##### Table of Contents



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 28, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from 
to
 Commission
File Number: 1-10542
 UNIFI, INC.
  New York
(State or other jurisdiction of 
incorporation or organization)
    
    11-2165495
(I.R.S. Employer
Identification No.)
 P.O. Box 19109  7201 West Friendly Avenue Greensboro, NC
(Address of principal executive offices)
    
    27419
(Zip Code)
 (336) 294-4410
 þ o
  Large accelerated filer: o
    
    Accelerated filer: þ
    
    Non-accelerated filer: o
    
    Smaller reporting company: o(Do not check if a smaller reporting company)
 o þ




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##### 



INDEX
 PagePart I
    
    Item 1.
    
    Financial Statements:Financial Information
    
    
    
    Condensed Consolidated Balance Sheets as of September 28, 2008 and June 29, 2008
    
    
    3Condensed Consolidated Statements of Operations
for the Quarters Ended September 28, 2008 and September
23, 2007
    
    
    4Condensed Consolidated Statements of Cash Flows
for the Quarters Ended September 28, 2008 and
September 23, 2007
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    21Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    37Item 4.
    
    Controls and Procedures
    
    
    38Part IIOtherInformation
    
    Item 1.
    
    Legal Proceedings
    
    
    39Item 1A.
    
    Risk Factors
    
    
    39Item 2.
    
    Unregistered Sales of Equity Securities and
Use of Proceeds
    
    
    39Item 3.
    
    Defaults Upon Senior Securities
    
    
    39Item 4.
    
    Submission of
Matters to a Vote of Security Holders
    
    
    39Item 5.
    
    Other Information
    
    
    39Item 6.
    
    Exhibits
    
    
    40Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
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September 28,
    
    
    June 29,2008
    
    
    2008(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    20,396
    
    
    $
    20,248Receivables, net
    
    
    95,247
    
    
    
    103,272Inventories
    
    
    127,994
    
    
    
    122,890Deferred income taxes
    
    
    1,962
    
    
    
    2,357Assets held for sale
    
    
    3,808
    
    
    
    4,124Restricted cash
    
    
    7,308
    
    
    
    9,314Other current assets
    
    
    4,290
    
    
    
    3,693Total current assets
    
    
    261,005
    
    
    
    265,898Property, plant and equipment
    
    
    843,616
    
    
    
    855,324Less accumulated depreciation
    
    
    (675,771
    )
    
    
    (678,025
    )167,845
    
    
    
    177,299Investments in unconsolidated affiliates
    
    
    71,950
    
    
    
    70,562Restricted cash
    
    
    19,989
    
    
    
    26,048Goodwill
    
    
    18,579
    
    
    
    18,579Intangible assets, net
    
    
    19,607
    
    
    
    20,386Other noncurrent assets
    
    
    11,698
    
    
    
    12,759Total assets
    
    $
    570,673
    
    
    $
    591,531LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    43,897
    
    
    $
    44,553Accrued expenses
    
    
    26,061
    
    
    
    25,531Income taxes payable
    
    
    832
    
    
    
    681Current maturities of long-term debt and other
current liabilities
    
    
    7,729
    
    
    
    9,805Total current liabilities
    
    
    78,519
    
    
    
    80,570Long-term debt and other liabilities
    
    
    198,518
    
    
    
    204,366Deferred income taxes
    
    
    657
    
    
    
    926Commitments and contingenciesShareholders equity:Common stock
    
    
    6,196
    
    
    
    6,069Capital in excess of par value
    
    
    28,838
    
    
    
    25,131Retained earnings
    
    
    253,818
    
    
    
    254,494Accumulated other comprehensive income
    
    
    4,127
    
    
    
    19,975292,979
    
    
    
    305,669Total liabilities and shareholders equity
    
    $
    570,673
    
    
    $
    591,531
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For the Quarters EndedSeptember 28,
    
    
    September 23,2008
    
    
    2007Net sales
    
    $
    169,009
    
    
    $
    170,536Cost of sales
    
    
    155,584
    
    
    
    159,543Selling, general & administrative expenses
    
    
    10,545
    
    
    
    14,454Provision for bad debts
    
    
    558
    
    
    
    254Interest expense
    
    
    5,965
    
    
    
    6,712Interest income
    
    
    (913
    )
    
    
    (826
    )Other (income) expense, net
    
    
    (561
    )
    
    
    (1,006
    )Equity in earnings of unconsolidated affiliates
    
    
    (3,482
    )
    
    
    (178
    )Write down of long-lived assets
    
    
    
    
    
    
    533Write down of investment in unconsolidated affiliate
    
    
    
    
    
    
    4,505Restructuring charges
    
    
    
    
    
    
    2,632Income (loss) from continuing operations before
income taxes
    
    
    1,313
    
    
    
    (16,087
    )Provision (benefit) for income taxes
    
    
    1,885
    
    
    
    (6,931
    )Loss from continuing operations
    
    
    (572
    )
    
    
    (9,156
    )Loss from discontinued operations, net of tax
    
    
    (104
    )
    
    
    (32
    )Net loss
    
    $
    (676
    )
    
    $
    (9,188
    )Loss per common share (basic and diluted):Net loss  continuing operations
    
    $
    (.01
    )
    
    $
    (.15
    )Net loss  discontinued operations
    
    
    
    
    
    
    Net loss  basic and diluted
    
    $
    (.01
    )
    
    $
    (.15
    )Weighted average outstanding shares of
common stock (basic and diluted)
    
    
    61,134
    
    
    
    60,537
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For the Quarters EndedSeptember 28,
    
    
    September 23,2008
    
    
    2007Cash and cash equivalents at beginning of year
    
    $
    20,248
    
    
    $
    40,031Operating activities:Net loss
    
    
    (676
    )
    
    
    (9,188
    )Adjustments to reconcile net loss to net cash provided by
(used in) continuing operating activities:Loss from discontinued operations
    
    
    104
    
    
    
    32Earnings of unconsolidated equity affiliates, net of distributions
    
    
    (1,417
    )
    
    
    282Depreciation
    
    
    8,980
    
    
    
    9,599Amortization
    
    
    1,069
    
    
    
    1,162Stock-based compensation expense
    
    
    282
    
    
    
    107Deferred compensation expense, net
    
    
    (81
    )
    
    
    30Net gain on asset sales
    
    
    (316
    )
    
    
    (142
    )Non-cash write down of long-lived assets
    
    
    
    
    
    
    533Non-cash write down of investment in unconsolidated affiliate
    
    
    
    
    
    
    4,505Non-cash portion of restructuring charges
    
    
    
    
    
    
    2,632Deferred income tax benefit
    
    
    (115
    )
    
    
    (7,524
    )Provision for bad debts
    
    
    558
    
    
    
    254Other
    
    
    296
    
    
    
    (473
    )Change in assets and liabilities, excluding effects of
acquisitions and foreign currency adjustments
    
    
    (6,082
    )
    
    
    (3,016
    )Net cash provided by (used in) continuing operating activities
    
    
    2,602
    
    
    
    (1,207
    )Investing activities:Capital expenditures
    
    
    (3,569
    )
    
    
    (1,064
    )Change in restricted cash
    
    
    5,183
    
    
    
    (915
    )Proceeds from sale of capital assets
    
    
    101
    
    
    
    2,216Return of capital from equity affiliate
    
    
    
    
    
    
    234Other
    
    
    (94
    )
    
    
    264Net cash provided by investing activities
    
    
    1,621
    
    
    
    735Financing activities:Borrowings of long-term debt
    
    
    4,600
    
    
    
    157Payments of long-term debt
    
    
    (9,080
    )
    
    
    (6,705
    )Proceeds from stock exercises
    
    
    3,551
    
    
    
    Other
    
    
    37
    
    
    
    33Net cash used in financing activities
    
    
    (892
    )
    
    
    (6,515
    )Cash flows of discontinued operations:Operating cash flow
    
    
    (114
    )
    
    
    (78
    )Net cash used in discontinued operations
    
    
    (114
    )
    
    
    (78
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (3,069
    )
    
    
    893Net increase (decrease) in cash and cash equivalents
    
    
    148
    
    
    
    (6,172
    )Cash and cash equivalents at end of period
    
    $
    20,396
    
    
    $
    33,859
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##### Table of Contents



1.
    
