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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended January 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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OR 12(G) OF THE ACT:
None
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. [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X]
The Company is not required to make filings under Section 16 of the Exchange Act
because it has no registered securities under Section 12 of the Securities
Exchange Act of 1934.
At April 15, 1999 there were 390,000 shares of the registrant's Class B Common
Stock, $0.01 per share par value (the "Class B Common") held by non-affiliates.
At such date, there was no established trading market for these shares. At April
16, 1999, there were 290,000 shares of the registrant's Class A Common Stock,
$0.01 per share par value (the "Class A Common") and 3,590,000 shares of Class B
Common outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Those portions of the Information Statement for the Company's 1999 Annual
Meeting of Stockholders (the "Information Statement") are incorporated
herein by reference in Part III, Items 10, 11, 12 and 13.
PART I
ITEM 1. BUSINESS
CORPORATE STRUCTURE AND RECENT ACQUISITIONS
On January 28, 1995, Anvil Holdings, Inc., a Delaware corporation ("Holdings"),
and its wholly-owned subsidiary, Anvil Knitwear, Inc., a Delaware corporation
("Anvil"), acquired the assets and assumed certain liabilities of the Anvil
Knitwear division (the "Predecessor") from McGregor Corporation ("McGregor")
(the "Acquisition").
On January 31, 1997, Anvil completed the acquisition of the assets of a marketer
and distributor of activewear products which, prior to the acquisition, supplied
finished activewear products to Anvil for redistribution by Anvil as well as
supplying directly into the retail market. This business operates through a
newly-formed Delaware corporation, Cottontops, Inc. ("Cottontops").
As used herein, the "Company" refers to Holdings, including, in some instances,
its subsidiaries, as appropriate to the context.
On March 14, 1997, the Company, Anvil VT, Inc., Vestar Equity Partners, L.P.,
399 Venture Partners, Inc. and certain of its employees and affiliates
(collectively, "399 Venture"), certain management investors (the "Management
Investors") and other existing shareholders of the Company (collectively, the
"Existing Shareholders") and Bruckmann, Rosser, Sherrill & Co., L.P. and certain
of its employees and affiliates (collectively, "BRS") completed a reorganization
(the "Recapitalization") pursuant to which: (i) the Company redeemed or
repurchased a substantial portion of its outstanding shares of capital stock
("Old Common Stock" and "Old Preferred Stock"); (ii) BRS contributed $13,063,000
for the purchase of new common stock; (iii) 399 Venture and the Management
Investors reinvested a portion of their shares of Old Common Stock of the
Company, which were converted into shares of newly issued common stock, and (iv)
399 Venture exchanged a portion of its Old Preferred Stock for 3,333 shares of
Senior Exchangeable Preferred Stock and new common stock.
Concurrently with the Recapitalization, the Company sold 30,000 Units consisting
of (i) $30,000,000, 13% Senior Exchangeable Preferred Stock due 2009 and (ii)
390,000 shares of Class B common stock (the "Units Offering"). Additionally, on
March 14, 1997, Anvil sold $130,000,000 of 10-7/8% Senior Notes due 2007
("Senior Notes") in connection with the Recapitalization and repaid its
borrowings under an existing credit agreement (the "Old Credit Agreement") and
entered into an Amended and Restated Credit Agreement (the "Credit Agreement")
The Credit Agreement was replaced in March 1999 (See Note 8 to Financial
Statements).
The Company's fiscal year ends on the Saturday closest to January 31.
Accordingly, when referring to the Company's fiscal years in this report,
"fiscal 1998" refers to the year ended January 30, 1999, "fiscal 1997" refers to
the year ended January 31, 1998, etc.
GENERAL
The Company is a leading designer, manufacturer and marketer of high quality
activewear for sale principally into the "imprinted" or "decorated" segment of
the U.S. apparel industry. The Company offers an extensive line of activewear
products designed for men, women and
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children, including short and long sleeve T-shirts, classic button and collar
knit sport shirts (known as "plackets"), collarless short and long sleeve knit
shirts (known as "henleys"), fleeced sweatshirts, athletic shorts and caps. The
Company reports its operations in one segment, as defined in Statement of
Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and
Related Information. The Company markets and sells its products primarily to
distributors and screen printers under the ANVIL, COTTON DELUXE and COTTON
DELUXE CASUALS brand names as well as under private labels. Prior to their
ultimate resale to the consumer, the Company's products typically are printed or
embroidered with logos, designs or characters. The Company believes that its
operating performance is favorably affected by: (i) its broad range of high
quality products; (ii) its strong relationships with customers and suppliers;
(iii) its flexible, vertically integrated manufacturing operations; (iv) its
commitment to controlling costs and improving manufacturing processes; and (v)
the continuing growth of the activewear market."
The Company offers high quality activewear in a variety of styles, colors,
fabric weights and blends, enabling it to serve a number of market niches
effectively as well as to serve the traditional T-shirt market segment. The
Company works closely with its distributor and screen printer customers to meet
their needs for style and color innovation. The Company continues to compete
successfully by: (i) targeting niche products on which larger competitors have
not traditionally focused; (ii) responding quickly to market developments; and
(iii) regularly introducing new products. In addition, the Company continues to
make significant investments to modernize and expand its manufacturing and
distribution facilities in order to improve quality, reduce costs, manage
inventories and shorten textile production cycles. To further reduce costs, the
Company has been moving a substantial portion of its sewing operations offshore.
BUSINESS STRATEGY
The Company's objective is to continue to increase net sales and improve results
of operations by implementing the following key elements of its business
strategy:
OFFER A BROAD RANGE OF HIGH QUALITY PRODUCTS. The Company offers high quality
activewear in a wide variety of styles, colors, fabric weights and blends,
enabling it to serve a number of market niches effectively. The Company
continues to strengthen its position in the activewear market by successfully
introducing higher priced products to supplement its traditional T-shirt
business. In addition, the Company expects to continue to expand its product
offerings under its ANVIL, COTTON DELUXE and COTTON DELUXE CASUALS brands,
capitalizing on the growth in the higher priced branded products segment of the
activewear market.
ENHANCE AND EXPAND CUSTOMER RELATIONSHIPS. The Company continually seeks to
strengthen and expand its customer relationships by promoting the Company's: (i)
broad product offerings; (ii) ability to design customized products; (iii)
quick, reliable delivery; and (iv) ability to accommodate modifications to
customer orders. The Company's direct salesforce focuses on developing strong
relationships with distributors, who have accounted for an increasing percentage
of the Company's activewear sales in recent years. In fiscal 1998, sales to
distributors accounted for approximately 78% of the Company's net sales. In the
Company's experience, distributors typically place larger purchase orders,
purchase a broader product mix, maintain higher inventory levels and develop
more predictable order and re-
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order patterns than certain of its other customers. The Company estimates that
distributors resell products to more than 20,000 smaller screen printers,
embroiderers and other customers. The Company's expanded product offerings have
enabled it to more effectively service distributors and satisfy the disparate
preferences of consumers.
MAINTAIN FLEXIBLE, VERTICALLY INTEGRATED MANUFACTURING OPERATIONS. The Company
is a vertically integrated manufacturer (i.e., performing substantially all of
the manufacturing processes required to produce its products) which knits
(exclusively from purchased yarn), bleaches, dyes, finishes, cuts and sews its
activewear products at its manufacturing facilities. The Company believes that
being vertically integrated allows it to maintain a competitive cost structure,
minimize delivery time and provide consistent, high quality products. The
Company's manufacturing flexibility enables it to efficiently complete smaller
volume production runs, respond quickly to customer needs and accommodate last
minute modifications to customer orders. Management of the Company believes that
the foregoing factors have enabled it to turn its finished goods inventory more
frequently than is typical for its industry segment.
CONTINUE TO CONTROL COSTS AND IMPROVE MANUFACTURING. From fiscal 1994 through
fiscal 1998, the Company invested approximately $32 million to modernize and
expand its manufacturing and distribution facilities in order to improve
quality, reduce costs, manage inventories and shorten textile production cycles.
The Company believes it can continue to improve its operating results by: (i)
increasing the use of offshore sewing operations; (ii) utilizing its centralized
distribution facility to deliver its products in a more cost efficient manner;
and (iii) opportunistically redesigning textile manufacturing processes to
shorten production cycles and improve inventory management.
CAPITALIZE ON THE GROWTH OF THE ACTIVEWEAR MARKET. The Company believes that
sales of activewear products have been driven primarily by: (i) the increased
consumer preference for comfortable apparel selections; (ii) more flexible dress
codes, including the greater acceptance of casual wear in the workplace; and
(iii) the heightened emphasis on physical fitness.
In addition, the Company continues to actively seek, identify and develop growth
opportunities in several international markets.
PRODUCTS
The Company's activewear products, which are designed for men, women and
children, include short and long sleeve T-shirts, tank tops, classic button and
collar knit sport shirts (known as "plackets") and collarless short and long
sleeve knit shirts (known as "henleys") as well as a variety of other niche
activewear products, such as fleeced sweatshirts, athletic shorts and caps. This
broad array of casual knitwear and athletic wear is marketed and sold by the
Company under its ANVIL, COTTON DELUXE and COTTON DELUXE CASUALS brand names as
well as under private labels. The Company manufactures its products in a variety
of fabrics and fabric blends. Prior to their ultimate resale to the consumer,
the Company's products typically are imprinted or embroidered with logos,
designs or characters.
BASIC AND SPECIALTY T-SHIRTS. Basic and specialty T-shirts are the Company's
principal products. The basic T-shirt was the first product introduced by the
Company in the early
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1970s. In addition to basic T-shirts, the Company also manufactures a variety of
specialty T-shirts. This category accounted for approximately 52% of the
Company's sales in fiscal 1998.
PLACKETS AND HENLEYS. The Company introduced its first line of plackets in the
early 1980s and its first line of henleys in the early 1990s. Plackets include
classic button and collar knit sport shirts which are produced in both short and
long sleeve versions. The Company's newest item in its placket line is its pique
knit golf shirt, which it introduced in the first quarter of fiscal 1996.
Henleys are collarless knit shirts, which are produced in both short and long
sleeve versions. This category accounted for approximately 40% of the Company's
sales in fiscal 1998.
OTHER PRODUCTS. The Company's other products include fleeced sweatshirts, knit
shorts and caps, most of which are produced in a variety of colors and designs.
In addition to products which it manufactures in-house, this category includes
those products which the Company sources as a finished product. This category
accounted for approximately 8% of the Company's sales in fiscal 1998.
SALES AND MARKETING
The Company markets its activewear products primarily to a wide range of
distributors, screen printers and private label customers through a direct
salesforce comprised of twelve salespersons, two sales managers and a director
of sales. Each member of the salesforce receives a base salary and is eligible
to receive an incentive bonus payment.
The Company seeks to differentiate itself from other larger activewear
manufacturers by marketing niche products to its customers and encouraging its
customers to purchase a broader product mix. The Company believes that by
encouraging its customers to expand their product mix towards higher priced
products with more style elements, it has been able to compete effectively
against other companies that concentrate primarily on basic, lower priced,
T-shirts. The Company believes that this strategy has enabled it to penetrate
the large and middle-tier wholesale T-shirt distributor market.
CUSTOMERS
The Company sells its products primarily to distributors and screen printers.
The Company also sells a small percentage of its products directly to retailers.
The Company currently services over 250 customers, of which twenty account for
approximately 73% of the Company's net sales. One such customer (Alpha Shirt
Company) accounted for 15% of the Company's net sales in fiscal 1998. No other
individual customer accounts for more than 10% of the Company's net sales.
RAW MATERIALS
The Company's primary raw material is cotton yarn. Unlike certain of its
competitors, the Company does not spin its own yarn. Instead, the Company
purchases substantially all of its yarn pursuant to purchase orders from five
domestic spinners. One individual spinner accounted for approximately 46% of the
Company's purchased yarn in fiscal 1998. The vast majority of the yarn used by
the Company is readily available and could be and is purchased
4
from a number of sources. Accordingly, the Company does not have to rely on its
orders with or deliveries from any single supplier. With the ability to
substitute its supply of yarn, the Company believes that the inability to obtain
yarn from any one supplier would not have a long term material adverse effect on
the Company's ability to manufacture. Other raw materials purchased by the
Company include dyes and other chemicals used in the dyeing and bleaching of
fabrics.
The Company believes that it is one of the larger purchasers of yarn in its
industry segment and has a sound relationship with each of its suppliers. The
Company believes these relationships allow the Company to order precise
quantities of yarn at highly competitive prices. The Company's relationships
with its suppliers help the Company's continued access to supplies of raw
materials during periods when yarn is in peak demand. As a result, the Company
has not experienced any significant shortages of raw materials.
The Company determines the size of its purchase orders for yarn based on its
estimate of future yarn prices and levels of supply and periodically places
large purchase orders as a means of fixing its raw materials costs. The
Company's purchase orders typically are for quantities of yarn ranging from 30
days' to a year's supply.
Certain of the Company's primary competitors spin their own yarn. The Company
estimates that in-house yarn production could reduce overall yarn costs. The
Company has concluded, however, that the benefits achieved by acquiring in-house
spinning capacity would not justify the investment required to achieve that
capacity. In addition, the Company believes that the quality of its purchased
yarn is at least equal to the quality of yarn produced by fully integrated
manufacturers in its industry market segment.
COMPETITION
The imprinted activewear segment of the apparel market includes a number of
significant competitors and the activewear segment of the industry overall is
extremely competitive. Competition in this activewear segment of the apparel
industry is generally based upon price, quality, service and breadth of product
offerings. In response to market conditions and industry-wide adjustments in
price, the Company reviews and adjusts its product offerings and pricing
structure from time to time. The Company believes that its overall turnaround
time provides a competitive advantage and enables it to continue to capitalize
on its timely responsiveness to its customers' requests. In addition, the
Company focuses on providing its customers with a broad array of branded and
private label niche products at competitive prices on a timely basis.
