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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-8941
FRUIT OF THE LOOM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 36-3361804
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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5000 SEARS TOWER,
233 SOUTH WACKER DRIVE,
CHICAGO, ILLINOIS 60606
(Address of principal executive offices, including Zip Code)
Registrant's telephone number, including area code: (312) 876-1724
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Class A Common Stock, $.01 par value New York Stock Exchange
7% Debentures Due 2011 American Stock Exchange
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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 the Registrant's knowledge, in definitive proxy statements incorporated
by reference in Part III of this Form 10-K or any amendment to this Form
10-K. / /
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
As of March 13, 1996, there were outstanding 69,275,957 shares of the
Registrant's Class A Common Stock, par value $.01 per share, and 6,690,976
shares of the Registrant's Class B Common Stock, par value $.01 per share. The
aggregate market value of the Registrant's Class A Common Stock held by
nonaffiliates at March 13, 1996 was approximately $1,721,000,000.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates by reference information from the proxy statement for
the Annual Meeting of Stockholders to be held on May 14, 1996.
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FRUIT OF THE LOOM, INC.
1995 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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PAGE
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PART I
Item 1. Business.................................................................... 1
Item 2. Properties.................................................................. 6
Item 3. Legal Proceedings........................................................... 6
Item 4. Submission of Matters to a Vote of Security Holders (None).................. 8
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....... 9
Item 6. Selected Financial Data..................................................... 10
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................. 11
Item 8. Financial Statements and Supplementary Data................................. 16
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure (None)........................................................... 44
PART III
Item 10. Directors and Executive Officers of the Registrant.......................... 44
Item 11. Executive Compensation...................................................... 45
Item 12. Security Ownership of Certain Beneficial Owners and Management.............. 45
Item 13. Certain Relationships and Related Transactions.............................. 45
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K.............. 48
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PART I
ITEM 1. BUSINESS
Fruit of the Loom, Inc. ("Fruit of the Loom" or the "Company") is a
vertically integrated international basic apparel company, emphasizing branded
products for consumers ranging from infants to senior citizens. It is one of the
largest domestic producers of underwear and of activewear for the imprinted
market, selling products principally under the FRUIT OF THE LOOM(R), BVD(R),
SCREEN STARS(R), BEST(TM), MUNSINGWEAR(R), WILSON(R), BOTANY 500(R) and JOHN
HENRY(R) brand names. Fruit of the Loom also manufactures and markets sports
licensed apparel bearing the names, tradenames and logos of the National
Football League, the National Basketball Association, Major League Baseball and
the National Hockey League, professional sports teams and most major colleges
and universities, as well as the likenesses of certain popular professional
athletes under the PRO PLAYER(R) and OFFICIAL FAN(R) brands. The Company
manufactures and markets men's and boys' basic and fashion underwear, activewear
for the imprint market, casualwear, jeanswear using the GITANO(R) brand name,
licensed sports apparel, women's and girls' underwear, infants' and toddlers'
apparel and family socks.
The Company is a fully integrated manufacturer, performing most of its own
spinning, knitting, cloth finishing, cutting, sewing and packaging. Management
believes that the Company is a low cost producer in the markets it serves.
Management considers the Company's primary strengths to be its excellent brand
recognition, low cost production, strong relationships with mass merchandisers
and discount chains and its ability to effectively service its customer base.
Management believes that consumer awareness of the value and excellent quality
at competitive prices of FRUIT OF THE LOOM brand products will benefit the
Company in the current retail environment where consumers are more value
conscious.
During 1995 the Company took several actions in an effort to substantially
reduce the Company's cost structure, streamline operations and further improve
customer service. These actions included the closing of certain domestic
manufacturing operations, further consolidation of the Company's Gitano and
licensed sportswear operations, the curtailment of selling and marketing
activities in Mexico and the accelerated migration of some manufacturing cut and
sew operations to lower cost, offshore locations. In addition, the Company
reviewed the operations of Salem Sportswear Corporation ("Salem") and Gitano
Fashions Limited ("Gitano") and decided to discontinue the use of the SALEM(R)
brand and redeployed the other tangible assets relating to the Salem business to
other brands within the Company's licensed sports apparel operations. The
Company also implemented a plan to restructure the Gitano business and to
improve Gitano's profitability. See "ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and "SPECIAL CHARGES"
in the Notes to Consolidated Financial Statements.
During the last five calendar years, the Company has been one of the market
leaders in men's and boys' underwear, with an annual market share ranging from
approximately 35% to 40%. In 1995, the Company's share in the men's and boys'
underwear market was approximately 35%, roughly equal to the market share of its
principal competitor.
The Company offers a broad array of men's and boys' underwear, including:
briefs, boxer shorts, T-shirts and A-shirts, colored and "high fashion" (as well
as RIBBED WHITES(TM)) underwear. It sells all-cotton and cotton-blend underwear
under its FRUIT OF THE LOOM and BVD brand names. Products sold under the BVD
brand name are priced higher than those sold under the FRUIT OF THE LOOM brand
name and are generally designed to appeal to a more premium market. Under
licensing arrangements, the Company manufactures and markets men's and boys'
underwear bearing the MUNSINGWEAR, KANGAROO(R), BOTANY 500 and JOHN HENRY
trademarks as well as certain activewear bearing the MUNSINGWEAR and BOTANY 500
trademarks in the United States and certain foreign markets.
Management believes the Company is the largest of the domestic activewear
manufacturers that supply screen printers and that it has a market share of
approximately 35% of the screen print T-shirt market. The Company produces and
sells blank T-shirts and fleecewear under the SCREEN STARS brand name and
premium fleecewear and T-shirts under the FRUIT OF THE LOOM, LOFTEEZ(TM) and
BEST(TM) BY FRUIT
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ITEM 1. BUSINESS -- (CONTINUED)
OF THE LOOM labels. These products are manufactured in a variety of styles and
colors and are sold to distributors, screen printers and specialty retailers,
who generally apply a decoration prior to sale at retail. Product quality,
delivery responsiveness and price are important factors in the sale of
activewear. Management believes that the Company's recent capacity additions,
improved distribution capabilities and its low cost position afford it a
competitive advantage in this market.
The Company markets casualwear under the FRUIT OF THE LOOM, BVD and
MUNSINGWEAR brands. The Company markets a selection of basic styles of jersey
and fleece tops, shorts and bottoms to mass merchandisers. There are separate
Spring and Fall lines with updated color selections for each of the men's,
women's, boys' and girls' categories. A national marketing program includes
national advertising and local cooperative advertising, promotions and in-store
merchandising. The casualwear market is fragmented and has no dominant brands.
In March 1994, the Company purchased certain assets of Gitano, including
GITANO and other trademarks. Gitano designs, manufactures (including contract
manufacturing) and markets women's and men's jeanswear and jeans related
sportswear. In addition to its core apparel products, Gitano licenses the
production and sale of a variety of accessories and other products bearing the
GITANO trademark. In 1995, the Company closed the Gitano New York office and
consolidated all Gitano related management functions into the Company's existing
operations.
The Company entered the imprinted licensed sportswear business through its
acquisitions of Salem, Artex Manufacturing Co. Inc. ("Artex") and Pro Player,
Inc. ("Pro Player"), which were acquired in November 1993, January 1994 and
August 1994, respectively. The Company designs, manufactures and markets sports
apparel under licenses granted by major American sports leagues, professional
players and many American colleges and universities. The Company sells a wide
variety of quality sportswear, including T-shirts, sweatshirts, shorts and
outerwear under the OFFICIAL FAN and PRO PLAYER brands. The Company manufactures
and markets a wide variety of decorated sportswear to retail stores, college
book stores and mass merchants. The Company is currently one of only three
companies using the "dual" license concept of combining licensed cartoon
characters with the logos of major professional sports leagues. The Company has
licenses from all the major professional sports leagues as well as from Warner
Bros. for LOONEY TUNES(R). Under its PRO PLAYER brand, the Company designs and
markets heavy jackets, light jackets, headwear and other outerwear bearing the
logos or insignia of professional and college teams and leagues. In addition,
the Company (under license agreements) manufactures and markets sportswear
featuring the well known WILSON trademark. In late December 1994, the Company
announced the closing of substantially all of the operating locations of Artex
and the consolidation of these operations into existing Company facilities. In
1995, certain of the Salem operating locations were consolidated into existing
Company facilities.
The Company produces women's and girls' underwear under the FRUIT OF THE
LOOM brand name. The Company introduced its women's and girls' lines in 1984
using the branded, packaged product strategy that it had successfully employed
in the men's and boys' market. In 1994, the Company introduced a new panty
program with all new product, new fit, new construction and redesigned
packaging. The Company's products are packaged, typically three to a pack,
making them convenient for the merchant to handle and display. During the last
five calendar years, in the fragmented women's and girls' underwear market, the
Company was one of the branded market leaders with a market share ranging from
approximately 13% to 17%. In 1995, the Company's share in the women's and girls'
underwear market was approximately 16% compared to a market share of 27% for the
largest competing brand. No other competitor had more than a 4% market share in
1995.
The Company has granted a license to Warnaco Inc. for the manufacture and
sale of bras, slips, camisoles and other products under the FRUIT OF THE LOOM
brand name in North America. The Company also licenses the use of the FRUIT OF
THE LOOM brand name to a manufacturer of sheer hosiery.
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ITEM 1. BUSINESS -- (CONTINUED)
The Company offers a broad array of childrenswear including decorated
underwear (generally with pictures of licensed movie or cartoon characters)
under the FUNPALS(R) and FUNGALS(R) brand names and layette sets under the FRUIT
OF THE LOOM brand and the WINNIE THE POOH(TM) license which includes both
packaged and hanging sets.
The Company produces cotton socks for men, women, boys and girls under the
FRUIT OF THE LOOM brand. These products are manufactured in a variety of styles
and colors including tube, crew and anklets. The Company entered the basic
family sock market in mid-1986 through acquisitions and management believes the
Company is now one of the two largest domestic manufacturers and that no
manufacturer has more than an 11% market share.
MARKETING AND DISTRIBUTION
The Company sells its products to over 22,000 accounts, including all major
discount and mass merchandisers, wholesale clubs and screen printers. The
Company also sells to many department, specialty, drug and variety stores,
national chains, supermarkets and sports specialty stores. The Company's
products are principally sold by a nationally organized direct sales force of
full-time employees. Certain of the Company's imprinted sportswear products are
sold through independent sales representatives. The Company's products are
shipped from 15 primary distribution centers.
Management believes that one of the Company's primary strengths is its
excellent relationships with mass merchandisers and discount chains. These
retailers accounted for approximately 66% of the men's and boys' underwear and
approximately 62% of the women's and girls' underwear sold in the United States
in 1995, up from approximately 59% and 54%, respectively, in 1991. The Company
supplied approximately 45% of the men's and boys' underwear and approximately
23% of the women's and girls' underwear sold by discount and mass merchandisers
in the United States in 1995. During the last several years many of the
Company's principal customers have revamped their inventory and distribution
systems requiring their suppliers to offer more flexible product deliveries. In
response to these demands, the Company has invested heavily in warehousing and
distribution facilities.
Sales to one customer amounted to approximately 19.5%, 15.6% and 13.4% of
consolidated net sales in 1995, 1994 and 1993, respectively. Additionally, sales
to a second customer amounted to approximately 10.8%, 11.8% and 12.3% of
consolidated net sales in 1995, 1994 and 1993, respectively. Management does not
believe the loss of any one customer would adversely affect its business as a
large percentage of these sales would shift to other outlets due to the high
degree of brand awareness of and consumer loyalty to the Company's products. The
Company's business is seasonal to the extent that approximately 56% of annual
sales occur in the second and third quarters. Sales are generally the lowest in
the first quarter.
INTERNATIONAL OPERATIONS
The Company primarily sells activewear through its foreign operations,
principally in the United Kingdom, continental Europe, Canada, Japan and Mexico.
The Company's approach has generally been to establish production in the
Company's larger foreign markets by both acquiring existing manufacturing
facilities and building new plants in order to decrease the impact of foreign
currency fluctuations on international sales and to better serve these markets.
The Company has established manufacturing plants in Canada, the Republic of
Ireland and Northern Ireland (United Kingdom) as a means of accomplishing these
objectives. In addition, the Company has established manufacturing operations in
Mexico, Honduras, El Salvador and Jamaica to assemble fabrics which have been
manufactured and cut in the Company's United States' operations, as well as
externally sourced fabric, into finished goods for sale principally in the
United States. The Company has established manufacturing operations in Morocco
where cut fabrics from the Republic of Ireland are sewn and returned to Europe
for sale.
Operations outside the United States are subject to risks inherent in
operating under different legal systems and various political and economic
environments. Among the risks are changes in existing tax laws, possible
limitations on foreign investment and income repatriation, government price or
foreign exchange controls and restrictions on currency exchange. At the
present time, existing limitations, controls and restrictions have not
significantly affected the Company.
Since 1991, the Company's international sales have more than doubled. Sales
from international operations during 1995 were $362,800,000 and were principally
generated from products manufactured at the
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ITEM 1. BUSINESS -- (CONTINUED)
Company's foreign facilities. These international sales accounted for
approximately 15.1% of the Company's net sales in 1995. Management believes
international sales will continue to be a source of growth for the Company,
particularly in Europe. This growth will depend on continued demand for the
Company's products in diverse international marketplaces. See "BUSINESS SEGMENT
AND MAJOR CUSTOMER INFORMATION" in the Notes to Consolidated Financial
Statements.
MANUFACTURING
Principal manufacturing operations consist of spinning, knitting, cloth
finishing, cutting, sewing and packaging. In addition, licensed sportswear
products are generally produced by applying decorative images, most often by
screen printing or embroidery, to blank garments. The Company knits yarn into
fabric using a multiple-knitting technique that produces long tubes of fabric
corresponding in weight and diameter to various sizes and styles required to
make underwear and activewear. Substantially all of the Company's products are
either bleached to remove the ecru color of natural cotton or dyed for colored
products. To achieve certain colors, the fabric must be dyed.
Computer controlled die cutting is used in all areas where management
believes it is more efficient. Fabric is distributed to employees operating
individual sewing machines. To increase efficiency, each employee specializes in
a particular function, such as sewing waistbands on briefs. Quality checkpoints
occur at many intervals in the manufacturing process, and each garment is
inspected prior to packaging. Where appropriate, the Company uses contract
manufacturing to further minimize its costs. Such contract manufacturing
accounted for less than 5% of the Company's total production in 1995.
As part of the closure of the Gitano New York office, responsibility for
denim manufacturing was transferred to existing Company manufacturing
operations. Denim fabric, which has been purchased from numerous sources in the
past and sewn in the Company's Jamaica facility, will now be produced in the
Company's own facilities. Existing yarn spinning operations will produce yarn
for denim. The Company has added new equipment for dyeing, slashing, weaving and
washing which will make the production of jeans totally vertical. The new
operations will give the Company the flexibility to produce a variety of fabric
weights in the desired colors and shades as required by the retail market.
Management believes that the vertical nature of the jeans manufacturing process
will give it a competitive cost advantage versus other major jeans manufacturers
which are not vertically integrated to this extent.
COMPETITION
All of the Company's markets are highly competitive. Competition in the
underwear and activewear markets is generally based upon quality, price and
delivery. The Company's vertically integrated manufacturing structure,
supplemented with offshore sewing of fabrics supplied by the Company's domestic
knitting operations, allows it to produce high quality products at costs which
management believes are among the lowest in the industry. The Company has
recently invested additional capital in warehousing and distribution facilities
to service its customer base effectively. In response to market conditions, the
Company, from time to time, reviews and adjusts its product offerings and
pricing structure.
LICENSING AND TRADEMARKS
The Company owns the FRUIT OF THE LOOM, BVD, SCREEN STARS, BEST, LOFTEEZ
and certain other trademarks, which are registered or protected by common law in
the United States and in many foreign countries. These trademarks are used on
men's, women's and children's underwear and activewear marketed by the Company.
The Company owns the GITANO trademark which is registered in the United States
and in many foreign countries for use principally in connection with women's
jeanswear, sportswear and certain other apparel and accessory items.
The Company licenses properties from different companies for its decorated
underwear products. Among the characters licensed are: BATMAN(TM), BATMAN
FOREVER(TM), LOONEY TUNES, SONIC THE
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ITEM 1. BUSINESS -- (CONTINUED)
HEDGEHOG(TM), MIGHTY MORPHIN POWER RANGERS(TM), LAMB CHOP(R), VR TROOPERS(TM),
SKELETON WARRIORS(TM), PEANUTS(TM), POCAHONTAS(TM) and WINNIE THE POOH. The
Company also has a license to use the MUNSINGWEAR, KANGAROO, BOTANY 500 and JOHN
HENRY trademarks on its men's and boys' underwear and certain activewear. The
Company has a license to use the WILSON brand on its sweatshirts and sweatpants,
T-shirts, shorts and other athletic activewear.
In addition, the Company owns the OFFICIAL FAN and PRO PLAYER trademarks
for its licensed sportswear business. The Company licenses properties, including
team insignia, images of professional athletes and college logos, from the
National Football League, the National Basketball Association, Major League
Baseball, the National Hockey League, professional players' associations and
certain individual players and many American colleges and universities. These
owned and licensed trademarks are used on sports apparel, principally T-shirts,
shorts, sweatshirts and jerseys, marketed by the Company. The Company also
licenses properties from Warner Bros. for LOONEY TUNES for use in a dual license
concept combining cartoon characters with major professional sports leagues.
In 1994, the Company entered into a licensing agreement with the Walt
Disney Company whereby the Company's European subsidiary offered for sale a
variety of casualwear apparel products bearing the world famous DISNEY(R)
characters in Europe, Eastern Europe and the Middle East. Collections offered
included T-shirts, sweatshirts, sweatpants, shorts, shirts, turtlenecks, polos
and leggings as well as a number of denim products. The Company terminated this
license agreement in 1995.
IMPORTS
Management believes that many domestic apparel manufacturers continue to
move sewing operations offshore to lower costs and compete with enhanced import
competition that is resulting from the Uruguay Round of the General Agreement on
Tariffs and Trade agreement. To maintain the Company's position as a low cost
manufacturer, the Company is increasing the percentage of garments sewn in the
Caribbean and Central America and returned to the United States under Section
9802 of the tariff schedule. The Company also has assembly operations in Mexico.
