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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended August 3, 2002
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 September 12, 2002, there were 290,000 shares of Class A Common Stock, $0.01
par value (the "Class A Common") and 3,592,500 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
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAGE
Consolidated Balance Sheets as of August 3, 2002 (Unaudited)
and February 2, 2002............................................................. 3
Unaudited Consolidated Statements of Operations for the
Quarters and Six Months Ended August 3, 2002
and August 4, 2001.............................................................. 4
Unaudited Consolidated Statements of Cash Flows for the
Six Months Ended August 3, 2002 and August 4, 2001............................... 5
Unaudited Notes to Consolidated Financial Statements............................. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................. 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.................................................................... 16
ITEM 4. CONTROLS AND PROCEDURES.......................................................... 16
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS........................................ 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................... 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................. 17
SIGNATURES......................................................................................... 18
CERTIFICATIONS..................................................................................... 19
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ANVIL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
AUGUST 3, FEBRUARY 2,
2002 2002*
-------- --------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents............................................. $ 28,443 $ 11,931
Accounts receivable, less allowances for doubtful accounts of
$1,290 and $1,110................................................... 29,291 28,827
Inventories........................................................... 28,178 45,339
Prepaid and refundable income taxes................................... 1,042 1,046
Deferred income taxes-current portion................................. 1,696 1,696
Prepaid expenses and other current assets............................. 2,412 1,021
-------- --------
Total current assets........................................ 91,062 89,860
PROPERTY, PLANT AND EQUIPMENT--Net...................................... 33,765 30,655
GOODWILL-Net............................................................ 19,416 19,416
INTANGIBLE ASSETS--Net ................................................. 2,907 3,216
OTHER ASSETS............................................................ 2,354 2,578
-------- --------
$149,504 $145,725
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Accounts payable...................................................... $ 9,258 $ 7,577
Accrued expenses and other current liabilities........................ 18,097 15,206
Current portion of term loan.......................................... 4,104 2,345
Income taxes payable................................................. 1,598 -
-------- --------
Total current liabilities............................. 33,057 25,128
-------- --------
LONG-TERM PORTION OF TERM LOAN.......................................... - 2,931
-------- --------
10-7/8% SENIOR NOTES.................................................... 128,200 128,005
-------- --------
DEFERRED INCOME TAXES................................................... 5,759 5,759
-------- --------
OTHER LONG-TERM OBLIGATIONS............................................. 999 1,397
-------- --------
REDEEMABLE PREFERRED STOCK
(Liquidation value $58,743 and $55,104)............................ 58,187 54,527
LESS-REDEEMABLE PREFERRED STOCK IN TREASURY
(Liquidation value $15,599 and $3,668)............................. (15,569) (3,620)
-------- --------
REDEEMABLE PREFERRED STOCK-Net........................................... 42,618 50,907
-------- --------
STOCKHOLDERS' DEFICIENCY:
Common stock
Class A, $.01 par value, 12.5% cumulative; authorized 500,000
shares, issued and outstanding: 290,000 shares
(aggregate liquidation value, $56,004 and $52,758).............. 3 3
Class B, $.01 par value, authorized 7,500,000 shares; issued and
outstanding: 3,592,500 and 3,590,000 shares..................... 36 36
Class C, $.01 par value; authorized 1,400,000 shares; none issued - -
Additional paid-in capital.......................................... 12,806 12,803
Deficit............................................................. (73,974) (81,244)
-------- --------
Total stockholders' deficiency............................... (61,129) (68,402)
-------- --------
$149,504 $145,725
======== ========
- ---------------------
*Derived from audited financial statements.
See notes to consolidated financial statements.
