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FORM 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 2000
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Ex-
change 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 IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
3101 North Elm Street,
Greensboro, N.C. 27408
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)(ZIP CODE)
336-379-6220
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
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Common Stock, $.10 par value........................... New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports re-
quired 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 reg-
istrant 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 state-
ments incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K. [X]
Aggregate market value of voting stock held by nonaffiliates of the regis-
trant as of March 13, 2001 (based on the closing sale price of $3.20 of the
registrant's voting stock, as reported on the New York Stock Exchange Compos-
ite Tape on such date) was approximately: $79,738,045.
Number of shares of common stock outstanding as of March 13, 2001:
25,542,211 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for Annual Meeting to be held May 8, 2001, Part III, Items
10, 11, 12 and 13 of this report.
Index to Exhibits -- Pages 52-57
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PART I
Item 1. BUSINESS
Founded in 1891 Cone Mills Corporation ("Cone"), incorporated and headquar-
tered in North Carolina, operates in three principal business segments: (1)
Denim and Khaki, (2) Commission Finishing and (3) Decorative Fabrics. Cone is
the world's largest producer of denim fabrics and the largest commission
printer of home furnishings in North America. Cone competes domestically and
internationally on the basis of styling and product development, management
experience, versatility and size of manufacturing facilities, competitive
prices and the Cone name and reputation. Cone has a 50% interest in Parras
Cone de Mexico, S.A. de C.V. ("Parras Cone"), a denim manufacturing facility
in Mexico.
Cone is engaged in denim production in Mexico through a joint venture fa-
cility with Compania Industrial de Parras, S.A. de C.V. ("CIPSA"). This facil-
ity, Parras Cone, has been producing basic denims and yarn since late 1995.
Under a marketing agreement with CIPSA, Cone markets and distributes 100% of
the denim production of Parras Cone. Parras Cone plans to expand its produc-
tive capacity by approximately 35% during 2001.
In 1999, Cone announced plans to continue its denim manufacturing expansion
in Mexico. Cone has a strategic project to co-develop an industrial park and
to build a denim facility in Altamira, Mexico. This project consists of two
components: (1) a 50/50 joint venture with Guilford Mills, Inc., to develop
and operate a textile and apparel industrial park on over 500 acres, and (2) a
100% owned denim plant with an initial annual capacity of 10 to 20 million
yards expandable to 30 to 40 million yards. The infrastructure of the indus-
trial park was completed in February 2001, and Cone is currently evaluating
financing options for its denim plant with a target to begin construction in
late 2001.
In the first quarter of 2001, Cone closed its Raytex Plant, part of its
commission finishing segment, as a result of adverse market conditions.
In late 1998 Cone initiated a comprehensive reorganization and downsizing
plan, which was completed in 1999. The plan consisted of four primary compo-
nents: (1) closing of the Salisbury plant, ceasing production of yarn-dyed
shirting fabrics and disposal of associated finished goods inventories, (2)
downsizing and reorganization of sales, manufacturing and administrative
staffs of the corporate staff and textile group, (3) outsourcing of ring-spun
yarn manufacturing at the Cliffside and Florence plants by forming a yarn al-
liance and closing the manufacturing facility and (4) restructuring of the
Carlisle operation including the decision to exit the piece-dyed shirting
product line. As a part of the plan, Cone reduced employment by over 1,600 em-
ployees. See "Item 7. Management's Discussion and Analysis of Results of Oper-
ations and Financial Condition, Long-Term Strategic Initiatives" and "Item 8.
Financial Statements and Supplementary Data," Note 21 of the Notes to Consoli-
dated Financial Statements.
Business Segments
Information concerning operating segments for Cone's 2000, 1999 and 1998
fiscal years are incorporated by reference. See "Item 7. Management's Discus-
sion and Analysis of Results of Operations and Financial Condition, Long-Term
Strategic Initiatives" and "Item 8. Financial Statements and Supplementary Da-
ta," Notes 18 and 21 of the Notes to Consolidated Financial Statements.
Denim & Khaki
The denim and khaki segment represents Cone's largest segment and is com-
prised of denim and piece-dyed bottomweight fabrics more commonly referred to
as khaki. Cone is the world's largest producer of denim fabrics and a mid-
sized participant in the khaki market. Cone's denim and khaki fabrics are used
primarily in branded and private label jeans and trousers.
Retail sales of denim and khaki apparel products grew throughout most of
the 1990s. The trend that began with casual Fridays in the 1990s matured into
a key market driver for the apparel industry over that decade. In 2000 and
1999, retail sales of men's casual pants experienced low double-digit increas-
es; however, denim men's bottoms experienced only marginal sales increases. In
addition to casual lifestyles driving the growth of denim and khakis, other
factors that Cone considers important are: (i) the enhanced value of casual
garments to consumers resulting from lower acquisition costs and lower life-
cycle costs, (ii) enhanced styling and comfort of casual garments and (iii)
strong brands that continue to create fashion interest for consumers.
2
Significant trends are shaping apparel retailing and manufacturing. The ac-
ceptance of casual apparel in the workplace and an emphasis on a casual, ac-
tive lifestyle have increased the demand for moderately priced casual apparel.
A decline in brand loyalty and increased competition among retailers as a re-
sult of consolidation have resulted in an increased demand for private label
apparel, which generally offers retailers higher margins and permits them to
differentiate their products. However, brands remain key to the success of re-
gional and national department stores. The traditional customer, who is very
insecure about fashion and trusts brand names to dress appropriately, is con-
tinuing to buy branded apparel.
Cone's domestic apparel fabrics markets have also been affected by changing
demographics. The "echo boomers" is the largest jeans consuming segment of the
U.S. population. Product trends, brand preferences and garment silhouettes
continually evolve to meet the fashion demands of this consumer group. Prefer-
ences in recent years by this consumer group required more intricate garment
styling, such as baggy jeans and carpenters pants, allowing imports to gain
market share. Recently basic five pocket jean silhouettes are moving more in
favor with the echo boomers, benefiting U.S. and Mexican suppliers. In addi-
tion, this consumer group has been more willing to experiment with new brands
in search of brands not fashionable with their parents, the baby boomers. As
the baby boom generation has matured, product trends have either evolved to
higher quality products with more diverse styling or to basic products at com-
petitive prices. These trends have resulted in a bifurcated market as a por-
tion of the population focuses on fashion and specialized fabric treatments
while others desire better fabric quality and styling and others seek basic
products at competitive prices. Cone attempts to compete in these markets by
being a leader in product development and focusing on its production costs
while maintaining high quality standards. Denim apparel is expected to accel-
erate its growth at retail in 2001 as the U.S. population continues to grow
and the consumer wardrobe becomes saturated with khaki products.
Mass merchants and specialty retailers have a combined jeans market share
of approximately 50% and have continued to gain market share at the expense of
department stores. This change in distribution has created the need to differ-
entiate marketing and manufacturing to provide the right product to each dis-
tribution channel. Cone uses its Parras Cone facility to target the mass mer-
chants 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 recent years as khakis and
other fabrics have gained market share. In the second half of 1999, Cone began
seeing evidence that denim demand in Europe was growing in both basic five-
pocket jeans and specialized denim fabrics. In less industrialized countries,
the potential market for denim jeans has continued to grow as youth popula-
tions expand. However, the growth in denim demand has been tempered by eco-
nomic and currency weaknesses in Asia and South America. Until consumers in
Asia regain some of their lost purchasing power, denim and apparel demand in
these countries will continue to be weak, forcing the exporting of most of the
region's production. In addition, Cone's sales growth has been impacted by in-
creased global supply primarily in countries with lower labor costs.
Cone's denim products, accounting for the majority of the denim and khaki
segment's sales, are primarily designed for use in garments targeted for the
middle and upper-end markets, where styling and quality generally command pre-
mium fabric prices. Fabric styling is supported by Cone's product development
specialists. Due to the nature of the manufacturing process, denim fabric con-
tains variations in color that give it a distinctive appearance. After weav-
ing, 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 Cone's fade resistant Deepdown(R) fabric. During these
processes, Cone's product development specialists generally work in collabora-
tion 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, Cone defines
its markets as heavyweight denims and specialty-weight denims. Heavyweight
denim is used primarily in jeans and is by far the largest component of the
denim market. Within the heavyweight market, Cone further classifies its den-
ims as "value-added" and "basic." Value-added denims are distinguished by fab-
ric construction, yarn variations, finishes and new product introductions. Ba-
sic denims are less differentiated by styling with competition being primarily
on the basis of price, quality and service.
3
Cone's value-added denims are sold principally to brand name apparel compa-
nies, specialty retailers and brand name garment producers. Cone's basic den-
ims are used primarily in garments sold through retail chains, department
stores and catalogs. Although most of Cone's basic denims are designed for the
upscale segment of these markets, Cone also produces high-quality basic heavy-
weight blue denim, primarily at Parras Cone, to service the mass-market dis-
tribution channel. Sales of basic denims constituted approximately 38% of
Cone's total denim sales in 2000.
Cone's largest denim customer is Levi Strauss, whose 501(R) family of jeans
are produced solely from Cone's proprietary fabrics. Other customers include
V.F. Corporation (Wrangler and Lee), The Gap, Old Navy, Calvin Klein, JC
Penney/Arizona and Tommy Hilfiger Jeans.
Specialty-weight denims include a variety of woven constructions, colors
and weights and are used primarily in fashion garment silhouettes and women's
and children's wear. These fabrics constitute a growing portion of the denim
market as recent growth in denim has occurred in fashion silhouettes such as
baggy jeans and carpenter pants at the expense of basic five-pocket jeans.
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.
Manufacturing. Cone's denim facilities are modern and flexible and encom-
pass substantially all manufacturing processes necessary to convert raw fiber
into finished fabrics. All of Cone's denim weaving facilities were re-loomed
in the nineties; however, in 1999, Cone outsourced a significant portion of
its yarn production in order to reduce operating costs and conserve capital
that would have been required for equipment modernization. Cone's U.S. dyeing
and finishing facilities include a wide range of technologies, with seven in-
digo long-chain dyeing machines, beam dyeing, continuous overdye machinery and
raw cotton dyeing equipment.
In addition to its U.S. facilities, Cone has a 50% equity interest in
Parras Cone, a low cost producer of high-quality basic denims located in Mexi-
co. Under a marketing agreement with its partner, Cone markets and distributes
100% of the fabric production of Parras Cone. Parras Cone plans to expand its
productive capacity by approximately 35% during 2001. This expansion, to the
originally targeted capacity, will make Parras Cone even more efficient and
allow expanded relationships with key customers.
Cone is recognized internationally as a leader in product quality and new
product development. Product and process development is supported by
manufacturing development groups, which have specialists located in each
facility. These groups work with Cone's product development specialists and
its customers' designers to produce new products for the marketplace. Cone
uses on-line computer-aided design systems to increase styling effectiveness.