The Company believes that its domestic yarn spinning, knitting, bleaching and
dyeing operations continue to provide it with a competitive advantage. Thus, the
Company's strategy is to combine low cost textile manufacturing in the United
States with a mix of sewing in the United States and offshore so that the
Company can continue to offer value to its customers.
Imports from the Caribbean, Central America and Mexico likely will continue
to rise more rapidly than imports from other parts of the world. This is because
Section 9802 (previously Section 807) grants preferential quotas when United
States made and cut fabrics are used, as customs duty is paid only on the value
added outside the United States. United States apparel and textile
manufacturers, including the Company, will continue to use Section 9802 to
compete with direct imports.
Direct imports accounted for approximately 23% of the United States men's
and boys' underwear market (66% if Section 9802 imports are included) in 1995
and about 37% (90% including Section 9802 imports) of the women's and girls'
underwear market. With regard to activewear and cotton socks, imports accounted
for approximately 46% and 2% of these respective markets in 1994, the latest
period for which data is available.
Consequently, management does not believe that direct imports presently
pose a significant threat to its business. United States tariffs and quotas
established under the international agreement known as the Multifiber
Arrangement ("MFA") limit the growth of imports from certain low-wage foreign
suppliers such as China, India and Pakistan, thus limiting the price pressure on
domestic manufacturers resulting from imports from these countries. However,
import competition will continue to increase and accelerate as MFA quotas are
phased out. Quotas will be completely eliminated on January 1, 2005.
EMPLOYEES
The Company employs approximately 33,300 persons. Approximately 5,900
employees, principally international, are covered by collective bargaining
agreements.
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ITEM 1. BUSINESS -- (CONCLUDED)
MISCELLANEOUS
MATERIALS AND SUPPLIES. Materials and supplies used by the Company are
available in adequate quantities. The primary raw materials used in the
manufacturing processes are cotton and polyester which are subject to the price
volatility of the commodity markets. The Company periodically enters into
futures contracts and call options as hedges for its purchases of cotton for
inventory as a means of fixing its cotton costs. As of December 31, 1995 the
Company has entered into contracts which cover a significant portion of its
estimated cotton usage for 1996 and 1997.
OTHER. The Company was incorporated under the laws of the state of Delaware
in 1985. The principal executive offices of the Company are located at 233 South
Wacker Drive, 5000 Sears Tower, Chicago, Illinois 60606, telephone (312)
876-1724. As used in this Annual Report on Form 10-K, the term "the Company"
refers to Fruit of the Loom, Inc. and its subsidiaries, together with its
predecessor, Northwest Industries, Inc. ("Northwest"), unless otherwise stated
or indicated by the context. Market share data contained herein are for domestic
markets and are based upon information supplied to the Company by the National
Purchase Diary, which management believes to be reliable.
ITEM 2. PROPERTIES
In 1995, as part of the Company's review of manufacturing capacity and
utilization, the Company commenced a plan which included the closure of certain
domestic manufacturing facilities and the acceleration of offshore manufacturing
capabilities. These actions were part of the Company's continuing effort to
improve its manufacturing cost structure. See "ITEM 1. BUSINESS" and "ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" for further discussion of the plan.
The Company's remaining properties and facilities aggregate approximately
18,782,000 square feet of usable space, of which approximately 6,856,000 square
feet of facilities are under leases expiring through 2017. Management believes
that the Company's remaining facilities and equipment are in good condition and
that the Company's remaining properties, facilities and equipment are adequate
for its current operations. Capital spending, primarily to enhance distribution
and yarn manufacturing capabilities and to establish and support offshore
assembly operations, is expected to approximate $75,000,000 in 1996. Management
believes that these actions, together with planned capital expenditures, will
allow the Company to accommodate current and anticipated sales growth and remain
a low cost producer in the next several years.
Set forth below is a summary of the principal facilities owned or leased by
the Company:
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SQUARE FEET
NO. OF ----------------------
PRIMARY USE LOCATIONS OWNED LEASED
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Manufacturing.................................. 52 6,860,000 3,539,000
Warehouse and distribution..................... 35 4,898,000 3,001,000
Sales and administration....................... 26 168,000 316,000
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See "LEASE COMMITMENTS" and "PROPERTY, PLANT AND EQUIPMENT" in the Notes to
Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
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 December 31, 1995
related to discontinued operations consist primarily of certain environmental
and product liability reserves of approximately $85,800,000. The Company has
recorded receivables related to these liabilities of approximately $39,100,000
which, management believes, will be
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ITEM 3. LEGAL PROCEEDINGS -- (CONTINUED)
recovered from insurance and other sources. Management and outside environmental
consultants evaluate, on a site-by-site or a claim-by-claim basis, the extent of
environmental damage, the type of remediation that will be required and the
Company's proportionate share of those costs as well as the Company's liability
in each case. The Company's retained liability reserves related to discontinued
operations principally pertain to 11 specifically identified environmental sites
and the aforementioned product liabilities. Four sites and the total product
liabilities individually represent more than 10% of the net reserve and, in the
aggregate, represent approximately 95% of the net reserve. Management believes
it has adequately estimated the impact of remediating identified sites, the
expected contribution from other potentially responsible parties and recurring
costs for managing sites as well as the ultimate resolution of the product
liability claims. Management currently estimates actual payments before
recoveries to range from approximately $5,600,000 to $28,300,000 annually
between 1996 and 1999 and $19,300,000 in total subsequent to 1999. Only the
long-term monitoring costs of approximately $11,300,000, primarily scheduled to
be paid in 2000 and beyond, have been discounted. The discount rate used was
10%. The undiscounted aggregate long-term monitoring costs, to be paid over
approximately the next 20 years, is approximately $28,200,000. Management
believes that adequate reserves have been established to cover potential claims
based on facts currently available and current Superfund Legislation. The
Company has provided the foregoing information in accordance with Staff
Accounting Bulletin 92.
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 United States
Environmental Protection Agency (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 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 Northwest by L.M.P. 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 totalling $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. 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.
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.
7
<PAGE> 10
ITEM 3. LEGAL PROCEEDINGS -- (CONCLUDED)
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. On January 29, 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.
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, including William Farley and John B. Holland, 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, as amended
(the "Act"), and that Mr. Farley and Mr. Holland 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. The
plaintiffs ask for unspecified amounts as compensatory damages, pre-judgment and
post-judgment interest, attorneys' fees, expert witness fees and costs and ask
the District Court to impose a constructive trust on the proceeds of the
individual defendants' trades to satisfy any potential judgment. Management
believes that this suit is without merit and management and the Company intend
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 March 1992, the Company received a refund of approximately $60,000,000
relating to Federal income taxes paid by Northwest plus interest thereon
applicable to the tax years 1964-1968. However, in September 1992, the Internal
Revenue Service (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 have accrued from the date
the IRS asserted the tax was due until payment, presently a period of about 28
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 has a period of 90 days from the date of the decision to petition for review
by the United States Supreme Court. The Company believes, based on information
currently available, that the IRS position is without merit and that the Company
will prevail should the IRS appeal and the United States Supreme Court decide to
hear the case.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
8
<PAGE> 11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
William Farley, an executive officer and director of the Company, holds
100% of the common stock of Farley Inc. ("FI"). William Farley and FI together
own all of the Class B Common Stock of the Company outstanding. See
"CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS' EQUITY" in the Notes to
Consolidated Financial Statements. William Farley also owns 318,000 shares of
the Class A Common Stock of the Company. As of March 13, 1996, there were 2,188
registered holders of record of the Class A Common Stock of the Company.
COMMON STOCK PRICES AND DIVIDENDS PAID
The Company's Class A Common Stock is listed on the New York Stock
Exchange. The following table sets forth the high and low market prices of the
Class A Common Stock for 1995 and 1994:
<TABLE>
<CAPTION>
MARKET PRICES
----------------------------
1995 1994
------------ ------------
HIGH LOW HIGH LOW
---- ---- ---- ----
<S> <C> <C> <C> <C>
1st Quarter....................................... $27 1/8 $23 1/8 $31 5/8 $23
2nd Quarter....................................... 27 3/4 19 7/8 33 25 3/4
3rd Quarter....................................... 24 7/8 20 3/8 27 1/2 23 1/4
4th Quarter....................................... 25 1/8 16 1/2 29 7/8 24 5/8
</TABLE>
No dividends were declared on the Company's common stock issues during 1995
or 1994. The Company does not currently anticipate paying any dividends in 1996.
For restrictions on the present or future ability to pay dividends, see
"LONG-TERM DEBT" in the Notes to Consolidated Financial Statements.
9
<PAGE> 12
ITEM 6. SELECTED FINANCIAL DATA
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
OPERATIONS STATEMENT DATA(1):
Net sales.................................... $2,403.1 $2,297.8 $1,884.4 $1,855.1 $1,628.1
Gross earnings............................... 517.4(2) 646.5 647.4 660.3 525.6
Operating earnings (loss).................... (108.1)(3) 235.0(5) 381.5 409.9 319.3
Interest expense............................. 116.9 95.4 72.7 82.1 114.9
Earnings (loss) before income tax (benefit)
expense, extraordinary items and cumulative
effect of change in accounting
principles................................. (246.7)(3)(4) 133.5 367.1 319.9 201.0
Earnings (loss) before extraordinary items
and cumulative effect of change in
accounting principles...................... (227.3)(3)(4) 60.3 212.8(6) 188.5 111.0(7)
Earnings (loss) per common share before
extraordinary items and cumulative effect
of change in accounting principles:
Primary.................................... (2.99) .79 2.80(6) 2.48 1.60(7)
Fully diluted.............................. (2.99) .79 2.80(6) 2.48 1.55(7)
Average common shares outstanding:
Primary.................................... 76.0 76.0 76.0 76.0 69.4(8)(9)
Fully diluted.............................. 76.0 76.0 76.0 76.0 72.8(8)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets........................................ $2,919.5 $3,163.5 $2,734.0 $2,281.9 $2,114.9
Long-term debt...................................... 1,427.2 1,440.2 1,194.0 756.3 811.2
Deferred and noncurrent income taxes................ -- 43.4 51.0 49.1 167.4
Other noncurrent liabilities........................ 292.9 222.3 191.5 187.9 77.3
Common stockholders' equity......................... 895.6 1,125.8 1,047.0 855.0 688.7
</TABLE>
- -------------------------
(1) This information should be read in conjunction with "ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS"
and the Financial Statements and Supplementary Data.
(2) Includes pretax charges of $146.7 related to costs associated with the
closing or disposal of a number of domestic manufacturing facilities and
attendant personnel reductions and charges related to inventory writedowns
and valuations and foreign operations.
(3) Includes pretax charges of approximately $158.5 related principally to the
write-off of Salem and Gitano goodwill and $193.7 related to costs
associated with the closing or disposal of a number of domestic
manufacturing facilities and attendant personnel reductions and charges
related to inventory writedowns and valuations and foreign operations.
(4) Includes pretax charges of approximately $20.7 related to certain
obligations and other matters related to former subsidiaries and certain
fees related to the modification of certain agreements.
(5) Includes pretax charges of approximately $40 to write inventories down to
net realizable value and a pretax charge of $18 related to the write-off of
Artex intangibles.
(6) Includes a pretax gain of $67.3 ($.55 per share on both a primary and fully
diluted basis) from the Company's investment in Acme Boot Company, Inc.
("Acme Boot"). Excluding this gain, earnings per share were $2.25 on both a
primary and fully diluted basis.
(7) Includes the effect of a court ordered refund of Federal income taxes of
$10.5, plus interest of $49.4, ($.57 per share on both a primary and fully
diluted basis), a pretax charge of $10.2 ($.12 per share on both a primary
and fully diluted basis) for certain obligations and other matters related
to former subsidiaries and a pretax charge of $39.2 ($.45 per share on both
a primary and fully diluted basis) to write down the Company's investment in
Acme Boot to its then market value.
(8) In May 1991, the Company completed an underwritten primary offering of 7.5
shares of its Class A Common Stock.
(9) In July 1991, the Company called for redemption all of its 6 3/4%
Convertible Subordinated Debentures due March 1, 2002 (the "Debentures")
totaling $59.9. The Debentures were converted into Class A Common Stock of
the Company at a conversion price of $11.25 per share. Approximately 5.3
shares were issued in the conversion.
10
<PAGE> 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for historical information contained herein, certain matters set
forth in this Annual Report on Form 10-K 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 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 table below sets forth selected operating data (in millions of dollars
and as percentages of net sales) of the Company:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Net sales...................................... $2,403.1 $2,297.8 $1,884.4
Gross earnings................................. $ 517.4 $ 646.5 $ 647.4
Gross margin................................... 21.5 % 28.1% 34.4%
Operating earnings (loss)...................... $ (108.1) $ 235.0 $ 381.5
Operating margin............................... (4.5)% 10.2% 20.2%
</TABLE>
OPERATIONS
In the fourth quarter of 1995, management announced plans to close
certain manufacturing operations and to take other actions to reduce costs and
streamline operations. Accordingly, the Company terminated 194 salaried and
5,926 production personnel related to closed operations. Terminated
personnel were notified of their separation in 1995 and the plant closings and
attendant personnel reductions were substantially completed in 1995.
These actions included the closing in 1995 of nine domestic
manufacturing operations, further consolidation of the Company's Gitano and
licensed sportswear operations, the curtailment of selling and marketing
activities in Mexico and the accelerated migration of some manufacturing cut
and sew operations to lower cost, offshore locations, which resulted in the
need to realign certain other domestic manufacturing operations. The Company
realigned its operations by shifting production at the remaining domestic
operations in order to balance its production capabilities. In addition,
management reviewed the operations of Salem and Gitano and decided to
discontinue the use of the SALEM brand and redeployed the other tangible assets
relating to the Salem business to other brands within the Company's licensed
sports apparel operations. Also, the Company discontinued certain of its
product offerings, including certain licensed products.
In addition, management determined that significant changes and
investment would be necessary to restructure the Gitano business and
implemented a plan to improve Gitano's profitability. Management determined
that the carrying value of the intangible assets related to the Salem and
Gitano businesses were not expected to be recovered by their future
undiscounted cash flows. Future cash flows were based on forecasted trends for
the particular businesses and assumed capital spending in line with expected
requirements. Accordingly, impairment writedowns of goodwill of $158,500,000
reflect the write-off of all goodwill related to the Salem and Gitano
businesses. See "Acquisitions" in the Notes to Consolidated Financial
Statements.
During the fourth quarter of 1995, the Company recorded charges of
approximately $82,800,000 (of which $28,400,000 are non-cash charges) related
to the closing or realignment of certain domestic manufacturing operations, the
closing of certain, leased manufacturing and distribution facilities, the
write-off of fixed assets related to these facilities and changes in estimates
of the cost of certain of the Company's insurance obligations. The detail of
these charges is presented below (in millions):
Loss on disposal of closed facilities, improvements
and equipment . . . . . . . . . . . . . . . . . . . . . . . . . $29.0
Changes in estimates of insurance liabilities. . . . . . . . . . 21.8
Costs related to expected increases in workers'
compensation and health and welfare costs . . . . . . . . . . . 8.0
Cost related to termination of certain lease
agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3
Costs related to the severance of the hourly
workforce . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.7
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.0
-----
$82.8
=====
These charges have been properly recorded in the fourth quarter of 1995 as
required by Emerging Issues Task Force No. 94-3 or other authoritative
literature.
The Company recorded charges in the fourth quarter of 1995 of
approximately $5,800,000 (of which approximately $800,000 was paid during 1995)
related to the cost of providing severance and benefits to employees at the
closed facilities as well as certain related administrative headcount
reductions. The severance and other benefits provided consisted of salary and
fringe benefits (FICA and unemployment taxes, health insurance, life insurance,
dental insurance, long-term disability insurance and participation in the
Company's pension plan). The Company recorded charges of approximately
$91,100,000 (of which $70,600,000 are non-cash charges) related to other asset
writedowns, valuation reserves and other reserves as a result of reductions in
its product offerings, changes in its operations and termination or
modification of certain license and other agreements. In addition, the Company
recorded charges of approximately $19,200,000 (which amounts will be paid in
periods subsequent to 1995) related to changes in estimates of certain
retained liabilities in connection with the prior sale of certain discontinued
operations. See "Contingent Liabilities" in the Notes to Consolidated
Financial Statements. Also, management adopted a plan to realign certain of
the corporate headquarters functions and to terminate the Company's agreement
regarding management services with Farley Industries, Inc. ("FII") and,
accordingly, recorded charges of aproximately $15,500,000 (which amounts will
be paid in periods subsequent to 1995) related to lease termination, severance
benefits and other costs. See "Related Party Transactions" in the Notes to
Consolidated Financial Statements.
As a result, the Company recorded charges of approximately $372,900,000
($287,400,000 after tax) related to impairment writedowns of goodwill, costs
associated with the closing or realignment of certain domestic manufacturing
facilities and attendant personnel reductions and charges related to inventory
writedowns and valuations, foreign operations and other corporate issues. These
charges were taken in an effort to substantially reduce the Company's cost
structure, streamline operations and further improve customer service.
As a result of the above actions, the Company anticipates reductions in
annual expenses of approximately $40,000,000, of which $28,000,000 will be cash
savings. The reductions in annual expenses are anticipated to be approximately
$11,500,000 in reduced labor costs, approximately $12,500,000 in reduced
selling, general and administrative expenses and approximately $12,000,000 in
reduced depreciation and goodwil amortization.
The above charges were recorded as $158,500,000 of impairment
writedown of goodwill, $146,700,000 of increases to cost of goods sold,
$47,000,000 of increases to selling, general and administrative costs and
$20,700,000 of increases to other expense in the accompanying Consolidated
Statement of Operations. These charges were based on management's best
estimates of the potential costs related to the aforementioned actions. The
amounts the Company will ultimately incur are dependent on certain risks and
uncertainties and could differ materially from the amounts assumed in arriving
at these charges. See "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- USE OF
ESTIMATES" in the Notes to Consolidated Financial Statements.
1995 COMPARED TO 1994
Net sales increased 4.6% in 1995 compared to 1994. The increase in net
sales was primarily due to price increases in all of the Company's businesses.
