Page 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 29, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-3634
CONE MILLS CORPORATION
(exact name of registrant as specified in its charter)
North Carolina 56-0367025
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3101 North Elm Street, Greensboro, N. C. 27408
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 910-379-6220
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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 28, 1997: $199,014,504.
Number of shares of common stock outstanding as of February 28, 1997:
26,197,733 shares.
Documents incorporated by reference: Portions of 1996 Annual Report to
Shareholders, Part II, Items 6, 7 & 8; Proxy Statement for Annual Meeting to be
held May 13, 1997, Part III, Items 10, 11, 12 and 13 of this report.
Index to Exhibits - Pages 27-39.
<PAGE>
FORM 10-K Page 2
PART I
Item 1. Business
THE COMPANY
OVERVIEW
Founded in 1891, Cone Mills Corporation (the "Company" or "Cone") is a leading
textile manufacturer with net sales in 1996 of $745.9 million. The Company
conducts business in two segments, apparel fabrics and home furnishings
products, representing 84% and 16% of 1996 net sales respectively, and currently
operates nine modern manufacturing facilities located in North Carolina and
South Carolina. Cone is the largest producer of denim fabrics in the world, the
largest domestic producer of yarn-dyed and chamois flannel shirtings and the
largest domestic commission printer of home furnishings fabrics. Sales and
marketing activities are conducted through a worldwide distribution network.
With export sales of $190.6 million in 1996, primarily denim, the Company is the
largest domestic exporter of denim fabrics.
The Company is recognized internationally as a primary source of high-quality
fabrics for use in the production of upper-end, branded casual apparel. The
Company is a leader in denim styling and development, with denims accounting for
approximately 79% of apparel fabrics sales. Cone believes that it has the
largest and most versatile denim manufacturing capacity in the world and that it
produces a broader range of fashion denims than any of its competitors. In 1996,
Cone sold over 225 different styles of denim. The Company's denim products are
primarily designed for use in garments targeted for the upper-end market, where
styling and quality generally command premium fabric prices. The Company is the
largest supplier to Levi Strauss and the sole supplier of denim for Levi 501(R)
jeans. Other customers include V.F. Corporation (Wrangler), H.I.S. (Chic),
Calvin Klein, The Gap, Polo, Aalfs (Arizona), P.L. Industries (Hilfiger) and
Guess.
The Company has used its manufacturing versatility and styling capabilities to
position itself as a leader in other selected specialty apparel fabric niches.
These include yarn-dyed and chamois flannel shirtings, specialty-dyed and
printed fabrics. Customers for these specialty apparel fabrics include M. Fine,
OshKosh, Woolrich, L.L. Bean, J.C. Penney, Eddie Bauer and Levi Strauss.
The Company services the home furnishings markets through three divisions: Cone
Finishing, Cone Decorative Fabrics and Cone Jacquards. Cone Finishing consists
of the Company's Carlisle and Raytex plants and provides custom printing
services to leading home furnishings stylists and distributors. Cone Decorative
Fabrics is one of the country's leading designers and marketers of printed and
solid woven fabrics for use in upholstery, draperies and bedspreads. Cone
Jacquards began production in late 1995, providing jacquard woven fabrics to
furniture, drapery and other markets. The Company's home furnishings customers
include the Waverly Division of F. Schumacher & Co., P. Kaufmann, Covington,
Richloom, Crown
<PAGE>
FORM 10-K Page 3
Item 1. (continued)
Crafts and Croscill. The home furnishings segment also includes Cornwallis
Development Co., a wholly owned subsidiary that develops previously acquired
real estate not required for manufacturing operations.
Cone's business strategy is to focus on products and services that generate
attractive margins and in which it believes it is an industry leader. It
competes domestically and internationally on the basis of styling and
development, management experience, versatility and size of manufacturing
facilities and the Cone name and reputation.
The Company seeks growth of its core denim, specialty sportswear and decorative
fabric businesses through expansion into new geographic areas and markets,
product development and investment in value-added technology such as CAD/CAM. A
primary goal of this strategy is to reduce cyclical fluctuations in its core
businesses through improved market and product balance. As a means of new market
penetration and geographic expansion, Cone actively seeks acquisitions of,
investments in and alliances with businesses in which it can add value through
its manufacturing and marketing expertise.
In 1993, the Company invested in Compania Industrial de Parras, S.A. de C.V.
("CIPSA") and entered into a 50/50 joint venture with CIPSA to build a new denim
manufacturing facility in Mexico. This joint venture facility, Parras Cone de
Mexico, S.A. de C.V. ("Parras Cone") was completed and began production of basic
denims and yarn in late 1995. The Company believes that Parras Cone produces
high-quality basic denim at costs competitive with manufacturers anywhere in the
world. In December 1994, Cone Mills purchased the Raytex printing facility that
primarily prints wide fabrics used in home furnishings, including comforters and
bedspreads. The Raytex facility prints for many of the same customers as the
Company's narrow print operation, Carlisle, allowing it to realize marketing,
operating and administrative efficiencies. In 1995, the Company built a new
jacquard weaving facility and late in the year began production, further
diversifying its home furnishings fabrics businesses. In 1996, the Company
expanded capacity of the jacquard weaving facility. See "Item 7. Management's
Discussion and Analysis of Results of Operations and Financial Condition -
Strategic Initiatives."
Consistent with its business strategy to focus on core strengths and exit
businesses in which the Company was not a leader, in January 1996, the Company
sold its Olympic Products Division. Olympic produced polyurethane foam and
related products for the home furnishings and automotive markets. In addition,
in late 1996, the Company completed the sale of Greeff Fabrics, a distributor of
high end fashion fabrics. In early 1997, the Company sold its synthetic fabric
division, including its finished inventory, forward commitments and order book.
Also, the Company has entered into a contract with an international real estate
development firm for the sale of certain real estate assets including the assets
of Cornwallis Development Co. See "Item 7. Management's Discussion
<PAGE>
FORM 10-K Page 4
Item 1. (continued)
and Analysis of Results of Operations and Financial Condition -
Strategic Initiatives" and "Item 8. Financial Statements and
Supplementary Data - Note 21 of the Notes to Consolidated Financial
Statements."
In December 1996, the Company adopted a plan to consolidate its specialty
sportswear finishing operation into its Carlisle finishing facility.
Consolidation of production will occur during 1997 and is expected to allow the
Company to utilize its finishing capacity more efficiently and reduce its cost
structure.
In addition to its acquisition strategy, the Company continues to invest in its
domestic facilities to improve productivity and product quality, expand its
product lines and increase customer satisfaction. Capital expenditures for the
last five years have totaled approximately $200 million. The Company expects to
spend approximately $44 million in 1997 for capital projects.
From 1992 to 1995, the Company's annual growth rate of sales averaged
approximately 9% per year. While sales in 1996 from new business ventures,
including Raytex, the Mexican J.V. and Jacquard operations, accounted for
approximately 10% of the Company's overall total revenues, these increases were
more than offset by weak market conditions and lower sales in the Company's
traditional denim, decorative prints and sportswear markets and by the sale of
Olympic which alone resulted in a $90 million sales reduction. Management
believes that these strategic initiatives have positioned the Company for
improved results in the long-term.
The Company, a North Carolina corporation, maintains its principal executive
offices at 3101 North Elm Street, Greensboro, North Carolina 27415-6540, and its
telephone number is (910)379-6220. Unless otherwise stated, references to "Cone"
or the "Company" include Cone Mills Corporation and its subsidiaries.
<PAGE>
FORM 10-K Page 5
Item 1.
(continued)
Business Segments
The following table sets forth certain net sales and operating income (loss)
information for each of the Company's two business segments as well as net
sales of the principal product groups included therein, for fiscal years 1992
through 1996.
<TABLE>
<CAPTION>
Fiscal Year (1)(2)
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET SALES (dollars in millions)
Apparel
Denim $498.7 66.9% $552.0 60.6% $423.5 52.5% $421.8 54.9% $402.4 57.0%
Specialty Sportswear(3) 129.4 17.3 148.1 16.3 177.0 22.0 154.0 20.0 117.6 16.7
Total 628.1 84.2 700.1 76.9 600.5 74.5 575.8 74.9 520.0 73.7
Home Furnishings
Fabrics(3) 95.7 12.9 98.4 10.8 93.7 11.6 94.4 12.3 93.0 13.2
Foam Products(3) 4.7 0.6 94.7 10.4 93.9 11.6 84.6 11.0 84.1 11.9
Real Estate and other(3) 17.4 2.3 17.0 1.9 18.1 2.3 14.4 1.8 8.3 1.2
Total 117.8 15.8 210.1 23.1 205.7 25.5 193.4 25.1 185.4 26.3
Total net sales $745.9 100.0% $910.2 100.0% $806.2 100.0% $769.2 100.0% $705.4 100.0%
OPERATING INCOME (LOSS)(4)
Apparel $31.0 4.9% $39.9 5.7% $47.5 7.9% $68.8 12.0% $67.4 13.0%
Home Furnishings(5) (8.5) (7.2) (0.6) (0.3) 19.0 9.2 19.5 10.1 16.3 8.8
Restructuring (5.2) - - - - - - - - -
</TABLE>
(1) Results from continuing operations.
(2) Fiscal 1992 contained 53 weeks. The remainder of the years presented
contained 52 weeks.
(3) Specialty Sportswear includes synthetic fabrics which was sold in January
1997; Fabrics includes Greeff, which was sold in December 1996; Foam
Products represents the Olympic Products Division which was sold in January
1996; and in February 1997, the Company entered into a contract for the
sale of substantially all of the assets of its real estate operations. See
"Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition - Strategic Initiatives" and "Item 8. Financial
Statements and Supplementary Data - Note 21 of Notes to Consolidated
Financial Statements" for a description of the sales and operating results
of these businesses.
(4) Operating income (loss) excludes general corporate expenses.
Percentages reflect operating income (loss) as a percentage of segment net
sales.
(5) Operating income (loss) includes from Olympic a loss of $1.0 million in 1995
and income of $1.6 million, $1.9 million and $1.2 million for years 1994,
1993 and 1992 respectively.
<PAGE>
FORM 10-K Page 6
Item 1. (continued)
MARKET DEVELOPMENTS
Casual wear, including jeans, knit shirts, flannel shirts and similar apparel,
has been the fastest growing category within the apparel fabrics industry in
recent years. The Company believes that this growth is the result of several
factors, including (i) the adoption of casual lifestyles by the "baby-boom"
generation, born between 1946 and 1964, and their children, (ii) the enhanced
value of casual garments to consumers resulting from lower acquisition costs and
lower life cycle costs (elimination of alteration, dry cleaning and pressing
costs), (iii) enhanced styling of casual garments along with greater acceptance
of casual wear in the workplace and (iv) strong brands such as Levi, Wrangler
and The Gap which continue to create fashion interest for consumers.
The Company's domestic apparel fabrics markets have been affected by changing
demographics associated with the maturation of the baby-boom generation. As the
baby-boom generation has matured, product trends have evolved away from
commodity-type products to higher quality products with more diverse styling. As
a result, denim apparel manufacturers desire better fabric quality and styling
to meet consumer demand, as well as faster service to reduce the risk of
changing fashion trends. The size of the 15-to 24-year-old age category, which
accounts for the largest jeans consumption segment of the U.S. population, began
to expand in the mid-1990s when the children of baby boomers began to reach
these ages. Demand for denim apparel is expected to increase as this segment of
the U.S. population expands. By virtue of its styling expertise, manufacturing
versatility and service capabilities, the Company believes that it has
positioned itself to take advantage of the market opportunities presented by
these demographic changes.
Internationally, consumption of denims has increased in industrialized
countries, notwithstanding moderate population growth, as these countries
continue to adopt U.S. casual fashion trends. In less industrialized countries,
the potential market for denim jeans has continued to grow as youth populations
expand. The Company believes that these international market trends present
opportunities for long-term growth through the Company's international
distribution network. Apparel fabrics exports have increased in recent years
with 1996 apparel fabrics export sales at $187.0 million as compared with $175.7
million in 1995 and $135.9 million in 1994. The Company, in partnership with
CIPSA, formed Parras Cone, a new denim manufacturing facility located in Mexico,
to expand its manufacturing and market presence into Latin America.
See "Business - International Operations."
The Company believes that the demographic trends applicable to the U.S. markets
for its home furnishings fabrics indicate increases in demand as the baby
boomers reach ages traditionally associated with high levels of spending on home
furnishings. Additionally, there has been international demand for U.S. styled
home furnishings products. The Company's strategy is to continue to expand its
home furnishings businesses.
<PAGE>
FORM 10-K Page 7
Item 1. (continued)
PRODUCTS FOR APPAREL MARKETS
Denims. Cone markets and manufactures a wide variety of denim apparel fabrics.
Denims are generally "yarn-dyed", which means that the yarn is dyed before the
fabric is woven. The result is a fabric with variations in color that give denim
its distinctive appearance. Fabric styling of denims, which the Company believes
to be critical to this market, is supported by the Company's experienced
stylists and extensive use of computer-aided design and manufacturing systems.
The Company is a leader in denim styling and development and believes that it
produces a broader range of fashion denim than any of its competitors. In 1996,
Cone sold over 225 different styles of denim. The styling process involves the
creation of a wide array of fabric colors, shades and patterns in a variety of
both traditional and innovative weaves. After weaving, fabrics are processed
further in finishing operations that produce different textures and other
physical properties. During this process, the Company's product development
specialists and stylists 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.
Although the markets and end uses for denim are very diverse, the Company
categorizes the market into heavyweight denims and specialty weight denims.
Heavyweight denim is used primarily in jeans and is by far the largest segment
of the denim market. Within the heavyweight market, the Company further
classifies its denims as "value-added" and "basic." Value-added denims are
distinguished by styling and customer service. Basic denims are less
differentiated by styling and customer service with competition being primarily
in the form of price and quality.
Cone's value-added denims are stylish and have broad market appeal. The
Company's largest customer in this category is Levi Strauss, whose 501(R) jeans
are produced solely from the Company's proprietary fabrics. Other customers
include V.F. Corporation (Wrangler), Calvin Klein, The Gap, Polo, Hilfiger,
Arizona and Guess.
Cone's basic denims, with mass market appeal, are used primarily in garments
sold through retail chains, department stores and catalogs. Customers for this
product include a majority of the same names as for value-added denims. Although
the Company's basic denims are designed for the upscale segment of these
markets, the Company also produces basic heavyweight blue denim, primarily at
Parras Cone, to service mass market needs of certain customers. Sales of this
product constituted approximately 20% of total denim sales in 1996.
Specialty weight denims include a variety of weave constructions, stripes,
colors and weights and are used primarily in women's and children's wear.
Although these fabrics constitute only a small
<PAGE>
FORM 10-K Page 8
Item 1. (continued)
portion of the denim market, they tend to establish market trends because of
their use in higher fashion garments. Cone's customers in this group include
OshKosh, The Gap, Ruff Hewn and Miller International.
As with all apparel fabrics, there is risk that fashion trends will change and
consumers will develop preferences for fabrics other than denims for casual
wear. However, the demand for denim jeans is growing, with a 7% increase in U.S.
unit sales in 1996, and the industry appears to believe that growth will
continue as evidenced by new garment manufacturers entering the market and
expansion of capacity worldwide.
Specialty Sportswear Fabrics. The Company is the largest domestic producer of
yarn-dyed plaid flannel and solid shade chamois flannel shirting fabrics. The
Company's manufacturing capability for producing fabrics with a soft texture is
essential to its success in this product group. These fabrics are primarily
manufactured for use in menswear sold through catalog stores and in
lighter-weight apparel products for women's and children's wear. Distribution
channels have expanded in recent years to include department stores and
discounters. Customers for these fabrics include M. Fine, Woolrich, L.L. Bean,
J.C. Penney, Eddie Bauer and Levi Strauss.
Cone also serves niche markets for piece dyed fabrics based on unique dye,
finishing, and yarn formation technologies and provides fabrics such as
Splashdown(TM) dyed fabrics and its new wrinkle resistant fabric ProSpin(R).
Cone styles and distributes a line of specialty print fabrics for a wide range
of branded apparel customers. These fabrics are printed at the Company's
Carlisle plant. The markets for these products are primarily fashion women's and
children's wear, and Cone's customers for these fabrics include OshKosh, L.L.
Bean, Healthtex, Woolrich, J.C. Penney, H. D. Lee, No Fear and Guess.
Through its Carlisle plant, the Company also provides fabric printing services
to converters of fashion apparel fabrics. These converters purchase unfinished
fabrics from weaving mills, use outside sources such as Carlisle to dye the
fabrics and print their designs, and then market the finished fabrics to apparel
manufacturers. Carlisle is well known for its quality, service and technical
capabilities in screen printing.
In December 1996, the Company approved the closing of the Granite Finishing
plant. With this closing, the plant's dyeing and finishing production will be
moved to the Carlisle plant. The production phaseout at Granite is expected to
be substantially complete by the end of the third quarter of 1997.
Marketing and Sales. The Company's marketing focus is to serve upper-end and
brand name apparel manufacturers through the development of innovative products
that are recognized in the marketplace for their distinctive quality and
styling.
<PAGE>
FORM 10-K Page 9
Item 1. (continued)
Styles of the Company's denim and other fabrics vary in color, finish and
fabrication, depending upon fashion trends and the needs of the specific
customer. The Company's stylists monitor fashion trends by traveling throughout
the United States, Europe and the Far East to attend fashion and trade shows,
meet with garment manufacturers and retailers and conduct market research.
Together with the apparel marketing group, stylists work directly with Cone's
customers to create fabrics that respond to rapidly changing fashion trends and
customer needs.
The Company employs an apparel fabrics marketing and sales staff of more than
150 persons. Business management of apparel fabrics is organized into four
operating divisions: Cone Denim North America, Cone Sportswear, Cone
International Marketing and Cone Denim Europe. The Company believes that it has
been able to achieve more effective customer service and improved efficiency
through the integration of its styling, manufacturing, marketing and customer
service functions. Except for Cone Denim Europe, the Company's apparel fabrics
marketing groups are headquartered in Greensboro in proximity to apparel
manufacturing facilities so that customer requirements can be translated more
effectively into finished products. To provide a more direct working
relationship with its customers, the Company also maintains sales offices
located in New York, Los Angeles, San Francisco, Dallas, Brussels and Singapore.
The Company's marketing professionals, together with its stylists and product
development personnel, work as early as one year in advance of a retail selling
season to develop fabric styles, colors, constructions and finishes. There are
three annual retail selling seasons: spring, fall (back-to-school) and the
Christmas season. The Company's sales for a particular selling season generally
begin six months in advance of that season. The Company's sales force presents
each season's line to customers in its showrooms as well as in its customers'
offices.
Manufacturing. The Company is the largest manufacturer of denims in the world.
Cone bases this conclusion upon capacity and sales information obtained from
trade sources. The Company is aware that a large foreign-based competitor is a
substantial minority owner in a foreign manufacturing facility and, in reaching
its conclusion, the Company has attributed to such competitor only its pro rata
ownership in this facility.
Cone believes that it has the most versatile denim manufacturing capabilities in
the world. The Company's denim facilities are modern, flexible, vertically
integrated, and encompass all manufacturing processes necessary to convert raw
fiber into finished fabrics. The Company has extensive flexibility in its yarn
spinning operations, with open-end and ring spinning equipment. The Company's
denim weaving facilities, which include approximately 850 weaving machines,
utilize all major cotton weaving technologies, including double-width
projectile, air-jet and rapier machines. The Company's dyeing and finishing
facilities include a wide range of technologies, with seven indigo long-chain
dyeing machines, package
<PAGE>
FORM 10-K Page 10
Item 1. (continued)
and beam dyeing, continuous overdye machinery and raw cotton dyeing equipment.
Specialty dyeing and printing processes for apparel fabrics are conducted at the
Company's Carlisle plant, which is one of the largest textile printing
facilities in the United States.
Cone is recognized internationally as a quality leader with its denim and
sportswear weaving plants being certified under the ISO 9002 process.
The Company also believes that it is a leader in customer service. The Company's
manufacturing facilities are continually scheduled and coordinated to maximize
versatility. Approximately 60% of Cone's denim volume is shipped under its
just-in-time quality assurance and delivery program.
Product and process development is supported by special manufacturing
development groups, which have specialists located in each facility. These
groups work with the Company's stylists and its customers' stylists to produce
new products for the marketplace. The Company uses on-line computer-aided design
systems to increase styling effectiveness.
Raw Materials. The primary raw material for the Company's fabric manufacturing
operations is cotton. The policies of the U.S. Government 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. Prior to 1991, domestic cotton
prices generally exceeded world price levels, which created a competitive
disadvantage for U.S. textile manufacturers who were generally prohibited by
U.S. law from importing cotton. Since 1991, changes in U.S. law, allowing
limited imports or providing government payments to cotton purchasers, have
resulted in effective U.S. cotton costs being more competitive with world
levels. Congress has recently passed additional farm legislation that is aimed
at reducing farm subsidies and allowing farmers more versatility in planting
decisions. The long-term impact of this legislation on cotton supplies and
pricing is unclear. However, management believes that U.S. companies will
continue to be able to acquire adequate cotton supplies at prices competitive
with offshore manufacturers but there can be no assurance that these results
will always occur. To the extent that effective U.S. cotton prices exceed world
prices, the Company's competitiveness may be materially adversely affected.
Since cotton is an agricultural product, its supply and quality are subject to
the forces of nature. Although the Company 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 adversely
affect the Company's operations.
In late 1993 and continuing through 1995, cotton prices increased throughout the
world. The Company believes that cotton prices were and are being affected by
three major trends: (i) an increase in
<PAGE>
FORM 10-K Page 11
Item 1. (continued)
worldwide demand as major consuming countries have recovered from a cyclical
recession, (ii) disappointing cotton crops in China, India and Pakistan in 1993
and 1994 and in the U.S. in 1995 resulting from poor weather, disease and
insects and (iii) financial speculation in commodities markets which tend to
exacerbate price movements. Because the Company cannot always pass increased
cotton costs on to its customers, such increases have adversely affected its
profitability in the past and may do so in the future. See "Item 7. Management's
Discussion and Analysis of Results of Operations and Financial Condition."
The Company 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 hedge
committed and anticipated fabric sales and to manage margin risks associated
with price fluctuations on anticipated cotton purchases. The Company 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 with product sales. Since
prices for forward purchase contracts are sometimes fixed in advance of
shipment, the Company may benefit from its fixed price purchases in 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 the Company or will protect the Company
from price fluctuations.
Cone also purchases "greige goods" (fabrics that have not been dyed or
finished), yarn, synthetic fibers, and dyes and chemicals. These raw materials
have normally been available in adequate supplies through a number of suppliers.
Competition. The textile apparel fabrics business is highly competitive. No
single company dominates the industry and domestic and foreign competitors range
from large, integrated enterprises to small niche concerns. There are nine denim
manufacturers in the United States, of which Cone is the largest, and three
domestic producers comprise approximately 60 percent of the U.S. productive
capacity. Foreign competition in domestic markets is in the form of imported
garments. 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. Increased competition in the form of imported apparel
from Mexico and other countries, the migration of garment manufacturing
facilities to Mexico and Caribbean countries, additional worldwide capacity,
more aggressive pricing from domestic companies and the proliferation of newly
styled fabrics competing for fashion acceptance have been factors affecting the
Company's business
<PAGE>
FORM 10-K Page 12
Item 1. (continued)
environment. Any failure of the Company to compete effectively in this
environment or to keep pace with changing markets could have a material adverse
effect on the Company's results of operations and financial position.
The level of import protection in the U.S. for domestic producers of textiles is
subject to both domestic political and foreign policy considerations. The World
Trade Organization ("WTO") was formed in January 1995 and is the successor to
the General Agreement on Trade and Tariffs ("GATT") approved by Congress in
December 1994. This new multilateral trade organization has set forth mechanisms
by which world trade in textiles and clothing is being progressively liberalized
by phasing-out quotas and reducing duties over a ten-year period which began in
January of 1995. Although the Company's export business should benefit from
reduced tariffs, there can be no assurance that the significant reduction in
import protection for domestic textile manufacturers will not have a material
adverse effect on the Company's results of operations and financial condition.
The North American Free Trade Agreement ("NAFTA"), which became effective on
January 1, 1994, has created a free-trade zone among Canada, Mexico and the U.S.
NAFTA contains safeguards which 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 will phase out all
trade restrictions and tariffs on textiles and apparel among the three
countries. In addition, legislation has been proposed that would grant benefits
to other countries in the Caribbean and Central and South America that are
roughly equivalent to those applicable to Mexico under NAFTA. The Company
believes that the removal of tariffs on denim and denim jeans in the
participating countries presents opportunities for growth. Cone's domestic
operations may benefit from the improved access to Mexico's consumer markets and
from access to garment manufacturers in Mexico and the Caribbean Basin who are
competitive with traditional import sources from the Far East. The Company's
Mexican joint venture, Parras Cone, benefits from its access to U.S. markets.
However, there can be no assurance that NAFTA, or the possible adoption of
proposed legislation, will not adversely affect the Company.
The Company's domestic strategy is to compete primarily on the basis of quality,
styling and service. The Company believes that the historically high quality of
its products and manufacturing processes has created a competitive advantage,
which it has enhanced by the extensive use of statistical quality control and
investment in modern equipment, including manufacturing process controls. The
Company also believes that its experienced stylists and product development
specialists, its use of computer-aided design systems and its manufacturing
versatility have created a competitive advantage in styling.
<PAGE>
FORM 10-K Page 13
Item 1. (continued)
The Company has focused its operations on the manufacture of fabrics for use in
garments that are less vulnerable to import penetration. The location of the
Company's U.S. manufacturing facilities, its joint venture in Mexico and its
emphasis on shortening production and delivery times allows the Company to
respond more quickly than foreign producers to changing fashion trends and to
its domestic customers' demands for precise production schedules and rapid
delivery. The Company has invested in technological and process improvements to
meet demand for quality and styling. Its emphasis on customer service is
supported by its just-in-time and quick response programs and by electronic data
interchange (EDI) with customers. These efforts have improved communication,
planning and processing time in manufacturing.
The Company believes it effectively competes in foreign markets through export
sales. See "Business - International Operations."
