<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 October 30, 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 December 14, 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.
<PAGE>
FORM 10-Q
ANVIL HOLDINGS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of October 30, 1999 (Unaudited)
and January 30, 1999............................................................. 3
Unaudited Consolidated Statements of Operations for the
Nine Months and Quarters Ended October 30, 1999 and
October 31, 1998................................................................. 4
Unaudited Consolidated Statements of Cash Flows for the
Nine Months Ended October 30, 1999 and October 31, 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.................................................................... 16
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
</TABLE>
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>
OCTOBER 30, JANUARY 30,
1999 1999*
---- -----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................. $ 456 $ 3,397
Accounts receivable, less allowances for doubtful accounts of
$1,207 and $635..................................................... 21,519 31,232
Inventories........................................................... 43,535 41,356
Prepaid and refundable income taxes................................... - 1,704
Deferred income taxes................................................. 2,353 2,353
Prepaid expenses and other current assets............................. 1,195 706
---------- ---------
Total current assets...................................... 69,058 80,748
PROPERTY, PLANT AND EQUIPMENT--Net...................................... 33,886 37,536
DEFERRED INCOME TAXES................................................... 3,823 3,823
INTANGIBLE ASSETS--Net ................................................. 23,800 24,529
OTHER ASSETS............................................................ 3,820 4,294
---------- ---------
$ 134,387 $ 150,930
========== =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Accounts payable...................................................... $ 8,681 $ 7,181
Accrued expenses and other current liabilities........................ 16,444 16,652
Current portion of revolving credit loans............................. 94 6,500
Current portion of term loan.......................................... 2,345 -
---------- ---------
Total current liabilities............................. 27,564 30,333
---------- ---------
LONG-TERM PORTION OF REVOLVING CREDIT LOAN.............................. - 25,000
---------- ---------
LONG-TERM PORTION OF TERM LOAN.......................................... 8,207 -
---------- ---------
10-7/8% SENIOR NOTES.................................................... 127,128 126,835
---------- ---------
DEFERRED INCOME TAXES................................................... 5,276 5,276
---------- ---------
OTHER LONG-TERM OBLIGATIONS............................................. 1,875 1,744
---------- ---------
REDEEMABLE PREFERRED STOCK
(Liquidation value $41,321 and $37,541)............................ 40,090 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, $40,091 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.................................................... (88,595) (87,239)
---------- ---------
Total stockholders' deficiency............................... (75,753) (74,397)
---------- ---------
$ 134,387 $ 150,930
========== =========
</TABLE>
* Derived from audited financial statements.
See notes to consolidated financial statements.
3
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ANVIL HOLDINGS, INC. AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
FISCAL QUARTER ENDED FISCAL NINE MONTHS ENDED
-------------------- ------------------------
OCTOBER 30, OCTOBER 31, OCTOBER 30, OCTOBER 31,
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
NET SALES.............................................. $42,856 $43,400 $147,037 $170,475
COST OF GOODS SOLD..................................... 30,530 37,526 110,712 140,026
------- ------- -------- --------
Gross profit.................................... 12,326 5,874 36,325 30,449
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES............................................ 5,842 6,188 17,299 19,133
AMORTIZATION OF INTANGIBLE ASSETS...................... 250 250 729 729
------- ------- -------- --------
Operating income................................ 6,234 (564) 18,297 10,587
OTHER INCOME (EXPENSE):
Interest expense................................... (3,850) (4,353) (12,127) (12,917)
Interest income and other expense--net............. (297) (267) (803) (728)
------- ------- -------- --------
INCOME (LOSS) BEFORE PROVISION FOR INCOME
TAXES AND EXTRAORDINARY ITEM....................... 2,087 (5,184) 5,367 (3,058)
