Item 1. Business
Corporate Structure
As used herein, the "Company" refers to Anvil Holdings, Inc. ("Holdings"), including, in some instances, its wholly-owned subsidiary, Anvil Knitwear, Inc., a Delaware corporation ("Anvil"), and its other subsidiaries, as appropriate to the context.
The Company's current capital structure is the result of a 1997 recapitalization (the "Recapitalization") pursuant to which: (i) the Company redeemed or repurchased a substantial portion of its outstanding shares of capital stock; (ii) Bruckmann, Rosser, Sherrill & Co., L.P. and certain of its employees and affiliates (collectively, "BRS") purchased new common stock; (iii) 399 Venture Partners, Inc. and certain of its employees and affiliates (collectively, "399 Venture") and certain members of Management of the Company (the "Management Investors") reinvested a portion of their shares of capital stock of the Company in exchange for newly issued common stock; and (iv) 399 Venture exchanged a portion of its capital stock for Senior Exchangeable Preferred Stock and new common stock. During fiscal 2003, 399 Venture transferred its holdings in the Company to an affiliate, Court Square Capital, Ltd ("Court Square").
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, Anvil sold $130,000,000 of 107/8% Senior Notes due 2007 ("Senior Notes") in connection with the Recapitalization.
The Company's fiscal years end on the Saturday closest to January 31. Accordingly, when referring to the Company's fiscal years in this report, "fiscal 2003" refers to the year ended January 31, 2004, "fiscal 2002" refers to the year ended February 1, 2003, 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 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") and athletic shorts, supplemented with caps, towels, robes and bags. The Company markets and sells its products primarily to distributors and screen printers under the Anvil, Cotton Deluxe and TowelsPlus brand names, the Anvil logo, as well as 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 successful marketing of its products is dependent upon: (i) maintaining a broad range of high quality goods; (ii) strong relationships with customers and suppliers; (iii) flexible, vertically integrated manufacturing operations; (iv) 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 its competitors have not traditionally focused; (ii) responding quickly to market developments; (iii) regularly introducing new products; and (iv) providing a broad range of products, thereby permitting distributors to increase efficiency by reducing the number of vendors and deliveries. In addition, the Company continues to make significant investments to maintain and modernize its manufacturing and distribution facilities and to seek methods to improve quality, increase efficiency, reduce costs, manage inventories and shorten production cycles.
Business Strategy
The Company's objective is 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 will continue to offer high quality activewear in a variety of styles, colors, fabric weights and blends, enabling it to serve a number of market niches effectively. The Company expects to continue to expand its product offerings under its Anvil, Cotton Deluxe and TowelsPlus brands and the Anvil logo, capitalizing on the growth in the activewear market. In addition, the Company seeks to strengthen its position in the activewear market by introducing products to supplement its traditional activewear business.
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, and enhancing "pull through" by the distributors' customers. In fiscal 2003, sales to domestic distributors accounted for approximately 77% of the Company's net sales. In the Company's experience, distributors typically place larger orders, purchase a broader product mix, maintain higher inventory levels and develop more predictable order and re-order patterns than certain of its other customers. Nevertheless, the Company continues to actively seek to broaden its customer base to meet competition in the diverse market place. The Company estimates that distributors resell products to more than 30,000 smaller screen printers, embroiderers and other customers. The Company's broad product offerings have enabled it to more effectively service its customers and satisfy their disparate preferences.
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 most of 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 efficiency enables it to provide its customers with low cost, quality products.
Continue to Control Costs and Improve Manufacturing. The Company continues to make capital expenditures to maintain and modernize its manufacturing and distribution facilities and explore methods to improve quality, increase efficiency, reduce costs, manage inventories and shorten production cycles. The Company believes it can improve its operating results by: (i) maximizing the use of offshore manufacturing operations; and (ii) continually improving its textile manufacturing processes.
Capitalize on the Growth of the Activewear Market. The Company believes that sales of activewear products have been, and will continue to be driven 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 continuing emphasis on physical fitness.
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") and athletic shorts, supplemented with caps, towels, robes and bags. This broad array of casual knitwear and athletic wear is marketed and sold by the Company under its Anvil, Cotton Deluxe and TowelsPlus brand names and the Anvil logo, as well as under private labels. The Company manufactures its products in a variety of fabrics and fabric blends. Recently, greater emphasis has been placed on sales of finished products
purchased from outside manufacturers. Prior to their ultimate resale to the consumer, the Company's products typically are imprinted or embroidered with logos, designs or characters.
Basic T-shirts and Specialty Products. Basic T-shirts and specialty products comprise the Company's principal source of revenues. The basic T-shirt was the first product introduced by the Company in the early 1970s. In addition to basic T-shirts, the Company also manufactures a variety of specialty T-shirts and other specialty products. This category accounted for approximately 78% of the Company's net sales in fiscal 2003.
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. Henleys are collarless knit shirts, which are produced in both short and long sleeve versions. This category accounted for approximately 18% of the Company's net sales in fiscal 2003.
Other Products. The Company's other products include, caps, towels, robes and bags, all of which the Company sources as finished products. This category accounted for approximately 4% of the Company's net sales in fiscal 2003.
Sales and Marketing
The Company markets its products primarily through a direct salesforce complemented by a sales support staff and the Company's marketing department.
The Company seeks to differentiate itself from other activewear manufacturers by marketing niche products to its customers and encouraging its customers to purchase a broader product mix. Recent market trends have necessitated increased emphasis on low-priced basic T-shirts, and this category has grown as a percentage of the Company's sales. However, Management believes that offering higher priced products with more style elements to its customers, has helped the Company to compete more effectively and to service the large and middle-tier wholesale T-shirt distributor market. Nevertheless, in order to keep up with changing market dynamics, Management is also actively seeking to expand and diversify its existing customer base.
Customers
The Company markets its products primarily to distributors, a wide range of screen printers and private label customers. The Company also sells a small percentage of its products directly to retailers. The Company currently services over 200 customers, of which 20 account for approximately 80% of the Company's net sales. One such customer, Broder Brothers, accounted for approximately 33% of the Company's net sales in fiscal 2003. No other individual customer accounted for more than 10% of the Company's net sales during fiscal 2003.
Raw Materials
The Company's primary raw material is cotton yarn. The Company does not spin its own yarn. Instead, the Company purchases substantially all of its yarn pursuant to purchase orders from a number of domestic spinners. One individual spinner accounted for approximately 40% of the Company's purchased yarn in fiscal 2003. The vast majority of the yarn used by the Company is readily available and can be purchased 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 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 that sound relationships with each of its suppliers allow the Company to order quantities of yarn at 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 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's principal competitors include several domestic and foreign manufacturers of activewear, some of which are larger and have greater financial and other resources than the Company. Increased competition has caused many domestic apparel manufacturers to move their manufacturing operations offshore to lower costs. The Company currently performs all of its cutting and sewing activities offshore.
