Page 1 of 29
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 June 28, 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 July 29, 1998:
26,160,033 shares.
1
<PAGE>
CONE MILLS CORPORATION
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Statements of Operations
Thirteen and twenty-six weeks ended
June 28, 1998 and June 29, 1997 (Unaudited).............3
Consolidated Condensed Balance Sheets
June 28, 1998 and June 29, 1997
(Unaudited) and December 28, 1997.......................4
Consolidated Condensed Statements of Cash Flows
Twenty-six weeks ended June 28, 1998
and June 29, 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.............................................18
Item 4. Submission of Matters to a Vote of Security Holders...........19
Item 5. Other Information.............................................20
Item 6. Exhibits and Reports on Form 8-K..............................20
2
<PAGE>
PART I Item 1.
CONE MILLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<S> <C> <C> <C> <C>
Thirteen Thirteen Twenty-Six Twenty-Six
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
June 28, 1998 June 29, 1997 June 28, 1998 June 29, 1997
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net Sales $ 197,304 $ 185,792 $ 387,475 $ 360,506
Operating Costs and Expenses:
Cost of sales 163,352 156,286 323,198 304,345
Selling and administrative 20,813 20,778 40,592 39,082
Depreciation 7,049 6,633 14,223 13,304
Restructuring - 1,154 - 1,809
191,214 184,851 378,013 358,540
Income from Operations 6,090 941 9,462 1,966
Other Income (Expense):
Interest income 751 631 1,362 819
Interest expense (4,174) (3,724) (7,721) (7,407)
(3,423) (3,093) (6,359) (6,588)
Income (Loss) before Income Taxes (Benefit) and
Equity in Earnings (Losses) of Unconsolidated
Affiliate 2,667 (2,152) 3,103 (4,622)
Income Taxes (Benefit) 880 (684) 1,024 (1,672)
Income (Loss) before Equity in Earnings (Losses)
of Unconsolidated Affiliate 1,787 (1,468) 2,079 (2,950)
Equity in Earnings (Losses) of Unconsolidated
Affiliate 1,264 397 2,516 (116)
Net Income (Loss) $ 3,051 $ (1,071) $ 4,595 $ (3,066)
Income (Loss) Available to Common Shareholders $ 2,331 $ (1,826) $ 3,122 $ (4,541)
Earnings (Loss) Per Share - Basic and Diluted $ .09 $ (.07) $ .12 $ (.17)
Weighted Average Common Shares Outstanding:
Basic 26,166 26,102 26,175 26,170
Diluted 26,280 26,102 26,246 26,170
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
3
<PAGE>
CONE MILLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands, except share and par value data)
<TABLE>
<S> <C> <C> <C>
June 28, June 29, December 28,
1998 1997 1997
ASSETS (Unaudited) (Unaudited) (Note)
Current Assets:
Cash $ 1,609 $ 4,999 $ 856
Accounts receivable, less allowance
of $1,500 24,652 21,186 19,958
Subordinated note receivable 44,970 39,491 23,842
Inventories 123,618 129,970 115,663
Other current assets 23,947 10,425 19,228
Total Current Assets 218,796 206,071 179,547
Investments in Unconsolidated Affiliates 39,297 34,028 36,781
Other Assets 36,354 38,982 38,431
Property, Plant and Equipment 251,821 239,633 251,887
$ 546,268 $ 518,714 $ 506,646
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 1,500 $ - $ 4,500
Current maturities of long-term debt 10,714 10,714 10,714
Accounts payable 37,480 32,292 32,994
Sundry accounts payable and accrued
liabilities 47,757 49,519 49,588
Deferred income taxes 20,938 24,421 23,370
Total Current Liabilities 118,389 116,946 121,166
Long-Term Debt 176,878 150,148 139,656
Deferred Income Taxes 41,964 38,300 38,523
Other Liabilities 11,080 10,519 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 5,000,000 shares - - -
Common stock - $.10 par value; authorized
42,700,000 shares; issued and outstanding
26,165,933 shares; 1997, 26,099,533 shares
and 26,201,633 shares 2,617 2,610 2,620
Capital in excess of par 62,049 61,483 62,300
Retained earnings 104,089 108,811 102,449
Deferred compensation - restricted stock (655) - (740)
Accumulated other comprehensive income (8,538) (8,498) (8,504)
Total Stockholders' Equity 197,957 202,801 196,520
$ 546,268 $ 518,714 $ 506,646
</TABLE>
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
<PAGE>
CONE MILLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<S> <C> <C>
Twenty-Six Twenty-Six
Weeks Ended Weeks Ended
June 28,1998 June 29,1997
(Unaudited) (Unaudited)
Cash Provided by (Used in) Operations $ (9,869) $ 2,316
Investing
Proceeds from divestitures - 19,529
Proceeds from sale of property, plant and equipment 5,017 3,564