In addition, the inclusion of a full year of the results of Pro Player, which
was acquired in August 1994, and the inclusion of a full year of the revenues of
the Company's jeans and sportswear subsidiary, Gitano, the assets of which were
acquired in late March 1994, also contributed to the increase in net sales.
Gitano's revenues now reflect Gitano's transition to a traditional wholesale
operation from a marketing service organization in late 1994. These increases
were offset by lower unit volume of the Company's activewear and casualwear
products as a result of the sluggish retail environment, a weak back-to-school
selling season and competitive selling pressures. In addition, lower unit volume
of certain products in the Company's licensed sports apparel business, which has
been adversely
11
<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (CONTINUED)
OPERATIONS -- (CONTINUED)
1995 COMPARED TO 1994 -- (CONTINUED)
affected by reduced consumer demand caused by labor issues in certain of the
professional sports leagues, resulted in lower unit sales levels in the 1995
period compared to 1994.
Gross earnings decreased 20% in 1995 compared to 1994 due principally to
the charges taken in the fourth quarter of 1995, the lower unit volume in
activewear and casualwear, the unfavorable effects of operating certain
facilities on reduced production schedules in response to lower than expected
consumer demand and the effects of cost increases, all of which more than offset
the effect of the price increases.
The gross margin was 21.5% in 1995 compared to 28.1% in 1994. The gross
margin was negatively affected by the charges taken in the fourth quarter of
1995, higher raw material costs, other general cost increases and the
unfavorable effects of operating certain facilities on reduced production
schedules. Higher sales of closeouts and discontinued products, principally in
the Company's casualwear and licensed sports apparel business as a result of the
Company's decision to eliminate a number of product offerings, also had a
negative impact on gross margin. In addition, a higher proportion of lower
margin Gitano products contributed to the gross margin decline. The effect of
these items on gross margin was partially offset by the effect of price
increases.
The Company had an operating loss of $108,100,000 in 1995 compared to
operating earnings of $235,000,000 in 1994. The operating margin decreased 14.7
percentage points to a negative 4.5% of net sales for 1995. The decrease in
operating earnings in 1995 resulted from lower gross earnings combined with
higher selling, general and administrative expenses and the recognition of an
impairment writedown of goodwill in 1995. Higher selling, general and
administrative costs arose principally from the charges taken in the fourth
quarter of 1995 and the inclusion of a full year of the Pro Player operations
acquired in 1994. The Pro Player operations include proportionally higher
selling expenses for royalties as compared to the Company's consumer packaged
goods and activewear operations. In addition, higher selling, general and
administrative expenses resulted from higher shipping costs as a result of new
distribution locations. The increase in selling, general and administrative
expenses also includes higher advertising and promotion expenses, charges in the
third quarter of 1995 related to severance costs and, in the first six months of
1995, charges related to the curtailment of selling and marketing activities in
Mexico, the closing of Gitano's New York office and the consolidation of all
Gitano related management functions into the Company's existing operations.
Selling, general and administrative expenses were 17.9% of net sales in 1995
compared to 16.4% of net sales in 1994.
Interest expense for 1995 increased 22.5% from 1994. The increase was
primarily due to the effect of higher debt levels in 1995. Higher debt levels in
1995 were due principally to the acquisition of Pro Player in August 1994,
higher working capital levels in 1995 and, in the first three months of 1995,
the effect of higher debt levels resulting from the acquisition of Gitano in
March 1994.
Included in other expense-net in 1995 are charges of $20,700,000 related to
certain obligations and other matters related to former subsidiaries and certain
fees related to the modification of certain agreements. See "SPECIAL CHARGES" in
the Notes to Consolidated Financial Statements. Included in other expense - net
in 1994 is $16,000,000 of service fee income from Gitano's operations which
represented Gitano's transition to a marketing service organization from a
traditional wholesaler base. These revenues did not recur after 1994 as Gitano
reverted to a traditional apparel wholesaler. In 1994, this fee income was
partially offset by $12,500,000 of charges to provide for certain obligations of
and legal expenses pertaining to litigation related to retained liabilities of
former subsidiaries. In addition, other expense-net in 1995 and 1994 included
approximately $5,700,000 and $8,100,000, respectively, of deferred debt
amortization and bank fees. Other expense-net in 1995 includes $5,700,000 of
gains as compared to $1,900,000 of expense in 1994 related to the settlement of
certain foreign currency denominated transactions.
12
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (CONTINUED)
OPERATIONS -- (CONTINUED)
1995 COMPARED TO 1994 -- (CONCLUDED)
The effective income tax rate for 1995 and 1994 differed from the Federal
statutory rate of 35% primarily due to the impact of the impairment writedown of
goodwill in 1995 and goodwill amortization, portions of which are not deductible
for Federal income tax purposes, state income taxes, the provision for interest
related to prior years' taxes and the impact of certain non-deductible foreign
losses.
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).
Earnings (loss) per share before extraordinary item and cumulative effect
of change in accounting principles was a loss of $2.99 for 1995 compared to
earnings of $.79 in 1994. The net loss per share in 1995 was $3.06 and included
a $.07 charge related to the cumulative effect of a change in accounting for
pre-operating costs.
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.
1994 COMPARED TO 1993
Net sales increased 21.9% in 1994 compared to 1993. The increase in net
sales in 1994 was primarily due to the results of the Company's new licensed
sports apparel line, principally as a result of the acquisitions of Salem in
November 1993, Artex in January 1994 and Pro Player in August 1994. Also, volume
increases in certain of the Company's existing businesses reflecting improved
demand and the introduction of new programs and products in 1994 contributed to
the sales increase in 1994. In addition, the 1994 results include the operations
of Gitano since April 1994. These increases were partially offset by the
negative effects of lower average selling prices (principally for domestic
activewear in the first six months of 1994).
Gross earnings decreased .1% in 1994 compared to 1993. The gross margin was
28.1% in 1994 compared to 34.4% in 1993. In December 1994, the Company announced
the closing of substantially all of the operations of Artex, consolidating the
manufacturing portion of those operations into existing Company-owned
facilities. In addition, the Company's casualwear businesses, Fruit of the Loom
casualwear and Gitano, undertook significant product line reduction programs
during the fourth quarter, and administrative consolidations resulted in the
elimination of the New York casualwear group. The Company also undertook a
comprehensive review of its other domestic product offerings during the last
quarter of 1994. As a result of this review, a substantial number of slower
moving or less profitable items have been removed, principally from the
casualwear and licensed sports apparel lines, and written down to net realizable
value. The total of the various inventory related charges was approximately
$40,000,000. In addition, gross earnings and gross margin have been impacted by
the effects of lower prices and promotional activities, other general cost
increases, including cotton cost increases, and manufacturing inefficiencies as
certain sewing operations are transferred to offshore locations.
Operating earnings decreased 38.4% compared to 1993 while the operating
margin decreased ten percentage points to 10.2% of net sales in 1994. The
decreases in operating earnings resulted from higher selling, general and
administrative expenses and goodwill amortization (from the acquisitions of
Salem, Artex, Gitano and Pro Player) in 1994, coupled with the decrease in gross
earnings. Selling, general and administrative expenses increased to 16.4% of net
sales in 1994 compared to 12.7% of net sales in 1993. Higher selling and other
administrative costs arose both from the acquisitions of Salem, Artex, Gitano
and Pro Player and from the Company's continuing effort to improve customer
service by making investments in added distribution capabilities, computer
systems and other infrastructure required to service customers more effectively.
In addition, selling, general and administrative expenses in 1994 include
charges related to the consolidation of
13
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (CONTINUED)
OPERATIONS -- (CONCLUDED)
1994 COMPARED TO 1993 -- (CONCLUDED)
the Company's licensed sportswear operations. Costs associated with the closing
of the Artex operations included the write-off of approximately $18,000,000 of
intangibles. The increases in selling, general and administrative expenses also
include higher royalty costs in 1994, principally due to the acquisitions of the
Salem, Artex and Pro Player licensed sports apparel operations.
Interest expense in 1994 increased 31.2% from 1993. The increase was
principally attributable to the effect of higher debt levels in 1994. Higher
debt levels were primarily due to the acquisitions of Salem, Artex, Gitano and
Pro Player, which were financed through borrowings under the Company's
$800,000,000 revolving line of credit (the "New Credit Agreement"), and higher
working capital levels.
Included in other expense-net in 1994 is $16,000,000 of service fee income
from Gitano's operations which represented Gitano's transition to a marketing
service organization from a traditional wholesaler base. These revenues did not
recur after 1994 as Gitano reverted to a traditional apparel wholesaler. This
was partially offset by $12,500,000 of charges to provide for certain
obligations of and legal expenses pertaining to litigation related to retained
liabilities of former subsidiaries. In addition, other expense-net in 1994 and
1993 included approximately $8,100,000 and $7,900,000, respectively, of deferred
debt fee amortization and bank fees.
In 1993 the Company received approximately $72,900,000 from Acme Boot
representing the entire unpaid principal and liquidation preference (including
accrued interest and dividends) on its investment in the securities of the
affiliate. The Company recorded a pretax gain of $67,300,000 related to the
investment in Acme Boot upon the receipt of the above mentioned proceeds. See
"RELATED PARTY TRANSACTIONS" in the Notes to Consolidated Financial Statements.
The effective income tax rate for 1994 and 1993 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 the provision for interest related to prior years' taxes.
In 1993 the Company recorded an extraordinary charge of $8,700,000 ($.11
per share) in connection with the refinancing of its bank credit agreements and
the redemption of its 12 3/8% Senior Subordinated Debentures due 2003 (the
"12 3/8% Notes"). The extraordinary charge consisted principally of the non-cash
write-off of the related unamortized debt expense on the bank credit agreements,
the 12 3/8% Notes and other debt issues and the premiums paid in connection with
the early redemption of the 12 3/8% Notes, both net of income tax benefits.
In the first quarter of 1993, the Company recorded the cumulative effect of
an accounting change related to the adoption of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("Statement No.
109"), resulting in a $3,400,000 ($.04 per share) benefit.
Earnings per share before extraordinary items and cumulative effect of
change in accounting principle decreased 71.8% to $.79 from $2.80 for 1993. Net
earnings per share in 1993 were $2.73 and included an $.11 extraordinary charge
related to the early retirement of debt and a $.04 benefit related to the
cumulative effect of a change in accounting for income taxes.
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. In May 1995, the Company entered into a $155,000,000 short-term
revolving commitment (the "Short-Term Facility") to supplement its existing
revolving lines of credit. The Short-Term Facility was scheduled to expire in
May 1996 and has been extended until May 1997. No borrowings are outstanding
under this facility.
14
<PAGE> 17
ITEM 7. 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
$1,066,600,000 of revolving lines of credit, including the Short-Term Facility.
As of March 25, 1996 approximately $398,200,000 was available and unused under
these facilities.
Net cash provided by operating activities for the years ended December 31,
1995 and 1994 were $107,000,000 and $215,100,000, respectively. The primary
components of cash provided by operating activities in 1995 were the net loss as
adjusted for depreciation and amortization and impairment writedown of goodwill
(totaling $95,000,000) plus $59,200,000 of special charges related to long-term
items partially offset by deferred income tax benefits of $50,500,000. In 1995
working capital uses were a net $1,300,000 as an increase in inventory of
$22,700,000 and a decrease in accounts payable of $53,200,000 were substantially
offset by a decrease in notes and accounts receivable of $34,700,000 and other
working capital declines of $39,900,000 (primarily the effect of the fourth
quarter 1995 charges on other accounts payable and accrued expenses). The
primary components of cash provided by operating activities in 1994 were net
earnings plus depreciation and amortization (totaling $216,100,000) plus
$18,000,000 of special charges related to Artex intangibles partially offset by
an increase in working capital of $3,600,000. In 1994, increases in trade
accounts payable of $32,500,000 and other working capital declines (primarily
increased other current liabilities) of $60,600,000 only partially offset
increases in accounts receivable of $23,300,000 and inventories of $73,400,000.
The increases in inventory in both 1995 and 1994 reflected the Company's ongoing
efforts to improve customer service. In addition, in 1995, the sluggish retail
environment which led to lower than anticipated sales volumes and, in 1994, the
effect of the acquisitions of Artex, Gitano and Pro Player, resulted in higher
inventory levels.
Net cash used for investing activities in 1995 and 1994 were $103,300,000
and $430,800,000, respectively. Capital expenditures, net of amounts
attributable to capital leases of $3,900,000 and $40,600,000 in 1995 and 1994,
respectively, were $121,700,000 and $246,400,000 in 1995 and 1994, respectively.
In 1994 the Company used approximately $192,100,000 on the acquisitions of
Artex, Gitano and Pro Player, the funds for which were provided by borrowings
under the New Credit Agreement. Capital spending, primarily to enhance
distribution and yarn manufacturing capabilities and to establish and support
offshore assembly operations, is anticipated to approximate $75,000,000 in
1996 compared to $125,600,000 in 1995.
Net cash used for financing activities in 1995 was $26,600,000 and
consisted primarily of principal payments on long-term debt and capital leases.
Net cash provided by financing activities in 1994 was $190,900,000 and consisted
principally of borrowings under the Company's bank credit agreements 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. The total cost of assets under lease as of December 31, 1995 was
approximately $132,000,000. The lease provides for a substantial 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 it 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 its ability to sell assets, incur debt, pay dividends and
make investments and requiring the Company to maintain certain financial ratios.
See "LONG-TERM DEBT" in the Notes to Consolidated Financial Statements.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ("Statement No. 123"), "Accounting for
Stock-Based Compensation," which provides an alternative to Accounting
Principles Board Opinion No. 25 ("APB No. 25"), "Accounting for Stock Issued to
Employees," in accounting for stock-based compensation issued to employees.
Statement No. 123 allows for a fair value based method of accounting for
employee stock options and similar equity instruments. However, for
15
<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (CONCLUDED)
LIQUIDITY AND CAPITAL RESOURCES -- (CONCLUDED)
companies that continue to account for stock-based compensation arrangements
under APB No. 25, Statement No. 123 requires disclosure of the pro forma effect
on net earnings and earnings per share of its fair value based accounting for
those arrangements. The disclosure requirements are effective for fiscal years
beginning after December 15, 1995. Management continues to evaluate the
provisions of Statement No. 123 and has not determined whether the Company will
adopt the recognition and measurement provisions or pro forma disclosure
provisions of Statement No. 123, which the Company expects would result in
increased compensation expense in future periods.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors...................................... 17
Consolidated Balance Sheet -- December 31, 1995 and 1994............................... 18
Consolidated Statement of Operations for Each of the Years Ended December 31, 1995,
1994
and 1993............................................................................. 19
Consolidated Statement of Cash Flows for Each of the Years Ended December 31, 1995,
1994
and 1993............................................................................. 20
Notes to Consolidated Financial Statements............................................. 21
Supplementary Data (Unaudited)......................................................... 43
Financial Statement Schedule:
Schedule II -- Valuation and Qualifying Accounts..................................... 50
</TABLE>
- -------------------------
Note: All other schedules are omitted because they are not applicable or not
required.
16
<PAGE> 19
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors of
Fruit of the Loom, Inc.
We have audited the accompanying consolidated balance sheet of Fruit of the
Loom, Inc. and Subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of operations and cash flows for each of the three years
in the period ended December 31, 1995. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule 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 consolidated financial position of
Fruit of the Loom, Inc. and Subsidiaries at December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as whole, presents fairly in all material respects the
information set forth therein.
As discussed in the Notes to Consolidated Financial Statements, the Company
changed its method of accounting for pre-operating costs in 1995 and for income
taxes in 1993.
ERNST & YOUNG LLP
Chicago, Illinois
February 14, 1996
17
<PAGE> 20
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
---------- ----------
(IN THOUSANDS OF
DOLLARS)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents (including restricted cash)....................... $ 26,500 $ 49,400
Notes and accounts receivable (less allowance for possible losses of
$26,600,000 and $20,700,000, respectively)................................ 261,000 295,600
Inventories
Finished goods............................................................ 522,300 496,200
Work in process........................................................... 132,400 141,500
Materials and supplies.................................................... 44,800 39,100
Other....................................................................... 72,800 54,800
---------- ----------
Total current assets.................................................... 1,059,800 1,076,600
---------- ----------
PROPERTY, PLANT AND EQUIPMENT
Land........................................................................ 20,100 19,300
Buildings, structures and improvements...................................... 486,400 435,600
Machinery and equipment..................................................... 1,076,600 1,041,300
Construction in progress.................................................... 24,200 35,200
---------- ----------
1,607,300 1,531,400
Less accumulated depreciation............................................... 578,900 473,200
---------- ----------
Net property, plant and equipment....................................... 1,028,400 1,058,200
---------- ----------
OTHER ASSETS
Goodwill (less accumulated amortization of $257,800,000 and $242,400,000,
respectively)............................................................. 771,100 965,800
Other....................................................................... 60,200 62,900
---------- ----------
Total other assets...................................................... 831,300 1,028,700
---------- ----------
$2,919,500 $3,163,500
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt........................................ $ 14,600 $ 23,100
Trade accounts payable...................................................... 60,100 113,300
Accrued insurance obligations............................................... 38,800 23,600
Accrued advertising and promotion........................................... 23,800 23,400
Interest payable............................................................ 16,000 18,300
Accrued payroll and vacation pay............................................ 15,300 33,100
Accrued pension............................................................. 11,300 19,800
Other accounts payable and accrued expenses................................. 123,900 77,200
---------- ----------
Total current liabilities............................................... 303,800 331,800
---------- ----------
NONCURRENT LIABILITIES
Long-term debt.............................................................. 1,427,200 1,440,200
Net deferred income taxes................................................... -- 43,400
Other....................................................................... 292,900 222,300
---------- ----------
Total noncurrent liabilities............................................ 1,720,100 1,705,900
---------- ----------
COMMON STOCKHOLDERS' EQUITY
Common stock and capital in excess of par value, $.01 par value; authorized,
Class A, 200,000,000 shares, Class B, 30,000,000 shares; issued and
outstanding:
Class A Common Stock, 69,268,701 and 69,160,349 shares, respectively...... 465,600 463,700
Class B Common Stock, 6,690,976 shares.................................... 4,400 4,400
Retained earnings........................................................... 448,100 680,600
Currency translation and minimum pension liability adjustments.............. (22,500) (22,900)
---------- ----------
Total common stockholders' equity....................................... 895,600 1,125,800
---------- ----------
$2,919,500 $3,163,500
========== ==========
</TABLE>
See accompanying notes.
