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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (Fee Required)
For the fiscal year ended January 2, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from to
Commission File Number 1-3634
CONE MILLS CORPORATION
(exact name of registrant as specified in its charter)
North Carolina 56-0367025
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1201 Maple Street, Greensboro, N. C. 27405
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,including area code:910-379-6220
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, $ .10 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X]
Aggregate market value of voting stock held by nonaffiliates
of the registrant as of March 1, 1994: $ 380,774,053.
Number of shares of common stock outstanding as of March 1,
1994: 27,747,021 shares.
Documents incorporated by reference: Proxy Statement for
Annual Meeting to be held May 10, 1994. Part III, Items 10,
11, 12 and 13.
Index to Exhibits - pages 79-83
FORM 10-K Page 2
PART I
Item 1. Business
Overview
Cone Mills Corporation ("Cone", "Cone Mills" or the "Company")
is the largest producer of denim fabrics in the world and is
the largest printer of home furnishings fabrics in North
America. Net sales were $769 million in 1993 and $705 million
in 1992. The Company operates in two business segments:
apparel fabrics and home furnishings products, representing
75% and 25%, respectively, of net sales. All wholly owned
manufacturing is performed in the United States, with sales
and marketing activities conducted through a worldwide
distribution network. The Company is the largest domestic
exporter of denim fabrics and is a major exporter of printed
home furnishings fabrics, with export sales of $132 million
for 1993 and $114 million for 1992.
The Company's business strategy is to focus on products and
services that generate attractive margins and in which the
Company believes it is an efficient international competitor.
To this end, the Company has been engaged in the process of
deemphasizing labor-intensive commodity businesses and in the
first quarter of 1994 will conclude an initiative to
discontinue its corduroy and other bottomweight continuous
piece-dyed fabrics product line, the estimated costs of which
were fully provided for in its 1991 financial statements. The
Company utilizes its styling and development expertise and
management depth and experience, in combination with its
versatile manufacturing facilities and technical capabilities,
to compete effectively in its worldwide markets.
Cone became a private company in 1984 in a leveraged
transaction funded with $445 million of bank debt and other
obligations and $20 million of Common Stock and equivalents.
Prior to its public offering in June 1992 the Company had
reduced its debt and other bank obligations by more than $225
million and had invested more than $160 million in capital
improvements. In 1992 the Company raised $63.6 million in net
proceeds through its public offering and replaced its bank
credit agreement with more flexible facilities. As of January
2, 1994, long-term debt comprised 27% of combined long-term
debt and equity capital.
FORM 10-K Page 3
Item 1.
(continued)
Business Segments
The following table sets forth information concerning net sales and operating income (excluding
restructuring, plant closing and general corporate expenses) for each of the Company's two business
segments as well as net sales of the principal product groups included therein, for fiscal years
1989 through 1993.
Fiscal Year (1)
1993 1992 1991 1990 1989
NET SALES (dollars in millions)
Apparel
Denim $421.8 54.9% $402.4 57.0% $356.6 56.3% $317.4 53.4% $315.8 51.1%
Specialty Sportswear 154.0 20.0 117.6 16.7 101.4 16.1 104.0 17.4 122.1 19.8
Total 575.8 74.9 520.0 73.7 458.0 72.4 421.4 70.8 437.9 70.9
Home Furnishings
Fabrics 94.4 12.3 93.0 13.2 83.7 13.2 80.4 13.5 78.7 12.7
Foam Products 84.6 11.0 84.1 11.9 83.9 13.3 85.4 14.4 89.7 14.5
Real Estate and other 14.4 1.8 8.3 1.2 7.4 1.1 7.6 1.3 11.6 1.9
Total 193.4 25.1 185.4 26.3 175.0 27.6 173.4 29.2 180.0 29.1
Total net sales $769.2 100.0% $705.4 100.0% $633.0 100.0% $594.8 100.0% $617.9 100.0%
OPERATING INCOME (2)
Apparel $68.8 12.0% $67.4 13.0% $20.4 4.5% $25.5 6.1% $41.2 9.4%
Home Furnishings 19.5 10.1 16.3 8.8 19.2 10.9 19.1 11.0 18.3 10.2
(1) Results from continuing operations. See Note 18 of Notes to Consolidated Financial Statements.
(2) Percentages reflect operating income as a percentage of segment net sales.
FORM 10-K Page 4
Item 1. Business (continued)
Market Developments
The Company's domestic apparel markets have been affected by
changing demographics associated with the maturation of the
"baby-boom" generation of consumers born between 1946 and
1964. As the baby-boom generation has matured, product trends
have evolved away from commodity-type products to higher
quality products with more diverse styling. As a result,
denim apparel manufacturers desire better fabric quality and
styling to meet consumer demand, as well as faster service to
reduce the risk of changing fashion trends. The size of the
15-to 24-year-old age category, which accounts for the largest
consumption segment of the U.S. population, has become smaller
in recent years; but this segment is expected to expand
beginning in the mid-1990's when the children of baby boomers
begin to reach these ages. Demand for denims is expected to
increase as this segment of the U.S. population expands. By
virtue of its styling expertise, manufacturing versatility and
service capabilities, the Company believes that it has
positioned itself to take advantage of the market
opportunities presented by these demographic changes.
Internationally, consumption of denims has increased in
industrialized countries, notwithstanding moderate population
growth, as these countries continue to adopt U.S. casual
fashion trends. In less industrialized countries, the
potential market for denim jeans has continued to grow as
youth populations expand. The Company believes that these
international market trends present opportunities for long-
term growth through the Company's international distribution
network. Apparel exports have increased sharply in recent
years as 1993 apparel export sales were $124.9 million as
compared with $105.2 million in 1992 and $81.9 million in
1991. In 1993, the Company entered into agreements with the
largest denim manufacturer in Mexico in order to expand both
market and manufacturing presence into Latin America. See
"Business - International Operations".
The Company believes that the demographic trends applicable to
the U.S. markets for its home furnishings fabrics indicate
continued increases in demand as the baby boomers reach ages
traditionally associated with high levels of spending on home
furnishings. The Company also believes that the outlook for
printed home furnishings fabrics is favorable because these
products provide high fashion appearance at affordable prices.
Additionally, there has been an increased international demand
for U.S. styled home furnishings products. Accordingly, the
Company's strategy is to continue to expand its home
furnishings businesses.
FORM 10-K Page 5
Item 1. Business (continued)
Products for Apparel Markets
Denims. Cone markets and manufactures a wide variety of denim
apparel fabrics. Denims are generally "yarn-dyed", which
means that the yarn is dyed before the fabric is woven. The
result is a fabric with variations in color that give denim
its distinctive appearance. Fabric styling of denims, which
the Company believes to be critical to this market, is
supported by the Company's experienced stylists and extensive
use of computer-aided design and manufacturing systems.
The Company is a leader in denim styling and development, and
believes that it produces a broader range of fashion denim
than any of its competitors. In 1993, Cone sold approximately
400 different styles of denim. The styling process involves
the creation of a wide array of fabric colors, shades and
patterns in a variety of both traditional and innovative
weaves. After weaving, fabrics are processed further in
finishing operations that produce different textures and other
physical properties. During this process, the Company's
product development specialists and stylists generally work in
collaboration with customers to assure that fabrics meet
customer requirements and can be manufactured efficiently.
This creates a strong working relationship that allows Cone to
react quickly to its customers' rapidly changing needs.
Although the markets and end uses for denim are very diverse,
the Company categorizes the market into heavyweight denims and
specialty weight denims. Heavyweight denim is used primarily
in jeans and is by far the largest segment of the denim
market. Within the heavyweight market, the Company further
classifies its denims as "fashion-forward", "fashion-basic"
and "basic".
Fashion-forward denims include innovative products and
trendsetting styles for use primarily in garments sold through
specialty stores and designer sections of department stores.
Cone's customers in this group include Ralph Lauren (Polo),
Calvin Klein, The Gap, and Stussy.
Cone's fashion-basic denims are stylish but have a broader
market than fashion-forward products. The Company's largest
customer in this category is Levi Strauss, whose 501 jeans
are produced solely from the Company's proprietary fabrics.
Other customers include The Gap, Structure and Wrangler.
FORM 10-K Page 6
Item 1. Business (continued)
Cone's basic denims, with mass market appeal, are used
primarily in garments sold through retail chains, department
stores and catalogs. Customers for this product include
Wrangler, Sasson, Chic, Faded Glory and Land's End. Although
the Company's basic denims are designed for the upscale
segment of these markets, the Company also produces basic
heavyweight blue denim to service mass market needs of certain
customers. While the Company's profit margins from basic
heavyweight blue denim are less than those generally
applicable to its other denim products, sales of this product
constituted approximately 20% of total denim sales in 1993.
Specialty weight denims include a variety of weave
constructions, stripes, colors and weights, and are used
primarily in women's and children's wear. Although these
fabrics constitute only a small portion of the denim market,
they tend to establish market trends and generally command
higher margins because of their use in higher fashion
garments. Cone's customers in this group include OshKosh,
Oxford, The Gap, Timber Creek, Ruff Hewn, Ralph Lauren (Polo),
Guess, Tanner, Woolridge, and Chic.
Specialty Sportswear Fabrics. The Company is the largest
domestic producer of yarn-dyed plaid flannel and solid shade
chamois shirting fabrics. Distribution channels for garments
using these fabrics are broadening to include mass
merchandising retailers. The Company's manufacturing
capability for producing fabrics with a soft texture is
essential to its success in this product group. These fabrics
are primarily manufactured for use in menswear sold through
catalog stores but recently have been used in lighter-weight
apparel products for women's and children's wear. Customers
in this market include M. Fine, Woolrich, L.L. Bean and
Oxford.
The Company styles and distributes a line of specialty print
fabrics for a wide range of branded apparel customers, which
are printed at the Company's Carlisle plant. The markets for
these products are primarily fashion women's and children's
wear, and Cone's customers for these fabrics include OshKosh,
Oxford, Healthtex, M. Fine, and Wrangler.
Through its Carlisle plant, the Company also provides fabric
printing services to converters of fashion apparel fabrics.
These converters purchase unfinished fabrics from weaving
mills, utilize outside sources to dye the fabrics and print
their designs, and then market the finished fabrics to apparel
FORM 10-K Page 7
Item 1. Business (continued)
manufacturers. Carlisle is well known for its quality,
service and technical capabilities in roller and screen
printing.
Cone also serves niche markets for two-ply, polyester/rayon
uniform and sportswear fabrics. Major end uses include
uniforms for organizations such as United Parcel Service, the
U. S. Postal Service, and police and fire departments.
Polyester/rayon sportswear fabrics are sold primarily for use
in women's wear.
Marketing and Sales. The Company's marketing focus is to
serve upper-end and brandname apparel manufacturers through
the development of innovative products that are recognized in
the marketplace for their distinctive quality and styling.
The Company has also placed its apparel fabrics marketing and
manufacturing activities under the same management in an
effort designed to assure that manufacturing is market driven.
Styles of the Company's denim and other fabrics vary in color,
finish and fabrication, depending upon fashion trends and the
needs of the specific customer. The Company's stylists
monitor fashion trends by periodically traveling throughout
the United States, Europe and the Far East to attend fashion
and trade shows, meet with garment manufacturers and retailers
and conduct market research. Together with the apparel
marketing group, stylists work directly with Cone's customers
to create fabrics that respond to rapidly changing fashion
trends and customer needs.
The Company employs an apparel marketing and sales staff of
more than 150 persons. The apparel marketing group is
organized around two product lines: denim and specialty
sportswear. The Company believes that it has been able to
achieve more effective customer service and improved
efficiency through the integration of its styling,
manufacturing, marketing and customer service functions. The
Company's apparel fabrics marketing group is headquartered in
Greensboro in proximity to its apparel manufacturing
facilities so that customer requirements can be translated
more effectively into finished products. In order to provide
a more direct working relationship with its customers, the
Company also maintains sales offices located in New York, Los
Angeles, San Francisco and Dallas. In addition, the Company
maintains a marketing support office in Brussels, Belgium.
The Company's marketing professionals, together with its
stylists and product development personnel, work as early as
one year in advance of a retail selling season to develop
fabric styles, colors, constructions and finishes. There are
FORM 10-K Page 8
Item 1. Business (continued)
three annual retail selling seasons: spring, fall (back-to-
school) and Christmas holiday. The Company's sales for a
particular selling season generally begin six months in
advance of that season. The Company's sales force presents
each season's line to customers in its showrooms as well as in
its customers' offices.
Manufacturing. The Company is the largest manufacturer of
denims in the world. Cone bases this conclusion upon capacity
and sales information obtained from trade sources. The
Company is aware that a large foreign-based competitor is a
substantial minority owner in a foreign manufacturing facility
and, in reaching its conclusion, the Company has attributed to
such competitor only its pro rata ownership in this facility.
Cone believes that it has the most versatile denim
manufacturing capabilities in the world. The Company's denim
facilities are modern, flexible, vertically integrated, and
encompass all manufacturing processes necessary to convert raw
fiber into finished fabrics. The Company has extensive
flexibility in its yarn spinning operations, with open-end,
ring and special stretch-yarn spinning equipment. The
Company's denim weaving facilities, which include
approximately 1,200 weaving machines, utilize all major cotton
weaving technologies, including double-width projectile, air-
jet and rapier machines. The Company's dyeing and finishing
facilities include a wide range of technologies, with six
indigo long-chain dyeing machines, package and beam dyeing,
continuous overdye machinery, and raw cotton dyeing equipment.
Specialty dyeing and printing processes for apparel fabrics
are conducted at the Company's Carlisle plant, which is one of
the largest textile printing facilities in the United States.
Cone is recognized internationally as a leader in quality.
The Company uses a number of methods to support this process,
including classroom training of employees, statistical process
quality controls, computer-aided product testing from raw
fiber to finished fabric and computer-aided manufacturing
control systems.
The Company also believes that it is a leader in customer
service. The Company's five denim manufacturing facilities
are continually scheduled and coordinated to maximize
versatility. Approximately 60% of Cone's apparel volume is
shipped under its just-in-time quality assurance and delivery
FORM 10-K Page 9
Item 1. Business (continued)
program. Cone also is a member of the Textile Apparel Linkage
Council and offers electronic data interchange (EDI) to its
customers and suppliers.
Product and process development is supported by a special
manufacturing development group, which has specialists located
in each facility. This group works with the Company's
stylists and its customers' stylists to produce new products
for the marketplace. The Company uses on-line computer aided
design systems to increase styling effectiveness.
Raw Materials. The primary raw material for the Company's
fabric manufacturing operations is cotton. In past years,
U.S. cotton prices generally exceeded world price levels,
which created a competitive disadvantage for U.S. textile
manufacturers. Because the Company's customers compete with
foreign producers, the Company cannot always pass through
increased cotton costs to its customers. The Food,
Agriculture, Conservation and Trade Act of 1990 and the
regulations promulgated thereunder, which became effective in
August 1991 and is scheduled to expire on July 31, 1996 unless
extended, established trigger mechanisms to modify the
prohibition on cotton imports that has been in effect since
1933 and to implement increased government supply targets.
This has resulted in declines in U.S. cotton prices, which,
together with certain price equalization payments authorized
under this Act, have reduced the Company's effective cotton
costs to world levels. While management believes that
existing legislation and agricultural policies presently allow
U.S. companies to acquire cotton at prices competitive with
offshore manufacturers, there can be no assurance that these
results will always occur.
Since cotton is an agricultural product, its supply and
quality are subject to the forces of nature. Although the
Company has always been able to acquire sufficient supplies of
cotton for its operations in the past, any shortage in the
cotton supply by reason of weather, disease or other factors
could adversely affect the Company's operations. In late 1993
and early 1994, as a result of less favorable supply and
demand balance, primarily related to smaller world cotton
crops in 1993, cotton prices began to rise throughout the
world. See Item 7. "Management's Discussion and Analysis of
Results of Operations and Financial Condition." In order to
assure a continuous supply of cotton, the Company enters into
cotton purchase contracts for several months in advance of
delivery. Since prices for such purchases are sometimes fixed
in advance of shipment, the Company may benefit from its
investments in cotton if prices thereafter rise, or suffer
losses if prices subsequently fall.
FORM 10-K Page 10
Item 1. Business (continued)
Cone also purchases "greige goods" (fabrics that have not been
dyed or finished), synthetic fibers and dyes and chemicals.
These raw materials have normally been available in adequate
supplies through a number of suppliers.
Competition. The apparel textile business is highly
competitive. No single company dominates the industry and
domestic and foreign competitors range from large, integrated
enterprises to small niche concerns. There are nine major
denim manufacturers in the United States, of which Cone is the
largest. Foreign competition in domestic markets is
principally in the form of imported garments. Primary
competitive factors include price, product styling and
differentiation, customer service, quality and flexibility,
with the significance of each factor dependent upon the
particular needs of the customer and the product involved.
Increased competition in the form of imported apparel, more
aggressive pricing from domestic companies and the
proliferation of newly styled fabrics competing for fashion
acceptance have been factors affecting the Company's business
environment.
The level of import protection in the U.S. for domestic
producers of textiles is subject to both domestic political
and foreign policy considerations. Proposed rules under GATT
would eliminate quota restrictions on imports of textile and
apparel after a ten-year transition period. Any significant
reduction in import protection for domestic textile
manufacturers could adversely affect the Company.
