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 January 3, 1999
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 22, 1999: $127,161,165
Number of shares of common stock outstanding as of February 22, 1999:
25,432,233 shares.
Documents incorporated by reference: Portions of 1998 Annual Report to
Shareholders, Part II, Items 5, 6, 7, 7a and 8; Proxy Statement for Annual
Meeting to be held May 11, 1999, Part III, Items 10, 11, 12 and 13 of this
report.
Index to Exhibits - Pages 24-34
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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. The Company has a 50%
interest in Parras Cone de Mexico, S.A. , ("Parras Cone"), a denim manufacturing
facility in Mexico, and an alliance with the Ashima Group of India.
The Company operates in four principal business segments: (1) Denim and Khaki,
(2) Yarn-Dyed Products, (3) Commission Finishing and (4) Decorative Fabrics. The
Company seeks growth of its products 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 $205 million and the Company expects to spend approximately $15
million in 1999 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, has been producing basic denims and yarn since late 1995. As
approved by the Parras Cone Board of Directors, Cone markets and distributes the
denim production of Parras Cone.
In August 1998, the Company formed an alliance with the Ashima Group of India.
This alliance consists of an equity investment in Ashima Syntex Ltd.,
technical service agreements and a marketing agreement whereby Cone markets
Ashima denim and sportswear products outside the Indian sub-continent. See "Item
7. Management's Discussion and Analysis of Results of Operations and Financial
Condition, Long-Term Strategic Initiatives."
During early 1999, the Company announced a major reorganization and downsizing
initiative. Upon completion of its announced restructuring plan Cone will employ
approximately 5,000 employees and operate seven manufacturing plants in North
and South Carolina. The plan includes the reconfiguration and closing of
manufacturing
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facilities and downsizing and reorganization of sales, manufacturing and
administrative staffs. See "Item 7. Management's Discussion and Analysis of
Results of Operations and Financial Condition, Long-Term Strategic Initiatives"
and "Item 8. Financial Statements and Supplementary Data," Note 21 of the Notes
to Consolidated Financial Statements.
BUSINESS SEGMENTS
Information concerning operating segments for the Company's 1998, 1997 and 1996
fiscal years are incorporated by reference. See "Item 7. Management's Discussion
and Analysis of Results of Operations and Financial Condition, Long-Term
Strategic Initiatives" and "Item 8. Financial Statement and Supplementary Data,"
Notes 18 and 21 of the Notes to Consolidated Financial Statements.
APPAREL PRODUCTS
Cone's apparel products group consists of two reporting segments:
the Denim and Khaki segment and the Yarn-Dyed Products segment.
Retail sales of denim and khaki apparel products have been growing in recent
years with khakis reporting double-digit increases for 1998 in the U.S. Flannel
shirting fabrics, which comprise the major portion of the Company's yarn-dyed
products, have seen a decrease in popularity in recent years as alternative
fabrics have gained fashion appeal. The Company believes that the rate of growth
in casual apparel fabrics, denim and khakis in particular, 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, (iii) enhanced styling and comfort of casual
garments along with greater acceptance of casual wear in the workplace and (iv)
strong brands such as Levi, Dockers, Wrangler, The Gap, Old Navy and Arizona
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 to higher quality
products with more diverse styling. As a result, many denim apparel customers
desire better fabric quality, durability 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.
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population, began to expand in the mid-1990s when the children of baby-boomers
began to reach these ages. Demand for denim and khaki apparel is expected to
increase as this segment of the U.S. population expands.
At the retail level, mass market and specialty retailers have gained market
share from department stores. This change in distribution has created the need
to differentiate marketing and manufacturing to provide the right product to
each distribution channel. The Company uses its Parras Cone facility to target
the mass market channel of distribution while its U.S. facilities are more
focused on specialty retailers and department store channels of distribution.
Internationally, consumption of denims has plateaued in industrialized
countries, with Europe showing a slight decline in the past year as khakis and
other alternative fabrics have gained market share. 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 tempered by
economic weakness in Asia and South America. In addition the Company's sales
growth has been countered by increased global supply primarily in countries with
lower labor costs.
Marketing and Sales. The Company's marketing focus is to serve brand name
apparel customers through the development of products that are recognized in the
marketplace for their distinctive quality, durability and styling. Styles of the
Company's denim and other fabrics vary in color, finish, weight and
construction, depending upon fashion trends and the needs of the specific
customer. The Company's product development specialists monitor fashion trends
throughout the United States, Europe, Far East and South America, attend fashion
and trade shows, meet with garment manufacturers and retailers and conduct
market research. In addition, the Company maintains an international focus with
a long history of distributing its products internationally. In 1998 the Company
exported approximately 35% of its denim sales.
The apparel products group is organized and managed by its major product lines
of denim, khaki and other piece-dyed products, yarn-dyed products and products
produced by Ashima. The marketing group is headquartered in Greensboro, North
Carolina with sales offices in New York, San Francisco, Los Angeles, Dallas,
Brussels and Singapore to provide a more direct working relationship with the
customer. In addition, the Company has sales agents in Europe, Japan, 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
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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. Cone's apparel products sales group and international agents
represent all product lines.
The Company's denim and khaki exports were approximately $177 million, $176
million and $188 million in 1998, 1997 and 1996, respectively.
Raw Materials. Cotton is the primary raw material for the Company's fabric
manufacturing operations, its purchased yarn and greige goods (fabrics that have
not been dyed or finished). United States agricultural programs affect the cost
and supply of cotton in the U.S., and the policies of foreign governments have
an effect on worldwide prices and supplies as well. The U.S. Department of
Agriculture provides several programs to keep the effective price to cotton
purchasers competitive with world levels while protecting the grower. Step 2 of
the Federal Agriculture Improvement and Reform Act provided a formula for
payments to users of domestically produced cotton when domestic cotton prices
exceeded world prices for a period of time. Funds for these payments were
depleted in December 1998. Step 3 of this program allows for the import of
cotton, which has become available to U.S. purchasers in March 1999, and has
resulted in the New York futures market price moving closer to the world price.
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, as 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."
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. 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 yarn, greige goods and dyes and chemicals. Based on the
Company's strategy to limit its investment in yarn manufacturing in the future,
it has formed alliances with yarn manufacturers to insure adequate supplies at
competitive prices. Pursuant to its decision to outsource an increased portion
of its yarn manufacturing, the Company has entered into a supply agreement with
Parkdale America, LLC, effective in 1999. Additional yarn and other materials
used by the Company have normally been available in adequate supplies through a
number of suppliers.
Trade. The North American Free Trade Agreement ("NAFTA"), which became effective
on January 1, 1994, 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, its alliance with the Ashima Group in India and its
emphasis on shortening production and delivery times allow Cone to respond more
quickly than foreign producers to changing fashion trends and to its
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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.
In instances where the Company finds itself uncompetitive with imports, the
Company is pursuing initiatives to either manufacture or source products
internationally.
DENIM AND KHAKI
The Company's denim products, accounting for the majority of this segment's
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 is supported by the Company's product development specialists.
Due to the nature of the manufacturing process, denim fabric contains variations
in color that give it a distinctive appearance. After weaving, denim fabrics and
garments are processed further in finishing operations that produce different
textures and other altered physical properties. In the dyeing and finishing of
khaki fabrics many different colors and finishes are produced including the
Company's fade resistant Deepdown(TM) fabric. During these processes, the
Company's product development specialists generally work in collaboration with
customers to assure that fabrics meet customer requirements and can be
manufactured efficiently. This creates a strong working relationship that allows
Cone to react quickly to its customers' rapidly changing needs.
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 fabric construction, yarn variations, finishes and new product
introductions. Basic denims are less differentiated by styling with competition
being primarily on the basis of price, quality and service.
Cone's value-added denims are sold principally to brand name apparel companies,
specialty retailers and brand name garment producers. Cone's basic denims are
used primarily in garments sold through retail chains, department stores and
catalogs. Although most of the
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Company's basic denims are designed for the upscale segment of these markets,
the Company also produces high-quality basic heavyweight blue denim, primarily
at Parras Cone, to service the mass market distribution channel. Sales of basic
denims constituted approximately one-fourth of the Company's total denim sales
in 1998.
The Company's largest denim customer is Levi Strauss, whose 501(R) family of
jeans are produced solely from the Company's proprietary fabrics. Other
customers include V.F. Corporation (Wrangler and Lee), The Gap, Old Navy, Calvin
Klein, Aalfs, Arizona, P.L. Industries and Hilfiger. The Company's international
customers include Levi International, Joker Jeans and Big Star in Europe, Edwin
in Japan and VF Corporation (Wrangler and Lee) in South America.
Specialty weight denims include a variety of woven constructions, colors and
weights and are used primarily in fashion garment silhouettes and women and
children's wear. These fabrics constitute a growing portion of the denim market
as recent growth in denim has occurred in fashion silhouettes such as baggy
jeans and carpenter pants at the expense of basic five pocket jeans. These
denims tend to establish market trends because of their use in higher fashion
garments.
Cone also serves niche markets for piece-dyed fabrics with its ProSpin(R) fabric
which provides superior wrinkle resistance properties based upon yarn formation
technologies. In addition, 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.
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's denim weaving facilities have all
been re-loomed in the nineties. The Company's U.S. dyeing and finishing
facilities include a wide range of technologies, with seven indigo long-chain
dyeing machines, beam dyeing, continuous overdye machinery and raw cotton
dyeing equipment. As previously discussed, in addition to its U.S. facilities
the Company has a 50% interest in Parras Cone, a low cost producer of
high-quality basic denims.
Cone is recognized internationally as a quality leader with its 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.
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These groups work with the Company's product development specialists and its
customers' designers to produce new products for the marketplace. The Company
uses on-line computer-aided design systems to increase styling effectiveness.
Competition. The denim and khaki fabrics business is highly competitive. Primary
competitive factors include price, product styling and differentiation, customer
service, quality and flexibility, with the significance of each factor dependent
upon the particular needs of the customer and the product involved.
No single company dominates the industry and domestic and foreign competitors
range from large, integrated enterprises to small niche concerns. Competition is
in the form of both domestic and foreign piece goods and in the form of imported
apparel garments from Mexico, Asia 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. Principal competitive factors in
the domestic and international markets for denims are quality, price and
styling. Denim jeans have an image of being uniquely American products. The
Company's competitiveness with producers from other countries is influenced by
tariffs and transportation costs. 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.
In recent years due to the competitiveness of the apparel business and the
criticality of low wage costs for garment producers the Company has been
exploring a number of international initiatives. Its objectives for expansion
into Mexico included 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. As the
garment industry has migrated to Mexico from the U.S. the Company has benefited
from Parras Cone's cost structure, location and Cone's U.S. infrastructure.
In 1998, the Company formed an alliance with the Ashima Group of India that
allows Cone to market Ashima denim and sportswear products worldwide outside the
Indian sub-continent. This alliance will allow Cone to provide products to its
customers on a worldwide basis that cannot be competitively produced in the U.S.
The Company is continuously assessing the feasibility of additional
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manufacturing platforms and alliances within certain trade blocs in order to
compete more effectively in its markets.
Seasonality. Demand for the Company's denim and khaki 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 generally begin six months in
advance of that season.
YARN-DYED PRODUCTS
Yarn-dyed products, primarily flannel, are principally used in menswear and in
lighter weight apparel products for women's and children's wear. These products
are sold through catalogs, department stores and discounters. Customers for
these fabrics include M. Fine, L.L. Bean, J.C. Penney and Woolrich.
Manufacturing. The Company's Salisbury facility provided the dyeing and weaving
production for the yarn-dyed product line. Due to extensive losses in this
product line in recent years and the cost structure of the Salisbury plant, in
January 1999, the Company announced its plans to close the facility. The Company
plans to continue to be in the yarn-dyed business primarily through products
produced by Ashima and potentially other third party manufacturers or on a
limited basis in its denim facilities.
The Company uses on-line computer-aided design systems to increase styling
effectiveness and will electronically link with Ashima in the development of
products and patterns.
Competition. The yarn-dyed products business is highly competitive with the
primary form of competition being imported garments and to a lesser extent North
and Central American piece goods. As with denim and khaki, primary competitive
factors include price, product styling and differentiation, customer service,
quality and flexibility. As styling has become more complex with finer yarn
counts, labor intensity of the product has increased resulting in increased cost
advantages for Asian producers.
As discussed previously, the Company formed an alliance with the Ashima Group of
India that allows Cone to market Ashima products worldwide outside the Indian
sub-continent. Ashima produces an extensive line of yarn-dyed products and the
Company will provide Ashima with its technical assistance and styling to enhance
Ashima's product offerings in this area. This alliance should provide Cone with
cost-competitive products for its customers.
Seasonality. Demand for the Company's yarn-dyed products has been
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very seasonal due to the fact that the primary product is heavyweight flannels.
As the Company moves forward in its alliance with Ashima the Company should have
products for both the Spring and Fall selling seasons.
COMMISSION FINISHING AND DECORATIVE FABRICS
Commission Finishing. The commission finishing segment, 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 and
plainshade dyeing services to leading home furnishings stylists and
distributors. As commission printers, Carlisle and Raytex print fabrics owned by
customers on a fee basis. 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.
The home furnishings fabrics processed at its Carlisle facility are generally
used for upholstery and drapery prints. The Company also provides fabric
printing and plainshade dyeing services to converters of fashion apparel
fabrics. Cone's khaki product line is primarily dyed and finished at the
Carlisle facility.
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., Springs Industries, Bloomcraft and P. Kaufman.
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 Springs
Industries, Tietex Ticking, Dan River Mills, Revman Industries and Croscill.
Cone's commission finishing marketing headquarters are located in New York City.
Marketing efforts of the New York sales staff are augmented by close working
relationships between Carlisle and Raytex's production and technical staffs
and customers' designers and stylists. The Company's commission finishing
operations also maintain a customer service center that utilizes electronic data
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interchange (EDI) with major customers.
Consumer fashion preference is based upon coloration, texture and value. As with
all home furnishing fabrics, there is fashion risk which affects consumer
preference. In recent years, home furnishing prints have experienced lesser
popularity than during previous years.
Decorative Fabrics. The Company's decorative fabrics segment includes John Wolf
and Cone Jacquards. John Wolf is a "converter" of printed and solid woven
fabrics for upholstery, draperies and bedspreads. A converter designs and
distributes fabrics, which are manufactured and printed for the converter by
others. The decorative fabrics' lines are printed primarily at the Carlisle
plant under the names "John Wolf Decorative Fabrics" and "David and Dash." John
Wolf customers include Corinthian Furniture Inc., Arden Companies, Bauhaus USA
Inc. and Burlington House Fabrics.
Cone Jacquards, a modern 138,000 square foot facility with wide weaving
machines, produces broadloom jacquard fabrics for furniture manufacturers,
fabric distributors, retailers, converters and specialty products manufacturers.
Customers for Cone Jacquards include Gum Tree Fabrics, Inc., Valley Forge
Fabrics, Inc., Fieldcrest Cannon and Westpoint Stevens, Inc.
Decorative fabrics are marketed domestically and internationally through the
segment's sales staff and sales agents. The 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.
Competition. The finishing and decorative fabrics business is highly competitive
and the Company competes primarily on the basis of quality and service. The
commission finishing segment competes directly with several large commission
printers as well as a number of smaller competitors. The decorative fabrics
segment competes with a large number of domestic and foreign suppliers of
decorative fabrics and jacquard woven fabrics.
Seasonality. Demand for the Company's finishing services and
decorative fabrics and the level of the Company's sales fluctuate
moderately during the year.
OTHER SEGMENT
The "Other" segment consists of synthetic fabrics, which were sold
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in January 1997, real estate operations, which were sold in May 1997, and other
miscellaneous ancillary operations.
TRADEMARKS, COPYRIGHTS AND PATENTS
The Company owns several registered trademarks containing the "Cone" name and
various designs. 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 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, which accounts for more than 10% of
net sales. Sales to this customer accounted for approximately 32%, 37% and 49%
of sales in 1998, 1997 and 1996, respectively. Levi has recently announced the
closing of eleven plants in the United States as it transitions from owned
facilities to a greater reliance upon contractors. The Company cannot predict
the impact on sales, if any, of this change in Levi's manufacturing strategy.
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 in March of 2004 and is automatically extended each
year, unless either party gives notice otherwise, so that the remaining term is
five years. Following a change in control, the Supply Agreement would terminate
at the end of the
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three-year supply arrangement or of the lease term, as the case may be.
Additionally, Levi may terminate the Supply Agreement at any time upon 30 days'
written notice and either party may terminate the Supply Agreement in the event
of the other party's insolvency, bankruptcy or occurrence of a similar event.
BACKLOG
The Company's order backlog was approximately $155 million at January 3, 1999,
as compared to approximately $157 million at December 28, 1997. 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
January 3, 1999, will be filled within the first quarter of 1999.
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, 1999, the Company employed approximately 6,100
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persons, of whom approximately 1,100 were salaried and approximately 5,000 were
hourly employees. Of such hourly employees, approximately 1,650 are represented
by collective bargaining units and are employed under collective bargaining
agreements that provide for annual wage negotiations in the spring of each year.
Based upon its records relating to the withholding of union dues from employee
compensation, the Company believes that approximately 620 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. The Company
expects to reduce the number of its employees to approximately 5,000 by mid-year
1999 pursuant to its restructuring program.
ITEM 2. PROPERTY
Cone's U.S. manufacturing facilities consist of eight plants, six located in
North Carolina and two in South Carolina, with approximately 5.2 million square
feet of floor space. The denim and khaki segment operates four plants,
commission finishing operates two plants and yarn-dyed products and decorative
fabrics each operate one plant. 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. The Company
announced in January 1999 the closing of its Salibury, North Carolina plant,
which contains approximately .5 million square feet of floor space, in the
second quarter of 1999. In early 1999, the Company also announced the closing of
the yarn manufacturing portions of two additional North Carolina facilities,
Florence and Cliffside, which constitute approximately .2 million square feet of
floor space.
All such facilities are maintained in good condition and are both adequate and
suitable for their respective purposes. The majority of the Company's
manufacturing facilities are substantially fully utilized.
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.
