SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended August 2, 1997
Commission File Number 333-26999
ANVIL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3801705
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
228 East 45th Street
New York, New York 10017
(address of principal executive office) (Zip Code)
Registrant's telephone number (212) 476-0300
(including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities 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 No X
------- -------
At September 15, 1997, there were 290,000 shares of Class A Common Stock,
$0.01 par value (the "Class A Common") and 3,590,000 shares of Class B Common
Stock, $0.01 par value (the "Class B Common") of the registrant outstanding.
Form 10-Q
ANVIL HOLDINGS, INC.
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS AS OF
AUGUST 2, 1997 (UNAUDITED) AND
FEBRUARY 1, 1997.......................................... 3
UNAUDITED CONSOLIDATED STATEMENTS
OF OPERATIONS FOR THE QUARTER AND
SIX MONTHS ENDED AUGUST 2, 1997
AND JULY 27, 1996......................................... 4
UNAUDITED CONSOLIDATED STATEMENTS
OF CASH FLOWS FOR THE SIX MONTHS
ENDED AUGUST 2, 1997 AND JULY 27, 1996.................... 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................ 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............. 10
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES...................................... 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................... 19
SIGNATURES................................................................. 20
2
PART I--FINANCIAL STATEMENTS FORM 10-Q
ITEM 1. FINANCIAL STATEMENTS
ANVIL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
AUGUST 2, FEBRUARY 1,
1997 1997*
----------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................ $ 10,766 $ 1,863
Accounts Receivable, less
allowance for doubtful accounts
of $700 and $874................................ 26,530 28,517
Inventories...................................... 30,784 32,471
Prepaid and refundable income taxes.............. 4,984 3,305
Deferred income taxes............................ 1,629 1,629
Prepaid expenses and other current assets....... 948 423
--------- --------
Total current assets........................... 75,641 68,208
PROPERTY, PLANT AND EQUIPMENT--Net................. 37,922 38,830
INTANGIBLE ASSETS--Net............................. 25,965 26,568
OTHER ASSETS....................................... 4,906 3,226
--------- --------
$ 144,434 $136,832
--------- --------
--------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Revolving credit facility borrowings........... $ 22,500 $ 14,400
Accounts payable................................ 9,868 9,360
Accrued expenses and other
current liabilities............................ 17,369 10,130
Current portion of long-term bank borrowings -- 4,850
--------- --------
Total current liabilities..................... 49,737 38,740
--------- --------
LONG-TERM BANK BORROWINGS......................... -- 41,475
--------
SUBORDINATED PROMISSORY NOTE...................... 7,869
--------
10-7/8% SENIOR NOTES.............................. 126,250 --
--------
DEFERRED INCOME TAXES............................. 1,697 3,535
--------- --------
OTHER LONG-TERM OBLIGATIONS....................... 1,966 1,827
--------- --------
REDEEMABLE PREFERRED STOCK (LIQUIDATION
VALUE, $31,188)................................ 29,196 --
STOCKHOLDERS' EQUITY (DEFICIENCY):
Preferred Stock - old........................... 2
Common Stock - old.............................. 101
Common Stock - new:
Class a, $.01 par value, 12.5% authorized
500,000 shares, issued and outstanding at
August 2, 1997: 290,000 shares (aggregate
liquidation value, $30,373,000) 3 --
Class b, $.01 par value, authorized 7,500,000
shares, issued and outstanding at
August 2, 1997: 3,590,000 shares.............. 36 --
Additional paid-in capital..................... 12,803 23,054
Retained earnings (deficit).................... (77,254) 20,479
Loans receivable stockholders.................. -- (250)
--------- --------
Total stockholders equity (deficiency)....... (64,412) 43,386
--------- --------
$ 144,434 $ 136,832
--------- --------
--------- --------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------
* Derived from audited financial statements.
