Russell (RML) 10-Q 2005 Q2 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 3, 2005

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to            

Commission file number

1-5822

RUSSELL CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

Delaware	63-0180720
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
3330 Cumberland Blvd., Suite 800, Atlanta, Georgia	30339
(Address of Principal Executive Offices)	(Zip Code)

(678) 742-8000

(Registrant’s Telephone Number, Including Area Code)

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report: None

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  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨

The number of shares outstanding of each of the issuer’s classes of common stock.

Class	Outstanding at August 8, 2005
Common Stock, Par Value $.01 Per Share	33,128,517 shares (Excludes Treasury)

INDEX

		Page No.
Part I. Financial Information
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets — July 3, 2005, January 1, 2005 and July 4, 2004	3
	Condensed Consolidated Statements of Income — Thirteen Weeks Ended July 3, 2005 and July 4, 2004 Twenty-six Weeks Ended July 3, 2005 and July 4, 2004	4 5
	Condensed Consolidated Statements of Cash Flows — Twenty-six Weeks Ended July 3, 2005 and July 4, 2004	6
	Notes to Condensed Consolidated Financial Statements	7
	Report of Independent Registered Public Accounting Firm	20
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures about Market Risks	27
Item 4.	Controls and Procedures	27
Part II. Other Information
Item 1.	Legal Proceedings	28
Item 6.	Exhibits and Reports on Form 8-K	28

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PART I. – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

RUSSELL CORPORATION

Condensed Consolidated Balance Sheets

(In Thousands Except Share and Per Share Amounts)

	July 3, 2005			January 1, 2005			July 4, 2004
	(Unaudited)			(Note 1)			(Unaudited)
ASSETS
Current assets:
Cash	$	44,784		$	29,816		$	21,789
Accounts receivable, net		268,078			212,063			225,951
Inventories – Note 2		466,089			411,701			424,593
Prepaid expenses & other current assets		35,399			23,838			33,967
Total current assets		814,350			677,418			706,300
Property, plant & equipment, net		316,246			322,890			317,303
Other assets		251,092			253,801			134,161
Total assets	$	1,381,688		$	1,254,109		$	1,157,764
LIABILITIES & STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	186,442		$	194,476		$	172,425
Short-term debt		14,975			18,190			9,481
Current maturities of long-term debt		2,024			6,938			6,882
Total current liabilities		203,441			219,604			188,788
Long-term debt, less current maturities		496,758			372,921			362,072
Deferred liabilities		93,019			84,637			67,399
Non-controlling interests		14,842			14,096			12,348
Stockholders’ equity:
Common stock, par value $.01 per share; authorized 150,000,000 shares, issued 41,419,958 shares		414			414			414
Paid-in capital		38,325			40,716			38,665
Retained earnings		760,019			755,799			721,168
Treasury stock, at cost (8,373,432 shares at 7/3/05, 8,654,614 shares at l/1/05 and 8,786,463 shares at 7/4/04)		(193,247	)		(201,171	)		(204,943	)
Accumulated other comprehensive loss		(31,883	)		(32,907	)		(28,147	)
Total stockholders’ equity		573,628			562,851			527,157
Total liabilities & stockholders’ equity	$	1,381,688		$	1,254,109		$	1,157,764

See accompanying notes to condensed consolidated financial statements.

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RUSSELL CORPORATION

Condensed Consolidated Statements of Income

(In Thousands Except Share and Per Share Amounts)

(Unaudited)

	13 Weeks Ended
	July 3, 2005			July 4, 2004
Net sales	$	342,099		$	289,771
Cost of goods sold		251,895			209,426
Gross profit		90,204			80,345
Selling, general & administrative expenses		73,186			61,686
Other income, net		(1,023	)		(5,247	)
Operating income		18,041			23,906
Interest expense, net		10,064			7,754
Earnings of non-controlling interests		747			274
Income before income taxes		7,230			15,878
Provision for income taxes		2,566			5,716
Net income	$	4,664		$	10,162
Weighted-average common shares outstanding:
Basic		32,980,182			32,652,492
Diluted		33,540,238			32,836,177
Net income per common share:
Basic	$	0.14		$	0.31
Diluted	$	0.14		$	0.31
Cash dividends per common share	$	0.04		$	0.04

See accompanying notes to condensed consolidated financial statements.

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RUSSELL CORPORATION

Condensed Consolidated Statements of Income

(In Thousands Except Share and Per Share Amounts)

(Unaudited)

	26 Weeks Ended
	July 3, 2005			July 4, 2004
Net sales	$	655,341		$	541,564
Cost of goods sold		479,245			396,586
Gross profit		176,096			144,978
Selling, general & administrative expenses		146,703			118,164
Other income, net		(1,568	)		(5,109	)
Operating income		30,961			31,923
Interest expense, net		18,953			14,941
Earnings of non-controlling interests		1,421			274
Income before income taxes		10,587			16,708
Provision for income taxes		3,741			6,015
Net income	$	6,846		$	10,693
Weighted-average common shares outstanding:
Basic		32,919,043			32,614,822
Diluted		33,368,450			32,843,219
Net income per common share:
Basic	$	0.21		$	0.33
Diluted	$	0.21		$	0.33
Cash dividends per common share	$	0.08		$	0.08

See accompanying notes to condensed consolidated financial statements.

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RUSSELL CORPORATION

Condensed Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)

	26 Weeks Ended
	July 3, 2005			July 4, 2004
Operating Activities:
Net income	$	6,846		$	10,693
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation		25,304			23,470
Amortization		1,785			615
Earnings of non-controlling interests		1,421			274
Provision for deferred income taxes		11,029			—
Gain on sale of assets		(597	)		(4,614	)
Other		3,830			2,132
Changes in operating assets & liabilities:
Trade accounts receivable		(63,289	)		(46,954	)
Inventories		(57,469	)		(72,821	)
Prepaid expenses and other current assets		(2,144	)		(811	)
Other assets		(442	)		3,785
Accounts payable and accrued expenses		(10,605	)		13,462
Income taxes		(9,267	)		4,294
Pension and other deferred liabilities		4,896			925
Net cash used in operating activities		(88,702	)		(65,550	)
Investing Activities:
Purchases of property, plant & equipment		(20,936	)		(10,221	)
Proceeds from the sale of property, plant & equipment and other assets		2,687			1,769
Cash refunded from (paid for) acquisitions, joint ventures and other, net		3,402			(14,758	)
Other		(196	)		1,469
Net cash used in investing activities		(15,043	)		(21,741	)
Financing Activities:
Borrowings on credit facility and other, net		118,838			80,424
(Payments) borrowings on short-term debt, net		(1,889	)		1,617
Dividends on common stock		(2,626	)		(2,605	)
Treasury stock re-issued		4,484			1,759
Cost of common stock for treasury		(30	)		(17	)
Net cash provided by financing activities		118,777			81,178
Effect of exchange rate changes on cash		(64	)		(73	)
Net increase (decrease) in cash		14,968			(6,186	)
Increase in cash from consolidating Frontier Yarns, LLC		—			7,859
Cash balance at beginning of period		29,816			20,116
Cash balance at end of period	$	44,784		$	21,789
Supplemental schedule of non-cash investing and financing activities:
Sold building – portion of proceeds in the form of a note	$	—		$	1,500
Sold investment – portion of proceeds in the form of stock and receivable		—			9,519
Non-cash investing and financing activities	$	—		$	11,019

See accompanying notes to condensed consolidated financial statements.

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RUSSELL CORPORATION

Notes to Condensed Consolidated Financial Statements

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In our opinion, the accompanying interim condensed consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly our financial position as of July 3, 2005 and July 4, 2004, and the results of our operations for the thirteen and twenty-six weeks ended July 3, 2005 and July 4, 2004, and our cash flows for the twenty-six weeks ended July 3, 2005 and July 4, 2004. The unaudited condensed consolidated financial statements as of July 3, 2005 and July 4, 2004 include the consolidation of Frontier Yarns, LLC (“Frontier Yarns”), our 45.3% owned yarn joint venture. Prior to April 4, 2004, we accounted for our investment in Frontier Yarns using the equity method of accounting.

The condensed consolidated balance sheet at January 1, 2005 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

For further information about our significant accounting policies, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended January 1, 2005.

Certain prior year amounts have been reclassified to conform to the 2005 presentation. These changes had no impact on previously reported results of operations or stockholders’ equity.

