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Index to Exhibits - Pages 27 - 41
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 29, 2002
OR
[ ] 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 1-3634
CONE MILLS CORPORATION
(Exact name of registrant as specified in its charter)
North Carolina 56-0367025
-------------- ----------
(State or other jurisdiction) (I.R.S. Employer Identification No.)
804 Green Valley Road, Suite 300, Greensboro, N.C. 27408
- -------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 336-379-6220
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Number of shares of common stock outstanding as of October 28, 2002: 25,757,344.
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1
CONE MILLS CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Page
Number
Item 1. Financial Statements
Consolidated Condensed Statements of Operations
Thirteen and Thirty-Nine weeks ended September 29, 2002 and
September 30, 2001 (Unaudited)......................................3
Consolidated Condensed Balance Sheets
September 29, 2002 and September 30, 2001 (Unaudited)
and December 30, 2001...............................................4
Consolidated Condensed Statements of Cash Flows
Thirty-Nine weeks ended September 29, 2002 and
September 30, 2001 (Unaudited)......................................5
Notes to Consolidated Condensed Financial Statements
(Unaudited).........................................................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......................16
Item 3. Quantitative and Qualitative Disclosures about Market
Risk .............................................................25
Item 4 Controls and Procedures ...........................................25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................26
Item 5. Other Information .................................................26
Item 6. Exhibits and Reports on Form 8-K...................................26
Annex A Section 302 Certifications........................................A-1
Annex B Section 906 Certification.........................................B-1
2
PART I
Item 1.
CONE MILLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
Thirteen Thirteen Thirty-Nine Thirty-Nine
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
September 29, September 30, September 29, September 30,
(in thousands, except per share data) 2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net Sales $ 111,688 $ 106,957 $ 343,345 $ 361,346
Cost of Goods Sold 94,625 95,562 294,710 331,997
---------------------------------------------------------------------
Gross Profit 17,063 11,395 48,635 29,349
Selling and Administrative 8,620 7,904 25,715 27,051
Restructuring and Impairment of Assets - 200 - 19,939
---------------------------------------------------------------------
Income (Loss) from Operations 8,443 3,291 22,920 ( 17,641 )
---------------------------------------------------------------------
Other Income (Expense)
Interest income 77 137 206 350
Interest expense ( 3,712 ) ( 3,982 ) ( 12,014 ) ( 13,456 )
Other ( 433 ) 893 ( 1,439 ) ( 430 )
---------------------------------------------------------------------
( 4,068 ) ( 2,952 ) ( 13,247 ) ( 13,536 )
---------------------------------------------------------------------
Income (Loss) from Continuing Operations before
Income Tax Expense (Benefit) and Equity in
Earnings (Losses) of Unconsolidated Affiliates 4,375 339 9,673 ( 31,177 )
Income Tax Expense (Benefit) 1,455 120 2,902 ( 8,954 )
---------------------------------------------------------------------
Income (Loss) from Continuing Operations before
Equity in Earnings (Losses) of Unconsolidated
Affiliates 2,920 219 6,771 ( 22,223 )
Equity in Earnings (Losses) of Unconsolidated
Affiliates 923 ( 88 ) 1,605 484
---------------------------------------------------------------------
Income (Loss) from Continuing Operations 3,843 131 8,376 ( 21,739 )
---------------------------------------------------------------------
Discontinued Operations
Loss from discontinued operations - ( 890 ) - ( 12,426 )
Loss on sale of discontinued operation - ( 6,397 ) - ( 6,397 )
Income tax benefit - ( 2,552 ) - ( 6,590 )
---------------------------------------------------------------------
- ( 4,735 ) - ( 12,233 )
---------------------------------------------------------------------
Net Income (Loss) $ 3,843 $ ( 4,604 ) $ 8,376 $ ( 33,972 )
---------------------------------------------------------------------
Income (Loss) Available to Common Stockholders $ 2,806 $ ( 5,677 ) $ 5,229 $ ( 37,091 )
---------------------------------------------------------------------
Earnings (Loss) per Share -
Income (loss) from continuing operations $ 0.11 $ ( 0.04 ) $ 0.20 $ ( 0.97 )
Loss from discontinued operations - ( 0.18 ) - ( 0.48 )
---------------------------------------------------------------------
Earnings (Loss) per Share - Basic and Diluted $ 0.11 $ ( 0.22 ) $ 0.20 $ ( 1.45 )
---------------------------------------------------------------------
Weighted-Average Common Shares Outstanding
Basic 25,739 25,595 25,704 25,557
---------------------------------------------------------------------
Diluted 26,153 25,595 26,104 25,557
---------------------------------------------------------------------
See Notes to Consolidated Condensed Financial Statements.
3
CONE MILLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
September 29, September 30, December 30,
(in thousands, except share and par value data) 2002 2001 2001
- ---------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited) (Note)
ASSETS
Current Assets
Cash $ 1,573 $ 858 $ 529
Accounts receivable, less allowances: 2002, $5,700;
2001, $5,350 and $5,700 43,327 44,251 28,373
Inventories 45,578 64,499 62,057
Other current assets 2,656 6,414 3,371
---------------------------------------------------------
Total Current Assets 93,134 116,022 94,330
Investments in and Advances to Unconsolidated Affiliates 53,010 51,915 51,664
Other Assets 27,496 18,646 23,917
Property, Plant and Equipment 152,198 167,968 164,468
---------------------------------------------------------
$ 325,838 $ 354,551 $ 334,379
---------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ 56,262 $ 3,208 $ 3,075
Accounts payable 28,730 29,511 21,535
Sundry accounts payable and accrued liabilities 22,869 23,948 27,928
---------------------------------------------------------
Total Current Liabilities 107,861 56,667 52,538
Long-Term Debt 98,908 177,548 170,655
Deferred Income Taxes 13,486 14,922 10,513
Other Liabilities 13,781 14,567 14,063
Stockholders' Equity
Class A preferred stock - $100 par value; authorized
1,500,000 shares; issued and outstanding: 2002, 337,497
shares; 2001, 342,780 shares and 334,309 shares 33,750 34,278 33,431
Class B preferred stock - no par value; authorized
5,000,000 shares - - -
Common stock - $.10 par value; authorized
42,700,000 shares; issued and outstanding: 2002, 25,757,344
shares; 2001, 25,622,816 shares and 25,660,663 shares 2,576 2,562 2,566
Capital in excess of par 58,098 57,815 57,872
Retained earnings 6,349 4,564 2,029
Deferred compensation - restricted stock ( 2 ) ( 17 ) ( 12 )
Accumulated other comprehensive loss ( 8,969 ) ( 8,355 ) ( 9,276 )
---------------------------------------------------------
Total Stockholders' Equity 91,802 90,847 86,610
---------------------------------------------------------
$ 325,838 $ 354,551 $ 334,379
---------------------------------------------------------
Note: The balance sheet at December 30, 2001, has been derived from
the audited financial statements at that date.
See Notes to Consolidated Condensed Financial Statements.
4
CONE MILLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Thirty-Nine Thirty-Nine
Weeks Ended Weeks Ended
September 29, September 30,
(in thousands) 2002 2001
- ------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
CASH PROVIDED BY OPERATIONS $ 30,080 $ 2,779
-----------------------------------
INVESTING
Investments in and advances to unconsolidated affiliates - ( 754 )
Proceeds from sale of property, plant and equipment 1,273 3,929
Proceeds from sale of discontinued operations - 5,375
Capital expenditures of continuing operations ( 3,932 ) ( 4,648 )
Capital expenditures of discontinued operations - ( 91 )
-----------------------------------
Cash provided by (used in) investing ( 2,659 ) 3,811
-----------------------------------
FINANCING
Decrease in checks issued in excess of deposits ( 3,982 ) ( 6,119 )
Principal borrowings (payments) on long-term debt ( 18,894 ) 548
Proceeds from issuance of common stock 236 195
Dividends paid - Class A Preferred ( 136 ) ( 95 )
Redemption of Class A Preferred stock ( 3,601 ) ( 3,137 )
-----------------------------------
Cash used in financing ( 26,377 ) ( 8,608 )
-----------------------------------
Net change in cash 1,044 (2,018 )
Cash at Beginning of Period 529 2,876
-----------------------------------
Cash at End of Period $ 1,573 $ 858
-----------------------------------
Supplemental Disclosures of Additional Cash Flow Information:
Cash payments for:
Interest $ 14,019 $ 15,997
-----------------------------------
Income taxes, net of refunds $ 17 $ 239
-----------------------------------
Supplemental Schedule of Noncash Financing Activities:
Stock dividend - Class A Preferred Stock $ 3,920 $ 3,881
-----------------------------------
See Notes to Consolidated Condensed Financial Statements.
5
CONE MILLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 1. Basis of Financial Statement Preparation
The Cone Mills Corporation ("Cone") consolidated condensed financial statements
for September 29, 2002 and September 30, 2001 are unaudited, but in the opinion
of management reflect all adjustments necessary to present fairly the
consolidated condensed balance sheets of Cone Mills Corporation and Subsidiaries
at September 29, 2002, September 30, 2001 and December 30, 2001, and the related
consolidated condensed statements of operations for the respective thirteen and
thirty-nine weeks ended September 29, 2002 and September 30, 2001 and cash flows
for the thirty-nine weeks then ended. All adjustments are of a normal recurring
nature with the exception of those reclassifications made in connection with
discontinued operations and entries related to Cone's Reinvention Plan. The
results are not necessarily indicative of the results to be expected for the
full year.
These statements should be read in conjunction with the audited financial
statements and related notes included in Cone's annual report on Form 10-K for
fiscal year 2001.
Inventories are stated at the lower of cost or market. The last-in, first-out
(LIFO) method is used to determine cost of most domestically produced goods. The
first-in, first-out (FIFO) or average cost methods are used to determine cost of
all other inventories. Because amounts for inventories under the LIFO method are
based on an annual determination of quantities as of year-end, the inventories
at September 29, 2002 and September 30, 2001 and related consolidated condensed
statements of operations for the thirteen and thirty-nine weeks then ended are
based on certain estimates relating to quantities and cost as of the end of the
fiscal year.
Reclassifications: Loss per share for the thirteen and thirty-nine weeks ended
September 30, 2001, has been reclassified to reflect discontinued operations.
Note 2. Securitization of Accounts Receivable
Accounting Policies: Cone records accounts receivable at cost, which
approximates fair value at the respective balance sheet dates. Cone estimates
its allowance for doubtful accounts based on a combination of historical and
current information regarding the balance of accounts receivable, as well as the
current composition of the pool of accounts receivable. Cone determines past due
status on accounts receivable based on the contractual terms of the original
sale. Accounts receivable that management believes to be ultimately
uncollectible are written off upon such determination.