Capital expenditures (16,706) (10,739)
Other - (1,500)
Cash provided by (used in) investing (11,689) 10,854
Financing
Net payments under line of credit agreements (3,000) (5,267)
Increase (decrease) in checks issued in excess of deposits (8,488) 522
Proceeds from long-term debt borrowings 37,000 -
Dividends paid - Class A Preferred (2,955) (2,829)
Other (246) (1,615)
Cash provided by (used in) financing 22,311 (9,189)
Net change in cash 753 3,981
Cash at Beginning of Period 856 1,018
Cash at End of Period $ 1,609 $ 4,999
Supplemental Disclosures of Additional Cash Flow Information:
Cash payments for:
Interest, net of interest capitalized $ 7,393 $ 7,489
Income taxes, net of refunds $ 522 $ (3,409)
Supplemental Schedule of Noncash Investing and Financing Activities:
Receivable recorded from divestitures $ - $ 2,298
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
5
<PAGE>
CONE MILLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 28, 1998
Note 1. Basis of Financial Statement Preparation
The Cone Mills Corporation (the "Company") consolidated condensed
financial statements for June 28, 1998 and June 29, 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 June 28, 1998 and June 29, 1997, and
the related consolidated condensed statements of operations for the
respective thirteen and twenty-six weeks ended June 28, 1998 and June
29, 1997, and cash flows for the twenty-six 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 June
28, 1998 and June 29, 1997 and related consolidated condensed
statements of operations for the thirteen and twenty-six 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
<PAGE>
Note 3. Inventories
<TABLE>
<S> <C> <C> <C>
(in thousands) 6/28/98 6/29/97 12/28/97
Greige and finished goods $ 79,589 $ 87,551 $ 81,130
Work in process 10,602 12,405 11,260
Raw materials 20,664 16,972 11,122
Supplies and other 12,763 13,042 12,151
------- ------- -------
$ 123,618 $ 129,970 $ 115,663
======= ======= =======
Note 4. Long-Term Debt
(in thousands) 6/28/98 6/29/97 12/28/97
Senior Note $ 53,572 $ 64,286 $ 53,572
Revolving Credit Agreement 37,000 - -
8 1/8% Debentures 97,020 96,576 96,798
------- ------- -------
187,592 160,862 150,370
Less current maturities 10,714 10,714 10,714
------- ------- -------
$ 176,878 $ 150,148 $ 139,656
======= ======= =======
</TABLE>
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 with the initial effective rate of 7.26% versus the fixed rate
of 8.125% on the debentures. 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
<PAGE>
Note 6. Earnings (Loss) Per Share
The following table sets forth the computation of basic and diluted earnings
(loss) per share ("EPS").
<TABLE>
<S> <C> <C>
(in thousands, except Thirteen Thirteen
per share data) Weeks Ended Weeks Ended
6/28/98 6/29/97
Net income (loss) $ 3,051 $ (1,071)
Preferred stock dividends (720) (755)
----- -----
Basic EPS - income (loss)
available to common shareholders 2,331 (1,826)
Effect of dilutive securities - -
----- -----
Diluted EPS - income (loss)
available to common shareholders
after assumed conversions $ 2,331 $ (1,826)
===== =====
Determination of shares:
Basic EPS - weighted average shares 26,166 26,102
Effect of dilutive securities 114 -
----- -----
Diluted EPS - adjusted weighted-
average shares and assumed
conversions 26,280 26,102
====== ======
Earnings (loss) per share:
Basic $ .09 $ ( .07)
====== ======
Diluted $ .09 $ ( .07)
====== ======
</TABLE>
8
<PAGE>
Note 6. Earnings (Loss) Per Share
The following table sets forth the computation of basic and diluted earnings
(loss) per share ("EPS").
<TABLE>
<S> <C> <C>
(in thousands, except Twenty-Six Twenty-Six
per share data) Weeks Ended Weeks Ended
6/28/98 6/29/97
Net income (loss) $ 4,595 $ (3,066)
Preferred stock dividends (1,473) (1,475)
----- -----
Basic EPS - income (loss)
available to common shareholders 3,122 (4,541)
Effect of dilutive securities - -
----- -----
Diluted EPS - income (loss)
available to common shareholders
after assumed conversions $ 3,122 $ (4,541)
===== =====
Determination of shares:
Basic EPS - weighted average shares 26,175 26,170
Effect of dilutive securities 71 -
----- -----
Diluted EPS - adjusted weighted-
average shares and assumed
conversions 26,246 26,170
====== ======
Earnings (loss) per share:
Basic $ .12 $ ( .17)
====== ======
Diluted $ .12 $ ( .17)
====== ======
</TABLE>
Common stock options outstanding at June 29, 1997 were not included in the
computation of diluted earnings per share because to do so would have been
antidilutive.