The Company's principal competitors include several manufacturers of activewear,
most of which are larger and have greater financial and other resources than the
Company. The Company also faces competition from foreign manufacturers of
activewear who generally have substantially lower costs than domestic
manufacturers.
Historically, the Company has benefited from quotas and tariffs imposed by the
United States on the importation of apparel. The Uruguay Round of GATT, which
became effective on January 1, 1995, requires a complete phase-out of all
existing quotas over a ten-year period. To date, no products manufactured by the
Company have been subject to quota reductions under GATT. In addition to the
phasing-out of the use of quotas, GATT also requires that
5
the United States reduce tariffs on textile/apparel imports over the same
ten-year period. To date, there have been only relatively small reductions in
such tariffs.
Increased competition has caused many domestic apparel manufacturers to move a
portion of their sewing operations offshore to lower costs. The Company
currently performs the greater portion of its sewing activities offshore to take
advantage of these lower offshore wage rates, and the Company intends to
increase its offshore sewing operations to the extent necessary to meet
competition.
The Company believes that its current strategy of emphasizing higher quality,
niche products, promoting a broader product mix, and increased use of lower-cost
offshore sewing operations, should enable it to continue to compete effectively
in its industry market segment.
EMPLOYEES
At January 30, 1999, the Company, including its offshore subsidiaries, employed
a total of 199 full-time salaried employees and 2,260 full-time and part-time
hourly employees. Of the Company's employees, 2,321 are involved in
manufacturing, 79 in finance, administration and distribution and 59 in
marketing and sales. Of the Company's 2,321 employees involved in manufacturing,
611 are employed at the Company's textile facilities and 1,710 are employed at
the Company's sewing facilities.
None of the Company's employees is covered by a collective bargaining agreement.
The Company has not experienced any work stoppages and considers its relations
with its employees to be good.
INTELLECTUAL PROPERTY
The Company attempts to register its material trademarks and trade names. The
Company believes that it has developed strong brand awareness among its targeted
customer base and as a result regards its brand names as valuable assets. The
Company has registered or applied for trademark registrations for ANVIL and
COTTON DELUXE (and the COTTON DELUXE and COTTON DELUXE CASUALS designs) and
other labels in the United States and certain foreign countries.
ENVIRONMENTAL MATTERS
The Company, like other apparel manufacturers, is subject to federal, state and
local environmental and occupational health and safety laws and regulations.
While there can be no assurance that the Company is at all times in complete
compliance with all such requirements, the Company believes that any
noncompliance is unlikely to have a material adverse effect on the financial
condition or results of operations of the Company. The Company has made, and
will continue to make, expenditures to comply with environmental and
occupational health and safety requirements. The Company currently does not
anticipate material capital expenditures for environmental control equipment in
fiscal 1998 or beyond. As is the case with manufacturers in general, if a
release of hazardous substances occurs on or from the Company's properties or
any associated offsite disposal location, or if contamination from prior
activities is discovered at any of the Company's properties, the Company may be
held liable. While the amount of such liability could be material, the Company
endeavors to conduct its operations in a manner that reduces such risks.
6
Prior to the Acquisition, groundwater contamination was discovered at the
Asheville, North Carolina facility. In 1990, Winston Mills, Inc., a subsidiary
of McGregor, entered into an Administrative Order on Consent ("AOC") with the
North Carolina Department of Environment, Health and Natural Resources ("DEHNR")
concerning such contamination. Since that time, McGregor, through Culligan
International Company ("Culligan"), a former affiliate, has been conducting
investigative and corrective action under DEHNR oversight and has remained
responsible to DEHNR with respect to contamination that is subject to the AOC.
While the total cost of the cleanup at the facility will depend upon the extent
of contamination and the corrective action approved by the DEHNR, preliminary
cleanup cost estimates ranged from $1.0 to $4.0 million. McGregor continues to
be a party to the Asheville, North Carolina facility's hazardous waste permit
and Culligan has guaranteed McGregor's obligations under the AOC. McGregor also
contractually agreed to fully indemnify the Company with respect to the
contamination as part of the terms of the Acquisition. This indemnity is
guaranteed by Culligan and by Astrum International Corp. ("Astrum"), an
affiliate of McGregor (now known as Samsonite Corporation) in the event Culligan
is unable to perform its guarantor obligations. The Company could be held
responsible for the cleanup of this contamination if McGregor, Culligan and
Samsonite were all to become unable to fulfill their obligations to DEHNR.
McGregor agreed to fully indemnify the Company for any costs associated with
certain other environmental matters identified at the time of the Acquisition.
The Company believes that, even if McGregor were unable to fulfill its
indemnification obligations, these other matters would not have a material
adverse effect on the financial condition or results of operations of the
Company. McGregor also agreed to indemnify the Company, subject to certain
limitations, with respect to environmental liabilities that arise from events
that occurred or conditions in existence prior to the Acquisition. Culligan and
Samsonite have also guaranteed McGregor's obligations under these indemnities.
ITEM 2. PROPERTIES
The Company conducts its operations principally through seven manufacturing
facilities and a centralized distribution center. The Company utilizes a
vertically integrated manufacturing process (i.e., performing substantially all
of the manufacturing processes required to produce its products) with fabric
being knit, bleached and dyed from purchased yarn at its two textile facilities
and with the cutting and sewing of such fabric occurring at its three sewing
facilities. The Company utilizes offshore and domestic contractors as it deems
necessary.
TEXTILE FACILITY OPERATIONS. The Company conducts textile operations at two
facilities owned by the Company located in Kings Mountain and Asheville, North
Carolina. The Company operates over 150 knitting machines at its textile
facilities where circular knit machines knit yarn into tubes of basic fabric
constructions such as jersey, rib and fleece and flat knit machines knit
collars. The tubes of fabric correspond in weight and diameter to the various
styles and sizes required to make the Company's activewear products. The knitted
fabric is then batched for bleaching and dyeing. Substantially all of the
Company's products are either bleached to remove the color of natural cotton or
dyed for colored products. The Company's textile facilities contain computerized
controls, dye simulators and spectrometers and modern jet vessels to assist the
Company in maintaining an efficient and quality controlled environment for the
dyeing and bleaching process. The Company's textile facilities each operated
within a range of approximately 70%-100% of capacity during fiscal
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1998. The Company believes it has the capability to increase the operating
capacity of its textile facilities with only relatively modest capital
expenditures. Cottontops operates a dyehouse and a screen printing facility,
both in Farmville, North Carolina.
SEWING FACILITY OPERATIONS. The Company conducts its cutting and sewing
operations at a leased facility located in Mullins, South Carolina, and sewing
at two leased facilities located in Honduras and El Salvador. Fabric produced at
the Company's textile operations is shipped to the Company's cutting facility
where it is marked by hand from design patterns, cut and then sewn.
During fiscal 1998, the Company's sewing facilities operated generally at
capacity. The Company began its offshore sewing operations in January 1996,
through a wholly-owned subsidiary of Anvil, at a leased facility in Honduras. In
October 1997, the Company opened a sewing facility in El Salvador through Livna,
Limitada, a wholly-owned subsidiary of Anvil. This facility was expanded during
fiscal 1998. For fiscal 1998, approximately 56% of the Company's production
(sewing hours) was sewn offshore (including in-house production and outside
sources), and the Company expects its percentage of offshore sewing labor hours
to continue to increase. Because of this increasing shift to offshore
production, the Company closed and sold one of its smaller domestic sewing
facilities during fiscal 1997, and has ceased operations at two other domestic
facilities in 1998.
DISTRIBUTION OPERATIONS. The Company performs all of its distribution functions
at its centralized distribution facility located in Dillon, South Carolina. In
the first quarter of fiscal 1996, the Company's centralized distribution
facility became fully operational, enabling the Company to consolidate its
formerly fragmented distribution operations and improve distribution
efficiencies. The Company's centralized distribution system also has enhanced
the Company's ability to provide efficient and responsive customer service and
to more efficiently manage inventory.
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The following table sets forth certain information regarding the Company's
facilities:
APPROX. SQ.
LOCATION PRINCIPAL USE FT. OWNED/LEASED
- -------- ------------- --- ------------
New York, NY Executive Offices 22,100 Leased(1)
Kings Mountain, NC Textile Facility 225,000 Owned
Asheville, NC Textile Facility 175,000 Owned
Mullins, SC Cut and Sew 149,000 Leased(2)
Farmville, NC Office, Warehouse
& Screen Printing 80,000 Leased(3)
Farmville, NC Dye House 30,000 Leased(4)
Dillon, SC Distribution 660,000 Owned
Honduras Sew 48,000 Leased(5)
El Salvador Sew 54,000 Leased(6)
- ----------
(1) The lease for the Company's executive office space expires in 2002. (2)
The lease for this facility can be extended to 2012.
(3) The lease for this facility expires in 2001.
(4) The lease for this facility expires in 2001.
(5) The lease for this facility can be extended to 2004.
(6) This facility is in two buildings with leases expiring in 2002 and 2003.
The Company also owns approximately 300,000 square feet of warehouse and
manufacturing facilities in three locations in North and South Carolina, that
are currently being held for sale. These facilities became excess space after
the consolidation of certain operations into the centralized distribution center
and the move of a substantial portion of sewing operations to offshore
locations.
The Company anticipates the level of capital expenditures for the next few years
to be at an annual rate of approximately $3.0 to $4.0 million. The Company has
no material capital commitments for the next twelve months outside of the
ordinary course of business.
The Company considers its owned and leased facilities and equipment to be in
good condition and suitable and adequate for the Company's current operations.
The Company's ongoing maintenance and improvement of its manufacturing
facilities enable it to accommodate anticipated sales growth. Periodically, as
necessary, the Company contracts certain manufacturing operations to outsiders.
Management considers this ordinary industry practice and foresees no material
risks in continuing this policy as necessary.
MANAGEMENT INFORMATION SYSTEMS. The Company has upgraded many of its older
legacy systems to sophisticated online real time information processing systems.
These include both in house and purchased systems. The Company has installed an
advanced order entry, allocation and customer service system along with a
complete in house radio frequency system in its centralized warehouse. These
systems tie into the Company's salespersons' laptop computers and its customers'
Automatic Replenishment Systems. The Company is currently implementing a
sophisticated planning and scheduling system which is driven by sales forecasts
and customer orders and will enable it to optimize available manufacturing
resources (textile and garment) to help reduce inventories, compress order lead
time and improve on time deliveries. This, along with the implementation of its
new offshore reporting system, allows Anvil to continue to meet future
information demands.
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ITEM 3. LEGAL PROCEEDINGS
The Company is a 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 or results of operations of the Company. See ITEM 1.
"BUSINESS--ENVIRONMENTAL MATTERS," above.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for any of the Company's common
equity securities. At April 16, 1999 there were 25 record holders of the Class A
Common and 26 record holders of the Class B Common. All of Anvil's issued and
outstanding capital stock is owned by Holdings.
RECENT SALES OF UNREGISTERED SECURITIES
Holdings has recently issued the following securities without registration under
the Securities Act:
On March 14, 1997, the Company completed the Recapitalization. Pursuant to which
(i) 399 Venture reinvested 1,294,685 shares of Old Common Stock in exchange for
122,484 shares of Class A Common and 1,351,552 shares of Class B Common; (ii)
the Management Investors exercised options granted pursuant to the Acquisition
and were issued 525,000 shares of Old Common Stock for an aggregate of $336,000;
(iii) the Management Investors reinvested 475,987 shares of Old Common Stock in
exchange for 45,032 shares of Class A Common and 496,894 shares of Class B
Common; (iv) 399 Venture exchanged 33,300 shares of Old Preferred Stock for
3,333 Units which consisted of, in the aggregate, 133,320 shares of Senior
Exchangeable Preferred Stock and 43,329 shares of Class B Common; and (v) BRS
purchased from Holdings 105,643 shares of Class A Common and 1,165,719 shares
Class B Common for an aggregate purchase price of $11,730,049.03. The
reinvestment and exchange in paragraphs (i), (iii) and (iv) were made in
reliance on the exemption contained in Section 3(a)(9) of the Securities Act.
The sale described in paragraph (v) was made in reliance on the exemption
contained in Section 4(2) of the Securities Act. The transactions described in
paragraph (ii) were made in reliance on the exemption contained in Rule 701 of
the Securities Act.
On March 14, 1997, Anvil sold $130,000,000 aggregate principal amount of 10-7/8%
Series A Senior Notes due 2007 to Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ"), Wasserstein Perella Securities, Inc. and NationsBanc
Capital Markets, Inc. pursuant to a Purchase Agreement, dated March 11, 1997, in
a transaction not registered under the
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Securities Act in a private placement pursuant to the exemption contained in
Section 4(2) of the Securities Act.
Anvil completed an exchange offer which expired August 22, 1997, pursuant to
which its 10-7/8% Series A Senior Notes were exchanged on a dollar-for-dollar
basis for its 10-7/8% Series B Senior Notes, due 2007. Pursuant to the exchange
offer, $129,000 principal amount were validly tendered and exchanged. The terms
and conditions of the aforementioned Series B securities are substantially
identical to the Series A securities for which they were exchanged, except that
the Series B securities have been registered under the Securities Act of 1933,
as amended.