The Company provides its customers with a broad array of branded and private label niche products at competitive prices on a timely basis. The Company believes that its overall turnaround time is well-regarded in the industry and provides a competitive advantage. The Company also believes that its strategy of offering a broader product mix including higher quality, niche products, and use of lower-cost offshore manufacturing operations, should enable it to continue to compete effectively in its industry market segment.
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. Accordingly, all quotas will be phased out by the year 2005. To date, only a small amount of 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 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.
Under the United States-Caribbean Basin Trade Partnership Act (the "Act"), effective October 1, 2000, quotas and duties were eliminated on apparel imported from certain Caribbean basin countries, provided such apparel is made from U.S. fabric (made from U.S. yarn) formed and cut in the United States. The same exemption from quotas and duties applies to apparel made from U.S. fabric cut in a Caribbean basin country if U.S. thread is used. This Act also exempts a limited amount of knit apparel (other than outerwear T-shirts) made from regional fabric (made from U.S. yarn), and T-shirts (other than underwear T-shirts) using fabric (made from U.S. yarns) formed in a Caribbean basin country.
Employees
At January 31, 2004, the Company, including its offshore subsidiaries, employed a total of 4,612 people (172 full-time salaried employees and 4,440 full-time and part-time hourly employees) in the following areas: manufacturing and distribution: 4,491; finance and administration: 76; and sales and marketing: 45. Of the Company's 4,612 employees, 906 are employed in the United States and 3,706 at offshore locations.
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, Cotton Deluxe, Towels Plus and the Anvil logo as well as 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 2004 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.
In 1990, Winston Mills, Inc., a subsidiary of McGregor Corporation ("McGregor") and a predecessor of the Company, entered into an Administrative Order on Consent ("AOC") with the North Carolina Department of Environment, Health and Natural Resources ("DEHNR") concerning certain groundwater contamination discovered at its Asheville, North Carolina facility. 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 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 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 of the Anvil business (the "Acquisition"). This indemnity is guaranteed by Culligan and by Astrum International Corp. (now known as Samsonite Corporation), an affiliate of McGregor, 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 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 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.
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 or dyed, from purchased yarn, at its domestic textile facility, and then cutting and sewing such fabric at its offshore facilities. Cottontops operates a small dyehouse and a small screen printing facility, both in Farmville, North Carolina. The Company utilizes offshore and domestic contractors as it deems necessary.
Textile Facility Operations. The Company conducts textile operations at its owned facility located in Asheville, North Carolina. Yarn is received at the textile facility, where circular knitting machines knit the yarn into tubes of basic fabric constructions, while flat and circular knitting machines are used to 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 or dyeing. Substantially all of the Company's activewear products are either bleached to remove the color of natural cotton or dyed for colored products. The Company's textile facility contains 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 facility operated near capacity during fiscal 2003.
Cutting and Sewing Facilities. Cutting is conducted at leased facilities located in Honduras and El Salvador. The Company's sewing operations are conducted at three leased facilities located in Honduras and El Salvador and at offshore contractors. Fabric produced at the Company's textile facility is shipped to cutting facilities where it is cut and then transferred to the sewing facilities for assembly. During fiscal 2003, the Company's cutting and sewing facilities operated near capacity.
Distribution Operations. The Company performs substantially all of its distribution functions at its owned centralized distribution facility located in Dillon, South Carolina. This centralized distribution facility enables the Company to provide efficient and responsive customer service and to efficiently manage inventory.
The following table sets forth certain information regarding the Company's facilities:
(1)The lease for the Company's executive office space expires in 2008.
(2)The lease for this facility expires in 2007.
(3)The lease for this facility expires in 2005
(4)The lease for this facility expires in 2006 In addition to the above facilities, the Company owns a 225,000 square foot former textile facility in Kings Mountain, North Carolina and is committed to lease of a former 149,000 square foot cutting and sewing facility in Mullins, South Carolina. As a result of the consolidation of its textile operations into its Asheville facility and the relocation of cutting and sewing to offshore locations, neither of these facilities is being significantly utilized, and the Company is attempting to dispose of them.
Management estimates that capital expenditures in fiscal 2004 and thereafter will aggregate approximately $6,000,000 annually. 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. Management of the Company believes that its ongoing maintenance and improvement program for its existing manufacturing facilities, will 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.
Information Technology. The Company continues its commitment to the growth and modernization of its information technology systems through the upgrading of both its purchased and in-house developed systems and equipment. This year's activities include major upgrades to several of the Company's purchased systems which support textile manufacturing, planning and distribution. Next under consideration are state of the art "high availability" backup systems, for both equipment and software, to ensure constant data and processing access for all Company operations. The Company will continue expanding its internet technology. Customers, vendors, contractors and the Company's sales force with internet access will have the ability to access selected parts of Anvil's database. There are also plans to complete the automation of the cutting facilities using radio frequency to track production from receipt of roll goods to sewing. Anvil's advance order entry, allocation and customer service systems tie into its warehouse management system using radio frequency and also tie into its customers' automatic replenishment and EDI systems. The Company's planning and scheduling system has allowed it to optimize available manufacturing resources (textile and garment) which has helped reduce lead times and inventories and improve the timeliness of deliveries. The system is driven by the Company's
in-house forecasting system as well as by customer orders. The Company has installed hardware and contracted for satellite communications service between its offshore and domestic locations.
Item 3.
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, liquidity, business or results of operations of the Company. See Item 1. "Business-Environmental Matters," above.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5.
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 23, 2004 there were 34 record holders of the Class A Common and 38 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.
As required by the Certificate of Designations relating to the Redeemable Preferred Stock, the Company has paid stock dividends aggregating 1,075,782 shares ($26,895,000 liquidation value) through the year ended January 31, 2004.
Item 6.
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 Company as of the dates and for the periods shown. The selected historical statement of operations data of the Company for fiscal years 2001 through 2003 and the balance sheet data for fiscal years 2002 and 2003 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 historical statement of operations data of the Company for fiscal years 1999 and 2000 and the balance sheet data for fiscal years 1999 through 2001 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.
(1)During the year ended January 29, 2000, the Company recorded an extraordinary charge of $627 (net of taxes), in connection with the Loan Agreement and concurrent repayment of a prior credit facility. Such amount represents the write off of deferred financing fees and other costs related to that refinancing.
(2)EBITDA is defined as operating income plus depreciation, amortization and certain other non-cash charges. 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, 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. 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. EBITDA has been computed as follows:
(3)See Note 11 to Financial Statements, included elsewhere herein.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
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 31, 2004. 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.