The ratification of NAFTA by Canada, Mexico and the U.S. in
1993 has created the world's largest free-trade zone. In its
present form, the agreement contains safeguards which were
sought by the U.S. textile industry, including a rule of
origin requirement that products be processed in one of the
three countries in order to benefit from NAFTA. The Company
believes that the removal of tariffs on denim and denim jeans
in the participating countries and improved access to Mexico's
consumer markets are opportunities for growth. However, there
can be no assurance that NAFTA will not adversely affect the
Company.
The Company's domestic strategy is to compete primarily on the
basis of quality, styling and service. The Company believes
that the historically high quality of its products and
manufacturing processes has created a competitive advantage,
which it has enhanced by the extensive use of statistical
quality control and investment in modern equipment, including
manufacturing process controls. The Company also believes
FORM 10-K Page 11
Item 1. Business (continued)
that its experienced stylists and product development
specialists, its use of computer-aided design systems and its
manufacturing versatility have created a competitive advantage
in styling.
The Company's emphasis on customer service is supported by its
just-in-time and quick response programs and by electronic
data interchange (EDI) with customers.
The Company has focused its operations on the manufacture of
fabrics for use in garments that are less vulnerable to import
penetration. The relatively low labor content of these
fabrics and garments, coupled with high levels of demand for
quality, styling and service, present barriers to foreign
competition. The location of the Company's manufacturing
facilities in the U.S. and its emphasis on shortening
production and delivery times allow the Company to respond
more quickly than foreign producers to changing fashion trends
and to its domestic customers' demands for precise production
schedules and rapid delivery.
The Company believes it effectively competes in foreign
markets through export sales. See "Business - International
Operations".
Seasonality. Demand for the Company's apparel products and
the level of the Company's sales fluctuate moderately during
the year. Generally, there is increased consumer demand for
garments made of denim and the Company's specialty apparel
fabrics during the fall (back-to-school) and Christmas holiday
selling seasons. As a result, demand for the Company's
apparel fabrics is generally higher during the first half of
the calendar year when apparel manufacturers are producing for
these selling seasons.
Home Furnishings Products
Textile Fabrics. Carlisle Finishing Company is the largest
U.S. commission printer of fabrics for decorative upholstery,
drapery and other home furnishings applications. As a
commission printer, Carlisle prints fabrics owned by customers
on a fee basis. Customers for Carlisle's printing services
include Waverly Division of F. Schumacher & Co., Ametex, P.
Kaufman, Anju/Woodridge, Covington, Richloom, and Universal.
FORM 10-K Page 12
Item 1. Business (continued)
The home furnishings fabrics processed at Carlisle are
generally used for upper-end upholstery and drapery prints.
The Carlisle plant is a modern, one-million square foot
facility specializing in rotary screen printing. In recent
years, the Company has invested heavily in computerized color-
mixing systems and automated process controls in order to
support its competitive strategy of focusing on quality and
service. Carlisle has completed its planned screen printing
building addition and in the first quarter of 1993 added the
third of five planned new screen printing machines. Through
this expansion Carlisle increased its home furnishings print
capacity by approximately 35%.
Carlisle marketing headquarters are located in New York City.
Marketing efforts of the New York sales staff are augmented by
close working relationships between Carlisle's production and
technical staff and customers' designers and stylists.
Carlisle also maintains a customer service center that
utilizes electronic data interchange (EDI) with major
customers.
John Wolf Decorative Fabrics is a major "converter" of printed
and solid woven fabrics for upholstery, draperies and
bedspreads. A converter designs and markets fabrics, which
are manufactured and printed for the converter by others.
John Wolf's lines are printed primarily at the Carlisle plant.
John Wolf's fabrics are marketed domestically and
internationally through the division's sales staff and sales
agents. The division's sales staff handles sales to large
customers such as hotels, institutions and furniture
manufacturers, as well as "jobbers", who resell to decorators,
fabric retailers and certain smaller quantity users.
International sales and sales to other smaller customers are
made primarily through agents.
Carlisle competes primarily with two large commission
printers, the Cherokee division of Spartan Mills and Santee
Print Works. John Wolf competes with a large number of
domestic and foreign suppliers of decorative fabrics. Both
Carlisle and John Wolf compete primarily on the basis of
quality and service.
Foam Products. Olympic Products Company is a supplier of
polyurethane foam and related products, primarily to the home
furnishings industry. Olympic's polyurethane foams are used
in upholstered furniture, mattresses, carpet padding and
specialty patient care applications. Related products and
FORM 10-K Page 13
Item 1. Business (continued)
services include nonwoven fiber batting, specialty fabricated
cushions marketed under the Prelude brand, quilting services
and distribution of other furniture components. Olympic
supplies foam to the automotive market, for use in interior
headliners and side panels, which has become the fastest
growing portion of its business.
Olympic markets its products through its own sales force.
Customers include Bench Craft, Span America, Henredon, Collins
& Aikman, Guilford Mills, Drexel Heritage, Bassett, Bio Clinic
and Milliken.
Olympic has four manufacturing facilities, which are located
in the two largest upholstered furniture manufacturing areas
in the U.S. Three of these facilities are located near High
Point, North Carolina, and one is located in Tupelo,
Mississippi.
Competition in the foam products market generally occurs on a
regional basis as a result of high shipping costs relative to
price associated with these products. Olympic competes with
several larger and numerous small competitors in its foam
products markets. Olympic's strategy is to compete on the
basis of quality and service and, to this end, it has adopted
statistical process quality control techniques and installed
a computerized customer service system.
Raw materials, which are a significant portion of Olympic's
costs, consist primarily of chemicals, dyes and synthetic
fibers. Adequate supplies at competitive costs are generally
available from a number of large suppliers.
Real Estate Activities. The Company owns more than 1,000
acres of real estate in the Greensboro area that were
purchased originally to support the Company's manufacturing
operations. The Company has determined that the land is no
longer needed for this purpose, and has adopted a strategy to
maximize the value of its real estate holdings through the
systematic development and orderly liquidation of this
property, much of which is considered prime residential real
estate. These activities are conducted through a wholly owned
subsidiary, Cornwallis Development Company. Cornwallis'
activities include residential and commercial lot development
and construction, primarily in the upper-end real estate
market. Net sales from real estate activities generally
account for less than two percent of the Company's total net
revenues and these activities have been profitable.
FORM 10-K Page 14
Item 1. Business (continued)
International Operations
The Company began development of its international
distribution network almost 40 years ago in response to the
post World War II growth in the popularity of jeans around the
world. Approximately 30% of the Company's current denim
production is exported. Historically, the Company's export
sales have been primarily to Europe; however, the fastest
growing areas of the Company's international sales are now its
non-European markets. The Company has sales agents in Europe,
Japan, Korea, Hong Kong, Africa, and throughout Central and
South America, and it maintains extensive support services in
trade financing, traffic and transportation in order to
support its international presence. The Company's strategy is
to service its international customers with the same degree of
commitment to quality, service and fabric development as its
domestic customers, and the Company believes this philosophy
is responsible for Cone's position as the dominant U.S.
exporter of denims. The Company's international customers
include: Levi International, Super Rifle, Giorgio Armani and
Benetton in Europe; C. Itoh and Shinpo in Japan; licensees for
Guess, Calvin Klein and Wrangler in Korea; Aca Joe in Mexico;
Ellus and Wrangler in South America.
Principal competitive factors in the international markets for
denims are quality, price and styling. The Company believes
it has competitive advantages in quality over foreign
manufacturers resulting primarily from its denim manufacturing
experience and the versatility of its manufacturing
facilities. The Company also believes that it is a cost-
effective producer in comparison with its foreign competitors,
primarily because of the economies of scale resulting from the
size of the Company's operations and the low labor content of
denim. In addition, denim jeans have an image of being
uniquely American products, which complements the Company's
strategy of serving the upper-end "genuine" jeans market.
In 1993 the Company purchased 20% of the voting common stock
of Compania Industrial de Parras, S.A. ("CIPSA"), and entered
into certain commercial marketing agreements as well. The
Company also entered into a 50/50 joint venture arrangement
with CIPSA to build and operate a new world class denim
manufacturing plant in Mexico. The Company believes that
these actions will better position Cone to serve the growing
Latin America markets.
John Wolf exports approximately one-sixth of its sales volume.
Styling and service are the principal competitive factors
affecting John Wolf's position in these markets. The Company
FORM 10-K Page 15
Item 1. Business (continued)
believes that there is a growing international preference for
U.S. styling and design. This styling and the Company's
technical printing expertise are not easily duplicated by
foreign competitors and have given John Wolf's products a
competitive advantage in international markets.
Trademarks and Patents
The Company owns a registered trademark containing the "Cone"
name and pine cone design, which it uses as its primary
trademark. In addition, the Company holds various other
trademarks and tradenames used in connection with its business
and products, both domestically and internationally. However,
because the Company's business is not dependent upon any
trademark or tradename, the loss of any trademark or tradename
now held by the Company would not have a material adverse
effect upon its business or results of operations.
Customers
The Company has one unaffiliated customer, Levi Strauss
("Levi"), which accounts for more than 10% of consolidated
sales. Sales to this customer amounted to 35.3%, 37.9%, and
38.5% of sales from continuing operations in 1993, 1992,and
1991, respectively.
Levi has been a customer of the Company for more than 75 years
and a close, cooperative supplier/customer relationship has
evolved through the development of the Company's proprietary
fabrics for use in Levi's 501 family of jeans. In addition
to supplying fabrics for Levi's 501 family of jeans, the
Company is increasing its sales of other denim fabrics to
Levi. Because the Company is Levi's major supplier, Levi
initiated discussions with the Company in 1989 concerning ways
to assure the continuity of this relationship. As a result of
these discussions, Cone and Levi entered into an exclusive
Supply Agreement as of March 30, 1992, which confirms that
Levi will continue to use only Cone's proprietary denim
fabrics in manufacturing Levi's 501 family of jeans, and that
Cone will continue to supply such fabrics solely to Levi. The
volume of purchases by Levi and the prices charged by Cone
will continue to be subject to customary negotiations between
the parties.
In addition to formalizing the exclusive relationship between
the Company and Levi relating to the denim fabrics used in
Levi 501 jeans, the Supply Agreement assures Levi of a source
of such fabrics in the event that a change in control of the
FORM 10-K Page 16
Item 1. Business (continued)
Company adversely affects the long-standing working
relationship between Levi and the Company. The Supply
Agreement provides that, upon a change in control of the
Company and at Levi's election, Cone will enter into a three-
year supply arrangement with Levi pursuant to which Cone will
make available to Levi up to 30 million yards per fiscal
quarter of its proprietary denim fabrics used in Levi's 501
family of jeans, and, so long as Levi purchases at least 10
million yards per fiscal quarter, Cone will sell these fabrics
exclusively to Levi. If the change in control provision
becomes operative, the price for the fabric will be derived
from a formula based upon prevailing denim market prices,
adjusted to reflect the average differential between the price
for the Company's proprietary denim and the market price of
certain other denims in the market over the preceding 16
fiscal quarters, plus an additional 1.5% of the total price
paid during any quarter for which purchases by Levi are less
than 15 million yards. Although the Company believes that the
formula price will not materially vary from the price at which
the Company could have otherwise sold its proprietary denims,
there is no assurance that the formula price will reflect
then-current market prices for such denims.
For purposes of the Supply Agreement, a "change in control" is
deemed to occur upon a change in a majority of the directors
of the Company excluding persons nominated by the current
Board of Directors, or a merger, consolidation or other
transaction pursuant to which a third party obtains 50% or
more of the Company's outstanding voting shares. In the event
of a change in control followed by the Company's failure to
supply fabric to Levi in accordance with the three-year supply
arrangement, Levi will have the option to lease from Cone its
White Oak denim manufacturing plant, which is the Company's
largest denim facility, for a period not to exceed four years
from the time Levi receives notice that a change of control
occurred. The annual rents under such lease would be an
amount equal to 115% of Cone's average operating profit on the
plant for the immediately preceding three fiscal years.
The Supply Agreement expires on March 30, 1998 and is
automatically extended on each March 30, for an additional
year unless either party gives notice otherwise. Following a
change in control, the Supply Agreement would terminate at the
end of the three-year supply arrangement or of the lease term,
as the case may be. Additionally, Levi may terminate the
Supply Agreement upon 30 days' written notice and either party
may terminate the Supply Agreement in the event of the other
party's insolvency, bankruptcy or occurrence of a similar
event.
FORM 10-K Page 17
Item 1. Business (continued)
Other than Levi, no single customer accounted for more than
10% of the Company's net sales in 1993, 1992, and 1991.
Backlog
The Company's apparel and home furnishings order backlog was
approximately $163 million, or 53 million yards, at January 2,
1994, as compared to approximately $170 million or 55 million
yards at January 3, 1993. Physical deliveries for booked
fabric orders in the apparel industry vary in that some
products are ordered for immediate delivery only while others
are ordered for delivery several months in the future;
therefore, orders on hand are not necessarily indicative of
total future revenues. It is expected that substantially all
of the orders outstanding at January 2, 1994 will be filled
within the next 90 days.
Research and Development
The research and development activities of the Company are
directed primarily toward improving the quality, style and
performance of its apparel fabrics and other products and
services. The Company also is engaged in the development of
computer-aided design and manufacturing systems and other
methods of improving the interaction between the Company's
stylists and its customers. These activities are conducted at
various facilities and expenses related to these activities
are an immaterial portion of the Company's overall operating
costs.
Governmental Regulation
Federal, state and local regulations relating to the work
place and the discharge of materials into the environment are
continually changing; therefore, it is difficult to gauge the
total future impact of such regulations on the Company.
However, existing government regulations are not expected to
have a material effect on the Company's financial position,
operating results or planned capital expenditures. The
Company currently has an active Environmental Protection
Committee and an active work place safety organization.
Discontinued Operations
At the end of 1991, the Company determined that continuation
of its corduroy and other bottomweight continuous piece-dyed
fabrics product line was no longer economically justifiable
due to substantial declines in demand and downward pressures
on prices and margins caused by imported garments and to the
FORM 10-K Page 18
Item 1. Business (continued)
configuration of its fabric finishing plant, which became
inefficient due to product mix changes. As a result, the
Company implemented a plan to discontinue and dispose of
these operations. The Company experienced after-tax operating
losses of $17.1 million in 1991 from its discontinued product
lines and provided for estimated after-tax costs of $17.9
million in its 1991 Consolidated Financial Statements for
expected future operating losses and losses associated with
disposal of these operations. The discontinuance of these
operations will be completed in first quarter 1994. See Note
18 of Notes to Consolidated Financial Statements. Losses from
discontinued operations for 1993 and 1992 were consistent with
management's assumptions in formulating the provision.
Accordingly, no gain or loss has been recognized on
discontinued operations in the 1993 and 1992 Consolidated
Financial Statements. Management does not expect to incur any
additional loss in 1994 as the discontinuance is completed.
Employees
At January 31, 1994, the Company employed approximately 7,900
persons, of whom approximately 1,500 were salaried and
approximately 6,400 were hourly employees. Of such hourly
employees, approximately 2,400 are represented by collective
bargaining units and are employed under collective bargaining
agreements that provide for annual wage negotiations in the
spring of each year. The Company has not suffered any major
disruptions in its operations due to strikes or similar events
for more than a decade.
FORM 10-K Page 19
Item 2. Property
The Company operates 11 manufacturing plants - nine in North
Carolina and one each in South Carolina and Mississippi.
There are six apparel and five home furnishings plants. The
Company also operates several distribution centers and
warehouses. All significant manufacturing facilities are held
in fee and are substantially free of any significant liens or
other encumbrances. The Company's manufacturing facilities
total approximately five million square feet of floor space,
with buildings generally constructed of brick, steel, concrete
or concrete block. All such facilities are maintained in good
condition and are suitable for their respective purposes.
Although such facilities are substantially fully utilized, the
Company believes that it is in a position to respond to
opportunities to produce additional higher margin fabrics
through changes in product mix and through acquisition of
greige goods from outside sources for further processing and
finishing by the Company. The Company also has an ongoing
capital expenditure program that will increase its production
capacity. See "Item 7. Management's Discussion and Analysis
of Results of Operations and Financial Condition". The
Company owns an office building in Greensboro where its
executive and administrative offices are located. All of the
Company's sales offices are leased from unrelated parties.
Item 3. Legal Proceedings
In November 1988, William J. Elmore and Wayne Comer (the
"Plaintiffs"), former employees of the Company, instituted a
class action suit against the Company and Wachovia Bank &
Trust Company, N.A. ("Wachovia") and certain current and
former employees of the Company and Wachovia. The suit was
brought on behalf of salaried employees of the Company who
were participants in certain Company retirement plans. The
Plaintiffs asserted a variety of claims related to actions
taken and statements made concerning certain employee benefit
plans maintained by the Company. In May 1990, the United
States District Court in Greenville, South Carolina, certified
a plaintiff class of salaried employees. In August 1990, the
District Court granted partial summary judgment in favor of
the defendants and significantly narrowed the extent of the
Plaintiffs' claims. A trial was held in February 1991, and
supplemental proceedings were held on July 24, 1991. At the
trial, a witness hired by the Plaintiffs estimated the alleged
loss to the Plaintiff class to range from approximately $34
million to approximately $94 million.