6
Cone has not sold any of its accounts receivable other than those pursuant to
the Accounts Receivable Securitization Facility ("A/R Securitization Facility")
with General Electric Capital Corporation. As of September 29, 2002 and
September 30, 2001, the total amount of advances of proceeds from the sale of
receivables under the A/R Securitization Facility was $28.5 million and $45.3
million, respectively. As of September 29, 2002 and September 30, 2001, included
in accounts receivable were deferred purchase price receivables under the A/R
Securitization Facility of $35.2 million and $36.7 million, respectively. The
table below summarizes certain cash flows under the securitization:
Thirteen Thirteen Thirty-Nine Thirty-Nine
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
(in thousands) 9/29/02 9/30/01 9/29/02 9/30/01
-----------------------------------------------------------------------------
Proceeds from securitizations $ 21,991 $ 24,284 $ 89,438 $ 55,012
Reductions due to change
in level of receivables sold ( 31,119 ) ( 27,764 ) ( 97,821 ) ( 65,466 )
Daily yield paid ( 437 ) ( 693 ) ( 1,427 ) ( 2,514 )
Servicing fees paid ( 140 ) ( 186 ) ( 451 ) ( 589 )
Servicing fees received 140 186 451 530
Note 3. Inventories
(in thousands) 9/29/02 9/30/01 12/30/01
------------------------------------------
Greige and finished goods $ 23,183 $ 34,939 $ 35,811
Work in process 4,118 6,611 5,084
Raw materials 9,026 12,336 10,779
Supplies and other 9,251 10,613 10,383
------------------------------------------
$ 45,578 $ 64,499 $ 62,057
------------------------------------------
Note 4. Long-Term Debt
(in thousands) 9/29/02 9/30/01 12/30/01
------------------------------------------
Senior Note $ 23,262 $ 27,494 $ 27,155
Revolving Credit Agreement 33,000 57,000 48,000
8-1/8% Debentures 98,908 96,262 98,575
------------------------------------------
155,170 180,756 173,730
Less current maturities 56,262 3,208 3,075
------------------------------------------
$ 98,908 $177,548 $170,655
------------------------------------------
7
On November 9, 2001, Cone entered into agreements to refinance both its
Revolving Credit Facility with its existing banks and its Senior Note. The new
agreements provide for scheduled amortization or commitment reductions of $10
million during 2002 with a final maturity date of January 15, 2003. In addition,
the agreements provide for additional amortization and commitment reductions
related to proceeds received by Cone for permitted asset sales and 75% of excess
cash flow (as defined in the agreements). Cone is considering its financing
alternatives and has not decided on a specific course of action at this time.
There can be no assurance that financing will be available on acceptable terms
and conditions.
Note 5. Class A Preferred Stock
On February 13, 2002, Cone declared a 12.0% stock dividend on Cone's Class A
Preferred Stock, which was paid on March 31, 2002. The dividend of $3.9 million
was charged to retained earnings. The 2003 dividend rate for Class A Preferred
Stock is 12.0%, payable March 31, 2003.
Note 6. Depreciation and Amortization
The following table presents depreciation and amortization included in
continuing operations in the consolidated condensed statements of operations.
Thirteen Thirteen Thirty-Nine Thirty-Nine
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
(in thousands) 9/29/02 9/30/01 9/29/02 9/30/01
-----------------------------------------------------------------------------
Depreciation $ 4,666 $ 4,862 $ 14,764 $ 15,744
Amortization 22 26 68 83
-----------------------------------------------------------------------------
$ 4,688 $ 4,888 $ 14,832 $ 15,827
-----------------------------------------------------------------------------
Depreciation expense included in the pre-tax loss from discontinued operations
(See Note 12, "Discontinued Operations," to the Notes to Consolidated Condensed
Financial Statements) is as follows:
Thirteen Thirteen Thirty-Nine Thirty-Nine
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
(in thousands) 9/29/02 9/30/01 9/29/02 9/30/01
-----------------------------------------------------------------------------
Depreciation $ - $ 23 $ - $ 134
Amortization - - - 4
-----------------------------------------------------------------------------
$ - $ 23 $ - $ 138
-----------------------------------------------------------------------------
8
Note 7. Earnings (Loss) Per Share
The following table sets forth the computation of basic and diluted earnings
(loss) per common share ("EPS").
Thirteen Thirteen
Weeks Ended Weeks Ended
(in thousands, except per share data) 9/29/02 9/30/01
----------------------------------------
Income from continuing operations $ 3,843 $ 131
Preferred dividends ( 1,037 ) ( 1,073 )
----------------------------------------
Income (loss) from continuing operations available
to common stockholders 2,806 ( 942 )
Loss from discontinued operations - ( 4,735 )
----------------------------------------
Basic EPS - income (loss) available to common
stockholders 2,806 ( 5,677 )
Effect of dilutive securities - -
----------------------------------------
Diluted EPS - income (loss) available to common
stockholders after assumed conversions $ 2,806 $ ( 5,677 )
----------------------------------------
Determination of shares:
Weighted-average shares 25,747 25,610
Contingently issuable (unvested restricted shares) ( 8 ) ( 15 )
----------------------------------------
Basic EPS - weighted-average shares 25,739 25,595
Effect of dilutive securities 414 -
----------------------------------------
Diluted EPS - adjusted weighted-average shares after
assumed conversions 26,153 25,595
----------------------------------------
Earnings (loss) per share - basic and diluted:
Income (loss) from continuing operations $ 0.11 $ ( 0.04 )
Loss from discontinued operations - ( 0.18 )
----------------------------------------
Earnings (loss) per share - basic and diluted $ 0.11 $ ( 0.22 )
----------------------------------------
The number of potentially dilutive common stock options outstanding using the
treasury stock method for the thirteen weeks ended September 30, 2001, were
approximately 84,000 but were not included in the computation of diluted loss
per share because to do so would have been antidilutive.
9
Note 7. Earnings (Loss) Per Share (continued)
The following table sets forth the computation of basic and diluted income
(loss) per common share ("EPS").
Thirty-Nine Thirty-Nine
Weeks Ended Weeks Ended
(in thousands, except per share data) 9/29/02 9/30/01
--------------------------------------
Income (loss) from continuing operations $ 8,376 $( 21,739 )
Preferred dividends ( 3,147 ) ( 3,119 )
--------------------------------------
Income (loss) from continuing operations available
to common stockholders 5,229 ( 24,858 )
Loss from discontinued operations - ( 12,233 )
--------------------------------------
Basic EPS - income (loss) available to common
stockholders 5,229 ( 37,091 )
Effect of dilutive securities - -
--------------------------------------
Diluted EPS - income (loss) available to common
stockholders after assumed conversions $ 5,229 $( 37,091 )
--------------------------------------
Determination of shares:
Weighted-average shares 25,712 25,572
Contingently issuable (unvested restricted shares) ( 8 ) ( 15 )
--------------------------------------
Basic EPS - weighted-average shares 25,704 25,557
Effect of dilutive securities 400 -
--------------------------------------
Diluted EPS - adjusted weighted-average shares after
assumed conversions 26,104 25,557
--------------------------------------
Earnings (loss) per share - basic and diluted:
Income (loss) from continuing operations $ 0.20 $ ( 0.97 )
Loss from discontinued operations - ( 0.48 )
--------------------------------------
Earnings (loss) per share - basic and diluted $ 0.20 $ ( 1.45 )
--------------------------------------
The number of potentially dilutive common stock options outstanding using the
treasury stock method for the thirty-nine weeks ended September 30, 2001, were
approximately 40,000 but were not included in the computation of diluted loss
per share because to do so would have been antidilutive.
Note 8. Segment Information
Cone has three principal business segments based upon organizational structure:
1) Denim; 2) Commission Finishing; and 3) Decorative Fabrics.
10
Operating income (loss) for each segment is total revenue less operating
expenses applicable to the segment. Intersegment revenue relates to the
commission finishing segment. Equity in earnings (losses) of unconsolidated
affiliates is included in the denim segment. Unallocated expenses, interest and
income tax expense (benefit) are not included in segment operating income
(loss). Unallocated expenses include certain legal expenses, bank fees and fees
and discounts on the sale of accounts receivable.
Net sales and income (loss) from continuing operations for Cone's operating
segments are as follows:
Thirteen Thirteen
Weeks Ended Weeks Ended
(in thousands) 9/29/02 9/30/01
---------------------------------------
Net Sales
Denim $ 95,448 $ 82,747
Commission Finishing 11,233 16,004
Decorative Fabrics 5,690 10,789
Other 93 52
---------------------------------------
112,464 109,592
Less Intersegment Sales 776 2,635
---------------------------------------
$ 111,688 $ 106,957
---------------------------------------
Income (Loss) from Continuing Operations
Denim $ 11,697 $ 2,460
Commission Finishing 5 1,279
Decorative Fabrics ( 1,584 ) 732
Other ( 408 ) ( 182 )
Unallocated Expenses ( 344 ) ( 736 )
---------------------------------------
9,366 3,553
Reinvention Plan - Inventory Charges and
Facility Consolidation Charges - ( 150 )
Restructuring and Impairment of Assets - ( 200 )
---------------------------------------
9,366 3,203
Less Equity in Earnings (Losses) of Unconsolidated
Affiliates 923 ( 88 )
---------------------------------------
8,443 3,291
Other Expense, Net ( 4,068 ) ( 2,952 )
---------------------------------------
Income before Income Tax Expense and Equity in
Earnings (Losses) of Unconsolidated Affiliates $ 4,375 $ 339
---------------------------------------
11
Note 8. Segment Information (continued)
Thirty-Nine Thirty-Nine
Weeks Ended Weeks Ended
(in thousands) 9/29/02 9/30/01
---------------------------------------
Net Sales
Denim $ 279,288 $ 286,372
Commission Finishing 41,757 53,321
Decorative Fabrics 25,500 31,854
Other 236 260
---------------------------------------
346,781 371,807
Less Intersegment Sales 3,436 10,461
---------------------------------------
$ 343,345 $ 361,346
---------------------------------------
Income (Loss) from Continuing Operations
Denim $ 26,170 $ 10,910
Commission Finishing 2,134 1,551
Decorative Fabrics ( 1,213 ) 465
Other ( 1,402 ) ( 249 )
Unallocated Expenses ( 1,164 ) ( 2,606 )
---------------------------------------
24,525 10,071
Reinvention Plan - Inventory Charges and
Facility Consolidation Charges - ( 7,289 )
Restructuring and Impairment of Assets - ( 19,939 )
---------------------------------------
24,525 ( 17,157 )
Less Equity in Earnings of Unconsolidated Affiliates 1,605 484
---------------------------------------
22,920 ( 17,641 )
Other Expense, Net ( 13,247 ) ( 13,536 )
---------------------------------------
Income (Loss) before Income Tax Expense (Benefit) and
Equity in Earnings of Unconsolidated Affiliates $ 9,673 $ ( 31,177 )
---------------------------------------
Note 9. Comprehensive Income (Loss)
Comprehensive income (loss) is the total of net income (loss) and other changes
in equity, except those resulting from investments by owners and distributions
to owners not reflected in net income (loss). Total comprehensive income (loss)
for the periods was as follows:
Thirteen Thirteen Thirty-Nine Thirty-Nine
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
(in thousands) 9/29/02 9/30/01 9/29/02 9/30/01
-------------------------------------------------------------------------------
Net income (loss) $ 3,843 $ ( 4,604 ) $ 8,376 $ ( 33,972 )
Other comprehensive
income (loss), cotton
derivatives gains (losses) (359 ) ( 99 ) 307 1,414
-------------------------------------------------------------------------------
$ 3,484 $ ( 4,703 ) $ 8,683 $ ( 32,558 )
-------------------------------------------------------------------------------
12
Cotton derivatives gains as of September 29, 2002, reflected above in other
comprehensive income (loss) will be recognized in cost of goods sold over the
next twelve months.