Competition. The denim and khaki fabrics business is highly competitive.
Primary competitive factors include price, product styling and differentia-
tion, customer service, quality and flexibility, with the significance of each
factor dependent upon the particular needs of the customer and the product in-
volved.
No single company dominates the industry and domestic and foreign competi-
tors range from large integrated enterprises to small niche companies. Compe-
tition is in the form of both domestic and foreign piece goods and in the form
of imported apparel garments from Mexico, Asia and other areas. The migration
of garment manufacturing facilities to Mexico and Caribbean countries, addi-
tional worldwide capacity, more aggressive pricing from domestic companies and
the proliferation of newly styled fabrics competing for fashion acceptance
have been factors affecting Cone's business environment. Cone's competitive-
ness with producers from other countries is influenced by tariffs and trans-
portation costs. Any failure of Cone to compete effectively in this environ-
ment or to keep pace with changing markets could have a material adverse ef-
fect on Cone'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 Cone has explored a number
of international initiatives. Its objectives for expansion into Mexico in-
cluded seeking access to the Mexican distribution system to sell Cone's prod-
ucts and access to lower cost cut-and-sew facilities in order to increase mar-
ket share with private label customers and large branded customers migrating
to Mexico. Cone is also seeking to gain production cost advantages while bene-
fiting from its technological expertise. As the garment industry has migrated
to Mexico from the U.S. Cone has benefited from Parras Cone's cost structure
and location, and Cone's U.S. infrastructure.
4
Growth of denim apparel bottoms has been rising since the beginning of 1998
with most of the growth coming from Mexico. Mexico is the dominant player in
denim bottom imports to the U.S., representing approximately 61% of total
units imported and approximately 79% of the total increase in units imported
in 2000. There has been a steady increase in U.S. fabric exports to Mexico
over the past few years. In 2000, U.S. fabric made up approximately 50% of the
Mexican denim apparel imports in the U.S.
In 1999, Cone announced plans to continue its denim manufacturing expansion
in Mexico. Cone has a strategic project to co-develop an industrial park and
to build a denim facility in Altamira, Mexico. This project as announced will
initially have two components: 1) a 50/50 joint venture with Guilford Mills,
Inc., to develop and operate a textile and apparel industrial park on over 500
acres, and 2) a 100% owned denim plant with an initial annual capacity of 10
to 20 million yards expandable to 30 to 40 million yards. Cone funded its in-
vestment in the industrial park of approximately $10 million through February
2001. While it is Cone's goal to start the construction of the denim facility
in late 2001, the timing and size of such a facility is dependent upon secur-
ing the necessary financing. Cone has not arranged the required financing at
this date and there is no assurance that we will be able to obtain financing
on terms and conditions acceptable to Cone. See "Item 7. Management's Discus-
sion and Analysis of Results of Operations and Financial Condition, Long-Term
Strategic Initiatives."
In 1998, Cone formed an alliance with the Ashima Group of India that allows
Cone to market Ashima denim and sportswear products worldwide outside the In-
dian sub-continent. The Ashima Group produces and markets a broad product line
of denim and sportswear fabrics. This alliance was dissolved in 2000 as a re-
sult of changes in the marketplace relating to the Asian financial crisis and
Cone's refocus on the Western Hemisphere. With the changes in the marketplace
the alliance did not have the profit potential that was initially envisioned.
Cone plans to continue to hold its equity investment in Ashima and maintain a
relationship, so as to keep a presence in that region of the world and poten-
tially benefit from future changes in market dynamics.
Cone is continuously assessing the feasibility of additional manufacturing
platforms and alliances within certain trade blocs in order to compete more
effectively in its markets.
Seasonality. Demand for Cone's denim and khaki products and the level of
Cone's sales fluctuate moderately during the year. There are three retail
selling seasons: spring, fall (back-to-school) and the holiday season. Cone's
sales for a particular selling season generally begin six months in advance of
that season.
Marketing and Sales. Cone's marketing focus is to serve brand name apparel
customers through the development of products that are recognized in the mar-
ketplace for their distinctive quality, durability and styling. Styles of
Cone's denim and other fabrics vary in color, finish, weight and construction,
depending upon fashion trends and the needs of the specific customer. Cone's
product development specialists monitor fashion trends throughout the U.S.,
Europe, Far East and South America, attend fashion and trade shows, meet with
garment manufacturers and retailers and conduct market research. In addition,
Cone maintains an international focus with a long history of distributing its
products internationally. In 2000 Cone exported approximately 39% of its denim
sales.
The textile group is organized and managed by its major product lines of
denim and khaki. The marketing group is headquartered in Greensboro, North
Carolina with sales offices in New York, San Francisco, Los Angeles, Dallas
and Brussels to provide a more direct working relationship with the customer.
In addition, Cone has sales agents in Europe, Japan, Hong Kong, and throughout
Central and South America, and it maintains support services in trade financ-
ing, traffic and transportation in order to support its international pres-
ence. In 2000, with the dissolution of the Ashima alliance Cone consolidated
its international marketing group into its larger textile group infrastruc-
ture. Cone's strategy is to service its international customers with the same
degree of commitment to quality, service and fabric development as its domes-
tic customers.
Cone's denim and khaki exports were approximately $185 million, $154 mil-
lion and $177 million in 2000, 1999 and 1998, respectively.
Raw Materials. Cotton is the primary raw material for Cone's fabric manu-
facturing 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
5
payments were depleted in December 1998. The Step 2 program received addi-
tional funding in October 1999. Cone received equalization payments during
2000 and expects to receive these payments throughout 2001. Although manage-
ment 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 ef-
fective U.S. cotton prices exceed world prices, Cone's competitiveness may be
materially adversely affected, as Cone cannot always fully pass increased cot-
ton costs on to its customers. See "Item 7. Management's Discussion and Analy-
sis of Results of Operations and Financial Condition."
Since cotton is an agricultural product, its supply and quality are subject
to the forces of nature. Although Cone has always been able to acquire suffi-
cient supplies of cotton for its operations in the past, any shortage in the
cotton supply by reason of weather, disease or other factors could materially
adversely affect Cone's operations. See "Item 7. Management's Discussion and
Analysis of Results of Operations and Financial Condition."
Cone has an established cotton purchasing program, administered in confor-
mance with policies approved by the Board of Directors, to ensure an uninter-
rupted supply of appropriate quality and quantities of cotton, to cover com-
mitted and anticipated fabric sales and to manage margin risks associated with
price fluctuations on anticipated cotton purchases. Cone primarily uses for-
ward purchase contracts and, to a lesser extent, futures and options con-
tracts. 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 ship-
ment, Cone may benefit from its fixed-price purchases of cotton if prices
thereafter rise, or fail to benefit if prices subsequently fall. There can be
no assurance the forward purchase contracts and hedging transactions will not
result in higher cotton costs to Cone or will protect Cone from price fluctua-
tions.
Cone also purchases yarn, greige goods and dyes and chemicals. Based on
Cone's strategy to limit its investment in yarn manufacturing in the future,
it has formed alliances and in some cases entered into supply contracts with
yarn manufacturers to help ensure adequate supplies at competitive prices.
Pursuant to its decision to outsource an increased portion of its yarn manu-
facturing, Cone entered into a supply agreement with Parkdale America, LLC,
during 1999, which expires in 2004. Additional yarn and other materials used
by Cone have normally been available in adequate supplies through a number of
suppliers.
Trade. The North American Free Trade Agreement ("NAFTA"), which became ef-
fective on January 1, 1994, has created a free-trade zone among Canada, Mexico
and the U.S. NAFTA contains safeguards that were sought by the U.S. textile
industry, including a rule of origin requirement that products be processed in
one of the three countries in order to benefit from the agreement. NAFTA has
phased out all trade restrictions and tariffs on textiles and apparel among
the three countries. NAFTA has been responsible in part for Mexico recently
surpassing China as the largest exporter of apparel to the U.S. NAFTA and the
Caribbean Basin Initiative program, through favored quota and tariff treat-
ment, have accelerated the shift in production of garments to sources in this
hemisphere, indirectly benefiting U.S. textile producers and Cone. Cone's Mex-
ican joint venture, Parras Cone, benefits from its access to U.S. markets and
has benefited from NAFTA.
Last year, the U.S. Congress approved the Trade and Development Act of
2000. This legislation increased the trade benefits available to the countries
in the Caribbean for certain textile and apparel products to the point where
they are roughly equivalent to those available to Mexico under NAFTA. The pro-
visions of the legislation affecting the countries in the Caribbean could po-
tentially benefit Cone. This legislation also increased the trade benefits
available to the countries in Sub-Saharan Africa for certain apparel products
shipped to the U.S. market. The provisions of this legislation benefiting Sub-
Saharan Africa nations could have a negative impact on Cone. While the legis-
lation has been approved by Congress and signed into law by the President, the
legislation has not been fully implemented by the U.S. government. At this
time the ultimate impact of the legislation on the U.S. textile and apparel
industry and Cone is impossible to predict.
The impact of multilateral agreements intended to liberalize global trade
could also significantly affect U.S. textile producers and Cone. The World
Trade Organization ("WTO") is overseeing the phase-out of textile and apparel
quotas over a 10-year period through 2004. Tariffs on textile/apparel products
are being reduced (but not eliminated) over the same 10-year period. In addi-
tion, the U.S. government recently approved an agreement with China to facili-
tate its admission to the WTO. As one of the world's major textile and apparel
producing countries, China's admission to the WTO will have a significant im-
pact on global textile and apparel trade. If China does gain full admission to
the WTO by 2005 and is therefore able to take advantage of the elimination of
6
quota limitations into the U.S. market, there could be a negative impact on
the domestic textile industry as well as Cone.
In response, Cone has focused its operations on the manufacture of fabrics
for use in garments that are less vulnerable to import penetration. Management
believes the location of Cone's U.S. manufacturing facilities, its 50% inter-
est in the Parras Cone plant in Mexico, and its emphasis on shortening produc-
tion and delivery times allow Cone to respond more quickly than foreign pro-
ducers to changing fashion trends and to its domestic customers' demands for
precise production schedules and rapid delivery. Cone has invested in techno-
logical and process improvements to meet demand for quality and styling. Its
emphasis on customer service is supported by its just-in-time and quick re-
sponse programs and by electronic data interchange (EDI) with customers. These
efforts have improved communication, planning and processing time in manufac-
turing.
In instances where Cone finds itself uncompetitive with imports, Cone is
pursuing initiatives either to manufacture or source products internationally
or to exit the product line, such as the decision to exit the chamois
shirtings product line in 1999.
Commission Finishing
The commission finishing segment provides custom printing and plain shade
dyeing services. Commission printers and dyers process fabrics owned by vari-
ous customers on a contract fee basis. The customers, primarily referred to in
the trade as converters, purchase base fabrics from weaving mills and use ei-
ther internal or external design staffs to create patterns or color direction.
The application of design, color, hand, and finish are the key value adding
components of a successful commission printer or dyer.
