Item 1. Business
THE COMPANY
OVERVIEW
Founded in 1891, Cone Mills Corporation (the "Company" or "Cone") is a leading textile manufacturer with net sales in 1996 of $745.9 million. The Company conducts business in two segments, apparel fabrics and home furnishings products, representing 84% and 16% of 1996 net sales respectively, and currently operates nine modern manufacturing facilities located in North Carolina and South Carolina. Cone is the largest producer of denim fabrics in the world, the largest domestic producer of yarn-dyed and chamois flannel shirtings and the largest domestic commission printer of home furnishings fabrics. Sales and marketing activities are conducted through a worldwide distribution network. With export sales of $190.6 million in 1996, primarily denim, the Company is the largest domestic exporter of denim fabrics.
The Company is recognized internationally as a primary source of high-quality fabrics for use in the production of upper-end, branded casual apparel. The Company is a leader in denim styling and development, with denims accounting for approximately 79% of apparel fabrics sales. Cone believes that it has the largest and most versatile denim manufacturing capacity in the world and that it produces a broader range of fashion denims than any of its competitors. In 1996, Cone sold over 225 different styles of denim. The Company's denim products are primarily designed for use in garments targeted for the upper-end market, where styling and quality generally command premium fabric prices. The Company is the largest supplier to Levi Strauss and the sole supplier of denim for Levi 501(R) jeans. Other customers include V.F. Corporation (Wrangler), H.I.S. (Chic), Calvin Klein, The Gap, Polo, Aalfs (Arizona), P.L. Industries (Hilfiger) and Guess.
The Company has used its manufacturing versatility and styling capabilities to position itself as a leader in other selected specialty apparel fabric niches. These include yarn-dyed and chamois flannel shirtings, specialty-dyed and printed fabrics. Customers for these specialty apparel fabrics include M. Fine, OshKosh, Woolrich, L.L. Bean, J.C. Penney, Eddie Bauer and Levi Strauss.
The Company services the home furnishings markets through three divisions: Cone Finishing, Cone Decorative Fabrics and Cone Jacquards. Cone Finishing consists of the Company's Carlisle and Raytex plants and provides custom printing services to leading home furnishings stylists and distributors. Cone Decorative Fabrics is one of the country's leading designers and marketers of printed and solid woven fabrics for use in upholstery, draperies and bedspreads. Cone Jacquards began production in late 1995, providing jacquard woven fabrics to furniture, drapery and other markets. The Company's home furnishings customers include the Waverly Division of F. Schumacher & Co., P. Kaufmann, Covington, Richloom, Crown
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Crafts and Croscill. The home furnishings segment also includes Cornwallis Development Co., a wholly owned subsidiary that develops previously acquired real estate not required for manufacturing operations.
Cone's business strategy is to focus on products and services that generate attractive margins and in which it believes it is an industry leader. It competes domestically and internationally on the basis of styling and development, management experience, versatility and size of manufacturing facilities and the Cone name and reputation.
The Company seeks growth of its core denim, specialty sportswear and decorative fabric businesses through expansion into new geographic areas and markets, product development and investment in value-added technology such as CAD/CAM. A primary goal of this strategy is to reduce cyclical fluctuations in its core businesses through improved market and product balance. As a means of new market penetration and geographic expansion, Cone actively seeks acquisitions of, investments in and alliances with businesses in which it can add value through its manufacturing and marketing expertise.
In 1993, the Company invested in Compania Industrial de Parras, S.A. de C.V. ("CIPSA") and entered into a 50/50 joint venture with CIPSA to build a new denim manufacturing facility in Mexico. This joint venture facility, Parras Cone de Mexico, S.A. de C.V. ("Parras Cone") was completed and began production of basic denims and yarn in late 1995. The Company believes that Parras Cone produces high-quality basic denim at costs competitive with manufacturers anywhere in the world. In December 1994, Cone Mills purchased the Raytex printing facility that primarily prints wide fabrics used in home furnishings, including comforters and bedspreads. The Raytex facility prints for many of the same customers as the Company's narrow print operation, Carlisle, allowing it to realize marketing, operating and administrative efficiencies. In 1995, the Company built a new jacquard weaving facility and late in the year began production, further diversifying its home furnishings fabrics businesses. In 1996, the Company expanded capacity of the jacquard weaving facility. See "Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition - Strategic Initiatives."
Consistent with its business strategy to focus on core strengths and exit businesses in which the Company was not a leader, in January 1996, the Company sold its Olympic Products Division. Olympic produced polyurethane foam and related products for the home furnishings and automotive markets. In addition, in late 1996, the Company completed the sale of Greeff Fabrics, a distributor of high end fashion fabrics. In early 1997, the Company sold its synthetic fabric division, including its finished inventory, forward commitments and order book. Also, the Company has entered into a contract with an international real estate development firm for the sale of certain real estate assets including the assets of Cornwallis Development Co. See "Item 7. Management's Discussion
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and Analysis of Results of Operations and Financial Condition - Strategic Initiatives" and "Item 8. Financial Statements and Supplementary Data - Note 21 of the Notes to Consolidated Financial Statements."
In December 1996, the Company adopted a plan to consolidate its specialty sportswear finishing operation into its Carlisle finishing facility. Consolidation of production will occur during 1997 and is expected to allow the Company to utilize its finishing capacity more efficiently and reduce its cost structure.
In addition to its acquisition strategy, the Company continues to invest in its domestic facilities to improve productivity and product quality, expand its product lines and increase customer satisfaction. Capital expenditures for the last five years have totaled approximately $200 million. The Company expects to spend approximately $44 million in 1997 for capital projects.
From 1992 to 1995, the Company's annual growth rate of sales averaged approximately 9% per year. While sales in 1996 from new business ventures, including Raytex, the Mexican J.V. and Jacquard operations, accounted for approximately 10% of the Company's overall total revenues, these increases were more than offset by weak market conditions and lower sales in the Company's traditional denim, decorative prints and sportswear markets and by the sale of Olympic which alone resulted in a $90 million sales reduction. Management believes that these strategic initiatives have positioned the Company for improved results in the long-term.
The Company, a North Carolina corporation, maintains its principal executive offices at 3101 North Elm Street, Greensboro, North Carolina 27415-6540, and its telephone number is (910)379-6220. Unless otherwise stated, references to "Cone" or the "Company" include Cone Mills Corporation and its subsidiaries.
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Business Segments
The following table sets forth certain net sales and operating income (loss) information for each of the Company's two business segments as well as net sales of the principal product groups included therein, for fiscal years 1992 through 1996.
(1) Results from continuing operations.
(2) Fiscal 1992 contained 53 weeks. The remainder of the years presented contained 52 weeks.
(3) Specialty Sportswear includes synthetic fabrics which was sold in January 1997; Fabrics includes Greeff, which was sold in December 1996; Foam Products represents the Olympic Products Division which was sold in January 1996; and in February 1997, the Company entered into a contract for the sale of substantially all of the assets of its real estate operations. See "Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition - Strategic Initiatives" and "Item 8. Financial Statements and Supplementary Data - Note 21 of Notes to Consolidated Financial Statements" for a description of the sales and operating results of these businesses.
(4) Operating income (loss) excludes general corporate expenses. Percentages reflect operating income (loss) as a percentage of segment net sales.
(5) Operating income (loss) includes from Olympic a loss of $1.0 million in 1995 and income of $1.6 million, $1.9 million and $1.2 million for years 1994, 1993 and 1992 respectively.
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MARKET DEVELOPMENTS
Casual wear, including jeans, knit shirts, flannel shirts and similar apparel, has been the fastest growing category within the apparel fabrics industry in recent years. The Company believes that this growth is the result of several factors, including (i) the adoption of casual lifestyles by the "baby-boom" generation, born between 1946 and 1964, and their children, (ii) the enhanced value of casual garments to consumers resulting from lower acquisition costs and lower life cycle costs (elimination of alteration, dry cleaning and pressing costs), (iii) enhanced styling of casual garments along with greater acceptance of casual wear in the workplace and (iv) strong brands such as Levi, Wrangler and The Gap which continue to create fashion interest for consumers.
The Company's domestic apparel fabrics markets have been affected by changing demographics associated with the maturation of the baby-boom generation. As the baby-boom generation has matured, product trends have evolved away from commodity-type products to higher quality products with more diverse styling. As a result, denim apparel manufacturers desire better fabric quality and styling to meet consumer demand, as well as faster service to reduce the risk of changing fashion trends. The size of the 15-to 24-year-old age category, which accounts for the largest jeans consumption segment of the U.S. population, began to expand in the mid-1990s when the children of baby boomers began to reach these ages. Demand for denim apparel is expected to increase as this segment of the U.S. population expands. By virtue of its styling expertise, manufacturing versatility and service capabilities, the Company believes that it has positioned itself to take advantage of the market opportunities presented by these demographic changes.