FORM 10-K Page 20
Item 3. (continued)
On March 20, 1992, the District Court entered a judgment
finding that the Company had promised to contribute certain
surplus funds (or their equivalent in Company stock) relating
to the overfunding of the Company's pension plans to the 1983
ESOP by December 23, 1985, that such surplus amounted to $69
million, that the Company's actual contribution totaled
approximately $55 million, and that the Company and its
Chairman, Dewey L. Trogdon, and its Secretary, Lacy G. Baynes,
therefore had breached their fiduciary duties under the
Employee Retirement Income Security Act of 1974 ("ERISA") to
certain participants in the 1983 ESOP. The District Court
ordered the Company to pay to the 1983 ESOP for the benefit of
plan participants, both salaried and hourly, the sum of $14.2
million in cash or the equivalent in Company stock. In
addition, the District Court awarded $3.5 million in
attorneys' fees to the Plaintiffs, $2.2 million of which is to
be paid from the sum awarded to the 1983 ESOP. Judgment was
entered in favor of the defendants on all remaining claims
except for claims relating to the ESOP contribution. In
accordance with and to the extent permitted by the Company's
Articles of Incorporation and Bylaws, the two individual
defendants in this litigation are indemnified by the Company
for any costs incurred by them in connection with this matter.
On March 20, 1992, the Company and the individual defendants
appealed the District Court's judgment against them to the
United States Court of Appeals for the Fourth Circuit. On
April 2, 1992, the Plaintiffs appealed the District Court's
judgment to the Court of Appeals insofar as it dismissed
certain of their claims. To secure the judgment on appeal,
the Company has deposited in escrow with the trustee of the
1983 ESOP an $8 million letter of credit and 75,330 shares of
Class A Preferred Stock valued at $7.5 million which has
subsequently earned dividends of an additional 5,795 shares
valued at $.6 million.
On September 22, 1993 a three-judge panel of the United States
Court of Appeals for the Fourth Circuit in a two-to-one
decision reversed the District Court's decision as to the
obligation to contribute additional funds to the 1983 ESOP and
affirmed the District Court's dismissal of all remaining
claims against the Company and the individual defendants. On
October 4, 1993, Plaintiffs petitioned the fourth Circuit for
rehearing, with a suggestion for rehearing en banc , and on
October 29, 1993 the United States Department of Labor filed
a brief in support of Plaintiffs' petition for rehearing.
Plaintiffs' petition for rehearing en banc was granted on
December 13, 1993, and, consequently, the panel opinion was
vacated. Briefs were filed by the Plaintiffs, Department of
Labor, and the Company, and an en banc oral argument was heard
FORM 10-K Page 21
Item 3. (continued)
by the Court of Appeals on March 8, 1994. The Company is
awaiting a decision. An attorney for the Plaintiffs has
contended that, if Plaintiffs prevail on appeal, the judgment
could exceed $50 million based on the existing judgment and
additional claims relating to alleged unjust enrichment and
alleged overvaluation of the Class A Preferred Stock initially
contributed to the 1983 ESOP, as well as prejudgment interest.
The Company has received an opinion from its lead counsel on
appeal, Robinson, Bradshaw & Hinson, P.A., a Charlotte, North
Carolina firm, that, while it is not possible to predict the
outcome of this lawsuit with certainty, in the opinion of such
firm the District Court's decision in Plaintiffs' favor is
erroneous and is more likely than not to be reversed or
substantially modified by the Court sitting en banc and the
dismissal of Plaintiffs' claims was proper and is more likely
than not to be affirmed by the en banc Court. However, the
Company has been advised by such counsel that an appellate
court which votes to rehear a case en banc often reaches a
result different from the panel originally designated to hear
the appeal, and further, that ERISA law is rapidly changing
and decisional law on many ERISA issues is neither unanimous
nor fully developed. Because of the foregoing and the
uncertainties inherent in the litigation process, there can be
no assurance as to the ultimate resolution of this lawsuit.
An unfavorable result could have a material adverse effect on
the Company's results of operations and, if Plaintiffs'
judgment (including the attorneys' fees award) is affirmed on
appeal, the Company's management estimates that income, net of
taxes, would be reduced by approximately $10 million. It is
the opinion of the Company's management that this lawsuit,
when finally concluded, will not have a material adverse
effect on the Company's financial condition.
The Company is a party to various other legal claims and
actions incidental to its business. Management believes that
none of these claims or actions, either individually or in the
aggregate, will have a material adverse effect on the
financial condition of the Company.
FORM 10-K Page 22
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 4A. Executive Officers of the Registrant.
Name Age Position with the Company
J. Patrick Danahy 50 Director, President, and
Chief Executive Officer
John L. Bakane 43 Director, Vice President
and Chief Financial
Officer
Richard S. Vetack 57 Director and Senior Vice
President
Bud W. Willis III 51 Director and Vice President
James S. Butner 48 Vice President
Neil W. Koonce 46 Vice President and
General Counsel
Lester J. Smith 64 Vice President
Eugene A. Trout 53 Vice President
David E. Bray 55 Treasurer
J. D. Holder 59 Controller
Terry L. Weatherford 51 Secretary
All officers of the Registrant are elected or reelected each
year at the Annual Meeting of the Board of Directors or at
other times as necessary. All officers serve at the pleasure
of the Board of Directors and until their successors are
elected and qualified.
J. Patrick Danahy joined the Company in 1971; he was
named General Manager of the Carlisle Plant in 1978 and
President of the Cone Finishing Division in September 1984.
He was elected corporate Vice President in May 1986 and
director in May 1989. He was named President and Chief
Operating Officer in August 1989 and President and Chief
Executive Officer in August 1990.
FORM 10-K Page 23
Item 4A. (continued)
John L. Bakane joined the Company in 1975 and has served
in various administrative and staff positions involving
planning, financial management and customer service. He was
named corporate Vice President in May 1986, became Chief
Financial Officer in November 1988 and was elected to the
Board of Directors in May 1989.
Richard S. Vetack was employed by Otto B. May Co., a
former subsidiary of the Company, until 1980. He joined the
Company in March 1983 and has served in various management
positions in the Textile Products Division. He was elected
Vice President of the Company in 1985 and Senior Vice
President in May 1987. He was elected to the Board of
Directors in May 1988.
Bud W. Willis III was employed by the Company in August
1970 and has served in various management positions in the
Textile Products Division. In March 1985 he was named
Executive Vice President of the Textile Products Division and
in December 1985 was elected corporate Vice President. He was
elected to the Board of Directors in May 1988. Since July
1992 he has been the President of the Denim Division of the
Textile Products Division.
James S. Butner was employed by Celanese Corporation, a
synthetic fibers and chemical company, from 1979 to 1984, at
which time he became Director of Industrial and Public
Relations for the Company. Effective August 1, 1988, he was
named corporate Vice President for Industrial and Public
Relations.
Neil W. Koonce was employed by the Company in January
1974 as a staff attorney. He was elected Assistant General
Counsel in 1985, General Counsel in August 1987 and Vice
President in May 1989.
Lester J. Smith was named Vice President of the Company
in August 1978, and has executive responsibility for
purchasing, including cotton and synthetic fiber procurement.
Eugene A. Trout was employed by the Company in 1971, and
was appointed Vice President of Cone Mills Marketing Co., a
division of the Company, in 1980. He was elected Vice
President of the Company in December 1985 and also serves as
Group Executive Vice President of the Textile Products
Division.
David E. Bray was employed in 1977 as Director of
Treasury Services. He was elected Assistant Treasurer of the
Company in May 1984 and Treasurer in November 1988.
FORM 10-K Page 24
Item 4A. (continued)
J. D. Holder was employed by the Company in 1954 as a
Cost Accountant. He became Manager of the corporate Cost
Department in April 1970 and was elected Assistant Controller
in 1984. He was named Controller of the Company in August
1987.
Terry L. Weatherford was Secretary and General Counsel of
Blue Bell, Inc., a manufacturer and distributor of wearing
apparel, from 1981 to 1987. From 1987 to 1993, he was self-
employed as an attorney except for a thirteen month period
from June 1988 when he was employed by Manufactured Homes,
Inc. as its General Counsel. He was employed by the Company
and elected Assistant Secretary in May 1993, and effective
December 1993, was elected Secretary.
FORM 10-K Page 25
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters
The Company's Common Stock has traded on the New York Stock
Exchange under the ticker symbol "COE" since June 18, 1992,
the date of its public offering. The following table sets
forth the high and low sales prices of the Common Stock as
reported on the NYSE Composite Tape for the periods indicated.
Quarter Ended
Apr.4,1993 Jul. 4,1993 Oct.3,1993 Jan.2,1994
Common stock
prices
High 19 5/8 19 1/4 18 17 5/8
Low 13 3/8 15 7/8 14 5/8 14 3/8
Quarter Ended
Mar.29,1992 Jun.28,1992 Sept.27,1992 Jan.3,1993
Common stock
prices
High - 11 5/8 15 7/8 16
Low - 10 10 1/2 13
The Company has not declared any dividends on its Common Stock
since it became a privately held company in 1984 and
anticipates that its earnings for the foreseeable future will
be retained for use in its business and to finance growth.
Payment of cash dividends in the future will depend upon the
Company's financial condition, results of operations, current
and anticipated capital requirements, and other factors deemed
relevant by the Company's Board of Directors. See Item 7.
"Management's Discussion and Analysis of Results of Operations
and Financial Condition".
The approximate number of holders of record of the Company's
Common Stock as of March 1, 1994 was 574.
FORM 10-K Page 26
Item 6. Selected Financial Data
(dollar amounts in millions, except per share data)
1993 1992(1) 1991 1990 1989
Summary of Operations
Net Sales $ 769.2 $ 705.4 $ 633.0 $ 594.8 $ 617.9
Cost of Sales 589.3 540.8 523.5 481.7 492.4
Depreciation 21.0 18.5 17.1 16.3 16.9
Subtotal 610.3 559.3 540.6 498.0 509.3
Gross Profit 158.9 146.1 92.4 96.8 108.6
Selling and Administrative 73.3 67.6 56.8 56.8 52.2
Restructure/Plant Closing - - 0.8 3.9 -
Income from Operations 85.6 78.5 34.8 36.1 56.4
Other Expense - Net 6.1 8.3 18.4 21.1 20.2
Income from Continuing Operations Before
Income Tax 79.5 70.2 16.4 15.0 36.2
Income Tax 29.9 24.8 6.3 4.1 13.0
Income from Continuing Operations 49.6 45.4 10.1 10.9 23.2
Discontinued Operations - - (34.9) (14.1) (8.4)
Extraordinary Item - (2.0) - - (1.7)
Net Income (Loss) $ 49.6 $ 43.4 $ (24.8) $ (3.2) $ 13.1
Per Share of Common Stock
Income from Continuing Operations $ 1.68 $ 1.67 $ 0.22 $ 0.24 $ 0.76
Net Income (Loss) 1.68 1.59 (1.58) (0.50) 0.26
Segment Information
Net Sales
Apparel $ 575.8 $ 520.0 $ 458.0 $ 421.4 $ 437.9
Home Furnishings 193.4 185.4 175.0 173.4 180.0
Total $ 769.2 $ 705.4 $ 633.0 $ 594.8 $ 617.9
Operating Income
Apparel $ 68.8 $ 67.4 $ 20.4 $ 25.5 $ 41.2
Home Furnishings 19.5 16.3 19.2 19.1 18.3
Statistics and Other Data
Current Ratio 1.9 1.8 1.9 2.1 2.9
Total Assets $ 431.6 $ 401.9 $ 432.7 $ 469.4 $ 517.0
Long-Term Debt 77.9 77.5 188.9 200.9 220.6
Stockholders' Equity 210.0 163.4 82.9 111.0 136.6
Long-Term Debt As a Percent of Stockholders'
Equity and Long-Term Debt 27% 32% 69% 64% 62%
Capital Expenditures-Continuing Operations $ 38.7 $ 25.4 $ 21.0 $ 17.8 $ 13.2
Shares Outstanding (millions) Year End (2)(3) 27.7 27.7 17.9 17.1 17.0
Number of Employees at Year End 7,800 7,600 7,600 8,400 8,900
(1)Fiscal Year 1992 represents a 53 week period
(2)Includes Participating Preferred Shares
(3)Includes 6.9 million shares of Common Stock issued in mid-1992 initial public offering
FORM 10-K Page 27
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Overview
The operating results and financial condition of Cone Mills
have been influenced by a number of external factors and
company initiatives. The principal influences have been
domestic cotton costs, the general business cycle, apparel and
fabric imports, and strategic changes in the Company's
business and capital structure.
Cotton Costs. Management believes that the most significant
factor affecting operating margins has been the price of
cotton, the Company's principal raw material. Prices and
supply of domestically grown cotton are influenced by U.S.
agricultural policy and U.S. companies are generally
prohibited by law from importing cotton. Historically, the
risk in operating under these cotton market regulations has
been that U.S. cotton prices could exceed world price levels,
and U.S. companies could, therefore, experience both eroding
competitiveness and margins unlike foreign competitors who
have access to lower-priced cotton. In 1990 through mid-1991,
domestic cotton prices generally exceeded world prices, which
contributed to substantial reductions in the Company's
operating margins. Provisions under the Food, Agriculture,
Conservation and Trade Act of 1990, which became effective in
August 1991, resulted in the reduction of the Company's
effective cotton costs to world levels.
Cotton prices fluctuate with the balance of supply and demand
and, since cotton is an agricultural product its supply and
quality are subject to the forces of nature. World cotton
prices began to rise in late 1993 and early 1994 as a result
of a less favorable balance between supply and demand,
primarily related to a smaller world cotton crop in 1993. See
"Financial Outlook and Strategy."
General Business Cycle. The Company's operating results are
closely related to the general business cycle of the U.S.
economy. In this regard, Cone Mills experienced an unfavorable
cyclical economic retrenchment from late 1989 through mid-
1991. Management believes the U.S. economy is currently in a
more mature phase of the economic cycle where typically, the
demand for home furnishings and consumer durables grows at a
higher rate than demand for apparel products which is usually
strongest in the earlier phases of a recovery. While demand
for denim apparel remains strong at retail, there presently
exists an excess of denim inventories in the softgoods
pipeline, which suppliers are in process of adjusting.
FORM 10-K Page 28
Item 7. (continued)
These trends are reflected in the Company's recent
quarterly net sales (which are also generally affected by mild
seasonal sales declines in the second half of the year). All
quarters had 13 weeks except the fourth quarter of 1992 which
had 14 weeks.
1993 1992 1991
(dollars in millions)
Net Sales:
1st Quarter $ 195.0 $ 174.2 $ 144.2
2nd Quarter 202.5 182.6 162.6
3rd Quarter 192.7 170.5 165.0
4th Quarter 179.0 178.1 161.2
Total $ 769.2 $ 705.4 $ 633.0
Imports. The Company's operating results have been influenced
by U.S. trade policy, which has allowed gains in market share
by foreign-produced, labor-intensive garments over the past
decade. This has caused U.S. manufacturers of fabrics used in
these labor-intensive garments to have excess capacity, which
has resulted in increased competition and reduced margins for
U.S. manufacturers of commodity-type goods. In response to
this environment, the Company has focused on high-margin and
low-labor content businesses in which it believes it is
internationally competitive. In addition, the Company believes
that the recent passage of the North American Free Trade
Agreement (NAFTA) will strengthen garment manufacturing in
this hemisphere and generate additional opportunities for Cone
Mills.
Strategic Initiatives. Over the past decade, the Company has
been in the process of curtailing its production of low-margin
commodity-type products and terminating or disposing of
unprofitable operations. In 1991, the Company decided to
discontinue its corduroy and other bottomweight continuous
piece-dyed fabrics product line as a result of ongoing losses.
Estimated costs of this discontinuance were provided for in
the Company's 1991 consolidated financial statements. See Note
18 of Notes to Consolidated Financial Statements for a
discussion of the financial impact of these actions. Cone
Mills will complete the liquidation of its corduroy and other
bottomweight continuous piece-dyed fabrics product line in the
first quarter of 1994. Actual losses in 1992 and 1993 have
been consistent with the original estimate. No additional
loss in 1994 is expected as the discontinuance is completed.
FORM 10-K Page 29
Item 7. (continued)
Management believes that ongoing businesses are interna-
tionally competitive and that the restructuring is now
substantially complete.
In 1992, Cone Mills undertook several initiatives to
strengthen its financial position, improve its financial
flexibility and increase its ability to raise capital. Cone
Mills consummated a public offering of its Common Stock in
mid-1992 and received $63.6 million in net proceeds, which
were used to repay $42.1 million of long-term debt and redeem
$21.5 million of Class A Preferred Stock (including payment of
dividend obligations on shares redeemed). Following the
consummation of the offering, the Company replaced the
existing credit agreement with a $75 million term loan, a $40
million receivables purchase agreement and a $60 million bank
revolving credit facility. See "Liquidity and Capital
Resources."
In 1993, Cone Mills used its strengthened financial
resources to fund a $38.7 million capital spending program
which included the expansion of denim and home furnishings
capacities. In addition, the Company purchased a 20% equity
ownership in CIPSA, the largest denim manufacturer in Mexico
and began the construction of a new joint venture denim plant
in Mexico with CIPSA as its partner. See "Liquidity and
Capital Resources."
Segment Information. Cone Mills operates in two principal
business segments, apparel fabrics and home furnishings
products. The following table sets forth certain net sales and
operating income information (excluding restructuring and
general corporate expenses) regarding these segments for 1993,
1992 and 1991.
Fiscal Year (1)
1993 1992 1991
(dollars in millions)
Net Sales
Apparel $575.8 74.9% $520.0 73.7% $458.0 72.4%
Home Furnishings 193.4 25.1 185.4 26.3 175.0 27.6
Total $769.2 100.0% $705.4 100.0% $633.0 100.0%
Operating Income (2)
Apparel $ 68.8 12.0% $ 67.4 13.0% $ 20.4 4.5%
Home Furnishings 19.5 10.1 16.3 8.8 19.2 10.9
(1) Fiscal years 1993 and 1991 contained 52 weeks, and 1992
contained 53 weeks.
