Page 1 of 32
Index to Exhibits-Pages 21-27
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to
Commission file number 1-3634
CONE MILLS CORPORATION
(Exact name of registrant as specified in its charter)
North Carolina 56-0367025
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3101 North Elm Street, Greensboro, North Carolina 27408
(Address of principal executive offices) (Zip Code)
(336) 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 October 23, 1998:
25,432,233 shares.
1
CONE MILLS CORPORATION
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Statements of Operations Thirteen and
thirty-nine weeks ended September 27, 1998 and September 28,
1997 (Unaudited)..................................................3
Consolidated Condensed Balance Sheets
September 27, 1998 and September 28, 1997
(Unaudited) and December 28, 1997.................................4
Consolidated Condensed Statements of Cash Flows
Thirty-nine weeks ended September 27, 1998
and September 28, 1997 (Unaudited)................................5
Notes to Consolidated Condensed Financial Statements
(Unaudited).......................................................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................19
Item 5. Other Information ...............................................20
Item 6. Exhibits and Reports on Form 8-K.................................20
2
PART I
Item 1.
CONE MILLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Thirteen Thirteen Thirty-Nine Thirty-Nine
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
Sept. 27, 1998 Sept. 28, 1997 Sept. 27, 1998 Sept. 28, 1997
------------- -------------- ------------- --------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net Sales $ 187,359 $ 185,501 $ 574,834 $ 546,007
------------- -------------- ------------- --------------
Operating Costs and Expenses:
Cost of sales 153,933 160,151 477,131 464,496
Selling and administrative 21,370 19,563 61,962 58,645
Depreciation 7,110 6,658 21,333 19,962
Restructuring - 1,314 - 3,123
------------- -------------- ------------- --------------
182,413 187,686 560,426 546,226
------------- -------------- ------------- --------------
Income (Loss) from Operations 4,946 (2,185) 14,408 (219)
------------- -------------- ------------- --------------
Other Income (Expense):
Interest income 837 834 2,199 1,653
Interest expense (3,534) (3,365) (11,255) (10,772)
------------- -------------- ------------- --------------
(2,697) (2,531) (9,056) (9,119)
------------- -------------- ------------- --------------
Income (Loss) before Income Taxes (Benefit) and
Equity in Earnings of Unconsolidated Affiliate 2,249 (4,716) 5,352 (9,338)
Income Taxes (Benefit) 742 (1,797) 1,766 (3,469)
------------- -------------- ------------- --------------
Income (Loss) before Equity in Earnings of
Unconsolidated Affiliate 1,507 (2,919) 3,586 (5,869)
Equity in Earnings of Unconsolidated Affiliate 1,285 1,553 3,801 1,437
------------- -------------- ------------- --------------
Net Income (Loss) $ 2,792 $ (1,366) $ 7,387 $ (4,432)
============= ============== ============= ==============
Income (Loss) Available to Common Shareholders $ 2,072 $ (2,121) $ 5,194 $ (6,662)
============= ============== ============= ==============
Earnings (Loss) Per Share - Basic and Diluted $ .08 $ (.08) $ .20 $ (.25)
============= ============== ============= ==============
Weighted Average Common Shares Outstanding:
Basic 25,972 26,109 26,107 26,150
============= ============== ============= ==============
Diluted 25,994 26,109 26,162 26,150
============= ============== ============= ==============
See Notes to Consolidated Condensed Financial Statements.
3
CONE MILLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands, except share and par value data)
September 27, September 28, December 28,
1998 1997 1997
------------ ------------ ------------
ASSETS (Unaudited) (Unaudited) (Note)
Current Assets:
Cash $ 624 $ 2,280 $ 856
Accounts receivable, less allowance of $1,500 29,237 20,910 19,958
Subordinated note receivable 28,515 35,909 23,842
Inventories 118,200 121,622 115,663
Other current assets 15,524 11,733 19,228
------------ ------------ ------------
Total CurrentCAssets Assets 192,100 192,454 179,547
Investments in Unconsolidated Affiliates 40,582 35,581 36,781
Other Assets 35,848 39,110 38,431
Property, Plant and Equipment 250,104 240,033 251,887
------------ ------------ ------------
$ 518,634 $ 507,178 $ 506,646
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 8,500 $ - $ 4,500
Current maturities of long-term debt 10,714 10,714 10,714
Accounts payable 34,317 37,318 32,994
Sundry accounts payable and accrued liabilities 48,233 44,439 49,588
Deferred income taxes 20,230 24,695 23,370
------------ ------------ ------------
Total Current Liabilities 121,994 117,166 121,166
Long-Term Debt 146,274 139,545 139,656
Deferred Income Taxes 42,949 38,211 38,523
Other Liabilities 11,315 10,780 10,781
Stockholders' Equity:
Class A preferred stock - $100 par value; authorized
1,500,000 shares;issued and outstanding 383,948 shares 38,395 38,395 38,395
Class B preferred stock - no par value; authorized
5,000,000oshares Plant and Equipment-Net - - -
Common stock - $.10 par value; authorized 42,700,000
shares; issued and outstanding 25,459,433 shares;
1997, 26,112,133 shares and 26,201,633 shares 2,546 2,611 2,620
Capital in excess of par 57,418 61,548 62,300
Retained earnings 106,860 107,423 102,449
Deferred compensation - restricted stock (617) - (740)
Accumulated other comprehensive income (8,500) (8,501) (8,504)
------------ ------------ ------------
Total Stockholders' Equity 196,102 201,476 196,520
------------ ------------ ------------
$ 518,634 $ 507,178 $ 506,646
============ ============ ============
Note: The balance sheet at December 28, 1997, has been derived from the
audited financial statements at that date.
