-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AoQICViSA58jr0GrFvMF3Udq4/cvmz7dFPLkGs0FWTZgjYtI9uXVZ5tfOUFJk3kR z5WzIvyHlhrMuWHIvu6UmQ== 0000950131-00-002635.txt : 20000417 0000950131-00-002635.hdr.sgml : 20000417 ACCESSION NUMBER: 0000950131-00-002635 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000414 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GLOBE MANUFACTURING CORP CENTRAL INDEX KEY: 0001071094 STANDARD INDUSTRIAL CLASSIFICATION: FABRICATED RUBBER PRODUCTS, NEC [3060] IRS NUMBER: 631101362 STATE OF INCORPORATION: AL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-64675 FILM NUMBER: 602494 BUSINESS ADDRESS: STREET 1: 456 BEDFORD STREET CITY: FALL RIVER STATE: MA ZIP: 02720 10-K 1 FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 333-64675 ---------------- GLOBE MANUFACTURING CORP. (Exact name of registrant as specified in its charter) Alabama 63-1101362 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 456 Bedford Street, Fall River, 02720 Massachusetts (Address of principal executive (Zip Code) offices) Registrant's telephone number, including area code: 508/674-3585 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: 10% Senior Subordinated Notes due 2008, Series B Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 25, 2000 all of the aggregate market value of voting stock was held by affiliates of the registrant. As of March 25, 2000, the Registrant had 1,000 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE None - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- TABLE OF CONTENTS
PAGE ---- PART I Item 1. Business.............................................................................. 1 Item 2. Properties............................................................................ 6 Item 3. Legal Proceedings..................................................................... 6 Item 4. Submission of Matters to a Vote of Security Holders................................... 7 PART II Item 5. Market for Registrant's Common Equity and Related Security Holder Matters............. 8 Item 6. Selected Consolidated Financial Data.................................................. 8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 9 Item 7a. Quantitative and Qualitative Disclosures About Market Risk............................ 14 Item 8. Financial Statements.................................................................. 14 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.. 14 PART III Item 10. Directors and Executive Officers...................................................... 15 Item 11. Executive Compensation................................................................ 16 Item 12. Security Ownership of Certain Beneficial Owners and Management........................ 18 Item 13. Certain Relationships and Related Transactions........................................ 19 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................... 23 Consolidated Financial Statements.............................................................. F-1
PART I Item 1. Business Globe Manufacturing Corp. (the "Company" or "Globe"), which is a wholly- owned subsidiary of Globe Holdings, Inc. ("Globe Holdings"), is a leading domestic manufacturer and worldwide supplier of spandex and latex elastomeric fibers, marketing its products to more than 500 customers. The Company's fibers are used in a broad range of applications, including men's and women's hosiery, waistbands, intimate apparel, performance athletic wear, swimwear, casual wear, suiting fabrics, body shaping (or foundation) garments, personal care products (including diapers and adult incontinence products) and footwear. The Company has produced elastomeric fibers exclusively for over 50 years and has developed long-term relationships with many of its principal customers, including Lexington Elastic (formerly Fruit of the Loom, Inc.), Kimberly-Clark Corporation, Minnesota Mining & Manufacturing Company, Sara Lee Hosiery, Unifi, Inc. and Worldtex, Inc. These customers in the aggregate contributed approximately 25% of total revenue during the 1999 fiscal year. Spandex fiber, which accounted for 86.5% of the Company's 1999 sales, is a highly desirable component of fabrics designed for performance, durability, comfort, control and resilience due to its unique chemical and physical properties. Spandex fiber is produced in a broad range of fine and heavy deniers and is sold on a private label basis and under brand names such as the Company's GLOSPAN(R) and CLEERSPAN(R), DuPont's Lycra(R) and Bayer's Dorlastan(R). Recent advances in fabric manufacturing technologies have facilitated the use of spandex fiber in an increasing number of apparel and non-apparel applications. Globe has benefited from this recent proliferation of spandex fiber applications due to its exclusive focus on elastomeric fibers, superior customer service, broad product line, strong market position and efficient manufacturing processes. See also Products section for details on the Company's impending sale of its Latex thread operation. The Company operates three manufacturing facilities, which are located in Fall River, Massachusetts, Tuscaloosa, Alabama and Gastonia, North Carolina. Since 1993, Globe has invested $114.9 million to increase manufacturing capacity, enhance productivity and shift its product mix to the faster growing, higher margin fine denier spandex fiber. During this period, the Company's annual fine denier spandex fiber production capacity increased from 2.6 million to 14.2 million pounds. Industry Overview The Company operates in one industry segment encompassing the manufacture and sale of elastomeric fibers. See Note 12 to the Company's Consolidated Financial Statements for additional information. Spandex Fiber The worldwide spandex fiber industry has experienced significant growth in recent years. First developed in the early 1960s, spandex fiber has repeatable stretch and recovery capabilities, end-to-end uniformity, and unlike most other elastomeric fibers, is resistant to breakdown from exposure to oxidation, ozone, light, solvents, body oils, and perspiration. In addition, advances in polymer chemistry and manufacturing technology have allowed manufacturers to produce increasingly finer elastomeric fibers. These production advances and the physical characteristics of spandex fiber have made spandex fiber a highly desirable component of an increasing number of applications. As the production capabilities of spandex fiber suppliers have improved, fabric manufacturers have also developed new processes that have allowed them to integrate spandex fiber into a number of new applications. Traditionally, manufacturers of circular knit fabrics were unable to use spandex fiber in the manufacturing process unless the spandex fiber had been covered with another fiber, such as cotton or nylon. Recently, new technologies enabling manufacturers to knit uncovered spandex fibers have spurred an increased use of spandex fiber in sheer, lightweight circular knit products. Suppliers of spandex fiber such as the Company generally target six end-use markets for their fibers: circular knits (which includes product applications such as active wear, swimwear and casual wear); hosiery; nonwovens (personal care products such as diapers); narrow fabrics (waistbands and straps); warp knits (intimate apparel and body shaping garments); and stretch wovens. Stretch wovens include fabrics that are used in men's suits and pants, as well as other new applications, and this segment represents a growth opportunity for industry participants such as Globe. Spandex fiber is currently produced throughout the world. Latex Thread The primary markets for extruded latex thread include men's hosiery, narrow fabrics and fused tapes. Fine gauges of latex thread are typically used in men's hosiery. Medium and heavy gauges are used in narrow fabrics and fused tapes. Fused tapes are used for face masks and insert elastics. The Company produces a heat resistant latex thread which resists degradation caused by repeated household laundry drying cycles. See also Products section for details on the Company's impending sale of its Latex thread operation. Products The Company develops, manufactures and sells spandex and latex elastomeric fibers. The Company's products include fine denier spandex fiber (15 to 140 denier), heavier denier spandex fiber (184 to 5040 denier), and latex thread in a variety of gauges. Spandex fiber accounted for 86.5% of the Company's sales in 1999, and latex thread accounted for the remaining 13.5%. Spandex Fiber. The unique chemical and physical properties of spandex fiber make it a desirable component of fabrics designed for performance, durability, comfort, control and resilience. Spandex fiber, produced from polyether or polyester, has repeatable stretch and recovery capabilities, end-to-end uniformity, and unlike most other elastomeric fibers, is resistant to breakdown from exposure to oxidation, ozone, light, solvents, body oils and perspiration. Such properties, together with the wide range of available deniers, make spandex fiber suitable for a broad range of applications, including men's and women's hosiery, waistbands, intimate apparel, performance athletic wear, swimwear, casual wear, suiting fabrics, body shaping (or foundation) garments, personal care products (including diapers and adult incontinence products) and footwear. Spandex fiber can be made in deniers much finer than alternative elastomeric fibers while retaining uniform physical properties, and can be heat set in finishing, thereby allowing manufacturers to create ultra sheer and lightweight, yet highly elastic fabrics. Although spandex fiber typically accounts for a small percentage of the total fiber in an application (ranging from 2% in men's suits to 40% in women's foundation garments), it can be used to enhance the performance of an increasing number of apparel and non-apparel products. Latex Thread. The Company's first product was latex thread. Extruded latex thread, which is round, was developed in the 1940's to replace cut rubber thread, which was square and limited in size and usage. Finer gauge latex thread is used in men's hosiery and athletic socks. Mid-range gauges are typically used for narrow fabrics, such as waistbands, straps and insert elastics, and for specialty products and medical garments. Coarse gauge latex thread is also used for narrow fabrics and in specialty products. The Company has engineered various latex thread compound formulations in response to market needs for high-strength, chemical and heat resistance, and durability. In February 2000, the Company entered into an agreement with North American Rubber Thread Company to sell its Latex thread operation. The closing of the transaction is expected to take place during the second quarter of 2000, with the final selling price being subject to certain adjustments stated in the agreement. See additional disclosure in Note 13 to the Consolidated Financial Statements. The Company's products have historically been sold to a variety of customers in five end-markets: circular knits, hosiery, nonwovens, narrow fabrics and warp knits. In addition, the Company sells products to the stretch woven market for use in suiting fabrics and outerwear linings. Fine denier spandex fiber accounted for approximately 58.5% of the Company's total 1999 sales, up from 34.8% in 1995. Based on current market demand for products which utilize lightweight or high quality fabrics, the Company believes that fine denier products manufactured for the circular knit, warp knit and stretch woven markets will represent an increasing percentage of Globe's sales. 2 Customers The Company sells its products to a diverse customer base of intermediate and end-use manufacturers. Intermediate users of the Company's products, which include Unifi, Inc., C.K.M. Industries, Inc. and Worldtex, Inc., cover the elastomeric fibers with other materials, and then either sell them to another manufacturer or knit or weave them. The Company's end-use customers, which include Lexington Elastic (formerly Fruit of the Loom, Inc.), Sara Lee Hosiery, Hanes Menswear, Inc., and Kayser-Roth Corporation (manufacturer of No Nonsense pantyhose), produce finished goods from the elastomeric fibers supplied by the Company. Most of the Company's customers rely on sophisticated technologies and production techniques to manufacture products of which the Company's fibers are a significant value-added component. These customers typically operate high speed, high volume production lines. In order to run their production lines efficiently and avoid costly line stoppages, customers rely on the Company's ability to provide reliable, on time delivery of high quality products. A number of the Company's customers have selected Globe as a preferred supplier of elastomeric fiber. Globe markets its products to over 500 customers. The Company's top ten customers accounted for approximately 50.6% of 1999 sales, with sales to CKM Industries, Inc., a manufacturer of circular knit fabrics, accounting for 11.3% of 1999 sales and sales to Unifi, Inc., a manufacturer of covered yarns for men's and women's hosiery and for narrow fabrics, accounting for approximately 8.8% of 1999 sales. Export sales represented approximately 35.5% of the Company's total sales in 1999. See Note 1 to the Company's Consolidated Financial Statements for additional information. As is customary in the industry, the Company generally does not have long-term supply agreements with its customers. Sales and Marketing Globe's sales and marketing functions are organized into three product lines: hosiery/narrow fabrics; wide fabrics (including circular knits, warp knits, stretch wovens); and nonwovens. Each product line requires different technical expertise and is the responsibility of one of the Company's product managers. Management believes that organizing its sales and marketing team by product line is the most efficient and effective way to develop and maintain customer relationships, to stay abreast of technical and other developments that may result in changing customer or consumer preferences and to take advantage of new business opportunities. The Company markets and sells its products under the direction of three product managers who are supported by key account managers, inside sales staff, field sales personnel, and technical service and customer service personnel. By providing dedicated support to key customers, the Company believes it can better support these larger customers, who, in many cases, have a variety of different product application or production requirements. Domestic sales are handled primarily by the Company's internal sales organization. International sales activity is coordinated by a senior manager and supported by a dedicated customer service staff. The Company sells its products internationally through commissioned agents or authorized distributors. Technical service is an integral part of Globe's sales and marketing efforts and includes providing product testing analysis of fabric composition at the Company's laboratories, assisting customers with the integration of Globe's products into the customer's production process and the development of methods to enhance a customer's products through the incorporation of the Company's elastomeric fibers. The Company's sales and marketing organization regularly provides market feedback to Globe's research and development teams. The Company believes this high level of service has been instrumental in retaining and attracting customers. Globe sells spandex fiber under its GLOSPAN(R) and CLEERSPAN(R) brand names. The Company does not require customers to co-brand their fabrics or products with its brand name. The Company believes that this marketing strategy is attractive for customers who seek to build their own brand identity and desire flexibility in sourcing their spandex fiber requirements. 3 Competition Spandex Fiber. The Company competes in the spandex fiber markets primarily on the basis of product quality, service, price and product innovation. The Company competes in the spandex fiber market primarily with DuPont and Bayer, both of which have domestic facilities, and with a number of foreign competitors. Some of the Company's competitors have substantially greater financial, marketing, manufacturing, distribution, sales and support resources, market share and brand awareness than the Company. Despite significant growth in demand for spandex fiber since 1990, the number of spandex fiber manufacturers has remained relatively constant primarily due to the technological expertise required to produce spandex fiber and the substantial capital requirements to establish a spandex fiber manufacturing facility. Because spandex fiber production is not labor- intensive, the Company believes that the availability of low-cost unskilled labor does not provide foreign manufacturers with a significant competitive advantage. Latex Thread. The Company competes in the latex thread market on the basis of product quality, product variety and price. The Company focuses its latex thread product marketing efforts on high quality and specialty latex thread, which requires high levels of customer support. The Company believes that its customer service and product quality, and its ability to respond to the just- in-time inventory needs of domestic customers, permit it to compete effectively with foreign latex thread manufacturers. The Company's primary competitors in the latex thread markets are foreign producers. Suppliers During 1999, raw materials represented 38.4% of the Company's total cost of sales and 25.6% of net sales. The primary raw materials used by the Company are polytetramethylene ether glycol, which the Company purchases from BASF, and polyester resin, which the Company purchases from two suppliers. These materials are used in a wide variety of products, and based on its experience, management believes that adequate quantities of these materials will be available from existing or alternative suppliers in the foreseeable future. The Company's ten largest suppliers accounted for approximately 94.0% of its total raw material purchases and 36.1% of its total cost of sales in 1999, with BASF, Polyurethane Specialties Corp. and Ennar Latex, Inc. accounting for 49.9%, 19.7% and 7.3% of such raw material purchases, respectively. The prices for the Company's raw materials have generally been stable over the past five years, although there can be no assurance that they will not fluctuate in the future. Intellectual Property The Company utilizes a variety of proprietary technology in its manufacturing processes. In addition to its proprietary technology, management believes that the Company's research, development and engineering skills, as well as its technical know-how, are significant to the Company's business. Much of the Company's technology is not patented. The Company relies primarily on intellectual property laws, confidentiality procedures and contractual provisions to protect its intellectual property. The Company seeks to protect the majority of its technology under trade secret laws, which afford only limited protection. The Company owns certain brand names and trademarks used in its business, including GLOSPAN(R) and CLEERSPAN(R). Manufacturing The Company utilizes multiple manufacturing processes that allow it to cost-effectively produce a broad range of elastomeric fibers. The Company utilizes real-time control and monitoring systems that continuously monitor key process variables using a sophisticated closed loop system of computers, sensors and custom software. Spandex Fiber. The Company produces spandex fiber in a wide variety of deniers, using dry-spin and reaction spin processes. Typically, spandex fiber of heavier deniers is produced by the reaction spin process, while fine denier threads are produced by the dry-spin process. 