<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------- --------
Commission File Number 1-8941
FRUIT OF THE LOOM, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-3361804
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5000 SEARS TOWER,
233 SOUTH WACKER DRIVE,
CHICAGO, ILLINOIS 60606
(Address of principal executive offices, including Zip Code)
(312) 876-1724
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Common shares outstanding at July 31, 1996: 69,519,789 shares of Class A
Common Stock, $.01 par value, and 6,690,976 shares of Class B Common Stock,
$.01 par value.
<PAGE> 2
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
INDEX
-----
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Condensed Consolidated Balance Sheet; June 30,
1996 (Unaudited) and December 31, 1995 2
Condensed Consolidated Statement of Earnings
(Unaudited); Three and Six Months Ended
June 30, 1996 and 1995 3
Condensed Consolidated Statement of Cash Flows
(Unaudited); Six Months Ended
June 30, 1996 and 1995 4
Notes to Condensed Consolidated Financial
Statements (Unaudited) 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 19
<PAGE> 3
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands of dollars)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
-------- ------------
1996 1995
---- ----
(UNAUDITED)
<S> <C> <C>
ASSETS
- ------
Current Assets
Cash and cash equivalents
(including restricted cash) ................................ $ 1,300 $ 26,500
Notes and accounts receivable
(less allowance for possible losses
of $27,900 and $26,600, respectively) ...................... 495,100 261,000
Inventories
Finished goods ............................................. 478,400 522,300
Work in process ............................................ 150,600 132,400
Materials and supplies ..................................... 46,200 44,800
Other ......................................................... 42,300 72,800
---------- ----------
Total current assets ................................. 1,213,900 1,059,800
---------- ----------
Property, plant, and equipment .................................. 1,620,500 1,607,300
Less accumulated depreciation ................................ 634,900 578,900
---------- ----------
Net property, plant, and equipment ................... 985,600 1,028,400
---------- ----------
Other assets
Goodwill (less accumulated amortization of
$271,200 and $257,800, respectively) ....................... 757,700 771,100
Other ........................................................ 65,600 60,200
---------- ----------
Total other assets ................................... 823,300 831,300
---------- ----------
$3,022,800 $2,919,500
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Current maturities of long-term debt .......................... $ 12,800 $ 14,600
Trade accounts payable ........................................ 78,000 60,100
Other accounts payable and accrued expenses ................... 247,300 229,100
---------- ----------
Total current liabilities ............................ 338,100 303,800
---------- ----------
Noncurrent Liabilities
Long-term debt ................................................ 1,438,800 1,427,200
Other ......................................................... 285,200 292,900
---------- ----------
Total noncurrent liabilities ......................... 1,724,000 1,720,100
---------- ----------
Common Stockholders' Equity ..................................... 960,700 895,600
---------- ----------
$3,022,800 $2,919,500
========== ==========
</TABLE>
See accompanying notes.
2
<PAGE> 4
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ------------------------
1996 1995 1996 1995
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales ....................................... $732,200 $724,800 $1,238,400 $1,253,000
Cost of sales ................................... 523,400 513,800 892,600 880,000
-------- -------- ---------- ----------
Gross earnings ................................. 208,800 211,000 345,800 373,000
Selling, general and administrative expenses...... 100,400 99,000 180,700 191,900
Goodwill amortization .......................... 6,700 9,400 13,400 18,800
-------- -------- ---------- ----------
Operating earnings ............................ 101,700 102,600 151,700 162,300
Interest expense ................................. (27,200) (30,700) (54,400) (59,100)
Other (expense) income - net .................... (1,000) 2,200 (2,900) 400
-------- -------- ---------- ----------
Earnings before income tax expense
and cumulative effect of change in
accounting principle ........................ 73,500 74,100 94,400 103,600
Income tax expense ............................... 25,700 34,400 34,100 47,400
-------- -------- ---------- ----------
Earnings before cumulative effect of
change in accounting principle ............... 47,800 39,700 60,300 56,200
Cumulative effect of change in
accounting for pre-operating costs............ - - - (5,200)
-------- -------- ---------- ----------
Net earnings .................................. $ 47,800 $ 39,700 $ 60,300 $ 51,000
======== ======== ========== ==========
Earnings per common share:
Earnings before cumulative effect
of change in accounting principle............. $ .63 $ .52 $ .79 $ .74
Cumulative effect of change in
accounting for pre-operating costs............ - - - (.07)
-------- -------- ---------- ----------
Net earnings .................................. $ .63 $ .52 $ .79 $ .67
======== ======== ========== ==========
Average common shares outstanding .............. 76,100 76,000 76,100 76,000
======== ======== ========== ==========
</TABLE>
See accompanying notes.
