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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended January 2, 2000
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________to____________
Commission File Number 1-3634
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CONE MILLS CORPORATION
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(exact name of registrant as specified in its charter)
North Carolina 56-0367025
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3101 North Elm Street, Greensboro, N.C. 27408
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 336-379-6220
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, $ .10 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of voting stock held by nonaffiliates of the registrant
as of February 29, 2000 (based on the closing sale price of $3 15/16 of the
registrant's voting stock, as reported on the New York Stock Exchange Composite
Tape on such date) was approximately: $97,809,221.
Number of shares of common stock outstanding as of February 29, 2000: 25,479,717
shares.
Documents incorporated by reference: Proxy Statement for Annual Meeting to be
held May 9, 2000, Part III, Items 10, 11, 12 and 13 of this report.
Index to Exhibits - Pages 60-71
PART I
ITEM 1. BUSINESS
THE COMPANY
OVERVIEW
Founded in 1891 Cone Mills Corporation (the "Company" or "Cone"), incorporated
and headquartered in North Carolina, is the world's largest producer of denim
fabrics and the largest commission printer of home furnishings in North America.
The Company competes domestically and internationally on the basis of styling
and product development, management experience, versatility and size of
manufacturing facilities, competitive prices and the Cone name and reputation.
The Company has a 50% interest in Parras Cone de Mexico, S.A., ("Parras Cone"),
a denim manufacturing facility in Mexico, and an alliance with the Ashima Group
of India.
The Company operates in three principal business segments: (1) Denim and Khaki,
(2) Commission Finishing and (3) Decorative Fabrics. In 1999, Cone substantially
exited the Yarn-Dyed Products segment as part of its comprehensive restructuring
program. The Company seeks growth of its products through expansion into new
geographic areas and markets, product development and investment in value-added
technology such as CAD/CAM. Capital expenditures for the last five years have
totaled approximately $180 million, and the Company expects to spend
approximately $12 million in 2000 for domestic capital projects.
The Company is engaged in denim production in Mexico through a joint venture
facility with Compania Industrial de Parras, S.A., ("CIPSA"). This facility,
Parras Cone, has been producing basic denims and yarn since late 1995. Under a
marketing agreement with CIPSA, Cone markets and distributes 100% of the denim
production of Parras Cone.
The Company has an alliance with the Ashima Group of India. This alliance
consists of an equity investment in Ashima Ltd., technical service agreements
and a marketing agreement whereby Cone markets Ashima denim and sportswear
products outside the Indian sub-continent. See "Item 7. Management's Discussion
and Analysis of Results of Operations and Financial Condition, Long-Term
Strategic Initiatives."
In 1999, the Company implemented a comprehensive reorganization and downsizing
initiative. The initiative consisted of four primary components: 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 alliance
and closing the manufacturing facility and 4) restructuring of the Carlisle
operation including the decision to exit the piece-dyed shirting product line.
The Company reduced employment by approximately 1,900 employees during 1999 as a
result of these initiatives. See "Item 7. Management's Discussion and Analysis
of Results of Operations and Financial Condition, Long-Term Strategic
Initiatives" and "Item 8. Financial Statements and Supplementary Data," Note 21
of the Notes to Consolidated Financial Statements.
BUSINESS SEGMENTS
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Information concerning operating segments for the Company's 1999, 1998 and 1997
fiscal years are incorporated by reference. See "Item 7. Management's Discussion
and Analysis of Results of Operations and Financial Condition, Long-Term
Strategic Initiatives" and "Item 8. Financial Statement and Supplementary Data,
"Notes 18 and 21 of the Notes to Consolidated Financial Statements.
DENIM & KHAKI
Retail sales of denim and khaki apparel products grew throughout most of the
1990s. The trend that began with casual Fridays in the 1990s has matured into a
key market driver for the apparel industry in this decade. In 1999, retail sales
of men's casual pants, primarily khakis, experienced double-digit increases;
however, denim apparel experienced marginal sales declines. The retail sales
decline in denim garments was primarily due to a fashion shift to other fabrics
for casual pants. In addition to casual lifestyles driving the growth of denim
and khakis, other factors that the Company 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 such as Levi, Dockers, Wrangler, The Gap, Old
Navy and Arizona which continue to create fashion interest for consumers.
The Company's domestic apparel fabrics markets have been affected by changing
demographics. Baby boomers as primary denim consumers are being replaced by
their children ("echo-boomers"). The echo-boomers account for the largest jeans
consumption segment of the U.S. population. Product trends, brand preferences
and garment silhouettes have evolved to meet the fashion demands of the
echo-boomers. Preferences by the echo-boomers for more intricate garment
styling, such as baggy jeans and carpenters pants as well as the favoring of new
brands, has allowed imports to gain market share. As the baby boom generation
has matured, product trends have evolved to higher quality products with more
diverse styling. These trends have resulted in a bifurcated market as
echo-boomers are focused on fashion silhouettes and specialized fabric
treatments while baby boomers desire better fabric quality and styling. The
Company attempts to compete in these markets by being a leader in product
development while maintaining high quality standards. Denim apparel is expected
to resume its growth at retail in 2000 as the U.S. population continues to grow,
the echo-boomers return to basic five-pocket jeans and the consumer wardrobe
becomes saturated with khaki products.
At the retail level, mass market and specialty retailers have gained market
share from department stores. This change in distribution has created the need
to differentiate marketing and manufacturing to provide the right product to
each distribution channel. The Company uses its Parras Cone facility to target
the mass market channel of distribution while its U.S. facilities are more
focused on specialty retailers and department store channels of distribution.
Internationally, consumption of denims has plateaued in industrialized
countries, with Europe showing a slight decline in recent years as khakis and
other fabrics have gained market share. Recently the Company has seen evidence
that denim demand in Europe is beginning to grow 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 populations expand.
However, the growth in denim demand has been tempered by economic weakness 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,
the Company's sales
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growth has been impacted by increased global supply primarily in countries with
lower labor costs.
The Company'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
upper-end market, where styling and quality generally command premium fabric
prices. Fabric styling is supported by the Company's product development
specialists. Due to the nature of the manufacturing process, denim fabric
contains variations in color that give it a distinctive appearance. After
weaving, denim fabrics and garments are processed further in finishing
operations that produce different textures and other altered physical
properties. In the dyeing and finishing of khaki fabrics many different colors
and finishes are produced including the Company's fade resistant Deepdown(R)
fabric. During these processes, the Company's product development specialists
generally work in collaboration with customers to assure that fabrics meet
customer requirements and can be manufactured efficiently. This creates a strong
working relationship that allows Cone to react quickly to its customers' rapidly
changing needs.
Although the markets and end uses for denim are very diverse, the Company
categorizes the market into heavyweight denims and specialty-weight denims.
Heavyweight denim is used primarily in jeans and is by far the largest segment
of the denim market. Within the heavyweight market, the Company further
classifies its denims as "value-added" and "basic." Value-added denims are
distinguished by fabric construction, yarn variations, finishes and new product
introductions. Basic denims are less differentiated by styling with competition
being primarily on the basis of price, quality and service.
Cone's value-added denims are sold principally to brand name apparel companies,
specialty retailers and brand name garment producers. Cone's basic denims are
used primarily in garments sold through retail chains, department stores and
catalogs. Although most of the Company's basic denims are designed for the
upscale segment of these markets, the Company also produces high-quality basic
heavyweight blue denim, primarily at Parras Cone, to service the mass market
distribution channel. Sales of basic denims constituted approximately one-fourth
of the Company's total denim sales in 1999.
The Company's largest denim customer is Levi Strauss, whose 501(R) family of
jeans are produced solely from the Company's proprietary fabrics. Other
customers include V.F. Corporation (Wrangler and Lee), The Gap, Old Navy, Calvin
Klein, Aalfs, Arizona, P.L. Industries and Hilfiger. The Company's international
customers include Levi International, Joker Jeans and Big Star in Europe, Edwin
in Japan and VF Corporation (Wrangler and Lee) in South America.
Specialty-weight denims include a variety of woven constructions, colors and
weights and are used primarily in fashion garment silhouettes and women and
children's wear. These fabrics constitute a growing portion of the denim market
as recent growth in denim has occurred in fashion silhouettes such as baggy
jeans and carpenter pants at the expense of basic five-pocket jeans. These
denims tend to establish market trends because of their use in higher fashion
garments.
Cone also serves niche markets for piece-dyed fabrics with its ProSpin(R) fabric
which provides superior wrinkle resistance properties based upon yarn formation
technologies.
Manufacturing. The Company's denim facilities are modern, flexible, vertically
integrated and encompass all manufacturing processes necessary to convert raw
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fiber into finished fabrics. The Company's denim weaving facilities have all
re-loomed in the nineties. The Company's U.S. dyeing and finishing facilities
include a wide range of technologies, with seven indigo long-chain dyeing
machines, beam dyeing, continuous overdye machinery and raw cotton dyeing
equipment.
