<PAGE>
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 2, 1998
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, 1998, 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.
<PAGE>
FORM 10-Q
ANVIL HOLDINGS, INC.
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of May 2, 1998 (Unaudited)
and January 31, 1998 . . . . . . . . . . . . . . . . . . . . . . .3
Unaudited Consolidated Statements of Operations for the
Fiscal Quarters Ended May 2, 1998 and May 3, 1997. . . . . . . . .4
Unaudited Consolidated Statements of Cash Flows for the
Fiscal Quarters Ended May 2, 1998 and May 3, 1997 . . . . . . . . . . .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 AND USE OF PROCEEDS. . . . . . . . . . 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. . . . . . . . . . . . . . 16
SIGNATURES. . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ANVIL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
MAY 2, JANUARY 31,
1998 1998*
---------- ----------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,532 $ 959
Accounts receivable, less allowance for
doubtful accounts of $909 and $822 37,710 27,271
Inventories 45,326 42,089
Prepaid and refundable income taxes 3,910 4,640
Deferred income taxes 2,510 2,510
Prepaid expenses and other current assets 1,093 1,004
---------- ----------
Total current assets 92,081 78,473
PROPERTY, PLANT AND EQUIPMENT Net 38,025 38,189
INTANGIBLE ASSETS Net 25,237 25,487
OTHER ASSETS 4,785 4,964
---------- ----------
$ 160,128 $ 147,113
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Accounts payable $ 12,067 $ 11,986
Accrued expenses and other current liabilities 12,681 15,349
Current portion of long-term debt 11,300 -
---------- ----------
Total current liabilities 24,748 27,335
---------- ----------
LONG-TERM BANK BORROWINGS 25,000 21,700
---------- ----------
10-7/8% SENIOR NOTES 126,543 126,445
---------- ----------
DEFERRED INCOME TAXES 4,613 4,613
---------- ----------
OTHER LONG-TERM OBLIGATIONS 1,965 1,883
---------- ----------
REDEEMABLE PREFERRED STOCK
(Liquidation value, $34,691 and $33,605) 32,537 31,392
---------- ----------
STOCKHOLDERS' DEFICIENCY:
Common stock:
Class A, $.01 par value, 12.5% cumulative;
authorized 500,000 shares, issued and outstanding:
290,000 (aggregate liquidation value, $33,350
and $32,333) 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 earnings (deficit) (79,420) (79,097)
---------- ----------
Total stockholders' deficiency (66,578) (66,255)
---------- ----------
$ 160,128 $ 147,113
---------- ----------
---------- ----------
* Derived from audited financial statements.
See notes to consolidated financial statements.
</TABLE>
3
<PAGE>
ANVIL HOLDINGS, INC. AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
-------------------------
MAY 2, MAY 3,
1998 1997
---------- ----------
(Unaudited)
<S> <C> <C>
NET SALES $ 64,892 $ 60,288
COST OF GOODS SOLD 51,831 45,859
---------- ----------
Gross profit 13,061 14,429
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 6,892 6,128
SPECIAL COMPENSATION - 10,915
AMORTIZATION OF INTANGIBLE ASSETS 250 250
---------- ----------
Operating income (loss) 5,919 (2,864)
OTHER INCOME (EXPENSE):
Interest expense (4,268) (3,142)
Interest income and other expense net (281) (178)
---------- ----------
Income (loss) before provision (benefit) for
income taxes and extraordinary item 1,370 (6,184)
PROVISION (BENEFIT) FOR INCOME TAXES 548 (2,474)
---------- ----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 822 (3,710)
EXTRAORDINARY ITEM - Loss on extinguishment
of debt (net of tax benefit of $1,838) - (2,757)
---------- ----------
NET INCOME (LOSS) 822 (6,467)
Less: Preferred Stock dividends (historical/pro forma) (1,075) (975)
Common A preference (historical/pro forma) (1,010) (906)
---------- ----------
NET INCOME (LOSS ) ATTRIBUTABLE TO
COMMON STOCKHOLDERS $ (1,280) $ (8,348)
---------- ----------
---------- ----------
BASIC INCOME (LOSS) PER COMMON SHARE
Class A Common Stock:
Income before extraordinary item $ 3.15 $1.68
Extraordinary item - (0.71)
------ ------
Net income $ 3.15 $ 0.97
------ ------
