interest rate in effect at September 24, 2006, was 8.3%. Under the Amended Credit Agreement, the Company pays an unused line fee ranging from 0.25% to 0.35% per annum of the borrowing base.
		The Amended Credit Agreement contains affirmative and negative customary covenants for asset based loans that restrict future borrowings and capital spending. Such covenants include, without limitation, restrictions and limitations on (i) sales of assets, consolidation, merger, dissolution and the issuance of our capital stock, each subsidiary guarantor and any domestic subsidiary thereof, (ii) permitted encumbrances on our property, each subsidiary guarantor and any domestic subsidiary thereof, (iii) the incurrence of indebtedness by the Company, any subsidiary guarantor or any domestic subsidiary thereof, (iv) the making of loans or investments by the Company, any subsidiary guarantor or any domestic subsidiary thereof, (v) the declaration of dividends and redemptions by the Company or any subsidiary guarantor and (vi) transactions with affiliates by the Company or any subsidiary guarantor. As of September 24, 2006 the Company was in compliance with the loan covenants.
		On May 26, 2006, the Company issued $190 million of 11.5% senior secured notes which mature on May 15, 2014. These notes were issued to substantially replace $250 million of senior, unsecured debt securities that were due February 2008. The estimated fair value of the 2014 notes, based on quoted market prices, at September 24, 2006 and June 25, 2006, was approximately $180.0 million and $182.4 million, respectively. The Company makes semi-annual interest payments of $10.9 million on the fifteenth business day of November and May.
		On July 25, 2005 the Company paid off a $24.4 million note payable, including accrued interest, associated with the acquisition of the Kinston POY manufacturing facility.
16.		Discontinued Operations
		On July 28, 2005, the Company announced that it would discontinue the operations of the Company’s external sourcing business, Unimatrix Americas. As of March 26, 2006, management’s plan to exit the business was successfully completed resulting in the reclassification of the segment’s losses as discontinued operations for all periods presented.
		On July 28, 2004, the Company announced its decision to close its European Division. The manufacturing facilities in Ireland ceased operations on October 31, 2004. On February 24, 2005, the Company announced that it had entered into three separate contracts to sell the property, plant and equipment of the European Division for approximately $37.0 million. As of June 26, 2005, the Company had received approximately $9.9 million in proceeds from the sales contracts and recognized a gain of $10.4 million on the sales of capital assets. The Company received the remaining proceeds of $28.1 million during the first quarter of

		fiscal year 2006 which resulted in a net gain of $4.6 million. The gains on the sales of capital assets are included in the line item “Income (loss) from discontinued operations—net of tax” in the Condensed Consolidated Statements of Operations.
		Results of operations for the sourcing segment and European Division for the first quarter of fiscal years 2007 and 2006 are as follows (amounts in thousands):

		For the Quarters Ended
		September 24,				September 25,
		2006				2005
Net sales		$	—			$	34
Income (loss) from discontinued operations before income taxes		$	(36	)		$	2,781
Income tax expense			—				—
Net income (loss) from discontinued operations — net of taxes		$	(36	)		$	2,781

17.		Commitments and Contingencies
		On September 30, 2004, the Company completed its acquisition of the polyester filament manufacturing assets located in Kinston, North Carolina from INVISTA S.a.r.l. (“INVISTA”). The land for the Kinston Site is leased pursuant to a 99 year ground lease (“Ground Lease”) with E.I. DuPont de Nemours (“DuPont”). Since 1993, DuPont has been investigating and cleaning up the Kinston Site under the supervision of the United States Environmental Protection Agency (“EPA”) and the North Carolina Department of Environment and Natural Resources pursuant to the Resource Conservation and Recovery Act Corrective Action program. The Corrective Action Program requires DuPont to identify all potential areas of environmental concern (“AOCs”), assess the extent of contamination at the identified AOCs and clean them up to comply with applicable regulatory standards. Under the terms of the Ground Lease, upon completion by DuPont of required remedial action, ownership of the Kinston Site will pass to the Company. Thereafter, the Company will have responsibility for future remediation requirements, if any, at the AOCs previously addressed by DuPont. At this time the Company has no basis to determine if and when it will have any responsibility or obligation with respect to the AOCs or the extent of any potential liability for the same.
18.		Subsequent Events
		On October 26, 2006, the Company announced that it has signed a definitive agreement to acquire the assets, including inventory, of the textured yarn business operating as the Dillon Yarn Division of Dillon Yarn Corporation. The purchase price will be approximately $65 million and will be comprised of approximately $44.5 million in cash and the issuance of approximately 8.3 million shares of Unifi common stock. All of the shares issued as consideration in the acquisition will be subject to a lock-up agreement, which will prohibit any transfers of shares for an initial six-month period following closing. Thereafter, two-thirds of the shares may not be transferred for 18 months following closing, and the remaining one-third of the shares may not be transferred until 30 months following closing. The Company expects to use cash-on-hand and its bank revolver to fund the cash portion of the purchase price.
		Subject to governmental approval and other customary conditions, the purchase is expected to be completed in early January 2007.

