<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
------------------------
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 26, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM
--------------- TO
---------------
------------------------
COMMISSION FILE NUMBER 1-8941
FRUIT OF THE LOOM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 36-3361804
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
5000 SEARS TOWER,
233 SOUTH WACKER DRIVE,
CHICAGO, ILLINOIS 60606
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(312) 876-1724
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Common shares outstanding at October 30, 1998: 66,415,163 shares of Class A
Common Stock, $.01 par value, and 5,684,276 shares of Class B Common Stock, $.01
par value.
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<PAGE> 2
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C> <C>
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet --
September 26, 1998 (Unaudited) and December 31, 1997...... 2
Condensed Consolidated Statement of Operations (Unaudited)
for the Three and Nine Months Ended September 26, 1998
and September 30, 1997.................................... 3
Condensed Consolidated Statement of Cash Flows (Unaudited)
for the Nine Months Ended September 26, 1998 and September
30, 1997.................................................. 4
Notes to Condensed Consolidated Financial Statements
(Unaudited)............................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 13
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings........................................... 20
Item 6. Exhibits and Reports on Form 8-K............................ 21
</TABLE>
1
<PAGE> 3
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SEPTEMBER 26, DECEMBER 31,
1998 1997
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents (including restricted cash)..... $ 11,100 $ 16,100
Notes and accounts receivable (less allowance for possible
losses
of $13,500 and $11,900, respectively).................. 123,200 98,100
Inventories
Finished goods......................................... 582,400 570,400
Work in process........................................ 217,400 212,300
Materials and supplies................................. 62,200 64,800
---------- ----------
Total inventories................................. 862,000 847,500
Other..................................................... 53,500 53,900
---------- ----------
Total current assets.............................. 1,049,800 1,015,600
---------- ----------
Property, Plant and Equipment............................... 1,198,500 1,232,200
Less accumulated depreciation............................. 753,100 717,800
---------- ----------
Net property, plant and equipment................. 445,400 514,400
---------- ----------
Other Assets
Goodwill (less accumulated amortization of $331,300 and
$311,400, respectively)................................ 693,000 712,900
Deferred income taxes..................................... -- 30,300
Other..................................................... 227,400 209,900
---------- ----------
Total other assets................................ 920,400 953,100
---------- ----------
$2,415,600 $2,483,100
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt...................... $ 20,600 $ 28,200
Trade accounts payable.................................... 87,800 234,100
Other accounts payable and accrued expenses............... 271,300 262,900
---------- ----------
Total current liabilities......................... 379,700 525,200
---------- ----------
Noncurrent Liabilities
Long-term debt............................................ 1,195,300 1,192,800
Other..................................................... 266,800 343,000
---------- ----------
Total noncurrent liabilities...................... 1,462,100 1,535,800
---------- ----------
Common Stockholders' Equity................................. 573,800 422,100
---------- ----------
$2,415,600 $2,483,100
========== ==========
</TABLE>
See accompanying notes.
2
<PAGE> 4
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ ------------------------------
SEPTEMBER 26, SEPTEMBER 30, SEPTEMBER 26, SEPTEMBER 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales................................... $593,700 $ 569,700 $1,678,900 $1,711,400
Cost of sales............................... 414,600 406,000 1,145,500 1,238,700
-------- --------- ---------- ----------
Gross earnings.................... 179,100 163,700 533,400 472,700
Selling, general and administrative
expenses.................................. 100,800 116,800 281,100 307,700
Goodwill amortization....................... 6,600 6,700 19,900 20,100
-------- --------- ---------- ----------
Operating earnings................ 71,700 40,200 232,400 144,900
Interest expense............................ (23,100) (22,500) (74,600) (62,500)
Other expense -- net........................ (2,800) (36,400) (3,100) (42,400)
-------- --------- ---------- ----------
Earnings (loss) before income tax
provision....................... 45,800 (18,700) 154,700 40,000
Income tax provision........................ (4,600) 5,400 7,800 21,500
-------- --------- ---------- ----------
Earnings (loss) from continuing
operations...................... 50,400 (24,100) 146,900 18,500
Discontinued operations -- LMP
litigation...................... -- (101,200) -- (101,200)
-------- --------- ---------- ----------
Net earnings (loss)............... $ 50,400 $(125,300) $ 146,900 $ (82,700)
======== ========= ========== ==========
Earnings (loss) per common share:
Continuing operations............. $ 0.70 $ (0.33) $ 2.04 $ 0.25
Discontinued operations -- LMP
litigation...................... -- (1.38) -- (1.35)
-------- --------- ---------- ----------
Net earnings (loss)............... $ 0.70 $ (1.71) $ 2.04 $ (1.10)
======== ========= ========== ==========
Earnings (loss) per common share-assuming
dilution:
Continuing operations............. $ 0.70 $ (0.33) $ 2.03 $ 0.25
Discontinued operations -- LMP
litigation...................... -- (1.38) -- (1.35)
-------- --------- ---------- ----------
Net earnings (loss)............... $ 0.70 $ (1.71) $ 2.03 $ (1.10)
======== ========= ========== ==========
Average common shares....................... 72,100 73,200 72,000 74,900
======== ========= ========== ==========
Average common shares-assuming dilution..... 72,400 73,200 72,500 74,900
======== ========= ========== ==========
</TABLE>
See accompanying notes.
3
<PAGE> 5
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------------
SEPTEMBER 26, SEPTEMBER 30,
1998 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss)....................................... $ 146,900 $ (82,700)
Adjustments to reconcile to net cash provided by (used
for) operating activities:
Depreciation and amortization.......................... 84,900 116,500
Deferred income tax provision.......................... (4,900) 8,500
Increase in working capital............................ (189,100) (212,200)
Loss on LMP litigation -- net of $28,600 paid.......... -- 72,600
Other-net.............................................. 3,300 (6,200)
--------- ---------
Net cash provided by (used for) operating
activities...................................... 41,100 (103,500)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures...................................... (25,000) (41,800)
Proceeds from sale of denim production facility........... 35,400 --
Payment on Acme Boot debt guarantee....................... (60,800) --
Other-net................................................. 11,800 (800)
--------- ---------
Net cash used for investing activities............ (38,600) (42,600)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt.................. -- 98,300
Proceeds under line-of-credit agreements.................. 754,300 975,000
Payments under line-of-credit agreements.................. (643,400) (785,800)
Principal payments on long-term debt and capital leases... (122,200) (11,800)
Common stock issued....................................... 6,800 11,100
Common stock repurchased.................................. (3,000) (141,200)
--------- ---------
Net cash provided by (used for) financing
activities...................................... (7,500) 145,600
--------- ---------
Net decrease in Cash and cash equivalents (including
restricted cash).......................................... (5,000) (500)
Cash and cash equivalents (including restricted cash) at
beginning of period....................................... 16,100 18,700
--------- ---------
Cash and cash equivalents (including restricted cash) at end
of period................................................. $ 11,100 $ 18,200
========= =========
</TABLE>
See accompanying notes.