3
<PAGE> 5
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(In thousands of dollars)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
1996 1995
-------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings ..................................................................... $ 60,300 $ 51,000
Adjustments to reconcile to net cash used
for operating activities:
Cumulative effect of change in accounting for
pre-operating costs ......................................................... - 5,200
Depreciation and amortization ................................................. 74,300 82,900
Deferred income taxes .......................................................... 15,000 9,300
Increase in working capital ................................................... (152,200) (300,400)
Other-net ..................................................................... (8,900) (7,000)
--------- ---------
Net cash used for operating activities ...................................... (11,500) (159,000)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures .......................................................... (18,500) (65,800)
Other-net ...................................................................... (11,300) 5,300
--------- ---------
Net cash used for investing activities ...................................... (29,800) (60,500)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of long-term debt .................................. 21,700 203,400
Principal payments on long-term debt and capital leases......................... (8,900) (13,800)
Issuances of common stock ...................................................... 3,300 300
--------- ---------
Net cash provided by financing activities ................................... 16,100 189,900
--------- ---------
Net decrease in Cash and cash equivalents (including
restricted cash) ............................................................... (25,200) (29,600)
Cash and cash equivalents (including restricted cash)
at beginning of period ........................................................ 26,500 49,400
--------- ---------
Cash and cash equivalents (including restricted cash)
at end of period ............................................................... $ 1,300 $ 19,800
========= =========
</TABLE>
See accompanying notes.
4
<PAGE> 6
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(UNAUDITED)
-----------
1. No dividends were declared on the Company's common stock for the
three and six month periods ended June 30, 1996 and 1995.
2. Prior to 1995 pre-operating costs associated with the start-up of
significant new production facilities were deferred and amortized over
three years. Effective January 1, 1995 the Company recorded the
cumulative effect of a change in accounting principle related to the
Company's decision to adopt a more conservative position as a result of
changes in its business and to expense pre-operating costs as incurred
resulting in an after tax charge of $5,200,000 ($.07 per share) in the
first quarter of 1995. The results of operations for the first six months
of 1995 have been restated to reflect this change in accounting principle.
3. The Company and its subsidiaries are involved in certain legal
proceedings and have retained liabilities, including certain environmental
liabilities, such as those under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, its regulations and
similar state statutes ("Superfund Legislation"), in connection with the
sale of certain discontinued operations, some of which were significant
generators of hazardous waste. The Company and its subsidiaries have also
retained certain liabilities related to the sale of products in connection
with the sale of certain discontinued operations. The Company's retained
liability reserves at June 30, 1996 related to discontinued operations
consist primarily of certain environmental and product liability reserves
of approximately $74,800,000. The Company has recorded receivables
related to these environmental liabilities of approximately $39,100,000
which management believes will be recovered from insurance and other
sources. Management believes that adequate reserves have been established
to cover potential claims based on facts currently available and current
Superfund Legislation.
Generators of hazardous wastes which were disposed of at offsite locations
which are now superfund sites are subject to claims brought by state and
Federal regulatory agencies under Superfund Legislation and by private
citizens under Superfund Legislation and common law theories. Since 1982,
the EPA has actively sought compensation for response costs and remedial
action at offsite disposal locations from waste generators under the
Superfund Legislation, which authorizes such action by the EPA regardless
of fault, legality of original disposal or ownership of a disposal site.
The EPA's activities under the Superfund Legislation can be expected to
continue during the remainder of 1996 and future years.