    Basis of PresentationThe Condensed Consolidated Balance Sheet of Unifi, Inc. (the Company) at June 29, 2008 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 29, 2008, this information is unaudited and reflects all adjustments which are, in the
opinion of management, necessary to present fairly the financial position at September 28, 2008,
and the results of operations and cash flows for the periods ended September 28, 2008 and
September 23, 2007. 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 29, 2008. Certain prior period amounts
have been reclassified to conform to current year presentation.The significant accounting policies followed by the Company are presented on pages 65 to 71 of
the Companys Annual Report on Form 10-K for the fiscal year ended June 29, 2008.2.
    
    InventoriesInventories are comprised of the following (amounts in thousands):
 September 28,
    
    
    June 29,2008
    
    
    2008Raw materials and supplies
    
    $
    50,873
    
    
    $
    51,407Work in process
    
    
    6,974
    
    
    
    7,021Finished goods
    
    
    70,147
    
    
    
    64,462$
    127,994
    
    
    $
    122,890
 3.
    
    Accrued ExpensesAccrued expenses are comprised of the following (amounts in thousands):
 September 28,
    
    
    June 29,2008
    
    
    2008Payroll and fringe benefits
    
    $
    7,237
    
    
    $
    11,101Severance
    
    
    1,749
    
    
    
    1,935Interest
    
    
    8,313
    
    
    
    2,813Utilities
    
    
    2,438
    
    
    
    3,114Closure reserve
    
    
    1,105
    
    
    
    1,414Retiree benefits
    
    
    1,715
    
    
    
    1,733Property taxes
    
    
    1,623
    
    
    
    1,132Other
    
    
    1,881
    
    
    
    2,289$
    26,061
    
    
    $
    25,531
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##### Table of Contents



4.
    
    Other (Income) Expense, NetThe following table summarizes the Companys other (income) expense, net (amounts in
thousands):
 For the Quarters EndedSeptember 28,
    
    
    September 23,2008
    
    
    2007Gain on sale of fixed assets
    
    $
    (316
    )
    
    $
    (142
    )Gain from sale of nitrogen credits
    
    
    
    
    
    
    (807
    )Technology fee from China joint venture
    
    
    
    
    
    
    (438
    )Currency (gains) losses
    
    
    (304
    )
    
    
    326Other, net
    
    
    59
    
    
    
    55Other (income) expense, net
    
    $
    (561
    )
    
    $
    (1,006
    )
 5.
    
    Recent Accounting PronouncementsIn February 2007, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standard (SFAS) No. 159, Fair Value Option for Financial Assets and
Financial Liabilities-Including an Amendment to FASB Statement No. 115 that expands the use of
fair value measurement of various financial instruments and other items. This statement
provides entities the option to record certain financial assets and liabilities, such as firm
commitments, non-financial insurance contracts and warranties, and host financial instruments at
fair value. Generally, the fair value option may be applied instrument by instrument and is
irrevocable once elected. The unrealized gains and losses on elected items would be recorded as
earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. On
June 30, 2008, the Company determined it would not elect to record any eligible balance sheet
accounts at fair value.In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157
addresses how companies should measure fair value when they are required to use a fair value
measure for recognition or disclosure purposes under generally accepted accounting principles.
As a result of SFAS No. 157 there is now a common definition of fair value to be used throughout
GAAP. The FASB believes that the new standard will make the measurement of fair value more
consistent and comparable and improve disclosures about those measures. The provisions of SFAS
No. 157 were to be effective for fiscal years beginning after November 15, 2007. On February 12,
2008, the FASB issued Staff Position (FSP) FAS 157-2 which delays the effective date of SFAS
No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring basis (at least
annually). This FSP partially defers the effective date of SFAS No. 157 to fiscal years
beginning after November 15, 2008, and interim periods within those fiscal years for items
within the scope of this FSP. Effective for fiscal year 2009, the Company adopted SFAS No. 157
except as it applies to those nonfinancial assets and nonfinancial liabilities as noted in FSP
FAS 157-2 and the adoption of this standard did not have a material effect on its consolidated
financial statements.6.
    
    Comprehensive Income (Loss)Comprehensive loss amounted to $16.5 million for the first quarter of fiscal year 2009 compared
to comprehensive loss of $5.7 million for the first quarter of fiscal year 2008. Comprehensive
loss is comprised of $0.7 million of net loss and $15.8 million of negative cumulative
translation adjustments for the first quarter of fiscal year 2009. Comparatively, comprehensive
loss for the corresponding period in the prior year was comprised of $9.2 million of net losses
and $3.5 million of positive cumulative translation adjustments. The Company does not provide
income taxes on the impact of currency translations as earnings from foreign subsidiaries are
deemed to be permanently invested.
 7




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##### Table of Contents



7.
    
    Investments in Unconsolidated AffiliatesThe following table represents the Companys investments in unconsolidated affiliates:
 Affiliate Name
    
    Date Acquired
    
    Location
    
    Percent OwnershipYihua Unifi Fibre Company Limited
    
    August 2005
    
    Yizheng, Jiangsu
Province, Peoples
Republic of China
    
    
    50
    %Parkdale America, LLC
    
    June 1997
    
    North and South Carolina
    
    
    34
    %Unifi-SANS Technical Fibers, LLC
    
    September 2000 (1)
    
    Stoneville, North Carolina
    
    
    50
    %U.N.F. Industries, LLC
    
    September 2000
    
    Migdal Ha  Emek, Israel
    
    
    50
    %
   For
the Quarter Ended September 28, 2008YUFI
    
    PAL
    
    UNF
    
    TotalNet sales
    
    $
    39,881
    
    
    $
    122,083
    
    
    $
    5,892
    
    
    $
    167,856Gross profit (loss)
    
    
    (2,048
    )
    
    
    6,246
    
    
    
    (789
    )
    
    
    3,409Depreciation and amortization
    
    
    1,395
    
    
    
    4,457
    
    
    
    474
    
    
    
    6,326Income (loss) from operations
    
    
    (4,156
    )
    
    
    3,478
    
    
    
    (1,270
    )
    
    
    (1,948
    )Net income (loss)
    
    
    (4,617
    )
    
    
    10,146
    
    
    
    (1,143
    )
    
    
    4,386
 For
the Quarter Ended September 23, 2007USTF
    
    YUFI
    
    PAL
    
    UNF
    
    TotalNet sales
    
    $
    6,455
    
    
    $
    37,069
    
    
    $
    110,596
    
    
    $
    7,362
    
    
    $
    161,482Gross profit (loss)
    
    
    571
    
    
    
    (307
    )
    
    
    4,622
    
    
    
    319
    
    
    
    5,205Depreciation and amortization
    
    
    578
    
    
    
    1,324
    
    
    
    4,910
    
    
    
    474
    
    
    
    7,286Income (loss) from operations
    
    
    189
    
    
    
    (1,772
    )
    
    
    1,058
    
    
    
    134
    
    
    
    (391
    )Net income (loss)
    
    
    148
    
    
    
    (2,414
    )
    
    
    1,353
    
    
    
    144
    
    
    
    (769
    )
 8.
    