Our revenues and income are subject to seasonal variations. Consequently, the results of operations for the thirteen and twenty-six weeks ended July 3, 2005 and July 4, 2004 are not necessarily indicative of the results to be expected for the full year.

2. INVENTORIES

Inventories of finished goods, work-in-process and raw materials are carried at the lower of cost or market, with cost for the majority of our inventories determined under the Last-In, First-Out (LIFO) method. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs and are subject to the final year-end LIFO inventory valuation. Any adjustments arising out of our interim LIFO calculations are allocated to each quarter based on cost of goods sold.

As has been the case in recent years, we are expecting costs to be lower than the prior year. Given this and our interim accounting for LIFO (discussed above), our LIFO reserve at July 3, 2005 is an add back to inventory. In accordance with our interim accounting for LIFO, additional costs will be incurred throughout the remainder of the year to completely offset this positive LIFO reserve.

The components of inventories consist of the following: (in thousands)

	7/3/05		1/1/05			7/4/04
Finished goods	$	383,108	$	340,487		$	356,244
Work in process		63,142		53,598			53,570
Raw materials and supplies		18,235		25,711			17,142
		464,485		419,796			426,956
LIFO and lower-of-cost or market adjustments, net		1,604		(8,095	)		(2,363	)
	$	466,089	$	411,701		$	424,593

3. ACQUISITIONS

On June 15, 2004, we acquired the net assets of American Athletic, Inc. (“AAI”) for approximately $13 million. Founded in 1954, AAI manufactures a variety of products including basketball and volleyball equipment, athletic mats and gymnastics apparatus under a variety of brands, including American Athletic and BPI. AAI markets these products to high schools, universities, professional teams, and athletic clubs globally.

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On July 19, 2004, we acquired the net assets of Huffy Sports Company (“Huffy Sports”), a division of Huffy Corporation, for approximately $30 million. Huffy Sports sells basketball equipment, including backboards and inflatable balls under theHuffy Sports^®,Sure Shot^® andHydra Rib^® brands.

On December 30, 2004, we acquired Brooks Sports (“Brooks”) for approximately $115 million. Brooks is a provider of performance athletic footwear, apparel and accessories to running enthusiasts worldwide. Brooks products are sold predominantly through specialty running stores and other retail outlets specializing in high quality, performance running products.

The results of AAI’s, Huffy Sports’ and Brooks’ operations have been included in our consolidated financial statements since their respective acquisition dates.

4. COMMITMENTS AND CONTINGENCIES

Commitments. Refer to Note 8 to our consolidated financial statements in our 2004 Annual Report on Form 10-K for a description of our commitments.

Contingencies. We are a co-defendant in Locke, et al. v. Russell Corporation, et al.filed on January 13, 2000 in the Circuit Court of Jefferson County, Alabama. Fifteen families who own property on Lake Martin in the Raintree Subdivision in Alexander City, Alabama, were the original plaintiffs in the case, which sought unspecified money damages for trespass and nuisance. However, 10 families dropped out of the case and there are five remaining plaintiff families. In May 2002, the trial court entered summary judgment in our favor on all but one of the plaintiffs’ claims. The remaining claim involves a private right of action for public nuisance. We filed a summary judgment motion in October 2003, which was denied in March 2004. Trial of theLocke case has been set for September 2005. A complaint substantially identical to the one filed in theLocke case was filed on November 20, 2001, in the Circuit Court of Jefferson County, Alabama, by two residents of the Raintree Subdivision (Gould v. Russell Corporation, et al.). The trial court has entered summary judgment in our favor on all claims in that case, and the plaintiffs in the case have filed a motion to alter that determination, which remains pending. The allegations in theLockeandGould cases are similar to those contained in a case styledSullivan, et al. v. Russell Corporation, et al., which was resolved in our favor by a ruling of the Alabama Supreme Court in 2001. We plan to vigorously defend theLockeandGouldsuits.

We also are a party to various other lawsuits arising out of the conduct of our business. We do not believe that any of these lawsuits, if adversely determined, would have a material adverse effect upon us.

5. STOCK-BASED COMPENSATION

On January 5, 2003, we adopted the prospective transition provisions of FASB Statement of Financial Accounting Standards (“SFAS”) No. 148, which amended SFAS No. 123,Accounting and Disclosure of Stock-based Compensation. SFAS No. 148 uses a fair value based method of accounting for employee stock options and similar equity instruments. By electing the prospective transition method of SFAS No. 148, our results of operations and our financial position are not affected by stock compensation awards granted prior to January 5, 2003. We recognized stock compensation expense of approximately $0.3 million and $1.3 million for the thirteen and twenty-six weeks ended July 3, 2005, respectively and $1.0 million and $1.4 million for the thirteen and twenty-six weeks ended July 4, 2004, respectively. For stock compensation awards granted prior to January 5, 2003, we used the intrinsic value approach under Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees.

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The following table presents a comparison of reported results versus pro forma results that assumes the fair value based method of accounting had been applied to all stock compensation awards granted. For purposes of calculating the pro forma amounts below, the estimated fair value of the options is determined using the Black-Scholes option valuation model and is amortized to expense over the options’ vesting period.

	13 Weeks Ended (in thousands)						26 Weeks Ended (in thousands)
	7/3/05			7/4/04			7/3/05			7/4/04
Reported net income	$	4,664		$	10,162		$	6,846		$	10,693
Stock-based employee compensation, net of tax, assuming SFAS No. 148 was applied for all periods		(14	)		(60	)		(28	)		(121	)
Pro forma net income	$	4,650		$	10,102		$	6,818		$	10,572
Reported net income per share-basic	$	0.14		$	0.31		$	0.21		$	0.33
Pro forma net income per share-basic	$	0.14		$	0.31		$	0.21		$	0.32
Reported net income per share-diluted	$	0.14		$	0.31		$	0.21		$	0.33
Pro forma net income per share-diluted	$	0.14		$	0.31		$	0.20		$	0.32

On December 16, 2004, the FASB issued Statement No. 123 (revised 2004),Share-Based Payment, (“Statement 123 (R)”), which is a revision of SFAS No. 123. Statement 123(R) supersedes APB No. 25 and amends FASB Statement No. 95,Statement of Cash Flows. Statement 123 (R) also supersedes SFAS No. 148, which we adopted on January 5, 2003. The approach in Statement 123(R) is similar to the approach described in SFAS No. 123. However, Statement 123(R)requiresall share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. In addition, Statement 123(R) will require us to record stock compensation expense as stock compensation awards granted prior to January 5, 2003 vest, which is a change from our current accounting treatment under SFAS No. 148. Currently, we use the Black-Scholes formula to estimate the value of stock options granted to employees and expect to continue to use this acceptable option valuation model under Statement 123(R). Statement 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after the effective date. We expect to adopt Statement 123(R) in January 2006, and we do not believe this new standard will have a material impact on our results of operations or financial position.

6. DILUTED WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING

Our diluted weighted-average common shares outstanding are calculated as follows:

	13 Weeks Ended (in thousands)		26 Weeks Ended (in thousands)
	7/3/05	7/4/04	7/3/05	7/4/04
Basic weighted-average common shares outstanding	32,980,182	32,652,492	32,919,043	32,614,822
Net common shares underlying unissued restricted stock and issuable on exercise of dilutive stock options	560,056	183,685	449,407	228,397
Diluted weighted-average common shares outstanding	33,540,238	32,836,177	33,368,450	32,843,219

Options to purchase 1.5 million and 1.6 million shares of our common stock for the thirteen and twenty-six weeks ended July 3, 2005, respectively and 1.8 million shares of our common stock for the thirteen and twenty-six weeks ended July 4, 2004, were excluded from the computation of diluted weighted-average common shares outstanding because the exercise prices of the options exceeded the average market price.