In February 1986, the Company completed the sale of stock of its then
wholly owned subsidiary, Universal Manufacturing Corporation ("Universal")
to MagneTek, Inc. ("MagneTek"). At the time of the sale there was a
suit pending against Universal and the
5
<PAGE> 7
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
------------------------------------------------------------------
(UNAUDITED)
-----------
Company's predecessor, Northwest Industries, Inc. ("Northwest"), by LMP
Corporation ("LMP"). The suit (the "LMP Litigation") alleged that
Universal and Northwest fraudulently induced LMP to sell its business to
Universal and then suppressed the development of certain electronic
lighting ballasts in breach of the agreement of sale, which required
Universal to pay to LMP a percentage of the net profits from such business
from 1982 through 1986. Two additional plaintiffs, Stevens Luminoptics
Partnership and Calmont Technologies, Inc., joined the litigation in 1986.
In December 1989 and January 1990, a jury returned certain verdicts
against Universal and also returned verdicts in favor of Northwest and on
certain issues in favor of Universal. A judgment totaling $25,800,000, of
which $7,500,000 represented punitive damages, reflecting these verdicts
was entered by the Alameda County, California Superior Court in January
1990 against Universal.
In April 1992, the California Court of Appeals reversed the
$25,800,000 judgment against Universal and affirmed those verdicts
favorable to Universal and Northwest. In July 1992, the California
Supreme Court denied the plaintiffs' petition for review. The case was
then remanded to the trial court.
Pursuant to the stock purchase agreement (the "Stock Purchase Agreement")
under which Universal was sold, the Company agreed to indemnify MagneTek
for a two-year period following the sale of Universal for certain
contingent liabilities. MagneTek brought suit against the Company for
declaratory and other relief in connection with the indemnification under
the Stock Purchase Agreement. In April 1992, the Los Angeles County,
California Superior Court found that the Company was obligated by the
Stock Purchase Agreement to indemnify MagneTek for, among other things,
its costs and expenses in defending that case. The court entered a
judgment requiring the Company to reimburse and indemnify MagneTek in two
stages: currently, to reimburse MagneTek for costs of defense and related
expenses in the LMP Litigation, plus costs of litigating the indemnity
case with the Company; and at a later date, if and when any liability in
the LMP Litigation is finally determined or a settlement is reached in
that case, to reimburse and/or indemnify MagneTek for that amount as well.
In October 1994, following a retrial of the LMP Litigation, a jury
returned a verdict of approximately $96,000,000 against Universal. The
jury verdict included breach of contract and fraud damages and
approximately $6,000,000 in punitive damages. The Company is obligated to
indemnify Universal for damages incurred in this case.
6
<PAGE> 8
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
------------------------------------------------------------------
(UNAUDITED)
-----------
Management of the Company believes that the jury's decision is incorrect
and is contrary to the evidence. Based on discussions with counsel and on
other information currently available, management believes that the court
committed numerous errors during the trial and, accordingly, that the
judgment will not stand on appeal. The Company filed its opening brief in
the LMP appeal on September 27, 1995. The plaintiffs' responsive brief
was filed in March 1996. The Company filed its reply brief in June 1996.
The appeal is awaiting oral argument.
In March 1988, a class action suit entitled Endo, et al. v.
Albertine, et al. was filed in the United States District Court for the
Northern District of Illinois (the "District Court") against the Company,
its then directors, certain of its then executive officers, its then
underwriters and the Company's current independent auditors in connection
with the Company's initial public offering of Class A Common Stock and
certain debt securities in March 1987. The suit alleges, among other
things, violations of Federal and state securities laws against all of the
defendants, as well as breaches of fiduciary duties by the director and
officer defendants, and seeks unspecified damages.
Motions to dismiss the complaint were filed by all defendants. In
December 1990, a magistrate judge recommended that the District Court
dismiss all of the plaintiffs' claims with prejudice. In January 1993,
the District Court adopted in part and rejected in part the magistrate
judge's recommendation for dismissal of the complaint. As a result, the
litigation will continue as to various remaining counts of the complaint.
Both the defendants and the plaintiffs filed motions for summary judgment
which were denied in all material respects. Management and the Board of
Directors believe that this suit is without merit and intend to continue
to vigorously defend against this litigation.
Management believes, based on information currently available, that
the ultimate resolution of the aforementioned matters will not have
a material adverse effect on the financial condition or results of
operations of the Company, but the ultimate resolution of certain of these
matters, if unfavorable, could be material to the results of operations of
a particular future period.