PROVISION (BENEFIT) FOR INCOME TAXES................... 835 (2,073) 2,146 (1,223)
------- ------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEM....................... 1,252 (3,111) 3,221 (1,835)
EXTRAORDINARY ITEM - Loss on extinguishment
of debt (net of tax benefit of $417)............... - - (627) -
------- ------- -------- --------
NET INCOME............................................. 1,252 (3,111) 2,594 (1,835)
Less: Preferred Stock dividends..................... (1,309) (1,144) (3,829) (3,328)
Common A preference ........................ (1,201) (1,075) (3,523) (3,127)
------- ------- -------- --------
NET (LOSS) ATTRIBUTABLE TO
COMMON STOCKHOLDERS................................ $ (1,258) $ (5,330) $ (4,758) $ (8,290)
========= ========= ========= ========
BASIC INCOME (LOSS) PER COMMON SHARE
Class A Common Stock:
Income before extraordinary item.................... $ 3.82 $ 2.34 $ 11.08 $ 8.65
Extraordinary item.................................. - - (0.16) -
------- ------- -------- --------
Net income.......................................... $ 3.82 $ 2.34 $ 10.92 $ 8.65
========= ========= ========= ========
Class B Common Stock:
(Loss) before extraordinary item.................... $ (0.32) $ (1.38) $ (1.06) $ (2.14)
Extraordinary item.................................. - - (0.16) -
------- ------- -------- --------
Net (loss).......................................... $ (0.32) $ (1.38) $ (1.22) $ (2.14)
========= ========= ========= ========
Weighted average shares used in computation of
basic income (loss) per share:
Class A Common....................................... 290 290 290 290
========= ========= ========= ========
Class B Common....................................... 3,590 3,590 3,590 3,590
========= ========= ========= ========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
ANVIL HOLDINGS, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
FISCAL NINE MONTHS ENDED
------------------------
OCTOBER 30, OCTOBER 31,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ 2,594 $ (1,835)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of fixed assets............... 5,255 4,972
Amortization of other assets................................ 1,538 1,538
Loss on extinguishment of debt.............................. 627 -
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable......................................... 9,643 4,016
Inventories................................................. (2,179) (11,606)
Prepaid and refundable income taxes......................... 1,704 (1,171)
Accounts payable............................................ 1,500 (3,953)
Accrued expenses & other liabilities........................ (77) 828
Other--net.................................................. (214) (61)
---------- -----------
Net cash provided (used) by operating activities..... 20,391 (7,272)
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment--net.................... (1,659) (4,960)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of Term Loan...................................... 10,552 -
(Repayments) borrowings under revolving credit agreements... (32,225) 12,100
---------- -----------
Net cash (used) provided by financing activities....... (21,673) 12,100
---------- -----------
(DECREASE) IN CASH.............................................. (2,941) (132)
CASH, BEGINNING OF PERIOD....................................... 3,397 959
---------- -----------
CASH, END OF PERIOD............................................. $ 456 $ 827
========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest........................................ $ 15,976 $ 16,613
========== ===========
Cash (received) for income taxes.............................. $ (356) $ (51)
========== ===========
Non-cash investing and financing activities -
Redeemable preferred stock issued in lieu of dividends...... $ 3,780 $ 3,021
========== ===========
</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 period ended October 30, 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
On 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%. 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 $60,000 consisting of a
term loan (the "Term Loan") and a revolving credit facility (the "Revolving
Credit Facility"). The Term Loan was in the principal amount of $11,725,
repayable in quarterly principal installments of $586, which commenced on July
1, 1999. Anvil also borrowed $19,566 under the Revolving Credit Facility. The
Loan Agreement expires March 11, 2002, and amounts due under it are secured by
substantially all the inventory, receivables and property, plant and equipment
of Anvil. Holdings and Cottontops, Inc., a Delaware corporation ("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 October 30, 1999, there was $94 outstanding
under the Revolving Credit Facility at an interest rate of 7.9%.