4 In 1985, the Company began commercial production of fine denier spandex fiber using a dry-spin, polyether-based process at its Fall River facility. Fine denier fiber production is a continuous process accomplished by vertical spinning of the polymer from the top of a production cell to the bottom, where the chamber is heated and filled with nitrogen in order to strip the solvent from the fiber. The solvent is removed from the cell chamber as a gas, recovered and recycled in a separate process. The process is monitored and controlled by a state-of-the-art computer system developed specifically for the Company. The Company produces fine denier spandex fiber using the dry-spin process at its facilities in Fall River, Massachusetts and Tuscaloosa, Alabama, and currently has the capacity to produce 14.2 million pounds of fine denier spandex fiber annually using the dry-spin process. The Company believes that it is the only manufacturer of spandex fiber using the reaction spin process, which is based on technology proprietary to the Company. The process begins with the preparation of the prepolymer which is transported to an extruder, where it is processed through pumps and filters. The resulting pressure forces the prepolymer through a series of tubes and spinerettes, which distribute the prepolymer into a spinning tank where the chemical reaction which gives the fiber its elasticity occurs and the fibers are formed. The fibers are heated, cured and dried in ovens and then cooled, lubricated and spooled for shipment. In some cases, the Company uses a proprietary process which permits the Company to deliver the fiber in "knit- tape" form, which facilitates its use for certain customers. The Company conducts reaction spin production at its Fall River, Massachusetts, and Gastonia, North Carolina facilities. It currently has the capacity to produce 13.4 million pounds of heavy denier spandex fiber annually using the reaction spin process. Latex Thread. The Company manufactures latex thread through a batch process which begins with the combination of latex (a natural rubber material) and various base chemicals. This compound is matured, heated and fed to extruders, where it is pumped through a series of filters and distributed separately out of a group of capillaries. These capillaries produce latex thread which is then moved through an acid bath reservoir before being washed, dried and cured. At the end of the extruder, the fibers are combined into ribbons of various counts depending on customer needs. The Company produces latex thread at its Fall River, Massachusetts facility, and currently has the capacity to produce 11.0 million pounds of latex thread annually. See also Products section for details on the Company's impending sale of its Latex thread operation. Environmental, Health and Safety Matters The Company is subject to stringent environmental, health and safety requirements, including laws and regulations relating to air emissions, wastewater management, the handling and disposal of waste and the cleanup of properties affected by hazardous substances. The Company's management believes that its operations have been and are in substantial compliance with environmental, health and safety requirements, and that it has no liabilities arising under such requirements, that would have a material adverse effect on the Company's operations, financial condition or competitive position. During 1998 and 1999, respectively, the Company spent approximately $2.9 million and $2.7 million on environmental, health and safety compliance activities at its three operating locations. Amounts spent in 1998 include approximately $0.2 million spent in connection with the Company's efforts to resolve pending compliance issues relating to air emissions and wastewater discharges from the Company's Fall River, Massachusetts facility. Since 1986, the Company has received requests for information and related correspondence from the U.S. EPA and other third parties indicating that the Company might be responsible under CERCLA or Superfund laws for costs associated with the investigation and cleanup of ten contaminated sites. The Company's management believes that the Company has resolved its involvement with respect to eight of these sites (five of which were inter-related) since 1988 and that the Company's involvement in matters arising under the Superfund laws will not have a material adverse effect on the Company's operations, liquidity or financial condition. 5 In December 1996, the Company's management learned that the U.S. EPA and the U.S. Attorney's Office were conducting an investigation into whether the Company had engaged in criminal violations of environmental laws with respect to its Fall River, Massachusetts facility. The investigators have not informed the Company of the scope of their inquiry. The Company has provided certain information regarding its Fall River operations to the federal investigators and believes it has cooperated fully with their inquiry. The Company does not know whether the investigation is currently active. If the Company is charged with violations of environmental laws, it may be subject to substantial fines and other penalties. Based on the Company's discussions with the investigators and the results of the Company's internal investigation of this matter, the Company's management does not believe that the investigation will result in any monetary or other penalties that would have a material adverse effect on the Company's financial condition, results of operations or ability to meet its obligations under the Company's existing debt. The Company is entitled to indemnification from, among other items, any liabilities arising out of this investigation to the extent related to the activities of the Company prior to the Merger (as defined in Item 7 Liquidity and Capital Resources--The Transactions). This indemnity expires on December 31, 2001. Employees As of March 25, 2000, the Company had approximately 768 employees. Of these, approximately 152 are salaried employees and 616 are hourly workers. None of the Company's employees are covered by a collective bargaining agreement. The Company believes its relationships with its employees are good. Item 2. Properties
Square Location Footage Owned/Leased Principal Function - -------- -------- ------------ ------------------ Fall River, Massachusetts.. 375,000 Owned Headquarters Fine denier spandex fiber Heavy denier spandex fiber Latex thread Gastonia, North Carolina... 180,000 Owned Heavy denier spandex fiber 80,000 Owned Distribution center 10,000 Leased Warehouse Tuscaloosa, Alabama........ 157,000 Owned Fine denier spandex fiber Rancho Dominguez, 15,000 Leased Warehouse California................ Charlotte, North Carolina.. 15,000 Leased Warehouse
The Company believes that its facilities are adequate and suitable for the purposes for which they are utilized by the Company. Item 3. Legal Proceedings In April 1997 two domestic purchasers of extruded latex thread filed a complaint against a number of foreign manufacturers and distributors of such thread, including an Indonesian limited liability company in which Globe Holdings then owned a 40% interest (the "Joint Venture"). The complaint alleged an international conspiracy to restrain trade in, and fix prices of, the thread in the U.S. The Company was not named as a defendant in the case. The Joint Venture alleged in its motion to dismiss that not all parties to the conspiracy had been joined. There can be no assurance that the Company will not be named in the future. The Company is entitled to indemnification from, among other items, any liabilities arising out of any criminal or civil antitrust claims or investigations resulting from the above-described proceedings to the extent related to the Company's activities prior to the Merger (as discussed in Item 7). This indemnity expires on December 31, 2001. The U.S. Department of Commerce has imposed anti-dumping duties on Indonesian extruded latex producers. Additional duties have been levied on extruded latex thread imported from Indonesia as of March 6 1999. During 1998 and 1999, the Company purchased approximately $7.3 million and $1.7 million, respectively, of latex thread from the Joint Venture for resale in the North American market. From time to time, the Company has been and is involved in various legal proceedings, all of which management believes are routine in nature and generally incidental to the conduct of its business. The ultimate legal and financial liability of the Company with respect to such proceedings cannot be estimated with certainty, but the Company believes, based on its examination of such matters, that none of such proceedings, if determined adversely to the Company, would have a material adverse effect on the Company's results of operations, financial condition and its ability to meet its obligations under the Company's existing debt. Item 4. Submission of Matters to a Vote of Security Holders None. 7 PART II Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters As of March 25, 2000, the Company had outstanding an aggregate of 1,000 shares of Common Stock. All of the Company's shares of Common Stock are owned by its parent, Globe Holdings. The Company does not expect to pay dividends on its Common Stock for the foreseeable future. The payment of dividends by the Company to the holders of Common Stock is currently prohibited by the Company's bank credit facility and limited by the indenture under which the Company's 10% Senior Subordinated Notes due 2008 were issued. Item 6. Selected Consolidated Financial Data The following information is qualified in its entirety by the consolidated financial statements of the Company. The following selected consolidated financial information should be read in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements of the Company and the related notes thereto included herein.
Fiscal Year Ended December 31, ------------------------------------------------ 1995 1996 1997 1998 1999 -------- -------- -------- -------- -------- (dollars in thousands) Statement of Income Data: Net sales............... $128,319 $152,603 $170,941 $171,093 $173,933 Cost of sales........... 97,182 110,609 115,099 111,609 116,111 -------- -------- -------- -------- -------- Gross margin.......... 31,137 41,994 55,842 59,484 57,822 Selling, general and administrative expenses............... 18,515 21,705 24,381 23,656 25,878 Research and development costs.................. 2,260 2,533 2,633 4,263 3,748 -------- -------- -------- -------- -------- Operating income...... 10,362 17,756 28,828 31,565 28,196 Other income (expenses): Interest, net........... (6,030) (5,285) (3,968) (12,665) (28,251) Transaction compensation expense................ -- -- -- (5,778) -- Transaction commitment fee expense............ -- -- -- (1,000) -- Loss in investment in joint venture (1)...... (643) -- -- -- -- Other income, etc....... 438 875 372 749 765 -------- -------- -------- -------- -------- Income before income taxes and extraordinary income. 4,127 13,346 25,232 12,871 710 Provision for income taxes.................. 1,718 4,784 8,383 4,445 2,738 -------- -------- -------- -------- -------- Income (loss) before extraordinary item..... 2,409 8,562 16,849 8,426 (2,028) Loss from write-off of deferred financing cost, net (2).......... 1,294 -- 301 187 -- -------- -------- -------- -------- -------- Net income (loss)..... $ 1,115 $ 8,562 $ 16,548 $ 8,239 $ (2,028) ======== ======== ======== ======== ======== Other Financial Data: Gross margin %.......... 24.3% 27.5% 32.7% 34.8% 33.2% EBITDA (3).............. $ 22,480 $ 28,960 $ 42,377 $ 43,563 $ 40,543 EBITDA margin % (4)..... 17.5% 19.0% 24.8% 25.5% 23.3% Depreciation and amortization........... $ 10,688 $ 9,676 $ 12,208 $ 14,429 $ 11,219 Capital expenditures.... $ 8,640 $ 5,806 $ 17,151 $ 35,805 $ 11,174
8
December 31, --------------------------------------------- 1995 1996 1997 1998 1999 ------- ------- -------- --------- --------- (dollars in thousands) Balance Sheet Data: Cash........................ $ 3,143 $ 3,101 $ 1,947 $ 1,439 $ 3,564 Working capital (deficit)... 5,052 4,263 19,453 20,674 (245,155) Working capital as adjusted (5)........................ 20,747 17,250 27,518 30,569 38,195 Property, plant and equipment, net............. 53,499 50,122 57,950 83,329 84,775 Total assets................ 92,824 91,329 105,133 145,826 155,635 Total debt.................. 66,698 50,615 56,917 276,378 288,533 Redeemable cumulative preferred stock............ 6,466 6,466 -- -- -- Stockholders' equity (deficit).................. 5,563 13,594 31,109 (155,177) (157,205)
- -------- (1) Represents the Company's share of the operating losses incurred by a joint venture in which the Company acquired a 40% interest in 1990. The Company accounted for its investment in the joint venture using the equity method of accounting. (2) Reflects non-recurring charges related to the write-off of the unamortized balance of deferred financing costs in the year in which the related refinancing occurred. The amounts are shown net of applicable income tax. (3) EBITDA represents income before interest expense (net), income taxes, depreciation and amortization, gain or loss on disposal of assets, noncash charges associated with net periodic postretirement benefit costs, noncash stock-based compensation, and deferred compensation and extraordinary, unusual, non-recurring charges consisting of (a) those referred to in footnotes (1) and (2) above, and (b) certain non-recurring legal expenses related to environmental matters of $454,000 in 1997 and $171,000 in 1998. EBITDA is not intended to represent cash flow from operations or net income as defined by generally accepted accounting principles and should not be considered as a measure of liquidity or an alternative to, or more meaningful than, operating income or operating cash flow as an indication of the Company's operating performance. EBITDA is included herein because management believes that certain investors find it a useful tool for measuring the Company's ability to service its debt. (4) EBITDA margin represents EBITDA as calculated in footnote (3) above as a percentage of net sales. (5) Working capital as adjusted represents the difference between current assets less cash and current liabilities less the current portions of long term debt and long term capital leases and notes payable. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of the Company's financial condition and results of operations is qualified in its entirety by, and should be read in conjunction with, the consolidated financial statements of the Company and related notes thereto included herein. General During 1999 the spandex industry experienced increased pricing pressure due to capacity increases and continued oversupply of fabric in the apparel industry related to Asian economic difficulties that began in 1998. As a result of these factors, the Company's operating results in 1999 were not sufficient to meet certain financial covenants under its bank credit facility. The credit agreement was amended in January and October 1999 to reset certain covenants at levels the Company believed it could achieve. These covenants governed the Consolidated Leverage Ratio, the Consolidated Interest Coverage Ratio, and Minimum EBITDA. In addition, revolving loan borrowings were conditioned on meeting a specified Consolidated Leverage ratio. As part of these amendments, the interest rates payable on term loan and revolving loan borrowings was increased and the payment of the management fee due to Code, Hennessy & Simmons was conditioned on satisfaction of certain leverage tests, which were not met in 1999. As of December 31, 1999, the Company was not in compliance with the Capital Expenditures covenant in its bank credit agreement, and the Company expects that it will not be able to meet the Consolidated Interest Coverage Ratio, Consolidated Fixed Charge Coverage Ratio, Maximum Leverage Ratio, 9 and Minimum EBITDA covenant in the bank credit agreement during 2000. To date, the lenders under the bank credit agreement have not accelerated the Company's debt under the credit agreement, and the Company is not in payment default. The lenders have agreed to enter into a forbearance agreement for the credit facility. The Company is negotiating to the specific terms of the forbearance agreement with its lenders. The Company expects that the forbearance agreement would last until May 31, 2000, and would preclude it from borrowing on its credit facility and require interest and bank fees to be paid monthly. As a result of the Company's default under its bank credit agreement, the Company's auditors have included a going concern paragraph in their audit opinion accompanying the 1999 financial statements. This "going concern" paragraph indicates that the Company's financial statements have been prepared assuming the Company will continue as a going concern and do not include any adjustments relating to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. Results of Operations The following table sets forth for the periods indicated information derived from the consolidated financial statements of income expressed as a percentage of net sales. There can be no assurance that the trends in sales growth or operating results will continue in the future.
