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 28, 1997
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: 336-379-6220
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 19, 1998: $200,319,346.
Number of shares of common stock outstanding as of February 19, 1998: 26,166,933
shares.
Documents incorporated by reference: Portions of 1997 Annual Report to
Shareholders, Part II, Items 5, 6, 7 and 8; Proxy Statement for Annual Meeting
to be held May 12, 1998, Part III, Items 10, 11, 12 and 13 of this report.
Index to Exhibits - Pages 24 - 35
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PART I
Item 1. Business
THE COMPANY
Overview
Founded in 1891 Cone Mills Corporation (the "Company" or "Cone"), incorporated
and headquartered in North Carolina, is the world's largest producer of denim
fabrics and the largest commission printer of home furnishings in North America.
The Company competes domestically and internationally on the basis of styling
and product development, management experience, versatility and size of
manufacturing facilities and the Cone name and reputation. Cone employs
approximately 6,100 employees and operates nine manufacturing plants in North
and South Carolina. The Company also has a 50% interest in a denim manufacturing
facility in Mexico.
The Company operates in two business segments: Apparel Fabrics, which includes
denims and speciality sportswear; and Home Furnishings Products, which includes
commission printing and finishing services and print and jacquard decorative
fabrics.
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.
Capital expenditures for the last five years have totaled approximately $210
million and the Company expects to spend approximately $37 million in 1998 for
capital projects.
The Company is engaged in denim production in Mexico through a joint venture
facility with Compania Industrial de Parras, S.A., ("CIPSA"). This facility,
Parras Cone de Mexico, S.A., ("Parras Cone"), in which the Company has a 50%
ownership interest, was completed and began production of basic denims and yarn
in late 1995.
During 1997 the Company sold its synthetic fabric division, including its
finished inventory, forward commitments and order book and substantially all the
assets of its real estate operations. Throughout 1997, the Company consolidated
its specialty sportswear finishing operation into its Carlisle finishing
facility and expects to achieve improved capacity utilization at Carlisle. The
consolidation involved the closing of the Company's Granite finishing operations
and moving machinery, equipment and manufacturing operations from that plant to
the Carlisle facility.
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Manufacturing efficiency was disrupted to a greater extent than planned, which
materially adversely impacted results of the sportswear and home furnishing
fabrics product lines for the year. 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 22 of the Notes to
Consolidated Financial Statements."
Business Segments
Information concerning industry segments for the Company's 1997, 1996 and 1995
fiscal years are incorporated by reference. See "Item 7. Management's Discussion
and Analysis of Results of Operations and Financial Condition-Strategic
Initiatives" and "Item 8. Financial Statement and Supplementary Data-Notes 19
and 22 of the Notes to Consolidated Financial Statements."
Market Developments
Within the apparel fabrics industry, casualwear, including denim and similar
apparel, has been the fastest growing category 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.
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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. However, the growth in denim demand has been countered by increased
global supply primarily in countries with lower labor costs. Apparel fabrics
exports were $175.1 million, $187.0 million and $175.7 million in 1997, 1996 and
1995, respectively. See "Business International Operations."
Apparel Products
Denims. The Company's denim products, accounting for approximately 80% of
apparel fabrics sales, are primarily designed for use in garments targeted for
the upper-end market, where styling and quality generally command premium fabric
prices. Fabric styling of denims is supported by the Company's stylists and
extensive use of computer-aided design and manufacturing systems. 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. 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 sold principally to independent brand name apparel
manufacturers. 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
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denim, primarily at Parras Cone, to service mass market needs of certain
customers. Sales of this product constituted approximately one-fourth of total
denim sales in 1997.
The Company's largest denim customer is Levi Strauss, whose 501(R) jeans are
produced solely from the Company's proprietary fabrics. Other customers include
V.F. Corporation (Wrangler), The Gap, Calvin Klein, Aalfs (Arizona), P.L.
Industries (Hilfiger) and H.I.S. (Chic).
Specialty weight denims include a variety of weave constructions, colors and
weights and are used primarily in women's and children's wear. Although these
fabrics constitute only a small 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 and The Gap.
Specialty Sportswear Fabrics. The Company is the largest domestic producer of
yarn-dyed, plaid flannel and solid shade, chamois flannel shirting fabrics.
These fabrics are primarily manufactured for use in menswear and in
lighter-weight apparel products for women's and children's wear and sold through
catalogs, department stores and discounters. Customers for these fabrics include
M. Fine, L.L. Bean, J.C. Penney, Woolrich, Eddie Bauer and Levi Strauss.
Cone also serves niche markets for piece-dyed fabrics based on dye, finishing
and yarn formation technologies and provides fabrics such as fade resistant
Deepdown(TM) fabric and its 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, printed at the Company's Carlisle
plant, are products primarily for fashion women's and children's wear. Cone's
customers for these fabrics include OshKosh, L.L. Bean, Healthtex, J.C. Penney
and William Carter.
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.
Marketing and Sales. The Company's marketing focus is to serve upper-end and
brand name apparel manufacturers through the
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development of products that are recognized in the marketplace for their
distinctive quality and styling.
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.
The Company employs an apparel fabrics marketing and sales staff of more than
140 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. Except for Cone Denim Europe, the
Company's apparel fabrics marketing groups are headquartered in Greensboro,
North Carolina, 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 offices in New York, Los Angeles, San Francisco, Dallas, Brussels
and Singapore.
Manufacturing. 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 flexibility in its yarn spinning
operations, with open-end and ring spinning equipment. The Company's denim
weaving facilities 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, 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.
Product and process development is supported by 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.
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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. Since 1991, U.S. law has
allowed limited imports of cotton or related government payments to cotton
purchasers which have resulted in effective U.S. cotton costs being more
competitive with world levels. In 1996, Congress passed additional farm
legislation 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. Although management believes that U.S.
companies will continue to be able to acquire adequate cotton supplies at prices
competitive with offshore manufacturers, there can be no assurance that these
results will always occur. To the extent that effective U.S. cotton prices
exceed world prices, 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
materially adversely affect the Company's operations.
In late 1993 and continuing through 1995, cotton prices increased throughout the
world. Major trends that affected the rise in cotton prices during this time
frame were (i) an increase in worldwide demand, (ii) disappointing cotton crops
and (iii) financial speculation in the commodities markets. 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. Cotton prices trended
downward into the mid $.70s to lower $.80s for 1996 and from the upper $.70s to
upper $.60s for 1997. Significant factors that affected the decrease in cotton
prices were (i) successful cotton crops in 1996 and 1997 especially in the U.S.,
(ii) decision by the Chinese government to encourage consumption of internally
produced and stored cotton rather than imports and (iii) the Asian economic
crisis that began in 1997 reducing consumption by mills in Asia. The Company
cannot always fully pass increased cotton costs on to its customers. See "Item
7. Management's Discussion and Analysis of Results of Operations and Financial
Condition."
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
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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 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. Primary
competitive factors include price, product styling and differentiation, customer
service, quality and flexbility, with the significance of each factor dependent
upon the particular needs of the customer and the product involved.
No single company dominates the industry and domestic and foreign competitors
range from large, integrated enterprises to small niche concerns. There are nine
denim manufacturers in the United States, of which Cone is the largest, and
three domestic producers comprise approximately 60% of the U.S. productive
capacity. Increased foreign competition in domestic markets is in the form of
imported apparel garments and fabrics 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 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
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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 that are roughly equivalent to those
applicable to Mexico under NAFTA. The Company's Mexican joint venture, Parras
Cone, benefits from its access to U.S. markets. There can be no assurance that
NAFTA, or the possible adoption of any proposed legislation, will not adversely
affect the Company.
The Company has focused its operations on the manufacture of fabrics for use in
garments that are less vulnerable to import penetration. Management believes the
location of the Company's U.S. manufacturing facilities, its 50% interest in the
Parras Cone plant in Mexico and its emphasis on shortening production and
delivery times allows Cone to respond more quickly than foreign producers to
changing fashion trends and to its domestic customers' demands for precise
production schedules and rapid delivery. 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. There are three retail selling seasons:
spring, fall (back-to-school) and the holiday season. The Company's sales for a
particular selling season
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generally begin six months in advance of that season.
Home Furnishings Products
The Company services the home furnishings markets through three divisions: Cone
Finishing, Cone Jacquards and Cone Decorative Fabrics.
Cone Finishing. The Cone Finishing Division, consisting of the Company's
Carlisle and Raytex plants, is the largest commission printer of decorative
fabrics in the United States and provides custom printing services to leading
home furnishings stylists and distributors. As commission printers, Carlisle and
Raytex prints fabrics owned by customers on a fee basis. The home furnishings
fabrics processed at Carlisle are generally used for upholstery and drapery
prints.
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. Customers
for Carlisle's home furnishings printing services include Waverly Division of F.
Schumacher & Co., P. Kaufman and Covington.
The Raytex plant is a modern, 260,000 square foot facility specializing in wide
rotary screen printing. In 1996, a new preparation range was installed providing
additional product capabilities. Raytex is one of the largest wide-fabric
commission printers in the United States. Customers for Raytex include Croscill,
Beco, Springs Industries and Revman.
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.
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 which took place in recent years.
Cone Jacquards. In 1995, the Company built a new jacquard weaving plant in order
to dampen the effects of shifts in consumer
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preference from printed fabrics. The Cone Jacquards plant is a modern, 138,000
square foot facility with wide weaving machines. Cone Jacquards produces
broadloom jacquard fabrics for furniture manufacturers, fabric distributors,
retailers, converters and specialty products manufacturers. Customers for Cone
Jacquards include Richloom, Klaussner Furniture, Barrow Industries, Flexsteel
Industries and Schnadig Corporation.
Cone Decorative Fabrics. 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 names "John Wolf Decorative Fabrics"
and "David and Dash."
Cone Decorative Fabrics is a well known designer and marketer of printed and
solid woven fabrics for use in upholstery, draperies and bedspreads.
Cone Decorative Fabrics are marketed domestically and internationally through
the division's sales staff and sales agents. The division's sales staff and
sales agents handle 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. Due to continuing
unsatisfactory operating results, in late 1997 the Company reorganized the
operations of John Wolf Decorative Fabrics to reduce costs and compete more
effectively.
Other Business Units. In 1997, the Company sold substantially all the assets of
its real estate operations, including most of the assets of its subsidiary
Cornwallis Development Co., for $19.5 million. Net sales from real estate
activities were historically less than two percent of the Company's total net
revenues. See "Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition-Strategic Initiatives."
Competition. The home furnishings products business is highly competitive and
the Company competes primarily on the basis of quality and service. The Cone
Finishing Division competes directly with several large commission printers as
well as a number of smaller competitors. The Cone Finishing Division competes
indirectly with other suppliers of products used in the home furnishing industry
including jacquard woven fabrics, velvets and plain shade fabrics. Cone
Decorative Fabrics competes with a large number of domestic and foreign
suppliers of decorative fabrics.
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Seasonality. Demand for the Company's home furnishing products and the level of
the Company's sales fluctuate moderately during the year.
International Operations
The Company has a long history of distributing its products internationally and
exported approximately 35% of the Company's denim sales in 1997. The Company has
sales agents in Europe, Japan, Korea, Hong Kong, Africa, and throughout Central
and South America, and it maintains 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's international customers include: Levi International, Joker Jeans
and Big Star in Europe; Edwin in Japan; Wellsum in Hong Kong; and Americanino
brand, Custer, Jeans and Jackets, UFO brand and Wrangler in South America.
Principal competitive factors in the international markets for denims are
quality, price and styling. Denim jeans have an image of being uniquely American
products, which complements the Company's strategy of serving the upper-end
"genuine" jeans market.
The Company's competitiveness in international market segments is influenced by
tariffs and transportation costs. The Company has a 50% interest in a denim
manufacturing facility in Mexico and is assessing the feasibility of additional
manufacturing platforms within certain trade blocs in order to compete more
effectively in these markets.
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 is also seeking to gain production cost
advantages while benefiting from its technological expertise. The Company
exports basic denims made by Parras Cone by utilizing 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.
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Trademarks, Copyrights and Patents
The Company owns several registered trademarks containing the "Cone" name and
pine cone design. In addition, the Company holds various other trademarks, trade
names, copyrights and patents 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 customer, Levi Strauss ("Levi"), which accounts for more
than 10% of net sales. Sales to this customer accounted for approximately 37%,
49% and 39% of sales in 1997, 1996 and 1995, respectively. 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 financial position and results
of operations.
Levi has been a customer of the Company since 1915 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, 2003 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 at any time upon 30 days' written notice and either party may
terminate the Supply Agreement in the event of the other party's insolvency,
bankruptcy or occurrence of a similar event.
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Backlog
The Company's order backlog was approximately $157 million at December 28, 1997,
as compared to approximately $132 million at December 29, 1996. 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 28, 1997, will be filled within the first quarter of 1998.
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.
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, 1998, the Company employed approximately 6,100 persons, of whom
approximately 1,200 were salaried and approximately 4,900 were hourly employees.
Of such hourly employees, approximately 1,900 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
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compensation, the Company believes that approximately 950 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
Cone's U.S. manufacturing facilities consist of nine plants, seven located in
North Carolina and two in South Carolina, with approximately 4.4 million square
feet of floor space. The apparel fabrics and home furnishings products segments
operate six and three plants, respectively. The Company also maintains several
distribution centers and warehouses. Internationally, the Company has a 50%
interest in a 575,000 square foot denim manufacturing facility in Parras,
Mexico.
All such facilities are maintained in good condition and are both adequate and
suitable for their respective purposes. Even when such facilities are
substantially fully utilized, the Company believes that it is properly
positioned to expand productive capacity. Additional higher margin fabrics can
be produced through changes in product mix and acquisition of yarn and greige
goods from outside sources for further processing and finishing.
All U.S. manufacturing facilities are held in fee and are substantially free of
any significant liens or other encumbrances. The Mexican denim facility serves
as collateral for a portion of the debt of the joint venture company.
The Company leases its executive and administrative offices, located in
Greensboro, North Carolina. Other offices, located in various U.S. cities,
Brussels, and Singapore, are leased from unrelated parties.
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
<PAGE>
16
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 to the 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.
The Company and its subsidiaries are involved in legal proceedings and claims
arising in the ordinary course of business. Although there can be no assurance
as to the ultimate disposition of these
<PAGE>
17
matters, management believes that the probable resolution of such contingencies
will not have a material adverse effect on the financial condition of the
Company.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 4A. Executive Officers of the Registrant
Name Age Position with the Company
- ---- --- -------------------------
J. Patrick Danahy 54 Director, President, and
Chief Executive Officer
John L. Bakane 47 Director,
Executive Vice President and
President Apparel Products Group
Anthony L. Furr 54 Vice President and
Chief Financial Officer
Marvin A. Woolen, Jr. 57 Vice President-Cotton Purchasing
James S. Butner 52 Vice President
Neil W. Koonce 50 Vice President and
General Counsel
Terry L. Weatherford 55 Vice President and Secretary
David E. Bray 59 Treasurer
Gary L. Smith 39 Controller
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 has been a Director since 1989
and President and Chief Executive Officer since 1990.
John L. Bakane joined the Company in 1975. He was named Chief Financial Officer
in 1988 and was elected to the Board of Directors in 1989. He was elected
Executive Vice President in 1995. In November 1996, he assumed responsibility
for management of the Denim
<PAGE>
18
Group of the Company and in April 1997 he was appointed President of Cone
Apparel Products Group.
Anthony L. Furr joined the Company in May 1997 as Vice President and Chief
Financial Officer. From 1992 to 1995 he was Chairman, President and Chief
Executive Officer of Wachovia Bank of South Carolina, N.A. and Executive Vice
President of the parent Wachovia Corporation for whom he served as Executive
Vice President and Chief Financial Officer from 1990 to 1992.
