<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended July 4, 1999 Commission file number 0-1790
RUSSELL CORPORATION
(Exact name of registrant as specified in its charter)
Alabama 63-0180720
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
755 Lee Street, Alexander City, Alabama 35011
(Address of principal executive offices) (Zip Code)
(256) 500-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of each of the issuer's classes of common
stock.
Class Outstanding at August 13, 1999
Common Stock, Par Value $.01 Per Share 33,336,794 shares
(Excludes Treasury)
<PAGE> 2
RUSSELL CORPORATION
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Condensed Balance Sheets --
July 4, 1999 and January 2, 1999 2
Consolidated Condensed Statements of Operations --
Thirteen Weeks Ended July 4, 1999 and July 5, 1998 3
Twenty-six Weeks Ended July 4, 1999 and July 5, 1998 4
Consolidated Condensed Statements of Cash Flows --
Twenty-six Weeks Ended July 4, 1999 and July 5, 1998 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition 11
Item 3. Quantitative and Qualitative Disclosure of Market Risk 15
Part II. Other Information
Item 1. Legal Proceedings 16
Exhibit 27 - Financial Data Schedule 18
</TABLE>
-1-
<PAGE> 3
PART I - FINANCIAL INFORMATION
RUSSELL CORPORATION
Consolidated Condensed Balance Sheets
(Dollars in Thousands Except Shares and Per Share Amounts)
<TABLE>
<CAPTION>
July 4 January 2
1999 1999
----------- -----------
ASSETS (Unaudited) (Audited)
<S> <C> <C>
Current assets:
Cash $ 9,993 $ 13,852
Accounts receivable, net 184,438 179,307
Inventories - Note 2 416,038 371,579
Prepaid expenses and other current assets 38,333 19,976
----------- -----------
Total current assets 648,802 584,714
Property, plant & equipment 1,214,555 1,224,242
Less accumulated depreciation (729,166) (704,255)
----------- -----------
485,389 519,987
Other assets 53,036 48,863
----------- -----------
Total assets $ 1,187,227 $ 1,153,564
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 110,219 $ 12,908
Accounts payable and accrued expenses 108,184 101,784
Federal and state income taxes -- 1,989
Current maturities of long-term debt 32,214 32,214
----------- -----------
Total current liabilities 250,617 148,895
Long-term debt, less current maturities 317,693 323,043
Deferred liabilities 67,115 66,855
Commitments and contingencies -- --
Shareholders' equity:
Common Stock, par value $.01 per share; authorized
150,000,000 shares, issued 41,419,958 shares 414 414
Paid-in capital 48,294 48,294
Retained earnings 708,126 730,723
Treasury stock, at cost (7,692,164 shares at
7/4/99 and 5,900,564 shares at 1/2/99) (197,469) (160,093)
Accumulated other comprehensive loss (7,563) (4,567)
----------- -----------
Total shareholders' equity 551,802 614,771
----------- -----------
Total liabilities & shareholders' equity $ 1,187,227 $ 1,153,564
=========== ===========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
-2-
<PAGE> 4
RUSSELL CORPORATION
Consolidated Condensed Statements of Operations
(Dollars in Thousands Except Shares and Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
13 Weeks Ended
-----------------------------
July 4 July 5
1999 1998
----------- ------------
<S> <C> <C>
Net sales $ 260,449 $ 271,824
Costs and expenses:
Cost of goods sold 199,776 198,588
Selling, general and administrative expenses 49,399 55,415
Interest expense 6,489 7,352
Other - net (income) 2,033 (464)
----------- ------------
257,697 260,891
----------- ------------
Income before income taxes 2,752 10,933
Provision for income taxes 1,309 4,373
----------- ------------
Net income $ 1,443 $ 6,560
=========== ============
Average shares outstanding:
Basic 34,065,723 36,279,681
Diluted 34,145,263 36,333,324
Net income per common share:
Basic $ 0.04 $ 0.18
Diluted $ 0.04 $ 0.18
Cash dividends per common share $ 0.14 $ 0.14
</TABLE>
See accompanying notes to consolidated condensed financial statements.