Internationally, consumption of denims has increased in industrialized countries, notwithstanding moderate population growth, as these countries continue to adopt U.S. casual fashion trends. In less industrialized countries, the potential market for denim jeans has continued to grow as youth populations expand. The Company believes that these international market trends present opportunities for long-term growth through the Company's international distribution network. Apparel fabrics exports have increased in recent years with 1996 apparel fabrics export sales at $187.0 million as compared with $175.7 million in 1995 and $135.9 million in 1994. The Company, in partnership with CIPSA, formed Parras Cone, a new denim manufacturing facility located in Mexico, to expand its manufacturing and market presence into Latin America. See "Business - International Operations."
The Company believes that the demographic trends applicable to the U.S. markets for its home furnishings fabrics indicate increases in demand as the baby boomers reach ages traditionally associated with high levels of spending on home furnishings. Additionally, there has been international demand for U.S. styled home furnishings products. The Company's strategy is to continue to expand its home furnishings businesses.
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PRODUCTS FOR APPAREL MARKETS
Denims. Cone markets and manufactures a wide variety of denim apparel fabrics. Denims are generally "yarn-dyed", which means that the yarn is dyed before the fabric is woven. The result is a fabric with variations in color that give denim its distinctive appearance. Fabric styling of denims, which the Company believes to be critical to this market, is supported by the Company's experienced stylists and extensive use of computer-aided design and manufacturing systems.
The Company is a leader in denim styling and development and believes that it produces a broader range of fashion denim than any of its competitors. In 1996, Cone sold over 225 different styles of denim. The styling process involves the creation of a wide array of fabric colors, shades and patterns in a variety of both traditional and innovative weaves. After weaving, fabrics are processed further in finishing operations that produce different textures and other physical properties. During this process, the Company's product development specialists and stylists generally work in collaboration with customers to assure that fabrics meet customer requirements and can be manufactured efficiently. This creates a strong working relationship that allows Cone to react quickly to its customers' rapidly changing needs.
Although the markets and end uses for denim are very diverse, the Company categorizes the market into heavyweight denims and specialty weight denims. Heavyweight denim is used primarily in jeans and is by far the largest segment of the denim market. Within the heavyweight market, the Company further classifies its denims as "value-added" and "basic." Value-added denims are distinguished by styling and customer service. Basic denims are less differentiated by styling and customer service with competition being primarily in the form of price and quality.
Cone's value-added denims are stylish and have broad market appeal. The Company's largest customer in this category is Levi Strauss, whose 501(R) jeans are produced solely from the Company's proprietary fabrics. Other customers include V.F. Corporation (Wrangler), Calvin Klein, The Gap, Polo, Hilfiger, Arizona and Guess.
Cone's basic denims, with mass market appeal, are used primarily in garments sold through retail chains, department stores and catalogs. Customers for this product include a majority of the same names as for value-added denims. Although the Company's basic denims are designed for the upscale segment of these markets, the Company also produces basic heavyweight blue denim, primarily at Parras Cone, to service mass market needs of certain customers. Sales of this product constituted approximately 20% of total denim sales in 1996.
Specialty weight denims include a variety of weave constructions, stripes, colors and weights and are used primarily in women's and children's wear. Although these fabrics constitute only a small
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portion of the denim market, they tend to establish market trends because of their use in higher fashion garments. Cone's customers in this group include OshKosh, The Gap, Ruff Hewn and Miller International.
As with all apparel fabrics, there is risk that fashion trends will change and consumers will develop preferences for fabrics other than denims for casual wear. However, the demand for denim jeans is growing, with a 7% increase in U.S. unit sales in 1996, and the industry appears to believe that growth will continue as evidenced by new garment manufacturers entering the market and expansion of capacity worldwide.
Specialty Sportswear Fabrics. The Company is the largest domestic producer of yarn-dyed plaid flannel and solid shade chamois flannel shirting fabrics. The Company's manufacturing capability for producing fabrics with a soft texture is essential to its success in this product group. These fabrics are primarily manufactured for use in menswear sold through catalog stores and in lighter-weight apparel products for women's and children's wear. Distribution channels have expanded in recent years to include department stores and discounters. Customers for these fabrics include M. Fine, Woolrich, L.L. Bean, J.C. Penney, Eddie Bauer and Levi Strauss.
Cone also serves niche markets for piece dyed fabrics based on unique dye, finishing, and yarn formation technologies and provides fabrics such as Splashdown(TM) dyed fabrics and its new wrinkle resistant fabric ProSpin(R).
Cone styles and distributes a line of specialty print fabrics for a wide range of branded apparel customers. These fabrics are printed at the Company's Carlisle plant. The markets for these products are primarily fashion women's and children's wear, and Cone's customers for these fabrics include OshKosh, L.L. Bean, Healthtex, Woolrich, J.C. Penney, H. D. Lee, No Fear and Guess.
Through its Carlisle plant, the Company also provides fabric printing services to converters of fashion apparel fabrics. These converters purchase unfinished fabrics from weaving mills, use outside sources such as Carlisle to dye the fabrics and print their designs, and then market the finished fabrics to apparel manufacturers. Carlisle is well known for its quality, service and technical capabilities in screen printing.
In December 1996, the Company approved the closing of the Granite Finishing plant. With this closing, the plant's dyeing and finishing production will be moved to the Carlisle plant. The production phaseout at Granite is expected to be substantially complete by the end of the third quarter of 1997.
Marketing and Sales. The Company's marketing focus is to serve upper-end and brand name apparel manufacturers through the development of innovative products that are recognized in the marketplace for their distinctive quality and styling.
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Styles of the Company's denim and other fabrics vary in color, finish and fabrication, depending upon fashion trends and the needs of the specific customer. The Company's stylists monitor fashion trends by traveling throughout the United States, Europe and the Far East to attend fashion and trade shows, meet with garment manufacturers and retailers and conduct market research. Together with the apparel marketing group, stylists work directly with Cone's customers to create fabrics that respond to rapidly changing fashion trends and customer needs.
The Company employs an apparel fabrics marketing and sales staff of more than 150 persons. Business management of apparel fabrics is organized into four operating divisions: Cone Denim North America, Cone Sportswear, Cone International Marketing and Cone Denim Europe. The Company believes that it has been able to achieve more effective customer service and improved efficiency through the integration of its styling, manufacturing, marketing and customer service functions. Except for Cone Denim Europe, the Company's apparel fabrics marketing groups are headquartered in Greensboro in proximity to apparel manufacturing facilities so that customer requirements can be translated more effectively into finished products. To provide a more direct working relationship with its customers, the Company also maintains sales offices located in New York, Los Angeles, San Francisco, Dallas, Brussels and Singapore.
The Company's marketing professionals, together with its stylists and product development personnel, work as early as one year in advance of a retail selling season to develop fabric styles, colors, constructions and finishes. There are three annual retail selling seasons: spring, fall (back-to-school) and the Christmas season. The Company's sales for a particular selling season generally begin six months in advance of that season. The Company's sales force presents each season's line to customers in its showrooms as well as in its customers' offices.
Manufacturing. The Company is the largest manufacturer of denims in the world. Cone bases this conclusion upon capacity and sales information obtained from trade sources. The Company is aware that a large foreign-based competitor is a substantial minority owner in a foreign manufacturing facility and, in reaching its conclusion, the Company has attributed to such competitor only its pro rata ownership in this facility.
Cone believes that it has the most versatile denim manufacturing capabilities in the world. The Company's denim facilities are modern, flexible, vertically integrated, and encompass all manufacturing processes necessary to convert raw fiber into finished fabrics. The Company has extensive flexibility in its yarn spinning operations, with open-end and ring spinning equipment. The Company's denim weaving facilities, which include approximately 850 weaving machines, utilize all major cotton weaving technologies, including double-width projectile, air-jet and rapier machines. The Company's dyeing and finishing facilities include a wide range of technologies, with seven indigo long-chain dyeing machines, package
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and beam dyeing, continuous overdye machinery and raw cotton dyeing equipment. Specialty dyeing and printing processes for apparel fabrics are conducted at the Company's Carlisle plant, which is one of the largest textile printing facilities in the United States.
Cone is recognized internationally as a quality leader with its denim and sportswear weaving plants being certified under the ISO 9002 process.
The Company also believes that it is a leader in customer service. The Company's manufacturing facilities are continually scheduled and coordinated to maximize versatility. Approximately 60% of Cone's denim volume is shipped under its just-in-time quality assurance and delivery program.