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7. COMPREHENSIVE INCOME

Comprehensive income consists of net income and certain changes in assets and liabilities that are not included in net income but are instead reported within Accumulated other comprehensive loss, a separate component of stockholder’s equity. The components of comprehensive income, net of tax, for the periods indicated below are as follows:

	13 Weeks Ended (in thousands)						26 Weeks Ended (in thousands)
	7/3/05			7/4/04			7/3/05			7/4/04
Net Income	$	4,664		$	10,162		$	6,846		$	10,693
Other Comprehensive income (loss):
Foreign currency translation loss, net		(2,254	)		(1,206	)		(2,753	)		(188	)
Gain on derivative instruments, net		1,912			823			3,659			1,488
Minimum pension liability, net		118			—			118			—
Total other comprehensive income (loss)		(224	)		(383	)		1,024			1,300
Comprehensive income, net	$	4,440		$	9,779		$	7,870		$	11,993

8. SEGMENT INFORMATION

We operate our global business primarily in two reportable segments: Sporting Goods and Activewear. The Sporting Goods segment consists of sports apparel, sports equipment and athletic footwear, which are sold principally under the brandsRussell Athletic^®, Spalding^®, Brooks^®, American Athletic^®, Huffy Sports^®, Mossy Oak^®, Moving Comfort^®, Bike^®, Dudley^®,and Sherrin^®. We market and distribute products in the Sporting Goods segment primarily through sporting goods dealers, specialty running stores, department and sports specialty stores, and college stores. Products in the Sporting Goods segment are primarily sourced.

The Activewear segment consists of our basic, performance and careerwear apparel products, such as t-shirts, sweatshirts and sweatpants, knit shirts, socks, and school uniforms. Products in the Activewear segment are sold principally under theJERZEES^® andCross Creek^® brands through mass merchandisers, distributors, screenprinters, and embroiderers. Products in the Activewear segment are primarily manufactured utilizing a combination of owned facilities and third-party contractors.

Other segments that do not meet the quantitative thresholds for determining reportable segments primarily include our fabrics division, custom private label business and Frontier Yarns. These are included in the “All Other” data presented herein.

Prior to 2005, we operated our business along distribution channels and reported two segments: Domestic and International Apparel. In 2005 and after several acquisitions in prior years that have redefined Russell as an authentic athletic and sporting goods company, we have realigned our operations by brands and products. Accordingly, the segment data presented herein for 2004 has been restated to present our segment data on the new basis of segment reporting.

Our management evaluates performance and allocates resources based on profit or loss from operations before interest and income taxes (Segment operating income). Segment operating income as presented by us may not be comparable to similarly titled measures used by other companies. The accounting policies of the reportable segments are the same as those described in Note 1 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended January 1, 2005. Intersegment transfers are recorded at cost, and there is no intercompany profit or loss on intersegment transfers.

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Following is selected financial data by reportable segment:

	13 Weeks Ended (in thousands)				26 Weeks Ended (in thousands)
	7/3/05		7/4/04		7/3/05		7/4/04
Net sales:
Sporting Goods	$	160,282	$	124,122	$	325,585	$	245,701
Activewear		167,833		151,702		298,159		269,117
All Other		13,984		13,947		31,597		26,746
Total net sales	$	342,099	$	289,771	$	655,341	$	541,564
Segment operating income:
Sporting Goods	$	6,956	$	12,267	$	19,399	$	24,555
Activewear		11,868		13,350		14,965		10,750
All Other		886		2,018		3,834		3,156
Total Segment operating income	$	19,710	$	27,635	$	38,198	$	38,461
Depreciation & amortization expense:
Sporting Goods	$	4,261	$	3,271	$	8,218	$	6,237
Activewear		7,390		6,368		13,709		12,989
All Other		1,559		1,771		3,094		2,903
Corporate		444		935		2,068		1,956
Total depreciation & amortization expense	$	13,654	$	12,345	$	27,089	$	24,085
Capital expenditures:
Sporting Goods	$	1,522	$	575	$	2,940	$	1,541
Activewear		5,969		4,670		14,902		6,561
All Other		188		164		495		275
Corporate		1,255		1,571		2,599		1,844
Total capital expenditures	$	8,934	$	6,980	$	20,936	$	10,221
Assets:
Sporting Goods	$	587,033	$	390,145
Activewear		627,185		581,680
All Other		59,967		62,423
Corporate		107,503		123,516
Total assets	$	1,381,688	$	1,157,764

A reconciliation of total segment operating income to consolidated income before income taxes is as follows:

	13 Weeks Ended (in thousands)						26 Weeks Ended (in thousands)
	7/3/05			7/4/04			7/3/05			7/4/04
Total segment operating income	$	19,710		$	27,635		$	38,198		$	38,461
Unallocated amounts:
Corporate expenses		(2,416	)		(4,003	)		(8,658	)		(6,812	)
Interest expense, net		(10,064	)		(7,754	)		(18,953	)		(14,941	)
Consolidated income before income taxes	$	7,230		$	15,878		$	10,587		$	16,708

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9. EMPLOYEE RETIREMENT BENEFITS

The following table presents the components of net periodic pension benefit cost for our qualified, noncontributory, defined benefit pension plans and unfunded plans that provide retirement benefits in excess of qualified plan formulas or regulatory limitations for certain employees:

	13 Weeks Ended (in thousands)						26 Weeks Ended (in thousands)
	7/3/05			7/4/04			7/3/05			7/4/04
Service cost	$	1,540		$	1,238		$	2,947		$	2,447
Interest cost		2,891			2,773			5,801			5,434
Expected return on plan assets		(2,780	)		(2,652	)		(5,528	)		(5,322	)
Net amortization		1,084			454			1,884			667
Net periodic pension benefit cost	$	2,735		$	1,813		$	5,104		$	3,226

Through July 3, 2005, we have made $0.3 million in contributions to the qualified defined benefit pension plans; however, we expect to contribute approximately $14 million before September 15, 2005.

10. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

The following tables present condensed consolidating financial information for: (a) Russell Corporation (the “Parent”) on a stand-alone basis; (b) on a combined basis, the guarantors of the Senior Notes (“Subsidiary Guarantors”), which include Jerzees Apparel, LLC; Mossy Oak Apparel Company; Cross Creek Apparel, LLC; Cross Creek Holdings, Inc.; DeSoto Mills, LLC; Russell Financial Services, Inc.; Russell Asset Management, Inc.; Russell Apparel, LLC; RINTEL Properties, Inc.; Russell Yarn, LLC; Russell Co-Op, LLC; and Brooks Sports, Inc. (all of which are wholly owned); and (c) on a combined basis, the non-guarantor subsidiaries, which include Alexander City Flying Service, Inc.; Russell Servicing Co., Inc.; Russell Europe Limited; Russell Mexico, S.A. de C.V.; Jerzees Campeche, S.A. de C.V.; Jerzees Yucatan, S.A. de C.V.; Athletic de Camargo, S.A. de C.V.; Jerzees de Jimenez, S.A. de C.V.; Cross Creek de Honduras, S.A. de C.V.; Russell Corp. Australia Pty Ltd; Russell do Brasil, Ltda.; Russell Corp. Far East, Limited; Russell Japan KK; Spalding Canada Corp.; Jerzees de Honduras, S.A. do C.V.; Jerzees Buena Vista, S.A.; Jerzees Choloma, S.A.; Russell del Caribe, Inc.; Russell France SARL; Russell CZ s.r.o.; Russell Germany GmbH; Russell Spain, S.L.; Russell Italy S.r.l.; Servicios Russell, S.A. de C.V.; Russell Foreign Sales Ltd.; Russell Corp. Bangladesh Limited; Russell Holdings Europe B.V.; Ruservicios, S.A.; Eagle R Holdings Limited; Citygate Textiles Limited; Russell Colombia Ltda; Russell Athletic Holdings (Ireland) Limited; SGG Lisco LLC; SGG Patents LLC; RLA Manufacturing, S.de R.L.; Brooks GmbH; Brooks Sports Limited (UK); Total Quality Apparel Resources, Inc. (Inactive); Cumberland Asset Management, Inc.; Jerzees Holdings (Ireland) Limited; Russco Holdings, Ltd.; and Frontier Yarns, LLC (our 45.3% owned yarn joint venture). Separate financial statements of the Subsidiary Guarantors are not presented because the guarantee by each 100% owned Subsidiary Guarantor is full and unconditional, joint and several, and we believe separate financial statements and other disclosures regarding the Subsidiary Guarantors are not material to investors. Furthermore, there are no significant legal restrictions on the Parent’s ability to obtain funds from its subsidiaries by dividend or loan.

The Parent is comprised of Alabama manufacturing operations and certain corporate management, information services and finance functions.