3
Form 10-Q
ANVIL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
FOR THE QUARTER ENDED FOR THE SIX MONTHS
ENDED
---------------------- ----------------------
AUGUST 2, JULY 27, AUGUST 2, JULY 27,
1997 1996 1997 1996
----------- --------- ---------- ----------
(UNAUDITED) (UNAUDITED)
NET SALES.......................................................... $ 51,745 $ 56,678 $ 112,033 $ 115,230
COST OF GOODS SOLD................................................. 39,714 43,410 85,573 90,246
----------- --------- ---------- ----------
Gross profit..................................................... 12,031 13,268 26,460 24,984
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE........................ 5,483 4,801 11,611 10,077
SPECIAL COMPENSATION............................................... -- -- 10,915 --
AMORTIZATION OF INTANGIBLES........................................ 230 239 480 442
----------- --------- ---------- ----------
Operating income................................................. 6,318 8,228 3,454 14,465
OTHER INCOME (EXPENSE):
Interest expense................................................. (4,104) (1,612) (7,246) (3,322)
Interest income and other expense-net.............................. (177) (346) (355) (793)
----------- --------- ---------- ----------
Income (loss) before provision (benefit) for income taxes and
extraordinary item............................................. 2,037 6,270 (4,147) 10,350
PROVISION (BENEFIT) FOR INCOME TAXES............................... 815 2,508 (1,659) 4,140
----------- --------- ---------- ----------
INCOME (LOSS) BEFORE EXTRA-ORDINARY ITEM........................... 1,222 3,762 (2,488) 6,210
EXTRAORDINARY ITEM--Loss on extinguishment of debt (net of tax
benefit of $1,888)............................................... -- -- (2,757) --
----------- --------- ---------- ----------
NET INCOME (LOSS)PER COMMON SHARE:................................. $ 1,222 $ 3,762 $ (5,245) $ 6,210
----------- --------- ---------- ----------
----------- --------- ---------- ----------
Class A Common:
Income (loss) before extraordinary item.......................... $ 3.39 $ .3.69 $ 5.42 $ 6.96
----------- --------- ---------- ----------
Net income (loss)................................................ $ 3.39 $ .3.69 $ 4.71 $ 6.96
----------- --------- ---------- ----------
Class B Common:
Income (loss) before extraordinary item.......................... $ (0.25) $ 0.47 $ (1.76) $ 0.62
----------- --------- ---------- ----------
----------- --------- ---------- ----------
Net income (loss)................................................ $ (0.25) $ 0.47 $ (2.47) $ 0.62
----------- --------- ---------- ----------
----------- --------- ---------- ----------
Weighted average shares used in computing pro forma per share data:
Class A Common................................................... 290 290 290 290
----------- --------- ---------- ----------
----------- --------- ---------- ----------
Class B Common................................................... 3,590 3,590 3,590 3,590
----------- --------- ---------- ----------
----------- --------- ---------- ----------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
Form 10-Q
ANVIL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except per share data)
FOR THE SIX MONTHS
ENDED
---------------------
AUGUST 2, JULY 27,
1997 1996
---------- ---------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................................................... $ (5,245) $ 6,210
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization....................................................... 3,243 3,173
Amortization of other assets........................................................ 951 796
Non-cash interest expense on subordinated note...................................... 121 606
Write-off of deferred financing fees................................................ 3,010 --
Non-cash compensation............................................................... 5,177 --
Non-cash interest expense........................................................... 1,706 --
Changes in operating assets and liabilities:
Accounts receivable................................................................. 1,987 (8,172)
Inventories......................................................................... 1,687 10,630
Prepaid and refundable income taxes................................................. (1,679) 4,161
Accounts payable.................................................................... 508 288
Accrued expenses and other current liabilities...................................... 7,239 3,440
Other--net.......................................................................... (2,196) 472
---------- ---------
Net cash provided by operating activities....................................... 16,509 21,604
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant & equipment............................................. (2,335) (1,960)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of new credit agreement--net............................................... 26,500
Repayment of old credit facility.................................................... (18,400) (9,100)
Repayment of long-term debt......................................................... (46,325) (1,800)
Repayment of subordinated promissory note........................................... (9,575) --
Proceeds of senior notes............................................................ 130,000 --
Redemption of old preferred stock................................................... (22,736) --
Exercise of stock options........................................................... 336 --
Repurchase of old common stock...................................................... (92,262) --
Proceeds from sale of units......................................................... 26,667 50
Issuance of new common stock........................................................ 13,063 --
Repayment of stockholder loans...................................................... 250 --
Expenses related to recapitalization................................................ (12,789) --
---------- ---------
Total cash (used in) financing activities....................................... (5,271) (10,850)
---------- ---------
NET INCREASE IN CASH........................................................................ 8,903 8,794
CASH AT BEGINNING OF PERIOD................................................................. 1,862 1,567
---------- ---------
CASH AT END OF PERIOD....................................................................... $ 10,765 $ 10,361
---------- ---------
Non-cash Investing and financing activities
-Redeemable preferred stock issued in lieu of
dividends............................................................................... $ 986 --
---------- ---------
---------- ---------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
Form 10-Q
ANVIL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Amounts in Thousands, Except Share Data
NOTE 1 -BUSINESS/PRINCIPLES OF CONSOLIDATION
Basis of Presentation: The accompanying consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the period ended August
2, 1997 are not necessarily indicative of the results that may be expected for
the year ending January 31, 1998 or any other period. The balance sheet at
February 1, 1997 has been derived from the audited financial statements at that
date. For further information, refer to the financial statements for the year
ended February 1, 1997.
Anvil Holdings, Inc. ("Holdings") together with its subsidiaries (the
"Company") are engaged in the business of designing, manufacturing and marketing
quality casual knitwear and athletic wear for men, women and children. The
Company markets and distributes its products, under private label and its own
brand names, primarily to wholesalers and screen printers, principally in the
United States. The Company's operations are on a "52/53-week" fiscal year ending
on the Saturday closest to January 31. The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries, after elimination of significant intercompany accounts and
transactions.
NOTE 2--RECAPITALIZATION AND REFINANCING
Effective March 14, 1997, the Company completed a significant
recapitalization and refinancing plan, the major components of which are as
follows:
On March 14, 1997, the Company, Anvil VT, Inc., Vestar Equity Partners, L.P.
