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 May 1, 1999
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 Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X__ No __
At June 15, 1999 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 May 1, 1999 (Unaudited)
and January 30,1999.............................................................. 3
Unaudited Consolidated Statements of Operations for the
Fiscal Quarters Ended May 1, 1999 and May 2, 1998................................ 4
Unaudited Consolidated Statements of Cash Flows for the
Fiscal Quarters Ended May 1, 1999 and May 2, 1998................................ 5
Notes to Consolidated Financial Statements....................................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................. 9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.................................................................... 15
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS........................................ 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................. 16
SIGNATURES......................................................................................... 17
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ANVIL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
MAY 1, JANUARY 30,
1999 1999*
---- -----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................. $ 7,829 $ 3,397
Accounts receivable, less allowances for doubtful accounts of
$837 and $635....................................................... 31,058 31,232
Inventories........................................................... 39,295 41,356
Prepaid and refundable income taxes................................... 1,576 1,704
Deferred income taxes................................................. 2,353 2,353
Prepaid expenses and other current assets............................. 960 706
-------- --------
Total current assets...................................... 83,071 80,748
PROPERTY, PLANT AND EQUIPMENT--Net...................................... 36,114 37,536
DEFERRED INCOME TAXES................................................... 3,823 3,823
INTANGIBLE ASSETS--Net ................................................. 24,279 24,529
OTHER ASSETS........................................................... 4,130 4,294
-------- --------
$ 151,417 $ 150,930
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Accounts payable...................................................... $ 10,209 $ 7,181
Accrued expenses and other current liabilities........................ 13,323 16,652
Current portion of revolving credit loans............................. 4,918 6,500
Current portion of term loan......................................... 2,345 -
-------- --------
Total current liabilities................................. 30,795 30,333
-------- --------
LONG-TERM PORTION OF REVOLVING CREDIT LOANS............................. 16,000 25,000
-------- --------
LONG-TERM PORTION OF TERM LOAN.......................................... 9,380 -
-------- --------
10-7/8% SENIOR NOTES.................................................... 126,933 126,835
-------- --------
DEFERRED INCOME TAXES................................................... 5,276 5,276
-------- --------
OTHER LONG-TERM OBLIGATIONS............................................. 1,785 1,744
-------- --------
REDEEMABLE PREFERRED STOCK
(Liquidation value $38,761and $37,541)............................. 37,435 36,139
-------- --------
STOCKHOLDERS' DEFICIENCY:
Common stock
Class A, $.01 par value, 12.5% cumulative; authorized 500,000
shares, issued and outstanding: 290,000 (aggregate liquidation
value, $37,724 and $36,568)..................................... 3 3
Class B, $.01 par value, authorized 7,500,000 shares; issued and
outstanding: 3,590,000 shares................................... 36 36
Class C, $.01 par value; authorized 1,400,000 shares; none issued
Additional paid-in capital.......................................... 12,803 12,803
Retained deficit.................................................... (89,029) (87,239)
-------- --------
Total stockholders' deficiency............................ (76,187) (74,397)
-------- --------
$ 151,417 $ 150,930
-------- --------
-------- --------
* Derived from audited financial statements.
See notes to consolidated financial statements.
3
ANVIL HOLDINGS, INC. AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
(In Thousands, Except Share Data)
Fiscal Quarter Ended
--------------------
MAY 1, MAY 2,
1999 1998
---- ----
(Unaudited)
NET SALES.............................................. $ 52,411 $ 64,892
COST OF GOODS SOLD..................................... 41,333 51,831
------ ------
Gross profit.................................... 11,078 13,061
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES............................................ 6,068 6,892
AMORTIZATION OF INTANGIBLE ASSETS...................... 250 250
------ ------
Operating income................................ 4,760 5,919
OTHER INCOME (EXPENSE):
Interest expense................................... (4,274) (4,268)
Interest income and other expense--net............. (265) (281)
------ ------
INCOME BEFORE PROVISION FOR INCOME
TAXES AND EXTRAORDINARY ITEM....................... 221 1,370
PROVISION FOR INCOME TAXES............................. 88 548
------ ------
INCOME BEFORE EXTRAORDINARY ITEM....................... 133 822
EXTRAORDINARY ITEM - Loss on extinguishment
of debt (net of tax benefit of $417)............... (627) -
------ ------
NET (LOSS) INCOME...................................... (494) 822
Less: Preferred Stock dividends..................... (1,255) (1,075)
Common A preference ........................... (1,156) (1,010)
------ ------
NET (LOSS ) ATTRIBUTABLE TO
COMMON STOCKHOLDERS................................ $(2,905) $(1,280)
------ ------
------ ------
BASIC INCOME (LOSS) PER COMMON SHARE
Class A Common Stock:
Income (loss) before extraordinary item............. $ 3.40 $3.15
Extraordinary item.................................. (0.16) -
------ ------
Net income.......................................... $ 3.24 $ 3.15
------ ------
------ ------
Class B Common Stock:
Income (loss) before extraordinary item............. $ (0.59) $(0.33)
Extraordinary item.................................. (0.16) -
------ ------
Net income.......................................... $ (0.75) $(0.33)
------ ------
------ ------
Weighted average shares used in computation of basic income (loss) per
share:
Class A Common....................................... 290 290
------ ------
------ ------
Class B Common....................................... 3,590 3,590
------ ------
------ ------
See notes to consolidated financial statements.
