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Index to Exhibits - Pages 38 - 54
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 28, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Transition period from ___________ to ____________
Commission File Number 1-3634
CONE MILLS CORPORATION
(Exact name of registrant as specified in its charter)
North Carolina 56-0367025
-------------- ----------
(State or other jurisdiction) (I.R.S. Employer Identification No.)
804 Green Valley Road, Suite 300, Greensboro, N.C. 27408
- -------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 336-379-6220
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No__
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes __ No X
Number of shares of common stock outstanding as of November 12, 2003: 25,941,475
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CONE MILLS CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Page
Number
Item 1. Financial Statements
Consolidated Condensed Statements of Operations
Thirteen and Thirty-Nine weeks ended September 28, 2003 and
September 29, 2002 (Unaudited) .....................................3
Consolidated Condensed Balance Sheets
September 28, 2003 and September 29, 2002 (Unaudited)
and December 29, 2002 ..............................................4
Consolidated Condensed Statements of Cash Flows
Thirty-Nine weeks ended September 28, 2003 and
September 29, 2002 (Unaudited) .....................................5
Notes to Consolidated Condensed Financial Statements
(Unaudited) ........................................................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operation ......................21
Item 3. Quantitative and Qualitative Disclosures about Market
Risk ..............................................................34
Item 4 Controls and Procedures ...........................................34
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .................................................35
Item 3. Defaults Upon Senior Securities....................................35
Item 4. Submission of Matters to a Vote of Security Holders ...............35
Item 5. Other Information .................................................36
Item 6. Exhibits and Reports on Form 8-K ..................................36
PART I
Item 1.
CONE MILLS CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION AS OF SEPTEMBER 24, 2003)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
Thirteen Thirteen Thirty-Nine Thirty-Nine
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
September 28, September 29, September 28, September 29,
(in thousands, except per share data) 2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net Sales $ 82,829 $ 111,688 $ 281,429 $ 343,345
Cost of Goods Sold 77,087 94,625 251,518 294,710
---------------------------------------------------------------------
Gross Profit 5,742 17,063 29,911 48,635
Selling and Administrative 6,493 8,620 22,944 25,715
Restructuring and Impairment of Assets 123,431 - 124,197 -
---------------------------------------------------------------------
Income (Loss)from Operations ( 124,182 ) 8,443 ( 117,230 ) 22,920
---------------------------------------------------------------------
Other Income (Expense)
Interest income 54 77 184 206
Interest expense (contractual interest of $4,222
for the thirteen weeks ended September 28, 2003
and $11,699 for the thirty-nine weeks ended
September 28, 2003) ( 4,042 ) ( 3,712 ) ( 11,519 ) ( 12,014 )
Other ( 41 ) ( 433 ) ( 726 ) ( 1,439 )
Equity appreciation rights - - ( 4,117 ) -
---------------------------------------------------------------------
( 4,029 ) ( 4,068 ) ( 16,178 ) ( 13,247 )
---------------------------------------------------------------------
Income (Loss) From Operations Before Reorganization
Items, Income Tax Expense (Benefit) and Equity In
Earnings of Unconsolidated Affiliates ( 128,211 ) 4,375 ( 133,408 ) 9,673
Reorganization Items ( 3,519 ) - ( 3,519 ) -
---------------------------------------------------------------------
Income (Loss) from Operations before
Income Tax Expense (Benefit) and Equity in
Earnings of Unconsolidated Affiliates ( 131,730 ) 4,375 ( 136,927 ) 9,673
Income Tax Expense (Benefit) ( 13,877 ) 1,455 ( 15,817 ) 2,902
---------------------------------------------------------------------
Income (Loss) from Operations before
Equity in Earnings of Unconsolidated Affiliates ( 117,853 ) 2,920 ( 121,110 ) 6,771
Equity in Earnings of Unconsolidated Affiliates 548 923 2,035 1,605
---------------------------------------------------------------------
Net Income (Loss) $ ( 117,305 ) $ 3,843 $ ( 119,075 ) $ 8,376
---------------------------------------------------------------------
Income (Loss) Available to Common Stockholders $ ( 118,304 ) $ 2,806 $ ( 122,072 ) $ 5,229
---------------------------------------------------------------------
Earnings (Loss) per Share - Basic and Diluted $ ( 4.56 ) $ 0.11 $ ( 4.72 ) $ 0.20
---------------------------------------------------------------------
Weighted-Average Common Shares Outstanding
Basic 25,941 25,739 25,844 25,704
---------------------------------------------------------------------
Diluted 25,941 26,153 25,844 26,104
---------------------------------------------------------------------
See Notes to Consolidated Condensed Financial Statements.
3
CONE MILLS CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION AS OF SEPTEMBER 24, 2003)
CONSOLIDATED CONDENSED BALANCE SHEETS
September 28, September 29, December 29,
(in thousands, except share and par value data) 2003 2002 2002
- ---------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited) (Note)
ASSETS
Current Assets
Cash $ 7,540 $ 1,573 $ 1,654
Accounts receivable, less allowances:
2003, $3,400; 2002, $5,700 and $3,400 30,608 43,327 33,017
Inventories 58,848 45,578 48,848
Other current assets 2,211 2,656 1,630
---------------------------------------------------------
Total Current Assets 99,207 93,134 85,149
Investments in and Advances to Unconsolidated
Affiliates 49,998 53,010 53,613
Other Assets 1,155 27,496 30,423
Property, Plant and Equipment 17,790 152,198 149,077
---------------------------------------------------------
$ 168,150 $ 325,838 $ 318,262
---------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Liabilities Not Subject to Compromise
Current Liabilities
Current maturities of long-term debt $ - $ 56,262 $ 46,170
Accounts payable 12,412 28,730 25,589
Sundry accounts payable and accrued liabilities 10,402 22,869 25,448
---------------------------------------------------------
Total Current Liabilities 22,814 107,861 97,207
Long-Term Liabilities
Long-term debt - 98,908 99,019
Deferred income taxes - 13,486 14,884
Other liabilities 1,756 13,781 13,699
---------------------------------------------------------
Total Long-Term Liabilities 1,756 126,175 127,602
---------------------------------------------------------
Total Liabilities Not Subject to Compromise 24,570 234,036 224,809
Liabilities Subject to Compromise 229,875 - -
---------------------------------------------------------
Total Liabilities 254,445 234,036 224,809
Stockholders' Equity (Deficit)
Class A preferred stock - $100 par value; authorized
1,500,000 shares; issued and outstanding:
2003, 340,832 shares; 2002, 337,497 shares and
327,283 shares 34,083 33,750 32,728
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:
2003, 25,941,475 shares; 2002, 25,757,344
shares and 25,757,344 shares 2,594 2,576 2,576
Capital in excess of par 58,366 58,098 58,098
Retained earnings (deficit) ( 113,747 ) 6,349 9,279
Deferred compensation - restricted stock - ( 2 ) -
Accumulated other comprehensive loss ( 67,591 ) ( 8,969 ) ( 9,228 )
---------------------------------------------------------
Total Stockholders' Equity (Deficit) ( 86,295 ) 91,802 93,453
---------------------------------------------------------
$ 168,150 $ 325,838 $ 318,262
---------------------------------------------------------
Note: The balance sheet at December 29, 2002, has been derived from
the audited financial statements at that date.
See Notes to Consolidated Condensed Financial Statements.
4
CONE MILLS CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION AS OF SEPTEMBER 24, 2003)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Thirty-Nine Thirty-Nine
Weeks Ended Weeks Ended
September 28, September 29,
(in thousands) 2003 2002
- ---------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
CASH PROVIDED BY (USED IN) OPERATIONS $ ( 13,709 ) $ 30,080
------------------------------------
INVESTING
Proceeds from sale of property, plant and equipment 4,535 1,273
Capital expenditures ( 3,480 ) ( 3,932 )
------------------------------------
Cash provided by (used in) investing 1,055 ( 2,659 )
------------------------------------
FINANCING
Decrease in checks issued in excess of deposits ( 2,548 ) ( 3,982 )
Principal borrowings (payments) on long-term debt 23,668 ( 18,894 )
Proceeds from issuance of common stock 16 236
Dividends paid - Class A Preferred ( 91 ) ( 136 )
Redemption of Class A Preferred stock ( 2,505 ) ( 3,601 )
------------------------------------
Cash provided by (used in) financing 18,540 ( 26,377 )
------------------------------------
Net change in cash 5,886 1,044
Cash at Beginning of Period 1,654 529
Cash at End of Period $ 7,540 $ 1,573
------------------------------------
Supplemental Disclosures of Additional Cash Flow Information:
Cash payments (receipts) for:
Interest $ 9,235 $ 14,019
------------------------------------
Income taxes, net of refunds $ ( 10,882 ) $ 17
------------------------------------
Supplemental Schedule of Noncash Financing Activities:
Stock dividend - Class A Preferred Stock $ 3,860 $ 3,920
------------------------------------
See Notes to Consolidated Condensed Financial Statements.
5
CONE MILLS CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION AS OF SEPTEMBER 24, 2003)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 1. Petition for Relief under Chapter 11
On September 24, 2003 (the "Petition Date"), Cone Mills Corporation ("Cone") and
certain of its domestic subsidiaries (collectively, the "Debtors") filed
voluntary petitions for relief under Chapter 11 of the United States Bankruptcy
Code (the "Bankruptcy Code") in the United States Bankruptcy Court (the
"Bankruptcy Court") for the District of Delaware (Case Nos. 03-12943 through
03-12946). The Chapter 11 cases for the Debtors (the "Chapter 11 Cases") are
being jointly administered for procedural purposes only. The Debtors' foreign
subsidiaries, foreign joint venture entities and certain of its domestic
subsidiaries were not included in the petitions for relief under Chapter 11.