("Vestar"), 399 Venture Partners, Inc. and certain of its employees and
affiliates (collectively, "399 Venture"), certain management investors and other
existing shareholders of the Company (collectively, the "Existing Shareholders")
and Bruckmann, Rosser, Sherrill & Co., L.P. and certain of its employees and
affiliates (collectively, "BRS") completed a reorganization (the
"Recapitalization") pursuant to which: (i) the Company redeemed or repurchased a
substantial portion of its outstanding shares of capital stock; (ii) BRS
contributed $13,063 for the purchase of new common stock; (iii) 399 Venture and
the management investors reinvested a portion of their existing shares of common
stock of the Company, which were converted into shares of newly issued common
stock, and (iv) 399 Venture exchanged a portion of its existing preferred stock
for 3,333 shares of Senior Exchangeable Preferred Stock and new common stock.
6
Form 10-Q
ANVIL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Amounts in Thousands, Except Share Data
Concurrently with the Recapitalization, the Company sold 30,000 Units
consisting of $30,000, 13% Senior Exchangeable Preferred Stock due 2009, and
390,000 shares of Class B Common (the "Units Offering"). Additionally, on March
14, 1997, the Company's wholly-owned subsidiary, Anvil Knitwear, Inc. ("Anvil")
sold $130,000 of 10 7/8% Senior Notes due 2007 ("Senior Notes"), guaranteed by
Holdings and Cottontops, Inc. ("Cottontops") an operating domestic subsidiary of
Anvil. The net proceeds from the Units and Notes offerings and borrowings under
the New Credit Agreement (see below) were used by the Company to: (i) redeem or
repurchase the outstanding common stock and preferred stock; (ii) repay the
balance outstanding under a then existing credit facility ("Old Credit
Agreement"); (iii) repay the subordinated debt; (iv) pay fees and expenses; (v)
pay a management bonus; and (vi) pay amounts due in accordance with a
previously-existing equity buy-out plan.
Concurrently with the Recapitalization, the Company repaid its borrowings
under the Old Credit Agreement and entered into an Amended and Restated Credit
Agreement ("New Credit Agreement") providing a $55,000 revolving credit
facility, with a sublimit of $5,000 for letters of credit, expiring March 14,
2002, subject to certain maximum levels of borrowings based upon asset levels.
The Company used $33,250 of the borrowings under the New Credit Agreement to
finance a portion of the Recapitalization.
The New Credit Agreement requires the Company to comply with various
covenants, including maintaining certain financial ratios, and limiting
additional indebtedness, the payment of dividends, asset sales, acquisitions and
mergers. Additionally, the net proceeds from certain assets must, in certain
circumstances, be used to prepay borrowings under the credit facility. All
borrowings under this credit facility are secured by substantially all the
assets of Anvil including accounts receivable, inventories and property and
equipment.
As required by the Certificate of Designations relating to the 13% Senior
Exchangeable Preferred Stock, on June 15, 1997, the Company paid a stock
dividend of 39,431 shares ($986 liquidation value).
The Company recorded an extraordinary charge of $2,757, after applicable
income taxes, as a result of losses incurred in connection with certain of the
above refinancing transactions.
NOTE 3--RECENT EXCHANGE OFFERS
Holdings has completed an exchange offer which expired August 26, 1997 (as
extended), pursuant to which its 13% Series A Senior Exchangeable Preferred
Stock was exchanged on a share-for-share basis for its 13% Series B Senior
Exchangeable Preferred Stock, due 2009. Pursuant to the exchange offer,
1,198,566 shares ($29,964 liquidation value) were validly tendered and
exchanged.
Anvil has completed an exchange offer which expired August 22, 1997,
pursuant to which its 10-7/8% Series A Senior Notes were exchanged on a
dollar-for-dollar basis for its 10-7/8% Series B Senior Notes, due 2007.
Pursuant to the exchange offer, $129,000 principal amount were validly tendered
and exchanged.
7
Form 10-Q
ANVIL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Amounts in Thousands, Except Share Data
The terms and conditions of the aforementioned Series B securities are
substantially identical to the Series A securities for which they were
exchanged, except that the Series B securities have been registered under the
Securities Act of 1933, as amended.
NOTE 4--SPECIAL COMPENSATION
In connection with the Recapitalization and refinancings effected during the
current fiscal year, the Company made significant compensatory payments to
members of management. Such amounts related to compensation earned by members of
management upon exercise of options, a special transaction bonus and payments
under a then existing equity buy-out plan. These payments aggregated $10,915,
and are considered by management to be nonrecurring in nature.
NOTE 5--INVENTORIES
Inventories at August 2, 1997 and February 1, 1997 consisted of the
following:
AUGUST 2, FEBRUARY 1,
1997 1997
----------- -----------
Finished goods.................... $ 17,853 $ 21,545
Work-in-process................... 5,345 4,326
Raw materials & supplies.......... 7,586 6,600
----------- -----------
$ 30,784 $ 32,471
----------- -----------
----------- -----------
NOTE 6--PRO FORMA (LOSS) EARNINGS PER SHARE
Pro Forma (loss) earnings per share is computed based upon the average
outstanding shares attributable to the Class A and Class B Common shares after
the Recapitalization, and assuming the Recapitalization took place at the
beginning of the earliest period presented.
NOTE 7--SUMMARIZED FINANCIAL DATA OF CERTAIN WHOLLY-OWED SUBSIDIARIES
Following is the summarized balance sheet data of Anvil and Cottontops.
Cottontops is a wholly-owned subsidiary of Anvil, which is a wholly-owned
subsidiary of Holdings.
