10-K 1 c61465e10-k.txt ANNUAL REPORT 1 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------- FORM 10-K ------------------------- [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 1-15873 FRUIT OF THE LOOM, LTD. (Exact name of registrant as specified in its charter) CAYMAN ISLANDS NONE (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization)
PO BOX 866GT, 3rd FLOOR, ANDERSON SQUARE BUILDING, SHEDDEN ROAD GRAND CAYMAN, CAYMAN ISLANDS, BWI (Address of principal executive offices, including Zip Code) Registrant's telephone number, including area code: (345) 945-8210 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- Class A Ordinary Shares, $.01 par value None
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ As of March 31, 2001, there were outstanding 66,955,542 shares of the Registrant's Class A Ordinary Shares, $.01 par value, and four of the Registrant's Class B Ordinary Shares, $.01 par value. The aggregate market value of the Registrant's Class A Ordinary Shares held by nonaffiliates at March 31, 2001 was approximately $6,700,000. See "ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS." -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 2 FRUIT OF THE LOOM, LTD. 2000 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS
PAGE ---- PART I Item 1. Business.................................................... 1 Item 2. Properties.................................................. 15 Item 3. Legal Proceedings........................................... 15 Item 4. Submission of Matters to a Vote of Security Holders......... 17 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................................... 18 Item 6. Selected Financial Data..................................... 20 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 22 Item 7A. Qualitative and Quantitative Disclosure about Market Risk... 37 Item 8. Financial Statements and Supplementary Data................. 39 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure (None)............................. 104 PART III Item 10. Directors and Executive Officers of the Registrant.......... 105 Item 11. Executive Compensation...................................... 107 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 111 Item 13. Certain Relationships and Related Transactions.............. 112 PART IV Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K......................................................... 114
i 3 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 that describe the Company's beliefs concerning future business conditions and the outlook for the Company based on currently available information. Wherever possible, the Company has identified these "forward looking" statements (as defined in Section 21E of the Securities Exchange Act of 1934) by words such as "anticipates," "believes," "estimates," "expects," and similar expressions. These forward looking statements are subject to risks, uncertainties and other factors that could cause the Company's actual results, performance or achievements to differ materially from those expressed in, or implied by, these statements. These risks, uncertainties and other factors include, but are not limited to, the following: the ability of the Company to continue operating as a going concern and successfully emerge from bankruptcy, the Company's ability to successfully execute its corporate strategy in a competitive marketplace, 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 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 successful planning and execution of production necessary to maintain inventories at levels sufficient to meet customer demand, the Company's effective income tax rate, the success of planned advertising, marketing and promotional campaigns, political and regulatory uncertainty that could influence international activities, the resolution of legal proceedings and other contingent liabilities, and weather conditions in the locations in which the Company manufactures and sells its products. Please refer to the Company's documents on file with the Securities and Exchange Commission and the U.S. Bankruptcy Court in Delaware for other risks and uncertainties and for additional information that the Company is required to report to the U.S. Bankruptcy Court on a monthly basis. 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 EXECUTIVE SUMMARY Fruit of the Loom, Ltd., a Cayman Islands company ("FTL Ltd."), Fruit of the Loom, Inc., a Delaware corporation ("FTL Inc.") and 32 direct and indirect subsidiaries, debtors and debtors-in-possession (collectively, the "Debtors") commenced reorganization cases (the "Reorganization Cases") by filing petitions for relief under chapter 11 ("Chapter 11"), title 11 of the United States Code, 11 U.S.C. sec.sec. 101-1330 (as amended, the "Bankruptcy Code") on December 29, 1999 (the "Petition Date") in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). On December 30, 1999, FTL Ltd. also commenced a proceeding under the Companies Law (1998 Revision) (the "Cayman Proceeding") in the Grand Court of the Cayman Islands (the "Cayman Court"), and Joint Provisional Liquidators ("JPL's) were appointed by the Cayman Court. The Reorganization Cases are being jointly administered, for procedural purposes only, before the Bankruptcy Court under Case No. 99-4497(PJW). Pursuant to Sections 1107 and 1108 of the Bankruptcy Code, FTL Ltd. and FTL Inc., as debtors and debtors-in-possession, have continued to manage and operate their assets and businesses subject to the supervision and orders of the Bankruptcy Court, pending confirmation of the joint plan of reorganization (the "Reorganization Plan") contained in the disclosure statement (the "Disclosure Statement") filed with the Bankruptcy Court on March 15, 2001, pursuant to Section 1125 of the Bankruptcy Code and filed as Exhibit 99.2 to the Company's Form 8-K dated March 22, 2001. On March 22, 2001, the JPL's, on behalf of FTL Ltd. only, filed with the Cayman Court a scheme of arrangement ("Scheme of Arrangement") in the Cayman Proceeding. See "JOINT PLAN OF REORGANIZATION" AND "SCHEME OF ARRANGEMENT." Because FTL Ltd. and FTL Inc. are operating as debtors-in-possession under the Bankruptcy Code, the existing directors and officers of FTL Ltd. and FTL Inc. continue to govern and manage the operations of FTL Ltd. and FTL Inc., respectively, subject to the supervision and orders of the Bankruptcy Court. The existing directors and officers of FTL LTD. ONLY, 1 4 ITEM 1. BUSINESS -- (CONTINUED) continue to govern and manage the operations of FTL Ltd., subject to the supervision of the JPL's and the Cayman Court. See "ITEM 3. LEGAL PROCEEDINGS." FTL Ltd. (together with all of its subsidiaries including FTL Inc. and its subsidiaries, collectively, "Fruit of the Loom" or the "Company") is a leading international, vertically integrated basic apparel company, selling products principally under the Fruit of the Loom(R) brand name. It is the market leader in men's and boys' underwear, and is one of the largest producers of activewear for the screenprint T-shirt and fleece market, women's and girls' underwear, casualwear, and childrenswear. As a fully integrated manufacturer, Fruit of the Loom performs most of its own yarn spinning, knitting, cloth finishing, cutting, sewing and packaging. Management considers Fruit of the Loom's primary strengths to be its excellent brand name recognition, ability to deliver large volumes of quality basic apparel at a low cost, and strong relationships with major discount chains and mass merchandisers. Management believes that consumer awareness of the value, quality and competitive prices of Fruit of the Loom's products will benefit Fruit of the Loom in any retail environment where consumers are value conscious. In the period leading up to the Petition Date, Fruit of the Loom's indebtedness increased substantially in connection with several acquisitions which did not achieve the cash flow levels anticipated at the time of the acquisitions. Proceeds from the issuance of debt were also used to finance significant legal settlements and environmental obligations related to discontinued operations, as well as open-market stock repurchases. After these expenditures, Fruit of the Loom was left with a highly leveraged capital structure. Changes in the competitive environment, inventory adjustments in 1998 and operating problems in 1999 reduced cash flows, resulting in covenant defaults and inadequate liquidity to continue to fund the ongoing operations of the business and debt requirements. As a result of these and other factors described below, Fruit of the Loom sought protection under the Bankruptcy Code to permit it to fix its operating problems and capital structure. See "EVENTS LEADING TO THE REORGANIZATION CASES". During the past year, Fruit of the Loom's current management has achieved significant operational improvements in manufacturing, disposed of non-productive assets, consolidated production facilities to improve capacity utilization and reduce fixed costs, improved service levels to customers, eliminated or reduced product lines and stockkeeping units ("SKU's") to create efficiencies in manufacturing and distribution costs and improve working capital management, simplified manufacturing and lowered corporate overhead and SG&A spending. JOINT PLAN OF REORGANIZATION AND SCHEME OF ARRANGEMENT Fruit of the Loom has filed its Reorganization Plan dated March 15, 2001, with the Bankruptcy Court. On March 22, 2001, the JPL's also filed, as to FTL Ltd. ONLY, a scheme of arrangement in the Cayman Proceeding, which is coordinated with, and contingent upon the effectiveness of, the Reorganization Plan. The Reorganization Plan (and, as to FTL Ltd. only, the Scheme of Arrangement) sets forth how claims against and equity interests in Fruit of the Loom will be treated upon the emergence of Fruit of the Loom from Chapter 11 and is contingent upon the effectiveness of the Scheme of Arrangement. The Reorganization Plan and the Scheme of Arrangement are a result of extensive negotiations with the informal committee of noteholders and the unofficial committee of prepetition bank lenders, together representing the prepetition secured creditors, and other constituencies in the Reorganization Cases and reflects the operational turnaround of Fruit of the Loom and strategic focus on core businesses, primarily men's and boys' underwear and activewear, since the Petition Date. This Disclosure Statement filed with the Reorganization Plan describes certain aspects of the Reorganization Plan and the Scheme of Arrangement, Fruit of the Loom's business operations, significant events occurring prior to and during the Reorganization Cases and related matters. This summary is intended solely as a summary of the provisions of the Reorganization Plan and certain matters related to Fruit of the Loom's business. FOR A COMPLETE UNDERSTANDING OF THE REORGANIZATION PLAN, YOU 2 5 ITEM 1. BUSINESS -- (CONTINUED) SHOULD READ THE DISCLOSURE STATEMENT, THE REORGANIZATION PLAN, AND THE EXHIBITS AND SCHEDULES THERETO IN THEIR ENTIRETY. In March 2001, the unsecured creditors' committee filed a motion to stay all proceedings in the Reorganization Plan and the Disclosure Statement until a determination is made as to whether various claims are secured or unsecured. The Bankruptcy Court has set the request for hearing on April 19, 2001. Fruit of the Loom opposes the motion. THE PLAN AND THE SCHEME OF ARRANGEMENT HAVE THE SUPPORT OF FRUIT OF THE LOOM, THE JPLS, THE INFORMAL COMMITTEE OF NOTEHOLDERS, AND THE UNOFFICIAL COMMITTEE OF PREPETITION BANK LENDERS. OVERVIEW OF REORGANIZATION PLAN The following is a brief summary of certain material provisions of the Reorganization Plan. These descriptions are qualified in their entirety by the provisions of the Reorganization Plan. The Reorganization Plan embodies a series of interconnected and interdependent settlements among the various creditor constituencies and between Fruit of the Loom and its creditors. The Reorganization Plan is premised upon effecting a substantial deleveraging and strengthening of the balance sheet of Fruit of the Loom through the conversion of substantially all of Fruit of the Loom's allowed prepetition secured creditor claims (which aggregate approximately $1,200,000,000) into 99% of the new common stock of reorganized Fruit of the Loom through the formation and establishment of a new Caymans Islands company, "new FTL Ltd." on or as soon as practicable after the effective date of the Reorganization Plan (the "Effective Date"). In addition, holders of allowed prepetition secured creditor claims will receive unsecured notes of reorganized Fruit of the Loom in the aggregate principal amount of $275,000,000, subject to adjustment up to an amount not to exceed $300,000,000 which will be guaranteed by new FTL Ltd. and each of the reorganizing subsidiaries. The distributions under the Reorganization Plan reflect Fruit of the Loom's belief that the value of Reorganized Fruit of the Loom is less than the aggregate amount of the allowed prepetition secured creditor claims. Holders of unsecured claims will receive 1% of the new common stock of reorganized Fruit of the Loom on or as soon as practicable after the Effective Date. Holders of allowed prepetition secured creditor claims and allowed unsecured claims will also receive common stock of new FTL Ltd. which they will be deemed to contribute to New FTL Ltd. Holders of allowed trade creditor class claims will receive payments totaling up to 25% of the principal amount of their allowed claims; provided that the maximum aggregate amount paid to holders of allowed trade creditor class claims may not exceed $1,500,000. FINALLY, HOLDERS OF CLASS A ORDINARY SHARES AND CLASS B ORDINARY SHARES OF FTL LTD. AND PREFERRED AND COMMON STOCK OF FTL INC. WILL NOT RECEIVE ANY DISTRIBUTION ON ACCOUNT OF THEIR EQUITY INTERESTS. THE CLASS A AND CLASS B ORDINARY SHARES OF FTL LTD. WILL BE CANCELLED IN CONJUNCTION WITH THE WINDING UP OF FTL LTD. PURSUANT TO THE SCHEME OF ARRANGEMENT. IN ADDITION, THE PREFERRED AND COMMON STOCK OF FTL INC. WILL BE CANCELLED PURSUANT TO THE REORGANIZATION PLAN. The Reorganization Plan also contemplates, and is contingent upon obtaining, a senior secured post-Effective Date working capital and letter of credit facility in the amount of $425,000,000, which will be guaranteed by new FTL Ltd. and each of the material subsidiaries, to fund working capital and other requirements for Reorganized Fruit of the Loom. OVERVIEW OF SCHEME OF ARRANGEMENT The following is a brief summary of certain material terms of the provisions of the Scheme of Arrangement. These descriptions are qualified in their entirety by the provisions of the Scheme of Arrangement. Terms are as defined in the Scheme of Arrangement. The Scheme of Arrangement is applicable ONLY to FTL Ltd. It provides for a transfer on the Scheme of Arrangement effective date of substantially all of the assets of FTL Ltd. to a newly formed Cayman Islands company, New FTL Ltd. The only asset remaining in FTL Ltd. will be the right of unsecured creditors of FTL Ltd. who have proven their claims to receive the distribution to which they would be entitled as a holder of an 3 6 ITEM 1. BUSINESS -- (CONTINUED) Allowed Claim against FTL Ltd. under the Reorganization Plan. Holders of allowed claims against FTL Ltd. under the Reorganization Plan will only be entitled to a single distribution on account of each allowed claim. The Scheme of Arrangement contemplates and is contingent upon confirmation of the Reorganization Plan. EVENTS LEADING TO THE REORGANIZATION CASES CHANGES IN THE COMPETITIVE ENVIRONMENT Beginning in the mid 1990s, prices for certain basic apparel products declined as a result of market consolidation and increased competition. Consolidation among the mass merchandisers in the retailing industry enabled those merchandisers to obtain price reductions from many of their suppliers, as the volume of the merchandisers' purchases increased as a percentage of the total market. Changes in international trade agreements, including the North American Free Trade Agreement ("NAFTA") adopted in 1995 (which have been expanded by the Caribbean Basin Initiative ("CBI") adopted in late 2000), removed certain tariff, quota, and other artificial trade barriers thereby increasing the supply of basic apparel products and consequently reducing prices. Fruit of the Loom was able to partially offset these price decreases with reductions in manufacturing costs. Nonetheless, these changes in industry dynamics negatively affected Fruit of the Loom's margins and cash flows. NON-PERFORMING ACQUISITIONS In 1993 and 1994, FTL Inc. commenced a strategy of diversification into the sports licensing apparel market with the acquisitions of Salem Sportswear, Inc. ("Salem Sportswear"), Artex Manufacturing Co., Inc. ("Artex") and Pro Player, Inc. ("Pro Player") and ventured into women's jeanswear manufacturing and marketing with the acquisition of the Gitano(R) brand. These acquisitions cost approximately $350,000,000, primarily financed by debt. These acquisitions were intended to add higher gross margin apparel products to the overall Fruit of the Loom product portfolio. However, none of the businesses achieved the cash flow anticipated at the time of acquisition and were dilutive to Fruit of the Loom's earnings over the period these businesses were owned. NON-OPERATING USE OF CASH During the period from 1995 through 1999, Fruit of the Loom used approximately $450,000,000 for non-operating purposes, including legal settlements, environmental liabilities related to operations sold by a former parent corporation, guarantees of a former subsidiary's indebtedness, and an open-market stock repurchase plan. All of these uses resulted in higher debt, combined with the debt incurred to fund non-performing acquisitions. INVENTORY ADJUSTMENTS AND OPERATING PROBLEMS The removal of certain trade barriers, as described above, provided domestic suppliers with an opportunity to reduce manufacturing costs by outsourcing the labor intensive components of production to offshore locations with lower labor rates. Fruit of the Loom participated in this opportunity, transitioning approximately 90% of its remaining assembly production to Mexico, Honduras and El Salvador between 1995 and 1999. Operating problems during the fourth quarter of 1998 resulted from a decision by Fruit of the Loom to virtually shut down manufacturing operations for several weeks to reduce inventory levels. As a result of these layoffs, Fruit of the Loom experienced significant turnover of highly trained employees. The replacement workers were less experienced, requiring additional training, which caused inefficiencies in production. When manufacturing recommenced in the first quarter of 1999, the level of irregular inventory increased. The inefficiency in output from these plants and the need to rebuild inventory to service unexpectedly strong 4 7 ITEM 1. BUSINESS -- (CONTINUED) demand for key retail and activewear products, resulted in inventory shortages, which negatively impacted customer order fulfillment and required Fruit of the Loom to incur additional production, shipping and distribution costs. In order to maintain customer service at acceptable levels, Fruit of the Loom increased its usage of external contractors, overtime labor, and time-sensitive and expensive methods of transporting materials and products, all of which resulted in approximately $300,000,000 of manufacturing cost overruns above budgeted costs. During the critical selling season of spring (Activewear/tee shirts) and fall (Retail/back to school) 1999, Fruit of the Loom experienced significant servicing and delivery problems with its customers; Fruit of the Loom found itself out of inventory or with an improper mix of inventory, and thus unable to fill customers' orders on a timely basis. This resulted in a loss of sales, as customers turned to other suppliers for short-term needs. The high cost of manufacturing and the lower sales contributed to a loss from continuing operations of almost $500,000,000. COVENANT DEFAULTS AND LIQUIDITY In 1999, Fruit of the Loom recorded charges for provisions and losses on the sale of closeout and irregular inventory, the impairment of certain European manufacturing facilities, severance costs and other writedowns and reserves totaling approximately $350,000,000. These charges resulted in covenant defaults under the Company's working capital facility. The combination of poor operating performance in 1999 and the increased debt resulting from non-core acquisitions and other nonoperating uses of cash flow, resulted in a severe liquidity problem prior to the Petition Date. Fruit of the Loom's cash shortfall resulted in difficulties with key suppliers on payment terms, interruptions to the manufacturing operations, and covenant defaults under the various financings. In 1999, Fruit of the Loom's total financings, including secured and unsecured public debt, aggregated in excess of $1,400,000,000. The interest payments on that debt aggregated over $100,000,000 per year. The likely curtailment of production due to difficulties in obtaining key supplies, the inability to pay vendors on a timely basis, and other considerations resulted in the Board of Directors' approval for Fruit of the Loom to seek protection under the Bankruptcy Code on December 29, 1999, commencing the Reorganization Cases. CHANGES MADE TO THE BUSINESS SINCE THE PETITION DATE Shortly before the Petition Date, a new management team was retained for Fruit of the Loom, to replace certain of the prior senior management to identify and rectify the underlying causes of many of the operational difficulties experienced by Fruit of the Loom. Management has also implemented a refocused business strategy, as described more fully below, to become the lowest-cost producer and marketer of high volume basic apparel, and thereby grow its core business. Since the Petition Date, management has made dramatic changes to Fruit of the Loom's operations and business plan, including: (i) disposing of non-core businesses, (ii) consolidating production capacity, thereby reducing fixed costs, (iii) improving manufacturing processes and efficiency, thereby reducing variable costs, (iv) eliminating unprofitable product lines, (v) improving inventory controls, (vi) improving customer order fill rates, thereby restoring customer satisfaction, and (vii) rejecting unfavorable contracts and leases. Also see "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." CURRENT BUSINESS STRATEGY Fruit of the Loom's business strategy is to become the lowest cost producer and marketer of high volume basic apparel and to grow its core business within that segment. Fruit of the Loom plans to continue to focus on the high volume basic apparel segment due to its relatively low fashion risk, the relationships it has developed with high volume retailers and wholesale distributors, and the competitive advantage Fruit of the Loom believes it has attained through its low cost, vertically integrated operations. 5 8 ITEM 1. BUSINESS -- (CONTINUED) Management believes that remaining among the lowest cost producers of basic apparel is essential to maintaining and increasing sales and profits. In this regard, Fruit of the Loom's strategy is to continue to implement the cost reduction initiatives begun in 2000, and to further drive down costs through new initiatives, including: (i) evaluating and rationalizing product categories and SKU's to create further efficiencies in manufacturing and distribution costs and working capital management; (ii) consolidating production capacity to improve capacity utilization and reduce fixed costs; (iii) reducing variable costs; and (iv) consolidating high cost assembly operations into lower cost operations. In addition to those improvements described above, Fruit of the Loom plans to invest approximately $200,000,000 from 2001 through 2003, primarily in state-of-the-art yarn and textile equipment that will enable it to increase economies of scale and manufacturing efficiencies, and incremental expansion of existing capacity. Fruit of the Loom believes that it is among the market leaders in branded, basic apparel due to its reputation for consistent quality and value. As such, Fruit of the Loom plans to leverage the Fruit of the Loom(R) brand to increase sales volume in 2001 and beyond. It is focused on reinvesting in advertising and promotions to strengthen the Fruit of the Loom(R) brand and increase volume. Fruit of the Loom plans to introduce new products that achieve certain volume minimums and profit targets, as well as explore high volume private label programs consistent with existing product lines. Fruit of the Loom also plans to utilize licensing to supplement its product line in non-core areas in smaller domestic and international markets. In Europe, Fruit of the Loom intends to maintain its imprint market share leadership and realize volume increases by refocusing on basic apparel products and participating in anticipated growth of its key retail accounts. DISPOSITION OF NON-CORE BUSINESSES Since the Petition Date, under the direction of the new management team, Fruit of the Loom completed a strategic review of its businesses and decided to focus its management and financial resources on its retail and activewear business units. As a result of this decision, Fruit of the Loom divested its Pro Player/Sports and Licensing Division, Gitano and Jet Sew operating businesses in 2000 and generated a total of approximately $45,000,000 in cash proceeds, and eliminated the operating losses generated by those business units. In addition, prior to the Petition Date, Fruit of the Loom had been operating under a number of licensing agreements which have been discontinued since the commencement of the Reorganization Cases. These agreements primarily relate to Pro Player/Sports and Licensing Division and Gitano businesses, and have either been rejected or allowed to lapse. Pro Player/Sports and Licensing Division Pro Player/Sports and Licensing Division manufactured and marketed sports licensing apparel under the Pro Player(R) and Fans Gear(R) brands pursuant to license agreements with professional sports leagues and major colleges and universities. Fruit of the Loom acquired these companies (Pro Player, Salem Sportswear, and Artex) when values in that segment of the industry were at peak levels. The Sports and Licensing Division performed significantly below expectations during 1998 and 1999. Fruit of the Loom believes that the underperformance of the Sports and Licensing Division was caused, in part, by a shift in consumer preferences, which reduced demand for sports licensed products, created overcapacity, which resulted in many bankruptcies and liquidations throughout the industry, including the 1999 liquidation of Starter Corp., the largest sports apparel company at that time. In addition, Fruit of the Loom believes that high guaranteed minimum royalties to licensors and high marketing expenses of the Sports and Licensing Division contributed to the underperformance of the Division. In 1999, the Sports and Licensing Division reported operating losses of approximately $31,000,000. As a result of the structural conditions described above and management's assessment that the business of Pro 6 9 ITEM 1. BUSINESS -- (CONTINUED) Player/Sports and Licensing Division could not become profitable, the Board of Directors directed Lazard Freres & Co. ("Lazard"), Fruit of the Loom's investment banker and financial advisor, to market the Sports and Licensing Division as a going concern. Ultimately, the prices offered to acquire the Sports and Licensing Division as a going concern were less than the estimated proceeds of liquidation, and the operations were wound down and liquidated pursuant to an Order of the Bankruptcy Court dated February 28, 2000. The disposition of assets of Pro Player/Sports and Licensing Division resulted in net cash proceeds to Fruit of the Loom of approximately $25,000,000 during the year ended December 30, 2000. Gitano In 1994, Fruit of the Loom acquired Gitano Fashions, Ltd. ("Gitano"), which manufactured women's and children's jeans and related sportswear under the Gitano(R) trade name and trademarks. Gitano never achieved the necessary sales volume and operating economies to become an efficient and profitable product line. The Board of Directors directed Lazard to seek a purchaser of the Gitano business assets on a going concern basis. After an auction and pursuant to an order dated June 15, 2000, the Bankruptcy Court approved the sale of substantially all of the Gitano assets to VF Corporation for an initial cash purchase price of $17,200,000 and additional consideration of $2,200,000 for additional inventory (pursuant to a separate Order dated August 18, 2000), which was delivered over time. Thereafter, by order dated November 14, 2000, Fruit of the Loom obtained Bankruptcy Court approval to sell certain specialized laundry equipment, previously used by Gitano, to Ibis de Mexico, S.A. de C.V. for a purchase price of $625,000. This sale closed on December 11, 2000. Jet Sew FOL R&D, Inc., formerly known as Jet Sew Technologies, Inc. ("Jet Sew"), was engaged in the business of designing, manufacturing, and marketing automatic, modular sewing systems that are used to manufacture textile and apparel machinery. As a result of a loss in the year ended December 30, 2000 and the non-core nature of its business, Fruit of the Loom determined that Jet Sew should be sold on a going concern basis, to best maximize value. Pursuant to an order dated December 13, 2000, Fruit of the Loom agreed to sell the assets of Jet Sew for a purchase price of $3,500,000, subject to adjustment. Pursuant to that Order, the sale closed on December 18, 2000. ELIMINATION OF UNPROFITABLE PRODUCT LINES Before the Petition Date, the number of style and product variations ("SKUs") offered by Fruit of the Loom increased as a result of prior management's strategy to, among other things, introduce higher fashion apparel. The proliferation of SKUs reduced manufacturing efficiency, as average production runs decreased and the number of changeovers increased. In 2000, Fruit of the Loom reduced total SKUs by 40% in order to improve manufacturing efficiencies and refocus production on higher volume styles. REDUCTION IN FIXED COSTS THROUGH CONSOLIDATION OF MANUFACTURING CAPACITY In 2000, Fruit of the Loom closed two yarn mills and two textile plants. During the first quarter in 2001, an additional yarn mill was closed. These closures were done to reduce textile capacity to the level of Fruit of the Loom's current manufacturing needs, after the discontinuation of unprofitable businesses and product lines. Textile production was realigned in Fruit of the Loom's remaining textile plants which have lower costs and lower labor turnover. The closure of these plants and the resulting rationalization of production costs are expected to create greater financial flexibility for Fruit of the Loom through fixed overhead cost reductions. Fruit of the Loom believes the remaining plants can produce the volumes projected for 2001, with future capacity growth being generated by capital expenditures and efficiency improvements. In addition, Fruit of the Loom has 7 10 ITEM 1. BUSINESS -- (CONTINUED) reestablished balanced production, where peak demand is partially serviced by the build-up of core inventory during the off-peak season, which results in greater manufacturing and cost efficiencies. Fruit of the Loom has also closed certain of its assembly operations in Mexico, shifting that production to lower cost operations in Central America. On October 25, 2000, the Bankruptcy Court authorized Fruit of the Loom to wind-down certain assembly operations located in Mexico, and to amend and restate certain prepetition agreements by and among the Debtors, certain non-debtor Fruit of the Loom affiliates and certain unrelated parties, all pursuant to a master termination agreement. At the present time, the only operating assembly facility in Mexico involves the assembly of fleece garments. As part of the master termination agreement, that operation will be acquired by Fruit of the Loom. IMPROVEMENTS IN MANUFACTURING PROCESSES AND EFFICIENCY Since the Petition Date, under the current management team, Fruit of the Loom has achieved a material improvement in virtually all operational categories in the United States and the Caribbean largely as a result of the centralization of key functional areas and the resulting standardization and simplification of manufacturing processes. Fruit of the Loom has also significantly reduced its manufacturing cost structure by largely replacing contract assembly with owned assembly capacity in Central America. Management believes that the owned assembly plants are generally more efficient than outside contractors. Approximately 37% of 1999 annual production was assembled by 37 separate outside contract manufacturers. Through 2000, Fruit of the Loom continued to reduce its reliance on contract manufacturers, as productivity and overall efficiency increased at Fruit of the Loom's owned assembly plants. As of the end of 2000, Fruit of the Loom has reduced the number of outside contractors to 4, from a high of 37, resulting in lower production costs for 2000. In 2000, the percentage of garments assembled at contractors was reduced to 27% with the remaining 73% at Company owned facilities. The Company expects the percentage of garments assembled at contractors to be less than 20% in 2001. DESCRIPTION OF BUSINESS OVERVIEW Fruit of the Loom is a vertically integrated manufacturer of basic apparel products, performing most of its own spinning, knitting, cloth finishing, cutting, sewing and packaging. Fruit of the Loom's primary strengths are its excellent brand recognition, strong relationships with major discount chains and mass merchandisers, and its ability to produce significant volumes of products at a low cost. North America is Fruit of the Loom's principal market, comprising more than 80% of consolidated net sales in each of the last three years. For the North American market, capital-intensive spinning, knitting and cutting operations are located in highly automated facilities in the United States, while labor-intensive sewing and finishing operations are located in lower labor cost facilities in Central America, Mexico and the Caribbean. For the European market, capital intensive manufacturing operations are done in Ireland and Northern Ireland; sewing is principally performed in Morocco. Fruit of the Loom has organized its business into three functional areas: (1) retail products (59% of 2000 net sales); (2) activewear products (30% of 2000 net sales); and (3) Europe (11% of 2000 net sales). Fruit of the Loom's products are generally sold to major discount chains, mass merchandisers and large wholesalers; Fruit of the Loom is among the market leaders in those markets. Fruit of the Loom has an estimated 45% domestic mass market share in men's and boys' underwear and an estimated 13% domestic mass market share in women's and girls' underwear. In 2000, Fruit of the Loom's domestic activewear market share was approximately 28% for T-shirts sold through wholesalers and 20% for fleecewear. In order to create a more efficient global tax and financial structure, on March 4, 1999, FTL Ltd. became the parent holding company of FTL Inc. pursuant to a reorganization (the "Cayman Reorganization") approved by the stockholders of FTL Inc. on November 12, 1998. FTL Inc. transferred ownership of its 8 11 ITEM 1. BUSINESS -- (CONTINUED) Central American subsidiaries that perform essentially all of Fruit of the Loom's sewing and finishing operations for the U.S. market to FTL Caribe Ltd., a Cayman Islands company directly and wholly owned by FTL Ltd. As originally planned, when fully implemented, the Cayman Reorganization would have transferred ownership from FTL Inc. to FTL Ltd., or a non-United States subsidiary of FTL Ltd., of essentially all businesses and subsidiaries of FTL Inc. located outside of the United States (other than certain operations in Canada and Mexico) and would have transferred beneficial ownership of certain trademarks from FTL Inc. to FTL Ltd. The Cayman Reorganization was not fully implemented before the Petition Date; neither the trademarks nor FTL Inc.'s indirect European subsidiaries were transferred to FTL Ltd. The Company extensively markets its activewear and, to a lesser extent, other products outside the United States, principally in Europe, Canada, Japan and Mexico. In order to serve these markets, the Company has manufacturing plants in Canada, the Republic of Ireland and Northern Ireland (United Kingdom), as well as manufacturing operations in Morocco where cut fabrics from the Republic of Ireland are sewn and returned to Europe for sale. PRODUCTS Retail Products Fruit of the Loom is a market leader in a number of product areas within the retail segment of the apparel industry. Fruit of the Loom is the mass market leader in men's and boys' underwear, with a 2000 domestic share in that distribution channel of approximately 45%. Fruit of the Loom is also one of the branded market leaders in the fragmented women's and girls' underwear market, with a 2000 domestic share in the mass merchandise market of approximately 13%. Only one other competitor had more than a 6% market share in that market in 2000. Men's and Boys' Underwear. Fruit of the Loom offers a broad array of men's and boys' underwear including briefs, boxer shorts, boxer briefs, T-shirts and A-shirts, colored and "fashion" underwear. These products are primarily sold to major discount chains and mass merchandisers and represent approximately 42% of Fruit of the Loom's domestic sales. Women's and Girls' Underwear. Fruit of the Loom offers a variety of women's and girls' underwear under the Fruit of the Loom(R) brand name. These products are primarily sold to major discount chains and mass merchandisers and represent approximately 5% of Fruit of the Loom's domestic sales. Casualwear. Fruit of the Loom markets knitwear (tees, tanks and shorts) and fleecewear (sweatshirts and pants) to mass merchandisers as casualwear primarily under the Fruit of the Loom(R) brand names. Casualwear is produced in separate Spring and Fall lines with updated color selections for each of the men's, women's, boys' and girls' categories. The casualwear market is highly fragmented. Fruit of the Loom holds the number two branded mass market share in knitwear products with an approximate 5% market share, and the number three branded mass market share in fleece products with an approximate 11% market share. Childrenswear. Fruit of the Loom offers a broad array of childrenswear including decorated underwear (generally with pictures of licensed movie or cartoon characters) under the FUNPALS(R), FUNGALS(TM) and UNDEROOS(R) brands. Activewear Fruit of the Loom produces and sells undecorated T-shirts and fleecewear under the Fruit of the Loom(R), LOFTEEZ(R) and BEST(TM) by Fruit of the Loom(R) labels. These products are manufactured in a variety of styles and colors and are sold to large wholesale distributors, who break down bulk purchases for resale to the 9 12 ITEM 1. BUSINESS -- (CONTINUED) screenprint market and specialty retailers. In 2000, Fruit of the Loom's domestic market share was approximately 28% for T-shirts sold through wholesalers and 20% for fleecewear. Europe Approximately 80% of Fruit of the Loom's European sales are in undecorated T-shirts, fleecewear, and knit sportshirts sold under the Screen Stars By Fruit of the Loom(R) label. These products are sold to wholesale distributors and screenprinters throughout Europe. European retail sales, which includes a variety of outerwear styles sold under the Fruit of the Loom(R) label, account for approximately 20% of Fruit of the Loom's European business. In 2000, Fruit of the Loom began testing a line of Fruit of the Loom(R) men's underwear for the European market and is restructuring its retail sales efforts to focus on high volume basic styles. MANUFACTURING Fruit of the Loom is one of the largest vertically integrated apparel manufacturers in the world. As a result of its integrated production process, substantially all functions required to produce finished apparel and fabrics can be performed by Fruit of the Loom without reliance on outside contractors. The combination of efficient textile operations and low cost offshore sewing has established Fruit of the Loom as one of the lowest cost producers in the basic apparel market. As a vertically integrated operation, Fruit of the Loom converts raw fibers into finished apparel products primarily in its own facilities. Fruit of the Loom is one of the largest private purchasers of cotton in the United States, which management believes creates an advantage in managing raw material cost. Fruit of the Loom spins cotton into yarn and converts it into fabric. The fabric is then dyed, finished and cut before it is sewn into finished garments. Fruit of the Loom uses its automated textile manufacturing facilities in the United States for yarn spinning, knitting and cloth finishing. This textile process is capital intensive and requires minimal labor. In 2000, over 99% of the garments produced by the Company for the domestic market were sewn in Central America, Mexico or the Caribbean basin. Of this total, approximately 27% were assembled at contractors and approximately 73% 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. Included in Company owned/operated facilities are goods assembled at a contractor which assembled garments solely for the Company. Of this total, 44% were assembled in Honduras, 42% in El Salvador and 14% in Mexico. European textile manufacturing operations are located in Ireland, and labor intensive assembly operations are located in lower cost Moroccan facilities. DISTRIBUTION Fruit of the Loom sells its products to approximately 100 major accounts, including all major discount chains and mass merchandisers, wholesale clubs and screenprinters. Fruit of the Loom's largest 100 customers accounted for approximately 77% of Fruit of the Loom's net sales in 2000. Sales to Fruit of the Loom's largest and second largest customers (Wal-Mart Stores, Inc. and Kmart Corporation, respectively) each represented greater than 10% of Fruit of the Loom's net sales in 2000. While the loss of either of these customers would have a significant impact on the Company, the Company believes it has good relations with these customers. In 2000, approximately 87% of Fruit of the Loom's domestic products sold through retail channels were sold to major discount chains and mass merchandisers, approximately 2% were sold to department stores, approximately 6% were sold to specialty stores, and approximately 5% were sold to other customers. Fruit of the Loom's products are principally sold by a nationally organized direct sales force of full-time employees. Fruit of the Loom's products are shipped from four (4) principal domestic distribution centers. Management believes that one of Fruit of the Loom's primary strengths is its long-standing, excellent relationships with major discount chains and mass merchandisers. These mass merchants accounted for 10 13 ITEM 1. BUSINESS -- (CONTINUED) approximately 60% of men's and boys' underwear and approximately 60% of women's and girls' underwear sold in the United States in 2000. As described above, in these mass market channels, Fruit of the Loom supplied approximately 45% of men's and boys' underwear and 13% of women's and girls' underwear. Fruit of the Loom attributes its success within this channel to its high brand name recognition and customer loyalty as well as its ability to supply large quantities of high quality, value-oriented products from its strategically located distribution centers. In addition, Fruit of the Loom has implemented electronic data interchange with its major mass merchandizing and discount customers, which enables Fruit of the Loom to satisfy these customers' requirements for flexible product deliveries. TRADEMARKS AND LICENSES Fruit of the Loom markets and sells products under trademarks owned by the Company, as well as trademarks licensed to the Company by unrelated third parties. The Company also licenses certain trademarks it owns to certain unrelated third parties. The Company owns the FRUIT OF THE LOOM(R), BVD(R), SCREEN STARS(R), BEST(TM), LOFTEEZ(R), and certain other trademarks, which are registered or protected by common law in the United States and in many foreign countries. A recent survey(2) found that the Fruit of the Loom brand is one of the most recognized of 90 men's apparel brands, with 94% brand awareness. The high brand awareness associated with Fruit of the Loom(R) branded products has been developed over the years through marketing programs that emphasize the quality and consistency of the brand. Products sold under Company owned trademarks account for approximately 95% of Fruit of the Loom's overall retail revenues. Additionally, Fruit of the Loom receives significant royalty income on the licensing of its Fruit of the Loom(R) and BVD(R) brands for soft goods lines, both domestically and internationally. The Company owns the FUNPALS(R), FUNGALS(TM) and UNDEROOS(R) trademarks which are registered or protected by common law and used on certain childrenswear. Fruit of the Loom also operates under a number of license agreements from unrelated third parties, primarily utilized for Fruit of the Loom's childrenswear products. These license agreements provide Fruit of the Loom with the right to manufacture and market apparel decorated with licensed characters, which include BATMAN(TM), SUPERMAN(TM), SPIDER-MAN(TM), SESAME STREET(TM), SCOOBY-DOO(TM), TELETUBBIES(TM), POKEMON(TM), BOB THE BUILDER(TM), JACKIE CHAN ADVENTURES(TM), SAILOR MOON(TM), SABRINA: THE ANIMATED SERIES(TM) and POWER RANGERS(TM). BATMAN(TM) and SUPERMAN(TM) are trademarks of D.C. Comics, in care of Warner Bros. Consumer Products, a division of Time Warner Entertainment Company L.P., used under license. TELETUBBIES(TM) is a trademark of Ragdoll Productions, Ltd., used under license from The itsy bitsy Entertainment Corporation. SPIDER-MAN(TM) is a trademark of Marvel Characters, Inc., used under license from Spider-Man Merchandising L.P. SCOOBY-DOO(TM) and all related characters and elements are trademarks of Hanna Barbera Productions, Inc., used under license from Warner Bros. Consumer Products, a division of Time Warner Entertainment Company L.P. SESAME STREET(TM) is a trademark of Children's Television Workshop, used under license. BOB THE BUILDER(TM) is a trademark of HIT Entertainment PLC and Keith Chapman, used under license from HIT Entertainment PLC. JACKIE CHAN ADVENTURES(TM) is a trademark of Adelaide Productions, Inc. used under license. SAILOR MOON(TM) is a trademark of DIC Entertainment, L.P., used under license. SABRINA: THE ANIMATED SERIES(TM) is a trademark of Archie Comic Publications, Inc., used under license. POKEMON(TM) is a trademark of Nintendo of America Inc. and used under license. POWER RANGERS(TM) is a trademark of Saban Entertainment, Inc. and used under license from Saban Merchandising, Inc. In January 2001, the Bankruptcy Court approved rejection of the license agreement between Perry Ellis International Corporation, successor in interest to Munsingwear, Inc., and the Company for the license of the MUNSINGWEAR(R) and KANGAROO DESIGN(R) trademarks. Pursuant to the terms of a termination agreement between the parties, the License agreement will terminate in April 2001. --------------- (2) 2000 KSA/NPD Branding Report by Kurt Salmon Associates. 11 14 ITEM 1. BUSINESS -- (CONTINUED) INFORMATION SYSTEMS Over the past several years, the Company has committed additional resources to enhance its information systems ("IS"). These efforts have included the implementation of an Oracle general ledger and accounts payable system, the development of a new order entry system enabling activewear retailers to order from wholesalers through the Internet and implementation of Electronic Data Interchange with its major retail customers. In addition, the Company has implemented its Vendor Managed Inventory ("VMI") program, enabling the Company to partner with its customers and allowing these customers to maintain optimal inventory levels. The VMI program and other IS enhancements enable the Company to improve utilization of its own inventories by matching production more closely with customer point of sale information. Also, the Company has improved its inventory control systems to enable the Company to better control product moving offshore. The Company continues to improve its inventory control systems. Finally, the Company plans to continue its efforts in the IS area in 2001 and future years to improve efficiency and customer service. INTERNATIONAL OPERATIONS The Company primarily sells activewear through its foreign operations, principally in Europe, Canada, Japan and Mexico. The Company's approach has generally been to establish production capability 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. The Company has also established manufacturing operations in Morocco where cut fabrics from the Republic of Ireland are sewn and returned to Europe for sale. In addition, the Company has established manufacturing operations in Honduras and El Salvador 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. 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. In addition, 74.5% of the garments assembled for sale in the United States in 2000 were assembled in Honduras and El Salvador. In 2001, the Company expects this percentage to increase to 87.1%. The concentration of the Company's assembly operations in these countries which are subject to hurricane, earthquakes and other natural disasters, and the occurrence of such natural disasters could result in a material adverse impact to the Company. Sales from international operations during 2000 were $256,300,000 and were principally generated from products manufactured at the Company's foreign facilities. These international sales accounted for 17% of the Company's net sales in 2000. Management believes international sales will continue to be a source of growth for the Company, particularly in Europe. See "OPERATING SEGMENTS" in the Notes to Consolidated Financial Statements. 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. In response to market conditions, the Company, from time to time, reviews and adjusts its product offerings and pricing structure. 12 15 ITEM 1. BUSINESS -- (CONTINUED) 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 regain the Company's position as a low cost manufacturer, the Company has increased the percentage of garments sewn in the Caribbean and Central America and returned to the United States under Section 9802 (previously Section 807) of the regulations of the United States Customs Service, Department of the Treasury. The Company believes domestic knitting, bleaching and dyeing operations will continue to provide the Company with a competitive advantage in future years. Thus, the Company's strategy is to combine low cost textile manufacturing in the United States with sewing predominantly offshore. 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 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 26% of the United States men's and boys' underwear market (100% if Section 9802 imports are included) in 2000 and approximately 38% (74% including Section 9802 imports) of the women's and girls' underwear market. With regard to activewear, imports accounted for approximately 58% of this market in 1998, 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 At March 1, 2001, the Company employed approximately 27,000 people. Approximately 2,000 employees, principally in foreign markets, are covered by collective bargaining agreements. Management believes that its employee relations are good. OTHER 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. Cotton prices are subject to the price volatility of the commodity markets. Polyester prices are principally linked to petroleum prices and, accordingly, are also subject to the price volatility of the commodity markets. The Company has historically contracted 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 March 24, 2001, the Company had entered into contracts that cover approximately 99% of its estimated cotton requirements for 2001 (with fixed prices on approximately 92% of its estimated cotton needs for 2001). SPECIAL CHARGES. During the five years ended January 1, 2000, the Company moved substantially all of its U.S. sewing and finishing operations to locations in the Caribbean, Mexico 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 third and fourth quarters of 1999, the Company recorded charges for provisions and losses on the sale of closeout and irregular inventory to reflect the reduced market prices for these categories of inventory, costs related to impairment of certain European manufacturing facilities, severance, a debt guarantee and other asset writedowns and reserves. In the fourth quarter of 1997, the Company recorded charges for costs related to the 13 16 ITEM 1. BUSINESS -- (CONCLUDED) OTHER -- (CONCLUDED) 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 connection with the Company's efforts to eliminate non-core businesses and unprofitable products, the Company incurred costs related to the closure of yarn, textile and assembly plants in 2000. The Company incurred charges of $90,100,000 for writedowns of inventory, property, plant and equipment, other assets and contractual obligations. 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. OTHER INFORMATION. The Company was incorporated under the laws of the Cayman Islands on March 4, 1999. The principal executive offices of the Company are located at P.O. Box 866GT, 3rd Floor, Anderson Square Building, Shedden Road, Grand Cayman, Cayman Islands, BWI, telephone (345) 945-8210. 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. 14 17 ITEM 1. BUSINESS -- (CONCLUDED) OTHER -- (CONCLUDED) ITEM 2. PROPERTIES Prior to the Petition Date, Fruit of the Loom operated 74 properties and facilities around the world. The combination of manufacturing, warehouse and distribution, and sales and administration facilities operated by the Company occupied approximately 13,358,000 square feet, of which approximately 4,852,000 square feet were under leases expiring through 2017. The Company's principal operations were in North and Central America, with the remaining properties in Europe. Subsequent to the Petition Date, the Company closed several of its least efficient manufacturing facilities. The closed facilities (including previously closed facilities) total 16 facilities and occupy approximately 3,942,000 square feet. Company owned facilities that have been closed are currently held for sale. Set forth below is a summary of the principal facilities owned or leased by Fruit of the Loom as of December 31, 2000, excluding closed facilities. The Company's facilities are located principally in the United States (the summary below includes Canada and Japan), Western Europe (the summary below includes United Kingdom, Republic of Ireland and Morocco) and Central America (the summary below includes Mexico and the Caribbean Basin).