Seasonality. Demand for the Company's apparel products and the level of the
Company's sales fluctuate moderately during the year. Generally, there is
increased consumer demand for garments made of denim and the Company's specialty
apparel fabrics during the fall (back-to-school) and the Christmas season. As a
result, demand for the Company's apparel fabrics is generally higher during the
first half of the calendar year when apparel fabrics are produced for these
selling seasons.
HOME FURNISHINGS PRODUCTS
Textile Fabrics. The Cone Finishing Division, consisting of the Company's
Carlisle and Raytex plants, is the largest commission printer of decorative
fabrics in the U.S. As commission printers, Carlisle and Raytex prints fabrics
owned by customers on a fee basis. Customers for Carlisle's printing services
include Waverly Division of F. Schumacher & Co., Western Textiles, P. Kaufman,
Anju/Woodridge, Covington, Ametex and Spectrum. The home furnishings fabrics
processed at Carlisle are generally used for upper-end upholstery and drapery
prints. Customers for Raytex include Beco, Galey & Lord, Croscill, Magic
Textiles, Revman, Perfect Fit and Whiting.
The Carlisle plant is a modern, one-million square foot facility specializing in
rotary screen printing. In recent years, the Company has invested heavily in
computerized color-mixing systems and automated process controls in order to
support its competitive strategy of focusing on quality and service.
The Raytex plant is a modern 260,000 square foot facility with six printing
machines specializing in wide rotary screen printing. In 1996, a new preparation
range was installed providing additional finishing capabilities. Raytex is one
of the largest wide-fabric commission printers in the U.S.
<PAGE>
FORM 10-K Page 14
Item 1. (continued)
Cone Finishing Division's marketing headquarters are located in New York City.
Marketing efforts of the New York sales staff are augmented by close working
relationships between Carlisle's and Raytex's production and technical staff and
customers' designers and stylists. Cone Finishing also maintains a customer
service center that utilizes electronic data interchange (EDI) with major
customers.
Cone Decorative Fabrics is a "converter" of printed and solid woven fabrics for
upholstery, draperies and bedspreads. A converter designs and markets fabrics,
which are manufactured and printed for the converter by others. The Decorative
Fabrics division's lines are printed primarily at the Carlisle plant under the
name "John Wolf Decorative Fabrics."
Cone Decorative Fabrics are marketed domestically and internationally through
the division's sales staff and sales agents. The division's sales staff handles
sales to large customers such as hotels, institutions and furniture
manufacturers, as well as "jobbers," who resell to decorators, fabric retailers
and certain smaller quantity users. International sales and sales to other
smaller customers are made primarily through agents.
The Cone Finishing Division competes directly with two large commission
printers, the Cherokee division of Spartan Mills and Santee Print Works, as well
as the Brookneal plant of the Bibb Company. Cone Decorative Fabrics competes
with a large number of domestic and foreign suppliers of decorative fabrics.
Both divisions compete primarily on the basis of quality and service.
The Cone Finishing Division also competes indirectly with other suppliers of
products used in the home furnishing industry including jacquard woven fabrics,
velvets and plain shade fabrics. Consumer fashion preference is based upon
coloration, texture and value. As with all home furnishing fabrics, there is a
risk that consumer fashion preference will shift away from prints. The Company
has experienced a shift in preference away from printed fabrics.
In order to dampen the effects of these shifts in consumer preference, the
Company formed the Cone Jacquards Division and entered the jacquard weaving
business with the start up in late 1995 of a new weaving facility. The Cone
Jacquards plant is a modern 88,000 square foot facility with approximately 20
wide weaving machines. Cone Jacquards produces broadloom jacquard fabrics for
furniture manufacturers, fabric distributors, retailers, converters and
specialty products manufacturers. Competitors of Cone Jacquards include
Mastercraft, Burlington, Culp, Quaker and Blumenthal. Customers for Cone
Jacquards include Barrow Industries, Kravet, Klaussner Furniture, Thomasville
Upholstery and Drexel Heritage.
Foam Products. In first quarter of 1996, the Company completed the sale of its
Olympic Products Division to British Vita PLC. Proceeds of the sale were in
excess of $50 million associated with the sale of fixed assets, inventories and
the liquidation of receivables.
<PAGE>
FORM 10-K Page 15
Item 1. (continued)
Olympic Products supplied polyurethane foam and related products to the home
furnishings and automotive markets.
The Company sold Olympic because management did not believe it was appropriate
to invest substantial amounts of capital in order to grow the business to the
size required to be an effective competitor in the business. Taking this action
allows the Company to focus on its core strengths for the long-term.
Real Estate Activities. The Company owns approximately 750 acres of real estate
in the Greensboro area, substantially all of which were purchased originally to
support the Company's manufacturing operations. The Company determined that the
land was no longer needed for this purpose and has systematically developed and
liquidated these properties. These activities are conducted through a wholly
owned subsidiary, Cornwallis Development Co. Net sales from real estate
activities generally account for less than two percent of the Company's total
net revenues.
Consistent with its strategy to concentrate on its core business, in late 1996
the Company announced its plan to sell Cornwallis Development Co. Several bids
were received and the Company has entered into a contract with an international
real estate development firm to sell certain real estate assets including those
of Cornwallis. See "Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition - Strategic Initiatives."
INTERNATIONAL OPERATIONS
The Company has a long history of distributing its products internationally and
exported approximately 35% of the Company's denim sales in 1996. The Company has
sales agents in Europe, Japan, Korea, Hong Kong, Africa, and throughout Central
and South America, and it maintains extensive support services in trade
financing, traffic and transportation in order to support its international
presence. The Company's strategy is to service its international customers with
the same degree of commitment to quality, service and fabric development as its
domestic customers. The Company believes this philosophy is responsible for
Cone's position as the largest U.S. exporter of denims. The Company's
international customers include: Levi International, Joker Jeans and Big Star in
Europe; Edwin in Japan; Wellsum and Talbots in Hong Kong; and Ellis, Custer,
Jeans and Jackets and UFO brands in South America.
Principal competitive factors in the international markets for denims are
quality, price and styling. The Company believes it has competitive advantages
in the upper-end segment of the market in quality, service and fabric
development as compared with foreign manufacturers, as a result of the economies
of scale resulting from manufacturing experience and the versatility of its
manufacturing facilities. In addition, denim jeans have an image of being
uniquely American products, which complements the Company's strategy of serving
the upper-end "genuine" jeans market.
<PAGE>
FORM 10-K Page 16
Item 1. (continued)
The Company's competitiveness in international market segments is influenced by
tariffs and shipping costs. The Company is assessing the feasibility of
manufacturing within certain trade blocs in order to compete more effectively in
these markets.
In 1993, the Company purchased an ownership in CIPSA, the largest Mexican denim
manufacturer and entered into a 50/50 joint venture arrangement with CIPSA to
build and operate a world class denim manufacturing plant in Mexico. The joint
venture, Parras Cone, was financed with approximately $74 million in debt,
non-recourse to the partners, and a total equity investment of $60 million split
equally between the two partners. Construction of the joint venture facility was
completed in 1995 and it began production of basic denims and yarn in the fourth
quarter of 1995.
The Company has several objectives in pursuing its Mexican initiatives. The
Company is seeking access to the Mexican distribution system to sell the
Company's products and 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. The Company also is seeking to gain from lower labor and
other cost advantages, while benefiting from its technological expertise. The
Company plans to export basic denims made by Parras Cone throughout the world by
taking advantage of Cone's distribution network.
Cone Decorative Fabrics and Cone Jacquards export approximately 10% of their
sales volume. Styling and service are the principal competitive factors
affecting its position in these markets. The Company believes that there is an
international demand for U.S.
styling and design.
TRADEMARKS AND PATENTS
The Company owns several registered trademarks containing the "Cone" name and
pine cone design. In addition, the Company holds various other trademarks and
trade names used in connection with its business and products, both domestically
and internationally. The Company believes that the name recognition of Cone
Mills and its reputation for quality, service and product development have value
in both domestic and international markets.
CUSTOMERS
The Company has one unaffiliated customer, Levi Strauss ("Levi"), which accounts
for more than 10% of consolidated sales. Sales to this customer accounted for
approximately 49%, 39% and 34% of sales from continuing operations in 1996, 1995
and 1994, respectively. In 1996, Levi repurchased common shares in a leveraged
transaction that may or may not affect purchasing practices. The loss of Levi as
a customer, or a significant reduction in its purchases from the Company, would
have a material adverse effect on the Company's results of operations.
<PAGE>
FORM 10-K Page 17
Item 1. (continued)
Levi has been a customer of the Company for more than 75 years and a close,
cooperative supplier/customer relationship has evolved through the development
of the Company'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, the Company
sells other denim fabrics to Levi. Because the Company is Levi's major denim
supplier, Levi initiated discussions with the Company 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 on March 30, 2002 and is automatically extended,
unless either party gives notice otherwise, for an additional year so that the
remaining term is five years. Following a change in control, the Supply
Agreement would terminate at the end of the three-year supply arrangement or of
the lease term, as the case may be. Additionally, Levi may terminate the Supply
Agreement 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
The Company's apparel and home furnishings order backlog was approximately $132
million, or 39 million yards, at December 29, 1996, as compared to approximately
$186 million or 54 million yards at December 31, 1995. 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, the Company 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
December 29, 1996, will be filled within the first quarter of 1997.
RESEARCH AND DEVELOPMENT
The research and development activities of the Company are directed primarily
toward improving the quality, styling and performance of its apparel fabrics and
other products and services. The Company also is engaged in the development of
computer-aided design and manufacturing systems and other methods of improving
the interaction between the Company's stylists and its customers. These
activities are conducted at various facilities, and expenses related to these
activities are an immaterial portion of the Company's overall operating costs.
<PAGE>
FORM 10-K Page 18
Item 1. (continued)
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 the Company.
However, existing government regulations are not expected to have a material
effect on the Company's financial position, operating results or planned capital
expenditures. The Company currently has an active environmental protection
committee and an active workplace safety organization.
EMPLOYEES
At January 31, 1997, the Company employed approximately 6,600 persons, of whom
approximately 1,300 were salaried and approximately 5,300 were hourly employees.
Of such hourly employees, approximately 2,200 are represented by collective
bargaining units and are employed under collective bargaining agreements that
provide for annual wage negotiations in the spring of each year. Based upon its
records relating to the withholding of union dues from employee compensation,
the Company believes that approximately 1,100 of its employees are dues-paying
union members. The Company 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
The Company operates nine manufacturing plants - seven in North Carolina and two
in South Carolina. There are six apparel fabric and three home furnishings
plants. The Company also operates several distribution centers and warehouses.
All significant manufacturing facilities are held in fee and are substantially
free of any significant liens or other encumbrances. The Company's manufacturing
facilities total approximately 4.3 million square feet of floor space, with
buildings generally constructed of brick, steel, concrete or concrete block. All
such facilities are maintained in good condition and are suitable for their
respective purposes. Even when such facilities are substantially fully utilized,
the Company believes that it is in a position to respond to opportunities to
produce additional higher margin fabrics through changes in product mix and
through acquisition of yarn and greige goods from outside sources for further
processing and finishing by the Company. The Company leases office buildings in
Greensboro where its executive and administrative offices are located. All of
the Company's sales offices are leased from unrelated parties.
Parras Cone, the Company's joint venture with CIPSA, owns 20 acres of land and a
575,000 square-foot building completed in 1995, which provides manufacturing
space and raw materials and finished goods warehouses.
<PAGE>
FORM 10-K Page 19
Item 3. Legal Proceedings
In November 1988, William J. Elmore and Wayne Comer (the "Plaintiffs") former
employees of the Company, instituted a class action suit against the Company and
certain other defendants in which the Plaintiffs asserted a variety of claims
related to the Cone Mills Corporation 1983 ESOP (the "1983 ESOP") and certain
other employee benefit plans maintained by the Company. In March 1992, the
United States District Court in Greenville, South Carolina entered a judgment in
the amount of $15.5 million (including an attorneys' fee award) against the
Company with respect to an alleged promise to make additional Company
contributions to the 1983 ESOP and all claims unrelated to the alleged promise
were dismissed. The Company, certain individual defendants and the Plaintiffs
appealed.
On May 6, 1994, the United States Court of Appeals for the Fourth Circuit,
sitting EN BANC, affirmed the prior conclusion of a panel of three of its judges
and unanimously reversed the $15.5 million judgment and unanimously affirmed all
of the District Court's rulings in favor of the Company. However, the Court of
Appeals affirmed, by an equally divided court, the District Court's holding that
Plaintiffs should be allowed to proceed on an alternative theory whether,
subject to proof of detrimental reliance, Plaintiffs could establish that a
letter to salaried employees on December 15, 1983 created an enforceable
obligation that could allow recovery on a theory of equitable estoppel.
Accordingly, the case was remanded tothe District Court for a determination of
whether the Plaintiffs could establish detrimental reliance creating estoppel of
the Company.
On April 19, 1995, the District Court granted a motion by the Company for
summary judgment on the issues of equitable estoppel and third-party beneficiary
of contract which had been remanded to it by the Court of Appeals. The court
ruled that the Plaintiffs could not forecast necessary proof of detrimental
reliance. The District Court, however, granted Plaintiffs motion to amend the
complaint insofar as they sought to pursue a "new" claim for unjust enrichment,
but denied their motion to amend so far as they sought to add claims for
promissory estoppel and unilateral contract. The court further denied the
Company's motion to decertify the class.
The District Court held a hearing on July 24, 1995 to decide on the merits
Plaintiffs' lone remaining claim of unjust enrichment, and in an order entered
September 25, 1995, the District Court dismissed that claim with prejudice. On
October 20, 1995, the Plaintiffs appealed to the Court of Appeals from the April
19, 1995 and September 25, 1995 orders of the District Court. Oral argument on
Plaintiffs' appeal was held in the Court of Appeals on October 31, 1996. Due to
the uncertainties inherent in the litigation process, it is not possible to
predict the ultimate outcome of this lawsuit. However, the Company has defended
this matter vigorously, and it is the opinion of the Company's management that
the probability is remote that this lawsuit, when finally concluded, will have a
material adverse effect on the Company's financial condition or results of
operations.
<PAGE>
FORM 10-K Page 20
Item 3. (continued)
The Company is a party to various other legal claims and actions incidental to
its business. 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 of the Company or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 4A. Executive Officers of the Registrant.
<TABLE>
<CAPTION>
Name Age Position with the Company
<S> <C> <C>
J. Patrick Danahy 53 Director, President, and
Chief Executive Officer
John L. Bakane 46 Director,
Executive Vice President
and Chief Financial
Officer
James S. Butner 51 Vice President
Neil W. Koonce 49 Vice President and
General Counsel
Terry L. Weatherford 54 Vice President and
Secretary
David E. Bray 58 Treasurer
Gary L. Smith 38 Controller
</TABLE>
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.
J. Patrick Danahy joined the Company in 1971; he was named General
Manager of the Carlisle Plant in 1978 and President of the Cone
Finishing Division in September 1984. He was elected corporate Vice
President in May 1986 and director in May 1989. He was named
President and Chief Operating Officer in August 1989 and President
and Chief Executive Officer in August 1990.
John L. Bakane joined the Company in 1975 and has served in various
administrative and staff positions involving planning, financial
management and customer service. He was named corporate Vice
President in May 1986, became Chief Financial Officer in November
<PAGE>
FORM 10-K Page 21
Item 4A. (continued)
1988 and was elected to the Board of Directors in May 1989. On February 17,
1995, he was elected Executive Vice President of the Company. On November 8,
1996, he assumed responsibility for management of the Denim Group of the
Company.
James S. Butner was employed by Celanese Corporation, a synthetic fibers and
chemical company, from 1979 to 1984, at which time he became Director of
Industrial and Public Relations for the Company. Effective August 1, 1988, he
was named corporate Vice President for Industrial and Public Relations.
Neil W. Koonce was employed by the Company in January 1974 as a staff attorney.
He was elected Assistant General Counsel in 1985, General Counsel in August 1987
and Vice President in May 1989.
Terry L. Weatherford was Secretary and General Counsel of Blue Bell, Inc., a
manufacturer and distributor of wearing apparel, from 1981 to 1987. From 1987 to
1993, he was self-employed as an attorney except for a thirteen-month period
from June 1988 when he was employed by Manufactured Homes, Inc., a manufacturer
and retailer of mobile homes, as its General Counsel. He was employed by the
Company and elected Assistant Secretary in May 1993, and effective December
1993, was elected Secretary. In May 1995 he was elected Vice President and
Secretary.
David E. Bray was employed in 1977 as Director of Treasury Services. He was
elected Assistant Treasurer of the Company in May 1984 and Treasurer in November
1988.
Gary L. Smith was employed by the Company in 1981 and has served in various
accounting, planning and financial management positions. In 1990, he was named
Manager of Business Analysis. He was elected Assistant Controller in 1994 and
was named Controller of the Company on December 16, 1996.
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
The Company'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
following table sets forth the high and low sales prices of the Common Stock as
reported on the NYSE Composite Tape for the periods indicated.
<PAGE>
FORM 10-K Page 22
Item 5
<TABLE>
<CAPTION>
Quarter Ended
Mar.31,1996 Jun. 30,1996 Sept.29,1996 Dec.29,1996
<S> <C> <C> <C> <C>
Common stock
prices
High 11 3/4 12 3/8 11 3/8 9 1/8
Low 9 7/8 10 7/8 8 7 1/4
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
Apr.2,1995 Jul. 2,1995 Oct.1,1995 Dec.31,1995
<S> <C> <C> <C> <C>
Common stock
prices
High 12 1/4 13 1/2 14 3/8 13 1/4
Low 10 5/8 11 12 1/2 10 3/4
</TABLE>
The Company has not declared any dividends on its Common Stock since it became a
privately held company in 1984 and anticipates that its earnings for the
foreseeable future will be retained for use in its business and to finance
growth. Payment of cash dividends in the future will depend upon the Company's
financial condition, results of operations, current and anticipated capital
requirements, and other factors deemed relevant by the Company's Board of
Directors. See "Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition."
The approximate number of holders of record of the Company's Common Stock as of
February 28, 1997 was 484.
Item 6. Selected Financial Data
The information appearing under the heading "Historical Financial Data" on page
38 of the Registrant's 1996 Annual Report to Shareholders is incorporated herein
by reference.
Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition
The information appearing under the heading "Management's Discussion and
Analysis of Results of Operations and Financial Condition" on pages 12 thru 16
of the Registrant's 1996 Annual Report to Shareholders is incorporated herein by
reference.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements and notes thereto, appearing on pages 18
through 37 of the Registrant's 1996 Annual Report to Shareholders, are
incorporated herein by reference.
<PAGE>
FORM 10-K Page 23
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information relating to directors of the Company is presented under the heading
"Election of Directors" in the Company's definitive Proxy Statement prepared for
the Annual Meeting of Shareholders to be held on May 13, 1997, and is hereby
incorporated by reference. Information regarding executive officers is included
as Item 4A in Part I.
Item 11. Executive Compensation.
Information relating to executive compensation is presented under the heading
"Executive Compensation" in the Company's definitive Proxy Statement prepared
for the Annual Meeting of Shareholders to be held on May 13, 1997, and is hereby
incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
Information with respect to beneficial ownership of the Company's voting
securities by each director and all officers and directors as a group, and by
any person known to beneficially own more than 5% of any class of voting
security of the Company, is presented under the heading "Security Ownership of
Directors, Nominees and Named Executive Officers" and "Security Ownership of
Certain Beneficial Owners" in the Company's definitive Proxy Statement prepared
for the Annual Meeting of Shareholders to be held on May 13, 1997, and is hereby
incorporated by reference.
Item 13. Certain Relationships and Related Transactions.
Information with respect to certain relationships and related transactions is
presented under the headings "Compensation of Directors" and "Certain
Relationships and Related Transactions" in the Company's definitive Proxy
Statement prepared for the Annual Meeting of Shareholders to be held on May 13,
1997, and is hereby incorporated by reference.
<PAGE>
FORM 10-K Page 24
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a)(1) The following financial statements of the Registrant are
incorporated by reference in Item 8 hereof:
Report of Independent Auditor
Consolidated Statements of Operations for the Years
Ended December 29, 1996, December 31, 1995 and
January 1, 1995
Consolidated Balance Sheets as of December 29, 1996
and December 31, 1995
Consolidated Statements of Stockholders' Equity for the
Years Ended December 29, 1996, December 31, 1995 and
January 1, 1995
Consolidated Statements of Cash Flows for the Years
Ended December 29, 1996, December 31, 1995 and January
1, 1995
Notes to Consolidated Financial Statements
(a)(2) The following Financial Statement Schedules are presented
on pages 25 through 26 hereto.
Report of Independent Auditor relating to Schedule II
Schedule II - Valuation and Qualifying Accounts
All other schedules specified under Regulation S-X are
omitted because they are not applicable, not required or
the information required appears in the Consolidated
Financial Statements or Notes thereto.
(a)(3) Exhibits. Exhibits to this report are listed on the
accompanying Index to Exhibits.
(b) Reports on Form 8-K
No report on 8-K was filed during the fourth quarter of
1996.
<PAGE>
FORM 10-K Page 25
MCGLADREY & PULLEN, LLP
CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS
INDEPENDENT AUDITOR'S REPORT ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
Cone Mills Corporation
Greensboro, North Carolina
Our audits were made for the purpose of forming an opinion on
the basic consolidated financial statements taken as a whole. The consolidated
supplemental schedule II is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not a part of the basic
consolidated financial statements. This schedule has been subject to the
auditing procedures applied in our audits of the basic consolidated financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic consolidated financial statements taken as a whole.
/s/ McGLADREY & PULLEN, LLP
MCGLADREY & PULLEN, LLP
Greensboro, North Carolina
February 14, 1997
<PAGE>
FORM 10-K Page 26
CONE MILLS CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 29, 1996, December 31, 1995 and January 1, 1995
(amounts in thousands)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
Additions
Balance (1) (2)
at Charged to Charged to Balance
beginning costs and other at end
Description of period expenses accounts Deductions of period
<S> <C> <C> <C> <C> <C>
December 29, 1996
Valuation accounts deducted
from the assets to which
they apply:
Provision for doubtful
accounts $3,200 $ 127 $ - $ 327(a) $3,000
Reserve for loss on real estate disposal (c) - 4,500 - - 4,500
Reserve for future losses (c) 2,644 1,522 - 2,441 1,725
Reserve for fixed asset writedowns (c) - 2,638 - - 2,638
December 31, 1995
Valuation accounts deducted
from the assets to which
they apply:
Provision for doubtful
accounts $3,000 $ 411 $ - $ 211(a) $3,200
Inventory reserves 45 - - 45(c) -
Reserve for future losses - 2,644 - - 2,644
January 1, 1995
Valuation accounts deducted
from the assets to which
they apply:
Provision for doubtful
accounts $3,000 $ 232 $ - $ 232(a) $3,000
Inventory reserves 393(b) - - 348(b)(c) 45
Reserve for future losses(b) 1,227 - - 1,227(c) -
</TABLE>
(a) Represents bad debts charged off.
(b) Represents reserves for discontinued operations (Note 18).
(c) Represents reserves charged to costs and expenses.
<PAGE>
FORM 10-K INDEX TO EXHIBITS Page 27
Exhibit Sequential
No. Description Page No.
* 2.1 Receivables Purchase Agreement dated
as of August 11, 1992, between the
Registrant and Delaware Funding
Corporation filed as Exhibit 2.01 to
the Registrant's report on Form 8-K
dated August 13, 1992.
* 2.1(a) Amendment to Receivables Purchase
Agreement dated April 4, 1994, between
the Registrant and Delaware Funding
Corporation filed as Exhibit 2.1 to
the Registrant's report on Form 8-K
dated March 1, 1995.
* 2.1(b) Amendment to Receivables Purchase
Agreement dated June 7, 1994, between
the Registrant and Delaware Funding
Corporation filed as Exhibit 2.2 to
the Registrant's report on Form 8-K
dated March 1, 1995.
* 2.1(c) Amendment to Receivables Purchase
Agreement dated as of June 30, 1994,
between the Registrant and Delaware
Funding Corporation filed as Exhibit
2.1 to the Registrant's report on
Form 10-Q for the quarter ended
July 3, 1994.
* 2.1(d) Amendment to Receivables Purchase
Agreement dated as of November 15, 1994,
between the Registrant and Delaware
Funding Corporation filed as Exhibit
2.4 to the Registrant's report on
Form 8-K dated March 1, 1995.
* 2.1(e) Amendment to Receivables Purchase
Agreement dated as of June 30, 1995,
between the Registrant and Delaware
Funding Corporation filed as Exhibit
2.1(e) to the Registrant's report on
Form 10-Q for the quarter ended
July 2, 1995.
* 2.1(f) Amendment to Receivables Purchase
Agreement dated as of December 31,
1995, between the Registrant and
Delaware Funding Corporation,
filed as Exhibit 2.1(f) to the
Registrant's report on Form 10-K
for the year ended December 31, 1995.
<PAGE>
FORM 10-K INDEX TO EXHIBITS Page 28
Exhibit Sequential
No. Description Page No.
* 2.1(g) Amendment to Receivables Purchase
Agreement and Letter Agreement
referred to therein dated as of
June 24, 1996, between the Registrant
and Delaware Funding Corporation filed
as Exhibit 2.1(g) to Registrant's report
on Form 10-K for the quarter ended
June 30, 1996.
* 2.1(h) Amendment to Receivables Purchase
Agreement dated as of June 30, 1996,
between the Registrant and Delaware
Funding Corporation filed as Exhibit
2.1(h)to the Registrant's report on
Form 10-Q for the quarter ended
September 29, 1996.
* 2.1(i) Amendment to Receivables Purchase
Agreement dated as of August 26, 1996,
between the Registrant and Delaware
Funding Corporation filed as Exhibit
2.1(i) to the Registrant's report on
Form 10-Q for the quarter ended
September 29, 1996.
* 2.1(j) Amendment to Receivables Purchase
Agreement dated as of September 29,
1996, between the Registrant and
Delaware Funding Corporation filed
as Exhibit 2.1(j) to the Registrant's
report on Form 10-Q for the quarter
ended September 29, 1996.