18
<PAGE> 21
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales................................................ $2,403,100 $2,297,800 $1,884,400
Cost of sales............................................ 1,885,700 1,651,300 1,237,000
---------- ---------- ----------
Gross earnings......................................... 517,400 646,500 647,400
Selling, general and administrative expenses............. 429,700 376,300 240,100
Goodwill amortization.................................... 37,300 35,200 25,800
Impairment writedown of goodwill......................... 158,500 -- --
---------- ---------- ----------
Operating earnings (loss).............................. (108,100) 235,000 381,500
Interest expense......................................... (116,900) (95,400) (72,700)
Gain on Acme Boot investment............................. -- -- 67,300
Other expense-net........................................ (21,700) (6,100) (9,000)
---------- ---------- ----------
Earnings (loss) before income tax (benefit) expense,
extraordinary item and cumulative effect of change
in accounting principles............................ (246,700) 133,500 367,100
Income tax (benefit) expense............................. (19,400) 73,200 154,300
---------- ---------- ----------
Earnings (loss) before extraordinary item and
cumulative effect of change in accounting
principles.......................................... (227,300) 60,300 212,800
Extraordinary item -- loss on early retirement of
debt................................................ -- -- (8,700)
---------- ---------- ----------
Earnings (loss) before cumulative effect of change in
accounting principles............................... (227,300) 60,300 204,100
Cumulative effect of change in accounting principles:
Pre-operating costs................................. (5,200) -- --
Income taxes........................................ -- -- 3,400
---------- ---------- ----------
Net earnings (loss).................................... $ (232,500) $ 60,300 $ 207,500
========== ========== ==========
Earnings (loss) per common share:
Earnings (loss) before extraordinary item and
cumulative effect of change in accounting
principles.......................................... $ (2.99) $ .79 $ 2.80
Extraordinary item..................................... -- -- (.11)
Cumulative effect of change in accounting principles:
Pre-operating costs................................. (.07) -- --
Income taxes........................................ -- -- .04
Net earnings (loss) per common share................... $ (3.06) $ .79 $ 2.73
Average common shares outstanding...................... 76,000 76,000 76,000
</TABLE>
See accompanying notes.
19
<PAGE> 22
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1994 1993
--------- --------- ---------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss)...................................... $(232,500) $ 60,300 $ 207,500
Adjustments to reconcile to net cash provided by
operating activities:
Cumulative effect of change in accounting
principles.......................................... 5,200 -- (3,400)
Impairment writedown of goodwill...................... 158,500 -- --
Depreciation and amortization......................... 169,000 155,800 121,600
Deferred income tax (benefit) expense................. (50,500) (7,600) 30,200
Decrease (increase) in notes and accounts
receivable.......................................... 34,700 (23,300) 14,200
Increase in inventories............................... (22,700) (73,400) (130,700)
(Decrease) increase in trade accounts payable......... (53,200) 32,500 (6,000)
Other working capital changes......................... 39,900 60,600 (29,700)
Special charges related to long-term items............ 59,200 18,000 --
Extraordinary item.................................... -- -- 8,700
Gain on Acme Boot investment.......................... -- -- (67,300)
Net payments on retained liabilities related to former
subsidiaries........................................ (16,300) (14,400) (38,600)
Other-net............................................. 15,700 6,600 (16,700)
--------- --------- ---------
Net cash provided by operating activities........ 107,000 215,100 89,800
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures..................................... (125,600) (287,000) (262,500)
Less amount attributable to capital leases............... 3,900 40,600 2,900
--------- --------- ---------
Capital expenditures............................. (121,700) (246,400) (259,600)
Acquisition of Gitano.................................... -- (91,400) --
Acquisition of Pro Player................................ -- (55,700) --
Acquisition of Artex..................................... -- (45,000) --
Acquisition of Salem..................................... -- -- (157,600)
Net proceeds from Acme Boot investment................... -- -- 72,900
Other-net................................................ 18,400 7,700 8,400
--------- --------- ---------
Net cash used for investing activities........... (103,300) (430,800) (335,900)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (repayments) borrowings under long-term debt
agreements............................................ (4,100) 232,300 782,400
Principal payments on long-term debt and capital
leases................................................ (23,000) (42,200) (100,700)
Decrease in short-term notes payable..................... -- -- (65,100)
Refinancing of long-term debt............................ -- -- (267,900)
Prepayment of long-term debt............................. -- -- (82,300)
Debt redemption premiums................................. -- -- (3,300)
Other-net................................................ 500 800 (200)
--------- --------- ---------
Net cash (used for) provided by financing
activities....................................... (26,600) 190,900 262,900
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents
(including restricted cash).............................. (22,900) (24,800) 16,800
Cash and cash equivalents (including restricted cash) at
beginning of year........................................ 49,400 74,200 57,400
--------- --------- ---------
Cash and cash equivalents (including restricted cash) at
end of year.............................................. $ 26,500 $ 49,400 $ 74,200
========= ========= =========
</TABLE>
See accompanying notes.
20
<PAGE> 23
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements of the
Company include the accounts of the Company and all of its subsidiaries. All
material intercompany accounts and transactions have been eliminated.
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates depending upon certain risks and uncertainties. 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 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.
INVENTORIES. Inventory costs include material, labor and factory overhead.
Inventories are stated at the lower of cost or market (net realizable value).
Approximately 72% of year-end inventory amounts at December 31, 1995 and 1994
are determined using the last-in, first-out cost method. If the first-in,
first-out method had been used, such inventories would have been $88,500,000 and
$41,500,000 higher than reported at December 31, 1995 and 1994, respectively.
The remainder of the inventories are determined using the first-in, first-out
method.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment is stated at
cost. Depreciation, which includes amortization of assets under capital leases,
is based on the straight-line method over the estimated useful lives of
depreciable assets. Interest costs incurred in the construction or acquisition
of property, plant and equipment are capitalized.
GOODWILL. Goodwill is amortized using the straight-line method over periods
ranging from 15 to 40 years.
IMPAIRMENT. In 1995 the Company adopted Statement of Financial Accounting
Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" ("Statement No. 121"). Accordingly, when
indicators of impairment are present, the Company periodically evaluates the
carrying value of property, plant and equipment and intangibles in relation to
the operating performance and future undiscounted cash flows of the underlying
businesses. The Company adjusts the net book value of the underlying assets if
the sum of expected future cash flows is less than book value.
PRE-OPERATING COSTS. 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 1995. The effect of the change in accounting
for pre-operating costs was not material to the reported results of operations
in 1995 nor was it material to the pro forma results of operations for 1994 or
1993.
FUTURES CONTRACTS. The Company periodically enters into futures contracts
and call options as hedges for its purchases of cotton for inventory as a means
of fixing its cotton costs. Futures contracts are closed by either cash
settlement or actual delivery of cotton. Gains and losses on these hedges are
matched to inventory purchases and charged or credited to cost of sales as such
inventory is sold. As of December 31, 1995 the Company has entered into
contracts which cover a significant portion of its estimated cotton usage for
1996 and 1997.
FORWARD CONTRACTS. Prior to 1995 the Company had entered into forward
contracts to cover its principal and interest obligations on certain foreign
currency denominated bank loans. The original discount on these contracts was
amortized over the life of the contract and served to reduce the effective
interest cost of these loans. In addition, the Company continues to enter into
forward contracts to cover the future obligations of
21
<PAGE> 24
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONCLUDED)
certain foreign subsidiaries for certain inventory purchases. Gains and losses
related to qualifying hedges of firm commitments are deferred and are matched to
inventory purchases and charged or credited to cost of sales as such inventory
is sold. Gains and losses related to anticipated transactions that do not
qualify as hedges are recognized as components of other income or expense as
they are incurred.
DEFERRED GRANTS. 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. Employee training
grants are recognized in income in the year in which the costs to which they
relate are incurred by the Company. Grants for the acquisition of property and
equipment are netted against the related capital expenditure. Grants for
property and equipment under operating leases are amortized to income as a
reduction of rents paid. Unamortized amounts netted against fixed assets under
these grants at December 31, 1995 and 1994 were $42,200,000 and $33,500,000,
respectively. At December 31, 1995 and 1994, the Company has a contingent
liability to repay, in whole or in part, grants received of approximately
$70,900,000 and $54,300,000, respectively, 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.
STOCK-BASED COMPENSATION. The Company typically grants stock options for a
fixed number of shares to employees with an exercise price equal to the fair
value of the shares at the date of grant. The Company accounts for stock option
grants in accordance with APB No. 25, and, accordingly, typically recognizes no
compensation expense for these stock option grants.
INCOME TAXES. Effective January 1, 1993, the Company adopted Statement No.
109. Under Statement No. 109, the liability method is used in accounting for
income taxes.
PENSION PLANS. The Company maintains pension plans which cover
substantially all employees. The plans provide for benefits based on an
employee's years of service and compensation. The Company funds the minimum
contributions required by the Employee Retirement Income Security Act of 1974.
SPECIAL CHARGES
In the fourth quarter of 1995, management announced plans to close certain
manufacturing operations and to take other actions to reduce costs and
streamline operations. As a result, the Company recorded charges of
approximately $372,900,000 ($287,400,000 after tax) related to impairment
writedowns of goodwill, costs associated with the closing or realignment of
certain domestic manufacturing facilities and attendant personnel reductions and
charges related to inventory writedowns and valuations, foreign operations and
other corporate issues. These charges were taken in an effort to substantially
reduce the Company's cost structure, streamline operations and further improve
customer service. The Company realigned its operations by shifting production
at the remaining domestic operations in order to balance its production
capabilities.
During 1995, management reviewed the operations of Salem and Gitano and
decided to discontinue the use of the SALEM brand and redeployed the other
tangible assets relating to the Salem business to other brands within the
Company's licensed sports apparel business. In addition, the Company determined
that significant changes and investment would be necessary to restructure the
Gitano business and implemented a plan to improve Gitano's profitability. The
Company determined that the carrying value of the intangible assets related to
the Salem and Gitano businesses were not expected to be recovered by their
future undiscounted cash flows. Future cash flows were based on forecasted
trends for the particular businesses and assumed capital spending in line with
expected requirements. Accordingly, impairment writedowns of goodwill of
$158,500,000 reflect the write-off of all goodwill related to the Salem and
Gitano businesses. See "ACQUISITIONS."
22
<PAGE> 25
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SPECIAL CHARGES -- (CONCLUDED)
During the fourth quarter of 1995, the Company recorded charges of
approximately $82,800,000 related to the closing or realignment of certain
domestic manufacturing operations, the closing of certain leased facilities, the
write-off of fixed assets related to these facilities and changes in estimates
of the cost of certain of the Company's insurance obligations. The detail of
these charges is presented below (in millions):
Loss on disposal of closed facilities, improvements
and equipment....................................... $29.0
Changes in estimates of insurance liabilities....... 21.8
Costs related to expected increases in workers'
compensation and health and welfare costs........... 8.0
Costs related to termination of certain lease
agreements.......................................... 7.3
Costs related to the severance of the hourly
workforce........................................... 6.7
Other............................................... 10.0
-----
$82.8
======
These charges have been properly recorded in the fourth quarter of 1995 as
required by Emerging Issues Task Force No. 94-3 or other authoritive literature.
The Company recorded charges of approximately $5,800,000 related to the
cost of providing severance and benefits to employees affected by the facility
closings as well as certain administrative headcount reductions. The severance
and other benefits provided consisted of salary and fringe benefits (FICA and
unemployment taxes, health insurance, life insurance, dental insurance,
long-term disability insurance and participation in the Company's pension
plan). The Company recorded charges of approximately $91,100,000 related to
other asset writedowns, valuation reserves and other reserves as a result of
reductions in its product offerings, changes in its operations and termination
or modification of certain license and other agreements. In addition, the
Company recorded charges of approximately $19,200,000 related to changes in
estimates of certain retained liabilities in connection with the prior sale of
certain discontinued operations. Also, the Company adopted a plan to realign
certain of its corporate headquarters functions and to terminate its
relationship for management services with Farley Industries, Inc. ("FII") and,
accordingly, recorded charges of approximately $15,500,000 related to lease
termination, severance benefits and other costs. These charges included certain
valuation reserves and the impact of license agreements which relate
specifically to the Salem and Gitano brands. The total impact of the charges
in 1995 (including the writedown of goodwill) pertaining to the Salem and
Gitano brands was $164,100,000. See "RELATED PARTY TRANSACTIONS."
The above charges were recorded as $158,500,000 of impairment writedown of
goodwill, $146,700,000 of increases to cost of goods sold, $47,000,000 of
increases to selling general and administrative costs and $20,700,000 of
increases to other expense in the accompanying Consolidated Statement of
Operations. These charges were based on management's best estimates of the
potential costs related to the aforementioned actions. The amounts the Company
will ultimately incur are dependent on certain risks and uncertainties and could
differ materially from the amounts assumed in arriving at these charges. See
"SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- USE OF ESTIMATES."
ACQUISITIONS
In late January 1994 the Company acquired Artex for approximately
$45,000,000. In late March 1994 the Company acquired certain assets of Gitano
for approximately $91,400,000. In August 1994 the Company acquired Pro Player
for approximately $55,700,000, including approximately $14,200,000 of Pro Player
debt which was repaid by the Company. The principals of Pro Player, who are also
key employees of that business, may also be entitled to receive compensation
based in part on the attainment of certain levels of operating performance by
the acquired entity. In November 1993 the Company acquired Salem for
approximately $157,600,000, including approximately $23,900,000 of Salem debt
which was repaid by the Company. The aforementioned acquisitions (collectively,
the "Acquisitions") were accounted for using the purchase method of accounting.
Accordingly, the purchase prices were preliminarily allocated to assets and
liabilities based on their estimated fair values as of the date of the
Acquisitions. The cost in excess of the net assets acquired in the Acquisitions
was approximately $215,000,000 and was originally being amortized over periods
ranging from 15 to 20 years. In 1995, the Company wrote-off the remaining
balance of all goodwill related to the acquisitions of Salem and Gitano. See
"SPECIAL CHARGES." In 1994, the Company wrote-off the remaining intangibles
related to the Acquisition of Artex.
CASH, CASH EQUIVALENTS AND RESTRICTED CASH
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. Short-term
investments (consisting primarily of certificates of deposit, overnight deposits
or Eurodollar deposits) totaling $2,700,000 and $4,100,000 were included in cash
and cash equivalents at December 31, 1995 and 1994, respectively. These
investments were carried at cost, which approximated quoted market value.
Included in short-term investments at December 31, 1995 and 1994 was
$1,500,000 of restricted cash collateralizing domestic subsidiaries' letters of
credit and insurance obligations.
23
<PAGE> 26
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LONG-TERM DEBT
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
INTEREST RATE 1995 1994
------------- ---------- ----------
<S> <C> <C> <C>
Senior Secured
Capitalized lease obligations, maturing
1995-2017(1)....................................... 3.1 - 12.96% $ 110,300 116,900
---------- ----------
Total senior secured............................... 110,300 116,900
---------- ----------
Senior Unsecured
Foreign Facility Loans, maturing 1995................. Variable(2) -- 5,400
Fixed rate debt, maturing 1995-2008................... 6.97% 117,900 123,400
Foreign Credit Facilities, maturing 1997-1999......... Variable(3) 50,900 38,000
New Term Loan, maturing 1998.......................... Variable(4) 40,000 40,000
New Credit Agreement, maturing 1999................... Variable(5) 503,400 521,700
Fixed rate debt, maturing 1999(6)(7).................. 7.97% 249,300 249,100
Nonredeemable fixed rate debt, maturing 2003(7)(8).... 6.61 149,000 148,900
Fixed rate debt, maturing 2011(9)..................... 12.6 72,900 71,900
Nonredeemable fixed rate debt, maturing 2023(7)(10)... 7.49 148,100 148,000
---------- ----------
Total Senior Unsecured............................. 1,331,500 1,346,400
---------- ----------
Total................................................... 1,441,800 1,463,300
Less current maturities................................. (14,600) (23,100)
---------- ----------
Total long-term debt.................................... $1,427,200 $1,440,200
========== ==========
</TABLE>
- -------------------------
(1) Represents the present value of future rentals on capitalized leases. The
capitalized leases are secured by the related property under lease.
(2) Interest ranged from 2.1% to 3.7% during 1995 and from 1.89% to 3.6% during
1994. (These rates are net of discount amortization. The Company entered
into forward contracts that fixed the dollar amount of interest that had to
be paid.)
(3) Interest ranged from 4.43% to 11.54% during 1995 and from 5.68% to 7.1%
during 1994. The weighted average interest rate for borrowings outstanding
at December 31, 1995 was approximately 7.29%.
(4) Interest ranged from 6.44% to 7.13% during 1995 and from 4% to 6.86% during
1994. The weighted average interest rate for borrowings outstanding under
the New Term Loan at December 31, 1995 was approximately 6.77%.
(5) Interest ranged from 5.49% to 9% during 1995 and from 3.41% to 8.5% during
1994.
(6) Net of unamortized discount of $700 and $900 in 1995 and 1994, respectively
(nominal rate 7.875%).
(7) The obligations of the Company under the New Credit Agreement, the Canadian
Note (as hereinafter defined) and the Foreign Credit Facilities are
guaranteed by certain of the Company's subsidiaries and such debt
effectively ranks ahead of this fixed rate debt with respect to such
guarantees.
(8) Net of unamortized discount of $1,000 and $1,100 in 1995 and 1994,
respectively (nominal rate 6.5%).
(9) Net of unamortized discount of $52,100 and $53,100 in 1995 and 1994,
respectively (nominal rate 7%).
(10) Net of unamortized discount of $1,900 and $2,000 in 1995 and 1994,
respectively (nominal rate 7.375%).