    Income TaxesThe Companys income tax provision for the quarter ended September 28, 2008 resulted in tax
expense at an effective rate of 143.5% compared to the quarter ended September 23, 2007 which
resulted in a tax benefit at an effective rate of 43.1%. The primary difference between the
Companys income tax expense and the U.S. statutory rate for the quarter ended September 28,
2008 was an increase in the valuation allowance due to an increase in domestic pre-tax losses
upon which no tax benefit could be recognized. The primary differences between the Companys
income tax benefit and the U.S. statutory rate for the quarter ended September 23, 2007 were a
decrease in the valuation allowance for certain asset impairments and state income tax benefit.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 continued to record a valuation allowance against its net domestic deferred tax assets as
those net deferred assets are more likely than not to be unrealizable for income tax purposes.
The valuation allowance increased $0.6 million in the quarter ended September 28, 2008 compared
to a $5.1 million decrease in the quarter ended September 23, 2007.During the quarter ended September 28, 2008, the Company had a reduction in its FIN 48 liability
of $0.1 million in relation to a settlement with the Internal Revenue Service (IRS) concerning
the audit of
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its federal corporate income tax returns for the fiscal years 2003-2006. This reduction in FIN
48 liability had no impact on the effective tax rate for the quarter. The liability for
unrecognized tax benefits is expected to be reduced within the next twelve months by
approximately $1.5 million related to North Carolina income tax credit carry forwards that are
anticipated to expire unused by the end of fiscal year 2009.There was no change in the amount of interest and penalties during the quarter ended September
28, 2008.The Company is subject to income tax examinations for U.S. federal income taxes for fiscal years
2007 and 2008; the IRS recently concluded its exam for fiscal years 2003 through 2006. The
Company is also subject to income tax examinations for non-U.S. income taxes for tax years 2000
through 2008, and for state and local income taxes for fiscal years 2001 through 2008.9.
    
    Stock-Based CompensationDuring the second quarter of fiscal year 2008, the Board of Directors (Board) authorized
the issuance of 1,570,000 stock options from the 1999 Long-Term Incentive Plan of which 120,000
were issued to certain Board members and the remaining options were issued to certain key
employees. The stock options issued to key employees are subject to a market condition which
vests the options on the date that the closing price of the Companys common stock shall have
been at least $6.00 per share for thirty consecutive trading days. The stock options issued to
certain Board members are subject to a similar market condition in that one half of each
members options vest on the date that the closing price of the Companys common stock shall
have been at least $8.00 per share for thirty consecutive trading days and the remaining one
half vest on the date that the closing price of the Companys common stock shall have been at
least $10.00 per share for thirty consecutive trading days. The Company used a Monte Carlo
stock option model to estimate fair value and the derived vesting periods which range from 2.4
to 3.9 years.The Company incurred $0.3 million and $0.1 million in the first quarter of fiscal years
2009 and 2008, respectively, in stock-based compensation charges which were recorded as selling,
general and administrative (SG&A) expenses with the offset to additional paid-in-capital.During the first quarter of fiscal year 2009, the Company issued 1,268,300 shares of common
stock as a result of the exercise of an equivalent number of stock options.10.
    
    Assets Held for SaleAs of September 28, 2008 and June 29, 2008, the Company had assets held for sale related to the
consolidation of its polyester manufacturing capacity. Included in assets held for sale are the
remaining assets and structures at the Kinston site which have a carrying value of $1.6 million
and certain real property and related assets located in Yadkinville, North Carolina which have a
carrying value of $2.2 million.On September 29, 2008, the Company entered into an agreement to sell certain polyester real
property and related assets located in Yadkinville, North Carolina for $7.0 million. Upon the
closing of this sale, the Company expects to record a gain of approximately $5.0 million. The
Company anticipates that the sale will be completed during the second quarter of fiscal year
2009, however, the sale is subject to closing conditions and therefore the Company can make no
assurance that the sale will be completed during this time period or at all.During the first quarter of fiscal year 2008, the Company completed the sale of a nylon
manufacturing facility located in Madison, North Carolina which was listed as held for sale.
Net proceeds from this transaction were $2.1 million.
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The following table summarizes by category assets held for sale (amounts in thousands):
 September 28,
    
    
    June 29,2008
    
    
    2008Land
    
    $
    30
    
    
    $
    30Building
    
    
    1,399
    
    
    
    1,348Machinery and equipment
    
    
    2,379
    
    
    
    2,746$
    3,808
    
    
    $
    4,124
 11.
    
    Impairment ChargesWrite down of long-lived assetsDuring the first quarter of fiscal year 2008, the Companys Brazilian polyester operation
continued the modernization plan for its facilities by abandoning four of its older machines and
replacing them with newer machines purchased from the Companys domestic polyester division. As
a result, the Company recognized $0.5 million in non-cash impairment charges on the older
machines.Write down of equity affiliatesDuring the first quarter of fiscal year 2008, the Company performed a review of the fair value
of USTF as part of the negotiations related to the sale. The Company determined that the
carrying value exceeded its fair value and recorded a non-cash impairment charge of $4.5
million. The investment was sold in the second quarter of fiscal year 2008.12.
    
    Severance and Restructuring ChargesSeveranceIn the first quarter of fiscal 2008, the Company announced the closure of its polyester facility
in Kinston, North Carolina. The Kinston facility produced partially oriented yarn (POY) for
internal consumption and third party sales. The Company now purchases its commodity POY needs
from external suppliers for conversion in its texturing operations. The Company continues to
produce POY in the Yadkinville, North Carolina facility for its specialty and premier
valued-added (PVA) yarns and certain other commodity yarns. During the first quarter of fiscal
year 2008, the Company recorded $0.8 million for severance related to its Kinston consolidation
which was reflected on the Cost of sales line item in the Consolidated Statements of
Operations. Approximately 231 employees which included 31 salaried positions and 200 wage
positions were affected as a result of the reorganization.In the first quarter of fiscal year 2008, the Company announced its plan to re-organize certain
corporate staff and manufacturing support functions to further reduce costs. The Company
recorded $1.1 million for severance related to this reorganization which was reflected on the
Restructuring charges line item of the Consolidated Statements of Operations. Approximately
54 salaried employees were affected by this reorganization. In addition, the Company recorded
severance of $2.4 million for its former President and Chief Executive Officer during the first
quarter of fiscal year 2008 and $1.7 million for severance related to its former Chief Financial
Officer during the second quarter of fiscal year 2008 which were reflected on the Selling,
general, & administrative expense line item in the Consolidated Statements of Operations.On September 28, 2007, the Company completed the sale of its polyester manufacturing facilities
located in Staunton, Virginia for $3.1 million. The Company continued to lease the Staunton
property under an operating lease which currently expires in November 2008. On May 14, 2008, the
Company announced the closing of its Staunton, Virginia facility and the transfer of all its
production to its facility in Yadkinville, North Carolina. During the first quarter of fiscal
year 2009, the Company recorded $0.1 million for severance related to its Staunton
consolidation. Approximately 6 salaried employees and 35 wage employees will be affected by
this reorganization. The expenses were reflected on the Cost of sales line item in the
Consolidated Statements of Operations.
 10




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RestructuringIn the first quarter of fiscal year 2008, the Company recorded $1.5 million for restructuring
charges related to unfavorable Kinston contracts for continued services after the closing of the
facility.The table below summarizes changes to the accrued severance and accrued restructuring accounts
for the period ended September 28, 2008 (amounts in thousands):
 Balance at
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance atJune 29, 2008
    
    Charges
    
    Adjustments
    
    Amounts Used
    
    September 28, 2008Accrued severance
    
    $
    3,668
    
    
    
    137
    
    
    
    5
    
    
    
    (781
    )
    
    $
    3,029
    (1)Accrued restructuring
    
    $
    1,414
    
    
    
    55
    
    
    
    190
    
    
    
    (554
    )
    
    $
    1,105
 (1)
        As of September 28, 2008, the Company classified $1.3 million of accrued executive severance
as long term. 13.
    