Product and process development is supported by special manufacturing development groups, which have specialists located in each facility. These groups work with the Company's stylists and its customers' stylists to produce new products for the marketplace. The Company uses on-line computer-aided design systems to increase styling effectiveness.
Raw Materials. The primary raw material for the Company's fabric manufacturing operations is cotton. The policies of the U.S. Government affect the cost and supply of cotton in the U.S. and the policies of foreign governments have an effect on worldwide prices and supplies as well. Prior to 1991, domestic cotton prices generally exceeded world price levels, which created a competitive disadvantage for U.S. textile manufacturers who were generally prohibited by U.S. law from importing cotton. Since 1991, changes in U.S. law, allowing limited imports or providing government payments to cotton purchasers, have resulted in effective U.S. cotton costs being more competitive with world levels. Congress has recently passed additional farm legislation that is aimed at reducing farm subsidies and allowing farmers more versatility in planting decisions. The long-term impact of this legislation on cotton supplies and pricing is unclear. However, management believes that U.S. companies will continue to be able to acquire adequate cotton supplies at prices competitive with offshore manufacturers but there can be no assurance that these results will always occur. To the extent that effective U.S. cotton prices exceed world prices, the Company's competitiveness may be materially adversely affected.
Since cotton is an agricultural product, its supply and quality are subject to the forces of nature. Although the Company has always been able to acquire sufficient supplies of cotton for its operations in the past, any shortage in the cotton supply by reason of weather, disease or other factors could adversely affect the Company's operations.
In late 1993 and continuing through 1995, cotton prices increased throughout the world. The Company believes that cotton prices were and are being affected by three major trends: (i) an increase in
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worldwide demand as major consuming countries have recovered from a cyclical recession, (ii) disappointing cotton crops in China, India and Pakistan in 1993 and 1994 and in the U.S. in 1995 resulting from poor weather, disease and insects and (iii) financial speculation in commodities markets which tend to exacerbate price movements. Because the Company cannot always pass increased cotton costs on to its customers, such increases have adversely affected its profitability in the past and may do so in the future. See "Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition."
The Company has an established cotton purchasing program, administered in conformance with policies approved by the Board of Directors, to ensure an uninterrupted supply of appropriate quality and quantities of cotton, to hedge committed and anticipated fabric sales and to manage margin risks associated with price fluctuations on anticipated cotton purchases. The Company primarily uses forward purchase contracts and, to a lesser extent, futures and options contracts. Management believes that its cotton purchasing program has resulted in lower overall cotton prices than if cotton were purchased solely on a spot market basis or by solely matching cotton purchases with product sales. Since prices for forward purchase contracts are sometimes fixed in advance of shipment, the Company may benefit from its fixed price purchases in cotton if prices thereafter rise, or fail to benefit if prices subsequently fall. There can be no assurance the forward purchase contracts and hedging transactions will not result in higher cotton costs to the Company or will protect the Company from price fluctuations.
Cone also purchases "greige goods" (fabrics that have not been dyed or finished), yarn, synthetic fibers, and dyes and chemicals. These raw materials have normally been available in adequate supplies through a number of suppliers.
Competition. The textile apparel fabrics business is highly competitive. No single company dominates the industry and domestic and foreign competitors range from large, integrated enterprises to small niche concerns. There are nine denim manufacturers in the United States, of which Cone is the largest, and three domestic producers comprise approximately 60 percent of the U.S. productive capacity. Foreign competition in domestic markets is in the form of imported garments. Primary competitive factors include price, product styling and differentiation, customer service, quality and flexibility, with the significance of each factor dependent upon the particular needs of the customer and the product involved. Increased competition in the form of imported apparel from Mexico and other countries, the migration of garment manufacturing facilities to Mexico and Caribbean countries, additional worldwide capacity, more aggressive pricing from domestic companies and the proliferation of newly styled fabrics competing for fashion acceptance have been factors affecting the Company's business
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environment. Any failure of the Company to compete effectively in this environment or to keep pace with changing markets could have a material adverse effect on the Company's results of operations and financial position.
The level of import protection in the U.S. for domestic producers of textiles is subject to both domestic political and foreign policy considerations. The World Trade Organization ("WTO") was formed in January 1995 and is the successor to the General Agreement on Trade and Tariffs ("GATT") approved by Congress in December 1994. This new multilateral trade organization has set forth mechanisms by which world trade in textiles and clothing is being progressively liberalized by phasing-out quotas and reducing duties over a ten-year period which began in January of 1995. Although the Company's export business should benefit from reduced tariffs, there can be no assurance that the significant reduction in import protection for domestic textile manufacturers will not have a material adverse effect on the Company's results of operations and financial condition.
The North American Free Trade Agreement ("NAFTA"), which became effective on January 1, 1994, has created a free-trade zone among Canada, Mexico and the U.S. NAFTA contains safeguards which were sought by the U.S. textile industry, including a rule of origin requirement that products be processed in one of the three countries in order to benefit from the agreement. NAFTA will phase out all trade restrictions and tariffs on textiles and apparel among the three countries. In addition, legislation has been proposed that would grant benefits to other countries in the Caribbean and Central and South America that are roughly equivalent to those applicable to Mexico under NAFTA. The Company believes that the removal of tariffs on denim and denim jeans in the participating countries presents opportunities for growth. Cone's domestic operations may benefit from the improved access to Mexico's consumer markets and from access to garment manufacturers in Mexico and the Caribbean Basin who are competitive with traditional import sources from the Far East. The Company's Mexican joint venture, Parras Cone, benefits from its access to U.S. markets. However, there can be no assurance that NAFTA, or the possible adoption of proposed legislation, will not adversely affect the Company.
The Company's domestic strategy is to compete primarily on the basis of quality, styling and service. The Company believes that the historically high quality of its products and manufacturing processes has created a competitive advantage, which it has enhanced by the extensive use of statistical quality control and investment in modern equipment, including manufacturing process controls. The Company also believes that its experienced stylists and product development specialists, its use of computer-aided design systems and its manufacturing versatility have created a competitive advantage in styling.
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The Company has focused its operations on the manufacture of fabrics for use in garments that are less vulnerable to import penetration. The location of the Company's U.S. manufacturing facilities, its joint venture in Mexico and its emphasis on shortening production and delivery times allows the Company to respond more quickly than foreign producers to changing fashion trends and to its domestic customers' demands for precise production schedules and rapid delivery. The Company has invested in technological and process improvements to meet demand for quality and styling. Its emphasis on customer service is supported by its just-in-time and quick response programs and by electronic data interchange (EDI) with customers. These efforts have improved communication, planning and processing time in manufacturing.
The Company believes it effectively competes in foreign markets through export sales. See "Business - International Operations."
Seasonality. Demand for the Company's apparel products and the level of the Company's sales fluctuate moderately during the year. Generally, there is increased consumer demand for garments made of denim and the Company's specialty apparel fabrics during the fall (back-to-school) and the Christmas season. As a result, demand for the Company's apparel fabrics is generally higher during the first half of the calendar year when apparel fabrics are produced for these selling seasons.
HOME FURNISHINGS PRODUCTS
Textile Fabrics. The Cone Finishing Division, consisting of the Company's Carlisle and Raytex plants, is the largest commission printer of decorative fabrics in the U.S. As commission printers, Carlisle and Raytex prints fabrics owned by customers on a fee basis. Customers for Carlisle's printing services include Waverly Division of F. Schumacher & Co., Western Textiles, P. Kaufman, Anju/Woodridge, Covington, Ametex and Spectrum. The home furnishings fabrics processed at Carlisle are generally used for upper-end upholstery and drapery prints. Customers for Raytex include Beco, Galey & Lord, Croscill, Magic Textiles, Revman, Perfect Fit and Whiting.
The Carlisle plant is a modern, one-million square foot facility specializing in rotary screen printing. In recent years, the Company has invested heavily in computerized color-mixing systems and automated process controls in order to support its competitive strategy of focusing on quality and service.
The Raytex plant is a modern 260,000 square foot facility with six printing machines specializing in wide rotary screen printing. In 1996, a new preparation range was installed providing additional finishing capabilities. Raytex is one of the largest wide-fabric commission printers in the U.S.
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Cone Finishing Division's marketing headquarters are located in New York City. Marketing efforts of the New York sales staff are augmented by close working relationships between Carlisle's and Raytex's production and technical staff and customers' designers and stylists. Cone Finishing also maintains a customer service center that utilizes electronic data interchange (EDI) with major customers.