See Notes to Consolidated Condensed Financial Statements.
4
CONE MILLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
Thirty-Nine Thirty-Nine
Weeks Ended Weeks Ended
Sept. 27, 1998 Sept 28, 1997
-------------- -------------
(Unaudited) (Unaudited)
Cash Provided by Operations $ 19,636 $ 19,033
----------- ---------
Investing
Proceeds from divestitures - 19,529
Proceeds from sale of property, plant and equipment 5,495 4,154
Capital expenditures (21,933) (17,651)
Other - (1,500)
----------- ---------
Cash provided by (used in) investing (16,438) 4,532
----------- ---------
Financing
Net borrowings (payments) under line of credit agreements 4,000 (5,267)
Decrease in checks issued in excess of deposits (5,945) (1,923)
Principal payments - long term debt (10,714) (10,796)
Proceeds from long-term debt borrowings 17,000 -
Purchase of outstanding common stock (4,795) (1,532)
Dividends paid - Class A Preferred (2,976) (2,851)
Other - 66
----------- ---------
Cash used in financing (3,430) (22,303)
---------- ---------
Net change in cash (232) 1,262
Cash at Beginning of Period 856 1,018
----------- ---------
Cash at End of Period $ 624 $ 2,280
=========== =========
Supplemental Disclosures of Additional Cash Flow Information:
Cash payments for:
Interest, net of interest capitalized $ 14,376 $ 14,317
=========== =============
Income taxes, net of refunds $ (7,058) $ (3,017)
=========== =============
Supplemental Schedule of Noncash Investing and Financing Activities:
Receivable recorded from divestitures $ - $ 811
=========== =============
Purchase of outstanding common stock
through incurrence of accounts payable $ 153 $ -
=========== =============
See Notes to Consolidated Condensed Financial Statements.
5
CONE MILLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 27, 1998
Note 1. Basis of Financial Statement Preparation
The Cone Mills Corporation (the "Company") consolidated condensed
financial statements for September 27, 1998 and September 28, 1997 are
unaudited, but in the opinion of management reflect all adjustments
necessary to present fairly the consolidated condensed balance sheets
of Cone Mills Corporation and Subsidiaries at September 27, 1998 and
September 28, 1997, and the related consolidated condensed statements
of operations for the respective thirteen and thirty-nine weeks ended
September 27, 1998 and September 28, 1997, and cash flows for the
thirty-nine weeks then ended. 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 year 1997.
Inventories are stated at the lower of cost or market. The last-in,
first-out (LIFO) method is used to determine cost of most domestically
produced goods. The first-in, first-out (FIFO) or average cost methods
are used to determine cost of all other inventories. Because amounts
for inventories under the LIFO method are based on an annual
determination of quantities as of the year-end, the inventories at
September 27, 1998 and September 28, 1997 and related consolidated
condensed statements of operations for the thirteen and thirty-nine
weeks then ended are based on certain estimates relating to quantities
and cost as of the end of the fiscal year.
Note 2. Securitization of Accounts Receivable
During July 1998, the Receivables Purchase Agreement between the
subsidiary of a major financial institution and Cone Receivables, LLC,
was increased from $40 million to $50 million.
6
Note 3. Inventories
(in thousands) 9/27/98 9/28/97 12/28/97
Greige and finished goods $ 79,820 $ 85,121 $ 81,130
Work in process 10,751 10,941 11,260
Raw materials 15,403 12,639 11,122
Supplies and other 12,226 12,921 12,151
------- ------- -------
$ 118,200 $ 121,622 $ 115,663
======= ======= =======
Note 4. Long-Term Debt
(in thousands) 9/27/98 9/28/97 12/28/97
Senior Note $ 42,858 $ 53,573 $ 53,572
Revolving Credit Agreement 17,000 - -
8 1/8% Debentures 97,130 96,686 96,798
------- ------- -------
156,988 150,259 150,370
Less current maturities 10,714 10,714 10,714
------- ------- -------
$ 146,274 $ 139,545 $ 139,656
======= ======= =======
Effective February 1998, the interest rate on the Company's Senior Note
increased to 8.75%. Interest rates under the Revolving Credit Agreement are
similar to the Company's unsecured short-term notes payable.
In July 1998, the Company entered into an interest rate swap agreement with a
notional amount of $100 million and a term of seven years with a major financial
institution. This agreement effectively converts the 8 1/8% Debentures to a
variable interest rate. The interest rate under the swap agreement is reset
every six months and the effective rate at September 27, 1998, was 7.07%. The
interest rate swap agreement also provides an interest rate cap at 8.125% for
the first three years adjusting to 9.625% for the balance of its term.
