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 November 1, 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 (Zip Code)
executive office)
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 _X__ No __
At December 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
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
November 1, 1997 (Unaudited) and
February 1,1997....................................................3
Unaudited Consolidated Statements of
Operations for the Quarter and Nine Months
Ended November 1, 1997 and October 26, 1996........................4
Unaudited Consolidated Statements of
Cash Flows for the Nine Months Ended
November 1, 1997 and October 26, 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)
NOVEMBER 1, FEBRUARY 1,
ASSETS 1997 1997*
- --------------------------------------------------------------------------------------- ----------- -----------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents.......................................................... $ 1,345 $ 1,863
Accounts receivable, less allowance for doubtful accounts of $809 and $874......... 28,385 28,517
Inventories........................................................................ 37,015 32,471
Prepaid and refundable income taxes................................................ 4,766 3,305
Deferred Income taxes.............................................................. 1,629 1,629
Prepaid expenses and other current assets.......................................... 1,341 423
----------- -----------
Total current assets............................................................. 74,481 68,208
PROPERTY, PLANT AND EQUIPMENT--Net..................................................... 38.458 38,830
INTANGIBLE ASSETS--Net................................................................. 25,715 26,568
OTHER ASSETS........................................................................... 5,172 3,226
----------- -----------
$ 143,826 $ 136,832
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Revolving credit facility borrowings............................................... $ -- $ 14,400
Accounts payable................................................................... 12,747 9,360
Accrued expenses and other current liabilities..................................... 15,727 10,130
Current portion of long-term bank borrowings....................................... -- 4,850
----------- -----------
Total current liabilities........................................................ 28,474 38,740
----------- -----------
REVOLVING CREDIT FACILITY BORROWINGS................................................... 20,200 --
----------- -----------
LONG-TERM BANK BORROWINGS.............................................................. -- 41,475
SUBORDINATED PROMISSORY NOTE........................................................... -- 7,869
10-7/8% SENIOR NOTES 126,347 --
DEFERRED INCOME TAXES.................................................................. 1,697 3,535
----------- -----------
OTHER LONG-TERM OBLIGATIONS............................................................ 1,984 1,827
----------- -----------
REDEEMABLE PREFERRED STOCK (Liquidation value, $32,524)................................ 30,294 --
----------- -----------
STOCKHOLDERS' EQUITY (DEFICIENCY):
Preferred Stock--old............................................................... 2
Common Stock -old.................................................................. 101
Common Stock--new:
Class A, $.01 par value, 12.5% cumulative; authorized 500,000 shares, issued and
outstanding at November 1, 1997: 290,000 shares (aggregate liquidation value,
$31,353)....................................................................... 3 --
Class B, $.01 par value, authorized 7,500,000 shares, issued and outstanding at
November 1, 1997: 3,590,000 shares............................................... 36 --
Additional paid-in capital......................................................... 12,803 23,054
Retained earnings (deficit)........................................................ (78,012) 20,479
Loans receivable--stockholders..................................................... -- (250)
----------- -----------
Total stockholders' equity (deficiency).......................................... (65,170) 43,386
----------- -----------
$ 143,826 $ 136,832
----------- -----------
----------- -----------
See accompanying notes to consolidated financial statements
*Derived from audited financial statements.