9
<PAGE>
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:
<TABLE>
<S> <C> <C>
(in thousands) Thirteen Thirteen
Weeks Ended Weeks Ended
6/28/98 6/29/97
Net income (loss) $ 3,051 $ (1,071)
Other comprehensive income (loss),
currency translation adjustment ( 7) (15)
----- -----
$ 3,044 $ (1,086)
===== =====
Twenty-Six Twenty-Six
Weeks Ended Weeks Ended
6/28/98 6/29/97
Net income (loss) $ 4,595 $ (3,066)
Other comprehensive income (loss),
currency translation adjustment (34) (23)
----- -----
$ 4,561 $ (3,089)
===== =====
</TABLE>
10
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Second Quarter Ended June 28, 1998 Compared with Second Quarter
Ended June 29, 1997.
For the second quarter of 1998, Cone Mills had sales of $197.3 million, up 6.2%,
as compared with sales of $185.8 million for the second quarter of 1997. Higher
sales of denim products and all home furnishings units accounted for the
increase. Lower specialty sportswear sales partially offset the other sales
increases. International sales were $46.9 million, or 24% of total sales, as
compared with $43.0 million, or 23% of sales, for the second quarter of 1997.
Gross profit for the second quarter of 1998 (net sales less cost of sales and
depreciation) was 13.6% of sales, as compared with 12.3% 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.
<TABLE>
<S> <C> <C> <C> <C>
Second Quarter
1998 1997
(Dollar amounts in millions)
NET SALES
Apparel $ 165.3 83.8% $ 159.1 85.6%
Home Furnishings(1) 32.0 16.2 26.7 14.4
----- ---- ----- -----
Total $ 197.3 100.0% $ 185.8 100.0%
===== ===== ===== =====
OPERATING INCOME (LOSS)(2)
Apparel $ 7.1 4.3% $ 6.2 3.9%
Home Furnishings (0.1) (0.4) (3.2) (12.1)
Restructuring - - (1.2) -
</TABLE>
(1) Home furnishings includes net sales of $0.8 million for a business unit
sold in 1997.
(2) Operating income (loss) excludes general corporate expenses.
Percentages reflect operating income (loss) as a percentage of
11
<PAGE>
segment net sales.
Apparel Fabrics. Apparel fabrics segment sales for the second quarter of
1998 were $165.3 million, up 4.0% from second quarter 1997 sales of $159.1
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 down in the second
quarter of 1998, reflecting more favorable world cotton prices. Denim
manufacturing facilities operated at capacity during the second quarter of
1998.
For the second quarter of 1998, the apparel fabric segment had operating
income of $7.1 million, or 4.3% of sales, as compared with $6.2 million, or
3.9% of sales, in the second quarter of 1997. Improved profits from denim
operations in the second quarter of 1998 were substantially offset by
unfavorable specialty sportswear results.
Home Furnishings. For the second quarter of 1998, home furnishings segment
sales were $32.0 million, up 19.9% as compared with $26.7 million for the
second quarter of 1997. Excluding operating units sold in 1997, second
quarter 1998 sales were up approximately 23%. Stronger commission
finishing, jacquard fabric and John Wolf sales accounted for the increase.
Home furnishings had an operating loss of $0.1 million, as compared with a
loss of $3.2 million for the second quarter of 1997. All home furnishings
units substantially improved operating results in 1998 as compared with
1997.
Total Company selling and administrative expenses were $20.8 million for the
second quarter of 1998, essentially the same as the second quarter of 1997.
Selling and administrative expenses were 10.5% of sales in the second quarter of
1998, as compared with 11.2% in the second quarter of 1997.
Interest expense for the second quarter of 1998 was up $0.5 million, as compared
to the second 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 second 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 second quarter of 1998, as compared with $0.4 million for the
second quarter of 1997. The 1998 results
12
<PAGE>
reflect a fuller operating schedule compared with the 1997 period, improved
operating efficiencies and lower cotton costs.
Cone Mills had net income for the second quarter of 1998 of $3.1 million, or
$.09 per share after preferred dividends. For comparison, second quarter 1997
had a net loss of $1.1 million, or $.07 per share, including a pre-tax charge of
$1.2 million related to the consolidation of the Granite and Carlisle finishing
operations.