4
ANVIL HOLDINGS, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
For the Quarter Ended
----------------------
MAY 1, MAY 2,
1999 1998
---- ----
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income........................................... $ (494) $ 822
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities:
Depreciation and amortization of fixed assets............... 1,778 1,681
Amortization of other assets................................ 528 527
Loss on extinguishment of debt.............................. 627 -
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable......................................... 104 (10,426)
Inventories................................................. 2,061 (3,237)
Prepaid and refundable income taxes......................... 128 730
Accounts payable............................................ 3,028 81
Accrued expenses & other liabilities........................ (3,288) (2,668)
Current portion of long-term debt........................... - 11,300
Other--net.................................................. (827) (6)
---------- -----------
Net cash provided by (used in) operating activities... 3,645 (1,196)
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment--net.................... (356) (1,531)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of Term Loan..................................... 11,725 -
Proceeds of Revolving Credit Agreement..................... 19,566 -
(Repayments) borrowings under revolving credit agreements... (30,148) 3,300
---------- -----------
Net cash provided by financing activities.............. 1,143 3,300
---------- -----------
INCREASE IN CASH................................................ 4,432 573
CASH, BEGINNING OF PERIOD....................................... 3,397 959
---------- -----------
CASH, END OF PERIOD............................................. $7,829 $1,532
---------- -----------
---------- -----------
See notes to consolidated financial statements.
5
ANVIL HOLDINGS, INC. AND SUBSIDIARIES FORM 10-Q
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 fiscal period ended May 1, 1999 are not
necessarily indicative of the results that may be expected for the fiscal year
ending January 29, 2000, or any other period. The balance sheet at January 30,
1999 has been derived from the audited financial statements at that date. For
further information, refer to the financial statements for the fiscal year ended
January 30, 1999.
As used herein, the "Company" refers to Anvil Holdings, Inc. ("Holdings"),
including, in some instances, its wholly owned subsidiary, Anvil Knitwear, Inc.,
a Delaware corporation ("Anvil"), and its other subsidiaries, as appropriate to
the context. The Company is 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 - REFINANCING AND EXTRAORDINARY ITEM
Effective March 14, 1997, concurrent with a recapitalization which resulted in
the Company's present capital structure, Anvil entered into a Credit Agreement
(the "Credit Agreement") providing a $55,000 revolving credit facility, subject
to certain maximum levels of borrowings based upon asset levels. At January 30,
1999, the amount outstanding under the Credit Agreement was $31,500, bearing
interest at 7.94%. Effective March 11, 1999, all amounts due under the Credit
Agreement were repaid from the proceeds of a new loan agreement (the "Loan
Agreement") more fully described below.
On March 11, 1999, Anvil entered into a Loan and Security Agreement (the "Loan
Agreement") providing for a maximum credit facility of $60,000 consisting of a
term loan (the "Term Loan") and a revolving credit facility (the "Revolving
Credit Facility"). The Term Loan is in the principal amount of $11,725, payable
in 20 equal quarterly principal installments of $586, commencing July 1, 1999.
Anvil borrowed $19,566 under the Revolving Credit Facility provided by the same
lender. The net proceeds of the Loan Agreement were used to repay all amounts
due under the Credit Agreement. The Revolving Credit Facility expires March 11,
2002, and amounts due under it and the Term Loan are secured by substantially
all the inventory, receivables and property, plant and equipment of Anvil.
Holdings and Cottontops, Inc., a Delaware corporation
6
("Cottontops") guaranty amounts due under the Loan Agreement. Interest on the
Term Loan and the Revolving Credit Facility are at prime plus one-half percent
or LIBOR plus 2-1/2%, at the Company's option. At May 1, 1999, there was $20,918
outstanding under the revolving Credit Facility at an interest rate of 7.40%.
