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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, 1997 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.
[X]
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 February 28, 1998, there were outstanding 66,100,394 shares of the
Registrant's Class A Common Stock, par value $.01 per share, and 5,684,276
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 February 28, 1998 was approximately $2,121,900,000.
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FRUIT OF THE LOOM, INC.
1997 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.................................................. 7
Item 3. Legal Proceedings........................................... 7
Item 4. Submission of Matters to a Vote of Security Holders
(None)...................................................... 7
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 8
Item 6. Selected Financial Data..................................... 9
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 10
Item 8. Financial Statements and Supplementary Data................. 22
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure (None)............................. 55
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 55
Item 11. Executive Compensation...................................... 59
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 66
Item 13. Certain Relationships and Related Transactions.............. 68
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form
8-K......................................................... 70
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PART I
FORWARD LOOKING INFORMATION
The Company desires to provide investors with meaningful and useful
information. Therefore, this Annual Report on Form 10-K 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 and
uncertainties which could cause the Company's actual results, performance and
achievements to differ materially from those expressed in, or implied by, these
statements. These risks and uncertainties 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.
ITEM 1. BUSINESS
Fruit of the Loom, Inc. ("Fruit of the Loom" or the "Company") is a
marketing oriented, vertically integrated international basic apparel company.
The Company emphasizes branded products for consumers ranging from infants to
senior citizens. The Company is one of the largest producers of men's and boys'
underwear, activewear for the imprinted market, casualwear, jeanswear, women's
and girls' underwear, and infants' and toddlers' apparel, selling products
principally under the FRUIT OF THE LOOM(R), BVD(R), SCREEN STARS(R), BEST(TM),
MUNSINGWEAR(R), WILSON(R), GITANO(R) and CUMBERLAND BAY(TM) brand names. Under
the PRO PLAYER(R) and FANS GEAR(R) brands, Fruit of the Loom designs,
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 many colleges and universities, as well as the likenesses of certain popular
professional athletes.
The Company is a fully integrated manufacturer, performing most of its own
spinning, knitting, cloth finishing, cutting, sewing and packaging. Based on the
Company's selling price points for its various products and its operating
margins, 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, cost effective production, and strong
relationships with mass merchandisers and discount chains. Management believes
that consumer awareness of the value, quality and competitive prices of FRUIT OF
THE LOOM products will benefit the Company in any retail environment where
consumers are value conscious.
Management believes that many domestic apparel manufacturers continue to
move sewing operations offshore to reduce costs and compete with enhanced import
competition that is resulting from the General Agreement on Tariffs and Trade
("GATT"). To maintain the Company's position as a low cost manufacturer, the
Company is increasing the percentage of garments sewn in the Caribbean, Central
America and Mexico. The Company believes that its domestic 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 sewing offshore so that the Company can continue to offer
value to its customers.
The Company's marketing programs emphasize the quality and consistency of
the brands it owns and those it licenses from others. Management is increasing
emphasis on marketing programs with increased commitment to advertising and
promotional programs. Advertising and promotion expense was $117,100,000 in 1997
compared to $102,700,000 in 1996. Advertising and promotion expense is expected
to approximate $125,000,000 in 1998.
1
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ITEM 1. BUSINESS -- (CONTINUED)
The Company offers a broad array of men's and boys' underwear including
briefs, boxer shorts, T-shirts and A-shirts, colored and "fashion" 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 and KANGAROO(R)
trademarks as well as certain activewear bearing the MUNSINGWEAR trademark in
the United States and certain overseas markets. The Company has historically
been one of the market leaders in men's and boys' underwear. In 1997, the
Company's share in the men's and boys' underwear market was approximately 34%,
approximately three points behind the market share of its principal competitor.
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 30% 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(R) and
BEST(TM) BY FRUIT 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 manufacturing
capacity, 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.
The Company designs, manufactures (including contract manufacturing) and
markets women's jeanswear and jeans related sportswear under the GITANO and
other trademarks. In addition to its core GITANO apparel products, the Company
licenses the production and sale of a variety of accessories and other products
bearing the GITANO trademark.
The Company designs, manufactures and markets sports apparel under licenses
granted by major professional sports leagues, professional players and many
colleges and universities in the United States. The Company also has licenses
with Walt Disney Company for the ESPN and X-Games properties. The Company sells
a wide variety of quality sportswear, including T-shirts, sweatshirts, shorts
and outerwear primarily under the FANS GEAR and PRO PLAYER brands. The Company
manufactures and markets a wide variety of decorated sportswear to retail stores
and mass merchants. Under its PRO PLAYER brand, the Company designs and markets
heavyweight jackets, lightweight jackets, headwear and other outerwear and
T-shirts and Fleecewear 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.
The Company offers a variety of women's and girls' underwear under the
FRUIT OF THE LOOM brand name including cotton, nylon and lycra panties and
thongs. 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 14% to 16%. In 1997, the Company's share in the women's and girls'
underwear market was approximately 16% compared to a market share of 30% for the
largest competing brand. No other competitor had more than a 4% market share in
1997.
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
2
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ITEM 1. BUSINESS -- (CONTINUED)
Company also licenses the use of the FRUIT OF THE LOOM brand name to a
manufacturer of sheer hosiery.
The Company offers a broad array of childrenswear including decorated
underwear (generally with pictures of licensed movie or cartoon characters)
under the FUNPALS(R), FUNGALS(R) and UNDEROOS(R) brand names and layette sets
under the FRUIT OF THE LOOM brand and the WINNIE THE POOH(TM) license which
include both packaged and hanging sets.
In November 1996, the Company sold substantially all the operating assets
of its Hosiery Division to an unrelated party and simultaneously entered into a
ten-year licensing agreement for the purchaser to sell hosiery in a variety of
styles and colors under the FRUIT OF THE LOOM name and pay the Company a royalty
fee based on a percentage of FRUIT OF THE LOOM branded hosiery sales. Prior to
the sale, the Company manufactured and sold socks for men, women, boys and girls
under the FRUIT OF THE LOOM brand. See "SALE OF HOSIERY DIVISION" in Notes to
Consolidated Financial Statements.
MARKETING AND DISTRIBUTION
The Company sells its products to over 10,000 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 10 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 65% of the men's and boys' underwear and
approximately 61% of the women's and girls' underwear sold in the United States
in 1997, up from approximately 56% and 51%, respectively, in 1992. In these
channels, the Company supplied approximately 47% of the men's and boys'
underwear compared to 42% for its principal competitor and approximately 24% of
the women's and girls' underwear compared to 42% for its principal competitor in
the United States in 1997. 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.
In August 1996, the Company signed a ten-year agreement to rename Joe
Robbie Stadium (home of the Miami Dolphins and Florida Marlins, as well as the
FedEx(R)Orange Bowl, the Carquest(R) Bowl, the 1997 World Series and the 1999
Super Bowl) as Pro Player Stadium. In addition, in 1996 the Company launched a
new advertising campaign and in 1996 and 1997 sponsored Countryfest, a major
promotion featuring well known country music performers which included a major
television network special. Also in 1997, the Company relaunched its BVD brand
and introduced a new television campaign featuring Fruit of the Loom briefs. The
Company expects to continue marketing activities at a higher level in future
years.
The Company committed additional expenditures during 1996 and 1997 to
enhance its Information Systems ("IS") and improve customer service. As part of
this effort, the Company developed a new order entry system in 1996, enabling
its customers to order from wholesalers through the Internet. In addition, the
Company implemented its Vendor Managed Inventory ("VMI") program which enables
the Company to partner with its customers and enable these customers to maintain
the most economical level of inventories. The VMI program will also enable the
Company to improve utilization of its own inventories. The Company plans to
continue its efforts in the IS area in future years to improve customer service.
Sales to one customer amounted to approximately 18.8%, 16.8% and 19.5% of
consolidated net sales in 1997, 1996 and 1995, respectively. Additionally, sales
to a second customer amounted to approximately 14.7%, 12.2% and 10.8% of
consolidated net sales in 1997, 1996 and 1995, respectively. Management does not
believe the loss of any one customer would materially 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
3
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ITEM 1. BUSINESS -- (CONTINUED)
MARKETING AND DISTRIBUTION -- (CONCLUDED)
products. The Company's business is seasonal to the extent that approximately
57% of annual sales occur in the second and third quarters. Sales are generally
the lowest in the first quarter.
INTERNATIONAL OPERATIONS
The Company sells primarily activewear through its foreign operations,
principally in Europe, Canada, Japan and Mexico. The Company's approach has
generally been to establish production in the Company's larger foreign markets
in order to better serve these markets and decrease the impact of foreign
currency fluctuations. 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 Honduras, El Salvador and Jamaica to assemble
fabrics which have been manufactured and cut in the Company's U.S. 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. In addition, currency fluctuations within certain markets
present risk.
Sales from international operations during 1997 were $356,000,000 and were
principally generated from products manufactured at the Company's foreign
facilities. These international sales accounted for approximately 17% of the
Company's net sales in 1997. Management believes international sales will
continue to be a source of growth for the Company, particularly in Europe. 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 both 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 bleached and
dyed.
Various cutting methods are used in the U.S. and Mexico to maximize
operating efficiency and minimize cost. 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.
In 1998 greater than 95% of the Company's garments are projected to be sewn
in Central America, Mexico, or the Caribbean basin. Of this total, about half
will be assembled at contractors and half at Company-owned/operated facilities.
Contract manufacturers have been used by the Company for the following reasons:
1) to balance internal capacity requirements, 2) for low volume specialty
garments, 3) for seasonal or one-time programs, and 4) as a capacity bridge in
the move from domestic plant to offshore plant sewing. The Company chooses to
sew large volume styles in its own facilities where it believes it has the
greatest cost reduction potential. The Company is in the process of increasing
its own sewing capacity in Central America and Mexico, which will reduce its
reliance on contract manufacturing, and result in further cost reduction.
4
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ITEM 1. BUSINESS -- (CONTINUED)
MANUFACTURING -- (CONCLUDED)
Gitano jeans are principally produced in the Company's own facilities.
Denim yarn and cloth are produced in the Company's U.S. factories, where the
product is cut and kitted; garments are then sewn in either Mexico or Jamaica,
with final wash, press, and pack operations in the U.S.
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
including management information systems to service its customer base more
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,
CUMBERLAND BAY 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 lines of
decorated underwear, sportswear, T-shirts and layette products. Among the
characters licensed are: BATMAN(TM) and ROBIN(TM), LOONEY TUNES, POWER RANGERS
IN SPACE(TM), LOST WORLD: JURASSIC PARK(TM), MIGHTY DUCKS(TM), HERCULES(TM),
SCOOBY-DOO(TM), SESAME STREET(TM), ANASTASIA and WINNIE THE POOH. The Company
also has a license to use the MUNSINGWEAR and KANGAROO 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 apparel.
In addition, the Company owns the FANS GEAR 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 colleges and universities in the United
States. These owned and licensed trademarks are used on sports apparel,
principally T-shirts, shorts, sweatshirts, jerseys and lightweight and
heavyweight jackets marketed by the Company.
IMPORTS
Domestic apparel manufacturers continue to move sewing operations offshore
to reduce costs and compete with enhanced import competition resulting from the
Uruguay Round of the General Agreement on Tariffs and Trade. 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 regulations of the Department of the
Treasury, United States Customs Service. The domestic knitting, bleaching and
dyeing operations continue to provide Fruit of the Loom with a competitive
advantage. Thus, the Company's strategy is to combine low cost textile
manufacturing in the United States with sewing predominantly offshore so that
the Company can continue to offer value to its customers.
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ITEM 1. BUSINESS -- (CONTINUED)
IMPORTS -- (CONCLUDED)
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 to imported
goods fabricated from fabrics made and cut in the United States, 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 11% of the United States men's
and boys' underwear market (59% if Section 9802 imports are included) in 1997
and about 35% (90% including Section 9802 imports) of the women's and girls'
underwear market. With regard to activewear, imports accounted for approximately
43% of this market in 1996, the latest period for which data is available.
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, the Company
believes 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 28,500 persons. Approximately 3,500
employees, principally international, are covered by collective bargaining
agreements. Management believes that its employee relations are good.
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 contracts in advance to meet
its cotton needs and manages the risk of cotton price volatility through a
combination of fixed and nonfixed price purchase commitments, cotton futures
contracts and call options. As of December 31, 1997 the Company had entered into
contracts that cover substantially all of its estimated cotton usage for 1998
and a portion of its estimated cotton usage for 1999.
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, 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.
SPECIAL CHARGES. During the three years ended December 31, 1997, the
Company moved substantially all of its sewing and finishing operations to
locations in the Caribbean and Central America as part of its strategy to reduce
its cost structure and remain a low cost producer in the U.S. markets it serves.
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. 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 and the accelerated migration of some sewing
operations to lower cost, offshore locations. In addition, the Company reviewed
the
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ITEM 1. BUSINESS -- (CONCLUDED)
MISCELLANEOUS -- (CONCLUDED)
operations of Salem and Gitano, decided to discontinue the use of the SALEM(R)
brand and redeployed the 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.
PROPOSED REORGANIZATION
A registration statement and preliminary proxy material was filed with the
Securities and Exchange Commission on February 10, 1998 in connection with a
planned reorganization of the Company. The Company's Board of Directors has
approved the proposed reorganization under which a Cayman Islands company, Fruit
of the Loom, Ltd., will become the parent holding company of Fruit of the Loom,
Inc. The proposed reorganization would be accounted for as a combination of
entities under common control (in a manner similar to a pooling of interests). A
special meeting of the stockholders of Fruit of the Loom, Inc. will be held to
vote on the proposed transaction. See "ITEM 5. MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS" for further discussion of the proposal.
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
16,296,000 square feet, of which approximately 5,230,000 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 establish and support
offshore assembly operations, is expected to approximate $57,000,000 in 1998.
Management believes that the actions referred to in the previous paragraph,
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.................................. 44 6,865,000 3,001,000
Warehouse and distribution..................... 22 3,974,000 1,860,000
Sales and administration....................... 31 227,000 369,000
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See "LEASE COMMITMENTS" in the Notes to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
The response to this item is incorporated by reference to the accompanying
Consolidated Financial Statements. See "CONTINGENT LIABILITIES" in the Notes to
Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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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
"STOCKHOLDERS' EQUITY" in the Notes to Consolidated Financial Statements.
William Farley also owns 50,305 shares of the Class A Common Stock of the
Company. As of February 28, 1998, there were 1,674 registered holders of record
of the Class A Common Stock of the Company.
The Company's Board of Directors, including a special committee of
independent directors, has approved a proposed reorganization pursuant to which
a Cayman Islands company, Fruit of the Loom, Ltd., will become the parent
holding company of Fruit of the Loom, Inc.
Upon completion of the transaction, holders of Fruit of the Loom, Inc.
Class A common stock will become holders of Fruit of the Loom, Ltd. Class A
ordinary shares. The Class A ordinary shares will have substantially the same
attributes as Fruit of the Loom, Inc. Class A common stock and are expected to
be listed on the New York Stock Exchange. William Farley, Chairman, Chief
Executive Officer, and President and Chief Operating Officer and his affiliates
will own Fruit of the Loom, Ltd. Class B shares which will have voting rights
equal to the voting rights currently held by them as owners of Fruit of the
Loom, Inc. Class B common stock as well as preferred stock of Fruit of the Loom,
Inc. that is exchangeable into Class A ordinary shares of Fruit of the Loom,
Ltd.
A special meeting of stockholders of Fruit of the Loom, Inc. will be held
to vote on the proposed transaction. Notice of the special meeting, along with a
proxy statement/prospectus describing in more detail the reorganization and
related matters, will be mailed to stockholders at a later date. A registration
statement relating to the Class A ordinary shares has been filed with the
Securities and Exchange Commission but has not yet become effective. These
shares may not be sold nor may offers to buy be accepted prior to the time the
registration statement becomes effective.
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 1997 and 1996:
<TABLE>
<CAPTION>
MARKET PRICES
----------------------------------------------------
1997 1996
------------------------------ ------------------
HIGH LOW HIGH LOW
------------- ------------- ------- -------
<S> <C> <C> <C> <C>
1st Quarter..................................... $44 7/8 $36 1/8 $26 1/2 $23
2nd Quarter..................................... 41 3/8 30 29 1/8 22 7/8
3rd Quarter..................................... 31 7/16 25 3/16 33 3/8 22 5/8
4th Quarter..................................... 29 5/8 23 3/16 39 30 5/8
</TABLE>
No dividends were declared on the Company's common stock issues during 1997
or 1996. The Company does not currently anticipate paying any common stock
dividends in 1998. For restrictions on the present or future ability to pay
dividends, see "LONG TERM DEBT" in the Notes to Consolidated Financial
Statements.
8
<PAGE> 11
ITEM 6. SELECTED FINANCIAL DATA
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
OPERATIONS STATEMENT DATA(1)(2):
Net sales........................ $2,139.9 $2,447.4 $2,403.1 $2,297.8 $1,884.4
Gross earnings................... 268.5(4) 722.9 516.6(9) 683.2 644.3
Operating earnings (loss)........ (287.7)(5) 318.2 (108.9)(10) 271.7(12) 378.4
Interest expense................. 84.7 103.6 116.9 95.4 72.7
Earnings (loss) from continuing
operations before income tax
expense (benefit),
extraordinary items and
cumulative effect of change in
accounting principles.......... (451.7)(6) 178.2(7) (247.5)(11) 170.2 364.0
Earnings (loss) from continuing
operations before extraordinary
items and cumulative effect of
change in accounting
principles..................... (385.4) 146.6(8) (227.8) 84.2 210.8(13)
Earnings (loss) per common share
from continuing operations
before extraordinary items and
cumulative effect of change in
accounting principles(3):
Basic........................ (5.18) 1.92 (3.00) 1.11 2.78
Diluted...................... (5.18) 1.90 (3.00) 1.11 2.77
Average common shares
outstanding:
Basic........................ 74.4 76.4 75.9 75.8 75.7
Diluted...................... 75.1 77.1 76.2 76.1 76.2
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA(1)(2):
Total assets..................... $2,483.1 $2,593.4 $2,973.1 $3,217.9 $2,751.7
Long-term debt, excluding current
maturities..................... 1,192.8 867.4 1,427.2 1,440.2 1,194.0
Other noncurrent liabilities..... 343.0 271.2 292.9 222.3 191.5
Common stockholders' equity...... 422.1 1,093.8 929.2 1,159.9 1,057.2
</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) During the fourth quarter of 1997, the Company changed its method of
determining the cost of inventories from the last-in, first-out (LIFO)
method to the first-in, first-out (FIFO) method. All previously reported
results have been restated to reflect the retroactive application of this
accounting change. The change increased (decreased) previously reported
results as follows:
<TABLE>
<CAPTION>
1996 1995 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Gross earnings.............................................. (7.1) (0.8) 36.7 (3.1)
Earnings (loss) from continuing operations before
extraordinary items and cumulative effect of change in
accounting principles..................................... (4.6) (0.5) 23.9 (2.0)
Earnings (loss) per common share from continuing operations
before extraordinary items and cumulative effect of change
in accounting principles:
Basic.................................................. (0.06) (0.01) 0.31 (0.03)
Diluted................................................ (0.06) (0.01) 0.32 (0.02)
</TABLE>
The accounting change increased the net loss for 1997 by $27.8 or $.37 per
share.
(3) The earnings per share amounts prior to 1997 have been restated as required
to comply with Statement of Financial Accounting Standards ("FAS") 128,
"Earnings Per Share". For further discussion of earnings per share and the
impact of FAS 128, see "EARNINGS PER SHARE" in the Notes to Consolidated
Financial Statements.
9
<PAGE> 12
ITEM 6. SELECTED FINANCIAL DATA -- (CONCLUDED)
(4) Includes pretax charges of $276.8 related to costs associated with the
closing or disposal of a number of domestic manufacturing facilities and
attendant personnel reductions, impairment write downs of a number of
domestic and foreign manufacturing facilities, and inventory valuation
write downs.
(5) Includes pretax charges of $409.3 related to costs associated with the
closing or disposal of a number of domestic manufacturing and distribution
facilities and attendant personnel reductions, impairment write downs of a
number of domestic and foreign manufacturing and distribution facilities,
inventory valuation write downs, and a pretax charge of $22.0 relating to a
compensation agreement at Pro Player.
(6) Includes pretax charges of $32.4 principally from retained liabilities
related to former subsidiaries and $32.0 related to the Company's
evaluation of its exposure under the guarantee of the debt of Acme Boot
Company, Inc. ("Acme Boot"), an affiliate.
(7) Includes a pretax charge of $35.0 related to the Company's evaluation of
its exposure under the guarantee of the debt of Acme Boot.
(8) Includes $24.1 related to reversal of excess income tax liabilities for tax
years through December 31, 1991, all of which closed for Federal income tax
purposes effective December 31, 1996.
(9) 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 write downs
and valuations and foreign operations.
(10) Includes pretax charges of approximately $158.5 related principally to the
write-off of Salem Sportswear Corporation 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 write downs and valuations and foreign
operations.
(11) 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.
(12) Includes pretax charges of approximately $40.0 to write inventories down to
net realizable value and a pretax charge of $18.0 related to the write-off
of Artex Manufacturing Co. Inc. intangibles.
(13) Includes a pretax gain of $67.3 from the Company's investment in Acme Boot.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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,
--------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales...................................... $2,139.9 $2,447.4 $2,403.1
Gross earnings................................. 268.5 722.9 516.6
Gross margin................................... 12.5% 29.5% 21.5%
Operating earnings (loss)...................... (287.7) 318.2 (108.9)
Operating margin............................... (13.4)% 13.0% (4.5)%
</TABLE>
The Company changed its method of determining the cost of inventories from
the LIFO method to the FIFO method in 1997. All previous reported results have
been restated to reflect the retroactive application of this accounting change
as required by generally accepted accounting principles.
10
<PAGE> 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (CONTINUED)
OPERATIONS
1997 RESTRUCTURING AND SPECIAL CHARGES
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) categorized as follows (in thousands of dollars):
<TABLE>
<S> <C>
Closing and disposal of U.S. manufacturing and distribution
facilities................................................ $251,400
Impairment of European manufacturing and distribution
facilities................................................ 44,100
Pro Player incentive compensation agreement................. 22,000
Other asset write downs and reserves........................ 103,600
Changes in estimates of retained liabilities of former
subsidiaries.............................................. 20,600
--------
$441,700
========
</TABLE>
Each of these categories is discussed below.
During the three years ended December 31, 1997, the Company moved
substantially all of its sewing and finishing operations to locations in the
Caribbean and Central America as part of its strategy to reduce its cost
structure and remain a low cost producer in the U.S. markets it serves. The
Company closed or committed to cease operations at nine sewing facilities in
1997. Accordingly, the Company terminated 176 salaried and 6,975 production
personnel related to closed operations. Terminated personnel were notified of
their separation in 1997 and the plant closings and attendant personnel
reductions were substantially completed in 1997. The decision to move
substantially all of the Company's sewing and finishing operations outside the
United States resulted in the need to realign certain other domestic
manufacturing operations and requires the Company to dispose of certain
production equipment. The Company realigned its operations by shifting
production at the remaining domestic and offshore locations (including
contractors) in order to balance its production capabilities. The resulting
redirection of the physical flow of goods in the Company's manufacturing
processes prompted a reassessment of the Company's domestic distribution
network. In addition, the Company's plans for further efficiencies in its
manufacturing operations and its commitment to reduce the capital intensity of
its business resulted in a decision to dispose of certain other U.S. based
manufacturing assets. Statement of Financial Accounting Standards ("FAS") 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of, requires that all long-lived assets to be disposed of be
measured at the lower of their carrying amount or estimated fair value, less
estimated selling costs. Charges related to closing and disposal of U.S.
manufacturing and distribution facilities consisted of the following (of which
$175,500,000 were non-cash charges) (in thousands of dollars):
<TABLE>
<S> <C>
Loss on disposal of facilities, improvements and
equipment................................................. $232,600
Severance costs............................................. 8,400
Other....................................................... 10,400
--------
$251,400
========
</TABLE>
Severance costs 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).
These charges were recorded in the fourth quarter of 1997 as required by
FAS 121, Emerging Issues Task Force ("EITF") 94-3 or other authoritative
literature. Assets held for sale included in other noncurrent assets in the
accompanying Consolidated Balance Sheet totalled $104,700,000 at December 31,
1997.
11
<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (CONTINUED)
OPERATIONS -- (CONTINUED)
1997 RESTRUCTURING AND SPECIAL CHARGES -- (CONCLUDED)
During 1997, events and circumstances indicated that certain of the
Company's European manufacturing and distribution assets to be held and
continued to be used might be impaired. Estimates of undiscounted cash flows
indicated that the carrying amounts of these assets were not likely to be
recovered. Therefore, as required by FAS 121, these assets were written down to
their estimated fair values, less estimated selling costs, resulting in charges
of approximately $44,100,000 in the fourth quarter of 1997 (of which $42,800,000
are non-cash charges).
In the fourth quarter of 1997, the Company recorded a $22,000,000 charge
for incentive compensation anticipated to be earned at its Pro Player subsidiary
(none of which was paid in 1997). The Company recorded charges totalling
$103,600,000 (of which $64,400,000 are non-cash charges) related to other asset
write downs, valuation reserves and other reserves as a result of reductions in
its product offerings, changes in its operations and termination or modification
of certain agreements. The Company recorded charges totalling $20,600,000
related to changes in estimates of environmental and other retained liabilities
of former subsidiaries (of which $8,000,000 are non-cash charges).
The above charges were recorded as $276,800,000 of increases to cost of
sales, $127,900,000 of increases to selling, general and administrative
expenses, $4,600,000 of impairment write down of goodwill and $32,400,000 of
increases to other expense in the accompanying Consolidated Statement of
Operations. These charges were based on management's best estimates of the
potential market values, timing and costs related to the above actions. Of the
Special Charges, approximately $151,000,000 are to be paid in 1998 and future
years, $10,900,000 of which relate to restructuring charges as defined by EITF
No. 94-3. See "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- USE OF ESTIMATES"
in the Notes to Consolidated Financial Statements.
1997 COMPARED TO 1996
Net sales declined 12.6% in 1997, compared to 1996 due mainly to
significantly lower activewear sales in 1997 and inclusion of hosiery sales
($97,600,000) in 1996. Activewear volume and pricing were substantially
unfavorable to last year with excessive T-shirt inventories at wholesale
activewear accounts and widespread promotional activity in the highly
competitive wholesale activewear market in the first half of 1997. Retail sales
were approximately equal to last year before considering hosiery sales. In the
retail division, sales of Gitano products were significantly in excess of 1996
and substantially offset shortfalls to 1996 in men's and boys' underwear,
casualwear fleece and women's and girls' underwear. The increase in Gitano sales
resulted from increased distribution of its customer base and additional product
offerings. Shortfalls in activewear and casualwear fleece shipments were
hampered by product shortages. Sales declines in men's and boys' underwear and
women's and girls' underwear resulted from widespread promotional activity.
Sports & licensing sales were off modestly on lower outerwear sales, and
European results were impacted by unfavorable currency translation rates.
Gross earnings decreased 62.9% in 1997 compared to 1996. Gross margin was
12.5% compared with 29.5% in 1996. Major factors were the special charges taken
in the fourth quarter of 1997, lower volume and increased promotional activity
and price reductions, primarily in activewear, men's and boys' underwear and
women's and girls' underwear, and unfavorable currency translation rates
compared with 1996. These negative factors more than offset savings achieved
from moving labor intensive operations to lower cost offshore locations.
The Company had an operating loss of $287,700,000 in 1997 compared with
operating earnings of $318,200,000 in 1996. Operating margin dropped 26.4
percentage points to a negative 13.4% of sales. The unfavorable comparison to
1996 reflected lower gross earnings combined with higher selling, general and
administrative expenses, largely from special charges in the fourth quarter of
1997. The selling, general and administrative expense increase combined with
lower sales resulted in an increase in the ratio of selling,
12
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (CONTINUED)
OPERATIONS -- (CONTINUED)
1997 COMPARED TO 1996 -- (CONTINUED)
general and administrative expense to sales from 15.4% in 1996 to 24.5% in 1997.
Before special charges selling, general and administrative expense increased 5%
in 1997 due mainly to higher advertising and promotion, market research and
royalty expense, offset partially by lower compensation and benefits related
expenses. In addition, 1997 included the finalization of certain of the
estimates recorded in connection with the special charges taken in 1995 which
reduced selling, general and administrative expenses by $7,500,000 in the first
quarter of 1997.
Interest expense decreased $18,900,000 or 18.2% in 1997 compared to 1996,
due to a lower average debt level. The average level of debt outstanding in 1997
was lower than 1996 despite repurchases of Company stock totalling $173,600,000
and the payment of $102,200,000 to settle the LMP litigation. Much of the
substantial cash in-flows from operations in 1996 (including the sale of
accounts receivable) and the sale of the Hosiery Division occurred in the fourth
quarter, while the LMP payment occurred in August ($28,600,000) and November
($73,600,000) 1997. Excluding the LMP litigation, cash flow from operations was
slightly favorable in 1997. See "SALE OF ACCOUNTS RECEIVABLE", "SALE OF HOSIERY
DIVISION" and "CONTINGENT LIABILITIES" in the Notes to Consolidated Financial
Statements and LIQUIDITY AND CAPITAL RESOURCES.
Other expense-net included charges of $32,000,000 and $35,000,000 in 1997
and 1996, respectively, relating to the Company's evaluation of its exposure
under the guarantee of debt incurred or created by Acme Boot under the Acme Boot
Credit Facilities. See "CONTINGENT LIABILITIES" in the Notes to Consolidated
Financial Statements. Other expense-net in 1997 included $32,400,000 of charges
to provide for certain retained liabilities in connection with the prior sale of
certain operations, fees related to the modification of certain agreements and
other valuation reserves. See "SPECIAL CHARGES" in the Notes to Consolidated
Financial Statements. Included in other expense-net in 1997 and 1996 was
deferred debt fee amortization and bank fees of approximately $4,500,000 and
$5,300,000. Other expense-net in 1997 included expense of $1,600,000 as compared
to $700,000 of income in 1996 related to the settlement of certain foreign
currency denominated transactions. Included in other expense-net was $11,800,000
in 1997 and $1,700,000 in 1996 of losses on sale of accounts receivable. See
"SALE OF ACCOUNTS RECEIVABLE" in the Notes to Consolidated Financial Statements.