Cone Decorative Fabrics is a "converter" of printed and solid woven fabrics for upholstery, draperies and bedspreads. A converter designs and markets fabrics, which are manufactured and printed for the converter by others. The Decorative Fabrics division's lines are printed primarily at the Carlisle plant under the name "John Wolf Decorative Fabrics."
Cone Decorative Fabrics are marketed domestically and internationally through the division's sales staff and sales agents. The division's sales staff handles sales to large customers such as hotels, institutions and furniture manufacturers, as well as "jobbers," who resell to decorators, fabric retailers and certain smaller quantity users. International sales and sales to other smaller customers are made primarily through agents.
The Cone Finishing Division competes directly with two large commission printers, the Cherokee division of Spartan Mills and Santee Print Works, as well as the Brookneal plant of the Bibb Company. Cone Decorative Fabrics competes with a large number of domestic and foreign suppliers of decorative fabrics. Both divisions compete primarily on the basis of quality and service.
The Cone Finishing Division also competes indirectly with other suppliers of products used in the home furnishing industry including jacquard woven fabrics, velvets and plain shade fabrics. Consumer fashion preference is based upon coloration, texture and value. As with all home furnishing fabrics, there is a risk that consumer fashion preference will shift away from prints. The Company has experienced a shift in preference away from printed fabrics.
In order to dampen the effects of these shifts in consumer preference, the Company formed the Cone Jacquards Division and entered the jacquard weaving business with the start up in late 1995 of a new weaving facility. The Cone Jacquards plant is a modern 88,000 square foot facility with approximately 20 wide weaving machines. Cone Jacquards produces broadloom jacquard fabrics for furniture manufacturers, fabric distributors, retailers, converters and specialty products manufacturers. Competitors of Cone Jacquards include Mastercraft, Burlington, Culp, Quaker and Blumenthal. Customers for Cone Jacquards include Barrow Industries, Kravet, Klaussner Furniture, Thomasville Upholstery and Drexel Heritage.
Foam Products. In first quarter of 1996, the Company completed the sale of its Olympic Products Division to British Vita PLC. Proceeds of the sale were in excess of $50 million associated with the sale of fixed assets, inventories and the liquidation of receivables.
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Olympic Products supplied polyurethane foam and related products to the home furnishings and automotive markets.
The Company sold Olympic because management did not believe it was appropriate to invest substantial amounts of capital in order to grow the business to the size required to be an effective competitor in the business. Taking this action allows the Company to focus on its core strengths for the long-term.
Real Estate Activities. The Company owns approximately 750 acres of real estate in the Greensboro area, substantially all of which were purchased originally to support the Company's manufacturing operations. The Company determined that the land was no longer needed for this purpose and has systematically developed and liquidated these properties. These activities are conducted through a wholly owned subsidiary, Cornwallis Development Co. Net sales from real estate activities generally account for less than two percent of the Company's total net revenues.
Consistent with its strategy to concentrate on its core business, in late 1996 the Company announced its plan to sell Cornwallis Development Co. Several bids were received and the Company has entered into a contract with an international real estate development firm to sell certain real estate assets including those of Cornwallis. See "Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition - Strategic Initiatives."
INTERNATIONAL OPERATIONS
The Company has a long history of distributing its products internationally and exported approximately 35% of the Company's denim sales in 1996. The Company has sales agents in Europe, Japan, Korea, Hong Kong, Africa, and throughout Central and South America, and it maintains extensive support services in trade financing, traffic and transportation in order to support its international presence. The Company's strategy is to service its international customers with the same degree of commitment to quality, service and fabric development as its domestic customers. The Company believes this philosophy is responsible for Cone's position as the largest U.S. exporter of denims. The Company's international customers include: Levi International, Joker Jeans and Big Star in Europe; Edwin in Japan; Wellsum and Talbots in Hong Kong; and Ellis, Custer, Jeans and Jackets and UFO brands in South America.
Principal competitive factors in the international markets for denims are quality, price and styling. The Company believes it has competitive advantages in the upper-end segment of the market in quality, service and fabric development as compared with foreign manufacturers, as a result of the economies of scale resulting from manufacturing experience and the versatility of its manufacturing facilities. In addition, denim jeans have an image of being uniquely American products, which complements the Company's strategy of serving the upper-end "genuine" jeans market.
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The Company's competitiveness in international market segments is influenced by tariffs and shipping costs. The Company is assessing the feasibility of manufacturing within certain trade blocs in order to compete more effectively in these markets.
In 1993, the Company purchased an ownership in CIPSA, the largest Mexican denim manufacturer and entered into a 50/50 joint venture arrangement with CIPSA to build and operate a world class denim manufacturing plant in Mexico. The joint venture, Parras Cone, was financed with approximately $74 million in debt, non-recourse to the partners, and a total equity investment of $60 million split equally between the two partners. Construction of the joint venture facility was completed in 1995 and it began production of basic denims and yarn in the fourth quarter of 1995.
The Company has several objectives in pursuing its Mexican initiatives. The Company is seeking access to the Mexican distribution system to sell the Company's products and access to lower cost cut and sew facilities in order to increase market share with private label customers and large branded customers migrating to Mexico. The Company also is seeking to gain from lower labor and other cost advantages, while benefiting from its technological expertise. The Company plans to export basic denims made by Parras Cone throughout the world by taking advantage of Cone's distribution network.
Cone Decorative Fabrics and Cone Jacquards export approximately 10% of their sales volume. Styling and service are the principal competitive factors affecting its position in these markets. The Company believes that there is an international demand for U.S. styling and design.
TRADEMARKS AND PATENTS
The Company owns several registered trademarks containing the "Cone" name and pine cone design. In addition, the Company holds various other trademarks and trade names used in connection with its business and products, both domestically and internationally. The Company believes that the name recognition of Cone Mills and its reputation for quality, service and product development have value in both domestic and international markets.
CUSTOMERS
The Company has one unaffiliated customer, Levi Strauss ("Levi"), which accounts for more than 10% of consolidated sales. Sales to this customer accounted for approximately 49%, 39% and 34% of sales from continuing operations in 1996, 1995 and 1994, respectively. In 1996, Levi repurchased common shares in a leveraged transaction that may or may not affect purchasing practices. The loss of Levi as a customer, or a significant reduction in its purchases from the Company, would have a material adverse effect on the Company's results of operations.
FORM 10-K Page 17
Item 1. (continued)
Levi has been a customer of the Company for more than 75 years and a close, cooperative supplier/customer relationship has evolved through the development of the Company's proprietary fabrics for use in Levi's 501(R) family of jeans. In addition to supplying fabrics for Levi's 501(R) family of jeans, the Company sells other denim fabrics to Levi. Because the Company is Levi's major denim supplier, Levi initiated discussions with the Company in 1989 concerning ways to assure the continuity of this relationship. As a result of these discussions, Cone and Levi entered into an exclusive Supply Agreement as of March 30, 1992, which confirms that Levi will continue to use only Cone's proprietary denim fabrics in manufacturing Levi's 501(R) family of jeans and that Cone will continue to supply such fabrics solely to Levi. The volume of purchases by Levi and the prices charged by Cone will continue to be subject to customary negotiations between the parties.
The Supply Agreement expires on March 30, 2002 and is automatically extended, unless either party gives notice otherwise, for an additional year so that the remaining term is five years. Following a change in control, the Supply Agreement would terminate at the end of the three-year supply arrangement or of the lease term, as the case may be. Additionally, Levi may terminate the Supply Agreement upon 30 days' written notice and either party may terminate the Supply Agreement in the event of the other party's insolvency, bankruptcy or occurrence of a similar event.
BACKLOG
The Company's apparel and home furnishings order backlog was approximately $132 million, or 39 million yards, at December 29, 1996, as compared to approximately $186 million or 54 million yards at December 31, 1995. Physical deliveries for accepted fabric orders in the apparel industry vary in that some products are ordered for immediate delivery only, while others are ordered for delivery several months in the future. In addition, the Company has an ongoing proprietary program for which orders are issued only for nearby delivery. Therefore, orders on hand are not necessarily indicative of total future revenues. It is expected that substantially all of the orders outstanding at December 29, 1996, will be filled within the first quarter of 1997.
RESEARCH AND DEVELOPMENT
The research and development activities of the Company are directed primarily toward improving the quality, styling and performance of its apparel fabrics and other products and services. The Company also is engaged in the development of computer-aided design and manufacturing systems and other methods of improving the interaction between the Company's stylists and its customers. These activities are conducted at various facilities, and expenses related to these activities are an immaterial portion of the Company's overall operating costs.