<PAGE>
16
ITEM 3. LEGAL PROCEEDINGS
In November 1988, William J. Elmore and Wayne Comer (the "Plaintiffs") former
employees of the Company, instituted a class action suit against the Company and
certain other defendants in which the Plaintiffs asserted a variety of claims
related to the Cone Mills Corporation 1983 ESOP (the "1983 ESOP") and certain
other employee benefit plans maintained by the Company. In March 1992, the
United States District Court in Greenville, South Carolina entered a judgment in
the amount of $15.5 million (including an attorneys' fee award) against the
Company with respect to an alleged promise to make additional Company
contributions to the 1983 ESOP and all claims unrelated to the alleged promise
were dismissed. The Company, certain individual defendants and the Plaintiffs
appealed.
On May 6, 1994, the United States Court of Appeals for the Fourth Circuit,
sitting EN BANC, affirmed the prior conclusion of a panel of three of its judges
and unanimously reversed the $15.5 million judgment and unanimously affirmed all
of the District Court's rulings in favor of the Company. However, the Court of
Appeals affirmed, by an equally divided court, the District Court's holding that
Plaintiffs should be allowed to proceed on an alternative theory whether,
subject to proof of detrimental reliance, Plaintiffs could establish that a
letter to salaried employees on December 15, 1983 created an enforceable
obligation that could allow recovery on a theory of equitable estoppel.
Accordingly, the case was remanded 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 of
the 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
<PAGE>
17
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 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
John L. Bakane 48 Director, President and
Chief Executive Officer
G. Watts Carr III 56 Executive Vice President and
President Apparel Products Group
Anthony L. Furr 55 Executive Vice President and
Chief Financial Officer
Gary L. Smith 40 Executive Vice President and
Controller
Neil W. Koonce 51 Vice President, General Counsel
and Secretary
Terry L. Weatherford 56 Vice President
Marvin A. Woolen, Jr. 58 Vice President-Cotton Purchasing
David E. Bray 60 Treasurer
All officers of the Registrant are elected or reelected each year at the Annual
Meeting of the Board of Directors or at other times
<PAGE>
18
as necessary. All officers serve at the pleasure of the Board of
Directors and until their successors are elected and qualified.
John L. Bakane joined 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 Group of the Company and in April 1997 he was
appointed President of Cone Apparel Products Group. He was appointed Chief
Operating Officer in April 1998, and served in such capacity until elected
President and Chief Executive Officer in November 1998.
G. Watts Carr III was employed by the Company and named president of the
Company's largest division, Cone Denim North America, effective October 1996. In
February 1999, he was named Executive Vice President and President of the
Apparel Products Group. Prior to joining the Company, Mr. Carr was employed by
the North Carolina Department of Commerce as director of Business and Industry
Development from 1992 until he joined the Company and as president of the North
Carolina Partnership of Economic Development. Prior to 1992, he held a number of
management and executive positions in textiles with Macfield, Inc. and the
company with which it merged, Unifi, Inc.
Anthony L. Furr joined the Company in May 1997 as Vice President and Chief
Financial Officer and served in that capacity until February 1999 when he was
appointed Executive 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.
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 and was appointed Executive Vice President in
February 1999.
Neil W. Koonce was employed by the Company in 1974. He has been
General Counsel since 1987, Vice President since 1989, and
Secretary since February 1999.
Terry L. Weatherford was employed by the Company and elected Assistant Secretary
in May 1993. He was elected Secretary in December 1993 and served in that
capacity until February 1999. In 1995 he also was elected Vice President.
<PAGE>
19
Marvin A. Woolen, Jr. 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. He was elected Vice President in 1997. From 1988 to 1995 he
was president of Rollins Company, a cotton shipping firm.
David E. Bray has been employed by the Company since 1977 and has been Treasurer
since 1988.
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
January 31, 1999, was 394.
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 37 of the Registrant's 1998 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 1998 Annual Report to Shareholders is incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
The information appearing under the heading "Management's Discussion and
Analysis of Results of Operations and Financial Condition" on pages 12 through
18 of the Registrant's 1998 Annual Report to Shareholders is incorporated herein
by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The information appearing under the heading "Market Risks" on pages 17 through
18 of the Registrant's 1998 Annual Report to Shareholders is incorporated herein
by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<PAGE>
20
The consolidated financial statements and notes thereto, appearing on pages 20
through 37 of the Registrant's 1998 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 11, 1999, and is hereby
incorporated by reference. Information regarding executive officers is included
as Item 4A in Part I.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation is presented under the heading
"Executive Compensation" in the Company's definitive Proxy Statement prepared
for the Annual Meeting of Shareholders to be held on May 11, 1999, 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 11, 1999, 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 11, 1999 and is hereby incorporated by reference.
<PAGE>
21
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a)(1) The following financial statements of the Registrant are
incorporated by reference in Item 8 hereof:
Independent Auditor's Report
Consolidated Statements of Operations for the Years Ended
January 3, 1999, December 28, 1997 and December 29, 1996
Consolidated Balance Sheets as of January 3, 1999
and December 28, 1997
Consolidated Statements of Stockholders' Equity for the
Years Ended January 3, 1999, December 28, 1997 and December
29, 1996
Consolidated Statements of Cash Flows for the Years Ended
January 3, 1999, December 28, 1997 and December 29, 1996
Notes to Consolidated Financial Statements
(a)(2) The following Financial Statement Schedules are
presented on pages 22 through 23 hereto.
Report of Independent Auditor's relating to Schedule II
Schedule II - Valuation and Qualifying Accounts
All other schedules specified under Regulation S-X are
omitted because they are not applicable, not required or the
information required appears in the Consolidated Financial
Statements or Notes thereto.
(a)(3) Exhibits. Exhibits to this report are listed on the
accompanying Index to Exhibits.
(b) Reports on Form 8-K
No report on 8-K was filed during the fourth quarter of
1998.
<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
Greensboro, North Carolina
February 19, 1999
<PAGE>
23
<TABLE>
<CAPTION>
CONE MILLS CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended January 3, 1999, December 28, 1997 and December 29, 1996
(in thousands)
Column A Column B Column C Column D Column E
- ------------------------------------------------------------- ----------- -------------------------- ------------- ----------
Additions
--------------------------
Balance (1) (2)
at Charged to Charged to Balance
beginning costs and other at end
Description of period expenses accounts Deductions of period
- ------------------------------------------------------------- ----------- ------------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
January 3, 1999
Valuation accounts deducted
from the assets to which
they apply:
Provision for doubtful accounts $ 1,500 $ 1,433 $ - $ 1,433 (a) $ 1,500
--------- ---------- ------- ---------- ---------
Reserve for inventory (b) 5,075 2,935 - 1,442 6,568
--------- ---------- ------- ---------- ---------
Reserve for fixed asset writedowns (b) 1,638 15,800 - 700 16,738
--------- ---------- ------- ---------- ---------
Reserve for restructuring charges (b) - 1,058 - - 1,058
--------- ---------- ------- ---------- ---------
Reserve for future losses (b) 1,357 88 - 1,323 122
--------- ---------- ------- ---------- ---------
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
--------- ---------- ------- ---------- ---------
</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.
*2.1(c) Amendment to Receivables Purchase
Agreement dated March 24, 1998,
between the Registrant and Delaware
Funding Corporation, filed as Exhibit
2.1(c) to Registrant's report on Form
10-Q for the quarter ending March 29,
1998.
*2.1(d) Second Amendment to Receivables
Purchase Agreement dated as of July
16, 1998, between the Registrant and
Delaware Funding Corporation, filed
as Exhibit 2.1(d) to Registrant's
report Form 10-Q for the quarter
ending September 27, 1998.
2.1(e) Third Amendment to Receivables
Purchase Agreement dated as of
December 23, 1998, between the
Registrant and Delaware Funding
Corporation. 37
*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
<PAGE>
25
Exhibit Sequential
No. Description Page No.
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.
*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
<PAGE>
26
Exhibit Sequential
No. Description Page No.
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.
*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,
<PAGE>
27
Exhibit Sequential
No. Description Page No.
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.
*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
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
<PAGE>
28
Exhibit Sequential
No. Description Page No.
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.
*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
<PAGE>
29
Exhibit Sequential
No. Description Page No.
the Registrant's report on Form 10-Q
for the quarter ended September 28, 1997.
*4.3(j) Modification to Note Agreement dated as
of February 14, 1998, between the
Registrant and The Prudential
Insurance Company of America, filed
as Exhibit 4.3(j) to Registrant's
report on Form 10-Q for the quarter
ending March 29, 1998.
*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 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.
*4.7(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.
*4.7(b) Second Amendment to the Cone Mills
Corporation 1983 ESOP dated
December 5, 1995, filed as
Exhibit 4.9(b) to the Registrant's
<PAGE>
30
Exhibit Sequential
No. Description Page No.
report on Form 10-K for year ended
December 31, 1995.
*4.7(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.
*4.7(d) Fourth Amendment to the Cone Mills
Corporation 1983 ESOP dated December
4, 1997, filed as Exhibit 4.8(d) to
the Registrant's report on Form 10-K
for the year ended December 28, 1997.
*4.8 Indenture dated as of February 14,
1995, between Cone Mills Corporation
and Wachovia Bank of North Carolina,
N.A. as Trustee (Bank of New York is
successor Trustee), filed as Exhibit 4.1
to Registrant's Registration Statement
on Form S-3 (File No. 33-57713).
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
<PAGE>
31
Exhibit Sequential
No. Description Page No.
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 September 28,
1997.
*10.1(e) Fifth Amendment to Employees'
Retirement Plan of Cone Mills
Corporation dated December 4, 1997,
filed as Exhibit 10.1(e) to the
Registrant's report on Form 10-K for
the year ended December 28, 1997.
*10.2 Cone Mills Corporation SERP as amended
and restated as of December 5, 1995,
filed as Exhibit 10.2 to the
Registrant's report on Form 10-K for
the year ended December 31, 1995.
*10.3 Excess Benefit Plan of Cone Mills
Corporation as amended and restated
as of December 5, 1995, filed as
Exhibit 10.3 to the Registrant's
report on Form 10-K for the year
ended December 31, 1995.
*10.4 1984 Stock Option Plan of Registrant
filed as Exhibit 10.7 to the Registrant's
Registration Statement on Form S-1
(File No. 33-28040).
<PAGE>
32
Exhibit Sequential
No. Description Page No.
*10.5 Form of Nonqualified Stock Option
Agreement under 1984 Stock Option Plan
of Registrant filed as Exhibit 10.8 to
the Registrant's Registration Statement
on Form S-1 (File No. 33-28040).
*10.6 Form of Incentive Stock Option Agreement
under 1984 Stock Option Plan of
Registrant filed as Exhibit 10.9 to the
Registrant's Registration Statement on
Form S-1 (File No. 33-28040).
*10.7 1992 Stock Option Plan of Registrant
filed as Exhibit 10.9 to the
Registrant's Report on Form 10-K for
the year ended December 29, 1991.
*10.7(a) Amended and Restated 1992 Stock Plan
filed as Exhibit 10.1 to Registrant's
report on Form 10-Q for the quarter
ended March 31, 1996.
*10.8 Form of Incentive Stock Option Agreement
under 1992 Stock Option Plan filed as
Exhibit 10.10 to the Registrant's
report on Form 10-K for the year
ended January 3, 1993.
*10.8(a) Form of Nonqualified Stock Option
Agreement under 1992 Stock Option
Plan, 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
<PAGE>
33
Exhibit Sequential
No. Description Page No.
Restated Stock Plan, filed as Exhibit
10.8(c) to the Registrant's report on
Form 10-K for the year ended December
28, 1997.
*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.
*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 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).
*10.15 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
<PAGE>
34
Exhibit Sequential
No. Description Page No.
on Form S-1 (No. 33-46907).
10.16 Agreement dated December 21, 1998
between the Registrant and J. Patrick
Danahy. 40
10.17 Agreement dated January 1, 1999 between
the Registrant and Parkdale Mills, Inc. 50
13 1998 Annual Report 57
21 Subsidiaries of the Registrant. 122
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. 123
27 Financial Data Schedule 124
* Incorporated by reference to the statement or report indicated.
<PAGE>
35
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: April 1, 1999 By: /s/ John L. Bakane
----------------- ------------------
John L. Bakane
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Dewey L. Trogdon Chairman of the Board April 1, 1999
- ---------------------
(Dewey L. Trogdon)
/s/ John L. Bakane Director, President April 1, 1999
- ------------------ and Chief Executive
(John L. Bakane) Officer (Principal
Executive Officer)
/s/ Anthony L. Furr Executive Vice President April 1, 1999
- --------------------- and Chief Financial
(Anthony L. Furr) Officer
/s/ Gary L. Smith Executive Vice President April 1, 1999
- --------------------- and Controller(Principal
(Gary L. Smith) Accounting Officer)
/s/ Doris R. Bray Director April 1, 1999
- ---------------------
(Doris R. Bray)
/s/ Jeanette C. Kimmel Director April 1, 1999
- ----------------------
(Jeanette C. Kimmel)
<PAGE>
36
Signature Title Date
/s/ Charles M. Reid Director April 1, 1999
- ----------------------
(Charles M. Reid)
/s/ John W. Rosenblum Director April 1, 1999
- ---------------------
(John W. Rosenblum)
/s/ Cyrus C. Wilson Director April 1, 1999
- --------------------
(Cyrus C. Wilson)
/s/ Nicholas Shreiber Director April 1, 1999
- ---------------------
(Nicholas Shreiber)
Page 37
Exhibit 2.1(e)
THIRD AMENDMENT
TO
RECEIVABLES PURCHASE AGREEMENT
THIS THIRD AMENDMENT dated as of December 23, 1998 (this "Amendment") to
the Receivables Purchase Agreement, dated as of March 25, 1997 as amended and
supplemented from time to time prior to the date hereof, (the "Receivables
Purchase Agreement"), by and among CONE RECEIVABLES LLC, a Delaware limited
liability company, as seller (the "Seller"), CONE MILLS CORPORATION, a North
Carolina corporation, as servicer (the "Servicer") and in its individual
capacity, and DELAWARE FUNDING CORPORATION, a Delaware corporation, as buyer
(the "Buyer"), is by and among the parties listed above. Capitalized terms used
in this Amendment and not otherwise defined shall have the meanings assigned to
such terms in the Receivables Purchase Agreement.
RECITALS
WHEREAS, the parties to the Receivables Purchase Agreement desire to
amend the Receivables Purchase Agreement as provided herein in accordance with
Section 8.06 of the Receivables Purchase Agreement;
NOW THEREFORE, in consideration of the premises and the agreements
contained herein, the parties hereto agree as follows:
SECTION 1. Amendment to Section 5.03 of the Receivables Purchase
Agreement. Section 5.03 of the Receivables Purchase Agreement is
hereby amended by adding the following:
(p) Year 2000 Compliance. The Servicer has initiated a review and
assessment of all computer applications which are related to or involved in the
origination, collection, management or servicing of the Receivables (the
"Receivables System") in connection with making a determination about whether
such Receivables System will be able to perform properly date-sensitive
functions for all dates before and after January 1, 2000 (that is, be "Year 2000
Compliant"). The Servicer is taking action to ensure that the Receivables
System will be Year 2000 Compliant.
SECTION 2. Amendment to Section 6.01 of the Receivables Purchase
Agreement. Section 6.01 of the Receivables Purchase Agreement is
<PAGE>
Page 38
hereby amended by adding the following:
(x) Year 2000 Covenant. The Servicer shall take all necessary actions to
ensure that each Receivable System is Year 2000 Compliant. On or before January
1, 1999, the Servicer will promptly notify the Agent in the event the Servicer
discovers that any computer application of the Servicer and its consolidated
subsidiaries that is necessary for the origination, collection, management or
servicing of the Receivables will not be Year 2000 Compliant on or before
December 31, 1999. The Servicer will deliver simultaneously with any quarterly
or annual financial statement or reports to be delivered under this Agreement, a
letter signed by an appropriate officer, to the effect to such officer's
knowledge, after due inquiry, no material events, problems or conditions have
occurred which would prevent or delay the Servicer's plan to become Year 2000
Compliant or if any such material events, problems or conditions have occurred.
SECTION 3. Amendment to Section 7.01 of the Receivables Purchase
Agreement. Section 7.01(n) of the Receivables Purchase Agreement is hereby
amended in its entirety to read as follows:
(n) the unsecured long-term debt rating of the Corporation shall be
downgraded below BB- or Ba3 by S&P or Moody's, respectively;
SECTION 4. Receivables Purchase Agreement in Full Force and Effect as
Amended. Except as specifically stated herein, all of the terms and conditions
of the Receivables Purchase Agreement shall remain in full force and effect. All
references to the Receivables Purchase Agreement in any other document or
instrument shall be deemed to mean the Receivables Purchase Agreement, as
amended by this Amendment. This Amendment shall not constitute a novation of the
Receivables Purchase Agreement, but shall constitute an amendment thereto. The
parties hereto agree to be bound by the terms and obligations of the Receivables
Purchase Agreement, as amended by this Amendment, as though the terms and
obligations of the Receivables Purchase Agreement were set forth herein.
SECTION 5. Prior Understandings. This Amendment sets forth the
entire understanding of the parties relating to the subject matter
hereof, and supersedes all prior understandings and agreements,
written or oral.
SECTION 6. Effectiveness. The amendments provided for by this Amendment
shall become effective as of the date hereof, upon receipt by the Buyer of (a)
executed counterparts of this Amendment and (b) a certificate of an officer of
each of the Seller and the Servicer to the effect that the representations and
warranties in Section 5.01 and
<PAGE>
Page 39
5.03, as applicable, of the Receivables Purchase Agreement are true and correct
as of the date hereof and that no Termination Event or Potential Termination
Event shall exist as of the date hereof.
SECTION 7. Counterparts. This Amendment may be executed in any number of
counterparts and by separate parties hereto on separate counterparts, each of
which when executed shall be deemed an original, but all such counterparts taken
together shall constitute one and the same instrument.
SECTION 8. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed and delivered by their duly authorized officers as of the date hereof.