Cone has entered into a definitive sale agreement with WL Ross & Co., which is
subject to higher or better offers in accordance with Section 363 of Chapter 11
of the Bankruptcy Code. Under the agreement, WL Ross & Co. will purchase
substantially all of Cone's assets for $46 million in cash and will assume
Cone's outstanding Debtor-in-Possession ("DIP") loans and selected other
liabilities, positioning the purchaser as the "stalking horse" - or original
bidder - in accordance with Section 363 of Chapter 11 of the Bankruptcy Code.
Cone and its subsidiaries remain in possession of their assets and properties
and continue to operate their businesses and manage their properties as
debtors-in-possession pursuant to sections 1107(a) and 1108 of the Bankruptcy
Code. Since the Chapter 11 filing, Cone has obtained several orders from the
Bankruptcy Court which included authorization of 1) payment of pre-petition
employee salaries, wages, payroll taxes, certain employee benefits and related
expenses, 2) payment of certain pre-petition freight and customs claims and
amounts due in respect to Cone's offshore operations, 3) payment of a limited
amount of pre-petition claims of critical vendors, 4) the continuation of Cone's
Workers' Compensation Program and Policies and Other Insurance Policies, 5) the
continuation of Cone's centralized cash management system and bank accounts and
6) Cone to enter into securitization documents with and sell accounts receivable
up to $35 million to GE Capital Corporation ("GECC"). On November 6, 2003, the
court entered final orders relating to the above items.
On November 10, 2003, the Bankruptcy Court approved bid procedures agreed upon
by Cone and its creditors that will enable Cone to move forward with its
proposed sale of assets to WL Ross & Co. in accordance with Section 363 of
Chapter 11 of the Bankruptcy Code. The Bankruptcy Court set a January 23, 2004,
deadline for the submission of initial bids with an auction scheduled for
January 29, 2004. The WL Ross & Co. offer sets a floor for other bids to be
submitted during a Section 363 auction process approved by the court and is
subject to higher or better offers. In addition, the agreement calls for WL Ross
& Co. to receive a $1.8 million breakup fee if a higher or better bid for Cone
is accepted. The bidding procedures also allow parties interested in purchasing
only selected assets of Cone to do so as long as Cone will obtain greater
aggregate value from such offers than under the offer submitted by WL Ross & Co.
6
Cone's Receivables Purchase and Servicing Agreement (the "A/R Securitization
Facility"), as amended on September 23, 2003, provides Cone with incremental
liquidity during the initial phase of the bankruptcy process. The A/R
Securitization Facility provides for $35 million in post-petition financing from
GECC and has a maturity date of May 29, 2004. On September 26, 2003, the
Bankruptcy Court approved Cone's entering into and implementing the amended A/R
Securitization Facility as part of the "first day orders." Amounts borrowed
under the A/R Securitization Facility bear interest at the GECC Commercial Paper
Rate plus an applicable margin of 2.75%. In addition, there is a commitment fee
of .0625% on unused capacity under the facility. The A/R Securitization Facility
contains financial covenants requiring Cone to maintain minimum levels of
earnings before interest, taxes, depreciation, amortization, restructuring, and
reorganization items, as defined in the agreement. It also imposes certain
limits on capital expenditures and cash restructuring charges. As of September
28, 2003, Cone was in compliance with the terms under the A/R Securitization
Facility.
On November 10, 2003, Cone filed with the Bankruptcy Court a proposal to enter
into a $45 million DIP financing agreement with Bank of America and GECC. This
facility would provide Cone additional liquidity of approximately $10 - $12
million after paying off and eliminating the A/R Securitization Facility. The
hearing date to consider approval of the $45 million DIP financing is November
25, 2003.
The accompanying consolidated condensed financial statements have been prepared
on a going concern basis in accordance with American Institute of Certified
Public Accountants Statement of Position 90-7, "Financial Reporting by Entities
in Reorganization Under the Bankruptcy Code" ("SOP 90-7"). Cone's recent losses
and the Chapter 11 Cases raise substantial doubt about its ability to continue
as a going concern. Currently, it is not possible to predict the outcome of the
Chapter 11 Cases or their effect on Cone's business. If it is determined that
the liabilities subject to compromise in the Chapter 11 Cases exceed the fair
value of the assets available, most secured and unsecured claims are likely to
be settled at less than 100% of their face value and the equity interests of
Cone's current shareholders will have no value.
Substantially all unsecured liabilities as of the date of the Chapter 11 filings
are subject to compromise or other treatment under the proposed sale of
substantially all of the assets of Cone. In addition, based upon the value of
the "stalking horse" bid, the secured liabilities are also subject to
compromise. For financial reporting purposes, liabilities, the settlement of
which is dependent on the outcome of the Chapter 11 Cases, have been segregated
and classified as liabilities subject to compromise in the accompanying
consolidated condensed balance sheet. These liabilities consist primarily of
amounts outstanding under long-term debt, a minimum pension liability,
pre-petition accounts payable that may be affected by the outcome of the Chapter
11 Cases, accrued interest, other accrued expenses and certain deferred
liabilities. The accrued interest subject to compromise of $4.9 million is
primarily comprised of interest on Cone's 8-1/8% Debentures. As a result of
deteriorating liquidity, Cone failed to make its semi-annual Debenture interest
payment of $4.1 million due on September 15, 2003. In addition, Cone concluded
as a result of the Chapter 11 filing, its revised long-term outlook and the
value of the "stalking horse" bid that the Class A Preferred Stock was likely to
receive no recovery. This being the case, under the floor-offset arrangement of
the pension plan, the accumulated benefit obligation was greater than pension
plan assets, resulting in the recording of a minimum pension liability with a
corresponding charge to accumulated other comprehensive loss (a contra account
to stockholders' equity) in the amount of $56.8 million and a liability subject
to compromise of
7
$24.5 million for the unfunded accumulated benefit obligation as of September
28, 2003 (See Note 4 of the Notes to Consolidated Condensed Financial
Statements). The ultimate amount and settlement terms for liabilities subject to
compromise are subject to negotiation and court approval and are not presently
determinable. The principal categories of claims classified as liabilities
subject to compromise under the Chapter 11 Cases as of September 28, 2003 are
identified below:
(in thousands) 9/28/03
-------------
14.2% Senior Notes $ 21,455
12.0% Senior Notes 26,171
Revolving Credit Agreement 24,000
8-1/8% Debentures 100,000
-------------
Total Debt 171,626
Interest accrued on above debt 4,850
Accounts payable 13,051
Sundry payables and accrued interest 5,035
Minimum pension liability 24,461
Other liabilities 10,852
-------------
Total Liabilities Subject to Compromise $ 229,875
-------------
In accordance with SOP 90-7, professional fees associated with the Chapter 11
Cases are expensed as incurred and reported as reorganization items in the
accompanying consolidated condensed financial statements. Interest expense is
reported only to the extent that it will be paid during the Chapter 11
proceeding or that it is probable that it will be an allowed priority, secured
or unsecured claim. During the third quarter of 2003, Cone recognized a charge
of $3.5 million in reorganization items associated with the Chapter 11 Cases.
Approximately $2.2 million of the reorganization charge related to the non-cash
write-offs of both the unamortized discount on the 8-1/8% Debentures and the
deferred financing fees associated with the debt classified as subject to
compromise. In addition, Cone incurred $1.3 million for professional fees
related to the Chapter 11 Cases.
Condensed combined financial information for the Debtors are not presented
because such financial information would not provide relevant material
additional information to the users of the consolidated condensed financial
statements of Cone.
Note 2. Basis of Financial Statement Preparation
Financial Statement Preparation. Cone's consolidated condensed financial
statements for September 28, 2003 and September 29, 2002 are unaudited, but in
the opinion of management reflect all adjustments necessary to present fairly
the consolidated condensed balance sheets of Cone Mills Corporations and
Subsidiaries at September 28, 2003, September 29, 2002 and December 29, 2002,
and the related consolidated condensed statements of operations for the
respective thirteen and thirty-nine weeks ended September 28, 2003 and September
29, 2002 and cash flows for the thirty-nine weeks then ended. The accompanying
consolidated condensed financial statements have been prepared on a going
concern basis in accordance with SOP 90-7. The results are not necessarily
indicative of the results to be expected for the full year.
8
These statements should be read in conjunction with the audited financial
statements and related notes included in Cone's annual report on Form 10-K for
fiscal year 2002.
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. Because amounts for inventories under
the LIFO method are based on an annual determination of quantities as of
year-end, the inventories at September 28, 2003 and September 29, 2002 and
related consolidated condensed statements of operations for the thirteen and
thirty-nine weeks then ended are based on certain estimates relating to
quantities and cost as of the end of the fiscal year.
Stock-Based Employee Compensation. Cone has stock-based employee compensation
plans. Cone accounts for those plans under the recognition and measurement
principles of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and related Interpretations. No stock-based
employee compensation cost is reflected in net income, as all options granted
under those plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. The following table illustrates
the effect on net income (loss) and earnings (loss) per share if Cone had
applied the fair value recognition provisions of the Financial Accounting
Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation," to stock-based employee
compensation. SFAS No. 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.
