Page 1 of 28
Index to Exhibits-Pages 27-28
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 3, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to
Commission file number 1-3634
CONE MILLS CORPORATION
(Exact name of registrant as specified in its charter)
North Carolina 56-0367025
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1201 Maple Street, Greensboro, North Carolina 27405
(Address of principal executive offices) (Zip Code)
(910) 379-6220
(Registrant's telephone number, including area code)
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
Number of shares of common stock outstanding as of May 1,
1994: 27,747,021 shares.
Page 1
FORM 10-Q
CONE MILLS CORPORATION
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income
Thirteen weeks ended April 3, 1994
and April 4, 1993 (Unaudited) . . . . . . .3
Consolidated Balance Sheets
April 3, 1994 and April 4, 1993
(Unaudited) and January 2, 1994 . . . .4 & 5
Consolidated Statements of Stockholders' Equity
Thirteen weeks ended April 3, 1994
and April 4, 1993 (Unaudited) . . . . . . .6
Consolidated Statements of Cash Flows
Thirteen weeks ended April 3, 1994
and April 4, 1993 (Unaudited) . . . . . . .7
Notes to Consolidated Financial Statements
(Unaudited) . . . . . . . . . . . . . . . .8
Item 2. Managements's Discussion and Analysis of
Financial Condition and Results of Operations 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . 24
Item 6. Exhibits and Reports on Form 8-K. . . . . . . 25
Page 2
FORM 10-Q
PART I
Item 1.
CONE MILLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands, except per share data)
Thirteen Thirteen
Weeks Ended Weeks Ended
April 3, 1994 April 4, 1993
(Unaudited) (Unaudited)
Net Sales $ 195,919 $ 195,035
Operating Costs and Expenses:
Cost of sales 153,581 147,958
Selling and administrative 18,953 20,246
Depreciation 5,802 5,238
178,336 173,442
Income from Operations 17,583 21,593
Other Income (Expense):
Interest income 88 164
Interest expense (2,205) (1,726)
Other income 99 -
(2,018) (1,562)
Income from Continuing Operations before Income Taxes 15,565 20,031
Income Taxes 5,540 7,412
Income from Continuing Operations 10,025 12,619
Gain on Disposal - Discontinued Operations - (Net of
income tax of $276) 439 -
Income before Cumulative Effect of Accounting Change 10,464 12,619
Cumulative Effect of Accounting Change for Postemployment
Benefits - (Net of income tax benefit of $772) (1,228) -
Net Income $ 9,236 $ 12,619
Income Available to Common Shareholders:
Income from Continuing Operations $ 9,353 $ 11,840
Income before Cumulative Effect of Accounting Change $ 9,792 $ 11,840
Cumulative Effect of Accounting Change (1,228) -
Net Income $ 8,564 $ 11,840
Earnings Per Share - Fully Diluted:
Income from Continuing Operations $ .34 $ .42
Income before Cumulative Effect of Accounting Change $ .35 $ .42
Cumulative Effect of Accounting Change (.04) -
Net Income $ .31 $ .42
Weighted Average Common Shares and
Common Share Equivalents Outstanding -
Fully Diluted 27,866 27,877
See Notes to Consolidated Financial Statements.
Page 3
FORM 10-Q
Item 1. (continued)
CONE MILLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share and par value data)
April 3, April 4, January 2,
ASSETS 1994 1993 1994
(Unaudited) (Unaudited)
Current Assets:
Cash $ 1,880 $ 2,126 $ 503
Accounts receivable - trade, less
provision for doubtful accounts $3,000;
$3,480; $3,000 53,388 52,505 44,175
Inventories:
Greige and finished goods 79,790 86,439 84,923
Work in process 16,098 18,311 15,968
Raw materials 20,914 16,269 20,612
Supplies and other 29,639 25,854 30,621
146,441 146,873 152,124
Other current assets 7,719 2,605 5,542
Total Current Assets 209,428 204,109 202,344
Investments in Unconsolidated Affiliates 27,919 - 26,420
Other Assets 5,232 1,284 3,171
Property, Plant and Equipment:
Land 20,559 22,118 20,758
Buildings 72,306 68,150 71,942
Machinery and equipment 245,342 219,913 239,846
Other 26,744 22,065 25,799
364,951 332,246 358,345
Less accumulated depreciation 163,905 143,909 158,669
Property, Plant and Equipment-Net 201,046 188,337 199,676
$ 443,625 $ 393,730 $ 431,611
See Notes to Consolidated Financial Statements.