Year Ended December 31, -------------------- 1997 1998 1999 ------ ------ ------ Net sales.................................................. 100.0% 100.0% 100.0% Cost of sales.............................................. 67.3% 65.2% 66.8% Gross margin............................................... 32.7% 34.8% 33.2% Selling, general and administrative expenses............... 14.3% 13.8% 14.9% Research and development expenses.......................... 1.5% 2.5% 2.1% Operating income........................................... 16.9% 18.5% 16.2%
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998. Net sales of the Company for 1999 were $173.9 million and $171.1 million for 1998, representing an increase of 1.7%. An overall increase of 11.2% in fine denier spandex sales was the result of a 25.4% increase in units combined with an 11.3% decrease in price. Heavy denier spandex sales decreased by 7.0%, with both volume and price down from last year. Latex sales decreased by 13.9% with both volume and price down from last year. The overall downward trend in selling price in the fiber industry is related to several factors. The oversupply of fabric in the apparel industry, that was originally caused by the Asian economic crisis in 1998, continued to exist in 1999 and resulted in price pressure from apparel manufacturers. In addition over the past several years the elastomeric fiber industry has increased production capacity of Spandex and such increase has out paced demand. Gross margin for 1999 decreased $1.7 million, or 2.8%, to $57.8 million from $59.5 million in 1998. The Company's gross margin as a percentage of net sales decreased to 33.2% in 1999 from 34.8% in 1998. The decrease in gross margin was primarily due to a decrease in pricing on fine denier spandex. Selling, general and administrative expenses for the Company in 1999 increased $2.2 million, or 9.4%, to $25.9 million from $23.7 million in 1998. As a percentage of net sales, selling, general and administrative expenses increased to 14.9% in 1999 from 13.8% in 1998. The increase was primarily due to increases in wages and property taxes related to the expansion of it's fine denier Spandex facility. Also, during 1998 the Company capitalized certain selling, general and administrative expenses related to the above expansion. Research and development expenses for the Company decreased $0.5 million, or 12.1%, to $3.7 million from $4.3 million in 1998. Research and development expenses for the Company as a percentage of net sales 10 decreased to 2.1% in 1999 from 2.5% in 1998. The decrease is attributable to the Company refocusing and streamlining its research and development efforts. The Company has concentrated on projects that have a higher probability of success and will result in new advances in chemistry and process capability. Net interest expense for the Company in 1999 increased $15.6 million to $28.3 million from $12.7 million in 1998. The increase in interest expense was directly attributable to the recapitalization of the Company, which occurred in the second quarter of 1998. Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 Net sales of the Company for 1998 were $171.1 million, remaining consistent with 1997. An 8.5% increase in fine denier spandex sales was offset by a 20.6% decrease in latex fiber sales. Heavy denier spandex sales remained consistent with 1997. The current economic crisis in Asia, which has resulted in an influx of fiber, fabric and apparel into Europe from Asia, has had a negative impact on prices and the Company's sales in Europe. In addition, economic difficulties in Russia have resulted in reduced demand for the Company's products. Continued economic difficulties may precipitate further downturns in spandex fiber consumption in all of Globe's export markets. Gross margin of the Company for 1998 increased $3.7 million, or 6.5%, to $59.5 million from $55.8 million in 1997. The Company's gross margin as a percentage of net sales increased to 34.8% in 1998 from 32.7% in 1997. The increase in gross margin was primarily due to a favorable shift in product mix toward higher margin fine denier spandex fiber products. Fine denier spandex fiber sales represented 53.5% of total net sales in 1998 compared to 49.4% in 1997. Selling, general and administrative expenses for the Company in 1998 decreased $0.7 million, or 3.0%, to $24.4 million from $23.6 million in 1997. As a percentage of net sales, selling, general and administrative expenses decreased to 13.8% in 1998 from 14.3% in 1997. Research and development expenses for the Company in 1998 increased $1.7 million, or 61.9%, to $4.3 million from $2.6 million in 1997. Research and development expenses for the Company as a percentage of net sales increased to 2.5% in 1998 from 1.5% in 1997. The increase is primarily attributed to the development of a new heavy denier spandex fiber. Net interest expense for the Company in 1998 increased $8.7 million to $12.7 million from $4.0 million in 1997. The increase in interest expense was directly attributable to the recapitalization of the Company. Liquidity and Capital Resources Cash provided by operating activities was $18.6 million in 1997, $22.2 million in 1998 and $3.7 million in 1999. The increase in cash provided by operating activities in 1998 was primarily due to increases in accrued expenses, depreciation and amortization, amortization of unearned compensation, accretion on discounted notes, and decreases in accounts receivable and prepaid expenses, partially offset by decreases in accounts payable, taxes payable, and an increase in inventory. The reduction in cash provided by operating activities in 1999 was due to an increase in accounts receivable offset by increases in accretion on discounted notes, deferred income taxes, accounts payable and decreases in inventories, prepaid taxes and prepaid expenses. The average days sales outstanding for accounts receivable was approximately 56, 57 and 82 days for the year ended 1997, 1998 and 1999, respectively. The increase in days sales outstanding is due to increases in foreign sales, which have a longer payment cycle than domestic sales as a result of longer shipping times and extended credit terms required by foreign competition. Foreign sales represented 30.9% and 35.5% of total sales for the year ended December 31, 1998 and 1999, respectively. Management has established a plan to reduce the average days sales outstanding during 2000. The Company's inventories increased from $13.8 million at December 31, 1997 to $18.4 million at December 31, 1998. This increase was primarily due to higher fine denier production capacity which out paced demand. The Company's inventories decreased from $18.4 million at December 31, 1998 to $17.8 million at 11 December 31, 1999. The decrease can be attributed to the increase in unit sales volume of fine denier spandex over the prior year. For the year ended December 31, 1999 unit sales volume of fine denier spandex increased by 25.4% from the year ended December 31, 1998. The Company's accounts payable decreased from $7.4 million at December 31, 1997 to $6.0 million at December 31, 1998. The decrease was primarily due to the completion of the expansion project to increase fine denier spandex capacity. The Company's accounts payable increased from $6.0 million at December 31, 1998 to $6.3 million at December 31, 1998. The Company's note payable increased $8.8 million from $2.5 million at December 31, 1997 to $11.3 million at December 31, 1998. The increase was in connection with the recapitalization transaction. The Company's note payable increased $8.7 million from $11.3 million at December 31, 1998 to $20 million at December 31, 1999. The increase was primarily due to interest payments due on the senior subordinated notes and working capital needs. Capital expenditures, including capital leases, were $17.2 million in 1997, $35.8 million in 1998 and $11.1 million for 1999. Capital expenditures incurred during 1997 and 1998 consisted primarily of expenditures for the expansion of the Tuscaloosa facility and process improvements. Capital expenditures incurred during 1999 consisted primarily of expenditures for a new computerized information system. The Company estimates that based on anticipated levels of operations its capital expenditures will be approximately $7.0 million in each 2000 and 2001. The Transactions During 1998, the Company's sole shareholder, Globe Holdings, was recapitalized (the "Recapitalization"). In connection with the Recapitalization, . Globe Holdings transferred substantially all of its assets and liabilities to the Company (the "Asset Drop Down"), . certain investors invested $50.0 million in Globe Holdings, . a company formed by Code, Hennessy & Simmons LLC merged with and into Globe Holdings (the "Merger"), with Globe Holdings being the surviving corporation, . the Company entered into a new senior secured credit facility (the "Senior Credit Facility") and repaid its debt under its existing credit facilities, . holders of the shares of common stock of Globe Holdings outstanding prior to the Recapitalization received cash (including the payment by Globe Holdings of fees and expenses on their behalf) equal to $315.0 million less (x) the amount of the Company's outstanding indebtedness for borrowed money and (y) the amount of the retained investment, . Globe Holdings deposited $15.0 million into escrow to secure certain indemnification and other obligations, . the Company sold $150 million in principal amount of its 10% Senior Subordinated Notes due 2008 (the "Notes"), . for an aggregate purchase price of $25 million, Globe Holdings sold units consisting of $49.086 million principal amount at maturity of 14% Senior Discount Notes due 2009 and warrants to purchase shares of its Class A Common Stock. The Senior Credit Facility consists of a $115.0 million term loan facility, which was fully drawn upon the consummation of the transactions described above, and a $50.0 million revolving loan facility, $25.9 million of which was outstanding at March 25, 2000. The revolving loan facility is available for general corporate and working capital purposes. As of December 31, 1999, the Company was not in compliance with its Senior Credit Facility. The lenders have agreed to enter into a forbearance agreement for the credit facility. The Company is negotiating to the specific terms of the forbearance agreement with its lenders. The Company expects that the forbearance agreement would last until May 31, 2000, and would preclude it from borrowing on its credit facility and require interest and bank fees to be paid monthly. 12 As a result of the transactions described above, the Company's total debt significantly increased. Interest payments on the Notes and under the Senior Credit Facility represent significant liquidity requirements for the Company. The Notes require semi-annual payments and interest on the loans under the Senior Credit Facility is due at least quarterly. Instruments governing the Company's indebtedness, including the Senior Credit Facility and the indenture governing the Notes, contain financial and other covenants that restrict, among other things, the Company's ability to incur additional indebtedness, incur liens, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of substantially all of the assets of the Company. Such limitations, together with the highly leveraged nature of the Company, could limit corporate and operating activities, including the Company's ability to respond to market conditions, to provide for unanticipated capital investments or to take advantage of business opportunities. The Company's operating results in 1999 were not sufficient to meet certain financial covenants under its bank credit facility. The credit agreement was amended in January and October 1999 to reset certain covenants at levels the Company believed it could achieve. These covenants governed the Consolidated Leverage Ratio, the Consolidated Interest Coverage Ratio, and Minimum EBITDA. In addition, revolving loan borrowings were conditioned on meeting a specified Consolidated Leverage ratio. As part of these amendments, the interest rates payable on term loan and revolving loan borrowings was increased and the payment of the management fee due to Code, Hennessy & Simmons was conditioned on satisfaction of certain leverage tests, which were not met in 1999. As of December 31, 1999, the Company was not in compliance with the Capital Expenditures covenant in its bank credit agreement, and the Company expects that it will not be able to meet the Consolidated Interest Coverage Ratio, Consolidated Fixed Charge Coverage Ratio, Maximum Leverage Ratio, and Minimum EBITDA covenant in the bank credit agreement during 2000. To date, the lenders under the bank credit agreement have not accelerated the Company's debt under the credit agreement, and the Company is not in payment default. The lenders have agreed to enter into a forbearance agreement for the credit facility. The Company is negotiating to the specific terms of the forbearance agreement with its lenders. The Company expects that the forbearance agreement would last until May 31, 2000, and would preclude it from borrowing on its credit facility and require interest and bank fees to be paid monthly. As a result of the Company's default under its bank credit agreement, the Company's auditors have included a going concern paragraph in their audit opinion accompanying the 1999 financial statements. As long as the lenders forbear from accelerating the Company's obligations under the bank credit facility, the Company expects that it would continue to operate in default for the near term. Acceleration of obligations under the bank credit facility would result in a default in the Company's $150 million 10% Senior Subordinated Notes due 2008. The Company expects that it will be required to restructure its outstanding debt and financing arrangements, in any case. There can be no assurances the Company will be able to restructure its debt, or of the terms on which any such restructuring may occur. The Company's senior subordinated debentures could suffer substantial impairment in a restructuring. Impact of the Year 2000 Issue The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Computer equipment and software and devices with embedded technology that are time-sensitive may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. During the last several years, the Company has spent approximately $0.3 million to address issues related to the Y2K problem. All of these costs were expensed as incurred and were funded by cash flow from operations. In 1999, the Company installed a new computerized information system which was Y2K compliant and did not require any significant additional costs attributable to the Y2K issue. As of December 31, 1999, the Company 13 had completed all aspects of its Y2K readiness program and, through March 25, 2000, the Company has not experienced any significant problems related to the Y2K issue. Inflation The Company does not believe that inflation has had any material effect on the Company's business over the past three years. Impact of New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and for Hedging Activities ("Statement 133"). Statement 133 is effective for years beginning after June 15, 2000. Statement 133 provides a comprehensive and consistent standard for the recognition and measurement of derivatives and hedging activities. Management does not anticipate that the adoption of Statement 133 will have a material impact on its financial position or the results of its operations. This Annual Report on Form 10-K contains certain forward-looking statements, including, without limitation, statements concerning the Company's future financial position, business strategy, budgets, projected costs and plans and objectives of management for future operations. These forward- looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (which do not apply to initial public offerings). Forward-looking statements generally can be identified by the use of forward-looking terminology such as "may," "will," "expect," "intend," "estimate," "anticipate," "believe," "should," "plans," or "continue" or the negative thereof or variations thereon or similar terminology. