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[LOGO] CONE (R)
Annual
Report
2001
Form 10-K
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FORM 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 30, 2001
COMMISSION FILE NUMBER 1-3634
CONE MILLS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NORTH CAROLINA 56-0367025
(STATE OR OTHER (I.R.S. EMPLOYER
JURISDICTION) IDENTIFICATION NO.)
804 GREEN VALLEY ROAD,
SUITE 300, GREENSBORO,
N.C. 27408
(ADDRESS OF PRINCIPAL
EXECUTIVE OFFICES) (ZIP CODE)
336-379-6220
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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Common Stock, $.10 par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes __X__ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Aggregate market value of voting stock held by nonaffiliates of the
registrant as of February 12, 2002 (based on the closing sale price of $2.10 of
the registrant's voting stock, as reported on the New York Stock Exchange
Composite Tape on such date) was approximately: $53,944,365.
Number of shares of common stock outstanding as of February 12, 2002:
25,687,793 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for Annual Meeting to be held May 7, 2002, Part III, Items 10,
11, 12 and 13 of this report.
Index to Exhibits--Pages 59-66.
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PART I
ITEM 1. BUSINESS
Founded in 1891 Cone Mills Corporation ("Cone"), incorporated and
headquartered in North Carolina, operates in three principal business segments:
(1) Denim, (2) Commission Finishing and (3) Decorative Fabrics. Cone believes
it is the world's largest producer of denim fabrics, the largest commission
printer and finisher of home furnishings in North America and a major producer
of wide jacquards in the United States. Cone competes domestically and
internationally on the basis of styling and product development, management
experience, versatility and size of manufacturing facilities, competitive
prices and the Cone name and reputation.
Cone is engaged in denim production in Mexico through Parras Cone de Mexico,
S.A. de C.V. ("Parras Cone"), a joint venture facility with Compania Industrial
de Parras, S.A. de C.V. ("CIPSA"). This facility, Parras Cone, has been
producing basic denims and yarn since late 1995. Under a marketing agreement
with CIPSA, Cone markets and distributes 100% of the denim production of Parras
Cone. As market conditions improve, it is the goal of the joint venture
partners to expand Parras Cone's productive capacity by approximately 35%. The
infrastructure to support the capacity expansion is presently in place.
In 1999, Cone announced plans to continue its denim manufacturing expansion
in Mexico. Cone has a strategic project to co-develop an industrial park and to
build a denim facility in Altamira, Tamaulipas, Mexico. This project consists
of two components: (1) a 50/50 joint venture with Guilford Mills, Inc., to
develop and operate a textile and apparel industrial park with each company
individually owning land for its respective textile operation and contracting
with the jointly owned service company for infrastructure services, such as
water, power and wastewater treatment, and (2) a 100% owned denim plant with an
initial targeted annual capacity of 20 million yards expandable to 40 million
yards. The infrastructure of the industrial park was completed in 2001, and
Cone continues to evaluate financing options for its denim plant with a target
to begin construction when financing is secured. It is expected that the
financing of the denim facility in Altamira, Tamaulipas, Mexico, will be
dependent upon the recapitalization of Cone's balance sheet; however, Cone will
continue to explore other financing alternatives.
Cone's stated strategy is to compete only in businesses in which it believes
it is a leader and that are defensible in this hemisphere. As a part of the
process of strategically focusing on these criteria, over the past three years
Cone has implemented several reorganization and downsizing initiatives, which
resulted in closing three manufacturing facilities and in eliminating over
2,900 employees.
On May 24, 2001, Cone announced the initiation of its "Reinvention Plan,"
which consisted of a goal of generating $30-$40 million in annual cost
reductions, profit improvement initiatives and loss avoidance. The Reinvention
Plan initially had four components: (1) workforce reductions; (2) changes in
employee pay and benefit practices; (3) streamlining of Cone's business
practices, which included a broad range of items from maintenance scheduling to
vendor sourcing practices, to the consolidation of denim operations to reduce
efficiently U.S. capacity; and (4) improvement of performance of the khaki and
John Wolf converted fabrics businesses. Subsequently, Cone decided to exit the
khaki business and sell the John Wolf converted fabrics business.
As a result of weaknesses in the U.S. economy and the need to focus on
businesses in which it is a leader, Cone decided to sell the John Wolf
converted fabrics operation rather than invest the resources necessary to
improve its performance. On August 10, 2001, Cone finalized the sale of this
business for net proceeds, including the collection of accounts receivable, of
approximately $9 million. On October 30, 2001, Cone announced its decision to
exit the khaki business segment because Cone was not a leader in this category
and Cone believes the long-term outlook for khaki fabrics produced in North
America is negative. Cone will not have any significant continuing involvement
in either of these businesses and has accounted for their results as
discontinued operations.
To date, the implementation of the Reinvention Plan has resulted in the
reduction of the workforce by 640 employees, primarily at Cone's corporate
office and the Rutherford County facilities, curtailment in salaried defined
benefit pension plans that have been frozen, and changes in business practices.
As part of the Rutherford
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County initiatives, Cone consolidated the Haynes and Florence denim facilities.
Cone has implemented initiatives to produce annualized cost savings and profit
improvement of approximately $27 million as a result of the Reinvention Plan.
In the first quarter of 2001, Cone completed the exit of its Raytex business
unit. The results of the Raytex operation are included in the commission
finishing segment. Raytex results have not been accounted for as a discontinued
operation as the decision to exit the business was prior to the change in
accounting standards as it relates to discontinued operations. The Raytex plant
and equipment are available for sale.
BUSINESS SEGMENTS
Information concerning operating segments for Cone's 2001, 2000 and 1999
fiscal years are incorporated by reference. (See "Item 7. Management's
Discussion and Analysis of Results of Operations and Financial Condition,
Long-Term Strategic Initiatives" and "Item 8. Financial Statements and
Supplementary Data," Notes 18 and 21 of the Notes to Consolidated Financial
Statements.)
DENIM
The denim segment represents Cone's largest segment. Cone believes it is the
world's largest producer of denim and its fabrics are used primarily in branded
and private label jeans.
Cone's denim products are primarily designed for use in garments targeted
for the middle and upper-end markets, where styling and quality generally
command premium fabric prices. Fabric styling is supported by Cone's product
development specialists. Because of the nature of the manufacturing process,
denim fabric contains variations in color that give it a distinctive
appearance. After weaving, denim fabrics and garments are processed further in
finishing operations that produce different textures and other altered physical
properties. During these processes, Cone's product development specialists
generally work in collaboration with customers to assure that fabrics meet
customer requirements and can be manufactured efficiently. This creates a
strong working relationship that allows Cone to react quickly to its customers'
rapidly changing needs.
Cone identifies its denims as "value-added" and "basic." Fabric
construction, yarn variations, finishes and new product introductions
distinguish value-added denims. Basic denims are less differentiated by styling
with competition being primarily on the basis of price, quality and service.
Cone's value-added denims are sold principally to brand name apparel
companies, specialty retailers and brand name garment producers. Although most
of Cone's basic denims are designed for the upscale segment of these markets,
Cone also produces high-quality basic heavyweight blue denim, primarily at
Parras Cone, to service the mass-market distribution channel. Sales of basic
denims constituted approximately 37% and 38% of Cone's total denim sales in
2001 and 2000, respectively.
Cone's largest denim customer is Levi Strauss, whose 501(R) family of jeans
are produced solely from Cone's proprietary fabrics. Other customers include
Gap Inc. (The Gap, Old Navy and Banana Republic), V.F. Corporation (Wrangler,
Lee, and others), Calvin Klein, Tommy Hilfiger Jeans, Polo Ralph Lauren and JC
Penney (Arizona).
Value-added denims include a variety of woven constructions, colors and
weights, with lighter-weight fabrics used primarily in fashion garment
silhouettes and women's and children's wear. These fabrics constitute a growing
portion of the denim market as recent growth in denim has occurred in fashion
silhouettes such as baggy jeans and carpenter pants at the expense of basic
five-pocket jeans. Because of their use in higher fashion garments, these
denims tend to establish market trends.
Manufacturing. Cone's denim facilities are modern and flexible and
encompass substantially all manufacturing processes necessary to convert raw
fiber or yarn into finished fabrics. Cone's U.S. dyeing and finishing
facilities include a wide range of technologies, with seven indigo long-chain
dyeing machines, beam dyeing, continuous overdye machinery and raw cotton
dyeing equipment. All of Cone's U.S. denim weaving facilities were re-loomed in
the late 1990s. In order to reduce operating costs and conserve capital that
would have been required for equipment modernization, Cone has been outsourcing
a significant portion of its yarn
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production since early 1999. Additionally, in 2001 Cone consolidated the denim
operations of the Haynes and Florence facilities, which reduced costs and U.S.
manufacturing capacity.
In addition to its U.S. facilities, Cone has a 50% equity interest in Parras
Cone, a low-cost producer of high-quality basic denims located in Mexico. Under
a marketing agreement with its partner, Cone markets and distributes 100% of
the fabric production of Parras Cone. Parras Cone plans to expand its
productive capacity by approximately 35% in the near future. This expansion
will make Parras Cone even more efficient and allow expanded relationships with
key customers.
Cone is recognized internationally as a leader in product quality and new
product development. Product and process development is supported by
manufacturing development groups, which have specialists located in each
facility. These groups work with Cone's product development specialists and its
customers' designers to produce new products for the marketplace. Cone uses
on-line computer-aided design systems to increase styling effectiveness.
Competition. The denim business is highly competitive. Primary competitive
factors include price, product styling and differentiation, customer service,
quality and flexibility, with the significance of each factor dependent upon
the particular needs of the customer and the product involved.
No single company dominates the industry and domestic and foreign
competitors range from large integrated enterprises to small niche companies.
Competition is in the form of both domestic and foreign piece goods and
imported apparel garments from Mexico, Asia and other areas. The migration of
garment manufacturing facilities to Mexico and Caribbean countries, the
strength of the U.S. dollar and the proliferation of newly styled fabrics
competing for fashion acceptance have been factors affecting Cone's business
environment. Cone believes that the financial instability of certain of its
domestic competitors is enhancing Cone's image as an industry leader. Cone's
competitiveness with producers from other countries is influenced by tariffs,
transportation costs, the relative value of the U.S. dollar and any foreign
subsidies. Any failure of Cone to compete effectively in this environment or to
keep pace with changing markets could have a material adverse effect on Cone's
results of operations and financial position.
In recent years, as a result of the competitiveness of the apparel business
and the criticality of low wage costs for garment producers Cone has explored a
number of international initiatives. Its objectives for expansion into Mexico
included seeking access to the Mexican distribution system to sell Cone's
products, as well as access to lower cost cut-and-sew facilities in order to
increase market share with private label customers and large branded customers
migrating to Mexico. Cone is also seeking to gain production cost advantages
while benefiting from its technological expertise. As the garment industry has
migrated to Mexico from the U.S., Cone has benefited from Parras Cone's cost
structure and location, and Cone's U.S. marketing and support infrastructure.
Growth of imported denim bottoms has been rising since the beginning of 1998
with most of the growth coming from Mexico. Mexico is the dominant player in
denim bottom imports to the U.S., representing approximately 56% of total units
imported in 2001. There has been a steady increase in U.S. fabric exports to
Mexico over the past few years, with a recent decline as a result of consumer
market conditions. In 2001, U.S. fabric made up approximately 40% of the
Mexican denim apparel imports in the U.S. The Far East, at approximately 13% of
total unit imports, is another important player, as imports from the region
represented approximately 46% of the total increase in units imported in 2001.
In 1999, Cone announced plans to continue its denim manufacturing expansion
in Mexico. Cone has a strategic project to co-develop an industrial park and to
build a denim facility in Altamira, Tamaulipas, Mexico. This project as
announced will initially have two components: 1) a 50/50 joint venture with
Guilford Mills, Inc., to develop and operate a textile and apparel industrial
park with each company individually owning land for its respective textile
operation and contracting with the jointly owned service company for
infrastructure services, such as water, power and wastewater treatment, and 2)
a 100% owned denim plant with an initial annual capacity of 20 million yards
expandable to 40 million yards. Cone invested approximately $10 million in the
infrastructure of the industrial park, which was completed in February 2001. It
is Cone's goal to start the construction of the denim facility when financing
is secured. Cone has not arranged the required financing at this
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date and there is no assurance that it will be able to obtain financing on
terms and conditions acceptable to Cone. (See "Item 7. Management's Discussion
and Analysis of Results of Operations and Financial Condition, Long-Term
Strategic Initiatives.")
Cone is continuously assessing the feasibility of non-U.S. manufacturing
platforms and alliances within certain trade blocs in order to compete more
effectively in its markets.
Seasonality. Demand for Cone's denim and the level of Cone's sales
fluctuate moderately during the year. There are three retail selling seasons:
spring, fall (back-to-school) and the holiday season. Cone's sales for a
particular selling season generally begin six months in advance of that season.
Marketing and Sales. Cone's marketing focus is to serve brand name apparel
customers through the development of products that are recognized in the
marketplace for their distinctive quality, durability and styling. Styles of
Cone's denim fabrics vary in color, finish, weight and construction, depending
upon fashion trends and the needs of the specific customer. Cone's product
development specialists monitor fashion trends throughout the U.S., Europe, Far
East and South America, attend fashion and trade shows, meet with garment
manufacturers and retailers and conduct market research. In addition, Cone
maintains an international focus with a long history of distributing its
products internationally. In 2001, Cone exported approximately 49% of its denim
sales.
The denim marketing group is headquartered in Greensboro, North Carolina
with sales offices in New York, San Francisco, Los Angeles, Dallas and Brussels
to provide a more direct working relationship with the customer. In addition,
Cone has sales agents in Europe, Japan, Hong Kong, and throughout Central and
South America, and it maintains support services in trade financing, traffic
and transportation in order to support its international presence. Cone's
strategy is to service its international customers with the same degree of
commitment to quality, service and fabric development as its domestic customers.
Cone's denim exports were approximately $174 million, $185 million, and $154
million in 2001, 2000 and 1999, respectively.
Raw Materials. Cotton is the primary raw material for Cone's fabric
manufacturing operations, its purchased yarn and greige goods (fabrics that
have not been dyed or finished). United States agricultural programs affect the
cost and supply of cotton in the U.S., and the policies of foreign governments
have an effect on worldwide prices and supplies as well. The U.S. Department of
Agriculture provides several programs to keep the effective price to cotton
purchasers competitive with world levels while protecting the grower. Step 2 of
the Federal Agriculture Improvement and Reform Act provided a formula for
payments to users of domestically produced cotton when domestic cotton prices
exceeded world prices for a period of time. Funds for these payments were
depleted in December 1998. The Step 2 program received additional funding in
October 1999. Cone received Step 2 equalization payments during 2001 and 2000.
Cone will be eligible for equalization payments in 2002. Although management
believes that U.S. companies will continue to be able to acquire adequate
cotton supplies at prices competitive with offshore manufacturers, there can be
no assurance that these results will always occur. To the extent that effective
U.S. cotton prices exceed world prices, Cone's competitiveness may be
materially adversely affected, as Cone cannot always fully pass increased
cotton costs on to its customers. (See "Item 7. Management's Discussion and
Analysis of Results of Operations and Financial Condition.")
Since cotton is an agricultural product, its supply and quality are subject
to the forces of nature. Although Cone has always been able to acquire
sufficient supplies of cotton for its operations in the past, any shortage in
the cotton supply by reason of weather, disease or other factors could
materially adversely affect Cone's operations. (See "Item 7. Management's
Discussion and Analysis of Results of Operations and Financial Condition.")
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 options
contracts. Management believes that its cotton purchasing program has resulted
in lower overall cotton prices than if cotton were purchased solely on a spot
market basis or by solely matching cotton purchases
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with product sales. Since prices for forward purchase contracts are sometimes
fixed in advance of shipment, Cone may benefit from its fixed-price purchases
of cotton if prices thereafter rise, or fail to benefit if prices subsequently
fall. There can be no assurance the forward purchase contracts and hedging
transactions will not result in higher cotton costs to Cone or will protect
Cone from price fluctuations.
Cone also purchases yarn, greige goods and dyes and chemicals. Based on
Cone's strategy to limit its investment in yarn manufacturing in the future, it
has formed alliances and, in some cases, entered into supply contracts with
yarn manufacturers to help ensure adequate supplies at competitive prices.
Pursuant to its decision to outsource an increased portion of its yarn
manufacturing, Cone entered into a supply agreement with Parkdale America, LLC,
during 1999, which expires in 2004. Additional yarn and other materials used by
Cone have normally been available in adequate supplies through a number of
suppliers.
Trade. The North American Free Trade Agreement ("NAFTA"), which became
effective on January 1, 1994, created a free-trade zone among Canada, Mexico
and the U.S. NAFTA contains safeguards that were sought by the U.S. textile
industry, including a rule of origin requirement that products be processed in
one of the three countries in order to benefit from the agreement. NAFTA phased
out all trade restrictions and tariffs on textiles and apparel among the three
countries. NAFTA has been responsible in part for Mexico recently surpassing
China as the largest exporter of apparel to the U.S. NAFTA and the Caribbean
Basin Initiative program, through favored quota and tariff treatment, have
accelerated the shift in production of garments to sources in this hemisphere,
indirectly benefiting U.S. textile producers and Cone. Cone's Mexican joint
venture, Parras Cone, benefits from its access to U.S. markets and has
benefited from NAFTA.
The U.S. Congress approved the Trade and Development Act of 2000. This
legislation granted trade benefits to the countries in the Caribbean for
certain textile and apparel products roughly equivalent to those available to
Mexico under NAFTA. The provisions of the legislation affecting the countries
in the Caribbean have resulted in increased shipments of Cone fabric to the
area for garment production. This legislation also increased the trade benefits
available to the countries in Sub-Saharan Africa for certain apparel products
shipped to the U.S. market. The provisions of this legislation benefiting
Sub-Saharan Africa nations have led to increased imports from the region. At
this time the ultimate impact of the legislation on the U.S. textile and
apparel industry and Cone is impossible to predict.
The impact of multilateral agreements intended to liberalize global trade
could also significantly affect U.S. textile producers and Cone. The World
Trade Organization ("WTO") is overseeing the phase-out of textile and apparel
quotas over a 10-year period through 2004. Tariffs on textile/apparel products
are being reduced (but not eliminated) over the same 10-year period. In
addition, China has recently gained admission to the WTO. As one of the world's
major textile and apparel producing countries, China's admission to the WTO
will have a significant impact on global textile and apparel trade. By gaining
admission to the WTO, China is able to take advantage of the elimination of
quota limitations into the U.S. market, and there could be a negative impact on
the domestic textile industry, including Cone.
In response, Cone has focused its operations on the manufacture of fabrics
for use in garments that are less vulnerable to import penetration. Management
believes the location of Cone's U.S. manufacturing facilities, its 50% interest
in the Parras Cone plant in Mexico, and its emphasis on shortening production
and delivery times allow Cone to respond more quickly than foreign producers to
changing fashion trends and to its domestic customers' demands for precise
production schedules and rapid delivery. Cone has invested in technological and
process improvements to meet demand for quality and styling.
In instances where Cone finds its products non-competitive with imports,
Cone is pursuing initiatives either to manufacture or source products
internationally or to exit the product line.
COMMISSION FINISHING
The commission finishing segment provides custom printing and plain-shade
dyeing services. Commission printers and dyers process fabrics owned by various
customers on a contract fee basis. The customers, primarily referred to in the
trade as converters, purchase base fabrics from weaving mills and use either
internal or external design staffs to create patterns or color direction. The
application of design, color, hand, and finish are the key value adding
components of a successful commission printer or dyer.
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Carlisle Finishing. The Carlisle plant is a modern, highly complex facility
comprised of over one million square feet with expertise in rotary screen
printing. In recent years, Cone has invested heavily in computerized
color-mixing systems, automated process controls, and communication systems
using the Internet to support the competitive strategy of focused attention on
quality and service.
Markets served by the Carlisle plant are home decorative, specialty apparel
and craft fabrics, and plain shade apparel. Cone believes that Carlisle is the
largest commission printer of home decorative fabrics in the U.S. Key customers
in this segment are the Waverly Division of F. Schumacher, P. Kaufmann, Inc.
and Covington Fabrics. Key markets for specialty printed products are
associated with over-the-counter craft and home sewing, camouflage fabrics for
the hunting trade, and baby products. Key customers for this segment include
Springs Industries and Schott International.
Consumer fashion preference heavily influences the market direction of each
of these product groups. Contributing factors to fashion include coloration,
texture, and design appeal. In recent years, home furnishings print demand has
been affected adversely by alternative products, such as yarn-dyed jacquard
fabrics and leather products.
In 1999, Cone restructured the Carlisle operation to reduce cost, improve
quality and more aggressively position itself in the market place. These
efforts have been successful in returning the operation to profitability.