SQUARE FEET NO. OF --------------------- LOCATIONS OWNED LEASED --------- --------- --------- UNITED STATES Manufacturing............................................. 8 3,275,000 1,034,000 Warehouse and distribution................................ 7 1,720,000 1,152,000 Sales and administration.................................. 7 86,000 102,000 WESTERN EUROPE Manufacturing............................................. 7 375,000 483,000 Warehouse and distribution................................ 8 349,000 370,000 Sales and administration.................................. 4 52,000 77,000 CENTRAL AMERICA Manufacturing............................................. 14 153,000 1,262,000 Warehouse and distribution................................ 1 -- 61,000 Sales and administration.................................. 3 8,000 9,000 SUB-TOTAL Manufacturing............................................. 29 3,803,000 2,779,000 Warehouse and distribution................................ 16 2,069,000 1,583,000 Sales and administration.................................. 14 146,000 188,000 -- --------- --------- TOTAL....................................................... 59 6,018,000 4,550,000
See "LEASE COMMITMENTS" in the Notes to Consolidated Financial Statements. ITEM 3. LEGAL PROCEEDINGS CHAPTER 11 FILING On December 29, 1999, FTL Ltd., FTL Inc. and 32 of its subsidiaries filed voluntary petitions for relief under Chapter 11 with the Bankruptcy Court. The bankruptcy cases of the Debtors are being jointly administered, for procedural purposes only, before the Bankruptcy Court under Case No. 99-4497(PJW). In addition, on December 30, 1999 FTL Ltd. voluntarily presented a petition to wind up the Company and obtained an order from the Cayman Court appointing provisional liquidators. FTL Ltd.'s petition is adjourned at this time. FTL Inc. and substantially all of its subsidiaries, as debtors-in-possession, are parties to a Postpetition Credit Agreement dated as of December 29, 1999 (the "DIP Facility") with Bank of America as agent. The DIP Facility has been approved by the Bankruptcy Court and, as amended, includes a total commitment of $450,000,000 which is comprised of revolving notes of $350,000,000 and a term note of $100,000,000. Letter of Credit obligations under the revolver portion of the DIP Facility are limited to $175,000,000. 15 18 ITEM 3. LEGAL PROCEEDINGS -- (CONCLUDED) Under section 362 of the Bankruptcy Code, during a reorganization case, creditors and other parties in interest may not without Bankruptcy Court approval: (i) commence or continue judicial, administrative or other cases against the Debtors that were or could have been commenced prior to commencement of the reorganization case, or recover a claim that arose prior to commencement of the case; (ii) enforce any prepetition judgments against the Debtors; (iii) take any action to obtain possession of or exercise control over property of the Debtors or their estates; (iv) create, perfect or enforce any lien against the property of the Debtors; (v) collect, assess or recover claims against the Debtors that arose before the commencement of the case; or (vi) set off any debt owing to the Debtors that arose prior to the commencement of the case against a claim of such creditor or party in interest against the Debtors that arose before the commencement of the case. Although the Debtors are authorized to operate their businesses and manage their properties as debtors-in-possession, they may not engage in transactions outside of the ordinary course of business without complying with the notice and hearing provisions of the Bankruptcy Code and obtaining Bankruptcy Court approval. An official unsecured creditors committee has been formed by the United States Trustee. This committee and various other parties in interest, including creditors holding claims, such as the prepetition bank group and secured bondholders, have the right to appear and be heard on applications of the Debtors relating to certain business transactions. The Company is required to pay certain expenses of the committee, including legal and accounting fees, to the extent allowed by the Bankruptcy Court. In addition, the Company has an agreement, approved by the Bankruptcy Court, with the prepetition bank groups and secured bondholders, to make quarterly adequate protection payments aggregating approximately $25,000,000 to $30,000,000. As debtors-in-possession, the Debtors have the right, subject to Bankruptcy Court approval and certain other limitations, to assume or reject executory, prepetition contracts and unexpired leases. In this context, "assumption" requires the Debtors to perform their obligations and cure all existing defaults under the assumed contract or lease and "rejection" means that the Debtors are relieved from their obligations to perform further under the rejected contract or lease, but are subject to a claim for damages for the breach thereof subject to certain limitations contained in the Bankruptcy Code. Any damages resulting from rejection are treated as general unsecured claims in the reorganization cases. Prepetition claims that were contingent or unliquidated at the commencement of the Reorganization Cases are generally allowable against the Debtors in amounts to be fixed by the Bankruptcy Court or otherwise agreed upon. These claims, including, without limitation, those which arise in connection with the rejection of executory contracts and leases, are expected to be substantial. The Debtors have established estimated accruals approximating what the Debtors believe will be their liability under these claims. The ultimate amount of and settlement terms for such liabilities are subject to consummating a plan of reorganization and, accordingly, are not presently determinable. CAYMAN ISLANDS PROVISIONAL LIQUIDATION On December 30, 1999, FTL Ltd. voluntarily filed a Petition in the Cayman Court for the appointment of Theo Bullmore and Simon Whicker as JPL's (Cause No. 823 of 1999). The JPL's were appointed pursuant to the Companies Law sec.. 99. Among Orders made by the Cayman Court on the presentation of the Petition was an Injunction restraining further proceedings in any action, suit or proceedings against FTL Ltd. without first obtaining leave of the Cayman Court. Under the Companies Law sec.. 110 the Cayman Court conferred the powers of an Official Liquidator (sec.. 109) on the JPL's. Those powers include: (a) to bring or defend any action, civil or criminal, on behalf of FTL Ltd.; (b) to carry on the business of FTL Ltd. to sell the real and personal property of FTL Ltd.; (c) to do all acts and execute all contracts, deeds, receipts and documents on behalf of FTL Ltd.; and (d) to oversee the continuation of the business of the Company under the control of the Company's Board of Directors, and under the supervision of the Cayman Court and the Bankruptcy Court. 16 19 ITEM 3. LEGAL PROCEEDINGS -- (CONCLUDED) Although FTL Ltd. is authorized to operate its business and manage its properties as debtor-in-possession, it may not engage in transactions outside the ordinary course of business without obtaining the sanction of the JPL's and complying with the Orders of the Cayman Court. The Cayman Proceedings are being conducted in tandem with the Reorganization Cases. On March 22, 2001, the JPL's, on behalf of FTL Ltd. only, filed with the Cayman Court a "Scheme of Arrangement" in the Cayman Proceeding. See "SCHEME OF ARRANGEMENT." PLAN OF REORGANIZATION PROCEDURES Fruit of the Loom filed its Reorganization Plan on March 15, 2001 and in accordance with the Bankruptcy Code has until April 30, 2001 within which to solicit acceptances to the plan (the "Exclusive Period"). The Bankruptcy Court may increase or decrease the Exclusive Period for cause shown, and as long as the Exclusive Period continues, no other party may file a reorganization plan. Fruit of the Loom filed a motion with the Bankruptcy Court to extend the Exclusive Period to September 28, 2001. The motion is subject to Bankruptcy Court approval. Inherent in a successful plan of reorganization is a capital structure which permits the Debtors to generate sufficient cash flow after reorganization to meet restructured obligations and fund the current obligations of the Debtors. Under the Bankruptcy Code, the rights and treatment of prepetition creditors and stockholders may be substantially altered. At this time it is not possible to predict the outcome of the Reorganization Cases, in general, or the effects of the Reorganization Cases on the business of the Debtors or on the interests of creditors. The Disclosure Statement filed on March 15, 2001 did not provide any recovery to FTL Ltd.'s equity security holders. ACCORDINGLY, MANAGEMENT BELIEVES THAT CURRENT EQUITY SECURITY HOLDERS (COMMON OR PREFERRED STOCK) WILL NOT RECEIVE ANY DISTRIBUTION UNDER ANY REORGANIZATION PLAN AS A RESULT OF THE ISSUANCE OF NEW EQUITY TO EXISTING CREDITORS. Generally, after a plan has been filed with the Bankruptcy Court, it will be sent, with a disclosure statement approved by the Bankruptcy Court following a hearing, to holders of claims and equity security interests. The Bankruptcy Court, after notice and a hearing, would consider whether to confirm the plan. Among other things, to confirm a plan the Bankruptcy Court is required to find that (i) each impaired class of creditors and equity security holders will, pursuant to the plan, receive at least as much as the class would have received in a liquidation of the debtor and (ii) confirmation of the plan is not likely to be followed by the liquidation or need for further financial reorganization of the debtor or any successor to the debtor, unless the plan proposes such liquidation or reorganization. To confirm a plan, the Bankruptcy Court generally is also required to find that each impaired class of creditors and equity security holders has accepted the plan by the requisite vote. If any impaired class of creditors or equity security holders does not accept a plan but all of the other requirements of the Bankruptcy Code are met, the proponent of the plan may invoke the so-called "cramdown" provisions of the Bankruptcy Code. Under these provisions, the Bankruptcy Court may confirm a plan notwithstanding the non-acceptance of the plan by an impaired class of creditors or equity security holders if certain requirements of the Bankruptcy Code are met, including that (i) at least one impaired class of claims has accepted the plan, (ii) the plan "does not discriminate unfairly" and (iii) the plan "is fair and equitable with respect to each class of claims or interests that is impaired under, and has not accepted, the plan." As used by the Bankruptcy Code, the phrases "discriminate unfairly" and "fair and equitable" have narrow and specific meanings unique to bankruptcy law. The remaining 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. 17 20 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS William F. Farley, formerly an executive officer and currently a director of the Company, holds 100% of the common stock of Farley Inc. Prior to the Cayman Reorganization, William F. Farley and Farley Inc. together owned all 5,229,421 outstanding shares of FTL Inc.'s Class B Common Stock entitled to five votes per share. On March 4, 1999, FTL Inc. became a subsidiary of FTL Ltd., pursuant to the Cayman Reorganization approved by the stockholders of the Company on November 12, 1998. In connection with the Cayman Reorganization, all outstanding shares of Class A Common Stock of FTL Inc. were automatically converted into Class A ordinary shares of FTL Ltd., and all outstanding shares of Class B Common Stock of FTL Inc. were automatically converted into shares of exchangeable participating preferred stock of FTL Inc. (the "FTL Inc. Preferred Stock"). The holders of the FTL Inc. Preferred Stock also received, in the aggregate, four Class B redeemable ordinary shares of FTL Ltd. Except as provided by law or FTL Ltd.'s Amended and Restated Memorandum of Association, the FTL Ltd. Class B Shares, in the aggregate, have voting rights equal to five times the number of shares of FTL Inc. Preferred Stock held by William F. Farley and his affiliates. Therefore, each FTL Ltd. Class B share has voting rights equivalent to 6,536,776.3 votes. As of February 28, 2001, there were 2,227 registered holders of record of the Class A ordinary shares of FTL Ltd. The FTL Inc. Preferred Stock (5,229,421 shares outstanding) in the aggregate (i) has a liquidation value of $71,700,000, which is equal to the fair market value of the FTL Inc. Class B common stock based upon the $13.71 average closing price of FTL Inc. Class A common stock on the New York Stock Exchange for the 20 trading days prior to March 4, 1999, (ii) is entitled to receive cumulative cash dividends of 4.5% per annum of the liquidation value, payable quarterly, (iii) is exchangeable at the option of the holder, in whole or from time to time in part, at any time for 4,981,000 FTL Ltd. Class A ordinary shares, (iv) is convertible at the option of the holder, in whole or from time to time in part, at any time for 4,981,000 shares of FTL Inc. common stock, (v) participates with the holders of FTL Inc. common stock in all dividends and liquidation payments in addition to its preference payments on an as converted basis, (vi) is redeemable by FTL Inc., at its option, after three years at a redemption price equal to the then fair market value of FTL Inc. Preferred Stock as determined by a nationally recognized investment banking firm, and (vii) has the right to vote on all matters put to a vote of the holders of FTL Inc. common stock, voting together with such holders as a single class, and is entitled to the number of votes which such holder would have on an as converted basis. The minority interest in FTL Inc. is based on the liquidation preference of $71,700,000. The fixed dividend on the FTL Inc. Preferred Stock of 4.5% of the liquidation preference of $71,700,000 equals $3,200,000 on an annual basis. In addition, preferred stockholders participate in FTL Inc.'s earnings after provision for the fixed preferred stock dividend. Participation in earnings is determined as the ratio of preferred shares outstanding to the total of preferred and common shares outstanding (7.2% at December 30, 2000 and at January 1, 2000). Preferred stockholder participation in losses is limited to the preferred stockholders' prior participation in earnings. Because FTL Inc. reported losses in the years ended December 30, 2000 and January 1, 2000, the minority interest participation was limited to the fixed preferred dividends of $3,200,000 in 2000 and $2,700,000 in 1999. The Company paid no dividends in 2000 and paid dividends in 1999 aggregating $1,900,000 to holders of the FTL Inc. Preferred Stock. The Company ceased paying dividends on the FTL Inc. Preferred Stock subsequent to the third quarter of 1999. COMMON STOCK PRICES AND DIVIDENDS PAID FTL Ltd.'s Class A Ordinary Shares were listed on the New York Stock Exchange ("NYSE"). Trading of the Company's Class A Ordinary Shares was suspended by the NYSE in the second quarter of 2000, and the shares were subsequently delisted. On April 26, 2000, the Company's Class A Ordinary Shares began trading as over-the-counter ("OTC") equity securities under the symbol "FTLAQ." Quotation service is provided by the National Quotation Bureau, LLC, ("NQB") "Pink Sheets" and the OTC Bulletin Board 18 21 ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS -- (CONCLUDED) COMMON STOCK PRICES AND DIVIDENDS PAID -- (CONCLUDED) ("OTCBB"). Pursuant to the Reorganization Plan, the FTL Ltd. Class A Ordinary Shares will be cancelled and therefore trading of such shares will cease at such time and no assurance can be given that trading will continue until the time of cancellation. The following table sets forth the high and low market prices for 2000 and 1999 of the FTL Inc. Class A Common Stock through March 3, 1999 and the FTL Ltd. Class A ordinary shares from March 4, 1999 through December 30, 2000:
MARKET PRICES ---------------------------------------------------- 2000 1999 ------------------ ------------------------- HIGH LOW HIGH LOW ------- ------- -------- -------- 1st Quarter........................ $3.5000 $1.1250 $19.0000 $10.1250 2nd Quarter........................ 1.2500 0.2200 12.5000 8.8125 3rd Quarter........................ 0.7400 0.2600 10.1250 3.2500 4th Quarter........................ 0.3600 0.1300 3.7500 0.5625
No dividends were declared on the Company's common stock or ordinary shares during 2000 or 1999. The Company does not currently anticipate paying any dividends on ordinary shares in 2001. For restrictions on the Company's ability to pay present or future dividends, see "LONG TERM DEBT" in the Notes to Consolidated Financial Statements. In addition, the Bankruptcy Code prohibits the Debtors from paying cash dividends. 19 22 ITEM 6. SELECTED FINANCIAL DATA (IN MILLIONS, EXCEPT PER SHARE DATA) On December 29, 1999, the Debtors filed voluntary petitions for reorganization under Chapter 11 and are operating their businesses as debtors-in-possession under control of the Bankruptcy Court. The following selected financial data have been derived from the Consolidated Financial Statements of the Company for each of the five years in the period ended December 30, 2000. The information set forth below should be read in conjunction with Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and the Notes thereto included elsewhere in the Annual Report. Effective January 1, 1998, the Company changed its year-end from December 31 to a 52 or 53 week year ending on the Saturday nearest December 31. Fiscal years 2000, 1999 and 1998 ended on December 30, 2000, January 1, 2000 and January 2, 1999, respectively.
YEAR ENDED --------------------------------------------------------------------------------------------- DECEMBER 30, JANUARY 1, JANUARY 2, DECEMBER 31, DECEMBER 31, 2000 2000 1999 1997 1996 ------------ ----------------- --------------- --------------- --------------- OPERATIONS STATEMENT DATA(1)(5): Net sales(2)...................... $1,549.8 $1,784.8 $1,942.0 $1,901.8 $2,232.2 Gross earnings(2)(3).............. 248.5 92.1(6) 508.6(10) 402.3(14) 648.0 Operating earnings (loss)......... (44.2)(4) (292.3)(7) 207.1(11) (266.7)(15) 298.2 Interest expense.................. 124.3 97.1 93.9 82.5 102.0 Reorganization Items.............. 48.2(8) 3.0(8) -- -- -- Earnings (loss) from continuing operations before income tax provision and minority interest........................ (217.6) (451.2)(9) 120.2(12) (428.3)(16) 160.3(17) Earnings (loss) from continuing operations...................... (103.6)(19) (491.1) 113.0 (362.0) 132.8(18) Earnings (loss) per common share from continuing operations(13): Basic......................... (1.55) (7.25) 1.57 (4.86) 1.74 Diluted....................... (1.55) (7.25) 1.56 (4.86) 1.72 Average common shares outstanding: Basic......................... 67.0 67.8 72.0 74.4 76.4 Diluted....................... 67.0 67.8 72.3 74.4 77.1 BALANCE SHEET DATA(1)(5): Total assets...................... $1,829.4 $2,167.2 $2,279.0 $2,448.9 $2,578.4 Long-term debt, excluding current maturities...................... 410.3 593.5 856.6 1,192.8 867.4 Other noncurrent liabilities...... 11.5 37.9 267.4 321.0 271.2 Liabilities subject to compromise...................... 540.7 683.0 -- -- -- Common stockholders' equity (deficit)....................... (238.3) (93.5) 548.9 422.1 1,093.8
------------------------- (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) Effective January 2, 2000, the Company records trade promotion expense as a reduction of Net sales. Trade promotion expense has been reclassified from Selling, general and administrative expense to net sales in each of the earlier years presented. (3) Effective January 2, 2000, the Company records intra-company freight expense incurred to transport goods between distribution facilities as a component of Selling, general and administrative expense. Intra-company freight expense has been reclassified from Cost of sales to Selling, general and administrative expense in each of the earlier years presented. (4) Includes pretax charges of $90.1 related principally to the closing of certain of the Company's higher cost production facilities. 20 23 ITEM 6. SELECTED FINANCIAL DATA -- (CONCLUDED) (5) 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 decreased previously reported results as follows:
1996 ------ Gross loss............................................ $ (7.1) Loss from continuing operations....................... (4.6) Loss per common share from continuing operations: Basic............................................... (0.06) Diluted............................................. (0.06)
The accounting change increased the net loss for 1997 by $27.8 or $.37 per share. (6) Includes pretax charges of $214.1 related to provisions and losses on the sale of closeout and irregular inventory and inventory valuation writedowns. (7) Includes pretax charges of $281.3 related to provisions and losses on the sale of closeout and irregular inventory and inventory valuation writedowns, impairment of European manufacturing facilities, severance and professional fees incurred in connection with the Company's restructuring efforts. (8) Reorganization items represent costs incurred by the Company related to the Reorganization Cases. The reorganization items consist of professional fees which include legal, accounting and other consulting services provided to the Company related to the Reorganization Cases. The reorganization items increased the net loss by $48.2 in 2000 and $3.0 in 1999. (9) Includes pretax charges of $345.8 related to provisions and losses on the sale of closeout and irregular inventory and inventory valuation writedowns, impairment of European manufacturing facilities, severance, a debt guarantee, professional fees incurred in connection with the Company's restructuring efforts and other asset writedowns and reserves. (10) Amounts received for the sale of inventory written down as part of the 1997 special charges exceeded amounts estimated, resulting in a reduction of $6.9 in cost of sales. (11) Reflects an $8.4 reduction in Selling, general and administrative expense resulting from finalization of certain estimates recorded in connection with the 1997 special charges. (12) Reflects a $1.5 increase in other income -- net resulting from finalization of certain estimates recorded in connection with the 1997 special charges. (13) The earnings per share amounts for 1996 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 see "Earnings Per Share" in the Notes to Consolidated Financial Statements. (14) Includes pretax charges of $47.8 related to inventory valuation writedowns. (15) Includes pretax charges of $384.4 related to costs associated with the closing or disposal of a number of domestic manufacturing and distribution facilities and attendant personnel reductions, impairment writedowns of a number of domestic and foreign manufacturing and distribution facilities and inventory valuation writedowns. (16) 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"). (17) 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. (18) 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. (19) Includes $116.3 related to reversal of excess income tax liabilities for tax years through January 2, 1999. 21 24 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the "SELECTED FINANCIAL DATA" and the Consolidated Financial Statements and Notes thereto appearing elsewhere in this document. GENERAL On December 29, 1999, the Debtors filed voluntary petitions for relief under Chapter 11 and are presently operating their business as debtors-in-possession subject to the jurisdiction of the Bankruptcy Court. For further discussion of Reorganization Cases, see "ITEM 1. BUSINESS", "ITEM 3. LEGAL PROCEEDINGS" and Notes to Consolidated Financial Statements. In the period leading up to the Petition Date, Fruit of the Loom's indebtedness increased substantially in connection with several acquisitions which did not achieve the cash flow levels anticipated at the time of the acquisitions. Proceeds from the issuance of debt were also used to finance a significant legal settlement and environmental obligations related to discontinued operations, as well as open-market stock repurchases. After these expenditures, Fruit of the Loom was left with a highly leveraged capital structure. Changes in the competitive environment, inventory adjustments in 1998 and operating problems in 1999 reduced cash flow, resulting in covenant defaults and inadequate liquidity to continue to fund the ongoing operations of the business and debt requirements. As a result of these and other factors described below, Fruit of the Loom sought protection in the Reorganization Cases, to permit it to fix its operating problems and capital structure. Beginning in the mid 1990s, prices for certain basic apparel products declined as a result of market consolidation and increased competition. Consolidation among the mass merchandisers in the retailing industry enabled those merchandisers to obtain price reductions from many of their suppliers, as the volume of the merchandisers' purchases increased as a percentage of the total market. Changes in international trade agreements, including the North American Free Trade Agreement ("NAFTA") adopted in 1995 (which have been expanded by the Caribbean Basin Initiative ("CBI") adopted in late 2000), removed certain tariff, quota, and other artificial trade barriers thereby increasing the supply of basic apparel products and consequently reducing prices. Fruit of the Loom was able to partially offset these price decreases with reductions in manufacturing costs. Nonetheless, these changes in industry dynamics negatively affected Fruit of the Loom's margins and cash flows. In 1993 and 1994, FTL Inc. commenced a strategy of diversification into the sports licensing apparel market with the acquisitions of Salem Sportswear, Artex and Pro Player and ventured into women's jeanswear manufacturing and marketing with the acquisition of the Gitano(R) brand. These acquisitions cost approximately $350,000,000 in cash, primarily financed by debt. These acquisitions were intended to add higher gross margin apparel products to the Fruit of the Loom product portfolio. However, none of the businesses achieved the cash flow anticipated at the time of acquisition, and were dilutive to Fruit of the Loom's earnings over the period these businesses were owned. During the period from 1995 through 1999, Fruit of the Loom used approximately $450,000,000 for non-operating purposes, including legal settlements, environmental liabilities related to operations sold by a former parent corporation, guarantees of a former subsidiary's indebtedness, and an open-market stock repurchase plan. All of these uses resulted in higher debt, combined with the debt incurred to fund non-performing acquisitions. The removal of certain trade barriers, as described above, provided domestic suppliers with an opportunity to reduce manufacturing costs by outsourcing the labor intensive components of production to offshore locations with lower labor rates. Fruit of the Loom participated in this opportunity, transitioning approximately 90% of its remaining assembly production to Mexico, Honduras and El Salvador between 1995 and 1999. Operating problems during the fourth quarter of 1998 resulted from a decision by Fruit of the Loom to virtually shut down manufacturing operations for several weeks to reduce inventory levels. As a result of these 22 25 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) GENERAL -- (CONTINUED) layoffs, Fruit of the Loom experienced significant turnover of highly trained employees. The replacement workers were less experienced, requiring additional training, which caused inefficiencies in production. When manufacturing recommenced in the first quarter of 1999, the level of irregular inventory increased. The inefficiency in output from these plants and the need to rebuild inventory to service unexpectedly strong demand for key retail and activewear products, resulted in inventory shortages, which negatively impacted customer order fulfillment and required Fruit of the Loom to incur additional production, shipping and distribution costs. In order to maintain customer service at acceptable levels, Fruit of the Loom increased its usage of external contractors, overtime labor, and time-sensitive and expensive methods of transporting materials and products, all of which resulted in approximately $300,000,000 of manufacturing cost overruns above budgeted costs. During the critical selling season of spring (Activewear/tee shirts) and fall (Retail/back to school) 1999, Fruit of the Loom experienced significant servicing and delivery problems with its customers; Fruit of the Loom found itself out of stock or with an improper mix of inventory, and thus unable to fill customers' orders on a timely basis. This resulted in a loss of sales, as customers turned to other suppliers for short-term needs. The high cost of manufacturing and the lower sales resulted in a loss from continuing operations of almost $500,000,000. In 1999, Fruit of the Loom recorded charges for provisions and losses on the sale of closeout and irregular inventory, impairment of certain European manufacturing facilities, severance, and other writedowns and reserves totaling approximately $350,000,000. These charges resulted in covenant defaults under the 1997 Credit Agreement, Fruit of the Loom's working capital facility. The combination of poor operating performance in 1999 and the increased debt resulting from non-performing acquisitions and other non-operating uses of cash flow, resulted in a severe liquidity problem prior to the Petition Date. Fruit of the Loom's cash shortfall resulted in difficulties with key suppliers on payment terms, interruptions to the manufacturing operations, and covenant defaults under the various financings. In 1999, Fruit of the Loom's total financings, including secured and unsecured public debt, aggregated in excess of $1,400,000,000. The interest payments on that debt aggregated over $100,000,000 per year. The likely curtailment of production due to difficulties in obtaining key supplies, the inability to pay vendors on a timely basis, and other considerations resulted in the Board of Directors' approval for Fruit of the Loom to seek protection under the Bankruptcy Code on December 29, 1999, commencing the Reorganization Cases. On February 23, 2000 the Bankruptcy Court approved the Company's plan to discontinue the operations of Pro Player which had historically been unprofitable. In accordance with accounting principles generally accepted in the United States, Pro Player has been treated as a discontinued operation in the accompanying consolidated financial statements. In connection with the Company's decision to discontinue the operations of Pro Player, $47,500,000 was accrued for the loss on disposal of the assets of Pro Player including a provision of $10,400,000 for expected operating losses during the phase-out period from February 24, 2000. In the fourth quarter of 2000 the Company recorded an estimated additional loss of $20,200,000 as a result of lower actual realization of receivables and inventories than originally anticipated. See "DISCONTINUED OPERATIONS" in the Notes to Consolidated Financial Statements. The Company continues to review the divestiture of certain non-core assets. Approximately $90,000,000 of losses were recorded related to additional divestitures and plant shutdowns during 2000. Additional gains or losses may be recorded on future divestitures but the amount cannot be determined at this time. In addition, restructuring costs may be incurred which the Company is unable to quantify at this time. On March 15, 2001, the Company filed its Reorganization Plan together with a proposed Disclosure Statement. No hearing has been set, as yet, to consider the adequacy of the Disclosure Statement, which is a prerequisite to approval of the Reorganization Plan. There can be no assurance that the Reorganization Plan or any other plan of reorganization will be confirmed under the Bankruptcy Code. If the Company is unable to 23 26 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) GENERAL -- (CONTINUED) obtain confirmation of a plan of reorganization, its creditors or equity security holders may seek other alternatives for the Company, which include soliciting bids for the Company or parts thereof through an auction process or possible liquidation. There can be no assurance that upon consummation of a plan of reorganization there will be improvement in the Company's financial condition or results of operations. The Company has, and will continue to incur professional fees and other cash demands typically incurred in bankruptcy. During 2000, the Company incurred reorganization costs of $48,200,000 related to the bankruptcy. The Company's consolidated financial statements have been prepared on a going concern basis which contemplates continuity of operations, realization of assets and liquidation of liabilities and commitments in the normal course of business. The Reorganization Cases, related circumstances, and the losses from operations, raise substantial doubt about the Company's ability to continue as a going concern. The appropriateness of reporting on the going concern basis is dependent upon, among other things, confirmation of a plan of reorganization, future profitable operations, and the ability to generate sufficient cash from operations and financing sources to meet obligations (see "LIQUIDITY AND CAPITAL RESOURCES" and Notes to Consolidated Financial Statements). As a result of the filing and related circumstances, however, such realization of assets and liquidation of liabilities are subject to significant uncertainty. While under the protection of Chapter 11, the Debtors may sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those reflected in the accompanying consolidated financial statements. Further, the Reorganization Plan or any other plan of reorganization could materially change the amounts reported in the accompanying consolidated financial statements. The consolidated financial statements do not include any adjustments relating to the recoverability of the value of recorded asset amounts or the amounts and classifications of liabilities that might be necessary as a consequence of a plan of reorganization. OPERATIONS 2000 CONSOLIDATION COSTS In the third and fourth quarters of 2000, the Company incurred costs in connection with the closure of several manufacturing facilities in the United States and Mexico, resulting in special charges aggregating $90,100,000 ($13,100,000 in the third quarter and $77,000,000 in the fourth quarter) for writedowns of inventory, property, plant and equipment, other assets and contractual obligations. These charges are recorded in results of operations in the accompanying condensed consolidated financial statements in Cost of sales ($1,800,000) and Selling, general and administrative expenses ($88,300,000). These charges consist of the following (in thousands of dollars): Closing and disposal of U.S. and Mexico manufacturing facilities................................................ $79,900 Closing of European manufacturing facilities................ 6,700 Other asset writedowns and reserves......................... 3,500 ------- $90,100 =======
Each of these categories is discussed below. A significant part of the Company's business strategy in 2000 and future years is the elimination of non-core businesses and reduction in low volume and unprofitable SKU's. Consistent with this strategy, the Company closed several of its higher cost production facilities in the third and fourth quarters of 2000. Accordingly, the Company terminated 224 salaried and 2,042 production personnel related to closed 24 27 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) OPERATIONS -- (CONTINUED) 2000 CONSOLIDATION COSTS -- (CONCLUDED) operations. Charges related to closing and disposal of U.S. and Mexico manufacturing and distribution facilities consisted of the following (of which $70,500,000 were non-cash charges) (in thousands of dollars): Loss on disposal of facilities, improvements and equipment................................................. $69,200 Severance costs............................................. 8,900 Other....................................................... 1,800 ------- $79,900 =======
The loss on disposal of facilities, improvements and equipment results from the writedown of property, plant and equipment to their net realizable values. Net realizable values were determined by appraisals for all significant assets. 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). Other costs represent estimated writedown of inventory in the facilities to be disposed. These costs have been included in Cost of sales. These charges were recorded in the third and fourth quarters of 2000 as required by Financial Accounting Standards Board Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of ("FAS 121"), Emerging Issues Task Force ("EITF") 94-3 or other authoritative literature. As part of its continuing review of its manufacturing organization, facilities and costs beginning in the third quarter of 2000, the Company also considered the strategic position and cost effectiveness of its organization and facilities in Europe. As a result of this continuing review, the Company shut down two of its European manufacturing facilities and recorded a charge of $6,700,000 in the fourth quarter of 2000 to writedown the facilities to their fair market value. Of this amount, $4,700,000 are severance costs which will require future cash; the remaining $2,000,000 are non-cash charges. The Company recorded charges for other asset writedowns and reserves totaling $3,500,000 (of which $3,200,000 are non-cash charges); these charges consist principally of receivable write-offs. These charges were based on management's best estimates of the potential market values, timing and costs related to the above actions. Of the consolidation costs, cash charges totaled $14,400,000, $11,900,000 of which were paid in 2000 with the remainder expected to be paid in 2001. Also, $13,200,000 of the consolidation costs related to restructuring charges as defined by EITF 94-3. REDUCTIONS IN VARIABLE COSTS Fruit of the Loom has implemented a number of measures to reduce its variable cost structure. Through enhanced planning and improved manufacturing efficiencies, Fruit of the Loom has been able to reduce total freight expenditures by over $65,000,000 from 1999 to 2000, and reduce material loss by approximately $40,000,000 from 1999 to 2000. Improvements in manufacturing processes have been a significant contributor in reducing headcount from a peak of approximately 40,000 in 1999 to approximately 27,000 by the beginning of 2001. Excluding consolidation costs of $88,300,000 in 2000 and special charges of $67,200,000 in 1999, Fruit of the Loom's Selling, general and administrative expenses decreased, as a percentage of sales, from 16.4% in 1999 to 11.6% in 2000 as a result of these and other changes to Fruit of the Loom's variable cost structure. 25 28 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) OPERATIONS -- (CONTINUED) 2000 COMPARED TO 1999 Net sales decreased $235,000,000 or 13.2% in 2000 compared to 1999. The decrease was principally caused by the elimination of non-core product lines and less profitable products, decreased production and sales of irregulars, reduced pricing on certain products, and a loss of market share in certain segments. In the first quality product category, $185,100,000 of the decrease was due to a reduction in volume and a change in product mix and $22,600,000 was attributable to lower pricing in the face of increased competition. The pricing decrease was partially offset by a favorable impact on net sales aggregating $12,100,000 related to the finalization and elimination of unprofitable prior year promotional programs. Sales of closeouts were flat with 1999 as additional dozens sold in 2000 were offset by lower selling prices due to the mix of products sold. In 2000 additional closeout sales of men's and boys' products were sold while in 1999 the Company experienced additional closeout sales of casualwear fleece. Sales of irregulars declined $16,200,000 due to a reduction in volume of irregulars produced and sold, and due to the reduced average selling price reflecting market conditions. Also, $23,400,000 of the decrease in sales was attributable to a weakening of European currencies in relation to the U.S. dollar. Sales of retail products decreased $116,000,000 or 11.3% in 2000 compared to 1999 principally due to reductions in casualwear fleece, intimate apparel and men's and boys' underwear. The decreases were principally caused by the elimination of unprofitable products and non-core product lines and decreased irregular sales. The Company's Gitano business was sold in July 2000, which accounted for $25,800,000 of the decrease in sales. In intimate apparel, the Company discontinued certain product lines, resulting in lower sales. Activewear sales declined $46,400,000 or 9.1% in 2000 compared to 1999, due to price reductions and lower volume of first quality merchandise and irregulars. The lower volume resulted partially from the elimination of non-core product lines or other unprofitable product lines and less profitable products as well as a decline in volumes of core products, which decline the Company attributes partially to the impact of the pending bankruptcy cases. Sales also declined due to lower pricing in response to aggressive pricing by competitors. European sales declined $38,900,000 in 2000 compared to 1999 due to unfavorable currency effects (higher U.S. dollar), price reductions and lower volume of retail products, offset partially by higher volume of Activewear products. At the beginning of 2000, the Company decided to refocus its sales and marketing efforts on basic branded products, which contributed to a reduction in volume of retail products and resulted in sales reductions of $15,700,000 in 2000 compared to 1999. Price reductions in Europe totaled $14,900,000 in 2000 compared to 1999 and reflected market conditions in Activewear ($9,700,000) and the shift in retail emphasis to concentrate on selling to discount chains ($5,200,000).