19.		Condensed Consolidated Guarantor and Non-Guarantor Financial Statements
		The guarantor subsidiaries presented below represent the Company’s subsidiaries that are subject to the terms and conditions outlined in the indenture governing the Company’s issuance of senior secured notes and guarantee the notes, jointly and severally, on a senior, secured basis. The non-guarantor subsidiaries presented below represent the foreign subsidiaries which do not guarantee the notes. Each subsidiary guarantor is 100% owned, directly or indirectly, by Unifi, Inc. and all guarantees are full and unconditional.
		Supplemental financial information for the Company and its guarantor subsidiaries and non-guarantor subsidiaries for the notes is presented below.

UNIFI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

     Balance Sheet Information as of September 24, 2006 (amounts in thousands):

						Guarantor				Non-Guarantor
		Parent				Subsidiaries				Subsidiaries				Eliminations				Consolidated
ASSETS
Current assets:
Cash and cash equivalents		$	13,687			$	1,292			$	14,537			$	—			$	29,516
Receivables, net			1				70,133				20,824				—				90,958
Inventories			—				93,276				22,237				—				115,513
Deferred income taxes			—				11,481				1,293				—				12,774
Assets held for sale			—				15,419				—				—				15,419
Other current assets			—				2,238				5,081				—				7,319
Total current assets			13,688				193,839				63,972				—				271,499
Property, plant and equipment			11,806				846,709				56,023				—				914,538
Less accumulated depreciation			(1,625	)			(646,547	)			(36,657	)			—				(684,829	)
			10,181				200,162				19,366				—				229,709
Investments in unconsolidated affiliates			—				156,825				30,619				—				187,444
Investments in consolidated subsidiaries			446,897				—				—				(446,897	)			—
Other noncurrent assets			75,728				4,019				9,250				(66,192	)			22,805
		$	546,494			$	554,845			$	123,207			$	(513,089	)		$	711,457
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable and other		$	395			$	47,254			$	8,139			$	—			$	55,788
Accrued expenses			7,561				14,820				3,144				—				25,525
Income taxes payable (receivable)			(7,460	)			8,421				1,658				—				2,619
Current maturities of long-term debt and other current Liabilities			—				290				5,273				—				5,563
Total current liabilities			496				70,785				18,214				—				89,495
Long-term debt and other liabilities			191,273				66,077				12,822				(66,192	)			203,980
Deferred income taxes			(18,547	)			61,936				1,321				—				44,710
Shareholders’/ invested equity			373,272				356,047				90,850				(446,897	)			373,272
		$	546,494			$	554,845			$	123,207			$	(513,089	)		$	711,457

UNIFI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

     Balance Sheet Information as of June 25, 2006 (amounts in thousands):