In June 1994, pursuant to authorization from the Company's Board of
Directors, the Company guaranteed a loan from a bank in an amount up to
$12,000,000 to Mr. William Farley, the Company's Chairman of the Board and
Chief Executive Officer. In exchange for the guarantee the Company
receives an annual fee from Mr. Farley equal to 1% of the value of the
loan covered by the guarantee. The guarantee is secured by a second lien
on certain shares of the Company held by the bank for other loans made to
Mr. Farley.
7
<PAGE> 9
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
------------------------------------------------------------------
(UNAUDITED)
-----------
The Company has guaranteed, on an unsecured basis, the repayment of
certain debt incurred or created by Acme Boot Company, Inc. ("Acme Boot"),
formerly a wholly-owned subsidiary of the Company, under Acme Boot's bank
credit facilities (the "Acme Boot Credit Facilities"). Acme Boot is a
majority owned subsidiary of Farley Inc. ("FI"). Mr. Farley holds 100% of
the common stock of FI. At June 30, 1996, the Acme Boot Credit Facilities
provide for up to approximately $67,000,000 of loans and letters of
credit. The Acme Boot Credit Facilities are secured by liens on
substantially all of the assets of Acme Boot and its subsidiaries. At
June 30, 1996, approximately $65,800,000 in loans and letters of credit
were outstanding under the Acme Boot Credit Facilities.
Summarized unaudited financial information for Acme Boot follows (in
thousands of dollars):
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
-------- ------------
<S> <C> <C>
Current assets $ 49,800 $ 49,500
Noncurrent assets-net 8,200 9,000
-------- --------
$ 58,000 $ 58,500
======== ========
Current liabilities $ 76,600 $ 17,900
Noncurrent liabilities 11,500 65,300
Preferred stock 2,900 2,500
Common stockholders' deficit (33,000) (27,200)
-------- --------
$ 58,000 $ 58,500
======== ========
</TABLE>
8
<PAGE> 10
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
------------------------------------------------------------------
(UNAUDITED)
-----------
CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
1996 1995 1996 1995
------- -------- ------- -------
<S> <C> <C> <C> <C>
Net sales $19,200 $25,100 $41,900 $52,000
======= ======= ======= =======
Gross earnings $ 4,800 $ 5,300 $12,200 $11,700
======= ======= ======= =======
Operating loss $(3,000) $(2,900) $(4,100) $(5,100)
======= ======= ======= =======
Extraordinary gain on
early retirement of debt $ - $18,100 $ - $18,100
======= ======= ======= =======
Net earnings (loss) $(4,300) $13,400 $(5,400) $ 8,900
======= ======= ======= =======
</TABLE>
The Company has negotiated grants from the governments of the Republic
of Ireland, Northern Ireland and Germany. The grants are being used for
employee training, the acquisition of property and equipment and other
governmental business incentives such as general employment. At June 30,
1996, the Company has a contingent liability to repay, in whole or in
part, grants received of approximately $60,300,000 in the event that the
Company does not meet defined average employment levels or terminates
operations in the Republic of Ireland, Northern Ireland or Germany.
4. The effective income tax rate for the second quarter and first six
months of 1996 and 1995 differed from the Federal statutory rate of 35%
primarily due to the impact of goodwill amortization, a portion of which
is not deductible for Federal income tax purposes, state income taxes and,
in 1996, the impact of higher foreign earnings, certain of which are taxed
at lower rates than in the United States. In addition, the 1995 effective
income tax rate in both periods differed from the Federal statutory rate
due to the provision for interest related to prior years' taxes.
5. The condensed consolidated financial statements contained herein should
be read in conjunction with the consolidated financial statements and
related notes contained in the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
The information furnished herein reflects all adjustments (consisting only
of normal recurring adjustments) which are, in the opinion of management,
necessary to a fair statement of the results of the interim periods and is
not necessarily indicative of results for the entire year.
