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[LOGO] CONE (R)
Annual
Report
2001
Form 10-K
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FORM 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 30, 2001
COMMISSION FILE NUMBER 1-3634
CONE MILLS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NORTH CAROLINA 56-0367025
(STATE OR OTHER (I.R.S. EMPLOYER
JURISDICTION) IDENTIFICATION NO.)
804 GREEN VALLEY ROAD,
SUITE 300, GREENSBORO,
N.C. 27408
(ADDRESS OF PRINCIPAL
EXECUTIVE OFFICES) (ZIP CODE)
336-379-6220
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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Common Stock, $.10 par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes __X__ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Aggregate market value of voting stock held by nonaffiliates of the
registrant as of February 12, 2002 (based on the closing sale price of $2.10 of
the registrant's voting stock, as reported on the New York Stock Exchange
Composite Tape on such date) was approximately: $53,944,365.
Number of shares of common stock outstanding as of February 12, 2002:
25,687,793 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for Annual Meeting to be held May 7, 2002, Part III, Items 10,
11, 12 and 13 of this report.
Index to Exhibits--Pages 59-66.
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PART I
ITEM 1. BUSINESS
Founded in 1891 Cone Mills Corporation ("Cone"), incorporated and
headquartered in North Carolina, operates in three principal business segments:
(1) Denim, (2) Commission Finishing and (3) Decorative Fabrics. Cone believes
it is the world's largest producer of denim fabrics, the largest commission
printer and finisher of home furnishings in North America and a major producer
of wide jacquards in the United States. Cone competes domestically and
internationally on the basis of styling and product development, management
experience, versatility and size of manufacturing facilities, competitive
prices and the Cone name and reputation.
Cone is engaged in denim production in Mexico through Parras Cone de Mexico,
S.A. de C.V. ("Parras Cone"), a joint venture facility with Compania Industrial
de Parras, S.A. de C.V. ("CIPSA"). This facility, Parras Cone, has been
producing basic denims and yarn since late 1995. Under a marketing agreement
with CIPSA, Cone markets and distributes 100% of the denim production of Parras
Cone. As market conditions improve, it is the goal of the joint venture
partners to expand Parras Cone's productive capacity by approximately 35%. The
infrastructure to support the capacity expansion is presently in place.
In 1999, Cone announced plans to continue its denim manufacturing expansion
in Mexico. Cone has a strategic project to co-develop an industrial park and to
build a denim facility in Altamira, Tamaulipas, Mexico. This project consists
of two components: (1) a 50/50 joint venture with Guilford Mills, Inc., to
develop and operate a textile and apparel industrial park with each company
individually owning land for its respective textile operation and contracting
with the jointly owned service company for infrastructure services, such as
water, power and wastewater treatment, and (2) a 100% owned denim plant with an
initial targeted annual capacity of 20 million yards expandable to 40 million
yards. The infrastructure of the industrial park was completed in 2001, and
Cone continues to evaluate financing options for its denim plant with a target
to begin construction when financing is secured. It is expected that the
financing of the denim facility in Altamira, Tamaulipas, Mexico, will be
dependent upon the recapitalization of Cone's balance sheet; however, Cone will
continue to explore other financing alternatives.
Cone's stated strategy is to compete only in businesses in which it believes
it is a leader and that are defensible in this hemisphere. As a part of the
process of strategically focusing on these criteria, over the past three years
Cone has implemented several reorganization and downsizing initiatives, which
resulted in closing three manufacturing facilities and in eliminating over
2,900 employees.
On May 24, 2001, Cone announced the initiation of its "Reinvention Plan,"
which consisted of a goal of generating $30-$40 million in annual cost
reductions, profit improvement initiatives and loss avoidance. The Reinvention
Plan initially had four components: (1) workforce reductions; (2) changes in
employee pay and benefit practices; (3) streamlining of Cone's business
practices, which included a broad range of items from maintenance scheduling to
vendor sourcing practices, to the consolidation of denim operations to reduce
efficiently U.S. capacity; and (4) improvement of performance of the khaki and
John Wolf converted fabrics businesses. Subsequently, Cone decided to exit the
khaki business and sell the John Wolf converted fabrics business.
As a result of weaknesses in the U.S. economy and the need to focus on
businesses in which it is a leader, Cone decided to sell the John Wolf
converted fabrics operation rather than invest the resources necessary to
improve its performance. On August 10, 2001, Cone finalized the sale of this
business for net proceeds, including the collection of accounts receivable, of
approximately $9 million. On October 30, 2001, Cone announced its decision to
exit the khaki business segment because Cone was not a leader in this category
and Cone believes the long-term outlook for khaki fabrics produced in North
America is negative. Cone will not have any significant continuing involvement
in either of these businesses and has accounted for their results as
discontinued operations.
To date, the implementation of the Reinvention Plan has resulted in the
reduction of the workforce by 640 employees, primarily at Cone's corporate
office and the Rutherford County facilities, curtailment in salaried defined
benefit pension plans that have been frozen, and changes in business practices.
As part of the Rutherford
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County initiatives, Cone consolidated the Haynes and Florence denim facilities.
Cone has implemented initiatives to produce annualized cost savings and profit
improvement of approximately $27 million as a result of the Reinvention Plan.
In the first quarter of 2001, Cone completed the exit of its Raytex business
unit. The results of the Raytex operation are included in the commission
finishing segment. Raytex results have not been accounted for as a discontinued
operation as the decision to exit the business was prior to the change in
accounting standards as it relates to discontinued operations. The Raytex plant
and equipment are available for sale.
BUSINESS SEGMENTS
Information concerning operating segments for Cone's 2001, 2000 and 1999
fiscal years are incorporated by reference. (See "Item 7. Management's
Discussion and Analysis of Results of Operations and Financial Condition,
Long-Term Strategic Initiatives" and "Item 8. Financial Statements and
Supplementary Data," Notes 18 and 21 of the Notes to Consolidated Financial
Statements.)
DENIM
The denim segment represents Cone's largest segment. Cone believes it is the
world's largest producer of denim and its fabrics are used primarily in branded
and private label jeans.
Cone's denim products are primarily designed for use in garments targeted
for the middle and upper-end markets, where styling and quality generally
command premium fabric prices. Fabric styling is supported by Cone's product
development specialists. Because of the nature of the manufacturing process,
denim fabric contains variations in color that give it a distinctive
appearance. After weaving, denim fabrics and garments are processed further in
finishing operations that produce different textures and other altered physical
properties. During these processes, Cone's product development specialists
generally work in collaboration with customers to assure that fabrics meet
customer requirements and can be manufactured efficiently. This creates a
strong working relationship that allows Cone to react quickly to its customers'
rapidly changing needs.
Cone identifies its denims as "value-added" and "basic." Fabric
construction, yarn variations, finishes and new product introductions
distinguish value-added denims. Basic denims are less differentiated by styling
with competition being primarily on the basis of price, quality and service.
Cone's value-added denims are sold principally to brand name apparel
companies, specialty retailers and brand name garment producers. Although most
of Cone's basic denims are designed for the upscale segment of these markets,
Cone also produces high-quality basic heavyweight blue denim, primarily at
Parras Cone, to service the mass-market distribution channel. Sales of basic
denims constituted approximately 37% and 38% of Cone's total denim sales in
2001 and 2000, respectively.
Cone's largest denim customer is Levi Strauss, whose 501(R) family of jeans
are produced solely from Cone's proprietary fabrics. Other customers include
Gap Inc. (The Gap, Old Navy and Banana Republic), V.F. Corporation (Wrangler,
Lee, and others), Calvin Klein, Tommy Hilfiger Jeans, Polo Ralph Lauren and JC
Penney (Arizona).
Value-added denims include a variety of woven constructions, colors and
weights, with lighter-weight fabrics used primarily in fashion garment
silhouettes and women's and children's wear. These fabrics constitute a growing
portion of the denim market as recent growth in denim has occurred in fashion
silhouettes such as baggy jeans and carpenter pants at the expense of basic
five-pocket jeans. Because of their use in higher fashion garments, these
denims tend to establish market trends.
Manufacturing. Cone's denim facilities are modern and flexible and
encompass substantially all manufacturing processes necessary to convert raw
fiber or yarn into finished fabrics. Cone's U.S. dyeing and finishing
facilities include a wide range of technologies, with seven indigo long-chain
dyeing machines, beam dyeing, continuous overdye machinery and raw cotton
dyeing equipment. All of Cone's U.S. denim weaving facilities were re-loomed in
the late 1990s. In order to reduce operating costs and conserve capital that
would have been required for equipment modernization, Cone has been outsourcing
a significant portion of its yarn
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production since early 1999. Additionally, in 2001 Cone consolidated the denim
operations of the Haynes and Florence facilities, which reduced costs and U.S.
manufacturing capacity.
In addition to its U.S. facilities, Cone has a 50% equity interest in Parras
Cone, a low-cost producer of high-quality basic denims located in Mexico. Under
a marketing agreement with its partner, Cone markets and distributes 100% of
the fabric production of Parras Cone. Parras Cone plans to expand its
productive capacity by approximately 35% in the near future. This expansion
will make Parras Cone even more efficient and allow expanded relationships with
key customers.
Cone is recognized internationally as a leader in product quality and new
product development. Product and process development is supported by
manufacturing development groups, which have specialists located in each
facility. These groups work with Cone's product development specialists and its
customers' designers to produce new products for the marketplace. Cone uses
on-line computer-aided design systems to increase styling effectiveness.
Competition. The denim business is highly competitive. Primary competitive
factors include price, product styling and differentiation, customer service,
quality and flexibility, with the significance of each factor dependent upon
the particular needs of the customer and the product involved.
No single company dominates the industry and domestic and foreign
competitors range from large integrated enterprises to small niche companies.
Competition is in the form of both domestic and foreign piece goods and
imported apparel garments from Mexico, Asia and other areas. The migration of
garment manufacturing facilities to Mexico and Caribbean countries, the
strength of the U.S. dollar and the proliferation of newly styled fabrics
competing for fashion acceptance have been factors affecting Cone's business
environment. Cone believes that the financial instability of certain of its
domestic competitors is enhancing Cone's image as an industry leader. Cone's
competitiveness with producers from other countries is influenced by tariffs,
transportation costs, the relative value of the U.S. dollar and any foreign
subsidies. Any failure of Cone to compete effectively in this environment or to
keep pace with changing markets could have a material adverse effect on Cone's
results of operations and financial position.
In recent years, as a result of the competitiveness of the apparel business
and the criticality of low wage costs for garment producers Cone has explored a
number of international initiatives. Its objectives for expansion into Mexico
included seeking access to the Mexican distribution system to sell Cone's
products, as well as access to lower cost cut-and-sew facilities in order to
increase market share with private label customers and large branded customers
migrating to Mexico. Cone is also seeking to gain production cost advantages
while benefiting from its technological expertise. As the garment industry has
migrated to Mexico from the U.S., Cone has benefited from Parras Cone's cost
structure and location, and Cone's U.S. marketing and support infrastructure.