ANVIL KNITWEAR, INC. COTTONTOPS, INC.
----------------------- ------------------------
AUGUST 2, FEBRUARY 1, AUGUST 2, FEBRUARY 1,
1997 1997 1997 1997
---------- ----------- ----------- -----------
CURRENT ASSETS....................... $ 75,641 $ 68,208 $ 2,685 $ 2,671
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
TOTAL ASSETS......................... $ 144,434 $ 136,832 $ 3,076 $ 3,100
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
CURRENT LIABILITIES.................. $ 49,737 $ 38,740 $ 335 $ 1,403
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
LONG-TERM LIABILITIES................ $ 129,913 $ 46,837 $ 1,054 $ 1,202
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
TOTAL LIABILITIES.................... $ 179,650 $ 85,577 $ 1,389 $ 2,605
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
STOCKHOLDER'S EQUITY (DEFICIENCY).... $ (35,216) $ 51,255 $ 1,687 $ 495
---------- ----------- ----------- -----------
8
Form 10-Q
ANVIL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Amounts in Thousands, Except Share Data
Following is the summarized statement of operations data of Anvil and
Cottontops for the periods indicated:
ANVIL KNITWEAR, INC. COTTONTOPS, INC.
-------------------------------- ----------------------------------
QUARTER ENDED
AUGUST 2, SIX MONTHS ENDED QUARTER ENDED SIX MONTHS ENDED
1997 AUGUST 2, 1997 AUGUST 2, 1997 AUGUST 2, 1997
------------- ----------------- --------------- -----------------
NET SALES................................... $ 51,745 $ 112,033 $ 741 $ 1,369
------------- ----------------- ------ -------
------------- ----------------- ------ -------
OPERATING INCOME (LOSS)..................... $ 6,318 $ 3,454 $ (91) $ (243)
------------- ----------------- ------ -------
------------- ----------------- ------ -------
INTEREST EXPENSE............................ $ 4,104 $ 7,246 -- --
------------- ----------------- ------ -------
------------- ----------------- ------ -------
NET INCOME (LOSS)........................... $ 1,222 $ (5,245) $ (45) $ (101)
------------- ----------------- ------ -------
------------- ----------------- ------ -------
Holdings and Cottontops have fully and unconditionally, jointly and severally
guaranteed the Series A Senior Notes and the Series B Senior Notes. Complete
financial statements and other disclosures concerning Anvil and Cottontops
are not presented because management has determined they are not material to
investors. Holdings has no independent operations apart from its wholly-owned
subsidiary, Anvil, and its sole asset is the capital stock of Anvil. Anvil is
Holding's only direct subsidiary. Cottontops does not currently have material
operations or assets. In addition to Cottontops, Anvil has two other
non-guarantor direct subsidiaries: Anvil (Czech), Inc., a Delaware
corporation and A.K.H., S.A., organized in Honduras, and one non-guarantor
indirect subsidiary, Anvil SRO, organized in the Czech Republic (a direct
subsidiary of Anvil (Czech), Inc.) (collectively, the "Non-Guarantor
Subsidiaries"). Other than as stated herein, there are no other direct or
indirect subsidiaries of the Company. Management believes the Non-Guarantor
Subsidiaries are inconsequential both individually and in the aggregate.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FORM 10-Q
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information with respect to the results of
operations of the Company for quarter and six month periods ended August 2, 1997
and July 27, 1996.
RESULTS OF OPERATIONS
GENERAL
The Company's results of operations are affected by numerous factors,
including competition, general economic conditions, raw material costs, mix of
products sold and plant utilization. Certain activewear products of the type
manufactured by the Company are generally available from multiple sources and
the Company's customers often purchase products from more than one source. To
remain competitive, the Company reviews and adjusts its pricing structure from
time to time in response to industry-wide price changes. In the basic T-shirt
market, for example, the Company generally does not lead its competitors in
setting the current pricing structure and modifies its prices to the extent
necessary to remain competitive with prices set by its larger competitors.
The Company has been able to mitigate pricing pressures by: (i) increasing
its average product margin by continuing to introduce new products with higher
gross margins; (ii) continuing to improve and modernize its manufacturing
processes in order to reduce production costs; and (iii) moving a portion of its
sewing operations offshore to take advantage of lower wage rates. The gross
profit margins of the Company's products vary significantly. Accordingly, the
Company's overall gross profit margin is affected by its product mix. In
addition, plant utilization levels are important to profitability due to the
capital intensive nature of the Company's textile operations.
The largest component of the Company's costs of goods sold is the cost of
cotton yarn. Unlike certain of its competitors, the Company does not spin its
own yarn. Instead, the Company obtains substantially all of its yarn from five
yarn suppliers, generally placing orders for quantities ranging from 30 days' to
one year's supply depending upon management's expectations regarding future yarn
prices and levels of supply. Yarn prices fluctuate from time to time principally
as a result of competitive conditions in the yarn market and supply and demand
for raw cotton. The Company adjusts the timing and size of its purchase orders
for cotton yarn in an effort to minimize fluctuations in its raw material costs
resulting from changes in yarn prices. Historically, the Company has been
successful in mitigating the impact of fluctuating yarn prices.