12

Russell Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

July 3, 2005 (In thousands) (unaudited)	Parent			Subsidiary Guarantors		Non-Guarantor Subsidiaries			Eliminations			Consolidated
Assets
Current assets:
Cash	$	821		$	15,514	$	28,449		$	—		$	44,784
Accounts receivable, net		14,055			235,368		67,221			(48,566	)		268,078
Inventories		311,080			66,427		88,582			—			466,089
Prepaid expenses and other current assets		30,965			9,479		661			(5,706	)		35,399
Total current assets		356,921			326,788		184,913			(54,272	)		814,350
Property, plant and equipment, net		198,520			31,499		86,227			—			316,246
Investment in subsidiaries		1,336,945			195		—			(1,337,140	)		—
Intercompany balances		(678,795	)		695,403		(16,608	)		—			—
Other assets		67,835			171,466		11,791			—			251,092
	$	1,281,426		$	1,225,351	$	266,323		$	(1,391,412	)	$	1,381,688
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued expenses	$	146,458		$	40,174	$	54,082		$	(54,272	)	$	186,442
Short-term debt		—			—		14,975			—			14,975
Current maturities of long-term debt		17			—		2,007			—			2,024
Total current liabilities		146,475			40,174		71,064			(54,272	)		203,441
Long-term debt, less current maturities		489,941			—		6,817			—			496,758
Deferred liabilities		56,540			30,986		5,493			—			93,019
Non-controlling interests		14,842			—		—			—			14,842
Stockholders’ equity		573,628			1,154,191		182,949			(1,337,140	)		573,628
	$	1,281,426		$	1,225,351	$	266,323		$	(1,391,412	)	$	1,381,688

13

Russell Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

January 1, 2005 (In thousands) (unaudited)	Parent			Subsidiary Guarantors		Non-Guarantor Subsidiaries			Eliminations			Consolidated
Assets
Current assets:
Cash	$	2,554		$	5,594	$	21,668		$	—		$	29,816
Accounts receivable, net		(2,177	)		186,294		59,629			(31,683	)		212,063
Inventories		272,396			59,678		79,627			—			411,701
Prepaid expenses and other current assets		32,796			7,334		578			(16,870	)		23,838
Total current assets		305,569			258,900		161,502			(48,553	)		677,418
Property, plant and equipment, net		209,928			36,372		76,590			—			322,890
Investment in subsidiaries		1,243,104			195		—			(1,243,299	)		—
Intercompany balances		(679,171	)		701,970		(22,799	)		—			—
Other assets		70,602			171,476		11,723			—			253,801
	$	1,150,032		$	1,168,913	$	227,016		$	(1,291,852	)	$	1,254,109
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued expenses	$	153,446		$	40,405	$	49,178		$	(48,553	)	$	194,476
Short-term debt		—			—		18,190			—			18,190
Current maturities of long-term debt		5,016			—		1,922			—			6,938
Total current liabilities		158,462			40,405		69,290			(48,553	)		219,604
Long-term debt, less current maturities		365,083			—		7,838			—			372,921
Deferred liabilities		49,540			30,002		5,095			—			84,637
Non-controlling interests		14,096			—		—			—			14,096
Stockholders’ equity		562,851			1,098,506		144,793			(1,243,299	)		562,851
	$	1,150,032		$	1,168,913	$	227,016		$	(1,291,852	)	$	1,254,109

14

Russell Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

July 4, 2004 (In thousands) (unaudited)	Parent			Subsidiary Guarantors		Non-Guarantor Subsidiaries			Eliminations			Consolidated
Assets
Current assets:
Cash	$	955		$	8,598	$	12,236		$	—		$	21,789
Accounts receivable, net		2,423			192,119		42,295			(10,886	)		225,951
Inventories		334,940			50,489		39,164			—			424,593
Prepaid expenses and other current assets		30,914			2,984		551			(482	)		33,967
Total current assets		369,232			254,190		94,246			(11,368	)		706,300
Property, plant and equipment, net		220,575			37,129		59,599			—			317,303
Investment in subsidiaries		991,752			195		—			(991,947	)		—
Intercompany balances		(605,287	)		620,875		(15,588	)		—			—
Other assets		98,337			25,861		9,963			—			134,161
	$	1,074,609		$	938,250	$	148,220		$	(1,003,315	)	$	1,157,764
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued expenses	$	121,758		$	33,688	$	28,347		$	(11,368	)	$	172,425
Short-term debt		—			—		9,481			—			9,481
Current maturities of long-term debt		5,017			—		1,865			—			6,882
Total current liabilities		126,775			33,688		39,693			(11,368	)		188,788
Long-term debt, less current maturities		353,259			—		8,813			—			362,072
Deferred liabilities		55,070			7,415		4,914			—			67,399
Non-controlling interests		12,348			—		—			—			12,348
Stockholders’ equity		527,157			897,147		94,800			(991,947	)		527,157
	$	1,074,609		$	938,250	$	148,220		$	(1,003,315	)	$	1,157,764

15

Russell Corporation and Subsidiaries

Condensed Consolidated Statements of Income

For the 13 Weeks Ended July 3, 2005 (In thousands) (unaudited)	Parent			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Net sales	$	303,778		$	72,411		$	184,954		$	(219,044	)	$	342,099
Cost of goods sold		246,867			56,536			166,170			(217,678	)		251,895
Gross profit		56,911			15,875			18,784			(1,366	)		90,204
Selling, general and administrative expenses		38,078			24,514			10,594			—			73,186
Other expense (income), net		41,544			(41,886	)		(681	)		—			(1,023	)
Operating income (loss)		(22,711	)		33,247			8,871			(1,366	)		18,041
Interest expense (income), net		20,348			(10,720	)		436			—			10,064
Earnings of non-controlling interests		747			—			—			—			747
Income (loss) before income taxes and equity in earnings of consolidated subsidiaries		(43,806	)		43,967			8,435			(1,366	)		7,230
Provision (benefit) for income taxes		(13,849	)		15,577			838			—			2,566
Equity in earnings of consolidated subsidiaries, net of income taxes		34,621			—			—			(34,621	)		—
Net income (loss)	$	4,664		$	28,390		$	7,597		$	(35,987	)	$	4,664
Russell Corporation and Subsidiaries Condensed Consolidated Statements of Income
For the 13 Weeks Ended July 4, 2004 (In thousands) (unaudited)	Parent			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Net sales	$	212,130		$	43,484		$	84,367		$	(50,210	)	$	289,771
Cost of goods sold		155,240			32,861			70,896			(49,571	)		209,426
Gross profit		56,890			10,623			13,471			(639	)		80,345
Selling, general and administrative expenses		39,123			14,397			8,166			—			61,686
Other expense (income), net		24,216			(29,111	)		(213	)		(139	)		(5,247	)
Operating income (loss)		(6,449	)		25,337			5,518			(500	)		23,906
Interest expense (income), net		15,941			(8,524	)		337			—			7,754
Earnings of non-controlling interests		274			—			—			—			274
Income (loss) before income taxes and equity in earnings of consolidated subsidiaries		(22,664	)		33,861			5,181			(500	)		15,878
Provision (benefit) for income taxes		(18,469	)		22,992			1,193			—			5,716
Equity in earnings of consolidated subsidiaries, net of income taxes		14,357			—			—			(14,357	)		—
Net income (loss)	$	10,162		$	10,869		$	3,988		$	(14,857	)	$	10,162