CONE RECEIVABLES LLC,
By: Cone Mills Corporation,
its sole member
By: /s/ David E. Bray
------------------------
Name: David E. Bray
Title:Treasurer
CONE MILLS CORPORATION
By: /s/ Neil W. Koonce
------------------------
Name: Neil W. Koonce
Title:Vice President & General Counsel
DELAWARE FUNDING CORPORATION,
By: Morgan Guaranty Trust Company of
New York, as attorney-in-fact for
Delaware Funding Corporation
By: /s/ Robert S. Jones
------------------------
Name: Robert S. Jones
Title:Vice President
Page 40
Exhibit 10.16
December 21, 1998
Mr. J. Patrick Danahy
5415 Eastern Shore Drive
Greensboro, North Carolina 27455
Dear Pat:
This will confirm our agreements in connection with your retirement from
Cone Mills Corporation (the "Company"). We have agreed as follows:
1. Subject to applicable withholdings and to your compliance with
paragraph 4(a) below and assuming no revocation of this letter agreement by you
pursuant to paragraph 9:
(a) The Company will continue your salary at the rate of $505,000
per year through December 31, 1998, and at the rate of $520,000 per year
from January 1, 1999, through December 31, 1999. Payment will be made in
monthly installments in accordance with the Company's payroll practices
for salaried employees. In the event of your death before December 31,
1999, the Company will continue to make the salary continuation payments
only through the end of the month in which death occurs but, as provided
in paragraph 2, during your terminal leave, you will continue to be
covered by the Company's life insurance plan under which your death
benefit would be $1 million.
(b) Upon expiration of the seven-day period described in
paragraph 9 below, the Company will transfer to you, free and clear of
all leases, liens and other encumbrances, the automobile that has
previously been made available to you by the Company. After the
transfer, you will be responsible for all taxes, insurance and other
expenses associated with the ownership and operation of the automobile.
2. Through December 31, 1999 (or, if earlier, the date of your death or
the date on which you cease to be in compliance
<PAGE>
Page 41
with the covenants contained in paragraph 4(a) below), you will be on "terminal
leave" in accordance with the Company's terminal leave policy. Under that
policy, which is described on Schedule A to this letter, you will be eligible to
participate in the Company's pension benefit plans and welfare benefit plans
(other than the long-term disability plan). During your terminal leave, the
Company will provide you off-site office space and secretarial services through
a mutually agreed upon executive support services firm.
3. The stock options previously granted to you by the Company, as listed
on Schedule B to this letter, will continue in effect in accordance with their
terms, and your employment will be treated as continuing during your terminal
leave. Accordingly, if your terminal leave continues through December 31, 1999,
then you will have the right to exercise your outstanding options for a period
of three months from and after December 31, 1999. (We note, however, that the
exercise of your incentive stock options after February 9, 1999, may result in
such options being treated as nonqualified stock options for income tax
purposes.) Under the Restricted Stock Award Agreement dated November 10, 1997,
you were awarded 15,000 shares of Restricted Stock. We have agreed to treat
10,000 of these shares as having been forfeited. Subject to your compliance with
paragraph 4(a) below at all times from the date hereof through December 31,
1999, and subject to the applicable provisions of the Cone Mills Corporation
Amended and Restated 1992 Stock Plan, the remaining 5,000 shares of Restricted
Stock will vest on December 31, 1999.
4. (a) Without the consent of the Board of Directors of the Company,
during the period beginning on the date hereof and continuing through December
31, 2001, you will not, anywhere in the world, directly or indirectly:
(i) Own any interest in, manage, operate, control, be employed
by, render advisory services to, represent, or participate in or be
connected with the management or control of, any business that is then
in competition with the Company or any of its subsidiaries, including
but not limited to the manufacture, marketing or merchandising of denim
fabrics, dyeing and finishing services, print fabrics, jacquard fabrics
and casual sportswear fabrics; provided, however, that you may own,
directly or indirectly, solely as an investment, securities of any
corporation traded on a national securities exchange
<PAGE>
Page 42
if you are not a controlling person of, or a member of a group which controls,
such corporation, do not, directly or indirectly, own more than 1% of any class
of securities of such corporation and do not otherwise violate the provisions of
this paragraph 4(a); or
(ii) Influence or attempt to influence any customer of the
Company or any of its subsidiaries to discontinue its purchase of goods
or services from the Company or any of its subsidiaries or to divert
such purchases to any other person, firm or corporation; or
(iii) Interfere with, disrupt or attempt to disrupt the
relationship, contractual or otherwise, between the Company or any of
its subsidiaries and any of their respective suppliers, principals,
distributors, lessors or licensors; or
(iv) Participate in or assist in any way with any attempt to
cause a change in control of the Company or a business combination with
the Company.
In addition, you have agreed that, without the consent of the Board of Directors
of the Company, you will not, in any capacity or at any time (whether on or
before December 31, 2001 or thereafter), solicit the employment of or employ any
person who is then employed by the Company or any of its subsidiaries at a base
annual salary of more than $50,000 or otherwise encourage any such employee to
leave the employ of the Company or any of its subsidiaries, and you have
acknowledged your continuing duty not to disclose any information concerning the
Company that is not generally available to the public. If you request the
consent of the Board of Directors of the Company with respect to an activity
covered by this paragraph 4(a), the Board will consider your request in good
faith, will not unreasonably withhold its consent and will advise you promptly
of its decision.
(b) In the event of any breach or threatened breach of any of the
covenants contained in paragraph 4(a) before January 1, 2002, the Company will
be entitled, as a matter of right, to an injunction from any court of competent
jurisdiction restraining the breach or threatened breach. This right to
injunctive relief will be cumulative and in addition to all other rights and
remedies available to the Company.
<PAGE>
Page 43
(c) Under paragraph 7(b) of the Excess Benefit Plan of Cone Mills
Corporation and paragraph 7(b) of the Cone Mills Corporation SERP (collectively,
the "Nonqualified Plans"), the Company has the right to terminate the payments
to which you would otherwise be entitled under the Nonqualified Plans. Subject
to your compliance with the provisions of paragraph 4(a), and in consideration
of your agreement, as stated in paragraph 4(a) above, with respect to employees
of the Company and its subsidiaries, the Company will waive its right to
terminate payments in the event of your violation of paragraph 7(b) of the
Nonqualified Plans.
5. You acknowledge that this letter agreement provides you with payments
and other assurances to which you would not otherwise be entitled upon your
retirement from the Company and, in consideration thereof, you hereby
irrevocably release and forever discharge the Company, its past, present and
future subsidiaries, affiliates, officers, directors, agents, employees and
representatives, jointly and individually, from any and all claims, demands,
actions, causes of action and liabilities (including, without limitation,
attorneys' fees and other costs and expenses of suit) that you had, now have or
may have, whether the same be at law, in equity, or mixed, upon or by reason of
any matter or cause whatsoever with respect to your employment by the Company or
the termination of your employment or with respect to other events that occurred
prior to the date of execution of this letter agreement, including, but not
limited to, any claim arising under the Age Discrimination in Employment Act,
the Civil Rights Act of 1964 (Title VII) and 1991, the Employee Retirement
Income Security Act, the Americans With Disabilities Act (each as amended
through the date hereof), all federal, state and local civil rights statutes,
and any other statutory, equitable or common law claims or causes of action in
tort or contract, including but not limited to impairment of economic
opportunity, wrongful discharge, and intentional or negligent infliction of
mental distress, except that this release does not extend to rights, benefits
and claims that expressly accrue under and pursuant to the terms of this letter
agreement, the Nonqualified Plans and the qualified retirement plans of the
Company. Without limiting the generality of this release, you acknowledge and
agree that, except for the payments and benefits provided for in this letter
agreement, you are not entitled to any compensation or benefits from the
Company, including but not limited to compensation for accrued vacation,
bonuses, incentive compensation or other forms of compensation, or to
reimbursement of expenses.
<PAGE>
Page 44
6. This letter agreement represents and contains the entire agreement
and understanding between you and the Company with respect to your retirement
from the Company and supersedes any and all prior and written agreements and
understandings of any kind, written or oral, with respect to your retirement
from the Company.
7. If one or more of the provisions of this letter agreement are
determined to be illegal or unenforceable, the remainder hereof will not be
affected by that determination and each remaining provision, or portion thereof,
will continue to be valid and effective and will be enforceable to the fullest
extent permitted by law.
8. You hereby acknowledge that the Company has advised you to consult
with an attorney prior to executing this letter agreement and that you have 21
days from the date this letter agreement is delivered to you during which to
review fully and consider whether or not you wish to accept and agree to all of
the terms and conditions set forth herein.
9. If you execute this letter agreement, you will nevertheless have a
period of seven days from the date of execution to reject or revoke the
agreement. Revocation must be made by delivering a written notice of revocation
to the Company, 3101 North Elm Street, Greensboro, North Carolina 27415-6540,
Attention: Terry L. Weatherford. This letter agreement shall not be effective
and enforceable until the seven-day revocation period has expired.
10. By executing this letter agreement, you represent to the Company
that you have completely read the terms hereof and that you fully understand and
voluntarily and knowingly accept those terms, including the release of claims
you may have against the Company.
11. This letter agreement shall be binding upon and shall inure to the
benefit of you and your heirs, executors, representatives and administrators, as
well as the Company and its successors and assigns. You may not assign your
rights under this letter agreement without the prior written consent of the
Company.
12. This letter agreement is entered into in the State of North Carolina
and will be interpreted, enforced and governed by the laws and judicial
decisions of the State of North Carolina, except to the extent preempted by
Federal law.
If this letter accurately states our agreements, please sign in the
space provided below and return this letter to me.
<PAGE>
Page 45
PLEASE READ CAREFULLY. THIS AGREEMENT INCLUDES A RELEASE
OF KNOWN AND UNKNOWN CLAIMS AGAINST THE COMPANY
Very truly yours,
CONE MILLS CORPORATION
By: /s/ Dewey L. Trogdon
---------------------------------------
Dewey L. Trogdon, Chairman of the Board
AGREED:
/s/ J. Patrick Danahy
J. Patrick Danahy
<PAGE>
Page 46
SCHEDULE A
DESCRIPTION OF BENEFITS
Terminal Leave policy for salaried employees provides that "employees on
terminal leave will continue to be covered under group insurance and the pension
plan, but not the long term disability plan. Employees will be expected to
continue paying (on same basis as active employee) premiums for themselves for
their dependents while on leave."
1. Defined Benefit Plan and Nonqualified Plans
Mr. Danahy will accrue a pension benefit through the end of
terminal leave, i.e. he will receive credit for his compensation
and service through December 31, 1999. Although a definitive
calculation of the pension benefit is not made until after the
termination date, an estimate of Mr. Danahy's monthly pension
benefit is as follows:
Life with guaranteed 10 year payment: $15,792.85
Life Only: 16,387.l0
Joint benefit with 50% to surviving
Spouse: 15,390.13
The estimate is based on 1999 compensation of $520,000, service
through 1999, benefits commencing on January 1, 2000, and
transfer of all ESOP accounts to the pension trust. The above
estimate is without any limits imposed by the IRC as to the
amount of compensation which can be considered in calculating the
benefit or as to the amount which can be paid as a qualified
pension benefit. The dollar amount of the limitations for Mr.
Danahy's benefits must be made by an independent actuary. Since
it involves a substantial calculation, we prefer to delay the
referral to the actuary until all compensation and service data
is certain. The amount of the accrued benefit which cannot be
paid from the pension trust will be paid by the Company out of
its general funds pursuant to the SERP and Excess Benefit Plan
(nonqualified deferred compensation plans).
2. Life Insurance
Mr. Danahy will continue to be eligible for the Company's
group life insurance program through the date the terminal leave
<PAGE>
Page 47
period ends. The coverage is two times the annual compensation but not to exceed
$1,000,000. Therefore his coverage is $1,000,000. A portion ($50,000) of the
coverage is provided by Prudential Insurance Company of America pursuant to a
group term policy. After terminal leave is over, he can convert this to an
individual policy by contacting a Prudential agent. The balance of the coverage
($950,000) is provided by The Principal Insurance Company through a universal
life policy. This coverage may be continued after the terminal leave pursuant to
the terms of the individual policy issued to Mr. Danahy. The local Principal
agent will be able to provide the amount of coverage that can be continued, the
premium cost to Mr. Danahy, the current cash value accrued if any, and the
amount of life insurance if any to which the cash value is convertible.
The Company will continue to pay the premiums to Prudential and the
Principal during the terminal leave period. The amount paid to the Principal is
treated as compensation to Mr. Danahy for tax purposes.
3. 401(k) Program
Mr. Danahy is eligible to participate in the 401(k) during the terminal
leave period. The Company will match his contributions up to the plan and IRC
limits. He will not be able to take a distribution (other than a loan or
hardship withdrawal) until after the terminal leave period ends. Following
terminal leave, he can take a distribution in cash or in-kind, he can make a
direct transfer or a roll-over to an IRA, or he can leave the funds in the plan.
After-tax contributions cannot be put into an IRA.
4. Disability
Mr. Danahy is no longer a participant in the Company's Long
Term Disability plan. His participation ended upon termination of
active employment.
5. Medical
Mr. Danahy, and his covered dependents on which premiums are paid,
continue during terminal leave to be eligible for the Company's group health
insurance program, as now constituted or hereafter amended. If Mr. Danahy dies
during terminal leave, his spouse being less than age 55 can continue dependent
coverage under the employee group medical plan. At age 55, she will be entitled
to COBRA benefits for the mandated period or she can elect to take the retiree
medical program.
<PAGE>
Page 48
After terminal leave, Mr. Danahy has an option to pay for and receive
COBRA benefits for the mandated period (e.g. 18 months) or to elect to
participate by paying the premiums in the Company's Retiree Medical Program.
The Retiree Medical Program continues for both he and his spouse respectively
until age 65 or until eligible for medicare if earlier. The dental portion of
the retiree program can continue for life if premiums are paid. The Company has
reserved the right to terminate or amend the retiree medical and dental program.
The Retiree Medical Program is similar in benefit coverage to the
salaried employee medical program except there are higher premiums, higher
deductibles and the out of pocket expense is different. Reference must be made
to the plan documents for coverage.
THE ABOVE LISTING IS A SUMMARY OF THE MAJOR BENEFITS OR RIGHTS AFFORDED
EMPLOYEES ON TERMINAL LEAVE AND RETIRED SALARIED EMPLOYEES. THE ABOVE IS NOT TO
BE CONSTRUED AS A SUMMARY PLAN DESCRIPTION OR A SUBSTITUTE FOR THE PLAN
DOCUMENTS TO WHICH REFERENCE IS MADE FOR EXPLANATION OF BENEFITS PROVIDED. A
SUMMARY PLAN DESCRIPTION OR THE PLAN DOCUMENT OR THE APPLICABLE POLICY WILL BE
PROVIDED IF REQUESTED.
<PAGE>
Page 49
Schedule B
Stock Options
1. 2/18/93 ISO for 30,000 shares at $15.625 per share
2. 11/9/94 Nonqualified Option for 40,000 shares at $12.00
per share (with tax reimbursement)
3. 11/7/96 Nonqualified Option for 50,000 shares at $8.00
per share (with tax reimbursement)
4. 11/10/97 Nonqualified Option for 23,250 shares at $8.50
per share
5. 11/10/97 ISO for 11,750 shares at $8.50 per share
Page 50
Exhibit 10.17
YARN PURCHASE AGREEMENT
This YARN PURCHASE AGREEMENT is entered into as of January 1, 1999
between PARKDALE AMERICA, LLC, hereinafter referred to as "Parkdale", and CONE
MILLS CORPORATION, hereinafter referred to as "Cone".
Parkdale agrees to sell and Cone agrees to purchase yarns meeting the
specifications spelled out in attached Schedule A beginning April 1, 1999 and
continuing through December 31, 2004.
IT IS AGREED:
1. QUANTITIES.
Cone's projected weekly requirements for each of the yarn counts
are stated in Schedule A for karded cotton ringspun. Parkdale agrees to
supply up to these quantities at the conversion prices set forth in
Schedule A plus any additional requirements at those prices. Actual
weekly shipments will be coordinated by the schedulers for the parties.
Cone agrees to purchase from Parkdale all requirements for these yarns
in excess of internal production. Cone is not required to order any
minimum amount of yarn while this agreement remains in effect.
Should Cone's requirements increase significantly over
projections stated in Schedule A or should Cone desire additional denim
yarns in excess of its internal production at the expiration of its
other outside denim yarn contracts, Parkdale shall have a right of first
refusal for all such additional denim yarns that it is willing to supply
at competitive prices and quality in the quantity desired.
Notwithstanding the above, the parties agree that nothing contained
herein prevents Cone from entering into a joint venture outside the
United States which manufactures these yarns. However, should Cone
invest in such a joint venture it will not use its production of these
yarns in the manufacture of denim in the United States unless Cone owns
50% or more of the joint venture so as to make the joint venture the
equivalent of internal capacity. Moreover, the parties agree that
nothing contained herein prevents Cone from otherwise increasing its
internal yarn capacity for these yarns. Should Cone decide to build a
new plant to increase such capacity, it will give Parkdale written
notice of at least one year prior to
<PAGE>
Page 51
the expected completion date. In addition, the parties agree that
nothing contained herein prevents Cone from contracting with third
parties for the purchase of fabric containing karded cotton ringspun
yarn without regard to the yarn source or from contracting with third
parties to weave fabric containing karded cotton ringspun yarn supplied
to Cone or assigned by Cone pursuant to this agreement.
Cone will provide Parkdale with a rolling three months projection
of yarn requirements covered by this agreement. The parties agree that
such projections are good faith estimates only and actual requirements
may vary significantly from the projections. Therefore, nothing in this
agreement constitutes a "take or pay" obligation on the part of Cone.
2. PRICES.
Yarn prices per pound shall be determined as follows:
o Cost of cotton content is based upon cotton price as fixed by
Cone plus no basis points times waste factor as stated in
Schedule A.
o Conversion costs as listed in Schedule A.
3. COTTON PRICE FIXATIONS AND REIMBURSEMENT PAYMENTS.
Except as otherwise may be agreed by the parties for the year
1999, Parkdale is responsible for purchasing the cotton. Cone is
responsible for fixing the cotton price. For 1999, the transition from
Cone's previously acquired cotton position to Parkdale's responsibility
for purchasing cotton shall be managed by Marvin Woolen of Cone or as
otherwise designated in writing by Cone.