In August 1993, the Company entered into the New Credit Agreement. Certain
indebtedness of the Company under pre-existing secured domestic bank agreements
(the "Credit Agreements") was refinanced with the proceeds of loans under the
New Credit Agreement and the Credit Agreements were terminated at
24
<PAGE> 27
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LONG-TERM DEBT -- (CONCLUDED)
that time. The New Credit Agreement provides the Company with an $800,000,000
revolving line of credit which expires in June 1999 and includes a letter of
credit facility. At December 31, 1995 and 1994, approximately $73,000,000 of
letters of credit were issued under the New Credit Agreement to secure a bond
posted in connection with the appeal of the LMP Litigation. Borrowings under the
New Credit Agreement bear interest at a rate approximating the prime rate (8.5%
at December 31, 1995) or, at the election of the Company, at rates approximating
LIBOR (5.63% at December 31, 1995) plus 30 basis points. The Company also pays a
facility fee (the "Facility Fee") under the New Credit Agreement equal to 15
basis points on the aggregate commitments thereunder. Interest rates and the
Facility Fee are subject to increase or decrease based upon the Company's
unsecured debt rating. The weighted average interest rate for borrowings
outstanding under the New Credit Agreement at December 31, 1995 was
approximately 6.31%. Borrowings under the New Credit Agreement are guaranteed by
certain of the Company's subsidiaries.
The Company has $98,400,000 of standby letter of credit facilities from its
bank lenders. At December 31, 1995 and 1994, approximately $79,600,000 and
$83,300,000, respectively, of letters of credit were issued under this facility
to secure various insurance and other obligations reflected in the accompanying
Consolidated Balance Sheet. In addition, the Company has $110,000,000 of trade
letter of credit facilities. At December 31, 1995 and 1994, the Company had
$16,700,000 and $51,100,000, respectively, of documentary letters of credit
outstanding under these facilities to finance various trade activities.
In August 1993, the Company's wholly-owned subsidiary, Fruit of the Loom
Canada, Inc., issued an unsecured senior note due in installments through 2008
(the "Canadian Note") in a private placement transaction with certain insurance
companies. The Canadian Note is fully guaranteed by the Company and its
principal operating subsidiaries and ranks pari passu in right of payment with
the New Credit Agreement.
In 1993, the Company redeemed its 12 3/8% Notes. The Company recorded an
extraordinary charge in 1993 of approximately $8,700,000 ($.11 per share)
relating to the early extinguishment of debt, primarily in connection with the
refinancing of the Credit Agreements and the redemption of the 12 3/8% Notes.
The extraordinary charge consists principally of the non-cash write-off of the
related unamortized debt expense on the Credit Agreements, the 12 3/8% Notes and
other debt issues and the premiums paid in connection with the early redemption
of the 12 3/8% Notes, both net of income tax benefits.
The New Credit Agreement imposes certain limitations on, and requires
compliance with covenants from, the Company and its subsidiaries including,
among other things: (i) maintenance of certain financial ratios and compliance
with certain financial tests and limitations; (ii) limitations on incurrence of
additional indebtedness and granting of certain liens and guarantees; and (iii)
restrictions on mergers, sale and leaseback transactions, asset sales and
investments. The New Credit Agreement also allows the Company to pay dividends
on its common stock so long as, among other things, the aggregate amount of such
dividends paid since January 1, 1996 does not exceed the sum of approximately
$80,000,000 and fifty percent of the Company's consolidated net earnings since
January 1, 1996.
The New Credit Agreement provides for the acceleration of amounts
outstanding thereunder should any person or entity other than William Farley, or
any person or entity controlled by William Farley, control more than 50% of the
voting stock or voting rights associated with such stock of the Company.
The aggregate amount of scheduled annual maturities of long-term debt for
each of the next five years is: $14,600,000 in 1996; $41,700,000 in 1997;
$63,500,000 in 1998; $783,100,000 in 1999; and $9,900,000 in 2000.
Cash payments of interest on debt were $114,600,000, $86,600,000 and
$67,100,000 in 1995, 1994 and 1993, respectively. These amounts exclude amounts
capitalized.
25
<PAGE> 28
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FINANCIAL INSTRUMENTS
Prior to December 31, 1995, certain of the Company's foreign subsidiaries
had entered into forward exchange contracts to hedge currency exposure relative
to certain inventory purchases and principal and interest obligations of certain
foreign currency denominated bank loans. The Company primarily sold European
currencies and purchased United States dollars. At December 31, 1995 no foreign
currency forward exchange contracts were outstanding. As of December 31, 1994
the primary foreign currencies sold forward to hedge the foreign currency
exposure relative to inventory purchases expressed in United States dollar
equivalents were as follows: $1,800,000 Italian lira, $1,900,000 German marks,
$2,000,000 British pounds and $1,800,000 French francs. At December 31, 1994,
the Company had bought forward Greek drachma relative to its Greek drachma
denominated debt obligations, the value of which was the United States dollar
equivalent of $5,600,000. The original discount of the purchased forward
contracts served to reduce the effective interest cost of the drachma
denominated loans and effectively made these loans the equivalent of United
States dollar based loans. All of the aforementioned contracts matured in 1995.
The fair value of the Company's foreign exchange forward contracts was
estimated based on quoted market prices of comparable contracts. At December 31,
1994, the fair value for the Company's forward contracts approximated their face
value.
The fair values of financial guarantees and letters of credit approximate
the face value of the underlying instruments.
The fair values of the Company's non-publicly traded long-term debt were
estimated using discounted cash flow analyses, based on the Company's current
incremental borrowing rates for similar types of borrowing arrangements. Fair
values for publicly traded long-term debt were based on quoted market prices
when available. At December 31, 1995 and 1994, the fair value of the Company's
debt was approximately $1,505,000,000 and $1,369,000,000, respectively.
The Company monitors its positions with, and the credit quality of, the
financial institutions which are counterparties to its off-balance sheet
financial instruments and does not anticipate nonperformance of the
counterparties. The Company does not require collateral from its counterparties
and management believes that the Company would not realize a material loss in
the event of nonperformance by the counterparties.
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables. The
Company sells its products to most major discount and mass merchandisers,
wholesale clubs and screen printers as well as many department, specialty, drug
and variety stores, national chains, supermarkets and sports specialty stores.
The Company performs ongoing credit evaluations of its customers and generally
does not require collateral or other security to support customer receivables.
The Company's ten largest customers accounted for approximately 42.5% of net
sales in 1995 and approximately 26.2% of gross accounts receivable at December
31, 1995. The Company routinely assesses the financial strength of its customers
and, as a consequence, management believes that its trade receivable credit risk
exposure is limited.
CONTINGENT LIABILITIES
The Company and its subsidiaries are involved in certain legal proceedings
and have retained liabilities, including certain environmental liabilities, such
as those under 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 December
31, 1995 related to discontinued operations consist primarily of certain
environmental and product liability reserves of approximately $85,800,000. The
Company has recorded receivables related to these environmental liabilities of
approximately $39,100,000 which management believes will be recovered from
insurance and
26
<PAGE> 29
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONTINGENT LIABILITIES -- (CONTINUED)
other sources. Management and outside environmental consultants evaluate, on a
site-by-site or a claim-by-claim basis, the extent of environmental damage, the
type of remediation that will be required and the Company's proportionate share
of those costs as well as the Company's liability in each case. The Company's
retained liability reserves related to discontinued operations principally
pertain to 11 specifically identified environmental sites and the aforementioned
product liabilities. Four sites and the total product liabilities individually
represent more than 10% of the net reserve and in the aggregate represent
approximately 95% of the net reserve. Management believes they have adequately
estimated the impact of remediating identified sites, the expected contribution
from other potentially responsible parties and recurring costs for managing
sites as well as the ultimate resolution of the product liability claims.
Management currently estimates actual payments before recoveries to range from
approximately $5,600,000 to $28,300,000 annually between 1996 and 1999 and
$19,300,000 in total subsequent to 1999. Only the long-term monitoring costs of
approximately $11,300,000, primarily scheduled to be paid in 2000 and beyond,
have been discounted. The discount rate used was 10%. The undiscounted aggregate
long-term monitoring costs, to be paid over approximately the next 20 years, is
approximately $28,200,000. Management believes that adequate reserves have been
established to cover potential claims based on facts currently available and
current Superfund Legislation. The Company has provided the foregoing
information in accordance with Staff Accounting Bulletin 92.
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 1996 and future years.
In February 1986, the Company completed the sale of stock of its then
wholly owned subsidiary, Universal, to MagneTek. At the time of the sale there
was a suit pending against Universal and Northwest by LMP. The suit 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 totalling $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 any liability that may be assessed against MagneTek or
Universal in the LMP Litigation and to reimburse 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
27
<PAGE> 30
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONTINGENT LIABILITIES -- (CONTINUED)
Litigation is finally determined or a settlement is reached in that case, to
reimburse and/or indemnify MagneTek for that amount as well. In 1993 the Company
paid approximately $9,600,000 in settlement of its obligations to MagneTek
related to the litigation expenses incurred by MagneTek.
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.
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.
In March 1988, a class action suit entitled Endo, et al. v. Albertine, et
al. was filed in 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.
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, including William Farley and John B. Holland, 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 and that
Mr. Farley and Mr. Holland 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. The plaintiffs ask for
unspecified amounts as compensatory damages, pre-judgment and post-judgment
interest, attorneys' fees, expert witness fees and costs and ask the District
Court to impose a constructive trust on the proceeds of the individual
defendants' trades to satisfy any potential judgment. Management believes that
this suit is without merit and management and the Company intend 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.
28
<PAGE> 31
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONTINGENT LIABILITIES -- (CONTINUED)
In August 1991, two creditors of a former subsidiary of Northwest, Lone
Star Steel Company, Inc. (a wholly owned subsidiary of Lone Star Technologies,
Inc., a publicly owned company) brought suit against the Company in the Superior
Court of the State of Delaware. In this suit, the creditors sought damages of
approximately $13,100,000, plus interest, against the Company for what they
alleged was the remaining liability under certain leases. In January 1993, the
Superior Court of Delaware issued an Opinion and Order finding that the leases
were in default, but made no findings as to the amount of damages. The Company
appealed the ruling and on June 4, 1993 the Supreme Court of Delaware entered an
order affirming the Opinion and Order of the Superior Court of Delaware issued
in January 1993. In December 1993, the Company paid the lessors approximately
$9,500,000 in settlement of this suit.
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. 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. See "RELATED PARTY
TRANSACTIONS."
In connection with the Company's transaction with Acme Boot during 1993,
the Company guaranteed, on an unsecured basis, the repayment of debt incurred or
created by Acme Boot under Acme Boot's bank credit facility (the "Acme Boot
Credit Facility"). FI owns 100% of the common stock of Acme Boot. William
Farley, an executive officer and a director of the Company, holds 100% of the
common stock of FI. See "RELATED PARTY TRANSACTIONS." At December 31, 1995 the
Acme Boot Credit Facility provides for up to $30,000,000 of loans and letters of
credit. The Acme Boot Credit Facility is secured by first liens on substantially
all of the assets of Acme Boot and its subsidiaries. At December 31, 1995
approximately $21,000,000 in loans and letters of credit were outstanding under
the Acme Boot Credit Facility.
Also, in April 1995, Acme Boot entered into an additional secured credit
facility with its bank lender (the "New Acme Credit Agreement"). The New Acme
Credit Agreement provides for up to $37,000,000 in borrowings and expires in
January 1997. In April 1995, Acme Boot used approximately $25,400,000 under this
facility to repurchase certain of its debt, preferred stock and common stock. In
November 1995, Acme Boot used approximately $11,300,000 under this facility to
repurchase substantially all of the remaining portions of its publicly held
debt, preferred stock and common stock issues. The New Acme Credit Agreement is
secured by a second lien on substantially all of the assets of Acme Boot and its
subsidiaries. In addition, the Company has guaranteed, on an unsecured basis,
repayment of debt incurred or created under the New Acme Credit Agreement. In
exchange for the additional guarantee, the Company received $6,000,000 of
initial liquidation preference of Acme Boot's Series C 10% Redeemable Junior
Preferred Stock (the "Junior Preferred Stock"). The Company has fully reserved
for the amount of the Junior Preferred Stock. The Acme Boot Credit Facility and
the New Acme Credit Agreement provide that no dividends may be paid in cash on
the Junior Preferred Stock subject to certain tests. The Junior Preferred Stock
carries voting rights representing 5% of the total voting power of Acme Boot so
long as any of Acme Boot's 12 1/2% Series B Preferred Stock (the "Acme 12 1/2%
Preferred Stock") is outstanding. The Acme 12 1/2% Preferred Stock currently
carries voting rights representing in the aggregate 25% of the total voting
power of Acme Boot. If none of the Acme 12 1/2% Preferred Stock is outstanding,
the Junior Preferred Stock will carry voting rights representing 25% of the
total voting power of Acme Boot.
29
<PAGE> 32
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONTINGENT LIABILITIES -- (CONCLUDED)
Summarized unaudited financial information for Acme Boot follows (in
thousands of dollars):
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
-------- --------
<S> <C> <C>
Current assets........................................ $ 52,100 $ 61,000
Noncurrent assets -- net.............................. 8,900 10,900
-------- --------
$ 61,000 $ 71,900
======== ========
Current liabilities................................... $ 35,500 $ 20,100
Noncurrent liabilities................................ 47,700 83,600
Preferred stock....................................... 2,500 22,300
Common stockholders' deficit.......................... (24,700) (54,100)
-------- --------
$ 61,000 $ 71,900
======== ========
</TABLE>
CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1995 1994
-------- --------
<S> <C> <C>
Net sales............................................. $133,600 $135,000
======== ========
Gross earnings........................................ $ 26,900 $ 36,600
======== ========
Operating (loss) earnings............................. $ (9,200) $ 3,600
======== ========
Extraordinary gain on early retirement of debt........ $ 26,700 $ --
======== ========
Net earnings (loss)................................... $ 9,200 $ (5,500)
======== ========
</TABLE>
LEASE COMMITMENTS
The Company and its subsidiaries lease certain manufacturing, warehousing
and other facilities and equipment. The leases generally provide for the lessee
to pay taxes, maintenance, insurance and certain other operating costs of the
leased property. The leases on most of the properties contain renewal
provisions.
In September 1994, the Company entered into a five year operating lease
agreement with two automatic 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. The total cost of assets under lease as of December
31, 1995 was approximately $132,000,000. The lease provides for a substantial
residual value guarantee by the Company at the end of the initial lease term and
includes purchase and renewal options at fair market values. The table of future
minimum operating lease payments which follows excludes any payment related to
the residual value guarantee which is due upon termination of the lease. The
Company has the right to exercise a purchase option with respect to the leased
equipment or the equipment can be sold to a third party. The Company expects the
fair market value of the leased equipment, subject to the purchase option or
sold to a third party, to substantially reduce or eliminate the Company's
payment under the residual value guarantee. The Company is obligated to pay the
difference between the maximum amount of the residual value guarantee and the
fair market value of the equipment at the termination of the lease. At December
31, 1995 the
30
<PAGE> 33
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LEASE COMMITMENTS -- (CONCLUDED)
maximum amount of the residual value guarantee relative to the assets under the
lease at December 31, 1995 is approximately $88,400,000.
Following is a summary of future minimum payments under capitalized leases
and under operating leases that have initial or remaining noncancelable lease
terms in excess of one year at December 31, 1995 (in thousands of dollars):
<TABLE>
<CAPTION>
CAPITALIZED OPERATING
LEASES LEASES
----------- ---------
<S> <C> <C>
YEAR ENDING DECEMBER 31,
1996................................................. $ 16,800 $ 28,700
1997................................................. 24,200 25,000
1998................................................. 10,800 22,100
1999................................................. 7,700 19,100
2000................................................. 7,700 3,200
Years subsequent to 2000............................. 120,800 6,800
-------- --------
Total minimum lease payments........................... 188,000 $ 104,900
========
Imputed interest....................................... (77,700)
--------
Present value of minimum capitalized lease payments.... 110,300
Current portion........................................ (8,800)
--------
Long-term capitalized lease obligations................ $ 101,500
========
</TABLE>
Assets recorded under capital leases are included in Property, Plant and
Equipment as follows (in thousands of dollars):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
-------- --------
<S> <C> <C>
Land................................................... $ 10,200 $ 9,800
Buildings, structures and improvements................. 71,700 72,900
Machinery and equipment................................ 95,800 94,800
-------- --------
177,700 177,500
Accumulated depreciation............................... (85,700) (78,500)
-------- --------
$ 92,000 $ 99,000
======== ========
</TABLE>
Rental expense for operating leases amounted to $30,200,000, $20,200,000
and $11,600,000 in 1995, 1994 and 1993, respectively.
STOCK PLANS
In 1995, the Company's Board of Directors approved the repricing of certain
of the Company's stock options which had exercise prices higher than the then
market price of the Company's Class A Common Stock. The Company took this action
as a means of reestablishing the long-term incentive benefits for which the
stock option plans were originally designed. The Company exchanged previously
granted stock options for fewer new stock options at an exercise price equal to
the fair market value on the date of the exchange using a replacement formula
based on the modified Black-Scholes Option Pricing Model.
In 1995, the Company established the 1995 Executive Incentive Compensation
Plan (the "1995 EICP"). The 1995 EICP provides for the granting of non-qualified
stock options, stock appreciation rights, restricted
31
<PAGE> 34
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK PLANS -- (CONTINUED)
stock, deferred stock, dividend equivalents, other stock related awards and
performance or annual incentive awards that may be settled in cash, stock or
other property. The 1995 EICP replaced the 1994 Plan, as hereinafter defined,
and no further grants are allowable under the 1994 Plan. The 1995 EICP is
administered by the Compensation Committee of the Board of Directors (the
"Compensation Committee") and provides for the granting of up to 2,000,000
shares plus any shares of Class A Common Stock which are or become available
under the 1994 Plan, the 1992 Plan (as hereinafter defined) and the 1987 Plan
(as hereinafter defined), plus 5% of the number of shares of Class A Common
Stock newly issued by the Company during the term of the 1995 EICP. Stock
options may be granted under the 1995 EICP to eligible employees of the Company,
its parent, its subsidiaries and certain entities who provide services to the
Company, at a price not less than the market price on the date of grant. Options
granted vest and may be exercised at such time as prescribed by the Compensation
Committee. The Compensation Committee may, in its discretion, accelerate the
exercisability, the lapsing of restrictions or the expiration of deferral or
vesting periods of any award under the 1995 EICP, and such accelerated
exercisability, lapse, expiration and vesting shall occur automatically in the
case of a change of control of the Company as defined in the 1995 EICP. The
Company granted 4,660,500 options in 1995, including 2,509,100 options which
were exchanged in the repricing in 1995, to eligible employees at prices ranging
from $17.75 to $26.13. The Company cancelled 2,051,400 options under the 1995
EICP during 1995. At December 31, 1995 approximately 6,580,500 shares, including
shares which became available under the 1994 Plan, the 1992 Plan and the 1987
Plan, were reserved for issuance and 967,500 shares were exercisable under the
1995 EICP at prices ranging from $17.75 to $26.13.
In 1995 the Company granted 56,000 shares of performance units under the
1995 EICP. These units confer upon the participants in the 1995 EICP the right
to receive one share of Class A Common Stock or the corresponding cash
equivalent or a combination thereof for each unit earned at the end of a
performance and service period.