The Company continues to experience strong denim sales and sales increases in
home furnishings operations as the third quarter of 1998 begins. The Company's
short-term operating imperatives are effective marketing for specialty
sportswear fabrics and satisfactory manufacturing results from its Carlisle and
Salisbury facilities.
Six Months Ended June 28, 1998 Compared with Six Months Ended June 29, 1997
For the first six months of 1998, Cone Mills experienced strong denim demand and
better market conditions in decorative print fabrics. However, for the first six
months of 1997, Cone Mills had value-added denim inventory adjustments and weak
fashion demand for decorative prints.
For the first six months of 1998, Cone Mills had sales of $387.5 million, up
7.5%, as compared with sales of $360.5 million for the first half of 1997. After
eliminating the sales of businesses which were sold in 1997, sales were up
approximately 9%. Higher sales of denim products, finishing services and
jacquard fabrics accounted for the increase. Lower specialty sportswear sales,
primarily shirting fabrics, partially offset the sales increases. International
sales were 25% of total sales, as compared with 24% of sales, for the first six
months of 1997.
Gross profit for the first six months of 1998 (net sales less cost of sales and
depreciation) was 12.9% of sales, as compared with 11.9% 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
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Six Months
----------
1998 1997
---- ----
(Dollar amounts in millions)
NET SALES
Apparel(1) $ 323.5 83.5% $ 307.4 85.3%
Home Furnishings(2) 64.0 16.5 53.1 14.7
----- ---- ----- -----
Total $ 387.5 100.0% $ 360.5 100.0%
===== ===== ===== =====
OPERATING INCOME (LOSS)(3)
Apparel $ 13.9 4.3% $ 12.3 4.0%
Home Furnishings (2.3) (3.7) (6.8) (12.7)
Restructuring - - (1.8) -
</TABLE>
(1) Apparel includes net sales of $2.7 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 six months of
1998 were $323.5 million, up 5.2% from first half 1997 sales of $307.4
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 six
months of 1998, reflecting more favorable world cotton prices. Denim
manufacturing facilities operated at capacity during the 1998 period.
For the first six months of 1998, the apparel fabrics segment had operating
income of $13.9 million, or 4.3% of sales, as compared with $12.3 million,
or 4.0% of sales, in the first half of 1997. Improved profits from denim
operations in the first six months of 1998 were substantially offset by
unfavorable specialty sportswear results.
Home Furnishings. For the first six months of 1998, home furnishings
segment sales were $64.0 million, up 20.5% as compared with $53.1 million
for the first six months of 1997. Excluding operating units sold in 1997,
first half 1998 sales were up approximately 26%. Stronger commission
finishing and jacquard fabric sales accounted for the increase. Home
furnishings had an operating loss of $2.3 million, as compared with a loss
of $6.8 million for the first six months of 1997.
14
<PAGE>
With the exception of the Carlisle Finishing plant, home furnishings units
substantially improved operating results in 1998 as compared with 1997.
Total Company selling and administrative expenses increased slightly from $39.1
million for the first six months of 1997 to $40.6 million in the first half of
1998, which included the expenses associated with the Company's increased
marketing and merchandising efforts. Selling and administrative expenses were
10.5% of sales in the first six months of 1998, as compared with 10.8% in the
first half of 1997.
Cone Mills had net income for the first six months of 1998 of $4.6 million, or
$.12 per share after preferred dividends. For comparison, first half 1997 had a
net loss of $3.1 million, or $.17 per share, including a pre-tax charge of $1.8
million related to the consolidation of the Granite and Carlisle finishing
operations.
Equity in earnings of Parras Cone, the joint venture plant in Mexico, was $2.5
million for the first six months of 1998, as compared with a loss of $0.1
million for the first half of 1997. The 1998 results reflect a fuller operating
schedule compared with the 1997 period, improved operating efficiencies and
lower cotton costs.
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. The
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 June 28,
1998, the Company had funds available of $43.0 million under its Revolving
Credit Facility. During the first six months of 1998, the Company generated cash
from operating activities before changes in working capital of $16.3 million, as
compared with $9.5 million for the first half of 1997. Working capital increases
in 1998, primarily accounts receivable and inventories, were $26.2 million.
Other sources of cash included proceeds of $5.0 million realized from the sale
of old manufacturing equipment. Uses of cash included $16.7 million for capital
expenditures, and $3.0 million for preferred stock dividends.
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, potential
15
<PAGE>
stock repurchases and financing for the foreseeable future.