(2) Percentages reflect operating income as a percentage of
segment net sales.
FORM 10-K Page 30
Item 7. (continued)
Fifty-two Weeks Ended January 2, 1994 Compared with Fifty-
three Weeks Ended January 3, 1993
Following a U.S. cyclical recovery from mid-1991 through the
end of 1992, the rate of growth in the domestic softgoods
sector began to decline and retailers and softgoods
manufacturers began to report mixed results during 1993.
Despite these general economic conditions, Cone Mills had
record sales and income from continuing operations in 1993. In
the apparel segment, sales were up substantially, primarily as
a result of growth in denims and flannel shirtings. The
Company believes that the strength of these products is
largely a result of favorable perception of value by consumers
and retailers who are seeking fashion and durability at
affordable price points. The Company also benefited from
expanding apparel export sales. Home Furnishings segment sales
increased because of sales growth at Carlisle Finishing,
arising primarily from market share gains, and the Company's
real estate division, Cornwallis Development Co.
Net sales for 1993 were $769.2 million, an increase of $63.8
million, or 9.0% from 1992 net sales of $705.4 million. Gross
profit (net sales less cost of sales and depreciation) as a
percentage of net sales was 20.7% for both 1993 and 1992.
Income from operations increased 9.0% to $85.6 million for
1993. The Company's 1993 net income was $49.6 million, or
$1.68 per share, of Common Stock after preferred dividends.
Net income for 1993 included $2.4 million of increased taxes
resulting from the 1993 change in federal tax rates. The per-
share impact of those increased taxes was $.09.
For comparison, Cone Mills reported net income of $43.4
million or $1.59 per share for 1992, which included an after
tax benefit of $2.2 million related to an income tax refund,
a $2.0 million extraordinary expense related to the early
extinguishment of debt, and for the first six months of 1992,
outstanding shares did not include 6.9 million shares issued
in the Company's mid-1992 initial public offering. On a pro-
forma basis, adjusted for calculating the per share earnings
as if the sale of the new stock in the Company's mid-year
public offering and the application of the net proceeds had
occurred at the beginning of the year, the Company's net
income would have been $1.47 per share for 1992. See Pro Forma
Condensed Consolidated Statement of Operations on Page 71a.
Apparel Fabrics. Apparel fabrics segment net sales were
$575.8 million for 1993, an increase of 10.7% from 1992.
The improved sales resulted from increases in sales
FORM 10-K Page 31
Item 7. (continued)
volume and, to a lesser extent, higher prices. Average
prices adjusted for product mix changes were up
approximately three percent.
Apparel export sales for 1993 were up 18.7% to $124.9
million, as compared with $105.2 million for 1992.
Operating margins for the apparel fabrics segment were
12.0% of net sales for 1993 as compared with 13.0% for
1992. Margins as a percent of sales were down slightly as
a result of a shift in mix to lower margin specialty
sportswear fabrics and, to a lesser extent, increased
depreciation expense. Average cotton costs were up by
approximately two percent for 1993 as compared with 1992.
Home Furnishings. For 1993, net sales of $193.4 million
for the home furnishings segment increased $8.0 million,
or 4.3.%, and operating income increased $3.2 million, or
19.3% , compared with 1992. All product groups of the
home furnishings segment had higher sales in 1993.
Export sales of home furnishings products were $7.1
million in 1993 compared with $8.6 million in 1992. These
export sales were impacted by poor economic conditions in
European and Japanese markets.
In 1993, operating margins for the home furnishings
segment improved to 10.1% of net sales compared with 8.8%
for 1992. The increase was primarily the result of
improved operating performance at Olympic Products and
higher sales and improved sales mix of real estate
operations.
Total Company selling and administrative expenses increased
from $67.6 million, or 9.6% of sales, for 1992 to $73.3
million, 9.5% of sales, for 1993. The increase in expenses was
primarily the result of the redeployment of people previously
charged to discontinued lines to support expanding sportswear
and denim businesses, increases in salaries and benefits costs
and, to a lesser extent, expenses associated with the
secondary offering in early 1993 of common stock held by
certain institutional shareholders of the Company.
Interest expense for 1993 decreased $4.0 million as compared
with 1992 because of reduced borrowing levels and, to a lesser
extent, lower interest rates. For 1993 interest income was
$2.1 million lower than 1992 levels because of the interest
associated with an income tax refund in the first quarter of
1992. Other income in 1993 of $.3 million represented the
income from the Company's 20% investment in CIPSA.
FORM 10-K Page 32
Item 7. (continued)
Income taxes as a percent of taxable income were 37.6% in 1993
compared with 35.3% in 1992. The effective tax rate for 1993
was higher than the previous year primarily because of the
1993 increase in federal statutory tax rates. Both periods
reflect tax benefits resulting from operations of the
Company's foreign sales corporation.
Fifty-three Weeks Ended January 3, 1993 Compared with Fifty-
two Weeks Ended December 29, 1991
Cone experienced more favorable market conditions in 1992
compared with 1991 as the industry continued to recover from
the severe U.S. economic cyclical downturn of 1989 through
early 1991. The Company realized improved volume, prices and
operating results because of this cyclical rebound.
Net sales for the fifty-three week fiscal year of 1992 were
$705.4 million, an increase of $72.5 million or 11.4% from net
sales of $633.0 million for the fifty-two week fiscal year of
1991. Operating income for 1992 of $78.5 million and income
from continuing operations before extraordinary expense of
$45.4 million, or $1.67 per share of Common Stock after
preferred dividends, compares favorably with operating income
of $34.8 million and income from continuing operations of
$10.1 million, or $.22 per common share after preferred
dividends for the 1991 period. Gross profit (net sales less
cost of sales and depreciation) as a percent of sales was
20.7% for 1992 compared with 14.6% for 1991.
Income before extraordinary expense for 1992 was $45.4 million
compared with a net loss of $24.8 million for 1991. Net income
for 1992, after extraordinary expense, was $43.4 million or
$1.59 per share of Common Stock after preferred dividends, and
includes an income tax refund and related interest income,
received in the first quarter, which together amounted to $.09
per share. The Company recognized an extraordinary expense of
$2.0 million in 1992 as a result of the early termination of
the existing credit agreement. The 1991 net loss was primarily
the result of a $35.0 million after-tax loss associated with
the Company's discontinued corduroy and bottomweight
continuous piece-dyed fabrics product line.
Apparel Fabrics. Apparel fabrics net sales were $520.0
million for the fifty-three week year of 1992, an
increase of 13.5% from 1991. The improved sales resulted
from increases in sales volume, primarily basic denims
and shirtings, of approximately nine percent and
increases in average prices, adjusted for product mix
changes, of approximately six percent.
FORM 10-K Page 33
Item 7. (continued)
Export sales for 1992 were $105.2 million, or 20.2% of
total apparel fabrics sales, compared with $81.9 million,
or 17.9% in 1991.
Operating margins for the apparel fabrics segment were
13.0% of net sales in 1992 compared with 4.5% in 1991.
The increase in margins as a percent of sales resulted
from reduced cotton costs, increases in volume and
selling prices, and higher operating efficiencies. This
included more fully absorbed overhead costs because
plants were running full schedules in 1992 compared with
curtailed operating schedules in the first half of 1991.
Average cotton prices declined by approximately twenty-
four percent in 1992 as compared with 1991.
Home Furnishings. Net sales for 1992 of the home
furnishings segment increased $10.4 million, or 6.0%,
while operating income was down 14.8% compared with 1991.
The increase in net sales primarily resulted from
increased sales by Carlisle Finishing and John Wolf
Decorative Fabrics. Operating margins in 1992 were
adversely affected by higher bad debt expense, a less
profitable mix of fabrics sales, higher sample and
product development expenses and costs associated with
the expansion of the Carlisle plant.
Export sales of home furnishings products were $8.6
million in 1992 as compared with $9.9 million in 1991,
and consisted primarily of export sales by John Wolf
Decorative Fabrics. Lower exports resulted primarily from
weaker economic conditions in the Company's foreign
markets for these products.
Selling and administrative expense for 1992 was $67.6 million,
an increase of $10.8 million from 1991, and primarily reflects
higher salary and benefit costs, including incentive
compensation associated with improved performance, the
addition of an overseas marketing office and higher sample
expense. Selling and administrative expenses represented 9.6%
of 1992 net sales compared with 9.0% for 1991.
Net interest expense of $8.3 million for 1992 was down $10.1
million or 54.8% from 1991 levels. The decrease represented
lower borrowing levels as a result of the proceeds from the
1992 public offering, cash flow from operations, including the
sale of accounts receivable, and the liquidation of working
capital associated with discontinued product lines and, to a
lesser extent, lower interest rates. Net interest expense for
1992 also included a $2.1 million increase in interest income
FORM 10-K Page 34
Item 7. (continued)
primarily resulting from interest associated with an income
tax refund received in the first quarter of 1992.
Income taxes as a percent of income from continuing operations
before income taxes were 35.3% in 1992 compared with 38.4% in
1991. The lower effective tax rate in the 1992 period
primarily was caused by the first quarter 1992 tax refund,
which related to a year in which statutory federal tax rates
were higher than 1992 rates.
Earnings per share comparisons for 1992 are affected by Cone's
mid-year public offering of common stock, which increased
outstanding shares by 6.9 million and, through use of the net
proceeds of the offering, reduced debt and preferred stock
outstanding and associated interest expense and preferred
dividends. Adjusting as if the offering and the application of
the net proceeds therefrom had occurred at the beginning of
1992, the Company's 1992 pro-forma earnings per share was
$1.47 after extraordinary item and preferred dividends, which
includes a pro forma amount of $.08 per share related to a
nonrecurring tax refund and associated interest income in the
first quarter of 1992. See Pro Forma Condensed Consolidated
Statement of Operations on Page 71a.
Liquidity and Capital Resources
The Company's principal long-term capital sources are a $75
million Note Agreement with The Prudential Insurance Company
of America (the "Term Loan") and stockholders' equity. Primary
sources of liquidity are internally generated funds, a $60
million Credit Agreement with Morgan Guaranty Trust Company of
New York ("Morgan Guaranty") as Agent Bank (the "Revolving
Credit Facility"), and a $40 million Receivables Purchase
Agreement (the "Receivables Purchase Agreement") with Delaware
Funding Corporation, an affiliate of Morgan Guaranty.
During 1993, Cone Mills generated $57.2 million in funds from
operating activities, including $70.6 million from net income
adjusted for non-cash depreciation expenses, partially offset
by increased working capital requirements, primarily resulting
from reductions of accounts payable and accrued expenses.
Major uses of cash during this period included $38.7 million
for capital expenditures and $3.1 million for preferred stock
dividends. For approximately $24 million, Cone Mills purchased
20% of CIPSA, the largest denim manufacturer in Mexico, and is
in the beginning stages of building a joint venture denim
plant with CIPSA. The investment in the joint venture was $2.3
million for 1993. Funding for these cash uses came primarily
from operating cash flow and cash available at the beginning
of the period.
FORM 10-K Page 35
Item 7. (continued)
During 1992, Cone Mills generated $115.8 million in funds from
operating activities, including $63.3 million from net income
adjusted for non-cash depreciation expenses and additional
funds resulting from working capital changes which included
$24 million from the sale of accounts receivables. In
addition, the Company raised $63.6 million in cash from the
initial public offering and received $6.4 million in proceeds
from the sale of property, plant and equipment primarily as a
result of entering into an operating lease of $3.9 million on
equipment which had been purchased in December 1991. Major
uses of cash during this period included $25.4 million for
capital investments, $28.5 million for redemption of preferred
stock (including associated dividend obligations) and a net of
$127.4 million of long-term and seasonal borrowing repayments.
On January 2, 1994, the long-term capital structure of Cone
Mills consisted of $77.2 million of long-term debt, including
the $75 million Term Loan, and $210.0 million of stockholders'
equity. For comparison, at year-end 1992 the Company had $76.6
million of long-term debt and $163.4 million of stockholders'
equity. Long-term debt as a percent of long-term debt and
stockholders' equity was 27% on January 2, 1994, compared with
32% at year-end 1992.
On January 2, 1994, Cone Mills had ample liquidity, with only
$.8 million of current maturities of long-term debt and $65.5
million of available liquidity including unused borrowing
capacity and cash. The Company had sold $35 million of
receivables under the Receivables Purchase Agreement.
Accounts receivable on January 2, 1994, were $44.2 million, a
decline of $13.2 million from January 3, 1993. At year-end
1993, the Company had sold $35 million of accounts receivable
compared with $24 million at year-end 1992. In addition, the
decrease in year-end 1993 balances was caused by certain
customers paying in advance of due date. Receivables at year-
end 1993, including those sold pursuant to the Receivables
Purchase Agreement, represented 41 days of sales outstanding
as compared with 47 days at year-end 1992.
Inventories on January 2, 1994, were $152.1 million, up 4.4%
from year-end 1992. The increase resulted from higher greige
and finished goods and real estate inventories.
Capital spending in 1993 was $38.7 million and included an
expansion of denim weaving capacity of approximately nine
percent and the addition of another screen printing machine at
the Carlisle plant. Capital expenditures for 1992 were $25.4
million.
FORM 10-K Page 36
Item 7. (continued)
Capital spending in 1994 is expected to be $36 million and
includes expansion and upgrading of yarn preparation
facilities, new weaving machines, and a new fiber production
line at Olympic Products. In addition, the Company expects to
invest a total of approximately $25 million in the Mexican
joint venture denim company through 1995. Approximately $5.1
million of the budgeted capital expenditures for 1994 had been
committed at year-end 1993.
Federal, state and local regulations relating to the workplace
and the discharge of materials into the environment are
continually changing; therefore, it is difficult to gauge the
total future impact of such regulations on the Company.
Existing government regulations are not expected to have a
material effect on the Company's competitive position,
operating results or planned capital expenditures. Cone Mills
has an active environmental committee which fosters protection
of the environment and compliance with laws.
In November 1988 certain former employees of the Company
instituted a class action suit against the Company and certain
other defendants in which the plaintiffs ("Plaintiffs")
asserted a variety of claims related to the 1983 ESOP and
certain other employee benefit plans maintained by the
Company. In March 1992 a judgment in the amount of $15.5
million (including an attorneys' fees award) was entered
against the Company with respect to an alleged promise to make
additional company contributions to the 1983 ESOP and all
claims unrelated to the alleged promise were dismissed. The
Company, the individual defendants and the Plaintiffs
appealed. On September 22, 1993, a three-judge panel of the
United States Court of Appeals for the Fourth Circuit in a
two-to-one decision reversed the District Court's decision as
to the obligation to contribute additional funds to the 1983
ESOP and affirmed the District Court's dismissal of all
remaining claims against the Company and individual
defendants. On October 4, 1993, Plaintiffs petitioned the
Fourth Circuit for rehearing, with a suggestion for rehearing
en banc, and on October 29, 1993, the United States Department
of Labor filed a brief in support of Plaintiffs' petition for
rehearing. Plaintiffs' petition for rehearing en banc, was
granted on December 13, 1993, and consequently, the panel
opinion was vacated. Briefs were filed by the Plaintiffs,
Department of Labor, and Cone Mills, and an en banc, oral
argument was heard by the Court of Appeals on March 8, 1994.
The Company is awaiting a decision.
FORM 10-K Page 37
Item 7. (continued)
Cone Mills has received an opinion from its lead counsel on
appeal that, while it is not possible to predict the outcome
of this lawsuit with certainty, in the opinion of such firm
the District Court's decision in Plaintiffs' favor is
erroneous and is more likely than not to be reversed or
substantially modified by the Court sitting en banc, and the
dismissal of Plaintiffs' claims was proper and is more likely
than not to be affirmed by the en banc Court. Therefore, the
Company's management has concluded that it is not probable
that a liability has been incurred with respect to this suit.
However, the Company has been advised by such counsel that an
appellate court which votes to rehear a case en banc, often
reaches a result different from the panel originally
designated to hear the appeal, and further, that Employee
Retirement Income Security Act (ERISA) law is rapidly changing
and decisional law on many ERISA issues is neither unanimous
nor fully developed. Because of the foregoing and the
uncertainties inherent in the litigation process, there can be
no assurance as to the ultimate resolution of this lawsuit. An
unfavorable result could have a material adverse effect on the
Company's results of operations and, if Plaintiffs' judgment
(including the attorneys' fees award) is affirmed on appeal,
the Company's management estimates that income net of taxes,
would be reduced by approximately $10 million. Management also
believes that the Company's unused borrowing capacity
available under the Revolving Credit Facility and its
internally generated funds are sufficient to meet its
liquidity requirements for the foreseeable future and that it
is unlikely that the Company's operations would be materially
adversely affected by any cash shortage as a result of the
judgement. For these reasons, it is the opinion of the
Company's management that this lawsuit, when finally
concluded, will not have a material adverse effect on the
Company's financial condition. To secure the judgment on
appeal from the District Court to the Court of Appeals, the
Company has deposited in escrow with the trustee of the 1983
ESOP an $8 million letter of credit and 75,330 shares of Class
A Preferred Stock valued at $7.5 million which has
subsequently earned dividends of an additional 5,795 shares
valued at $.6 million. The letter of credit was substituted
for an $8 million cash deposit made in April 1992. To record
these escrow transactions, the Company increased outstanding
Class A Preferred Stock by $8.1 million and established an
offsetting contra stockholders' equity account. These
transactions did not have an effect upon net income or
stockholders' equity of the Company.