Page 4
FORM 10-Q
Item 1. (continued)
CONE MILLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share and par value data)
April 3, April 4, January 2,
LIABILITIES AND STOCKHOLDERS' EQUITY 1994 1993 1994
(Unaudited) (Unaudited)
Current Liabilities:
Notes payable $ - $ 6,369 $ 5,099
Current maturities of long-term debt 482 708 767
Accounts payable - trade 27,285 27,458 26,746
Sundry accounts payable and accrued expenses 36,810 39,821 44,231
Income taxes payable 5,176 3,778 -
Deferred income taxes 28,224 25,656 27,295
Total Current Liabilities 97,977 103,790 104,138
Long-Term Debt 87,433 76,337 77,172
Deferred Items:
Deferred income taxes 35,883 36,960 36,652
Other deferred items 5,695 2,491 3,615
41,578 39,451 40,267
Contribution to Employee Stock Ownership Plan - 1,172 -
Stockholders' Equity:
Class A Preferred Stock - $100 par value; authorized
1,500,000 shares; issued and outstanding 470,756
shares; 1993, 465,077 shares - Employee Stock
Ownership Plan 47,075 46,508 46,508
Class A Preferred Stock held in escrow (86,804 shares;
1993, 81,125 shares) (8,680) (8,113) (8,113)
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 27,747,021 shares;
1993, 27,765,215 shares and 27,744,783 shares 2,775 2,768 2,774
Capital in excess of par 75,397 75,278 75,397
Retained earnings 100,070 56,539 93,468
Total Stockholders' Equity 216,637 172,980 210,034
$ 443,625 $ 393,730 $ 431,611
See Notes to Consolidated Financial Statements.
Page 5
FORM 10-Q
Item 1. (continued)
CONE MILLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THIRTEEN WEEKS ENDED APRIL 3, 1994 AND APRIL 4, 1993
(amounts in thousands, except share data)
(Unaudited)
Class A Preferred Class A Preferred
Stock Stock - Escrow Common Stock
Shares Amount Shares Amount Shares Amount
Balance, January 2, 1994 465,077 $ 46,508 (81,125)$ (8,113) - $ -
Net income - - - - - -
Class A Preferred Stock
- Employee Stock Ownership Plan:
Cash dividends paid - - - - - -
Shares issued (7.0% dividend on shares
held in Cone Mills escrow account) 5,679 567 (5,679) (567) - -
Common Stock
Options exercised - - - - - -
Purchase of common shares - - - - - -
Balance, April 3, 1994 470,756 $ 47,075 (86,804)$ (8,680) - $ -
Class A Preferred Class A Preferred Nonvoting
Stock Stock - Escrow Common Stock
Shares Amount Shares Amount Shares Amount
Balance, January 3, 1993 459,282 $ 45,928 (75,330)$ (7,533) 1,231,327 $ 123
Net income - - - - - -
Class A Preferred Stock -
Employee Stock Ownership Plan:
Cash dividends paid - - - - - -
Shares issued (8.0% dividend on shares
held in Cone Mills escrow account) 5,795 580 (5,795) (580) - -
Nonvoting Common Stock - converted
to Voting Common Stock - - - - (1,231,327) (123)
Common Stock:
Options exercised - - - - - -
Balance, April 4, 1993 465,077 $ 46,508 (81,125)$ (8,113) 0 $ 0
See Notes to Consolidated Financial Statements.
Page 6
FORM 10-Q
Item 1. (continued)
CONE MILLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THIRTEEN WEEKS ENDED APRIL 3, 1994 AND APRIL 4, 1993
(amounts in thousands, except share data)
(Unaudited)
Capital in
Common Stock Excess Retained
Shares Amount of Par Earnings
Balance, January 2, 1994 27,744,783 $ 2,774 $ 75,397 $ 93,468
Net income - - - 9,236
Class A Preferred Stock
- Employee Stock Ownership Plan:
Cash dividends paid - - - (2,634)
Shares issued (7.0% dividend on shares
held in Cone Mills escrow account) - - - -
Common Stock
Options exercised 4,000 1 26 -
Purchase of common shares (1,762) - (26) -
Balance, April 3, 1994 27,747,021 $ 2,775 $ 75,397 $ 100,070
Capital in
Common Stock Excess Retained
Shares Amount of Par Earnings
Balance, January 3, 1993 26,435,888 $ 2,644 $ 75,227 $ 46,962
Net income - - - 12,619
Class A Preferred Stock -
Employee Stock Ownership Plan:
Cash dividends paid - - - (3,042)
Shares issued (8.0% dividend on shares
held in Cone Mills escrow account) - - - -
Nonvoting Common Stock - converted
to Voting Common Stock 1,231,327 123 - -
Common Stock:
Options exercised 8,000 1 51 -
Balance, April 4, 1993 27,675,215 $ 2,768 $ 75,278 $ 56,539
See Notes to Consolidated Financial Statements.