Note 10. Financial Instruments
Cone utilizes derivative financial instruments to manage risks associated with
changes in cotton prices, interest rates and foreign exchange rates.
Cone adopted Statement of Financial Accounting Standards ("SFAS") No. 133 and
SFAS No. 138 as of January 1, 2001. Cone determined that its interest rate swap
agreement was an ineffective hedge under the new standards. Because of the
transition provision of SFAS No. 133, Cone did not recognize a cumulative effect
of an accounting change affecting results of operations related to its interest
rate swap agreement at January 1, 2001. The adjustment to the carrying value of
debt in the amount of approximately $2.7 million on January 1, 2001, recorded
under the transition provisions of the new standards, was amortized to results
of operations over the period to swap termination. Cone recognized approximately
$0.1 million and $0.5 million in expense related to amortization of this
adjustment to the carrying value of debt for the thirteen and thirty-nine weeks
ended September 30, 2001, which is reflected in the "Other" caption on the
consolidated condensed statements of operations. Changes in the fair value of
the interest rate swap agreement after transition were recorded in the
statements of operations in the period of change. For the thirteen and
thirty-nine weeks ended September 30, 2001, Cone recognized a gain on the change
in the fair value of this derivative instrument of $1.7 million and $2.5
million, respectively, which is reflected in the "Other" caption on the
consolidated condensed statements of operations. As of September 30, 2001, the
interest rate swap had an estimated fair market value of $0.2 million and was
recorded in other long-term liabilities on the consolidated condensed balance
sheet. Effective October 4, 2001, the interest rate swap agreement was
terminated for a total cost of $50,000.
Cash Flow Hedging Strategy
Cotton is the primary raw material for Cone's fabric manufacturing operations.
Cone has an established cotton purchasing program, administered in conformance
with policies approved by the Board of Directors, to ensure an uninterrupted
supply of appropriate quality and quantities of cotton, to cover committed and
anticipated fabric sales and to manage margin risks associated with price
fluctuations on anticipated cotton purchases. Cone primarily uses forward
purchase contracts and, to a lesser extent, futures and option contracts. Cone
considers its cotton derivatives to be primarily cash flow hedges of anticipated
future transactions under SFAS No. 133. The effective portion of derivative
gains and losses for these hedges is initially reported as a component of other
comprehensive income (loss) outside results of operations and subsequently
reclassified into results of operations when the forecasted transactions being
hedged affect results of operations. At September 29, 2002, Cone recorded in
accumulated other comprehensive income (loss) cotton derivative gains, net of
deferred taxes, of $0.6 million. At September 29, 2001, Cone recorded in
accumulated other comprehensive income (loss) cotton derivative gains,
13
net of deferred taxes, of $1.4 million. Gains of $0.2 million and $0.8 million
were credited to cost of goods sold during the thirteen and thirty-nine weeks
ended September 29, 2002, respectively. Gains of less than $0.5 million and $0.9
million were credited to cost of goods sold during the thirteen and thirty-nine
weeks ended September 30, 2001, respectively. The ineffective portion of
derivative gains and losses is reported in results of operations immediately.
Hedge ineffectiveness for the thirteen and thirty-nine weeks ended September 29,
2002 and September 30, 2001, was immaterial.
Note 11. Restructuring and Impairment of Assets
A roll-forward of the activity related to Cone's restructuring charges for the
thirty-nine weeks ended September 29, 2002 and September 30, 2001 follows:
Corporate
& Textile
Products
(in thousands) Group Raytex Total
----------------------------------------------------
Balance, December 30, 2001 $ 639 $ - $ 639
Deductions:
Terminal leave and related benefits ( 639 ) - ( 639 )
----------------------------------------------------
Balance, September 29, 2002 $ - $ - $ -
----------------------------------------------------
Balance, December 31, 2000 $ - $ 964 $ 964
Additions:
Terminal leave and related benefits 3,535 - 3,535
Consulting and legal fees 600 - 600
Pension curtailment* 888 - 888
----------------------------------------------------
5,023 - 5,023
----------------------------------------------------
Deductions:
Terminal leave and related benefits ( 1,701 ) ( 925 ) ( 2,626 )
Consulting and legal fees ( 600 ) - ( 600 )
Pension curtailment* ( 888 ) - ( 888 )
----------------------------------------------------
( 3,189 ) ( 925 ) ( 4,114 )
----------------------------------------------------
Balance, September 30, 2001 $ 1,834 $ 39 $ 1,873
----------------------------------------------------
*Items expensed as incurred.
Note 12. Discontinued Operations
In accordance with the provisions of SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," Cone recorded in fiscal year 2001
the operating results of its khaki
14
business and the John Wolf converted fabrics business as discontinued
operations. Cone will not have any significant continuing involvement in the
operations of these businesses.
Net sales and losses from discontinued operations were as follows:
Thirteen Thirty-Nine
Weeks Ended Weeks Ended
(in thousands) 9/30/01 9/30/01
----------------------------------------
Net Sales
John Wolf $ 2,794 $ 14,414
Khaki 6,075 22,815
----------------------------------------
$ 8,869 $ 37,229
----------------------------------------
Pretax Loss from Discontinued Operations
John Wolf $ ( 428 ) $ ( 4,620 )
Khaki ( 462 ) ( 7,806 )
----------------------------------------
( 890 ) ( 12,426 )
Loss on Sale of Discontinued Operations ( 6,397 ) ( 6,397 )
Income Tax Benefit ( 2,552 ) ( 6,590 )
----------------------------------------
Net Loss from Discontinued Operations $ ( 4,735 ) $ ( 12,233 )
----------------------------------------
Note 13. Income Taxes
The effective tax rate for the thirteen and thirty-nine weeks ended September
29, 2002, is lower than expected because of the effect of the extraterritorial
income exclusion related to export sales. The effective tax rate used for the
thirty-nine weeks ended September 30, 2001, differs from the corporate U.S. tax
rate of 35% because Cone recorded a valuation allowance on the deferred tax
assets that resulted from the non-cash impairment charges totaling $5.6 million
related to Cone's investments in certain of its unconsolidated affiliates,
Ashima and CIPSA. The impairment charges will result in future tax deductible
capital losses; however, Cone does not expect to have taxable capital gains in
the future to realize these tax deductible losses. As such, Cone has established
the valuation allowance on the resulting deferred tax assets.
15
Item 2.
MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Cone's results of operations are influenced by a number of macroeconomic factors
such as U.S. GDP growth, the relative value of the U.S. dollar against other
currencies and consumer spending. During the third quarter of 2002, U.S. GDP
growth continued below first quarter levels as the continued volatility of the
U.S. equity markets and the threat of war dampened consumer confidence. For the
quarter U.S. GDP growth was estimated to be 3.1% driven primarily by auto sales
and housing. In addition, during the quarter the U.S. dollar marginally
strengthened on a trade-weighted basis and the manufacturing sector contracted.
While economic conditions were less favorable than expected, Cone's overall
third quarter results continued to improve on a sequential quarter basis and as
compared with the prior year. The continued improvement in financial performance
was attributable to multiple factors including excellent manufacturing
performance as measured against historical benchmarks, cost savings from
initiatives undertaken as part of the 2001 Reinvention Plan and ongoing profit
improvement initiatives, capacity utilization levels in the company's denim
facilities and lower cotton costs, which were partially offset by lower denim
sales prices and lower sales volume for Cone's home furnishing operations. Cone
expects fourth quarter results to be lower than the third quarter as a result of
slightly higher cotton prices and the fact that many of Cone's denim customers
typically idle their garment cut-and-sew facilities for two weeks around the
Christmas holidays. The outlook for 2003 results will be dependent upon general
economic conditions, denim and home furnishings demand at retail and 2002
holiday sales.
Cone remains focused on its strategy to grow its denim business by expanding
capacity in Mexico. The stated plan has been to build a denim plant, with an
initial capacity of 20 million yards, on our site in Altamira, Tamaulipas,
Mexico when financing is available. We believe that the initial denim facility
can be completed for a capital investment of less than $60 million. As an
alternative to building a denim plant on its site in Altamira, Cone is also
exploring other opportunities to expand denim manufacturing in Mexico. The funds
required for the Mexico denim expansion will require debt or equity financing
and certain modifications to current debt agreements. Cone is presently in
discussions with its lenders regarding a balance sheet recapitalization and is
holding discussions with capital providers regarding funds for the Mexico denim
project. Cone has not reached agreements on new financing or equity, nor has it
modified its debt structure or lending agreements to date, and there can be no
assurance that such new monies will be available on acceptable terms and
conditions or that its present lenders will agree to the necessary
modifications.
Also in Mexico, Cone and its joint venture partner, Compania Industrial de
Parras, S.A. de C.V. ("CIPSA"), have agreed to expand Parras Cone's denim
production capacity by up to 35%. The expansion is expected to be financed by
Parras Cone with internally generated cash flow and debt.
16
The majority of the capacity expansion has been delayed until financing can be
secured; however, in the interim, a smaller scale expansion of approximately 9%
of capacity at a cost of approximately $1 million was completed in August 2002.
There can be no assurance that the joint venture partners will be able to
arrange financing on acceptable terms and conditions for the remaining expansion
of Parras Cone. Cone will continue to market and distribute 100% of the fabric
production of Parras Cone.
During the third quarter of 2002, Cone completed the process of forming a joint
venture in Turkey with Isko, a large Turkish denim company. Cone and Isko
established a joint venture company, IsKone, (owned 51% by Cone) to sell denim
fabrics to Levi Strauss Europe for Levi's(R) 501(R) jeans. The denim fabrics
will be marketed by Cone to Levi Strauss Europe and produced by Isko. The joint
venture with Isko was formed to provide denim fabrics for Levi's(R) 501(R) jeans
in Europe on a tariff friendly basis. The joint venture company, IsKone, is
expected to begin shipping product to Levi Strauss Europe on a regular
commercial basis in the first quarter of 2003.
RESULTS OF OPERATIONS
Third Quarter Ended September 29, 2002 Compared with Third Quarter Ended
September 30, 2001.
For the third quarter of 2002, Cone had sales of $111.7 million, an increase of
4.4% over sales of $107.0 million for the third quarter of 2001. The increase in
sales was primarily driven by denim unit increases, partially offset by
weaknesses in the commission finishing and decorative fabrics segments where
sales declined by 33.2%.
Gross profit margin increased to 15.3% of sales for the third quarter of 2002,
as compared with 10.7% for the third quarter of 2001. The primary drivers of the
improvement in gross profit margin were cost savings from the 2001 Reinvention
Plan and ongoing profit improvement initiatives, capacity utilization levels in
the company's denim facilities and lower cotton costs that were partially offset
by lower denim sales prices. Gross profit was negatively impacted in the third
quarter, as compared with the prior year as a result of lower sales volume for
the commission finishing and decorative fabrics operations resulting in a $3.6
million reduction in operating income for these two segments for the third
quarter of 2002, as compared with the third quarter of 2001.