Carlisle Finishing. The Carlisle Plant is a modern, highly complex facility
comprised of over one million square feet with expertise in rotary screen
printing. In recent years, Cone has invested heavily in computerized color-
mixing systems, automated process controls, and communication systems using
the Internet to support the competitive strategy of focused attention on qual-
ity and service.
Markets served by the Carlisle Plant are home decorative, specialty apparel
and craft fabrics, and plain shade apparel. Cone believes that Carlisle is the
largest commission printer of home decorative fabrics in the United States.
Key customers in this segment are the Waverly Division of F. Schumacher, P.
Kaufmann, Inc. and Covington/Spectrum Fabrics. Cone's internal home decorative
printed product lines are supported by the Carlisle facility. The specialty
printed product markets are associated with over-the-counter craft and home
sewing, camouflage fabrics for the hunting trade, and baby products. Key cus-
tomers for this segment include Springs Industries and Schott International.
In addition, Cone's khaki product line is primarily dyed and finished at the
Carlisle facility.
Consumer fashion preference heavily influences the market direction of each
of these product groups. Contributing factors to fashion include coloration,
texture, and design appeal. In recent years, home furnishing print demand has
been affected adversely by alternative products such as yarn-dyed jacquard
fabrics and leather products.
In 1999, Cone restructured the Carlisle operation to reduce cost, improve
quality and more aggressively position itself in the market place. These ef-
forts have been successful in returning the operation to marginal profitabili-
ty. Market competitive forces resulted in the closing of several competitors
in 2000, including Carlisle's largest home decorative competitor. These
closings significantly reduced the available number of domestic printers for
some key fabrics that should benefit Carlisle in the future.
Raytex Finishing. Product markets supported by the Raytex Plant included
top of the bed products such as comforters and sheets along with home and bath
products such as shower curtains. Customers for these products included
Croscill, Burlington, Springs, and Dan River. Additional product markets in-
cluded mattress ticking fabrics and products for outdoor furniture. Customers
for these products included Tietex Ticking and Meadowcraft.
During late 1999 and early 2000, the product markets served by the Raytex
Plant experienced price and volume pressures. Market forces contributing to
this pressure were lower consumer demand, styling direction more oriented to-
ward yarn-dyed jacquards, and an increase in the use of imported products by
the converters involved with these markets.
7
In late 2000, Cone announced that it was undertaking a thorough analysis
into the long-range viability of the Raytex Plant. In December 2000, Cone an-
nounced the intent to cease operations at the Raytex Plant and exit those mar-
kets. The closing of the Raytex Plant was completed in the first quarter of
2001. The first quarter 2001 results will be affected negatively by operating
inefficiencies associated with closing the Raytex Plant.
Decorative Fabrics
Cone's decorative fabrics segment operates under the name Cone Decorative
Fabrics and includes a New York-based converting operation (formerly known as
John Wolf Fabrics) and Cone Jacquards, a jacquard weaving plant. The New York
operation is a "converter" of printed, jacquard and solid woven fabrics for
upholstery, draperies, bedspreads and outdoor fabrics. A converter designs and
distributes fabrics, which are manufactured and printed for the converter by
others. Cone's decorative fabrics lines are printed primarily at its Carlisle
plant under the name "Cone Decorative Fabrics."
Cone Jacquards, a modern 142,000 square foot facility with wide weaving ma-
chines, produces jacquard fabrics for furniture manufacturers, fabric distrib-
utors, retailers, converters and specialty products manufacturers.
Decorative fabrics are marketed domestically and internationally through
the segment's sales staff and sales agents. The sales staff and agents handle
sales to large customers such as hotels, institutions and furniture manufac-
turers, 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.
In 2000, Cone intensified its efforts to coordinate the merchandise offer-
ing of the converting operation and the jacquard mill. As a result of this ef-
fort, the decorative fabrics design area was modified through the addition of
new personnel and computer aided design equipment.
Competition. The finishing and decorative fabrics businesses are highly
competitive and Cone competes primarily on the basis of product styling, qual-
ity and service. The commission finishing segment competes directly with sev-
eral large commission printers as well as a number of smaller competitors. The
decorative fabrics segment competes with a large number of domestic and for-
eign suppliers of decorative fabrics and jacquard woven fabrics.
Seasonality. Demand for Cone's finishing services and decorative fabrics
and the level of Cone's sales fluctuate moderately during the year with Janu-
ary being a seasonally slow period.
Yarn-Dyed Products
Cone's yarn-dyed products consisted primarily of flannel shirting fabrics.
Due to market conditions, manufacturing cost competitiveness and competition
Cone ceased production of fabrics for the yarn-dyed segment at its facilities
in May 1999 and liquidated associated inventories by year-end 1999.
Other Segment
The "Other" segment consists of miscellaneous ancillary operations.
Trademarks, Copyrights and Patents
Cone owns several registered trademarks containing the "Cone" name and var-
ious designs. In addition, Cone holds various other trademarks, trade names,
copyrights and patents used in connection with its business and products, both
domestically and internationally. Cone believes that the name recognition of
Cone and its reputation for quality, service and product development have
value in both domestic and international markets.
Customers
Cone has one customer, Levi Strauss, which accounts for more than 10% of
net sales. Sales to this customer accounted for approximately 34%, 31% and 32%
of sales in 2000, 1999 and 1998, respectively. The loss of Levi as a customer,
or a significant reduction in its purchases from Cone, would have a material
adverse effect on Cone's financial position and results of operations.
Levi has been a customer of Cone since 1915 and a close, cooperative
supplier/customer relationship has evolved through the development of Cone's
proprietary fabrics for use in Levi's 501(R) family of jeans. In addition
8
to supplying fabrics for Levi's 501(R) family of jeans, Cone sells other denim
fabrics to Levi. Because Cone is Levi's major denim supplier, Levi initiated
discussions with Cone in 1989 concerning ways to assure the continuity of this
relationship. As a result of these discussions, Cone and Levi entered into an
exclusive Supply Agreement as of March 30, 1992, which confirms that Levi will
continue to use only Cone's proprietary denim fabrics in manufacturing Levi's
501(R) family of jeans and that Cone will continue to supply such fabrics
solely to Levi. The volume of purchases by Levi and the prices charged by Cone
will continue to be subject to customary negotiations between the parties.
The Supply Agreement expires in March of 2006 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 three-year supply arrangement or of the lease
term, as the case may be. Additionally, Levi may terminate the Supply Agree-
ment at any time upon 30 days' written notice and either party may terminate
the Supply Agreement in the event of the other party's insolvency, bankruptcy
or occurrence of a similar event.
Backlog
Cone's order backlog was approximately $115 million at January 28, 2001, as
compared to approximately $85 million at January 30, 2000. Denim and Khaki ac-
counted for 95% of the order backlog at January 28, 2001.
Physical deliveries for accepted fabric orders in the apparel industry vary
in that some products are ordered for immediate delivery only, while others
are ordered for delivery several months in the future. In addition, Cone has
an ongoing proprietary program for which orders are issued only for nearby de-
livery. Therefore, orders on hand are not necessarily indicative of total fu-
ture revenues. It is expected that substantially all of the orders outstanding
at January 28, 2001, will be filled within the first four months of 2001.
Research and Development
Cone's research and development activities are directed primarily toward
improving the quality, styling and performance of its apparel fabrics and
other products and services. Cone also is engaged in the development of com-
puter-aided design and manufacturing systems and other methods of improving
the interaction between Cone's stylists and its customers. These activities
are conducted at various facilities, and expenses related to these activities
are an immaterial portion of Cone's overall operating costs.
Governmental Regulation
Federal, state and local regulations relating to the workplace and the dis-
charge of materials into the environment are continually changing; therefore,
it is difficult to gauge the total future impact of such regulations on Cone.
However, existing government regulations are not expected to have a material
effect on Cone's financial position, operating results or planned capital ex-
penditures. Cone currently has an active environmental protection committee
and an active workplace safety organization.
Employees
At January 31, 2001, Cone employed approximately 4,300 persons, of whom ap-
proximately 750 were salaried and approximately 3,550 were hourly employees.
Of such hourly employees, approximately 1,200 are represented by collective
bargaining units and are employed under collective bargaining agreements that
provide for annual wage negotiations in the spring of each year. Based upon
its records relating to the withholding of union dues from employee compensa-
tion, Cone believes that approximately 410 of its employees are dues-paying
union members. Cone has not suffered any major disruptions in its operations
from strikes or similar events for more than a decade and considers its rela-
tionship with its employees to be satisfactory.
Item 2. PROPERTY
As of March 2001, Cone's U.S. manufacturing facilities consist of six
plants, five located in North Carolina and one in South Carolina, with approx-
imately 4.2 million square feet of floor space. The denim and khaki segment
operates four plants, and each of the commission finishing and the decorative
fabrics segments operates one plant. Cone also maintains several distribution
centers and warehouses. Internationally, Cone has a 50% interest in a 575,000
square foot denim manufacturing facility in Parras, Mexico.
9
In the first quarter of 2001, Cone closed its Raytex Plant, located in
Marion, South Carolina, which contains .3 million square feet of floor space.
In addition, Cone owns its Salisbury, North Carolina plant, closed in 1999,
which contains approximately .5 million square feet of floor space. Both of
these facilities are held for sale. Also, during 1999, Cone closed the yarn
manufacturing portions of two 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. Cone's manufacturing facilities
are substantially utilized except for those facilities formerly used for yarn
manufacturing that Cone has outsourced.
All U.S. manufacturing facilities are pledged as security for Cone's in-
debtedness under its debt agreements. The Parras Cone denim facility serves as
collateral for a portion of the debt of the joint venture company.
Cone leases its executive and administrative offices, located in Greens-
boro, North Carolina, and other offices, located in various U.S. cities and
Brussels, from unrelated third parties. In the third quarter of 2000, Cone
terminated its prior lease arrangement for its corporate headquarters and en-
tered into a new operating lease arrangement for less space at the same loca-
tion. Cone expects to vacate the site at the end of 2001, when its present
lease expires, and move into substantially smaller space, thus reducing its
annual occupancy costs.
Item 3. LEGAL PROCEEDINGS
Cone and its subsidiaries are involved in legal proceedings and claims
arising in the ordinary course of business. Although there can be no assurance
as to the ultimate disposition of these matters, management believes that the
probable resolution of such contingencies will not have a material adverse ef-
fect on the financial condition and liquidity of Cone. Due to Cone's recent
operating results, management believes that the effects of any litigation, no
matter how small or insignificant, could be considered material to Cone's fu-
ture results of operations. As of December 31, 2000, no significant litigation
exists.