    Discontinued OperationsOn July 28, 2004, the Company announced its decision to close its European Division. The
manufacturing facilities in Ireland ceased operations on October 31, 2004. The Company is in
the process of settling its obligations relating to the closure. The Company does not
anticipate significant future cash flow activity from its discontinued operations. For the
quarters ended September 28, 2008 and September 23, 2007, the Company recorded losses of $0.1
million and $0, respectively.14.
    
    Derivative Financial InstrumentsThe Company accounts for derivative contracts and hedging activities under SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities which requires all derivatives to
be recorded on the balance sheet at fair value. If the derivative is a hedge, depending on the
nature of the 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 or
are recorded in other comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivatives change in fair value is immediately recognized in
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 and the dates they are consummated. The Company
utilizes some natural hedging to mitigate these transaction exposures. The Company primarily
enters into foreign currency forward contracts for the purchase and sale of European, North
American and Brazilian 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. Counter-parties for these
instruments are major financial institutions.Currency forward contracts are used 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, 50% of the sales value of these orders is covered by forward contracts. Maturity
dates of the forward contracts are intended 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% 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
 11




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##### Table of Contents



latest maturity for all outstanding purchase and sales foreign currency forward contracts are
November 2008 and January 2009, respectively.The dollar equivalent of these forward currency contracts and their related fair values are
detailed below (amounts in thousands):
 September 28,
    
    
    June 29,2008
    
    
    2008Foreign currency purchase contracts:Notional amount
    
    $
    507
    
    
    $
    492Fair value
    
    
    461
    
    
    
    499Net (gain) loss
    
    $
    46
    
    
    $
    (7
    )Foreign currency sales contracts:Notional amount
    
    $
    1,463
    
    
    $
    620Fair value
    
    
    1,410
    
    
    
    642Net gain (loss)
    
    $
    53
    
    
    $
    (22
    )
 For the quarters ended September 28, 2008 and September 23, 2007, 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, resulted in pre-tax income of $0.3
million and pre-tax loss of $0.3 million, respectively.15.
    
    ContingenciesOn September 30, 2004, the Company completed its acquisition of the polyester filament
manufacturing assets located at Kinston from INVISTA S.a.r.l. (INVISTA). The land for the
Kinston site was 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 (DENR) 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
containment at the identified AOCs and clean it 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 was to pass to the Company and after seven years of
sliding scale shared responsibility with DuPont, the Company would have had sole responsibility
for future remediation requirements, if any. Effective March 20, 2008, the Company entered into
a Lease Termination Agreement associated with conveyance of certain assets at Kinston to DuPont.
This agreement terminated the Ground Lease and relieved the Company of any future
responsibility for environmental remediation, other than participation with DuPont, if so called
upon, with regard to the Companys period of operation of the Kinston site. However, the
Company continues to own a satellite service facility acquired in the INVISTA transaction that
has contamination from DuPonts operations and is monitored by DENR. This site has been
remediated by DuPont and DuPont has received authority from DENR to discontinue remediation,
other than natural attenuation. DuPonts duty to monitor and report to DENR will be transferred
to the Company in the future, at which time DuPont must pay the Company for seven years of
monitoring and reporting costs and the Company will assume responsibility for any future
remediation and monitoring of the site. 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.
 12




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##### Table of Contents



16.
    
    Related Party TransactionIn fiscal year 2007, the Company purchased the polyester and nylon texturing operations of
Dillon (the Transaction). In connection with the Transaction, the Company and Dillon entered
into a Sales and Services Agreement for a term of two years from January 1, 2007, pursuant to
which the Company agreed to pay Dillon an aggregate amount of $6.0 million in exchange for
certain sales and transitional services to be provided by Dillons sales staff and executive
management, of which $0.8 million was paid during the first quarter of both fiscal year 2009 and
fiscal year 2008. Mr. Stephen Wener is the President and Chief Executive Officer of Dillon and
is a director of the Company.17.
    
    Segment DisclosuresThe following is the Companys selected segment information for the
quarters ended September 28, 2008 and September 23, 2007 (amounts in
thousands):
 Polyester
    
    
    Nylon
    
    
    TotalQuarter ended September 28, 2008:Net sales to external customers
    
    $
    122,979
    
    
    $
    46,030
    
    
    $
    169,009Intersegment net sales
    
    
    
    
    
    
    71
    
    
    
    71Depreciation and amortization
    
    
    6,982
    
    
    
    2,309
    
    
    
    9,291Segment operating profit (loss)
    
    
    (161
    )
    
    
    3,041
    
    
    
    2,880Total assets
    
    
    365,943
    
    
    
    93,933
    
    
    
    459,876Quarter ended September 23, 2007:Net sales to external customers
    
    $
    129,377
    
    
    $
    41,159
    
    
    $
    170,536Intersegment net sales
    
    
    1,798
    
    
    
    769
    
    
    
    2,567Depreciation and amortization
    
    
    6,610
    
    
    
    3,292
    
    
    
    9,902Segment operating profit (loss)
    
    
    (7,391
    )
    
    
    765
    
    
    
    (6,626
    )Total assets
    
    
    410,520
    
    
    
    110,507
    
    
    
    521,027
  For the Quarters EndedSeptember 28,
    
    
    September 23,2008
    
    
    2007Depreciation and amortization:Depreciation and amortization of specific reportable segment
    
    $
    9,291
    
    
    $
    9,902Depreciation of allocated assets
    
    
    468
    
    
    
    568Amortization of allocated assets
    
    
    290
    
    
    
    291Consolidated depreciation and amortization
    
    $
    10,049
    
    
    $
    10,761Reconciliation of segment operating income (loss) to
income (loss) from continuing operations before income
taxes:Reportable segments operating income (loss)
    
    $
    2,880
    
    
    $
    (6,626
    )Provision for bad debts
    
    
    558
    
    
    
    254Interest expense, net
    
    
    5,052
    
    
    
    5,886Other (income) expense, net
    
    
    (561
    )
    
    
    (1,006
    )Equity in earnings of unconsolidated affiliates
    
    
    (3,482
    )
    
    
    (178
    )Write down of investment in unconsolidated affiliate
    
    
    
    
    
    
    4,505Income (loss) from continuing operations before income
taxes
    
    $
    1,313
    
    
    $
    (16,087
    )
 13




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##### Table of Contents



For purposes of internal management reporting, segment operating income (loss) represents
segment net sales less cost of sales, allocated selling, general and administrative expenses,
segment restructuring charges, and segment impairments of long-lived assets. Certain
non-segment manufacturing and unallocated selling, general and administrative costs are
allocated to the operating segments based on activity drivers relevant to the respective costs.
In the prior year, consolidated intersegment sales were recorded at market. Beginning in fiscal
year 2009, the Company changed its domestic intersegment transfer pricing of inventory from a
market value approach to a cost approach. Using the new methodology, no intersegment sales are
recorded for domestic transfers of inventory. The amounts of domestic intersegment sales that
were included in the prior year numbers totaled $1.8 million for domestic polyester and $0.8
million for domestic nylon sales. The remaining intersegment sales relate to sales to the
Companys foreign subsidiaries which are still recorded at market.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, interest expense, net, and
corporate equity investment and long-lived asset impairments.Segment operating income (loss) excluded the provision for bad debts of $0.6 million and $0.3
million for the current and prior year quarter periods, respectively.The total assets for the polyester segment decreased from $387.0 million at June 29, 2008 to
$365.9 million at September 28, 2008 due primarily to decreases in property, plant, and
equipment, accounts receivable, long-term restricted cash, short-term restricted cash, other
assets, cash, other current assets, and deferred taxes of $7.8 million, $6.4 million, $2.4
million, $2.0 million, $1.6 million, $0.8 million, $0.7 million, and $0.4 million, respectively.
These decreases were offset by increases in inventory of $1.0 million. The total assets for
the nylon segment increased from $92.5 million at June 29, 2008 to $93.9 million at September
28, 2008 due primarily to increases in inventory and cash of $4.0 million and $0.3 million,
respectively. These increases were offset by decreases in property, plant, and equipment and
accounts receivable of $2.1 million and $0.8 million, respectively.18.
    