Thirteen Thirteen Thirty-Nine Thirty-Nine
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
(in thousands, except per share data) 9/28/03 9/29/02 9/28/03 9/29/02
--------------------------------------------------------------------
Net income (loss), as reported $ ( 117,305 ) $ 3,843 $ ( 119,075 ) $ 8,376
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects ( 125 ) ( 156 ) ( 376 ) ( 467 )
--------------------------------------------------------------------
Pro forma net income (loss) $ ( 117,430 ) $ 3,687 $ ( 119,451 ) $ 7,909
--------------------------------------------------------------------
Earnings (loss) per share - basic and diluted:
Basic and diluted - as reported $ ( 4.56 ) $ 0.11 $ ( 4.72 ) $ 0.20
Basic - pro forma $ ( 4.57 ) $ 0.10 $ ( 4.74 ) $ 0.19
Diluted - pro forma $ ( 4.57 ) $ 0.10 $ ( 4.74 ) $ 0.18
Recent Accounting Pronouncements. In January 2003, the FASB issued
Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities,"
which clarifies the application of Accounting Research Bulletin No. 51,
Consolidated Financial Statements, relating to consolidation of certain
entities. First, FIN 46 will require identification of Cone's participation in
variable interests entities (VIE), which are defined as entities with a level of
invested equity that is not sufficient to fund future activities to permit them
to operate on a standalone basis, or whose equity holders lack certain
characteristics of a controlling financial interest. Then
9
for entities identified as VIE, FIN 46 sets forth a model to evaluate potential
consolidation based on an assessment of which party to the VIE, if any, bears a
majority of the exposure to its expected losses, or stands to gain from a
majority of its expected returns. FIN 46 also sets forth certain disclosures
regarding interests in VIE that are deemed significant, even if consolidation is
not required. FIN 46 will become effective for fourth quarter of 2003. Cone is
currently assessing the application of FIN 46 as it relates to its variable
interests.
Note 3. Securitization of Accounts Receivable
As of September 28, 2003 and September 29, 2002, the total amount of advances of
proceeds from the sale of receivables under the A/R Securitization Facility was
$23.2 million and $28.5 million, respectively. As of September 28, 2003 and
September 29, 2002, included in accounts receivable were deferred purchase price
receivables under the A/R Securitization Facility of $24.2 million and $34.6
million, respectively. Expenses incurred in connection with the sale of accounts
receivable were $0.3 million and $0.4 million for the thirteen weeks ended
September 28, 2003 and September 29, 2002, respectively, and $1.0 million and
$1.4 million for the thirty-nine weeks ended September 28, 2003 and September
29, 2002, respectively, and were included in "Other" in the Consolidated
Condensed Statements of Operations. The table below summarizes certain cash
flows under the securitization for the fiscal quarters ended September 28, 2003
and September 29, 2002:
Thirteen Thirteen Thirty-Nine Thirty-Nine
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
(in thousands) 9/28/03 9/29/02 9/28/03 9/29/02
-----------------------------------------------------------------------
Proceeds from
securitizations $ 19,446 $ 21,991 $ 67,918 $ 89,438
Reductions due to change
in level of receivables sold ( 26,520 ) ( 31,119 ) ( 72,562 ) ( 97,821 )
Daily yield paid ( 315 ) ( 437 ) ( 1,000 ) ( 1,427 )
Servicing fees paid ( 130 ) ( 140 ) ( 395 ) ( 451 )
Servicing fees received 130 140 395 451
Cone's A/R Securitization Facility, as amended on September 23, 2003, provides
Cone with incremental liquidity during the initial phase of the bankruptcy
process. The A/R Securitization Facility provides for $35 million in
post-petition financing from GECC and has a maturity date of May 29, 2004.
Note 4. Defined Benefit Pension Plan
Cone has a noncontributory defined benefit pension plan that covers
substantially all employees. In 2001, as part of Cone's Reinvention Plan,
benefits were frozen for salaried employees in the defined benefit pension plan.
Cone's funding policy has been to make annual contributions of
10
amounts that are deductible for income tax purposes. Cone contributed $4.5
million to the defined benefit pension plan in July 2003, prior to Cone's
Chapter 11 filing.
Additionally, Cone has the Cone Mills Corporation 1983 Employee Stock Ownership
Plan ("ESOP") to which contributions were discontinued after the 1992 plan year.
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.
The ESOP assets consist substantially of Cone Class A Preferred Stock. 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;
however, given the events of the Chapter 11 filing, the illiquid market for such
stock and the inability of Cone to redeem outstanding shares of the Class A
Preferred Stock, the market value of the Class A Preferred Stock has been deemed
to be $0 per share as of September 28, 2003. Accordingly, the floor-offset
arrangement is considered to have no value.
The reduction of the value of the floor-offset arrangement with the defined
benefit pension plan has resulted in an increase in the accumulated benefit
obligation of the defined benefit pension plan by approximately $25.7 million.
As of September 28, 2003, Cone's accumulated benefit obligation under the
defined benefit pension plan was approximately $100.6 million with the fair
market value of the plan assets being approximately $76.1 million resulting in
an unfunded position of $24.5 million.
SFAS No. 87, "Employers' Accounting for Pensions" ("SFAS 87"), requires a
company with a plan that has an accumulated benefit obligation in excess of the
fair value of plan assets to recognize an additional minimum liability in its
balance sheet in all cases except where the accrued liability for pension cost
on the company's books is equal to or greater than that excess. When an
additional minimum liability is required to be recognized, its amount is to be
equal to the excess referred to above less the company's accrued pension cost or
plus the company's prepaid pension cost. When it is recognized, it may, in some
cases, be partially or fully offset by the recognition of an intangible asset on
the company's balance sheet. If the additional minimum liability exceeds the
allowed intangible asset, the excess is recognized, net of any applicable
deferred tax, as an item of other comprehensive income on the employer's
statement of comprehensive income. In accordance with SFAS 87 and SOP 90-7, the
consolidated condensed balance sheet as of September 28, 2003, includes a
liability subject to compromise of $24.5 million for the unfunded accumulated
benefit obligation and an additional minimum pension liability with a
corresponding charge to accumulated other comprehensive loss (a contra account
to stockholders' equity) in the amount of $56.8 million.
11
Note 5. Inventories
(in thousands) 9/28/03 9/29/02 12/29/02
------------------------------------------
Greige and finished goods $ 34,705 $ 23,183 $ 24,401
Work in process 3,298 4,118 6,237
Raw materials 12,792 9,026 9,188
Supplies and other 8,053 9,251 9,022
------------------------------------------
$ 58,848 $ 45,578 $ 48,848
------------------------------------------
Note 6. Long-Term Debt
On May 27, 2003, Cone amended agreements with its lenders extending the maturity
date of its existing Revolving Credit Facility and its Senior Note obligation
through March 15, 2004. With the amendments, the interest rate on the senior
note remained 14.2%. The revolving credit agreement was split into two
components. The first component was a $25 million, 12% senior note and the
second component was a $31 million revolving credit facility bearing interest at
the London Interbank Offering Rate ("LIBOR") plus 6.75%.
As part of the extension, Cone settled the Equity Appreciation Rights Agreement
("EARS"), which were contingent rights granted as a part of agreements in
November 2001, for $4.1 million. The rights entitled the lenders, upon giving of
notice within two years following January 15, 2003, to receive a payment of the
greater of $1 million or 10% of the market value of Cone's outstanding common
stock if Cone did not refinance the Revolving Credit Facility and Senior Note by
January 15, 2003, which did not occur. The rights were settled for $2.1 million
in cash, $1.8 million in senior notes bearing interest at 12% and 14.2% maturing
on March 15, 2004 and approximately 169,000 shares of Cone common stock.
Excluding Cone's A/R Securitization Facility, Cone is currently in default of
its senior securities as a result of the Chapter 11 Cases. Cone is making no
payments under its senior securities and the payment of interest accruing under
its senior securities after September 24, 2003, is stayed in connection with the
Chapter 11 Cases.
Note 7. Class A Preferred Stock
On February 12, 2003, Cone declared a 12.0% stock dividend on Cone's Class A
Preferred Stock, which was paid on March 31, 2003. The dividend was charged to
retained earnings in the amount of approximately $3.9 million in Cone's fiscal
quarter ended June 29, 2003. The 2004 dividend rate for Class A Preferred Stock
is 11.5%, payable March 31, 2004; however, based on the default of the credit
agreements in the third quarter of 2003, it is unlikely that the 2004 dividend
will be paid.
12
Note 8. Depreciation and Amortization
The following table presents depreciation and amortization included in
operations in the consolidated condensed statements of operations.
Thirteen Thirteen Thirty-Nine Thirty-Nine
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
(in thousands) 9/28/03 9/29/02 9/28/03 9/29/02
-----------------------------------------------------------------------------
Depreciation $ 4,722 $ 4,666 $ 14,345 $ 14,764
Amortization 149 22 195 68
----------------------------------------------------------------------------
$ 4,871 $ 4,688 $ 14,540 $ 14,832
----------------------------------------------------------------------------
Note 9. Earnings (Loss) Per Share
The following table sets forth the computation of basic and diluted earnings
(loss) per common share ("EPS").
Thirteen Thirteen
Weeks Ended Weeks Ended
(in thousands, except per share data) 9/28/03 9/29/02
------------------------------------
Net income (loss) $ ( 117,305 ) $ 3,843
Preferred dividends ( 999 ) ( 1,037 )
------------------------------------
Basic EPS - income (loss) available to common
stockholders ( 118,304 ) 2,806
Effect of dilutive securities - -
------------------------------------
Diluted EPS - income (loss) available to common
stockholders after assumed conversions $ ( 118,304 ) $ 2,806
------------------------------------
Determination of shares:
Weighted-average shares 25,941 25,747
Contingently issuable (unvested restricted shares) - ( 8 )
------------------------------------
Basic EPS - weighted-average shares 25,941 25,739
Effect of dilutive securities - 414
------------------------------------
Diluted EPS - adjusted weighted-average shares after
assumed conversions 25,941 26,153
------------------------------------
Earnings (loss) per share - basic and diluted: $ ( 4.56 ) $ 0.11
------------------------------------
The number of potentially dilutive common stock options outstanding using the
treasury stock method for the thirteen weeks ended September 28, 2003, were
approximately 148,000 but were not included in the computation of diluted loss
per share because to do so would have been antidilutive.