3
ANVIL HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Share Data)
FISCAL QUARTER ENDED FISCAL SIX MONTHS ENDED
--------------------------- --------------------------
AUG 3, 2002 AUG 4, 2001 AUG 3, 2002 AUG 4, 2001
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
NET SALES...................................................... $64,546 $53,050 $127,901 $110,810
COST OF GOODS SOLD............................................. 46,450 40,966 93,561 84,269
------ ------ -------- ------
GROSS PROFIT................................................... 18,096 12,084 34,340 26,541
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.................................................... 6,031 5,675 12,733 12,230
AMORTIZATION OF INTANGIBLE ASSETS.............................. 151 321 309 670
------- ------ -------- ------
OPERATING INCOME............................................... 11,914 6,088 21,298 13,641
INTEREST EXPENSE............................................... 3,480 3,722 7,047 7,528
AMORTIZATION OF DEBT EXPENSE AND OTHER - NET................... 263 166 411 369
------- ------ ------ --------
INCOME BEFORE PROVISION FOR INCOME TAXES....................... 8,171 2,200 13,840 5,744
PROVISION FOR INCOME TAXES..................................... 3,270 886 5,560 2,434
----- ----- ------- ------
NET INCOME..................................................... 4,901 1,314 8,280 3,310
Less preferred stock dividends and accretion.................. (1,631) (1,675) (3,263) (3,211)
Less Common A preference....................................... (1,684) (1,490) (3,246) (2,854)
Add gain on purchases of preferred stock....................... 1,897 - 2,253 -
------- --------- ------ --------
Net Income (Loss) Attributable to Common Stockholders......... $ 3,483 $ (1,851) $4,024 $ (2,755)
======= ========= ====== =========
BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE:
Class A Common Stock........................................... $ 6.70 $ 4.66 $ 12.23 $ 9.13
====== ====== ======= ======
Class B Common Stock........................................... $ 0.90 $(0.48) $ 1.04 $ (0.71)
====== ======= ======= ========
Weighted average shares used in computation of basic and diluted
income (loss) per share:
Class A Common............................................... 290 290 290 290
=== === === ===
Class B Common............................................... 3,593 3,590 3,592 3,590
===== ===== ===== =====
See notes to consolidated financial statements.
4
ANVIL HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands, Except Share Data)
FISCAL SIX MONTHS ENDED
-----------------------
AUGUST 3, AUGUST 4,
2002 2001
---- ----
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................... $ 8,280 $ 3,310
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of fixed assets ........ 4,340 3,281
Amortization of other assets ......................... 748 1,207
Provision for bad debts .............................. 180 --
Changes in operating assets and liabilities:
Accounts receivable .................................. (644) 3,209
Inventories .......................................... 17,161 6,982
Prepaid and refundable income taxes .................. 4 (393)
Prepaid expenses and other current assets ............ (1,391) --
Accounts payable ..................................... 1,681 (5,920)
Accrued expenses & other liabilities ................. 2,891 (565)
Income taxes payable ................................. 1,598 (363)
Other--net ........................................... (414) 129
-------- --------
Net cash provided by operating activities ..... 34,434 10,877
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment .................. (7,644) (3,856)
Proceeds from disposals of property and equipment .... 193 254
-------- --------
Net cash used in investing activities ......... (7,451) (3,602)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of Term Loan ............................ (1,172) (1,172)
Purchase of preferred stock ......................... (9,299) --
-------- --------
Net cash used in financing activities .......... (10,471) (1,172)
-------- --------
INCREASE IN CASH ......................................... 16,512 6,103
CASH, BEGINNING OF PERIOD ................................ 11,931 6,838
-------- --------
CASH, END OF PERIOD ...................................... $ 28,443 $ 12,941
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest ................................. $ 7,106 $ 7,537
======== ========
Cash paid for income taxes ............................ $ 3,908 $ 3,190
======== ========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Redeemable preferred stock issued in lieu of
dividends........................................... $ 1,591 $ 3,129
======== ========
Preferred stock dividends payable in cash ............ $ 1,694
========
Gain on purchase of preferred stock .................. $ 2,253
========
See notes to consolidated financial statements.
5
ANVIL HOLDINGS, INC. AND SUBSIDIARIES FORM
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands, Except Share Data)
NOTE 1 - GENERAL
BASIS OF PRESENTATION: The accompanying consolidated financial statements have
been prepared in accordance with accounting principles which are generally
accepted in the United States of America ("Generally Accepted Accounting
Principles" or "GAAP") 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 GAAP 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 August 3, 2002 are
not necessarily indicative of the results that may be expected for the fiscal
year ending February 1, 2003, or any other period. The balance sheet at February
2, 2002 has been derived from the audited financial statements at that date. For
further information, refer to the financial statements for the fiscal year ended
February 2, 2002 included in the Company's annual report on Form 10-K filed with
the Securities and Exchange Commission.