    Condensed Consolidated Guarantor and Non-Guarantor Financial StatementsThe 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 the
notes due in 2014 (the 2014 notes) and the guarantees, 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 of the 2014 notes is presented below.
 14




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##### Table of Contents



UNIFI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  Guarantor
    
    
    Non-GuarantorParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent assets:Cash and cash equivalents
    
    $
    4,570
    
    
    $
    179
    
    
    $
    15,647
    
    
    $
    3⁄4
    
    
    $
    20,396Receivables, net
    
    
    16
    
    
    
    74,628
    
    
    
    20,603
    
    
    
    3⁄4
    
    
    
    95,247Inventories
    
    
    3⁄4
    
    
    
    102,256
    
    
    
    25,738
    
    
    
    3⁄4
    
    
    
    127,994Deferred income taxes
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    1,962
    
    
    
    3⁄4
    
    
    
    1,962Assets held for sale
    
    
    3⁄4
    
    
    
    3,808
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3,808Restricted cash
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    7,308
    
    
    
    3⁄4
    
    
    
    7,308Other current assets
    
    
    130
    
    
    
    1,667
    
    
    
    2,493
    
    
    
    3⁄4
    
    
    
    4,290Total current assets
    
    
    4,716
    
    
    
    182,538
    
    
    
    73,751
    
    
    
    3⁄4
    
    
    
    261,005Property, plant and equipment
    
    
    11,342
    
    
    
    765,664
    
    
    
    66,610
    
    
    
    3⁄4
    
    
    
    843,616Less accumulated depreciation
    
    
    (1,687
    )
    
    
    (627,297
    )
    
    
    (46,787
    )
    
    
    3⁄4
    
    
    
    (675,771
    )9,655
    
    
    
    138,367
    
    
    
    19,823
    
    
    
    3⁄4
    
    
    
    167,845Investments in unconsolidated affiliates
    
    
    3⁄4
    
    
    
    62,237
    
    
    
    9,713
    
    
    
    3⁄4
    
    
    
    71,950Restricted cash
    
    
    3⁄4
    
    
    
    14,543
    
    
    
    5,446
    
    
    
    3⁄4
    
    
    
    19,989Investments in consolidated subsidiaries
    
    
    405,547
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (405,547
    )
    
    
    3⁄4Goodwill and intangible assets, net
    
    
    3⁄4
    
    
    
    38,186
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    38,186Other noncurrent assets
    
    
    70,836
    
    
    
    (57,315
    )
    
    
    (1,823
    )
    
    
    3⁄4
    
    
    
    11,698$
    490,754
    
    
    $
    378,556
    
    
    $
    106,910
    
    
    $
    (405,547
    )
    
    $
    570,673LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable and other
    
    $
    280
    
    
    $
    38,443
    
    
    $
    5,174
    
    
    $
    3⁄4
    
    
    $
    43,897Accrued expenses
    
    
    8,859
    
    
    
    13,932
    
    
    
    3,270
    
    
    
    3⁄4
    
    
    
    26,061Income taxes payable
    
    
    (1,364
    )
    
    
    1,336
    
    
    
    860
    
    
    
    3⁄4
    
    
    
    832Current maturities of long-term debt and other current
liabilities
    
    
    3⁄4
    
    
    
    421
    
    
    
    7,308
    
    
    
    3⁄4
    
    
    
    7,729Total current liabilities
    
    
    7,775
    
    
    
    54,132
    
    
    
    16,612
    
    
    
    3⁄4
    
    
    
    78,519Long-term debt and other liabilities
    
    
    190,000
    
    
    
    3,072
    
    
    
    5,446
    
    
    
    3⁄4
    
    
    
    198,518Deferred income taxes
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    657
    
    
    
    3⁄4
    
    
    
    657Shareholders/ invested equity
    
    
    292,979
    
    
    
    321,352
    
    
    
    84,195
    
    
    
    (405,547
    )
    
    
    292,979$
    490,754
    
    
    $
    378,556
    
    
    $
    106,910
    
    
    $
    (405,547
    )
    
    $
    570,673
 15




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##### Table of Contents



UNIFI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
  Guarantor
    
    
    Non-GuarantorParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent assets:Cash and cash equivalents
    
    $
    689
    
    
    $
    3,377
    
    
    $
    16,182
    
    
    $
    3⁄4
    
    
    $
    20,248Receivables, net
    
    
    66
    
    
    
    82,040
    
    
    
    21,166
    
    
    
    3⁄4
    
    
    
    103,272Inventories
    
    
    3⁄4
    
    
    
    92,581
    
    
    
    30,309
    
    
    
    3⁄4
    
    
    
    122,890Deferred income taxes
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    2,357
    
    
    
    3⁄4
    
    
    
    2,357Assets held for sale
    
    
    3⁄4
    
    
    
    4,124
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    4,124Restricted cash
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    9,314
    
    
    
    3⁄4
    
    
    
    9,314Other current assets
    
    
    26
    
    
    
    733
    
    
    
    2,934
    
    
    
    3⁄4
    
    
    
    3,693Total current assets
    
    
    781
    
    
    
    182,855
    
    
    
    82,262
    
    
    
    3⁄4
    
    
    
    265,898Property, plant and equipment
    
    
    11,273
    
    
    
    765,710
    
    
    
    78,341
    
    
    
    3⁄4
    
    
    
    855,324Less accumulated depreciation
    
    
    (1,616
    )
    
    
    (623,262
    )
    
    
    (53,147
    )
    
    
    3⁄4
    
    
    
    (678,025
    )9,657
    
    
    
    142,448
    
    
    
    25,194
    
    
    
    3⁄4
    
    
    
    177,299Investments in unconsolidated affiliates
    
    
    3⁄4
    
    
    
    60,853
    
    
    
    9,709
    
    
    
    3⁄4
    
    
    
    70,562Restricted cash
    
    
    3⁄4
    
    
    
    18,246
    
    
    
    7,802
    
    
    
    3⁄4
    
    
    
    26,048Investments in consolidated subsidiaries
    
    
    417,503
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (417,503
    )
    
    
    3⁄4Goodwill and intangible assets, net
    
    
    3⁄4
    
    
    
    38,965
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    38,965Other noncurrent assets
    
    
    74,271
    
    
    
    (60,879
    )
    
    
    (633
    )
    
    
    3⁄4
    
    
    
    12,759$
    502,212
    
    
    $
    382,488
    
    
    $
    124,334
    
    
    $
    (417,503
    )
    
    $
    591,531LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable and other
    
    $
    172
    
    
    $
    39,328
    
    
    $
    5,053
    
    
    $
    3⁄4
    
    
    $
    44,553Accrued expenses
    
    
    3,371
    
    
    
    18,011
    
    
    
    4,149
    
    
    
    3⁄4
    
    
    
    25,531Income taxes payable
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    681
    
    
    
    3⁄4
    
    
    