Critical Accounting Policies And Estimates
The Company's significant accounting policies are more fully described in Note 3 to the consolidated financial statements, included elsewhere herein. The application of accounting policies require judgement by Management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgements are subject to an inherent degree of uncertainty and are based upon historical experience, trends in the industry, and information available from outside sources. The preparation of financial statements in conformity with GAAP requires Management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company's significant critical accounting policies include:
Revenue Recognition and Allowances-Revenue is recognized at the time merchandise is shipped and title has passed. Allowances for sales returns, discounts and for estimated uncollectible accounts are provided when sales are recorded, based upon historical experience and current trends, and periodically updated, as appropriate. The Company's promotional discounts and returns during fiscal 2003 were higher than in prior years due to certain nonrecurring customer experiences. Overall, these allowances have increased slightly in recent fiscal periods. While the actual amounts have been within the range of the Company's projections, there can be no assurances that this will continue in the future.
Inventories-Inventories are stated at the lower of cost or market, with cost being determined by the first-in, first-out (FIFO) method. If required, based upon Management's judgement, reserves for slow moving inventory and markdowns of inventory which has declined significantly in value are provided. Reflective of industry-wide lower selling prices for basic goods, the Company's markdowns of
inventory have increased significantly over the last three fiscal years. While such markdowns have been within the range of Management's projections, the Company cannot guarantee that it will continue to experience the same level of markdowns, or that markdowns taken will be adequately representative of any future declines in selling prices.
Evaluation of Long-Lived Assets-Long-lived assets are assessed for recoverability 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. Pursuant to SFAS No. 144, through January 31, 2004, 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.
Results of Operations
The Company's results of operations are affected by numerous factors, including competition, general economic conditions, raw material costs, mix of products sold and plant utilization. Certain activewear products of the type manufactured by the Company are generally available from multiple sources and the Company's customers often purchase products from more than one source. To remain competitive, the Company reviews and adjusts its pricing structure from time to time in response to price changes. The Company generally does not lead its competitors in pricing, but instead modifies its prices to the extent necessary to remain competitive with those set by its competitors.
The gross profit margins of the Company's products vary significantly. Accordingly, the Company's overall gross profit margin is affected by its product mix. In addition, plant utilization levels are important to profitability due to the substantial fixed costs of the Company's textile operations. The largest component of the Company's cost of goods sold is the cost of yarn. The Company obtains substantially all of its yarn from a number of domestic yarn suppliers, generally placing orders based 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 the cost of raw cotton. The Company adjusts the timing and size of its purchase orders for yarn in an effort to minimize fluctuations in its raw material costs resulting from changes in yarn prices. Management is continually reviewing and adjusting the Company's purchase commitments to take advantage of price decreases and ameliorate the impact of price increases.
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 31, 2004:
(1)EBITDA is defined as operating income plus depreciation and amortization and certain other non-cash charges. 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, 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. 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. See page 10 of this Form 10-K for the computation of EBITDA. Fiscal Year Ended January 31, 2004 Compared to Fiscal Year Ended February 1, 2003
Net sales for the fiscal year ended January 31, 2004 amounted to $191,222,000 as compared to $224,329,000 for the prior fiscal year, a decrease of $33,107,000 or approximately 14.8%. Total units sold were approximately 4% less than the prior fiscal year, while the average selling price declined by nearly 11% for the same period.
Gross profit for the fiscal year ended January 31, 2004 amounted to $27,955,000 as compared to $56,161,000 for the fiscal year ended February 1, 2003. The decline of $28,206,000 (50.2%) is the result of the following factors in the amounts indicated: (i) lower selling prices-$23,400,000 (including approximately $2,000,000 from an unfavorable change in product mix); (ii) higher yarn prices-$5,000,000; and (iii) decline in sales volume-$2,400,000. The foregoing factors were partially offset by higher expenses in the prior year relating to relocation, consolidation and integration of the Company's manufacturing facilities.
Selling, general and administrative expenses (including distribution expense) for the fiscal year ended January 31, 2004 increased $327,000 (1.4%) as compared to the prior fiscal year. As a percentage of sales, these expenses increased to 12.8% from 10.8% in the prior fiscal year. Advertising expense for the year was approximately $1,000,000 greater than the prior fiscal year. However, this increase was partially offset by reduced incentive compensation related to both selling and administrative personnel.
Interest expense increased $266,000 (1.9%) in the current fiscal year compared to the same period of the prior year. The increase is the result of the Company's need for additional borrowing under its Revolving Credit Facility during the current period, while lower borrowings were required during the same period of the prior year.
Amortization of intangible assets declined by $306,000 because by the end of the first fiscal quarter of the current year, the Company had fully amortized a covenant not to compete which had been valued at $1,000,000 and was being amortized over a three year period.
As described in Note 6 to the financial statements included elsewhere herein, the Company wrote off $19,416,000 of goodwill in the current fiscal year.
Fiscal Year Ended February 1, 2003 Compared to Fiscal Year Ended February 2, 2002
Net sales for the fiscal year ended February 1, 2003 amounted to $224,329,000 as compared to $199,661,000 for the prior fiscal year, an increase of approximately 12.4%. Total units sold increased more than 27%. However, industry-wide declining selling prices for basic goods and an unfavorable change in product mix towards goods having lower selling prices and gross margins partially offset the favorable effect of increased unit sales.
Gross profit for the fiscal year ended February 1, 2003 increased $9,057,000 (19.2%), as compared to the immediately preceding fiscal year. Gross margins improved to 25.0% as compared to 23.6% in the earlier period. This increase was largely the result of lower yarn prices and improved production efficiencies, partially offset by the adverse effect of lower selling prices and less favorable product mix. Gross profit in the fiscal year ended February 1, 2003 was adversely affected by additional depreciation charges aggregating approximately $1,295,000 relating to the consolidation of the Company's textile facilities. Comparable charges in the prior fiscal year ended February 2, 2002 amounted to $769,000.
Selling, general and administrative expenses (including distribution expense) for the fiscal year ended February 1, 2003 increased $597,000 (2.5%) as compared to the prior fiscal year. As a percentage of sales, these expenses declined from 11.8% to 10.8%. Higher expenditures incurred in improving product support in the areas of distribution and information technology were partially offset by lower selling expenses. Distribution expense for the year ended February 1, 2003 was approximately the same as the prior year despite an increase of more than 27% in units sold.
Interest expense declined $471,000 (3.2%) in the fiscal year ended February 1, 2003 compared to the same period of the prior year. Interest rates declined slightly, and the level of borrowings during the more recent fiscal year were lower than the prior year. At the end of each of the two fiscal years in the period ended February 1, 2003, the Company was able to reduce its revolving credit borrowings to zero.