Growth of imported denim bottoms has been rising since the beginning of 1998
with most of the growth coming from Mexico. Mexico is the dominant player in
denim bottom imports to the U.S., representing approximately 56% of total units
imported in 2001. There has been a steady increase in U.S. fabric exports to
Mexico over the past few years, with a recent decline as a result of consumer
market conditions. In 2001, U.S. fabric made up approximately 40% of the
Mexican denim apparel imports in the U.S. The Far East, at approximately 13% of
total unit imports, is another important player, as imports from the region
represented approximately 46% of the total increase in units imported in 2001.
In 1999, Cone announced plans to continue its denim manufacturing expansion
in Mexico. Cone has a strategic project to co-develop an industrial park and to
build a denim facility in Altamira, Tamaulipas, Mexico. This project as
announced will initially have two components: 1) a 50/50 joint venture with
Guilford Mills, Inc., to develop and operate a textile and apparel industrial
park with each company individually owning land for its respective textile
operation and contracting with the jointly owned service company for
infrastructure services, such as water, power and wastewater treatment, and 2)
a 100% owned denim plant with an initial annual capacity of 20 million yards
expandable to 40 million yards. Cone invested approximately $10 million in the
infrastructure of the industrial park, which was completed in February 2001. It
is Cone's goal to start the construction of the denim facility when financing
is secured. Cone has not arranged the required financing at this
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date and there is no assurance that it will be able to obtain financing on
terms and conditions acceptable to Cone. (See "Item 7. Management's Discussion
and Analysis of Results of Operations and Financial Condition, Long-Term
Strategic Initiatives.")
Cone is continuously assessing the feasibility of non-U.S. manufacturing
platforms and alliances within certain trade blocs in order to compete more
effectively in its markets.
Seasonality. Demand for Cone's denim and the level of Cone's sales
fluctuate moderately during the year. There are three retail selling seasons:
spring, fall (back-to-school) and the holiday season. Cone's sales for a
particular selling season generally begin six months in advance of that season.
Marketing and Sales. Cone's marketing focus is to serve brand name apparel
customers through the development of products that are recognized in the
marketplace for their distinctive quality, durability and styling. Styles of
Cone's denim fabrics vary in color, finish, weight and construction, depending
upon fashion trends and the needs of the specific customer. Cone's product
development specialists monitor fashion trends throughout the U.S., Europe, Far
East and South America, attend fashion and trade shows, meet with garment
manufacturers and retailers and conduct market research. In addition, Cone
maintains an international focus with a long history of distributing its
products internationally. In 2001, Cone exported approximately 49% of its denim
sales.
The denim marketing group is headquartered in Greensboro, North Carolina
with sales offices in New York, San Francisco, Los Angeles, Dallas and Brussels
to provide a more direct working relationship with the customer. In addition,
Cone has sales agents in Europe, Japan, Hong Kong, and throughout Central and
South America, and it maintains support services in trade financing, traffic
and transportation in order to support its international presence. Cone's
strategy is to service its international customers with the same degree of
commitment to quality, service and fabric development as its domestic customers.
Cone's denim exports were approximately $174 million, $185 million, and $154
million in 2001, 2000 and 1999, respectively.
Raw Materials. Cotton is the primary raw material for Cone's fabric
manufacturing operations, its purchased yarn and greige goods (fabrics that
have not been dyed or finished). United States agricultural programs affect the
cost and supply of cotton in the U.S., and the policies of foreign governments
have an effect on worldwide prices and supplies as well. The U.S. Department of
Agriculture provides several programs to keep the effective price to cotton
purchasers competitive with world levels while protecting the grower. Step 2 of
the Federal Agriculture Improvement and Reform Act provided a formula for
payments to users of domestically produced cotton when domestic cotton prices
exceeded world prices for a period of time. Funds for these payments were
depleted in December 1998. The Step 2 program received additional funding in
October 1999. Cone received Step 2 equalization payments during 2001 and 2000.
Cone will be eligible for equalization payments in 2002. Although management
believes that U.S. companies will continue to be able to acquire adequate
cotton supplies at prices competitive with offshore manufacturers, there can be
no assurance that these results will always occur. To the extent that effective
U.S. cotton prices exceed world prices, Cone's competitiveness may be
materially adversely affected, as Cone cannot always fully pass increased
cotton costs on to its customers. (See "Item 7. Management's Discussion and
Analysis of Results of Operations and Financial Condition.")
Since cotton is an agricultural product, its supply and quality are subject
to the forces of nature. Although Cone has always been able to acquire
sufficient supplies of cotton for its operations in the past, any shortage in
the cotton supply by reason of weather, disease or other factors could
materially adversely affect Cone's operations. (See "Item 7. Management's
Discussion and Analysis of Results of Operations and Financial Condition.")
Cone has an established cotton purchasing program, administered in
conformance with policies approved by the Board of Directors, to ensure an
uninterrupted supply of appropriate quality and quantities of cotton, to cover
committed and anticipated fabric sales and to manage margin risks associated
with price fluctuations on anticipated cotton purchases. Cone primarily uses
forward purchase contracts and, to a lesser extent, futures and options
contracts. Management believes that its cotton purchasing program has resulted
in lower overall cotton prices than if cotton were purchased solely on a spot
market basis or by solely matching cotton purchases
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with product sales. Since prices for forward purchase contracts are sometimes
fixed in advance of shipment, Cone may benefit from its fixed-price purchases
of cotton if prices thereafter rise, or fail to benefit if prices subsequently
fall. There can be no assurance the forward purchase contracts and hedging
transactions will not result in higher cotton costs to Cone or will protect
Cone from price fluctuations.
Cone also purchases yarn, greige goods and dyes and chemicals. Based on
Cone's strategy to limit its investment in yarn manufacturing in the future, it
has formed alliances and, in some cases, entered into supply contracts with
yarn manufacturers to help ensure adequate supplies at competitive prices.
Pursuant to its decision to outsource an increased portion of its yarn
manufacturing, Cone entered into a supply agreement with Parkdale America, LLC,
during 1999, which expires in 2004. Additional yarn and other materials used by
Cone have normally been available in adequate supplies through a number of
suppliers.
Trade. The North American Free Trade Agreement ("NAFTA"), which became
effective on January 1, 1994, created a free-trade zone among Canada, Mexico
and the U.S. NAFTA contains safeguards that were sought by the U.S. textile
industry, including a rule of origin requirement that products be processed in
one of the three countries in order to benefit from the agreement. NAFTA phased
out all trade restrictions and tariffs on textiles and apparel among the three
countries. NAFTA has been responsible in part for Mexico recently surpassing
China as the largest exporter of apparel to the U.S. NAFTA and the Caribbean
Basin Initiative program, through favored quota and tariff treatment, have
accelerated the shift in production of garments to sources in this hemisphere,
indirectly benefiting U.S. textile producers and Cone. Cone's Mexican joint
venture, Parras Cone, benefits from its access to U.S. markets and has
benefited from NAFTA.
The U.S. Congress approved the Trade and Development Act of 2000. This
legislation granted trade benefits to the countries in the Caribbean for
certain textile and apparel products roughly equivalent to those available to
Mexico under NAFTA. The provisions of the legislation affecting the countries
in the Caribbean have resulted in increased shipments of Cone fabric to the
area for garment production. This legislation also increased the trade benefits
available to the countries in Sub-Saharan Africa for certain apparel products
shipped to the U.S. market. The provisions of this legislation benefiting
Sub-Saharan Africa nations have led to increased imports from the region. At
this time the ultimate impact of the legislation on the U.S. textile and
apparel industry and Cone is impossible to predict.
The impact of multilateral agreements intended to liberalize global trade
could also significantly affect U.S. textile producers and Cone. The World
Trade Organization ("WTO") is overseeing the phase-out of textile and apparel
quotas over a 10-year period through 2004. Tariffs on textile/apparel products
are being reduced (but not eliminated) over the same 10-year period. In
addition, China has recently gained admission to the WTO. As one of the world's
major textile and apparel producing countries, China's admission to the WTO
will have a significant impact on global textile and apparel trade. By gaining
admission to the WTO, China is able to take advantage of the elimination of
quota limitations into the U.S. market, and there could be a negative impact on
the domestic textile industry, including Cone.
In response, Cone has focused its operations on the manufacture of fabrics
for use in garments that are less vulnerable to import penetration. Management
believes the location of Cone's U.S. manufacturing facilities, its 50% interest
in the Parras Cone plant in Mexico, and its emphasis on shortening production
and delivery times allow Cone to respond more quickly than foreign producers to
changing fashion trends and to its domestic customers' demands for precise
production schedules and rapid delivery. Cone has invested in technological and
process improvements to meet demand for quality and styling.
In instances where Cone finds its products non-competitive with imports,
Cone is pursuing initiatives either to manufacture or source products
internationally or to exit the product line.
COMMISSION FINISHING
The commission finishing segment provides custom printing and plain-shade
dyeing services. Commission printers and dyers process fabrics owned by various
customers on a contract fee basis. The customers, primarily referred to in the
trade as converters, purchase base fabrics from weaving mills and use either
internal or external design staffs to create patterns or color direction. The
application of design, color, hand, and finish are the key value adding
components of a successful commission printer or dyer.
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Carlisle Finishing. The Carlisle plant is a modern, highly complex facility
comprised of over one million square feet with expertise in rotary screen
printing. In recent years, Cone has invested heavily in computerized
color-mixing systems, automated process controls, and communication systems
using the Internet to support the competitive strategy of focused attention on
quality and service.
Markets served by the Carlisle plant are home decorative, specialty apparel
and craft fabrics, and plain shade apparel. Cone believes that Carlisle is the
largest commission printer of home decorative fabrics in the U.S. Key customers
in this segment are the Waverly Division of F. Schumacher, P. Kaufmann, Inc.
and Covington Fabrics. Key markets for specialty printed products are
associated with over-the-counter craft and home sewing, camouflage fabrics for
the hunting trade, and baby products. Key customers for this segment include
Springs Industries and Schott International.
Consumer fashion preference heavily influences the market direction of each
of these product groups. Contributing factors to fashion include coloration,
texture, and design appeal. In recent years, home furnishings print demand has
been affected adversely by alternative products, such as yarn-dyed jacquard
fabrics and leather products.
In 1999, Cone restructured the Carlisle operation to reduce cost, improve
quality and more aggressively position itself in the market place. These
efforts have been successful in returning the operation to profitability.
Market competitive forces resulted in the closing of several competitors in
2000, including Carlisle's largest home decorative competitor. These closings
significantly reduced the available number of domestic printers for some key
fabrics that Cone believes will benefit Carlisle.