Market competitive forces resulted in the closing of several competitors in
2000, including Carlisle's largest home decorative competitor. These closings
significantly reduced the available number of domestic printers for some key
fabrics that Cone believes will benefit Carlisle.
Raytex Finishing. In December 2000, Cone announced its intent to cease
operations at the Raytex plant and exit those markets. The closing of the
Raytex plant was completed in the first quarter of 2001. The first quarter 2001
results were affected negatively by operating inefficiencies associated with
closing the Raytex plant.
DECORATIVE FABRICS
The decorative fabrics segment consists of the Cone Jacquards operation.
Cone Jacquards focuses on the design, styling and manufacturing of jacquard
products primarily for the furniture, top-of-the-bed and novelty markets.
Customers work side-by-side with Cone professionals on CAD/CAM machines to
design and revise fabric specifications, which are then sent electronically to
the weaving machines for production.
The manufacturing facility, built in 1995, is a state-of-the-art weaving
platform with a mix of wide and narrow weaving equipment. Yarn is procured from
multiple sources including Cone's denim operation. Woven fabric is finished at
outside finishers. Cone Jacquard's manufacturing configuration gives it a high
degree of flexibility to match production with customer demand.
Fabrics are produced for furniture manufacturers, distributors, specialty
product manufacturers, jobbers and retailers. Key customers include Valley
Forge Fabrics, Westpoint Stevens and Sure Fit, Inc. Cone Jacquard fabrics are
marketed domestically and internationally, primarily through dedicated sales
agents.
On August 10, 2001, Cone sold substantially all of the assets, with the
exception of outstanding accounts receivable, of the John Wolf converted
fabrics business, a component of its decorative fabrics segment, to an
unrelated third party and exited the decorative fabrics converting business.
Competition. The decorative fabrics business is highly competitive and Cone
Jacquards competes primarily on the basis of product styling, quality, sales
initiative and service. Cone Jacquards competes with a large number of domestic
and foreign suppliers.
Seasonality. Demand for Cone's jacquards fabrics and the level of Cone's
sales fluctuate moderately during the year with January being a seasonally slow
period.
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KHAKI
On October 30, 2001, Cone announced its decision to exit the khaki business
segment because Cone was not a leader in this category and Cone believes the
long-term outlook for khaki fabrics produced in North America is negative. Cone
will not have any significant continuing involvement in the khaki business and
has accounted for the results as discontinued operations.
OTHER SEGMENT
The "Other" segment consists of miscellaneous ancillary operations.
TRADEMARKS, COPYRIGHTS AND PATENTS
Cone owns several registered trademarks containing the "Cone" name and
various designs. In addition, Cone holds various other trademarks, trade names,
copyrights and patents used in connection with its business and products, both
domestically and internationally. Cone believes that the name recognition of
Cone and its reputation for quality, service and product development have value
in both domestic and international markets.
CUSTOMERS
Cone has one customer, Levi Strauss, which accounts for more than 10% of net
sales. Sales to this customer accounted for approximately 37%, 38% and 35% of
net sales in 2001, 2000 and 1999, respectively. The loss of Levi as a customer,
or a significant reduction in its purchases from Cone, would have a material
adverse effect on Cone's financial position and results of operations.
Levi has been a customer of Cone since 1915 and a close, cooperative
supplier/customer relationship has evolved through the development of Cone's
proprietary fabrics for use in Levi's 501(R) family of jeans. In addition to
supplying fabrics for Levi's 501(R) family of jeans, Cone sells other denim
fabrics to Levi. Because Cone is Levi's major denim supplier, Levi initiated
discussions with Cone in 1989 concerning ways to assure the continuity of this
relationship. As a result of these discussions, Cone and Levi entered into an
exclusive Supply Agreement as of March 30, 1992, which confirms that Levi will
continue to use only Cone's proprietary denim fabrics in manufacturing Levi's
501(R) family of jeans and that Cone will continue to supply such fabrics
solely to Levi. The volume of purchases by Levi and the prices charged by Cone
will continue to be subject to customary negotiations between the parties.
The Supply Agreement expires in March of 2007 and is automatically extended
each year, unless either party gives notice otherwise, so that the remaining
term is five years. Following a change in control, the Supply Agreement would
terminate at the end of a three-year supply arrangement or of the lease term,
as the case may be. Additionally, Levi may terminate the Supply Agreement at
any time upon 30 days' written notice and either party may terminate the Supply
Agreement in the event of the other party's insolvency, bankruptcy or
occurrence of a similar event.
BACKLOG
Cone's order backlog was approximately $68 million at January 27, 2002, as
compared to approximately $115 million at January 28, 2001. Denim accounted for
94% of the order backlog at January 27, 2002. The decrease in Cone's order
backlog is attributable to changes in economic conditions and the shortening of
product delivery schedules demanded by Cone's customers.
Physical deliveries for accepted fabric orders in the apparel industry vary
in that some products are ordered for immediate delivery only, while others are
ordered for delivery several months in the future. In addition, Cone has an
ongoing proprietary program for which orders are issued only for nearby
delivery. Therefore, orders on hand are not necessarily indicative of total
future revenues. It is expected that substantially all of the orders
outstanding at January 27, 2002, will be filled within the first four months of
2002.
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RESEARCH AND DEVELOPMENT
Cone's research and development activities are directed primarily toward
improving the quality, styling and performance of its apparel fabrics and other
products and services. Cone also is engaged in the development of
computer-aided design and manufacturing systems and other methods of improving
the interaction between Cone's stylists and its customers. These activities are
conducted at various facilities, and expenses related to these activities are
an immaterial portion of Cone's overall operating costs.
GOVERNMENTAL REGULATION
Federal, state and local regulations relating to the workplace and the
discharge of materials into the environment are continually changing;
therefore, it is difficult to gauge the total future impact of such regulations
on Cone. However, existing government regulations are not expected to have a
material effect on Cone's financial position, operating results or planned
capital expenditures. Cone has an environmental protection committee and a
workplace safety organization.
EMPLOYEES
At January 31, 2002, Cone employed approximately 3,300 persons, of whom
approximately 550 were salaried and approximately 2,750 were hourly employees.
Of such hourly employees, approximately 860 are represented by collective
bargaining units. Based upon its records relating to the withholding of union
dues from employee compensation, Cone believes that approximately 360 of its
employees are dues-paying union members. Cone has not suffered any major
disruptions in its operations from strikes or similar events for more than a
decade and considers its relationship with its employees to be satisfactory.
ITEM 2. PROPERTY
As of March 2002, Cone's U.S. manufacturing facilities consist of five
plants, four located in North Carolina and one in South Carolina, with
approximately 4.0 million square feet of floor space. The denim segment
operates three plants, and each of the commission finishing and the decorative
fabrics segments operates one plant. Cone also maintains several distribution
centers and warehouses. Internationally, Cone has a 50% interest in a 575,000
square foot denim manufacturing facility in Parras, Mexico.
All such facilities are maintained in good condition and are both adequate
and suitable for their respective purposes. Cone's manufacturing facilities are
substantially utilized except for those portions of the facilities formerly
used for yarn manufacturing.
All U.S. manufacturing facilities are pledged as security for Cone's
indebtedness under its debt agreements. The Parras Cone denim facility serves
as collateral for a portion of the debt of the joint venture company.
Cone leases its executive and administrative offices, located in Greensboro,
North Carolina, and other offices, located in various U.S. cities and Brussels,
from unrelated third parties. In the fourth quarter of 2001, Cone moved its
corporate headquarters into substantially smaller space, thus reducing its
annual occupancy costs by more than $1 million.
In January 2002, Cone closed the remaining manufacturing processes at its
Florence denim plant, located in Forest City, North Carolina, which contains
0.2 million square feet of floor space. In the first quarter of 2001, Cone
closed its Raytex plant, located in Marion, South Carolina, which contains 0.3
million square feet of floor space. In addition, Cone owns its Salisbury, North
Carolina plant, closed in 1999, which contains approximately 0.5 million square
feet of floor space. All three facilities are classified as available for sale.
Also, during 1999, Cone closed the yarn manufacturing portions of two North
Carolina facilities, Florence and Cliffside, which constitute approximately 0.2
million square feet of floor space.
9
ITEM 3. LEGAL PROCEEDINGS
Cone and its subsidiaries are involved in legal proceedings and claims
arising in the ordinary course of business. Although there can be no assurance
as to the ultimate disposition of these matters, management believes that the
probable resolution of such contingencies will not 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 December 30, 2001, no significant
litigation existed.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
John L. Bakane....... 51 Director, President and Chief Executive Officer
Gary L. Smith........ 43 Executive Vice President and Chief Financial Officer
Thomas E. McKenna.... 43 Executive Vice President, Denim Merchandising and Marketing
Michael J. Whisenant. 57 Executive Vice President, Denim Operations
Neil W. Koonce....... 54 Vice President, General Counsel and Secretary
Michael K. Horrigan.. 47 Vice President, Human Resources
Marvin A. Woolen, Jr. 61 Vice President, Cotton Purchasing
Samir M. Gabriel..... 44 Controller
W. Scott Wenhold..... 37 Treasurer
All officers of the Registrant are elected or reelected each year at the
Annual Meeting of the Board of Directors or at other times as necessary. All
officers serve at the pleasure of the Board of Directors and until their
successors are elected and qualified.
John L. Bakane joined Cone in 1975. He was named Chief Financial Officer in
1988 and was elected to the Board of Directors in 1989. He was elected
Executive Vice President in 1995. In November 1996, he assumed responsibility
for management of the Denim Group of Cone and in April 1997 he was appointed
President of Cone Apparel Products Group. He was appointed Chief Operating
Officer in April 1998, and served in such capacity until elected President and
Chief Executive Officer in November 1998.
Gary L. Smith was employed by Cone in 1981 and was serving as Manager of
Business Analysis when he was elected Assistant Controller in 1994. He was
named Controller in December 1996, Executive Vice President in February 1999
and Chief Financial Officer in November 1999.
Thomas E. McKenna was employed by Cone in 1981. He worked in Cone's San
Francisco, Brussels, and Singapore sales offices prior to being named Vice
President, National Sales and Merchandising in June 1997. He was named Senior
Vice President, Sales and Marketing in March 1999 and Executive Vice President,
Denim Merchandising and Marketing in May 2001.
10
Michael J. Whisenant was employed by Cone in 1967. He has served in plant
management, product development and product quality. He was named Vice
President, Technical Services and Product Quality in October 1996 and named
Senior Vice President, Operations in March 1999. He was appointed Executive
Vice President, Denim Operations in May 2001.
Neil W. Koonce was employed by Cone in 1974. He has been General Counsel
since 1987, Vice President since 1989, and Secretary since February 1999.
Michael K. Horrigan was employed by Cone in March 1999 as Vice President,
Human Resources. He served as Vice President of Human Resources for the sales
and marketing and bed fashions groups at Springs Industries from February 1997
to March 1999. Before joining Springs, he was employed by Sara Lee branded
apparel businesses for eight years, including five years as Vice President of
Human Resources for Champion Products. For ten years prior to that he worked in
human resources for General Electric.
Marvin A. Woolen, Jr. was employed by Cone in July 1995 as Director of
Cotton Purchasing. He was elected Vice President in 1997. He has been in the
cotton sales, merchandising, purchasing, classing and shipping business since
1971. From 1988 to 1995 he was President of Rollins Company, a cotton shipping
firm.
Samir M. Gabriel was employed by Cone in 1988. He has held a variety of
positions in Cone's Finance Department including Manager of Accounting from
March 1994 to May 1999, Director of Accounting from June 1999 to May 2000, and
Director of Cost Accounting from June 2000 to April 2001. He was appointed
Controller in May 2001.
W. Scott Wenhold was appointed Treasurer in January 2001. He served as
Director of International Treasury of Johnson Controls, Inc. from September
1999 to December 2000. Prior to joining Johnson Controls, Inc., he was employed
by Fort James Corporation where he served as Assistant Treasurer from July 1998
to July 1999, Director of Corporate Finance from August 1997 to July 1998, and
Manager of Corporate Finance from April 1994 to August 1997.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Cone's Common Stock has traded on the New York Stock Exchange under the
ticker symbol "COE" since June 18, 1992, the date of its public offering. The
approximate number of holders of record of Cone's Common Stock as of January
31, 2002, was 300.
Information required by this Item on the sales prices and dividends of the
Common Stock of Cone are incorporated in "Note 23. Quarterly Financial Data
(Unaudited)" of "Item 8. Financial Statements and Supplementary Data" and is
incorporated herein by reference.
11
ITEM 6. SELECTED FINANCIAL DATA
HISTORICAL FINANCIAL REVIEW (1)
2001 2000 1999 1998(2) 1997
------ ------ ------ ------- ------
(IN MILLIONS, EXCEPT PER SHARE DATA AND NUMBER
OF EMPLOYEES)
Summary of Operations
Net Sales........................................................... $449.9 $552.6 $548.9 $660.9 $645.3
Cost of Goods Sold.................................................. 409.5 488.5 498.8 596.8 586.2
------ ------ ------ ------ ------
Gross Profit........................................................ 40.4 64.1 50.1 64.1 59.1
Selling and Administrative.......................................... 35.8 38.4 39.1 50.7 49.6
Restructuring and Impairment of Assets.............................. 19.9 38.5 16.0 17.1 5.2
------ ------ ------ ------ ------
Income (Loss) from Operations....................................... (15.3) (12.8) (5.0) (3.7) 4.3
Other Expense -- Net................................................ 20.1 22.2 13.9 12.1 11.7
------ ------ ------ ------ ------
Loss from Continuing Operations Before Income Tax Benefit and Equity
in Earnings of Unconsolidated Affiliates.......................... (35.4) (35.0) (18.9) (15.8) (7.4)
Income Tax Benefit.................................................. (12.1) (12.0) (6.6) (6.3) (3.0)
------ ------ ------ ------ ------
Loss from Continuing Operations Before Equity in
Earnings of Unconsolidated Affiliates............................. (23.3) (23.0) (12.3) (9.5) (4.4)
Equity in Earnings of Unconsolidated Affiliates..................... 0.2 2.7 1.7 5.2 2.6
------ ------ ------ ------ ------
Loss from Continuing Operations..................................... (23.1) (20.3) (10.6) (4.3) (1.8)
Loss from Discontinued Operations................................... (13.4) (5.0) (7.5) (2.4) (7.6)
Cumulative Effect of Accounting Change (3).......................... -- -- (1.0) -- --
------ ------ ------ ------ ------
Net Loss............................................................ $(36.5) $(25.3) $(19.1) $ (6.7) $ (9.4)
====== ====== ====== ====== ======
Loss Available to Common Stockholders
Loss from Continuing Operations................................... $(23.1) $(20.3) $(10.6) $ (4.3) $ (1.8)
Preferred Dividends............................................... (4.2) (3.8) (3.0) (2.9) (2.9)
------ ------ ------ ------ ------
Loss from Continuing Operations................................... (27.3) (24.1) (13.6) (7.2) (4.7)
Loss from Discontinued Operations................................. (13.4) (5.0) (7.5) (2.4) (7.6)
Cumulative Effect of Accounting Change (3)........................ -- -- (1.0) -- --
------ ------ ------ ------ ------
Net Loss.......................................................... $(40.7) $(29.1) $(22.1) $ (9.6) $(12.3)
====== ====== ====== ====== ======
Per Share of Common Stock -- Basic and Diluted
Loss from Continuing Operations................................... $(1.07) $(0.94) $(0.53) $(0.28) $(0.17)
Loss from Discontinued Operations................................. (0.52) (0.20) (0.30) (0.09) (0.30)
Cumulative Effect of Accounting Change (3)........................ -- -- (0.04) -- --
------ ------ ------ ------ ------
$(1.59) $(1.14) $(0.87) $(0.37) $(0.47)
====== ====== ====== ====== ======
Balance Sheet Data (at period end)
Total Assets........................................................ $334.4 $423.2 $472.8 $488.5 $506.6
Long-Term Debt...................................................... 173.7 182.1 198.8 172.1 150.4
Stockholders' Equity................................................ 86.6 126.4 157.5 181.9 196.5
Long-Term Debt as a Percent of Stockholders' Equity and Long-Term
Debt.............................................................. 67% 59% 56% 49% 43%
Shares Outstanding.................................................. 25.7 25.5 25.5 25.4 26.2
Other Data
Number of Employees at Period End................................... 3,300 4,300 4,300 6,200 6,100
Capital Expenditures................................................ $ 7.1 $ 10.0 $ 13.2 $ 32.8 $ 36.3
Investments in and Advances to Unconsolidated Affiliates............ 1.0 6.7 0.7 3.5 1.6
Common Stock Dividend Paid (4)...................................... -- -- -- -- --
- --------
(1) Prior years have been restated to reflect discontinued operations.
(2) Fiscal 1998 represents a 53 week period.
(3) In accordance with Statement of Position 98-5, "Reporting the Costs of
Start-up Activities", Cone recognized a charge of $1.0 million in 1999,
Cone's 50% portion of Parras Cone's unamortized start-up costs, as a
cumulative effect of an accounting change, net of income tax benefit.
(4) Financing agreements of Cone prohibit Cone from paying dividends on its
Common Stock.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
For the fiscal year 2001, Cone had net sales from continuing operations of
$449.9 million, down substantially from net sales from continuing operations of
$552.6 million in 2000. Sales for the year were negatively impacted by the
economic recession, lower prices and retail inventory liquidations that
occurred throughout the year. For the year 2001, after excluding charges
associated with the Reinvention Plan and the closing of Raytex, Cone reported
substantially reduced operating results from continuing operations, as compared
with 2000. Operating results were negatively impacted by general economic
conditions, raw material costs and the events beginning September 11, 2001,
which further disrupted retail sales and business activity. By year-end, Cone
had essentially finalized the implementation of its Reinvention Plan including
initiatives to produce cost savings and profit improvements of approximately
$27 million.
Denim results in 2001 were disappointing, as compared with 2000. Results for
2001 were adversely affected by retailers' continuous inventory liquidation
throughout the year and an economic recession, all of which continued to place
pressure on top line sales and forced reduced operating schedules at the
plants. Cone exited the khaki business in 2001 because of a deteriorating U.S.
khaki market and a lack of critical mass within Cone for this business. Denim
pricing continued to be difficult as a result of the economic conditions,
inventory liquidations and a chronic industry over-capacity condition.
Commission finishing at Cone's Carlisle plant continued its trend of improving
operating results. The Raytex operation, the other component of the commission
finishing segment, was closed in February of 2001. In August 2001, Cone sold
its John Wolf business and, despite difficult industry conditions, has managed
to post positive operating results.
Management believes that one of the most significant factors affecting
operating margins is the price of cotton, which varied between the $.50s and
$.70s per pound through much of 1999 and 2000. In 2001 cotton prices fell as
low as $.28 per pound. Cone purchased cotton at fixed prices for delivery in
2002. While Cone believes that its cotton commitments are at competitive
levels, lower prices could adversely affect Cone because of its forward
purchases. Whether cotton prices are lower or higher in 2002 compared with 2001
will depend upon factors such as the strength of the U.S. economy, global
supply and demand conditions as they impact the export of U.S. cotton and the
level of equalization payments received under the U.S. government cotton
program.
Other significant factors that influence Cone's operating results and
financial condition include general business cycles, consumer fashion
preferences, changes in demand for print fabrics, international trade
conditions, the relative strength of the U.S. dollar and market interest rates,
as well as the availability and terms of debt financing.
13
In the fourth quarter of 2001, the U.S. economy was in the midst of a
recession. By the end of 2001 the U.S. textile industry had experienced its
worst year in history. A number of Cone's competitors either filed for
protection under Chapter 11 of the Federal Bankruptcy Code in the fourth
quarter of 2001 or the first quarter of 2002 or exited Cone's business
segments. It is difficult to forecast when the economy will improve; however, a
number of economists believe the turn will come in the spring of 2002. Assuming
improved economic conditions, the exit of certain competitors and lower cotton
costs, Cone expects improved operating results beginning in the second quarter
of 2002. As a result of the slowing economy, the Federal Reserve Bank reduced
its benchmark interest rate 11 times during 2001 to a 40-year low of 1.75%.
However, Cone expects its interest rate to remain essentially flat because of
increased rates related to the extension of its bank credit facility and the
maturity of its senior note to January 15, 2003.
LONG-TERM STRATEGIC INITIATIVES
The environment in which Cone operates is extremely difficult. The relative
strength of the U.S. dollar, weakness in consumer spending and reduction in
business investment have pushed the U.S. manufacturing sector into a recession.