* 2.2(a) Investment Agreement dated as of
June 18, 1993, among Compania Industrial
de Parras, S.A. de C.V., Sr. Rodolfo
Garcia Muriel, and Cone Mills
Corporation, filed as Exhibit 2.2(a)
to Registrant's report on Form 10-Q for
the quarter ended July 4, 1993, with
exhibits herein numbered 2.2(b),(c),
(d), (f), (g), and (j) attached.
* 2.2(b) Commercial Agreement dated as of June
25, 1993, among Compania Industrial de
Parras, S.A. de C.V., Cone Mills
Corporation and Parras Cone de Mexico,
S.A., filed as Exhibit 2.2(b) to
Registrant's report on Form 10-Q for the
quarter ended July 4, 1993.
<PAGE>
FORM 10-K INDEX TO EXHIBITS Page 29
Exhibit Sequential
No. Description Page No.
* 2.2(c) Guaranty Agreement dated as of June 25,
1993, between Cone Mills Corporation and
Compania Industrial de Parras, S.A. de
C.V., filed as Exhibit 2.2(c) to
Registrant's report on Form 10-Q for the
quarter ended July 4, 1993.
* 2.2(d) Joint Venture Agreement dated as of
June 25, 1993, between Compania
Industrial de Parras, S.A. de C.V., and
Cone Mills (Mexico), S.A. de C.V. filed as
Exhibit 2.2(d) to Registrant's report on
Form 10-Q for the quarter ended
July 4, 1993.
* 2.2(e) First Amendment to Joint Venture
Agreement dated as of June 14, 1995,
between Compania Industrial de Parras,
S.A. de C.V., and Cone Mills (Mexico),
S.A. de C.V., filed as Exhibit 2.2(e)
to the Registrant's report on Form 10-Q
for the quarter ended July 2, 1995.
* 2.2(f) Joint Venture Registration Rights
Agreement dated as of June 25, 1993,
among Parras Cone de Mexico, S.A.,
Compania Industrial de Parras, S.A. de
C.V. and Cone Mills (Mexico),
S.A. de C.V. filed as Exhibit 2.2(e)
to Registrant's report on Form 10-Q
for the quarter ended July 4, 1993.
* 2.2(g) Parras Registration Rights Agreement
dated as of June 25, 1993, between Compania
Industrial de Parras, S.A. de C.V. and
Cone Mills Corporation filed as Exhibit
2.2(f) to the Registrant's report on Form
10-Q for the quarter ended July 4, 1993.
* 2.2(h) Guaranty Agreement dated as of June 14,
1995, between Compania Industrial de
Parras, S.A. de C.V. and Cone Mills
Corporation filed as Exhibit 2.2(h) to
the Registrant's report on Form 10-Q
for the quarter ended July 2, 1995.
<PAGE>
FORM 10-K INDEX TO EXHIBITS Page 30
Exhibit Sequential
No. Description Page No.
* 2.2(i) Guaranty Agreement dated as of June 15,
1995, between Cone Mills Corporation
and Morgan Guaranty Trust Company of
New York filed as Exhibit 2.2(I) to
the Registrant's report on Form 10-Q
for the quarter ended July 2, 1995.
* 2.2(j) Support Agreement dated as of June 25,
1993, among Cone Mills Corporation, Sr.
Rodolfo L. Garcia, Sr. Rodolfo Garcia
Muriel and certain other person listed
herein ("private stockholders") filed
as Exhibit 2.2(g) to Registrant's
report on Form 10-Q for the quarter
ended July 4, 1993.
* 2.2(k) Call Option dated September 25, 1995,
between Registrant and SMM Trust, 1995
- M, a Delaware business trust, filed
as Exhibit 2.2(k) to the Registrant's
report on Form 10-Q for the quarter
ended October 1, 1995.
* 2.2(l) Put Option dated September 25, 1995,
between Registrant and SMM Trust, 1995
- M, a Delaware business trust, filed
as Exhibit 2.2(l) to the Registrant's
report on Form 10-Q for the quarter
ended October 1, 1995.
* 2.2(m) Letter Agreement dated January 11, 1996
among Registrant, Rodolfo Garcia Muriel,
and Compania Industrial de Parras,
S.A. de C.V., filed as Exhibit 2.2(m) to
the Registrant's report on Form 10-K
for the year ended December 31, 1995.
* 2.3 Asset Purchase Agreement dated as
of December 2, 1994 between the
Registrant, Lancer Industries, Inc.
and M.P.M. Transportation, Inc.,
filed as Exhibit 2 to the Registrant's
Current Report on Form 8-K dated
December 2, 1994.
<PAGE>
FORM 10-K INDEX TO EXHIBITS Page 31
Exhibit Sequential
No. Description Page No.
* 2.4 Olympic Division Acquisition Agreement
by and among Vitafoam Incorporated,
British Vita PLC, and Registrant
dated January 19, 1996 with related
Lease Agreement, Lease Agreement and
Option to Purchase, Sublease Agreement,
Services Agreement, License Agreement
And Hold Back Escrow Agreement, each
dated January 22, 1996. The Acquisition
Agreement and related agreements were
filed as Exhibit 2.4 to the Registrant's
report on Form 10-K for the year ended
December 31, 1995. The following
exhibits and schedules to the Acquisition
Agreement have been omitted. The
Registrant hereby undertakes to furnish
supplementally a copy of such omitted
exhibit or schedule to the Commission upon
request.
Exhibits
Exhibit A1 Form of Buyer Lease
Exhibit A2 Form of Buyer Lease
Exhibit B Form of Holdback Escrow
Agreement
Exhibit C1 Facility 1
Exhibit C2 Facility 2
Exhibit C3 Facility 3
Exhibit C4 Facility 4
Exhibit C5 Facility 5
Exhibit C6 Facility 6
Exhibit D Form of Sublease Agreement
Exhibit E Form of Opinion of Buyer's
Counsel
Exhibit F Form of Opinion of Seller's
Counsel
Exhibit G Form of Assumption Agreement
Exhibit H Form of Services Agreement
Exhibit I Inventory Valuation Principles
Exhibit J Form of License Agreement
Schedules
Schedule 1.1(a) Excluded Assets
Schedule 1.1(b) Tangible Fixed Assets
Schedule 2.8 Assigned Contracts
Schedule 2.10 Allocation of Purchase
Price
Schedule 4.3 Consents and
Authorizations
Schedule 4.7 Contracts by Category
Schedule 4.9 Litigation
<PAGE>
FORM 10-K INDEX TO EXHIBITS Page 32
Exhibit Sequential
No. Description Page No.
Schedule 4.11 Tax Matters
Schedule 4.12 Licenses and Permits
Schedule 4.14 Tangible Personal
Property
Schedule 4.15 Employees and Wage Rates
Schedule 4.16 Insurance Policies
Schedule 4.17 Intellectual Property
Schedule 4.18 Licenses to Intellectual
Property; Third-party
Patents
Schedule 4.19 Purchases from One Party
Schedule 4.22 Real Property
Schedule 4.23 Business Names
Schedule 4.24 Environmental Matters
Schedule 9.4 Facility 5 Remediation Plan
* 4.1 Restated Articles of Incorporation of
the Registrant effective August 25, 1993,
filed as Exhibit 4.1 to Registrant's
report on Form 10-Q for the quarter ended
October 3, 1993.
* 4.2 Amended and Restated Bylaws of Registrant,
Effective June 18, 1992, filed as Exhibit
3.5 to the Registrant's Registration
Statement on Form S-1 (File No. 33-46907).
* 4.3 Note Agreement dated as of August 13, 1992,
between Cone Mills Corporation and The
Prudential Insurance Company of America,
with form of 8% promissory note attached,
filed as Exhibit 4.01 to the Registrant's
report on Form 8-K dated August 13, 1992.
* 4.3(a) Letter Agreement dated September 11, 1992,
amending the Note Agreement dated August 13,
1992, between the Registrant and The
Prudential Insurance Company of America
filed as Exhibit 4.2 to the Registrant's
report on Form 8-K dated March 1, 1995.
* 4.3(b) Letter Agreement dated July 19, 1993,
amending the Note Agreement dated
August 13, 1992, between the Registrant
and The Prudential Insurance Company of
America filed as Exhibit 4.3 to the
Registrant's report on Form 8-K dated
March 1, 1995.
<PAGE>
FORM 10-K INDEX TO EXHIBITS Page 33
Exhibit Sequential
No. Description Page No.
* 4.3(c) Letter Agreement dated June 30, 1994,
amending the Note Agreement dated
August 13, 1992, between the Registrant
and The Prudential Insurance Company of
America filed as Exhibit 4.4 to the
Registrant's report on Form 8-K dated
March 1, 1995.
* 4.3(d) Letter Agreement dated November 14, 1994,
amending the Note Agreement dated
August 13, 1992, between the Registrant
and The Prudential Insurance Company of
America filed as Exhibit 4.5 to the
Registrant's report on Form 8-K dated
March 1, 1995.
* 4.3(e) Letter Agreement dated as of June 30,
1995, amending the Note Agreement dated
August 13, 1992, between the Registrant
and The Prudential Insurance Company
of America filed as Exhibit 4.3(e) to
the Registrant's report on Form 10-Q
for the quarter ended July 2, 1995.
* 4.3(f) Letter Agreement dated as of June 30,
1995, between the Registrant and
The Prudential Insurance Company
of America superseding Letter Agreement
filed as Exhibit 4.3(e) to the
Registrant's report on Form 10-Q
for the quarter ended July 2, 1995.
* 4.3(g) Letter Agreement dated as of March 30,
1996, between the Registrant and The
Prudential Insurance Company of
America filed as Exhibit 4.3(g) to the
Registrant's report on Form 10-Q for
the quarter ended March 31, 1996.
4.3(h) Letter Agreement dated as of January
31, 1997, between the Registrant and
The Prudential Insurance Company of
America.
* 4.4 Credit Agreement dated as of August 13,
1992, among Cone Mills Corporation,
the banks listed therein and Morgan
Guaranty Trust Company of New York,
as Agent, with form of note attached
filed as Exhibit 4.02 to the Registrant's
report on Form 8-K dated August 13, 1992.
<PAGE>
FORM 10-K INDEX TO EXHIBITS Page 34
Exhibit Sequential
No. Description Page No.
* 4.4(a) Amended and Restated Credit Agreement
dated November 18, 1994, among the
Registrant, various banks and Morgan
Guaranty Trust Company of New York,
as Agent, filed as Exhibit 4.1
to the Registrant's report on Form 8-K
dated March 1, 1995.
* 4.4(b) Amendment to Credit Agreement dated as of
June 30, 1995, amending the Amended and
Restated Credit Agreement dated
November 18, 1994, among the Registrant,
various banks and Morgan Guaranty Trust
Company of New York, as Agent filed as
Exhibit 4.4(b) to the Registrant's
report on Form 10-Q for the quarter
ended July 2, 1995.
* 4.4(c) Amendment No. 2 to Credit Agreement
dated as of December 31, 1995, amending
the Amended and Restated Credit
Agreement dated November 18, 1994,
among the Registrant, various banks
and Morgan Guaranty Trust Company
of New York, as Agent, filed as
Exhibit 4.4(c) to the Registrant's
report on Form 10-K for year ended
December 31, 1995.
* 4.4(d) Amendment No. 3 to Credit Agreement
dated as of June 30, 1996 to the
Amended and Restated Credit
Agreement dated as of November 18,
1994, among the Registrant, various
banks and Morgan Guaranty Trust
Company of New York, as Agent, filed
as Exhibit 4.4(d) to the Registrant's
report on Form 10-Q for the quarter
ended September 29, 1996.
* 4.4 (e) Amendment No. 4 to Credit Agreement
dated as of September 29, 1996 to
the Amended and Restated Credit
Agreement dated as of November 18,
1994, among the Registrant, various
banks and Morgan Guaranty Trust
Company of New York, as Agent, filed
as Exhibit 4.4(e) to the Registrant's
report on Form 10-Q for the quarter
ended September 29, 1996.
<PAGE>
FORM 10-K INDEX TO EXHIBITS Page 35
Exhibit Sequential
No. Description Page No.
* 4.5 Specimen Class A Preferred Stock
Certificate, filed as Exhibit 4.5
to the Registrant's Registration
Statement on Form S-1(File No. 33-46907).
* 4.6 Specimen Common Stock Certificate,
effective June 18, 1992, filed as
Exhibit 4.7 to the Registrant's
Registration Statement on Form S-1
(File No. 33-46907).
* 4.7 The 401(k) Program of Cone Mills
Corporation, amended and restated
effective December 1, 1994, filed as
Exhibit 4.8 to the Registrant's
report on Form 10-K for year ended
January 1, 1995.
* 4.7(a) First Amendment to the 401(k)
Program of Cone Mills Corporation
dated May 9, 1995, filed as
Exhibit 4.8(a) to the Registrant's
report on Form 10-K for year ended
December 31, 1995.
* 4.7(b) Second Amendment to the 401(k)
Program of Cone Mills Corporation
dated December 5, 1995, filed as
Exhibit 4.8(b) to the Registrant's
report on Form 10-K for year ended
December 31, 1995.
* 4.8 Cone Mills Corporation 1983 ESOP as
amended and restated effective
December 1, 1994, filed as Exhibit 4.9
to the Registrant's report on Form 10-K
for year ended January 1, 1995.
* 4.8(a) First Amendment to the Cone Mills
Corporation 1983 ESOP dated
May 9, 1995, filed as Exhibit 4.9(a)
to the Registrant's report on Form 10-K
for year ended December 31, 1995.
* 4.8(b) Second Amendment to the Cone Mills
Corporation 1983 ESOP dated
December 5, 1995, filed as
Exhibit 4.9(b) to the Registrant's
report on Form 10-K for year ended
December 31, 1995.
<PAGE>
FORM 10-K INDEX TO EXHIBITS Page 36
Exhibit Sequential
No. Description Page No.
* 4.9 Indenture dated as of February 14,
1995, between Cone Mills Corporation
and Wachovia Bank of North Carolina,
N.A. as Trustee, filed as Exhibit 4.1
to Registrant's Registration Statement
on Form S-3 (File No. 33-57713).
Management contract or compensatory plan or arrangement
(Exhibits 10.1 - 10.13)
*10.1 Employees' Retirement Plan of Cone Mills
Corporation as amended and restated effective
December 1, 1994, filed as Exhibit 10.1 to
the Registrant's report on Form 10-K for the
year ended January 1, 1995.
*10.1(a) First Amendment to the Employees' Retirement
Plan of Cone Mills Corporation dated May 9,1995,
filed as Exhibit 10.1(a) to the Registrant's
report on Form 10-K for the year ended
December 31, 1995.
*10.1(b) Second Amendment to the Employees' Retirement
Plan of Cone Mills Corporation dated December 5,
1995, filed as Exhibit 10.1(b) to the
Registrant's report on Form 10-K for the year
ended December 31, 1995.
10.1(c) Third Amendment to the Employees' Retirement
Plan of Cone Mills Corporation dated August 16,
1996. 41
*10.2 Cone Mills Corporation SERP as amended and
restated as of December 5, 1995, filed as
Exhibit 10.2 to the Registrant's report on Form
10-K for the year ended December 31, 1995.
*10.3 Excess Benefit Plan of Cone Mills Corporation
as amended and restated as of December 5, 1995,
filed as Exhibit 10.3 to the Registrant's report
on Form 10-K for the year ended December 31, 1995.
*10.4 1984 Stock Option Plan of Registrant filed as
Exhibit 10.7 to the Registrant's Registration
Statement on Form S-1 (File No. 33-28040).
<PAGE>
FORM 10-K INDEX TO EXHIBITS Page 37
Exhibit Sequential
No. Description Page No.
*10.5 Form of Nonqualified Stock Option
Agreement under 1984 Stock Option Plan
of Registrant filed as Exhibit 10.8 to
the Registrant's Registration Statement
on Form S-1 (File No. 33-28040).
*10.6 Form of Incentive Stock Option Agreement
under 1984 Stock Option Plan of
Registrant filed as Exhibit 10.9 to the
Registrant's Registration Statement on
Form S-1 (File No. 33-28040).
*10.7 1992 Stock Option Plan of Registrant filed
as Exhibit 10.9 to the Registrant's Report
on Form 10-K for the year ended December 29,
1991.
*10.7(a) Amended and Restated 1992 Stock Plan filed
as Exhibit 10.1 to Registrant's report on
Form 10-Q for the quarter ended March 31,
1996.
*10.8 Form of Incentive Stock Option Agreement
under 1992 Stock Option Plan filed as
Exhibit 10.10 to the Registrant's report
on Form 10-K for the year ended January 3,
1993.
10.8(a) Form of Nonqualified Stock Option
Agreement under 1992 Stock Option Plan. 42
10.8(b) Form of Nonqualified Stock Option
Agreement under 1992 Amended and
Restated Stock Plan. 46
*10.9 1994 Stock Option Plan for Non- Employee
Directors of Registrant filed as Exhibit 10.9
to Registrant's report on Form 10-K for the
year ended January 2, 1994.
*10.10 Form of Non-Qualified Stock Option
Agreement under 1994 Stock Option Plan for
Non-Employee Directors of Registrant filed
as Exhibit 10.10 to Registrant's report on
Form 10-K for the year ended January 2, 1994.
*10.11 Management Incentive Plan of the Registrant
filed as Exhibit 10.11(b) to Registrant's
report on Form 10-K for the year ended
January 3, 1993.
<PAGE>
FORM 10-K INDEX TO EXHIBITS Page 38
Exhibit Sequential
No. Description Page No.
*10.12 1997 Senior Management Incentive Compensation
Plan filed as Exhibit 10.2 to Registrant's
report on Form 10-Q for the quarter ended
March 31, 1996.
10.13 1997 Senior Management Discretionary
Bonus Plan. 50
10.14 Consulting Agreement between Dewey L.
Trogdon and the Registrant dated
December 5, 1996. 54
*10.15 Form of Agreement between the Registrant
and Levi Strauss dated as of March 30,
1992, filed as Exhibit 10.14 to the
Registrant's Registration Statement on
Form S-1 (File No. 33-46907).
*10.16 First Amendment to Supply Agreement dated
as of April 15, 1992, between the Registrant
and Levi Strauss dated as of March 30, 1992,
filed as Exhibit 10.15 to Registrant's
Registration Statement on Form S-1
(No. 33-46907).
21 Subsidiaries of the Registrant. 58
23.l Consent of McGladrey & Pullen, LLP,
independent auditor, with respect to
the incorporation by reference in the
Registrant's Registration Statements
on Form S-8 (Nos. 33-31977; 33-31979;
33-51951; 33-51953; 33-53705 and
33-67800) of their reports on the
consolidated financial statements
and schedules included in this
Annual Report on Form 10-K. 59
23.2 Consent of McGladrey & Pullen, LLP,
independent auditor, with respect to
the incorporation by reference in the
Registrant's Registration Statements
on Form S-8 (Nos. 33-31979; 33-51951
and 33-51953) of their report on the
financial statements included in the
Form 11-K Annual Report of Cone Mills
Corporation Employee Equity Plan
(to be filed by amendment).
27 Financial Data Schedule 60
<PAGE>
FORM 10-K INDEX TO EXHIBITS Page 39
Exhibit Sequential
No. Description Page No.
99.1 Form 11-K Annual Report of Cone Mills
Corporation Employee Equity Plan
(to be filed by amendment)
* Incorporated by reference to the statement or report indicated.
<PAGE>
FORM 10-K Page 61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant had duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CONE MILLS CORPORATION
Date: March 27, 1997 By: /s/ J. Patrick Danahy
J.Patrick Danahy
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Dewey L. Trogdon Chairman of the March 27, 1997
(Dewey L. Trogdon) Board
/s/ J. Patrick Danahy Director, President March 27, 1997
(J. Patrick Danahy) and Chief Executive
Officer (Principal
Executive Officer)
/s/ John L. Bakane Director, March 27, 1997
(John L. Bakane) Executive Vice
President and Chief
Financial Officer
(Principal Financial
Officer)
/s/ Doris R. Bray Director March 27, 1997
(Doris R. Bray)
/s/ Leslie W. Gaulden Director March 27, 1997
(Leslie W. Gaulden)
<PAGE>
FORM 10-K Page 62
Signature Title Date
/s/ Jeanette C. Kimmel Director March 27, 1997
(Jeanette C. Kimmel)
/s/ Charles M. Reid Director March 27, 1997
(Charles M. Reid)
/s/ John W. Rosenblum Director March 27, 1997
(John W. Rosenblum)
/s/ Gary L. Smith Controller March 27, 1997
(Gary L. Smith) (Principal Accounting
Officer)
<PAGE>
FORM 10-K Page 40
Exhibit 4.3(h)
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
c/o Prudential Capital Group
One Gateway Center - 11th Floor
7-45 Raymond Boulevard West
Newark, New Jersey 07102-53 1 1
As of January 31, 1997
Cone Mills Corporation
3101 North Elm Street
Greensboro, North Carolina 27408
Attn: Mr. David Bray, Treasurer
Ms. Leesa Sluder, Director, Treasury Services
Ladies and Gentlemen:
Reference is made to the Note Agreement dated as of August 13, 1992,
as heretofore amended (the "Note Agreement") between Cone Mills Corporation (the
"Company") and The Prudential Insurance Company of America ("Prudential").
Capitalized terms used and not otherwise defined in this letter have the same
meanings given those terms in the Note Agreement. Prudential and the Company
hereby agree that the Note Agreement shall be amended as follows:
1. Paragraph 6A is hereby amended and restated to read in its
entirety as follows:
"6A. RATINGS MAINTENANCE. The Company covenants that it
will maintain a long term debt rating of either (i) not
less than BBB- from Standard & Poor's Rating Group or (ii)
not less than Baa3 from Moody's Investors Service, Inc."
2. Except as amended herein, all of the terms, conditions and
obligations of the Note Agreement shall remain in full force and
effect.
If you agree to these changes, please sign each copy of this letter
enclosed and return two of them to Prudential, at which time this letter shall
become a binding agreement as of the date first above written.
Very truly yours,
THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA
By: /s/ Yvonne Guajardo
Vice President
Agreed to and accepted as of January 31, 1997
CONE MILLS CORPORATION
By: /s/ David E. Bray
Treasurer
<PAGE>
FORM 10-K Page 41
Exhibit 10.1(c)
THIRD AMENDMENT TO THE
EMPLOYEES' RETIREMENT PLAN
OF
CONE MILLS CORPORATION
(As Amended and Restated December 1, 1994)
AMENDMENT dated as of August 8, 1996 to the Employees' Retirement Plan of Cone
Mills Corporation, as Amended and Restated December 1, 1994 (the "Plan").
A. The Board of Directors desires to correct certain drafting errors in
the Plan as requested by the Internal Revenue Service in order to
obtain a favorable determination letter as to the Plan's qualified
status.
NOW, THEREFORE, the Plan as submitted to the Internal Revenue Service be and
hereby is amended as follows, effective December 1, 1994:
(1) By deleting subparagraph (ii) of Plan Section 1.03(c) in its
entirety and inserting in lieu
thereof the following:
"(ii) by using 120% of the "applicable interest rate" if the present
value of the Accrued Benefit exceeds $25,000 as determined under
subparagraph (i), above, but in no event shall the present value
calculated under this subparagraph (ii) be less than $25,000."
The above amendment shall be deemed retroactively to precede the First Amendment
and the Second Amendment to the Plan, the latter of which further amended and
restated Section 1.03 of the Plan in its entirety effective January 1, 1996.
IN WITNESS WHEREOF, this Amendment, having been authorized by the Board of
Directors of Cone Mills Corporation at a meeting duly held on August 8, 1996 is
signed by the Vice President and Secretary of the Corporation on the 8th day of
August, 1996.
CONE MILLS CORPORATION
By:/s/ Terry L. Weatherford
Terry L. Weatherford
Vice President and Secretary
<PAGE>
FORM 10-K Page 42
Exhibit 10.8(a)
CONE MILLS CORPORATION
NONQUALIFIED STOCK OPTION AGREEMENT
THIS AGREEMENT, dated as of the 9th day of November, 1994 between
Cone Mills Corporation, a North Carolina corporation having its principal office
at 1201 Maple Street, Greensboro, North Carolina (hereinafter called the
"Company"), and (management name), a key management employee of the Company
(hereinafter called the OPTION Holder").
WITNESSETH:
WHEREAS, the Board of Directors of the Company has adopted, and the
shareholders have approved, the 1992 Stock Option Plan, a copy of which is
annexed hereto as Exhibit A (hereinafter called the "Plan"); and
WHEREAS, the Company recognizes the value to it of the services of
the Option Holder as a key management employee and is desirous of furnishing him
or her with added incentive and inducement to contribute to the success of the
Company; and
WHEREAS, on November 9, 1994 pursuant to the provisions of the Plan,
the Compensation Committee, which is the stock option committee as designated by
the Board of Directors of the Company, (a) granted to the Option Holder,
pursuant to Article III of the Plan, an option in respect of the number of
shares hereinbelow set forth, (b) designated the option a Nonqualified Stock
Option, (c) fixed and determined the option price hereinbelow set forth, and (d)
approved the form of this Agreement:
NOW, THEREFORE, in consideration of the mutual promises and
representations herein contained and other good and valuable consideration, it
is agreed by and between the parties hereto as follows:
1. Subject to the Plan, the terms and provisions of which are incorporated
herein by reference, the Company hereby grants to the Option Holder a
Nonqualified Stock Option to purchase, on the terms and subject to the
conditions hereinafter set forth, all or any part of an aggregate of
(number of shares) shares of the Common Stock ($0.10 par value) of
the Company at the purchase price of $12.00 per share (the "Option"),
exercisable in the
<PAGE>
FORM 10-K Page 43
Exhibit 10.8(a) (continued)
amounts and at the times set forth in this paragraph 1. Unless sooner
terminated as provided in Section 6(f) of Article I of the Plan or in
this Agreement, the Option shall terminate, and all rights of the
Option Holder hereunder shall expire, on November 8, 2004. In no event
may the Option be exercised after November 8, 2004.