3.A All fixation orders and executions of orders must be confirmed in
writing. Cone will provide fixation orders by contract months
that are currently being traded and in multiples of 100 bales.
3.B In the event that the cotton content of the yarn deliveries are
less than the number of bales fixed for the quarter, the average
of the excess cotton fixation will be rolled forward to the next
quarter having an open cotton position. If the cotton content of
the yarn
<PAGE>
Page 52
deliveries is greater than the bales fixed for the quarter,
cotton fixation will be rolled back from the upcoming quarter.
3.C. Should Cone fail to exercise its right to fix the price as
contemplated by paragraph 3.A above, Parkdale has the right to
fix the cotton price for the coming quarter's yarn requirements.
3.D The individual responsible for price fixation orders and
executions shall be Marvin Woolen or as otherwise designated in
writing by Cone.
3.E Parkdale agrees to provide a status report each week of yarn
deliveries against cotton price fixations.
3.F. With respect to any cotton rebate or reimbursement
program, such as the Step 2 program, which may be or become in
effect during this agreement, the parties agree as follows:
Cone shall receive the benefit as it relates to cotton
contained in the yarn purchased by Cone pursuant to this
agreement. Each month Parkdale will send Cone a report
detailing the net pounds of cotton contained in these yarns
eligible for payment reimbursement. Net pounds will be
calculated by subtracting returned pounds from shipped pounds.
The net pounds will then be multiplied by the reimbursement
payment to determine the total amount payable to Cone each
week. Within ten (10) days of the end of each quarter,
Parkdale will write Cone a check reimbursing the total payment
reimbursement for the quarter. Should any cotton rebate or
reimbursement program be in effect for which this calculation
and reimbursement to Cone is not workable, then the parties
agree that a procedure will be developed to assure that Cone
shall receive an economic benefit as close to what would be
realized under this paragraph as possible.
4. TERM.
Unless terminated sooner upon the mutual agreement of the
parties, this agreement shall remain in effect until December 31, 2004,
and shall continue for successive renewal terms of one calendar year
each thereafter, unless at least one year in advance of the commencement
of the renewal term a party gives notice to the other party of its
election to terminate the agreement.
<PAGE>
Page 53
5. ASSIGNMENT.
None of the rights or obligations under this agreement shall be
assigned or deleted without the express written consent of each party,
which consent shall not be unreasonably withheld. Notwithstanding this,
Cone shall have the right to assign all or a portion of the entitlements
under this agreement to a third party greige weaver who will produce
fabric for the account of Cone. Any such third party would be required
to agree to abide by the confidentiality provisions of paragraph 15
below, and Cone and Parkdale will otherwise develop a mutually agreeable
procedure to protect the confidential nature of this transaction.
6. SPECIFICATIONS.
Any changes in specifications of the yarn counts covered in
Schedule A that result in an increase or decrease in Parkdale's
manufacturing costs must be mutually agreed to in writing upon before
commencement of manufacture. These changes will also be reflected in the
yarn prices.
7. PAYMENT.
All invoices are payable net cash thirty (30) days in U. S.
dollars. Terms are F.O.B. Parkdale's Hillsville, Virginia plant
unless otherwise mutually agreed to by the parties.
8. COVER OPTION.
Should Parkdale for any reason be unable to fulfill the
conditions of this contract, Parkdale will be responsible for purchasing
yarn from a reliable supplier and delivering such yarn to Cone under the
terms and conditions of this contract. Parkdale shall notify Cone thirty
(30) days in advance should this become necessary.
9. WARRANTY.
Parkdale warrants that the yarn supplied hereunder shall conform
to the specifications set forth in Schedule A. These specifications may
be changed from time to time upon agreement in writing between the
parties. In addition, yarn supplied hereunder will meet the requirements
of Levi Strauss. Parkdale further represents and warrants that it shall
pass good title to the yarn, free and clear of any liens, security
interests, claims or other
<PAGE>
Page 54
encumbrances, to Cone and the yarn shall be free from defects of
material and workmanship. With respect to any defects in the yarn used
by Cone, Cone shall be entitled to damages in an amount necessary to
make Cone whole limited to Cone's cost excluding profits. Parkdale
further represents and warrants that the use or sale of the yarn
delivered hereunder will not infringe the claims of any United States
patent covering the yarn. Parkdale further represents and warrants that
all yarn delivered hereunder is or will be produced in compliance with
requirements of the Fair Labor Standards Act of 1938 as amended.
10. INSPECTION AND REJECTION.
Cone will notify Parkdale as soon as possible if yarn deliveries
vary from the specifications contained herein. All non-conforming yarns
will be returned to Parkdale.
11. INVENTORY AVAILABILITY.
Parkdale agrees to maintain an inventory of each of the yarns
covered by this contract equal to three (3) days requirements.
12. PACKAGING.
Yarn shall be delivered on pallets. All packaging materials will
be returned to Parkdale at their expense. Yarn performance data will
accompany each shipment.
13. ADDITIONS OR DELETIONS OF YARN COUNTS.
Cone may elect to discontinue a given yarn count or to add a yarn
count to this contract. However, negotiations on waste factors and
conversion costs must be mutually agreed upon prior to adding a yarn
count. All such changes will be reflected on a revised Schedule A.
14. GOVERNING LAW.
This agreement has been executed in the State of North Carolina
and the parties agree that the rights and obligations of the parties
shall be governed by North Carolina law.
<PAGE>
Page 55
15. CONFIDENTIALITY.
Neither Parkdale nor Cone shall use or disclose to any third
party (other than any assignee by Cone permitted under paragraph 5
above) any information related to this agreement or the transactions
contemplated hereby, except as is required to be disclosed by applicable
law or becomes generally available to the public other than through a
breach of this agreement, or for transactions specifically contemplated
by this agreement.
Each of the parties hereto has caused this Agreement to be executed by
its appropriate officer as of the day and year first above written.
PARKDALE AMERICA, LLC CONE MILLS CORPORATION
By: /s/ W. Duke Kimbrell By: /s/ John L. Bakane
--------------------- -------------------
W. Duke Kimbrell John L. Bakane
Title: Chief Executive Officer Title: Chief Executive Officer
<PAGE>
Page 56
Schedule A containing technical specifications, committed quantities, and
conversion prices has been omitted because of its competitive nature. A copy
will be furnished to the Commission upon request.
1998 Annual Report
[cover graphics]
Revitalize
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
(amounts in millions, except per share data) 1998 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Summary of Operations
Sales $ 728.6 $ 716.9 $ 745.9
Gross Profit 93.3 75.1 104.4
Income (Loss) from Operations (7.7) (8.3) 12.8
Equity in Earnings (Losses) of Foreign Affiliate 5.2 2.6 (2.4)
Net Loss (6.7) (9.4) (2.2)
Financial Position
Long-Term Debt $ 172.1 $ 150.4 $ 160.7
Stockholders' Equity 181.9 196.5 210.3
Long-Term Debt to Capitalization 49% 43% 43%
Per Common Share Data
Net Income (Loss) $ (0.37) $ (0.47) $ (0.19)
Net Income (Loss) Excluding Restructuring
and Other Non-Recurring Items $ 0.08 $ (0.31) $ (0.08)
- ------------------------------------------------------------------------------------------------
</TABLE>
Corporate Profile
For 108 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. In addition, the company is the
largest producer of 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 four principal business segments: Denim and Khaki,
Yarn-Dyed Products, Commission Finishing and Decorative Fabrics for upholstery,
draperies and bedspreads.
In 1998 Cone Mills performed manufacturing both in the United States and through
a joint venture in Mexico, and conducted sales and marketing activities through
a worldwide distribution network. Cone Mills is the nation's largest exporter of
denims and a major exporter of other apparel fabrics.
<PAGE>
Revitalize
Cone Mills is reacting to the opportunities
and challenges of the global marketplace
to maximize growth, efficiency
and profitability by:
Responding from a leadership position to changes in the casual sportswear
markets
Refocusing fabric sourcing to compete in a global economy
Reinvigorating finishing operations to build on our capabilities as the leading
commission finisher in the U.S.
Reasserting our leadership in decorative fabrics
<PAGE>
Restore
[photograph]
The vision of Cone Mills is to be the premier casual fabric company, the leading
provider of commission finishing and a prominent supplier of decorative fabrics
to targeted markets. As we strive to achieve this vision we are restructuring
the company to achieve and sustain profitable growth and create value for our
shareholders.
To this end, Cone Mills moved decisively in 1998 and early 1999 to focus on the
things we do best and most profitably. Our restructuring program is cutting
costs, realigning business units and concentrating the company on areas in which
we have market leadership and potential for growth.
Financially, Cone made progress in 1998, although non-recurring expenses
associated with restructuring kept us from showing a profit for the year. Cone
Mills had a net loss of $6.7 million on sales of $728.6 million for 1998 versus
a net loss of $9.4 million on sales of $716.9 million for 1997. However,
excluding the non-recurring expenses in both years, the company earned $.08 per
share in 1998 versus a loss of $.31 per share last year.
Our denim business was strong through the first three quarters of 1998 before
suffering a weak fourth quarter brought on by factors including warm weather in
much of the United States, strong consumer interest in fashion denim and khaki
and inventory adjustments throughout the pipeline. Our Parras Cone joint venture
continued to outperform expectations and ran essentially at capacity for the
second straight year.
Our yarn-dyed sportswear business was buffeted by the global economic crisis,
which has resulted in a flood of low-cost fabric in world markets. Continuing
losses led us to announce the closing of our Salisbury, North Carolina,
yarn-dyed flannel shirtings plant in January of 1999.
In early 1999, Cone put all of its casual sportswear businesses and shirtings
fabrics into one sales and administrative organization. This puts our expertise
in denim to work in support of other popular fabrics, such as khakis, that have
the same channels of distribution as jeans. Cone remains the world's premier
supplier of denim, with the best distribution in the industry and the largest
denim export business of any U.S. company. In 1998, we continued to expand our
denim customer
<PAGE>
CONE RESTORE
[photograph]
base through stronger bonds with emerging customers. We are now a leading
supplier of denim to all the major manufacturers of first-quality branded jeans.
To remain competitive in global fabric markets, in August of 1998, Cone invested
$3.5 million to purchase approximately 8% of Ashima Syntex Ltd. of Ahmedabad,
India, a low-cost producer of denim and sportswear fabrics. The benefits to Cone
from this strategic alliance include access to global markets, fees for
technology, services and product certification and marketing rights outside of
the Indian subcontinent.
In 1998, the decorative fabrics business grew as a proportion of total revenues.
Cone Jacquards was profitable in 1998 on increased sales while John Wolf reduced
its losses substantially. These two businesses were combined into Cone
Decorative Fabrics in November, creating an organization with a broader and
highly competitive line of products to be offered by an integrated sales force.
Cone's commission finishing operations remained unprofitable in 1998 but made
progress as we gained a greater share of the consolidating print business. Our
Raytex finishing plant was profitable, and both Raytex and our Carlisle plants
broadened their customer bases. The company is pursuing program business for
piece-dyed products to improve capacity utilization at our Carlisle plant.
As part of our ongoing cost-cutting efforts, Cone is reducing its headquarters
staff significantly and downsizing manufacturing staffs to reduce management
layers. Coupled with the other restructuring initiatives discussed above, the
company's goal is to achieve annualized savings of approximately $30 million.
To remain competitive, reduce costs and improve quality, Cone invested $33
million in capital spending in 1998, bringing our total investment in the last
three years to over $105 million. This year we added new jacquard looms,
linked-ring spinning capabilities and completed the relooming of our domestic
denim facilities. Our entire domestic denim-production capability has now been
reloomed.
In November Pat Danahy retired as President and Chief Executive Officer. The
company thanks Pat for his many years of dedicated service. John Bakane
succeeded Pat and is responsible for guiding us through this transition. New
managers are also in place in several key positions, including Decorative
Fabrics, Commission Finishing and the Apparel Products Group.
We did not restructure Cone Mills to retrench but rather to become more
effective at building customer franchises. We will build these franchises with a
sense of urgency so that these relationships, coupled with the industry's search
for new sourcing, will create growth opportunities for Cone Mills.
The positive operating results we anticipate may be preceded by some continuing
weakness in denim for the first half of 1999, but we are confident that the
company is on the right track. We wish to thank Cone's customers, suppliers,
employees and shareholders for their support as we position ourselves for
leadership in the changing textile industry.
/s/ Dewey L. Trogdon /s/ John L. Bakane
- ----------------------------- -------------------------------
Dewey L. Trogdon John L. Bakane
Chairman (at right) President and CEO (at left)
2/3
<PAGE>
CONE REVITALIZE
[photograph]
Our modern production facilities, broad product line, strong customer base and
targeted marketing efforts position us to respond rapidly to changes in the
casual sportswear markets.
o With a diverse product line that includes many styles of denim and a variety
of casual bottom-weight fabrics, Cone can meet a wide range of customer needs
and grow along with changing fashion markets.
o By broadening our customer base to make full use of our versatile production
and diverse design capabilities, Cone is selling to more customers than ever
before and continuing to develop high-growth markets and product lines.
o To meet fierce competition and serve price-sensitive customers, we have
equipped our production facilities with modern looms and technology such as
linked-ring spinning.
o Cone is streamlining its marketing effort to recognize and capitalize on the
common distribution channels and customer base for denims and other casual
bottomweight fabrics.
o We have developed and offered cost-competitive, fashion-forward products like
our fade-resistant Deepdown(TM), wrinkle-free ProSpin(R) and old fashioned,
red-selvage denim fabrics.
4/5
<PAGE>
Respond
from a leadership position to changes
in the casual sportswear markets
[photograph]
<PAGE>
Refocus
fabric sourcing to compete
in a global economy
[photograph]
<PAGE>
CONE REVITALIZE
[photograph]
Through our international partnerships, we have refocused fabric sourcing to
compete in the global economy. We can provide our domestic customers with
cost-competitive products near their worldwide cut-and-sew operations.
o Cone will continue to develop its presence in Mexico. Our joint venture,
Parras Cone, which gives us high-quality, low-cost denim production that is
close to important cut-and-sew customers, serves as a platform for future
Mexican initiatives.
o With our investment in Ashima Syntex Ltd. of Ahmedabad, India, a low-cost,
quality maker of denims, yarn-dyed shirtings and bottomweight fabrics, Cone has
better access to European and Asian markets. This strategic alliance strengthens
Cone in important sportswear lines and increases our international capabilities.
o We are developing a network of complementary operations worldwide, including
sales and marketing capabilities, to service our domestic production and
international alliances. Cone is actively pursuing business around the globe.
o Cone is continuously evaluating potential manufacturing and sourcing platforms
for fabrics and garment packages.
6/7
<PAGE>
CONE REVITALIZE
[photograph]
By investing in new technology and broadening our product line, we have
reinvigorated our finishing operations to build on our capabilities as the
leading commission finisher in the United States.
o Cone has an array of versatile equipment capable of sophisticated printing,
dyeing and finishing operations including popular surface treatments, such as
sanding, sueding, brushing and napping.
o We have invested in technology and new equipment, such as the expanded
preparation range and new 24-color dyeing machine at Raytex, and new surface
finishing equipment and reconditioned dyeing machines at Carlisle.
o With emphasis on marketing diversification, Cone brings a variety of new print
customers into our finishing business.
o By taking advantage of dyeing expertise to diversify into plain shade apparel
product finishing, we can expand into program business for khaki-style pants and
slacks.
8/9
<PAGE>
Reinvigorate
finishing operations to build on our capabilities as
the leading commission finisher in the U.S.
[photograph]
<PAGE>
Reassert
our leadership in decorative fabrics
[photograph]
<PAGE>
[photograph]
The combination of the John Wolf and Cone Jacquards divisions has helped us
reassert our leadership in decorative fabrics by providing new operating
efficiencies, new products and marketing synergies that create opportunities for
growth and profit.
o By merging Cone Jacquards and John Wolf into Cone Decorative Fabrics, we can
take advantage of the strong overlap in customers and build on our design and
marketing expertise.
o With a consolidated sales force, Cone Decorative Fabrics can get more products
in front of more customers.
o With a diversified product line that caters to more customer requirements
across a variety of needs, Cone Decorative Fabrics is a one-stop shopping
experience for a broad range of manufacturers, retailers, jobbers and
hospitality markets.
o Cone Decorative Fabrics is sharing product design from top-of-bed to furniture
to products for retailers and jobbers with a consistent, high-quality look and
feel.
o Cone Decorative Fabrics is styling our decorative fabric lines with fresh new
prints, plain shades and stripes. We are also introducing new cotton warps,
outdoor fabrics and dobby-woven products.
10/11
<PAGE>
Results
Management's Discussion and
Analysis of Results of Operations
and Financial Condition
Overview
During 1998, Cone Mills improved operating results excluding charges for
restructuring and the impairment of assets. However, during the year, the
industry in general and the Company were negatively impacted by a number of
internal and external factors.
The economic slowdown in many Asian and Latin American countries coupled with
currency devaluations has resulted in worldwide supply and demand imbalances in
garments and fabrics and a need by many foreign mills to earn U.S. dollars. The
result has been intensified foreign competition and the U.S. industry's earnings
and stock prices have been severely impacted.
The Company continued to encounter manufacturing difficulties at its Carlisle
Finishing plant. Even though the facility improved capacity utilization and
broadened its customer base, the consolidation that began in 1997 of the
Company's Granite Finishing operations into Carlisle disrupted manufacturing
efficiencies to a greater extent than anticipated, which materially adversely
impacted results of the commission finishing segment during 1998.
The Company also encountered adverse market conditions in its yarn-dyed product
segment in 1998. Increased import penetration of yarn-dyed products and
ineffective marketing and merchandising programs resulted in significant
operating losses. Following unsuccessful plans to utilize the Salisbury
yarn-dyed plant for lightweight denim production and to modernize weaving, the
Company announced in January of 1999 the closing of this facility in the second
quarter of 1999.