Marvin A. Woolen was employed by the Company in July 1995 as director of cotton
purchasing. He has been in the cotton sales, merchandising, purchasing, classing
and shipping business since 1971. From 1988 to 1995 he was president of Rollins
Company, a cotton shipping firm. He was elected Vice President in 1997.
James S. Butner has been employed by the Company since 1984. He was named
corporate Vice President for Industrial and Public Relations in 1988.
Neil W. Koonce was employed by the Company in 1974. He has been General Counsel
since 1987 and Vice President since 1989.
Terry L. Weatherford was employed by the Company and elected Assistant Secretary
in May 1993. He was elected Secretary in December 1993. In 1995 he also was
elected Vice President.
David E. Bray has been employed by the Company since 1977 and has been Treasurer
since 1988.
Gary L. Smith was employed by the Company in 1981 and was serving as Manager of
Business Analysis when he was elected Assistant Controller in 1994. He was named
Controller in December 1996.
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
approximate number of holders of record of the Company's Common Stock as of
February 27, 1998 was 449.
Information required by this Item on the sales prices and dividends of the
Common Stock of the Company appearing under the heading "Quarterly Financial
Data (Unaudited)" on page 38 of the
<PAGE>
19
Registrant's 1997 Annual Report is incorporated herein by reference.
Item 6. Selected Financial Data
The information appearing under the heading "Historical Financial Review" on
page 40 of the Registrant's 1997 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 14 thru 18
of the Registrant's 1997 Annual Report to Shareholders is incorporated herein by
reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not required for the Company in 1997.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements and notes thereto, appearing on pages 20
through 38 of the Registrant's 1997 Annual Report to Shareholders, are
incorporated herein by reference.
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 12, 1998, 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
<PAGE>
20
Proxy Statement prepared for the Annual Meeting of Shareholders to be held on
May 12, 1998, 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 12, 1998, and is hereby
incorporated by reference.
Item 13. Certain Relationships and Related Transactions.
Information with respect to certain relationships and related transactions is
presented under the headings "Compensation of Directors" in the Company's
definitive Proxy Statement prepared for the Annual Meeting of Shareholders to be
held on May 12, 1998 and is hereby incorporated by reference.
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 28, 1997, December 29, 1996 and
December 31, 1995
Consolidated Balance Sheets as of December 28, 1997
and December 29, 1996
Consolidated Statements of Stockholders' Equity for the
Years Ended December 28, 1997, December 29, 1996 and
December 31, 1995
Consolidated Statements of Cash Flows for the Years
Ended December 28, 1997, December 29, 1996 and
<PAGE>
21
December 31, 1995
Notes to Consolidated Financial Statements
(a)(2) The following Financial Statement Schedules are
presented on pages 22 through 23 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
1997.
<PAGE>
22
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 subjected to the
auditing procedures applied in our audits of the basic consolidated financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic consolidated financial statements taken as a whole.
/s/ McGLADREY & PULLEN, LLP
McGladrey & Pullen, LLP
[zz]
Greensboro, North Carolina
February 13, 1998
<PAGE>
23
CONE MILLS CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 28, 1997, December 29, 1996 and December 31, 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 28, 1997
Valuation accounts deducted
from the assets to which
they apply:
Provision for doubtful Accounts $3,000 $ 624 $ -- $2,124(a)(c) $1,500
------ ------ ---- ------ ------
Reserve for inventory (b) -- 5,075 -- -- 5,075
------ ------ ---- ------ ------
Reserve for fixed asset writedowns 2,638 -- -- 1,000 1,638
------ ------ ---- ------ ------
Reserve for loss on real estate disposal 4,500 -- -- 4,500 --
------ ------ ---- ------ ------
Reserve for future losses(b) 1,725 950 -- 1,318 1,357
------ ------ ---- ------ ------
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 fixed asset writedowns (b) -- 2,638 -- -- 2,638
------ ------ ---- ------ ------
Reserve for loss on real estate disposal (b) -- 4,500 -- -- 4,500
------ ------ ---- ------ ------
Reserve for future losses (b) 2,644 1,522 -- 2,441 1,725
------ ------ ---- ------ ------
December 31, 1995
Valuation accounts deducted
from the assets to which
they apply:
Provision for doubtful Accounts $3,000 $ 411 $ -- $ 211(a) $3,200
------ ------ ---- ------ ------
Reserve for inventory 45 -- -- 45 --
------ ------ ---- ------ ------
Reserve for future losses (b) -- 2,644 -- -- 2,644
------ ------ ---- ------ ------
</TABLE>
(a) Represents bad debts charged off.
(b) Represents reserves charged to costs and expenses.
(c) Includes reduction of $1,750 related to sale of receivables to Cone
Receivables, LLC.
<PAGE>
24
Exhibit Sequential
No. Description Page No.
--- ----------- --------
*2.1(a) Purchase Agreement between Registrant
and Cone Receivables LLC dated as of
March 25, 1997, filed as Exhibit 2.1(l)
to Registrant's report on Form 10-Q
for the quarter ended March 30, 1997.
*2.1(b) Receivables Purchase Agreement dated
as of March 25, 1997, among Cone
Receivables LLC, as Seller, the
Registrant, as Servicer, and
Delaware Funding Corporation, as
buyer, filed as Exhibit 2.1(m) to
Registrant's report on Form 10-Q
for the quarter ended March 30, 1997.
*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.
*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.
<PAGE>
25
Exhibit Sequential
No. Description Page No.
--- ----------- --------
*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.
*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.
<PAGE>
26
Exhibit Sequential
No. Description Page No.
--- ----------- --------
*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 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
<PAGE>
27
Exhibit Sequential
No. Description Page No.
--- ----------- --------
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
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
<PAGE>
28
Exhibit Sequential
No. Description Page No.
--- ----------- --------
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.
*4.3(c) Letter Agreement dated June 30, 1994,
amending the Note Agreement dated
<PAGE>
29
Exhibit Sequential
No. Description Page No.
--- ----------- --------
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 filed as Exhibit 4.3(h) to the
Registrant's report on Form 10-K for
the year ended December 29, 1996.
<PAGE>
30
Exhibit Sequential
No. Description Page No.
--- ----------- --------
*4.3(i) Letter Agreement dated as of July 31,
1997, between the Registrant and the
Prudential Insurance Company of
America, filed as Exhibit 4.3(i) to the
Registrant's report on Form 10-Q for
the quarter ended September 28, 1997.
*4.4 Credit Agreement dated August 7, 1997,
among the Registrant, various banks and
Morgan Guaranty Trust Company of New
York as agent, filed as Exhibit 4.4 to
the Registrant's report on Form 10-Q
for the quarter ended September 28,
1997.
*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
<PAGE>
31
Exhibit Sequential
No. Description Page No.
--- ----------- --------
Report on Form 10-K for year ended
December 31, 1995.
*4.7(c) Third Amendment to the 401(k) Program
of Cone Mills Corporation dated August
7, 1997, filed as Exhibit 4.7(c) to the
Registrant's report on Form 10-Q for
the quarter ended September 28, 1997.
4.7(d) Fourth Amendment to the 401(k)
Program of Cone Mills Corporation
dated December 4, 1997. 38
*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.
*4.8(c) Third Amendment to the Cone Mills
Corporation 1983 ESOP dated August 7,
1997, filed as Exhibit 4.8(c) to the
Registrant's report on Form 10-Q for
the quarter ended September 28, 1997.
4.8(d) Fourth Amendment to the Cone Mills
Corporation 1983 ESOP dated
December 4, 1997. 40
<PAGE>
32
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,
filed as Exhibit 10.1(c) to the
Registrant's report on Form 10-K for
the year ended December 29, 1996.
*10.1(d) Fourth Amendment to the Employees'
Retirement Plan of Cone Mills
Corporation, filed as Exhibit 10 to the
Registrant's report on Form 10-Q for
the quarter ended
<PAGE>
33
Exhibit Sequential
No. Description Page No.
--- ----------- --------
September 28, 1997.
10.1(e) Fifth Amendment to Employees'
Retirement Plan of Cone Mills
Corporation dated December 4, 1997. 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).
*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
<PAGE>
34
Exhibit Sequential
No. Description Page No.
--- ----------- --------
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,
filed as Exhibit 10.8(a) to the
Registrant's report on Form 10-K for
the year ended December 29, 1996.
*10.8(b) Form of Nonqualified Stock Option
Agreement under 1992 Amended and
Restated Stock Plan, filed as Exhibit
10.8(b) to the Registrant's report on
Form 10-K for the year ended December
29, 1996.
10.8(c) Form of Restricted Stock Award
Agreement under 1992 Amended and
Restated Stock Plan. 44
*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>
35
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, filed as Exhibit 10.13 to
the Registrant's report on Form 10-K
for the year ended December 29, 1996.
10.14 Consulting Agreement between Dewey L.
Trogdon and the Registrant dated
December 19, 1997. 48
*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. 50
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. 51
27 Financial Data Schedule 52
- ---------
* Incorporated by reference to the statement or report indicated.
<PAGE>
Page 36
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 26, 1998 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 Board March 26, 1998
- ---------------------
(Dewey L. Trogdon)
/s/ J. Patrick Danahy Director, President March 26, 1998
- --------------------- and Chief Executive
(J. Patrick Danahy) Officer (Principal
Executive Officer)
/s/ Anthony L. Furr Vice President and March 26, 1998
- --------------------- Chief Financial Officer
(Anthony L. Furr)
/s/ Gary L. Smith Controller March 26, 1998
- --------------------- (Principal Accounting
(Gary L. Smith) Officer)
/s/ John L. Bakane Director March 26, 1998
- ---------------------
(John L. Bakane)
/s/ Doris R. Bray Director March 26, 1998
- ---------------------
(Doris R. Bray)
<PAGE>
Page 37
Signature Title Date
--------- ----- ----
/s/ Jeanette C. Kimmel Director March 26, 1998
- ----------------------
(Jeanette C. Kimmel)
/s/ Charles M. Reid Director March 26, 1998
- ----------------------
(Charles M. Reid)
/s/ John W. Rosenblum Director March 26, 1998
- ---------------------
(John W. Rosenblum)
Director March 26, 1998
(Cyrus C. Wilson)
Page 38
Exhibit 4.7(d)
FOURTH AMENDMENT TO THE
401(K) PROGRAM
OF
CONE MILLS CORPORATION
(As Amended and Restated December 1, 1994)
FOURTH AMENDMENT, dated December 4, 1997, to the 401(K) Program of Cone
Mills Corporation, As Amended and Restated December 1, 1994 (the "Plan").
RECITAL
Under the terms of the Plan as presently in effect, if the value of a
Member's Account does not exceed $3,500, then upon termination of the Member's
participation in the Plan, the Account may be "cashed out" without the consent
of the Member and, if applicable, without the consent of the Member's spouse.
Under the Taxpayer Relief Act of 1997, the Plan may increase the limit on
involuntary cash outs from $3,500 to $5,000, and the Board of Directors desires
to have the new limit apply to the Plan effective January 1, 1998.
NOW, THEREFORE, the Plan shall be amended, effective January 1, 1998, as
follows:
(1) By deleting Plan Section 6.04(b) in its entirety and inserting in lieu
thereof the following:
"(b) Notwithstanding the foregoing, if the vested portion of a
Member's Account is $5,000 or less, distribution will only be
made in a single lump sum amount or direct trustee-to- trustee
transfer; in such event, the Member shall not be entitled to
elect any other method of payment pursuant to paragraph (a)
above. If the vested portion of such Member's Account is over
$5,000, distribution before the Member's sixty-fifth birthday
shall be made only with the consent of the Member."
(2) By deleting the next to last sentence of Plan Section 6.07(b) in its
entirety and inserting in lieu thereof the following:
<PAGE>
Page 39
Exhibit 4.7(d) (continued)
"Notwithstanding the foregoing, if the aggregate amount of the
Member's vested Account balance is $5,000 or less, such amount
shall be distributed to the Surviving Spouse in a single lump-sum
payment."
IN WITNESS WHEREOF, this Fourth Amendment, having been duly authorized by
the Board of Directors of Cone Mills Corporation at a meeting duly held on
December 4, 1997, is signed by the Vice President and Secretary of the
Corporation on this 4th day of December, 1997.
CONE MILLS CORPORATION
By: /s/ Terry L. Weatherford
------------------------------
Terry L. Weatherford
Vice President and Secretary
Page 40
Exhibit 4.8(d)
FOURTH AMENDMENT TO THE
CONE MILLS CORPORATION 1983 ESOP
(As Amended and Restated December 1, 1994)
FOURTH AMENDMENT, dated December 4, 1997, to the Cone Mills Corporation
1983 ESOP, As Amended and Restated December 1, 1994 (the "Plan").
RECITAL
Under the terms of the Plan as presently in effect, if the value of a
Member's Account does not exceed $3,500, then upon termination of the Member's
participation in the Plan, the Account may be "cashed out" without the consent
of the Member and, if applicable, without the consent of the Member's spouse.
Under the Taxpayer Relief Act of 1997, the Plan may increase the limit on
involuntary cash outs from $3,500 to $5,000, and the Board of Directors desires
to have the new limit apply to the Plan effective January 1, 1998.
NOW, THEREFORE, the Plan shall be amended, effective January 1, 1998, by
deleting the amount, "$3,500" at each place it appears in Plan Sections 6.04(e),
6.04-A(c), 6.04- B(d), 6.04-C(a), 6.05(b), 6.05(e) and 6.07(e) and inserting in
lieu thereof the amount "$5,000."
IN WITNESS WHEREOF, this Fourth Amendment, having been duly authorized by
the Board of Directors of Cone Mills Corporation at a meeting duly held on
December 4, 1997, is signed by the Vice President and Secretary of the
Corporation on this 4th day of December, 1997.
CONE MILLS CORPORATION
By: /s/ Terry L. Weatherford
---------------------------
Terry L. Weatherford
Vice President and Secretary
Page 41
Exhibit 10.1(e)
FIFTH AMENDMENT TO THE
EMPLOYEES' RETIREMENT PLAN
OF
CONE MILLS CORPORATION
(As Amended and Restated December 1, 1994)
FIFTH AMENDMENT, dated December 4, 1997, to the Employees' Retirement Plan
of Cone Mills Corporation, As Amended and Restated December 1, 1994 (the
"Plan").
RECITAL
Under the terms of the Plan as presently in effect, if the present value of
a Member's vested accrued benefit does not exceed $3,500, then upon termination
of the Member's participation in the Plan, the vested accrued benefit may be
"cashed out" without the consent of the Member and, if applicable, without the
consent of the Member's spouse. Under the Taxpayer Relief Act of 1997, the Plan
may increase the limit on involuntary cash outs from $3,500 to $5,000, and the
Board of Directors desires to have the new limit apply to Members whose
participation in the Plan terminates on or after January 1, 1998.
NOW, THEREFORE, the Plan shall be amended, effective January 1, 1998, as
follows:
(1) By deleting Plan Section 5.06(d) in its entirety and inserting in lieu
thereof the following:
"(d) Notwithstanding the foregoing:
(1) With respect to a Member whose Severance from Service Date is
before January 1, 1998, if the present value of the vested
portion of his Accrued Benefit, determined in accordance with
Plan Sections 1.03 and 7.02(a), does not exceed $3,500, that
present value will be distributed to the Member in a single lump
sum payment and no spousal consent shall be required. If the
amount distributable under this paragraph (d)(1) exceeds $3,500,
a single sum payment shall not be made.