Note 5. Class A Preferred Stock
The 1999 dividend rate for Class A Preferred Stock is 7.50%, payable March 31,
1999.
7
Note 6. Earnings (Loss) Per Share
The following table sets forth the computation of basic and diluted earnings
(loss) per share ("EPS").
(in thousands, except Thirteen Thirteen
per share data) Weeks Ended Weeks Ended
9/27/98 9/28/97
Net income (loss) $ 2,792 $ (1,366)
Preferred stock dividend (720) (755)
----- -----
Basic EPS - income (loss)
available to common shareholders 2,072 (2,121)
Effect of dilutive securities - -
----- -----
Diluted EPS - income (loss)
available to common shareholders
after assumed conversions $ 2,072 $ (2,121)
===== =====
Determination of shares:
Basic EPS - weighted average shares 25,972 26,109
Effect of dilutive securities 22 -
------ ------
Diluted EPS - adjusted weighted-
average shares and assumed
conversions 25,994 26,109
====== ======
Earnings (loss) per share:
Basic $ .08 $ ( .08)
====== ======
Diluted $ .08 $ ( .08)
====== ======
8
Note 6. Earnings (Loss) Per Share
The following table sets forth the computation of basic and diluted earnings
(loss) per share ("EPS").
(in thousands, except Thirty-Nine Thirty-Nine
per share data) Weeks Ended Weeks Ended
9/27/98 9/28/97
Income (loss) $ 7,387 $ (4,432)
Preferred stock dividends (2,193) (2,230)
----- -----
Basic EPS - income (loss)
available to common shareholders 5,194 (6,662)
Effect of dilutive securities - -
------ ------
Diluted EPS - income (loss)
available to common shareholders
after assumed conversions $ 5,194 $ (6,662)
===== =====
Determination of shares:
Basic EPS - weighted average shares 26,107 26,150
Effect of dilutive securities 55 -
------ ------
Diluted EPS - adjusted weighted-
average shares and assumed
conversions 26,162 26,150
====== ======
Earnings (loss) per share:
Basic $ .20 $ ( .25)
====== ======
Diluted $ .20 $ ( .25)
====== ======
Common stock options outstanding at September 28, 1997 were not included in the
computation of diluted earnings per share because to do so would have been
antidilutive.
9
Note 7. Recent Accounting Pronouncements
Beginning in fiscal year 1998, the Company adopted SFAS 130, "Reporting
Comprehensive Income." Comprehensive income is the total of net income and other
changes in equity, except those resulting from investments by owners and
distribution to owners not reflected in net income. Total comprehensive income
for the periods was as follows:
(in thousands) Thirteen Thirteen
Weeks Ended Weeks Ended
9/27/98 9/28/97
Net income (loss) $ 2,792 $ (1,366)
Other comprehensive income (loss),
currency translation adjustment 38 ( 3)
----- -----
$ 2,830 $ (1,369)
===== =====
Thirty-Nine Thirty-Nine
Weeks Ended Weeks Ended
9/27/98 9/28/97
Net income (loss) $ 7,387 $ (4,432)
Other comprehensive income (loss),
currency translation adjustment 4 (26)
----- -----
$ 7,391 $ (4,458)
===== =====
10
Item 2.
MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Third Quarter Ended September 27, 1998 Compared with Third Quarter
Ended September 28, 1997.
For the third quarter of 1998, Cone Mills had sales of $187.4 million, as
compared with sales of $185.5 million for the third quarter of 1997. Higher
sales of denim, decorative and jacquard woven fabrics accounted for the
increase. Lower specialty sportswear sales partially offset the other sales
increases. International sales were $49.1 million, or 26% of total sales, as
compared with $48.2 million, or 26% of sales, for the third quarter of 1997.
Gross profit for the third quarter of 1998 (net sales less cost of sales and
depreciation) was 14.0% of sales, as compared with 10.1% for the previous year.
The improvement in gross profit was primarily due to lower raw material costs,
improved average denim prices resulting from mix changes, and higher capacity
utilization.
Segment Information. Cone operates in two principal business segments, apparel
fabrics and home furnishings products. The following table sets forth certain
net sales and operating income (loss) information.
Third Quarter
1998 1997
(Dollar amounts in millions)
NET SALES
Apparel $ 156.1 83.3% $ 157.7 85.0%
Home Furnishings 31.3 16.7 27.8 15.0
----- ---- ----- -----
Total $ 187.4 100.0% $ 185.5 100.0%
===== ===== ===== =====
OPERATING INCOME (LOSS)(1)
Apparel $ 7.1 4.5% $ 4.4 2.8%
Home Furnishings (1.3) (4.2) (4.4) (15.9)
Restructuring - - (1.3) -
(1) Operating income (loss) excludes general corporate expenses.
Percentages reflect operating income (loss) as a percentage of segment
net sales.