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 $17,435,000 and $3,708,000 in the fiscal years ended February 1, 2003 and January 31, 2004, respectively. The amount for the year ended February 1, 2003 includes expenditures relating to the consolidation and expansion of the Company's textile facilities. Management estimates that capital expenditures in the fiscal year ending January 29, 2005 and thereafter will aggregate approximately $6,000,000 annually. Historically, the Company's major capital expenditures have related
to the acquisition of machinery and equipment and management information systems hardware and software.
The Company's principal working capital requirements are financing accounts receivable and inventories. The Company also expended $13,201,000 through the fiscal year ended February 2, 2003 to acquire a portion of its Redeemable Preferred Stock.
At January 31, 2004 the Company had net working capital of $54,214,000 comprised of $1,451,000 in cash and cash equivalents, $28,496,000 of accounts receivable, $52,514,000 of inventories, $10,168,000 of other current assets, and $38,415,000 in accounts payable and other current liabilities.
Anvil's Loan and Security Agreement, as amended (the "Loan Agreement"), provides for a maximum credit facility of $50,000,000 consisting of a term loan (the "Term Loan") and a revolving credit facility (the "Revolving Credit Facility"). The Loan Agreement was for an original term of three years with automatic one year renewals unless contrary notice is given by either party at least 60 days prior to the expiration date. The Loan Agreement (as currently extended) expires March 11, 2005. The Term Loan was in the original principal amount of $11,725,000, repayable in quarterly principal installments of $586,000 through April 2004. Amounts due under the Loan Agreement 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-quarter percent or LIBOR plus 21/4%, at the Company's option. At January 31, 2004 there was $16,686,000 outstanding under the Revolving Credit Facility.
Holdings has no independent operations with its sole asset being the capital stock of Anvil, which stock is pledged to secure the obligations under the Loan Agreement. As a holding company, Holdings' ability to pay cash dividends on the Senior Preferred Stock or, if issued, principal and interest on the debentures into which the Senior Preferred Stock is convertible (the "Exchange Debentures") is dependent upon the earnings of Anvil and its subsidiaries and their ability to declare dividends or make other intercompany transfers to Holdings. Under the terms of the Senior Indenture, Anvil may incur certain indebtedness pursuant to agreements that may restrict its ability to pay such dividends or other intercompany transfers necessary to service Holdings' obligations, including its obligations under the terms of the Senior Preferred Stock and, if issued, the Exchange Debentures. The Senior Note Indenture restricts, among other things, Anvil's and certain of its subsidiaries' ability to pay dividends or make certain other "restricted" payments (except to the extent, among other things, the restricted payments are less than 50% of the Consolidated Net Income of Anvil [as defined therein]), to incur additional indebtedness, to encumber or sell assets, to enter into transactions with affiliates, to enter into certain guarantees of indebtedness, to make certain investments, to merge or consolidate with any other entity and to transfer or lease all or substantially all of their assets. Neither the Senior Note Indenture nor the Loan Agreement restricts Anvil's subsidiaries from declaring dividends or making other intercompany transfers to Anvil.
The Company's ability to satisfy its debt obligations, including, in the case of Anvil, to pay principal and interest on the Senior Notes and, in the case of Holdings, to pay principal and interest on the Exchange Debentures, if issued, to perform its obligations under its guarantees and to pay cash dividends on the Senior Preferred Stock, will depend upon the Company's future operating performance, which will be affected by prevailing economic conditions and financial, business and other factors, certain of which are beyond its control, as well as the availability of revolving credit borrowings under the Loan Agreement. However, the Company may be required to refinance a portion of the principal of the Senior Notes and, if issued, the Exchange Debentures prior to their maturity and, if the Company is unable to service its indebtedness, it will be forced to take actions such as reducing or
delaying capital expenditures, selling assets, restructuring or refinancing its indebtedness, or seeking additional equity capital. There can be no assurance that if any of these remedies are necessary, they could be effected on satisfactory terms, if at all.
Contractual Obligations and Commitments
A summary of the Company's contractual obligations and commitments as of January 31, 2004 is as follows:
The Company believes that, based upon current and anticipated levels of operations, funds generated from operations, together with other available sources of liquidity, including borrowings under the Loan Agreement, will be sufficient over the next twelve months for the Company to fund its normal working capital requirements and satisfy its debt service requirements.
Seasonality
The Company's business is not significantly seasonal as it manufactures and sells a wide variety of activewear products that may be worn throughout the year.
Effect of Inflation
Inflation generally affects the Company by increasing the interest expense of floating rate indebtedness and by increasing the cost of labor, equipment and raw materials. The Company does not believe that inflation has had any material effect on the Company's business during the periods discussed herein.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 143, Accounting for Asset Retirement Obligations. The standard requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The standard was effective for the Company beginning February 2, 2003. The adoption of SFAS No.143 did not have a material impact on the Company's results of operations or financial position.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which is effective for all fiscal years beginning after December 15, 2001. SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The primary objectives of SFAS No. 144 are to develop one accounting model based on the framework established in SFAS No. 121 for long-lived assets to be
disposed of by sale, and to address significant implementation issues. The Company adopted SFAS No. 144 effective February 1, 2003. The adoption of SFAS No. 144 did not have a significant impact on the financial position or results of operations of the Company.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 rescinds and amends certain previous standards related primarily to debt and leases. The most substantive amendment requires sale-leaseback accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. The provisions of SFAS No. 145 related to the rescission of SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, an Amendment of APB Opinion No. 30 are effective for financial statements issued for fiscal years beginning after May 15, 2002 and became effective for the Company commencing February 2, 2003. The provisions of SFAS No. 145 related to the amendment of SFAS No. 13 became effective for transactions occurring after May 15, 2002. All other provisions of SFAS No. 145 are effective for financial statements issued on or after May 15, 2002. The adoption of SFAS No. 145 did not have a material impact on the Company's results of operations or financial position.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities which will supersede Emerging Issues Task Force Consensus No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 will affect the timing of the recognition of costs associated with an exit or disposal plan by requiring them to be recognized when incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The adoption of SFAS No. 146 is not expected to have a material impact on the Company's results of operations or financial position.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123, Accounting for Stock-Based Compensation. This Statement amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for annual periods ending after December 15, 2002 and interim periods beginning after December 15, 2002. The adoption of SFAS No. 148 did not have a material impact on the Company's results of operations or financial position.
In November 2002, the FASB approved FASB Interpretation No. 45 ("FIN 45") "Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others," an Interpretation of FASB Statement No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34. FIN 45 clarifies the requirements of SFAS No. 5, "Accounting for Contingencies", relating to a guarantor's accounting for, and disclosure of, the issuance of certain types of guarantees. Specifically, FIN 45 requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The provisions for initial recognition and measurement are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002, irrespective of a guarantor's fiscal year-end. However, the disclosure provisions of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of FIN 45 did not have a material impact on the Company's results of operations or financial position.