Textiles in particular have been affected adversely by the relative strength of
the U.S. dollar in comparison to the currencies of many Asian countries. The
currency effect, global oversupply of apparel and textiles, retail
consolidation and the slowing in consumer spending have resulted in extreme
volume and pricing pressures for Cone's products. These conditions are expected
to continue through early 2002.
Cone's business strategy is to invest and grow in its core franchises where
it is recognized as a market leader. As a result of economic and industry
conditions, Cone is focused on four initiatives: (1) engage in businesses in
which Cone believes it is an industry leader; (2) retain, attract, motivate and
focus a talented and capable management team; (3) migrate to low-cost
manufacturing platforms for commodity products; and (4) attract and efficiently
invest capital.
On May 24, 2001, Cone announced the initiation of its Reinvention Plan. The
objectives of the Reinvention Plan were (1) to produce $30 to $40 million in
annual cost savings or improvement in operating results of under-performing
businesses and (2) to market actively non-core assets including idle plants,
property, equipment and excess inventories with a cash generation target of $15
to $25 million over 18 months.
The Reinvention Plan initially had four components: (1) workforce
reductions; (2) changes in employee pay and benefit practices; (3) streamlining
of Cone's business practices, which included a broad range of items from
maintenance scheduling to vendor sourcing practices to the consolidation of
denim operations to reduce U.S. capacity; and (4) improvement of the
performance of the khaki and John Wolf converted fabrics businesses.
Subsequently, Cone decided to exit the khaki business and sell its John Wolf
converted fabrics business.
To date the implementation of the Reinvention Plan has resulted in the
reduction of the workforce by approximately 640 employees, primarily at Cone's
corporate office and the Rutherford County facilities, the freezing of benefits
for salaried employees in the qualified and nonqualified pension plans, changes
in business practices, and the consolidation of the Haynes and Florence denim
facilities.
Based upon economic and industry conditions as well as its business
leadership criteria, Cone made the decision to sell the John Wolf business on
August 10, 2001. Cone did not have the size and scale to be able to compete
efficiently in this business and in turn was unable to develop a business
outlook that would provide an appropriate return on its investment in this
operation. Cone received net proceeds of approximately $9 million from the sale
including the collection of accounts receivable.
In addition, Cone exited the khaki business in the fourth quarter of 2001.
The decision was primarily based on the fact that Cone was not a leader in this
category and believed the long-term outlook for khaki produced in North America
to be negative. At the end of 2001, the exit of the khaki segment was
substantially complete. Cone will not have any significant involvement in the
John Wolf and khaki businesses and has accounted for their results as
discontinued operations under SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets."
14
Cone has enacted initiatives to date that are expected to yield
approximately $30 million in annualized cost reduction, loss avoidance or
business improvements. For 2002, Cone has targeted additional initiatives that
are expected to yield $2 to $4 million in additional savings per year.
In keeping with its strategy to reduce overhead costs, Cone relocated its
corporate headquarters to smaller, leased offices in December 2001. Cone also
relocated to smaller office space at its New York marketing office during 2001.
During the course of 2001, Cone became a much simpler company with three
main businesses. Cone believes it is the largest denim producer, the largest
commission printer and finisher and a leader in U.S. wide-jacquard weaving.
These three businesses had positive operating income in 2001.
Cone's strategy is focused on the growth of its denim business by expanding
capacity in Mexico. In 1999, Guilford Mills, Inc. and Cone entered into a 50/50
joint venture to develop and operate a new textile and apparel industrial park
in Altamira, Tamaulipas, Mexico. Each company individually owns land for its
respective textile operation and will contract with the jointly owned service
company for infrastructure services, such as water, power and wastewater
treatment. Cone plans to build a denim plant on its property with an initial
capacity of 20 million yards when financing is available. Depending upon the
ultimate size and configuration, Cone expects to invest between $60 and $90
million in the initial denim facility. The funds required for the denim
facility will require debt or equity financing and certain modifications to its
current debt structure and lending agreements. Cone has not arranged financing
or modified its debt structure or lending agreements to date, and there can be
no assurance that such financing will be available on acceptable terms and
conditions or that its present lenders will agree to the required modifications.
Cone and its joint venture partner, CIPSA, have agreed to expand Parras
Cone's production capacity by up to 35%. As a result of a slowdown in the
economy and an overall softness in basic denim in 2001, the expansion has been
delayed until financing can be secured. The expansion will be financed by
Parras Cone with internally generated cash flow and debt. Financing for the
expansion has not been finalized and there can be no assurance that such
financing will be available on acceptable terms and conditions. Cone will
continue to market and distribute 100% of the fabric production at Parras Cone.
SEGMENT INFORMATION
Cone operates in three principal business segments: Denim, Commission
Finishing and Decorative Fabrics. (See Notes 18 and 21 of the Notes to
Consolidated Financial Statements included in Part II, Item 8.)
RESULTS OF OPERATIONS
FIFTY-TWO WEEKS ENDED DECEMBER 30, 2001 COMPARED WITH FIFTY-TWO WEEKS ENDED
DECEMBER 31, 2000
For the year 2001, Cone had sales from continuing operations of $449.9
million, as compared with sales of $552.6 million for 2000. Sales for the year
were negatively impacted by the economic recession, lower prices and retail
inventory liquidations.
Gross profit for 2001 decreased to 9.0% of sales, as compared with 11.6% for
the previous year. The decline in gross profit for 2001 was a result of lower
sales volume, increased cotton costs to Cone, curtailed manufacturing operating
schedules and continued pressure on prices.
DENIM. For 2001, denim segment sales were $352.0 million, a decrease of 19%
from 2000 sales of $434.6 million. In late 2000, retailers continued to build
inventory for the holiday season, which turned out to be disappointing, forcing
retailers to liquidate overstocked inventory. This liquidation continued into a
downward spiraling economy through most of 2001, which placed further pressure
on pricing.
Operating income of the denim segment for 2001 was $13.4 million, as
compared to 2000 income of $35.1 million. The decrease in income resulted
primarily from lower sales volume and curtailed manufacturing operating
schedules after the first quarter of 2001. Operating income for the segment
includes the equity in
15
earnings from the Parras Cone joint venture plant, which declined from 2000
amounts because of lower sales and curtailed operating schedules in the second
half of the year. Parras Cone primarily produces denim for the basic denim
market, which was the hardest hit segment of the denim market in 2001.
COMMISSION FINISHING. Outside sales (total segment sales less intercompany
sales) of the commission finishing segment, which consisted of the Carlisle and
Raytex plants, were $55.8 million for 2001, as compared to 2000 sales of $64.2
million. The majority of the sales decline resulted from ceased operations at
Raytex in February 2001. Exclusive of Raytex sales of $2.0 million for 2001 and
sales of $16.9 million for 2000, outside commission finishing sales actually
increased 13.8% in 2001.
Operating income for the commission finishing segment in 2001 was $2.3
million, as compared to an operating loss of $6.6 million in 2000. Raytex had
an operating loss of $0.9 million in 2001, as compared to a loss of $6.7
million in 2000. Carlisle continued its turnaround during the year despite a
very difficult economic operating environment. The improvement in operating
income was primarily attributable to the closing of Raytex, improved operating
efficiencies, increased sales volume and better sales mix.
DECORATIVE FABRICS. For 2001, sales from continuing operations of the
decorative fabrics segment were $41.8 million, down from $53.0 million in 2000.
A declining home furnishings market primarily affected sales. Operating income
for 2001 was $0.8 million, as compared to $2.3 million in 2000. Operating
results were affected by lower sales volume partially offset by improved
operating efficiencies.
Cone's selling and administrative expenses are primarily fixed expenses and,
therefore, do not vary directly with sales. Selling and administrative expenses
for 2001 were $35.8 million, as compared with $38.4 million in 2000. The lower
expenses in 2001 were primarily a result of savings related to the Reinvention
Plan, which were partially offset by higher bank and legal fees associated with
Cone's financing agreements.
Interest expense for 2001 was $17.7 million, as compared with $18.4 million
in 2000. Other expense of $3.0 million in 2001 includes ongoing expenses of the
accounts receivable securitization program, as compared to other expense of
$5.3 million in 2000, of which $4.4 million was related to the accounts
receivable securitization program in that year.
For 2001 and 2000, the income tax benefit as a percent of the pre-tax loss
from continuing operations was 34% and 37%, respectively. (See Note 11, "Income
Tax Benefit," of the Notes to Consolidated Financial Statements included in
Part II, Item 8.)
Equity in earnings of Parras Cone, Cone's joint venture plant in Mexico, was
$0.4 million for 2001, as compared with $2.8 million for 2000. In the 2001
period, the plant operated at a lower capacity utilization rate and was
impacted negatively by lower selling prices.
For the year 2001, Cone had a net loss from continuing operations of $23.1
million, or a loss of $1.07 per share after preferred dividends. Including
losses associated with the exit of the khaki business and the sale of John
Wolf, which were accounted for as discontinued operations, Cone reported a net
loss of $1.59 per share after preferred dividends for 2001. By comparison, Cone
reported a net loss from continuing operations in 2000 of $20.3 million or a
loss of $0.94 per share after preferred dividends. Including losses from
discontinued operations, Cone reported a net loss of $1.14 per share after
preferred dividends. The 2000 results included charges to reflect the closing
of the Raytex facility.
FIFTY-TWO WEEKS ENDED DECEMBER 31, 2000 COMPARED WITH FIFTY-TWO WEEKS ENDED
JANUARY 2, 2000
For the year 2000, Cone had sales from continuing operations of $552.6
million, as compared with sales from continuing operations of $548.9 million
for 1999. Denim segment sales and decorative fabrics segment sales were each up
6.3% and 17.8%, respectively, partially offset by weaker commission finishing
sales primarily at the Raytex facility.
16
Gross profit for 2000 increased to 11.6% of sales, as compared with 9.1% for
the previous year. The improved gross profit for 2000 was a result of
realization of benefits of the 1999 comprehensive restructuring program and
improved capacity utilization in the denim operations partially offset by lower
denim prices, weak market conditions for Raytex and poor results for the
decorative fabrics segment.
DENIM. For 2000, denim segment sales were $434.6 million, an increase of
6.3% from 1999 sales of $409.0 million. Sales volume on a yardage basis for the
denim segment increased by 11.3% as the denim market recovered from a 1999
downturn. In early 2000, Cone began to experience improvements in denim market
conditions, including more denim at retail and a fashion shift back to basic
five-pocket jeans. These market improvements continued to the year-end holiday
season, which was considered a disappointment as the economy slowed in late
2000.
Operating income of the denim segment for 2000 was $35.1 million, or 8.1% of
sales, compared with $26.5 million, or 6.5%, for 1999. The increased margin and
income resulted primarily from higher sales volume, improved plant operating
schedules after the first quarter of 2000 and the benefit of liquidating
approximately $12 million of inventory at previous year cost levels. These
increases in operating profit were partially offset by lower sales prices and
cost increases. Results of the segment also reflected marginally lower cotton
costs. Operating income for the segment includes Cone's equity in earnings from
the Parras Cone joint venture plant.
COMMISSION FINISHING. Outside sales (total segment sales less intercompany
sales) of the commission finishing segment, which consisted of the Carlisle and
Raytex plants, were $64.2 million for 2000, down 15.9% from $76.3 million for
1999. The majority of this sales decline was at the Raytex plant where the year
began with weak top of bed volume, especially from the major retail brands that
outsourced production; Raytex's markets continued to deteriorate throughout the
year. As discussed previously, these market conditions led to Cone's decision
to close the Raytex plant. For Carlisle, overall print market conditions did
not improve in 2000. However, because of the closing of several competitors,
including its largest home decorative competitor, Carlisle's market share
increased at the end of 2000.
For 2000, the segment had an operating loss of $6.6 million, as compared
with a loss of $6.9 million in 1999. The Raytex plant lost $6.7 million in 2000
versus a marginal loss of less than $0.1 million in 1999 on the same basis.
Carlisle's results benefited from the 1999 restructuring, downsizing and
refocusing of the Carlisle plant. The operating improvements at Carlisle were
partially offset late in 2000 by higher energy costs and the start-up costs
associated with new business assumed from a competitor's plant upon its
closing. Intercompany sales of this segment were to the denim and decorative
fabrics segments.
DECORATIVE FABRICS. For 2000, sales from continuing operations of the
decorative fabrics segment were $53.0 million, up 17.8% from sales of $45.0
million for 1999. The decorative fabrics segment had operating income of $2.3
million in 2000, as compared with earnings of $4.2 million for 1999. Results
for 2000 were affected negatively by the lack of market demand for Cone's
product offerings, start-up expenses associated with increasing capacity and
operating efficiencies at the jacquard plant and difficulties with outsourcing.
YARN-DYED PRODUCTS. Cone ceased manufacturing yarn-dyed products in May
1999. For 2000 there were essentially no sales of yarn-dyed products, as
compared with 1999 sales of $17.1 million. For 1999, the yarn-dyed products
segment had an operating loss of $5.6 million. The 1999 results include
inventory reserves of $1.3 million associated with the closing of the Salisbury
plant. In addition to the segment operating losses in 1999, $3.4 million of the
restructuring charges in 1999 were attributable to the yarn-dyed segment. These
restructuring costs were primarily for the writedown of property, plant and
equipment, as well as employee severance costs.
Cone's selling and administrative expenses are primarily fixed expenses and
therefore do not vary directly with sales. Selling and administrative expenses
for 2000 were $38.4 million, as compared with $39.0 million in 1999. Selling
and administrative expenses in 2000 were affected negatively by higher bank and
legal fees associated with Cone's financing agreements.
Interest expense for 2000 was $18.4 million, an increase of $3.9 million
from $14.5 million for 1999. The increase in interest expense was primarily the
result of increases in interest rate spreads under new lending agreements and
market rates. Other expenses include $4.4 million recognized in 2000 related to
the ongoing
17
expense of the new accounts receivable securitization program, which began on
September 1, 1999. The comparable number in 1999 was $1.0 million for the new
accounts receivable securitization program.
For 2000 and 1999, the income tax benefit as a percent of the taxable loss
was 37% and 39%, respectively. (See Note 11, "Income Tax Benefit," of the Notes
to Consolidated Financial Statements included in Part II, Item 8.)
Equity in earnings of Parras Cone, Cone's joint venture plant in Mexico, was
$2.8 million for 2000, as compared with $1.7 million for 1999. In the 2000
period, the plant operated at a higher capacity utilization rate and
experienced lower raw material costs.
For the year 2000, Cone had a net loss from continuing operations of $20.3
million, or $0.94 per share after preferred dividends. For comparison, in 1999,
Cone had a net loss from continuing operations of $10.5 million, or $0.53 per
share after preferred dividends. However, both years included significant
pre-tax restructuring, related expenses and inventory write-downs connected
with the exit from certain business segments. In 2000, excluding restructuring
and asset impairment charges related to the closing of the Raytex facility,
Cone had net income of $1.1 million or, after preferred dividends, a loss of
$0.11 per share. For comparison in 1999 excluding special charges, losses from
product lines exited in 1999 and the $1.0 million after-tax charge from the
cumulative effect of an accounting change related to capitalized start-up costs
at Parras Cone, Cone had a pro forma net loss of $0.18 per share after
preferred dividends.
LIQUIDITY AND CAPITAL RESOURCES
Cone's principal long-term capital components consist of debt outstanding
under its Revolving Credit Facility, Senior Note, 8 1/8% Debentures and
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
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 $10 million during 2002 with a new
maturity date of January 15, 2003. In addition, the agreements provide for
additional amortization and commitment reductions related to proceeds received
by Cone for permitted asset sales and 75% of excess cash flow (as defined in
the agreements). Interest rates were increased and new covenant levels were
established.
Financing agreements of Cone prohibit it from paying dividends on its Common
Stock.
The following is a summary of primary financing agreements as of December
30, 2001.
INTEREST/
FACILITY AMOUNT DISCOUNT
FINANCING AGREEMENT COMMITMENT OUTSTANDING RATE MATURITY DATE
------------------- ---------- ----------- --------- -------------
($ AMOUNTS IN MILLIONS)
8 1/8% Debenture........... $100.0 $100.0 8.125% Mar 15, 2005
Senior Note................ 27.2 27.2 13.700 Jan 15, 2003
Revolving Credit Facility.. 68.4 48.0 8.750 Jan 15, 2003
A/R Securitization Facility 60.0 36.9 5.340 Sept 1, 2004
At December 30, 2001, Cone had availability under its financing agreements
of $13.6 million. Availability under the Revolving Credit Facility and the A/R
Securitization Facility is determined by borrowing base calculations, as
defined in the respective agreements. During 2001, Cone generated cash from
operations of $13.7 million, as compared with cash from operations of $35.7
million in 2000. Other sources of cash flow included $4.3 million in proceeds
from sales of property and equipment for 2001, as compared with $3.2 million in
2000. Uses of cash in 2001 included $7.0 million for capital expenditures from
continuing operations and $1.0 million of net advances to the joint venture
industrial park in Altamira, Tamaulipas, Mexico.
18
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 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.
On December 30, 2001, Cone's long-term capital structure consisted of $173.7
million of long-term debt (including current maturities) and $86.6 million of
stockholders' equity. For comparison, Cone had $182.1 million of long-term debt
(including current maturities) and $126.4 million of stockholders' equity in
2000. In 1998, Cone entered into a $100 million notional interest rate swap,
which converted its 8 1/8% Debentures to a floating interest rate. In the
fourth quarter of 2001, Cone terminated the swap for a cash payment of $50,000
converting interest expense on the 8 1/8% Debentures back to a fixed rate.
Accounts receivable on December 30, 2001, were $28.4 million, as compared
with $40.1 million at December 31, 2000. Receivables, including those sold
pursuant to the A/R Securitization Facility, represented 68 days of sales
outstanding at December 30, 2001 and 60 days at December 31, 2000. The increase
in days outstanding was primarily the result of slower pay practices by certain
customers.
Inventories on December 30, 2001, were $62.1 million, down $44.2 million
from $106.3 million at December 31, 2000. The reduction is the result of the
liquidation of core inventories, writedowns taken as part of Cone's Reinvention
Plan, the sale of John Wolf, the exit from the khaki segment and lower cotton
and other raw material prices.
For 2001, domestic capital spending from continuing operations was $7.0
million compared to $9.8 million for the 2000 period. Domestic capital spending
in 2002 is expected to be $8 to $9 million financed by internally generated
funds.
OTHER MATTERS
EBITDA from continuing operations, which is 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 it is a widely accepted financial
indicator of the ability to incur and service debt, is calculated by Cone as
follows (in thousands):
FIFTY-TWO WEEKS ENDED
---------------------------
12/30/01 12/31/00 1/2/00
-------- -------- -------
Income (loss) from continuing operations $(15,265) $(12,802) $(5,004)
Depreciation and amortization........... 20,692 23,853 26,327
Inventory charges and facility
consolidation charges................. 7,489 1,875 1,600
Restructuring and impairment charges.... 19,939 38,500 16,017
-------- -------- -------
EBITDA.................................. $ 32,855 $ 51,426 $38,940
======== ======== =======
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.
19
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 December 30, 2001, no significant litigation existed.
OFF-BALANCE SHEET FINANCING ARRANGEMENTS
Cone's A/R Securitization Facility is its only off-balance sheet financing
arrangement. This facility generates funds by the sale of receivables in the
U.S. through Cone Receivables II LLC ("CRIILLC"). CRIILLC's sole business is
the ongoing purchase and subsequent resale of certain trade receivables from
Cone. CRIILLC sells an undivided 100% ownership interest in these receivables
under an agreement with General Electric Capital Corporation ("GECC"). CRIILLC
is a separate corporate entity with its own separate creditors who, in the
event of its liquidation, will be entitled to be satisfied out of CRIILLC's
assets prior to any value in CRIILLC becoming available to Cone. CRIILLC
retains no interests in those receivables transferred to GECC and has not
experienced any gains or losses on the transfer of such receivables. Cone
believes that minimal counterparty risk exists because of the financial
strength of GECC. In addition, the A/R Securitization Facility is essentially
asset neutral because of the inverse relationship between the level of accounts
receivable and the level of cash proceeds available under the A/R
Securitization Facility, subject to funding limits. (See Note 2,
"Securitization of Accounts Receivable," of the Notes to Consolidated Financial
Statements included in Part II, Item 8.)
TRANSACTIONS WITH RELATED PARTIES
Cone has various transactions in the normal course of business with its
unconsolidated affiliated companies. Cone purchases denim and yarn from Parras
Cone under a transfer pricing arrangement that is a part of the Commercial
Agreement between Parras Cone, Cone and its joint venture partner CIPSA.