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
high quality activewear for men, women and children, supplemented with caps,
towels, robes and bags. The Company markets and distributes its products, under
its brand names and private labels, primarily to wholesalers and screen
printers, principally in the United States.
The Company reports its operations in one segment in accordance with Statement
of Financial Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. 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.
LITIGATION: The Company is party to various litigation matters incidental to the
conduct of its business. The Company does not believe that the outcome of any of
the matters in which it is currently involved will have a material adverse
effect on the financial condition, liquidity, business or results of operations
of the Company.
NOTE 2 - CREDIT AGREEMENTS, ETC.
Anvil's Loan and Security Agreement, as amended on May 28, 2002 (the "Loan
Agreement"), provides for a maximum credit facility of $50,000 consisting of a
term loan (the "Term Loan") and a revolving credit facility (the "Revolving
Credit Facility"). The Loan Agreement was for an original term of three years
with automatic one year renewals unless contrary notice is given by either party
at least 60 days prior to the expiration date. The Loan Agreement (as currently
extended) expires March 11, 2003. The Term Loan was in the original principal
amount of $11,725, repayable in quarterly principal installments of $586
6
through April 2004, subject to extension of the Loan Agreement. Amounts due
under the Loan Agreement are secured by substantially all the inventory,
receivables and property, plant and equipment of Anvil. Amounts due under the
Loan Agreement are guaranteed by Holdings and Cottontops, Inc., a Delaware
corporation ("Cottontops," a wholly-owned subsidiary of Anvil). Interest on the
Term Loan and the Revolving Credit Facility are at prime plus one-quarter
percent or LIBOR plus 2-1/4%, at the Company's option. At August 3, 2002, there
were no amounts outstanding under the Revolving Credit Facility.
As required by the Company's Certificate of Designations relating to the 13%
Senior Exchangeable Preferred Stock (the "Preferred Stock"), the Company has
paid stock dividends aggregating 1,075,782 shares ($26,895 liquidation value)
through August 3, 2002. This amount includes all dividends declared and paid
through the March 15, 2002 quarterly dividend payment date. Dividends subsequent
to that date are required to be paid in cash. The Board of Directors of Holdings
has determined not to declare or pay the quarterly dividends of June 15, 2002 or
September 15, 2002. At August 3, 2002, the accrued dividends amounted to $1,694
(excluding dividends on preferred shares held by the Company). If the Company
fails to make dividend payments for four consecutive quarters, the holders of
the Preferred Stock, voting together as a class, are entitled to elect two
additional directors to the Company's Board of Directors.
Through August 3, 2002, the Company has repurchased 604,334 shares of Preferred
Stock at an aggregate cost of $11,151.
NOTE 3 - INVENTORIES
Inventories at August 3, 2002 and February 2, 2002 consisted of the following:
August 3, 2002 February 2, 2002
---------------- ----------------
Finished goods $14,100 $33,772
Work-in-process 5,045 4,493
Raw materials & supplies 9,033 7,074
----- ------
$28,178 $45,339
======= =======
NOTE 4 - GOODWILL AND OTHER INTANGIBLE ASSETS - ADOPTION OF SFAS NO. 142
Effective at the beginning of the current fiscal year, the Company adopted the
provisions of SFAS No.142, "GOODWILL AND OTHER INTANGIBLE ASSETS." The adoption
of SFAS No. 142 did not require any adjustments to the carrying value of
goodwill or other intangible assets, but did result in the Company's ceasing to
amortize existing goodwill. Previously recorded amortization had amounted to
$719 annually ($172 and $359 for the quarter and six months ended August 4,
2001, respectively). Goodwill at August 3, 2002 (net of amortization recorded
through the fiscal year ended February 2, 2002) amounted to $19,416.
7
Intangible assets being amortized consist of the following:
August 3, February 2,
2002 2002
--------- ---------
Trademarks--net of accumulated
amortization of $2,145 and $2,002........... $ 2,713 $ 2,856
Covenant not to compete--net of accumulated
amortization of $806 and $640............... 194 360
--------- ---------
$ 2,907 $ 3,216
========= =========
Amortization expense relating to the above intangible assets will be as follows
for each of the next five fiscal years, beginning with the year ending February
1, 2003: $619 (including $309 for the six months ended August 3, 2002), $313,
$286, $286 and $286, respectively.
The following table presents the adjusted amounts for the quarter and six months
ended August 4, 2001 had the Company applied the nonamortization provisions of
SFAS 142 during that period.