2000 1999 ----------- ----------- (IN MILLIONS OF DOLLARS) NET SALES Retail products........................................... $ 911.1 $1,027.1 Activewear................................................ 464.0 510.4 Europe.................................................... 174.0 212.9 Other..................................................... 0.7 34.4 -------- -------- $1,549.8 $1,784.8 ======== ========
26 29 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) OPERATIONS -- (CONTINUED) 2000 COMPARED TO 1999 -- (CONTINUED)
2000 1999 ----------- ----------- (IN MILLIONS OF DOLLARS) OPERATING EARNINGS (LOSS) Retail products........................................... $ 75.6 $ (98.2) Activewear................................................ (30.2) (93.9) Europe.................................................... 4.1 (24.4) Consolidation costs/Special charges....................... (88.3) (67.2) Other..................................................... (5.4) (8.6) -------- -------- $ (44.2) $ (292.3) ======== ========
Gross earnings increased $156,400,000 or 169.8% in 2000 compared to 1999 and gross margin increased 10.8 percentage points to 16.0% for the year. Gross earnings in 2000 were favorably impacted by lower production costs of $35,800,000, the finalization of prior year promotional programs of $12,100,000, reduced physical inventory adjustments of $81,900,000, reduction of $78,300,000 related to slow moving, discontinued, closeout and irregular products, improvements in obsolete inventory as a result of reduced obsolescence charges of $19,500,000, lower expenses for property taxes and duty costs of $18,000,000 and the absence of a 1999 write-off of repair parts totaling $12,100,000. The $78,300,000 improvement for discontinued, close-out and irregular products noted above resulted principally from charges recorded in 1999 to establish reserves in connection with the Company's product and SKU rationalization strategy. During 2000, the Company continued to implement this strategy, resulting in additional reduction in SKU's. Accordingly, the net inventory balance of these product categories at year end 2000 was approximately equal to 1999 levels. Cost reductions were partially offset by price decreases aggregating $22,600,000, sales volume and production mix declines totaling $74,400,000 and unfavorable miscellaneous adjustments of $4,300,000. The volume declines were in line with the Company's strategy of eliminating low volume and unprofitable SKU's. The Company experienced an operating loss in 2000 of $44,200,000 compared to an operating loss in 1999 of $292,300,000. The improvement resulted from the increase in gross earnings and a decrease in selling, general and administrative expenses (excluding consolidation costs in 2000 and special charges in 1999) of $112,800,000 in 2000 compared to 1999. The reduction in selling, general and administrative expenses was partially due to a $37,800,000 reduction in advertising and promotion expenses, a $24,400,000 reduction in salaries and employment costs, a $4,400,000 reduction in travel expenditures, a $13,000,000 reduction in selling related expenses due to the Company's focus on simplifying operations and eliminating non-core businesses, a $7,400,000 reduction in office and related expenses, a $10,000,000 decrease in legal and professional costs and $8,200,000 of non-recurring Year 2000-related costs incurred in 1999. Substantially all of the decreases in selling, general and administrative expenses resulted from business simplification and specific cost reduction efforts undertaken by management. The Company incurred and recognized several one-time or non-recurring costs in both 2000 and 1999. In 2000, the Company incurred $88,300,000 in consolidation costs recorded in selling, general and administrative expenses principally related to the closure of certain of the Company's higher cost production facilities. In 1999, special charges aggregated $67,200,000 as the Company recorded an accrual for $30,000,000 of asset impairment charges related to the Company's European manufacturing facilities as a result of the move from the Republic of Ireland to Morocco. In addition, in 1999 the Company incurred nonrecurring severance costs of $30,600,000 and $6,600,000 of additional legal and professional costs associated with the Company's restructuring efforts. Also see "SPECIAL CHARGES" in the Notes to Consolidated Financial Statements. Interest expense increased $27,200,000 or 28.0% in 2000 compared to 1999. The increases reflected a higher average interest rate and, in 1999, expense of $8,800,000 related to the accounts receivable 27 30 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) OPERATIONS -- (CONTINUED) 2000 COMPARED TO 1999 -- (CONTINUED) securitization was recorded in other expense. The full year increase was partially offset by lower average borrowing levels earlier in 2000 compared to 1999. Also, the Company discontinued recording interest on $250,000,000 8.875% unsecured notes in 2000. See "CONTINGENT LIABILITIES" in the Notes to Consolidated Financial Statements and "LIQUIDITY AND CAPITAL RESOURCES" below. Net other expense in 2000 totaled $900,000 compared with $58,800,000 in 1999. Principal components of net other expense in 2000 included adequate protection payments (interest payments) in the amount of $5,700,000 related to the guarantee of personal indebtedness of William Farley, the Company's former Chairman of the Board, Chief Executive Officer and Chief Operating Officer ("Mr. Farley"), bank fees of $2,800,000 and foreign currency translation of $4,200,000 and other expense of $3,000,000. These unfavorable impacts were partially offset by a $14,800,000 gain on marketable equity securities. Principal components of net other expense in 1999 included a $30,000,000 charge for a loss contingency on the Company's guarantee of personal indebtedness of Mr. Farley, the write-off of an $8,000,000 receivable related to an insurance claim as recovery was no longer deemed probable in the fourth quarter of 1999, an $8,000,000 charge for a loss contingency related to a vacation pay settlement in Louisiana, a provision on the ultimate realization of certain current and non-current assets of $8,000,000, environmental costs of $7,400,000 and $16,900,000 for debt and other fees and debt waivers (which includes the write-off of fees of $6,000,000 principally related to the Company's accounts receivable securitization) and accounts receivable securitization costs of $8,800,000. These costs were offset by a favorable environmental insurance settlement of $13,700,000, gains on the sale of fixed assets of $7,800,000 and a recovery of previously settled litigation of $3,900,000. See "CONTINGENT LIABILITIES" and "SALE OF ACCOUNTS RECEIVABLE" in the Notes to Consolidated Financial Statements. Reorganization items represent costs incurred by the Company related to the Reorganization Cases. The reorganization items in 2000 and 1999 aggregated approximately $48,200,000 and $3,000,000, respectively, and consist of professional fees which include legal, accounting, consulting and other services provided to the Company related to the Reorganization Cases. There is no income tax in the Cayman Islands. Income taxes do apply to results attributable to operations in the U.S. and certain other countries. As a result of the Reorganization Cases and the favorable completion of a U.S. Internal Revenue Service and various state tax audits for tax years through January 2, 1999, the Company reversed, during the fourth quarter of 2000, net excess income tax liabilities (including discontinued operations) totaling approximately $104,000,000, which reduced income tax expense in 2000. The Company's 1999 income tax provision reflects a $36,700,000 provision to fully reserve all deferred tax assets and foreign income taxes. The fixed dividend on the FTL Inc. Preferred Stock of 4.5% of the liquidation preference of $71,700,000 equals $3,200,000 on an annual basis. In addition, preferred stockholders participate in FTL Inc.'s earnings after provision for the fixed preferred stock dividend. Participation in earnings is determined as the ratio of preferred shares outstanding to the total of preferred and common shares outstanding (7.2% at December 30, 2000). Preferred stockholder participation in losses is limited to the preferred stockholders' prior participation in earnings. Because FTL, Inc. had losses in 1999 and 2000, the minority interest participation is limited to the fixed preferred dividends. FTL, Inc. ceased recording dividends on the FTL, Inc. Preferred Stock as of the date FTL, Inc.'s bankruptcy case commenced since it is an unsecured obligation. In 1999, the Company paid dividends aggregating $1,900,000 to the holders of the FTL, Inc. Preferred Stock. The Company ceased paying dividends on the FTL, Inc. Preferred Stock subsequent to the third quarter of 1999. Discontinued operations reflect the Company's February 2000 decision to wind-down its Pro Player Sports and Licensing division. The 2000 loss from operations through the measurement date (February 23, 2000) was $2,600,000 compared to a loss from operations in 1999 of $37,600,000. The 1999 loss from operations resulted from weak sales volume (impact on gross earnings of $24,700,000) and a $12,800,000 28 31 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) OPERATIONS -- (CONTINUED) 2000 COMPARED TO 1999 -- (CONCLUDED) charge for obsolete inventories. The sales volume decreases resulted from a soft outerwear market with the significant increase in merchandise into the market (as a result of an inventory liquidation) by a major competitor, declines in the decorated Sports Licensed market, lower volume of knit products due to the loss of a major program with a customer and the loss of a major customer for the sale of Wilson products. Discontinued operations in 1999 includes an estimated loss on disposal of $47,500,000. In the fourth quarter of 2000, the Company determined that an additional estimated loss on disposal of $20,200,000 was required as a result of reduced realization related to receivables and inventories than originally anticipated. This loss was recorded in the fourth quarter of 2000. The balance sheets at December 30, 2000 and January 1, 2000 include liabilities subject to compromise aggregating $540,700,000 and $683,000,000, respectively, and principally represent unsecured long-term debt, prepetition trade accounts payable and other unsecured liabilities. The reduction in liabilities subject to compromise in 2000 principally relates to reductions in recorded income tax liabilities to claims filed with the bankruptcy court by the U.S. Internal Revenue Service and various other taxing authorities as well as court approved settlement payments. 1999 SPECIAL CHARGES In the third and fourth quarters of 1999, the Company recorded charges for provisions and losses on the sale of closeout and irregular inventory, costs related to impairment of certain European manufacturing facilities, severance, a debt guarantee and other asset writedowns and reserves. These charges totaled $345,800,000 ($126,600,000 in the third quarter and $219,200,000 in the fourth quarter) categorized as follows (in thousands of dollars): Provisions and losses on the sale of closeout and irregular merchandise............................................... $ 83,300 Impairment of European manufacturing facilities............. 30,000 Severance................................................... 30,600 Debt guarantee.............................................. 30,000 Other asset writedowns and reserves......................... 171,900 -------- $345,800 ========
Each of these categories is discussed below. As part of its restructuring activities, the Company decided to streamline product offerings by discontinuing unprofitable and low volume product offerings. In addition, the Company generated additional levels of irregular merchandise in 1999 as a result of its production problems. Further, selling prices for closeout and irregular merchandise decreased significantly during 1999. Also, inventory remaining at January 1, 2000 had to be written down to net realizable value. 1999 losses on the sale of closeout and irregular merchandise in excess of 1998 losses aggregated $22,500,000 and $25,800,000, respectively. Provisions recorded in 1999 in excess of provisions recorded in 1998 on remaining closeout and irregular inventory as of January 1, 2000 aggregated $13,300,000 and $21,700,000, respectively. Of the total charges, $58,100,000 were incurred in the fourth quarter of 1999. All of these charges are non-cash charges. As a result of the review of the strategic position and cost effectiveness of its organization and facilities worldwide, the Company was in the process of moving its assembly operations for T-shirts to be sold in Europe from the Republic of Ireland to Morocco. Estimates of undiscounted cash flows indicated that the carrying amounts of assets related to this move and other manufacturing facilities in the Republic of Ireland were not likely to be recovered. Therefore, as required by FAS 121, these assets were written down to their estimated 29 32 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) OPERATIONS -- (CONTINUED) 1999 SPECIAL CHARGES -- (CONTINUED) fair values, resulting in charges of approximately $30,000,000 in the fourth quarter of 1999 (all are non-cash charges). Severance costs consisted of salary and fringe benefits. Of the $30,600,000 of total severance costs, $27,400,000 related to an employment contract with Mr. Farley. This severance was recorded in the third quarter of 1999. Although reflected as a "Future Cash" charge, any severance payable to Mr. Farley would be treated as an unsecured pre-bankruptcy claim in the Reorganization Cases. The Company terminated Mr. Farley's employment agreement in 1999. Thereafter, the Company received approval from the Bankruptcy Court to reject the agreement. The debt guarantee charge relates to the loss contingency on the Company's guarantee of personal indebtedness of Mr. Farley (the "Loans"). Mr. Farley is in default under the Loans and under the reimbursement agreements with the Company. The total amount guaranteed is $59,300,000 as of February 28, 2001. The debt guarantee charge of $30,000,000 at January 1, 2000 was recorded in the third and fourth quarters of 1999 in the amounts of $10,000,000 and $20,000,000, respectively (this charge will require cash if paid). The Company's obligations under the guarantee are collateralized by 2,507,512 shares of FTL Inc. Preferred Stock and all of Mr. Farley's assets. The Company recorded charges for other asset writedowns and reserves totaling $171,900,000 (of which $148,300,000 are non-cash charges) comprised of the following (in thousands of dollars):
FOURTH TOTAL QUARTER YEAR -------- -------- Inventory markdown.......................................... $ 19,800 $ 39,300 Inventory shrinkage......................................... 19,800 37,300 Inventory obsolescence...................................... 16,300 32,400 Debt fees................................................... 6,000 10,500 Professional fees........................................... 6,300 6,600 Other charges............................................... 37,800 45,800 -------- -------- $106,000 $171,900 ======== ========
The inventory markdown provision reflected excess quantities with respect to continuing first quality programs and significantly reduced selling prices in 1999. Excess quantities were generated as the Company could not meet customer demand in the first eight months of 1999 due to production and distribution difficulties. Customers reduced demand for these products as a result of the lack of adequate supply leaving excess quantities once production had been increased to projected demand. The significant charges for inventory shrinkage resulted from the Company's 1999 decision to hire additional contractors to increase production and represents the difficulty in accounting for inventories at these new and existing contractors as well as the difficulty experienced in connection with in-transit inventories from a greatly extended pipeline. Inventory shrinkage experienced in 1999 was $81,500,000 compared with $56,300,000, $26,000,000, $18,900,000 and $17,600,000 in 1998, 1997, 1996 and 1995, respectively. Provisions for inventory obsolescence related to raw materials including excess labels and packaging as well as unbalanced components and obsolete cut parts. Debt fees include the increased cost of obtaining bank waivers and amendments during 1999 as a result of loan covenant violations and the write-off of fees of $6,000,000 principally related to the Company's accounts receivable securitization. See "SALE OF ACCOUNTS RECEIVABLE" in the Notes to Consolidated Financial Statements. Professional fees include amounts associated with the Company's restructuring efforts. 30 33 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) OPERATIONS -- (CONTINUED) 1999 SPECIAL CHARGES -- (CONCLUDED) Other charges include $12,800,000 of repair parts related to physical inventory and other adjustments, the write-off of an $8,000,000 insurance claim as recovery was no longer deemed probable in the fourth quarter of 1999, an $8,000,000 charge for a loss contingency related to a vacation pay settlement in Louisiana and a provision on the ultimate realization of certain current and non-current assets of $8,000,000. All of the above charges, except for the vacation pay loss contingency, were recorded in the fourth quarter of 1999. The above charges were recorded as $214,100,000 of increases to cost of sales, $67,200,000 of increases to Selling, general and administrative expenses and $64,500,000 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 remaining at December 30, 2000, cash charges total approximately $65,900,000 to be paid in 2001 and future years. Substantially all of the cash charges represent liabilities subject to compromise under the bankruptcy laws. 1999 COMPARED TO 1998 Net sales decreased $157,200,000 or 8.1% in 1999 compared to 1998. Pricing decreased $89,000,000 and sales volume and mix decreased $59,600,000. Sales of closeouts and irregulars declined $5,900,000 due to reduced prices reflecting market conditions. Within the individual product groups, Retail products increased $26,900,000 in the year ended January 1, 2000 compared to 1998 principally due to growth in men's and boys' underwear, childrenswear and casualwear offset by decreases in sales of intimate apparel and Gitano. The increases were principally due to new product programs and increased sales of excess and discontinued merchandise and irregulars. These increases were partially offset by lack of product availability. In addition, Retail casualwear sales increased in 1999 due to a new fleece program obtained from a major customer. The decrease in intimate apparel resulted from a lack of product availability. Gitano sales were impacted unfavorably by the loss of a major customer. Activewear sales declined $131,000,000 or 20.4% in 1999 compared to 1998 due to price reductions and lower volume. The lower volume experienced in activewear resulted from a lack of product availability in the first eight months of 1999. European sales declined $55,800,000 in 1999 compared to 1998 due to price reductions, lower volume of retail products and unfavorable currency effects (lower U.S. dollar). Lower volume of retail products in Europe resulted in sales reductions of $39,500,000 in 1999 compared to 1998 and reflected the Company's decision to pursue the up-market retail channel in 1999. Price reductions in Europe totaled $14,300,000 in 1999 compared to 1998 and reflected market conditions. 31 34 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) OPERATIONS -- (CONTINUED) 1999 COMPARED TO 1998 -- (CONTINUED)
1999 1998 ---------- ---------- (IN MILLIONS OF DOLLARS) NET SALES Retail products........................................... $1,027.1 $1,000.2 Activewear................................................ 510.4 641.4 Europe.................................................... 212.9 268.7 Other..................................................... 34.4 31.7 -------- -------- $1,784.8 $1,942.0 ======== ======== OPERATING EARNINGS (LOSS) Retail products........................................... $ (120.5) $ 104.3 Activewear................................................ (108.8) 81.7 Europe.................................................... (54.4) 29.9 Other..................................................... (8.6) (8.8) -------- -------- $ (292.3) $ 207.1 ======== ========
Gross earnings declined $416,500,000 or 81.9% in 1999 compared to 1998 and gross margin declined 21.0 percentage points to 5.2% for the year. Price decreases aggregated $89,000,000, sales volume and production mix declines totaled $26,800,000 and higher production costs accounted for $89,500,000 of the decline. The balance of $211,200,000 is the result of other charges including $39,300,000 of provisions for and sales of slow-moving and discontinued products, $32,400,000 of provisions for and sales of obsolete inventory, $83,300,000 of provisions and losses on the sale of closeout and irregular merchandise of repair parts, $25,000,000 of physical inventory adjustments in excess of 1998, $12,800,000 of repair parts related to physical inventory and other adjustments, a $9,600,000 charge for a market loss on a supply contract resulting from a previously sold facility and $8,800,000 of other miscellaneous adjustments. The Company experienced an operating loss in 1999 of $292,300,000 compared to operating earnings of $207,100,000 in 1998. In addition to the decrease in gross earnings, the unfavorable impact on operating earnings resulted from increases in Selling, general and administrative expenses. Selling, general and administrative expenses increased $90,700,000 in 1999 compared to 1998. The increase was due, in part, to an accrual for $30,000,000 of asset impairment charges related to the Company's European manufacturing facilities as a result of the move from the Republic of Ireland to Morocco. In addition, in 1999 the Company incurred nonrecurring severance costs of $30,600,000 and $6,600,000 of additional legal and professional costs associated with the Company's restructuring efforts and recognized increased amortization expense of $7,200,000 related to new computer software. Further, 1998 included the finalization of certain of the estimates recorded in connection with the special charges taken in 1997 which in total reduced 1998 Selling, general and administrative expense by $8,400,000. See "1997 RESTRUCTURING AND SPECIAL CHARGES" below. Also see "SPECIAL CHARGES" in the Notes to Consolidated Financial Statements. Selling, general and administrative expense as a percent of net sales increased 6.2 percentage points to 21.9% of net sales in 1999. Interest expense increased $3,200,000 or 3.4% in 1999 compared with 1998. The increases reflected a higher average interest rate. The full year increase was partially offset by lower average borrowing levels earlier in 1999 compared with 1998. See "CONTINGENT LIABILITIES" in the Notes to Consolidated Financial Statements and "LIQUIDITY AND CAPITAL RESOURCES" below. Net other expense in 1999 totaled $58,800,000 compared with net other income of $7,000,000 in 1998. Principal components of net other expense in 1999 included a $30,000,000 charge for a loss contingency on the Company's guarantee of personal indebtedness of Mr. Farley, the write-off of an $8,000,000 receivable related 32 35 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) OPERATIONS -- (CONTINUED) 1999 COMPARED TO 1998 -- (CONTINUED) to an insurance claim as recovery was no longer deemed probable in the fourth quarter of 1999, an $8,000,000 charge for a loss contingency related to a vacation pay settlement in Louisiana, a provision on the ultimate realization of certain current and non-current assets of $8,000,000, environmental costs of $7,400,000 and $16,900,000 for debt and other fee amortization and debt waivers (which includes the write-off of fees of $6,000,000 principally related to the Company's accounts receivable securitization) and accounts receivable securitization costs of $8,800,000. These costs were offset by a favorable environmental insurance settlement of $13,700,000, gains on the sale of fixed assets of $7,800,000 and a recovery of previously settled litigation of $3,900,000. Principal components of net other income in 1998 included $8,000,000 recognized on a business interruption insurance claim, $6,400,000 from settlement of the Acme Boot debt guarantees and net gains of $5,800,000 from property disposals, partially offset by accounts receivable securitization costs of $11,800,000. See "CONTINGENT LIABILITIES" and "SALE OF ACCOUNTS RECEIVABLE" in the Notes to Consolidated Financial Statements. Reorganization items represent costs incurred by the Company related to the Reorganization Cases. The reorganization items in 1999 aggregated approximately $3,000,000 and consist of professional fees which include legal, accounting and other services provided to the Company related to the Reorganization Cases. There is no income tax in the Cayman Islands. Income taxes do apply to results attributable to operations in the U.S. and certain other countries. The Company's 1999 income tax provision reflects a $36,700,000 provision to fully reserve all deferred tax assets and foreign income taxes. The effective income tax rate for 1998 differed from the U.S. Federal statutory rate of 35% primarily due to the impact of foreign earnings, certain of which are taxed at lower rates than in the United States, and to reduction of deferred tax asset valuation allowances attributable to 1997 special charges. These favorable factors were partially offset by goodwill amortization, a portion of which is not deductible for U.S. Federal income taxes, and state income taxes. The fixed dividend on the FTL, Inc. Preferred Stock of 4.5% of the liquidation preference of $71,700,000 equals $3,200,000 on an annual basis. In addition, preferred stockholders participate in FTL, Inc.'s earnings after provision for the fixed preferred stock dividend. Participation in earnings is determined as the ratio of preferred shares outstanding to the total of preferred and common shares outstanding (7.2% at January 1, 2000). Preferred stockholder participation in losses is limited to the preferred stockholders' prior participation in earnings. Because FTL, Inc. had a loss in 1999, the minority interest participation is limited to the fixed preferred dividends of $2,700,000 from the date of the Cayman reorganization (March 4, 1999) through January 1, 2000. In 1999, the Company paid dividends aggregating $1,900,000 to the holders of the FTL, Inc. Preferred Stock. The Company ceased paying dividends on the FTL, Inc. Preferred Stock subsequent to the third quarter of 1999. Discontinued operations reflect the Company's February 2000 decision to wind-down its Pro Player Sports and Licensing division. The 1999 loss from operations was ($37,600,000) compared to earnings from operations in 1998 of $22,900,000. Earnings from operations in 1998 included the reversal of the $22,000,000 incentive compensation accrual in the fourth quarter of 1998 as it was determined it was no longer probable that the Company would pay the incentive compensation at its Pro Player subsidiary. In addition, the 1999 loss from operations resulted from lower sales volume (impact on gross earnings of $24,700,000) and a $12,800,000 charge for obsolete inventories. The sales volume decreases resulted from a soft outerwear market with the significant increase in merchandise into the market (as a result of an inventory liquidation) by a major competitor, declines in the decorated Sports Licensed market, lower volume of knit products due to the loss of a major program with a customer and the loss of a major customer for the sale of Wilson products. Discontinued operations in 1999 includes an estimated loss on disposal of $47,500,000. 33 36 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) OPERATIONS -- (CONCLUDED) 1999 COMPARED TO 1998 -- (CONCLUDED) The balance sheet at January 1, 2000 includes liabilities subject to compromise aggregating $683,000,000 and principally represent unsecured long-term debt, prepetition trade accounts payable and other unsecured liabilities. LIQUIDITY AND CAPITAL RESOURCES LONG-TERM DEBT FTL, Inc. and substantially all of its subsidiaries, as debtors-in-possession, are parties to a Postpetition Credit Agreement dated as of December 29, 1999 (the "DIP Facility") with Bank of America as agent. The DIP Facility has been approved by the Bankruptcy Court and, as amended, includes a total commitment of $450,000,000 which is comprised of revolving notes of $350,000,000 and a term note of $100,000,000. Letter of Credit obligations under the revolver portion of the DIP Facility are limited to $175,000,000. The DIP Facility is intended to provide the Company with the cash and liquidity to conduct its operations and pay for merchandise shipments at normal levels during the course of the Reorganization Cases. The maximum borrowings, excluding the term commitments, under the DIP Facility are limited to 85% of eligible accounts receivable, 50% to 65% of eligible inventory and the assets existing as of the Petition Date. Various percentages of the proceeds from the sales of assets (as defined in the DIP Facility) will permanently reduce the commitments under the DIP Facility. Qualification of accounts receivable and inventory items as "eligible" is subject to unilateral change at the discretion of the lenders. Availability under the DIP Facility at March 31, 2001 was $270,100,000 and, in addition, the Company had $53,700,000 in invested cash at March 31, 2001. The lenders under the DIP Facility have a super-priority administrative expense claim against the estates of the Debtors. The DIP Facility expires on December 31, 2001. The DIP Facility is secured by substantially all of the assets of FTL, Ltd. and its subsidiaries and a perfected pledge of stock of substantially all of FTL, Ltd.'s subsidiaries, including those subsidiaries that did not file Chapter 11. The DIP Facility contains restrictive covenants including, among other things, the maintenance of minimum earnings before interest, taxes, depreciation and amortization and restructuring expenses as defined (EBITDAR), limitations on the incurrence of additional indebtedness, liens, contingent obligations, sale of assets, capital expenditures and a prohibition on paying dividends. The DIP loan limits annual capital expenditures for 2001 to a maximum of $75,000,000. Cash provided by operating activities in 2000 totaling $142,300,000 benefited from decreases in working capital and positive cash flow from the liquidation of the Company's discontinued Sports & Licensing operation, while cash used for operating activities totaling $254,200,000 in 1999 largely reflected the Company's manufacturing inefficiencies and the termination of the Company's receivable securitization at the end of 1999. For 2000, the primary factors in reconciling from the loss from continuing operations of $103,600,000 to cash provided by operating activities totaling $142,300,000 were depreciation and amortization of $116,500,000, a decrease in notes and accounts receivable of $88,800,000, an inventory reduction of $73,900,000 (excluding the effects of asset sales) and an increase in writedowns and reserves of $77,400,000 principally related to the costs associated with the closure of certain of the Company's higher cost facilities, other working capital changes of $26,100,000 and cash flows of discontinued operations (primarily generated from the reduction of working capital) of $25,400,000. These additive factors were partially offset by a decrease in liabilities subject to compromise of $142,300,000. Cash paid for reorganization items totaled $29,000,000. 34 37 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) LIQUIDITY AND CAPITAL RESOURCES -- (CONTINUED) LONG-TERM DEBT --(CONTINUED) For 1999, the primary positive factors in reconciling from the loss from continuing operations of $491,100,000 to cash used for operating activities of $254,200,000 were depreciation and amortization of $122,700,000 and the working capital decrease of $253,600,000 before the effect of terminating the Company's receivable securitization program. The termination of the Company's receivable securitization program reduced operating cash flows by $186,500,000. Cash flows of discontinued operations were a use of $47,800,000. Net cash provided by investing activities totaled $19,000,000 in 2000 compared with net cash used for investing activities of $30,900,000 in 1999. Capital expenditures were lower in 2000 ($26,800,000 compared with $34,400,000 in 1999). Proceeds from fixed asset sales were $12,700,000 lower than 1999; however, cash flows from investing activities in 2000 included $18,100,000 in proceeds from the sale of the Company's Gitano jeanswear division. Capital spending is anticipated to approximate $65,000,000 in 2001. As stated above, the DIP loan limits annual capital expenditures to a maximum of $75,000,000. Fruit of the Loom plans to invest approximately $200,000,000 from 2001 through 2003 primarily in state-of-the-art yarn and textile equipment that will enable it to increase economies of scale and manufacturing efficiencies, and incremental expansion of existing capacity. Net repayment from financing activities were $71,800,000 in 2000 compared with net proceeds of $328,200,000 in 1999 (including $152,200,000 of DIP financing), due to the favorable comparison in operating and investing cash flows, offset partially by additional cash retained. In order to satisfy its repurchase obligation arising from the Cayman Reorganization, FTL, Inc. commenced an offer on April 5, 1999 to repurchase all $250,000,000 of its 7 7/8% Senior Notes due October 15, 1999 (the "7 7/8% Senior Notes") at a price equal to 101% of the principal amount thereof plus accrued and unpaid interest. This offer expired on May 20, 1999. Holders of $204,200,000 of aggregate principal amount of the 7 7/8% Senior Notes tendered their notes. On June 4, 1999, FTL, Inc. paid these tendering holders an aggregate purchase price of $206,300,000 plus accrued interest. The remaining $45,800,000 principal amount of the 7 7/8% Senior Notes matured by the terms of the indenture for these notes and was repaid on October 15, 1999. On March 25, 1999, the Company issued $250,000,000 of 8 7/8% Senior Notes due April 2006 (the "Senior Notes"). Proceeds from the Senior Notes were approximately $242,700,000 and were initially used to repay outstanding borrowings under the Company's Bank Credit Agreement. The availability under the Bank Credit Agreement created through this repayment of outstanding borrowings was used to satisfy the Company's repurchase obligations with respect to the 7 7/8% Senior Notes. In December 1996, the Company entered into a three-year receivables purchase agreement that enabled it to sell to a third party up to a $250,000,000 undivided interest in a defined pool of its trade accounts receivable. The maximum amount outstanding as defined under the agreement varied based upon the level of eligible receivables. The agreement was refinanced in the fourth quarter of 1999 and increased to $275,000,000 and subsequently terminated with the Company's bankruptcy filing. Consequently, none of the Company's trade receivables were securitized at December 30, 2000 or January 1, 2000. 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 covered by the lease is $144,600,000. Additional liquidity of $30,400,000 expired unused on March 31, 1999. The total amount outstanding under this lease is $87,600,000 at December 30, 2000 and January 1, 2000. The amount outstanding under this lease was scheduled to be paid in 2000; however, due to the bankruptcy filing, payments were suspended on this lease. 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 35 38 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) LIQUIDITY AND CAPITAL RESOURCES -- (CONCLUDED) LONG-TERM DEBT --(CONCLUDED) 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. The reserve balance related to this provision was $54,200,000 at December 30, 2000 and January 1, 2000. The Company believes such lease should be characterized as a financing arrangement in the Reorganization Cases which would result in the cancellation of any obligation in connection with the distribution to the lessor under the Reorganization Plan. The Company believes that cash on hand, amounts available under the DIP Facility and funds from operations will enable the Company to meet its current liquidity and capital expenditure requirements during the Bankruptcy cases, although no assurances can be given in this regard. Until a plan of reorganization is approved, the Company's long-term liquidity and the adequacy of its capital resources cannot be determined. Inherent in a successful plan of reorganization is a capital structure which permits the Debtors to generate sufficient cash flow after reorganization to meet restructured obligations and fund the current obligations of the Debtors. Under the Bankruptcy Code, the rights and treatment of prepetition creditors and stockholders may be substantially altered. At this time it is not possible to predict the outcome of the Reorganization Cases, in general, or the effects of the Reorganization Cases on the business of the Debtors or on the interests of creditors. The Disclosure Statement filed on March 15, 2001 did not provide any recovery to FTL Ltd.'s equity security holders. ACCORDINGLY, MANAGEMENT BELIEVES THAT CURRENT EQUITY SECURITY HOLDERS (COMMON OR PREFERRED STOCK) WILL NOT RECEIVE ANY DISTRIBUTION UNDER ANY REORGANIZATION PLAN AS A RESULT OF THE ISSUANCE OF NEW EQUITY TO EXISTING CREDITORS. The Company filed the Reorganization Plan on March 15, 2001. The Reorganization Plan provides for a capital structure which the Company believes will enable it to generate sufficient cash flow after reorganization to meet its restructured obligations and fund the current obligations of the Company. A significant component of the proposed plan of reorganization is obtaining "Exit Financing." In addition, the Company's creditors and equity security holders must have an opportunity to review the Plan and the Bankruptcy Court must determine the Plan to be fair and reasonable. There can be no assurance that Exit Financing will be obtained or that the Plan will be determined fair and reasonable by the Bankruptcy Court. Also, there can be no assurance that the proposed capital structure will enable the Company to generate sufficient cash flow after reorganization to meet its restructured obligations and fund its current obligations. 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 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which is required to be adopted in years beginning after June 15, 1999. In June 1999 the Financial Accounting Standards Board issued Statement No. 137, Deferral of the Effective Date of FASB Statement No. 133, which deferred the effective date to all fiscal quarters for fiscal years beginning after June 15, 2000. The Company adopted the new Statement effective for the quarter ending March 31, 2001. The Statement requires 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 the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments 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 adoption of 36 39 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONCLUDED) ACCOUNTING STANDARDS -- (CONCLUDED) Statement No. 133 on December 31, 2000, resulted in no changes in the Company's net income or other comprehensive income. EURO CONVERSION The adoption of a common currency by countries of the European Economic Community on January 1, 1999 may ultimately expose the Company's European operations to certain risk factors such as the resulting cross-border transparency of pricing differences. Certain system conversion costs will also necessarily be incurred. Because the Company already competes throughout Western Europe, however, the emergence of a single market in this region did not immediately expose the Company to increased competition and may present opportunities for further economies of scale. Management anticipates no material adverse effect on the Company's financial position or results of operations. Sales in the affected countries totaled less than 10% of the Company's net sales for the years ended December 30, 2000 and January 1, 2000. IMPACT OF YEAR 2000 In prior years, the Company discussed the nature and progress of its plans to become Year 2000 ready. In late 1999, the Company completed its remediation and testing of systems. As a result of those planning and implementation efforts, the Company experienced no significant disruptions in mission critical information technology and non-information technology systems and believes those systems successfully responded to the Year 2000 date change. The Company expensed approximately $8,400,000 during 1999 in connection with remediating its systems. The Company is not aware of any material problems resulting from Year 2000 issues, either with its products, its internal systems, or the products and services of third parties. 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 Consolidated Financial Statements, and further disclosure relating to financial instruments is included in "FINANCIAL INSTRUMENTS" in the Notes to Consolidated Financial Statements. INTEREST RATES The fair value of the Company's total long-term debt is estimated at $615,700,000 and $557,800,000 at December 30, 2000 and January 1, 2000, respectively, based upon quoted market prices and yields obtained through independent pricing sources for the same or similar types of borrowing arrangements, and taking into consideration the underlying terms of the debt and management's estimate of the effects of the Chapter 11 filing on the fair value of its long-term debt. Such fair value estimates reflect a deficit of $789,500,000 and $920,000,000 as compared to the carrying value of debt at December 30, 2000 and January 1, 2000, respectively. Market risk is estimated as the potential change in fair value resulting from a hypothetical 10% change in interest rates. Management believes that market risk as a result of interest rate changes from 1999 to 2000 and 2000 to 2001 will have a minimal effect on the fair value of the Company's debt due to the Chapter 11 filing and because the fair value of the Company's debt is traded based more on the public's perception of its liquidity and reorganization plans than on any fundamental changes in the debt markets. 37 40 ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK -- (CONCLUDED) INTEREST RATES -- (CONCLUDED) Accordingly, a hypothetical change in interest rates would not necessarily impact the fair value of the Company's fixed rate debt. The Company had $745,700,000 and $807,700,000 of variable rate debt outstanding at December 30, 2000 and January 1, 2000, respectively. At these borrowing levels, a hypothetical 10% adverse change in the interest rates in effect at year-end 2000 and 1999 would have had unfavorable impacts of $7,900,000 and $7,800,000 in 2000 and 1999, respectively, on the Company's pretax earnings and cash flows. The primary interest rate exposures on floating rate debt are with respect to the U.S. interbank rate and to the prime rate. 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. The primary currencies to which the Company is exposed include the Euro and the British pound. The Company generally views as long-term its investments in foreign subsidiaries with a functional currency other than the U.S. 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 $279,000,000 at December 30, 2000 and $283,600,000 at January 1, 2000. 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 amounts to $9,100,000 at December 30, 2000 and $7,800,000 at January 1, 2000. COMMODITY PRICES The availability and price of cotton are 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 Company does not have any cotton futures outstanding at December 30, 2000 or January 1, 2000. The Company, through one of its subsidiaries, expects to enter into futures contracts in 2001. FORWARD-LOOKING INFORMATION The above risk management discussion and the estimated amounts generated from the sensitivity analyses contain 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 analytical methods used by the Company to assess and mitigate risks discussed above should not be considered projections of future events or losses. 38 41 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Ernst & Young LLP, Independent Auditors........... 40 Consolidated Balance Sheet -- December 30, 2000 and January 1, 2000................................................... 41 Consolidated Statement of Operations for Each of the Years Ended December 30, 2000, January 1, 2000 and January 2, 1999...................................................... 42 Consolidated Statement of Stockholders' Equity (Deficit) for Each of the Years Ended December 30, 2000, January 1, 2000 and January 2, 1999....................................... 43 Consolidated Statement of Cash Flows for Each of the Years Ended December 30, 2000, January 1, 2000 and January 2, 1999...................................................... 44 Notes to Consolidated Financial Statements.................. 45 Supplementary Data (Unaudited).............................. 104 Financial Statement Schedule: Schedule II -- Valuation and Qualifying Accounts............ 116
Note: All other schedules are omitted because they are not applicable or not required. 39 42 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS To the Board of Directors of Fruit of the Loom, Ltd. We have audited the accompanying consolidated balance sheet of Fruit of the Loom, Ltd. and Subsidiaries (the "Company") as of December 30, 2000 and January 1, 2000, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 30, 2000. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Fruit of the Loom, Ltd. and Subsidiaries at December 30, 2000 and January 1, 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 30, 2000, in conformity with accounting principles generally accepted in the United States. 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. The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in the Notes to the Consolidated Financial Statements, on December 29, 1999, Fruit of the Loom, Ltd., and certain of its subsidiaries filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code ("Chapter 11"). The Company is currently operating its business under the jurisdiction of Chapter 11 and the United States Bankruptcy Court in Wilmington, Delaware (the "Bankruptcy Court"), and continuation of the Company as a going concern is contingent upon, among other things, the ability to formulate a plan of reorganization which will gain approval of the requisite parties under the United States Bankruptcy Code and confirmation by the Bankruptcy Court, the ability to comply with its debtor-in-possession financing facility, and the Company's ability to return to profitability, generate sufficient cash from operations and obtain financing sources to meet its future obligations. In addition, the Company has experienced operating losses, and negative operating cash flows and is currently in default under substantially all of its prepetition debt agreements. These matters raise substantial doubt about the Company's ability to continue as a going concern. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classifications of liabilities that might result from the outcome of these uncertainties. ERNST & YOUNG LLP Chicago, Illinois February 13, 2001 except for "Reorganization Cases," "Long-Term Debt," and "Contingent Liabilities" notes as to which the date is March 28, 2001 40 43 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) CONSOLIDATED BALANCE SHEET
DECEMBER 30, JANUARY 1, 2000 2000 ------------ ---------- (IN THOUSANDS OF DOLLARS) ASSETS CURRENT ASSETS Cash and cash equivalents (including restricted cash)..... $ 134,000 $ 44,500 Notes and accounts receivable (less allowance for possible losses of $44,800,000 and $35,000,000, respectively).... 143,400 232,100 Inventories Finished goods.......................................... 417,900 422,800 Work in process......................................... 102,400 169,900 Materials and supplies.................................. 45,100 66,400 ---------- ---------- 565,400 659,100 Net assets of discontinued operations..................... -- 41,100 Other..................................................... 26,100 27,700 ---------- ---------- Total current assets................................ 868,900 1,004,500 ---------- ---------- PROPERTY, PLANT AND EQUIPMENT Land...................................................... 14,300 12,900 Buildings, structures and improvements.................... 267,800 279,900 Machinery and equipment................................... 831,500 909,800 Construction in progress.................................. 4,100 2,000 ---------- ---------- 1,117,700 1,204,600 Less accumulated depreciation............................. 841,100 797,400 ---------- ---------- Net property, plant and equipment................... 276,600 407,200 ---------- ---------- OTHER ASSETS Goodwill (less accumulated amortization of $376,700,000 and $352,100,000, respectively)......................... 606,600 631,200 Other..................................................... 77,300 124,300 ---------- ---------- Total other assets.................................. 683,900 755,500 ---------- ---------- $1,829,400 $2,167,200 ========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES Current maturities of long-term debt...................... $ 746,400 $ 635,800 Trade accounts payable.................................... 33,500 31,400 Net liabilities of discontinued operations................ 5,100 -- Other accounts payable and accrued expenses............... 236,600 198,000 ---------- ---------- Total current liabilities........................... 1,021,600 865,200 ---------- ---------- NONCURRENT LIABILITIES Long-term debt............................................ 410,300 593,500 Net liabilities of discontinued operations................ 11,900 9,400 Other..................................................... 11,500 37,900 ---------- ---------- Total noncurrent liabilities........................ 433,700 640,800 ---------- ---------- LIABILITIES SUBJECT TO COMPROMISE........................... 540,700 683,000 ---------- ---------- MINORITY INTEREST........................................... 71,700 71,700 ---------- ---------- COMMON STOCKHOLDERS' DEFICIT Ordinary shares and capital in excess of par value, $.01 par value; authorized, Class A, 200,000,000 shares, Class B, 100 shares; issued and outstanding: Class A Ordinary Shares -- 66,931,450 shares............ 257,500 257,500 Class B Ordinary Shares -- 4 shares..................... -- -- Accumulated deficit....................................... (426,000) (299,600) Accumulated other comprehensive loss...................... (69,800) (51,400) ---------- ---------- Total common stockholders' deficit.................. (238,300) (93,500) ---------- ---------- $1,829,400 $2,167,200 ========== ==========