The Company has classified $16,000 and $25,000 of its revolving credit loans as
a long-term liability at May 1, 1999 and January 30, 1999, respectively, which
represent amounts at such dates which the Company anticipated to continually
refinance.
As required by the Certificate of Designations relating to the 13% Senior
Exchangeable Preferred Stock, the Company has paid stock dividends aggregating
350,428 shares ($8,761 liquidation value) through May 1, 1999.
During the quarter ended May 1, 1999, the Company recorded an extraordinary
charge of $1,044, before a tax benefit of $417, to write off deferred financing
and interest hedging costs relating to the repayment of the Credit Agreement.
NOTE 3 - INVENTORIES
Inventories at May 1, 1999 and January 30, 1999 consisted of the following:
May 1, 1999 January 30, 1999
----------- ----------------
Finished goods $17,849 $26,313
Work-in-process 13,358 9,441
Raw materials & supplies 8,088 5,602
-------- ---------
$39,295 $41,356
-------- ---------
-------- ---------
NOTE 4 - 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.
----------------------- ----------------------
MAY 1, JANUARY 30, MAY 1, JANUARY 30,
1999 1999 1999 1999
---- ---- ---- ----
Current assets............................ $ 83,071 $ 80,748 $ 1,286 $ 882
---------- --------- ------- -------
---------- --------- ------- -------
Total assets.............................. $ 151,417 $150,930 $ 1,622 $1,863
---------- --------- ------- -------
---------- --------- ------- -------
Current liabilities....................... $ 30,795 $ 30,333 $ 472 $ 287
---------- --------- ------- -------
---------- --------- ------- -------
Long-term liabilities..................... $ 159,374 $ 158,855 - -
---------- --------- ------- -------
---------- --------- ------- -------
Total liabilities......................... $ 190,169 $ 189,188 $ 472 $ 287
---------- --------- ------- -------
---------- --------- ------- -------
Stockholder's equity (deficiency)......... $ (38,752) $ (38,258) $ 1,150 $ 1,576
---------- --------- ------- -------
---------- --------- ------- -------
7
Following is the summarized statement of operations data of Anvil and Cottontops
for the periods indicated:
ANVIL KNITWEAR, INC. COTTONTOPS, INC.
-------------------- ----------------
QUARTER ENDED QUARTER ENDED
-------------------- ----------------
MAY 1, MAY 2, MAY 1, MAY 2,
1999 1998 1999 1998
---- ---- ---- ----
Net sales................ $ 52,411 $ 64,892 $ 626 $ 832
Operating income (loss).. $ 4,760 $ 5,919 $ (431) $ 106
Interest expense......... $ 4,274 $ 4,268 - -
Net (loss) income........ $ (494) $ 822 $( 256) $ 96
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
Holdings' only direct subsidiary. In addition to Cottontops, Anvil has three
other non-guarantor direct subsidiaries: Anvil (Czech), Inc., a Delaware
corporation, A.K.H., S.A., organized in Honduras and Livna, Limitada organized
in El Salvador and one non-guarantor indirect subsidiary, Anvil s.r.o.,
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.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 competitors in this market.
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 substantial fixed costs of the Company's textile
operations.
The largest component of the Company's cost of goods sold is the cost of 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 a
one year's supply, and occasionally even longer periods, 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 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. Over the past several fiscal quarters, yarn prices
have exhibited a significant downward trend and management has taken steps to
adjust the Company's purchase commitments to take advantage of the declining
prices.
QUARTER ENDED MAY 1, 1999 COMPARED TO QUARTER ENDED MAY 2, 1998
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
-----------------------
MAY 1, MAY 2,
1999 1998
---- ----
STATEMENT OF OPERATIONS DATA:
Net sales......................................... 100.0% 100.0%
Cost of goods sold................................ 78.9 79.9
Gross profit...................................... 21.1 20.1
Selling, general and administrative expenses...... 11.6 10.6
Interest expense.................................. 8.2 6.6
OTHER DATA:
EBITDA (1)........................................ $6.8 million $7.9 million
Percentage of net sales................... 13.0% 12.7%
9
(1) EBITDA is defined as operating income plus depreciation and amortization.
EBITDA is not a measure of performance under GAAP. 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 believes, however, that EBITDA represents a useful measure of
assessing the performance of the Company's ongoing operating activities as
it reflects earnings trends of the Company without the impact of purchase
accounting. In addition, management believes EBITDA is a widely accepted
financial indicator of a company's ability to service and/or incur
indebtedness. EBITDA should not be construed as an indication of the
Company's operating performance or as a measure of liquidity. 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. The EBITDA measure presented
herein may not be comparable to other similarly titled measures of other
companies.