In addition to its U.S. facilities, the Company has a 50% equity interest in
Parras Cone, a low cost producer of high-quality basic denims. Under a marketing
agreement with its partner, Cone markets and distributes 100% of the fabric
production of Parras Cone.
Cone is recognized internationally as a quality leader with its weaving plants
being certified under the ISO 9002 process.
Product and process development is supported by manufacturing development
groups, which have specialists located in each facility. These groups work with
the Company's product development specialists and its customers' designers to
produce new products for the marketplace. The Company uses on-line
computer-aided design systems to increase styling effectiveness.
Competition. The denim and khaki fabrics business is highly competitive. Primary
competitive factors include price, product styling and differentiation, customer
service, quality and flexibility, with the significance of each factor dependent
upon the particular needs of the customer and the product involved.
No single company dominates the industry and domestic and foreign competitors
range from large, integrated enterprises to small niche companies. Competition
is in the form of both domestic and foreign piece goods and in the form of
imported apparel garments from Mexico, Asia and other areas. The migration of
garment manufacturing facilities to Mexico and Caribbean countries, additional
worldwide capacity, more aggressive pricing from domestic companies and the
proliferation of newly styled fabrics competing for fashion acceptance have been
factors affecting the Company's business environment. Denim jeans have an image
of being uniquely American products. The Company's competitiveness with
producers from other countries is influenced by tariffs and transportation
costs. Any failure of the Company to compete effectively in this environment or
to keep pace with changing markets could have a material adverse effect on the
Company's results of operations and financial position.
In recent years due to the competitiveness of the apparel business and the
criticality of low wage costs for garment producers the Company has explored a
number of international initiatives. Its objectives for expansion into Mexico
included seeking access to the Mexican distribution system to sell the Company's
products and access to lower cost cut-and-sew facilities in order to increase
market share with private label customers and large branded customers migrating
to Mexico. The Company is also seeking to gain production cost advantages while
benefiting from its technological expertise. As the garment industry has
migrated to Mexico from the U.S. the Company has benefited from Parras Cone's
cost structure and location, and Cone's U.S. infrastructure.
In 1999, the Company announced plans to continue its denim manufacturing
expansion in Mexico. The Company 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 three 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, 2) 100% owned basic ring-spun, value-added denim plant
with
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an initial capacity of 20 million yards expandable to 40 million yards and 3) a
51/49 joint venture to build and operate a yarn facility to support the denim
plant and the Mexican yarn market. The Company expects to fund its investment in
the industrial park of approximately $9 million in 2000. Capital requirements
for the denim and yarn facility will be in 2001. The funds required for the
denim and yarn facilities will require debt financing, which the Company has not
arranged at this date. There is no assurance that the Company will be able to
obtain financing on terms and conditions acceptable to the Company. See "Item 7.
Management's Discussion and Analysis of Results of Operations and Financial
Condition, Long-Term Strategic Initiatives."
In 1998, the Company formed an alliance with the Ashima Group of India that
allows Cone to market Ashima denim and sportswear products worldwide outside the
Indian sub-continent. This alliance will allow Cone to provide products that
cannot be competitively produced in the U.S. to its customers on a worldwide
basis.
The Company 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 the Company's denim and khaki products and the level of
the Company's sales fluctuate moderately during the year. There are three retail
selling seasons: spring, fall (back-to-school) and the holiday season. The
Company's sales for a particular selling season generally begin six months in
advance of that season.
Marketing and Sales. The Company's marketing focus is to serve brand name
apparel customers through the development of products that are recognized in the
marketplace for their distinctive quality, durability and styling. Styles of the
Company's denim and other fabrics vary in color, finish, weight and
construction, depending upon fashion trends and the needs of the specific
customer. The Company's product development specialists monitor fashion trends
throughout the 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, the Company maintains an international focus with a long
history of distributing its products internationally. In 1999 the Company
exported approximately 37% of its denim sales.
The textile group is organized and managed by its major product lines of denim,
khaki and other piece-dyed products and products produced by Ashima. The
marketing group is headquartered in Greensboro, North Carolina with sales
offices in New York, San Francisco, Los Angeles, Dallas and Brussels to provide
a more direct working relationship with the customer. In addition, the Company
has sales agents in Europe, Japan, Hong Kong, Africa, and throughout Central and
South America, and it maintains support services in trade financing, traffic and
transportation in order to support its international presence. The Company's
strategy is to service its international customers with the same degree of
commitment to quality, service and fabric development as its domestic customers.
The Company's denim and khaki exports were approximately $154 million, $177
million and $176 million in 1999, 1998 and 1997, respectively.
Raw Materials. Cotton is the primary raw material for the Company's fabric
manufacturing operations, its purchased yarn and greige goods (fabrics that have
not been dyed or finished). United States agricultural programs affect the cost
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and supply of cotton in the U.S., and the policies of foreign governments have
an effect on worldwide prices and supplies as well. The U.S. Department of
Agriculture provides several programs to keep the effective price to cotton
purchasers competitive with world levels while protecting the grower. Step 2 of
the Federal Agriculture Improvement and Reform Act provided a formula for
payments to users of domestically produced cotton when domestic cotton prices
exceeded world prices for a period of time. Funds for these payments were
depleted in December 1998. The Step 2 program received additional funding in
October 1999 and the Company expects to receive rebates throughout 2000.
Although management believes that U.S. companies will continue to be able to
acquire adequate cotton supplies at prices competitive with offshore
manufacturers, there can be no assurance that these results will always occur.
To the extent that effective U.S. cotton prices exceed world prices, the
Company's competitiveness may be materially adversely affected, as the Company
cannot always fully pass increased cotton costs on to its customers. See "Item
7. Management's Discussion and Analysis of Results of Operations and Financial
Condition."
Since cotton is an agricultural product, its supply and quality are subject to
the forces of nature. Although the Company has always been able to acquire
sufficient supplies of cotton for its operations in the past, any shortage in
the cotton supply by reason of weather, disease or other factors could
materially adversely affect the Company's operations. See "Item 7. Management's
Discussion and Analysis of Results of Operations and Financial Condition."
The Company has an established cotton purchasing program, administered in
conformance with policies approved by the Board of Directors, to ensure an
uninterrupted supply of appropriate quality and quantities of cotton, to hedge
committed and anticipated fabric sales and to manage margin risks associated
with price fluctuations on anticipated cotton purchases. The Company primarily
uses forward purchase contracts and, to a lesser extent, futures and options
contracts. Management believes that its cotton purchasing program has resulted
in lower overall cotton prices than if cotton were purchased solely on a spot
market basis or by solely matching cotton purchases with product sales. Since
prices for forward purchase contracts are sometimes fixed in advance of
shipment, the Company may benefit from its fixed price purchases in cotton if
prices thereafter rise, or fail to benefit if prices subsequently fall. There
can be no assurance the forward purchase contracts and hedging transactions will
not result in higher cotton costs to the Company or will protect the Company
from price fluctuations.
Cone also purchases yarn, greige goods and dyes and chemicals. Based on the
Company's strategy to limit its investment in yarn manufacturing in the future,
it has formed alliances with yarn manufacturers to ensure adequate supplies at
competitive prices. Pursuant to its decision to outsource an increased portion
of its yarn manufacturing, the Company entered into a supply agreement with
Parkdale America, LLC, during 1999. Additional yarn and other materials used by
the Company have normally been available in adequate supplies through a number
of suppliers.
Trade. The North American Free Trade Agreement ("NAFTA"), which became effective
on January 1, 1994, has created a free-trade zone among Canada, Mexico and the
U.S. NAFTA contains safeguards 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 will phase 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
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largest exporter of apparel to the U.S. NAFTA and the Caribbean Basin Initiative
program, through favored quota and tariff treatment, have accelerated the shift
in production of garments to sources in this hemisphere, indirectly benefiting
U.S. textile producers and the Company. The Company's Mexican joint venture,
Parras Cone, benefits from its access to U.S. markets and has benefited from
NAFTA.
Legislation has been proposed in the U.S. Congress that would increase the trade
benefits currently available to the countries in the Caribbean to the point
where they would be roughly equivalent to those applicable to Mexico under
NAFTA. Legislation has also been introduced relating to trade between the U.S.
and Sub-Saharan African nations which, if enacted, could have a negative impact
on the Company. Both pieces of legislation have been proposed in previous
sessions but have not become law. These bills in various forms continue to be
considered in 2000, and the Company cannot predict the ultimate impact, if any,
of the legislation.
The impact of multilateral agreements intended to liberalize global trade could
also significantly affect U.S. textile producers and the Company. The World
Trade Organization ("WTO") is overseeing the phaseout of textile and apparel
quotas over a ten-year period through 2004. Tariffs on textile/apparel products
are being reduced (but not eliminated) over the same ten-year period. In
addition, the Clinton Administration recently announced an agreement with China
(which is subject to Congressional approval) to facilitate its admission to the
WTO.