Page 6a
FORM 10-Q
Item 1. (continued)
CONE MILLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
Thirteen Thirteen
Weeks Ended Weeks Ended
April 3, 1994 April 4, 1993
(Unaudited) (Unaudited)
Cash Flows Provided By Operating Activities $ 6,801 $ 6,867
Cash Flows from Investing Activities:
Investments in unconsolidated affiliates (1,399) -
Proceeds from sale of property, plant and equipment 669 1,909
Capital expenditures (6,937) (10,206)
Net cash used in investing activities (7,667) (8,297)
Cash Flows from Financing Activities:
Principal payments - long-term debt (20,602) (21,455)
Proceeds from long-term debt borrowings 30,578 21,000
Dividends paid - Class A Preferred (2,634) (3,042)
Other (5,099) (232)
Net cash provided by (used in) financing activities 2,243 (3,729)
Net increase (decrease) in cash 1,377 (5,159)
Cash at Beginning of Period 503 7,285
Cash at End of Period $ 1,880 $ 2,126
Supplemental Disclosures of Additional Cash Flow Information:
Cash payments for:
Interest, net of interest capitalized $ 3,542 $ 3,361
Income taxes, net of refunds $ (798)$ (2,087)
Supplemental Schedule of Noncash Investing and Financing Activities:
Stock dividend paid to ESOP trustee for Cone escrow account $ 567 $ 580
Class A Preferred Stock issued $ 567 $ 580
Common Stock issued $ - $ 123
Nonvoting Common Stock converted $ - $ 123
See Notes to Consolidated Financial Statements.
Page 7
FORM 10-Q
Item 1. (continued)
CONE MILLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 3, 1994
Note 1. Basis of Financial Statement Preparation
The Cone Mills Corporation (the "Company") condensed
consolidated financial statements for April 3, 1994
and April 4, 1993 are unaudited, but in the opinion
of management reflect all adjustments necessary to
present fairly the consolidated balance sheets of
Cone Mills Corporation and Subsidiaries at April 3,
1994, January 2, 1994 and April 4, 1993 and the
related consolidated statements of income,
stockholders' equity and cash flows for the thirteen
weeks ended April 3, 1994 and April 4, 1993. All
adjustments are of a normal recurring nature. The
results are not necessarily indicative of the results
to be expected for the full year.
These statements should be read in conjunction with
the audited financial statements and related notes
included in the Company's annual report on Form 10-K
for fiscal 1993.
Substantially all components of textile inventories
are valued at the lower of cost or market using the
last-in, first-out (LIFO) method. Nontextile
inventories are valued at the lower of average cost
or market. Because amounts for inventories under the
LIFO method are based on an annual determination of
quantities as of the year-end, the inventories at
April 3, 1994 and April 4, 1993 and related
consolidated statements of income for the thirteen
weeks then ended are based on certain estimates
relating to quantities and cost as of the end of the
fiscal year.
Page 8
FORM 10-Q
Item 1. (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Sale of Accounts Receivable
On August 11, 1992, the Company entered into an
agreement extendable to August 1995, with the
subsidiary of a major financial institution, which
allows the sale without recourse of up to $40 million
of an undivided interest in eligible trade
receivables. Accounts receivable is shown net of $40
million sold at April 3, 1994 and April 4, 1993, and
net of $35 million sold at January 2, 1994 under this
agreement. Cash Flows provided by operating
activities for the thirteen weeks ended April 3, 1994
and April 4, 1993 include the sale of accounts
receivable of $5 million and $16 million,
respectively.
Page 9
FORM 10-Q
Item 1. (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Long-Term Debt
On February 3, 1994, the Company's real estate
subsidiary entered into a credit agreement with a
financial institution which provides a $15 million
credit facility. Interest rates under this agreement
are, at the option of the borrower, either the LIBOR
rate plus 2 percent per annum or the lender's Prime
Rate. Cone Mills Corporation is guarantor for $7.5
million of obligations under this agreement. The
termination date of this agreement is June 30, 1995.
(amounts in thousands) April 3, 1994
Current
Total Maturity Long-Term
8% Senior Note $ 75,000 $ - $ 75,000
Revolving Credit Agreement - - -
Credit Facility (see above) 11,578 - 11,578
Industrial Revenue Bonds 1,150 449 701
Other 187 33 154
$ 87,915 $ 482 $ 87,433
(amounts in thousands) April 4, 1993
Current
Total Maturity Long-Term
8% Senior Note $ 75,000 $ - $ 75,000
Revolving Credit Agreement - - -
Industrial Revenue Bonds 1,828 678 1,150
Other 217 30 187
$ 77,045 $ 708 $ 76,337
Note 4. Class A Preferred Stock
The dividend rate for Class A Preferred Stock is 7.00%,
which is payable March 31, 1995.
