Document/Exhibit Description Pages Size
1: 10-K Annual Report 116 761K
2: EX-10.(X) Amendment #3 to the Berkshire Agreement 3 14K
3: EX-10.(Y) Supplement to Disclosure Statement 28 128K
4: EX-10.(Z) Third Amended Joint Plan Reorganization 101 452K
5: EX-21 Subsidiaries of the Company 2 14K
6: EX-23 Consent of Ernst & Young LLP 1 6K
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 29, 2001 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-8941
FRUIT OF THE LOOM, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-3361804
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
200 W. MADISON,
SUITE 2700
CHICAGO, ILLINOIS 60606
(Address of principal executive offices, including Zip Code)
Registrant's telephone number, including area code: (312) 899-1320
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
7% Debentures Due 2011 None
8 7/8% Notes Due 2006
6 1/2% Notes Due 2003
7 3/8% Debentures Due 2023
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
As of March 30, 2002, there were outstanding 66,905,348 shares of the
Registrant's Class A Common Stock, $.01 par value, and 5,229,421 of the
Registrant's Preferred Stock, $.01 par value. There is no market for the
Registrant's Common Stock or Preferred Stock. See "ITEM 5. MARKET FOR
REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS."
FRUIT OF THE LOOM, INC.
2001 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
[Enlarge/Download Table]
PAGE
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PART I
Item 1. Business...................................................................... 1
Item 2. Properties.................................................................... 16
Item 3. Legal Proceedings............................................................. 16
Item 4. Submission of Matters to a Vote of Security Holders........................... 18
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......... 19
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..................... 39
Item 8. Financial Statements and Supplementary Data................................... 41
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure (None)............................................................. 98
PART III
Item 10. Directors and Executive Officers of the Registrant............................ 99
Item 11. Executive Compensation........................................................ 101
Item 12. Security Ownership of Certain Beneficial Owners and Management................ 104
Item 13. Certain Relationships and Related Transactions................................ 106
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K................ 108
i
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; the 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 the 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, Inc., a Delaware corporation ("FTL Inc., Fruit of the
Loom or the Company") is a subsidiary of Fruit of the Loom, Ltd., a Cayman
Islands company ("FTL Ltd."). Please refer to FTL Ltd.'s Annual Report on Form
10-K for consolidated results of operations. FTL Inc., FTL Ltd. and 32 direct
and indirect subsidiaries of FTL Inc., 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.Sections 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"). 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
Inc., as debtor and debtor-in-possession, has continued to manage and operate
its assets and businesses subject to the supervision and orders of the
Bankruptcy Court, pending confirmation of the Third Amended Joint Plan of
Reorganization of Fruit of the Loom under Chapter 11 of the Bankruptcy Code (the
"Third Amended Reorganization Plan") contained in the Supplement to the
Disclosure Statement with respect to Third Amended Joint Plan of Reorganization
of Fruit of the Loom (the "Supplement to the Disclosure Statement") filed with
the Bankruptcy Court on March 19, 2002, pursuant to Section 1125 of the
Bankruptcy Code. See "JOINT PLAN OF REORGANIZATION." Because FTL Inc. is
operating as debtor-in-possession under the Bankruptcy Code, the existing
directors and officers of FTL Inc. continue to govern and manage the operations
of FTL Inc. subject to the supervision and orders of the Bankruptcy Court. See
"ITEM 3. LEGAL PROCEEDINGS."
The Third Amended Reorganization Plan, among other things, implements
the sale of Fruit of the Loom's basic apparel business (the "Apparel Business")
as a going concern to New FOL Inc. (the "Purchaser"), a wholly owned subsidiary
of Berkshire Hathaway Inc. ("Berkshire"), pursuant to the terms, and subject to
the conditions of the Asset Purchase Agreement dated as of November 1, 2001 (as
amended, the "Berkshire Agreement"), a copy of which is attached as Appendix 3
to the Disclosure Statement filed as Exhibit 99.1 to the Company's Form 8-K
dated February 15, 2002. Purchaser was the successful bidder pursuant to the
Bankruptcy Court approved auction process, which followed a six-month marketing
process. The Third Amended Reorganization Plan also provides for the liquidation
of the Debtors who are not
1
transferred to the Purchaser under the Berkshire Agreement, and of the
non-Apparel Business assets of Fruit of the Loom.
FTL Inc. (together with all of its subsidiaries, hereinafter,
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 a 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 vertically integrated manufacturer, Fruit of the Loom performs most
of its own yarn spinning, knitting, cloth finishing, and cutting operations.
Sewing and packaging are performed by affiliated companies or offshore
manufacturers. Management considers Fruit of the Loom's primary strengths to be:
(i) its excellent brand name recognition, (ii) its ability to deliver large
volumes of quality basic apparel at a low cost, and (iii) its 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. Indebtedness also increased because of the financing of 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 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".
Since the Petition Date, Fruit of the Loom's current management has
achieved significant operational improvements in all areas of 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 improved production
efficiencies and lowered corporate overhead and SG&A spending.
Notwithstanding these substantial improvements in operations achieved
since the Petition Date, sales in all segments, including the core Apparel
Business segments, have declined since the commencement of the Reorganization
Cases. In addition, there has been an overall market decline in activewear since
the Petition Date, for both tees and fleece.
JOINT PLAN OF REORGANIZATION
Fruit of the Loom filed the Second Amended Joint Plan of Reorganization
of Fruit of the Loom under Chapter 11 of the Bankruptcy Code (the "Second
Amended Reorganization Plan") contained in the Disclosure Statement pursuant to
Section 1125 of the Bankruptcy Code with respect to Second Amended Joint Plan of
Reorganization of Fruit of the Loom under Chapter 11 of the Bankruptcy Code (the
"Disclosure Statement") dated February 4, 2002, with the Bankruptcy Court. On
March 19, 2002, Fruit of the Loom filed the Supplement to the Disclosure
Statement and the Third Amended Reorganization Plan. The Third Amended
Reorganization Plan 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.
The Third Amended Reorganization Plan is the result of extensive
negotiations with the Official Committee of Unsecured Creditors of Fruit of the
Loom appointed in the Reorganization Cases (the "Unsecured Creditors Committee")
which represents holders of in excess of $450,000,000 of unsecured debt, the
steering committee of the informal committee of senior secured noteholders (the
"Noteholders Steering Committee"), and the unofficial prepetition bank steering
committee (the "Bank Steering Committee"), together representing the interests
of holders of claims representing approximately $1,200,000,000 of secured debt,
and other constituencies in the Reorganization Cases, and reflects the results
of a series of interconnected and mutually dependent settlements and compromises
reached among the parties since the Petition Date.
2
The Disclosure Statement and Supplement to the Disclosure Statement
filed with the Second and Third Amended Reorganization Plans, respectively,
describe certain aspects of the Second and Third Amended Reorganization Plans,
Fruit of the Loom's business operations, significant events occurring prior to
and during the Reorganization Cases and related matters, including the proposed
sale of the Apparel Business. This summary is intended solely as a summary of
the distribution and other provisions of the Third Amended Reorganization Plan
and certain matters related to Fruit of the Loom's business. FOR A COMPLETE
UNDERSTANDING OF THE SECOND AND THIRD AMENDED REORGANIZATION PLANS, YOU SHOULD
READ THE DISCLOSURE STATEMENT AND SUPPLEMENT TO THE DISCLOSURE STATEMENT, THE
SECOND AND THIRD AMENDED REORGANIZATION PLANS, AND THE EXHIBITS AND SCHEDULES
THERETO IN THEIR ENTIRETY.
The Third Amended Reorganization Plan has the support of Fruit of the
Loom, the Unsecured Creditors Committee, the Noteholders Steering Committee, and
the Bank Steering Committee.
OVERVIEW OF REORGANIZATION PLAN
Following is a brief summary of certain material provisions of the Third
Amended Reorganization Plan. These descriptions are qualified in their entirety
by the provisions of the Third Amended Reorganization Plan.
The Third Amended 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 Third
Amended Reorganization Plan is premised upon the sale of Fruit of the Loom's
reorganized Apparel Business, as a going concern, to Purchaser, and the
liquidation of the remaining assets and companies of Fruit of the Loom
(collectively, except for NWI Land Management Corp. and its assets, referred to
herein as the "Non-Core Assets") for the benefit of holders of allowed claims.
In addition, FTL Inc.'s wholly owned subsidiary, NWI Land Management Corp.
("NWI"), will be separately liquidated. Fruit of the Loom's allowed secured
claims aggregate approximately $1,200,000,000, subject to adjustment for
Adequate Protection Payments (as such term is hereinafter defined).
The distributions under the Third Amended Reorganization Plan reflect
the fact that the aggregate value of the Apparel Business, the Non-Core Assets,
and the remaining assets of NWI is less than the aggregate amount of the allowed
secured claims, and Fruit of the Loom's belief, based upon the results of a
comprehensive marketing process undertaken by Fruit of the Loom, in conjunction
with the various creditors committees, which took place over more than six
months and culminated in a Bankruptcy Court approved auction process.
Holders of Allowed Unsecured Claims (other than holders of allowed trade
convenience claims and the NWI Claims) will receive on the effective date of the
Third Amended Reorganization Plan (the "Effective Date") their ratable
proportion of the beneficial interests in the Unsecured Creditors Trust. Holders
of Allowed Unsecured Claims (other than holders of Allowed Trade Convenience
Claims, holders of 8?% Notes Claims, and the NWI Claims), who are classified in
Class 4A, will receive their Ratable Proportion of the beneficial interests in
the Unsecured Creditors Trust which holds (a) 190/445 of 7.5% of the beneficial
interests of FOL Liquidation Trust representing (i) 190/445 of 7.5% of the
adjusted Apparel Business sale proceeds and (ii) 190/445 of 7.5% of the net
proceeds of liquidation of the Non-Core Assets, (b) a supplemental payment of
$2,000,000, and (c) certain claims and causes of action (defined in the Third
Amended Reorganization Plan as the "UCT Claims"), on account of their Allowed
Unsecured Claims, in full settlement, satisfaction and discharge of those Claims
and the Committee Avoidance Action. Under the Third Amended Reorganization Plan,
a new Class (Class 4C) was created that consists solely of the claims of the
holders and indenture trustee for the 8?% Notes. Under the Third Amended
Reorganization Plan, holders of Allowed 8?% Note Claims, who are classified in
Class 4C, will receive on the Initial Distribution Date of the Third Amended
Reorganization Plan (a) 255/445 of 7.5% of the beneficial interests of FOL
Liquidation Trust representing (i) 255/445 of 7.5% of the adjusted Apparel
Business sale proceeds and (ii) 255/445 of 7.5% of the net proceeds of
liquidation of the Non-Core Assets, and (b) a supplemental payment of
$15,000,000 (minus the allowed administrative expense claims of the members of
and professionals retained by the Ad Hoc Committee of 8?% Noteholders), on
account of their Allowed Unsecured Claims, in full settlement, satisfaction and
discharge of those Claims, including the guarantee Claims against each member of
Fruit of the Loom, and the Committee Avoidance Action. Under the Third Amended
Reorganization Plan, holders of Allowed Class 2 Secured Claims will receive
their Ratable Proportion of (i) 92.5% of the beneficial interests of FOL
Liquidation Trust representing 92.5% of the adjusted Apparel Business sale
proceeds and 92.5% of the net proceeds of liquidation of the Non-Core Assets,
and (ii) an estimated $277 million in Cash
3
(less the sum of $9,400,000 on account of the Class 4A and Class 4C Supplemental
Payments and an amount up to $1,600,000 on account of the Farley Gross-up
Reserve), plus certain other amounts on account of Adequate Protection. In
addition, the Third Amended Reorganization Plan resolves the dispute regarding
the Allowed amount of the Claims of holders of the 7% Debentures (which are a
part of the Prepetition Secured Creditor Claims in Class 2), by Allowing them in
the aggregate amount of $90,800,000. Pursuant to the Third Amended
Reorganization Plan, the UCT Claims are assigned to the Unsecured Creditors
Trust for the benefit of holders of Class 4A Claims only, subject to certain
limitations as set forth in the Third Amended Reorganization Plan and described
hereinafter. Holders of Allowed Class 5 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 claims may not exceed
$1,500,000. Holders of allowed unsecured claims that are NWI Claims will receive
pro rata interests in NWI Successor in accordance with the terms of the EPA
Settlement Agreement. Finally, holders of Preferred and Common Stock of FTL Inc.
will not receive any distribution on account of their equity interests. The
Preferred and Common Stock of FTL Inc. will be cancelled pursuant to the Third
Amended Reorganization Plan. Also, the 8 7/8% Notes due 2006, the 6 1/2% Notes
due 2003, the 7 3/8% Debentures due 2023, and the 7% Debentures due 2011 of FTL
Inc. will be deregistered under the Securities Exchange Act of 1934, as amended,
as soon as possible on or after confirmation of the Third Amended Reorganization
Plan.
EVENTS LEADING TO THE REORGANIZATION CASES
In the period leading up to the Petition Date, Fruit of the Loom's
indebtedness increased substantially in connection with several acquisitions
that did not achieve the cash flow levels anticipated at the time of the
acquisitions. Indebtedness also increased because of the financing of a
significant legal settlement, environmental obligations related to discontinued
operations and open-market stock repurchases. After these borrowings, 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.
CHANGES IN THE COMPETITIVE ENVIRONMENT
Beginning in the mid 1990's, 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 adopted in 1995 (which has been expanded by the
Caribbean Basin Initiative 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 Fashions, Ltd. ("Gitano").
These acquisitions, primarily financed by debt, cost approximately $350,000,000.
The 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 instead dilutive to Fruit of the Loom's earnings over the period they were
owned. These businesses have been divested since the Petition Date.
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,
4
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 the layoffs from
these shut-downs, Fruit of the Loom experienced significant turnover of
highly-trained employees who found other employment. When manufacturing
recommenced in the first quarter of 1999, the replacement workers were less
experienced, requiring additional training that caused irregular production to
increase. 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 that 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 reduced sales resulted in a net loss before discontinued
operations of $491,100,000.
CREDIT RATING CHANGES
In 1997, when Fruit of the Loom entered into the 1997 Credit Agreement
(which was Fruit of the Loom's working capital facility), Fruit of the Loom was
rated BBB- by Standard & Poor's (S&P). In May 1998, S&P downgraded Fruit of the
Loom to BB+, which triggered the effectiveness of a pledge of the stock of
certain subsidiaries of FTL Inc. under the 1997 Credit Agreement. In the first
quarter of 1999, as described in the March prospectus for the 8 7/8% Notes,
Fruit of the Loom had a debt-to-EBITDA ratio of 4.9x and was downgraded to BB by
S&P. Thereafter, in June 1999, S&P downgraded Fruit of the Loom to BB- and then
to B- in October 1999.
COVENANT DEFAULTS AND LIQUIDITY
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 costs and other write-downs 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, evidenced by the
credit rating changes, 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
manufacturing operations, and covenant defaults under the various secured
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 the debt aggregated over $100,000,000 per year. The anticipated
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
5
Shortly before the Petition Date, a new management team was retained for
Fruit of the Loom to identify and rectify the underlying causes of many of the
operational difficulties experienced by the Company. Since the Petition Date,
the new management team has 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 the Company's core business.
The refocused business strategy includes: (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.
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.
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 2002 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 will
achieve certain volume minimums and profit targets, as well as explore high
volume private label programs consistent with existing product lines. The
Company 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.
Fruit of the Loom's business strategy includes the Apparel Business. The
Third Amended Reorganization Plan, among other things, implements the sale of
the Apparel Business as a going concern to a wholly owned subsidiary of
Berkshire.
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, which
reduced some of the losses generated by those business units.
As a part of the re-focusing on the core basic apparel business, Fruit
of the Loom has undergone a number of changes and discontinued a number of lines
of business, including among other things the Pro Player Sports and Licensing
Division, which had revenues in 1999 of approximately $133,000,000. As described
more fully below, notwithstanding those revenues, Pro Player incurred an
operating loss of $31,300,000 in 1999. Following the Petition Date, attempts
were made to sell Pro Player as a going concern, but ultimately no purchaser was
located. Therefore, in February 2000, the orderly
6
liquidation of Pro Player, was authorized. The net cash proceeds of that
liquidation, which was substantially completed in 2000, of $23,800,000 were
applied to reduce the DIP Facility (as defined below). Similarly, Gitano, which
had sales in 1999 of $48,200,000, but an operating loss of $28,800,000 for the
same period, was liquidated in 2000 for net cash proceeds of $19,400,000. Again,
the proceeds were applied to repay and reduce the DIP Facility. In addition,
there were a number of other asset sales whereby Fruit of the Loom disposed of
assets no longer used in its business operations. The total proceeds of all of
these asset sales (including Pro Player and Gitano) was approximately
$91,600,000; in each instance, the proceeds were applied to the DIP Facility.
In addition, prior to the Petition Date, Fruit of the Loom had been
operating under a number of licensing agreements that have been discontinued
since the commencement of the Reorganization Cases. These agreements were
primarily related to Pro Player/Sports and Licensing Division, and Gitano
businesses whose assets have been divested.
Pro Player/ Sports and Licensing Division
Pro Player/Sports and Licensing Division (the "Sports and Licensing
Division") manufactured and marketed sports licensing apparel under the Pro
Player(R) and Fans Gear(R) brands pursuant to licensing 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 and 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 and
defalcations by certain members of prior management of the Sports and Licensing
Division contributed to the underperformance of the Sports and Licensing
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 the 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 from a 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 the Sports and
Licensing Division resulted in net cash proceeds to Fruit of the Loom of
$23,800,000 through December 29, 2001.
Gitano
In 1994, Fruit of the Loom acquired 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 $600,000. 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 used to manufacture textile and apparel
machinery. As a result of losses generated and the non-core nature of its
business, Fruit of the Loom determined that Jet Sew should be sold on a
7
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.
Russell Hosiery
Leesburg Holding Company, Inc., formerly known as Russell Hosiery Mills,
Inc. ("Russell Hosiery"), a non-debtor subsidiary, whose only asset was an
interest in the trademark Russell National, sold that trademark to Russell
Corporation on January 12, 2001, for approximately $1,000,000. Those funds are
held in escrow, and may not be disbursed without notice to Fruit of the Loom,
Russell Hosiery and State Street Bank. Pursuant to the Third Amended
Reorganization Plan, the proceeds from the sale of the Russell Hosiery trademark
will be applied to accrued and unpaid fees of the Indenture Trustees, the
Prepetition Bank Agent and the Prepetition Collateral Agent.
ELIMINATION OF UNPROFITABLE PRODUCT LINES
Before the Petition Date, the number of SKU's 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 SKU's reduced
manufacturing efficiency, as average production runs decreased and the number of
changeovers increased. In 2000, Fruit of the Loom reduced total SKU's 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 of 2001, an additional yarn mill was closed, and in the
second quarter of 2001, the Company announced the closure of one additional
textile plant and two sewing facilities. Also in the third quarter of 2001,
Fruit of the Loom announced the closure of a textile facility in the Republic of
Ireland, and certain administrative offices outside the United States. 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, and to eliminate excess administrative space.
Textile production was realigned in Fruit of the Loom's remaining textile plants
that 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 2002, with future capacity growth being generated by capital
expenditures and efficiency improvements. However, the current lower level of
capacity could affect Fruit of the Loom's ability to respond to an increase in
market demand, potentially resulting in delays in order fulfillment until
additional capacity is fully operational.
FTL Ltd. has also closed certain assembly operations in Mexico, shifting
that production to lower cost operations in Central America. On October 25,
2000, the Bankruptcy Court authorized FTL Ltd. 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 (the "Master Termination Agreement"). At the present time, the only
operating assembly facility in Mexico involves the assembly of fleece garments.
As a part of the Master Termination Agreement, that operation will be acquired
by FTL Ltd.
IMPROVEMENTS IN MANUFACTURING PROCESSES AND EFFICIENCY
Since the Petition Date, under the current management team, Fruit of the
Loom has achieved material improvements in virtually all operational measurement
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 affiliate owned assembly
in Central America. Management believes that the affiliate 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
8
manufacturers, as productivity and overall efficiency increased at affiliate
owned assembly plants. As of the end of 2000, Fruit of the Loom had reduced the
number of outside contractors to 4, from the high of 37, resulting in lower
production costs for 2000. In the fourth quarter of 2001, approximately 13% of
all garments sewn for Fruit of the Loom were sewn by contract manufacturers with
substantially all of the remaining 87% at facilities owned and operated by
affiliated companies.
EFFECTS OF CHANGES IN BUSINESS
Since the Petition Date through the end of 2001, the total amount of
inventory and accounts receivable shown on Fruit of the Loom's balance sheet has
been reduced by a total of $255,500,000. This reduction is a result of the
elimination of unprofitable business lines, combined with increased efficiencies
in manufacturing, so that inventory is no longer held for extended periods of
time and accounts are collected more efficiently. However, looked at as merely
the book value of assets (which was the valuation basis upon which the Adequate
Protection Order was entered), this reduction, which is a reflection of the
improved manufacturing capabilities and the elimination of unprofitable lines of
business, did reduce the absolute book value of the assets of Fruit of the Loom.
CONTINUED OPERATING RISKS
COMPETITIVE CONDITIONS
All of Fruit of the Loom's markets are highly competitive. Fruit of the
Loom's operations may be negatively impacted by changes in the financial
strength of the retail industry, particularly the mass merchant channel, the
level of consumer spending for apparel, the amount of sales of Fruit of the
Loom's activewear screenprint products, and the competitive pricing environment
within the basic apparel segment of the apparel industry. The loss of one of its
major customers could have a significant adverse effect on Fruit of the Loom.
Fruit of the Loom's largest 100 customers accounted for approximately 80% of
Fruit of the Loom's Net sales to unrelated parties. Sales to Fruit of the Loom's
largest and second largest customers represented approximately 29.5% and 10.3%,
respectively, of Fruit of the Loom's Net sales to unrelated parties in 2001.
EXCHANGE RATE AND COMMODITY PRICING MARKET FLUCTUATIONS
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. Fruit of the Loom and its subsidiaries generally
enter into transactions denominated in their respective functional currencies.
Therefore, foreign currency exposures arising from transactions are not material
to Fruit of the Loom. However, Fruit of the Loom does have foreign currency
exposure arising from the translation of foreign denominated revenues and
profits into U.S. dollars. The primary currencies to which Fruit of the Loom is
exposed include the Euro and the British pound.
Commodity Prices
The availability and price of cotton are subject to fluctuation due to
unpredictable factors such as weather conditions, governmental regulations,
economic climate, or other unforeseen circumstances.
INTERNATIONAL OPERATIONS RISKS
Sales from international operations for 2001 were $226,200,000, and were
principally generated from products manufactured at Fruit of the Loom's foreign
facilities. These international sales accounted for 16.9% of Fruit of the Loom's
Net sales to unrelated parties for the year. Operations outside the United
States are subject to risks inherent in operating under different legal systems
and various political and economic environments. In addition, Fruit of the
Loom's operations, particularly in Central America, have been, and will continue
to be, exposed to extreme weather and other conditions (i.e., hurricanes and
earthquakes), which could have a material adverse impact on operations. Fruit of
the Loom's operations also involve the use of ocean-going transport to ship
fabric to off-shore assembly plants and to return finished goods to both Europe
and the United States; such maritime transport is inherently subject to risk
from weather and other conditions.
9
EFFECT OF KMART FILING
On January 22, 2002, Kmart Corporation and certain of its affiliates
(collectively, "Kmart") filed petitions for relief under Chapter 11 of the
Bankruptcy Code in the United States Bankruptcy Court for the Northern District
of Illinois. Kmart has been Fruit of the Loom's second largest customer, as a
percentage of Net sales, in each of the three years in the period ended December
29, 2001. The collectability of accounts receivable from Kmart and the prospects
for future business with Kmart cannot be estimated at this time. The effect of
Kmart's Chapter 11 cases on Reorganized Fruit of the Loom's future performance
cannot be predicted at this time. The Company believes adequate provision has
been made in the accompanying consolidated financial statements for estimated
losses on Kmart's account receivable as a result of Kmart's Chapter 11 cases.
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
and cutting operations. Sewing and packaging are performed by affiliated
companies or offshore contractors. This core apparel business in the United
States operates through Union Underwear Company, Inc. ("Union Underwear"), and
its operating subsidiaries and, outside the United States, through FTL Caribe
and its subsidiaries. Fruit of the Loom's primary strengths are its brand-name
recognition, relationships with major discount chains and mass merchandisers,
and 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, that accounted for approximately 62% of 2001 Net
sales to unrelated parties; (2) activewear products, that accounted for
approximately 26% of 2001 Net sales to unrelated parties; and (3) Europe, that
accounted for approximately 12% of 2001 Net sales to unrelated parties. The
Company's products are generally sold to major discount chains, mass
merchandisers, and large wholesalers; Fruit of the Loom is among the market
leaders in the foregoing market segments. Fruit of the Loom has an estimated
43.7% domestic mass market share in men's and boys' underwear and an estimated
13.5% domestic mass market share in women's and girls' underwear in 2001.