See accompanying notes. 41 44 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 30, JANUARY 1, JANUARY 2, 2000 2000 1999 ------------ ---------- ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) Net sales................................................. $1,549,800 $1,784,800 $1,942,000 Cost of sales............................................. 1,301,300 1,692,700 1,433,400 ---------- ---------- ---------- Gross earnings.......................................... 248,500 92,100 508,600 Selling, general and administrative expenses.............. 268,100 359,800 276,900 Goodwill amortization..................................... 24,600 24,600 24,600 ---------- ---------- ---------- Operating earnings (loss)............................... (44,200) (292,300) 207,100 Interest expense.......................................... (124,300) (97,100) (93,900) Other income (expense) -- net............................. (900) (58,800) 7,000 ---------- ---------- ---------- Earnings (loss) from continuing operations before reorganization items, income tax provision and minority interest.................................... (169,400) (448,200) 120,200 Reorganization items...................................... (48,200) (3,000) -- ---------- ---------- ---------- Earnings (loss) from continuing operations before income tax provision and minority interest.................. (217,600) (451,200) 120,200 Income tax provision...................................... (114,000) 37,200 7,200 Minority interest......................................... -- 2,700 -- ---------- ---------- ---------- Earnings (loss) from continuing operations.............. (103,600) (491,100) 113,000 Discontinued operations -- Sports & Licensing Earnings (loss) from operations...................... (2,600) (37,600) 22,900 Estimated loss on disposal........................... (20,200) (47,500) -- ---------- ---------- ---------- Net earnings (loss).................................. $ (126,400) $ (576,200) $ 135,900 ========== ========== ========== Earnings (loss) per common share: Continuing operations................................... $ (1.55) $ (7.25) $ 1.57 Discontinued operations -- Sports & Licensing Earnings (loss) from operations...................... (0.04) (0.55) 0.32 Estimated loss on disposal........................... (0.30) (0.70) -- ---------- ---------- ---------- Net earnings (loss).................................. $ (1.89) $ (8.50) $ 1.89 ========== ========== ========== Earnings (loss) per common share -- assuming dilution: Continuing operations................................... $ (1.55) $ (7.25) $ 1.56 Discontinued operations -- Sports & Licensing Earnings (loss) from operations...................... (0.04) (0.55) 0.32 Estimated loss on disposal........................... (0.30) (0.70) -- ---------- ---------- ---------- Net earnings (loss).................................. $ (1.89) $ (8.50) $ 1.88 ========== ========== ========== Average common shares..................................... 67,000 67,800 72,000 ========== ========== ========== Average common shares -- assuming dilution................ 67,000 67,800 72,300 ========== ========== ==========
See accompanying notes. 42 45 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK ACCUMULATED AND CAPITAL IN OTHER COMMON EXCESS OF RETAINED COMPREHENSIVE SHARES PAR VALUE EARNINGS INCOME TOTAL ------- -------------- --------- ------------- --------- (IN THOUSANDS OF DOLLARS) BALANCE, DECEMBER 31, 1997............... 71,901 $319,000 $ 140,700 $(37,600) $ 422,100 --------- Class A shares issued upon exercise of options.............................. 332 9,100 9,100 --------- Restricted Stock -- Class A shares issued -- net......... 38 1,600 1,600 --------- Class A shares repurchased............. (121) (3,000) (3,000) --------- Net earnings........................... 135,900 135,900 Foreign currency translation adjustments -- net................... (6,400) (6,400) Minimum pension liability adjustment... (10,400) (10,400) --------- Comprehensive income -- 1998........... 119,100 ------- -------- --------- -------- --------- BALANCE, JANUARY 2, 1999................. 72,150 326,700 276,600 (54,400) 548,900 --------- Class A shares issued upon exercise of options.............................. 1 -- -- --------- Restricted Stock -- Class A shares issued -- net......... 77 2,500 2,500 --------- FTL Inc. Class B Shares exchanged for FTL Inc. Preferred Stock............. (5,229) (71,700) (71,700) --------- Net loss............................... (576,200) (576,200) Foreign currency translation adjustments -- net................... (18,300) (18,300) Minimum pension liability adjustment... 11,000 11,000 Unrealized gain on available-for-sale securities........................... 10,300 10,300 --------- Comprehensive loss -- 1999............. (573,200) ------- -------- --------- -------- --------- BALANCE, JANUARY 1, 2000................. 66,999 257,500 (299,600) (51,400) (93,500) --------- Restricted Stock -- Class A shares cancelled -- net...... (43) -- -- --------- Net loss............................... (126,400) (126,400) Foreign currency translation adjustments -- net................... (12,600) (12,600) Unrealized gain on available-for-sale securities Holding gain......................... 5,100 5,100 Gain reclassified to net income...... (10,900) (10,900) --------- Comprehensive loss -- 2000............. (144,800) ------- -------- --------- -------- --------- BALANCE, DECEMBER 30, 2000............... 66,956 $257,500 $(426,000) $(69,800) $(238,300) ======= ======== ========= ======== =========
See accompanying notes. 43 46 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED ---------------------------------------- DECEMBER 30, JANUARY 1, JANUARY 2, 2000 2000 1999 ------------ ----------- ----------- (IN THOUSANDS OF DOLLARS) CASH FLOWS FROM OPERATING ACTIVITIES Earnings (loss) from continuing operations............. $ (103,600) $(491,100) $ 113,000 Adjustments to reconcile to net operating cash flows: Depreciation and amortization....................... 116,500 122,700 107,600 Deferred income tax provision....................... 200 36,700 (6,100) Decrease (increase) in notes and accounts receivable........................................ 88,800 (123,300) (5,800) Decrease in inventories............................. 73,900 54,600 97,500 Increase (decrease) in trade accounts payable....... 2,100 26,400 (113,300) Other working capital changes....................... 26,100 109,400 7,400 (Gain) loss on sale of marketable equity securities........................................ (14,800) 600 (700) Net decrease in liabilities subject to compromise... (142,300) -- -- Consolidation of operations -- writedowns and reserves.......................................... 77,400 -- -- Net payments on retained liabilities related to former subsidiaries............................... (1,400) (8,600) (13,400) Cash flows of discontinued operations............... 25,400 (47,800) 8,500 Other -- net........................................ 23,000 66,200 (72,000) ----------- --------- --------- Net operating cash flows before reorganization items........................................ 171,300 (254,200) 122,700 Net cash used for reorganization items.............. (29,000) -- -- ----------- --------- --------- Net operating cash flows....................... 142,300 (254,200) 122,700 ----------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures................................... (26,800) (34,400) (41,600) Proceeds from sale of property, plant & equipment...... 9,300 22,000 86,400 Proceeds from sale of marketable equity securities..... 16,600 6,100 -- Proceeds from sale of Gitano........................... 18,100 -- -- Payment on Acme Boot debt guarantee.................... -- -- (65,900) Other -- net........................................... 1,800 (24,600) (19,100) ----------- --------- --------- Net investing cash flows....................... 19,000 (30,900) (40,200) ----------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES DIP financing proceeds................................. 1,381,200 152,200 -- DIP financing payments................................. (1,443,700) -- -- Proceeds from issuance of long-term debt............... -- 240,100 -- Proceeds under line-of-credit agreements............... -- 727,300 874,000 Payments under line-of-credit agreements............... (8,700) (507,200) (836,200) Principal payments on long-term debt and capital leases.............................................. (600) (282,300) (138,800) Subsidiary preferred minority dividends................ -- (1,900) -- Common stock issued.................................... -- -- 6,800 Common stock repurchased............................... -- -- (3,000) ----------- --------- --------- Net financing cash flows....................... (71,800) 328,200 (97,200) ----------- --------- --------- Net increase (decrease) in cash and cash equivalents (including restricted cash)............................ 89,500 43,100 (14,700) Cash and cash equivalents (including restricted cash) at beginning of year...................................... 44,500 1,400 16,100 ----------- --------- --------- Cash and cash equivalents (including restricted cash) at end of year............................................ $ 134,000 $ 44,500 $ 1,400 =========== ========= =========
See accompanying notes. 44 47 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS REORGANIZATION CASES GENERAL. Fruit of the Loom, Ltd. ("FTL Ltd., Fruit of the Loom or the Company"), Fruit of the Loom, Inc. ("FTL Inc.") and 32 direct and indirect subsidiaries, debtors and debtors-in-possession (collectively, the "Debtors") commenced reorganization cases (the "Reorganization Cases") by filing petitions for relief under chapter 11 ("Chapter 11"), title 11 of the United States Code, 11 U.S.C. sec.sec. 101-1330 (as amended, the "Bankruptcy Code") on December 29, 1999 (the "Petition Date") in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). On December 30, 1999, FTL Ltd. (a Cayman Islands company) also commenced a proceeding under the Companies Law (the "Cayman Proceeding") in the Grand Court of the Cayman Islands (the "Cayman Court"). The Reorganization Cases are being jointly administered, for procedural purposes only, before the Bankruptcy Court under Case No. 99-4497(PJW). Pursuant to Sections 1107 and 1108 of the Bankruptcy Code, FTL Ltd. and FTL Inc., as debtors and debtors-in-possession, have continued to manage and operate their assets and businesses subject to the supervision and orders of the Bankruptcy Court, pending confirmation of the joint plan of reorganization (the "Reorganization Plan") contained in the disclosure statement (the "Disclosure Statement") filed with the Bankruptcy Court on March 15, 2001, pursuant to Section 1125 of the Bankruptcy Code. Because FTL Ltd. and FTL Inc. are operating as debtors-in-possession under the Bankruptcy Code, the existing directors and officers of FTL Ltd. and FTL Inc. continue to govern and manage the operations of FTL Ltd. and FTL Inc., respectively, subject to the supervision and orders of the Bankruptcy Court. The existing directors and officers of FTL LTD. ONLY, continue to govern and manage the operations of FTL Ltd., subject to the supervision of the Joint Provisional Liquidators ("JPL's") and the Cayman Court. Certain subsidiaries were not included in the Reorganization Cases. Condensed combined financial statements of the entities in reorganization are presented herein. CAYMAN ISLANDS PROVISIONAL LIQUIDATION. On December 30, 1999, FTL Ltd. voluntarily filed a Petition in the Cayman Court for the appointment of Theo Bullmore and Simon Whicker as JPL's (Cause No. 823 of 1999). The JPL's were appointed pursuant to the Companies Law sec.. 99. Among Orders made by the Cayman Court on the presentation of the Petition was an Injunction restraining further proceedings in any action, suit or proceedings against FTL Ltd. without first obtaining leave of the Cayman Court. Under the Companies Law section 110 the Cayman Court conferred the powers of an Official Liquidator (section 109) on the JPL's. Those powers include: (a) to bring or defend any action, civil or criminal, on behalf of FTL Ltd.; (b) to carry on the business of FTL Ltd. to sell the real and personal property of FTL Ltd.; (c) to do all acts and execute all contracts, deeds, receipts and documents on behalf of FTL Ltd.; and (d) to oversee the continuation of the business of the Company under the control of the Company's Board of Directors, and under the supervision of the Cayman Court and the Bankruptcy Court. Although FTL Ltd. is authorized to operate its business and manage its properties as debtor-in-possession, it may not engage in transactions outside the ordinary course of business without obtaining the sanction of the JPL's and complying with the Orders of the Grand Court. It is intended that the Cayman Proceedings will be conducted in tandem with the Reorganization Cases. On March 22, 2001, the JPL's, on behalf of FTL Ltd. only, filed with the Cayman Court a "Scheme of Arrangement" in the Cayman Proceeding. REORGANIZATION PLAN PROCEDURES. The Debtors expect to reorganize their affairs under the protection of Chapter 11 and, accordingly, the Debtors filed the Reorganization Plan with the Bankruptcy Court on March 15, 2001. Although the Reorganization Plan contemplates emergence in 2001, there can be no assurance at this time that the Reorganization Plan proposed by the Debtors will be approved or confirmed by 45 48 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) REORGANIZATION CASES -- (CONCLUDED) the Bankruptcy Court, or that the Reorganization Plan will be consummated. The Disclosure Statement filed on March 15, 2001 did not provide any recovery to FTL Ltd.'s equity security holders. Accordingly, management believes that current equity security holders (common or preferred stock) will not receive any distribution under any reorganization plan as a result of the issuance of new equity to existing creditors. The consummation of a plan of reorganization is the principal objective of the Reorganization Cases. The Reorganization Plan sets forth the means for satisfying claims and interests in the Company and its debtor subsidiaries, including the liabilities subject to compromise. The consummation of the Reorganization Plan will require the requisite vote of impaired creditors entitled to vote under the Bankruptcy Code and confirmation of the plan by the Bankruptcy Court. BASIS OF FINANCIAL STATEMENT PRESENTATION The consolidated financial statements have been presented in accordance with the American Institute of Certified Public Accountants Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" (SOP 90-7), and have been prepared in accordance with accounting principles generally accepted in the United States applicable to a going concern, which principles, except as otherwise disclosed, assume that assets will be realized and liabilities will be discharged in the ordinary course of business. As a result of the Reorganization Cases and circumstances relating to this event, including FTL Ltd.'s debt structure, default on all prepetition debt, negative cash flows, its recurring losses, and current economic conditions, such realization of assets and liquidation of liabilities are subject to significant uncertainty. While under the protection of Chapter 11, the Company may sell or otherwise dispose of assets, and liquidate or settle liabilities, for amounts other than those reflected in the financial statements. Additionally, the amounts reported on the consolidated balance sheet could materially change because of changes in business strategies and the effects of any proposed plan of reorganization. The appropriateness of using the going concern basis is dependent upon, among other things, confirmation of a plan of reorganization, future profitable operations, the ability to comply with the terms of the debtor-in-possession financing facility and the ability to generate sufficient cash from operations and financing arrangements to meet obligations. In the Reorganization Cases, substantially all unsecured liabilities as of the Petition Date are subject to compromise or other treatment under a plan of reorganization which must be confirmed by the Bankruptcy Court after submission to any required vote by affected parties. For financial reporting purposes, those liabilities and obligations whose treatment and satisfaction are dependent on the outcome of the Reorganization Cases, have been segregated and classified as liabilities subject to compromise under reorganization proceedings in the consolidated balance sheets. Generally, all actions to enforce or otherwise effect repayment of prepetition liabilities as well as all pending litigation against the Debtors are stayed while the Debtors continue their business operations as debtors-in-possession. Unaudited schedules have been filed by the Debtors with the Bankruptcy Court setting forth the assets and liabilities of the Debtors as of the Petition Date as reflected in the Debtors' accounting records. The ultimate amount of and settlement terms for such liabilities are subject to an approved plan of reorganization and accordingly are not presently determinable. Under the Bankruptcy Code, the Debtors may elect to assume or reject real estate leases, employment contracts, personal property leases, service contracts and other prepetition executory contracts, subject to Bankruptcy Court approval. Claims for damages resulting from the rejection of real estate leases and other executory contracts will be subject to separate bar dates. The Debtors have not reviewed all leases for assumption or rejection but will analyze their leases and executory contracts and may assume or reject leases and contracts. Such rejections could result in additional liabilities subject to compromise. 46 49 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONSOLIDATED STATEMENT OF OPERATIONS Pursuant to SOP 90-7, revenues and expenses, realized gains and losses, and provisions for losses resulting from the reorganization of the business are reported in the Consolidated Statement of Operations separately as reorganization items. Professional fees are expensed as incurred. Interest expense is reported only to the extent that it will be paid during the cases or that it is probable that it will be an allowed claim. Reorganization items are reported separately within the operating, investing and financing categories of the Consolidated Statement of Cash Flows. CAYMAN REORGANIZATION On March 4, 1999, FTL, Ltd., a Cayman Islands company, became the parent holding company of FTL, Inc. pursuant to a reorganization (the "Cayman Reorganization") approved by the stockholders of FTL Inc. on November 12, 1998. Hereinafter the "Company" refers to the operations of FTL Inc. and subsidiaries through March 3, 1999 and the operations of FTL Ltd. and subsidiaries from March 4, 1999. Hereinafter FTL Inc. refers to the domestic subsidiary that owned all of the Company's operations as of July 3, 1999. At the beginning of the third quarter of 1999, FTL Inc. transferred ownership of its Central American subsidiaries that perform essentially all of the Company's sewing and finishing operations for the U.S. market to FTL Caribe Ltd., a Cayman Islands company directly wholly owned by FTL Ltd. As originally planned, when fully implemented, the Cayman Reorganization would have transferred ownership from FTL Inc. to FTL Ltd., or a non-United States subsidiary of FTL Ltd., of essentially all businesses and subsidiaries of FTL Inc. located outside of the United States (other than certain operations in Canada and Mexico) and would have transferred beneficial ownership of certain trademarks from FTL Inc. to FTL Ltd. The Cayman Reorganization was not fully implemented before the Petition Date; neither the trademarks nor FTL Inc.'s indirect European subsidiaries were transferred to FTL Ltd. FTL Ltd.'s Class A Ordinary Shares were listed on the New York Stock Exchange ("NYSE"). The trading of FTL Ltd.'s Class A Ordinary Shares was suspended by the NYSE following the commencement of the Reorganization Cases, and the shares thereafter were delisted. On April 26, 2000, FTL Ltd.'s Class A Ordinary Shares began trading as an over-the-counter equity security under the symbol "FTLAQ." Effective June 14, 2000, Fruit of the Loom was notified by the NASDAQ -- AMEX Market Group ("NASDAQ") that it had fallen below certain continued listing requirements and the 7% Debentures due March 15, 2011 issued by FTL Inc. were delisted. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION. The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany accounts and transactions have been eliminated. FISCAL YEAR. Effective January 1, 1998, the Company changed its year-end from December 31 to a 52 or 53 week year ending on the Saturday nearest December 31. Fiscal years 2000, 1999 and 1998 ended on December 30, 2000, January 1, 2000 and January 2, 1999, respectively. USE OF ESTIMATES. The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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, demand for the Company's activewear screenprint products, the competitive 47 50 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) pricing environment within the basic apparel segment of the apparel industry, the Company's ability to develop, market and sell new products, the success of planned advertising, marketing and promotional campaigns, international activities, legal proceedings, other contingent liabilities and the actual fair values of assets held for sale, impaired assets and leased assets covered by residual value guarantees. REVENUE RECOGNITION. The Company records revenues when all of the following criteria are met: (i) terms of sale are evidenced by a binding purchase order or on-line authorization; (ii) delivery has occurred; (iii) the price is fixed or determinable; and (iv) collection of amounts owed for goods shipped is reasonably assured. SALES INCENTIVES. In May 2000, the Emerging Issues Task Force ("EITF") reached a consensus on Issue 00-14, Accounting for Certain Sales Incentives. EITF 00-14 addresses the recognition and income statement classification of various sales incentives. Among its requirements, the consensus will require the costs related to consumer coupons currently classified as Selling, general and administrative expenses to be classified as a reduction of Net sales. The impact of adopting this consensus is not expected to have a material impact on the Company's results of operations. SHIPPING COSTS. The Company adopted EITF 00-10 Accounting for Shipping and Handling Fees and Costs in the fourth quarter of fiscal 2000. Shipping costs related to shipments between production facilities and shipments from production facilities to distribution facilities are reflected in Costs of sales. Shipments between distribution facilities and consumer shipments are reflected in Selling, general and administrative expenses. Amounts billed to customers for shipping costs are reflected in Net sales. INVENTORIES. Inventory costs include material, labor and factory overhead. Inventories are stated at the lower of cost (first-in, first-out) or market. 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. Buildings, structures and improvements are depreciated over 20 years. Machinery and equipment are depreciated over periods not exceeding 10 years. GOODWILL. Goodwill is amortized using the straight-line method over periods ranging from 30 to 40 years. MARKETABLE SECURITIES. Investments in marketable equity securities are included in Other assets at fair value. Unrealized gains and losses on trading securities are included in Other income. Unrealized gains and losses on available-for-sale securities are reported net of tax in a separate component of Stockholders' Deficit. Realized gains and losses (determined based on specific identification method) on all securities and declines in value of available-for-sale securities judged to be other than temporary are included in Other income. The fair value of available-for-sale securities aggregated $8,100,000 at December 30, 2000 and $10,800,000 at January 1, 2000. The cost of these securities totaled $2,900,000 at December 30, 2000 and $500,000 at January 1, 2000. Other investments totaled $8,600,000 at December 30, 2000 and $12,500,000 at January 1, 2000. The Company sold securities for aggregate proceeds of $16,600,000 in 2000 and $6,100,000 in 1999 and purchased securities at an aggregate cost of $1,100,000 in 2000 and $4,000,000 in 1999. DERIVATIVES AND HEDGING ACTIVITIES -- BEFORE ADOPTION OF STATEMENT NO. 133. The Company periodically uses cotton futures contracts to hedge a portion of forecasted 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. Contract terms match the Company's purchasing cycle. Futures contracts are closed by cash 48 51 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) settlement. Open futures contracts are marked to market. Realized and unrealized gains and losses are deferred and recognized in 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. The Company had no position in cotton futures contracts as of December 30, 2000 or January 1, 2000, or at any other time since August 1999. The Company has periodically used interest rate swaps to limit the risk of exposure to increases in interest rates on selected portions of its variable rate debt. These agreements involve the exchange of payments based on a variable interest rate for payments 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. The Company had no position in interest rate swaps as of December 30, 2000 or January 1, 2000, or at any other time since December 1999. DERIVATIVES AND HEDGING ACTIVITIES -- ADOPTION OF STATEMENT NO. 133. In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which is required to be adopted in years beginning after June 15, 2000. The Company adopted Statement No. 133 effective December 31, 2000. The Statement requires 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 the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will be either: (i) offset in earnings against changes in the fair values of hedged assets, liabilities or firm commitments; or (ii) 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 adoption of Statement No. 133 on December 31, 2000, resulted in no changes in the Company's net income or other comprehensive income. At the adoption date, the Company's position with respect to derivative instruments and hedging activities consisted of fixed price cotton purchase contracts that qualify for the "normal purchases and sales" exclusion under Statement No. 133. The exclusion precludes derivative accounting for nonfinancial instruments that are in quantities expected to be used over a reasonable period in the normal course of business. 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 30, 2000 and January 1, 2000 were $4,200,000 and $6,000,000, 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. 49 52 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONCLUDED) STOCK BASED COMPENSATION. The Company accounts for stock based compensation in accordance with Accounting Principles Board Opinion No. 25 ("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. IMPAIRMENT. 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. Assets to be disposed of are adjusted to fair value less cost to sell if less than book value. EMPLOYEE BONUS PLANS AND OTHER INCENTIVE COMPENSATION. The Company has a performance based management incentive plan for officers and key employees of the Company based upon performance related criteria determined at the discretion of the Compensation Committee of the Board of Directors. The Company accrues amounts based on anticipated performance for the current year, and awards are made in the first quarter of the succeeding year. RECLASSIFICATIONS. Certain prior year amounts have been reclassified to conform with the current year presentation. DISCONTINUED OPERATIONS On February 23, 2000, the Bankruptcy Court approved the Company's plan to discontinue the operations of the Company's Pro Player Sports and Licensing Division ("Pro Player"). In accordance with accounting principles generally accepted in the United States, Pro Player has been treated as a discontinued operation in the accompanying consolidated financial statements. A portion of the Company's interest expense (in the amount of interest expense in each period presented below) has been allocated to discontinued operations based on the debt balance attributable to those operations. Income taxes have been provided on a separate company basis. In connection with the Company's decision to discontinue the operations of Pro Player, $47,500,000 was accrued in 1999 for the loss on disposal of the assets of Pro Player and for expected operating losses during the phase-out period from February 24, 2000 through disposal. An additional $20,200,000 provision for loss on disposal was recorded in the fourth quarter of 2000. Accordingly, the portion of Pro Player's net loss attributable to periods after February 23, 2000 has been charged to the Company's reserve for loss on disposal. 50 53 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DISCONTINUED OPERATIONS -- (CONCLUDED) Operating results for Pro Player for each of the three years in the period ended December 30, 2000 are classified as Discontinued Operations in the accompanying statement of operations as follows (in thousands of dollars):
2000 1999 1998 -------- -------- -------- Net sales........................................ $ 30,000 $133,000 $185,500 Cost of sales.................................... 36,100 109,800 123,700 -------- -------- -------- Gross earnings (loss).......................... (6,100) 23,200 61,800 Selling, general & administrative expenses....... 14,300 52,500 54,000 Reversal of prior year compensation charge....... -- -- (22,000) Goodwill amortization............................ 1,000 2,000 2,000 -------- -------- -------- Operating earnings (loss)...................... (21,400) (31,300) 27,800 Interest expense................................. (1,500) (5,500) (4,800) Other expense -- net............................. (9,300) (800) (100) -------- -------- -------- Net earnings (loss)............................ (32,200) (37,600) 22,900 Portion of net loss charged to reserve for loss on disposal.................................... 29,600 -- -- -------- -------- -------- Earnings (loss) from discontinued operations... $ (2,600) $(37,600) $ 22,900 ======== ======== ========
In the fourth quarter of 1998, the Company reversed a $22,000,000 charge as it determined it was no longer probable it would have to pay incentive compensation at its Pro Player subsidiary. A portion of the Company's interest expense has been allocated to discontinued operations based upon the debt balance attributable to those operations (interest expense allocated to discontinued operations was $1,500,000, $5,500,000 and $4,800,000 in 2000, 1999 and 1998, respectively). Assets and liabilities of the discontinued Pro Player segment consisted of the following (in thousands of dollars):
DECEMBER 30, JANUARY 1, 2000 2000 ------------ ---------- Accounts receivable....................................... $ -- $ 19,100 Inventories............................................... 500 22,400 Income tax receivable..................................... -- 11,800 Other current assets...................................... -- 700 Other accounts payable and accrued expenses............... (5,600) (12,900) -------- -------- Net current assets (liabilities)........................ (5,100) 41,100 -------- -------- Property, plant and equipment............................. 2,000 7,500 Liabilities subject to compromise......................... (13,900) (16,900) -------- -------- Net noncurrent liabilities.............................. (11,900) (9,400) -------- -------- Net assets (liabilities) of discontinued operations..... $(17,000) $ 31,700 ======== ========
Assets are shown at their expected net realizable values. 51 54 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SPECIAL CHARGES 2000 Consolidation Costs In the third and fourth quarters of 2000, the Company incurred costs in connection with the closure of several manufacturing facilities in the United States and Mexico, resulting in special charges aggregating $90,100,000 ($13,100,000 in the third quarter and $77,000,000 in the fourth quarter) for writedowns of inventory, property, plant and equipment, other assets and contractual obligations. These charges are recorded in results of operations in the accompanying condensed consolidated financial statements in Cost of sales ($1,800,000) and Selling, general and administrative expenses ($88,300,000). These charges are categorized as follows (in thousands of dollars):
FUTURE CASH NONCASH TOTAL CHARGES ----------- ------- ------------- Closing and disposal of U.S. and Mexico manufacturing facilities......................... $ 9,400 $70,500 $79,900 Closing of European manufacturing facilities....... 4,700 2,000 6,700 Other asset writedowns and reserves................ 300 3,200 3,500 ------- ------- ------- $14,400 $75,700 $90,100 ======= ======= =======
Each of these categories is discussed below. A significant part of the Company's business strategy in 2000 and future years is the elimination of non-core businesses and reduction in low volume and unprofitable SKU's. Consistent with this strategy, the Company closed several of its higher cost production facilities in the third and fourth quarters of 2000. Accordingly, the Company terminated 224 salaried and 2,042 production personnel related to closed operations. Charges related to closing and disposal of U.S. and Mexico manufacturing and distribution facilities consisted of the following (in thousands of dollars):
Loss on disposal of facilities, improvements and equipment................................................. $69,200 Severance costs............................................. 8,900 Other....................................................... 1,800 ------- $79,900 =======
The loss on disposal of facilities, improvements and equipment results from the writedown of property, plant and equipment to their net realizable values. Net realizable values were determined by appraisals for all significant assets. 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). Other costs represent estimated writedown of inventory in the facilities to be disposed. These costs have been included in Cost of sales. These charges were recorded in the third and fourth quarters of 2000 as required by Financial Accounting Standards Board Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of ("FAS 121"), EITF 94-3 or other authoritative literature. As part of its continuing review of its manufacturing organization, facilities and costs beginning in the third quarter of 2000, the Company also considered the strategic position and cost effectiveness of its 52 55 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SPECIAL CHARGES -- (CONTINUED) 2000 Consolidation Costs -- (Concluded) organization and facilities in Europe. As a result of this continuing review, the Company shut down two of its European manufacturing facilities and recorded a charge of $6,700,000 in the fourth quarter of 2000 to writedown the facilities to their fair market value. Of this amount, $4,700,000 are severance costs. The Company recorded charges for other asset writedowns and reserves totaling $3,500,000; these charges consist principally of receivable write-offs. These charges were based on management's best estimates of the potential market values, timing and costs related to the above actions. Of the consolidation costs, cash charges totaled $14,400,000, $11,900,000 of which were paid in 2000 with the remainder expected to be paid in 2001. Also, $13,200,000 of the consolidation costs related to restructuring charges as defined by EITF 94-3. Following is a summary of the 2000 consolidation costs and related reserve balances at December 30, 2000 (in thousands of dollars):
RESERVE 2000 OTHER BALANCE AT CONSOLIDATION CASH ACTIVITY DECEMBER 30, COSTS PAYMENTS IN 2000 2000 ------------- -------- -------- ------------ Closing and disposal of U.S. and Mexico manufacturing facilities................ $79,900 $ 7,200 $ -- $72,700 Impairment of European manufacturing facilities.............................. 6,700 4,700 2,000 -- Other asset writedowns and reserves....... 3,500 -- 3,200 300 ------- ------- ------ ------- $90,100 $11,900 $5,200 $73,000 ======= ======= ====== =======
Other activity in 2000 represents assets written off. Assets held for sale included in other noncurrent assets in the accompanying Consolidated Balance Sheet totaled $12,400,000 and $16,800,000 at December 30, 2000 and January 1, 2000, respectively. 1999 Special Charges In the third and fourth quarters of 1999, the Company recorded charges for provisions and losses on the sale of closeout and irregular inventory, costs related to impairment of certain European manufacturing facilities, severance, a debt guarantee and other asset writedowns and reserves. These charges totaled $345,800,000 ($126,600,000 in the third quarter and $219,200,000 in the fourth quarter) categorized as follows (in thousands of dollars):
FUTURE CASH NONCASH TOTAL CHARGES ----------- -------- ------------- Provisions and losses on the sale of closeout and irregular merchandise........................... $ -- $ 83,300 $ 83,300 Impairment of European manufacturing facilities... -- 30,000 30,000 Severance......................................... 30,600 -- 30,600 Debt guarantee.................................... 30,000 -- 30,000 Other asset writedowns and reserves............... 23,600 148,300 171,900 ------- -------- -------- $84,200 $261,600 $345,800 ======= ======== ========
53 56 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SPECIAL CHARGES -- (CONTINUED) 1999 Special Charges -- (Continued) Each of these categories is discussed below. As part of its restructuring activities, the Company decided to streamline product offerings by discontinuing unprofitable and low volume product offerings. In addition, the Company generated additional levels of irregular merchandise in 1999 as a result of its production problems. Further, selling prices for closeout and irregular merchandise decreased significantly during 1999. Also, inventory remaining at January 1, 2000 had to be written down to net realizable value. 1999 losses on the sale of closeout and irregular merchandise in excess of 1998 losses aggregated $22,500,000 and $25,800,000, respectively. Provisions recorded in 1999 in excess of provisions recorded in 1998 on remaining closeout and irregular inventory as of January 1, 2000 aggregated $13,300,000 and $21,700,000, respectively. Of the total charges, $58,100,000 were incurred in the fourth quarter of 1999. All of these charges were non-cash charges. As a result of the review of the strategic position and cost effectiveness of its organization and facilities worldwide, the Company was in the process of moving its assembly operations for T-shirts to be sold in Europe from the Republic of Ireland to Morocco. Estimates of undiscounted cash flows indicated that the carrying amounts of assets related to this move and other manufacturing facilities in the Republic of Ireland were not likely to be recovered. Therefore, as required by FAS 121, these assets were written down to their estimated fair values, resulting in charges of approximately $30,000,000 in the fourth quarter of 1999 (all were non-cash charges). Severance costs consisted of salary and fringe benefits. Of the $30,600,000 of total severance costs, $27,400,000 related to an employment contract with William Farley, the Company's former Chairman of the Board, Chief Executive Officer and Chief Operating Officer ("Mr. Farley"). This severance was recorded in the third quarter of 1999. Although reflected as a "Future Cash" charge, any severance payable to Mr. Farley would be treated as an unsecured pre-bankruptcy claim in the Reorganization Cases. The Company terminated Mr. Farley's employment agreement in 1999. Thereafter, the Company received approval from the Bankruptcy Court to reject the agreement. The debt guarantee charge relates to the loss contingency on the Company's guarantee of personal indebtedness of Mr. Farley (the "Loans"). Mr. Farley is in default under the Loans and under the reimbursement agreements with the Company. The total amount guaranteed is $59,300,000 as of December 30, 2000. The debt guarantee charge of $30,000,000 at January 1, 2000 was recorded in the third and fourth quarters of 1999 in the amounts of $10,000,000 and $20,000,000, respectively. The Company's obligations under the guarantee are collateralized by 2,507,512 shares of FTL Inc. Preferred Stock and all of Mr. Farley's assets. 54 57 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SPECIAL CHARGES -- (CONTINUED) 1999 Special Charges -- (Continued) The Company recorded charges for other asset writedowns and reserves totaling $171,900,000 (of which $148,300,000 were non-cash charges) comprised of the following (in thousands of dollars):
TOTAL ASSET OTHER RESERVES CHARGES WRITEDOWN AND ACCRUALS -------- ---------- -------------- Inventory markdown................................ $ 39,300 $ 39,300 $ -- Inventory shrinkage............................... 37,300 37,300 -- Inventory obsolescence............................ 32,400 32,400 -- Debt fees......................................... 10,500 10,500 -- Professional fees................................. 6,600 -- 6,600 Other charges..................................... 45,800 28,800 17,000 -------- -------- ------- $171,900 $148,300 $23,600 ======== ======== =======
The inventory markdown provision reflected excess quantities with respect to continuing first quality programs and significantly reduced selling prices in 1999. Excess quantities were generated as the Company could not meet customer demand in the first eight months of 1999 due to production and distribution difficulties. Customers reduced demand for these products as a result of the lack of adequate supply leaving excess quantities once production had been increased to projected demand. The significant charges for inventory shrinkage resulted from the Company's 1999 decision to hire additional contractors to increase production and represents the difficulty in accounting for inventories at these new and existing contractors as well as the difficulty experienced in connection with in-transit inventories from a greatly extended pipeline. Inventory shrinkage experienced in 1999 was $81,500,000 compared with $56,300,000 and $26,000,000 in 1998 and 1997, respectively. Provisions for inventory obsolescence related to raw materials including excess labels and packaging as well as unbalanced components and obsolete cut parts. Debt fees include the increased cost of obtaining bank waivers and amendments during 1999 as a result of loan covenant violations and the write-off of fees of $6,000,000 principally related to the Company's accounts receivable securitization. See "SALE OF ACCOUNTS RECEIVABLE." Professional fees include amounts associated with the Company's restructuring efforts. Other charges include $12,800,000 of repair parts related to physical inventory and other adjustments, the write-off of an $8,000,000 insurance claim as recovery was no longer deemed probable in the fourth quarter of 1999, an $8,000,000 charge for a loss contingency related to a vacation pay settlement in Louisiana and a provision on the ultimate realization of certain current and non-current assets of $8,000,000. All of the above charges except for the vacation pay loss contingency were recorded in the fourth quarter of 1999. 55 58 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SPECIAL CHARGES -- (CONTINUED) 1999 Special Charges -- (Continued) The above charges were recorded in the accompanying Consolidated Statement of Operations as follows (in thousands of dollars):
SELLING, GENERAL AND COST OF ADMINISTRATIVE OTHER SALES EXPENSE EXPENSE TOTAL -------- -------------- ------- -------- Provisions and losses on the sales of closeout and irregular merchandise..... $ 83,300 $ -- $ -- $ 83,300 Impairment of European manufacturing facilities............................. -- 30,000 -- 30,000 Severance................................ -- 30,600 -- 30,600 Debt guarantee........................... -- -- 30,000 30,000 Other asset writedowns and reserves...... 130,800 6,600 34,500 171,900 -------- ------- ------- -------- $214,100 $67,200 $64,500 $345,800 ======== ======= ======= ========
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 remaining at December 30, 2000, cash charges total approximately $65,900,000 to be paid in 2001 and future years. See "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- USE OF ESTIMATES." Substantially all of the cash charges represent liabilities subject to compromise under the bankruptcy laws. Following is a summary of the 1999 special charges and related reserve balances at January 1, 2000 (in thousands of dollars):
RESERVE 1999 OTHER BALANCE AT SPECIAL CASH ACTIVITY JANUARY 1, CHARGES PAYMENTS IN 1999 2000 -------- -------- -------- ---------- Provisions and losses on the sales of closeout and irregular merchandise........ $ 83,300 $ -- $ 48,300 $ 35,000 Impairment of European manufacturing facilities................................ 30,000 -- 30,000 -- Severance................................... 30,600 -- -- 30,600 Debt guarantee.............................. 30,000 -- -- 30,000 Other asset writedowns and reserves......... 171,900 6,000 93,800 72,100 -------- ------ -------- -------- $345,800 $6,000 $172,100 $167,700 ======== ====== ======== ========
Other activity in 1999 represents sales of closeout and irregular merchandise and assets written off. 56 59 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SPECIAL CHARGES -- (CONTINUED) 1999 Special Charges -- (Concluded) A rollforward of the 1999 special charges from January 1, 2000 through December 30, 2000 is presented below (in thousands of dollars):
RESERVE RESERVE BALANCE AT BALANCE AT JANUARY 1, CASH INCOME OTHER DECEMBER 30, 2000 PAYMENTS (EXPENSE) ACTIVITY 2000 ---------- -------- --------- -------- ------------ Provisions and losses on the sales of closeout and irregular merchandise........ $ 35,000 $ -- $ -- $30,100 $ 4,900 Severance...................... 30,600 2,000 -- -- 28,600 Debt guarantee................. 30,000 700 -- -- 29,300 Other asset writedowns and reserves..................... 72,100 600 -- 49,000 22,500 -------- ------ ---- ------- ------- $167,700 $3,300 -- $79,100 $85,300 ======== ====== ==== ======= =======
Other activity in 2000 primarily consists of inventory reserves which were relieved as the inventory was sold. Other activity does not include amounts provided in 2000 for additional ongoing normal lower of cost or market reserves. 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 57 60 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SPECIAL CHARGES -- (CONTINUED) 1997 Special Charges -- (Continued) with the Company's world-wide restructuring of manufacturing and distribution facilities. These and other special charges totaled $441,700,000 ($372,200,000 after tax) categorized as follows (in thousands of dollars):
FUTURE TOTAL CASH NONCASH CHARGES -------- -------- -------- CLOSING AND DISPOSAL OF U.S. MANUFACTURING AND DISTRIBUTION FACILITIES Loss on sale of facilities, improvements and equipment: Sewing and finishing................................... $ -- $ 30,500 $ 30,500 Distribution facilities................................ -- 36,100 36,100 Impairment of mills to be sold......................... -- 75,400 75,400 Lease residual guarantees.............................. 61,000 -- 61,000 Other equipment........................................ -- 29,600 29,600 -------- -------- -------- 61,000 171,600 232,600 Severance costs........................................... 8,400 -- 8,400 Other accruals............................................ 6,500 3,900 10,400 -------- -------- -------- 75,900 175,500 251,400 -------- -------- -------- IMPAIRMENT OF EUROPEAN MANUFACTURING AND DISTRIBUTION FACILITIES Impairment of long lived assets........................... -- 42,800 42,800 Other accruals............................................ 1,300 -- 1,300 -------- -------- -------- 1,300 42,800 44,100 -------- -------- -------- PRO PLAYER INCENTIVE COMPENSATION AGREEMENT................. 22,000 -- 22,000 -------- -------- -------- OTHER ASSET WRITEDOWNS AND RESERVES Inventory valuation provisions............................ -- 49,800 49,800 Other accruals............................................ 39,200 14,600 53,800 -------- -------- -------- 39,200 64,400 103,600 -------- -------- -------- CHANGES IN ESTIMATES OF RETAINED LIABILITIES OF FORMER SUBSIDIARIES.............................................. 12,600 8,000 20,600 -------- -------- -------- Total pretax charges.............................. $151,000 $290,700 $441,700 ======== ======== ========
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 and finishing 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 required 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. Management committed to dispose of these sewing and finishing facilities in late November and December 1997 and had ceased production at eight of the nine facilities by January 2, 58 61 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SPECIAL CHARGES -- (CONTINUED) 1997 Special Charges -- (Continued) 1999. Equipment is being sold or scrapped and real estate is being sold. The Company expected to complete these asset sales in 1999. Impairment charges related to sewing and finishing facilities that the Company had not ceased operating at December 31, 1997 totaled $7,000,000. The redirection of the physical flow of goods in the Company's manufacturing processes prompted a reassessment of the Company's domestic distribution network. Management committed to dispose of certain distribution assets in December 1997. The Company had ceased operating at four of seven locations. The Company expected to complete the asset sales in 1999. Impairment charges related to distribution assets that the Company had not ceased operating at December 31, 1997 totaled $34,000,000. 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 three of its U.S. based yarn mills. Management committed to dispose of these assets in December 1997. To avoid further impairment, the Company continues to operate these impaired mills as going concerns as efforts to sell them progress. Management expected to complete these asset sales in 1999. Impairment charges related to these yarn mills totaled $75,400,000. 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. It was originally the Company's intention to dispose of the facilities and equipment for which impairment charges have been recorded, and the Company believes it has the ability to dispose of the assets in less than 30 days from the time a buyer agrees to purchase the assets and still meet production and distribution needs. As a result of the offshore migration of its sewing and finishing operations 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. See "Lease Commitments." Charges related to loss on disposal of facilities, improvements and equipment totaled $232,600,000. 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. The Company made the decision in the first quarter of 1999 to retain one distribution center and two yarn mills as a result of continuing evolution in the mix of distribution resources needed to service the Company's customers and overcapacity in U.S. yarn production which prevented the Company from selling its two largest yarn mills at acceptable prices. The Company had continued to operate these facilities pending their sale. In accordance with GAAP, these facilities have been included in property, plant and equipment and are being depreciated at their impaired value which approximates current fair value. As part of its review of its manufacturing, distribution, and logistics organization, facilities and costs beginning in the third quarter of 1997, the Company also considered the strategic position and cost effectiveness of its organization and facilities in Europe where industry trends similar to those in the U.S. (such as movement of certain operations to low cost countries) were emerging. This review 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. 59 62 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SPECIAL CHARGES -- (CONTINUED) 1997 Special Charges -- (Continued) The Company recorded charges for other asset writedowns and reserves totaling $103,600,000 comprised of the following (in millions of dollars).