FORM 10-K Page 18
Item 1. (continued)
GOVERNMENTAL REGULATION
Federal, state and local regulations relating to the workplace and the discharge of materials into the environment are continually changing; therefore, it is difficult to gauge the total future impact of such regulations on the Company. However, existing government regulations are not expected to have a material effect on the Company's financial position, operating results or planned capital expenditures. The Company currently has an active environmental protection committee and an active workplace safety organization.
EMPLOYEES
At January 31, 1997, the Company employed approximately 6,600 persons, of whom approximately 1,300 were salaried and approximately 5,300 were hourly employees. Of such hourly employees, approximately 2,200 are represented by collective bargaining units and are employed under collective bargaining agreements that provide for annual wage negotiations in the spring of each year. Based upon its records relating to the withholding of union dues from employee compensation, the Company believes that approximately 1,100 of its employees are dues-paying union members. The Company has not suffered any major disruptions in its operations from strikes or similar events for more than a decade and considers its relationship with its employees to be satisfactory.
Item 2.
Item 2. Property
The Company operates nine manufacturing plants - seven in North Carolina and two in South Carolina. There are six apparel fabric and three home furnishings plants. The Company also operates several distribution centers and warehouses. All significant manufacturing facilities are held in fee and are substantially free of any significant liens or other encumbrances. The Company's manufacturing facilities total approximately 4.3 million square feet of floor space, with buildings generally constructed of brick, steel, concrete or concrete block. All such facilities are maintained in good condition and are suitable for their respective purposes. Even when such facilities are substantially fully utilized, the Company believes that it is in a position to respond to opportunities to produce additional higher margin fabrics through changes in product mix and through acquisition of yarn and greige goods from outside sources for further processing and finishing by the Company. The Company leases office buildings in Greensboro where its executive and administrative offices are located. All of the Company's sales offices are leased from unrelated parties.
Parras Cone, the Company's joint venture with CIPSA, owns 20 acres of land and a 575,000 square-foot building completed in 1995, which provides manufacturing space and raw materials and finished goods warehouses.
FORM 10-K Page 19
Item 3.
Item 3. Legal Proceedings
In November 1988, William J. Elmore and Wayne Comer (the "Plaintiffs") former employees of the Company, instituted a class action suit against the Company and certain other defendants in which the Plaintiffs asserted a variety of claims related to the Cone Mills Corporation 1983 ESOP (the "1983 ESOP") and certain other employee benefit plans maintained by the Company. In March 1992, the United States District Court in Greenville, South Carolina entered a judgment in the amount of $15.5 million (including an attorneys' fee award) against the Company with respect to an alleged promise to make additional Company contributions to the 1983 ESOP and all claims unrelated to the alleged promise were dismissed. The Company, certain individual defendants and the Plaintiffs appealed.
On May 6, 1994, the United States Court of Appeals for the Fourth Circuit, sitting EN BANC, affirmed the prior conclusion of a panel of three of its judges and unanimously reversed the $15.5 million judgment and unanimously affirmed all of the District Court's rulings in favor of the Company. However, the Court of Appeals affirmed, by an equally divided court, the District Court's holding that Plaintiffs should be allowed to proceed on an alternative theory whether, subject to proof of detrimental reliance, Plaintiffs could establish that a letter to salaried employees on December 15, 1983 created an enforceable obligation that could allow recovery on a theory of equitable estoppel. Accordingly, the case was remanded tothe District Court for a determination of whether the Plaintiffs could establish detrimental reliance creating estoppel of the Company.
On April 19, 1995, the District Court granted a motion by the Company for summary judgment on the issues of equitable estoppel and third-party beneficiary of contract which had been remanded to it by the Court of Appeals. The court ruled that the Plaintiffs could not forecast necessary proof of detrimental reliance. The District Court, however, granted Plaintiffs motion to amend the complaint insofar as they sought to pursue a "new" claim for unjust enrichment, but denied their motion to amend so far as they sought to add claims for promissory estoppel and unilateral contract. The court further denied the Company's motion to decertify the class.
The District Court held a hearing on July 24, 1995 to decide on the merits Plaintiffs' lone remaining claim of unjust enrichment, and in an order entered September 25, 1995, the District Court dismissed that claim with prejudice. On October 20, 1995, the Plaintiffs appealed to the Court of Appeals from the April 19, 1995 and September 25, 1995 orders of the District Court. Oral argument on Plaintiffs' appeal was held in the Court of Appeals on October 31, 1996. Due to the uncertainties inherent in the litigation process, it is not possible to predict the ultimate outcome of this lawsuit. However, the Company has defended this matter vigorously, and it is the opinion of the Company's management that the probability is remote that this lawsuit, when finally concluded, will have a material adverse effect on the Company's financial condition or results of operations.
FORM 10-K Page 20
Item 3. (continued)
The Company is a party to various other legal claims and actions incidental to its business. Management believes that none of these claims or actions, either individually or in the aggregate, will have a material adverse effect on the financial condition of the Company or results of operations.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 4A. Executive Officers of the Registrant.
All officers of the Registrant are elected or reelected each year at the Annual Meeting of the Board of Directors or at other times as necessary. All officers serve at the pleasure of the Board of Directors and until their successors are elected and qualified.
J. Patrick Danahy joined the Company in 1971; he was named General Manager of the Carlisle Plant in 1978 and President of the Cone Finishing Division in September 1984. He was elected corporate Vice President in May 1986 and director in May 1989. He was named President and Chief Operating Officer in August 1989 and President and Chief Executive Officer in August 1990.
John L. Bakane joined the Company in 1975 and has served in various administrative and staff positions involving planning, financial management and customer service. He was named corporate Vice President in May 1986, became Chief Financial Officer in November
FORM 10-K Page 21
Item 4A. (continued)
1988 and was elected to the Board of Directors in May 1989. On February 17, 1995, he was elected Executive Vice President of the Company. On November 8, 1996, he assumed responsibility for management of the Denim Group of the Company.
James S. Butner was employed by Celanese Corporation, a synthetic fibers and chemical company, from 1979 to 1984, at which time he became Director of Industrial and Public Relations for the Company. Effective August 1, 1988, he was named corporate Vice President for Industrial and Public Relations.
Neil W. Koonce was employed by the Company in January 1974 as a staff attorney. He was elected Assistant General Counsel in 1985, General Counsel in August 1987 and Vice President in May 1989.
Terry L. Weatherford was Secretary and General Counsel of Blue Bell, Inc., a manufacturer and distributor of wearing apparel, from 1981 to 1987. From 1987 to 1993, he was self-employed as an attorney except for a thirteen-month period from June 1988 when he was employed by Manufactured Homes, Inc., a manufacturer and retailer of mobile homes, as its General Counsel. He was employed by the Company and elected Assistant Secretary in May 1993, and effective December 1993, was elected Secretary. In May 1995 he was elected Vice President and Secretary.
David E. Bray was employed in 1977 as Director of Treasury Services. He was elected Assistant Treasurer of the Company in May 1984 and Treasurer in November 1988.
Gary L. Smith was employed by the Company in 1981 and has served in various accounting, planning and financial management positions. In 1990, he was named Manager of Business Analysis. He was elected Assistant Controller in 1994 and was named Controller of the Company on December 16, 1996.
PART II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock has traded on the New York Stock Exchange under the ticker symbol "COE" since June 18, 1992, the date of its public offering. The following table sets forth the high and low sales prices of the Common Stock as reported on the NYSE Composite Tape for the periods indicated.
FORM 10-K Page 22
Item 5
The Company has not declared any dividends on its Common Stock since it became a privately held company in 1984 and anticipates that its earnings for the foreseeable future will be retained for use in its business and to finance growth. Payment of cash dividends in the future will depend upon the Company's financial condition, results of operations, current and anticipated capital requirements, and other factors deemed relevant by the Company's Board of Directors. See "Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition."
The approximate number of holders of record of the Company's Common Stock as of February 28, 1997 was 484.
Item 6.
Item 6. Selected Financial Data
The information appearing under the heading "Historical Financial Data" on page 38 of the Registrant's 1996 Annual Report to Shareholders is incorporated herein by reference.
Item 7.
Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition
The information appearing under the heading "Management's Discussion and Analysis of Results of Operations and Financial Condition" on pages 12 thru 16 of the Registrant's 1996 Annual Report to Shareholders is incorporated herein by reference.
Item 8.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements and notes thereto, appearing on pages 18 through 37 of the Registrant's 1996 Annual Report to Shareholders, are incorporated herein by reference.
FORM 10-K Page 23
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
Information relating to directors of the Company is presented under the heading "Election of Directors" in the Company's definitive Proxy Statement prepared for the Annual Meeting of Shareholders to be held on May 13, 1997, and is hereby incorporated by reference. Information regarding executive officers is included as Item 4A in Part I.