In response, the Company has focused its operations on the manufacture of
fabrics for use in garments that are less vulnerable to import penetration.
Management believes the location of the Company's U.S. manufacturing facilities,
its 50% interest in the Parras Cone plant in Mexico, its alliance with the
Ashima Group of India and its emphasis on shortening production and delivery
times allow Cone to respond more quickly than foreign producers to changing
fashion trends and to its domestic customers' demands for precise production
schedules and rapid delivery. The Company has invested in technological and
process improvements to meet demand for quality and styling. Its emphasis on
customer service is supported by its just-in-time and quick response programs
and by electronic data interchange (EDI) with customers. These efforts have
improved communication, planning and processing time in manufacturing.
In instances where the Company finds itself uncompetitive with imports, the
Company is pursuing initiatives 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 AND DECORATIVE FABRICS
Commission Finishinq. The commission finishing segment, consisting of the
Company's Carlisle and Raytex plants, is the largest commission printer of
decorative fabrics in the U.S. and provides custom printing and plainshade
dyeing services to leading home furnishings stylists and distributors. As
commission printers, Carlisle and Raytex print fabrics owned by customers on a
fee basis. Converters purchase unfinished fabrics from weaving mills, use
outside sources such as Carlisle to dye the fabrics and print their designs and
then market the finished fabrics to home furnishings and apparel manufacturers.
The home furnishings fabrics processed at its Carlisle facility are generally
used for upholstery and drapery prints. The Company also provides fabric
printing
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and plainshade dyeing services to converters of fashion apparel fabrics. Cone's
khaki product line is primarily dyed and finished at the Carlisle facility.
The Carlisle plant is a modern, one-million square foot facility specializing in
rotary screen printing. In recent years, the Company has invested heavily in
computerized color-mixing systems and automated process controls in order to
support its competitive strategy of focusing on quality and service. Customers
for Carlisle's home furnishings printing services include P. Kaufman, Springs
Industries, Waverly Division of F. Schumacher & Co. and Covington.
The Raytex plant is a modern, 266,000 square foot facility specializing in wide
rotary screen printing. In 1996, a new preparation range was installed providing
additional product capabilities. Raytex is one of the largest wide-fabric
commission printers in the United States. Customers for Raytex include Springs
Industries, Tietex Ticking, Croscill, Burlington Industries and Revman
Industries.
Cone's commission finishing marketing headquarters are located in New York City.
Marketing efforts of the New York sales staff are augmented by close working
relationships between Carlisle and Raytex's production and technical staffs and
customers' designers and stylists. The Company's commission finishing operations
also maintain a customer service center that utilizes electronic data
interchange (EDI) with major customers.
Consumer fashion preference is based upon coloration, texture and value. As with
all home furnishing fabrics, there is fashion risk that affects consumer
preference. In recent years, home furnishing prints have been out of fashion
favor as compared to other home furnishing fabrics.
In 1999, the Company restructured the Carlisle operation to reduce cost, improve
quality and more aggressively position itself in the marketplace. The reductions
in cost were substantially complete by the end of 1999 with quality savings and
market opportunities expected to be realized in 2000.
Decorative Fabrics. The Company's decorative fabrics segment includes John Wolf
and Cone Jacquards. John Wolf is a "converter" of printed, jacquard and solid
woven fabrics for upholstery, draperies and bedspreads. A converter designs and
distributes fabrics, which are manufactured and printed for the converter by
others. The decorative fabrics' lines are printed primarily at the Carlisle
plant under the names "John Wolf Decorative Fabrics" and "David and Dash." John
Wolf customers include Corinthian Furniture Inc., Arden Companies, Bauhaus USA
Inc. and Burlington House Fabrics.
Cone Jacquards, a modern 142,000 square foot facility with wide weaving
machines, produces broadloom jacquard fabrics for furniture manufacturers,
fabric distributors, retailers, converters and specialty products manufacturers.
Customers for Cone Jacquards include Gum Tree Fabrics, Inc., Valley Forge
Fabrics, Inc., Fieldcrest Cannon and Westpoint Stevens, Inc.
Decorative fabrics are marketed domestically and internationally through the
segment's sales staff and sales agents. The sales staff and sales agents handle
sales to large customers such as hotels, institutions and furniture
manufacturers, as well as jobbers, who resell to decorators, fabric retailers
and certain smaller quantity users. International sales and sales to other
smaller customers are made primarily through agents.
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In 1999 the Company consolidated the sales agents for John Wolf and Cone
Jacquards and began the integration of product lines to present a coordinated
line to the marketplace.
Competition. The finishing and decorative fabrics business is highly competitive
and the Company competes primarily on the basis of quality and service. The
commission finishing segment competes directly with several large commission
printers as well as a number of smaller competitors. The decorative fabrics
segment competes with a large number of domestic and foreign suppliers of
decorative fabrics and jacquard woven fabrics.
Seasonality. Demand for the Company's finishing services and decorative fabrics
and the level of the Company's sales fluctuate moderately during the year with
January being a seasonally slow period.
YARN-DYED PRODUCTS
The Company's yarn-dyed products consisted primarily of flannel shirting
fabrics. Due to market conditions, manufacturing cost competitiveness and
competition the Company ceased production of fabrics for the yarn-dyed segment
at its facilities in May 1999 and liquidated associated inventories by year-end
1999.
Manufacturinq. The Company's Salisbury facility provided the dyeing and weaving
production for the yarn-dyed product line. Due to extensive losses in this
product line in recent years and the cost structure of the Salisbury plant, the
Company closed the facility in 1999. The Company plans to continue to be in the
yarn-dyed business on a limited basis primarily through products produced by
Ashima.
The Company uses on-line computer-aided design systems to increase styling
effectiveness and will electronically link with Ashima in the development of
products and patterns.
Competition. The yarn-dyed products business is highly competitive with the
primary form of competition being imported garments. As styling became more
complex with finer yarn counts, labor intensity of the product increased cost
advantages for Asian producers resulting in the Company becoming uncompetitive.
As discussed previously, the Company formed an alliance with the Ashima Group of
India that allows Cone to market Ashima products worldwide outside the Indian
sub-continent. Ashima produces an extensive line of yarn-dyed products and the
Company will provide Ashima with its technical assistance and styling to enhance
Ashima's product offerings in this area. This alliance should provide Cone's
customers with cost competitive products.
Seasonality. Demand for the Company's yarn-dyed products was very seasonal due
to the fact that the primary product is heavyweight flannels. As the Company
moves forward in its alliance with Ashima the Company should have products for
both the spring and fall selling seasons.
OTHER SEGMENT
The "Other" segment consists of synthetic fabrics, which were sold in January
1997, real estate operations, which were sold in May 1997, and other
miscellaneous ancillary operations.
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TRADEMARKS, COPYRIGHTS AND PATENTS
The Company owns several registered trademarks containing the "Cone" name and
various designs. In addition, the Company holds various other trademarks, trade
names, copyrights and patents used in connection with its business and products,
both domestically and internationally. The Company believes that the name
recognition of Cone and its reputation for quality, service and product
development have value in both domestic and international markets.
CUSTOMERS
The Company has one customer, Levi Strauss, which accounts for more than 10% of
net sales. Sales to this customer accounted for approximately 31%, 32% and 37%
of sales in 1999, 1998 and 1997, respectively. Levi is transitioning from owned
facilities to a greater reliance upon contractors. The Company cannot predict
the long-term impact on sales, if any, of this change in Levi's manufacturing
strategy. The loss of Levi as a customer, or a significant reduction in its
purchases from the Company, would have a material adverse effect on the
Company's financial position and results of operations.
Levi has been a customer of the Company since 1915 and a close, cooperative
supplier/customer relationship has evolved through the development of the
Company's proprietary fabrics for use in Levi's 501(R) family of jeans. In
addition to supplying fabrics for Levi's 501(R) family of jeans, the Company
sells other denim fabrics to Levi. Because the Company is Levi's major denim
supplier, Levi initiated discussions with the Company in 1989 concerning ways to
assure the continuity of this relationship. As a result of these discussions,
Cone and Levi entered into an exclusive Supply Agreement as of March 30, 1992,
which confirms that Levi will continue to use only Cone's proprietary denim
fabrics in manufacturing Levi's 501(R) family of jeans and that Cone will
continue to supply such fabrics solely to Levi. The volume of purchases by Levi
and the prices charged by Cone will continue to be subject to customary
negotiations between the parties.
The Supply Agreement expires in March of 2005 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 Agreement at any time
upon 30 days' written notice and either party may terminate the Supply Agreement
in the event of the other party's insolvency, bankruptcy or occurrence of a
similar event.