6
<PAGE>
The Company classified $25,000 of its then revolving credit loan as a long-term
liability at January 30, 1999, which represents the amount which the Company
then 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
452,842 shares ($11,321 liquidation value) through October 30, 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 October 30, 1999 and January 30, 1999 consisted of the following:
<TABLE>
<CAPTION>
OCTOBER 30, 1999 JANUARY 30, 1999
---------------- ----------------
<S> <C> <C>
Finished goods $25,333 $26,313
Work-in-process 12,093 9,441
Raw materials & supplies 6,109 5,602
------- -------
$43,535 $41,356
======= =======
</TABLE>
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.
<TABLE>
<CAPTION>
ANVIL KNITWEAR, INC. COTTONTOPS, INC.
-------------------- ----------------
OCTOBER 30, JANUARY 30, OCTOBER 30, JANUARY 30,
1999 1999 1999 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Current assets............................ $ 69,058 $ 80,748 $ 1,903 $ 882
========== ========= ======== =======
Total assets.............................. $ 134,387 $ 150,930 $ 2,044 $ 1,863
========== ========= ======== =======
Current liabilities....................... $ 27,564 $ 30,333 $ 548 $ 287
========== ========= ======== =======
Long-term liabilities..................... $ 142,486 $ 158,855 - -
========== ========= ======== =======
Total liabilities......................... $ 170,050 $ 189,188 $ 1,187 $ 287
========== ========= ======== =======
Stockholder's equity (deficiency)......... $ (35,663) $ (38,258) $ 857 $ 1,576
========== ========= ======== =======
</TABLE>
7
<PAGE>
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 NINE MONTHS ENDED QUARTER ENDED NINE MONTHS ENDED
------------------ ------------------- ------------------ ------------------
OCT 30, OCT 31, OCT 30, OCT 31, OCT 30, OCT 31, OCT 30, OCT 31,
1999 1998 1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales................ $ 42,856 $ 43,400 $147,037 $ 170,475 $ 994 $ 1,329 $ 2,956 $3,081
Operating income (loss).. $ 6,234 $ (564) $ 18,297 $ 10,587 $ (229) $ 105 $ (738) $ 255
Interest expense......... $ 3,850 $ 4,353 $ 12,127 $ 12,917 - - - -
Net income (loss)........ $ 1,252 $ (3,111) $ 2,594 $ (1,835) $ (132) $ 65 $ (431) $ 154
</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: A.K.H., S.A., organized in Honduras;
Livna, Limitada organized in El Salvador; and CDC, GmbH, recently organized in
Germany to distribute the Company's products there (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
<PAGE>
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,
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.
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. Yarn prices currently continue at lower levels and
management has taken steps to adjust the Company's purchase commitments to take
advantage of these lower prices.
QUARTER ENDED OCTOBER 30, 1999 COMPARED TO QUARTER ENDED OCTOBER 31, 1998
The following table sets forth, for each of the periods indicated, certain
statement of operations data, expressed as a percentage of net sales.
<TABLE>
<CAPTION>
FISCAL QUARTER ENDED
--------------------
OCTOBER 30, OCTOBER 31,
1999 1998
---- ----
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales...................................... 100.0% 100.0%
Cost of goods sold............................. 71.2 86.5
Gross profit................................... 28.8 13.5
Selling, general and administrative expenses... 13.6 14.3
Interest expense............................... 9.0 10.0
OTHER DATA:
EBITDA (1).........................................$8.3 million $1.4 million
Percentage of net sales.........................19.3% 3.2%
</TABLE>
9
<PAGE>
(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 October 30, 1999 decreased $0.5 million (1.3%)
to $42.9 million from $43.4 million for the quarter ended October 31, 1998. The
decrease in net sales is the result of a decline in the average selling price
for all goods sold of approximately 14%, which was substantially offset by an
increase in units sold.
GROSS PROFIT for the quarter ended October 30, 1999 increased approximately $6.5
million (110%) despite the small decline in sales. The improvement was the
result of a substantial increase in gross margin from 13.5% in the prior year's
quarter to 28.8% in the current quarter. This improvement has been the result of
the following factors:
- - The Company has negotiated what it considers advantageous yarn purchase
commitments to take advantage of the lower price of yarn, and has
restructured its employee medical plan for the current fiscal year.