Item 11.
Item 11. Executive Compensation.
Information relating to executive compensation is presented under the heading "Executive Compensation" in the Company's definitive Proxy Statement prepared for the Annual Meeting of Shareholders to be held on May 13, 1997, and is hereby incorporated by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information with respect to beneficial ownership of the Company's voting securities by each director and all officers and directors as a group, and by any person known to beneficially own more than 5% of any class of voting security of the Company, is presented under the heading "Security Ownership of Directors, Nominees and Named Executive Officers" and "Security Ownership of Certain Beneficial Owners" in the Company's definitive Proxy Statement prepared for the Annual Meeting of Shareholders to be held on May 13, 1997, and is hereby incorporated by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions.
Information with respect to certain relationships and related transactions is presented under the headings "Compensation of Directors" and "Certain Relationships and Related Transactions" in the Company's definitive Proxy Statement prepared for the Annual Meeting of Shareholders to be held on May 13, 1997, and is hereby incorporated by reference.
FORM 10-K Page 24
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) The following financial statements of the Registrant are incorporated by reference in Item 8 hereof:
Report of Independent Auditor
Consolidated Statements of Operations for the Years Ended December 29, 1996, December 31, 1995 and January 1, 1995
Consolidated Balance Sheets as of December 29, 1996 and December 31, 1995
Consolidated Statements of Stockholders' Equity for the Years Ended December 29, 1996, December 31, 1995 and January 1, 1995
Consolidated Statements of Cash Flows for the Years Ended December 29, 1996, December 31, 1995 and January 1, 1995
Notes to Consolidated Financial Statements
(a)(2) The following Financial Statement Schedules are presented on pages 25 through 26 hereto.
Report of Independent Auditor relating to Schedule II
Schedule II - Valuation and Qualifying Accounts
All other schedules specified under Regulation S-X are omitted because they are not applicable, not required or the information required appears in the Consolidated Financial Statements or Notes thereto.
(a)(3) Exhibits. Exhibits to this report are listed on the accompanying Index to Exhibits.
(b) Reports on Form 8-K
No report on 8-K was filed during the fourth quarter of 1996.
FORM 10-K Page 25
MCGLADREY & PULLEN, LLP
CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS
INDEPENDENT AUDITOR'S REPORT ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors Cone Mills Corporation Greensboro, North Carolina
Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The consolidated supplemental schedule II is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a part of the basic consolidated financial statements. This schedule has been subject to the auditing procedures applied in our audits of the basic consolidated financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic consolidated financial statements taken as a whole.
/s/ McGLADREY & PULLEN, LLP MCGLADREY & PULLEN, LLP
Greensboro, North Carolina February 14, 1997
FORM 10-K Page 26
CONE MILLS CORPORATION AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Years Ended December 29, 1996, December 31, 1995 and January 1, 1995 (amounts in thousands)
(a) Represents bad debts charged off. (b) Represents reserves for discontinued operations (Note 18). (c) Represents reserves charged to costs and expenses.
FORM 10-K INDEX TO EXHIBITS Page 27
Exhibit Sequential No. Description Page No.
* 2.1 Receivables Purchase Agreement dated as of August 11, 1992, between the Registrant and Delaware Funding Corporation filed as Exhibit 2.01 to the Registrant's report on Form 8-K dated August 13, 1992.
* 2.1(a) Amendment to Receivables Purchase Agreement dated April 4, 1994, between the Registrant and Delaware Funding Corporation filed as Exhibit 2.1 to the Registrant's report on Form 8-K dated March 1, 1995.
* 2.1(b) Amendment to Receivables Purchase Agreement dated June 7, 1994, between the Registrant and Delaware Funding Corporation filed as Exhibit 2.2 to the Registrant's report on Form 8-K dated March 1, 1995.
* 2.1(c) Amendment to Receivables Purchase Agreement dated as of June 30, 1994, between the Registrant and Delaware Funding Corporation filed as Exhibit 2.1 to the Registrant's report on Form 10-Q for the quarter ended July 3, 1994.
* 2.1(d) Amendment to Receivables Purchase Agreement dated as of November 15, 1994, between the Registrant and Delaware Funding Corporation filed as Exhibit 2.4 to the Registrant's report on Form 8-K dated March 1, 1995.
* 2.1(e) Amendment to Receivables Purchase Agreement dated as of June 30, 1995, between the Registrant and Delaware Funding Corporation filed as Exhibit 2.1(e) to the Registrant's report on Form 10-Q for the quarter ended July 2, 1995.
* 2.1(f) Amendment to Receivables Purchase Agreement dated as of December 31, 1995, between the Registrant and Delaware Funding Corporation, filed as Exhibit 2.1(f) to the Registrant's report on Form 10-K for the year ended December 31, 1995.
FORM 10-K INDEX TO EXHIBITS Page 28
Exhibit Sequential No. Description Page No.
* 2.1(g) Amendment to Receivables Purchase Agreement and Letter Agreement referred to therein dated as of June 24, 1996, between the Registrant and Delaware Funding Corporation filed as Exhibit 2.1(g) to Registrant's report on Form 10-K for the quarter ended June 30, 1996.
* 2.1(h) Amendment to Receivables Purchase Agreement dated as of June 30, 1996, between the Registrant and Delaware Funding Corporation filed as Exhibit 2.1(h)to the Registrant's report on Form 10-Q for the quarter ended September 29, 1996.
* 2.1(i) Amendment to Receivables Purchase Agreement dated as of August 26, 1996, between the Registrant and Delaware Funding Corporation filed as Exhibit 2.1(i) to the Registrant's report on Form 10-Q for the quarter ended September 29, 1996.
* 2.1(j) Amendment to Receivables Purchase Agreement dated as of September 29, 1996, between the Registrant and Delaware Funding Corporation filed as Exhibit 2.1(j) to the Registrant's report on Form 10-Q for the quarter ended September 29, 1996.
* 2.2(a) Investment Agreement dated as of June 18, 1993, among Compania Industrial de Parras, S.A. de C.V., Sr. Rodolfo Garcia Muriel, and Cone Mills Corporation, filed as Exhibit 2.2(a) to Registrant's report on Form 10-Q for the quarter ended July 4, 1993, with exhibits herein numbered 2.2(b),(c), (d), (f), (g), and (j) attached.
* 2.2(b) Commercial Agreement dated as of June 25, 1993, among Compania Industrial de Parras, S.A. de C.V., Cone Mills Corporation and Parras Cone de Mexico, S.A., filed as Exhibit 2.2(b) to Registrant's report on Form 10-Q for the quarter ended July 4, 1993.
FORM 10-K INDEX TO EXHIBITS Page 29
Exhibit Sequential No. Description Page No.
* 2.2(c) Guaranty Agreement dated as of June 25, 1993, between Cone Mills Corporation and Compania Industrial de Parras, S.A. de C.V., filed as Exhibit 2.2(c) to Registrant's report on Form 10-Q for the quarter ended July 4, 1993.
* 2.2(d) Joint Venture Agreement dated as of June 25, 1993, between Compania Industrial de Parras, S.A. de C.V., and Cone Mills (Mexico), S.A. de C.V. filed as Exhibit 2.2(d) to Registrant's report on Form 10-Q for the quarter ended July 4, 1993.
* 2.2(e) First Amendment to Joint Venture Agreement dated as of June 14, 1995, between Compania Industrial de Parras, S.A. de C.V., and Cone Mills (Mexico), S.A. de C.V., filed as Exhibit 2.2(e) to the Registrant's report on Form 10-Q for the quarter ended July 2, 1995.
* 2.2(f) Joint Venture Registration Rights Agreement dated as of June 25, 1993, among Parras Cone de Mexico, S.A., Compania Industrial de Parras, S.A. de C.V. and Cone Mills (Mexico), S.A. de C.V. filed as Exhibit 2.2(e) to Registrant's report on Form 10-Q for the quarter ended July 4, 1993.
* 2.2(g) Parras Registration Rights Agreement dated as of June 25, 1993, between Compania Industrial de Parras, S.A. de C.V. and Cone Mills Corporation filed as Exhibit 2.2(f) to the Registrant's report on Form 10-Q for the quarter ended July 4, 1993.
* 2.2(h) Guaranty Agreement dated as of June 14, 1995, between Compania Industrial de Parras, S.A. de C.V. and Cone Mills Corporation filed as Exhibit 2.2(h) to the Registrant's report on Form 10-Q for the quarter ended July 2, 1995.
FORM 10-K INDEX TO EXHIBITS Page 30
Exhibit Sequential No. Description Page No.