-3-
<PAGE> 5
RUSSELL CORPORATION
Consolidated Condensed Statements of Operations
(Dollars in Thousands Except Shares and Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
26 Weeks Ended
-------------------------------
July 4 July 5
1999 1998
----------- ------------
<S> <C> <C>
Net sales $ 493,626 $ 528,053
Costs and expenses:
Cost of goods sold 376,571 382,387
Selling, general and administrative expenses 100,925 117,804
Interest expense 13,382 14,001
Other - net (income) 23,632 (369)
------------ ------------
514,510 513,823
------------ ------------
(Loss) income before income taxes (20,884) 14,230
(Benefit) provision for income taxes (7,976) 5,821
------------ ------------
Net (loss) income $ (12,908) $ 8,409
============ ============
Average shares outstanding:
Basic 34,514,500 36,341,613
Diluted 34,562,000 36,383,469
Net (loss) income per common share:
Basic $ (0.37) $ 0.23
Diluted $ (0.37) $ 0.23
Cash dividends per common share $ 0.28 $ 0.28
</TABLE>
See accompanying notes to consolidated condensed financial statements.
-4-
<PAGE> 6
RUSSELL CORPORATION
Consolidated Condensed Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
26 Weeks Ended
-----------------------
July 4 July 5
1999 1998
-------- --------
<S> <C> <C>
Cash Flows from Operating Activities:
Net (loss) income $(12,908) $ 8,409
Adjustments to reconcile net (loss) income to
cash used in operating activities:
Depreciation and amortization 35,160 37,135
Deferred income taxes (5,625) (4,385)
Loss on sale of property, plant & equipment 657 10
Restructuring charges 19,090 --
Changes in assets and liabilities:
Accounts receivable (5,865) 19,691
Inventories (46,983) (72,485)
Prepaid expenses and other current assets (5,147) (8,715)
Other assets (4,637) 1,331
Accounts payable and accrued expenses 7,641 (5,242)
Income taxes payable (11,192) 6,577
Pension and other deferred liabilities 1,869 8,712
-------- --------
Net cash used in operating activities (27,940) (8,962)
Cash Flows from Investing Activities:
Purchases of property, plant & equipment (22,518) (41,355)
Proceeds from the sale of property, plant & equipment 780 156
-------- --------
Net cash used in investing activities (21,738) (41,199)
Cash Flows from Financing Activities:
Short-term borrowings 97,892 63,851
Payments on long-term debt (5,350) (41)
Dividends on common stock (9,689) (10,192)
Cost of common stock for treasury (37,376) (6,673)
Distribution of treasury shares -- 34
-------- --------
Net cash provided by financing activities 45,477 46,979
Effect of exchange rate changes on cash 342 236
-------- --------
Net decrease in cash (3,859) (2,946)
Cash balance at beginning of period 13,852 8,609
-------- --------
Cash balance at end of period $ 9,993 $ 5,663
======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements
-5-
<PAGE> 7
RUSSELL CORPORATION
Notes to Consolidated Condensed Financial Statements
1. In the opinion of Management, the accompanying audited and unaudited
consolidated condensed financial statements contain all adjustments
(consisting of only normal recurring accruals) necessary to present
fairly the financial position as of July 4, 1999, and January 2, 1999,
and the results of operations and cash flows for the thirteen and
twenty-six week periods ended July 4, 1999, and July 5, 1998.
The accounting policies followed by the Company are set forth in Note
One to the Company's consolidated financial statements in Form 10-K for
the year ended January 2, 1999.
2. The components of inventory consist of the following: (In thousands)
<TABLE>
<CAPTION>
7/4/99 1/2/99
--------- ---------
<S> <C> <C>
Finished goods $ 338,387 $ 288,465
Work in process 66,348 58,182
Raw material 43,633 54,943
--------- ---------
448,368 401,590
LIFO reserve (32,330) (30,011)
--------- ---------
$ 416,038 $ 371,579
========= =========
</TABLE>
3. The results of operations for the twenty-six weeks ended July 4, 1999,
are not necessarily indicative of the results to be expected for the
full year. The financial statements for the twenty-six weeks ended July
4, 1999, include non-recurring charges of approximately $37,517,000 on
a pre-tax basis related primarily to severance accruals, asset
impairments, the relocation of certain personnel to Atlanta, and
adjustments to depreciation expense related to assets involved in the
Company's restructuring plans.