On March 14, 1997, Holdings sold 26,667 Units to DLJ and 3,333 Units, for which
DLJ acted as agent in connection with the sale by Holdings, pursuant to a
Purchase Agreement, dated March 11, 1997. The Units consisted of an aggregate of
(i) 390,000 shares of Class B Common and (ii) 1.2 million shares of Senior
Exchangeable Preferred Stock with an aggregate liquidation preference of
$30,000,000. These sales were made in transaction not registered under the
Securities Act in a private placement pursuant to the exemption contained in
Section 4(2) of the Securities Act.
Holdings completed an exchange offer which expired August 26, 1997 (as
extended), pursuant to which its 13% Series A Senior Exchangeable Preferred
Stock was exchanged on a share-for-share basis for its 13% Series B Senior
Exchangeable Preferred Stock, due 2009. Pursuant to the exchange offer,
1,198,566 shares ($29,964 liquidation value) were validly tendered and
exchanged. The terms and conditions of the aforementioned Series B securities
are substantially identical to the Series A securities for which they were
exchanged, except that the Series B securities have been registered under the
Securities Act of 1933, as amended.
11
ITEM 6. SELECTED FINANCIAL DATA
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Set forth below are the selected historical financial data of the Predecessor
and the Company as of the dates and for the periods shown. The selected
historical financial balance sheet data of the Company for fiscal years 1997 and
1998 and the statement of operations data for the three years in the period
ended fiscal 1998 have been derived from the consolidated financial statements
of the Company which have been audited by Deloitte & Touche LLP, whose report
thereon appears under "Item 8. Financial Statements and Supplementary Data." The
selected consolidated financial data for fiscal years 1994 and 1995 and the
balance sheet data for fiscal 1996 have been derived from audited consolidated
financial statements which are not included herein. Holdings has no independent
operations apart from its wholly owned subsidiary, Anvil, and its sole asset is
the capital stock of Anvil. The selected consolidated financial data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and with the consolidated financial
statements and related notes thereto included elsewhere herein.
PREDECESSOR(1) COMPANY(1)
-------------- ------------------------------------------------
FISCAL YEAR ENDED
------------------------------------------------------------------
JANUARY 28, JANUARY 27, FEBRUARY 1, JANUARY 31, JANUARY 30,
1995 (1) 1996 1997 1998 1999
--------- --------- --------- --------- ---------
[Fiscal 1994] [Fiscal 1995] [Fiscal 1996] [Fiscal 1997] [Fiscal 1998]
STATEMENT OF OPERATIONS DATA:
Net sales ........................ $ 169,923 $ 193,389 $ 204,154 $ 214,867 $ 217,302
Cost of goods sold ............... 131,906 149,723 156,813 167,491 179,092
--------- --------- --------- --------- ---------
Gross profit ..................... 38,017 43,666 47,341 47,376 38,210
Selling, general and
administrative expenses ...... 14,704 17,778 21,678 22,771 24,626
Special compensation (2) ......... -- -- -- 10,915 --
Amortization of intangible assets 13,435 736 958 958 958
--------- --------- --------- --------- ---------
Operating income (loss) .......... 9,878 25,152 24,705 12,732 12,626
Other income (expense):
Interest income and other--net 2,451 616 415 247 59
Interest expense ............. (227) (8,844) (7,912) (16,536) (18,344)
--------- --------- --------- --------- ---------
Income (loss) before
provision for income
taxes and extraordinary item . 12,102 16,924 17,208 (3,557) (5,659)
Provision (benefit) for
income taxes ............... 11,045 6,770 6,883 (1,423) (2,264)
--------- --------- --------- --------- ---------
Income (loss) before
extraordinary item ........... 1,057 10,154 10,325 (2,134) (3,395)
Extraordinary item--loss on
extinguishment of debt, net
of $1,838 tax benefit(3) ..... -- -- -- (2,757) --
--------- --------- --------- --------- ---------
Net income (loss) ................ $ 1,057 $ 10,154 $ 10,325 $ (4,891) $ (3,395)
========= ========= ========= ========= =========
EBITDA(4) ........................ $ 28,639 $ 31,615 $ 32,592 $ 30,864 $ 19,847
========= ========= ========= ========= =========
12
FISCAL YEAR ENDED
--------------------------
JANUARY 31, JANUARY 30,
1998 1999
--------- ---------
Basic Income (Loss) Per Common Share: (6)
Class A Common Stock:
Income before extraordinary item ........ $ 10.51 $ 11.46
Extraordinary item ...................... (0.71) --
--------- ---------
Net income .............................. $ 9.80 $ 11.46
========= =========
Class B Common Stock:
(Loss) before extraordinary item ........ $ (2.58) $ (3.15)
Extraordinary item ...................... (0.71) --
--------- ---------
Net income .............................. $ (3.29) $ (3.15)
========= =========
Weighted average shares used in computation
of basic income (loss) per share:
Class A Common ........................... 290 290
========= =========
Class B Common ........................... 3,590 3,590
========= =========
PREDECESSOR (1) THE COMPANY (1)
----------------- -----------------------------------------------
JAN 28, JAN 27, FEB 1, JAN 31, JAN 30,
BALANCE SHEET DATA (AT END OF PERIOD): 1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
Cash and cash equivalents ............. $ 999 $ 1,568 $ 1,863 $ 959 $ 3,397
Total assets .......................... 109,941 136,527 136,832 147,113 150,267
Total debt ............................ -- 84,457 68,594 148,145 158,335
Preferred stock (liquidation value) .. -- 22,620 25,582 33,033 37,541
Total stockholders' equity (deficit)(5) 87,503 33,008 43,386 (66,255) (74,397)
- ----------
(1) The period prior to and including January 28, 1995 reflects the combined
financial data of the Predecessor, which was acquired by the Company as of
January 28, 1995 from McGregor. The periods beginning January 29, 1995
reflect the consolidated financial data of the Company after the
Acquisition. Because of the revaluation of the assets and liabilities
acquired and the related impact to the consolidated statements of
operations, the financial statements of the Predecessor (other than net
sales) for the period prior to January 29, 1995 is not comparable to those
of the Company subsequent to that date.
(2) In connection with the Recapitalization, the Company recorded a special
charge in the three months ended May 3, 1997 for compensation related to
the exercise of options by members of management, payment of a special
transaction bonus to members of management and payments under a then
existing equity buy-out plan to members of management. These charges
aggregated $10,915, and are considered by management to be nonrecurring in
nature.
(3) In connection with the Recapitalization, the Company recorded an
extraordinary charge of $2,757, net of an income tax benefit, in the year
ended January 31, 1998, as a result of losses incurred in connection with
the early extinguishment of debt.
(4) EBITDA is defined as operating income plus depreciation and amortization.
Fiscal 1995 includes a non-cash charge of $1.7 million resulting from the
increase in cost of goods sold due to the inventory revaluation in
connection with the Acquisition. Fiscal 1996 EBITDA excludes a non-cash
charge of $0.6 million for the estimated loss on disposal of certain fixed
assets and fiscal 1997 excludes non-recurring items of $10.9 million for
charges to special compensation. EBITDA is not a measure of performance
under Generally Accepted Accounting Principles ("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
13
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 applied in connection with the
Acquisition. In addition, management believes EBITDA is a widely accepted
financial indicator of a company's ability to service and/or incur
indebtedness and is used by the Company's creditors in assessing debt
covenant compliance. EBITDA should not be construed as an indication of
the Company's operating performance or as a measure of liquidity. EBITDA
does not take into account the Company's debt service requirements and
other commitments and, accordingly, is not necessarily indicative of
amounts that may be available for discretionary uses. The EBITDA measure
presented herein may not be comparable to other similarly titled measures
of other companies.
(5) Stockholder's equity for the Predecessor represents McGregor's investment
in the Predecessor.
(6) See Note 13 to Financial Statements, included elsewhere herein.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion provides information with respect to the results of
operations of the Company for each of the three fiscal years in the period ended
January 30, 1999. The following information should be read in conjunction with
ITEM 6. "SELECTED FINANCIAL DATA" and the consolidated financial statements and
the notes thereto included elsewhere herein.
RESULTS OF OPERATIONS
The Company's results of operations are affected by numerous factors, including
competition, general economic conditions, raw material costs, mix of products
sold and plant utilization. Certain activewear products of the type manufactured
by the Company are generally available from multiple sources and the Company's
customers often purchase products from more than one source. To remain
competitive, the Company reviews and adjusts its pricing structure from time to
time in response to industry-wide price changes. In the basic T-shirt market,
for example, the Company generally does not lead its competitors in setting the
current pricing structure and modifies its prices to the extent necessary to
remain competitive with prices set by its larger competitors in this market.
The gross profit margins of the Company's products vary significantly.
Accordingly, the Company's overall gross profit margin is affected by its
product mix. In addition, plant utilization levels are important to
profitability due to the substantial fixed costs of the Company's textile
operations.
The largest component of the Company's cost of goods sold is the cost of yarn.
Unlike certain of its competitors, the Company does not spin its own yarn.
Instead, the Company obtains substantially all of its yarn from five yarn
suppliers, generally placing orders for quantities ranging from 30 days' to a
one year's supply, and occasionally even longer periods, depending upon
management's expectations regarding future yarn prices and levels of supply.
Yarn prices fluctuate from time to time principally as a result of competitive
conditions in the yarn market and supply and demand for raw cotton.
Historically, the
14
Company has been successful in mitigating the impact of fluctuating yarn prices.
In recent months, yarn prices have exhibited a significant downward trend and
management has taken steps to adjust the Company's purchase commitments to take
advantage of the declining prices.
The following table sets forth, for each of the periods indicated, certain
statement of operations data, expressed as a percentage of net sales, for the
Company for each of the three years in the period ended January 30, 1999:
YEAR ENDED
FEBRUARY 1, JANUARY 31, JANUARY 30,
1997 1998 1999
---- ---- ----
[Fiscal 1996] [Fiscal 1997] [Fiscal 1998]
STATEMENT OF OPERATIONS DATA:
Net sales ........................................... 100.0% 100.0% 100.0%
Cost of goods sold .................................. 76.8 78.0 82.4
Gross profit ........................................ 23.2 22.0 17.6
Selling, general and administrative expenses ........ 10.6 10.6 11.3
Interest expense .................................... 3.9 7.7 8.4
OTHER DATA:
EBITDA (1)........................................... $32.6 million $30.9 million $19.8 million
Percentage of net sales ......................... 16.0% 14.4% 9.1%
(1) EBITDA is defined as operating income plus depreciation and amortization.
Fiscal 1996 EBITDA excludes a non-cash charge of $0.6 million for the
disposal of certain fixed assets and fiscal 1997 excludes non-recurring
charges of $10.9 million for special compensation. EBITDA is not a measure
of performance under GAAP. EBITDA should not be considered in isolation or
as a substitute for net income, cash flows from operating activities and
other income or cash flow statement data prepared in accordance with GAAP,
or as a measure of profitability or liquidity. Management believes,
however, that EBITDA represents a useful measure of assessing the
performance of the Company's ongoing operating activities as it reflects
earnings trends of the Company without the impact of purchase accounting
applied in connection with the Acquisition. In addition, management
believes EBITDA is a widely accepted financial indicator of a company's
ability to service and/or incur indebtedness and is used by the Company's
creditors in assessing debt covenant compliance. EBITDA should not be
construed as an indication of the Company's operating performance or as a
measure of liquidity. EBITDA does not take into account the Company's debt
service requirements and other commitments and, accordingly, is not
necessarily indicative of amounts that may be available for discretionary
uses. The EBITDA measure presented herein may not be comparable to other
similarly titled measures of other companies.
YEAR ENDED JANUARY 30, 1999 COMPARED TO YEAR ENDED JANUARY 31, 1998
NET SALES for the year ended January 30, 1999 increased $2.4 million, or 1.1%,
to $217.3 million from $214.9 million for the year ended January 31, 1998. The
overall increase in net sales is comprised of an increase in units sold of
approximately 2%, partially offset by a small decrease in the average selling
price of all goods sold for the year. The Company's revenues and gross margins
have been unfavorably impacted by ongoing lower prices for basic T-shirts. While
the average selling price for all goods sold declined only slightly, the price
has been maintained by increasing the percentage of higher priced products, such
as henleys and plackets, in the Company's product mix. See "Forward Looking
Information," below.
15
GROSS PROFIT for the year ended January 30, 1999 declined by $9.2 million
(19.4%) from the prior year despite the $2.4 million increase in sales, as gross
profit margin on sales declined to 17.6% from 22.0% in the prior year. Any
favorable impact achieved by emphasizing the sale of products with traditionally
higher profit margins, has been offset by industry-wide pricing pressures
affecting the Company's basic T-shirt business. In addition, production costs
per unit for all products increased due to lower utilization of textile
capacity, wage increases and the inefficiencies created by the transition of a
substantial majority of sewing operations to offshore locations. A significant
increase in the Company's contribution for employee medical benefits also
unfavorably impacted the Company's results of operations. Management is
addressing these areas of increasing costs. See "Forward Looking Information,"
below.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (including distribution expense)
for the year ended January 30, 1999 increased by $1.9 million, or 8.2%, to $24.6
million from $22.7 million for the prior year. Expenditures for advertising,
travel and entertainment, and other selling expenses increased $1.1 million and
administrative expenses (primarily data processing and related costs) increased
approximately $0.5 million. The remaining increase is primarily composed of
increased distribution expense due to greater volume, and unusually high first
quarter expenditures for freight to meet delivery commitments.
INTEREST EXPENSE for the year ended January 31, 1999 increased by $1.8 million,
or 10.9%, to $18.3 million from $16.5 million for the prior year. This increase
in interest expense was the result of higher borrowings in connection with the
Recapitalization and to fund additional working capital requirements. Interest
rates were also slightly higher during the current year compared to the prior
year.