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. These forward-looking statements are subject to a number of risks and uncertainties, including, without limitation, those related to the Company's substantial leverage and debt service requirements, the Company's ability to restructure its debt, the Company's dependence on significant customers and on certain suppliers, the effects of competition on the Company, the risks related to environmental, health and safety laws and regulations, the Company's exposure to foreign sales risk and the cyclicality of the textile industry, and the other factors discussed in the Company's filings with the Securities and Exchange Commission. Actual results could differ materially from these forward-looking statements. Item 7(a). Quantitative and Qualitative Disclosures about Market Risk The Company is exposed to market risk from changes in interest rates on its senior secured credit facility. The Company uses interest rate swap agreements to manage its exposure to interest rate movements by effectively converting a portion of its variable rate long-term debt from floating to fixed rates. These agreements involve the exchange of variable rate payments for fixed rate payments without the effect of leverage and without the exchange of the underlying principal amount. Interest rate differentials paid or received under these swap agreements are recognized over the life of the contracts as adjustments to interest expense. At December 31, 1999 the notional amount of interest rate swaps outstanding was $25 million. A 10% increase in the interest rates on the Company's variable rate debt outstanding at December 31, 1999 would approximate 98 basis points. Such an increase in interest rates would increase the Company's interest expense by approximately $1.1 million. The Company periodically enters into forward contracts with a third party to sell Italian lire and Euro. Relative to foreign currency exposures existing at December 31, 1999, a 10% unfavorable movement in the Italian lire rate and the Euro rate would not significantly affect consolidated operating results, financial position or cash flows. Item 8. Financial Statements See the attached Consolidated Financial Statements (pages F-1 through F-19) Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 14 PART III Item 10. Directors and Executive Officers of the Registrant The executive officers and directors of the Company, and their ages as of March 25, 2000 are set forth below:
Name Age Position ---- --- -------- Thomas A. Rodgers, III.. 54 Chairman Richard F. Heitmiller... 71 Vice Chairman, Acting Chief Executive Officer, Director Horst Hesshaus.......... 55 Vice President, Operations Lawrence R. Walsh....... 47 Vice President, Finance and Administration Robert L. Bailey........ 62 Vice President, Sales and Marketing Robert F. Rebello....... 31 Vice President, Technical Operations William J. Girrier...... 43 Assistant Vice President of Marketing Kevin T. Cardullo....... 40 Assistant Vice President of Finance and Accounting Andrew W. Code.......... 41 Director Peter M. Gotsch......... 35 Director Edward M. Lhee.......... 29 Director
The present principal occupations and recent employment history of each of the executive officers and directors of the Company listed above are set forth below. Thomas A. Rodgers, Jr., co-founded the Company in 1945. He served as Chairman since 1945, and served as president from 1945 to 1992. On January 1, 2000, Thomas A. Rodgers, Jr. stepped down as Chairman and retired from the Company. Thomas A. Rodgers, III, was appointed Chairman on January 1, 2000. He served as President of the Company from 1992 to 1999. He served as the Executive Vice President and Chief Operating Officer of the Company from 1985 to 1992. Mr. Rodgers joined the Company in 1968. Mr. Rodgers has been a Director of the Company since 1972. Dr. Richard F. Heitmiller was appointed to Vice Chairman and Acting Chief Executive Officer on January 1, 2000. Dr. Heitmiller is an industry consultant who specializes in the elastomeric fiber, textile and chemical industries. Prior to forming his own consulting firm, Dr. Heitmiller was a Vice President of Arthur D. Little, Inc. He is a director of Wellman, Inc. a producer of fibers. Horst Hesshaus joined the Company in 1999 as the Company's Vice President of Operations. From 1997 to 1998 he served as Director of Knitting at Malden Mills. From 1994 to 1997 he served as Vice President of Operations at Carapace, a Subsidiary of Lohman. Lawrence R. Walsh has served as Vice President, Finance and Administration of the Company since 1982. From 1976 to 1982, he was employed by Smith Precious Metals Co. Robert L. Bailey has served as the Company's Vice President, Sales and Marketing since he joined the Company in 1979. From 1972 to 1979, he served as Vice President of Sales for the Yarn Division of Texfi Industries, Inc., and from 1967 to 1972 was Vice President of Sales for Intercontinental Fibers. Robert F. Rebello was appointed to Vice President, Technical Operations on December 7, 1999. Mr. Rebello joined the Company in 1992 and has served as a Process Development Engineer, Process Development Manager, and Technical Director. From 1991 to 1992, he worked as a Technical Sales Representative for Exxon Company USA. Mr. Rebello has a BS in Chemical Engineering and an MBA from Northeastern University." William J. Girrier has been appointed to Assistant Vice President of Marketing in July 1999. Mr. Girrier has been with the Company since 1990 and has served as Marketing Manager and then as Director of Marketing and Business Development. From 1987 to 1990, he was an Associate Manager of The Robbins Group, a commercial real estate development company. From 1978 to 1987, he served as a Naval Officer in various command and staff positions at the Pentagon and onboard warships. 15 Kevin T. Cardullo has been appointed to Assistant Vice President of Finance and Accounting in July 1999. From 1992 to 1999 Mr Cardullo has served as the Company's Director of Finance and Accounting. He is a Certified Public Accountant, and worked as a Senior Manager with Ernst & Young from 1986 to 1992. Mr. Cardullo was with Coopers & Lybrand from 1983 to 1986. Andrew W. Code is a Partner of Code Hennessy & Simmons LLC ("CHS"), which manages three private equity funds, including Code, Hennessy & Simmons III, L.P. Since founding the first such fund in 1988, Mr. Code has been actively involved in the investment organization and investment management activities of CHS. Mr. Code was a Vice President with Citicorp's Leveraged Capital Group from 1986 to 1988, and prior to 1986 he was employed by American National Bank. He is a director of SCP Pool Corporation, a distributor of swimming pool supplies. Peter M. Gotsch has been a Partner of CHS since 1997, and has been employed by CHS and its affiliates since 1989. From 1987 to 1989, Mr. Gotsch was a Corporate Banking Officer at The First National Bank of Chicago, N.A. He is a director of SCP Pool Corporation. Edward M. Lhee has been an associate of CHS since 1997. From 1995 to 1997, he attended the Kellogg Graduate School of Management. From 1992 to 1995, Mr. Lhee was employed by Morgan Stanley & Co., where he worked as a financial analyst in the mergers and acquisitions and corporate finance departments. The term of office for each officer and director of the Company is one year. Item 11. Executive Compensation The following table summarizes the compensation paid by Globe Holdings and its subsidiaries, including the Company, to the Company's Chief Executive Officer and four other most highly compensated executive officers at December 31, 1999 (collectively, the "Named Executive Officers") for services rendered to the Company in 1999. Summary Compensation Table
Long Term Annual Compensation Compensation ---------------------------- ------------ Other Annual Securities All Other Name and Principal Salary Bonus Compensation Underlying Compensation Position Year ($) ($) (1) Option/SARs ($) - ------------------ ---- ------- ------- ------------ ------------ ------------ Thomas A. Rodgers, Jr. (2)................ 1999 -- -- -- -- 93,500 Chairman 1998 514,237 -- -- -- -- 1997 759,668 5,000 -- -- 198,796 Thomas A. Rodgers, III (3)................ 1999 549,042 -- -- -- 70,258 President 1998 549,042 880,000 4,731,890 -- 70,258 1997 549,042 197,000 -- 11,250 70,158 Horst Hesshaus (4)...... 1999 106,510 -- -- -- -- Vice President, Operations Americo Reis (5)........ 1999 126,374 -- -- -- 580,195 Vice President, Operations (Retired) 1998 211,982 440,000 1,051,290 2,246.5 579,795 1997 211,982 72,500 -- 3,750 79,371 Lawrence R. Walsh (6)... 1999 218,889 -- -- -- 29,505 Vice President, Finance 1998 218,889 440,000 1,051,290 2,246.5 29,505 and Administration 1997 218,889 72,500 -- 3,750 29,338 Robert L. Bailey (7).... 1999 200,000 -- -- -- 328,677 Vice President, Sales and Marketing 1998 200,000 440,000 1,051,290 2,246.5 328,677 1997 176,828 72,500 -- 3,750 25,022
- -------- (1) Other Annual Compensation reflects the difference between exercise price and fair market value of stock options. (2) Thomas A. Rodgers, Jr. retired on January 1, 2000. All other compensation reflects payments for consulting services in 1999 and reimbursement of premiums for life insurance in 1997. 16 (3) All other compensation reflects reimbursement of premiums for life insurance and Company contributions under a 401(k) plan. (4) Joined the Company in February 1999. (5) Retired in July 1999. All other compensation reflects reimbursement of premiums for life insurance and Company contributions under a 401(k) plan. (6) All other compensation reflects reimbursement of premiums for life insurance and Company contributions under a 401(k) plan. (7) All other compensation reflects reimbursement of premiums for life insurance and Company contributions under a 401(k) plan. No options were granted in fiscal 1999 to the Named Executive Officers. The following table sets forth information with respect to all options exercised in fiscal 1999 and the year-end value of unexercised options held by the Named Executive Officers. Aggregated Option/SAR Exercises in Last Fiscal Year And Fiscal Year-End Option/SAR Values
Number of Securities --------------- Underlying Value of Unexercised Unexercised In-the-Money Options/SARs at Options/SARs at Fiscal Fiscal Year End Year-End --------------- ---------------------- Shares Acquired Value Exercisable/ on Exercise Realized Unexercisable Exercisable/ Name (#) ($) (#) Unexercisable ($) - ---- --------------- -------- ------------- ---------------------- Thomas A. Rodgers, Jr... -- -- -/- -- Thomas A. Rodgers, III.. -- -- -/- -- Horst Hesshaus.......... -- -- -/- -- Americo Reis............ -- -- 2,246.5/- $400,000 Lawrence R. Walsh....... -- -- 2,246.5/- $400,000 Robert L. Bailey........ -- -- 2,246.5/- $400,000
Pension Plans Globe maintains a Non-Qualified Pension Plan and a Deferred Compensation Plan, pursuant to which each of Thomas A. Rodgers, III, Lawrence R. Walsh and Robert L. Bailey (the "Participating Executives") will be entitled to receive certain payments upon retirement. Under the Non-Qualified Pension Plan, each of the Participating Executives will receive a lump sum distribution upon retirement at age 65. The amounts payable under the Non-Qualified Pension Plan were determined by the Company and its consultants to approximate 50% of estimated final compensation. Pursuant to the Deferred Compensation Plan, each Participating Executive is entitled to receive, beginning at his retirement at age 65, an annual distribution payable for the following 15 years. The following table shows the estimated annual benefits payable under the Non- Qualified Pension Plan and the Deferred Compensation Plan for each of the Participating Executives.
Estimated Annual Benefit Upon Retirement at Age 65 -------------------------- Deferred Non-Qualified Compensation Name Pension Plan Plan - ---- ------------- ------------ Thomas A. Rodgers, Jr. (1)........................... $ -- $ -- Thomas A. Rodgers, III............................... $206,400 $90,000 Horst Hesshaus....................................... $ -- $ -- Americo Reis......................................... $ 86,400 $25,000 Lawrence R. Walsh.................................... $104,000 $15,000 Robert L. Bailey..................................... $ 96,000 $20,000
- -------- (1) Thomas A. Rodgers, Jr. does not participate in the Non-Qualified Pension Plan or the Deferred Compensation Plan. 17 Employment Agreements Each of Messrs. Thomas A. Rodgers, III, Lawrence R. Walsh and Robert L. Bailey are parties to an Employment Agreement with Globe Holdings dated as of December 31, 1997 (the "Employment Agreements"). The Employment Agreements were transferred to the Company pursuant to the Asset Drop Down. The Employment Agreements provide for annual base salaries for Messrs. Rodgers, Walsh and Bailey of at least $549,000, $219,000 and $200,000, respectively, and provide that such executives shall generally be entitled to participate in all bonus and benefit plans made available to executives. The Employment Agreements have a term of three years, but may be terminated earlier by the Company or the executive. If an executive's employment is terminated by the Company without Cause or by the executive with Good Reason (each as defined in the Employment Agreements), then the Company will be required to pay the executive his base salary through December 2000 and the maximum amount he would have been entitled to under the Company's incentive plans for the year in which the termination occurred, and will also be required to provide insurance benefits for three years from the date of termination, except to the extent the executive obtains comparable benefits from a subsequent employer. Item 12. Security Ownership of Certain Beneficial Owners and Management. Globe Holdings owns all of the Company's issued and outstanding capital stock. The following table sets forth certain information as of March 25, 2000 regarding the beneficial ownership of the capital stock of Globe Holdings by (i) each shareholder who beneficially owns more than 5% of the common stock of Globe Holdings, (ii) each director and Named Executive Officer of the Company and (iii) all directors and executive officers of the Company as a group. Except as otherwise indicated below, each of the persons named in the table has sole voting and investment power with respect to the securities beneficially owned by it or him as set forth opposite its or his name. Unless otherwise noted, the address for each director and executive officer of the Company is c/o the Company, 456 Bedford Street, Fall River, Massachusetts 02720.