16

Russell Corporation and Subsidiaries

Condensed Consolidated Statements of Income

For the 26 Weeks Ended July 3, 2005 (In thousands) (unaudited)	Parent			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Net sales	$	583,549		$	130,644		$	352,803		$	(411,655	)	$	655,341
Cost of goods sold		472,002			99,507			316,793			(409,057	)		479,245
Gross profit		111,547			31,137			36,010			(2,598	)		176,096
Selling, general and administrative expenses		77,523			47,539			21,641			—			146,703
Other expense (income), net		80,842			(80,956	)		(1,454	)		—			(1,568	)
Operating income (loss)		(46,818	)		64,554			15,823			(2,598	)		30,961
Interest expense (income), net		38,896			(20,799	)		856			—			18,953
Earnings of non-controlling interests		1,421			—			—			—			1,421
Income (loss) before income taxes and equity in earnings of consolidated subsidiaries		(87,135	)		85,353			14,967			(2,598	)		10,587
Provision (benefit) for income taxes		(27,858	)		29,663			1,936			—			3,741
Equity in earnings of consolidated subsidiaries, net of income taxes		66,123			—			—			(66,123	)		—
Net income (loss)	$	6,846		$	55,690		$	13,031		$	(68,721	)	$	6,846
Russell Corporation and Subsidiaries Condensed Consolidated Statements of Income
For the 26 Weeks Ended July 4, 2004 (In thousands) (unaudited)	Parent			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Net sales	$	404,073		$	71,678		$	130,663		$	(64,850	)	$	541,564
Cost of goods sold		300,256			54,372			106,150			(64,192	)		396,586
Gross profit		103,817			17,306			24,513			(658	)		144,978
Selling, general and administrative expenses		75,164			27,465			15,535			—			118,164
Other expense (income), net		54,166			(58,788	)		(329	)		(158	)		(5,109	)
Operating income (loss)		(25,513	)		48,629			9,307			(500	)		31,923
Interest expense (income), net		28,696			(14,194	)		439			—			14,941
Earnings of non-controlling interests		274			—			—			—			274
Income (loss) before income taxes and equity in earnings of consolidated subsidiaries		(54,483	)		62,823			8,868			(500	)		16,708
Provision (benefit) for income taxes		(18,644	)		22,992			1,667			—			6,015
Equity in earnings of consolidated subsidiaries, net of income taxes		46,532			—			—			(46,532	)		—
Net income (loss)	$	10,693		$	39,831		$	7,201		$	(47,032	)	$	10,693

17

Russell Corporation and Subsidiaries

Condensed Consolidated Statement of Cash Flows

For the 26 Weeks Ended July 3, 2005 (In thousands) (unaudited)	Parent			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Eliminations		Consolidated
Operating Activities
Net cash (used in) provided by operating activities	$	(92,385	)	$	30,552		$	(26,869	)	$	—	$	(88,702	)
Investing Activities
Purchases of property, plant and equipment		(6,981	)		(734	)		(13,221	)		—		(20,936	)
Investment in and advances to subsidiaries		(29,122	)		(20,735	)		49,857			—		—
Proceeds from the sale of property, plant and equipment and other Assets		811			1,876			—			—		2,687
Cash refunded from (paid for) acquisitions, joint ventures and other, net		4,441			(1,039	)		—			—		3,402
Other		(196	)		—			—			—		(196	)
Net cash (used in ) provided by investing activities		(31,047	)		(20,632	)		36,636			—		(15,043	)
Financing Activities
Borrowings (payments) on credit facility and other, net		119,871			—			(1,033	)		—		118,838
Payments on short-term debt, net		—			—			(1,889	)		—		(1,889	)
Dividends on common stock		(2,626	)		—			—			—		(2,626	)
Treasury stock re-issued		4,484			—			—			—		4,484
Cost of common stock for treasury		(30	)		—			—			—		(30	)
Net cash provided by financing activities		121,699			—			(2,922	)		—		118,777
Effect of exchange rate changes on cash		—			—			(64	)		—		(64	)
Net (decrease) increase in cash		(1,733	)		9,920			6,781			—		14,968
Increase in cash from consolidating Frontier Yarns, LLC		—			—			—			—		—
Cash balance at beginning of period		2,554			5,594			21,668			—		29,816
Cash balance at end of period	$	821		$	15,514		$	28,449		$	—	$	44,784

18

Russell Corporation and Subsidiaries

Condensed Consolidated Statement of Cash Flows

For the 26 Weeks Ended July 4, 2004 (In thousands) (unaudited)	Parent			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Eliminations		Consolidated
Operating Activities
Net cash (used in) provided by operating activities	$	(1,626	)	$	(36,898	)	$	(27,026	)	$	—	$	(65,550	)
Investing Activities
Purchases of property, plant and equipment		(4,993	)		(684	)		(4,544	)		—		(10,221	)
Investment in and advances to subsidiaries		(60,483	)		29,494			30,989			—		—
Proceeds from sales of property, plant and equipment		923			846			—			—		1,769
Cash paid for acquisitions, joint ventures and other		(14,758	)		—			—			—		(14,758	)
Other		1,469			—			—			—		1,469
Net cash (used in) provided by investing activities		(77,842	)		29,656			26,445			—		(21,741	)
Financing Activities
Borrowings on credit facility, net		80,873			—			(449	)		—		80,424
Borrowings on short-term debt		—			—			1,617			—		1,617
Dividends on common stock		(2,605	)		—			—			—		(2,605	)
Treasury stock re-issued		1,759			—			—			—		1,759
Cost of common stock for treasury		(17	)		—			—			—		(17	)
Net cash provided by (used in) financing activities		80,010			—			1,168			—		81,178
Effect of exchange rate changes on cash		—			—			(73	)		—		(73	)
Net (decrease) increase in cash		542			(7,242	)		514			—		(6,186	)
Increase in cash from consolidating Frontier Yarns, LLC		—			—			7,859			—		7,859
Cash balance at beginning of period		414			15,840			3,862			—		20,116
Cash balance at end of period	$	956		$	8,598		$	12,235		$	—	$	21,789

19

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Russell Corporation

We have reviewed the condensed consolidated balance sheets of Russell Corporation and subsidiaries as of July 3, 2005 and July 4, 2004, the related condensed consolidated statements of income for the thirteen and twenty-six week periods ended July 3, 2005 and July 4, 2004, and the condensed consolidated statements of cash flows for the twenty-six week periods ended July 3, 2005 and July 4, 2004. These financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Russell Corporation and subsidiaries as of January 1, 2005, and the related consolidated statements of income, stockholders’ equity, and cash flows for the year then ended [not presented herein] and in our report dated March 16, 2005, we expressed an unqualified opinion on those consolidated financial statements and included an explanatory paragraph for the consolidation of Frontier Yarns in accordance with the provisions of FASB Interpretation No. 46,Consolidation of Variable Interest Entities. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of January 1, 2005, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Ernst & Young LLP

Atlanta, Georgia

August 2, 2005

20

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Russell Corporation is a leading authentic athletic and sporting goods company with over a century of success. We operate our global business primarily in two reportable segments: Sporting Goods and Activewear. The Sporting Goods segment consists of sports apparel, sports equipment and athletic footwear, which are sold principally under the brandsRussell Athletic®, Spalding®, Brooks®, American Athletic®, Huffy Sports®, Mossy Oak®, Moving Comfort®, Bike®, Dudley®,andSherrin®. The Activewear segment consists of our basic, performance and careerwear apparel products, such as t-shirts, sweatshirts and sweatpants, knit shirts, socks, and school uniforms. Products in the Activewear segment are sold principally under theJERZEES® andCross Creek® brands. Other businesses that do not meet the quantitative thresholds for determining reportable segments primarily include our fabrics division, custom private label business and Frontier Yarns.

In 2004, we made three strategic acquisitions to further advance our position in the sports equipment and athletic footwear businesses. On June 15, 2004, we acquired American Athletic, Inc. (“AAI”), a leader in the gymnastics equipment business, but just as important to us, provided our Spalding business a platform for extension into the basketball backboard and backboard systems business. On July 19, 2004, we acquired Huffy Sports, which further expanded our basketball backboard, backboard systems and accessories business. On December 30, 2004, we entered into the athletic footwear business with the acquisition of Brooks Sports (“Brooks”). Brooks is a pioneer in the technical footwear industry, and its technical apparel is highly valued in the world of serious runners.

Typically, demand for our apparel products is higher during the third and fourth quarters of each fiscal year. Weather conditions also affect the demand for our apparel products, particularly for fleece products (sweatshirts and sweatpants). Generally, we produce, source and store finished goods inventory, particularly fleece, to meet the expected demand for delivery in the upcoming season.

Summary of results for the second quarter of 2005 included:

• Net sales were at record levels for the second quarter and included $50.6 million of incremental sales from our 2004 acquisitions.

• Dozens shipped in our Activewear segment were up approximately 11% versus the prior year.

• Net sales in our Sporting Goods segment were positively impacted by acquisitions in the quarter but negatively impacted by lower sales volume of our Mossy Oak branded products, the absence of the Major League Baseball related business and the discontinuance of the Discus brand at a major retail account.

• Increase in product demand (primarily in our Activewear segment) led to significant cost increases associated with ramping up production quickly and reacting to changes in style mix.

• $10 million term loan was paid off.

21

DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS

Consolidated Results

The following information is derived from our unaudited condensed consolidated statements of income for the thirteen and twenty-six weeks ended July 3, 2005 and July 4, 2004.