9
<PAGE> 11
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONCLUDED)
------------------------------------------------------------------
(UNAUDITED)
-----------
The Company uses the last-in, first-out ("LIFO") method of accounting for
the majority of inventories for financial reporting purposes. Interim
determinations of LIFO inventories are necessarily based on management's
estimates of year-end inventory levels and costs. Subsequent changes in
these estimates, including the final year-end LIFO determination, and the
effect of such changes on earnings are recorded in the interim periods in
which they occur.
10
<PAGE> 12
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Except for historical information contained herein, certain matters set forth
in this Quarterly Report on Form 10-Q are forward looking statements that
involve certain risks and uncertainties that could cause actual results to
differ materially from those in the forward looking statements. Potential
risks and uncertainties include such factors as the financial strength of the
retail industry (particularly the mass merchant channel), the level of consumer
spending for apparel, the amount of sales of the Company's activewear
screenprint products, the competitive pricing environment within the basic
apparel segment of the apparel industry, the continued ability of the Company
to successfully move labor-intensive segments of the manufacturing process
offshore and the success of planned advertising, marketing and promotional
campaigns. Investors are also directed to consider other risks and
uncertainties discussed in documents filed by the Company with the Securities
and Exchange Commission.
The following discussion should be read in conjunction with the accompanying
condensed consolidated financial statements for the period ended June 30, 1996
and the Company's Annual Report on Form 10-K for the year ended December 31,
1995.
The table below sets forth selected operating data (in millions of dollars and
as percentages of net sales) of the Company.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ --------------------
1996 1995 1996 1995
------- ------ ------ ------
<S> <C> <C> <C> <C>
Net sales $732.2 $724.8 $1,238.4 $1,253.0
Gross earnings $208.8 $211.0 $345.8 $373.0
Gross margin 28.5% 29.1% 27.9% 29.8%
Operating earnings $101.7 $102.6 $151.7 $162.3
Operating margin 13.9% 14.2% 12.2% 13.0%
</TABLE>
NET SALES
Net sales increased 1.0% in the second quarter, but decreased 1.2% in the first
six months of 1996 compared to the same periods of 1995. The increase in net
sales in the second quarter of 1996 compared to the same period in 1995 related
primarily to increased shipments of activewear products, which more than offset
price decreases on activewear tee shirts, decreased shipments of
11
<PAGE> 13
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (CONTINUED)
NET SALES - (CONCLUDED)
Gitano and casualwear products and promotional programs for the Company's
underwear products. The decrease in net sales for the first six months relates
primarily to price decreases on activewear tee shirts, decreased shipments of
Gitano products and promotional programs for the Company's underwear products,
the sum of which more than offset increased shipments of activewear products.
GROSS EARNINGS
Gross earnings decreased 1.0% and 7.3%, respectively, in the second quarter and
first six months of 1996 compared to the same periods of 1995. The gross
margins were 28.5% and 27.9% in the second quarter and first six months of 1996
compared to 29.1% and 29.8%, respectively, in the same periods of 1995. The
decrease in gross earnings and gross margin for both periods is primarily due
to the effect of: (a) lower domestic activewear tee shirt selling prices and
(b) the impact of irregulars. The decrease in gross earnings and gross margins
for both periods was partially offset by the effect of the Company's offshore
manufacturing operations which operate at lower costs than the Company's
domestic facilities. The decrease in gross earnings and gross margins in the
first six months of 1996 as compared to the same period of 1995 was also due to
the effect of normal cost increases and operating certain domestic
manufacturing facilities at less than optimal levels to better manage
inventory.
OPERATING EARNINGS
Operating earnings decreased .9% and 6.5%, respectively, in the second quarter
and the first six months of 1996 compared to the same periods of 1995.