As part of the increasing shift of production to lower cost, offshore
locations, the Company announced plans to close its Gibson, North Carolina
sewing facility. The shutdown is expected to be completed prior to the end of
September 1997. Management anticipates that the closing of this facility will
have no material effect on the Company's financial position or results of
operations.
The Company seeks to minimize inventory risk by maintaining a supply of
goods in a "greige" (undyed and unbleached) state until relatively late in the
production process and by turning its finished goods inventory frequently (for
example, approximately 8 times in fiscal 1996). The
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FORM 10-Q
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Company believes these efforts have been a major contributing factor to the
Company's ability to compete successfully in the imprinted activewear market.
QUARTER ENDED AUGUST 2, 1997 COMPARED TO QUARTER ENDED JULY 27, 1996
The following table sets forth, for each of the periods indicated, certain
statement of operations data, expressed as a percentage of net sales.
FISCAL QUARTER ENDED
---------------------------------
AUGUST 2, JULY 27,
1997 1996
--------------- ----------------
STATEMENT OF OPERATIONS DATA:
NET SALES............................................ 100.0% 100.0%
COST OF GOODS SOL.................................... 76.7 76.6
GROSS PROFIT......................................... 23.3 23.4
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES......... 10.6 8.5
INTEREST EXPENSE..................................... 7.9 2.8
EBITDA (1)............................................. $8.11 MILLION $10.06 MILLION
- ------------------------
(1) EBITDA is defined as operating income plus depreciation and amortization.
EBITDA is not a measure of performance under generally accepted accounting
principles ("GAAP"). While EBITDA should not be considered in isolation or
as a substitute for net income, cash flows from operating activities and
other income or cash flow statement data prepared in accordance with GAAP,
or as a measure of profitability or liquidity, management understands that
EBITDA is commonly used in evaluating a company's ability to service debt.
EBITDA should not be construed as an indication of the Company's operating
performance. EBITDA does not take into account the Company's debt service
requirements and other commitments and, accordingly, is not necessarily
indicative of amounts that may be available for discretionary uses. EBITDA
measure, herein, may not be comparable to other similarly titled measures of
other companies.
NET SALES
Net sales for the quarter ended August 2, 1997 decreased $4.9 million, or
8.7%, to $51.7 million from $56.6 million for the quarter ended July 27, 1996.
This decrease in net sales was primarily the result of a decline in sales volume
of approximately 10%. Such decline was compounded by a decrease in revenues of
approximately $0.5 million caused by generally lower selling prices for basic
T-shirts effected to meet competition. These declines were partially offset by
an increase in average selling price caused by a favorable change in product mix
to higher-priced products such as plackets and henleys, and the inclusion of
$0.8 million in sales of Cottontops.
GROSS PROFIT
Gross profit for the quarter ended August 2, 1997 decreased by $1.2 million,
or 9.3%, to $12.0 million from $13.2 million for the quarter ended July 27,
1996. This decrease was the result of the decrease in sales discussed above.
Gross profit margin was the same for both periods at approximately 23%. Margins
were maintained in spite of the sales decline through the obtaining of lower
yarn prices, improved manufacturing efficiencies and increased sales of the
aforementioned products with higher gross margins.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FORM 10-Q
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses (including distribution
expense) for the quarter ended August 2, 1997 increased by $0.7 million, or
14.2%, to $5.5 million from $4.8 million for the prior year's quarter ended July
27, 1996. As a percentage of net sales, selling, general and administrative
expenses increased to 10.6% from 8.5% in the quarter ended August 2, 1997
compared to the quarter ended July 27, 1996. This increase was caused by an
additional $0.3 million for the inclusion of the operating expenses of
Cottontops; $0.2 million for co-op advertising and other selling expenses to
meet competition and promote sales of new products; $0.2 million caused by
general and administrative wage and other increases; and $0.1 million in legal
and professional expenses. The aforementioned increases were partially offset
by a decline in distribution expense due to lower volume and more efficient
warehouse operations.
INTEREST EXPENSE
Interest expense for the quarter ended August 2, 1997 increased by $2.5
million, or 154.6%, to $4.1 million from $1.6 million for the prior year's
quarter. This increase in interest expense was the result of higher borrowings
in connection with the Recapitalization. Interest rates were also higher during
the current year's quarter compared to the same period in the prior year.
NET (LOSS) INCOME
Net income for the quarter ended August 2, 1997 was $1.2 million compared to
$3.8 million for the quarter ended July 27, 1996.
SIX MONTHS ENDED AUGUST 2, 1997 COMPARED TO SIX MONTHS ENDED JULY 27, 1996
The following table sets forth, for each of the periods indicated, certain
statement of operations data, expressed as a percentage of net sales.
FISCAL SIX MONTHS ENDED
----------------------------------
AUGUST 2, JULY 27,
1997 1996
---------------- ----------------
STATEMENT OF OPERATIONS DATA:
NET SALES......................................... 100.0% 100.0%
COST OF GOODS SOLD................................ 76.4 78.3
GROSS PROFIT...................................... 23.6 21.7
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES...... 10.4 8.8
INTEREST EXPENSE.................................. 6.5 2.9
OTHER DATA:
EBITDA (1)........................................ $18.09 MILLION $18.08 MILLION
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FORM 10-Q
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -----------------------------------
(1) EBITDA is defined as operating income plus depreciation and amortization.