<PAGE>
Page 42
Exhibit 10.1(e) (continued)
(2) With respect to a Member whose Severance from Service Date is on
or after January 1, 1998, if the present value of the vested
portion of his Accrued Benefit, determined in accordance with
Plan Sections 1.03 and 7.02(a), does not exceed $5,000, that
present value will be distributed to the Member in a single lump
sum payment and no spousal consent shall be required. If the
amount distributable under this paragraph (d)(2) exceeds $5,000,
a single sum payment shall not be made."
(2) By deleting Plan Sections 7.02(a) and 7.02(b) in their entirety and
inserting in lieu thereof the following:
"(a) (1) With respect to a Member whose Severance from Service Date
is before January 1, 1998, if the present value of the
Member's nonforfeitable Accrued Benefit determined in
accordance with Plan Section 1.02 does not exceed $3,500,
that present value shall be payable in a single sum as soon
as practicable;
(2) With respect to a Member whose Severance from Service Date
is on or after January 1, 1998, if the present value of the
Member's nonforfeitable Accrued Benefit determined in
accordance with Plan Section 1.02 does not exceed $5,000,
that present value shall be payable in a single sum as soon
as practicable;
(b) (1) With respect to a Member whose Severance from Service Date
is before January 1, 1998, if the present value of the
Member's nonforfeitable Accrued Benefit determined in
accordance with Plan Section 1.02 exceeds $3,500, payment
shall be made in accordance with paragraph (c);
(2) With respect to a Member whose Severance from Service Date
is on or after January 1, 1998, if the
<PAGE>
Page 43
Exhibit 10.1(e) (continued)
present value of the Member's nonforfeitable Accrued Benefit
determined in accordance with Plan Section 1.02 exceeds
$5,000, payment shall be made in accordance with paragraph
(c);"
(3) By deleting the last paragraph of Plan Section 8.03(b) in its entirety
and inserting in lieu thereof the following:
"Notwithstanding the foregoing, if the present value of the
preretirement spousal death benefit with respect to a Member who dies
before becoming eligible to receive a benefit under the Plan does not
exceed $3,500 ($5,000 in the case of a Member who dies on or after
January 1, 1998), his Spouse shall be entitled to receive such present
value as soon as practicable."
IN WITNESS WHEREOF, this Fifth Amendment, having been duly authorized by
the Board of Directors of Cone Mills Corporation at a meeting duly held on
December 4, 1997, is signed by the Vice President and Secretary of the
Corporation on this 4th day of December, 1997.
CONE MILLS CORPORATION
By: /s/ Terry L. Weatherford
------------------------------
Terry L. Weatherford
Vice President and Secretary
Page 44
Exhibit 10.8(c)
CONE MILLS CORPORATION
RESTRICTED STOCK AWARD AGREEMENT
Agreement, dated November 10, 1997, by and between Cone Mills Corporation and
FIELD (MANAGEMENT NAME), a key management employee of Cone Mills Corporation
("Grantee").
1. Plan
Pursuant to the Cone Mills Corporation Amended and Restated 1992 Stock Plan
(the "Plan"), the Grantee is hereby awarded restricted stock. Terms defined
in the Plan are used in this Agreement as defined in the Plan.
2. Award of Restricted Stock
The Company hereby grants to the Grantee a total of FIELD (rsshares) shares
of Restricted Stock. The shares of Restricted Stock subject to this
Agreement shall be issued to the Grantee pursuant to the Plan upon the
following terms and conditions:
2.1 The restriction period shall expire for the respective shares as set
forth below, or if earlier, upon the Grantee's death or disability (as
defined under the then established policies of the Company).
_____________ shares on November 9, 2000
_____________ shares on November 9, 2001
_____________ shares on November 9, 2002
2.2 Shares of Restricted Stock are forfeitable if the Grantee ceases to be
an employee of Cone Mills Corporation before the end of the
restriction period for any reason other than death or disability.
2.3 Prior to the end of the restriction period and prior to forfeiture,
the Grantee shall have all rights of a shareholder, including the
right to receive dividends paid on the shares of Restricted Stock and
the right to vote the shares.
2.4 Certificates issued for the shares of Restricted Stock will be
registered in the name of the Grantee but will be deposited with a
duly endorsed stock power with the Secretary of Cone Mills Corporation
<PAGE>
Page 45
Exhibit 10.8(c) (continued)
to be held until the restriction period has lapsed. Certificates will
bear a restrictive legend referencing restrictions and conditions.
2.5 When the restriction period has lapsed, new certificates without the
restrictive legend will be issued.
2.6 During the restriction period, shares of Restricted Stock may not be
sold, assigned, transferred, pledged or otherwise encumbered by the
Grantee.
2.7 The Grantee is responsible for payment of all federal, state and local
income taxes for which he may be liable as a result of the grant of
Restricted Stock.
2.8 This Agreement is subject to the terms and conditions of the Plan,
which are incorporated herein by reference and made a part hereof, but
the terms of the Plan shall not be considered an enlargement of any
benefits under this Agreement.
2.9 If the Corporation shall be a party to any merger or 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 unvested Restricted Stock outstanding under
this Agreement shall terminate on the effective date of such merger,
consolidation, dissolution, liquidation or sale; provided, however,
that the Committee in its discretion, may prior to such effective
date, accelerate the time at which any stock restrictions may lapse,
may authorize a payment to each grantee that approximates the economic
benefit that the grantee would realize if the stock was vested
immediately before such effective date, may authorize a payment in
such other amount as it deems appropriate to compensate each grantee
for the termination of the grant, or may arrange for the granting of a
substitute grant to each grantee.
3. Grantee Bound by Plan
The Grantee hereby acknowledges receipt of a copy of the Plan and agrees to
be bound by all the terms and provisions thereof.
<PAGE>
Page 46
Exhibit 10.8(c) (continued)
IN WITNESS WHEREOF, the Company has caused this Agreement to be signed on its
behalf as of the 10th day of November, 1997.
CONE MILLS CORPORATION
By:
_________________________________________
Terry L. Weatherford
Vice President and Secretary
Accepted and agreed to as of the __ day of November, 1997.
___________________________________________________________________
(Grantee's signature)
<PAGE>
Page 47
Exhibit 10.8(c) (continued)
CONE MILLS CORPORATION
RESTRICTED STOCK AWARD AGREEMENT
Beneficiary Designation
I designate such of the following as survive me as Beneficiary to receive any
shares of Restricted Stock due me under the Cone Mills Corporation Amended and
Restated 1992 Stock Plan following my death. If any named Beneficiary shall fail
to survive me, his or her share shall be divided pro rata among those who do
survive, in proportion to his or her respective shares.
Name Relation Shares
---- -------- ------
_____________________ ________________________ ___________%
_____________________ ________________________ ___________%
_____________________ ________________________ ___________%
In the event none of the above-named shall survive me, I designate such of the
following as survive me as Beneficiary, in the same fashion as set forth above.
Name Relation Shares
---- -------- ------
_____________________ ________________________ ___________%
_____________________ ________________________ ___________%
_____________________ ________________________ ___________%
ATTEST:
By: _____________________________ ______________________________
(Authorized Signature) (Participant's signature)
CONE MILLS CORPORATION
Date: _______________________
Page 48
Exhibit 10.14
CONSULTING AGREEMENT
CONSULTING AGREEMENT, dated December 19, 1997, 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, 1996, and 1997
pursuant to Consulting Agreements dated November 19, 1992, December 3, 1993,
November 10, 1994, December 5, 1995, and December 5, 1996, respectively. The
Company and Trogdon have agreed to continue the consulting arrangement during
the period beginning January 1, 1998, and ending December 31, 1998 (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 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,
1998, June 30, 1998, September 30, 1998, and December 31, 1998) 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
<PAGE>
Page 49
Exhibit 10.14 (continued)
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.
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 unreimbursed 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.
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
ANNUAL REPORT 97
<PAGE>
For 107 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 home furnishings 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 1997 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
nations's largest exporter of denims and a major exporter of other apparel
fabrics.
<PAGE>
Our 5 Point Plan
----------------
Eighteen months ago, Cone Mills designed and started implementing a five-point
plan to improve its financial performance. This report details our progress to
date. The components of the plan are:
1 Focus on Core Businesses
2 Aggressive Marketing
3 Reconfigure Manufacturing
4 Cost Control
5 Capital Conservation
Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(amounts in millions, except per share data) 1997 1996 1995
-----------------------------------
<S> <C> <C> <C>
SUMMARY OF OPERATIONS
Sales $716.9 $745.9 $910.2
Gross Profit 75.1 104.4 125.0
Income (Loss) from Operations (8.3) 12.8 35.4
Equity in Earnings (Losses) of Foreign Affiliates 2.6 (2.4) (16.9)
Net Income (Loss) (9.4) (2.2) (3.3)
FINANCIAL POSITION
Long-Term Debt $150.4 $160.7 $173.0
Stockholders' Equity 196.5 210.3 222.1
Long-Term Debt to Capitalization 43% 43% 44%
PER COMMON SHARE DATA
Net Income (Loss) $ (0.47) $ (0.19) $ (0.22)
</TABLE>
1
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
While we are encouraged by our long-term strategic opportunities, we are
disappointed by Cone's unsatisfactory 1997 financial results. We are driving the
short-term imperatives that will return the company to profitability this year.
We have made important strides in the key components of our improvement plan:
focus on core businesses, aggressive marketing, manufacturing reconfiguration,
cost control and capital conservation. New division leadership is in place in
finishing, sportswear and decorative fabrics and they are taking important steps
to complete the plan. While adverse market conditions were evident for denim in
the first half of the year and for printed fabrics throughout all of 1997,
markets for Cone's two core franchises -- 1) the casualwear fabrics of denim and
specialty sportswear and 2) home furnishings -- are improving. The company is
positioned to respond to stronger market demand for its products. As we enter
1998, we are encouraged by the company's diversified and expanded mix of
customers and products which has resulted in higher manufacturing utilization
with a lower cost structure.
Sales in 1997 were $716.9 million, essentially the same as 1996, excluding
sales of businesses in our restructuring plan. Sales were impacted by certain
denim pipeline inventory imbalances, unfavorable decorative print markets and
lower than projected demand for flannel shirtings. Export sales, primarily
denim, were $179.8 million and continue to be an important component
representing 25% of total company sales. Cone Mills had a net loss for 1997 of
$9.4 million or $.47 per share, including $5.2 million of pre-tax restructuring
charges. As outlined last year, we eliminated over $8 million of selling and
administrative expenses, lowering these expenses from 11.6% of sales in 1996 to
10.9% of sales in 1997. In addition, we have now implemented and have realized
cost savings of more than $12 million from operating units.
In our effort to control inventory levels, all Cone apparel fabric
manufacturing facilities operated at less than full schedules through the third
quarter of 1997, impacting margins and income. However, as a result of improved
market conditions and our aggressive marketing efforts, denim sales rebounded in
the second half of 1997. As our largest customer made adjustments to inventory,
Cone's denim sales force broadened and strengthened our customer base, resulting
in an increase in sales of over 50% to other customers. This expanded customer
base for denim is now resulting in full utilization of Cone's denim
manufacturing capacity.
Parras Cone, our Mexican joint venture denim plant, operated at near full
capacity throughout the year and contributed appropriate returns to the
corporation. This plant has exceeded our expectations for quality and efficiency
and is responding to the migration of cut-and-sew customers to Mexico. Parras
Cone delivers a high quality basic denim product at attractive costs to a market
segment in which Cone has not historically been a major participant.
The specialty sportswear segment showed a loss in 1997 as a result of
manufacturing difficulties in connection with the consolidation of finishing
facilities and lower than projected demand for flannel shirtings. Our plan to
substantially improve this business is based on
2
<PAGE>
resolution of manufacturing inefficiencies, strong product development and
aggressive marketing aimed at the growing casual apparel demand. We have seen an
increase in sales to this growing market and we are focused on delivering
manufacturing quality that exceeds customer expectations.
Home furnishings results in 1997 were negatively impacted by unfavorable
decorative print markets, finishing plants operating at less than capacity,
costs associated with consolidating the finishing plants to Carlisle and the
restructuring of the John Wolf Decorative Fabrics operations. New leadership is
in place both in decorative fabrics and commission finishing. At year-end, we
began to see modest improvement in the finishing and bedding markets, both from
a shift in fashion direction and industry consolidation. We are also beginning
to realize advantages resulting from consolidating the company's finishing
facilities.
We are focused on driving the short-term imperatives that are key to
Cone's return to profitability: 1) satisfactory manufacturing results from the
Carlisle finishing plant; 2) upgraded marketing activities by the sportswear
group and 3) successful restructuring of the John Wolf Decorative Fabrics
division. Our long-term goal continues to be positioning the company to generate
shareholder value. Cone's strategy remains the same as we invest in markets
where we see opportunities for growth of our core franchises of casualwear
fabrics and home furnishings. To expand Cone's global denim network and solidify
our leadership position, we continue to explore alliances to service markets in
Europe, Asia and South America. We are using product development extensively to
deliver new products and gain access to new markets where Cone's capabilities
match consumer needs.
Cone Mills enjoys a reputation for quality and service built by delivering
value to customers for more than a century. Our focus is on executing the
appropriate steps not only to return the company to profitability, but also to
implement our long-term, global strategy and to yield appropriate returns for
shareholders. In the midst of the disappointing financial results of 1997, we
see exciting opportunities in Cone's markets of casualwear fabrics and home
furnishings and evidence of improving performance as our plan is fully executed
and markets improve. We appreciate your support and wish to thank Cone's
customers, suppliers and employees.
/s/ Dewey L. Trogdon (Photos of Dewel L. Trogdon
DEWEY L. TROGDON and J. Patrick Danahy)
Chairman (right)
/s/ J. Patrick Danahy
J. PATRICK DANAHY
President & CEO (left)
<PAGE>
1 Focus on Core Businesses
(Photos Cone Mills' products and people)
<PAGE>
(Photo of bed spread across page 5 and page 6)
The first component of our plan to return the company to profitability
has been to focus on our core franchises in which Cone Mills delivers value to
customers. This means we have exited businesses where we were not willing to
dedicate the capital and resources to become major players. Cone's core
businesses include 1) the casualwear fabrics of denim and specialty sportswear
and 2) home furnishings fabrics and commission finishing used in the drapery,
bedding and furniture markets. These core units are experiencing growing markets
as casualwear has become more visible in the workplace and everyday life around
the world. The strong U.S. economy and consumer confidence are positive
indicators for the home furnishings market. Cone is positioning its core
businesses to respond to customer needs with the appropriate product offerings
at the best value possible.
In the last two years we exited the foam business, where we needed to be
much larger to be a significant player, sold a decorative fabrics designer that
no longer fit the strategic direction of this business, and divested our real
estate operations. Cone also sold its synthetic fabrics business, a small
component of the specialty sportswear unit, where we were one of many commodity
suppliers. Analysis of our strengths has motivated us to dedicate resources to
areas in which we have core competencies.
We are now well positioned to focus on market development of the
businesses of casualwear fabrics and home furnishings where we see exciting
opportunities for growth.
Divesting non-core businesses allows Cone to redeploy the capital and
management resources these activities required into our core franchises where
Cone delivers value to customers.
(Photo of chair)
5
<PAGE>
All areas of Cone Mills are focused on increasing sales levels through
aggressive marketing and energized product development. Quality, styling and
service remain the advantages that differentiate Cone as a supplier. Enhanced
selling skills help showcase these values to our customers.
In denim, we are sharpening our marketing skills to recognize consumer
fashion trends and respond to customer expectations around the globe. Cone's
international fashion directors identify local market preferences and
communicate these opportunities to Cone's product development group. Aggressive
marketing has broadened Cone's customer base and Cone is now a major supplier to
most of the branded jeans companies that market around the world. Sales to
customers other than our largest customer have increased more than 50% in the
past year.