The Option may be exercised as follows:
(a) up to (sharesa) shares (20% of the total shares
subject to the Option) at any time after May 9, 1995
and prior to termination of the Option;
(b) up to (sharesb) shares (40% of the total shares
subject to the Option), less any shares previously
purchased pursuant to the Option, at any time after
May 9, 1996 and prior to termination of the Option;
(c) up to (sharesc) shares (60% of the total shares
subject to the Option), less any shares previously
purchased pursuant to the Option, at any time after
May 9, 1997 and prior to termination of the Option;
(d) up to (sharesd) (80% of the total shares subject
to the Option), less any shares previously purchased
pursuant to the Option, at any time after May 9, 1998
and prior to termination of the Option;
(e) up to (sharese) (100% of the total shares
subject to the Option), less any shares previously
purchased pursuant to the Option, at any time after
May 9, 1999 and prior to termination of the Option;
provided, however, that not less than one hundred shares may be
purchased at any one time unless the number purchased is the total
number that may be purchased under the Option at that time; and further
provided, that no more than fifty percent (50%) of the shares granted
pursuant to this Option may be exercised in any one calendar year.
2. Subject to Section 6 of this Agreement, the option or any part thereof
may, to the extent that it is exercisable, be exercised in the manner
provided in Section 6(c) of Article I of the Plan. Payment of the
aggregate option price for the number of shares purchased shall be made
in the manner provided in Section 6(d) of Article I of the Plan.
<PAGE>
FORM 10-K Page 44
Exhibit 10.8(a) (continued)
3. The Option or any part thereof may be exercised during the lifetime of
the Option Holder only by the Option Holder and, except as provided in
Section 6(f) of Article I of the Plan, may be exercised only while the
Option Holder is in the employ of the Company.
4. Except as provided in Section 6(e) and 6(f) of Article I of the Plan
with respect to transfers upon the death of the Option Holder, the
Option shall not be transferred, assigned, pledged or hypothecated in
any way, whether by operation of law or otherwise. Upon any attempt to
transfer, assign, pledge, hypothecate or otherwise dispose of the
Option or any right of privilege confirmed hereby contrary to the
provisions hereof, the Option and the rights and privileges confirmed
hereby shall immediately become null and void.
5. If the Corporation shall be a party to any merger of consolidation in
which it is not the surviving corporation or pursuant to which the
shareholders of the Corporation exchange their Common Stock or if the
Corporation shall dissolve or liquidate or sell all or substantially
all of its assets, all options outstanding under this Plan shall
terminate on the effective date of such merger, consolidation,
dissolution, liquidation or sale; provided, however, that the Board of
Directors, in its discretion, may prior to such effective date,
accelerate the time at which any outstanding option may be exercised,
may authorize a payment to each optionee that approximates the economic
benefit that the optionee would realize if the option were exercised
immediately before such effective date, may authorize a payment in such
other amount as it deems appropriate to compensate each optionee for
the termination of this option, or may arrange for the granting of a
substitute option to each optionee.
6. The Option Holder acknowledges that, upon exercise of the option, he or
she will recognize ordinary income for federal and state income tax
purposes (generally in an amount equal to the difference between the
fair market value of the purchased shares on the date of exercise and
the option price therefor) and the Company will be entitled to a
corresponding deduction and that, consequently, no exercise of the
option will be effective until he or she has paid, or made arrangements
for payment, to the Company an amount equal to the income and other
taxes that the Company is required to withhold from the Option Holder
as a result of his or her exercise of the option.
<PAGE>
FORM 10-K Page 45
Exhibit 10.8(a) (continued)
7. Any notice to be given to the Company shall be addressed to the
Secretary of the Company at 1201 Maple Street, Greensboro, North
Carolina 27405.
8. Nothing herein contained shall affect the right of the Option Holder to
participate in and receive benefits under and in accordance with the
provisions of any pensions, insurance or other benefit plan or program
of the Company as in effect from time to time and for which he or she
is eligible.
9. Nothing herein contained shall affect the right of the Company, subject
to the terms of any existing contractual arrangement to the contrary,
to terminate the Option Holder's employment at any time for any reason
whatsoever.
10. This Agreement shall be binding upon and inure to the benefit of the
Option Holder, his or her personal representatives, heirs and legatees,
but neither this Agreement nor any rights hereunder shall be assignable
or otherwise transferable by the Option Holder except as expressly set
forth in this Agreement or in the Plan.
11. Other terms and conditions:
The Tax Reimbursement Provisions of Article III, Paragraph 1 of the
Cone Mills Corporation 1992 Stock Option Plan are applicable to the
option granted and described herein.
CONE MILLS CORPORATION
By
Terry L. Weatherford, Secretary
<PAGE>
FORM 10-K Page 46
Exhibit 10.8(b)
CONE MILLS CORPORATION
NONQUALIFIED STOCK OPTION AGREEMENT
THIS AGREEMENT, dated as of the 7th day of November, 1996 between Cone
Mills Corporation, a North Carolina corporation having its principal office at
3101 N. Elm Street, Greensboro, North Carolina (hereinafter called the
"Company"), and MANAGEMENT NAME , a key management employee of the Company
(hereinafter called the "Option Holder").
WITNESSETH:
WHEREAS, the Board of Directors of the Company has adopted, and the
shareholders have approved, the Amended and Restated 1992 Stock Plan, a copy of
which is annexed hereto as Exhibit A (hereinafter called the "Plan"); and
WHEREAS, the Company recognizes the value to it of the services of the
Option Holder as a key management employee and is desirous of furnishing him or
her with added incentive and inducement to contribute to the success of the
Company; and
WHEREAS, on November 7, 1996 pursuant to the provisions of the Plan,
the Compensation Committee, which is the stock committee as designated by the
Board of Directors of the Company, (a) granted to the Option Holder, pursuant to
Article II, Section 2 of the Plan, an option in respect of the number of shares
hereinbelow set forth, (b) designated the option a Nonqualified Stock Option,
(c) fixed and determined the option price hereinbelow set forth, and (d)
approved the form of this Agreement:
NOW, THEREFORE, in consideration of the mutual promises and
representations herein contained and other good and valuable consideration, it
is agreed by and between the parties hereto as follows:
1. Subject to the Plan, the terms and provisions of which are
incorporated herein by reference, the Company hereby grants to
the Option Holder a Nonqualified Stock Option to purchase, on
the terms and subject to the conditions hereinafter set forth,
all or any part of an aggregate of number of shares
shares of the Common Stock ($0.10 par value) of the Company at
the purchase price of $8.00 per share (the "Option"),
exercisable in the amounts and at the times set forth in this
paragraph 1. Unless sooner terminated as provided in Section
<PAGE>
FORM 10-K Page 47
Exhibit 10.8(b) (continued)
3(f) of Article II of the Plan or in this Agreement, the Option shall
terminate, and all rights of the Option Holder hereunder shall expire,
on November 6, 2006. In no event may the Option be exercised after
November 6, 2006. The Option may be exercised as follows:
(a) up to sharesa shares (20% of the total shares
subject to the Option) at any time after May 7, 1997 and
prior to termination of the Option;
(b) up to sharesb shares (40% of the total shares subject to the
Option), less any shares previously purchased pursuant to the
Option, at any time after May 7, 1998 and prior to termination
of the Option;
(c) up to sharesc shares (60% of the total shares subject to the
Option), less any shares previously purchased pursuant to the
Option, at any time after May 7, 1999 and prior to termination
of the Option;
(d) up to sharesd shares (80% of the total shares subject to the
Option), less any shares previously purchased pursuant to the
Option, at any time after May 7, 2000 and prior to termination
of the Option;
(e) up to sharese shares (100% of the total shares subject to the
Option), less any shares previously purchased pursuant to the
Option, at any time after May 7, 2001 and prior to termination
of the Option;
provided, however, that not less than one hundred shares may be
purchased at any one time unless the number purchased is the total
number that may be purchased under the Option at that time; and further
provided, that no more than fifty percent (50%) of the shares granted
pursuant to this Option may be exercised in any one calendar year.
2. Subject to Section 6 of this Agreement, the option or any part thereof
may, to the extent that it is exercisable, be exercised in the manner
provided in Section 3(c) of Article II of the Plan. Payment of the
aggregate option price for the number of shares purchased shall be made
in the manner provided in Section 3(d) of Article II of the Plan.
3. The Option or any part thereof may be exercised during the lifetime of
the Option Holder only by the Option Holder and, except as provided in
Section 3(f) of Article II of the Plan, may be exercised only while the
Option Holder is in the employ of the Company.
<PAGE>
FORM 10-K Page 48
Exhibit 10.8(b) (continued)
4. Except as provided in Section 3(e) and 3(f) of Article II of the Plan
with respect to transfers upon the death of the Option Holder, the
Option shall not be transferred, assigned, pledged or hypothecated in
any way, whether by operation of law or otherwise. Upon any attempt to
transfer, assign, pledge, hypothecate or otherwise dispose of the
Option or any right of privilege confirmed hereby contrary to the
provisions hereof, the Option and the rights and privileges confirmed
hereby shall immediately become null and void.
5. If the Corporation shall be a party to any merger of consolidation in
which it is not the surviving corporation or pursuant to which the
shareholders of the Corporation exchange their Common Stock, or if the
Corporation shall dissolve or liquidate or sell all or substantially
all of its assets, all options outstanding under this Plan shall
terminate on the effective date of such merger, consolidation,
dissolution, liquidation or sale; provided, however, that the Board of
Directors, in its discretion, may prior to such effective date,
accelerate the time at which any outstanding option may be exercised,
may authorize a payment to each optionee that approximates the economic
benefit that the optionee would realize if the option were exercised
immediately before such effective date, may authorize a payment in such
other amount as it deems appropriate to compensate each optionee for
the termination of this option, or may arrange for the granting of a
substitute option to each optionee.
6. The Option Holder acknowledges that, upon exercise of the option, he or
she will recognize ordinary income for federal and state income tax
purposes (generally in an amount equal to the difference between the
fair market value of the purchased shares on the date of exercise and
the option price therefor) and the Company will be entitled to a
corresponding deduction and that, consequently, no exercise of the
option will be effective until he or she has paid, or made arrangements
for payment, to the Company an amount equal to the income and other
taxes that the Company is required to withhold from the Option Holder
as a result of his or her exercise of the option.
7. Any notice to be given to the Company shall be addressed to the
Secretary of the Company at 3101 N. Elm Street, Greensboro, North
Carolina 27415-6540.
<PAGE>
FORM 10-K Page 49
Exhibit 10.8(b) (continued)
8. Nothing herein contained shall affect the right of the Option Holder to
participate in and receive benefits under and in accordance with the
provisions of any pensions, insurance or other benefit plan or program
of the Company as in effect from time to time and for which he or she
is eligible.
9. Nothing herein contained shall affect the right of the Company, subject
to the terms of any existing contractual arrangement to the contrary,
to terminate the Option Holder's employment at any time for any reason
whatsoever.
10. This Agreement shall be binding upon and inure to the benefit of the
Option Holder, his or her personal representatives, heirs and legatees,
but neither this Agreement nor any rights hereunder shall be assignable
or otherwise transferable by the Option Holder except as expressly set
forth in this Agreement or in the Plan.
11. Other terms and conditions:
The Tax Reimbursement Provisions of Article I, Section 18 are
applicable to the option granted and described herein. Pursuant to
Article I, Section 3(d) of the Plan, the Committee has consented to the
receipt of shares of Common Stock of the Company as a medium of
payment.
CONE MILLS CORPORATION
By
Terry L. Weatherford
Vice President and Secretary
<PAGE>
FORM 10-K Page 50
Exhibit 10.13
1997 CONE MILLS CORPORATION
SENIOR MANAGEMENT DISCRETIONARY BONUS PLAN
1. Purpose. The purpose of the 1997 Cone Mills Corporation (the
"Company") Senior Management Discretionary Bonus Plan (the "Plan") is to enable
the Company to attract, retain, motivate and reward those corporate officers,
division presidents and other key employees who make a significant contribution
to the Company's success through personal performance achievement, both tangible
and intangible, in their positions with the Company.
2. Administration. The Compensation Committee of the Board of
Directors of the Company or such other Committee of the Board as the Board shall
designate (the "Committee") shall administer the Plan in accordance with its
provisions. The Committee shall consist of no less than two persons, and all
Committee members must be nonemployee directors of the Company. The
interpretation and construction of the Plan by the Committee shall be final and
binding on all persons, including the Company and the Participants.
3. Participation. Corporate officers, division presidents and other
key employees who are designated by the Committee as participants in the Plan
are eligible to participate in the Plan (a "Participant"). Participation in the
Plan in one Plan Year does not imply participation in any other Plan Year. In
order to receive a bonus under the Plan (a "Bonus") for a Plan Year, a
Participant must maintain employment in the same or a similar job throughout
that Plan Year (as hereafter defined). No vesting of Bonuses occurs; a
Participant whose employment with the Company terminates during a Plan Year or
thereafter before his or her Bonus is paid ceases eligibility under the Plan for
such Plan Year. Corporate officers and division presidents who join the Company
during a Plan Year may participate in the Plan in the discretion of the
Committee. Participation in the Plan creates no guaranty of award of a Bonus for
any Plan Year or of continued employment with the Company.
4. Amount of Bonus. A Participant may earn a Bonus for a fiscal
year (a "Plan Year") for which the Bonus is paid in an amount up to thirty
percent (30%) of his or her Base Compensation as in effect for the fiscal year
for which the Bonus is paid. "Base Compensation" means a Participant's regular
salary, excluding Bonuses, incentive payments under the 1997 Senior Management
Incentive Compensation Plan, or employee benefits.
<PAGE>
FORM 10-K Page 51
Exhibit 10.13 (continued)
5. Basis for Bonuses. Bonuses are completely discretionary in
nature and no Participant under this Plan is assured of the receipt of a Bonus
for any particular Plan Year. The Committee or, with respect to Participants
other than himself, the Company's Chief Executive Officer may, but is not
obligated to, establish achievement goals for any or all Participants for any
Plan Year. Such goals may be objective or subjective in nature, and whether or
not such goals are achieved, and the degree of achievement, shall be solely the
determination of the Committee, in consultation with the Company's Chief
Executive Officer. Bonuses may also be awarded to Participants who achieve a
level of performance that significantly exceeds the expected maximum result.
6. Payment of Bonuses. After the end of each Plan Year, the
Committee, in consultation with the Company's Chief Executive Officer, shall
determine what, if any, Bonuses will be paid under the Plan and which
Participants receive Bonuses and the amount of each Bonus. All Bonuses will be
paid in cash in a lump sum based on the Committee's certificate. The Committee
shall set forth in writing, in its minutes or otherwise, the basis for awarding
bonuses under the Plan. Bonuses awarded under this Plan must be based on
individual performance and shall be made without reference to the Company's
Senior Management Incentive Compensation Plan.
7. Funding. The Plan is intended to constitute an "unfunded" plan.
With respect to any payments not yet made by the Company, nothing set forth in
this document shall give any Participant any rights other than those of a
general creditor of the Company.
8. Death, Disability and Change of Control. In the event of the
death or total and permanent disability of a Participant or a Change of Control
of the Company as hereafter defined, the Committee may, in their discretion, pay
Bonuses prior to the end of a Plan Year in their sole discretion.
For purposes of this Plan, a "Change of Control" means the
occurrence of any of the following:
A. When any "person", as such term is used in Section 13(d)
and 14(d) of the Exchange Act [other than the Company or a
Subsidiary or any Company employee benefit plan (including
its trustee)], is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or
indirectly of
<PAGE>
FORM 10-K Page 52
Exhibit 10.13 (continued)
securities of Cone Mills Corporation representing 20
percent or more of the combined voting power of the
Company's then outstanding securities;
B. When, during any period of two consecutive years
during the existence of the Plan, the individuals
who, at the beginning of such period, constitute the
Board cease, for any reason other than death, to
constitute at least a majority thereof, unless each
director who was not a director at the beginning of
such period was elected by, or on the recommendation
of, at least two-thirds of the directors at the
beginning of such period; or
C. The occurrence of a transaction requiring stockholder
approval for the acquisition of Cone Mills Corporation by
an entity other than the Company or a subsidiary through
purchase of assets, or by merger, or otherwise, if such
transaction did not have the approval of a majority of the
Board of Directors.
9. Term. The term of the Plan shall be for the fiscal years
beginning on December 30, 1996 and ending on December 30, 2001 unless sooner
terminated by the Board of Directors.
10. Amendments and Termination. The Board of Directors may amend,
alter or discontinue the Plan at any time, and such amendment, alteration or
discontinuance will be binding upon all Participants.
11. Not Exclusive. Nothing set forth in the Plan shall prevent the
Company from adopting other or additional compensation arrangements, subject to
shareholder approval or approval of the Board of Directors, if such approval is
required; and such arrangements may either generally be applicable or applicable
only in specific cases.
12. No Liability. No members of the Board of Directors or of the
Committee, nor any officer or employee OF the Company acting on behalf of the
Board or the Committee, shall be personally liable for any action, determination
or interpretation taken or made in good faith with respect to the Plan, and all
members of the Board
<PAGE>
FORM 10-K Page 53
Exhibit 10.13 (continued)
or the Committee and each and every officer or employee of the Company acting on
their behalf shall, to the extent permitted by law, be fully indemnified and
protected by the Company with respect to such action, determination or
interpretation.
13. Applicable Law. The validity, interpretation and
administration of the Plan and of any rules, regulations, determinations or
decisions made hereunder, and the rights of any and all persons having or
claiming to have any interests hereunder or thereunder, shall be determined
exclusively in accordance with the laws of the state of North Carolina. Without
limiting the generality of the foregoing, the period within which any action in
connection with the Plan must be commenced shall be governed by the laws of
North Carolina.
<PAGE>
FORM 10-K Page 54
Exhibit 10.14
CONSULTING AGREEMENT
CONSULTING AGREEMENT, dated December 5, 1996, by and between Dewey L.
Trogdon ("Trogdon") and Cone Mills Corporation (the "Company").
RECITAL
Trogdon retired from active service as an employee of the Company,
effective March 31, 1992. Because of his familiarity with the business and
affairs of the Company, Trogdon was in a position to provide valuable
consultation and advice to the Company and the Company desired to obtain such
consultation and advice. Accordingly, the Company agreed to retain Trogdon as a
consultant, and Trogdon agreed to provide consulting services, during the period
beginning April 1, 1992, and ending December 31, 1992, pursuant to a Consulting
Agreement dated December 19, 1991. The Company and Trogdon agreed to an
extension of the consulting arrangement through 1993, 1994, 1995, and 1996
pursuant to Consulting Agreements dated November 19, 1992, December 3, 1993,
November 10, 1994, and December 5, 1995, respectively. The Company and Trogdon
have agreed to continue the consulting arrangement during the period beginning
January 1, 1997, and ending December 31, 1997 (the "Consulting Period").
NOW, THEREFORE, Trogdon and the Company agree as follows:
1. Consulting Services. Subject to the terms and provisions of
this Agreement, the Company hereby engages Trogdon to perform
consulting services during the Consulting Period. Trogdon
<PAGE>
FORM 10-K Page 55
Exhibit 10.14 (continued)
hereby accepts such engagement and agrees to render such
consulting services pertaining to the business of the Company
as the Chief Executive Officer of Cone shall request from time
to time during the Consulting Period.
2. Fees. During the Consulting Period, the Company shall pay to
Trogdon a consulting fee of $15,000 per calendar quarter
(payable on March 31, 1997, June 30, 1997, September 30, 1997,
and December 31, 1997) and, in addition, shall reimburse
Trogdon for any travel and entertainment expenses reasonably
incurred by him in connection with rendering consulting
services hereunder upon submission of appropriate
documentation therefore.
3. Independent Contractor. During the Consulting Period, Trogdon
shall be an independent contractor and not an employee of the
Company. Accordingly, Trogdon shall determine when, where and
how the consulting services required of him under this
Agreement will be performed, shall be responsible for the
payment of all employment, income and other taxes payable by
reason of his receipt of consulting fees under this Agreement,
and shall not be eligible to participate in any pension,
profit sharing, health, disability, life, or other employee
benefit plan or program maintained by the Company.
<PAGE>
FORM 10-K Page 56
Exhibit 10.14 (continued)
4. Termination by Death. If Trogdon dies during the Consulting
Period, this Agreement shall thereupon terminate, but the
Company shall pay to Trogdon's estate all consulting fees and
unremibursed expenses to which he would otherwise have been
entitled under this Agreement through the end of the
Consulting Period.
5. Entire Contract. This Agreement constitutes the entire
contract and agreement of the parties and supersedes and
replaces all other prior agreements and understandings, both
written and oral, with respect to the performance of personal
services by Trogdon for the Company during the Consulting
Period.
6. Miscellaneous. This Agreement may not be amended or modified
except by an instrument in writing signed by the party against
whom any such modification or amendment is sought to be
enforced. No wavier of any breach of this Agreement shall
operate or be construed as a waiver of any subsequent breach.
This Agreement shall be construed in accordance with the laws
and judicial decisions of the State of North Carolina.
<PAGE>
FORM 10-K Page 57
Exhibit 10.14 (continued)
IN WITNESS WHEREOF, Trogdon and the Company have signed this Agreement
as of the day and year first above written.
By: /s/Dewey L. Trogdon
Dewey L. Trogdon
CONE MILLS CORPORATION
By: /s/J. Patrick Danahy
J. Patrick Danahy, President & CEO
<PAGE>
(Cone logo) Annual Report 1996
<PAGE>
For 106 years Cone Mills Corporation has responded to the needs of its
customers. One of America's major textile manufacturers, Cone Mills is the
largest producer of denim fabrics in the world. The company is also the largest
producer of yarn-dyed and chamois flannel shirting fabrics and the largest
commission printer of decorative fabrics in the United States. Our mission is to
match consumer needs with the company's core capabilities to add value for our
worldwide customers, investors, employees, suppliers and communities. The
company operates in two business segments: Apparel Fabrics, which includes
denims, yarn-dyed and chamois flannel shirtings, prints, and sportswear fabrics;
and Home Furnishings Products, which includes commission printing and finishing
services and print and jacquard decorative fabrics used for upholstery,
draperies and bedspreads. In 1996 Cone Mills performed manufacturing both in the
United States and through a joint venture in Mexico and conducted sales and
marketing activities through a worldwide distribution network. Cone Mills is the
nation's largest exporter of denims and is a major exporter of other apparel
fabrics.
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
(amounts in millions, except per share data) 1996 1995 1994
<S> <C> <C> <C>
Summary of Operations
Sales $ 745.9 $ 910.2 $ 806.2
Gross Profit 104.4 125.0 140.4
Income before Results of Foreign Affiliates 0.2 13.6 35.5
Net Income (2.2) (3.3) 35.0
Financial Position
Long-Term Debt $ 160.7 $ 173.0 $ 126.5
Stockholders' Equity 210.3 222.1 236.9
Financial Ratios
Long-Term Debt to Capitalization 43% 44% 35%
Return on Average
Common Stockholders' Equity (2.9)% (3.2)% 17.9%
Per Common Share Data
Net Income (Loss) $ (0.19) $ (0.22) $ 1.16
</TABLE>
Sales
(millions)
(Sales chart appears here. Plot points are below.)
92 93 94 95 96
705.4 769.2 806.2 910.2 745.9
Income Before Results
of Foreign Affiliates
(millions)
(Income Before Results chart appears here. Plot points are below.)
92 93 94 95 96
45.4 49.3 35.5 13.6 0.2
Return on Average Common
Stockholder's Equity
(percent)
(Return on Average Common Stockholder's Equity chart appears here. Plot points
are below.)
92 93 94 95 96
55.3% 31.6% 17.9% (3.2)% (2.9)%
<PAGE>
(Picture of Pat Danahy appears here.)
Pat Danahy
President & CEO
To Our Shareholders
In 1996, strategic initiatives to position Cone Mills for the long term met with
short-term adverse market conditions in the company's three core business
segments: denim, specialty sportswear and home furnishings fabrics. In response
to declining sales and earnings, we exited non-core businesses which were
diverting capital and management attention, and we are continuing the
restructuring of operations designed to return the company to profitability.
1996 sales were $745.9 million. Sales were affected by weak specialty sportswear
and decorative print demand and by lower denim revenues in the second half of
the year that resulted from excessive industry inventory levels. Sales were down
9.1% compared with 1995 sales, excluding the Olympic Products Division, which
was sold in early 1996. The weak sales volume resulted in curtailed operating
schedules which impacted margins and income. Cone Mills had a net loss for 1996
of $2.2 million or $.19 per share, which included $5.2 million of pre-tax
restructuring charges and $2.5 million of after-tax losses associated with the
Mexican joint venture denim plant, Parras Cone, which started up in late 1995.
The first half of 1996 showed positive sales growth in denim; however, beginning
in midyear, denim sales started to decline and, for the full year, were off
9.6%. While unit sales of denim products continue to grow at retail, excessive
inventories at the wholesale and mill levels resulted in weak near-term sales of
denim fabrics. Specialty sportswear sales remained sluggish in 1996 but improved
toward year-end as excess inventory cleared the distribution channels. All Cone
apparel fabric manufacturing facilities operated at less than full capacity as
we attempted to control inventory levels.
Home furnishings sales, excluding Olympic, were down 2.0% as sales of Cone's new
jacquard fabric were more than offset by lower finishing and decorative fabrics
sales. Decorative print markets remained sluggish throughout the year and the
finishing plants operated at below break-even volumes. Export sales, primarily
denim, increased 5.7% and represented 26% of sales. While short-term, adverse
market conditions produced lower sales for the company in 1996, it is important
to note that about 10% of our sales now come from businesses that we were not
associated with prior to 1995, including Raytex, Parras Cone and Cone Jacquards.
Despite weak reported earnings, the company invested $36.2 million in capital
expenditures including a denim relooming project for greater quality and
efficiency, additional weaving machines for a planned expansion of Cone
Jacquards and new preparation equipment at Cone Finishing which will allow us to
broaden our market. We also repaid $16.3 million of debt and repurchased 1.1
million shares of common stock for $8.8 million. Cone's ratio of long-term debt
to long-term capital declined to 43% at year-end.