Page 10
FORM 10-Q
Item 1. (continued)
Note 5. Stock Option Plans
1984 Stock Option Plan:
Option price per share $ 5.25 $ 6.50
Outstanding at 1/3/93 190,200 111,800
Canceled (3,000) -
Exercised - (8,000)
Outstanding at 4/4/93 187,200 103,800
Exercised (92,000) -
Outstanding at 1/2/94 95,200 103,800
Exercised - (4,000)
Outstanding at 4/3/94 95,200 99,800
1992 Stock Option Plan:
Option price per share $15.625
Granted 2/18/93 500,000
Outstanding at 4/3/94 500,000
Options exercisable
at 4/3/94 95,200 45,900 100,000
Page 11
FORM 10-Q
Item 1. (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Earnings Per Share
Thirteen Thirteen
Weeks Ended Weeks Ended
April 3, 1994 April 4, 1993
Fully Fully
Primary Diluted Primary Diluted
(amounts in thousands, except per share data)
Income from continuing
operations $10,025 $10,025 $12,619 $12,619
Less: Class A Preferred
dividends (672) (672) ( 779) ( 779)
Adjusted income from
continuing operations $ 9,353 $ 9,353 $11,840 $11,840
Gain on disposal-
discontinued operations 439 439 - -
Adjusted income before
cumulative effect of
accounting change 9,792 9,792 11,840 11,840
Cumulative effect of
accounting change (1,228) (1,228) - -
Adjusted net income $ 8,564 $ 8,564 $11,840 $11,840
Weighted average common
shares and common share
equivalents outstanding 27,866 27,866 27,853 27,877
Earnings per common
share and common share
equivalent:
Income from continuing
operations $ .34 $ .34 $ .43 $ .42
Income before
cumulative effect
of accounting change $ .35 $ .35 $ .43 $ .42
Cumulative effect of
accounting change (.04) (.04) - -
Net income $ .31 $ .31 $ .43 $ .42
Primary and fully diluted earnings per share have been
computed by dividing the net earnings available to common
stockholders by the sum of the weighted average number of
voting and nonvoting common shares outstanding, plus common
share equivalents resulting from the assumed exercise of stock
options using the treasury stock method.
Page 12
FORM 10-Q
Item 1. (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. Litigation and Contingencies
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 Wachovia Bank
& Trust Company, N.A. ("Wachovia") and certain current and
former employees of the Company and Wachovia. The suit was
brought on behalf of salaried employees of the Company who
were participants in certain Company retirement plans. The
Plaintiffs asserted a variety of claims related to actions
taken and statements made concerning certain employee
benefit plans maintained by the Company.
On March 20, 1992, the United States District Court in
Greenville, South Carolina, entered a judgment finding that
the Company had promised to contribute certain surplus
funds (or their equivalent in Company stock) relating to
the overfunding of the Company's pension plans to the 1983
ESOP by December 23, 1985, that such surplus amounted to
$69 million, that the Company's actual contribution totaled
approximately $55 million, and that the Company and certain
of its executive officers therefore had breached their
fiduciary duties under the Employee Retirement Income
Security Act of 1974 ("ERISA") to certain participants in
the 1983 ESOP. The District Court ordered the Company to
pay to the 1983 ESOP for the benefit of plan participants,
both salaried and hourly, the sum of $14.2 million in cash
or the equivalent in Company stock. In addition, the
District Court awarded $3.5 million in attorneys' fees to
the Plaintiffs, $2.2 million of which is to be paid from
the sum awarded to the 1983 ESOP. Judgment was entered in
favor of the defendants on all remaining claims except for
claims relating to the ESOP contribution.
On March 20, 1992, the Company and the individual
defendants appealed the District Court's judgment against
them to the United States Court of Appeals for the Fourth
Circuit. On April 2, 1992, the Plaintiffs appealed the
District Court's judgment to the Court of Appeals insofar
as it dismissed certain of their claims. To secure the
judgment on appeal the Company has deposited in escrow with
the trustee of the 1983 ESOP an $8 million letter of credit
and 75,330 shares of Class A Preferred Stock valued at $7.5
million which has subsequently earned dividends of an
additional 11,474 shares valued at $1.2 million. To record
these escrow transactions,the Company increased outstanding
Page 13
FORM 10-Q
Item 1. (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Class A Preferred Stock by $8.7 million. The increase in
outstanding Class A Preferred Stock was offset by a contra
stockholders' equity account labeled "Class A Preferred Stock
held in escrow." These escrow account transactions did not
have an effect upon net income or stockholders' equity of the
Company.
On May 6, 1994, the Court of Appeals, sitting en banc,
unanimously reversed the $15.5 million judgment and
unanimously affirmed all of the District Court's rulings in
favor of the Company, which decision affirmed the prior
conclusion of a panel of three of its judges. 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
any detrimental reliance, Plaintiffs could establish that a
letter to salaried employees on December 15, 1983 could allow
recovery on a theory of equitable estoppel. Accordingly,
the case was remanded to the District Court for a
determination of whether the Plaintiffs can establish
detrimental reliance creating estoppel of the Company.