3
ANVIL HOLDINGS, INC. AND SUBSIDIARIES FORM 10-Q
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE NINE MONTHS
FOR THE QUARTER ENDED ENDED
------------------------ ------------------------
NOVEMBER 1, OCTOBER 26, NOVEMBER 1, OCTOBER 26,
1997 1996 1997 1996
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
NET SALES................................................... $ 53,708 $ 44,144 $ 165,741 $ 159,374
COST OF GOODS SOLD.......................................... 42,726 33,901 128,299 124,147
----------- ----------- ----------- -----------
Gross profit.......................................... 10,982 10,243 37,442 35,227
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE................. 5,887 5,131 17,498 15,208
SPECIAL COMPENSATION........................................ -- -- 10,915 --
AMORTIZATION OF INTANGIBLES................................. 250 258 730 700
----------- ----------- ----------- -----------
Operating income...................................... 4,845 4,854 8,299 19,319
OTHER INCOME (EXPENSE):
Interest expense........................................ (4,322) (1,842) (12,160) (6,124)
Interest income and other expense-net................... 46 115 283 282
----------- ----------- ----------- -----------
Income (loss) before provision (benefit) for income
taxes and extraordinary item.......................... 569 3,127 (3,578) 13,477
PROVISION (BENEFIT) FOR INCOME TAXES........................ 228 1,251 (1,431) 5,391
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE EXTRA-ORDINARY ITEM.................... 341 1,876 (2,147) 8,086
EXTRAORDINARY ITEM--Loss on extinguishment of debt (net of
tax benefit of $1,888).................................... -- -- (2,757) --
----------- ----------- ----------- -----------
NET INCOME (LOSS)........................................... $ 341 $ 1,876 $ (4,904) $ 8,086
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
PRO FORMA INCOME (LOSS) PER COMMON SHARE:
Class A Common:
Income (loss) before extraordinary item................. $ 3.26 $ 3.29 $ 8.68 $ 10.25
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net income (loss)....................................... $ 3.26 $ 3.29 $ 7.97 $ 10.25
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Class B Common:
Income (loss) before extraordinary item................. $ (0.50) $ (0.03) $ (2.26) $ 0.58
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net income (loss)....................................... $ (0.50) $ (0.03) $ (2.97) $ 0.58
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
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
ANVIL HOLDINGS, INC. AND SUBSIDIARIES FORM 10-Q
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE NINE MONTHS
ENDED
------------------------
NOVEMBER 1, OCTOBER 26,
1997 1996
----------- -----------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................................................. $ (4,904) $ 8,086
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization.................................................... 4,900 4,813
Amortization of other assets..................................................... 1,474 1,241
Non-cash interest expense on subordinated note................................... 121 923
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.............................................................. 66 (4,789)
Inventories...................................................................... (4,544) 3,676
Prepaid and refundable income taxes.............................................. (1,461) 4.107
Other current assets............................................................. (849) 107
Accounts payable................................................................. 3,387 1,499
Accrued expenses and other current liabilities................................... 5,597 6,275
Other non-current liabilities.................................................... (1,681) 1,050
----------- -----------
Net cash provided by operating activities...................................... 11,999 26,988
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant & equipment.......................................... (4,580) (3,425)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of new credit agreement--net............................................ 26,500
Repayment of old credit facility................................................. (20,700) (20,600)
Repayment of long-term debt...................................................... (46,325) (2,825)
Repayment of subordinated promissory note........................................ (9,575) --
Proceeds of senior notes......................................................... 130,000 --
Redemption of old preferred stock................................................ (22,736) 50
Exercise of stock options........................................................ 336 --
Repurchase of old common stock................................................... (92,262) --
Proceeds from sale of units...................................................... 26,667 --
Issuance of new common stock..................................................... 13,063 --
Repayment of stockholder loans................................................... 250 --
Expenses related to recapitalization............................................. (13,155) --
----------- -----------
Total cash (used in) financing activities...................................... (7,937) (23,375)
----------- -----------
NET (DECREASE) INCREASE IN CASH........................................................ (518) 188
CASH AT BEGINNING OF PERIOD............................................................ 1,862 1,567
----------- -----------
CASH AT END OF PERIOD.................................................................. $ 1,344 $ 1,755
----------- -----------
----------- -----------
Non-cash Investing and financing activities -
Redeemable preferred stock issued in lieu of dividends................................. $ 1,993 --
----------- -----------
----------- -----------
See accompanying notes to consolidated financial statements
5
ANVIL HOLDINGS, INC. AND SUBSIDIARIES Form 10-Q
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 November 1, 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, 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
ANVIL HOLDINGS, INC. AND SUBSIDIARIES Form 10-Q
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. Since the Company anticipates
continually refinancing amounts drawn down under the revolving credit facility
through the expiration date, the amount outstanding under such facility has been
classified as a long-term liability in the accompanying November 1, 1997 balance
sheet.
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, the Company has paid stock dividends aggregating
79,714 shares ($1,993 liquidation value) through the period ended November 1,
1997.
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.
7
ANVIL HOLDINGS, INC. AND SUBSIDIARIES Form 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Amounts in Thousands, Except Share Data
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.
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 November 1, 1997 and February 1, 1997 consisted of the following:
November 1, February 1,
1997 1997
----- ----
Finished goods......................... $17,615 $21,545
Work-in-process........................ 9,081 4,326
Raw materials & supplies............... 10,319 6,600
------- -------
$37,015 $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.