Common Stock Preferred Stock -------------------- ------------------- Name of Beneficial Owner Number (1) Percent Number (1) Percent - -------------------------------------- ------------ ------- ---------- -------- Code, Hennessy & Simmons III, L.P. (2).................................. 1,649,155.26 75.7 22,022.55 75.7 Thomas A. Rodgers, Jr. (3)............ 166,244 7.6 2,220 7.6 Thomas A. Rodgers, III................ 89,862 4.1 1,200 4.1 Horst Hesshaus........................ -- -- -- -- Americo Reis (4)...................... 22,465 1.0 300 1.0 Lawrence R. Walsh (4)................. 22,465 1.0 300 1.0 Robert L. Bailey (4).................. 22,465 1.0 300 1.0 Robert Rebello........................ -- -- -- -- Andrew W. Code (5).................... 1,649,155.26 75.7 22,022.55 75.7 Peter M. Gotsch (5)................... 1,649,155.26 75.7 22,022.55 75.7 Edward M. Lhee........................ 1,647.51 * 22 * Brinson Partners, Inc. (6)(7)......... 224,655 10.3 3,000 10.3 Virginia Retirement System (7)........ 179,724 8.2 2,400 8.2 All executive officers and directors as a group (11 persons).............. 1,808,059.77 80.5 24,144.55 80.5
- -------- *Less than 1% (1) Includes shares of Common Stock and Preferred Stock subject to options which are exercisable within 60 days of March 18, 1999. (2) The business address of Code, Hennessy & Simmons III, L.P. is 10 South Wacker Drive, Suite 3175, Chicago, Illinois 60606. (3) All of such shares are held of record by the Thomas A. Rodgers, Jr. Grantor Retained Annuity Trust, of which Thomas A. Rodgers, Jr. is the sole beneficiary. (4) All of the shares shown are issuable upon exercise of outstanding options. 18 (5) All of such shares are held of record by Code, Hennessy & Simmons III, L.P. Messrs. Code and Gotsch are officers, directors and shareholders of the sole general partner of Code, Hennessy & Simmons III, L.P. and share investment and voting power with respect to the securities owned by Code, Hennessy & Simmons III, L.P. Each of Messrs. Code and Gotsch disclaims beneficial ownership of such shares except to the extent of his pecuniary interest therein. The business address of Messrs. Code and Gotsch is c/o Code, Hennessy & Simmons III, L.P., 10 South Wacker Drive, Suite 3175, Chicago, Illinois 60606. (6) Brinson Partners, Inc. ("BPI") has advised the Company that it is an Investment Adviser registered under Section 203 of the Investment Advisers Act of 1940. Of the shares shown: (i) 38,631 shares of Common Stock and 515.87 shares of Preferred Stock are held of record by Brinson Venture Capital Fund III, L.P., of which BPI is the general partner and (ii) 6,300 shares of Common Stock and 84.13 shares of Preferred Stock are held of record by Brinson MAP Venture Capital Fund III, a trust of which a wholly owned subsidiary of BPI is the sole trustee. As a result, BPI has sole voting and dispositive power with respect to such shares. The address of BPI is 209 South LaSalle Street, Chicago, Illinois 60604-1295. (7) BPI serves as an Investment Adviser to Virginia Retirement System and shares voting and dispositive power with respect to the shares held of record by Virginia Retirement System. The address of Virginia Retirement System is 1200 East Main Street, Richmond, Virginia 23219. Item 13. Certain Relationships and Related Transactions. The following summaries of the material terms of certain agreements to which the Company is a party do not purport to be complete and are subject to, and are qualified in their entirety by reference to, all of the provisions of such agreements, including the definitions of certain terms therein and the exhibits and schedules thereto. Copies of such agreements may be obtained from the Company. Recapitalization The Recapitalization was effected pursuant to a Merger Agreement between Globe Holdings and MergerCo, a newly formed affiliate of Code Hennessy & Simmons. In connection with the Merger and the Recapitalization, (i) Globe Holdings transferred substantially all of its assets and liabilities to the Company pursuant to the Asset Drop Down, (ii) Code Hennessy & Simmons and certain other investors invested approximately $42.8 million in common stock and preferred stock of MergerCo and (iii) Code Hennessy & Simmons made a loan to Globe Holdings in the amount of $25.0 million (the "CHS Loan"). Pursuant to the Merger Agreement: (i) MergerCo merged with and into Globe Holdings, with Globe Holdings being the surviving corporation; (ii) the common stock of MergerCo was converted into common stock of the surviving corporation (the "New Common Stock") and the preferred stock of MergerCo became preferred stock of the surviving corporation (the "New Preferred Stock"); (iii) the CHS loan became the obligation of the surviving corporation; (iv) certain stock and all stock options of Globe Holdings was converted into or became exercisable for New Common Stock and New Preferred Stock; (v) holders of the remaining stock of Globe Holdings outstanding prior to the Merger received cash merger consideration (including the payment by Globe Holdings of fees and expenses on their behalf) in an aggregate amount equal to $315.0 million less (x) the amount of Globe Holdings' outstanding indebtedness as of the date of the Merger and (y) the amount of the retained investment; and (vi) $15.0 million was deposited into escrow as the Escrow Amount. Following the consummation of the Recapitalization, the CHS loan was repaid with the net proceeds to Globe Holdings from its units offering. The Escrow Amount consisted of (a) $5.0 million to secure the obligations of the pre-merger shareholders with respect to the post-closing adjustment of the cash merger consideration and (b) $10.0 million to satisfy any indemnification obligations of the pre-merger shareholders under the merger agreement. The post-closing adjustment escrow fund was released to the pre- merger shareholders upon the determination of the final closing date consolidated net asset value of the Company. The indemnification escrow fund is required to be released promptly after December 31, 2001. Pursuant to the Merger Agreement, the pre-merger shareholders have agreed to indemnify Globe Holdings and certain of its related parties for all liabilities and other losses arising from, among other things, (i) any breach 19 of representations, warranties or pre-closing covenants of Globe Holdings contained in or contemplated by the Merger Agreement, (ii) the failure of any pre-merger shareholders to have good, valid and marketable title to the shares of common stock held by such pre-merger shareholder, (iii) the environmental investigation relating to Globe Holdings' facility in Fall River, Massachusetts to the extent related to activities prior to the effective time of the Merger, (iv) the antitrust claims and investigations relating to the alleged conspiracy by the Company's Indonesian joint venture to restrain trade in, and fix prices of, latex thread in the United States to the extent related to activities prior to the effective time of the Merger and (v) certain other matters. With respect to claims based on any misrepresentation or breach of any representation or warranty made by Globe Holdings, the pre-merger shareholders are not required to indemnify Globe Holdings unless the aggregate of all amounts for which indemnity would otherwise be payable exceeds $1.0 million and, in such event, the pre-merger shareholders will only be responsible for the amount in excess of $1.0 million. In addition, the indemnification obligations of the pre-merger shareholders are generally limited to the amount held in the indemnification escrow fund, other than with respect to claims based on fraud or on the failure of a pre-merger shareholder to have good, valid and marketable title to his shares of common stock. The Merger Agreement contains representations and warranties typical of agreements of like nature, including, without limitation, those relating to corporate organization and capitalization, the valid authorization, execution, delivery and enforceability of all transaction documents, Globe Holdings' financial statements, the absence of material adverse changes in the business, assets, financial condition and results of operations, the absence of material undisclosed liabilities, tax matters, the quality and title of personal and real property, material contracts, intellectual property, employee benefits plans, environmental matters, compliance with laws, governmental authorizations, permits and licenses and insurance matters. Generally, the representations and warranties of Globe Holdings expire 18 months after the closing date of the Merger except that (i) those relating to environmental matters remain in full force and effect until the second anniversary of the closing date of the Merger and (ii) those relating to tax matters survive until the expiration of the applicable statute of limitations. Prior to the Merger, Thomas A. Rodgers, Jr. and Thomas A. Rodgers, III beneficially owned, directly or indirectly, an aggregate of approximately 39% of the common stock of Globe Holdings on a fully-diluted basis. In addition, Messrs. Bailey, Reis and Walsh beneficially owned, in the aggregate, approximately 2% of the common stock of Globe Holdings on a fully-diluted basis. In connection with the Merger, these individuals received a pro rata portion of the aggregate merger consideration. Management Agreement In connection with the Recapitalization, the Company entered into a Management Agreement with CHS Management III, L.P. ("CHS Management"), an affiliate of Code Hennessy & Simmons LLC, pursuant to which CHS Management will provide financial and management consulting services to the Company and receive a quarterly fee of $250,000, payable in arrears only if certain leverage ratios under the Senior Credit Facility are met. In addition, pursuant to the Management Agreement the Company paid to CHS Management $3.0 million at the closing of the Transactions as compensation for services rendered by CHS Management to the Company in connection with the Transactions. The Management Agreement also provides that when and as the Company consummates the acquisition of other businesses, the Company will pay to CHS Management a fee equal to the greater of $250,000 and one percent of the acquisition price of each such business as compensation for services rendered by CHS Management to the Company in connection with the consummation of such acquisition. During 1999 and 1998 no management fee was required to be paid to CHS. The term of the Management Agreement is five years, subject to automatic renewal unless either CHS Management or the Company elects to terminate. The Company believes that the fees to be paid to CHS Management for the professional services to be rendered are at least as favorable to the Company as those which could be negotiated with an unrelated third party. The Company reimbursed CHS Management for expenses related to the Transactions and will reimburse CHS Management for expenses incurred in rendering services to the Company and Globe Holdings under the Management Agreement. 20 Securityholders Agreement In connection with the Recapitalization, Globe Holdings' shareholders entered into a Securityholders Agreement. This agreement provides, among other things, for the nomination of and voting for at least five directors of Globe Holdings by Globe Holdings' shareholders. The Securityholders Agreement also provides that Code Hennessy & Simmons will be entitled to appoint all of the directors of Globe Holdings. The following individuals were designated by Code Hennessy & Simmons to serve as directors: Thomas A. Rodgers, Jr., Thomas A. Rodgers, III, Andrew W. Code, Peter M. Gotsch, Edward M. Lhee and Richard F. Heitmiller. Effective January 1, 2000 Thomas A. Rodgers Jr. resigned as a director. Executive Securities Agreements In connection with the Recapitalization, each of Lawrence R. Walsh, Americo Reis and Robert L. Bailey entered into an Executive Securities Agreement with Globe Holdings and Code Hennessy & Simmons which provides for, among other things, repurchase rights with respect to the Globe Holdings securities held by them upon termination of employment (other than retirement) and restrictions on transfer of such securities. Registration Agreement In connection with the Recapitalization, Globe Holdings' shareholders entered into a Registration Agreement. The Registration Agreement grants certain demand registration rights to Code Hennessy & Simmons. An unlimited number of such demand registrations may be requested by Code Hennessy & Simmons. In the event that Code Hennessy & Simmons makes such a demand registration request, all other shareholders of Globe Holdings will be entitled to participate in such registration on a pro rata basis (based on shares held). Code Hennessy & Simmons may request, pursuant to its demand registration rights, and each other shareholder may request, pursuant to his or its participation rights, that up to all of such shareholder's shares of common stock be registered by Globe Holdings. Globe Holdings is entitled to postpone such a demand registration for up to 180 days under certain circumstances. In addition, the parties to the Registration Agreement are granted certain rights to have shares included in registrations initiated by Globe Holdings or its shareholders ("piggyback registration rights"). Expenses incurred in connection with the exercise of such demand or piggyback registration rights shall, subject to limited exceptions, be borne by Globe Holdings. Non-Competition Agreement In connection with the Merger and the Recapitalization, each of the Named Executive Officers entered into a Non-Competition Agreement with Globe Holdings pursuant to which the Named Executive Officers agreed not to engage anywhere in the U.S. in any business that manufactures, distributes or sells polyester or polyester spandex fiber, latex thread or other elastomeric fiber for a period of three years (or, in the case of Mr. Bailey, until December 31, 2000). The Named Executive Officers also agreed not to solicit employees or customers of Globe Holdings or its subsidiaries, or to hire any person who was an employee of Globe Holdings or any of its subsidiaries within twelve months after such person's employment with Globe Holdings or any subsidiary is terminated. The Named Executive Officers also agreed to maintain the confidentiality of information regarding the business and affairs of Globe Holdings and its subsidiaries. Tax Sharing Agreement The operations of the Company are included in the Federal income tax returns filed by Globe Holdings. On July 31, 1998, Globe Holdings and the Company entered into a Tax Sharing Agreement ("Tax Sharing Agreement") pursuant to which the Company agreed to advance to Globe Holdings so long as Globe Holdings files consolidated income tax returns that include the Company (i) payments for the Company's share of income taxes assuming the Company is a stand-alone entity, which in no event may exceed the group's consolidated tax liabilities for such year, and (ii) payments to or on behalf of Globe Holdings in respect of franchise or similar taxes and governmental charges incurred by it relating to the business, operations or finances of the Company. 21 Consulting Agreement In connection with the Merger and the Recapitalization, Thomas A. Rodgers, Jr. entered into a consulting agreement with the Company, pursuant to which he will be compensated at a rate of $100,000 per annum, and agreed to perform special projects for the Company and such other matters as the Company's Board of Directors or officers reasonably request. 22 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. The following documents are filed as part of this report: (a) (1) The consolidated financial statements included in Item 8 hereof and set forth on pages F-1 through F-19. (2) Financial Statement Schedule: Schedule II (Valuation and Qualifying Accounts). Schedules other than those listed above are omitted because they are not required or are not applicable. (3) The exhibits listed in the Index to the Exhibits (b) Reports on Form 8-K. None (c) Exhibits
Exhibit No. Description ------- ----------- 2.1* Agreement and Plan of Merger dated as of June 23, 1998 between Globe Holdings, and Globe Acquisition Company. 2.2* Asset Transfer Agreement dated as of July 29, 1998 between the Company and Globe Holdings. 2.3* Amendment No. 1 dated as of July 17, 1998 to the Agreement and Plan of Merger dated as of June 23, 1998 between Globe Holdings and Globe Acquisition Company. 2.4* Amendment No. 2 dated as of July 30, 1998 to the Agreement and Plan of Merger dated as of June 23, 1998 between Globe Holdings and Globe Acquisition Company. 2.5* Purchase Agreement dated as of July 31, 1998 by and among Globe Acquisition Company, Code, Hennessy & Simmons III, L.P. and certain other purchasers to purchase shares of Globe Acquisition Company's stock. 3.1* Articles of Incorporation of the Company. 3.2* Bylaws of the Company. 4.1* Indenture dated as of July 31, 1998 by and between the Company and Norwest Bank Minnesota, National Association. 4.2* Purchase Agreement dated as of July 28, 1998 by and among the Company, BancAmerica Robertson Stephens and Merrill Lynch & Co. 4.3* Registration Rights Agreement dated as of July 31, 1998 by and among the Company, BancAmerica Robertson Stephens and Merrill Lynch & Co. 4.4* Securityholders Agreement dated as of July 31, 1998 by and among the shareholders of Globe Holdings. 4.5* Registration Agreement dated as of July 31, 1998 by and among the shareholders of Globe Holdings. 10.1*+ Employment Agreement dated as of December 31, 1997 between Globe Holdings and Thomas A. Rodgers, III. 10.2*+ Employment Agreement dated as of December 31, 1997 between Globe Holdings and Americo Reis.