The effective income tax benefit rate on the loss from continuing
operations in 1997 differed from the Federal statutory rate of 35% primarily due
to a deferred tax asset valuation provision, a provision for interest related to
prior years' taxes, the $32,000,000 charge related to the Acme Boot guarantee
for which no tax benefit was recorded and goodwill amortization, portions of
which are not deductible for Federal income tax purposes, partially offset by
the impact of foreign earnings, certain of which are taxed at lower rates than
in the United States. The effective income tax rate in 1996 differed from the
Federal statutory rate of 35% primarily due to the impact of higher foreign
earnings, certain of which are taxed at lower rates than in the United States,
goodwill amortization, portions of which are not deductible for Federal income
tax purposes, state income taxes and the reversal of excess income tax
liabilities related to all tax years through December 31, 1991 which were closed
for Federal income tax purposes effective December 31, 1996.
As a result of the migration of certain of its operations to offshore
locations and the planned reorganization of the Company, future operations may
not generate sufficient U.S. sourced income to utilize all of the net deferred
tax benefits generated by operations through December 31, 1997. Consequently,
the Company recorded a deferred tax asset valuation provision of $64,100,000 in
the fourth quarter of 1997.
In August 1997, the Court of Appeal of the State of California upheld a
1994 judgement of $96,000,000 in the LMP litigation against Universal
Manufacturing Corporation ("Universal"), a former subsidiary of the Company, and
MagneTek, Inc. ("MagneTek"). In accordance with an agreement between the Company
and the plaintiffs, the Company paid $28,600,000 to the plaintiffs on August 18,
1997. The Company's petition for review with the California Supreme Court was
denied and the Company paid an additional $73,600,000
13
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (CONTINUED)
OPERATIONS -- (CONTINUED)
1997 COMPARED TO 1996 -- (CONCLUDED)
including interest to the plaintiffs on November 24, 1997. As a result, a charge
of $102,200,000 was recorded in 1997 which is classified as discontinued
operations in the accompanying Consolidated Statement of Operations. See
"CONTINGENT LIABILITIES" in the Notes to Consolidated Financial Statements.
The Company adopted Statement of Financial Accounting Standards No. 128,
Earnings per Share, in 1997. Earnings per share for all periods presented has
been restated to conform with statement 128. The net loss per share in 1997 was
$6.55 per share including the loss of $1.37 from discontinued operations as a
result of settlement of the LMP litigation. Restated net earnings per share were
$1.92 in 1996, or $1.90 assuming dilution.
1995 RESTRUCTURING AND 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. 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 and the accelerated migration of some sewing 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 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
write downs 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 were 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 of dollars):
<TABLE>
<S> <C>
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
=====
</TABLE>
14
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (CONTINUED)
OPERATIONS -- (CONTINUED)
1995 RESTRUCTURING AND SPECIAL CHARGES -- (CONCLUDED)
These charges were recorded in the fourth quarter of 1995 as required by
EITF 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 write downs, 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 of
former subsidiaries. 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 approximately $15,500,000 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 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. These
charges were taken in an effort to substantially reduce the Company's cost
structure, streamline operations and further improve customer service.
In 1996, the Company achieved cost savings of approximately $54,000,000, of
which $42,000,000 were cash savings. In 1997, the Company achieved an additional
$43,000,000 in cash savings over 1996.
The above charges were recorded as $158,500,000 of impairment write down of
goodwill, $146,700,000 of increases to cost of sales, $47,000,000 of increases
to selling, general and administrative expenses 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. Finalization of many of the Special Charges
estimated at December 31, 1995 occurred during 1996. Of the Special Charges,
approximately $4,900,000 and $33,400,000 were paid in 1997 and 1996 and
$43,400,000 remain to be paid in 1998 and future years, $900,000, of which
relate to restructuring charges as defined by EITF No. 94-3. See "SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES -- USE OF ESTIMATES" in the Notes to
Consolidated Financial Statements.
1996 COMPARED TO 1995
Net sales increased 1.8% in 1996 compared to 1995. The increase in net
sales was primarily due to increased shipments of activewear T-shirts for the
imprint market, activewear and casualwear fleece products, men's and boys'
underwear, women's and girls' underwear and goods sold in Mexico and improved
mix of sales of the Company's sports and licensing division. These increases
were offset in part by price decreases on activewear T-shirts, the impact of
promotional programs in response to competitive market conditions, decreased
shipments of Gitano branded products due to repositioning of the brand and
decreased shipments of licensed products in Europe. In addition, sales of
hosiery products decreased in 1996 due to the sale of the Hosiery Division in
November 1996. See "SALE OF HOSIERY DIVISION" in the Notes to Consolidated
Financial Statements.
Gross earnings increased 39.9% in 1996 compared to 1995 and gross margin
was 29.5% in 1996 compared to 21.5% in 1995. A substantial portion of the
improvements in gross earnings and gross margin were due to
15
<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (CONTINUED)
OPERATIONS -- (CONTINUED)
1996 COMPARED TO 1995 -- (CONTINUED)
special charges in 1995 and the benefits derived from the 1995 restructuring in
1996. In addition, gross earnings and gross margin improved due to lower raw
material costs, favorable product mix and increased sales in 1996. These
improvements were offset by the impact of price decreases on activewear
T-shirts, promotional programs, cost increases at domestic facilities and higher
sales of closeouts and discontinued products, principally as a result of the
1995 decision to eliminate a number of product offerings.
The Company had operating earnings of $318,200,000 compared to an operating
loss of $108,900,000 in 1995. Operating margin increased 17.5 percentage points
to a positive 13.0% of net sales for 1996. The increase in operating earnings
resulted from higher gross earnings combined with lower selling, general and
administrative expenses in 1996 and the recognition of the impairment write down
of goodwill in 1995. Lower selling, general and administrative expenses arose
principally from the charges taken in the fourth quarter of 1995, lower goodwill
amortization in 1996 resulting from the write down of goodwill in 1995 and lower
shipping costs in 1996 as a result of the Company's consolidation of
distribution locations. The change in selling, general and administrative
expenses also relates to severance costs in the third quarter of 1995 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 related management functions into the Company's existing
operations. In addition, the Company discontinued several licensing arrangements
on December 31, 1995 resulting in lower royalty expense in 1996. Also,
administrative salary expense decreased in 1996 as a result of the 1995
restructuring. Finally, selling, general and administrative expenses decreased
in 1996 due to reduced management fees and reductions in legal and professional
costs and bad debt expenses. The decrease in selling, general and administrative
expenses in 1996 was partially offset by increases in advertising and promotion
expenses and increased costs for management information services required to
meet customer demand for more sophisticated distribution and inventory control.
Selling, general and administrative expenses were 15.4% of net sales in 1996
compared to 17.9% of net sales in 1995.
Interest expense for 1996 decreased 11.4% from 1995. The decrease was
primarily due to the effect of lower debt levels in 1996. Lower debt levels in
1996 were due to positive cash flow from operating activities (including the
sale of accounts receivable) and proceeds from the sale of the Hosiery Division.
See "SALE OF ACCOUNTS RECEIVABLE" and "SALE OF HOSIERY DIVISION" in the Notes to
Consolidated Financial Statements and LIQUIDITY AND CAPITAL RESOURCES.
Included in other expense-net in 1996 is a $35,000,000 charge relating to
the Company's evaluation of its exposure under the guarantee of debt incurred by
Acme Boot under Acme Boot's credit facilities. See "OTHER EXPENSE-NET" in the
Notes to Consolidated Financial Statements. 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. In addition, other expense-net in 1996 and 1995 included
approximately $5,300,000 and $5,700,000, respectively, of deferred debt
amortization and bank fees. Other expense-net in 1996 and 1995 included $700,000
and $5,700,000, respectively, of gains related to the settlement of certain
foreign currency denominated transactions. Included in other expense-net in 1996
is $1,700,000 related to the loss on the sale of accounts receivable in December
1996. See "SALE OF ACCOUNTS RECEIVABLE" in the Notes to Consolidated Financial
Statements.
The effective income tax rate in 1996 differed from the Federal statutory
rate of 35% primarily due to the impact of higher foreign earnings, certain of
which are taxed at lower rates than in the United States, goodwill amortization,
portions of which are not deductible for Federal income tax purposes, state
income taxes and the reversal of excess income tax liabilities related to all
tax years through December 31, 1991 which were closed for Federal income tax
purposes effective December 31, 1996. The effective income tax rate in 1995
differed from the Federal statutory rate of 35% primarily due to the impact of
the impairment write down of goodwill
16
<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (CONTINUED)
OPERATIONS -- (CONCLUDED)
1996 COMPARED TO 1995 -- (CONCLUDED)
and goodwill amortization, portions of which are not deductible for Federal
income tax purposes, the impact of non-deductible foreign losses, the provision
for interest related to prior years' taxes and state income taxes.
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
preoperating costs as incurred resulting in an after tax charge of $5,200,000
($.07 per share).
Earnings per share were $1.92 in 1996, or $1.90 assuming dilution. The net
loss per share was $3.07 in 1995, including 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.
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 $814,000,000 of revolving lines of credit. As of March 26, 1998
approximately $287,800,000 was available and unused under these facilities.
Operating activities in 1997 included payments aggregating of $102,200,000
to settle the LMP litigation. Excluding these payments cash provided by
operating activities aggregated $7,300,000 and $513,700,000 in 1997 and 1996.
Primary factors in reconciling from the $385,400,000 loss from continuing
operations to $7,300,000 of cash provided by operating activities before LMP
payments in 1997 were addbacks for non-cash special charges related to long-term
items of $261,300,000, the non-cash Acme Boot charge of $32,000,000,
depreciation and amortization of $154,200,000, impairment write down of goodwill
of $4,600,000 and a decrease in working capital of $94,500,000, along with
deductions for a non-cash deferred income tax benefit of $64,600,000 and other
deductions of $89,300,000. In 1997, a decrease in notes and accounts receivable
of $69,200,000, increases in trade accounts payable of $122,200,000 and other
decreases in working capital of $86,100,000 more than offset the increase in
inventories of $183,000,000. The decrease in notes and accounts receivable
principally reflects the adoption of FAS 125 effective January 1, 1997. The
increase in trade accounts payable includes excess amounts advanced to the
Company of $83,100,000 by the ultimate purchaser of the receivables. See "SALE
OF ACCOUNTS RECEIVABLE" in the Notes to Consolidated Financial Statements. The
increase in inventories reflects additional lead time required related to the
offshore movement of production. The primary components of cash provided by
operating activities in 1996 were net earnings plus depreciation and
amortization (totalling $302,300,000) plus a decrease in working capital of
$198,000,000. In 1996, decreases in notes and accounts receivable of $93,700,000
and inventories of $60,200,000 and increases in trade accounts payable of
$51,800,000 more than offset other working capital uses of $7,700,000. The
decrease in notes and accounts receivable in 1996 reflects the Sale of Accounts
Receivable of $200,000,000, partially offset by an increase in sales in the
fourth quarter over 1995, increased sales allowances and an increase of reserves
included in other accounts payable and accrued expenses related to the
Receivables sold. The decrease in inventory in 1996 resulted from the
implementation of management's plans to reduce inventories and the 1995 decision
to eliminate a number of product offerings.
Net cash used for investing activities was $89,300,000 in 1997 compared
with net cash provided by investing activities of $31,300,000 in 1996. The
unfavorable year-to-year comparison largely resulted from higher capital
expenditures in 1997 ($55,400,000 as compared to $44,500,000 in 1996) and
proceeds from the
17
<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES -- (CONTINUED)
sale of the Hosiery Division in 1996 of $73,800,000. Capital spending, primarily
to support offshore assembly operations, is anticipated to approximate
$57,000,000 in 1998.
Net cash provided by financing activities was $181,600,000 in 1997. Net
borrowings on the Company's revolving lines of credit and term loan proceeds
exceeded payments by $344,100,000 and proceeds from Common Stock issued totalled
$11,100,000 while purchases of the Company's Class A Common Stock totalled
$173,600,000. The net financing proceeds went largely for the LMP settlement and
capital expenditures. In 1996, the substantial cash flow from operations and
proceeds from sale of the hosiery division far exceeded capital spending needs
and were applied to reduce outstanding borrowings resulting in net cash used for
financing activities of $552,800,000.
In November 1996, the Company's Board of Directors authorized the
repurchase of up to $200,000,000 of the Company's common stock in open market
and privately negotiated transactions. In 1996, the Company repurchased 440,400
shares of its Class A common stock at an aggregate cost of $16,600,000. In 1997,
the Company repurchased 5,329,000 shares of its Class A Common Stock at an
aggregate cost of $173,600,000. In early January, 1998, the Company purchased an
additional 120,900 shares of its Class A common stock at an aggregate cost of
$3,000,000.
Under a three-year receivables purchase agreement entered into in December
1996, the Company, through a wholly-owned special purpose entity, can sell 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, $183,000,000
and $200,000,000 of trade accounts receivable were sold at December 31, 1997 and
1996, respectively. The proceeds were used to reduce amounts outstanding under
the Company's revolving lines of credit. See "SALE OF ACCOUNTS RECEIVABLE" in
the Notes to Consolidated Financial Statements.
In September 1994, the Company entered into a five-year operating lease
agreement with two annual renewal options, primarily for certain machinery and
equipment. The total cost of the assets to be covered by the lease is limited to
$175,000,000. At December 31, 1997 and 1996, approximately $30,400,000 was
available and unused under this facility. 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. As a result of the
migration of its sewing and finishing operations to the Caribbean and Central
America and related decisions to close or dispose of certain manufacturing and
distribution facilities, the Company evaluated its operating lease structure and
the ability of the lessor to recover its costs in the used equipment market and
concluded that residual values guaranteed by the Company will be substantially
in excess of fair market values. Accordingly a provision of $61,000,000 was
included in the 1997 special charges.
On July 11, 1997, the Company filed with the Securities and Exchange
Commission a shelf registration statement on Form S-3 (the "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 (collectively, the "Securities"). The Registration Statement does not
relate to any particular offering of Securities; rather, the 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, common stock repurchases
investments and acquisitions.
Management believes the funding available to it is sufficient to meet
anticipated requirements for capital expenditures, working capital and other
needs.
18
<PAGE> 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES -- (CONCLUDED)
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.
ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued FAS 130,
Reporting Comprehensive Income. FAS 130 establishes new rules for the reporting
and display of comprehensive income and its components in financial statements.
The new rules require that all items that are recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. The rules require companies to (a) display items of other
comprehensive income either below the total for net income, in a separate
statement of comprehensive income, or in a statement of changes in equity, and
(b) disclose the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section of
the balance sheet. Application of FAS 130 will not impact amounts previously
reported for net income or affect the comparability of previously issued
financial statements. FAS 130 is effective for financial statements for fiscal
years beginning after December 15, 1997, and therefore, the Company will adopt
the new requirements retroactively in 1998. Management has not completed its
review of FAS 130, but does not anticipate that the adoption of this statement
will have a significant effect on the Company's financial statements.
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 financial statements for fiscal years beginning after December 15,
1997, and therefore, the Company will adopt the new requirements retroactively
in 1998. Management has not completed its review of FAS 131.
YEAR 2000
Until recently, computer programs were written to store only two digits of
date-related information in order to more efficiently handle and store data.
Thus, the programs were unable to properly distinguish between the year 1900 and
the year 2000. This is frequently referred to as the Year 2000 Problem. The
Company has initiated a company-wide Year 2000 Project to address this issue.
Utilizing both internal and external resources, the Company is in the process of
defining, assessing and converting, or replacing, various programs, hardware and
instrumentation systems to make them Year 2000 compatible. The Company's Year
2000 project is comprised of two components -- business applications and
equipment. The business applications component consists of the Company's
business computer systems, as well as the computer systems of third-party
suppliers or customers whose Year 2000 problems could potentially impact the
Company. The equipment component relates to micro-processors with the power of
small computers that are embedded within operating equipment such as spinning,
knitting and bleach and dye equipment. The Company currently expects the project
to be substantially completed by mid 1999 and that it will cost between
$5,000,000 and $10,000,000, which will be expensed as incurred.
BUSINESS APPLICATIONS. In 1996 the Company began a worldwide business
systems redesign and implementation project which is expected to be completed in
1999. It is anticipated that these new systems, which are Year 2000 compliant,
will replace approximately 60% of the Company's business computer programs. An
additional 20% of business application programs will be made compliant through
the Year 2000 Project, and 20% will be retired. The remaining non-compliant
programs are to be brought into compliance by
19
<PAGE> 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (CONCLUDED)
YEAR 2000 -- (CONCLUDED)
the vendors that will supply the programs. The majority of the business
applications Year 2000 Project is scheduled to be completed by June 1999, with a
few software programs scheduled to be replaced near the end of the year. The
Company is also identifying and prioritizing critical suppliers and customers
and will follow up with them concerning their plans and progress in addressing
the Year 2000 as part of routine maintenance.
The Company has ascertained that failure to alleviate the Year 2000
problems with its application systems could result in possible 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. These problems could be substantially
alleviated with manual processing. However, this would cause delays, possible
lost production days and incremental costs.
EQUIPMENT. The Company is currently evaluating the Year 2000 readiness of
its equipment with a comprehensive inventory of monitoring and control devices
for plants, safety systems and other similar operation installations. Work plans
detailing the tasks and resources required to insure equipment Year 2000
readiness by the end of 1998 are expected to be in place by the end of the first
half of 1998.
The costs of Year 2000 modifications and the date of completion will be
closely monitored and are based on management's best estimates. Actual results,
however, could differ from those anticipated.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risk from changes in foreign exchange and
interest rates and commodity prices. To reduce such risks, the Company
selectively uses financial instruments. All hedging transactions are authorized
and executed pursuant to clearly defined policies and procedures, which strictly
prohibit the use of financial instruments for trading purposes. Analytical
techniques used to manage and monitor foreign exchange and interest rate risk
include market valuation and sensitivity analysis.
A discussion of the Company's accounting policies for derivative financial
instruments is included in the Summary of Significant Accounting Policies in the
Notes to the Consolidated Financial Statements, and further disclosure relating
to financial instruments is included in "FINANCIAL INSTRUMENTS" in the Notes to
Consolidated Financial Statements.
INTEREST RATES
At December 31, 1997, the fair value of the Company's total debt is
estimated at $1,267,400,000 using quoted market prices and yields obtained
through independent pricing sources for the same or similar types of borrowing
arrangements, taking into consideration the underlying terms of the debt. Such
fair value exceeded the carrying value of debt at December 31, 1997 by
$46,400,000. Market risk is estimated as the potential change in fair value
resulting from a hypothetical 10% decrease in interest rates and amounts to
$30,900,000 at December 31, 1997.
The Company had $342,600,000 of variable rate debt outstanding at December
31, 1997. At this borrowing level, a hypothetical 10% adverse change in interest
rates would have a $2,100,000 unfavorable impact on the Company's pretax
earnings and cash flows. The primary interest rate exposures on floating rate
debt are with respect to U.S. and European interbank rates.
FOREIGN CURRENCY EXCHANGE RATES
Foreign currency exposures arising from transactions include firm
commitments and anticipated transactions denominated in a currency other than an
entity's functional currency. The Company and its subsidiaries generally enter
into transactions denominated in their respective functional currencies.
Therefore foreign currency exposures arising from transactions are not material
to the Company. The Company's primary foreign currency exposure arises from
foreign denominated revenues and profits translated into U.S. dollars.
20
<PAGE> 23
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK --
(CONCLUDED)
FOREIGN CURRENCY EXCHANGE RATES -- (CONCLUDED)
The primary currencies to which the Company is exposed included the Irish punt,
the British pound and other European currencies.
The Company generally views as long-term its investments in foreign
subsidiaries with a functional currency other than the US dollar. As a result,
the Company does not generally hedge these net investments. However, the Company
uses capital structuring techniques to manage its net investment in foreign
currencies as considered necessary. The net investment in foreign subsidiaries
and affiliates translated into dollars using the year-end exchange rates is
$430,500,000 at December 31, 1997. The potential loss in value of the Company's
net investment in foreign subsidiaries resulting from a hypothetical 10% adverse
change in quoted foreign currency exchange rates at December 31, 1997 amounts to
$12,300,000.
COMMODITY PRICES
The availability and price of cotton is subject to wide fluctuations due to
unpredictable factors such as weather conditions, governmental regulations,
economic climate or other unforeseen circumstances. To reduce price risk caused
by market fluctuations, the Company enters into futures contracts to cap prices
on varying proportions of its cotton needs, thereby minimizing the risk of
decreased margins from cotton price increases.
A sensitivity analysis has been prepared to estimate the Company's exposure
to market risk from its cotton position, excluding inventory on hand and fixed
price contracts. The fair value of the Company's position is the fair value
calculated by valuing its net position at quoted futures prices. Market risk is
estimated as the potential loss in fair value resulting from a hypothetical 10%
adverse change in such prices. The potential loss in fair value of the Company's
cotton futures position at December 31, 1997 from a hypothetical 10% decrease in
cotton prices was $4,700,000.
FORWARD-LOOKING INFORMATION
The above risk management discussion and the estimated amounts generated
from the sensitivity analyses are forward-looking statements of market risk
assuming certain adverse market conditions occur. Actual results in the future
may differ materially from those projected results due to actual developments in
the global financial markets. The analysis methods used by the Company to assess
and mitigate risks discussed above should not be considered projections of
future events or losses.
21
<PAGE> 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA OF FRUIT OF THE LOOM, INC.
AND SUBSIDIARIES
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... 23
Consolidated Balance Sheet -- December 31, 1997 and 1996.... 24
Consolidated Statement of Operations for Each of the Years
Ended December 31, 1997, 1996 and 1995.................... 25
Consolidated Statement of Cash Flows for Each of the Years
Ended December 31, 1997, 1996 and 1995.................... 26
Notes to Consolidated Financial Statements.................. 27
Supplementary Data (Unaudited)............................ 54
Financial Statement Schedule:
Schedule II -- Valuation and Qualifying Accounts.......... 72
</TABLE>
NOTE: All other schedules are omitted because they are not applicable or not
required.
22
<PAGE> 25
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, 1997 and 1996, and the related
consolidated statements of operations and cash flows for each of the three years
in the period ended December 31, 1997. 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 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, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, 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 a 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 inventories in 1997 and for pre-operating
costs in 1995.
ERNST & YOUNG LLP
Chicago, Illinois
February 12, 1998
23
<PAGE> 26
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
---- ----
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents (including restricted cash)..... $ 16,100 $ 18,700
Notes and accounts receivable (less allowance for possible
losses of $11,900,000 and $20,600,000, respectively).... 98,100 167,300
Inventories
Finished goods.......................................... 570,400 428,600
Work in process......................................... 212,300 188,500
Materials and supplies.................................. 64,800 47,400
---------- ----------
847,500 664,500
Other..................................................... 53,900 38,100
---------- ----------
Total current assets.................................. 1,015,600 888,600
---------- ----------
PROPERTY, PLANT AND EQUIPMENT
Land...................................................... 14,700 20,000
Buildings, structures and improvements.................... 330,500 483,800
Machinery and equipment................................... 882,800 1,034,600
Construction in progress.................................. 4,200 2,600
---------- ----------
1,232,200 1,541,000
Less accumulated depreciation............................. 717,800 641,100
---------- ----------
Net property, plant and equipment..................... 514,400 899,900
---------- ----------
OTHER ASSETS
Goodwill (less accumulated amortization of $311,400,000
and $284,500,000, respectively)......................... 712,900 744,300
Net deferred income taxes................................. 30,300 --
Other..................................................... 209,900 60,600
---------- ----------
Total other assets.................................... 953,100 804,900
---------- ----------
$2,483,100 $2,593,400
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt...................... $ 28,200 $ 18,200
Trade accounts payable.................................... 234,100 111,900
Accrued insurance obligations............................. 20,100 24,800
Accrued advertising and promotion......................... 23,400 18,200
Acme Boot guarantee....................................... 67,000 --
Accrued payroll and vacation pay.......................... 17,900 19,700
Other accounts payable and accrued expenses............... 134,500 133,900
---------- ----------
Total current liabilities............................. 525,200 326,700
---------- ----------
NONCURRENT LIABILITIES
Long-term debt............................................ 1,192,800 867,400
Net deferred income taxes................................. -- 34,300
Other..................................................... 343,000 271,200
---------- ----------
Total noncurrent liabilities.......................... 1,535,800 1,172,900
---------- ----------
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, 66,216,720 and 69,937,600 shares,
respectively........................................... 315,300 472,900
Class B Common Stock, 5,684,276 and 6,690,976 Shares,
respectively........................................... 3,700 4,400
Retained earnings......................................... 140,700 628,300
Currency translation, pension and investment
adjustments............................................. (37,600) (11,800)
---------- ----------
Total common stockholders' equity..................... 422,100 1,093,800
---------- ----------
$2,483,100 $2,593,400
========== ==========
</TABLE>
See accompanying notes.
24
<PAGE> 27
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales................................................ $2,139,900 $2,447,400 $2,403,100
Cost of sales............................................ 1,871,400 1,724,500 1,886,500
---------- ---------- ----------
Gross earnings......................................... 268,500 722,900 516,600
Selling, general and administrative expenses............. 524,800 378,000 429,700
Goodwill amortization.................................... 26,800 26,700 37,300
Impairment write down of goodwill........................ 4,600 -- 158,500
---------- ---------- ----------
Operating earnings (loss).............................. (287,700) 318,200 (108,900)
Interest expense......................................... (84,700) (103,600) (116,900)
Other expense-net........................................ (79,300) (36,400) (21,700)
---------- ---------- ----------
Earnings (loss) from continuing operations before
income tax expense (benefit) and cumulative effect
of change in accounting principle................... (451,700) 178,200 (247,500)
Income tax expense (benefit)............................. (66,300) 31,600 (19,700)
---------- ---------- ----------
Earnings (loss) from continuing operations before
cumulative effect of change in accounting
principle........................................... (385,400) 146,600 (227,800)
Discontinued operations -- LMP litigation.............. (102,200) -- --
Cumulative effect of change in accounting for
pre-operating costs................................. -- -- (5,200)
---------- ---------- ----------
Net earnings (loss).................................... $ (487,600) $ 146,600 $ (233,000)
========== ========== ==========
Earnings (loss) per common share:
Continuing operations.................................. $(5.18) $1.92 $(3.00)
Discontinued operations -- LMP litigation.............. (1.37) -- --
Cumulative effect of change in accounting for
pre-operating costs................................. -- -- (0.07)
---------- ---------- ----------
Net earnings (loss) $(6.55) $1.92 $(3.07)
========== ========== ==========
Earnings (loss) per common share -- assuming dilution:
Continuing operations.................................. $(5.18) $1.90 $(3.00)
Discontinued operations -- LMP litigation.............. (1.37) -- --
Cumulative effect of change in accounting for
pre-operating costs................................. -- -- (0.07)
---------- ---------- ----------
Net earnings (loss).................................... $(6.55) $1.90 $(3.07)
========== ========== ==========
Average common shares outstanding
Basic.................................................. 74,400 76,400 75,900
========== ========== ==========
Diluted................................................ 75,100 77,100 76,200
========== ========== ==========
</TABLE>
See accompanying notes.
25
<PAGE> 28
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss)...................................... $(487,600) $ 146,600 $(233,000)
Adjustments to reconcile net earnings (loss) to net cash
provided by (used for) operating activities:
Cumulative effect of change in accounting principle... -- -- 5,200
Impairment write down of goodwill..................... 4,600 -- 158,500
Depreciation and amortization......................... 154,200 155,700 169,000
Deferred income tax expense (benefit)................. (64,600) 23,200 (50,800)
Decrease in notes and accounts receivable............. 69,200 93,700 34,700
Decrease (increase) in inventories.................... (183,000) 60,200 (21,900)
Increase (decrease) in trade accounts payable......... 122,200 51,800 (53,200)
Other working capital changes......................... 86,100 (7,700) 39,900
Special charges related to long-term items............ 261,300 -- 59,200
Acme Boot charge...................................... 32,000 35,000 --
Net payments on retained liabilities related to former
subsidiaries........................................ (19,600) (18,000) (16,300)
Other-net............................................. (69,700) (26,800) 15,700
--------- --------- ---------
Net cash provided by (used for) operating
activities..................................... (94,900) 513,700 107,000
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures..................................... (55,400) (44,500) (125,600)
Less amount attributable to capital leases............... -- -- 3,900
--------- --------- ---------
Capital expenditures............................. (55,400) (44,500) (121,700)
Proceeds from sale of Hosiery Division................... -- 73,800 --
Other-net................................................ (33,900) 2,000 18,400
--------- --------- ---------
Net cash provided by (used for) investing
activities..................................... (89,300) 31,300 (103,300)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt................. 97,800 63,000 --
Proceeds under line-of-credit agreements................. 1,245,800 488,500 546,700
Payments under line-of-credit agreements................. (981,900) (979,600) (550,800)
Principal payments on long-term debt and capital
leases................................................ (17,600) (125,500) (23,000)
Common stock issued...................................... 11,100 17,400 500
Common stock repurchased................................. (173,600) (16,600) --
--------- --------- ---------
Net cash provided by (used for) financing
activities..................................... 181,600 (552,800) (26,600)
--------- --------- ---------
Net decrease in cash and cash equivalents (including
restricted cash)......................................... (2,600) (7,800) (22,900)
Cash and cash equivalents (including restricted cash) at
beginning of year........................................ 18,700 26,500 49,400
--------- --------- ---------
Cash and cash equivalents (including restricted cash) at
end of year.............................................. $ 16,100 $ 18,700 $ 26,500
========= ========= =========
</TABLE>
See accompanying notes.
26
<PAGE> 29
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The accompanying consolidated financial
statements include the accounts of the Company and its subsidiaries other than
its special purpose entity which is not consolidated (see "Sale of Accounts
Receivable"). 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, the success of planned advertising, marketing and promotional
campaigns and the actual fair values of assets held for sale, impaired assets
and leased assets covered by residual value guarantees.
INVENTORIES. Inventory costs include material, labor and factory overhead.
Inventories are stated at the lower of cost (first-in, first-out) or market.
During the fourth quarter of 1997, the Company changed its method of
determining the cost of inventories from the LIFO method to the FIFO method as
it experienced reduced costs from offshore assembly operations and expects
continuing cost reductions. The cost of inventories on a LIFO basis at December
31, 1997 was approximately equal to their replacement cost. Accordingly, the
Company believes that the FIFO method will result in a better measurement of
operating results. All previously reported results have been restated to reflect
the retroactive application of this accounting change as required by generally
accepted accounting principles. The accounting change increased the net loss for
1997 by $27,800,000, or $.37 per share. Due principally to the effect of LIFO
reserve liquidations, net earnings previously reported for 1996 were reduced by
$4,600,000 or $.06 per share, and the net loss previously reported for 1995
increased by $500,000 or $.01 per share.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment is stated at
cost. Impaired assets are stated at fair value less estimated selling costs.