8
ANVIL HOLDINGS, INC. AND SUBSIDIARIES Form 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Amounts in Thousands, Except Share Data
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.
----------------------------- --------------------------
November 1, February 1, November 1, February 1,
1997 1997 1997 1997
---- ---- ---- ----
Current assets....... $ 74,481 $ 68,208 $4,147 $2,671
--------- --------- ------ ------
--------- --------- ------ ------
Total Assets......... $143,826 $136,832 $4,513 $3,100
--------- --------- ------ ------
--------- --------- ------ ------
Current liabilities.. $ 28,474 $ 38,740 $ 841 $1,403
--------- --------- ------ ------
--------- --------- ------ ------
Long-term liabilities $130,028 $ 46,837 $2,048 $1,202
--------- --------- ------ ------
--------- --------- ------ ------
Total liabilities.... $158,502 $ 85,577 $2,889 $2,605
--------- --------- ------ ------
--------- --------- ------ ------
Stockholder's equity
(deficiency)........ $(34,876) $ 51,255 $1,624 $ 495
--------- --------- ------ ------
--------- --------- ------ ------
Following is the summarized statement of operations data of Anvil and
Cottontops for the periods indicated:
Anvil Knitwear, Inc. Cottontops, Inc.
-------------------------------------- ----------------------------------------
Quarter Ended Nine months Ended Quarter Ended Nine months Ended
November 1, 1997 November 1, 1997 November 1, 1997 November 1, 1997
---------------- ---------------- ---------------- ----------------
Net Sales $ 53,708 $ 165,741 $ 1,195 $2,564
---------- --------- -------- -------
---------- --------- -------- -------
Operating Income (loss) $ 4,845 $ 8,299 $ (111) $ (354)
---------- --------- -------- -------
---------- --------- -------- -------
Interest Expense $ 4,322 $ 12,039 - -
---------- --------- -------- -------
Net Income (loss) $ 341 $ (4,904) $ (100) $ (269)
---------- --------- -------- -------
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 nine month periods ended November 1,
1997 and October 26, 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,
during the third fiscal quarter the Company completed the closing of its Gibson,
North Carolina, sewing facility. 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
10
Management's Discussion and Analysis of Form 10-Q
Financial Condition and Results of Operations
1996). The Company believes these efforts have been a major contributing factor
to its ability to compete successfully in the imprinted activewear market.
Quarter Ended November 1, 1997 Compared to Quarter Ended October 26, 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
November 1, October 26,
1997 1996
----------- -----------
Statement of Operations Data:
Net sales................................... 100.0% 100.0%
Cost of goods sold.......................... 79.6 76.8
Gross profit................................ 20.4 23.2
Selling, general and
administrative expenses................... 11.0 11.6
Interest expense............................ 8.1 4.2
EBITDA (1).................................... $ 6.76 million $ 6.75 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 November 1, 1997 increased $9.6 million, or
21.7%, to $53.7 million from $44.1 million for the quarter ended October 26,
1996. This increase in net sales was primarily the result of increased sales of
collar plackets ($5.9 million), long-sleeve T-shirts ($1.8 million) Cotton
Deluxe Casuals products ($0.9 million), and the inclusion of $1.2 million in
sales of Cottontops.
Gross profit
Gross profit for the quarter ended November 1, 1997 increased by $0.7 million,
or 7.2%, to $11.0 million from $10.3 million for the quarter ended October 26,
1996. This increase was the result of the increased sales of the higher priced,
higher margin products discussed above. Gross profit margins declined from
approximately 23.2% in the quarter ended October 26, 1996 to approximately 20.4%
in the current year's quarter. This decline is mainly due to industry-wide
pricing pressures affecting the Company's basic T-shirt business. Management of
the Company anticipates that this trend (i.e., increased sales at declining
average selling prices for basic T-shirts) is being experienced throughout the
industry and that it may continue for at least the remainder of the current
fiscal year.
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 November 1, 1997 increased by $0.8 million, or 14.7%, to
$5.9 million from $5.1 million for the prior year's quarter ended October 26,
1996. As a percentage of net sales, selling, general and administrative
expenses decreased to 11.0% from 11.6% in the quarter ended November 1, 1997
compared to the quarter ended October 26, 1996. The increase of $0.8 million
was caused by: an additional $0.4 million for the inclusion of the operating
expenses of Cottontops; $0.1 million due to the higher wages and benefits; $0.1
million in legal and professional expenses; and $0.1 million in expenses for
advertising, travel and entertainment, and sales samples and supplies.