We at Cone Mills are responding to depressed short-term conditions with a
program designed to improve profits to levels that reflect our leadership
positions in our core businesses. Our plan consists of five elements:
The first element is to focus on our core franchises where Cone delivers value
to customers and to exit businesses to which we are not willing to dedicate the
capital and resources to become major players. We sold Olympic Products, Greeff
Fabrics and our small synthetic apparel fabric business. We also entered into a
contract to sell certain real estate assets, including those of Cornwallis
Development Co. The sale of Olympic generated more than $50 million and, when
concluded, we expect these remaining steps
02
<PAGE>
to have generated about $24 million in cash proceeds.
Second, Cone is becoming more responsive to the marketplace. This shift is
reflected by improving sales of the high-quality basic denim produced by Parras
Cone to support the migration of apparel customers to that region. Also, our
specialty sportswear division has experienced increasing demand for shirting
fabric from cut-and-sew production returning to the Americas after many years of
Pacific Rim sourcing. The specialty sportswear and commission printing plants
have been reconfigured with new equipment to manufacture new product offerings
and produce shorter run orders for added customer flexibility. This step also
allows our finishing plant facilities better access to bedding and niche print
markets.
The third component is cost control. Our infrastructure was premised on larger
volumes of business, and the sales decline this year magnified this
relationship. In 1996 we identified selling and administrative expense savings
in excess of $5 million on an annualized basis. However, as we balance
short-term profit improvement initiatives with long-term investments necessary
to position Cone for growth, we continue to attack costs throughout Cone's
operating units. We have a goal to identify an additional $20 million in annual
cost savings. Through these actions, we intend to manage through these difficult
market conditions and evolve into a leaner, more efficient marketing and
manufacturing organization.
Fourth, Cone is reconfiguring its manufacturing facilities to obtain more
optimal plant and product combinations and support our customers from the most
appropriate locations. With the Mexican joint venture operating, we are able to
provide basic denim from this plant, and value-added denim from our U.S. plants.
In early 1997 we announced the closing of our Granite facility and the
redirection of this business to the Carlisle finishing facility. This step will
allow Cone's Carlisle facility to operate at a higher level of capacity
utilization.
Fifth, we expect to realize cash through our capital conservation program
focusing on reducing inventories and better controlling other working capital
assets. Cone operates under a targeted capital spending program with an emphasis
on appropriate returns on these investments.
As the textile business becomes global, we recognize that textile plants must
move closer to the markets they serve. The apparel industry led this movement
and we are following our customers around the world. We believe that Cone has an
early lead in this effort with our Mexican joint venture plant. To enhance our
leadership position, we are currently exploring establishing a manufacturing
platform to serve European markets and alliances in the Pacific Rim and South
America.
Cone's long-term strategy remains the same: to invest and grow in product
areas where we have core competencies--global denim, specialty sportswear
and decorative fabrics--and to exit areas where we do not want to dedicate
the capital to compete long term. We remain steadfast on this strategic
course with a heightened focus on the steps necessary to return the company
to profitability and yield benefits to shareholders. As denim and specialty
sportswear inventories return to acceptable levels, and as consolidation of
our finishing facilities is completed, we expect to benefit from higher
capacity utilization as well as ongoing cost reduction programs. Cone Mills
appreciates your support and wants to take this opportunity to thank its
customers, suppliers and employees.
/s/ Dewey L. Trogdon /s/ J. Patrick Danahy
Dewey L. Trogdon J. Patrick Danahy
Chairman President & CEO
(Picture of Dewey Trogdon
appears here)
03
<PAGE>
We have returned Cone Mills to its core businesses of denim,
sportswear fabrics and home furnishings fabrics. Within these business
units we have focused on sharpening marketing skills, cost controls
and long-term, worldwide configuration of manufacturing facilities to
serve local markets better. We believe these actions will result in
increased value for both our customers and our shareholders over the
long term.
(Picture of John L. Bakane appears here.) John L. Bakane
Executive Vice President and
Chief Financial Officer
<PAGE>
Ask Cone
Cone Mills asked nine highly regarded textile/apparel security
analysts to share their questions about the company, its three core
business units (Denim, Sportswear and Home Furnishings) and the
significant strategic challenges each faces. On the pages that follow,
the company addresses their questions on current market conditions,
future growth opportunities and corporate strategy.
Cone would like to express its sincere
appreciation to these participating analysts:
Kay C. Norwood, Interstate/Johnson Lane
Thomas J. Lewis, CL King & Associates
Pamela Singleton, Merrill Lynch & Co.
Carol A. Pope, J.P. Morgan Securities Inc.
David E. Griffith, Morgan Stanley
John S. Pickler, Prudential Securities Inc.
Jay J. Meltzer, LJR Redbook Research
Lorraine D. Miller, The Robinson-Humphrey Company, Inc.
Craig Sirois, Value Line, Inc.
05
<PAGE>
Denim
Cone has sought to position itself to weather short-term challenges in the
domestic and international denim markets and to pursue market share increases
aggressively in the long term.
Worldwide demand for denim is increasing, but in the U.S. prices have been under
pressure. What are the long- and short- term outlooks for the fabric? Denim
sales have remained solid in the United States with unit sales of denim jeans up
7% in 1996 and 19% since 1993, according to The NPD Group data. However, the
emergence of several new denim suppliers and the overly ambitious fabric
purchasing of several branded jeans producers have led to congested pipelines,
market disruption and price weakness during the last year. Inventories are
expected to be in balance again in the latter part of 1997.
We also expect well-established garment producers to continue using
denim suppliers like Cone from whom they can expect high levels of
quality, styling and service. As in any process of stabilization, some
suppliers may exit the market, but we believe that Cone is ideally
positioned, not only to weather the short-term storm but to pursue
market share increases aggressively in the long term. The addition of
the Parras Cone facility in Mexico allows Cone to increase its
participation in the basic jeans market. We are investing in new
machinery and improved plant configurations for value-added denim
produced by our U.S. plants. Doing business on a global basis entails
new pressures--tariffs, shipping charges and lead time among them--but
it does not lessen the importance of getting the right fabric and
garment to the right location at the right price.
NAFTA is accelerating the shift of garment manufacturing to Mexico, and
Cone already
06
<PAGE>
has production in place there. How promising is the outlook there?
Cone is the first U.S. producer to establish a denim manufacturing
platform in Mexico, well before its competitors. Our joint venture
plant, Parras Cone, which began production in late 1995, has already
established a reputation for high-quality basic denim. With NAFTA, our
customer base will grow as tariffs on jeans made with Mexican denim
are reduced by half in 1998 and eliminated entirely in 1999. To build
on our competitive advantages--low cost manufacturing and proximity to
our customers' manufacturing plants--we intend to focus heavily on
quality and service.
How important is your international business in denim? And what is your
strategy for increasing it in the future? Denim exports accounted for more than
a third of Cone's total 1996 denim sales, with denim products now sold in over
35 countries. Bolstered by a 43-year history of selling denim worldwide Cone is
the sole global supplier of Levi Strauss & Co.'s 501(R) fabric and enjoys close
relationships with other major jeans brands. Capitalizing on the strong link
between denim jeans and the American popular culture, many of these customers
are entering new markets in need of fabric to help meet global demand. Cone
supports their efforts with marketing and styling operations in Brussels, a
marketing office in Singapore and distribution facilities in several other
locations.
To lower costs and lead times, address tariff issues and improve local
market styling, we are evaluating the establishment of a manufacturing
presence to service European markets. We are also exploring potential
alliances in the Pacific Rim and South America as we defend our denim
leadership position against local suppliers. Our criteria for direct
involvement in overseas markets include return to shareholders,
compatibility with existing market and manufacturing competencies,
competitiveness of products and services and cultural considerations.
What programs does Cone have in place to effect cost savings?
Domestically, Cone Denim is working diligently to drive down costs at
our U.S. locations through close review of all aspects of
manufacturing and administrative support. A new capital expenditure
discipline is providing more analysis and focus on appropriate
returns. Together, these efforts are designed to produce approximately
$10 million in annualized savings after they are fully implemented.
These efforts are in addition to Cone's corporate selling and
administrative expense reduction initiatives.
Internationally, the Parras Cone facility in Mexico is a low-cost
manufacturing platform that is well positioned strategically and
geographically to service both North and South America. Our strat-egy
also includes building alliances with producers in both low-cost
countries and in
07
<PAGE>
Denim
locations that provide access to trade blocks, which is
essential to avoid the extra costs of high duties and other barriers.
What's being done to freshen Cone's denim lines and reflect changing
fashion trends? What is the strategy to outperform the competition in
such a challenging market? We are more sensitive than ever to the
continuous feedback we receive from customers on their expectations
and requirements. We are constantly developing new products to respond
to fashion demand, and we are adding fashion directors with
international backgrounds to address market differences.
Our organization coordinates the manufacturing process with this
product development. In 1996 Cone's versatile manufacturing
capabilities helped us produce more than 225 styles of denim
incorporating both ring and open-end spinning, raw stock dyeing,
continuous and over-dyeing, and long-chain rope yarn and package
dyeing. As part of our ongoing quest for better manufacturing methods,
we are in the midst of a multi-year relooming project to bring new
technologies to our U.S. denim facilities. Another component of our
strategy is to expand our knowledge base of fabric performance
specifications. All of Cone's denim plants have received ISO 9002
certification, an important designation for an international
manufacturer.
What steps has Cone Sportswear taken to capitalize on its leadership
position in yarn-dyed and chamois flannel shirtings? To remain the
largest North American producer of flannel and chamois shirting
fabrics, we are focusing on five initiatives. First, we are continuing
to renew our line with updated styling of our core products and the
introduction of new products, such as our unique indigo collection
which includes a wide array of textures and visual effects.
Second, we are using computer-aided design and manufacturing (CAD/CAM)
equipment to translate fashion trends quickly into product ideas.
Third, we have installed new sample equipment to convert product ideas
quickly and efficiently into fabric samples. Fourth, we have installed
new manufacturing equipment to produce fabric efficiently in smaller
lot sizes.
Finally, we are working with our customers to make the supply chain
more efficient--from fabric selection by retailers to shipment of
finished garments. With nearly two thirds of our sportswear fabric
shipments going to Mexico and the Caribbean Basin as compared with
about half of our shipments two years ago, we believe our customers
are gaining efficiencies compared with sourcing from Far Eastern
suppliers.
Cost control has been a prime concern during the recent period of excess
08
<PAGE>
Sportswear
Consumer demand for sportswear fabrics is increasing and Cone is among the
beneficiaries of this encouraging trend.
inventories. How has Cone Sportswear responded? Our customers were
very cautious about their fabric purchases following the sluggish 1995
retail holiday season. In 1996, as product in the pipeline made its
way through the distribution channels, we focused on strict cost
controls, inventory control and reconfiguration of our finishing
facilities to lower overall company costs.
We reduced costs over $1 million in 1996 and expect to achieve greater
reductions this year. Early in 1997 we sold our synthetics business
and made the difficult decision to close our Granite facility. The
shift in production to Cone's Carlisle plant is expected to generate
savings beginning in the latter part of 1997, with the full effect
felt in 1998.
Is the market for sportswear fabric improving and will Cone benefit in
1997? We believe the outlook is good for improvements in 1997. Several
of our catalog customers, recalling a difficult late 1995 in which
they were overstocked, underestimated consumer demand and ran out of
our product during the 1996 holiday selling season. This year,
industry demand is stronger and we are encouraged that our fabrics are
being selected to meet this demand. Operating rates at our sportswear
facilities were below break-even levels last year. This year we expect
to operate at higher levels as a result of increased volume based on
recent strengthening of demand and the shift in production from
Granite to Carlisle.
09
<PAGE>
Home Furnishings
Cone is gaining from its investment in new weaving and design technology as well
as from cost saving measures.
How has new jacquard technology, which allows for a broader selection of home
fabrics, affected Cone Decorative Fabrics? What will it mean for printed
decorative fabrics? Jacquards are an important category for both furniture and
top-of-the-bed covers. We entered this market to broaden our product offerings
in home furnishings. Printed jacquard fabrics have distinct color and texture
appeal, and their price points have dropped to levels that are now accessible to
a broader consumer mix. Cone's new jacquard facility is working closely with
Cone Decorative Fabrics' well-developed marketing and distribution channels to
create and deliver these products. Printed decorative fabrics remain important,
but demand is driven by their fashion appeal, which has been weak for the last
two years.
Decorative prints have been disappointing for the past few years,
contributing to an underutilization of capacity. What is Cone doing to
bolster sales? Prints fell out of fashion favor during this period,
and Cone's attempts to move its John Wolf product line upscale were
hampered by poor execution and unsatisfactory earnings. A new
management group is now repositioning the line to focus on core
products that target the middle market and take advantage of synergies
with other Cone divisions. As we explore the yarn-dyed and piece-dyed
segments of the industry, we have also expanded our line to give us
access to other parts of the print market, including outdoor
furniture, recreational vehicles and greater penetration of the hotel
and hospital markets.
Cone Finishing's increasingly versatile Carlisle and Raytex plants are
well positioned to support Cone's entry into new
10
<PAGE>
markets and improve our standing in existing ones. Carlisle has a
16-color print capability and, with the shift from Granite to
Carlisle, increased capability for plain shade dyeing. Its pad batch
reactive dyeing capacity allows customers runs of less than 1,000
yards, and Carlisle has also added sanding equipment to meet increased
demand for camouflage fabrics. Raytex has a new preparation range,
giving us access to cotton bedding and niche wide-print markets, and
24-color print capability combined with in-house engraving provide
even greater flexibility to our customers.
Information technologies are being used extensively to link
production to changes in consumer preferences. How is Cone involved? Cone
Decorative Fabrics is increasingly using information technology to track and
analyze sales, market trends and product turns. This helps control inventory,
maximize sales and reduce markdowns and closeouts. Electronic Data Interchange
(EDI) and computer-aided design and manufacturing (CAD/CAM) allow for quicker
style evaluation and modification and streamlined manufacturing processes. Cone
has embraced both technologies for some time but is now expanding their use to
do such things as prepare for trade shows where major orders for decorative
print and jacquard fabrics are placed. We also use these technologies
extensively in our Carlisle and Raytex plants to shorten the time frame for
product development for customers. Cone Jacquards' looms use electronic files to
store fabric patterns, eliminating the need to store paper patterns.
What are Cone's strategic advantages and core competencies in
jacquards? What are the long-term plans for this business? We believe
that design and distribution synergies between our printed fabrics
businesses and our jacquards business give us an advantage. In
addition, Cone's state-of-the-art equipment, which is capable of
weaving jacquards at widths of 108 to 126 inches, provides flexibility
and efficiencies to meet customer needs. We are now installing four
new rapier looms, bringing our total to 24. We are also evaluating a
plant expansion to accommodate additional wide air jet looms. We
already have a distinct niche in the jacquard market, and we could
significantly increase our production capacity in the next three to
five years.
Why is finishing activity from the Granite facility being transferred
to Carlisle? What benefits do you expect? The difficult decision to
close the older Granite plant will ultimately result in better use of
capacity, greater flexibility and enhanced company finishing
capabilities. Carlisle's capacity utilization rates will improve as a
result of this transition. With the movement of equipment and other
transition steps scheduled for completion by the third quarter of
1997, we expect cost savings to begin in late 1997.
11
<PAGE>
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Overview
The operating results and financial condition of Cone have been
influenced by a number of external factors and Company initiatives.
The principal influences have been the general business cycle,
domestic cotton costs, changes in consumer fashion preferences for
printed fabrics and strategic changes in the Company's business and
capital structure.
In 1993 through mid-1995, Cone benefited from favorable general
economic conditions. Apparel fabric markets were characterized by
increasing prices and volume in denim and sportswear fabrics markets.
In decorative fabrics markets, following several years of strong
demand, consumer preferences began to shift in 1994 from prints. In
mid-1995, U.S. retail apparel and home furnishings markets weakened
which caused a decline in orders for both Cone's specialty sportswear
and decorative print fabrics as retailers adjusted their inventories.
In addition to the continuation of these weak market conditions in
1996, denim demand softened as excess inventories of garments in
market channels of distribution were being liquidated. Management
believes that one of the most significant factors affecting operating
margins is the price of cotton, the Company's principal raw material.
World cotton prices began to rise in late 1993 and throughout 1994 and
1995, primarily as a result of cotton crop declines in Pakistan, India
and China in 1993 and 1994, and the United States in 1995. Weather,
disease and insects accounted for the declines. Consequently,
mill-delivered cotton prices per pound for the industry rose from the
lower $.60s in 1993 to the upper $.70s in 1994, into the $.90s during
1995. Prices for 1996 were in the mid $.70s to lower $.80s.
The Company has purchased cotton from suppliers at fixed prices for
delivery throughout 1997 and expects 1997 average cotton costs to be
slightly lower than 1996 levels. The Company primarily uses forward
purchase contracts and, to a lesser extent, futures and options
contracts. The price of cotton will continue to unfavorably impact
profit margins in 1997 as compared with 1993 and 1994 results. While
the Company was unable to increase prices in its major product lines
during 1994 and early 1995, price increases in the range of 6%-8% were
effected during the second half of 1995. With excess inventories in
the denim pipeline, significant price increases were not effected in
1996 and the Company is experiencing price pressures in 1997.
Strategic Initiatives
Cone's business strategy is to focus on products
and services that generate attractive margins and in which it believes
it is an industry leader. The Company seeks growth of its core denim,
specialty sportswear and decorative fabric businesses through
expansion into new geographic areas and markets, product development
and investment in value-added technology such as CAD/CAM. For example,
in 1993, the Company positioned itself to supply North American
markets more efficiently and effectively through the purchase of an
equity ownership interest in Compania Industrial de Parras, S.A. de
C.V. ("CIPSA") and the formation of a joint venture with CIPSA to
construct and operate a world-class denim plant in Mexico. The joint
venture partners invested approximately $60 million in equity in the
venture, with each partner providing one-half of the investment. The
joint venture plant began production in the fourth quarter of 1995.
In 1994, the Company further implemented its business strategy by
acquiring substantially all of the assets of Golding Industries, Inc.,
consisting primarily of the Raytex division, for a purchase price of
$57.6 million in cash and the assumption of $6.0 million in
liabilities. Raytex is a leading commission printer of wide fabrics
used primarily in home furnishings products and uses technologies
similar to Cone's Carlisle facility, which also prints and finishes
decorative fabrics.
In 1995, a new jacquard fabric plant was constructed at a cost of
$14.6 million and began operation late in the year. Consistent with
the strategy to focus on its core
Denim Jeans Sales -- Units
(units in thousands)
(Denim Jeans Sales chart appears here. Plot points are below.)
96 95 94 93 92 91
Men 251,198 232,328 215,079 210,781 200,863 190,232
Women 168,243 158,539 153,110 140,177 123,061 115,643
Children 109,175 103,847 98,250 92,729 82,291 78,745
Total 528,616 494,714 466,439 443,687 406,215 384,620
12
<PAGE>
strengths, in the first quarter of 1996, the Company completed the
sale of its Olympic Products Division to British Vita PLC. Proceeds
were realized in excess of $50 million associated with the sale of
fixed assets, inventories and the liquidation of receivables. As a
result of this sale, the Company had a pre-tax gain of $4.3 million.
During 1996 the Company initiated additional steps to concentrate on
core businesses and facilities. This restructuring program includes
the divestiture of operations that management believes are
inconsistent with the strategic objectives of the Company and the
rational-ization of manufacturing facilities to improve cost
effectiveness. This program included the sale of Greeff Fabrics, part
of the Cone Decorative Fabrics group; the sale of the synthetic fabric
business, a part of the Cone Sportswear division; the expected sale of
the assets of Cornwallis Development Co., Cone's real estate
subsidiary; and the planned closing of the Granite Finishing Plant and
consolidation of the finishing operations with its Carlisle facility.
These actions resulted in combined fourth quarter 1996 pre-tax charges
of $9.7 million arising primarily from the losses on disposal of these
assets. The total restructuring charge for 1996, including the gain on
the sale of Olympic, was $5.2 million. The Company expects to receive
proceeds of approximately $24 million on the sale of Greeff, real
estate and the synthetic fabric business.
Operating units whose activities will not continue as part of the
Company in 1997 had sales of $34.1 million, $137.4 million and $137.8
million for 1996, 1995 and 1994, respectively. Net operating results
of these businesses, excluding restructuring charges, were losses of
$2.3 million and $0.8 million in 1996 and 1995, respectively, and
income of $2.2 million in 1994. See Note 21 of Notes to Consolidated
Financial Statements.
The consolidation of finishing production is scheduled to occur during
1997 and is expected to allow the Company to utilize finishing
capacity more efficiently. Expenses related to the phaseout of the
Granite operation, relocation and start-up of equipment at its
Carlisle facility should be offset, at least in part, by improved
facility utilization and the lower cost structure at its Carlisle
facility.
As part of its strategy to maintain modern manufacturing facilities
through reinvestment, the Company made significant capital
expenditures of $135.4 million from 1994 through 1996, including the
$14.6 million spent in 1995 for the jacquard plant. The Company plans
to spend approximately $44 million in 1997. In addition, the Company
has priorities for the use of cash flow and debt capacity. Cone's
first priority is reinvestment in existing manufacturing facilities.
The second priority is investment in international denim manufacturing
and marketing opportunities. Another priority is acquisitions in
related core product lines. The Company from time to time reviews and
will continue to review acquisitions and other investment
opportunities (some of which may be material to the Company) that
permit Cone to add value through its manufacturing and marketing
expertise. However, the Company currently has no agreement,
arrangement or understanding to make any such acquisition or
investment.
On February 17, 1994, the Board of Directors of the Company authorized
the repurchase, from time to time, of up to 2.5 million shares of the
Company's outstanding common stock in market transactions. As of March
14, 1997, 1.7 million shares had been repurchased in open market
transactions, 1.1 million of which were purchased during 1996. Future
repurchase decisions will be based on the Company's expected capital
structure, alternative investment opportunities, and the market price
of the common stock.
Segment Information
Cone operates in two principal business segments, apparel fabrics and home
furnishings products. The following table sets forth for years 1996, 1995 and
1994 certain net sales and operating income (loss) information regarding these
segments as well as net sales of the principal product groups.
<TABLE>
<CAPTION>
Net Sales (dollars in millions) 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
Apparel
Denim $ 498.7 66.9% $ 552.0 60.6% $ 423.5 52.5%
Specialty Sportswear(1) 129.4 17.3 148.1 16.3 177.0 22.0
Total 628.1 84.2 700.1 76.9 600.5 74.5
Home Furnishings
Fabrics(1) 95.7 12.9 98.4 10.8 93.7 11.6
Foam Products(1) 4.7 0.6 94.7 10.4 93.9 11.6
Real Estate and other(1) 17.4 2.3 17.0 1.9 18.1 2.3
Total 117.8 15.8 210.1 23.1 205.7 25.5
Total net sales $ 745.9 100.0% $ 910.2 100.0% $ 806.2 100.0%
Operating Income (Loss)(2)
Apparel $ 31.0 4.9% $ 39.9 5.7 $ 47.5 7.9%
Home Furnishings(3) (8.5) (7.2) (.6) (.3) 19.0 9.2
Restructuring (5.2) -- -- -- -- --
</TABLE>
(1) Specialty Sportswear includes synthetic fabrics which was sold in January
1997; Fabrics includes Greeff, which was sold in December 1996; Foam
Products represents Olympic, which was sold in January 1996; and in February
1997, the Company entered into a contract for the sale of substantially all
of the assets of its real estate operations. See "Strategic Initiatives"
above and Note 21 of Notes to Consolidated Financial Statements for a
description of the sales and operating results of these businesses.
(2) Operating income (loss) excludes general corporate expenses. Percentages
reflect operating income (loss) as a percentage of segment net sales.
(3) Operating income (loss) includes a loss of $1.0 million in 1995 and income
of $1.6 million in 1994 from Olympic.
13
<PAGE>
Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations
Fiscal Year Ended December 29, 1996, Compared with
Fiscal Year Ended December 31, 1995.
The Company experienced good demand for value-added denim apparel
fabrics and weak markets for specialty sportswear and home furnishings
fabrics in the first half of 1996. However, in the second half of
1996, the Company began to experience weaker demand in selective
value-added denim product lines resulting from inventory adjustments
in the softgoods pipeline.
For 1996, net sales were $745.9 million. Sales for 1995 were $910.2
including the sales of the Olympic Products Division, which was sold
in early 1996. Excluding the sales of Olympic, 1996 sales were $741.2
million, down 9.1% from year-ago sales of $815.5 million. Export sales
were $190.6 million, 26% of total sales, up 5.7% from 1995 amounts,
which represented 20% of sales.
Cone Mills had a net loss for 1996 of $2.2 million or $.19 per share after
preferred dividends, as compared with a net loss of $3.3 million or $.22 per
share for the previous year. Before losses of unconsolidated affiliates, the
Company earned $0.2 million in 1996, which included net pre-tax charges of
$5.2 million associated with restructuring and disposal of non-core
businesses. For the prior year, the Company had earnings of $13.6 million
before losses of unconsolidated affiliates related primarily from Mexican
peso devaluations.
Gross profit for 1996 (net sales less cost of sales and depreciation)
was 14.0% of sales, as compared with 13.7% for the previous year. The
increase was primarily the result of the elimination of Olympic
operations which had low gross profits.
Apparel Fabrics: Apparel fabric segment sales for 1996 were $628.1
million, down 10.3% compared with sales of $700.1 million for 1995.
Denim sales for 1996 were down 9.6% from 1995, the result of lower
volume. In addition, the Company experienced 12.7% lower specialty
sportswear sales. Operating margins in 1996 for the apparel segment
were 4.9% of sales as compared with 5.7% in 1995. Cotton costs
increased marginally from 1995 amounts but were offset by fabric price
increases. In 1996, apparel segment margins were negatively impacted
by operating both denim and specialty sportswear manufacturing
facilities at less than capacity. Export sales, primarily denims, were
up 6.5% compared with the previous year amounts.
Home Furnishings: Excluding Olympic, home furnishings segment sales were $113.1
million for 1996, down 2.0% from 1995. Sales of Cone Jacquards, which
started operation in late 1995, partially offset lower sales in both the
Cone Finishing and Cone Decorative Fabrics Divisions. The home furnishings
segment, excluding Olympic, had an operating loss of $8.5 million compared
with income of $0.3 million for the 1995 period. The loss was primarily the
result of lower sales volume and operating at levels substantially less than
capacity.