BACKLOG
The Company's order backlog was approximately $85 million at January 30, 2000,
as compared to approximately $125 million at January 31, 1999. In periods of
declining fabric prices, customers typically place orders closer to the date of
their expected needs. In 1999, the order backlog for the yarn-dyed shirtings
product line was $15 million. As discussed earlier, the Company exited this
product line in 1999. The Company's order backlog pertains primarily to the
denim and khaki segment and jacquards. Denim and Khaki accounted for 81% of the
order backlog at January 30, 2000.
Physical deliveries for accepted fabric orders in the apparel industry vary in
that some products are ordered for immediate delivery only, while others are
11
ordered for delivery several months in the future. In addition, the Company has
an ongoing proprietary program for which orders are issued only for nearby
delivery. Therefore, orders on hand are not necessarily indicative of total
future revenues. It is expected that substantially all of the orders outstanding
at January 30, 2000, will be filled within the first four months of 2000.
RESEARCH AND DEVELOPMENT
The research and development activities of the Company are directed primarily
toward improving the quality, styling and performance of its apparel fabrics and
other products and services. The Company also is engaged in the development of
computer-aided design and manufacturing systems and other methods of improving
the interaction between the Company's stylists and its customers. These
activities are conducted at various facilities, and expenses related to these
activities are an immaterial portion of the Company's overall operating costs.
GOVERNMENTAL REGULATION
Federal, state and local regulations relating to the workplace and the discharge
of materials into the environment are continually changing; therefore, it is
difficult to gauge the total future impact of such regulations on the Company.
However, existing government regulations are not expected to have a material
effect on the Company's financial position, operating results or planned capital
expenditures. The Company currently has an active environmental protection
committee and an active workplace safety organization.
EMPLOYEES
At January 31, 2000, the Company employed approximately 4,300 persons, of whom
approximately 800 were salaried and approximately 3,500 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 compensation,
the Company believes that approximately 450 of its employees are dues-paying
union members. The Company has not suffered any major disruptions in its
operations from strikes or similar events for more than a decade and considers
its relationship with its employees to be satisfactory.
ITEM 2. PROPERTY
Cone's U.S. manufacturing facilities consist of seven plants, five located in
North Carolina and two in South Carolina, with approximately 4.5 million square
feet of floor space. The denim and khaki segment operates four plants, the
commission finishing segment operates two plants and the decorative fabrics
segment operates one plant. The Company also maintains several distribution
centers and warehouses. Internationally, the Company has a 50% interest in a
575,000 square foot denim manufacturing facility in Parras, Mexico. In addition,
the Company owns its Salisbury, North Carolina plant, closed in 1999, which
contains approximately .5 million square feet of floor space. Also, during 1999,
the Company closed the yarn manufacturing portions of two additional North
Carolina facilities, Florence and Cliffside, which constitute approximately .2
million square feet of floor space.
All such facilities are maintained in good condition and are both adequate and
suitable for their respective purposes. The Company's manufacturing facilities
12
are substantially fully utilized except for those facilities in which the
Company has outsourced yarn manufacturing.
All U.S. manufacturing facilities are pledged as security, as of January 28,
2000, for the Company's indebtedness under its debt agreements. The Mexican
denim facility serves as collateral for a portion of the debt of the joint
venture company.
The Company leases its executive and administrative offices, located in
Greensboro, North Carolina. Other offices, located in various U.S. cities and
Brussels, are leased from unrelated parties.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are involved in legal proceedings and claims
arising in the ordinary course of business. Although there can be no assurance
as to the ultimate disposition of these matters, management believes that the
probable resolution of such contingencies will not have a material adverse
effect on the financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Position with the Company
- ---- --- -------------------------
John L. Bakane 49 Director, President and
Chief Executive Officer
Anthony L. Furr 56 Executive Vice President
Gary L. Smith 41 Executive Vice President and
Chief Financial Officer
Neil W. Koonce 52 Vice President, General Counsel
and Secretary
Michael K. Horrigan 45 Vice President
Marvin A. Woolen, Jr. 59 Vice President-Cotton Purchasing
David E. Bray 61 Treasurer
Christopher F. Conlon 43 Controller
All officers of the Registrant are elected or reelected each year at the Annual
Meeting of the Board of Directors or at other times as necessary. All officers
serve at the pleasure of the Board of Directors and until their successors are
elected and qualified.
John L. Bakane joined the Company in 1975. He was named Chief Financial Officer
in 1988 and was elected to the Board of Directors in 1989. He was elected
13
Executive Vice President in 1995. In November 1996, he assumed responsibility
for management of the Denim Group of the Company and in April 1997 he was
appointed President of Cone Apparel Products Group. He was appointed Chief
Operating Officer in April 1998, and served in such capacity until elected
President and Chief Executive Officer in November 1998.
Anthony L. Furr joined the Company in May 1997 as Vice President and Chief
Financial Officer and served in that capacity until February 1999 when he was
appointed Executive Vice President and Chief Financial Officer. He was appointed
acting president of the Cone Finishing Division on November 9, 1999 at which
time he relinquished the title of Chief Financial Officer. From 1992 to 1995 he
was Chairman, President and Chief Executive Officer of Wachovia Bank of South
Carolina, N.A. and Executive Vice President of the parent Wachovia Corporation
for whom he served as Executive Vice President and Chief Financial Officer from
1990 to 1992.
Gary L. Smith was employed by the Company in 1981 and was serving as Manager of
Business Analysis when he was elected Assistant Controller in 1994. He was named
Controller in December 1996, Executive Vice President in February 1999 and Chief
Financial Officer on November 9, 1999.
Neil W. Koonce was employed by the Company in 1974. He has been General Counsel
since 1987, Vice President since 1989, and Secretary since February 1999.
Michael K. Horrigan was employed by the Company in March 1999 as Vice President,
Human Resources. He served as Vice President of Human Resources for the sales
and marketing and bed fashions groups at Springs Industries from February 1997
to March 1999. Before joining Springs, he was employed by Sara Lee branded
apparel businesses for eight years, including five years as Vice President of
Human Resources for Champion Products. For ten years prior to that he worked in
human resources for General Electric.
Marvin A. Woolen, Jr. was employed by the Company in July 1995 as director of
cotton purchasing. He was elected Vice President in 1997. He has been in the
cotton sales, merchandising, purchasing, classing and shipping business since
1971. From 1988 to 1995 he was president of Rollins Company, a cotton shipping
firm.
David E. Bray has been employed by the Company since 1977 and has been Treasurer
since 1988.
Christopher F. Conlon was appointed Controller on November 9, 1999. He
previously worked at Cone Mills for eight years in the 1980s in several
financial roles including cost accountant, plant controller, and division
controller returning 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.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock has traded on the New York Stock Exchange under the
ticker symbol "COE" since June 18, 1992, the date of its public offering. The
14
approximate number of holders of record of the Company's Common Stock as of
January 31, 2000, was 382.
Information required by this Item on the sales prices and dividends of the
Common Stock of the Company are incorporated in "Note 23. Quarterly Financial
Data (Unaudited)" on page 55 of "Item 8. Financial Statements and Supplementary
Data" and is incorporated herein by reference.
15
ITEM 6. SELECTED FINANCIAL DATA
HISTORICAL FINANCIAL REVIEW
(in millions, except per share data and number of employees) 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Net Sales $ 616.3 $ 728.6 $ 716.9 $ 745.9 $ 910.2
Cost of Sales (a) 568.2 661.8 664.4 662.0 802.6
-----------------------------------------------------------------------
Gross Profit 48.1 66.8 52.5 83.9 107.6
Selling and Administrative (a) 48.7 57.4 55.6 65.9 72.2
Restructuring and Impairment of Assets 16.0 17.1 5.2 5.2 -
-----------------------------------------------------------------------
Income (Loss) from Operations (16.6) (7.7) (8.3) 12.8 35.4
Other Expense - Net 13.9 12.1 11.7 14.9 14.5
-----------------------------------------------------------------------
Income (Loss) from Operations Before Income Taxes
(Benefit), Equity in Earnings (Losses) of
Unconsolidated Affiliate and Cumulative Effect
of Accounting Change (30.5) (19.8) (20.0) (2.1) 20.9
Income Taxes (Benefit) (10.7) (7.9) (8.0) (2.3) 7.3
-----------------------------------------------------------------------
Income (Loss) from Operations Before Equity in
Earnings (Losses) of Unconsolidated Affiliate and
Cumulative Effect of Accounting Change (19.8) (11.9) (12.0) 0.2 13.6
Equity in Earnings (Losses) of Unconsolidated Affiliate 1.7 5.2 2.6 (2.4) (16.9)
-----------------------------------------------------------------------
Loss from Operations Before Cumulative
Effect of Accounting Change (18.1) (6.7) (9.4) (2.2) (3.3)
Cumulative Effect of Accounting Change (1.0) - - - -
-----------------------------------------------------------------------
Net Loss $ (19.1) $ (6.7) $ (9.4) $ (2.2) $ (3.3)
-----------------------------------------------------------------------
Per Share of Common Stock
Loss Before Cumulative Effect of Accounting Change
Basic $ (0.83) $ (0.37) $ (0.47) $ (0.19) $ (0.22)
Diluted (0.83) (0.37) (0.47) (0.19) (0.22)
Net Loss
Basic (0.87) (0.37) (0.47) (0.19) (0.22)
Diluted (0.87) (0.37) (0.47) (0.19) (0.22)
BALANCE SHEET DATA (AT YEAR END)
Current Ratio 1.1 1.6 1.5 1.7 1.6
Total Assets $ 472.8 $ 488.5 $ 506.6 $ 530.0 $ 584.3
Long-Term Debt 198.8 172.1 150.4 160.7 173.0
Stockholders' Equity 157.5 181.9 196.5 210.3 222.1
Long-Term Debt as a Percent of Stockholders' Equity
and Long-Term Debt 56% 49% 43% 43% 44%
Shares Outstanding (millions) Year End 25.5 25.4 26.2 26.3 27.4
OTHER DATA
Capital Expenditures $ 13.2 $ 32.8 $ 36.3 $ 36.2 $ 61.7
Common Stock Dividend Paid - - - - -
Number of Employees at Year End 4,300 6,200 6,100 6,700 7,900
(a) Selling and administrative expenses for prior years were restated to conform
to industry practices.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
OVERVIEW
During 1999, Cone Mills had lower operating results as the Company implemented a
comprehensive restructuring program, and the industry in general was negatively
impacted by a number of internal and external factors.