OTHER TOTAL ASSET RESERVES AND CHARGES WRITEDOWN ACCRUALS ------- --------- ------------ Inventory obsolescence............................ $ 10.1 $10.1 $ -- Inventory shrinkage............................... 19.5 19.5 -- Inventory markdown................................ 20.2 20.2 -- Software costs.................................... 7.1 -- 7.1 Severance......................................... 6.1 -- 6.1 Professional fees................................. 6.6 -- 6.6 Various contract commitments...................... 12.1 -- 12.1 Other charges..................................... 21.9 8.3 13.6 ------ ----- ----- $103.6 $58.1 $45.5 ====== ===== =====
Provisions to inventory reserves largely resulted from conditions associated with the acceleration of the offshore movement of the Company's sewing and finishing operations which began late in the third quarter of 1997. Provisions for inventory obsolescence reflected made in U.S.A. labels and polybags and other supplies on hand that were made obsolete because remaining planned domestic production would be insufficient to utilize them. The provision for inventory shrinkage reflected the greatly extended pipeline for the Company's in-transit inventories, new freight channels and the difficulty of accounting for inventories at contractor facilities, as well as start-up operations at Company owned facilities, in foreign locations. The estimated inventory shrinkage provision was based on analyses of in-transit inventory reconciliations, and in the fourth quarter of 1997, the Company identified book to physical adjustments related to inventories at foreign contractor locations. Inventory shrinkage experienced in 1997 was $26,000,000, compared with $18,900,000 in 1996 and $17,600,000 in 1995. The inventory markdown provision reflected quality issues related to start-up operations resulting from acceleration of the offshore movement of sewing and finishing operations and, unrelated to the offshore move, a shift in customer demand to upsized garments as opposed to more traditional sizing. The Company incurred software costs during 1997 related to business process reengineering and information technology transformation. Substantially all of these costs were incurred and expensed in the fourth quarter in accordance with EITF 97-13 issued November 20, 1997. Severance costs were accrued for the termination of certain executive officers with employment agreements as well as other corporate executives. Legal, accounting and consulting fees were incurred in connection with the proposed recapitalization of the Company announced February 11, 1998. The Company also incurred costs associated with a proposed new venture that was cancelled in the fourth quarter of 1997 and other matters. Contract commitment charges consisted of lease commitments on office space no longer occupied, minimum liabilities under royalty agreements whose sales minimums were not met, a loss on a firm 60 63 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SPECIAL CHARGES -- (CONTINUED) 1997 Special Charges -- (Continued) commitment to purchase cloth in 1998, estimated fees to amend certain debt and lease covenants and, as a result of the European restructuring, estimated obligations to repay employment grants in Europe. Other charges totaling $21,900,000 consisted of an impairment writedown of goodwill along with accruals related to various asset valuation, state and local tax, financing and other issues related to the Company's world-wide restructuring efforts. 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 totaling $20,600,000 related to changes in estimates of environmental and other retained liabilities of former subsidiaries. Environmental charges reflected an increase in estimated environmental costs of $8,600,000 and a reduction in expected recoveries of $8,000,000. See "CONTINGENT LIABILITIES." The remaining $4,000,000 reflected the projected costs to the Company of pension obligations of certain former subsidiaries as estimated based on settlement negotiations begun with the Pension Benefit Guarantee Corporation in late December 1997. The above charges were recorded in the accompanying Consolidated Statement of Operations as follows (in thousands of dollars):
SELLING, IMPAIRMENT GENERAL AND WRITE COST OF ADMINISTRATIVE DOWN OF OTHER DISCONTINUED SALES EXPENSE GOODWILL EXPENSE OPERATIONS TOTAL ------- -------------- ---------- ------- ------------ -------- Closing and disposal of U.S. manufacturing and distribution facilities........................ $ -- $251,400 $ -- $ -- $ -- $251,400 Impairment of European manufacturing and distribution facilities....... -- 44,100 -- -- -- 44,100 Pro Player incentive compensation agreement......................... -- -- -- -- 22,000 22,000 Other asset writedowns and reserves.......................... 47,800 36,500 4,600 11,800 2,900 103,600 Changes in estimates of retained liabilities of former subsidiaries...................... -- -- -- 20,600 -- 20,600 ------- -------- ------ ------- ------- -------- $47,800 $332,000 $4,600 $32,400 $24,900 $441,700 ======= ======== ====== ======= ======= ========
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, cash charges totaled approximately $118,400,000 to be paid in 1998 and future years, $10,900,000 of which related to restructuring charges as defined by EITF No. 94-3. The Company paid $28,200,000, $20,900,000 and $2,100,000 of these cash charges in 1998, 1999 and 2000, respectively. Also, the Company finalized its estimate of certain of these special charges in 1998 and 1999. Approximately $67,200,000 is scheduled to be paid in 2001. A portion of the cash charges scheduled to be paid in 2001 represent liabilities subject to compromise under the bankruptcy laws. See "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- USE OF ESTIMATES." 61 64 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SPECIAL CHARGES -- (CONTINUED) 1997 Special Charges -- (Continued) Following is a summary of the 1997 special charges and related reserve balances at December 31, 1997 (in thousands of dollars):
RESERVE 1997 OTHER BALANCE AT SPECIAL CASH ACTIVITY DECEMBER 31, CHARGES PAYMENTS IN 1997 1997 -------- -------- -------- ------------ CLOSING AND DISPOSAL OF U.S. MANUFACTURING AND DISTRIBUTION FACILITIES Loss on sale of facilities, improvements and equipment: Sewing, finishing and distribution facilities.................................. $ 66,600 $ -- $ -- $ 66,600 Impairment of mills to be sold................ 75,400 -- -- 75,400 Lease residual guarantees..................... 61,000 -- -- 61,000 Other equipment............................... 29,600 -- 22,100 7,500 -------- ------ ------- -------- 232,600 -- 22,100 210,500 Severance costs.................................. 8,400 -- -- 8,400 Other accruals................................... 10,400 -- -- 10,400 -------- ------ ------- -------- 251,400 -- 22,100 229,300 -------- ------ ------- -------- IMPAIRMENT OF EUROPEAN MANUFACTURING AND DISTRIBUTION FACILITIES Impairment of long lived assets.................. 42,800 -- 42,800 -- Other accruals................................... 1,300 -- -- 1,300 -------- ------ ------- -------- 44,100 -- 42,800 1,300 -------- ------ ------- -------- PRO PLAYER INCENTIVE COMPENSATION AGREEMENT........ 22,000 -- -- 22,000 -------- ------ ------- -------- OTHER ASSET WRITEDOWNS AND RESERVES Inventory valuation provisions................... 49,800 -- -- 49,800 Other accruals................................... 53,800 7,400 9,200 37,200 -------- ------ ------- -------- 103,600 7,400 9,200 87,000 -------- ------ ------- -------- CHANGES IN ESTIMATES OF RETAINED LIABILITIES OF FORMER SUBSIDIARIES.............................. 20,600 -- 8,000 12,600 -------- ------ ------- -------- Total pretax charges..................... $441,700 $7,400 $82,100 $352,200 ======== ====== ======= ========
Other activity in 1997 represented assets written off. 62 65 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SPECIAL CHARGES -- (CONTINUED) 1997 Special Charges -- (Continued) A rollforward of the 1997 special charges through January 2, 1999 is presented below (in thousands of dollars):
RESERVE RESERVE BALANCE AT CASH INCOME OTHER BALANCE AT DECEMBER 31, PAYMENTS (EXPENSE) ACTIVITY JANUARY 2, 1997 IN 1998 IN 1998 IN 1998 1999 ------------ -------- --------- -------- ---------- CLOSING AND DISPOSAL OF U.S. MANUFACTURING AND DISTRIBUTION FACILITIES Loss on sale of facilities, improvements and equipment: Sewing, finishing and distribution facilities......................... $ 66,600 $ 100 $ -- $ 6,400 $ 60,100 Impairment of mills to be sold....... 75,400 -- -- -- 75,400 Lease residual guarantees............ 61,000 -- -- -- 61,000 Other equipment...................... 7,500 -- -- 1,300 6,200 -------- ------- ------- ------- -------- 210,500 100 -- 7,700 202,700 Severance costs......................... 8,400 5,100 3,100 -- 200 Other accruals.......................... 10,400 5,800 1,000 1,200 2,400 -------- ------- ------- ------- -------- 229,300 11,000 4,100 8,900 205,300 -------- ------- ------- ------- -------- IMPAIRMENT OF EUROPEAN MANUFACTURING AND DISTRIBUTION FACILITIES Impairment of long lived assets......... -- -- -- -- -- Other accruals.......................... 1,300 -- -- 200 1,100 -------- ------- ------- ------- -------- 1,300 -- -- 200 1,100 -------- ------- ------- ------- -------- PRO PLAYER INCENTIVE COMPENSATION AGREEMENT............................... 22,000 -- 22,000 -- -- -------- ------- ------- ------- -------- OTHER ASSET WRITEDOWNS AND RESERVES Inventory valuation provisions.......... 49,800 -- 5,900 43,900 -- Other accruals.......................... 37,200 16,700 5,300 3,900 11,300 -------- ------- ------- ------- -------- 87,000 16,700 11,200 47,800 11,300 -------- ------- ------- ------- -------- CHANGES IN ESTIMATES OF RETAINED LIABILITIES OF FORMER SUBSIDIARIES...... 12,600 500 1,500 -- 10,600 -------- ------- ------- ------- -------- Total pretax charges............ $352,200 $28,200 $38,800 $56,900 $228,300 ======== ======= ======= ======= ========
Other activity in 1998 principally related to inventory reserves established which were relieved as the inventory was sold and fixed asset write-offs as the assets were sold. During the first quarter of 1998, the Company sold certain inventory which had been written down as part of the 1997 special charges. Amounts received for the inventory sold were in excess of amounts estimated, resulting in increases to earnings before income tax expense of $5,100,000 in the first nine months of 1998, substantially all of which occurred in the first quarter of 1998. In the fourth quarter of 1998, the Company reversed the $22,000,000 charge as it determined it was no longer probable it would have to pay the incentive compensation at its Pro Player subsidiary. Also in the fourth quarter of 1998, the Company finalized certain other estimates recorded in connection with the special charges recorded in 1997 which increased earnings 63 66 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SPECIAL CHARGES -- (CONTINUED) 1997 Special Charges -- (Continued) before income tax expense by $11,700,000. The increases to earnings were recorded in the accompanying Consolidated Statement of Operations as follows (in thousands of dollars): Cost of sales............................................... $ 6,900 Selling, general and administrative expenses................ 8,400 Other expenses.............................................. 1,500 Discontinued operations..................................... 22,000 ------- Total............................................. $38,800 =======
The Company continued to operate certain assets held for sale during 1998 so that they may be sold as "ongoing operations." Accordingly, the Company did not depreciate these facilities during 1998, resulting in lower depreciation expense of approximately $10,000,000 than if the Company had recorded depreciation. 64 67 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SPECIAL CHARGES -- (CONTINUED) 1997 Special Charges -- (Continued) A rollforward of the 1997 special charges through January 1, 2000 is presented below (in thousands of dollars):
RESERVE RESERVE BALANCE AT CASH INCOME OTHER BALANCE AT JANUARY 2, PAYMENTS (EXPENSE) ACTIVITY JANUARY 1, 1999 IN 1999 IN 1999 IN 1999 2000 ---------- -------- --------- -------- ---------- CLOSING AND DISPOSAL OF U.S. MANUFACTURING AND DISTRIBUTION FACILITIES Loss on sale of facilities, improvements and equipment: Sewing, finishing and distribution facilities......................... $ 60,100 $ 200 $10,200 $24,100 $ 25,600 Impairment of mills to be sold....... 75,400 -- -- 62,000 13,400 Lease residual guarantees............ 61,000 14,900 -- (8,100) 54,200 Other equipment...................... 6,200 -- -- 100 6,100 -------- ------- ------- ------- -------- 202,700 15,100 10,200 78,100 99,300 Severance costs......................... 200 -- -- -- 200 Other accruals.......................... 2,400 500 -- -- 1,900 -------- ------- ------- ------- -------- 205,300 15,600 10,200 78,100 101,400 -------- ------- ------- ------- -------- IMPAIRMENT OF EUROPEAN MANUFACTURING AND DISTRIBUTION FACILITIES Impairment of long lived assets......... -- -- -- -- -- Other accruals.......................... 1,100 -- -- 900 200 -------- ------- ------- ------- -------- 1,100 -- -- 900 200 -------- ------- ------- ------- -------- PRO PLAYER INCENTIVE COMPENSATION AGREEMENT............................... -- -- -- -- -- -------- ------- ------- ------- -------- OTHER ASSET WRITEDOWNS AND RESERVES Inventory valuation provisions.......... -- -- -- -- -- Other accruals.......................... 11,300 4,800 100 2,200 4,200 -------- ------- ------- ------- -------- 11,300 4,800 100 2,200 4,200 -------- ------- ------- ------- -------- CHANGES IN ESTIMATES OF RETAINED LIABILITIES OF FORMER SUBSIDIARIES...... 10,600 500 -- 800 9,300 -------- ------- ------- ------- -------- Total pretax charges............ $228,300 $20,900 $10,300 $82,000 $115,100 ======== ======= ======= ======= ========
Other activity in 1999 principally related to the transfer of one distribution center and two yarn mills which the Company decided to retain to property, plant and equipment at its written down value as well as the sale of two facilities in the first half of 1999. The Company sold the two facilities at an aggregate price of $16,400,000 which resulted in a gain of $10,200,000 ($8,000,000 of the gain was recorded in the second quarter of 1999). The gain on sale was recorded in other expense in the accompanying Consolidated Statement of Operations. 65 68 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SPECIAL CHARGES -- (CONTINUED) 1997 Special Charges -- (Concluded) A rollforward of the 1997 special charges through December 30, 2000 is presented below (in thousands of dollars):
RESERVE RESERVE BALANCE AT CASH INCOME OTHER BALANCE AT JANUARY 1, PAYMENTS (EXPENSE) ACTIVITY DECEMBER 30, 2000 IN 2000 IN 2000 IN 2000 2000 ---------- -------- --------- -------- ------------ CLOSING AND DISPOSAL OF U.S. MANUFACTURING AND DISTRIBUTION FACILITIES Loss on sale of facilities, improvements and equipment: Sewing, finishing and distribution facilities....................... $ 25,600 $ -- $ 400 $ 2,000 $ 23,200 Impairment of mills to be sold..... 13,400 -- -- -- 13,400 Lease residual guarantees.......... 54,200 -- -- -- 54,200 Other equipment.................... 6,100 -- -- -- 6,100 -------- ------- ------- ------- -------- 99,300 -- 400 2,000 96,900 Severance costs....................... 200 -- -- -- 200 Other accruals........................ 1,900 -- -- -- 1,900 -------- ------- ------- ------- -------- 101,400 -- 400 2,000 99,000 -------- ------- ------- ------- -------- IMPAIRMENT OF EUROPEAN MANUFACTURING AND DISTRIBUTION FACILITIES Impairment of long lived assets....... -- -- -- -- -- Other accruals........................ 200 -- -- 200 -- -------- ------- ------- ------- -------- 200 -- -- 200 -- -------- ------- ------- ------- -------- OTHER ASSET WRITEDOWNS AND RESERVES Other accruals..................... 4,200 1,600 400 100 2,100 -------- ------- ------- ------- -------- 4,200 1,600 400 100 2,100 -------- ------- ------- ------- -------- CHANGES IN ESTIMATES OF RETAINED LIABILITIES OF FORMER SUBSIDIARIES.... 9,300 500 -- -- 8,800 -------- ------- ------- ------- -------- Total pretax charges.......... $115,100 $ 2,100 $ 800 $ 2,300 $109,900 ======== ======= ======= ======= ========
Other activity in 2000, principally related to the sale of one facility in the second quarter of 2000. The Company sold the facility at an aggregate price of $2,200,000 which resulted in a gain of $400,000 which was recorded in the second quarter of 2000. The gain on sale was recorded in other expense in the accompanying Consolidated Statement of Operations. Also in 2000, the Company finalized certain settlement with the Industrial Revenue Authority of Northern Ireland. These settlements resulted in a cash payment of $1,600,000. 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. Accordingly, the Company identified for 66 69 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SPECIAL CHARGES -- (CONTINUED) 1995 Special Charges -- (Continued) termination 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. Of the terminated personnel, all production and 180 of the salaried personnel were terminated in 1995; the remaining 14 salaried personnel were terminated in 1996. As a result, the Company recorded charges of approximately $372,900,000 ($287,400,000 after tax) related to impairment writedowns of goodwill, costs associated with the closing or realignment of certain domestic manufacturing facilities and attendant personnel reductions and charges related to inventory writedowns and valuations, foreign operations and other corporate issues. These 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 values of the intangible assets related to the Salem and Gitano businesses were not expected to be recovered by their future undiscounted cash flows. Future cash flows were based on forecasted trends for the particular businesses and assumed capital spending in line with expected requirements. Accordingly, impairment writedowns of goodwill of $158,500,000 reflect the write-off of all goodwill related to the Salem and Gitano businesses. See "ACQUISITIONS." During the fourth quarter of 1995, the Company recorded charges of approximately $82,800,000 related to the closing or realignment of certain domestic manufacturing operations, the closing of certain leased facilities, the write-off of fixed assets related to these facilities and changes in estimates of the cost of certain of the Company's insurance obligations. The detail of these charges is presented below (in thousands of dollars): 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 =======
These charges were recorded in the fourth quarter of 1995 as required by EITF No. 94-3 or other authoritative literature. All facilities, improvements and equipment closed in 1995 were sold to third parties or relinquished in settlement of lease terminations. Transactions to dispose of substantially all of these assets occurred in 1995 and 1996. 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 67 70 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SPECIAL CHARGES -- (CONTINUED) 1995 Special Charges -- (Continued) participation in the Company's pension plan). The Company recorded charges of approximately $91,100,000 related to other asset writedowns, valuation reserves and other reserves as a result of reductions in its product offerings, changes in its operations and termination or modification of certain license and other agreements. In addition, the Company recorded charges of approximately $19,200,000 related to changes in estimates of certain retained liabilities 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 Farley Industries, Inc. and, accordingly, recorded charges of approximately $15,500,000 related to lease termination, severance benefits and other costs. These charges included certain valuation reserves and the impact of license agreements which relate specifically to the SALEM and GITANO brands. The total impact of the charges in 1995 (including the writedown of goodwill) pertaining to the SALEM and GITANO brands was $164,100,000. The above charges were recorded as $158,500,000 of Impairment writedown 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 1995 Consolidated Statement of Operations. As Pro Player has been classified as a discontinued operation in the financial statements, approximately $100,900,000 of the above charges have been reclassified to discontinued 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 $1,900,000, $17,300,000, $23,000,000, $4,800,000 and $33,300,000 were paid in 2000, 1999, 1998, 1997 and 1996, respectively, and $800,000 remain to be paid in 2001. 68 71 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SPECIAL CHARGES -- (CONTINUED) 1995 Special Charges -- (Continued) A rollforward of the 1995 special charges by year through December 30, 2000 is presented below (in thousands of dollars):
RESERVE 1995 CASH OTHER BALANCE AT SPECIAL PAYMENTS ACTIVITY DECEMBER 31, CHARGES IN 1995 IN 1995 1995 -------- -------- -------- ------------ Impairment writedown of goodwill...................... $158,500 $ -- $156,400 $ 2,100 Closing or realignment of manufacturing operations: Loss on disposal of closed facilities, improvements and equipment..................................... 29,000 -- 27,200 1,800 Changes in estimates of insurance liabilities....... 21,800 -- -- 21,800 Costs related to expected increases in workers' compensation and health and welfare costs......... 8,000 -- -- 8,000 Costs related to termination of certain lease obligations....................................... 7,300 900 -- 6,400 Costs related to severance of the hourly workforce......................................... 6,700 6,700 -- -- Other............................................... 10,000 300 -- 9,700 -------- ------- -------- -------- 82,800 7,900 27,200 47,700 Severance............................................. 5,800 1,100 -- 4,700 Other asset writedowns, valuation reserves and other reserves............................................ 91,100 8,600 19,400 63,100 Changes in estimates of certain retained liabilities of former subsidiaries.............................. 19,200 -- -- 19,200 Termination of management agreement................... 15,500 -- -- 15,500 -------- ------- -------- -------- $372,900 $17,600 $203,000 $152,300 ======== ======= ======== ========
RESERVE RESERVE BALANCE AT CASH INCOME OTHER BALANCE AT DECEMBER 31, PAYMENTS (EXPENSE) ACTIVITY DECEMBER 31, 1995 IN 1996 IN 1996 IN 1996 1996 ------------ -------- --------- -------- ------------ Impairment writedown of goodwill.......... $ 2,100 $ -- $ -- $ 2,100 $ -- Closing or realignment of manufacturing operations: Loss on disposal of closed facilities, improvements and equipment............ 1,800 300 -- 200 1,300 Changes in estimates of insurance liabilities........................... 21,800 7,800 -- -- 14,000 Costs related to expected increases in workers' compensation and health and welfare costs......................... 8,000 1,800 300 -- 5,900 Costs related to termination of certain lease obligations..................... 6,400 5,500 (1,200) -- 2,100 Costs related to severance of the hourly workforce............................. -- -- -- -- -- Other................................... 9,700 2,000 4,700 -- 3,000 -------- ------- ------- ------- ------- 47,700 17,400 3,800 200 26,300 Severance................................. 4,700 4,400 -- -- 300 Other asset writedowns, valuation reserves and other reserves...................... 63,100 2,800 6,600 44,500 9,200 Changes in estimates of certain retained liabilities of former subsidiaries...... 19,200 -- 3,000 -- 16,200 Termination of management agreement....... 15,500 8,700 -- -- 6,800 -------- ------- ------- ------- ------- $152,300 $33,300 $13,400 $46,800 $58,800 ======== ======= ======= ======= =======
69 72 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SPECIAL CHARGES -- (CONTINUED) 1995 Special Charges -- (Continued)
RESERVE RESERVE BALANCE AT CASH INCOME OTHER BALANCE AT DECEMBER 31, PAYMENTS (EXPENSE) ACTIVITY DECEMBER 31, 1996 IN 1997 IN 1997 IN 1997 1997 ------------ -------- --------- -------- ------------ Impairment writedown of goodwill........ $ -- $ -- $ -- $ -- $ -- ------- ------ ------ ------ ------- Closing or realignment of manufacturing operations: Loss on disposal of closed facilities, improvements and equipment......... 1,300 700 -- 400 200 Changes in estimates of insurance liabilities........................ 14,000 -- -- -- 14,000 Costs related to expected increases in workers' compensation and health and welfare costs.................. 5,900 700 -- -- 5,200 Costs related to termination of certain lease obligations.......... 2,100 1,100 -- -- 1,000 Costs related to severance of the hourly workforce................... -- -- -- -- -- Other................................. 3,000 300 -- -- 2,700 ------- ------ ------ ------ ------- 26,300 2,800 -- 400 23,100 Severance............................... 300 100 -- -- 200 Other asset writedowns, valuation reserves and other reserves........... 9,200 600 2,000 2,700 3,900 Changes in estimates of certain retained liabilities of former subsidiaries.... 16,200 -- -- -- 16,200 Termination of management agreement..... 6,800 1,300 5,500 -- -- ------- ------ ------ ------ ------- $58,800 $4,800 $7,500 $3,100 $43,400 ======= ====== ====== ====== =======
70 73 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SPECIAL CHARGES -- (CONTINUED) 1995 Special Charges -- (Continued)
RESERVE RESERVE BALANCE AT CASH INCOME OTHER BALANCE AT DECEMBER 31, PAYMENTS (EXPENSE) ACTIVITY JANUARY 2, 1997 IN 1998 IN 1998 IN 1998 1999 ------------ -------- --------- -------- ---------- Impairment writedown of goodwill.......... $ -- $ -- $ -- $-- $ -- ------- ------- ---- --- ------- Closing or realignment of manufacturing operations: Loss on disposal of closed facilities, improvements and equipment........... 200 200 -- -- -- Changes in estimates of insurance liabilities.......................... 14,000 4,500 -- -- 9,500 Costs related to expected increases in workers' compensation and health and welfare costs........................ 5,200 5,200 -- -- -- Costs related to termination of certain lease obligations.................... 1,000 900 100 -- -- Costs related to severance of the hourly workforce............................ -- -- -- -- -- Other................................... 2,700 2,500 -- -- 200 ------- ------- ---- --- ------- 23,100 13,300 100 -- 9,700 Severance................................. 200 200 -- -- -- Other asset writedowns, valuation reserves and other reserves...................... 3,900 3,800 100 -- -- Changes in estimates of certain retained liabilities of former subsidiaries...... 16,200 5,700 -- -- 10,500 Termination of management agreement....... -- -- -- -- -- ------- ------- ---- --- ------- $43,400 $23,000 $200 $-- $20,200 ======= ======= ==== === =======
71 74 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SPECIAL CHARGES -- (CONTINUED) 1995 Special Charges -- (Continued)
RESERVE RESERVE BALANCE AT CASH INCOME OTHER BALANCE AT JANUARY 2, PAYMENTS (EXPENSE) ACTIVITY JANUARY 1, 1999 IN 1999 IN 1999 IN 1999 2000 ---------- -------- --------- -------- ---------- Impairment writedown of goodwill............ $ -- $ -- $-- $-- $ -- ------- ------- -- -- ------ Closing or realignment of manufacturing operations: Loss on disposal of closed facilities, improvements and equipment............. -- -- -- -- -- Changes in estimates of insurance liabilities............................ 9,500 9,000 -- -- 500 Costs related to expected increases in workers' compensation and health and welfare costs.......................... -- -- -- -- -- Costs related to termination of certain lease obligations...................... -- -- -- -- -- Costs related to severance of the hourly workforce.............................. -- -- -- -- -- Other..................................... 200 -- -- -- 200 ------- ------- -- -- ------ 9,700 9,000 -- -- 700 Severance................................... -- -- -- -- -- Other asset writedowns, valuation reserves and other reserves........................ -- -- -- -- -- Changes in estimates of certain retained liabilities of former subsidiaries........ 10,500 8,300 -- -- 2,200 Termination of management agreement......... -- -- -- -- -- ------- ------- -- -- ------ $20,200 $17,300 $-- $-- $2,900 ======= ======= == == ======
72 75 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SPECIAL CHARGES -- (CONTINUED) 1995 Special Charges -- (Continued)
RESERVE RESERVE BALANCE AT CASH INCOME OTHER BALANCE AT JANUARY 1, PAYMENTS (EXPENSE) ACTIVITY DECEMBER 30, 2000 IN 2000 IN 2000 IN 2000 2000 ---------- -------- --------- -------- ------------ Impairment writedown of goodwill.......... $ -- $ -- $-- $ -- $ -- ------ ------ -- ---- ---- Closing or realignment of manufacturing operations: Loss on disposal of closed facilities, improvements and equipment........... -- -- -- -- -- Changes in estimates of insurance liabilities.......................... 500 500 -- -- -- Costs related to expected increases in workers' compensation and health and welfare costs........................ -- -- -- -- -- Costs related to termination of certain lease obligations.................... -- -- -- -- -- Costs related to severance of the hourly workforce............................ -- -- -- -- -- Other................................... 200 -- -- 200 -- ------ ------ -- ---- ---- 700 500 -- 200 -- Severance................................. -- -- -- -- -- Other asset writedowns, valuation reserves and other reserves...................... -- -- -- -- -- Changes in estimates of certain retained liabilities of former subsidiaries...... 2,200 1,400 -- -- 800 Termination of management agreement....... -- -- -- -- -- ------ ------ -- ---- ---- $2,900 $1,900 $-- $200 $800 ====== ====== == ==== ====
Other activity in 1995 principally consisted of goodwill and fixed asset write offs and sales of inventory which had been written down as part of the special charges. In 1996 and 1997, other activity of $46,800,000 and $3,100,000 principally related to inventory reserves established which were relieved as the inventory was sold. During 1996, the Company finalized certain of the estimates recorded in connection with the special charges taken in 1995 which reduced Cost of sales by $3,400,000, Selling, general and administrative expenses by $6,400,000 and other expense by $3,600,000. Of this amount, $3,800,000 related to closing or realignment of manufacturing operations, principally reflecting the favorable settlement from subletting leased facilities and decreases in actual COBRA costs incurred over amounts estimated. The favorable settlement from subletting leased facilities and decreases in actual COBRA costs incurred over amounts estimated are included in "other" within "Closing or realignment of manufacturing operations" in the rollforward for the year ended December 31, 1996. In addition, estimates of other asset writedowns and reserves were reduced by $6,600,000 and primarily resulted from favorable renegotiation of royalty contracts. Further, changes in estimates of certain retained liabilities of former subsidiaries were reduced by $3,000,000, reflecting favorable settlement of product liability lawsuits. During 1997, the Company finalized 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. The adjustments to reserves consisted of $5,500,000 resulting from a favorable lease 73 76 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SPECIAL CHARGES -- (CONCLUDED) 1995 Special Charges -- (Concluded) renegotiation and $2,000,000 related to a reduction in bad debt reserves due to improvement in customer financial performance. See "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- USE OF ESTIMATES." The remaining reserve balance of $800,000 at December 30, 2000 will be relieved as costs are incurred and consists of environmental charges and is expected to be utilized in 2001. 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 money market funds, overnight deposits or Eurodollar deposits) totaling $93,500,000 and $9,800,000 were included in cash and cash equivalents at December 30, 2000 and January 1, 2000, respectively, as restricted cash. These investments were carried at cost, which approximated quoted market value. SALE OF ACCOUNTS RECEIVABLE Effective with its bankruptcy filing, the Company terminated its accounts receivable securitization agreement. Consequently, none of the Company's trade receivables were securitized at December 30, 2000 or at January 1, 2000. Under the agreement, the Company was able to sell up to a $275,000,000 undivided interest in a defined pool of its trade accounts receivable. The discount and fees under this agreement were variable based on the general level of interest rates. Rates ranged from 4.55% to 9.47% during 1999, and from 4.73% to 6.11% during 1998 on the amount of the undivided interest sold plus certain administrative and servicing fees typical in such transactions. These costs totaled approximately $8,800,000 in 1999 and $11,900,000 in 1998 and were charged to Other expense -- net in the accompanying Consolidated Statement of Operations. 74 77 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) LONG-TERM DEBT (IN THOUSANDS OF DOLLARS)
DECEMBER 30, JANUARY 1, INTEREST RATE 2000 2000 ------------- ------------ ---------- Senior Secured DIP Facility........................................ Variable(1) $ 100,000 $ 162,500 Capitalized lease obligations, maturing 2001-2017(2)..................................... 2.80 - 7.74% 32,800 45,500 Foreign Credit Facility(3).......................... Variable(4) -- 10,000 Bank Credit Agreement, maturing 2001-2002(5)........ Variable(6) 645,700 635,200 Nonredeemable fixed rate debt, maturing 2003(5)(7)....................................... 6.61% 149,600 149,400 Fixed rate debt, maturing 2011(5)(8)................ 12.60% 80,500 78,600 Nonredeemable fixed rate debt, maturing 2023(5)(9)....................................... 7.49% 148,100 148,100 ---------- ---------- Total Senior Secured............................. 1,156,700 1,229,300 ---------- ---------- Senior Unsecured Fixed rate debt, maturing 2006(10).................. 9.03% 248,500 248,500 ---------- ---------- Total debt............................................ 1,405,200 1,477,800 Less current maturities............................. (746,400) (635,800) Less liabilities subject to compromise.............. (248,500) (248,500) ---------- ---------- Total long-term debt.................................. $ 410,300 $ 593,500 ========== ==========
------------------------- (1) Interest ranged from 8.28% to 10.50% during 2000 and was 9.50% in 1999. The weighted average interest rate for borrowings outstanding at December 30, 2000 was approximately 9.23%. (2) Represents the principal portion on capitalized lease obligations. The capitalized leases are secured by the related property under lease. (3) This obligation, although guaranteed by the Company, is a direct obligation of the Company's wholly owned European subsidiary which is not a Debtor in the Reorganization Cases. It is secured by a lien on certain European assets. (4) Interest ranged from 6.15% to 9.05% during 2000 and 4.67% to 7.66% during 1999. This obligation was repaid October 31, 2000. (5) The obligations of the Company under the Bank Credit Agreement are guaranteed by and collateralized with certain assets of the Debtors. Certain fixed rate obligations share this security pari passu with the Bank Credit Agreement. (6) Interest ranged from 9.75% to 10.75% during 2000 and 5.56% to 9.75% during 1999. The weighted average interest rate for borrowings outstanding at December 30, 2000 was approximately 10.75%. (7) Net of unamortized discount of $400 and $600 in fiscal 2000 and 1999, respectively (nominal rate 6.5%). (8) Net of unamortized discount of $44,500 and $46,400 in fiscal 2000 and 1999, respectively (nominal rate 7%). (9) Net of unamortized discount of $1,900 in fiscal 2000 and 1999 (nominal rate 7.375%). (10) Net of unamortized discount of $1,500 (nominal rate 8.875%). This obligation is considered a liability subject to compromise. FTL Inc. and substantially all of its subsidiaries, as debtors-in-possession, are parties to a Postpetition Credit Agreement dated as of December 29, 1999 (the "DIP Facility") with Bank of America as agent. The 75 78 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) LONG-TERM DEBT -- (CONTINUED) DIP Facility as originally approved by the Bankruptcy Court included a total commitment of $625,000,000 comprised of revolving notes of $475,000,000 and a term note of $150,000,000. In March 2001, the Company requested and the DIP lenders and Bankruptcy Court approved a voluntary reduction of the total commitment to $450,000,000, comprised of a $350,000,000 revolver facility and a $100,000,000 term loan. Letter of Credit obligations under the revolver portion of the DIP Facility are limited to $175,000,000. The DIP Facility is intended to provide the Company with the cash and liquidity to conduct its operations and pay for merchandise shipments at normal levels during the course of the Reorganization Cases. As part of the initial funding, approximately $152,300,000 was used to retire the Company's Accounts Receivable Securitization arrangement, and approximately $10,200,000 was used to pay payroll and payroll taxes, bank and professional fees, and purchase inventory. In addition, $33,100,000 and $2,200,000 of letters of credit were issued under the DIP Facility at December 30, 2000 and January 1, 2000, respectively, primarily to secure various insurance, trade, debt and other obligations, of which approximately $15,800,000 and $2,000,000 are reflected in the accompanying consolidated balance sheet as of December 30, 2000 and January 1, 2000, respectively. Loans made under the DIP Facility revolving and term notes bear interest, at FTL Inc.'s option, at the prime rate (9.5% at December 30, 2000) plus 1.0% or the LIBOR rate 6.0% at December 30, 2000) plus 2.5%. The maximum borrowings, excluding the term commitments, under the DIP Facility are limited to 85% of eligible accounts receivable, 50% to 65% of eligible inventory and the assets existing as of the Petition Date. Various percentages of the proceeds from the sales of assets (as defined in the DIP Facility) will permanently reduce the commitments under the DIP Facility. Qualification of accounts receivable and inventory items as "eligible" is subject to unilateral change at the discretion of the lenders. The lenders under the DIP Facility have a super-priority administrative expense claim against the estates of the Debtors. The DIP Facility, as amended, expires on December 31, 2001. The DIP Facility is secured by substantially all of the assets of FTL Ltd. and its subsidiaries and a perfected pledge of stock of substantially all FTL Ltd.'s subsidiaries, including those subsidiaries that did not file Chapter 11. The DIP Facility contains restrictive covenants including, among other things, the maintenance of minimum earnings before interest, taxes, depreciation and amortization and restructuring expenses as defined (EBITDAR), limitations on the incurrence of additional indebtedness, liens, contingent obligations, sale of assets, capital expenditures and a prohibition on paying dividends. Prior to Chapter 11, the Bank Credit Agreement provided the Company with a $660,000,000 line of credit which consists of a $600,000,000 revolving line of credit and a $60,000,000 Term Loan. In addition to the borrowed amounts reflected above, at December 30, 2000 and January 1, 2000, $1,100,000 and $24,800,000, respectively, of letters of credit were outstanding under the Bank Credit Agreement. The letters of credit were issued to secure various insurance, debt and other obligations and all such obligations are reflected in the accompanying Consolidated Balance Sheet. As of the Petition Date and subject to the adequate protection order approved by the Bankruptcy Court, borrowings outstanding under the Bank Credit Agreement bear interest at the prime rate (9.5% at December 30, 2000) plus 1.25%. At December 30, 2000 and January 1, 2000, approximately $8,200,000 and $45,400,000, respectively, of letters of credit were issued under additional letter of credit facilities from the Company's bank lenders, to secure various insurance, debt, trade and other obligations, of which $5,000,000 and $22,300,000 of these obligations are reflected in the accompanying Consolidated Balance Sheet as of December 30, 2000 and January 1, 2000, respectively. Of the $45,400,000 of letters of credit outstanding at January 1, 2000, approximately $10,000,000 were secured by a lien on European assets. 76 79 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) LONG-TERM DEBT -- (CONCLUDED) The Company is currently in default on substantially all of its long-term debt other than the DIP Facility. Only scheduled maturities and the Bank Credit Agreement have been included in current maturities of long-term debt. The remaining secured long-term debt is in default due to the filing of a voluntary Chapter 11 petition and has been included in noncurrent liabilities in accordance with SOP 90-7. The Unsecured 8 7/8% Senior Notes have been included in liabilities subject to compromise. The aggregate amount of scheduled annual maturities of long-term debt for each of the next five years is: $746,400,000 in 2001; $2,000,000 in 2002; $152,000,000 in 2003; $2,000,000 in 2004; and $2,000,000 in 2005. Cash payments of interest on debt were $95,900,000, $98,200,000 and $100,500,000 in 2000, 1999 and 1998, respectively. These amounts exclude immaterial amounts of interest capitalized. LIABILITIES SUBJECT TO COMPROMISE The principal categories of obligations classified as liabilities subject to compromise under Reorganization Cases are identified below. The amounts below in total may vary significantly from the stated amount of proofs of claim that will be filed with the Bankruptcy Court and may be subject to future adjustment depending on Bankruptcy Court action, further developments with respect to potential disputed claims, determination as to the value of any collateral securing claims, or other events. Additional claims may arise from the rejection of additional real estate leases and executory contracts by the Debtors.