On July 22, 1998, the Company announced its intent to undertake a major
restructuring to improve the Company's global competitiveness. It was
further announced that management expected the Company to incur charges
associated with the restructuring and reorganization in the range of
$100 to $125 million after tax which would occur over a three year
period. The financial statements for the twenty-six weeks ended July 4,
1999 include charges amounting to $31,275,000 pre-tax, equivalent to
$.56 on an after-tax per share basis. The cumulative after-tax
restructuring and reorganization charges incurred, as of July 4, 1999
is approximately $65.9 million.
For the twenty-six weeks ended July 4, 1999, $7,913,000 of the pre-tax
charge was reflected in cost of goods sold associated with severance
accruals and the closing of certain operations. The balance of the
charges, $23,362,000, is reflected as a loss in other income and
expense and consists primarily of write-down of assets (machinery,
equipment and facilities) to fair value. Also for the same twenty-six
week period, cost of sales reflected additional depreciation cost of
$4,452,000 arising from a change in the estimated useful life of
certain assets, and selling, general and administrative expenses
reflected charges of $1,790,000 related to expenses associated with the
relocation of certain personnel to Atlanta.
-6-
<PAGE> 8
The following tables reflect restructuring, asset impairment and other charges
recorded in the 26 weeks ended July 4, 1999:
CLASSIFICATION IN STATEMENT OF OPERATIONS (In thousands)
<TABLE>
<CAPTION>
Cost of Selling, General Other
Goods Sold & Administrative Expense
---------- ---------------- -------
<S> <C> <C> <C>
Restructuring charges
Employee termination $ 6,110
Exit cost related to facilities 1,624 $ 485
------- ------- -------
$ 7,734 $ 0 $ 485
------- ------- -------
Asset impairment
Facilities in operation $ 179 $15,595
Facilities held for disposal 5,701
------- ------- -------
$ 179 $ 0 $21,296
------- ------- -------
Other unusual charges
Other $ 1,581
------- ------- -------
$ 0 $ 0 $ 1,581
------- ------- -------
Total $ 7,913 $ 0 $23,362
======= ======= =======
Grand Total $31,275
=======
</TABLE>
SEGMENTING RESTRUCTURING AND OTHER CHARGES (In thousands)
<TABLE>
<CAPTION>
Restructuring Asset
Charges Impairments Other
------------- ----------- ------
<S> <C> <C> <C>
Activewear $ 8,219 $21,475 $ 1,581
International
All Other
------- ------- -------
$ 8,219 $21,475 $ 1,581
======= ======= =======
Grand Total $31,275
=======
</TABLE>
ACTIVITY RELATED TO RESTRUCTURING (In thousands)
<TABLE>
<CAPTION>
Liability at Expense Amount Liability at
Cash Related: January 2, 1999 Incurred Paid July 4, 1999
--------------- -------- ------ ------------
<S> <C> <C> <C> <C>
Exit cost related to facilities $ 534 $ 2,109 $ 2,109 $ 534
Employee termination charges 4,567 6,110 9,071 1,606
Royalties on licenses 1,223 0 0 1,223
Asset impairment charges related to facilities 0 2,385 2,385 0
------- ------- ------- ------
$ 6,324 $10,604 $13,565 $3,363
======= ======= ======= ======
Non-cash related
Exit cost related to facilities $ 0
Asset impairment charges related to facilities 19,090
-------
$19,090
=======
</TABLE>
At July 4, 1999, the Company held for resale certain closed facilities
with an adjusted carrying value of approximately $21.8 million, which
have been included in property, plant and equipment.
-7-
<PAGE> 9
4. On November 17, 1998, a Jefferson County, Alabama jury returned a
verdict in Sullivan, et al. v. Russell Corporation, et al. Five
plaintiff families were awarded a total of $155,200 in compensatory
property damages and $52,398,000 in punitive damages from the three
defendants, Russell Corporation, Avondale Mills, Inc. and Alabama Power
Company. Allegations in the case were that two of the defendants',
including Russell Corporation, textile discharges into the Alexander
City, Alabama wastewater treatment plant, the subsequent treatment by
the City of Alexander City and discharge into Lake Martin constituted a
nuisance and indirect trespass. Alabama Power Company, the third
defendant, was alleged to have allowed the nuisance and trespass to
continue as the owner of the land under the lake. The plaintiffs
alleged mental anguish but no damages were granted for this claim. No
allegation of personal injury was made in the case.