NET LOSS for the year ended January 31, 1999 was $3.4 million compared to a net
loss of $4.9 million for the prior year. A decrease in gross profit of $9.2
million was further impacted by higher selling, general and administrative
expenses ($1.9 million) and higher interest expense ($1.8 million). In the prior
year there was a charge of $10.9 million for "special compensation" and an
extraordinary charge of $2.8 million (after applicable income tax benefit) on
extinguishment of debt. A tax benefit of $2.3 million was recognized in the
current year compared to $1.4 million in the prior year.
YEAR ENDED JANUARY 31, 1998 COMPARED TO YEAR ENDED FEBRUARY 1, 1997
NET SALES for the year ended January 31, 1998 increased $10.7 million, or 5.2%,
to $214.9 million from $204.2 million for the year ended February 1, 1997. The
overall increase in net sales is comprised of a small increase in units sold as
well as a small increase in average selling price, and is also due to the
inclusion of Cottontops' sales of approximately $3.7 million.
GROSS PROFIT for the year ended January 31, 1998 remained approximately the same
as the prior year despite the $10.7 million increase in sales, as gross profit
margin on sales declined to 22.0% from 23.2% in the prior year. This decline was
primarily the result of lower prices for basic T-shirts.
16
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (including distribution expense)
for the year ended January 31, 1998 increased by $1.1 million, or 5.1%, to $22.8
million from $21.7 million for the prior year. As a percentage of net sales,
selling, general and administrative expenses were approximately 10.6% for both
fiscal years. The year ended January 31, 1998 includes $1.6 million of operating
expenses of Cottontops. In addition, sales department salaries and expenditures
for advertising, travel and entertainment, and other selling expenses increased
$0.8 million and administrative expenses (primarily legal and professional)
expenses increased $0.5 million. The aforementioned increases were partially
offset by a decline of approximately $1.2 million in distribution expense due to
more efficient warehouse operations. Also, fiscal 1996 includes charges of
approximately $0.6 million for certain start-up costs and losses on disposal of
fixed assets.
INTEREST EXPENSE for the year ended January 31, 1998 increased by $8.6 million,
or 109.0%, to $16.5 million from $7.9 million for the prior year. This increase
in interest expense was the result of higher borrowings in connection with the
Recapitalization. Interest rates were also slightly higher during the year ended
January 31, 1998 compared to the prior year.
NET LOSS for year ended January 31, 1998 was $4.9 million compared to net income
of $10.3 million for the year ended February 1, 1997. While the amount of gross
profit was nearly equal in both years, the year ended January 31, 1998 results
were reduced by higher selling, general and administrative expenses ($1.1
million), higher interest expense ($8.6 million), and, in the year ended January
31, 1998, there was a charge of $10.9 million for "special compensation" (See
Note 4 to the consolidated financial statements) and an extraordinary charge of
$2.8 million (net of taxes) on extinguishment of debt (See Note 2 to the
consolidated financial statements).
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. The Company
anticipates the level of capital expenditures to decline to an annual rate of
approximately $3.0 to $4.0 million for the next few years, and has no material
capital commitments for the next twelve months outside of the ordinary course of
business.
The Company's principal working capital requirements are financing accounts
receivable and inventories. At January 30, 1999, the Company had net working
capital of approximately $50.4 million, including approximately $31.2 million of
accounts receivable, $41.4 million of inventories, $8.1 million of other current
assets; and $30.3 million in accounts payable and other current liabilities.
In connection with the Recapitalization, the Company entered into a credit
agreement (the "Credit Agreement") which refinanced its existing indebtedness
under the Old Credit Agreement. The Credit Agreement provided for borrowings of
up to $55.0 million for working capital and other general corporate purposes,
and bore interest, at the Company's
17
option, at LIBOR or prime rate plus a margin. The indebtedness under the Credit
Agreement was guaranteed by Holdings and Cottontops and secured by substantially
all of Anvil's assets and a pledge by Holdings of all of the capital stock of
Anvil. At January 30, 1999, the Company had $31.5 million outstanding borrowings
under the Credit Agreement at an interest rate of approximately 7.94%. In March
1999, this amount was repaid with the proceeds of the New Loan Agreement
described below. The Company has classified $21,700 and $25,000 as a long-term
liability at January 31, 1998 and January 30, 1999, respectively which
represents amounts the Company anticipates continually refinancing. See "New
Loan Agreement," below
NEW LOAN AGREEMENT
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 Loan Agreement eliminated the covenant ratio issues under
the Credit Agreement.
The Term Loan is in the principal amount of $11.7 million payable in 20 equal
quarterly principal installments of approximately $0.6 million commencing July
1, 1999.
Anvil borrowed $19.6 million under the Revolving Credit Facility provided by the
same lender. The net proceeds of the Loan Agreement were used to repay all
amounts due under the Credit Agreement. The Revolving Credit Facility expires
March 11, 2002, and amounts due under it and the Term Loan are secured by
substantially all the inventory, receivables and property, plant and equipment
of Anvil. Holdings and Cottontops 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.
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 New
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
18
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 levels of operations and
anticipated growth, funds generated from operations, together with other
available sources of liquidity, including borrowings under the Loan Agreement,
will be sufficient over the next twelve months for the Company to make
anticipated capital expenditures, fund working capital requirements and satisfy
its debt service requirements.
SEASONALITY
The Company's business is not significantly seasonal as it manufactures and
sells a wide variety of activewear products that may be worn throughout the
year.
EFFECT OF INFLATION
Inflation generally affects the Company by increasing the interest expense of
floating rate indebtedness and by increasing the cost of labor, equipment and
raw materials. The Company does not believe that inflation has had any material
effect on the Company's business during the periods discussed herein.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS" ) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The statement establishes accounting and
reporting standards requiring that derivative instruments be recorded in the
balance sheet as either an asset or liability measured at fair value. The
statement requires that changes in a derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. SFAS
No. 133 is effective for fiscal years beginning after June 15, 1999; however, it
may be adopted earlier. It cannot be applied retroactively to financial
statements of prior periods. The Company has not yet quantified the impact on
its financial statements nor determined the timing or method of adopting SFAS
No. 133.
YEAR 2000 ISSUES
The Company's comprehensive Year 2000 Plan has been implemented and is nearing
completion. The Company has a senior Information Technology staff member
assigned to lead its Year 2000 project. The Company has upgraded the majority of
its major software
19
systems over the past few years and they are all Year 2000 compliant.
Confirmation has been received from its software vendors and testing is in
progress. All legacy software has also been upgraded, other than the accounts
payable and general ledger systems. The Company is in the process of installing
new accounts payable and general ledger systems which are Year 2000 compliant.
The target completion date for the installation is August 1, 1999. If the
installation of the new systems is delayed, the legacy systems can be made Year
2000 compliant with minimal programming work. The Company has already upgraded
and made Year 2000 compliant its systems that interface with its sales force and
significant customers.
The Company has also upgraded its major computer hardware which are all Year
2000 compliant. As projected, there have been no material hardware or software
costs associated with this project beyond the budgeted costs needed for normal
business requirements, and the Company does not anticipate any material future
costs beyond normal business requirements.
Year 2000 compliance requires that the Company not only insure internal
compliance (hardware, software, operational devices) but external compliance
(suppliers, contractors, customers) as well.
The Company 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
concerns. However, the Company has no means of ensuring that external agents
will be Year 2000 compliant.
The Company has and will continue to test all internal and external systems to
insure Year 2000 readiness. The Company believes its ongoing efforts to address
the Year 2000 issue have been thorough and there should be minimal, if any,
interruption to the Company's operation. However, the Company is in the process
of developing contingency plans, which will be reviewed by senior management, to
help insure a smooth transition into the 21st Century. These plans will address
critical areas of the business which would enable the Company to operate
independent of certain external partners. Some areas being reviewed are
maintaining increased inventory in key products, identifying alternate sources
for critical services, materials, and utilities, and instituting a 24-hour
hotline with key personnel on call.
FORWARD-LOOKING INFORMATION
For the past fiscal year, the Company has been experiencing the adverse effects
of an industry-wide decline in selling prices of basic T-shirts, the Company's
primary product. This trend of relatively low average selling prices for basic
T-shirts is beyond the Company's control and has continued into fiscal 1999. The
Company has been able to slightly lessen the effect of these pricing pressures
by: (i) continuing to emphasize new higher priced products and de-emphasize
certain basic T-shirt sales; (ii) continuing to improve and modernize its
manufacturing processes in order to reduce production costs; and (iii) moving a
substantial majority of its sewing operations offshore to take advantage of
lower wage rates. Following are some of the Company's specific actions and plans
to effect favorable changes in these three areas.
1. The Company has been able to increase the percentage of sales of what it
considers its "higher priced" products. More favorable gross margins on
these products have partially
20
offset the decline in gross margins on basic T-shirts. The Company plans
to continue this strategy.
2. During the last five fiscal years, the Company has invested in excess of
$32 million to modernize and expand its manufacturing and distribution
facilities to improve quality, reduce costs, manage inventories and
shorten textile production cycles. In fiscal 1997, the Company began full
utilization of its centralized distribution facility and is continuing to
refine its textile manufacturing processes to shorten production cycles.
In addition, the Company has negotiated what it considers advantageous
yarn purchase commitments to take advantage of a recent downward trend in
the price of yarn, and has restructured its employee medical plan for
fiscal 1999. While no assurances can be given, Management believes that
the aforementioned changes will significantly contribute to lower unit
costs in the future.
3. Increased competition has caused many domestic apparel manufacturers to
move a portion of their sewing operations offshore to lower costs. The
Company has moved a substantial majority of its sewing activities offshore
to take advantage of these lower offshore wage rates and may further
increase its offshore sewing operations to the extent necessary to reduce
costs. The initial impact of moving offshore resulted in an increase in
unit costs due to inefficiencies in production, more irregulars, etc.
Management believes these inefficiencies have abated in recent months.
Because of this increasing shift to offshore production, the Company
closed and sold one of its smaller domestic sewing facilities during
fiscal 1997, and has ceased operations at two other domestic facilities in
1998.
The Company is including the following cautionary statement in this Form 10-K 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:
21
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 1998 and beyond to be materially
different from any anticipated results expressed in any forward-looking
statement made by or on behalf of the Company.
The Company disclaims any obligation to update any forward-looking statements to
reflect events or other circumstances after the date hereof.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company believes that its potential exposure to market risk at January 30,
1999 is not material. The Company has an interest rate swap agreement in place
to hedge its exposure to interest rate risk. See Note 3- "Summary of Significant
Account Policies" and Note 14-"Fair Value of Financial Instruments" in Notes to
the Consolidated Financial Statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See page F-1, Index to Financial Statements, included elsewhere herein.
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
With respect to the directors of the Company, the information required by Item
10 of Form 10-K appears on pages 1 through 3 of the Information Statement, and
is incorporated herein by reference.
Pursuant to General Instruction G to Form 10-K, the following information is
furnished concerning the executive officers and key employees of the Company.
EXECUTIVE OFFICERS AND
CERTAIN KEY EMPLOYEES OF ANVIL
The following sets forth certain information with respect to the executive
officers and certain key employees of Anvil.
NAME AGE(1) POSITION
- ---- ------ --------
Bernard Geller.................65 President, Chief Executive Officer,
Chairman of the Board
Jacob Hollander................57 Executive Vice President, Chief Administrative Officer,
Secretary, General Counsel and Director
Anthony Corsano................39 Executive Vice President of Sales and Marketing
William H. Turner..............51 Executive Vice President of Manufacturing
Pasquale Branchizio............60 Vice President of Finance
- ----------
(1) All ages are as of December 31, 1998.
BERNARD GELLER has served as the Chief Executive Officer of Anvil, President of
Holdings and has been a Director of Anvil and Holdings since the Acquisition.
Since the Recapitalization, Mr. Geller has served as Chairman of the Board of
Anvil and Holdings and since July 1997 as President of Anvil. From 1989 to 1995,
Mr. Geller served as Chairman of the Predecessor. From 1986 to 1989, Mr. Geller
served as President of the Predecessor and from 1975 to 1986, as Controller and
then President of the Predecessor. Before joining the Predecessor, Mr. Geller
was with Union Underwear Co., Inc., a subsidiary of Fruit of the Loom, Inc.,
where he worked for 14 years, principally as that company's controller.
JACOB HOLLANDER has served as Executive Vice President, Chief Administrative
Officer, Secretary and General Counsel of Anvil and Vice President, Secretary
and General Counsel of Holdings since the Acquisition. Since the
Recapitalization, Mr. Hollander has served as a Director of Anvil and Holdings.
From 1991 to 1995, Mr. Hollander served as Vice President and General Counsel of
Astrum. From 1985 to 1990, Mr. Hollander served as Vice President and General
Counsel of McGregor and Faberge, Incorporated, and from 1987 to 1989, Mr.
23
Hollander also served as Vice President and General Counsel of Elizabeth Arden,
Inc. During 1990, Mr. Hollander provided legal consulting services to the
Unilever group of companies and to McGregor. Prior to its acquisition by
McGregor, Mr. Hollander was Vice President of Faberge, Incorporated.
ANTHONY CORSANO has served as Executive Vice President of Sales and Marketing of
Anvil since the Acquisition. From 1993 to 1995, Mr. Corsano served as Vice
President of Sales and Marketing of the Predecessor. From 1988 to 1993, Mr.
Corsano served as Vice President--Sales of the Predecessor and from 1985 to 1988
Mr. Corsano served as National Sales Manager of the Predecessor.
WILLIAM H. TURNER has served as Executive Vice President of Manufacturing of
Anvil since the Acquisition. From 1992 to 1995, Mr. Turner served as Executive
Vice President of Manufacturing of the Predecessor. From 1985 to 1992, Mr.