- - The Company has moved substantially all of its sewing activities offshore
to take advantage of lower offshore wage rates and will further increase
its in-house offshore sewing operations to the extent necessary to increase
production and reduce reliance on offshore contractors. Because of this
increasing shift to offshore production, the Company closed several of its
domestic sewing facilities during fiscal 1997 and 1998. During the quarter
ended July 31, 1999, the Company substantially eliminated its remaining
domestic sewing operations, retaining only minimal domestic sewing
capability. While the initial impact of moving offshore resulted in some
inefficiencies in production and more irregulars, these inefficiencies have
abated during recent fiscal quarters.
The Company has experienced a substantial improvement in unit production costs
and gross profit as a result of the management initiatives discussed above, and,
while no assurances can be given, management believes that some of these
initiatives will continue to contribute to lower unit costs in the future. See
"Forward Looking Information," below.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (including distribution expense)
for the quarter ended October 30, 1999 decreased by $0.4 million (5.6%) to $5.8
million from $6.2 million for the prior year's quarter. The decrease is composed
of a reduction in selling expense resulting from sales staff reductions and
lower general and administrative expenses effected by staff and other expense
reductions.
10
<PAGE>
INTEREST EXPENSE for the quarter ended October 30, 1999 declined approximately
$0.5 million (11.6%) as compared to the prior year's quarter. While interest
rates were comparable during both periods, lower levels of borrowings were made
possible by improved operating results and an effective inventory reduction
program.
NINE MONTHS ENDED OCTOBER 30, 1999 COMPARED TO NINE MONTHS ENDED OCTOBER 31,
1998
The following table sets forth, for each of the periods indicated, certain
statement of operations data, expressed as a percentage of net sales.
<TABLE>
<CAPTION>
FISCAL NINE MONTHS ENDED
------------------------
OCTOBER 30, OCTOBER 31,
1999 1998
---- ----
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................................ 100.0% 100.0%
Cost of goods sold....................................... 75.3 82.1
Gross profit............................................. 24.7 17.9
Selling, general and administrative expenses............. 11.8 11.2
Interest expense......................................... 8.3 7.6
OTHER DATA:
EBITDA (1)............................................... $24.3 million $16.3 million
Percentage of net sales.......................... 16.5% 9.6%
</TABLE>
(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 nine months ended October 30, 1999 decreased $23.5 million
(13.7%) to $147.0 million from $170.5 million for the nine months ended October
31, 1998. The decrease in net sales is the result of a decline in units sold of
approximately 5% and a decline in the average selling price for all goods sold
of approximately 9%.
GROSS PROFIT for the nine months ended October 30, 1999 increased approximately
$5.9 million (19.3%) compared to the prior nine month period despite the $23.5
million decline in sales. This improvement is the result of a substantial
increase in gross margin percentages from 17.9% to 24.7%. This year to date
improvement in gross margin occurred primarily in the second and third quarters,
and was accomplished through the management initiatives discussed below under
"Forward Looking Information."
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (including distribution expense)
for the nine months ended October 30, 1999 decreased by $1.8 million (9.6%) to
$17.3 million from $19.1
11
<PAGE>
million for the prior year. As a percentage of net sales, selling, general
and administrative expenses were 11.8% and 11.2% for the fiscal nine month
periods ended October 30, 1999 and October 31, 1998, respectively. The dollar
decrease is composed of a reduction in selling expense of approximately
$1.0 million resulting from sales staff reductions, a decline of $0.5 million
general and administrative expenses effected by staff and other expense
reductions, and a reduction of $0.3 million in distribution expense due to
lower units shipped. In addition, during the prior year's nine month period
there were unusually high first quarter distribution expenditures to meet
delivery commitments.