The economic slowdown in Asian and Latin American countries resulted in
worldwide supply and demand imbalances in garments and fabrics. Foreign mills
were forced to produce and export to the U.S. at depressed prices. The result
has been intensified foreign competition and depressed pricing which severely
impacted the U.S. industry's earnings and stock prices. Large U.S. apparel
fabric producers generally had poor operating results in 1999.
The Company encountered depressed market conditions in denim fabrics during 1999
resulting in a significant reduction of sales in the third and fourth quarters.
Retail sales of denim garments showed a slight decrease for 1999. Lower denim
fabric sales resulted primarily from a stronger consumer interest 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 baggier silhouettes negatively impacted U.S.
mills. The resulting increase in sewing complexity and requirements for better
needle capability favored low-cost Asian producers. The Company has experienced
severe price pressure reflecting these conditions, and throughout 1999,
operating schedules at the denim manufacturing plants were curtailed to control
inventories. In early 2000, the Company began to see some improvements in denim
market conditions that should benefit U.S. mills. Notably, more denim is being
shown in certain product lines and there appears to be a shift of fashion back
to basic five-pocket jeans.
The Company continued to encounter manufacturing difficulties at its Carlisle
Finishing plant through the first nine months of 1999. However, in the fourth
quarter, Carlisle benefited from cost reductions associated with its
restructuring. The facility improved capacity utilization with a broadened
customer base, improved efficiency and quality, and earned a small operating
profit. The consolidation of the Company'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, the Company 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, the Company closed this
facility in the second quarter of 1999.
In response to business conditions for apparel products and commission
finishing, the Company implemented a comprehensive downsizing and reorganization
program in 1999, which included:
1) The streamlining of product offering of the sportswear division
including the closing of the Salisbury plant which produced yarn-dyed
shirting fabrics.
17
2) The downsizing and reorganization of the corporate administrative staff.
3) The merger of the denim and sportswear fabrics businesses into one unit.
4) The reduction of the manufacturing staff to simplify the management
structure.
5) The closing of the Florence and Cliffside ring-spun yarn manufacturing
facilities, coupled with the outsourcing of yarn to reduce operating
costs and conserve capital which would have been required for equipment
modernization.
6) The restructuring of the Carlisle plant reducing the workforce by
approximately 25%, increasing efficiencies and quality, and refocusing
of marketing activities.
7) The exit of the chamois flannel shirting product line with the
restructuring of Carlisle.
The Company expects to achieve on an annual basis over $40 million of cost
savings as a result of these initiatives.
The Company restructured its decorative fabrics operations in 1998, which
included the consolidation of Cone Jacquards and John Wolf divisions, reductions
of staff and overhead, and the development of a new management team. The
decorative fabrics units made progress in 1999 by broadening their product lines
and customer bases as well as expanding capacity.
Significant factors that influence the Company's operating results and financial
condition include general business cycles, consumer fashion preferences, changes
in demand for print fabrics, international trade conditions, rising market
interest rates as well as the terms on which debt financing is available to the
Company.
Management also believes that one of the most significant factors affecting
operating margins is the price of cotton, which varied between the $.50s and
$.70s through much of 1997, 1998 and 1999. The Company has purchased cotton at
fixed prices for delivery throughout 2000. The Company expects 2000 average
cotton prices to be lower than 1999 levels because of the lower cotton market in
general and payments to be received under the U.S. government cotton program.
LONG-TERM STRATEGIC INITIATIVES
Cone's business strategy is to invest and grow in its core franchises where it
is recognized as a market leader. The Company seeks sales growth of denim and
khaki fabrics, commission finishing and decorative fabric businesses through
expansion into new geographic markets, aggressive marketing efforts, product
development, investment in technology and strategic manufacturing initiatives.
Consistent with its strategy to focus on core strengths, the Company divested
the assets of its real estate subsidiary and synthetics fabric business in 1997
and exited yarn-dyed and chamois flannel shirting business in 1999.
The Company has an alliance with a related group of companies known as the
Ashima Group of India. This alliance was formed in August of 1998. The Ashima
Group produces and markets a broad product line of denim and sportswear fabrics.
The alliance consists of four elements: 1) the purchase by Cone of approximately
8% of Ashima Ltd. capital stock for $3.6 million; 2) Cone's providing technology
and technical services to the Ashima companies, receiving fees as compensation;
3) Cone certification of certain Ashima products for distribution throughout the
world; and 4) the right of Cone to market Ashima products outside the Indian
sub-
18
continent under the name Ashima-Cone.
The Company has established priorities for the use of cash flow and debt
capacity. The first priority is investment in international denim manufacturing
facilities and marketing opportunities. In April 1999, Guilford Mills, Inc. and
the Company entered into a 50/50 joint venture to develop and operate a new
textile and apparel industrial park in Altamira, near Tampico, Tamaulipas,
Mexico. It is expected that Cone's investment in the industrial park will be
approximately $9 million. The textile plant planned to be built on the property
by Cone will be a basic ring-spun, value-added denim plant with an initial
capacity of 20 million yards expandable to 40 million yards. The Company expects
to invest approximately $60 million in the initial denim facility. In addition,
the Company is in negotiations to form a joint venture to build a yarn
manufacturing facility to support the denim operation. The yarn facility is
expected to cost $30 million and the Company expects to own 51% of the joint
venture. The Company plans to start construction of the denim facility and joint
venture yarn facility in 2001 after the completion of the infrastructure for the
industrial park. An additional capital investment of approximately $45 million
would be required to expand the denim facility to 40 million yards including the
corresponding increase in yarn capacity. The funds required for the denim and
yarn facilities will require debt financing, which the Company has not arranged
at this date and there can be no assurance that such financing will be available
at acceptable terms and conditions.
The second priority for the use of cash flow and debt capacity is reinvestment
in existing manufacturing facilities. Reflecting this priority, the Company has
made capital expenditures of over $82 million from 1997 through 1999 to maintain
modern manufacturing facilities and to expand the jacquard plant. The Company
plans to reduce domestic capital spending to approximately $12 million in 2000.
SEGMENT INFORMATION
In the years 1997, 1998 and 1999, Cone operated in four principal business
segments: denim and khaki, commission finishing, decorative fabrics and
yarn-dyed products. (See Notes 18 and 21 to Notes to Consolidated Financial
Statements included in Part II, Item 8.)
RESULTS OF OPERATIONS
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 adjustments 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 elimination
of unprofitable lines and inventories more than offset the improved operating
results in commission finishing and decorative fabrics.
DENIM AND KHAKI. For 1999, denim and khaki segment sales were $448.5 million,
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 4% of sales, compared
with
19
$52.2 million, or 10%, for 1998. The reduced margin and income resulted
primarily from lower sales volume, lower prices, reduced plant operating
schedules and closeouts on certain khaki inventories as the Company refocused
this 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 intersegment
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
unsatisfactory prices and the anticipated recovery in print demand did not
materialize. 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, the Company implemented a substantial restructuring,
downsizing and refocusing of the Carlisle Finishing plant. Intersegment 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 improved.
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 negatively impacted
by higher than expected start-up costs related to capacity additions at the
jacquard plant.
YARN-DYED PRODUCTS. The Company 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 operating loss
of $5.6 million, as compared with a loss of $14.5 million for 1998. Most of the
losses for this segment were reserved under the Company's restructuring plan.
Selling and administrative expenses for 1999 were $48.7 million, as compared
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 administrative
expenses in 1999 reflects the cost savings realized from restructuring
initiatives. Selling and administrative expenses for 1998 were restated to
conform to industry practices.