Apparel Fabrics. Apparel fabrics segment sales for the third
quarter of 1998 were $156.1 million, down 1.0% from third quarter
11
1997 sales of $157.7 million. Increased sales of denims were more than
offset by lower specialty sportswear sales. Average denim prices were up
year over year as a result of mix changes. Cotton costs were down in the
third quarter of 1998, reflecting more favorable world cotton prices and
the U.S. government cotton program. Denim manufacturing facilities operated
at capacity during the third quarter of 1998.
For the third quarter of 1998, the apparel fabric segment had operating
income of $7.1 million, or 4.5% of sales, as compared with $4.4 million, or
2.8% of sales, in the third quarter of 1997. Improved profits from denim
operations in the third quarter of 1998 were substantially offset by
unfavorable specialty sportswear results.
Home Furnishings. For the third quarter of 1998, home furnishings segment
sales were $31.3 million, up 12.7% as compared with $27.8 million for the
third quarter of 1997. Stronger jacquard fabric and John Wolf sales
accounted for the increase. Home furnishings had an operating loss of $1.3
million, as compared with a loss of $4.4 million for the third quarter of
1997. All home furnishings units substantially improved operating results
in 1998 as compared with 1997.
Total Company selling and administrative expenses were $21.4 million for the
third quarter of 1998, up $1.8 million, as compared to the third quarter of
1997. During the 1998 period, the Company incurred consulting fees associated
with cost savings efforts and increases in merchandising and marketing expenses.
Selling and administrative expenses were 11.4% of sales in the third quarter of
1998, as compared with 10.5% in the third quarter of 1997.
Interest expense for the third quarter of 1998 was up $0.2 million, as compared
to the third quarter of 1997, primarily the result of additional borrowing to
support increases in working capital.
Income taxes as a percentage of pre-tax income for the third quarter of 1998
were 33.0% reflecting the tax benefit resulting from operation of the Company's
foreign sales corporation.
Equity in earnings of Parras Cone, the joint venture plant in Mexico, was $1.3
million for the third quarter of 1998, as compared with $1.6 million for the
third quarter of 1997. The 1998 results reflect the benefit of lower cotton
costs and the capacity expansion. In addition, the 1998 results include an
income tax accrual whereas the Company accrued no income taxes in 1997 due to
the availability of tax loss carryovers.
12
Cone Mills had net income for the third quarter of 1998 of $2.8 million, or $.08
per share after preferred dividends. For comparison, third quarter 1997 had a
net loss of $1.4 million, or $.08 per share, including a pre-tax charge of $1.3
million ($.03 per share) related to the consolidation of the Granite and
Carlisle finishing operations.
The outlook for the fourth quarter is clouded by weakening apparel sales at the
retail level. The Company's sales and operating results will be affected by
slowing consumer demand and, as a result, operating schedules will be reduced to
keep inventories in line. The Company's short-term operating imperatives are
effective marketing for specialty sportswear fabrics and satisfactory
manufacturing results from its Carlisle and Salisbury facilities.
Nine Months Ended September 27, 1998 Compared with Nine Months Ended
September 28, 1997
For the first nine months of 1998, Cone Mills experienced strong denim demand
and better market conditions in decorative print fabrics. However, for the first
nine months of 1997, Cone Mills ran reduced operating schedules as certain
customers adjusted value-added denim inventory levels and the Company
experienced weak fashion demand for decorative prints.
For the first nine months of 1998, Cone Mills had sales of $574.8 million, up
5.3%, as compared with sales of $546.0 million for the first nine months of
1997. After eliminating the sales of businesses which were sold in 1997, sales
were up approximately 6%. Higher sales of denim products, finishing services and
jacquard and decorative fabrics accounted for the increase. Lower specialty
sportswear sales, primarily shirting fabrics, partially offset the sales
increases. International sales were 26% of total sales, as compared with 25% of
sales for the first nine months of 1997.
Gross profit for the first nine months of 1998 (net sales less cost of sales and
depreciation) was 13.3% of sales, as compared with 11.3% for the previous year.
The increase was primarily the result of the improved sales volume, lower raw
material costs and higher capacity utilization partially offset by operating
performance of the Carlisle Finishing plant.
Segment Information. Cone operates in two principal business segments, apparel
fabrics and home furnishings products. The following table sets forth certain
net sales and operating income (loss) information.
13
Nine Months
1998 1997
(Dollar amounts in millions)
NET SALES
Apparel(1) $ 479.5 83.4% $ 465.1 85.2%
Home Furnishings(2) 95.3 16.6 80.9 14.8
----- ----- ----- -----
Total $ 574.8 100.0% $ 546.0 100.0%
===== ===== ===== =====
OPERATING INCOME (LOSS)(3)
Apparel $ 21.0 4.4% $ 16.7 3.6%
Home Furnishings (3.7) (3.9) (11.2) (13.8)
Restructuring - - (3.1) -
(1) Apparel includes net sales of $2.5 million for a business unit
sold in 1997.
(2) Home furnishings includes net sales of $2.2 million for business units
sold in 1997.
(3) Operating income (loss) excludes general corporate expenses.
Percentages reflect operating income (loss) as a percentage of segment
net sales.