13
Note 9. Earnings (Loss) Per Share (continued)
The following table sets forth the computation of basic and diluted income
(loss) per common share ("EPS").
Thirty-Nine Thirty-Nine
Weeks Ended Weeks Ended
(in thousands, except per share data) 9/28/03 9/29/02
------------------------------------
Net income (loss) $ ( 119,075 ) $ 8,376
Preferred dividends ( 2,997 ) ( 3,147 )
------------------------------------
Basic EPS - income (loss) available to common
Stockholders ( 122,072 ) 5,229
Effect of dilutive securities - -
------------------------------------
Diluted EPS - income (loss) available to common
stockholders after assumed conversions $ ( 122,072 ) $ 5,229
------------------------------------
Determination of shares:
Weighted-average shares 25,844 25,712
Contingently issuable (unvested restricted shares) - ( 8 )
------------------------------------
Basic EPS - weighted-average shares 25,844 25,704
Effect of dilutive securities - 400
------------------------------------
Diluted EPS - adjusted weighted-average shares after
assumed conversions 25,844 26,104
------------------------------------
Earnings (loss) per share - basic and diluted: $ ( 4.72 ) $ 0.20
------------------------------------
The number of potentially dilutive common stock options outstanding using the
treasury stock method for the thirty-nine weeks ended September 28, 2003, were
approximately 209,000 but were not included in the computation of diluted loss
per share because to do so would have been antidilutive.
Note 10. Segment Information
Cone has three principal business segments based upon organizational structure:
1) Denim; 2) Commission Finishing; and 3) Decorative Fabrics.
Operating income (loss) for each segment is total revenue less operating
expenses applicable to the segment. Intersegment revenue relates to both the
denim and commission finishing segments. Equity in earnings (losses) of
unconsolidated affiliates is included in the denim segment. Unallocated
expenses, interest and income tax expense (benefit) are not included in segment
operating income (loss). Unallocated expenses include certain legal expenses,
bank fees and fees and discounts on the sale of accounts receivable.
14
Net sales and income (loss) from operations for Cone's operating segments are as
follows:
Thirteen Thirteen
Weeks Ended Weeks Ended
(in thousands) 9/28/03 9/29/02
----------------------------------
Net Sales
Denim $ 69,151 $ 95,448
Commission Finishing 8,766 11,233
Decorative Fabrics 4,952 5,690
Other 127 93
----------------------------------
82,996 112,464
Less Intersegment Sales 167 776
----------------------------------
$ 82,829 $ 111,688
----------------------------------
Income (Loss) from Operations
Denim $ ( 89 ) $ 11,697
Commission Finishing ( 535 ) 5
Decorative Fabrics ( 1,547 ) ( 1,584 )
Other 2,415 ( 408 )
Unallocated Expenses ( 447 ) ( 344 )
----------------------------------
( 203 ) 9,366
Restructuring and Impairment of Assets ( 123,431 ) -
----------------------------------
( 123,634 ) 9,366
Less Equity in Earnings of Unconsolidated Affiliates 548 923
----------------------------------
( 124,182 ) 8,443
Other Expense, Net ( 4,029 ) ( 4,068 )
Reorganization Items ( 3,519 ) -
----------------------------------
Income (Loss) from Operations before Income Tax Expense
(Benefit) and Equity in Earnings of Unconsolidated
Affiliates $( 131,730 ) $ 4,375
----------------------------------
15
Note 10. Segment Information (continued)
Thirty-Nine Thirty-Nine
Weeks Ended Weeks Ended
(in thousands) 9/28/03 9/29/02
----------------------------------
Net Sales
Denim $ 232,576 $ 279,288
Commission Finishing 31,734 41,757
Decorative Fabrics 18,570 25,500
Other 315 236
-----------------------------------
283,195 346,781
Less Intersegment Sales 1,766 3,436
-----------------------------------
$ 281,429 $ 343,345
-----------------------------------
Income (Loss) from Operations
Denim $ 13,094 $ 26,170
Commission Finishing ( 728 ) 2,134
Decorative Fabrics ( 3,571 ) ( 1,213 )
Other 1,608 ( 1,402 )
Unallocated Expenses ( 1,401 ) ( 1,164 )
-----------------------------------
9,002 24,525
Restructuring and Impairment of Assets ( 124,197 ) -
-----------------------------------
( 115,195 ) 24,525
Less Equity in Earnings of Unconsolidated Affiliates 2,035 1,605
-----------------------------------
( 117,230 ) 22,920
Other Expense, Net ( 12,061 ) ( 13,247 )
Equity Appreciation Rights ( 4,117 ) -
Reorganization Items ( 3,519 ) -
-----------------------------------
Income (Loss) from Operations before Income Tax Expense
(Benefit) and Equity in Earnings of Unconsolidated
Affiliates $ (136,927 ) $ 9,673
-----------------------------------
Note 11. Comprehensive Income (Loss)
Comprehensive income (loss) is the total of net income (loss) and other changes
in equity, except those resulting from investments by owners and distributions
to owners not reflected in net income (loss). Total comprehensive income (loss)
for the periods was as follows:
Thirteen Thirteen Thirty-Nine Thirty-Nine
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
(in thousands) 9/28/03 9/29/02 9/28/03 9/29/02
---------------------------------------------------------------------------
Net income (loss) $ ( 117,305 ) $ 3,843 $ ( 119,075 ) $ 8,376
Other comprehensive
income (loss):
Minimum pension liability
and SERP liability ( 57,503 ) - ( 57,503 ) -
Derivatives gains (losses) 2 ( 359 ) ( 860 ) 307
---------------------------------------------------------------------------
$ ( 174,806 ) $ 3,484 $ ( 177,438 ) $ 8,683
---------------------------------------------------------------------------
16
Derivatives (primarily cotton) gains (losses) as of September 28, 2003,
reflected above in other comprehensive income (loss) will be recognized in cost
of goods sold over the next twelve months.
Note 12. Financial Instruments
Cone utilizes derivative financial instruments to manage risks associated with
changes in cotton prices, natural gas prices, interest rates and foreign
exchange rates. Cone accounts for derivative instruments in accordance with SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities", SFAS
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities" and SFAS No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities."
Cotton is the primary raw material for Cone's fabric manufacturing operations.
Cone has an established cotton purchasing program, administered in conformance
with policies approved by the Board of Directors, to ensure an uninterrupted
supply of appropriate quality and quantities of cotton, to cover committed and
anticipated fabric sales and to manage margin risks associated with price
fluctuations on anticipated cotton purchases. Cone primarily uses forward
purchase contracts and, to a lesser extent, futures and option contracts. Cone
considers its cotton derivatives to be primarily cash flow hedges of anticipated
future transactions under SFAS No. 133. The effective portion of derivative
gains and losses for these hedges is initially reported as a component of other
comprehensive income (loss) outside results of operations and subsequently
reclassified into results of operations when the forecasted transactions being
hedged affect results of operations. At September 28, 2003, Cone recorded in
accumulated other comprehensive income (loss) derivatives (primarily cotton)
losses of $0.4 million. At September 29, 2002, Cone recorded in accumulated
other comprehensive income (loss) cotton derivative gains of $1.0 million.
Losses of $0.1 million and gains of $0.6 million were charged/credited to cost
of goods sold during the thirteen and thirty-nine weeks ended September 28,
2003, respectively. Gains of $0.2 million and $0.8 million were credited to cost
of goods sold during the thirteen and thirty-nine weeks ended September 29,
2002, respectively. The ineffective portion of derivative gains and losses is
reported in results of operations immediately. Hedge ineffectiveness for the
thirteen and thirty-nine weeks ended September 28, 2003 and September 29, 2002,
was immaterial.
17
Note 13. Restructuring and Impairment of Assets
Restructuring:
A roll-forward of the activity related to Cone's restructuring charges for the
thirty-nine weeks ended September 28, 2003 and September 29, 2002 follows:
Corporate &
Textile Products
(in thousands) Group
--------------------
Balance, December 29, 2002 $ 58
Deductions:
Terminal leave and related benefits ( 37 )
----------------------
Balance, September 28, 2003 $ 21
----------------------
Balance, December 30, 2001 $ 639
Deductions:
Terminal leave and related benefits ( 639 )
----------------------
Balance, September 29, 2002 $ -
----------------------
Impairment of Assets:
Cone accounts for Impairment of Assets in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." Per SFAS No.
144, 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. Fair value is
determined based on a present valuation technique, which includes multiple cash
flow scenarios that reflect the range of possible outcomes (probability-weighted
approach) and an appropriate risk-free rate. Long-lived assets to be disposed of
are reported at the lower of carrying amount or fair value less cost to sell.
The facts and circumstances leading to the impairment of asset charges in the
third quarter of 2003 was that management's view of the long-term
competitiveness of domestic production began to change during the third quarter
of 2003. Cone's downward revision in outlook was driven by a number of factors
including: 1) the completion of an extensive market research in which Cone's
customers indicated that the North American supply chain needed to continue to
reduce prices and improve efficiency, 2) a meeting with a representative from
the U.S. Department of Commerce where Cone gained a greater understanding that
the present administration was going to continue to press for free trade
agreements, 3) trade data indicating that imports from Vietnam were surging
since the enactment of the spring 2003 trade agreement, 4) information regarding
changing sourcing patterns and pricing expectations for 2004, which was obtained
during meetings with Cone's key customers, and 5) cotton future prices
increasing by over 25% from mid-August to early November 2003.