						Guarantor				Non-Guarantor
		Parent				Subsidiaries				Subsidiaries				Eliminations				Consolidated
ASSETS
Current assets:
Cash and cash equivalents		$	22,992			$	1,392			$	10,933			$	—			$	35,317
Receivables, net			1				72,332				20,903				—				93,236
Inventories			—				91,840				24,178				—				116,018
Deferred income taxes			—				10,473				1,266				—				11,739
Assets held for sale			—				15,419				—				—				15,419
Other current assets			—				2,558				6,671				—				9,229
Total current assets			22,993				194,014				63,951				—				280,958
Property, plant and equipment			11,806				848,068				56,463				—				916,337
Less accumulated depreciation			(1,553	)			(637,487	)			(37,601	)			—				(676,641	)
			10,253				210,581				18,862				—				239,696
Investments in unconsolidated affiliates			—				157,741				32,476				—				190,217
Investments in consolidated subsidiaries			450,655				—				—				(450,655	)			—
Other noncurrent assets			65,713				8,116				8,223				(60,286	)			21,766
		$	549,614			$	570,452			$	123,512			$	(510,941	)		$	732,637
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable and other		$	1,698			$	57,315			$	9,903			$	—			$	68,916
Accrued expenses			2,202				18,011				3,656				—				23,869
Income taxes payable (receivable)			(10,046	)			11,004				1,345				—				2,303
Current maturities of long-term debt and other current liabilities			—				290				6,040				—				6,330
Total current liabilities			(6,146	)			86,620				20,944				—				101,418
Long-term debt and other liabilities			191,273				57,557				13,861				(60,286	)			202,405
Deferred income taxes			(18,466	)			63,380				947				—				45,861
Shareholders’/ invested equity			382,953				362,895				87,760				(450,655	)			382,953
		$	549,614			$	570,452			$	123,512			$	(510,941	)		$	732,637

UNIFI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

     Statement of Operations Information for the Fiscal Quarter Ended September 24, 2006 (amounts in thousands):

						Guarantor				Non-Guarantor
		Parent				Subsidiaries				Subsidiaries				Eliminations				Consolidated
Summary of Operations:
Net sales		$	¾			$	139,525			$	31,341			$	(922	)		$	169,944
Cost of sales			¾				134,487				27,147				(730	)			160,904
Selling, general and administrative expenses			¾				9,922				1,521				(154	)			11,289
Provision for bad debts			¾				1,088				522				¾				1,610
Interest expense			5,929				136				¾				¾				6,065
Interest income			(104	)			¾				(340	)			¾				(444	)
Other (income) expense, net			(4,388	)			4,070				(408	)			247				(479	)
Equity in (earnings) losses of unconsolidated affiliates			¾				111				1,982				(144	)			1,949
Equity in subsidiaries			7,109				¾				¾				(7,109	)			¾
Write down of long-lived assets			¾				1,200				¾				¾				1,200
Income (loss) from continuing operations before income taxes			(8,546	)			(11,489	)			917				6,968				(12,150	)
Provision (benefit) for income taxes			2,507				(4,640	)			1,000				¾				(1,133	)
Income (loss) from continuing operations			(11,053	)			(6,849	)			(83	)			6,968				(11,017	)
Income (loss) from discontinued operations, net of tax			¾				¾				(36	)			¾				(36	)
Net income (loss)		$	(11,053	)		$	(6,849	)		$	(119	)		$	6,968			$	(11,053	)

UNIFI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

Statement of Operations Information for the Fiscal Quarter Ended September 25, 2005 (amounts in thousands):

						Guarantor				Non-Guarantor
		Parent				Subsidiaries				Subsidiaries				Eliminations				Consolidated
Summary of Operations:
Net sales		$	¾			$	158,959			$	25,048			$	(905	)		$	183,102
Cost of sales			¾				150,722				24,763				(786	)			174,699
Selling, general and administrative expenses			82				9,052				1,510				(157	)			10,487
Provision for bad debts			¾				527				¾				¾				527
Interest expense			4,510				267				¾				¾				4,777
Interest income			(299	)			(65	)			(917	)			¾				(1,281	)
Other (income) expense, net			(4,350	)			3,845				(348	)			¾				(853	)
Equity in (earnings) losses of unconsolidated affiliates			¾				(2,151	)			459				(132	)			(1,824	)
Equity in subsidiaries			2,887				¾				¾				(2,887	)			¾
Write down of long-lived assets			¾				1,500				¾				¾				1,500
Restructuring charges (recovery)			¾				(54	)			83				¾				29
Income (loss) from continuing operations before income taxes			(2,830	)			(4,684	)			(502	)			3,057				(4,959	)
Provision (benefit) for income taxes			256				(1,248	)			840				¾				(152	)
Income (loss) from continuing operations			(3,086	)			(3,436	)			(1,342	)			3,057				(4,807	)
Income (loss) from discontinued operations, net of tax			¾				(852	)			2,781				¾				1,929
Extraordinary gain (loss) — net of taxes of $0			¾				(208	)			¾				¾				(208	)
Net income (loss)		$	(3,086	)		$	(4,496	)		$	1,439			$	3,057			$	(3,086	)