In 1999, the Company had $10.4 million of EBITDA defined as income (loss) from
operations before depreciation and amortization. However, excluding
restructuring charges, related expenses, inventory writedowns and operating
losses associated with businesses exited in 1999, the Company had $38.6 million
of EBITDA. For comparison, EBITDA for 1998 was $57.5 million.
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 expense 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, the Company'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
20
joint venture partners.
For the year 1999, the Company 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
restructuring 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, the Company 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, the Company had a pro forma net
income of $.37 per share.
FIFTY-THREE WEEKS ENDED JANUARY 3, 1999 COMPARED WITH FIFTY-TWO WEEKS ENDED
DECEMBER 28, 1997
Cone Mills had sales for 1998 of $728.6 million, as compared with 1997 sales of
$716.9 million. For 1998, sales of denim, commission finishing and decorative
fabrics improved while sales of yarn-dyed products were lower. In the fourth
quarter of 1998, denim sales slowed significantly.
Gross profit for 1998 increased to 9.2% of sales, as compared with 7.3% for the
previous year. The improvement was primarily the result of lower raw material
costs including cotton, dyes and chemicals. Cotton costs were lower in 1998,
reflecting more favorable world cotton prices and the U.S. government cotton
program.
DENIM AND KHAKI. For 1998, sales for this segment, primarily denims, were $545.0
million, up 2% from 1997 sales of $533.8 million. In the fourth quarter of 1998,
and in the first two quarters of 1997, operating schedules at the Company's
denim facilities were curtailed as certain customers reduced orders to control
inventories. Operating profits for the segment were $52.2 million, up 43% for
1998, as compared with $36.5 million for 1997. Lower raw material costs
including cotton, dyes and chemicals accounted for the increase. Prices of denim
and khaki fabrics were down slightly year-over-year as pricing in the fourth
quarter of 1998 weakened.
COMMISSION FINISHING. Outside sales (total segment sales less intersegment
sales) of commission finishing at the Raytex and Carlisle plants were $88.9
million, up 7% in 1998, as compared with $83.4 million for 1997. Sales
improvements were primarily the result of sales efforts to broaden the customer
base. The segment had an operating loss of $15.1 million for 1998, as compared
with an operating loss of $13.1 million in 1997. All of the 1998 losses were
associated with the Carlisle plant, where operations improved modestly
quarter-to-quarter during 1998. Intersegment sales of this segment were to the
denim and khaki and decorative fabrics segments.
DECORATIVE FABRICS. For 1998, sales of decorative fabrics were $56.3 million, up
32% from 1997 sales of $42.5 million. The segment had an operating loss of $0.4
million in 1998 compared with an operating loss of $9.7 million in 1997. Both
John Wolf and Cone Jacquards had improved operating results because of new
product offerings, expanded capacity and reduced overhead expenses.
YARN-DYED PRODUCTS. In 1998, sales of yarn-dyed products were $33.7 million,
down
21
27%, as compared with $46.4 million for 1997. Unseasonably warm weather in 1998
affected retail sales. Continued import penetration also affected the Company's
sales. The Company had an operating loss for 1998 of $14.5 million in this
segment, as compared with an operating loss of $5.0 million for 1997. The loss
was primarily associated with operations and excess inventories at the Salisbury
plant.
Total Company selling and administrative expenses for 1998 were $57.4 million,
or 7.9% of sales, as compared with $55.6 million, or 7.8% of sales in 1997. The
increase was primarily from international initiatives, including the start-up
expenses related to the new alliance with Ashima in India, expenses and fees
associated with cost savings efforts and increases in certain sales staffs to
complement more aggressive sales efforts. Selling and administrative expenses
for 1998 and 1997 were restated to conform to industry practices.
Interest expense for 1998 was up $0.7 million, as compared to 1997, primarily
the result of additional borrowing to support increases in working capital.
For 1998 and 1997, the income tax benefit as a percent of the taxable loss was
40.0%. (See Note 11 to Notes to Consolidated Financial Statements included in
Item II, Part 8.)
Equity in earnings of Parras Cone, the joint venture plant in Mexico, was $5.2
million for 1998, as compared with $2.6 million for 1997. The 1998 results
reflect a fuller operating schedule compared with the 1997 period, improved
operating efficiencies and lower cotton costs.
Cone Mills had a net loss for 1998 of $6.7 million, or $.37 per share after
preferred dividends, as compared with a net loss of $9.4 million, or $.47 per
share for the prior year. Excluding restructuring charges, related expenses,
inventory write-downs and operating losses associated with businesses exited in
1999, the Company had a pro forma net income of $.37 per share in 1998, as
compared with a pro forma net loss of $.22 per share in 1997. Pre-tax charges of
$19.3 million in 1998 included $15.8 million for the write-down of property and
equipment at the Salisbury plant and $2.2 million for additional inventory
reserves on the yarn-dyed shirting product lines. In 1997, the Company incurred
pre-tax restructuring charges and inventory adjustments of $7.4 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal long-term capital components consist of debt outstanding
under its Senior Note, its 8-1/8% Debentures and stockholders' equity. Primary
sources of liquidity are internally generated funds, an $80 million Revolving
Credit Facility (under which $11 million was available on January 2, 2000) and a
new $50 million Receivables Purchase and Servicing Agreement (the "Receivables
Agreement") entered into on September 1, 1999 with Cone Receivables II LLC,
Redwood Receivables Corporation ("Redwood"), an affiliate of General Electric
Capital Corporation, and General Electric Capital Corporation. The new
Receivables Agreement will terminate in August 2004 and replaced a similar
facility with Delaware Funding Corporation.
Pursuant to the Receivables Agreement documents, the Company will sell or
contribute to Cone Receivables II LLC certain of their accounts receivable and
Cone Receivables II LLC will in turn sell to Redwood an undivided 100% ownership
interest in such receivables. Redwood will then issue commercial paper backed
by, among other things, Redwood's ownership interest in the receivables. The
sale
22
price to Cone Receivables II LLC for the receivables will be subject to a
purchase discount equal to a percentage over Redwood's commercial paper interest
rate, which percentage may vary based upon the Company's operating performance.
At present, the percentage over the commercial paper rate is 1.00%.
During 1999, the Company generated cash from operations, before changes in
working capital, of $1.5 million, as compared with $22.3 million for 1998. In
the 1999 period, working capital increased by $8.1 million. Uses of cash in the
1999 period included $13.2 million for capital expenditures and $5.6 million for
the redemption of preferred stock.
On January 28, 2000, the Company entered into a new $80 million Revolving Credit
Facility with its existing banks with Bank of America, N.A., as agent. The
Revolving Credit Facility was secured by Company assets and will mature on
August 7, 2000. Interest rates were increased to market levels and new covenants
were set. (See Note 9 to Notes to Consolidated Financial Statements included in
Part II, Item 8.)
At the same time the Company entered into the new Revolving Loan Agreement, its
Senior Notes and 8-1/8% Debentures were ratably secured with the bank facility.
The Company believes that internally generated operating funds and funds
available under its credit facilities will be sufficient to meet its needs for
working capital and domestic capital spending under the terms of its revolving
credit facility. Liquidity is predicated on the Company meeting its operating
targets in 2000 and further reductions in inventories. By August 2000, the
Company must either refinance or replace the revolving credit facility. The
Company is in the process of exploring its alternatives related to financing its
business. These alternatives may include one or more of the following: (1) the
restructuring or replacing of the revolving credit facility; (2) an increase in
the accounts receivable securitization facility from $50 million to up to $60
million; 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, there is no assurance that the
Company will be able to replace its revolving credit facility or otherwise
obtain financing on terms and conditions acceptable to the Company.
On January 2, 2000, the Company's long-term capital structure consisted of
$198.8 million of long-term debt (including current maturities) and $157.5
million of stockholders' equity. For comparison, on January 3, 1999, the Company
had $172.1 million of long-term debt and $181.9 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 56% at January 2, 2000, as
compared with 49% at January 3, 1999.
Accounts and note receivable on January 2, 2000, were $47.5 million, as compared
with $36.4 million at January 3, 1999. Receivables, including those sold
pursuant to the Receivables Purchase Agreement, represented 65 days of sales
outstanding at January 2, 2000 and 56 days at January 3, 1999. The increase in
days of sales outstanding primarily reflects a change in customer sales mix with
fewer customers paying in advance of due date.
Inventories on January 2, 2000, were $110.6 million, down $9.8 million from
$120.4 million of inventories at January 3, 1999. The Company continues to
curtail operating schedules to control denim inventories and to liquidate
inventories associated with businesses which it has exited.
23
For 1999, capital spending was $13.2 million compared to $32.8 million for 1998.
Domestic capital spending in 2000 is expected to be approximately $12 million.
At January 2, 2000, the Company had committed $1.6 million to capital projects.