Interest expense
Interest expense for the quarter ended November 1, 1997 increased by $2.5
million, or 134.6%, to $4.3 million from $1.8 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 fiscal quarter compared to the same period in the prior year.
Net (loss) income
Net income for the quarter ended November 1, 1997 was $0.3 million compared to
$1.9 million for the quarter ended October 26, 1996.
Nine months Ended November 1, 1997 Compared to Nine months Ended October 26,
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 Nine months Ended
------------------------
November 1, October 26,
1997 1996
---- ----
Statement of Operations Data:
Net sales............................. 100.0% 100.0%
Cost of goods sold.................... 77.4 77.9
Gross profit.......................... 22.6 22.1
Selling, general and
administrative expenses............. 10.6 9.5
Interest expense...................... 7.3 3.8
Other Data:
EBITDA (1)............................$24.85 million $24.83 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 November 1, 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 nine months ended November 1, 1997 increased $6.4 million, or
4.0%, to $165.7 million from $159.4 million for the nine months ended October
26, 1996. The decline in sales experienced during the first two fiscal quarters
was more than offset by the increase in sales for the third quarter as discussed
above. On a year to date basis, the increase in net sales is composed of a
small increase in units sold as well as a small increase in average selling
price, and was mainly due to the inclusion of Cottontops' sales of approximately
$2.6 million. Each of these factors accounted for approximately 2% of the
overall 4% increase in sales.
Gross profit
Gross profit for the nine months ended November 1, 1997 increased by $2.2
million, or 6.3%, to $37.4 million from $35.2 million for the nine months ended
October 26, 1996. Gross profit margin remained approximately the same (22.6%
versus 22.1% in the prior year's period). During the first half of the current
fiscal year, an 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
products with higher gross margins. This favorable increase was substantially
offset by the continuing adverse pricing pressures discussed above.
Selling, general and administrative expenses
Selling, general and administrative expenses (including distribution expense)
for the nine months ended November 1, 1997 increased by $2.3 million, or
15.1%, to $17.5 million from $15.2 million for the prior year's period ended
October 26, 1996. As a percentage of net sales, selling, general and
administrative expenses increased to 10.5% from 9.5%. For the first nine
months of the current fiscal year compared to the same period in the prior
year, $1.1 million is included for the operating expenses of Cottontops.
Expenses for advertising, travel and entertainment, and sales samples and
supplies increased $0.5 million, and legal and professional expenses
increased $0.3 million. In addition, wages and benefits related to selling
expenses exceeded last year's nine month period by $0.2 million. The
aforementioned increases were partially offset by a decline in distribution
expense due to more efficient warehouse operations.
13
Management's Discussion and Analysis of Form 10-Q
Financial Condition and Results of Operations
Interest expense
Interest expense for the nine months ended November 1, 1997 increased by $6.0
million, or 98.6%, to $12.1 million from $6.1 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 fiscal quarter compared to the same period in the prior year.
Net (loss) income
The net loss for nine months ended November 1, 1997 was $4.9 million compared to
net income of $8.1 million for the nine months ended October 26, 1996. The
increase in gross profit ($2.2 million) was more than offset by increases in
selling general and administrative and interest expense ($2.3 million and $6.0
million, respectively). In addition, in the current nine 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 nine months ended November 1,
1997 was $1.4 million versus a provision of $5.4 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 $12.0 million for the nine months ended
November 1, 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 November 1, 1997,
the Company has made $4.6 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 November 1, 1997, the Company had net
working capital of approximately $46.0 million, including approximately $28.4
million of accounts receivable, $37.0 million of inventories and $28.5 million
in accounts payable and accrued expenses. Effective with the current fiscal
quarter, the Company has classified the amount due under its revolving credit
facility ($20,200 at November 1, 1997) as a long term liability since the
Company anticipates continually refinancing amounts drawn down under this
facility through the expiration date of March 14, 2002.
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 November 1, 1997, the Company had $20,200
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 if any of
these remedies are necessary, they could 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 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
15
Management's Discussion and Analysis of Form 10-Q
Financial Condition and Results of Operations
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
16
Management's Discussion and Analysis of Form 10-Q
Financial Condition and Results of Operations
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.
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
27.1 Financial Data Schedule.
(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 SUBSIDIARIES 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: December 15, 1997
20