The evidence was uncontroverted that Russell Corporation is in
compliance with its permit issued by the Alabama Department of
Environmental Management (ADEM) for the indirect discharge of its
wastewater to the Alexander City wastewater treatment plant. Therefore,
the Company believes that the verdict is contrary to the evidence
presented in the case and under applicable law, no damages should have
been awarded. The Company's appeal is pending before the Alabama
Supreme Court. If such appeal proves to be unsuccessful, damages
associated with this matter could have a significant adverse effect on
the Company's future results from operations and its ability to comply
with certain debt covenant requirements.
As management believes that the amount of the final verdict should be
significantly reduced, no immediate assessment can be made of the
impact on the Company's financial statements, liquidity or the
Company's ability to comply with its loan agreements. Accordingly, no
accrual for this contingency has been recorded as of July 4, 1999.
On February 23, 1999, a similar law suit was filed in Jefferson County,
Alabama by two former residents of the same residential subdivision.
The suit seeks unspecified damages for alleged nuisance and trespass.
The Company plans to vigorously defend this suit.
5. Earnings per share calculated in accordance with SFAS 128 are as
follows: (In thousands except shares and per share amounts)
<TABLE>
<CAPTION>
13 Weeks Ended 26 Weeks Ended
---------------------------- ------------------------------
7/4/99 7/5/98 7/4/99 7/5/98
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net income (loss) $ 1,443 $ 6,560 $ (12,908) $ 8,409
Basic Calculation:
Average shares outstanding 34,065,723 36,279.681 34,514,500 36,341,613
=========== =========== ============ ===========
Net income (loss) per share-basic $ 0.04 $ 0.18 $ (0.37) $ 0.23
=========== =========== ============ ===========
Diluted Calculation:
Average shares outstanding 34,065,723 36,279,681 34,514,500 36,341,613
Net common shares issuable
on exercise of certain stock options 79,540 53,643 47,500 41,856
----------- ----------- ------------ -----------
34,145,263 36,333,324 34,562,000 36,383,469
=========== =========== ============ ===========
Net income (loss) per share-diluted $ 0.04 $ 0.18 $ (0.37) $ 0.23
=========== =========== ============ ===========
</TABLE>
-8-
<PAGE> 10
6. For the thirteen and twenty-six week periods ended July 4, 1999 and
July 5, 1998, accumulated other comprehensive loss as shown in the
consolidated condensed balance sheets was comprised of foreign currency
translation adjustments. The components of comprehensive income, net of
tax, for these periods were as follows: (In thousands)
<TABLE>
<CAPTION>
13 Weeks Ended 26 Weeks Ended
--------------------- ---------------------
7/4/99 7/5/98 7/4/99 7/5/98
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income (loss) $ 1,443 $ 6,560 $(12,908) $8,409
Translation (loss) gain (688) (41) (2,996) 652
------- ------- -------- ------
Comprehensive income (loss) $ 755 $ 6,519 $(15,904) $9,061
======= ======= ======== ======
</TABLE>
7. Russell Corporation has three reportable segments: Activewear,
International and All Other. The following tables reflect segment
financial information for the 13 week periods ended July 4, 1999 and
July 5, 1998. (In thousands)
<TABLE>
<CAPTION>
13 Weeks ended July 4, 1999
---------------------------
Activewear International All Other Total
---------- ------------- --------- -----
<S> <C> <C> <C> <C>
Revenues from
external customers $193,686 $ 32,006 $ 34,757 $ 260,449
Earnings before interest
and income taxes
(EBIT) 9,540 1,080 4,011 14,631
Total assets 834,747 112,104 240,376 1,187,227
</TABLE>
<TABLE>
<CAPTION>
13 weeks ended July 5, 1998
---------------------------
Activewear International All Other Total
---------- ------------- --------- -----
<S> <C> <C> <C> <C>
Revenues from
external customers $204,954 $ 31,282 $35,588 $271,824
EBIT (loss) 13,940 (567) 4,912 18,285
</TABLE>
The Activewear EBIT for the 13 weeks ended July 4, 1999 reflects a
charge of $2,226,000 in additional depreciation expense for changes in
the expected useful lives of certain facilities.