Parras Cone, Cone's joint venture production platform in Mexico, allows us
to be a much larger player in the basic denim market, where we historically did
not provide a cost competitive product from our U.S. facilities. This plant
supports the migration of cut-and-sew activities to Mexico. Along with CIPSA,
our partner, we are the first denim producer in North America to successfully
integrate U.S. sales, customer service, quality assurance,
(Photo of Cone Mills worker)
Cone is focused on enhancing selling skills to communicate our
expertise and versatility in manufacturing, with an emphasis on quality, styling
and service.
6
<PAGE>
2 Aggressive Marketing
(Photos of materials and people)
7
<PAGE>
2 Aggressive Marketing
(Photo of two Cone Mills workers)
product development and manufacturing precision with a Mexican manufacturing
site. Cone's U.S. plants produce value-added or fashion denim, which supports
our customers' brands with an emphasis on styling and more complex fabric
construction.
Over the last few years, Cone's export sales have averaged about 25% of
total company sales, and we are committed to expanding this global presence. To
service European markets more efficiently, Cone added sales personnel and
styling expertise to the marketing office in Belgium. The Singapore office has
been expanded to support business in Asia. We have added additional warehouses
to the Cone system in various locations to streamline delivery times.
We continue to evaluate potential global expansion as we move to
capitalize on our leadership position in denim. To reduce tariffs and shipping
costs and locate production closer to the markets we serve, we are exploring a
manufacturing platform to service European markets. We are also exploring
alliances with existing manufacturers elsewhere around the world in order to
gain favorable access to all major trade blocs.
To increase sales in the specialty sportswear group we have installed
sample and short-set equipment for manufacturing versatility. The sample
equipment allows our customers to test fabric color or texture without the major
up-front investment in a full line commitment. Consolidating the finishing
activity at the Carlisle plant provides a lower cost platform, allowing access
to new apparel markets. Product development remains a key
(Photo of three children)
8
<PAGE>
(Photo of equipment)
component for the sportswear group, with continual refinements to traditional
products and the introduction of new products such as the performance fabric
ProSpin(R), fabrics using indigo filling, and the fade-resistant Deepdown(TM)
fabric line.
We have restructured the John Wolf decorative fabrics line to utilize our
core competencies, which are primarily in the middle market segment. The John
Wolf line has been expanded to include new products in the plain shades area and
acrylic and polyester outdoor furniture fabrics. To complement the decorative
fabrics line and to diversify our product offerings in home furnishings, we
entered the jacquard market with the successful startup of the Cone jacquard
facility two years ago.
In Cone Finishing, we added new equipment in order to enter new markets
and utilize finishing capacity. The new sanding equipment allows us to produce
camouflage fabric and a new preparation range provides access to niche
wide-print markets. These additions have led to new customers in both the
apparel and top-of-the-bed segments. We have made progress in sales to the
outdoor furniture and RV markets and are aggressively pursuing new finishing
business as the industry consolidates.
(Photo of equipment)
9
<PAGE>
3 Reconfigure Manufacturing
(Photos of looms and yarn)
10
<PAGE>
(Photo)
The third element of Cone's plan is the reconfiguration of our
manufacturing facilities to obtain more optimal plant and product combinations.
Parras Cone is recognized as a quality, low-cost producer of basic denim.
Producing basic denim in Mexico, to supply the increasing number of cut-and-sew
facilities there, frees up capacity in our U.S. plants to focus on value-added
denim.
Cone's relooming process is near completion in our U.S. denim facilities.
The installation of new weaving equipment upgrades our facilities to the most
current technologies and allows our plants to produce similar volumes of denim
with fewer machines. We are adding linked ring spinning capabilities to obtain
efficiencies and address fashion preferences. In addition to improvements at
our denim facilities, we are adding looms at our jacquard facility to complete
the configuration in this growing segment of our business.
In early 1997, Cone announced the closing of the Granite finishing
facility with plans to transfer this volume to our Carlisle facility. This move
will reduce costs for the products of the Sportswear division and improve the
overall capacity utilization at the Carlisle plant. The product transition was
completed in 1997, however we are still resolving difficult manufacturing issues
at the Carlisle facility.
To capitalize on our leadership position in denim and meet customer
demands from appropriate and efficient locations, Cone is exploring alliances
which will provide a manufacturing presence in Europe, Asia and South America.
Cone is looking for international opportunities which will allow us to utilize
our technological expertise and global marketing and distribution strengths.
(Photo of the Parras Cone building)
To improve efficiencies, Cone is reconfiguring its manufacturing
facilities by producing basic denim in Mexico and value-added products in U.S.
plants, upgrading equipment and consolidating finishing activity.
11
<PAGE>
(Photo)
Additional elements of the plan to return Cone to profitability are
cost control and capital conservation. In 1997, Cone reduced its selling and
administrative expenses by $8.1 million and identified an additional $20 million
in annual cost savings that the business units could generate from manpower
reductions, savings on supplies and materials, and process reconfiguration. We
have made significant progress in obtaining these cost savings.
Finished goods inventories from continuing businesses were reduced by over
$9 million in 1997. Reduced operating schedules at our plants, in conjunction
with matching production schedules with sales and inventory target levels, has
contributed to this decline in inventories. After dramatically improving the
inventory situation in denim, we are now focused on reducing inventory levels in
the sportswear product line.
Cone uses a capital spending discipline designed to allocate capital
dollars to projects that we believe will generate appropriate returns. In 1997,
Cone spent about $5 million less on capital expenditures than originally
anticipated through disciplined review and targeted equipment selection.
We will realize additional cost savings as our initiatives, such as the
relooming project and the consolidation of finishing plants, continue. Cost
control and capital conservation are essential for Cone to return to
profitability and maintain financial flexibility to prepare for strategic
initiatives.
(Photo of worker at a computer)
Cone is focused on reducing operating costs and selling and
administrative expenses, controlling inventory and using a disciplined capital
spending process, all to improve profitability.
12
<PAGE>
4 Cost Control
5 Capital Conservation
(Photos of computers and equipment)
13
<PAGE>
Management's Discussion and Analysis of Results
of Operations and Financial Condition
OVERVIEW
The Company's operating results for 1997 were negatively impacted by a number of
internal and external factors. The Company encountered manufacturing
difficulties in connection with the consolidation of its finishing facilities at
its Carlisle plant. The consolidation involved the closing of the Company's
Granite finishing operations and moving machinery, equipment and manufacturing
operations from that plant to the Carlisle facility. Manufacturing efficiency
was disrupted to a greater extent than planned, which materially adversely
impacted results of the sportswear and home furnishing fabrics product lines for
the year.
The Company also encountered adverse market conditions in denim in the
first half of 1997 due to customer and retail increases of inventories. As a
result of denim inventory increases and the continuing low demand for flannel
shirtings, the Company's apparel fabric facilities operated at less than full
capacity throughout most of 1997. Parras Cone, the Company's joint venture plant
in Mexico, on the other hand, operated at near capacity after the first quarter
of 1997.
Casual apparel and jeans sales continued to do well at the retail level
during the year, so that denim pipeline inventories were essentially in balance
by the end of 1997. While Cone's sales to its largest customer declined from 49%
to 37% of total Company revenues, sales to customers other than the Company's
largest customer increased over 50%. The Company's aggressive marketing efforts
increased value-added and basic denim sales. Production management allowed the
Company to reduce denim inventories to appropriate levels. A decline in sales of
denim to Asian markets, which represent less than 5% of the Company's denim
volume, began in late 1997.
As a result of continued weakness in decorative print markets in 1997, the
Company reorganized operations of John Wolf Decorative Fabrics by reducing staff
and inventories, which resulted in a pre-tax fourth quarter charge of $4.2
million for inventory adjustments and severance liabilities. Continued growth of
Cone Jacquards helped offset a portion of the decorative print market weakness.
The Company is committed to resolving its manufacturing problems at its
Carlisle facility in 1998 in order to benefit from a strengthening of the
decorative print market. Consolidation in the print fabric industry should
provide an opportunity for increased sales. Management is focused on the
sportswear and commission finishing businesses to take advantage of improving
market trends.
Significant factors that influence the Company's operating results and
financial condition include the price of cotton, general business cycles,
consumer fashion preferences, changes in demand for print fabrics and
international trade conditions. Management believes that one of the most
significant factors affecting operating margins is the price of cotton, which
spiked in 1995 into the $.90s due to crop declines and declined to the high
$.70s and then to the high $.60s during 1997. The Company has purchased cotton
at fixed prices for delivery throughout 1998 and expects 1998 average cotton
prices to be slightly lower than 1997 levels. The Company's average cotton
prices for 1998 will be higher than first quarter 1998 spot market quotations
due to its practice of continuously buying cotton forward. The Company was able
to raise denim prices in 1995 to partially offset cotton price increases, but
experienced price pressures in 1997 and early 1998, reflecting a strong global
supply of denim.
STRATEGIC INITIATIVES Cone's business strategy is to invest and grow in its core
franchises where it is recognized as a market leader. The Company seeks growth
of its denim, specialty sportswear and decorative fabric businesses through
expansion into new geographic markets, aggressive marketing efforts, product
development and investment in technology.
Consistent with its strategy to focus on core strengths, the Company
divested the assets of its real estate subsidiary and synthetic fabrics business
in 1997 and completed the sale of the Olympic Products Division and Greeff
Fabrics in 1996. The consolidation of the Granite facility into Carlisle was
initiated at the beginning of 1997 to reduce operating costs and was
substantially completed in the fourth quarter of 1997. See Note 22 of Notes to
Consolidated Financial Statements.
The Company has established priorities for the use of cash flow and debt
capacity. The first priority is reinvestment in existing manufacturing
facilities. Reflecting this priority, the Company has made capital expenditures
of $134.2 million from 1995 through 1997 to maintain modern manufacturing
facilities and to build the new jacquard plant. The Company plans to spend
approximately $37 million in 1998. The second priority is investment in
international denim manufacturing facilities
14
<PAGE>
and marketing opportunities. The Company continues to explore potential
alliances and will continue to review acquisitions and other investment
opportunities in core product lines. However, the Company currently has no
agreement, arrangement or understanding to make any such acquisition or
investment.
Other priorities for the use of cash flow and debt capacity include common
stock share repurchases and the reduction of debt. 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 13, 1998, 1.8 million shares had been repurchased in
open market transactions. 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 1997, 1996 and
1995 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(1,2) (dollars in millions) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Apparel
Denim $483.5 67.4% $498.7 66.9% $552.0 60.6%
Specialty Sportswear 123.1 17.2 129.4 17.3 148.1 16.3
----- ------ ------ ------ ------ -------
Total 606.6 84.6 628.1 84.2 700.1 76.9
===========================================================================================================================
Home Furnishings
Fabrics 101.9 14.2 95.7 12.9 98.4 10.8
Foam Products -- -- 4.7 0.6 94.7 10.4
Real Estate and Other 8.4 1.2 17.4 2.3 17.0 1.9
------ ------ ------ ------ ------ -------
Total 110.3 15.4 117.8 15.8 210.1 23.1
------ ------ ------ ------ ------- -------
Total net sales $716.9 100.0% $745.9 100.0% $910.2 100.0%
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS)2,3
Apparel $17.8 2.9% $31.0 4.9% $39.9 5.7%
Home Furnishings (17.3) (15.7) (8.5) (7.2) (0.6) (0.3)
Restructuring (5.2) -- (5.2) -- -- ---
</TABLE>
(1) Specialty Sportswear net sales 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
May 1997, the Company sold substantially all of the assets of its real
estate operations. Previous sales of real estate were included in the Real
Estate and Other product group.
(2) Operating units whose activities will not continue as part of the Company
had sales of $4.6 million, $34.1 million and $137.4 million for 1997, 1996
and 1995, respectively. Net operating results of these businesses,
excluding restructuring charges, were losses of $1.0 million, $2.3 million
and $0.8 million in 1997, 1996 and 1995, respectively.
(3) Operating income (loss) excludes general corporate expenses. Percentages
reflect operating income (loss) as a percentage of segment net sales.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED DECEMBER 28, 1997, COMPARED WITH FISCAL YEAR ENDED DECEMBER
29, 1996. While U.S. consumer spending in apparel and home furnishings was
strong in 1997, Cone Mills experienced value-added denim inventory adjustments
in the first half of the year and weak fashion demand for decorative prints. For
1996, the Company experienced good demand for value-added denim apparel fabrics
and weak markets for both specialty sportswear and home furnishings fabrics.
Sales for 1997 were $716.9 million, down 3.9%, as compared with sales
of $745.9 million for 1996. After eliminating the sales of business units
included in the Company's restructuring plan, sales were approximately the same
year-to-year. Lower sales in denim products and decorative prints were partially
offset by increased specialty sportswear and jacquard sales. International
sales, primarily denims, were 25% of total sales in 1997 and 26% for 1996.
Cone Mills had a net loss for 1997 of $9.4 million, or $.47 per share
after preferred dividends, which included a pre-tax restructuring charge of $5.2
million primarily associated with the consolidation of the Granite operations
into Carlisle. For comparison, for 1996 the net loss was $2.2 million, or $.19
per share, including a pre-tax charge of $5.2 million associated with
restructuring and disposal of non-core businesses.
15
<PAGE>
Gross profit for 1997 (net sales less cost of sales and depreciation) was
10.5% of sales, as compared with 14.0% for 1996. The decrease was primarily the
result of mix changes to more basic denim products with lower margins, cost
inefficiencies associated with operating plants at less than capacity, operating
disruption due to consolidation of finishing operations, and the repositioning
and restructuring of decorative print operations. Also impacting gross profit
was the increase in sales of product produced by Parras Cone, where a portion of
the operating income is reported as equity in earnings of unconsolidated
affiliate.
APPAREL FABRICS Apparel fabric segment sales for 1997 were $606.6 million, down
3.4% from 1996. Excluding sales of the synthetic fabrics business, which was
sold in January of 1997, apparel fabric segment sales were down approximately
2%. Lower denim sales because of lower volume and prices, partially offset by
higher specialty sportswear sales, accounted for the decrease. Average denim
prices were down in 1997 as a result of a mix shift to more basic denims and
price pressure from industry supply and demand imbalances.
For 1997, the apparel segment had operating income of $17.8 million, or
2.9% of sales, as compared with income of $31.0 million, or 4.9% of sales, in
1996. In both years, profits from denim operations were partially offset by
specialty sportswear losses.
HOME FURNISHINGS For 1997, home furnishings segment sales were $108.1 million,
excluding Olympic, Greeff and real estate, an increase of 9%, as compared with
$98.7 million in 1996. Increased sales of Cone Jacquards accounted for the
change. The home furnishings segment had an operating loss of $17.3 million
compared with a loss of $8.5 million for 1996. Home furnishings results were
negatively impacted by weak decorative fabrics markets, the operating disruption
due to consolidation of finishing operations and the repositioning and
restructuring of decorative fabrics operations.
Total Company selling and administrative expenses declined from $86.4
million for 1996 to $78.3 million in 1997, the result of the sale of the
Olympic, Greeff, real estate and synthetic fabric operations as well as a cost
reduction program. Selling and administrative expenses were 10.9% of sales in
1997, as compared with 11.6% in 1996.
Interest expense for 1997 was $14.2 million, down 9% from 1996,
primarily the result of lower borrowing levels.
For 1997, the income tax benefit as a percent of the taxable loss was
40.0%. Income taxes reflect tax benefits resulting from operation of the
Company's foreign sales corporation. See Note 12 of Notes to Consolidated
Financial Statements.
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
million 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 affiliate, 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.
16
<PAGE>
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.