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........................ 50 Director, President and Chief Executive Officer
Executive Vice President and Chief Financial
Gary L. Smith......................... 42 Officer
Neil W. Koonce........................ 53 Vice President, General Counsel and Secretary
Thomas J. Gmitter..................... 53 Vice President, Chief Information Officer
Michael K. Horrigan................... 46 Vice President, Human Resources
Marvin A. Woolen, Jr. ................ 60 Vice President, Cotton Purchasing
Christopher F. Conlon................. 44 Controller
W. Scott Wenhold...................... 36 Treasurer
All officers of the Registrant are elected or reelected each year at the
Annual Meeting of the Board of Directors or at other times as necessary. All
officers serve at the pleasure of the Board of Directors and until their suc-
cessors are elected and qualified.
John L. Bakane joined Cone in 1975. He was named Chief Financial Officer in
1988 and was elected to the Board of Directors in 1989. He was elected Execu-
tive Vice President in 1995. In November 1996, he assumed responsibility for
management of the Denim Group of Cone and in April 1997 he was appointed Pres-
ident of Cone Apparel Products Group. He was appointed Chief Operating Officer
in April 1998, and served in such capacity until elected President and Chief
Executive Officer in November 1998.
Gary L. Smith was employed by Cone in 1981 and was serving as Manager of
Business Analysis when he was elected Assistant Controller in 1994. He was
named Controller in December 1996, Executive Vice President in February 1999
and Chief Financial Officer in November 1999.
10
Neil W. Koonce was employed by Cone in 1974. He has been General Counsel
since 1987, Vice President since 1989, and Secretary since February 1999.
Thomas J. Gmitter was employed by Cone in 1999 as Vice President of Infor-
mation Services, Chief Information Officer. He served in the same capacity at
Universal Tobacco Inc., Richmond Virginia from 1996 to 1999. He was Vice Pres-
ident of Information Services of Jostens Inc., Memphis, Tennessee from 1995 to
1996.
Michael K. Horrigan was employed by Cone in March 1999 as Vice President,
Human Resources. He served as Vice President of Human Resources for the sales
and marketing and bed fashions groups at Springs Industries from February 1997
to March 1999. Before joining Springs, he was employed by Sara Lee branded ap-
parel businesses for eight years, including five years as Vice President of
Human Resources for Champion Products. For ten years prior to that he worked
in human resources for General Electric.
Marvin A. Woolen, Jr. was employed by Cone in July 1995 as director of cot-
ton purchasing. He was elected Vice President in 1997. He has been in the cot-
ton sales, merchandising, purchasing, classing and shipping business since
1971. From 1988 to 1995 he was president of Rollins Company, a cotton shipping
firm.
Christopher F. Conlon was appointed Controller in November 1999. He previ-
ously worked at Cone Mills for eight years in the 1980s in several financial
roles including cost accountant, plant controller, and division controller re-
turning to Cone Mills in 1998 as Group Controller and later served as Director
of Business Planning. He worked as Chief Financial Officer of Kron Medical
Corporation, Spectrum Glass Products and Sandlapper Fabrics. He also was Chief
Operating Officer at Sandlapper Fabrics from 1996 to 1998.
W. Scott Wenhold was appointed Treasurer in January 2001. He served as Di-
rector of International Treasury of Johnson Controls, Inc. from September 1999
to December 2000. Prior to joining Johnson Controls, Inc., he was employed by
Fort James Corporation where he served as Assistant Treasurer from July 1998
to July 1999, Director of Corporate Finance from August 1997 to July 1998, and
Manager of Corporate Finance from April 1994 to August 1997.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MAT-
TERS
Cone's Common Stock has traded on the New York Stock Exchange under the
ticker symbol "COE" since June 18, 1992, the date of its public offering. The
approximate number of holders of record of Cone's Common Stock as of January
31, 2001, was 322.
Information required by this Item on the sales prices and dividends of the
Common Stock of Cone are incorporated in "Note 22. Quarterly Financial Data
(Unaudited)" of "Item 8. Financial Statements and Supplementary Data" and is
incorporated herein by reference.
11
Item 6. SELECTED FINANCIAL DATA
HISTORICAL FINANCIAL REVIEW
2000 1999 1998 (1) 1997 1996
------- ------- -------- ------- -------
(in millions, except per share data and
number of employees)
Summary of Operations
Net Sales........................................... $ 617.7 $ 616.3 $ 728.6 $ 716.9 $ 745.9
Cost of Sales....................................... 550.3 568.2 661.8 664.4 662.0
Gross Profit........................................ 67.4 48.1 66.8 52.5 83.9
Selling and Administrative.......................... 49.3 48.7 57.4 55.6 65.9
Restructuring and Impairment of Assets (2).......... 38.5 16.0 17.1 5.2 5.2
Income (Loss) from Operations....................... (20.4) (16.6) (7.7) (8.3) 12.8
Other Expense -- Net................................ 22.2 13.9 12.1 11.7 14.9
Loss Before Income Tax Benefit, Equity in Earnings
(Losses) of Unconsolidated Affiliates and
Cumulative Effect of Accounting Change............. (42.6) (30.5) (19.8) (20.0) (2.1)
Income Tax Benefit.................................. (14.6) (10.7) (7.9) (8.0) (2.3)
Income (Loss) Before Equity in Earnings (Losses) of
Unconsolidated Affiliates and Cumulative Effect of
Accounting Change.................................. (28.0) (19.8) (11.9) (12.0) 0.2
Equity in Earnings (Losses) of Unconsolidated
Affiliates......................................... 2.7 1.7 5.2 2.6 (2.4)
Loss Before Cumulative Effect of Accounting Change.. (25.3) (18.1) (6.7) (9.4) (2.2)
Cumulative Effect of Accounting Change (3).......... -- (1.0) -- -- --
Net Loss............................................ $ (25.3) $ (19.1) $ (6.7) $ (9.4) $ (2.2)
Loss Available to Common Stockholders
Loss Before Cumulative Effect of Accounting Change.. $ (25.3) $ (18.1) $ (6.7) $ (9.4) $ (2.2)
Preferred Dividends................................ (3.8) (3.0) (2.9) (2.9) (2.9)
Loss before Cumulative Effect of Accounting
Change............................................. (29.1) (21.1) (9.6) (12.3) (5.1)
Cumulative Effect of Accounting Change (3)......... -- (1.0) -- -- --
Net Loss........................................... $ (29.1) $ (22.1) $ (9.6) $ (12.3) $ (5.1)
Per Share of Common Stock
Loss Before Cumulative Effect of Accounting Change
Basic and Diluted................................. $ (1.14) $ (0.83) $ (0.37) $ (0.47) $ (0.19)
Net Loss
Basic and Diluted................................. (1.14) (0.87) (0.37) (0.47) (0.19)
Balance Sheet Data (at year end)
Total Assets........................................ $ 423.2 $ 472.8 $ 488.5 $ 506.6 $ 530.0
Long-Term Debt...................................... 182.1 198.8 172.1 150.4 160.7
Stockholders' Equity................................ 126.4 157.5 181.9 196.5 210.3
Long-Term Debt as a Percent of Stockholders' Equity
and Long-Term Debt................................. 59% 56% 49% 43% 43%
Shares Outstanding.................................. 25.5 25.5 25.4 26.2 26.3
Other Data
Number of Employees at Year End..................... 4,300 4,300 6,200 6,100 6,700
Capital Expenditures................................ $ 10.0 $ 13.2 $ 32.8 $ 36.3 $ 36.2
Investments in and Advances to Unconsolidated
Affiliates......................................... 6.7 0.7 3.5 1.6 --
Common Stock Dividend Paid.......................... -- -- -- -- --
- --------
(1) Fiscal 1998 represents a 53 week period.
(2) See Note 21, "Restructuring and Impairment of Assets," of the Notes to
Consolidated Financial Statements.
(3) In accordance with Statement of Position 98-5, "Reporting the Costs of
Start-up Activities", Cone recognized a charge of $1.0 million in 1999,
Cone's 50% portion of Parras Cone's unamortized start-up costs, as a cumu-
lative effect of an accounting change, net of income tax benefit.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FI-
NANCIAL CONDITION
Overview
For the fiscal year 2000, Cone had sales of $617.7 million, up marginally
from sales of $616.3 million in 1999. During 2000, excluding charges for re-
structuring of operations and impairment of assets, Cone reported improved re-
sults of operations as compared with 1999. While we realized approximately $40
million in restructuring savings or cost reductions in 2000 as a result of the
1999 comprehensive restructuring plan, much of these savings were offset by
lower sales prices and by manufacturing cost increases. The year 2000 marked
the third consecutive year of declining sales for the U.S. textile industry.
While Cone has made progress in its plan, the business environment continues
to affect actual results adversely.
12
Denim results improved in 2000 from 1999 as retail sales increased and we
were able to operate our denim facilities at essentially full capacity after
the first quarter of the year. In addition to much improved operating sched-
ules in 2000 versus 1999, we were able to liquidate in excess of $12 million
of denim inventories. Pricing continued to be difficult as a result of indus-
try oversupply, competitors' inventory and backlog positions, and resistance
to price increases at retail. Carlisle, as a component of the commission fin-
ishing segment, continued its turnaround. The Raytex operation as the other
component of the commission finishing segment experienced deteriorating market
conditions that resulted in unacceptable operating losses and led to the deci-
sion in December 2000 to close the facility. The decorative fabrics segment
continued to realize sales growth in 2000; however, a continuing decline in
operating results led to the installation of a new management team.
Management believes that one of the most significant factors affecting op-
erating margins is the price of cotton, which varied between the $.50's and
$.70's per pound through much of 1998, 1999 and 2000. Cone has purchased cot-
ton at fixed prices for delivery for a portion of 2001. Whether cotton prices
are marginally lower or higher in 2001 compared to 2000 will depend upon fac-
tors such as the strength of the U.S. economy, supply and demand conditions
around the world as they impact the export of U.S. cotton and the level of
equalization payments received under the U.S. government cotton program.
Other significant factors that influence Cone's operating results and fi-
nancial condition include general business cycles, consumer fashion prefer-
ences, changes in demand for print fabrics, international trade conditions,
the relative strength of the U.S. dollar, market interest rates, as well as
the terms on which debt financing is available to Cone.
In the fourth quarter of 2000 the U.S. economy began slowing with holiday
sales at retail ranging from mixed to disappointing for apparel and home fur-
nishings products. The denim and finishing businesses continued to show strong
order position at year-end 2000; however, declining general economic condi-
tions are expected to affect growth and margins adversely for the first half
of 2001. Based upon general economic forecasts for improvements in the U.S.
economy in the second half of the year, Cone expects improved operating re-
sults in the second half of 2001 in all lines with a potential for some price
improvements in denim. First half 2001 results will also be affected adversely
by rising natural gas and other energy costs. As a result of the slowing U.S.
economy, the Federal Reserve reduced interest rates by 1.5% in the first quar-
ter of 2001, which should reduce Cone's borrowing cost on a portion of its
debt.