In addition to the 1999 domestic capital spending budget, the Company expects to
spend approximately $8 million for investments in international initiatives.
OTHER MATTERS
During 1999, the Company implemented a comprehensive plan to address possible
exposures to Year 2000 issues. To date, the Company has not experienced any
major disruptions to its business nor is it aware of any major Year 2000 related
disruptions impacting other entities with which it interacts, both domestically
and globally, including suppliers, customers and financial service
organizations. The Company will continue to monitor its critical financial,
operational and manufacturing systems, as well as customers and suppliers,
during 2000 but does not anticipate any significant Year 2000 related issues.
The costs incurred to address the Company's Year 2000 issues were less than $1.0
million.
Federal, state and local regulations relating to the workplace and the discharge
of materials into the environment continue to change and, consequently, it is
difficult to gauge the total future impact of such regulations on the Company.
Existing government regulations are not expected to cause a material change in
the Company's competitive position, operating results or planned capital
expenditures. The Company has an active environmental committee, which fosters
protection of the environment and compliance with laws.
The Company is a party to various legal claims and actions. Management believes
that none of these claims or actions, either individually or in the aggregate,
will have a material adverse effect on the financial condition of the Company.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company's primary market risk exposures are cotton (commodity) price risk
and interest rate risk. At January 2, 2000, Cone had no material exchange rate
risk. The Company had no financial instruments, derivative financial instruments
or derivative commodity instruments held for trading purposes at January 2,
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. The Company has an established
cotton purchasing program, administered in conformance with policies approved by
the Board of Directors, to ensure an uninterrupted supply of appropriate quality
and quantities of cotton, to hedge committed and anticipated fabric sales, and
to manage margin risks associated with price fluctuations on anticipated cotton
purchases. The Company primarily uses forward contracts and, to a lesser extent,
futures and options contracts.
The following table provides information about the Company's cotton inventory
options contracts that are sensitive to changes in cotton prices. The table
presents the number of contracts, the weighted-average strike price and the
total dollar contract price by expected maturity dates. Contract amounts are
used to calculate the contractual payments and quantity of cotton under option
at January 2, 2000 and January 3, 1999.
24
Expected Expected
Maturity Fair Maturity Fair
Date 2000 Value Date 1999 Value
- --------------------------------------------------------------------------------------------------------
COTTON OPTIONS (PUTS)
Contract Volume
(100 bales per contract) 396 NA 642 NA
Weighted-Average Strike Price (per lb.;
500 lbs. per bale avg.) $ .55 NA $ .61 NA
Contract Amount $ 266,625 $ 572,660 $ 406,700 $ 874,200
COTTON OPTIONS (CALLS)
Contract Volume
(100 bales per contract) 1,611 NA 778 NA
Weighted-Average Strike Price (per lb.;
500 lbs. per bale avg.) $ .53 NA $ .75 NA
Contract Amount $ 1,165,630 $ 794,385 $ 370,150 $ 117,510
The Company's debt instruments are exposed to interest rate risk. Cone's
strategy is to balance its fixed to floating interest rate mix. The table
presents principal cash flows and related weighted-average interest rates by
expected maturity dates. Variable weighted-average interest rates for the
Company's debentures are based on the applicable forward LIBOR rates.
25
Expected Maturity Date
----------------------------------------------------------------
There- Fair
(dollars in millions) 2000 2001 2002 2003 2004 after Total Value
- ----------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT
FIXED RATE
Senior Note $ 10.7 $ 10.7 $ 10.7 $ - $ - $ - $ 32.1 $ 31.5
Average interest rate (%) 10.9 11.0 11.0 - - - 11.0
VARIABLE RATE
Revolver $ 69.0 $ - $ - $ - $ - $ - $ 69.0 $ 69.0
Average interest rate (%) 10.5 - - - - - 10.5
Debentures (including an
interest rate swap) $ - $ - $ - $ - $ - $100.0 $100.0 $ 55.0
Average interest rate (%) 7.3 7.3 7.3 7.3 7.3 7.3 7.3
"Safe Harbor" Statement under Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Except for the historical information presented, the matters disclosed in the
foregoing discussion and analysis and other parts of this report include
forward-looking statements. These statements represent the Company's current
judgment on the future and are subject to risks and uncertainties that could
cause actual results to differ materially. Such factors include, without
limitation: (i) the demand for textile products, including the Company's
products, will vary with the U.S. and world business cycles, imbalances
between consumer demand and inventories of retailers and manufacturers and
changes in fashion trends, (ii) the highly competitive nature of the textile
industry and the possible effects of reduced import protection and free-trade
initiatives, (iii) the unpredictability of the cost and availability of
cotton, the Company's principal raw material, (iv) the Company's
relationships with Levi Strauss as its major customer, (v) the Company's
ability to attract and maintain adequate capital to fund operations and
strategic initiatives, (vi) increases in prevailing interest rates, and (vii)
the inability to achieve the cost savings associated with the Company's
restructuring initiatives. For a further description of these risks see "Item
1. Business -Competition, -Raw Materials and -Customers" and "Management's
Discussion and Analysis of Results of Operations and Financial Condition -
Overview" of Item 7. Other risks and uncertainties may be described from time
to time in the Company's other reports and filings with the Securities and
Exchange Commission.
26
STATEMENT OF RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of Cone Mills is responsible for the preparation and integrity of
the Company's published financial statements. The financial statements have been
prepared in accordance with generally accepted accounting principles and include
management's best estimates and judgment. Management has also prepared the other
information contained in this report and is responsible for its accuracy and
consistency with the financial statements.
The Company maintains a system of internal control over financial reporting,
which is designed to provide reasonable assurance to the Company's management
and Board of Directors regarding the preparation of reliable published financial
statements. The system includes a code of conduct to foster a strong ethical
climate, established policies and procedures, internal audit processes, and the
employment of qualified personnel. The Company has established formal criteria
against which the internal control system is measured and as of January 2, 2000,
the Company was in compliance with these criteria.
The Board of Directors, assisted by its Audit Committee which is composed
entirely of directors who are not officers or employees of the Company, provides
oversight to the financial reporting process. The Committee meets regularly with
management, internal auditors and independent certified public accountants to
review the scope and findings of audits, financial reporting issues and the
adequacy of the internal control system. To assure complete independence,
representatives of McGladrey & Pullen, LLP, Certified Public Accountants,
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
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MCGLADREY & PULLEN, LLP
INDEPENDENT AUDITOR'S REPORT
We have audited the accompanying consolidated balance sheets of Cone Mills
Corporation and subsidiaries as of January 2, 2000 and January 3, 1999, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended January 2, 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 obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cone Mills
Corporation and subsidiaries as of January 2, 2000 and January 3, 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended January 2, 2000 in conformity with generally accepted
accounting principles.
As discussed in Note 22 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 11, 2000
28
CONE MILLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended January 2, 2000, January 3, 1999 and December 28, 1997
(in thousands, except per share data) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Net Sales $616,321 $ 728,626 $ 716,853
Cost of Goods Sold 568,197 661,795 664,394
---------------------------------------------------
Gross Profit 48,124 66,831 52,459
Selling and Administrative 48,651 57,362 55,612
Restructuring and Impairment of Assets 16,017 17,124 5,176
---------------------------------------------------
Loss from Operations (16,544) (7,655) (8,329)
---------------------------------------------------
Other Income (Expense)
Interest income 1,529 2,777 2,486
Interest expense (14,450) (14,890) (14,160)
Other expense (993) - -
---------------------------------------------------
(13,914) (12,113) (11,674)
---------------------------------------------------
Loss before Income Tax Benefit, Equity in Earnings of Unconsolidated
Affiliate and Cumulative Effect of Accounting Change (30,458) (19,768) (20,003)
Income Tax Benefit (10,740) (7,907) (8,001)
---------------------------------------------------
Loss before Equity in Earnings of Unconsolidated Affiliate and Cumulative
Effect of Accounting Change (19,718) (11,861) (12,002)
Equity in Earnings of Unconsolidated Affiliate 1,684 5,210 2,637
---------------------------------------------------
Loss before Cumulative Effect of Accounting Change (18,034) (6,651) (9,365)
Cumulative Effect of Accounting Change (1,038) - -
---------------------------------------------------
Net Loss $(19,072) $ (6,651) $ (9,365)
---------------------------------------------------
Loss Available to Common Shareholders
Loss before Cumulative Effect of Accounting Change $(21,081) $ (9,564) $ (12,346)
Cumulative Effect of Accounting Change (1,038) - -
---------------------------------------------------
Net Loss $(22,119) $ (9,564) $ (12,346)
---------------------------------------------------
Loss Per Share - Basic and Diluted
Loss before Cumulative Effect of Accounting Change $ (0.83) $ (0.37) $ (0.47)
Cumulative Effect of Accounting Change (0.04) - -
---------------------------------------------------
Net Loss $ (0.87) $ (0.37) $ (0.47)
---------------------------------------------------
Weighted-Average Common Shares Outstanding
Basic 25,462 25,929 26,140
---------------------------------------------------
Diluted 25,462 25,929 26,140
---------------------------------------------------
See Notes to Consolidated Financial Statements.