However, the Company has experienced declines in overall sales across all market
segments since the Petition Date. For the year 2001, Fruit of the Loom's
domestic activewear market share was 24.7% for T-shirts sold through wholesalers
and 17.3% for fleecewear. In addition, the overall market for activewear has
also declined since the Petition Date. In 2001, the total activewear market
declined 4% for tees and fleece.
Following the Petition Date, the new operating management team put into
effect an overall reorganization of the operations of Fruit of the Loom,
eliminating several layers of management and rationalizing the chain of
authority, so that all marketing, manufacturing, and sales functions are
coordinated and consolidated over all business lines.
The Fruit of the Loom label has been used in the textile market since
1856, and was registered as a trademark in 1871. A predecessor to Fruit of the
Loom began producing men's and boys' underwear under the Fruit of the Loom (R)
brand in 1938. FTL Inc. was incorporated under the laws of the State of Delaware
in 1985 as a result of the leveraged buyout of its conglomerate parent,
Northwest Industries, Inc. ("Northwest"). After divesting the other operating
businesses of Northwest, FTL Inc. became a publicly held company in 1987.
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 Central American subsidiaries that perform essentially all of
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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 and
Mexico. In order to serve these markets, the Company has a distribution center
in Canada, and manufacturing plants in 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 one of the mass
market leaders in men's and boys' underwear, with a 2001 domestic share in that
distribution channel of 43.7%. Fruit of the Loom is also one of the branded
market leaders in the fragmented women's and girls' underwear market, with a
2001 domestic share in the mass merchandise market of 13.5%. Only one other
competitor had more than a 4% market share in that market in 2001.
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 48%
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 brand name. These
products are primarily sold to major discount chains and mass merchandisers and
represent approximately 6% 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 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 4% 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 screenprint market and specialty retailers. In 2001, Fruit of the
Loom's domestic market share was 24.7% for T-shirts sold through wholesalers and
17.3% for fleecewear.
Europe
Approximately 84% of Fruit of the Loom's European 2001 sales were in
undecorated T-shirts, fleecewear, and knit sportshirts sold under the Screen
Stars By Fruit of the Loom(R) label. These products were sold to wholesale
distributors and
11
screenprinters throughout Europe. European retail sales, which includes a
variety of outerwear styles sold under the Fruit of the Loom(R) label, accounted
for approximately 16% of Fruit of the Loom's 2001 European business. Fruit of
the Loom 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 (owned
by affiliates) 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 but requires minimal labor. In 2001, 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 15% were
assembled at contractors and 84% at facilities owned and operated by affiliates.
Contract manufacturers have been used by the Company for the following reasons:
1) to balance internal capacity requirements, 2) for low volume specialty
garments, and 3) for seasonal or one-time programs. The Company chooses to sew
large volume styles in facilities owned and operated by affiliates where it
believes it has the greatest cost reduction potential. Included in the
percentages of goods assembled at facilities owned and operated by affiliates
are goods assembled at a contractor that assembled garments solely for the
Company. European textile manufacturing operations are located in Northern
Ireland and the Republic of Ireland, and labor intensive assembly operations are
located in lower cost Moroccan facilities. Approximately 32% of European sales
were produced at contractors.
DISTRIBUTION
Fruit of the Loom sells its products to approximately 100 major
accounts, including major discount chains and mass merchandisers, wholesale
clubs and screenprinters. Fruit of the Loom's largest 100 customers accounted
for approximately 80% of Fruit of the Loom's Net sales to unrelated parties in
2001. Sales to Fruit of the Loom's largest and second largest customers
(Wal-Mart Stores, Inc. and Kmart, respectively) each represented greater than
10% of Fruit of the Loom's Net sales to unrelated parties in 2001. 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
2001, approximately 84% of Fruit of the Loom's domestic products sold through
retail channels was sold to major discount chains and mass merchandisers,
approximately 3% was sold to department stores, approximately 6% was sold to
specialty stores, and approximately 7% was 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
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. In the mass market channel, Fruit of the Loom supplied 43.7% of
men's and boys' underwear and 13.5% 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
12
other trademarks, which are registered or protected by common law in the United
States and in many foreign countries. The KSA/NPD Branding Report by Kurt Salman
Associates, a bi-annual survey last conducted in 2000, 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, the Company 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. it also operates under a number of licensing agreements from
unrelated third parties, primarily utilized for its childrenswear products.
These licensing agreements provide Fruit of the Loom with the right to
manufacture and market apparel decorated with licensed characters that include
BATMAN(TM), SUPERMAN(TM), SPIDER-MAN THE MOVIE(TM), SESAME STREET(TM),
SCOOBY-DOO(TM), TELETUBBIES(TM), BOB THE BUILDER(TM), JACKIE CHAN
ADVENTURES(TM), SABRINA: THE ANIMATED SERIES(TM), POWERPUFF GIRLS(TM), DRAGON
TALES(TM), JAY JAY THE JET PLANE(TM), CUBIX(TM) and POWER RANGERS(TM).
BATMAN(TM) and SUPERMAN(TM) and all related character, names and indicia
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, Ltd., used under license from The
itsy bitsy Entertainment Company. 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 Sesame Workshop, used under license. BOB THE BUILDER(TM) is a
trademark of HIT Entertainment PLC and Keith Chapman, used under license. JACKIE
CHAN ADVENTURES(TM) is a trademark of Adelaide Productions, Inc. used under
license. SABRINA: THE ANIMATED SERIES(TM) is a trademark of Archie Comic
Publications, Inc., used under license. POWERPUFF GIRLS(TM) is a trademark of
Cartoon Network used under license from Warner Bros. Consumer Products, a
division of Time Warner Entertainment Company L.P. DRAGON TALES(TM) is a
trademark of Sesame Workshop used under license. JAY JAY THE JET PLANE(TM) is a
trademark of KIDQUEST, INC, dba WonderWings.com Entertainment used under license
from ProchLight Entertainment, Inc. CUBIX(TM) is a trademark of 4 Kids
Entertainment, Inc. used under license. POWER RANGERS(TM) is a trademark of
Saban Entertainment, Inc. and Saban International N.V. and used under license
from Saban Merchandising, Inc.
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 it to better control product moving
offshore. The Company continues to improve its inventory control systems, and
plans to continue its efforts in the IS area in 2002 and future years to improve
efficiency and customer service.
INTERNATIONAL OPERATIONS
Fruit of the Loom primarily sells activewear through its foreign
operations, principally in Europe, Canada, and Mexico. The Company's approach
has generally been to establish production capability in Europe in order to
better serve this market and decrease the impact of foreign currency
fluctuations. The Company has established manufacturing plants in the Republic
of Ireland and Northern Ireland (United Kingdom) as a means of accomplishing
these objectives. It 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's affiliates have established manufacturing
operations in Honduras and El Salvador to assemble fabrics
13
that 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, 96% of the garments assembled for sale in the United States
in 2001 were assembled in Honduras and El Salvador. The concentration of the
Company's affiliate's assembly operations in these countries that 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 to unrelated parties from international operations during 2001
were $226,200,000 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 to unrelated parties in 2001. 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.
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 in facilities owned by
affiliates.
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 40% of the United States
men's and boys' underwear market (100% if Section 9802 imports are included) in
2001 and approximately 42% (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. However, the Company believes that the import share of the activewear
market was greater in 2001 than it was in 1998. Substantially all of the
Company's activewear products sold in the United States are assembled offshore
(Central America). The Company believes that its operations are representative
of the industry in general.
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 by January 1, 2005.
14
EMPLOYEES
At March 1, 2002, the Company employed approximately 9,400 people.
Approximately 1,800 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 23, 2002, the Company had
entered into contracts that cover approximately 88% of its estimated cotton
requirements for 2002 (with fixed prices on approximately 77%).
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. As a result of the Cayman Reorganization, beginning in the third
quarter of 1999, the Company began selling cut goods to affiliates in Central
America and the Caribbean where sewing and finishing are performed by the
affiliates. The finished goods are then sold to the Company at arms length
transfer prices which approximate market prices. 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
write-downs and reserves. In the fourth quarter of 1997, the Company recorded
charges for costs related to the closing and disposal of a number of domestic
manufacturing and distribution facilities, impairment of manufacturing equipment
and other assets and certain European manufacturing and distribution facilities,
and other costs associated with the Company's world-wide restructuring of
manufacturing and distribution facilities. During 1995, the Company took several
actions in an effort to substantially reduce the Company's cost structure,
streamline operations and further improve customer service. These actions
included the closing of certain domestic manufacturing operations, further
consolidation of the Company's Gitano and Sports and Licensing Division 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 and 2001. The Company
incurred charges of $73,300,000 in 2000 and $46,200,000 in 2001 for write-downs
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. FTL Ltd. was incorporated under the laws of the state
of Delaware in 1985. The principal executive offices of FTL Ltd. are located at
200 W. Madison, Suite 2700, Chicago, Illinois, 60606, telephone (312) 899-1320.
Market share data contained herein are for domestic markets and are based upon
information supplied to FTL Ltd. by the National Purchase Diary, which
management believes to be reliable.
15
ITEM 2. PROPERTIES
The combination of manufacturing, warehouse and distribution, and sales
and administration facilities operated by the Company as of December 29, 2001,
occupied approximately 7,828,000 square feet of real property, of which
approximately 2,258,000 square feet were under leases expiring through 2017. The
Company's principal facilities were in North America, with the remaining
properties in Europe.
During 2001, the Company closed three of its least efficient
manufacturing facilities that occupied approximately 1,269,000 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 29, 2001, excluding closed facilities. The
Company's facilities are located principally in the United States (the summary
below includes Canada) and Western Europe (the summary below includes United
Kingdom, Republic of Ireland and Morocco).
[Enlarge/Download Table]
SQUARE FEET
NO. OF -----------
LOCATIONS OWNED LEASED
--------- ----- ------
UNITED STATES
Manufacturing........................................ 7 2,786,000 510,000
Warehouse and distribution........................... 7 1,829,000 782,000
Sales and administration............................. 4 86,000 96,000
WESTERN EUROPE
Manufacturing........................................ 7 332,000 435,000
Warehouse and distribution........................... 7 487,000 370,000
Sales and administration............................. 4 50,000 65,000
SUB-TOTAL
Manufacturing........................................ 14 3,118,000 945,000
Warehouse and distribution........................... 14 2,316,000 1,152,000
Sales and administration............................. 8 136,000 161,000
---- ------------ ------------
TOTAL..................................................... 36 5,570,000 2,258,000
See "LEASE COMMITMENTS" in the Notes to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
CHAPTER 11 FILING
On December 29, 1999, 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).
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"), for an original commitment of
$625,000,000, with Bank of America as agent. The DIP Facility has been approved
by the Bankruptcy Court and, as amended, is a commitment of $150,000,000
comprised of revolving notes. No amounts were outstanding under the revolver at
December 29, 2001. Letter of Credit obligations under the DIP Facility are
limited to $125,000,000.
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.
16
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 $19,000,000 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 that arise in connection with
the rejection of executory contracts and leases, are expected to be substantial.
The Debtors have established estimated accruals approximating what they 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. See "OVERVIEW
OF THIRD AMENDED REORGANIZATION PLAN" in Item 1. Business.
PLAN OF REORGANIZATION PROCEDURES
The Debtors filed the Disclosure Statement and Second Amended
Reorganization Plan with the Bankruptcy Court on February 4, 2002. The
Bankruptcy Court entered approval of the Disclosure Statement on February 6,
2002. Holders of Claims that are impaired and are to receive distributions are
entitled to vote to accept or reject the Second Amended Reorganization Plan
and/or Amended Scheme of Arrangement. The Disclosure Statement, Second Amended
Reorganization Plan and Amended Scheme of Arrangement have been transmitted to
these holders along with ballots and voting procedures. On March 19, 2002, FTL
Ltd. and FTL Inc. filed the Supplement to the Disclosure Statement and the Third
Amended Reorganization Plan. Holders of Claims that are impaired and are to
receive a distribution have also received, and are entitled to change their vote
based on their review of the Supplement to the Disclosure Statement and the
Third Amended Reorganization Plan. Unless changed, a vote on the Second Amended
Reorganization Plan will be counted as a vote on the Third Amended
Reorganization Plan. The Bankruptcy Court has scheduled a hearing for April 19,
2002, to confirm the results of the vote. See "OVERVIEW OF REORGANIZATION PLAN"
in Item 1. Business.
Inherent in a successful plan of reorganization is a capital structure
that permits the Debtors to generate sufficient cash flow after reorganization
to meet restructured obligations and fund their current obligations. 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 Third Amended Reorganization Plan provides no recovery to FTL
Ltd.'s or FTL Inc.'s equity security holders. All outstanding equity securities
will be cancelled and current holders will receive no distribution with respect
to FTL Inc. equity securities (common or preferred stock). New equity will be
issued to creditors holding impaired claims.
Generally, after a plan has been filed with the Bankruptcy Court, it is
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
17
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.
18
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 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 29, 2001 and at
December 30, 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 29, 2001 and December 30, 2000, the
minority interest participation was limited to the fixed preferred dividends of
$3,200,000 in each year. The Company paid no dividends in either year 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.
There is no market for FTL Inc.'s common or preferred stock. All shares
of common stock are owned by FTL Ltd.
No dividends were declared on the Company's common stock during 2001 or
2000. The Company does not currently anticipate paying any dividends on common
stock in 2002. 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
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 29, 2001. 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 2001, 2000, 1999 and 1998 ended on December 29, 2001, December 30,
2000, January 1, 2000 and January 2, 1999, respectively.
[Enlarge/Download Table]
YEAR ENDED
--------------------------------------------------------------------------
DECEMBER 29, DECEMBER 30, JANUARY 1, JANUARY 2, DECEMBER 31,
2001 2000 2000 1999 1997
---- ---- ---- ---- ----
OPERATIONS STATEMENT DATA(1)(5):
Net sales--unrelated parties............... $ 1,341.8 $1,553.6 $1,787.2 $ 1,945.5 $ 1,906.4
Gross earnings (loss)...................... 171.8 113.8 (31.3)(7) 492.6(10) 387.3(12)
Operating earnings (loss).................. (46.6)(2) (143.2)(5) (388.5)(8) 207.1(11) (266.7)(13)
Interest expense........................... 97.4 124.3 97.1 93.9 82.5
Reorganization Items (3)................... 33.8 48.2 3.0 -- --
Earnings (loss) from continuing operations
before income tax provision.............. (176.9)(4) (316.9) (547.5)(9) 120.2 (428.3)(14)
Earnings (loss) from continuing operations. (157.8) (202.9)(6) (584.7) 113.0 (362.0)
BALANCE SHEET DATA(1):
Total assets............................... $ 1,578.4 $1,787.7 $2,090.9 $ 2,279.0 $ 2,448.9
Long-term debt, excluding current
maturities............................... 410.7 410.3 593.5 856.6 1,192.8
Other noncurrent liabilities............... 87.8 11.5 37.9 267.4 321.0
Liabilities subject to compromise--unrelated
parties.................................. 498.1 554.6 699.9 -- --
Common stockholders' equity (deficit)...... (995.2) (791.2) (547.1) 548.9 422.1
(1) This information should be read in conjunction with "ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS" and the Financial Statements and Supplementary Data.
(2) Includes pretax charges of $42.6 related principally to closing certain
of the Company's higher cost production facilities.
(3) 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.
(4) Includes $20.0 related to reversal of excess income tax liabilities for
tax years through January 1, 2000.
(5) Includes pretax charges of $73.3 related principally to the closing of
certain of the Company's higher cost production facilities.
(6) Includes $116.3 related to reversal of excess income tax liabilities for
tax years through January 2, 1999.
(7) Includes pretax charges of $214.1 related to provisions and losses on
the sale of closeout and irregular inventory and inventory valuation
writedowns.
20
(8) 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.
(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 an
increase in Gross earnings of $6.9.
(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) Includes pretax charges of $47.8 related to inventory valuation
writedowns.
(13) 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.
(14) 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").
21
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 and
the Cayman 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. Indebtedness also increased because of the financing of 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 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 (collectively "Pro Player") and ventured into women's
jeanswear manufacturing and marketing with the acquisition of the Gitano(R)
brand. These acquisitions, primarily financed by debt, cost approximately
$350,000,000.
The 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 instead dilutive to Fruit of the Loom's earnings over the period they 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, combined with the debt
incurred to fund non-performing acquisitions, resulted in higher debt.
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
facilities owned by affiliates in 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 the layoffs from
these shut-downs, Fruit of the Loom experienced significant turnover of
highly-trained employees, who found other employment. When manufacturing
recommenced in the first quarter of 1999, the replacement workers were less
experienced, requiring additional
22
training that caused the level of irregular production to increase. 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 that 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.
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 write-downs 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 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 the 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. Also, principally as
a result of a $20,000,000 settlement with one of Pro Player's creditors approved
by the Bankruptcy Court, the Company recorded an additional loss of $18,000,000
in the fourth quarter of 2001. See "DISCONTINUED OPERATIONS" in the Notes to
Consolidated Financial Statements.
The Company continues to review the divestiture of certain non-core
assets. Approximately $50,100,000 and $90,000,000 of losses related to
additional divestitures and plant shutdowns during 2001 and 2000, respectively,
were recorded. 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 a Reorganization Plan together with
a proposed Disclosure Statement. Amended Reorganization Plans were filed on
December 28, 2001 and February 4, 2002. The Second Amended Reorganization Plan
dated February 4, 2002 has been submitted to a vote of creditors. On March 19,
2002, the Company filed the Supplement to the Disclosure Statement and the Third
Amended Reorganization Plan. Holders of Claims that are impaired and are to
receive a distribution have also received, and are entitled to change their vote
based on their review of, the Supplement to the Disclosure Statement and the
Third Amended Reorganization Plan. Unless changed, a vote on the Second Amended
Reorganization Plan will be counted as a vote on the Third Amended
Reorganization Plan. There can be no assurance that the Third Amended
Reorganization Plan or any other plan of reorganization will be confirmed under
the Bankruptcy Code. If the Company is unable to 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 connection with bankruptcy proceedings. Through December
29, 2001, the Company incurred reorganization costs of $85,000,000 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.
23
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, 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 Third Amended 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. The sale of the Apparel Business is subject to approval
of the Third Amended Reorganization Plan. The operation of this business will be
included in continuing operations in the Company's consolidated financial
statements until the Third Amended Reorganization Plan is approved
OPERATIONS
2001 Consolidation Costs
During 2001, the Company incurred costs in connection with the closure
of several manufacturing facilities in the United States and Canada, resulting
in special charges aggregating $46,200,000 for write-downs of inventory,
property, plant and equipment, severance and other costs. Also, in 2001, the
Company finalized certain estimates principally related to the 1997 special
charges, resulting in reductions in 2001 consolidation costs of $3,600,000. Net
charges of $42,600,000 have been recorded in results of operations in the
accompanying consolidated financial statements in Selling, general and
administrative expenses.
These charges were recorded in the following quarters (in thousands of
dollars):
[Download Table]
1st quarter........................................... $ 6,700
2nd quarter........................................... 30,100
3rd quarter........................................... 3,600
4th quarter........................................... 2,200
--------
$ 42,600
These charges are categorized as follows (in thousands of dollars):
[Enlarge/Download Table]
FUTURE CASH NONCASH TOTAL CHARGES
----------- ------- -------------
Closing and disposal of U.S. and Canadian manufacturing
facilities......................................... $ 4,100 $ 35,400 $ 39,500
Closing of European manufacturing and sales
facilities......................................... 4,800 1,900 6,700
-------- -------- --------
Subtotal........................................... 8,900 37,300 46,200
Finalization of prior year consolidation costs/special
charges............................................ (1,200) (2,400) (3,600)
-------- -------- --------
$ 7,700 $ 34,900 $ 42,600
======== ======== =========
Each of these categories is discussed below.
24
As part of the Company's continuing business strategy to improve
profitability in future years, the Company continued to focus on eliminating
unprofitable and low volume SKU's. In addition, the overall market for the
Company's activewear products declined substantially, and the Company
experienced reduced market share. As a result, the Company closed several of its
production facilities in 2001. Accordingly, the Company terminated 431 salaried
and 2,867 production personnel related to closed operations. Charges related to
closing and disposal of U.S. and Canadian manufacturing facilities consisted of
the following (in thousands of dollars):
[Enlarge/Download Table]
Loss on disposal of facilities, improvements and equipment.................... $ 36,900
Severance costs............................................................... 3,000
Other......................................................................... 500
----------
$ 39,500
The loss on disposal of facilities, improvements and equipment results
from the write-down of property, plant and equipment to their net realizable
values. Net realizable values were determined by appraisals and historical
experience 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).
These charges were recorded in the appropriate quarters of 2001 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 No. 94-3 ("EITF 94-3") or other
authoritative literature.
As part of its continuing review of its sales and manufacturing
organization, the Company continued to evaluate the strategic position and cost
effectiveness of its organization and facilities in Europe. As a result of this
continuing review, the Company shut down one of its European manufacturing
facilities and several sales offices throughout Europe. In connection therewith,
the Company recorded charges aggregating $6,700,000 in the third and fourth
quarters of 2001, as detailed below:
[Enlarge/Download Table]
Loss on disposal of facilities, improvements and equipment.................... $ 1,900
Severance costs............................................................... 3,700
Other......................................................................... 1,100
----------
$ 6,700
Other costs consist of a settlement with the Industrial Development
Board of Northern Ireland for repayment of grants as the Company failed to
maintain minimum employment levels stipulated in the grants.
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 incurred in 2001, cash charges totaled $8,900,000,
$3,600,000 of which was paid in 2001 with the remainder expected to be paid in
2002. Also, $6,700,000 of the consolidation costs was related to restructuring
charges as defined by EITF 94-3.
2000 Consolidation Costs
In the fourth quarter of 2000, the Company incurred costs in connection
with the closure of several manufacturing facilities in the United States,
resulting in special charges aggregating $73,300,000 for write-downs of
property, plant and equipment, other assets and contractual obligations. These
charges were recorded in results of operations in the accompanying consolidated
financial statements in Selling, general and administrative expenses.
These charges are categorized as follows (in thousands of dollars):
[Enlarge/Download Table]
Closing and disposal of U.S. manufacturing facilities..................... $ 65,700
Closing of European manufacturing facilities.............................. 6,700
Receivable write-off...................................................... 900
------------
$ 73,300
25
Each of these categories is discussed below.
A significant part of the Company's business strategy 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 fourth quarter 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. manufacturing and
distribution facilities consisted of the following (of which $58,400,000 were
non-cash charges) (in thousands of dollars):
[Enlarge/Download Table]
Loss on disposal of facilities, improvements and equipment.................... $ 58,500
Severance costs............................................................... 7,200
----------
$ 65,700
The loss on disposal of facilities, improvements and equipment results
from the write-down 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).
These charges were recorded in the fourth quarter of 2000 as required by
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 organization and
facilities in Europe. As a result of this continuing review, the Company closed
two of its European manufacturing facilities and recorded a charge of $6,700,000
in the fourth quarter of 2000 to write-down 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 a $900,000 non-cash charge to write-off an
uncollectible receivable.
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 $12,000,000, $1,700,000 and $9,800,000
of which were paid in 2001 and 2000, respectively, with the remainder expected
to be paid in 2002. Also, $11,500,000 of the consolidation costs were 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 $41,800,000 from 1999 to 2000 and a further $24,500,000 in 2001.
Excluding consolidation costs of $73,300,000 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 Net sales to unrelated parties, from
14.9% in 1999 to 10.2% in 2000 as a result of these and other changes to Fruit
of the Loom's variable cost structure. Excluding consolidation costs of
$42,600,000 in 2001, selling, general and administrative expenses were 11.3% of
Net sales to unrelated parties; this number includes 2.1% of Net sales for
advertising expenses. In 2000, there were no advertising expenditures. Fruit of
the Loom believes that at current volume levels, it has substantially achieved
the benefits that are immediately available from cost reduction initiatives.
2001 COMPARED TO 2000
Net sales decreased $522,200,000 in 2001 compared to 2000. Net sales to
unrelated parties decreased $211,800,000 or 13.6% in 2001 compared to 2000. The
decrease in Net sales to unrelated parties 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,
$185,700,000 of the decrease was
26
due to a reduction in volume and a change in product mix, and $27,900,000 was
attributable to lower pricing in the face of increased competition. The
Company's Gitano business was sold in July 2000, accounting for $22,200,000 of
the reduction in volume. Excluding the Gitano decrease, $121,000,000 of the
reduction in volume related to the discontinuation of non-core product lines.
The pricing decrease was partially offset by a favorable impact on Net sales
aggregating $9,900,000 related to the finalization and elimination of 2000
promotional programs. Sales of closeouts were $12,500,000 higher than 2000 as
additional dozens sold in 2001 more than offset lower selling prices realized in
2000. Sales of irregulars declined $11,400,000 due to a reduction in volume of
irregulars produced and sold, and due to the reduced average selling price
reflecting market conditions. Also, $7,200,000 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 $85,100,000 or 9.4% in 2001 compared
to 2000 principally due to reductions in casualwear fleece, men's and boys'
underwear and sales of Gitano products, partially offset by an increase in
intimate apparel. The decreases were principally caused by the elimination of
unprofitable products and non-core product lines, the loss of a casualwear
fleece program with a major customer and decreased irregular sales, partially
offset by an increase in closeout sales.