Selling and administrative expenses declined from $89.6 million in 1995 to $86.4
million in 1996. However, selling and administrative expenses rose to 11.6%
of sales in 1996 as compared with 9.8% for the previous year as a result of
businesses operating at substantially less than capacity.
Interest expense for 1996 was up $0.4 million as compared with the
1995 period. Income taxes in 1995 were $7.3 million whereas the
Company had an income tax benefit of $2.3 million in 1996. See Note 12
of Notes to Consolidated Financial Statements.
The Company expects continued weak denim sales, associated with industry
inventory corrections, to persist through at least the first half of 1997
and margins will continue to be depressed by lower sales and higher unit
costs resulting from operating facilities at less than capacity. Decorative
print and finishing operations are also expected to experience continued
weak sales associated with fashion preferences away from printed products.
While there has been some strengthening in specialty sportswear fabrics
markets, the improvements will not offset the weaknesses in denim and
printed fabrics. In the longer term, the Company expects to see improvements
in denim results after the industry inventory correction is completed and
expects an improvement in finishing operation results as the Granite plant
is closed and additional business is shifted to its Carlisle facility.
Fiscal Year Ended December 31, 1995 Compared with
Fiscal Year Ended January 1, 1995
Net sales for 1995 were $910.2 million dollars, up 12.9% from 1994 sales of
$806.2 million. This increase resulted from strong denim and export sales
and the added sales resulting from the Raytex acquisition, partially offset
by weak specialty sportswear and decorative print fabric sales in the second
half of the year. Export sales were $180.3 million, or 20% of sales, as
compared with 18% for 1994.
The Company had a net loss for 1995 of $3.3 million, or $.22 per share after
preferred dividends, which included after-tax losses of $16.9 million
arising from losses primarily associated with peso devaluations and the
write-down of Cone's investment in CIPSA to current net realizable value.
Without these losses from unconsolidated affiliates, Cone Mills had income
of $13.6 million
14
<PAGE>
or $.39 per share. This earnings decline from the previous year resulted from
deteriorating sportswear and home furnishings markets and from higher cotton
costs unrecovered in pricing in the first half of the year. For comparison,
net income in 1994 was $35.0 million, or $1.16 per share.
Gross profit for 1995 (net sales less cost of sales and depreciation) as
a percentage of sales was 13.7%, down from 17.4% for the previous year. The
decrease was primarily the result of higher cotton costs not recovered in prices
in the first half of 1995 and the poor market conditions for specialty
sportswear and printed decorative fabrics.
Apparel Fabrics: Apparel fabric segment sales for 1995 were $700.1 million, up
16.6% from 1994 levels. Denim sales were up 30.3% as the Company benefited
from both higher volume and prices. However, specialty sportswear sales were
down 16.3% from 1994 amounts, the result of overall weak retail apparel
markets and corresponding excess inventory in the softgoods pipeline.
Operating margins for 1995 for the apparel segment were 5.7% as compared
with 7.9% in 1994. Denim margins as a percentage of sales were lower, the
result of higher cotton costs unrecovered in first-half 1995 pricing.
Specialty sportswear fabrics experienced an operating loss arising from
deteriorating sales and the impact of operating sportswear fabric and print
facilities at less than capacity. Average prices adjusted for product mix
were up approximately 4% compared with 1994. Apparel segment export sales,
primarily denims, were up 29.3% as compared with previous year amounts.
Home Furnishings: Home furnishings segment sales for 1995 were $210.1 million,
up 2.1% from 1994 amounts. Sales additions from the acquisition of Raytex
were essentially offset by lower sales at Carlisle and John Wolf. Decorative
print markets deteriorated during 1995, the result of overall weak furniture
markets and customer fashion preferences for fabrics other than prints. The
home furnishings segment had an operating loss of $0.6 million compared with
income of $19.0 million for the 1994 period. The operating loss was
primarily the result of lower sales volume and under-absorbed overhead in
decorative print facilities.
Total Company selling and administrative expenses were 9.8% of sales, a slight
increase from 9.7% for 1994. Net interest expense increased to $14.5 million
from $7.3 million, the result of increased borrowings to support the
Company's expansion strategy in core businesses.
Before losses from unconsolidated affiliates, income taxes as a percentage of
taxable income were 34.9% in 1995 compared with 35.7% in 1994. Both periods
reflect tax benefits resulting from operation of the Company's foreign sales
corporation.
Liquidity & Capital Resources
The Company's principal long-term capital components consist of $64.3 million
outstanding under a Note Agreement with The Prudential Insurance Company of
America (the "Term Loan"), its 8 1/8% Debentures issued on March 15, 1995 and
due on March 15, 2005 (the "Debentures"), and stockholders' equity. Primary
sources of liquidity are internally generated funds, an $80 million Credit
Agreement with a group of banks with Morgan Guaranty Trust Company of New York
("Morgan Guaranty") as Agent Bank (the "Revolving Credit Facility"), and a $50
million Receivables Purchase Agreement (the "Receivables Purchase Agreement")
with Delaware Funding Corporation, an affiliate of Morgan Guaranty. On December
29, 1996, the Company had funds available of $88 million under its Revolving
Credit Facility and Receivables Purchase Agreement.
During 1996, the Company generated net cash from operating activities of $27.5
million as compared with $32.1 million in 1995. Uses of cash in 1996
included $36.2 million for capital expenditures, $2.9 million for the
preferred stock dividend and $8.8 million for the repurchase of 1.1 million
shares of common stock. In addition, the Company repaid $28.7 million from
financing activities including debt and short-term obligations. During the
first quarter of 1996, the Company sold Olympic which provided in excess of
$50 million of cash proceeds including the collection of accounts
receivable.
The Company believes that the proceeds from the sale of various operating units
as discussed in "Strategic Initiatives", together with Cone's internally
generated operating funds and funds available under its credit facilities,
will be sufficient to meet its working capital, capital spending, potential
stock repurchases, and financing needs for the foreseeable future. The
Company's Revolving Credit Facility and Receivables Purchase Agreement
mature in 1997. Based upon discussions with financial institutions,
management believes the Company can enter into successor facilities that
will provide adequate liquidity with terms and conditions acceptable to the
Company.
On December 29, 1996, the Company's long-term capital structure consisted of
$150.0 million of long-term debt and $210.3 million of stockholders' equity.
For comparison, on December 31, 1995, the Company had
15
<PAGE>
Management's Discussion and Analysis of Results of Operations and Financial
Condition
$161.8 million of long-term debt and $222.1 million of stockholders' equity.
Long-term debt (including current maturities of long-term debt) as a
percentage of long-term debt and stockholders' equity was 43% on December
29, 1996 and 44% on December 31, 1995.
Accounts receivables on December 29, 1996, were $49.1 million, down from $61.0
million at December 31, 1995. At the end of 1996, the Company had sold $42
million of accounts receivable, an increase of $2 million from the amount
sold at December 31, 1995. The decrease in accounts receivable was primarily
due to lower sales levels, the collection of Olympic receivables and the
additional amount sold under the Receivables Purchase Agreement. In
addition, the Company will adopt SFAS 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities"
prospectively to transactions beginning in the first quarter of 1997. As
discussed above, the Company is renegotiating the Receivables Purchase
Agreement with the intent to continue present accounting treatment.
Inventories on December 29, 1996, were $139.5 million, down approximately $8.6
million from year-end 1995 levels when adjusted for the sale of Olympic
inventories. The Company's additional finished goods inventories were the
result of lower unit sales than planned.
Capital spending in 1996 was originally budgeted at $52 million with
projects for new weaving machines, investments in information systems
and the expansion of the jacquard weaving facility. For 1996
expenditures were $36.2 million. The Board of Directors approved a
reduction in the 1996 capital budget reflecting the adoption of new
weaving technology in the Company's multi-year relooming program that
would allow the Company to achieve modernization results at lower
levels of capital investment.
Capital spending in 1997 is expected to be $44 million. Projects include
new weaving machines that replace 1970s vintage weaving machines, link ring
spinning, and additional looms for the jacquard facility. Approximately
$4.8 million of the budgeted capital expenditures for 1997 had been committed
on December 29, 1996.
Cone will redeploy capital from the reduction of the capital spending budget and
from the expected sale of non-core businesses to support general corporate
initiatives as discussed in "Strategic Initiatives."
Other potential uses of Cone capital include an agreement with CIPSA to purchase
up to an additional 33% of the existing outstanding common stock of Parras
Cone for an amount of $20 million if CIPSA does not meet certain financial
obligations.
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 the
Company. Existing government regulations are not expected to cause a
material change on the Company's competitive position, operating results or
planned capital expenditures. The Company has an active environmental
committee which fosters protection of the environment and compliance with
laws.
The Company 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 of
the Company.
"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 the Company's current
judgement 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 the
Company'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, the Company's principal raw material, and
(iv) the Company's relationship with Levi Strauss as its major customer. For
a further description of these risks see "Overview" above and the Company's
1996 Form 10-K, "Item 1. Business -Competition, -Raw Materials and
- -Customers." Other risks and uncertainties may be described from time to
time in the Company's other reports and filings with the Securities and
Exchange Commission.
16
<PAGE>
Financial Review
Consolidated Statements
of Operations 18
Consolidated Balance Sheets 19
Consolidated Statements
of Stockholders' Equity 20
Consolidated Statements
of Cash Flows 21
Notes to Consolidated
Financial Statements 22
Statement of Responsibility
for Financial Statements 37
Independent Auditor's Report 37
Historical Financial Review 38
17
<PAGE>
Consolidated Statements of Operations
(amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 29, 1996, December 31, 1995 and January 1, 1995 1996 1995 1994
<S> <C> <C> <C>
Net Sales (Note 17) $ 745,939 $ 910,217 $806,167
Operating Costs and Expenses:
Cost of sales 614,657 756,975 642,472
Selling and administrative 86,394 89,561 77,823
Depreciation 26,868 28,257 23,269
Restructuring (Note 21) 5,197 -- --
733,116 874,793 743,564
Income from Operations 12,823 35,424 62,603
Other Income (Expense):
Interest income 586 563 614
Interest expense (15,483) (15,081) (7,924)
(14,897) (14,518) (7,310)
Income (Loss) from Continuing Operations before
Income Taxes (Benefit) and Equity in Earnings (Loss) of
Unconsolidated Affiliates (2,074) 20,906 55,293
Income Taxes (Benefit) (Note 12) (2,311) 7,306 19,764
Income from Continuing Operations before Equity
in Earnings (Loss) of Unconsolidated Affiliates 237 13,600 35,529
Equity in Earnings (Loss) of Unconsolidated Affiliates
(Net of income tax benefit of $2,992-1995) (Note 4) (2,458) (16,856) 223
Income (Loss) from Continuing Operations (2,221) (3,256) 35,752
Gain on DisposalDiscontinued Operations-
(Net of income tax of $276) (Note 18) -- -- 439
Income (Loss) before Cumulative Effect of Accounting Change (2,221) (3,256) 36,191
Cumulative Effect of Accounting Change for Postemployment
Benefits(Net of income tax benefit of $772) (Note 11) -- -- (1,228)
Net Income (Loss) $ (2,221) $ (3,256) $34,963
Income (Loss) Available to Common Shareholders (Note 16):
Income (Loss) from Continuing Operations $(5,101) $ (6,088) $ 33,064
Income (Loss) before Cumulative Effect of Accounting Change $(5,101) $ (6,088) $ 33,503
Cumulative Effect of Accounting Change -- -- (1,228)
Net Income (Loss) $(5,101) $ (6,088) $ 32,275
Earnings (Loss) Per ShareFully Diluted (Note 16):
Income (Loss) from Continuing Operations $ (.19) $ (.22) $ 1.19
Income (Loss) before Cumulative Effect of Accounting Change $ (.19) $ (.22) $ 1.20
Cumulative Effect of Accounting Change -- -- (.04)
Net Income (Loss) $ (.19) $ (.22) $ 1.16
Weighted Average Common Shares and Common Share
Equivalents OutstandingFully Diluted (Note 16) 27,179 27,380 27,834
</TABLE>
See Notes to Consolidated Financial Statements.
18
<PAGE>
Consolidated Balance Sheets
(amounts in thousands, except share and par value data)
<TABLE>
<CAPTION>
December 29, 1996 and December 31, 1995 1996 1995
<S> <C> <C>
Assets
Current Assets:
Cash $ 1,018 $ 336
Accounts receivabletrade, less provision for doubtful
accounts $3,000; $3,200 (Notes 2 and 17) 49,073 60,955
Inventories (Note 3):
Greige and finished goods 94,635 84,822
Work in process 10,793 14,786
Raw materials 7,231 29,274
Supplies and other 26,874 33,492
139,533 162,374
Other current assets 14,794 10,227
Total Current Assets 204,418 233,892
Investments in Unconsolidated Affiliates (Note 4) 34,144 37,680
Other Assets (Note 5) 40,746 45,540
Property, Plant and Equipment:
Land 17,880 19,615
Buildings 83,048 89,128
Machinery and equipment 319,271 322,361
Other 34,143 34,292
454,342 465,396
Less accumulated depreciation 203,664 198,188
Property, Plant and EquipmentNet 250,678 267,208
$ 529,986 $584,320
Liabilities and Stockholders Equity
Current Liabilities:
Notes payable (Note 6) $ 5,267 $ 8,875
Current maturities of long-term debt (Note 8) 10,754 11,236
Accounts payable-trade 27,113 40,023
Sundry accounts payable and accrued expenses (Note 7) 52,770 64,800
Deferred income taxes (Note 12) 23,667 25,938
Total Current Liabilities 119,571 150,872
Long-Term Debt (Note 8) 149,968 161,782
Deferred Items:
Deferred income taxes (Note 12) 40,066 40,836
Other deferred items 10,130 8,705
50,196 49,541
Stockholders Equity:
Class A Preferred Stock-$100 par value; authorized 1,500,000 shares;
issued and outstanding 383,948 shares-Employee Stock
Ownership Plan (Note 13) 38,395 38,395
Class B Preferred Stock-no par value; authorized 5,000,000
shares (Note 13) -- --
Common Stock-$.10 par value; authorized 42,700,000 shares;
issued and outstanding 26,301,233 shares; 1995, 27,380,409 shares
(Notes 13 and 14) 2,630 2,738
Capital in excess of par 62,995 71,090
Retained earnings 114,706 119,825
Currency translation adjustment (8,475) (9,923)
Total Stockholders' Equity 210,251 222,125
$ 529,986 $584,320
</TABLE>
See Notes to Consolidated Financial Statements.
19
<PAGE>
Consolidated Statements of Stockholders Equity
(amounts in thousands, except share data)
Years Ended December 29, 1996, December 31, 1995 and January 1, 1995
<TABLE>
<CAPTION>
Class A Preferred Class A Preferred Capital in Currency
Stock Stock - Escrow Common Stock Excess Retained Translation
Shares Amount Shares Amount Shares Amount of Par Earnings Adjustment
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 2, 1994 465,077 $46,508 (81,125) $(8,113) 27,744,783 $2,774 $75,397 $93,468 $ --
Net income -- -- -- -- -- -- -- 34,963 --
Currency translation loss (net
of income tax benefit of
$1,002) -- -- -- -- -- -- -- (1,380)
Class A Preferred Stock-
Employee Stock
Ownership Plan:
Cash dividends paid -- -- -- -- -- -- -- (2,660) --
Shares issued (7.0%
dividend on shares held
in Cone Mills
escrow account) 5,679 567 (5,679) (567) -- -- -- -- --
Shares received from
Employee Stock
Ownership Plan
Trustee-Cone Mills
escrow account (86,804) (8,680) 86,804 8,680 -- -- -- -- --
Shares redeemed (4) -- -- -- -- -- -- -- --
Common Stock:
Options exercised - -- -- -- -- 21,000 2 113 -- --
Purchase of common
shares - -- -- -- -- (362,162) (36) (4,156) -- --
Balance, January 1, 1995 383,948 $38,395 -- $ -- 27,403,621 $2,740 $ 71,354 $125,771 $ (1,380)
Net loss -- -- -- -- -- -- -- (3,256) --
Currency translation loss (net
of income tax benefit of
$3,630) -- -- -- -- -- -- -- -- (8,543)
Class A Preferred Stock-
Employee Stock
Ownership Plan:
Cash dividends paid -- -- -- -- -- -- -- (2,690) --
Common Stock:
Options exercised -- -- -- -- 4,000 1 25 -- --
Purchase of common shares -- -- -- -- (27,212) (3) (289) -- --
Balance, December
31, 1995 383,948 $38,395 -- $ -- 27,380,409 $2,738 $ 71,090 $119,825 $(9,923)
Net loss -- -- -- -- -- -- -- (2,221) --
Currency translation
adjustment-Sale of stock
of affiliate -- -- -- -- -- -- -- -- 1,448
Class A Preferred Stock-
Employee Stock
Ownership Plan:
Cash dividends paid -- -- -- -- -- -- -- (2,898) --
Common Stock:
Options exercised -- -- -- -- 61,800 6 515 -- --
Shares issued -- -- -- -- 6,000 1 47 -- --
Purchase of common
shares -- -- -- -- (1,146,976) (115) (8,657) -- --
Balance, December 29, 1996 383,948 $38,395 -- $ -- 26,301,233 $2,630 $62,995 $ 114,706 $(8,475)
</TABLE>
See Notes to Consolidated Financial Statements.
20
<PAGE>
Consolidated Statements of Cash Flows
(amounts in thousands)
<TABLE>
<CAPTION>
Years Ended December 29, 1996, December 31, 1995 and January 1, 1995 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income (Loss) $ (2,221) $(3,256) $34,963
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 26,868 28,257 23,269
Gain on divestitures (3,351) -- --
(Gain) Loss on sale and writedown of property, plant and equipment, net 647 (1,794) (2,519)
Amortization 2,938 3,116 777
Equity in (earnings) loss-unconsolidated affiliates 2,458 19,848 (223)
Dividend received-unconsolidated affiliate -- -- 541
Change in assets and liabilities, net of divestitures and acquisitions:
Decrease (increase) in trade receivables 11,882 (4,075) (9,577)
Decrease (increase) in inventories 5,729 (10,920) 5,317
Decrease (increase) in other assets (4,258) (12,968) (2,989)
Increase (decrease) in accounts payable and accrued expenses (11,594) 10,072 1,644
Increase (decrease) in deferred income taxes (3,041) 1,837 990
Increase (decrease) in other liabilities 1,458 1,977 3,113
Net cash provided by operating activities 27,515 32,094 55,306
Cash Flows from Investing Activities:
Investments in unconsolidated affiliates -- (30,316) (9,572)
Proceeds from sale of stock in unconsolidated affiliate 805 -- --
Proceeds from divestitures (a) 44,045 -- --
Proceeds from sale of property, plant and equipment 4,402 5,924 2,903
Acquisitions, net of cash acquired (b) -- (2,038) (57,647)
Capital expenditures (36,221) (61,662) (37,494)
Net cash provided by (used in) investing activities 13,031 (88,092) (101,810)
Cash Flows from Financing Activities:
Net (payments) borrowings under line of credit agreements (3,608) (1,825) 5,601
Increase (decrease) in checks issued in excess of deposits (12,369) 14,727 --
Principal paymentslong-term debt (12,739) (97,414) (47,606)
Proceeds from long-term debt borrowings -- 48,000 94,578
Proceeds from debentures issued -- 99,831 --
Debt issuance costs -- (915) --
Payment on interest hedge activity -- (4,272) --
Purchase of outstanding capital stock-Common (8,771) (292) (2,869)
Proceeds from issuance of capital stock-Common 521 26 115
Dividends paid-Class A Preferred (2,898) (2,690) (2,660)
Net cash (used in) provided by financing activities (39,864) 55,176 47,159
Net increase (decrease) in cash 682 (822) 655
Cash at Beginning of Period 336 1,158 503
Cash at End of Period $ 1,018 $ 336 $ 1,158
(a) Divestitures:
Inventories $ 17,112
Property, plant and equipment 21,563
Other 2,019
Gain on sale 3,351
Proceeds from divestitures$ 44,045
(b) Acquisitions, net of cash acquired:
Working capital, other than cash $(2,008) $(1,377)
Property, plant and equipment (30) (23,795)
Cost in excess of net assets -- (19,686)
Other assets -- (14,400)
Long-term debt assumed -- 1,611
Net cash used to acquire businesses $(2,038) $(57,647)
Supplemental Disclosures of Additional Cash Flow Information:
Cash payments for:
Interest, net of interest capitalized $ 15,860 $ 12,758 $ 7,703
Income taxes, net of refunds $ 1,189 $ 3,861 $ 17,938
Supplemental Schedule of Noncash Investing and Financing Activities:
Receivable recorded from divestiture $ 1,879 $ -- $ --
Stock dividend paid to ESOP trustee for Cone escrow account $ -- $ -- $ 567
Class A Preferred Stock issued $ -- $ -- $ 567
Class A Preferred Stock received from ESOP trustee and closure of
escrow account $ -- $ -- $ 8,680
Purchase of outstanding capital stock-Common through incurrence of $ -- $ -- $ 1,323
accounts payable
</TABLE>
See Notes to Consolidated Financial Statements.
21
<PAGE>
Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
Principles of Consolidation -The consolidated financial statements include all
majority owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation.
Fiscal Year - The Company's fiscal year ends on the Sunday nearest December 31.
The years ended December 29, 1996, December 31, 1995 and January 1, 1995,
contained 52 weeks.
Inventories -Inventories are stated at the lower of cost or market. The last-in,
first-out (LIFO) method is used to value inventories of most domestically
produced goods. The first-in, first-out (FIFO) or average cost methods are used
to value all other inventories. Inventories priced at LIFO as of December 29,
1996 and December 31, 1995 were 73% and 68% of total inventories, respectively.
If current replacement cost had been used for valuing financial statement
inventories, that portion of the inventories based on the LIFO method would have
been approximately $28 million higher at December 29, 1996, and $32 million
higher at December 31, 1995. LIFO inventories valued for financial statement
purposes exceed their income tax basis by approximately $83 million at December
29, 1996, and December 31, 1995.
Investments in Unconsolidated Affiliates -Investments in unconsolidated
affiliated companies are accounted for by both the equity and cost methods,
depending upon ownership levels. The Company's equity in earnings/losses and
currency translation adjustments may be recorded on up to a one quarter delay
basis.
Impairment of Assets - The Financial Accounting Standards Board has issued SFAS
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," which requires impairment losses to be recorded on
long-lived assets used in operations or to be disposed of when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amount. The Company adopted
SFAS 121 in the first quarter of 1996. There was no cumulative effect on the
Companys financial statements from the initial adoption of SFAS 121; however,
the accounting principles of this statement were used in estimating the
restructuring charges discussed in Note 21.
Other Assets - Other assets consist primarily of the excess of cost over net
assets acquired and trade names, which are carried at cost less accumulated
amortization. Costs are amortized using the straight-line method over the
estimated useful lives of the related assets, not exceeding twenty years.
Property, Plant and Equipment - Property, plant and equipment is carried at
cost. Depreciation is computed by the straight-line method for financial
reporting purposes over the following estimated useful lives:
Buildings 15-39 Years
Machinery and Equipment 10-20 Years
Other 3-20 Years
Capital Stock Redeemed - Redemption of capital stock is accounted for by the par
value method. Excess of redemption price over par value for Class A Preferred
Stock is charged to retained earnings. Excess of purchase price over par value
for common stock is charged to capital in excess of par applicable to common
shares and to retained earnings thereafter.
Deferred Income Taxes - Deferred income taxes are provided on the difference
between the financial reporting and the income tax basis of assets and
liabilities, principally inventories, and property, plant and equipment. Balance
sheet classification of these deferred income taxes is based upon the
classification of the related assets or liabilities that created the temporary
differences and does not necessarily reflect the expected timing of the
reversals.
Estimates - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
22
<PAGE>
Note 2. Sale of Accounts Receivables
The Company has an agreement with a subsidiary of a major financial institution
which allows the sale without recourse of up to $50 million undivided interest
in eligible trade receivables. This agreement has been extended to June 1997.
The Company acts as an agent for the purchaser by performing record keeping and
collection functions of receivables sold. The cost of receivables sold by the
Company is the commercial paper rate plus 35 basis points calculated for the
period of time from the sale of a receivable until its payment date. The
resulting cost on the sale of receivables is included in cost of sales. Accounts
receivable is shown net of $42 million sold at December 29, 1996, and net of $40
million sold at December 31, 1995, under this agreement. As a result of the sale
of interest in these receivables, cash flows provided by operating activities
include an increase of $2 million for 1996, a decrease of $10 million for 1995,
and an increase of $15 million for 1994.
The Financial Accounting Standards Board has issued SFAS 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities",
which requires an entity to recognize the financial and servicing assets it
controls and the liabilities it has incurred and to derecognize financial assets
when control has been surrendered in accordance with the criteria provided in
the Statement. The Company will apply the new rules prospectively to
transactions beginning in the first quarter of 1997 and is currently negotiating
a new agreement with the intent to continue present accounting treatment.
Note 3. Inventory Liquidations
During 1996, 1995 and 1994, certain inventory quantities were reduced, resulting
in a liquidation of LIFO inventory layers carried at the lower costs prevailing
in prior years. The effect of these liquidations increased net earnings or
decreased net losses by $1.4 million in 1996, $0.5 million in 1995 and $0.2
million in 1994.