23
Exhibit No. Description ------- ----------- 10.3*+ Employment Agreement dated as of December 31, 1997 between Globe Holdings and Lawrence R. Walsh. 10.4*+ Employment Agreement dated as of December 31, 1997 between Globe Holdings and Robert L. Bailey. 10.5*+ Form of Executive Securities Agreement dated as of July 31, 1998 by and among Globe Holdings, Code Hennessy & Simmons and each of Messrs. Walsh, Reis and Bailey. 10.6*+ Form of Non-Competition Agreement dated as of July 31, 1998 between Globe Holdings and each of Messrs. Rodgers, III, Walsh, Reis and Bailey. Mr. Bailey's non-competition restriction terminates on December 31, 2000, compared to July 31, 2001 for the other executives. 10.7* Management Agreement, dated as of July 31, 1998 between the Company and CHS Management III, L.P. 10.8* Tax Sharing Agreement dated as of July 31, 1998 between the Company and Globe Holdings. 10.9* Credit Agreement dated as of July 31, 1998 by and among the Company, Globe Holdings, various banks, Bank of America National Trust and Savings Association, BancAmerica Robertson Stephens and Merrill, Lynch, Pierce, Fenner & Smith, Inc. 10.10 Form of First Amendment and Waiver dated as of January 28, 1999 to the Credit Agreement. 10.11* Pledge Agreement dated as of July 31, 1998 by the Company and Globe Holdings in favor of Bank of America Trust and Savings Association. 10.12* Security Agreement dated as of July 31, 1998 by the Company and Globe Holdings in favor of Bank of America National Trust and Savings Association. 10.13*+ Form of Amended and Restated Performance Option Agreement by and between Globe Holdings and each of Messrs. Walsh, Reis, and Bailey. 10.14*+ Globe Holdings Management Incentive Plan. 10.15*+ Consulting Agreement dated as of July 31, 1998 between the Company and Thomas A. Rodgers, Jr. 10.16** Form of Second Amendment dated as of May 24, 1999 to the Credit Agreement. 10.17** Form of Third Amendment and Waiver date as of October 20, 1999 to the Credit Agreement. 27.1 Financial Data Schedule
- -------- *Incorporated by reference to Registration Statement on Form S-4 (File number 333-64675) **Incorporated by reference to the quarterly report on Form 10-Q of Globe Manufacturing Corp. filed on November 15, 1999. +Management contract or compensation plan required to be filed by Item 601 of Regulation S-K. 24 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on April 14, 2000. Globe Manufacturing Corp. /s/ Richard F. Heitmiller By: _________________________________ Richard F. Heitmiller Vice Chairman, Acting Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities indicated on April 14, 2000.
Signature Title --------- ----- Thomas A. Rodgers, III Chairman ___________________________________________ Thomas A. Rodgers, III /s/ Richard F. Heitmiller Vice Chairman, Acting Chief Executive ___________________________________________ Officer Richard F. Heitmiller and Director /s/ Lawrence R. Walsh Vice President, Finance and Administration ___________________________________________ (Principal Financial Officer) Lawrence R. Walsh /s/ Kevin T. Cardullo Assistant Vice President of Finance and ___________________________________________ Accounting Kevin T. Cardullo (Principal Accounting Officer) Andrew W. Code Director ___________________________________________ Andrew W. Code /s/ Peter M. Gotsch Director ___________________________________________ Peter M. Gotsch /s/ Edward M. Lhee Director ___________________________________________ Edward M. Lhee
25 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 No annual report covering the Company's last fiscal year or proxy material has been sent to the Company's security holders. Subsequent to the filing of its Annual Report on Form 10-K, a copy of this Annual Report on Form 10-K will be furnished to the Company's security holders. 26 GLOBE MANUFACTURING CORP. CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 1999, 1998 and 1997 Contents Report of Independent Auditors.............................................. F-2 Consolidated Balance Sheets................................................. F-3 Consolidated Statements of Operations....................................... F-4 Consolidated Statements of Changes in Stockholders' Equity (Deficit)........ F-5 Consolidated Statements of Cash Flows....................................... F-6 Notes to Consolidated Financial Statements.................................. F-7
F-1 REPORT OF INDEPENDENT AUDITORS The Board of Directors Globe Manufacturing Corp. We have audited the accompanying consolidated balance sheets of Globe Manufacturing Corp. as of December 31, 1999 and 1998, and the related consolidated statements of operations, changes in stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1999. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Globe Manufacturing Corp. at December 31, 1999 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. The accompanying financial statements have been prepared assuming that Globe Manufacturing Corp. will continue as a going concern. As more fully described in Note 2, the Company has not complied, and is not expected to be able to comply in the future, with certain covenants of loan agreements and has a working capital deficiency. Those conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments to reflect the possible future effects of the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. Ernst & Young LLP Providence, Rhode Island March 17, 2000, except for Note 2, as to which the date is April 5, 2000 F-2 GLOBE MANUFACTURING CORP. CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
December 31, -------------------- 1998 1999 --------- --------- ASSETS ------ Current assets: Cash and cash equivalents............................... $ 1,439 $ 3,564 Accounts receivable, net of allowance for doubtful accounts of $2,736 and $3,482 at December 31, 1998 and 1999, respectively..................................... 22,510 37,136 Inventories (Note 3).................................... 18,380 17,791 Prepaid expenses and other assets....................... 439 251 Prepaid taxes........................................... 5,309 2,270 Deferred income taxes (Note 9).......................... 3,092 -- --------- --------- Total current assets................................ 51,169 61,012 Property, plant and equipment (Note 1): Land and land improvements.............................. 942 942 Building and building improvements...................... 43,256 44,329 Manufacturing equipment................................. 103,234 111,689 Furniture and equipment................................. 2,166 7,092 Autos and trucks........................................ 319 319 Construction in progress................................ 7,519 4,239 --------- --------- 157,436 168,610 Less accumulated depreciation and amortization.......... (74,107) (83,836) --------- --------- Net property, plant and equipment....................... 83,329 84,774 Deferred income taxes (Note 9).......................... 819 -- Cash surrender value of life insurance.................. 1,076 913 Deferred financing costs, net of amortization of $621 and $2,068 at December 31, 1998 and 1999, respectively (Note 4)............................................... 9,433 8,936 --------- --------- Total assets........................................ $ 145,826 $ 155,635 ========= ========= LIABILITIES AND STOCKHOLDERS' DEFICIT ------------------------------------- Current liabilities: Accounts payable........................................ $ 6,012 $ 6,278 Accrued expenses: Workers' compensation insurance (Note 10)............. 929 505 Interest.............................................. 7,773 8,029 Other................................................. 4,047 4,990 Lease obligations due within one year (Note 5).......... 34 1,364 Note payable (Note 4)................................... 11,300 20,000 Long-term debt obligations due within one year (Note 4)..................................................... -- 115,000 Senior Subordinated Notes............................... -- 150,000 --------- --------- Total current liabilities........................... 30,095 306,166 Other long-term liability................................ 1,774 -- Long-term debt (Note 4).................................. 115,000 -- Senior Subordinated Notes................................ 150,000 -- Long-term lease obligation (Note 5)...................... 44 2,169 Other long-term post retirement liability (Note 8)....... 4,090 4,505 Stockholders' deficit (Note 6): Common Stock, Class A, voting, $.01 par value........... 1 1 Paid In capital......................................... 337 337 Retained deficit........................................ (155,515) (157,543) --------- --------- Total stockholders' deficit......................... (155,177) (157,205) --------- --------- Total liabilities and stockholders' deficit......... $ 145,826 $ 155,635 ========= =========
See accompanying notes. F-3 GLOBE MANUFACTURING CORP. CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands)
Year ended December 31, ---------------------------- 1997 1998 1999 -------- -------- -------- Net sales........................................ $170,941 $171,093 $173,933 Cost of sales.................................... 115,099 111,609 116,111 -------- -------- -------- Gross margin..................................... 55,842 59,484 57,822 Selling, general and administrative expenses..... 24,381 23,656 25,878 Research and development expenses................ 2,633 4,263 3,748 -------- -------- -------- Operating income................................. 28,828 31,565 28,196 Other income (expenses): Interest, net.................................. (3,968) (12,665) (28,251) Transaction compensation expense............... -- (5,778) -- Transaction commitment fee expense............. -- (1,000) -- Other income, net.............................. 372 749 765 -------- -------- -------- Income before income taxes and extraordinary item............................................ 25,232 12,871 710 Provision for income taxes (Note 9).............. 8,383 4,445 2,738 -------- -------- -------- Income (loss) before extraordinary item.......... 16,849 8,426 (2,028) Extraordinary item (Note 4): Loss from write-off of deferred financing costs, net of tax benefit of $177 and $112 in 1997 and 1998, respectively................... 301 187 -- -------- -------- -------- Net income (loss)................................ $ 16,548 $ 8,239 $ (2,028) ======== ======== ========
See accompanying notes. F-4 GLOBE MANUFACTURING CORP. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (Dollars in thousands, except share data)
Shares Outstanding Treasury Stock ----------------- ------------------ Common Common Retained Common Stock Total ----------------- ---------------- Paid-in Earnings ------------------ Unearned Stockholders' Class A Class B Class A Class B Capital (Deficit) Class A Class B Compensation Equity (Deficit) ------- -------- ------- ------- -------- --------- ------- --------- ------------ ---------------- Balances, December 31, 1996........... 100,000 931,404 $ 2 $ 16 $ 5,700 $ 41,744 $(4,187) $ (28,657) $ (1,024) $ 13,594 Redemption of Series A Cumulative Preferred Stock.......... (1,534) (1,534) Dividends....... (290) (290) Unearned compensation relating to the grant of stock options........ 5,085 (5,085) -- Amortization of unearned compensation... 2,791 2,791 Net income...... 16,548 16,548 ------- -------- ------ ------ -------- --------- ------- --------- ------------ ------------- Balances, December 31, 1997........... 100,000 931,404 2 16 10,785 56,468 (4,187) (28,657) (3,318) 31,109 Net effect of recapitalization transaction.... (99,000) (931,404) (1) (16) (10,448) (220,222) 4,187 28,657 3,318 (194,525) Net income...... 8,239 8,239 ------- -------- ------ ------ -------- --------- ------- --------- ------------ ------------- Balances, December 31, 1998........... 1,000 -- 1 -- 337 (155,515) -- -- -- (155,177) Net loss........ (2,028) (2,028) ------- -------- ------ ------ -------- --------- ------- --------- ------------ ------------- Balances, December 31, 1999........... 1,000 -- $ 1 $ -- $ 337 $(157,543) $ -- $ -- $ -- $ (157,205) ======= ======== ====== ====== ======== ========= ======= ========= ============ =============
See accompanying notes. F-5 GLOBE MANUFACTURING CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)
Year ended December 31, ----------------------------- 1997 1998 1999 -------- --------- -------- Operating Activities Net income (loss).............................. $ 16,548 $ 8,239 $ (2,028) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................ 9,417 11,095 11,176 Amortization of unearned compensation........ 2,791 3,318 -- Extraordinary charge--write-off of deferred financing costs............................. 478 299 -- Provision for losses on accounts receivable.. 691 1,393 1,116 Deferred income tax provision (benefit)...... (2,455) 1,360 3,911 Other post-retirement benefits charge........ 515 600 415 Increase (decrease) in cash from changes in assets and liabilities: Accounts receivable........................ (5,821) 263 (15,701) Inventories................................ (1,952) (4,616) 589 Prepaid expenses and other assets.......... (38) 45 188 Refundable income taxes.................... -- (4,972) -- Accounts payable........................... 263 (1,428) 266 Accrued expenses........................... (357) 7,922 734 Taxes (payable) receivable................. (1,178) (1,028) 3,039 Other long-term post-retirement liability.. (274) (272) -- -------- --------- -------- Net cash provided by operating activities.............................. 18,628 22,218 3,705 Investing Activities Capital expenditures........................... (17,101) (33,968) (8,757) Note receivable collected from (issued to) stockholders.................................. (15) 278 -- -------- --------- -------- Net cash used in investing activities.... (17,116) (33,690) (8,757) Financing Activities Net change in notes payable.................... (275) 8,825 8,700 Borrowing on long-term debt.................... 15,000 119,400 -- Deferred financing costs....................... (403) (10,054) (950) Principal payments on long-term debt........... (8,375) (58,775) -- Principal payments on capital lease obligation. (97) (52) (736) Issuance of senior subordinate notes........... -- 150,000 -- Distribution to Company stockholders for recapitalization.............................. -- (198,181) -- Redemption of preferred stock.................. (8,000) -- -- Cash surrender value of life insurance, ....... 596 (149) 163 Payment of dividends........................... (1,112) (50) -- -------- --------- -------- Net cash provided by (used in) financing activities.............................. (2,666) 10,964 7,177 -------- --------- -------- Net increase (decrease) in cash and cash equivalents................................... (1,154) (508) 2,125 Cash and cash equivalents at beginning of year. 3,101 1,947 1,439 -------- --------- -------- Cash and cash equivalents at end of year....... $ 1,947 $ 1,439 $ 3,564 ======== ========= ======== Supplemental schedule of cash flow information: Noncash investing activity: Equipment acquired under capital leases.... $ 50 $ 1,837 $ 2,417 ======== ========= ========
See accompanying notes. F-6 GLOBE MANUFACTURING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998 and 1999 (Dollars in thousands, except per share data) 1. Summary of Significant Accounting Policies Basis of Presentation The financial statements include the accounts of Globe Manufacturing Corp. (formerly Globe Elastic Co.) and its wholly-owned subsidiary, Globe Manufacturing FSC, Ltd. and the accounts of Globe Manufacturing Co. for all periods prior to the date of the recapitalization transaction described below (collectively the Company). The Company is a wholly-owned subsidiary of Globe Holdings, Inc. (Holdings). On June 23, 1998, Holdings entered into an Agreement and Plan of Merger (the Agreement) with an affiliate of Code Hennessy & Simmons III, L.P. (CHS). The Agreement provided for the obtaining of additional debt and equity to be used in a recapitalization transaction whereby CHS obtained a majority interest in Holdings and certain continuing shareholders retained a minority interest. The recapitalization transaction was financed with $50,000 of equity and $295,000 of debt. Proceeds from the recapitalization were used to (i) pay consideration to certain shareholders of Holdings, (ii) repay certain indebtedness of the Company and Holdings and (iii) pay related fees and expenses of the recapitalization transaction and refinancing. Prior to the closing of the merger, substantially all of the assets and liabilities of Holdings were contributed to the Company. Inasmuch as the recapitalization transaction was among the Holdings' shareholders, some of whom maintained a continuing interest in Holdings, the assets and liabilities contributed to the Company were carried at their respective historical cost bases. Cash and Cash Equivalents The Company considers all highly-liquid, short-term investments with an original maturity of three months or less to be cash equivalents. Risks and Uncertainties Concentration of Credit Risk The company performs credit evaluations on all new customers and requires collateral in certain circumstances. Sales to one customer represented 9%, 9%, and 11% respectively, of total sales for the year ended December 31, 1997, 1998, and 1999. Also, for the years ended December 31, 1997, 1998, and 1999, sales to five customers totaled 36%, 34%, and 39%, respectively. At December 31, 1998 and 1999, 54% and 58%, respectively, of total receivables were from foreign customers. Balances owed from one customer totaled 8% and 15%, respectively, of total receivables at December 31, 1998 and 1999. Also, at December 31, 1998 and 1999, 39% and 47% respectively, of total receivables was from five customers. Of these five customers, three are foreign, which represent 26% and 30% of the total receivables balance at December 31, 1998 and 1999, respectively. Use of Estimates The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. F-7 GLOBE MANUFACTURING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except per share data) Revenue Recognition Revenue is recognized when products are shipped to customers. Inventories Inventories are valued at lower of cost or market. Cost is determined by the last-in, first-out (LIFO) method for latex and certain spandex inventories and the first-in, first out (FIFO) method for the other inventories. Management utilizes LIFO for those product lines that have exhibited increasing costs to better match costs with revenues. Property, Plant and Equipment Property, plant and equipment are stated at cost. Depreciation is provided using both accelerated and straight line methods over estimated useful lives of the assets, which range from 3 to 39.5 years. For the years ended December 31, 1997, 1998 and 1999, the Company recorded depreciation expense of $9,322, $10,426, and $9,729, respectively. The Company capitalizes direct materials, labor and certain overhead costs for self-constructed assets. In 1997, 1998, and 1999, the Company capitalized interest costs of $506, $1,194, and $839, respectively. Total interest costs in 1997, 1998 and 1999 amounted to $4,573, $13,859, and $29,091, respectively. Deferred Financing Costs Deferred financing costs are amortized over the term of the facility using the effective interest method beginning July 31, 1998. Prior to that date, deferred financing costs were amortized using the straight-line method. Use of the straight-line method to amortize deferred financing costs did not yield results that were materially different from those that resulted from the use of the effective interest method. Stock Based Compensation The Company accounts for its stock based compensation arrangements under the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. The Company recognizes as compensation expense the excess of the deemed fair value of the common stock issuable upon exercise of compensatory stock options over the aggregate exercise price of such options. The expense is amortized over the vesting period of each option. Income Taxes Globe Manufacturing Corp. is a member of a federal affiliated group that files a consolidated tax return. As such, the Company's revenues and expenses are included in Holdings' consolidated tax return. In accordance with the tax sharing agreement between group members, current tax expense for each member is recorded on a separate company basis. The liability method is used in accounting for income taxes. Deferred tax assets and liabilities are determined based on differences between financial reporting and income tax bases of assets and liabilities and are measured using the currently enacted tax rates and laws that are in effect for the period when the differences are expected to reverse. Deferred tax assets may be reduced by a valuation allowance to reflect the uncertainty associated with the realization of such assets. F-8 GLOBE MANUFACTURING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except per share data) Fair Value of Financial Instruments The carrying amounts of accounts receivable, accounts payable, long-term debt, notes payable, interest rate swap agreements and other curent and long- term liabilities approximate their respective fair values. Interest Rate Swap Agreements The differential to be paid or received on interest rate swap agreements is accrued as an interest rate charge and is recognized over the life of the agreements (see Note 4). Foreign Currency Exchange Contracts Foreign currency exchange contracts are used to minimize exposure on certain foreign currency denominated assets. Gains and losses from currency rate changes on these contracts are recorded currently in income and generally offset gains and losses on the foreign currency denominated assets (see Note 4). Research and Development Costs The Company expenses research and development costs as incurred. New Accounting Pronouncements In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and for Hedging Activities (Statement 133). Statement 133 is effective for years beginning after June 15, 2000. Statement 133 provides a comprehensive and consistent standard for the recognition and measurement of derivatives and hedging activities. Management does not anticipate that the adoption of Statement 133 will have a material impact on the Company's financial position or the results of its operations. 