Activewear sales declined $115,000,000 or 24.5% in 2001 compared to
2000, 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 and less profitable product lines as well as
a decline in volume of core products, which decline the Company attributes
partially to the impact of the pending bankruptcy cases. Sales also declined due
to price reductions in response to aggressive pricing by competitors. The
decrease in sales was partially offset by higher sales of closeouts.
European sales declined $11,100,000 in 2001 compared to 2000 due to
unfavorable currency effects (higher U.S. dollar), price reductions and lower
volume of closeouts, offset partially by higher volume of Activewear products.
Price reductions in Europe totaled $8,700,000 in 2001 compared to 2000 and
reflected market conditions in Activewear ($3,500,000) and lower retail prices
($5,200,000).
[Enlarge/Download Table]
2001 2000
---- ----
(IN MILLIONS OF DOLLARS)
NET SALES
Retail products................................................. $ 824.6 $ 909.7
Activewear...................................................... 354.0 469.0
Europe.......................................................... 163.1 174.2
Other........................................................... 0.1 0.7
------------ -----------
Subtotal - unrelated parties.................................. 1,341.8 1,553.6
Affiliates.................................................... 499.1 809.5
------------ -----------
$ 1,840.9 $ 2,363.1
============ ===========
OPERATING EARNINGS (LOSS)
Retail products................................................. $ 130.6 $ 75.6
Activewear...................................................... (10.5) (30.1)
Europe.......................................................... 2.5 4.1
Consolidation costs/Special charges............................. (46.5) (88.3)
Other........................................................... (6.0) (5.5)
------------ -----------
Subtotal - unrelated parties.................................. 70.1 (44.2)
Affiliates.................................................... (116.7) (99.0)
------------ -----------
$ (46.6) $ (143.2)
============ ===========
Gross earnings increased $58,000,000 in 2001 compared to 2000. Gross
earnings on sales to unrelated parties increased $72,500,000 or 31.2% in 2001
compared to 2000, and gross margin increased 7.7 percentage points to 22.7% for
the year. Gross earnings in 2001 were favorably impacted by lower production
costs of $133,700,000, the finalization of prior year promotional programs of
$9,900,000, a favorable impact of $27,400,000 related to closeouts and
irregulars, decreased freight charges related to the reduced volume of
$6,200,000, improvements in obsolete inventory as a result of reduced
obsolescence charges of $4,600,000 and duty refunds in 2001 of $5,300,000. Cost
reductions were partially offset by price decreases aggregating $27,900,000,
sales volume and production mix declines totaling $58,200,000, increased
physical inventory adjustments of $8,900,000, a $9,000,000 reversal in 2000 of
an accrual for property taxes and duty costs and unfavorable miscellaneous
adjustments of $10,600,000. The volume declines were in line with the Company's
strategy of eliminating low volume and unprofitable SKU's.
27
The Company generated operating earnings on sales to unrelated parties
in 2001 of $70,100,000 compared to an operating loss on sales to unrelated
parties in 2000 of $44,200,000. The improvement resulted from an increase in
gross earnings of $72,500,000 in 2001 compared to 2000. Operating selling,
general and administrative expenses in 2001 were equal to 2000 even though the
Company reinstituted television advertising in 2001, which offset other
decreases. During 2001, advertising and promotion expenses increased
$30,100,000, and bad debt expense increased $6,300,000 over 2000, principally
related to the Chapter 11 bankruptcy filing of a major customer in January 2002.
These increases were offset by a $12,600,000 reduction in salaries and
employment costs, a $5,900,000 reduction in office and related expenses, a
$7,800,000 reduction in software expense and a $7,200,000 decrease in royalty
expense as a result of the decrease in Net sales.
The Company incurred and recognized several one-time or non-recurring
costs in both 2001 and 2000. In 2001 and 2000, the Company incurred $42,600,000
and $73,300,000, respectively, 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. Also see "SPECIAL
CHARGES" in the Notes to Consolidated Financial Statements.
Interest expense decreased $26,900,000 or 21.6% in 2001 compared to
2000. The decrease reflected a lower average interest rate and lower average
borrowing levels in 2001 compared to 2000. See "CONTINGENT LIABILITIES" in the
Notes to Consolidated Financial Statements and "LIQUIDITY AND CAPITAL RESOURCES"
below.
Net other income in 2001 totaled $900,000 compared with $1,200,000 Net
other expense in 2000. Principal components of Net other income in 2001 included
$5,500,000 in gains on marketable equity securities and two litigation
settlements with unrelated parties aggregating $7,000,000. These favorable
impacts were partially offset by adequate protection payments (interest
payments) in the amount of $4,000,000 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
$3,200,000, a currency transaction loss of $2,300,000 and losses on the sale of
fixed assets of $1,600,000. 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 Mr. Farley, bank
fees of $2,800,000, foreign currency transaction loss 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. See "CONTINGENT LIABILITIES"
in the Notes to Consolidated Financial Statements.
Reorganization items represent costs incurred by the Company related to
the Reorganization Cases. Reorganization items in 2001 and 2000 aggregated
approximately $33,800,000 and $48,200,000, respectively, and consist of
professional fees that include legal, accounting, consulting and other services
provided to the Company related to the Reorganization Cases.
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 quarters of
2001 and 2000, net excess income tax liabilities (including discontinued
operations) totaling approximately $20,000,000 and $104,000,000, respectively,
which reduced income tax expense in each year.
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 29, 2001). Preferred
stockholder participation in losses is limited to the preferred stockholders'
prior participation in earnings. Because FTL Inc. had losses in 1999, 2000 and
2001, the preferred stock 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.
Discontinued operations reflect the Company's February 2000 decision
(which was subsequently approved by the Bankruptcy Court) 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. 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. Also, principally as a result of a $20,000,000
settlement with one of Pro Player's creditors approved by the Bankruptcy Court,
the Company recorded an additional loss of $18,000,000 in the fourth quarter of
2001.
28
The balance sheets at December 29, 2001 and December 30, 2000 include
liabilities to unrelated parties subject to compromise aggregating $498,100,000
and $554,600,000, respectively, and principally represent unsecured long-term
debt, prepetition trade accounts payable and other unsecured liabilities. The
reduction in liabilities subject to compromise in 2001 principally relates to
reductions in recorded income tax liabilities related 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. This reduction was
partially offset by an increase in liabilities for discontinued operations as a
result of the $20,000,000 settlement agreement completed in 2001.
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 write-downs 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):
[Enlarge/Download Table]
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 write-downs 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
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 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 29, 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. 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.
29
The Company recorded charges for other asset write-downs and reserves
totaling $171,900,000 (of which $148,300,000 were non-cash charges) comprised of
the following (in thousands of dollars):
[Enlarge/Download Table]
TOTAL ASSET OTHER RESERVES
CHARGES WRITE-DOWN 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 represented 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 $70,400,000 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.
2000 COMPARED TO 1999
Net sales increased $76,500,000 in 2000 compared to 1999; however, net
sales to unrelated parties decreased $233,600,000 or 13.1% 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.
30
Sales of retail products decreased $114,000,000 or 11.1% 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. Also, in intimate
apparel, the Company discontinued certain product lines, resulting in lower
sales.
Activewear sales declined $46,800,000 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 and less profitable product lines as well as
a decline in volume of core products, which decline the Company attributes
partially to the impact of the pending bankruptcy cases. Sales also declined due
to price reductions in response to aggressive pricing by competitors.
European sales declined $39,100,000 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
lower retail pricing ($5,200,000).
[Enlarge/Download Table]
2000 1999
---- ----
(IN MILLIONS OF DOLLARS)
NET SALES
Retail products................................................. $ 909.7 $ 1,023.7
Activewear...................................................... 469.0 515.8
Europe.......................................................... 174.2 213.3
Other........................................................... 0.7 34.4
------------ -----------
Subtotal - unrelated parties.................................. 1,553.6 1,787.2
Affiliates.................................................... 809.5 499.4
------------ -----------
$ 2,363.1 $ 2,286.6
============ ===========
OPERATING EARNINGS (LOSS)
Retail products................................................. $ 75.6 $ (98.2)
Activewear...................................................... (30.1) (93.9)
Europe.......................................................... 4.1 (24.4)
Consolidation costs/Special charges............................. (88.3) (67.2)
Other........................................................... (5.5) (8.6)
------------ -----------
Subtotal - unrelated parties.................................. (44.2) (292.3)
Affiliates.................................................... (99.0) (96.2)
------------ -----------
$ (143.2) $ (388.5)
============ ===========
Gross earnings in 2000 improved $145,100,000 to $113,800,000 from a loss
of $31,300,000 in 1999. Gross earnings on sales to unrelated parties increased
$160,300,000 or 222.6% in 2000 compared to 1999 and gross margin increased 11.0
percentage points to 15.0% 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 favorable miscellaneous adjustments of
$11,700,000. 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 and sales volume and production mix declines totaling
$74,400,000. 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 on sales to unrelated parties
in 2000 of $44,200,000 compared to an Operating loss on sales to unrelated
parties in 1999 of $292,300,000. The improvement resulted from the increase in
Gross
31
earnings and a decrease in operating Selling, general and administrative
expenses (excluding consolidation costs in 2000 and special charges in 1999) of
$108,900,000 in 2000 compared to 1999. The reduction in operating Selling,
general and administrative expenses was partially due to a $33,900,000 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 $73,300,000 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 increase reflected a higher average interest rate, and in 1999,
expense of $8,800,000 related to the accounts receivable 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 $1,200,000 compared with $58,900,000
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 Mr. Farley, bank fees of $2,800,000,
foreign currency transaction loss 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, $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. Reorganization items in 2000 and 1999 aggregated
$48,200,000 and $3,000,000, respectively, and consist of professional fees that
include legal, accounting, consulting and other services provided to the Company
related to the Reorganization Cases.
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. In addition, the
effective income tax rate for 1999 differed from the U.S. Federal statutory rate
of 35% primarily due to the impact of foreign earnings and the impact of
goodwill amortization, a portion of which is not deductible for U.S. Federal
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
32
to the preferred stockholders' prior participation in earnings. Because FTL Inc.
had losses in 1999 and 2000, the preferred stock 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 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 to unrelated parties subject to compromise aggregating $554,600,000
and $699,900,000, 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.
CRITICAL ACCOUNTING POLICIES
General Accounts Receivable
The Company's ten largest customers accounted for approximately 57.9%
and 53.5% of Net sales to unrelated parties in 2001 and 2000, respectively, and
approximately 42.2% and 42.1% of accounts receivable at December 29, 2001 and
December 30, 2000, respectively. These customers represent major discount chains
and the largest activewear distributors and screen printers. In determining our
allowance for doubtful accounts, we have assumed the financial condition of
these companies will continue to be viable in the near term. 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.
On January 22, 2002, Kmart filed petitions for relief under Chapter 11
of the Bankruptcy Code in the United States Bankruptcy Court for the Northern
District of Illinois. Kmart was Fruit of the Loom's second largest customer, as
a percentage of Net sales to unrelated parties, in each of the three years in
the period ended December 29, 2001. As of December 29, 2001, approximately
$70,900,000 of our accounts receivable were attributable to our ten largest
customers. If our primary customers experience significant adverse conditions in
their industry or operations, including the continued impact of the current
downturn, our customers may not be able to meet their ongoing financial
obligations to us for amounts owed on accounts receivable and future demand for
our products may decrease.
General Accounts Receivable - Foreign Currency
We generate a significant portion of our revenues and corresponding
accounts receivable through sales denominated in approximately 10 currencies
other than the U.S. dollar. As of December 29, 2001, approximately $50,300,000
of our accounts receivable were denominated in foreign currencies of which
$29,700,000 are Euro-denominated. Historically, the foreign currency gains and
losses on these receivables have not been significant, and we have determined
that foreign currency derivative products are generally not required to hedge
our exposure. If there were a significant decline in the Euro exchange rate, the
U.S. dollar equivalents we would receive from our customers could be materially
less than the reported amount. A decline in the exchange rate of the Euro to the
U.S. dollar of approximately 10% from the rate as of December 29, 2001 would
result in an exchange loss of approximately $3,000,000.
33
Bad Debt Reserve - Methodology
We evaluate the collectibility of our accounts receivable based on a
combination of factors. In circumstances where we are aware of a specific
customer's inability to meet its financial obligations to us (e.g., bankruptcy
filings, substantial down-grading of credit scores), we record a specific
reserve for bad debts against amounts due to reduce the net recognized
receivable to the amount we reasonably believe will be collected. For all other
customers, we recognize reserves for bad debts based on the length of time the
receivables are past due and based on our historical experience over the prior
five years. If circumstances change (i.e., higher than expected defaults, an
unexpected material adverse change in a major customer's ability to meet its
financial obligations to us, or changes in the expected recovery of amounts from
customers who have made bankruptcy filings), our estimates of the recoverability
of amounts due us could be reduced by a material amount. Similar estimates are
made for accounts receivable outside the United States. We have historically
experienced a higher percentage of bad debts in certain countries and,
accordingly, have recorded a larger bad debt reserve in accordance with our
experience. The total bad debt reserve of $15,800,0000 as of December 29, 2001
consists of $9,600,000 from domestic accounts receivable and $6,200,000 from
foreign accounts receivable.
Inventories - Slow Moving and Obsolescence
At December 29, 2001, the Company has identified certain product styles
within finished goods to be offered as closeouts as well as finished goods with
a supply in excess of six months, based on our current forecast. In addition,
the Company has identified irregular merchandise on hand at December 29, 2001.
Also, the Company has identified certain raw materials and work in process that
will not be used in the normal production process. The Company has estimated the
net realizable value of this inventory based on actual loss experience in the
last twelve months, selling prices currently in place and other market related
factors. As a result, we have recorded lower of cost or market and obsolescence
reserves aggregating $40,300,000 at December 29, 2001. Should we not achieve our
expectations of the net realizable value of this inventory or other finished
goods are identified to be offered as closeouts or as excess, potential future
losses may occur to the extent of the reduced carrying value of the inventory at
December 29, 2001.
Derivatives
We hold derivative instruments to hedge forecast purchases of certain
raw materials used in our production processes. These derivatives qualify for
hedge accounting as discussed in detail in the footnotes to our consolidated
financial statements. We do not participate in speculative derivatives trading.
Hedge accounting results when we designate and document the hedging
relationships involving these derivative instruments. While we intend to
continue to meet the conditions for hedge accounting, if hedges did not qualify
as highly effective or if we did not believe that forecasted transactions would
occur, the changes in the fair value of the derivatives used as hedges would be
reflected in earnings.
To hedge commodity risks, we use exchange-traded futures contracts. The
fair values of these instruments are determined from market quotes. The values
of these derivatives will change over time as cash receipts and payments are
made and as market conditions change. Our derivative instruments are not subject
to multiples or leverage on the underlying commodity. Information about the fair
values, notional amounts, and contractual terms of these instruments can be
found in the footnotes to our consolidated financial statements and the section
titled "Quantitative and Qualitative Disclosures About Market Risk."
In addition to the above derivative instruments, we have other contracts
that have the characteristics of derivatives as defined in Statement of
Financial Accounting Standards ("SFAS") No. 133 issued by the Financial
Accounting Standards Board, but are not required to be accounted for as
derivatives. These contracts for the physical delivery of commodities qualify
for the normal purchases and sales exception under SFAS No. 133 because we take
physical delivery of the commodity and use it in the production process. This
exception is an election and, if not elected, these contracts would be carried
in the balance sheet at fair value. Changes in fair value would then be
reflected either 1) in income currently, or 2) if designated as a cash flow
hedge of forecast purchases of cotton, in other comprehensive income and
deferred until the cost of the hedged cotton flows into cost of sales. As of
December 29, 2001, these contracts covered 58% of the Company's projected cotton
needs for 2002. Adjusting these contracts to estimated total fair value at
December 29, 2001 would have required the Company to recognize a portion of the
contracted cost as a deferred loss of $13,100,000 in other comprehensive
34
income, assuming hedge designation. The fair value adjustment has been computed
using the excess of the contract price over the corresponding exchange traded
cotton futures price for each contract. Fixed price contract commitments reflect
the Company's assessment of quality and reliability of supply, as well as lead
times required to meet production schedules.
Pensions
The Company accounts for its defined benefit pension plans in accordance
with SFAS No. 87, "Employers' Accounting for Pensions", which requires that
amounts recognized in financial statements be determined on an actuarial basis.
A substantial portion of the Company's pension amounts relates to its defined
benefit plan in the United States. We have not made contributions to the U.S.
pension plan since 2000 because the Company's policy is to fund contributions
based on ERISA's minimum funding requirements. SFAS No. 87 and the policies used
by the Company, notably the use of a smoothed value of plan assets (which is
further described below), generally reduced the volatility of pension income
(expense) from changes in pension liability discount rates and the performance
of the pension plan's assets.
The most significant element in determining the Company's pension income
(expense) in accordance with SFAS No. 87 is the expected return on plan assets.
The Company has assumed that the expected long-term rate of return on plan
assets will be 9.0%. Over the long term, the Company believes this rate is
reasonable. The assumed long-term rate of return on assets is applied to a
calculated value of plan assets, which recognizes changes in the fair value of
plan assets in a systematic manner over five years. This produces the expected
return on plan assets that is included in pension income (expense). The
difference between this expected return and the actual return on plan assets is
deferred. The net deferral of past asset gains (losses) affects the calculated
value of plan assets and, ultimately, future pension income (expense). The plan
assets have earned a rate of return substantially less than 9.0% in the last two
years. Should this trend continue, future pension expense would likely increase.
At the end of each year, the Company determines the discount rate to be
used to discount plan liabilities. The discount rate reflects the current rate
at which the pension liabilities could be effectively settled at the end of the
year. In estimating this rate, the Company looks to rates of return on high
quality, fixed-income investments that receive one of the two highest ratings
given by a recognized ratings agency. At December 29, 2001, the Company
determined this rate to be 7.0%. Changes in discount rates over the past three
years have not materially affected pension income (expense), and the net effect
of changes in the discount rate, as well as the net effect of other changes in
actuarial assumptions and experience, have been deferred as allowed by SFAS No.
87.
At December 29, 2001, the Company's consolidated pension liability was
$22,600,000, up from $20,800,000 at the end of 2000. The increase was
principally due to the recognition of pension expense. For the year ended
December 29, 2001, the Company recognized consolidated pretax pension expense of
$2,200,000, down from $4,100,000 in 2000. The Company currently expects that
consolidated pension expense for 2002 will not be materially different from
2001.
Litigation and Tax Contingencies
We have been notified that we are a defendant in a number of legal
proceedings associated with employment and product liability matters. We do not
believe we are a party to any legal proceedings that will have a material
adverse effect on our consolidated financial position. It is possible, however,
that future results of operations for any particular quarterly or annual period
could be materially affected by changes in our assumptions related to these
proceedings.
As discussed in the footnotes of our consolidated financial statements,
as of December 29, 2001, we do not believe it is probable that the ultimate
resolution of these claims will result in any liability to the Company. This
conclusion is based on consultation with outside counsel handling our defense in
these matters, and also upon a combination of litigation and settlement
strategies. Certain litigation is being addressed before juries in states where
past jury awards have been significant. To the extent additional information
arises or our strategies change, it is possible that our best estimate of our
probable liability in these matters may change. We recognize the costs of legal
defense in the periods incurred. Accordingly, the future costs of defending
claims are not included in our estimated liability. We can not currently
accurately estimate these costs, but the effect of following such an accrual
policy on a consistent basis would not have had a significant effect of reported
results of operations for 2001.
35
We frequently face challenges from domestic and foreign tax authorities
regarding the amount of taxes due. These challenges include questions regarding
the timing and amount of deductions and the allocation of income among various
tax jurisdictions. In evaluating the exposure associated with our various filing
positions, we record reserves for probable exposures. Based on our evaluation of
our tax positions, we believe we have appropriately accrued for probable
exposures. To the extent we were to prevail in matters for which accruals have
been established or be required to pay amounts in excess of our reserves, our
effective tax rate in a given financial statement period may be materially
impacted.
Promotional Accruals
We offer various trade promotional and cooperative advertising programs
to qualified customers. In addition, we sponsor consumer promotion programs to
drive sell through of our products to the end user. At December 29, 2001, the
Company has recorded accruals for trade promotions, cooperative advertising and
consumer promotions aggregating $6,300,000. We routinely analyze the results of
these programs to evaluate the success of the programs along with the adequacy
of the expense recorded.
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 $150,000,000, comprised of revolving notes. Letter of Credit
obligations under the revolver portion of the DIP Facility are limited to
$125,000,000. The DIP Facility is intended to provide the Company with the
additional 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, and 50% to 65% of
eligible raw materials or finished goods inventory. 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 30,
2002 was $89,000,000 and, in addition, the Company had $93,900,000 in invested
cash with the agent at March 30, 2002.
The lenders under the DIP Facility have a super-priority administrative
expense claim against the estates of the Debtors. The DIP Facility expires on
June 30, 2002. 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 the period from
December 31, 2001 to June 30, 2002 to a maximum of $50,000,000.
Cash provided by operating activities in 2001 totaling $72,300,000
benefited from decreases in working capital while cash provided by operating
activities in 2000 totaling $17,600,000 benefited from decreases in working
capital and positive cash flow from the liquidation of the Company's
discontinued Sports and Licensing operation.
For 2001, the primary factors in reconciling from the loss from
continuing operations of $157,800,000 to cash provided by operating activities
totaling $72,300,000 were depreciation and amortization of $75,500,000, an
inventory reduction of $175,800,000 and an increase in write-downs and reserves
of $41,900,000 principally related to the costs associated with the closure of
certain of the Company's higher cost facilities. These additive factors were
partially offset by a decrease in liabilities subject to compromise of
$56,500,000 and other working capital changes of $40,800,000. Cash paid for
reorganization items totaled $29,300,000.
Net cash used for investing activities totaled $31,800,000 in 2001
compared with net cash provided by investing
36
activities of $20,300,000 in 2000. Capital expenditures were higher in 2001
($46,700,000 compared with $24,500,000 in 2000). Proceeds from fixed asset sales
were $500,000 lower than 2000, and 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 $40,000,000 in 2002. As
stated above, the DIP loan limits annual capital expenditures to a maximum of
$50,000,000 for the period December 31, 2001 to June 30, 2002.
Net repayment from financing activities were $20,700,000 in 2001
compared with $55,000,000 in 2000, due to the favorable comparison in operating
cash flows and additional cash retained in 2000, offset partially by the
unfavorable comparison in investing cash flows.
Cash provided by operating activities in 2000 totaling $17,600,000
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 $383,100,000 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 $202,900,000 to cash provided by operating activities
totaling $17,600,000 were depreciation and amortization of $107,500,000, a
decrease in notes and accounts receivable of $88,800,000, an inventory reduction
of $59,900,000 (excluding the effects of asset sales) and an increase in
write-downs and reserves of $68,500,000 principally related to the costs
associated with the closure of certain of the Company's higher cost facilities,
other working capital changes of $78,700,000 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.
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 $240,100,000 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 29, 2001, or December 30, 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 29, 2001 and
December 30, 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 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 29, 2001 and December 30, 2000. The Company believes such lease should
be characterized as a financing arrangement in the Reorganization Cases which
would
37
result in the cancellation of any obligation in connection with the distribution
to the lessor under the Third Amended 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
that 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 current Disclosure Statement filed on February 4,
2002 did not provide any recovery to FTL Inc.'s equity security holders.
ACCORDINGLY, MANAGEMENT EXPECTS 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 Second Amended Reorganization Plan on February 4,
2002. On March 19, 2002, FTL Ltd. and FTL Inc. filed the Supplement to the
Disclosure Statement and the Third Amended Reorganization Plan. The Third
Amended Reorganization Plan provides for a capital structure that 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 2001, the Financial Accounting Standards Board issued SFAS No.
141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets, effective for fiscal years beginning after December 15, 2001. Under the
new rules, goodwill and intangible assets deemed to have indefinite lives will
no longer be amortized but will be subject to annual impairment tests in
accordance with the Statements. Other intangible assets will continue to be
amortized over their useful lives.
The Company adopted SFAS Nos. 141 and 142 on December 30, 2001. The
Company will apply the new rules on accounting for goodwill and other intangible
assets beginning in the first quarter of 2002. Application of the
non-amortization provisions of the Statement is expected to result in an
increase in net income of $24,600,000 ($0.37 per share) per year. During 2002,
the Company will perform the required impairment tests of goodwill and
indefinite lived intangible assets as of December 30, 2001 and has not yet
determined what the effect of these tests will be on the earnings and financial
position of the Company.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144),
which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets and supersedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and
the accounting and reporting provisions of APB Opinion No. 30, Reporting the
Results of Operations for a disposal of a segment of a business. SFAS 144 is
effective for fiscal years beginning after December 15, 2001, with earlier
application encouraged. Adoption of SFAS 144 in the first quarter of 2002, had
no impact on the Company's financial position and results of operations.