The period ended August 2, 1997 excludes a non-recurring charge of $10.9
million for special compensation. EBITDA is not a measure of performance
under generally accepted accounting principles ("GAAP"). While EBITDA should
not be considered in isolation or as a substitute for net income, cash flows
from operating activities and other income or cash flow statement data
prepared in accordance with GAAP, or as a measure of profitability or
liquidity, management understands that EBITDA is commonly used in evaluating
a company's ability to service debt. EBITDA should not be construed as an
indication of the Company's operating performance. EBITDA does not take into
account the Company's debt service requirements and other commitments and,
accordingly, is not necessarily indicative of amounts that may be available
for discretionary uses. EBITDA measure, herein, may not be comparable to
other similarly titled measures of other companies.
NET SALES
Net sales for the six months ended August 2, 1997 decreased $3.2 million, or
2.8%, to $112.0 million from $115.2 million for the six months ended July 27,
1996. The increase in sales experienced during the first fiscal quarter was more
than offset by the decline in sales for the second quarter as discussed above.
On a year to date basis, the decrease in net sales was primarily the result of a
decline in sales volume of approximately 3%, which was further compounded by a
$0.9 million revenue decline due to the lower prices of basic T-shirts mentioned
above. This decline was partially offset by an increase in average selling
price caused by a favorable change in product mix to higher priced products, and
the inclusion of $1.4 million in sales of Cottontops.
GROSS PROFIT
Gross profit for the six months ended August 2, 1997 increased by $1.5
million, or 5.9%, to $26.5 million from $25.0 million for the six months ended
July 27, 1996. Gross profit margin increased to 23.6% for the six months ended
August 2, 1997 from 21.7% in the comparable period of the prior year. The
improvement in gross profit margin (most of which occurred during the Company's
first fiscal quarter) was primarily the result of obtaining lower yarn prices,
improved manufacturing efficiencies and increased sales of the aforementioned
products with higher gross margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses (including distribution
expense) for the six months ended August 2, 1997 increased by $1.5 million, or
15.2%, to $11.6 million from $10.1 million for the prior year's period ended
July 27, 1996. As a percentage of net sales, selling, general and administrative
expenses increased to 10.4% from 8.8 %. For the first half of the current fiscal
year compared to the same period in the prior year, $0.6 million is included for
the operating expenses of Cottontops; an additional $0.5 million was expended
for co-op advertising and other selling expenses to meet competition and promote
sales of new products; general and administrative wage and other increases
caused an additional $0.4 million in expenses; and there was an increase of $0.2
million in legal and professional expenses. The aforementioned increases were
partially offset by a decline in distribution expense due to lower volume and
more efficient warehouse operations.
13
INTEREST EXPENSE
Interest expense for the six months ended August 2, 1997 increased by $3.9
million, or 118.1%, to $7.2 million from $3.3 million for the prior year's
period. This increase in interest expense was the result of higher borrowings in
connection with the Recapitalization. Interest rates were also higher during the
current year's quarter compared to the same period in the prior year.
NET (LOSS) INCOME
The net loss for six months ended August 2, 1997 was $5.2 million compared
to net income of $6.2 million for the six months ended July 27, 1996. The
increase in gross profit ($1.5 million) was more than offset by increases in
selling general and administrative and interest expense ($1.5 million and $3.9
million, respectively). Other non-operating expenses declined $0.4 million in
the current period. In addition, in the current six month period, there was a
charge of $10.9 million for "special compensation" (See Note 4 to the
consolidated financial statements) and an extraordinary charge of $2.7 million
(net of taxes) on extinguishment of debt (See Note 2 to the consolidated
financial statements). The tax benefit for the six months ended August 2, 1997
was $1.6 million versus a provision of $4.1 million during the same period of
the prior year.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically utilized funds generated from operations and
borrowings under its credit agreements to meet working capital and capital
expenditure requirements. Net cash generated by operating activities for its
previous two completed fiscal years totaled approximately $7.2 million and $23.8
million, respectively and totaled $16.5 million for the six months ended August
2, 1997.
During its preceding two completed fiscal years, the Company made capital
expenditures of approximately $7.7 million and $4.8 million, respectively. The
Company's major capital expenditures related to: (i) the acquisition of the
660,000 square foot distribution center in Dillon, South Carolina; (ii) the
acquisition of machinery and equipment; and (iii) the acquisition of management
information systems hardware and software. Through August 2, 1997, the Company
has made $2.3 million in capital expenditures. The Company currently has no
capital commitments outside the ordinary course of business.
The Company's principal working capital requirements are financing accounts
receivable and inventories. As of August 2, 1997, the Company had net working
capital of approximately $25.9 million, including approximately $26.5 million of
accounts receivable, approximately $30.8 million of inventories and
approximately $49.7 million in accounts payable, accrued expenses and revolving
credit loans.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FORM 10-Q
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In connection with the Recapitalization, the Company refinanced its existing
indebtedness under the Old Credit Agreement. The New Credit Agreement provides
for borrowings of up to $55.0 million for working capital and other general
corporate purposes, and bears interest, at the Company's option, at LIBOR or
prime rate plus a margin. The indebtedness under the New Credit Agreement is
guaranteed by Holdings and its domestic operating subsidiary and is secured by
substantially all of Anvil's assets and a pledge by Holdings of all of the
capital stock of Anvil. At August 2, 1997, the Company had $22,500 outstanding
borrowings under the New Credit Agreement at an interest rate of approximately
7.7%.