Purchases of denim and yarn from Parras Cone were $56.6 million, $70.1 million
and $71.2 million in 2001, 2000 and 1999, respectively. Cone received $1.0
million in management fees from Parras Cone in 2001, 2000 and 1999 for
production management, cotton buying, administrative support and engineering
services. In addition, Cone sold looms to Parras Cone in 2001 for $2.9 million,
the approximate net book value of the equipment at the time of sale. Cone also
paid $2.2 million, $2.7 million and $1.3 million in marketing fees to CIPSA in
2001, 2000 and 1999, respectively.
CRITICAL ACCOUNTING POLICIES
Investments in Unconsolidated Affiliates. Investments in unconsolidated
affiliated companies are accounted for by both the equity and cost methods,
depending upon ownership levels. (See Note 1, "Summary of Significant
Accounting Policies," and Note 4, "Investments in Unconsolidated Affiliates,"
of the Notes to Consolidated Financial Statements included in Part II, Item 8.)
Cone has a 15% ownership interest in CIPSA, a denim manufacturer in Mexico.
Cone and CIPSA formed a company, Parras Cone, to build and operate a denim
manufacturing facility in Parras, Mexico. Each shareholder has a 50% interest
in Parras Cone. Accordingly, Cone records the equity in earnings of Parras Cone
in its consolidated statements of operations in accordance with accounting
principles generally accepted in the United States of America.
Cone purchases 100% of the fabric production, markets the production to the
end customer, handles production scheduling for the plant, provides financial
management and cotton purchasing services and provides customer service on
behalf of Parras Cone. However, Cone lacks board of director control and does
not have sole discretion over Parras Cone's management, which prevents Cone
from consolidating the entity.
Impairment of Assets. Long-lived assets and certain identifiable intangibles
to be held and used are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In performing the review for recoverability, Cone estimates the
future cash flows expected to result from the use of the asset and its eventual
disposition. If the sum of the expected future cash flows, undiscounted and
without interest charges, is less than the carrying amount of the asset, an
impairment loss is recognized. Measurement of an impairment loss for long-lived
assets and identifiable intangibles that Cone
20
expects to hold and use are based on the difference between the carrying amount
and fair value of the asset. Long-lived assets and certain identifiable
intangibles to be disposed of are reported at the lower of carrying amount or
fair value less cost to sell. Cone has made its best estimate of asset
impairments as of December 30, 2001. (See Note 21, "Restructuring and
Impairment of Assets," of the Notes to Consolidated Financial Statements
included in Part II, Item 8.)
Stock Plans. Cone applies Accounting Principles Board Opinion Number 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its stock option plans, which requires
compensation expense for Cone's options to be recognized only if the market
price of the underlying stock exceeds the exercise price on the date of grant.
Option prices are determined by the last reported sale price on the New York
Stock Exchange composite tape on the date of grant. Accordingly, Cone has not
recognized compensation expense for any of its options granted. Had SFAS No.
123, "Accounting for Stock Based Compensation," been used as opposed to APB 25,
Cone would have recorded compensation expense using a fair value based
accounting model. The effect of using SFAS No. 123 would have decreased the net
loss per share after preferred dividends to $1.61, $1.17 and $0.89 for 2001,
2000 and 1999, respectively. (See Note 14, "Stock Plans," of the Notes to
Consolidated Financial Statements included in Part II, Item 8.)
LONG-TERM DEBT AND CONTRACTUAL OBLIGATIONS
LONG-TERM CONTRACTUAL
DEBT OBLIGATIONS
--------- -----------
(IN THOUSANDS)
2002...... $ 3,075 $2,475
2003...... 72,080 2,192
2004...... -- 2,000
2005...... 100,000 1,844
2006...... -- 1,783
Thereafter -- 7,177
Long-Term Debt. Cone's debt financing consists of its Senior Note, its $68.4
million Revolving Credit Facility and its 8 1/8% Debentures. (See Note 9,
"Long-Term Debt," of the Notes to Consolidated Financial Statements included in
Part II, Item 8.)
Contractual Obligations. Cone has various leases accounted for as operating
leases. Future contractual obligations required under these lease agreements
represent minimum rental payments totaling $17.5 million. These operating
leases are primarily related to office space and production equipment leases.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Cone's primary market risk exposures are cotton (commodity) price risk and
interest rate risk. At December 30, 2001, Cone had no material exchange rate
risk on any of its financial instruments. Cone had no financial instruments,
derivative financial instruments or derivative commodity instruments held for
trading purposes at December 30, 2001. Fair values for cotton derivatives and
long-term debt instruments were estimated with reference to market quotes at
year-end.
Commodity price risk primarily relates to cotton. 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 contracts and, to a
lesser extent, futures and options contracts in its cotton purchasing program.
The following table provides information about Cone's cotton option
contracts that are sensitive to changes in cotton prices. The table presents
the number of contracts, the weighted-average strike price and the total dollar
contract price by expected maturity dates. Contract amounts are used to
calculate the contractual payments and quantity of cotton under option at
December 30, 2001 and December 31, 2000.
21
EXPECTED
MATURITY FAIR MATURITY FAIR
2002 VALUE 2001 VALUE
-------- ------- -------- -------
Cotton Options (Puts)
Contract Volume
(100 bales per contract)...................... NA NA NA NA
Weighted-Average
Strike Price (per lb.; 500 lbs. per bale avg.) NA NA NA NA
Contract Amount................................ NA NA NA NA
Cotton Options (Calls)
Contract Volume
(100 bales per contract)...................... 250 NA 350 NA
Weighted-Average
Strike Price (per lb.; 500 lbs. per bale avg.) $ .46 NA $ .66 NA
Contract Amount................................ $118,500 $11,750 $183,250 $88,750
Cone's debt instruments are exposed to interest rate risk. The table
presents principal cash flows and related weighted-average interest rates by
expected maturity dates.
EXPECTED MATURITY DATE
-------------------------- FAIR
2002 2003 2004 2005 TOTAL VALUE
------ ------ ----- ------ ------ -----
(DOLLARS IN MILLIONS)
Long-Term Debt
Fixed Rate
Senior Note............... $ -- $ 27.2 $ -- $ -- $ 27.2 $27.3
Average interest rate (%). 13.95 14.20 -- -- 13.96 --
Debentures................ $ -- $ -- $ -- $100.0 $100.0 $45.0
Average interest rate (%). 8.57 8.57 8.57 8.57 8.57 --
Variable Rate
Revolving................ $ -- $ 48.0 $ -- $ -- $ 48.0 $48.0
Average interest rate (%). 9.00 9.25 -- -- 9.01 --
"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 and free-trade initiatives, (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, (v) Cone's ability to attract and maintain
adequate capital to fund operations and strategic initiatives, (vi) increases
in prevailing interest rates, (vii) Cone's inability to continue the cost
savings and profit improvement associated with its Reinvention Plan, and (viii)
the effect on Cone' 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.
22
STATEMENT OF RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of Cone Mills is responsible for the preparation and
integrity of Cone's published financial statements. The financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America and include management's best estimates and
judgment. Management has also prepared the other information contained in this
report and is responsible for its accuracy and consistency with the financial
statements.
Cone maintains a system of internal control over financial reporting, which
is designed to provide reasonable assurance to Cone's management and Board of
Directors regarding the preparation of reliable published financial statements.
The system includes a code of conduct to foster a strong ethical climate,
established policies and procedures, internal audit processes, and the
employment of qualified personnel. Cone has established formal criteria against
which the internal control system is measured and as of December 30, 2001, Cone
was in compliance with these criteria.
The Board of Directors, assisted by its Audit Committee, which is composed
entirely of directors who are not officers or employees of Cone, provides
oversight to the financial reporting process. The Committee meets regularly
with management, internal auditors and independent certified public accountants
to review the scope and findings of audits, financial reporting issues and the
adequacy of the internal control system. To assure complete independence,
representatives of McGladrey & Pullen, LLP, Certified Public Accountants,
approved by the shareholders, have free access to the Audit Committee with or
without the presence of management.
/s/ Gary L. Smith
/s/John L. Bakane Gary L. Smith
John L. Bakane Executive Vice President
President and and
Chief Executive Officer Chief Financial Officer
/s/ Samir M. Gabriel
Samir M. Gabriel
Controller
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MCGLADREY & PULLEN, LLP
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Cone Mills Corporation
Greensboro, North Carolina
We have audited the accompanying consolidated balance sheets of Cone Mills
Corporation and subsidiaries as of December 30, 2001 and December 31, 2000, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 30, 2001.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Cone Mills
Corporation and subsidiaries as of December 30, 2001 and December 31, 2000, and
the results of their operations and their cash flows for each of the three
years in the period ended December 30, 2001 in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, in 2001 the
Company changed its method of accounting for derivative instruments, and in
1999 changed its methods of accounting for start-up costs and costs of computer
software developed or obtained for internal use.
/s/ McGladrey & Pullen, LLP
Greensboro, North Carolina
February 8, 2002
24
CONE MILLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 30, 2001, DECEMBER 31, 2000 AND JANUARY 2, 2000
2001 2000 1999
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net Sales.................................................... $449,908 $552,603 $548,870
Cost of Goods Sold........................................... 409,473 488,508 498,845
-------- -------- --------
Gross Profit................................................. 40,435 64,095 50,025
Selling and Administrative................................... 35,761 38,397 39,012
Restructuring and Impairment of Assets....................... 19,939 38,500 16,017
-------- -------- --------
Loss from Operations......................................... (15,265) (12,802) (5,004)
-------- -------- --------
Other Income (Expense)
Interest income........................................... 510 1,392 1,529
Interest expense.......................................... (17,675) (18,363) (14,450)
Other expense............................................. (3,007) (5,256) (993)
-------- -------- --------
(20,172) (22,227) (13,914)
-------- -------- --------
Loss from Continuing Operations before Income Tax Benefit and
Equity in Earnings of Unconsolidated Affiliates............ (35,437) (35,029) (18,918)
Income Tax Benefit........................................... (12,145) (12,047) (6,701)
-------- -------- --------
Loss from Continuing Operations before Equity in Earnings of
Unconsolidated Affiliates.................................. (23,292) (22,982) (12,217)
Equity in Earnings of Unconsolidated Affiliates.............. 177 2,716 1,684
-------- -------- --------
Loss from Continuing Operations.............................. (23,115) (20,266) (10,533)
-------- -------- --------
Discontinued Operations
Loss from discontinued operations......................... (14,129) (7,580) (11,540)
Loss on sale of discontinued operations................... (6,397) -- --
Income tax benefit........................................ 7,185 2,577 4,039
-------- -------- --------
(13,341) (5,003) (7,501)
-------- -------- --------
Cumulative Effect of Accounting Change....................... -- -- (1,038)
-------- -------- --------
Net Loss..................................................... $(36,456) $(25,269) $(19,072)
======== ======== ========
Loss Available to Common Stockholders
Loss from continuing operations........................... $(27,255) $(24,119) $(13,580)
Loss from discontinued operations......................... (13,341) (5,003) (7,501)
Cumulative effect of accounting change.................... -- -- (1,038)
-------- -------- --------
Net loss.................................................. $(40,596) $(29,122) $(22,119)
======== ======== ========
Loss per Share--Basic and Diluted
Loss from continuing operations........................... $ (1.07) $ (0.94) $ (0.53)
Loss from discontinued operations......................... (0.52) (0.20) (0.30)
Cumulative effect of accounting change.................... -- -- (0.04)
-------- -------- --------
Loss per Share -- Basic and Diluted.......................... $ (1.59) $ (1.14) $ (0.87)
======== ======== ========
Weighted-Average Common Shares Outstanding
Basic..................................................... 25,582 25,481 25,397
======== ======== ========
Diluted................................................... 25,582 25,481 25,397
======== ======== ========
See Notes to Consolidated Financial Statements.
25
CONE MILLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 30, 2001 AND DECEMBER 31, 2000
2001 2000
-------- ----
(IN THOUSANDS, EXCEPT
SHARE AND PAR VALUE DATA)
ASSETS
Current Assets
Cash................................................................... $ 529 $ 2,876
Accounts receivable, less allowances of $5,700; 2000, $5,050........... 28,373 40,091
Inventories............................................................ 62,057 106,308
Other current assets................................................... 3,371 6,270
-------- --------
Total Current Assets................................................. 94,330 155,545
Investments in and Advances to Unconsolidated Affiliates................. 51,664 56,265
Other Assets............................................................. 23,917 18,505
Property, Plant and Equipment............................................ 164,468 192,901
-------- --------
$334,379 $423,216
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt................................... $ 3,075 $ 73,495
Accounts payable....................................................... 21,535 37,420
Sundry accounts payable and accrued liabilities........................ 27,928 33,282
Deferred income taxes.................................................. -- 9,434
-------- --------
Total Current Liabilities............................................ 52,538 153,631
Long-Term Debt........................................................... 170,655 108,582
Deferred Income Taxes.................................................... 10,513 20,338
Other Liabilities........................................................ 14,063 14,246
Stockholders' Equity
Class A preferred stock--$100 par value; authorized 1,500,000 shares;
issued and outstanding 334,309 shares; 2000, 335,340 shares.......... 33,431 33,534
Class B preferred stock--no par value; authorized 5,000,000 shares..... -- --
Common stock--$.10 par value; authorized 42,700,000 shares; issued and
outstanding 25,660,663 shares; 2000, 25,522,211 shares............... 2,566 2,552
Capital in excess of par............................................... 57,872 57,630
Retained earnings...................................................... 2,029 42,512
Deferred compensation--restricted stock................................ (12) (40)
Accumulated other comprehensive loss................................... (9,276) (9,769)
-------- --------
Total Stockholders' Equity........................................... 86,610 126,419
-------- --------
$334,379 $423,216
======== ========
See Notes to Consolidated Financial Statements.
26
CONE MILLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 30, 2001, DECEMBER 31, 2000 AND JANUARY 2, 2000
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
OPERATIONS
Net Loss.................................................................. $(36,456) $(25,269) $(19,072)
Adjustments to reconcile net loss to cash provided by (used in) operations
Depreciation............................................................ 20,582 22,330 24,526
Loss from discontinued operations....................................... 6,944 5,003 7,501
Loss on sale of discontinued operations................................. 6,397 -- --
Loss on sale and writedown of property, plant and equipment............. 9,823 12,859 2,541
Amortization............................................................ 110 1,523 1,801
Writedown of goodwill and tradename..................................... -- 24,007 --
Writedown of investments in unconsolidated affiliates................... 3,188 -- --
Deferred compensation expense--restricted stock......................... 28 255 153
Equity in earnings of unconsolidated affiliates......................... (177) (2,716) (1,684)
Cumulative effect of accounting change.................................. -- -- 1,038
Change in operating assets and liabilities................................
Accounts receivable..................................................... 5,593 8,035 (12,374)
Subordinated note receivable............................................ -- -- 10,414
Inventories............................................................. 12,057 6,790 10,254
Other assets............................................................ (1,139) (4,841) 488
Accounts payable and accrued liabilities................................ 19,247 4,860 (20,308)
Deferred income taxes................................................... (27,056) (15,852) (12,949)
Other liabilities....................................................... (183) (1,471) 510
-------- -------- --------
Net cash provided by (used in) continuing operations.................. 18,958 35,513 (7,161)
Net cash provided by (used in) discontinued operations................ (5,282) 217 587
-------- -------- --------
Cash provided by (used in) operations................................... 13,676 35,730 (6,574)
-------- -------- --------
INVESTING
Investments in and advances to unconsolidated affiliates.................. (964) (6,734) (680)
Proceeds from sale of property, plant and equipment....................... 4,312 3,153 3,198
Proceeds from sale of discontinued operations............................. 5,375 -- --
Capital expenditures of continuing operations............................. (7,027) (9,768) (12,664)
Capital expenditures of discontinued operations........................... (91) (217) (530)
-------- -------- --------
Cash provided by (used in) investing.................................... 1,605 (13,566) (10,676)
-------- -------- --------
FINANCING
Net payments under line of credit agreements.............................. -- -- (1,000)
Increase (decrease) in checks issued in excess of deposits................ (4,962) 1,442 (1,907)
Principal borrowings (payments) on long-term debt......................... (8,792) (17,197) 26,286
Proceeds from issuance of common stock.................................... 256 228 326
Purchase of outstanding common stock...................................... -- (3) (45)
Dividends paid--Class A Preferred stock................................... (146) (62) (154)
Redemption of Class A Preferred stock..................................... (3,984) (4,963) (5,628)
-------- -------- --------
Cash provided by (used in) financing.................................... (17,628) (20,555) 17,878
-------- -------- --------
Net change in cash...................................................... (2,347) 1,609 628
Cash at Beginning of Period................................................ 2,876 1,267 639
-------- -------- --------
Cash at End of Period...................................................... $ 529 $ 2,876 $ 1,267
======== ======== ========
See Notes to Consolidated Financial Statements.
27
CONE MILLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 30, 2001, DECEMBER 31, 2000 AND JANUARY 2, 2000
CLASS A DEFERRED
PREFERRED STOCK COMMON STOCK CAPITAL IN COMPENSATION
---------------- ------------------ EXCESS RETAINED RESTRICTED
SHARES AMOUNT SHARES AMOUNT OF PAR EARNINGS STOCK
------- ------- ---------- ------ ---------- -------- ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
Balance, January 3, 1999............................ 383,948 $38,395 25,432,233 $2,543 $57,264 $ 92,799 $(579)
------- ------- ---------- ------ ------- -------- -----
Comprehensive Loss
Net loss.......................................... -- -- -- -- -- (19,072) --
Currency translation adjustment................... -- -- -- -- -- -- --
Total comprehensive loss..........................
Class A Preferred Stock
Shares redeemed................................... (56,281) (5,628) -- -- -- -- --
Cash dividends paid............................... -- -- -- -- -- (154) --
Stock dividend.................................... 27,968 2,797 -- -- -- (2,797) --
Common Stock
Purchase of common shares......................... -- -- (6,916) -- (45) -- --
Options exercised................................. -- -- 62,400 6 320 -- --
Issuance of restricted shares..................... -- -- 10,000 1 47 -- (48)
Restricted stock compensation..................... -- -- -- -- -- -- 153
Cancellation of restricted shares................. -- -- (18,000) (2) (151) -- 153
------- ------- ---------- ------ ------- -------- -----
Balance, January 2, 2000............................ 355,635 $35,564 25,479,717 $2,548 $57,435 $ 70,776 $(321)
------- ------- ---------- ------ ------- -------- -----
Comprehensive Loss
Net loss.......................................... -- -- -- -- -- (25,269) --
Minimum pension liability adjustment.............. -- -- -- -- -- -- --
Total comprehensive loss..........................
Class A Preferred Stock
Shares redeemed................................... (48,746) (4,875) -- -- -- (88) --
Cash dividends paid............................... -- -- -- -- -- (62) --
Stock dividend.................................... 28,451 2,845 -- -- -- (2,845) --
Common Stock
Purchase of common shares......................... -- -- (401) -- (3) -- --
Issuance of common shares......................... -- -- 36,695 3 184 -- --
Options exercised................................. -- -- 9,200 1 40 -- --
Restricted stock compensation..................... -- -- -- -- -- -- 255
Cancellation of restricted shares................. -- -- (3,000) -- (26) -- 26
------- ------- ---------- ------ ------- -------- -----
Balance, December 31, 2000.......................... 335,340 $33,534 25,522,211 $2,552 $57,630 $ 42,512 $ (40)
------- ------- ---------- ------ ------- -------- -----
Comprehensive Loss
Net loss.......................................... -- -- -- -- -- (36,456) --
Hedging transactions, net of deferred tax of $172. -- -- -- -- -- -- --
Minimum pension liability adjustment.............. -- -- -- -- -- -- --
Total comprehensive loss..........................