Turner held the position of Vice President of Manufacturing (Cut and Sew) of the
Predecessor and from 1982 to 1985 he was the Predecessor's Plant Manager.
PASQUALE BRANCHIZIO has served as Vice President of Finance of Anvil and
Holdings since the Acquisition. From 1986 until 1995, Mr. Branchizio served as
Vice President of Finance of the Predecessor. From 1981 to 1986, Mr. Branchizio
served as the Controller of the Predecessor. Prior thereto, Mr. Branchizio
served as the Predecessor's Senior Accountant.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 of Form 10-K appears on pages 4 through 8 of
the Information Statement, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 of Form 10-K appears on pages 8 through 10
of the Information Statement, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 of Form 10-K appears on pages 11 through 12
of the Information Statement and is incorporated herein by reference.
24
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements - See Page F-1 for index to Financial
Statements
2. Financial Statement Schedules - Schedule II--Valuation and
Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions, are inapplicable or not material, or the information
called for thereby is otherwise included in the financial statements and
therefore has been omitted.
(b) Reports on Form 8-K
None.
(c) Exhibits
NO. DESCRIPTION
- --- -----------
2.1 Recapitalization Agreement, dated as of February 12, 1997, by and among
Citicorp Venture Capital, Ltd., BRS,, Holdings, Anvil VT, Inc. and the
stockholders and voting trust certificate holders named on the signature
pages thereto, as amended by the certain Amendment and Consent to
Assignment dated as of February 21, 1997 and that Waiver and Second
Amendment to the Recapitalization Agreement dated as of March 13, 1997.(1)
3.1 Certificate of Incorporation of Anvil.(1)
3.2 Restated Certificate of Incorporation of Holdings.(4)
3.3 Certificate of Incorporation of Cottontops.(1)
3.4 By-Laws of Anvil.(1)
3.5 By-Laws of Holdings.(1)
3.6 By-Laws of Cottontops.(1)
3.7 Certificate of Designation of Holdings.(1)
3.8 Certificate of Designation of Holdings relating to Series B 13% Senior
Exchangeable Preferred Stock due 2009.(2)
4.1 Purchase Agreement, dated as of March 14, 1997, by and among Donaldson,
Lufkin & Jenrette Securities Corporation ("DLJ"), Wasserstein Perella
Securities, Inc. ("Wasserstein"), NationsBanc Capital Markets, Inc.
("NationsBanc"), Anvil and Holdings.(1)
25
4.2 Senior Indenture, dated as of March 14, 1997, by and among the Anvil,
Holdings, Cottontops and the other Subsidiary Guarantors and United States
Trust Company of New York, as trustee.(1)
4.3 10-7/8% Senior Notes and Guarantees.(1)
4.4 Series B 10-7/8% Senior Notes and Guarantees.(2)
4.5 Registration Rights Agreement, dated as of March 14, 1997, by and among
Anvil, Holdings, Cottontops and DLJ, Wasserstein and NationsBanc, as
Initial Purchasers.(1)
4.6 Amended and Restated Credit Agreement, dated as of March 14, 1997, among
Anvil, as Borrower, Holdings, Cottontops and certain subsidiaries, as
Guarantors, the Banks Identified therein as lending institutions,
NationsBank, N.A. ("NationsBank"), as Agent, and Bank of America Illinois,
Banque Nationale de Paris and Heller Financial Inc., as co- agents.(1)
4.7 Amended and Restated Pledge and Security Agreement, dated as of March 14,
1997, by and among Anvil, Holdings and NationsBank.(1)
4.8 Loan and Security Agreement dated March 11, 1999 by and among Congress
Financial Corporation, Anvil , Holdings and Cottontops.
4.9 Term Promissory Note of Anvil dated March 11, 1999 payable to Congress
Financial Corporation.
4.10 Pledge and Security Agreement dated March 11, 199 between Congress
Financial Corporation and Holdings.
4.11 Pledge and Security Agreement dated March 11, 199 between Congress
Financial Corporation and Anvil.
10.1 Employment Agreement, dated as of January 31, 1995, by and between Anvil
and Bernard Geller.(1)
10.2 Employment Agreement, dated as of January 31, 1995, by and between Anvil
and Jacob Hollander.(1)
10.3 Employment Agreement, dated as of January 31, 1995, by and between Anvil
and William H. Turner.(1)
10.4 Employment Agreement, dated as of January 31, 1995, by and between Anvil
and Anthony Corsano.(1)
10.5 Exchange Debenture Indenture, dated as of March 14, 1997, by and between
Holdings and United States Trust Company of New York, as trustee.(1)
26
10.6 Guaranty Agreement, dated as of January 28, 1995, by and among Culligan,
Astrum and Anvil.
10.7 Registration Rights Agreement, dated as of March 14, 1997, by and between
Holdings and DLJ, as the Initial Purchaser.(1)
10.8 Registration Rights and Securityholders Agreement, dated as of March 14,
1997, by and among Holdings, BRS, 399 Venture CCT II Partners, L.P.
("CCT") and DLJ.(1)
10.9 Registration Rights Agreement, dated as of March 14, 1997, by and among
Holdings, BRS, 399 Venture, CCT, Bernard Geller, Anthony Corsano, William
Turner, Jacob Hollander and each other executive of Holdings or its
subsidiaries who acquires common stock from Holdings after the date
thereof and executes a joinder thereto, the persons set forth on the
signature pages thereto and DLJ.(1)
10.10 Stockholders Agreement, dated as of March 14, 1997, by and among Holdings,
BRS, 399 Venture, CCT, Bernard Geller, Anthony Corsano, William Turner,
Jacob Hollander and each other person who acquires common stock of
Holdings after the date thereof and executes a joinder thereto.(1)
10.11 Stock Option Plan.(1)
10.12 Employment Agreement, dated as of January 31, 1997, by and between
Cottontops and Tom Glennon.(1)
10.13 Amendment No. 1 dated as of December 27, 1997 to Stockholders Agreement by
and among Holdings, BRS, 399 Venture, CCT, Bernard Geller, Anthony
Corsano, William Turner, Jacob Hollander and each other person who
acquires common stock of Holdings after the date thereof and executes a
joinder thereto(3)
10.14 Management Agreement dated November 3, 1998 among Anvil, Holdings, and
BRS.
21 Subsidiaries of Anvil, Holdings and Cottontops.
27.1 Financial Data Schedule.
(1) Previously filed with the Company's Registration Statement and Amendments
thereto on Form S-4 (SEC file No. 333-26999) and is incorporated herein by
reference.
(2) Previously filed with the Company's Form 10-Q for the Quarter ended August
2, 1997, and is incorporated herein by reference.
(3) Previously filed with the Company's Form 10-K for the Year ended January
31, 1998, and is incorporated herein by reference.
(4) Previously filed with the Company's Form 10-Q for the Quarter ended
October 31, 1998 , and is incorporated herein by reference.
27
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange
Act of 1934, Anvil Holdings, Inc. has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ANVIL HOLDINGS, INC.
By: /s/ JACOB HOLLANDER
----------------------------
Jacob Hollander
Vice President and Secretary
Pursuant to the requirements of the Securities Act of 1934, this report has been
signed by the following persons in the capacities and on the dates indicated:
SIGNATURE CAPACITY DATE
--------- -------- ----
/s/ BERNARD GELLER Chairman of the Board, APRIL 29, 1999
- ---------------------------- President and Director
Bernard Geller (Principal Executive
And Financial Officer)
/s/ JACOB HOLLANDER Vice President, Secretary APRIL 29, 1999
- ---------------------------- and Director
Jacob Hollander
/s/ PASQUALE BRANCHIZIO Vice President of Finance APRIL 29, 1999
- ---------------------------- (Principal Accounting Officer)
Pasquale Branchizio
/s/ BRUCE C. BRUCKMANN Director APRIL 29, 1999
- ----------------------------
Bruce C. Bruckmann
/s/ STEPHEN F. EDWARDS Director APRIL 29, 1999
- ----------------------------
Stephen F. Edwards
/s/ DAVID F. THOMAS Director APRIL 29, 1999
- ----------------------------
David F. Thomas
/s/ JOHN D. WEBER Director APRIL 29, 1999
- ----------------------------
John D. Weber
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED
PURSUANT TO SECTION 15(D) OF THE ACT BY REGISTRANTS
WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT:
The Registrant has not sent an annual report or proxy material to its security
holders during the period covered by this report.
28
ANVIL HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
PAGE
Independent Auditors' Report.........................................................F-2
Consolidated Balance Sheets at January 31, 1998 and January 30, 1999.................F-3
Consolidated Statements of Operations for the years ended February 1, 1997,
January 31, 1998 and January 30, 1999...........................................F-4
Consolidated Statements of Cash Flows for the years ended February 1, 1997,
January 31, 1998 and January 30, 1999...........................................F-7
Consolidated Statements of Changes in Stockholders' Equity for the years ended
February 1, 1997, January 31, 1998 and January 30, 1999.........................F-6
Notes to Consolidated Financial Statements...........................................F-8
Schedule II --Valuation and Qualifying Accounts......................................S-1
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Anvil Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Anvil Holdings,
Inc. and subsidiaries as of January 31, 1998 and January 30, 1999, and the
related consolidated statements of operations, stockholders' deficiency, and
cash flows for the years ended February 1, 1997, January 31, 1998 and January
30, 1999. Our audits also included the financial statement schedule listed in
the index at Item 14(a)(2). These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Anvil Holdings, Inc.
and subsidiaries as of January 31, 1998 and January 30, 1999 and the results of
their operations and their cash flows for the years ended February 1, 1997,
January 31, 1998 and January 30, 1999 in conformity with generally accepted
accounting principles. Also, in our opinion, the financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
/s/ Deloitte & Touche LLP
April 5, 1999
New York, New York
F-2
ANVIL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
JANUARY 31, JANUARY 30,
1998 1999
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................................ $ 959 3,397
Accounts receivable, less allowances for doubtful accounts of
$822 and $635 ...................................................... 27,271 31,232
Inventories .......................................................... 42,089 41,356
Prepaid and refundable income taxes .................................. 4,640 1,704
Deferred income taxes ................................................ 2,510 2,353
Prepaid expenses and other current assets ............................ 1,004 706
--------- ---------
Total current assets ..................................... 78,473 80,748
PROPERTY, PLANT AND EQUIPMENT--Net ..................................... 38,189 37,536
DEFERRED INCOME TAXES .................................................. -- 3,823
INTANGIBLE ASSETS--Net ................................................. 25,487 24,529
OTHER ASSETS ........................................................... 4,964 4,294
--------- ---------
$ 147,113 $ 150,930
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Accounts payable ..................................................... $ 11,986 $ 7,181
Accrued expenses and other current liabilities ....................... 15,349 16,652
Current portion of long-term bank borrowings ......................... -- 6,500
--------- ---------
Total current liabilities ............................ 27,335 30,333
--------- ---------
LONG-TERM BANK BORROWINGS .............................................. 21,700 25,000
--------- ---------
10-7/8% SENIOR NOTES ................................................... 126,445 126,835
--------- ---------
DEFERRED INCOME TAXES .................................................. 4,613 5,276
--------- ---------
OTHER LONG-TERM OBLIGATIONS ............................................ 1,883 1,744
--------- ---------
REDEEMABLE PREFERRED STOCK
(Liquidation value $33,033 and $37,541) ........................... 31,392 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, $32,333 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
Deficit ............................................................... (79,097) (87,239)
--------- ---------
Total stockholders' deficiency .............................. (66,255) (74,397)
--------- ---------
$ 147,113 $ 150,930
========= =========
See notes to consolidated financial statements.
F-3
ANVIL HOLDINGS, INC. AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
(In Thousands, Except Share Data)
FISCAL YEAR ENDED
-------------------------------------
FEBRUARY 1, JANUARY 31, JANUARY 30,
1997 1998 1999
--------- --------- ---------
NET SALES ........................................... $ 204,154 $ 214,867 $ 217,302
COST OF GOODS SOLD .................................. 156,813 167,491 179,092
--------- --------- ---------
Gross profit ................................. 47,341 47,376 38,210
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES ......................................... 21,678 22,771 24,626
SPECIAL COMPENSATION ................................ -- 10,915 --
AMORTIZATION OF INTANGIBLE ASSETS ................... 958 958 958
--------- --------- ---------
Operating income ............................ 24,705 12,732 12,626
OTHER INCOME (EXPENSE):
Interest expense ................................ (7,912) (16,536) (18,344)
Interest income and other expense--net .......... 415 247 59
--------- --------- ---------
Income (loss) before provision (benefit)
for income taxes and extraordinary item .. 17,208 (3,557) (5,659)
PROVISION (BENEFIT) FOR INCOME TAXES ................ 6,883 (1,423) (2,264)
--------- --------- ---------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM .............................. 10,325 (2,134) (3,395)
EXTRAORDINARY ITEM - Loss on extinguishment
of debt (net of tax benefit of $1,838) ........ -- (2,757) --
--------- --------- ---------
NET INCOME (LOSS) ................................... $ 10,325 (4,891) (3,395)
=========
Less Preferred Stock dividends (pro forma in 1998) (4,094) (4,585)
Less Common A preference (pro forma in 1998) ...... (3,798) (4,235)
--------- ---------
Net (loss) attributable to common stockholders .... $ (12,784) $ (12,215)
========= =========
BASIC INCOME (LOSS) PER COMMON SHARE:
Class A Common Stock:
Income before extraordinary item ................. $ 10.51 $ 11.46
Extraordinary item ............................... (.71) --
--------- ---------
Net income ....................................... $ 9.80 $ 11.46
========= =========
Class B Common Stock:
(Loss) before extraordinary item ................. $ (2.58) $ (3.15)
Extraordinary item ............................... (.71) --
--------- ---------
Net (loss) ....................................... $ (3.29) $ (3.15)
========= =========
Weighted average shares used in computation of
pro forma basic income (loss) per share:
Class A Common .................................... 290 290
========= =========
Class B Common .................................... 3,590 3,590
========= =========
See notes to consolidated financial statements.