Note 4. Investments in Unconsolidated Affiliates
On June 25, 1993, the Company purchased a 20% ownership in Compania Industrial
de Parras S.A., ("CIPSA"), a denim manufacturer in Mexico. Cost of the initial
investment was approximately $24 million. In October 1995 and December 1994,
CIPSA elected to increase capital through the sale of additional shares of
capital stock, and the Company retained its 20% ownership level by additional
investments of $5.7 million and $6.7 million, respectively. Through 1995 the
Company accounted for this investment by the equity method. The summarized
unaudited financial information of CIPSA (100% basis), as adjusted for purchase
accounting, is set forth below:
Financial Information
Year Ended Year Ended
(amounts in thousands) Sept. 30, 1995 Sept. 30, 1994
Income statement data
Net sales $132,565 $90,648
Gross profit 1,583 1 17,025
Net income (loss) (57,138)1 1,114
Company's equity in
net income (loss) (11,429)2 223
Balance sheet data
Current assets $76,619
Noncurrent assets 89,645
Current liabilities 109,451
Noncurrent liabilities 34,019
Net assets 22,794
Company's equity in net
assets 4,558
1 Includes write-off of acquisition goodwill of $17,857.
2 Includes write-off of acquisition goodwill of $3,571.
In December 1994, the Mexican government devalued the peso and allowed it to
freely trade against the U.S. dollar resulting in a substantial decline in value
of the peso versus the U.S. dollar. The peso continued to devalue versus the
U.S. dollar in 1995 sending the Mexican economy into a severe recession. On
September 30, 1995, the peso was trading at 6.38 pesos per U.S. dollar versus an
exchange rate of approximately 3.45 prior to the devaluation. Due to the peso
devaluation CIPSA recognized large foreign currency transaction losses related
to debt denominated in U.S. dollars. In the fourth quarter of 1995 the peso
continued to devalue and was trading at 7.69 pesos per U.S. dollar on December
31, 1995. Due to the continued devaluation of the peso and the deepening of the
recession in the Mexican economy, the Company accelerated the amortization of
goodwill associated with its initial investment in CIPSA increasing its 1995
loss by $3.6 million. In 1995, based upon the above factors and the share price
for the fourth quarter 1995 capital increase, the Company recognized an
additional $7.3 million charge, reduced by a tax benefit of $3.0 million, to
adjust its investment in CIPSA to expected net realizable value. Pursuant to a
December 22, 1995 agreement the Company sold 1.5 million shares of CIPSA
(approximately 10% of its holdings) for $0.8 million in January 1996. Based upon
the reduction in its ownership to 18% and certain other factors, the Company
began accounting for its investment in CIPSA by the cost method during the first
quarter of 1996.
23
<PAGE>
Notes to Consolidated Financial Statements
The Company and CIPSA formed a joint venture company, Parras Cone de Mexico,
S.A.("Parras Cone"), to build and operate a world-class denim manufacturing
facility in Parras, Mexico. The partners invested a total of approximately $60
million, with each partner providing 50% of this investment. Parras Cone signed
two credit agreements with a Mexican bank for approximately $74 million of debt
financing and also has a $10 million line of credit to finance normal working
capital requirements. This debt is not guaranteed by Cone Mills Corporation or
CIPSA. Construction on the facility was completed in 1995 and Parras Cone began
production of denim and yarn in the fourth quarter of 1995. Included in the
current year statement of operations is a loss of $2.5 million representing
Cone's portion of Parras Cones loss for 1996 and fourth quarter 1995. As is
customary for start-up foreign operations, the equity in earnings/losses of
Parras Cone was previously recorded on a one quarter delay based on the
availability of information. As Parras Cone became fully-operational in 1996,
the Company elected to report the equity in earnings/losses as of the same
period as the Companys reporting period, beginning in the fourth quarter of
1996. This change increased the loss reported in 1996 by $0.8 million.
Note 5. Other Assets
Other assets consist of the following:
(amounts in thousands) 1996 1995
Excess of cost over net assets acquired $19,693 $19,871
Trade names 14,332 14,317
Other intangible assets 5,299 8,010
39,324 42,198
Less accumulated amortization (4,945) (3,052)
Net intangible assets 34,379 39,146
Other assets 6,367 6,394
Total other assets $40,746 $45,540
Note 6. Notes Payable
The Company's real estate subsidiary had unsecured notes payable outstanding of
$5.3 million at December 29, 1996 and $8.9 million at December 31, 1995. These
funds were borrowed pursuant to a $15 million bank credit agreement with
interest rates, at the borrowers option, of LIBOR plus 2% or the prime rate.
The availability of funds under this credit agreement is based upon capital
invested in real estate inventory. Weighted average interest rates applicable to
outstanding notes payable were 7.510% and 7.875% at December 29, 1996, and at
December 31, 1995, respectively.
Note 7. Sundry Accounts Payable and Accrued Expenses
Sundry accounts payable and accrued expenses consist
of the following:
(amounts in thousands) 1996 1995
Accrued salaries, wages and commissions $14,435 $13,946
Checks issued in excess of deposits 13,168 25,538
Other 25,167 25,316
$52,770 $64,800
24
<PAGE>
Note 8. Long-Term Debt
Long-term debt consists of the following:
(amounts in thousands) December 29, 1996
Current
Total Maturity Long-Term
8% Senior Note $ 64,286 $10,714 $53,572
Revolving Credit
Agreement -- -- --
8 1/8% Debentures 96,353 -- 96,353
Other 83 40 43
$160,722 $10,754 $149,968
(amounts in thousands) December 31, 1995
Current
Total Maturity Long-Term
8% Senior Note $ 75,000 $10,714 $ 64,286
Revolving Credit
Agreement -- -- --
8 1/8% Debentures 95,910 -- 95,910
Capital Lease Obligation 1,455 366 1,119
Industrial Revenue Bonds 533 149 384
Other 120 37 83
$173,018 $11,236 $161,782
The Senior Note is a ten year $75 million 8% Promissory Note, dated August 13,
1992. Annual principal payments of $10.7 million began August 1996 with the
remaining principal amount due August 2002.
The Revolving Credit Agreement, dated August 13, 1992, and extended by
amendment to August 1997, provides for borrowings up to $80 million.
Borrowings under this Agreement may be at floating rates, determined by
either the prime rate, CD rate, or LIBOR, at the Companys option, plus a
margin determined by the Companys capital structure or through a competitive
bid. The Company had no borrowings under this Agreement at December
29, 1996, or December 31, 1995. The total Revolving Credit Facility of $80
million remains available for future working capital requirements and represents
unused funding capacity at December 29, 1996. These financing agreements contain
certain covenants regarding the operations and financial condition of the
Company. The Company was in compliance with all loan covenants on December 29,
1996.
On March 15, 1995, the Company completed the sale of $100 million 8 1/8%
Debentures through an underwritten public offering. The unsecured debentures are
due March 15, 2005, and are not redeemable prior to maturity. Interest is
payable semiannually each March 15 and September 15. In early 1995, considering
the uncertainty in the bond market, the Company entered into an interest rate
hedge contract to fix the interest rate on the debentures. The contract was
terminated in conjunction with the pricing of the debentures at a cost of $4.3
million. Amortization of the loss on the interest rate hedge and original issue
discount, both over a ten-year life, will result in an 8.57% effective rate for
the issue.
During 1996 the Company satisfied its capital lease and industrial revenue bond
obligations.
Annual maturities of long-term debt for each of the next five fiscal years are:
(amounts in thousands)
1997 $10,754
1998 10,757
1999 10,714
2000 10,714
2001 10,714
Note 9. Retirement Plans
The Company maintains noncontributory defined benefit pension plans covering
substantially all employees. The plan covering salaried employees provides
pension benefits based on years of service and average compensation for the
highest five consecutive years during the last ten years of service. Plans
covering hourly employees and long distance drivers provide benefits based on
compensation for each year of service. The Companys funding policy is to make
annual contributions of amounts that are deductible for income tax purposes.
Assets of the pension plans at the end of 1996 were approximately seventy-five
percent invested in fixed income securities consisting of bond funds and
short-term money market or cash equivalent funds, while the remaining
twenty-five percent were invested in an equity fund.
Net periodic pension costs for 1996, 1995 and 1994 included the following
components:
(amounts in thousands) 1996 1995 1994
Service cost, benefits
earned during period $3,652 $2,748 $2,144
Interest cost on projected
benefit obligation 3,363 2,552 1,752
Actual loss (return)
on assets (1,963) (2,174) 93
Net amortization
and deferral 1,518 2,031 111
Pension Expense $6,570 $5,157 $4,100
25
<PAGE>
Notes to Consolidated Financial Statements
Assumptions used in determining the periodic pension cost of the pension plans
are as follows:
1996 1995 1994
Discount rate 7.0% 8.0% 7.5%
Average rate of increase in compensation levels 5.0 5.0 4.0
Expected long-term rate of return on assets 9.0 9.0 8.5
The following table sets forth the pension plans' funded status and amounts
recognized in the Companys consolidated balance sheets at December 29, 1996 and
December 31, 1995:
<TABLE>
<CAPTION>
(amounts in thousands) 1996 1995
Assets Accumulated Assets Accumulated
Exceed Benefits Exceed Benefits
Accumulated Exceed Accumulated Exceed
Benefits Assets Benefits Assets
<S> <C> <C> <C> <C>
Actuarial present value of accumulated benefit obligation-vested portion $28,506 $ 4,506 $ 24,190 $ 4,271
Actuarial present value of accumulated benefit obligation-nonvested portion 2,748 143 2,466 62
Accumulated benefit obligation-total 31,254 4,649 26,656 4,333
Additional amounts related to projected compensation levels 13,772 2,067 14,944 1,354
Total actuarial projected benefit obligation for service rendered to date 45,026 6,716 41,600 5,687
Less: Plan assets at fair value 35,562 -- 28,387 --
Projected benefit obligation in excess of plan assets (9,464) (6,716) (13,213) (5,687)
Unrecognized net actuarial loss, difference in assumptions and
actual experience 21,120 3,212 25,161 2,497
Unrecognized prior service cost (income) (771) 469 (963) 508
Initial unrecognized net liability at date of adoption, being recognized
over 14-16 years 304 472 397 566
Adjustment to recognize minimum liability through recording
an intangible asset -- (2,086) -- (2,217)
Pension related assets (liabilities) included in the consolidated balance sheets $11,189 $(4,649) $ 11,382 $(4,333)
</TABLE>
Assumptions used in determining the funded status of the pension plans (shown
above) are as follows:
1996 1995
Discount rate 7.5% 7.0%
Average rate of increase in compensation levels 4.8 5.0
Listed below are the Company's five defined contribution plans which cover
substantially all employees.
1. The 1983 Employee Stock Ownership Plan ("ESOP")
2. The Supplemental Retirement Plan ("SRP")
3. The Supplemental Retirement Plan-Hourly ("SRP Hourly")
4. The Employee Equity Plan ("EEP")
5. The Employee Equity Plan-Hourly ("EEP Hourly")
The Company discontinued contributions to the ESOP after 1992. The ESOP is
subject to a floor offset arrangement in conjunction with the Company's defined
benefit plans with respect to pension benefits earned for service after 1983.
Under the floor offset arrangement, retirement benefits earned after 1983 under
the Company's three defined benefit pension plans are offset by the actuarial
equivalent pension value of a portion of participants' ESOP accounts.
The 401(k) Program consists of the EEP, EEP Hourly, SRP and the SRP Hourly
plans. Participants of the Program may contribute from 2% to 15% of their annual
compensation to their respective SRP or to their respective EEP, or their
contributions may be divided between the two plans. The Company makes matching
cash contributions of 25% to both SRP plans, and 50% to both EEP plans. The
Company does not match employee contributions in excess of 6% of the employees
annual compensation.
Expenses for the defined contribution plans are shown below:
(amounts in thousands) 1996 1995 1994
EEP (combined) $1,080 $1,197 $1,090
SRP (combined) 692 712 630
26
<PAGE>
Note 10. Postretirement Benefits Other Than Pensions
The Company provides postretirement health care benefits to certain retired
employees between the ages of 55 and 65. These employees become eligible for
postretirement health care benefits if they retire after age 55 and have
completed ten years of service. The plan is contributory, with retiree
contributions and plan design adjusted annually to reflect changes in health
care costs.
The periodic expense for postretirement benefits included the following
components:
(amounts in thousands) 1996 1995 1994
Service cost for benefits
earned during the year $135 $ 132 $ 113
Interest cost on
accumulated benefit
obligation 195 244 197
Amortization of the
unrecognized net gain -- (101) (130)
Amortization of transition
obligation over 20 years 114 230 230
Total expense $444 $ 505 $ 410
The actuarial and recorded liabilities for postretirement benefits, none of
which have been funded, are as follows:
(amounts in thousands) 1996 1995
Accumulated postretirement
benefit obligation:
Retirees $ 430 $ 575
Fully eligible active plan participants 847 1,274
Other active plan participants 1,618 2,001
Total 2,895 3,850
Plus unrecognized net gain 195 1,007
Less unrecognized transition obligation 1,827 3,908
Accrued postretirement benefit cost $1,263 $ 949
For measurement purposes, an 8.5% annual rate of increase in per capita health
care cost of covered benefits was assumed for 1997, with such rate of increase
gradually declining to 5.5% in 2003. Increasing the assumed health care cost
trend rate by 1 percentage point would increase the accumulated postretirement
benefit obligation for fiscal year 1996 by $0.3 million and increase net
periodic postretirement benefit expense by less than $0.1 million in 1996. The
accumulated postretirement benefit obligation was computed using an assumed
discount rate of 7.5% for 1996 and 7.0% for 1995. In 1996, the Company amended
the plan which reduced the accumulated postretirement benefit obligation. The
reduction of $2.0 million was offset against the unrecognized transition
obligation.
Note 11. Postemployment Benefits
The Company provides health care benefits (in excess of Medicare) and life
insurance benefits for certain disabled employees and health care continuation
coverage for former employees as mandated by law. Presently, the Company pays a
portion of the actual costs of these benefits.
The Company adopted SFAS 112, "Employers' Accounting for Postemployment
Benefits", as of the beginning of the 1994 fiscal year. This statement requires
an accrual method of recognizing postemployment benefits rather than recording
an expense when paid. The cumulative effect of this accounting change, included
in first quarter 1994 earnings, resulted in a one-time charge to income of $2.0
million and a reduction in net income of $1.2 million. Additional annual
expenses resulting from the implementation of this accounting statement were
insignificant.
27
<PAGE>
Notes to Consolidated Financial Statements
Note 12. Income Taxes (Benefit)
The following tables present the provision (credit) for income taxes, the
components of income tax expense (benefit) from continuing operations, a
reconciliation of the statutory U.S. income tax provision (credit) to the actual
income tax provision (credit), and the components and items comprising net
deferred income tax liability.
<TABLE>
<CAPTION>
Provision (Credit) for Income Taxes
(amounts in thousands) 1996 1995 1994
<S> <C> <C> <C>
Continuing operations before equity in losses in unconsolidated affiliates $(2,311) $ 7,306 $19,764
Equity in losses in unconsolidated affiliates -- (2,992) --
Subtotal-Provision (credit) for income taxes on continuing operations (2,311) 4,314 19,764
Discontinued operations -- -- 276
Cumulative effect of accounting change -- -- (772)
Stockholders equity, currency translation adjustment -- (3,630) (1,002)
Total provision (credit) for income taxes $(2,311) $ 684 $18,266
</TABLE>
<TABLE>
<CAPTION>
Components of Income Tax Provision (Credit) from Continuing Operations
(amounts in thousands) 1996 1995 1994
Current Deferred Total Current Deferred Total Current Deferred Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal $342 $(1,742) $(1,400) $2,271 $1,417 $3,688 $15,928 $1,145 $17,073
State, local
and foreign 388 (1,299) (911) 206 420 626 2,350 341 2,691
Total income tax
provision
(credit) $730 $(3,041) $(2,311) $2,477 $1,837 $4,314 $18,278 $1,486 $19,764
</TABLE>
<TABLE>
<CAPTION>
Reconciliation of Income Tax Provision (Credit) from Continuing Operations
(amounts in thousands) 1996 1995 1994
<S> <C> <C> <C>
Statutory U. S. tax $(1,586) $ 370 $ 19,431
State income taxes
(benefit), net of
federal benefit (taxes) (644) 407 1,749
Tax benefit from foreign
sales corporation (798) (1,210) (1,262)
Equity in losses in
unconsolidated affiliates 860 4,387 --
Nondeductible meals and
entertainment expenses 155 189 175
Company owned
life insurance (104) (178) (8)
Donations of appreciated
property (119) (73) (200)
Other (75) 422 (121)
Total income tax
provision (credit) $(2,311) $ 4,314 $ 19,764
Components of Net Deferred Income Tax Liability
(amounts in thousands) 1996 1995 1994
Deferred income tax
liabilities $ 81,891 $ 83,231 $ 75,391
Deferred income
tax assets (18,158) (16,457) (10,454)
Net deferred income
tax liability $ 63,733 $ 66,774 $ 64,937
Items Comprising Net Deferred Income Tax Liability
(amounts in thousands) 1996 1995 1994
Property, plant &
equipment-principally
depreciation $40,118 $41,348 $ 38,804
Alternative minimum tax (2,670) (3,825) --
Inventories 30,940 31,979 32,313
Other-net (4,655) (2,728) (6,180)
Net deferred income
tax liability $63,733 $66,774 $ 64,937
</TABLE>
28
<PAGE>
Note 13. Capital Stock
All Class A Preferred Stock is held by the Cone Mills Corporation 1983 ESOP
except shares held by a former participant who elected to receive shares in a
distribution of account balances. Class A Preferred Stock is nonvoting, except
as otherwise required by law, and is senior in dividend preference to all other
classes of capital stock. Class A Preferred Stock has a liquidation preference
senior to all other classes of capital stock of $100 per share plus accrued and
unpaid dividends.
Holders of Class A Preferred Stock are entitled to receive dividends on the 31st
day of March of each year from funds legally available therefor when, as and if
declared by the Board of Directors. The dividend rate is established on March 31
for the succeeding dividend period and is determined by an independent
investment bank or appraisal firm selected by the Board of Directors, subject to
confirmation by the ESOP trustee. The dividend rate is determined annually and
is that rate required to make the fair market value of Class A Preferred Stock
equal to its original par value. The dividend rate cannot exceed 13% per annum
or be less than 7% per annum. Dividends on Class A Preferred Stock are
cumulative, but accumulated dividends do not bear interest. Dividend rates
declared for Class A Preferred Stock were 7.5% for 1997, 7.5% for 1996, and 7.0%
for 1995.
Dividends on the Class A Preferred Stock are, at the option of the Board of
Directors, paid in cash or by delivery of shares of the Companys Class A
Preferred Stock, Common Stock or by delivery of other "qualifying employer
securities" of the Company as that term is used, on the date of such delivery,
in Section 407 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") (or the corresponding section of any future law) or by a
combination of the foregoing; provided, however, that on the date of delivery
the fair market value of any stock or qualifying employer securities used to pay
dividends shall be equal to or greater than the amount of dividends paid
therewith. All dividends paid to date on the Class A Preferred Stock have been
paid in additional shares of Class A Preferred Stock or cash.
Class A Preferred Stock held by the 1983 ESOP may be redeemed, in whole or in
part, at the option of the Company by a vote of the Board of Directors, at a
price equal to the greater of $100 per share or the fair market value thereof,
plus dividends accrued and unpaid thereon to the date fixed for redemption. The
redemption price shall be paid in cash or by delivery of shares of the Companys
Class A Preferred Stock, Common Stock or by delivery of other qualifying
employer securities or a combination of the foregoing, at the Companys option;
provided, however, that on the date of delivery the fair market value of any
stock or other qualifying employer securities used to pay the redemption price
shall be equal to or greater than the redemption price (or portion thereof) paid
therewith. The fair market value of Class A Preferred Stock was determined to be
$99.94 per share at December 29, 1996.
Purchases of Class A Preferred Stock by the ESOP may be necessary to provide all
or part of the pension due under the Company's defined benefit plans pursuant to
the floor offset arrangement in connection with the ESOP and to make
distributions due to retired or terminated employees. The ESOP is obligated to
purchase shares of Class A Preferred Stock from participants and former
participants of these plans in accordance with the terms and conditions of the
plans, the trust agreements and liquidity agreements thereunder. To the extent
the ESOP has insufficient liquidity to make these purchases, it may require the
Company to repurchase shares of Class A Preferred Stock. It is within the
control of the Company to satisfy the liquidity needs of the ESOP through cash
contributions, cash dividends or optional repurchases of the Class A Preferred
Stock.
The Company is authorized to issue Class B Preferred Stock but it has no Class B
Preferred Stock outstanding nor does it have present plans to issue such shares.
The Restated Articles of Incorporation provide that the Board of Directors may
determine the preferences, limitations and relative rights of the Class B
Preferred Stock, including voting rights, which could adversely affect the
voting rights of holders of Common Stock. Any Class B Preferred Stock which is
authorized and issued shall be junior to Class A Preferred Stock in accordance
with the terms of the Restated Articles of Incorporation.
Holders of Common Stock are entitled ratably, share for share, to dividends,
when, as and if declared by the Board of Directors, out of funds legally
available therefor. Common Stock is junior to Class A Preferred Stock with
respect to dividend preference and may be junior to Class B Preferred Stock
depending upon the relative preferences, limitations and relative rights the
Board of Directors may determine upon issuance of such Class B Preferred Stock.
The Common Stock is junior in liquidation preference to the Class A Preferred
Stock and may be junior to the Class B Preferred Stock depending upon the
relative preferences, limitations and rights the Board of Directors may
establish upon issuance of Class B Preferred Stock. After payment in liquidation
has been made to the senior capital stock, the remaining assets of the Company
would be distributed pro rata among the holders of Common Stock equally on a per
share basis. Holders of Common Stock are entitled to one vote per share on all
matters submitted to a vote of holders of Common Stock.
29
<PAGE>
Notes to Consolidated Financial Statements
Note 14. Stock Option Plans
The Company's 1984 Stock Option Plan provides for the granting of options to
purchase 5,000,000 shares of Common Stock; such options may be incentive stock
options or nonqualified stock options with a term of ten years, and nonqualified
stock options may include income tax reimbursement in accordance with the terms
of the plan. All options granted under this plan are exercisable as of December
29, 1996. No additional grants will be made under the 1984 Plan.
The Company has in effect the 1992 Stock Option Plan that permits the granting
of options to purchase up to 2,000,000 shares of Common Stock. Such options may
be incentive stock options or nonqualified stock options. Option grants under
this plan have a term of ten years and an exercise price equal to the market
price of the Companys common stock on the date of grant. Options granted in
1993 are incentive stock options and options granted in 1994 and 1996 are
nonqualified stock options with a tax reimbursement feature.
The options are exercisable on a cumulative basis, at a rate of 20% in each
twelve month period, beginning six months after the date of grant; however,
the 1994 and 1996 options provide that no more than fifty percent (50%) of the
shares granted can be exercised in any one calendar year.
The Company has in effect the 1994 Stock Option Plan for non-employee directors
which allows the grant of options to purchase an aggregate of 100,000 shares of
Common Stock. A grant of 1,000 shares is issued on the fifth business day after
each annual meeting to each of the non-employee directors. The option price is
the last reported sale price on the New York Stock Exchange composite tape on
the date of grant. Options granted under the Plan are nonqualified stock option
grants with a term of seven years.
The Company applies Accounting Principles Board Opinion Number 25, "Accounting
for Stock Issued to Employees" ("APB 25") and related Interpretations in
accounting for these plans which requires compensation expense for the Company's
options to be recognized only if the market price of the underlying stock
exceeds the exercise price on the date of grant. Accordingly, the Company has
not recognized compensation expense for its options granted in 1994, 1995, and
1996. SFAS 123, "Accounting for Stock-Based Compensation," issued in October
1995, requires pro forma disclosures for option grants made after December 31,
1994, when accounting for stock-based compensation plans in accordance with APB
25. The pro forma effects on net income (loss) and earnings (loss) per share of
applying SFAS 123 to option grants made during 1995 and 1996 are insignificant.
The pro forma effects are determined as if compensation costs were recognized
using the fair value based accounting method. The fair value of each option
grant during 1995 and 1996 is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions: risk free
interest rate of 6.5%; expected lives of eight years for 1992 Plan options and
six years for 1994 Plan options; expected volatility of 35%; and a zero percent
dividend yield.
A reconciliation of the Companys stock option activity, and related
information, for the fiscal years ended follows:
<TABLE>
<CAPTION>
1996 1995 1994
Exercise Exercise Exercise
Number Price Number Price Number Price
of Weighted of Weighted of Weighted
Options Average Options Average Options Average
<S> <C> <C> <C> <C> <C> <C>
Outstanding--beginning of year 1,047,000 $12.55 1,086,000 $12.66 699,000 $12.86
Granted 398,000 8.06 7,000 11.63 416,000 12.01
Exercised (61,800) 6.46 (4,000) 6.50 (21,000) 5.49
Forfeited (69,000) 13.94 (42,000) 15.63 (8,000) 15.63
Outstanding--end of year 1,314,200 $11.41 1,047,000 $12.55 1,086,000 $12.66
Exercisable at end of year 612,200 $12.79 512,050 $12.15 326,900 $11.81
Weighted average fair value of
options granted during year $6.68 $5.97
</TABLE>
The following table summarizes information about stock options outstanding at
December 29, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Range of Number Outstanding Wtd. Avg.Remaining Wtd. Avg. Number Exercisable Wtd. Avg.
Exercise Prices at 12/29/96 Contract Life Exercise Price at 12/29/96 Exercise Price
<S> <C> <C> <C> <C> <C>
$ 5-8 504,200 8.44 $ 7.48 112,200 $ 5.65
11-13 397,000 7.79 12.01 169,600 12.02
15-16 413,000 6.10 15.63 330,400 15.63
1,314,200 7.51 11.41 612,200 12.79
</TABLE>
30
<PAGE>
Note 15. Leases and Commitments
The Company has various leases accounted for as operating leases. Rent
expense was $5.3 million, $6.0 million and $5.1 million for 1996, 1995 and 1994,
respectively. Future minimum rental payments required under lease agreements for
the next five years are $3.6 million for 1997, $3.1 million for 1998, $2.4
million for 1999, $1.1 million for 2000 and $0.7 million for 2001. Aggregate
future minimum rental payments total $11.0 million. Commitments for improvements
of and additions to property, plant and equipment were approximately $4.8
million at December 29, 1996.