Raytex Finishing. In December 2000, Cone announced its intent to cease
operations at the Raytex plant and exit those markets. The closing of the
Raytex plant was completed in the first quarter of 2001. The first quarter 2001
results were affected negatively by operating inefficiencies associated with
closing the Raytex plant.
DECORATIVE FABRICS
The decorative fabrics segment consists of the Cone Jacquards operation.
Cone Jacquards focuses on the design, styling and manufacturing of jacquard
products primarily for the furniture, top-of-the-bed and novelty markets.
Customers work side-by-side with Cone professionals on CAD/CAM machines to
design and revise fabric specifications, which are then sent electronically to
the weaving machines for production.
The manufacturing facility, built in 1995, is a state-of-the-art weaving
platform with a mix of wide and narrow weaving equipment. Yarn is procured from
multiple sources including Cone's denim operation. Woven fabric is finished at
outside finishers. Cone Jacquard's manufacturing configuration gives it a high
degree of flexibility to match production with customer demand.
Fabrics are produced for furniture manufacturers, distributors, specialty
product manufacturers, jobbers and retailers. Key customers include Valley
Forge Fabrics, Westpoint Stevens and Sure Fit, Inc. Cone Jacquard fabrics are
marketed domestically and internationally, primarily through dedicated sales
agents.
On August 10, 2001, Cone sold substantially all of the assets, with the
exception of outstanding accounts receivable, of the John Wolf converted
fabrics business, a component of its decorative fabrics segment, to an
unrelated third party and exited the decorative fabrics converting business.
Competition. The decorative fabrics business is highly competitive and Cone
Jacquards competes primarily on the basis of product styling, quality, sales
initiative and service. Cone Jacquards competes with a large number of domestic
and foreign suppliers.
Seasonality. Demand for Cone's jacquards fabrics and the level of Cone's
sales fluctuate moderately during the year with January being a seasonally slow
period.
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KHAKI
On October 30, 2001, Cone announced its decision to exit the khaki business
segment because Cone was not a leader in this category and Cone believes the
long-term outlook for khaki fabrics produced in North America is negative. Cone
will not have any significant continuing involvement in the khaki business and
has accounted for the results as discontinued operations.
OTHER SEGMENT
The "Other" segment consists of miscellaneous ancillary operations.
TRADEMARKS, COPYRIGHTS AND PATENTS
Cone owns several registered trademarks containing the "Cone" name and
various designs. In addition, Cone holds various other trademarks, trade names,
copyrights and patents used in connection with its business and products, both
domestically and internationally. Cone believes that the name recognition of
Cone and its reputation for quality, service and product development have value
in both domestic and international markets.
CUSTOMERS
Cone has one customer, Levi Strauss, which accounts for more than 10% of net
sales. Sales to this customer accounted for approximately 37%, 38% and 35% of
net sales in 2001, 2000 and 1999, respectively. The loss of Levi as a customer,
or a significant reduction in its purchases from Cone, would have a material
adverse effect on Cone's financial position and results of operations.
Levi has been a customer of Cone since 1915 and a close, cooperative
supplier/customer relationship has evolved through the development of Cone's
proprietary fabrics for use in Levi's 501(R) family of jeans. In addition to
supplying fabrics for Levi's 501(R) family of jeans, Cone sells other denim
fabrics to Levi. Because Cone is Levi's major denim supplier, Levi initiated
discussions with Cone in 1989 concerning ways to assure the continuity of this
relationship. As a result of these discussions, Cone and Levi entered into an
exclusive Supply Agreement as of March 30, 1992, which confirms that Levi will
continue to use only Cone's proprietary denim fabrics in manufacturing Levi's
501(R) family of jeans and that Cone will continue to supply such fabrics
solely to Levi. The volume of purchases by Levi and the prices charged by Cone
will continue to be subject to customary negotiations between the parties.
The Supply Agreement expires in March of 2007 and is automatically extended
each year, unless either party gives notice otherwise, so that the remaining
term is five years. Following a change in control, the Supply Agreement would
terminate at the end of a three-year supply arrangement or of the lease term,
as the case may be. Additionally, Levi may terminate the Supply Agreement at
any time upon 30 days' written notice and either party may terminate the Supply
Agreement in the event of the other party's insolvency, bankruptcy or
occurrence of a similar event.
BACKLOG
Cone's order backlog was approximately $68 million at January 27, 2002, as
compared to approximately $115 million at January 28, 2001. Denim accounted for
94% of the order backlog at January 27, 2002. The decrease in Cone's order
backlog is attributable to changes in economic conditions and the shortening of
product delivery schedules demanded by Cone's customers.
Physical deliveries for accepted fabric orders in the apparel industry vary
in that some products are ordered for immediate delivery only, while others are
ordered for delivery several months in the future. In addition, Cone has an
ongoing proprietary program for which orders are issued only for nearby
delivery. Therefore, orders on hand are not necessarily indicative of total
future revenues. It is expected that substantially all of the orders
outstanding at January 27, 2002, will be filled within the first four months of
2002.
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RESEARCH AND DEVELOPMENT
Cone's research and development activities are directed primarily toward
improving the quality, styling and performance of its apparel fabrics and other
products and services. Cone also is engaged in the development of
computer-aided design and manufacturing systems and other methods of improving
the interaction between Cone's stylists and its customers. These activities are
conducted at various facilities, and expenses related to these activities are
an immaterial portion of Cone's overall operating costs.
GOVERNMENTAL REGULATION
Federal, state and local regulations relating to the workplace and the
discharge of materials into the environment are continually changing;
therefore, it is difficult to gauge the total future impact of such regulations
on Cone. However, existing government regulations are not expected to have a
material effect on Cone's financial position, operating results or planned
capital expenditures. Cone has an environmental protection committee and a
workplace safety organization.
EMPLOYEES
At January 31, 2002, Cone employed approximately 3,300 persons, of whom
approximately 550 were salaried and approximately 2,750 were hourly employees.
Of such hourly employees, approximately 860 are represented by collective
bargaining units. Based upon its records relating to the withholding of union
dues from employee compensation, Cone believes that approximately 360 of its
employees are dues-paying union members. Cone has not suffered any major
disruptions in its operations from strikes or similar events for more than a
decade and considers its relationship with its employees to be satisfactory.
ITEM 2. PROPERTY
As of March 2002, Cone's U.S. manufacturing facilities consist of five
plants, four located in North Carolina and one in South Carolina, with
approximately 4.0 million square feet of floor space. The denim segment
operates three plants, and each of the commission finishing and the decorative
fabrics segments operates one plant. Cone also maintains several distribution
centers and warehouses. Internationally, Cone has a 50% interest in a 575,000
square foot denim manufacturing facility in Parras, Mexico.
All such facilities are maintained in good condition and are both adequate
and suitable for their respective purposes. Cone's manufacturing facilities are
substantially utilized except for those portions of the facilities formerly
used for yarn manufacturing.
All U.S. manufacturing facilities are pledged as security for Cone's
indebtedness under its debt agreements. The Parras Cone denim facility serves
as collateral for a portion of the debt of the joint venture company.
Cone leases its executive and administrative offices, located in Greensboro,
North Carolina, and other offices, located in various U.S. cities and Brussels,
from unrelated third parties. In the fourth quarter of 2001, Cone moved its
corporate headquarters into substantially smaller space, thus reducing its
annual occupancy costs by more than $1 million.
In January 2002, Cone closed the remaining manufacturing processes at its
Florence denim plant, located in Forest City, North Carolina, which contains
0.2 million square feet of floor space. In the first quarter of 2001, Cone
closed its Raytex plant, located in Marion, South Carolina, which contains 0.3
million square feet of floor space. In addition, Cone owns its Salisbury, North
Carolina plant, closed in 1999, which contains approximately 0.5 million square
feet of floor space. All three facilities are classified as available for sale.
Also, during 1999, Cone closed the yarn manufacturing portions of two North
Carolina facilities, Florence and Cliffside, which constitute approximately 0.2
million square feet of floor space.
9
ITEM 3. LEGAL PROCEEDINGS
Cone and its subsidiaries are involved in legal proceedings and claims
arising in the ordinary course of business. Although there can be no assurance
as to the ultimate disposition of these matters, management believes that the
probable resolution of such contingencies will not have a material adverse
effect on the financial condition and liquidity of Cone. As a result of Cone's
recent operating results, management believes that the effects of any
litigation, no matter how small or insignificant, could be considered material
to Cone's future results of operations. As of December 30, 2001, no significant
litigation existed.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
John L. Bakane....... 51 Director, President and Chief Executive Officer
Gary L. Smith........ 43 Executive Vice President and Chief Financial Officer
Thomas E. McKenna.... 43 Executive Vice President, Denim Merchandising and Marketing
Michael J. Whisenant. 57 Executive Vice President, Denim Operations
Neil W. Koonce....... 54 Vice President, General Counsel and Secretary
Michael K. Horrigan.. 47 Vice President, Human Resources
Marvin A. Woolen, Jr. 61 Vice President, Cotton Purchasing
Samir M. Gabriel..... 44 Controller
W. Scott Wenhold..... 37 Treasurer
All officers of the Registrant are elected or reelected each year at the
Annual Meeting of the Board of Directors or at other times as necessary. All
officers serve at the pleasure of the Board of Directors and until their
successors are elected and qualified.
John L. Bakane joined Cone in 1975. He was named Chief Financial Officer in
1988 and was elected to the Board of Directors in 1989. He was elected
Executive Vice President in 1995. In November 1996, he assumed responsibility
for management of the Denim Group of Cone and in April 1997 he was appointed
President of Cone Apparel Products Group. He was appointed Chief Operating
Officer in April 1998, and served in such capacity until elected President and
Chief Executive Officer in November 1998.
Gary L. Smith was employed by Cone in 1981 and was serving as Manager of
Business Analysis when he was elected Assistant Controller in 1994. He was
named Controller in December 1996, Executive Vice President in February 1999
and Chief Financial Officer in November 1999.
Thomas E. McKenna was employed by Cone in 1981. He worked in Cone's San
Francisco, Brussels, and Singapore sales offices prior to being named Vice
President, National Sales and Merchandising in June 1997. He was named Senior
Vice President, Sales and Marketing in March 1999 and Executive Vice President,
Denim Merchandising and Marketing in May 2001.
10
Michael J. Whisenant was employed by Cone in 1967. He has served in plant
management, product development and product quality. He was named Vice
President, Technical Services and Product Quality in October 1996 and named
Senior Vice President, Operations in March 1999. He was appointed Executive
Vice President, Denim Operations in May 2001.
Neil W. Koonce was employed by Cone in 1974. He has been General Counsel
since 1987, Vice President since 1989, and Secretary since February 1999.