The issue of detrimental reliance and other issues related to
whether the Plaintiffs can prevail on remand in the District
Court are factually oriented, and additional proceedings will
likely be necessary. For that reason, and because of the
uncertainties inherent in the litigation process, it is not
possible to predict the ultimate outcome of this lawsuit.
However, the Company intends to continue to defend this matter
vigorously, and it is the opinion of the Company's management
that this lawsuit, when finally concluded, will not have a
material adverse effect on the Company's financial condition.
As the judgment has been reversed, the Company expects the
escrowed stock and letter of credit to be released. Upon
release, the stock will be redeemed, the offsetting contra
account eliminated and letter of credit terminated. None of
these escrow transactions will have an effect on net income or
stockholders' equity.
Page 14
FORM 10-Q
Item 1. (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8. Discontinued Operations
(amounts in thousands)
On January 4, 1994 the Company completed the sale of all
remaining assets identified with discontinued operations.
Proceeds from this sale were $3,500. This concluded the
Company's December 5, 1991 plan to discontinue and
liquidate its corduroy and other bottomweight continuous
piece-dyed fabrics product line.
Note 9. Accounting Change - Postemployment Benefits
(amounts in thousands)
At January 3, 1994 the Company adopted SFAS No. 112,
"Employers' Accounting for Postemployment Benefits." This
statement requires an accrual method of recognizing
postemployment benefits rather than recording an expense
when paid. The cumulative effect of this accounting
change, included in first quarter 1994 earnings, resulted
in a one-time charge to income of $2,000 and a reduction in
net income of $1,228. Additional expenses resulting from
the implementation of this accounting statement were
insignificant.
Page 15
FORM 10-Q
Item 2.
MANAGEMENTS' DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OPERATING RESULTS
First Quarter Ended April 3, 1994 compared with First Quarter
Ended April 4, 1993
Following a U.S. cyclical recovery from mid-1991 through the
end of 1992, the rate of growth in the domestic textile and
apparel softgoods sector, in general, began to decline and
retailers and softgoods manufacturers began to report mixed
results during 1993 and first quarter 1994. In particular,
denim inventories in the softgoods pipeline experienced
downward adjustments and printed home furnishings fabrics
experienced soft demand. As a result of these trends, the
Company's sales levels were essentially unchanged from first
quarter 1993.
First quarter 1994 sales were $195.9 million as compared with
first quarter 1993 sales of $195.0 million. Income of $.35 per
share, before the cumulative effect of adoption of SFAS No.
112, was down 16.7% from first quarter 1993 results of $.42
per share. Included in the latest quarter's results was a net
gain of $.4 million, or $.01 per share, arising from the final
disposal of assets of the company's discontinued operations.
During the quarter, the company adopted SFAS No. 112,
"Employers' Accounting for Postemployment Benefits," which
resulted in an after-tax, non-cash charge of $1.2 million, or
$.04 per share, and reduced net income to $.31 per share, for
the first quarter of 1994. Net income for the first quarter of
1994 was $9.2 million as compared with $12.6 million for the
1993 first quarter.
The company's income from continuing operations of $10.0
million declined by $2.6 million from the previous year. The
decline was caused by a lower gross profit in the apparel
fabrics segment and higher interest expenses, partially offset
by lower selling and administrative costs and a lower
effective tax rate. The company's gross profit (net sales less
cost of sales and depreciation) as a percentage of net sales
was 18.6% compared with 21.5% for the first quarter of 1993.
The decline primarily resulted from the inability to raise
denim prices to cover rising manufacturing costs, higher unit
costs associated with operating denim facilities at less than
capacity, higher cotton costs, and weaker printed fabrics
demand.
Page 16
FORM 10-Q
Item 2. (continued)
The company operates in two principal business segments,
apparel fabrics and home furnishings products. The following
table sets forth certain net sales and operating income
information (excluding general corporate expenses) regarding
these segments for the first quarters of 1994 and 1993:
First Quarter
1994 1993
NET SALES
Apparel $ 146.0 74.5% $ 142.4 73.0%
Home Furnishings 49.9 25.5 52.6 27.0
Total $ 195.9 100.0% $ 195.0 100.0%
OPERATING INCOME (1)
Apparel $ 12.8 8.7% $ 17.2 12.0%
Home Furnishings 5.5 11.0 5.2 9.8
(1) Percentages reflect operating income as a percentage of
segment net sales.
Apparel Fabrics. Sales of apparel fabrics were $146.0
million, up 2.5% as compared with year-ago levels. The
increase came from stronger sales of specialty sportswear
fabrics, which were partially offset by a slight decline in
heavyweight denim sales. The apparel fabrics segment
realized higher unit sales while average prices, adjusted
for product mix changes, were essentially unchanged from
year-ago levels. Sportswear fabrics prices were up slightly
and denim prices were down slightly. Apparel segment profit
margins declined to 8.7%, compared with 12.0% for the first
quarter of 1993 as discussed above. (See analysis of gross
profits above.)