* 2.2(i) Guaranty Agreement dated as of June 15, 1995, between Cone Mills Corporation and Morgan Guaranty Trust Company of New York filed as Exhibit 2.2(I) to the Registrant's report on Form 10-Q for the quarter ended July 2, 1995.
* 2.2(j) Support Agreement dated as of June 25, 1993, among Cone Mills Corporation, Sr. Rodolfo L. Garcia, Sr. Rodolfo Garcia Muriel and certain other person listed herein ("private stockholders") filed as Exhibit 2.2(g) to Registrant's report on Form 10-Q for the quarter ended July 4, 1993.
* 2.2(k) Call Option dated September 25, 1995, between Registrant and SMM Trust, 1995 - M, a Delaware business trust, filed as Exhibit 2.2(k) to the Registrant's report on Form 10-Q for the quarter ended October 1, 1995.
* 2.2(l) Put Option dated September 25, 1995, between Registrant and SMM Trust, 1995 - M, a Delaware business trust, filed as Exhibit 2.2(l) to the Registrant's report on Form 10-Q for the quarter ended October 1, 1995.
* 2.2(m) Letter Agreement dated January 11, 1996 among Registrant, Rodolfo Garcia Muriel, and Compania Industrial de Parras, S.A. de C.V., filed as Exhibit 2.2(m) to the Registrant's report on Form 10-K for the year ended December 31, 1995.
* 2.3 Asset Purchase Agreement dated as of December 2, 1994 between the Registrant, Lancer Industries, Inc. and M.P.M. Transportation, Inc., filed as Exhibit 2 to the Registrant's Current Report on Form 8-K dated December 2, 1994.
FORM 10-K INDEX TO EXHIBITS Page 31
Exhibit Sequential No. Description Page No.
* 2.4 Olympic Division Acquisition Agreement by and among Vitafoam Incorporated, British Vita PLC, and Registrant dated January 19, 1996 with related Lease Agreement, Lease Agreement and Option to Purchase, Sublease Agreement, Services Agreement, License Agreement And Hold Back Escrow Agreement, each dated January 22, 1996. The Acquisition Agreement and related agreements were filed as Exhibit 2.4 to the Registrant's report on Form 10-K for the year ended December 31, 1995. The following exhibits and schedules to the Acquisition Agreement have been omitted. The Registrant hereby undertakes to furnish supplementally a copy of such omitted exhibit or schedule to the Commission upon request.
Exhibits Exhibit A1 Form of Buyer Lease Exhibit A2 Form of Buyer Lease Exhibit B Form of Holdback Escrow Agreement Exhibit C1 Facility 1 Exhibit C2 Facility 2 Exhibit C3 Facility 3 Exhibit C4 Facility 4 Exhibit C5 Facility 5 Exhibit C6 Facility 6 Exhibit D Form of Sublease Agreement Exhibit E Form of Opinion of Buyer's Counsel Exhibit F Form of Opinion of Seller's Counsel Exhibit G Form of Assumption Agreement Exhibit H Form of Services Agreement Exhibit I Inventory Valuation Principles Exhibit J Form of License Agreement
Schedules Schedule 1.1(a) Excluded Assets Schedule 1.1(b) Tangible Fixed Assets Schedule 2.8 Assigned Contracts Schedule 2.10 Allocation of Purchase Price Schedule 4.3 Consents and Authorizations Schedule 4.7 Contracts by Category Schedule 4.9 Litigation
FORM 10-K INDEX TO EXHIBITS Page 32
Exhibit Sequential No. Description Page No.
Schedule 4.11 Tax Matters Schedule 4.12 Licenses and Permits Schedule 4.14 Tangible Personal Property Schedule 4.15 Employees and Wage Rates Schedule 4.16 Insurance Policies Schedule 4.17 Intellectual Property Schedule 4.18 Licenses to Intellectual Property; Third-party Patents Schedule 4.19 Purchases from One Party Schedule 4.22 Real Property Schedule 4.23 Business Names Schedule 4.24 Environmental Matters Schedule 9.4 Facility 5 Remediation Plan
* 4.1 Restated Articles of Incorporation of the Registrant effective August 25, 1993, filed as Exhibit 4.1 to Registrant's report on Form 10-Q for the quarter ended October 3, 1993.
* 4.2 Amended and Restated Bylaws of Registrant, Effective June 18, 1992, filed as Exhibit 3.5 to the Registrant's Registration Statement on Form S-1 (File No. 33-46907).
* 4.3 Note Agreement dated as of August 13, 1992, between Cone Mills Corporation and The Prudential Insurance Company of America, with form of 8% promissory note attached, filed as Exhibit 4.01 to the Registrant's report on Form 8-K dated August 13, 1992.
* 4.3(a) Letter Agreement dated September 11, 1992, amending the Note Agreement dated August 13, 1992, between the Registrant and The Prudential Insurance Company of America filed as Exhibit 4.2 to the Registrant's report on Form 8-K dated March 1, 1995.
* 4.3(b) Letter Agreement dated July 19, 1993, amending the Note Agreement dated August 13, 1992, between the Registrant and The Prudential Insurance Company of America filed as Exhibit 4.3 to the Registrant's report on Form 8-K dated March 1, 1995.
FORM 10-K INDEX TO EXHIBITS Page 33
Exhibit Sequential No. Description Page No.
* 4.3(c) Letter Agreement dated June 30, 1994, amending the Note Agreement dated August 13, 1992, between the Registrant and The Prudential Insurance Company of America filed as Exhibit 4.4 to the Registrant's report on Form 8-K dated March 1, 1995.
* 4.3(d) Letter Agreement dated November 14, 1994, amending the Note Agreement dated August 13, 1992, between the Registrant and The Prudential Insurance Company of America filed as Exhibit 4.5 to the Registrant's report on Form 8-K dated March 1, 1995.
* 4.3(e) Letter Agreement dated as of June 30, 1995, amending the Note Agreement dated August 13, 1992, between the Registrant and The Prudential Insurance Company of America filed as Exhibit 4.3(e) to the Registrant's report on Form 10-Q for the quarter ended July 2, 1995.
* 4.3(f) Letter Agreement dated as of June 30, 1995, between the Registrant and The Prudential Insurance Company of America superseding Letter Agreement filed as Exhibit 4.3(e) to the Registrant's report on Form 10-Q for the quarter ended July 2, 1995.
* 4.3(g) Letter Agreement dated as of March 30, 1996, between the Registrant and The Prudential Insurance Company of America filed as Exhibit 4.3(g) to the Registrant's report on Form 10-Q for the quarter ended March 31, 1996.
4.3(h) Letter Agreement dated as of January 31, 1997, between the Registrant and The Prudential Insurance Company of America.
* 4.4 Credit Agreement dated as of August 13, 1992, among Cone Mills Corporation, the banks listed therein and Morgan Guaranty Trust Company of New York, as Agent, with form of note attached filed as Exhibit 4.02 to the Registrant's report on Form 8-K dated August 13, 1992.
FORM 10-K INDEX TO EXHIBITS Page 34
Exhibit Sequential No. Description Page No.
* 4.4(a) Amended and Restated Credit Agreement dated November 18, 1994, among the Registrant, various banks and Morgan Guaranty Trust Company of New York, as Agent, filed as Exhibit 4.1 to the Registrant's report on Form 8-K dated March 1, 1995.
* 4.4(b) Amendment to Credit Agreement dated as of June 30, 1995, amending the Amended and Restated Credit Agreement dated November 18, 1994, among the Registrant, various banks and Morgan Guaranty Trust Company of New York, as Agent filed as Exhibit 4.4(b) to the Registrant's report on Form 10-Q for the quarter ended July 2, 1995.
* 4.4(c) Amendment No. 2 to Credit Agreement dated as of December 31, 1995, amending the Amended and Restated Credit Agreement dated November 18, 1994, among the Registrant, various banks and Morgan Guaranty Trust Company of New York, as Agent, filed as Exhibit 4.4(c) to the Registrant's report on Form 10-K for year ended December 31, 1995.
* 4.4(d) Amendment No. 3 to Credit Agreement dated as of June 30, 1996 to the Amended and Restated Credit Agreement dated as of November 18, 1994, among the Registrant, various banks and Morgan Guaranty Trust Company of New York, as Agent, filed as Exhibit 4.4(d) to the Registrant's report on Form 10-Q for the quarter ended September 29, 1996.
* 4.4 (e) Amendment No. 4 to Credit Agreement dated as of September 29, 1996 to the Amended and Restated Credit Agreement dated as of November 18, 1994, among the Registrant, various banks and Morgan Guaranty Trust Company of New York, as Agent, filed as Exhibit 4.4(e) to the Registrant's report on Form 10-Q for the quarter ended September 29, 1996.