Even though market conditions in denims were strong for the first nine months of
1998, the Company encountered a significant reduction of sales in the fourth
quarter. Lower sales resulted primarily from the negative impact of unseasonably
warm weather on retail sales of basic heavyweight jeans, a stronger consumer
interest in fashion denims and khakis and adjustments to retail and
manufacturing inventories associated with these trends. In the fourth quarter of
1998, operating schedules at the denim manufacturing plants were curtailed to
control inventories. Parras Cone, the Company's joint venture plant in Mexico,
operated essentially at capacity throughout 1998.
While Cone's denim sales to Levi Strauss, its major customer, declined from 37%
in 1997 to 32% in 1998 of total Company revenues, sales to customers other than
Levi Strauss increased approximately 20%. The Company's aggressive denim
marketing efforts increased the customer base.
In response to these 1998 business conditions for apparel products and
commission finishing, the Company announced in early 1999 a comprehensive
downsizing and reorganization program which included: 1) The streamlining of
product offering of the sportswear division including the closing of the
Salisbury plant which produces yarn-dyed shirting fabrics. 2) The downsizing and
reorganization of the Corporate Administrative staff to more efficiently match
Cone's present sales base. 3) The merger of the denim and sportswear fabrics
businesses into one unit which will more efficiently serve the growing
casualwear market. 4) The reduction of the manufacturing staff in order to
simplify the management structure and become more responsive to customer cycle
times. 5) The closing of the Florence and Cliffside yarn manufacturing
facilities, coupled with the outsourcing of yarn, to reduce operating costs and
conserve capital which would have been required for equipment modernization. 6)
The downsizing of screen printing operations at the Carlisle plant to reduce
costs and improve efficiency.
The Company expects to achieve significant cost savings as a result of these
initiatives.
The Company restructured its decorative fabrics operations in 1998 which
included the consolidation of Cone Jacquards and John Wolf divisions, reductions
of staff and overhead and the development of a new management team. The
decorative fabrics units made progress in 1998 by broadening their product lines
and customer bases as well as expanding capacity.
12/13
<PAGE>
CONE RESULTS
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 also believes that one of the most significant factors
affecting operating margins is the price of cotton, which varied between the
$.60s and $.70s through much of 1996, 1997 and 1998. The Company has purchased
cotton at fixed prices for delivery throughout 1999. The Company expects 1999
average cotton prices to be slightly higher than 1998 levels because there will
be less benefit from the U.S. government cotton program. The Company's average
cotton prices for 1999 are expected to be higher than first quarter 1999 spot
market quotations due to its practice of continuously buying cotton forward. The
Company has also experienced price pressure reflecting the slowdown of denim
sales in the fourth quarter of 1998 and a strong global supply of denim.
Long-Term 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 apparel
products, commission finishing 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 synthetics fabric 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.
In August 1998, the Company announced an alliance with a related group of
companies known as the Ashima Group of India. The Ashima Group produces and
markets a broad product line of denim and sportswear fabrics. The Indian
government approved the alliance on September 12, 1998. The alliance consists of
four elements: 1) the purchase by Cone of approximately 8% of Ashima Syntex Ltd.
capital stock which was completed on October 23, 1998 for $3.5 million; 2)
Cone's providing technology and technical services to the Ashima companies,
receiving fees as compensation; 3) Cone certification, after full process and
product conformance to Cone standards, of certain Ashima products for
distribution throughout the world; and 4) the exclusive right of Cone to market
Ashima products outside the Indian sub-continent under the name Ashima-Cone. The
Company expects 1999 sales and earnings to be enhanced by this new alliance.
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 over $105 million from 1996 through 1998 to maintain modern manufacturing
facilities and to expand the jacquard plant. The Company plans to reduce
domestic capital spending to approximately $15 million in 1999 as relooming of
domestic denim facilities was completed in 1998. The second priority is
investment in international denim manufacturing facilities 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 include the reduction of debt and
common stock share repurchases. At a meeting of the Board of Directors on
October 19, 1998, the Company was authorized to repurchase from time to time up
to 1.5 million shares of its common stock. In 1998, the Company repurchased 0.8
million shares of common stock which completed the previous authorization. No
repurchases have been made under the October 1998 authorization. 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
In 1998, the Company adopted Financial Accounting Standards Board Statement,
SFAS 131, "Disclosures about Segments of an Enterprise and Related
Information." See Notes 18 and 21 of the Notes to Consolidated Financial
Statements. Cone operates in four principal business segments: denim and khaki,
yarn-dyed products, commission finishing and decorative fabrics. The following
table sets forth for years 1998, 1997 and 1996 certain net sales and segment
income (loss) information regarding these segments.
12/13
<PAGE>
CONE RESULTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
continued
<TABLE>
<CAPTION>
(dollars in millions) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales 1,2,3
Denim and Khaki $ 545.0 74.8% $ 533.8 74.5% $ 542.9 72.8%
Yarn-Dyed Products 33.7 4.6 46.4 6.5 41.9 5.6
Commission Finishing 107.1 14.7 94.8 13.2 87.6 11.7
Decorative Fabrics 56.3 7.7 42.5 5.9 38.7 5.2
Other 4.7 0.7 10.8 1.5 41.3 5.6
-------- ----- -------- ----- -------- -----
Subtotal $ 746.8 102.5 $ 728.3 101.6 $ 752.4 100.9
Less Intersegment Sales 18.2 2.5 11.4 1.6 6.5 0.9
-------- ----- -------- ----- -------- -----
$ 728.6 100.0% $ 716.9 100.0% $ 745.9 100.0%
---------------------------------------------------------------
Segment Income (Loss)2,4,5
Denim and Khaki $ 52.2 9.6% $ 36.5 6.8% $ 42.1 7.8%
Yarn-Dyed Products (14.5) (43.0) (5.0) (10.9) (5.6) (13.3)
Commission Finishing (15.1) (14.1) (13.1) (13.8) (8.2) (9.4)
Decorative Fabrics (0.4) (0.7) (9.7) (22.8) (8.5) (21.9)
Other (1.7) (35.3) (3.3) (30.9) (2.1) (5.0)
Restructuring & Impairment of Assets (17.1) -- (5.2) -- (5.2) --
- --------------------------------------------------------------------------------------------------------
</TABLE>
1 Decorative fabrics includes Greeff, which was sold in December 1996; Other
includes Olympic, which was sold in January 1996, synthetic fabrics, which
was sold in January 1997, and real estate operations, which was sold in May
1997.
2 Divested operating units had sales of $4.6 million and $34.1 million in 1997
and 1996, respectively. Net segment results of these businesses, excluding
restructuring charges, were losses of $1.0 million and $2.3 million in 1997
and 1996, respectively.
3 Intersegment sales represent commission finishing intercompany sales to the
denim and khaki and decorative fabrics segments.
4 Segment income (loss) excludes unallocated expenses. Percentages reflect
segment income (loss) as a percentage of segment net sales.
5 Denim and khaki segment income includes equity in earnings (losses) of
unconsolidated affiliate.
Results of Operations
Fifty-Three Weeks Ended January 3, 1999 Compared with Fifty-Two Weeks Ended
December 28, 1997
Cone Mills had sales for 1998 of $728.6 million, as compared with 1997 sales of
$716.9 million. For 1998, sales of denim, commission finishing and decorative
fabrics improved while sales of yarn-dyed products were lower. In the fourth
quarter of 1998, denim sales slowed significantly. International sales
represented 25% of total sales in both years.
Gross profit for 1998 (net sales less cost of sales and depreciation) increased
to 12.8% of sales, as compared with 10.5% for the previous year. The improvement
was primarily the result of lower raw material costs including cotton, dyes and
chemicals. Cotton costs were lower in 1998, reflecting more favorable world
cotton prices and the U.S. government cotton program.
Denim and Khaki For 1998, sales of this segment, primarily denims, were $545.0
million, up 2% from 1997 sales of $533.8 million. In the fourth quarter of 1998,
and in the first two quarters of 1997, operating schedules at the Company's
denim facilities were curtailed as certain customers reduced orders to control
inventories. Operating profits for the segment were $52.2 million, up 43% for
1998 as compared with $36.5 million for 1997. Lower raw material costs including
cotton, dyes and chemicals accounted for the increase. Prices of denim and khaki
fabrics were down slightly year-over-year as pricing in the fourth quarter of
1998 weakened.
Yarn-Dyed Products In 1998, sales of yarn-dyed products were $33.7 million, down
27%, as compared with $46.4 million for 1997. Unseasonably warm weather in 1998
affected retail sales. Continued import penetration also affected the Company's
sales. The Company had an operating loss for 1998 of $14.5 million in this
segment, as compared with an operating loss of $5.0 million for 1997. The loss
was primarily associated with operations and excess inventories at the Salisbury
plant, which will be closed in the first half of 1999.
Commission Finishing Outside sales (total segment sales less intersegment sales)
of commission finishing at the Raytex and Carlisle plants were $88.9 million, up
7% in 1998, as compared with $83.4 million for 1997. Sales improvements were
primarily the result of sales efforts to broaden the customer base. The segment
had an operating loss of $15.1 million for 1998, as compared with an operating
loss of $13.1 million in 1997. All of the 1998 losses were associated with the
Carlisle plant,
14/15
<PAGE>
CONE RESULTS
where operations improved modestly quarter-to-quarter during 1998. Intracompany
sales of this segment were to the denim and khaki and decorative fabrics
segments.
Decorative Fabrics For 1998, sales of decorative fabrics were $56.3 million, up
32% from 1997 sales of $42.5 million. The segment had an operating loss of $0.4
million in 1998 compared with an operating loss of $9.7 million in 1997. Both
John Wolf and Cone Jacquards had improved operating results because of new
product offerings, expanded capacity and reduced overhead expenses.
Total Company selling and administrative costs for 1998 were $83.8 million, or
11.5% of sales, as compared with $78.3 million, or 10.9% of sales in 1997. The
increase was primarily from international initiatives, including the start-up
expenses related to the new alliance with Ashima in India, expenses and fees
associated with cost savings efforts and increases in certain sales staffs to
complement more aggressive sales efforts.
Interest expense for 1998 was up $0.7 million, as compared to 1997, primarily
the result of additional borrowing to support increases in working capital.
For 1998 and 1997, the income tax benefit as a percent of the taxable loss was
40.0%. The Company operates a foreign sales corporation which results in certain
tax benefits. See Note 11 of the Notes to Consolidated Financial Statements.
Equity in earnings of Parras Cone, the joint venture plant in Mexico, was $5.2
million for 1998, as compared with $2.6 million for 1997. The 1998 results
reflect a fuller operating schedule compared with the 1997 period, improved
operating efficiencies and lower cotton costs.
Cone Mills had a net loss for 1998 of $6.7 million, or $.37 per share after
preferred dividends, as compared with a net loss of $9.4 million, or $.47 per
share for the prior year. Excluding restructuring and other non-recurring
charges, the Company earned $.08 per share in 1998, as compared with a loss of
$.31 per share in 1997. Pretax charges of $19.3 million in 1998 included $15.8
million for the write-down of property and equipment at the Salisbury plant and
$2.2 million for additional inventory reserves on the yarn-dyed shirting product
lines. In 1997, the Company incurred pretax restructuring charges and inventory
adjustments of $7.4 million.
Results of Operations
Fifty-Two Weeks Ended December 28, 1997 Compared with Fifty-Two Weeks 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 fabrics and weak markets for
non-denim apparel fabrics, decorative fabrics and commission finishing.
Sales for 1997 were $716.9 million, down 4%, as compared with sales of $745.9
million for 1996. After eliminating the sales of business units included in the
Company's reorganization plan, sales were approximately the same year-to-year.
Lower sales in the denim and khaki segment were offset by increased sales in
other segments. International sales, primarily denims, were 25% of total sales
in 1997 and 26% for 1996.
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 fabrics operations. Also impacting gross profit
was the increase in sales of products produced by Parras Cone, where a portion
of the operating income is reported as equity in earnings of unconsolidated
affiliate.
Denim and Khaki Sales of this segment were $533.8 million for 1997, as compared
with $542.9 million for 1996. Lower denim sales because of lower volume and
prices, partially offset by higher sales of non-denim apparel fabrics, 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 denim and khaki segment had operating income of $36.5
million, as compared with operating income of $42.1 million in 1996.
Yarn-dyed Products Sales of this segment for 1997 were $46.4 million, up 11%
from 1996 sales of $41.9 million, as heavyweight yarn-dyed flannel shirtings
were
14/15
<PAGE>
CONE RESULTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
continued
fashionable and there were strong December 1996 retail sales. This segment had
an operating loss of $5.0 million in 1997, as compared with an operating loss of
$5.6 million in 1996.
Commission Finishing Outside sales of commission finishing (total segment sales
less intersegment sales) for 1997 were $83.4 million, as compared with $81.1
million in 1996. Stronger apparel print finishing services were partially offset
by weaker decorative print markets. Operating losses for commission finishing
were $13.1 million in 1997, as compared with $8.2 million for 1996. Operating
results were negatively impacted by weak decorative fabrics markets and the
operating disruption due to consolidation of finishing operations.
Decorative Fabrics For 1997, sales of decorative fabrics were $42.5 million, as
compared with $38.7 million in 1996. Increased sales of jacquard products, the
result of capacity expansion and the movement of the product line to more
expensive products, more than offset lower sales at John Wolf, the result of
weak decorative print markets. The operating loss for decorative fabrics was
$9.7 million in 1997 as compared with $8.5 million in 1996. As a result of
continued weakness in decorative print markets in the fourth quarter of 1997,
the Company reorganized operations of John Wolf by reducing staff and
inventories, which resulted in a pre-tax fourth quarter charge of $4.2 million
for inventory adjustments and severance liabilities.
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 11 of the Notes to Consolidated Financial
Statements.
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.
Liquidity and Capital Resources
The Company's principal long-term capital components consist of debt outstanding
under its Senior Note, its 8 1/8% Debentures and stockholders' equity. Primary
sources of liquidity are internally generated funds, an $80 million Revolving
Credit Facility and the $50 million Receivables Purchase Agreement. The
Receivables Purchase Agreement expires in June 1999 and the Company believes it
can replace this facility on comparable terms. On January 3, 1999, the Company
had funds available of $48 million under its Revolving Credit Facility.
During 1998, the Company generated cash from operating activities before changes
in working capital of $22.3 million, as compared with $13.2 million for 1997.
Working capital reductions in 1998, primarily accounts receivable, were $5.1
million. Other sources of cash included proceeds of $6.2 million realized from
the sale of retired manufacturing equipment. Uses of cash included $32.8 million
for capital expenditures, $5.1 million for the repurchase of common stock and
$3.0 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 needs for
working capital, domestic capital spending and stock repurchases for the
foreseeable future. Potential international investments may require additional
long-term financing.
On January 3, 1999, the Company's long-term capital structure consisted of
$161.4 million of long-term debt and $181.9 million of stockholders' equity. For
comparison, on December 28, 1997, the Company had $139.7 million of long-term
debt and $196.5 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 49% at January 3, 1999, as compared with 43% at
December 28, 1997.
Accounts and note receivable on January 3, 1999, were $36.4 million, as compared
with $43.8 million at December 28, 1997. Receivables, including those sold
pursuant to the Receivables Purchase Agreement,
16/17
<PAGE>
CONE RESULTS
represented 56 days of sales outstanding at January 3, 1999 and 45 days at
December 28, 1997. The increase in days of sales outstanding primarily reflects
a change in customers' sales mix and fewer customers paying in advance of due
date.
Inventories on January 3, 1999, were $120.4 million, up $4.8 million from
December 28, 1997. The increase was primarily due to higher denim finished goods
inventories.
Capital spending in 1998 was $32.8 million, as compared with $36.3 million for
1997. Domestic capital spending in 1999 is expected to be approximately $15
million. The reduced spending in 1999 is because the Company completed in 1998
its relooming program of domestic denim facilities. Approximately $5.4 million
of the budgeted capital expenditures for 1999 had been committed on January 3,
1999. In addition to the capital spending budget, the Board of Directors has
authorized up to $12 million of investments in international initiatives.
Other Matters
The Company recognizes the business implications regarding the Year 2000 as it
relates to computer programs and software systems. A comprehensive plan has been
developed to address possible exposures to Year 2000 issues. Critical financial,
operational and manufacturing systems have been inventoried and assessed and
detailed plans are in place for the necessary system modifications or
replacements. Implementation of required changes for all systems is targeted for
completion during fiscal year 1999.
Executive management periodically reviews the status of the Company's Year 2000
compliance efforts. At present the Company estimates it is approximately 60%
complete with implementation of new systems or remediation of existing systems
related to core business systems and approximately 80% complete with such
efforts related to manufacturing, operating and control systems. Testing and
certification is expected to be substantially completed by June 1999.
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. Coordination efforts involve communication with
major suppliers and customers to undertake testing of electronic interfaces and
obtaining written certifications of compliance where applicable. Risk
assessments and action plans have been substantially completed. The majority of
necessary system modifications, including testing and certification, should be
completed in the first half of 1999. All required changes are targeted for
completion by third quarter 1999.
The Company has made significant investments to modernize its core business
systems over the past several years. With each system modification or
replacement, Cone has addressed the Year 2000 issue. Therefore, total
remediation costs to address the Company's Year 2000 issues are presently
expected to be less than $1 million.
The Company currently has contingency plans which address system related
interruptions and will further develop such plans to protect the business from
potential Year 2000 interruptions. These plans will be completed during fiscal
year 1999 and will include, for example, as a worst case scenario, processing
certain significant business transactions manually. The Company is taking
reasonable steps to prevent major interruptions related to the Year 2000 issue;
however, the effect on the Company's results of operations if the Company, its
suppliers or its customers are not fully Year 2000 compliant is not reasonably
estimable.
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.
Market Risks
The Company's primary market risk exposures are cotton (commodity) price risk
and interest rate risk. At January 3, 1999, Cone had no material exchange rate
risk. The Company had no financial instruments, derivative financial instruments
or derivative commodity instruments held for trading purposes at January 3,
1999.
16/17
<PAGE>
CONE RESULTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
continued
Fair values for cotton derivatives and long-term debt instruments were estimated
with reference to market quotes at year-end.