FASB Interpretation No. 46 ("FIN 46"), Consolidation of Variable Interest Entities, an Interpretation of APB No. 50 was issued in January 2003. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have
the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The adoption of FIN 46 did not have a material impact on the Company's consolidated results of operations or financial position.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150 requires that a financial instrument issued in the form of shares that is mandatorily redeemable be classified as a liability if such financial instrument embodies an unconditional obligation requiring the issuer to redeem it by transferring its assets at a specified or determinable date (or dates) or upon an event that is certain to occur. The statement is effective for the Company beginning in the first quarter of the fiscal year ending January 29, 2005, and requires that the Company begin classifying its 13% Senior Exchangeable Preferred Stock (the "Preferred Stock") as a liability, and to classify dividends and accretion on the Preferred Stock as interest expense. Currently, the Company includes the Preferred Stock on its balance sheet between liabilities and equity and classifies the related dividends and accretion as a reduction in equity not included as an element of interest expense. Accordingly, FASB No. 150 will impact the way the Company presents the Preferred Stock and related dividends and accretion in its future consolidated statements of operations, stockholders' deficiency and balance sheets. FASB No. 150 will have no impact on the Company's computation of basic and diluted net income (loss) per common share. Restatement of prior periods is not permitted when applying SFAS No. 150.
Forward-Looking Information
The Company's results of operations have been significantly affected by an industry-wide decline in selling prices of more than 30% over the last three years. The Company continues its efforts to mitigate the effects of this decline by exploring additional cost reduction methods and improvements in manufacturing efficiencies, which could entail additional capital expenditures. Management is actively seeking to diversify and expand the Company's customer base and also plans to place increased emphasis on the sale of goods sourced as finished products. In addition, modifications to the Company's historical methods of producing and acquiring fabric are being considered.
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:
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 2004 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.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
The Company believes that its potential exposure to market risk is not material.
Item 8.
Item 8. Financial Statements and Supplementary Data
See page, Index to Financial Statements, included elsewhere herein.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9a.
Item 9a. Controls and Procedures
The Company's Chief Executive Officer (who is also the Chief Financial Officer) has evaluated the Company's disclosure controls and procedures as of April 16, 2004 and concluded that these controls and procedures are effective.
There have been no significant changes in internal controls or in other factors that could significantly affect these controls subsequent to April 16, 2004.
PART III
Item 10.
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 4 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.
(1)All ages are as of December 31, 2003. Bernard Geller has served as the Chief Executive Officer of Anvil, President of Holdings, and has been a Director of Anvil and Holdings since February 1995. Since March 1997, Mr. Geller has served as Chairman of the Board of Anvil and Holdings and from July 1997 to February 28, 2001, as President of Anvil. From 1989 to 1995, Mr. Geller served as Chairman of Anvil's predecessor. From 1986 to 1989, Mr. Geller served as President of Anvil's predecessor and from 1975 to 1986, as Controller. Before joining Anvil's 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.
Anthony Corsano has served as President and Chief Operating Officer Anvil since February 28, 2001. Prior thereto, he served as Executive Vice President of Sales and Marketing of Anvil for more than five years. From 1993 to 1995, Mr. Corsano served as Vice President of Sales and Marketing of Anvil's predecessor. From 1988 to 1993, Mr. Corsano served as Vice President-Sales of Anvil's predecessor and from 1985 to 1988 Mr. Corsano served as National Sales Manager of Anvil's predecessor.
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 February, 1995. Since March, 1997, 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 International Corp. From 1985 to 1990, Mr. Hollander served as Vice President and General Counsel of McGregor Corporation and Faberge, Incorporated, and from 1987 to 1989, Mr. 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.
William H. Turner has served as Executive Vice President of Manufacturing of Anvil since February, 1995. From 1992 to 1995, Mr. Turner served as Executive Vice President of Manufacturing of Anvil's predecessor. From 1985 to 1992, Mr. Turner held the position of Vice President of Manufacturing (Cut and Sew) of Anvil's predecessor and from 1982 to 1985 he was Plant Manager for Anvil's predecessor.
Pasquale Branchizio has served as Vice President of Finance of Anvil and Holdings since 1995. From 1986 until 1995, Mr. Branchizio served as Vice President of Finance of Anvil's predecessor. From 1981 to 1986, Mr. Branchizio served as the Controller of Anvil's predecessor. Prior thereto, Mr. Branchizio served as Senior Accountant for Anvil's predecessor.
Item 11.
Item 11. Executive Compensation
The information required by Item 11 of Form 10-K appears on pages 6 through 9 of the Information Statement, and is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by Item 12 of Form 10-K appears on pages 9 through 12 of the Information Statement, and is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions
The information required by Item 13 of Form 10-K appears on page 12 of the Information Statement and is incorporated herein by reference.
Item 14.
Item 14. Principal Accountant Fees and Services
The information required by Item 14 of Form 10-K appears on pages 5 and 6 of the Information Statement and is incorporated herein by reference.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)1. Financial Statements-See Page 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)
4.1
Certificate of Designation of Holdings.(1)
4.2
Certificate of Designation of Holdings relating to Series B 13% Senior Exchangeable Preferred Stock due 2009.(2)
4.3
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)
4.4
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)
4.5
107/8% Senior Notes and Guarantees.(1)
4.6
Series B 107/8% Senior Notes and Guarantees.(2)
4.7
Registration Rights Agreement, dated as of March 14, 1997, by and among Anvil, Holdings, Cottontops and DLJ, Wasserstein and NationsBanc, as Initial Purchasers.(1)
4.8
Loan and Security Agreement dated March 11, 1999 by and among Congress Financial Corporation, Anvil, Holdings and Cottontops.(5)
4.9
Term Promissory Note of Anvil dated March 11, 1999 payable to Congress Financial Corporation.(5)
4.10
Pledge and Security Agreement dated March 11, 1999 between Congress Financial Corporation and Holdings.(5)
4.11
Pledge and Security Agreement dated March 11, 1999 between Congress Financial Corporation and Anvil.(5)
10.1
Employment Agreement, dated as of January 30, 2001, by and between Anvil and Bernard Geller.(6)
10.2
Employment Agreement, dated as of January 30, 2001 by and between Anvil and Anthony Corsano.(6)
10.3
Employment Agreement, dated as of January 30, 2001, by and between Anvil and Jacob Hollander.(6)
10.4
Employment Agreement, dated as of January 30, 2001 by and between Anvil and William H. Turner.(6)
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)
10.6
Registration Rights Agreement, dated as of March 14, 1997, by and between Holdings and DLJ, as the Initial Purchaser.(1)
10.7
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)
10.8
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)
10.9
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)
10.10
2002 Stock Option Plan(7)
10.11
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)
10.12
Management Agreement dated November 3, 1998 among Anvil, Holdings, Cottontops and BRS.(5)
10.13
Management Agreement dated September 15, 2002 among Anvil, Holdings, Cottontops and CVC Management LLC.(8)
10.14
Letter Agreement effective as of February 1, 2004 amending and extending the Employment Agreement of Mr. Geller
Subsidiaries of Holdings.