18
Based upon the factors discussed above, Cone prepared a cash flow analyses of
the value of its long-lived assets as of the end of the third quarter of 2003.
These cash flow scenarios were based upon the forecasts provided to its
creditors in mid-September as modified for changes in the cotton market, Cone's
expected denim configuration and, as well as, key negotiations with certain
suppliers. Multiple forecast scenarios for each business unit were prepared
depending upon different outcomes of the bankruptcy process with a probability
of occurrence assigned to each scenario. Based upon the continued growth of
textile, apparel and furniture imports, expectations of future cash flows
generated by the commission finishing and jacquards businesses were reduced.
Based upon the above analyses, Cone recognized an asset impairment charge of
$123.4 million in its third quarter 2003 statements of operations as follows:
o Non-cash charges for the impairment of property and equipment in
Cone's denim segment totaling $82.8 million.
o Non-cash charges for the impairment of property and equipment in
Cone's commission finishing segment totaling $24.2 million.
o Non-cash charges for the impairment of property and equipment in
Cone's decorative fabrics segment totaling $9.1 million.
Additionally, in the third quarter of 2003, Cone recorded non-cash impairment
losses on certain investments in unconsolidated foreign affiliates totaling $5.7
million and a $1.6 million charge to further write-down certain assets available
for sale.
The impairment charges reflect management's best estimate of the excess of
carrying amounts of long-lived assets over their fair values. It is reasonably
possible that those estimates could change in the near term and that the effect
of those changes could be material.
Note 14. Income Taxes
Excluding equity in earnings of unconsolidated affiliates, upon which no U.S.
tax was provided, the effective tax benefit for the thirteen and the thirty-nine
weeks ended September 28, 2003, was 10.5% and 11.6%, respectively. The
difference between the effective tax rate and the corporate U.S. tax rate of 35%
is primarily attributable to the fact that the tax benefit recorded was limited
to the extent that Cone had deferred tax liabilities. Excluding equity in
earnings of unconsolidated affiliates, upon which no U.S. tax was provided, the
effective tax rate for the thirteen and thirty-nine weeks ended September 29,
2002, was 33% and 30%, respectively.
Note 15. Subsequent Events
During the fourth quarter of 2003, Cone announced the downsizing of its U.S.
denim manufacturing capacity to reflect its revised business outlook. The
downsizing has several components that will reduce overall manufacturing costs,
require minimal capital expenditures to implement and should be substantially
completed by December 2003. The initiative will downsize denim manufacturing at
19
Cone's Cliffside Weave plant, eliminate certain denim manufacturing processes at
its Haynes and White Oak plants, and close its Cliffside Finishing plant.
Domestic denim weaving capacity will be reduced by 10 - 25% depending upon
market demand. This will result in a reduction of workforce of approximately 800
employees during the fourth quarter of 2003. Expenses related to the relocation
of equipment and run-out costs will be expensed as incurred. In the fourth
quarter of 2003, Cone expects to record a restructuring charge for terminal
leave pay and benefits for salaried employees of approximately $1.5 million.
Cone continues to assess its overall cost structure and manufacturing capacities
across all business segments; however, no additional restructuring charges, if
any, can be reasonably estimated at this time.
20
Item 2.
MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
OVERVIEW
On September 24, 2003, Cone filed for protection under the United States
Bankruptcy Code (the "Bankruptcy Code"). The events leading up to this filing
were primarily market and liquidity driven. In our second quarter 2003 Form
10-Q, we reported that Cone's business outlook for the third quarter was for
continued pressure on margins and volumes as a result of weak U.S. economic
conditions, higher cotton costs, higher than desired customer and competitor
inventory levels, continuation of retailers' cautiousness and imports. Cone
believed that longer term the monetary and fiscal stimuli being applied to the
U.S. economy, along with the inevitable end to inventory liquidations would
result in some recovery in our markets. Cone expected, however, that in the
short term, the continued pressure on denim prices from retailers and imports,
coupled with higher cotton costs, would reduce denim sales margins and Cone's
operating earnings in the second half of 2003.
However, during the third quarter of 2003, Cone realized that it was operating
in a seriously changed business environment as denim shipments failed to rebound
or even hold to second quarter 2003 levels. Cone shipped less than 75% of
domestic capacity in seasonally its strongest quarter, primarily because of
larger than expected denim jeans imports from Asia. This reduced level of
shipments required Cone to reduce plant operating schedules throughout the
quarter and furlough its smallest U.S. denim weaving facility for August and
September of 2003. This reduced level of sales during the third quarter 2003 and
the curtailment of plant operating schedules resulted in a contraction in Cone's
liquidity primarily because of the resulting reduction of availability under its
Receivables Purchase and Servicing Agreement (the "A/R Securitization
Facility"). Its reduced level of liquidity led Cone to conclude that it could
not make its semi-annual interest payment on its 8-1/8% Debentures due on
September 15, 2003. The change in Cone's outlook regarding the long-term
competitiveness of U.S. denim production, lack of liquidity and the complexity
of Cone's capital structure consisting of multiple secured lenders led Cone to
conclude that a bankruptcy filing was necessary.
On September 24, 2003 (the "Petition Date"), Cone and certain of its domestic
subsidiaries (collectively, the "Debtors") filed voluntary petitions for relief
under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court
(the "Bankruptcy Court") for the District of Delaware (Case Nos. 03-12943
through 03-12946). The Chapter 11 cases for the Debtors (the "Chapter 11 Cases")
are being jointly administered for procedural purposes only. The Debtors'
foreign subsidiaries, foreign joint venture entities and certain of its domestic
subsidiaries were not included in the petitions for relief under Chapter 11.
Cone has entered into a definitive sale agreement with WL Ross & Co., which is
subject to higher or better offers in accordance with Section 363 of Chapter 11
of the Bankruptcy Code. Under the agreement, WL Ross & Co. will purchase
substantially all of Cone's assets for $46 million in cash and will assume
Cone's outstanding Debtor-in-Possession ("DIP") loans and selected other
21
liabilities, positioning the purchaser as the "stalking horse" - or original
bidder - in accordance with Section 363 of Chapter 11 of the Bankruptcy Code.
Cone and its subsidiaries remain in possession of their assets and properties
and continue to operate their businesses and manage their properties as
debtors-in-possession pursuant to sections 1107(a) and 1108 of the Bankruptcy
Code. Since the Chapter 11 filing, Cone has obtained several orders from the
Bankruptcy Court which included authorization of 1) payment of pre-petition
employee salaries, wages, payroll taxes, certain employee benefits and related
expenses, 2) payment of certain pre-petition freight and customs claims and
amounts due in respect to Cone's offshore operations, 3) payment of a limited
amount of pre-petition claims of critical vendors, 4) the continuation of Cone's
Workers' Compensation Program and Policies and Other Insurance Policies, 5) the
continuation of Cone's centralized cash management system and bank accounts and
6) Cone to enter into securitization documents with and sell accounts receivable
up to $35 million to GE Capital Corporation ("GECC"). On November 6, 2003, the
court entered final orders relating to the above items.
On November 10, 2003, the Bankruptcy Court approved bid procedures agreed upon
by Cone and its creditors that will enable Cone to move forward with its
proposed sale of assets to WL Ross & Co. in accordance with Section 363 of
Chapter 11 of the Bankruptcy Code. The Bankruptcy Court set a January 23, 2004,
deadline for the submission of initial bids with an auction scheduled for
January 29, 2004. The WL Ross & Co. offer sets a floor for other bids to be
submitted during a Section 363 auction process approved by the court and is
subject to higher or better offers. In addition, the agreement calls for WL Ross
& Co. to receive a $1.8 million breakup fee if a higher or better bid for Cone
is accepted. The bidding procedures also allow parties interested in purchasing
only selected assets of Cone to do so as long as Cone will obtain greater
aggregate value from such offers than under the offer submitted by WL Ross & Co.
Cone's A/R Securitization Facility as amended on September 23, 2003 provides
Cone with incremental liquidity during the initial phase of the bankruptcy
process. The A/R Securitization Facility provides for $35 million in
post-petition financing from GECC and has a maturity date of May 29, 2004. On
September 26, 2003, the Bankruptcy Court approved Cone's entering into and
implementing the amended A/R Securitization Facility as part of the "first day
orders." Amounts borrowed under the A/R Securitization Facility bear interest at
the GECC Commerical Paper Rate plus an applicable margin of 2.75%. In addition,
there is a commitment fee of .0625% on unused capacity under the facility. The
A/R Securitization Facility contains financial covenants requiring Cone to
maintain minimum levels of earnings before interest, taxes, depreciation,
amortization, restructuring, and reorganization items, as defined in the
agreement. It also imposes certain limits on capital expenditures and cash
restructuring charges. As of September 28, 2003, Cone was in compliance with the
terms under the A/R Securitization Facility.
On November 10, 2003, Cone filed with the Bankruptcy Court a proposal to enter
into a $45 million DIP financing agreement with Bank of America and GECC. This
facility would provide Cone additional liquidity of approximately $10 - $12
million after paying off and eliminating the A/R Securitization Facility. The
hearing date to consider approval of the $45 million DIP financing is November
25, 2003.
22
The accompanying consolidated condensed financial statements have been prepared
on a going concern basis in accordance with American Institute of Certified
Public Accountants Statement of Position 90-7, "Financial Reporting by Entities
in Reorganization Under the Bankruptcy Code" ("SOP 90-7"). Cone's recent losses
and the Chapter 11 Cases raise substantial doubt about its ability to continue
as a going concern. Currently, it is not possible to predict the outcome of the
Chapter 11 Cases or their effect on Cone's business. If it is determined that
the liabilities subject to compromise in the Chapter 11 Cases exceed the fair
value of the assets available, most secured and unsecured claims are likely to
be settled at less than 100% of their face value and the equity interests of
Cone's current shareholders will have no value.