Total Company 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal long-term capital components consist of debt outstanding
under a Note Agreement with The Prudential Insurance Company of America (the
"Senior Note"), its 8 1/8% Debentures issued on March 15, 1995 and due 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 the $40 million Receivables
Purchase Agreement (the "Receivables Purchase Agreement") with Delaware Funding
Corporation, an affiliate of Morgan Guaranty. The Receivables Purchase Agreement
is a renewable, one-year agreement entered into on March 25, 1997 between
Delaware Funding Corporation and Cone Receivables, LLC, a wholly owned
subsidiary of Cone Mills Corporation. This facility was renewed in March 1998.
The Company's Revolving Credit Facility was entered into in August 1997 and is a
successor facility with terms and conditions not materially different from the
previous facility. On December 28, 1997, the Company had funds available of $80
million under its Revolving Credit Facility.
During 1997, the Company generated cash from operating activities before
changes in working capital of $13.2 million, as compared with $25.8 million in
1996. Working capital reductions in 1997, primarily inventories, were $11.1
million. Other sources of cash included net proceeds of $19.5 million realized
from the sale of substantially all of the assets of the real estate operations
and proceeds of $5.0 million from the sale of plant and equipment. Uses of cash
in 1997 included $36.3 million for capital expenditures, $10.8 million for
repayment of long-term debt, $1.5 million for the repurchase of common stock and
$2.9 million for preferred stock dividends.
The Company believes that 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.
On December 28, 1997, the Company's long-term capital structure consisted
of $139.7 million of long-term debt and $196.5 million of stockholders' equity.
For comparison, on December 29, 1996, the Company had $150.0 million of
long-term debt and $210.3 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% at both year-ends, 1997 and 1996.
Accounts and note receivable on December 28, 1997, were $43.8 million,
down from $49.1 million at December 29, 1996. At December 28, 1997, the Company
had sold accounts receivable of $66 million to Cone Receivables, LLC, an
unconsolidated subsidiary, which subsequently sold $40 million of these accounts
receivables to an unrelated party. In addition to the $40
17
<PAGE>
million received for the sale of these receivables, the Company also has
received a $24 million subordinated note receivable from Cone Receivables, LLC.
At December 29, 1996, the Company had sold $42 million of accounts receivable to
an unrelated party. The decrease in accounts and note receivable from year-end
1996 to year-end 1997 was primarily due to the collection of receivables from
business units sold and a lower number of days of sales outstanding as certain
customers paid in advance of due date. The Company adopted SFAS 125 "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" during the first quarter of 1997 (See Note 2 of Notes to
Consolidated Financial Statements). Receivables, including those sold pursuant
to the Receivables Purchase Agreement, represented 45 days of sales outstanding
at December 28, 1997 and 54 days at December 29, 1996.
Inventories on December 28, 1997, were $115.7 million, down $23.9 million
from December 29, 1996 levels. The decrease was primarily due to the sale of
operating units and lower denim finished goods inventories partially offset by
increases in raw material levels.
Capital spending in 1997 was $36.3 million. Projects included new denim
weaving machines, capacity expansion of the jacquard facility and computer
technology.
Capital spending in 1998 is expected to be $37 million. Projects include
new weaving machines and linked ring spinning for the White Oak denim plant and
additional looms for the jacquard facility. Approximately $9.4 million of the
budgeted capital expenditures for 1998 had been committed on December 28, 1997.
The Company recognizes the business implications regarding the Year 2000
as it relates to computer programs and software systems. The Company is
currently adopting new software and modifying existing software to ensure that
business operations are not negatively impacted by the millennium change. The
Company is coordinating Year 2000 readiness with other entities with which it
interacts, both domestically and globally, including suppliers, customers and
financial service organizations.
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 in 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 1993,
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
judgment on the future and are subject to risks and uncertainties that could
cause actual results to differ materially. Such factors include, without
limitation: (i) the demand for textile products, including 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
relationships with Levi Strauss as its major customer. For a further
description of these risks see the Company's 1997 Form 10-K, "Item 1.
Business -Competition, -Raw Materials and -Customers" and "Management's
Discussion and Analysis of Results of Operations and Financial Condition
--Overview" of the Company's 1997 Annual Report to Shareholders incorporated
by reference into Item 7. of the Form 10-K. 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.
18
<PAGE>
Financial Review
Consolidated Statements
of Operations 20
Consolidated Balance Sheets 21
Consolidated Statements
of Stockholders' Equity 22
Consolidated Statements
of Cash Flows 23
Notes to Consolidated
Financial Statements 24
Statement of Responsibility
for Financial Statements 39
Independent Auditor's Report 39
Historical Financial Review 40
[GRAPHIC OMITTED]
19
- --------------------------------------------------------------------------------
- -----
<PAGE>
Consolidated Statements of Operations
Years Ended December 28, 1997, December 29, 1996 and December 31, 1995
(in thousands, except per share data)
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
---- ---- ----
NET SALES $ 716,853 $ 745,939 $ 910,217
--------- --------- ---------
OPERATING COSTS AND EXPENSES:
Cost of sales 615,792 614,657 756,975
Selling and administrative 78,266 86,394 89,561
Depreciation 25,948 26,868 28,257
Restructuring 5,176 5,197 -
--------- --------- ---------
725,182 733,116 874,793
--------- --------- ---------
INCOME (LOSS) FROM OPERATIONS (8,329) 12,823 35,424
--------- --------- ---------
OTHER INCOME (EXPENSE):
Interest income 2,486 586 563
Interest expense (14,160) (15,483) (15,081)
--------- --------- ---------
(11,674) (14,897) (14,518)
--------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT) AND EQUITY IN EARNINGS
(LOSSES) OF UNCONSOLIDATED AFFILIATES (20,003) (2,074) 20,906
INCOME TAXES (BENEFIT) (8,001) (2,311) 7,306
--------- --------- ---------
INCOME (LOSS) BEFORE EQUITY IN EARNINGS (LOSSES) OF UNCONSOLIDATED
AFFILIATES (12,002) 237 13,600
EQUITY IN EARNINGS (LOSSES) OF UNCONSOLIDATED AFFILIATES (Net of
income tax benefit of $2,992-1995) 2,637 (2,458) (16,856)
--------- --------- ---------
NET INCOME (LOSS) $ (9,365) $ (2,221) $ (3,256)
========= ========= =========
INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ (12,346) $ (5,101) $ (6,088)
========= ========= =========
EARNINGS (LOSS) PER SHARE - Basic and Diluted $ (.47) $ (.19) $ (.22)
========= ========= =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - Basic and Diluted 26,140 27,179 27,380
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
[GRAPHIC OMITTED]
20
- --------------------------------------------------------------------------------
<PAGE>
Consolidated Balance Sheets
December 28, 1997 and December 29, 1996
(in thousands, except share and par value data)
<TABLE>
<S> <C> <C>
1997 1996
-------- --------
ASSETS
CURRENT ASSETS:
Cash $ 856 $ 1,018
Accounts receivable, less allowances of $1,500 and $3,000 19,958 49,073
Subordinated note receivable 23,842 -
Inventories 115,663 139,533
Other current assets 19,228 14,794
--------- ---------
Total Current Assets 179,547 204,418
INVESTMENTS IN UNCONSOLIDATED AFFILIATES 36,781 34,144
OTHER ASSETS 38,431 40,746
PROPERTY, PLANT AND EQUIPMENT 251,887 250,678
--------- ---------
$506,646 $529,986
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 4,500 $ 5,267
Current maturities of long-term debt 10,714 10,754
Accounts payable 32,994 27,113
Sundry accounts payable and accrued liabilities 49,588 52,770
Deferred income taxes 23,370 23,667
--------- ---------
Total Current Liabilities 121,166 119,571
LONG-TERM DEBT 139,656 149,968
DEFERRED INCOME TAXES 38,523 40,066
OTHER LIABILITIES 10,781 10,130
STOCKHOLDERS' EQUITY:
Class A Preferred Stock - $100 par value; authorized 1,500,000 shares;
issued and outstanding 383,948 shares 38,395 38,395
Class B Preferred Stock - no par value; authorized 5,000,000 shares - -
Common Stock - $.10 par value; authorized 42,700,000 shares; issued and
outstanding 26,201,633 shares; 1996, 26,301,233 shares 2,620 2,630
Capital in excess of par 62,300 62,995
Retained earnings 102,449 114,706
Deferred compensation - restricted stock (740) -
Currency translation adjustment (8,504) (8,475)
--------- ---------
Total Stockholders' Equity 196,520 210,251
--------- ---------
$506,646 $529,986
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
[GRAPHIC OMITTED]
21
- --------------------------------------------------------------------------------
<PAGE>
Consolidated Statements of Stockholders' Equity
Years Ended December 28, 1997, December 29, 1996 and December 31, 1995
(in thousands, except share data)
<TABLE>
<S> <C> <C> <C> <C>
Class A
Preferred Stock Common Stock
Shares Amount Shares Amount
------- ----- ----------- -------
BALANCE, JANUARY 1, 1995 383,948 $38,395 27,403,621 $2,740
Net income (loss) - - - -
Currency translation loss - net
of income tax benefit of
$3,630 - - - -
Class A Preferred Stock:
Cash dividends paid - - - -
Common Stock:
Options exercised - - 4,000 1
Purchase of common shares - - (27,212) (3)
-------- ------- ------------- ---------
BALANCE, DECEMBER 31, 1995 383,948 $38,395 27,380,409 $2,738
Net income (loss) - - - -
Currency translation adjustment:
Sale of stock of affiliate - - - -
Class A Preferred Stock:
Cash dividends paid - - - -
Common Stock:
Options exercised - - 61,800 6
Issuance of common shares - - 6,000 1
Purchase of common shares - - (1,146,976) (115)
-------- ------- ------------- --------
BALANCE, DECEMBER 29, 1996 383,948 $38,395 26,301,233 $2,630
Net income (loss) - - - -
Currency translation adjustment - - - -
Class A Preferred Stock:
Cash dividends paid - - - -
Common Stock:
Options exercised - - 12,600 1
Purchase of common shares - - (201,700) (20)
Issuance of restricted shares - - 89,500 9
Restricted stock compensation - - - -
-------- ------- ------------- --------
BALANCE, DECEMBER 28, 1997 383,948 $38,395 26,201,633 $2,620
======== ======= ============= ========
<S> <C> <C> <C> <C>
Deferred
Capital in Compensation Currency
Excess Retained Restricted Translation
of Par Earnings Stock Adjustment
------------ ------- ---- ------
BALANCE, JANUARY 1, 1995 $71,354 $ 125,771 $ - $ (1,380)
Net income (loss) - (3,256) - -
Currency translation loss - net
of income tax benefit of
$3,630 - - - (8,543)
Class A Preferred Stock:
Cash dividends paid - (2,690) - -
Common Stock:
Options exercised 25 - - -
Purchase of common shares (289) - - -
------- --------- ------------ -----------
BALANCE, DECEMBER 31, 1995 $71,090 $ 119,825 $ - $ (9,923)
Net income (loss) - (2,221) - -
Currency translation adjustment:
Sale of stock of affiliate - - - 1,448
Class A Preferred Stock:
Cash dividends paid - (2,898) - -
Common Stock:
Options exercised 515 - - -
Issuance of common shares 47 - - -
Purchase of common shares (8,657) - - -
------- --------- ------------ -----------
BALANCE, DECEMBER 29, 1996 $62,995 $ 114,706 $ - $ (8,475)
Net income (loss) - (9,365) - -
Currency translation adjustment - - - (29)
Class A Preferred Stock:
Cash dividends paid - (2,892) - -
Common Stock:
Options exercised 65 - - -
Purchase of common shares (1,512) - - -
Issuance of restricted shares 752 - (761) -
Restricted stock compensation - - 21 -
------- --------- ------------ -----------
BALANCE, DECEMBER 28, 1997 $62,300 $ 102,449 $ (740) $ (8,504)
======= ========= ============ ===========
</TABLE>
See Notes to Consolidated Financial Statements.
[GRAPHIC OMITTED]
22
- --------------------------------------------------------------------------------
<PAGE>
Consolidated Statements of Cash Flows
Years Ended December 28, 1997, December 29, 1996 and December 31, 1995
(in thousands)
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
------- ------- -------
OPERATIONS
Net income (loss) $ (9,365) $ (2,221) $ (3,256)
Adjustments to reconcile net income (loss) to cash
provided by operations:
Depreciation 25,948 26,868 28,257
Gain on divestitures (34) (3,351) -
(Gain) loss on sale and writedown of property, plant and equipment (2,114) 647 (1,794)
Amortization 2,767 2,938 3,116
Deferred compensation expense - restricted stock 21 - -
Equity in (earnings) losses of unconsolidated affiliates (2,637) 2,458 19,848
Change in operating assets and liabilities, excluding effects of business
acquisition and divestitures:
Accounts receivable 28,415 11,882 (4,075)
Subordinated note receivable (23,842) - -
Inventories 11,836 5,729 (10,920)
Other assets (2,905) (4,258) (12,968)
Accounts payable and accrued liabilities (2,440) (11,594) 10,072
Deferred income taxes (1,840) (3,041) 1,837
Other liabilities 448 1,458 1,977
---------- ---------- ----------
Cash provided by operations 24,258 27,515 32,094
---------- ---------- ----------
INVESTING
Investments in unconsolidated entities (1,564) - (30,316)
Proceeds from sale of stock in unconsolidated affiliate - 805 -
Proceeds from divestitures 19,529 44,045 -
Proceeds from sale of property, plant and equipment 4,995 4,402 5,924
Acquisition, net of cash acquired - - (2,038)
Capital expenditures (36,290) (36,221) (61,662)
---------- ---------- ----------
Cash provided by (used in) investing (13,330) 13,031 (88,092)
---------- ---------- ----------
FINANCING
Net payments under line of credit agreements (767) (3,608) (1,825)
Increase (decrease) in checks issued in excess of deposits 4,831 (12,369) 14,727
Principal payments of long-term debt (10,796) (12,739) (97,414)
Proceeds from long-term debt borrowings - - 48,000
Proceeds from debentures issued - - 99,831
Debt issuance costs - - (915)
Payment on interest hedge activity - - (4,272)
Purchase of outstanding common stock (1,532) (8,771) (292)
Proceeds from issuance of common stock 66 521 26
Dividends paid - Class A Preferred (2,892) (2,898) (2,690)
---------- ---------- ----------
Cash provided by (used in) financing (11,090) (39,864) 55,176
---------- ---------- ----------
Net change in cash (162) 682 (822)
CASH AT BEGINNING OF YEAR 1,018 336 1,158
---------- ---------- ----------
CASH AT END OF YEAR $ 856 $ 1,018 $ 336
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
[GRAPHIC OMITTED]
23
- --------------------------------------------------------------------------------
<PAGE>
Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
- --------------------------------------------------------------------------------
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the
accounts of Cone Mills Corporation and all majority owned subsidiaries
(collectively, the "Company") except for Cone Receivables, LLC, which is a
special-purpose entity. 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 1997, 1996 and 1995 fiscal years each contained 52 weeks.
INVENTORIES Inventories are stated at the lower of cost or market. The last-in,
first-out (LIFO) method is used to determine cost of most domestically produced
goods. The first-in, first-out (FIFO) or average cost methods are used to
determine cost of all other inventories.
INVESTMENTS IN UNCONSOLIDATED AFFILIATES Investments in unconsolidated
affiliated companies are accounted for by both the equity and cost methods,
depending upon ownership levels. The Company's equity in earnings/losses and
currency translation adjustments may be recorded on up to a one-quarter delay
basis.
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:
<TABLE>
<S> <C>
Buildings 15-39 Years
Machinery and Equipment 10-20 Years
Other 3-20 Years
</TABLE>
IMPAIRMENT OF ASSETS Impairments of long-lived assets used in operations or to
be disposed of are recorded as losses by the Company when the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
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.