UNIFI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

     Statements of Cash Flows Information for the Fiscal Quarter Ended September 24, 2006 (amounts in thousands):

						Guarantor				Non-Guarantor
		Parent				Subsidiaries				Subsidiaries				Eliminations				Consolidated
Operating activities:
Net cash provided by (used in) continuing operating		$	(9,294	)		$	8			$	4,962			$	(28	)		$	(4,352	)
Investing activities:
Capital expenditures			¾				(659	)			(821	)			¾				(1,480	)
Return of capital in equity affiliates			¾				229				¾				¾				229
Collection of notes receivable			116				612				(600	)			(12	)			116
Other			¾				¾				3				¾				3
Net cash provided by (used in) investing activities			116				182				(1,418	)			(12	)			(1,132	)
Financing activities:
Other			(127	)			(290	)			¾				¾				(417	)
Net cash used in financing activities			(127	)			(290	)			¾				¾				(417	)
Cash flows of discontinued operations:
Operating cash flow			¾				¾				63				¾				63
Investing cash flow			¾				¾				¾				¾				¾
Net cash provided by discontinued operations			¾				¾				63				¾				63
Effect of exchange rate changes on cash and cash equivalents			¾				¾				(3	)			40				37
Net increase (decrease) in cash and cash equivalents			(9,305	)			(100	)			3,604				¾				(5,801	)
Cash and cash equivalents at beginning of period			22,992				1,392				10,933				¾				35,317
Cash and cash equivalents at end of period		$	13,687			$	1,292			$	14,537			$	—			$	29,516

UNIFI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

     Statements of Cash Flows Information for the Fiscal Quarter Ended September 25, 2005 (amounts in thousands):

						Guarantor				Non-Guarantor
		Parent				Subsidiaries				Subsidiaries				Eliminations				Consolidated
Operating activities:
Net cash provided by (used in) continuing operating		$	(5,035	)		$	2,589			$	1,453			$	¾			$	(993	)
Investing activities:
Capital expenditures			¾				(3,534	)			(369	)			¾				(3,903	)
Investment in equity affiliates			¾				(331	)			(15,000	)			¾				(15,331	)
Investment of foreign restricted assets			¾				¾				167				¾				167
Collection of notes receivable			119				(3	)			(6	)			¾				110
Proceeds from sale of capital assets			¾				2,222				17				¾				2,239
Change in restricted cash			¾				¾				2,766				¾				2,766
Other			(10	)			(15	)			(172	)			¾				(197	)
Net cash provided by (used in) investing activities			109				(1,661	)			(12,597	)			¾				(14,149	)
Financing activities:
Payment of long term debt			¾				(24,407	)			¾				¾				(24,407	)
Other			(2	)			30				433				¾				461
Net cash provided by (used in) financing activities			(2	)			(24,377	)			433				¾				(23,946	)
Cash flows of discontinued operations:
Operating cash flow			¾				517				57				¾				574
Investing cash flow			¾				(125	)			23,062				¾				22,937
Net cash provided by discontinued operations			¾				392				23,119				¾				23,511
Effect of exchange rate changes on cash and cash equivalents			¾				¾				700				¾				700
Net increase (decrease) in cash and cash equivalents			(4,928	)			(23,057	)			13,108				¾				(14,877	)
Cash and cash equivalents at beginning of period			35,868				25,272				44,481				¾				105,621
Cash and cash equivalents at end of period		$	30,940			$	2,215			$	57,589			$	—			$	90,744