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 10 to 40 years.
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.
DERIVATIVE COMMODITY INSTRUMENTS. Cotton futures contracts are the primary
derivative commodity instruments utilized by the Company. These instruments are
designated and effective as hedges of a portion of the probable periodic cotton
purchases that would otherwise expose the Company to the risk of increases in
the price of cotton consumed in manufacturing the Company's products. The
contract terms match the Company's purchasing cycle. Options (caps and floors)
are also used but are not currently material to the Company's financial
condition or net income. Futures contracts are closed by cash settlement. Open
futures contracts are marked to market. Realized and unrealized gains and losses
are deferred and recognized in
27
<PAGE> 30
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONCLUDED)
earnings as cotton costs are recovered through sales of the Company's products
(the deferral accounting method). Deferred realized gains and losses are
included as a component of inventory. Deferred unrealized gains and losses are
included in other liabilities or assets and in cash flows from investing
activities.
DERIVATIVE FINANCIAL INSTRUMENTS. Interest rate swap agreements are the
primary derivative financial instruments utilized by the Company. These
instruments limit the Company's risk of exposure to increases in interest rates
on selected portions of its variable rate debt. These agreements involve the
exchange of amounts based on a variable interest rate for amounts based on fixed
interest rates over the life of the agreement without an exchange of the
notional amount upon which the payments are based. The differential to be paid
or received as interest rates change is accrued and recognized as an adjustment
of interest expense related to the debt (the accrual accounting method). The
related amount payable to or receivable from counterparties is included in
interest payable. The fair values of the swap agreements are not recognized in
the financial statements.
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, 1997 and 1996 were $28,000,000 and $40,200,000,
respectively.
SOFTWARE COSTS. Costs associated with the application development stage of
significant new computer software applications for internal use are deferred and
amortized over periods ranging from three to five years. Costs associated with
the preliminary and post implementation stages of these projects are expensed as
incurred.
STOCK-BASED COMPENSATION. The Company accounts for stock based compensation
in accordance with APB 25. 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. Accordingly, the Company typically
recognizes no compensation expense for these stock option grants.
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.
EARNINGS PER SHARE. In 1997, the Financial Accounting Standards Board
issued FAS 128, Earnings per Share. FAS 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to the FAS 128
requirements.
IMPAIRMENT. In 1995, the Company adopted FAS 121. Accordingly, when
indicators of impairment are present, the Company 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.
RECLASSIFICATIONS. Certain prior year amounts have been reclassified to
conform with the current year presentation.
28
<PAGE> 31
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SPECIAL CHARGES
1997 Special Charges
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) categorized as follows (in thousands of dollars):
<TABLE>
<S> <C>
Closing and disposal of U.S. manufacturing and distribution
facilities................................................ $251,400
Impairment of European manufacturing and distribution
facilities................................................ 44,100
Pro Player incentive compensation agreement................. 22,000
Other asset write downs and reserves........................ 103,600
Changes in estimates of retained liabilities of former
subsidiaries.............................................. 20,600
--------
$441,700
========
</TABLE>
Each of these categories is discussed below.
During the three years ended December 31, 1997, the Company moved
substantially all of its sewing and finishing operations to locations in the
Caribbean and Central America as part of its strategy to reduce its cost
structure and remain a low cost producer in the U.S. markets it serves. The
Company closed or committed to cease operations at nine sewing facilities in
1997. Accordingly, the Company terminated 176 salaried and 6,975 production
personnel related to closed operations. Terminated personnel were notified of
their separation in 1997 and the plant closings and attendant personnel
reductions were substantially completed in 1997. The decision to move
substantially all of the Company's sewing and finishing operations outside the
United States resulted in the need to realign certain other domestic
manufacturing operations and requires the Company to dispose of certain
production equipment. The Company realigned its operations by shifting
production at the remaining domestic and offshore locations (including
contractors) in order to balance its production capabilities. The resulting
redirection of the physical flow of goods in the Company's manufacturing
processes prompted a reassessment of the Company's domestic distribution
network. In addition, the Company's plans for further efficiencies in its
manufacturing operations and its commitment to reduce the capital intensity of
its business resulted in a decision to dispose of certain other U.S. based
manufacturing assets. FAS 121 requires that all long-lived assets to be disposed
of be measured at the lower of their carrying amount or estimated fair value,
less estimated selling costs. Charges related to closing and disposal of U.S.
manufacturing and distribution facilities consisted of the following (of which
$175,500,000 were non-cash charges) (in thousands of dollars):
<TABLE>
<S> <C>
Loss on disposal of facilities, improvements and
equipment................................................. $232,600
Severance costs............................................. 8,400
Other....................................................... 10,400
--------
$251,400
========
</TABLE>
Severance costs 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).
These charges were recorded in the fourth quarter of 1997 as required by
FAS 121, EITF 94-3 or other authoritative literature. Assets held for sale
included in other noncurrent assets in the accompanying Consolidated Balance
Sheet totalled $104,700,000 at December 31, 1997.
29
<PAGE> 32
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SPECIAL CHARGES -- (CONTINUED)
1997 Special Charges -- (Concluded)
During 1997, events and circumstances indicated that certain of the
Company's European manufacturing and distribution assets to be held and
continued to be used might be impaired. Estimates of undiscounted cash flows
indicated that the carrying amounts of these assets were not likely to be
recovered. Therefore, as required by FAS 121, these assets were written down to
their estimated fair values, less estimated selling costs, resulting in charges
of approximately $44,100,000 in the fourth quarter of 1997 (of which $42,800,000
are non-cash charges).
In the fourth quarter of 1997, the Company recorded a $22,000,000 charge
for incentive compensation anticipated to be earned at its Pro Player subsidiary
(none of which was paid in 1997). The Company recorded charges totalling
$103,600,000 (of which $64,400,000 are non-cash charges) related to other asset
write downs, valuation reserves and other reserves as a result of reductions in
its product offerings, changes in its operations and termination or modification
of certain agreements. The Company recorded charges totalling $20,600,000
related to changes in estimates of environmental and other retained liabilities
of former subsidiaries (of which $8,000,000 are non-cash charges).
The above charges were recorded as $276,800,000 of increases to cost of
sales, $127,900,000 of increases to selling, general and administrative
expenses, $4,600,000 of impairment write down of goodwill and $32,400,000 of
increases to other expense in the accompanying Consolidated Statement of
Operations. These charges were based on management's best estimates of the
potential market values, timing and costs related to the above actions. Of the
Special Charges, approximately $151,000,000 are to be paid in 1998 and future
years, $10,900,000 of which relate to restructuring charges as defined by EITF
No. 94-3. See "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- USE OF ESTIMATES."
1995 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 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. These actions 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 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 write downs of goodwill of $158,500,000
reflect the write-off of all goodwill related to the Salem and Gitano
businesses. See "ACQUISITIONS."
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
30
<PAGE> 33
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SPECIAL CHARGES -- (CONCLUDED)
1995 Special Charges -- (Concluded)
of the Company's insurance obligations. The detail of these charges is presented
below (in thousands of dollars):
<TABLE>
<S> <C>
Loss on disposal of closed facilities, improvements and
equipment................................................. $29,000
Changes in estimates of insurance liabilities............... 21,800
Costs related to expected increases in workers' compensation
and health and welfare costs.............................. 8,000
Costs related to termination of certain lease agreements.... 7,300
Costs related to the severance of the hourly workforce...... 6,700
Other....................................................... 10,000
-------
$82,800
=======
</TABLE>
These charges were recorded in the fourth quarter of 1995 as required by
EITF No. 94-3 or other authoritative 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
write downs, 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 of former subsidiaries. Also, the Company adopted a plan to
realign certain of its corporate headquarters functions and to terminate its
relationship for management services with 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 write down 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 write down of
goodwill, $146,700,000 of increases to cost of sales, $47,000,000 of increases
to selling general and administrative expenses 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. Finalization of many of the Special Charges
estimated at December 31, 1995 occurred during 1996. Of the Special Charges,
approximately $4,900,000 and $33,400,000 were paid in 1997 and 1996 and
$43,400,000 remain to be paid in 1998 and future years, $900,000 of which relate
to restructuring charges as defined by EITF No. 94-3. See "SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES -- USE OF ESTIMATES."
SALE OF HOSIERY DIVISION
In November 1996, the Company completed the sale of a substantial portion
of its hosiery manufacturing operations and related assets for $73,800,000 in
cash. The sale resulted in a pretax gain of $4,200,000 or $.03 per share --
assuming dilution after tax. The purchaser also entered into a ten year
licensing agreement with the Company granting the purchaser an exclusive
royalty-bearing license to use the Fruit of the Loom
31
<PAGE> 34
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SALE OF HOSIERY DIVISION -- (CONCLUDED)
tradename and trademark for the manufacture, sale and distribution of athletic,
casual and dress socks for adults and children.
ACQUISITIONS
In 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 of
varying amounts 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 the fourth
quarter of 1997, the Company recorded a $22,000,000 charge related to this
compensation agreement. 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 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."
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) totalling $1,300,000 and $7,900,000 were included in
cash and cash equivalents at December 31, 1997 and 1996, respectively. Included
in short-term investments at December 31, 1997 and 1996 was $1,300,000 and
$6,800,000 of restricted cash. These investments were carried at cost, which
approximated quoted market value.
SALE OF ACCOUNTS RECEIVABLE
Under a three-year receivables purchase agreement entered into in December
1996, the Company, through a wholly-owned special purpose entity ("SPE"), can
sell 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, $183,000,000 and $200,000,000 of trade accounts receivable were sold
at December 31, 1997 and 1996, respectively.
Prior to January 1, 1997, the Company accounted for these sales in
accordance with FAS 77 "Reporting by Transferors for Transfers of Receivables
with Recourse," under which accounts of the SPE were consolidated. Effective
January 1, 1997, the Company adopted FAS 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," for sales of
trade accounts receivable. Adoption of FAS 125 had no impact on net income in
1997. Under FAS 125, however, the Company no longer consolidates the SPE.
Rather, the SPE is reflected as an equity basis investment as of December 31,
1997, in the accompanying Consolidated Balance Sheet.
Sales of trade accounts receivable are reflected as a reduction of notes
and accounts receivable in the accompanying Consolidated Balance Sheet and the
proceeds received are included in cash flows from operating activities in the
accompanying Consolidated Statement of Cash Flows. The proceeds from the sale
are less than the face amount of trade accounts receivable sold by a discounted
amount which closely approximates the purchaser's financing cost of issuing its
own commercial paper backed by these and other
32
<PAGE> 35
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SALE OF ACCOUNTS RECEIVABLE -- (CONCLUDED)
accounts receivable. Trade accounts payable in the accompanying Consolidated
Balance Sheet at December 31, 1997, included advances totalling $83,100,000 owed
to the ultimate purchaser by the Company.
The full amount of the allowance for possible losses has been retained by
the SPE and classified as a recourse liability because the SPE, as agent for the
purchaser, retains the same risk of credit loss, including collection and
administrative responsibilities, as if the receivables had not been sold. The
fair value of the recourse liability of $20,900,000 included in current
liabilities in the accompanying Consolidated Balance Sheet at December 31, 1996
approximated the allocated allowance for possible losses given the short-term
nature of the transferred receivables.
The discount and fees under this agreement are variable based on the
general level of interest rates and the Company's debt ratings. Rates ranged
from 5.14% to 5.92% during 1997 and from 5.37% to 5.83% during 1996 on the
amount of the undivided interest sold plus certain administrative and servicing
fees typical in such transactions. These costs were approximately $11,800,000
and $1,700,000 in 1997 and 1996 and were charged to other expense -- net in the
accompanying Consolidated Statement of Operations. The Company receives
compensation for servicing that is approximately equal to its cost of servicing
the accounts receivable. Accordingly, no servicing asset or liability is
recorded.
33
<PAGE> 36
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 1997 1996
------------- ---- ----
<S> <C> <C> <C>
Senior Secured
Capitalized lease obligations, maturing 1997-2017(1)... 4.25 - 11.13% $ 50,300 $ 67,000
---------- --------
Senior Unsecured
Fixed rate Canadian debt, maturing 1998-2008........... 6.97% 105,900 112,100
Foreign Credit Facilities, maturing 1998............... Variable(2) 7,000 22,500
Term Loan, maturing 1998-2002(8)....................... Variable(3) 100,000 --
Irish Term Loan, maturing 1999......................... Variable(4) 23,400 25,700
Credit Agreement, maturing 1999........................ Variable(5) -- 37,700
Fixed rate debt, maturing 1999(7)(8)................... 7.97% 249,600 249,400
Bank Credit Agreement, maturing 2002(8)................ Variable(6) 312,200 --
Nonredeemable fixed rate debt, maturing 2003(8)(9)..... 6.61% 149,200 149,100
Fixed rate debt, maturing 2011(10)..................... 12.6 75,400 74,100
Nonredeemable fixed rate debt, maturing 2023(8)(11).... 7.49 148,000 148,000
---------- --------
Total Senior Unsecured.............................. 1,170,700 818,600
---------- --------
Total.................................................... 1,221,000 885,600
Less current maturities.................................. (28,200) (18,200)
---------- --------
Total long-term debt..................................... $1,192,800 $867,400
========== ========
</TABLE>
- -------------------------
(1) Represents the principal portion on capitalized lease obligations. The
capitalized leases are secured by the related property under lease.
(2) Interest ranged from 5.24% to 6.44% during 1997 and 3.39% to 11.05% during
1996. The weighted average interest rate for borrowings outstanding at
December 31, 1997 was approximately 5.24%.
(3) Interest ranged from 6.11% to 6.39% during 1997.
(4) Interest ranged from 6.30% to 6.82% during 1997 and 3.39% to 10.38% during
1996. The weighted average interest rate for borrowings outstanding at
December 31, 1997 was approximately 6.82%.
(5) Interest ranged from 5.73% to 8.50% during 1997 and 5.55% to 8.50% during
1996.
(6) Interest ranged from 5.93% to 8.50% during 1997.
(7) Net of unamortized discount of $400 and $600 in 1997 and 1996, respectively
(nominal rate 7.875%).
(8) The obligations of the Company under the Bank Credit Agreement, the
Canadian Debt (as hereinafter defined), the Foreign Credit Facilities and
the Irish Term Loan 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.
(9) Net of unamortized discount of $800 and $900 in 1997 and 1996, respectively
(nominal rate 6.5%).
(10) Net of unamortized discount of $49,600 and $50,900 in 1997 and 1996,
respectively (nominal rate 7%). This fixed rate obligation ranks pari passu
with the Company's Bank Credit Agreement.
(11) Net of unamortized discount of $2,000 in 1997 and 1996 (nominal rate
7.375%).
In September 1997, the Company entered into a Bank Credit Agreement
maturing September 2002, replacing the prior Credit Agreement, maturing June
1999. The Bank Credit Agreement provides the Company with an $900,000,000 line
of credit which consists of a $600,000,000 revolving line of credit, a
34
<PAGE> 37
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LONG-TERM DEBT -- (CONCLUDED)
$200,000,000 364-day facility and a $100,000,000 Term Loan. At December 31,
1997, no borrowings were outstanding under the $200,000,000 364-day facility. At
December 31, 1997, $22,200,000 of letters of credit were issued under the Bank
Credit Agreement. The letters of credit were issued to secure various insurance,
debt and other obligations. At December 31, 1996, approximately $73,000,000 of
letters of credit were issued under the Credit Agreement. In 1996, the letters
of credit were issued to secure a bond posted in connection with the appeal of
the LMP Litigation. Borrowings under the Bank Credit Agreement bear interest at
a rate approximating the prime rate (8.50% at December 31, 1997) or, at the
election of the Company, at rates approximating LIBOR (6.00% at December 31,
1997) plus 30 basis points. The Company also pays a facility fee (the "Facility
Fee") under the Bank 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 ratings. The
weighted average interest rate for borrowings outstanding under the Bank Credit
Agreement at December 31, 1997 was approximately 6.53%. Borrowings under the
Bank Credit Agreement are guaranteed by certain of the Company's subsidiaries.
The Company has an additional $135,000,000 of letter of credit facilities
from its bank lenders. At December 31, 1997 and 1996, approximately $77,500,000
and $83,200,000, respectively, of letters of credit were issued under these
facilities, to secure various insurance, debt, trade and other obligations, of
which $67,100,000 and $55,800,000 of these obligations are reflected in the
accompanying Consolidated Balance Sheet as of December 31, 1997 and 1996,
respectively.
The Company's wholly-owned subsidiary, Fruit of the Loom Canada, Inc., has
an unsecured senior note due in installments through 2008 (the "Canadian Debt")
that was issued in a private placement transaction with certain insurance
companies. The Canadian Debt is fully guaranteed by the Company and its
principal operating subsidiaries and ranks pari passu in right of payment with
the Bank Credit Agreement.
The Bank 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; (iii)
restrictions on mergers, sale and leaseback transactions, asset sales and
investments, and (iv) provides for the acceleration of the amounts outstanding
thereunder should a change in ownership occur, unless waived by the required
lenders. As of December 31, 1997, the Company was not in compliance with certain
of the financial covenants. Subsequent to December 31, 1997 the Bank Credit
Agreement was amended. The Company is in compliance with the terms of the
amended Bank Credit Agreement. The Bank 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 September 19, 1997 through
December 31, 1998 does not exceed $300,000,000.
The aggregate amount of scheduled annual maturities of long-term debt for
each of the next five years is: $28,200,000 in 1998; $295,000,000 in 1999;
$20,800,000 in 2000; $21,000,000 in 2001; and $332,200,000 in 2002.
Cash payments of interest on debt were $86,700,000, $101,600,000 and
$114,600,000 in 1997, 1996 and 1995, respectively. These amounts exclude amounts
capitalized.
FINANCIAL INSTRUMENTS
During 1996, the Company entered into interest rate swaps to help manage
its interest rate exposures and its mix of fixed and floating interest rates.
The Company is party to interest rate swap contracts for $50,000,000 expiring in
1998 and $50,000,000 expiring in 1999 that have the effect of converting
floating rate debt based on three month LIBOR rates into fixed rate debt. The
average annual variable rate received in
35
<PAGE> 38
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FINANCIAL INSTRUMENTS -- (CONCLUDED)
1997 and 1996 was 5.70% and 5.53%, respectively. The average annual fixed rate
paid in 1997 and 1996 was 5.05% for both years.
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, 1997 and 1996, the fair value of the Company's
debt was approximately $1,267,400,000 and $921,900,000, respectively.
The Company monitors its positions with, and the credit quality of, the
financial institutions which are counter parties to its off-balance sheet
financial instruments and does not anticipate nonperformance of the counter
parties. The Company does not require collateral from its counter parties and
management believes that the Company would not realize a material loss in the
event of nonperformance by the counter parties.
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 47.8% of net
sales in 1997 and approximately 38.9% of accounts receivable at December 31,
1997. 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 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 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 operations. The Company's
retained liability reserves at December 31, 1997 consist primarily of certain
environmental and product liability reserves of approximately $66,000,000. The
Company has recorded receivables related to these liabilities of approximately
$13,800,000 which management believes will be 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 principally pertain to 10 specifically identified
environmental sites and the aforementioned product liabilities. Three sites and
the total product liabilities each individually represent more than 10% of the
net reserve and in the aggregate represent approximately 58% 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
36
<PAGE> 39
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONTINGENT LIABILITIES -- (CONTINUED)
currently estimates actual payments before recoveries by year for the next five
years and thereafter as noted below (in thousands of dollars):
<TABLE>
<S> <C>
1998........................................................ $14,300
1999........................................................ 10,600
2000........................................................ 7,200
2001........................................................ 6,800
2002........................................................ 4,500
Thereafter.................................................. 22,600
-------
$66,000
=======
</TABLE>
Only the long-term monitoring costs of approximately $13,900,000, primarily
scheduled to be paid in 2002 and beyond, have been discounted. The discount rate
used was 10%. The undiscounted aggregate long-term monitoring costs, to be paid
during the years 2002 through 2027, are approximately $32,500,000. 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. In addition, in 1996 the Company elected to early adopt
Statement of Position 96-1, Environmental Remediation Liabilities, the impact of
which was not material to the Company.
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 1998 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 Industries, Inc. by L.M.P.
Corporation ("LMP"). The suit alleged that Universal and Northwest Industries,
Inc. 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. In accordance with an
agreement between the Company and the plaintiffs (the "Settlement Agreement"),
the Company paid $28,600,000 to the plaintiffs on August 18, 1997 and paid an
additional $73,600,000 including interest on November 24, 1997. The Company took
a charges of $101,200,000 in the third quarter 1997 and $1,000,000 in the fourth
quarter of 1997 to reflect these costs which are classified as discontinued
operations in the accompanying Consolidated Statement of Operations.
In March 1988, a class action suit entitled Endo, et al. v. Albertine, et
al. (the "Endo Class Action") 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 alleged, 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 sought
unspecified damages.
37
<PAGE> 40
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONTINGENT LIABILITIES -- (CONTINUED)
The Endo Class Action was settled in October 1997 and approved by the
District Court in February 1998. The settlement cost recorded in the third
quarter of 1997 of $1,500,000, net of insurance proceeds, is included in Other
expense-net in the accompanying Consolidated Statement of Operations, to reflect
the settlement.
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. 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."
On November 20, 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 FI held by non-affiliated third parties. In
consideration of the guarantee, 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 Shares 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 matures 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 December 31, 1997, the
Company has a contingent liability to repay, in whole or in part, grants
received of approximately $64,600,000 in the event that the Company does not
meet defined average employment levels or terminates operations in the Republic
of Ireland, Northern Ireland or Germany.
In connection with the Company's transaction with 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 (the "Acme Boot Credit
Facility"). FI owns 100% of the common stock of Acme Boot. Mr. Farley holds 100%
of the common stock of FI. See "OTHER EXPENSE-NET" and "RELATED PARTY
TRANSACTIONS." At December 31, 1997 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, 1997 approximately $27,000,000 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 1998. 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
38
<PAGE> 41
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONTINGENT LIABILITIES -- (CONCLUDED)
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. At
December 31, 1997, approximately $36,700,000 remains outstanding under the New
Acme Credit Agreement. In addition, the Company loaned Acme Boot $8,000,000 in
August 1997 to provide Acme Boot with supplemental working capital during Acme
Boot's peak selling season. The loan was made in the form of a demand note
payable and is senior to all indebtedness of Acme Boot.
Summarized unaudited financial information for Acme Boot follows (in
thousands of dollars):
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996
---- ----
<S> <C> <C>
Current assets......................................... $ 29,900 $ 32,900
Noncurrent assets -- net............................... 3,400 1,600
-------- --------
$ 33,300 $ 34,500
======== ========
Current liabilities.................................... $ 81,300 $ 11,100
Noncurrent liabilities................................. 12,300 67,600
Preferred stock........................................ 4,300 3,400
Common stockholders' deficit........................... (64,600) (47,600)
-------- --------
$ 33,300 $ 34,500
======== ========
</TABLE>
CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996
---- ----
<S> <C> <C>
Net sales.............................................. $ 52,600 $ 89,600
======== ========
Gross earnings......................................... $ 9,300 $ 26,500
======== ========
Operating loss......................................... $ (6,100) $(15,600)
======== ========
Net loss............................................... $(12,400) $(19,500)
======== ========
</TABLE>
As a result of the Acme Boot operating performance and management's
assessment of existing facts and circumstances of Acme Boot's financial
condition, the Company recorded charges of $32,000,000 in the third quarter of
1997 and $35,000,000 in the fourth quarter of 1996 related to the Company's
evaluation of its exposure under the Acme Boot guarantees. See "OTHER
EXPENSE-NET."
The Company has certain contingent liabilities resulting from litigation
and claims incident to the ordinary course of business. Management believes that
the probable resolution of such contingencies will not materially affect the
financial position or results of operations of the Company.
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
39
<PAGE> 42
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LEASE COMMITMENTS -- (CONCLUDED)
covered by the lease is limited to $175,000,000. At December 31, 1997 and 1996,
approximately $30,400,000 was available and unused under this facility. 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 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. As a result of the migration of
its sewing and finishing operations to the Caribbean and Central America and
related decisions to close or dispose of certain manufacturing and distribution
facilities, the Company evaluated its operating lease structure and the ability
of the lessor to recover its costs in the used equipment market and concluded
that residual values guaranteed by the Company will be substantially in excess
of fair market values. Accordingly, a provision of $61,000,000 was included in
the 1997 special charges.
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, 1997 (in thousands of dollars):
<TABLE>
<CAPTION>
CAPITALIZED OPERATING
LEASES LEASES
----------- ---------
<S> <C> <C>
YEAR ENDING DECEMBER 31,
1998.................................................... $ 4,700 $33,300
1999.................................................... 3,600 29,100
2000.................................................... 3,600 11,400
2001.................................................... 3,600 5,200
2002.................................................... 3,600 2,200
Years subsequent to 2002................................ 63,800 1,000
-------- -------
Total minimum lease payments.............................. 82,900 $82,200
=======
Imputed interest.......................................... (32,600)
--------
Present value of minimum capitalized lease payments....... 50,300
Current portion........................................... 1,500
--------
Long-term capitalized lease obligations................... $ 48,800
========
</TABLE>
Assets recorded under capital leases are included in Property, Plant and
Equipment as follows (in thousands of dollars):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
---- ----
<S> <C> <C>
Land.................................................... $ 8,300 $ 9,000
Buildings, structures and improvements.................. 58,500 61,700
Machinery and equipment................................. 82,500 82,500
--------- --------
149,300 153,200
Accumulated amortization................................ (101,900) (93,200)
--------- --------
$ 47,400 $ 60,000
========= ========
</TABLE>
Rental expense for operating leases amounted to $33,700,000, $34,100,000
and $30,200,000 in 1997, 1996 and 1995, respectively.
40
<PAGE> 43
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK PLANS
The Company has a number of compensation plans that provide a variety of
stock-based incentive awards to Directors, officers and key employees. Various
plans provide for granting non-qualified stock options, stock appreciation
rights, restricted stock, deferred stock, bonus stock awards in lieu of
obligations, dividend equivalents, other stock-based awards and performance or
annual incentive awards that may be settled in cash, stock or other property. As
of December 31, 1997 a total of 11,190,700 shares of the Company's Class A
Common Stock were reserved for issuance under these plans, including option and
other awards outstanding totalling 6,037,600 shares. Each plan is administered
by the Compensation Committee of the Board of Directors (the "Compensation
Committee").
Under the Company's stock-based compensation plans, stock options may be
granted to eligible employees of the Company and its subsidiaries, at a price
not less than the market price on the date of grant. Options granted vest, may
be exercised and expire at such time as prescribed by the Compensation
Committee. No option granted is exercisable beyond ten years from the grant
date. 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. Such accelerated exercisability, lapse, expiration
and vesting occurs automatically under certain plans in the event of a change of
control of the Company.
Following is a summary of option activity for the three years ended
December 31, 1997.
<TABLE>
<CAPTION>
1997 1996 1995
--------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding January 1................. 5,079,400 $23.63 4,169,900 $19.80 3,195,900 $26.62
Granted............................... 2,086,800 39.61 2,215,400 27.62 4,660,500 21.45
Exercised............................. (563,800) 19.69 (1,050,500) 16.33 (50,900) 9.70
Cancelled/expired..................... (587,000) 28.81 (255,400) 25.98 (3,635,600) 28.05
--------- ---------- ----------
Outstanding, December 31.............. 6,015,400 29.04 5,079,400 23.63 4,169,900 19.80
========= ========== ==========
Exercisable:
At December 31...................... 2,071,100 22.17 1,391,900 19.60 1,878,300 18.21
Upon completion of additional
service........................... 3,944,300 32.65 3,187,500 24.57 1,641,600 18.02
Upon completion of additional
service and achievement of
specified performance targets..... -- -- 500,000 28.88 650,000 28.88
--------- ---------- ----------
Total outstanding................... 6,015,400 29.04 5,079,400 23.63 4,169,900 19.80
========= ========== ==========
Weighted average fair value of
options granted during the year... $15.79 $11.36 $10.66
====== ====== ======
</TABLE>
The following information is as of December 31, 1997.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
WEIGHTED REMAINING WEIGHTED
OPTIONS AVERAGE CONTRACTUAL OPTIONS AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING PRICE LIFE EXERCISABLE PRICE
------------------------ ----------- -------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 6.38 to $14.50............................... 52,400 $12.42 2.6 Years 52,400 $12.42
$17.75 to $27.06............................... 3,544,900 21.91 7.9 Years 1,750,500 20.27
$30.88 to $42.00............................... 2,418,100 39.85 8.9 Years 268,200 36.46
--------- ---------
6,015,400 2,071,100
========= =========
</TABLE>
41
<PAGE> 44
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK PLANS -- (CONTINUED)
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 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. Options granted in 1995 included 2,509,100
options which were exchanged in the repricing in 1995.
In 1997, the Company granted 88,900 shares of performance units with a fair
value of $41 per share. These units conferred upon the participants 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. No performance units were earned based on 1997 performance, and
all 88,900 performance units were cancelled.
In 1996, the Company granted 392,800 shares of performance units with a
fair value of $25.88 per share. These units conferred upon the participants the
right to receive at the end of a performance and service period one share of
Class A Common Stock or the corresponding cash equivalent or a combination
thereof for each unit earned. Vesting was subject to acceleration if a target
market price was achieved for the Class A Common Stock. These performance units
were earned in full in 1996 and accelerated vesting occurred in January 1997.
Each performance unit was valued at the market price of the Class A Common Stock
on the date the performance units vested.
In 1995 the Company granted 56,000 shares of performance units with a fair
value of $24.88 per share. These units conferred upon the participants 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. Of these units, 8,300 were cancelled and the
remaining 47,700 units were earned in 1996. Each performance unit was valued at
the market price of the Class A Common Stock on the date the performance units
were earned.
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 "Eligible Directors"). The 1995 Directors' Plan provides
for granting restricted stock units, each representing the right to receive one
share of the Company's Class A Common Stock (the "Restricted Stock Units"), to
each Eligible Director. Restricted Stock Units vest on the second anniversary of
the grant date and are 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 Plan. Each Eligible Director received
an initial grant of 2,500 Restricted Stock Units. Each Eligible Director also
received annual grants of 1,250, 1,850 and 1,850 Restricted Stock Units in 1995,
1996 and 1997, respectively, and the 1995 Directors' Plan provides for grants
thereafter of 1,850 Restricted Stock Units annually to each Eligible Director.
During 1997, all Restricted Stock Units vested were valued at the market price
of the Class A Common Stock on the date the Restricted Stock Units vested. In
total, 22,200 and 35,450 Restricted Stock Units were outstanding at December 31,
1997 and 1996, respectively, none of which were vested.