Class A Preferred Stock
Shares redeemed................................... (39,842) (3,984) -- -- -- -- --
Cash dividends paid............................... -- -- -- -- -- (146) --
Stock dividend.................................... 38,811 3,881 -- -- -- (3,881) --
Common Stock
Issuance of common shares......................... -- -- 137,452 14 241 -- --
Options exercised................................. -- -- 1,000 -- 1 -- --
Restricted stock compensation..................... -- -- -- -- -- -- 28
------- ------- ---------- ------ ------- -------- -----
Balance, December 30, 2001.......................... 334,309 $33,431 25,660,663 $2,566 $57,872 $ 2,029 $ (12)
======= ======= ========== ====== ======= ======== =====
ACCUMULATED
OTHER
COMPREHENSIVE
LOSS TOTAL
------------- --------
Balance, January 3, 1999............................ $(8,498) $181,924
------- --------
Comprehensive Loss
Net loss.......................................... -- (19,072)
Currency translation adjustment................... (19) (19)
--------
Total comprehensive loss.......................... (19,091)
--------
Class A Preferred Stock
Shares redeemed................................... -- (5,628)
Cash dividends paid............................... -- (154)
Stock dividend.................................... -- --
Common Stock
Purchase of common shares......................... -- (45)
Options exercised................................. -- 326
Issuance of restricted shares..................... -- --
Restricted stock compensation..................... -- 153
Cancellation of restricted shares................. -- --
------- --------
Balance, January 2, 2000............................ $(8,517) $157,485
------- --------
Comprehensive Loss
Net loss.......................................... -- (25,269)
Minimum pension liability adjustment.............. (1,252) (1,252)
--------
Total comprehensive loss.......................... (26,521)
--------
Class A Preferred Stock
Shares redeemed................................... -- (4,963)
Cash dividends paid............................... -- (62)
Stock dividend.................................... -- --
Common Stock
Purchase of common shares......................... -- (3)
Issuance of common shares......................... -- 187
Options exercised................................. -- 41
Restricted stock compensation..................... -- 255
Cancellation of restricted shares................. -- --
------- --------
Balance, December 31, 2000.......................... $(9,769) $126,419
------- --------
Comprehensive Loss
Net loss.......................................... -- (36,456)
Hedging transactions, net of deferred tax of $172. 320 320
Minimum pension liability adjustment.............. 173 173
--------
Total comprehensive loss.......................... (35,963)
--------
Class A Preferred Stock
Shares redeemed................................... -- (3,984)
Cash dividends paid............................... -- (146)
Stock dividend.................................... -- --
Common Stock
Issuance of common shares......................... -- 255
Options exercised................................. -- 1
Restricted stock compensation..................... -- 28
------- --------
Balance, December 30, 2001.......................... $(9,276) $ 86,610
======= ========
See Notes to Consolidated Financial Statements.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of Cone Mills Corporation and all majority owned subsidiaries
(collectively, "Cone") except for Cone Receivables, LLC, which was a
special-purpose entity that is currently inactive and has no balances. All
significant intercompany transactions and balances have been eliminated in
consolidation.
FISCAL YEAR. Cone's fiscal year ends on the Sunday nearest December 31.
Fiscal years 2001, 2000 and 1999 each contained 52 weeks.
INVENTORIES. 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.
INVESTMENTS IN UNCONSOLIDATED AFFILIATES. Investments in unconsolidated
affiliated companies are accounted for by both the equity and cost methods,
depending upon ownership levels. The equity method of accounting is used when
Cone's investment in voting stock gives it the ability to exercise significant
influence over operating and financial policies of the investee. This method of
accounting is used for unconsolidated affiliated companies in which Cone holds
20 percent or more of the voting stock of the investee, but no more than 50
percent. Investments in less than 20 percent of the voting stock of an
unconsolidated affiliated company are accounted for by the cost method. Cone's
equity in earnings and currency translation adjustments may be recorded on up
to a one-quarter delay basis. These investments in unconsolidated affiliates
are assessed periodically for impairment and are written down when the carrying
amount is not considered fully recoverable.
OTHER ASSETS. In 1999, other assets consisted primarily of the excess of
cost over net assets acquired ("goodwill") and trade names, which were carried
at cost less accumulated amortization. Costs were amortized using the
straight-line method over the estimated useful lives of the related assets, not
exceeding twenty years. In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to Be Disposed Of," the goodwill and trade name related
to the Raytex plant were written off in 2000 as a result of the related
restructuring. (See Note 21, "Restructuring and Impairment of Assets," of the
Notes to Consolidated Financial Statements.)
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment is carried at
cost. Depreciation is computed by the straight-line method for financial
reporting purposes over the following estimated useful lives:
Buildings.............. 15-39 Years
Machinery and Equipment 10-20 Years
Other.................. 3-20 Years
Property, plant and equipment removed from operation and deemed available
for sale is separately identified as such in Note 6, "Property, Plant and
Equipment" of the Notes to Consolidated Financial Statements. Such assets are
reported at the lower of carrying amount or fair value less costs to sell with
no future depreciation expense being recorded thereon. Determination of fair
market value is based upon in-house engineering and purchasing appraisals or
surveys with used equipment dealers.
IMPAIRMENT OF ASSETS. Long-lived assets and certain identifiable intangibles
to be held and used are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In performing the review for recoverability, Cone estimates the
future cash flows expected to result from the use of the asset and its eventual
disposition. If the sum of the expected future cash flows, undiscounted and
without interest charges, is less than the carrying amount of the asset, an
impairment loss is recognized. Measurement of an impairment loss for long-lived
assets and identifiable intangibles that Cone expects to hold and use are based
on the difference between the carrying amount and fair value of the asset.
29
Long-lived assets and certain identifiable intangibles to be disposed of are
reported at the lower of carrying amount or fair value less cost to sell. (See
Note 21, "Restructuring and Impairment of Assets," of the Notes to Consolidated
Financial Statements.)
DEFERRED INCOME TAXES. Deferred income taxes are provided on a liability
method whereby deferred tax assets are recognized for deductible temporary
differences and operating loss and tax credit carryforwards and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. Deferred
tax assets and liabilities are adjusted for the effects of changes in tax laws
and rates on the date of enactment.
United States income taxes are not provided on the earnings of foreign
affiliates as those are intended to be permanently reinvested in the country
from which they were derived. Undistributed earnings of such foreign affiliates
were approximately $7 million at December 30, 2001. Deferred tax liabilities,
if recorded, on these undistributed earnings would amount to approximately $3
million.
CAPITAL STOCK REDEEMED. Redemption of capital stock is accounted for by the
par value method. Excess of redemption price over par value for Class A
Preferred Stock is charged to retained earnings. Excess of purchase price over
par value for common stock is charged to capital in excess of par and to
retained earnings thereafter.
REVENUE RECOGNITION. Revenue from product sales is recognized at the time
ownership of the goods transfers to the customer, which in certain situations
may be prior to shipment. Cone classifies those amounts billed to customers for
shipping and handling in "Net Sales" in the Consolidated Statements of
Operations. In addition, Cone classifies costs incurred for shipping and
handling in "Cost of Goods Sold" in the Consolidated Statements of Operations.
ESTIMATES. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amount of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
DERIVATIVE INSTRUMENTS. In June 2000, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities." This Statement amended the
accounting and reporting standards of Statement No. 133 for certain derivative
instruments and certain hedging activities. SFAS No. 133 established accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. This Statement also
established criteria for designation and effectiveness of hedging
relationships. If the derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of the derivative are either offset against
the change in fair value of the hedged assets, liabilities or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's
change in fair value is immediately recognized in earnings.
Cone adopted SFAS No. 133 and SFAS No. 138 as of January 1, 2001. At that
time, 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. (See Note 19, "Financial Instruments," of the Notes to
Consolidated Financial Statements.)
Cone considers its cotton derivatives to be 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 (outside results of operations) and subsequently
reclassified into cost of goods
30
sold when the forecasted transactions being hedged affect results of
operations. The ineffective portion of derivative gains and losses is reported
in results of operations immediately. Upon adoption of the new standards on
January 1, 2001, a cumulative-effect-type adjustment of accumulated other
comprehensive income was recorded for less than $0.1 million.
RECENT ACCOUNTING PRONOUNCEMENTS. Cone adopted SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets," in fiscal year 2001. SFAS No.
144 supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," and broadens the
applicable accounting principles generally accepted in the United States of
America related to discontinued operations to include a component of an entity
(rather than a segment of a business). A component of an entity comprises
operations and cash flows that can be clearly distinguished, operationally and
for financial reporting purposes, from the rest of the entity. (See Note 22,
"Discontinued Operations," of the Notes to Consolidated Financial Statements.)
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No.
140 replaced SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities," but carried over most of the
provisions of SFAS No. 125 without reconsideration. Most of the accounting
provisions of SFAS No. 140 were effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after March 15,
2001. SFAS No. 140 has not had a significant impact on amounts recorded in
Cone's financial statements. (See Note 2, "Securitization of Accounts
Receivable," of the Notes to Consolidated Financial Statements.)
Cone adopted several American Institute of Certified Public Accountants
Statements of Position ("SOP") in fiscal year 1999. SOP 98-5, "Reporting the
Costs of Start-up Activities," required future start-up costs to be expensed as
incurred and previously capitalized start-up costs to be expensed when SOP 98-5
was adopted. In 1999, Cone recognized a charge of $1.0 million, Cone's 50%
portion of Parras Cone's unamortized start-up costs, as a cumulative effect of
an accounting change. SOP 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," requires capitalization of certain
costs, which Cone has historically expensed. Cone capitalized $1.1 million of
costs related to internally developed software in 1999.
NOTE 2. SECURITIZATION OF ACCOUNTS RECEIVABLE
Funds generated by the sale of receivables in the U.S. are provided through
Cone Receivables II LLC ("CRIILLC"). CRIILLC's sole business is the ongoing
purchase and subsequent resale of certain trade receivables from Cone. CRIILLC
sells an undivided 100% ownership interest in these receivables under an
agreement (the "A/R Securitization Facility") with General Electric Capital
Corporation ("GECC"), whose purchases yield proceeds of up to $60 million at
any point in time. GECC issues commercial paper backed by, among other things,
GECC's ownership interest in the receivables. CRIILLC is a separate corporate
entity with its own separate creditors who, in the event of its liquidation,
will be entitled to be satisfied out of CRIILLC's assets prior to any value in
CRIILLC becoming available to Cone. CRIILLC retains no interests in those
receivables transferred to GECC and has not experienced any gains or losses on
the transfer of such receivables. The A/R Securitization Facility expires in
August 2004.
Under the securitization agreements, the sale price to CRIILLC for the
receivables is subject to a purchase discount equal to a percentage over GECC's
commercial paper interest rate, which percentage may vary based upon Cone's
operating performance. At year-end 2001, the percentage over the commercial
paper rate was 3.50%. As of December 30, 2001 and December 31, 2000, the total
amount of outstanding advances of proceeds from the sale of receivables under
the A/R Securitization Facility was $36.9 million and $55.7 million,
respectively. Expenses incurred in connection with the sale of accounts
receivable were $3.0 million, $4.4 million and $1.0 million for 2001, 2000 and
1999, respectively, and were included in "Other expense" in the Consolidated
Statements of Operations.
31
The table below summarizes certain cash flows under the securitization:
2001 2000
-------- --------
(IN THOUSANDS)
Proceeds from securitizations........................ $ 78,117 $ 45,714
Reductions due to change in level of receivables sold (96,908) (39,043)
Daily yield paid..................................... (3,058) (4,422)
Servicing fees paid.................................. (759) (881)
Servicing fees received.............................. 344 866
NOTE 3. INVENTORIES
2001 2000
------- --------
(IN THOUSANDS)
Greige and finished goods $35,811 $ 69,991
Work in process.......... 5,084 6,463
Raw materials............ 10,779 18,717
Supplies and other....... 10,383 11,137
------- --------
$62,057 $106,308
======= ========
Inventories valued at LIFO as of December 30, 2001 and December 31, 2000
represented 90% and 93% of total inventories, respectively. If current
replacement cost had been used for valuing financial statement inventories,
that portion of the inventories based on the LIFO method would have been
approximately $9 million higher at December 30, 2001 and $15 million higher at
December 31, 2000. LIFO inventories valued for financial statement purposes
exceed their income tax basis by approximately $56 million and $75 million at
December 30, 2001 and December 31, 2000, respectively. During 2001, 2000 and
1999, certain inventory quantities were reduced, resulting in a liquidation of
LIFO inventory layers carried at the lower costs prevailing in prior years. The
effect of these liquidations decreased net losses by $1.0 million, $3.0 million
and $0.5 million in 2001, 2000 and 1999, respectively.
NOTE 4. INVESTMENTS IN UNCONSOLIDATED AFFILIATES
Cone has a 15% ownership interest in Compania Industrial de Parras S.A. de
C.V. ("CIPSA"), a denim manufacturer in Mexico. Cone and CIPSA formed a
company, Parras Cone de Mexico, S.A. de C.V. ("Parras Cone"), to build and
operate a denim manufacturing facility in Parras, Mexico. Parras Cone is
capitalized with approximately $73 million of equity, each shareholder with a
50% interest, and approximately $28 million of Mexican bank financing. The debt
is not guaranteed by Cone or CIPSA.
Cone's equity in earnings of Parras Cone was $0.4 million, $2.8 million and
$0.7 million (which includes the cumulative effect of an accounting change
expense of $1.0 million) for 2001, 2000 and 1999, respectively. The summarized
unaudited financial information of Parras Cone is set forth below:
2001 2000 1999
------- ------- -------
(IN THOUSANDS)
Current assets........ $24,354 $21,936 $26,180
Noncurrent assets..... 83,677 82,676 87,186
Current liabilities... 9,448 13,245 18,901
Noncurrent liabilities 25,197 18,840 25,961
Net sales............. 58,469 71,098 74,964
Gross profit.......... 7,677 14,944 11,933
Net income............ 859 5,673 1,312
32
Cone has a 50% ownership interest in Altamira Servicios de Infraestructura,
S.A. de C.V. ("ASISA"), a joint venture with Guilford Mills, Inc., to develop
and operate a textile and apparel industrial park in Altamira, Tamaulipas,
Mexico. Cone's equity in losses of ASISA was $0.2 million and $0.1 million for
2001 and 2000. There were no equity in earnings (losses) of ASISA for 1999.
NOTE 5. OTHER ASSETS
2001 2000
------- -------
(IN THOUSANDS)
Miscellaneous intangible assets $ 1,547 $ 4,263
Accumulated amortization....... (1,068) (1,895)
------- -------
479 2,368
Noncurrent prepaid benefit cost 22,885 15,643
Other assets................... 553 494
------- -------
$23,917 $18,505
======= =======
NOTE 6. PROPERTY, PLANT AND EQUIPMENT
2001 2000
-------- --------
(IN THOUSANDS)
Land................................. $ 9,620 $ 10,062
Buildings............................ 72,578 73,739
Machinery and equipment.............. 253,847 271,955
Other................................ 32,002 36,243
-------- --------
368,047 391,999
Less accumulated depreciation........ 213,661 210,936
-------- --------
154,386 181,063
Assets available for sale............ 10,082 11,838
-------- --------
$164,468 $192,901
======== ========
Assets available for sale by segment:
Denim............................ $ 4,737 $ 639
Commission Finishing............. 4,004 5,042
Yarn-Dyed Products............... 1,276 5,968
Other............................ 65 189
-------- --------
$ 10,082 $ 11,838
======== ========
Depreciation expense on property, plant and equipment classified as
"available for sale" prior to being classified as such was $0.5 million, $2.5
million and $3.5 million for 2001, 2000 and 1999, respectively.
33
NOTE 7. ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss, net of related tax,
at December 30, 2001 and December 31, 2000, are as follows:
2001 2000
------- -------
(IN THOUSANDS)
Foreign currency translation adjustments.................................. $(8,517) $(8,517)
Minimum pension liability adjustment, net of deferred tax benefit of $657;
2000, $764.............................................................. (1,079) (1,252)
Cotton hedging transactions, net of deferred tax liability of $172........ 320 --
------- -------
$(9,276) $(9,769)
======= =======
Cotton derivatives gains reflected above in other comprehensive income
(loss) will be recognized in results of operations over the next twelve months
because Cone generally hedges cotton transactions for a period of twelve months
or less.
NOTE 8. SUNDRY ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
2001 2000
------- -------
(IN THOUSANDS)
Accrued salaries, wages and commissions $ 7,547 $ 7,742
Checks issued in excess of deposits.... 5,382 10,344
Other.................................. 14,999 15,196
------- -------
$27,928 $33,282
======= =======
NOTE 9. LONG-TERM DEBT
2001 2000
-------- --------
(IN THOUSANDS)
Senior Note.............. $ 27,155 $ 28,946
Revolving Credit Facility 48,000 55,000
8 1/8% Debentures........ 98,575 98,131
-------- --------
173,730 182,077
Less current maturities.. 3,075 73,495
-------- --------
$170,655 $108,582
======== ========
On November 9, 2001, Cone entered into agreements to refinance both its
Revolving Credit Facility with its existing banks and its Senior Note. Interest
rates were increased and new covenant levels were established. 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's obligations
under the Revolving Credit Facility, Senior Note and 8 1/8% Debentures are
secured by substantially all of the assets of Cone. The Senior Note and
Revolving Credit Facility have a priority lien on Cone's assets of $28 million.
The priority lien was established in January 2000. If Cone is unable to
refinance this debt or is in default on its credit agreements with its lenders,
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.
The Senior Note is a ten-year $75 million Promissory Note, dated August 13,
1992, with a current interest rate of 13.7%, which increased from 11.7% on
November 9, 2001. The interest rate on the Senior Note was increased to 11.7%
from 11% on July 14, 2000. Future scheduled amortization during 2002 will be
equal to the
34
Senior Note's pro rata share of the scheduled $10 million amortization and
commitment reductions. In addition, the November 9, 2001, amendment provides
for further amortization of the outstanding balance on a pro rata basis for
excess cash flow (as defined in the agreement) measured on a two-quarter period
basis. The applicable interest rate on the Senior Note will be increased to
14.2% as of July 1, 2002, unless Cone is able to enter into an agreement to
replace its Senior Note.
On January 28, 2000, Cone entered into an $80 million Revolving Credit
Facility with its existing banks with Bank of America, N.A., as agent. This
Revolving Credit Facility replaced an $80 million Revolving Credit Agreement.
The Revolving Credit Facility was amended on November 9, 2001, to extend the
maturity date to January 15, 2003, and to revise the covenants and borrowing
base included in the Facility. The Revolving Credit Facility commitment has
been reduced to $68.4 million, including letters of credit, as of December 30,
2001. Future scheduled amortization and commitment reductions during 2002 will
be equal to the Revolving Credit Facility's pro rata share of the scheduled $10
million amortization and commitment reductions. The maximum amount that can be
borrowed is based on the borrowing base as specified in the Facility agreement.
Cone may borrow from time to time under the Revolving Credit Facility at a Base
Rate. Base Rate Loans bear interest at the rate per annum equal to the sum of
(a) the higher of (i) the Federal Funds Rate (as defined) for such day plus
one-half of one percent (0.5%) and (ii) the Prime Rate (as defined) for such
day plus (b) 4.00%. The applicable margin on Base Rate Loans on the Revolving
Credit Facility will be increased from 4.00% to 4.50% as of July 1, 2002,
unless Cone is able to enter into an agreement to replace its Revolving Credit
Facility. The weighted-average interest rates under the Revolving Credit
Facility were 8.75% and 11.25% at December 30, 2001 and December 31, 2000,
respectively.
The Revolving Credit Facility and the Senior Note Agreement contain certain
financial covenants, including but not limited to minimum levels of
consolidated net worth, maintenance of certain ratios including consolidated
interest coverage ratios, minimum required Earnings Before Interest, Taxes,
Depreciation and Amortization ("EBITDA") and limitations on capital
expenditures. These covenants also currently prohibit Cone from paying
dividends on its Common Stock. Cone was in compliance with these covenants as
of December 30, 2001.
On March 15, 1995, Cone completed the sale of $100 million 8 1/8% Debentures
through an underwritten public offering. The Debentures are due March 15, 2005,
and are not redeemable prior to maturity. Interest is payable semiannually each
March 15 and September 15. In 1995, Cone entered into an interest rate hedge
contract to fix the interest rate on the Debentures. The contract was
terminated at a cost of $4.3 million. Amortization of the loss on the interest
rate hedge and original issue discount, both over a ten-year life, resulted in
an 8.57% effective rate for the issue. The adoption of SFAS No. 133 and SFAS
No. 138 did not have an effect on the accounting for this interest rate hedge.
In July 1998, Cone entered into an interest rate swap agreement with a
notional amount of $100 million and a term of seven years with a major
financial institution. This agreement converted the Debentures to a variable
interest rate. Effective October 4, 2001, the interest rate swap agreement was
terminated for a total cost of $50,000.
Annual maturities of long-term debt for each of the next five fiscal years
are (in thousands):
2002 $ 3,075
2003 72,080
2004 --
2005 100,000
2006 --
Maturities of long-term debt in fiscal 2005 include the remaining
unamortized original issue discount and the remaining unamortized loss on an
interest rate hedge in the total amount of $1.4 million as of December 30, 2001.
35
NOTE 10. PENSIONS AND OTHER BENEFIT PROGRAMS
Cone offers several qualified pension and other postretirement benefit plans
to its employees. The benefit plans offered by Cone include Defined
Contribution Retirement Plans, Defined Benefit Plans and Other Retiree Benefits
as outlined below:
DEFINED CONTRIBUTION RETIREMENT PLANS
Cone presently has three defined contribution plans as outlined below:
1. The 1983 Employee Stock Ownership Plan ("ESOP")
2. The 401(k) Program Plan
3. The 401(k) Program Plan-Hourly
Cone discontinued contributions to the ESOP after 1992. The ESOP is subject
to a floor-offset arrangement in conjunction with Cone's defined benefit plan
with respect to pension benefits earned for service after 1983. Under the
floor-offset arrangement, retirement benefits earned after 1983 under Cone's
defined benefit plan are offset by the actuarial equivalent pension value of a
portion of the participants' ESOP accounts.