2. Going Concern In response to lower than expected earnings in 1999, the Company and its lenders amended certain covenant requirements under its various credit agreements. Specifically, as of January 28, 1999, the Senior Credit Facility was amended such that i) certain leverage ratio tests were waived and certain covenants were amended, ii) the interest rates on both term loans and revolving loans were increased and iii) the management fee due to CHS may only be paid if certain leverage tests are met. Additionally, the Company received a waiver on the capital expenditures covenant requirements for 1998. On October 20, 1999, the Senior Credit Facility was again amended such that i) the revolving loan permitted borrowings were limited by the Company's leverage ratio, ii) the interest rates on both term loans and the revolving loan were increased and iii) certain covenant ratio requirements were amended. At December 31, 1999, the Company was in violation of the capital expenditures covenant, which has not been waived. Accordingly, the Company has been in default of its credit agreement since December 31, 1999. Additionally, the Company is expecting to be in default of various covenant requirements throughout 2000 based on the Company's current forecast and existing covenant requirements. Accordingly, the Company's debt has been classified as short- term. F-9 GLOBE MANUFACTURING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except per share data) On April 5, 2000, the Company was notified by its senior lenders that they intended to issue a 60-day forbearance notice (subject to final documentation) indicating that the creditors will not exercise their right to call the debt until May 31, 2000. As a result of these violations the Company has no availability under its revolving loan under the Credit Agreement. The Company is exploring various alternatives to restructure its indebtedness. As of April 5, 2000, the Company has $5.4 million of cash on hand and has been meeting its normal cash needs. In addition, management expects the Company to generate sufficient cash to meet its cash requirements in 2000 by reducing accounts receivable and inventory levels, as well as by enforcing strict cash management procedures. The Company believes that, the refinancing of its capital and debt structure in 2000, the availability of adequate liquidity throughout the year, as well as any possible future lenders, and finalizing and complying with the terms of the forbearance agreement will be necessary for the Company to continue as a going concern. However, it is not possible to predict whether any such arrangements could be obtained or negotiated or of the terms thereof. The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments relating to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. 3. Inventories At December 31, 1998 and 1999, inventories totaling approximately $6,530 and $7,711 (at their FIFO value), respectively, were valued using the LIFO method. Had the FIFO method of inventory valuation been used, inventories and income before taxes would have increased (decreased) by approximately; $1,247 and $98 in 1997; $808 and $(439) in 1998; and $436 and $(372) in 1999. Inventories consist of the following:
December 31, ---------------- 1998 1999 ------- ------- Raw materials........................................... $ 2,688 $ 3,282 Finished goods.......................................... 16,500 14,945 ------- ------- 19,188 18,227 Less LIFO reserve....................................... (808) (436) ------- ------- $18,380 $17,791 ======= =======
F-10 GLOBE MANUFACTURING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except per share data) 4. Debt Long-term debt consists of the following:
December 31, ----------------- 1998 1999 -------- -------- Term Loan A, principal due in variable semi-annual installments through 2005; variable interest rates based on the base rate (9.07%-9.57% at December 31, 1999) (See (a) below)............................... $ 60,000 $ 60,000 Term Loan B, principal due in variable semi-annual installments through 2006; variable interest rates based on the base rate (9.57%-10.07% at December 31, 1999) (See (a) below)............................... 55,000 55,000 Senior Subordinated Notes, due 2008; interest at 10%. 150,000 150,000 -------- -------- 265,000 265,000 Less current maturities.............................. -- 265,000 -------- -------- $265,000 $ -- ======== ========
- -------- (a) In connection with the Recapitalization Transaction, the Company entered into a new Senior Credit Facility (the Credit Facility) that provided for two term loans to the Company in the amount of $60,000 and $55,000 (Term Loan A and Term Loan B, respectively), as well as a revolver for up to $50,000 (subject to certain leverage requirements). The Credit Facility allows for letters of credit to the extent of the unused portion of the working capital facility. At December 31, 1999 the Company had $2,000 outstanding under letters of credit. Of the $2,000 outstanding under letters of credit, $1,000 is to secure the Company's workers' compensation self insurance program (see Note 10), and $1,000 is to secure a lease obligation (see Note 5). Borrowings under Term Loan A and B bear interest at either the bank's prime rate plus a margin of 2.25% and 2.75%, respectively, or the applicable Eurodollar rate plus a margin of 3.25% and 3.75%, respectively. The Credit Facility contains certain covenants that limit the ability of the Company to incur additional debt, issue capital stock, and pay dividends. The Credit Facility also requires the maintenance of a minimum interest coverage ratio, fixed charge coverage ratio, and maximum leverage ratio, as defined in the Agreement. All of the Company's assets are pledged under the Credit Facility. Cash paid for interest, net of amounts capitalized amounted to $4,192, $4,344, and $27,301 in 1997, 1998, and 1999, respectively. In connection with various financing transactions, unamortized financing costs of $478 and $299, relating to the previous debt agreements, was charged to expense (net of tax) as an extraordinary item in 1997 and 1998, respectively. The Company uses interest-rate swap agreements to effectively convert a portion of its floating rate debt to a fixed rate basis, thus reducing the impact of interest-rate changes on future income. At December 31, 1999, the Company had outstanding interest rate swap agreements with a commercial bank, having a total notional principal amount of $25 million. These agreements effectively change the Company's interest rate exposure on $25 million of its variable rate term notes to a fixed rate of 5.98%. The interest rate swap agreements in effect at December 31, 1999, mature on March 31, 2000. The Company is obligated to maintain such agreements during the first two years that the term note is outstanding. While the Company is exposed to credit loss for the periodic settlement of amounts due under the agreement in the event of nonperformance by the counter-party, the Company does not anticipate nonperformance by this party. F-11 GLOBE MANUFACTURING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except per share data) From time to time, the Company enters into foreign currency exchange contracts to reduce the exposure associated with certain foreign currency transactions. These contracts generally have maturities of twelve months or less, and are regularly renewed to provide continuing coverage throughout the year. The Company does not engage in currency speculation. Foreign exchange gains and losses included in income have not been material. The amount of outstanding foreign exchange contracts was approximately $7,677 and $2,169 at December 31, 1999. The priority, with regard to the right of payment on the Company's debt is that the Senior Subordinated Notes are subordinate to the Credit Facility. There is no priority established for the three components (Term Loan A, Term Loan B and Revolver) of the Credit Facility. 5. Lease Commitments The Company leases certain assets under capital leases. At December 31, 1998 and 1999, leased assets with a cost of approximately $429 and $4,620, respectively, have been included in property, plant and equipment. Accumulated amortization of assets under capital leases was approximately $343 and $623 at December 31, 1998 and 1999, respectively. Future minimum lease payments relating to the equipment under the capital leases are $1,655, $1,633, and $710 for the years 2000, 2001, and 2002, respectively. Interest imputed in these future minimum lease payments amounted to $465 at December 31, 1999. At December 31, 1999 the Company had outstanding letters of credit of $1,000 to secure the Company's lease obligation. 6. Stock Options Through the date of the Recapitalization Transaction, the Company had a Management Incentive Plan ("the Plan") which authorized the grant of incentive stock options and nonqualified stock options including performance options based on the financial performance of the Company to employees. A total of 102,570 shares has been reserved for issuance under the Plan. The term of stock options granted under the plan may not exceed ten years. F-12 GLOBE MANUFACTURING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except per share data) The following table presents the activity under the Plan for the years ended December 31, as follows:
1997 1998 1999 ---------------------- ---------------------- ---------------------- ------- Weighted Weighted Weighted Average Average Average Per Share Per Share Per Share Exercise Price Exercise Price Exercise Price Options (1) Options (1) Options (1) ------- -------------- ------- -------------- ------- -------------- Outstanding at January 1...................... 22,500 $3.00 45,000 $3.00 6,739 $3.00 Granted................. 22,500 3.00 -- -- -- -- Exercised............... -- -- 38,261 3.00 -- -- ------ ----- ------ ----- ----- ----- Outstanding at December 31..................... 45,000 $3.00 6,739 $3.00 6,739 $3.00 ====== ===== ====== ===== ===== ===== Options exercisable at December 31............ 22,500 $3.00 6,739 $3.00 6,739 $3.00 ====== ===== ====== ===== ===== =====
- -------- (1) All options were granted at an exercise price of $30 per option; however, in connection with the recapitalization transaction, the Plan was amended as of July 31, 1998. The new performance option agreement provides for the holder of an option the right to purchase ten shares of Holding's Class A Common Stock and .13354106 shares of the Company's Class A Preferred Stock. The table presented above has been retroactively restated to reflect this change. In connection with the grant of performance options, the Company recorded a total of $5,085 of unearned compensation in 1997, of which $2,791 was earned and recognized as compensation expense in 1997. Approximately $3,318 was earned and recognized as transaction compensation expense in 1998. Options that did not vest in the years 1994 and 1995 were vested in 1997 since cumulative five-year performance measurements were achieved for the option granted in 1933. The weighted average remaining contractual life of options outstanding at December 31, 1999, is eight years. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation. Had compensation expense for options granted in 1997 under the Plan been determined based on the fair value at the grant date, pro forma net income would not have differed materially from reported amounts. Since the options granted under the Plan did not vest during 1997 and 1999, there was no impact on the determination of consolidated net income during these years. During 1998, the pro forma effect of recognizing the fair value of the options which vested in 1998 was to reduce net income by $167. The weighted average fair value per share of options granted during 1997 and whose exercise price was less than the market price of the underlying common stock on the grant date was $219.44. The fair value of options issued at the date of grant were estimated using the Black-Scholes model with the following weighted average assumptions:
Options Granted 1997 --------------- Expected life (years)..................................... 5.0 Risk-free interest rate................................... 5.7% Expected volatility....................................... 0.0% Expected divided yield.................................... --
F-13 GLOBE MANUFACTURING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except per share data) 7. Commitments and Contingencies The Company is a party to an agreement with a utility company, under the terms of which, the Company is obligated to purchase power generated from a co-generation power plant through 2006. The Company receives a portion of the savings generated by the plant and profits on excess supply generated. The co- generation power plant began operations in January 1991. Currently the Company is attempting to terminate this agreement. As a result the utility company has filed suit, however, the suit is in the discovery stages. Accordingly no determination regarding the outcome of this suit can be made at this time. From time to time, the Company has been and is involved in various legal and environmental proceedings, all of which management believes are routine in nature and incidental to the conduct of its business. The ultimate legal and financial liability of the Company with respect to such proceedings cannot be estimated with certainty, but the Company believes, based on its examination of such matters, that none of such proceedings, if determined adversely to the Company, would have a material adverse effect on the Company's results of operations or financial condition. As part of the recapitalization, the Company is obligated to pay to CHS a quarterly fee of $250 for financial and management consulting services. This fee is payable in arrears only if certain leverage ratios under the Senior Credit Facility are met. During 1998 and 1999 the Company did not meet the leverage ratio criteria. Accordingly no management fee was required to be paid to CHS. F-14 GLOBE MANUFACTURING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except per share data) 8. Pension and Other Benefits The Company sponsors three noncontributory defined benefit pension plans covering substantially all employees. The Plan assets are invested in a group annuity contract with an insurance company and in a trust that holds a balanced portfolio of corporate stocks and bonds, U.S. Government bonds and money market investments. The plan covering salaried employees at the Massachusetts, North Carolina and Alabama locations provides pension benefits based on the employee's average monthly compensation during a defined period. The plans covering hourly employees at the Massachusetts, North Carolina and Alabama locations provide benefits based on years of service. The Company's funding policy is to contribute annually the maximum deductible amount allowable under applicable tax regulations. The following is an analysis of the change in benefit obligation, change in Plan assets, funded status and components of net periodic pension benefit cost as of December 31:
Pension Benefits --------------- 1998 1999 ------ ------- Change in benefit obligation Benefit obligation at beginning of year................ $6,591 $ 7,386 Service cost........................................... 186 355 Interest cost.......................................... 264 442 Actuarial (gain) loss.................................. 549 (435) Benefits paid.......................................... (204) (149) Effect of distributions (1)............................ -- (1,050) ------ ------- Benefit obligation at end of year...................... $7,386 $ 6,549 ====== ======= Change in plan assets Fair value of plan assets at beginning of year......... $6,679 $ 7,476 Actual return on plan assets........................... 1,001 1,252 Employer contribution.................................. -- 2 Benefits paid.......................................... (204) (149) Effect of distributions (1)............................ -- (1,001) ------ ------- Fair value of plan assets at end of year............... $7,476 $ 7,580 ====== ======= Funded status.......................................... $ 90 $ 1,031 Unrecognized transition amount......................... 36 11 Unrecognized net actuarial gain........................ (185) (1,022) Unrecognized prior service cost........................ 176 138 ------ ------- Prepaid pension cost................................... $ 117 $ 158 ====== =======
(1) During 1999, 26 eligible plan participants elected to receive full distribution payments as permitted under the Company's pension plans.