Segment Information. Cone operates in three principal business segments: Denim,
Commission Finishing and Decorative Fabrics. (See Note 8 of the Notes to
Consolidated Condensed Financial Statements included in Part I, Item 1.)
Denim. Denim sales revenues were $95.4 million for the third quarter of
2002, as compared with sales of $82.7 million for the third quarter of
2001, or an increase of 15.3%. Denim sales yards increased 18.0%, as
compared with the prior year's third quarter results, as improvements
in the market for denim fabrics and Cone's product styling allowed the
denim facilities to operate at full capacity and also to reduce
inventory levels. As compared with the prior year's period, sales
prices on a percentage basis were
17
down in the mid-single digits, and on a consolidated basis sales mix
was less favorable as denims produced by Parras Cone were a slightly
higher percentage of total denim sales. Operating income for the denim
segment was $11.7 million or 12.3% of sales for the third quarter of
2002, as compared with $2.5 million, or 3.0% of sales for the third
quarter of 2001. The improvement in operating income was attributable
to cost savings programs, lower cotton costs, and favorable
manufacturing variances. Operating income for the segment includes the
equity in earnings (losses) of the Parras Cone joint venture and the
Altamira industrial park joint venture. Equity in earnings of Parras
Cone was $1.0 million for the third quarter of 2002, as compared with
break-even results for the third quarter of 2001. The improvement in
Parras Cone's results is primarily attributable to the same factors
that affected Cone's overall denim performance.
Commission Finishing. Outside sales (total segment sales less
intercompany sales) of the commission finishing segment decreased by
21.8%, as compared with third quarter 2001 results. The decrease in
outside sales was the result of weakness in all of Carlisle's product
lines, especially apparel and specialty products, as compared with the
prior year. Total sales, including intercompany sales, decreased by
29.8%, a greater percentage decline than outside sales, primarily as a
result of Cone's decision to exit the khaki segment at the end of 2001.
For the third quarter of 2002, the segment reported break-even results,
as compared with operating income of $1.3 million for the third quarter
of 2001. The decline in the segment's operating income is attributable
to lower sales volume partially offset by plant operating efficiencies,
improved quality and savings from Cone's cost reduction plans.
Decorative Fabrics. The decorative fabrics segment consists of Cone's
jacquard operation. Sales revenue in the third quarter of 2002 was $5.7
million, as compared with $10.8 million for third quarter 2001. Sales
volume decreased by approximately 50%. The reduction in sales volume is
the result of fewer product placements in the market because of product
styling, a general weakness in home decorative fabrics demand and
management's decision earlier in 2002 to phase out certain unprofitable
lines. For the third quarter of 2002 the segment had an operating loss
of $1.6 million versus an operating profit of $0.7 million for the
third quarter of 2001. The decline in sales volume and profitability
has resulted in operational changes at the plant that are expected to
reduce the loss for the fourth quarter of 2002.
Selling and administrative expenses for the third quarter of 2002 were 7.7% of
sales, as compared to 7.4% for the third quarter of 2001. Selling and
administrative expenses as a percentage of sales were higher primarily as a
result of accruals for performance-based compensation.
Interest expense for the third quarter of 2002 was $3.7 million, as compared
with $4.0 million for the third quarter of 2001. Benefits from lower borrowing
levels and lower market interest rate levels were partially offset by increases
in rates under Cone's financing agreements. Other expense of $0.4 million in the
third quarter of 2002 includes the ongoing expenses of the accounts receivable
securitization program, as compared to other income of $0.9 million in the
18
third quarter of 2001. For the third quarter of 2001 other income consisted of
an expense of $0.7 million for the ongoing expense of the accounts receivable
securitization program and income of $1.7 million for the amortization of the
transition amount related to recording an interest rate swap and the valuation
adjustment of the interest rate swap derivative instrument. The recognition of
income was a result of marking to market, as required by SFAS No. 133, the fair
value of the interest rate swap. The interest rate swap was terminated in the
fourth quarter of 2001.
The effective tax rate from continuing operations for the third quarter of 2002
was 33% versus 35% for the third quarter of 2001.
For the third quarter of 2002, Cone had a net profit of $3.8 million or $.11 per
share after preferred dividends. For the third quarter of 2001, Cone had a net
loss of $4.6 million, or $.22 per share after preferred dividends. Included in
the net loss were after-tax charges of $4.7 million for discontinued operations,
or $.18 per share.
Nine Months Ended September 29, 2002 Compared with Nine Months Ended September
30, 2001
For the first nine months of 2002, Cone had sales of $343.3 million, a decrease
of 5.0%, as compared with sales of $361.3 million for the first nine months of
2001. The decrease in sales dollars was across all segments; however, denim
sales units increased in 2002, as compared with 2001.
Gross profit margin increased to 14.2% of sales for the first nine months of
2002, as compared with 8.1% for the first nine months of 2001. The improvement
in gross profit margin was attributable to many factors including cost savings
from the 2001 Reinvention Plan and the ongoing profit improvement initiatives,
lower cotton costs that were partially offset by lower denim selling prices and
favorable manufacturing variances and efficiencies, increased capacity
utilization in the denim plants and improved quality.
Segment Information. Cone operates in three principal business segments: Denim,
Commission Finishing and Decorative Fabrics. (See Note 8 of the Notes to
Consolidated Condensed Financial Statements included in Part I, Item 1.)
Denim. Denim sales revenues were $279.3 million for nine months of
2002, as compared with sales of $286.4 million for the comparable nine
months of 2001, or a decrease of 2.5%. Sales yards for 2002 increased
from 2001 levels primarily as a result of increased denim demand and
market share gains. Sales prices, on a percentage basis, were down in
the mid-single digits, as compared with the prior year, and sales mix
was also less favorable. Operating income for the denim segment
increased to $26.2 million or 9.4% of sales for the nine months of
2002, as compared with $10.9 million or 3.8% of sales for the first
nine months of 2001. The improvement in operating income was primarily
attributable to the 2001 Reinvention Plan savings, lower cotton costs
and favorable manufacturing variances. Cotton cost savings were
partially offset by the decline in average selling prices. Operating
income for the segment includes the equity in earnings
19
(losses) of the Parras Cone joint venture and the Altamira industrial
park joint venture. Equity in earnings of Parras Cone was $1.9 million
for nine months of 2002, as compared with $0.6 million for nine months
of 2001.
Commission Finishing. In 2002, the commission finishing segment
consists only of the Carlisle plant. In 2001, the segment consisted of
both the Carlisle and Raytex operations. During the first quarter of
2001, Cone was in the process of closing the Raytex operation. Outside
sales (total segment sales less intercompany sales) of the commission
finishing segment decreased by 6.2%, as compared with 2001 results
after eliminating the sales produced by the Raytex operation. The
decrease in outside sales was the result of weakness in all of
Carlisle's product lines in the third quarter of 2002, as compared with
the third quarter of 2001, as sales for the first half of 2002 were
basically flat with year ago levels. Total sales excluding Raytex, but
including intercompany sales, decreased by 18.6% primarily as a result
of Cone's decision to exit the khaki segment at the end of 2001. For
the nine months of 2002, the segment reported a profit of $2.1 million,
as compared with a profit $1.6 million for the first nine months of
2001. The improvement in the segment's operating income is primarily
attributable to improved quality and operating efficiencies, savings
from the 2001 Reinvention Plan and the closing of the Raytex operation.
Decorative Fabrics. The decorative fabrics segment consists of Cone's
jacquard operation. Sales revenue for the nine months of 2002 was $25.5
million, as compared with $31.9 million for the comparable period of
2001. Sales volume decreased by approximately 30%. The reduction in
sales volume is the result of fewer product placements in the market as
a result of product styling, weaker decorative fabrics market demand
and management's decision to phase out certain unprofitable lines in
early 2002. Segment operating loss was $1.2 million for nine months of
2002, as compared with segment operating income of $0.5 million for the
comparable prior year period.
Selling and administrative expenses for the first nine months of 2002 were $25.7
million, as compared to $27.1 million for the first nine months of 2001. Selling
and administrative expenses were 7.5% of sales for both years primarily a result
of savings from the 2001 Reinvention Plan offset by accruals for
performance-based compensation.
Interest expense for the nine months of 2002 was $12.0 million, as compared with
$13.5 million for the nine months of 2001. Benefits from lower borrowing levels
and lower market interest rate levels were partially offset by increases in
rates under Cone's financing agreements. Other expenses of $1.4 million in the
first nine months of 2002 include the ongoing expense of the accounts receivable
securitization program, as compared to other expense of $0.4 million for the
nine months of 2001. For the nine months of 2001 other expense consisted of an
expense of $2.5 million for the ongoing expense of the accounts receivable
securitization program and income of $2.1 million for the amortization of the
transition amount related to recording an interest rate swap and the valuation
adjustment of the interest rate swap derivative instrument. The recognition of
income was as a result of marking to market, as required by SFAS No. 133, the
fair value of the interest rate swap. The interest rate swap was terminated in
the fourth quarter of 2001.
20
The effective tax rate on continuing operations for year to date 2002 was 30%
versus a tax benefit of 29% for the comparable period of 2001. Tax benefits of
export sales reduced the effective tax rate for 2002. The effective tax rate
used for the nine months ended September 30, 2001, differs from the corporate
U.S. tax rate of 35% because Cone recorded a valuation allowance on the deferred
tax assets that resulted from the non-cash impairment charges totaling $5.6
million related to Cone's investments in certain of its unconsolidated
affiliates, Ashima and CIPSA. The impairment charges will result in future tax
deductible capital losses; however, Cone does not expect to have taxable capital
gains in the future to realize these tax deductible losses. Therefore, Cone has
established the valuation allowance on the resulting deferred tax assets.
For the nine months of 2002, Cone had a net profit $8.4 million, or $.20 per
share after preferred dividends. For the nine months of 2001, Cone had a net
loss of $34.0 million, or $1.45 per share after preferred dividends. Included in
the net loss for 2001 were after-tax charges of $19.7 million for impairment and
restructuring charges and inventory write-downs and facility consolidation
charges related to the Reinvention Plan attributable to continuing operations,
or $.77 per share. In addition, included in the net loss for the nine months of
2001 were after-tax charges of $12.2 million for discontinued operations, or
$.48 per share.
LIQUIDITY AND CAPITAL RESOURCES
Cone's principal capital components consist of debt outstanding under its
Revolving Credit Facility, its Senior Note, its 8-1/8% Debentures and its
stockholders' equity. Primary sources of liquidity are internally generated
funds, availability under the Revolving Credit Facility and a $60 million
Receivables Purchase and Servicing Agreement (the "A/R Securitization
Facility").
On November 9, 2001, Cone entered into agreements both to refinance and to
extend its Revolving Credit Facility with its existing bank group and to extend
the maturity on its Senior Note. The new agreements provide for scheduled
amortization and commitment reductions of $10 million during 2002 with a new
maturity date of January 15, 2003. In addition, the agreements provide for
additional amortization and commitment reductions related to proceeds received
by Cone for permitted asset sales and 75% of excess cash flow (as defined in the
agreements). Interest rates were increased and new covenant levels were
established.