Substantially all unsecured liabilities as of the date of the Chapter 11 filings
are subject to compromise or other treatment under the proposed sale of
substantially all of the assets of Cone. In addition, based upon the value of
the "stalking horse" bid, the secured liabilities are also subject to
compromise. For financial reporting purposes, liabilities, the settlement of
which is dependent on the outcome of the Chapter 11 Cases, have been segregated
and classified as liabilities subject to compromise in the accompanying
consolidated condensed balance sheet. These liabilities consist primarily of
amounts outstanding under long-term debt, a minimum pension liability,
pre-petition accounts payable that may be affected by the outcome of the Chapter
11 Cases, accrued interest, other accrued expenses and certain deferred
liabilities. The ultimate amount and settlement terms for liabilities subject to
compromise are subject to negotiation and court approval and are not presently
determinable.
Long-Term Outlook, Asset Impairment and Subsequent Events
During the third quarter of 2003, management's view of the long-term
competitiveness of domestic production began to change. Cone's downward revision
in outlook was driven by a number of factors including:
o Cone's CEO commented in July (furnished on Form 8-K dated July 30,
2003) "that retailer caution and distraction by non-jeans inventories
have created a difficult market to read because there could very well
be a time when retailers scramble to satisfy consumer demand for fall
goods once their near-term summer inventories are cleared away."
Because of weak end of June and July shipments, that Cone had felt
were initially being driven by cyclical inventory adjustments
throughout the denim jeans pipeline, the Cone Denim marketing team did
extensive market research in late July and August. The market research
was focused on long-term sourcing strategies for denim jeans and what
the customers felt the strengths and weaknesses of the North American
supply chain were. The primary observations from customers were that,
while sourcing from Asia was perhaps not their preference because of
difficulties in securing deliveries and replenishing inventories, the
North American supply chain needed to continue to reduce prices and
improve efficiency. A summary of these findings and the expected
implications upon U.S. denim mills was presented to senior management
in mid-August.
o Also in mid-August, Cone's senior management met with the United
States Department of Commerce Deputy Assistant Secretary of Textiles,
Apparel and Consumer Goods Industries to discuss U.S. trade policy as
it related to the U.S. textile industry, the recently enacted trade
legislation with Vietnam and the outlook for the CAFTA (Central
America Free Trade Act) negotiations. From these discussions a greater
understanding was reached that the present administration was going to
23
continue to press for free trade agreements, even to the detriment of
the U.S. textile industry, and that the retailers coalition was an
aggressive force in pushing for this trade liberalization.
o Imports from Vietnam were surging since the enactment of the spring
2003 trade agreement. Denim apparel imports from Vietnam to the U.S.
were up approximately 700% for May and June and almost 400% for July.
As it takes approximately 45 days after the end of the month to
receive and sort U.S. trade data, Cone only began to fully realize the
impact of the Vietnam trade agreement in mid-third quarter 2003.
Vietnam's rate of growth for the August/September period slowed
significantly as it reached in excess of 90% of its 2003 quota levels
under the new trade agreement.
o Cone's revised market outlook, the likely direction of future trade
policy and sourcing patterns and the decline in Cone's denim shipments
since June 2003, led senior management to schedule meetings with key
customers in late August and early September. During these meetings it
became clear that retailers had been working with Chinese denim mills
well in advance of the Vietnam trade pact to establish Vietnam as a
source of denim jeans to U.S. retail. In addition, our customers
continued to drive home the point that they expected denim prices to
continue to decline even in the face of higher cotton costs as
compared with 2002 and 2003.
o Cotton futures prices increased by over 25% from mid-August to early
November.
o In price negotiations with key customers, Cone, along with their other
denim suppliers, was demanded to reduce or hold the line on prices in
2004 even in the face of escalating cotton prices. This stance has
raised serious doubts regarding recovery of cotton cost increases
through increased pricing.
With the change in business outlook, Cone prepared a cash flow analyses of the
value of its long-lived assets as of the end of the third quarter of 2003. These
cash flow scenarios were based upon the forecasts provided to its creditors in
mid-September as modified for changes in the cotton market, Cone's expected
denim configuration and, as well as, key negotiations with certain suppliers.
Multiple forecast scenarios for each business unit were prepared depending upon
different outcomes of the bankruptcy process with a probability of occurrence
assigned to each scenario. As a result of the downward revisions in long-term
business outlook, the forecast for Cone's denim business profitability from U.S.
facilities was substantially lower than 2002 results and the first half of 2003
results. In addition, based upon the continued growth of textile, apparel and
furniture imports, expectations of future cash flows generated by the commission
finishing and jacquards businesses were reduced.
Based upon these various analyses, prepared in accordance with the Financial
Accounting Standards Board ("FASB") Statement of Financial Accounting Standards
("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets", Cone recognized an asset impairment charge of $123.4 million in its
third quarter 2003 statements of operations to write-down the value of U.S.
property, plant and equipment as well as certain investments in unconsolidated
foreign affiliates engaged in the denim business who are facing the same
competitive issues as Cone. (See Note 13 of the Notes to Consolidated Condensed
Financial Statements included in Part I, Item 1.) In addition, Cone concluded
that, as a result of the bankruptcy filing, our revised long-term outlook and
the value of the "stalking horse" bid, the Class A Preferred Stock was likely to
receive no recovery. This being the case, under the floor-offset arrangement of
the pension plan, the accumulated benefit obligation was greater than pension
plan assets, resulting in the recording of a minimum pension liability with a
24
corresponding charge to accumulated other comprehensive loss (a contra account
to stockholders' equity) in the amount of $56.8 million. (See Note 4 of the
Notes to Consolidated Condensed Financial Statements included in Part I, Item
1.)
During the fourth quarter of 2003, Cone announced the downsizing of its U.S.
denim manufacturing capacity to reflect its revised business outlook. The
downsizing has several components that will reduce overall manufacturing costs,
require minimal capital expenditures to implement and should be substantially
completed by December 2003. The initiative will downsize denim manufacturing at
Cone's Cliffside Weave plant, eliminate certain denim manufacturing processes at
its Haynes and White Oak plants, and close its Cliffside Finishing plant.
Domestic denim weaving capacity will be reduced by 10 - 25% depending upon
market demand. This will result in a reduction of workforce of approximately 800
employees during the fourth quarter of 2003. Expenses related to the relocation
of equipment and run-out costs will be expensed as incurred. In the fourth
quarter of 2003, Cone expects to record a restructuring charge for terminal
leave pay and benefits for salaried employees of approximately $1.5 million.
Cone continues to assess its overall cost structure and manufacturing capacities
across all business segments; however, no additional restructuring charges, if
any, can be reasonably estimated at this time.
For the foreseeable future, Cone continues to see margin pressure in each of its
businesses caused by deflationary pricing pressures at retail, excess worldwide
capacity and rising cotton costs. The January 1, 2005 scheduled elimination of
import quota restrictions under existing WTO agreements is also expected to
result in further pressure on U.S. textiles and will result in changes in global
sourcing patterns. We believe that these extensive pressures on profit margins
will result in continued consolidation and rationalization of the entire U.S.
textile industry.
RESULTS OF OPERATIONS
Third Quarter Ended September 28, 2003 Compared with Third Quarter Ended
September 29, 2002.
For the third quarter of 2003, Cone had sales of $82.8 million, a decrease of
25.8%, as compared with sales of $111.7 million for the third quarter of 2002.
The decrease in sales was primarily driven by denim unit decreases as well as
weaknesses in the commission finishing and decorative fabrics business segments.
Gross profit margin decreased to 6.9% of sales for the third quarter of 2003, as
compared with 15.3% for the third quarter of 2002. The decline in gross profit
margin was primarily attributable to higher raw material costs (cotton) and
unfavorable manufacturing variances associated with curtailed operating
schedules resulting from lower sales.
Cone operates in three principal business segments: Denim, Commission Finishing
and Decorative Fabrics. (See Note 10 of the Notes to Consolidated Condensed
Financial Statements included in Part I, Item 1.)
25
Denim. Outside sales (total segment sales less intercompany sales) of
the denim segment were $69.0 million for the third quarter of 2003, as
compared with sales of $95.4 million for the third quarter of 2002, a
decrease of 27.7%. Denim sales yards decreased 27.8%, as compared with
the prior year's third quarter results, as a result of increased Asian
imports, conservative buying and inventory adjustments by key customers
and the comparison against a strong prior year period. Operating loss
for the denim segment was $0.1 million, or 0.1% of sales for the third
quarter of 2003, as compared with operating income of $11.7 million, or
12.3% of sales for the third quarter of 2002. The decline in operating
income was attributable to lower sales volume, unfavorable
manufacturing variances, and higher raw material costs (cotton).
Operating income for the segment includes the equity in earnings of the
Parras Cone joint venture and the Altamira industrial park joint
venture. Equity in earnings of Parras Cone was $0.3 million for the
third quarter of 2003, as compared with $1.0 million results for the
third quarter of 2002. The decline in Parras Cone's results is
primarily attributable to the same factors that affected Cone's overall
denim performance.
Commission Finishing. Outside sales (total segment sales less
intercompany sales) of the commission finishing segment (Carlisle)
decreased by 16.5%, as compared with third quarter 2002 results. The
decrease in outside sales was the result of overall weak market
conditions in all of Carlisle's product lines. For the third quarter of
2003, Carlisle reported an operating loss of $0.5 million, as compared
with break-even results for the third quarter of 2002. Operating
results were negatively impacted by lower sales volume, which resulted
in curtailed operating schedules, and higher energy costs. Plant
operating efficiencies continued to improve in the third quarter of
2003, as compared with the third quarter of 2002. The home fashions
industry continues to experience extremely difficult market conditions.