4
<PAGE> 6
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The condensed consolidated financial statements contained herein should be
read in conjunction with the consolidated financial statements and related
notes contained in the Annual Report on Form 10-K, as amended by a Form
10-K/A, of Fruit of the Loom, Inc. (the "Company") for the year ended
December 31, 1997. The information furnished herein reflects all adjustments
(consisting of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the results of operations of
the interim periods. Operating results for the three and nine months ended
September 26, 1998 are not necessarily indicative of results that may be
expected for the full year.
Effective January 1, 1998, the Company changed its year end from December 31
to a 52 or 53 week year ending on the Saturday nearest December 31. All
quarterly reporting periods are prepared on a 4-4-5 accounting cycle with
each quarter ending on the Saturday nearest the calendar quarter end.
2. No dividends were declared on the Company's common stock for the nine-month
periods ended September 26, 1998 and September 30, 1997.
3. The Company's effective income tax rate of 5.0% for the first nine months of
1998 differed from the Federal statutory rate of 35% primarily due to the
impact of foreign earnings, certain of which are taxed at lower rates than in
the United States, and to reduction of deferred tax asset valuation
allowances attributable to 1997 special charges. These favorable factors were
partially offset by goodwill amortization, a portion of which is not
deductible for Federal income taxes, and state income taxes.
The Company's effective income tax rate for the first nine months of 1997 was
significantly impacted by the $32,000,000 charge related to the Acme Boot
guarantee for which no tax benefit was recorded. The Company's effective
income tax rate of 28% excluding this charge differed from the Federal
statutory rate of 35% primarily due to the impact of foreign earnings,
certain of which are taxed at lower rates than in the United States,
partially offset by goodwill amortization, a portion of which is not
deductible for Federal income taxes, and state income taxes.
4. In 1995, management announced plans to close certain manufacturing operations
and to take other actions to reduce costs and improve operations. As a
result, the Company recorded charges of approximately $372,900,000
($287,400,000 after tax) related to impairment write-downs of goodwill, costs
associated with the closing or realignment of certain domestic manufacturing
facilities and attendant personnel reductions and charges related to
inventory write-downs and valuations, foreign operations and other corporate
issues.
During the first quarter of 1997, the Company finalized certain of the
estimates recorded in connection with the above noted charges. As a result of
finalizing these estimates, earnings before income tax expense for the first
quarter of 1997 were increased by $7,500,000. These amounts were recorded as
a reduction of selling, general, and administrative expenses.
5
<PAGE> 7
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(UNAUDITED)
A rollforward of the 1995 special charges from December 31, 1997 through
September 26, 1998 is presented below (in thousands of dollars):
<TABLE>
<CAPTION>
RESERVE RESERVE
BALANCE BALANCE
DECEMBER 31, CASH INCOME OTHER SEPTEMBER 26,
1997 PAYMENTS (EXPENSE) ACTIVITY 1998
----------------- -------- --------- -------- -------------
<S> <C> <C> <C> <C> <C>
Impairment write down of
goodwill.................... $ -- $ -- $ -- $ -- $ --
Closing or realignment of
manufacturing operations
Loss on disposal of closed
facilities, improvements
and equipment............ 200 200 -- -- --
Changes in estimates of
insurance liabilities.... 14,000 2,000 -- -- 12,000
Costs related to expected
increases in workers'
compensation and health
and welfare costs........ 5,200 5,200 -- -- --
Costs related to termination
of certain lease
obligations.............. 1,000 900 -- -- 100
Costs related to severance
of the hourly
workforce................ -- -- -- -- --
Other....................... 2,700 2,500 -- -- 200
------- ------- ------- ------- -------
23,100 10,800 -- -- 12,300
Severance..................... 200 200 -- -- --
Other asset write downs,
valuation reserves and other
reserves.................... 3,900 3,700 -- -- 200
Changes in estimates of
certain retained liabilities
of former subsidiaries...... 16,200 3,100 -- -- 13,100
Termination of management
agreement................... -- -- -- -- --
------- ------- ------- ------- -------
$43,400 $17,800 $ -- $ -- $25,600
======= ======= ======= ======= =======
</TABLE>
6
<PAGE> 8
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(UNAUDITED)
In the fourth quarter of 1997, the Company recorded charges for costs related
to the closing and disposal of a number of domestic manufacturing and
distribution facilities, impairment of manufacturing equipment and other
assets and certain European manufacturing and distribution facilities, and
other costs associated with the Company's world-wide restructuring of
manufacturing and distribution facilities. These and other special charges
totalled $441,700,000 ($372,200,000 after tax). Following is a summary of the
1997 special charges and related reserve balances at December 31, 1997 (in
thousands of dollars):
<TABLE>
<CAPTION>
RESERVE
1997 CASH OTHER BALANCE
SPECIAL PAYMENTS ACTIVITY DECEMBER 31,
CHARGES IN 1997 IN 1997 1997
-------- -------- ----------- ------------
<S> <C> <C> <C> <C>
Closing and disposal of U.S. manufacturing
and distribution facilities
Loss on sale of facilities, improvements
and equipment:
Sewing, finishing and distribution
facilities............................ $ 66,600 $ -- $ -- $ 66,600
Impairment of mills to be sold.......... 75,400 -- -- 75,400
Lease residual guarantees............... 61,000 -- -- 61,000
Other equipment......................... 29,600 -- 22,100 7,500
-------- ------ ------- --------
232,600 -- 22,100 210,500
Severance costs............................ 8,400 -- -- 8,400
Other accruals............................. 10,400 -- -- 10,400
-------- ------ ------- --------
251,400 -- 22,100 229,300
-------- ------ ------- --------
Impairment of European manufacturing and
distribution facilities
Impairment of long lived assets............ 42,800 -- 42,800 --
Other accruals............................. 1,300 -- -- 1,300
-------- ------ ------- --------
44,100 -- 42,800 1,300
-------- ------ ------- --------
Pro Player incentive compensation
agreement.................................. 22,000 -- -- 22,000
-------- ------ ------- --------
Other asset write-downs and reserves
Inventory valuation provisions............. 49,800 -- -- 49,800
Other accruals............................. 53,800 7,400 9,200 37,200
-------- ------ ------- --------
103,600 7,400 9,200 87,000
-------- ------ ------- --------
Changes in estimates of certain retained
liabilities of former subsidiaries......... 20,600 -- 8,000 12,600
-------- ------ ------- --------
Total pretax charges............... $441,700 $7,400 $82,100 $352,200
======== ====== ======= ========
</TABLE>
7
<PAGE> 9
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(UNAUDITED)
A rollforward of the 1997 special charges from December 31, 1997 through
September 26, 1998 is presented below (in thousands of dollars):
<TABLE>
<CAPTION>
RESERVE RESERVE
BALANCE BALANCE
DECEMBER 31, CASH INCOME OTHER SEPTEMBER 26,
1997 PAYMENTS (EXPENSE) ACTIVITY 1998
------------ -------- --------- -------- -------------
<S> <C> <C> <C> <C> <C>
Closing and disposal of U.S.