31.1
Certification pursuant to section 240.13a-14 of general rules and regulations of the Securities Exchange act of 1934.
(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.
(5)Previously filed with the Company's Form 10-K for the Year ended January 30, 1999, and is incorporated herein by reference.
(6)Previously filed with the Company's Form 10-K for the Year ended February 3, 2001 and is incorporated herein by reference.
(7)Previously filed with the Company's Form 10-K for the Year ended February 2, 2002 and is incorporated herein by reference.
(8)Previously filed with the Company's Form 10-K for the Year ended February 1, 2003 and is incorporated herein by reference.
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.
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 Bernard Geller
Chairman of the Board and Director (Principal Executive and Financial Officer)
April 23, 2004
/s/ JACOB HOLLANDER Jacob Hollander
Vice President, Secretary and Director
April 23, 2004
/s/ PASQUALE BRANCHIZIO Pasquale Branchizio
Vice President of Finance (Principal Accounting Officer)
April 23, 2004
/s/ BRUCE C. BRUCKMANN Bruce C. Bruckmann
Director
April 23, 2004
/s/ RICHARD R. LEONARD Richard R. Leonard
Director
April 23, 2004
/s/ RICHARD D. MOSS Richard D. Moss
Director
April 23, 2004
/s/ DAVID WAGSTAFF III David Wagstaff III
Director
April 23, 2004
/s/ JOHN D. WEBER John D. Weber
Director
April 23, 2004
/s/ ANTHONY T. WILLIAMS Anthony T. Williams
Director
April 23, 2004
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.
ANVIL HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
PAGE
Independent Auditors' Report
Consolidated Balance Sheets at February 1, 2003 and January 31, 2004
Consolidated Statements of Operations for the years ended February 2, 2002, February 1, 2003 and January 31, 2004
Consolidated Statements of Stockholders' Deficiency for the years ended February 2, 2002, February 1, 2003 and January 31, 2004
Consolidated Statements of Cash Flows for the years ended February 2, 2002, February 1, 2003 and January 31, 2004
Notes to Consolidated Financial Statements
Schedule II-Valuation and Qualifying Accounts
S-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Anvil Holdings, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of Anvil Holdings, Inc. and subsidiaries as of January 31, 2004 and February 1, 2003, and the related consolidated statements of operations, stockholders' deficiency, and cash flows for each of the three fiscal years in the period ended January 31, 2004. Our audits also included the financial statement schedule listed in the Index at Item 15(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 the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 financial position of Anvil Holdings, Inc. and subsidiaries as of January 31, 2004 and February 1, 2003, and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 31, 2004, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such 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.
As discussed in Note 6 to the consolidated financial statements, the Company changed its method of accounting for goodwill and other intangible assets to conform to Statement of Financial Accounting Standards No. 142 "Goodwill and other Intangible Assets" effective on February 3, 2002.
DELOITTE & TOUCHE LLP
New York, New York
April 19, 2004
ANVIL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
See notes to consolidated financial statements.
ANVIL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Share Data)
See notes to consolidated financial statements.
ANVIL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
(In Thousands)
See notes to consolidated financial statements.
ANVIL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
See notes to consolidated financial statements.
ANVIL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
1. THE COMPANY
As used herein, the "Company" refers to Anvil Holdings, Inc. ("Holdings"), including, in some instances, its wholly-owned subsidiary, Anvil Knitwear, Inc., a Delaware corporation ("Anvil"), and its other subsidiaries, as appropriate to the context. The Company is engaged in the business of designing, manufacturing and marketing high quality activewear for men, women and children, supplemented with caps, towels, robes and bags. The Company markets and distributes its products, under its brand names and private labels, primarily to wholesalers and screen printers, principally in the United States. The Company reports its operations in one segment in accordance with Statement of Financial Accounting Standards No. 131, Disclosures About Segments of an Enterprise and Related Information.
2. RECAPITALIZATION AND REFINANCING
The Company's current capital structure is the result of a 1997 recapitalization (the "Recapitalization") pursuant to which: (i) the Company redeemed or repurchased a substantial portion of its outstanding shares of capital stock; (ii) Bruckmann, Rosser, Sherrill & Co., L.P. and certain of its employees and affiliates (collectively, "BRS") contributed $13,063 for the purchase of new common stock; (iii) 399 Venture Partners, Inc. and certain of its employees and affiliates (collectively, "399 Venture") and certain management investors reinvested a portion of their shares of capital stock of the Company in exchange for newly issued common stock; and (iv) 399 Venture exchanged a portion of its capital stock for 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 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 107/8% Senior Notes due March 14, 2007 ("Senior Notes") in connection with the Recapitalization.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation-The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("Generally Accepted Accounting Principles" or "GAAP"). Such financial statements include the accounts of the Company and its wholly-owned subsidiaries, after elimination of significant intercompany accounts and transactions. To facilitate comparison with the current fiscal year, certain prior fiscal year amounts have been reclassified.
Fiscal Year-The Company's operations are on a "52/53-week" fiscal year ending on the Saturday closest to January 31.
Use of Estimates-The preparation of financial statements in conformity with GAAP requires Management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The accounts requiring the use of significant estimates include accounts receivable, inventories, income taxes, intangible assets and certain reserves.
Cash and Cash Equivalents-Cash and cash equivalents include all highly liquid investments with an original maturity of 90 days or less.
Fair Value of Financial Instruments-The carrying amounts of 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.
Property, Plant and Equipment-Property, plant and equipment is being depreciated for financial reporting purposes using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the lesser of the estimated useful life or the term of the lease. Depreciable lives are generally as follows:
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, goodwill and a covenant not to compete. Trademarks are being amortized over their estimated useful life of 17 years and the covenant not to compete has been amortized over its three year term. Goodwill (which was not being amortized) has been fully written off due to an impairment in value recorded as of January 31, 2004-see Note 6.
Evaluation of Long-Lived Assets-Long-lived assets are assessed for recoverability 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.
Deferred Financing Fees-Included in other assets are deferred financing fees ($1,657 and $1,247 at February 1, 2003 and January 31, 2004, respectively) which are being amortized over the term of the applicable obligations.
Revenue Recognition-Revenue is recognized at the time merchandise is shipped and title has passed. 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 and diluted income (loss) per share is computed based upon the average outstanding shares of Class A and Class B common stock.