	13 Weeks Ended										26 Weeks Ended
(Dollars in millions)	July 3, 2005					July 4, 2004					July 3, 2005					July 4, 2004
Net sales	$	342.1		100.0	%	$	289.8		100.0	%	$	655.3		100.0	%	$	541.6		100.0	%
Cost of goods sold		251.9		73.6	%		209.4		72.3	%		479.2		73.1	%		396.6		73.2	%
Gross profit		90.2		26.4	%		80.4		27.7	%		176.1		26.9	%		145.0		26.8	%
Selling, general and administrative expenses (SG&A)		73.2		21.4	%		61.7		21.3	%		146.7		22.4	%		118.2		21.8	%
Other (income) expense, net		(1.0	)	(0.3	)%		(5.2	)	(1.8	)%		(1.5	)	(0.2	)%		(5.1	)	(0.9	)%
Operating income		18.0		5.3	%		23.9		8.2	%		30.9		4.7	%		31.9		5.9	%
Interest expense, net		10.1		3.0	%		7.7		2.7	%		19.0		2.9	%		14.9		2.8	%
Earnings of non-controlling interests		0.7		0.2	%		0.3		—	%		1.4		0.2	%		0.3		—	%
Income before income taxes		7.2		2.1	%		15.9		5.5	%		10.5		1.6	%		16.7		3.1	%
Provision for income taxes		2.5		0.8	%		5.7		2.0	%		3.7		0.6	%		6.0		1.1	%
Net income	$	4.7		1.3	%	$	10.2		3.5	%	$	6.8		1.0	%	$	10.7		2.0	%

Net sales for the 2005 second quarter were $342.1 million, an increase of $52.3 million, or 18.0%, from last year’s second quarter sales of $289.8 million. Incremental net sales from acquisitions (Brooks, Huffy Sports and AAI) were $50.6 million for the second quarter of 2005, while net sales from our ongoing businesses were slightly better than the comparable period last year. Net sales for the first six months of 2005 were $655.3 million, an increase of $113.7 million, or 21.0%, from the comparable period a year ago. Incremental net sales from acquisitions (Brooks, Huffy Sports and AAI) were $104.7 million for the first six months of 2005, while net sales from our ongoing businesses were up slightly over the comparable period last year. See segment analysis below for more information.

Gross profit was $90.2 million, or 26.4% of net sales, in the 2005 second quarter versus a gross profit of $80.4 million, or 27.7% of net sales, in the prior year. Excluding the contribution from acquisitions, our gross profit was $73.9 million, or 25.5% of net sales. This decrease in gross profit as a percent of net sales is primarily due to (i) significant costs incurred in our Activewear segment to ramp up production quickly to meet increased demand for our products and react to changes in style mix, (ii) sales volume and pricing declines in our Mossy Oak branded products, (iii) the loss of the Major League Baseball related business, and (iv) the discontinuance of the Discus brand at a major account, which were offset by higher sales volumes in our Activewear segment (primarily in Artwear).

Gross profit was $176.1 million, or 26.9% of net sales, in the first six months of 2005 versus a gross profit of $145.0 million, or 26.8% of net sales, in the prior year. Excluding the contribution from acquisitions, our gross profit was $140.9 million, or 25.6% of net sales. This decrease in gross profit as a percent of net sales for the first half of 2005 is primarily due to (i) lower sales volumes in our Mossy Oak business, (ii) the loss of the Major League Baseball related business and (iii) the discontinuance of the Discus brand at a major account, which were offset by higher sales volumes in our Activewear segment (primarily in Artwear).

Selling, general and administrative expenses (“SG&A”) were $73.2 million, or 21.4% of net sales, in the 2005 second quarter which was basically flat with the 21.3% of net sales in the comparable prior year period. SG&A was $146.7 million, or 22.4% of net sales, for the first six months of 2005 versus $118.2 million, or 21.8% of net sales, in the comparable prior year period. This increase in SG&A as a percent of net sales is primarily due to the impact of acquisitions (as our recently acquired sporting goods brands have higher SG&A costs as a percent of sales than do our base businesses), additional expenses to comply with the Sarbanes-Oxley Act of 2002 and higher pension costs.

Other income was $1.0 million in the 2005 second quarter, down $4.2 million versus $5.2 million in the comparable period a year ago. For the first six months of 2005, other income was $1.5 million, down $3.6 million from the $5.1 million in the first six months of 2004. These decreases were primarily driven by the $4.4 million gain on the sale of our investment in Marmot Mountain. Ltd. (“Marmot”) in the 2004 second quarter, less $0.9 million in gains on sales of non-core assets in the second quarter 2005.

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Segment Results

The following table presents a breakdown of our net sales and segment operating income by segment:

	13 Weeks Ended (in millions)				26 Weeks Ended (in millions)
	July 3, 2005		July 4, 2004		July 3, 2005		July 4, 2004
Net sales:
Sporting Goods	$	160.3	$	124.1	$	325.6	$	245.7
Activewear		167.8		151.7		298.1		269.1
All Other		14.0		14.0		31.6		26.8
Total net sales	$	342.1	$	289.8	$	655.3	$	541.6
Segment operating income:
Sporting Goods	$	7.0	$	12.3	$	19.4	$	24.6
Activewear		11.8		13.3		15.0		10.8
All Other		0.9		2.0		3.8		3.1
Total Segment operating income	$	19.7	$	27.6	$	38.2	$	38.5

Sporting Goods

For the 2005 second quarter, net sales in our Sporting Goods segment totaled $160.3 million, an increase of $36.2 million, or 29.2%, from the comparable period last year. Excluding incremental net sales from acquisitions, net sales in the Sporting Goods segment for the 2005 first quarter decreased $14.4 million, or 11.7%. Approximately $6.1 million of this decrease relates to Mossy Oak, as dozens shipped quarter-over-quarter are down over 25% and pricing continues to be pressured by our competitors and several of our customers who are substantially promoting their own private label camouflage products. The remaining decrease in quarter-over-quarter net sales relates to the Major League Baseball apparel contract, which expired in December 2004 and the discontinuance of the Discus brand at a major account.

For the first six months of 2005, net sales in our Sporting Goods segment totaled $325.6 million, an increase of $79.9 million, or 32.5%, from the comparable period last year. Excluding incremental net sales from acquisitions, net sales in the Sporting Goods segment for the first half of 2005 decreased $24.8 million, or 10.1%. Approximately $10.1 million of this decrease relates to Mossy Oak, as dozens shipped in the first half of 2005 versus the comparable prior year period are down over 24%. The remaining decrease in net sales for the first half 2005 relates to the Major League Baseball apparel contract, which expired in December 2004, and the discontinuance of the Discus brand at a major account.

In the 2005 second quarter, our Sporting Goods segment operating income was $7.0 million, or 4.4% of the segment’s net sales, versus $12.3 million, or 9.9% of the segment’s net sales, in the comparable period last year. Excluding the impact from acquisitions and the $4.4 million gain on the sale of our investment in Marmot in the prior year, Sporting Goods segment operating income was $4.1 million, or 3.7% for the 2005 second quarter versus $7.8 million, or 6.3%, for the comparable prior year period. The decrease in segment operating income is primarily due to the factors noted above that describe the decrease in net sales quarter-over-quarter.

In the first half of 2005, our Sporting Goods segment operating income was $19.4 million, or 6.0% of the segment’s net sales, versus $24.6 million, or 10.0% of the segment’s net sales, in the comparable period last year. Excluding the impact from acquisitions and the $4.4 million gain on the sale of our investment in Marmot in the prior year, Sporting Goods segment operating income was $9.7 million, or 4.4%, for the first half of 2005 versus $20.0 million, or 8.2%, for the comparable prior year period. The decrease in segment operating income is primarily due to the factors noted above that describe the decrease in first half 2005 sales versus the comparable prior year period.

Activewear

For the 2005 second quarter, net sales in our Activewear segment totaled $167.8 million, an increase of $16.1 million, or 10.6%, from the comparable period last year. This increase in net sales was primarily driven by volume in the Artwear and Mass Retail channels as dozens shipped in the 2005 second quarter were up approximately 11% versus the comparable prior year period. In the first half of 2005, net sales in our Activewear segment totaled $298.1 million, an increase of $29.0 million, or 10.8%, from the comparable period last year. Similar to the second quarter, this increase in net sales was primarily driven by volume in the Artwear and Mass Retail channels as dozens shipped in the first half of 2005 were up approximately 11% versus the comparable prior year period.