manufacturing and distribution
facilities
Loss on sale of facilities,
improvements and equipment:
Sewing, finishing and
distribution facilities.... $ 66,600 $ -- $ -- $ 2,900 $ 63,700
Impairment of mills to be
sold....................... 75,400 -- -- 200 75,200
Lease residual guarantees.... 61,000 -- -- -- 61,000
Other equipment.............. 7,500 -- -- -- 7,500
-------- ------- ------ ------- --------
210,500 -- -- 3,100 207,400
Severance costs................... 8,400 5,100 -- -- 3,300
Other accruals.................... 10,400 5,700 -- 1,200 3,500
-------- ------- ------ ------- --------
229,300 10,800 -- 4,300 214,200
-------- ------- ------ ------- --------
Impairment of European
manufacturing and distribution
facilities
Impairment of long lived
assets....................... -- -- -- -- --
Other accruals.................. 1,300 -- -- -- 1,300
-------- ------- ------ ------- --------
1,300 -- -- -- 1,300
-------- ------- ------ ------- --------
Pro Player incentive compensation
agreement....................... 22,000 -- -- -- 22,000
-------- ------- ------ ------- --------
Other asset write-downs and
reserves
Inventory valuation
provisions................... 49,800 600 5,100 23,700 20,400
Other accruals.................. 37,200 14,000 -- 800 22,400
-------- ------- ------ ------- --------
87,000 14,600 5,100 24,500 42,800
-------- ------- ------ ------- --------
Changes in estimates of certain
retained liabilities of former
subsidiaries.................... 12,600 2,000 -- -- 10,600
-------- ------- ------ ------- --------
Total pretax charges.... $352,200 $27,400 $5,100 $28,800 $290,900
======== ======= ====== ======= ========
</TABLE>
The Other Activity in 1997 represented assets written off. The Other Activity
in the first nine months of 1998 principally consisted of sales of inventory
which had been written down as part of the 1997 special charges. Amounts
received for the inventory sold were in excess of amounts estimated,
resulting in reductions in cost of sales and increases to earnings before
income tax expense of $5,100,000 in the first nine months of 1998,
substantially all of which occurred in the first quarter of 1998.
5. 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
8
<PAGE> 10
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(UNAUDITED)
operations. The Company's retained liability reserves at September 26, 1998
related to discontinued operations consist primarily of certain environmental
reserves of approximately $38,600,000 and product liability reserves of
approximately $16,300,000. The Company has recorded receivables related to
these liabilities of approximately $13,600,000, which management believes
will be recovered from insurance and other sources. Management believes that
adequate reserves have been established to cover potential claims based on
facts currently available and current Superfund Legislation.
Generators of hazardous wastes which were disposed of at offsite locations
which are now superfund sites are subject to claims brought by state and
Federal regulatory agencies under Superfund Legislation and by private
citizens under Superfund Legislation and common law theories. Since 1982, the
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 the remainder of
1998 and future years.
In June 1994, pursuant to authorization from the Company's Board of
Directors, the Company guaranteed a loan from a bank in an amount up to
$12,000,000 to Mr. William Farley, the Company's Chairman 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.
In November, 1997, the Board of Directors, excluding Mr. Farley and other
employee Directors, upon recommendation of a Special Committee of the Board
of Directors, comprised of Messrs. Al Askari and Wolfson, guaranteed a bank
loan to Mr. Farley in the amount of $26,000,000. The proceeds of this loan
were used by Mr. Farley to purchase all of the Zero Coupon Convertible
Subordinated Debentures due 2012 of Farley Inc. held by non-affiliated third
parties. Mr. Farley owns 100% of Farley Inc. In consideration of the
guarantee, which is scheduled to expire in November, 2000, Mr. Farley pays
the Company an annual guarantee fee equal to 1 1/8% of the outstanding
principal balance of the loan. The loan is secured by a second lien on
2,507,512 shares of Class B Common Stock of the Company held by Mr. Farley
and the assets held for the benefit of Mr. Farley under the Company's Senior
Executive Officer Deferred Compensation Trust. The loan is scheduled to
mature on November 19, 1998. The Special Committee received an opinion from
an independent financial advisor that the terms of the transaction are
commercially reasonable.
The Company has negotiated grants from the governments of the Republic of
Ireland, Northern Ireland and Germany. The grants are being used for employee
training, the acquisition of property and equipment and other governmental
business incentives such as general employment. At September 26, 1998, the
Company had a contingent liability to repay, in whole or in part, grants
received of approximately $64,700,000 in the event that the Company does not
meet defined average employment levels or terminates operations in the
Republic of Ireland, Northern Ireland and Germany.
In connection with the Company's transaction with Acme Boot Company, Inc.
("Acme Boot") during 1993, the Company guaranteed, on an unsecured basis, the
repayment of debt incurred by Acme Boot under Acme Boot's bank credit
facility which was secured by substantially all the assets of Acme Boot and
its subsidiaries and provided for up to $30,000,000 of loans and letters of
credit. Farley Inc. owns 100% of the common stock of Acme Boot.
Also, in April 1995, Acme Boot entered into an additional secured credit
facility with its bank which provided for up to $37,000,000 in borrowings.
The Company guaranteed, on an unsecured basis, repayment of debt incurred or
created under this new credit facility. In exchange for the additional
guarantee, the
9
<PAGE> 11
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(UNAUDITED)
Company received $6,000,000 of initial liquidation preference of Acme Boot
Series C Redeemable Junior Preferred Stock.
As a result of the operating performance of Acme Boot and management's
assessment of existing facts and circumstances of Acme Boot's financial
condition, the Company provided a reserve of $35,000,000 at the end of 1996
for loss on the Acme Boot debt guarantees and increased its reserve by
$32,000,000 at the end of the third quarter of 1997 to fully reserve the
Company's $67,000,000 exposure under the Acme Boot guarantees.
In addition, through July, 1998, the Company loaned Acme Boot $9,000,000 to
provide Acme Boot with supplemental working capital. These loans were made in
the form of demand notes payable and were senior to all other outstanding
indebtedness of Acme Boot. These loans were repaid by Acme Boot upon the sale
of its business in the third quarter of 1998.
In June 1998, Acme Boot entered into agreements with unrelated parties for
the sale of certain assets and its business. Financing for the sale of the
business was completed in the third quarter of 1998, at which time the
Company paid $60,800,000 to satisfy the Acme Boot guarantees in full.
Accordingly, Other expense -- net for the nine months ended September 26,
1998 in the accompanying condensed consolidated statement of operations
includes income of $6,200,000 related to settlement of this liability.