------ ------
Class B Common Stock:
(Loss) before extraordinary item $(0.33) $(1.44)
Extraordinary item - (0.71)
\ ------ ------
Net (loss) $(0.33) $(2.15)
------ ------
------ ------
Weighted average shares used in computation of
basic income (loss) per share:
Class A Common 290 290
------ ------
------ ------
Class B Common 3,590 3,590
------ ------
------ ------
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
ANVIL HOLDINGS, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
-------------------------
MAY 2, MAY 3,
1998 1997
---------- ----------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 822 $ (6,467)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization of fixed assets 1,681 1,678
Amortization of other assets 527 461
Noncash interest expense - 1,827
Write-off of deferred financing fees - 3,010
Noncash compensation - 5,177
Changes in operating assets and liabilities,
net of acquisition:
Accounts receivable (10,426) (4,411)
Inventories (3,237) 2,146
Prepaid and refundable income taxes 730 (2,487)
Accounts payable 81 737
Accrued expenses & other liabilities (2,668) 2,526
Current portion of long-term debt 11,300
Other net (6) (2,465)
---------- ----------
Net cash (used in) provided by
operating activities (1,196) 1,732
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment-net (1,531) (1,231)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit agreement-net 3,300 26,500
Repayment of old revolving credit facility - (14,400)
Repayments of long-term debt - (46,325)
Repayment of Subordinated Promissory Note - (9,575)
Proceeds of Senior Notes - 130,000
Redemption of Old Preferred Stock - (22,736)
Repurchase of Old Common Stock - (92,262)
Proceeds from sale of Units - 26,667
Exercise of stock options - 336
Issuance of New Common Stock - 13,063
Repayment of stockholder loans - 250
Expenses related to the Recapitalization - (12,477)
---------- ----------
Net cash (used in) provided by
financing activities 3,300 (959)
---------- ----------
INCREASE (DECREASE) IN CASH 573 (458)
CASH, BEGINNING OF YEAR 959 1,863
---------- ----------
CASH, END OF YEAR $ 1,532 $ 1,405
---------- ----------
---------- ----------
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
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 quarter ended May 2, 1998 are
not necessarily indicative of the results that may be expected for the fiscal
year ending January 30, 1999 or any other period. The balance sheet at January
31, 1998 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 31, 1998.
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.
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,
Holdings' 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
6
<PAGE>
borrowings under the New Credit Agreement (see below) were used by the Company
to: (i) redeem or repurchase the outstanding common stock and preferred stock;
(ii) repay the balance outstanding under a then existing credit facility ("Old
Credit Agreement"); (iii) repay the subordinated debt; (iv) pay fees and
expenses; (v) pay a management bonus; and (vi) pay amounts due in accordance
with a previously-existing equity buy-out plan.
Concurrently with the Recapitalization, the Company repaid its borrowings under
the Old Credit Agreement and entered into an Amended and Restated Credit
Agreement ("New Credit Agreement") providing a $55,000 revolving credit
facility, with a sublimit of $5,000 for letters of credit, expiring March 14,
2002, subject to certain maximum levels of borrowings based upon asset levels.
The Company used $33,250 of the borrowings under the New Credit Agreement to
finance a portion of the Recapitalization. The Company has classified $25,000
and $21,700 of the revolving credit borrowings as long-term liabilities in the
accompanying balance sheets at May 2, 1998 and January 31, 1998, respectively,
representing, at the respective balance sheet dates, amounts the Company
anticipates continually refinancing.
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
164,245 shares ($4,106 liquidation value) through the period ended May 2, 1998.