In 1994, the Company granted performance shares to eligible employees of
the Company, its subsidiaries and FII. The Compensation Committee set
performance goals to be achieved over an initial performance period of two
years. In September 1995, the Compensation Committee extended the initial
performance period two years to December 31, 1997. In 1996, 92,000 performance
shares were earned in full, and each
42
<PAGE> 45
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK PLANS -- (CONTINUED)
performance share was valued at the market price of the Class A Common Stock on
the date the performance shares were earned.
At December 31, 1997 and 1996, approximately 94,000 and 131,400 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 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 4,000 previously issued shares during 1997. The Company granted
approximately 41,300 shares to eligible employees during 1997.
At December 31, 1997 and 1996, 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.
The Company has elected to follow APB 25 and related Interpretations in
accounting for its stock compensation plans because, as discussed below, the
alternative fair value accounting provided for under FAS 123 requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, the Company records no compensation expense for
options granted under any of its stock plans because the exercise price of the
stock options equals the market price of the underlying Class A Common Stock on
the date granted. For other stock-based compensation awards, the Company
recognized compensation costs under APB 25 totaling $2,200,000, $15,700,000 and
$2,700,000 in 1997, 1996 and 1995 respectively.
FAS 123 requires the Company to disclose pro forma net earnings and
earnings per share determined as if the Company had accounted for stock-based
compensation awards granted after December 31, 1994, under the fair value method
of that statement. The fair values of options under FAS 123 were estimated at
each grant date using a Black-Scholes option pricing model with the following
weighted average assumptions: risk-free interest rates of 6.13% in 1997, 5.65%
in 1996 and 6.34% in 1995, a dividend yield of zero, a volatility factor of the
expected market price of the Company's common stock of .33 in 1997 and .36 in
1996 and 1995, and an expected option life of five years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For the following pro forma disclosures, the estimated fair value of
options and other stock-based awards is amortized to expense over the award's
vesting period (in thousands of dollars, except per share information):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Pro forma net earnings (loss).......................... $(503,800) $141,500 $(235,600)
Pro forma earnings (loss) per share:
Basic................................................ $(6.77) $1.85 $(3.10)
Assuming dilution.................................... $(6.77) $1.84 $(3.10)
</TABLE>
43
<PAGE> 46
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK PLANS -- (CONCLUDED)
Because FAS 123 is applicable only to stock-based compensation awards
granted after December 31, 1994, the effects of applying FAS 123 for pro forma
disclosure will not be indicative of future amounts until the new rules are
applied to all outstanding nonvested awards.
STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Common Shares
Balance, beginning of period.............................. 76,629 75,960 75,851
Class A shares issued upon exercise of options............ 564 1,059 51
Class A shares issued under stock grant plan-net.......... 37 50 58
Class A shares repurchased................................ (5,329) (440) --
--------- -------- ---------
Balance, end of period.................................... 71,901 76,629 75,960
========= ======== =========
Common Stock and Capital in Excess of Par Value
Balance, beginning of period.............................. $ 477,300 $470,000 $ 468,100
Class A shares issued upon exercise of options............ 14,100 22,500 700
Class A shares issued under stock grant plan-net.......... 1,200 1,400 1,200
Class A shares repurchased................................ (173,600) (16,600) --
--------- -------- ---------
Balance, end of period.................................... $ 319,000 $477,300 $ 470,000
========= ======== =========
Retained Earnings
Balance, beginning of period.............................. $ 628,300 $481,700 $ 714,700
Net earnings (loss)....................................... (487,600) 146,600 (233,000)
--------- -------- ---------
Balance, end of period.................................... $ 140,700 $628,300 $ 481,700
========= ======== =========
Currency Translation, Minimum Pension Liability and
Investment Adjustments
Balance, beginning of period.............................. $ (11,800) $(22,500) $ (22,900)
Translation adjustments-net............................... (27,600) 12,500 1,000
Minimum pension liability adjustment...................... 900 (900) (600)
Unrealized loss on investments............................ 900 (900) --
--------- -------- ---------
Balance, end of period.................................... $ (37,600) $(11,800) $ (22,500)
========= ======== =========
</TABLE>
In the fourth quarter of 1997, the Company changed its method of
determining the cost of inventories from the LIFO method to the FIFO method. All
previously reported results have been restated to reflect the retroactive
application of this accounting change. As a result of this change, previously
reported retained earnings of $680,600,000 at January 1, 1995 were increased by
$34,100,000.
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. During 1997, 1,006,700 Class B shares were converted to Class A shares.
In November 1996 the Company's Board of Directors authorized the repurchase
of up to $200,000,000 of the Company's common stock in open market and privately
negotiated transactions. In December 1996, the
44
<PAGE> 47
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCKHOLDERS' EQUITY -- (CONCLUDED)
Company repurchased 440,400 shares of its Class A common stock at an aggregate
cost of $16,600,000. In 1997, the Company repurchased 5,329,000 shares of its
Class A Common Stock at an aggregate cost of $173,600,000.
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.
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 8.0% of the Company's common stock at December 31, 1997 is
held by FI and Mr. 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 30.1% 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, 1997 FI and Mr. Farley's combined
ownership of Class B Common Stock is approximately 7.9% 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.
At December 31, 1997 and 1996, 35,000,000 shares of Preferred Stock with a
par value of $.01 per share were authorized, none of which have been issued.
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 18.8%, 16.8% and 19.5% of consolidated net sales in 1997, 1996 and
1995, respectively. Additionally, sales to a second customer amounted to
approximately 14.7%, 12.2% and 10.8% of consolidated net sales in 1997, 1996 and
1995, respectively.
45
<PAGE> 48
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
BUSINESS SEGMENT AND MAJOR CUSTOMER INFORMATION -- (CONCLUDED)
Sales, operating earnings and identifiable assets are as follows (in
thousands of dollars):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net Sales
Domestic................................................ $1,783,900 $2,080,500 $2,040,300
Foreign................................................. 356,000 366,900 362,800
---------- ---------- ----------
Total................................................... $2,139,900 $2,447,400 $2,403,100
========== ========== ==========
Operating Earnings (Loss)
Domestic................................................ $ (231,500) $ 294,400 $ (54,300)
Foreign................................................. (13,700) 47,600 (19,000)
General corporate expenses.............................. (42,500) (23,800) (35,600)
---------- ---------- ----------
Total................................................... $ (287,700) $ 318,200 $ (108,900)
========== ========== ==========
Identifiable Assets
Domestic................................................ $2,100,200 $2,167,800 $2,484,600
Foreign................................................. 323,100 392,700 402,000
Corporate............................................... 59,800 32,900 86,500
---------- ---------- ----------
Total................................................... $2,483,100 $2,593,400 $2,973,100
========== ========== ==========
</TABLE>
The operating loss and identifiable assets for 1997 and 1995 reflect the
effect of special charges recorded in the fourth quarter of 1997 and 1995. See
"SPECIAL CHARGES." Corporate assets presented above consist primarily of cash
and other short-term investments, deferred financing costs and a receivable
related to anticipated environmental recoveries. Corporate assets also include
Federal income taxes receivable in 1997 and 1995.
PENSION PLANS
Pension expense was $10,200,000, $11,900,000 and $12,200,000 in 1997, 1996
and 1995, respectively. The net pension expense is comprised of the following
(in thousands of dollars):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Components:
Service cost -- benefits earned during the period......... $ 11,100 $ 12,100 $ 12,800
Interest cost on projected benefit obligation............. 14,400 13,500 13,100
Return on assets:
Actual (gain).......................................... (11,600) (21,900) (27,900)
Deferred actuarial gains (losses)...................... (4,000) 8,200 14,900
Amortization of unrecognized net loss..................... 1,300 700 600
Amortization of prior service cost........................ 300 200 200
Amortization of unrecognized January 1, 1987 net
transition asset....................................... (1,300) (1,300) (1,300)
Curtailment loss (gain)................................... -- 400 (200)
-------- -------- --------
Net periodic pension cost.............................. $ 10,200 $ 11,900 $ 12,200
======== ======== ========
Assumptions:
Discount rate............................................. 8.0% 7.5% 8.25%
Rates of increase in compensation levels.................. 4-7% 4-7% 5-8%
Expected long-term rate of return on assets............... 10% 10% 10%
</TABLE>
46
<PAGE> 49
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PENSION PLANS -- (CONTINUED)
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,
--------------------
1997 1996
---- ----
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits........................................... $156,800 $137,600
Non-vested benefits....................................... 7,500 8,000
-------- --------
Accumulated benefit obligation......................... 164,300 145,600
Effect of projected future salary increases............... 29,800 36,700
-------- --------
Projected benefit obligation................................ 194,100 182,300
Plan assets at fair value................................... 167,700 157,400
-------- --------
Plan assets less than projected benefit obligation.......... (26,400) (24,900)
Unrecognized actuarial losses............................... 7,600 1,700
Unrecognized prior service cost............................. 3,100 2,400
Unrecognized net transition asset at end of period.......... (3,700) (4,700)
Additional minimum liability................................ (3,300) (4,200)
-------- --------
Unfunded accrued pension cost at end of period.............. $(22,700) $(29,700)
======== ========
</TABLE>
The discount rate for purposes of determining the funded status of the
plans at December 31, 1997 and 1996 was 7.5% and 8.0%, respectively.
Plan assets for the Company's funded plans, which are primarily invested in
international and domestic debt securities, international and domestic 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 Mr. 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 67.0% and
70.0% of the Master Trust Allocated Assets at December 31, 1997 and 1996,
respectively.
Included in the Master Trust Allocated Assets at December 31, 1997 and 1996
were 647,852 shares (with a cost of $5,100,000 and a market value of $16,600,000
and $24,500,000, respectively) of the Company's Class A Common Stock.
As of December 31, 1997 and 1996, the Master Trust holds 348,012 shares
(with a cost of $7,700,000 and a market value of $8,900,000 and $13,200,000,
respectively) of the Company's Class A Common Stock (these shares are in
addition to the 647,852 shares noted in the immediately preceding paragraph)
that are 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 affect the Master Trust Allocated Assets.
FAS 87, Employers' Accounting For Pensions requires recognition in 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 as a reduction in equity. To reflect
the balance sheet provisions of FAS 87 relative to certain unfunded nonqualified
pension plans, the Company has recorded minimum liabilities of $3,300,000 and
$4,200,000 at December 31, 1997 and 1996, respectively. Corresponding to these
amounts, intangible assets of $2,600,000 and $2,700,000, and reductions in
equity of $700,000 and $1,500,000, respectively, were recorded at December 31,
1997 and 1996.
47
<PAGE> 50
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PENSION PLANS -- (CONCLUDED)
The Company sponsors a 401(k) defined contribution plan for all non-highly
compensated domestic salaried employees. Eligible participants may contribute up
to 15% of their annual compensation subject to maximum amounts established by
the United States Internal Revenue Service (the "IRS"). The Company makes
matching contributions which equal 50% of the first 6% of annual compensation
contributed to the plan by each employee, subject to maximum amounts established
by the IRS. The Company's contributions under this Plan amounted to $900,000,
$800,000 and $800,000 during 1997, 1996 and 1995, respectively.
DEPRECIATION EXPENSE
Depreciation expense, including amortization of capital leases,
approximated $117,800,000, $121,800,000 and $125,500,000 in 1997, 1996 and 1995,
respectively.
ADVERTISING EXPENSE
Advertising, which is expensed as incurred, approximated $80,800,000,
$81,600,000 and $72,000,000 in 1997, 1996 and 1995, 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,
-------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Income tax expense (benefit) on earnings (loss) from
continuing operations before cumulative effect of
change in accounting principle......................... $(66,300) $31,600 $(19,700)
Discontinued operations................................... -- -- --
Cumulative effect of change in accounting principle for
pre-operating costs.................................... -- -- (1,900)
-------- ------- --------
Total income tax expense (benefit)................... $(66,300) $31,600 $(21,600)
======== ======= ========
</TABLE>
Included in earnings (loss) from continuing operations before income tax
expense (benefit) and cumulative effect of change in accounting principle are
foreign earnings of $1,600,000 in 1996 and foreign losses of $46,400,000 and
$47,300,000 in 1997 and 1995, respectively.
The components of income tax expense (benefit) related to earnings (loss)
from continuing operations before cumulative effect of change in accounting
principle were as follows (in thousands of dollars):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current:
Federal..................................... $ (1,700) $ 6,500 $ 17,000
State....................................... -- 1,900 15,200
Foreign..................................... -- -- (1,100)
-------- ------- --------
Total current.......................... (1,700) 8,400 31,100
-------- ------- --------
Deferred:
Federal..................................... (64,300) 19,200 (39,100)
State....................................... -- 3,700 (11,200)
Foreign..................................... (300) 300 (500)
-------- ------- --------
Total deferred......................... (64,600) 23,200 (50,800)
-------- ------- --------
Total income tax expense (benefit)..... $(66,300) $31,600 $(19,700)
======== ======= ========
</TABLE>
48
<PAGE> 51
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES -- (CONTINUED)
The income tax rate on earnings (loss) from continuing operations before
cumulative effect of change in accounting principle differed from the Federal
statutory rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate................................ (35.0)% 35.0% (35.0)%
Deferred tax asset valuation allowance................ 14.2 -- --
Reversal of income tax accruals....................... -- (13.5) --
Interest on prior years' taxes........................ 5.4 -- 2.1
Impairment write down of goodwill..................... -- -- 11.1
Foreign operating (earnings) losses................... (3.3) (10.5) 6.1
Goodwill amortization................................. 2.4 5.3 4.4
State income taxes, net of Federal tax benefit........ -- 2.0 1.1
Other-net............................................. 1.6 (0.6) 2.2
----- ----- -----
Effective rate...................................... (14.7)% 17.7% (8.0)%
===== ===== =====
</TABLE>
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $227,400,000 at December 31, 1997. $157,400,000 of those earnings
are considered to be indefinitely reinvested and, accordingly, no provision for
U.S. federal and state income taxes has been provided thereon. Upon distribution
of those earnings in the form of dividends or otherwise, the Company would be
subject to both U.S. income taxes (subject to an adjustment for foreign tax
credits) and withholding taxes payable to the various foreign countries. In the
event that the other foreign entities' earnings were distributed, it is
estimated that U.S. federal and state income taxes, net of foreign credits, of
approximately $50,300,000 would be due, a portion of which may be offset for
financial statement reporting purposes by the reduction of the valuation
allowance provided against deferred tax assets in 1997.
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,
----------------------
1997 1996
---- ----
<S> <C> <C>
Depreciation and amortization.......................... $ 155,800 $ 149,000
Items includible in future tax years................... 81,100 61,600
--------- ---------
Gross deferred tax liabilities....................... 236,900 210,600
--------- ---------
Inventory valuation reserves........................... (35,600) (6,000)
Accrued employee benefit expenses...................... (47,400) (34,600)
Acquired tax benefits and basis differences............ (49,600) (49,600)
Allowance for possible losses on receivables........... (5,400) (5,800)
Fixed asset impairment................................. (60,300) --
Residual value guarantees of leased equipment.......... (22,900) --
Items deductible in future tax years................... (110,100) (80,300)
--------- ---------
Gross deferred tax assets............................ (331,300) (176,300)
Valuation allowance.................................. 64,100 --
--------- ---------
Net deferred tax (asset) liability................... $ (30,300) $ 34,300
========= =========
</TABLE>
As a result of the migration of certain of its operations to offshore
locations and the planned reorganization of the Company, future operations may
not generate sufficient U.S. sourced income to utilize
49
<PAGE> 52
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES -- (CONCLUDED)
all of the net deferred tax benefits generated by operations through December
31, 1997. Consequently, the Company recorded a deferred tax asset valuation
provision of $64,100,000 in the fourth quarter of 1997.
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 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.
In October 1994, the United States Tax Court ruled in favor of the Company in
the above case. On January 5, 1996, the United States Court of Appeals for the
Seventh Circuit affirmed the decision of the United States Tax Court. The IRS
had a period of 90 days from the date of the decision to petition for review by
the United States Supreme Court. The IRS did not petition for a review and,
accordingly, the case is now closed. Effective December 31, 1996, for Federal
income tax purposes, all years through December 31, 1991, were closed. As a
result, excess income tax liabilities totaling $24,100,000 for tax years through
December 31, 1991 were reversed in the fourth quarter and reduced income tax
expense in 1996.
The Company has $104,200,000 of U.S. Federal net operating loss
carryforwards at December 31, 1997, which expire in 2012.
Cash payments for income taxes were $11,200,000, $13,600,000 and $32,700,00
in 1997, 1996 and 1995, respectively.
OTHER EXPENSE-NET
Other expense-net included charges of $32,000,000 and $35,000,000 in 1997
and 1996, respectively relating to the Company's evaluation of its exposure
under the guarantee of debt incurred or created by Acme Boot under the Acme Boot
Credit Facilities. See "CONTINGENT LIABILITIES." Other expense-net in 1997 and
1995 included $32,400,000 and $20,700,000, respectively, of charges to provide
for certain retained liabilities in connection with the prior sale of certain
operations, fees related to the modification of certain agreements and other
valuation reserves. See "SPECIAL CHARGES." Included in other expense-net in
1997, 1996 and 1995 was deferred debt fee amortization and bank fees of
approximately $4,500,000, $5,300,000 and $5,700,000, respectively. Other
expense-net in 1996 and 1995 included gains of $700,000 and $5,700,000,
respectively, as compared to $1,600,000 of losses in 1997 related to the
settlement of certain foreign currency denominated transactions. Included in
other expense-net was $11,800,000 in 1997 and $1,700,000 in 1996 of losses on
sale of accounts receivable.
50
<PAGE> 53
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
NUMERATOR:
Earnings (loss) from continuing operations before
cumulative effect of change in accounting
principle............................................ $(385,400) $146,600 $(227,800)
Discontinued operations -- LMP litigation.............. (102,200) -- --
Cumulative effect of change in accounting for
pre-operating costs.................................. -- -- (5,200)
--------- -------- ---------
Net earnings (loss).................................... $(487,600) $146,600 $(233,000)
========= ======== =========
DENOMINATOR:
Denominator for basic earnings per share -- weighted
average shares outstanding........................... 74,400 76,400 75,900
Effect of dilutive employee stock options.............. 700 700 300
--------- -------- ---------
Denominator for diluted earnings per share -- weighted
average shares outstanding and assumed conversions... 75,100 77,100 76,200
========= ======== =========
Earnings (loss) per common share:
Continuing operations................................ $(5.18) $1.92 $(3.00)
Discontinued operations -- LMP litigation............ (1.37) -- --
Cumulative effect of change in accounting for
preoperating costs................................ -- -- (0.07)
--------- -------- ---------
Net earnings (loss)............................... $(6.55) $1.92 $(3.07)
========= ======== =========
Earnings (loss) per common share -- assuming dilution:
Continuing operations................................ $(5.18) $1.90 $(3.00)
Discontinued operations -- LMP litigation............ (1.37) -- --
Cumulative effect of change in accounting for
preoperating costs................................ -- -- (0.07)
--------- -------- ---------
Net earnings (loss)............................... $(6.55) $1.90 $(3.07)
========= ======== =========
</TABLE>
RELATED PARTY TRANSACTIONS
As a part of the 1995 special charge, the Company decided to integrate into
the Company's Bowling Green, Kentucky operations certain functions historically
performed by FII personnel. In connection with this effort, the Board of
Directors determined that the Company's management agreement with FII should not
be renewed for 1996 and that the general management functions previously
performed by FII under the agreement should be assumed directly by the Company.
Accordingly, effective January 1, 1996, the Company severed its relationship
with FII 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 of its personnel and settlement of all obligations the Company owed 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
51
<PAGE> 54
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RELATED PARTY TRANSACTIONS -- (CONTINUED)
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
($3,600,000 was actually paid 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 to which the Company was
a party. 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."
Under the terms of the management agreement between FII and the Company,
FII provided the Company, to the extent that the Company requested, (i) general
management services which included, but were 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,
prior to 1996, the Company. Certain of the executive officers of the Company
were employed by, and received their compensation from, FII. These officers
devoted their time as needed to those companies owned and controlled by Mr.
Farley and, accordingly, did not devote full time to any single company,
including the Company.
In consideration for investment banking and financing services, the Company
paid 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 did 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 were generally payable to FII
upon the closing of the subject transaction or agreement.
Under the terms of the management agreement, the Company paid 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 in 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. 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. In connection with
the 1993 transaction the Company guaranteed, on an unsecured basis, the
repayment of debt incurred by Acme under the Acme Boot Credit Facility and the
New Acme Credit Agreement. FI owns 100% of the common stock of Acme Boot. Mr.
Farley holds 100% of the common stock of FI. Other expense-net includes charges
of $32,000,000 and $35,000,000 in 1997 and 1996, respectively, related to the
Company's evaluation of its exposure under the guarantee. See "CONTINGENT
52
<PAGE> 55
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONCLUDED)
RELATED PARTY TRANSACTIONS -- (CONCLUDED)
LIABILITIES." In addition, the Company loaned Acme Boot $8,000,000 in August
1997 to provide Acme Boot with supplemental working capital during Acme Boot's
peak selling season. The loan was made in the form of a demand note payable and
is senior to all indebtedness of Acme Boot.
On November 20, 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 FI held by non-affiliated third parties. In
consideration of the guarantee, 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 Shares 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 matures on November 19, 1998. The Special Committee received an opinion
from an independent financial advisor that the terms of the transaction are
commercially reasonable.
SUBSEQUENT EVENT
A registration statement and preliminary proxy material was filed with the
Securities and Exchange Commission on February 10, 1998 in connection with a
planned reorganization of the Company. The Company's Board of Directors has
approved the proposed reorganization under which a Cayman Islands company, Fruit
of the Loom, Ltd. will become the parent holding company of Fruit of the Loom,
Inc. The proposed reorganization would be accounted for as a combination of
entities under common control (in a manner similar to a pooling of interests). A
special meeting of the stockholders of Fruit of the Loom, Inc. will be held to
vote on the proposed transaction.
Upon completion of the transaction, holders of Fruit of the Loom, Inc.
Class A common stock will become holders of Fruit of the Loom, Ltd. Class A
ordinary shares. The Class A ordinary shares will have substantially the same
attributes as Fruit of the Loom, Inc. Class A common stock and are expected to
be listed on the New York Stock Exchange. William Farley, Chairman, Chief
Executive Officer, and President and Chief Operating Officer and his affiliates
will own Fruit of the Loom, Ltd. Class B shares which will have voting rights
equal to the voting rights currently held by them as owners of Fruit of the
Loom, Inc. Class B common stock as well as preferred stock of Fruit of the Loom,
Inc.
53
<PAGE> 56
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>
1997
Net sales...................... $501.0 $640.7 $ 569.7 $ 428.5 $2,139.9
Gross earnings (loss)(3)....... 142.8 166.2 163.7 (204.2) 268.5
Operating earnings (loss)...... 52.4 52.3 40.2 (432.6) (287.7)
Earnings (loss) from continuing
operations................... 22.6 20.0 (24.1)(1) (403.9)(4) (385.4)(1,4)
Net earnings (loss)............ 22.6 20.0 (125.3)(2) (404.9) (487.6)(2)
Earnings per common share from
continuing operations(7):
Basic........................ .30 .27 (.33) (5.56) (5.18)
Assuming Dilution............ .29 .26 (.33) (5.56) (5.18)
1996
Net sales...................... $506.2 $732.2 $ 628.0 $ 581.0 $2,447.4
Gross earnings(3).............. 173.0 200.4 194.2 155.3 722.9
Operating earnings............. 86.0 93.3 87.8 51.1 318.2
Net earnings................... 35.9 42.3 43.7 24.7(5)(6) 146.6
Earnings per common share(7):
Basic........................ .47 .56 .57 .32 1.92
Assuming Dilution............ .47 .55 .57 .32 1.90
</TABLE>
- -------------------------
(1) Includes a pretax charge of $32.0 related to the Company's evaluation of its
expense under the guarantee of the debt of Acme Boot.
(2) Includes pretax charges of $101.2 for the third quarter and $102.2 for the
year related to discontinued operations for a litigation judgement.
(3) In the fourth quarter of 1997, the Company changed its method of determining
the cost of inventories from the LIFO method to the FIFO method. All
previously reported results have been restated to reflect the retroactive
application of this accounting change. The change increased (decreased)
previously reported results as follows:
<TABLE>
<CAPTION>
QUARTER
---------------------------------- TOTAL
FIRST SECOND THIRD FOURTH YEAR
----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C>
1997
Gross earnings...................................... 2.2 (5.0) 21.6
Earnings (loss) from continuing operations.......... 1.4 (3.2) 14.0
Earnings per common share from continuing operations
Basic............................................ 0.02 (0.04) 0.19
Diluted.......................................... 0.02 (0.04) 0.19
1996
Gross earnings...................................... 36.0 (8.4) (6.4) (28.3) (7.1)
Net earnings........................................ 23.4 (5.5) (4.1) (18.4) (4.6)
Earnings per common share
Basic............................................ 0.31 (0.07) (0.06) (0.24) (0.06)
Diluted.......................................... 0.31 (0.07) (0.05) (0.24) (0.06)
</TABLE>
The accounting change increased the net loss for the fourth quarter of 1997
by $40.0 or $.55 per share.
(4) In the fourth quarter of 1997, the Company recorded charges totaling $441.7
($372.2 after tax) for costs related to the closing and disposal of a number
of domestic manufacturing and distribution facilities,
54
<PAGE> 57
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.
(5) Includes a pretax charge of $35.0 related to the Company's evaluation of its
exposure under the guarantee of the debt of Acme Boot.
(6) Includes $24.1 related to reversal of excess income tax liabilities for tax
years through December 31, 1991, all of which closed for Federal income tax
purposes effective December 31, 1996.
(7) Earnings per share amounts for 1996 and the first three quarters of 1997
have been restated to comply with FAS 128 "Earnings per Share".
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, 1997, except as
noted, were as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
William Farley (1)................... 55 Chairman of the Board and Chief Executive Officer
Richard C. Lappin(1)................. 53 President and Chief Operating Officer
Larry K. Switzer..................... 54 Senior Executive Vice President and Chief Financial
Officer
G. William Newton.................... 45 Senior Vice President -- Finance
Bernard Hansen(2).................... 70 President -- Europe
Burgess D. Ridge..................... 53 Senior Vice President -- Administration and Secretary
Brian J. Hanigan..................... 39 Vice President -- Treasurer
J. Gary Raley........................ 49 Senior Vice President -- Sales
John Wendler......................... 48 Senior Vice President -- Marketing
Gary Wood............................ 44 Senior Vice President -- Manufacturing
John J. Ray III...................... 39 Vice President and Assistant Secretary
</TABLE>
- -------------------------
(1) Mr. Lappin ceased to be President and Chief Operating Officer in February
1998, at which time Mr. Farley succeeded to these additional positions.
(2) Ceased to hold such position in January 1998.
WILLIAM FARLEY. Mr. Farley has been Chairman of the Board and Chief
Executive Officer of the Company since May 1985. In February 1998, Mr. Farley
was appointed to the additional positions of President and Chief Operating
Officer. Mr. Farley has also been Chairman and a director of Acme Boot for more
than the past five years. For more than the past five years, Mr. Farley has also
been Chairman and Chief Executive Officer of FII.
RICHARD C. LAPPIN. Mr. Lappin has been a director of the Company since
December 1990 and served as Vice Chairman of the Company from October 1991 until
February 1996. Mr. Lappin served as President and Chief Operating Officer of the
Company from February 1996 until February 1998. Mr. Lappin served as an officer
and director of Acme Boot until May 1996. Mr. Lappin also served as President
and Chief Operating Officer of FII from February 1991 until December 1995.
55
<PAGE> 58
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT -- (CONTINUED)
LARRY K. SWITZER. Mr. Switzer was Executive Vice President and Chief
Financial Officer of FII from May 1994 until December 1995, and of the Company
and FI from May 1994 until February 1996. In February 1996, Mr. Switzer was
appointed Senior Executive Vice President and Chief Financial Officer of the
Company and FI. In May 1997, Mr. Switzer was elected as a director of the
Company. Mr. Switzer also serves as an officer and a director of Acme Boot. From
before 1993 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.
G. WILLIAM NEWTON. Mr. Newton has served as Senior Vice President --
Finance of the Company since August 1994. From before 1993 until April 1994, Mr.
Newton was Vice President and Chief Financial Officer of Allegro MicroSystems, a
manufacturer of semiconductors supplying the automotive, electronic and
telecommunications industries worldwide.
BURGESS D. RIDGE. Mr. Ridge served as Vice President -- Administration of
FII and FI from before 1992 until December 1995, and the Company and FI from
before 1992 until February 1996. Mr. Ridge was appointed Senior Vice President
- -- Administration and Secretary of the Company and FI in February 1996.
BERNHARD HANSEN. Mr. Hansen served as a consultant to FOL, GmbH from
January 1995 to June 1996. Mr. Hansen served as President of FOL Europe from
January 1996 until 1998. Before joining FOL and after his retirement from
Unilever, Mr. Hansen was a consultant to several companies.
BRIAN J. HANIGAN. Mr. Hanigan was appointed Vice President and Treasurer of
the Company in February 1997. Mr. Hanigan was Assistant Treasurer of the Company
from before 1993 until February 1997.
JOHN J. RAY III. Mr. Ray was appointed Vice President and Assistant
Secretary of the Company in February 1998. From before 1993 until January 1998,
Mr. Ray was Vice President and General Counsel of various operating groups of
Waste Management, Inc. and its affiliates, providers of waste management and
environmental services.
J. GARY RALEY. Mr. Raley served as Vice President -- Business Development
in 1996 and in December 1996, was appointed Senior Vice President -- Retail
Sales. From before 1993 until 1996, Mr. Raley served in sales and marketing
positions at S.C. Johnson & Son, Inc.
JOHN WENDLER. Mr. Wendler has served as Senior Vice President -- Marketing
of the Company since October 1995. From before 1993 until October 1995 Mr.
Wendler was Vice President, Worldwide Marketing of Kentucky Fried Chicken,
International, a chain of worldwide fast food restaurants. Kentucky Fried
Chicken is a subsidiary of Pepsico.
GARY WOOD. Mr. Wood has served since 1993 as Senior Vice President --
Manufacturing of the Company.
THE DIRECTORS OF THE COMPANY AS OF DECEMBER 31, 1997 WERE AS FOLLOWS:
William Farley. Mr. Farley, age 55, has been Chairman of the Board and
Chief Executive Officer of the Company since May 1985. In February 1998, Mr.
Farley was appointed to the positions of President and Chief Operating Officer.