Commodity price risk primarily relates to cotton. The Company has an established
cotton purchasing program, administered in conformance with policies approved by
the Board of Directors, to ensure an uninterrupted supply of appropriate quality
and quantities of cotton, to hedge committed and anticipated fabric sales and to
manage margin risks associated with price fluctuations on anticipated cotton
purchases. The Company primarily uses forward contracts and, to a lesser extent,
futures and options contracts.
The following table provides information about the Company's cotton inventory
options contracts that are sensitive to changes in cotton prices. The table
presents the contract amounts in bales of cotton, the weighted-average strike
price and the total dollar contract price by expected maturity dates. Contract
amounts are used to calculate the contractual payments and quantity of cotton
under option at January 3, 1999.
<TABLE>
<CAPTION>
Cotton Derivatives Expected Maturity Date 1999 Fair Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cotton Options (Puts)
Contract Volume (500 lb bales) 642 NA
Weighted-Average Strike Price (per 500 lb bales) $ .61 NA
Contract Amount $ 406,700 $874,200
Cotton Options (Calls)
Contract Volume (500 lb bales) 778 NA
Weighted-Average Strike Price (per 500 lb bales) $ .75 NA
Contract Amount $ 370,150 $117,510
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The Company's debt instruments are exposed to interest rate risk. Cone's
strategy is to balance its fixed to floating interest rate mix. For debt
obligations, the table presents principal cash flows and related
weighted-average interest rates by expected maturity dates. Variable
weighted-average interest rates for the Company's debentures are based on the
applicable forward LIBOR rates.
<TABLE>
<CAPTION>
Expected Maturity Date
------------------------------------------------------------
(dollars in millions) 1999 2000 2001 2002 Thereafter Total Fair Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Liabilities
Long-Term Debt
Fixed Rate
Senior Note $ 10.7 $ 10.7 $ 10.7 $ 10.7 $ -- $ 42.8 $ 42.8
Average interest rate (%) 8.8 8.8 8.8 8.8 -- 8.8
Variable Rate
Revolver $ -- $ 32.0 $ -- $ -- $ -- $ 32.0 $ 32.0
Average interest rate (%) 6.1 6.1 -- -- -- 6.1
Debentures (including an
interest rate swap) $ -- $ -- $ -- $ -- $100.0 $100.0 $ 97.9
Average interest rate (%) 7.3 7.7 9.2 9.6 9.9 8.7
- -----------------------------------------------------------------------------------------------------------
</TABLE>
"Safe Harbor" Statement under Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Except for the historical information presented, the matters disclosed in the
foregoing discussion and analysis and other parts of this report include
forward-looking statements. These statements represent the Company's current
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, (iv) the Company's relationships with Levi Strauss as
its major customer, and (v) the risks associated with unforeseen technological
difficulties arising under the Company's Year 2000 compliance efforts and the
potential for increased costs associated therewith. For a further description of
these risks see the Company's 1998 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 1998
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.
18/19
<PAGE>
Review
1998 Financial Review
<TABLE>
<S> <C>
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 38
Independent Auditor's Report 39
Historical Financial Review 40
</TABLE>
<PAGE>
CONE REVIEW
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended January 3, 1999, December 28, 1997 and December 29, 1996
(in thousands, except per share data) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales $ 728,626 $ 716,853 $ 745,939
---------------------------------------
Operating Costs and Expenses
Cost of sales 607,625 615,792 614,657
Selling and administrative 83,835 78,266 86,394
Depreciation 27,697 25,948 26,868
Restructuring and impairment of assets 17,124 5,176 5,197
---------------------------------------
736,281 725,182 733,116
---------------------------------------
Income (Loss) from Operations (7,655) (8,329) 12,823
---------------------------------------
Other Income (Expense)
Interest income 2,777 2,486 586
Interest expense (14,890) (14,160) (15,483)
---------------------------------------
(12,113) (11,674) (14,897)
---------------------------------------
Loss Before Income Tax Benefit and Equity in
Earnings (Losses) of Unconsolidated Affiliate (19,768) (20,003) (2,074)
Income Tax Benefit (7,907) (8,001) (2,311)
---------------------------------------
Income (Loss) Before Equity in Earnings (Losses) of
Unconsolidated Affiliate (11,861) (12,002) 237
Equity in Earnings (Losses) of Unconsolidated Affiliate 5,210 2,637 (2,458)
---------------------------------------
Net Loss $ (6,651) $ (9,365) $ (2,221)
=======================================
Loss Available to Common Shareholders $ (9,564) $ (12,346) $ (5,101)
=======================================
Loss Per Share - Basic and Diluted $ (.37) $ (.47) $ (.19)
=======================================
Weighted-Average Common Shares Outstanding
Basic and Diluted 25,929 26,140 27,179
=======================================
</TABLE>
See Notes to Consolidated Financial Statements.
20/21
<PAGE>
CONE REVIEW
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
January 3, 1999 and December 28, 1997
(in thousands, except share and par value data) 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current Assets
Cash $ 639 $ 856
Accounts receivable, less allowances of $1,500 26,010 19,958
Subordinated note receivable 10,414 23,842
Inventories 120,430 115,663
Other current assets 10,253 19,228
-----------------------
Total Current Assets 167,746 179,547
Investments in Unconsolidated Affiliates 45,489 36,781
Other Assets 36,616 38,431
Property, Plant and Equipment 238,666 251,887
-----------------------
$488,517 $506,646
=======================
Liabilities and Stockholders' Equity
Current Liabilities
Notes payable $ 1,000 $ 4,500
Current maturities of long-term debt 10,714 10,714
Accounts payable 27,255 32,994
Sundry accounts payable and accrued liabilities 42,071 49,588
Deferred income taxes 22,670 23,370
-----------------------
Total Current Liabilities 103,710 121,166
Long-Term Debt 161,385 139,656
Deferred Income Taxes 30,050 38,523
Other Liabilities 11,448 10,781
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 25,432,233 shares; 1997, 26,201,633 shares 2,543 2,620
Capital in excess of par 57,264 62,300
Retained earnings 92,799 102,449
Deferred compensation - restricted stock (579) (740)
Accumulated other comprehensive loss, currency translation adjustment (8,498) (8,504)
-----------------------
Total Stockholders' Equity 181,924 196,520
-----------------------
$488,517 $506,646
=======================
</TABLE>
See Notes to Consolidated Financial Statements.
20/21
<PAGE>
CONE REVIEW
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Class A
Years Ended January 3, 1999, Preferred Stock Common Stock
December 28, 1997 and ----------------- ----------------------
December 29, 1996
(in thousands, except share data) Shares Amount Shares Amount
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 383,948 $38,395 27,380,409 $ 2,738
Comprehensive Loss
Net loss - - - -
Currency translation adjustment,
sale of stock affiliate - - - -
Total comprehensive loss
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
Comprehensive Loss
Net loss - - - -
Currency translation adjustment - - - -
Total comprehensive loss
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
Comprehensive Loss
Net loss - - - -
Currency translation adjustment - - - -
Total comprehensive loss
Class A Preferred Stock
Cash dividends paid - - - -
Common Stock
Purchase of common shares - - (768,400) (77)
Cancellation of restricted shares - - (1,000) -
Restricted stock compensation - - - -
---------------------------------------------------
Balance, January 3, 1999 383,948 $38,395 25,432,233 $ 2,543
---------------------------------------------------
Years Ended January 3, 1999, Deferred Accumulated
December 28, 1997 and Capital in Compensation Other Total
December 29, 1996 Excess Retained Restricted Comprehensive Comprehensive
(in thousands, except share data) of Par Earnings Stock Loss Loss
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $71,090 $ 119,825 $ - $ (9,923)
Comprehensive Loss
Net loss - (2,221) - - $ (2,221)
Currency translation adjustment,
sale of stock affiliate - - - 1,448 1,448
-------------
Total comprehensive loss $ (773)
=============
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)
Comprehensive Loss
Net loss - (9,365) - - $ (9,365)
Currency translation adjustment - - - (29) (29)
-------------
Total comprehensive loss $ (9,394)
=============
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)
Comprehensive Loss
Net loss - (6,651) - - $ (6,651)
Currency translation adjustment - - - 6 6
-------------
Total comprehensive loss $ (6,645)
=============
Class A Preferred Stock
Cash dividends paid - (2,999) - -
Common Stock
Purchase of common shares (5,028) - - -
Cancellation of restricted shares (8) - 8 -
Restricted stock compensation - - 153 -
-----------------------------------------------------------
Balance, January 3, 1999 $57,264 $ 92,799 $ (579) $ (8,498)
-----------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements. 22/23
<PAGE>
CONE REVIEW
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended January 3, 1999, December 28, 1997 and December 29, 1996
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operations
Net loss $ (6,651) $ (9,365) $ (2,221)
Adjustments to reconcile net loss to net cash provided by operations
Depreciation 27,697 25,948 26,868
Gain on divestitures - (34) (3,351)
Loss (gain) on sale and writedown of property, plant and equipment 12,182 (2,114) 647
Amortization 2,667 2,767 2,938
Deferred compensation expense - restricted stock 153 21 -
Equity in (earnings) losses of unconsolidated affiliate (5,210) (2,637) 2,458
Change in operating assets and liabilities, excluding effects of
business divestitures
Accounts receivable (6,052) 28,415 11,882
Subordinated note receivable 13,428 (23,842) -
Inventories (4,767) 11,836 5,729
Other assets 8,573 (2,905) (4,258)
Accounts payable and accrued liabilities (6,066) (2,440) (11,594)
Deferred income taxes (9,173) (1,840) (3,041)
Other liabilities 667 448 1,458
----------------------------------------
Cash provided by operations 27,448 24,258 27,515
----------------------------------------
Investing
Investments in unconsolidated entities (3,498) (1,564) -
Proceeds from sale of stock in unconsolidated affiliate - - 805
Proceeds from business divestitures - 19,529 44,045
Proceeds from sale of property, plant and equipment 6,162 4,995 4,402
Capital expenditures (32,821) (36,290) (36,221)
----------------------------------------
Cash provided by (used in) investing (30,157) (13,330) 13,031
----------------------------------------
Financing
Net payments under line of credit agreements (3,500) (767) (3,608)
Increase (decrease) in checks issued in excess of deposits (7,190) 4,831 (12,369)
Principal payments of long-term debt (10,714) (10,796) (12,739)
Proceeds from long-term debt borrowings 32,000 - -
Purchase of outstanding common stock (5,105) (1,532) (8,771)
Proceeds from issuance of common stock - 66 521
Dividends paid - Class A Preferred (2,999) (2,892) (2,898)
----------------------------------------
Cash provided by (used in) financing 2,492 (11,090) (39,864)
----------------------------------------
Net change in cash (217) (162) 682
Cash at Beginning of Year 856 1,018 336
----------------------------------------
Cash at End of Year $ 639 $ 856 $ 1,018
========================================
</TABLE>
See Notes to Consolidated Financial Statements.
22/23
<PAGE>
CONE REVIEW
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.
Fiscal year 1998 contained 53 weeks. Fiscal years 1997 and 1996 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. See Note 21, "Restructuring, Impairment of Assets and
Divestitures," of the Notes to the Consolidated Financial Statements.
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.
United States income taxes are not provided on the earnings of foreign
affiliates as those are intended to be permanently reinvested in the country
from which they were derived. Undistributed earnings of such foreign affiliates
were approximately $4 million at January 3, 1999.
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 24, 1998, the Company renewed 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 $50 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 Statement of Financial Accounting Standards ("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.
The Company had sold Cone Receivables, LLC, accounts receivable of $63 million
and $66 million at fiscal year end 1998 and 1997, respectively. The Company's
subordinated note receivable from Cone Receivables, LLC was $10 million and $24
million at fiscal year end 1998 and 1997, respectively.
24/25
<PAGE>
CONE REVIEW
Note 3. Inventories
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands) 1998 1997
- -------------------------------------------------
<S> <C> <C>
Greige and finished goods $ 87,087 $ 81,130
Work in process 9,810 11,260
Raw materials 11,508 11,122
Supplies and other 12,025 12,151
---------------------
$120,430 $115,663
=====================
</TABLE>
Inventories valued at LIFO as of January 3, 1999 and December 28, 1997 were 97%
and 95% 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 $22 million
higher at January 3, 1999 and $25 million higher at December 28, 1997. LIFO
inventories valued for financial statement purposes exceed their income tax
basis by approximately $79 million at January 3, 1999 and $81 million at
December 28, 1997. During 1998, 1997 and 1996, 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 1998 and 1997 and $1.4
million in 1996.
Note 4. Investments In Unconsolidated Affiliates
- --------------------------------------------------------------------------------
The Company has an 18% ownership interest in Compania
Industrial de Parras S.A., ("CIPSA"), a denim manufacturer in Mexico. 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, each
shareholder with a 50% interest, and approximately $45 million of Mexican bank
financing. The debt is not guaranteed by Cone Mills Corporation or CIPSA.
The Company's equity in earnings of Parras Cone was $5.2 million and $2.6
million for 1998 and 1997, respectively. 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
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>
<CAPTION>
(in thousands) 1998 1997 1996
- -------------------------------------------------------
<S> <C> <C> <C>
Current assets $24,508 $ 18,332 $ 14,511
Noncurrent assets 96,272 103,611 110,870
Current liabilities 15,383 13,218 13,468
Noncurrent liabilities 35,241 51,506 59,934
Net sales 85,225 84,849 63,810
Gross profit 22,163 15,827 4,791
Net income (loss) 10,069 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>
<CAPTION>
(in thousands) 1998 1997
- -----------------------------------------------
<S> <C> <C>
Current assets $ 10,361 $25,788
Noncurrent assets - -
Current liabilities 10,715 24,225
Noncurrent liabilities - -
Net sales NA NA
Gross profit NA NA
Net income (loss) (1,918) 664
</TABLE>
Note 5. Other Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands) 1998 1997
- ---------------------------------------------------------------
<S> <C> <C>
Excess of cost over net assets acquired $19,693 $19,693
Trade names 14,332 14,332
Other intangible assets 5,075 5,005
---------------------
39,100 39,030
Less accumulated amortization 9,413 7,145
---------------------
29,687 31,885
Other assets 6,929 6,546
---------------------
$36,616 $38,431
=====================
</TABLE>
24/25
<PAGE>
CONE REVIEW
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Property, Plant and Equipment
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands) 1998 1997
- -----------------------------------------------------
<S> <C> <C>
Land $ 11,395 $ 11,799
Buildings 88,394 85,206
Machinery and equipment 335,797 329,249
Other 34,240 33,724
---------------------
469,826 459,978
Less accumulated depreciation 231,160 208,091
---------------------
$238,666 $251,887
=====================
</TABLE>
Note 7. Notes Payable
- --------------------------------------------------------------------------------
The Company had outstanding unsecured short-term notes payable of $1.0 million
and $4.5 million at weighted-average interest rates of 6.25% and 5.94%, at
fiscal year end 1998 and 1997, respectively.
Note 8. Sundry Accounts Payable and Accrued Liabilities
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands) 1998 1997
- --------------------------------------------------------------
<S> <C> <C>
Accrued salaries, wages and commissions $13,261 $10,274
Checks issued in excess of deposits 10,809 17,999
Other 18,001 21,315
--------------------
$42,071 $49,588
====================
</TABLE>
Note 9. Long-Term Debt
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands) 1998 1997
- --------------------------------------------------
<S> <C> <C>
Senior Note $ 42,858 $ 53,572
Revolving Credit Agreement 32,000 -
8 1/8% Debentures 97,241 96,798
---------------------
172,099 150,370
Less current maturities 10,714 10,714
---------------------
$161,385 $139,656
=====================
</TABLE>
The Senior Note is a ten-year $75 million Promissory Note, dated August 13,
1992 with an interest rate of 8% for 1997 which increased to 8.75% in February
1998. 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 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 weighted-average interest rate on the borrowings under the
Revolving Credit Agreement was 6.11% at January 3, 1999. 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 January 3, 1999.
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 1995, the Company
entered into an interest rate hedge contract to fix the interest rate on the
Debentures. The contract was terminated at a cost of $4.3 million. Amortization
of the loss on the interest rate hedge and original issue discount, both over a
ten-year life, resulted in an 8.57% effective rate for the issue.
In July 1998, the Company entered into an interest rate swap agreement with a
notional amount of $100 million and a term of seven years with a major
financial institution. This agreement effectively converts the Debentures to a
variable interest rate. The interest rate under the swap agreement is reset
every six months and the effective rate at January 3, 1999 was 7.52%. The
interest rate swap agreement also provides an effective interest rate cap at
8.57% for the first three years and then to 10.07% for the balance of its term.
Annual maturities of long-term debt, consisting of amortization of the Senior
Note and the expiration of the Revolving Credit Agreement, for each of the next
five fiscal years are:
<TABLE>
<CAPTION>
(in thousands)
- ---------------
<S> <C>
1999 $10,714
2000 42,714
2001 10,714
2002 10,716
2003 -
</TABLE>
26/27
<PAGE>
Note 10. Pensions and Other Benefit Programs
- --------------------------------------------------------------------------------
The benefit plans offered by the Company to its employees include Defined
Contribution Retirement Plans, Defined Benefit Plans and Other Retiree Benefits
which are outlined below:
Defined Contribution Retirement Plans
At the beginning of 1998, the Company had five defined contribution plans as
outlined below:
1) The 1983 Employee Stock Ownership Plan ("ESOP")
2) The Supplemental Retirement Plan ("SRP")
3) The Supplemental Retirement Plan-Hourly ("SRP-H")
4) The Employee Equity Plan ("EEP")
5) The Employee Equity Plan-Hourly ("EEP-H")
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 plans are offset by the actuarial equivalent
pension value of a portion of participants' ESOP accounts.
For 1997 through June 1, 1998, the Company's 401(k) Program consisted of the
EEP, EEP-H, SRP, and SRP-H. As of June 1, 1998, the EEP and EEP-H plans were
merged into the respective SRP and SRP-H plans. Participants of the Program may
contribute from 2% to 15% of their annual compensation. The Company matches
employee contributions up to 6% of the employee's annual compensation. Prior to
June 1, 1998, the Company made matching contributions of 25% to both SRP plans
and 50% to both EEP plans. Subsequent to June 1, 1998, the Company made
matching contributions of 40% to both SRP plans, the surviving plans. Expenses
for the defined contribution plans were $1.6 million, $1.5 million and $1.8
million in 1998, 1997 and 1996, respectively.