F-4
ANVIL HOLDINGS, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(In Thousands, Except Share Data)
FISCAL YEAR ENDED
-------------------------------------
FEBRUARY 1, JANUARY 31, JANUARY 30,
1997 1998 1999
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ........................................... $ 10,325 $ (4,891) $ (3,395)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization of fixed assets ............... 6,329 6,259 6,263
Amortization of intangible and other assets ................. 1,686 1,981 2,023
Write down of property and equipment ............................ 600 -- --
Provision (recovery) of bad debts-net ....................... 440 (52) (187)
Noncash interest expense .................................... 1,187 1,706 --
Write-off of deferred financing fees ........................ -- 3,010 --
Noncash compensation ........................................ -- 5,177 --
Deferred income taxes ....................................... 1,922 551 (1,584)
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable ......................................... (5,878) 1,194 (3,899)
Inventories ................................................. 2,917 (9,618) 733
Prepaid, and refundable income taxes ........................ 1,477 700 2,936
Accounts payable ............................................ 707 2,626 (4,805)
Accrued expenses & other liabilities ........................ 1,169 3,437 1,303
Other--net .................................................. 930 (1,711) (1,121)
-------- -------- --------
Net cash provided (used) by operating activities ..... 23,811 10,369 (1,733)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition, net of cash acquired ............................. (1,728) -- --
Purchases of property and equipment--net ...................... (4,791) (6,102) (5,629)
-------- -------- --------
Net cash used in investing activities ................ (6,519) (6,102) (5,629)
-------- -------- --------
See notes to consolidated financial statements.
F-5
ANVIL HOLDINGS, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS-CONTINUED
(In Thousands, Except Share Data)
FISCAL YEAR ENDED
-------------------------------------
FEBRUARY 1, JANUARY 31, JANUARY 30,
1997 1998 1999
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under new credit agreement-net ............ -- 26,500 9,800
Borrowings under old revolving credit facility ....... 15,100 -- --
Repayment of old revolving credit facility ........... (28,300) (19,200) --
Repayments of long-term debt ......................... (3,850) (46,325) --
Proceeds from exercise of stock options .............. 53 336 --
Repayment of Subordinated Promissory Note ............ -- (9,575) --
Proceeds of Senior Notes ............................. -- 130,000 --
Redemption of Old Preferred Stock .................... -- (22,736) --
Repurchase of Old Common Stock ....................... -- (92,262) --
Proceeds from sale of Units .......................... -- 26,667 --
Issuance of New Common Stock ......................... -- 13,063 --
Repayment of stockholder loans ....................... -- 250 --
Expenses related to the Recapitalization ............. -- (11,889) --
--------- --------- ---------
Net cash (used in) provided by
financing activities ....................... (16,997) (5,171) 9,800
--------- --------- ---------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS ................................ 295 (904) 2,438
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR ................................... 1,568 1,863 959
--------- --------- ---------
CASH AND CASH EQUIVALENTS,
END OF YEAR ......................................... $ 1,863 $ 959 $ 3,397
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest ............................... $ 6,036 $ 10,533 $ 17,206
========= ========= =========
Cash paid (received) for income taxes ................ $ 3,484 $ (2,123) $ (2,198)
========= ========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Fair value of assets acquired, excluding cash ........ $ 3,049
Liabilities assumed .................................. (1,194)
Expenses incurred .................................... (127)
---------
Cash paid ............................................ $ 1,728
=========
Promissory note issued ............................... $ 250
=========
Exchange of Old Preferred Stock into Units ........... $ 3,333
=========
Redeemable Preferred Stock Issued in Lieu of Dividends $ 3,033 $ 4,585
========= =========
See notes to consolidated financial statements.
F-6
ANVIL HOLDINGS, INC. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN CONSOLIDATED STOCKHOLDERS' EQUITY
(IN THOUSANDS)
Common Stock
------------------------------------
Preferred Stock (Old) (New)
----------------- ----------------- ----------------- Additional Retained Loans
Class Class Class Class Class Class Class Class Class Paid-in Earnings Receivable-
A B C A B C A B C Capital (Deficit) Stockholders Total
--------------------------------------------------- ------- --------- ------------ -----
Balance at January 27, 1996...... $1 $1 - $58 $26 $17 - - - $23,001 $ 10,154 $(250) $ 33,008
Exercise of stock options........ - 53 53
Net income....................... 10,325 10,325
-----------------------------------------------------------------------------------------------
Balance at February 1, 1997...... 1 1 - 58 26 17 - - - 23,054 20,479 (250) 43,386
Exercise of stock options........ 5 5,507 5,512
Repurchase and exchange of Old
Common Stock................... (58) (31) (17) 2 19 (8,563) (85,440) (94,088)
Redemption and exchange of Old
Preferred Stock................ (1) (1) (19,998) (6,025)
(26,025)
Common shares issued in
Units Offering................. 4 386 390
Repayment of stockholder loans... 250 250
Issuance of new common stock..... 1 13 13,049 13,063
Offering expenses attributable to
the sale of common stock ...... (632) (632)
Preferred stock dividends........ (3,033) (3,033)
Accretion of preferred stock..... (187) (187)
Net loss......................... (4,891) (4,891)
------------------------------------------------------------------------------------------------
Balance at January 31, 1998...... - - - - - 3 36 - 12,803 (79,097) - (66,255)
Preferred stock dividends........ (4,585) (4,585)
Accretion of preferred stock..... (162) (162)
Net loss......................... (3,395) (3,395)
------------------------------------------------------------------------------------------------
Balance at January 30,1999....... - - - - - $3 $36 - $12,803 $(87,239) - $(74,397)
================================================================================================
See notes to consolidated financial statements.
F-7
ANVIL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
1. THE COMPANY
On January 28, 1995, Anvil Holdings, Inc., a Delaware corporation ("Holdings"),
and its wholly-owned subsidiary, Anvil Knitwear, Inc., a Delaware corporation
("Anvil"), acquired the assets and assumed certain liabilities of the Anvil
Knitwear division (the "Predecessor") from McGregor Corporation ("McGregor")
(the "Acquisition").
The Company is engaged in the business of designing, manufacturing and marketing
high quality activewear for men, women and children. The Company markets and
distributes its products, under private label and brand names, 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.
On January 31, 1997, Anvil, through its subsidiary, Cottontops, Inc.
("Cottontops") completed the acquisition of certain assets and assumption of
certain liabilities of a marketer and distributor of activewear products which,
prior to the acquisition, sold finished activewear products to the Company as
well as directly into the retail market. The acquisition has been accounted for
using the purchase method of accounting. The Company began consolidating the
results of operations of Cottontops effective February 2, 1997.
2. RECAPITALIZATION AND REFINANCING
Effective March 14, 1997, the Company completed a significant recapitalization
and refinancing plan, the major components of which are as follows:
On March 14, 1997, the Company, Anvil VT, Inc., Vestar Equity Partners, L.P.,
399 Venture Partners, Inc. and certain of its employees and affiliates
(collectively, "399 Venture"), certain management investors (the "Management
Investors") and other existing shareholders of the Company (collectively, the
"Existing Shareholders") and Bruckmann, Rosser, Sherrill & Co., L.P. and certain
of its employees and affiliates (collectively, "BRS") completed a reorganization
(the "Recapitalization") pursuant to which: (i) the Company redeemed or
repurchased a substantial portion of its outstanding shares of capital stock;
(ii) BRS contributed $13,063 for the purchase of new common stock; (iii) 399
Venture and the Management Investors reinvested a portion of their existing
shares of common stock of the Company, which were converted into shares of newly
issued common stock, and (iv) 399 Venture exchanged a portion of its existing
preferred stock for 3,333 shares of Senior Exchangeable Preferred Stock and new
common stock.
Concurrently with the Recapitalization, the Company sold 30,000 Units consisting
of (i) $30,000, 13% Senior Exchangeable Preferred Stock due 2009 and (ii)
390,000 shares of Class B common stock (the "Units Offering"). The Senior
Exchangeable Preferred Stock was recorded at $27,656
F-8
representing the proceeds of $30,000, less $390 allocated to the Class B common
stock and $1,954 of expenses attributable to the Units offering. Additionally,
on March 14, 1997, Anvil sold $130,000 of 10-7/8% Senior Notes due 2007 ("Senior
Notes") in connection with the Recapitalization, repaid its borrowings under an
existing credit agreement (the "Old Credit Agreement") and entered into an
Amended and Restated Credit Agreement ("the "Credit Agreement"- See Note 8).
The net proceeds from the Units and Notes offerings and borrowings under the
Credit Agreement were used by the Company to: (i) redeem the outstanding common
stock and preferred stock; (ii) repay the balance outstanding under the Old
Credit Agreement; (iii) repay the subordinated debt; (iv) pay fees and expenses;
(v) pay a management bonus; and (vi) pay amounts due in accordance with the
Phantom Equity Plan (see Note 18).
During the year ended January 31, 1998, the Company recorded a special
compensation charge of $10,915, which consists of the compensation recorded upon
exercise of options by members of management, payment of a special transaction
bonus to management and payments under a then existing equity buy-out plan to
members of management.
The following summarizes the sources and uses of funds relating to the
Recapitalization
SOURCES: (in millions)
Borrowings under the Credit Agreement .......................... $ 33.3
Senior Notes due 2007 .......................................... 130.0
Units .......................................................... 26.7
Equity Contribution ............................................ 13.1
Other .......................................................... .6
------
Total sources ...................................... $203.7
======
USES:
Repay borrowings under the existing credit agreement ........... $ 61.1
Repay the Subordinated Note .................................... 9.5
Redeem or exchange the Old Preferred Stock ..................... 22.7
Repurchase shares of Old Common Stock .......................... 92.3
Payment under the Phantom Equity Plan .......................... 5.3
Payment of Management Bonus .................................... 0.5
Fees and expenses .............................................. 12.3
------
Total uses ......................................... $203.7
======
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR--The Company's operations are on a "52/53-week" fiscal year ending
on the Saturday closest to January 31. The year ended February 1, 1997 includes
53 weeks.
BASIS OF PRESENTATION--The accompanying consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries, after
elimination of significant intercompany accounts and transactions.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles 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
F-9
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS--Cash and cash equivalents include all highly liquid
investments with an original maturity of 90 days or less.
PROPERTY, PLANT AND EQUIPMENT--Property, plant and equipment is being
depreciated for financial reporting purposes principally using the straight-line
method over the estimated useful lives of the assets, ranging from 4 to 25
years. Leasehold improvements are amortized over the lesser of the estimated
useful life or the term of the lease.
INVENTORIES--Inventories are stated at the lower of cost or market, with cost
being determined by the first-in, first-out (FIFO) method.
INTANGIBLE ASSETS--Intangible assets of the Company consist of trademarks and
goodwill. Trademarks are being amortized over their estimated useful life of 17
years. Goodwill is being amortized over the period of expected benefit of 35
years.
EVALUATION OF LONG-LIVED ASSETS--Long-lived assets are continually assessed for
recoverability and particularly whenever events or changes in circumstances
indicate that an asset may have been impaired. In evaluating an asset for
recoverability, the Company estimates the future cash flows expected to result
from the use of the asset and eventual disposition. If the sum of the expected
future cash flows (undiscounted and without interest charges) is less than the
carrying amount of the asset, an impairment loss, equal to the excess of the
carrying amount over the fair value of the asset, is recognized. There were no
adjustments to the carrying amount of long-lived assets resulting from the
Company's evaluation for any periods presented in the accompanying financial
statements, except as described in Note 5.
DEFERRED FINANCING FEES--Included in other assets are deferred financing fees
(approximately $4,800 and $4,100 at January 31, 1998 and January 30, 1999,
respectively), which were being amortized over approximately six years to
coincide with the term of the Credit Agreement. As discussed in Note 8, on March
11, 1999, the Company entered into a new credit facility, and accordingly, the
unamortized balance of deferred financing fees will be written off during the
first quarter of fiscal 1999.
INTEREST RATE SWAPS--Gains and losses related to interest rate swaps that
qualify as hedges of existing liabilities are included in the carrying amount of
those liabilities and are ultimately recognized in income as adjustments to the
recorded interest expense. The Company does not hold or issue financial
instruments for trading or speculative purposes.
REVENUE RECOGNITION--Revenue is recognized at the time merchandise is shipped.
Allowances for sales returns and discounts are provided when sales are recorded.
INCOME TAXES--Income taxes have been accounted for in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 109, ACCOUNTING FOR INCOME TAXES,
which requires the use of an asset and liability approach for financial
accounting and reporting of income taxes.
EARNINGS PER SHARE--Basic income (loss) per share is computed based upon the
average
F-10
outstanding shares attributable to the Class A and Class B Common shares after
the Recapitalization, and assuming the Recapitalization took place at the
beginning of the fiscal year ended January 31, 1998.
RECLASSIFICATIONS--To facilitate comparison with the current fiscal year,
certain reclassifications have been made to prior year's financial statements.
NEW ACCOUNTING STANDARDS--In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities." This Statement establishes
accounting and reporting standards requiring that derivative instruments be
recorded in the balance sheet as either an asset or liability measured at fair
value and requires that changes in a derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. SFAS
No. 133 is effective for fiscal years beginning after June 15, 1999; however, it
may be adopted earlier. It cannot be applied retroactively to financial
statements of prior periods. The Company has not yet quantified the impact on
its financial statements nor determined the timing or method of adopting SFAS
No. 133.