Export sales of continuing operations for the apparel
segment, primarily denims, were $31.9 million for first
quarter 1994, basically flat with first quarter 1993 export
amounts.
Home Furnishings. Sales of home furnishings were $49.9
million, down 5.2% as compared with year-ago levels. Sales
of the decorative fabrics product group were down because
of continued softness in print fashion demand. Sales of
polyurethane foam and related products by the Olympic
Products division were higher than previous year levels as
the division benefited from stronger sales for both
automotive and home furnishings applications.
Page 17
FORM 10-Q
Item 2. (continued)
Despite lower sales, home furnishings segment earnings as
a percent of sales increased to 11.0% for the first quarter
of 1994 as compared with 9.8% for the first quarter of
1993, primarily because of improved operating results at
Olympic Products.
Export sales of home furnishings products were $1.5 million
for the first quarter of 1994 compared with $2.1 million in
the 1993 period. Export sales were impacted by poor
economic conditions in European markets.
Total company selling and administrative expenses decreased
from $20.2 million, or 10.4% of sales, for first quarter 1993
to $19.0 million, 9.7% of sales, for first quarter 1994. First
quarter 1993 expenses were impacted by costs associated with
the secondary offering of common stock by certain
institutional shareholders of the company.
Interest expense for the first quarter of 1994 increased $.5
million compared to the first quarter of 1993, primarily the
result of a $.4 million interest charge on the settlement of
1990 and 1991 taxes by the Internal Revenue Service.
Income taxes as a percent of taxable income were 35.6% in the
first quarter of 1994 compared with 37.0% for the 1993 period.
Both periods reflect tax benefits resulting from operation of
the company's foreign sales corporation.
Liquidity and Capital Resources
The company's principal long-term capital sources are a $75
million Note Agreement with The Prudential Insurance Company
of America (the "Term Loan") and stockholders' equity. Primary
sources of liquidity are internally generated funds, a $60
million Credit Agreement with Morgan Guaranty Trust Company of
New York ("Morgan Guaranty") as Agent Bank (the "Revolving
Credit Facility"), and a $40 million Receivables Purchase
Agreement (the "Receivables Purchase Agreement") with Delaware
Funding Corporation, an affiliate of Morgan Guaranty.
During the first quarter of 1994, the company generated $6.8
million in funds from operating activities including $15.0
million from net income adjusted for non-cash depreciation
expenses, partially offset by increased working capital
requirements, primarily reductions of accounts payable and
accrued expenses and increases in trade receivables. Major
uses of cash during this period included $6.9 million for
capital expenditures, $2.6 million for preferred stock dividends
Page 18
FORM 10-Q
Item 2. (continued)
and $1.4 million for its Mexican joint venture. Funding
came primarily from operating cash flow and short term
borrowings to support working capital needs.
During the first quarter of 1993, the company generated $6.9
million in funds from operating activities including $17.9
million from net income and depreciation, partially offset by
increased working capital requirements, primarily reductions
of accounts payable and accrued expenses. Major uses of cash
during this period included $10.2 million for capital
expenditures and $3.0 million for preferred stock dividends
with funding coming primarily from operating cash flow and
cash available at the beginning of the period.
On April 3, 1994 the company's long-term capital structure
consisted of $87.4 million of long-term debt, including the
$75 million Term Loan, real estate subsidiary debt of $11.6
million which was previously structured as notes payable, and
$216.6 million of stockholders' equity. For comparison, on
April 4, 1993 the company had $76.3 million of long-term debt
and $173.0 million of stockholders' equity. Long-term debt as
a percent of long-term debt and stockholders' equity was 29%
on April 3, 1994, compared with 31% on April 4, 1993. The
company believes it has significant unused debt capacity as it
considers the target leverage for Cone Mills to be
approximately 35 - 40% long-term debt as a percent of total
capital. (See Financial Outlook and Strategy.)
On April 3, 1994 the company had ample liquidity with $.5
million of current maturities of long-term debt and $60
million of unused borrowing capacity under its Revolving
Credit Facility. The company had sold $40 million of
receivables under the Receivables Purchase Agreement.
Accounts receivable on April 4, 1994, were $53.4 million, up
slightly from $52.5 million at April 4, 1993. At the end of
each period, the company had sold $40 million of accounts
receivable. Receivables, including those sold pursuant to the
Receivables Purchase Agreement, represented 45 days of sales
outstanding at the end of both periods.
Inventories on April 4, 1994, were $146.4 million, essentially
unchanged from April 4, 1993 levels of $146.9 million.