Apparel Fabrics. Apparel fabrics segment sales for the first nine months of
1998 were $479.5 million, up 3.1% from the first nine months of 1997 sales
of $465.1 million. Increased sales of denims, partially offset by lower
specialty sportswear sales, accounted for the increase. Average denim
prices were essentially flat year over year. Cotton costs were lower in the
first nine months of 1998, reflecting more favorable world cotton prices
and the U.S. government cotton program. Denim manufacturing facilities
operated at capacity during the 1998 period.
For the first nine months of 1998, the apparel fabrics segment had
operating income of $21.0 million, or 4.4% of sales, as compared with $16.7
million, or 3.6% of sales, in the first nine months of 1997. Improved
profits from denim operations in the first nine months of 1998 were
substantially offset by unfavorable specialty sportswear results.
Home Furnishings. For the first nine months of 1998, home furnishings
segment sales were $95.3 million, up 17.8% as compared with $80.9 million
for the first nine months of 1997. Excluding operating units sold in 1997,
nine months 1998 sales were up approximately 21%. Stronger commission
finishing, decorative and jacquard fabrics sales accounted for the
increase. Home furnishings had an operating loss of $3.7 million, as
compared with a loss of $11.2 million for the first nine months of 1997.
With the exception of the Carlisle Finishing plant, home
14
furnishings units substantially improved operating results in 1998 as
compared with 1997.
Total Company selling and administrative expenses increased $3.4 million from
$58.6 million for the first nine months of 1997 to $62.0 million for the first
nine months of 1998, which included the expenses associated with the Company's
increased marketing and merchandising efforts. Selling and administrative
expenses were 10.8% of sales in the first nine months of 1998, as compared with
10.7% in the first nine months of 1997.
Cone Mills had net income for the first nine months of 1998 of $7.4 million, or
$.20 per share after preferred dividends. For comparison, the first nine months
of 1997 had a net loss of $4.4 million, or $.25 per share, including a pre-tax
charge of $3.1 million (approximately $.08 per share) related to the
consolidation of the Granite and Carlisle finishing operations.
Equity in earnings of Parras Cone, the joint venture plant in Mexico, was $3.8
million for the first nine months of 1998, as compared with $1.4 million for the
first nine months of 1997. The 1998 results reflect a fuller operating schedule
compared with the 1997 period, improved operating efficiencies and lower cotton
costs. In addition, the 1998 results include an income tax accrual whereas the
Company accrued no income taxes in 1997 due to the availability of tax loss
carryovers.
Liquidity and Capital Resources
The Company's principal long-term capital components consist of debt outstanding
under its Senior Note, its 8 1/8% Debentures and stockholders' equity. Primary
sources of liquidity are internally generated funds, an $80 million Revolving
Credit Facility and the $50 million Receivables Purchase Agreement. A
Receivables Purchase Agreement, a one-year facility, was renewed in March 1998
and increased from $40.0 million to $50.0 million in July 1998. On September 27,
1998, the Company had funds available of $63.0 million under its Revolving
Credit Facility.
During the first nine months of 1998, the Company generated cash from operating
activities before changes in working capital of $25.7 million, as compared with
$13.7 million for the first nine months of 1997. Working capital increases in
1998, primarily accounts receivable, were $6.1 million. Other sources of cash
included proceeds of $5.4 million realized from the sale of old manufacturing
equipment. Uses of cash included $21.9 million for capital expenditures, $4.8
million for the repurchase of common stock, and
15
$3.0 million for preferred stock dividends.
In August 1998, the Company announced an alliance with a related group of
companies known as the Ashima Group of India. The Ashima Group produces and
markets a broad product line of denim and sportswear fabrics. The Indian
government approved the alliance on September 12, 1998. The alliance consists of
four elements: 1) the purchase by Cone of approximately 8% of outstanding shares
of Ashima Syntex Limited completed on October 23, 1998 for $3.5 million; 2) Cone
providing technology and technical services to the Ashima companies, receiving
fees as compensation; 3)Cone certification, after full process and product
conformance to Cone standards, of certain Ashima products for distribution
throughout the world; and 4) the exclusive right of Cone to market certain
Ashima products outside the Indian sub-continent under the name Ashima-Cone.
At a special meeting of the board of directors on October 19, 1998, the Company
was authorized to repurchase from time to time up to 1.5 million shares of its
common stock. Since the beginning of the third quarter of 1998, the Company has
repurchased 733,700 shares of common stock which completed the previous
authorization.
The Company believes that internally generated operating funds and funds
available under its credit facilities will be sufficient to meet its needs for
working capital, capital spending and stock repurchases for the foreseeable
future. Potential international investments may require additional long-term
financing.
On September 27, 1998, the Company's long-term capital structure consisted of
$146.3 million of long-term debt and $196.1 million of stockholders' equity. For
comparison, on September 28, 1997, the Company had $139.5 million of long-term
debt and $201.5 million of stockholders' equity. Long-term debt (including
current maturities of long-term debt) as a percentage of long-term debt and
stockholders' equity was 44% at September 27, 1998, as compared with 43% at
September 28, 1997.
Accounts and note receivable on September 27, 1998, were $57.8 million, as
compared with $56.8 million at September 28, 1997. Receivables, including those
sold pursuant to the Receivables Purchase Agreement, represented 53 days of
sales outstanding at September 27, 1998 and 48 days at September 28, 1997. The
increase in days of sales outstanding primarily reflects a change in customer
sales mix.