Operating margins decreased .3 percentage points to 13.9% of net sales in the
second quarter, and .8 percentage points to 12.2% of net sales for the first
six months, of 1996. The decreases in both periods resulted from lower gross
earnings offset partially by lower amounts of goodwill amortization. In
addition, lower selling, general and administrative expenses helped offset the
decrease in gross earnings in the first six months of 1996 as compared to the
same period of 1995. Lower selling, general and administrative expenses
resulted principally from a reduction of personnel as a result of the Company's
1995 actions taken in an effort to substantially reduce the Company's cost
structure and streamline operations. Consolidations of shipping locations and
the Company's administrative offices and attendant staff reductions have
resulted in reduced shipping and
12
<PAGE> 14
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (CONTINUED)
OPERATING EARNINGS - (CONCLUDED)
general and administrative costs by approximately $10,000,000 (11.1%) in the
first six months of 1996 compared to the same period of 1995. In addition, the
first six months of 1995 included charges related to the curtailment of selling
and marketing activities in Mexico, and the second quarter and first six months
of 1995 included charges related to the closing of Gitano's New York office and
integration of all Gitano related management functions into the Company's
existing operations. These cost reductions were partially offset by increases
in both 1996 periods in advertising and management information systems expenses
as compared to the same periods of 1995. Selling, general and administrative
expense was 13.7% of net sales for both the second quarter of 1996 and 1995 and
was 14.6% of net sales in the first six months of 1996 compared to 15.3% of net
sales in the same period of 1995.
In addition, during 1995 the Company determined that the carrying value of the
intangible assets related to certain acquired businesses were not expected to
be recovered by their future undiscounted cash flows. Accordingly, impairment
write downs of goodwill in the fourth quarter of 1995 reflected the write-off
of all goodwill related to these certain acquired businesses. The effect of
this impairment write down was to reduce goodwill amortization expense in the
second quarter and first six months of 1996 by approximately $2,700,000 and
$5,400,000, respectively, compared to the same periods of 1995.
INTEREST EXPENSE
Interest expense for the second quarter and first six months of 1996 decreased
11.4% and 8.0%, respectively, from the same periods of 1995. The decrease was
principally attributable to the effect of lower average debt levels in both
periods of 1996. Lower average debt levels in both periods of 1996 were due
principally to the effect of lower working capital levels in both periods of
1996 as compared to the same periods of 1995, primarily lower inventories, the
effect of which is partially offset by higher accounts receivable. In
addition, the Company has significantly reduced its capital expenditures
between 1996 and 1995, thereby reducing its borrowing needs.
13
<PAGE> 15
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (CONTINUED)
INCOME TAXES
The effective income tax rate for the second quarter and first six months of
1996 and 1995 differed from the Federal statutory rate of 35% primarily due to
the impact of goodwill amortization, a portion of which is not deductible for
Federal income tax purposes, state income taxes and, in 1996, the impact of
higher foreign earnings, certain of which are taxed at lower rates than in the
United States. In addition, the 1995 effective income tax rate in both periods
differed from the Federal statutory rate due to the provision for interest
related to prior years' taxes.
EARNINGS PER SHARE
Earnings per share were $.63 for the second quarter of 1996 compared to $.52
for the same prior year period, a 21.2% increase. For the first six months of
1996, earnings per share before cumulative effect of change in accounting
principle increased 6.8% from the same period of 1995. Earnings per share
before cumulative effect of change in accounting principle were $.79 for the
first six months of 1996 compared to $.74 for the same period of 1995.
Included in the restated first six months of 1995 was a charge of $.07 per
share related to the Company's decision to adopt a more conservative position
as a result of changes in its business and to expense pre-operating costs as
incurred. Net earnings per share were $.79 for the first six months of 1996
compared to $.67 for the same prior year period.
EFFECTS OF INFLATION
Management believes that the moderate rate of inflation over the past few years
has not had a significant impact on the Company's sales or profitability.
LIQUIDITY AND CAPITAL RESOURCES
Funds generated from the Company's operations are the major source of liquidity
and are supplemented by funds obtained from capital markets including bank
facilities. The Company has available a $125,000,000 short-term revolving
commitment from a group of banks which expires in May 1997 to supplement its
existing revolving lines of credit. No borrowings are outstanding under this
facility.
14
<PAGE> 16
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES - (CONTINUED)
The Company has available for the funding of its operations approximately
$974,100,000 of revolving lines of credit. As of July 31, 1996, approximately
$380,000,000 was available and unused under these facilities.