Defined Benefit Plans and Other Retiree Benefits The Company maintains
noncontributory defined benefit pension plans covering substantially all
employees. 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 1998 were 55% invested in fixed income securities consisting of
bond funds and short-term money market or cash equivalent funds, while the
remaining 45% were invested in an equity fund.
The Company provides postretirement health care benefits to certain retired
employees between the ages of 55 and 65 who have completed ten years of
service. The plan is contributory, with the retiree contributions and plan
design adjusted annually to reflect changes in health care costs.
26/27
<PAGE>
CONE REVIEW
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following chart summarizes the balance sheet impact, as well as the benefit
obligations, assets, funded status and weighted-average rate assumptions
related to the Defined Benefit Plans and Other Retiree Benefits:
<TABLE>
<CAPTION>
Defined Other
Benefit Plans Retiree Benefits
---------------------------- -------------------------
(in thousands) 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in Benefit Obligation
Benefit obligation at beginning of year $ 62,139 $ 51,742 $ 3,309 $ 2,895
Service cost 3,629 3,273 123 137
Interest cost 4,371 3,688 211 216
Participants' contributions - - 331 356
Actuarial loss (gain) 1,403 4,764 (288) 139
Benefit payments (2,024) (1,328) (440) (434)
---------------------------------------------------------
Benefit obligation at end of year $ 69,518 $ 62,139 $ 3,246 $ 3,309
=========================================================
Change in Plan Assets
Fair value of plan assets at beginning of year $ 43,391 $ 35,562 $ - $ -
Actual return on plan assets 5,684 4,394 - -
Employer contributions 6,692 4,763 109 78
Participants' contributions - - 331 356
Benefit payments (2,024) (1,328) (440) (434)
---------------------------------------------------------
Fair value of plan assets at end of year $ 53,743 $ 43,391 $ - $ -
=========================================================
Funded Status
Funded status at end of year $ (15,775) $ (18,748) $ (3,246) $ (3,309)
Unrecognized net actuarial loss (gain) 23,462 25,993 (344) (56)
Unrecognized prior service income (207) (254) - -
Unrecognized transition amount 484 630 1,599 1,713
---------------------------------------------------------
Net amount recognized $ 7,964 $ 7,621 $ (1,991) $ (1,652)
=========================================================
Prepaid benefit cost $ 11,544 $ 10,739 $ - $ -
Accrued liability (5,430) (4,883) (1,991) (1,652)
Intangible asset 1,850 1,765 - -
---------------------------------------------------------
Net amount recognized $ 7,964 $ 7,621 $ (1,991) $ (1,652)
=========================================================
Weighted-Average Assumptions
Discount rate 7.0% 7.0% 7.0% 7.0%
Expected rate of return on plan assets 8.0 8.0 NA NA
Rate of compensation increase 4.8 4.8 NA NA
</TABLE>
The aggregate projected benefit obligations and fair value of assets for
defined benefit plans with projected benefit obligations in excess of assets
for the respective years were as follows:
<TABLE>
<CAPTION>
(in thousands) 1998 1997
- -----------------------------------------------------
<S> <C> <C>
Projected benefit obligations $60,756 $54,564
Plan assets 44,009 34,988
- -----------------------------------------------------
</TABLE>
The Company's nonqualified pension plan was the only pension plan with an
accumulated obligation in excess of the fair value of plan assets. There are no
plan assets due to the nature of the plan. Accumulated benefit obligations for
this plan were $6.6 million and $8.9 million for 1998 and 1997, respectively.
The following table provides the components of net periodic benefit cost for
fiscal years 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Defined Other
Benefit Plans Retiree Benefits
----------------------------------- ------------------------------
(in thousands) 1998 1997 1996 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 3,629 $ 3,273 $ 3,652 $ 123 $ 137 $ 135
Interest cost 4,371 3,688 3,363 211 216 195
Expected return on plan assets (3,458) (2,686) (2,522) - - -
Amortization of prior service income (47) (47) (47) - - -
Amortization of transition amount 146 146 146 114 114 114
Recognized net actuarial loss 1,708 1,393 1,978 - - -
--------------------------------------------------------------------
Net periodic benefit cost $ 6,349 $ 5,767 $ 6,570 $ 448 $ 467 $ 444
====================================================================
</TABLE>
28/29
<PAGE>
CONE REVIEW
For measurement purposes, a 7.5% annual rate of increase in per capita health
care cost of covered benefits was assumed for 1999, with such rate of increase
gradually declining to 5.5% in 2003. A one-percentage point change in assumed
health care cost trend rates would have the following effects on 1998:
<TABLE>
<CAPTION>
(in thousands) 1% Increase 1% Decrease
- -------------------------------------------------------------------------------------
<S> <C> <C>
Effect on total of service and interest cost components $41 $36
Effect on postretirement benefit obligation 341 298
- -------------------------------------------------------------------------------------
</TABLE>
Note 11. Income Tax Benefit
- --------------------------------------------------------------------------------
The following tables present the components of the income tax provision
(benefit), a reconciliation of the U.S. statutory income tax benefit to the
actual income tax provision (benefit), and the components and items comprising
net deferred income tax liability.
Components of Income Tax Provision (Benefit)
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------------------------------------------------------------------------
(in thousands) Current Deferred Total Current Deferred Total Current Deferred Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal $ 1,081 $ (9,009) $ (7,928) $ (6,351) $ (1,596) $ (7,947) $ 342 $ (1,742) $ (1,400)
State, local and foreign 185 (164) 21 190 (244) (54) 388 (1,299) (911)
-------------------------------------------------------------------------------------------------
$ 1,266 $ (9,173) $ (7,907) $ (6,161) $ (1,840) $ (8,001) $ 730 $ (3,041) $ (2,311)
=================================================================================================
</TABLE>
Reconciliation of Income Tax Benefit
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory U.S. tax $ (5,096) $ (6,078) $ (1,586)
State income tax benefit, net of federal tax (92) (50) (644)
Tax benefit from foreign sales corporation (1,450) (1,239) (798)
Foreign affiliates (earnings) losses with no U.S. tax effect (1,488) (614) 867
Nondeductible meals and entertainment expenses 165 158 155
Company owned life insurance (64) (53) (104)
Donations of appreciated property - - (119)
Other 118 (125) (82)
----------------------------------------
$ (7,907) $ (8,001) $ (2,311)
========================================
</TABLE>
Components of Net Deferred Income Tax Liability
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred income tax liabilities $ 81,239 $ 78,039 $ 81,891
Deferred income tax assets (28,519) (16,146) (18,158)
----------------------------------------
$ 52,720 $ 61,893 $ 63,733
========================================
</TABLE>
Items Comprising Net Deferred Income Tax Liability
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Property, plant & equipment - principally depreciation $ 39,029 $ 39,778 $ 40,118
Alternative minimum tax credit (7,707) (2,710) (2,670)
Inventories 27,921 29,018 30,940
Other - net (6,523) (4,193) (4,655)
-----------------------------------
$ 52,720 $ 61,893 $ 63,733
===================================
</TABLE>
28/29
<PAGE>
CONE REVIEW
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12. Supplemental Cash Flow Information
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Payments For
Interest, net of interest capitalized $15,067 $14,579 $15,860
===================================
Income taxes, net of refunds $(6,872) $(3,188) $ 1,189
===================================
Receivable Recorded From Divestitures $ - $ 270 $ 1,879
===================================
Details of Divestitures
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
======================
</TABLE>
Note 13. 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 as
of April 1 for the succeeding dividend period and is determined by an
independent investment bank or appraisal firm selected by the Board of
Directors, subject to confirmation by the ESOP trustee. The dividend rate is
determined annually and is that rate required to make the fair market value of
Class A Preferred Stock equal to its original par value. The dividend rate
cannot exceed 13% per annum or be less than 7% per annum. Dividends on Class A
Preferred Stock are cumulative, but accumulated dividends do not bear interest.
Dividend rates declared for Class A Preferred Stock were 7.50%, 7.85% and
7.50%, respectively for the dividend periods ending March 31, 1999, 1998 and
1997.
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 for redemption purposes was determined to be $100.00 per share at January
3, 1999.
Purchases of Class A Preferred Stock by the ESOP may be necessary to provide
all or part of the pension due under the Company's defined benefit plans
pursuant to the floor offset arrangement in connection with the ESOP and to
make distributions due to retired or terminated employees. The ESOP is
obligated to purchase shares of Class A Preferred Stock from participants and
former participants of these plans in accordance with the terms and conditions
of the plans, the trust agreements and liquidity agreements thereunder. To the
extent the ESOP has insufficient liquidity to make these purchases, it may
require the Company to repurchase shares of Class A
30/31
<PAGE>
CONE REVIEW
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 14. 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
January 3, 1999. 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 1996 and 1994. In 1998 and
1997, both incentive stock options and nonqualified stock options (without the
tax reimbursement feature) were granted. In 1997, the Company issued restricted
shares with 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 1996 and 1994 options provide that no more than 50%
of the shares granted can be exercised in any one calendar year. Incentive
stock options granted, 22,500 in 1998 and 23,500 in 1997, 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 1998, 1997
and 1996.
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
30/31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
following weighted-average assumptions: risk-free interest rate of 5.00% for
1998, 5.75% for 1997 and 6.50% for 1996; expected lives of eight years for 1992
Plan options and six years for 1994 Plan options; expected volatility of 38%
for 1998, 34% for 1997 and 35% for 1996; and a zero percent dividend yield.
The pro forma effects on net loss and loss per share of options granted in
1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
(in thousands, except per share data) 1998 1997 1996
- ---------------------------------------------- ---- ---- ----
<S> <C> <C> <C>
Reported net loss $(6,651) $(9,365) $(2,221)
Pro forma net loss (7,073) (9,692) (2,423)
Reported loss per share - basic and diluted $ (.37) $ (.47) $ (.19)
Pro forma loss per share - basic and diluted (.39) (.48) (.20)
</TABLE>
SFAS 123 requires pro forma disclosures only for options granted after December
31, 1994; therefore, the pro forma amounts for compensation expense may not be
representative of the pro forma earnings impact upon future years.
A reconciliation of the Company's stock option activity and related information
follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------------------------------------------------------
Number Weighted- Number Weighted- Number Weighted-
of Average of Average of Average
Options Exercise Options Exercise Options Exercise
(thousands) Price (thousands) Price (thousands) Price
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning of year 1,422 $ 10.82 1,314 $ 11.41 1,047 $ 12.55
Granted 347 4.54 241 8.48 398 8.06
Exercised - - (12) 5.25 (62) 6.46
Forfeited (29) 12.18 (121) 13.16 (69) 13.94
------- ------ ------
Outstanding - end of year 1,740 $ 9.54 1,422 $ 10.82 1,314 $ 11.41
----------------------------------------------------------------------------------
Exercisable at end of year 944 $ 11.77 752 $ 12.47 612 $ 12.79
----------------------------------------------------------------------------------
Weighted-average fair value of options
granted during year $ 2.34 $ 4.41 $ 6.68
----------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about stock options outstanding at
January 3, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ -------------------------------
Range of Number Wtd. Avg. Wtd. Avg. Number Wtd. Avg.
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices (thousands) Contract Life Price (thousands) Price
- ---------------------------------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C>
$ 4-9 1,053 8.15 $ 6.74 320 $ 7.38
9-13 336 5.80 11.95 273 11.94
13-16 351 4.10 15.63 351 15.63
------- ----
1,740 6.88 9.54 944 11.77
======= ====
</TABLE>
Note 15. Leases
- --------------------------------------------------------------------------------
The Company has various leases accounted for as operating leases. Rent expense
was $3.6 million, $4.0 million and $5.3 million for 1998, 1997 and 1996,
respectively. Future minimum rental payments required under lease agreements
for the next five years are $3.0 million for 1999, $1.7 million for 2000, $1.2
million for 2001, $0.5 million for 2002 and $0.5 million for 2003. Aggregate
future minimum rental payments total $7.5 million.
32/33
<PAGE>
CONE REVIEW
Note 16. 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 17. Loss Per Share
- --------------------------------------------------------------------------------
The following table sets forth the computation of basic and diluted loss per
share ("EPS"):
<TABLE>
<CAPTION>
(in thousands, except per share data) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss $(6,651) $ (9,365) $(2,221)
Preferred stock dividends (2,913) (2,981) (2,880)
-------------------------------------
Basic EPS - loss available to common shareholders (9,564) (12,346) (5,101)
Effect of dilutive securities - - -
-------------------------------------
Diluted EPS - loss available to common shareholders after assumed conversions $(9,564) $(12,346) $(5,101)
=====================================
Determination of shares:
Basic EPS - weighted-average shares 25,929 26,140 27,179
Effect of dilutive securities - - -
-------------------------------------
Diluted EPS - adjusted weighted-average shares after assumed conversions 25,929 26,140 27,179
=====================================
Loss per share - basic and diluted $ (.37) $ (.47) $ (.19)
=====================================
</TABLE>
Common stock options were outstanding during 1998, 1997 and 1996 but were not
included in the computation of diluted loss per share because to do so would
have been antidilutive.
Note 18. Segment Information and Major Customers
- --------------------------------------------------------------------------------
The Company has four principal business segments which are based upon
organizational structure: 1) denim and khaki; 2) yarn-dyed products; 3)
commission finishing and 4) decorative fabrics.
The denim and khaki segment includes denim and khaki fabrics in various styles,
finishes and weights and chamois shirtings. The yarn-dyed product segment is
comprised primarily of yarn-dyed flannel shirting. The commission finishing
segment consists of outside commission dyeing and printing for the home
decorative markets and khaki dyeing. The decorative fabrics segment includes
the design and distribution of decorative fabrics for the home furnishings
industry. Other includes Olympic, which was sold in January 1996; synthetic
fabrics which was sold in January 1997; real estate operations, which was sold
in May 1997; and miscellaneous ancillary operations.
The percentages of net sales to foreign customers were 25.4%, 25.1% and 25.6%
in 1998, 1997 and 1996, respectively. The Company has one denim and khaki
customer that accounted for more than 10% of net sales. Sales to this customer,
as a percentage of net sales, were 32.2%, 36.6% and 49.3% in 1998, 1997 and
1996, respectively. This customer had an outstanding accounts receivable
balance with the Company of approximately $19.3 million at January 3, 1999. The
Company has not incurred any losses related to this customer's accounts
receivable.
Operating income (loss) for each segment is total revenue less operating
expenses applicable to the segment. Intersegment revenue relates to the
commission finishing segment. Equity in earnings (losses) of unconsolidated
affiliate is included in the denim and khaki segment. Restructuring and
impairment of asset expenses, unallocated expenses, interest and income taxes
are not included in segment operating income (loss). Segment identifiable
assets include investments in unconsolidated affiliates, pension assets and
income taxes. Denim and khaki and yarn-dyed products' segments include
investments in unconsolidated affiliates. Pension assets are included in each
segment. Assets in the "Other" segment include cash, income taxes,
administrative facilities, deferred charges and miscellaneous receivables.
Unallocated expenses include certain legal expenses, bank fees and discount on
the sale of accounts receivable. Geographic sales dollars are determined
generally based on the ultimate destination of the fabric.
32/33
<PAGE>
CONE REVIEW
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Segment Information
Sales, income (loss) from operations, identifiable assets, depreciation and
amortization, capital expenditures and geographic sales information for the
Company's operating segments are as follows:
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales
Denim and Khaki $ 545,013 $ 533,792 $542,946
Yarn-Dyed Products 33,733 46,375 41,923
Commission Finishing 107,095 94,811 87,633
Decorative Fabrics 56,347 42,544 38,709
Other 4,668 10,755 41,270
-----------------------------------------
746,856 728,277 752,481
Less Intersegment Sales 18,230 11,424 6,542
-----------------------------------------
$ 728,626 $ 716,853 $745,939
=========================================
Income (Loss) from Operations
Denim and Khaki $ 52,176 $ 36,491 $ 42,086
Yarn-Dyed Products (14,498) (5,048) (5,577)
Commission Finishing (15,129) (13,077) (8,205)
Decorative Fabrics (408) (9,682) (8,476)
Other (1,650) (3,324) (2,072)
Unallocated Expenses (5,812) (5,876) (2,194)
-----------------------------------------
14,679 (516) 15,562
Restructuring and Impairment of Assets (17,124) (5,176) (5,197)
-----------------------------------------
(2,445) (5,692) 10,365
Less Equity in Earnings (Losses) of Unconsolidated Affiliate 5,210 2,637 (2,458)
-----------------------------------------
(7,655) (8,329) 12,823
Interest Expense - Net 12,113 11,674 14,897
-----------------------------------------
Loss before Income Tax Benefit and Equity in Earnings (Losses)
of Unconsolidated Affiliate $ (19,768) $ (20,003) $ (2,074)
=========================================
Identifiable Assets
Denim and Khaki $ 302,171 $ 283,392 $283,198
Yarn-Dyed Products 29,902 52,609 63,061
Commission Finishing 99,433 102,563 102,412
Decorative Fabrics 42,164 39,567 38,219
Other 14,847 28,515 43,096
-----------------------------------------
$ 488,517 $ 506,646 $529,986
=========================================
Depreciation and Amortization
Denim and Khaki $ 13,740 $ 12,692 $ 13,783
Yarn-Dyed Products 2,745 2,643 2,822
Commission Finishing 8,104 8,027 8,250
Decorative Fabrics 2,421 2,029 1,819
Other 3,354 3,324 3,132
-----------------------------------------
$ 30,364 $ 28,715 $ 29,806
=========================================
Capital Expenditures
Denim and Khaki $ 21,069 $ 20,745 $ 19,742
Yarn-Dyed Products 2,126 1,145 4,142
Commission Finishing 4,735 7,127 7,778
Decorative Fabrics 3,915 5,509 2,333
Other 976 1,764 2,226
-----------------------------------------
$ 32,821 $ 36,290 $ 36,221
=========================================
Geographic Sales Information
United States $ 543,432 $ 537,053 $555,302
Belgium 102,780 93,520 101,856
North and South America - excluding U.S. 52,265 40,084 27,402
Other 30,149 46,196 61,379
-----------------------------------------
$ 728,626 $ 716,853 $745,939
=========================================
</TABLE>
34/35
<PAGE>
Note 19. Financial Instruments
- --------------------------------------------------------------------------------
The Company utilizes derivative financial instruments to manage risks
associated with changes in cotton prices, interest rates and foreign exchange
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. Gains of $2.9 million and $0.3 million were credited to cost of sales
in 1998 and 1997, respectively. Losses of $0.6 million were charged to cost of
sales in 1996.