DECEMBER 30, JANUARY 1, 2000 2000 ------------ ---------- (IN THOUSANDS OF DOLLARS) 8.875% Unsecured Senior Notes............................ $248,500 $248,500 Trade accounts payable................................... 97,200 113,100 Environmental and product liability...................... 33,800 35,400 Accrued severance........................................ 27,400 27,400 Deferred compensation accrual............................ 14,300 16,400 Other.................................................... 119,500 242,200 -------- -------- $540,700 $683,000 ======== ========
As a result of the Reorganization Cases, no principal or interest payments will be made on unsecured prepetition debt without Bankruptcy Court approval or until a plan of reorganization providing for the repayment terms has been confirmed by the Bankruptcy Court and becomes effective. Therefore, interest on prepetition unsecured obligations has not been accrued after the Petition Date. 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 was party to interest rate swap contracts for $50,000,000 which expired in 1998 and $50,000,000 which expired in 1999 that had the effect of converting floating rate debt based on three month LIBOR rates into fixed rate debt. The average annual variable rate received in 1998 was 5.62%. The average annual fixed rate paid in 1998 was 5.20%. The fair values of financial guarantees and letters of credit approximate the face value of the underlying instruments. 77 80 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) FINANCIAL INSTRUMENTS -- (CONCLUDED) 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 30, 2000 and January 1, 2000, the fair value of the Company's long-term debt was approximately $615,700,000 and $557,800,000, 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 53.5% and 49.2% of net sales in 2000 and 1999, respectively and approximately 42.1% and 41.2% of accounts receivable at December 30, 2000 and January 1, 2000, respectively. 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. The Company's indirect subsidiary, NWI Land Management, Inc. ("NWI"), is responsible for several sites that require varying levels of inspection, maintenance, environmental monitoring and remedial or corrective action. Reserves for estimated losses from environmental remediation obligations generally are recognized no earlier than the completion of the remedial feasibility study. The Company has established procedures to evaluate its potential remedial liabilities and routinely reviews and evaluates sites requiring remediation, giving consideration to the nature, extent and number of years of the Company's alleged connection with the site. The Company's retained liability reserves as of December 30, 2000 are set forth in the table below. The reserves consist primarily of certain environmental and product liability reserves of $31,800,000 and $2,000,000, respectively. The Company's retained liability reserves principally pertain to seven owned environmental sites and environmental management costs for those owned sites. Anticipated direct site expenditures associated with the owned sites represent approximately 44% of the total reserves and approximately $5,200,000 is reserved for the long-term professional management of the sites. The Company and NWI are parties to prepetition indemnity agreements ("Indemnity Agreements") with certain parties ("Indemnified Parties") whereby the Company or NWI are contractually liable to indemnify the parties to such Indemnity Agreements, related to sites owned or operated by such Indemnified Parties, or related to third party sites in which the Indemnified Parties conducted or arranged for disposal activities. The retained liability reserves relative to the prepetition Indemnity Agreements comprise approximately $13,800,000 or 41% of the retained liability reserves. 78 81 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONTINGENT LIABILITIES -- (CONTINUED) On March 14, 2001, the Bankruptcy Court entered an order rejecting certain of the prepetition Indemnity Agreements. The Company and NWI are reviewing and considering rejection of other prepetition Indemnity Agreements and related prepetition Agreements. The Company has certain amounts of environmental and other insurance which may cover expenditures in connection with environmental sites and product liabilities. The Company, on October 28, 1997, filed suit against numerous insurance carriers seeking reimbursement for past and future remedial, defense and tort claim costs at a number of sites. Carriers in this matter have denied coverage and are defending against the Company's claims. In the fourth quarter of 1999, the Company entered into a settlement agreement with certain of the insurance carriers. As a result of the settlement agreement, the Company received $13,700,000 which has been recorded as a reduction of Other expense in the accompanying Consolidated Statement of Operations. The Company continues to pursue its claims against the remaining insurance carriers. During 1998, the Company purchased insurance coverage for potential cleanup cost expenditures from the level of the current environmental reserves up to $100,000,000 for certain sites with on-going remediation, pollution liability coverage for claims arising from pollution conditions at owned locations including continuing operations, sold facilities and non-owned sites and product liability coverage for claims arising from products manufactured by the sold operations. Where the Company believes that both the amount of a particular environmental liability and the timing of the payments are reliably determinable, the cost in current dollars is inflated at 2.0% until the expected time of payment and then discounted to present value at 7.5%. The undiscounted aggregate costs to be paid subsequent to December 30, 2000 for environmental liabilities are approximately $41,500,000. None of the product liability reserves for future expenditures have been inflated or discounted. Management believes that adequate reserves have been established to cover potential claims based on facts currently available and current Superfund and CERCLA Legislation. However, determination of the Company's responsibility at a particular site and the method and ultimate cost of remediation require a number of assumptions which make estimates inherently difficult, and the ultimate outcome may differ from current estimates. Current estimates of payments before recoveries by year for the next five years and thereafter are noted below (in thousands of dollars). The reserves are reduced by cash expenditures incurred at specific sites or product cases.
YEAR ENVIRONMENTAL PRODUCT TOTAL ---- ------------- ------- ------- 2001.............................................. $ 2,300 $ 500 $ 2,800 2002.............................................. 5,400 500 5,900 2003.............................................. 3,600 300 3,900 2004.............................................. 2,700 300 3,000 2005.............................................. 2,500 200 2,700 Thereafter........................................ 15,300 200 15,500 ------- ------ ------- Total...................................... $31,800 $2,000 $33,800 ======= ====== =======
The Company has provided the foregoing information in accordance with Staff Accounting Bulletin 92 and Statement of Position 96-1. Owners and operators of hazardous waste sites, generators and transporters of hazardous wastes 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 disposal locations from liable parties under the Superfund Legislation, which authorizes such action by the EPA regardless of fault, legality of original disposal or ownership of a disposal 79 82 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONTINGENT LIABILITIES -- (CONTINUED) site. The EPA's activities under the Superfund Legislation can be expected to continue during 2001 and future years. On February 24, 1999, the Board of Directors, excluding Mr. Farley, authorized the Company to guarantee a bank loan of up to $65,000,000 to Mr. Farley in connection with Mr. Farley's refinancing and retirement of his $26,000,000 and $12,000,000 loans previously guaranteed by the Company and other indebtedness of Mr. Farley. The Company's obligations under the guarantee are collateralized by 2,507,512 shares of FTL, Inc. Preferred Stock and all of Mr. Farley's assets, including Mr. Farley's personal guarantee. In consideration of the guarantee, which expired in September 2000, Mr. Farley is obligated to pay an annual guarantee fee equal to 2% of the outstanding principal balance of the loan. The Board of Directors received an opinion from an independent financial advisor that the terms of the transaction are commercially reasonable. The total amount guaranteed is $59,300,000 as of December 30, 2000. Based on management's assessment of existing facts and circumstances of Mr. Farley's financial condition, the Company recorded a $10,000,000 charge in the third quarter of 1999 and $20,000,000 in the fourth quarter of 1999 related to the Company's exposure under the guarantee. The Company continues to evaluate its exposure under the guarantee. Mr. Farley has not paid the Company the guarantee fee due in 2000 and 2001 and is in default under the loans and the reimbursement agreement with the Company. The Company began paying interest on the loan in the first quarter of 2000 including interest that was outstanding from the fourth quarter of 1999. On May 16, 2000, Fruit of the Loom sent a demand letter to Mr. Farley on account of his reimbursement obligation. On March 27, 1995, Mr. Farley and Fruit of the Loom entered into an employment agreement, effective as of December 18, 1994, which was subsequently amended and restated as of January 6, 1999 (the "Employment Agreement"). Mr. Farley relinquished the additional duties of chief executive officer and chief operating officer in August of 1999 at the direction of the Board. The Company recorded a provision of $27,400,000 in the third quarter of 1999 for estimated future severance and retirement obligations under Mr. Farley's Employment Agreement. Fruit of the Loom terminated the Employment Agreement prior to the Petition Date and, as a protective measure, rejected it by order of the Bankruptcy Court on December 30, 1999. Pursuant to the terms of the Employment Agreement, Mr. Farley had the right to defer all or a portion of his compensation in a particular year in exchange for the right to receive benefits payable (if any) under a Deferred Compensation Plan and a Rabbi Trust. The Rabbi Trust provided that, in the event Fruit of the Loom becomes a "debtor" under the Bankruptcy Code, the assets of the Rabbi Trust would be held for the benefit of Fruit of the Loom's general creditors. Nonetheless, Mr. Farley has taken the position that the Rabbi Trust and its assets should not be considered property of Fruit of the Loom's estate. On or about October 27, 2000, the Farley lenders commenced an action in the Supreme Court for the State of New York, County of New York, Bank of America, N.A. v. William F. Farley, Index No. 001604685, against Mr. Farley to enforce his obligations to the Farley lenders. On December 8, 2000, this action was removed to the United States District Court for the Southern District of New York. The Farley lenders assert that Mr. Farley is in default under the Farley loan agreements and seek repayment of the Farley loan pursuant to the loan agreements in an amount equal to approximately $60,000,000. The case is currently pending. On March 3, 2000, Fruit of the Loom moved for the entry of an order, pursuant to Sections 105 and 543 of the Bankruptcy Code (the "Turnover Motion"), directing the turnover of the cash and securities held in the Rabbi Trust (the "Rabbi Trust Assets") from Wachovia. On or about June 30, 2000, the Bankruptcy Court entered an order granting, in part, the Turnover Motion and directing that (i) Wachovia turn over the Rabbi Trust Assets to Fruit of the Loom, (ii) Fruit of the Loom deposit the Rabbi Trust Assets in an escrow account (the "Escrow Account") and (iii) Fruit of the Loom commence an adversary proceeding seeking a declaratory judgment regarding the ownership of the Rabbi Trust Assets and Fruit of the Loom's ability to use such assets in the Reorganization Cases. As described more fully below, in furtherance of the Bankruptcy 80 83 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONTINGENT LIABILITIES -- (CONTINUED) Court's order, Fruit of the Loom commenced an adversary proceeding against Mr. Farley, which is pending, and deposited the Rabbit Trust Assets into the Escrow Account. On July 17, 2000, Fruit of the Loom commenced an action against Mr. Farley in the Bankruptcy Court Fruit of the Loom, Inc. v. Farley, Case No. 99-04497, Adv. Proc. No. 00-724 (D. Del.) (the "Rabbi Trust Proceeding"). The Rabbi Trust Proceeding seeks a declaratory judgment that certain assets maintained and held in the Rabbi Trust are the property of Fruit of the Loom's estate and may be used immediately by Fruit of the Loom for the benefit of its estate and creditors. On August 21, 2000, Mr. Farley filed an answer and counterclaims against Fruit of the Loom. On August 4, 2000, Fruit of the Loom commenced an action against Mr. Farley in the Bankruptcy Court Fruit of the Loom, Inc. v. Farley, Case No. 99-04497, Adv. Proc. No. 00-276 (D. Del.) (the "Artwork Proceeding"). The Artwork Proceeding seeks the return of certain pieces of art owned by Fruit of the Loom that Fruit of the Loom contends are in the possession of Mr. Farley. On September 2, 2000, Mr. Farley filed an answer and counterclaims against Fruit of the Loom. On May 30, 2000, Mr. Farley commenced an adversary proceeding against Fruit of the Loom in the Bankruptcy Court Farley v. Fruit of the Loom, Inc., Case No. 99-04497, Adv. Proc. No. 00-646 (D. Del.) (the "Remedies Proceeding"). The Remedies Proceeding seeks a declaratory judgment that Mr. Farley is a third-party beneficiary of certain documents with respect to Fruit of the Loom's guarantee of the Farley loan, and thus those documents cannot be altered without his consent. Mr. Farley seeks a judgment that Fruit of the Loom is foreclosed from seeking reimbursement and repayment for payments made by Fruit of the Loom to the Farley lenders pursuant to the Farley guaranty until the Farley lenders are paid in full. Fruit of the Loom has filed an answer and counterclaim seeking, among other things, a determination that Mr. Farley is in breach of his reimbursement obligations to Fruit of the Loom and a judgment requiring him to specifically perform his obligations under the reimbursement agreement. On June 30, 2000, Fruit of the Loom filed a motion for summary judgment in the Remedies Proceeding. On July 21, 2000, Mr. Farley opposed Fruit of the Loom's summary judgment motion and filed a motion, pursuant to Rule 56(f) of the Federal Rules of Civil Procedure, seeking entry of an order postponing and continuing the Bankruptcy Court's consideration of Fruit of the Loom's summary judgment motion. The District Court has reserved judgment on both motions. On September 7, 2000, the reference for all three adversary proceedings involving Fruit of the Loom and Mr. Farley was withdrawn to the United States District Court for the District of Delaware and they were assigned to Chief Judge Robinson, effective September 27, 2000. Discovery has commenced with respect to all of the adversary proceedings. 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 30, 2000, the Company had a contingent liability to repay, in whole or in part, grants received of approximately $18,800,000 in the event that the Company does not meet defined average employment levels or terminates operations in the Republic of Ireland, Northern Ireland and Germany. In connection with the Company's transaction with Acme Boot Company, Inc. ("Acme Boot") during 1993, the Company guaranteed, on an unsecured basis, the repayment of debt incurred by Acme Boot under Acme Boot's bank credit facility which was secured by substantially all the assets of Acme Boot and its subsidiaries and provided for up to $30,000,000 of loans and letters of credit. Farley Inc. owned 100% of the common stock of Acme Boot. 81 84 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONTINGENT LIABILITIES -- (CONTINUED) Also, in April 1995, Acme Boot entered into an additional secured credit facility with its bank which provided for up to $37,000,000 in borrowings. The Company guaranteed, on an unsecured basis, repayment of debt incurred or created under this new credit facility. In exchange for the additional guarantee, the Company received $6,000,000 of initial liquidation preference of Acme Boot Series C Redeemable Junior Preferred Stock. As a result of the operating performance of Acme Boot and management's assessment of existing facts and circumstances of Acme Boot's financial condition, the Company provided a reserve of $35,000,000 at the end of 1996 for loss on the Acme Boot debt guarantees and increased its reserve by $32,000,000 at the end of the third quarter of 1997 to fully reserve the Company's $67,000,000 exposure under the Acme Boot guarantees. In addition, through July 1998, the Company loaned Acme Boot $9,000,000 to provide Acme Boot with supplemental working capital. These loans were made in the form of demand notes payable and were senior to all other outstanding indebtedness of Acme Boot. These loans were repaid by Acme Boot upon the sale of its business in the third quarter of 1998. In June 1998, Acme Boot entered into agreements with unrelated parties for the sale of certain assets and its business. Financing for the sale of the business was completed in the third quarter of 1998, at which time the Company paid $65,900,000 to satisfy the Acme Boot guarantees in full. Other income (expense) -- net for 1998 in the accompanying Consolidated Statement of Operations includes income of $6,400,000 from the sale of Acme Boot and the settlement of this liability. On September 30, 1998, the New England Health Care Employees Pension Fund filed a purported class action on behalf of all those who purchased FTL Inc. Class A Common Stock and publicly traded options between July 24, 1996 and September 5, 1997 against Fruit of the Loom and William F. Farley, Bernhard Hansen, Richard C. Lappin, G. William Newton, Burgess D. Ridge, Larry K. Switzer and John D. Wigodsky, each of whom is a current or former officer of Fruit of the Loom, in the United States District Court for the Western District of Kentucky (the "New England Action"). The plaintiff claims that the defendants engaged in conduct violating Section 10(b) of the Securities Exchange Act of 1934, as amended (the "Act"), and that Fruit of the Loom and Mr. Farley are also liable under Section 20(a) of the Act. Fruit of the Loom and counsel for the plaintiff reached agreement, so ordered by the Bankruptcy Court on November 20, 2000 (the "105 Stipulation"), to stay the New England Action and certain other proceedings at least until January 15, 2001, (which has been extended on consent) subject, among other things, to certain limited document discovery against non-parties (other than any current or former officers and directors) being permitted to proceed, and to the right of the plaintiffs to amend the complaint to add additional parties. Pursuant to the 105 Stipulation, as extended on consent, the New England Action has been stayed indefinitely as to all parties. In March, April and May 2000, nine putative class actions were filed on behalf of all those who purchased Fruit of the Loom, Inc. Class A common stock between September 28, 1998 and November 4, 1999 against William F. Farley and G. William Newton, each of whom is a current or former officer of Fruit of the Loom, in the United States District Court for the Western District of Kentucky. The actions allege that the defendants violated section 10(b) of the Act, and that Mr. Farley is also liable under Section 20(a) of the Act. The nine putative class action lawsuits have been consolidated under Bernard Fidel v. William Farley, et al., Civil Action No. 1:00 CV-48M (W.D. Ky.), filed on March 22, 2000. 82 85 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONTINGENT LIABILITIES -- (CONTINUED) The Fidel v. Farley, et al. action, is subject to a stay due to a pending motion to dismiss. In addition, this action is stayed by the 105 Stipulation. By letter dated January 19, 2001, counsel for the class action plaintiffs agreed to continue the stay under the 105 Stipulation indefinitely pending settlement discussions. Management believes that the suit is without merit, and management and the Company intend to defend it vigorously. Management believes, based on information currently available, that the ultimate resolution of this litigation will not have a material adverse effect on the financial condition or results of the operations of the Company. On or about August 24, 2000, the Creditors' Committee initiated the Committee Avoidance Action against the Prepetition Secured Creditors (Adv. Proceeding No. 00-1022) by filing a complaint with the Bankruptcy Court. In the Committee Avoidance Action, the Creditors Committee alleges that: (i) the guaranties made by FTL Ltd. and the Debtor Subsidiaries of FTL Inc.'s obligations under the 1997 Credit Agreement are avoidable as fraudulently incurred obligations; (ii) the guaranties made by FTL Inc., FTL Ltd., and the debtor subsidiaries of Farley's obligations under the Farley Credit Agreement are avoidable as fraudulently incurred obligations; (iii) the grant of liens by Fruit of the Loom to support obligations owed to the Prepetition Secured Creditors are avoidable as fraudulent and/or preferential transfers; (iv) if any member of Fruit of the Loom provided to an Indenture Trustee or any Senior Noteholder any liens to support the Senior Notes pursuant to any provision of an Indenture requiring the granting of such liens "equally and ratably" to the extent liens were granted to other specified prepetition lenders to secure obligations owed to them, those liens are avoidable as fraudulent or preferential transfers; (v) any postpetition payments (or other transfers of property, including the granting of liens under the DIP Financing Order and the Adequate Protection Order) made by Fruit of the Loom to any of the Prepetition Secured Creditors on account of the obligations and liens described in the foregoing clauses (i)-(iv) should be avoided and recovered as transfers not authorized under the Bankruptcy Code or otherwise; and (vi) by reason of Prepetition Bank Lenders' conduct in shifting to the unsecured creditors the risk of loss with respect to their loans to Farley and various members of Fruit of the Loom, the Claims of the Prepetition Bank Lenders against Fruit of the Loom should be equitably subordinated to the payment in full of all unsecured claims in accordance with Bankruptcy Code section 510(c). The reference with regard to this adversary proceeding was withdrawn by the United States District Court for the District of Delaware, and the matter was assigned to Chief District Court Judge Sue Robinson, effective September 27, 2000. On January 17, 2001, the Creditors' Committee filed an amended complaint (the "Amended Complaint"), adding certain additional banks as defendants. The defendants have filed their answers to the Complaint and the Amended Complaint, denying the allegations in the Complaint and Amended Complaint and asserting various affirmative defenses. Limited discovery has been undertaken as of the date hereof. In August 1994, the Company acquired Pro Player, Inc. ("Pro Player") for approximately $55,700,000, including approximately $14,200,000 of Pro Player debt which was repaid by the Company. The Company had compensation agreements with the former principals of Pro Player who became employees of the business upon the Company's acquisition. The compensation agreements provided for these former employees to receive compensation up to a maximum of $47,100,000, based in part on the attainment of certain levels of operating performance by the acquired entity in 1998 and 1999. In the fourth quarter of 1997, the Company recorded a $22,000,000 charge related to this compensation agreement, based on its assessment of the probability that Pro Player's operating performance would result in such amount being earned. During the fourth quarter of 1998, the Company determined that it was no longer probable that the $22,000,000 would be paid and reversed the 1997 charge. As Pro Player has been presented as a discontinued operation the charge 83 86 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONTINGENT LIABILITIES -- (CONCLUDED) and reversal are included in discontinued operations in the accompanying Consolidated Statement of Operations. In the fourth quarter of 2000, the Company recorded an additional estimated loss on the disposal of these operations of $20,200,000 as a result of lower actual realization of receivables and inventories than originally anticipated. 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 covered by the lease is $144,600,000. Additional liquidity of $30,400,000 expired unused on March 31, 1999. The total amount outstanding under this lease is $87,600,000 at December 30, 2000 and January 1, 2000, respectively. 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. As part of the Reorganization Cases, the Company is reviewing the legal status of this equipment lease (and other leases), including the issue of whether such lease should be characterized as a financing arrangement in the Reorganization Cases. 84 87 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) LEASE COMMITMENTS -- (CONCLUDED) 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 30, 2000 (in thousands of dollars):
CAPITALIZED OPERATING LEASES LEASES ----------- --------- FISCAL YEAR 2001..................................................... $ 2,800 $10,400 2002..................................................... 2,800 7,400 2003..................................................... 2,800 4,500 2004..................................................... 2,800 2,400 2005..................................................... 2,800 1,500 Years subsequent to 2005................................. 36,200 2,400 -------- ------- Total minimum lease payments............................... 50,200 $28,600 ======= Imputed interest........................................... (17,400) -------- Present value of minimum capitalized lease payments........ 32,800 Current portion............................................ 700 -------- Long-term capitalized lease obligations.................... $ 32,100 ========
Assets recorded under capital leases are included in Property, Plant and Equipment as follows (in thousands of dollars):
DECEMBER 30, JANUARY 1, 2000 2000 ------------ ---------- Land..................................................... $ 7,100 $ 7,200 Buildings, structures and improvements................... 15,600 21,700 Machinery and equipment.................................. 700 3,800 ------- -------- 23,400 32,700 Accumulated amortization................................. (8,600) (17,200) ------- -------- $14,800 $ 15,500 ======= ========
Rental expense for operating leases amounted to $30,200,000, $46,100,000 and $38,100,000 in 2000, 1999 and 1998, respectively. STOCK PLANS BECAUSE MANAGEMENT BELIEVES THAT THE REORGANIZATION CASES WILL RESULT IN NO DISTRIBUTION TO EQUITY HOLDERS AND THAT THE CLASS A ORDINARY SHARES WILL BE CANCELLED, THE COMPANY'S COMPENSATION PLANS BASED ON CLASS A ORDINARY SHARES HAVE NO FURTHER INCENTIVE VALUE. CONSEQUENTLY, NO AWARDS HAVE BEEN GRANTED UNDER THE PLANS DISCUSSED BELOW SINCE THE REORGANIZATION CASES WERE FILED. 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 30, 2000, a total of 11,756,600 shares of the Company's Class A Ordinary Shares were reserved for issuance under these plans, including option and other awards outstanding 85 88 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) STOCK PLANS -- (CONTINUED) totaling 3,595,300 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, at 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 occur automatically under certain plans in the event of a change in control of the Company. Following is a summary of option activity for the three years ended December 30, 2000.
2000 1999 1998 --------------------- --------------------- --------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE ---------- -------- ---------- -------- ---------- -------- Outstanding, beginning of year...... 6,361,600 $15.91 8,217,600 $24.53 6,015,400 $29.04 Granted............................. -- -- 4,470,100 10.45 4,037,100 21.00 Exercised........................... -- -- (1,500) 10.75 (332,100) 20.59 Cancelled/expired................... (2,857,900) 18.76 (6,324,600) 23.28 (1,502,800) 33.66 ---------- ---------- ---------- Outstanding, end of year............ 3,503,700 13.58 6,361,600 15.91 8,217,600 24.53 ========== ========== ========== Exercisable: At end of year.................... 2,148,000 17.31 2,571,000 24.04 3,097,100 24.61 Upon completion of additional service......................... 1,355,700 7.67 3,790,600 10.40 5,120,500 24.48 ---------- ---------- ---------- Total outstanding.......... 3,503,700 13.58 6,361,600 15.91 8,217,600 24.53 ========== ========== ========== Weighted average fair value of options granted during the year............................ N/A $ 5.13 $ 7.89 ====== ====== ======
The following information is as of December 30, 2000.
WEIGHTED WEIGHTED REMAINING WEIGHTED OPTIONS AVERAGE CONTRACTUAL OPTIONS AVERAGE RANGE OF EXERCISE PRICES OUTSTANDING PRICE LIFE EXERCISABLE PRICE ------------------------ ----------- -------- ----------- ----------- -------- $3.06 to $14.50............................... 1,546,700 $ 4.94 6.4 Years 522,900 $ 5.06 $15.13 to $19.19.............................. 1,520,800 17.22 6.0 Years 1,221,100 17.22 $23.88 to $27.06.............................. 202,500 25.77 5.6 Years 194,200 25.85 $30.13 to $42.00.............................. 233,700 36.48 6.1 Years 209,800 37.21 --------- --------- 3,503,700 2,148,000 ========= =========
In 1998, the Company's Board of Directors approved the repricing of certain of the Company's stock options that had been granted to employees other than executive officers and that 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. In exchange for the previously granted stock options, the Company granted fewer new stock options at an exercise price equal to the market price of the Class A Common Stock on the date of the exchange using a replacement formula based on the modified Black-Scholes Option Pricing Model. Consequently, the repricing resulted in no additional compensation expense to the Company. Options granted in 1998 included 720,992 options granted in the exchange. 86 89 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) STOCK PLANS -- (CONTINUED) Following is a summary of activity in nonvested stock under the Company's compensation plans for the three years ended December 30, 2000. Nonvested stock includes restricted stock units and performance shares granted under the plans. Nonvested stock grants generally vest over periods ranging from two to three years. The Compensation Committee may, at its discretion, accelerate the vesting of any award. Vested awards under certain plans may be settled either by issuance of Class A Ordinary Shares or in cash based on the market price of Class A Ordinary Shares on the vesting date.