Net cash used for operating activities in the six months ended June 30, 1996
and 1995 was $11,500,000 and $159,000,000, respectively. The primary
components of cash used for operating activities in the first six months of
1996 and 1995 were increases in working capital of $152,200,000 and
$300,400,000, respectively. The working capital increases in the first six
months of 1996 and 1995 were primarily driven by higher notes and accounts
receivable ($234,100,000 and $158,900,000, respectively) and, in 1995, higher
inventories ($154,300,000). The increases in accounts receivable in the first
six months of 1996 and 1995 reflect the seasonality of the Company's business
at its peak selling period. The increase in inventory in 1995 was the result
of higher raw material costs, an increase in heavier weight apparel carried in
inventory to meet increased consumer demand, the effect of the Company's
ongoing efforts to improve customer service and the effect of the sluggish
retail environment which led to lower than anticipated sales volumes. In 1996,
inventories were reduced by $24,300,000 from December 31, 1995. The decrease
is primarily due to the Company's efforts to reduce the number of product
offerings and better manage inventory levels.
Net cash used for investing activities in the six months ended June 30, 1996
and 1995 was $29,800,000 and $60,500,000, respectively. Capital expenditures
were $18,500,000 and $65,800,000 in the first six months of 1996 and 1995,
respectively. Capital spending, primarily to enhance distribution and finished
cloth manufacturing capabilities and to establish and support offshore assembly
operations, is anticipated to approximate $65,000,000 to $75,000,000 in 1996.
Net cash provided by financing activities in the six months ended June 30, 1996
and 1995 was $16,100,000 and $189,900,000, respectively, and consisted
principally of borrowings under the Company's bank facilities, partially offset
by principal payments on long-term debt and capital leases.
In September 1994, the Company entered into a five year operating lease
agreement, with two annual renewal options, primarily for certain machinery and
equipment. The total cost of the assets to be covered by the lease is limited
to $175,000,000. At June 30, 1996, approximately $27,400,000 was available
and unused under this facility. The lease provides for a substantial
15
<PAGE> 17
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - (CONCLUDED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (CONCLUDED)
LIQUIDITY AND CAPITAL RESOURCES - (CONCLUDED)
residual value guarantee by the Company at the termination of the lease and
includes purchase and renewal options at fair market values.
Management believes the funding available to the Company is sufficient to meet
anticipated requirements for capital expenditures, working capital and other
needs.
The Company's debt instruments, principally its bank agreements, contain
covenants restricting the Company's ability to sell assets, incur debt,
pay dividends and make investments and require the Company to maintain
certain financial ratios.
16
<PAGE> 18
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Internal Revenue Service (the "IRS") declined to seek United States Supreme
Court review of a decision by the United States Court of Appeals for the Third
Circuit which reversed a lower court ruling and directed the lower court to
order a refund to the Company of approximately $10,500,000 in Federal income
taxes collected from a predecessor of the Company, plus approximately
$49,400,000 in interest thereon applicable to the tax years 1964-1968. The
Company received the full refund of approximately $60,000,000 in March 1992.
However, in September 1992 the IRS issued a statutory notice of deficiency in
the amount of approximately $7,300,000 for the taxable years from which the
March 1992 refund arose, exclusive of interest which would accrue from the date
the IRS asserted the tax was due until payment, presently a period of about 29
years. In October 1994, the United States Tax Court ruled in favor of the
Company in the above case. On January 5, 1996, the United States Court of
Appeals for the Seventh Circuit affirmed the decision of the United States Tax
Court. The IRS had a period of 90 days from the date of the decision to
petition for a review by the United States Supreme Court. The IRS did not
petition for a review and, accordingly, the case is now closed.
On December 23, 1993, James J. Locke, as Trustee of Locke Family Trust, and I.
Jack Saline filed a lawsuit against the Company and certain of its then
officers and directors in the District Court. The lawsuit was then amended to
add additional plaintiffs. On April 19, 1994, the District Court granted
plaintiffs' motion for class certification. The plaintiffs claim that all of
the defendants engaged in conduct violating Section 10b of the Securities
Exchange Act of 1934 (the "Act") and that certain of its then officers and
directors also violated Section 20a of the Act. According to the plaintiffs,
beginning before June 1992 and continuing through early June 1993, the Company,
with the knowledge and assistance of the individual defendants, issued positive
public statements about its expected sales increases and growth through 1993
and afterwards. They also allege that beginning in approximately mid-1992 and
continuing afterwards, the Company's business was not as strong and its growth
prospects were not as certain as represented. The plaintiffs further allege
that during the end of 1992 and beginning of 1993, certain of the individual
defendants traded the stock of the Company while in the possession of material,
non-public information.