Participants of the 401(k) plans may contribute from 2% to 15% of their
annual compensation. Cone makes matching contributions of 40%. Cone does not
match employee contributions in excess of 6% of the employee's annual
compensation.
Expenses for the defined contribution plans were $1.2 million, $1.4 million
and $1.6 million for 2001, 2000 and 1999, respectively.
DEFINED BENEFIT PLANS
Cone has a noncontributory defined benefit pension plan that covers
substantially all employees. Cone's funding policy is to make annual
contributions of amounts that are deductible for income tax purposes. Assets of
the plan at the end of 2001 were 40% invested in fixed income securities
consisting of bond funds and short-term money market or cash equivalent funds,
while the remaining 60% were invested in equity funds. Cone also has a
noncontributory nonqualified pension plan that provides benefits to certain
salaried employees. In 2001, as part of Cone's Reinvention Plan, benefits were
frozen for salaried employees in the qualified and nonqualified defined benefit
pension plans.
OTHER RETIREE BENEFITS
Cone provides postretirement health care benefits to certain retired
employees between the ages of 55 and 65 who have completed ten years of
service. The plan is contributory, with the retiree contributions and plan
design adjusted periodically to reflect changes in health care costs.
36
The following chart summarizes the balance sheet impact, as well as the
benefit obligations, assets, funded status and weighted-average rate
assumptions related to the Defined Benefit Plans and Other Retiree Benefits:
DEFINED OTHER
BENEFIT PLANS RETIREE BENEFITS
---------------- ----------------
2001 2000 2001 2000
------- ------- ------- -------
(IN THOUSANDS)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year....... $75,069 $67,197 $ 2,792 $ 3,203
Service cost.................................. 1,660 2,433 60 98
Interest cost................................. 5,056 5,182 205 213
Curtailment................................... (8,824) -- -- --
Participants' contributions................... -- -- 569 418
Plan changes.................................. -- 830 -- (3,041)
Actuarial loss................................ 1,533 3,220 91 2,737
Benefit payments.............................. (4,548) (3,793) (965) (836)
Special termination benefits.................. -- -- 135 --
------- ------- ------- -------
Benefit obligation at end of year........... $69,946 $75,069 $ 2,887 $ 2,792
======= ======= ======= =======
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $67,335 $61,703 $ -- $ --
Actual return on plan assets.................. 5,972 1,783 -- --
Employer contributions........................ 5,656 7,642 396 418
Participant's contributions................... -- -- 569 418
Benefit payments.............................. (4,548) (3,793) (965) (836)
------- ------- ------- -------
Fair value of plan assets at end of year.... $74,415 $67,335 $ -- $ --
======= ======= ======= =======
FUNDED STATUS
Funded status at end of year.................. $ 4,469 $(7,734) $(2,887) $(2,792)
Unrecognized net actuarial loss............... 12,650 20,463 2,145 2,292
Unrecognized prior service cost (income)...... 21 840 (1,499) (1,670)
Unrecognized transition amount................ 1 164 -- --
------- ------- ------- -------
Net amount recognized....................... $17,141 $13,733 $(2,241) $(2,170)
======= ======= ======= =======
Prepaid benefit cost.......................... $22,885 $18,193 $ -- $ --
Accrued liability............................. (7,480) (7,715) (2,241) (2,170)
Intangible asset.............................. -- 1,239 -- --
Minimum liability............................. 1,736 2,016 -- --
------- ------- ------- -------
Net amount recognized....................... $17,141 $13,733 $(2,241) $(2,170)
======= ======= ======= =======
WEIGHTED-AVERAGE ASSUMPTIONS
Discount rate................................. 7.00% 7.50% 7.00% 7.50%
Expected rate of return on plan assets........ 9.25% 8.50% NA NA
Rate of compensation increase................. NA 4.80% NA NA
The aggregate projected benefit obligations and fair value of assets for
defined benefit plans with projected benefit obligations in excess of assets
for the respective years were as follows:
2001 2000
------ -------
(IN THOUSANDS)
Projected benefit obligations $7,480 $65,681
Plan assets.................. -- 55,513
Cone's nonqualified pension plan was the only pension plan with an
accumulated obligation in excess of the fair value of plan assets. There are no
plan assets due to the nature of the plan. Accumulated benefit obligations for
this plan were $7.5 million and $7.7 million for 2001 and 2000, respectively.
37
The following table provides the components of net periodic benefit cost for
fiscal years 2001, 2000 and 1999:
DEFINED BENEFIT PLANS OTHER RETIREE BENEFITS
------------------------- ----------------------
2001 2000 1999 2001 2000 1999
------- ------- ------- ----- ---- ----
(IN THOUSANDS)
Service cost............................... $ 1,660 $ 2,433 $ 3,420 $ 60 $ 98 $123
Interest cost.............................. 5,056 5,182 4,866 205 213 227
Expected return on plan assets............. (6,111) (5,266) (4,199) -- -- --
Curtailment................................ 888 -- 572 -- -- --
Amortization of prior service cost (income) 24 (23) (29) (172) -- --
Amortization of transition amount.......... 69 131 136 -- 114 114
Recognized net actuarial loss (gain)....... 661 680 1,313 238 (70) --
Special termination benefits............... -- -- -- 135 -- --
------- ------- ------- ----- ---- ----
Net periodic benefit cost.............. $ 2,247 $ 3,137 $ 6,079 $ 466 $355 $464
======= ======= ======= ===== ==== ====
Cone recorded an $888,000 curtailment loss in 2001 as a result of freezing
the benefits for salaried employees in the qualified and nonqualified pension
plans. Cone recorded a $572,000 curtailment loss in 1999 as a result of the
reduction in employees and closing of plants in the 1999 Restructuring Program
(see Note 21, "Restructuring and Impairment of Assets," of the Notes to
Consolidated Financial Statements).
Cone has established an exact amount per month that it will pay for
postretirement health care benefits with any balance of actual costs being
passed on to the covered individual through additional participant
contributions. Any change in assumed health care trend rates would have a
negligible effect on service and interest cost components and the
postretirement benefit obligation.
38
NOTE 11. INCOME TAX BENEFIT
The following tables present the components of the income tax provision
(benefit) between continuing and discontinued operations, the components from
continuing operations, a reconciliation of the U.S. statutory income tax
benefit to the actual income tax benefit, and the components and items
comprising net deferred income tax liability.
CREDIT FOR INCOME TAXES 2001 2000 1999
----------------------- -------- -------- --------
(IN THOUSANDS)
Continuing operations.. $(12,145) $(12,047) $ (6,701)
Discontinued operations (7,185) (2,577) (4,039)
-------- -------- --------
$(19,330) $(14,624) $(10,740)
======== ======== ========
COMPONENTS OF INCOME TAX PROVISION (BENEFIT)
- --------------------------------------------
2001 2000 1999
--------------------------- --------------------------- -------------------------
CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL
------- -------- -------- ------- -------- -------- ------- -------- -------
(IN THOUSANDS)
Federal................... $(12) $(11,139) $(11,151) $(1,999) $ (9,654) $(11,653) $(2,036) $(4,190) $(6,226)
State, local and foreign.. 219 (1,213) (994) 650 (1,044) (394) 206 (681) (475)
---- -------- -------- ------- -------- -------- ------- ------- -------
$207 $(12,352) $(12,145) $(1,349) $(10,698) $(12,047) $(1,830) $(4,871) $(6,701)
==== ======== ======== ======= ======== ======== ======= ======= =======
RECONCILIATION OF INCOME TAX BENEFIT 2001 2000 1999
- ------------------------------------ -------- -------- --------
(IN THOUSANDS)
Statutory U.S. tax.......................................... $(12,341) $(11,310) $ (6,395)
State income tax benefit, net of federal tax................ (733) (646) (559)
Tax benefit from extraterritorial income exclusion.......... (1,330) (315) --
Foreign affiliates (earnings) losses with no U.S. tax effect 72 (588) (164)
Other....................................................... 231 812 417
Increase in valuation allowance............................. 1,956 -- --
-------- -------- --------
$(12,145) $(12,047) $ (6,701)
======== ======== ========
COMPONENTS OF NET DEFERRED INCOME TAX LIABILITY 2001 2000 1999
- ----------------------------------------------- -------- -------- --------
(IN THOUSANDS)
Deferred income tax assets.................................. $(59,766) $(49,816) $(37,636)
Less: Valuation allowance................................... 1,956 -- --
-------- -------- --------
Net deferred income tax assets.............................. (57,810) (49,816) (37,636)
Deferred income tax liabilities............................. 68,323 79,588 81,446
-------- -------- --------
Net deferred income tax liability........................... $ 10,513 $ 29,772 $ 43,810
======== ======== ========
ITEMS COMPRISING NET DEFERRED INCOME TAX LIABILITY 2001 2000 1999
- -------------------------------------------------- -------- -------- --------
(IN THOUSANDS)
Property, plant & equipment -- principally depreciation..... $ 29,924 $ 35,134 $ 42,461
Alternative minimum tax credit.............................. (7,745) (7,745) (7,745)
Accrued expenses............................................ (1,352) (825) (1,136)
Inventories................................................. 19,576 26,301 24,505
Intangible assets........................................... -- (6,981) 933
Allowances for accounts receivable.......................... (2,118) (1,615) (1,311)
Employee benefits........................................... 2,263 1,914 (165)
Net operating loss carryforward............................. (30,159) (15,086) (10,728)
Impairment of unconsolidated affiliates..................... (1,956) -- --
Valuation allowance......................................... 1,956 -- --
Other -- net................................................ 124 (1,325) (3,004)
-------- -------- --------
$ 10,513 $ 29,772 $ 43,810
======== ======== ========
39
Cone recorded a valuation allowance during 2001 on the deferred tax assets
that resulted from the non-cash impairment charges totaling $5.6 million
related to Cone's investment in certain of its unconsolidated affiliates,
Ashima and CIPSA. The impairment charges will result in future deductible
capital losses; however, Cone does not expect to have taxable capital gains in
the future to realize these tax deductible losses. Thus, Cone has established a
valuation allowance on the resulting deferred tax assets.
As of December 30, 2001, Cone has available for income tax purposes
approximately $88.7 million in federal net operating loss carryforwards that
may be used to offset future taxable income. These loss carryforwards expire in
fiscal years 2018 through 2021. Cone also has alternative minimum tax credit
carryforwards of $7.7 million that are available to reduce future regular
income taxes over an indefinite period.
NOTE 12. SUPPLEMENTAL CASH FLOW INFORMATION
2001 2000 1999
-------- ------- -------
(IN THOUSANDS)
Cash Payments For:
Interest............................................................... $ 18,073 $18,051 $13,815
======== ======= =======
Income tax refunds..................................................... $ (249) $ (74) $ (844)
======== ======= =======
Noncash Financing Activities, Stock dividend -- Class A Preferred Stock $ 3,881 $ 2,845 $ 2,797
======== ======= =======
Net Cash Provided By (Used In) Discontinued Operations:
Net Loss............................................................... $(13,341) $(5,003) $(7,501)
Depreciation........................................................... 149 144 137
Loss on sale and writedown of property, plant and equipment............ 310 56 --
Amortization........................................................... 4 4 4
Change in operating assets and liabilities:
Accounts receivable................................................ 6,125 (595) (9,147)
Inventories........................................................ 27,194 (2,485) (437)
Other assets....................................................... 2,580 90 (112)
Accounts payable and other accrued expenses........................ (28,303) 8,006 17,643
-------- ------- -------
$ (5,282) $ 217 $ 587
======== ======= =======
NOTE 13. CAPITAL STOCK
All Class A Preferred Stock is held by Cone's 1983 Employee Stock Ownership
Plan ("ESOP") except shares held by a former participant who elected to receive
shares in a distribution of account balances. Class A Preferred Stock is
nonvoting, except as otherwise required by law, and is senior in dividend
preference to all other classes of capital stock. Class A Preferred Stock has a
liquidation preference senior to all other classes of capital stock of $100 per
share plus accrued and unpaid dividends.
Holders of Class A Preferred Stock are entitled to receive dividends on the
31st day of March of each year from funds legally available therefor when, as
and if declared by the Board of Directors. The dividend rate is established as
of April 1 for the succeeding dividend period and is determined by an
independent investment bank or appraisal firm selected by the Board of
Directors, subject to confirmation by the ESOP trustee. The dividend rate is
determined annually and is that rate required to make the fair market value of
Class A Preferred Stock equal to its original par value. The dividend rate
cannot exceed 13% per annum or be less than 7% per annum. Dividends on Class A
Preferred Stock are cumulative, but accumulated dividends do not bear interest.
Dividend rates declared for Class A Preferred Stock were 12.00%, 11.75% and
8.0%, respectively for the dividend periods ending March 31, 2002, 2001 and
2000.
Dividends on the Class A Preferred Stock are, at the option of the Board of
Directors, paid in cash or by delivery of shares of Cone's Class A Preferred
Stock, Common Stock or by delivery of other "qualifying employer securities" of
Cone as that term is used, on the date of such delivery, in Section 407 of the
Employee Retirement
40
Income Security Act of 1974, as amended ("ERISA") (or the corresponding section
of any future law) or by a combination of the foregoing; provided, however,
that on the date of delivery the fair market value of any stock or qualifying
employer securities used to pay dividends shall be equal to or greater than the
amount of dividends paid therewith. All dividends paid to date on the Class A
Preferred Stock have been paid in additional shares of Class A Preferred Stock
or cash.
Class A Preferred Stock held by the 1983 ESOP may be redeemed, in whole or
in part, at the option of Cone by a vote of the Board of Directors, at a price
equal to the greater of $100 per share or the fair market value thereof, plus
dividends accrued and unpaid thereon to the date fixed for redemption. The
redemption price shall be paid in cash or by delivery of shares of Cone's Class
A Preferred Stock, Common Stock or by delivery of other qualifying employer
securities or a combination of the foregoing, at Cone's option; provided,
however, that on the date of delivery the fair market value of any stock or
other qualifying employer securities used to pay the redemption price shall be
equal to or greater than the redemption price (or portion thereof) paid
therewith. The fair market value of Class A Preferred Stock for redemption
purposes was determined to be $99.99 per share at December 30, 2001.
Purchases of Class A Preferred Stock by the ESOP may be necessary to provide
all or part of the pension due under Cone's defined benefit plans pursuant to
the floor-offset arrangement in connection with the ESOP and to make
distributions due to retired or terminated employees. The ESOP is obligated to
purchase shares of Class A Preferred Stock from participants and former
participants of these plans in accordance with the terms and conditions of the
plans, the trust agreements and liquidity agreements thereunder. To the extent
the ESOP has insufficient liquidity to make these purchases, it may require
Cone to repurchase shares of Class A Preferred Stock. It is within the control
of Cone to satisfy the liquidity needs of the ESOP through cash contributions,
cash dividends or optional repurchases of the Class A Preferred Stock.
Cone is authorized to issue Class B Preferred Stock but it has no Class B
Preferred Stock outstanding nor does it have present plans to issue such
shares. The Restated Articles of Incorporation provide that the Board of
Directors may determine the preferences, limitations and relative rights of the
Class B Preferred Stock, including voting rights, which could adversely affect
the voting rights of holders of Common Stock. Any Class B Preferred Stock that
is authorized and issued shall be junior to Class A Preferred Stock in
accordance with the terms of the Restated Articles of Incorporation.
Holders of Common Stock are entitled ratably, share for share, to dividends,
when, as and if declared by the Board of Directors, out of funds legally
available. Common Stock is junior to Class A Preferred Stock with respect to
dividend preference and may be junior to Class B Preferred Stock depending upon
the relative preferences, limitations and relative rights the Board of
Directors may determine upon issuance of such Class B Preferred Stock.
The Common Stock is junior in liquidation preference to the Class A
Preferred Stock and may be junior to the Class B Preferred Stock depending upon
the relative preferences, limitations and rights the Board of Directors may
establish upon issuance of Class B Preferred Stock. After payment in
liquidation has been made to the senior capital stock, the remaining assets of
Cone would be distributed pro rata among the holders of Common Stock equally on
a per share basis. Holders of Common Stock are entitled to one vote per share
on all matters submitted to a vote of holders of Common Stock.
On October 14, 1999, Cone's Board of Directors amended Cone's Restated
Articles of Incorporation creating a series of Class B Preferred Stock (the
"Class B Preferred Stock (Series A)"). The number of shares constituting the
Class B Preferred Stock (Series A) is 500,000. The Class B Preferred Stock
(Series A) is junior to the Class A Preferred Stock and senior to Common Stock
in dividends or distributions of assets upon liquidation, dissolution or
winding up of Cone. Dividends on the Class B Preferred Stock (Series A) are
cumulative and accrue from the quarterly dividend payment date. Each share of
Class B Preferred Stock (Series A) entitles the holder thereof to 100 votes on
all matters submitted to a vote of shareholders of Cone. These shares were
reserved under the Shareholder Rights Plan.
On October 14, 1999, Cone's Board of Directors adopted a new Shareholder
Rights Plan (the "Plan"). Under the terms of the Plan, Cone common stock
acquired by a person or a group buying 20% or more of Cone's common stock would
be diluted, except in transactions approved by the Board of Directors.
41
Under the terms of the Plan, Cone's Board of Directors declared a dividend
distribution of one right (a "Right") for each outstanding share of Cone's
common stock paid on November 1, 1999, to shareholders of record at the close
of business on October 25, 1999. Each Right entitles the registered holder to
purchase from Cone a unit (a "Unit") consisting of one one-hundredth of a share
of Class B Preferred Stock (Series A) at a purchase price of $30 per Unit.
Under the Plan, the Rights detach and become exercisable upon the earlier of
(i) 10 days following public announcement that a person or group of affiliated
or associated persons has acquired, or obtained the right to acquire,
beneficial ownership of 20% or more of the outstanding shares of Cone's common
stock, or (ii) 10 business days following the commencement of, or first public
announcement of the intent of a person or group to commence, a tender offer or
exchange offer that would result in a person or group beneficially owning 20%
or more of such outstanding shares of Cone's common stock. The exercise price,
the kind and the number of shares covered by each right are subject to
adjustment upon the occurrence of certain events described in the Plan.
If Cone is acquired in a merger or consolidation in which Cone is not the
surviving corporation, or Cone engages in a merger or consolidation in which
Cone is the surviving corporation and Cone's common stock is changed or
exchanged, or more than 50% of Cone's assets or earning power is sold or
transferred, the Rights entitle a holder (other than the acquiring person or
group) to buy, at the exercise price, stock of the acquiring company having a
market value equal to twice the exercise price. Following an acquisition by any
person or group of 20% or more of Cone's common stock, but prior to the
acquisition by such person or group of 50% or more of the outstanding common
stock, Cone's Board of Directors may exchange the Rights (other than the Rights
owned by such person or group), in whole or in part, at an exchange ratio of
one share of Cone's common stock, or one one-hundredth of a share of Preferred
Stock, per Right.
The Rights expire on October 13, 2009, and are redeemable upon action by the
Board of Directors at a price of $0.01 per right at any time before they become
exercisable.
NOTE 14. STOCK PLANS
The Amended and Restated 1992 Stock Plan is scheduled to expire on March 16,
2002.
On May 8, 2001, the shareholders approved the 2001 Stock Incentive Plan that
permits the granting of awards for up to 2,000,000 shares of Common Stock.
Types of awards may include (1) stock options, including incentive stock
options; (2) stock appreciation rights; (3) restricted stock; (4) deferred
shares, performance shares and performance units; and (5) other stock-based
awards. Awards under this plan have a term up to ten years.
Options to purchase 498,500 shares of common stock were awarded under the
2001 Stock Incentive Plan during 2001.
Cone has in effect the 1994 Stock Option Plan for Non-Employee Directors,
which allows the grant of options to purchase an aggregate of 100,000 shares of
Common Stock. A grant of an option to purchase 1,000 shares is issued on the
fifth business day after each annual meeting to each of the non-employee
directors. The option price is the last reported sale price on the New York
Stock Exchange composite tape on the date of grant. Options granted under the
1994 Plan are nonqualified stock option grants with a term of seven years.
On May 9, 2000, Cone's stockholders adopted, as of March 7, 2000, the 2000
Stock Compensation Plan for Non-Employee Directors. An aggregate of 300,000
shares of Common Stock are available for grant under the plan. Each eligible
director is granted on a quarterly basis, either shares or equivalent deferred
stock units as compensation for director's fees earned as a retainer for
serving as a director in that period and as fees for attendance at regular or
special meetings of the Board of Directors or any committee of the Board. The
election to receive deferred stock units is effective on an annual basis. The
number of shares or deferred stock units is determined by the fair market value
(average of highest and lowest prices on the New York Stock Exchange composite
tape) of the Common Stock on the fifth trading day after earnings are announced
for the most recently ended fiscal quarter.