INTEREST EXPENSE for the nine months ended October 30, 1999 declined
approximately $0.8 million (6.1%) as compared to the prior year's period. The
decrease occurred primarily during the second and third quarters due to lower
levels of borrowings made possible by improved operating results and an
effective inventory reduction program.
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, other than those relating to new offshore
sewing operations.
The Company's principal working capital requirements are financing accounts
receivable and inventories. At October 30, 1999, the Company had net working
capital of approximately $41.5 million, including approximately $0.5 million of
cash and cash equivalents, $21.5 million of accounts receivable, $43.5 million
of inventories, $3.5 million of other current assets; and $27.5 million in
accounts payable and other current liabilities.
On 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%. 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 was in the principal amount of $11.7 million,
repayable in quarterly principal installments of $0.6 million, which commenced
on July 1, 1999. Anvil also borrowed $19.6 million under the Revolving Credit
Facility. The Loan Agreement expires March 11, 2002, and amounts due under it
are secured by substantially all the inventory, receivables and
12
<PAGE>
property, plant and equipment of Anvil. Holdings and 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 October 30, 1999, the Company had reduced the amount due
under the Revolving Credit Facility to a nominal amount ($94,000), bearing
interest at 7.9%.
At January 30, 1999, the Company classified $25.0 million of its then revolving
credit loan as a long-term liability, which represents the amount which the
Company then anticipated to continually refinance.
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.
13
<PAGE>
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.
YEAR 2000 ISSUES
The Company's comprehensive Year 2000 Plan has been fully implemented. A senior
Information Technology staff member continues to supervise the re-testing of all
systems and is also responsible for finalizing and implementing the Company's
contingency 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 has completed the installation of new accounts payable
and general ledger systems which are now operational and are Year 2000
compliant. 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. Full Year 2000 testing on these systems has been
successful. 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 customers 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 in order to address the most reasonably likely worst case
scenario. 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 2000
implementation, beyond normal business requirements.
FORWARD-LOOKING INFORMATION
Although the Company has been experiencing the adverse effects of an
industry-wide decline in selling prices, management has been able to partially
offset the effect of these pricing pressures by: (i) continuing to improve and
modernize its manufacturing processes in order to reduce production costs; and
(ii) moving virtually all of its sewing operations offshore to take advantage of
lower wage rates.
As discussed above, these management initiatives have begun to have a favorable
effect on the Company's results of operations, particularly in the two fiscal
quarters just ended.
14
<PAGE>
Management intends to continue these and other efficiency-oriented strategies to
the extent it deems necessary to improve operating results and meet competition.
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.
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
15
<PAGE>
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.
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.
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: December 14, 1999
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ANVIL
HOLDINGS' FINANCIAL STATEMENTS INCLUDED IN ITS FORM 10-Q FOR THE QUARTERLY
PERIOD ENDED OCTOBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> OCT-30-1999
<CASH> 456
<SECURITIES> 0
<RECEIVABLES> 22,726
<ALLOWANCES> 1,207
<INVENTORY> 43,535
<CURRENT-ASSETS> 69,058
<PP&E> 62,784
<DEPRECIATION> 28,898
<TOTAL-ASSETS> 134,387
<CURRENT-LIABILITIES> 27,564
<BONDS> 135,335
40,090
0
<COMMON> 39
<OTHER-SE> (77,660)
<TOTAL-LIABILITY-AND-EQUITY> 134,387
<SALES> 147,037
<TOTAL-REVENUES> 147,037
<CGS> 110,712
<TOTAL-COSTS> 18,028
<OTHER-EXPENSES> 803
<LOSS-PROVISION> 572
<INTEREST-EXPENSE> 12,127
<INCOME-PRETAX> 5,367
<INCOME-TAX> 2,146
<INCOME-CONTINUING> 3,221
<DISCONTINUED> 0
<EXTRAORDINARY> (627)
<CHANGES> 0
<NET-INCOME> 2,594
<EPS-BASIC> 11.08
<EPS-DILUTED> 11.08
</TABLE>