2000 1999 1998 --------- --------- -------- Outstanding, beginning of year............................. 330,100 163,400 147,300 Granted.................................................... -- 511,000 111,800 Earned upon completion of service.......................... (59,700) (226,200) (55,900) Forfeited.................................................. (178,800) (118,100) (39,800) --------- --------- -------- Outstanding, end of year................................... 91,600 330,100 163,400 ========= ========= ======== Weighted average grant date fair value of nonvested stock granted during the year.................................. $ N/A $ 8.57 $ 15.37 ========= ========= ========
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 is equal to or greater than the market price of the underlying Class A Ordinary Shares on the date granted. For other stock-based compensation awards, the Company recognized compensation costs under APB 25 totaling $2,800,000 and $1,900,000 in 1999 and 1998, respectively. Due to the Reorganization Cases, no compensation cost was recorded in 2000. 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 5.39% in 1999, and 4.81% in 1998, a dividend yield of zero, a volatility factor of the expected market price of the Company's common stock of .59 in 1999 and .45 in 1998, and an expected option life of four years in 1999 and five years in 1998. 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 option life. 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. 87 90 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) STOCK PLANS -- (CONCLUDED) 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):
2000 1999 1998 --------- --------- -------- Pro forma net earnings (loss).............................. $(129,100) $(568,300) $123,300 Pro forma earnings (loss) per share: Basic.................................................... $ (1.93) $ (8.38) $ 1.71 Assuming dilution........................................ $ (1.93) $ (8.38) $ 1.71
MINORITY INTEREST In connection with the Cayman Reorganization, all outstanding shares of Class A common stock of FTL Inc. were automatically converted into Class A ordinary shares of FTL Ltd., and all outstanding shares of Class B common stock of FTL Inc. were automatically converted into shares of exchangeable participating preferred stock of FTL Inc. (the "FTL Inc. Preferred Stock"). The holders of the FTL Inc. Preferred Stock also received, in the aggregate, four Class B redeemable ordinary shares of FTL Ltd. The minority interest resulting from issuance of the FTL Inc. Preferred Stock has been recorded based on the liquidation preference of $71,700,000. Holders of the FTL Inc. Preferred Stock will receive no distribution under the Reorganization Plan if approved. The Disclosure Statement filed on March 15, 2001 did not provide any recovery to FTL Ltd.'s equity security holders. Accordingly, management believes that current equity security holders (common or preferred stock) will not receive any distribution under any reorganization plan as a result of the issuance of new equity to existing creditors. The FTL Inc. Preferred Stock (5,229,421 shares outstanding) in the aggregate (i) has a liquidation value of $71,700,000, which is equal to the fair market value of the FTL Inc. Class B common stock based upon the $13.71 average closing price of FTL Inc. Class A common stock on the New York Stock Exchange for the 20 trading days prior to March 4, 1999, (ii) is entitled to receive cumulative cash dividends of 4.5% per annum of the liquidation value, payable quarterly, (iii) is exchangeable at the option of the holder, in whole or from time to time in part, at any time for 4,981,000 FTL Ltd. Class A ordinary shares, (iv) is convertible at the option of the holder, in whole or from time to time in part, at any time for 4,981,000 shares of FTL Inc. common stock, (v) participates with the holders of FTL Inc. common stock in all dividends and liquidation payments in addition to its preference payments on an as converted basis, (vi) is redeemable by FTL Inc., at its option, after three years at a redemption price equal to the then fair market value of FTL Inc. Preferred Stock as determined by a nationally recognized investment banking firm, and (vii) has the right to vote on all matters put to a vote of the holders of FTL Inc. common stock, voting together with such holders as a single class, and is entitled to the number of votes which such holder would have on an as converted basis. The fixed dividend on the FTL Inc. Preferred Stock of 4.5% of the liquidation preference of $71,700,000 equals $3,200,000 on an annual basis. In addition, preferred stockholders participate in FTL Inc.'s earnings after provision for the fixed preferred stock dividend. Participation in earnings is determined as the ratio of preferred shares outstanding to the total of preferred and common shares outstanding (7.2% at December 30, 2000 and January 1, 2000). Preferred stockholder participation in losses is limited to the preferred stockholders' prior participation in earnings. Because FTL Inc. reported losses throughout 2000 and 1999, the minority interest participation was limited to the fixed preferred dividends of $3,200,000 in 2000 and $2,700,000 in 1999. The Company paid no dividends in 2000 and paid dividends in 1999 aggregating $1,900,000 to the holders of the FTL Inc. Preferred Stock. The Company ceased paying dividends on the FTL Inc. Preferred Stock subsequent to the third quarter of 1999. 88 91 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) STOCKHOLDERS' EQUITY Ordinary Shares; General The Memorandum of Association provides that the authorized share capital of FTL Ltd. is divided into 200,000,000 Class A shares, 100 Class B shares and 35,000,000 preference shares. Voting The holders of FTL Ltd. Class A shares are entitled to one vote per share. The voting rights of the four (4) FTL Ltd. Class B shares issued to Farley are equal to the aggregate number of votes held by the holders of FTL Inc. Class B Stock on the date the Merger was consummated (26,147,105 votes or approximately 28% of the aggregate voting power). All actions submitted to a vote of shareholders are voted on by the holders of FTL Ltd. Class A shares and FTL Ltd. Class B shares, voting together as a single class, except as otherwise set forth below or as provided by law. With respect to the election of directors, holders of FTL Ltd. Class A shares, voting as a separate class, are entitled to elect 25% of the total number of directors constituting the entire Board of Directors of FTL Ltd. (the "Class A Directors") for so long as any FTL Ltd. Class B shares are outstanding, and, if not a whole number, then the holders of the FTL Ltd. Class A shares are entitled to elect the nearest higher whole number of directors that is at least 25% of the total number of directors. There are no limitations on the right of nonresident shareholders to hold or vote their FTL Ltd. Class A shares imposed by Cayman Islands law or FTL Ltd.'s Articles of Association; provided, however, that, except as otherwise required by Cayman Islands law, FTL Ltd. shall not be bound to recognize any equitable, contingent, future or partial interest in any share except the absolute right in the registered holder. The rights attached to any separate class of shares (unless otherwise provided by the terms of the shares of that class) may be varied only with the consent in writing of the holders of a majority of the shares of that class or by a Special Resolution (as defined below) passed at a separate general meeting of holders of the shares of that class. The necessary quorum for such a meeting shall be holders of at least a majority of the shares of that class and any holder of shares of the class present in person or by proxy may demand a vote and, on such vote, shall have one vote for each share of the class of which he is the holder. No additional FTL Ltd. Class B shares may be issued without the consent in writing of the holders of a majority of the then issued FTL Ltd. Class B shares or by a Special Resolution of such shareholders. The rights attached to any class of shares, other than the FTL Ltd. Class B shares, shall not be deemed to be varied by the issuance of additional shares that rank pari passu with such shares. Dividend Rights Holders of FTL Ltd. Class A shares are entitled to participate pari passu, on a share-for-share basis, with the holders of any other class of ordinary shares outstanding, including the FTL Ltd. Class B shares, with respect to any dividends declared by the Board of Directors of FTL Ltd. The payment of any future cash dividends on the FTL Ltd. Class A shares is necessarily dependent upon the earnings and financial needs of FTL Ltd., along with applicable legal and contractual restrictions. A Special Resolution is a resolution passed by two-thirds of such shareholders as, being entitled to do so, vote in person or, where proxies are allowed, by proxy at a general meeting of which notice specifying the intention to propose such resolution has been duly given or which has been approved in writing by all shareholders of a company entitled to vote at a general meeting of the company. 89 92 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) STOCKHOLDERS' EQUITY -- (CONTINUED) Redemption The FTL Ltd. Class A shares will not be subject to redemption either by FTL Ltd. or the holder thereof. The FTL Ltd. Class B shares held by Farley will be redeemed by FTL Ltd. in the following instances: (i) upon exchange by Farley of any FTL Inc. Preferred Stock held by Farley for FTL Ltd. Class A shares pursuant to the terms thereof, FTL Ltd. shall redeem a proportionate number of whole or fractional FTL Ltd. Class B shares equal to the percentage of outstanding shares of FTL Inc. Preferred Stock so exchanged by Farley at a redemption price per FTL Ltd. Class B share equal to the closing price on the NYSE of an FTL Ltd. Class A share on the last trading day prior to the redemption date (the "Redemption Price"). (ii) upon redemption of all of the FTL Inc. Preferred Stock held by Farley by FTL Inc. pursuant to the terms thereof, FTL Ltd. shall redeem all of the FTL Ltd. Class B shares at a price equal to the Redemption Price. (iii) upon transfer by Farley to a non-affiliate of Farley of any shares of FTL Inc. Preferred Stock or FTL Inc. common stock received upon conversion thereof, a proportionate number of whole or fractional FTL Ltd. Class B shares equal to the percentage of outstanding shares of FTL Inc. Preferred Stock and/or such FTL Inc. common stock which are transferred by Farley shall be redeemed by FTL Ltd. at a price equal to the Redemption Price. Restrictions on Transfer The FTL Ltd. Class B shares are not transferable by the holders thereof except to affiliates of Farley. The FTL Ltd. Class A shares contain no restrictions on transfer. Preference Shares Under the Memorandum of Association and the Articles of Association, FTL Ltd. has the authority to issue 35,000,000 preference shares. There are currently no preference shares outstanding, and FTL Ltd. will not issue any preference shares in connection with the Cayman Reorganization. Under the Articles of Association, subject to the special rights attaching to any class of shares of FTL Ltd. not being varied, the Board of Directors of FTL Ltd. may establish one or more classes or series of preference shares having the number of shares, designations, relative voting rights, dividend rates, liquidation and other rights, preferences and limitations that the Board of Directors fixes without any shareholder approval. Other During 1999, before the effective date of the Cayman Reorganization, 454,855 FTL Inc. Class B shares were converted to FTL Inc. Class A shares. During 1997, 1,006,700 FTL Inc. Class B shares were converted to FTL Inc. Class A shares. 90 93 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The components of other comprehensive income are as follows (in thousands of dollars):
UNREALIZED CURRENCY MINIMUM (GAIN) LOSS ON TRANSLATION PENSION AVAILABLE-FOR- ADJUSTMENTS LIABILITY SALE SECURITIES TOTAL ----------- --------- --------------- -------- Balance, December 31, 1997.................... $(37,000) $ (600) $ -- $(37,600) Currency translation adjustment............... (6,400) (6,400) Minimum pension liability adjustment.......... (10,400) (10,400) -------- -------- -------- -------- Balance, January 2, 1999...................... (43,400) (11,000) -- (54,400) Currency translation adjustment............... (18,300) (18,300) Minimum pension liability adjustment.......... 11,000 11,000 Unrealized gains on available-for-sale securities.................................. 10,300 10,300 -------- -------- -------- -------- Balance, January 1, 2000...................... (61,700) -- 10,300 (51,400) Currency translation adjustment............... (12,600) (12,600) Unrealized gains on available-for-sale securities Holding gain..................... 5,100 5,100 Gain reclassified to net income............... (10,900) (10,900) -------- -------- -------- -------- Balance, December 30, 2000.................... $(74,300) $ -- $ 4,500 $(69,800) ======== ======== ======== ========
OPERATING SEGMENTS The Company manufactures and markets basic family apparel with vertically integrated operations in the Americas (North America, Central America and the Caribbean) and in Europe. North America is the Company's principal market, comprising more than 80% of consolidated net sales in each of the last three years. For the North American market, capital intensive spinning, knitting and cutting operations are located in the United States. Labor intensive sewing and finishing operations are located in Central America, Mexico and the Caribbean. For the European market, manufacturing operations are concentrated in Ireland, but labor intensive operations are located in Morocco. In North America, the Company is organized into two operating segments based on the products it offers. These segments are Retail Products and Activewear, the Company's historic core businesses. The Company's former Sports & Licensing segment is reported as discontinued operations in the accompanying Consolidated Statement of Operations. Management allocates promotional efforts, working capital, and manufacturing and distribution capacity based on its assessment of segment operating results and market conditions. In Europe the Company is organized into a single geographic operating segment. Employing an entirely separate management team, the Company produces and sources a different mix of garments in Ireland and Morocco for sale in Europe. Retail Products are offered principally under the FRUIT OF THE LOOM and BVD brand names through major discount and mass merchandisers, wholesale clubs and other retailers. 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. Casualwear offerings include a selection of basic styles of jersey and fleece tops, shorts and bottoms selections for each of the men's, women's, boys' and girls' categories. Women's and girls' underwear products include a variety of cotton, nylon and lycra panties and thongs. Childrenswear offerings include decorated underwear (generally with pictures of licensed movie or cartoon characters) and layette sets. The Company's Activewear segment 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 and BEST BY FRUIT OF THE LOOM labels. These products are manufactured in a variety of 91 94 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) OPERATING SEGMENTS -- (CONTINUED) styles and colors and are sold to distributors, screen printers and specialty retailers, who generally apply a decoration prior to sale at retail. European product offerings consist of T-shirts, fleecewear and polo shirts sold to the imprint market, with distribution similar to the Company's Activewear segment, and also to the retail market, primarily under the FRUIT OF THE LOOM label. Consolidated net sales and operating earnings (loss) in the following tables correspond to Net sales and Operating earnings (loss) in the Company's Consolidated Statement of Operations. Segment and other detail are derived from the Company's internal management reporting system. Other net sales consist of external sales of yarn and cloth. Other operating earnings consist of margin on external sales of yarn and cloth and net external royalty income. Nonrecurring items relate to the 1999 and 1997 special charges and finalization of certain estimates included in special charges. See "SPECIAL CHARGES." The accounting policies of the reportable segments are the same as those described in "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES." The Company evaluates performance and allocates resources based on operating income. The Company does not allocate interest expense to reportable segments. Total foreign net sales as a percentage of consolidated net sales totaled 16.5% in 2000, 16.7% in 1999 and 18.1% in 1998. Sales in the United Kingdom exceeded 5% of consolidated net sales in 1998 (5.1%). Sales to one Retail Products customer amounted to approximately 24.7%, 22.6% and 18.4% of net sales in 2000, 1999 and 1998, respectively. Additionally, sales to a second Retail Products customer amounted to approximately 11.0%, 13.9% and 13.0% of net sales in 2000, 1999 and 1998, respectively.
OPERATING NET SALES EARNINGS (LOSS) ------------------------------ ------------------------- 2000 1999 1998 2000 1999 1998 -------- -------- -------- ------ ------- ------ ($ IN MILLIONS) Retail Products..................... $ 911.1 $1,027.1 $1,000.2 $ 75.6 $ 26.8 $ 93.9 Activewear.......................... 464.0 510.4 641.4 (30.2) (4.8) 77.0 Europe.............................. 174.0 212.9 268.7 4.1 (24.5) 29.7 Other............................... 0.7 34.4 31.7 19.2 16.1 15.8 Goodwill amortization............... -- -- -- (24.6) (24.6) (24.6) Nonrecurring items.................. -- -- -- (88.3) (281.3) 15.3 -------- -------- -------- ------ ------- ------ Consolidated........................ $1,549.8 $1,784.8 $1,942.0 $(44.2) $(292.3) $207.1 ======== ======== ======== ====== ======= ======
Assets reported below for Retail Products and for Activewear consist of accounts receivable and finished goods inventories. Unallocated Retail Products and Activewear assets consist primarily of property, plant and equipment and goodwill. Depreciation expense is allocated to Retail Products and to Activewear operating earnings even though property, plant and equipment is not identifiable or allocable to those operating segments. 92 95 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) OPERATING SEGMENTS -- (CONCLUDED) Consolidated long-lived assets, consisting of property, plant and equipment, goodwill and other noncurrent assets, excluding deferred tax assets, financial instruments and net assets of discontinued operations, totaled $914,700,000 at December 30, 2000, $1,108,200,000 at January 1, 2000 and $1,273,400,000 at January 2, 1999. Long-lived assets in foreign countries (consisting of property, plant and equipment) as a percentage of consolidated totaled 11.0% at December 30, 2000, 12.3% at January 1, 2000 and 13.8% at January 2, 1999.
TOTAL ASSETS CAPITAL EXPENDITURES ------------------------------ --------------------- 2000 1999 1998 2000 1999 1998 -------- -------- -------- ----- ----- ----- ($ IN MILLIONS) Retail Products......................... $ 331.7 $ 360.2 $ 327.1 $ -- $ -- $ -- Activewear.............................. 224.3 200.8 264.9 -- -- -- Unallocated Retail Products and Activewear............................ 1,125.7 1,365.5 1,540.4 25.0 30.0 34.0 Europe.................................. 147.7 199.6 276.0 1.8 4.4 7.6 Sale of accounts receivable............. -- -- (186.5) -- -- -- ----- ----- ----- Net assets of discontinued operations... -- 41.1 57.1 -------- -------- -------- Consolidated............................ $1,829.4 $2,167.2 $2,279.0 $26.8 $34.4 $41.6 ======== ======== ======== ===== ===== =====
DEPRECIATION ----------------------- 2000 1999 1998 ----- ----- ----- ($ IN MILLIONS) Retail Products............................................. $43.1 $46.8 $39.6 Activewear.................................................. 20.2 21.5 24.0 Europe...................................................... 9.6 11.6 8.9 ----- ----- ----- Consolidated................................................ $72.9 $79.9 $72.5 ===== ===== =====
93 96 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) PENSION PLANS The following table sets forth the changes in the pension benefit obligation and fair value of plan assets, the amounts recognized in the Company's Consolidated Balance Sheet and the funded status of the plans (in thousands of dollars):
2000 1999 -------- -------- Change in projected benefit obligation: Projected benefit obligation at beginning of year........... $247,000 $266,900 Service cost................................................ 8,100 8,200 Interest cost............................................... 18,000 17,800 Plan participants' contributions............................ 300 500 Actuarial (gain) loss....................................... 5,300 (21,300) Foreign currency translation................................ (300) (900) Benefits paid............................................... (18,000) (24,200) -------- -------- Projected benefit obligation at end of year................. $260,400 $247,000 ======== ======== Change in plan assets: Fair value of plan assets at beginning of year.............. $273,200 $202,100 Actual return on plan assets................................ 4,000 91,700 Employer contribution....................................... 6,600 4,000 Plan participants' contributions............................ 300 500 Foreign currency translation................................ (400) (900) Benefits paid............................................... (18,000) (24,200) -------- -------- Fair value of plan assets at end of year.................... $265,700 $273,200 ======== ======== Funded status............................................... $ 5,300 $ 26,200 Unrecognized net actuarial gain............................. (27,200) (50,100) Unrecognized prior service cost............................. 1,800 2,100 Accrued unrecognized net transition asset................... (700) (1,700) -------- -------- Net amount recognized....................................... $(20,800) $(23,500) ======== ======== Amounts recognized in the consolidated balance sheet consist of: Prepaid pension cost........................................ $ 1,300 $ 1,100 Accrued benefit liability................................... (22,200) (25,200) Intangible asset............................................ 100 600 -------- -------- Net amount recognized....................................... $(20,800) $(23,500) ======== ========
YEAR ENDED YEAR ENDED DECEMBER 30, JANUARY 1, 2000 2000 ------------ ---------- Weighted-average assumptions: Discount rate............................................. 7.5% 7.5% Rates of increase in compensation levels.................. 4-7% 4-7% Expected long-term rate of return on assets............... 10% 10%
94 97 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) PENSION PLANS -- (CONCLUDED)
YEAR ENDED ------------------------------ 2000 1999 1998 -------- -------- -------- Components of net periodic benefit cost: Service cost -- benefits earned during the period......... $ 8,100 $ 8,200 $ 9,700 Interest cost on projected benefit obligation............. 18,000 17,800 17,900 Expected return on plan assets............................ (20,900) (18,700) (19,300) Amortization of unrecognized net (gain)/loss.............. (200) 1,300 600 Amortization of prior service cost........................ 300 300 500 Amortization of unrecognized January 1, 1987 net transition asset....................................... (1,200) (1,200) (900) Curtailment loss.......................................... -- -- (100) -------- -------- -------- Net periodic pension cost................................. $ 4,100 $ 7,700 $ 8,400 ======== ======== ========
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for those pension plans with accumulated benefit obligations in excess of plan assets were $3,247,676, $2,859,733 and $0, respectively, as of December 30, 2000, and $3,101,776, $2,933,591 and $0, respectively, as of January 1, 2000. In April 1998, Acme Boot and the Company signed an agreement with the Pension Benefit Guaranty Corporation (the "PBGC") which settled a dispute between Acme and the PBGC as to whether Acme Boot was a member of the Company's "Control Group" for ERISA purposes as of May 21, 1993 and thus whether the Company was liable to the PBGC for the unfunded benefit liabilities of the Acme Boot Company, Inc. Pension Plan (the "Acme Plan"). Under the terms of the agreement, the Company assumed the Acme Plan on June 26, 1998. Included in the plan assets at December 30, 2000 and January 1, 2000 were 0 and 426,842 shares (with a cost of $3,400,000 and a market value of $614,000) of FTL Ltd. Class A Ordinary Shares. 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 $500,000, $600,000 and $800,000 during 2000, 1999 and 1998, respectively. The Company also sponsors a 401(k) defined contribution plan for all of its domestic hourly employees except for those employees covered by a collective bargaining agreement unless such agreement provides for eligibility. Eligible participants may contribute up to 15% of their annual compensation subject to maximum amounts established by the IRS. The Company does not match employee contributions. DEPRECIATION EXPENSE Depreciation expense, including amortization of capital leases, approximated $72,900,000, $79,900,000 and $72,500,000 in 2000, 1999, and 1998, respectively. 95 98 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ADVERTISING EXPENSE Advertising, which is expensed as incurred, approximated $1,900,000, $22,100,000 and $54,700,000 in 2000, 1999 and 1998, respectively. INCOME TAXES Income taxes are included in the Consolidated Statement of Operations as follows (in thousands of dollars):
YEAR ENDED -------------------------------------- DECEMBER 30, JANUARY 1, JANUARY 2, 2000 2000 1999 ------------ ---------- ---------- Income tax provision on earnings (loss) from continuing operations................................................ $(114,000) $37,200 $7,200 Discontinued operations..................................... 11,900 -- -- --------- ------- ------ Total income tax provision.................................. $(102,100) $37,200 $7,200 ========= ======= ======
Included in earnings (loss) from continuing operations before income tax provision and minority interest are foreign earnings of $67,200,000, $97,200,000 and $146,700,000 in 2000, 1999 and 1998, respectively. These amounts include foreign taxable losses of $9,300,000, $63,500,000 and $3,400,000 in 2000, 1999 and 1998, respectively. The components of income tax provision related to earnings (loss) from continuing operations were as follows (in thousands of dollars):
YEAR ENDED -------------------------------------- DECEMBER 30, JANUARY 1, JANUARY 2, 2000 2000 1999 ------------ ---------- ---------- Current: Cayman Islands............................................ $ -- $ -- $ -- United States -- Federal.................................. (111,400) -- 10,300 United States -- State.................................... (5,000) -- 1,200 Foreign................................................... 2,200 500 1,800 --------- ------- ------- Total current............................................... (114,200) 500 13,300 --------- ------- ------- Deferred: Cayman Islands............................................ -- -- -- United States -- Federal.................................. -- 36,700 (6,500) United States -- State.................................... -- -- -- Foreign................................................... 200 -- 400 --------- ------- ------- Total deferred.............................................. 200 36,700 (6,100) --------- ------- ------- Total income tax provision.................................. $(114,000) $37,200 $ 7,200 ========= ======= =======
96 99 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) INCOME TAXES -- (CONTINUED) The income tax rate on earnings (loss) from continuing operations differed from the applicable statutory rate as follows:
YEAR ENDED ---------------------------------------- DECEMBER 30, JANUARY 1, JANUARY 2, 2000 2000 1999 ------------ ---------- ---------- Applicable statutory rate..................... 0.0% 0.0% 35.0% Loss subject to U.S. income tax in excess of statutory rate.............................. (24.4) (33.6) -- Deferred tax asset valuation allowance........ 15.9 42.7 (4.2) Reversal of income tax accruals............... (53.5) -- -- Foreign operating earnings.................... (5.5) (5.6) (36.1) Goodwill amortization......................... -- -- 7.2 State income taxes, net of U.S. Federal tax benefit..................................... -- -- 2.9 Other -- net.................................. 15.1 4.7 1.2 ----- ----- ----- Effective rate................................ (52.4)% 8.2% 6.0% ===== ===== =====
The applicable statutory rate for 2000 and 1999 is the Cayman Islands rate. Prior to 1999, the applicable statutory rate is the United States rate. Undistributed earnings of the Company's foreign subsidiaries amounted to approximately $593,200,000 at December 30, 2000. $473,200,000 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 $119,900,000 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. 97 100 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) INCOME TAXES -- (CONTINUED) 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):
DECEMBER 30, JANUARY 1, 2000 2000 ------------ ---------- Depreciation and amortization............................... $ 159,700 $ 158,100 Items includible in future tax years........................ 122,200 124,600 --------- --------- Gross deferred tax liabilities............................ 281,900 282,700 --------- --------- Inventory valuation reserves................................ (46,600) (54,400) Accrued employee benefit expenses........................... (29,600) (35,900) Acquired tax benefits and basis differences................. (18,100) (38,900) Allowance for possible losses on receivables................ (5,100) (5,200) Fixed asset impairment...................................... (106,300) (82,300) Residual value guarantees of leased equipment............... (14,300) (22,900) NOL and tax credit carryforwards............................ (211,000) (187,200) Items deductible in future tax years........................ (145,100) (124,000) --------- --------- Gross deferred tax assets................................. (576,100) (550,800) --------- --------- Valuation allowance....................................... 294,200 268,100 --------- --------- Net deferred tax (asset) liability.......................... $ -- $ -- ========= =========
Due to the operating loss generated for 2000, the continuing Reorganization Cases, and the present inability under the Reorganization Cases to implement certain tax planning strategies, the Company recorded a deferred tax asset valuation allowance of $294,200,000 as of December 30, 2000 to fully reserve all net deferred tax assets. The Company has regular net operating loss carryforwards for U.S. income tax purposes of approximately $549,600,000 that expire between 2007 and 2020. The Company has alternative minimum tax net operating loss carryforwards for U.S. income tax purposes of approximately $543,400,000 that expire between 2018 and 2020. Of the regular net operating loss carryforward for U.S. tax purposes, $500,000 is subject to separate return limitation year ("SRLY") provisions of the U.S. Internal Revenue Code which permit the offset of the SRLY net operating losses only against the future taxable income of those subsidiaries which generated the SRLY net operating losses. The Company also has alternative minimum tax credit carryforwards for U.S. income tax purposes of approximately $18,100,000 that have an unlimited carryforward period. Finally, the Company has approximately $500,000 of research and development and foreign tax credit carryforwards that expire between 2000 and 2003. Implementation of the Reorganization Plan will result in a change in ownership of the Company for federal income tax purposes. As a result, the Company's net operating loss carryforwards and certain other tax attributes allocable to periods ending on or prior to the effective date of the Reorganization Plan will be subject to an annual limitation under Section 382 of the U.S. Internal Revenue Code. Assuming an appropriate election is made, the amount of the annual limitation to which the Company would be subject generally should be equal to the product of (i) the lesser of the value of the equity of the Company immediately after the ownership change or the value of the Company's consolidated gross assets immediately before such change (with certain adjustments) and (ii) the "long-term tax exempt rate" in effect for the month in which the ownership change occurs. In addition, the Company will realize cancellation of 98 101 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) INCOME TAXES -- (CONCLUDED) indebtedness income ("CODI") upon implementation of the Reorganization Plan, which will require the Company to reduce certain of its tax attributes, including net operating loss carryforwards, by the amount of the CODI it realizes. The Company is currently unable to determine the amount of CODI or the reduction of net operating loss carryforwards and tax attributes that will be caused by the CODI. As a result of the Reorganization Cases and the favorable completion of an IRS and various state tax audits for tax years through January 2, 1999, the Company reversed, during the fourth quarter of 2000, net excess income tax liabilities (including discontinued operations) totaling approximately $104,000,000, which reduced income tax expense in 2000. Cash refunds of income taxes totaled $2,300,000, $7,000,000 and $60,000,000 in 2000, 1999 and 1998, respectively. OTHER INCOME (EXPENSE)-NET Significant expense items in net other expense in 2000 included adequate protection expense of $5,700,000 related to the Company's guarantee of personal indebtedness of Mr. Farley, bank fees of $2,900,000 and currency translation expense of $4,200,000. Net gains on sales of marketable securities investments totaled $14,800,000. Net other expense in 1999 included a $30,000,000 charge for a loss contingency related to the Company's guarantee of personal indebtedness of Mr. Farley and $16,900,000 for debt and other fees and debt waivers (which include the write-off of fees of $6,000,000 principally related to the Company's accounts receivable securitization). In addition, net other expense in 1999 included the write-off of the $8,000,000 receivable related to an insurance claim as recovery was no longer deemed probable in the fourth quarter of 1999, an $8,000,000 charge for a loss contingency related to a vacation settlement in Louisiana, a provision on the ultimate realization of certain current and non-current assets of $8,000,000, environmental costs of $7,400,000 and accounts receivable securitization costs of $8,800,000. Of the total, $64,500,000 are considered special charges and are discussed under "SPECIAL CHARGES." These costs were offset by a favorable environmental insurance settlement of $13,700,000, gains on the sale of fixed assets of $7,800,000 and a recovery of previously settled litigation of $3,900,000. Principal components of net other income in 1998 included $8,000,000 recognized on a business interruption insurance claim, $6,400,000 from settlement of the Acme Boot debt guarantees and net gains of $5,800,000 from property disposals, partially offset by accounts receivable securitization costs of $11,900,000. The Company's receivable securitization program is discussed under "SALE OF ACCOUNTS RECEIVABLE." 99 102 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) 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):
2000 1999 1998 --------- --------- -------- NUMERATOR: For basic earnings per common share: Earnings (loss) from continuing operations............... $(103,600) $(491,100) $113,000 Discontinued operations -- Sports & Licensing Earnings (loss) from operations....................... (2,600) (37,600) 22,900 Estimated loss on disposal............................ (20,200) (47,500) -- --------- --------- -------- Net earnings (loss)...................................... (126,400) (576,200) 135,900 Add back dividends on minority exchangeable preferred assumed to be converted............................... -- -- -- --------- --------- -------- For diluted earnings per share: Earnings (loss) applicable to common stock after assumed conversion............................................ $(126,400) $(576,200) $135,900 ========= ========= ======== DENOMINATOR: For basic earnings per common share: Weighted average shares outstanding...................... 67,000 67,800 72,000 Effect of dilutive employee stock options................ -- -- 300 Effect of dilutive exchangeable preferred................ -- -- -- --------- --------- -------- For diluted earnings per share: Weighted average shares outstanding and assumed conversions........................................... 67,000 67,800 72,300 ========= ========= ======== Earnings (loss) per common share: Continuing operations.................................... $ (1.55) $ (7.25) $ 1.57 Discontinued operations -- Sports & Licensing Earnings (loss) from operations....................... (0.04) (0.55) 0.32 Estimated loss on disposal............................ (0.30) (0.70) -- --------- --------- -------- Net earnings (loss).............................. $ (1.89) $ (8.50) $ 1.89 ========= ========= ======== Earnings (loss) per common share -- assuming dilution: Continuing operations.................................... $ (1.55) $ (7.25) $ 1.56 Discontinued operations -- Sports & Licensing Earnings (loss) from operations....................... (0.04) (0.55) 0.32 Estimated loss on disposal............................ (0.30) (0.70) -- --------- --------- -------- Net earnings (loss).............................. $ (1.89) $ (8.50) $ 1.88 ========= ========= ========
In 2000 and in 1999, the effect of employee stock options are antidilutive and are ignored in the computation of diluted earnings per share. 100 103 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DEBTOR FINANCIAL STATEMENTS The following represents the consolidation of the Company and its Debtor Subsidiaries as of and for the years ended December 30, 2000 and January 1, 2000. Investments in nondebtor subsidiaries are presented using the equity method. FRUIT OF THE LOOM, LTD. AND DEBTOR SUBSIDIARIES (DEBTOR IN POSSESSION) SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEET (IN THOUSANDS OF DOLLARS)
DECEMBER 30, JANUARY 1, 2000 2000 ------------ ---------- ASSETS CURRENT ASSETS Cash and cash equivalents (including restricted cash)..... $ 93,100 $ 18,200 Notes and accounts receivable (less allowance for possible losses of $34,100 and $23,600, respectively)............ 94,000 179,500 Inventories Finished goods.......................................... 392,700 421,900 Work in process......................................... 66,800 94,100 Materials and supplies.................................. 23,700 44,400 ---------- ---------- Total inventories.................................. 483,200 560,400 Net assets of discontinued operations..................... -- 41,100 Other..................................................... 18,200 6,700 ---------- ---------- Total current assets............................... 688,500 805,900 ---------- ---------- PROPERTY, PLANT AND EQUIPMENT............................... 870,000 923,300 Less accumulated depreciation............................. 699,200 657,000 ---------- ---------- Net property, plant and equipment.................. 170,800 266,300 ---------- ---------- OTHER ASSETS Goodwill (less accumulated amortization of $376,700 and $352,100, respectively)................................. 606,600 631,200 Investment in nondebtor subsidiaries...................... 886,000 808,100 Receivable from nondebtor subsidiaries.................... 85,800 52,200 Other..................................................... 75,900 117,700 ---------- ---------- Total other assets................................. 1,654,300 1,609,200 ---------- ---------- $2,513,600 $2,681,400 ========== ========== LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES Current maturities of long-term debt...................... $ 745,700 $ 635,200 Trade accounts payable.................................... 21,700 7,000 Net liabilities of discontinued operations................ 5,100 -- Other accounts payable and accrued expenses............... 211,600 109,300 ---------- ---------- Total current liabilities.......................... 984,100 751,500 ---------- ---------- NONCURRENT LIABILITIES Long-term debt............................................ 385,800 556,300 Net liabilities of discontinued operations................ 11,900 9,400 Payable to nondebtor subsidiaries......................... 81,000 -- Other..................................................... 11,500 37,800 ---------- ---------- Total noncurrent liabilities....................... 490,200 603,500 ---------- ---------- LIABILITIES SUBJECT TO COMPROMISE Unrelated parties......................................... 540,700 683,000 Affiliates................................................ 665,200 665,200 ---------- ---------- 1,205,900 1,348,200 ---------- ---------- MINORITY INTEREST........................................... 71,700 71,700 ---------- ---------- COMMON STOCKHOLDERS' DEFICIT................................ (238,300) (93,500) ---------- ---------- $2,513,600 $2,681,400 ========== ==========
101 104 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DEBTOR FINANCIAL STATEMENTS -- (CONTINUED) FRUIT OF THE LOOM, LTD. AND DEBTOR SUBSIDIARIES (DEBTOR IN POSSESSION) SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS OF DOLLARS)
YEAR ENDED -------------------------- DECEMBER 30, JANUARY 1 2000 2000 ------------ ---------- Net Sales Unrelated parties......................................... $1,296,700 $1,494,000 Affiliates................................................ 854,200 1,013,500 ---------- ---------- 2,150,900 2,507,500 ---------- ---------- Cost of Sales Unrelated parties......................................... 1,111,000 1,452,700 Affiliates................................................ 968,300 1,189,800 ---------- ---------- 2,079,300 2,642,500 ---------- ---------- Gross earnings (loss)..................................... 71,600 (135,000) Selling, general and administrative expenses................ 187,800 243,600 Goodwill amortization....................................... 24,600 24,600 ---------- ---------- Operating loss............................................ (140,800) (403,200) Interest expense............................................ (121,800) (93,800) Equity in earnings of nondebtor subsidiaries................ 90,400 106,600 Other income (expense) -- net............................... 1,600 (61,500) ---------- ---------- Loss from continuing operations before reorganization items, income tax provision and minority interest...... (170,600) (451,900) Reorganization items........................................ (48,200) (3,000) ---------- ---------- Loss from continuing operations before income tax provision and minority interest........................ (218,800) (454,900) Income tax provision........................................ (115,200) 33,500 Minority interest........................................... -- 2,700 ---------- ---------- Loss from continuing operations........................... (103,600) (491,100) Discontinued operations -- Sports & Licensing Loss from operations................................... (2,600) (37,600) Estimated loss on disposal............................. (20,200) (47,500) ---------- ---------- Net loss............................................... $ (126,400) $ (576,200) ========== ==========
102 105 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES (DEBTOR IN POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONCLUDED) DEBTOR FINANCIAL STATEMENTS -- (CONCLUDED) FRUIT OF THE LOOM, LTD. AND DEBTOR SUBSIDIARIES (DEBTOR IN POSSESSION) SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS OF DOLLARS)
YEAR ENDED --------------------------- DECEMBER 30, JANUARY 1, 2000 2000 ------------ ----------- CASH FLOWS FROM OPERATING ACTIVITIES Loss from continuing operations........................... $ (103,600) $(491,100) Adjustments to reconcile to net cash used for operating activities: Equity in earnings of nondebtor subsidiaries........... (90,400) (106,600) Depreciation and amortization.......................... 96,100 101,600 Deferred income tax provision.......................... -- 36,700 Decrease (Increase) in working capital................. 234,300 (134,700) (Gain) loss on sale of marketable equity securities.... (14,800) 600 Net decrease in liabilities subject to compromise...... (142,300) -- Consolidation of operations -- writedowns and reserves.............................................. 59,800 -- Cash flows of discontinued operations.................. 25,400 (47,800) Other -- net........................................... 38,700 51,000 ----------- --------- Net operating cash flows before reorganization items............................................... 103,200 (590,300) Net cash used for reorganization items................. (29,000) -- ----------- --------- Net operating cash flows............................. 74,200 (590,300) ----------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures...................................... (22,200) (22,400) Proceeds from sale of Gitano.............................. 18,100 -- Proceeds from sale of marketable equity securities........ 16,600 6,100 Proceeds from other asset sales........................... 6,500 19,700 Affiliate notes & accounts receivable..................... (33,600) (26,600) Other -- net.............................................. (800) (17,800) ----------- --------- Net investing cash flows............................. (15,400) (41,000) ----------- --------- CASH FLOWS FROM FINANCING ACTIVITIES DIP financing proceeds.................................... 1,381,200 152,200 DIP financing payments.................................... (1,443,700) -- Proceeds from issuance of long-term debt.................. -- 240,100 Proceeds under line-of-credit agreements.................. -- 707,800 Payments under line-of-credit agreements.................. -- (486,800) Principal payments on long-term debt and capital leases... (600) (270,000) Affiliate notes and accounts payable...................... 79,100 305,800 Subsidiary preferred minority dividends................... -- (1,900) ----------- --------- Net financing cash flows............................. 16,000 647,200 ----------- --------- Net increase in cash and cash equivalents (including restricted cash).......................................... 74,900 15,900 Cash and cash equivalents (including restricted cash) at beginning of period....................................... 18,200 2,300 ----------- --------- Cash and cash equivalents (including restricted cash) at end of period................................................. $ 93,100 $ 18,200 =========== =========
103 106 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES SUPPLEMENTARY DATA QUARTERLY FINANCIAL SUMMARY (UNAUDITED) (IN MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
QUARTER ----------------------------------- TOTAL FIRST SECOND THIRD FOURTH YEAR ------ ------ ------- ------- -------- 2000 Net sales....................................... $374.9 $446.0 $ 396.4 $ 332.5 $1,549.8 Gross earnings.................................. 17.5 49.7 93.0 88.3 248.5 Operating earnings (loss)....................... (48.0) (11.4) 28.7 (13.5) (44.2) Earnings (loss) from continuing operations...... (79.2) (55.9) (16.2) 47.7 (103.6) Net earnings (loss)............................. (81.8) (55.9) (16.2) 27.5 (126.4) Earnings (loss) per common share from continuing operations: Basic......................................... (1.18) (0.83) (0.24) 0.71 (1.55) Assuming Dilution............................. (1.18) (0.83) (0.24) 0.66 (1.55) 1999 Net sales....................................... $370.6 $517.7 $ 480.5 $ 416.0 $1,784.8 Gross earnings (loss)........................... 80.3 111.8 2.9 (102.9) 92.1 Operating earnings (loss)....................... 10.0 26.6 (110.3) (218.6) (292.3) Earnings (loss) from continuing operations...... (4.9) 4.5 (162.9) (327.8) (491.1) Net loss........................................ (9.0) (2.3) (166.4) (398.5) (576.2) Earnings (loss) per common share from continuing operations: Basic......................................... (0.07) 0.07 (2.44) (4.90) (7.25) Assuming Dilution............................. (0.07) 0.06 (2.44) (4.90) (7.25)
The Company made certain reclassifications in the reported quarterly financial information subsequent to the filing of its Quarterly reports on Form 10-Q. A reconciliation of the quarterly financial information on the Company's 2000 quarterly reports on Form 10-Q to the above amounts is presented below:
QUARTER ------------------------ FIRST SECOND THIRD ----- ------ ----- 2000 Gross earnings per Form 10-Q................................ $21.8 $ 54.7 $97.5 Reclassification to transfer rework costs to Cost of sales..................................................... (4.3) (5.0) (4.5) ----- ------ ----- Gross earnings per Annual Report on Form 10-K............... $17.5 $ 49.7 $93.0 ===== ====== ===== 1999 Gross earnings per Form 10-Q................................ $84.4 $118.4 $ 9.0 Reclassification to transfer rework costs to Cost of sales..................................................... (4.1) (6.6) (6.1) ----- ------ ----- Gross earnings per Annual Report on Form 10-K............... $80.3 $111.8 $ 2.9 ===== ====== =====
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 104 107 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company as of December 30, 2000, were as follows.