Pension Benefits ------------------- 1997 1998 1999 ----- ----- ----- Components of net periodic pension benefit cost Service cost....................................... $ 303 $ 320 $ 355 Interest cost on PBO............................... 478 453 442 Actual return on assets............................ (454) (554) (543) Amortization transition amount..................... 22 64 23 Amortization of prior service cost................. 26 49 27 ----- ----- ----- Net periodic pension cost............................ $ 375 $ 332 $ 304 ===== ===== =====
F-15 GLOBE MANUFACTURING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except per share data) Assumptions used in calculating the pension expense and the accumulated benefit obligation, were as follows:
December 31, -------------- 1997 1998 1999 ---- ---- ---- Discount rate.............................................. 7.5% 7.0% 6.8% Rate of increase in compensation levels.................... 5.5% 5.5% 5.0% Expected long-term rate of return on assets................ 7.5% 7.5% 7.5%
The Company has instituted a tax deferred savings plan covering all employees of the Company under Section 401(k) of the Internal Revenue Code. Under the Plan, subject to certain limitations, each eligible employee may contribute up to 10% of gross wages per year to the maximum amount set by law. The Company matches one third of the first 6% of employee contributions. Company contributions to the Plan for employees were approximately $384 in 1997; $395 in 1998; and $405 in 1999. In addition to the Company's defined benefit plans, the Company currently provides postretirement medical and life insurance benefits (postretirement benefits) to eligible full-time employees. The Company is recognizing the initial accumulated benefit obligation over a 20-year period. The following is an analysis of change in benefit obligation, change in Plan assets and components of net periodic postretirement benefit cost as of December 31:
Postretirement Benefits ---------------- 1998 1999 ------- ------- Change in benefit obligation: Benefit obligation at beginning of year........... $ 5,660 $ 5,364 Service cost...................................... 299 330 Interest cost..................................... 342 364 Actuarial gain.................................... (639) (72) Benefits paid..................................... (298) (250) Changes in assumptions............................ -- (122) ------- ------- Benefit obligation at end of year................. $ 5,364 $ 5,614 ======= ======= Change in plan assets Fair value of plan assets at beginning of year.... $ -- $ -- Contribution by employer.......................... 298 251 Benefits paid..................................... (298) (251) ------- ------- Fair value of plan assets at end of year.......... $ -- $ -- ======= ======= Funded status..................................... $(5,364) (5,614) Unrecognized transition amount.................... 2,755 2,558 Unrecognized net actuarial gain................... (1,481) (1,449) ------- ------- Accrued postretirement cost....................... $(4,090) $(4,505) ======= =======
F-16 GLOBE MANUFACTURING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except per share data)
Postretirement Benefits ------------------- 1997 1998 1999 ----- ----- ----- Components of net periodic postretirement benefit cost Service cost.................................... $ 273 $ 299 $ 330 Interest cost................................... 365 342 364 Amortization transition amount.................. 197 197 197 Recognized net actuarial gain................... (192) (238) (200) ----- ----- ----- Net periodic benefit cost....................... $ 643 $ 600 $ 691 ===== ===== =====
The Company's policy is to fund postretirement benefits as claims are paid. The accumulated postretirement benefit obligation was determined using a discount rate of 7.0% in 1998, and 8.0% in 1999, and a health care cost trend rate of 9.0%, declining each year to 5.0% in the year 2007 and thereafter. The effect of a 1.0% annual increase in these assumed cost trend rates would increase the accumulated postretirement benefit obligation by approximately $479 and the annual net periodic postretirement benefit cost by approximately $84. 9. Income Taxes Significant components of the Company's deferred tax assets and liabilities as of December 31, are as follows:
1997 1998 1999 ------ ------ ------- Deferred tax liabilities: Depreciation..................................... $ 249 $ 676 $3,857 Pension.......................................... 126 112 59 ------ ------ ------- Total deferred tax liabilities................. 375 788 3,916 Deferred tax assets: Other postretirement benefits.................... 1,519 1,581 1,694 Inventories...................................... 639 1,053 1,774 Bad debts........................................ 759 1,057 1,309 Deferred compensation............................ 1,330 -- 262 Accrued liabilities.............................. 732 594 323 Other, net....................................... 667 414 626 ------ ------ ------- Total deferred tax assets...................... 5,646 4,699 5,988 Valuation allowance............................ -- -- (2,072) ------ ------ ------- Net deferred tax assets............................ $5,271 $3,911 $ 0 ====== ====== =======
The Company established a valuation allowance of $2,072 during 1999 to reflect the uncertainty associated with the realization of deferred tax assets. F-17 GLOBE MANUFACTURING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands, except per share data) The following table sets forth selected data with respect to the Company's provision for income taxes (excluding extraordinary items) for the years ended:
1997 1998 1999 ------- ------ ------- Current: Federal........................................ $ 9,090 $2,595 $(1,245) State.......................................... 1,748 490 72 ------- ------ ------- 10,838 3,085 (1,173) Deferred: Federal........................................ (2,034) 942 3,388 State.......................................... (421) 418 523 ------- ------ ------- (2,455) 1,360 3,911 ------- ------ ------- Total........................................ $ 8,383 $4,445 $ 2,738 ======= ====== =======
The reconciliation of income taxes computed at the U.S. federal statutory tax rate to income tax expense (excluding extraordinary items) is as follows:
1997 1998 1999 ------------ ------------ ------------- Amount % Amount % Amount % ------ ---- ------ ---- ------ ----- Tax at statutory rate............ $8,831 35.0% $4,376 34.0% $ 241 34.0% State income tax expense, less federal tax benefit............. 858 3.4 578 4.4 149 21.0 Foreign sales corporation........ (775) (3.0) (790) (6.1) (145) (20.5) Change in valuation allowance.... (428) (1.7) -- -- 2,072 292.0 Other, net....................... (103) (0.4) 281 2.2 421 59.3 ------ ---- ------ ---- ------ ----- Total........................ $8,383 33.3% $4,445 34.5% $2,738 385.8% ====== ==== ====== ==== ====== =====
Cash paid for income taxes amounted to $11,833, $9,057, $449 in 1997, 1998 and 1999, respectively. 10. Self-Insurance The Company has a self-insurance program for its workers' compensation. The plan, which is administered by an insurance company, contains certain stop loss clauses that limit the Company's liability in the event of catastrophic losses ($200 per incident, $580 in the aggregate per year). Claims are accrued as incurred based on available claim information and management's estimate of claims incurred but not yet reported. At December 31, 1998 and 1999, the Company had outstanding letters of credit of $1,000 to secure the Company's workers' compensation self-insurance program. 11. Investment in Joint Venture On November 23, 1990, the Company entered into a joint venture agreement (Joint Venture) with PT Bakrie Nusantara Corporation ("Bakrie"), an Indonesian company, to engage in the business of the manufacture of rubber thread and its related products. On January 7, 1999, the Company terminated its Joint Venture relationship. However, the Company continues to acquire and sell the entire production of the Joint Venture, other than production sold in Indonesia. During the years ended December 31, 1998 and 1999, respectively, the Company purchased inventory totaling $7,251 and $1,724 from the Joint Venture. F-18 GLOBE MANUFACTURING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded) (Dollars in thousands, except per share data) 12. Segment Information The Company operates in one industry segment encompassing the manufacture and sale of elastomeric fibers. These fibers, which consist of spandex fibers and latex thread, are sold to customers in the textile and apparel industries that are geographically diversified throughout the United States and in various foreign countries. The Company's manufacturing facilities are located in the United States. The following is a summary by geographic area of revenues from customers. Revenues are attributed to each geographic location based upon the location of the Company's customers.
1997 1998 1999 -------- -------- -------- United States.................................. $123,077 $118,225 $112,260 Europe......................................... 23,590 29,257 34,155 Asia........................................... 6,838 5,646 11,259 Central and South America...................... 3,590 4,620 4,439 Other.......................................... 13,846 13,345 11,820 -------- -------- -------- Total sales................................ $170,941 $171,093 $173,933 ======== ======== ========
13. Subsequent Event In February 2000, the Company entered into an agreement with North American Rubber Thread Company to sell its Latex thread operation. The agreement provides for a selling price of $3,000, payable in a combination of cash and notes to be determined before the close of the transaction. The estimated gain from the sale will be approximately $1,000. The closing of the transaction is expected to take place during the second quarter of 2000, with the final selling price being subject to certain adjustments stated in the agreement. In connection with the proposed sale of the Latex operation and other reorganization efforts the Company has reduced its work force and has offered an early retirement program to employees. The Company expects to incur a one time charge of $1,900, excluding the effects of the early retirement program, in the first quarter for the work force reduction. F-19 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS GLOBE MANUFACTURING CORP.
COL. A COL. B COL. C COL. D COL. E ------ --------- ----------------- ----------- ------- Additions ----------------- Balance Charged Charged Balance at to Costs to Other at end Beginning and Accounts Deductions- of Description of period Expenses Describe Describe Period ----------- --------- -------- -------- ----------- ------- YEAR ENDED DECEMBER 31, 1999 Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts................... $2,736 $1,107 $361(1) $3,482 YEAR ENDED DECEMBER 31, 1998 Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts................... $1,870 $1,393 $527(1) $2,736 YEAR ENDED DECEMBER 31, 1997 Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts................... $1,346 $ 691 $167(1) $1,870
(1) Uncollectible accounts written off, net of recoveries F-20 EX-27 2 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the financial statements of Globe Manufacturing Corp. for the year ended December 31, 1998 and December 31, 1999 and is qualified in its entirety by reference to such financial statements. 1,000 YEAR YEAR DEC-31-1998 DEC-31-1999 JAN-01-1998 JAN-01-1999 DEC-31-1998 DEC-31-1999 1,439 3,564 0 0 25,246 40,618 2,736 3,482 18,380 17,791 51,169 61,012 157,436 168,610 74,107 83,836 145,826 155,635 30,095 306,166 278,152 288,533 0 0 0 0 1 1 (155,177) (157,206) 145,826 155,635 171,093 173,933 171,093 173,933 111,609 116,111 139,528 145,737 6,029 (765) 0 0 12,665 28,251 12,871 710 4,445 2,738 0 0 0 0 187 0 0 0 8,239 (2,028) 0 0 0 0
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