Decorative Fabrics. Sales revenue in the third quarter of 2003 was $5.0
million, as compared with $5.7 million for third quarter 2002. Sales
volume decreased by 8.7%. Market conditions in the bedding and
furniture segments continued to be weak and were exacerbated by
increased import penetration of furniture products and the low level of
new product introductions achieved by Cone Jacquards in 2001 and 2002.
For the third quarter of 2003 the segment had an operating loss of $1.5
million versus an operating loss of $1.6 million for the third quarter
of 2002. Operating results were affected negatively by lower sales
volume, resulting in poor plant utilization levels and unsatisfactory
operating efficiencies. In addition, in an attempt to improve its new
product introductions in 2003 the business unit increased expenditures
on design and sampling.
Selling and administrative expenses for the third quarter of 2003 were 7.8% of
sales, as compared to 7.7% for the third quarter of 2002.
In accordance with SOP 90-7, professional fees associated with the Chapter 11
Cases are expensed as incurred and reported as reorganization items in the
accompanying consolidated condensed financial statements. Interest expense is
reported only to the extent that it will be paid during the Chapter 11
proceeding or that it is probable that it will be an allowed priority, secured
or unsecured claim. Interest expense for the third quarter of 2003 was $4.0
million, substantially all of which is pre-petition, as compared with $3.7
million for the third quarter of 2002.
26
Other expense of $0.04 million in the third quarter of 2003 include the ongoing
expenses of the accounts receivable securitization program offset by a one-time
income of $0.3 million from an insurance policy demutualization, as compared to
other expense of $0.4 million in the third quarter of 2002.
For the thirteen weeks ended September 28, 2003, Cone recognized a charge of
$3.5 million in reorganization items associated with the Chapter 11 Cases.
Approximately $2.2 million of the reorganization charge related to the non-cash
write-offs of both the unamortized discount on the 8-1/8% Debentures and the
deferred financing fees associated with the debt classified as subject to
compromise. In addition, Cone incurred $1.3 million for professional fees
related to the Chapter 11 Cases.
Excluding equity in earnings of unconsolidated affiliates, upon which no U.S.
tax was provided, the effective tax benefit for the thirteen weeks ended
September 28, 2003, was 10.5%. The difference between the effective tax rate and
the corporate U.S. tax rate of 35% is primarily attributable to the fact that
the tax benefit recorded was limited to the extent that Cone had deferred tax
liabilities. Excluding equity in earnings of unconsolidated affiliates, upon
which no U.S. tax was provided, the effective tax rate for the thirteen weeks
ended September 29, 2002, was 33%.
For the third quarter of 2003, Cone sold a portion of its real estate holdings
in Altamira, Tamaulipas, Mexico for gross proceeds of $2.5 million. Cone
recognized an overall gain of $1.8 million, of which $1.5 million is reflected
in income (loss) from operations and $0.3 million in equity in earnings of
unconsolidated affiliates.
For the third quarter of 2003, Cone had a net loss of $117.3 million or $4.56
per share after preferred dividends. Included in the net loss for 2003 were
charges of $123.4 million, or $4.76 per share for restructuring and impairment
of assets (See Note 13 of the Notes to Consolidated Condensed Financial
Statements included in Part I, Item 1). For the third quarter of 2002, Cone had
a net profit of $3.8 million, or $.11 per share after preferred dividends.
Nine Months Ended September 28, 2003 Compared with Nine Months Ended September
29, 2002
For the first nine months of 2003, Cone had sales of $281.4 million, a decrease
of 18.0%, as compared with sales of $343.3 million for the first nine months of
2002. The decrease in sales dollars was across all business segments.
Gross profit margin decreased to 10.6% of sales for the first nine months of
2003, as compared with 14.2% for the first nine months of 2002. The decline in
gross profit margin was primarily attributable to unfavorable manufacturing
variances associated with curtailed operating schedules resulting from lower
sales partially offset by the benefits of cost reduction programs.
Cone operates in three principal business segments: Denim, Commission Finishing
and Decorative Fabrics. (See Note 10 of the Notes to Consolidated Condensed
Financial Statements included in Part I, Item 1.)
27
Denim. Outside sales (total segment sales less intercompany sales) were
$232.1 million for nine months of 2003, as compared with sales of
$279.3 million for the comparable nine months of 2002, or a decrease of
16.9%. Sales yards for 2003 decreased from 2002 levels primarily as a
result of market weaknesses that began to materialize in the latter
part of second quarter 2003 and became more evident throughout the
third quarter. Denim sales prices declined slightly, as compared with
the prior year. Operating income for the denim segment decreased to
$13.1 million or 5.6% of sales for the nine months of 2003, as compared
with $26.2 million or 9.4% of sales for the first nine months of 2002.
The decline in operating income was primarily attributable to lower
sales volume and unfavorable manufacturing variances associated with
curtailed operating schedules. Operating income for the segment
includes the equity in earnings (losses) of the Parras Cone joint
venture and the Altamira industrial park joint venture. Equity in
earnings of Parras Cone was $1.9 million for nine months of 2003, as
compared with $1.9 million for nine months of 2002.
Commission Finishing. Outside sales (total segment sales less
intercompany sales) decreased by 20.6%, as compared with third quarter
2002 results. Total sales decreased by 24% primarily as a result of
overall weak market conditions in all of Carlisle's product lines. For
the nine months of 2003, Carlisle reported a loss of $0.7 million, as
compared with a profit $2.1 million for the first nine months of 2002.
Operating results were negatively impacted by lower sales volume, which
resulted in curtailed operating schedules, and higher energy costs.
Plant operating efficiencies continued to improve in 2003, as compared
with 2002.
Decorative Fabrics. Sales revenue for the nine months of 2003 was $18.6
million, as compared with $25.5 million for the comparable period of
2002. Sales volume decreased by 26.1%. Market conditions in the bedding
and furniture segments continued to be weak and were exacerbated by
increased import penetration of furniture products and the low level of
new product introductions achieved by Cone Jacquards in 2001 and 2002.
The segment operating loss was $3.6 million for nine months of 2003, as
compared with a segment operating loss of $1.2 million for the
comparable prior year period. Operating results were affected
negatively by lower sales volume, resulting in poor plant utilization
levels and unsatisfactory operating efficiencies. In addition, in an
attempt to improve its new product introductions in 2003 the business
unit increased expenditures on design and sampling.
Selling and administrative expenses for the first nine months of 2003 were 8.2%
of sales, as compared to 7.5% of sales for the first nine months of 2002.
In accordance with SOP 90-7, professional fees associated with the Chapter 11
Cases are expensed as incurred and reported as reorganization items in the
accompanying consolidated condensed financial statements. Interest expense is
reported only to the extent that it will be paid during the Chapter 11
proceeding or that it is probable that it will be an allowed priority, secured
or unsecured claim. Interest expense for the nine months of 2003 was $11.5
million, substantially all of which is pre-petition, as compared with $12.0
million for the nine months of 2002. Benefits from lower borrowing levels and
lower market interest rate levels were partially offset by increases in rates
under Cone's financing agreements.
28
Other expenses of $0.7 million in the first nine months of 2003 include the
ongoing expense of the accounts receivable securitization program offset by a
one-time income of $0.3 million from an insurance policy demutualization, as
compared to other expense of $1.4 million for the nine months of 2002.
For the thirty-nine weeks ended September 28, 2003, Cone recognized a charge of
$3.5 million in reorganization items associated with the Chapter 11 Cases.
Approximately $2.2 million of the reorganization charge related to the non-cash
write-offs of both the unamortized discount on the 8-1/8% Debentures and the
deferred financing fees associated with the debt classified as subject to
compromise. In addition, Cone incurred $1.3 million for professional fees
related to the Chapter 11 Cases.
On May 27, 2003, Cone amended agreements with its lenders extending the maturity
date of its existing Revolving Credit Facility and its Senior Note obligation
through March 15, 2004. With the amendments, the interest rate on the senior
note remained 14.2%. The revolving credit agreement was split into two
components. The first component was a $25 million, 12% senior note and the
second component was a $31 million revolving credit facility bearing interest at
the London Interbank Offering Rate ("LIBOR") plus 6.75%.
As part of the extension, Cone settled the Equity Appreciation Rights Agreement
("EARS"), which were contingent rights granted as a part of the agreements in
November 2001, for $4.1 million. The rights entitled the lenders, upon giving of
notice within two years following January 15, 2003, to receive a payment of the
greater of $1 million or 10% of the market value of Cone's outstanding common
stock if Cone did not refinance the Revolving Credit Facility and Senior Note by
January 15, 2003, which did not occur. The rights were settled for $2.1 million
in cash, $1.8 million in senior notes bearing interest at 12% and 14.2% maturing
on March 15, 2004 and approximately 169,000 shares of Cone common stock.
Excluding equity in earnings of unconsolidated affiliates, upon which no U.S.
tax was provided, the effective tax benefit for the thirty-nine weeks ended
September 28, 2003, was 11.6%. The difference between the effective tax rate and
the corporate U.S. tax rate of 35% is primarily attributable to the fact that
the tax benefit recorded was limited to the extent that Cone had deferred tax
liabilities. Excluding equity in earnings of unconsolidated affiliates, upon
which no U.S. tax was provided, the effective tax rate for the thirty-nine weeks
ended September 29, 2002, was 30%.
For the first nine months of 2003, Cone sold a portion of its real estate
holdings in Altamira, Tamaulipas, Mexico for gross proceeds of $2.5 million.