Michael K. Horrigan was employed by Cone in March 1999 as Vice President,
Human Resources. He served as Vice President of Human Resources for the sales
and marketing and bed fashions groups at Springs Industries from February 1997
to March 1999. Before joining Springs, he was employed by Sara Lee branded
apparel businesses for eight years, including five years as Vice President of
Human Resources for Champion Products. For ten years prior to that he worked in
human resources for General Electric.
Marvin A. Woolen, Jr. was employed by Cone in July 1995 as Director of
Cotton Purchasing. He was elected Vice President in 1997. He has been in the
cotton sales, merchandising, purchasing, classing and shipping business since
1971. From 1988 to 1995 he was President of Rollins Company, a cotton shipping
firm.
Samir M. Gabriel was employed by Cone in 1988. He has held a variety of
positions in Cone's Finance Department including Manager of Accounting from
March 1994 to May 1999, Director of Accounting from June 1999 to May 2000, and
Director of Cost Accounting from June 2000 to April 2001. He was appointed
Controller in May 2001.
W. Scott Wenhold was appointed Treasurer in January 2001. He served as
Director of International Treasury of Johnson Controls, Inc. from September
1999 to December 2000. Prior to joining Johnson Controls, Inc., he was employed
by Fort James Corporation where he served as Assistant Treasurer from July 1998
to July 1999, Director of Corporate Finance from August 1997 to July 1998, and
Manager of Corporate Finance from April 1994 to August 1997.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Cone's Common Stock has traded on the New York Stock Exchange under the
ticker symbol "COE" since June 18, 1992, the date of its public offering. The
approximate number of holders of record of Cone's Common Stock as of January
31, 2002, was 300.
Information required by this Item on the sales prices and dividends of the
Common Stock of Cone are incorporated in "Note 23. Quarterly Financial Data
(Unaudited)" of "Item 8. Financial Statements and Supplementary Data" and is
incorporated herein by reference.
11
ITEM 6. SELECTED FINANCIAL DATA
HISTORICAL FINANCIAL REVIEW (1)
2001 2000 1999 1998(2) 1997
------ ------ ------ ------- ------
(IN MILLIONS, EXCEPT PER SHARE DATA AND NUMBER
OF EMPLOYEES)
Summary of Operations
Net Sales........................................................... $449.9 $552.6 $548.9 $660.9 $645.3
Cost of Goods Sold.................................................. 409.5 488.5 498.8 596.8 586.2
------ ------ ------ ------ ------
Gross Profit........................................................ 40.4 64.1 50.1 64.1 59.1
Selling and Administrative.......................................... 35.8 38.4 39.1 50.7 49.6
Restructuring and Impairment of Assets.............................. 19.9 38.5 16.0 17.1 5.2
------ ------ ------ ------ ------
Income (Loss) from Operations....................................... (15.3) (12.8) (5.0) (3.7) 4.3
Other Expense -- Net................................................ 20.1 22.2 13.9 12.1 11.7
------ ------ ------ ------ ------
Loss from Continuing Operations Before Income Tax Benefit and Equity
in Earnings of Unconsolidated Affiliates.......................... (35.4) (35.0) (18.9) (15.8) (7.4)
Income Tax Benefit.................................................. (12.1) (12.0) (6.6) (6.3) (3.0)
------ ------ ------ ------ ------
Loss from Continuing Operations Before Equity in
Earnings of Unconsolidated Affiliates............................. (23.3) (23.0) (12.3) (9.5) (4.4)
Equity in Earnings of Unconsolidated Affiliates..................... 0.2 2.7 1.7 5.2 2.6
------ ------ ------ ------ ------
Loss from Continuing Operations..................................... (23.1) (20.3) (10.6) (4.3) (1.8)
Loss from Discontinued Operations................................... (13.4) (5.0) (7.5) (2.4) (7.6)
Cumulative Effect of Accounting Change (3).......................... -- -- (1.0) -- --
------ ------ ------ ------ ------
Net Loss............................................................ $(36.5) $(25.3) $(19.1) $ (6.7) $ (9.4)
====== ====== ====== ====== ======
Loss Available to Common Stockholders
Loss from Continuing Operations................................... $(23.1) $(20.3) $(10.6) $ (4.3) $ (1.8)
Preferred Dividends............................................... (4.2) (3.8) (3.0) (2.9) (2.9)
------ ------ ------ ------ ------
Loss from Continuing Operations................................... (27.3) (24.1) (13.6) (7.2) (4.7)
Loss from Discontinued Operations................................. (13.4) (5.0) (7.5) (2.4) (7.6)
Cumulative Effect of Accounting Change (3)........................ -- -- (1.0) -- --
------ ------ ------ ------ ------
Net Loss.......................................................... $(40.7) $(29.1) $(22.1) $ (9.6) $(12.3)
====== ====== ====== ====== ======
Per Share of Common Stock -- Basic and Diluted
Loss from Continuing Operations................................... $(1.07) $(0.94) $(0.53) $(0.28) $(0.17)
Loss from Discontinued Operations................................. (0.52) (0.20) (0.30) (0.09) (0.30)
Cumulative Effect of Accounting Change (3)........................ -- -- (0.04) -- --
------ ------ ------ ------ ------
$(1.59) $(1.14) $(0.87) $(0.37) $(0.47)
====== ====== ====== ====== ======
Balance Sheet Data (at period end)
Total Assets........................................................ $334.4 $423.2 $472.8 $488.5 $506.6
Long-Term Debt...................................................... 173.7 182.1 198.8 172.1 150.4
Stockholders' Equity................................................ 86.6 126.4 157.5 181.9 196.5
Long-Term Debt as a Percent of Stockholders' Equity and Long-Term
Debt.............................................................. 67% 59% 56% 49% 43%
Shares Outstanding.................................................. 25.7 25.5 25.5 25.4 26.2
Other Data
Number of Employees at Period End................................... 3,300 4,300 4,300 6,200 6,100
Capital Expenditures................................................ $ 7.1 $ 10.0 $ 13.2 $ 32.8 $ 36.3
Investments in and Advances to Unconsolidated Affiliates............ 1.0 6.7 0.7 3.5 1.6
Common Stock Dividend Paid (4)...................................... -- -- -- -- --
- --------
(1) Prior years have been restated to reflect discontinued operations.
(2) Fiscal 1998 represents a 53 week period.
(3) In accordance with Statement of Position 98-5, "Reporting the Costs of
Start-up Activities", Cone recognized a charge of $1.0 million in 1999,
Cone's 50% portion of Parras Cone's unamortized start-up costs, as a
cumulative effect of an accounting change, net of income tax benefit.
(4) Financing agreements of Cone prohibit Cone from paying dividends on its
Common Stock.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
For the fiscal year 2001, Cone had net sales from continuing operations of
$449.9 million, down substantially from net sales from continuing operations of
$552.6 million in 2000. Sales for the year were negatively impacted by the
economic recession, lower prices and retail inventory liquidations that
occurred throughout the year. For the year 2001, after excluding charges
associated with the Reinvention Plan and the closing of Raytex, Cone reported
substantially reduced operating results from continuing operations, as compared
with 2000. Operating results were negatively impacted by general economic
conditions, raw material costs and the events beginning September 11, 2001,
which further disrupted retail sales and business activity. By year-end, Cone
had essentially finalized the implementation of its Reinvention Plan including
initiatives to produce cost savings and profit improvements of approximately
$27 million.
Denim results in 2001 were disappointing, as compared with 2000. Results for
2001 were adversely affected by retailers' continuous inventory liquidation
throughout the year and an economic recession, all of which continued to place
pressure on top line sales and forced reduced operating schedules at the
plants. Cone exited the khaki business in 2001 because of a deteriorating U.S.
khaki market and a lack of critical mass within Cone for this business. Denim
pricing continued to be difficult as a result of the economic conditions,
inventory liquidations and a chronic industry over-capacity condition.
Commission finishing at Cone's Carlisle plant continued its trend of improving
operating results. The Raytex operation, the other component of the commission
finishing segment, was closed in February of 2001. In August 2001, Cone sold
its John Wolf business and, despite difficult industry conditions, has managed
to post positive operating results.
Management believes that one of the most significant factors affecting
operating margins is the price of cotton, which varied between the $.50s and
$.70s per pound through much of 1999 and 2000. In 2001 cotton prices fell as
low as $.28 per pound. Cone purchased cotton at fixed prices for delivery in
2002. While Cone believes that its cotton commitments are at competitive
levels, lower prices could adversely affect Cone because of its forward
purchases. Whether cotton prices are lower or higher in 2002 compared with 2001
will depend upon factors such as the strength of the U.S. economy, global
supply and demand conditions as they impact the export of U.S. cotton and the
level of equalization payments received under the U.S. government cotton
program.
Other significant factors that influence Cone's operating results and
financial condition include general business cycles, consumer fashion
preferences, changes in demand for print fabrics, international trade
conditions, the relative strength of the U.S. dollar and market interest rates,
as well as the availability and terms of debt financing.
13
In the fourth quarter of 2001, the U.S. economy was in the midst of a
recession. By the end of 2001 the U.S. textile industry had experienced its
worst year in history. A number of Cone's competitors either filed for
protection under Chapter 11 of the Federal Bankruptcy Code in the fourth
quarter of 2001 or the first quarter of 2002 or exited Cone's business
segments. It is difficult to forecast when the economy will improve; however, a
number of economists believe the turn will come in the spring of 2002. Assuming
improved economic conditions, the exit of certain competitors and lower cotton
costs, Cone expects improved operating results beginning in the second quarter
of 2002. As a result of the slowing economy, the Federal Reserve Bank reduced
its benchmark interest rate 11 times during 2001 to a 40-year low of 1.75%.
However, Cone expects its interest rate to remain essentially flat because of
increased rates related to the extension of its bank credit facility and the
maturity of its senior note to January 15, 2003.
LONG-TERM STRATEGIC INITIATIVES
The environment in which Cone operates is extremely difficult. The relative
strength of the U.S. dollar, weakness in consumer spending and reduction in
business investment have pushed the U.S. manufacturing sector into a recession.
Textiles in particular have been affected adversely by the relative strength of
the U.S. dollar in comparison to the currencies of many Asian countries. The
currency effect, global oversupply of apparel and textiles, retail
consolidation and the slowing in consumer spending have resulted in extreme
volume and pricing pressures for Cone's products. These conditions are expected
to continue through early 2002.
Cone's business strategy is to invest and grow in its core franchises where
it is recognized as a market leader. As a result of economic and industry
conditions, Cone is focused on four initiatives: (1) engage in businesses in
which Cone believes it is an industry leader; (2) retain, attract, motivate and
focus a talented and capable management team; (3) migrate to low-cost
manufacturing platforms for commodity products; and (4) attract and efficiently
invest capital.