In 1998, the Company did not allocate specific assets (i.e. Facilities)
to segments, therefore segment asset data is not available for the
periods ended on or before January 2, 1999.
The following tables reflect segment financial information for the 26
week periods ended July 4, 1999 and July 5, 1998.
<TABLE>
<CAPTION>
26 Weeks ended July 4, 1999
---------------------------
Activewear International All Other Total
---------- ------------- --------- -----
<S> <C> <C> <C> <C>
Revenues from
external customers $368,634 $61,743 $63,249 $493,626
EBIT 14,689 2,188 8,686 25,563
</TABLE>
-9-
<PAGE> 11
<TABLE>
<CAPTION>
26 Weeks ended July 5, 1999
---------------------------
Activewear International All Other Total
---------- ------------- --------- -----
<S> <C> <C> <C> <C>
Revenues from
external customers $398,686 $ 62,555 $66,812 $528,053
EBIT (loss) 29,449 (2,621) 9,662 36,490
</TABLE>
The Activewear EBIT for the 26 weeks ended July 4, 1999 reflects a
charge of $4,452,000 in additional depreciation expense for changes in the
expected useful lines of certain facilities.
A reconciliation of combined operating profit (loss) for the three
segments to consolidated (loss) income before taxes is as follows: (In
thousands)
<TABLE>
<CAPTION>
13 Weeks Ended 26 Weeks Ended
----------------------- ------------------------------
7/4/99 7/5/98 7/4/99 7/5/98
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Total EBIT for reportable segments $ 14,631 $ 18,285 $ 25,563 $ 36,490
Restructuring, impairment and
other unusual charges (5,390) -- (33,064) (8,259)
Interest expense (6,489) (7,352) (13,382) (14,001)
-------- -------- -------- --------
Income (loss) before taxes $ 2,752 $ 10,933 $(20,884) $ 14,230
======== ======== ======== ========
</TABLE>
-10-
<PAGE> 12
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
RESULTS OF OPERATIONS
The following is Management's Discussion and Analysis of certain
significant factors which have affected the Company's earnings during the
periods included in the accompanying consolidated condensed statements of
operations.
A summary of the period to period changes in the principal items
included in the consolidated condensed statements of operations is shown below:
<TABLE>
<CAPTION>
Comparison of
--------------------------------------------------
13 Weeks 26 Weeks
Ended 7/4/99 Ended 7/4/99
and 7/5/98 and 7/5/98
---------------------- ----------------------
Increase (Decrease)
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Net sales $(11,375) (4.2)% $(34,427) (6.5)%
Cost of goods sold 1,188 0.6 (5,816) (1.5)
Selling, general and
administrative expenses (6,016) (10.9) (16,879) (14.3)
Interest expense (863) (11.7) (619) (4.4)
Other income (2,497) n/a (24,001) n/a
Income before taxes (8,181) (74.8) (35,114) n/a
Provision for income taxes (3,064) (70.1) (13,797) n/a
Net income (5,117) (78.0) (21,317) n/a
</TABLE>
Net sales for the second quarter of 1999 were $260,449,000 down 4.2%
from the previous year's second quarter of $271,824,000. On a year to date
basis, sales were $493,626,000 versus $528,053,000; a decline of 6.5%. Of the
$34 million decline in year-to-date sales, 87% occurred in the Activewear
segment. In Activewear, approximately one third of the sales decline was related
to discontinued businesses, and more than $20 million related to business
declined for credit concerns (versus years past).
The All Other segment sales and income were generally in line with
expectations and the previous year. The International segment experienced a
sales increase over the second quarter of 1998. Due to the elimination of
certain operations and product lines, the segment produced EBIT in the current
quarter of $1.1 million versus a loss of $0.6 million the prior year.