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.
REVENUE RECOGNITION Revenue from product sales is recognized at the time
ownership of the goods transfers to the customer.
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.
Note 2. Securitization of Accounts Receivable
- --------------------------------------------------------------------------------
On March 25, 1997, the Company entered into a one year agreement with the
subsidiary of a major financial institution ("the purchaser") and Cone
Receivables, LLC, a wholly owned subsidiary of Cone Mills Corporation, which
allows the sale of up to $40 million undivided interest in eligible accounts
receivable by Cone Receivables, LLC. Cone Receivables, LLC, a qualifying
special-purpose entity, meets the requirements for accounts receivable
securitization in accordance with SFAS 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," and
therefore is not a consolidated entity of the Company. The Company accounts for
the sale of receivables to Cone Receivables, LLC, as a true sale in accordance
with SFAS 125.
At December 28, 1997, the Company had sold accounts receivable of $66
million, less a $2 million allowance for doubtful accounts receivable, to Cone
Receivables, LLC.
[GRAPHIC OMITTED]
24
- --------------------------------------------------------------------------------
<PAGE>
The Company currently has a subordinated note receivable from Cone Receivables,
LLC of $24 million.
Prior to March of 1997, the Company had an agreement with a subsidiary
of a major financial institution which allowed the sale without recourse of up
to $50 million undivided interest in eligible trade receivables. The Company
acted as an agent for the purchaser by performing record keeping and collection
functions of receivables sold. Accounts receivable, under this agreement, was
shown net of $42 million sold at December 29, 1996.
Note 3. Inventories
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
(in thousands) 1997 1996
-------- --------
Greige and finished goods $ 81,130 $ 94,635
Work in process 11,260 10,793
Raw materials 11,122 7,231
Supplies and other 12,151 26,874
-------- --------
$115,663 $139,533
======== ========
</TABLE>
Inventories valued at LIFO as of December 28, 1997 and December 29,
1996 were 95% and 73% 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 $25 million higher at December 28, 1997, and $28 million higher
at December 29, 1996. LIFO inventories valued for financial statement purposes
exceed their income tax basis by approximately $81 million at December 28, 1997
and $83 million at December 29, 1996. During 1997, 1996 and 1995, certain
inventory quantities were reduced, resulting in a liquidation of LIFO inventory
layers carried at the lower costs prevailing in prior years. The effect of
these liquidations decreased net losses by less than $0.1 million in 1997, $1.4
million in 1996 and $0.5 million in 1995.
Note 4. Investments in Unconsolidated Affiliates
- --------------------------------------------------------------------------------
In 1993, the Company purchased a 20% ownership in Compania Industrial de Parras
S.A. de C.V., ("CIPSA"), a denim manufacturer in Mexico. 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 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. Through 1995 the Company
accounted for this investment by the equity method. 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.
The Company and CIPSA formed a company, Parras Cone de Mexico, S.A.,
("Parras Cone"), to build and operate a denim manufacturing facility in Parras,
Mexico. Parras Cone is capitalized with approximately $60 million of equity
from the shareholders, each with a 50% interest, and approximately $60 million
of Mexican bank financing. The debt is not guaranteed by Cone Mills Corporation
or CIPSA. Parras Cone began production of denim in the fourth quarter of 1995.
The Company's equity in earnings of Parras Cone was $2.6 million for 1997.
Included in the 1996 statement of operations is a loss of $2.5 million
representing the portion of Parras Cone's losses for 1996 and the fourth
quarter of 1995. As is customary for start-up foreign operations, the equity in
earnings/losses of Parras Cone were 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
[GRAPHIC OMITTED]
25
- --------------------------------------------------------------------------------
<PAGE>
Notes to Consolidated Financial Statements
Company's reporting period beginning in the fourth quarter of 1996. This change
increased the loss reported in 1996 by $0.8 million. The summarized unaudited
financial information of Parras Cone is set forth below:
<TABLE>
<S> <C> <C>
(in thousands) 1997 1996
------- -------
Current assets $ 18,332 $ 14,511
Noncurrent assets 103,611 110,870
Current liabilities 13,218 13,468
Noncurrent liabilities 51,506 59,934
Net sales 84,849 63,810
Gross profit 15,827 4,791
Net income (loss) 5,396 (5,368)
</TABLE>
Cone Receivables, LLC, a qualifying special-purpose entity formed in
1997, is a 100% owned unconsolidated subsidiary of the Company. The summarized
unaudited financial information of Cone Receivables, LLC, is set forth below:
<TABLE>
<S> <C>
(in thousands) 1997
-------
Current assets $25,788
Noncurrent assets -
Current liabilities 24,225
Noncurrent liabilities -
Net sales NA
Gross profit NA
Net income 664
</TABLE>
Note 5. Other Assets
<TABLE>
<S> <C> <C>
(in thousands) 1997 1996
------- -------
Excess of cost over net assets acquired $19,693 $19,693
Trade names 14,332 14,332
Other intangible assets 5,005 5,299
-------- --------
39,030 39,324
Less accumulated amortization 7,145 4,945
-------- --------
31,885 34,379
Other assets 6,546 6,367
-------- --------
$38,431 $40,746
======== ========
</TABLE>
Note 6. Property, Plant and Equipment
<TABLE>
<S> <C> <C>
(in thousands) 1997 1996
-------- --------
Land $ 11,799 $ 17,880
Buildings 85,206 83,048
Machinery and equipment 329,249 319,271
Other 33,724 34,143
--------- ---------
459,978 454,342
Less accumulated depreciation 208,091 203,664
--------- ---------
$251,887 $250,678
========= =========
</TABLE>
Note 7. Notes Payable
- --------------------------------------------------------------------------------
At December 28, 1997 the Company had outstanding unsecured short-term notes
payable of $4.5 million at a weighted average interest rate of 5.94%. The
Company's real estate subsidiary, which was sold in May 1997, had unsecured
notes payable outstanding of $5.3 million at December 29, 1996, at a weighted
average interest rate of 7.51%.
[GRAPHIC OMITTED]
26
- --------------------------------------------------------------------------------
<PAGE>
Note 8. Sundry Accounts Payable and Accrued Liabilities
<TABLE>
<S> <C> <C>
(in thousands) 1997 1996
------- -------
Accrued salaries, wages and commissions $10,274 $14,435
Checks issued in excess of deposits 17,999 13,168
Other 21,315 25,167
------- -------
$49,588 $52,770
======= =======
</TABLE>
Note 9. Long-Term Debt
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
(in thousands) 1997 1996
-------- --------
Senior Note $ 53,572 $ 64,286
Revolving Credit Agreement - -
8 1/8% Debentures 96,798 96,353
Other - 83
-------- --------
150,370 160,722
Less current maturities 10,714 10,754
-------- --------
$139,656 $149,968
======== ========
</TABLE>
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. In August of 1997, the
Company signed a new three-year $80 million Revolving Credit Agreement.
Borrowings under this Agreement are based upon current quoted rates, as
determined by either the prime rate, CD rate, or LIBOR, at the Company's
option, or through a competitive bid. The Company had no borrowings under this
Agreement at December 28, 1997. The total Revolving Credit Facility of $80
million remains available for future working capital requirements or general
corporate purposes and represented unused funding capacity at December 28,
1997. These financing agreements contain certain covenants regarding the
operations and financial condition of the Company. The Company was in
compliance with all loan covenants at December 28, 1997.
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.
Annual maturities of long-term debt for each of the next five fiscal
years are:
<TABLE>
<S> <C>
(in thousands)
1998 $10,714
1999 10,714
2000 10,714
2001 10,714
2002 10,716
</TABLE>
Note 10. 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 Company's 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 1997 were approximately 65% invested
in fixed income securities consisting of bond funds and short-term money market
or cash equivalent funds, while the remaining 35% were invested in an equity
fund.
[GRAPHIC OMITTED]
Net periodic pension cost for 1997, 1996 and 1995 included the
following components:
<TABLE>
<S> <C> <C> <C>
(in thousands) 1997 1996 1995
------ ------ ------
Service cost, benefits earned during
period $3,273 $3,652 $2,748
Interest cost on projected benefit
obligation 3,688 3,363 2,552
Actual return on assets (4,394) (1,963) (2,174)
Net amortization and deferral 3,200 1,518 2,031
------ ------ ------
$5,767 $6,570 $5,157
====== ====== ======
</TABLE>
27
- --------------------------------------------------------------------------------
<PAGE>
Notes to Consolidated Financial Statements
Assumptions used in determining the net periodic pension cost of the
pension plans are as follows:
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
---- ---- ----
Discount rate 7.5% 7.0% 8.0%
Average rate of increase in compensation levels 4.8 5.0 5.0
Expected long-term rate of return on assets 8.0 9.0 9.0
</TABLE>
The following table sets forth the pension plans' funded status and
amounts recognized in the Company's consolidated balance sheets at December 28,
1997 and December 29, 1996:
<TABLE>
<S> <C> <C>
(in thousands) 1997
---------------------------
Assets Accumulated
Exceed Benefits
Accumulated Exceed
Benefits Assets
------- ------
Actuarial present value of accumulated benefit obligation - vested portion $34,833 $ 3,612
Actuarial present value of accumulated benefit obligation - nonvested portion 4,280 1,271
------- -------
Accumulated benefit obligation - total 39,113 4,883
Additional amounts related to projected compensation levels 14,171 3,972
------- -------
Total actuarial projected benefit obligation for service rendered to date 53,284 8,855
Less: Plan assets at fair value 43,391 -
------- -------
Projected benefit obligation in excess of plan assets (9,893) (8,855)
Unrecognized net actuarial loss, difference in assumptions and
actual experience 21,064 4,929
Unrecognized prior service cost (income) (685) 431
Initial unrecognized net liability at date of adoption, being recognized
over 14-16 years 253 377
Adjustment to recognize minimum liability through recording an
intangible asset - (1,765)
------- -------
Pension related assets (liabilities) included in the consolidated balance sheets $10,739 $(4,883)
======= =======
<S> <C> <C>
(in thousands) 1996
--------------------------
Assets Accumulated
Exceed Benefits
Accumulated Exceed
Benefits Assets
------- ------
Actuarial present value of accumulated benefit obligation - vested portion $28,506 $ 4,506
Actuarial present value of accumulated benefit obligation - nonvested portion 2,748 143
------- -------
Accumulated benefit obligation - total 31,254 4,649
Additional amounts related to projected compensation levels 13,772 2,067
------- -------
Total actuarial projected benefit obligation for service rendered to date 45,026 6,716
Less: Plan assets at fair value 35,562 -
------- -------
Projected benefit obligation in excess of plan assets (9,464) (6,176)
Unrecognized net actuarial loss, difference in assumptions and
actual experience 21,120 3,212
Unrecognized prior service cost (income) (771) 469
Initial unrecognized net liability at date of adoption, being recognized
over 14-16 years 304 472
Adjustment to recognize minimum liability through recording an
intangible asset - (2,086)
------- -------
Pension related assets (liabilities) included in the consolidated balance sheets $11,189 $(4,649)
======= =======
</TABLE>
Assumptions used in determining the funded status of the pension plans
(shown above) are as follows:
<TABLE>
<S> <C> <C>
1997 1996
---- ----
Discount rate 7.0% 7.5%
Average rate of increase in compensation levels 4.8 4.8
</TABLE>
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.
[GRAPHIC OMITTED]
28
- --------------------------------------------------------------------------------
<PAGE>
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 respective 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 employee's annual compensation.
Expenses for the defined contribution plans are shown below:
<TABLE>
<S> <C> <C> <C>
(in thousands) 1997 1996 1995
---- ------ ------
EEP (combined) $779 $1,080 $1,197
SRP (combined) 716 692 712
</TABLE>
Note 11. 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 net periodic pension cost for postretirement benefits included the
following components:
<TABLE>
<S> <C> <C> <C>
(in thousands) 1997 1996 1995
---- ---- ----
Service cost for benefits earned during the
year $137 $135 $132
Interest cost on accumulated benefit
obligation 216 195 244
Amortization of the unrecognized net gain - - (101)
Amortization of transition obligation
over 20 years 114 114 230
---- ---- ----
$467 $444 $505
==== ==== ====
</TABLE>
The actuarial and recorded liabilities for postretirement benefits,
none of which have been funded, are as follows:
<TABLE>
<S> <C> <C>
(in thousands) 1997 1996
------ ------
Accumulated postretirement
benefit obligation:
Retirees $ 534 $ 430
Fully eligible active
plan participants 995 847
Other active plan participants 1,780 1,618
------ ------
3,309 2,895
Plus unrecognized net gain 56 195
Less unrecognized transition obligation 1,713 1,827
------ ------
Accrued postretirement
benefit cost $1,652 $1,263
====== ======
</TABLE>
For measurement purposes, an 8.0% annual rate of increase in per capita
health care cost of covered benefits was assumed for 1998, with such rate of
increase gradually declining to 5.5% in 2003. Increasing the assumed health
care cost trend rate by one percentage point would increase the accumulated
postretirement benefit obligation for fiscal year 1997 by $0.4 million and
increase net periodic postretirement benefit expense by less than $0.1 million
in 1997. The accumulated postretirement benefit obligation was computed using
an assumed discount rate of 7.0% for 1997 and 7.5% for 1996. 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.
[GRAPHIC OMITTED]
29
- --------------------------------------------------------------------------------
<PAGE>
Notes to Consolidated Financial Statements
Note 12. Income Taxes (Benefit)
- --------------------------------------------------------------------------------
The following tables present the provision (credit) for income taxes, the
components of the income tax expense (benefit), a reconciliation of the U.S.
statutory income tax provision (credit) to the actual income tax provision
(credit), and the components and items comprising net deferred income tax
liability.