On May 24, 2001, Cone announced the initiation of its Reinvention Plan. The
objectives of the Reinvention Plan were (1) to produce $30 to $40 million in
annual cost savings or improvement in operating results of under-performing
businesses and (2) to market actively non-core assets including idle plants,
property, equipment and excess inventories with a cash generation target of $15
to $25 million over 18 months.
The Reinvention Plan initially had four components: (1) workforce
reductions; (2) changes in employee pay and benefit practices; (3) streamlining
of Cone's business practices, which included a broad range of items from
maintenance scheduling to vendor sourcing practices to the consolidation of
denim operations to reduce U.S. capacity; and (4) improvement of the
performance of the khaki and John Wolf converted fabrics businesses.
Subsequently, Cone decided to exit the khaki business and sell its John Wolf
converted fabrics business.
To date the implementation of the Reinvention Plan has resulted in the
reduction of the workforce by approximately 640 employees, primarily at Cone's
corporate office and the Rutherford County facilities, the freezing of benefits
for salaried employees in the qualified and nonqualified pension plans, changes
in business practices, and the consolidation of the Haynes and Florence denim
facilities.
Based upon economic and industry conditions as well as its business
leadership criteria, Cone made the decision to sell the John Wolf business on
August 10, 2001. Cone did not have the size and scale to be able to compete
efficiently in this business and in turn was unable to develop a business
outlook that would provide an appropriate return on its investment in this
operation. Cone received net proceeds of approximately $9 million from the sale
including the collection of accounts receivable.
In addition, Cone exited the khaki business in the fourth quarter of 2001.
The decision was primarily based on the fact that Cone was not a leader in this
category and believed the long-term outlook for khaki produced in North America
to be negative. At the end of 2001, the exit of the khaki segment was
substantially complete. Cone will not have any significant involvement in the
John Wolf and khaki businesses and has accounted for their results as
discontinued operations under SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets."
14
Cone has enacted initiatives to date that are expected to yield
approximately $30 million in annualized cost reduction, loss avoidance or
business improvements. For 2002, Cone has targeted additional initiatives that
are expected to yield $2 to $4 million in additional savings per year.
In keeping with its strategy to reduce overhead costs, Cone relocated its
corporate headquarters to smaller, leased offices in December 2001. Cone also
relocated to smaller office space at its New York marketing office during 2001.
During the course of 2001, Cone became a much simpler company with three
main businesses. Cone believes it is the largest denim producer, the largest
commission printer and finisher and a leader in U.S. wide-jacquard weaving.
These three businesses had positive operating income in 2001.
Cone's strategy is focused on the growth of its denim business by expanding
capacity in Mexico. In 1999, Guilford Mills, Inc. and Cone entered into a 50/50
joint venture to develop and operate a new textile and apparel industrial park
in Altamira, Tamaulipas, Mexico. Each company individually owns land for its
respective textile operation and will contract with the jointly owned service
company for infrastructure services, such as water, power and wastewater
treatment. Cone plans to build a denim plant on its property with an initial
capacity of 20 million yards when financing is available. Depending upon the
ultimate size and configuration, Cone expects to invest between $60 and $90
million in the initial denim facility. The funds required for the denim
facility will require debt or equity financing and certain modifications to its
current debt structure and lending agreements. Cone has not arranged financing
or modified its debt structure or lending agreements to date, and there can be
no assurance that such financing will be available on acceptable terms and
conditions or that its present lenders will agree to the required modifications.
Cone and its joint venture partner, CIPSA, have agreed to expand Parras
Cone's production capacity by up to 35%. As a result of a slowdown in the
economy and an overall softness in basic denim in 2001, the expansion has been
delayed until financing can be secured. The expansion will be financed by
Parras Cone with internally generated cash flow and debt. Financing for the
expansion has not been finalized and there can be no assurance that such
financing will be available on acceptable terms and conditions. Cone will
continue to market and distribute 100% of the fabric production at Parras Cone.
SEGMENT INFORMATION
Cone operates in three principal business segments: Denim, Commission
Finishing and Decorative Fabrics. (See Notes 18 and 21 of the Notes to
Consolidated Financial Statements included in Part II, Item 8.)
RESULTS OF OPERATIONS
FIFTY-TWO WEEKS ENDED DECEMBER 30, 2001 COMPARED WITH FIFTY-TWO WEEKS ENDED
DECEMBER 31, 2000
For the year 2001, Cone had sales from continuing operations of $449.9
million, as compared with sales of $552.6 million for 2000. Sales for the year
were negatively impacted by the economic recession, lower prices and retail
inventory liquidations.
Gross profit for 2001 decreased to 9.0% of sales, as compared with 11.6% for
the previous year. The decline in gross profit for 2001 was a result of lower
sales volume, increased cotton costs to Cone, curtailed manufacturing operating
schedules and continued pressure on prices.
DENIM. For 2001, denim segment sales were $352.0 million, a decrease of 19%
from 2000 sales of $434.6 million. In late 2000, retailers continued to build
inventory for the holiday season, which turned out to be disappointing, forcing
retailers to liquidate overstocked inventory. This liquidation continued into a
downward spiraling economy through most of 2001, which placed further pressure
on pricing.
Operating income of the denim segment for 2001 was $13.4 million, as
compared to 2000 income of $35.1 million. The decrease in income resulted
primarily from lower sales volume and curtailed manufacturing operating
schedules after the first quarter of 2001. Operating income for the segment
includes the equity in
15
earnings from the Parras Cone joint venture plant, which declined from 2000
amounts because of lower sales and curtailed operating schedules in the second
half of the year. Parras Cone primarily produces denim for the basic denim
market, which was the hardest hit segment of the denim market in 2001.
COMMISSION FINISHING. Outside sales (total segment sales less intercompany
sales) of the commission finishing segment, which consisted of the Carlisle and
Raytex plants, were $55.8 million for 2001, as compared to 2000 sales of $64.2
million. The majority of the sales decline resulted from ceased operations at
Raytex in February 2001. Exclusive of Raytex sales of $2.0 million for 2001 and
sales of $16.9 million for 2000, outside commission finishing sales actually
increased 13.8% in 2001.
Operating income for the commission finishing segment in 2001 was $2.3
million, as compared to an operating loss of $6.6 million in 2000. Raytex had
an operating loss of $0.9 million in 2001, as compared to a loss of $6.7
million in 2000. Carlisle continued its turnaround during the year despite a
very difficult economic operating environment. The improvement in operating
income was primarily attributable to the closing of Raytex, improved operating
efficiencies, increased sales volume and better sales mix.
DECORATIVE FABRICS. For 2001, sales from continuing operations of the
decorative fabrics segment were $41.8 million, down from $53.0 million in 2000.
A declining home furnishings market primarily affected sales. Operating income
for 2001 was $0.8 million, as compared to $2.3 million in 2000. Operating
results were affected by lower sales volume partially offset by improved
operating efficiencies.
Cone's selling and administrative expenses are primarily fixed expenses and,
therefore, do not vary directly with sales. Selling and administrative expenses
for 2001 were $35.8 million, as compared with $38.4 million in 2000. The lower
expenses in 2001 were primarily a result of savings related to the Reinvention
Plan, which were partially offset by higher bank and legal fees associated with
Cone's financing agreements.
Interest expense for 2001 was $17.7 million, as compared with $18.4 million
in 2000. Other expense of $3.0 million in 2001 includes ongoing expenses of the
accounts receivable securitization program, as compared to other expense of
$5.3 million in 2000, of which $4.4 million was related to the accounts
receivable securitization program in that year.
For 2001 and 2000, the income tax benefit as a percent of the pre-tax loss
from continuing operations was 34% and 37%, respectively. (See Note 11, "Income
Tax Benefit," of the Notes to Consolidated Financial Statements included in
Part II, Item 8.)
Equity in earnings of Parras Cone, Cone's joint venture plant in Mexico, was
$0.4 million for 2001, as compared with $2.8 million for 2000. In the 2001
period, the plant operated at a lower capacity utilization rate and was
impacted negatively by lower selling prices.
For the year 2001, Cone had a net loss from continuing operations of $23.1
million, or a loss of $1.07 per share after preferred dividends. Including
losses associated with the exit of the khaki business and the sale of John
Wolf, which were accounted for as discontinued operations, Cone reported a net
loss of $1.59 per share after preferred dividends for 2001. By comparison, Cone
reported a net loss from continuing operations in 2000 of $20.3 million or a
loss of $0.94 per share after preferred dividends. Including losses from
discontinued operations, Cone reported a net loss of $1.14 per share after
preferred dividends. The 2000 results included charges to reflect the closing
of the Raytex facility.
FIFTY-TWO WEEKS ENDED DECEMBER 31, 2000 COMPARED WITH FIFTY-TWO WEEKS ENDED
JANUARY 2, 2000
For the year 2000, Cone had sales from continuing operations of $552.6
million, as compared with sales from continuing operations of $548.9 million
for 1999. Denim segment sales and decorative fabrics segment sales were each up
6.3% and 17.8%, respectively, partially offset by weaker commission finishing
sales primarily at the Raytex facility.
16
Gross profit for 2000 increased to 11.6% of sales, as compared with 9.1% for
the previous year. The improved gross profit for 2000 was a result of
realization of benefits of the 1999 comprehensive restructuring program and
improved capacity utilization in the denim operations partially offset by lower
denim prices, weak market conditions for Raytex and poor results for the
decorative fabrics segment.
DENIM. For 2000, denim segment sales were $434.6 million, an increase of
6.3% from 1999 sales of $409.0 million. Sales volume on a yardage basis for the
denim segment increased by 11.3% as the denim market recovered from a 1999
downturn. In early 2000, Cone began to experience improvements in denim market
conditions, including more denim at retail and a fashion shift back to basic
five-pocket jeans. These market improvements continued to the year-end holiday
season, which was considered a disappointment as the economy slowed in late
2000.
Operating income of the denim segment for 2000 was $35.1 million, or 8.1% of
sales, compared with $26.5 million, or 6.5%, for 1999. The increased margin and
income resulted primarily from higher sales volume, improved plant operating
schedules after the first quarter of 2000 and the benefit of liquidating
approximately $12 million of inventory at previous year cost levels. These
increases in operating profit were partially offset by lower sales prices and
cost increases. Results of the segment also reflected marginally lower cotton
costs. Operating income for the segment includes Cone's equity in earnings from
the Parras Cone joint venture plant.
COMMISSION FINISHING. Outside sales (total segment sales less intercompany
sales) of the commission finishing segment, which consisted of the Carlisle and
Raytex plants, were $64.2 million for 2000, down 15.9% from $76.3 million for
1999. The majority of this sales decline was at the Raytex plant where the year
began with weak top of bed volume, especially from the major retail brands that
outsourced production; Raytex's markets continued to deteriorate throughout the
year. As discussed previously, these market conditions led to Cone's decision
to close the Raytex plant. For Carlisle, overall print market conditions did
not improve in 2000. However, because of the closing of several competitors,
including its largest home decorative competitor, Carlisle's market share
increased at the end of 2000.