NET SALES for the quarter ended May 1, 1999 decreased $12.5 million (19.2%) to
$52.4 million from $64.9 million for the quarter ended May 2, 1998. The decrease
in net sales is the result of a decline in units sold of nearly 13% and a
decline in the average selling price for all goods sold of approximately 7%.
Although the Company has been increasing its percentage sales of higher priced
products, such as henleys and plackets, a continuing decrease in selling prices
and lower overall unit sales resulted in the sales decline for the quarter. See
"Forward Looking Information," below.
GROSS PROFIT for the quarter ended May 1, 1999 declined approximately $2.0
million (15.2%) despite a 1% increase in overall gross profit margin from 20.1%
in the prior year's quarter to 21.1% in the quarter ended May 1, 1999. The
reduced gross profit was the result of lower sales, partially offset by lower
production costs per unit. The improvement in unit production costs is the
direct result of lower yarn prices in the current quarter as well as lower
sewing costs due to a higher percentage of offshore labor being used in the
current quarter as compared to the same period last year. See "Forward Looking
Information," below.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (including distribution expense)
for the quarter ended May 1, 1999 decreased by $0.8 million (12.0%) to $6.1
million from $6.9 million for the prior year. The decrease is primarily the
result of a selling expense decline of approximately $0.4 million resulting from
sales staff reductions and lower general and administrative expenses ($0.1
million) due to cost efficiencies effected in the Company's medical benefit
programs. In addition, the prior year's quarter contains unusually high freight
costs to meet delivery requirements. The Company's continuing efforts to reduce
these and other costs are further discussed in "Forward Looking Information,"
below.
INTEREST EXPENSE for the quarter ended May 1, 1999 was approximately the same as
the prior year's quarter, as rates and borrowing levels in both periods were
comparable.
INCOME BEFORE EXTRAORDINARY ITEM AND NET INCOME
Income before extraordinary item was $0.1 million compared to $0.8 million for
the quarter ended May 2, 1998. The factors discussed above accounted for a
decline in pre-tax profit of approximately $1.2 million. The provision for taxes
was $0.1 million in the quarter ended May 1, 1999 compared to $0.5 million in
the prior year, representing an effective tax rate of approximately 40% in both
periods. An extraordinary charge of $0.6 million (after taxes) relating to the
Company's refinancing brought the net loss to $0.5 million in the current
quarter.
10
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. The Company made capital expenditures of approximately
$6.1 million in year ended January 31, 1998 and $5.6 million in the year ended
January 30, 1999. The Company's major capital expenditures related to: (i)
improvements to 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. Beginning
with the current fiscal year, the Company anticipates the level of capital
expenditures to decline to an annual rate of approximately $3.0 to $4.0 million
and has no material capital commitments for the next twelve months outside of
the ordinary course of business.
The Company's principal working capital requirements are financing accounts
receivable and inventories. At May 1, 1999, the Company had net working capital
of approximately $52.3 million, including approximately $7.8 million of cash and
cash equivalents, $31.1 million of accounts receivable, $39.3 million of
inventories, $4.9 million of other current assets; and $30.8 million in accounts
payable and other current liabilities.
Effective March 14, 1997, Anvil entered into a Credit Agreement (the "Credit
Agreement") providing a $55.0 million revolving credit facility, subject to
certain maximum levels of borrowings based upon asset levels. At January 30,
1999, the amount outstanding under the Credit Agreement was $31.5 million,
bearing interest at 7.94%. Effective March 11, 1999, all amounts due under the
Credit Agreement were repaid from the proceeds of a new loan agreement, more
fully described below.
On March 11, 1999, Anvil entered into a Loan and Security Agreement (the "Loan
Agreement") providing for a maximum credit facility of $60.0 million consisting
of a term loan (the "Term Loan") and a revolving credit facility (the "Revolving
Credit Facility"). The Term Loan is in the principal amount of $11.7 million,
payable in 20 equal quarterly principal installments of $0.6 million commencing
July 1, 1999.
Anvil borrowed $19.6 million under the Revolving Credit Facility provided by the
same lender. The net proceeds of the Loan Agreement were used to repay all
amounts due under the Credit Agreement. The Revolving Credit Facility expires
March 11, 2002, and amounts due under it and the Term Loan are secured by
substantially all the inventory, receivables and property, plant and equipment
of Anvil. Holdings and Cottontops, Inc. ("Cottontops") guaranty amounts due
under the Loan Agreement. Interest on the Term Loan and the Revolving Credit
Facility are at prime plus one-half percent or LIBOR plus 2-1/2%, at the
Company's option. At May 1, 1999, there was $20.9 million outstanding under the
Revolving Credit Facility at an interest rate of 7.40%
The Company has classified $16.0 million and $25.0 million of its revolving
credit loans as a long-term liability at May 1, 1999 and January 30, 1999,
respectively, which represent amounts at such dates which the Company
anticipates to continually refinance.