During the quarter ended May 3, 1997, the Company recorded an extraordinary
charge of $2,757, after an applicable income tax benefit, as a result of losses
incurred in connection with certain of the above refinancing transactions.
NOTE 3 - RECENT EXCHANGE OFFERS
Holdings completed an exchange offer which expired August 26, 1997 (as
extended), pursuant to which its 13% Series A Senior Exchangeable Preferred
Stock was exchanged on a share-for-share basis for its 13% Series B Senior
Exchangeable Preferred Stock, due 2009. Pursuant to the exchange offer,
1,198,566 shares ($29,964 liquidation value) were validly tendered and
exchanged.
Anvil 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
7
<PAGE>
In connection with the Recapitalization and refinancings effected during the
fiscal year ended January 31, 1998, the Company made significant compensatory
payments to members of management during the quarter ended May 3, 1997. 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 May 2, 1998 and January 31, 1998 consisted of the following:
May 2, 1998 January 31, 1998
----------- ----------------
Finished goods $23,021 $22,505
Work-in-process 10,240 9,830
Raw materials & supplies 12,065 9,754
------- -------
$45,326 $42,089
------- -------
------- -------
NOTE 6 - INCOME (LOSS) PER SHARE
Basic income (loss) per share is computed based upon the average outstanding
shares attributable to the Class A and Class B Common stock. For the quarter
ended May 3, 1997, the amounts assume the Recapitalization took place at the
beginning of period. The following is a computation of basic net income (loss)
per share for the quarter ended May 3, 1997 using the historical shares
outstanding, and is computed by dividing net income (loss) applicable to each
class of Common Stock by the actual average number of common shares outstanding
during the period Such computation does not give retroactive effect to the
Recapitalization.
Quarter Ended
May 3,
1997
-------------
Net income (loss) $(6,467)
Preferred stock dividends -
Common A preference -
-------
Net loss attributable to common stockholders $(6,467)
-------
-------
Class A Common:
Loss before extraordinary item $ (0.82)
-------
-------
Net loss $ (1.42)
-------
-------
Class B Common:
Loss before extraordinary item $ (0.82)
-------
-------
Net loss $ (1.42)
-------
-------
Weighted average shares outstanding:
Class A Common 928
-------
-------
Class B Common 3,633
-------
-------
NOTE 7 - SUMMARIZED FINANCIAL DATA OF CERTAIN WHOLLY-OWED SUBSIDIARIES
8
<PAGE>
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.
<TABLE>
<CAPTION>
ANVIL KNITWEAR, INC. COTTONTOPS, INC.
------------------------- -------------------------
MAY 2, JANUARY 31, MAY 2, JANUARY 31,
1998 1998 1998 1998
---------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Current assets $ 92,081 $ 78,473 $ 2,954 $ 3,825
---------- ---------- ---------- -------
---------- ---------- ---------- -------
Total assets $ 160,128 $ 147,113 $ 3,268 $ 4,166
---------- ---------- ---------- -------
---------- ---------- ---------- -------
Current liabilities $ 24,748 $ 27,335 $ 626 $ 550
---------- ---------- ---------- -------
---------- ---------- ---------- -------
Long-term liabilities $ 169,421 $ 154,641 $ 1,074 $ 1,854
---------- ---------- ---------- -------
---------- ---------- ---------- -------
Total liabilities $ 194,169 $ 181,976 $ 1,700 $ 2,404
---------- ---------- ---------- -------
---------- ---------- ---------- -------
Stockholder's equity (deficiency) $ (34,041) $ (34,863) $ 1,568 $ 1,762
---------- ---------- ---------- -------
---------- ---------- ---------- -------
</TABLE>
Following is the summarized statement of operations data of Anvil and
Cottontops for the periods indicated:
<TABLE>
<CAPTION>
ANVIL KNITWEAR, INC. COTTONTOPS, INC.