    681Current maturities of long-term debt and other current
liabilities
    
    
    3⁄4
    
    
    
    491
    
    
    
    9,314
    
    
    
    3⁄4
    
    
    
    9,805Total current liabilities
    
    
    3,543
    
    
    
    57,830
    
    
    
    19,197
    
    
    
    3⁄4
    
    
    
    80,570Long-term debt and other liabilities
    
    
    193,000
    
    
    
    3,563
    
    
    
    7,803
    
    
    
    3⁄4
    
    
    
    204,366Deferred income taxes
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    926
    
    
    
    3⁄4
    
    
    
    926Shareholders/ invested equity
    
    
    305,669
    
    
    
    321,095
    
    
    
    96,408
    
    
    
    (417,503
    )
    
    
    305,669$
    502,212
    
    
    $
    382,488
    
    
    $
    124,334
    
    
    $
    (417,503
    )
    
    $
    591,531
 16




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##### Table of Contents



UNIFI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
  Guarantor
    
    
    Non-GuarantorParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedSummary of Operations:Net sales
    
    $
    3⁄4
    
    
    $
    129,691
    
    
    $
    39,667
    
    
    $
    (349
    )
    
    $
    169,009Cost of sales
    
    
    3⁄4
    
    
    
    122,480
    
    
    
    33,435
    
    
    
    (331
    )
    
    
    155,584Selling, general and administrative expenses
    
    
    3⁄4
    
    
    
    8,571
    
    
    
    2,035
    
    
    
    (61
    )
    
    
    10,545Provision for bad debts
    
    
    3⁄4
    
    
    
    454
    
    
    
    104
    
    
    
    3⁄4
    
    
    
    558Interest expense
    
    
    5,929
    
    
    
    31
    
    
    
    5
    
    
    
    3⁄4
    
    
    
    5,965Interest income
    
    
    (19
    )
    
    
    (47
    )
    
    
    (847
    )
    
    
    3⁄4
    
    
    
    (913
    )Other (income) expense, net
    
    
    (2
    )
    
    
    21
    
    
    
    (361
    )
    
    
    (219
    )
    
    
    (561
    )Equity in (earnings) losses of unconsolidated affiliates
    
    
    3⁄4
    
    
    
    (3,450
    )
    
    
    572
    
    
    
    (604
    )
    
    
    (3,482
    )Equity in subsidiaries
    
    
    (3,891
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3,891
    
    
    
    3⁄4Income (loss) from continuing operations before income
taxes
    
    
    (2,017
    )
    
    
    1,631
    
    
    
    4,724
    
    
    
    (3,025
    )
    
    
    1,313Provision (benefit) for income taxes
    
    
    (1,341
    )
    
    
    1,374
    
    
    
    1,852
    
    
    
    3⁄4
    
    
    
    1,885Income (loss) from continuing operations
    
    
    (676
    )
    
    
    257
    
    
    
    2,872
    
    
    
    (3,025
    )
    
    
    (572
    )Loss from discontinued operations, net of tax
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (104
    )
    
    
    3⁄4
    
    
    
    (104
    )Net income (loss)
    
    $
    (676
    )
    
    $
    257
    
    
    $
    2,768
    
    
    $
    (3,025
    )
    
    $
    (676
    )
 17




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##### Table of Contents



UNIFI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
  Guarantor
    
    
    Non-GuarantorParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedSummary of Operations:Net sales
    
    $
    3⁄4
    
    
    $
    140,843
    
    
    $
    30,174
    
    
    $
    (481
    )
    
    $
    170,536Cost of sales
    
    
    3⁄4
    
    
    
    133,115
    
    
    
    26,913
    
    
    
    (485
    )
    
    
    159,543Selling, general and administrative expenses
    
    
    3⁄4
    
    
    
    12,800
    
    
    
    1,747
    
    
    
    (93
    )
    
    
    14,454Provision for bad debts
    
    
    3⁄4
    
    
    
    414
    
    
    
    (160
    )
    
    
    3⁄4
    
    
    
    254Interest expense
    
    
    6,562
    
    
    
    154
    
    
    
    (4
    )
    
    
    3⁄4
    
    
    
    6,712Interest income
    
    
    (152
    )
    
    
    3⁄4
    
    
    
    (674
    )
    
    
    3⁄4
    
    
    
    (826
    )Other (income) expense, net
    
    
    (6,514
    )
    
    
    5,301
    
    
    
    207
    
    
    
    3⁄4
    
    
    
    (1,006
    )Equity in (earnings) losses of unconsolidated affiliates
    
    
    3⁄4
    
    
    
    (909
    )
    
    
    1,135
    
    
    
    (404
    )
    
    
    (178
    )Equity in subsidiaries
    
    
    9,208
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (9,208
    )
    
    
    3⁄4Write down of long-lived assets
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    533
    
    
    
    3⁄4
    
    
    
    533Write down of investment in unconsolidated affiliate
    
    
    3⁄4
    
    
    
    4,505
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    4,505Restructuring charges
    
    
    3⁄4
    
    
    
    2,632
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    2,632Income (loss) from continuing operations before income
taxes
    
    
    (9,104
    )
    
    
    (17,169
    )
    
    
    477
    
    
    
    9,709
    
    
    
    (16,087
    )Provision (benefit) for income taxes
    
    
    84
    
    
    
    (7,533
    )
    
    
    518
    
    
    
    3⁄4
    
    
    
    (6,931
    )Income (loss) from continuing operations
    
    
    (9,188
    )
    
    
    (9,636
    )
    
    
    (41
    )
    
    
    9,709
    
    
    
    (9,156
    )Loss from discontinued operations, net of tax
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (32
    )
    
    
    3⁄4
    
    
    
    (32
    )Net income (loss)
    
    $
    (9,188
    )
    
    $
    (9,636
    )
    
    $
    (73
    )
    
    $
    9,709
    
    
    $
    (9,188
    )
 18




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##### Table of Contents



UNIFI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
  Guarantor
    
    
    Non-GuarantorParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedOperating activities:Net cash
provided by (used in) continuing operating activities
    
    $
    3,491
    
    
    $
    (4,031
    )
    
    $
    3,252
    
    
    $
    (110
    )
    
    $
    2,602Investing activities:Capital expenditures
    
    
    (68
    )
    
    
    (2,978
    )
    
    
    (523
    )
    
    
    3⁄4
    
    
    
    (3,569
    )Change in restricted cash
    
    
    3⁄4
    
    
    
    3,703
    
    
    
    1,480
    
    
    
    3⁄4
    
    
    
    5,183Proceeds from sale of capital assets
    
    
    3⁄4
    
    
    
    70
    
    
    
    31
    
    
    
    
    
    
    
    101Other
    
    
    (94
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (94
    )Net cash provided by (used in) investing activities
    
    
    (162
    )
    
    
    795
    
    
    
    988
    
    
    
    3⁄4
    
    
    
    1,621Financing activities:Borrowings of long term debt
    
    
    4,600
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    4,600Payments of long term debt
    
    
    (7,600
    )
    
    
    3⁄4
    
    
    
    (1,480
    )
    
    
    3⁄4
    
    
    
    (9,080
    )Proceeds from stock exercises
    
    
    3,551
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3,551Other
    
    
    3⁄4
    
    
    
    37
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    37Net cash provided by (used in) financing activities
    
    
    551
    
    
    
    37
    
    
    
    (1,480)
    
    
    
    3⁄4
    
    
    
    (892
    )Cash flows of discontinued operations:Operating cash flow
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (114
    )
    
    
    3⁄4
    
    
    
    (114
    )Net cash used in discontinued operations
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (114
    )
    
    
    3⁄4
    
    
    
    (114
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (3,179
    )
    