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, short-term
borrowings and borrowings under the Revolving Credit Agreement are reasonable
estimates of their fair value at January 3, 1999 and
December 28, 1997.
The fair value of the Company's long-term debt, excluding borrowings under the
Revolving Credit Agreement, 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 January 3, 1999 and December 28, 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
-----------------------------------------
Carrying Fair Carrying Fair
(in thousands) Amount Value Amount Value
- ---------------------------------------------------------------
<S> <C> <C> <C> <C>
Foreign Exchange
Contracts $ 236 $ 258 $ - $ -
Long-Term Debt
Senior Note 42,858 42,772 53,572 53,963
8 1/8% Debentures 97,241 97,890 96,798 99,120
</TABLE>
Note 20. Transactions with Affiliated Companies
- --------------------------------------------------------------------------------
The Company has various transactions in the normal course of business with its
unconsolidated affiliated companies. The Company purchased $0.2 million, $0.7
million and $5.4 million of finished goods from CIPSA in 1998, 1997 and 1996,
respectively. Sales of finished goods to CIPSA were $1.6 million in 1996. The
Company did not have significant sales with CIPSA in 1998 or 1997.
Purchases of denim and yarn from Parras Cone were $78.4 million, $71.5 million
and $51.7 million in 1998, 1997 and 1996, respectively. There were also
insignificant miscellaneous services rendered from and to Parras Cone in the
normal course of business.
Note 21. Restructuring, Impairment of Assets and Divestitures
- --------------------------------------------------------------------------------
In recent years the Company has undertaken a number of restructuring activities
to focus on core businesses and improve its cost competitiveness. These actions
include the reconfiguration and closing of manufacturing facilities, downsizing
and reorganization of sales and administrative staffs to reduce overhead costs
and the divestiture of operations which management believes are inconsistent
with the strategic objectives of the Company. The Company incurred
restructuring and impairment of asset charges of $17.1 million in 1998 and $5.2
million in both 1997 and 1996.
Throughout 1998 market demand for yarn-dyed products produced at the Company's
Salisbury plant continued to decline and low cost imports gained market share
aided by the devaluation of Asian currencies. In the fourth quarter denim
demand weakened resulting in the Company's management and Board of Directors
decision not to modernize weaving machinery at the plant and convert a portion
of its capacity to denim. The decision not to modernize or produce denim on a
larger scale along with the plant's noncompetitive cost structure led to a
fourth quarter impairment charge of $15.8 million to write-down the Salisbury
property, plant and equipment to their estimated net realizable value.
Subsequently, on January 6, 1999, the Company announced the closing of the
Salisbury plant by second quarter of 1999. The carrying value of the Salisbury
property, plant and equipment at January 3, 1999 was $25.8 million before the
fourth quarter impairment charge.
In the fourth quarter of 1998 in addition to the $15.8 million charge for
write-down of the Salisbury facility, the Company recognized a $1.3 million
restructuring charge related to overhead downsizing and reorganization and an
inventory charge of $2.2 million related to excess yarn-dyed inventories. On
February 19, 1999, the Company announced the details of its overhead downsizing
and reorganization program along with additional restructuring activities that
will result in restructuring charges
34/35
<PAGE>
CONE REVIEW
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and other exit costs of approximately $14.0 million in the first quarter of
1999. Details of the first quarter 1999 charges include:
o$5.1 million for severance benefits and consulting fees related to the
downsizing and reorganization of the Company's sales and administrative
staffs, reconfiguration of denim manufacturing overhead structures and
downsizing of screen printing operations at the Carlisle plant.
o$4.1 million for severance benefits and operating variances related to the
shutdown of the Salisbury plant.
o$4.8 million for severance benefits and the write-down of property and
equipment resulting from the exit from yarn manufacturing at the Company's
Cliffside and Florence plants.
These first quarter restructuring activities will result in
the termination of approximately 1,250 employees, the closing of one
manufacturing facility and the downsizing or restructuring of three others.
In 1997, the Company terminated approximately 130 employees at the Granite
plant and incurred restructuring charges of $4.5 million. In addition, the
Company recognized other restructuring charges for severance and other
employee-related costs of $0.7 million in 1997.
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 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.
In 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 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. The Company also recognized fourth quarter 1996 restructuring charges of
$0.7 million to reserve for disposal of certain equipment, and $0.4 million for
inventory write-down of its synthetic fabrics business which was sold in early
January 1997 for $2.7 million.
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.
Operating units which were divested had sales of $4.6 million and $34.1 million
for 1997 and 1996, respectively. Net operating results of these businesses,
excluding restructuring charges, were losses of $1.0 million and $2.3 million
in 1997 and 1996, respectively.
Note 22. Recent Accounting Pronouncements
- --------------------------------------------------------------------------------
The Company adopted numerous Financial Accounting Standards Board ("FASB")
statements in fiscal year 1998. SFAS 130, "Reporting Comprehensive Income,"
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. SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information," is based on the management approach to
segment reporting and establishes requirements about reporting operating
segments and certain information regarding products, services, geo-graphic areas
and major customers. SFAS 132, "Employer's Disclosures about Pension and Other
Postretirement Benefits," revises the disclosures for pensions and other
postretirement benefits and standardizes them into a combined format. The
Company's financial information for prior years has been restated to conform to
SFAS 130, 131 and 132.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities," which is effective for all fiscal quarters for all
fiscal years beginning after June 15, 1999. SFAS 133 provides a comprehensive
and consistent standard for the recognition and
36/37
<PAGE>
CONE REVIEW
measurement of derivatives and hedging activities and requires all derivatives
to be recorded on the balance sheet at fair value. In March 1998, the American
Institute of Certified Public Accountants ("AICPA") issued Statement of
Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use," which is effective for fiscal year 1999. SOP
98-1 requires capitalization of certain costs which the Company has
historically expensed. The Company has not yet evaluated the effects of SFAS
133 or SOP 98-1. Also, in April 1998, the AICPA issued SOP 98-5, "Reporting on
the Costs of Start-Up Activities," which requires future start-up costs to be
expensed as incurred and previously capitalized start-up costs to be expensed
when SOP 98-5 is adopted. The Company will adopt SOP 98-5 in the first quarter
of 1999 and recognize a charge of approximately $1 million, the Company's 50%
portion of Parras Cone's unamortized start-up costs, as a cumulative effect of
a change in accounting principle.
Note 23. Quarterly Financial Data (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarters Ended
-------------------------------------------------------------
Mar. 29, June 28, Sept. 27, Jan. 3,
(in thousands, except per share data) 1998 1998 1998 1999
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $190,171 $197,304 $187,359 $153,792
Gross profit(1) 23,151 26,903 26,316 16,934
Income (loss) from operations 3,372 6,090 4,946 (22,063)
Equity in earnings of unconsolidated affiliate 1,252 1,264 1,285 1,409
Net income (loss) 1,544 3,051 2,792 (14,038)
Earnings (loss) per share - basic and diluted $ .03 $ .09 $ .08 $ (.58)
=========================================================
Weighted-average shares outstanding
Basic 26,183 26,166 25,972 25,432
=========================================================
Diluted 26,210 26,280 25,994 25,432
=========================================================
Common stock prices
High $ 9.00 $ 10.25 $ 9.19 $ 7.88
----------------------------------------------------------
Low $ 6.81 $ 8.25 $ 6.00 $ 3.81
----------------------------------------------------------
<CAPTION>
Quarters Ended
--------------------------------------------------------------
Mar. 30, June 29, Sept. 28, Dec. 28,
1997 1997 1997 1997
----------------------------------------------------------
<S> <C> <C> <C> <C>
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 loss (1,995) (1,071) (1,366) (4,933)
Loss per share - basic and diluted $ (.10) $ (.07) $ (.08) $ (.22)
=========================================================
Weighted-average shares outstanding
Basic 26,237 26,102 26,109 26,112
=========================================================
Diluted 26,237 26,102 26,109 26,112
=========================================================
Common stock prices
High $ 8.50 $ 9.38 $ 8.81 $ 9.00
----------------------------------------------------------
Low $ 7.00 $ 7.13 $ 7.38 $ 7.88
----------------------------------------------------------
</TABLE>
The number of holders of record of the Company's Common Stock as of January 31,
1999 was 394.
(1) Net sales less cost of sales and depreciation.
No dividends have been declared on Common Stock since 1984 and the Company
anticipates that its earnings for the foreseeable future will be retained for
use in its business and to finance growth. Payment of cash dividends in the
future will depend upon the Company's financial condition, results of
operations, current and anticipated capital requirements, and other factors
deemed relevant by the Company's Board of Directors.
In the fourth quarter of 1998, the Company recognized restructuring and
impairment of asset charges of $17.1 million related to severance and other
costs of $1.3 million ($.03 per share, net of tax) and $15.8 million ($.37 per
share, net of tax) to write-down Salisbury property and equipment to their
estimated net realizable value. Additionally, a charge of $2.2 million ($.05 per
share, net of tax) was recorded in the fourth quarter of 1998 to reflect
write-down of certain inventory values. See Note 21, "Restructuring, Impairment
of Assets and Divestitures," of the Notes to the Consolidated Financial
Statements.
In the fourth quarter of 1997, a charge of $5.0 million ($.11 per share, net of
tax) was recorded to reflect write-down of inventory values as well as $2.1
million ($.05 per share, net of tax) for certain restructuring charges. See Note
21, "Restructuring, Impairment of Assets and Divestitures," of the Notes to the
Consolidated Financial Statements.
36/37
<PAGE>
CONE REVIEW
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
January 3, 1999, 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.
/s/ John L. Bakane /s/ Anthony L. Furr /s/ Gary L. Smith
- ------------------- -------------------- -------------------
John L. Bakane Anthony L. Furr Gary L. Smith
President and Executive Vice President and Executive Vice President
Chief Executive Officer Chief Financial Officer and Controller
38/39
<PAGE>
CONE REVIEW
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 January 3, 1999 and December 28, 1997, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended January 3, 1999.
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 January 3, 1999 and December 28, 1997, and
the results of their operations and their cash flows for each of the three
years in the period ended January 3, 1999 in conformity with generally accepted
accounting principles.
/s/ McGladrey & Pullen, LLP
- ---------------------------------
McGladrey & Pullen, LLP
Greensboro, North Carolina
February 19, 1999
38/39
<PAGE>
CONE REVIEW
HISTORICAL FINANCIAL REVIEW
<TABLE>
<CAPTION>
(in millions, except per share data and number of employees) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Summary of Operations
Net Sales $728.6 $ 716.9 $ 745.9 $ 910.2 $ 806.2
-----------------------------------------------------------
Cost of Sales 607.6 615.9 614.6 757.0 642.5
Depreciation 27.7 25.9 26.9 28.2 23.3
-----------------------------------------------------------
635.3 641.8 641.5 785.2 665.8
-----------------------------------------------------------
Gross Profit 93.3 75.1 104.4 125.0 140.4
Selling and Administrative 83.9 78.2 86.4 89.6 77.8
Restructuring and Impairment of Assets 17.1 5.2 5.2 - -
-----------------------------------------------------------
Income (Loss) from Operations (7.7) (8.3) 12.8 35.4 62.6
Other Expense - Net 12.1 11.7 14.9 14.5 7.3
-----------------------------------------------------------
Income (Loss) from Continuing Operations Before
Income Taxes (Benefit) and Equity in Earnings (Losses)
of Unconsolidated Affiliates (19.8) (20.0) (2.1) 20.9 55.3
Income Taxes (Benefit) (7.9) (8.0) (2.3) 7.3 19.7
-----------------------------------------------------------
Income (Loss) from Continuing Operations before Equity
in Earnings (Losses) of Unconsolidated Affiliates (11.9) (12.0) 0.2 13.6 35.6
Equity in Earnings (Losses) of Unconsolidated Affiliates 5.2 2.6 (2.4) (16.9) 0.2
-----------------------------------------------------------
Income (Loss) from Continuing Operations (6.7) (9.4) (2.2) (3.3) 35.8
Discontinued Operations - - - - 0.4
-----------------------------------------------------------
Income (Loss) before Cumulative Effect of
Accounting Change (6.7) (9.4) (2.2) (3.3) 36.2
Cumulative Effect of Accounting Change - - - - (1.2)
-----------------------------------------------------------
Net Income (Loss) $ (6.7) $ (9.4) $ (2.2) $ (3.3) $ 35.0
===========================================================
Per Share of Common Stock
Income (Loss) from Continuing Operations
Basic $ (.37) $ (.47) $ (.19) $ (.22) $ 1.19
Diluted (.37) (.47) (.19) (.22) 1.19
Net Income (Loss)
Basic (.37) (.47) (.19) (.22) 1.16
Diluted (.37) (.47) (.19) (.22) 1.16
Balance Sheet Data (at year end)
Current Ratio 1.6 1.5 1.7 1.6 1.8
Total Assets $ 488.5 $506.6 $ 530.0 $ 584.3 $ 524.1
Long-Term Debt 172.1 150.4 160.7 173.0 126.5
Stockholders' Equity 181.9 196.5 210.3 222.1 236.9
Long-Term Debt as a Percent of Stockholders' Equity
and Long-Term Debt 49% 43% 43% 44% 35%
Shares Outstanding (millions) Year End 25.4 26.2 26.3 27.4 27.4
Other Data
Capital Expenditures $ 32.8 $ 36.3 $ 36.2 $ 61.7 $ 37.5
Common Stock Dividend Paid - - - - -
Number of Employees at Year End 6,200 6,100 6,700 7,900 8,100
</TABLE>
40/41
<PAGE>
CONE REVIEW
DIRECTORS AND OFFICERS
Directors
- --------------------------------------------------------------------
Dewey L. Trogdon(1)
Chairman of the Board
John L. Bakane(1)
President and Chief Executive Officer
Doris R. Bray(1)(2)
Partner, Schell Bray Aycock Abel
& Livingston L.L.P.
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
Nicholas Shrieber
President and Chief Executive Officer,
Tetra Pak Americas, Inc.
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
- --------------------------------------------------------------------
John L. Bakane
President and Chief Executive Officer
G. Watts Carr III
Executive Vice President
Anthony L. Furr
Executive Vice President and Chief Financial Officer
Gary L. Smith
Executive Vice President and Controller
Neil W. Koonce
Vice President, General Counsel and Secretary
Terry L. Weatherford
Vice President
Marvin A. Woolen, Jr.
Vice President - Cotton Purchasing
David E. Bray
Treasurer
David K. Bradbury
Assistant Treasurer - Tax and Assistant Secretary
40/41
<PAGE>
CONE REVIEW
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 11, 1999, 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
Executive Vice President and Chief Financial Officer
David E. Bray
Treasurer
(336) 379-6220
Cone Apparel Products
- --------------------------------------------------------------------
Marketing and Manufacturing Headquarters
3101 N. Elm Street
P.O. Box 26540
Greensboro, NC 27415-6540
(336) 379-6220
G. Watts Carr III, President
Cone Decorative Fabrics
- --------------------------------------------------------------------
John Wolf Cone Jacquards
261 Fifth Avenue 3400 Highway 221-A
New York, NY 10016 Cliffside, NC 28024
(212) 683-4800 (828) 657-9662
Murray S. Engle, President
Cone Commission Finishing
- --------------------------------------------------------------------
Carlisle Plant Raytex Plant
P.O. Box 8 P.O. Box 884
Carlisle, SC 29031 Marion, SC 29571
(864) 466-4100 (843) 423-5030
Sales and Marketing
1440 Broadway
New York, NY 10018
(212) 391-1300
Jerry W. Kennedy, President
42
<PAGE>
Design: Wright Communications Inc/NYC
Portions of this annual report utilize recycled paper.
<PAGE>
Cone Mills Corporation
3101 North Elm Street
P.O. Box 26540
Greensboro, NC 27415-6540
(336)379-6220
Page 122
EXHIBIT 21 - SUBSIDIARIES
<TABLE>
<CAPTION>
CONE MILLS CORPORATION AND SUBSIDIARIES
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. 100 %
de C.V.
Comercializadora Cone Mills, Mexico City Mexico, D.F. 100
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, SC 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 123
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; 33-53705 and 33-67800) of our reports; dated February 19, 1999, 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
January 3, 1999.
/s/ McGLADREY & PULLEN, LLP
---------------------------
McGLADREY & PULLEN, LLP
Greensboro, North Carolina
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONE MILLS
CORPORATION CONSOLIDATED FINANCIAL STATEMENTS DATED JANAURY 3, 1999, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
(In thousands, except earnings per share data)
</LEGEND>
<CIK> 0000023304
<NAME> CONE MILLS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-3-1999
<PERIOD-START> DEC-29-1997
<PERIOD-END> JAN-3-1999
<CASH> 639
<SECURITIES> 0
<RECEIVABLES> 37,924
<ALLOWANCES> 1,500
<INVENTORY> 120,430
<CURRENT-ASSETS> 167,746
<PP&E> 469,826
<DEPRECIATION> 231,160
<TOTAL-ASSETS> 488,517
<CURRENT-LIABILITIES> 103,710
<BONDS> 161,385
0
38,395
<COMMON> 2,543
<OTHER-SE> 140,986
<TOTAL-LIABILITY-AND-EQUITY> 488,517
<SALES> 728,626
<TOTAL-REVENUES> 728,626
<CGS> 635,322
<TOTAL-COSTS> 635,322
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (12,113)
<INCOME-PRETAX> (19,768)
<INCOME-TAX> (7,907)
<INCOME-CONTINUING> (6,651)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,651)
<EPS-PRIMARY> (.37)
<EPS-DILUTED> (.37)
</TABLE>