Cone recognized an overall gain of $1.8 million, of which $1.5 million is
reflected in income (loss) from operations and $0.3 million in equity in
earnings of unconsolidated affiliates.
For the first nine months of 2003, Cone had a net loss of $119.1 million, or
$4.72 per share after preferred dividends. Included in the net loss for 2003
were charges of $124.2 million, or $4.81 per share for restructuring and
impairment of assets (See Note 13 of the Notes to Consolidated Condensed
Financial Statements included in Part I, Item 1). For the nine months of 2002,
Cone had a net profit of $8.4 million, or $.20 per share after preferred
dividends.
29
LIQUIDITY AND CAPITAL RESOURCES
On September 24, 2003, Cone filed for protection under Chapter 11 of the
Bankruptcy Code. This will affect Cone's liquidity and capital resources as
described below.
The following is a summary of primary financing agreements as of the Petition
Date.
Interest/
($ Amounts in Millions) Facility Amount Discount
Financing Agreement Commitment Outstanding Rate Maturity Date
- -------------------------------------------------------------------------------------------------------
%
8-1/8% Debentures $ 100.0 $ 100.0 8.125 Mar 15, 2005
14.2% Senior Notes 21.4 21.4 14.200 Mar 15, 2004
12.0% Senior Notes 26.2 26.2 12.000 Mar 15, 2004
Revolving Credit Facility 28.9 24.0 8.100 Mar 15, 2004
A/R Securitization Facility 35.0 23.5 3.780 May 29, 2004
On May 27, 2003, Cone amended agreements with its lenders extending the maturity
date of its existing Revolving Credit Facility and its Senior Note obligation
through March 15, 2004. With the amendments, the interest rate on the senior
note remained 14.2%. The revolving credit agreement was split into two
components. The first component was a $25 million, 12% senior note and the
second component was a $31 million revolving credit facility bearing interest at
LIBOR plus 6.75%.
As part of the extension, Cone settled the EARS, which were contingent rights
granted as a part of the agreements in November 2001, for $4.1 million. The
rights entitled the lenders, upon giving of notice within two years following
January 15, 2003, to receive a payment of the greater of $1 million or 10% of
the market value of Cone's outstanding common stock if Cone did not refinance
the Revolving Credit Facility and Senior Note by January 15, 2003, which did not
occur. The rights were settled for $2.1 million in cash, $1.8 million in senior
notes bearing interest at 12% and 14.2% maturing on March 15, 2004 and
approximately 169,000 shares of Cone common stock.
Excluding Cone's A/R Securitization Facility, Cone is currently in default of
its senior securities as a result of the Chapter 11 Cases. Cone is making no
payments under its senior securities and the payment of interest accruing under
its senior securities after September 24, 2003, is stayed in connection with the
Chapter 11 Cases.
Cone's A/R Securitization Facility, as amended on September 23, 2003, provides
Cone with incremental liquidity during the initial phase of the bankruptcy
process. The A/R Securitization Facility provides for $35 million in
post-petition financing from GECC and has a maturity date of May 29, 2004. On
September 26, 2003, the Bankruptcy Court approved Cone's entering into and
implementing the amended A/R Securitization Facility as part of the "first day
orders." Amounts borrowed under the A/R Securitization Facility bear interest at
the GECC Commercial Paper Rate plus an applicable margin of 2.75%. In addition,
there is a commitment fee of .0625% on unused capacity under the facility. The
A/R Securitization Facility contains financial covenants requiring Cone to
maintain minimum levels of earnings before interest, taxes, depreciation,
amortization, restructuring, and reorganization items, as defined in the
30
agreement. It also imposes certain limits on capital expenditures and cash
restructuring charges. As of September 28, 2003, Cone was in compliance with the
terms under the A/R Securitization Facility.
At September 28, 2003, Cone had availability under its A/R Securitization
Facility, as determined by the difference between the borrowing base and
outstanding advances, of $9.8 million. Availability under the A/R Securitization
Facility is based upon the level of domestic receivables within the facility,
subject to certain concentration and eligibility restrictions, and is determined
by a daily borrowing base calculation. As of November 12, 2003, Cone had
availability under the A/R Securitization Facility, as determined by the
difference between the borrowing base and outstanding advances, of $16.8
million. The improvement in availability reflects the continued reduction of
inventories and the receipt of post-petition trade terms from certain key
vendors. Cone operates within the boundaries of a court-approved weekly cash
expenditures budget.
On November 10, 2003, Cone filed with the Bankruptcy Court a proposal to enter
into a $45 million DIP financing agreement with Bank of America and GECC. This
facility would provide Cone additional liquidity of approximately $10 - $12
million and will pay off the A/R Securitization Facility. The hearing date to
consider approval of the $45 million DIP financing is November 25, 2003.
The proposed DIP financing would be a senior secured revolving facility of $45
million with availability subject to a borrowing base formula consisting of
advances against eligible accounts receivables and inventories. The DIP lenders
would have a valid, perfected and first priority security interest and lien upon
all real and personal property of Cone. The security interests and liens would
be priming liens under Section 364(d) of the Bankruptcy Code with respect to the
liens and security interests in favor of the pre-petition senior secured
creditors. Loans outstanding under the DIP facility would bear interest at the
LIBOR plus 2.75%. The DIP facility has customary affirmative covenants for
asset-based transactions. Cone will continue to be bound by the court-approved
cash budget as presented and approved by the Bankruptcy Court from time to time.
Accounts receivable on September 28, 2003 were $30.6 million, as compared with
$43.3 million at September 29, 2002. Receivables, including those sold pursuant
to the A/R Securitization Facility, represented 62 days of sales outstanding at
both September 28, 2003 and at September 29, 2002. Advances outstanding under
the A/R Securitization Facility were $23.2 million at September 28, 2003 and
$28.5 million at September 29, 2002.
Inventories on September 28, 2003 were $58.8 million, as compared with $48.8
million at December 29, 2002 reflecting an increase in denim finished goods
inventories and raw materials, partially offset by a decrease in work in process
inventory. For comparison purposes, inventories at September 29, 2002 were $45.6
million. The year-over-year increase in inventories is primarily the result of
increased denim finished goods inventory levels and higher cotton prices.
During the first nine months of 2003, cash used in operations was $13.7 million
as cash generated was offset by an increase of $10 million in inventories.
During the first nine months of 2003, capital expenditures were $3.5 million, as
31
compared to $3.9 million for the first nine months of 2002. Cone's amended A/R
Securitization Facility prohibits 2003 capital expenditures in excess of $6.0
million.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
Except for the historical information presented, the matters disclosed in the
foregoing discussion and analysis and other parts of this report, as well as
oral statements made from time to time by representatives of Cone, include
forward-looking statements within the meaning of the Federal Securities laws.
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.
These forward-looking statements include statements relating to our anticipated
financial performance and business prospects. Statements preceded by, followed
by or that include words such as "believe," "anticipate," "estimate," "expect,"
"could," and other similar expressions are to be considered such forward-looking
statements. These forward-looking statements speak only as of the date stated
and we do not undertake any obligation to update or revise publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise, even if experience or future events make it clear that any
expected results expressed or implied by these forward-looking statements will
not be realized. Although we believe that the expectations reflected in these
forward-looking statements are reasonable, these expectations may not prove to
be correct or we may not achieve the financial results, savings or other
benefits anticipated in the forward-looking statements. These forward-looking
statements are necessarily estimates reflecting the best judgment of our senior
management and involve a number of risks and uncertainties, some of which may be
beyond our control, that could cause actual results to differ materially from
those suggested by the forward-looking statements. Such factors include, without
limitation:
o 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,
o the highly competitive nature of the textile industry and the
continuing effects of reduced import protection, free-trade
initiatives and retaliatory measures in trade disputes,
o the unpredictability of the cost and availability of cotton, Cone's
principal raw material, and other manufacturing costs,
o Cone's relationships with Levi Strauss as its major customer including
its sourcing practices,
o Cone's ability to attract and maintain adequate capital, to fund
operations, and expand its denim manufacturing in low-cost countries,
o increases in prevailing interest rates,
o Cone's ability to exit successfully from the Chapter 11 Cases, and
o the effect on Cone's sales and markets of events such as the events of
September 11, 2001.
32
For a further description of these risks see "Item 1. Business -Competition,
- -Raw Materials and -Customers" and "Item 7. Management's Discussion and Analysis
of Results of Operations and Financial Condition -- Overview" contained in
Cone's 2002 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.
OTHER MATTERS
The Securities and Exchange Commission by Order dated October 29, 2003, granted
the application of the New York Stock Exchange, Inc. for removal of the Common
Stock of Cone from listing and registration on the Exchange under the Securities
Exchange Act of 1934. The removal from listing and registration on the Exchange
of the above issue of Cone became effective at the opening of the trading
session on October 30, 2003 pursuant to the Order of the Commission.
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 environmental committee, which fosters protection of the environment and
compliance with laws.
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
results of operations, financial condition and liquidity of the Debtors. As a
result of the Chapter 11 Cases, litigation relating to pre-petition claims
against the Debtors is stayed; however, certain pre-petition claims by the
government or governmental agencies seeking equitable or other non-monetary
relief against the Debtors may not be subject to the automatic stay.
Furthermore, litigants may seek to obtain relief from the Bankruptcy Court to
preserve their claims. As of September 28, 2003, no significant litigation
existed.
NON-GAAP FINANCIAL MEASURES
From time to time management discloses Operating Income (Loss) before
Depreciation, Amortization, Restructuring and Impairment of Assets as well as
Earnings Per Share, excluding selected items. These non-GAAP (generally acc