For 2000, the segment had an operating loss of $6.6 million, as compared
with a loss of $6.9 million in 1999. The Raytex plant lost $6.7 million in 2000
versus a marginal loss of less than $0.1 million in 1999 on the same basis.
Carlisle's results benefited from the 1999 restructuring, downsizing and
refocusing of the Carlisle plant. The operating improvements at Carlisle were
partially offset late in 2000 by higher energy costs and the start-up costs
associated with new business assumed from a competitor's plant upon its
closing. Intercompany sales of this segment were to the denim and decorative
fabrics segments.
DECORATIVE FABRICS. For 2000, sales from continuing operations of the
decorative fabrics segment were $53.0 million, up 17.8% from sales of $45.0
million for 1999. The decorative fabrics segment had operating income of $2.3
million in 2000, as compared with earnings of $4.2 million for 1999. Results
for 2000 were affected negatively by the lack of market demand for Cone's
product offerings, start-up expenses associated with increasing capacity and
operating efficiencies at the jacquard plant and difficulties with outsourcing.
YARN-DYED PRODUCTS. Cone ceased manufacturing yarn-dyed products in May
1999. For 2000 there were essentially no sales of yarn-dyed products, as
compared with 1999 sales of $17.1 million. For 1999, the yarn-dyed products
segment had an operating loss of $5.6 million. The 1999 results include
inventory reserves of $1.3 million associated with the closing of the Salisbury
plant. In addition to the segment operating losses in 1999, $3.4 million of the
restructuring charges in 1999 were attributable to the yarn-dyed segment. These
restructuring costs were primarily for the writedown of property, plant and
equipment, as well as employee severance costs.
Cone's selling and administrative expenses are primarily fixed expenses and
therefore do not vary directly with sales. Selling and administrative expenses
for 2000 were $38.4 million, as compared with $39.0 million in 1999. Selling
and administrative expenses in 2000 were affected negatively by higher bank and
legal fees associated with Cone's financing agreements.
Interest expense for 2000 was $18.4 million, an increase of $3.9 million
from $14.5 million for 1999. The increase in interest expense was primarily the
result of increases in interest rate spreads under new lending agreements and
market rates. Other expenses include $4.4 million recognized in 2000 related to
the ongoing
17
expense of the new accounts receivable securitization program, which began on
September 1, 1999. The comparable number in 1999 was $1.0 million for the new
accounts receivable securitization program.
For 2000 and 1999, the income tax benefit as a percent of the taxable loss
was 37% and 39%, respectively. (See Note 11, "Income Tax Benefit," of the Notes
to Consolidated Financial Statements included in Part II, Item 8.)
Equity in earnings of Parras Cone, Cone's joint venture plant in Mexico, was
$2.8 million for 2000, as compared with $1.7 million for 1999. In the 2000
period, the plant operated at a higher capacity utilization rate and
experienced lower raw material costs.
For the year 2000, Cone had a net loss from continuing operations of $20.3
million, or $0.94 per share after preferred dividends. For comparison, in 1999,
Cone had a net loss from continuing operations of $10.5 million, or $0.53 per
share after preferred dividends. However, both years included significant
pre-tax restructuring, related expenses and inventory write-downs connected
with the exit from certain business segments. In 2000, excluding restructuring
and asset impairment charges related to the closing of the Raytex facility,
Cone had net income of $1.1 million or, after preferred dividends, a loss of
$0.11 per share. For comparison in 1999 excluding special charges, losses from
product lines exited in 1999 and the $1.0 million after-tax charge from the
cumulative effect of an accounting change related to capitalized start-up costs
at Parras Cone, Cone had a pro forma net loss of $0.18 per share after
preferred dividends.
LIQUIDITY AND CAPITAL RESOURCES
Cone's principal long-term capital components consist of debt outstanding
under its Revolving Credit Facility, Senior Note, 8 1/8% Debentures and
stockholders' equity. Primary sources of liquidity are internally generated
funds, availability under the Revolving Credit Facility and a $60 million
Receivables Purchase and Servicing Agreement (the "A/R Securitization
Facility").
On November 9, 2001, Cone entered into agreements both to refinance and
extend its Revolving Credit Facility with its existing bank group and to extend
the maturity on its Senior Note. The new agreements provide for scheduled
amortization and commitment reductions of $10 million during 2002 with a new
maturity date of January 15, 2003. In addition, the agreements provide for
additional amortization and commitment reductions related to proceeds received
by Cone for permitted asset sales and 75% of excess cash flow (as defined in
the agreements). Interest rates were increased and new covenant levels were
established.
Financing agreements of Cone prohibit it from paying dividends on its Common
Stock.
The following is a summary of primary financing agreements as of December
30, 2001.
INTEREST/
FACILITY AMOUNT DISCOUNT
FINANCING AGREEMENT COMMITMENT OUTSTANDING RATE MATURITY DATE
------------------- ---------- ----------- --------- -------------
($ AMOUNTS IN MILLIONS)
8 1/8% Debenture........... $100.0 $100.0 8.125% Mar 15, 2005
Senior Note................ 27.2 27.2 13.700 Jan 15, 2003
Revolving Credit Facility.. 68.4 48.0 8.750 Jan 15, 2003
A/R Securitization Facility 60.0 36.9 5.340 Sept 1, 2004
At December 30, 2001, Cone had availability under its financing agreements
of $13.6 million. Availability under the Revolving Credit Facility and the A/R
Securitization Facility is determined by borrowing base calculations, as
defined in the respective agreements. During 2001, Cone generated cash from
operations of $13.7 million, as compared with cash from operations of $35.7
million in 2000. Other sources of cash flow included $4.3 million in proceeds
from sales of property and equipment for 2001, as compared with $3.2 million in
2000. Uses of cash in 2001 included $7.0 million for capital expenditures from
continuing operations and $1.0 million of net advances to the joint venture
industrial park in Altamira, Tamaulipas, Mexico.
18
Cone believes that internally generated operating funds and funds available
under its Revolving Credit Facility currently in effect are sufficient to meet
its needs for working capital and domestic capital spending permitted under the
terms of the Revolving Credit Facility. However, by January 2003, Cone must
either refinance or replace the Revolving Credit Facility and Senior Note. If
Cone is unable to refinance this debt or is in default, in addition to the
amounts owed, Cone will be required to pay to the lenders within two years
thereafter, upon notice from the lenders, an amount equal to the greater of $1
million or 10% of the market value of Cone's outstanding common stock at the
time of the notice. There is no assurance that Cone will be able to replace its
Revolving Credit Facility and its Senior Note or otherwise obtain financing on
terms and conditions acceptable to Cone. Cone has not yet been able to finance
its proposed plant in Altamira, Tamaulipas, Mexico, and its current debt
structure will not permit that financing. Cone is in the process of exploring
its alternatives related to financing its businesses in both the U.S. and
Mexico.
On December 30, 2001, Cone's long-term capital structure consisted of $173.7
million of long-term debt (including current maturities) and $86.6 million of
stockholders' equity. For comparison, Cone had $182.1 million of long-term debt
(including current maturities) and $126.4 million of stockholders' equity in
2000. In 1998, Cone entered into a $100 million notional interest rate swap,
which converted its 8 1/8% Debentures to a floating interest rate. In the
fourth quarter of 2001, Cone terminated the swap for a cash payment of $50,000
converting interest expense on the 8 1/8% Debentures back to a fixed rate.
Accounts receivable on December 30, 2001, were $28.4 million, as compared
with $40.1 million at December 31, 2000. Receivables, including those sold
pursuant to the A/R Securitization Facility, represented 68 days of sales
outstanding at December 30, 2001 and 60 days at December 31, 2000. The increase
in days outstanding was primarily the result of slower pay practices by certain
customers.
Inventories on December 30, 2001, were $62.1 million, down $44.2 million
from $106.3 million at December 31, 2000. The reduction is the result of the
liquidation of core inventories, writedowns taken as part of Cone's Reinvention
Plan, the sale of John Wolf, the exit from the khaki segment and lower cotton
and other raw material prices.
For 2001, domestic capital spending from continuing operations was $7.0
million compared to $9.8 million for the 2000 period. Domestic capital spending
in 2002 is expected to be $8 to $9 million financed by internally generated
funds.
OTHER MATTERS
EBITDA from continuing operations, which is presented not as an alternative
measure of operating results or cash flow from continuing operations (as
determined in accordance with accounting principles generally accepted in the
United States of America) but because it is a widely accepted financial
indicator of the ability to incur and service debt, is calculated by Cone as
follows (in thousands):
FIFTY-TWO WEEKS ENDED
---------------------------
12/30/01 12/31/00 1/2/00
-------- -------- -------
Income (loss) from continuing operations $(15,265) $(12,802) $(5,004)
Depreciation and amortization........... 20,692 23,853 26,327
Inventory charges and facility
consolidation charges................. 7,489 1,875 1,600
Restructuring and impairment charges.... 19,939 38,500 16,017
-------- -------- -------
EBITDA.................................. $ 32,855 $ 51,426 $38,940
======== ======== =======
Federal, state and local regulations relating to the workplace and the
discharge of materials into the environment continue to change and,
consequently, it is difficult to gauge the total future impact of such
regulations on Cone. Existing government regulations are not expected to cause
a material change in Cone's competitive position, operating results or planned
capital expenditures. Cone has an active environmental committee, which fosters
protection of the environment and compliance with laws.
19
From time to time, Cone is a party to various legal claims and actions.
Management believes that none of these claims or actions, either individually
or in the aggregate, will have a material adverse effect on the financial
condition and liquidity of Cone. As a result of Cone's recent operating
results, management believes that the effects of any litigation, no matter how
small or insignificant, could be considered material to Cone's future results
of operations. As of December 30, 2001, no significant litigation existed.
OFF-BALANCE SHEET FINANCING ARRANGEMENTS
Cone's A/R Securitization Facility is its only off-balance sheet financing
arrangement. This facility generates funds by the sale of receivables in the
U.S. through Cone Receivables II LLC ("CRIILLC"). CRIILLC's sole business is
the ongoing purchase and subsequent resale of certain trade receivables from
Cone. CRIILLC sells an undivided 100% ownership interest in these receivables
under an agreement with General Electric Capital Corporation ("GECC"). CRIILLC
is a separate corporate entity with its own separate creditors who, in the
event of its liquidation, will be entitled to be satisfied out of CRIILLC's
assets prior to any value in CRIILLC becoming available to Cone. CRIILLC
retains no interests in those receivables transferred to GECC and has not
experienced any gains or losses on the transfer of such receivables. Cone
believes that minimal counterparty risk exists because of the financial
strength of GECC. In addition, the A/R Securitization Facility is essentially
asset neutral because of the inverse relationship between the level of accounts
receivable and the level of cash proceeds available under the A/R
Securitization Facility, subject to funding limits. (See Note 2,
"Securitization of Accounts Receivable," of the Notes to Consolidated Financial
Statements included in Part II, Item 8.)