Significant Customers-The Company has one customer that accounted for approximately 33% of the Company's net sales for the fiscal year ended January 31, 2004.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 143, Accounting for Asset Retirement Obligations. The standard requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The standard was effective for the Company beginning February 2, 2003. The adoption of SFAS No.143 did not have a material impact on the Company's results of operations or financial position.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which is effective for all fiscal years beginning after December 15, 2001. SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The primary objectives of SFAS No. 144 are to develop one accounting model based on the framework established in SFAS No. 121 for long-lived assets to be disposed of by sale, and to address significant implementation issues. The Company adopted SFAS No. 144 effective February 1, 2003. The adoption of SFAS No. 144 did not have a significant impact on the financial position or results of operations of the Company.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 rescinds and amends certain previous standards related primarily to debt and leases. The most substantive amendment requires sale-leaseback accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. The provisions of SFAS No. 145 related to the rescission of SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, an Amendment of APB Opinion No. 30 are effective for financial statements issued for fiscal years beginning after May 15, 2002 and became effective for the Company commencing February 2, 2003. The provisions of SFAS No. 145 related to the amendment of SFAS No. 13 became effective for transactions occurring after May 15, 2002. All other provisions of SFAS No. 145 are effective for financial statements issued on or after May 15, 2002. The adoption of SFAS No. 145 did not have a material impact on the Company's results of operations or financial position.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities which will supersede Emerging Issues Task Force Consensus No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 will affect the timing of the recognition of costs associated with an exit or disposal plan by requiring them to be recognized when incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The adoption of SFAS No. 146 is not expected to have a material impact on the Company's results of operations or financial position.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123, Accounting for Stock-Based Compensation. This Statement amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for annual periods ending after December 15, 2002 and interim periods beginning after
December 15, 2002. The adoption of SFAS No. 148 did not have a material impact on the Company's results of operations or financial position.
In November 2002, the FASB approved FASB Interpretation No. 45 ("FIN 45") "Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others," an Interpretation of FASB Statement No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34. FIN 45 clarifies the requirements of SFAS No. 5, "Accounting for Contingencies", relating to a guarantor's accounting for, and disclosure of, the issuance of certain types of guarantees. Specifically, FIN 45 requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The provisions for initial recognition and measurement are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002, irrespective of a guarantor's fiscal year-end. However, the disclosure provisions of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of FIN 45 did not have a material impact on the Company's results of operations or financial position.
FASB Interpretation No. 46 ("FIN 46"), Consolidation of Variable Interest Entities, an Interpretation of APB No. 50 was issued in January 2003. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The adoption of FIN 46 did not have a material impact on the Company's consolidated results of operations or financial position.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150 requires that a financial instrument issued in the form of shares that is mandatorily redeemable be classified as a liability if such financial instrument embodies an unconditional obligation requiring the issuer to redeem it by transferring its assets at a specified or determinable date (or dates) or upon an event that is certain to occur. The statement is effective for the Company beginning in the first quarter of the fiscal year ending January 29, 2005, and requires that the Company begin classifying its 13% Senior Exchangeable Preferred Stock (the "Preferred Stock") as a liability, and to classify dividends and accretion on the Preferred Stock as interest expense. Currently, the Company includes the Preferred Stock on its balance sheet between liabilities and equity and classifies the related dividends and accretion as a reduction in equity not included as an element of interest expense. Accordingly, FASB No. 150 will impact the way the Company presents the Preferred Stock and related dividends and accretion in its future consolidated statements of operations, stockholders' deficiency and balance sheets. FASB No. 150 will have no impact on the Company's computation of basic and diluted net income (loss) per common share. Restatement of prior periods is not permitted when applying SFAS No. 150.
4. INVENTORIES
Inventories consist of the following:
5. PROPERTY, PLANT AND EQUIPMENT-NET
Property plant and equipment consists of the following:
Depreciation expense for the fiscal years ended February 2, 2002, February 1, 2003, and January 31, 2004 was $7,068, $9,619 and $8,261, respectively.
6. GOODWILL AND INTANGIBLE ASSETS
Effective at the beginning of the fiscal year ended February 1, 2003, the Company adopted the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets." The adoption of SFAS No. 142 required that the Company cease amortizing existing goodwill and also requires goodwill to be tested for impairment annually and when an event occurs indicating that it is possible an impairment exists. Previously recorded amortization had amounted to $719 annually. As of January 31, 2004, Management tested existing goodwill for impairment by comparing its carrying value with its fair value, which was estimated as a multiple of future cash flow. Based on this comparison, the Company recorded an impairment of $19,416, representing the entire carrying amount of the Company's existing goodwill. The impairment resulted from an implied reduction in the Company's fair value resulting from the reduced revenue and gross margin projections caused by the continuing industry-wide decline in selling prices for the Company's basic goods. The Company believes, however, that projected cash flows would be adequate to cover the carrying value of its trademarks which continue to be amortized.
Intangible assets being amortized consist of the following:
Amortization expense relating to the above intangible assets will be $286 for each of the next five fiscal years, beginning with the year ending January 29, 2005.
The following table presents the adjusted amounts for the fiscal year ended February 2, 2002 had the Company applied the nonamortization provisions of SFAS 142 during such fiscal year.
7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
8. CREDIT AGREEMENT
Anvil's Loan and Security Agreement, as amended (the "Loan Agreement"), provides for a maximum credit facility of $50,000 consisting of a term loan (the "Term Loan") and a revolving credit facility (the "Revolving Credit Facility"). The Loan Agreement was for an original term of three years with automatic one year renewals unless contrary notice is given by either party at least 60 days prior to the expiration date. The Loan Agreement (as currently extended) expires March 11, 2005. The Term Loan was in the original principal amount of $11,725, repayable in quarterly principal installments of $586, the last of which was made in April 2004. Amounts due under the Loan Agreement 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 borrowings under the Loan Agreement are at prime plus one-quarter percent or LIBOR plus 21/4%, at the Company's option. At January 31, 2004 there was $16,686 outstanding under the Revolving Credit Facility bearing interest at the rate of 4.25%. The weighted average interest rate on borrowings under the Loan Agreement during the years ended February 2, 2002, February 1, 2003 and January 31, 2004 was 7.3%, 4.9% and 4.3%, respectively.
9. 107/8% SENIOR NOTES
On March 14, 1997, Anvil issued $130,000 of 107/8% 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. The Company may redeem the Senior Notes at a redemption price of 100% at any time beginning March 15, 2004.
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.
10. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
The Company's consolidated pre-tax income for the years ended February 1, 2003 and January 31, 2004 includes pre-tax income of $1,742 and $633, respectively, attributable to foreign sources.