Inventories on September 27, 1998, were $118.2 million, down $3.4 million from
September 28, 1997. The decrease was primarily due to
16
lower finished goods inventories which were partially offset by increases in raw
material levels.
Capital spending in the first nine months of 1998 was $21.9 million, as compared
with $17.7 million for the first nine months of 1997. Capital spending in 1998
is expected to be approximately $37 million. Projects include new weaving
machines and link ring spinning for the White Oak denim plant and additional
looms for the jacquard facility.
The Company recognizes the business implications regarding the Year 2000 as it
relates to computer programs and software systems. A comprehensive plan has been
developed to address possible exposures to Year 2000 issues. Critical financial,
operational, and manufacturing systems have been inventoried and assessed and
detail plans are in place for the necessary system modifications or
replacements. Implementation of required changes for all systems is targeted for
completion during fiscal year 1999. Testing and certification is expected to be
substantially completed by June 1999.
Executive management periodically reviews the status of its Year 2000 compliance
efforts. At present the Company estimates it is approximately one-fourth
complete with implementation of new systems or remediation of existing systems
as its relates to core business systems and approximately two-thirds complete
with its efforts as it relates to manufacturing, operating and control systems.
The Company is coordinating Year 2000 readiness with other entities with which
it interacts, both domestically and globally, including suppliers, customers and
financial service organizations. Risk assessments and action plans have been
substantially completed. The majority of necessary system modifications,
including testing and certification, should be completed in early 1999. All
required changes are targeted for completion by third quarter 1999.
The Company has made significant investments to modernize its core business
systems over the past several years. With each system modification or
replacement, Cone has addressed the Year 2000 issue. Therefore, remediation
costs to address the Company's Year 2000 issues are expected to be less than
$1.0 million.
The Company currently has contingency plans which address system related
interruptions and will further develop such plans to protect the business from
potential Year 2000 interruptions. These plans will be completed during fiscal
year 1999. The Company is taking reasonable steps to prevent major interruptions
related to the Year
17
2000 issue; however, the effect on the Company's results of operations if the
Company, its suppliers or its customers are not fully Year 2000 compliant is not
reasonably estimable.
Federal, state and local regulations relating to the workplace and the discharge
of materials into the environment continue to change and, consequently, it is
difficult to gauge the total future impact of such regulations on the Company.
Existing government regulations are not expected to cause a material change in
the Company's competitive position, operating results or planned capital
expenditures. The Company has an active environmental committee which fosters
protection of the environment and compliance with laws.
The Company is a party to various legal claims and actions. Management believes
that none of these claims or actions, either individually or in the aggregate,
will have a material adverse effect on the financial condition of the Company.
"Safe Harbor" Statement under Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Except for the historical information presented, the matters disclosed
in the foregoing discussion and analysis and other parts of this report
include forward- looking statements. These statements represent the
Company's current judgment on the future and are subject to risks and
uncertainties that could cause actual results to differ materially.
Such factors include, without limitation: (i) the demand for textile
products, including the Company's products, will vary with the U.S. and
world business cycles, imbalances between consumer demand and
inventories of retailers and manufacturers and changes in fashion
trends, (ii) the highly competitive nature of the textile industry and
the possible effects of reduced import protection and free-trade
initiatives, (iii) the unpredictability of the cost and availability of
cotton, the Company's principal raw material, and (iv) the Company's
relationships with Levi Strauss as its major customer. For a further
description of these risks see the Company's 1997 Form 10-K, "Item 1.
Business Competition, -Raw Materials and -Customers" and "Management's
Discussion and Analysis of Results of Operations and Financial
Condition -- Overview" of the Company's 1997 Annual Report to
Shareholders incorporated by reference into Item 7. of the Form 10-K.
18
Other risks and uncertainties may be described from time to time in the
Company's other reports and filings with the Securities and Exchange
Commission.
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
certain other defendants in which the Plaintiffs asserted a variety of claims
related to the Cone Mills Corporation 1983 ESOP (the "1983 ESOP") and certain
other employee benefit plans maintained by the Company. In March 1992, the
United States District Court in Greenville, South Carolina entered a judgment in
the amount of $15.5 million (including an attorneys' fee award) against the
Company with respect to an alleged promise to make additional Company
contributions to the 1983 ESOP and all claims unrelated to the alleged promise
were dismissed. The Company, certain individual defendants and the Plaintiffs
appealed.
On May 6, 1994, the United States Court of Appeals for the Fourth Circuit,
sitting en banc, affirmed the prior conclusion of a panel of three of its judges
and unanimously reversed the $15.5 million judgment and unanimously affirmed all
of the District Court's rulings in favor of the Company. However, the Court of
Appeals affirmed, by an equally divided court, the District Court's holding that
Plaintiffs should be allowed to proceed on an alternative theory whether,
subject to proof of detrimental reliance, Plaintiffs could establish that a
letter to salaried employees on December 15, 1983 created an enforceable
obligation that could allow recovery on a theory of equitable estoppel.