------------------------- -----------------------
QUARTER ENDED QUARTER ENDED
------------------------- -----------------------
MAY 2, MAY 3, MAY 2, MAY 3,
1998 1997 1998 1997
---------- ---------- -------- --------
<C> <C> <C> <C>
Net sales $ 64,892 $ 60,288 $ 832 $ 628
---------- ---------- -------- --------
---------- ---------- -------- --------
Operating income (loss) $ 5,919 $ (2,864) $ 106 $ (152)
---------- ---------- -------- --------
---------- ---------- -------- --------
Interest expense $ 4,268 $ 3,142 - -
---------- ---------- -------- --------
---------- ---------- -------- --------
Net income (loss) $ 822 $ (6,467) $ 96 $ (56)
---------- ---------- -------- --------
---------- ---------- -------- --------
</TABLE>
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, 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.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
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 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 in this segment.
The Company has been able to lessen the effect of pricing pressures by: (i)
continuing to emphasize new higher priced products; (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 substantial fixed costs of the Company's
textile operation.
The largest component of the Company's cost 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 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 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.
10
<PAGE>
The following table sets forth, for each of the periods indicated, certain
statement of operations data, expressed as a percentage of net sales.
FOR THE QUARTER ENDED
------------------------
MAY 2, MAY 3,
1998 1997
--------- ---------
STATEMENT OF OPERATIONS DATA:
Net sales 100.0% 100.0%
Cost of goods sold 79.9 76.1
Gross profit 20.1 23.9
Selling, general and administrative expenses 10.6 10.2
Interest expense 6.6 5.2
OTHER DATA:
EBITDA (1) $7.9 million $10.0 million
Percentage of net sales 12.1% 16.6%
(1) EBITDA is defined as operating income plus depreciation and amortization.
The quarter ended May 3, 1997 excludes non-recurring charges of $10.9
million for special compensation. 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 and is used by the
Company's creditors in assessing debt covenant compliance. 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.
QUARTER ENDED MAY 2, 1998 COMPARED TO QUARTER ENDED MAY 3, 1997
NET SALES for the quarter ended May 2, 1998 increased $4.6 million, or 7.6%, to
$64.9 million from $60.3 million for the quarter ended May 3, 1997. The
increase in net sales is comprised of an increase in units sold of more than 8%,
offset by a slight decline in average selling price per unit. The decline in
average selling price has been caused by the continuing pressures on the
selling prices of basic T-shirts. The Company was able to mitigate some of the
effect of such depressed T-shirt prices by continuing to emphasize sales of
higher priced products, such as henleys and plackets.
GROSS PROFIT for the quarter ended May 2, 1998 declined approximately $1.4
million (9.5%) despite the $4.6 million increase in sales, as gross profit
margin declined to 20.1% from 23.9% in the prior year. Although the Company
continues to place greater emphasis on products with traditionally higher profit
margins such as plackets and henleys, any favorable impact achieved by this
strategy was offset by industry-wide pricing pressures affecting the Company's
basic T-shirt business. Management of the Company believes that this trend
(i.e., relatively low average selling prices for basic T-shirts) is being
experienced throughout the industry and is continuing into the second fiscal
quarter.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (including distribution expense)
for the quarter ended May 2, 1998 increased by $0.8 million, or 12.5%, to $6.9
million from $6.1 million for the prior year. As a percentage of net sales,
selling, general and administrative expenses were
11
<PAGE>
approximately 10.6% and 10.2% for the fiscal quarters ended May 2, 1998 and May
3, 1997, respectively. Selling expenses (principally advertising and other
selling expenses) increased $0.3 million and administrative expenses (primarily
salaries and expenses relating to Cottontops) increased $0.2 million.
Distribution expense increased approximately $0.3 million due to additional
volume and unusually high freight costs in order to meet delivery requirements.
INTEREST EXPENSE for the quarter ended May 2, 1998 increased by $1.1 million,
or 35.8%, to $4.3 million from $3.2 million for the prior year's quarter. This
increase in interest expense was the result of higher borrowings in connection
with the Recapitalization, as well as additional requirements to fund current
operations. Interest rates were also slightly higher during the current quarter
compared to the prior year's quarter.