38
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 that 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
$819,100,000 and $615,700,000 at December 29, 2001 and December 30, 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
$487,500,000 and $789,500,000 as compared to the carrying value of debt at
December 29, 2001 and December 30, 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 2000 to 2001 and 2001 to 2002 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. Accordingly, a hypothetical change in interest
rates would not necessarily impact the fair value of the Company's fixed rate
debt.
The Company had $646,700,000 and $745,700,000 of variable rate debt
outstanding at December 29, 2001 and December 30, 2000, respectively. At these
borrowing levels, a hypothetical 10% adverse change in the interest rates in
effect at year-end 2001 and 2000 would have had unfavorable impacts of
$3,900,000 and $7,900,000 in 2001 and 2000, respectively, on the Company's
pretax earnings and cash flows. The primary interest rate exposures on floating
rate debt are with respect to the London interbank rate and to the U.S. 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
$243,000,000 at December 29, 2001 and $279,000,000 at December 30, 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 $9,600,000 at December 29, 2001 and $9,100,000 at
December 30, 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, and enters
39
into fixed price purchase contracts for its production 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 futures and fixed price contract
positions. Inventory on hand has been excluded from the analysis. Market risk,
estimated as the potential loss in fair value resulting from a hypothetical 10%
adverse change in cotton futures prices, was approximately $9,500,000 at
December 29, 2001. The fair value of the Company's position is the fair value
calculated by valuing its net position at quoted futures prices.
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.
40
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
[Enlarge/Download Table]
Report of Ernst & Young LLP, Independent Auditors.............................................................. 42
Consolidated Balance Sheet
December 29, 2001 and December 30, 2000...................................................................... 43
Consolidated Statement of Operations
for Each of the Years Ended December 29, 2001, December 30, 2000 and January 1, 2000......................... 44
Consolidated Statement of Stockholders' Equity (Deficit)
for Each of the Years Ended December 29, 2001, December 30, 2000 and January 1, 2000......................... 45
Consolidated Statement of Cash Flows
for Each of the Years Ended December 29, 2001, December 30, 2000 and January 1, 2000......................... 46
Notes to Consolidated Financial Statements..................................................................... 47
Supplementary Data (Unaudited)................................................................................. 98
Financial Statement Schedule:
Schedule II -- Valuation and Qualifying Accounts................................................................ 110
Note: All other schedules are omitted because they are not applicable or not required.
41
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors of
Fruit of the Loom, Inc.
We have audited the accompanying consolidated balance sheet of Fruit of
the Loom, Inc. and Subsidiaries (the "Company") as of December 29, 2001 and
December 30, 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 29, 2001. 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, Inc. and Subsidiaries at December 29, 2001 and December 30, 2000,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 29, 2001, 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,
Inc., and certain of its subsidiaries, and its parent, Fruit of the Loom, Ltd.
(collectively the "Companies") filed a voluntary petition for relief under
Chapter 11 of the United States Bankruptcy Code ("Chapter 11"). The Companies
are 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, confirmation of a plan of reorganization by the Bankruptcy
Court, future profitable operations, the ability to comply with the
debtor-in-possession financing facility, and the ability to generate sufficient
cash from operations and obtain financing arrangements to meet future
obligations. 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.
As discussed in the Notes to the consolidated financial statements,
effective December 30, 2000, the Company changed its method for accounting for
derivative financial instruments to conform with SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities.
ERNST & YOUNG LLP
Chicago, Illinois
February 15, 2002, except for the "Reorganization Cases" note
as to which the date is March 19, 2002
42
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
(DEBTORS IN POSSESSION)
CONSOLIDATED BALANCE SHEET
[Enlarge/Download Table]
DECEMBER 29, DECEMBER 30,
2001 2000
---- ----
(IN THOUSANDS OF DOLLARS)
ASSETS
Current Assets
Cash and cash equivalents (including restricted cash of $2,900,000 and
$11,700,000, respectively)................................................... $ 192,400 $ 131,200
Notes and accounts receivable (less allowance for possible
losses of $29,500,000 and $44,800,000, respectively)......................... 135,100 142,400
Inventories..................................................................... 388,200 564,000
Other ........................................................................ 25,900 25,900
------------- ------------
Total current assets.................................................... 741,600 863,500
------------- ------------
Property, Plant and Equipment
Land ........................................................................ 11,200 14,300
Buildings, structures and improvements.......................................... 190,200 265,900
Machinery and equipment......................................................... 592,000 738,200
Construction in progress........................................................ 7,000 4,000
------------- ------------
800,400 1,022,400
Less accumulated depreciation................................................... 601,100 783,100
------------- ------------
Net property, plant and equipment....................................... 199,300 239,300
------------- ------------
Other Assets
Goodwill (less accumulated amortization of $401,400,000 and $376,700,000,
respectively)................................................................ 581,900 606,600
Net assets of discontinued operations........................................... 2,000 2,000
Other ........................................................................ 53,600 76,300
------------- ------------
Total other assets...................................................... 637,500 684,900
------------- ------------
$ 1,578,400 $ 1,787,700
============= ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Current maturities of long-term debt............................................ $ 647,400 $ 746,400
Trade accounts payable.......................................................... 24,300 31,500
Net liabilities of discontinued operations...................................... 2,100 5,100
Other accounts payable and accrued expenses..................................... 196,600 232,800
------------- ------------
Total current liabilities............................................... 870,400 1,015,800
------------- ------------
Noncurrent Liabilities
Long-term debt.................................................................. 410,700 410,300
Affiliate notes and accounts payable............................................ 248,600 128,700
Other ........................................................................ 87,800 11,500
------------- ------------
Total noncurrent liabilities............................................ 747,100 550,500
------------- ------------
Liabilities Subject to Compromise
Unrelated parties............................................................... 498,100 554,600
Affiliates...................................................................... 386,300 386,300
------------- ------------
Total liabilities subject to compromise................................. 884,400 940,900
------------- ------------
Exchangeable Preferred Stock, $.01 par value; authorized
6,000,000 shares; issued and outstanding 5,229,421 shares........................ 71,700 71,700
------------- ------------
Common Stockholder's Deficit
Common stock and capital in excess of par value, $.01 par value Common
Stock--authorized, 75,000,000 shares; issued and outstanding,
66,905,348 shares............................................................ 255,100 255,100
Accumulated deficit............................................................. (728,200) (553,000)
Due from parent................................................................. (423,500) (423,500)
Accumulated other comprehensive loss............................................ (98,600) (69,800)
------------- ------------
Total common stockholder's deficit...................................... (995,200) (791,200)
------------- ------------
$ 1,578,400 $ 1,787,700
============= ============
See accompanying notes.
43
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
(DEBTORS IN POSSESSION)
CONSOLIDATED STATEMENT OF OPERATIONS
[Enlarge/Download Table]
YEAR ENDED
-------------------------------------------------
DECEMBER 29, DECEMBER 30, JANUARY 1,
2001 2000 2000
---- ---- ----
(IN THOUSANDS OF DOLLARS)
Net sales
Unrelated parties............................................. $ 1,341,800 $ 1,553,600 $ 1,787,200
Affiliates.................................................... 499,100 809,500 499,400
------------- -------------- --------------
1,840,900 2,363,100 2,286,600
------------- -------------- --------------
Cost of sales
Unrelated parties............................................. 1,037,000 1,321,300 1,715,200
Affiliates.................................................... 632,100 928,000 602,700
------------- -------------- --------------
1,669,100 2,249,300 2,317,900
------------- -------------- --------------
Gross earnings (loss)............................................ 171,800 113,800 (31,300)
Selling, general and administrative expenses..................... 193,800 232,400 332,600
Goodwill amortization............................................ 24,600 24,600 24,600
------------- -------------- --------------
Operating earnings (loss)........................................ (46,600) (143,200) (388,500)
Interest expense................................................. (97,400) (124,300) (97,100)
Other income (expense)--net...................................... 900 (1,200) (58,900)
------------- -------------- --------------
Earnings (loss) from continuing operations before
reorganization items and income tax provision................. (143,100) (268,700) (544,500)
Reorganization items............................................. (33,800) (48,200) (3,000)
------------- -------------- --------------
Earnings (loss) from continuing operations before
income tax provision....................................... (176,900) (316,900) (547,500)
Income tax provision............................................. (19,100) (114,000) 37,200
------------- -------------- --------------
Earnings (loss) from continuing operations.................... (157,800) (202,900) (584,700)
Discontinued operations--Sports & Licensing
Earnings (loss) from operations............................ -- (2,600) (37,600)
Estimated loss on disposal................................. (18,000) (20,200) (47,500)
------------- -------------- --------------
Net earnings (loss)........................................ $ (175,800) $ (225,700) $ (669,800)
============= ============== ==============
See accompanying notes.
44
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
(DEBTORS IN POSSESSION)
CONSOLIDATED STATEMENT OF COMMON STOCKHOLDER'S EQUITY (DEFICIT)
[Enlarge/Download Table]
COMMON
STOCK ACCUMULATED
AND CAPITAL DUE OTHER
COMMON IN EXCESS OF RETAINED FROM COMPREHENSIVE
SHARES PAR VALUE EARNINGS PARENT INCOME (LOSS) TOTAL
------ --------- -------- ------ ------------- -----
(IN THOUSANDS OF DOLLARS)
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................. (17) 100 100
---------
FTL Inc. Class B Shares exchanged for
FTL Inc. Preferred Stock................... (5,229) (71,700) (71,700)
---------
Preferred dividends.......................... (2,700) (2,700)
---------
Sale of subsidiaries to FTL Ltd.............. 68,600 (423,500) (354,900)
---------
Net loss..................................... (669,800) (669,800)
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..................... (666,800)
--------- --------- ---------- ---------- ---------- ---------
BALANCE, JANUARY 1, 2000........................ 66,905 255,100 (327,300) (423,500) (51,400) (547,100)
---------
Net loss..................................... (225,700) (225,700)
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 loss.............. (10,900) (10,900)
---------
Comprehensive loss--2000..................... (244,100)
--------- --------- ---------- ---------- ---------- ---------
BALANCE, DECEMBER 30, 2000...................... 66,905 255,100 (553,000) (423,500) (69,800) (791,200)
---------
Net loss..................................... (175,800) (175,800)
Foreign currency translation
adjustments--net.......................... (6,900) (6,900)
Minimum pension liability adjustment......... (13,400) (13,400)
Unrealized loss on available for sale securities
Net holding loss.......................... (4,700) (4,700)
Gain reclassified to net loss............. (300) (300)
Deferred hedging loss........................ (2,900) (2,900)
---------
Comprehensive loss--2001..................... (85,900)
------- --------- ---------- ---------- --------- ---------
BALANCE, DECEMBER 29, 2001...................... 66,905 $ 255,100 $ (728,800) $ (423,500) $ (98,000) $(995,200)
======= ========= ========== ========== ========= =========
See accompanying notes.
45
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
(DEBTORS IN POSSESSION)
CONSOLIDATED STATEMENT OF CASH FLOWS
[Enlarge/Download Table]
YEAR ENDED
---------------------------------------------------
DECEMBER 29, DECEMBER 30, JANUARY 1,
2001 2000 2000
---- ---- ----
(IN THOUSANDS OF DOLLARS)
CASH FLOWS FROM OPERATING ACTIVITIES
Earnings (loss) from continuing operations.................... $ (157,800) $ (202,900) $ (584,700)
Adjustments to reconcile to net operating cash flows:
Depreciation and amortization.............................. 75,500 107,500 115,400
Deferred income tax provision.............................. (300) 200 36,700
Decrease (increase) in notes and accounts receivable....... 7,300 88,200 (127,600)
Decrease in inventories.................................... 175,800 59,900 34,800
Increase (decrease) in trade accounts payable.............. (7,200) 13,600 32,000
Other working capital changes.............................. (40,800) 78,700 104,200
(Gain) loss on sale of marketable equity securities........ (5,500) (14,800) 600
Net decrease in liabilities subject to compromise.......... (56,500) (142,300) --
Consolidation of operations--writedowns and reserves....... 41,900 68,500 --
Net payments on retained liabilities related to
former subsidiaries...................................... (1,400) (1,400) (8,600)
Cash flows of discontinued operations...................... (1,600) 25,400 (47,800)
Other--net................................................. 72,200 (34,000) 61,900
-------------- -------------- -------------
Net operating cash flows before reorganization items..... 101,600 46,600 (383,100)
Net cash used for reorganization items..................... (29,300) (29,000) --
-------------- -------------- -------------
Net operating cash flows................................. 72,300 17,600 (383,100)
-------------- -------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures.......................................... (46,700) (24,500) (33,600)
Proceeds from sale of property, plant and equipment........... 7,900 8,400 21,700
Proceeds from sale of marketable equity securities............ 7,900 16,600 6,100
Proceeds from sale of Gitano.................................. -- 18,100 --
Other--net.................................................... (900) 1,700 (24,600)
-------------- -------------- -------------
Net investing cash flows................................. (31,800) 20,300 (30,400)
-------------- -------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
DIP financing proceeds........................................ 1,064,300 1,381,200 152,200
DIP financing payments........................................ (1,164,300) (1,443,700) --
Proceeds from issuance of long-term debt...................... -- -- 240,100
Proceeds under line-of-credit agreements...................... -- -- 727,300
Payments under line-of-credit agreements...................... -- (8,700) (507,200)
Principal payments on long-term debt and capital leases....... (700) (600) (282,300)
Increase in affiliate notes and accounts payable.............. 121,400 126,800 122,200
Preferred stock dividends..................................... -- -- (1,900)
-------------- -------------- -------------
Net financing cash flows................................. 20,700 55,000 450,400
-------------- -------------- -------------
Net increase in cash and cash
equivalents (including restricted cash)....................... 61,200 92,900 36,900
Cash and cash equivalents (including restricted cash)
at beginning of year.......................................... 131,200 38,300 1,400
-------------- -------------- -------------
Cash and cash equivalents (including restricted cash) at end of year $ 192,400 $ 131,200 $ 38,300
============== ============== =============
See accompanying notes.
46
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
(DEBTORS IN POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REORGANIZATION CASES
GENERAL. Fruit of the Loom, Inc., a Delaware corporation ("FTL Inc.,
Fruit of the Loom or the Company") is a subsidiary of Fruit of the Loom, Ltd., a
Cayman Islands company ("FTL Ltd."). Please refer to FTL Ltd.'s Annual Report on
Form 10-K for consolidated results of operations. FTL Inc. and 32 direct and
indirect subsidiaries of FTL Inc., 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. Sections 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"). 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
Inc., as debtor and debtor-in-possession, has continued to manage and operate
their assets and businesses subject to the supervision and orders of the
Bankruptcy Court, pending confirmation of the Third Amended Joint Plan of
Reorganization of FTL Ltd. under Chapter 11 of the Bankruptcy Code (the "Third
Amended Reorganization Plan") contained in the Supplement to the Disclosure
Statement with respect to Third Amended Joint Plan of Reorganization of Fruit of
the Loom (the "Supplement to the Disclosure Statement") filed with the
Bankruptcy Court on March 19, 2002, pursuant to Section 1125 of the Bankruptcy
Code. Because FTL Inc. is operating as debtor-in-possession under the Bankruptcy
Code, the existing directors and officers of FTL Inc. continue to govern and
manage the operations of FTL Inc., subject to the supervision and orders of the
Bankruptcy Court.
Certain subsidiaries of the Company were not included in the
Reorganization Cases. Condensed combined financial statements of the entities in
reorganization are presented herein.
REORGANIZATION PLAN PROCEDURES. The Debtors expected to reorganize their
affairs under the protection of Chapter 11 and, accordingly, filed the Second
Amended Joint Plan of Reorganization of Fruit of the Loom under Chapter 11 of
the Bankruptcy Code (the "Second Amended Reorganization Plan") contained in the
Disclosure Statement pursuant to Section 1125 of the Bankruptcy Code with
respect to Second Amended Joint Plan of Reorganization of Fruit of the Loom
under Chapter 11 of the Bankruptcy Code (the "Disclosure Statement") with the
Bankruptcy Court on February 4, 2002. The Bankruptcy Court entered approval of
the Disclosure Statement on February 6, 2002. Holders of Claims that are
impaired and are to receive distributions are entitled to vote to accept or
reject the Second Amended Reorganization Plan and/or Amended Scheme of
Arrangement. The Disclosure Statement, Second Amended Reorganization Plan and
Amended Scheme of Arrangement have been transmitted to these holders along with
ballots and voting procedures. On March 19, 2002, FTL Ltd. and FTL Inc. filed
the Supplement to the Disclosure Statement and the Third Amended Reorganization
Plan. Holders of Claims that are impaired and are to receive distributions have
also received, and are entitled to change their vote based on their review of,
the Supplement to the Disclosure Statement and the Third Amended Reorganization
Plan. Unless changed, a vote on the Second Amended Reorganization Plan will be
counted as a vote on the Third Amended Reorganization Plan. The Bankruptcy Court
has scheduled a hearing for April 19, 2002, to confirm the results of the vote.
The Third Amended Reorganization Plan provides no recovery to FTL Inc.'s equity
security holders. All outstanding equity securities will be cancelled, current
holders will receive no distribution with respect to FTL Inc. equity securities
(common or preferred stock), and new equity will be issued to creditors holding
impaired claims.
THE BERKSHIRE AGREEMENT. The Third Amended Reorganization Plan, among
other things, implements the sale of Fruit of the Loom's basic apparel business
(the "Apparel Business") as a going concern to New FOL Inc. (the "Purchaser"), a
wholly owned subsidiary of Berkshire Hathaway Inc. ("Berkshire"), pursuant to
the terms, and subject to the conditions, of the Asset Purchase Agreement dated
as of November 1, 2001, (as amended, the "Berkshire Agreement"). Purchaser was
the successful bidder pursuant to the Bankruptcy Court approved auction process,
which followed a six-month marketing process. The Third Amended Reorganization
Plan also provides for the liquidation of the Debtors who are not transferred to
Purchaser under the Berkshire Agreement and of the non-Apparel Business assets
of Fruit of the Loom.
47
The Berkshire Agreement was entered into among FTL Inc., Union Underwear
Company, Inc. ("Union Underwear," a wholly-owned subsidiary of FTL Inc.) and FTL
Ltd., collectively as Sellers, New FOL Inc., as Purchaser, and Berkshire as
guarantor of New FOL Inc.'s obligations under the Berkshire Agreement. The
Berkshire Agreement provides, among other things, for the sale of the Apparel
Business through the sale of all of the capital stock of FTL Caribe Ltd., a
wholly-owned subsidiary of FTL Ltd., the issuance of new capital stock of
designated subsidiaries of Union Underwear which are Debtors, the transfer of
certain non-debtor subsidiaries that form a part of the Apparel Business, and
the transfer of any other assets of Sellers used in the Apparel Business, all to
be effectuated by the Third Amended Reorganization Plan. In addition, the
Berkshire Agreement provides that Purchaser will cause reorganized Fruit of the
Loom to offer employment to substantially all of the employees of Fruit of the
Loom and will assume all obligations with respect to the Union Underwear pension
plan.
The stated purchase price for the Apparel Business under the Berkshire
Agreement is $835,000,000, plus the assumption of approximately $31,000,000 in
capital leases. The purchase price is subject to adjustment for variances in
working capital from an agreed upon amount, and for any deficit between the
liabilities and assets of the Union Underwear pension plan. The purchaser will
assume the ordinary course post-petition liabilities and certain specified
prepetition liabilities of the business.
The Berkshire Agreement also requires that Fruit of the Loom continue to
operate the Apparel Business in accordance with past practices and consult with
Berkshire regarding certain matters pending confirmation of the Third Amended
Reorganization Plan and the closing under the Berkshire Agreement. The sale of
the Apparel Business is subject to approval of the Third Amended Reorganization
Plan. The operation of this business will be included in continuing operations
in the Company's consolidated financial statements until the Third Amended
Reorganization Plan is approved.
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 Inc.'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.
48
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
reviewed substantially all leases and executory contracts and have assumed or
rejected most of such leases and contracts. The remaining leases and executory
contracts are anticipated to be either assumed or rejected pursuant to a plan of
reorganization upon emergence from Chapter 11. Such rejections could result in
additional liabilities subject to compromise.
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
Reorganization 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.
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.
EXCHANGE LISTED SECURITIES
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 that it had fallen below certain continued listing
requirements, and the 7% Debentures due March 15, 2011 issued by FTL Inc. were
delisted.
FTL Ltd.'s Class A Ordinary Shares and FTL Inc.'s 8 7/8% Notes due 2006,
6 1/2% Notes due 2003, 7 3/8% Debentures dues 2023, and 7% Debentures due 2011
will be deregistered under the Securities Exchange Act of 1934, as amended, as
soon as possible on or after confirmation of the Third Amended Reorganization
Plan, and the dissolution of FTL Ltd. will automatically extinguish all the
issued shares of FTL Ltd.
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. The Company uses a 52 or 53 week year ending on the
Saturday nearest December 31. Fiscal years 2001, 2000 and 1999 ended on December
29, 2001, December 30, 2000 and January 1, 2000, 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
49
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 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 requires 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 in the second quarter of 2001 did not 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. The components of inventories at December 29, 2001 and December 30 2000,
respectively, are as follows:
[Enlarge/Download Table]
DECEMBER 29, DECEMBER 30,
2001 2000
---- ----
(IN THOUSANDS OF DOLLARS)
Finished Goods................................................... $ 343,600 $ 454,800
Work in process.................................................. 32,900 78,900
Materials and supplies........................................... 11,700 30,300
---------------- ---------------
$ 388,200 $ 564,000
================ ===============
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 has been amortized using the straight-line method
over periods ranging from 30 to 40 years. Amortization will cease with adoption
of Statement No. 142, Goodwill and Other Intangible Assets, effective in the
first quarter of 2002. See "IMPAIRMENT" below.
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
$2,600,000 at December 29, 2001 and $8,100,000 at December 30, 2000. The cost of
these securities totaled $2,600,000 at December 29, 2001 and $2,900,000 at
December 30, 2000. Other investments totaled $7,700,000 at December 29, 2001 and
$8,600,000 at December 30,
50
2000. The Company sold securities for aggregate proceeds of $7,900,000 in 2001
and $16,600,000 in 2000 and funded investments at an aggregate cost of
$1,000,000 in 2001 and $1,100,000 in 2000.
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 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
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 at any other time
since December 1999.
DERIVATIVES AND HEDGING ACTIVITIES--ADOPTION OF STATEMENT NO. 133.
Financial Accounting Standards Board Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities ("FAS 133"), requires that all
derivative instruments be recognized in the balance sheet as either assets or
liabilities at fair value. The accounting for changes in the fair value of a
derivative instrument depends on whether it has been designated and qualifies as
part of a hedging relationship and on the nature of the hedging relationship.
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 are 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 is immediately recognized in earnings.
The adoption of FAS 133 on December 31, 2000, resulted in no changes in
the Company's net loss or other comprehensive loss. 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 FAS 133. The exclusion generally does not
require derivative accounting for nonfinancial instruments that are in
quantities expected to be used over a reasonable period in the normal course of
business.
The Company purchases exchange traded cotton futures contracts to hedge
its exposure to the variability in future cash flows that is attributable to the
risk of changes in the market price of cotton until fixed price contracts for
the purchase of specific cotton are negotiated with producers and dealers. When
cotton futures market prices increase, the increase in future cash outflows for
hedged forecast cotton purchases is offset by a gain on the fair value of the
designated cotton futures contract. Conversely, when cotton futures market
prices decline, the decrease in future cash outflows for hedged forecast cotton
purchases is offset by a loss on the fair value of the designated cotton futures
contract. The effective portion of gain or loss on a cotton futures contract is
reported as a component of Other comprehensive income and reclassified to Cost
of sales in the same period that the cost of the cotton purchased in the hedged
transaction is recognized in income. Any remaining gain or loss on the cotton
futures contract in excess of the cumulative change in the present value of
future cash flows of the hedged forecast cotton purchase is recognized in Other
income (expense) in current earnings in the period of the change. Any gain or
loss deferred in Other comprehensive income related to a hedged forecast cotton
purchase no longer probable of occurring is recognized in Other income (expense)
in current earnings in the period of the change.
In 2001, to hedge a portion of its forecasted cotton needs, the Company
purchased cotton futures contracts maturing at various dates through July 2003.
Through December 29, 2001, net losses of $2,900,000 from changes in the fair
values of cotton futures have been deferred and included in Other comprehensive
income. The Company would expect to reclassify an insignificant portion of these
deferred gains and losses to income in the next twelve months, if realized,
based on forecasted
51
cotton purchases and average finished inventory turns. Gains or losses related
to hedge ineffectiveness, to derivative components excluded from the assessment
of hedge effectiveness or to discontinuance of hedge accounting have been
insignificant or have not occurred.
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 29, 2001 and December 30, 2000, were $3,100,000 and
$4,200,000, respectively.