For more than five years, Mr. Farley has also been Chairman and Chief Executive
Officer of FII. He has held substantially similar positions with FI for more
than the past five years. Mr. Farley has also been Chairman of the Board of Acme
Boot for more than five years.
Richard C. Lappin. Mr. Lappin, age 53, has been a director of the Company
since December 1990 and served as Vice Chairman of the Company from October 1991
until February 1996. Mr. Lappin served as President and Chief Operating Officer
of the Company from February 1996 until February 1998. Mr. Lappin served as an
officer and director of Acme Boot until May 1996. Mr. Lappin also served as
President and Chief Operating Officer of FII from February 1991 until December
1995.
Omar Z. Al Askari. Mr. Al Askari, age 47, has been a director of the
Company since October 1993. Mr. Al Askari has been Chairman of the Board of
Plaid Clothing Group Inc., a men's tailored clothing
56
<PAGE> 59
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT -- (CONTINUED)
THE DIRECTORS OF THE COMPANY AS OF DECEMBER 31, 1997 WERE ARE FOLLOWS: --
(CONCLUDED)
business, since 1991. Since 1980, Mr. Al Askari has also served as President and
Chief Executive Officer of United Technical Services, which sells and services
engineered products for the oil field and construction industries in the United
Arab Emirates. He also serves as Chief Executive Officer of United Eastern
Investment Corp., which holds investments in privately held companies in the
United States and the United Kingdom.
Dennis S. Bookshester. Mr. Bookshester, age 59, has been a director of the
Company since May 1992 and has served as a director of FI since February 1997.
Mr. Bookshester currently serves as Chairman of Cutanix Corporation. He is also
a director of Arthur Treachers, Evans Inc., Playboy Enterprises, Inc. and
Sundance Homes, Inc.
Henry A. Johnson. Mr. Johnson, age 79, has been a director of the Company
since July 1988. For more than five years, Mr. Johnson has been President of
Henry A. Johnson & Associates, a management consulting firm.
Mark H. McCormack. Mr. McCormack, age 67, has been a director of the
Company since September 1997. Mr. McCormack has been President and Chief
Executive Officer of International Management Company ("IMC") for more than the
past five years. IMC is an athlete representation firm and promotional manager
and owner of worldwide sporting and classical music events and through its
affiliated companies produces televised sports programming and distributes
sports television rights. Mr. McCormack is also a Director of Gulfstream
Aerospace and Planet Hollywood.
Larry K. Switzer. Mr. Switzer, age 54, has been a director of the Company
since May 1997. Mr. Switzer has served as Executive Vice President and Chief
Financial Officer of the Company from May 1994 until February 1996. In February
1996, Mr. Switzer was appointed Senior Executive Vice President and Chief
Financial Officer of the Company. Mr. Switzer also served as Executive Vice
President and Chief Financial Officer of FII from May 1994 until December 1995
and of FI from May 1994 until February 1996. Mr. Switzer also serves as an
officer and director of Acme Boot. From before 1993 to March 1993, Mr. Switzer
was Executive Vice President and Chief Financial Officer of Alco Standard
Corporation.
A. Lorne Weil. Mr. Weil, age 52, has been a director of the Company since
October 1991. Since 1990, Mr. Weil has been Chairman of the Board and Chief
Executive Officer of Autotote Corporation, a manufacturer of products for the
gaming industry. He is also a director of General Growth Properties, Inc.
Sir Brian Wolfson. Sir Brian Wolfson, age 62, has been a director of the
Company since May 1992. Sir Brian currently serves as Chairman of the Board of
Global Health Alternatives, Inc., and Chairman of Natural Health Trends. He was
Executive Chairman of Wembley plc., a company engaged in the sports and
entertainment industry, from January 1986 until September 1995. He is also a
director of Autotote Corporation and Playboy Enterprises, Inc.
BOARD MEETINGS AND COMMITTEES
The Board of Directors has an Audit Committee, a Compensation Committee and
an Executive Committee. The Board does not have a standing nominating committee.
The Audit Committee oversees the establishment and review of the Company's
internal accounting controls, determines the Company's audit policies, reviews
audit reports and recommendations made by the Company's internal auditing staff
and its independent auditors, meets with the Company's independent auditors,
oversees the Company's independent auditors and recommends the engagement of the
Company's independent auditors.
The Compensation Committee establishes, implements and monitors the
Company's strategy, policies and plans for the compensation and benefits of all
executive officers of the Company. The Compensation Committee administers the
Fruit of the Loom, Inc. 1987 Stock Option Plan, the Fruit of the Loom, Inc.
57
<PAGE> 60
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT -- (CONCLUDED)
BOARD MEETINGS AND COMMITTEES -- (CONCLUDED)
Executive Stock Option Plan, the Fruit of the Loom, Inc. Executive Incentive
Compensation Plan (the "1994 Plan"), the Fruit of the Loom, Inc. 1995 Executive
Incentive Compensation Plan (the "1995 EICP") and the Fruit of the Loom, Inc.
1996 Incentive Compensation Plan. The Compensation Committee, among other
things, determines the persons to whom stock options, stock appreciation rights
and long term incentives are granted and the price and/or terms of such options,
rights and incentives.
The Executive Committee may exercise the powers of the Board of Directors
(other than certain powers specifically reserved to the full Board of Directors)
in the management of the business and affairs of the Company in the intervals
between meetings of the full Board of Directors.
In 1997, Messrs. Al Askari and Bookshester served on the Audit Committee;
Messrs. Bookshester, Weil and Wolfson served as members of the Compensation
Committee; and Messrs. Bookshester, Farley and Lappin served as members of the
Executive Committee.
During 1997, the Board of Directors held five meetings, the Audit Committee
met seven times and the Compensation Committee met four times. There were no
meetings of the Executive Committee during 1997. During 1997, each of the
incumbent directors attended greater than 75% of all meetings of the Board of
Directors and all meetings of any Board committees on which he served.
COMPENSATION OF DIRECTORS
Each director who is not also an employee of the Company receives an annual
cash retainer of $41,000 and $1,000 for each meeting of the Board of Directors
and each committee meeting which he attends. Non-employee directors may elect to
forego all or a portion of their annual cash retainers for a specified period in
exchange for option grants. Effective February 13, 1997, certain non-employee
directors elected to forego one-half of their annual cash retainers for a
four-year period and, in exchange, each received ten-year non-qualified option
grant effective February 13, 1997 to purchase 10,000 shares of the Company's
Class A Common Stock at $41.00 per share. Such options vest monthly at the rate
of 2.083% per month commencing April 1, 1998. Under the Fruit of the Loom, Inc.
1995 Non-Employee Director Stock Plan (the "1995 Directors Plan") each new
non-employee director receives an initial grant of 2,500 restricted stock units
("Restricted Stock Units") to be settled by delivery of shares of the Company's
Class A Common Stock or cash at the fair market value of the stock on the
vesting date, and each continuing director receives an annual grant of 1,850
Restricted Stock Units that vest after a two-year service period.
The Company provides no retirement benefits to non-employee directors.
Directors who are also employees of the Company receive no additional
compensation from the Company for services rendered in their capacity as
directors.
* * *
Plaid Clothing Group, Inc., a company of which Mr. Al Askari serves as
Chairman of the Board, voluntarily filed for protection from creditors under
Chapter 11 of the Federal Bankruptcy Code in July 1995.
58
<PAGE> 61
ITEM 11. EXECUTIVE COMPENSATION
INTRODUCTION
Certain of the Company's executive officers, other than Messrs. Farley and
Hansen, were employed by FII through March 31, 1996 and received their salaries,
other cash compensation and benefits from FII. FII is wholly-owned and
controlled by Mr. Farley. Until December 31, 1995, FII provided general
management, investment banking, financing and other services, including the
services of certain of the Company's executive officers, to the Company and
other companies owned and controlled by Mr. Farley.
As a part of the 1995 and 1996 restructuring of its corporate operations,
the Company decided to integrate certain functions historically performed by FII
personnel into its Bowling Green operations. In connection with this effort, the
Board of Directors determined that the functions previously performed by FII
should be assumed directly by the Company. Effective January 1, 1996, the
Company severed its relationship with FII and directly employed certain persons
previously employed by FII. (See "-- FII Management Agreement".) Since April 1,
1996, all of the Company's executive officers have received their salaries,
other compensation and benefits directly from the Company. However, certain
officers of the Company, including certain of the Named Officers, continue to
perform services for other companies owned and controlled by Mr. Farley.
The Compensation Committee establishes, implements and monitors the
Company's strategy, policies and plans for the compensation and benefits of all
executive officers of the Company.
The following table provides information concerning the annual and
long-term compensation amounts for the fiscal years ended December 31, 1997,
1996 and 1995 of those persons who were at December 31, 1997 (i) the Chief
Executive Officer and (ii) the four other most highly compensated executive
officers of the Company (collectively, with the Chief Executive Officer, the
"Named Officers"). No other individuals are required to be included in the
table.
For each Named Officer other than Messrs. Farley and Hansen, the cash
compensation figures in the table for 1996 and 1995 include the total cash
compensation paid by FII to each of the Named Officers who were employees of FII
in 1996 and 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------------- -------------------------------------
SECURITIES
OTHER RESTRICTED UNDERLYING
ANNUAL STOCK OPTIONS/ LTIP
NAME AND SALARY BONUS COMPENSATION AWARDS SARS PAYOUTS ALL OTHER
PRINCIPAL POSITION YEAR ($) ($) ($) (#) (# SHARES) ($) COMPENSATION
------------------ ---- ------ ----- ------------ ---------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William Farley,.......... 1997 $ 0(1) $ 0 $145,591(2) $ 0 940,000 $ 0 $19,377(3)
Chairman of the Board 1996 950,000 1,900,000 152,786 5,757,000 605,800 2,317,163 30,057
and
Chief Executive Officer 1995 950,000 0 137,584 0 995,230 0 28,509
Richard C. Lappin,....... 1997 834,769 0 31,860(4) 0 293,500 0 7,917(3)
President and Chief 1996 775,000 976,500 230,926 3,287,550 231,600 834,300 41,000
Operating Officer(5) 1995 643,750 0 19,303 0 220,813 0 18,450
Larry K. Switzer,........ 1997 599,615 0 28,107(6) 0 176,000 0 4,130(3)
Senior Executive Vice 1996 500,000 585,000 35,513 1,969,500 134,000 605,325 14,743
President and 1995 379,167 0 13,395 0 135,267 0 9,154
Chief Financial Officer
Bernhard Hansen,......... 1997 400,000 0 75,764(8) 0 0 0 0
President, Europe(7) 1996 400,000 324,000 99,218 181,800 39,100 0 98,036
Burgess D. Ridge,........ 1997 270,000 0 76,765(9) 0 12,500 0 16,942(10)
Senior Vice President
Administration and
Secretary
</TABLE>
- -------------------------
(1) Mr. Farley elected to forego salary in 1997 in consideration of the grant
of options under the terms of the Executive Equity Investment Program. See
"Option Grants in 1997."
59
<PAGE> 62
ITEM 11. EXECUTIVE COMPENSATION -- (CONTINUED)
(2) Includes $70,923 of tax reimbursements, $31,353 of estate planning fees and
other perquisites.
(3) Represents split dollar life insurance premiums of $19,377, $7,917, and
$4,130 paid by the Company for the benefit of Messrs. Farley, Lappin and
Switzer, respectively.
(4) Represents tax reimbursements to the Named Officer.
(5) Mr. Lappin ceased to be an officer of the Company in February 1998.
(6) Represents tax reimbursements to the Named Officer.
(7) Mr. Hansen ceased to be an officer of the Company in 1998.
(8) Includes housing expense of $75,764 paid by the Company for Mr. Hansen.
(9) Includes payments of $43,374 and $23,896 for tax reimbursements and
relocation expenses, respectively, and other payments for Mr. Ridge.
(10) Represents payments of $14,582 for the purchase of an annuity and $2,360
for the purchase of a term life insurance policy.
60
<PAGE> 63
ITEM 11. EXECUTIVE COMPENSATION -- (CONTINUED)
OPTION GRANTS IN 1997
The following table sets forth certain information concerning stock options
granted during 1997 by the Company to the Named Officers. The hypothetical grant
date present values shown in the last column below for stock options granted in
1997 are presented pursuant to the rules of the SEC and are calculated under the
Modified Black-Scholes Option Pricing Model for pricing options. The Company is
not aware of any model or formula that will determine with reasonable accuracy
present values for stock options. The actual before-tax amount, if any, realized
upon the exercise of any stock option will depend upon the excess, if any, of
the market price of the Company's Class A Common Stock over the exercise price
per share of the stock option at the time the stock option is exercised. There
is no assurance that the hypothetical present values of the stock options
reflected in this table will be realized.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------------------------------
PERCENT OF
NUMBER OF TOTAL OPTIONS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES EXERCISE OR GRANT DATE
OPTIONS IN FISCAL BASE PRICE PRESENT
NAME GRANTED(#) YEAR(3) ($/SHARE) EXPIRATION DATE VALUE(3)($)
---- ---------- ------------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C>
William Farley.................... 940,000(1) 45.0% $41.00 2/13/2007 $16,186,800
Richard C. Lappin................. 293,500(1) 14.1% $41.00 2/13/2007 $ 5,054,070
Larry K. Switzer.................. 176,000(1) 8.4% $41.00 2/13/2007 $ 3,030,720
Bernhard Hansen................... 0 0.0% -- -- $ --
Burgess D. Ridge.................. 12,500(2) 0.6% $41.00 2/13/2007 $ 215,250
</TABLE>
- -------------------------
(1) These options were granted under the 1995 EICP and become exercisable in
four equal annual installments beginning on February 13, 1998. The grants
were made in accordance with the terms of the Executive Equity Investment
Program under which Mr. Farley elected to forego receipt of his base salary
for 1997, 1998 and 1999 and Messrs. Farley, Lappin and Switzer elected to
forego their regular annual stock option grants for those years.
(2) These options were granted under the 1995 EICP and became exercisable in
three annual installments beginning on February 13, 1998.
(3) Options were granted during 1997 to purchase a total of 2,086,800 shares.
(4) The hypothetical grant date present values are calculated under the Modified
Black-Scholes Option Pricing Model, which is a mathematical formula used to
value options traded on stock exchanges. This formula considers a number of
factors in hypothesizing an option's present value. Range of factors used to
value 1997 option grants include the stock's expected volatility rate
(32.3%), risk free rate of return (5.18%), projected dividend yield (0%),
projected time of exercise (7 years) and projected risk of forfeiture rate
for vesting period (5% per annum).
61
<PAGE> 64
ITEM 11. EXECUTIVE COMPENSATION -- (CONTINUED)
AGGREGATED OPTION/SAR EXERCISES IN 1997 AND 1997 FISCAL YEAR-END OPTION/SAR
VALUES
The following table sets forth certain information concerning the number
and value of stock options held by the Named Officers at December 31, 1997.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTION/SARS IN-THE-MONEY OPTIONS/SARS
SHARES VALUE AT DECEMBER 31, 1997(#) AT DECEMBER 31, 1997($)(1)
ACQUIRED ON REALIZED --------------------------- ---------------------------
NAME EXERCISE (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William Farley.......... -- -- 784,161 2,146,869(2) $4,585,046 $2,386,141
Richard C. Lappin....... -- -- 218,632 489,281 1,113,777 302,250
Larry K. Switzer........ -- -- 93,019 371,529 380,780 484,541
Bernhard Hansen......... 20,149 $371,911 7,117 20,150 56,046 56,046
Burgess D. Ridge........ 26,645 646,586 42,828 61,445 193,158 97,217
</TABLE>
- -------------------------
(1) Values are calculated by subtracting the exercise price from the closing
price of the Company's Class A Common Stock on the New York Stock Exchange
on December 31, 1997, which was $25.625.
(2) Pursuant to its terms, an option grant of 500,000 of these shares were
cancelled as of January 30, 1998.
62
<PAGE> 65
ITEM 11. EXECUTIVE COMPENSATION -- (CONTINUED)
PENSION PLANS
Since April 1, 1996, all of the Company's executive officers, except for
Mr. Hansen, have been covered by the qualified pension plan for the Company's
operating company employees (the "Pension Plan") and the nonqualified excess
benefit plan which covers certain employees of the Company (the "Supplemental
Benefit Plan"), collectively referred to as the "FOL Plan". Prior to April 1,
1996, all executive officers of the Company who were employees of FII, including
Messrs. Lappin, Switzer and Ridge, were covered by the salaried portion of the
Retirement Program of Farley Inc. (the "RPFI"). All benefits under the RPFI were
frozen as of March 31, 1996. The frozen annual benefits for Messrs. Lappin,
Switzer and Ridge are $14,000, $4,000 and $35,000, respectively. The pension
benefit payable to Messrs. Lappin, Switzer and Ridge will equal the greater of
the following benefits: 1) the FOL Plan formula based on service from the date
of hire at FII less the frozen benefit under the RPFI; or 2) the FOL Plan
formula based on service after March 31, 1996.
The Pension Plan covers all employees of the Company and its participating
subsidiaries after the completion of one year of service and the attainment of
age 21.
The following table indicates the approximate amounts of annual retirement
income that would be payable under the FOL Plan to the Company's operating
company employees based on various assumptions as to compensation and years of
service for certain employees, assuming benefits are computed under a straight
life annuity formula. These amounts do not assume any offsets under the RPFI.
There is no social security or other offset deducted from the amounts shown.
PENSION PLAN TABLE(1)(2)
<TABLE>
<CAPTION>
15 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS
COMPENSATION OF SERVICE OF SERVICE OF SERVICE OF SERVICE OF SERVICE
- ------------ ---------- ---------- ---------- ---------- ----------
<C> <S> <C> <C> <C> <C> <C>
$ 300,000 ................................ 81,544 108,725 135,907 146,100 156,293
400,000 ................................ 110,044 146,725 183,407 197,162 210,918
500,000 ................................ 138,544 184,725 230,907 248,225 265,543
600,000 ................................ 167,044 222,725 278,407 299,287 320,168
700,000 ................................ 195,544 260,725 325,907 350,350 374,793
800,000 ................................ 224,044 298,725 373,407 401,412 429,418
900,000 ................................ 252,544 336,725 420,907 452,475 484,043
1,000,000 ................................ 281,044 374,725 468,407 503,537 538,668
1,100,000 ................................ 309,544 412,725 515,907 554,600 593,293
1,200,000 ................................ 338,044 450,725 563,407 605,662 647,918
</TABLE>
- -------------------------
(1) Assumes individual retires at age 65 on December 31, 1997 with indicated
years of service and further assumes covered compensation as it was
determined in 1997, which was $29,304, as updated each year by the Internal
Revenue Service for annual covered compensation. The annual covered
compensation for 1998 will increase to $31,128.
(2) Maximum pension limits for 1995, 1996 and 1997 under Section 415 of the
Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"),
were $120,000, $120,000 and $125,000 respectively. The maximum pension limit
for 1998 will increase to $130,000. Amounts in excess of these limits are
paid under the Supplemental Benefit Plan.
Contributions to the Pension Plan, which are made by the Company and its
participating subsidiaries, are computed on an actuarial basis and, as such,
individual employee payments (or accruals) cannot be calculated. Compensation
covered by the Pension Plan generally consists of all compensation paid to a
participant for personal services rendered as an employee of the Company or a
participating subsidiary, but excludes bonuses, deferred compensation and
payments under certain benefit programs. Compensation used to determine benefits
for each of the Named Officers for 1997 equals the respective amounts shown in
the Salary column of the Summary Compensation Table. The Pension Plan provides
that participants' benefits fully vest after five years of service or the
attainment of age 65.
63
<PAGE> 66
ITEM 11. EXECUTIVE COMPENSATION -- (CONTINUED)
The Pension Plan retirement benefits are computed at the rate of 1% of a
participant's final average base compensation (the average of the highest five
consecutive full plan years of base compensation during the last ten plan years
of service) plus either .75%, .70% or .65% (depending on the participant's
social security retirement age) of a participant's final average base
compensation in excess of the average social security wage base for the 35-year
period preceding the participant's social security retirement age. The resulting
sum is multiplied by the participant's years of service up to 25 years and is
then increased by 1.5% for each year of service over 25 years. Under the terms
of the Executive Equity Investment Plan, Mr. Farley elected to forego receipt of
his base salary for the three-year period from 1997 to 1999 and Messrs. Farley,
Lappin and Switzer elected to forego their regular annual stock option grants
for the same three-year period upon receipt of their 1997 stock option grants
(see "Option Grants in 1997").
Under Section 401(a)(17) of the Internal Revenue Code, a participant's
compensation under a qualified retirement plan was limited to a maximum annual
amount of $160,000 for 1997. For 1998, this amount remains at $160,000.
Amendments made to Sections 401(a)(5) and 401(l) of the Internal Revenue Code by
the Omnibus Budget Reconciliation Act of 1993 reduced the amount of permitted
disparity between benefits provided under a qualified pension plan with respect
to a participant's compensation up to the average social security wage base and
the benefits provided with respect to compensation above the average social
security wage base. For officers of the Company, any reduction in benefits under
the Pension Plan caused by these limitations will be made up dollar-for-dollar
by benefits under the Supplemental Benefit Plan. Non-officer participants in the
Pension Plan will receive benefits under the Supplemental Benefit Plan in an
amount equal to the reduction in benefits under the Pension Plan attributable to
the Internal Revenue Code Section 401(a)(17) limitation on compensation and the
Internal Revenue Code Section 415 limitation on annual pension benefits.
The estimated number of years of vesting service credited for Messrs.
Farley, Lappin, Switzer and Ridge under the Pension Plan and Supplemental
Benefit Plan is 15, 8, 4 and 7 years, respectively. Years of service for Messrs.
Farley, Lappin, Switzer and Ridge include their years of service with FII.
The Company established the Fruit of the Loom, Inc. Supplemental Executive
Retirement Plan (the "FOL SERP") on January 1, 1995 for certain officers,
including Messrs. Farley, Lappin, Switzer and Ridge. Prior to April 1, 1996,
Messrs. Lappin, Switzer and Ridge participated in the Farley Industries, Inc.
Supplemental Executive Retirement Plan (the "FII SERP").
The FOL SERP and the FII SERP provide for retirement benefits equal to the
excess of (a) over (b), where (a) equals the product of 1.9% of the
participant's final average SERP compensation (the average of the highest five
consecutive full plan years of base compensation plus short term bonuses during
the last ten plan years of service, without applying the dollar limitation of
Section 401(a)(17) of the Internal Revenue Code) and the number, not in excess
of 25, of his Benefit Accrual Years of Service (defined as the sum of (1) the
number of years of service after December 31, 1994 that would be credited to the
participant under the Pension Plan and (2) the number of additional years of
service credited to the participant by the Compensation Committee), increased by
1.5% for each Benefit Accrual Year of Service in excess of 25; and (b) equals
the participant's primary social security benefit. The FOL SERP benefit is
offset by a portion of the benefit paid under the Pension Plan and the
Supplemental Benefit Plan and, in the case of Messrs. Lappin, Switzer and Ridge,
the FOL SERP is offset by the amount of their frozen FII SERP benefit. The
frozen FII SERP benefit for Lappin, Switzer and Ridge is $105,333 and $13,250
and $5,757, respectively.
The estimated annual benefit payable under the FOL SERP upon retirement at
normal retirement age, assuming pay increases of 5% per year, for Messrs.
Farley, Lappin, Switzer and Ridge are $849,033, $651,800, $535,163 and $70,426,
respectively.
Additional years of benefit accrual service were given to selected
participants in the FOL SERP and the FII SERP. The estimated number of Benefit
Accrual Years of Service at December 31, 1997 credited for Messrs. Farley,
Lappin, Switzer and Ridge are 18, 11, 6 and 6 years, respectively.
64
<PAGE> 67
ITEM 11. EXECUTIVE COMPENSATION -- (CONCLUDED)
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements (the "Agreements") with
Messrs. Farley, Lappin, Switzer and Ridge (the "Participants"). The Agreements
generally provide for payment of an annual base salary that will be reviewed
each year and may not be decreased from the amount in effect in the previous
year. The Agreements also give each Participant the right to continue to
participate in employee benefit programs at not less than 1995 levels, including
life insurance equal to three times annual salary (ten times for Mr. Farley and
four times for Mr. Lappin), and impose on the Participants certain
post-termination non-competition and confidentiality obligations. Mr. Farley's
Agreement requires him to devote substantial time to the Company's business,
consistent with his duties, but permits him to devote time to other business
interests as well.
The Agreements provide for certain payments and benefits upon termination
of employment in addition to those previously accrued. If employment terminates
due to normal retirement, approved early retirement, death or disability, the
Participant will receive: (i) in lieu of annual incentive compensation for that
year, an amount equal to the average annual incentive compensation paid in the
three preceding years, pro rated to reflect the part of the year completed
before termination, (ii) in settlement of outstanding long-term incentives such
as performance shares or units, cash calculated assuming maximum performance in
case of death or disability, or target performance in case of retirement, pro
rated to reflect the part of the performance period completed before termination
and with vesting accelerated, and (iii) in case of disability, continued
participation in employee benefit plans until age 65. If employment is
terminated by the Company other than for cause or after a change in control or
by the executive for good reason, the executive will receive: (i) if such
termination precedes a change in control, for Mr. Farley an amount equal to
then-current annual salary plus the average of the three highest annual
incentive compensation awards paid or the current maximum opportunity, if
greater ("total cash"), multiplied by the number of years of employment
remaining under the Agreement, for Mr. Lappin two times salary, and for other
Participants one times salary, plus a cash settlement of outstanding performance
shares or units, pro rated and assuming performance is the greater of actual
performance to date or target performance, plus the amount specified in clause
(i) of the preceding sentence, (ii) if termination follows a change in control,
total cash multiplied by a number generally ranging from two to three (depending
on the seniority of the executive and the period remaining in the employment
term) and, in lieu of annual incentive compensation for that year, for Mr.
Farley an amount equal to the average of the three highest annual incentive
compensation awards paid or the current maximum opportunity, if greater, without
proration, and, for other Participants, the maximum opportunity without
proration plus, in settlement of outstanding performance shares or units, cash
equal to the amount payable upon achievement of maximum performance and vesting
for all performance shares and units, and (iii) if such termination follows a
change in control, a lump-sum cash payment of the present value of accrued
benefits under any supplemental pension plan if such benefits are not fully
funded or secured, and continued participation in employee benefit plans for two
years (three years for Mr. Farley). If payments following a change in control
are subject to the "golden parachute" excise tax, the Company will pay the
Participant an additional "gross-up" amount so that his after-tax benefits are
the same as if no excise tax had applied. The Company must continue
indemnification and officers' and directors' liability insurance during
employment and for up to six years thereafter, and reimburse a Participant for
expenses incurred in good faith in enforcing the Agreement.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1997, Dennis S. Bookshester, A. Lorne Weil and Sir Brian G. Wolfson
served on the Compensation Committee.
William Farley, an executive officer and director of the Company, is also
an executive officer and director of Acme Boot and establishes compensation for
executive officers of Acme Boot.
65
<PAGE> 68
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares of Class A Common Stock
and Class B Common Stock, the percentage of each class and the percentage of
total voting power of the Company beneficially owned as of February 28, 1998 by
(i) each director, (ii) each of the Named Officers (as defined on page 59),
(iii) all directors and executive officers as a group, and, to the knowledge of
the Board of Directors, (iv) each person owning more than 5% of a class of the
Company's voting securities. Except as otherwise indicated, each beneficial
owner has sole voting and investment power. This table reflects shares issuable
upon the exercise of options which are exercisable within 60 days of February
28, 1998.
<TABLE>
<CAPTION>
CLASS A COMMON STOCK CLASS B COMMON STOCK PERCENT
------------------------ ------------------------ OF TOTAL
PERCENT PERCENT VOTING
NUMBER OF CLASS NUMBER OF CLASS POWER(1)
------ -------- ------ -------- --------
<S> <C> <C> <C> <C> <C>
Farley Inc........................... --(2) -- 3,176,764 55.9% 16.8%
5000 Sears Tower
233 South Wacker Drive
Chicago, IL 60606
Franklin Resources, Inc.............. 5,112,221(3) 7.7% -- -- 5.4%
777 Mariners Island Blvd.
San Mateo, CA 94404
Goldman, Sachs & Co.................. 5,229,218(4) 7.9% -- -- 5.5%
85 Broad Street
New York, NY 10004
William Farley....................... 1,274,200(5) 1.9% 5,684,276(6) 100% 31.4%
5000 Sears Tower
Chicago, IL 60606
Omar Al Askari....................... 21,000(7) * -- -- *
Dennis S. Bookshester................ 16,500(8) * -- -- *
Bernhard Hansen...................... 13,034(9) * -- -- *
Henry A. Johnson..................... 18,500(10) * -- -- *
Richard C. Lappin.................... 428,245(11) * -- -- *
Mark McCormack....................... 0 * -- -- *
Burgess D. Ridge..................... 66,855(12) * -- -- *
Larry K. Switzer..................... 181,686(13) * -- -- *
A. Lorne Weil........................ 14,500(10) * -- -- *
Sir Brian Wolfson.................... 13,500(10) * -- -- *
All directors and executive officers
as a group (17 persons)............ 2,163,596(14) 3.5% 5,684,276 32.5% 32.5%
</TABLE>
- -------------------------
* Less than 1%
(Footnotes on following page)
66
<PAGE> 69
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT --
(CONTINUED)
(Footnotes from preceding page)
(1) Each share of Class A Common Stock has one vote and each share of Class B
Common Stock has five votes. This column shows the combined voting power of
all Class A Common Stock and Class B Common Stock beneficially owned by
each of the listed persons. The percentages shown assume no conversion of
Class B Common Stock into Class A Common Stock. On February 28, 1998, there
were 66,100,394 shares of Class A Common Stock and 5,684,276 shares of
Class B Common Stock outstanding.
(2) Excludes 3,176,764 shares of Class A Common Stock issuable upon conversion
of shares of Class B Common Stock.
(3) As reported on a Schedule 13G filed by Franklin Resources, Inc., Charles B.
Johnson, Rupert H. Johnson, Jr. and Templeton Global Advisors Limited on
February 3, 1998. According to such Schedule 13G, Templeton Global Advisors
Limited, Templeton Investment Counsel, Inc. and Templeton Management
Limited have sole power and dispositive power over 4,205,368, 564,453 and
342,400 shares, respectively.
(4) As reported on a Schedule 13G filed by Goldman, Sachs & Co. and The Goldman
Sachs Group, L.P. on February 17, 1998. According to such Schedule 13G,
Goldman, Sachs & Co. and The Goldman Sachs Group, L.P. each have shared
voting power over 4,887,418 shares and shared dispositive power over
5,229,218 shares.