The New Credit Agreement requires the Company to meet certain financial
tests, including minimum levels of consolidated net worth, minimum levels of
consolidated EBITDA (as defined therein), minimum interest coverage and maximum
leverage ratio. The New Credit Agreement also contains covenants which, among
other things, limit: (1) the incurrence of additional indebtedness; (ii) the
payment of dividends; (iii) transactions with affiliates; (iv) asset sales,
acquisitions and mergers; (v) prepayments of other indebtedness; (vi) creation
of liens and encumbrances; and (vii) other matters customarily restricted in
such agreements.
The Company's ability to satisfy its debt obligations, including, in the
case of Anvil, to pay principal and interest on the Senior Notes and, in the
case of Holdings, to pay principal and interest on the Exchange Debentures, if
issued, to perform its obligations under its guarantees and to pay cash
dividends on the Senior Preferred Stock, will depend upon the Company's future
operating performance, which will be affected by prevailing economic conditions
and financial, business and other factors, certain of which are beyond its
control, as well as the availability of revolving credit borrowings under the
New Credit Agreement. However, the Company may be required to refinance a
portion of the principal of the Senior Notes and, if issued, the Exchange
Debentures prior to their maturity and, if the Company is unable to service its
indebtedness, it will be forced to take actions such as reducing or delaying
capital expenditures, selling assets, restructuring or refinancing its
indebtedness, or seeking additional equity capital. There can be no assurance
that any of these remedies can be effected on satisfactory terms, if at all.
Holdings has no independent operations with its sole asset being the capital
stock of Anvil, which stock is pledged to secure the obligations under the New
Credit Agreement. As a holding company, Holdings' ability to pay cash dividends
on the Senior Preferred Stock or, if issued, principal and interest on the
debentures into which the Senior Preferred Stock is convertible (the "Exchange
Debentures") is dependent upon the earnings of Anvil and its subsidiaries and
their ability to declare dividends or make other intercompany transfers to
Holdings. Under the terms of the Senior Indenture, Anvil may incur certain
indebtedness pursuant to agreements that may restrict its ability to pay such
dividends or other intercompany transfers necessary to service Holdings'
obligations, including its obligations under the terms of the Senior Preferred
Stock and, if issued, the Exchange Debentures. The Senior Note Indenture
restricts, among other things, Anvil's and certain of its subsidiaries' ability
to pay dividends or make certain other "restricted" payments (except to the
extent, among other things, the restricted payments are less than 50% of the
Consolidated Net Income of Anvil (as defined therein)), to incur additional
indebtedness, to encumber or sell assets, to enter into transactions with
affiliates, to enter into certain guarantees of indebtedness, to make
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FORM 10-Q
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
certain investments, to merge or consolidate with any other entity and to
transfer or lease all or substantially all of their assets. In addition, the
New Credit Agreement contains other and more restrictive covenants that
prohibit Anvil from declaring dividends or making other intercompany transfers
to Holdings in certain circumstances. Neither the Senior Note Indenture nor the
New Credit Agreement restricts Anvil's subsidiaries from declaring dividends
or making other intercompany transfers to Anvil.
The Company believes that based upon current levels of operations and
anticipated growth, funds generated from operations, together with other
available sources of liquidity, including borrowings under the New Credit
Agreement, will be sufficient over the next twelve months for the Company to
make anticipated capital expenditures, fund working capital requirements and
satisfy its debt service requirements.
SEASONALITY
The Company's business is not significantly seasonal as it manufactures and
sells a wide variety of activewear products that may be worn throughout the
year.
EFFECT OF INFLATION
Inflation generally affects the Company by increasing the interest expense
of floating rate indebtedness and by increasing the cost of labor, equipment and
raw materials. The Company does not believe that inflation has had any material
effect on the Company's business during the periods discussed herein.
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings per
Share, effective for interim and annual periods ending after December 15,
1997, establishes standards for computing and presenting earnings per share
("EPS") and simplifies the standards for computing EPS currently found in
Accounting Principles Board Opinion No. 15, Earnings per Share, Common stock
equivalents under APB No. 15, with the exception of contingently issuable
shares (shares issuable for little or no cash consideration), are no longer
included in the calculation of primary, or basic EPS. Under SFAS No. 128,
contingently issuable shares are included in the calculation of basic EPS.
For the year ending January 31, 1998, the adoption of SFAS No. 128 will not
have a material effect on the calculation of EPS.
SFAS No. 129, Disclosure of Information about Capital Structure, effective
for periods ending after December 15, 1997, establishes standards for disclosing
information about an entity's capital structure. This statement requires
disclosure of the pertinent rights and privileges of various securities
outstanding (stocks, options, warrants, preferred stock, debt and participation
rights) including dividend and liquidation preferences, participant rights, call
prices and dates, conversion or exercise prices and redemption requirements.