SOFTWARE COSTS. Costs associated with the application development stage
of significant new computer software applications for internal use are deferred
and amortized over periods ranging from three to five years. Costs associated
with the preliminary and post-implementation stages of these projects are
expensed as incurred.
STOCK BASED COMPENSATION. The Company accounts for stock based
compensation in accordance with 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 that cover
substantially all U.S. and European 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. In the fourth quarter of 2001, the Company recorded a $20,000,000
charge for an allowed claim in the Reorganization Cases resulting from a
settlement agreement reached with the National Hockey League ("NHL"). The
liability was recorded in liabilities subject to compromise.
52
Operating results for Pro Player for each of the three years in the
period ended December 29, 2001 are classified as Discontinued Operations in the
accompanying statement of operations as follows (in thousands of dollars):
[Enlarge/Download Table]
2001 2000 1999
---- ---- ----
Net sales........................................................... $ 3,600 $ 30,000 $ 133,000
Cost of sales....................................................... 3,600 36,100 109,800
------------- ------------- ------------
Gross earnings (loss)............................................ -- (6,100) 23,200
Selling, general & administrative expenses.......................... (900) 14,300 52,500
Goodwill amortization............................................... -- 1,000 2,000
------------- ------------- ------------
Operating earnings (loss)........................................ 900 (21,400) (31,300)
Interest expense.................................................... -- (1,500) (5,500)
Other income (expense)--net......................................... 400 (9,300) (800)
------------- ------------- ------------
Net earnings (loss).............................................. 1,300 (32,200) (37,600)
Portion of net (earnings) loss charged to reserve for loss on
disposal......................................................... (1,300) 29,600
------------- ------------- -------------
Loss from discontinued operations................................ $ -- $ (2,600) $ (37,600)
============= ============= ============
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
and $5,500,000 in 2000 and 1999, respectively).
Assets and liabilities of the discontinued Pro Player segment consisted
of the following (in thousands of dollars):
[Enlarge/Download Table]
DECEMBER 29, DECEMBER 30,
2001 2000
---- ----
Inventories..................................................................... $ -- $ 500
Other accounts payable and accrued expenses..................................... (2,100) (5,600)
------------- -------------
Net current assets (liabilities)............................................. (2,100) (5,100)
------------- -------------
Property, plant and equipment................................................... 2,000 2,000
Liabilities subject to compromise............................................... (33,800) (13,900)
------------- -------------
(31,800) (11,900)
Reclassify liabilities subject to compromise.................................... 33,800 13,900
------------- -------------
Net non-current assets....................................................... 2,000 2,000
------------- -------------
Net liabilities of discontinued operations................................... $ (100) $ (3,100)
============= =============
Assets are shown at their expected net realizable values.
53
SPECIAL CHARGES
2001 Consolidation Costs
During 2001, the Company incurred costs in connection with the closure
of several manufacturing facilities in the United States and Canada, resulting
in special charges aggregating $46,200,000 for write-downs of inventory,
property, plant and equipment, severance and other costs. In 2001, the Company
finalized certain estimates principally related to the 1997 special charges,
resulting in reductions in 2001 consolidation costs of $3,600,000. Net charges
of $42,600,000 have been recorded in results of operations in the accompanying
consolidated financial statements in Selling, general and administrative
expenses.
These charges were recorded in the following quarters (in thousands of
dollars):
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1st quarter....................................................... $ 6,700
2nd quarter....................................................... 30,100
3rd quarter....................................................... 3,600
4th quarter....................................................... 2,200
----------
$ 42,600
These charges are categorized as follows (in thousands of dollars):
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FUTURE CASH NONCASH TOTAL CHARGES
----------- ------- -------------
Closing and disposal of U.S. and Canadian manufacturing
facilities.................................................... $ 4,100 $ 35,400 $ 39,500
Closing of European manufacturing and sales facilities........... 4,800 1,900 6,700
---------- ----------- -----------
Subtotal...................................................... 8,900 37,300 46,200
Finalization of prior year consolidation costs/special charges.... (1,200) (2,400) (3,600)
---------- ----------- -----------
$ 7,700 $ 34,900 $ 42,600
========== =========== ===========
Each of these categories is discussed below.
As part of the Company's continuing business strategy to improve
profitability in future years, the Company continued to focus on eliminating
unprofitable and low volume SKU's. In addition, the overall market for the
Company's activewear products declined substantially, and the Company
experienced reduced market share. As a result, the Company closed several of its
production facilities in 2001. Accordingly, the Company terminated 431 salaried
and 2,867 production personnel related to closed operations. Charges related to
closing and disposal of U.S. and Canadian manufacturing facilities consisted of
the following (in thousands of dollars):
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Loss on disposal of facilities, improvements and equipment...................................... $ 36,000
Severance costs................................................................................. 3,000
Other........................................................................................... 500
------------
$ 39,500
The loss on disposal of facilities, improvements and equipment results
from the write-down of property, plant and equipment to their net realizable
values. Net realizable values were determined by appraisals and historical
experience 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).
54
These charges were recorded in the appropriate quarters of 2001 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.
In Europe, as part of its continuing review of its sales and
manufacturing organization, the Company continued to evaluate the strategic
position and cost effectiveness of its organization and facilities. As a result
of this continuing review, the Company shut down one of its European
manufacturing facilities and several sales offices throughout Europe. In
connection therewith, the Company recorded charges aggregating $6,700,000 in the
third and fourth quarters of 2001, as detailed below:
[Enlarge/Download Table]
Loss on disposal of facilities, improvements and equipment...................................... $ 1,900
Severance costs................................................................................. 3,700
Other........................................................................................... 1,100
------------
$ 6,700
Other costs consist of a settlement with the Industrial Development
Board of Northern Ireland for repayment of grants as the Company failed to
maintain minimum employment levels stipulated in the grants.
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 incurred in 2001, cash charges totaled $8,900,000,
$3,600,000 of which were paid in 2001 with the remainder expected to be paid in
2002. Also, $6,700,000 of the consolidation costs were related to restructuring
charges as defined by EITF 94-3.
Following is a summary of the 2001 consolidation costs and related
reserve balances at December 29, 2001 (in thousands of dollars):
[Enlarge/Download Table]
RESERVE
2001 OTHER BALANCE AT
CONSOLIDATION CASH ACTIVITY DECEMBER 29,
COSTS PAYMENTS IN 2001 2001
----- -------- ------- ----
Closing and disposal of U.S. and Canadian manufacturing
facilities.......................................... $ 37,900 $ -- $ 10,300 $ 27,600
Impairment of European manufacturing facilities......... 6,700 2,800 (200) 4,100
Other................................................... 1,600 800 (400) 1,200
---------- --------- --------- ----------
$ 46,200 $ 3,600 $ 9,700 $ 32,900
========== ========= ========= ==========
Other activity in 2001 represents assets written off. Assets held for
sale included in other non-current assets in the accompanying Consolidated
Balance Sheet totaled $9,200,000 and $12,400,000 at December 29, 2001 and
December 30, 2000, respectively.
2000 Consolidation Costs
In the fourth quarter of 2000, the Company incurred costs in connection
with the closure of several manufacturing facilities in the United States,
resulting in special charges aggregating $73,300,000 for write-downs of
property, plant and equipment, other assets and contractual obligations. These
charges were recorded in results of operations in the accompanying consolidated
financial statements in Selling, general and administrative expenses.
These charges are categorized as follows (in thousands of dollars):
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FUTURE CASH NONCASH TOTAL CHARGES
----------- ------- -------------
Closing and disposal of U.S. manufacturing
facilities.................................................... $ 7,300 $ 58,400 $ 65,700
Closing of European manufacturing facilities...................... 4,700 2,000 6,700
Receivable write-off.............................................. -- 900 900
---------- ----------- -----------
$ 12,000 $ 61,300 $ 73,300
========== =========== ===========
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Each of these categories is discussed below.
A significant part of the Company's business strategy 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 fourth quarter 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. manufacturing and
distribution facilities consisted of the following (in thousands of dollars):
[Enlarge/Download Table]
Loss on disposal of facilities, improvements and equipment...................................... $ 58,500
Severance costs................................................................................. 7,200
------------
$ 65,700
The loss on disposal of facilities, improvements and equipment results
from the write-down 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).
These charges were recorded in the fourth quarter of 2000 as required by
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 organization and
facilities in Europe. As a result of this continuing review, the Company closed
two of its European manufacturing facilities and recorded a charge of $6,700,000
in the fourth quarter of 2000 to write-down the facilities to their fair market
value. Of this amount, $4,700,000 represented severance costs.
The Company recorded a $900,000 non-cash charge to write-off an
uncollectible receivable.
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 $12,000,000, $1,700,000 and $9,800,000
of which were paid in 2001 and 2000, respectively, with the remainder expected
to be paid in 2002. Also, $11,500,000 of the consolidation costs were 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):
[Enlarge/Download Table]
RESERVE
2000 OTHER BALANCE AT
CONSOLIDATION CASH ACTIVITY DECEMBER 30,
COSTS PAYMENTS IN 2000 2000
----- -------- ------- ----
Closing and disposal of U.S. manufacturing facilities... $ 65,700 $ 5,100 $ -- $ 60,600
Impairment of European manufacturing facilities......... 6,700 4,700 2,000 --
Other asset write-downs and reserves.................... 900 -- 900 --
---------- --------- --------- ----------
$ 73,300 $ 9,800 $ 2,900 $ 60,600
========== ========= ========= ==========
Other activity in 2000 represents assets written off.
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A rollforward of the 2000 consolidation costs from December 30, 2000
through December 29, 2001 is presented below (in thousands of dollars):
[Enlarge/Download Table]
RESERVE RESERVE
BALANCE AT BALANCE AT
DECEMBER 30, CASH INCOME OTHER DECEMBER 29,
2000 PAYMENTS (EXPENSE) ACTIVITY 2001
---- -------- --------- -------- ----
Closing and disposal of U.S.
manufacturing facilities.................... $ 60,600 $ 1,700 $ (2,000) $ 55,900 $ 5,000
========== ========== ========== ============ =========
Other activity in 2001 consists primarily of disposal of property, plant
and equipment. The Company sold five facilities in the second quarter of 2001 at
an aggregate price of $4,100,000 which resulted in a loss of $2,300,000 in
addition to the charges recorded in 2000. The loss was recorded in other expense
in the accompanying consolidated statement of operations. In addition, the
Company sold equipment in the first nine months of 2001 for an aggregate price
of $2,200,000 and recorded no gain or loss on the sales compared to the written
down balance. Also, the Company finalized certain of the 2000 consolidation
costs in the second quarter of 2001, resulting in a reduction in 2001
consolidation costs of $300,000 in the second quarter.
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 write-downs 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):
[Enlarge/Download Table]
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 write-downs and reserves.............................. 23,600 148,300 171,900
----------- ---------- ------------
$ 84,200 $ 261,600 $ 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
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).
57
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 29, 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. 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 write-downs and reserves
totaling $171,900,000 (of which $148,300,000 were non-cash charges) comprised of
the following (in thousands of dollars):
[Enlarge/Download Table]
TOTAL ASSET OTHER RESERVES
CHARGES WRITE-DOWN 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 represented 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 $70,400,000 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 for 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.
58
The above charges were recorded in the accompanying Consolidated
Statement of Operations as follows (in thousands of dollars):
[Enlarge/Download Table]
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 write-downs 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 29, 2001, cash charges total approximately
$65,900,000 to be paid in 2002 and future years. The Company made cash payments
related to the 1999 special charges aggregating $3,300,000 and $6,000,000 in
2000 and 1999, respectively. See "SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES--USE OF ESTIMATES."
Following is a summary of the 1999 special charges and related reserve
balances at January 1, 2000 (in thousands of dollars):
[Enlarge/Download Table]
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 write-downs 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.
A rollforward of the 1999 special charges from January 1, 2000 through
December 30, 2000 is presented below (in thousands of dollars):
[Enlarge/Download Table]
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 write-downs and reserves............. 72,100 600 9,000 40,000 22,500
---------- ---------- ---------- ------------ ---------
$ 167,700 $ 3,300 9,000 $ 70,100 $ 85,300
========== ========== ========== ============ =========
In the fourth quarter of 2000, the Company finalized certain reserves
related to the 1999 special charges, resulting in a decrease to selling, general
and administrative expenses aggregating $9,000,000.
59
A rollforward of the 1999 special charges from December 30, 2000 through
December 29, 2001 is presented below (in thousands of dollars):
[Enlarge/Download Table]
RESERVE RESERVE
BALANCE AT BALANCE AT
DECEMBER 30, CASH INCOME OTHER DECEMBER 29,
2000 PAYMENTS (EXPENSE) ACTIVITY 2001
---- -------- --------- -------- ----
Provisions and losses on the sales
of closeout and irregular merchandise....... $ 4,900 $ -- $ -- $ 4,900 $ --
Severance........................................ 28,600 -- -- -- 28,600
Debt guarantee................................... 29,300 -- -- -- 29,300
Other asset write-downs and reserves............. 22,500 -- -- 14,500 8,000
---------- ---------- ---------- ------------ ---------
$ 85,300 $ -- -- $ 19,400 $ 65,900
========== ========== ========== ============ =========
Other activity in 2000 and 2001 primarily consists of inventory reserves
which were relieved as the inventory was sold..
1997 Special Charges
In the fourth quarter of 1997, the Company recorded charges for costs
related to the closing and disposal of a number of domestic manufacturing and
distribution facilities, impairment of manufacturing equipment and other assets
and certain European manufacturing and distribution facilities, and other costs
associated with the Company's world-wide restructuring of manufacturing and
distribution facilities. These and other special charges totaled $441,700,000
($372,200,000 after tax) categorized as follows (in thousands of dollars):
[Enlarge/Download Table]
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 WRITE-DOWNS 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.
60
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, 1999. Equipment has been substantially all sold or scrapped, and real
estate is being sold. 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. 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 continued 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.
61
The Company recorded charges for other asset write-downs and reserves
totaling $103,600,000 comprised of the following (in millions of dollars).
[Enlarge/Download Table]
OTHER
TOTAL ASSET RESERVES AND
CHARGES WRITE-DOWN 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 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 write-down
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
62
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):
[Enlarge/Download Table]
SELLING, IMPAIRMENT
GENERAL AND WRITE
COST OF ADMINISTRATIVE DOWN OF OTHER DISCOUNTED
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 write-downs 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, $2,100,000 and
$600,000 of these cash charges in 1998, 1999, 2000 and 2001, respectively. Also,
the Company finalized its estimate of certain of these special charges in 1998,
1999 and 2001. Approximately $62,300,000 is scheduled to be paid in 2002. A
portion of the cash charges scheduled to be paid in 2002 represent liabilities
subject to compromise under the bankruptcy laws. See "SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES--USE OF ESTIMATES."
63
Following is a summary of the 1997 special charges and related reserve
balances at December 31, 1997 (in thousands of dollars):
[Enlarge/Download Table]
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 WRITE-DOWNS AND RESERVES
Inventory valuation provisions............................... 49,800 -- -- 49,800
Other accruals............................................... 53,800 7,400 9,200 37,200
------------ ------------ ------------ -----------
103,600 7,400 9,200 87,000
------------ ------------ ------------ -----------
CHANGES IN ESTIMATES OF 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.
64
A rollforward of the 1997 special charges through January 2, 1999 is
presented below (in thousands of dollars):
[Enlarge/Download Table]
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 WRITE-DOWNS 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 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):
[Enlarge/Download Table]
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.
65
A rollforward of the 1997 special charges through January 1, 2000 is
presented below (in thousands of dollars):
[Enlarge/Download Table]
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 WRITE-DOWNS 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.
66
A rollforward of the 1997 special charges through December 30, 2000 is
presented below (in thousands of dollars):
[Enlarge/Download Table]
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 WRITE-DOWNS 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.
67
A rollforward of the 1997 special charges through December 29, 2001 is
presented below (in thousands of dollars):
[Enlarge/Download Table]
RESERVE RESERVE
BALANCE AT CASH INCOME OTHER BALANCE AT
DECEMBER 30, PAYMENTS (EXPENSE) ACTIVITY DECEMBER 29,
2000 IN 2001 IN 2001 IN 2001 2001
---- ------- ------- ------- ----
CLOSING AND DISPOSAL OF U.S. MANUFACTURING
AND DISTRIBUTION FACILITIES
Loss on sale of facilities, improvements
and equipment:
Sewing, finishing and distribution
facilities.................................. $ 23,200 $ -- $ -- $ 17,400 $ 5,800
Impairment of mills to be sold................ 13,400 -- -- 8,400 5,000
Lease residual guarantees..................... 54,200 -- -- -- 54,200
Other equipment............................... 6,100 -- -- 2,600 3,500
---------- ----------- ----------- ------------ -----------
96,900 -- -- 28,400 68,500
Severance costs................................... 200 -- 200 -- --
Other accruals.................................... 1,900 -- 1,900 -- --
---------- ----------- ----------- ------------ -----------
99,000 -- 2,100 28,400 68,500
---------- ----------- ----------- ------------ -----------
OTHER ASSET WRITE-DOWNS AND RESERVES
Other accruals................................ 2,100 -- 2,000 100 --
---------- ----------- ----------- ------------ -----------
2,100 -- 2,000 100 --
---------- ----------- ----------- ------------ -----------
CHANGES IN ESTIMATES OF RETAINED
LIABILITIES OF FORMER SUBSIDIARIES................ 8,800 600 -- 200 8,000
---------- ----------- ----------- ------------ -----------
Total pretax charges.......................... $ 109,900 $ 600 $ 4,100 $ 28,700 $ 76,500
========== =========== =========== ============ ===========
Other activity in 2001 consists primarily of disposal of property, plant
and equipment. During 2001, the Company finalized certain estimates related to
the 1997 special charges, resulting in reductions in 2001 consolidation costs of
$4,100,000.
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 $105,500,000 and $68,300,000 were included in cash
and cash equivalents at December 29, 2001 and December 30, 2000, respectively.
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 29, 2001 or at December
30, 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, 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 were charged to Other expense--net in the accompanying Consolidated
Statement of Operations.
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LONG-TERM DEBT
(IN THOUSANDS OF DOLLARS)
[Enlarge/Download Table]
DECEMBER 29, DECEMBER 30,
INTEREST RATE 2001 2000
------------- ---- ----
Senior Secured
DIP Facility...................................................... Variable(1) $ -- $ 100,000
Capitalized lease obligations, maturing 2001-2017(2).............. 2.80-7.74% 30,900 32,800
Bank Credit Agreement, maturing 2001-2002(3)...................... Variable(4) 646,700 645,700
Nonredeemable fixed rate debt, maturing 2003(3)(5)................ 6.61% 149,700 149,600
Fixed rate debt, maturing 2011(3)(6).............................. 12.60% 82,600 80,500
Nonredeemable fixed rate debt, maturing 2023(3)(7)................ 7.49% 148,200 148,100
-------------- -------------
Total Senior Secured........................................... 1,058,100 1,156,700
-------------- -------------
Senior Unsecured
Fixed rate debt, maturing 2006(8)................................. 9.03% 248,500 248,500
-------------- -------------
Total debt........................................................... 1,306,600 1,405,200
Less current maturities........................................... (647,400) (746,400)
Less liabilities subject to compromise............................ (248,500) (248,500)
-------------- -------------
Total long-term debt................................................. $ 410,700 $ 410,300
============== =============
(1) Interest ranged from 6.08% to 9.23% during 2001 and ranged from 8.28% to
10.50% during 2000. The weighted average interest rate at December 29,
2001 was approximately 7.32%. There were no borrowings outstanding at
December 29, 2001.
(2) Represents the principal portion on capitalized lease obligations. The
capitalized leases are secured by the related property under lease.
(3) 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.
(4) Interest ranged from 6.00% to 10.25% during 2001 and 9.75% to 10.75%
during 2000. The weighted average interest rate for borrowings
outstanding at December 29, 2001 was approximately 8.28%.
(5) Net of unamortized discount of $300 and $400 in fiscal 2001 and 2000,
respectively (nominal rate 6.5%).
(6) Net of unamortized discount of $42,400 and $44,500 in fiscal 2001 and
2000, respectively (nominal rate 7%).
(7) Net of unamortized discount of $1,800 and $1,900 in fiscal 2001 and 2000
(nominal rate 7.375%).
(8) 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 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 were limited to $175,000,000. In December 2001, the Company
requested and the DIP lenders and Bankruptcy Court approved a voluntary
reduction of the total commitment, comprised entirely of a $150,000,000 revolver
facility. Letter of Credit obligations under the revolver portion of the DIP
Facility are limited to $125,000,000.
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,
69
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, $63,800,000 and $33,100,000 of letters of credit were issued under
the DIP Facility at December 29, 2001 and December 30, 2000, respectively,
primarily to secure various insurance, trade, debt and other obligations, of
which approximately $16,400,000 and $15,800,000 are reflected in the
accompanying consolidated balance sheet as of December 29, 2001 and December 30,
2000, respectively.
Loans made under the DIP Facility revolving and term notes bear
interest, at FTL Inc.'s option, at the prime rate (4.75% at December 29, 2001)
plus 1.0% or the LIBOR rate (1.9% at December 29, 2001) 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 raw material and finished goods inventory. 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 June 30, 2002. 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, $1,100,000, of letters of credit was
outstanding under the Bank Credit Agreement. No letters of credit were
outstanding under the Bank Credit Agreement at December 29, 2001. 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 (4.75% at December 29, 2001) plus
1.25%.
At December 29, 2001 and December 30, 2000, approximately $7,800,000 and
$8,200,000, 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, $5,000,000 of which is reflected
in the accompanying Consolidated Balance Sheet at both December 29, 2001 and
December 30, 2000.
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: $647,400,000 in 2002; $152,000,000 in 2003;
$2,000,000 in 2004; $2,000,000 in 2005 and $252,000,000 in 2006.
Cash payments of interest on debt were $96,500,000, $95,900,000, and
$98,200,000 in 2001, 2000 and 1999, respectively. These amounts exclude
immaterial amounts of interest capitalized.
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LIABILITIES SUBJECT TO COMPROMISE
The principal categories of obligations classified as liabilities
subject to compromise to unrelated parties 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.
[Enlarge/Download Table]
DECEMBER 29, DECEMBER 30,
2001 2000
---- ----
(IN THOUSANDS OF DOLLARS)
8.875% Unsecured Senior Notes............................................ $ 248,500 $ 248,500
Trade accounts payable................................................... 96,400 97,200
Environmental and product liability...................................... 31,400 33,800
Accrued severance........................................................ 27,900 27,900
Deferred compensation accrual............................................ 10,200 14,300
Discontinued operations.................................................. 33,800 13,900
Other.................................................................... 49,900 119,000
-------------- -------------
$ 498,100 $ 554,600
============== =============
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 an interest rate swap contract for $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 fair values of financial guarantees and letters of credit
approximate the face value of the underlying instruments.
The fair value of the Company's total long-term debt is estimated at
$819,100,000 and $615,700,000 at December 29, 2001 and December 30, 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
$487,500,000 and $789,500,000 as compared to the carrying value of debt at
December 29, 2001 and December 30, 2000, respectively.
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 57.9% and 53.5%
of net sales to unrelated parties in 2001 and 2000, respectively, and
approximately 42.2% and 42.1% of accounts receivable at December 29, 2001 and
December 30, 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.
On January 22, 2002, Kmart Corporation and certain of its affiliates
(collectively, "Kmart") filed petitions for relief under Chapter 11 of the
Bankruptcy Code in the United States Bankruptcy Court for the Northern District
of Illinois. Kmart was Fruit of the Loom's second largest customer, as a
percentage of Net sales, in each of the three years in the period ended
71
December 29, 2001. The collectability of accounts receivable from Kmart and the
prospects for future business with Kmart cannot be estimated at this time. The
effect of Kmart's Chapter 11 cases on Reorganized Fruit of the Loom's future
performance cannot be predicted at this time.
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 Corp.
("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 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 29, 2001 are set forth in the table below. The reserves
consist primarily of certain environmental and product liability reserves of
$29,400,000 and $2,000,000, respectively. The Company's retained liability
reserves principally pertain to seven sites owned by NWI and environmental
management costs for those owned sites. Anticipated direct site expenditures
associated with the owned sites represent approximately 63% of the total
reserves, and approximately $3,400,000 is reserved for the long-term
professional management.
The Company and NWI are parties to prepetition indemnity agreements
("Indemnity Agreements") with certain parties ("Indemnified Parties") whereby
the Company or NWI is contractually liable to indemnify the Indemnified Parties,
for certain environmental costs and expenses related to the seven sites owned by
NWI and certain other sites owned or operated by such Indemnified Parties, and
third party sites at which the Indemnified Parties conducted or arranged for
disposal activities. The retained liability reserves relative to the prepetition
Indemnity Agreements (other than the seven properties owned by NWI) comprise
approximately $7,500,000 or 26% of the retained liability reserves.
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
that 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 that 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
above the level of the then current environmental reserves up to an aggregate
liability of $100,000,000 in insured costs 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 as reflected in the reserves are calculated 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 29, 2001 for environmental liabilities are estimated at
approximately $37,400,000. 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 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.