FORM 10-K Page 38
Item 7. (continued)
The Company is a party to various other legal claims and
actions incidental to its business. Management believes that
none of these claims or actions, either individually or in the
aggregate, will have a material adverse effect on the
financial condition of the Company.
Cone Mills adopted SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" ("FAS 106") in
the first quarter of 1993. The additional noncash charge to
earnings resulting from implementation of FAS 106, including
amortization of the transition obligation, did not have a
material impact on the Company's results of operations. See
Note 8 of Notes to Consolidated Financial Statements.
The Company provides health care benefits and life insurance
benefits for certain disabled employees and health care
continuation coverage for former employees as mandated by law.
The Company pays a portion of the actual costs of these
benefits. SFAS No. 112, "Employers' Accounting for
Postemployment Benefits," which is effective in 1994, requires
an accrual method of recognizing these benefits rather than
recording an expense when paid. Based upon preliminary
studies, the Company expects the cumulative effect of this
accounting change will reduce first quarter 1994 net income by
less than $2 million.
Financial Outlook and Strategy
For over two years, Cone Mills has benefited from favorable
apparel fabric markets characterized by increasing prices and
volume in both domestic and international denim markets and
the rapid expansion of sportswear fabrics markets. While the
Company believes that demographic trends and other market
developments continue to present favorable long-term
opportunities for growth, Cone is cautious about the near-term
balance between growing domestic retail denim apparel sales
and domestic, industry-wide denim garment and fabric
inventories which have been increasing at a higher rate of
growth. As inventory levels are adjusted, prices and volumes
could potentially be affected. Sportswear and home furnishings
markets should not be directly impacted and are expected to
grow over the next year.
Since November of 1993, the market price of cotton, the
Company's principal raw material, has increased significantly.
Even though Cone Mills has purchased cotton for future
deliveries at favorable prices, continued high spot and
forward cotton prices could affect the Company's profit margin
FORM 10-K Page 39
Item 7. (continued)
in 1994, unless prices for denims and specialty sportswear
products can be increased accordingly.
Cone Mills actively seeks possible acquisitions and other
investment opportunities to which it believes it can add value
through application of its manufacturing and marketing
expertise. There can be no assurance that any actual
transaction will ultimately result, but the consummation of
any such transaction could involve a significant financial
commitment.
On June 25, 1993, the Company purchased a 20% ownership in
CIPSA, the largest denim manufacturer in Mexico. This
investment cost approximately $24 million and the Company
accounts for this investment by the equity method. Third-
quarter 1993 earnings from this affiliate were included in the
Company's statement of operations for the fourth quarter of
1993.
Cone Mills has also signed agreements dated June 25, 1993,
with CIPSA, providing for the formation of a joint venture
company to build and operate a world-class denim manufacturing
facility in Parras, Mexico. The partners plan to invest a
total of approximately $50 million, with each partner
providing 50% of this investment. Capital requirements for the
joint venture will primarily occur in 1994 and 1995. The joint
venture has signed a credit agreement with a Mexican bank for
approximately $63 million of debt financing. This debt is not
guaranteed by Cone Mills Corporation or CIPSA.
On February 17, 1994, the Board of Directors of Cone Mills
Corporation authorized the repurchase, from time to time, of
up to 2.5 million shares of the Company's outstanding common
stock in open market transactions. Repurchase decisions will
be based on the Company's expected capital structure, the
market price of the common stock, and alternative investment
opportunities.
The Company believes that its internally generated operating
funds and funds available under its credit facilities are
sufficient to meet its working capital, capital spending,
possible stock repurchases, and financing needs for the
foreseeable future, including the investment in the joint
venture.
FORM 10-K Page 40
Item 8. Financial Statements and Supplementary Data
McGLADREY & PULLEN
CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Cone Mills Corporation
Greensboro, North Carolina
We have audited the accompanying consolidated balance
sheets of Cone Mills Corporation and subsidiaries as of
January 2, 1994 and January 3, 1993 and the related
consolidated statements of operations, stockholders' equity,
and cash flows for each of the three years in the period ended
January 2, 1994. These financial statements are the
responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects,
the financial position of Cone Mills Corporation and
subsidiaries as of January 2, 1994 and January 3, 1993, and
the results of their operations and their cash flows for each
of the three years in the period ended January 2, 1994 in
conformity with generally accepted accounting principles.
McGladrey & Pullen
Greensboro, North Carolina
February 11, 1994 except for
Note 17 as to which the date
is March 8, 1994
FORM 10-K Page 41
Item 8. (continued)
CONE MILLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended January 2, 1994, January 3, 1993 and December 29, 1991
(amounts in thousands, except per share data)
1993 1992 1991
Net Sales (Note 16) $ 769,230 $ 705,430 $ 632,964
Operating Costs and Expenses:
Cost of sales 589,314 540,825 523,454
Selling and administrative 73,326 67,554 56,802
Depreciation 20,991 18,553 17,093
Restructuring cost (Note 14) - - 767
683,631 626,932 598,116
Income from Operations 85,599 78,498 34,848
Other Income (Expense):
Interest income 521 2,621 568
Interest expense (6,950) (10,938) (18,973)
Other income 317 - -
(6,112) (8,317) (18,405)
Income from Continuing Operations
before Income Taxes 79,487 70,181 16,443
Income Taxes (Note 9) 29,884 24,782 6,308
Income from Continuing Operations 49,603 45,399 10,135
Discontinued Operations (Note 18):
(Loss) from operations (net of income tax benefit
of $10,311) - - (17,091)
(Loss) on disposal of discontinued operations
(net of income tax benefit of $10,777) - - (17,860)
(Loss) on Discontinued Operations - - (34,951)
Income (Loss) before Extraordinary Item 49,603 45,399 (24,816)
Extraordinary Item - Expenses Related to
Early Extinguishment of Debt-(Net of
income tax benefit of $1,212) - (2,009) -
Net Income (Loss) $ 49,603 $ 43,390 $ (24,816)
Income (Loss) Available to Common Stockholders (Note 15):
Income from Continuing Operations $ 46,808 $ 40,839 $ 4,324
Income (Loss) before Extraordinary Item $ 46,808 $ 40,839 $ (30,627)
Net Income (Loss) $ 46,808 $ 38,830 $ (30,627)
Earnings (Loss) Per Share (Note 15):
Income from Continuing Operations $ 1.68 $ 1.67 $ .22
Income (Loss) before Extraordinary Item $ 1.68 $ 1.67 $ (1.58)
Net Income (Loss) $ 1.68 $ 1.59 $ (1.58)
Weighted Average Common Shares and
Common Share Equivalents Outstanding -
Fully Diluted (Note 15) 27,894 24,470 19,415
See Notes to Consolidated Financial Statements.
FORM 10-K Page 42
Item 8. (continued)
CONE MILLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 2, 1994 and January 3, 1993
(amounts in thousands, except share and par value data)
ASSETS 1993 1992
Current Assets:
Cash $ 503 $ 7,285
Accounts receivable - trade, less
provision for doubtful accounts $3,000;
$3,228 (Notes 2 and 16) 44,175 57,357
Inventories (Note 3):
Greige and finished goods 84,923 82,444
Work in process 15,968 14,788
Raw materials 20,612 22,469
Supplies and other 30,621 26,060
152,124 145,761
Other current assets 5,542 5,164
Total Current Assets 202,344 215,567
Investments in Unconsolidated Affiliates (Note 4) 26,420 -
Other Assets 3,171 2,105
Property, Plant and Equipment:
Land 20,758 22,744
Buildings 71,942 67,071
Machinery and equipment 239,846 213,388
Other 25,799 21,954
358,345 325,157
Less accumulated depreciation 158,669 140,881
Property, Plant and Equipment-Net 199,676 184,276
$ 431,611 $ 401,948
See Notes to Consolidated Financial Statements.
FORM 10-K Page 43
Item 8. (continued)
CONE MILLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 2, 1994 and January 3, 1993
(amounts in thousands, except share and par value data)
LIABILITIES AND STOCKHOLDERS' EQUITY 1993 1992
Current Liabilities:
Notes payable $ 5,099 $ 6,653
Current maturities of long-term debt (Note 6) 767 872
Accounts payable - trade 26,746 31,418
Sundry accounts payable and accrued expenses (Note 5) 44,231 58,858
Income taxes payable - 276
Deferred income taxes (Note 9) 27,295 22,848
Total Current Liabilities 104,138 120,925
Long-Term Debt (Note 6) 77,172 76,628
Deferred Items:
Deferred income taxes (Note 9) 36,652 37,328
Other deferred items 3,615 2,520
40,267 39,848
Contribution to Employee Stock Ownership Plan - 1,196
Stockholders' Equity:
Class A Preferred Stock - $100 par value; authorized
1,500,000 shares; issued and outstanding 465,077
shares; 1992, 459,282 shares - Employee Stock
Ownership Plan (Notes 11 and 17) 46,508 45,928
Class A Preferred Stock held in escrow (81,125 shares;
1992, 75,330 shares) (Notes 11 and 17) (8,113) (7,533)
Class B Preferred Stock - no par value; authorized
5,000,000 shares (Note 11) - -
Nonvoting Common Stock - $.10 par value; 1993, authorized
0 shares; 1992, authorized 8,000,000 shares; issued
and outstanding 1,231,327 shares (Note 11) - 123
Common Stock - $.10 par value; authorized 42,700,000
shares; issued and outstanding 27,744,783 shares;
1992, 26,435,888 shares (Notes 11 and 12) 2,774 2,644
Capital in excess of par 75,397 75,227
Retained earnings 93,468 46,962
Total Stockholders' Equity 210,034 163,351
$ 431,611 $ 401,948
See Notes to Consolidated Financial Statements.
FORM 10-K
CONE MILLS CORPORATION AND SUBSIDIARIES Page 44
Item 8. (continued) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JANUARY 2, 1994, JANUARY 3, 1993 AND DECEMBER 29, 1991
(amounts in thousands, except share data)
Class A Preferred Class A Preferred Participating
Stock Stock - Escrow Preferred Stock
Shares Amount Shares Amount Shares Amount
Balance, December 30, 1990 607,029 $ 60,703 - $ - 635,000 $ 635
Net income (loss) - - - - - -
Class A Preferred Stock -
Employee Stock Ownership
Plan:
Shares redeemed (72,003) (7,200) - - - -
Cash dividends paid - - - - - -
Shares issued (9.50%
dividend on shares
outstanding) 53,105 5,310 - - - -
Shares issued to fund 1990
contribution to Employee
Stock Ownership Plan 13,743 1,374 - - - -
Common Stock:
Options exercised - - - - - -
Purchase of common shares - - - - - -
Shares issued -
Employee Equity Plan - - - - - -
Balance, December 29, 1991 601,874 $ 60,187 - $ - 635,000 $ 635
Net income - - - - - -
Class A Preferred Stock -
Employee Stock Ownership
Plan:
Shares redeemed (274,425) (27,442) - - - -
Cash dividends paid - - - - - -
Shares issued (9.70%
dividend on shares
outstanding) 56,100 5,610 - - - -
Shares issued for partial
funding of 1991
contribution to Employee
Stock Ownership Plan 403 40 - - - -
Shares issued to Employee
Stock Ownership Plan
Trustee held in Cone
escrow account 75,330 7,533 (75,330) (7,533) - -
Participating Preferred Stock
Converted to CommonStock:
Voting - - - - (511,867) (512)
Nonvoting - - - - (123,133) (123)
Common Stock:
6,900,000 common shares
issued in public offering - - - - - -
Options exercised - - - - - -
Purchase of common shares - - - - - -
Balance, January 3, 1993 459,282 $ 45,928 (75,330)$ (7,533) - $ -
Net income - - - - - -
Class A Preferred Stock -
Employee Stock Ownership
Plan:
Cash dividends paid - - - - - -
Shares issued (8.0%
dividend on shares held
in Cone escrow account) 5,795 580 (5,795) (580) - -
Nonvoting Common Stock -
converted to Voting Common
Stock - - - - - -
Common Stock:
Options exercised - - - - - -
Purchase of common shares - - - - - -
Balance, January 2, 1994 465,077 $ 46,508 (81,125)$ (8,113) - $ -
See Notes to Consolidated Financial Statements.
FORM 10-K
CONE MILLS CORPORATION AND SUBSIDIARIES Page 44a
Item 8.(continued) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JANUARY 2, 1994, JANUARY 3, 1993 AND DECEMBER 29, 1991
(amounts in thousands, except share data)
Nonvoting Capital in
Common Stock Common Stock Excess Retained
Shares Amount Shares Amount of Par Earnings
Balance, December 30, 1990 - $ - 10,777,268 $ 1,078 $ 7,753 $ 40,784
Net income (loss) - - - - - (24,816)
Class A Preferred Stock -
Employee Stock Ownership
Plan:
Shares redeemed - - - - - (2)
Cash dividends paid - - - - - (460)
Shares issued (9.50%
dividend on shares
outstanding) - - - - - (5,310)
Shares issued to fund 1990
contribution to Employee
Stock Ownership Plan - - - - - -
Common Stock:
Options exercised - - 81,000 8 122 -
Purchase of common shares - - (17,812) (2) (69) -
Shares issued -
Employee Equity Plan - - 750,000 75 2,925 -
Balance, December 29, 1991 - $ - 11,590,456 $ 1,159 $ 10,731 $ 10,196
Net income - - - - - 43,390
Class A Preferred Stock -
Employee Stock Ownership
Plan:
Shares redeemed - - - - - (5)
Cash dividends paid - - - - - (1,009)
Shares issued (9.70%
dividend on shares
outstanding) - - - - - (5,610)
Shares issued for partial
funding of 1991
contribution to Employee
Stock Ownership Plan - - - - - -
Shares issued to Employee
Stock Ownership Plan
Trustee held in Cone
escrow account - - - - - -
Participating Preferred Stock
Converted to CommonStock:
Voting - - 5,118,669 512 - -
Nonvoting 1,231,327 123 - - - -
Common Stock:
6,900,000 common shares
issued in public offering - - 6,900,000 690 62,792 -
Options exercised - - 3,200,550 320 7,084 -
Purchase of common shares - - (373,787) (37) (5,380) -
Balance, January 3, 1993 1,231,327 $ 123 26,435,888 $ 2,644 $ 75,227 $ 46,962
Net income - - - - - 49,603
Class A Preferred Stock -
Employee Stock Ownership
Plan:
Cash dividends paid - - - - - (3,097)
Shares issued (8.0%
dividend on shares held
in Cone escrow account) - - - - - -
Nonvoting Common Stock -
converted to Voting Common
Stock (1,231,327) (123) 1,231,327 123 - -
Common Stock:
Options exercised - - 100,000 10 525 -
Purchase of common shares - - (22,432) (3) (355) -
Balance, January 2, 1994 - $ - 27,744,783 $ 2,774 $ 75,397 $ 93,468
See Notes to Consolidated Financial Statements.
FORM 10-K Page 45
Item 8. (continued)
CONE MILLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended January 2, 1994, January 3, 1993 and December 29, 1991
(amounts in thousands)
1993 1992 1991
Cash Flows from Operating Activities:
Net Income (Loss) $ 49,603 $ 43,390 $ (24,816)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 20,991 19,952 19,287
Employee Stock Ownership Plan expense - 1,250 1,435
Loss(gain) on sale and writedown of property,plant and equipment (1,657) (1,670) 13,995
Amortization 444 959 1,069
Equity in earnings-unconsolidated affiliate (317) - -
Change in assets and liabilities:
Decrease (increase) in trade receivables 13,182 42,050 (17,903)
Decrease (increase) in inventories (6,363) (5,013) 35,431
Decrease (increase) in other assets (2,045) 275 (319)
Increase (decrease) in accounts payable and accrued expenses (19,299) 14,194 25,140
Increase (decrease) in income taxes payable (276) (1,948) 2,031
Increase (decrease) in deferred income taxes 3,771 4,062 (17,083)
Increase (decrease) in other liabilities (835) (1,661) (1,540)
Net cash provided by operating activities 57,199 115,840 36,727
Cash Flows from Investing Activities:
Investments in unconsolidated affiliates (26,103) - -
Proceeds from sale of property, plant and equipment 4,869 6,423 6,222
Capital expenditures (38,712) (25,398) (21,751)
Net cash used in investing activities (59,946) (18,975) (15,529)
Cash Flows from Financing Activities:
Net borrowing (payments) - short-term loans (1,554) 353 (1,303)
Principal payments - long-term debt (77,307) (316,655) (127,866)
Proceeds from long-term debt borrowings 77,746 189,246 111,865
Purchase of outstanding capital stock - Class A Preferred - (27,442) (7,200)
Purchase of outstanding capital stock - Common (358) (5,417) (71)
Proceeds from issuance of capital stock - Common 535 70,886 3,130
Dividends paid - Class A Preferred (3,097) (1,009) (460)
Net cash used in financing activities (4,035) (90,038) (21,905)
Net increase (decrease) in cash (6,782) 6,827 (707)
Cash at Beginning of Period 7,285 458 1,165
Cash at End of Period $ 503 $ 7,285 $ 458
Supplemental Disclosures of Cash Flow Information:
Cash payments for:
Interest, net of interest capitalized $ 7,125 $ 11,100 $ 21,387
Income taxes, net of refunds $ 23,926 $ 25,011 $ (1,553)
Supplemental Schedule of Noncash Investing and Financing Activities:
Stock dividend paid - Class A Preferred Stock $ - $ 5,610 $ 5,310
Contribution to ESOP - Class A Preferred Stock - 40 1,374
Class A Preferred Stock issued $ - $ 5,650 $ 6,684
Class A Preferred Stock issued to ESOP trustee for Cone
escrow account $ - $ 7,533 $ -
Stock Dividend paid to ESOP trustee for escrow account 580 - -
Class A Preferred Stock issued $ 580 $ 7,533 $ -
Nonvoting Common Stock issued $ - $ 123 $ -
Common Stock issued 123 512 -
Participating Preferred Stock converted to common stocks - $ 635 $ -
Nonvoting Common Stock converted to Voting Common Stock $ 123
See Notes to Consolidated Financial Statements.