4. INVENTORIES
Inventories, valued at lower of cost or market, consist of the following:
JANUARY 31, JANUARY 30,
1998 1999
---- ----
Finished goods.................... $ 22,505 $ 26,313
Work-in-process................... 9,830 9,441
Raw materials and supplies........ 9,754 5,602
--------- ---------
$ 42,089 $ 41,356
========= =========
5. PROPERTY, PLANT AND EQUIPMENT
During the year ended February 1, 1997 the Company recorded a charge of $600
(equal to the amount by which the carrying value exceeded the estimated
realizable value) for the disposal of certain fixed assets. Property plant and
equipment consists of the following:
JANUARY 31, JANUARY 30,
1998 1999
---- ----
Land........................................... $ 849 $ 849
Buildings and improvements..................... 14,763 15,271
Machinery, equipment, furniture and fixtures... 40,567 45,391
--------- --------
56,179 61,511
Less accumulated depreciation and amortization. (17,990) (23,975)
--------- --------
$ 38,189 $ 37,536
========= ========
F-11
6. INTANGIBLE ASSETS
Intangible assets consist of the following:
JANUARY 31, JANUARY 30,
1998 1999
---- ----
Trademarks--net of accumulated
amortization of $858 and $1,144...... $ 4,000 $ 3,714
Goodwill--net of accumulated
amortization of $1,794 and $2,466.... 21,487 20,815
--------- --------
$ 25,487 $ 24,529
========= ========
7. ACCRUED EXPENSES
JANUARY 31, JANUARY 30,
1998 1999
---- ----
Accrued expenses consist of the following:
Accrued wages and bonuses........ $ 3,273 $ 2,906
Accrued interest payable......... 5,715 5,788
Other............................ 6,361 7,958
-------- -------
$ 15,349 $16,652
======== =======
8. CREDIT AGREEMENTS
THE CREDIT AGREEMENT
In March 1997, Anvil entered into the Credit Agreement providing a $55,000
revolving credit facility, with a sublimit of $5,000 for letters of credit
expiring March 14, 2002, subject to certain maximum levels of borrowings based
upon asset levels. Anvil used $33,250 of the borrowings under the Credit
Agreement to finance a portion of the Recapitalization. Effective March 11,
1999, all amounts due under the Credit Agreement were repaid from the proceeds
of a new loan agreement (the "Loan Agreement") more fully described below.
Interest on borrowings under the Credit Agreement was payable at a rate equal
to LIBOR or the Alternate Base Rate (defined as the higher of (i) the lender's
prime rate and (ii) the Federal Funds rate plus 0.5%), each plus an applicable
margin ranging from 1.25% to 2.50% for LIBOR loans and 0.25% to 1.50% for
Alternate Base Rate loans, determined based upon attainment of certain financial
ratios.
At January 31, 1998 and January 30, 1999, the amounts outstanding under the
Credit Agreement were $21,700 and $31,500, bearing interest at 7.97% and 7.94%,
respectively. The weighted average interest rate on such debt during each of the
years ended January 31, 1998 and January 30, 1999 was approximately 7.88%. The
Company has classified $21,700 and $25,000 as a long-term liability at January
31, 1998 and January 30, 1999, respectively which represents amounts the Company
anticipates to continually refinance.
F-12
NEW LOAN AGREEMENT
On March 11, 1999, Anvil entered into a Loan and Security Agreement (the "Loan
Agreement") providing for a maximum credit facility of $60,000 consisting of a
term loan (the "Term Loan") and a revolving credit facility (the "Revolving
Credit Facility"). The Term Loan is in the principal amount of $11,725, payable
in 20 equal quarterly principal installments of $586, commencing July 1, 1999.
The Loan Agreement eliminated the covenant ratio issues under the Credit
Agreement.
Anvil also borrowed $19,566 under the Revolving Credit Facility provided by the
same lender. The net proceeds of the Loan Agreement were used to repay all
amounts due under the Credit Agreement. The Revolving Credit Facility expires
March 11, 2002, and amounts due under it and the Term Loan are secured by
substantially all the inventory, receivables and property, plant and equipment
of Anvil. Holdings and Cottontops 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.
Holdings and Cottontops guaranty amounts due under the Loan Agreement.
9. SENIOR NOTES
On March 14, 1997, Anvil issued $130,000 of 10-7/8% Senior Notes (the "Senior
Notes") due March 15, 2007 and received proceeds of $126,100 net of debt
discount of $3,900. Interest on the notes is payable semiannually on March 15
and September 15. Prior to March 15, 2000, the Company may redeem up to 40% of
the aggregate principal amount of the Senior Notes outstanding at a redemption
price of 110%. The Company may redeem the Senior Notes at a redemption price of
105.438%, 103.625%, and 101.813% at any time during the 12-month period
beginning on March 15, 2002, 2003 and 2004, respectively and at 100% thereafter.
The Senior Notes are guaranteed by the Company and Cottontops, are senior
unsecured obligations of the Company and rank senior in right of payment to all
subordinated indebtedness of the Company and PARI PASSU in right of payment with
all existing and future senior indebtedness, including borrowings under the Loan
Agreement. The indenture relating to the Senior Notes contains certain
covenants, including restrictions on additional indebtedness, certain asset
sales, and the payment of dividends.
Anvil completed an exchange offer which expired August 22, 1997, pursuant to
which its 10-7/8% Series A Senior Notes were exchanged on a dollar-for-dollar
basis for its 10-7/8% Series B Senior Notes, due 2007. Pursuant to the exchange
offer, $129,000 principal amount were validly tendered and exchanged. The terms
and conditions of the aforementioned Series B securities are substantially
identical to the Series A securities for which they were exchanged, except that
the Series B securities have been registered under the Securities Act of 1933,
as amended.
10. RELATED PARTY TRANSACTIONS
Concurrent with the Acquisition, the Company entered into a management agreement
with Vestar Equity Partners L.P. ("Vestar"), Citicorp Venture Capital, Ltd.
("CVC") and Culligan through January 2005, whereby Vestar provided advisory and
consulting services to the Company and its subsidiaries, and CVC and Culligan,
in turn, provided consulting services to Vestar, when requested
F-13
in connection with the fulfillment by Vestar, of Vestar's obligation to the
Company. In exchange for these services, the Company paid management fees
aggregating $472 during the year ended February 1, 1997. Pursuant to the terms
and conditions of the Recapitalization and the Units and Notes Offerings, the
management agreement was terminated.
Anvil, Holdings and Cottontops have entered into a management agreement with BRS
(the "Management Agreement"), effective as of the Recapitalization, whereby BRS
is to provide certain advisory and consulting services in relation to the
affairs of Anvil, Holdings and Cottontops, including services in connection with
strategic financial planning, and the selection, retention and supervision of
investment bankers or other financial advisors or consultants. Annual fees under
the Management Agreement are $250.
Holdings' Articles of Incorporation now provide for an additional special
dividend on its Series 1-Class A Common Stock, all of which is held by 399
Venture and its affiliates. In lieu of such dividend, Holdings has agreed to pay
399 Venture financing fees in the aggregate annual amount of $250 from the date
of the Recapitalization.
11. EXTRAORDINARY ITEMS
In connection with the Acquisition (see Note 1), the Company issued a
subordinated promissory note (the "Note") to Culligan in the principal amount of
$7,500, due January 30, 2005, or earlier upon a change in ownership, as defined.
The Note was recorded at the fair value of the property received and the
discount ($1,600 at February 1, 1997) was being amortized on a straight-line
basis over the term of the Note. Principal and interest on the Note was prepaid
on March 14, 1997. In connection with such repayment, the Company recorded an
extraordinary loss of $1,585, before a tax benefit of $634 representing the
balance of the unamortized debt discount.
In connection with the repayment of the Old Credit Agreement (See Note 8), the
Company recorded an extraordinary charge of $3,010 before a tax benefit of
$1,204, to write off the balance of related deferred financing fees.
The Company will record an extraordinary charge of approximately $480 (net of
taxes) during the first quarter of fiscal 1999, in connection with the Loan
Agreement and concurrent repayment of repayment of the Credit Agreement (See
Note 8). Such amount represents the write off of deferred financing fees and
other costs related to that refinancing.
12. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
YEAR ENDED
FEBRUARY 1, JANUARY 31, JANUARY 30,
1997 1998 1999
---- ---- ----
Current:
Federal.............. $ 4,337 $ (3,335) $ (680)
State and local...... 624 (477) --
Deferred............. 1,922 551 (1,584)
-------- -------- -------
$ 6,883 $ (3,261) $(2,264)
======== ======== =======
F-14
Deferred income taxes (benefit), resulting from differences between accounting
for financial statement purposes and accounting for tax purposes were as
follows:
YEAR ENDED
-----------------------------------
FEBRUARY 1, JANUARY 31, JANUARY 30,
1997 1998 1999
------- ------- -------
Depreciation ............................... $ 2,268 $ 1,215 $ 760
Expenses capitalized to inventory .......... 57 (397) 85
Amortization of goodwill ................... 300 303 144
Accretion of Subordinated Promissory Note .. (80) --
Insurance reserves ......................... (240) --
Accrued expenses not deductible until paid . (383) 70 (514)
Basis difference in Seller Note ............ -- (640) --
Net operating loss ......................... -- -- (2,059)
------- ------- -------
$ 1,922 $ 551 $(1,584)
======= ======= =======
A reconciliation of the statutory Federal tax rate and the effective rate is as
follows:
YEAR ENDED
-----------------------------------
FEBRUARY 1, JANUARY 31, JANUARY 30,
1997 1998 1999
------- ------- -------
Federal statutory tax rate ................. 35% 35% 35%
State and local taxes --net of
Federal income tax benefit ............. 5 5 5
------- ------- -------
40% 40% 40%
======= ======= =======
The tax effects of temporary differences that give rise to a significant portion
of the deferred tax assets and liabilities are presented below:
JANUARY 31, JANUARY 30,
1998 1999
------- -------
Deferred tax assets:
Inventories ................................... $ 1,583 $ 662
Net operating loss carryforward ............... -- 3,824
Reserves not currently deductible ............. 687 1,450
Accounts receivable reserves and other ........ 240 240
------- -------
Total deferred tax assets ................ 2,510 6,176
------- -------
Deferred tax liabilities:
Property, plant and equipment ................. (2,683) (3,389)
Goodwill and trademarks ....................... (1,930) (1,887)
------- -------
Total deferred tax liabilities .......... (4,613) (5,276)
------- -------
Net deferred tax liability .................... $(2,103) $ (900)
======= =======
At January 30, 1999, the Company had an aggregate net operating loss
carryforward of approximately $9,600, with expirations beginning in the year
2013
F-15
13. 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. For the
year ended January 31, 1998 the computation assumes that the Recapitalization
had occurred at the beginning of that fiscal year. Following is the computation
of the per share amounts as presented in the Statement of Operations:
YEAR ENDED
--------------------------
JANUARY 31, JANUARY 30,
1998 1999
---------- ----------
Net (loss) attributable to common stockholders .... $ (12,784) $ (12,215)
========== ==========
Preference per Class A common share ............... $ 13.10 $ 14.61
Net (loss) per common share ....................... (3.29) (3.15)
---------- ----------
Net income per Class A common share................ $ 9.80 $ 11.46
========== ==========
Net (loss) per Class B common share .............. $ (3.29) $ (3.15)
========== ==========
The following table presents basic net income (loss) per share for the year
ended January 31, 1998 using the historical shares outstanding, and is computed
by dividing net income (loss) applicable to each class of Common Stock by the
actual average number of commons shares outstanding during that year. Such
computation does not give retroactive effect to the Recapitalization.
FISCAL YEAR ENDED
JANUARY 31,
1998
Net (loss) ............................................... $ (4,891)
Less: preferred dividends ................................ (2,805)
Class A common preference ....................... (3,021)
--------
Net (loss) applicable to common stockholders ............. $(10,717)
========
Preference per Class A common share ...................... $ 9.67
Net income (loss) per common share (all classes) ......... (2.35)
--------
Net income per Class A common share ...................... $ 7.32
========
Net income (loss) per Class B common share .............. $ (2.35)
========
Weighted average shares used in computation
of basic income (loss) per share:
Class A Common ..................................... 928
Class B Common ..................................... 3,633
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
In March 1995, Anvil entered into interest rate swap agreements for an aggregate
notional amount of $25,000 to manage its interest rate risk. At January 30, 1999
the amount was reduced to $10,000 as the result of the maturities and
non-renewals. Under these interest rate swaps, Anvil receives interest at LIBOR,
reset quarterly, and pays interest at the weighted average fixed rate of 7.3%.
Interest payments and receipts commenced September 1995 and occur quarterly. The
swap
F-16
agreements have terms of three and five years. The Company does not hold or
issue financial instruments for trading purposes.
The Company is exposed to credit-related losses in the event of nonperformance
by counterparties to swap agreements, but it does not expect any counterparties
to fail to meet their obligations given their high credit ratings. The fair
value of interest rate swaps at January 31, 1998 and January 30, 1999 is
approximately $534 and $345, respectively and reflects the estimated amount that
the Company would pay to terminate the contracts at such dates. The fair value
information has been obtained from dealer quotations.
The carrying amounts of all other financial instruments reported in the
accompanying consolidated balance sheets approximate their fair value.
Considerable judgment is required in interpreting certain market data to develop
estimated fair values for certain financial instruments. Accordingly, the
estimates presented herein are not necessarily indicative of the amounts that
the Company could realize in a current market exchange.