At December 31, 1995 and 1994, approximately 707,400 and 1,494,700 shares,
respectively, of Class A Common Stock were reserved for issuance under the
Company's 1987 Stock Option Plan (the "1987 Plan"). Under the terms of the Plan,
options were granted to eligible employees of the Company, its parent and its
subsidiaries at a price not less than the market price on the date of grant.
Option shares must be exercised within the period prescribed by the Compensation
Committee at the time of grant but not later than ten years and one day from the
date of grant. The 1987 Plan provides for the granting of qualified and
nonqualified stock options.
The following summarizes the activity of the 1987 Plan for 1995:
<TABLE>
<CAPTION>
OPTION PRICE SHARES
PER SHARE UNDER OPTION
---------------------- ------------
<S> <C> <C>
Outstanding at December 31, 1994.................. $ 6 3/8 to $47 5/8 1,434,300
Options exercised................................. $ 6 3/8 to $14 1/2 (50,900)
Options canceled.................................. $20 1/4 to $47 5/8 (676,000)
---------
Outstanding and exercisable at December 31,
1995............................................ $ 6 3/8 to $41 3/8 707,400
=========
</TABLE>
In 1994 the Company established the Executive Incentive Compensation Plan
(the "1994 Plan"). The 1994 Plan provided for the granting of non-qualified
stock options, incentive stock options, performance shares and annual incentive
awards. The 1994 Plan is administered by the Compensation Committee and
originally provided for the granting of up to 3,600,000 shares under the plan,
which shares were reserved and available for purchase under the provisions of
the plan. The 1994 Plan was replaced by the 1995 EICP. Stock options were
granted under the 1994 Plan to eligible employees of the Company, its parent,
its subsidiaries and certain entities who provide services to the Company at a
price not less than the market price on the date of grant.
32
<PAGE> 35
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK PLANS -- (CONTINUED)
Options granted vested at such time as prescribed by the Compensation Committee,
but in no event was any option exercisable prior to six months following its
grant. No option granted was exercisable later than the tenth anniversary date
of its grant.
The following summarizes the activity of the 1994 Plan for 1995:
<TABLE>
<CAPTION>
OPTION PRICE SHARES
PER SHARE UNDER OPTION
------------ ------------
<S> <C> <C>
Outstanding at December 31, 1994................... $24 3/4 to $30 7/8 664,100
Options cancelled.................................. $24 3/4 to $30 7/8 (583,200)
---------
Outstanding and exercisable at December 31, 1995... $25 3/4 to $30 7/8 80,900
=========
</TABLE>
Performance shares were granted under the 1994 Plan to eligible employees
of the Company, its parent, its subsidiaries and certain entities who provide
services to the Company. Each performance share has a value equal to the market
price of the Company's Class A Common Stock on the date the performance share is
earned. The Compensation Committee sets performance goals to be achieved over
performance periods of not less than two years. The extent to which performance
goals based on total shareholder return over at least a two year period are met
will determine the number of performance shares earned by participants. Payment
of earned performance shares shall be made in either cash or shares of Class A
Common Stock within seventy five days following the close of the performance
period. In September of 1995, the performance period was extended by two years
to December 31, 1997. If the shares are not earned in 1996 under the original
performance schedule, higher performance goals will be effective for 1997.
In 1995 the Company's stockholders approved the Company's 1995 Non-Employee
Directors' Stock Plan (the "1995 Directors' Plan"). The 1995 Directors' Plan
provides for the issuance of up to 200,000 shares of the Company's Class A
Common Stock which shares are reserved and available for issuance under the
plan. Only directors who are not employees of the Company, any parent or
subsidiary of the Company or FII are eligible to participate in the 1995
Directors' Plan. The 1995 Directors' Plan provides for an initial grant to each
non-employee director of a right to receive 2,500 shares of the Company's Class
A Common Stock (each share representing one "Restricted Stock Unit"). In
addition, the 1995 Directors' Plan provides for automatic annual grants of 1,250
Restricted Stock Units in 1995 and 1,850 Restricted Stock Units thereafter to
each non-employee director at the close of business on the date 120 days after
the annual meeting of stockholders. The right to receive shares of the Company's
Class A Common Stock in settlement of a Restricted Stock Unit is subject to
forfeiture in the event the recipient ceases to serve as a director prior to the
second anniversary of the date of grant for any reason other than death,
disability, retirement or upon the occurrence of a change of control as defined
in the 1995 EICP. At December 31, 1995 22,500 Restricted Stock Units are
outstanding under the 1995 Directors' Plan.
In 1993, the Company's stockholders approved the Company's Directors' Stock
Option Plan (the "Directors' Plan"). The Directors' Plan provided for the
issuance of options to purchase up to 175,000 shares of Class A Common Stock,
which shares were reserved and available for purchase upon the exercise of
options granted under the Directors' Plan. As of December 31, 1995 no additional
shares can be granted under the Directors' Plan. Only directors who were not
employees of the Company, any parent or subsidiary of the Company or FII were
eligible to participate in the Directors' Plan. The Directors' Plan was
administered by the Company's Board of Directors. Under the Directors' Plan each
non-employee director was initially granted an option to purchase 7,500 shares
of Class A Common Stock. On the date of each annual meeting at which such person
was elected or after which the person continued as a non-employee director, such
non-employee director was granted an option to purchase 2,500 shares of Class A
Common Stock. The options were exercisable at a price per share equal to the
fair market value per share of the Class A Common Stock on the
33
<PAGE> 36
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK PLANS -- (CONCLUDED)
date of grant. Option shares must be exercised not later than ten years from the
date of grant and do not become exercisable until the first anniversary of the
date of grant. At December 31, 1995, 72,500 options are outstanding and
exercisable at prices ranging from $30.88 to $42.
In 1992, the Company established the 1992 Executive Stock Option Plan (the
"1992 Plan"). The 1992 Plan provided for the issuance of options to purchase up
to 975,000 shares of Class A Common Stock, which shares are reserved and
available for purchase upon the exercise of stock options granted under the 1992
Plan. The 1992 Plan is administered by the Compensation Committee. In 1992,
options to purchase 975,000 shares of Class A Common Stock were granted under
the 1992 Plan to two directors of the Company who were also employees of the
Company. The options are exercisable at a price of $28.88 per share (which was
the closing price of the Class A Common Stock on the date of grant). Pursuant to
the terms of the grants, options for the shares vest (subject to acceleration
under certain circumstances) as follows: (i) one-third of the options granted
vested immediately upon grant; (ii) one-third of the options granted vest if the
closing price of the Class A Common Stock reaches or exceeds $45 per share for
90 consecutive days within six years from the date of grant; and (iii) the
remaining one-third of the options granted vest if the closing price of the
Class A Common Stock reaches or exceeds $60 per share for 90 consecutive days
within six years from the date of grant. All vested options expire ten years and
one day after the date of grant. Options which do not vest because the Company's
stock price has not reached the targeted price levels for vesting expire six
years after the date of grant. As of December 31, 1994, 325,000 of these options
were exercisable and none of these options had been exercised or canceled. These
325,000 options were cancelled and a total of 227,500 options were issued in
their place under the 1995 EICP in connection with the option repricing in 1995.
The remaining options under the 1992 Plan were not repriced. In January 1996,
150,000 of these remaining options were cancelled.
In July 1991, the Company granted an option to purchase 50,000 shares of
the Class A Common Stock to a director of the Company who is also an employee of
FII at a purchase price of $10.25 per share. The exercise period of the option
terminates ten years and one day from the date of grant. As of December 31,
1995, none of these options have been exercised or canceled.
At December 31, 1995 and 1994, approximately 181,300 and 238,800 shares,
respectively, of Class A Common Stock were reserved for issuance under the
Company's 1989 Stock Grant Plan. Under the terms of this plan, eligible
employees of the Company, its parent and its subsidiaries are awarded shares,
subject to forfeitures or certain restrictions which generally expire three
years from the date of the grant. Shares are awarded in the name of the
employee, who has all the rights of a shareholder, subject to the above
mentioned restrictions. The Company canceled 5,300 previously issued shares
during 1995. The Company granted approximately 62,800 shares to eligible
employees during 1995.
At December 31, 1995 and 1994, approximately 298,600 shares of Class A
Common Stock were reserved for issuance under the Company's 1987 Long-Term Bonus
Plan. Under the terms of this plan, eligible employees of the Company's
operating subsidiary participate in cash and stock bonus pools for four year
plan periods. Awards under this plan are payable in a combination of cash and
stock. No new four year plan period began subsequent to December 31, 1990.
34
<PAGE> 37
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Common Shares
Balance, beginning of period................................ 75,851 75,724 75,554
Class A shares issued upon exercise of options.............. 51 52 106
Class A shares issued under stock grant plan-net............ 58 29 12
Class A shares issued under long-term bonus plan............ -- 46 52
-------- -------- --------
Balance, end of period...................................... 75,960 75,851 75,724
======== ======== ========
Common Stock and Capital in Excess of Par Value
Balance, beginning of period................................ $468,100 $464,000 $458,400
Class A shares issued upon exercise of options.............. 700 1,000 2,400
Class A shares issued under stock grant plan-net............ 1,200 2,000 700
Class A shares issued under long-term bonus plan............ -- 1,100 2,400
Other....................................................... -- -- 100
-------- -------- --------
Balance, end of period...................................... $470,000 $468,100 $464,000
======== ======== ========
Retained Earnings
Balance, beginning of period................................ $680,600 $620,300 $412,800
Net earnings (loss)......................................... (232,500) 60,300 207,500
-------- -------- --------
Balance, end of period...................................... $448,100 $680,600 $620,300
======== ======== ========
Currency Translation and Minimum Pension Liability Adjustments
Balance, beginning of period................................ $(22,900) $(37,300) $(16,200)
Translation adjustments-net................................. 1,000 14,400 (21,100)
Minimum pension liability adjustment........................ (600) -- --
-------- -------- --------
Balance, end of period...................................... $(22,500) $(22,900) $(37,300)
======== ======== ========
</TABLE>
Holders of Class A Common Stock are entitled to receive, on a cumulative
basis, the first dollar per share of dividends declared. Thereafter, holders of
Class A Common Stock and Class B Common Stock will share ratably in any
dividends declared. Each share of Class A Common Stock is entitled to one vote
and each share of Class B Common Stock is entitled to five votes. The Class B
Common Stock is convertible into the Class A Common Stock on a share for share
basis.
In March 1996 the Company adopted a stockholder rights plan (the "Rights
Plan") by which preferred stock purchase rights were distributed for each
outstanding share of the Company's Class A Common Stock and Class B Common
Stock. The Rights Plan provides for Series A Rights and Series B Rights. Each
Series A Right entitles holders of the Company's common stock to buy one
one-hundredth of a share of a new series of preferred stock at an exercise price
of $90. The Series A Rights will be exercisable only if a person or entity
acquires 15% or more of the Company's common stock or announces a tender offer
upon consummation of which such person or entity would own 15% or more of the
common stock.
Generally, if any person or entity becomes the beneficial owner of 15% or
more of the Company's common stock, each Series A Right not owned by such a
person or entity will enable its holder both to (i) purchase Class A Common
Stock of the Company having a value of $180 for a purchase price of $90 and (ii)
receive a Series B Right. In addition, in such case, if the Company is
thereafter involved in a merger or other business combination transaction with
another entity or sells 50% or more of its assets or earning power to another
person or entity, each Series B Right and each Series A Right that has not
previously been exercised will entitle its holder to purchase, at $90 per Series
A and Series B Right, common shares of such other entity having a value of twice
that price.
35
<PAGE> 38
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS' EQUITY -- (CONCLUDED)
The Company generally will be entitled to amend the Rights Plan and redeem
the Series A Rights at $.01 per Series A Right at any time prior to the time a
person or group has acquired 15% of the Company's common stock. The Series B
Rights cannot be redeemed after the time they are issued. The foregoing
description of the Rights Plan does not purport to be complete and is qualified
in its entirety by reference to the Rights Plan.
Approximately 9.2% of the Company's common stock at December 31, 1995 is
held by FI and William Farley. Because these affiliates hold all of the Class B
Common Stock of the Company outstanding, which has five votes per share, they
control approximately 32.9% of all voting rights of the Company. All actions
submitted to a vote of stockholders are voted on by holders of Class A Common
Stock and Class B Common Stock voting together as a single class, except for the
election of directors. With respect to the election of directors, holders of the
Class A Common Stock vote as a separate class and are entitled to elect 25% of
the total number of directors constituting the entire Board of Directors and, if
not a whole number, then the holders of the Class A Common Stock are entitled to
elect the nearest higher whole number of directors that is at least 25% of the
total number of directors. If, at the record date for any stockholder meeting at
which directors are elected, the number of shares of Class B Common Stock
outstanding is less than 12.5% of the total number of shares of both classes of
common stock outstanding, then the holders of Class A Common Stock would vote
together with the holders of Class B Common Stock to elect the remaining
directors to be elected at such meeting, with the holders of Class A Common
Stock having one vote per share and the holders of Class B Common Stock having
five votes per share. At December 31, 1995 FI and William Farley's combined
ownership of Class B Common Stock is approximately 8.8% of the total common
stock of the Company outstanding. As a result, Mr. Farley does not have the sole
ability to elect those members of the Company's Board of Directors who are not
separately elected by the holders of the Company's Class A Common Stock.
BUSINESS SEGMENT AND MAJOR CUSTOMER INFORMATION
The Company operates in only one business segment consisting of the
manufacturing and marketing of basic apparel. Sales to one customer amounted to
approximately 19.5%, 15.6% and 13.4% of consolidated net sales in 1995, 1994 and
1993, respectively. Additionally, sales to a second customer amounted to
approximately 10.8%, 11.8% and 12.3% of consolidated net sales in 1995, 1994 and
1993, respectively.
Sales, operating earnings and identifiable assets are as follows (in
thousands of dollars):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Net Sales
Domestic................................................ $2,040,300 $1,972,000 $1,634,600
Foreign................................................. 362,800 325,800 249,800
---------- ---------- ----------
Total................................................... $2,403,100 $2,297,800 $1,884,400
========== ========== ==========
Operating Earnings (Loss)
Domestic................................................ $ (53,500) $ 234,500 $ 368,900
Foreign................................................. (19,000) 21,900 29,800
General corporate expenses.............................. (35,600) (21,400) (17,200)
---------- ---------- ----------
Total................................................... $ (108,100) $ 235,000 $ 381,500
========== ========== ==========
</TABLE>
36
<PAGE> 39
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
BUSINESS SEGMENT AND MAJOR CUSTOMER INFORMATION -- (CONCLUDED)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Identifiable Assets
Domestic................................................ $2,431,000 $2,661,000 $2,390,700
Foreign................................................. 402,000 442,400 300,500
Corporate............................................... 86,500 60,100 42,800
---------- ---------- ----------
Total................................................... $2,919,500 $3,163,500 $2,734,000
========== ========== ==========
</TABLE>
The operating loss and identifiable assets for 1995 reflect the effect of
special charges recorded in the fourth quarter of 1995. See "SPECIAL CHARGES."
Corporate assets presented above consist primarily of cash and other short-term
investments, deferred financing costs and, in 1995 and 1994, a receivable
related to anticipated environmental recoveries. Corporate assets in all periods
also include Federal income taxes receivable.
PENSION PLANS
Pension expense was $12,200,000, $11,700,000 and $5,500,000 in 1995, 1994
and 1993, respectively. The net pension expense is comprised of the following
(in thousands of dollars):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
-------- -------- -------
<S> <C> <C> <C>
Components:
Service cost -- benefits earned during the period............ $ 12,800 $ 11,700 $ 7,700
Interest cost on projected benefit obligation................ 13,100 12,800 10,800
Return on assets:
Actual (gain) loss........................................ (27,900) 800 (5,900)
Deferred actuarial gains (losses)......................... 14,900 (13,500) (5,800)
Amortization of unrecognized net loss........................ 600 1,200 --
Amortization of prior service cost........................... 200 -- --
Amortization of unrecognized January 1, 1987 net transition
asset..................................................... (1,300) (1,300) (1,300)
Curtailment gain............................................. (200) -- --
------- ------- --------
Net periodic pension cost............................... $ 12,200 $ 11,700 $ 5,500
======= ======= ========
Assumptions:
Discount rate................................................ 8.25% 7.75% 9%
Rates of increase in compensation levels..................... 5-8% 5-8% 5-8%
Expected long-term rate of return on assets.................. 10% 10% 10%
</TABLE>
37
<PAGE> 40
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PENSION PLANS -- (CONCLUDED)
The following table sets forth the funded status of the plans and amounts
recognized in the Company's Consolidated Balance Sheet (in thousands of
dollars):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
-------- --------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits....................................................... $125,000 $106,400
Non-vested benefits................................................... 12,300 10,200
-------- --------
Accumulated benefit obligation..................................... 137,300 116,600
Effect of projected future salary increases........................... 53,400 52,400
-------- --------
Projected benefit obligation............................................ 190,700 169,000
Plan assets at fair value............................................... 140,900 118,200
-------- --------
Plan assets less than projected benefit obligation...................... (49,800) (50,800)
Unrecognized loss....................................................... 24,900 39,700
Unrecognized prior service cost......................................... 2,100 (200)
Unrecognized net transition asset at end of period...................... (5,900) (8,500)
Additional minimum liability............................................ (2,700) --
-------- --------
Unfunded accrued pension cost at end of period.......................... $(31,400) $(19,800)
======== ========
</TABLE>
The discount rate for purposes of determining the funded status of the
plans at December 31, 1995 and 1994 was 7.5% and 8.25%, respectively.