QUARTER ENDED SIX MONTHS ENDED
------------------- -------------------
AUG 3, AUG 4, AUG 3, AUG 4,
2002 2001 2002 2001
------- -------- ------- -------
Reported net income..................................... $ 4,901 $ 1,314 $ 8,280 $ 3,310
Add- goodwill amortization (net of tax effect).......... - 103 - 208
------- -------- ------- -------
Adjusted net income..................................... $ 4,901 $ 1,417 $ 8,280 $ 3,518
======= ======== ======= =======
Reported basic and diluted income per share,
Class A Common Stock............................... $ 6.70 $ 4.66 $ 12.23 $ 9.13
Add- goodwill amortization (net of tax effect).......... - 0.03 - 0.06
------- ------- ------- ------
Adjusted basic and diluted income per share,
Class A Common Stock............................... $ 6.70 $ 4.69 $ 12.23 $ 9.19
======= ======= ======= =======
Reported basic and diluted income (loss) per share,
Class B Common Stock............................... $ 0.90 $ (0.48) $ 1.04 $ (0.71)
Add- goodwill amortization (net of tax effect).......... - 0.03 - 0.06
------- ------- ------- -------
Adjusted basic and diluted income (loss) per share,
Class B Common Stock............................... $ 0.90 $ (0.45) $ 1.04 $ (0.65)
======== ======= ======= =======
NOTE 5 - INCOME (LOSS) PER SHARE
Net income (loss) per share as presented in the accompanying statements of
operations is computed by dividing net income (loss) applicable to each class of
Common Stock by the average number of shares of such stock outstanding.
Dividends and accretion on the Company's redeemable preferred stock (net of
treasury shares) are deducted, and gains on repurchase of preferred stock
(credited directly to the stockholders' deficiency) are added in arriving at
income (loss) attributable to the Company's two classes of common stock. The
12.5% liquidation preference relating to the Company's Class A Common Stock is
considered as per share earnings of that class only.
8
NOTE 6 - SUMMARIZED FINANCIAL DATA OF CERTAIN WHOLLY-OWNED 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. The amounts presented below for Anvil are consolidated
amounts which include Cottontops.
ANVIL KNITWEAR, INC. COTTONTOPS, INC.
--------------------------- -------------------------
AUGUST 3, FEBRUARY 2, AUGUST 3, FEBRUARY 2,
2002 2002 2002 2002
---- ---- ---- ----
Current assets............................ $ 91,062 $ 89,860 $ 3,333 $ 1,570
========= ========== ======= =======
Total assets.............................. $ 149,504 $ 145,725 $ 3,936 $ 1,867
========= ========== ======= =======
Current liabilities....................... $ 33,057 $ 25,128 $ 458 $ 502
========= ========== ======= =======
Long-term liabilities..................... $ 134,958 $ 138,092
========= ==========
Total liabilities......................... $ 168,015 $ 163,220 $ 458 $ 502
========= ========== ======= =======
Stockholder's (deficiency) equity......... $ (18,511) $ (17,495) $ 3,478 $ 1,365
========= ========== ======= =======
Following is the summarized statement of operations data of Anvil and Cottontops
for the periods indicated:
ANVIL KNITWEAR, INC. COTTONTOPS, INC.
-------------------------------------- ---------------------------------------
QUARTER ENDED SIX MONTHS ENDED QUARTER ENDED SIX MONTHS ENDED
------------------------------------ --------------------------------------
AUG 3, AUG 4, AUG 3, AUG 4, AUG 3, AUG 4, AUG 3, AUG 4,
2002 2001 2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ---- ---- ----
Net sales....................... $64,546 $53,050 $127,901 $110,810 $3,424 $2,124 $6,198 $3,820
Operating income................ 11,914 6,088 21,298 13,641 261 179 577 233
Interest expense................ 3,480 3,722 7,047 7,528 - - - -
Net income...................... 4,901 1,314 8,280 3,310 158 117 348 152
Holdings and Cottontops have fully and unconditionally, jointly and severally
guaranteed the 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 five other non-guarantor direct subsidiaries:
A.K.H., S.A., Estrella Mfg. Ltda. and Star, S.A., organized in Honduras; Livna,
Limitada, organized in El Salvador; and CDC GmbH, organized in Germany.