Based upon its operating results for the first six months of 2002, pursuant to
the 75% of excess cash flow provision of its lending agreements, Cone made an
additional amortization payment and commitment reduction of $3.7 million in
August 2002.
Financing agreements of Cone prohibit it from paying dividends on its Common
Stock.
21
The following is a summary of primary financing agreements as of September 29,
2002.
Interest/
($ Amounts in Millions) Facility Amount Discount
Financing Agreement Commitment Outstanding Rate Maturity Date
- --------------------------------------------------------------------------------------------------
8-1/8% Debentures $ 100.0 $ 100.0 8.125% Mar 15, 2005
Senior Note 23.3 23.3 14.200 Jan 15, 2003
Revolving Credit Facility 59.5 33.0 9.250 Jan 15, 2003
A/R Securitization
Facility 60.0 28.5 5.250 Sept 1, 2004
At September 29, 2002, Cone had availability under its financing agreements of
$24.8 million. Availability under the Revolving Credit Facility and the A/R
Securitization Facility is determined by overall facility commitment levels and
borrowing base calculations, as defined in the respective agreements.
Availability under these agreements averaged in excess of $20 million for the
third quarter of 2002. During the first nine months of 2002, Cone generated
$30.1 million of cash from operations. Changes in operating assets and
liabilities provided $8.3 million of the cash from operations as liquidation of
inventories and increase in payables more than offset the increase in accounts
receivable. During the first nine months of 2002, Cone invested $3.9 million in
capital expenditures and sold $1.3 million of land and other non-essential
equipment. Cone expects to spend approximately $8.0 million in 2002 for domestic
capital expenditures to maintain its manufacturing facilities and to provide the
flexibility and capability necessary to meet market demands. Capital
expenditures are expected to be financed by internally generated funds.
On September 29, 2002, Cone's capital structure consisted of $155.2 million of
debt (including current maturities) and $91.8 million of stockholders' equity.
For comparison, Cone had $180.8 million of debt (including current maturities)
and $90.8 million of stockholders' equity at September 30, 2001.
Accounts receivable on September 29, 2002 were $43.3 million, as compared with
$44.3 million at September 30, 2001. Receivables, including those sold pursuant
to the A/R Securitization Facility, represented 62 days of sales outstanding at
September 29, 2002 and 73 days at September 30, 2001. Advances outstanding under
the A/R Securitization Facility were $28.5 million at September 29, 2002 and
$45.3 million at September 30, 2001.
Inventories on September 29, 2002 were $45.6 million, as compared with $62.1
million at December 30, 2001 reflecting reductions in inventory levels of
finished goods, work-in-process, raw materials and supplies and other. In
addition, inventory carrying values were lower reflecting lower cotton prices
and the reduced cost of operations as the result of the 2001 Reinvention Plan.
Finished goods inventories were reduced by $12.6 million from year-end 2001
levels. For comparison purposes, inventories at September 30, 2001 were $64.5
million. The year-over-year reduction in inventories is the result of the
liquidation of core inventories, write-downs taken as part of Cone's Reinvention
Plan, the exit from the khaki segment and lower cotton and other raw material
prices.
22
Cone believes that internally generated operating funds and funds available
under its Revolving Credit Facility currently in effect are sufficient to meet
its needs for working capital and domestic capital spending permitted under the
terms of the Revolving Credit Facility. However, by January 2003, Cone must
either refinance or replace the Revolving Credit Facility and the Senior Note.
If Cone is unable to refinance this debt or is in default, in addition to the
amounts owed, Cone will be required to pay to the lenders within two years
thereafter, upon notice from the lenders, an amount equal to the greater of $1
million or 10% of the market value of Cone's outstanding common stock at the
time of the notice. There is no assurance that Cone will be able to replace its
Revolving Credit Facility and its Senior Note or otherwise obtain financing on
terms and conditions acceptable to Cone. Cone has not yet been able to finance
its proposed plant in Altamira, Tamaulipas, Mexico, and its current debt
structure will not permit that financing. Cone is in the process of exploring
its alternatives related to financing its businesses in both the U.S. and
Mexico.
The long-term recapitalization of Cone's balance sheet is expected to result in
the extension and modifications of existing debt agreements and the issuance of
new debt or equity securities (potentially including securities convertible into
common stock) that will provide the funding for its Mexico denim expansion. Cone
has made it a priority to implement a long-term recapitalization of its balance
sheet; therefore, in the second quarter of 2002, Cone retained Jefferies and
Co., as its investment banker to assist in the process. We have had discussions
with our existing lenders and potential new sources of debt or equity. At this
time, there is no definitive proposal or agreement on the recapitalization of
the balance sheet. Cone's goal is to announce the details of a recapitalization
plan in 2002 with a completion date in the first quarter of 2003. The company's
schedule will require an interim amendment to the Revolving Credit Facility and
the Senior Note to extend the January 15, 2003 maturity.
With the significant declines in the equity markets in 2002, the fair value of
Cone's pension plan assets has declined so that its accumulated benefit
obligations to plan participants exceed the fair value of pension plan assets.
If the fair value of pension plan assets does not exceed the accumulated benefit
obligations to plan participants at year-end, Cone will recognize an after-tax
reduction to stockholders' equity for a minimum pension liability. Based upon
pension plan assets at the end of the third quarter, the after-tax reduction to
stockholders equity would be approximately $19 million at year-end. The noncash
charge will not impact 2002 net income or liquidity; however, the decline in
fair value of pension plan assets may reduce future operating results. As a part
of the 2001 Reinvention Plan, the salary defined benefit pension plan was
frozen.
OTHER MATTERS
EBITDA from continuing operations and pro forma EBITDA, which includes 50% of
Parras Cone's EBITDA, are presented not as an alternative measure of operating
results or cash flow from continuing operations (as determined in accordance
with accounting principles generally accepted in the United States of America)
but because they are a widely accepted financial indicator of the ability to
incur and service debt. Cone calculates EBITDA from continuing operations and
pro forma EBITDA as follows:
23
Thirteen Thirteen Thirty-Nine Thirty-Nine
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
(in thousands) 9/29/02 9/30/01 9/29/02 9/30/01
---------------------------------------------------------------------
Income (Loss) from Continuing Operations $ 8,443 $ 3,291 $ 22,920 $( 17,641 )
Depreciation and Amortization 4,688 4,888 14,832 15,827
Reinvention Plan - Inventory Charges
and Facility Consolidation Charges - 150 - 7,289
Restructuring and Impairment Charges - 200 - 19,939
---------------------------------------------------------------------
EBITDA 13,131 8,529 37,752 25,414
50% Parras Cone EBITDA 2,531 1,043 6,068 4,270
---------------------------------------------------------------------
Pro Forma EBITDA $ 15,662 $ 9,572 $ 43,820 $ 29,684
---------------------------------------------------------------------
Federal, state and local regulations relating to the workplace and the discharge
of materials into the environment continue to change and, consequently, it is
difficult to gauge the total future impact of such regulations on Cone. Existing
government regulations are not expected to cause a material change in Cone's
competitive position, operating results or planned capital expenditures. Cone
has an active environmental committee, which fosters protection of the
environment and compliance with laws.
From time to time, Cone is a party to various legal claims and actions.
Management believes that none of these claims or actions, either individually or
in the aggregate, will have a material adverse effect on the financial condition
and liquidity of Cone. As a result of Cone's recent operating results,
management believes that the effects of any litigation, no matter how small or
insignificant, could be considered material to Cone's future results of
operations. As of September 29, 2002, no significant litigation existed.
"Safe Harbor" Statement under Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Except for the historical information presented, the matters disclosed
in the foregoing discussion and analysis and other parts of this report
include forward-looking statements. These statements represent Cone's
current judgment on the future and are subject to risks and
uncertainties that could cause actual results to differ materially.
Such factors include, without limitation: (i) the demand for textile
products, including Cone's products, will vary with the U.S. and world
business cycles, imbalances between consumer demand and inventories of
retailers and manufacturers and changes in fashion trends, (ii) the
highly competitive nature of the textile industry and the possible
effects of reduced import protection, free-trade initiatives and
retaliatory measures in trade disputes, (iii) the unpredictability of
the cost and availability of cotton, Cone's principal raw material, and
other manufacturing costs, (iv) Cone's relationships with Levi Strauss
as its major customer including its sourcing practices, (v) Cone's
ability to attract and maintain adequate capital to fund operations and
strategic initiatives, (vi) increases in prevailing interest rates,
(vii) the effect of financial market performance on Cone's defined
benefit pension plan assets, and (viii) the effect on Cone's sales and
markets of events such as the events of September 11, 2001. For a
further description of these risks see Cone's 2001 Form 10-K, "Item 1.
Business -- Competition, --Raw Materials and --Customers" and "Item 7.
Management's Discussion and Analysis of Results of Operations and
Financial Condition -- Overview" of the Form 10-K. Other risks and
uncertainties may be described from time to time in Cone's other
reports and filings with the Securities and Exchange Commission.
24
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Cone is exposed to market risks relating to fluctuations in interest rates and
commodity prices. There has been no material change in Cone's market risks that
would significantly affect the disclosures made in the Form 10-K for the year
ended December 30, 2001.
Item 4. Controls and Procedures
Based on their evaluation of Cone's disclosure controls and procedures, which
was completed within 90 days prior to the filing of this report, the Chief
Executive Officer and the Chief Financial Officer have concluded that Cone's
disclosure controls and procedures are effective to ensure that information
required to be disclosed by Cone in the reports that it files or submits under
the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms. In reaching this conclusion, the Chief
Executive Officer and Chief Financial Officer determined that Cone's disclosure
controls and procedures are effective in ensuring that such information is
accumulated and communicated to Cone's management to allow timely decisions
regarding required disclosure.
There were no significant changes in Cone's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation.
25
PART II
Item 1. Legal Proceedings
From time to time, Cone is a party to various legal claims and actions.
Management believes that none of these claims or actions, either individually or
in the aggregate, will have a material adverse effect on the financial condition
and liquidity of Cone. As a result of Cone's recent operating results,
management believes that the effects of any litigation, no matter how small or
insignificant, could be considered material to Cone's future results of
operations. As of September 29, 2002, no significant litigation existed.
Item 5. Other Information
Notice of a matter to be presented by a shareholder for consideration at the
2003 annual meeting other than pursuant to Rule 14a-8 of the Securities Exchange
Act of 1934 must be received by the company prior to February 10, 2003. Failure
to give timely notice will result in the proxy statement relating to the meeting
not including information on the matter or the manner in which management's
proxies will vote on the matter and the proxies received by management will have
discretionary authority to vote on such matter.
Item 6. Exhibits and Reports on Form 8-K
(a) The exhibits to this Form 10-Q are listed in the accompanying Index to
Exhibits.
(b) Reports on Form 8-K. None
26
Exhibit
No. Description
*2.1 Receivables Purchase and Servicing Agreement dated as of September 1,
1999, by and among Cone Receivables II LLC, as Seller, Redwood
Receivables Corporation, as Purchaser, the Registrant, as Servicer,
and General Electric Capital Corporation, as Operating Agent and
Collateral Agent, filed as Exhibit 2.1(h) to Registrant's report on
Form 10-Q for the quarter ended October 3, 1999.