On July 1, 1998, the New England Health Care Employees Pension Fund filed a
purported class action on behalf of all those who purchased Fruit of the
Loom, Inc. Class A Common Stock and publicly traded options between July 24,
1996 and September 5, 1997 (the "Class Period") against the Company and
William Farley, Bernhard Hansen, Richard C. Lappin, G. William Newton,
Burgess D. Ridge, Larry K. Switzer and John D. Wigodsky, each of whom are
current or former officers of the Company, in the United States District
Court for the Western District of Kentucky ("New England Action"). The
plaintiff claims that the defendants engaged in conduct violating Section
10(b) of the Securities Exchange Act of 1934, as amended (the "Act"), and
that the Company and Mr. Farley are also liable under Section 20(a) of the
Act. According to the plaintiff, the Company, with the knowledge and
assistance of the individual defendants, made certain material
misrepresentations and failed to disclose certain material facts about the
Company's condition and prospects during the Class Period, causing the
plaintiff and the class to buy Company stock or options at artificially
inflated prices. The plaintiff also alleges that during the Class Period, the
individual defendants sold stock of the Company while possessing material
non-public information. The plaintiff asks for unspecified amounts as
damages, interest and costs and ancillary relief. On September 30, 1998, the
defendants filed a motion to dismiss the action, which is currently being
briefed. All discovery is stayed pending resolution of the motion.
Management believes that the suit is without merit, and management and the
Company intend to defend it vigorously. Management believes, based on
information currently available, that the ultimate resolution of this
litigation will not have a material adverse effect on the financial condition
or results of the operations of the Company, but the ultimate resolution of
the suit, if unfavorable, could be material to the results of operations of a
particular future period.
On August 26, 1998, Carol Bradley filed a purported derivative action on
behalf of the Company, against William Farley, Richard C. Lappin, Omar Z. Al
Askari, Dennis S. Bookshester, Henry A. Johnson, Mark H. McCormack, Larry K.
Switzer, A. Lorne Weil and Sir Brian Wolfson, each of whom are current or
former directors of the Company, and the Company, as a nominal defendant, in
the Warren Circuit Court of the State of Kentucky. The plaintiff asserts
various common law claims against the individual defendants including, inter
alia, breach of fiduciary duty, waste of corporate assets, breach of contract
and constructive fraud claims. The plaintiff also asserts an insider trading
claim against defendants Farley, Lappin and Switzer. The claims asserted
against the individual defendants are based on the same alleged
10
<PAGE> 12
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(UNAUDITED)
misrepresentations and omissions which form the basis of the claims asserted
by the plaintiff in the New England Action as described above. The plaintiff
seeks unspecified compensatory and punitive damages, attorney's fees and
costs and ancillary relief.
On September 18, 1998, defendant Farley, with the consent of the Company,
removed the action from state court to the United States District Court for
the Western District of Kentucky. Those defendants subsequently filed a
motion to dismiss on the ground that the plaintiff failed to make an
appropriate demand on the Company prior to filing the action. That motion is
currently being briefed.
In August 1994, the Company acquired Pro Player, Inc. ("Pro Player") for
approximately $55,700,000, including approximately $14,200,000 of Pro Player
debt which was repaid by the Company. The Company had compensation agreements
with the former principals of Pro Player who became employees of the business
upon the Company's acquisition. The compensation agreements provided for
these former employees to receive compensation up to a maximum of
$47,100,000, based in part on the attainment of certain levels of operating
performance by the acquired entity in 1998 and 1999. In the fourth quarter of
1997, the Company recorded a $22,000,000 charge related to this compensation
agreement, based on its assessment of the probability that Pro Player's
operating performance would result in such amount being earned. During the
six months ended June 27, 1998, the Company recorded an additional $3,300,000
which is included in selling, general, and administrative expenses in the
accompanying condensed consolidated statement of operations. Subsequently,
the Company determined that it would not have further liability under the
compensation agreements pursuant to their terms. As a result, the Company did
not record additional compensation in the quarter ended September 26, 1998.
6. As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income ("FAS 130"). FAS 130
establishes new rules for the reporting and display of comprehensive income
and its components. The adoption of FAS 130 had no impact on the Company's
Net earnings or Common stockholders' equity. Rather, FAS 130 requires foreign
currency translation adjustments, minimum pension liability adjustments and
unrealized gains or losses on available-for-sale securities, all of which
were reported separately in Common stockholders' equity prior to adoption, to
be included in new disclosures related to comprehensive income.
For the third quarter, comprehensive income totaled $58,400,000 in 1998
compared with a loss of $131,100,000 in 1997. For the first nine months,
comprehensive income totaled $142,500,000 in 1998 compared with a loss of
$104,300,000 in 1997. The principal differences from reported net income were
foreign currency translation adjustments resulting from the financial
statement translation of the accounts of certain of the Company's foreign
operations from local currencies to the U.S. dollar. These adjustments
reflect changes in the value of the U.S. dollar with respect to the
currencies of a number of Western European countries where the Company has
made long-term operating commitments. The dollar weakened in the third
quarter of 1998 after a sustained period of increasing value. Consequently,
currency translation adjustments increased comprehensive income by $7,900,000
in the third quarter of 1998 but caused reductions of $5,600,000 in the third
quarter of 1997, and reductions of $4,400,000 and $21,500,000 in the first
nine months of 1998 and 1997, respectively.
11
<PAGE> 13
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(UNAUDITED)
7. The following table sets forth the computation of basic and diluted earnings
per common share (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ ------------------------------
SEPTEMBER 26, SEPTEMBER 30, SEPTEMBER 26, SEPTEMBER 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NUMERATOR
Earnings (loss) from continuing
operations........................ $50,400 $ (24,100) $146,900 $ 18,500
Discontinued operations -- LMP
litigation........................ -- (101,200) -- (101,200)
------- --------- -------- ---------
Net earnings (loss)................. $50,400 $(125,300) $146,900 $ (82,700)
======= ========= ======== =========
DENOMINATOR
For basic earnings per common
share --
Weighted average shares
outstanding....................... 72,100 73,200 72,000 74,900
Effect of dilutive employee stock
options........................... 300 -- 500 --
------- --------- -------- ---------
For diluted earnings per common
share --
Weighted average shares
outstanding and assumed
conversions.................... 72,400 73,200 72,500 74,900
======= ========= ======== =========
Earnings (loss) per common share:
Continuing operations............. $ 0.70 $ (0.33) $ 2.04 $ 0.25
Discontinued operations -- LMP
litigation..................... -- (1.38) -- (1.35)
------- --------- -------- ---------
Net earnings (loss)............... $ 0.70 $ (1.71) $ 2.04 $ (1.10)
======= ========= ======== =========
Earnings (loss) per common
share -- assuming dilution:
Continuing operations............. $ 0.70 $ (0.33) $ 2.03 $ 0.25
Discontinued operations -- LMP
litigation..................... -- (1.38) -- (1.35)
------- --------- -------- ---------
Net earnings (loss)............... $ 0.70 $ (1.71) $ 2.03 $ (1.10)
======= ========= ======== =========
</TABLE>
Because diluted EPS increases in the third quarter of 1997 from a loss of
$1.71 to a loss of $1.70 and in the first nine months of 1997 from a loss of
$1.10 to a loss of $1.09, the effects of employee stock options (500,000 and
900,000 shares, respectively) are antidilutive and have been ignored in the
computation of diluted EPS. Therefore, diluted EPS is reported as a loss of
$1.71 in the third quarter and a loss of $1.10 in the first nine months of
1997.