Plan assets for the Company's funded plans, which are primarily invested in
United States Government, international and domestic corporate debt securities,
equity securities, real estate and venture capital funds, are commingled in a
master trust which includes the assets of the pension plans of substantially all
affiliated companies controlled directly and indirectly by William Farley (the
"Master Trust"). Plan assets, except those that are specifically identified to a
particular plan, are shared by each of the plans in the Master Trust ("Allocated
Assets"). Any gains and losses associated with the Allocated Assets are spread
among each of the plans based on each plan's respective share of the Allocated
Assets market value. The Company's plan assets represent approximately 70.6% and
69.3% of the Master Trust Allocated Assets at December 31, 1995 and 1994,
respectively.
Included in the Master Trust Allocated Assets at December 31, 1995 and 1994
were 647,852 shares (with a cost of $5,100,000 and a market value of $15,800,000
and $17,500,000, respectively) of the Company's Class A Common Stock.
As of December 31, 1995 and 1994, the Master Trust holds 348,012 shares
(with a cost of $7,700,000 and a market value of $8,500,000 and $9,400,000,
respectively) of the Company's Class A Common Stock that is specifically
identified to the retirement plan of FI. Any change in market value associated
with these shares is allocated entirely to the FI plan and does not effect the
Master Trust Allocated Assets.
Statement of Financial Accounting Standards No. 87 "Employers' Accounting
For Pensions" ("Statement No. 87") requires recognition on the balance sheet of
a minimum liability at least equal to the excess of the accumulated benefit
obligation over plan assets. A corresponding amount is recognized as either an
intangible asset or a reduction of equity. Accordingly, the Company, at December
31, 1995, has recorded an intangible asset of $2,100,000, an additional
liability of $2,700,000 and a reduction in equity of $600,000 to reflect the
balance sheet provisions of Statement No. 87 relative to certain unfunded
nonqualified pension plans.
38
<PAGE> 41
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DEPRECIATION EXPENSE
Depreciation expense, including amortization of capital leases,
approximated $125,500,000, $107,600,000 and $84,300,000 in 1995, 1994 and 1993,
respectively.
ADVERTISING EXPENSE
Advertising, which is expensed as incurred, approximated $72,000,000,
$70,800,000 and $52,800,000 in 1995, 1994 and 1993, respectively.
INCOME TAXES
Income taxes are included in the Consolidated Statement of Operations as
follows (in thousands of dollars):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
-------- ------- --------
<S> <C> <C> <C>
Income tax (benefit) expense on earnings before extraordinary
item and cumulative effect of change in accounting
principles................................................... $(19,400) $73,200 $154,300
Extraordinary item............................................. -- -- (4,700)
Cumulative effect of change in accounting principles:
Pre-operating costs.......................................... (1,900) -- --
Income taxes................................................. -- -- (3,400)
------- -------- --------
Total income tax (benefit) expense............................. $(21,300) $73,200 $146,200
======= ======== ========
</TABLE>
Included in earnings (loss) before extraordinary items and cumulative
effect of change in accounting principles are foreign losses of $47,300,000 and
$15,500,000 in 1995 and 1994, respectively, and foreign earnings of $17,000,000
in 1993.
The components of income tax (benefit) expense related to earnings (loss)
before extraordinary item and cumulative effect of change in accounting
principles were as follows (in thousands of dollars):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1994 1993
-------- ------- --------
<S> <C> <C> <C>
Current:
Federal..................................... $ 17,000 $73,600 $111,100
State....................................... 15,200 6,100 10,100
Foreign..................................... (1,100) 1,100 2,900
------- -------- --------
Total current.......................... 31,100 80,800 124,100
------- -------- --------
Deferred:
Federal..................................... (38,800) (7,400) 28,500
State....................................... (11,200) (200) 1,800
Foreign..................................... (500) -- (100)
------- -------- --------
Total deferred......................... (50,500) (7,600) 30,200
------- -------- --------
Total.................................. $(19,400) $73,200 $154,300
======= ======== ========
</TABLE>
39
<PAGE> 42
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES -- (CONTINUED)
The income tax rate on earnings (loss) before extraordinary item and
cumulative effect of change in accounting principles differed from the Federal
statutory rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1994 1993
----- ---- ----
<S> <C> <C> <C>
Federal statutory rate................................ (35.0)% 35.0% 35.0%
Impairment writedown of goodwill...................... 11.1 -- --
Foreign operating losses.............................. 6.1 4.1 --
Goodwill amortization................................. 4.4 7.9 2.5
Interest on prior years' taxes........................ 2.1 5.2 2.1
State income taxes, net of Federal tax benefit........ 1.1 2.9 2.1
Other-net............................................. 2.3 (.3) .3
---- ---- ----
Effective rate................................. (7.9)% 54.8% 42.0%
==== ==== ====
</TABLE>
Deferred income taxes are provided for temporary differences between income
tax and financial statement recognition of revenues and expenses. Deferred tax
liabilities (assets) are comprised of the following (in thousands of dollars):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
--------- ---------
<S> <C> <C>
Depreciation and amortization........................ $ 139,800 $ 120,600
Items includible in future tax years................. 51,500 39,700
-------- ---------
Gross deferred tax liabilities..................... 191,300 160,300
-------- ---------
Inventory valuation reserves......................... (29,600) (27,900)
Accrued employee benefit expenses.................... (32,500) (23,200)
Acquired tax benefits and basis differences.......... (51,700) (14,800)
Allowance for possible losses on receivables......... (6,300) (6,200)
Items deductible in future tax years................. (80,000) (44,800)
-------- ---------
Gross deferred tax assets.......................... (200,100) (116,900)
-------- ---------
Net deferred tax (asset) liability................. $ (8,800) $ 43,400
======== =========
</TABLE>
Effective January 1, 1993, the Company recorded the cumulative effect of a
change in accounting principle related to the initial adoption of Statement No.
109 resulting in a $3,400,000 ($.04 per share) benefit.
In 1993, the Company paid the IRS approximately $28,300,000 in settlement
of Federal income tax assessments for the tax periods ended December 31, 1984
and July 31, 1985 (the final predecessor tax periods). This amount included
approximately $14,800,000 of accrued interest. The Company had previously
established reserves for these matters and these payments did not have an impact
on the 1993 tax provision.
The IRS previously asserted income tax deficiencies, excluding statutory
interest which accrues from the date the tax was due until payment, for the
Company of approximately $93,000,000 for the years 1978-1980 and $15,400,000 for
the years 1981-1983. The Company had protested the IRS's asserted tax
deficiencies for these six years with respect to a number of issues and also had
raised certain affirmative tax issues that bear on these years. Settlement
agreements with respect to all the 1978-1980 and 1981-1983 protested and
affirmative issues resulted in the Company receiving a refund of approximately
$5,900,000, including interest, in January 1993.
In an unrelated matter, 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
40
<PAGE> 43
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES -- (CONCLUDED)
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 28 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 has a period of 90 days from the date of the decision
to petition for a review by the United States Supreme Court. The Company
believes, based on information currently available, that the IRS position is
without merit and that the Company will prevail should the IRS appeal and the
United States Supreme Court decide to hear the case.
Cash payments for income taxes were $32,700,000, $49,000,000 and
$137,500,000 in 1995, 1994 and 1993, respectively.
OTHER EXPENSE-NET
Other expense-net in 1995 includes $20,700,000 of charges to provide for
certain retained liabilities in connection with the prior sale of certain
discontinued operations and fees related to the modification of certain
agreements. See "SPECIAL CHARGES." Included in other expense-net in 1995, 1994
and 1993 was deferred debt fee amortization and bank fees of approximately
$5,700,000, $8,100,000 and $7,900,000, respectively. Other expense-net in 1995
includes $5,700,000 of gains as compared to $1,900,000 and $1,500,000 of expense
in 1994 and 1993, respectively, related to the settlement of certain foreign
currency denominated transactions. In addition, included in other expense-net in
1994 is $16,000,000 of service fee income from Gitano's operations which
represent Gitano's transition to a marketing service organization from a
traditional wholesaler base. These revenues did not recur after 1994 as Gitano
reverted to a traditional apparel wholesaler. In 1994, this service fee revenue
was partially offset by $12,500,000 of charges to provide for certain
obligations of and legal expenses pertaining to litigation related to retained
liabilities of former subsidiaries.
EARNINGS PER SHARE
Primary earnings per share are based on the weighted average number of
common shares and equivalents outstanding during the year.
RELATED PARTY TRANSACTIONS
Under the terms of a management agreement between FII and the Company, FII
provides the Company, to the extent that the Company may request, (i) general
management services which include, but are not limited to, financial management,
legal, tax, accounting, corporate development, human resource and personnel
advice; (ii) investment banking services in connection with the acquisition or
disposition of the assets or operations of a business or entity; (iii) financing
services in connection with the arrangement by FII of public or private debt
(including letter of credit facilities); and (iv) other financial, accounting,
legal and advisory services rendered outside the ordinary course of the
Company's business. FII is owned and controlled by Mr. Farley; its employees
provide services to companies owned or controlled by Mr. Farley, including the
Company. Certain of the executive officers of the Company are employed by, and
receive their compensation from, FII. These officers devote their time as needed
to those companies owned and controlled by Mr. Farley and, accordingly, do not
devote full time to any single company, including the Company.
In consideration for investment banking and financing services, the Company
pays FII fees established by FII and determined to be reasonable by FII in
relation to (i) the size and complexity of the transaction; and (ii) the fees
customarily charged by other advisors for similar investment banking and
financing services; provided, such fees shall not exceed two percent of the
total consideration paid or received by the Company or two percent of the
aggregate amount available for borrowing or use under the subject agreement or
facility.
41
<PAGE> 44
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONCLUDED)
RELATED PARTY TRANSACTIONS -- (CONCLUDED)
Fees for investment banking and financing services are generally payable to FII
upon the closing of the subject transaction or agreement.
Effective January 1995, the Company entered into a new management agreement
(the "Management Agreement") with FII pursuant to which FII agreed to render
substantially similar services to the Company as under the prior management
agreements. Under the terms of the management agreement, the Company pays a fee
to FII based on FII's cost of providing management services. The Company paid
management fees to FII of approximately $8,100,000, $8,800,000 and $9,900,000 in
1995, 1994 and 1993, respectively. At December 31, 1994 approximately $600,000
was owed for management services related to 1994, which amount was paid in
February 1995. The Company also paid a financing fee to FII of approximately
$2,000,000 and $2,500,000 in 1995 and 1994, respectively, for financing services
related to 1994 and 1993, respectively, which costs were capitalized as deferred
financing costs in 1995 and 1994, respectively.
As a part of the 1995 special charge, the Company decided to integrate into
the Company's Bowling Green operations certain functions historically performed
by FII personnel. In connection with this effort, the Board of Directors
determined that the management agreement with FII should not be renewed for 1996
and that the general management functions previously performed by FII should be
assumed directly by the Company. Accordingly, effective January 1, 1996, the
Company severed its relationship with FII and by agreement with FII acquired
substantially all of the assets (exclusive of a cash balance at December 31,
1995 of approximately $1,500,000) used by FII in providing management services
to the Company and directly employed certain persons previously employed by FII
who provide such services.
Pursuant to a determination by the non-management members of the Board of
Directors, the Company agreed to pay $3,500,000 to FII in consideration of FII's
transfer to the Company of such assets and personnel and its release of
obligations to FII. The non-management members of the Board of Directors
determined that such payment was fair and reasonable to the Company, basing
their determination, in part, upon the anticipated cost savings to the Company
in 1996 and beyond from the integration of FII functions into the Company, the
cost of otherwise creating the workforce necessary to provide the management
services previously provided by FII and the assistance of FII in effecting the
transition of functions and personnel (including certain executive officers) to
the Company. The Company agreed to pay up to approximately $4,000,000 to FII in
1996, all of which relates to the severance of certain FII employees who were
not re-employed by the Company, including severance payments under certain
employment agreements that were guaranteed by the Company. The Company also
agreed to reimburse FII for any direct ordinary and reasonable costs and
expenses associated with the transition of management functions from FII into
the Company in 1996. The severance and asset purchase amounts were included in
the Company's special charge accrued in the fourth quarter of 1995. See "SPECIAL
CHARGES."
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. 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. See "CONTINGENT
LIABILITIES."
The Company completed the sale of the stock of Acme Boot at book value,
which approximated fair market value, to an affiliate in June 1987 for an
aggregate of $38,400,000 of cash and preferred stock and subordinated debentures
of the affiliate. In the fourth quarter of 1993, the Company received
approximately $72,900,000 from Acme Boot representing the entire unpaid
principal and liquidation preference (including accrued interest and dividends)
on its investment in the securities of the affiliate. The Company recorded a
pretax gain of approximately $67,300,000 in connection with the investment in
Acme Boot upon the receipt of the above mentioned proceeds. See "CONTINGENT
LIABILITIES."
42
<PAGE> 45
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
SUPPLEMENTARY DATA
QUARTERLY FINANCIAL SUMMARY (UNAUDITED)
(IN MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
QUARTER
------------------------------------------- TOTAL
FIRST SECOND THIRD FOURTH YEAR
------ ------ ------ ------- --------
<S> <C> <C> <C> <C> <C>
1995
Net sales............................... $528.2 $724.8 $641.3 $ 508.8 $2,403.1
Gross earnings (loss)................... 162.0 211.0 190.9 (46.5) 517.4
Operating earnings (loss)............... 59.7 102.6 81.9 (352.3) (108.1)
Earnings (loss) before cumulative effect
of change in accounting principle..... 16.5 39.7 24.5 (308.0)(2) (227.3)
Net earnings (loss)..................... 11.3(1) 39.7 24.5 (308.0) (232.5)
Earnings (loss) per common share before
cumulative effect of change in
accounting principle.................. .22 .52 .32 (4.05) (2.99)
</TABLE>
<TABLE>
<CAPTION>
QUARTER
------------------------------------------- TOTAL
FIRST SECOND THIRD FOURTH YEAR
------ ------ ------ ------- --------
<S> <C> <C> <C> <C> <C>
1994
Net sales............................... $438.2 $635.2 $640.4 $ 584.0 $2,297.8
Gross earnings.......................... 145.8 190.8 201.5 108.4 646.5
Operating earnings (loss)............... 66.7 91.5 98.4 (21.6)(3) 235.0
Net earnings (loss)..................... 25.1 38.7 40.2 (43.7) 60.3
Net earnings (loss) per common share.... .33 .51 .53 (.58) .79
</TABLE>
- -------------------------
(1) Effective January 1, 1995, the Company recorded and restated for 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 $5.2 ($.07 per share).
(2) Includes pretax charges of $372.9 ($287.4 after tax) related to impairment
writedowns of goodwill, costs associated with the closing or realignment of
certain domestic manufacturing facilities and attendant personnel reductions
and charges related to inventory writedowns and valuations, foreign
operations and other corporate issues.
(3) Includes pretax charges of approximately $40 to write inventories down to
net realizable value and a pretax charge of $18 related to the write-off of
Artex intangibles.
43
<PAGE> 46
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company as of December 31, 1995 were as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- --------------------------------------------------------
<S> <C> <C>
William Farley................ 53 Chairman of the Board and Chief Executive Officer
John B. Holland(1)............ 63 President and Chief Operating Officer
Richard C. Lappin(2).......... 51 Vice-Chairman of the Board
Richard M. Cion............... 52 Senior Executive Vice President -- Corporate Development
Larry K. Switzer.............. 52 Executive Vice President and Chief Financial Officer
Michael F. Bogacki............ 41 Vice President and Controller
Burgess D. Ridge.............. 51 Vice President -- Administration
Earl C. Shanks................ 39 Vice President and Treasurer
</TABLE>
- -------------------------
(1) Mr. Holland retired as President and Chief Operating Officer at the end of
January 1996.
(2) Mr. Lappin was appointed to the additional posts of President and Chief
Operating Officer at the end of January 1996.
Officers serve at the discretion of the Board of Directors. Messrs. Lappin,
Cion, Switzer, Bogacki, Ridge and Shanks were employed by FII, which provided
management services to companies owned or managed by Mr. Farley. Effective
January 1, 1996, the FII Management Agreement was terminated and the functions
previously performed by FII began to be performed directly by the Company. See
"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS." Certain of the
executive officers, as noted below, are also executive officers of FI and were
executive officers of VBQ, Inc. ("VBQ"), formerly a defense contractor and an
affiliate of FI. Certain of the executive officers, as noted below, were also
executive officers of Valley Fashions Corp. (formerly West Point Acquisition
Corp. and currently West Point Stevens, Inc.). During 1992, FI and Valley
Fashions Corp. emerged from bankruptcy proceedings and VBQ became the subject of
a Chapter 7 liquidation.
WILLIAM FARLEY. Mr. Farley has been Chairman of the Board and Chief
Executive Officer of the Company since May 1985. Mr. Farley has also been
Chairman and a director of Acme Boot for more than the past five years. During
the past five years, Mr. Farley has also been Chairman and Chief Executive
Officer of FII. He has held substantially similar positions with FI since 1982,
VBQ from 1984 until January 1992, West Point-Pepperell, Inc. ("West Point") from
April 1989 until October 1992 and Valley Fashions Corp. from March 1989 until
October 1992.
JOHN B. HOLLAND. Mr. Holland has been a director of the Company since
November 1992 and President of the Company since May 1992. Mr. Holland has
served as Chief Operating Officer of the Company for more than the past five
years. Mr. Holland served as Vice Chairman of West Point from April 1989 until
September 1992 and as a director of West Point from April 1989 until September
1992. Mr. Holland is also a director of Dollar General Corp. and Camping World,
Inc.