(5) Excludes 5,684,276 shares of Class A Common Stock issuable upon conversion
of shares of Class B Common Stock. Includes 1,221,095 shares of Class A
Common Stock currently issuable upon exercise of options granted to Mr.
Farley under the Company's stock option plans. Excludes 995,864 shares of
Class A Common Stock held by a master trust, which includes the assets of
the pension plans of substantially all affiliated companies managed by Mr.
Farley, the voting of which shares is controlled or managed by Mr. Farley
in his capacity as the investment committee with respect to such trust. Mr.
Farley disclaims beneficial ownership of the shares held in the master
trust.
(6) Includes 3,176,764 shares of Class B Common Stock owned by Farley Inc. Mr.
Farley owns 100% of the common stock of Farley Inc.
(7) Includes 10,000 shares of Class A Common Stock held by United Technical
Services, 1,000 shares of Class A Common Stock held by United Eastern
Investment Corp., both companies are controlled by Mr. Al Askari and 10,000
shares of Class A Common Stock currently issuable upon exercise of options
granted by the Company.
(8) Includes 3,000 shares of Class A Common Stock held as custodian for a minor
child and 12,500 shares of Class A Common Stock currently issuable upon
exercise of options granted by the Company
(9) Represents 13,034 shares of Class A Common Stock currently issuable upon
exercise of options granted by the Company.
(10) Includes 12,500 shares of Class A Common Stock currently issuable upon
exercise of options granted by the Company, and, in the case of Mr.
Johnson, also includes 1,000 shares owned by Mr. Johnson's spouse, the
beneficial ownership of which is disclaimed by Mr. Johnson.
(11) Mr. Lappin holds 31,700 shares of Class A Common Stock jointly with his
wife. Includes 396,545 shares of Class A Common Stock currently issuable
upon the exercise of options granted to him by the Company.
(12) Includes 65,855 shares of Class A Common Stock currently issuable upon
exercise of options granted by the Company.
(13) Represents 181,686 shares of Class A Common Stock currently issuable upon
exercise of options granted by the Company.
67
<PAGE> 70
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT --
(CONCLUDED)
(14) Includes 2,122,636 shares of Class A Common Stock currently issuable upon
the exercise of options granted by the Company and 1,000 shares of Class A
Common Stock owned by the spouse of a director, beneficial ownership of
which is disclaimed by such director.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Act"), requires the Company's officers, directors and persons who beneficially
own greater than 10% of a registered class of the Company's equity securities to
file reports of ownership and changes in ownership with the Securities and
Exchange Commission (the "SEC"). Based solely on a review of the forms it has
received and on representations from certain reporting persons that no such
forms were required for them, the Company believes that, except as set forth
below, during 1997 all Section 16(a) filing requirements applicable to its
officers, directors and 10% beneficial owners were complied with by such
persons.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 Company's management agreement with FII under the agreement
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 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 its personnel and in settlement of all obligations
the Company owed 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 ($3,600,000 was actually paid in 1996), all of which related to the
severance of certain FII employees who were not re-employed by the Company,
including severance payments under certain employment agreements to which the
Company was a party. 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
settlement amounts were included in the Company's special charge accrued in the
fourth quarter of 1995.
Under the terms of the management agreement between FII and the Company,
FII provided the Company, to the extent that the Company requested, (i) general
management services which included, but were 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 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, prior to 1996, the Company. Certain of the executive officers of the
Company were employed by, and received their compensation from, FII. These
officers devote their time as needed to those companies owned and controlled by
Mr. Farley and, accordingly, did not devote full time to any single company,
including the Company.
68
<PAGE> 71
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -- (CONTINUED)
In consideration for investment banking and financing services, the Company
paid 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 did 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 were generally payable to FII
upon the closing of the subject transaction or agreement.
Under the terms of the management agreement, the Company paid 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 in 1995.
As part of the Company's normal executive relocation policy and in
connection with the transition of certain executive functions from Chicago,
Illinois to Bowling Green, Kentucky, the Company made an interest free bridge
loan, to Mr. Ridge, the Company's Senior Vice President -- Administration and
Secretary, of $325,500 in 1996 for the purchase of a home in Alvaton, Kentucky.
The Company purchased Mr. Ridge's home in Chicago, Illinois in 1997 for $662,000
based on independent appraisals, at which time the loan was repaid. In 1997, the
Company made an interest free bridge loan of $100,000 to Mr. Wendler, the
Company's Senior Vice President of Marketing, which amount is outstanding as of
March 1, 1998.
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. 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" and "RELATED PARTY TRANSACTIONS" 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. In connection with
the 1993 transaction, the Company guaranteed, on an unsecured basis, the
repayment of debt incurred by Acme Boot under the Acme Boot Credit Facility and
the New Acme Credit Agreement. Other expense-net includes charges of $32,000,000
and $35,000,000 in 1997 and 1996, respectively, related to the Company's
evaluation of its exposure under the guarantee. See "CONTINGENT LIABILITIES" in
the Notes to Consolidated Financial Statements.
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 1998. 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 Company has fully reserved for the amount of such Junior
Preferred Stock. At December 31, 1997, approximately $36,700,000 remains
outstanding under the New Acme Credit Agreement.
As a result of the Acme Boot operating performance and management's
assessment of existing facts and circumstances of Acme Boot's financial
condition, the Company increased its reserve relating to the
69
<PAGE> 72
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -- (CONCLUDED)
Company's guarantee of debt secured under the Acme Boot guarantees from $35
million to $67 million in the third quarter of 1997 related to the Company's
evaluation of its exposure under the Acme Boot guarantees.
On November 20, 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 FI held by non-affiliated third parties. In
consideration of the guarantee, 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 Shares 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 matures on November 19, 1998. The Special Committee received an opinion
from an independent financial advisor that the terms of the transaction are
commercially reasonable.
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 22 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 22 is filed as part of this Annual Report.
3. Exhibits
The exhibits listed in the Index to Exhibits on pages 73 and 74 are filed
as part of this Annual Report.
(b) Reports on Form 8-K
In October 1997, the Company filed a Current Report on Form 8-K dated
October 27, 1997, reporting the Company's October 22, 1997 press release
announcing its earnings for the quarter ended September 30, 1997.
70
<PAGE> 73
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 31, 1998.
FRUIT OF THE LOOM, INC.
By: /s/ LARRY K. SWITZER
----------------------------------
(Larry K. Switzer
Senior 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 31, 1998.
<TABLE>
<CAPTION>
NAME CAPACITY
---- --------
<S> <C>
/s/ WILLIAM FARLEY Chairman of the Board and Chief Executive
- ----------------------------------------------------- Officer (Principal Executive Officer) and
(William Farley) Director
/s/ LARRY K. SWITZER Senior Executive Vice President and Chief
- ----------------------------------------------------- Financial Officer (Principal Financial and
(Larry K. Switzer) Accounting Officer) and Director
Director
- -----------------------------------------------------
(Richard C. Lappin)
/s/ OMAR Z. AL ASKARI Director
- -----------------------------------------------------
(Omar Z. Al Askari)
/s/ DENNIS S. BOOKSHESTER Director
- -----------------------------------------------------
(Dennis S. Bookshester)
/s/ HENRY A. JOHNSON Director
- -----------------------------------------------------
(Henry A. Johnson)
/s/ MARK H. MCCORMACK Director
- -----------------------------------------------------
(Mark H. McCormack)
/s/ A. LORNE WEIL Director
- -----------------------------------------------------
(A. Lorne Weil)
/s/ SIR BRIAN G. WOLFSON Director
- -----------------------------------------------------
(Sir Brian G. Wolfson)
</TABLE>
71
<PAGE> 74
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(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)(2) DEDUCTIONS(3) OF PERIOD
------------ ---------- ----------------- -------------------- ------------- ---------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997:
Reserves deducted from assets
to which they apply:
Accounts receivable
allowances:
Doubtful accounts........... $ 9,100 $ 2,300 $ (2,300) $ 3,400 $ 5,700
Sales discounts, returns,
and allowances........... 11,500 52,200 (17,400) 40,100 6,200
------- ------- -------- ------- -------
$20,600 $54,500 $(19,700) $43,500 $11,900
======= ======= ======== ======= =======
Reserves included in Other
accounts payable and accrued
expenses.................... $20,900 $ -- $(20,900) $ -- $ --
======= ======= ======== ======= =======
YEAR ENDED DECEMBER 31, 1996:
Reserves deducted from assets
to which they apply:
Accounts receivable
allowances:
Doubtful accounts........... $15,200 $ 5,900 $ (1,100) $10,900 $ 9,100
Sales discounts, returns,
and allowances........... 11,400 51,200 (15,500) 35,600 11,500
------- ------- -------- ------- -------
$26,600 $57,100 $(16,600) $46,500 $20,600
======= ======= ======== ======= =======
Reserves included in Other
accounts payable and accrued
expenses.................... $ -- $ -- $ 20,900 $ -- $20,900
======= ======= ======== ======= =======
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
======= ======= ======== ======= =======
</TABLE>
- -------------------------
(1) Reserves included in Other accounts payable and accrued expenses represents
a recourse liability retained in connection with Sale of Accounts Receivable
in December 1996. Corresponding amounts of $5,400 and $15,500 were deducted
from accounts receivable allowances at time of sale.
(2) Recoveries of bad debts and foreign currency translation.
(3) Bad debts written off and allowances and discounts taken by customers.
72
<PAGE> 75
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)* -- $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
the Loom, Inc. and Chemical Mellon Shareholder Services,
L.L.C., Rights Agent (incorporated herein by reference to
Exhibit 4(c) to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995).
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. (incorporated
herein by reference to Exhibit 10(j) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995).
</TABLE>
- -------------------------
See footnote on following page.
73
<PAGE> 76
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS -- (CONCLUDED)
(ITEM 14(A)(3) AND 14(C))
<TABLE>
<CAPTION>
DESCRIPTION
-----------
<S> <C> <C>
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.
(incorporated herein by reference to Exhibit 10(l) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1995).
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 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(o)* -- 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(p)* -- Employment Agreement between Farley Industries, Inc., Fruit
of the Loom, Inc. and Burgess D. Ridge.
10(q)* -- 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 (incorporated herein by
reference to Exhibit 10(r) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995).
10(r)* -- Fruit of the Loom, Inc. 1996 Incentive Compensation Plan
(incorporated herein by reference to the Company's
Registration Statement on Form S-8, Reg. No. 333-09203).
10(s)* -- Purchase and Contribution Agreement dated as of December 18,
1996 among Union Underwear Company, Inc., Pro Player, Inc.
and Salem Sportswear, Inc., as the Originators and FTL
Receivables Company, as the Purchaser (incorporated herein
by reference to Exhibit 10(t) to the Company's Annual Report
on Form 10-K for the year ended December 31, 1996).
10(t)* -- Receivables Purchase Agreement dated as of December 18, 1996
among FTL Receivables Company, as Seller, Union Underwear
Company, Inc., as initial Servicer, Barton Capital
Corporation, as Purchaser, and Societe Generale, as Agent
(incorporated herein by reference to Exhibit 10(u) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1996).
18 -- Letter re change in accounting principle.
21 -- Subsidiaries of the Company.
23 -- Consent of Ernst & Young LLP.
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 #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.
74
<PAGE> 1
Exhibit 10(P)
FARLEY INDUSTRIES, INC.
and
FRUIT OF THE LOOM, INC.
- --------------------------------------------------------------------------------
Employment Agreement for Burgess D. Ridge
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
1. Employment and Assignment; Obligations of FOL and Company................................ 1
2. Term..................................................................................... 2
3. Offices and Duties....................................................................... 2
4. Salary and Annual Incentive Compensation................................................. 2
5. Long-Term Compensation, Including Stock Options, and Benefits, Deferred
Compensation, and Expense Reimbursement.................................................. 3
6. Termination Due to Normal Retirement, Approved Early Retirement,...Death, or Disability.. 7
7. Termination For Reasons Other Than Normal Retirement, Approved Early Retirement,
Death or Disability...................................................................... 9
8. Definitions Relating to Termination Events............................................... 13
9. Excise Tax Gross-Up...................................................................... 16
10. Non-Competition and Non-Disclosure; Executive Cooperation................................ 18
11. Governing Law; Disputes; Arbitration..................................................... 19
12. Miscellaneous............................................................................ 20
13. Indemnification.......................................................................... 22
</TABLE>
Exhibit
- -------
A Option Agreement for 25,000 Shares under 1995 EICP (1995 Option)
<PAGE> 2
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is dated as of the ____ th day of March, 1995, by
and among FARLEY INDUSTRIES, INC., an Illinois corporation (the "Company"),
FRUIT OF THE LOOM, INC., a Delaware corporation ("FOL"), and Burgess D. Ridge
("Executive"), and shall become effective as of December 18, 1994 (the
"Effective Date").
WITNESSETH
WHEREAS, Executive has served and is serving as a senior executive of the
Company and, under Service Agreements between the Company and FOL (any such
agreement as may be in effect from time to time being the "Service Agreement"),
as a senior executive of FOL; and
WHEREAS, FOL desires that Executive continue to serve FOL in a senior
executive capacity in connection with the conduct of its businesses, the
Company desires to continue to employ Executive as a senior executive so that
he may continue serve FOL, under the Service Agreement, in such a senior
executive capacity, and Executive desires to accept such employment by the
Company and assignment with FOL on the terms and conditions herein set forth;
and
WHEREAS, the Company, FOL, and Executive desire to set forth the terms
upon which Executive shall be so employed by the Company and assigned to FOL.
NOW, THEREFORE, in consideration of the foregoing, the mutual covenants
contained herein, and other good and valuable consideration the receipt and
adequacy of which the Company, FOL, and Executive each hereby acknowledge, the
Company, FOL, and Executive hereby agree as follows:
1. Employment and Assignment; Obligations of FOL and Company.
(a) Employment by the Company and Assignment to FOL. The Company hereby
agrees to employ Executive as a senior executive of the Company and as a senior
executive assigned to serve as a senior executive of FOL, FOL hereby agrees to
the assignment of Executive as a senior executive of FOL, and Executive hereby
agrees to accept such employment and assignment and serve in such capacities,
during the Term as defined in Section 2 and upon the terms and conditions set
forth in this Employment Agreement (this "Agreement").
(b) Obligations of FOL and Company, and Effect on Service Agreement. FOL
guarantees to Executive payment of all obligations hereunder of the Company to
Executive, including obligations under Sections 6 and 7. FOL and the Company
acknowledge and agree that, to the extent that this Agreement specifies matters
relating to the assignment of Executive to FOL and imposes obligations between
FOL and the Company relating thereto, this Agreement may modify and amend the
terms of any Service Agreement. If FOL makes any payment of cash or property
to Executive hereunder, including any payment under a guarantee by FOL of a
direct obligation of the Company to Executive hereunder, that duplicates a
payment made or owing by FOL to the Company under the Service Agreement, FOL
shall have a right of reimbursement or setoff against the Company in respect of
such payment. If Section 6 or 7 specify a payment, action or other obligation
to Executive following termination of Executive's employment by the Company and
service to FOL without specifying the primary obligor therefor, the obligor
therefor shall be FOL in respect of any obligation that replaces, settles, or
otherwise relates to an obligation of FOL under Sections 4 and 5 and shall be
the Company in respect of any obligation
<PAGE> 3
that replaces, settles, or otherwise relates to an obligation of the Company
under Sections 4 and 5, subject to FOL's guarantee of the obligations of the
Company.
2. Term.
The term of employment of Executive and assignment to FOL under this
Agreement (the "Term") shall be the period commencing on the Effective Date and
terminating on December 17, 1997 and any period of extension thereof in
accordance with this Section 2, subject to earlier termination in accordance
with Section 6 or 7. The Term shall be extended automatically without further
action by any party for the one-year period beginning on December 18, 1997 and
each succeeding December 18 thereafter, unless the Company or FOL shall have
served written notice upon Executive (and on the one of the Company or FOL not
serving such notice, if the two are not acting jointly), or Executive shall
have served written notice on the Company and FOL, in either case in accordance
with the provisions of Section 12(d), on or prior to the June 30 preceding a
date upon which such extension would become effective electing not to extend
the Term further as of the December 18 next succeeding the date such notice is
served, in which case the Term shall terminate at the next December 17 (subject
to earlier termination in accordance with Section 6 or 7).
3. Offices and Duties.
The provisions of this Section 3 will apply during the Term:
(a) Generally. Executive shall serve as a senior executive assigned,
pursuant to the Service Agreement, to serve as a senior executive of FOL and
shall perform such duties and responsibilities, as are substantially consistent
with his duties, responsibilities, rank and status with the Company and FOL as
of the Effective Date. Executive shall devote substantial business time and
attention, and his best efforts, abilities, experience, and talent, to the
position of senior executive of the Company and of FOL and for the businesses
of the Company and FOL; provided, however, that nothing in this Agreement shall
preclude or prohibit Executive from engaging in other activities, including as
assigned by the Company, to the extent that such other activities do not
preclude Executive's employment and assignment to serve FOL or otherwise
inhibit the performance of Executive's duties under this Agreement or impair
the businesses of the FOL, the Company and their subsidiaries and affiliates.
(b) Place of Employment. Executive's principal place of employment shall
be the Corporate Offices of FOL in Chicago, Illinois or such other headquarters
location as may be assigned by FOL, subject to the consent of the Company which
shall not be reasonably withheld.
4. Salary and Annual Incentive Compensation.
As partial compensation for the services to be rendered hereunder by
Executive, the Company agrees to pay to Executive during the Term the
compensation set forth in this Section 4, and FOL agrees to guarantee the
payment of such compensation to Executive.
(a) Base Salary. The Company will pay to Executive during the Term a
base salary at the annual rate in effect at the Effective Date, payable in cash
in substantially equal monthly installments during each calendar year, or
portion thereof, of the Term and otherwise in accordance with the Company's
usual payroll practices with respect to persons assigned to serve as senior
executives of FOL (except to the extent deferred under Section 5(d)).
Executive's annual base salary shall be reviewed by FOL and the Company at
least once in each calendar
2
<PAGE> 4
year and may be increased above, but may not be reduced below, the then-current
rate of such base salary.
(b) Annual Incentive Compensation. The Company will pay to Executive
during the Term annual incentive compensation, determined through Executive's
participation in the FOL 1995 Executive Incentive Compensation Plan (subject to
approval thereof by FOL's stockholders) (the "1995 EICP"), the FOL Executive
Incentive Compensation Plan (the "EICP") if the 1995 EICP is not approved by
FOL stockholders, and any successor to the 1995 EICP or the EICP, which shall
offer to Executive an opportunity to earn additional compensation in amounts
determined by and in the sole discretion of the Compensation Committee of the
Board of Directors of FOL (the "Committee"), in accordance with the applicable
plan and consistent with past practices of the Company; provided, however, that
FOL and the Company will use their best efforts to maintain in effect, for each
year during the Term, the 1995 EICP, the EICP (if the 1995 EICP is not approved
by FOL stockholders), or an equivalent plan under which Executive will be
eligible for an award not less than the opportunity level available under the
1995 EICP or the EICP during 1995 (if the 1995 EICP is not approved by FOL
stockholders) to senior executives of FOL in similar capacities. Any such
annual incentive compensation payable to Executive shall be paid by FOL to the
Company and by the Company (without varying the amount or timing of payment or
otherwise exercising discretion) to Executive in accordance with FOL's
incentive compensation payment practices with respect to senior executives
(except to the extent deferred under Section 5(d)).
5. Long-Term Compensation, Including Stock Options, and Benefits, Deferred
Compensation, and Expense Reimbursement
As partial compensation for the services to be rendered hereunder by
Executive, the Company agrees to provide the compensation and benefits to the
extent specified in this Section 5, including Sections 5(a), (c), (d), and (e),
FOL agrees to guarantee the payment of all such compensation and benefits to be
provided by the Company under this Section 5, and FOL agrees to provide the
compensation and benefits to the extent specified in this Section 5, including
Sections 5(a), (b),(d) and (e).
(a) Executive Compensation Plans. Executive shall be entitled during the
Term to participate, without discrimination or duplication, in all executive
compensation plans and programs intended for general participation by senior
executives of the Company, including those assigned to FOL and by senior
executives of FOL, as presently in effect or as they may be modified or added
to from time to time, subject to the eligibility and other requirements of
stockholders), any successor to such plans, and other stock option plans,
performance share plans, management incentive plans, and deferred compensation
plans of FOL, and supplemental retirement plans of the Company; provided,
however, that such compensation plans and programs, in the aggregate, shall
provide Executive with benefits and compensation and incentive award
opportunities substantially no less favorable than those provided by the
Company and FOL under such plans and programs to senior executives in similar
capacities. For purposes of this Agreement, all references to "performance
share plans" and "performance shares" refer to such arrangements under the 1994
EICP or the EICP and to any performance shares, performance units, stock
grants, or other long-term incentive arrangements adopted as a successor or
replacement to performance shares under such plans or other plans of the
Company
(b) Stock Option Grant Upon Signing Agreement. In addition to the
compensation otherwise specified under Sections 4 and 5, FOL has granted to
Executive, as of December 18, 1994 and conditioned upon Executive's execution
of this Agreement, a non-
3
<PAGE> 5
qualified stock option to purchase 25,000 shares of FOL's Class A Common Stock
(the "1995 Option"), under the 1995 EICP, subject to stockholder approval of the
1995 EICP at FOL's 1995 Annual Meeting of Stockholders. The 1995 Option shall
be evidenced by, and have the terms set forth in, the option agreement attached
as Exhibit A hereto (the "Option Agreement"), which has been authorized and
approved by the Committee under the 1995 EICP.
Not later than such time as the 1995 Option becomes exercisable, FOL will
have filed with the Securities and Exchange Commission, and will thereafter
maintain the effectiveness of, a registration statement registering under the
Securities Act of 1933, as amended, the offer and sale of shares by FOL
pursuant to the 1995 Option, which registration statement shall include a
resale prospectus covering the reoffer and resale (or other disposition) of all
shares acquired by Executive upon exercise of the 1995 Option, and FOL will
maintain as current all offering materials under such registration statement at
all times that offers and sales of such shares could be made by FOL or
Executive.
(c) Employee and Executive Benefit Plans. Executive shall be entitled
during the Term to participate, without discrimination or duplication, in all
employee and executive benefit plans and programs of the Company, as presently
in effect or as they may be modified or added to by the Company from time to
time, to the extent such plans are available to similarly situated senior
executives or employees of the Company, including those assigned to serve as
senior executives of FOL, subject to the eligibility and other requirements of
such plans and programs, including without limitation plans providing pensions,
other retirement benefits, medical insurance, life insurance, disability
insurance, and accidental death or dismemberment insurance, and participation
in savings, profit-sharing, and stock ownership plans; provided, however, that
such benefit plans and programs and any benefit plans and programs of FOL in
which Executive may from time to time participate shall, in the aggregate,
provide Executive with benefits substantially no less favorable than those
provided by the Company and FOL to senior executives in similar capacities.
In furtherance of and not in limitation of the foregoing, during the Term:
(i) Executive will participate in all executive and employee
vacation and time-off programs;
(ii) The Company will provide Executive with coverage by long-term
disability insurance and benefits substantially no less favorable
(including any required contributions by Executive) than such
insurance and benefits provided to Executive at January 1, 1995;
(iii) Executive will be covered by Company-paid group and
individual term life insurance providing a death benefit of not less
than three times Executive's annual base salary under Section 4(a);
provided, however, that such insurance may be combined with a
supplementary retirement funding vehicle;
(iv) Under the Company's pension plans (including supplemental
plans): (A) Executive will be entitled to benefits substantially no
less favorable than those under such plans and programs of the
Company as in effect at January 1, 1995; (B) for purposes of
calculating such benefits Executive's compensation covered by such
plans will include 100% of annual salary paid under Section 4(a) and
no less than 50% of annual incentive compensation paid under Section
4(b), and Executive shall be credited, for each full calendar year
of the Term that is completed up to
4
<PAGE> 6
five years, with one additional year of service up to five additional
years under such plans, which shall be fully vested upon crediting; and
(C) amounts equal to the present value of Executive's accrued benefit
vested at any time during the Term, under all supplemental
(non-qualified) pension plans of the Company, will be fully funded by
the Company by the purchase of an insured annuity, the ownership of
which shall be transferred to Executive, providing a benefit equivalent
to such accrued benefit on an after-tax basis, and the Company will pay
to Executive an additional amount (or apply such additional amount to
the purchase of an increased insured annuity if so elected by Executive)
equal to the total of Executive's federal, state, and local income and
employment taxes on the insured annuity and such additional amount; and
(v) The Company will provide Executive with health and medical
benefits consistent with its policies for other senior executives,
including those assigned to serve as senior executives of FOL,
subject to a lifetime maximum amount of supplemental reimbursements
of $750,000; provided, however, that supplemental health and medical
benefits shall provide for reimbursement of Executive to the extent
that any limitation on maximum lifetime health and medical benefits
and reimbursements under other Company policies and programs is
exceeded.
(d) Deferral of Compensation. The Company and FOL shall implement
deferral arrangements, as obligations of FOL, permitting Executive to elect to
irrevocably defer receipt, pursuant to written deferral election terms and
forms (the "Deferral Election Forms"), of all or a specified portion of (i) his
annual base salary and annual incentive compensation under Section 4, (ii)
long-term incentive compensation under Sections 5(a) and 5(b) (including
payouts relating to performance shares), and (iii) shares acquired upon
exercise of options granted under Sections 5(a) and (b) that are acquired in an
exercise in which Executive pays the exercise price by the surrender of
previously acquired shares, to the extent of the net additional shares acquired
by Executive in such exercise; provided, however, that such deferrals shall not
reduce Executive's total cash compensation in any calendar year below the sum of
(i) the FICA maximum taxable wage base plus (ii) 1.45% of Executive's salary,
annual incentive compensation and long-term incentive compensation in excess of
such FICA maximum. In addition, the Committee may require mandatory deferral of
amounts payable as annual incentive compensation under Section 4(b) or long-term
incentive compensation under Sections 5(a) and 5(b), which deferrals will
otherwise be in accordance with this Section 5(d), and the Company hereby
delegates to such Committee full authority to require such mandatory
deferral of annual incentive compensation.
In accordance with such duly executed Deferral Election Forms or the terms
of any mandatory deferral, FOL shall, in lieu of payment by FOL to the Company
(under the Service Agreement in respect of Executive's services) and in lieu of
any direct payment by FOL or the Company to Executive, credit to one or more
bookkeeping accounts maintained by FOL for Executive, on the respective date or
dates payments would otherwise be due to Executive, amounts equal to the
compensation subject to deferral, such credits to be denominated in cash if the
compensation would have been paid in cash but for the deferral or in shares if
the compensation would have been paid in shares but for the deferral. An
amount of cash equal in value to all cash-denominated amounts credited to
Executive's account and a number of shares of Common Stock equal to the number
of shares credited to Executive's account pursuant to this Section 5(d) shall
be transferred as soon as practicable following such crediting by FOL to, and
shall be held and invested by, an independent trustee selected by FOL (a
"Trustee") pursuant to a "rabbi trust" established by FOL in connection with
such deferral arrangement and as to which the Trustee shall make investments
based on Executive's investment objectives (including
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possible investment in publicly traded stocks and bonds, mutual funds, and
insurance vehicles). Thereafter, Executive's deferral accounts will be valued by
reference to the value of the assets of the "rabbi trust"; provided, however,
that a portion of the assets of the "rabbi trust" may be used to reimburse FOL
for its reasonable cost of funds resulting from payment of taxes by FOL relating
to such rabbi trust assets during the period of deferral and prior to the
settlement of Executive's deferral accounts. FOL shall pay all other costs of
administration of the deferral arrangement, without deduction or reimbursement
from the assets of the "rabbi trust."
Except as otherwise provided under Section 7 in the event of Executive's
termination of employment with the Company or termination of service to FOL or
as otherwise determined by the Committee in the event of hardship on the part
of Executive, upon such date(s) or event(s) set forth in the Deferral Election
Forms (including forms filed after deferral but before settlement in which
Executive may elect to further defer settlement) or the terms of any mandatory
deferral, FOL shall promptly pay to Executive cash equal to the cash then
credited to Executive's deferral accounts and cash equal in value to any shares
of Common Stock then credited to Executive's deferral accounts, less applicable
withholding taxes, and such distribution shall be deemed to fully settle such
accounts; provided, however, that FOL may instead settle such accounts by
directing the Trustee to distribute the assets of the "rabbi trust." FOL, the
Company, and Executive agree that compensation deferred pursuant to this
Section 5(d) shall be fully vested and nonforfeitable; provided, however,
Executive acknowledges that his rights to the deferred compensation provided
for in this Section 5(d) shall be no greater than those of a general unsecured
creditor of FOL, and that such rights may not be pledged, collateralized,
encumbered, hypothecated, or liable for or subject to any lien, obligation, or
liability of Executive, or be assignable or transferable by Executive, otherwise
than by will or the laws of descent and distribution, provided that
Executive may designate one or more beneficiaries to receive any payment of such
amounts in the event of his death.
(e) Reimbursement of Expenses. The Company will promptly reimburse
Executive for all reasonable business expenses and disbursements incurred by
Executive in the performance of Executive's duties during the Term in
accordance with the Company's reimbursement policies as in effect from time to
time.
6. Termination Due to Normal Retirement, Approved Early Retirement, Death,
or Disability
Executive may terminate employment with the Company and cease to serve as
a senior executive of FOL upon Executive's retirement at or after age 65
("Normal Retirement") or, if approved in advance by the Company and the
Committee, upon Executive's early retirement prior to age 65 ("Approved Early
Retirement"). FOL may terminate the service of Executive due to the Disability
(as defined in Section 8(c)) of Executive, in which case Executive's employment
by the Company and service to FOL will terminate due to Disability.
At the time Executive's employment by the Company and service to FOL
terminates due to Normal Retirement, Approved Early Retirement, or death, the
Term will terminate. In the event Executive's employment by the Company and
service to FOL terminates due to Disability, the Term will terminate at the
expiration of the 30-day period referred to in the definition of Disability (set
forth in Section 8(c)) absent the actions referred to therein being taken by
Executive to return to service and present to the Company and FOL a certificate
of good health.