*2.2 Receivables Transfer Agreement dated as of September 1, 1999, by and
among the Registrant, any other Originator Party hereto, and Cone
Receivables II LLC, filed as Exhibit 2.1(i) to Registrant's report on
Form 10-Q for the quarter ended October 3, 1999.
*2.3.1 First Amendment and Waiver to Securitization Agreements dated as of
November 16, 1999, by and between Cone Receivables II LLC, the
Registrant, Redwood Receivables Corporation and General Electric
Capital Corporation, together with all exhibits thereto, filed as
Exhibit 2.1(c) to Registrant's report on Form 10-K for the fiscal year
ending January 2, 2000.
*2.3.2 Second Amendment to Securitization Agreements dated as of January 28,
2000, by and between Cone Receivables II LLC, the Registrant, Redwood
Receivables Corporation, and General Electric Capital Corporation,
together with all exhibits thereto, filed as Exhibit 2.1(d) to
Registrant's report on Form 10-K for the fiscal year ending January 2,
2000.
*2.3.3 Third Amendment to Securitization Agreements dated as of March 31,
2000, by and between Cone Receivables II LLC, the Registrant, Redwood
Receivables Corporation, and General Electric Capital Corporation,
together with all Exhibits thereto, filed as Exhibit 2.1(e) to
Registrant's report on Form 10-Q for the quarter ended April 2, 2000.
*2.3.4 Fourth Amendment to Securitization Agreements dated as of April 24,
2000 by and between Cone Receivables II LLC, the Registrant, Cone
Foreign Trading LLC, Redwood Receivables Corporation, and General
Electric Capital Corporation, together with all exhibits thereto,
filed as Exhibit 2.1(f) to Registrant's report on Form 10-Q for the
quarter ended April 2, 2000, filed as Exhibit 2.3.4 to Registrant's
Registration Statement on Form S-4 (File No. 333-43014).
27
Exhibit
No. Description
*2.3.5 Fifth Amendment to Securitization Agreements dated as of June 30, 2000
by and between Cone Receivables II LLC, the Registrant, Cone Foreign
Trading LLC, Redwood Receivables Corporation, and General Electric
Capital Corporation, filed as Exhibit 2.3.5 to Registrant's
Registration Statement on Form S-4 (File No. 333-43014).
*2.3.6 Sixth Amendment to Securitization Agreements dated as of December 12,
2000 by and between Cone Receivables II LLC, the Registrant, Cone
Foreign Trading LLC, Redwood Receivables Corporation and General
Electric Capital Corporation, filed as Exhibit 2.3.6 to Registrant's
Registration Statement on Form S-4 (File No. 333-43014).
*2.3.7 Seventh Amendment to Securitization Agreement dated as of April 23,
2001 by and between Cone Receivables II LLC, the Registrant, Cone
Foreign Trading LLC, and General Electric Capital Corporation, filed
as Exhibit 2.3.7 to Registrant's report on Form 10-Q for the quarter
ended July 1, 2001.
*2.3.8 Eighth Amendment to Securitization Agreement dated as of July 20, 2001
by and between Cone Receivables II LLC, the Registrant, Cone Foreign
Trading LLC, and General Electric Capital Corporation, filed as
Exhibit 2.3.8 to Registrant's report on Form 10-Q for the quarter
ended July 1, 2001.
*2.3.9 Ninth Amendment to Securitization Agreement dated as of November 9,
2001 by and between Cone Receivables II LLC, the Registrant, Cone
Foreign Trading LLC, and General Electric Capital Corporation, filed
as Exhibit 2.3.9 to the Registrant's report on Form 10-K for the year
ended December 30, 2001.
*2.4 Investment Agreement dated as of June 18, 1993, among Compania
Industrial de Parras, S.A. de C.V., Sr. Rodolfo Garcia Muriel, and the
Registrant, filed as Exhibit 2.2(a) to Registrant's report on Form
10-Q for the quarter ended July 4, 1993.
*2.5 Commercial Agreement dated as of July 1, 1999, among Compania
Industrial de Parras, S.A. de C.V., the Registrant, and Parras Cone de
Mexico, S.A., filed as Exhibit 2.2(b) to Registrant's report on Form
10-K for the fiscal year ending January 2, 2000.
28
Exhibit
No. Description
*2.5.1 Amended and Restated Commercial Agreement, dated as of December 12,
2000, among Compania Industrial de Parras, S.A. de C.V., the
Registrant and Parras Cone de Mexico, S.A., filed as Exhibit 2.5.1 to
Registrant's Registration Statement on Form S-4 (File No. 333-43014).
*2.6 Guaranty Agreement dated as of June 25, 1993, between the Registrant
and Compania Industrial de Parras, S.A. de C.V., filed as Exhibit
2.2(c) to Registrant's report on Form 10-Q for the quarter ended July
4, 1993.
*2.7 Joint Venture Agreement dated as of June 25, 1993, between Compania
Industrial de Parras, S.A. de C.V., and Cone Mills (Mexico), S.A. de
C.V., filed as Exhibit 2.2(d) to Registrant's report on Form 10-Q for
the quarter ended July 4, 1993.
*2.7.1 First Amendment to Joint Venture Agreement dated as of June 14, 1995,
between Compania Industrial de Parras, S.A. de C.V., and Cone Mills
(Mexico), S.A. de C.V., filed as Exhibit 2.2(e) to Registrant's report
on Form 10-Q for the quarter ended July 2, 1995.
*2.8 Joint Venture Registration Rights Agreement dated as of June 25, 1993,
among Parras Cone de Mexico, S.A., Compania Industrial de Parras, S.A.
de C.V. and Cone Mills (Mexico), S.A. de C.V., filed as Exhibit 2.2(e)
to Registrant's report on Form 10-Q for the quarter ended July 4,
1993.
*2.9 Parras Registration Rights Agreement dated as of June 25, 1993,
between Compania Industrial de Parras, S.A. de C.V. and the
Registrant, filed as Exhibit 2.2(f) to Registrant's report on Form
10-Q for the quarter ended July 4, 1993.
*2.10 Support Agreement dated as of June 25, 1993, among the Registrant, Sr.
Rodolfo L. Garcia, Sr. Rodolfo Garcia Muriel and certain other persons
listed therein ("private stockholders"), filed as Exhibit 2.2(g) to
Registrant's report on Form 10-Q for the quarter ended July 4, 1993.
*3.1 Restated Articles of Incorporation of the Registrant effective August
25, 1993, filed as Exhibit 4.1 to Registrant's report on Form 10-Q for
the quarter ended October 3, 1993.
29
Exhibit
No. Description
*3.1.1 Articles of Amendment of the Articles of Incorporation of the
Registrant effective October 22, 1999, to fix the designation,
preferences, limitations, and relative rights of a series of its Class
B Preferred Stock, filed as Exhibit 4.1(a) to Registrant's report on
Form 10-Q for the quarter ended October 3, 1999.
*3.2 Amended and Restated Bylaws of Registrant, effective June 18, 1992,
filed as Exhibit 3.5 to Registrant's Registration Statement on Form
S-1 (File No. 33-46907).
*4.1 Rights Agreement dated as of October 14, 1999, between the Registrant
and First Union National Bank, as Rights Agent, with Form of Articles
of Amendment with respect to the Class B Preferred Stock (Series A),
the Form of Rights Certificate, and Summary of Rights attached, filed
as Exhibit 1 to Registrant's report on Form 8-A dated October 29,
1999.
*4.2 Note Agreement dated as of August 13, 1992, between the Registrant and
The Prudential Insurance Company of America, with form of 8%
promissory note attached, filed as Exhibit 4.01 to Registrant's report
on Form 8-K dated August 13, 1992.
*4.2.1 Letter Agreement dated September 11, 1992, amending the Note Agreement
dated August 13, 1992, between the Registrant and The Prudential
Insurance Company of America, filed as Exhibit 4.2 to Registrant's
report on Form 8-K dated March 1, 1995.
*4.2.2 Letter Agreement dated July 19, 1993, amending the Note Agreement
dated August 13, 1992, between the Registrant and The Prudential
Insurance Company of America, filed as Exhibit 4.3 to Registrant's
report on Form 8-K dated March 1, 1995.
*4.2.3 Letter Agreement dated June 30, 1994, amending the Note Agreement
dated August 13, 1992, between the Registrant and The Prudential
Insurance Company of America, filed as Exhibit 4.4 to Registrant's
report on Form 8-K dated March 1, 1995.
*4.2.4 Letter Agreement dated November 14, 1994, amending the Note Agreement
dated August 13, 1992, between the Registrant and The Prudential
Insurance Company of America, filed as Exhibit 4.5 to Registrant's
report on Form 8-K dated March 1, 1995.
30
Exhibit
No. Description
*4.2.5 Letter Agreement dated as of June 30, 1995, amending the Note
Agreement dated August 13, 1992, between the Registrant and The
Prudential Insurance Company of America, filed as Exhibit 4.3(e) to
Registrant's report on Form 10-Q for the quarter ended July 2, 1995.
*4.2.6 Letter Agreement dated as of June 30, 1995, between the Registrant and
The Prudential Insurance Company of America superseding Letter
Agreement, filed as Exhibit 4.3(e) to Registrant's report on Form 10-Q
for the quarter ended July 2, 1995, filed as Exhibit 4.3(f) to
Registrant's report on Form 10-K for year ended December 31, 1995.
*4.2.7 Letter Agreement dated as of March 30, 1996, between the Registrant
and The Prudential Insurance Company of America, filed as Exhibit
4.3(g) to Registrant's report on Form 10-Q for the quarter ended March
31, 1996.
*4.2.8 Letter Agreement dated as of January 31, 1997, between the Registrant
and The Prudential Insurance Company of America, filed as Exhibit
4.3(h) to Registrant's report on Form 10-K for the year ended December
29, 1996.
*4.2.9 Letter Agreement dated as of July 31, 1997, between the Registrant and
The Prudential Insurance Company of America, filed as Exhibit 4.3(i)
to Registrant's report on Form 10-Q for the quarter ended September
28, 1997.
*4.2.10 Modification to Note Agreement dated as of February 14, 1998, between
the Registrant and The Prudential Insurance Company of America, filed
as Exhibit 4.3(j) to Registrant's report on Form 10-Q for the quarter
ended March 29, 1998.
*4.2.11 Letter Agreement dated as of September 1, 1999, amending the Note
Agreement dated August 13, 1992, between the Registrant and The
Prudential Insurance Company of America, filed as Exhibit 4.3(i) to
Registrant's report on Form 10-Q for the quarter ended October 3,
1999.
*4.2.12 Amendment of 1992 Note Agreement dated as of January 28, 2000, by and
among the Registrant and The Prudential Insurance Company of America,
together with all exhibits thereto, filed as Exhibit 9 to Registrant's
report on Form 8-K dated February 11, 2000.
31
Exhibit
No. Description
*4.2.13 Waiver under Note Agreement dated as of July 3, 2000, by and among the
Registrant and The Prudential Insurance Company of America, filed as
Exhibit 4.2.13 to Registrant's Registration Statement on Form S-4
(File No. 333-43014).