12
<PAGE> 14
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward Looking Information
The Company desires to provide investors with meaningful and useful
information. Therefore, this Quarterly Report on Form 10-Q contains certain
statements which describe the Company's beliefs concerning future business
conditions and the outlook for the Company, based on currently available
information. Wherever possible, the Company has identified these "forward
looking" statements (as defined in Section 21E of the Securities Exchange Act of
1934) by words such as "anticipates," "believes," "estimates," "expects" and
similar expressions. These forward looking statements are subject to risks,
uncertainties and other factors which could cause the Company's actual results,
performance or achievements to differ materially from those expressed in, or
implied by, these statements. These risks, uncertainties and other factors
include, but are not limited to, the following: the financial strength of the
retail industry (particularly the mass merchant channel), the level of consumer
spending for apparel, demand for the Company's activewear screenprint products,
the competitive pricing environment within the basic apparel segment of the
apparel industry, the Company's ability to develop, market and sell new
products, the Company's effective income tax rate, the Company's ability to
successfully move labor-intensive segments of the manufacturing process outside
of the United States, the success of planned advertising, marketing and
promotional campaigns, international activities and the resolution of legal
proceedings and other contingent liabilities. The Company assumes no obligation
to update publicly any forward looking statements, whether as a result of new
information, future events or otherwise.
Results of Operations
The following discussion should be read in conjunction with the
accompanying condensed consolidated financial statements and related notes for
the period ended September 26, 1998 and the Company's consolidated financial
statements and related notes contained in the Company's Annual Report on Form
10-K, as amended by a Form 10-K/A, for the year ended December 31, 1997.
The table below sets forth selected operating data (in millions of dollars
and as percentages of net sales) of the Company.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------------- --------------------------------
SEPTEMBER 26, SEPTEMBER 30, SEPTEMBER 26, SEPTEMBER 30,
1998 1997 1998 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales.................... $593.7 $569.7 $1,678.9 $1,711.4
Gross earnings............... 179.1 163.7 533.4 472.7
Gross margin................. 30.2% 28.7% 31.8% 27.6%
Operating earnings........... 71.7 40.2 232.4 144.9
Operating margin............. 12.1% 7.1% 13.8% 8.5%
</TABLE>
SPECIAL CHARGES
During the first quarter of 1998, the Company sold certain inventory which
had been written down as part of the 1997 special charges. Amounts received for
the inventory sold were in excess of amounts estimated, resulting in reductions
in cost of sales and increases to earnings before income tax expense of
$5,100,000 in the first nine months of 1998, substantially all of which occurred
in the first quarter of 1998.
In connection with the transfer of substantially all of its sewing
operations to offshore locations, and the related increase in the use of foreign
contract manufacturers, the Company is in the process of completing enhanced
inventory control procedures. Until such time as such procedures are completed,
the Company remains subject to increased risks regarding the management of its
inventory. These risks, such as inventory shrinkage and obsolescence, could
result in the Company incurring additional write-downs; however the
13
<PAGE> 15
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- (CONTINUED)
Company believes it has adequate reserves for these potential write-downs.
Although the Company is not currently aware of any facts that would require any
substantial write-down of its inventory, there can be no assurance that
write-downs will not be recognized in the future.
The 1995 and 1997 restructuring activities are progressing as expected, and
management currently anticipates completion of these activities by the end of
1999. There can be no assurance, however, that all activities will be completed
by the end of 1999.
NET SALES
Net sales increased $24,000,000 or 4% in the third quarter and decreased
$32,500,000 or 2% in the first nine months. Sales of Retail Products improved
slightly in the third quarter but remained behind last year for the first nine
months. Retail sales benefited from third quarter Men's & Boys' volume/mix
improvement and an April 1998 men's underwear price increase, as well as third
quarter Casualwear sales growth. Although improved for both the third quarter
and first nine months, Casualwear Fleece sales were unfavorably affected by
unusually warm September weather. Gitano sales were sharply lower. Activewear
sales were significantly favorable in the third quarter on improved T-shirt
volume but behind last year for the first nine months due to lower fleece volume
in the first half. Sports & Licensing sales declined on lower third quarter
volume due principally to the NBA lockout and lower orders for NFL licensed
products. Sales improved in Europe on increased volume.
GROSS EARNINGS
Gross earnings increased $15,400,000 or 9% in the third quarter and
$60,700,000 or 13% in the first nine months. Gross margin improved 1.5
percentage points to 30.2% for the quarter and 4.2 percentage points to 31.8%
for the first nine months. The most significant factor in the margin improvement
was Retail and Activewear cost savings from the Company's offshore move and
other cost initiatives. Earnings and margins were, however, diminished in the
third quarter by production down time taken in an effort to better balance
inventories, and by reductions in list prices on Activewear products in December
1997. Activewear promotions were reduced in the first six months of 1998 and
substantially offset the December 1997 list price reduction during this period.
In the third quarter of 1998, however, promotional programs were increased and
approximated 1997 levels, resulting in lower Activewear margins in the third
quarter of 1998. Sports and Licensing gross earnings declined on lower volume,
but margins have been maintained. Gross earnings increased in Europe on
favorable volume.
OPERATING EARNINGS
Operating earnings increased $31,500,000 or 78% in the third quarter and
$87,500,000 or 60% in the first nine months. Operating margin improved 5.0
percentage points to 12.1% for the third quarter and 5.3 percentage points to
13.8% for the first nine months. Gross earnings and margin improved as noted
above, while selling, general and administrative expense declined $16,000,000 or
13.7% in the third quarter and $26,600,000 or 8.6% for the first nine months.
The decrease in selling, general and administrative expense in the third quarter
and first nine months represented reductions in personnel and advertising
expense, distribution center depreciation, royalty expense and travel costs,
offset partially by the Pro Player incentive compensation charge in the first
six months of 1998 and increased costs for management information systems and
communications resulting from the shift of the Company's sewing and finishing
operations to offshore facilities from domestic facilities. The increased
management information systems costs included $2,700,000 in the third quarter
and $4,400,000 in the first nine months in "Year 2000" remediation costs. In
addition, the decrease in selling, general and administrative expense for the
first nine months reflected the recording of
14
<PAGE> 16
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- (CONTINUED)
compensation expense related to a performance share compensation plan for
certain executive officers in the first quarter of 1997. For the first nine
months, these favorable variances were partially offset by changes in estimates
recorded in connection with the special charges taken in 1995 which were
finalized in the first quarter of 1997 (reducing selling, general and
administrative expense by $7,500,000 in the first quarter of 1997). Selling,
general and administrative expense was 17.0% and 16.7% of sales in the third
quarter and first nine months of 1998, respectively, compared with 20.5% and
18.0% of sales for the respective periods in 1997.