TRANSACTIONS WITH RELATED PARTIES
Cone has various transactions in the normal course of business with its
unconsolidated affiliated companies. Cone purchases denim and yarn from Parras
Cone under a transfer pricing arrangement that is a part of the Commercial
Agreement between Parras Cone, Cone and its joint venture partner CIPSA.
Purchases of denim and yarn from Parras Cone were $56.6 million, $70.1 million
and $71.2 million in 2001, 2000 and 1999, respectively. Cone received $1.0
million in management fees from Parras Cone in 2001, 2000 and 1999 for
production management, cotton buying, administrative support and engineering
services. In addition, Cone sold looms to Parras Cone in 2001 for $2.9 million,
the approximate net book value of the equipment at the time of sale. Cone also
paid $2.2 million, $2.7 million and $1.3 million in marketing fees to CIPSA in
2001, 2000 and 1999, respectively.
CRITICAL ACCOUNTING POLICIES
Investments in Unconsolidated Affiliates. Investments in unconsolidated
affiliated companies are accounted for by both the equity and cost methods,
depending upon ownership levels. (See Note 1, "Summary of Significant
Accounting Policies," and Note 4, "Investments in Unconsolidated Affiliates,"
of the Notes to Consolidated Financial Statements included in Part II, Item 8.)
Cone has a 15% ownership interest in CIPSA, a denim manufacturer in Mexico.
Cone and CIPSA formed a company, Parras Cone, to build and operate a denim
manufacturing facility in Parras, Mexico. Each shareholder has a 50% interest
in Parras Cone. Accordingly, Cone records the equity in earnings of Parras Cone
in its consolidated statements of operations in accordance with accounting
principles generally accepted in the United States of America.
Cone purchases 100% of the fabric production, markets the production to the
end customer, handles production scheduling for the plant, provides financial
management and cotton purchasing services and provides customer service on
behalf of Parras Cone. However, Cone lacks board of director control and does
not have sole discretion over Parras Cone's management, which prevents Cone
from consolidating the entity.
Impairment of Assets. Long-lived assets and certain identifiable intangibles
to be held and used are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In performing the review for recoverability, Cone estimates the
future cash flows expected to result from the use of the asset and its eventual
disposition. If the sum of the expected future cash flows, undiscounted and
without interest charges, is less than the carrying amount of the asset, an
impairment loss is recognized. Measurement of an impairment loss for long-lived
assets and identifiable intangibles that Cone
20
expects to hold and use are based on the difference between the carrying amount
and fair value of the asset. Long-lived assets and certain identifiable
intangibles to be disposed of are reported at the lower of carrying amount or
fair value less cost to sell. Cone has made its best estimate of asset
impairments as of December 30, 2001. (See Note 21, "Restructuring and
Impairment of Assets," of the Notes to Consolidated Financial Statements
included in Part II, Item 8.)
Stock Plans. Cone applies Accounting Principles Board Opinion Number 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its stock option plans, which requires
compensation expense for Cone's options to be recognized only if the market
price of the underlying stock exceeds the exercise price on the date of grant.
Option prices are determined by the last reported sale price on the New York
Stock Exchange composite tape on the date of grant. Accordingly, Cone has not
recognized compensation expense for any of its options granted. Had SFAS No.
123, "Accounting for Stock Based Compensation," been used as opposed to APB 25,
Cone would have recorded compensation expense using a fair value based
accounting model. The effect of using SFAS No. 123 would have decreased the net
loss per share after preferred dividends to $1.61, $1.17 and $0.89 for 2001,
2000 and 1999, respectively. (See Note 14, "Stock Plans," of the Notes to
Consolidated Financial Statements included in Part II, Item 8.)
LONG-TERM DEBT AND CONTRACTUAL OBLIGATIONS
LONG-TERM CONTRACTUAL
DEBT OBLIGATIONS
--------- -----------
(IN THOUSANDS)
2002...... $ 3,075 $2,475
2003...... 72,080 2,192
2004...... -- 2,000
2005...... 100,000 1,844
2006...... -- 1,783
Thereafter -- 7,177
Long-Term Debt. Cone's debt financing consists of its Senior Note, its $68.4
million Revolving Credit Facility and its 8 1/8% Debentures. (See Note 9,
"Long-Term Debt," of the Notes to Consolidated Financial Statements included in
Part II, Item 8.)
Contractual Obligations. Cone has various leases accounted for as operating
leases. Future contractual obligations required under these lease agreements
represent minimum rental payments totaling $17.5 million. These operating
leases are primarily related to office space and production equipment leases.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Cone's primary market risk exposures are cotton (commodity) price risk and
interest rate risk. At December 30, 2001, Cone had no material exchange rate
risk on any of its financial instruments. Cone had no financial instruments,
derivative financial instruments or derivative commodity instruments held for
trading purposes at December 30, 2001. Fair values for cotton derivatives and
long-term debt instruments were estimated with reference to market quotes at
year-end.
Commodity price risk primarily relates to cotton. Cone has an established
cotton purchasing program, administered in conformance with policies approved
by the Board of Directors to ensure an uninterrupted supply of appropriate
quality and quantities of cotton to cover committed and anticipated fabric
sales, and to manage margin risks associated with price fluctuations on
anticipated cotton purchases. Cone primarily uses forward contracts and, to a
lesser extent, futures and options contracts in its cotton purchasing program.
The following table provides information about Cone's cotton option
contracts that are sensitive to changes in cotton prices. The table presents
the number of contracts, the weighted-average strike price and the total dollar
contract price by expected maturity dates. Contract amounts are used to
calculate the contractual payments and quantity of cotton under option at
December 30, 2001 and December 31, 2000.
21
EXPECTED
MATURITY FAIR MATURITY FAIR
2002 VALUE 2001 VALUE
-------- ------- -------- -------
Cotton Options (Puts)
Contract Volume
(100 bales per contract)...................... NA NA NA NA
Weighted-Average
Strike Price (per lb.; 500 lbs. per bale avg.) NA NA NA NA
Contract Amount................................ NA NA NA NA
Cotton Options (Calls)
Contract Volume
(100 bales per contract)...................... 250 NA 350 NA
Weighted-Average
Strike Price (per lb.; 500 lbs. per bale avg.) $ .46 NA $ .66 NA
Contract Amount................................ $118,500 $11,750 $183,250 $88,750
Cone's debt instruments are exposed to interest rate risk. The table
presents principal cash flows and related weighted-average interest rates by
expected maturity dates.
EXPECTED MATURITY DATE
-------------------------- FAIR
2002 2003 2004 2005 TOTAL VALUE
------ ------ ----- ------ ------ -----
(DOLLARS IN MILLIONS)
Long-Term Debt
Fixed Rate
Senior Note............... $ -- $ 27.2 $ -- $ -- $ 27.2 $27.3
Average interest rate (%). 13.95 14.20 -- -- 13.96 --
Debentures................ $ -- $ -- $ -- $100.0 $100.0 $45.0
Average interest rate (%). 8.57 8.57 8.57 8.57 8.57 --
Variable Rate
Revolving................ $ -- $ 48.0 $ -- $ -- $ 48.0 $48.0
Average interest rate (%). 9.00 9.25 -- -- 9.01 --
"Safe Harbor" Statement under Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Except for the historical information presented, the matters disclosed in
the foregoing discussion and analysis and other parts of this report include
forward-looking statements. These statements represent Cone's current judgment
on the future and are subject to risks and uncertainties that could cause
actual results to differ materially. Such factors include, without limitation:
(i) the demand for textile products, including Cone's products, will vary with
the U.S. and world business cycles, imbalances between consumer demand and
inventories of retailers and manufacturers and changes in fashion trends, (ii)
the highly competitive nature of the textile industry and the possible effects
of reduced import protection and free-trade initiatives, (iii) the
unpredictability of the cost and availability of cotton, Cone's principal raw
material, and other manufacturing costs, (iv) Cone's relationships with Levi
Strauss as its major customer, (v) Cone's ability to attract and maintain
adequate capital to fund operations and strategic initiatives, (vi) increases
in prevailing interest rates, (vii) Cone's inability to continue the cost
savings and profit improvement associated with its Reinvention Plan, and (viii)
the effect on Cone' sales and markets of events such as the events of September
11, 2001. For a further description of these risks see Cone's 2001 Form 10-K,
"Item 1. Business -- Competition, -- Raw Materials and -- Customers" and "Item
7. Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Overview" of the Form 10-K. Other risks and uncertainties may be
described from time to time in Cone's other reports and filings with the
Securities and Exchange Commission.
22
STATEMENT OF RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of Cone Mills is responsible for the preparation and
integrity of Cone's published financial statements. The financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America and include management's best estimates and
judgment. Management has also prepared the other information contained in this
report and is responsible for its accuracy and consistency with the financial
statements.
Cone maintains a system of internal control over financial reporting, which
is designed to provide reasonable assurance to Cone's management and Board of
Directors regarding the preparation of reliable published financial statements.
The system includes a code of conduct to foster a strong ethical climate,
established policies and procedures, internal audit processes, and the
employment of qualified personnel. Cone has established formal criteria against
which the internal control system is measured and as of December 30, 2001, Cone
was in compliance with these criteria.
The Board of Directors, assisted by its Audit Committee, which is composed
entirely of directors who are not officers or employees of Cone, provides
oversight to the financial reporting process. The Committee meets regularly
with management, internal auditors and independent certified public accountants
to review the scope and findings of audits, financial reporting issues and the
adequacy of the internal control system. To assure complete independence,
representatives of McGladrey & Pullen, LLP, Certified Public Accountants,
approved by the shareholders, have free access to the Audit Committee with or
without the presence of management.
/s/ Gary L. Smith
/s/John L. Bakane Gary L. Smith
John L. Bakane Executive Vice President
President and and
Chief Executive Officer Chief Financial Officer
/s/ Samir M. Gabriel
Samir M. Gabriel
Controller
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MCGLADREY & PULLEN, LLP
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Cone Mills Corporation
Greensboro, North Carolina
We have audited the accompanying consolidated balance sheets of Cone Mills
Corporation and subsidiaries as of December 30, 2001 and December 31, 2000, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 30, 2001.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Cone Mills
Corporation and subsidiaries as of December 30, 2001 and December 31, 2000, and
the results of their operations and their cash flows for each of the three
years in the period ended December 30, 2001 in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, in 2001 the
Company changed its method of accounting for derivative instruments, and in
1999 changed its methods of accounting for start-up costs and costs of computer
software developed or obtained for internal use.