On June 28, 1998, the Company's long-term capital structure consisted of $176.9
million of long-term debt and $198.0 million of stockholders' equity. For
comparison, on June 29, 1997, the Company had $150.1 million of long-term debt
and $202.8 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 49% at June 28, 1998, as compared with 44% at June 29,
1997.
Accounts and note receivable on June 28, 1998, were $69.6 million, an increase
of $8.9 million, as compared with June 29, 1997. This increase in accounts and
note receivable was primarily due to increases in sales. Receivables, including
those sold pursuant to the Receivables Purchase Agreement, represented 51 days
of sales outstanding at June 28, 1998 and 50 days at June 29, 1997.
Inventories on June 28, 1998, were $123.6 million, down $6.4 million from June
29, 1997. The decrease was primarily due to lower denim finished goods
inventories which were partially offset by increases in raw material levels.
Capital spending in the first six months of 1998 was $16.7 million, as compared
with $10.7 million for the first half 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. The Company is currently
adopting new software and modifying existing software to ensure that business
operations are not negatively impacted by the millennium change. 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. While there can be no assurance that all such actions
will be successful, management does not expect that either costs of
modifications or implementation of any unsuccessful modifications or
implementation should have a material adverse effect on the financial condition
of the Company.
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
16
<PAGE>
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.
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.
17
<PAGE>
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.
The District Court held a hearing on July 24, 1995 to decide on the merits
Plaintiffs' lone remaining claim of unjust enrichment, and
18
<PAGE>
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 4. Submission of Matters to a Vote of Security Holders
Cone Mills Corporation's Annual Meeting of Shareholders was held May 12, 1998.
The proposals voted upon and the results of the voting were as follows:
<TABLE>
<S> <C> <C> <C> <C> <C>
Broker
For Against Abstentions Withheld Non-Votes
1. Election of three Class III directors for a three-year term:
Doris R. Bray 22,889,337 0 0 165,955 n/a
Dewey L. Trogdon 22,881,400 0 0 173,892 n/a
Cyrus C. Wilson 22,905,707 0 0 149,585 n/a
2. Election on one Class I director for a one-year term:
Nicholas Shreiber 22,907,946 0 0 147,346 n/a
3. Ratification of the appointment of McGladrey & Pullen, LLP, as
independent auditors for the Corporation for the current year:
22,906,080 80,226 68,986 0 n/a
4. Consideration of shareholder proposal for adoption of nonbinding
resolution urging the directors to arrange for the sale of the
Corporation:
2,127,463 17,176,766 286,218 0 n/a
</TABLE>
19
<PAGE>
Item 5. Other Information
Notice of a matter to be presented by a shareholder for consideration at the
1999 annual meeting other than pursuant to Rule 14a-8 of the Securities Exchange
Act of 1934 must be received by the Company prior to February 15, 1999. Failure
to give timely notice will result in the proxy statement relating to the meeting
not including information on the matter or the manner in which management's
proxies will vote on the matter and the proxies received by management will have
discretionary authority to vote on such matter.
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
<PAGE>
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.
*2.2(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.
*2.2(c) Guaranty Agreement dated as of June 25,
1993, between Cone Mills Corporation and
Compania Industrial de Parras, S.A.
21
<PAGE>
Exhibit Sequential
No. Description Page No.
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.
22
<PAGE>
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.
*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.
23
<PAGE>
Exhibit Sequential
No. Description Page No.
*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
<PAGE>
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
<PAGE>
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
<PAGE>
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 29
* Incorporated by reference to the statement or report indicated.
27
<PAGE>
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 August 10, 1998 /s/ Anthony L. Furr
Anthony L. Furr
Vice President and
Chief Financial Officer
28
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Cone
Mills Corporation Consolidated Financial Statements dated June 28, 1998, and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000023304
<NAME> CONE MILLS CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-03-1999
<PERIOD-END> JUN-28-1998
<CASH> 1,609
<SECURITIES> 0
<RECEIVABLES> 71,122
<ALLOWANCES> 1,500
<INVENTORY> 123,618
<CURRENT-ASSETS> 218,796
<PP&E> 459,689
<DEPRECIATION> 207,868
<TOTAL-ASSETS> 546,268
<CURRENT-LIABILITIES> 118,389
<BONDS> 176,878
0
38,395
<COMMON> 2,617
<OTHER-SE> 156,945
<TOTAL-LIABILITY-AND-EQUITY> 546,268
<SALES> 387,475
<TOTAL-REVENUES> 387,475
<CGS> 337,421
<TOTAL-COSTS> 337,421
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,359
<INCOME-PRETAX> 3,103
<INCOME-TAX> 1,024
<INCOME-CONTINUING> 4,595
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,595
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
</TABLE>