INTEREST EXPENSE
Interest expense increased $600,000 or 2.7% in the third quarter and
$12,100,000 or 19.4% in the first nine months. The increases were largely due to
a significantly higher average debt level, resulting principally from the LMP
settlement ($73,600,000 of which occurred in the fourth quarter of 1997), and a
greater average investment in working capital needed to better service customers
while the Company consolidates the offshore movement of its sewing and finishing
operations and realigns its domestic manufacturing and distribution facilities.
The third quarter comparison benefited from a significant positive cash flow
from operations in the 1998 period.
OTHER EXPENSE -- NET
Other expense -- net included a $32,000,000 charge in the third quarter of
1997 for the estimated loss on the Acme Boot guarantees. Excluding this 1997
charge, net other expense decreased $1,600,000 for the third quarter and
$7,300,000 for the first nine months of 1998. Principal favorable factors were
net gains on asset sales and the second quarter reduction in the liability
related to the Acme Boot guarantees. Losses from sale of accounts receivable
pursuant to the Company's receivable purchase agreement totaled $2,700,000 and
$2,500,000 in the third quarter of 1998 and 1997, and $8,700,000 and $8,000,000
in the first nine months of 1998 and 1997.
INCOME TAXES
The Company's effective income tax rate of 5.0% for the first nine months
of 1998 differed from the Federal statutory rate of 35% primarily due to the
impact of foreign earnings, certain of which are taxed at lower rates than in
the United States, and to reduction of deferred tax asset valuation allowances
attributable to 1997 special charges. These favorable factors were partially
offset by goodwill amortization, a portion of which is not deductible for
Federal income taxes, and state income taxes.
The Company's effective income tax rate for the first nine months of 1997
was significantly impacted by the $32,000,000 charge related to the Acme Boot
guarantee for which no tax benefit was recorded. The Company's effective income
tax rate of 28% excluding this charge differed from the Federal statutory rate
of 35% primarily due to the impact of foreign earnings, certain of which are
taxed at lower rates than in the United States, partially offset by goodwill
amortization, a portion of which is not deductible for Federal income taxes, and
state income taxes.
EARNINGS PER COMMON SHARE
Third quarter earnings (loss) per common share from continuing operations,
basic and diluted, was earnings of $0.70 in 1998 and a loss of $0.33 in 1997.
Nine-month basic earnings per common share from continuing operations were $2.04
in 1998 and $0.25 in 1997. Nine-month diluted earnings per common share from
continuing operations were $2.03 in 1998 and $0.25 in 1997. The effects of
employee stock options were
15
<PAGE> 17
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- (CONTINUED)
antidilutive and have been ignored in the 1997 periods. Average common shares,
both basic and diluted, were lower in 1998 due to the repurchase of
approximately 5,400,000 shares since January 1, 1997.
Liquidity and Capital Resources
Funds generated from the Company's operations are its major source of
liquidity and are supplemented by funds obtained from capital markets, including
bank facilities. The Company has available for the funding of its operations
approximately $615,000,000 of revolving lines of credit. As of November 6, 1998,
approximately $164,800,000 was available and unused under these facilities.
Operating activities provided a net of $41,100,000 in cash in the first
nine months of 1998, compared with a net use of $103,500,000 by operations in
the same 1997 period. Earnings from continuing operations plus depreciation and
amortization was $96,800,000 higher than 1997, while the seasonal increase in
working capital was $23,100,000 less than 1997, and the 1997 period included a
$28,600,000 payment in connection with the LMP litigation.
Investing activities used $38,600,000 in 1998, down from $42,600,000 in the
1997 period. Capital expenditures were $16,800,000 lower, and asset sales added
$63,100,000 more in proceeds than last year. These favorable variances were
substantially offset by the $60,800,000 payment to settle the Acme Boot debt
guarantees. Capital spending, primarily to support offshore assembly operations,
is anticipated to approximate $35,000,000 in 1998.
The Company paid a net of $7,500,000 for financing activities in the first
nine months of 1998 compared with net proceeds of $145,600,000 in 1997. The
Company borrowed $100,000,000 under its bank term loan facility in 1997 along
with $78,300,000 more under its other bank credit facilities in 1997 than in
1998. Payments on long-term debt and capital leases were higher in 1998
($110,400,000), and proceeds from issuance of common stock were lower
($4,300,000). Substantially offsetting these variances that reflected reductions
in net cash provided by financing activities was a decrease of $138,200,000 in
common stock repurchases. Payments on long-term debt and capitalized leases in
1998 included repayment of a senior unsecured note of the Company's wholly-owned
subsidiary, Fruit of the Loom Canada, Inc., for $102,600,000 principal value.
In November 1996, the Company's Board of Directors authorized the purchase
of up to $200,000,000 of the Company's common stock in open market and privately
negotiated transactions. Total purchases under the program through January 1998
were 5,890,000 shares at an aggregate cost of $193,200,000.
In December 1996, the Company entered into a three-year receivables
purchase agreement whereby it can currently sell to a third party up to a
$250,000,000 undivided interest in a defined pool of its trade accounts
receivable. The maximum amount outstanding as defined under the agreement varies
based upon the level of eligible receivables. Under the agreement, approximately
$306,000,000 of eligible receivables at September 26, 1998 and $183,000,000 of
eligible receivables at December 31, 1997 were sold to the Company's
unconsolidated receivable financing subsidiary, reducing consolidated notes and
accounts receivable. Proceeds of approximately $250,000,000 and $214,500,000
from the ultimate purchaser at the respective balance sheet dates were used to
reduce borrowings outstanding under the Company's revolving lines of credit.
Such proceeds as of December 31, 1997, included advances from the ultimate
purchaser totalling $83,100,000 which were included in trade accounts payable.