42
Cone applies Accounting Principles Board Opinion Number 25, "Accounting for
Stock Issued to Employees" ("APB 25") and related Interpretations in accounting
for these plans which requires compensation expense for Cone's options to be
recognized only if the market price of the underlying stock exceeds the
exercise price on the date of grant. Accordingly, Cone has not recognized
compensation expense for any of its options granted.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires pro forma
disclosures for option grants when accounting for stock-based compensation
plans in accordance with APB 25. The pro forma effects are determined as if
compensation costs were recognized using a fair value based accounting method.
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions: risk-free interest rate of 4.00% for 2001 and 6.00% for 2000 and
1999; expected lives of eight years for 1992 Plan options, and six years for
1994 Plan options and for 2001 Plan options; expected volatility of 56% for
2001, 47% for 2000 and 41% for 1999; and a zero percent dividend yield.
The pro forma effects on net loss and loss per share of options granted
after December 31, 1994 are as follows:
2001 2000 1999
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Reported net loss............................ $(36,456) $(25,269) $(19,072)
Pro forma net loss........................... (37,076) (25,921) (19,644)
Reported loss per share -- basic and diluted. $ (1.59) $ (1.14) $ (0.87)
Pro forma loss per share -- basic and diluted (1.61) (1.17) (0.89)
SFAS 123 requires pro forma disclosures only for options granted after
December 31, 1994; therefore, the pro forma amounts for compensation expense
may not be representative of the pro forma earnings impact upon future years.
A reconciliation of Cone's stock option activity and related information
follows:
2001 2000 1999
--------------------- --------------------- ---------------------
WEIGHTED- WEIGHTED- WEIGHTED-
NUMBER OF AVERAGE NUMBER OF AVERAGE NUMBER OF AVERAGE
OPTIONS EXERCISE OPTIONS EXERCISE OPTIONS EXERCISE
(THOUSANDS) PRICE (THOUSANDS) PRICE (THOUSANDS) PRICE
----------- --------- ----------- --------- ----------- ---------
Outstanding -- beginning of year...... 1,756 $ 7.30 1,891 $8.39 1,740 $ 9.54
Granted............................... 827 1.29 348 4.35 469 4.79
Exercised............................. (1) 1.42 (9) 4.44 (62) 5.24
Forfeited............................. (197) 6.16 (438) 9.78 (256) 10.43
Expired............................... (5) 12.88 (36) 6.50 -- --
------ ------ ------
Outstanding -- end of year............ 2,380 $ 5.30 1,756 $7.30 1,891 $ 8.39
====== ====== ====== ===== ====== ======
Exercisable at end of year............ 1,262 $ 7.53 950 $9.28 1,066 $10.70
====== ====== ====== ===== ====== ======
Weighted-average fair value of options
granted during year................. $ 1.60 $ 2.65 $ 2.71
====== ====== ======
The following table summarizes information about stock options outstanding
at December 30, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------- ---------------------
WTD. AVG
NUMBER REMAINING WTD. AVG. NUMBER WTD. AVG.
OUTSTANDING CONTRACT EXERCISE EXERCISABLE EXERCISE
RANGE OF EXERCISE PRICES (THOUSANDS) LIFE PRICE (THOUSANDS) PRICE
------------------------ ----------- --------- --------- ----------- ---------
$ 1-5.......... 1,686 8.57 $ 2.99 593 $ 3.62
5-9.......... 343 5.28 7.99 318 7.99
9-13......... 177 2.81 11.89 177 11.89
13-16......... 174 1.10 15.63 174 15.63
----- -----
2,380 7.12 5.30 1,262 7.53
===== =====
43
NOTE 15. LEASES
Cone has various leases accounted for as operating leases. Rent expense was
$4.4 million, $4.0 million and $3.6 million for 2001, 2000 and 1999,
respectively. Future minimum rental payments required under lease agreements
for the next five years are $2.5 million for 2002, $2.2 million for 2003, $2.0
million for 2004, $1.8 million for 2005 and $1.8 million for 2006. Aggregate
future minimum rental payments total $17.5 million.
NOTE 16. CONTINGENCIES
Cone and its subsidiaries, from time to time, are involved in legal
proceedings and claims arising in the ordinary course of business. Although
there can be no assurance as to the ultimate disposition of these matters,
management believes that the probable resolution of such contingencies will not
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 December 30,
2001, no significant litigation existed.
NOTE 17. LOSS PER SHARE
The following table sets forth the computation of basic and diluted loss per
share ("EPS"):
2001 2000 1999
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Loss from continuing operations................................... $(23,115) $(20,266) $(10,533)
Preferred stock dividends......................................... (4,140) (3,853) (3,047)
-------- -------- --------
Loss from continuing operations available to common stockholders.. (27,255) (24,119) (13,580)
Loss from discontinued operations................................. (13,341) (5,003) (7,501)
Cumulative effect of accounting change............................ -- -- (1,038)
-------- -------- --------
Basic EPS -- loss available to common stockholders................ (40,596) (29,122) (22,119)
Effect of dilutive securities..................................... -- -- --
-------- -------- --------
Diluted EPS -- loss available to common stockholders after assumed
conversions..................................................... $(40,596) $(29,122) $(22,119)
======== ======== ========
Determination of shares:
Weighted-average shares........................................... 25,590 25,496 25,462
Contingently issuable (unvested restricted shares)................ (8) (15) (65)
-------- -------- --------
Basic EPS -- weighted-average shares.............................. 25,582 25,481 25,397
Effect of dilutive securities..................................... -- -- --
-------- -------- --------
Diluted EPS -- adjusted weighted-average shares after assumed
conversions..................................................... 25,582 25,481 25,397
======== ======== ========
Loss per share -- basic and diluted:
Loss from continuing operations................................... $ (1.07) $ (0.94) $ (0.53)
Loss from discontinued operations................................. (0.52) (0.20) (0.30)
Cumulative effect of accounting change............................ -- -- (0.04)
-------- -------- --------
Loss per share -- basic and diluted............................... $ (1.59) $ (1.14) $ (0.87)
======== ======== ========
The number of potentially dilutive common stock options outstanding using
the treasury stock method during 2001, 2000, and 1999 were approximately
148,000, 79,000 and 60,000, respectively, but were not included in the
computation of diluted loss per share because to do so would have been
antidilutive. (See Note 14, "Stock Plans," of the Notes to Consolidated
Financial Statements for information about stock options outstanding at
December 30, 2001.)
44
NOTE 18. SEGMENT INFORMATION AND MAJOR CUSTOMERS
Cone has three principal business segments based upon organizational
structure: 1) Denim; 2) Commission Finishing and 3) Decorative Fabrics.
In 2001, Cone exited the khaki segment and sold the John Wolf operating
division, a component of its decorative fabrics segment. Accordingly, Cone has
reflected the operating results of these operations in discontinued operations.
(See Note 22, "Discontinued Operations," of the Notes to Consolidated Financial
Statements.)
The denim segment includes denim fabrics in various styles, finishes and
weights. The commission finishing segment provides custom printing and plain
shade dyeing services. In December 2000, Cone announced the closing of the
Raytex plant, part of its commission finishing segment, which was completed in
the first quarter of 2001. Sales for the Raytex plant were $2.0 million, $16.9
million and $27.7 million for 2001, 2000 and 1999, respectively. Operating
results for the Raytex plant were a loss of $0.9 million, $6.7 million and a
loss of less than $0.1 million for 2001, 2000 and 1999, respectively. The
decorative fabrics segment includes the design and distribution of decorative
fabrics for the home furnishings industry.
The percentages of net sales to foreign customers were 38.6%, 34.0% and
28.7% in 2001, 2000 and 1999, respectively. Cone has one denim customer that
accounted for more than 10% of net sales. Sales to this customer, as a
percentage of net sales, were 37.1%, 38.3% and 35.3% in 2001, 2000 and 1999,
respectively. This customer had an outstanding accounts receivable balance with
Cone, including amounts accounted for under the A/R Securitization Facility
with GECC, of approximately $18.5 million and $32.6 million at December 30,
2001 and December 31, 2000, respectively. Cone has not incurred any losses
related to this customer's accounts receivable.
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 of unconsolidated affiliates
is included in the denim segment. Restructuring and impairment of asset
expenses, inventory charges and facility consolidation charges under Cone's
Reinvention Plan, unallocated expenses, interest, income tax benefits and the
cumulative effect of an accounting change are not included in segment operating
income (loss). Segment identifiable assets include investments in
unconsolidated affiliates and pension assets. Denim includes investments in
unconsolidated affiliates. Pension assets are included in each segment. Assets
in the "Other" segment include cash, income taxes, administrative facilities,
deferred charges, miscellaneous receivables and assets of discontinued
operations. Unallocated expenses include certain legal expenses, bank fees and
fees and discounts on the sale of accounts receivable. Geographic sales dollars
are determined generally based on the ultimate destination of the fabric.
Sales, income (loss) from operations, identifiable assets, depreciation and
amortization, capital expenditures and geographic sales information for Cone's
operating segments are as follows:
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
NET SALES
Denim.................... $352,013 $434,609 $408,968
Commission Finishing..... 68,276 79,933 94,707
Decorative Fabrics....... 41,842 53,023 45,005
Yarn-Dyed Products....... -- 10 17,149
Other.................... 303 810 1,453
-------- -------- --------
462,434 568,385 567,282
Less Intersegment Sales.. 12,526 15,782 18,412
-------- -------- --------
$449,908 $552,603 $548,870
======== ======== ========
45
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
INCOME (LOSS) FROM OPERATIONS
Denim................................................................... $ 13,369 $ 35,059 $ 26,490
Commission Finishing.................................................... 2,317 (6,643) (6,874)
Decorative Fabrics...................................................... 755 2,315 4,249
Yarn-Dyed Products...................................................... -- (60) (5,625)
Other................................................................... (495) 295 (628)
Unallocated Expenses.................................................... (3,606) (2,552) (4,915)
-------- -------- --------
12,340 28,414 12,697
Reinvention Plan -- Inventory Charges and Facility Consolidation Charges (7,489) -- --
Restructuring and Impairment of Assets.................................. (19,939) (38,500) (16,017)
-------- -------- --------
(15,088) (10,086) (3,320)
Less Equity in Earnings of Unconsolidated Affiliates.................... 177 2,716 1,684
-------- -------- --------
(15,265) (12,802) (5,004)
OTHER EXPENSE -- NET...................................................... 20,172 22,227 13,914
-------- -------- --------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAX BENEFIT AND EQUITY
IN EARNINGS OF UNCONSOLIDATED AFFILIATES................................ $(35,437) $(35,029) $(18,918)
======== ======== ========
IDENTIFIABLE ASSETS
Denim................................................................... $234,896 $275,376 $273,339
Commission Finishing.................................................... 50,613 53,949 95,213
Decorative Fabrics...................................................... 28,383 49,941 49,741
Yarn-Dyed Products...................................................... 207 288 16,533
Other................................................................... 20,280 43,662 37,971
-------- -------- --------
$334,379 $423,216 $472,797
======== ======== ========
DEPRECIATION AND AMORTIZATION
Denim................................................................... $ 13,094 $ 13,298 $ 13,322
Commission Finishing.................................................... 4,091 6,623 8,131
Decorative Fabrics...................................................... 2,262 2,391 2,197
Yarn-Dyed Products...................................................... -- -- 734
Other................................................................... 1,245 1,541 1,943
-------- -------- --------
$ 20,692 $ 23,853 $ 26,327
======== ======== ========
CAPITAL EXPENDITURES
Denim................................................................... $ 4,026 $ 4,677 $ 5,158
Commission Finishing.................................................... 1,138 2,999 4,502
Decorative Fabrics...................................................... 709 373 977
Yarn-Dyed Products...................................................... -- -- 932
Other................................................................... 1,154 1,719 1,095
-------- -------- --------
$ 7,027 $ 9,768 $ 12,664
======== ======== ========
GEOGRAPHIC SALES INFORMATION
United States........................................................... $276,339 $364,873 $391,498
Belgium................................................................. 72,036 90,437 73,377
North and South America -- excluding U.S................................ 97,036 73,438 49,843
Other................................................................... 4,497 23,855 34,152
-------- -------- --------
$449,908 $552,603 $548,870
======== ======== ========
46
NOTE 19. FINANCIAL INSTRUMENTS
Cone utilizes derivative financial instruments to manage risks associated
with changes in cotton prices, interest rates and foreign exchange rates.
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 the results of
operations and subsequently reclassified into results of operations when the
forecasted transactions being hedged affect results of operations. At December
30, 2001, Cone recorded in accumulated other comprehensive income (loss) cotton
derivative gains, net of deferred tax benefits, of $0.3 million. Gains of $3.0
million, $1.7 million and $4.0 million were credited to cost of goods sold in
2001, 2000 and 1999, respectively. The ineffective portion of derivative gains
and losses is reported in cost of goods sold immediately. Hedge ineffectiveness
for 2001 was immaterial.
Cone adopted 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 of 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. During 2001, Cone recognized a gain on the change in the fair
value of this derivative instrument of $2.7 million, which is reflected in the
"Other expense" caption in the consolidated statements of operations. Effective
October 4, 2001, the interest rate swap agreement was terminated for a total
cost of $50,000. Cone recognized a charge of $2.7 million in 2001, which is
reflected in the "Other expense" caption in the consolidated statements of
operations, for the write off of the swap's unamortized transition liability
that resulted from the adoption of SFAS No. 133.
The carrying amounts of cash, accounts receivable, certain other financial
assets, accounts payable and borrowings under the Revolving Credit Facility are
reasonable estimates of their fair value at December 30, 2001 and December 31,
2000.
The fair value of Cone's long-term debt, excluding borrowings under the
Revolving Credit Facility, is estimated based on the quoted market prices for
the same or similar issues or on the current rates offered for debt of the same
remaining maturities.
47
The carrying amount and estimated fair value of certain financial
instruments at December 30, 2001 and December 31, 2000 are as follows:
2001 2000
---------------- ----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
(IN THOUSANDS)
Interest Rate Swap Liability.. $ -- $ -- $ -- $(2,674)
Long-Term Debt................
Senior Note............... 27,155 27,311 28,946 28,913
8 1/8% Debentures......... 98,575 45,000 98,131 65,000
The fair value of the 8 1/8% Debentures was significantly lower than its
carrying value at the end of 2001 and 2000 as a result of increased market
spreads from treasury benchmarks for high yield debt and Cone's past operating
performance.
NOTE 20. RELATED PARTY TRANSACTIONS
Cone has various transactions in the normal course of business with its
unconsolidated affiliated companies. Cone purchases denim and yarn from Parras
Cone under a transfer pricing arrangement that is a part of the Commercial
Agreement between Parras Cone, Cone and its joint venture partner, CIPSA.
Purchases of denim and yarn from Parras Cone were $56.6 million, $70.1 million
and $71.2 million in 2001, 2000 and 1999, respectively. Cone received $1.0
million in management fees from Parras Cone in 2001, 2000 and 1999 for
production management, cotton buying, administrative support and engineering
services. In addition, Cone sold looms to Parras Cone in 2001 for $2.9 million,
the approximate net book value of the equipment at the time of sale. Cone also
paid $2.2 million, $2.7 million and $1.3 million in marketing fees to CIPSA in
2001, 2000 and 1999, respectively. In addition, a current member of the board
of directors of Cone owned $150,000 of Cone's 8 1/8% Debentures at December 31,
2000.
NOTE 21. RESTRUCTURING AND IMPAIRMENT OF ASSETS
In recent years, Cone has undertaken a number of restructuring activities to
concentrate on businesses in which it has a leadership position, to redeploy
human and capital resources to those core businesses, and to lower
manufacturing costs.
The restructuring and impairment of assets charges, before income taxes,
were $19.9 million, $38.5 million and $16.0 million in 2001, 2000 and 1999,
respectively.
2001
During the year 2001, Cone implemented its Reinvention Plan, which was an
entire assessment of how Cone competed in each of its businesses. The goal of
the Reinvention Plan was to significantly reduce cost and to reduce Cone's
investment in inventories and non-core assets. Reinvention Plan initiatives
included the consolidation of two denim manufacturing facilities into one, the
downsizing of sales and administrative staffs, aggressive inventory
liquidations and the sale of non-core assets. Inventory to be liquidated was
written down to its estimated net realizable value based on its disposal as a
closeout rather than a core product. Non-core asset values were reviewed and
adjusted to reflect the rapidly declining value of textile equipment available
for sale.
A by-product of the Reinvention Plan was the decision to sell the John Wolf
business unit and to exit khaki. Losses on these business units are reflected
in discontinued operations.
The restructuring and impairment charges, before income taxes, were $19.9
million for 2001, and related primarily to the denim segment. The Reinvention
Plan included:
. Non-cash charges for the impairment of property and equipment totaling
$9.3 million.
48
. Terminal leave pay and benefits for salaried employees totaling $3.5
million. The restructuring initiatives resulted in the reduction of the
workforce by 640 employees, primarily at Cone's corporate office and
the Rutherford County facilities.
. Recognition of a net pension curtailment loss of $0.9 million as a
result of freezing the benefits for salaried employees in the qualified
and nonqualified pension plans. (See Note 10, "Pensions and Other
Benefit Programs" of the Notes to Consolidated Financial Statements.)
. Non-cash impairment losses on its investments in Ashima and CIPSA,
totaling $5.6 million.
. Fees related to review of the workforce totaling $0.6 million.
2000
The market segment served by the Raytex plant, part of Cone's commission
finishing segment, deteriorated during late 1999 and early 2000. In December
2000, as a result of the adverse market positions, Cone announced the closing
of the Raytex plant that was completed in the first quarter of 2001.
During the fiscal year 2000, restructuring and impairment charges included:
. Non-cash charges of $24.0 million for the write-off of intangible
assets and $13.8 million for the write down of property, plant and
equipment at Cone's Raytex plant, part of the commission finishing
segment.
. Terminal leave pay and benefits for salaried employees totaling $1.0
million. The restructuring initiatives resulted in the reduction of the
workforce by approximately 47 employees at the Raytex plant.
The 2000 restructuring and impairment charges were partially offset by a
$0.3 million gain on the sale of Carlisle equipment originally reserved in the
1999 restructuring and impairment charges. Cone classified the gain as a
reversal of restructuring charges in the fiscal 2000 statement of operations.
1999
During the fourth quarter of fiscal year 1998, Cone implemented a
comprehensive reorganization program that included the reconfiguration and
closing of manufacturing facilities, downsizing and reorganization of sales and
administrative staffs to reduce overhead costs and the divestiture of
operations that management believed were inconsistent with Cone's strategic
objectives. Specifically, the comprehensive program included:
. Closing of the Salisbury plant and exit of production of fabrics for
the yarn-dyed segment at Cone facilities completed in May 1999. The
disposal of substantially all yarn-dyed shirting inventories by
year-end 1999.
. Downsizing and reorganization of the corporate administrative staff and
the combination of denim and sportswear sales and marketing which was
substantially completed in March 1999.
. Reconfiguration of denim manufacturing overhead structures
substantially completed in March 1999.
. Exit from ring-spun yarn manufacturing at Cone's Cliffside and Florence
plants completed in May 1999.
. The restructuring of the Carlisle plant reducing the workforce by
approximately 25% completed in September 1999.
The components of the 1999 restructuring charges included the establishment
of an $11.9 million reserve for severance benefit payments, consulting fees and
pension curtailment losses. Severance benefit payments consisted of terminal
leave pay for salary employees, severance pay for hourly employees and health
insurance. The consulting fees were primarily for review of the workforce,
design of severance packages and legal review to ensure that Cone was in
compliance with laws and regulations related to the selection of those persons
terminated. In addition, Cone also recognized non-cash charges for impairment
of property and equipment of $4.1 million at the Cliffside and Florence yarn
manufacturing facilities and the Carlisle screen printing facility. The
restructuring initiatives resulted in the reduction of approximately 1,600
employees.
49
OTHER MATTERS
Assets that have been sold, or are available for sale at December 30, 2001,
and are no longer in use, were written down to their estimated fair values less
costs to sell. Determination of fair market value was based upon in-house
engineering and purchasing appraisals and surveys with used equipment dealers.
Assets available for sale are included in the Property, Plant and Equipment
caption on the balance sheet in the carrying amount of $10.1 million and $11.8
million at December 30, 2001 and December 31, 2000, respectively. (See Note 6,
"Property, Plant and Equipment" of the Notes to Consolidated Financial
Statements.)
Cone is actively marketing the affected property and equipment currently
available for sale and will pursue the most expedient manner of effecting the
sale or disposition of such assets. However, the actual timing of the
disposition of these assets may vary as a result of market conditions.