Accordingly, the case was remanded to the District Court for a determination of
whether the Plaintiffs could establish detrimental reliance creating estoppel of
the Company.
On April 19, 1995, the District Court granted a motion by the Company for
summary judgment on the issues of equitable estoppel and third-party beneficiary
of contract which had been remanded to it by the Court of Appeals. The Court
ruled that the Plaintiffs could not forecast necessary proof of detrimental
reliance. The District Court, however, granted Plaintiffs motion to amend the
complaint insofar as they sought to pursue a "new" claim for unjust enrichment,
but denied their motion to amend so far as they sought to add claims for
promissory estoppel and unilateral contract. The court further denied the
Company's motion to decertify the class.
19
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.
The Company and its subsidiaries are involved in legal proceedings and claims
arising in the ordinary course of business. Although there can be no assurance
as to the ultimate disposition of these matters, management believes that the
probable resolution of such contingencies shall not have a material adverse
effect on the financial condition of the Company.
Item 5. Other Information
On November 10, 1998, J. Patrick Danahy, President and Chief Executive Officer
and member of the Board of Directors of Cone Mills Corporation, announced his
retirement from the Company and his resignation from the Board of Directors.
Mr. Danahy is succeeded as President and Chief Executive Officer by John L.
Bakane.
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
20
Exhibit Sequential
No. Description Page No.
*2.1(a) Purchase Agreement between Registrant
and Cone Receivables LLC dated as of
March 25, 1997, filed as Exhibit 2.1(l)
to Registrant's report on Form 10-Q for
the quarter ended March 30, 1997.
*2.1(b) Receivables Purchase Agreement dated
as of March 25, 1997, among Cone
Receivables LLC, as Seller, the
Registrant, as Servicer, and
Delaware Funding Corporation, as
buyer, filed as Exhibit 2.1(m) to
Registrant's report on Form 10-Q
for the quarter ended March 30, 1997.
*2.1(c) Amendment to Receivables Purchase
Agreement dated March 24, 1998,
between the Registrant and Delaware
Funding Corporation, filed as Exhibit
2.1(c) to Registrant's report on
Form 10-Q for the quarter ending
March 29, 1998.
2.1(d) Second Amendment to Receivables
Purchase Agreement dated as of
July 16, 1998, between the Registrant
and Delaware Funding Corporation. 29
*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
21
Exhibit Sequential
No. Description Page No.
quarter ended July 4, 1993.
*2.2(c) Guaranty Agreement dated as of June 25,
1993, between Cone Mills Corporation and
Compania Industrial de Parras, S.A. de C.V.,
filed as Exhibit 2.2(c) to Registrant's
report on Form 10-Q for the quarter ended
July 4, 1993.
*2.2(d) Joint Venture Agreement dated as of
June 25, 1993, between Compania
Industrial de Parras, S.A. de C.V.,
and Cone Mills (Mexico), S.A. de C.V.
filed as Exhibit 2.2(d) to
Registrant's report on Form 10-Q for
the quarter ended July 4, 1993.
*2.2(e) First Amendment to Joint Venture
Agreement dated as of June 14, 1995,
between Compania Industrial de Parras,
S.A. de C.V., and Cone Mills (Mexico),
S.A. de C.V., filed as Exhibit 2.2(e)
to the Registrant's report on Form 10-Q
for the quarter ended July 2, 1995.
*2.2(f) Joint Venture Registration Rights
Agreement dated as of June 25, 1993,
among Parras Cone de Mexico, S.A.,
Compania Industrial de Parras, S.A. de
C.V. and Cone Mills (Mexico),
S.A. de C.V. filed as Exhibit 2.2(e)
to Registrant's report on Form 10-Q
for the quarter ended July 4, 1993.
*2.2(g) Parras Registration Rights Agreement
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
22
Exhibit Sequential
No. Description Page No.
Corporation filed as Exhibit 2.2(h) to the
Registrant's report on Form 10-Q for the
quarter ended July 2, 1995.
*2.2(i) Guaranty Agreement dated as of June 15,
1995, between Cone Mills Corporation and
Morgan Guaranty Trust Company of New York
filed as Exhibit 2.2(i) to the Registrant's
report on Form 10-Q for the quarter ended
July 2, 1995.
*2.2(j) Support Agreement dated as of June 25,
1993, among Cone Mills Corporation, Sr.
Rodolfo L. Garcia, Sr. Rodolfo Garcia
Muriel and certain other person listed
herein ("private stockholders") filed
as Exhibit 2.2(g) to Registrant's
report on Form 10-Q for the quarter
ended July 4, 1993.
*2.2(k) Call Option dated September 25, 1995, between
Registrant and SMM Trust, 1995 - M, a Delaware
business trust, filed as Exhibit 2.2(k) to the
Registrant's report on Form 10-Q for the
quarter ended October 1, 1995.
*2.2(l) Put Option dated September 25, 1995, between
Registrant and SMM Trust, 1995 - M, a Delaware
business trust, filed as Exhibit 2.2(l) to the
Registrant's report on Form 10-Q for the quarter
ended October 1, 1995.