RICHARD C. LAPPIN. Mr. Lappin has been a director of the Company since
December 1990 and Vice Chairman of the Company since October 1991. Mr. Lappin
has been Vice Chairman and Chief Executive Officer of Acme Boot since February
1991 and a director of Acme Boot since December 1993. Mr. Lappin has been
President and Chief Operating Officer of FII since February 1991.
44
<PAGE> 47
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT -- (CONCLUDED)
RICHARD M. CION. Mr. Cion has been Senior Executive Vice President of the
Company, FII and Acme Boot since before 1991 and of West Point from February
1990 until October 1992. Mr. Cion was also a director of West Point from April
1989 until October 1992. Mr. Cion served as a director of Valley Fashions Corp.
from April 1989 until June 1992. Mr. Cion was also Senior Executive Vice
President of Valley Fashions Corp. from March 1992 until October 1992.
LARRY K. SWITZER. Mr. Switzer has been Executive Vice President and Chief
Financial Officer of the Company, FII and FI since May 1994. From September 1992
to March 1993 Mr. Switzer was Executive Vice President and Chief Financial
Officer of Alco Standard Corporation, a distributor of paper products, office
equipment and supplies. Mr. Switzer was Senior Vice President and Chief
Financial Officer of S.C. Johnson & Son, Inc., a manufacturer and marketer of
consumer home care and commercial chemical products, from before 1991 to August
1992.
MICHAEL F. BOGACKI. Mr. Bogacki has served as Vice President and Corporate
Controller of the Company, FII and FI since before 1991 and as a Vice President
of Acme Boot since February 1991. In June 1991, Mr. Bogacki was appointed
Assistant Secretary of the Company. Mr. Bogacki was Corporate Controller of
Valley Fashions Corp. from March 1989 until November 1992. Mr. Bogacki was also
Vice President of Valley Fashions Corp. from June 1991 until November 1992.
BURGESS D. RIDGE. Mr. Ridge was Assistant Treasurer of the Company, FII and
FI from before 1991 until October 1991. Mr. Ridge was appointed Vice President
- -- Administration of FII and FI in August 1991 and of the Company in October
1991.
EARL C. SHANKS. Mr. Shanks served as Vice President -- Taxes and Assistant
Secretary of the Company, FII and FI from before 1991 until June 1991. In June
1991, Mr. Shanks became Treasurer of the Company, FII, Acme Boot and FI. Mr.
Shanks was Vice President and Assistant Secretary of West Point from April 1989
until November 1992. Mr. Shanks served as Vice President -- Taxes and Assistant
Secretary of Valley Fashions Corp. from March 1989 until June 1991. Mr. Shanks
was Vice President and Treasurer of Valley Fashions Corp. from June 1991 until
November 1992. During the past five years Mr. Shanks has been a Vice President
of Acme Boot. Mr. Shanks was Vice President -- Taxes of VBQ from before 1991 to
January 1992.
Information relating to the directors of the Company is set forth in the
Registrant's proxy statement for its Annual Meeting of Stockholders to be held
on May 14, 1996 (the "Proxy Statement") to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A of the Securities Exchange Act of
1934, as amended, and is hereby incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation is set forth in the Proxy
Statement to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended, and is hereby
incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information relating to the security ownership of certain beneficial owners
and management is set forth in the Proxy Statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A of the Securities
Exchange Act of 1934, as amended, and is hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Under the terms of a management agreement between FII and the Company, FII
provides the Company, to the extent that the Company may request, (i) general
management services which include, but are not limited to, financial management,
legal, tax, accounting, corporate development, human resource and personnel
advice; (ii) investment banking services in connection with the acquisition or
disposition of the assets or operations of any business or entity; (iii)
financing services in connection with the arrangement by
45
<PAGE> 48
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -- (CONTINUED)
FII of public or private debt (including letter of credit facilities); and (iv)
other financial, accounting, legal and advisory services rendered outside the
ordinary course of the Company's business. FII is owned and controlled by Mr.
Farley; its employees provide services to companies owned or controlled by Mr.
Farley, including the Company. Certain of the executive officers of the Company
are employed by, and receive their compensation from, FII. These officers devote
their time as needed to those companies owned and controlled by Mr. Farley and,
accordingly, do not devote full time to any single company, including the
Company.
In consideration for investment banking and financing services, the Company
pays FII fees established by FII and determined to be reasonable by FII in
relation to (i) the size and complexity of the transaction; and (ii) the fees
customarily charged by other advisors for similar investment banking and
financing services; provided, such fees shall not exceed two percent of the
total consideration paid or received by the Company or two percent of the
aggregate amount available for borrowing or use under the subject agreement or
facility. Fees for investment banking and financing services are generally
payable to FII upon the closing of the subject transaction or agreement.
Effective January 1995, the Company entered into the Management Agreement
with FII pursuant to which FII agreed to render substantially similar services
to the Company as under the prior management agreements. Under the terms of a
management agreement, the Company pays a fee to FII based on FII's cost of
providing management services. The Company paid management fees to FII of
approximately $8,100,000, $8,800,000 and $9,900,000 in 1995, 1994 and 1993,
respectively. At December 31, 1994 approximately $600,000 was owed for
management services related to 1994, which amount was paid in 1995. The Company
also paid a financing fee to FII of approximately $2,000,000 and $2,500,000 in
1995 and 1994, respectively, for financing services related to 1994 and 1993,
respectively, which costs were capitalized as deferred financing costs in 1995
and 1994, respectively.
As a part of the 1995 special charge, the Company decided to integrate into
the Company's Bowling Green operations certain functions historically performed
by FII personnel. In connection with this effort, the Board of Directors
determined that the management agreement with FII should not be renewed for 1996
and that the general management functions previously performed by FII should be
assumed directly by the Company. Accordingly, effective January 1, 1996, the
Company severed its relationship with FII and by agreement with FII acquired
substantially all of the assets (exclusive of a cash balance at December 31,
1995 of approximately $1,500,000) used by FII in providing management services
to the Company and directly employed certain persons previously employed by FII
who provide such services.
Pursuant to a determination by the non-management members of the Board of
Directors, the Company agreed to pay $3,500,000 to FII in consideration of FII's
transfer to the Company of such assets and personnel and its release of
obligations to FII. The non-management members of the Board of Directors
determined that such payment was fair and reasonable to the Company, basing
their determination, in part, upon the anticipated cost savings to the Company
in 1996 and beyond from the integration of FII functions into the Company, the
cost of otherwise creating the workforce necessary to provide the management
services previously provided by FII and the assistance of FII in effecting the
transition of functions and personnel (including certain executive officers) to
the Company. The Company has agreed to pay up to approximately $4,000,000 to FII
in 1996, all of which relates to the severance of certain FII employees who were
not re-employed by the Company, including severance payments under certain
employment agreements that were guaranteed by the Company. The Company also
agreed to reimburse FII for any direct ordinary and reasonable costs and
expenses associated with the transition of management functions from FII into
the Company in 1996. The severance and asset purchase amounts were included in
the Company's special charge accrued in the fourth quarter of 1995.
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. 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
46
<PAGE> 49
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -- (CONCLUDED)
lien on certain shares of the Company held by the bank for other loans made to
Mr. Farley. See "CONTINGENT LIABILITIES" in the Notes to Consolidated Financial
Statements.
The Company completed the sale of the stock of Acme Boot at book value,
which approximated fair market value, to an affiliate in June 1987 for an
aggregate of $38,400,000 of cash and preferred stock and subordinated debentures
of the affiliate. In the fourth quarter of 1993, the Company received
approximately $72,900,000 from Acme Boot representing the entire unpaid
principal and liquidation preference (including accrued interest and dividends)
on its investment in the securities of the affiliate. The Company recorded a
pretax gain of approximately $67,300,000 in connection with the investment in
Acme Boot upon the receipt of the above mentioned proceeds. See "CONTINGENT
LIABILITIES" in the Notes to Consolidated Financial Statements.
Information relating to certain relationships and related transactions is
set forth in the Proxy Statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A of the Securities Exchange Act of 1934, as
amended, and is hereby incorporated by reference.
47
<PAGE> 50
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) Financial statements, financial statement schedule and exhibits
1. Financial Statements
The financial statements listed in the Index to Financial Statements and
Supplementary Data on page 16 are filed as part of this Annual Report.
2. Financial Statement Schedule
The schedule listed in the Index to Financial Statements and Supplementary
Data on page 16 is filed as part of this Annual Report.
3. Exhibits
The exhibits listed in the Index to Exhibits on pages 51 and 52 are filed
as part of this Annual Report.
(b) Reports on Form 8-K
In December 1995 the Company filed a Current Report on Form 8-K dated
December 20, 1995 reporting the announcement of fourth quarter charges to
operations.
48
<PAGE> 51
ALTERNATE
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of
Chicago, State of Illinois, on March 28, 1996.
FRUIT OF THE LOOM, INC.
By: LARRY K. SWITZER
--------------------------------------
(Larry K. Switzer
Executive Vice President and
Chief Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities indicated on
March 28, 1996.
<TABLE>
<CAPTION>
NAME CAPACITY
- ------------------------------------------ ----------------------------------------------
<C> <S>
/s/ WILLIAM FARLEY Chairman of the Board and Chief Executive
- ------------------------------------------ Officer (Principal Executive Officer) and
(William Farley) Director
/s/ LARRY K. SWITZER Executive Vice President and Chief Financial
- ------------------------------------------ Officer (Principal Financial Officer)
(Larry K. Switzer)
/s/ MICHAEL F. BOGACKI Vice President and Controller (Principal
- ------------------------------------------ Accounting Officer)
(Michael F. Bogacki)
/s/ OMAR Z. AL ASKARI Director
- ------------------------------------------
(Omar Z. Al Askari)
/s/ DENNIS S. BOOKSHESTER Director
- ------------------------------------------
(Dennis S. Bookshester)
/s/ JOHN B. HOLLAND Director
- ------------------------------------------
(John B. Holland)
/s/ LEE W. JENNINGS Director
- ------------------------------------------
(Lee W. Jennings)
/s/ HENRY A. JOHNSON Director
- ------------------------------------------
(Henry A. Johnson)
/s/ RICHARD C. LAPPIN Director
- ------------------------------------------
(Richard C. Lappin)
/s/ A. LORNE WEIL Director
- ------------------------------------------
(A. Lorne Weil)
/s/ SIR BRIAN G. WOLFSON Director
- ------------------------------------------
(Sir Brian G. Wolfson)
</TABLE>
49
<PAGE> 52
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT --------------------------------------- BALANCE
BEGINNING CHARGED TO CHARGED TO AT END
DESCRIPTION: OF PERIOD COSTS AND EXPENSE OTHER ACCOUNTS(1) DEDUCTIONS(2) OF PERIOD
- ----------------------------- ---------- ------------------ ----------------- ------------- ---------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995:
Reserves deducted from assets
to which they apply:
Accounts receivable
allowances:
Doubtful accounts.......... $ 12,000 $ 13,200 $ 2,700 $12,700 $ 15,200
Sales discounts, returns,
and allowances.......... 8,700 38,200 -- 35,500 11,400
------- ------- ------ ------- -------
$ 20,700 $ 51,400 $ 2,700 $48,200 $ 26,600
======= ======= ====== ======= =======
YEAR ENDED DECEMBER 31, 1994:
Reserves deducted from assets
to which they apply:
Accounts receivable
allowances:
Doubtful accounts.......... $ 12,500 $ 6,000 $ 1,100 $ 7,600 $ 12,000
Sales discounts, returns,
and allowances.......... 3,600 20,300 600 15,800 8,700
------- ------- ------ ------- -------
$ 16,100 $ 26,300 $ 1,700 $23,400 $ 20,700
======= ======= ====== ======= =======
YEAR ENDED DECEMBER 31, 1993:
Reserves deducted from assets
to which they apply:
Accounts receivable
allowances:
Doubtful accounts.......... $ 10,800 $ 4,100 $ 2,800 $ 5,200 $ 12,500
Sales discounts, returns,
and allowances.......... 3,500 3,600 -- 3,500 3,600
------- ------- ------ ------- -------
$ 14,300 $ 7,700 $ 2,800 $ 8,700 $ 16,100
======= ======= ====== ======= =======
</TABLE>
- -------------------------
(1) Recoveries of bad debts and, in 1994 and 1993, the effect of the
Acquisitions.
(2) Bad debts written off and allowances and discounts taken by customers.
50
<PAGE> 53
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
(ITEM 14(A)(3) AND 14(C))
<TABLE>
<CAPTION>
DESCRIPTION
-----------
<S> <C> <C>
3(a)* -- Restated Certificate of Incorporation of the Company and
Certificate of Amendment of the Restated Certificate of
Incorporation of the Company (incorporated herein by
reference to Exhibit 3 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1993).
3(b)* -- By-Laws of the Company (incorporated herein by reference to
Exhibit 4(b) to the Company's Registration Statement on Form
S-2, Reg. No. 33-8303 (the "S-2")).
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 Agreements 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.
10(a)* -- Fruit of the Loom 1989 Stock Grant Plan dated January 1,
1989 (incorporated herein by reference to Exhibit 10(b) to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1988).
10(b)* -- Fruit of the Loom 1987 Stock Option Plan (incorporated
herein by reference to Exhibit 10(b) to the S-2).
10(c)* -- Fruit of the Loom Stock Option Agreement for Richard C.
Lappin (incorporated herein by reference to Exhibit 10(d) to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1991).
10(d)* -- Fruit of the Loom 1992 Executive Stock Option Plan
(incorporated herein by reference to the Company's
Registration Statement on Form S-8, Reg. No. 33-57472).
10(e)* -- Fruit of the Loom, Inc. Directors' Stock Option Plan
(incorporated herein by reference to the Company's
Registration Statement on Form S-8, Reg. No. 33-50499).
10(f)* -- Fruit of the Loom, Inc. 1995 Non-Employee Directors' Stock
Plan (incorporated by reference to Exhibit B to the
Company's Proxy Statement for its annual meeting on May 16,
1995 (the "1995 Proxy Statement").
10(g)* -- Fruit of the Loom, Inc. 1995 Executive Incentive
Compensation Plan (incorporated herein by reference to
Exhibit A to the 1995 Proxy Statement).
10(h)* -- Fruit of the Loom, Inc. Executive Incentive Compensation
Plan (incorporated herein by reference to Exhibit A to the
Company's Proxy Statement for its annual meeting on May 17,
1994).
10(i)* -- Guarantee of Payment dated as of June 27, 1994 by Fruit of
the Loom, Inc. and NationsBank of Florida N.A. (incorporated
herein by reference to Exhibit 10(a) to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1994 (the "10-Q")).
10(j)* -- Guarantee of Corporation dated as of January 15, 1996 by
Fruit of the Loom, Inc. and NationsBank N.A. (South),
formerly known as NationsBank of Georgia, N.A.
10(k)* -- Stock Pledge Agreement dated as of June 27, 1994 between
William F. Farley and Fruit of the Loom, Inc. (incorporated
herein by reference to Exhibit 10(b) to the 10-Q).
10(l)* -- Asset purchase and transitional services agreement between
Farley Industries, Inc. and Fruit of the Loom, Inc.
</TABLE>
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See footnote on following page.
51
<PAGE> 54
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS -- (CONCLUDED)
(ITEM 14(a)(3) AND 14(c))
<TABLE>
<CAPTION>
DESCRIPTION
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<S> <C>
10(m)* -- Employment Agreement between Fruit of the Loom, Inc. and William Farley
(incorporated herein by reference to Exhibit 10(j) to the Company's Annual Report
on Form 10-K for the year ended December 31, 1994 (the "1994 10-K")).
10(n)* -- Employment Agreement between Fruit of the Loom, Inc. and John B. Holland
(incorporated herein by reference to Exhibit 10(k) to the Company's 1994 Form
10-K.
10(o)* -- Employment Agreement between Farley Industries, Inc., Fruit of the Loom, Inc. and
Richard C. Lappin (incorporated herein by reference to Exhibit 10(l) to the
Company's 1994 Form 10-K.
10(p)* -- Employment Agreement between Farley Industries, Inc., Fruit of the Loom, Inc. and
Richard M. Cion (incorporated herein by reference to Exhibit 10(m) to the
Company's 1994 10-K.
10(q)* -- Employment Agreement between Farley Industries, Inc., Fruit of the Loom, Inc. and
Larry K. Switzer (incorporated herein by reference to Exhibit 10(o) to the
Company's 1994 10-K.
10(r)* -- Credit Agreement among Acme Boot Company, Inc., as borrower, Fruit of the Loom,
Inc., Acme Boot Retail Co., Inc. and Acme Footwear Company, Inc., as guarantors,
the Lenders identified herein and NationsBank, N.A., (Carolinas), as agent, dated
as of April 19, 1995.
11* -- Computation of Earnings Per Common Share.
18 -- Preferability letter dated February 14, 1996 given by Ernst & Young LLP.
22* -- Subsidiaries of the Company.
24* -- Consent of Ernst & Young LLP.
27* -- Financial Data Schedule.
</TABLE>
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* 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 #1-8941).
The Registrant has not listed or filed as Exhibits to this Annual Report
certain instruments with respect to long-term debt representing indebtedness of
the Company 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.
52
<PAGE> 1
Exhibit 18
[ERNST & YOUNG LLP LETTERHEAD]
February 14, 1996
Mr. Larry K. Switzer
Senior Vice President &
Chief Financial Officer
Fruit of the Loom, Inc.
5000 Sears Tower
233 South Wacker Drive
Chicago, Illinois 60606
Dear Sir:
The Summary of Significant Accounting Policies Note of Notes to the Consolidated
Financial Statements of Fruit of the Loom, Inc. and Subsidiaries included in
its Form 10-K for the year ended December 31, 1995 describes a change in the
method of accounting for pre-operating costs from the deferral and amortization
of such costs over 36 months to expensing such costs as incurred. You have
advised us that you believe that the change is to a preferable method in your
circumstances because it results in a more conservative position due to changes
in the Company's business.
There are no authoritative criteria for determining a "preferable" method of
accounting for pre-operating costs based on the specific circumstances:
however, we conclude that the change in the method of accounting for pre-
operating costs is to an acceptable alternative method which, based on your
business judgment to make this change for the reason cited above, is preferable
in your circumstances.
Very truly yours,
ERNST & YOUNG LLP