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[Enlarge/Download Table]
YEAR ENVIRONMENTAL PRODUCT TOTAL
---- ------------- ------- -----
2002 ...................................... $ 2,900 $ 500 $ 3,400
2003 ...................................... 3,500 500 4,000
2004 ...................................... 2,100 300 2,400
2005 ...................................... 2,100 300 2,400
2006 ...................................... 2,800 200 3,000
Thereafter..................................... 16,000 200 16,200
----------- ----------- -----------
Total................................. $ 29,400 $ 2,000 $ 31,400
=========== =========== ===========
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 site. The EPA's
activities under the Superfund Legislation can be expected to continue during
2002 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 were commercially reasonable. The
total amount guaranteed is $59,300,000 as of December 29, 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, 2001 and 2002 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 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 Court's order,
Fruit of the
73
Loom commenced an adversary proceeding against Mr. Farley, which is pending, and
deposited the Rabbit Trust Assets into the Escrow Account.
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 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 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 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 was assigned to Chief Judge
Robinson, effective September 27, 2000. Discovery has commenced with respect to
all of the adversary proceedings.
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. On December 28,
2001, the District Court granted summary judgment in favor of the Farley
Lenders, and on February 4, 2002, the District Court awarded judgment in favor
of the Farley Lenders in the amount of $59,900,000. Mr. Farley has filed a
notice of appeal.
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 29, 2001, the
Company had a contingent liability to repay, in whole or in part, grants
received of approximately $4,800,000 in the event that the Company does not meet
defined average employment levels or terminates operations in the Republic of
Ireland. During 2001, all remaining restrictions lapsed on grants received in
Northern Ireland and Germany. Accordingly, the Company no longer has a
contingent liability to repay grants received of approximately $15,800,000.
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 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
74
the Loom and Mr. Farley are also liable under Section 20(a) of the Act. A motion
to dismiss the complaint filed by the defendants was denied.
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. A motion to dismiss the complaint filed by the defendants was denied.
Discovery has commenced in this proceeding.
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.
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
29, 2001 and December 30, 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 that follows excludes any
payment related to the residual value guarantee that 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. Pursuant to the Third Amended Reorganization Plan, this equipment lease
is being treated as a Class 2 Claim, and the lessors shall receive distribution
in accordance with the Third Amended Reorganization Plan, and the lease
cancelled.
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 29, 2001 (in thousands of
dollars):
[Download Table]
CAPITALIZED OPERATING
LEASES LEASES
------ ------
FISCAL YEAR
2002 .................................................... $ 2,500 $ 3,900
2003 .................................................... 2,500 2,700
2004 .................................................... 2,500 900
2005 .................................................... 2,500 100
2006 .................................................... 2,500 100
Years subsequent to 2006 ................................ 32,000 400
-------- --------
Total minimum lease payments ............................... 44,500 $ 8,100
========
Imputed interest ........................................... (13,600)
--------
Present value of minimum capitalized lease payments ........ 30,900
Current portion ............................................ 800
--------
Long-term capitalized lease obligations .................... $ 30,100
========
75
Assets recorded under capital leases are included in Property, Plant and
Equipment as follows (in thousands of dollars):
[Download Table]
DECEMBER 29, DECEMBER 30,
2001 2000
---- ----
Land ............................................. $ 6,200 $ 7,100
Buildings, structures and improvements ........... 15,700 15,600
Machinery and equipment .......................... 3,100 700
-------- --------
25,000 23,400
Accumulated amortization ......................... (12,300) (8,600)
-------- --------
$ 12,700 $ 14,800
======== ========
Rental expense for operating leases amounted to $15,600,000,
$25,300,000, and $46,100,000 in 2001, 2000 and 1999, respectively.
STOCK PLANS
In the Cayman Reorganization, FTL Ltd. assumed all of the Company's
stock based compensation plans. The Company's officers and directors participate
in these plans. The Third Amended Reorganization Plan provides no distribution
to holders of FTL Ltd. Class A Ordinary Shares. Under the Third Amended
Reorganization Plan, all outstanding Class A Ordinary Shares would be
deregistered under the Securities Exchange Act of 1934, as amended, and the
dissolution of FTL Ltd. will automatically extinguish all the issued shares of
FTL Ltd. Consequently, the Company's compensation plans based on Class A
Ordinary Shares have no incentive value. The Company has options and restricted
stock units remaining outstanding under these plans totaling approximately
2,900,000 shares as of December 29, 2001. Activity in the plans since the
Petition Date has consisted of expirations and cancellations; no new awards have
been granted, nor have any been exercised. With exercise prices ranging from
$3.06 to $42.00, all outstanding options and restricted stock units have been
out of the money since January 2000.
STOCKHOLDERS' DEFICIT
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 Inc., 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 February 4, 2002 did not provide any recovery to
FTL Inc.'s equity security holders. Accordingly, management expects 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.
76
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 29, 2001 and December
30, 2000). Preferred stockholder participation in losses is limited to the
preferred stockholders' prior participation in earnings. Because FTL Inc.
reported losses throughout 2001, 2000 and 1999, the minority interest
participation was limited to the fixed preferred dividends of $3,200,000 in 2001
and 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.
The Company's articles of incorporation were amended and restated in the
Cayman Reorganization. Under the amended and restated articles of incorporation,
the authorized capital stock of the Company consists of 81,000,000 shares
divided into two classes: a class of 6,000,000 shares of preferred stock having
a par value of $.01 each; and a class of 75,000,000 shares of common stock
having a par value of $.01 each.
Exchangeable Preferred Stock
The holders of FTL Inc. Preferred Stock (all of which is held by Mr.
Farley and Farley, Inc.) are entitled 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 are entitled to the number of votes which such holder would
have on an as converted basis, provided, however, that if dividends on the FTL
Inc. Preferred Stock are in arrears for six or more quarters, then the holders
of the FTL Inc. Preferred Stock shall have the right, voting separately as a
class, to elect one additional member to the Board of Directors of FTL Inc. (the
"Preferred Stock Director"). The Preferred Stock Director shall be the sole
member of a special committee of the Board of Directors of FTL Inc., the only
purpose of which will be to declare dividends on the FTL Inc. Preferred Stock.
The special committee, however, will not be permitted to declare dividends on
the FTL Inc. Preferred Stock if such a payment would be or cause a default or an
event of default unter any debt agreement of FTL Inc. or any of its affiliates.
At December 29, 2001, holders of FTL Inc. Preferred Stock have approximately
6.9% of the total voting rights of the Company.
Holders of the FTL Inc. Preferred Stock are entitled to receive
cumulative preferred cash dividends of 4.5% per annum of the liquidation
preference of such FTL Inc. Preferred Stock (the "Preferred Stock Dividend").
The Preferred Stock Dividend is paid to the holders of FTL Inc. on a quarterly
basis. In addition to the Preferred Stock Dividend, holders of FTL Inc.
Preferred Stock are entitled to participate with the holders of the common stock
with respect to all other dividends declared by the Board of Directors of FTL
Inc. on an as converted basis in accordance with the terms of conversion.
The certificate of incorporation of FTL Inc. provides that dividends,
other than the Preferred Stock Dividend, may be declared only by a committee of
the Board of Directors of FTL Inc., consisting entirely of directors who are not
affiliates of Mr. Farley or employees of FTL Inc. or its affiliates.
Common Stock
As a result of the Cayman Reorganization, all outstanding shares of FTL
Inc. Class A Common Stock were converted to shares of the Company's new class of
$.01 par value common stock and are held by FTL Ltd. The FTL Inc. Class B Common
Stock was cancelled upon conversion to FTL Inc. Preferred Stock.
77
The components of other comprehensive income are as follows (in
thousands of dollars):
[Enlarge/Download Table]
UNREALIZED DEFERRED
CURRENCY MINIMUM GAIN (LOSS) ON GAIN (LOSS) ON
TRANSLATION PENSION AVAILABLE-FOR- HEDGING
ADJUSTMENTS LIABILITY SALE SECURITIES ACTIVITIES TOTAL
----------- --------- --------------- ---------- -----
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
Available-for-sale securities
Holding gain ..................... 10,300 10,300
-------- -------- -------- -------- --------
Balance, January 1, 2000 ................ (61,700) -- 10,300 (51,400)
Currency translation adjustment ......... (12,600) (12,600)
Available-for-sale securities:
Holding gain ..................... 5,100 5,100
Gain reclassified to net loss .... (10,900) (10,900)
-------- -------- -------- -------- --------
Balance, December 30, 2000 .............. (74,300) -- 4,500 (69,800)
Currency translation adjustment ......... (6,900) (6,900)
Minimum pension liability adjustment .... (13,400) (13,400)
Available-for-sale securities:
Holding loss ..................... (4,700) (4,700)
Gain reclassified to net loss .... (300) (300)
Deferred hedging loss ................... (2,900) (2,900)
-------- -------- -------- -------- --------
Balance December 29, 2001 ............... $(81,200) $(13,400) $ (500) $ (2,900) $(98,000)
======== ======== ======== ======== ========
OPERATING SEGMENTS
The Company manufactures and markets basic family apparel with
operations in the Americas and in Europe. North America is the Company's
principal market, comprising more than 80% of consolidated Net sales to
unrelated parties 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. In July 1999, the Company sold its labor intensive sewing
and finishing operations are located in Central America, Mexico and the
Caribbean to FTL Ltd. as part of the Cayman Reorganization. As a result, the
Company sells cut cloth to these affiliates and, in turn, purchases finished
garments from the affiliates, principally for the North American market.. For
the European market, manufacturing operations are concentrated in Northern
Ireland and the Republic of 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
and 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 panties. Childrenswear offerings include decorated
underwear (generally with pictures of licensed movie or cartoon characters).
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
78
THE LOOM, LOFTEEZ and BEST BY FRUIT OF THE LOOM labels. These products are
manufactured in a variety of styles and colors and are sold to distributors who
in turn sell to screen printers and embroiders, 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 2001, 2000 and 1999 special charges and finalization of
certain estimates included in special charges. See "SPECIAL CHARGES." Affiliates
net sales and operating earnings (loss) reflect transactions with sewing and
finishing operations sold to FTL Ltd. in July 1999 as part of the Cayman
Reorganization.
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 to unrelated parties as a percentage of
consolidated Net sales to unrelated parties totaled 16.9% in 2001, 16.5% in 2000
and 16.7% in 1999. Sales to one Retail Products customer amounted to
approximately 29.5%, 26.5% and 22.6% of Net sales to unrelated parties in 2001,
2000 and 1999, respectively. Additionally, sales to a second Retail Products
customer amounted to approximately 10.3%, 11.0% and 13.9% of Net sales to
unrelated parties in 2001, 2000 and 1999, respectively.
[Enlarge/Download Table]
OPERATING
NET SALES EARNINGS (LOSS)
-------------------------------- ----------------------------------
2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ----
($ IN MILLIONS)
Retail Products .................... $ 824.6 $ 909.7 $1,023.7 $ 130.6 $ 75.6 $ 26.8
Activewear ......................... 354.0 469.0 515.8 (10.5) (30.2) (4.8)
Europe ............................. 163.1 174.2 213.3 2.5 4.1 (24.5)
Other .............................. .1 0.7 34.4 18.6 19.2 16.1
Goodwill amortization .............. -- -- -- (24.6) (24.6) (24.6)
Nonrecurring items ................. -- -- -- (46.5) (88.3) (281.3)
-------- -------- -------- -------- -------- --------
Subtotal - unrelated parties ....... 1,341.8 1,553.6 1,787.2 70.1 (44.2) (292.3)
Affiliates ......................... 499.1 809.5 499.4 (116.7) (99.0) (96.2)
-------- -------- -------- -------- -------- --------
Consolidated ....................... $1,840.9 $2,363.1 $2,286.6 $ (46.6) $ (143.2) $ (388.5)
======== ======== ======== ======== ======== ========
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.
79
Consolidated long-lived assets, consisting of property, plant and
equipment, goodwill and other non-current assets, excluding deferred tax assets,
financial instruments and net assets of discontinued operations, totaled
$799,000,000 at December 29, 2001, $876,400,000 at December 30, 2000, and
$1,047,700,000 at January 1, 2000. Long-lived assets in foreign countries
(consisting of property, plant and equipment) as a percentage of consolidated
assets totaled 6.3% at December 29, 2001, 7.2% at December 30, 2000, and 6.8% at
January 1, 2000.
[Enlarge/Download Table]
TOTAL ASSETS CAPITAL EXPENDITURES
-------------------------------- --------------------------------
2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ----
($ IN MILLIONS)
Retail Products .................... $ 265.3 $ 331.7 $ 360.2 $ -- $ -- $ --
Activewear ......................... 163.6 224.3 200.8 -- -- --
Unallocated Retail Products
and Activewear ................... 960.8 1,051.0 1,281.7 45.2 22.7 29.2
Europe ............................. 186.7 178.7 199.6 1.5 1.8 4.4
-------- -------- --------
Net assets of discontinued
operations ....................... 2.0 2.0 48.6
-------- -------- --------
Consolidated ....................... $1,578.4 $1,787.7 $2,090.9 $ 46.7 $ 24.5 $ 33.6
======== ======== ======== ======== ======== ========
[Download Table]
DEPRECIATION
------------
2001 2000 1999
---- ---- ----
($ IN MILLIONS)
Retail Products ......... $ 20.4 $ 37.5 $ 43.8
Activewear .............. 11.6 16.8 19.6
Europe .................. 7.0 9.6 11.6
------ ------ ------
Consolidated ............ $ 39.0 $ 63.9 $ 75.0
====== ====== ======
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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):
[Enlarge/Download Table]
2001 2000
---- ----
Change in projected benefit obligation:
Projected benefit obligation at beginning of year .................... $ 260,400 $ 247,000
Service cost ......................................................... 7,700 8,100
Interest cost ........................................................ 18,400 18,000
Plan participants' contributions ..................................... 300 300
Curtailment .......................................................... (8,100) --
Actuarial (gain) loss ................................................ 12,400 5,300
Foreign currency translation ......................................... (100) (300)
Benefits paid ........................................................ (18,200) (18,000)
--------- ---------
Projected benefit obligation at end of year .......................... $ 272,800 $ 260,400
========= =========
Change in plan assets:
Fair value of plan assets at beginning of year ....................... $ 265,700 $ 273,200
Actual return on plan assets ......................................... (31,700) 4,000
Employer contribution ................................................ 200 6,600
Plan participants' contributions ..................................... 300 300
Foreign currency translation ......................................... (300) (400)
Benefits paid ........................................................ (18,200) (18,000)
--------- ---------
Fair value of plan assets at end of year ............................. $ 216,000 $ 265,700
========= =========
Funded status ........................................................ $ (56,800) $ 5,300
Unrecognized net actuarial (gain) loss ............................... 32,100 (27,200)
Unrecognized prior service cost ...................................... 1,500 1,800
Accrued unrecognized net transition asset ............................ 600 (700)
--------- ---------
Net liability recognized ............................................. $ (22,600) $ (20,800)
========= =========
Amounts recognized in the consolidated balance sheet consist of:
Prepaid pension cost ................................................. $ 1,400 $ 1,300
Accrued benefit liability ............................................ (37,900) (22,200)
Intangible asset ..................................................... 500 100
Accumulated other comprehensive income ............................... 13,400 --
--------- ---------
Net amount recognized ................................................ $ (22,600) $ (20,800)
========= =========
[Enlarge/Download Table]
YEAR ENDED YEAR ENDED
DECEMBER 29, DECEMBER 30,
2001 2000
---- ----
Weighted-average assumptions:
Discount rate ........................................... 7.0% 7.5%
Rates of increase in compensation levels ................ 4-7% 4-7%
Expected long-term rate of return on assets ............. 9% 10%
81
[Enlarge/Download Table]
YEAR ENDED
----------
2001 2000 1999
---- ---- ----
Components of net periodic benefit cost:
Service cost--benefits earned during the period ........................ $ 7,700 $ 8,100 $ 8,200
Interest cost on projected benefit obligation .......................... 18,400 18,000 17,800
Expected return on plan assets ......................................... (22,800) (20,900) (18,700)
Amortization of unrecognized net (gain)/loss ........................... (200) (200) 1,300
Amortization of prior service cost ..................................... 300 300 300
Amortization of unrecognized January 1, 1987 net transition asset ...... (1,200) (1,200) (1,200)
-------- -------- --------
Net periodic pension cost .............................................. $ 2,200 $ 4,100 $ 7,700
======== ======== ========
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 $267,500,000, $247,000,000 and
$210,600,000, respectively, as of December 29, 2001, and $3,247,676, $2,859,733
and $0, respectively, as of December 30, 2000.
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 $400,000, $500,000 and $600,000 during 2001, 2000 and 1999,
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 $39,000,000, $72,900,000 and $79,900,000 in 2001, 2000 and 1999,
respectively.
ADVERTISING EXPENSE
Advertising, which is expensed as incurred, approximated $28,500,000,
$1,900,000 and $22,100,000 in 2001, 2000 and 1999, respectively.
INCOME TAXES
Income taxes are included in the Consolidated Statement of Operations as
follows (in thousands of dollars):
[Enlarge/Download Table]
YEAR ENDED
----------
DECEMBER 29, DECEMBER 30, JANUARY 1,
2001 2000 2000
---- ---- ----
Income tax provision on earnings (loss) from continuing operations ... $ (19,100) $(114,000) $ 37,200
Discontinued operations .............................................. -- 11,900 --
--------- --------- ---------
Total income tax provision ........................................... $ (19,100) $(102,100) $ 37,200
========= ========= =========
Included in earnings (loss) from continuing operations before income tax
provision and minority interest are foreign earnings (loss) of ($20,400,000),
($20,100,000) and $900,000 in 2001, 2000 and 1999, respectively. These amounts
include foreign taxable losses of $23,900,000, $9,300,000 and $63,500,000 in
2001, 2000 and 1999, respectively.
82
The components of income tax provision related to earnings (loss) from
continuing operations were as follows (in thousands of dollars):
[Download Table]
YEAR ENDED
----------
DECEMBER 29, DECEMBER 30, JANUARY 1,
2001 2000 2000
---- ---- ----
Current:
Federal ..................... $ (20,000) $(111,400) $ --
State ....................... (600) (5,000) --
Foreign ..................... 1,500 2,200 500
--------- --------- ---------
Total current .................. (19,100) (114,200) 500
--------- --------- ---------
Deferred:
Federal ..................... -- -- 36,700
State ....................... -- -- --
Foreign ..................... -- 200 --
--------- --------- ---------
Total deferred ................. -- 200 36,700
--------- --------- ---------
Total income tax provision ..... $ (19,100) $(114,000) $ 37,200
========= ========= =========
The income tax rate on earnings (loss) from continuing operations
differed from the applicable statutory rate as follows:
[Enlarge/Download Table]
YEAR ENDED
----------
DECEMBER 29, DECEMBER 30, JANUARY 1,
2001 2000 2000
---- ---- ----
Applicable statutory rate ............................. (35.0)% (35.0)% (35.0)%
Deferred tax asset valuation allowance ................ 48.8 10.9 35.4
Reversal of income tax accruals ....................... (11.6) (36.6) --
Foreign operating earnings ............................ 4.6 7.2 1.5
Goodwill amortization ................................. 4.9 2.7 1.6
State income taxes, net of U.S. Federal tax benefit ... (0.6) (0.2) (0.5)
Other--net ............................................ (21.9) 15.1 3.8
----- ----- -----
Effective rate ........................................ (10.8)% (35.9)% 6.8%
===== ===== =====
The applicable statutory rate for 2001, 2000 and 1999 is the U.S.
Federal income tax rate.
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $342,900,000 at December 29, 2001. $222,800,000 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 $93,600,000 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.
83
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):
[Download Table]
DECEMBER 29, DECEMBER 30,
2001 2000
---- ----
Depreciation and amortization .................... $ 151,000 $ 159,700
Items includible in future tax years ............. 108,700 122,200
--------- ---------
Gross deferred tax liabilities ................. 259,700 281,900
--------- ---------
Inventory valuation reserves ..................... (31,600) (46,600)
Accrued employee benefit expenses ................ (30,600) (29,600)
Acquired tax benefits and basis differences ...... (14,900) (18,100)
Allowance for possible losses on receivables ..... (7,000) (5,100)
Fixed asset impairment ........................... (122,500) (106,300)
Residual value guarantees of leased equipment .... (12,000) (14,300)
NOL and tax credit carryforwards ................. (296,800) (211,000)
Items deductible in future tax years ............. (131,000) (145,100)
--------- ---------
Gross deferred tax assets ...................... (646,400) (576,100)
--------- ---------
Valuation allowance ............................ 386,700 294,200
--------- ---------
Net deferred tax (asset) liability ............... $ -- $ --
========= =========
Due to the operating loss generated for 2001, 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 $386,700,000 as of December 29, 2001 to fully
reserve all net deferred tax assets.
The Company has regular net operating loss carryforwards for U.S. income
tax purposes of approximately $789,400,000 that expire between 2007 and 2021.
The Company has alternative minimum tax net operating loss carryforwards for
U.S. income tax purposes of approximately $732,900,000 that expire between 2018
and 2021. 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
$20,000,000 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 2002 and 2009.
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 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 quarters of 2001 and 2000, net excess income
tax liabilities (including discontinued operations) totaling approximately
$20,000,000 and $104,000,000, respectively, which reduced income tax expense in
each year.
Cash refunds of income taxes totaled $300,000, $2,300,000 and $7,000,000
in 2001, 2000 and 1999, respectively.
84
OTHER INCOME (EXPENSE)-NET
Net other income in 2001 totaled $900,000 compared with $1,200,000 in
Net other expense in 2000. Principal components of Net other income in 2001
included $5,500,000 in gains on marketable equity securities and two litigation
settlements with unrelated parties aggregating $7,000,000. These favorable
impacts were partially offset by adequate protection payments (interest
payments) in the amount of $4,000,000 related to the guarantee of personal
indebtedness of Mr. Farley, bank fees of $3,200,000, a currency transaction loss
of $2,300,000 and losses on the sale of fixed assets of $1,600,000. 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 Mr. Farley, bank fees of $2,800,000, foreign currency
transaction loss 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, $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".