*4.2.14 Amendment of 1992 Note Agreement dated as of July 14, 2000, by and
among the Registrant and The Prudential Insurance Company of America,
filed as Exhibit 4.2.14 to Registrant's Registration Statement on Form
S-4 (File No. 333-43014).
*4.2.15 Amendment of 1992 Note Agreement dated as of December 12, 2000, by and
among the Registrant and The Prudential Insurance Company of America,
filed as Exhibit 4.2.15 to the Registrant's Registration Statement on
Form S-4 (File No. 333-43014).
*4.2.16 Amendment of 1992 Note Agreement and Waiver dated as of April 23,
2001, by and among the Registrant and The Prudential Insurance Company
of America, filed as Exhibit 4.2.16 to Registrant's report on Form
10-Q for quarter ended July 1, 2001.
*4.2.17 Amendment of 1992 Note Agreement dated as of June 28, 2001, by and
among the Registrant and The Prudential Insurance Company of America,
filed as Exhibit 4.2.17 to Registrant's report on Form 10-Q for the
quarter ended July 1, 2001.
*4.2.18 Waiver Under 1992 Note Agreement dated as of August 10, 2001, by and
among the Registrant and The Prudential Insurance Company of America,
filed as Exhibit 4.2.18 to Registrant's report on Form 10-Q for the
quarter ended September 30, 2001.
*4.2.19 Amendment of 1992 Note Agreement dated as of September 25, 2001, by
and among the Registrant and The Prudential Insurance Company of
America, filed as Exhibit 4.2.19 to Registrant's report on Form 10-Q
for the quarter ended September 30, 2001.
*4.2.20 Amendment of 1992 Note Agreement dated as of October 25, 2001, by and
among the Registrant and The Prudential Insurance Company of America,
filed as Exhibit 4.2.20 to Registrant's report on Form 10-Q for the
quarter ended September 30, 2001.
32
Exhibit
No. Description
*4.2.21 Amendment of 1992 Note Agreement dated as of November 9, 2001, by and
among the Registrant and The Prudential Insurance Company of America,
filed as Exhibit 4.2.21 to the Registrant's report on Form 10-K for
the year ended December 30, 2001.
*4.2.22 Amendment of 1992 Note Agreement dated as of March 22, 2002, by and
among the Registrant and The Prudential Insurance Company of America,
filed as Exhibit 4.2.22 to the Registrant's report on Form 10-K for
the year ended December 30, 2001.
*4.3 Credit Agreement dated as of January 28, 2000, by and among the
Registrant, as Borrower, Bank of America, N.A., as Agent and as Lender
and the Lenders party thereto from time to time, together with all
exhibits thereto, filed as Exhibit 1 to Registrant's report on Form
8-K dated February 11, 2000.
*4.3.1 Amendment No. 1 to Credit Agreement dated as of July 14, 2000, by and
among the Registrant, as Borrower, Cone Global Finance Corp., CIPCO
S.C. Inc. and Cone Foreign Trading LLC, as Guarantors, Bank of
America, N.A., as Agent and as Lender, and the Lenders party thereto
from time to time, filed as Exhibit 4.3.1 to Registrant's Registration
Statement on Form S-4 (File No. 333-43014).
*4.3.2 Amendment No. 2 to Credit Agreement dated as of December 12, 2000, by
and among the Registrant, as Borrower, Cone Global Finance Corp.,
CIPCO S.C. Inc. and Cone Foreign Trading LLC, as Guarantors, Bank of
America, N.A., as Agent and as Lender, and the Lenders party thereto
from time to time, filed as Exhibit 4.3.2 to Registrant's Registration
Statement on Form S-4 (File No. 333-43014).
*4.3.3 Waiver and Amendment No. 3 to Credit Agreement dated as of April 23,
2001, by and among the Registrant, as Borrower, Bank of America, N.A.,
as Agent and as Lender, and the Lenders Signatory Thereto, filed as
Exhibit 4.3.3 to Registrant's report on Form 10-Q for the quarter
ended July 1, 2001.
*4.3.4 Amendment No. 4 to Credit Agreement dated as of June 28, 2001, by and
among the Registrant, as Borrower, Bank of America, N.A., as Agent and
Lender, and the Lenders Signatory Thereto, filed as Exhibit 4.3.4 to
Registrant's report on Form 10-Q for the quarter ended July 1, 2001.
33
Exhibit
No. Description
*4.3.5 Amendment No. 5 to Credit Agreement dated as of August 10, 2001, by
and among the Registrant, as Borrower, Bank of America, N.A., as Agent
and Lender, and the Lenders Signatory Thereto, filed as Exhibit 4.3.5
to Registrant's report on Form 10-Q for the quarter ended September
30, 2001.
*4.3.6 Amendment No. 6 to Credit Agreement dated as of September 25, 2001, by
and among the Registrant, as Borrower, Bank of America, N.A., as Agent
and Lender, and the Lenders Signatory Thereto, filed as Exhibit 4.3.6
to Registrant's report on Form 10-Q for the quarter ended September
30, 2001.
*4.3.7 Amendment No. 7 to Credit Agreement dated as of October 25, 2001, by
and among the Registrant, as Borrower, Bank of America, N.A., as Agent
and Lender, and the Lenders Signatory Thereto, filed as Exhibit 4.3.7
to Registrant's report on Form 10-Q for the quarter ended September
30, 2001.
*4.3.8 Amendment No. 8 to Credit Agreement dated as of November 9, 2001, by
and among the Registrant, as Borrower, Bank of America, N.A., as Agent
and Lender, and the Lenders Signatory Thereto, filed as Exhibit 4.3.8
to the Registrant's report on Form 10-K for the year ended December
30, 2001.
*4.3.9 Amendment No. 9 to Credit Agreement dated as of February 27, 2002, by
and among the Registrant, as Borrower, Bank of America, N.A., as Agent
and Lender, and the Lenders Signatory Thereto, filed as Exhibit 4.3.9
to the Registrant's report on Form 10-K for the year ended December
30, 2001.
*4.4 Guaranty Agreement dated as of January 28, 2000, made by Cone Global
Finance Corporation, CIPCO S.C., Inc. and Cone Foreign Trading LLC in
favor of Bank of America, N.A. as Revolving Credit Agent for the
Lenders, The Prudential Insurance Company of America, SunTrust Bank,
Morgan Guaranty Trust Company of New York, Wilmington Trust Company,
as General Collateral Agent, Bank of America, N.A., as Priority
Collateral Agent, and Atlantic Financial Group, Ltd., together with
all exhibits thereto, filed as Exhibit 2 to Registrant's report on
Form 8-K dated February 11, 2000.
*4.5 Priority Security Agreement dated as of January 28, 2000, by the
Registrant and certain of its subsidiaries, as Grantors, and Bank of
America, N.A., as Priority Collateral Agent, together with all
exhibits thereto, filed as Exhibit 3 to Registrant's report on Form
8-K dated February 11, 2000.
34
Exhibit
No. Description
*4.6 General Security Agreement dated as of January 28, 2000, by the
Registrant and certain of its subsidiaries, as Grantors, and
Wilmington Trust Company, as General Collateral Agent, together with
all exhibits thereto, filed as Exhibit 4 to Registrant's report on
Form 8-K dated February 11, 2000.
*4.7 Securities Pledge Agreement dated as of January 28, 2000, by the
Registrant in favor of Wilmington Trust Company, as General Collateral
Agent, together with all exhibits thereto, filed as Exhibit 5 to
Registrant's report on Form 8-K dated February 11, 2000.
*4.8 CMM Pledge Agreement dated as of January 28, 2000, by the Registrant
in favor of Wilmington Trust Company, as General Collateral Agent,
together with all exhibits thereto, filed as Exhibit 6 to Registrant's
Report on Form 8-K dated February 11, 2000.
*4.9 Deed of Trust, Security Agreement, Fixture Filing, Assignment of
Leases and Rents and Financing Statement dated as of January 28, 2000,
between the Registrant, as Grantor, TIM, Inc., as Trustee, Wilmington
Trust Company, as General Collateral Agent, and Bank of America, N.A.,
as Designated Collateral Subagent, together with all exhibits thereto,
filed as Exhibit 7 to Registrant's report on Form 8-K dated February
11, 2000.
*4.10 Deed of Trust, Security Agreement, Fixture Filing, Assignment of
Leases and Rents and Financing Statement dated as of January 28, 2000,
between the Registrant, as Grantor, TIM, Inc., as Trustee, and Bank of
America, N.A., as Priority Collateral Agent, together with all
exhibits thereto, filed as Exhibit 8 to Registrant's report on Form
8-K dated February 11, 2000.
*4.11 Termination Agreement dated as of January 28, 2000, between the
Registrant and Morgan Guaranty Trust Company of New York, as Agent for
various banks terminating the Credit Agent dated August 7, 1997, filed
as Exhibit 4.4(h) to Registrant's report on Form 10-K for the fiscal
year ending January 2, 2000.
*4.12 Specimen Class A Preferred Stock Certificate, filed as Exhibit 4.5 to
Registrant's Registration Statement on Form S-1 (File No. 33-46907).
*4.13 Specimen Common Stock Certificate, effective June 18, 1992, filed as
Exhibit 4.7 to Registrant's Registration Statement on Form S-1 (File
No. 33-46907).
35
Exhibit
No. Description
*4.14 Cone Mills Corporation 1983 ESOP as amended and restated effective
December 1, 1994, filed as Exhibit 4.9 to Registrant's report on Form
10-K for year ended January 1, 1995.
*4.14.1 First Amendment to the Cone Mills Corporation 1983 ESOP dated May 9,
1995, filed as Exhibit 4.9(a) to Registrant's report on Form 10-K for
year ended December 31, 1995.
*4.14.2 Second Amendment to the Cone Mills Corporation 1983 ESOP dated
December 5, 1995, filed as Exhibit 4.9(b) to Registrant's report on
Form 10-K for year ended December 31, 1995.
*4.14.3 Third Amendment to the Cone Mills Corporation 1983 ESOP dated August
7, 1997, filed as Exhibit 4.8(c) to Registrant's report on Form 10-Q
for the quarter ended September 28, 1997.
*4.14.4 Fourth Amendment to the Cone Mills Corporation 1983 ESOP dated
December 4, 1997, filed as Exhibit 4.8(d) to Registrant's report on
Form 10-K for the year ended December 28, 1997.
*4.15 Indenture dated as of February 14, 1995, between the Registrant and
Wachovia Bank of North Carolina, N.A. as Trustee (The Bank of New York
is successor Trustee), filed as Exhibit 4.1 to Registrant's
Registration Statement on Form S-3 (File No. 33-57713).
*10.1 Employees' Retirement Plan of Cone Mills Corporation as amended and
restated effective December 1, 1994, filed as Exhibit 10.1 to
Registrant's report on Form 10-K for the year ended January 1, 1995.
*10.1.1 First Amendment to the Employees' Retirement Plan of Cone Mills
Corporation dated May 9, 1995, filed as Exhibit 10.1(a) to
Registrant's report on Form 10-K for the year ended December 31, 1995.
*10.1.2 Second Amendment to the Employees' Retirement Plan of Cone Mills
Corporation dated December 5, 1995, filed as Exhibit 10.1(b) to
Registrant's report on Form 10-K for the year ended December 31, 1995.