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. As a result of economic and industry con-
ditions we have focused on four initiatives: (1) engage in businesses in which
Cone believes it is an industry leader; (2) retain, attract, motivate and fo-
cus a talented and capable management team; (3) migrate to low-cost manufac-
turing platforms for commodity products; and (4) attract and efficiently in-
vest capital.
In the fourth quarter of 2000, based upon economic and industry conditions
as well as our business leadership criteria, Cone reached the decision to
close the Raytex finishing operation that served the top of bed home furnish-
ings markets. Cone was not a leader in this business segment and was unable to
develop a business outlook that would provide an appropriate return on its in-
vestment in this operation. The decision to close the facility was announced
in December 2000 with the closing of operations completed in the first quarter
of 2001. In 2000, Cone recognized a restructuring and impairment of asset
charge of $38.6 million and an $1.9 million exit inventory charge related to
the decision to close this facility. The $38.6 million charge includes noncash
charges of $24.0 million for the write-off of intangible assets and $13.6 mil-
lion for the write-down of property, plant and equipment. The remaining $1.0
million charge is for employee severance benefits. The Raytex assets are held
for sale, and Cone's goal is to realize proceeds from the liquidation of these
assets in 2001.
In addition to Raytex, we exited the Ashima alliance in 2000. The Ashima-
Cone alliance was formed in August 1998 and consisted of four elements: (1)
the purchase by Cone of approximately 8% of the capital stock of Ashima Ltd.,
an Indian company, for $3.6 million; (2) Cone's providing technology and tech-
nical services to Ashima, receiving fees as compensation; (3) Cone certifica-
tion of certain Ashima products for distribution throughout the world; and (4)
the right of Cone to market Ashima products outside the Indian sub-continent
under the name Ashima-Cone. During the third quarter of 2000, Cone reached a
mutual agreement with Ashima to terminate the commercial and technical serv-
ices agreements between the parties. As a result of changes in the marketplace
relating to the Asian financial crisis and Cone's refocus on the Western Hemi-
sphere, the alliance did not have the
13
profit potential for both parties that was initially envisioned. In addition,
the alliance became a distraction to the efficient management of Cone's core
businesses. Cone plans to continue to hold its equity investment in Ashima and
maintain a relationship so as to keep a presence in that region of the world
and potentially benefit from changes in market dynamics. The Ashima Group pro-
duces and markets a broad product line of denim and sportswear fabrics.
With the exit of the Ashima alliance Cone collapsed its International Mar-
keting group into its larger Textile Products Group infrastructure to provide
for increased efficiencies and economies of scale.
In keeping with its strategy to reduce overhead costs, Cone will relocate
its corporate headquarters to substantially smaller leased space by year-end
2001. Cone also has downsized its office space in New York and will relocate
to a smaller New York office in 2001.
Cone believes that its present business units can meet the performance cri-
teria that it has established. However, given the global and capital markets
environment in which Cone operates, Cone will continually review its busi-
nesses to make sure that they are capable of providing an acceptable long term
return to Cone's stockholders.
In 1999, in response to deteriorating business conditions for apparel prod-
ucts and commission finishing Cone implemented a comprehensive downsizing and
reorganization program targeted at providing over $40 million in cost savings
or loss avoidance for the year 2000. The components and status of this program
are:
(1) Cone streamlined the product offerings of the sportswear division
by, among other things, closing the Salisbury plant, which produced
yarn-dyed shirting fabrics. The plant closing and streamlining of
operations was completed in 1999 resulting in a full year of savings
in 2000 from this initiative. In 2000, Cone recognized an additional
$.2 million restructuring charge to write down further the value of
the assets held for sale;
(2) Cone downsized and reorganized the corporate administrative staff,
merged the denim and sportswear fabrics businesses into one unit and
reduced the manufacturing staff to simplify the management struc-
ture. These actions were completed in 1999;
(3) Cone closed the Florence and Cliffside ring-spun yarn manufacturing
facilities and entered into a long-term yarn-sourcing contract. The
closing of the yarn-manufacturing portion of the facilities and
outsourcing of yarn were completed in 1999;
(4) Cone restructured the Carlisle plant by reducing the workforce by
approximately 25%, increasing efficiencies and quality, and refocus-
ing marketing activities. Workforce reductions were implemented in
1999, and in aggregate the operating efficiency and quality targets
were met or exceeded in 2000, resulting in the targeted savings for
this initiative;
(5) Cone exited the chamois flannel shirting product line with the re-
structuring of Carlisle. The exit of this business allowed Carlisle
to focus on the home furnishings and bottom weight apparel fabrics
markets, thereby helping it attain the efficiency and quality tar-
gets.
Cone calculates that it achieved approximately $40 million in cost savings
as a result of these initiatives. Cone's results of operations did not improve
by the amount of the realized savings as a result of other factors prevalent
within the industry including continued pricing pressures, manufacturing cost
increases and deteriorating general business conditions.
Cone's priority for the use of cash flow and debt capacity is the invest-
ment in low-cost denim manufacturing facilities, primarily in Mexico. In April
1999, Guilford Mills, Inc. and Cone entered into a 50/50 joint venture to
develop and operate a new textile and apparel industrial park in Altamira, Ta-
maulipas, Mexico. The infrastructure for the industrial park was substantially
completed in February 2001. Under the agreement with Guilford the companies
jointly developed and own the infrastructure for the industrial park. Each
company individually owns the land for its respective textile operations and
will contract with the jointly owned service company for infrastructure serv-
ices, such as water, power and waste water treatment. The textile plant
planned to be built on Cone's property will be a denim plant with an initial
capacity of between 10 and 20 million yards. Depending upon the ultimate size
and configuration Cone expects to invest between $60 and $100 million in the
initial denim facility. Cone's goal is to start construction of the textile
facility in late 2001. The funds required for the denim facility will require
debt financing and certain modifications to current lending agreements. Cone
has not arranged financing or modified its lending agreements at this date,
and there can be no assurance that such
14
financing will be available on acceptable terms and conditions or that its
present lenders will agree to the required modifications.
In keeping with Cone's stated goal to expand capacity in Mexico Cone an-
nounced an agreement to expand Parras Cone's production capacity by 35% in
2001. The expansion will cost approximately $18 million and is expected to be
completed by year-end 2001. The expansion will be financed by Parras Cone with
internally generated cash flow and debt. Financing for the expansion has not
been finalized. Cone will continue to market and distribute 100% of the pro-
duction of Parras Cone.
Segment Information
In the years 1998 through 2000, Cone operated in three principal business
segments: denim and khaki, commission finishing and decorative fabrics. In
1998 and 1999, Cone also operated in the yarn-dyed products segment. (See
Notes 18 and 21 to the Notes to Consolidated Financial Statements included in
Part II, Item 8.)
Results of Operations
Fifty-Two Weeks Ended December 31, 2000 Compared with Fifty-Two Weeks Ended
January 2, 2000
For the year 2000, Cone had sales of $617.7 million as compared with sales
of $616.3 million for 1999. Denim and khaki segment sales and decorative fab-
ric segment sales were each up 6% offset by weaker commission finishing sales
primarily at the Raytex plant.
Gross profit for 2000 increased to 10.9% of sales, as compared with 7.8%
for the previous year. If inventory charges related to the Raytex closing were
excluded, 2000 gross profit would have been 11.2% of sales. The improved gross
profit for 2000 was a result of realization of benefits of the 1999 comprehen-
sive restructuring program and improved capacity utilization in the denim op-
erations partially offset by lower denim prices, weak market conditions for
Raytex and poor results for the decorative fabrics segment.
Denim and Khaki. For 2000, denim and khaki segment sales were $475.5 mil-
lion, an increase of 6% from 1999 sales of $448.5 million. Sales volume on a
yardage basis for the denim and khaki segment increased by 10% as the denim
market recovered from a 1999 downturn. In early 2000, Cone began to experience
improvements in denim market conditions, including more denim at retail and a
fashion shift back to basic five-pocket jeans. These market improvements con-
tinued to the year-end holiday season, which was not as robust as expected
earlier in the year. Relatively good market demand for khaki products contin-
ued from 1999 until late in 2000 when Cone began seeing evidence that the re-
tail pipeline may have become saturated.
Operating income of the denim and khaki segment for 2000 was $31.4 million,
or 6.6% of sales, compared with $17.6 million, or 3.9%, for 1999. The in-
creased margin and income resulted primarily from higher sales volume, im-
proved plant operating schedules after the first quarter of 2000 and the bene-
fit of liquidating approximately $12 million of inventory at previous year
cost levels. These increases in gross profit were partially offset by lower
sales prices, cost increases and closeouts of certain khaki inventories. The
closeout of certain khaki inventories reflects the competitiveness of the mar-
ket place and Cone's adjustment of fashion and basics product mix for this
product line. Results of the segment also reflected marginally lower cotton
costs and additional writedowns on the khaki inventory. Operating income for
the segment includes Cone's equity in earnings from the Parras Cone joint ven-
ture plant.
Commission Finishing. Outside sales (total segment sales less intercompany
sales) of the commission finishing segment, which consisted of the Carlisle
and Raytex plants, were $64.2 million for 2000, down 16% from $76.3 million
for 1999. The majority of this sales decline was at the Raytex plant where the
year began with weak top of bed volume, especially from the major retail
brands that outsourced production; Raytex's markets continued to deteriorate
throughout the year. As discussed previously, these market conditions led to
Cone's decision to close the Raytex plant. For Carlisle, overall print market
conditions did not improve in 2000. However, because of the closing of several
competitors, including its largest home decorative competitor, Carlisle's mar-
ket share increased at the end of 2000.
For 2000, the segment had an operating loss of $6.6 million as compared
with a loss of $6.9 million in 1999. The Raytex plant lost $6.7 million in
2000 versus a marginal loss of less than $.1 million in 1999 on the same ba-
sis. Carlisle's results benefited from the 1999 restructuring, downsizing and
refocusing of the Carlisle plant. The operating improvements at Carlisle were
partially offset late in 2000 by higher energy costs and the start-up
15
costs associated with new business assumed from a competitor's plant upon its
closing. Intercompany sales of this segment were to the denim and khaki and
decorative fabrics segments.
Decorative Fabrics. For 2000, sales of the decorative fabrics segment were
$77.3 million, up 6% from sales of $72.9 million for 1999. Cone Jacquard's
sales increased by 18% benefiting from expanded capacity and outsourcing while
converting (John Wolf) sales declined by 14% as a result of a lack of market
demand for Cone's product offerings for the home furnishings market and over-
all weak interest in prints. The decorative fabrics segment had a loss $1.6
million in 2000 as compared with earnings of $1.6 million for 1999. Results
for 2000 were affected negatively by the lack of market demand for Cone's
product offerings, start-up expenses associated with increasing capacity and
operating efficiencies at the Jacquard plant and difficulties with
outsourcing. As part of the management restructuring, the jacquards and con-
verting operations have been integrated to provide for a better coordination
of woven and printed products and lower selling costs. Market conditions in
the furniture industry weakened in the fourth quarter of 2000. The timing and
strength of the industry's recovery will have an impact on 2001 results.