15. EMPLOYEE SAVINGS PLAN
The Company has a savings plan (the "Plan") under which eligible employees may
contribute up to 16%, subject to certain limitations, of their compensation. The
Company matches 100% of the contributions up to the first 3% and 50% of the next
3%. During the years ended February 1, 1997, January 31, 1998 and January 30,
1999, the Company made contributions to the Plan aggregating $1,059, $1,011 and
$1,022, respectively.
16. CAPITAL STRUCTURE
All shares of preferred and common stocks under the Company's old capital
structure were redeemed or exchanged in connection with the Recapitalization.
The capital structure at January 31, 1998 and January 30, 1999 was as follows:
REDEEMABLE PREFERRED STOCK--In connection with the Units Offering, in March
1997, the Company issued 1,200,000 shares of 13% Senior Exchangeable Preferred
Stock ("Redeemable Preferred Stock") due 2009. Total shares authorized are
2,300,000. Dividends accrue quarterly at 13% on the sum of the liquidation value
($25 per share) plus accumulated and unpaid dividends thereon. Through March 15,
2002 the Company may, at its option, pay dividends in cash or in additional
fully paid and non-assessable shares of Redeemable Preferred Stock having an
aggregate liquidation preference equal to the amount of such dividends. On any
scheduled dividend payment date, the Company may, at its option, but subject to
certain conditions, exchange all but not less than all of the shares of
Redeemable Preferred Stock then outstanding for the Company's 13% Subordinated
Exchange Debentures due 2009 ("Exchange Debentures"). The Redeemable Preferred
Stock or the Exchange Debentures, if issued, will be redeemable at the option of
the Company, in whole or in part, at any time on or after March 15, 2002, at the
redemption price of 101% of the liquidation preference or aggregate principal
amount thereof (as the case may be), plus, in the case of the Redeemable
Preferred Stock, an amount equal to all accumulated and unpaid dividends per
share to the date of purchase, or in the case of the Exchange Debentures, an
amount equal to all accumulated and unpaid interest thereon to the date of
purchase. On March 15, 2009, the Company is required to redeem all outstanding
shares of the Redeemable Preferred Stock at an amount equal to the liquidation
preference and all accumulated and unpaid dividends. The Redeemable Preferred
Stock
F-17
was recorded at an amount equal to the proceeds (net of discounts) less an
amount attributable to the Class B Common Stock issued in Connection with the
Units Offering.
The Class A Common Stock accretes liquidation value at the rate of 12.5% per
annum, compounded quarterly, payable in shares of Class A Common Stock.
Holders of Class B Common Stock are entitled to one vote per share on all
matters to be voted on by stockholders, while holders of Class A Common Stock
and Class C Common Stock have no right to vote on any matters except in special
circumstances, such as a merger, consolidation, recapitalization or
reorganization of the Company.
As required by the Certificate of Designations relating to the 13% Senior
Exchangeable Preferred Stock, the Company has paid stock dividends aggregating
301,626 shares ($7,541 liquidation value) through the year ended January 30,
1999.
Holdings completed an exchange offer which expired August 26, 1997 (as
extended), pursuant to which its 13% Series A Senior Exchangeable Preferred
Stock was exchanged on a share-for-share basis for its 13% Series B Senior
Exchangeable Preferred Stock, due 2009. Pursuant to the exchange offer,
1,198,566 shares ($29,964 liquidation value) were validly tendered and
exchanged. The terms and conditions of the aforementioned Series B securities
are substantially identical to the Series A securities for which they were
exchanged, except that the Series B securities have been registered under the
Securities Act of 1933, as amended.
17. STOCK OPTION PLAN AND AGREEMENTS
STOCK OPTION PLAN--During fiscal 1997, the Company adopted a stock option plan
which authorizes the granting of options for approximately 5.0% of the
outstanding Class B Common Stock on a fully diluted basis (the " Stock Option
Plan"). The options under the Stock Option Plan may be granted to certain
members of management and key employees and are subject to time and performance
vesting provisions. The exercise price of such options is the fair market value
of the Common Stock as of the date of grant. Options to purchase 90,000 shares
were granted to certain officers and key employees on May 29, 1997 at an
exercise price of $1 per share, the fair value at date of grant. These options
(none of which are exercisable) are outstanding at January 30, 1999 and January
31, 1998. No options were granted, exercised, or canceled in fiscal 1998. The
weighted average fair value of options granted in fiscal 1997 was $1.00. The
fair value of each stock option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in fiscal 1997: risk-free interest rate of 5.75%;
expected dividend yield of 0%; expected life of 10 years; and expected
volatility of 0%.
The Company accounts for its stock option plans in accordance with Accounting
Principles Board Opinion No. 25, under which no compensation cost is recognized
for stock option awards. Had compensation cost been determined consistent with
Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION ("SFAS 123"), the effect on the Company's results of operations
would have been less than $10 for fiscal 1997 and fiscal 1998, which is
immaterial to the financial statements. The SFAS 123 method of accounting has
not been applied to options granted under the prior stock option plan since all
options under that plan have been exercised in connection with the
Recapitalization.
F-18
PHANTOM EQUITY PLAN--As provided for in the "Phantom Equity Plan" upon sale of
the Company or under certain other circumstances, certain Management Investors
were to be paid 5% of the excess of the aggregate sale price over $100,000. In
connection with the Recapitalization, the Management Investors were paid $5,300
in accordance with the Phantom Equity Plan at which time the Phantom Equity Plan
was terminated. The $5,300 was charged to expense as "special compensation" in
the year ended January 31, 1998. See Note 2.
18. COMMITMENTS AND CONTINGENCIES
LEASES--The Company is obligated under various leases for equipment, office
space and distribution facilities which expire at various dates through 2002.
Future minimum rental commitments under noncancelable operating leases, with
terms in excess of one year, are as follows:
Fiscal Year Ending:
2000............................................. $1,279
2001............................................. 1,062
2002............................................. 696
2003............................................. 396
2004............................................. 86
-------
Total....................................... $ 3,519
=======
Rental expense for the years ended February 1, 1997 and January 31, 1998 and
January 30, 1999 was $620, 956 and $1,218, respectively.
LITIGATION--The Company is a 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 or results of operations of the
Company.
Prior to the Acquisition, groundwater contamination was discovered at the
Asheville, North Carolina facility. In 1990, Winston Mills, Inc., a subsidiary
of McGregor, entered into an Administrative Order on Consent ("AOC") with the
North Carolina Department of Environment, Health and Natural Resources ("DEHNR")
concerning such contamination. Since that time, McGregor has been conducting
investigative and corrective action under DEHNR oversight and has remained
responsible to the DEHNR with respect to the contamination that is subject to
the AOC. While the total cost of the cleanup at the facility will depend upon
the extent of contamination and the corrective action approved by the DEHNR,
preliminary cleanup cost estimates range from $1.0 to $4.0 million. McGregor
continues to be a party to the Asheville, North Carolina facility's hazardous
waste permit and Culligan, an affiliate of McGregor, has guaranteed McGregor's
obligations under the AOC. McGregor also contractually agreed to fully indemnify
the Company with respect to the contamination as part of the terms of the
Acquisition. This indemnity is guaranteed by Culligan and by Astrum (now known
as Samsonite Corporation) in the event Culligan is unable to perform its
guarantor obligations. The Company could be held responsible for the cleanup of
this contamination if McGregor, Culligan and Samsonite were all to become unable
to fulfill their obligations to DEHNR and the Company was not successful in
obtaining indemnification for the clean-up from either McGregor, Culligan or
Astrum.
F-19
McGregor also agreed to fully indemnify the Company for any costs associated
with certain other environmental matters identified at the time of the
Acquisition. The Company believes that, even if McGregor were unable to fulfill
its indemnification obligations, these other matters would not have a material
adverse effect on the Company. McGregor also agreed to indemnify the Company,
subject to certain limitations, with respect to environmental liabilities that
arise from events that occurred or conditions in existence prior to the
Acquisition. Culligan and Astrum have also guaranteed McGregor's obligations
under these indemnities.
EMPLOYMENT AGREEMENTS--The Company has entered into employment agreements which
currently expire January 31, 2000, with annual renewals thereafter, with certain
senior executives providing for minimal annual compensation, plus bonuses equal
to 4% of the Company's annual profits, as defined. At January 30, 1999, the
aggregate minimum obligation under the remaining terms of these employment
agreements is approximately $965. If an executive is terminated without cause,
or if the executive terminates his employment under certain circumstances, as
provided, the Company is liable for termination payments through the end of the
agreement. Additionally, under certain circumstances, the Company may be liable
for additional termination benefits up to a period not exceeding two years.
19. 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.
ANVIL KNITWEAR, INC. COTTONTOPS, INC.
----------------------- -------------------------
JANUARY 31, JANUARY 30, JANUARY 31, JANUARY 30,
1998 1999 1998 1999
---- ---- ---- ----
Current assets .................. $ 78,473 $ 83,908 $3,825 $ 882
========= ========= ====== ======
Total assets .................... $ 147,113 $ 148,626 $4,166 $1,863
========= ========= ====== ======
Current liabilities ............. $ 27,335 $ 30,333 $ 550 $ 287
========= ========= ====== ======
Long-term liabilities ........... $ 154,641 $ 158,192 $1,854 --
========= ====== ======
Total liabilities ............... $ 181,976 $ 188,525 $2,404 $ 287
========= ========= ====== ======
Stockholder's equity (deficiency) $ (34,863) $ (38,258) $1,762 $1,576
========= ========= ====== ======
Following is the summarized statement of operations data of Anvil and Cottontops
for the periods indicated:
ANVIL KNITWEAR, INC. COTTONTOPS, INC.
YEAR ENDED YEAR ENDED
------------------------------------- -------------------------
JANUARY 27, JANUARY 31, JANUARY 30, JANUARY 31, JANUARY 30,
1997 1998 1999 1998 1999
Net sales ............. $204,154 $ 214,867 $ 217,302 $ 3,731 $3,583
======== ========= ========= ======= ======
Operating income (loss) $ 24,705 $ 12,732 $ 12,626 $ (222) $ 85
======== ========= ========= ======= ======
Interest expense ...... $ 6,725 $ 16,415 $ 18,344 -- --
========= ======= ======
Net income (loss) ..... $ 11,037 $ (4,818) $ (3,395) $ (131) $ 62
======== ========= ========= ======= ======
F-20
Holdings and Cottontops have fully and unconditionally, jointly and severally
guaranteed the Series A Senior Notes and the Series B Senior Notes. Complete
financial statements and other disclosures concerning Anvil and Cottontops are
not presented because management has determined they are not material to
investors. Holdings has no independent operations apart from its wholly-owned
subsidiary, Anvil, and its sole asset is the capital stock of Anvil. Anvil is
Holding's only direct subsidiary. In addition to Cottontops, Anvil has three
other non-guarantor direct subsidiaries: Anvil (Czech), Inc., a Delaware
corporation, A.K.H., S.A., organized in Honduras and Livna, Limitada organized
in El Salvador, one non-guarantor indirect subsidiary, Anvil s.r.o., organized
in the Czech Republic (a direct subsidiary of Anvil (Czech), Inc.)
(collectively, the "Non-Guarantor Subsidiaries"). Other than as stated herein,
there are no other direct or indirect subsidiaries of the Company. Management
believes the Non-Guarantor Subsidiaries are inconsequential both individually
and in the aggregate.
20. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
FISCAL 1997 FISCAL 1998
QUARTER QUARTER
-------------------------------------------- --------------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
----- ------ ----- ------ ----- ------ ----- ------
Net sales ...................... $ 60,288 $ 51,745 $ 53,708 $ 49,126 $ 64,892 $ 62,183 $ 43,400 $ 46,827
Gross profit ................... 14,429 12,031 10,982 9,934 13,061 11,514 5,874 7,761
Operating profit (loss) ........ (2,864) 6,318 4,845 4,433 5,919 5,232 (564) 2,039
Income (loss) before extra-
ordinary item ................ (3,710) 1,222 341 13 822 454 (3,111) (1,560)
Net income (loss) .............. (6,467) 1,222 341 13 822 454 (3,111) (1,560)
Basic Income (loss) per share:
(Pro Forma in fiscal 1997)
Class A Common Stock:
Income (loss) before extra-
ordinary item ........... $ (0.82) $ 2.98 $ 2.87 $ 2.89 $ 3.15 $ 3.16 $ 2.34 $ 2.81
======== ======== ======== ======== ======== ======== ======== ========
Net income ............... $ (1.42) $ 2.98 $ 2.87 $ 2.89 $ 3.15 $ 3.16 $ 2.34 $ 2.81
======== ======== ======== ======== ======== ======== ======== ========
Class B Common Stock:
Income (loss) before extra-
ordinary item ........... $ (0.82) $ (0.14) $ (0.35) $ (0.44) $ (0.33) $ (0.44) $ (1.38) $ (1.01)
======== ======== ======== ======== ======== ======== ======== ========
Net Income ................ $ (1.42) $ (0.14) $ (0.35) $ (0.44) $ (0.33) $ (0.44) $ (1.38) $ (1.01)
======== ======== ======== ======== ======== ======== ======== ========
F-21
SCHEDULE II
ANVIL HOLDINGS, INC. AND SUSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Charged to Balance at
Beginning costs and other end of
Description of Year Expenses Accounts Deductions Year
----------- ------- -------- -------- ---------- ----
Year ended February 1, 1997
Allowance for doubtful accounts...... $ 451 $ 440 $ 17(a) $ 874
====== ====== ===== ======
Year ended January 31, 1998
Allowance for doubtful accounts...... $ 874 $ 400 $ 452(a) $ 822
====== ====== ===== ======
Year ended January 30, 1999
Allowance for doubtful accounts...... $ 822 $ 498 $ 685(a) $ 635
====== ====== ===== ======
- ----------
(a) Accounts written off as uncollectible.
S-1