Provision (Credit) for Income Taxes
<TABLE>
<S> <C> <C> <C>
(in thousands) 1997 1996 1995
------- ------- ------
Income (loss) before equity in earnings/losses of unconsolidated affiliates $(8,001) $(2,311) $7,306
Equity in losses of unconsolidated affiliates - - (2,992)
------- ------- ------
Subtotal - Provision (credit) for income taxes (8,001) (2,311) 4,314
Stockholders' equity, currency translation adjustment - - (3,630)
------- ------- ------
$(8,001) $(2,311) $ 684
======= ======= ======
</TABLE>
Components of Income Tax Provision (Credit)
<TABLE>
<S> <C> <C> <C> <C>
(in thousands) 1997 1996
--------------------------------- ----
Current Deferred Total Current
-------- ------- ------- ----
Federal $(6,351) $(1,596) $(7,947) $342
State, local and foreign 190 (244) (54) 388
------- ------- ------- ----
$(6,161) $(1,840) $(8,001) $730
======= ======= ======= ====
<S> <C> <C> <C> <C> <C>
(in thousands) 1996 1995
---------------------- ----------------------------
Deferred Total Current Deferred Total
--------- ------- ------- ------- ------
Federal $(1,742) $(1,400) $2,271 $1,417 $3,688
State, local and foreign (1,299) (911) 206 420 626
------- ------- ------ ------ ------
$(3,041) $(2,311) $2,477 $1,837 $4,314
======= ======= ====== ====== ======
</TABLE>
Reconciliation of Income Tax Provision (Credit)
<TABLE>
<S> <C> <C> <C>
(in thousands) 1997 1996 1995
------- ------- ------
Statutory U. S. tax $(6,078) $(1,586) $ 370
State income taxes (benefit), net of
federal benefit (taxes) (50) (644) 407
Tax benefit from foreign sales
corporation (1,239) (798) (1,210)
Equity in (earnings) losses of
unconsolidated affiliates (923) 860 4,387
Nondeductible meals and
entertainment expenses 158 155 189
Company owned life insurance (53) (104) (178)
Donations of appreciated property - (119) (73)
Other 184 (75) 422
------- ------- ------
$(8,001) $(2,311) $4,314
======= ======= ======
</TABLE>
Components of Net Deferred Income Tax Liability
<TABLE>
<S> <C> <C> <C>
(in thousands) 1997 1996 1995
------- ------- -------
Deferred income tax liabilities $78,039 $81,891 $83,231
Deferred income tax assets (16,146) (18,158) (16,457)
------- ------- -------
$61,893 $63,733 $66,774
======= ======= =======
</TABLE>
Items Comprising Net Deferred Income Tax Liability
<TABLE>
<S> <C> <C> <C>
(in thousands) 1997 1996 1995
------- ------- -------
Property, plant & equipment -
principally depreciation $39,778 $40,118 $41,348
Alternative minimum tax (2,710) (2,670) (3,825)
Inventories 29,018 30,940 31,979
Other - net (4,193) (4,655) (2,728)
------- ------- -------
$61,893 $63,733 $66,774
======= ======= =======
</TABLE>
[GRAPHIC OMITTED]
30
- --------------------------------------------------------------------------------
<PAGE>
Note 13. Supplemental Cash Flow Information
<TABLE>
<S> <C> <C> <C>
(in thousands) 1997 1996 1995
--------- ------- -------
Cash Payments For:
Interest, net of interest capitalized $ 14,579 $15,860 $12,758
========= ======= =======
Income taxes, net of refunds $ (3,188) $ 1,189 $ 3,861
========= ======= =======
Receivable recorded from divestitures $ 270 $ 1,879 $ -
========= ======= =======
Details of Divestures:
Inventories $ 12,034 $17,112
Property, plant and equipment 6,262 21,563
Other 1,199 2,019
Gain 34 3,351
--------- -------
$ 19,529 $44,045
========= =======
Details of Acquisition:
Working capital, other than cash $(2,008)
Property, plant and equipment (30)
-------
$(2,038)
=======
</TABLE>
Note 14. Capital Stock
- --------------------------------------------------------------------------------
All Class A Preferred Stock is held by the Company's 1983 Employee Stock
Ownership Plan ("ESOP") except shares held by a former participant who elected
to receive shares in a distribution of account balances. Class A Preferred
Stock is nonvoting, except as otherwise required by law, and is senior in
dividend preference to all other classes of capital stock. Class A Preferred
Stock has a liquidation preference senior to all other classes of capital stock
of $100 per share plus accrued and unpaid dividends.
Holders of Class A Preferred Stock are entitled to receive dividends on
the 31st day of March of each year from funds legally available therefor when,
as and if declared by the Board of Directors. The dividend rate is established
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 7.85% for 1998, and
7.5% for 1997 and 1996.
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 Company's
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 Company's Class A Preferred Stock, Common Stock or by delivery of other
qualifying employer securities or a combination of the foregoing, at the
Company's option; provided, however, that on the date of delivery the fair
market value of any stock or other qualifying employer securities used to pay
the redemption price shall be equal to or greater than the redemption price (or
portion thereof) paid therewith. The fair market value of Class A Preferred
Stock was determined to be $100.06 per share at December 28, 1997.
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
[GRAPHIC OMITTED]
31
- --------------------------------------------------------------------------------
<PAGE>
Notes to Consolidated Financial Statements
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. 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.
Note 15. Stock Plans
- --------------------------------------------------------------------------------
The Company's 1984 Stock Option Plan provided for the granting of options to
purchase 5,000,000 shares of Common Stock. Options granted pursuant to the plan
were nonqualified stock options with a term of ten years, and included income
tax reimbursement in accordance with the terms of the plan. All options granted
under this plan which are outstanding are exercisable as of December 28, 1997.
No additional grants may be made under the 1984 Plan.
The Company has in effect the 1992 Amended and Restated Stock Plan that
permits the granting of options to purchase up to 2,000,000 shares of Common
Stock. Options granted 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 Company's common stock on the date of
grant. The 1992 Amended and Restated Stock Plan also permits the granting of an
aggregate of 200,000 shares of common stock as restricted stock or performance
shares in lieu of options.
Incentive stock options were granted in 1993, and nonqualified stock
options with a tax reimbursement feature were granted in 1994 and 1996. In
1997, both incentive stock options and nonqualified stock options (without the
tax reimbursement feature) were granted. In 1997, the Company issued 89,500
restricted shares with a charge to compensation expense of less than $0.1
million. These shares have a vesting period of one to five years.
Unless otherwise stipulated, 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 50% of the shares granted can be exercised in any one calendar
year. Of the incentive stock options granted in 1997, 23,500 are exercisable
after six months from date of grant.
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 1997, 1996 and 1995.
[GRAPHIC OMITTED]
32
- --------------------------------------------------------------------------------
<PAGE>
SFAS 123, "Accounting for Stock-Based Compensation," requires pro forma
disclosures for option grants when accounting for stock-based compensation
plans in accordance with APB 25. The pro forma effects are determined as if
compensation costs were recognized using a fair value based accounting method.
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions: risk free interest rate of 5.75% for 1997 and 6.5% for 1996 and
1995; expected lives of eight years for 1992 Plan options and six years for
1994 Plan options; expected volatility of 34% for 1997 and 35% for 1996 and
1995; and a zero percent dividend yield.
The pro forma effects of net income (loss) and earnings (loss) per share
of options granted in 1997, 1996 and 1995 are as follows:
<TABLE>
<S> <C> <C> <C>
(in thousands, except per share data) 1997 1996 1995
---- ---- ----
Reported net income (loss) $ (9,365) $ (2,221) $ (3,256)
Pro forma net income (loss) (9,692) (2,423) (3,256)
Reported earnings (loss) per share - basic and diluted $ (0.47) $ (0.19) $ (0.22)
Pro forma earnings (loss) per share - basic and diluted (0.48) (0.20) (0.22)
</TABLE>
SFAS 123 requires pro forma disclosures only for options granted after
December 31, 1994; therefore, the pro forma amounts for compensation expense,
as presented above, may not be representative of the pro forma earnings impact
upon future years.
A reconciliation of the Company's stock option activity and related
information follows:
<TABLE>
<S> <C> <C>
1997
----------
Number Exercise
of Price
Options Weighted
(thousands) Average
-------------- -----------
Outstanding - beginning of year 1,314 $ 11.41
Granted 241 8.48
Exercised (12) 5.25
Forfeited (121) 13.16
-------------- ----------
Outstanding - end of year 1,422 $ 10.82
============== ==========
Exercisable at end of year 752 $ 12.47
============== ==========
Weighted average fair value of options granted
during year $ 4.41
==============
<CAPTION>
<S> <C> <C> <C> <C>
1996 1995
------------------------- ----------------------------
Number Exercise Number Exercise
of Price of Price
Options Weighted Options Weighted
(thousands) Average (thousands) Average
---------- -------- ---------- ----
Outstanding - beginning of year 1,047 $ 12.55 1,086 $ 12.66
Granted 398 8.06 7 11.63
Exercised (62) 6.46 (4) 6.50
Forfeited (69) 13.94 (42) 15.63
-------------- ---------- ---------------- ----------
Outstanding - end of year 1,314 $ 11.41 1,047 $ 12.55
============== ========== ================ ==========
Exercisable at end of year 612 $ 12.79 512 $ 12.15
============== ========== ================ ==========
Weighted average fair value of options granted
during year $ 6.68 $ 5.97
============== ================
</TABLE>
The following table summarizes information about stock options outstanding
and exercisable at December 28, 1997:
<TABLE>
<S> <C> <C> <C> <C> <C>
Options Outstanding Options Exercisable
-------------------------------------------- ----------------------------------
Wtd. Avg.
Range of Number Remaining Wtd. Avg. Number Wtd. Avg.
Exercise Outstanding Contract Exercise Exercisable Exercise
Prices (thousands) Life Price (thousands) Price
- ----- ------------- --------- ------ ----------- ------
$ 5-9 720 8.32 $7.84 181 $ 6.72
11-13 342 6.79 12.01 211 12.01
15-16 360 5.10 15.63 360 15.63
------------- ---
1,422 7.13 10.82 752 12.47
============= ===
</TABLE>
[GRAPHIC OMITTED]
33
- --------------------------------------------------------------------------------
<PAGE>
Notes to Consolidated Financial Statements
Note 16. Leases
- --------------------------------------------------------------------------------
The Company has various leases accounted for as operating leases. Rent expense
was $4.0 million, $5.3 million and $6.0 million for 1997, 1996 and 1995,
respectively. Future minimum rental payments required under lease agreements
for the next five years are $3.2 million for 1998, $2.5 million for 1999, $1.1
million for 2000, $0.6 million for 2001 and $0.1 million for 2002. Aggregate
future minimum rental payments total $7.5 million.
Note 17. Contingencies
- --------------------------------------------------------------------------------
The Company and its subsidiaries are involved in legal proceedings and claims
arising in the ordinary course of business. Although there can be no assurance
as to the ultimate disposition of these matters, management believes that the
probable resolution of such contingencies will not have a material adverse
effect on the financial condition of the Company.
Note 18. Earnings (Loss) Per Share
- --------------------------------------------------------------------------------
The following table sets forth the computation of basic and diluted earnings
(loss) per share ("EPS"):
<TABLE>
<S> <C> <C> <C>
(in thousands, except per share data) 1997 1996 1995
---- ---- ----
Net income (loss) $ (9,365) $(2,221) $(3,256)
Preferred stock dividends (2,981) (2,880) (2,832)
-------- ------- -------
Basic EPS - income (loss) available to common shareholders (12,346) (5,101) (6,088)
Effect of dilutive securities - - -
-------- ------- -------
Diluted EPS - income (loss) available to common shareholders
after assumed conversions $(12,346) $(5,101) $(6,088)
======== ======= =======
Determination of shares:
Basic EPS - weighted-average shares 26,140 27,179 27,380
Effect of dilutive securities - - -
-------- ------- -------
Diluted EPS - adjusted weighted-average shares and
assumed conversions 26,140 27,179 27,380
======== ======= =======
Earnings (loss) per share - basic and diluted $ (.47) $ (.19) $ (.22)
======== ======= =======
</TABLE>
Common stock options were outstanding during 1997, 1996 and 1995 but were
not included in the computation of diluted earnings per share because to do so
would have been antidilutive.
Note 19. 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 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
the foam division, sold in January 1996, and real estate operations sold in May
1997.
Sales to foreign customers, principally in Europe, were 25.1% of sales
in 1997, 25.6% in 1996, and 19.8% in 1995. The Company has one apparel customer
which accounted for more than 10% of net sales. Sales to this customer, as a
percentage of net sales, were 36.6% in 1997, 49.3% in 1996 and 39.1% in 1995.
At December 28, 1997, this customer had an outstanding accounts receivable
balance with the Company of approximately $11.4 million. The Company has not
incurred any losses related to this customer's accounts receivable.
[GRAPHIC OMITTED]
34
- --------------------------------------------------------------------------------
<PAGE>
Operating profit for each segment is total revenue less operating
expenses applicable to that segment. Restructuring activities, general
corporate expenses, interest, income taxes, and equity in earnings/losses of
unconsolidated affiliates are not included in segment operating income. General
corporate expenses include certain executive officers' compensation, legal
expenses and bank fees. Intersegment sales and transfers are considered
insignificant. Corporate assets include cash, administrative facilities,
deferred charges, and miscellaneous receivables.
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>
<S> <C> <C> <C>
(in thousands) 1997 1996 1995
---- ---- ----
Sales
Apparel $606,609 $628,139 $700,147
Home Furnishings 110,244 117,800 210,070
--------- -------- --------
$716,853 $745,939 $910,217
========= ======== ========
Operating Income (Loss)
Apparel $ 17,767 $ 31,024 $ 39,928
Home Furnishings (17,306) (8,523) (615)
Restructuring (5,176) (5,197) -
--------- -------- --------
(4,715) 17,304 39,313
--------- -------- --------
General Corporate Expenses 3,614 4,481 3,889
Interest Expense - Net 11,674 14,897 14,518
--------- -------- --------
15,288 19,378 18,407
--------- -------- --------
Income (Loss) before Income Taxes (Benefit) and Equity in
Earnings (Losses) of Unconsolidated Affiliates $(20,003) $ (2,074) $ 20,906
========= ======== ========
Operating Margin
Apparel 2.9% 4.9% 5.7%
Home Furnishings (15.7) (7.2) (0.3)
Identifiable Assets
Apparel $303,157 $314,191 $311,917
Home Furnishings 130,458 147,260 203,689
Corporate 36,250 34,391 31,034
Investments in Unconsolidated Affiliates 36,781 34,144 37,680
--------- -------- --------
$506,646 $529,986 $584,320
========= ======== ========
Depreciation and Amortization
Apparel $ 16,697 $ 18,186 $ 19,691
Home Furnishings 8,763 8,674 9,330
Corporate 3,255 2,946 2,352
--------- -------- --------
$ 28,715 $ 29,806 $ 31,373
========= ======== ========
Capital Expenditures
Apparel $ 23,394 $ 26,203 $ 33,904
Home Furnishings 11,140 8,687 21,660
Corporate 1,756 1,331 6,098
--------- -------- --------
$ 36,290 $ 36,221 $ 61,662
========= ======== ========
</TABLE>
[GRAPHIC OMITTED]
35
- --------------------------------------------------------------------------------
<PAGE>
Notes to Consolidated Financial Statements
Note 20. 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 for cotton to
manage the risk of cotton price fluctuations by hedging both committed and
anticipated transactions. 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 1997 and 1995 gains of $0.3 million and $1.3 million
were credited to cost of sales. Losses for 1996 of $0.6 million were charged to
cost of sales.
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 amounts of cash, accounts receivable, subordinated note
receivable, certain other financial assets, accounts payable and short-term
borrowings are reasonable estimates of their fair value at December 28, 1997
and December 29, 1996.
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 certain financial
instruments at December 28, 1997 and December 29, 1996 are as follows:
<TABLE>
<S> <C> <C> <C> <C>
(in thousands) 1997 1996
------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ---- ------ ----
Foreign Exchange
Contracts $ - $ - $ 383 $ 375
Long Term Debt:
Senior Note 53,572 53,963 64,286 66,369
8 1/8% Debentures 96,798 99,120 96,353 104,320
Other long-term debt - - 83 83
</TABLE>
Note 21. Transactions with Affiliated Companies
- --------------------------------------------------------------------------------
The Company has various transactions in the normal course of business with its
unconsolidated affiliated companies. The Company purchased $0.7 million, $5.4
million and $44.8 million of finished goods from CIPSA in 1997, 1996 and 1995,
respectively. Sales of finished goods to CIPSA were $1.6 million and $1.7
million in 1996 and 1995, respectively. The Company did not have significant
sales with CIPSA in 1997. In addition, for 1995 the Company had proceeds of
$1.0 million from the sale of used textile manufacturing equipment to CIPSA.
Parras Cone began production of denim and yarn during the fourth
quarter of 1995. Purchases of denim and yarn from Parras Cone were $71.5
million and $51.7 million in 1997 and 1996, respectively. Purchases of these
products from this affiliate were insignificant during 1995. There were also
insignificant miscellaneous services rendered from/to Parras Cone in the normal
course of business.
Note 22. Restructuring Activities
- --------------------------------------------------------------------------------
The Company's business strategy to focus on core businesses and facilities
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.
During 1996 and 1997, the Company completed several steps in its restructuring
program resulting in charges of $5.2 million for restructuring activities in
each year.
[GRAPHIC OMITTED]
36
- --------------------------------------------------------------------------------
<PAGE>
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 realized
from this sale were 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 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.