FORM 10-K Page 46
Item 8. (continued)
CONE MILLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Principles of consolidation:
The consolidated financial statements include
the accounts of the Company and its
subsidiaries. All significant intercompany
accounts have been eliminated.
Fiscal year:
The Company's fiscal year ends on the Sunday
nearest December 31. The years ended January
2, 1994, and December 29, 1991, contained 52
weeks. The year ended January 3, 1993,
contained 53 weeks.
Inventories (amounts in thousands):
Substantially all components of textile
inventories are valued at the lower of cost or
market using the last-in, first-out (LIFO)
method. Nontextile inventories are valued at
the lower of average cost or market. If
current replacement cost had been used for
valuing financial statement inventories, that
portion of the inventories based on the LIFO
method would have been approximately $20,000
higher at January 2, 1994, and $14,000 higher
at January 3, 1993. LIFO inventories valued
for financial statement purposes exceed their
income tax basis by approximately $86,000 at
January 2, 1994, and $84,000 at January 3,
1993.
Investments in Unconsolidated Affiliates:
Investments in unconsolidated affiliated
companies are accounted for by the equity method.
FORM 10-K Page 47
Item 8. (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property, plant and equipment:
Property, plant and equipment is carried at
cost except for assets related to discontinued
operations, which are carried at estimated net
realizable value. Depreciation is computed by
the straight-line method for financial
reporting purposes.
Capital stock redeemed:
Redemption of capital stock is accounted for
by the par value method. Excess of redemption
price over par value for Class A Preferred
Stock is charged to retained earnings. Excess
of purchase price over par value for common
stock is charged to capital in excess of par
applicable to common shares and to retained
earnings thereafter.
Deferred Income Taxes:
Deferred income taxes are provided on the
difference between the financial reporting and
the income tax basis of assets and
liabilities, principally inventories, and
property, plant and equipment. Balance sheet
classification of these deferred income taxes
is based upon the classification of the
related assets or liabilities that created the
temporary differences and does not necessarily
reflect the expected timing of the reversals.
Postemployment Benefits:
The Company provides health care benefits (in
excess of Medicare) and life insurance
benefits for certain disabled employees and
health care continuation coverage for former
employees as mandated by law. Presently, the
Company pays a portion of the actual costs of
these benefits. SFAS No. 112, "Employers'
Accounting for Postemployment Benefits," which
is effective for fiscal years beginning after
December 15, 1993, requires an accrual method
of recognizing postemployment benefits rather
than recording an expense when paid. Based
FORM 10-K Page 48
Item 8. (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
upon preliminary studies, the Company expects the
cumulative effect of this accounting change will
reduce first quarter 1994 net income by less than
$2 million.
Note 2. Sale of Accounts Receivables
On August 11, 1992, the Company entered into an
agreement extendable to August 1995, with the
subsidiary of a major financial institution, which
allows the sale without recourse of up to $40
million of an undivided interest in eligible trade
receivables. The Company acts as an agent for the
purchaser by performing record keeping and
collections function of receivables sold. The cost
of receivables sold by the Company is the
commercial paper rate plus 65 basis points
calculated for the period of time from the sale of
a receivable until its payment date. The resulting
cost on the sale of receivables is included in cost
of sales. Accounts receivable is shown net of $35
million sold at January 2, 1994 and net of $24
million sold at January 3, 1993 under this
agreement. Cash flows provided by operating
activities for the years ended January 2, 1994 and
January 3, 1993 include the sale of accounts
receivable of $11 million and $24 million,
respectively.
Note 3. Inventory Liquidations (amounts in thousands):
During 1993, 1992 and 1991, certain inventory
quantities were reduced, resulting in a liquidation
of LIFO inventory layers carried at lower costs
prevailing in prior years. The effect of these
liquidations increased net earnings by $303 in
1993, $1,076 in 1992 and by $2,082 in 1991.
Note 4. Investments In Unconsolidated Affiliates
On June 25, 1993, the Company purchased a 20%
ownership in Compania Industrial de Parras S.A.,
("CIPSA"), the largest denim manufacturer in
Mexico. This investment cost approximately $24
million and the Company accounts for this
investment by the equity method. Third-quarter
1993 earnings from this affiliate were included in
FORM 10-K Page 49
Item 8. (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the Company's statement of operations for the fourth
quarter of 1993. The Company has not received any
dividends on this investment.
The summarized unaudited financial information of CIPSA
(100% basis), as adjusted for purchase accounting, is set
forth below:
Financial Information (amounts in thousands):
Income statement data 1993
(13 weeks ending September 30, 1993)
Net sales $ 23,128
Gross profit 5,669
Net income 1,584
Company's equity in net income 317
Balance sheet data (September 30, 1993)
Current assets $ 70,311
Noncurrent assets 87,657
Current liabilities 13,282
Noncurrent liabilities 24,121
Net assets 120,565
Company's equity in net assets 24,113
The carrying value of this investment exceeds by
approximately $10.4 million the Company's share in
CIPSA's net assets calculated using U.S. generally
accepted accounting principles before application of
purchase accounting. Approximately $2.9 million of the
excess relates to differences between historical costs
and fair market values of CIPSA's property, plant and
equipment. The remainder is goodwill of approximately
$7.5 million which is being amortized over 25 years by
the straight-line method.
The Company has also signed agreements dated June 25,
1993, with CIPSA providing for the formation of a joint
venture company to build and operate a world-class denim
manufacturing facility in Parras, Mexico. The partners
plan to invest a total of approximately $50 million, with
each partner providing 50% of this investment. The joint
venture has signed a credit agreement with a Mexican bank
for approximately $63 million of debt financing. This
debt is not guaranteed by Cone Mills Corporation or
CIPSA. Expenditures on the joint venture began in the
third quarter of 1993 and as of January 2, 1994 the
Company has invested $2.3 million.
FORM 10-K Page 50
Item 8. (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Sundry Accounts Payable and Accrued Expenses
Sundry accounts payable and accrued expenses
consist of the following:
1993 1992
(amounts in thousands)
Accrued salaries, wages
and commissions $ 15,062 $ 12,158
Checks issued in excess
of deposits 12,185 10,101
Employee withholdings 936 13,768
Other 16,048 22,831
$ 44,231 $ 58,858
Note 6. Long-Term Debt
Long-term debt consists of the following:
January 2, 1994
Current
Total Maturity Long-Term
(amounts in thousands)
8% Senior Note $ 75,000 $ - $ 75,000
Revolving Credit Agreement - - -
Industrial Revenue Bonds 1,231 474 757
Other 1,708 293 1,415
$ 77,939 $ 767 $ 77,172
January 3, 1993
Current
Total Maturity Long-Term
(amounts in thousands)
8% Senior Note $ 75,000 $ - $ 75,000
Revolving Credit Agreement - - -
Industrial Revenue Bonds 2,035 804 1,231
Other 465 68 397
$ 77,500 $ 872 $ 76,628
FORM 10-K Page 51
Item 8. (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Financing arrangements effective August 13, 1992 include
a ten year $75 million 8% Senior Promissory Note and a
three year $60 million Revolving Credit Agreement.
Annual principal payments of $10.7 million are required
by the Senior Note, beginning August 1996, with the
remaining principal amount due August 2002. Borrowings
under the Revolving Credit Agreement are at floating
rates, determined by either the prime rate, CD Rate, or
LIBOR, at the Company's option, plus a margin determined
by the Company's capital structure.
The financing agreements contain certain covenants
regarding the operations and financial condition of the
Company. The Company was in compliance with all loan
covenants at January 2, 1994. The total amount of unused
capacity under the Revolving Credit Agreement at January
2, 1994, was $60 million.
The Company's industrial revenue bond obligations are at
interest rates ranging from 70% to 86% of prime rate and
have maturities through 1999.
The Company's other long-term obligations are $187,000 at
7% per annum and $1,521,000 at lender's prime rate plus
1%. These obligations also have maturities through 1999.
The fair value of the Company's long-term debt
approximates its carrying value.
Annual maturities of long-term debt for each of the next
five fiscal years are:
1994 $ 767,000
1995 745,000
1996 11,675,000
1997 10,878,000
1998 10,881,000
Note 7. Retirement Plans
The Company maintains noncontributory defined benefit
pension plans covering substantially all employees. The
plan covering salaried employees provides pension
benefits based on years of service and average
compensation for the highest five consecutive years
during the last ten years of service. Plans covering
hourly employees and long distance drivers provide
benefits based on compensation for each year of service.
FORM 10-K Page 52
Item 8. (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pension expense related to these plans was $2,445,000 in
1993, $1,807,000 in 1992 and $1,963,000 in 1991. The
Company's funding policy is to make annual contributions
of amounts that are deductible for income tax purposes.
Assets of the pension plans are primarily invested in
fixed income securities consisting of bond funds and
short-term money market or cash equivalent funds.
Net periodic pension costs for 1993, 1992 and 1991
included the following components:
1993 1992 1991
(amounts in thousands)
Service cost, benefits
earned during period $ 1,284 $ 1,194 $ 1,263
Interest cost on projected
benefit obligation 1,180 686 667
Actual return on assets (571) (262) (327)
Net amortization and deferral 552 189 360
$ 2,445 $ 1,807 $ 1,963
Assumptions used in determining the periodic pension cost
of the pension plans are as follows:
1993 1992 1991
Discount rate 8.5% 8.5% 8.5%
Average rate of increase
in compensation levels 4.0 4.5 4.5
Expected long-term rate of
return on assets 9.0 8.0 8.0
FORM 10-K Page 53
Item 8(continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the pension plans' funded status
and amounts recognized in the Company's consolidated balance
sheets at January 2,1994 and January 3, 1993:
1993 1992
Assets Accumulated Assets Accumulated
Exceed Benefits Exceed Benefits
Accumulated Exceed Accumulated Exceed
Benefits Assets Benefits Assets
(amounts in thousands)
Actuarial present value of accumulated
benefit obligation-vested portion $ 5,415 $ 2,472 $ 2,251 $ 1,514
Actuarial present value of accumulated
benefit obligation-nonvested portion 649 20 824 6
Accumulated benefit obligation - total 6,064 2,492 3,075 1,520
Additional amounts related to projected
compensation levels 8,377 133 3,762 -
Total actuarial projected benefit
obligation for service rendered to date 14,441 2,625 6,837 1,520
Less: Plan assets at fair value 8,168 159 5,235 139
Projected benefit obligation in excess of
plan assets (6,273) (2,466) (1,602) (1,381)
Unrecognized net actuarial (gain) loss,
difference in assumptions and actual
experience 7,879 176 425 (963)
Unrecognized prior service income (543) (28) (607) (34)
Initial unrecognized net liability
at date of adoption, being recognized
over 15-16 years 512 756 570 850
Adjustment to recognize minimum liability
through recording an intangible asset - (734) - -
Pension-related assets (liabilities)
included in the consolidated balance
sheets $ 1,575 $ (2,296) $ (1,214) $ (1,528)
Assumptions used in determining the funded status of the pension plans
(shown above) are as follows:
1993 1992
Discount Rate 7.5% 8.5%
Average rate of increase in
compensation levels 4.0 4.5
FORM 10-K Page 54
Item 8. (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Listed below are the Company's three defined contribution
plans which cover substantially all employees.
1. The 1983 Employee Stock Ownership Plan ("ESOP")
2. The Supplemental Retirement Plan ("SRP")
3. The Employee Equity Plan ("EEP")
For the years 1990 through 1992, the Company made ESOP
contributions for eligible, nonsalaried employees equal
to 1% of compensation, less forfeitures. Contributions
to the ESOP were made in cash and Class A Preferred Stock
of the Company. The Company discontinued contributions
to the ESOP after 1992. The ESOP is subject to a floor
offset arrangement in conjunction with the Company's
defined benefit plans with respect to pension benefits
earned for service after 1983. Under the floor offset
arrangement, retirement benefits earned after 1983 under
the Company's three defined benefit pension plans are
offset by the actuarial equivalent pension value of
participants' ESOP accounts.
The 401(k) Program ("Program"), formerly known as the
Supplemental Retirement Program, consists of the EEP and
the SRP. Participants of the Program may contribute from
2% to 10% of their annual compensation to the SRP or to
the EEP, or their contributions may be divided between
the two plans. Starting in 1994, employees may
contribute from 2% to 15% of their compensation. The
Company makes matching cash contributions of 25% to the
SRP, and 50% to the EEP. The Company matches employee
contributions up to 6% of the employee's annual
compensation.
Beginning in 1994, there will be two new plans in the
Program, the EEP-Hourly and the SRP-Hourly. Salaried
participants will remain in the EEP and SRP while hourly
participants will go into the two new plans. The two new
hourly plans are identical to the original EEP and SRP,
except for the employment status of the participants.
FORM 10-K Page 55
Item 8. (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Expenses for the three defined contribution plans are
shown below:
1993 1992 1991
(amounts in thousands)
ESOP $ - $ 1,250 $ 1,435
EEP 544 1,174 353
SRP 631 1,149 286
The 1992 EEP and SRP expenses include a special
discretionary contribution made by the Company.
Note 8. Postretirement Benefits Other Than Pensions
(amounts in thousands)
The Company provides postretirement health care benefits
to certain retired employees between the ages of 55 and
65. These employees become eligible for postretirement
health care benefits if they retire after age 55 and have
completed 15 years of service. The plan is contributory,
with retiree contributions and plan design adjusted
annually to reflect changes in health care costs. The
Company funds a portion of the actual health care costs.
The Company adopted SFAS No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions," ("FAS
106"), as of the beginning of the 1993 fiscal year. FAS
106 requires accrual of the cost of providing
postretirement benefits during the employees' active
service periods. The Company's accumulated
postretirement benefit obligation ("APBO") at the time of
adoption was $4,598 and is being amortized to expense
over a 20-year transition period. Prior to 1993, the
Company recognized retiree health care expense when the
benefits were paid. The effect of the change in
accounting policy was to reduce net income for 1993 by
$405.
FORM 10-K Page 56
Item 8. (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The periodic expense for postretirement benefits included
the following components for the year ended January 2,
1994:
Service cost for benefits
earned during the year $ 188
Interest cost on accumulated benefit
obligation 379
Amortization of transition obligation 230
Total expense $ 797
Postretirement benefit cost recognized in 1992 under the
Company's prior accounting policy was $277.
The actuarial and recorded liabilities for postretirement
benefits, none of which have been funded, are as follows
at January 2, 1994:
Accumulated postretirement benefit obligation:
Retirees $ 743
Fully eligible active plan participants 967
Other active plan participants 2,242
Total $ 3,952
Plus unrecognized gain 1,080
Less unrecognized transition obligation 4,368
Accrued postretirement benefit cost $ 664
For measurement purposes, a 15 percent annual rate of
increase in per capita health care costs of covered
benefits was assumed for 1994, with such rate of increase
gradually declining to 5.5 percent in 2003. Increasing
the assumed health care cost trend rate by 1 percentage
point would increase the accumulated postretirement
benefit obligation at January 2, 1994 by $431 and
increase net periodic postretirement benefit expense by
approximately $78 in 1993. The accumulated
postretirement benefit obligation was computed using an
assumed discount rate of 7 percent for 1993.
FORM 10-K Page 57
Item 8. (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Income Taxes
The following tables present the provision for income taxes, the
components of income tax expense from continuing
operations, a reconciliation of the statutory U.S. income tax rate
to the effective income tax rate, and the components and
items comprising net deferred income tax liability.
Provision (Credit) for Income Taxes (in thousands)
1993 1992 1991
Continuing operations $ 29,884 $ 24,782 $ 6,308
Discontinued operations - - (21,088)
Extraordinary item - (1,212) -
Total provision (credit) $ 29,884 $ 23,570 $ (14,780)
Components of Income Tax Expense from
Continuing Operations (in thousands)
1993 1992 1991
Current Deferred Total Current Deferred Total Current Deferred Total
Federal $ 22,303 $ 3,470 $ 25,773 $ 17,447 $ 3,511 $ 20,958 $ 10,737 $ (6,406)$ 4,331
State and local 3,810 301 4,111 3,273 551 3,824 1,877 100 1,977
Total provision (credit) $ 26,113 $ 3,771 $ 29,884 $ 20,720 $ 4,062 $ 24,782 $ 12,614 $ (6,306)$ 6,308
Reconciliation to Effective Tax Rate
from Continuing Operations 1993 1992 1991
Statutory U. S. tax rate 35.0 % 34.0 % 34.0 %
State income taxes, net of federal
benefit 3.4 3.6 7.9
Tax benefit from foreign sales
corporation (1.9) (1.4) (2.9)
Impact on deferred taxes from federal
tax rate increase 2.1 - -
Other (1.0) (0.9) (0.6)
Total effective tax rate 37.6 % 35.3 % 38.4 %
Components of Net Deferred
Income Tax Liability (in thousands) 1993 1992 1991
Deferred income tax liabilities $ 75,160 $ 73,731 $ 71,745
Deferred income tax assets (11,213) (13,555) (15,631)
Net deferred income tax liability $ 63,947 $ 60,176 $ 56,114
No valuation allowance has been provided due to scheduled reversals of deferred tax liabilities sufficient to offset
scheduled reversals of deferred tax assets.