FORM 10-K INDEX TO EXHIBITS Page 35
Exhibit Sequential No. Description Page No.
* 4.5 Specimen Class A Preferred Stock Certificate, filed as Exhibit 4.5 to the Registrant's Registration Statement on Form S-1(File No. 33-46907).
* 4.6 Specimen Common Stock Certificate, effective June 18, 1992, filed as Exhibit 4.7 to the Registrant's Registration Statement on Form S-1 (File No. 33-46907).
* 4.7 The 401(k) Program of Cone Mills Corporation, amended and restated effective December 1, 1994, filed as Exhibit 4.8 to the Registrant's report on Form 10-K for year ended January 1, 1995.
* 4.7(a) First Amendment to the 401(k) Program of Cone Mills Corporation dated May 9, 1995, filed as Exhibit 4.8(a) to the Registrant's report on Form 10-K for year ended December 31, 1995.
* 4.7(b) Second Amendment to the 401(k) Program of Cone Mills Corporation dated December 5, 1995, filed as Exhibit 4.8(b) to the Registrant's report on Form 10-K for year ended December 31, 1995.
* 4.8 Cone Mills Corporation 1983 ESOP as amended and restated effective December 1, 1994, filed as Exhibit 4.9 to the Registrant's report on Form 10-K for year ended January 1, 1995.
* 4.8(a) First Amendment to the Cone Mills Corporation 1983 ESOP dated May 9, 1995, filed as Exhibit 4.9(a) to the Registrant's report on Form 10-K for year ended December 31, 1995.
* 4.8(b) Second Amendment to the Cone Mills Corporation 1983 ESOP dated December 5, 1995, filed as Exhibit 4.9(b) to the Registrant's report on Form 10-K for year ended December 31, 1995.
FORM 10-K INDEX TO EXHIBITS Page 36
Exhibit Sequential No. Description Page No.
* 4.9 Indenture dated as of February 14, 1995, between Cone Mills Corporation and Wachovia Bank of North Carolina, N.A. as Trustee, filed as Exhibit 4.1 to Registrant's Registration Statement on Form S-3 (File No. 33-57713).
Management contract or compensatory plan or arrangement (Exhibits 10.1 - 10.13)
*10.1 Employees' Retirement Plan of Cone Mills Corporation as amended and restated effective December 1, 1994, filed as Exhibit 10.1 to the Registrant's report on Form 10-K for the year ended January 1, 1995.
*10.1(a) First Amendment to the Employees' Retirement Plan of Cone Mills Corporation dated May 9,1995, filed as Exhibit 10.1(a) to the Registrant's report on Form 10-K for the year ended December 31, 1995.
*10.1(b) Second Amendment to the Employees' Retirement Plan of Cone Mills Corporation dated December 5, 1995, filed as Exhibit 10.1(b) to the Registrant's report on Form 10-K for the year ended December 31, 1995.
10.1(c) Third Amendment to the Employees' Retirement Plan of Cone Mills Corporation dated August 16, 1996. 41
*10.2 Cone Mills Corporation SERP as amended and restated as of December 5, 1995, filed as Exhibit 10.2 to the Registrant's report on Form 10-K for the year ended December 31, 1995.
*10.3 Excess Benefit Plan of Cone Mills Corporation as amended and restated as of December 5, 1995, filed as Exhibit 10.3 to the Registrant's report on Form 10-K for the year ended December 31, 1995.
*10.4 1984 Stock Option Plan of Registrant filed as Exhibit 10.7 to the Registrant's Registration Statement on Form S-1 (File No. 33-28040).
FORM 10-K INDEX TO EXHIBITS Page 37
Exhibit Sequential No. Description Page No.
*10.5 Form of Nonqualified Stock Option Agreement under 1984 Stock Option Plan of Registrant filed as Exhibit 10.8 to the Registrant's Registration Statement on Form S-1 (File No. 33-28040).
*10.6 Form of Incentive Stock Option Agreement under 1984 Stock Option Plan of Registrant filed as Exhibit 10.9 to the Registrant's Registration Statement on Form S-1 (File No. 33-28040).
*10.7 1992 Stock Option Plan of Registrant filed as Exhibit 10.9 to the Registrant's Report on Form 10-K for the year ended December 29, 1991.
*10.7(a) Amended and Restated 1992 Stock Plan filed as Exhibit 10.1 to Registrant's report on Form 10-Q for the quarter ended March 31, 1996.
*10.8 Form of Incentive Stock Option Agreement under 1992 Stock Option Plan filed as Exhibit 10.10 to the Registrant's report on Form 10-K for the year ended January 3, 1993.
10.8(a) Form of Nonqualified Stock Option Agreement under 1992 Stock Option Plan. 42
10.8(b) Form of Nonqualified Stock Option Agreement under 1992 Amended and Restated Stock Plan. 46
*10.9 1994 Stock Option Plan for Non- Employee Directors of Registrant filed as Exhibit 10.9 to Registrant's report on Form 10-K for the year ended January 2, 1994.
*10.10 Form of Non-Qualified Stock Option Agreement under 1994 Stock Option Plan for Non-Employee Directors of Registrant filed as Exhibit 10.10 to Registrant's report on Form 10-K for the year ended January 2, 1994.
*10.11 Management Incentive Plan of the Registrant filed as Exhibit 10.11(b) to Registrant's report on Form 10-K for the year ended January 3, 1993.
FORM 10-K INDEX TO EXHIBITS Page 38
Exhibit Sequential No. Description Page No.
*10.12 1997 Senior Management Incentive Compensation Plan filed as Exhibit 10.2 to Registrant's report on Form 10-Q for the quarter ended March 31, 1996.
10.13 1997 Senior Management Discretionary Bonus Plan. 50
10.14 Consulting Agreement between Dewey L. Trogdon and the Registrant dated December 5, 1996. 54
*10.15 Form of Agreement between the Registrant and Levi Strauss dated as of March 30, 1992, filed as Exhibit 10.14 to the Registrant's Registration Statement on Form S-1 (File No. 33-46907).
*10.16 First Amendment to Supply Agreement dated as of April 15, 1992, between the Registrant and Levi Strauss dated as of March 30, 1992, filed as Exhibit 10.15 to Registrant's Registration Statement on Form S-1 (No. 33-46907).
21 Subsidiaries of the Registrant. 58
23.l Consent of McGladrey & Pullen, LLP, independent auditor, with respect to the incorporation by reference in the Registrant's Registration Statements on Form S-8 (Nos. 33-31977; 33-31979; 33-51951; 33-51953; 33-53705 and 33-67800) of their reports on the consolidated financial statements and schedules included in this Annual Report on Form 10-K. 59
23.2 Consent of McGladrey & Pullen, LLP, independent auditor, with respect to the incorporation by reference in the Registrant's Registration Statements on Form S-8 (Nos. 33-31979; 33-51951 and 33-51953) of their report on the financial statements included in the Form 11-K Annual Report of Cone Mills Corporation Employee Equity Plan (to be filed by amendment).
27 Financial Data Schedule 60
FORM 10-K INDEX TO EXHIBITS Page 39
Exhibit Sequential No. Description Page No.
99.1 Form 11-K Annual Report of Cone Mills Corporation Employee Equity Plan (to be filed by amendment)
* Incorporated by reference to the statement or report indicated.
FORM 10-K Page 61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant had duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CONE MILLS CORPORATION
Date: March 27, 1997 By: /s/ J. Patrick Danahy J.Patrick Danahy President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Dewey L. Trogdon Chairman of the March 27, 1997 (Dewey L. Trogdon) Board
/s/ J. Patrick Danahy Director, President March 27, 1997 (J. Patrick Danahy) and Chief Executive Officer (Principal Executive Officer)
/s/ John L. Bakane Director, March 27, 1997 (John L. Bakane) Executive Vice President and Chief Financial Officer (Principal Financial Officer)
/s/ Doris R. Bray Director March 27, 1997 (Doris R. Bray)
/s/ Leslie W. Gaulden Director March 27, 1997 (Leslie W. Gaulden)
FORM 10-K Page 62
Signature Title Date
/s/ Jeanette C. Kimmel Director March 27, 1997 (Jeanette C. Kimmel)
/s/ Charles M. Reid Director March 27, 1997 (Charles M. Reid)
/s/ John W. Rosenblum Director March 27, 1997 (John W. Rosenblum)
/s/ Gary L. Smith Controller March 27, 1997 (Gary L. Smith) (Principal Accounting Officer)