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Although net sales are up in the Activewear segment, this increase and related demand for our products caused significant cost increases associated with ramping up production quickly and reacting to changes in style mix. Because of this, segment operating income for the 2005 second quarter was $11.8 million, or 7.0% of the segment’s net sales, versus $13.3 million, or 8.8% of the segment’s net sales, in the comparable period last year.

On a year-to-date basis, segment operating income is $15.0 million, or 5.0% of the segment’s net sales in 2005 versus $10.8 million, or 4.0% of the segment’s net sales, in 2004. This increase is the result of the sales volume increase in the Artwear and Mass Retail channels along with lower manufacturing costs as a result of our ongoing cost savings initiatives during the first quarter 2005 that more than offset the operational issues seen in the second quarter 2005.

All Other

For the 2005 second quarter, net sales for all other segments totaled $14.0 million which was consistent with the comparable prior year period. Net sales for the first half of 2005 for all other segments were $31.6 million, an increase of $4.8 million, or 17.9%, from the comparable period’s net sales of $26.8 million. This increase in net sales was primarily driven by increased volume in our fabrics division and custom private label business along with additional net sales from the consolidation of Frontier Yarns.

In the 2005 second quarter, all other segments contributed $0.9 million of segment operating income, or 6.4% of their net sales, versus $2.0 million, or 14.3% of their net sales, in the comparable period last year. This decrease relates to additional rework costs incurred to improve product quality and an increase in the bad debt reserve for a certain account.

For the first half of 2005, all other segments contributed $3.8 million of segment operating income, or 12.0% of their net sales, versus $3.1 million, or 11.6% of their net sales, in the comparable prior year period. This increase was primarily driven by the increased sales volume in our fabrics division and custom private label business in the first quarter of 2005, which more than offset the additional rework costs and the increase in bad debt reserves that occurred in the 2005 second quarter.

Corporate Expenses

Corporate expenses are primarily enterprise costs that are not allocated to the segments. Corporate expenses decreased by $1.6 million to $2.4 million in the 2005 second quarter versus $4.0 million in the comparable prior year period. This decrease was due to gains on sales of non-core assets and lower incentive compensation accruals as a result of our earnings decline in the 2005 second quarter and outlook for the remainder of the year. For the first six months of 2005, corporate expenses increased by $1.8 million to $8.6 million versus $6.8 in the comparable prior year period. This increase is primarily the result of the incremental costs to comply with the Sarbanes-Oxley Act of 2002 and additional pension cost, less gains on sales of non-core assets.

OUTLOOK

We continue to expect sales for fiscal 2005 to increase approximately 15% to 17%, to approximately $1.50 billion to $1.52 billion. However, based on the second quarter results, we have changed our earnings per share outlook for the 2005 full year. We now expect earnings per share, on a fully diluted basis, to be in the $1.40 to $1.48 range for 2005.

LIQUIDITY AND CAPITAL RESOURCES

Our financial condition is reflected in the following (dollars in thousands):

	July 3, 2005			January 1, 2005			July 4, 2004
Working capital	$	610,909		$	457,814		$	517,512
Net debt	$	468,973		$	368,233		$	356,646
Net debt to total capital ratio		45.0	%		40.0	%		40.4	%

Net debt is defined as short-term and long-term borrowings less cash. For the ratio of net debt to total capital, total capital is defined as net debt plus stockholders’ equity.

The increase in working capital at July 3, 2005 as compared to July 4, 2004 is primarily due to the acquisitions of Brooks Sports and Huffy Sports along with the ramp up needed to support our anticipated sales growth for the remainder of the year.

Net debt is $112.4 million higher at July 3, 2005 as compared to July 4, 2004; however, this increase is lower than the $140.2 million of investments in acquisitions that have been made during the same period.

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Cash from Operating Activities

Cash provided by operating activities is primarily dependent on the level of income and controlling investments in inventories and other working capital components. Cash provided by operating activities is substantially higher in the second half of the year due to higher net income and reduced working capital requirements during that period.

Our operations used approximately $88.7 million of cash during the first half of 2005, versus using $65.6 million during the same period in 2004. The primary reasons for the increase in cash usage were (i) stronger sales at the end of the 2005-second quarter versus the end of the 2004-second quarter and (ii) net increase in cash outflow for incentive compensation (i.e. a component of accounts payable and accrued expenses), as higher incentive compensation was earned in 2004 (paid in early 2005), compared with lower amounts earned in 2003 (paid in early 2004).

Cash from Investing Activities

Net cash used in investing activities was $15.0 million in the first half of 2005 versus $21.7 million in the comparable prior year period. Our investing activities in the 2005 first six months have consisted primarily of capital expenditures of $20.9 million less $4.5 million of proceeds from the settlement of disputes in the Spalding purchase agreement and the sale of non-core assets. In the first half of 2004, our investing activities primarily consisted of capital expenditures of $10.2 million and investments in acquisitions of $14.8 million less $1.8 million of proceeds from the sale of non-core assets and $1.5 million of distributions from joint ventures.

For fiscal 2005, we are forecasting capital expenditures to be approximately $55 million. The majority of planned fiscal 2005 capital expenditures are to further enhance our manufacturing capabilities, including the completion of Phase I of the new textile facility in Honduras, and to improve our information systems capabilities to support our business initiatives.

Cash From Financing Activities

We paid $2.6 million in dividends ($0.08 per share) during the first six months of 2005 and 2004.

On July 3, 2005, our debt facilities and outstanding debt obligations included:

• $300 million in Senior Secured Credit Facilities (the “Facilities”). The Facilities include a $300 million Senior Secured Revolving Credit Facility (the “Revolver”) due April 2007, of which $239.9 million was outstanding;

• $250 million in 9.25% Senior Unsecured Notes (the “Senior Notes”) due 2010; and

• $23.9 million of other outstanding borrowings, of which $14.5 million related to our line of credit used by our subsidiary in the United Kingdom; $0.5 million related to draws made by Frontier Yarns on their factored receivables; and $8.9 million related to notes and capital leases held by Frontier Yarns for machinery and equipment used in operations.

On April 6, 2005, we paid off the remaining $10 million outstanding under our Senior Secured Term Loan.

Under the Facilities, pricing is adjusted quarterly based on our consolidated fixed charge coverage ratio. Variable interest on the Revolver from April 4, 2005 to July 3, 2005 was either LIBOR plus 2.00% (5.70% at July 3, 2005) or Base Rate plus 0.50% (6.75% at July 3, 2005), with an annual commitment fee on the unused portion of the Facilities of 0.375%.

For the third quarter of 2005, variable interest on the Revolver is expected to be consistent with the second quarter 2005, as either LIBOR plus 2.00% or Base Rate plus 0.50% with an annual commitment fee on the unused portion of the Facilities of 0.375%.

Adequacy of Borrowing Capacity

The availability under our Revolver is subject to a borrowing base limitation that is determined on the basis of eligible accounts receivable and inventory. As of July 3, 2005, we had $239.9 million outstanding under the Revolver and approximately $49 million of availability under our Revolver. We also had $44.8 million in cash available to fund ongoing operations. Although there can be no assurances, we believe that cash flow available from operations, along with the availability under our Revolver and cash on hand, will be sufficient to operate our business; satisfy our working capital, capital expenditure and pension funding requirements; and meet our foreseeable liquidity requirements, including debt service on our Senior Notes and the Facilities until the maturity of our Facilities in 2007.

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Contingencies

For information concerning our ongoing litigation, see Note 4 to the Condensed Consolidated Financial Statements.

Commitments

For information about our contractual cash obligations and other commercial commitments, refer to Management’s Discussion & Analysis of Financial Condition and Results of Operations in our 2004 Annual Report on Form 10-K.

Quantitative and Qualitative Disclosures About Market Risks

We are exposed to market risks relating to fluctuations in interest rates, currency exchange rates and commodity prices. Our financial risk management objectives are to minimize the potential impact of interest rate, foreign exchange rate and commodity price fluctuations on our earnings, cash flows and equity. To manage these risks, we may use various financial instruments, including interest rate swap agreements, foreign currency forward contracts and commodity futures contracts. Refer to Notes 1 and 4 of the consolidated financial statements in our Annual Report on Form 10-K for the year ended January 1, 2005, for a more complete description of our accounting policies and the extent of our use of such instruments.