Yarn-Dyed Products. Cone ceased manufacturing yarn-dyed products in May
1999. For 2000 there were essentially no sales of yarn-dyed products as com-
pared with 1999 sales of $17.1 million. For 1999, the yarn-dyed products seg-
ment had an operating loss of $5.6 million. The 1999 results include inventory
reserves of $1.3 million associated with the closing of the Salisbury plant.
In addition to the segment operating losses in 1999, $3.4 million of the re-
structuring charges in 1999 were attributable to the yarn-dyed segment. These
restructuring costs were primarily for the writedown of property, plant and
equipment, as well as employee severance costs.
Selling and administrative expenses for 2000 were $49.3 million or 8.0% of
sales, as compared with $48.7 million or 7.9% of sales in 1999. Selling and
administrative expenses in 2000 were affected negatively by higher bank and
legal fees associated with Cone's financing agreements.
Interest expense for 2000 was $18.4 million, an increase of $3.9 million
from $14.5 million for 1999. The increase in interest expense was primarily
the result of increases in rates under new lending agreements and in market
rates. Other expenses include $4.4 million recognized in 2000 related to the
ongoing expense of the new accounts receivable securitization program, which
began on September 1, 1999. The comparable number in 1999 was $1.0 million for
the new accounts receivable securitization program.
For 2000 and 1999, the income tax benefit as a percent of the taxable loss
was 34% and 35%, respectively. (See Note 11 to Notes to Consolidated Financial
Statements included in Part II, Item 8.)
Equity in earnings of Parras Cone, Cone's joint venture plant in Mexico,
was $2.8 million for 2000, as compared with $1.7 million for 1999. In the 2000
period, the plant operated at a higher capacity utilization rate and experi-
enced lower raw material costs.
For the year 2000, Cone had a net loss of $25.3 million, or $1.14 per share
after preferred dividends. For comparison, in 1999, Cone had a net loss of
$19.1 million, or $.87 per share. However, both years included significant
pre-tax restructuring, related expenses and inventory write-downs connected
with the exit from businesses. In 2000, excluding restructuring and asset im-
pairment charges related to the closing of the Raytex operation, Cone had net
income of $1.1 million or, after preferred dividends, a loss of $.11 per
share. For comparison in 1999 excluding special charges, losses from product
lines exited in 1999 and the $1.0 million after-tax charge from the cumulative
effect of an accounting change related to capitalized start-up costs at Parras
Cone, Cone had a pro forma net loss of $.18 per share.
Fifty-Two Weeks Ended January 2, 2000 Compared with Fifty-Three Weeks Ended
January 3, 1999
For the year 1999, Cone Mills had sales of $616.3 million, down 15% from
sales of $728.6 million for 1998, primarily due to a sales shortfall in denim.
Lower denim sales resulted from weaker consumer interest in jeans and adjust-
ments to retail and manufacturing inventories.
Gross profit for 1999 decreased to 7.8% of sales, as compared with 9.2% for
the previous year. Lower volume and pricing in denims and the aggressive elim-
ination of unprofitable lines and inventories more than offset the improved
operating results in commission finishing and decorative fabrics.
Cone encountered depressed market conditions in denim fabrics during 1999
resulting in a significant reduction of sales in the third and fourth quar-
ters. Retail sales of denim garments showed a slight decrease for
16
1999. Lower denim fabric sales resulted primarily from a stronger consumer in-
terest in khakis, inventory adjustments by retailers and wholesalers of
brands, and the continued worldwide over-capacity in denims even as several
competitors exited the U.S. market. In addition, the trend to more complex
garment silhouettes affected U.S. mills negatively as sourcing favored low-
cost Asian producers. As a result of these conditions, Cone experienced lower
margins as a result of both pricing pressures and curtailed operating sched-
ules aimed at controlling inventories.
Cone continued to encounter manufacturing difficulties at its Carlisle Fin-
ishing plant through the first nine months of 1999. However, in the fourth
quarter, Carlisle benefited from cost reductions associated with its restruc-
turing. The facility improved capacity utilization with a broadened customer
base, improved efficiency and quality, and earned a small operating profit.
The consolidation of Cone's Granite Finishing operations into Carlisle that
began in 1997 disrupted manufacturing efficiencies to a greater extent than
anticipated, which materially adversely impacted results of the commission
finishing segment during 1998 and 1999.
During 1999, Cone ceased production of yarn-dyed products and liquidated
associated inventories. Adverse market conditions increased import penetration
of yarn-dyed products, and ineffective marketing and merchandising programs
resulted in significant operating losses. Following unsuccessful attempts to
make use of the Salisbury yarn-dyed plant profitably, Cone closed this facil-
ity in the second quarter of 1999.
In response to business conditions for apparel products and commission fin-
ishing, Cone implemented a comprehensive downsizing and reorganization program
in 1999, which included:
(1) Cone streamlined the product offering of the sportswear division in-
cluding the closing of the Salisbury plant which produced yarn-dyed
shirting fabrics. As a result of these decisions Cone recognized a
restructuring charge of $15.8 million in 1998 for the write-down of
the Salisbury plant and equipment and restructuring charges in 1999
for employee separation costs and shutdown expenses of $2.8 million
and $0.6 million, respectively. This initiative resulted in the re-
duction of approximately 625 employees.
(2) Cone downsized and reorganized the corporate administrative staff,
merged the denim and sportswear fabrics businesses into one unit and
reduced the manufacturing staff to simplify the management struc-
ture. These actions resulted in restructuring charges in 1999 of
$6.0 million and the elimination of approximately 250 employees. The
components of the restructuring charges include $4.6 million for em-
ployee separation costs, $0.7 million for write down of equipment
and $0.7 million for consulting and legal fees associated with the
downsizing. Consulting fees were primarily for review of the
workforce, design of severance packages and legal review to ensure
that Cone was in compliance with laws and regulations.
(3) Cone closed the Florence and Cliffside ring-spun yarn manufacturing
facilities, coupled with the outsourcing of yarn to reduce operating
costs and conserve capital that would have been required for equip-
ment modernization. This action resulted in 1999 restructuring
charges of $4.0 million comprised of $3.0 million for write-down of
plant and equipment and $1.0 million for employee separation costs.
Approximately 400 employees were terminated.
(4) Cone restructured the Carlisle plant reducing the workforce by ap-
proximately 25%, increased efficiencies and quality, and refocused
marketing activities. This action in the third quarter of 1999 re-
sulted in restructuring charges of $2.7 million; $1.3 million for
employee separation costs, $1.0 million for consulting and legal
fees and $0.4 million for write-down of plant and equipment. Approx-
imately 250 employees were terminated with the restructuring of the
Carlisle operation.
(5) Cone exited the chamois flannel shirting product line with the re-
structuring of Carlisle. No restructuring charges were recognized
related to this action; however, a charge of $2.0 million was real-
ized in the third quarter of 1999 related to additional inventory
reserves for chamois greige and finished goods.
Denim and Khaki. For 1999, denim and khaki segment sales were $448.5 mil-
lion, down 18% from 1998 sales of $545.0 million. Almost all of the sales
shortfall resulted from lower sales volume and prices for denims. Operating
income of the denim and khaki segment for 1999 was $17.6 million, or 3.9% of
sales, compared with $52.2 million, or 9.6%, for 1998. The reduced margin and
income resulted primarily from lower sales volume, lower sales prices, reduced
plant operating schedules and inventory losses. The inventory losses were com-
posed
17
of closeouts of certain khaki inventories as Cone refocused this product line
as part of its comprehensive restructuring, additional market and aging re-
serves and the exit of the chamois shirting product line. Operating income for
the segment includes the equity in earnings from the Parras Cone joint venture
plant.
Commission Finishing. Outside sales (total segment sales less intercompany
sales) of the commission finishing segment, which consists of the Carlisle and
Raytex plants, were $76.3 million for 1999, down 14% from $88.9 million for
1998. In 1999, Carlisle did not compete in certain product segments due to un-
satisfactory prices and the anticipated recovery in print demand not material-
izing. For 1999, the operating loss was $6.9 million, an improvement of 55%
from the loss of $15.1 million for 1998. As discussed earlier, during the
third quarter of 1999, Cone implemented a substantial restructuring, downsiz-
ing and refocusing of the Carlisle Finishing plant. Intercompany sales of this
segment were to the denim and khaki and decorative fabrics segments.
Decorative Fabrics. For 1999, sales of the decorative fabrics segment were
$72.9 million, up 29% from sales of $56.3 million for 1998. Cone Jacquard's
sales improved as capacity expanded and John Wolf decorative fabrics sales im-
proved. The decorative fabrics segment had earnings of $1.6 million for 1999
compared with a loss of $0.4 million for 1998. Results for 1999 were affected
negatively by higher than expected start-up costs related to capacity addi-
tions at the jacquard plant.
Yarn-Dyed Products. Cone ceased manufacturing yarn-dyed products in May
1999. For 1999, sales of yarn-dyed products were $17.1 million, down from
$33.7 million in 1998. For 1999, the yarn-dyed products segment had an operat-
ing loss of $5.6 million, as compared with a loss of $14.5 million for 1998.
Segment results improved from 1998 due to only a partial year of operation.
The 1999 results include inventory reserves of $1.3 million associated with
the closing of the Salisbury plant. In addition to the segment operating
losses in 1999 and 1998, $3.4 million and $15.8 million of the restructuring
charges in 1999 and 1998, respectively were attributable to the yarn-dyed seg-
ment. These restructuring costs were primarily for the writedown of property,
plant and equipment, as well as employee separation costs.
Selling and administrative expenses for 1999 were $48.7 million, as com-
pared with $57.4 million in 1998. In both years, selling and administrative
expenses were 7.9% of sales. The lower dollar amount of selling and adminis-
trative expenses in 1999 reflects the cost savings realized from restructuring
initiatives. Selling and administrative expenses for 1998 were restated to
conform to industry practices.
Interest expense for 1999 was $14.5 million, down from $14.9 million for
1998. Other expenses of $1.0 million recognized in 1999 were the ongoing ex-
pense of the new accounts receivable securitization program, which began on
September 1, 1999.
For 1999 and 1998, the income tax benefit as a percent of the taxable loss
was 35% and 40%, respectively. (See Note 11 to Notes to Consolidated Financial
Statements included in Part II, Item 8.)
Equity in earnings of Parras Cone, Cone's joint venture plant in Mexico,
was $1.7 million for 1999, as compared with $5.2 million for 1998. In the 1999
period, the plant had lower capacity utilization, higher cotton costs as a
percentage of sales, and additional marketing and management fees paid to the
joint venture partners.