Page 19
FORM 10-Q
Item 2. (continued)
Capital spending in 1994 is expected to be $36 million and
includes expansion and upgrading of yarn preparation
facilities, new weaving machines, and a new fiber production
line at Olympic Products. In addition, the company expects to
invest a total of approximately $25 million in the Mexican
joint venture denim company through 1995. Capital spending in
the first quarter of 1994 was $6.9 million and the investment
in the Mexican joint venture was $1.4 million.
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.
Existing government regulations are not expected to have a
material effect on the company's competitive position,
operating results or planned capital expenditures. Cone Mills
has an active environmental committee which fosters protection
of the environment and compliance with laws.
In November 1988 certain former employees of the company
instituted a class action suit against the company and certain
other defendants in which the plaintiffs ("Plaintiffs")
asserted a variety of claims related to the 1983 ESOP and
certain other employee benefit plans maintained by the
company. In March 1992 a judgment in the amount of $15.5
million (including an attorneys' fees award) was entered
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, the individual defendants and the Plaintiffs
appealed.
On May 6, 1994, the Court of Appeals, sitting en banc,
unanimously reversed the $15.5 million judgment and
unanimously affirmed all of the District Court's rulings in
favor of the Company, which decision affirmed the prior
conclusion of a panel of three of its judges. 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
any detrimental reliance, Plaintiffs could establish that a
letter to salaried employees on December 15, 1983 could allow
recovery on a theory of equitable estoppel. Accordingly,
the case was remanded to the District Court for a
determination of whether the Plaintiffs can establish
detrimental reliance creating estoppel of the Company.
Page 20
FORM 10-Q
Item 2. (continued)
The issue of detrimental reliance and other issues related to
whether the Plaintiffs can prevail on remand in the District
Court are factually oriented, and additional proceedings will
likely be necessary. For that reason, and because of the
uncertainties inherent in the litigation process, it is not
possible to predict the ultimate outcome of this lawsuit.
However, the Company intends to continue to defend this matter
vigorously, and it is the opinion of the Company's management
that this lawsuit, when finally concluded, will not have a
material adverse effect on the Company's financial condition.
To secure the judgment on appeal from the District Court to
the Court of Appeals, the company deposited in escrow with the
trustee of the 1983 ESOP an $8 million letter of credit and
75,330 shares of Class A Preferred Stock valued at $7.5
million which has subsequently earned dividends of an
additional 11,474 shares valued at $1.2 million. The letter of
credit was substituted for an $8 million cash deposit made in
April 1992. To record these escrow transactions, the company
increased outstanding Class A Preferred Stock by $8.7 million
and established an offsetting contra stockholders' equity
account.
As the judgment has been reversed, the Company expects the
escrowed stock and letter of credit to be released. Upon
release, the stock will be redeemed, the offsetting contra
account eliminated and letter of credit terminated. None of
the escrow transactions have had or will have an effect on net
income or stockholders' equity.
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.
Financial Outlook and Strategy
In 1992 and 1993, Cone Mills benefited from favorable apparel
fabric markets characterized by increasing prices and volume
in both domestic and international denim markets and the rapid
expansion of sportswear fabrics markets. While the company
believes that demographic trends and other market developments
continue to present favorable long-term opportunities for
growth, Cone continues to be cautious about the near-term
imbalance between the supply and demand of denim fabrics. As
inventory levels are adjusted, prices and volumes are
affected.
Page 21
FORM 10-Q
Item 2. (continued)
Since November of 1993, the market price of cotton, the
company's principal raw material, has increased significantly.
Even though Cone Mills has purchased cotton for future
deliveries at favorable prices, continued high spot and
forward cotton prices will affect the company's profit margin
unless prices for denims and specialty sportswear products can
be increased accordingly.
The company has set priorities for the use of net cash flow
and available borrowing capacity. The first is international
denim manufacturing and marketing opportunities and in 1993,
the company purchased a 20% ownership in CIPSA, the largest
denim manufacturer in Mexico, for approximately $24 million
and signed agreements with CIPSA providing for the formation
of a joint venture company to build and operate a world-class
denim manufacturing facility. The partners plan to invest a
total of approximately $50 million, with each partner
providing 50% of this investment. Capital requirements for the
joint venture will primarily occur in 1994 and 1995. The joint
venture has signed a credit agreement with a Mexican bank for
approximately $63 million of debt financing. This debt is not
guaranteed by Cone Mills Corporation or CIPSA.
In order to meet the company's goal of $1 billion in sales and
commensurate growth in earnings by 1996, Cone Mills' second
priority for cash flow and available credit is acquisitions.
The company actively seeks possible acquisitions to which it
believes it can add value through application of its
manufacturing and marketing expertise. There can be no
assurance that any actual transaction will ultimately result,
but the consummation of any such transaction could involve a
significant financial commitment.