On July 11, 1997, the Company filed with the Securities and Exchange
Commission a shelf registration statement on Form S-3 (the "S-3 Registration
Statement") to register under the Securities Act of 1933, as amended, the sale
of up to $850,000,000 of its debt securities, preferred stock and Class A Common
Stock
16
<PAGE> 18
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- (CONTINUED)
(collectively, the "Securities"). The S-3 Registration Statement does not relate
to any particular offering of Securities; rather, the S-3 Registration Statement
was filed to provide the Company with the flexibility to engage in future
offerings without the delay which could result from the filing of new
registration statements at that time. The types of Securities offered, and their
terms, will be determined prior to any particular offering. The Company
anticipates that the net proceeds from any future sale of the Securities would
be used for general corporate purposes, including, but not limited to, working
capital, capital expenditures, expansion of existing properties, development of
new projects, prepayment of outstanding indebtedness, investments and
acquisitions. The Board of Directors of the Company has unanimously approved,
and recommended that the stockholders of the Company adopt, a proposed
reorganization pursuant to which a Cayman Islands company ("FTL-Cayman") will
become the parent holding company of the Company (the "Reorganization"). After
consummation of the Reorganization, FTL-Cayman will continue to conduct the
businesses (through direct and indirect subsidiaries, including the Company) in
which the Company is now engaged, and substantially all of the businesses and
subsidiaries of the Company located outside the United States will be
transferred to FTL-Cayman (or direct or indirect foreign subsidiaries of
FTL-Cayman), other than certain interests of the Company in Canada, Germany,
Italy and Mexico, along with the beneficial ownership of certain trademarks. The
timing of the reorganization is subject to the receipt of all necessary
third-party consents and compliance with the provisions of the indenture
governing the Company's 7 7/8% Senior Notes due October 15, 1999, or the
refinancing of such indebtedness. In connection with the Reorganization,
FTL-Cayman has filed an S-4 registration statement with the Securities and
Exchange Commission which became effective on September 16, 1998, and a Proxy
statement/Prospectus has been mailed to stockholders for a November 12, 1998
special meeting of stockholders to consider the plan. Until the Reorganization
is consummated, the Company does not anticipate that the Company will utilize
the S-3 Registration Statement for purposes of meeting its liquidity needs and
anticipates use of other means of financing, including the private placement of
debt securities for such purposes.
Management believes the funding available to the Company is sufficient to
meet anticipated requirements for capital expenditures, working capital and
other needs. The Company's debt instruments, principally its bank agreements,
contain covenants restricting the Company's ability to sell assets, incur debt,
pay dividends and make investments and require the Company to maintain certain
financial ratios.
The adoption of a common currency by countries of the European Economic
Community beginning January 1, 1999 may ultimately expose the Company's European
operations to certain risk factors such as the resulting cross-border
transparency of pricing differences. Certain system conversion costs will also
necessarily be incurred. Because the Company already competes throughout Western
Europe, however, the emergence of a single market in this region would not
immediately expose the Company to increased competition and may present
opportunities for further economies of scale. Management has not completed its
study of the impact on the Company but anticipates no material adverse effect on
the Company's financial position or results of operations. Sales in the affected
countries totalled less than 10% of consolidated net sales in 1998 and 1997.
Accounting Standards
In June 1997, the Financial Accounting Standards Board issued FAS 131,
Disclosures about Segments of an Enterprise and Related Information. FAS 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. FAS 131 is
effective for annual financial statements for fiscal years beginning after
December 15, 1997. Management has not completed its review of FAS 131.
17
<PAGE> 19
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- (CONTINUED)
In June 1998, the Financial Accounting Standards Board issued FAS 133,
Accounting for Derivative Instruments and Hedging Activities. The new Statement
requires all derivatives to be recorded on the balance sheet at fair value and
establishes "special accounting" for the following three different types of
hedges: hedges of changes in the fair value of assets, liabilities, or firm
commitments (referred to as fair value hedges); hedges of the variable cash
flows of forecasted transactions (cash flow hedges); and hedges of foreign
currency exposures of net investments in foreign operations. Though the
accounting treatment and criteria for each of the three types of hedges are
unique, they all result in offsetting changes in fair values or cash flows of
both the hedge and the hedged item being recognized in earnings in the same
period. Changes in fair value of derivatives that do not meet the criteria of
one of these three categories of hedges are included in income. The Statement is
effective for years beginning after June 15, 1999, but companies can early adopt
as of the beginning of any fiscal quarter that begins after June 1998.
Management has not completed its review of FAS 133.
Year 2000
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
The Company presently believes that with modifications or replacements of
existing software and certain hardware, the Year 2000 Issue can be mitigated.
However, if such modifications and replacements are not made, or are not
completed timely, the Year 2000 Issue could have a material impact on the
operations of the Company.
The Company's plan to resolve the Year 2000 Issue involves the following
four phases: assessment, remediation, testing, and implementation. To date, the
Company has fully completed its assessment of all mission-critical systems.
Assessments of other systems that could be significantly affected by the Year
2000 are underway. The completed assessments have indicated that most of the
Company's significant information technology systems could be affected,
particularly the order entry, billing, and inventory systems. Software and
hardware (embedded chips) used in production and manufacturing systems
(hereafter also referred to as operating equipment) also are at risk. Affected
systems include technologies used in various aspects of the manufacturing and
distribution process. In addition, the Company is gathering information about
the Year 2000 compliance status of its significant customers, suppliers and
subcontractors and continues to monitor their compliance.
For its information technology exposures through September 26, 1998, the
Company is 20% complete on the remediation phase and expects to complete
software reprogramming and replacement no later than June 30, 1999. Once
software is reprogrammed or replaced for a system, the Company begins testing
and implementation. These phases run concurrently for different systems.
Completion of the testing phase for all significant systems is expected by
August 31, 1999, with all remediated systems fully tested and implemented by
September 30, 1999.
For the Company's operating equipment, plans were completed, and the
assessment phase began in the third quarter of 1998. Assessment efforts will be
completed, and remediation will begin in the fourth quarter of 1998. Completion
of remediation, testing and implementation is scheduled for the first half of
1999.
18
<PAGE> 20
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- (CONTINUED)
The Company's order entry system interfaces directly with significant
customers. The Company is in the process of working with customers to ensure
that the Company's systems that interface directly with third parties are Year
2000 compliant by September 30, 1999. The Company has completed its assessment
phase and begun remediation efforts on these systems. Testing of all significant
systems will begin in the first quarter of 1999 and is expected to be completed
no later than August 31, 1999. Implementation is expected to be completed by
September 30, 1999. We believe that these key customers are in the process of
making their purchasing systems Year 2000 compliant.
The Company has queried its significant suppliers and subcontractors, none
of which share information systems with the Company (external agents). To date,
the Company is not aware of any external agent with a Year 2000 issue that would
materially impact the Company's results of operations, liquidity, or capital
resources. However, the Company has no means of ensuring that external agents
will be Year 2000 ready. The inability of external agents to complete their Year
2000 resolution process in a timely fashion could materially impact the Company.
The effect of non-compliance by external agents is not determinable.
The Company will utilize both internal and external resources to reprogram,
or replace, test, and implement the software and operating equipment for Year
2000 modifications. The total cost of the Year 2000 project is estimated at
$16.6 million and is being funded through operating cash flows. Through
September 26, 1998, the Company has incurred costs totalling approximately $4.4
million, all of which has been expensed, related to all phases of the Year 2000
project. All remaining expenditures related to repair of hardware and software
will be expensed as incurred.