Results for the current quarter include restructuring and
reorganization charges and other unusual expenses as part of the Company's
previously announced multi-year strategic plan. This plan was announced on July
22, 1998, and details of the plan are more fully discussed in the 1998 Annual
Report to Shareholders. Charges in the current quarter amounted to $4.4 million
of restructuring and reorganization expenses and $3.2 million of other unusual
charges.
-11-
<PAGE> 13
For the 13-week period ended July 4, 1999, gross margins declined to
23.3% versus 26.9% in the previous year. Gross margins were impacted by the
previously mentioned activities. For the quarter, $5,032,000 was reflected in
cost of goods sold for employee severance amounts associated with the closing of
three apparel operations facilities and accelerated depreciation on facilities
scheduled for closing. Excluding this impact, gross margins would have been
25.2%, below last year because of reductions in prices and product mix changes.
On a year-to-date basis, these changes were $12,368,000, implying a gross margin
of 26.2% versus 27.6% for 1998.
Selling, general and administrative expense includes approximately
$1,016,000 for the quarter, and $1,790,000 for the year related to unusual
expenses associated with the establishment of a dual headquarters in Atlanta.
Results for the prior year include approximately $8 million related to the
retirement, and subsequent replacement of the chairman, president and chief
executive officer of the Company reported in the first quarter of 1998.
During the second quarter of 1999, $1,568,000 is reflected as a loss in
other income and expense and consists of the write-down of certain assets
(machinery, equipment and facilities) to fair-value, again, as part of the
strategic plan. This brings the total loss in other income and expense to
$23,362,000 for the year.
Liquidity and Capital Resources
At the end of the quarter, the current ratio was 2.6, down from last
year's 3.4. Long-term debt to total capitalization was 36.5% and 35.1% at July
4, 1999 and July 5, 1998, respectively. Long-term debt to equity was 57.6% and
54.0% at July 4, 1999 and July 5, 1998, respectively.
Required cash for inventories, purchases of property, plant and
equipment, dividends, prepaid expenses and treasury stock purchases was provided
by short-term borrowings during the period ended July 4, 1999. The Company
maintained $287 million of informal lines of credit at the end of the quarter.
Borrowings against these lines were $110,219,000 at quarter end.
Approximately 741,000 shares were repurchased in the quarter ended July
4, 1999, bringing the total repurchased to 1,776,000 year to date. Approximately
2.2 million shares remain in the current authorization.
Contingencies
On November 17, 1998, a Jefferson County, Alabama jury returned a
verdict in Sullivan, et al. v. Russell Corporation, et al. Five plaintiff
families were awarded a total of $155,200 in compensatory property damages and
$52,398,000 in punitive damages from the three defendants, Russell Corporation,
Avondale Mills, Inc. and Alabama Power Company. Allegations in the case were
that two of the defendants', including Russell Corporation, textile discharges
into the Alexander City, Alabama wastewater treatment plant, the subsequent
treatment by the City of Alexander City and discharge into Lake Martin
constituted a nuisance and indirect trespass. Alabama Power Company, the third
defendant, was alleged to have allowed the nuisance and trespass to continue as
the owner of the land under the lake. The plaintiffs alleged mental anguish but
no damages were granted for this claim. No allegation of personal injury was
made in the case.
The evidence was uncontroverted that Russell Corporation is in
compliance with its permit issued by the Alabama Department of Environmental
Management (ADEM) for the indirect discharge of its wastewater to the Alexander
City wastewater treatment plant. Therefore, the Company believes that the
verdict is contrary to the evidence presented in the case and under applicable
law, no damages should have been awarded. The Company's appeal is pending before
the Alabama Supreme Court. If such appeals prove to be unsuccessful, damages
associated with this matter could have a significant adverse effect on the
Company's future results from operations and its ability to comply with certain
debt covenant requirements.
-12-
<PAGE> 14
As management believes that the amount of the final verdict should be
significantly reduced, no immediate assessment can be made of the impact on the
Company's financial statements, liquidity or the Company's ability to comply
with its loan agreements. Accordingly, no accrual for this contingency has been
recorded as of July 4, 1999.
On February 23, 1999, a similar law suit was filed in Jefferson County,
Alabama by two former residents of the same residential subdivision. The suit
seeks unspecified damages for alleged nuisance and trespass. The Company plans
to vigorously defend this suit.