    
    110
    
    
    
    (3,069
    )Net increase (decrease) in cash and cash equivalents
    
    
    3,880
    
    
    
    (3,199
    )
    
    
    (533
    )
    
    
    3⁄4
    
    
    
    148Cash and cash equivalents at beginning of period
    
    
    689
    
    
    
    3,378
    
    
    
    16,181
    
    
    
    3⁄4
    
    
    
    20,248Cash and cash equivalents at end of period
    
    $
    4,569
    
    
    $
    179
    
    
    $
    15,648
    
    
    $
    3⁄4
    
    
    $
    20,396
 19




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##### Table of Contents



UNIFI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
  Guarantor
    
    
    Non-GuarantorParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedOperating activities:Net cash
provided by (used in) continuing operating activities
    
    $
    1,627
    
    
    $
    (1,170
    )
    
    $
    (1,675
    )
    
    $
    11
    
    
    $
    (1,207
    )Investing activities:Capital expenditures
    
    
    3⁄4
    
    
    
    (613
    )
    
    
    (451
    )
    
    
    3⁄4
    
    
    
    (1,064
    )Change in restricted cash
    
    
    3⁄4
    
    
    
    (915
    )
    
    
    
    
    
    
    3⁄4
    
    
    
    (915
    )Return of capital in equity affiliates
    
    
    3⁄4
    
    
    
    234
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    234Proceeds from sale of capital assets
    
    
    3⁄4
    
    
    
    2,105
    
    
    
    111
    
    
    
    3⁄4
    
    
    
    2,216Other
    
    
    3
    
    
    
    260
    
    
    
    1
    
    
    
    3⁄4
    
    
    
    264Net cash provided by (used in) investing activities
    
    
    3
    
    
    
    1,071
    
    
    
    (339
    )
    
    
    3⁄4
    
    
    
    735Financing activities:Borrowings of long term debt
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    157
    
    
    
    3⁄4
    
    
    
    157Payments of long term debt
    
    
    (6,000
    )
    
    
    3⁄4
    
    
    
    (705
    )
    
    
    3⁄4
    
    
    
    (6,705
    )Dividend payment
    
    
    5,307
    
    
    
    3⁄4
    
    
    
    (5,307
    )
    
    
    3⁄4
    
    
    
    3⁄4Other
    
    
    3⁄4
    
    
    
    34
    
    
    
    (1
    )
    
    
    3⁄4
    
    
    
    33Net cash provided by (used in) financing activities
    
    
    (693
    )
    
    
    34
    
    
    
    (5,856
    )
    
    
    3⁄4
    
    
    
    (6,515
    )Cash flows of discontinued operations:Operating cash flow
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (78
    )
    
    
    3⁄4
    
    
    
    (78
    )Net cash used in discontinued operations
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (78
    )
    
    
    3⁄4
    
    
    
    (78
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    904
    
    
    
    (11
    )
    
    
    893Net increase (decrease) in cash and cash equivalents
    
    
    937
    
    
    
    (65
    )
    
    
    (7,044
    )
    
    
    3⁄4
    
    
    
    (6,172
    )Cash and cash equivalents at beginning of period
    
    
    17,808
    
    
    
    1,645
    
    
    
    20,578
    
    
    
    3⁄4
    
    
    
    40,031Cash and cash equivalents at end of period
    
    $
    18,745
    
    
    $
    1,580
    
    
    $
    13,534
    
    
    $
    3⁄4
    
    
    $
    33,859
 20




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##### Table of Contents



Business Overview
  Polyester Segment
 Nylon Segment
 Recent Developments and Outlook
   21




---



##### Table of Contents



Key Performance Indicators
  
    
    sales volume, which is an indicator of demand;
    
    margins, which are indicators of product mix and profitability;
    
    net income or loss before interest, taxes, depreciation and amortization, and income
or loss from discontinued operations (EBITDA), which are indicators of the Companys
ability to pay debt; and
    
    working capital of each business unit as a percentage of sales, which is an indicator
of the Companys production efficiency and ability to manage its inventory and
receivables.
 22




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##### Table of Contents



Corporate Restructuring
 Severance
    Restructuring
   Balance at
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance atJune 29, 2008
    
    Charges
    
    Adjustments
    
    Amounts Used
    
    September 28, 2008Accrued severance
    
    $
    3,668
    
    
    
    137
    
    
    
    5
    
    
    
    (781
    )
    
    $
    3,029
    (1)Accrued
restructuring
    
    $
    1,414
    
    
    
    55
    
    
    
    190
    
    
    
    (554
    )
    
    $
    1,105
 (1)
    
    As of September 28, 2008, the Company classified $1.3 million of accrued executive severance as
long term. 23




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##### Table of Contents



Joint Ventures and Other Equity Investments
  For
the Quarter Ended September 28, 2008YUFI
    
    PAL
    
    UNF
    
    TotalNet sales
    
    $
    39,881
    
    
    $
    122,083
    
    
    $
    5,892
    
    
    $
    167,856Gross profit (loss)
    
    
    (2,048
    )
    
    
    6,246
    
    
    
    (789
    )
    
    
    3,409Depreciation and amortization
    
    
    1,395
    
    
    
    4,457
    
    
    
    474
    
    
    
    6,326Income (loss) from operations
    
    
    (4,156
    )
    
    
    3,478
    
    
    
    (1,270
    )
    
    
    (1,948
    )Net income (loss)
    
    
    (4,617
    )
    
    
    10,146
    
    
    
    (1,143
    )
    
    
    4,386
 For
the Quarter Ended September 23, 2007USTF
    
    YUFI
    
    PAL
    
    UNF
    
    TotalNet sales
    
    $
    6,455
    
    
    $
    37,069
    
    
    $
    110,596
    
    
    $
    7,362
    
    
    $
    161,482Gross profit (loss)
    
    
    571
    
    
    
    (307
    )
    
    
    4,622
    
    
    
    319
    
    
    
    5,205Depreciation and amortization
    
    
    578
    
    
    
    1,324
    
    
    
    4,910
    
    
    
    474
    
    
    
    7,286Income (loss) from operations
    
    
    189
    
    
    
    (1,772
    )
    
    
    1,058
    
    
    
    134
    
    
    
    (391
    )Net income (loss)
    
    
    148
    
    
    
    (2,414
    )
    
    
    1,353
    
    
    
    144
    
    
    
    (769
    )
 ® ® ®
    24




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##### Table of Contents



25




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##### Table of Contents



Review of First Quarter Fiscal Year 2009 compared to First Quarter Fiscal Year 2008
  For the Quarters EndedSeptember 28, 2008
    
    
    September 23, 2007% to Total
    
    
    
    
    
    
    % to Total
    
    
    % ChangeNet salesPolyester
    
    $
    122,979
    
    
    
    72.8
    
    
    $
    129,377
    
    
    
    75.9
    
    
    
    (4.9
    )Nylon
    
    
    46,030
    
    
    
    27.2
    
    
    
    41,159
    
    
    
    24.1
    
    
    
    11.8Total
    
    $
    169,009
    
    
    
    100.0
    
    
    $
    170,536
    
    
    
    100.0
    
    
    
    (0.9
    )
 % to Sales
    
    
    
    
    
    
    % to SalesGross profitPolyester
    
    $
    8,200
    
    
    
    4.8
    
    
    $
    7,889
    
    
    
    4.6
    
    
    
    3.9Nylon
    
    
    5,225
    
    
    
    3.1
    
    
    
    3,104
    
    
    
    1.8
    
    
    
    68.3Total
    
    
    13,425
    
    
    
    7.9
    
    
    
    10,993
    
    
    
    6.4
    
    
    
    22.1Selling, general and administrative
expensesPolyester
    
    
    8,361
    
    
    