For the year 1999, Cone had a net loss of $19.1 million, or $.87 per share
after preferred dividends. For comparison, in 1998, Cone had a net loss of
$6.7 million, or $.37 per share. However, both years included significant pre-
tax restructuring, related expenses and inventory write-downs connected with
the exit from businesses, all associated with a company-wide comprehensive re-
structuring program. Excluding these special charges, losses from product
lines exited in 1999 and the $1.0 million after-tax charge from the cumulative
effect of an accounting change related to capitalized start-up costs at Parras
Cone, Cone had a pro forma net loss of $.18 per share in 1999. For comparison,
in 1998 after adjusting for restructurings, exit inventory charges and losses
from product lines exited in 1999, Cone had a pro forma net income of $.37 per
share.
Liquidity and Capital Resources
Cone'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, a $73 million Revolving
Credit Facility ("Revolving Credit Facility") and a $60 million Receivables
Purchase and Servicing Agreement (the "Receivables Agreement") entered into on
September 1, 1999, and amended on April 24, 2000, with Cone Receivables II
LLC, Redwood Receivables Corporation ("Redwood"), and General Electric Capital
Corporation.
18
On January 28, 2000, Cone entered into a new $80 million Revolving Credit
Facility with its existing banks with Bank of America, N.A., as agent, ratably
secured, together with the Senior Note and the 8 1/8% Debentures, by substan-
tially all of Cone's assets. The Revolving Credit Facility was amended on July
14, 2000 to extend the maturity date from August 7, 2000 to August 7, 2001,
and to revise the covenants. The present Revolving Credit Facility commitment
has been reduced to $73 million, including letters of credit, as a result of
the August 7, 2000, Senior Note payment and the sale of the corporate head-
quarters building. Cone may, at its option, borrow from time to time under the
Revolving Credit Agreement at a Base Rate or a Eurodollar Rate, each based on
a formula set forth in the agreement. (See Note 9 to the Notes to Consolidated
Financial Statements included in Part II, Item 8.)
On April 24, 2000, Cone amended the Receivables Agreement increasing the
facility from $50 million to $60 million. In addition to increasing the com-
mitment, Cone modified other provisions of the Agreement to allow it to uti-
lize more fully the entire facility.
On July 14, 2000 Cone amended its Senior Note debt repayment schedule to
reduce the August 7, 2000, principal payment of $10.7 million to $2.9 million
with the resulting principal payment reduction of $7.8 million being rolled
forward into the August 7, 2001, payment. The interest rate on the Senior Note
was increased to 11.7% from 11.0%.
Financing agreements prohibit Cone from paying dividends on its Common
Stock.
The following is a summary of Cone's primary financing agreements as of De-
cember 31, 2000.
Facility Amount Interest/ Maturity
Financing Agreement Commitment Outstanding Discount Rate Date
- ------------------- ---------- ----------- ------------- ------------
($ Amounts in Millions)
8 1/8% Debenture.............. $100.0 $100.0 8.125% Mar 15, 2005
Senior Note................... 28.9 28.9 11.700 Aug 13, 2002
Revolving Credit.............. 73.0 55.0 11.250 Aug 7, 2001
Receivables Agreement......... 60.0 55.7 8.217 Sept 1, 2004
In third quarter of 2000, Cone terminated its prior lease arrangement for
its corporate headquarters and entered into a new operating lease arrangement
for less space at the same location. Cone expects to vacate the site at the
end of 2001, when its present lease expires, and move into substantially
smaller space, thus reducing its annual occupancy costs.
During 2000, Cone generated cash from operations of $35.7 million, as com-
pared with cash used in operations of $6.6 million in 1999. Included in the
cash provided by (used in) operating activities, working capital decreased by
$15.8 million in 2000 as compared with a $7.1 million increase in 1999. Other
sources of cash flow, excluding financing activities, were $3.2 million in
proceeds from sales of property and equipment for each of 2000 and 1999. Uses
of cash in 2000 included $10.0 million for capital expenditures, $6.7 million
of investments in and advances to the joint venture industrial park in Tamau-
lipas, Mexico, and $5.0 million for the redemption of preferred stock. For
2001 Cone expects capital spending to be approximately $14 million and invest-
ments and advances to the joint venture industrial park to be less than $2.0
million.
Cone believes that internally generated operating cash flow and funds
available under its Revolving Credit Facility will be sufficient to meet its
needs for working capital and capital spending permitted under the terms of
the Revolving Credit Facility until August 2001, when the Revolving Credit Fa-
cility expires. Liquidity is predicated on Cone's meeting its operating tar-
gets in 2001. By August 2001, Cone must either refinance or replace the re-
volving credit facility. Cone is in the process of exploring its alternatives
related to restructuring its balance sheet and financing its business. These
alternatives may include one or more of the following: (1) completion of an
exchange offer with the 8 1/8% bonds and the entering into of an asset based
lending transaction with revolver and term loan components; (2) the restruc-
turing or replacing of the revolving credit facility; and (3) funding from
nontraditional sources of capital. While management believes that it will be
able to obtain the appropriate financings, including those for its Mexican
initiatives, given the present capital markets there is no assurance that Cone
will be able to replace its revolving credit facility or otherwise obtain fi-
nancing on terms and conditions acceptable to Cone.
In connection with the restructuring of its balance sheet, on August 4,
2000, Cone filed with the SEC a registration statement relating to a proposed
offering to holders of its 8 1/8% Debentures due March 15, 2005,
19
to exchange its common stock for up to $15 million of the debentures, which
may be increased to $25 million at the option of Cone, and its new secured
subordinated debentures and common stock for up to $85 million of the deben-
tures. In addition, the exchange includes a consent to make certain changes in
the indenture governing the 8 1/8% Debentures and a release of the collateral
currently securing the debentures, which require acceptance of the exchange
offer by holders of more than 50% of the 8 1/8% Debentures. The principal pur-
pose of the proposed exchange offer is to enable Cone to revise its debt
structure in a manner that should provide more flexibility and should permit
Cone to obtain financing necessary for its proposed expansion into Mexico.
Cone expects to replace certain of its existing financing agreements with an
asset-based lending facility that will contain less restrictive covenants and
lower interest costs. This facility should enable Cone to obtain project fi-
nancing for a portion of its proposed Mexican expansion. While management be-
lieves that it will be able to obtain the asset-based facility and the Mexican
project financing if the exchange offer is successful, there is no assurance
that Cone will obtain financing on terms and conditions acceptable to Cone. On
December 28, 2000, Cone filed a second amendment to the August 4, 2000 filing
in further response to SEC comments regarding the original filing. The regis-
tration statement relating to the proposed exchange offer has not yet become
effective and, therefore, the exchange offer has not commenced.
On December 31, 2000, Cone's long-term capital structure consisted of
$182.1 million of long-term debt (including current maturities) and $126.4
million of stockholders' equity. For comparison, on January 2, 2000, Cone had
$198.8 million of long-term debt (including current maturities) and $157.5
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 59% at December 31, 2000, as compared with 56% at January 2, 2000.
Accounts receivable on December 31, 2000, were $40.1 million, as compared
with $47.5 million at January 2, 2000. Receivables, including those sold pur-
suant to the Receivables Purchase Agreement, represented 61 days of sales out-
standing at December 31, 2000, as compared with 65 days at January 2, 2000.
The reduction in days of sales outstanding reflects an improvement in the pay-
ment practices of certain customers.
Inventories on December 31, 2000, were $106.3 million, as compared with
$110.6 million at January 2, 2000. The decrease reflects a reduction in denim
finished goods inventories in excess of $12 million partially offset by in-
creased raw materials and greige fabric inventories.
OTHER MATTERS
Federal, state and local regulations relating to the workplace and the dis-
charge of materials into the environment continue to change and, consequently,
it is difficult to gauge the total future impact of such regulations on Cone.
Existing government regulations are not expected to cause a material change in
Cone's competitive position, operating results or planned capital expendi-
tures. Cone has an active environmental committee, which fosters protection of
the environment and compliance with laws.
Cone is a party to various legal claims and actions. Management believes
that none of these claims or actions, either individually or in the aggregate,
will have a material adverse effect on the financial condition and liquidity
of Cone. Due to Cone's recent operating results, management believes that the
effects of any litigation, no matter how small or insignificant, could be con-
sidered material to Cone's future results of operations. As of December 31,
2000, no significant litigation exists.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Cone's primary market risk exposures are cotton (commodity) price risk and
interest rate risk. At December 31, 2000, Cone had no material exchange rate
risk on any of its financial instruments. Cone had no financial instruments,
derivative financial instruments or derivative commodity instruments held for
trading purposes at December 31, 2000. Fair values for cotton derivatives and
long-term debt instruments were estimated with reference to market quotes at
year-end.
Commodity price risk primarily relates to cotton. Cone has an established
cotton purchasing program, administered in conformance with policies approved
by the Board of Directors, to ensure an uninterrupted supply of appropriate
quality and quantities of cotton, to cover committed and anticipated fabric
sales, and to manage margin risks associated with price fluctuations on antic-
ipated cotton purchases. Cone primarily uses forward contracts and, to a
lesser extent, futures and options contracts in its cotton purchasing program.
The following table provides information about Cone's cotton inventory op-
tions contracts that are sensitive to changes in cotton prices. The table pre-
sents the number of contracts, the weighted-average strike price and
20
the total dollar contract price by expected maturity dates. Contract amounts
are used to calculate the contractual payments and quantity of cotton under
option at December 31, 2000 and January 2, 2000.
Expected
Maturity Fair Maturity Fair
Date 2001 Value Date 2000 Value
--------- ------- ---------- --------
Cotton Options (Puts)
Contract Volume
(100 bales per contract)................ NA NA 396 NA
Weighted-Average
Strike Price (per lb.; 500 lbs. per bale
avg.)................................... NA NA $ .55 NA
Contract Amount.......................... NA NA $ 266,625 $572,660
Cotton Options (Calls)
Contract Volume
(100 bales per contract)................ 350 NA 1,611 NA
Weighted-Average
Strike Price (per lb.; 500 lbs. per bale
avg.)................................... $ .66 NA $ .53 NA
Contract Amount.......................... $183,250 $88,750 $1,165,630 $794,385
Cone's debt instruments are exposed to interest rate risk. The table pre-
sents principal cash flows and related weighted-average interest rates by ex-
pected maturity dates. Variable weighted-average interest rates for Cone's de-
bentures are based on the applicable forward LIBOR rates.