*2.2(m) Letter Agreement dated January 11, 1996 among
Registrant, Rodolfo Garcia Muriel, and Compania
Industrial de Parras, S.A. de C.V., filed as
Exhibit 2.2(m) to the Registrant's report on
Form 10-K for the year ended December 31, 1995.
*4.1 Restated Articles of Incorporation of the
Registrant effective August 25, 1993, filed as
Exhibit 4.1 to Registrant's report on
Form 10-Q for the quarter ended
23
Exhibit Sequential
No. Description Page No.
October 3, 1993.
*4.2 Amended and Restated Bylaws of Registrant,
Effective June 18, 1992, filed as Exhibit
3.5 to the Registrant's Registration
Statement on Form S-1 (File No. 33-46907).
*4.3 Note Agreement dated as of August 13, 1992,
between Cone Mills Corporation and The Prudential
Insurance Company of America, with form of 8%
promissory note attached, filed as Exhibit 4.01
to the Registrant's report on Form 8-K dated
August 13, 1992.
*4.3(a) Letter Agreement dated September 11, 1992,
amending the Note Agreement dated August 13,
1992, between the Registrant and The
Prudential Insurance Company of America filed
as Exhibit 4.2 to the Registrant's report on
Form 8-K dated March 1, 1995.
*4.3(b) Letter Agreement dated July 19, 1993,
amending the Note Agreement dated
August 13, 1992, between the Registrant
and The Prudential Insurance Company of
America filed as Exhibit 4.3 to the
Registrant's report on Form 8-K dated
March 1, 1995.
*4.3(c) Letter Agreement dated June 30, 1994,
amending the Note Agreement dated
August 13, 1992, between the Registrant
and The Prudential Insurance Company of
America filed as Exhibit 4.4 to the
Registrant's report on Form 8-K dated
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.
24
Exhibit Sequential
No. Description Page No.
*4.3(e) Letter Agreement dated as of June 30,
1995, amending the Note Agreement dated
August 13, 1992, between the Registrant
and The Prudential Insurance Company
of America filed as Exhibit 4.3(e) to
the Registrant's report on Form 10-Q
for the quarter ended July 2, 1995.
*4.3(f) Letter Agreement dated as of June 30,
1995, between the Registrant and
The Prudential Insurance Company
of America superseding Letter Agreement
filed as Exhibit 4.3(e) to the
Registrant's report on Form 10-Q
for the quarter ended July 2, 1995.
*4.3(g) Letter Agreement dated as of March 30, 1996,
between the Registrant and The Prudential
Insurance Company of America filed as Exhibit
4.3(g) to the Registrant's report on Form 10-Q
for the quarter ended March 31, 1996.
*4.3(h) Letter Agreement dated as of January 31, 1997,
between the Registrant and The Prudential
Insurance Company of America filed as Exhibit
4.3(h) to the Registrant's report on Form 10-K
for the year ended December 29, 1996.
*4.3(i) Letter Agreement dated as of July 31, 1997,
between the Registrant and the Prudential
Insurance Company of America, filed as Exhibit
4.3(i) to the Registrant's report on Form 10-Q
for the quarter ended September 28, 1997.
*4.3(j) Modification to Note Agreement dated as of
February 14, 1998, between the Registrant and
The Prudential Insurance Company of America,
filed as Exhibit 4.3(j) to Registrant's report
on Form 10-Q for the quarter ending March 29, 1998.
25
Exhibit Sequential
No. Description Page No.
*4.4 Credit Agreement dated August 7, 1997,
among the Registrant, various banks and
Morgan Guaranty Trust Company of New York as
agent, filed as Exhibit 4.4 to the Registrant's
report on Form 10-Q for the quarter ended
September 28, 1997.
*4.5 Specimen Class A Preferred Stock
Certificate, filed as Exhibit 4.5
to the Registrant's Registration
Statement on Form S-1(File No. 33-46907).
*4.6 Specimen Common Stock Certificate,
effective June 18, 1992, filed as
Exhibit 4.7 to the Registrant's
Registration Statement on Form S-1
(File No. 33-46907).
*4.8 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.
*4.8(c) Third Amendment to the Cone Mills Corporation
1983 ESOP dated August 7, 1997, filed as Exhibit
4.8(c) to the Registrant's report on Form 10-Q
for the quarter ended September 28, 1997.
26
Exhibit Sequential
No. Description Page No.
*4.8(d) Fourth Amendment to the Cone Mills Corporation
1983 ESOP dated December 4, 1997, filed as
Exhibit 4.8(d) to the Registrant's report on
Form 10-K for the year ended December 28, 1997.
*4.9 Indenture dated as of February 14,
1995, between Cone Mills Corporation
and Wachovia Bank of North Carolina,
N.A. as Trustee, (Bank of New York is
successor Trustee)filed as Exhibit 4.1
to Registrant's Registration Statement
on Form S-3 (File No. 33-57713).
27 Financial Data Schedule 32
* Incorporated by reference to the statement or report indicated.
27
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 November 10, 1998 /s/ Anthony L. Furr
------------------ -------------------
Anthony L. Furr
Vice President and
Chief Financial Officer
28