    4.9
    
    
    
    12,333
    
    
    
    7.2
    
    
    
    (32.2
    )Nylon
    
    
    2,184
    
    
    
    1.3
    
    
    
    2,121
    
    
    
    1.3
    
    
    
    3.0Total
    
    
    10,545
    
    
    
    6.2
    
    
    
    14,454
    
    
    
    8.5
    
    
    
    (27.0
    )Write down of long-lived assets and
investment in equity affiliatePolyester
    
    
    
    
    
    
    
    
    
    
    533
    
    
    
    0.3
    
    
    
    Nylon
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Corporate
    
    
    
    
    
    
    
    
    
    
    4,505
    
    
    
    2.6
    
    
    
    Total
    
    
    
    
    
    
    
    
    
    
    5,038
    
    
    
    2.9
    
    
    
    Restructuring chargesPolyester
    
    
    
    
    
    
    
    
    
    
    2,414
    
    
    
    1.4
    
    
    
    Nylon
    
    
    
    
    
    
    
    
    
    
    218
    
    
    
    0.1
    
    
    
    Total
    
    
    
    
    
    
    
    
    
    
    2,632
    
    
    
    1.5
    
    
    
    Other (income) expense, net
    
    
    1,567
    
    
    
    0.9
    
    
    
    4,956
    
    
    
    2.9
    
    
    
    (68.4
    )Income (loss) from continuing
operations
before income taxes
    
    
    1,313
    
    
    
    0.8
    
    
    
    (16,087
    )
    
    
    (9.4
    )
    
    
    (108.2
    )Provision (benefit) for income taxes
    
    
    1,885
    
    
    
    1.1
    
    
    
    (6,931
    )
    
    
    (4.0
    )
    
    
    (127.2
    )Loss from continuing
operations
    
    
    (572
    )
    
    
    (0.3
    )
    
    
    (9,156
    )
    
    
    (5.4
    )
    
    
    (93.8
    )Loss from discontinued
operations, net of tax
    
    
    (104
    )
    
    
    (0.1
    )
    
    
    (32
    )
    
    
    
    
    
    
    225.0Net loss
    
    $
    (676
    )
    
    
    (0.4
    )
    
    $
    (9,188
    )
    
    
    (5.4
    )
    
    
    (92.6
    )
 26




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##### Table of Contents



For the Quarters EndedSeptember 28,
    
    
    September 23,2008
    
    
    2007Gain on sale of fixed assets
    
    $
    (316
    )
    
    $
    (142
    )Gain from sale of nitrogen credits
    
    
    
    
    
    
    (807
    )Technology fee from China joint venture
    
    
    
    
    
    
    (438
    )Currency (gains) losses
    
    
    (304
    )
    
    
    326Other, net
    
    
    59
    
    
    
    55Other (income) expense, net
    
    $
    (561
    )
    
    $
    (1,006
    )
   27




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##### Table of Contents



Accounting for Uncertainty
in Income Taxes, Accounting for Income Taxes
   Polyester Operations
    28




---



##### Table of Contents



Nylon Operations
    Corporate
   Liquidity and Capital Resources
 Liquidity Assessment
   Capital Expenditures
 29




---



##### Table of Contents



Joint Venture Investments
   Cash Provided by Continuing Operations
   30




---



##### Table of Contents



Cash Used in Investing Activities and Financing Activities
   Other Factors Affecting Liquidity
 Asset Sales.
  31




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##### Table of Contents



1.
    
    The Company must receive fair market value for the Collateral sold or disposed of;2.
    
    Fair market value must be certified by the Companys Chief Executive Officer or Chief
Financial Officer and for sales of Collateral in excess of $5.0 million, by the Companys
Board of Directors;3.
    
    At least 75% of the consideration for the sale of the Collateral must be in the form of
cash or cash equivalents and 100% of the proceeds must be deposited by the Company into a
specified account designated under the Indenture (the Collateral Account); and4.
    
    Any remaining consideration from an asset sale that is not cash or cash equivalents
must be pledged as Collateral.
    1.
    
    The Company must receive fair market value for the Non-Collateral sold or disposed of;2.
    
    Fair market value must be certified by the Companys Chief Executive Officer or Chief
Financial Officer and for asset sales in excess of $5.0 million, by the Companys Board of
Directors; and,3.
    
    At least 75% of the consideration for the sale of Non-Collateral must be in the form of
cash or cash equivalents.
  32




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##### Table of Contents



pari passu
 pari passu pari passu
 Note Repurchases from Sources Other than Sales of Collateral and Non-Collateral.
  Stock Repurchase Program.
 Environmental Liabilities.
 33




---



##### Table of Contents



Market Conditions.
 Long-Term Debt
     34




---



##### Table of Contents



Recent Accounting Pronouncements
   35




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##### Table of Contents



Off Balance Sheet Arrangements
  Forward-Looking Statements
  
    
    the competitive nature of the textile industry and the impact of worldwide
competition;
    
    changes in the trade regulatory environment and governmental policies and
legislation;
    
    the availability, sourcing and pricing of raw materials;
    
    general domestic and international economic and industry conditions in markets
where the Company competes, such as recession and other economic and political
factors over which the Company has no control;
    
    changes in consumer spending, customer preferences, fashion trends and end-uses;
    
    its ability to reduce production costs;
    
    changes in currency exchange rates, interest and inflation rates;
    
    the financial condition of its customers;
    
    its ability to sell excess assets;
    
    technological advancements and the continued availability of financial resources
to fund capital expenditures;
    
    the operating performance of joint ventures, alliances and other equity
investments;
    
    the impact of environmental, health and safety regulations;
    
    the loss of a material customer;
    
    employee relations;
    
    volatility of financial and credit markets;
 36




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##### Table of Contents




    
    the continuity of the Companys leadership; and
    
    the success of the Companys consolidation initiatives.
  
   Interest Rate Risk:
 Currency Exchange Rate Risk:
  37




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##### Table of Contents



September 28,
    
    
    June 29,2008
    
    
    2008Foreign currency purchase contracts:Notional amount
    
    $
    507
    
    
    $
    492Fair value
    
    
    461
    
    
    
    499Net (gain) loss
    
    $
    46
    
    
    $
    (7
    )
 September 28,
    
    
    June 29,2008
    
    
    2008Foreign currency sales contracts:Notional amount
    
    $
    1,463
    
    
    $
    620Fair value
    
    
    1,410
    
    
    
    642Net gain (loss)
    
    $
    53
    
    
    $
    (22
    )
  Raw Material Supply:
 Inflation and Other Risks:
 
    38




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##### Table of Contents



Total Number of
    
    Maximum NumberTotal Number
    
    Average Price
    
    Shares Purchased as
    
    of Shares that Mayof
    
    Paid
    
    Part of Publicly
    
    Yet Be PurchasedShares
    
    per
    
    Announced Plans
    
    Under the Plans orPeriod
    
    Purchased
    
    Share
    
    or Programs
    
    Programs6/30/08 - 7/29/08
    
    
    
    
    
    
    
    6,807,2417/30/08 - 8/29/08
    
    
    
    
    
    
    
    6,807,2418/30/08 - 9/28/08
    
    
    
    
    
    
    
    6,807,241Total
    
    
    
    
    
    
  
 
 
  39




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##### Table of Contents



31.1
    
    Chief Executive Officers certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.31.2
    
    Chief Financial Officers certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.32.1
    
    Chief Executive Officers certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.32.2
    
    Chief Financial Officers certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
 40




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##### Table of Contents



UNIFI, INC.Date: November 7, 2008
    
    /s/ RONALD L. SMITHRonald L. SmithVice President and Chief Financial Officer
 41