85
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, INC. AND DEBTOR SUBSIDIARIES
(DEBTORS IN POSSESSION)
SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEET
[Enlarge/Download Table]
DECEMBER 29, DECEMBER 30,
2001 2000
---- ----
(IN THOUSANDS OF DOLLARS)
ASSETS
Current Assets
Cash and cash equivalents (including restricted cash) ..................................... $ 116,100 $ 93,100
Notes and accounts receivable (less allowance for possible losses
of $18,100,000 and $34,100,000, respectively) .......................................... 96,400 94,000
Inventories
Finished goods ......................................................................... 280,500 392,700
Work in process ........................................................................ 24,000 66,800
Materials and supplies ................................................................. 10,500 23,700
----------- -----------
Total inventories ................................................................... 315,000 483,200
Other ..................................................................................... 20,000 18,200
----------- -----------
Total current assets ................................................................ 547,500 688,500
----------- -----------
Property, Plant and Equipment .................................................................. 670,500 870,000
Less accumulated depreciation ............................................................. 525,600 699,200
----------- -----------
Net property, plant and equipment ................................................... 144,900 170,800
----------- -----------
Other Assets
Goodwill (less accumulated amortization of $401,400,000 and $376,700,000, respectively) ... 581,900 606,600
Investment in nondebtor subsidiaries ...................................................... 247,700 274,500
Receivable from nondebtor subsidiaries .................................................... 120,200 85,800
Net assets of discontinued operations ..................................................... 2,000 2,000
Other ..................................................................................... 52,300 76,000
----------- -----------
Total other assets .................................................................. 1,004,100 1,044,900
----------- -----------
$ 1,696,500 $ 1,904,200
=========== ===========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current Liabilities
Current maturities of long-term debt ...................................................... $ 646,600 $ 745,700
Trade accounts payable .................................................................... 16,200 21,700
Net liabilities of discontinued operations ................................................ 2,000 5,100
Other accounts payable and accrued expenses ............................................... 176,600 211,500
----------- -----------
Total current liabilities ........................................................... 841,400 984,000
----------- -----------
Noncurrent Liabilities
Long-term debt ............................................................................ 388,200 385,800
Affiliate notes and accounts payable ...................................................... 197,600 81,600
Other ..................................................................................... 88,500 11,500
----------- -----------
Total noncurrent liabilities ........................................................ 674,300 478,900
----------- -----------
Liabilities Subject to Compromise
Unrelated parties ......................................................................... 498,100 554,600
Affiliates ................................................................................ 606,200 606,200
----------- -----------
1,104,300 1,160,800
----------- -----------
Exchangeable Preferred Stock ................................................................... 71,700 71,700
----------- -----------
Common Stockholder's Deficit ................................................................... (995,200) (791,200)
----------- -----------
$ 1,696,500 $ 1,904,200
=========== ===========
86
FRUIT OF THE LOOM, INC. AND DEBTOR SUBSIDIARIES
(DEBTORS IN POSSESSION)
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
[Enlarge/Download Table]
YEAR ENDED
---------------------------------------------
DECEMBER 29, DECEMBER 30, JANUARY 1,
2001 2000 2000
----------- ----------- -----------
(IN THOUSANDS OF DOLLARS)
Net Sales
Unrelated parties ............................................. $ 1,116,000 $ 1,296,700 $ 1,494,000
Affiliates .................................................... 533,500 854,200 1,013,500
----------- ----------- -----------
1,649,500 2,150,900 2,507,500
----------- ----------- -----------
Cost of Sales
Unrelated parties ............................................. 851,600 1,111,000 1,452,700
Affiliates .................................................... 663,800 968,300 1,189,800
----------- ----------- -----------
1,515,400 2,079,300 2,642,500
----------- ----------- -----------
Gross earnings (loss) ......................................... 134,100 71,600 (135,000)
Selling, general and administrative expenses ..................... 144,700 187,800 243,600
Goodwill amortization ............................................ 24,600 24,600 24,600
----------- ----------- -----------
Operating loss ................................................ (35,200) (140,800) (403,200)
Interest expense ................................................. (95,700) (121,800) (93,800)
Equity in earnings (loss) of nondebtor subsidiaries .............. (20,000) (8,300) 10,300
Other income (expense)--net ...................................... 6,600 1,000 (61,500)
----------- ----------- -----------
Loss from continuing operations before reorganization items
and income tax provision ................................. (144,300) (269,900) (548,200)
Reorganization items ............................................. (33,800) (48,200) (3,000)
----------- ----------- -----------
Loss from continuing operations before income tax provision ... (178,100) (318,100) (551,200)
Income tax provision ............................................. (20,300) (115,200) 33,500
----------- ----------- -----------
Loss from continuing operations ............................... (157,800) (202,900) (584,700)
Discontinued operations--Sports & Licensing
Loss from operations ..................................... -- (2,600) (37,600)
Estimated loss on disposal ............................... (18,000) (20,200) (47,500)
----------- ----------- -----------
Net loss ................................................. $ (175,800) $ (225,700) $ (669,800)
=========== =========== ===========
87
FRUIT OF THE LOOM, INC. AND DEBTOR SUBSIDIARIES
(DEBTORS IN POSSESSION)
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
[Enlarge/Download Table]
YEAR ENDED
---------------------------------------------
DECEMBER 29, DECEMBER 30, JANUARY 1,
2001 2000 2000
---- ---- ----
(IN THOUSANDS OF DOLLARS)
CASH FLOWS FROM OPERATING ACTIVITIES
Loss from continuing operations ........................................ $ (157,800) $ (202,900) $ (584,700)
Adjustments to reconcile to net operating cash flows:
Equity in earnings (loss) of nondebtor subsidiaries ............... 20,000 8,300 (10,300)
Depreciation and amortization ..................................... 66,800 96,100 101,600
Deferred income tax provision ..................................... -- -- 36,700
Decrease (increase) in working capital ............................ 139,700 234,300 (134,700)
(Gain) loss on sale of marketable equity securities ............... (5,500) (14,800) 600
Net decrease in liabilities subject to compromise ................. (56,500) (142,300) --
Consolidation of operations--writedowns and reserves .............. 34,200 59,800 --
Cash flows of discontinued operations ............................. (1,600) 25,400 (47,800)
Other--net ........................................................ 60,700 38,700 38,800
----------- ----------- -----------
Net operating cash flows before reorganization items ........... 100,000 102,600 (599,800)
Net cash used for reorganization items ............................ (29,300) (29,000) --
----------- ----------- -----------
Net operating cash flows ....................................... 70,700 73,600 (599,800)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures ................................................... (44,600) (22,200) (22,400)
Proceeds from sale of Gitano ........................................... -- 18,100 --
Proceeds from sale of marketable equity securities ..................... 7,900 16,600 6,100
Proceeds from asset sales .............................................. 6,800 6,500 19,700
Affiliate notes and accounts receivable ................................ (34,400) (33,600) (26,600)
Other--net ............................................................. (900) (800) (17,800)
----------- ----------- -----------
Net investing cash flows .......................................... (65,200) (15,400) (41,000)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
DIP financing proceeds ................................................. 1,064,300 1,381,200 152,200
DIP financing payments ................................................. (1,164,300) (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 ................................... 117,500 79,800 315,300
Preferred dividends .................................................... -- -- (1,900)
----------- ----------- -----------
Net financing cash flows .......................................... 17,500 16,700 656,700
----------- ----------- -----------
Net increase in cash and cash equivalents (including restricted cash) ..... 23,000 74,900 15,900
Cash and cash equivalents (including restricted cash) at
beginning of period .................................................... 93,100 18,200 2,300
----------- ----------- -----------
Cash and cash equivalents (including restricted cash) at end of period .... $ 116,100 $ 93,100 $ 18,200
=========== =========== ===========
88
SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The Company's 8 7/8% senior notes due April 2006 ("8 7/8% Senior Notes")
are fully and unconditionally guaranteed on a senior unsecured basis, jointly
and severally, by each of the Company's principal, wholly-owned domestic
subsidiaries (the "Guarantor Subsidiaries"). Substantially all of the Company's
operating income and cash flow is generated by its subsidiaries. As a result,
funds necessary to meet the Company's debt service obligations are provided in
part by distributions or advances from its subsidiaries. Under certain
circumstances, contractual and legal restrictions, as well as the financial
condition and operating requirements of the Company's subsidiaries could limit
the Company's ability to obtain cash from its subsidiaries for the purpose of
meeting its debt service obligations. There are currently no significant
restrictions on the ability of the Guarantor Subsidiaries to make distributions
to the Company. The 8 7/8% Senior Notes, as well as the 7 3/8% Debentures dues
2023, 7% Debentures due 2011, and 6 1/2% Notes due 2003, will be deregistered
under the Securities Exchange Act of 1934, as amended, as soon as possible on or
after the confirmation of the Third Amended Reorganization Plan.
The supplemental guarantor condensed consolidating financial statements
present:
(a) Supplemental condensed consolidating balance sheets as of
December 29, 2001 and December 30, 2000, and supplemental condensed
consolidating summaries of operations and cash flows for each of the
three years ended, December 29, 2001, December 30, 2000 and January 1,
2000;
(b) The non-guarantor subsidiaries combined;
(c) The Guarantor Subsidiaries combined, with investments in
non-guarantor subsidiaries accounted for using the equity method and net
assets of discontinued operations segregated;
(d) Fruit of the Loom, Inc. with investments in subsidiaries
accounted for using the equity method; and
(e) Elimination entries necessary to consolidate the Company and
all of its subsidiaries.
Separate financial statements of individual Guarantor Subsidiaries are
not presented because the Guarantor Subsidiaries are jointly, severally and
unconditionally liable under the guarantees, are wholly-owned by the Company,
and the Company believes the supplemental guarantor/non-guarantor condensed
consolidating financial statements as presented are more meaningful in
understanding the financial position of the Company and its Guarantor
Subsidiaries.
89
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 29, 2001
[Enlarge/Download Table]
COMBINED COMBINED ELIMINATIONS
NON-GUARANTOR GUARANTOR FRUIT OF AND
SUBSIDIARIES SUBSIDIARIES THE LOOM INC. RECLASSIFICATIONS CONSOLIDATED
------------ ------------ ------------- ----------------- ------------
(IN THOUSANDS OF DOLLARS)
ASSETS
Current Assets
Cash and cash equivalents (including restricted cash) ... $ 72,000 $ 12,100 $ 108,300 $ $ 192,400
Notes and accounts receivable (less
allowance for possible losses of $29,500) .......... 35,000 99,700 400 135,100
Inventories
Finished goods ....................................... 56,700 286,900 -- 343,600
Work in process .................................... 7,600 25,300 -- 32,900
Materials and supplies ............................. 4,500 7,200 -- 11,700
----------- ----------- ----------- ----------- -----------
Total inventories ............................... 68,800 319,400 -- 388,200
Other ................................................ 3,900 19,800 2,200 25,900
----------- ----------- ----------- ----------- -----------
Total currents assets ........................... 179,700 451,000 110,900 741,600
----------- ----------- ----------- ----------- -----------
Property, Plant and Equipment ........................... 119,800 680,200 400 800,400
Less accumulated depreciation ........................... 71,800 529,000 300 601,100
----------- ----------- ----------- ----------- -----------
Net property, plant and equipment .................... 48,000 151,200 100 199,300
----------- ----------- ----------- ----------- -----------
Other assets
Goodwill (less accumulated amortization of $401,400) . -- 26,300 555,600 581,900
Affiliate notes and accounts receivable--net ......... -- -- 1,046,700 (1,046,700) --
Investment in subsidiaries ........................... -- 60,800 -- (60,800) --
Net assets of discontinued operations ................ -- 2,000 -- 2,000
Other ................................................ 2,200 19,800 31,600 53,600
----------- ----------- ----------- ----------- -----------
Total other assets .............................. 2,200 108,900 1,633,900 (1,107,500) 637,500
----------- ----------- ----------- ----------- -----------
............................................... $ 229,900 $ 711,100 $ 1,744,900 $(1,107,500) $ 1,578,400
=========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current Liabilities
Current maturities of long-term debt ................. $ 800 -- $ 646,600 $ $ 647,400
Trade accounts payable ............................... 7,900 14,900 1,500 24,300
Net liabilities of discontinued operations ........... -- 2,100 -- 2,100
Other accounts payable and accrued expenses .......... 17,700 103,700 75,200 196,600
----------- ----------- ----------- ----------- -----------
Total current liabilities ....................... 26,400 120,700 723,300 870,400
----------- ----------- ----------- ----------- -----------
Noncurrent Liabilities
Long-term debt ....................................... 22,500 7,600 380,600 410,700
Losses in excess of investment in subsidiaries ....... -- -- 1,234,100 (1,234,100) --
Affiliate notes and accounts payable ................. 120,200 1,175,100 -- (1,046,700) 248,600
Other ................................................ -- 64,200 23,600 87,800
----------- ----------- ----------- ----------- -----------
Total noncurrent liabilities .................... 142,700 1,246,900 1,638,300 (2,280,800) 747,100
----------- ----------- ----------- ----------- -----------
Liabilities Subject to Compromise
Unrelated parties .................................... -- 191,300 306,800 498,100
Affiliates ........................................... -- 386,300 -- 386,300
----------- ----------- ----------- ----------- -----------
-- 577,600 306,800 884,400
----------- ----------- ----------- ----------- -----------
Exchangeable Preferred Stock ............................ -- -- 71,700 71,700
----------- ----------- ----------- ----------- -----------
Common Stockholder's Equity (Deficit) ................... 60,800 (1,234,100) (995,200) 1,173,300 (995,200)
----------- ----------- ----------- ----------- -----------
$ 229,900 $ 711,100 $ 1,744,900 $(1,107,500) $ 1,578,400
=========== =========== =========== =========== ===========
90
SUPPLEMENTAL CONDENSED CONSOLIDATING SUMMARY OF OPERATIONS
YEAR ENDED DECEMBER 29, 2001
[Enlarge/Download Table]
COMBINED COMBINED ELIMINATIONS
NON-GUARANTOR GUARANTOR FRUIT OF AND
SUBSIDIARIES SUBSIDIARIES THE LOOM INC. RECLASSIFICATIONS CONSOLIDATED
------------ ------------ ------------- ----------------- ------------
(IN THOUSANDS OF DOLLARS)
Net sales
Unrelated parties ................................... $ 212,500 $ 1,129,300 $ -- $ -- $ 1,341,800
Affiliates .......................................... -- 523,700 -- (24,600) 499,100
----------- ----------- ----------- ----------- -----------
212,500 1,653,000 -- (24,600) 1,840,900
----------- ----------- ----------- ----------- -----------
Cost of sales
Unrelated parties ................................... 175,400 861,600 -- -- 1,037,000
Affiliates .......................................... -- 656,700 -- (24,600) 632,100
----------- ----------- ----------- ----------- -----------
175,400 1,518,300 -- (24,600) 1,669,100
----------- ----------- ----------- ----------- -----------
Gross earnings (loss) ............................... 37,100 134,700 -- 171,800
Selling, general and administrative expenses ........... 44,900 144,900 4,000 193,800
Goodwill amortization .................................. -- 1,000 23,600 24,600
----------- ----------- ----------- ----------- -----------
Operating loss ...................................... (7,800) (11,200) (27,600) (46,600)
Interest expense ....................................... (1,700) -- (95,700) (97,400)
Affiliated interest income (expense) ................... (3,000) (90,600) 93,600 --
Equity in losses of subsidiaries ....................... -- (17,300) (123,100) 140,400 --
Other income (expense)--net ............................ (3,600) 14,200 (9,700) 900
----------- ----------- ----------- ----------- -----------
Loss from continuing operations before
reorganization items and income tax provision ..... (16,100) (104,900) (162,500) 140,400 (143,100)
Reorganization items ................................... -- (500) (33,300) (33,800)
----------- ----------- ----------- ----------- -----------
Loss from continuing operations before income
tax provision ....................................... (16,100) (105,400) (195,800) 140,400 (176,900)
Income tax provision ................................... 1,200 (300) (20,000) (19,100)
----------- ----------- ----------- ----------- -----------
Loss from continuing operations ........................ (17,300) (105,100) (175,800) 140,400 (157,800)
Discontinued operations--Sports & Licensing
Estimated loss on disposal .......................... -- (18,000) -- (18,000)
----------- ----------- ----------- ----------- -----------
Net earnings (loss) .................................... $ (17,300) $ (123,100) $ (175,800) $ 140,400 $ (175,800)
=========== =========== =========== =========== ===========
91
SUPPLEMENTAL CONDENSED CONSOLIDATING SUMMARY OF CASH FLOWS
YEAR ENDED DECEMBER 29, 2001
[Enlarge/Download Table]
COMBINED COMBINED ELIMINATIONS
NON-GUARANTOR GUARANTOR FRUIT OF AND
SUBSIDIARIES SUBSIDIARIES THE LOOM INC. RECLASSIFICATIONS CONSOLIDATED
------------ ------------ ------------- ----------------- ------------
(IN THOUSANDS OF DOLLARS)
CASH FLOWS FROM OPERATING ACTIVITIES
Loss from continuing operations ........................ $ (17,300) $ (105,100) $ (175,800) $ 140,400 $ (157,800)
Adjustments to reconcile to net operating cash flows:
Equity in losses of subsidiaries ..................... -- 17,300 123,100 (140,400) --
Depreciation and amortization ........................ 8,200 36,200 31,100 75,500
Deferred income tax provision ........................ -- -- -- --
(Increase) decrease in working capital ............... 11,500 124,200 (600) 135,100
(Gain) loss on sale of marketable equity securities .. -- (5,500) -- (5,500)
Net decrease in liabilities subject to compromise .... -- (34,200) (22,300) (56,500)
Consolidation of operations--writedowns and
reserves .......................................... 9,200 32,700 -- -- 41,900
Cash flows of discontinued operations ................ -- (1,600) -- (1,600)
Other--net ........................................... (11,100) 26,100 55,500 -- 70,500
----------- ----------- ----------- ----------- -----------
Net operating cash flows before
reorganization items ............................ 500 90,100 11,000 101,600
Reorganization items ................................. -- -- (29,300) -- (29,300)
----------- ----------- ----------- ----------- -----------
Net operating cash flows .......................... 500 90,100 (18,300) -- 72,300
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures ................................... (1,800) (44,900) -- (46,700)
Proceeds from sale of marketable equity securities ..... -- 7,900 -- 7,900
Proceeds from asset sales .............................. 1,100 6,800 -- 7,900
Affiliate notes and accounts receivable ................ 65,400 -- 146,200 (211,600) --
Liquidation of investment in
preferred stock of subsidiary ........................ -- 50,800 -- (50,800) --
Other--net ............................................. -- (900) (900)
----------- ----------- ----------- ----------- -----------
Net investing cash flows .......................... 64,700 19,700 146,200 (262,400) (31,800)
----------- ----------- ----------- ----------- -----------
Cash Flows from Financing Activities
DIP financing proceeds ................................. -- -- 1,064,300 1,064,300
DIP financing payments ................................. -- -- (1,164,300) (1,164,300)
Principal payments on long-term debt and
capital leases ....................................... (700) -- -- (700)
Affiliate notes and accounts payable ................... 25,300 (115,500) -- 211,600 121,400
Redemption of preferred stock held by affiliate ........ (50,800) 50,800
----------- ----------- ----------- ----------- -----------
Net financing cash flows .......................... (26,200) (115,500) (100,000) 262,400 20,700
----------- ----------- ----------- ----------- -----------
Net increase(decrease) in Cash and cash equivalents
(including restricted cash) ............................ 39,000 (5,700) 27,900 -- 61,200
Cash and cash equivalents (including restricted
cash) at beginning of period ........................... 33,000 17,800 80,400 -- 131,200
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents (including restricted
cash) at end of period ................................. $ 72,000 $ 12,100 $ 108,300 $ -- $ 192,400
=========== =========== =========== =========== ===========
92
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 30, 2000
[Enlarge/Download Table]
COMBINED
NON- COMBINED FRUIT ELIMINATIONS
GUARANTOR GUARANTOR OF THE AND
SUBSIDIARIES SUBSIDIARIES LOOM INC. RECLASSIFICATIONS CONSOLIDATED
------------ ------------ ---------- ----------------- ------------
(IN THOUSANDS OF DOLLARS)
ASSETS
Current Assets
Cash and cash equivalents (including restricted cash) ... $ 33,000 $ 17,800 $ 80,400 $ $ 131,200
Notes and accounts receivable (less allowance
for possible losses of $44,800) ....................... 38,100 104,100 200 142,400
Inventories
Finished goods ........................................ 62,400 392,400 -- 454,800
Work in process ....................................... 7,300 71,600 -- 78,900
Materials and supplies ................................ 5,500 24,800 -- 30,300
----------- ----------- ---------- ----------- ----------
Total inventories .................................. 75,200 488,800 -- 564,000
Other ................................................... 5,500 18,400 2,000 25,900
----------- ----------- ---------- ----------- ----------
Total currents assets ................................. 151,800 629,100 82,600 863,500
----------- ----------- ---------- ----------- ----------
Property, Plant and Equipment ............................. 142,600 874,600 5,200 1,022,400
Less accumulated depreciation ............................. 80,800 699,700 2,600 783,100
----------- ----------- ---------- ----------- ----------
Net property, plant and equipment ...................... 61,800 174,900 2,600 239,300
----------- ----------- ---------- ----------- ----------
Other assets
Goodwill (less accumulated amortization of $376,700) .... -- 27,500 579,100 606,600
Net assets of discontinued operations ................... -- 2,000 -- -- 2,000
Affiliate notes and accounts receivable--net ............ -- -- 1,202,800 (1,202,800) --
Investment in subsidiaries .............................. -- 135,100 -- (135,100) --
Other ................................................... 1,400 30,500 44,400 76,300
----------- ----------- ---------- ----------- ----------
Total other assets .................................... 1,400 195,100 1,826,300 $(1,337,900) 684,900
----------- ----------- ---------- ----------- ----------
$ 215,000 $ 999,100 $1,911,500 $(1,337,900) $1,787,700
=========== =========== ========== =========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current Liabilities
Current maturities of long-term debt .................... $ 700 $ -- $ 745,700 $ $ 746,400
Trade accounts payable .................................. 7,100 24,400 -- 31,500
Net liabilities of discontinued operations .............. -- 5,100 -- 5,100
Other accounts payable and accrued expenses ............. 18,100 133,100 81,600 232,800
----------- ----------- ---------- ----------- ----------
Total current liabilities ............................. 25,900 162,600 827,300 1,015,800
----------- ----------- ---------- ----------- ----------
Noncurrent Liabilities
Long-term debt .......................................... 24,400 7,700 378,200 410,300
Losses in excess of investment in subsidiaries .......... -- -- 1,096,300 (1,096,300) --
Affiliate notes and accounts payable .................... 29,500 1,302,000 -- (1,202,800) 128,700
Other ................................................... 100 11,300 100 11,500
----------- ----------- ---------- ----------- ----------
Total noncurrent liabilities .......................... 54,000 1,321,000 1,474,600 (2,299,100) 550,500
----------- ----------- ---------- ----------- ----------
Liabilities Subject to Compromise
Unrelated parties ....................................... -- 225,500 329,100 554,600
Affiliates .............................................. -- 386,300 -- 386,300
----------- ----------- ---------- ----------- ----------
-- 611,800 329,100 940,900
----------- ----------- ---------- ----------- ----------
Exchangeable Preferred Stock .............................. -- -- 71,700 71,700
----------- ----------- ---------- ----------- ----------
Common Stockholder's Equity (Deficit) ..................... 135,100 (1,096,300) (791,200) 961,200 (791,200)
----------- ----------- ---------- ----------- ----------
$ 215,000 $ 999,100 $1,911,500 $(1,337,900) $1,787,700
=========== =========== ========== =========== ==========
93
SUPPLEMENTAL CONDENSED CONSOLIDATING SUMMARY OF OPERATIONS
YEAR ENDED DECEMBER 30, 2000
[Enlarge/Download Table]
COMBINED
NON- COMBINED FRUIT ELIMINATIONS
GUARANTOR GUARANTOR OF THE AND
SUBSIDIARIES SUBSIDIARIES LOOM INC. RECLASSIFICATIONS CONSOLIDATED
------------ ------------ --------- ----------------- ------------
(IN THOUSANDS OF DOLLARS)
Net sales
Unrelated parties .............................. $231,700 $1,321,900 $ -- $ -- $1,553,600
Affiliates ..................................... -- 845,400 -- (35,900) 809,500
-------- ---------- --------- -------- ----------
231,700 2,167,300 -- (35,900) 2,363,100
-------- ---------- --------- -------- ----------
Cost of sales
Unrelated parties .............................. 184,700 1,136,600 -- -- 1,321,300
Affiliates ..................................... -- 963,900 -- (35,900) 928,000
-------- ---------- --------- -------- ----------
184,700 2,100,500 -- (35,900) 2,249,300
-------- ---------- --------- -------- ----------
Gross earnings (loss) .......................... 47,000 66,800 -- 113,800
Selling, general and administrative expenses ..... 49,000 177,300 6,100 232,400
Goodwill amortization ............................ -- 1,000 23,600 24,600
-------- ---------- --------- -------- ----------
Operating loss ................................. (2,000) (111,500) (29,700) (143,200)
Interest income (expense) ........................ (2,500) (800) (121,000) (124,300)
Affiliated interest income (expense) ............. (2,900) (139,600) 142,500 --
Equity in losses of subsidiaries ................. -- (9,000) (339,000) 348,000 --
Other income (expense)--net ...................... (400) 9,800 (10,600) (1,200)
-------- ---------- --------- -------- ----------
Loss from continuing operations before
reorganization items and income tax provision. (7,800) (251,100) (357,800) 348,000 (268,700)
Reorganization items ............................. -- (4,100) (44,100) (48,200)
-------- ---------- --------- -------- ----------
Loss from continuing operations before income
tax provision .................................. (7,800) (255,200) (401,900) 348,000 (316,900)
Income tax provision ............................. 1,200 61,000 (176,200) (114,000)
-------- ---------- --------- -------- ----------
Loss from continuing operations .................. (9,000) (316,200) (225,700) 348,000 (202,900)
Discontinued operations--Sports & Licensing
Loss from operations ........................... -- (2,600) -- (2,600)
Estimated loss on disposal ..................... -- (20,200) -- (20,200)
-------- ---------- --------- -------- ----------
Net earnings (loss) .............................. $ (9,000) $ (339,000) $(225,700) $348,000 $ (225,700)
======== ========== ========= ======== ==========
94
SUPPLEMENTAL CONDENSED CONSOLIDATING SUMMARY OF CASH FLOWS
YEAR ENDED DECEMBER 30, 2000