<TABLE>
<CAPTION>
Note 16. Earnings (Loss) Per Share
(amounts in thousands, except per share data) 1996 1995 1994
Fully Fully Fully
Primary Diluted Primary Diluted Primary Diluted
<S> <C> <C> <C> <C> <C> <C>
Income (loss) from continuing operations $ (2,221) $ (2,221) $ (3,256) $ (3,256) $35,752 $35,752
Less: Class A Preferred dividends (2,880) (2,880) (2,832) (2,832) (2,688) (2,688)
Adjusted income (loss) from continuing operations (5,101) (5,101) (6,088) (6,088) 33,064 33,064
Gain on disposal--discontinued operations -- -- -- -- 439 439
Adjusted income (loss) before cumulative effect
of accounting change (5,101) (5,101) (6,088) (6,088) 33,503 33,503
Cumulative effect of accounting change -- -- -- -- (1,228) (1,228)
Adjusted net income (loss) $ (5,101) $ (5,101) $( 6,088) $ (6,088) $32,275 $32,275
Weighted average common shares outstanding 27,179 27,179 27,380 27,380 27,728 27,728
Common share equivalents from assumed
exercise of outstanding options, less
shares assumed repurchased -- -- -- -- 106 106
Weighted average common shares and
common share equivalents outstanding 27,179 27,179 27,380 27,380 27,834 27,834
Earnings (loss) per common share and
common share equivalent:
Income (loss) from continuing operations $ (0.19) $ (0.19) $ (0.22) $ (0.22) $ 1.19 $ 1.19
Income (loss) before cumulative effect
of accounting change $ (0.19) $ (0.19) $ (0.22) $ (0.22) $ 1.20 $ 1.20
Cumulative effect of accounting change -- -- -- -- (.04) (.04)
Net income (loss) $ (0.19) $ (0.19) $ (0.22) $ (0.22) $ 1.16 $ 1.16
</TABLE>
Primary and fully diluted earnings per share have been computed by dividing net
income (loss) available to common stockholders by the sum of the weighted
average common shares and common share equivalents outstanding for 1994. Common
stock equivalents have been excluded for 1996 and 1995 since they would be
antidilutive.
31
<PAGE>
Notes to Consolidated Financial Statements
Note 17. Segment Information and Major Customers
The Company operates in two major segments within the textile industry: Apparel
Fabrics and Home Furnishings. The Company designs, manufactures and markets
Apparel Fabrics including denim in various styles, finishes and weights,
yarn-dyed and chamois flannel shirting fabrics, printed fabrics and blended
sportswear fabrics. The Home Furnishings segment consists of the design and
distribution of decorative fabrics for the home furnishings industry and
decorative fabrics commission dyeing, printing and finishing services. This
segment also included polyurethane foam products, batting, cushions, carpet
padding, and the distribution of furniture hardware in 1995 and 1994. The
polyurethane foam division was sold in January, 1996. For reporting purposes,
real estate operations are included in the Home Furnishings segment.
The Company sells its products worldwide and presently has no foreign
manufacturing operations. Cone operates small customer support offices in other
countries solely for the purpose of assisting customers in their use of Cone
products. Sales to unaffiliated foreign customers, principally in Europe, were
25.6% of sales in 1996, 19.8% in 1995, and 17.6% in 1994. Cone has one
unaffiliated customer which accounted for more than 10% of consolidated sales
from the Apparel Fabrics segment. Sales to this customer, as a percentage of
sales from continuing operations, were 49.3% in 1996, 39.1% in 1995, and 33.9%
in 1994. At December 29, 1996, this customer had an outstanding accounts
receivable balance with the Company of approximately $30.9 million (32.8% of
total receivables before sales pursuant to receivables purchase agreement). The
Company has not incurred any losses in past years related to this customer's
accounts receivable.
Operating profit for each segment is total revenue less operating expenses
applicable to that segment. Restructuring activities, general corporate
expenses, interest, income taxes, equity in earnings/losses of unconsolidated
affiliates, gains from discontinued operations and cumulative effect of
accounting changes are not included in segment operating income. General
corporate expenses include certain executive officers' salaries, legal expenses
and bank fees. Intersegment sales and transfers are considered insignificant.
Corporate assets include cash, administrative facilities, deferred charges, and
miscellaneous receivables.
32
<PAGE>
Segment Information
The Company operates in two major industry segments: products for apparel and
home furnishings. Sales, operating income, identifiable assets, depreciation and
amortization and capital expenditures for these segments are as follows:
<TABLE>
<CAPTION>
(amount in thousands) 1996 1995 1994
<S> <C> <C> <C>
Sales
Apparel $628,139 $700,147 $600,477
Home Furnishings 117,800 210,070 205,690
Total $745,939 $910,217 $806,167
Operating Income (Loss)
Apparel $ 31,024 $ 39,928 $ 47,498
Home Furnishings (8,523) (615) 18,970
Restructuring (5,197) -- --
17,304 39,313 66,468
General corporate expenses 4,481 3,889 3,865
Interest expense--net 14,897 14,518 7,310
19,378 18,407 11,175
Income (Loss) from Continuing Operations before Income Taxes (Benefit)
and Equity in Earnings (Loss) of Unconsolidated Affiliates $ (2,074) $ 20,906 $ 55,293
Operating Margin
Apparel 4.9% 5.7% 7.9%
Home Furnishings (7.2) (0.3) 9.2
Total 2.3% 4.3% 8.2%
Identifiable Assets
Apparel $314,191 $311,917 $289,929
Home Furnishings 147,260 203,689 182,510
Corporate 34,391 31,034 17,344
Investments in Unconsolidated Affiliates 34,144 37,680 34,294
Total $529,986 $584,320 $524,077
Depreciation and Amortization
Apparel $18,186 $19,691 $17,964
Home Furnishings 8,674 9,330 4,523
Corporate 2,946 2,352 1,559
Total $29,806 $31,373 $24,046
Capital Expenditures
Apparel $26,203 $33,904 $25,234
Home Furnishings 8,687 21,660 9,077
Corporate 1,331 6,098 3,183
Total $36,221 $61,662 $37,494
</TABLE>
33
<PAGE>
Notes to Consolidated Financial Statements
Note 18. Discontinued Operations
On January 4, 1994, the Company completed the sale of all remaining assets
identified with discontinued operations. Proceeds from this sale of inventories
were $3.5 million and resulted in net income of $0.4 million. This transaction
concluded the Company's 1991 Plan for Discontinued Operations.
Note 19. Derivative Financial Instruments and Fair Value of Financial
Instruments
The Company utilizes derivative financial instruments to manage risks associated
with changes in cotton prices, foreign exchange rates and interest rates.
The Company enters into options and futures contracts to manage the risk of
cotton price fluctuations by hedging both committed and anticipated
transactions. The majority of gains and losses on these hedges are deferred and
matched to inventory purchases and credited or charged to cost of sales as such
inventory is sold. For 1996, losses of $0.6 million were charged to cost of
sales and in 1995 gains of $1.3 million were credited to cost of sales. For
1994, losses charged to the cost of sales were insignificant.
The Company enters into foreign exchange contracts to hedge transactions
denominated in foreign currencies related to export sales and machinery
purchases. The gains or losses from these contracts are deferred and included in
the basis of the transaction hedged. The fair value of these contracts is
estimated using the end of year exchange rates.
The carrying value of short-term financial instruments approximates fair value
due to the short maturity of those instruments.
The fair value of the Company's long-term debt is estimated based on the quoted
market prices for the same or similar issues or on the current rates offered for
debt of the same remaining maturities.
The carrying amount and estimated fair value of the Company's financial
instruments presented below at December 29, 1996 and December 31, 1995 are as
follows:
(amounts in thousands) 1996 1995
Carrying Fair Carrying Fair
Amount Value Amount Value
Foreign Exchange Contracts 383 375 947 964
Notes Payable 5,267 5,267 8,875 8,875
Long Term Debt:
8% Senior Note 64,286 66,369 75,000 79,575
8-1/8% Debentures 96,353 104,320 95,910 110,625
Other long-term debt 83 83 2,108 2,108
Note 20. Transactions with Affiliated Companies
The Company has various transactions in the normal course of business with its
unconsolidated affiliated companies. The Company purchased $5.4 million and
$44.8 million of finished goods from CIPSA and sold $1.6 million and $1.7
million of finished goods to CIPSA in 1996 and 1995, respectively. In addition,
for 1995 the Company had proceeds of $1.0 million from the sale of used textile
manufacturing equipment to CIPSA. The Company did not have significant sales or
purchases with CIPSA in 1994.
Parras Cone began production of denim and yarn during the fourth quarter of
1995. During 1996, purchases of denim and yarn from Parras Cone were $51.7
million. Purchases of these products from this affiliate were not significant
during 1995. In addition, there were insignificant miscellaneous services
rendered from/to Parras Cone in the normal course of business.
34
<PAGE>
Note 21. Restructuring Activities
During 1996 the Company initiated additional steps to concentrate on core
businesses and facilities. This restructuring program includes the divestiture
of operations which management believes are inconsistent with the strategic
objectives of the Company and the rationalization of manufacturing facilities to
improve cost effectiveness. Accordingly, the Company's 1996 financial statements
include a net charge of $5.2 million, or $.12 per share loss for restructuring
activities.
In January 1996, the Company completed the sale of its polyurethane products
division, Olympic Products, to British Vita PLC. The Company sold all inventory
and substantially all of the property, plant and equipment of this division.
Proceeds of $42.2 million had been realized at December 29, 1996, and additional
proceeds of $1.9 million were received in January 1997. Including the collection
of outstanding receivables during 1996, total proceeds to be realized from this
sale will be in excess of $50 million. A gain of $4.3 million from the sale of
this business was recognized in the Company's 1996 financial statements.
In November 1996, the Company signed a letter of intent to sell substantially
all the assets of its real estate operations, including its subsidiary
Cornwallis Development Co., for approximately $21 million. A charge of $4.5
million was recognized in the Company's fourth quarter 1996 financial statements
to adjust the carrying value of these assets to the expected net proceeds. While
this sale is subject to a number of contingencies a definitive sales contract
was entered into in January 1997 and the transaction is expected to be
consummated in the first part of 1997.
In December 1996, the Company received proceeds of $1.9 million from the sale of
Greeff Fabrics, a fabric distributor that was part of the Cone Decorative
Fabrics group. The Company realized a loss of $0.9 million on this sale in its
fourth quarter 1996 financial statements. Sales revenues of Greeff Fabrics for
1996 were $3.2 million.
In December 1996, the Company's Board of Directors adopted a plan to consolidate
its Granite Finishing Plant in Haw River, North Carolina with its Carlisle,
South Carolina finishing plant. Consolidation of production at the more modern
Carlisle plant will allow the Company to reduce its cost structure and to more
efficiently utilize its finishing capacity. A provision of $3.0 million was
recognized in the Company's fourth quarter 1996 financial statements for the
closing of the Granite facility that will begin in mid-April 1997 and should be
substantially complete by third quarter 1997. The components of the
restructuring charge for 1996 include $0.7 million for severance and other
employee-related costs and $2.3 million to write down plant and equipment to
estimated net realizable value. Approximately 160 hourly and salaried employees
will be terminated due to the plant closing. The Company expects to realize
additional charges of approximately $3.0 million in 1997 related to the phaseout
of the Granite operation, relocation of production equipment and startup
expenses. These 1997 expenses are expected to be offset by savings from improved
capacity utilization and a lower cost structure at its Carlisle facility.
The Company also recognized fourth quarter 1996 restructuring charges of $0.7
million to reserve for disposal of certain equipment, and $0.4 million for
inventory write-down of its synthetic fabrics business which was sold in early
January 1997 for $2.7 million.
Operating units whose activities will not continue as part of the Company had
sales of $34.1 million, $137.4 million and $137.8 million for 1996, 1995 and
1994, respectively. Net operating results of these businesses, excluding
restructuring charges, were losses of $2.3 million and $0.8 million in 1996 and
1995, respectively, and income of $2.2 million in 1994.
35
<PAGE>
Notes to Consolidated Financial Statements
Note 22. Quarterly Financial Data (unaudited)
Summarized quarterly financial data for years 1996 and 1995:
<TABLE>
<CAPTION>
(amounts in thousands, except per share) Quarters Ended
Mar. 31, June 30, Sept. 29, Dec. 29,
1996 1996 1996 1996
<S> <C> <C> <C> <C>
Net sales $199,282 $208,119 $180,849 $157,689
Gross profit (1) 30,910 32,300 21,692 19,512
Income (loss) from operations 14,469 9,918 800 (12,364)
Equity in earnings (loss) of unconsolidated affiliates 212 (414) (547) (1,709)
Net income (loss) $ 7,185 $ 3,702 $ (2,243) $ (10,865)
Per share data (fully diluted):
Net income (loss) $ .24 $ .11 $ (.11) $ (.44)
Weighted average shares outstanding 27,462 27,446 27,416 26,513
Common stock prices*
High 11 3/4 12 3/8 11 3/8 9 1/8
Low 9 7/8 10 7/8 8 7 1/4
</TABLE>
<TABLE>
<CAPTION>
(amounts in thousands, except per share) Quarters Ended
Apr. 2, Jul. 2, Oct. 1, Dec. 31,
1995 1995 1995 1995
<S> <C> <C> <C> <C>
Net sales $226,205 $232,952 $231,699 $219,361
Gross profit (1) 33,056 34,446 33,863 23,620
Income (loss) from operations 12,229 12,496 11,788 (1,089)
Equity in earnings (loss) of unconsolidated affiliates (2,515) (6,423) 683 (8,601)
Net income (loss) $ 3,634 $ (872) $ 5,866 $ (11,884)
Per share data (fully diluted):
Net income (loss) $ .11 $ (.06) $ .19 $ (.46)
Weighted average shares outstanding 27,465 27,380 27,530 27,380
Common stock prices*
High 12 1/4 13 1/2 14 3/8 13 1/4
Low 10 5/8 11 12 1/2 10 3/4
</TABLE>
The number of holders of record of the Company's Common Stock as of February 1,
1997 was 498.
*New York Stock Exchange Composite Tape.
(1) Net sales less cost of sales and depreciation.
No dividends have been declared on Common Stock since 1984 and the Company
anticipates that its earnings for the foreseeable future will be retained for
use in its business and to finance growth. Payment of cash dividends in the
future will depend upon the Company's financial condition, results of
operations, current and anticipated capital requirements, and other factors
deemed relevant by the Company's Board of Directors.
In the first quarter of 1996, the Company recorded income of $4.7 million ($.10
per share) from the sale of its polyurethane division, beginning its current
restructuring plan to refocus on core businesses. In the fourth quarter a charge
of $9.7 million ($.22 per share) was recorded reflecting the write-down of
assets sold and assets held for sale related to the restructuring plan. See Note
21.
In the fourth quarter of 1995 the Company recorded a $10.9 million pre-tax
charge related to its investment in CIPSA for the write-off of acquisition
goodwill and the write-down of the investment to expected net realizable value.
In addition, the Company recorded a $2.5 million and a $1.2 million provision to
write down its former corporate headquarters site and certain manufacturing
equipment to their realizable value, respectively. The net effect of these
charges was to increase fourth quarter loss by $10.2 million ($.37 per share).
36
<PAGE>
Statement of Responsibility for Financial Statements
The management of Cone Mills is responsible for the preparation and integrity of
the Company's published financial statements. The financial statements have been
prepared in accordance with generally accepted accounting principles 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.
The Company maintains a system of internal control over financial reporting,
which is designed to provide reasonable assurance to the Company'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. The Company has established formal criteria
against which the internal control system is measured and as of December 29,
1996, the Company 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 the Company, 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 and
Consultants, approved by the shareholders, have free access to the Audit
Committee with or without the presence of management.
(Sig of J. Patrick Danahy) (Sig of John L. Bakane) (Sig of Gary L. Smith)
J. Patrick Danahy John L. Bakane Gary L. Smith
President and Executive Vice President and Controller
Chief Executive Officer Chief Financial Officer
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 29, 1996 and December 31, 1995, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 29, 1996.
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 generally accepted auditing
standards. 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 29, 1996 and December 31, 1995, and
the results of their operations and their cash flows for each of the three years
in the period ended December 29, 1996 in conformity with generally accepted
accounting principles.
As described in Note 11 to the consolidated financial statements, on January 3,
1994 the Company changed its method of accounting for postemployment benefits.
(Sig of McGladrey & Pullen, LLP)
McGladrey & Pullen, LLP
Greensboro, North Carolina
February 14, 1997
37
<PAGE>
Historical Financial Review
<TABLE>
<CAPTION>
(dollar amounts in millions, except per share data) 1996 1995 1994 1993 1992(1)
<S> <C> <C> <C> <C> <C>
Summary of Operations
Net Sales $745.9 $910.2 $806.2 $769.2 $705.4
Cost of Sales 614.6 757.0 642.5 589.3 540.8
Depreciation 26.9 28.2 23.3 21.0 18.5
Subtotal 641.5 785.2 665.8 610.3 559.3
Gross Profit 104.4 125.0 140.4 158.9 146.1
Selling and Administrative 86.4 89.6 77.8 73.3 67.6
Restructuring 5.2 -- -- -- --
Income from Operations 12.8 35.4 62.6 85.6 78.5
Other Expense--Net 14.9 14.5 7.3 6.4 8.3
Income (Loss) from Continuing Operations Before
Income Taxes (Benefit) and Equity in Earnings (Loss)
of Unconsolidated Affiliates (2.1) 20.9 55.3 79.2 70.2
Income Taxes (Benefit) (2.3) 7.3 19.7 29.9 24.8
Income from Continuing Operations before Equity
in Earnings (Loss) of Unconsolidated Affiliates 0.2 13.6 35.6 49.3 45.4
Equity in Earnings (Loss) of Unconsolidated Affiliates (2.4) (16.9) 0.2 0.3 --
Income (Loss) from Continuing Operations (2.2) (3.3) 35.8 49.6 45.4
Discontinued Operations -- -- 0.4 -- --
Income (Loss) before Extraordinary Item and Cumulative
Effect of Accounting Change (2.2) (3.3) 36.2 49.6 45.4
Extraordinary Item -- -- -- -- (2.0)
Cumulative Effect of Accounting Change -- -- (1.2) -- --
Net Income (Loss) $(2.2) $(3.3) $ 35.0 $ 49.6 $ 43.4
Per Share of Common Stock
Income (Loss) from Continuing Operations $ (.19) $(.22) $ 1.19 $ 1.68 $ 1.67
Net Income (Loss) (.19) (.22) 1.16 1.68 1.59
Segment Information
Net Sales
Apparel $628.1 $700.1 $600.5 $575.8 $520.0
Home Furnishings 117.8 210.1 205.7 193.4 185.4
Total $745.9 $910.2 $806.2 $769.2 $705.4
Operating Income (Loss)
Apparel $ 31.0 $ 39.2 $ 47.5 $ 68.8 $ 67.4
Home Furnishings (8.5) (0.6) 19.0 19.5 16.3
Restructuring (5.2) -- -- -- --
Balance Sheet Data (at year end):
Current Ratio 1.7 1.6 1.8 1.9 1.8
Total Assets $530.0 $584.3 $524.1 $431.6 $401.9
Long-Term Debt 160.7 173.0 126.5 77.9 77.5
Stockholders' Equity 210.3 222.1 236.9 210.0 163.4
Long-Term Debt As a Percent of Stockholders' Equity
and Long-Term Debt 43% 44% 35% 27% 32%
Shares Outstanding (millions) Year End (2) 26.3 27.4 27.4 27.7 27.7
Other Data:
Capital Expenditures $ 36.2 $ 61.7 $ 37.5 $ 38.7 $ 25.4
Return on Average Common Stockholders' Equity (3) (2.9)% (3.2)% 17.9% 31.6% 55.3%
Common Stock Dividend Paid -- -- -- -- --
Number of Employees at Year End 6,700 7,900 8,100 7,800 7,600
</TABLE>
(1) Fiscal Year 1992 represents a 53 week period
(2) Includes 6.9 million shares of Common Stock issued in mid-1992 initial
public offering
(3) Continuing Operations
<PAGE>
<PAGE>
Directors and Officers
Directors
Dewey L. Trogdon(1)
Chairman of the Board
John L. Bakane(1)
Executive Vice President and
Chief Financial Officer
Doris R. Bray(1,2)
Partner, Schell Bray Aycock Abel
& Livingston L.L.P.
J. Patrick Danahy(1)
President and Chief Executive Officer
Leslie W. Gaulden(2)
Former Vice President and Controller
Jeanette Cone Kimmel(2,3)
Private Investor
Charles M. Reid(1,3)
President and Chief Executive Officer,
United Guaranty Corporation,
a member company of
American International Group
John W. Rosenblum(3)
Dean, Jepson School of Leadership Studies,
University of Richmond
Committees of the Board
(1)Executive
(2)Audit
(3)Compensation
Officers
J. Patrick Danahy
President and Chief Executive Officer
John L. Bakane
Executive Vice President and
Chief Financial Officer
James S. Butner
Vice President
Neil W. Koonce
Vice President and General Counsel
Terry L. Weatherford
Vice President and Secretary
David E. Bray
Treasurer
Gary L. Smith
Controller
David K. Bradbury
Assistant Treasurer and Assistant Secretary
39
<PAGE>
Shareholder Information
Corporate Headquarters
Cone Mills Corporation
3101 N. Elm Street
P.O. Box 26540
Greensboro, NC 27415-6540
(910) 379-6220
Annual Meeting
The Annual Meeting of Shareholders will be held
at the Cone Corporate Center, 3101 N. Elm Street,
Greensboro, NC on May 13, 1997, at 10:00 a.m.
Transfer Agent And Registrar
First Union National Bank of North Carolina,
Shareholder Administration
230 S. Tryon Street, 11th Floor
Charlotte, NC 28288-1153.
Stock Listing
The Company's common stock is traded primarily
on the New York Stock Exchange with the trading
symbol of COE.
Form 10-K
The Annual Report to the Securities & Exchange
Commission, Form 10-K, is available upon
request from:
Cone Mills Corporation
3101 N. Elm Street, P.O. Box 26540
Greensboro, NC 27415-6540
Attention: Investor Relations
Investor Relations:
John L. Bakane
Executive Vice President and
Chief Financial Officer
David E. Bray
Treasurer
(910) 379-6220
Cone Denim Group
Marketing/Manufacturing Headquarters
3101 N. Elm Street
P.O. Box 26540
Greensboro, NC 27415-6540
(910) 379-6220
John L. Bakane, President
George Watts Carr III, President--Cone Denim
North America
Frans G. Spits, President--Cone Denim Europe
Miguel G. Rubiera, President--Cone International
Marketing
Cone Sportswear Division
3101 N. Elm Street
P.O. Box 26540
Greensboro, NC 27415-6540
(910) 379-6220
Jerry W. Kennedy, President
Cone Decorative Fabrics
John Wolf Cone Jacquards
261 Fifth Avenue 3400 Highway 221-A
New York, NY 10016 Cliffside, NC 28024
(212) 683-4800 (704) 657-9662
Norman Friedman, President Andrew Major, President
Cone Finishing Division
Carlisle Plant Raytex Plant
P.O. Box 8 P.O. Box 884
Carlisle, SC 29031 Marion, SC 29571
(864) 427-6221 (803) 423-5030
Sales and Marketing
1440 Broadway
New York, NY 10018
(212) 391-1300
Carl L. Mason, President
Cornwallis Development Co.
3101 N. Elm Street
Greensboro, NC 27415-6540
(910) 379-6130
C. Richard Routh, President
40
<PAGE>
Design: Wright Communications Inc./NYC
(Recycle logo)
This annual report utilizes
recycled paper.
<PAGE>
(Cone logo)
Cone Mills Corporation
3101 North Elm Street
P.O. Box 26540
Greensboro, NC 27415-6540
(910) 379-6220
FORM 10-K Page 58
EXHIBIT 21 - SUBSIDIARIES
CONE MILLS CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Percentage
State or of Voting
Jurisdiction of Securities
Name Address Incorporation Owned
<S> <C> <C> <C>
Boelas Pipeline Greensboro, NC North Carolina 100%
Corporation
Cliffside Railroad Cliffside, NC North Carolina 98
Company
Cornwallis Development Co. Greensboro, NC North Carolina 100
House 'N Home New York, NY New York 100
Fabrics and
Draperies, Inc.
Cone Mills International Greensboro, NC North Carolina 100
Corporation
Cone Foreign Sales Greensboro, NC Barbados 100
Corporation
Cone Mills (Mexico), S.A. Mexico City Mexico, D.F. 100
de C.V.
Comercializadora Cone Mills, Mexico City Mexico, D.F. 98
S.A. de C.V.
Cone Global Finance Corp. San Francisco, CA California 100
Cone Singapore, Pte., Ltd. Singapore Republic of Singapore 100
CIPCO S.C., Inc. Carlisle, S.C. Delaware 100
Cone Mills (Europe) S.A. Zaventem, Belgium Brussels, Belgium 100
</TABLE>
<PAGE>
FORM 10-K Page 59
Exhibit 23.1
MCGLADREY & PULLEN, LLP
Consent of McGladrey & Pullen, LLP, Independent Auditor
We hereby consent to the incorporation by reference in Cone Mills Corporation's
Registration Statements on Form S-8 (Nos. 33-31977; 33-31979; 33-51951;
33-51953; 33-67800 and 33-53705) of our reports; dated February 14, 1997, with
respect to the consolidated financial statements and schedule included in the
Annual Report on Form 10-K of Cone Mills Corporation for the fiscal year ended
December 20, 1996.
/s/McGLADREY & PULLEN, LLP
MCGLADREY & PULLEN, LLP
Greensboro, North Carolina
March 24, 1997
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Cone Mills Corporation consolidated financial statements dated December
29, 1996, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-END> DEC-29-1996
<CASH> 1,018
<SECURITIES> 0
<RECEIVABLES> 52,073
<ALLOWANCES> 3,000
<INVENTORY> 139,533
<CURRENT-ASSETS> 204,418
<PP&E> 454,342
<DEPRECIATION> 203,664
<TOTAL-ASSETS> 529,986
<CURRENT-LIABILITIES> 119,571
<BONDS> 149,968
0
38,395
<COMMON> 2,630
<OTHER-SE> 169,226
<TOTAL-LIABILITY-AND-EQUITY> 529,986
<SALES> 745,939
<TOTAL-REVENUES> 745,939
<CGS> 641,525
<TOTAL-COSTS> 641,525
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,897
<INCOME-PRETAX> (2,074)
<INCOME-TAX> (2,311)
<INCOME-CONTINUING> (2,221)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,221)
<EPS-PRIMARY> (.19)
<EPS-DILUTED> (.19)
<PAGE>
</TABLE>