A reconciliation of the statutory Federal tax rate and the effective rate is as follows:
The tax effects of temporary differences that give rise to deferred tax assets and liabilities are presented below:
11. 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, excluding anti-dilutive options (See note 14). Dividends and accretion on the Company's redeemable preferred stock (net of treasury shares) are deducted, and gains on repurchase of preferred stock (credited directly to the stockholders' deficiency) are added in arriving at income (loss) attributable to the Company's two classes of common stock. The 12.5% liquidation preference relating to the Company's Class A Common Stock is considered as per share earnings of that class only. Following is the computation of the per share amounts as presented in the Statement of Operations:
12. EMPLOYEE SAVINGS AND INVESTMENT PLAN
The Company has a savings and investment plan under which eligible employees may contribute up to 16% of their compensation, subject to certain limitations. The Company matches 100% of pre-tax contributions up to the first 3% and 50% of the next 3%. During the years ended February 2, 2002, February 1, 2003 and January 31, 2004, the Company made cash contributions to the plan aggregating $783, $779 and $667, respectively.
13. CAPITAL STRUCTURE
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.
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 redemption, or in the case of the Exchange
Debentures, an amount equal to all accumulated and unpaid interest thereon to the date of redemption. 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 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.
In accordance with the provisions of the Company's Certificate of Designations relating to the 13% Senior Exchangeable Preferred Stock (the "Preferred Stock"), the Company has paid stock dividends aggregating 1,075,782 shares ($26,895 liquidation value). This amount includes all dividends declared and paid through the March 15, 2002 quarterly dividend payment date. Dividends subsequent to that date are required to be paid in cash. The Board of Directors of Holdings has not declared any quarterly dividends since the March 15, 2002 dividend, and such dividends have not been paid. To date, the accrued dividends amount to $11,455, excluding dividends on preferred shares held by the Company. Under the Certificate of Designations relating to the Preferred Stock, if the Company fails to make cash dividend payments for four consecutive quarters, the holders of the Preferred Stock, at a special meeting held for that purpose, voting together as a class, may elect two additional directors to the Company's Board of Directors. On November 6, 2003, a special meeting of the holders of the Preferred Stock was held for the purpose of electing two additional directors. At that meeting, two directors, nominated by the holders of Preferred Stock, were elected to the Company's Board of Directors.
Common Stock
The Class A Common Stock accretes liquidation preference at the rate of 12.5% per annum, compounded quarterly, which is payable prior to distribution of dividends on 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 (authorized, but unissued) have no right to vote on any matters except in special circumstances, such as a merger, consolidation, recapitalization or reorganization of the Company.
14. STOCK OPTION PLAN
Effective January 1, 2002, the Company adopted a stock option plan (the "2002 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 2002 Stock Option Plan may be terminated by the Company at any time. The options may be granted to certain members of management and key employees and are subject to time vesting as well as vesting provisions relating to the sale or recapitalization of the Company, as defined. 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 with an exercise period of ten years were granted to certain members of management and key employees on January 1, 2002 at an exercise price of $1 per share, the fair value at date of grant. All such options were outstanding at February 2, 2002. During the year ended February 1, 2003, options to purchase 10,000 shares were cancelled. During the years ended February 1, 2003 and January 31, 2004, options to purchase 2,500 shares and 12,500 shares, respectively, were exercised. At January 31, 2004 options to purchase 65,000 shares (45,000 of which were exercisable) were outstanding with an average life of approximately eight years.. 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 2002: 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 immaterial.
15. COMMITMENTS AND CONTINGENCIES
Leases-The Company is obligated under various leases for equipment, office space and distribution facilities which expire at various dates through 2009. Future minimum rental commitments under noncancelable operating leases, with terms in excess of one year, are as follows:
Rental expense for the years ended February 2, 2002, February 1, 2003 and January 31, 2004 was $2,441, $2,818 and $2,875, respectively.
Litigation-The Company is party to various litigation matters incidental to the conduct of its business. The Company does not believe that the outcome of any of the matters in which it is currently involved will have a material adverse effect on the financial condition, liquidity, business or results of operations of the Company.
Letters of Credit-At January 31, 2004, the Company was party to open letters of credit in the amount of $901, expiring through July 6, 2004.
Environmental Matters-Prior to the Acquisition, groundwater contamination was discovered at the Asheville, North Carolina facility. In 1990, Winston Mills, Inc., a subsidiary of McGregor Corporation ("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 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 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 of the Anvil business (the "Acquisition"). This indemnity is guaranteed by Culligan and by Astrum International Corp. (now known as Samsonite Corporation), an affiliate of McGregor, 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 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 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.
16. SUMMARIZED FINANCIAL DATA OF CERTAIN SUBSIDIARIES
Holdings has no independent operations apart from its wholly-owned subsidiary, Anvil, and its sole asset is the capital stock of Anvil. Anvil is Holdings' only direct subsidiary. Holdings and Cottontops guarantee the Senior Notes of Anvil. In addition to Cottontops, Anvil has five other direct subsidiaries (the "Non-U.S. Subsidiaries") which do not guarantee the Senior Notes: A.K.H., S.A., Estrella Mfg. Ltda. and Star, S.A., organized in Honduras; Livna, Limitada, organized in El Salvador; and CDC GmbH, organized in Germany. There are no other direct or indirect subsidiaries of the Company. The following information presents certain condensed consolidating financial data for Holdings, Anvil, Cottontops and the Non-U.S. Subsidiaries. Complete financial statements and other disclosures concerning Anvil, Cottontops and the Non-U.S. Subsidiaries are not presented because Management has determined they are not material to investors.
17. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Anvil, Holdings and Cottontops have entered into a management agreement with BRS, 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 this management agreement are $250.
Anvil, Holdings and Cottontops have entered into a management agreement with CVC Management LLC, an affiliate of 399 Venture and Court Square ("CVC Mgmt.") effective September 15, 2002, whereby CVC Mgmt. 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 this management agreement are $250.
Holdings' Articles of Incorporation provide for a special dividend in the annual amount of $250 on its Series 1-Class A Common Stock, all of which was held by 399 Venture or its affiliates. Such special dividend has been paid through September 14, 2002. All of the holders of the Series 1-Class A Common Stock have waived the payment of the special dividend on and after September 15, 2002 and have agreed to vote their shares of the Company's voting stock in favor of amending and restating the Company's Certificate of Incorporation to effectuate the elimination of the special dividend.
BRS and Court Square (an affiliate of CVC Mgmt.) are significant stockholders of the Company and each have two designees on the Company's Board of Directors.
18. QUARTERLY FINANCIAL INFORMATION (Unaudited)
SCHEDULE II
ANVIL HOLDINGS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(a)Accounts written off or collected-net S-1
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9a. Controls and Procedures
PART III
Item 10. Directors and Executive Officers of the Registrant