Year 2000 Disclosure Statement
The Company has been involved in an organized program to assure that
the Company's information technology systems and related infrastructure will be
Year 2000 compliant. These efforts began in July of 1996 with the assignment of
a full-time coordinator of Year 2000 Compliance. The project initially involved
the computer applications which support the parent company.
The initial phase of the corporate project involved the inventory and
analysis of existing information systems. From this analysis a plan for
remediation was formulated and put into action in January, 1997. This plan is
now 100% complete in bringing these systems into Year 2000 compliance with
23,641 actual hours expended against a planned 22,319 hours. The Company met its
planned completion date for testing and implementation of this phase on June 30,
1999.
The second phase of the corporate project was to inventory, analyze and
test the infrastructure that involves imbedded microchips. This phase began in
January, 1998, and has identified 3,739 unique products (hardware and models,
software and releases) that are being certified through vendor certification and
testing where possible. To date 3,276 or 88% of these products have been
certified. The planned completion date for this phase is the end of the third
quarter of this year.
The Year 2000 corporate project was expanded into a third phase to
include the Cross Creek and DeSoto Mills subsidiaries under the same project
format and phases as the parent company. DeSoto Mills is 100% complete in
remediation of business and manufacturing systems and has certified 67% of
infrastructure products. The Cross Creek subsidiary is 100% complete on
remediation of information systems and has certified 81% of infrastructure
products.
The fourth phase of the Year 2000 project involves the identification,
analysis and certification of suppliers of materials and services to the
Company. There have been 2,044 suppliers identified and individually contacted
by questionnaires, letters and telephone contacts to determine their compliance
status and ability to service the Company in the Year 2000. If it is determined
that a supplier will be in non-compliance or of questionable compliance,
contingency plans will be developed to address the need, including the selection
and introduction of new suppliers.
The fifth phase of the Year 2000 project involves an assessment of the
major customers of the Company and their Year 2000 readiness. A questionnaire
was mailed in November 1998 to 200 customers to begin the assessment of their
Year 2000 status and their potential as a viable customer in the Year 2000.
Response has been positive in this area with most customers achieving compliance
by June, 1999.
The Year 2000 efforts in the Russell UK subsidiary involve the
replacement of purchased application software. The first phase of this project
was to identify and select an information systems software solution that would
meet the business needs of the subsidiary and resolve the Year 2000 issue. The
software has been selected with implementation underway and scheduled to be
completed by the end of the third quarter. The second phase of the Russell UK
project was the identification of infrastructure products. To date, 456 products
were identified with 86% being certified as compliant.
-13-
<PAGE> 15
Management has determined that the costs for correction of the Year
2000 issues are expected to total approximately $1,895,000 with $1,750,000 being
expended through the end of the second quarter of 1999. The Year 2000 project is
being funded out of normal operating funds.
Senior management receives monthly updates on the progress of this
project by each individual phase. The Year 2000 compliance project is a priority
project for the Company and especially the IT department. Other IT projects,
including upgrade of certain existing systems and implementation of new systems,
continue while the Year 2000 project is being accomplished.
Management of the Company believes it has an effective program in place
to resolve the Year 2000 issue in a timely manner. As previously noted, the
Company has not yet completed all necessary phases of the Year 2000 program. In
the event that the Company does not complete any additional phases, the Company
may be unable to take customer orders, manufacture and ship products, invoice
customers or collect payments. In addition, disruptions in the economy generally
resulting from Year 2000 issues could also materially adversely affect the
Company. The Company could be subject to litigation for computer systems product
failure, for example, equipment shutdown or failure to properly date business
records. The amount of potential liability and lost revenue cannot be reasonably
estimated at this time.
Business units are in the process of developing contingency plans for
processes, equipment and suppliers. The planned completion date is the end of
the third quarter of 1999.
This document contains Year 2000 Readiness Disclosures as defined in
the Year 2000 Information and Readiness Disclosure Act, P.L.105-271 (Oct 19,
1998). Accordingly, this disclosure, in whole or in part, is not, to the extent
provided in the act, admissible in any state or federal civil action to prove
the accuracy or truth of any Year 2000 statements contained herein.