Cottontops owns 100% of the stock of ISP Honduras Limitada, S.A., organized in
Honduras. Other than as stated herein, there are no other direct or indirect
subsidiaries of the Company. Management believes the Non-Guarantor Subsidiaries
are inconsequential both individually and in the aggregate.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's significant accounting policies are more fully described in Note 3
to the consolidated financial statements contained in the Company's annual
report on Form 10-K for the year ended February 2, 2002. The application of
accounting policies require judgement by management in selecting the appropriate
assumptions for calculating financial estimates. By their nature, these
judgements are subject to an inherent degree of uncertainty and are based upon
historical experience, trends in the industry, and information available from
outside sources. The preparation of financial statements in conformity with GAAP
requires management to make certain estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates. The Company's significant accounting policies
include:
REVENUE RECOGNITION--Revenue is recognized at the time merchandise is shipped
and title has passed. Allowances for sales returns, discounts and for estimated
uncollectible accounts are provided when sales are recorded, based upon
historical experience and current trends, and periodically updated, as
appropriate. While the actual amounts have been within expectations, the Company
cannot guarantee that this will continue in the future.
INVENTORIES--Inventories are stated at the lower of cost or market, with cost
being determined by the first-in, first-out (FIFO) method. If required, based
upon management's judgment, reserves for slow moving inventory and markdowns of
inventory which has declined significantly in value are provided. While such
markdowns have been within management's expectations, the Company cannot
guarantee that it will continue to experience the same level of markdowns as in
the past.
EVALUATION OF INTANGIBLE AND LONG-LIVED ASSETS--Long-lived assets, including
intangible assets, are assessed for recoverability whenever events or changes in
circumstances indicate that an asset may have been impaired. In evaluating
assets for recoverability, the Company estimates the fair value of the
respective asset using valuation techniques which may incorporate cash flow
estimates, multiples of earnings, market values and similar criteria.
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 price changes. The Company generally does not lead its
competitors in pricing, but instead modifies its prices to the extent necessary
to remain competitive with those set by its competitors.
10
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 a number of
yarn suppliers, generally placing orders, as appropriate, depending upon
management's expectations regarding future yarn prices and levels of supply.
Yarn prices fluctuate principally as a result of supply and demand in the yarn
market and supply and demand in the raw cotton market. 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, management has been successful in mitigating the impact of
fluctuating yarn prices and is continually reviewing and adjusting the Company's
purchase commitments to take advantage of price changes. Yarn utilization costs
included in the fiscal quarter just ended reflect the lower prices paid under
purchase commitments made in prior fiscal periods. The Company expects such
benefits to continue into the remainder of the fiscal year.
During the fiscal year ended February 2, 2002, the Company announced its
intention to consolidate its textile operations into a single expanded facility
located in Asheville, North Carolina. Such consolidation and expansion is
expected to be completed during the fiscal year ending January 31, 2004. As a
result, the useful life of certain production equipment was adjusted, and
certain other assets were written off. The necessary adjustments were recorded
in the fourth quarter of the fiscal year ended February 2, 2002, and resulted in
additional depreciation of $0.3 million and a direct write-off of assets of $0.4
million, both of which were charged to cost of goods sold. The additional
depreciation charge of $0.3 million will continue during each of the four
quarters of the fiscal year ending February 1, 2003.
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 FISCAL SIX MONTHS ENDED
---------------------- ------------------------
AUGUST 3, AUGUST 4, AUGUST 3, AUGUST 4,
2002 2001 2002 2001
---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Net sales................................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold.......................... 72.0 77.2 73.2 76.0
Gross profit................................ 28.0 22.8 26.8 24.0
Selling, general and administrative
expenses ............................... 9.3 10.7 10.0 11.0
Interest expense............................ 5.4 7.0 5.5 6.8
OTHER DATA:
EBITDA (1)................................ $14.2 million $8.0 million $25.9 million $17.6 million
Percentage of net sales............. 22.1% 15.1% 20.3% 15.9%
- --------------------
(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.
11
QUARTER ENDED AUGUST 3, 2002 COMPARED TO QUARTER ENDED AUGUST 4, 2001
NET SALES for the quarter ended August 3, 2002 amounted to $64.5 million, as
compared to $53.0 million for the second quarter of the prior year, an increase
of $11.5 million, or 21.7%. Total units sold were more than 35% higher for the
current quarter, compared to the prior year's quarter, while the average selling
price declined by approximately 10%.