29
CONE MILLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 2, 2000 and January 3, 1999
(in thousands, except share and par value data) 1999 1998
- ------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash $ 1,267 $ 639
Accounts receivable, less allowances of $5,050; 1998, $1,500 47,531 26,010
Subordinated note receivable - 10,414
Inventories 110,613 120,430
Other current assets 6,149 10,253
----------------------------------
Total Current Assets 165,560 167,746
Investments in Unconsolidated Affiliates 46,815 45,489
Other Assets 38,964 36,616
Property, Plant and Equipment 221,458 238,666
----------------------------------
$472,797 $ 488,517
----------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable $ - $ 1,000
Current maturities of long-term debt 79,714 10,714
Accounts payable 26,849 27,255
Sundry accounts payable and accrued liabilities 33,866 42,071
Deferred income taxes 9,894 22,670
----------------------------------
Total Current Liabilities 150,323 103,710
Long-Term Debt 119,115 161,385
Deferred Income Taxes 33,916 30,050
Other Liabilities 11,958 11,448
Stockholders' Equity
Class A preferred stock - $100 par value; authorized 1,500,000 shares;
issued and outstanding 355,635 shares;
1998, 383,948 shares 35,564 38,395
Class B preferred stock - no par value; authorized
5,000,000 shares - -
Common stock - $.10 par value; authorized 42,700,000
shares; issued and outstanding 25,479,717 shares;
1998, 25,432,233 shares 2,548 2,543
Capital in excess of par 57,435 57,264
Retained earnings 70,776 92,799
Deferred compensation - restricted stock (321) (579)
Accumulated other comprehensive loss, currency translation adjustment (8,517) (8,498)
----------------------------------
Total Stockholders' Equity 157,485 181,924
----------------------------------
$472,797 $ 488,517
==================================
See Notes to Consolidated Financial Statements.
30
CONE MILLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended January 2, 2000,
January 3, 1999 and Class A Preferred Stock Common Stock
December 28, 1997 ----------------------------------- -----------------------------------
(in thousands, except share data) Shares Amount Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 29, 1996 383,948 $ 38,395 26,301,233 $ 2,630
Comprehensive Loss
Net loss - - - -
Currency translation adjustment - - - -
Total comprehensive loss
Class A Preferred Stock
Cash dividends paid - - - -
Common Stock
Purchase of common shares - - (201,700) (20)
Options exercised - - 12,600 1
Issuance of restricted shares - - 89,500 9
Restricted stock compensation - - - -
--------------------------------------------------------------------------
BALANCE, DECEMBER 28, 1997 383,948 $ 38,395 26,201,633 $ 2,620
--------------------------------------------------------------------------
Comprehensive Loss
Net loss - - - -
Currency translation adjustment - - - -
Total comprehensive loss
Class A Preferred Stock
Cash dividends paid - - - -
Common Stock
Purchase of common shares - - (768,400) (77)
Restricted stock compensation - - - -
Cancellation of restricted shares - - (1,000) -
--------------------------------------------------------------------------
BALANCE, JANUARY 3, 1999 383,948 $ 38,395 25,432,233 $ 2,543
--------------------------------------------------------------------------
Comprehensive Loss
Net loss - - - -
Currency translation adjustment - - - -
Total comprehensive loss
Class A Preferred Stock
Shares redeemed (56,281) (5,628) - -
Cash dividends paid - - - -
Stock dividend 27,968 2,797 - -
Common Stock
Purchase of common shares - - (6,916) -
Options exercised - - 62,400 6
Issuance of restricted shares - - 10,000 1
Restricted stock compensation - - - -
Cancellation of restricted shares - - (18,000) (2)
--------------------------------------------------------------------------
BALANCE, JANUARY 2, 2000 355,635 $ 35,564 25,479,717 $ 2,548
--------------------------------------------------------------------------
Years Ended January 2, 2000, Deferred Accumulated
January 3, 1999 and Capital in Compensation Other
December 28, 1997 Excess Retained Restricted Comprehensive
(in thousands, except share data) of Par Earnings Stock Loss Total
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 29, 1996 $ 62,995 $ 114,706 $ - $ (8,475) $ 210,251
Comprehensive Loss
Net loss - (9,365) - - (9,365)
Currency translation adjustment - - - (29) (29)
------------
Total comprehensive loss (9,394)
------------
Class A Preferred Stock
Cash dividends paid - (2,892) - - (2,892)
Common Stock
Purchase of common shares (1,512) - - - (1,532)
Options exercised 65 - - - 66
Issuance of restricted shares 752 - (761) - -
Restricted stock compensation - - 21 - 21
---------------------------------------------------------------------------
BALANCE, DECEMBER 28, 1997 $ 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 (5,028) - - - (5,105)
Restricted stock compensation - - 153 - 153
Cancellation of restricted shares (8) - 8 - -
---------------------------------------------------------------------------
BALANCE, JANUARY 3, 1999 $ 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 - - - - (5,628)
Cash dividends paid - (154) - - (154)
Stock dividend - (2,797) - - -
Common Stock
Purchase of common shares (45) - - - (45)
Options exercised 320 - - - 326
Issuance of restricted shares 47 - (48) - -
Restricted stock compensation - - 153 - 153
Cancellation of restricted shares (151) - 153 - -
---------------------------------------------------------------------------
BALANCE, JANUARY 2, 2000 $ 57,435 $ 70,776 $ (321) $ (8,517) $ 157,485
---------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
31
CONE MILLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended January 2, 2000, January 3, 1999 and December 28, 1997
(in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
OPERATIONS
Net loss $(19,072) $ (6,651) $ (9,365)
Adjustments to reconcile net loss to cash provided by (used in) operations
Depreciation 24,663 27,697 25,948
Gain on divestitures - - (34)
Loss (gain) on sale and writedown of property, plant and equipment 2,541 12,182 (2,114)
Amortization 2,249 2,667 2,767
Deferred compensation expense - restricted stock 153 153 21
Equity in earnings of unconsolidated affiliate (1,684) (5,210) (2,637)
Cumulative effect of accounting change 1,038 - -
Change in operating assets and liabilities, excluding effect of business divestiture
Accounts receivable (21,521) (6,052) 28,415
Subordinated note receivable 10,414 13,428 (23,842)
Inventories 9,817 (4,767) 11,836
Other assets (68) 8,573 (2,905)
Accounts payable and accrued liabilities (6,704) (6,066) (2,440)
Deferred income taxes (8,910) (9,173) (1,840)
Other liabilities 510 667 448
---------------------------------------
Cash provided by (used in) operations (6,574) 27,448 24,258
---------------------------------------
INVESTING
Investments in unconsolidated entities (680) (3,498) (1,564)
Proceeds from business divestitures - - 19,529
Proceeds from sale of property, plant and equipment 3,198 6,162 4,995
Capital expenditures (13,194) (32,821) (36,290)
---------------------------------------
Cash used in investing (10,676) (30,157) (13,330)
---------------------------------------
FINANCING
Net payments under line of credit agreements (1,000) (3,500) (767)
Increase (decrease) in checks issued in excess of deposits (1,907) (7,190) 4,831
Principal payments on long-term debt (10,714) (10,714) (10,796)
Proceeds from long-term debt borrowings 37,000 32,000 -
Proceeds from issuance of common stock 326 - 66
Purchase of outstanding common stock (45) (5,105) (1,532)
Dividends paid - Class A Preferred (154) (2,999) (2,892)
Redemption of Class A Preferred stock (5,628) - -
---------------------------------------
Cash provided by (used in) financing 17,878 2,492 (11,090)
---------------------------------------
Net change in cash 628 (217) (162)
CASH AT BEGINNING OF YEAR 639 856 1,018
---------------------------------------
CASH AT END OF YEAR $ 1,267 $ 639 $ 856
---------------------------------------
See Notes to Consolidated Financial Statements.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the
accounts of Cone Mills Corporation and all majority owned subsidiaries
(collectively, the "Company") except for Cone Receivables, LLC, which was a
special-purpose entity that was dissolved in the third quarter of 1999. All
significant intercompany transactions and balances have been eliminated in
consolidation.
FISCAL YEAR. The Company's fiscal year ends on the Sunday nearest December 31.
Fiscal years 1999 and 1997 each contained 52 weeks. Fiscal year 1998 contained
53 weeks.
INVENTORIES. Inventories are stated at the lower of cost or market. The last-in,
first-out (LIFO) method is used to determine cost of most domestically produced
goods. The first-in, first-out (FIFO) or average cost methods are used to
determine cost of all other inventories.
INVESTMENTS IN UNCONSOLIDATED AFFILIATES. Investments in unconsolidated
affiliated compani