Items Comprising Net Deferred
Income Tax Liability (in thousands) 1993 1992 1991
Property, plant & equipment
- principally depreciation $ 37,538 $ 37,239 $ 38,771
Inventories 32,853 31,557 27,121
Anticipated future expenses (942) (2,552) (4,673)
Other - net (5,502) (6,068) (5,105)
Net deferred income tax liability $ 63,947 $ 60,176 $ 56,114
In August 1993 the federal statutory income tax rate for the Company was increased to 35%, effective January 4, 1993.
FORM 10-K Page 58
Item 8. (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Common Stock Offering and Conversion of
Participating Preferred Stock
On June 25, 1992, the Company received net proceeds of
$55.2 million upon consummation of an underwritten public
offering for 6,000,000 shares of Common Stock. Pursuant
to exercise by the underwriters of a 900,000 share over-
allotment option, the Company received additional net
proceeds of $8.3 million on July 22, 1992.
On June 18, 1992, the effective date of the Company's
registration statement for its public offering, and in
accordance with agreements executed by the Company and
each of the holders of its Participating Preferred Stock,
all outstanding shares of Participating Preferred Stock
were converted into an aggregate of 5,118,669 shares of
Common Stock and 1,231,327 shares of Nonvoting Common
Stock.
Note 11. Capital Stock
All Class A Preferred Stock is held by the Cone Mills
Corporation 1983 ESOP except shares held in escrow and
shares held by former participants who elected to receive
shares in a distribution of account balances. Class A
Preferred Stock is nonvoting, except as otherwise
required by law, and is senior in dividend preference to
all other classes of capital stock. Class A Preferred
Stock has a liquidation preference senior to all other
classes of capital stock of $100 per share plus accrued
and unpaid dividends.
Holders of Class A Preferred Stock are entitled to
receive dividends on the 31st day of March of each year
from funds legally available therefor when, as and if
declared by the Board of Directors. The dividend rate is
established on March 31 for the succeeding dividend
period, and is determined by an independent investment
bank or appraisal firm selected by the Board of
Directors, subject to confirmation by the ESOP trustee.
The dividend rate is determined annually, and is that
rate required to make the fair market value of Class A
Preferred Stock equal to its original par value. The
dividend rate cannot exceed 13% per annum or be less than
7% per annum. Dividends on Class A Preferred Stock are
cumulative, but accumulated dividends do not bear
interest. Dividend rates for Class A Preferred Stock
were 7.0% for 1994, 8.0% for 1993 and 9.7% for 1992.
FORM 10-K Page 59
Item 8. (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dividends on the Class A Preferred Stock are, at the
option of the Board of Directors, paid in cash or by
delivery of shares of the Company's Class A Preferred
Stock, Common Stock or by delivery of other "qualifying
employer securities" of the Company as that term is used,
on the date of such delivery, in Section 407 of the
Employee Retirement Income Security Act of 1974, as
amended ("ERISA") (or the corresponding section of any
future law) or by a combination of the foregoing;
provided, however, that on the date of delivery the fair
market value of any stock or qualifying employer
securities used to pay dividends shall be equal to or
greater than the amount of dividends paid therewith. All
dividends paid to date on the Class A Preferred Stock
have been paid in additional shares of Class A Preferred
Stock or cash.
Class A Preferred Stock held by the 1983 ESOP may be
redeemed, in whole or in part, at the option of the
Company by a vote of the Board of Directors, at a price
equal to the greater of $100 per share or the fair market
value thereof, plus dividends accrued and unpaid thereon
to the date fixed for redemption. The redemption price
shall be paid in cash or by delivery of shares of the
Company's Class A Preferred Stock, Common Stock or by
delivery of other qualifying employer securities or a
combination of the foregoing, at the Company's option;
provided, however, that on the date of delivery the fair
market value of any stock or other qualifying employer
securities used to pay the redemption price shall be
equal to or greater than the redemption price (or portion
thereof) paid therewith. The fair market value of Class
A Preferred Stock was determined to be $100.10 per share
at January 2, 1994.
Purchases of Class A Preferred Stock by the ESOP may be
necessary to provide all or part of the pension due under
the Company's defined benefit plans pursuant to the floor
offset arrangement in connection with the ESOP and to
make distributions due to retired or terminated
employees. The ESOP is obligated to purchase shares of
Class A Preferred Stock from participants and former
participants of these plans in accordance with the terms
and conditions of the plans, the trust agreements and
liquidity agreements thereunder. To the extent the ESOP
has insufficient liquidity to make these purchases, it
may require the Company to repurchase shares of Class A
FORM 10-K Page 60
Item 8. (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Preferred Stock. It is within the control of the Company
to satisfy the liquidity needs of the ESOP through cash
contributions, cash dividends or optional repurchases of
the Class A Preferred Stock.
All outstanding shares of Nonvoting Common Stock were
converted to Common Stock during February, 1993. These
shares, owned exclusively by unaffiliated shareholders,
were converted at the rate of one share of Common Stock
for each share of Nonvoting Common Stock. On May 11,
1993, the shareholders approved an amendment to the
Company's Restated Articles of Incorporation which
removed Nonvoting Common Stock as authorized capital
stock. At the same time, Participating Preferred Stock
was removed as authorized capital stock.
The Company is authorized to issue Class B Preferred
Stock but it has no Class B Preferred Stock outstanding
nor does it have present plans to issue such shares. The
Restated Articles of Incorporation provide that the Board
of Directors may determine the preferences, limitations
and relative rights of the Class B Preferred Stock,
including voting rights, which could adversely affect the
voting rights of holders of Common Stock. Any Class B
Preferred Stock which is authorized and issued shall be
junior to Class A Preferred Stock in accordance with the
terms of the Restated Articles of Incorporation.
Holders of Common Stock are entitled ratably, share for
share, to dividends, when, as and if declared by the
Board of Directors, out of funds legally available
therefor. Common Stock is junior to Class A Preferred
Stock with respect to dividend preference and may be
junior to Class B Preferred Stock depending upon the
relative preferences, limitations and relative rights the
Board of Directors may determine upon issuance of such
Class B Preferred Stock.
The Common Stock is junior in liquidation preference to
the Class A Preferred Stock and may be junior to the
Class B Preferred Stock depending upon the relative
preferences, limitations and rights the Board of
Directors may establish upon issuance of Class B
Preferred Stock. After payment in liquidation has been
made to the senior capital stock, the remaining assets of
the Company would be distributed pro rata among the
holders of Common Stock equally on a per share basis.
FORM 10-K Page 61
Item 8. (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Holders of Common Stock are entitled to one vote per
share on all matters submitted to a vote of holders of
Common Stock.
Note 12. Stock Option Plan
The Company's 1984 Stock Option Plan provides for the
granting of options to purchase 5,000,000 shares of
Common Stock; such options may be incentive stock options
or nonqualified stock options. All of the options
granted have been nonqualified stock options with a term
of ten years, and such grants included income tax
reimbursement in accordance with the terms of the plan.
Options are exercisable on a cumulative basis, at a rate
of 20% per year beginning in the year of grant. No
additional grants will be made under the 1984 Plan.
The Company also has in effect the 1992 Stock Option Plan
that permits the granting of options to purchase up to
2,000,000 shares of Common Stock. This plan is
substantially identical to the 1984 Stock Option Plan.
On February 18, 1993, incentive stock option grants to
purchase 500,000 shares of Common Stock at $15.625 per
share were made. These options have a term of ten years
and are exercisable, on a cumulative basis, at a rate of
20% in each twelve month period, beginning six months
after the date of grant.
A summary of activity under the plans follows:
1984 Stock Option Plan:
Option price per share $ 1.31 $ 5.25 $ 6.50
Outstanding at
12/29/91 2,404,800 991,000 -
Canceled - (28,000) -
Granted 2/20/92 - - 134,750
Exercised (2,404,800) (772,800) ( 22,950)
Outstanding at
1/3/93 - 190,200 111,800
Canceled (3,000) -
Exercised (92,000) (8,000)
Outstanding at
1/2/94 95,200 103,800
1992 Stock Option Plan:
Option price per share $15.625
Granted 2/18/93 500,000
Outstanding at 1/2/94 500,000
Options exercisable
at 1/2/94 95,200 22,950 100,000
FORM 10-K Page 62
Item 8. (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13. Leases, Commitments and Repairs and Maintenance -
Continuing Operations (amounts in thousands)
The Company has various leases accounted for as operating
leases. Rent expense was $5,053, $4,465, and $4,255, for
1993, 1992 and 1991, respectively. Future minimum rental
payments required under lease agreements are $4,332 for
1994, $3,625 for 1995, $2,698 for 1996, $1,979 for 1997,
$1,077 for 1998, and thereafter $2,217. Aggregate future
minimum rental payments total $15,928. Commitments for
improvements of and additions to property, plant and
equipment approximated $5,105 at January 2, 1994.
Operating costs and expenses include repairs and
maintenance costs of $34,680, $32,239, and $28,738 for
1993, 1992 and 1991, respectively.
Note 14. Restructuring Costs (amounts in thousands)
In 1991 the Company sold the assets of Ragan Hardware
Company, a small wholesale distributor of hardware in the
furniture industry. The loss of $767 relating to this
disposition is shown as restructuring cost in 1991.
FORM 10-K Page 63
Item 8. (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15. Earnings (Loss) Per Share
1993 1992 1991
Fully Fully Fully
Primary Diluted Primary Diluted Primary Diluted
(amounts in thousands, except per share data)
Income from continuing operations $ 49,603 $ 49,603 $ 45,399 $ 45,399 $ 10,135 $ 10,135
Less: Class A Preferred dividends (2,795) (2,795) (4,560) (4,560) (5,811) (5,811)
Adjusted income from continuing
operations 46,808 46,808 40,839 40,839 4,324 4,324
(Loss) from discontinued operations - - - - (34,951) (34,951)
Adjusted income (loss) before extraordinary
item 46,808 46,808 40,839 40,839 (30,627) (30,627)
Extraordinary Item - - (2,009) (2,009) - -
Adjusted net income (loss) $ 46,808 $ 46,808 $ 38,830 $ 38,830 $ (30,627) $ (30,627)
Weighted average common shares and
common share equivalents outstanding 27,886 27,894 24,285 24,470 19,384 19,415
Earnings (loss) per common share and
common share equivalent:
Income from continuing operations $ 1.68 $ 1.68 $ 1.68 $ 1.67 $ .22 $ .22
Income (loss) before extraordinary item $ 1.68 $ 1.68 $ 1.68 $ 1.67 $ (1.58) $ (1.58)
Net income (loss) $ 1.68 $ 1.68 $ 1.60 $ 1.59 $ (1.58) $ (1.58)
Primary and fully diluted earnings per share have been computed by dividing the net earnings (loss)
available to common stockholders by the sum of the weighted average number of voting and
nonvoting common shares outstanding, plus common share equivalents resulting from the assumed
exercise of stock options using the treasury stock method, and for 1992 and 1991, the conversion
of Participating Preferred Stock.
Common shares issued June 18, 1992 have been included from date of issue.
FORM 10-K Page 64
Item 8. (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16. Segment Information and Major Customers
The Company operates in two major segments within the
textile industry: Apparel Fabrics and Home Furnishings.
The Company designs, manufactures and markets Apparel
Fabrics including denim in various styles, finishes and
weights, yarn-dyed and chamois flannel shirting fabrics,
printed fabrics and synthetic sportswear fabrics. The
Home Furnishings segment consists of the design and
distribution of decorative fabrics for the home
furnishings industry, and decorative fabrics commission
dyeing, printing and finishing services. This segment
also includes polyurethane foam products, batting,
cushions, carpet padding, and the distribution of
furniture hardware. For reporting purposes, real estate
operations are included in the Home Furnishings segment.
The Company has no foreign operations. Sales to
unaffiliated foreign customers, principally in Europe,
were 17.2% of sales from continuing operations in 1993,
16.1% in 1992 and 14.5% in 1991. Cone has one
unaffiliated customer which accounted for more than 10%
of consolidated sales from the Apparel Fabrics segment.
Sales to this customer, as a percentage of sales from
continuing operations, were 35.3% in 1993, 37.9% in 1992,
and 38.5% in 1991. At January 2, 1994 this customer had
an outstanding accounts receivable balance with the
Company of approximately $8.6 million. The Company has
not incurred any losses in past years related to this
customer's accounts receivable.
Operating profit for each segment is total revenue less
operating expenses applicable to that segment. General
corporate expenses, interest, income taxes, and losses
from discontinued operations are not included in segment
operating income. General corporate expenses include
certain executive officers salaries, legal expenses, bank
fees and charitable contributions. Intersegment sales
and transfers are considered insignificant. Corporate
assets include cash, administrative facilities, deferred
charges, and miscellaneous receivables.
FORM 10-K Page 65
Item 8 (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Segment Information
The Company operates in two major industry segments: products for apparel and home furnishings.
Sales, operating income, identifiable assets, depreciation and capital expenditures for these
segments are as follows:
1993 1992 1991
(amounts in thousands)
Sales
Apparel $ 575,800 $ 520,019 $ 457,994
Home Furnishings 193,430 185,411 174,970
Total $ 769,230 $ 705,430 $ 632,964
Operating income
Apparel $ 68,828 $ 67,382 $ 20,409
Home Furnishings 19,470 16,317 19,157
Restructuring - - (767)
88,298 83,699 38,799
General corporate expenses 2,699 5,201 3,951
Interest expense - net 6,429 8,317 18,405
Other (income) expense (317) - -
8,811 13,518 22,356
Income from continuing operations
before income taxes $ 79,487 $ 70,181 $ 16,443
Operating Margin
Apparel 12.0% 13.0% 4.5%
Home Furnishings 10.1 8.8 10.9
Total 11.5% 11.9% 6.1%
Identifiable Assets
Apparel $ 295,832 $ 268,872 $ 256,751
Home Furnishings 113,780 104,039 112,621
Corporate 16,227 20,888 13,238
Discontinued Operations 5,772 8,149 50,091
Total $ 431,611 $ 401,948 $ 432,701
Depreciation
Apparel $ 16,518 $ 14,634 $ 13,536
Home Furnishings 3,376 2,893 2,622
Corporate 1,097 1,026 935
Total $ 20,991 $ 18,553 $ 17,093
Capital Expenditures
Apparel $ 28,083 $ 17,590 $ 11,762
Home Furnishings 8,927 5,993 8,608
Corporate 1,702 1,815 597
Discontinued Operations - - 784
Total $ 38,712 $ 25,398 $ 21,751
FORM 10-K Page 66
Item 8. (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17. Litigation and Contingencies
In November 1988, William J. Elmore and Wayne Comer (the
"Plaintiffs"), former employees of the Company,
instituted a class action suit against the Company and
Wachovia Bank & Trust Company, N.A. ("Wachovia") and
certain current and former employees of the Company and
Wachovia. The suit was brought on behalf of salaried
employees of the Company who were participants in certain
Company retirement plans. The Plaintiffs asserted a
variety of claims related to actions taken and statements
made concerning certain employee benefit plans maintained
by the Company. In May 1990, the United States District
Court in Greenville, South Carolina, certified a
plaintiff class of salaried employees. In August 1990,
the District Court granted partial summary judgment in
favor of the defendants and significantly narrowed the
extent of the Plaintiffs' claims. A trial was held in
February 1991, and supplemental proceedings were held on
July 24, 1991. At the trial, a witness hired by the
Plaintiffs estimated the alleged loss to the Plaintiff
class to range from approximately $34 million to
approximately $94 million.
On March 20, 1992, the District Court entered a judgment
finding that the Company had promised to contribute
certain surplus funds (or their equivalent in Company
stock) relating to the overfunding of the Company's
pension plans to the 1983 ESOP by December 23, 1985, that
such surplus amounted to $69 million, that the Company's
actual contribution totaled approximately $55 million,
and that the Company and its Chairman, Dewey L. Trogdon,
and its Secretary, Lacy G. Baynes, therefore had breached
their fiduciary duties under the Employee Retirement
Income Security Act of 1974 ("ERISA") to certain
participants in the 1983 ESOP. The District Court
ordered the Company to pay to the 1983 ESOP for the
benefit of plan participants, both salaried and hourly,
the sum of $14.2 million in cash or the equivalent in
Company stock. In addition, the District Court awarded
$3.5 million in attorneys' fees to the Plaintiffs, $2.2
million of which is to be paid from the sum awarded to
the 1983 ESOP. Judgment was entered in favor of the
defendants on all remaining claims except for claims
relating to the ESOP contribution. In accordance with
and to the extent permitted by the Company's Articles of
Incorporation and Bylaws, the two individual defendants
in this litigation are indemnified by the Company for any
costs incurred by them in connection with this matter.