No depreciation expense for these impaired assets subsequent to
classification as available for sale is included in the operating results for
the periods presented.
Other expenses related to the comprehensive reorganization program,
including losses on inventories of discontinued styles, of approximately $6.1
million, $1.9 million and $3.6 million in 2001, 2000 and 1999, respectively,
were charged to cost of goods sold as incurred. Inventory writedowns related to
discontinued styles are booked at expected net realizable value based upon the
style or category of inventory.
50
A roll-forward of the activity related to Cone's restructuring charges for
the years 1999, 2000 and 2001 follows:
CORPORATE &
TEXTILE SALISBURY &
PRODUCTS YARN-DYED RING GRANITE
GROUP RAYTEX PRODUCTS SPINNING CLOSING CARLISLE TOTAL
----------- ------ ----------- -------- ------- -------- --------
(IN THOUSANDS)
BALANCE, JANUARY 3, 1999
Terminal leave and related benefits $ 532 $ -- $ -- $ -- $ 49 $ -- $ 581
------- ----- ------- ----- ---- ------- --------
ADDITIONS:
Terminal leave and related benefits 4,326 -- 2,703 931 -- 1,022 8,982
Pension curtailment*............... 211 -- 72 17 -- 272 572
Consulting and legal fees*......... 727 -- -- -- -- 1,012 1,739
Shut-down expenses*................ -- -- 600 -- -- -- 600
------- ----- ------- ----- ---- ------- --------
5,264 -- 3,375 948 -- 2,306 11,893
------- ----- ------- ----- ---- ------- --------
DEDUCTIONS:
Terminal leave and related benefits (4,140) -- (2,512) (931) (49) (83) (7,715)
Pension curtailment*............... (211) -- (72) (17) -- (272) (572)
Consulting and legal fees*......... (727) -- -- -- -- (1,012) (1,739)
Shut-down expenses*................ -- -- (600) -- -- -- (600)
------- ----- ------- ----- ---- ------- --------
(5,078) -- (3,184) (948) (49) (1,367) (10,626)
------- ----- ------- ----- ---- ------- --------
Terminal leave and related benefits 718 -- 191 -- -- 939 1,848
------- ----- ------- ----- ---- ------- --------
BALANCE, JANUARY 2, 2000........... $ 718 $ -- $ 191 $ -- $ -- $ 939 $ 1,848
------- ----- ------- ----- ---- ------- --------
ADDITIONS:
Terminal leave and related benefits -- 964 -- -- -- -- 964
------- ----- ------- ----- ---- ------- --------
DEDUCTIONS:
Terminal leave and related benefits (718) -- (191) -- -- (939) (1,848)
------- ----- ------- ----- ---- ------- --------
Terminal leave and related benefits -- 964 -- -- -- -- 964
------- ----- ------- ----- ---- ------- --------
BALANCE, DECEMBER 31, 2000......... $ -- $ 964 $ -- $ -- $ -- $ -- $ 964
------- ----- ------- ----- ---- ------- --------
ADDITIONS:
Terminal leave and related benefits 3,535 -- -- -- -- -- 3,535
Pension curtailment*............... 888 -- -- -- -- -- 888
Consulting fees*................... 600 -- -- -- -- -- 600
------- ----- ------- ----- ---- ------- --------
5,023 -- -- -- -- -- 5,023
------- ----- ------- ----- ---- ------- --------
DEDUCTIONS:
Terminal leave and related benefits (2,896) (964) -- -- -- -- (3,860)
Pension curtailment*............... (888) -- -- -- -- -- (888)
Consulting fees*................... (600) -- -- -- -- -- (600)
------- ----- ------- ----- ---- ------- --------
(4,384) (964) -- -- -- -- (5,348)
------- ----- ------- ----- ---- ------- --------
Terminal leave and related benefits 639 -- -- -- -- -- 639
------- ----- ------- ----- ---- ------- --------
BALANCE, DECEMBER 30, 2001......... $ 639 $ -- $ -- $ -- $ -- $ -- $ 639
======= ===== ======= ===== ==== ======= ========
- -----------------
* Items expensed as incurred.
51
NOTE 22. DISCONTINUED OPERATIONS
On August 10, 2001, Cone sold substantially all of the assets, with the
exception of outstanding accounts receivable, of the John Wolf converted
fabrics business, a component of its decorative fabrics segment, to an
unrelated third party and exited the decorative fabrics converting business.
In connection with the sale and discontinuance of the converted fabrics
business, Cone recognized a loss of $6.4 million. This loss includes a charge
for terminal leave pay and benefits for salaried employees of $1.1 million and
lease termination charges of $0.2 million related to its leased office space in
New York. The discontinuance of the converted fabrics business resulted in the
reduction of Cone's workforce by 18 employees.
Based upon the weaknesses of the domestic khaki business, Cone's market
position in khaki, including the sustained losses and long-term outlook for
khaki fabrics produced in North America, Cone decided to exit its khaki
business in the fourth quarter of fiscal year 2001.
Cone will not have any significant continuing involvement in the operations
of businesses exited in fiscal 2001. Thus, the results of these businesses have
been reflected as discontinued operations and prior periods have been restated
accordingly.
Net sales and losses from discontinued operations were as follows:
2001 2000 1999
-------- ------- --------
(IN THOUSANDS)
Net Sales
John Wolf............................ $ 14,926 $24,268 $ 27,939
Khaki................................ 27,284 40,850 39,512
-------- ------- --------
$ 42,210 $65,118 $ 67,451
======== ======= ========
Pretax loss from discontinued operations
John Wolf............................ $ (4,648) $(3,957) $ (2,658)
Khaki................................ (9,481) (3,623) (8,882)
-------- ------- --------
(14,129) (7,580) (11,540)
Pretax loss on sale of John Wolf........ (6,397) -- --
Income tax benefit...................... 7,185 2,577 4,039
-------- ------- --------
Net loss from discontinued operations... $(13,341) $(5,003) $ (7,501)
======== ======= ========
Balance Sheet balances related to these discontinued operations at December
30, 2001 and December 31, 2000, are as follows:
2001 2000
---------------- -----------------
JOHN WOLF KHAKI JOHN WOLF KHAKI
--------- ------ --------- -------
Accounts receivable........................ $ 388 $5,001 $ 3,541 $ 7,973
Inventories................................ 3 1,767 13,015 20,949
Other assets............................... 2 1,028 26 3,586
Property, plant and equipment.............. 244 -- 987 --
------ ------ ------- -------
$ 637 $7,796 $17,569 $32,508
====== ====== ======= =======
Accounts payable and other accrued expenses $1,678 $ 176 $11,431 $18,726
====== ====== ======= =======
52
NOTE 23. QUARTERLY FINANCIAL DATA (UNAUDITED)
Certain amounts in the following tables have been restated for discontinued
operations in accordance with SFAS No. 144.
QUARTERS ENDED
--------------------------------------
APRIL 1, JULY 1, SEPT. 30, DEC. 30,
2001 2001 2001 2001
-------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales......................................................... $132,661 $121,728 $106,959 $ 88,560
Gross profit...................................................... 12,548 5,406 12,995 9,486
Income (loss) from continuing operations.......................... 3,150 (24,082) 4,891 776
Equity in earnings (losses) of unconsolidated affiliates.......... 349 223 (88) (307)
Loss from discontinued operations................................. (2,001) (5,497) (4,735) (1,108)
Net loss.......................................................... $ (2,903) $(26,465) $ (4,604) $ (2,484)
Loss available to common stockholders............................. $ (3,903) $(27,532) $ (5,677) $ (3,484)
Loss per share -- basic and diluted
Continuing Operations.......................................... $ (0.07) $ (0.86) $ (0.04) $ (0.10)
Discontinued Operations........................................ (0.08) (0.22) (0.18) (0.04)
-------- -------- -------- --------
$ (0.15) $ (1.08) $ (0.22) $ (0.14)
======== ======== ======== ========
Items previously reported in continuing operations now included in
discontinued operations:
Net sales...................................................... $ 14,874 $ 13,486 $ 6,075 $ --
Gross profit................................................... (1,015) (6,405) (1,939) --
Loss from operations........................................... (3,079) (8,457) (2,062) --
Weighted-average shares outstanding
Basic.......................................................... 25,518 25,557 25,595 25,637
Diluted........................................................ 25,518 25,557 25,595 25,637
Common stock prices
High........................................................... $ 4.00 $ 2.64 $ 1.83 $ 1.90
Low............................................................ $ 2.56 $ 1.11 $ 1.30 $ 1.50
QUARTERS ENDED
--------------------------------------
APRIL 2, JULY 2, OCT. 1, DEC. 31,
2000 2000 2000 2000
-------- -------- --------- --------
Net sales......................................................... $126,121 $143,765 $146,666 $136,051
Gross profit...................................................... 16,812 18,865 15,930 12,488
Income (loss) from continuing operations.......................... 6,404 8,809 7,649 (35,664)
Equity in earnings of unconsolidated affiliates................... 450 775 932 559
Loss from discontinued operations................................. (1,582) (1,300) (765) (1,356)
Net income (loss)................................................. $ (277) $ 1,526 $ 1,436 $(27,954)
Income (loss) available to common stockholders.................... $ (984) $ 431 $ 389 $(28,958)
Earnings (loss) per share -- basic and diluted
Continuing Operations.......................................... $ 0.02 $ 0.07 $ 0.05 $ (1.09)
Discontinued Operations........................................ (0.06) (0.05) (0.03) (0.05)
-------- -------- -------- --------
$ (0.04) $ 0.02 $ 0.02 $ (1.14)
======== ======== ======== ========
Items previously reported in continuing operations now included in
discontinued operations:
Net sales...................................................... $ 15,556 $ 17,784 $ 18,607 $ 13,171
Gross profit................................................... 289 727 1,617 692
Loss from operations........................................... (2,397) (1,970) (1,159) (2,054)
Weighted-average shares outstanding
Basic.......................................................... 25,425 25,432 25,441 25,507
Diluted........................................................ 25,425 25,648 25,649 25,507
Common stock prices
High........................................................... $ 4.69 $ 6.44 $ 7.31 $ 4.44
Low............................................................ $ 3.25 $ 3.88 $ 4.06 $ 2.38
53
The number of holders of record of Cone's Common Stock as of January 31,
2002 was 300.
No dividends have been declared on Common Stock since 1984, and Cone's
financing agreements currently prohibit it from paying dividends on its Common
Stock. Payment of cash dividends in the future will depend upon Cone's
financial condition, results of operations, current and anticipated capital
requirements, and other factors deemed relevant by Cone's Board of Directors.
In the second quarter of 2001, Cone implemented its Reinvention Plan. The
Reinvention Plan included recording restructuring and impairment of asset
charges of $19.7 million including severance and other costs of $3.3 million
($0.08 per share, net of tax), $9.3 million ($0.24 per share, net of tax) to
write-down property and equipment to its estimated net realizable value less
costs to sell, $0.6 million ($0.02 per share, net of tax) for consulting fees,
$0.9 million ($0.02 per share, net of tax) as a result of freezing the benefits
for salaried employees in the qualified and nonqualified pension plans, and
$5.6 million ($0.22 per share, net of tax) for the impairment of Cone's
investment in certain unconsolidated affiliates. Additionally, a charge of
$12.9 million ($0.33 per share, net of tax) was recorded in the second quarter
of 2001 in cost of goods sold to reflect write-down of certain inventory values.
In the third quarter of 2001, Cone recognized a $2.0 million ($0.05 per
share, net of tax) mark-to-market gain related to its interest rate swap
derivative instrument. The interest rate swap derivative instrument was
terminated during the fourth quarter of 2001, at which time the remaining
unamortized amount was written off in the amount of $2.1 million ($0.05 per
share, net of tax). (See Note 19, "Financial Instruments," of the Notes to
Consolidated Financial Statements.) In the fourth quarter of 2001, Cone
recognized an additional restructuring charge of $0.2 million ($0.01 per share,
net of tax) related to severance and other costs. (See Note 21, "Restructuring
and Impairment of Assets," of the Notes to Consolidated Financial Statements.)
In the third quarter of 2001, Cone sold substantially all of the assets of
the John Wolf converted fabrics business and reflected the operating results of
this unit as a discontinued operation. Proceeds from the sale were
approximately $5.3 million. Cone recognized a pre-tax loss of $6.4 million in
the third quarter of 2001 on the sale. In the fourth quarter of 2001, Cone
exited its khaki business. Accordingly, prior periods have been restated to
reflect discontinued operations for these exited businesses. In addition,
results of discontinued operations previously reported in Cone's quarterly
filings with the Securities and Exchange Commission have been provided for
purposes of reconciliation.
In the first quarter of 2000, Cone recognized a gain of $0.3 million on sale
of Carlisle equipment reserved in 1999. In the fourth quarter of 2000, Cone
recorded restructuring and impairment of asset charges of $38.8 million related
to severance and other costs of $1.0 million ($0.02 per share, net of tax) and
$37.8 million ($0.96 per share, net of tax) to write-down Raytex intangibles
and property and equipment to its estimated net realizable value less costs to
sell. Additionally, a charge of $1.9 million ($0.05 per share, net of tax) was
recorded in the fourth quarter of 2000 to reflect write-down of certain
inventory values. (See Note 21, "Restructuring and Impairment of Assets," of
the Notes to Consolidated Financial Statements.)
54
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to directors is presented under the heading "Election
of Directors" in Cone's definitive Proxy Statement prepared for the Annual
Meeting of Shareholders to be held on May 7, 2002, and is hereby incorporated
by reference. Information regarding executive officers is included as Item 4A
in Part I.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation is presented under the
heading "Executive Compensation" in Cone's definitive Proxy Statement prepared
for the Annual Meeting of Shareholders to be held on May 7, 2002, and is hereby
incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to beneficial ownership of Cone's voting securities
by each director and all officers and directors as a group, and by any person
known to beneficially own more than 5% of any class of voting security of Cone,
is presented under the heading "Security Ownership of Directors, Nominees and
Named Executive Officers" and "Security Ownership of Certain Beneficial Owners"
in Cone's definitive Proxy Statement prepared for the Annual Meeting of
Shareholders to be held on May 7, 2002, and is hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and related transactions
is presented under the headings "Compensation of Directors" in Cone's
definitive Proxy Statement prepared for the Annual Meeting of Shareholders to
be held on May 7, 2002, and is hereby incorporated by reference.
55
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) The following financial statements of the Registrant are incorporated by reference in Item 8 hereof:
Independent Auditor's Report
Consolidated Statements of Operations for the Years Ended December 30, 2001, December 31, 2000, and
January 2, 2000
Consolidated Balance Sheets as of December 30, 2001 and December 31, 2000
Consolidated Statements of Stockholders' Equity for the Years Ended December 30, 2001, December 31, 2000
and January 2, 2000
Consolidated Statements of Cash Flows for the Years Ended December 30, 2001, December 31, 2000 and
January 2, 2000
Notes to Consolidated Financial Statements
(a)(2) The following Financial Statement Schedules are presented on pages 57 through 58 hereto.
Report of Independent Auditor's relating to Schedule II
Schedule II--Valuation and Qualifying Accounts
All other schedules specified under Regulation S-X are omitted because they are not applicable, not required or
the information required appears in the Consolidated Financial Statements or Notes thereto.
(a)(3) Exhibits. Exhibits to this report are listed on the accompanying Index to Exhibits.
(b) Reports on Form 8-K
None
56
INDEPENDENT AUDITOR'S REPORT ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
Cone Mills Corporation
Greensboro, North Carolina
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The consolidated
supplemental Schedule II is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not a part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in our audits of the basic consolidated financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic consolidated financial statements taken as a whole.
/s/ McGladrey & Pullen, LLP
Greensboro, North Carolina
February 8, 2002
57
CONE MILLS CORPORATION AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 30, 2001, DECEMBER 31, 2000 AND JANUARY 2, 2000
(IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------------------------------- --------- ------------------- ---------- ---------
ADDITIONS
-------------------
BALANCE (1) (2)
AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ------------------------------------------------------- --------- ---------- ---------- ---------- ---------
DECEMBER 30, 2001
Valuation accounts deducted from the assets to which
they apply:
Provision for doubtful accounts.................. $5,050 $ 1,795 $ -- $ 1,145(c) $5,700
------ ------- ------ ------- ------
Reserve for inventory (b)........................ 5,837 12,880 -- 14,049 4,668
------ ------- ------ ------- ------
Restructuring:
Reserve for other restructuring charges
excluding fixed assets writedowns (b).............. 964 5,023 -- 5,348 639
------ ------- ------ ------- ------
DECEMBER 31, 2000
Valuation accounts deducted from the assets to which
they apply:
Provision for doubtful accounts.................. $5,050 $ 577 $ -- $ 577(c) $5,050
------ ------- ------ ------- ------
Reserve for inventory (b)........................ 7,576 1,358 -- 3,097 5,837
------ ------- ------ ------- ------
Restructuring:
Reserve for other restructuring charges
excluding fixed assets writedowns (b).............. 1,848 964 -- 1,848 964
------ ------- ------ ------- ------
JANUARY 2, 2000
Valuation accounts deducted from the assets to which
they apply:
Provision for doubtful accounts.................. $1,500 $ 1,938 $3,550(a) $ 1,938(c) $5,050
------ ------- ------ ------- ------
Reserve for inventory (b)........................ 6,948 1,230 -- 602 7,576
------ ------- ------ ------- ------
Restructuring:
Reserve for other restructuring charges
excluding fixed assets writedowns (b).............. 581 11,893 -- 10,626 1,848
------ ------- ------ ------- ------
(a) Represents doubtful accounts allowance carried over from Cone Receivables,
LLC.
(b) Represents reserves charged to costs and expenses.
(c) Represents bad debts charged off.
58
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).
*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.
*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.
59
EXHIBIT
NO. DESCRIPTION
- ------- ----------- -
*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.
*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 person 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.
*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.
60
EXHIBIT
NO. DESCRIPTION
- ------- ----------- -
*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.
*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.
*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.
*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.
61
EXHIBIT
NO. DESCRIPTION
- ------- ----------- -
*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.
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.
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.
*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.
*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.
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.
62
EXHIBIT
NO. DESCRIPTION
- ------- ----------- -
*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.
*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).
*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.
63
EXHIBIT
NO. DESCRIPTION
- -------- ----------- -
*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.
*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.
*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.
64
EXHIBIT
NO. DESCRIPTION
- -------- ----------- -
*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.
*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).
*10.24 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.
10.26.2 2002 Executive Incentive Compensation Plan.
21 Subsidiaries of the Registrant.
65
EXHIBIT
NO. DESCRIPTION
- ------- ----------- -
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 this Annual Report on Form 10-K.
**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 and schedules
included in this Annual Report on Form 10-K.
**99.1 Financial Statements of Parras Cone de Mexico, S.A. de C.V.
- --------
* Incorporated by reference to the statement or report indicated.
** To be filed by amendment.
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.
66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant had duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
CONE MILLS CORPORATION
Date: March 27, 2002 By: /S/ JOHN L. BAKANE
-------------------------
John L. Bakane
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/S/ DEWEY L. TROGDON Chairman of the Board March 27, 2002
- -----------------------------
(Dewey L. Trogdon)
/S/ JOHN L. BAKANE Director, President and Chief March 27, 2002
- ----------------------------- Executive Officer (Principal
(John L. Bakane) Executive Officer)
/S/ GARY L. SMITH Executive Vice President and March 27, 2002
- ----------------------------- Chief Financial Officer
(Gary L. Smith)
/S/ SAMIR M. GABRIEL Controller (Principal March 27, 2002
- ----------------------------- Accounting Officer)
(Samir M. Gabriel)
/S/ DORIS R. BRAY Director March 27, 2002
- -----------------------------
(Doris R. Bray)
/S/ MARVIN W. GOLDSTEIN Director March 27, 2002
- -----------------------------
(Marvin W. Goldstein)
/S/ HAYNES G. GRIFFIN Director March 27, 2002
- -----------------------------
(Haynes G. Griffin)
/S/ JEANETTE C. KIMMEL Director March 27, 2002
- -----------------------------
(Jeanette C. Kimmel)
/S/ DAVID T. KOLLAT Director March 27, 2002
- -----------------------------
(David T. Kollat)
/S/ MARC H. KOZBERG Director March 27, 2002
- -----------------------------
(Marc H. Kozberg)
/S/ CHARLES M. REID Director March 27, 2002
- -----------------------------
(Charles M. Reid)
/S/ JOHN W. ROSENBLUM Director March 27, 2002
- -----------------------------
(John W. Rosenblum)
/S/ CYRUS C. WILSON Director March 27, 2002
- -----------------------------
(Cyrus C. Wilson)
67