/s/ McGladrey & Pullen, LLP
Greensboro, North Carolina
February 8, 2002
24
CONE MILLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 30, 2001, DECEMBER 31, 2000 AND JANUARY 2, 2000
2001 2000 1999
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net Sales.................................................... $449,908 $552,603 $548,870
Cost of Goods Sold........................................... 409,473 488,508 498,845
-------- -------- --------
Gross Profit................................................. 40,435 64,095 50,025
Selling and Administrative................................... 35,761 38,397 39,012
Restructuring and Impairment of Assets....................... 19,939 38,500 16,017
-------- -------- --------
Loss from Operations......................................... (15,265) (12,802) (5,004)
-------- -------- --------
Other Income (Expense)
Interest income........................................... 510 1,392 1,529
Interest expense.......................................... (17,675) (18,363) (14,450)
Other expense............................................. (3,007) (5,256) (993)
-------- -------- --------
(20,172) (22,227) (13,914)
-------- -------- --------
Loss from Continuing Operations before Income Tax Benefit and
Equity in Earnings of Unconsolidated Affiliates............ (35,437) (35,029) (18,918)
Income Tax Benefit........................................... (12,145) (12,047) (6,701)
-------- -------- --------
Loss from Continuing Operations before Equity in Earnings of
Unconsolidated Affiliates.................................. (23,292) (22,982) (12,217)
Equity in Earnings of Unconsolidated Affiliates.............. 177 2,716 1,684
-------- -------- --------
Loss from Continuing Operations.............................. (23,115) (20,266) (10,533)
-------- -------- --------
Discontinued Operations
Loss from discontinued operations......................... (14,129) (7,580) (11,540)
Loss on sale of discontinued operations................... (6,397) -- --
Income tax benefit........................................ 7,185 2,577 4,039
-------- -------- --------
(13,341) (5,003) (7,501)
-------- -------- --------
Cumulative Effect of Accounting Change....................... -- -- (1,038)
-------- -------- --------
Net Loss..................................................... $(36,456) $(25,269) $(19,072)
======== ======== ========
Loss Available to Common Stockholders
Loss from continuing operations........................... $(27,255) $(24,119) $(13,580)
Loss from discontinued operations......................... (13,341) (5,003) (7,501)
Cumulative effect of accounting change.................... -- -- (1,038)
-------- -------- --------
Net loss.................................................. $(40,596) $(29,122) $(22,119)
======== ======== ========
Loss per Share--Basic and Diluted
Loss from continuing operations........................... $ (1.07) $ (0.94) $ (0.53)
Loss from discontinued operations......................... (0.52) (0.20) (0.30)
Cumulative effect of accounting change.................... -- -- (0.04)
-------- -------- --------
Loss per Share -- Basic and Diluted.......................... $ (1.59) $ (1.14) $ (0.87)
======== ======== ========
Weighted-Average Common Shares Outstanding
Basic..................................................... 25,582 25,481 25,397
======== ======== ========
Diluted................................................... 25,582 25,481 25,397
======== ======== ========
See Notes to Consolidated Financial Statements.
25
CONE MILLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 30, 2001 AND DECEMBER 31, 2000
2001 2000
-------- ----
(IN THOUSANDS, EXCEPT
SHARE AND PAR VALUE DATA)
ASSETS
Current Assets
Cash................................................................... $ 529 $ 2,876
Accounts receivable, less allowances of $5,700; 2000, $5,050........... 28,373 40,091
Inventories............................................................ 62,057 106,308
Other current assets................................................... 3,371 6,270
-------- --------
Total Current Assets................................................. 94,330 155,545
Investments in and Advances to Unconsolidated Affiliates................. 51,664 56,265
Other Assets............................................................. 23,917 18,505
Property, Plant and Equipment............................................ 164,468 192,901
-------- --------
$334,379 $423,216
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt................................... $ 3,075 $ 73,495
Accounts payable....................................................... 21,535 37,420
Sundry accounts payable and accrued liabilities........................ 27,928 33,282
Deferred income taxes.................................................. -- 9,434
-------- --------
Total Current Liabilities............................................ 52,538 153,631
Long-Term Debt........................................................... 170,655 108,582
Deferred Income Taxes.................................................... 10,513 20,338
Other Liabilities........................................................ 14,063 14,246
Stockholders' Equity
Class A preferred stock--$100 par value; authorized 1,500,000 shares;
issued and outstanding 334,309 shares; 2000, 335,340 shares.......... 33,431 33,534
Class B preferred stock--no par value; authorized 5,000,000 shares..... -- --
Common stock--$.10 par value; authorized 42,700,000 shares; issued and
outstanding 25,660,663 shares; 2000, 25,522,211 shares............... 2,566 2,552
Capital in excess of par............................................... 57,872 57,630
Retained earnings...................................................... 2,029 42,512
Deferred compensation--restricted stock................................ (12) (40)
Accumulated other comprehensive loss................................... (9,276) (9,769)
-------- --------
Total Stockholders' Equity........................................... 86,610 126,419
-------- --------
$334,379 $423,216
======== ========
See Notes to Consolidated Financial Statements.
26
CONE MILLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 30, 2001, DECEMBER 31, 2000 AND JANUARY 2, 2000
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
OPERATIONS
Net Loss.................................................................. $(36,456) $(25,269) $(19,072)
Adjustments to reconcile net loss to cash provided by (used in) operations
Depreciation............................................................ 20,582 22,330 24,526
Loss from discontinued operations....................................... 6,944 5,003 7,501
Loss on sale of discontinued operations................................. 6,397 -- --
Loss on sale and writedown of property, plant and equipment............. 9,823 12,859 2,541
Amortization............................................................ 110 1,523 1,801
Writedown of goodwill and tradename..................................... -- 24,007 --
Writedown of investments in unconsolidated affiliates................... 3,188 -- --
Deferred compensation expense--restricted stock......................... 28 255 153
Equity in earnings of unconsolidated affiliates......................... (177) (2,716) (1,684)
Cumulative effect of accounting change.................................. -- -- 1,038
Change in operating assets and liabilities................................
Accounts receivable..................................................... 5,593 8,035 (12,374)
Subordinated note receivable............................................ -- -- 10,414
Inventories............................................................. 12,057 6,790 10,254
Other assets............................................................ (1,139) (4,841) 488
Accounts payable and accrued liabilities................................ 19,247 4,860 (20,308)
Deferred income taxes................................................... (27,056) (15,852) (12,949)
Other liabilities....................................................... (183) (1,471) 510
-------- -------- --------
Net cash provided by (used in) continuing operations.................. 18,958 35,513 (7,161)
Net cash provided by (used in) discontinued operations................ (5,282) 217 587
-------- -------- --------
Cash provided by (used in) operations................................... 13,676 35,730 (6,574)
-------- -------- --------
INVESTING
Investments in and advances to unconsolidated affiliates.................. (964) (6,734) (680)
Proceeds from sale of property, plant and equipment....................... 4,312 3,153 3,198
Proceeds from sale of discontinued operations............................. 5,375 -- --
Capital expenditures of continuing operations............................. (7,027) (9,768) (12,664)
Capital expenditures of discontinued operations........................... (91) (217) (530)
-------- -------- --------
Cash provided by (used in) investing.................................... 1,605 (13,566) (10,676)
-------- -------- --------
FINANCING
Net payments under line of credit agreements.............................. -- -- (1,000)
Increase (decrease) in checks issued in excess of deposits................ (4,962) 1,442 (1,907)
Principal borrowings (payments) on long-term debt......................... (8,792) (17,197) 26,286
Proceeds from issuance of common stock.................................... 256 228 326
Purchase of outstanding common stock...................................... -- (3) (45)
Dividends paid--Class A Preferred stock................................... (146) (62) (154)
Redemption of Class A Preferred stock..................................... (3,984) (4,963) (5,628)
-------- -------- --------
Cash provided by (used in) financing.................................... (17,628) (20,555) 17,878
-------- -------- --------
Net change in cash...................................................... (2,347) 1,609 628
Cash at Beginning of Period................................................ 2,876 1,267 639
-------- -------- --------
Cash at End of Period...................................................... $ 529 $ 2,876 $ 1,267
======== ======== ========
See Notes to Consolidated Financial Statements.
27
CONE MILLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 30, 2001, DECEMBER 31, 2000 AND JANUARY 2, 2000
CLASS A DEFERRED
PREFERRED STOCK COMMON STOCK CAPITAL IN COMPENSATION
---------------- ------------------ EXCESS RETAINED RESTRICTED
SHARES AMOUNT SHARES AMOUNT OF PAR EARNINGS STOCK
------- ------- ---------- ------ ---------- -------- ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
Balance, January 3, 1999............................ 383,948 $38,395 25,432,233 $2,543 $57,264 $ 92,799 $(579)
------- ------- ---------- ------ ------- -------- -----
Comprehensive Loss
Net loss.......................................... -- -- -- -- -- (19,072) --
Currency translation adjustment................... -- -- -- -- -- -- --
Total comprehensive loss..........................
Class A Preferred Stock
Shares redeemed................................... (56,281) (5,628) -- -- -- -- --
Cash dividends paid............................... -- -- -- -- -- (154) --
Stock dividend.................................... 27,968 2,797 -- -- -- (2,797) --
Common Stock
Purchase of common shares......................... -- -- (6,916) -- (45) -- --
Options exercised................................. -- -- 62,400 6 320 -- --
Issuance of restricted shares..................... -- -- 10,000 1 47 -- (48)
Restricted stock compensation..................... -- -- -- -- -- -- 153
Cancellation of restricted shares................. -- -- (18,000) (2) (151) -- 153
------- ------- ---------- ------ ------- -------- -----
Balance, January 2, 2000............................ 355,635 $35,564 25,479,717 $2,548 $57,435 $ 70,776 $(321)
------- ------- ---------- ------ ------- -------- -----
Comprehensive Loss
Net loss.......................................... -- -- -- -- -- (25,269) --
Minimum pension liability adjustment.............. -- -- -- -- -- -- --
Total comprehensive loss..........................
Class A Preferred Stock
Shares redeemed................................... (48,746) (4,875) -- -- -- (88) --
Cash dividends paid............................... -- -- -- -- -- (62) --
Stock dividend.................................... 28,451 2,845 -- -- -- (2,845) --
Common Stock
Purchase of common shares......................... -- -- (401) -- (3) -- --
Issuance of common shares......................... -- -- 36,695 3 184 -- --
Options exercised................................. -- -- 9,200 1 40 -- --
Restricted stock compensation..................... -- -- -- -- -- -- 255
Cancellation of restricted shares................. -- -- (3,000) -- (26) -- 26
------- ------- ---------- ------ ------- -------- -----
Balance, December 31, 2000.......................... 335,340 $33,534 25,522,211 $2,552 $57,630 $ 42,512 $ (40)
------- ------- ---------- ------ ------- -------- -----
Comprehen