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Upon a termination of Executive's employment by the Company and service to
FOL due to Normal Retirement, Approved Early Retirement, death, or Disability,
all obligations of the Company, FOL, and Executive under Sections 1 through 5
of this Agreement will immediately cease; provided, however, that subject to
the provisions of Section 12(c), the Company and FOL will pay Executive (or his
beneficiaries or estate) (in accordance with Section 1(b)), and Executive (or
his beneficiaries or estate) will be entitled to receive, the following:
(i) The unpaid portion of annual base salary at the rate payable,
in accordance with Section 4(a) hereof, at the date of termination,
pro rated through such date of termination, will be paid;
(ii) All vested, nonforfeitable amounts owing or accrued at the
date of termination under any compensation and benefit plans,
programs, and arrangements set forth or referred to in Sections 4(b)
and 5(a) and (c) hereof (including any earned annual incentive
compensation and performance shares) in which Executive
theretofore participated will be paid under the terms and
conditions of the plans, programs, and arrangements (and agreements
and documents thereunder) pursuant to which such compensation and
benefits were granted;
(iii) In lieu of any annual incentive compensation under Section
4(b) for the year of Executive's termination (unless otherwise
payable under (ii) above), Executive will be paid an amount equal to
the average annual incentive compensation paid to Executive in the
three years immediately preceding the year of termination (or, if
Executive was not eligible to receive or did not receive such
incentive compensation for any year in such three year period, the
Executive's target annual incentive compensation for such year(s)
shall be used to calculate average annual incentive compensation)
multiplied by a fraction the numerator of which is the number of
days Executive was employed and served in the year of termination
and the denominator of which is the total number of days in the year
of termination;
(iv) In lieu of any payment in respect of performance shares
granted in accordance with Section 5(a) for any performance period
not completed at the date of Executive's termination (unless
otherwise payable under (ii) above), Executive will be paid in cash
an amount equal to the cash amount payable plus the value of any
shares of Common Stock or other property (valued at the date of
termination) payable upon achievement of (A) the maximum
performance, in the case of death or Disability, or (B) at target
performance, in the case of Normal Retirement or Early Retirement,
in respect of each tranche of performance shares, multiplied by a
fraction the numerator of which is the number of days Executive was
employed and served during the respective performance period and the
denominator of which is the total number of days in such performance
period;
(v) Stock options then held by Executive will be exercisable to
the extent and for such periods, and otherwise governed, by the
plans and programs and the agreements and other documents thereunder
pursuant to which such stock options were granted;
(vi) All deferral arrangements under Section 5(d) will be settled
in accordance with Executive's duly executed Deferral Election Forms
or the terms of any mandatory deferral;
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(vii) Reasonable business expenses and disbursements incurred by
Executive prior to such termination will be reimbursed, as
authorized under Section 5(e); and
(viii) If Executive's employment and service terminates due to
Disability, for the period extending from such termination until
Executive reaches age 65, Executive shall continue to participate in
all employee benefit plans, programs, and arrangements under Section
5(c) providing health, medical, and life insurance and pension
benefits in which Executive was participating immediately prior to
termination, the terms of which allow Executive's continued
participation, as if Executive had continued in employment with the
Company and service to FOL during such period or, if such plans,
programs, or arrangements do not allow Executive's continued
participation, a cash payment equivalent on an after-tax basis to the
value of the additional benefits Executive would have received under
such employee benefit plans, programs, and arrangements in which
Executive was participating immediately prior to termination, as if
Executive had received credit under such plans, programs, and
arrangements for service and age with the Company and FOL during such
period following Executive's termination, with such benefits payable by
the Company and/or FOL at the same times and in the same manner as such
benefits would have been received by Executive under such plans (it
being understood that the value of any insurance-provided benefits
will be based on the premium cost to Executive, which shall not exceed
the highest risk premium charged by a carrier having an investment grade
or better credit rating);
provided further, that, in the case of termination of Executive's employment
and service due to Disability, Executive must continue to satisfy the
conditions set forth in Section 10 in order to continue receiving the
compensation and benefits under (viii), above. Amounts payable under (i),
(ii), (iii), (iv), and (vii) above will be paid as promptly as practicable
after Executive's termination; provided, however, to the extent that FOL would
not be entitled to deduct any such payments under Internal Revenue Code Section
162(m), such payments shall be made at the earliest time that the payments
would be deductible by FOL without limitation under Section 162(m) (unless this
provision is waived by FOL).
7. Termination For Reasons Other Than Normal Retirement, Approved Early
Retirement, Death or Disability
(a) Termination for Cause and Termination by Executive. In accordance
with the provisions of this Section 7(a), FOL may terminate the service of
Executive as a senior executive of FOL for Cause (as defined in Section 8(a))
at any time prior to a Change in Control (as defined in Section 8(b)), in which
case Executive's employment by the Company and service to FOL will terminate,
the Company may terminate the employment of Executive for Cause (as defined in
Section 8(a)) at any time prior to a Change in Control (as defined in Section
8(b)), and Executive may terminate his employment with the Company and service
with FOL voluntarily for reasons other than Good Reason (as defined in Section
8(d)) at any time. An election by Executive not to extend the Term pursuant to
Section 2 hereof shall be deemed to be a voluntary termination of such
employment and such service by Executive at the date of expiration of the Term,
unless there occurs a Change in Control prior to the date of expiration.
Upon a termination of Executive's service with FOL for Cause, termination
of Executive's employment by the Company for Cause or voluntarily termination
by the Executive, the Term will immediately terminate, and all obligations of
the Company and FOL under Sections
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1 through 5 of this Agreement will immediately cease; provided, however, that
subject to the provisions of Section 12(c), the Company and FOL shall pay
Executive, and Executive shall be entitled to receive, the following:
(i) The unpaid portion of annual base salary at the rate payable,
in accordance with Section 4(a) hereof, at the date of termination,
pro rated through such date of termination, will be paid;
(ii) All vested, nonforfeitable amounts owing or accrued at the date of
termination under any compensation and benefit plans, programs, and
arrangements set forth or referred to in Sections 4(b) and 5(a) and 5(c)
hereof (including any earned annual incentive compensation and
performance shares) in which Executive theretofore participated will be
paid under the terms and conditions of the plans, programs, and
arrangements (and agreements and documents thereunder) pursuant to which
such compensation and benefits were granted;
(iii) A cash amount equal to the amount credited to Executive's deferral
accounts under deferral arrangements authorized under Section 5(d) hereof
at the date of termination (including cash equal in value at that date to
any shares of Common Stock credited to Executive's deferral accounts),
less applicable withholding taxes under Section 12(i); provided, however,
that FOL may instead settle such accounts by directing the Trustee to
distribute the assets of the "rabbi trust." Such amounts shall be paid
or distributed as promptly as practicable following such date of
termination, without regard to any stated period of deferral otherwise
remaining in respect of such amounts, and the payment of such amounts
shall be deemed to fully settle such accounts; and
(iv) Reasonable business expenses and disbursements incurred by Executive
prior to such termination will be reimbursed, as authorized under
Section 5(e).
Amounts payable under (i), (ii), (iii), and (iv) above will be paid as promptly
as practicable after Executive's termination; provided, however, to the extent
that FOL would not be entitled to deduct any such payments under Internal
Revenue Code Section 162(m), such payments shall be made at the earliest time
that the payments would be deductible by FOL without limitation under Section
162(m) (unless this provision is waived by FOL).
(b) Termination Without Cause and Termination by Executive for Good
Reason. In accordance with the provisions of this Section 7(b), FOL may
terminate the service by Executive as a senior executive of FOL without Cause
(as defined in Section 8(a)), including after a Change in Control (as defined
in Section 8(b)), upon 90 days' written notice to Executive, in which case
Executive's employment by the Company will terminate, the Company may terminate
Executive's employment without Cause (as defined in Section 8(a)), including
after a Change in Control (as defined in Section 8(b)), upon 90 days' written
notice to Executive, and Executive may terminate his employment by the Company
and service with FOL for Good Reason (as defined in Section 8(d)) following a
Change in Control upon 90 days' written notice to the Company and FOL;
provided, however, that, if the basis for such Good Reason is correctable, the
Company and/or FOL have not corrected the basis for such Good Reason within 30
days after both have received such notice. The foregoing notwithstanding, in
lieu of the Company or FOL providing 90 days' written notice to Executive, the
Company and FOL may pay Executive his then-current annual base salary under
Section 4(a) and credit Executive with service for 90 days for all purposes
hereunder. An election by the Company or FOL not to
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extend the Term pursuant to Section 2 hereof shall be deemed to be a
termination of service with FOL and termination of employment by the Company
without Cause at the date of expiration of the Term.
Upon a termination of Executive's service with FOL without Cause or
termination of Executive's employment by the Company without Cause prior to or
following a Change in Control or termination of Executive's service with FOL
and employment with the Company by Executive for Good Reason following a Change
in Control, the Term will immediately terminate and all obligations of the
Company, FOL, and Executive under Sections 1 through 5 of this Agreement will
immediately cease, except that subject to the provisions of Section 12(c) the
Company and FOL shall pay Executive, and Executive shall be entitled to
receive, the following:
(i) A lump-sum cash payment will be paid as follows:
(A) In the event such termination is a termination by
FOL or the Company without Cause following a Change in Control
or a termination by Executive for Good Reason following a
Change in Control, an amount paid by FOL equal to the sum of
Executive's annual base salary payable under Section 4(a)
immediately prior to termination plus the average annual
incentive compensation paid to Executive in the three years
immediately preceding the year of termination (or, if
Executive was not eligible to receive or did not receive such
incentive compensation for any year in such three year period,
the Executive's target annual incentive compensation for such
year(s) shall be used to calculate average annual incentive
compensation) (such sum being the "total cash" for purposes of
this Section 7(b)(i)) multiplied by a number which is the
greater of the number of years (including any fraction
determined based on the number of days remaining in the year
of termination) remaining in the term without regard to such
termination or 2.0, which payment shall be reduced pro rata to
the extent the number of full months remaining until Executive
attains age 65 is less than 24 months, plus, in lieu of any
payment in respect of performance shares or other long term
incentive awards granted in accordance with Section 5(a) for
any performance period not completed at the date of
Executive's termination (unless otherwise payable under (iii)
below), an amount equal to the cash amount payable plus the
value of any shares of Common Stock or other property (valued
at the date of termination) payable upon the achievement of
maximum performance in respect of each tranche of performance
shares without proration; or
(B) In the event such termination is a termination by
FOL or the Company without Cause prior to a Change in Control,
an amount equal to then-current annual base salary payable
under Section 4(a) multiplied by 1.0, which payment shall be
reduced pro rata to the extent the number of full months
remaining until Executive attains age 65 is less than 12
months, plus, in lieu of any payment in respect of performance
shares or other long term incentive awards granted in
accordance with Section 5(a) for any performance period not
completed at the date of Executive's termination (unless
otherwise payable under (iii) below), Executive will be paid
in cash an amount equal to the cash amount payable plus the
value of any shares of Common Stock or other property (valued
at the date of termination) payable upon achievement of the
greater of target performance or actual
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performance achieved at the date of termination in respect of
each tranche of performance shares, multiplied by a fraction
the numerator of which is the number of days Executive was
employed and served during the respective performance period
and the denominator of which is the total number of days in
such performance period;
(ii) The unpaid portion of annual base salary at the rate payable,
in accordance with Section 4(a) hereof, at the date of termination,
pro rated through such date of termination, will be paid;
(iii) All vested, nonforfeitable amounts owing or accrued at the
date of termination under any compensation and benefit plans,
programs, and arrangements set forth or referred to in Sections 4(b)
and 5(a) and (c) hereof (including any earned annual incentive
compensation and performance shares) in which Executive theretofore
participated will be paid under the terms and conditions of the
plans, programs, and arrangements (and agreements and documents
thereunder) pursuant to which such compensation and benefits were
granted;
(iv) In lieu of any annual incentive compensation under Section
4(b) for the year in which Executive's employment and service
terminated (unless otherwise payable under (iii) above), Executive
will be paid an amount equal to the average annual incentive
compensation paid to Executive in the three years immediately
preceding the year of termination (or, if Executive was not eligible
to receive or did not receive such incentive compensation for any
year in such three year period, the Executive's target annual
incentive compensation for such year(s) shall be used to calculate
average annual incentive compensation) multiplied by a fraction the
numerator of which is the number of days Executive was employed and
served in the year of termination and the denominator of which is
the total number of days in the year of termination;
(v) Stock options then held by Executive will be exercisable to
the extent and for such periods, and otherwise governed, by the
plans and programs (and the agreements and other documents
thereunder) pursuant to which such stock options were granted;
(vi) All deferral arrangements under Section 5(d) will be settled
in accordance with Executive's duly executed Deferral Election Forms
or the terms of any mandatory deferral; provided, however, in the
event of a termination by FOL or the Company without Cause prior to
a Change in Control, a cash amount will be paid equal to the amount
credited to Executive's deferral accounts under deferral
arrangements authorized under Section 5(d) hereof at the date of
termination (including cash equal in value at that date to any
shares of Common Stock credited to Executive's deferral accounts),
less applicable withholding taxes under Section 12(i); provided,
however, that FOL may instead settle such accounts by directing the
Trustee to distribute the assets of the "rabbi trust." Such amounts
shall be paid or distributed as promptly as practicable following
such date of termination, without regard to any stated period of
deferral otherwise remaining in respect of such amounts, and the
payment of such amounts shall be deemed to fully settle such
accounts;
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(vii) Reasonable business expenses and disbursements incurred by
Executive prior to such termination will be reimbursed, as
authorized under Section 5(e);
(viii) In the event such termination is a termination by FOL or the
Company without Cause following a Change in Control or a termination
by Executive for Good Reason following a Change in Control, a
lump-sum cash payment will be paid by FOL equal to the present value
of Executive's accrued benefit, if any, which shall be fully vested
at the date of termination, under all supplemental (non-qualified)
pension plans of the Company, unless such benefits are fully funded
based on assets held in trust for the benefit of Executive which
cannot be reached by creditors of the Company or FOL, or such
benefits are otherwise funded and secured in an equivalent manner;
and
(ix) In the event such termination is a termination by FOL without
cause or a termination by Executive for Good Reason, for a period of
two years after such termination, Executive shall continue to
participate in all employee, executive, and special individual
benefit plans, programs, and arrangements under Section 5(c)
including but not limited to health, medical, disability, life
insurance, and pension benefits in which Executive was participating
immediately prior to termination, the terms of which allow
Executive's continued participation, as if Executive had continued
in employment with the Company and service to FOL during such period
or, if such plans, programs, or arrangements do not allow
Executive's continued participation, a cash payment equivalent on an
after-tax basis to the value of the additional benefits Executive
would have received under such employee benefit plans, programs, and
arrangements in which Executive was participating immediately prior
to termination, as if Executive had received credit under such
plans, programs, and arrangements for service and age with the
Company during such period following Executive's termination, with
such benefits payable by the Company and/or FOL at the same times
and in the same manner as such benefits would have been received by
Executive under such plans (it being understood that the value of
any insurance-provided benefits will be based on the premium cost to
Executive, which shall not exceed the highest risk premium charged
by a carrier having an investment grade or better credit rating).
Amounts payable under (i), (ii), (iii), (iv), (vi), (vii), and (viii) above
will be paid as promptly as practicable after Executive's termination, and in
no event more than 45 days after such termination, provided, however, that, in
the case of a termination by FOL without Cause prior to a Change in Control,
to the extent that FOL would not be entitled to deduct any such payments under
Internal Revenue Code Section 162(m), such payments shall be made at the
earliest time that the payments would be deductible by FOL without limitation
under Section 162(m) (unless this provision is waived by FOL), but in no event
later than twelve months subsequent to the date of termination.
8. Definitions Relating to Termination Events.
(a) "Cause." For purposes of this Agreement, "Cause" shall mean
Executive's gross misconduct (as defined herein) or willful and material breach
of Section 10 of this Agreement. For purposes of this definition, "gross
misconduct" shall mean (A) a felony conviction in a court of law under
applicable federal or state laws which results in material damage to the
Company, FOL, or any of their subsidiaries or affiliates or materially impairs
the
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value of the Executive's services to the Company or FOL, or (B) willfully
engaging in one or more acts, or willfully omitting to act in accordance with
duties hereunder, which is demonstrably and materially damaging to the Company,
FOL, or any of their subsidiaries or affiliates, including acts and omissions
that constitute gross negligence in the performance of Executive's duties under
this Agreement. For purposes of this Agreement, an act or failure to act on
Executive's part shall be considered "willful" if it was done or omitted to be
done by him not in good faith, and shall not include any act or failure to act
resulting from any incapacity of Executive. Notwithstanding the foregoing,
Executive may not be terminated for Cause unless and until there shall have
been delivered to him a copy of a resolution duly adopted by a majority
affirmative vote of the membership of the Board of Directors of FOL or the
Company (excluding Executive, if he is then a member) at a meeting of such
Board called and held for such purpose (after giving Executive reasonable
notice specifying the nature of the grounds for such termination and not less
than 30 days to correct the acts or omissions complained of, if correctable,
and affording Executive the opportunity, together with his counsel, to be heard
before such Board) finding that, in the good faith opinion of the Board,
Executive was guilty of conduct affecting the Board's corporation or a
subsidiary which conduct constitutes Cause as set forth in this Section 8(a).
(b) "Change in Control." A "Change in Control" shall be deemed to have
occurred if:
(i) An acquisition by any Person of Beneficial Ownership of the shares of
Common Stock of FOL then outstanding ("FOL Common Stock Outstanding") or
the voting securities of FOL then outstanding entitled to vote generally
in the election of directors ("FOL Voting Securities Outstanding");
provided, however, that such acquisition of Beneficial Ownership would
result in the Person's Beneficially Owning twenty-five percent (25%) or
more of FOL Common Stock Outstanding or twenty-five percent (25%) or more
of the combined voting power of FOL Voting Securities Outstanding; and
provided further, that immediately prior to such acquisition such Person
was not a direct or indirect Beneficial Owner of twenty-five percent (25%)
or more of FOL Common Stock Outstanding or twenty-five percent (25%)
or more of the combined voting power of FOL Voting Securities Outstanding,
as the case may be; or
(ii) The approval by the stockholders of FOL of a reorganization, merger,
consolidation, complete liquidation or dissolution of FOL, the sale or
disposition of all or substantially all of the assets of FOL or similar
corporate transaction (in each case referred to in this Section 8(b) as a
"Corporate Transaction") or, if consummation of such Corporate Transaction
is subject, at the time of such approval by stockholders, to the consent
of any government or governmental agency, the obtaining of such
consent (either explicitly or implicitly); or
(iii) A change in the composition of the Board of Directors of FOL
(the "FOL Board") such that the individuals who, as of the Effective
Date, constitute the FOL Board (such FOL Board shall be hereinafter
referred to as the "Incumbent Board") cease for any reason to constitute
at least a majority of the FOL Board; provided, however, for purposes of
this Section 8(b), that any individual who becomes a member of the FOL
Board subsequent to the Effective Date whose election, or nomination for
election by FOL's stockholders, was approved by a vote of at least a
majority of those individuals who are members of the Board and who were
also members of the Incumbent FOL Board (or deemed to be such pursuant to
this proviso) shall be considered as though such individual were a member
of the
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Incumbent Board; but, provided, further, that any such individual
whose initial assumption of office occurs as a result of either an actual
or threatened election contest (as such terms are used in Rule 14a-11 of
Regulation 14A under the Exchange Act, including any successor to
such Rule) or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board shall not be so
considered as a member of the Incumbent Board.
Notwithstanding the provisions set forth in subparagraphs (i) and (ii) of this
Section 8(b), the following shall not constitute a Change in Control for
purposes of this Plan: (1) any acquisition by or consummation of a Corporate
Transaction with any Subsidiary or an employee benefit plan (or related trust)
sponsored or maintained by FOL or an affiliate; or (2) any acquisition or
consummation of a Corporate Transaction following which more than fifty percent
(50%) of, respectively, the shares then outstanding of common stock of the
corporation resulting from such acquisition or Corporate Transaction and the
combined voting power of the voting securities then outstanding of such
corporation entitled to vote generally in the election of directors is then
beneficially owned, directly or indirectly, by all or substantially all of the
individuals and entities who were Beneficial Owners, respectively, of FOL
Common Stock Outstanding and FOL Voting Securities Outstanding immediately
prior to such acquisition or Corporate Transaction in substantially the same
proportions as their ownership, immediately prior to such acquisition or
Corporate Transaction, of FOL Common Stock Outstanding and FOL Voting
Securities Outstanding, as the case may be; or (3) any transaction initiated or
controlled, directly or indirectly, by Executive, in a capacity other than as a
senior executive or director of FOL or senior executive or director of the
Company.
For purposes of this definition:
(A) The terms "Beneficial Owner," "Beneficially Owning," and
"Beneficial Ownership" shall have the meanings ascribed to such
terms in Rule 13d-3 under the Exchange Act (including any successor
to such Rule).
(B) The term "Exchange Act" means the Securities Exchange Act of
1934, as amended from time to time, or any successor act thereto.
(C) The term "Person" shall have the meaning ascribed to such
term in Section 3(a)(9) of the Exchange Act and used in Sections
13(d) and 14(d) thereof, including "group" as defined in Section
13(d) thereof.
(c) "Disability." "Disability" means the failure of Executive to
render and perform the services required of him under this Agreement, for a
total of 180 days of more during any consecutive 12 month period, because of any
physical or mental incapacity or disability as determined by a physician or
physicians selected by FOL and reasonably acceptable to Executive, unless,
within 30 days after Executive has received written notice from FOL of a
proposed termination due to such absence, Executive shall have returned to the
full performance of his duties hereunder and shall have presented to FOL a
written certificate of Executive's good health prepared by a physician selected
FOL and reasonably acceptable to the Executive.
(d) "Good Reason." For purposes of this Agreement, "Good Reason"
shall mean the occurrence of a Change in Control following which there occurs,
without Executive's prior written consent: (A) a material change, adverse to
Executive, in Executive's positions, titles, or offices, status, rank, nature
of responsibilities, or authority within FOL in effect prior to a Change in
Control, except in connection with the termination of Executive's service to
FOL for
14
<PAGE> 16
Cause, Disability, Normal Retirement or Approved Early Retirement, as a
result of Executive's death, or as a result of action by Executive, (B) an
assignment of any duties to Executive with FOL which are inconsistent with his
status, duties, responsibilities, and authorities in effect prior to a Change
in Control, (C) a decrease in annual base salary or other compensation
opportunities and maximums or benefits provided under this Agreement, (D) any
other failure by FOL or the Company to perform any material obligation under,
or breach by FOL or the Company of any material provision of, this Agreement,
(E) any failure to secure the agreement of any successor corporation or other
entity to FOL or to the Company to fully assume the obligations of FOL or the
Company, respectively, under this Agreement in a form reasonably acceptable to
Executive, and (F) any attempt by FOL or the Company to terminate Executive for
Cause which does not result in a valid termination for Cause, except in the
case that valid grounds for termination for Cause exist but are corrected as
permitted under Section 8(a).
9. Excise Tax Gross-Up.
In the event that there shall occur a Change in Control of FOL, if
Executive becomes entitled to one or more payments (with a "payment" including,
without limitation, the vesting of an option or other non-cash benefit or
property), whether pursuant to the terms of this Agreement or any other plan,
arrangement, or agreement with the Company, FOL, or any affiliated company (the
"Total Payments"), which are or become subject to the tax imposed by Section
4999 of the Internal Revenue Code of 1986, as amended (the "Code") (or any
similar tax that may hereafter be imposed) (the "Excise Tax"), FOL shall pay to
Executive at the time specified below an additional amount (the "Gross-up
Payment") (which shall include, without limitation, reimbursement for any
penalties and interest that may accrue in respect of such Excise Tax) such that
the net amount retained by Executive, after reduction for any Excise Tax
(including any penalties or interest thereon) on the Total Payments and any
federal, state and local income or employment tax and Excise Tax on the
Gross-up Payment provided for by this Section 9, but before reduction for any
federal, state, or local income or employment tax on the Total Payments, shall
be equal to the sum of (a) the Total Payments, and (b) an amount equal to the
product of any deductions disallowed for federal, state, or local income tax
purposes because of the inclusion of the Gross-up Payment in Executive's
adjusted gross income multiplied by the highest applicable marginal rate of
federal, state, or local income taxation, respectively, for the calendar year
in which the Gross-up Payment is to be made.
For purposes of determining whether any of the Total Payments will be
subject to the Excise Tax and the amount of such Excise Tax:
(i) The Total Payments shall be treated as "parachute payments" within
the meaning of Section 280G(b)(2) of the Code, and all "excess
parachute payments" within the meaning of Section 280G(b)(1) of the
Code shall be treated as subject to the Excise Tax, unless, and
except to the extent that, in the written opinion of independent
compensation consultants or auditors of nationally recognized
standing ("Independent Advisors") selected by FOL and reasonably
acceptable to Executive, the Total Payments (in whole or in part) do
not constitute parachute payments, or such excess parachute payments
(in whole or in part) represent reasonable compensation for services
actually rendered within the meaning of Section 280G(b)(4) of the
Code in excess of the base amount within the meaning of Section
280G(b)(3) of the Code or are otherwise not subject to the Excise
Tax;
15
<PAGE> 17
(ii) The amount of the Total Payments which shall be treated as subject
to the Excise Tax shall be equal to the lesser of (A) the total
amount of the Total Payments or (B) the total amount of excess
parachute payments within the meaning of section 280G(b)(1) of the
Code (after applying clause (i) above); and
(iii) The value of any non-cash benefits or any deferred payment or
benefit shall be determined by the Independent Advisors in accordance
with the principles of Sections 280G(d)(3) and (4) of the Code.
For purposes of determining the amount of the Gross-up Payment, Executive
shall be deemed (A) to pay federal income taxes at the highest marginal rate of
federal income taxation for the calendar year in which the Gross-up Payment is
to be made; (B) to pay any applicable state and local income taxes at the
highest marginal rate of taxation for the calendar year in which the Gross-up
Payment is to be made, net of the maximum reduction in federal income taxes
which could be obtained from deduction of such state and local taxes if paid in
such year (determined without regard to limitations on deductions based upon
the amount of Executive's adjusted gross income); and (C) to have otherwise
allowable deductions for federal, state, and local income tax purposes at least
equal to those disallowed because of the inclusion of the Gross-up Payment in
Executive's adjusted gross income. In the event that the Excise Tax is
subsequently determined to be less than the amount taken into account hereunder
at the time the Gross-up Payment is made, Executive shall repay to FOL at the
time that the amount of such reduction in Excise Tax is finally determined
(but, if previously paid to the taxing authorities, not prior to the time the
amount of such reduction is refunded to Executive or otherwise realized as a
benefit by Executive) the portion of the Gross-up Payment that would not have
been paid if such Excise Tax had been applied in initially calculating the
Gross-up Payment, plus interest on the amount of such repayment at the rate
provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise
Tax is determined to exceed the amount taken into account hereunder at the time
the Gross-up Payment is made (including by reason of any payment the existence
or amount of which cannot be determined at the time of the Gross-up Payment),
FOL shall make an additional Gross-up Payment in respect of such excess (plus
any interest and penalties payable with respect to such excess) at the time
that the amount of such excess is finally determined.
The Gross-up Payment provided for above shall be paid on the 30th day (or
such earlier date as the Excise Tax becomes due and payable to the taxing
authorities) after it has been determined that the Total Payments (or any
portion thereof) are subject to the Excise Tax; provided, however, that if the
amount of such Gross-up Payment or portion thereof cannot be finally determined
on or before such day, FOL shall pay to Executive on such day an estimate, as
determined by the Independent Advisors, of the minimum amount of such payments
and shall pay the remainder of such payments (together with interest at the
rate provided in Section 1274(b)(2)(B) of the Code), as soon as the amount
thereof can be determined. In the event that the amount of the estimated
payments exceeds the amount subsequently determined to have been due, such
excess shall constitute a loan by FOL to Executive, payable on the fifth day
after demand by FOL (together with interest at the rate provided in Section
1274(b)(2)(B) of the Code). If more than one Gross-up Payment is made, the
amount of each Gross-up Payment shall be computed so as not to duplicate any
prior Gross-up Payment. FOL shall have the right to control all proceedings
with the Internal Revenue Service that may arise in connection with the
determination and assessment of any Excise Tax and, at its sole option, FOL may
pursue or forego any and all administrative appeals, proceedings, hearings, and
conferences with any taxing authority in respect of such Excise Tax (including
any interest or penalties thereon); provided, however, that FOL's control over
any such proceedings shall be limited to issues with
16
<PAGE> 18
respect to which a Gross-up Payment would be payable hereunder, and Executive
shall be entitled to settle or contest any other issue raised by the Internal
Revenue Service or any other taxing authority. Executive shall cooperate with
FOL in any proceedings relating to the determination and assessment of any
Excise Tax and shall not take any position or action that would materially
increase the amount of any Gross-Up Payment hereunder.
10. Non-Competition and Non-Disclosure; Executive Cooperation.
(a) Non-Competition. Without the consent in writing of the Board of
Directors of FOL, upon termination of Executive's employment and cessation of
service to FOL for any reason, Executive will not, for a period of one year
thereafter, acting alone or in conjunction with others, directly or indirectly
(i) engage (either as owner, investor, partner, stockholder, employer,
employee, consultant, advisor or director) in any business in the continental
United States in which he has been directly engaged on behalf of FOL or any of
its subsidiaries; or has supervised as an executive thereof, during the last
two years prior to such termination and which is directly in competition with a
business then conducted by FOL or any of its subsidiaries; (ii) induce any
customers of FOL or any of its subsidiaries with whom Executive has had
contacts or relationships, directly or indirectly, during and within the scope
of his assignment and service to FOL or any of its subsidiaries, to curtail or
cancel their business with such companies or any of them; or (iii) induce, or
attempt to influence, any employee FOL or any of its subsidiaries to terminate
employment; provided, however, that the limitation contained in clause (i)
above shall not apply if Executive's employment is terminated as a result of a
termination by FOL without Cause following a Change in Control or a termination
by Executive for Good Reason following a Change in Control. The provisions of
subparagraphs (i), (ii) and (iii) above are separate and distinct commitments
independent of each of the other subparagraphs. It is agreed that the
ownership of not more than one percent of the equity securities of any company
having securities listed on an exchange or regularly traded in the
over-the-counter market shall not, of itself, be deemed inconsistent with
clause (i) of this paragraph (a).
(b) Non-Disclosure. Executive shall not, at any time during the Term and
thereafter (including following Executive's termination of employment with the
Company or service with FOL for any reason), disclose, use, transfer, or sell,
except in the course of employment with or other service to the Company, FOL,
any company or business other than FOL for which the Company provides
management services, and any subsidiary or affiliate thereof, any confidential
or proprietary information of the Company, FOL, any company or business other
than FOL for which the Company provides management services, and any subsidiary
or affiliate thereof so long as such information has not otherwise been
disclosed or is not otherwise in the public domain, except as required by law
or pursuant to legal process.