GROSS PROFIT for the quarter ended August 3, 2002 increased approximately $6.0
million (49.8%). Gross margin for the quarter improved significantly from 22.8%
in the prior year's quarter to 28.0% in the quarter ended August 3, 2002. This
improvement is primarily the result of lower yarn prices and continuing
manufacturing efficiencies, partially offset by lower selling prices and an
unfavorable change in the product mix of goods sold toward goods having lower
profit margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (including distribution expense)
increased approximately $0.3 million in the current year's quarter compared to
the same period in the prior year. This increase is largely the result of higher
advertising expenditures and other general and administrative expenses. As a
percentage of sales, selling, general and administrative expenses declined from
10.7% to 9.3%. This was primarily due to a significant improvement in per unit
distribution costs achieved due to higher volume.
INTEREST EXPENSE declined $0.2 million (6.5%) in the current quarter compared to
the same period of the prior year. Interest rates have declined slightly, and
during the current fiscal quarter, the Company had no borrowings under its
Revolving Credit Facility.
AMORTIZATION OF INTANGIBLE ASSETS declined by $0.2 million as the result of the
Company's adoption, in the current fiscal quarter, of SFAS No. 142, "GOODWILL
AND OTHER INTANGIBLE ASSETS." See, "Recent Accounting Pronouncement," below.
SIX MONTHS ENDED AUGUST 3, 2002 COMPARED TO SIX MONTHS ENDED AUGUST 4, 2001
NET SALES for the six months ended August 3, 2002 amounted to $127.9 million, as
compared to $110.8 million for the first six months of the prior year, an
increase of $17.1 million, or 15.4%. Total units sold are approximately 27%
higher on a year to date basis for the current six months, compared to the prior
year's six months, while on the same basis, the average selling price has
declined by approximately 9%.
GROSS PROFIT for the six months ended August 3, 2002 increased approximately
$7.8 million (29.4%). Due largely to the aforementioned improvement during the
current quarter, gross margins for the six months improved from approximately
24% to 27%. This improvement is primarily the result of lower yarn prices and
continuing manufacturing efficiencies, partially offset by lower selling prices
and an unfavorable change in the product mix of goods sold toward goods having
lower profit margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (including distribution expense)
increased approximately $0.5 million (4.1%) for the six months ended August 3,
2002, compared to the six months ended August 4, 2001. This increase is the
result of higher advertising expenditures and other general and administrative
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expenses with distribution expense remaining approximately the same despite an
increase of more than 27% in units sold.
INTEREST EXPENSE declined $0.5 million (6.4%) in the current six months compared
to the same period of the prior year. Interest rates have declined slightly, and
during the current fiscal six months, the Company had no borrowings under its
Revolving Credit Facility.
AMORTIZATION OF INTANGIBLE ASSETS declined by $0.4 million as the result of the
Company's adoption, in the current fiscal six months, of SFAS No. 142, "GOODWILL
AND OTHER INTANGIBLE ASSETS." See, "Recent Accounting Pronouncement," below.
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
$6.6 million in the year ended February 2, 2002 and $6.2 million in the year
ended February 3, 2001. Historically, the Company's major capital expenditures
have related to the acquisition of machinery and equipment and management
information systems hardware and software.
Management estimates that capital expenditures in the current fiscal year will
aggregate approximately $15 million. This amount includes expenditures relating
to the aforementioned consolidation of the Company's textile facilities, as well
as routine capital expenditures in the ordinary course of business. For fiscal
years thereafter, current estimates are that capital expenditures will
approximate $6 million annually.
The Company's principal working capital requirements are financing accounts
receivable and inventories. The Company has also expended approximately $11.2
million to acquire 604,334 shares of its Redeemable Preferred Stock having a
carrying value of approximately $15.1 million.
At August 3, 2002 the Company had net working capital of approximately $58.0
million, comprised of $28.4 million in cash and cash equivalents, $29.3 million
of accounts receivable, $28.2 million of inventories, $5.2 million of other
current assets, and $33.1 million in accounts payable and other current
liabilities.