On May 8, 1996, the parties preliminarily agreed to settle the case. The
parties have executed an agreement in principle pursuant to which plaintiffs
have agreed to drop their claims against the defendants and defendants'
insurers have agreed to pay into an escrow account, for the benefit of
plaintiffs, the sum of $7,250,000. Prior to the distribution of any settlement
funds to plaintiffs, class counsel will deduct its fees from the fund in an
amount approved by the District Court.
17
<PAGE> 19
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION - (CONTINUED)
ITEM 1. LEGAL PROCEEDINGS - (CONCLUDED)
On August 19, 1996, the parties will submit for the District Court's approval a
more extensive settlement agreement which will supersede the agreement in
principle and control all issues relating to the settlement. Once the District
Court approves the settlement agreement, and notices are sent to members of the
class, the District Court will be asked to enter a final judgment order
dismissing with prejudice all of the plaintiffs' claims against the defendants.
18
<PAGE> 20
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION - (CONCLUDED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS
4(a)* $800,000,000 Credit Agreement dated as of August 16, 1993, among
the several banks and other financial institutions from time to time
parties thereto (the "Lenders"), Bankers Trust Company, a New York banking
corporation, as administrative agent for the Lenders thereunder, Chemical
Bank, NationsBank, N.A. (Carolinas), The Bank of New York and the Bank of
Nova Scotia, as co-agents (incorporated herein by reference to Exhibit 4.3
to the Company's Registration Statement on Form S-3, Reg. No. 33-50567
(the "1993 S-3")).
4(b)* Subsidiary Guarantee Agreement dated as of August 16, 1993 by each
of the guarantors signatory thereto in favor of the beneficiaries referred
to therein (incorporated herein by reference to Exhibit 4.4 to the 1993
S-3).
4(c)* Rights Agreement, dated as of March 8, 1996 between Fruit of the
Loom, Inc. and Chemical Mellon Shareholder Services, L.L.C., Rights Agent
(incorporated herein by reference to Exhibit 4(c) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995).
27 Financial Data Schedule.
- -------------------------------
* Document is available at the Public Reference Section of the Securities and
Exchange Commission, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D. C.
20549 (Commission file No. 1-8941).
The Registrant has not listed nor filed as an Exhibit to this Quarterly Report
certain instruments with respect to long-term debt representing indebtedness of
the Registrant and its subsidiaries which do not individually exceed 10% of the
total assets of the Registrant and its subsidiaries on a consolidated basis.
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, the Registrant agrees to
furnish such instruments to the Securities and Exchange Commission upon
request.
b. REPORTS ON FORM 8-K
No report on form 8-K was filed by the Registrant during the quarter ended June
30, 1996.
19
<PAGE> 21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FRUIT OF THE LOOM, INC.
-------------------------------
(Registrant)
Date: August 13, 1996 LARRY K. SWITZER
-------------------------------
Larry K. Switzer
Senior Executive Vice President
and Chief Financial Officer
(Principal Financial Officer
and duly authorized to sign
on behalf of Registrant)
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's quarterly report on Form 10-Q and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,300
<SECURITIES> 0
<RECEIVABLES> 523,000
<ALLOWANCES> 27,900
<INVENTORY> 675,200
<CURRENT-ASSETS> 1,213,900
<PP&E> 1,620,500
<DEPRECIATION> 634,900
<TOTAL-ASSETS> 3,022,800
<CURRENT-LIABILITIES> 338,100
<BONDS> 1,438,800
<COMMON> 475,200
0
0
<OTHER-SE> 485,500
<TOTAL-LIABILITY-AND-EQUITY> 3,022,800
<SALES> 1,238,400
<TOTAL-REVENUES> 1,238,400
<CGS> 892,600
<TOTAL-COSTS> 892,600
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 54,400
<INCOME-PRETAX> 94,400
<INCOME-TAX> 34,100
<INCOME-CONTINUING> 60,300
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 60,300
<EPS-PRIMARY> .79
<EPS-DILUTED> .79
</TABLE>