The following analyses present the sensitivity of the market value, earnings or cash flows, as applicable, of our significant financial instruments to hypothetical changes in interest rates, exchange rates and commodity prices as if these changes had occurred at July 3, 2005. The range of changes chosen for these analyses reflects our view of changes that are reasonably possible over a one-year period. Market values are the present values of projected future cash flows based on the interest rate assumptions or quoted market prices, where available. These forward-looking disclosures are selective in nature and only address the potential impacts from financial instruments. They do not include other potential effects, which could impact our business as a result of these changes in interest rates, exchange rates and commodity prices.

Interest Rate and Debt Sensitivity Analysis.At July 3, 2005, our outstanding debt totaled $513.8 million, which consisted of fixed-rate debt of $258.9 million and variable-rate debt of $254.9 million. Based on our average outstanding borrowings under our variable-rate debt for the twenty-six weeks ended July 3, 2005, a one-percentage point increase in interest rates would have negatively impacted our 2005 first half pre-tax earnings and cash flows by approximately $1.0 million. A one-percentage point increase in market interest rates would decrease the fair market value of our fixed-rate debt at July 3, 2005 by approximately $2.1 million. Changes in the fair value of our fixed rate debt will not have any impact on us unless we repurchase the debt in the open market.

Currency Exchange Rate Sensitivity.We have foreign currency exposures related to buying, selling and financing in currencies other than our functional currencies. We also have foreign currency exposure related to foreign denominated revenues and costs translated into U.S. dollars. These exposures are primarily concentrated in the euro and British pound sterling and to a lesser extent, the Australian dollar and Japanese yen. We enter into foreign currency forward contracts to manage the risk associated with doing business in foreign currencies. Our policy is to hedge currency exposures of firm commitments and anticipated transactions denominated in non-functional currencies to protect against the possibility of diminished cash flow and adverse impacts on earnings. At July 3, 2005, we had a $1.4 million asset associated with these foreign currency forward contracts. A five-percentage point adverse change in the foreign currency spot rates would decrease our foreign currency forward contract asset at July 3, 2005 by $2.6 million. Changes in the fair value of our foreign currency forward contract liability will not have any impact on our results of operations unless these contracts are deemed to be ineffective at hedging currency exposures of anticipated transactions. We generally view our net investments in foreign subsidiaries that have a functional currency other than the U.S. dollar as long-term. As a result, we generally do not hedge these net investments.

Commodity Price Sensitivity.The availability and price of cotton is subject to wide fluctuations due to unpredictable factors such as weather conditions, governmental regulations, economic climate or other unforeseen circumstances. In addition, the price of polyester is subject to fluctuations, due to petroleum prices, the economic climate or other unforeseen circumstances. We purchase yarn from Frontier Yarns, Frontier Spinning, and other third parties, and our yarn pricing will continue to be impacted by the price of cotton and polyester. We did not have any outstanding commodity futures contracts at July 3, 2005.

FORWARD-LOOKING INFORMATION

This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” includes “forward-looking” statements (as defined by the Private Securities Litigation Reform Act of 1995 (the “Act”)) that describe our beliefs concerning future business conditions, prospects, growth opportunities, and the outlook for the Company based upon currently available information. Wherever possible, we have identified these forward-looking statements by words such as “anticipate”, “believe”, “could”, “may”, “intend”, “estimate”, “expect”, “project”, “could”, “will”, and similar expressions. We include such statements because we believe it is important to communicate our future expectations to our stockholders, and we therefore make such forward-looking statements in reliance upon the safe harbor provisions of the Act. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including, but not limited to, any projections of net sales, gross margin, expenses, or earnings or losses from operations or per share. These forward-looking statements are based upon assumptions we believe are reasonable.

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Factors that could cause our actual results to differ materially from those expressed or implied in such forward-looking statements include, but are not limited to: (a) the effect of pricing pressures and competition on our Mossy Oak business; (b) our ability to leverage growth opportunities; (c) our ability to effect cost reductions and resolve current operational issues; (d) changes in customer demand for our products; (e) changes in weather and the seasonal nature of our business; (f) changes in economic conditions such as changes in interest rates, currency exchange rates, commodity prices, and other external and political factors over which we have no control; (g) significant competitive activity, including promotional and price competition; (h) our investments in capital expenditures; (i) our management of inventory levels and working capital; (j) our debt structure, cash management and cash requirements; (k) our ability to efficiently utilize plants and equipment; and (l) other risk factors listed from time to time in our SEC filings. We undertake no obligation to revise the forward-looking statements included in this Quarterly Report on Form 10-Q to reflect any future events or circumstances. Our actual results, performance or achievements could differ materially from the results expressed or implied by any forward-looking statements contained in this Quarterly Report.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

We are exposed to market risks relating to fluctuations in interest rates, currency exchange rates and commodity prices. Please see our update under the “LIQUIDITY AND CAPITAL RESOURCES” section in Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Quarterly Report on Form 10-Q.

ITEM 4. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that information we are required to disclose in the reports we file under the Securities Exchange Act of 1934, as amended (“Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to ensure that such information is accumulated and communicated to our management, including our Chairman and Chief Executive Officer and Senior Vice President, Chief Financial Officer as appropriate, to allow timely decisions regarding disclosure. As of the end of the period covered by this Quarterly Report on Form 10-Q, we evaluated, under the supervision and with the participation of our management, including our Chairman and Chief Executive Officer and Senior Vice President, Chief Financial Officer, the effectiveness of our disclosure controls and procedures. Based on that evaluation, our Chairman and Chief Executive Officer and Senior Vice President, Chief Financial Officer concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures are effective.

During the fiscal quarter ended July 3, 2005, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Contingencies. For information concerning our ongoing litigation, see Note 4 to the Condensed Consolidated Financial Statements.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits (numbered in accordance with Item 601 of Regulation S-K)

Exhibit Numbers	Description
(10a)	Employment Agreement, dated June 14, 2005, between Russell Corporation and Victoria W. Beck (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K dated July 27, 2005).
(15)	Letter re/ unaudited interim financial information
(31a)	Rule 13a-14(a)/15d-14(a) CEO Certification
(31b)	Rule 13a-14(a)/15d-14(a) CFO Certification
(32)	Section 1350 Certifications

With respect to the unaudited financial information of Russell Corporation, incorporated by reference into effective registration statements on Form S-3 and Form S-8, Ernst & Young LLP reported that they have applied limited procedures in accordance with professional standards for a review of such information. However, their separate reports, including the report dated August 2, 2005 included herein, state that they did not audit and they do not express an opinion on that unaudited financial information. Accordingly, the degree of reliance on their reports on such information should be restricted in light of the limited nature of the review procedures applied. Ernst & Young LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933 for their reports on the unaudited financial information because those reports are not a “report” or a “part” of the registration statement prepared or certified by Ernst & Young LLP within the meaning of Sections 7 and 11 of the Securities Act.

(b) Reports on Form 8-K

On April 27, 2005, we filed a Form 8-K reporting on the following:

(i) Under Item 1.01, we reported on the April 27, 2005 amendment of the Rights Agreement, dated September 15, 1999, by and between Russell Corporation, an Alabama corporation and SunTrust Bank, as Rights Agent.

(ii) Under Item 2.02, we reported on the issuance of our press release announcing our results of operations for the first quarter of fiscal 2005.

(iii) Under Item 8.01, we announced that on April 27, 2005, Russell Corporation, an Alabama corporation, reincorporated in the State of Delaware by merging with and into its wholly owned subsidiary, Russell Corporation, a Delaware corporation.

(iv) Under Item 9.01(c), we filed (or furnished) certain exhibits relating to the matters in (i) through (iii) above.

On May 12, 2005, we furnished a Form 8-K (under Items 2.02, 7.01 and 9.01):

(i) reporting on our May 12, 2005 press release, which summarized certain of the Company’s goals, objectives and strategic initiatives; and

(ii) providing information regarding our May 12, 2005 investor conference, including a copy of the presentation for the conference.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	RUSSELL CORPORATION
	(Registrant)
Date: August 10, 2005	/s/ Robert D. Koney, Jr.
	Robert D. Koney, Jr.
	Senior Vice President, Chief Financial Officer
	(Principal Financial Officer)
Date: August 10, 2005	/s/ Larry E. Workman
	Larry E. Workman
	Corporate Controller

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