Anvil's Loan and Security Agreement, as amended on May 28, 2002 (the "Loan
Agreement"), provides for a maximum credit facility of $50 million, consisting
of a term loan (the "Term Loan") and a revolving credit facility (the "Revolving
Credit Facility"). The Loan Agreement was for an original term of three years
with automatic one year renewals unless contrary notice is given by either party
at least 60 days prior to the expiration date. The Loan Agreement (as currently
extended) expires March 11, 2003. The Term Loan was in the original principal
amount of $11.7 million, repayable in quarterly principal installments of $0.6
million through April 2004, subject to extension of the Loan Agreement. Amounts
due under the Loan Agreement 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-quarter percent or LIBOR plus 2-1/4%, at the Company's option. At
August 3, 2002, there were no amounts outstanding under the Revolving Credit
Facility.
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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'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. Anvil Holdings believes that it is in compliance with the covenants of
its debt obligations.
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 fund its normal
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
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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.
RECENT ACCOUNTING PRONOUNCEMENTS
During the first quarter of the current fiscal year, the Company adopted the
provisions of Statements of Financial Accounting Standards ("SFAS") No. 141,
"BUSINESS COMBINATIONS." SFAS No.141 requires that all business combinations be
accounted under the purchase method and that certain intangible assets acquired
in a business combination be recognized as assets apart from goodwill. The
Company has not engaged in any business combinations to which SFAS No. 141 would
apply.
During the first quarter of the current fiscal year, the Company adopted the
provisions of SFAS No. 142, "GOODWILL AND OTHER INTANGIBLE ASSETS." SFAS No. 142
prohibits ratable periodic amortization of goodwill and indefinite-lived
intangibles and requires that they be reduced in value only when periodic tests
for impairment indicate that such reduction in value is appropriate. Other
intangible assets are to be amortized over their useful lives. The adoption of
SFAS No. 142 during the first quarter of the current fiscal year did not require
any adjustments to the carrying value of goodwill or other intangible assets,
but did result in the Company's ceasing to amortize existing goodwill.
Previously recorded amortization had amounted to approximately $0.7 million
annually, or approximately $0.2 million during each fiscal quarter.
During the first quarter of the current fiscal year, the Company adopted the
provisions of SFAS No. 144, "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF
LONG-LIVED ASSETS," which provides accounting and reporting guidance for the
impairment or disposal of certain long-lived assets. The Company's accounting
treatment for assets related to the consolidation of its textile facility
(discussed above) is in conformity with the requirements of SFAS No. 144. There
have been no other adjustments to the carrying value of long-lived assets.
In June 2001, the FASB issued SFAS No. 143, "ACCOUNTING FOR ASSET RETIREMENT
OBLIGATIONS." This Statement establishes accounting standards for recognition
and measurement of a liability for an asset retirement obligation and the
associated asset retirement costs. SFAS No. 143 is effective for fiscal years
beginning after June 15, 2002. The Company does not expect that the adoption of
SFAS 143 will have a material impact on its financial position and results of
operations.
STATEMENT REGARDING FORWARD-LOOKING INFORMATION
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.
15
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 2002 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 and interest rate
risk is not material.
ITEM 4. CONTROLS AND PROCEDURES.
Item 307 of Regulation S-K is not applicable to this filing.
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PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
See Note 2 to Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The Company held its annual meeting of stockholders on May 23, 2002.
(b) At the aforementioned annual meeting, the Board of Directors was re-elected
in its entirety to serve until the next annual meeting of stockholders or
until their respective successors are elected and qualified. No other
matters were voted upon at such meeting.
(c) All votes cast (a total of 3,000,781) were in favor of each Director. There
were 591,719 votes withheld.
(d) Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
99.1 Certification Pursuant to
18 U.S.C. Section 1350
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(b) REPORTS ON FORM 8-K
None.
Items 1, 3, and 5 are not applicable and have been omitted.
17
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
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Pasquale Branchizio
Vice President of Finance
(Principal Accounting Officer)
Dated: September 12, 2002
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CERTIFICATIONS
CERTIFICATION PURSUANT TO SECTION 240.13a-14
OF GENERAL RULES AND REGULATIONS OF THE SECURITIES
EXCHANGE ACT OF 1934
I, Bernard Geller, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Anvil Holdings, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
Date: September 12, 2002
-----------------------
/S/ BERNARD GELLER
- --------------------
Chief Executive Officer and
Chief Financial Officer
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