Other priorities for cash flow include the reduction of
preferred stock, cash dividends or common stock repurchases,
depending on the expected benefits to shareholders. On
February 17, 1994, the Board of Directors of Cone Mills
Corporation authorized the repurchase, from time to time, of
up to 2.5 million shares of the company's outstanding common
stock in open market transactions. Repurchase decisions will
be based on the company's expected capital structure,
alternative investment opportunities, and the market price of
the common stock.
Page 22
FORM 10-Q
Item 2. (continued)
The company believes that its internally generated operating
funds and funds available under its credit facilities are
sufficient to meet its working capital, capital spending,
possible stock repurchases, and financing commitments needs
for the foreseeable future, including the investment in the
joint venture.
Page 23
FORM 10-Q
PART II
Item 1. 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 Wachovia Bank &
Trust Company, N.A. ("Wachovia") and certain current and
former employees of the Company and Wachovia. The suit was
brought on behalf of salaried employees of the Company who
were participants in certain Company retirement plans. The
Plaintiffs asserted a variety of claims related to actions
taken and statements made concerning certain employee benefit
plans maintained by the Company.
On March 20, 1992, the United States District Court in
Greenville, South Carolina, entered a judgment finding that
the Company had promised to contribute certain surplus funds
(or their equivalent in Company stock) relating to the
overfunding of the Company's pension plans to the 1983 ESOP by
December 23, 1985, that such surplus amounted to $69 million,
that the Company's actual contribution totaled approximately
$55 million, and that the Company and certain of its executive
officers therefore had breached their fiduciary duties under
the Employee Retirement Income Security Act of 1974 ("ERISA")
to certain participants in the 1983 ESOP. The District Court
ordered the Company to pay to the 1983 ESOP for the benefit of
plan participants, both salaried and hourly, the sum of $14.2
million in cash or the equivalent in Company stock. In
addition, the District Court awarded $3.5 million in
attorneys' fees to the Plaintiffs, $2.2 million of which is to
be paid from the sum awarded to the 1983 ESOP. Judgment was
entered in favor of the defendants on all remaining claims
except for claims relating to the ESOP contribution.
On March 20, 1992, the Company and the individual defendants
appealed the District Court's judgment against them to the
United States Court of Appeals for the Fourth Circuit. On
April 2, 1992, the Plaintiffs appealed the District Court's
judgment to the Court of Appeals insofar as it dismissed
certain of their claims.
On May 6, 1994, the Court of Appeals, sitting en banc,
unanimously reversed the $15.5 million judgment and
unanimously affirmed all of the District Court's rulings in
favor of the Company, which decision affirmed the prior
conclusion of a panel of three of its judges. 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
Page 24
FORM 10-Q
Item 1. (continued)
any detrimental reliance, Plaintiffs could establish that a
letter to salaried employees on December 15, 1983 could allow
recovery on a theory of equitable estoppel. Accordingly,
the case was remanded to the District Court for a
determination of whether the Plaintiffs can establish
detrimental reliance creating estoppel of the Company.
The issue of detrimental reliance and other issues related to
whether the Plaintiffs can prevail on remand in the District
Court are factually oriented, and additional proceedings will
likely be necessary. For that reason, and because of the
uncertainties inherent in the litigation process, it is not
possible to predict the ultimate outcome of this lawsuit.
However, the Company intends to continue to defend this matter
vigorously, and it is the opinion of the Company's management
that this lawsuit, when finally concluded, will not have a
material adverse effect on the Company's financial condition.
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.
Item 6. Exhibits and Reports on Form 8-K
(a) The exhibits to this Form 10-Q are listed in the
accompanying Index to Exhibits.
(b) Reports on Form 8-K
None
Page 25
FORM 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
CONE MILLS CORPORATION
(Registrant)
Date May 18, 1994 JOHN L. BAKANE
John L. Bakane
Vice President and
Chief Financial Officer
Page 26
FORM 10-Q INDEX TO EXHIBITS
Exhibit Sequential
No. Description Page No.
* 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.
* 4.4 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.
* 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 Registration Rights Agreement dated
as of March 30, 1992, among the
Registrant and the shareholders listed
therein, filed as Exhibit 4.8 to the
Registrant's Registration Statement on
Form S-1 (File No. 33-46907).
Page 27
FORM 10-Q INDEX TO EXHIBITS
Exhibit Sequential
No. Description Page No.
* 4.8 The 401(k) Program (formerly the
Supplemental Retirement Program) of
Registrant, amended and restated
effective January 1, 1994, filed as
Exhibit 4.9 to the Registrant's
Registration Statement on Form S-8
(File Nos.33-51951 and 33-51953).
* 4.9 Cone Mills Corporation 1983 ESOP as
amended and restated effective March 1,
1993, filed as Exhibit 4.9 to
Registrant's report on Form 10-K for
the year ended January 2, 1994.
* Incorporated by reference to the statement or report
indicated.
Page 28