Impact of Recently Issued Accounting Standards
In June 1998, the FASB issued Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities. The Company plans to adopt the
new Statement effective January 1, 2001. The Statement will require the Company
to recognize all derivatives on the balance sheet at fair value. Derivatives
that are not hedges must be adjusted to fair value through income. If a
derivative is a hedge, depending on the nature of the hedge, changes in the fair
value of the derivative will either be offset against the change in fair value
of the hedged asset, liability, or firm commitment through earnings, or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. The Company has not yet completed its
analysis of the impact, if any, that Statement 133 may have on its financial
statements.
FORWARD LOOKING INFORMATION
This quarterly report on Form 10-Q, including management's discussion
and analysis, contains certain statements that describe the Company's beliefs
concerning future business conditions and the outlook for the Company based upon
currently available information. Wherever possible, the Company has identified
these "forward-looking" statements (as defined in Section 21E of the Securities
and Exchange Act of 1934) by words such as "anticipates," "believes,"
"estimates," "expects" and similar phrases. These forward-looking statements are
based upon assumptions the Company believes are reasonable; however, such
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. Some forward looking
statements concern anticipated sales levels, cost estimates and resulting
earnings that are not necessarily indicative of subsequent periods due to among
other matters, the mix of future orders, at once orders and product mix changes,
which may vary significantly from quarter to quarter and due to other risk
factors listed from time to time in the Company's SEC reports and announcements.
The Company assumes no obligation to update publicly any forward-looking
statements whether as a result of new information, future events or otherwise.
-14-
<PAGE> 16
Item 3. Quantitative and Qualitative Disclosure of Market Risk
The Company is exposed to market risks relating to fluctuations in
interest rates, currency exchange rates and commodity prices. There has been no
material change in the Company's market risks that would significantly affect
the disclosures made in the Form 10-K for the year ended January 2, 1999.
-15-
<PAGE> 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Contingencies
On November 17, 1998, a Jefferson County, Alabama jury returned a
verdict in Sullivan, et al. v. Russell Corporation, et al. Five plaintiff
families were awarded a total of $155,200 in compensatory property damages and
$52,398,000 in punitive damages from the three defendants, Russell Corporation,
Avondale Mills, Inc. and Alabama Power Company. Allegations in the case were
that two of the defendants', including Russell Corporation, textile discharges
into the Alexander City, Alabama wastewater treatment plant, the subsequent
treatment by the City of Alexander City and discharge into Lake Martin
constituted a nuisance and indirect trespass. Alabama Power Company, the third
defendant, was alleged to have allowed the nuisance and trespass to continue as
the owner of the land under the lake. The plaintiffs alleged mental anguish but
no damages were granted for this claim. No allegation of personal injury was
made in the case.
The evidence was uncontroverted that Russell Corporation is in
compliance with its permit issued by the Alabama Department of Environmental
Management (ADEM) for the indirect discharge of its wastewater to the Alexander
City wastewater treatment plant. Therefore, the Company believes that the
verdict is contrary to the evidence presented in the case and under applicable
law, no damages should have been awarded. The Company's appeal is pending before
the Alabama Supreme Court. If such appeals prove to be unsuccessful, damages
associated with this matter could have a significant adverse effect on the
Company's future results from operations and its ability to comply with certain
debt covenant requirements.
As management believes that the amount of the final verdict should be
significantly reduced, no immediate assessment can be made of the impact on the
Company's financial statements, liquidity or the Company's ability to comply
with its loan agreements. Accordingly, no accrual for this contingency has been
recorded as of July 4, 1999.
On February 23, 1999, a similar law suit was filed in Jefferson County,
Alabama by two former residents of the same residential subdivision. The suit
seeks unspecified damages for alleged nuisance and trespass. The Company plans
to vigorously defend this suit.
-16-
<PAGE> 18
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RUSSELL CORPORATION
---------------------------------------
(Registrant)
Date August 17, 1999 /s/ Eric N. Hoyle
--------------- ---------------------------------------
Eric N. Hoyle, Executive Vice President
and Chief Financial Officer
(For the Registrant and as
Principal Financial Officer)
-17-
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