NAME AGE POSITION ---- --- -------- Dennis S. Bookshester..................... 62 Chief Executive Officer John B. Holland........................... 69 Executive Vice President, Operations John D. Wigodsky.......................... 52 Executive Vice President, Sales and Marketing G. William Newton......................... 48 Vice President, Finance, Acting Chief Financial Officer and Assistant Secretary Brian J. Hanigan.......................... 42 Vice President, Treasurer and Assistant Secretary John J. Ray III........................... 42 Chief Administrative Officer, General Counsel and Secretary
DENNIS S. BOOKSHESTER. Mr. Bookshester has been a director of the Company since January 1998, and has been a director of FTL, Inc. since May 1992. In August 1999, Mr. Bookshester was appointed Acting Chief Executive Officer of the Company, and in April 2000 he was appointed Chief Executive Officer. Mr. Bookshester currently serves as Chairman of Cutanix Corporation. He is also a director of Playboy Enterprises, Inc. and Elder-Beerman Stores Corp. JOHN B. HOLLAND. Mr. Holland has been a director of FTL, Inc. from November 1992 through May 1997 and President and Chief Operating Officer of the Company from before 1994 through January 1996. In December 1999, Mr. Holland was appointed Executive Vice President, Operations and named as a director of the Company. He is also a director of Dollar General Corp., a retail company. JOHN D. WIGODSKY. Mr. Wigodsky was Executive Vice President, Operations of Union Underwear Company, Inc. from before 1992 until December 1994. Mr. Wigodsky was Executive Vice President -- Sales and Marketing from January 1995 to March 1997. From August 1997 to February 1999, Mr. Wigodsky was Executive Vice President Sales and Marketing of Delta Apparel. Mr. Wigodsky was President and CEO of Pluma, Inc. from May 1999 until December 1999. Pluma, Inc. voluntarily filed for protection from creditors under Chapter 11 of the Federal Bankruptcy Code in May 1999. Mr. Wigodsky has served as Executive Vice President, Sales and Marketing since April 2000. G. WILLIAM NEWTON. Mr. Newton has served as Vice President, Finance of the Company since August 1994 and as acting Chief Financial Officer since August 1998. 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. 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. Mr. Ray was appointed Secretary in November 1998 and General Counsel in December 1998. In September 1999, Mr. Ray was appointed Chief Administrative Officer of the Company. 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. The Directors of the Company as of December 30, 2000 were as follows: Sir Brian Wolfson. Sir Brian Wolfson, age 65, has been a director of the Company since January 1998, and has been a director of FTL, Inc. since May 1992. In January 2000 Sir Brian Wolfson was appointed Chairman of the Board. Sir Brian Wolfson currently serves as Chairman of Kepner Tregoe, Inc., an international consulting company. He is also a director of Autotote Corporation and Playboy Enterprises, Inc. Dennis S. Bookshester. Mr. Bookshester, age 62, has been a director of the Company since January 1998, and has been a director of FTL, Inc. since May 1992. In August 1999, Mr. Bookshester was appointed Acting Chief Executive Officer of the Company, and in April 2000 he was appointed Chief Executive Officer. Mr. Bookshester currently serves as Chairman of Cutanix Corporation. He is also a director of Playboy Enterprises, Inc. and Elder-Beerman Stores Corp. 105 108 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT -- (CONTINUED) William F. Farley. Mr. Farley, age 58, has been Chairman of the Board, Chief Executive Officer, President and Chief Operating Officer of the Company from January 1998 through August 1999. Mr. Farley has been Chairman of the Board and Chief Executive Officer of FTL, Inc. from May 1985 through August 1999. Mr. Farley continued as Chairman of the Board until January 2000. In February 1998, Mr. Farley was appointed to the positions of President and Chief Operating Officer of the Company. Mr. Farley currently serves as a director of the Company. For more than five years, Mr. Farley has also been Chairman and Chief Executive Officer of Farley Industries, Inc. He has held substantially similar positions with Farley Inc. for more than the past five years. Mr. Farley has also been Chairman of the Board of Acme Boot for more than the past five years through January 2000. John B. Holland. Mr. Holland, age 69, has been a director of FTL, Inc. from November 1992 through May 1997 and President and Chief Operating Officer of the Company from before 1994 through January 1996. In December 1999 Mr. Holland was appointed Executive Vice President, Operations and named as a director of the Company. He is also a director of Dollar General Corp., a retail company. Henry A. Johnson. Mr. Johnson, age 82, has been a director of the Company since January 1998, and has been a director of FTL, Inc. since July 1988. For more than the past five years, Mr. Johnson has been President of Henry A. Johnson & Associates, a management consulting firm. Robert E. Nason. Mr. Nason, age 64, was appointed as a director of the Company in February 2000. Mr. Nason was the Chief Executive Officer of Grant Thornton, an international accounting and management consulting firm, from 1990 to 1998 and currently is a private investor and consultant. He is also a director of Liberty Acorn Trust. A. Lorne Weil. Mr. Weil, age 54, has been a director of the Company since January 1998, and has been a director of FTL, Inc. 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. BOARD MEETINGS AND COMMITTEES The Board of Directors has an Audit Committee, a Compensation Committee, an Executive Committee and a Pension 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 FTL, Ltd. 1987 Stock Option Plan, the FTL, Ltd. Executive Incentive Compensation Plan, the FTL, Ltd. 1995 Executive Incentive Compensation Plan, the FTL, Ltd. 1996 Incentive Compensation Plan and the FTL, Inc. Senior Executive Officer Deferred 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. The Pension Committee establishes, implements and manages the benefits provided under the Company's qualified pension and 401(k) plans. In 2000 Messrs. Johnson and Weil served on the Audit Committee, with Mr. Nason joining the Committee as Chairman in February 2000; Messrs. Johnson and Weil served as members of the Compensation Committee; Messrs. Bookshester and Wolfson served as members of the Executive Committee; and Messrs. Johnson and Weil served as members of the Pension Committee. 106 109 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT -- (CONCLUDED) During 2000, the Board of Directors held nine (9) meetings, the Audit Committee held five (5) meetings, the Compensation Committee held two (2) meetings and the Pension Committee held two (2) meetings. The Executive Committee did not meet during 2000. During 2000, each of the directors attended greater than 75% of all meetings of the Board of Directors and Board committee on which he served. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934, as amended, 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. 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 during 2000 all Section 16(a) filing requirements applicable to its officers, directors and 10% beneficial owners were complied with by such persons. ITEM 11. EXECUTIVE COMPENSATION INTRODUCTION The following table provides information concerning the annual and long-term compensation amounts for the fiscal years ended December 30, 2000, January 1, 2000 and January 2, 1999 of those persons who were at December 30, 2000 (i) the Chief Executive Officer and (ii) the four other most highly compensated executive officers of FTL, Ltd. (collectively, with the Chief Executive Officer, the "Named Officers"). No other individuals are required to be included in the table. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ANNUAL COMPENSATION ----------------------- ------------------------------------------ SECURITIES OTHER RESTRICTED UNDERLYING ANNUAL STOCK OPTIONS/ NAME AND SALARY BONUS COMPENSATION AWARDS SARS ALL OTHER PRINCIPAL POSITION YEAR $ $ $ $ (# SHARES) COMPENSATION ------------------ ---- -------- -------- ------------ ---------- ---------- ------------ Dennis S. Bookshester.................... 2000 $700,000 $ 0 $ 0 $ 0 $ 0 $ 0 Chief Executive Officer 1999 236,923 0 0 34,844 265,000 0 John B. Holland.......................... 2000 500,000 239,175 0 0 0 200,000(1) Executive Vice President, Operations 1999 69,231 0 0 0 0 0 John J. Ray III.......................... 2000 400,000 191,340 0 0 0 160,000(1) Chief Administrative Officer, 1999 288,481 175,000 0 202,129 157,037 0 General Counsel and Secretary 1998 185,250 125,000 155,543 0 82,000 0 G. William Newton........................ 2000 285,000 121,182 0 0 0 85,500(1) Vice President, Finance Acting Chief 1999 257,308 0 438,668(2) 189,413 93,062 858 Financial Officer and Assistant Secretary 1998 250,000 60,000 13,502 0 37,567 10,380 John D. Wigodsky......................... 2000 269,231 131,340 0 0 0 160,000(1) Executive Vice President, Sales and Marketing
------------------------- (1) Amounts represent payments under the Retention and Emergence Program approved by the Bankruptcy Court on March 27, 2000. (2) Includes $415,882 of earnings on 1996 deferred compensation, $22,000 paid in lieu of participation in the Company's qualified deferred compensation plan and $372 of earnings on deferred compensation. 107 110 ITEM 11. EXECUTIVE COMPENSATION -- (CONTINUED) INTRODUCTION -- (CONTINUED) OPTION GRANTS IN 2000 There were no options granted in 2000. AGGREGATED OPTION/SAR EXERCISES IN 2000 AND 2000 FISCAL YEAR-END OPTION/SAR VALUES The following table sets forth certain information concerning the number and value of stock options held by the Named Officers at December 30, 2000. None of the Named Officers received any Company stock appreciation rights in 2000.
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY SHARES OPTION/SARS AT OPTIONS/SARS AT ACQUIRED ON VALUE JANUARY 1, 2000(#) JANUARY 1, 2000($)(1) EXERCISE REALIZED --------------------------- --------------------------- NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- -------- ----------- ------------- ----------- ------------- Dennis S. Bookshester..... -- -- 287,083 417 $0 $0 John B. Holland........... -- -- 154,675 0 0 0 G. William Newton......... -- -- 92,744 74,565 0 0 John J. Ray III........... -- -- 140,345 98,692 0 0 John D. Wigodsky.......... -- -- 0 0 0 0
------------------------- (1) Values are calculated by subtracting the exercise price from the closing price of Class A shares on the OTC (FTLAQ) on December 30, 2000, which was $0.13. PENSION PLANS All of the Company's executive officers are 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 FTL, Ltd. (the "Supplemental Benefit Plan," together with the Pension Plan, are referred to as the "FTL Plan"). The Pension Plan covers all domestic 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 FTL Plan to the Company's executive officers based on various assumptions as to compensation and years of service for certain employees, assuming benefits are computed under a straight life annuity formula and assuming benefits are not restricted due to limitations imposed by Sections 401(a) (17), 401(a) (5) and 401(1) or 415 of the Internal Revenue Code of 1986, as amended (the "Code"), discussed below. PENSION PLAN TABLE(1)(2)
15 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS COMPENSATION OF SERVICE OF SERVICE OF SERVICE OF SERVICE OF SERVICE ------------ ---------- ---------- ---------- ---------- ---------- $300,000................................ $ 80,721 $107,628 $134,535 $144,625 $154,715 400,000................................ 109,221 145,628 182,035 195,688 209,340 500,000................................ 137,721 183,628 229,535 246,750 263,965 600,000................................ 166,221 221,628 277,035 297,813 318,590 700,000................................ 194,721 259,628 324,535 348,875 373,215 800,000................................ 223,221 297,628 372,035 399,938 427,840 900,000................................ 251,721 335,628 419,535 451,000 482,465
------------------------- (1) Assumes individual retires at age 65 on December 31, 2000 with indicated years of service and further assumes covered compensation as it was determined in 2000, which was $35,400, as updated each year by the Internal Revenue Service for annual covered compensation. The annual covered compensation for 2001 will increase to $37,200. 108 111 ITEM 11. EXECUTIVE COMPENSATION -- (CONTINUED) INTRODUCTION -- (CONTINUED) (2) Maximum qualified plan limits for 1999, 2000 and 2001 under Section 415 of the Code, were $130,000, $135,000 and $140,000, respectively. Amounts in excess of these limits are paid under the Supplemental Benefit Plan. Contributions to the Pension Plan, which are made by the Company, 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 certain other payments under benefit programs. Compensation used to determine benefits under the FTL Plan for each of the Named Officers for 2000 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. 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 0.75%, 0.70% or 0.65% (depending on the participant's social security retirement age) of the 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 Section 401(a)(17) of the Code, a participant's compensation under a qualified retirement plan was limited to a maximum annual amount of $170,000 for 2000. For 2001, this amount will remain at $170,000. Amendments made to Sections 401(a)(5) and 401(l) of the 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. Under Section 415 of the Code, a participant's annual benefit was limited to $135,000 for 2000 and $140,000 for 2001. For officers of the Company, any reduction in benefits under the Pension Plan caused by these three 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 Section 401(a)(17) of the Code limitation on compensation and Section 415 of the Code limitation on annual pension benefits. The estimated number of years of service credited for Messrs. Bookshester, Holland, Wigodsky, Ray and Newton under the FTL Plan is 1, 1, 1, 3 and 6 years, respectively. The Company established the Supplemental Executive Retirement Plan (the "FTL SERP") on January 1, 1995 for certain officers. As of December 30, 2000 Messrs. Holland, Wigodsky, Ray and Newton are participants in the FTL SERP. The Reorganization Plan provides that the FTL SERP and the Supplemental Benefit Plan will not be assumed by FTL Ltd. upon confirmation of the Plan. The FTL SERP provides 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 FTL 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 Code) and the number, not in excess of 25, of the Participant's 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 FTL SERP benefit is further reduced by a portion of the benefits paid under the FTL Plan. 109 112 ITEM 11. EXECUTIVE COMPENSATION -- (CONCLUDED) The estimated annual benefits payable under the FTL SERP upon retirement at normal retirement age, assuming pay increases of 5% per year, for Messrs. Holland, Wigodsky, Ray and Newton are $8,334, $157,758, $293,001 and $139,429, respectively. Additional Benefit Accrual Years of Service were given to selected participants in the FTL SERP. The estimated number of Benefit Accrual Years of Service at December 30, 2000 credited for Messrs. Holland, Wigodsky, Ray and Newton are 2, 1, 5 and 11 years, respectively. COMPENSATION OF DIRECTORS Each director who is not also an employee of the Company receives an annual cash retainer of $41,000 and receives $1,000 for each meeting of the Board of Directors that he attends and $1,000 for each committee meeting that he attends except as otherwise established. In addition, the Company reimburses directors for out-of-pocket expenses. 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 a ten-year non-qualified option grant effective February 13, 1997 to purchase 10,000 shares of Class A Ordinary Shares at $41.00 per share. Such options vest monthly at the rate of 2.083% per month commencing April 1, 1998. Under the FTL, Ltd. 1995 Non-Employee Director Stock 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 Class A Ordinary Shares or an amount of cash equal to the closing price as of the settlement date. Each continuing director receives an annual grant of 2,500 Restricted Stock Units. Restricted Stock Units vest after a two-year service period. No options or Restricted Stock Units have been granted to directors since the petition date and all such options and Restricted Stock Units outstanding will be canceled pursuant to the Reorganization Plan. The Company provides no retirement benefits to non-employee directors. Except as described below, directors who are also employees of the Company receive no additional compensation from the Company for services rendered in their capacity as directors. From August 25, 1999 through June 30, 2000, Mr. Wolfson had been receiving compensation (in addition to his regular compensation as a director) in the annual amount of $250,000 for special limited services assigned to him by the Board of Directors including 1999 management changes, anticipated future management changes and the Chapter 11 bankruptcy. Since July 1, 2000, Mr. Wolfson elected to reduce his annual compensation to $175,000. EMPLOYMENT AGREEMENTS Pursuant to Bankruptcy Court order, the Company implemented a severance plan (the "Executive Severance Plan") for certain of its executive officers. Pursuant to the Executive Severance Plan, the named executive officers are entitled to one to two times the amount of their base pay in the form of salary continuation, plus their full target bonus, after certain qualifying termination of employment events. Upon a qualifying termination of employment event in connection with a change in control, such executive officers receive their severance benefit as a lump sum equal to their severance multiple (1.0 to 2.0) multiplied by their base pay plus target bonus percentage, plus their full target bonus. The Executive Severance Plan benefit is in lieu of the severance benefits provided under any prior employment agreements with such executive officers. The Bankruptcy Court also approved a retention plan for key employees, including executive officers. Pursuant to such order, executive officers, other than Mr. Bookshester, receive retention and emergence payments equal to 65% to 80% of their base pay. Mr. Bookshester is entitled to receive an emergence bonus equal to $800,000. 110 113 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth the number of shares of Class A shares and Class B shares, the percentage of each class and the percentage of total voting power of the Company beneficially owned as of February 28, 2001 by (i) each director of the Company, (ii) the Named Officers appearing in the table below (as defined on page), (iii) all directors and current executive officers as a group and (iv) to the knowledge of the Company, 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, 2001.
CLASS A SHARES CLASS B SHARES PERCENT OF ----------------------- ----------------- TOTAL PERCENT PERCENT VOTING NUMBER OF CLASS NUMBER OF CLASS POWER(1) --------- -------- ------ -------- ---------- Farley Inc.................................. 454,855 * 2.08 52.0% 15.1% 233 South Wacker Dr Chicago, IL 60606 William F. Farley........................... 88,889(2) * 1.92(3) 48.0% 13.6% 233 South Wacker Dr Chicago, IL 60606 Dennis S. Bookshester....................... 292,850(4) * -- -- * Henry A. Johnson............................ 47,850(5) * -- -- * Robert E. Nason............................. 500 * -- -- * A. Lorne Weil............................... 43,850(6) * -- -- * Sir Brian Wolfson........................... 132,850(7) * -- -- * Brian J. Hanigan............................ 146,390(8) * -- -- * John B. Holland............................. 155,175(9) * -- -- * G. William Newton........................... 114,086(10) * -- -- * John J. Ray III............................. 171,345(11) * -- -- * John D. Wigodsky............................ 500 * -- -- * All directors and executive officers as a group (11 people)......................... 1,631,672 2.4% 4 100% 29.8%
------------------------- * Less than 1%. (1) Each Class A share has one vote and each Class B share has 6,536,776.3 votes. This column shows the combined voting power of all Class A shares and Class B shares beneficially owned by each of the listed people. (2) Excludes 454,855 Class A shares owned by Farley Inc. shown elsewhere in the table. Mr. Farley owns 100% of the stock of Farley Inc. Ownership information for Mr. Farley and Farley Inc. is based on information available to the Company. The Company has not been able to verify ownership by Mr. Farley and Farley Inc. (3) Excludes 2.08 Class B shares owned by Farley Inc. shown elsewhere in the table. Mr. Farley owns 100% of the stock of Farley Inc. (4) Includes 1,000 Class A shares which are owned by the Dennis S. Bookshester Revocable Trust dated February 17, 1989. Includes 290,000 Class A shares currently issuable upon the exercise of options granted to Mr. Bookshester by the Company. (5) Includes 2,500 Class A shares owned by Mr. Johnson's spouse, the beneficial ownership of which is disclaimed by Mr. Johnson. Includes 30,000 Class A shares currently issuable upon the exercise of options granted to Mr. Johnson by the Company. (6) Includes 40,000 Class A shares currently issuable upon the exercise of options granted to Mr. Weil by the Company. (7) Includes 130,000 Class A shares currently issuable upon the exercise of options granted to Sir Brian Wolfson by the Company. (8) Includes 146,390 Class A shares currently issuable upon the exercise of options granted to Mr. Hanigan by the Company. 111 114 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -- (CONCLUDED) (9) Includes 154,675 Class A shares currently issuable upon the exercise of options granted to Mr. Holland by the Company. (10) Includes 113,045 Class A shares currently issuable upon the exercise of options granted to Mr. Newton by the Company. (11) Includes 171,345 Class A shares currently issuable upon the exercise of options granted to Mr. Ray by the Company. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS On February 24, 1999, the Board of Directors, excluding Mr. Farley, authorized the Company to guarantee a bank loan of $65,000,000 to Mr. Farley in connection with Mr. Farley's refinancing and retirement of his $26,000,000 and $12,000,000 loans previously guaranteed by the Company and other indebtedness of Mr. Farley. The Company's obligations under the guarantee are collateralized by 2,507,512 shares of FTL, Inc. Preferred Stock and all of Mr. Farley's assets, including Mr. Farley's personal guarantee. In consideration of the guarantee, which expired in September 2000, Mr. Farley is obligated to pay an annual guarantee fee equal to 2% of the outstanding principal balance of the loan. The Board of Directors received an opinion from an independent financial advisor that the terms of the transaction are commercially reasonable. The total amount guaranteed is $59,300,000 as of February 28, 2001. Based on management's assessment of existing facts and circumstances of Mr. Farley's financial condition, the Company recorded a $10,000,000 charge in the third quarter of 1999 and $20,000,000 in the fourth quarter of 1999 related to the Company's exposure under the guarantee. The Company continues to evaluate its exposure under the guarantee. Mr. Farley has not paid the Company the guarantee fee due in 2000 and 2001 and is in default under the loans and the reimbursement agreement with the Company. The Company began paying interest on the loan in the first quarter of 2000 including interest that was outstanding from the fourth quarter of 1999. Through February 28, 2001, total payments made by the Company on behalf of Mr. Farley's loan aggregated $5,900,000. In addition, unpaid guarantee fees owed to the Company by Mr. Farley through February 28, 2001 aggregated $1,800,000. On May 16, 2000, Fruit of the Loom sent a demand letter to Mr. Farley on account of his reimbursement obligation. On March 27, 1995, Mr. Farley and Fruit of the Loom entered into an employment agreement, effective as of December 18, 1994, which was subsequently amended and restated as of January 6, 1999 (the "Employment Agreement"). Mr. Farley relinquished the additional duties of chief executive officer and chief operating officer in August of 1999 at the direction of the Board. The Company recorded a provision of $27,400,000 in the third quarter of 1999 for estimated future severance and retirement obligations under Mr. Farley's Employment Agreement. Fruit of the Loom terminated the Employment Agreement prior to the Petition Date and, as a protective measure, rejected it by order of the Bankruptcy Court on December 30, 1999. Pursuant to the terms of the Employment Agreement, Mr. Farley had the right to defer all or a portion of his compensation in a particular year in exchange for the right to receive benefits payable (if any) under a Deferred Compensation Plan and a Rabbi Trust. The Rabbi Trust provided that, in the event Fruit of the Loom becomes a "debtor" under the Bankruptcy Code, the assets of the Rabbi Trust would be held for the benefit of Fruit of the Loom's general creditors. Nonetheless, Mr. Farley has taken the position that the Rabbi Trust and its assets should not be considered property of Fruit of the Loom's estate. On or about October 27, 2000, the Farley lenders commenced an action in the Supreme Court for the State of New York, County of New York, Bank of America, N.A. v. William F. Farley, Index No. 001604685, against Mr. Farley to enforce his obligations to the Farley lenders. On December 8, 2000, this action was removed to the United States District Court for the Southern District of New York. The Farley lenders assert that Mr. Farley is in default under the Farley loan agreements and seek repayment of the Farley loan pursuant to the loan agreements in an amount equal to approximately $60,000,000. The case is currently pending. On March 3, 2000, Fruit of the Loom moved for the entry of an order, pursuant to Sections 105 and 543 of the Bankruptcy Code (the "Turnover Motion"), directing the turnover of the cash and securities held in the Rabbi Trust (the "Rabbi Trust Assets") from Wachovia. On or about June 30, 2000, the Bankruptcy Court entered an order granting, in part, the Turnover Motion and directing that (i) Wachovia turn over the Rabbi 112 115 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -- (CONCLUDED) Trust Assets to Fruit of the Loom, (ii) Fruit of the Loom deposit the Rabbi Trust Assets in an escrow account (the "Escrow Account") and (iii) Fruit of the Loom commence an adversary proceeding seeking a declaratory judgment regarding the ownership of the Rabbi Trust Assets and Fruit of the Loom's ability to use such assets in the Reorganization Cases. As described more fully below, in furtherance of the Bankruptcy Court's order, Fruit of the Loom commenced an adversary proceeding against Mr. Farley, which is pending, and deposited the Rabbit Trust Assets into the Escrow Account. On July 17, 2000, Fruit of the Loom commenced an action against Mr. Farley in the Bankruptcy Court Fruit of the Loom, Inc. v. Farley, Case No. 99-04497, Adv. Proc. No. 00-724 (D. Del.) (the "Rabbi Trust Proceeding"). The Rabbi Trust Proceeding seeks a declaratory judgment that certain assets maintained and held in the Rabbi Trust are the property of Fruit of the Loom's estate and may be used immediately by Fruit of the Loom for the benefit of its estate and creditors. On August 21, 2000, Mr. Farley filed an answer and counterclaims against Fruit of the Loom. On August 4, 2000, Fruit of the Loom commenced an action against Mr. Farley in the Bankruptcy Court Fruit of the Loom, Inc. v. Farley, Case No. 99-04497, Adv. Proc. No. 00-276 (D. Del.) (the "Artwork Proceeding"). The Artwork Proceeding seeks the return of certain pieces of art owned by Fruit of the Loom that Fruit of the Loom contends are in the possession of Mr. Farley. On September 2, 2000, Mr. Farley filed an answer and counterclaims against Fruit of the Loom. On May 30, 2000, Mr. Farley commenced an adversary proceeding against Fruit of the Loom in the Bankruptcy Court Farley v. Fruit of the Loom, Inc., Case No. 99-04497, Adv. Proc. No. 00-646 (D. Del.) (the "Remedies Proceeding"). The Remedies Proceeding seeks a declaratory judgment that Mr. Farley is a third-party beneficiary of certain documents with respect to Fruit of the Loom's guarantee of the Farley loan, and thus those documents cannot be altered without his consent. Mr. Farley seeks a judgment that Fruit of the Loom is foreclosed from seeking reimbursement and repayment for payments made by Fruit of the Loom to the Farley lenders pursuant to the Farley guaranty until the Farley lenders are paid in full. Fruit of the Loom has filed an answer and counterclaim seeking, among other things, a determination that Mr. Farley is in breach of his reimbursement obligations to Fruit of the Loom and a judgment requiring him to specifically perform his obligations under the reimbursement agreement. On June 30, 2000, Fruit of the Loom filed a motion for summary judgment in the Remedies Proceeding. On July 21, 2000, Mr. Farley opposed Fruit of the Loom's summary judgment motion and filed a motion, pursuant to Rule 56(f) of the Federal Rules of Civil Procedure, seeking entry of an order postponing and continuing the Bankruptcy Court's consideration of Fruit of the Loom's summary judgment motion. The District Court has reserved judgment on both motions. See "CONTINGENT LIABILITIES" in the Notes to Consolidated Financial Statements. On September 7, 2000, the reference for all three adversary proceedings involving Fruit of the Loom and Mr. Farley was withdrawn to the United States District Court for the District of Delaware and they were assigned to Chief Judge Robinson, effective September 27, 2000. Discovery has commenced with respect to all of the adversary proceedings. 113 116 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 39 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 39 is filed as part of this Annual Report. 3. Exhibits The exhibits listed in the Index to Exhibits on pages 117, 118 and 119 are filed as part of this Annual Report. (b) Reports on Form 8-K No reports on Form 8-K were filed by the Registrant during the quarter ended December 30, 2000. 114 117 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 April 16, 2001. FRUIT OF THE LOOM, LTD. By: /s/ G. WILLIAM NEWTON -------------------------------------- (G. William Newton Vice President-Finance, Acting 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 April 16, 2001.
NAME CAPACITY ---- -------- /s/ DENNIS S. BOOKSHESTER Chief Executive Officer (Principal Executive Officer) --------------------------------------------- and Director (Dennis S. Bookshester) /s/ G. WILLIAM NEWTON Vice President-Finance, Acting Chief Financial --------------------------------------------- Officer (Principal Financial and Accounting Officer) (G. William Newton) /s/ SIR BRIAN G. WOLFSON Chairman of the Board of Directors --------------------------------------------- (Sir Brian G. Wolfson) Director --------------------------------------------- (William F. Farley) /s/ HENRY A. JOHNSON Director --------------------------------------------- (Henry A. Johnson) /s/ A. LORNE WEIL Director --------------------------------------------- (A. Lorne Weil) /s/ JOHN B. HOLLAND Director --------------------------------------------- (John B. Holland) /s/ ROBERT E. NASON Director --------------------------------------------- (Robert E. Nason)
115 118 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 30, 2000, JANUARY 1, 2000 AND JANUARY 2, 1999 (IN THOUSANDS OF DOLLARS)
ADDITIONS --------------------------- BALANCE AT CHARGED TO CHARGED TO BALANCE BEGINNING COSTS AND OTHER AT END DESCRIPTION OF PERIOD EXPENSES ACCOUNTS(1)(2) DEDUCTIONS(3) OF PERIOD ----------- ---------- ---------- -------------- ------------- --------- YEAR ENDED DECEMBER 30, 2000: Reserves deducted from assets to which they apply: Accounts receivable allowances: Doubtful accounts..................... $10,500 $ 2,700 $ 600 $ 1,600 $12,200 Sales discounts, returns, and allowances......................... 24,500 31,700 1,000 24,600 32,600 ------- ------- -------- ------- ------- $35,000 $34,400 $ 1,600 $26,200 $44,800 ======= ======= ======== ======= ======= YEAR ENDED JANUARY 1, 2000: Reserves deducted from assets to which they apply: Accounts receivable allowances: Doubtful accounts..................... $ 6,700 $ 4,800 $ 1,600 $ 2,600 $10,500 Sales discounts, returns, and allowances......................... 5,300 29,200 13,500 23,500 24,500 ------- ------- -------- ------- ------- $12,000 $34,000 $ 15,100 $26,100 $35,000 ======= ======= ======== ======= ======= YEAR ENDED JANUARY 2, 1999: Reserves deducted from assets to which they apply: Accounts receivable allowances: Doubtful accounts..................... $ 5,700 $ -- $ 2,700 $ 1,700 $ 6,700 Sales discounts, returns, and allowances......................... 6,200 27,700 5,700 34,300 5,300 ------- ------- -------- ------- ------- $11,900 $27,700 $ 8,400 $36,000 $12,000 ======= ======= ======== ======= =======
------------------------- (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. 116 119 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES INDEX TO EXHIBITS (ITEM 14(a)(3) AND 14(c))
DESCRIPTION ----------- 3(a)* -- Amended and Restated Memorandum of Association of Fruit of the Loom, Ltd. (incorporated herein by reference to Exhibit 3(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended April 3, 1999). 3(b)* -- Amended and Restated Articles of Association of Fruit of the Loom, Ltd. (incorporated herein by reference to Exhibit 3(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended April 3, 1999). 3(c)* -- Disclosure Statement (including Joint Plan of Reorganization) pursuant to Section 1125 of the United States Bankruptcy Code with the Bankruptcy Court (incorporated herein by reference to Exhibit 99.2 to the Company's 8-K filed March 22, 2001). 4(a)* -- $900,000,000 Credit Agreement dated as of September 19, 1997 (the "Credit Agreement"), 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). 4(c)* -- First Amendment to Credit Agreement dated March 26, 1998; Second Amendment to Credit Agreement dated July 2, 1998; Third Amendment to Credit Agreement dated December 31, 1998; Fourth Amendment to Credit Agreement dated March 10, 1999; Second Amended and Restated Pledge Agreement dated March 10, 1999 related to the Credit Agreement; and Bond Pledge Agreement dated March 10, 1999 related to the Credit Agreement (incorporated herein by reference to Exhibit 4(c) to the Company's Annual Report on Form 10-K for the year ended January 2, 1999). 4(d)* -- Indenture dated as of March 25, 1999, among Fruit of the Loom, Inc., as issuer, Fruit of the Loom, Ltd., as guarantor, certain subsidiaries of Fruit of the Loom, Inc., as guarantors, and The Bank of New York, as trustee of the 8 7/8% senior Notes due 2006 (incorporated herein by reference to Exhibit 4(c) to the Company's Quarterly Report on Form 10-Q for the quarter ended April 3, 1999). 4(e)* -- Fifth Amendment to Credit Agreement dated July 20, 1999 (incorporated herein by reference to Exhibit 4(d) to the Company's Quarterly Report on Form 10-Q for the quarter ended July 3, 1999). 4(f)* -- Security Agreement dated March 10, 1999 (incorporated herein by reference to Exhibit 4(e) to the Company's Quarterly Report on Form 10-Q for the quarter ended October 2, 1999). 4(g)* -- First Amendment to Security Agreement dated July 20, 1999 (incorporated herein by reference to Exhibit 4(f) to the Company's Quarterly Report on Form 10-Q for the quarter ended October 2, 1999). 4(h)* -- Sixth Amendment to Credit Agreement and Limited Waiver dated October 13, 1999 (incorporated herein by reference to Exhibit 4(g) to the Company's Quarterly Report on Form 10-Q for the quarter ended October 2, 1999).
117 120 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES INDEX TO EXHIBITS -- (CONTINUED) (ITEM 14(a)(3) AND 14(c))
DESCRIPTION ----------- 4(i)* -- Loan and Security Agreement dated as of October 29, 1999, among the financial institutions from time to time parties thereto (the "Lenders"), Bank of America, National Association as administrative "Agent" for the Lenders, Banc of America Securities LLC, as "Syndication Agent", and FTL Receivables Company, as "Borrower" (incorporated herein by reference to Exhibit 4(h) to the Company's Quarterly Report on Form 10-Q for the quarter ended October 2, 1999). 4(j)* -- $625,000,000 Debtor-in-Possession Credit Facility dated as of December 29, 1999, with Bank of America, N.A. (incorporated by reference to the Company's Current Report on Form 8-K dated December 29, 1999). 4(k) -- Amendment No. 1 to post-petition loan and security agreement dated January 14, 2000 by and among Bank of America, N.A. ("Agent"), Fruit of the Loom, Inc. ("Borrower") and Fruit of the Loom, Ltd. and certain domestic Subsidiaries of Borrower ("Guarantors"). 4(l) -- Amendment No. 2 to post-petition loan and security agreement dated February 4, 2000 by and among Bank of America, N.A. ("Agent"), Fruit of the Loom, Inc. ("Borrower") and Fruit of the Loom, Ltd. and certain domestic Subsidiaries of Borrower ("Guarantors"). 4(m) -- Amendment No. 3 to post-petition loan and security agreement dated March 3, 2000 by and among Bank of America, N.A. ("Agent"), Fruit of the Loom, Inc. ("Borrower") and Fruit of the Loom, Ltd. and certain domestic Subsidiaries of Borrower ("Guarantors"). 4(n) -- Amendment No. 4 to post-petition loan and security agreement dated February 9, 2001 by and among Bank of America, N.A. ("Agent"), Fruit of the Loom, Inc. ("Borrower") and Fruit of the Loom, Ltd. and certain domestic Subsidiaries of Borrower ("Guarantors"). 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 Company's Registration Statement on Form S-2, Reg. No. 33-8303). 10(c)* -- 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(d)* -- 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(e)* -- 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(f)* -- Fruit of the Loom, Inc. 1995 Executive Incentive Compensation Plan (incorporated herein by reference to Exhibit A to the 1995 Proxy Statement). 10(g)* -- 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(h)* -- 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).
118 121 FRUIT OF THE LOOM, LTD. AND SUBSIDIARIES INDEX TO EXHIBITS -- (CONCLUDED) (ITEM 14(a)(3) AND 14(c))
DESCRIPTION ----------- 10(i)* -- 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(j)* -- Employment Agreement between Fruit of the Loom, Inc. and William F. Farley (incorporated herein by reference to Exhibit 10(k) to the Company's Annual Report on Form 10-K for the year ended January 2, 1999). 10(k)* -- Employment Agreement between Fruit of the Loom, Inc. and Brian J. Hanigan (incorporated herein by reference to Exhibit 10(l) to the Company's Annual Report on Form 10-K for the year ended January 2, 1999). 10(l)* -- Employment Agreement between Fruit of the Loom, Inc. and G. William Newton (incorporated herein by reference to Exhibit 10(m) to the Company's Annual Report on Form 10-K for the year ended January 2, 1999). 10(m)* -- Employment Agreement between Fruit of the Loom, Inc. and John J. Ray III (incorporated herein by reference to Exhibit 10(n) to the Company's Annual Report on Form 10-K for the year ended January 2, 1999). 10(n)* -- 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(o)* -- 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(p)* -- 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). 10(q)* -- Guaranty of Payment dated March 24, 1999 between Fruit of the Loom, Inc. and NationsBank, N.A. as administrative agent (incorporated herein by reference to Exhibit 10(u) to the Company's Annual Report on Form 10-K for the year ended January 2, 1999). 18* -- Letter re change in accounting principle (incorporated herein by reference to Exhibit 18 to the Company's 1997 Annual Report on Form 10-K for the year ended December 31, 1997). 21 -- Subsidiaries of the Company. 23 -- Consent of Ernst & Young LLP.
------------------------- * 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. 119