FORM 10-K Page 67
Item 8. (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On March 20, 1992, the Company and the individual
defendants appealed the District Court's judgment against
them to the United States Court of Appeals for the Fourth
Circuit. On April 2, 1992, the Plaintiffs appealed the
District Court's judgment to the Court of Appeals insofar
as it dismissed certain of their claims. To secure the
judgment on appeal the Company has deposited in escrow
with the trustee of the 1983 ESOP an $8 million letter of
credit and 75,330 shares of Class A Preferred Stock
valued at $7.5 million which has subsequently earned
dividends of an additional 5,795 shares valued at $.6
million. To record these escrow transactions, the
Company increased outstanding Class A Preferred Stock by
$8.1 million. The increase in outstanding Class A
Preferred Stock was offset by a contra stockholders'
equity account labeled "Class A Preferred Stock held in
escrow." These escrow account transactions did not have
an effect upon net income or stockholders' equity of the
Company.
On September 22, 1993 a three-judge panel of the United
States Court of Appeals for the Fourth Circuit in a two-
to-one decision reversed the District Court's decision as
to the obligation to contribute additional funds to the
1983 ESOP and affirmed the District Court's dismissal of
all remaining claims against the Company and the
individual defendants. On October 4, 1993, Plaintiffs
petitioned the Fourth Circuit for rehearing, with a
suggestion for rehearing en banc, and on October 29, 1993
the United States Department of Labor filed a brief in
support of Plaintiffs' petition for rehearing.
Plaintiffs' petition for rehearing en banc was granted on
December 13, 1993, and, consequently, the panel opinion
was vacated. Briefs were filed by the Plaintiffs,
Department of Labor, and the Company, and an en banc oral
argument was heard by the Court of Appeals on March 8,
1994. The Company is awaiting a decision. An attorney
for the Plaintiffs has contended that, if Plaintiffs
prevail on appeal, the judgment could exceed $50 million
based on the existing judgment and additional claims
relating to alleged unjust enrichment and alleged
overvaluation of the Class A Preferred Stock initially
contributed to the 1983 ESOP, as well as prejudgment
interest.
FORM 10-K Page 68
Item 8. (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has received an opinion from its lead counsel
on appeal, that, while it is not possible to predict the
outcome of this lawsuit with certainty, in the opinion of
such firm the District Court's decision in Plaintiffs'
favor is erroneous and is more likely than not to be
reversed or substantially modified by the Court sitting
en banc and the dismissal of Plaintiffs' claims was
proper and is more likely than not to be affirmed by the
en banc Court. Therefore, the Company has concluded that
it is not probable that a liability has been incurred
with respect to this suit. However, the Company has been
advised by such counsel that an appellate court which
votes to rehear a case en banc often reaches a result
different from the panel originally designated to hear
the appeal, and further, that ERISA law is rapidly
changing and decisional law on many ERISA issues is
neither unanimous nor fully developed. Because of the
foregoing and the uncertainties inherent in the
litigation process, there can be no assurance as to the
ultimate resolution of this lawsuit. If Plaintiffs'
judgment (including the attorneys' fees award) is
affirmed on appeal, the Company's management estimates
that income, net of taxes, would be reduced by
approximately $10 million. It is the opinion of the
Company's management that this lawsuit, when finally
concluded, will not have a material adverse effect on the
Company's financial condition.
Note 18. Discontinued Operations
(amounts in thousands)
As of December 5, 1991, the Company adopted a plan to
discontinue and liquidate its corduroy and other
bottomweight continuous piece-dyed fabrics product line.
Earlier in 1991, the Company closed its last weaving
facility dedicated to corduroy and flat woven fabrics.
The operations to dye and finish these fabrics are
concentrated at Cone's Haw River, North Carolina
facility. The Company began to phase out this product
line in early 1992, and continued to accommodate
customers, liquidate inventory and collect receivables
through the 1993 cutting season and will complete the
liquidation of its corduroy and other bottomweight
continuous piece-dyed fabrics product line in the first
quarter of 1994.
FORM 10-K Page 69
Item 8. (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
An estimated loss on disposal of these discontinued
operations of $17,860, net of income tax benefits of
$10,777, was recognized in the 1991 fiscal year. This
estimate included anticipated operating losses during the
phase-out period of $6,952, net of income tax benefits of
$4,195. This operating loss included allocated interest
of $765, net of income tax benefits of $462. Actual
losses from discontinued operations in 1992 and 1993 were
consistent with the estimated provision for such years;
therefore, no gain or additional loss has been recognized
on discontinued operations.
1993 1992 1991 (1)
(amounts in thousands)
Revenue (Sales) $ 4,814 $ 62,036 $ 87,812
Operating (Loss) from
discontinued operations $ - $ - $ (24,693)
Interest expense allocated
to discontinued operations - - 2,709
Operating (Loss) before
income taxes - - (27,402)
Income tax benefit - - (10,311)
(Loss) from discontinued
operations $ - $ - $ (17,091)
(Loss) on disposal of
discontinued operations $ - $ - $ (27,410)
Interest allocated to
disposal - - 1,227
(Loss) from disposal
before income taxes - - (28,637)
Income tax benefit - - (10,777)
(Loss) from disposal $ - $ - $ (17,860)
(1) Allocable interest expense has been computed based upon
the ratio of net realizable assets of the discontinued
operation as a ratio of the total assets of the Company.
FORM 10-K Page 70
Item 8. (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 19. Quarterly Financial Data (unaudited)
Summarized quarterly financial data for years 1993 and 1992:
Quarters Ended
Apr. 4, Jul. 4, Oct. 3, Jan. 2,
1993 1993 1993 1994
(in thousands, except per share)
Net sales $ 195,035 $ 202,515 $ 192,644 $ 179,036
Gross profit (1) 41,839 40,320 39,623 37,143
Income from operations 21,593 23,365 21,669 18,972
Net income $ 12,619 $ 13,668 $ 11,809 $ 11,507
Per share data (fully diluted):
Net income $ .42 $ .47 $ .40 $ .39
Weighted average shares outstanding 27,877 27,936 27,889 27,911
Common stock prices*
High 19 5/8 19 1/4 18 17 5/8
Low 13 3/8 15 7/8 14 5/8 14 3/8
Quarters Ended
Mar. 29, Jun. 28, Sept. 27, Jan. 3,
1992 1992 1992 1993
(in thousands, except per share)
Net sales $ 174,246 $ 182,571 $ 170,536 $ 178,077
Gross profit (1) 35,458 36,968 36,003 37,623
Income from operations 19,071 20,020 19,476 19,931
Income before extraordinary item 12,044 10,839 10,937 11,579
Extraordinary item - - (2,009) -
Net income $ 12,044 $ 10,839 $ 8,928 $ 11,579
Per share data (fully diluted):
Income before extraordinary item $ .53 $ .45 $ .35 $ .39
Net income $ .53 $ .45 $ .28 $ .39
Weighted average shares outstanding 20,069 21,342 27,471 27,806
Common stock prices*
High - 11 5/8 15 7/8 16
Low - 10 10 1/2 13
The approximate number of holders of record of the Company's Common Stock as of March 1,
1994 was 574.
*New York Stock Exchange Composite Tape since date of public offering, June 18, 1992.
(1) Net sales less cost of sales and depreciation
No dividends have been declared on Common Stock since 1984 and the Company anticipates
that its earnings for the foreseeable future will be retained for use in its business and to finance
growth. Payment of cash dividends in the future will depend upon the Company's financial
condition, results of operations, current and anticipated capital requirements, and other factors
deemed relevant by the Company's Board of Directors.
FORM 10-K Page 71
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
None.
FORM 10-K Page 71a
PART II - ADDITIONAL DISCLOSURE
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
Year ended January 3, 1993
Actual Adjustments Pro Form
(amounts in thousands, except per share)
Net sales $ 705,430 $ $ 705,430
Operating costs and expenses 626,932 626,932
Income from operations 78,498 78,498
Interest expense - net 8,317 (1,054)(1) 7,263
Income from continuing
operations before income taxes 70,181 1,054 71,235
Income taxes 24,782 397 (2) 25,179
Income from continuing operations 45,399 657 46,056
Extraordinary item (2,009) (2,009)
Net Income 43,390 657 44,047
Income from continuing operations $ 45,399 $ 657 $ 46,056
Less: Class A Preferred dividends 4,560 (1,369)(3) 3,191
Income from continuing operations
available to Common Stock 40,839 2,026 42,865
Extraordinary item (2,009) (2,009)
Net income available to Common Stock $ 38,830 $ 2,026 $ 40,856
Earnings per share from continuing operations $ 1.67 $ 1.55
Earnings per share $ 1.59 $ 1.47
Weighted average common shares and
common share equivalents outstanding 24,470 3,273 (4) 27,743
Pro forma adjustments have been made to reflect the following:
(1)Net reduction in interest expense applicable to continuing operations due to $42.1 million reduction of
borrowings resulting from application of a portion of the net proceeds from the 1992 Initial Public Offering
$(1,054).
(2)Provision for income tax expense on interest expense reduction reflected in (1) above at the Company's
marginal tax rate (37.63%) - $397.
(3)Reduction in dividends on Class A Preferred Stock redeemed with a portion of the net proceeds from the
1992 Initial Public Offering - $(1,369).
(4)Issuance of 6,900,000 shares of Common Stock in the 1992 Initial Public Offering at an initial public offering
price of $10 per share.
FORM 10-K Page 71b
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information relating to directors of the Company is presented
under the heading "Election of Directors" in the Company's
definitive Proxy Statement dated April 1, 1994, prepared for
the Annual Meeting of Shareholders to be held on May 10, 1994,
and is hereby incorporated by reference. Information
regarding executive officers is included as Item 4A in Part I.
Item 11. Executive Compensation.
Information relating to executive compensation is presented
under the heading "Executive Compensation" in the Company's
definitive Proxy Statement dated April 1, 1994, prepared for
the Annual Meeting of Shareholders to be held on May 10, 1994,
and is hereby incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
Information with respect to beneficial ownership of the
Company's voting securities by each director and all officers
and directors as a group, and by any person known to
beneficially own more than 5% of any class of voting security
of the Company is presented under the heading "Security
Ownership of Directors, Nominees and Named Executive Officers"
and "Security Ownership of Certain Beneficial Owners" in the
Company's definitive Proxy Statement dated April 1, 1994,
prepared for the Annual Meeting of Shareholders to be held on
May 10, 1994, and is hereby incorporated by reference.
Item 13. Certain Relationships and Related Transactions.
Information with respect to certain relationships and related
transactions is presented under the headings "Compensation of
Directors" and "Compensation Committee Interlocks and Insider
Participation" in the Company's definitive Proxy Statement
dated April 1, 1994, prepared for the Annual Meeting of
Shareholders to be held on May 10, 1994, and is hereby
incorporated by reference.
FORM 10-K Page 72
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K
(a)(1) The following financial statements of the
Registrant are presented in Item 8 on pages 40
through 70 hereof.
Report of Independent Auditor
Consolidated Statements of Operations for the Years
Ended January 2, 1994, January 3, 1993 and December
29, 1991
Consolidated Balance Sheets as of January 2, 1994,
and January 3, 1993
Consolidated Statements of Stockholders' Equity for
the Years Ended January 2, 1994, January 3, 1993,
and December 29, 1991
Consolidated Statements of Cash Flows for the Years
Ended January 2, 1994, January 3, 1993, and
December 29, 1991
Notes to Consolidated Financial Statements
(a)(2) The following Financial Statement Schedules are
presented on pages 75 through 78 hereto.
Report of Independent Auditor relating to Schedules
V, VI, VIII and IX
Schedule V - Property, Plant and Equipment
Schedule VI - Accumulated Depreciation of Property,
Plant and Equipment
Schedule VIII - Valuation and Qualifying Accounts
Schedule IX - Short-Term Borrowings
All other schedules specified under Regulation S-X
are omitted because they are not applicable, not
required or the information required appears in the
Consolidated Financial Statements or Notes thereto.
FORM 10-K Page 73
Item 14. (continued)
(a)(3) Exhibits. Exhibits to this report are listed on
the accompanying Index to Exhibits.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth
quarter of 1994.
FORM 10-K Page 74
McGLADREY & PULLEN
CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS
INDEPENDENT AUDITOR'S REPORT ON FINANCIAL STATEMENT
SCHEDULES
To the Board of Directors
Cone Mills Corporation
Greensboro, North Carolina
Our audit of the consolidated financial statements of
Cone Mills Corporation and subsidiaries included schedules V,
VI, VIII and IX contained herein, for the years ended January
2, 1994, January 3, 1993 and December 29, 1991.
In our opinion, such schedules present fairly the
information required to be set forth therein in conformity
with generally accepted accounting principles.
McGladrey & Pullen
Greensboro, North Carolina
February 11, 1994
FORM 10-K Page 75
CONE MILLS CORPORATION AND SUBSIDIARIES
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT
Years Ended January 2, 1994, January 3, 1993 and December 29, 1991
(amounts in thousands)
Column A Column B Column C Column D Column E Column F
Balance at Additions Balance
beginning at Other changes at end
Classification of period cost Retirements add(deduct)(a) of period
1993
Land $ 22,744 $ - $ 1,986 $ - $ 20,758
Buildings 67,071 4,410 46 507 71,942
Machinery and equipment 213,388 30,108 3,346 (304) 239,846
Other 21,954 4,194 146 (203) 25,799
$ 325,157 $ 38,712 $ 5,524 $ - $ 358,345
1992
Land $ 24,755 $ - $ 2,011 $ - $ 22,744
Buildings 63,626 4,030 585 - 67,071
Machinery and equipment 202,388 18,912 7,912 - 213,388
Other 19,823 2,456 325 - 21,954
$ 310,592 $ 25,398 $ 10,833 $ - $ 325,157
1991
Land $ 25,205 $ - $ 450 $ - $ 24,755
Buildings 60,494 5,705 2,573 - 63,626
Machinery and equipment 203,075 14,362 15,065 16 202,388
Other 19,700 1,684 1,545 (16) 19,823
$ 308,474 $ 21,751 $ 19,633 $ - $ 310,592
Depreciation is computed on straight line method using the following approximate lives
Buildings 15-32 Years
Machinery and equipment 12-15 Years
Other 3-20 Years
(a) Represents reclassification of assets.
FORM 10-K Page 76
CONE MILLS CORPORATION AND SUBSIDIARIES
SCHEDULE VI - ACCUMULATED DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT
Years Ended January 2, 1994, January 3, 1993 and December 29, 1991
(amounts in thousands)
Column A Column B Column C Column D Column E Column F
Balance Additions
at charged to Balance
beginning costs and Other changes at end
Description of period expenses Retirements add(deduct)(a) of period
1993
Buildings $ 19,309 $ 2,925 $ 21 $ - $ 22,213
Machinery and equipment 107,366 16,199 2,682 (372) 120,511
Other 14,206 1,867 127 (1) 15,945
$ 140,881 $ 20,991 $ 2,830 $ (373) $ 158,669
1992
Buildings $ 16,682 $ 2,781 $ 154 $ - $ 19,309
Machinery and equipment 96,808 15,563 3,234 (1,771) 107,366
Other 12,871 1,608 273 - 14,206
$ 126,361 $ 19,952 $ 3,661 $ (1,771) $ 140,881
1991
Buildings $ 14,959 $ 2,681 $ 958 $ - $ 16,682
Machinery and equipment 79,178 14,949 7,659 10,340 96,808
Other 12,408 1,657 1,194 - 12,871
$ 106,545 $ 19,287 $ 9,811 $ 10,340 $ 126,361
(a) Net changes in reserves for assets to be disposed of in subsequent years.
FORM 10-K Page 77
CONE MILLS CORPORATION AND SUBSIDIARIES
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
Years Ended January 2, 1994, January 3, 1993 and December 29, 1991
(amounts in thousands)
Column C
Column A Column B Additions Column D Column E
Balance (1) (2)
at Charged to Charged to Balance
beginning costs and other at end
Description of period expenses accounts Deductions of period
January 2, 1994
Valuation accounts deducted
from the assets to which
they apply:
Provision for doubtful
accounts $ 3,228 $ 246 $ - $ 474 (a) $ 3,000
Inventory reserves (b) 553 - - 160 (c) 393
Reserve for future losses (b) 2,045 - - 818 (c) 1,227
January 3, 1993
Valuation accounts deducted
from the assets to which
they apply:
Provision for doubtful
accounts $ 2,227 $ 2,813 $ - $ 1,812 (a) $ 3,228
Inventory reserves (b) 4,070 - - 3,517 (c) 553
Reserve for future losses (b) 12,598 - - 10,553 (c) 2,045
December 29, 1991
Valuation accounts deducted
from the assets to which
they apply:
Provision for doubtful
accounts $ 2,109 $ 1,247 $ - $ 1,129 (a) $ 2,227
Inventory reserves (b) - 4,070 - - 4,070
Reserve for future losses (b) - 12,598 - - 12,598
(a) Represents bad debts charged off.
(b) Represents reserves for discontinued operations (Note 18).
(c) Represents reserves charged to costs and expenses.
FORM 10-K Page 78
CONE MILLS CORPORATION AND SUBSIDIARIES
SCHEDULE IX - SHORT TERM BORROWINGS
Years Ended January 2, 1994, January 3, 1993 and December 29, 1991
(amounts in thousands)
Column A Column B Column C Column D Column E Column F
Maximum Average Weighted
Category Weighted amount amount average
aggregate Balance average outstanding outstanding interest rate
Short-term at end of interest during the during the during the
Date Borrowings period rate period period(a) period (a)
01/02/94 Bank Loan 5,099 6.00% 6,701 5,788 6.02%
01/03/93 Bank Loan 6,653 6.07 27,563 12,827 6.88
12/29/91 Bank Loans 22,300 9.19 28,115 18,664 9.56
General Terms: Revolving credit line, construction loans, and for 1992 and 1991,
seasonal inventory facility.
(a) Weighted daily average.