*10.1.3 Third Amendment to the Employees' Retirement Plan of Cone Mills
Corporation dated August 16, 1996, filed as Exhibit 10.1(c) to
Registrant's report on Form 10-K for the year ended December 29, 1996.
36
Exhibit
No. Description
*10.1.4 Fourth Amendment to the Employees' Retirement Plan of Cone Mills
Corporation, filed as Exhibit 10 to Registrant's report on Form 10-Q
for the quarter ended September 28, 1997.
*10.1.5 Fifth Amendment to Employees' Retirement Plan of Cone Mills
Corporation dated December 4, 1997, filed as Exhibit 10.1(e) to
Registrant's report on Form 10-K for the year ended December 28, 1997.
*10.1.6 Employees Retirement Plan of Cone Mills Corporation as amended and
restated as of June 30, 2001, filed as Exhibit 10.1.6 to Registrant's
report on Form 10-Q for the quarter ended July 1, 2001.
*10.7 Cone Mills Corporation SERP as amended and restated as of December 5,
1995, filed as Exhibit 10.2 to Registrant's report on Form 10-K for
the year ended December 31, 1995.
*10.7.1 Cone Mills Corporation SERP as amended and restated effective June 30,
2001, filed as Exhibit 10.7.1 to Registrant's report on Form 10-Q for
the quarter ended July 1, 2001.
*10.8 Excess Benefit Plan of Cone Mills Corporation as amended and restated
as of December 5, 1995, filed as Exhibit 10.3 to Registrant's report
on Form 10-K for the year ended December 31, 1995.
*10.8.1 Excess Benefit Plan of Cone Mills Corporation as amended and restated
effective June 30, 2001, filed as Exhibit 10.8.1 to Registrant's
report on form 10-Q for the quarter ended July 1, 2001.
*10.9 1984 Stock Option Plan of Registrant filed as Exhibit 10.7 to
Registrant's Registration Statement on Form S-1 (File No. 33-28040).
*10.10 Form of Nonqualified Stock Option Agreement under 1984 Stock Option
Plan of Registrant, filed as Exhibit 10.8 to Registrant's Registration
Statement on Form S-1 (File No. 33-28040).
*10.11 Form of Incentive Stock Option Agreement under 1984 Stock Option Plan
of Registrant, filed as Exhibit 10.9 to Registrant's Registration
Statement on Form S-1 (File No. 33-28040).
*10.12 1992 Stock Option Plan of Registrant, filed as Exhibit 10.9 to
Registrant's Report on Form 10-K for the year ended December 29, 1991.
37
Exhibit
No. Description
*10.12.1 Amended and Restated 1992 Stock Plan, filed as Exhibit 10.1 to
Registrant's report on Form 10-Q for the quarter ended March 31, 1996.
*10.13 Form of Incentive Stock Option Agreement under 1992 Stock Option Plan,
filed as Exhibit 10.10 to Registrant's report on Form 10-K for the
year ended January 3, 1993.
*10.14 Form of Nonqualified Stock Option Agreement under 1992 Stock Option
Plan, filed as Exhibit 10.8(a) to Registrant's report on Form 10-K for
the year ended December 29, 1996.
*10.14.1 Form of Nonqualified Stock Option Agreement under 1992 Amended and
Restated Stock Plan, filed as Exhibit 10.8(b) to Registrant's report
on Form 10-K for the year ended December 29, 1996.
*10.15 Form of Restricted Stock Award Agreement under 1992 Amended and
Restated Stock Plan, filed as Exhibit 10.8(c) to Registrant's report
on Form 10-K for the year ended December 28, 1997.
*10.15.1 Form of Incentive Stock Option Agreement under 1992 Amended and
Restated Stock Plan, filed as Exhibit 10.8(d) to Registrant's report
on Form 10-K for the year ended December 28, 1997.
*10.16 1994 Stock Option Plan for Non-Employee Directors of Registrant, filed
as Exhibit 10.9 to Registrant's report on Form 10-K for the year ended
January 2, 1994.
*10.17 Form of Non-Qualified Stock Option Agreement under 1994 Stock Option
Plan for Non-Employee Directors of Registrant, filed as Exhibit 10.10
to Registrant's report on Form 10-K for the year ended January 2,
1994.
*10.18 Management Incentive Plan of the Registrant, filed as Exhibit 10.11(b)
to Registrant's report on Form 10-K for the year ended January 3,
1993.
*10.19 1997 Senior Management Incentive Compensation Plan, filed as Exhibit
10.2 to Registrant's report on Form 10-Q for the quarter ended March
31, 1996.
*10.20 1997 Senior Management Discretionary Bonus Plan, filed as Exhibit
10.13 to Registrant's report on Form 10-K for the year ended December
29, 1996.
38
Exhibit
No. Description
*10.21 2000 Stock Compensation Plan for Non-Employee Directors of Registrant
dated as of May 9, 2000, filed as Exhibit 10.18 to Registrant's report
on Form 10-Q for the quarter ended April 7, 2000.
*10.22 Form of Agreement between the Registrant and Levi Strauss dated as of
March 30, 1992, filed as Exhibit 10.14 to Registrant's Registration
Statement on Form S-1 (File No. 33-46907).
*10.23 First Amendment to Supply Agreement dated as of April 15, 1992,
between the Registrant and Levi Strauss dated as of March 30, 1992,
filed as Exhibit 10.15 to Registrant's Registration Statement on Form
S-1 (No. 33-46907).
*10.23.1 Second Amendment to Supply Agreement dated as of May 13, 2002, between
the Registrant and Levi Strauss dated as of March 30, 1992, filed as
Exhibit 10.23.1 to Registrant's report on Form 10-Q for the quarter
ended March 31, 2002.
*10.24 Agreement dated January 1, 1999, between the Registrant and Parkdale
Mills, Inc., filed as Exhibit 10.17 to Registrant's report on Form
10-K for the year ended January 2, 2000.
*10.25 Tenth Amendment to Master Lease dated as of January 28, 2000, between
Atlantic Financial Group, Ltd. and the Registrant, together with all
exhibits thereto, filed as Exhibit 10 to Registrant's Report on Form
8-K dated February 11, 2000.
*10.25.1 Eleventh Amendment to Master Lease dated as of July 14, 2000 between
Atlantic Financial Group, Ltd. and the Registrant, filed as Exhibit
10.25.1 to Registrant's Registration Statement on Form S-4 (File No.
333-43014).
*10.25.2 Assignment and Termination Agreement dated as of August 31, 2000,
among Atlantic Financial Group, Ltd., Suntrust Bank, and the
Registrant, filed as Exhibit 10.25.2 to Registrant's report on Form
10-Q for the quarter ended October 1, 2000.
*10.26 2001 Stock Incentive Plan, filed as Exhibit 10.26 to Registrant's
report on Form 10-Q for the quarter ended April 1, 2001.
*10.26.1 Form of Incentive Stock Option Agreement under 2001 Stock Incentive
Plan, filed as Exhibit 10.26.1 to Registrant's report on Form 10-Q for
the quarter ended April 1, 2001.
39
Exhibit
No. Description
*10.26.2 2002 Executive Incentive Compensation Plan filed as Exhibit 10.26.2 to
Registrant's report on Form 10-K for the year ended December 30, 2001.
10.27.1 Joint Venture Agreement between Isko Dokuma Isletmeleri Sanayi ve
Ticaret A.S. and Cone Mills Corporation and Zekeriye Konukoglu and
Fatih Konukoglu and Oguzhan Gurdogan dated as of June 17, 2002.
10.27.2 Commercial Agreement among Isko Dokuma Isletmeleri Sanayi ve Ticaret
A.S., Cone Mills Corporation and IsKone Denim Pazarlama A.S. dated as
of October 3, 2002.
10.27.3 Transfer Price Agreement among Isko Dokuma Isletmeleri Sanayi ve
Ticaret A.S., Cone Mills Corporation and IsKone Denim Pazarlama A.S.
dated as of October 3, 2002.
10.27.4 License Agreement among Isko Dokuma Isletmeleri Sanayi ve Ticaret
A.S., Cone Mills Corporation and IsKone Denim Pazarlama A.S. dated as
of October 3, 2002.
10.27.5 Administrative Services Agreement between Isko Dokuma Isletmeleri
Sanayi ve Ticaret A.S. and IsKone Denim Pazarlama A.S. dated as of
October 3, 2002.
*21 Subsidiaries of the Registrant.
*23.1 Consent of McGladrey & Pullen, LLP, Independent auditor, with respect
to the incorporation by reference in the Registrant's Registration
Statements on Form S-8 (Nos. 33-31977; 33-31979; 33-51951; 33-51953;
33-53705; 33-67800; 333-37054; and 333-60954) of their reports on the
consolidated financial statements and schedules included in
Registrant's report on Form 10-K for the year ended December 30, 2001.
*23.2 Consent of Auditors of Parras Cone de Mexico, S.A. de C.V. with
respect to the incorporation by reference in the Registrant's
Registration Statements on Form S-8 (Nos. 33-31977; 33-31979;
33-51951; 33-51953; 33-53705; 33-67800; 333-37054 and 333-60954) of
their reports on the financial statements included on Form 10-K/A for
the year ended December 31, 2001.
*99.1 Financial Statements of Parras Cone de Mexico, S.A. de C.V., as of and
for the year ended December 31, 2001.
*99.2 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
- --------------------------------------------------------------------------
*Incorporated by reference to the statement or report indicated.
40
The Registrant will provide any Shareholder or participant in the Company Stock
Fund in the 401(k) Programs copies of any of the foregoing exhibits upon written
request addressed to Corporate Secretary, Cone Mills Corporation, 804 Green
Valley Road, Suite 300, Greensboro NC 27408.
41
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONE MILLS CORPORATION
----------------------
(Registrant)
Date: November 12, 2002 /s/Gary L. Smith
----------------- ----------------------
Gary L. Smith
Executive Vice President and
Chief Financial Officer
42
Annex A
Annual and Quarterly Certifications
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, John L. Bakane, president and chief executive officer, certify that:
1. I have reviewed this report on Form 10-Q of Cone Mills Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
A-1
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002 /s/ John L. Bakane
Title: Chief Executive Officer
A-2
Annex A
Annual and Quarterly Certifications
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Gary L. Smith, chief financial officer, certify that:
1. I have reviewed this report on Form 10-Q of Cone Mills Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
A-3
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002 /s/ Gary L. Smith
Title: Chief Financial Officer
A-4
Annex B
Annual and Quarterly Certifications
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and
(b) of Section 1350, Chapter 63 of Title 18, United States Code), each of the
undersigned officers of Cone Mills Corporation (the "Company"), does hereby
certify, to such officer's knowledge, that:
The Quarterly Report on Form 10-Q for the quarter ended September 29, 2002 of
the Company fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934 and information contained in the Form 10-Q
fairly presents, in all material respects, the financial condition and results
of operations of the Company.
Dated: November 12, 2002 /s/ John L. Bakane
Name: John L. Bakane
Title: Chief Executive Officer
Dated: November 12, 2002 /s/ Gary L. Smith
Name: Gary L. Smith
Title: Chief Financial Officer
B-1