NET (loss) INCOME
The net profit for the quarter ended May 2, 1998 was $0.8 million compared to a
net loss of $6.5 million for quarter ended May 3, 1997. A decrease in gross
profit of $1.4 million was further reduced by higher selling, general and
administrative expenses ($0.8 million) and higher interest expense ($1.1
million). In the prior year's quarter there was a charge of $10.9 million for
"special compensation" and an extraordinary charge of $2.8 million (after
applicable income tax benefit) on extinguishment of debt. Taxes of $0.5 million
were provided in the current year's quarter compared to a tax benefit of $2.5
million for 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. For the quarter ended May 2, 1998, the company funded
its cash requirements chiefly through additional borrowings under its line of
credit.
The Company made capital expenditures of approximately $6.1 million and $4.8
million for the fiscal years ended January 31, 1998 and February 1, 1997,
respectively. The Company's major capital expenditures related to: (i)
improvements to the Company's distribution center in Dillon, South Carolina;
(ii) the acquisition of machinery and equipment; and (iii) the acquisition
of management information systems hardware and software. 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. At May 2, 1998, the Company had net working capital
of approximately $67.3 million, including approximately $37.7 million of
accounts receivable, $45.3 million of inventories and $24.7 million in accounts
payable and accrued expenses. The Company has classified $25,000 and $21,700 of
the revolving credit borrowings as long-term liabilities in the accompanying
balance sheets at May 2, 1998 and January 31, 1998, respectively, representing,
at the respective balance sheet dates, amounts the Company anticipates
continually refinancing.
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
12
<PAGE>
New Credit Agreement is guaranteed by Holdings and Anvil's 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 May 2, 1998, the Company had
$36.3 million outstanding borrowings under the New Credit Agreement at an
interest rate of approximately 7.75%.
The New Credit Agreement, as amended, 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: (i) 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 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,
13
<PAGE>
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
The Company is required to adopt Statement of Financial Account Standards
(""SFAS") No. 130, "Reporting Comprehensive Income" during the year ending
January 30, 1999. SFAS 130 establishes 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. Currently, the Company has no items of " other
comprehensive income" to report.
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 following factors
14
<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:
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 fiscal 1998 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.
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
See Notes 2 and 3 to Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 19, 1998, the Company held its annual meeting of stockholders for the
purpose of electing six directors. The following directors were re-elected to
serve until the next annual meeting of stockholders or until their respective
successors are elected and qualified: Bernard Geller, Jacob Hollander, Bruce C.
Bruckmann, Stephen F. Edwards, David F. Thomas and John D. Weber.
No other matters were voted upon at the meeting.
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 and 5 are not applicable and have been omitted.
16
<PAGE>
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, 1998
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM ANVIL HOLDINGS'
FINANCIAL STATEMENTS INCLUDED IN ITS FORM 10-Q FOR THE QUARTER ENDED MAY 2, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> MAY-02-1998
<CASH> 1,532
<SECURITIES> 0
<RECEIVABLES> 38,619
<ALLOWANCES> 909
<INVENTORY> 45,326
<CURRENT-ASSETS> 92,081
<PP&E> 57,682
<DEPRECIATION> 19,657
<TOTAL-ASSETS> 160,128
<CURRENT-LIABILITIES> 24,748
<BONDS> 126,543
32,537
0
<COMMON> 39
<OTHER-SE> (66,617)
<TOTAL-LIABILITY-AND-EQUITY> 160,128
<SALES> 64,892
<TOTAL-REVENUES> 64,892
<CGS> 51,831
<TOTAL-COSTS> 11,441
<OTHER-EXPENSES> 250
<LOSS-PROVISION> 120
<INTEREST-EXPENSE> 4,268
<INCOME-PRETAX> 1,370
<INCOME-TAX> 548
<INCOME-CONTINUING> 822
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 822
<EPS-PRIMARY> 3.15
<EPS-DILUTED> 3.15
</TABLE>