Adoption of this statement will have no effect on the Company as it currently
discloses the information required.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FORM 10-Q
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In June 1997, the Financial Account Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information". SFAS 130 established standards for
reporting comprehensive income and its components in a full set of
general-purpose financial statements. This Statement requires than an
enterprise (a) classify items of other comprehensive income by their nature
in a financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. SFAS 131
establishes standards for public business enterprises to report information
about operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services, geographic
areas, and major customers. Both of the statements are effective for fiscal
periods beginning after December 15, 1997. The Company has not yet determined
the impact, if any, of adopting these standards.
FORWARD-LOOKING STATEMENTS
The Company is including the following cautionary statement in this Form
10-Q to make applicable and take advantage of the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995 for any forward-looking
statements made by, or on behalf of, the Company. Forward-looking statements
include statements concerning plans, objectives, goals, strategies, future
events or performance, and underlying assumptions and other statements which are
other than statements of historical facts. From time to time, the Company may
publish or otherwise make available forward-looking statements of this nature.
All such subsequent forward-looking statements, whether written or oral and
whether made by or on behalf of the Company, are also expressly qualified by
these cautionary statements. Certain statements contained herein are
forward-looking statements and accordingly involve risks and uncertainties which
could cause actual results or outcomes to differ materially from those expressed
in the forward-looking statements. The forward-looking statements contained
herein are based on various assumptions, many of which are based, in turn, upon
further assumptions. The Company's expectations, beliefs and projections are
expressed in good faith and are believed by the Company to have a reasonable
basis, including without limitation, management's examination of historical
operating trends, data contained in the Company's records and other data
available from third parties, but there can be no assurance that management's
expectation, beliefs or projections will result or be achieved or accomplished.
In addition to the other factors and matters discussed elsewhere herein, the
factors listed on the following page are important factors that, in the view of
the Company, could cause actual results to differ materially from those
discussed in the forward-looking statements:
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FORM 10-Q
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
1. Changes in economic conditions, in particular those which affect the
activewear market.
2. Changes in the availability and/or price of cotton yarn, in
particular if increases in the price of cotton yarn are not passed along to
the Company's customers.
3. Changes in senior management or control of the Company.
4. Inability to obtain new customers or retain existing ones.
5. Significant changes in competitive factors, including product
pricing conditions, affecting the Company.
6. Governmental/regulatory actions and initiatives, including, those
affecting financings.
7. Significant changes from expectations in actual capital expenditures
and operating expenses.
8. Occurrences affecting the Company's ability to obtain funds from
operations, debt or equity to finance needed capital expenditures and other
investments.
9. Significant changes in rates of interest, inflation or taxes.
10. Significant changes in the Company's relationship with its employees
and the potential adverse effects if labor disputes or grievance were to
occur.
11. Changes in accounting principles and/or the application of such
principles to the Company.
The foregoing factors could affect the Company's actual results and could
cause the Company's actual results during 1997 and beyond to be materially
different from any anticipated results expressed in any forward-looking
statement made by or on behalf of the Company.
The Company disclaims any obligation to update any forward-looking
statements to reflect events or other circumstances after the date hereof.
18
ANVIL HOLDINGS, INC. AND SUBSIDIARIES Form 10-Q
PART II--OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
SEE NOTES 2 AND 3 TO FINANCIAL STATEMENTS.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 Recapitalization Agreement, dated as of February 21, 1997, by and among Citicorp
Venture Capital, Ltd., Bruckmann, Rosser, Sherrill & Co., Inc. ("BRS & Co."), Anvil
Holdings, Inc. ("Holdings") Anvil VT, Inc. and the stockholders and voting trust
certificate holders named on the signature pages thereto, as amended by the certain
Amendment and Consent to Assignment dated as of February 21, 1997 and that Waiver and
Second Amendment to the Recapitalization Agreement dated as of March 13, 1997.*
3.1 Certificate of Incorporation of Holdings.*
3.4 By-Laws of Holdings.*
4.1 Units Purchase Agreement, dated as of March 14, 1997, by and between Donaldson, Lufkin
& Jenrette Securities Corporation ("DLJ") and Holdings.*
4.2 Unit Agreement, dated as of March 14, 1997, by and between Holdings and United States
Trust Company of New York, as trustee.*
4.3 Exchange Debenture Indenture, dated as of March 14, 1997, by and between Holdings and
United States Trust Company of New York, as trustee.*
4.4 Registration Rights Agreement, dated as of March 14, 1997, by and between Holdings and
DLJ, as the Initial Purchaser.*
4.5 Certificate of Designation of Holdings.*
4.6 Certificate of Designation of Holdings relating to Series B 13% Senior Exchangeable
Preferred Stock.
10.1 Series B 10-7/8% Senior Notes and Guarantees.
27.1 Financial Data Schedule.
- ------------------------
* Exhibit was filed as the same exhibit number pursuant to a Registration
Statement on Form S-4 (SEC File No. 333-26999) and is incorporated herein by
reference
(b) Reports on Form 8-K
None.
Items 1, 3, 4 and 5 are not applicable and have been omitted.
19
ANVIL HOLDINGS, INC. AND SUSBSIDIARIES Form 10-Q
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 hereunto duly authorized.
ANVIL HOLDINGS, INC.
(Registrant)
/s/ Pasquale Branchizio
- -----------------------
Pasquale Branchizio
Vice President of Finance
(Principal Accounting Officer)
Dated: September 15, 1997
20