11
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 Loan
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 Loan
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. Neither the Senior Note Indenture nor the Loan Agreement restricts
Anvil's subsidiaries from declaring dividends or making other intercompany
transfers to Anvil.
The Company believes that based upon current and anticipated levels of
operations, funds generated from operations, together with other available
sources of liquidity, including borrowings under the Loan 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.
12
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.
YEAR 2000 ISSUES
The Company's comprehensive Year 2000 Plan has been substantially implemented. A
senior Information Technology staff member continues to monitor the Company's
Year 2000 Plan.
Over the past several years, the Company has upgraded its major software
systems, which are now Year 2000 compliant. Confirmations have been received
from the Company's software vendors and testing to date has confirmed their
compliance. The Company is in the process of installing new accounts payable
and general ledger systems which are Year 2000 compliant. The target completion
date for the installation is the third quarter of 1999. However, even if
installation is delayed, the existing general ledger system can be made Year
2000 compliant with minimal programming work. The Company has also upgraded and
made Year 2000 compliant its major computer hardware and the systems that
interface with its sales force and significant customers. Although the Company
has no means of ensuring that all external agents will be Year 2000 compliant,
it has sent questionnaires to critical vendors, service providers, and select
customer to verify their Year 2000 readiness. A substantial number of responses
have been received and they do not indicate any material compliance concern. The
Company is constantly updating its contingency plans. Some of the areas being
reviewed include maintaining increased inventory in key products, identifying
alternate sources for critical materials, services and utilities, and
instituting a 24-hour hotline with key personnel on call.
The Company does not anticipate any material future costs relating to Year 200
implementation, beyond normal business requirements.
FORWARD-LOOKING INFORMATION
The Company has been experiencing the adverse effects of an industry-wide
decline in selling prices. This trend of relatively low average selling
prices is beyond the Company's control and has continued into the current
fiscal year. The Company has been able to slightly lessen the effect of these
pricing pressures by: (i) continuing to emphasize new higher priced products
and de-emphasize certain basic T-shirt sales; (ii) continuing to improve and
modernize its manufacturing processes in order to reduce production costs;
and (iii) moving a substantial majority of its sewing operations offshore to
take advantage of lower wage rates. Following are some of the Company's
specific actions and plans to effect favorable changes in these three areas.
1. The Company has been able to increase the percentage of sales of what it
considers its "higher priced" products. More favorable gross margins on
these products have partially offset the decline in gross margins on basic
T-shirts. The Company plans to continue this strategy.
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2. During the last five fiscal years, the Company has invested in excess of
$32 million to modernize and expand its manufacturing and distribution
facilities to improve quality, reduce costs, manage inventories and shorten
textile production cycles. In fiscal 1997, the Company began full
utilization of its centralized distribution facility and is continuing to
refine its textile manufacturing processes to shorten production cycles. In
addition, the Company has negotiated what it considers advantageous yarn
purchase commitments to take advantage of a recent downward trend in the
price of yarn, and has restructured its employee medical plan for the
current fiscal year. While no assurances can be given, Management believes
that the aforementioned changes will significantly contribute to lower unit
costs in the future.
3. Increased competition has caused many domestic apparel manufacturers to
move a portion of their sewing operations offshore to lower costs. The
Company has moved a substantial majority of its sewing activities offshore
to take advantage of these lower offshore wage rates and may further
increase its offshore sewing operations to the extent necessary to increase
production. The initial impact of moving offshore resulted in an increase
in unit costs due to inefficiencies in production, more irregulars, etc.
Management believes these inefficiencies have abated in recent months.
Because of this increasing shift to offshore production, the Company closed
and sold one of its smaller domestic sewing facilities during fiscal 1997,
and ceased operations at two other domestic facilities in 1998. During the
fiscal quarter ended May 1, 1999, the Company also announced a substantial
reduction in sewing personnel at its Mullins, South Carolina facility.
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 following factors 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:
1. Changes in economic conditions, in particular those which affect the
activewear market.
2. Changes in the availability and/or price of yarn, in particular, if
increases in the price of 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.
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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 grievances 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 fiscal 1999 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company believes that its potential exposure to market risk is not material.
The Company has an interest rate swap agreement in place to hedge its exposure
to interest rate risk.
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PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
See Note 2 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.
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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: June 15, 1999
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