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. 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 began in April 1997 and was completed
during the fourth quarter of 1997. The components of the restructuring charge
for 1996 included $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.
In 1997, the Company terminated approximately 130 employees at the
Granite plant and incurred restructuring charges of $4.5 million, $1.5 million
higher than planned, due to unexpected expenses and difficulties associated
with the consolidation. Beginning in 1998, the Company expects to realize
savings from improved capacity utilization and a lower cost structure at the
Carlisle facility. The relocation of production equipment and incurrence of
startup expenses was substantially completed in 1997. Accordingly, the Company
does not expect additional restructuring charges in 1998 related to the
consolidation of finishing operations.
In May 1997, the Company sold substantially all the assets of its real
estate operations, including its subsidiary Cornwallis Development Co., for
$19.5 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. The gain recognized upon disposition of the
assets in 1997 was insignificant.
The Company 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. In December 1997, the Company also recognized
restructuring charges of $0.7 million for severance and other employee-related
costs.
Operating units whose activities will not continue as part of the
Company had sales of $4.6 million, $34.1 million and $137.4 million for 1997,
1996 and 1995, respectively. Net operating results of these businesses,
excluding restructuring charges, were losses of $1.0 million, $2.3 million and
$0.8 million in 1997, 1996 and 1995, respectively.
Note 23. Recent Accounting Pronouncements
- --------------------------------------------------------------------------------
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 128, "Earnings Per Share,"
which was adopted by the Company in the fourth quarter of 1997. SFAS 128
requires a presentation of basic and diluted earnings per share ("EPS")
replacing primary and fully diluted EPS. All prior-period EPS data presented has
been restated to conform with the provisions of SFAS 128. The adoption of SFAS
128 had no material effect on the Company's reported EPS.
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive
Income," effective for fiscal years beginning after December 15, 1997. SFAS 130
requires that comprehensive income and its components be reported in a financial
statement. Comprehensive income is the total of net income and other changes in
equity, except those resulting from investments by owners and distribution to
owners not reflected in net income. The Company will adopt SFAS 130 in fiscal
year 1998.
Also in June 1997, the FASB issued SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information," which is effective for
fiscal years beginning after December 15, 1997. SFAS 131, which is based on the
management approach to segment reporting, establishes requirements about
reporting operating segments and certain information regarding products,
services, geographic areas and major customers. Management has not yet
evaluated the effects of SFAS 131 on its reporting of segment information. The
Company will adopt SFAS 131 in fiscal year 1998.
[GRAPHIC OMITTED]
37
- --------------------------------------------------------------------------------
<PAGE>
Notes to Consolidated Financial Statements
Note 24. Quarterly Financial Data (Unaudited)
<TABLE>
<S> <C> <C> <C> <C>
(in thousands, except per share data) Quarters Ended
---------------------------------------------------------------
Mar. 30, June 29, Sept. 28, Dec. 28,
1997 1997 1997 1997
---------- ----------- ----------- ---------
Net sales $174,714 $185,792 $185,501 $170,846
Gross profit (1) 19,984 22,873 18,692 13,564
Income (loss) from operations 1,025 941 (2,185) (8,110)
Equity in earnings (losses) of unconsolidated affiliate (513) 397 1,553 1,200
Net income (loss) $ (1,995) $ (1,071) $ (1,366) $ (4,933)
Earnings (loss) per share - diluted $ (.10) $ (.07) $ (.08) $ (.22)
========== =========== =========== =========
Weighted average shares outstanding - diluted 26,237 26,102 26,109 26,112
========== =========== =========== =========
Common stock prices
High 8 1/2 9 3/8 8 13/16 9
---------- ----------- ----------- ---------
Low 7 7 1/8 7 3/8 7 7/8
---------- ----------- ----------- ----------
(in thousands, except per share data)
Quarters Ended
---------------------------------------------------------------
Mar. 31, June 30, Sept. 29, Dec. 29,
1996 1996 1996 1996
---------- ----------- ----------- ----------
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 (losses) of unconsolidated affiliate 212 (414) (547) (1,709)
Net income (loss) $ 7,185 $ 3,702 $ (2,243) $(10,865)
Earnings (loss) per share - diluted $ .24 $ .11 $ (.11) $ (.44)
========== =========== =========== ==========
Weighted average shares outstanding - diluted 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>
The number of holders of record of the Company's Common Stock as of February 2,
1998 was 449.
(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.
The 1996 and first three quarters of 1997 earnings (loss) per share amounts
have been restated to comply with SFAS 128, "Earnings Per Share."
In the second quarter of 1997, the Company completed the sale of substantially
all the assets of its real estate operations, including those of its subsidiary
Cornwallis Development Co. As noted below, a reserve was established in the
Company's fourth quarter 1996 financial statements to adjust the carrying value
of these assets to estimated net realizable value. In the fourth quarter of
1997, a charge of $5.0 million ($.11 per share, net of tax) was recorded to
reflect writedown of inventory values as well as $2.1 million ($.05 per share,
net of tax) for certain restructuring charges. See Note 22, "Restructuring
Activities" of the Notes to Consolidated Financial Statements.
In the first quarter of 1996, the Company recorded income of $4.7 million ($.10
per share, net of tax) from the sale of its polyurethane division, beginning
its current restructuring plan to refocus on core businesses. In the fourth
quarter of 1996, a charge of $9.7 million ($.22 per share, net of tax) was
recorded reflecting the writedown of assets sold and assets held for sale
related to the restructuring plan. See Note 22, "Restructuring Activities" of
the Notes to Consolidated Financial Statements.
[GRAPHIC OMITTED]
38
- --------------------------------------------------------------------------------
<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 28, 1997, 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.
[GRAPHIC OMITTED]
/s/ J. Patrick Danahy
J. Patrick Danahy
President and
Chief Executive Officer
/s/ Anthony L. Furr
Anthony L. Furr
Vice President and
Chief Financial Officer
/s/ Gary L. Smith
Gary L. Smith
Controller
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 28, 1997 and December 29, 1996, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 28, 1997.
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 28, 1997 and December 29, 1996, and
the results of their operations and their cash flows for each of the three
years in the period ended December 28, 1997 in conformity with generally
accepted accounting principles.
[GRAPHIC OMITTED]
/s/ McGladrey & Pullen, LLP
McGladrey & Pullen, LLP
Greensboro, North Carolina
February 13, 1998
[GRAPHIC OMITTED]
39
- --------------------------------------------------------------------------------
<PAGE>
Historical Financial Review
(in millions, except per share data)
<TABLE>
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS 1997 1996 1995 1994 1993
---- ---- ---- ---- -----
Net Sales $ 716.9 $ 745.9 $ 910.2 $ 806.2 $ 769.2
-------- -------- -------- -------- ---------
Cost of Sales 615.9 614.6 757.0 642.5 589.3
Depreciation 25.9 26.9 28.2 23.3 21.0
-------- -------- -------- -------- ---------
Subtotal 641.8 641.5 785.2 665.8 610.3
-------- -------- -------- -------- ---------
Gross Profit 75.1 104.4 125.0 140.4 158.9
Selling and Administrative 78.2 86.4 89.6 77.8 73.3
Restructuring 5.2 5.2 - - -
-------- -------- -------- -------- ---------
Income (Loss) from Operations ( 8.3) 12.8 35.4 62.6 85.6
Other Expense - Net 11.7 14.9 14.5 7.3 6.4
-------- -------- -------- -------- ---------
Income (Loss) from Continuing Operations before
Income Taxes (Benefit) and Equity in Earnings
(Losses) of Unconsolidated Affiliates ( 20.0) ( 2.1) 20.9 55.3 79.2
Income Taxes (Benefit) ( 8.0) ( 2.3) 7.3 19.7 29.9
-------- -------- -------- -------- ---------
Income (Loss) from Continuing Operations before Equity
in Earnings (Losses) of Unconsolidated Affiliates ( 12.0) 0.2 13.6 35.6 49.3
Equity in Earnings (Losses) of Unconsolidated Affiliates 2.6 ( 2.4) ( 16.9) 0.2 0.3
-------- -------- -------- -------- ---------
Income (Loss) from Continuing Operations ( 9.4) ( 2.2) ( 3.3) 35.8 49.6
Discontinued Operations - - - 0.4 -
-------- -------- -------- -------- ---------
Income (Loss) before Cumulative Effect of Accounting Change ( 9.4) ( 2.2) ( 3.3) 36.2 49.6
Cumulative Effect of Accounting Change - - - ( 1.2) -
-------- -------- -------- -------- ---------
Net Income (Loss) $ (9.4) $ (2.2) $ (3.3) $ 35.0 $ 49.6
======== ======== ======== ======== =========
Per Share of Common Stock (1)
Income (Loss) from Continuing Operations:
Basic $( .47) $ ( .19) $ ( .22) $ 1.19 $ 1.69
Diluted ( .47) ( .19) ( .22) 1.19 1.68
Net Income (Loss):
Basic ( .47) ( .19) ( .22) 1.16 1.69
Diluted ( .47) ( .19) ( .22) 1.16 1.68
SEGMENT INFORMATION
Net Sales
Apparel $ 606.6 $ 628.1 $ 700.1 $ 600.5 $ 575.8
Home Furnishings 110.3 117.8 210.1 205.7 193.4
--------- --------- --------- -------- ---------
Total $ 716.9 $ 745.9 $ 910.2 $ 806.2 $ 769.2
========= ========= ========= ======== =========
Operating Income (Loss)
Apparel $ 17.8 $ 31.0 $ 39.9 $ 47.5 $ 68.8
Home Furnishings ( 17.3) ( 8.5) ( 0.6) 19.0 19.5
Restructuring ( 5.2) ( 5.2) - - -
BALANCE SHEET DATA (AT YEAR END):
Current Ratio 1.5 1.7 1.6 1.8 1.9
Total Assets $ 506.6 $ 530.0 $ 584.3 $ 524.1 $ 431.6
Long-Term Debt 150.4 160.7 173.0 126.5 77.9
Stockholders' Equity 196.5 210.3 222.1 236.9 210.0
Long-Term Debt as a Percent of Stockholders' Equity
and Long-Term Debt 43% 43% 44% 35% 27%
Shares Outstanding (millions) Year End 26.2 26.3 27.4 27.4 27.7
OTHER DATA:
Capital Expenditures $ 36.3 $ 36.2 $ 61.7 $ 37.5 $ 38.7
Common Stock Dividend Paid - - - - -
Number of Employees at Year End 6,100 6,700 7,900 8,100 7,800
</TABLE>
(1) 1993 to 1996 were restated for effect of SFAS 128, "Earnings Per Share."
[GRAPHIC OMITTED]
40
- --------------------------------------------------------------------------------
<PAGE>
Directors and Officers
Directors
- --------------------------------------------------------------------------------
Dewey L. Trogdon(1)
Chairman of the Board
John L. Bakane(1)
Executive Vice President
Doris R. Bray(1)(2)
Partner, Schell Bray Aycock Abel
& Livingston L.L.P.
J. Patrick Danahy(1)
President and Chief Executive Officer
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
Cyrus C. Wilson(2)
International Retail Marketing Consultant
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
Anthony L. Furr
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
Marvin A. Woolen, Jr.
Vice President - Cotton Purchasing
David E. Bray
Treasurer
Gary L. Smith
Controller
Leesa C. Sluder
Assistant Treasurer
David K. Bradbury
Assistant Treasurer - Tax and Assistant Secretary
[GRAPHIC OMITTED]
41
- --------------------------------------------------------------------------------
<PAGE>
Shareholder Information
Corporate Headquarters
- --------------------------------------------------------------------------------
Cone Mills Corporation
3101 N. Elm Street
P. O. Box 26540
Greensboro, NC 27415-6540
(336) 379-6220
Visit our website at www.cone.com
Annual Meeting
- --------------------------------------------------------------------------------
The Annual Meeting of Shareholders will be held at the Cone Corporate Center,
3101 N. Elm Street,
Greensboro, NC on May 12, 1998, at 10:00 a.m.
Transfer Agent And Registrar
- --------------------------------------------------------------------------------
First Union National Bank of North Carolina,
Shareholder Administration, NC-1153
1525 West W. T. Harris Blvd - 3C3
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
- --------------------------------------------------------------------------------
Anthony L. Furr
Vice President and Chief Financial Officer
David E. Bray
Treasurer
(336) 379-6220
Cone Apparel Products
- --------------------------------------------------------------------------------
Marketing/Manufacturing Headquarters
3101 N. Elm Street
P. O. Box 26540
Greensboro, NC 27415-6540
(336) 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
Douglas W. Hart, President
Cone Sportswear
Cone Decorative Fabrics
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
John Wolf Cone Jacquards
261 Fifth Avenue 3400 Highway 221-A
New York, NY 10016 Cliffside NC 28024
(212) 683-4800 (704) 657-9662
Murray S. Engle, President Andrew Major, President
</TABLE>
Cone Finishing Division
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Carlisle Plant Raytex Plant
P. O. Box 8 P. O. Box 884
Carlisle, SC 29031 Marion SC 29571
(864) 427-6221 (803) 423-5030
</TABLE>
Sales and Marketing
1440 Broadway
New York, NY 10018
(212) 391-1300
Jerry W. Kennedy, President
[GRAPHIC OMITTED]
42
- --------------------------------------------------------------------------------
<PAGE>
Design: Wright Communications Inc./NYC
[Recycle Logo appears here]
Portions of this annual report utilize recycled paper.
<PAGE>
Page 50
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>
Cone Mills (Mexico), S.A. Mexico City Mexico, D. F. 99 %
de C.V.
Comercializadora Cone Mills, Mexico City Mexico, D.F. 99
S.A. de C.V.
Cone Mills (Europe) S.A. Zaventem, Belgium Brussels, Belgium 100
Cone Singapore, PTE., Ltd. Singapore Republic of Singapore 100
Cone Foreign Sales Greensboro, NC Barbados 100
Corporation
Cone Mills International Greensboro, NC North Carolina 100
Corporation
Cone Global Finance Corp. San Francisco, CA California 100
CIPCO S.C., Inc. Carlisle, S.C. Delaware 100
Cornwallis Development Co. Greensboro, NC North Carolina 100
Boelas Pipeline Greensboro, NC Louisiana 100
Corporation
Cliffside Railroad Cliffside, NC North Carolina 98
Company
House 'N Home Fabrics New York, NY New York 100
and Draperies, Inc.
Cone Receivables, LLC Greensboro, NC Delaware 100
Cone Foreign Trading, LLC Greensboro, NC North Carolina 100
</TABLE>
Page 51
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 13, 1998, 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 28, 1997.
/s/McGLADREY & PULLEN, LLP
McGladrey & Pullen, LLP
Greensboro, North Carolina
March 24, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONE
MILLS CORPORATION CONSOLIDATED FINANCIAL STATEMENTS DATED DECEMBER 28, 1997, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-END> DEC-28-1997
<CASH> 856
<SECURITIES> 0
<RECEIVABLES> 45,300
<ALLOWANCES> 1,500
<INVENTORY> 115,663
<CURRENT-ASSETS> 179,547
<PP&E> 459,978
<DEPRECIATION> 208,091
<TOTAL-ASSETS> 506,646
<CURRENT-LIABILITIES> 121,166
<BONDS> 139,656
0
38,395
<COMMON> 2,620
<OTHER-SE> 155,505
<TOTAL-LIABILITY-AND-EQUITY> 506,646
<SALES> 716,853
<TOTAL-REVENUES> 716,853
<CGS> 641,740
<TOTAL-COSTS> 641,740
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,674
<INCOME-PRETAX> (20,003)
<INCOME-TAX> (8,001)
<INCOME-CONTINUING> (9,365)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,365)
<EPS-PRIMARY> (.47)
<EPS-DILUTED> (.47)
</TABLE>