Management of the Company believes it has an effective program in place to
resolve the Year 2000 issue in a timely manner. As noted above, the Company has
not yet completed all necessary phases of the Year 2000 program. In the event
that the Company does not complete any additional phases, the Company would be
unable to use its electronic systems to take customer orders, manufacture and
ship products, invoice customers or collect payments. In addition, disruptions
in the economy generally resulting from Year 2000 issues could also materially
adversely affect the Company. The Company could be subject to litigation for
computer systems failure, for example, equipment shutdown or failure to properly
date business records. The amount of potential liability and lost revenue cannot
be reasonably estimated at this time.
The Company currently has no contingency plans in place in the event it
does not complete all phases of the Year 2000 program. The Company plans to
evaluate the status of completion in March 1999 and determine whether such a
plan is necessary.
19
<PAGE> 21
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 1, 1998, the New England Health Care Employees Pension Fund filed a
purported class action on behalf of all those who purchased Fruit of the Loom,
Inc. Class A Common Stock and publicly traded options between July 24, 1996 and
September 5, 1997 (the "Class Period") against the Company and William Farley,
Bernhard Hansen, Richard C. Lappin, G. William Newton, Burgess D. Ridge, Larry
K. Switzer and John D. Wigodsky, each of whom are current or former officers of
the Company, in the United States District Court for the Western District of
Kentucky ("New England Action"). The plaintiff claims that the defendants
engaged in conduct violating Section 10(b) of the Securities Exchange Act of
1934, as amended (the "Act"), and that the Company and Mr. Farley are also
liable under Section 20(a) of the Act. According to the plaintiff, the Company,
with the knowledge and assistance of the individual defendants, made certain
material misrepresentations and failed to disclose certain material facts about
the Company's condition and prospects during the Class Period, causing the
plaintiff and the class to buy Company stock or options at artificially inflated
prices. The plaintiff also alleges that during the Class Period, the individual
defendants sold stock of the Company while possessing material non-public
information. The plaintiff asks for unspecified amounts as damages, interest and
costs and ancillary relief. On September 30, 1998, the defendants filed a motion
to dismiss the action, which is currently being briefed. All discovery is stayed
pending resolution of the motion.
Management believes that the suit is without merit, and management and the
Company intend to defend it vigorously. Management believes, based on
information currently available, that the ultimate resolution of this litigation
will not have a material adverse effect on the financial condition or results of
the operations of the Company, but the ultimate resolution of the suit, if
unfavorable, could be material to the results of operations of a particular
future period.
On August 26, 1998, Carol Bradley filed a purported derivative action on
behalf of the Company, against William Farley, Richard C. Lappin, Omar Z. Al
Askari, Dennis S. Bookshester, Henry A. Johnson, Mark H. McCormack, Larry K.
Switzer, A. Lorne Weil and Sir Brian Wolfson, each of whom are current or former
directors of the Company, and the Company, as a nominal defendant, in the Warren
Circuit Court of the State of Kentucky. The plaintiff asserts various common law
claims against the individual defendants including, inter alia, breach of
fiduciary duty, waste of corporate assets, breach of contract and constructive
fraud claims. The plaintiff also asserts an insider trading claim against
defendants Farley, Lappin and Switzer. The claims asserted against the
individual defendants are based on the same alleged misrepresentations and
omissions which form the basis of the claims asserted by the plaintiff in the
New England Action as described above. The plaintiff seeks unspecified
compensatory and punitive damages, attorney's fees and costs and ancillary
relief.
On September 18, 1998, defendant Farley, with the consent of the Company,
removed the action from state court to the United States District Court for the
Western District of Kentucky. Those defendants subsequently filed a motion to
dismiss on the ground that the plaintiff failed to make an appropriate demand on
the Company prior to filing the action. That motion is currently being briefed.
20
<PAGE> 22
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION (CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS
<TABLE>
<S> <C>
4(a)* $900,000,000 Credit Agreement dated as of September 19,
1997, among the several banks and other financial
institutions from time to time parties thereto (the
"Lenders"), NationsBank, N.A., as administrative agent for
the Lenders thereunder, Chase Manhattan Bank, Bankers Trust
Company, The Bank of New York and the Bank of Nova Scotia,
as co-agents (incorporated herein by reference to Exhibit
4(a) to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997).
4(b)* Rights Agreement, dated as of March 8, 1996 between Fruit of
the Loom, Inc. and Chase Mellon Shareholder Services,
L.L.C., Rights Agent (incorporated herein by reference to
Exhibit 4(c) to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995).
27 Financial Data Schedule.
</TABLE>
- ---------------
* Document is available at the Public Reference Section of the Securities and
Exchange Commission, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549 (Commission file No. 1-8941).
The Registrant has not listed nor filed as an Exhibit to this Quarterly
Report certain instruments with respect to long-term debt representing
indebtedness of the Registrant and its subsidiaries which do not individually
exceed 10% of the total assets of the Registrant and its subsidiaries on a
consolidated basis. Pursuant to Item 601(b)(4)(iii) of Regulation S-K, the
Registrant agrees to furnish such instruments to the Securities and Exchange
Commission upon request.
B. REPORTS ON FORM 8-K
In July 1998, the Company filed a current Report on Form 8-K dated July 24,
1998 reporting that the New England Health Care Employees Pension Fund had filed
a purported class action against the Company and certain of its current and
former officers and directors. SEE ITEM 1, LEGAL PROCEEDINGS.
21
<PAGE> 23
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FRUIT OF THE LOOM, INC.
-----------------------
(Registrant)
G. WILLIAM NEWTON
-----------------------
G. William Newton
Senior Vice President Finance
and Acting Chief Financial Officer
(Principal Financial Officer
and duly authorized to sign
on behalf of Registrant)
Date: November 10, 1998
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-26-1998
<CASH> 11,100
<SECURITIES> 0
<RECEIVABLES> 136,700
<ALLOWANCES> 13,500
<INVENTORY> 862,000
<CURRENT-ASSETS> 1,049,800
<PP&E> 1,198,500
<DEPRECIATION> 753,100
<TOTAL-ASSETS> 2,415,600
<CURRENT-LIABILITIES> 379,700
<BONDS> 1,195,300
0
0
<COMMON> 328,200
<OTHER-SE> 245,600
<TOTAL-LIABILITY-AND-EQUITY> 2,415,600
<SALES> 1,678,900
<TOTAL-REVENUES> 1,678,900
<CGS> 1,145,500
<TOTAL-COSTS> 1,145,500
<OTHER-EXPENSES> 3,100
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 74,600
<INCOME-PRETAX> 154,700
<INCOME-TAX> 7,800
<INCOME-CONTINUING> 146,900
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 146,900
<EPS-PRIMARY> 2.04
<EPS-DILUTED> 2.03
</TABLE>