(c) Cooperation With Regard to Litigation. Executive agrees to cooperate
with the Company and FOL, during the Term and thereafter (including following
Executive's termination of employment with the Company or service with FOL for
any reason), by making himself available to testify on behalf of the Company,
FOL, any company or business other than FOL for which the Company provides
management services, or any subsidiary or affiliate thereof, in any action,
suit, or proceeding, whether civil, criminal, administrative, or investigative,
and to assist the Company, FOL, any company or business other than FOL for
which the Company provides management services, or any subsidiary or affiliate
thereof, in any such action, suit, or proceeding, by providing information and
meeting and consulting with the Board of Directors of the Company and the Board
of Directors of FOL, and their representatives or counsel, or representatives
or counsel of the Company, FOL, any company or business other than FOL for
which the Company provides management services, or any subsidiary or affiliate
thereof, as
17
<PAGE> 19
requested. The Company and FOL agree to reimburse Executive, on an
after-tax basis, for all expenses actually incurred in connection with his
provision of testimony or assistance.
(d) Release of Employment Claims. Executive agrees, as a condition to
receipt of the termination payments and benefits provided for in Sections 6 and
7 herein, that he will execute a release agreement, in a form satisfactory to
the Company and FOL, releasing any and all claims arising out of Executive's
employment by the Company and service by FOL (other than enforcement of this
Agreement).
(e) Survival. The provisions of this Section 10 shall survive the
termination or expiration of this Agreement in accordance with the terms
hereof.
11. Governing Law; Disputes; Arbitration.
(a) Governing Law. This Agreement is governed by and is to be construed,
administered, and enforced in accordance with the laws of the State of
Illinois, without regard to Illinois conflicts of law principles, except
insofar as the Delaware General Corporation Law and federal laws and
regulations may be applicable. If under the governing law, any portion of this
Agreement is at any time deemed to be in conflict with any applicable statute,
rule, regulation, ordinance, or other principle of law, such portion shall be
deemed to be modified or altered to the extent necessary to conform thereto or,
if that is not possible, to be omitted from this Agreement. The invalidity of
any such portion shall not affect the force, effect, and validity of the
remaining portion hereof. If any court determines that any provision of
Section 10 is unenforceable because of the duration or geographic scope of such
provision, it is the parties' intent that such court shall have the power to
modify the duration or geographic scope of such provision, as the case may be,
to the extent necessary to render the provision enforceable and, in its
modified form, such provision shall be enforced.
(b) Reimbursement of Expenses in Enforcing Rights. All reasonable costs
and expenses (including fees and disbursements of counsel) incurred by
Executive in seeking to enforce rights pursuant to this Agreement shall be paid
on behalf of or reimbursed to Executive promptly by the Company, whether or not
Executive is successful in asserting such rights; provided, however, that no
reimbursement shall be made of such expenses relating to any unsuccessful
assertion of rights if and to the extent that Executive's assertion of such
rights was in bad faith or frivolous, as determined by independent counsel
mutually acceptable to the Executive and the Company.
(c) Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
Chicago, Illinois by three arbitrators in accordance with the rules of the
American Arbitration Association in effect at the time of submission to
arbitration. Judgment may be entered on the arbitrators' award in any court
having jurisdiction. For purposes of entering any judgment upon an award
rendered by the arbitrators, the Company, FOL, and Executive hereby consent to
the jurisdiction of any or all of the following courts: (i) the United States
District Court for the Northern District of Illinois, (ii) any of the courts of
the State of Illinois, or (iii) any other court having jurisdiction. The
Company, FOL, and Executive further agree that any service of process or notice
requirements in any such proceeding shall be satisfied if the rules of such
court relating thereto have been substantially satisfied. The Company, FOL,
and Executive hereby waive, to the fullest extent permitted by applicable law,
any objection which it may now or hereafter have to such jurisdiction and any
defense of inconvenient forum. The Company, FOL, and Executive hereby agree
that a judgment upon an award rendered by the arbitrators may be enforced in
other jurisdictions by suit
18
<PAGE> 20
on the judgment or in any other manner provided by law. Subject to Section
11(b), the Company shall bear all costs and expenses arising in connection with
any arbitration proceeding pursuant to this Section 11. Notwithstanding any
provision in this Section 11, Executive shall be entitled to seek specific
performance of Executive's right to be paid during the pendency of any dispute
or controversy arising under or in connection with this Agreement.
(d) Interest on Unpaid Amounts. Any amounts that have become payable
pursuant to the terms of this Agreement or any decision by arbitrators or
judgment by a court of law pursuant to this Section 11 but which are not timely
paid shall bear interest, payable by the party owing such amounts, at the prime
rate in effect at the time such payment first becomes payable, as quoted by the
Bankers Trust Company.
12. Miscellaneous.
(a) Integration. This Agreement modifies and supersedes any and all prior
agreements and understandings among the parties hereto with respect to the
employment of Executive by the Company (and any affiliate) and assignment as a
senior executive of FOL (and any subsidiary), except for contracts relating to
compensation under executive compensation and employee benefit plans of the
Company and FOL and subject to the provisions of Section 1(b). This Agreement
(together with the Option Agreement) constitutes the entire agreement among the
parties with respect to the matters herein provided, and no modification or
waiver of any provision hereof shall be effective unless in writing and signed
by the parties hereto. Executive shall not be entitled to any payment or
benefit under this Agreement which duplicates a payment or benefit received or
receivable by Executive under such prior agreements and understandings with the
Company and/or FOL or under any benefit or compensation plan of the Company
and/or FOL.
(b) Non-Transferability. Neither this Agreement nor the rights or
obligations hereunder of the parties hereto shall be transferable or assignable
by Executive, except in accordance with the laws of descent and distribution or
as specified in Section 12(c). The Company and FOL may assign this Agreement
and the Company's and FOL's rights and obligations hereunder, and shall assign
this Agreement, to any Successor (as hereinafter defined) which, by operation
of law or otherwise, continues to carry on substantially the business of the
Company or FOL prior to the event of succession, and the Company and FOL, if
involved in any such event, shall, as a condition of the succession, require
such Successor to agree to assume the obligations of the predecessor and be
bound by this Agreement. For purposes of this Agreement, "Successor" shall
mean any person that succeeds to, or has the practical ability to control
(either immediately or with the passage of time), the business of the Company
or FOL directly, by merger or consolidation, or indirectly, by purchase of the
Company's or FOL's voting securities or all or substantially all of the Company
or FOL's assets, or otherwise.
(c) Beneficiaries. Executive shall be entitled to designate (and change,
to the extent permitted under applicable law) a beneficiary or beneficiaries to
receive any compensation or benefits payable hereunder following Executive's
death.
(d) Notices. Whenever under this Agreement it becomes necessary to give
notice, such notice shall be in writing, signed by the party or parties giving
or making the same, and shall be served on the person or persons for whom it is
intended or who should be advised or notified, by Federal Express or other
similar overnight service or by certified or registered mail, return receipt
requested, postage prepaid and addressed to such party at the address set
forth below or at such other address as may be designated by such party by like
notice:
19
<PAGE> 21
If to the Company:
Farley Industries, Inc.
5000 Sears Tower
233 South Wacker Drive
Chicago, Illinois 60606
Attention: Secretary
If to FOL:
Fruit of the Loom, Inc.
5000 Sears Tower
233 South Wacker Drive
Chicago, Illinois 60606
Attention: Secretary
With copies to:
Fruit of the Loom, Inc.
5000 Sears Tower
233 South Wacker Drive
Chicago, Illinois 60606
Attention: General Counsel
If to Executive:
Burgess D. Ridge
43 Ramsgate
Palos Park, Illinois 60464
If the parties by mutual agreement supply all other parties with telecopier
numbers for the purposes of providing notice by facsimile, such notice shall
also be proper notice under this Agreement. In the case of Federal Express or
other similar overnight service, such notice or advice shall be effective when
sent, and, in the cases of certified or registered mail, shall be effective 2
days after deposit into the mails by delivery to the U.S. Post Office.
20
<PAGE> 22
(e) Reformation. The invalidity of any portion of this Agreement shall
not deemed to render the remainder of this Agreement invalid.
(f) Headings. The headings of this Agreement are for convenience of
reference only and do not constitute a part hereof.
(g) No General Waivers. The failure of any party at any time to require
performance by any other party of any provision hereof or to resort to any
remedy provided herein or at law or in equity shall in no way affect the right
of such party to require such performance or to resort to such remedy at any
time thereafter, nor shall the waiver by any party of a breach of any of the
provisions hereof be deemed to be a waiver of any subsequent breach of such
provisions. No such waiver shall be effective unless in writing and signed by
the party against whom such waiver is sought to be enforced.
(h) No Obligation To Mitigate. Executive shall not be required to seek
other employment or otherwise to mitigate Executive's damages upon any
termination of employment or service to FOL; provided, however, that, to the
extent Executive receives from a subsequent employer health or other insurance
benefits that are substantially similar to the benefits referred to in Section
5(c) hereof, any such benefits to be provided by the Company or FOL to
Executive following the Term shall be correspondingly reduced.
(i) Offsets; Withholding. The amounts required to be paid by the Company
and/or FOL to Executive pursuant to this Agreement shall not be subject to
offset other than with respect to any amounts that are owed to the Company or
FOL by Executive due to his receipt of funds as a result of his fraudulent
activity. The foregoing and other provisions of this Agreement
notwithstanding, all payments to be made to Executive under this Agreement,
including under Sections 6 and 7, or otherwise by the Company or FOL will be
subject to required withholding taxes and other required deductions.
(j) Successors and Assigns. This Agreement shall be binding upon and
shall inure to the benefit of Executive, his heirs, executors, administrators
and beneficiaries, and shall be binding upon and inure to the benefit of the
Company and its successors and assigns and of FOL and its successors and
assigns.
13. Indemnification.
All rights to indemnification by the Company or FOL now existing in favor
of the Executive as provided in the Certificate of Incorporation or By-Laws of
the Company or FOL or pursuant to other agreements in effect on or immediately
prior to the Effective Date shall continue in full force and effect from the
Effective Date (including all periods after the expiration of the Term), and
the Company and FOL shall also advance expenses for which indemnification may
be ultimately claimed as such expenses are incurred to the fullest extent
permitted under applicable law, subject to any requirement that the Executive
provide an undertaking to repay such advances if it is ultimately determined
that the Executive is not entitled to indemnification; provided, however, that
any determination required to be made with respect to whether the Executive's
conduct complies with the standards required to be met as a condition of
indemnification or advancement of expenses under applicable law and the
Company's or FOL's Certificate of Incorporation, By-Laws, or other agreement
shall be made by independent counsel mutually acceptable to the Executive and
the indemnifying party (except to the extent otherwise required by law). After
the date hereof, the Company and FOL shall not amend its respective
Certificate of Incorporation or By-Laws or any agreement in any manner which
adversely affects
21
<PAGE> 23
the rights of the Executive to indemnification thereunder. Any provision
contained herein notwithstanding, this Agreement shall not limit or reduce any
rights of the Executive to indemnification pursuant to applicable law. In
addition, the Company and FOL will maintain directors' and officers' liability
insurance in effect and covering acts and omissions of Executive (including
during the Term and for a period of six years thereafter) on terms
substantially no less favorable as those in effect on the Effective Date (if
any).
<PAGE> 24
22
IN WITNESS WHEREOF, Executive has hereunto set his hand and the Company
and FOL have each caused this instrument to be duly executed as of the day and
year first above written.
FARLEY INDUSTRIES, INC.
By: /S/ Larry K. Switzer
------------------------------------
Name: Larry K. Switzer
Title: Executive Vice President and
Chief Financial Officer
FRUIT OF THE LOOM, INC.
By: /S/ Michael F. Bogacki
-------------------------------------
Name: Michael F. Bogacki
Title: Vice President and Controller
EXECUTIVE
/S/ Burgess D. Ridge
--------------------------------------------
Burgess D. Ridge
23
<PAGE> 25
Exhibit A
24
<PAGE> 1
EXHIBIT 18
February 12, 1998
Mr. Larry K. Switzer
Senior Executive Vice president and
Chief Financial Officer
Fruit of the Loom, Inc.
One Fruit of the Loom Drive
Bowling Green, KY 42102-9015
The Inventories Note of Notes to Consolidated Financial Statements of Fruit of
the Loom, Inc. included in its Form 10-K for the year ended December 31, 1997
describes a change in the method of accounting for inventories from the
last-in, first out (LIFO) method to the first-in, first-out (FIFO) method. You
have advised us that you believe the change is to a preferable method in your
circumstances primarily because the current production costs of inventory have
declined below LIFO costs and are not expected to increase in the foreseeable
future.
There are no authoritative criteria for determining a "preferable" method of
costing inventories based on the particular circumstances, however we conclude
that the change in the method of accounting for inventories from LIFO to FIFO
is 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
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF
FRUIT OF THE LOOM, INC.(1)
<TABLE>
<CAPTION>
JURISDICTION OF
INCORPORATION
---------------
<S> <C>
NWI Land Management Corporation............................. Delaware
Union Underwear Company, Inc................................ New York
SUBSIDIARIES OF UNION UNDERWEAR COMPANY, INC. (A NEW YORK
CORPORATION)
Aliceville Cotton Mill, Inc................................. Alabama
Apparel Outlet Stores, Inc.................................. Delaware
Artex Manufacturing Co, Inc................................. Delaware
AVX Management Co., Inc..................................... Kentucky
Brundidge Shirt Corporation................................. Alabama
The B.V.D. Licensing Corporation............................ Delaware
Camp Hosiery Company, Inc................................... Tennessee
Fayette Cotton Mill, Inc.................................... Alabama
FOL Caribbean Corporation................................... Delaware
Fruit of the Loom Arkansas, Inc............................. Arkansas
Fruit of the Loom Canada, Inc............................... Ontario
Fruit of the Loom Caribbean, Inc............................ Delaware
Fruit of the Loom, Inc...................................... New York
Fruit of the Loom Italy, S.r.1.............................. Italy
Fruit of the Loom Texas, Inc................................ Texas
FTL Receivables Company..................................... Delaware
FTL Sales Company, Inc...................................... New York
FTL Systems, Inc............................................ Tennessee
Gitano Fashions Limited..................................... Delaware
Greenville Manufacturing, Inc............................... Mississippi
Jet Sew Technologies, Inc................................... New York
Leesburg Knitting Mills, Inc................................ Alabama
Martin Mills, Inc........................................... Louisiana
Panola Mills, Inc........................................... Mississippi
Pro Player, Inc............................................. New York
Rabun Apparel, Inc.......................................... Georgia
Russell Hosiery Mills, Inc.................................. North Carolina
Salem Sportswear Corporation................................ Delaware
Sherman Warehouse Corporation............................... Mississippi
Superior Underwear Mill, Inc................................ New York
Superior Underwear Mills, Inc............................... Pennsylvania
Union Sales, Inc............................................ Delaware
Union Yarn Mills, Inc....................................... Alabama
Whitmire Manufacturing, Inc................................. South Carolina
Winfield Cotton Mill, Inc................................... Alabama
Woodville Apparel Corporation............................... Mississippi
SUBSIDIARIES OF ARTEX MANUFACTURING CO., INC. (A DELAWARE
CORPORATION)
FTL Investments, Inc........................................ Delaware
</TABLE>
- -------------------------
(1) Excludes some subsidiaries which, if considered in the aggregate as a single
subsidiary, would not constitute a "significant subsidiary" at December
31, 1997.
<PAGE> 2
SUBSIDIARIES OF
FRUIT OF THE LOOM, INC.(1) -- (CONTINUED)
<TABLE>
<CAPTION>
JURISDICTION OF
INCORPORATION
---------------
<S> <C>
SUBSIDIARIES OF FOL CARIBBEAN CORPORATION (A DELAWARE
CORPORATION)
FOL Holding, Ltd............................................ Cayman Islands
FTL Finance Ltd............................................. Cayman Islands
SUBSIDIARIES OF FOL HOLDING, LTD. (A CAYMAN ISLANDS
CORPORATION)
Fruit of the Loom Operating Ltd............................. Cayman Islands
FTL Sourcing Ltd............................................ Cayman Islands
SUBSIDIARIES OF FRUIT OF THE LOOM OPERATING LTD. (A CAYMAN
ISLANDS CORPORATION)
Confecciones Dos Caminos, S. De R.L. de C.V................. Honduras
El Porvenir Manufacturing, S. De R.L. de C.V................ El Salvador
Gitano of Jamaica Company................................... Jamaica
Manufacturas Villanueva S. De R.L. de C.V................... Honduras
Productos San Jose, S. De R.L. de C.V....................... Honduras
Superior Acquisition Corporation............................ Cayman Islands
Textiles Lourdes Limitada................................... El Salvador
SUBSIDIARIES OF SUPERIOR ACQUISITION CORPORATION (A CAYMAN
ISLANDS CORPORATION)
Confecciones de Lourdes S.A. de C.V......................... El Salvador
Confecciones dos Caminos, S.A. de C.V....................... Honduras
SUBSIDIARIES OF FRUIT OF THE LOOM CANADA, INC. (AN ONTARIO
CORPORATION)
FOL International........................................... Republic of Ireland
SUBSIDIARIES OF FOL INTERNATIONAL (A REPUBLIC OF IRELAND
CORPORATION)
FOL International GmbH...................................... Germany
FOL Ireland Limited......................................... Republic of Ireland
Fruit of the Loom AG........................................ Switzerland
Fruit of the Loom Benelux, S.A.............................. Belgium
Fruit of the Loom France, S.a.r.1........................... France
Fruit of the Loom Investments, Ltd.......................... United Kingdom
Fruit of the Loom International Sp. Z.o.o................... Poland
Fruit of the Loom-Maroc..................................... Morocco
Fruit of the Loom Nordic, AB................................ Sweden
Fruit of the Loom Spain, S.A................................ Spain
SUBSIDIARIES OF FOL IRELAND LIMITED (A REPUBLIC OF IRELAND
CORPORATION)
Fruit of the Loom International Limited..................... Republic of Ireland
Fruit of the Loom Distribution Limited...................... Republic of Ireland
SUBSIDIARIES OF FRUIT OF THE LOOM INVESTMENTS, LTD. (A
UNITED KINGDOM CORPORATION)
Fruit of the Loom, Ltd...................................... United Kingdom
Fruit of the Loom Management Co., Ltd....................... United Kingdom
Fruit of the Loom Manufacturing Co., Ltd.................... Northern Ireland
SUBSIDIARIES OF FRUIT OF THE LOOM INTERNATIONAL LIMITED (A
REPUBLIC OF IRELAND CORPORATION)
Protean..................................................... Republic of Ireland
All Screen & Design Limited................................. Republic of Ireland
</TABLE>
- -------------------------
(1) Excludes some subsidiaries which, if considered in the aggregate as a single
subsidiary, would not constitute a "significant subsidiary" at December
31, 1997.
<PAGE> 3
SUBSIDIARIES OF
FRUIT OF THE LOOM, INC.(1) -- (CONCLUDED)
<TABLE>
<CAPTION>
JURISDICTION OF
INCORPORATION
---------------
<S> <C>
SUBSIDIARIES OF FRUIT OF THE LOOM, INC. (A NEW YORK
CORPORATION)
Fruit of the Loom GmbH...................................... Germany
SUBSIDIARIES OF FRUIT OF THE LOOM GMBH (A GERMAN
CORPORATION)
Fruit of the Loom Distribution GmbH......................... Germany
SUBSIDIARIES OF FTL SALES COMPANY, INC. (A NEW YORK
CORPORATION)
FTL Regional Sales Company, Inc............................. Delaware
SUBSIDIARIES OF GITANO FASHIONS LIMITED (A DELAWARE
CORPORATION)
Dutton II Trading Limited................................... Hong Kong
Noel of Jamaica Limited..................................... Jamaica
SUBSIDIARIES OF DUTTON II TRADING LIMITED (A HONG KONG
CORPORATION)
P.S. Garment Limited........................................ Hong Kong
SUBSIDIARIES OF RUSSELL HOSIERY MILLS, INC. (A NORTH
CAROLINA CORPORATION)
Leesburg Yarn Mills, Inc.................................... Alabama
SUBSIDIARIES OF SALEM SPORTSWEAR CORPORATION (A DELAWARE
CORPORATION)
All-Star Manufacturing, Inc................................. Alabama
Rienzi Manufacturing, Inc................................... Mississippi
Rogersville Apparel, Inc.................................... Alabama
Salem Screen South, Inc..................................... Alabama
Salem Sportswear, Inc....................................... New Hampshire
SUBSIDIARIES OF SALEM SPORTSWEAR, INC. (A NEW HAMPSHIRE
CORPORATION)
Salem International, Inc. (FSC)............................. U.S. Virgin Islands
SUBSIDIARIES OF UNION SALES, INC. (A DELAWARE CORPORATION)
Fruit of the Loom Trading Company........................... Delaware
SUBSIDIARIES OF FRUIT OF THE LOOM TRADING COMPANY (A
DELAWARE CORPORATION)
Controladora Fruit of the Loom, S.A. de C.V................. Mexico
SUBSIDIARIES OF CONTROLADORA FRUIT OF THE LOOM, S.A. DE D.V.
(A MEXICAN CORPORATION)
Distribuidora FTL, S.A. de C.V.............................. Mexico
Distribuidora Fruit of the Loom, S.A. de C.V................ Mexico
Edificadora de Valle Hermoso, S.A. de C.V................... Mexico
Fruit of the Loom De Mexico, S.A. de C.V.................... Mexico
Inmobiliaria de Miguel Aleman, S.A. de C.V.................. Mexico
SUBSIDIARIES OF UNION YARN MILLS, INC. (AN ALABAMA
CORPORATION)
DeKalb Knitting Corporation................................. Alabama
</TABLE>
- -------------------------
(1) Excludes some subsidiaries which, if considered in the aggregate as a single
subsidiary, would not constitute a "significant subsidiary" at December
31, 1997.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Forms S-8 Nos. 33-18250, 33-39625, 33-57472, 33-50499, 333-00039, 333-09203 and
333-38953, and Forms S-3 Nos. 33-56376, 33-56378, and 333-31087) pertaining to
the Fruit of the Loom, Inc. 1987 Stock Option Plan, the 1989 Stock Grant Plan
and Long Term Bonus Plan, the 1992 Executive Stock Option Plan, the Fruit of the
Loom, Inc. Directors' Stock Option Plan, the 1995 Executive Incentive
Compensation Plan, the 1995 Non-Employee Directors' Stock Plan and the 1996
Incentive Compensation Plan, the registration of 800,000 shares of Class A
Common Stock, the registration of 1,550,391 shares of Class A Common Stock, the
registration of 1,800,000 shares of Class A Common Stock, $850,000,000 of Debt
Securities, Preferred Stock and/or Class A Common Stock, the registration of
1,000,000 shares of Class A Common Stock and the registration of 3,000,000
shares of Class A Common Stock, and in the related Prospectuses of our report
dated February 12, 1998, with respect to the consolidated financial statements
and schedule of Fruit of the Loom, Inc. and subsidiaries included in this Annual
Report (Form 10-K) for the year ended December 31, 1997.
ERNST & YOUNG LLP
Chicago, Illinois
March 26, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 16,100
<SECURITIES> 0
<RECEIVABLES> 110,000
<ALLOWANCES> 11,900
<INVENTORY> 847,500
<CURRENT-ASSETS> 1,015,600
<PP&E> 1,232,200
<DEPRECIATION> 717,800
<TOTAL-ASSETS> 2,483,100
<CURRENT-LIABILITIES> 525,200
<BONDS> 1,192,800
0
0
<COMMON> 319,000
<OTHER-SE> 103,100
<TOTAL-LIABILITY-AND-EQUITY> 2,483,100
<SALES> 2,139,900
<TOTAL-REVENUES> 2,139,900
<CGS> 1,871,400
<TOTAL-COSTS> 1,871,400
<OTHER-EXPENSES> 79,300
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 84,700
<INCOME-PRETAX> (451,700)
<INCOME-TAX> (66,300)
<INCOME-CONTINUING> (385,400)
<DISCONTINUED> (102,200)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (487,600)
<EPS-PRIMARY> (6.55)
<EPS-DILUTED> (6.55)
</TABLE>
<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>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 18,200
<SECURITIES> 0
<RECEIVABLES> 282,100
<ALLOWANCES> 19,500
<INVENTORY> 816,300
<CURRENT-ASSETS> 1,141,000
<PP&E> 1,546,200
<DEPRECIATION> 719,000
<TOTAL-ASSETS> 2,776,100
<CURRENT-LIABILITIES> 463,100
<BONDS> 1,118,400
0
0
<COMMON> 353,500
<OTHER-SE> 512,400
<TOTAL-LIABILITY-AND-EQUITY> 2,776,100
<SALES> 1,711,400
<TOTAL-REVENUES> 1,711,400
<CGS> 1,238,700
<TOTAL-COSTS> 1,238,700
<OTHER-EXPENSES> 42,400
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 62,500
<INCOME-PRETAX> 40,000
<INCOME-TAX> 21,500
<INCOME-CONTINUING> 18,500
<DISCONTINUED> (101,200)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (82,700)
<EPS-PRIMARY> (1.10)
<EPS-DILUTED> (1.10)
</TABLE>
<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>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 21,800
<SECURITIES> 0
<RECEIVABLES> 338,800
<ALLOWANCES> 26,200
<INVENTORY> 766,800
<CURRENT-ASSETS> 1,140,900
<PP&E> 1,552,900
<DEPRECIATION> 692,400
<TOTAL-ASSETS> 2,810,700
<CURRENT-LIABILITIES> 359,400
<BONDS> 1,155,400
0
0
<COMMON> 356,000
<OTHER-SE> 643,500
<TOTAL-LIABILITY-AND-EQUITY> 2,810,700
<SALES> 1,141,700
<TOTAL-REVENUES> 1,141,700
<CGS> 832,700
<TOTAL-COSTS> 832,700
<OTHER-EXPENSES> 6,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40,000
<INCOME-PRETAX> 58,700
<INCOME-TAX> 16,100
<INCOME-CONTINUING> 42,600
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 42,600
<EPS-PRIMARY> .56
<EPS-DILUTED> .55
</TABLE>
<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>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 18,400
<SECURITIES> 0
<RECEIVABLES> 197,100
<ALLOWANCES> 17,200
<INVENTORY> 768,000
<CURRENT-ASSETS> 1,006,500
<PP&E> 1,550,000
<DEPRECIATION> 665,600
<TOTAL-ASSETS> 2,695,800
<CURRENT-LIABILITIES> 285,700
<BONDS> 1,024,600
0
0
<COMMON> 457,400
<OTHER-SE> 625,500
<TOTAL-LIABILITY-AND-EQUITY> 2,695,800
<SALES> 501,000
<TOTAL-REVENUES> 501,000
<CGS> 358,200
<TOTAL-COSTS> 358,200
<OTHER-EXPENSES> 1,800
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,900
<INCOME-PRETAX> 31,700
<INCOME-TAX> 9,100
<INCOME-CONTINUING> 22,600
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,600
<EPS-PRIMARY> .30
<EPS-DILUTED> .29
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 18,700
<SECURITIES> 0
<RECEIVABLES> 187,900
<ALLOWANCES> 20,600
<INVENTORY> 664,500
<CURRENT-ASSETS> 888,600
<PP&E> 1,541,000
<DEPRECIATION> 641,100
<TOTAL-ASSETS> 2,593,400
<CURRENT-LIABILITIES> 326,700
<BONDS> 867,400
0
0
<COMMON> 477,300
<OTHER-SE> 616,500
<TOTAL-LIABILITY-AND-EQUITY> 2,593,400
<SALES> 2,447,400
<TOTAL-REVENUES> 2,447,400
<CGS> 1,724,500
<TOTAL-COSTS> 1,724,500
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 103,600
<INCOME-PRETAX> 178,200
<INCOME-TAX> 31,600
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 146,600
<EPS-PRIMARY> 1.92
<EPS-DILUTED> 1.90
</TABLE>
<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>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,000
<SECURITIES> 0
<RECEIVABLES> 496,800
<ALLOWANCES> 28,800
<INVENTORY> 723,100
<CURRENT-ASSETS> 1,239,500
<PP&E> 1,591,600
<DEPRECIATION> 635,600
<TOTAL-ASSETS> 3,008,300
<CURRENT-LIABILITIES> 318,100
<BONDS> 1,295,800
0
0
<COMMON> 485,500
<OTHER-SE> 580,600
<TOTAL-LIABILITY-AND-EQUITY> 3,008,300
<SALES> 1,866,400
<TOTAL-REVENUES> 1,866,400
<CGS> 1,298,800
<TOTAL-COSTS> 1,298,800
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 79,800
<INCOME-PRETAX> 184,000
<INCOME-TAX> 62,100
<INCOME-CONTINUING> 121,900
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 121,900
<EPS-PRIMARY> 1.60
<EPS-DILUTED> 1.59
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,300
<SECURITIES> 0
<RECEIVABLES> 523,000
<ALLOWANCES> 27,900
<INVENTORY> 756,400
<CURRENT-ASSETS> 1,295,100
<PP&E> 1,620,500
<DEPRECIATION> 634,900
<TOTAL-ASSETS> 3,104,000
<CURRENT-LIABILITIES> 338,100
<BONDS> 1,438,800
0
0
<COMMON> 475,200
<OTHER-SE> 537,100
<TOTAL-LIABILITY-AND-EQUITY> 3,104,000
<SALES> 1,238,400
<TOTAL-REVENUES> 1,238,400
<CGS> 865,000
<TOTAL-COSTS> 865,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 54,400
<INCOME-PRETAX> 122,000
<INCOME-TAX> 43,800
<INCOME-CONTINUING> 78,200
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 78,200
<EPS-PRIMARY> 1.03
<EPS-DILUTED> 1.02
</TABLE>
<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>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 5,400
<SECURITIES> 0
<RECEIVABLES> 322,100
<ALLOWANCES> 22,800
<INVENTORY> 838,800
<CURRENT-ASSETS> 1,200,500
<PP&E> 1,614,200
<DEPRECIATION> 605,900
<TOTAL-ASSETS> 3,033,500
<CURRENT-LIABILITIES> 316,900
<BONDS> 1,431,100
0
0
<COMMON> 470,700
<OTHER-SE> 491,400
<TOTAL-LIABILITY-AND-EQUITY> 3,033,500
<SALES> 506,200
<TOTAL-REVENUES> 506,200
<CGS> 333,200
<TOTAL-COSTS> 333,200
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,200
<INCOME-PRETAX> 56,900
<INCOME-TAX> 21,000
<INCOME-CONTINUING> 35,900
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35,900
<EPS-PRIMARY> .47
<EPS-DILUTED> .47
</TABLE>