[Enlarge/Download Table]
COMBINED
NON- COMBINED FRUIT ELIMINATIONS
GUARANTOR GUARANTOR OF THE AND
SUBSIDIARIES SUBSIDIARIES LOOM INC. RECLASSIFICATIONS CONSOLIDATED
------------ ------------ --------- ----------------- ------------
(IN THOUSANDS OF DOLLARS)
CASH FLOWS FROM OPERATING ACTIVITIES
Loss from continuing operations ....................... $ (9,000) $(316,200) $ (225,700) $ 348,000 $(202,900)
Adjustments to reconcile to net operating cash flows:
Equity in losses of subsidiaries .................... -- 9,000 339,000 (348,000) --
Depreciation and amortization ....................... 10,300 62,600 34,600 107,500
Deferred income tax provision ....................... 200 -- -- 200
(Increase) decrease in working capital .............. (4,500) 201,400 43,500 240,400
(Gain) loss on sale of marketable equity securities . -- (14,800) -- (14,800)
Net decrease in liabilities subject to compromise ... -- (41,800) (100,500) (142,300)
Consolidation of operations--writedowns and
reserves ......................................... -- 68,500 -- 68,500
Cash flows of discontinued operations ............... -- 25,400 -- 25,400
Other--net .......................................... (10,300) (50,100) 25,000 (35,400)
-------- --------- ----------- --------- ---------
Net operating cash flows before
reorganization items ........................... (13,300) (56,000) 115,900 46,600
Reorganization items ................................ -- (3,100) (25,900) (29,000)
-------- --------- ----------- --------- ---------
Net operating cash flows ......................... (13,300) (59,100) 90,000 -- 17,600
-------- --------- ----------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures .................................. (1,800) (22,700) -- (24,500)
Proceeds from sale of Gitano .......................... -- 18,100 -- 18,100
Proceeds from sale of marketable equity securities .... -- 16,600 -- 16,600
Proceeds from asset sales ............................. 4,500 3,900 -- 8,400
Affiliate notes and accounts receivable ............... 16,300 -- 43,800 (60,100) --
Other--net ............................................ -- 1,500 200 1,700
-------- --------- ----------- --------- ---------
Net investing cash flows ......................... 19,000 17,400 44,000 (60,100) 20,300
-------- --------- ----------- --------- ---------
Cash Flows from Financing Activities
DIP financing proceeds ................................ -- -- 1,381,200 1,381,200
DIP financing payments ................................ -- -- (1,443,700) (1,443,700)
Payments under line-of-credit agreements .............. (8,700) -- -- (8,700)
Principal payments on long-term debt and
capital leases ...................................... (600) -- -- (600)
Affiliate notes and accounts payable .................. 17,500 49,200 -- 60,100 126,800
-------- --------- ----------- --------- ---------
Net financing cash flows ......................... 8,200 49,200 (62,500) 60,100 55,000
-------- --------- ----------- --------- ---------
Net increase in Cash and cash equivalents
(including restricted cash) ........................... 13,900 7,500 71,500 92,900
Cash and cash equivalents (including restricted
cash) at beginning of period .......................... 19,100 10,300 8,900 38,300
-------- --------- ----------- --------- ---------
Cash and cash equivalents (including restricted
cash) at end of period ................................ $ 33,000 $ 17,800 $ 80,400 $ -- $ 131,200
======== ========= =========== ========= =========
95
SUPPLEMENTAL CONDENSED CONSOLIDATING SUMMARY OF OPERATIONS
YEAR ENDED JANUARY 1, 2000
[Enlarge/Download Table]
COMBINED
NON- COMBINED FRUIT ELIMINATIONS
GUARANTOR GUARANTOR OF THE AND
SUBSIDIARIES SUBSIDIARIES LOOM INC. RECLASSIFICATIONS CONSOLIDATED
------------ ------------ --------- ----------------- ------------
(IN THOUSANDS OF DOLLARS)
Net sales
Unrelated parties.............................. $272,900 $1,514,300 $ -- $ -- $1,787,200
Affiliates..................................... -- 531,700 -- (32,300) 499,400
-------- ---------- --------- --------- ----------
272,900 2,046,000 -- (32,300) 2,286,600
-------- ---------- --------- --------- ----------
Cost of sales
Unrelated parties.............................. 236,600 1,478,600 -- -- 1,715,200
Affiliates..................................... -- 635,000 -- (32,300) 602,700
-------- ---------- --------- --------- ----------
236,600 2,113,600 -- (32,300) 2,317,900
-------- ---------- --------- --------- ----------
Gross earnings (loss).......................... 36,300 (67,600) -- (31,300)
Selling, general and administrative expenses...... 92,500 175,400 64,700 332,600
Goodwill amortization............................. -- 1,000 23,600 24,600
-------- ---------- --------- --------- ----------
Operating loss................................. (56,200) (244,000) (88,300) (388,500)
Interest income (expense)......................... (3,300) 5,000 (98,800) (97,100)
Affiliated interest income (expense).............. (1,400) (55,400) 56,800 --
Equity in losses of subsidiaries.................. -- (63,000) (474,800) 537,800 --
Other income (expense)--net....................... (2,300) (31,700) (24,900) (58,900)
-------- ---------- --------- --------- ----------
Loss from continuing operations before
reorganization items and income
tax provision................................ (63,200) (389,100) (630,000) 537,800 (544,500)
Reorganization items.............................. -- -- (3,000) (3,000)
-------- ---------- --------- --------- ----------
Loss from continuing operations before income
tax provision.................................. (63,200) (389,100) (633,000) 537,800 (547,500)
Income tax provision.............................. (200) 600 36,800 37,200
-------- ---------- --------- --------- ----------
Loss from continuing operations................... (63,000) (389,700) (669,800) 537,800 (584,700)
Discontinued operations--Sports & Licensing
Loss from operations........................... -- (37,600) -- (37,600)
Estimated loss on disposal..................... -- (47,500) -- (47,500)
-------- ---------- --------- --------- ----------
Net earnings (loss)............................... $(63,000) $ (474,800) $(669,800) $ 537,800 $ (669,800)
======== ========== ========= ========= ==========
96
SUPPLEMENTAL CONDENSED CONSOLIDATING SUMMARY OF CASH FLOWS
YEAR ENDED JANUARY 1, 2000
[Enlarge/Download Table]
COMBINED
NON- COMBINED FRUIT ELIMINATIONS
GUARANTOR GUARANTOR OF THE AND
SUBSIDIARIES SUBSIDIARIES LOOM INC. RECLASSIFICATIONS CONSOLIDATED
------------ ------------ --------- ----------------- ------------
(IN THOUSANDS OF DOLLARS)
CASH FLOWS FROM OPERATING ACTIVITIES
Loss from continuing operations........................ $(63,000) $(389,700) $(669,800) $ 537,800 $(584,700)
Adjustments to reconcile to net operating cash flows:
Equity in losses of subsidiaries..................... -- 63,000 474,800 (537,800) --
Depreciation and amortization........................ 12,200 74,300 28,900 115,400
Deferred income tax provision........................ -- 36,700 -- 36,700
(Increase) decrease in working capital............... 40,100 (61,800) 65,100 43,400
Cash flows of discontinued operations................ -- (47,800) -- (47,800)
Other--net........................................... 23,600 27,200 3,100 53,900
-------- --------- --------- --------- ---------
Net operating cash flows.......................... 12,900 (298,100) (97,900) -- (383,100)
-------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures................................... (5,000) (25,900) (2,700) (33,600)
Proceeds from asset sales.............................. 1,000 20,700 -- 21,700
Affiliate notes and accounts receivable................ 28,400 -- (233,500) 205,100 --
Other--net............................................. (6,800) (11,700) -- (18,500)
-------- --------- --------- --------- ---------
Net investing cash flows............................. 17,600 (16,900) (236,200) 205,100 (30,400)
-------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
DIP financing proceeds................................. -- -- 152,200 152,200
Proceeds from issuance of long-term debt............... -- -- 240,100 240,100
Proceeds under line-of-credit agreements............... 19,500 -- 707,800 727,300
Payments under line-of-credit agreements............... (20,400) -- (486,800) (507,200)
Principal payments on long-term debt and capital leases (12,300) -- (270,000) (282,300)
Affiliate notes and accounts payable................... -- 327,300 -- (205,100) 122,200
Preferred dividends.................................... -- -- (1,900) (1,900)
-------- --------- --------- --------- ---------
Net financing cash flows............................. (13,200) 327,300 341,400 (205,100) 450,400
-------- --------- --------- --------- ---------
Net increase in Cash and cash equivalents
(including restricted cash)............................ 17,300 12,300 7,300 36,900
Cash and cash equivalents (including restricted
cash) at beginning of period........................... 1,800 (2,000) 1,600 1,400
-------- --------- --------- --------- ---------
Cash and cash equivalents (including
restricted cash) at end of period...................... $ 19,100 $ 10,300 $ 8,900 $ -- $ 38,300
======== ========= ========= ========= =========
97
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
(DEBTORS IN POSSESSION)
SUPPLEMENTARY DATA
QUARTERLY FINANCIAL SUMMARY (UNAUDITED)
(IN MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
[Enlarge/Download Table]
QUARTER
------- TOTAL
FIRST SECOND THIRD FOURTH YEAR
----- ------ ----- ------ ----
2001
Net sales............................................ $ 460.8 $ 478.5 $ 480.1 $ 421.5 $ 1,840.9
Gross earnings....................................... 21.4 52.9 47.5 50.6 172.4
Operating earnings (loss)............................ (32.9) (20.5) 1.4 6.0 (46.0)
Earnings (loss) from continuing operations........... (70.1) (54.6) (32.8) 0.3 (157.2)
Net loss............................................. (70.1) (54.6) (32.8) (17.7) (175.2)
2000
Net sales............................................ $ 601.7 $ 679.0 $ 600.4 $ 482.0 $ 2,363.1
Gross earnings (loss)................................ (14.8) 19.2 59.8 49.6 113.8
Operating earnings (loss)............................ (75.8) (37.6) 15.1 (44.9) (143.2)
Earnings (loss) from continuing operations........... (107.2) (82.1) (29.9) 16.3 (202.9)
Net loss............................................. (109.8) (82.1) (29.9) (3.9) (225.7)
The Company made certain reclassifications in the reported quarterly
financial information subsequent to filing its Quarterly Reports on Form 10-Q
for the first quarter. A reconciliation of the quarterly financial information
on the Company's 2001 Quarterly Report on Form 10-Q to the above amounts is
presented below:
[Enlarge/Download Table]
FIRST QUARTER
2001 2000
----- ----
Net sales per Form 10-Q................................... $ 461.2 $ 601.1
Reclassification of certain sales incentive costs......... (0.6) (0.5)
Other..................................................... 0.2 1.1
------------- -------------
Net sales per Annual Report on Form 10-K.................. $ 460.8 $ 601.7
============= =============
Gross earnings per Form 10-Q.............................. $ 25.1 $ (10.3)
Reclassification of certain sales incentive costs......... (1.0) (0.9)
Other..................................................... (2.7) (3.6)
------------- ------------
Gross earnings per Annual Report on Form 10-K............. $ 21.4 $ (14.8)
============= =============
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
98
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company as of December 29, 2001, were as
follows.
[Enlarge/Download Table]
NAME AGE POSITION
---- --- --------
Dennis S. Bookshester................... 63 Chief Executive Officer
John B. Holland......................... 70 Executive Vice President, Operations
John D. Wigodsky........................ 53 Executive Vice President, Sales and Marketing
G. William Newton....................... 49 Vice President, Finance, Acting Chief Financial Officer and Assistant Secretary
Brian J. Hanigan........................ 43 Vice President, Treasurer and Assistant Secretary
John J. Ray III......................... 43 Chief Administrative Officer, General Counsel and Secretary
DENNIS S. BOOKSHESTER. Mr. Bookshester has been a director of the
Company 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 the Company 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. ("Dollar General"), a
retail company, and Renfro Corporation ("Renfro"), a hosiery manufacturer.
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 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.
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 29, 2001 were as follows:
Sir Brian Wolfson. Sir Brian Wolfson, age 66, has been a director of the
Company 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 63, has been a director of
the Company 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.
99
William F. Farley. Mr. Farley, age 59, has been Chairman of the Board,
Chief Executive Officer, and President of the Company 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 70, has been a director of the Company
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 and Renfro.
Henry A. Johnson. Mr. Johnson, age 83, has been a director of the
Company 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 65, 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 56, has been a director of the Company
since October 1991. Since 1990, Mr. Weil has been Chairman of the Board and
Chief Executive Officer of Autotote Corporation, a manufacturer of products for
the gaming industry. He is also a director of General Growth Properties, Inc.
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 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 2001, Messrs. Nason, Johnson and Weil served on the Audit Committee,
with Mr. Nason serving as Chairman. 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.
During 2001, the Board of Directors held five (5) meetings, the Audit
Committee held three (3) meetings, and the Compensation Committee held three (3)
meetings. The Executive Committee and the Pension Committee did not meet during
2001. During 2001, except for Mr. Farley, each of the directors attended greater
than 75% of all meetings of the Board of Directors and Board committee on which
he served except Mr. Weil who attended 63%. Mr. Farley did not attend any
meetings of the Board of Directors in 2001.
100
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 2001 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 29, 2001,
December 30, 2000 and January 1, 2000 of those persons who were at December 29,
2001 (i) the Chief Executive Officer and (ii) the four other most highly
compensated executive officers of FTL Inc. (collectively, with the Chief
Executive Officer, the "Named Officers"). No other individuals are required to
be included in the table. All stock based compensation is awarded under FTL Ltd.
compensation plans.
SUMMARY COMPENSATION TABLE
[Enlarge/Download Table]
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION SECURITIES
------------------- OTHER RESTRICTED UNDERLYING
ANNUAL STOCK OPTIONS
SALARY BONUS COMPENSATION AWARDS SARS ALL OTHER
PRINCIPAL POSITION YEAR $ $ $ $ (# SHARES) COMPENSATION
------------------ ---- - - - - ---------- ------------
Dennis S. Bookshester............................. 2001 $768,654 $ 0 $ 0 $ 0 $ 0 $ 0
Chief Executive Officer 2000 700,000 0 0 0 0 0
1999 236,923 0 0 34,844 265,000 0
John B. Holland................................... 2001 549,039 383,265 0 0 0 0
Executive Vice President, Operations 2000 500,000 239,175 0 0 0 200,000(1)
1999 69,231 0 0 0 0 0
John J. Ray III................................... 2001 439,231 306,900 0 0 0 0
Chief Administrative Officer, 2000 400,000 191,340 0 0 0 160,000(1)
General Counsel and Secretary 1999 288,481 175,000 0 202,129 157,037 0
G. William Newton................................. 2001 312,952 194,372 0 0 0 0
Vice President, Finance Acting Chief 2000 285,000 121,182 0 0 0 85,500(1)
Financial Officer and Assistant Secretary 1999 257,308 0 438,668(2) 189,413 93,062 858
John D. Wigodsky.................................. 2001 439,231 306,900 0 0 0 0
Executive Vice President, Sales and Marketing 2000 269,231 131,340 0 0 0 160,000(1)
(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.
101
OPTION GRANTS IN 2001
There were no options granted in 2001.
AGGREGATED OPTION/SAR EXERCISES IN 2001
AND 2001 FISCAL YEAR-END OPTION/SAR VALUES
Pursuant to the Company's amended Joint Plan of Reorganization, the
Company's stock will be cancelled, including any stock options or other rights
to purchase Company stock. The Class A Ordinary Shares of FTL Ltd. will be
deregistered under the Securities Exchange Act of 1934, as amended, as soon as
possible on or after the confirmation of the Third Amended Reorganization Plan.
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
Inc. (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.
[Enlarge/Download Table]
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 ...................... 80,478 107,304 134,130 144,190 154,250
400,000 ...................... 108,978 145,304 181,630 195,252 208,875
500,000 ...................... 137,478 183,304 229,130 246,315 263,500
600,000 ...................... 165,978 221,304 276,630 297,377 318,125
700,000 ...................... 194,478 259,304 324,130 348,440 372,750
800,000 ...................... 222,978 297,304 371,630 399,502 427,375
900,000 ...................... 251,478 335,340 419,130 450,565 482,000
1,000,000 ...................... 279,978 373,304 466,630 501,627 536,625
1,100,000 ...................... 308,478 411,304 514,130 552,690 591,250
(1) Assumes individual retires at age 65 on December 29, 2001 with indicated
years of service and further assumes covered compensation as it was
determined in 2001, which was $37,200, as updated each year by the
Internal Revenue Service for annual covered compensation. The annual
covered compensation for 2002 will increase to $39,600.
(2) Maximum qualified plan limits for 2000, 2001, and 2002 under Section 415
of the Code, were $135,000, $140,000 and $160,000, 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
102
used to determine benefits under the FTL Plan for each of the Named Officers for
2001 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 2001. For 2002, this amount will increase to $200,000. 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 $140,000 for 2001 and
$160,000 for 2002. For officers of the Company, any reduction in benefits under
the Pension Plan caused by the above 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, Newton and Ray under the FTL Plan is 2, 2, 2, 7,
and 4 respectively.
The Company established the Supplemental Executive Retirement Plan (the
"FTL SERP") on January 1, 1995 for certain officers. As of December 29, 2001
Messrs. Holland, Wigodsky, Newton and Ray 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 Inc. 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.
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, Newton, and Ray are $27,089, $165,206, $145,753 and $306,032,
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 29, 2001 credited for Messrs. Holland, Wigodsky, Newton, and
Ray are 4, 3, 12, and 7 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. 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,
103
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. Pursuant to the Company's contemplated sale to Berkshire, a change in
control will occur under such Executive Severance Plan.
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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares of FTL Ltd. Class A
shares and FTL Ltd. Class B shares, the percentage of each class and the
percentage of total voting power of the Company beneficially owned as of
February 28, 2002 by (i) each director of the Company, (ii) the Named Officers
appearing in the table below (as defined on page 101), (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 FTL Ltd.'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, 2002. The Class A
and Class B shares shall be cancelled upon the effective date of the Company's
Amended Joint Plan of Reorganization. The Class A Ordinary Shares of FTL Ltd.
will be deregistered under the Securities Exchange Act of 1934, as amended.
[Enlarge/Download Table]
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.......................... 295,350(4) * -- -- *
Henry A. Johnson............................... 50,350(5) * -- -- *
Robert E. Nason................................ 500 * -- -- *
A. Lorne Weil.................................. 46,350(6) * -- -- *
Sir Brian Wolfson.............................. 135,350(7) * -- -- *
John B. Holland................................ 155,175(8) * -- -- *
G.W. Newton.................................... 157,812(9) * -- -- *
John J. Ray III................................ 224,647(10) * -- -- *
John D. Wigodsky............................... 100 * -- -- *
All directors and executive
officers as a group (11 people)............. 1,794,808 2.7% 4 100% 30.0%
* Less than 1%.
104
(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 292,500
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
32,500 Class A shares currently issuable upon the exercise of options
granted to Mr. Johnson by the Company.
(6) Includes 42,500 Class A shares currently issuable upon the exercise of
options granted to Mr. Weil by the Company.
(7) Includes 132,500 Class A shares currently issuable upon the exercise of
options granted to Sir Brian Wolfson by the Company.
(8) Includes 154,675 Class A shares currently issuable upon the exercise of
options granted to Mr. Holland by the Company.
(9) Includes 156,771 Class A shares currently issuable upon the exercise of
options granted to Mr. Newton by the Company.
(10) Includes 224,647 Class A shares currently issuable upon the exercise of
options granted to Mr. Ray by the Company.
As of March 30, 2002, FTL Ltd. owns 100% of the common stock of FTL Inc.
Mr. Farley and Farley, Inc. own 100% of the preferred stock of FTL Inc. as of
March 30, 2002.
105
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 were commercially reasonable. The total amount
guaranteed is $59,300,000 as of February 28, 2002. 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, 2002, total payments made by the Company
on behalf of Mr. Farley's loan aggregated $10,000,000. In addition, unpaid
guarantee fees owed to the Company by Mr. Farley through February 28, 2002
aggregated $3,000,000. 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 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 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 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 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
106
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 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 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 was assigned to Chief Judge
Robinson, effective September 27, 2000. Discovery has commenced with respect to
all of the adversary proceedings.
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. On December 28,
2001, the District Court granted summary judgment in favor of the Farley
Lenders, and on February 4, 2002, the District Court awarded judgment in favor
of the Farley Lenders in the amount of $59,900,000. Mr. Farley has filed a
notice of appeal.
Mr. Holland is also a director of Dollar General and Renfro, a hosiery
manufacturer. The Company sells a wide variety of its retail products to Dollar
General. Total sales in 2001 to Dollar General aggregated $43,200,000. In
addition, the Company licenses the Fruit of the Loom brand to Renfro for
hosiery. Total royalty income recorded in 2001 from Renfro aggregated
$8,900,000.
107
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 41 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 41 is filed as part of this Annual Report.
3. Exhibits
The exhibits listed in the Index to Exhibits on pages 111, 112, 113 and
114 are filed as part of this Annual Report.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated November 9, 2001,
reporting under Item 5 that FTL Ltd., FTL Inc. and Berkshire announced that they
and certain of their respective subsidiaries have executed a definitive
agreement dated November 1, 2001 for Purchaser to acquire substantially all of
the Company's basic apparel business operations at a purchase price of $835
million in cash, subject to adjustments.
The Company filed a Current Report on Form 8-K dated December 14, 2001,
reporting under Item 5 that:
1. On November 29, 2001, Sellers, FTL Caribe, Purchaser, and
Berkshire entered into Amendment No. 1 to the Berkshire
Agreement pursuant to which the parties agreed to extend the
deadline by which the Bankruptcy Court must approve the bidding
procedures to December 7, 2001, the failure of which would allow
Purchaser to terminate the Berkshire Agreement.
2. On December 5, 2001, the Bankruptcy Court approved the bidding
procedures in open court. The order approving the bidding
procedures was entered December 12, 2001.
3. On December 7, 2001, Sellers, FTL Caribe, Purchaser, and
Berkshire entered into Amendment No. 2 to the Berkshire
Agreement to reflect changes to the Berkshire Agreement required
to conform certain portions of the Berkshire Agreement to the
bidding procedures approved by the Bankruptcy Court.
108
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 15, 2002.
FRUIT OF THE LOOM, INC.
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 15, 2002.
[Enlarge/Download Table]
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)
----------------------------------------------------
(William F. Farley) Director
/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)
109
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 29, 2001, DECEMBER 30, 2000 AND JANUARY 1, 2000
(IN THOUSANDS OF DOLLARS)
[Enlarge/Download Table]
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 29, 2001:
Reserves deducted from assets to which they apply:
Accounts receivable allowances:
Doubtful accounts .................................. $12,200 $ 9,600 $ 700 $ 5,300 $15,800
Sales discounts, returns, and allowances ........... 32,600 59,600 18,500 60,000 13,700
------- ------- ------- ------- -------
$44,800 $69,200 $19,200 $65,300 $29,500
======= ======= ======= ======= =======
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
======= ======= ======= ======= =======
(1) Reserves included in Other accounts payable and accrued expenses
represent 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.
110
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
(ITEM 14(a)(3) AND 14(c))
DESCRIPTION
3(a)* -- Amended and Restated Certificate of Incorporation of Fruit of
the Loom, Inc. (incorporated herein by reference to Exhibit 3(a)
to the Company's Annual Report on Form 10-K for the year ended
January 1, 2000).
3(b)* -- By-Laws of Fruit of the Loom, Inc. (incorporated herein by
reference to Exhibit 3(b) to the Company's Registration
Statement on Form S-2, Reg. No. 33-8303).
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 Current Report on Form 8-K dated
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 of 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).
111
DESCRIPTION
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).
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"). (Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended December 30,
2000.)
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"). (Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended December 30,
2000.)
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"). (Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended December 30,
2000.)
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"). (Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended December 30,
2000.)
4(o)* -- Amendment No. 5 to post-petition loan and security agreement
date April 20, 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"). (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended September
29, 2001.)
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).
112
DESCRIPTION
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).
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).
10(r)* -- Asset Purchase Agreement, dated as of November 1, 2001, by and
among the Company, FTL Inc., Union Underwear Company, Inc.
(together, the "Sellers"), FTL Caribe, Ltd., New FOL Inc.
("Purchaser") and Berkshire (the "Berkshire Agreement")
(incorporated by reference to Exhibit 2.1 to the Company's
Current Report on Form 8-K dated November 9, 2001).
10(s)* -- Amendment No. 1 to the Berkshire Agreement (incorporated by
reference to Exhibit 2.1 to the Company's
113
Current Report on Form 8-K dated November 29, 2001).
DESCRIPTION
10(t)* -- Amendment No. 2 to the Berkshire Agreement (incorporated by
reference to Exhibit 2.2 to the Company's Current Report on Form
8-K dated November 29, 2001).
10(u)* -- Disclosure Statement Pursuant to Section 1125 of the Bankruptcy
Code with Respect to Joint Plan of Reorganization of Fruit of
the Loom under Chapter 11 of the Bankruptcy Code, dated March
15, 2001 (incorporated by reference to Exhibit 99.2 to the
Company's Current Report on Form 8-K dated March 22, 2001).
10(v)* -- Disclosure Statement Pursuant to Section 1125 of the Bankruptcy
Code with Respect to First Amended Joint Plan of Reorganization
of Fruit of the Loom under Chapter 11 of the Bankruptcy Code,
dated December 28, 2001 (incorporated by reference to Exhibit
99.1 to the Company's Current Report on Form 8-K dated January
8, 2002).
10(w)* -- Disclosure Statement Pursuant to Section 1125 of the Bankruptcy
Code with Respect to Second Amended Joint Plan of Reorganization
of Fruit of the Loom under Chapter 11 of the Bankruptcy Code,
dated February 4, 2002 (incorporated by reference to Exhibit
99.1 to the Company's Current Report on Form 8-K dated February
15, 2002).
10(x) -- Amendment No. 3 to the Berkshire Agreement.
10(y) -- Supplement to Disclosure Statement with Respect to Third
Amendment Joint Plan of Reorganization of Fruit of the Loom
dated March 19, 2002.
10(z) -- Third Amended Joint Plan of Reorganization of Fruit of the Loom
under Chapter 11 of the Bankruptcy Code.
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.
114
Dates Referenced Herein and Documents Incorporated by Reference
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