Expected Maturity Date
---------------------------- Fair
2001 2002 2003 2004 2005 Total Value
----- ----- ---- ---- ------ ------ -----
(dollars in millions)
Long-Term Debt
Fixed Rate
Senior Note........................ $18.5 $10.4 $ -- $ -- $ -- $ 28.9 $28.9
Average interest rate (%).......... 11.7 11.7 -- -- -- 11.7
Variable Rate
Revolver........................... $55.0 $ -- $ -- $ -- $ -- $ 55.0 $55.0
Average interest rate (%).......... 10.9 -- -- -- -- 10.9
Debentures (including an interest
rate swap)......................... $ -- $ -- $ -- $ -- $100.0 $100.0 $65.0
Average interest rate (%).......... 8.6 8.6 8.6 8.6 8.6 8.6
"Safe Harbor" Statement under Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Except for the historical information presented, the matters disclosed
in the foregoing discussion and analysis and other parts of this report
include forward-looking statements. These statements represent Cone's
current judgment on the future and are subject to risks and uncertain-
ties that could cause actual results to differ materially. Such factors
include, without limitation: (i) the demand for textile products, in-
cluding Cone's products, will vary with the U.S. and world business cy-
cles, imbalances between consumer demand and inventories of retailers
and manufacturers and changes in fashion trends, (ii) the highly com-
petitive nature of the textile industry and the possible effects of re-
duced import protection and free-trade initiatives, (iii) the unpre-
dictability of the cost and availability of cotton, Cone's principal
raw material, (iv) Cone's relationships with Levi Strauss as its major
customer, (v) Cone's ability to attract and maintain adequate capital
to fund operations and strategic initiatives, including its planned ex-
pansion in Mexico, (vi) successful completion of the Exchange Offer for
the 8 1/8% Debentures, (vii) increases in prevailing interest rates,
and (viii) Cone's inability to continue the cost savings associated
with its restructuring initiatives. For a further description of these
risks see Cone's 2000 Form 10-K, "Item 1. Business -- Competition, --
Raw Materials and -- Customers" and "Item 7. Management's Discussion
and Analysis of Results of Operations and Financial Condition -- Over-
view" of the Form 10-K. Other risks and uncertainties may be described
from time to time in Cone's other reports and filings with the Securi-
ties and Exchange Commission.
21
Statement of Responsibility for Financial Statements
The management of Cone Mills is responsible for the preparation and integ-
rity of Cone'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 ac-
curacy and consistency with the financial statements.
Cone maintains a system of internal control over financial reporting, which
is designed to provide reasonable assurance to Cone's management and Board of
Directors regarding the preparation of reliable published financial state-
ments. The system includes a code of conduct to foster a strong ethical cli-
mate, established policies and procedures, internal audit processes, and the
employment of qualified personnel. Cone has established formal criteria
against which the internal control system is measured and as of December 31,
2000, Cone was in compliance with these criteria.
The Board of Directors, assisted by its Audit Committee which is composed
entirely of directors who are not officers or employees of Cone, provides
oversight to the financial reporting process. The Committee meets regularly
with management, internal auditors and independent certified public accoun-
tants to review the scope and findings of audits, financial reporting issues
and the adequacy of the internal control system. To assure complete indepen-
dence, representatives of McGladrey & Pullen, LLP, Certified Public Accoun-
tants, approved by the shareholders, have free access to the Audit Committee
with or without the presence of management.
/s/ John L. Bakane /s/ Gary L. Smith
John L. Bakane Gary L. Smith
President and Executive Vice President and
Chief Executive Officer Chief Financial Officer
/s/ Christopher F. Conlon
Christopher F. Conlon
Controller
22
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
McGLADREY & PULLEN, LLP
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Cone Mills Corporation
Greensboro, North Carolina
We have audited the accompanying consolidated balance sheets of Cone Mills
Corporation and subsidiaries as of December 31, 2000 and January 2, 2000, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 2000.
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 ob-
tain 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 esti-
mates made by management, as well as evaluating the overall financial state-
ment presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Cone Mills
Corporation and subsidiaries as of December 31, 2000 and January 2, 2000, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2000 in conformity with generally ac-
cepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 1999
the Company changed its methods of accounting for start-up costs and costs of
computer software developed or obtained for internal use.
/s/ McGLADREY & PULLEN, LLP
McGladrey & Pullen, LLP
Greensboro, North Carolina
February 10, 2001
23
CONE MILLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2000, January 2, 2000 and January 3, 1999
2000 1999 1998
-------- -------- --------
(in thousands, except per
share data)
Net Sales....................................... $617,721 $616,321 $728,626
Cost of Goods Sold.............................. 550,301 568,197 661,795
-------- -------- --------
Gross Profit.................................... 67,420 48,124 66,831
Selling and Administrative...................... 49,302 48,651 57,362
Restructuring and Impairment of Assets.......... 38,500 16,017 17,124
-------- -------- --------
Loss from Operations............................ (20,382) (16,544) (7,655)
-------- -------- --------
Other Income (Expense)
Interest income................................ 1,392 1,529 2,777
Interest expense............................... (18,363) (14,450) (14,890)
Other expense.................................. (5,256) (993) --
-------- -------- --------
(22,227) (13,914) (12,113)
-------- -------- --------
Loss before Income Tax Benefit, Equity in
Earnings of Unconsolidated Affiliates and
Cumulative Effect of Accounting Change......... (42,609) (30,458) (19,768)
Income Tax Benefit.............................. (14,624) (10,740) (7,907)
-------- -------- --------
Loss before Equity in Earnings of Unconsolidated
Affiliates and Cumulative Effect of Accounting
Change......................................... (27,985) (19,718) (11,861)
Equity in Earnings of Unconsolidated
Affiliates..................................... 2,716 1,684 5,210
-------- -------- --------
Loss before Cumulative Effect of Accounting
Change......................................... (25,269) (18,034) (6,651)
Cumulative Effect of Accounting Change.......... -- (1,038) --
-------- -------- --------
Net Loss........................................ $(25,269) $(19,072) $ (6,651)
======== ======== ========
Loss Available to Common Stockholders
Loss before Cumulative Effect of Accounting
Change........................................ $(29,122) $(21,081) $ (9,564)
Cumulative Effect of Accounting Change......... -- (1,038) --
-------- -------- --------
Net Loss....................................... $(29,122) $(22,119) $ (9,564)
======== ======== ========
Loss Per Share -- Basic and Diluted
Loss before Cumulative Effect of Accounting
Change........................................ $ (1.14) $ (0.83) $ (0.37)
Cumulative Effect of Accounting Change......... -- (0.04) --
-------- -------- --------
Net Loss....................................... $ (1.14) $ (0.87) $ (0.37)
======== ======== ========
Weighted-Average Common Shares Outstanding
Basic.......................................... 25,481 25,397 25,856
======== ======== ========
Diluted........................................ 25,481 25,397 25,856
======== ======== ========
See Notes to Consolidated Financial Statements.
24
CONE MILLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and January 2, 2000
2000 1999
-------- --------
(in thousands,
except share and
par value data)
ASSETS
Current Assets
Cash..................................................... $ 2,876 $ 1,267
Accounts receivable, less allowances of $5,050........... 40,091 47,531
Inventories.............................................. 106,308 110,613
Other current assets..................................... 6,270 6,149
-------- --------
Total Current Assets.................................... 155,545 165,560
Investments in and Advances to Unconsolidated Affiliates.. 56,265 46,815
Other Assets.............................................. 18,505 38,964
Property, Plant and Equipment............................. 192,901 221,458
-------- --------
$423,216 $472,797
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt..................... $ 73,495 $ 79,714
Accounts payable......................................... 37,420 26,849
Sundry accounts payable and accrued liabilities.......... 33,282 33,866
Deferred income taxes.................................... 9,434 9,894
-------- --------
Total Current Liabilities............................... 153,631 150,323
Long-Term Debt............................................ 108,582 119,115
Deferred Income Taxes..................................... 20,338 33,916
Other Liabilities......................................... 14,246 11,958
Stockholders' Equity
Class A preferred stock -- $100 par value; authorized
1,500,000 shares; issued and outstanding 335,340 shares;
1999, 355,635 shares.................................... 33,534 35,564
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 25,522,211 shares; 1999,
25,479,717 shares....................................... 2,552 2,548
Capital in excess of par................................. 57,630 57,435
Retained earnings........................................ 42,512 70,776
Deferred compensation -- restricted stock................ (40) (321)
Accumulated other comprehensive loss..................... (9,769) (8,517)
-------- --------
Total Stockholders' Equity.............................. 126,419 157,485
-------- --------
$423,216 $472,797
======== ========
See Notes to Consolidated Financial Statements.
25
CONE MILLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2000, January 2, 2000 and January 3, 1999
Class A Deferred Accumulated
Preferred Stock Common Stock Capital in Compensation Other
---------------- ------------------ Excess Retained Restricted Comprehensive
Shares Amount Shares Amount of Par Earnings Stock Loss Total
------- ------- ---------- ------ ---------- -------- ------------ ------------- --------
(in thousands, except share data)
Balance, December 28,
1997................... 383,948 $38,395 26,201,633 $2,620 $62,300 $102,449 $(740) $(8,504) $196,520
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) -- -- (2,999)
Common Stock............
Purchase of common
shares................ -- -- (768,400) (77) (5,028) -- -- -- (5,105)
Restricted stock
compensation.......... -- -- -- -- -- -- 153 -- 153
Cancellation of
restricted shares..... -- -- (1,000) -- (8) -- 8 -- --
------- ------- ---------- ------ ------- -------- ----- ------- --------
Balance, January 3,
1999................... 383,948 $38,395 25,432,233 $2,543 $57,264 $ 92,799 $(579) $(8,498) $181,924
------- ------- ---------- ------ ------- -------- ----- ------- --------
Comprehensive Loss......
Net loss............... -- -- -- -- -- (19,072) -- -- (19,072)
Currency translation
adjustment............ -- -- -- -- -- -- -- (19) (19)
--------
Total comprehensive
loss.................. (19,091)
--------
Class A Preferred
Stock..................
Shares redeemed........ (56,281) (5,628) -- -- -- -- -- -- (5,628)
Cash dividends paid.... -- -- -- -- -- (154) -- -- (154)
Stock dividend......... 27,968 2,797 -- -- -- (2,797) -- -- --
Common Stock............
Purchase of common
shares................ -- -- (6,916) -- (45) -- -- -- (45)
Options exercised...... -- -- 62,400 6 320 -- -- -- 326
Issuance of restricted
shares................ -- -- 10,000 1 47 -- (48) -- --
Restricted stock
compensation.......... -- -- -- -- -- -- 153 -- 153
Cancellation of
restricted shares..... -- -- (18,000) (2) (151) -- 153 -- --
------- ------- ---------- ------ ------- -------- ----- ------- --------
Balance, January 2,
2000................... 355,635 $35,564 25,479,717 $2,548 $57,435 $ 70,776 $(321) $(8,517) $157,485
------- ------- ---------- ------ ------- -------- ----- ------- --------
Comprehensive Loss......
Net loss............... -- -- -- -- -- (25,269) -- -- (25,269)
Minimum pension
liability adjustment.. -- -- -- -- -- -- -- (1,252) (1,252)
--------
Total comprehensive
loss.................. (26,521)
--------
Class A Preferred
Stock..................
Shares redeemed........ (48,746) (4,875) -- -- -- (88) -- -- (4,963)
Cash dividends paid.... -- -- -- -- -- (62) -- -- (62)
Stock dividend......... 28,451 2,845 -- -- -- (2,84