10-Q 1 0001.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD YEAR ENDED JUNE 30, 2000 OR [_] 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 of (I.R.S. Employer incorporation or organization) Identification No.) 456 Bedford Street, Fall River, Massachusetts 02720 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 508/674-3585 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --------- --------- As of June 30, 2000, the Registrant had 1,000 shares of Common Stock outstanding. TABLE OF CONTENTS
PART I FINANCIAL INFORMATION PAGE Item 1. Financial Statements Condensed Consolidated Balance Sheets - June 30, 2000 (Unaudited) and December 31, 1999................................................. 1 Condensed Consolidated Statements of Income (Unaudited) Three months ended June 30, 2000 and 1999; Six months ended June 30, 2000 and 1999................................................ 2 Condensed Consolidated Statements of Cash Flows (Unaudited) - Six Months Ended June 30, 2000 and June 30, 1999.......................... 3 Notes to Condensed Consolidated Financial Statements (Unaudited) - June 30, 2000......................................................... 4 Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations................................................. 6 Item 3. Quantitative and Qualitative Disclosure about Market Risk............. 6 PART II OTHER INFORMATION Item 1. Legal Proceedings..................................................... 6 Item 2. Changes in Securities and Use of Proceeds............................. 6 Item 3. Defaults Upon Senior Securities....................................... 6 Item 4. Submission of Matters to a Vote of Security Holders .................. 6 Item 5. Other Information..................................................... 6 Item 6. Exhibits and Reports on Form 8-K...................................... 6
Part 1 ------ GLOBE MANUFACTURING CORP. Condensed Consolidated Balance Sheets (Dollars in thousands)
(Unaudited) (Note A) June 30 December 31 -------------- -------------- 2000 1999 -------------- -------------- ASSETS ------ Current assets: Cash and cash equivalents $ 4,320 $ 3,564 Accounts receivable, net 28,383 37,136 Inventories 14,655 17,791 Prepaid taxes and other assets 3,080 2,521 ----------- ---------- Total current assets 50,438 61,012 Property, plant and equipment 170,689 168,610 Less accumulated depreciation and amortization (87,749) (83,836) ----------- ---------- Net property, plant and equipment 82,940 84,774 Other Assets 8,519 9,849 ----------- ---------- Total assets $ 141,897 $ 155,635 =========== ========== LIABILITIES AND STOCKHOLDERS' DEFICIT ------------------------------------- Current liabilities: Accounts payable $ 4,340 $ 6,278 Accrued interest 6,322 8,029 Other current liabilities 7,161 6,859 Note payable 25,900 20,000 Long-term debt obligations due within one year 112,225 115,000 Senior Subordinated Notes 150,000 150,000 ----------- ---------- Total current liabilities 305,948 306,166 Other long-term liabilities 6,158 6,674 Stockholders' deficit Common stock, Class A, voting, $.01 par value 1 1 Other stockholders' deficit (170,210) (157,206) ----------- ---------- Total stockholders' deficit (170,209) (157,205) ----------- ---------- Total liabilities & stockholders' deficit $ 141,897 $ 155,635 =========== ==========
See notes to condensed consolidated financial statements. GLOBE MANUFACTURING CORP. Condensed Consolidated Statements of Income (Dollars in thousands)
Three months ended Six months ended Unaudited Unaudited Unaudited Unaudited June 30, June 30, June 30, June 30, 2000 1999 2000 1999 --------- --------- --------- --------- Net Sales $ 31,794 $ 44,374 $ 73,274 $ 87,958 Cost of sales 23,615 29,996 52,414 59,925 --------- --------- --------- --------- Gross Margin 8,179 14,378 20,860 28,033 Selling, general and administrative expenses 8,928 5,565 15,237 11,735 Research and development expenses 1,092 1,180 1,801 2,335 Restructuring costs 336 0 2,542 - --------- --------- --------- --------- Operating Income (loss) (2,177) 7,633 1,280 13,963 Interest, net 7,615 7,038 15,102 13,938 Miscellaneous (368) (167) 182 (217) --------- --------- --------- --------- Loss before income taxes (10,160) 762 (14,004) 242 Expense (Benefit) for income taxes 1,000 259 (1,000) 86 --------- --------- --------- --------- Net (loss) income $ (11,160) $ 503 $ (13,004) $ 156 ========= ========= ========= =========
See notes to condensed consolidated financial statements. GLOBE MANUFACTURING CORP. Condensed Consolidated Statements of Cash Flows (Dollars in thousands)
Six Months Ending ------------------------ (Unaudited) (Unaudited) June 30, June 30, 2000 1999 ----------- ----------- Net cash provided (used) by operating activities $ 270 $(4,182) Investing Activities Capital expenditures (2,478) (4,419) Other - 441 ------- ------- (2,478) (3,978) Financing Activities Net change in note payable 5,900 8,200 Principal payments on long-term debt (2,775) - Other (161) (115) ------- ------- 2,964 8,085 ------- ------- Net increase (decrease) in cash and cash equivalents 756 (75) Cash and cash equivalents at beginning of year 3,564 1,439 ------- ------- Cash and cash equivalents at end of period $ 4,320 $ 1,364 ======= =======
See notes to condensed consolidated financial statements. Globe Manufacturing, Corp. Notes to Condensed Consolidated Financial Statements (Unaudited) (Dollars in thousands) June 30, 2000 Note A. Basis of presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six month period ended June 30, 2000 are not necessarily indicative of the results that may be expected for the year ended December 31, 2000. The balance sheet at December 31, 1999 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Registrant Company and Subsidiaries' annual report on Form 10-K for the year ended December 31, 1999. Note B. Going Concern and Forbearance Agreement In response to lower than expected earning in 1999, the Company and its lenders amended certain covenant requirements under its various credit agreement. 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 from 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. On April 12, 2000, the Company entered into a forbearance agreement with its senior lenders in which they agree to not exercise their right to call the debt until May 31, 2000. As of May 31, 2000 the forebearance agreement was amended to extend the forebearance period to July 31, 2000. As of July 17, 2000 the forbearance agreement was extended to September 15, 2000. The Company is in negotiations to extend the forbearance agreement. As a result of this agreement the Company has no availability under its revolving loan under the Credit Agreement, has been restricted from making interest payments on the Senior Subordinated Notes, and must meet certain covenant ratios during the forbearance period. Because of the payment default on its Senior Credit Facility, the Company has not made an interest payment due August 1, 2000 on its Senior Subordinated Notes. The Company is exploring various alternatives to restructure its indebtedness. As of August 7, 2000, the Company has $4,300 of cash on hand and has been paying suppliers and employees in the ordinary course. In addition, management expects the Company to generate sufficient cash to pay suppliers and employees in the ordinary course in 2000 by reducing accounts receivable and inventory levels, as well as by enforcing strict cash management procedures. The Company believes the refinancing of its capital and debt structure in 2000, the availability of adequate liquidity throughout the year, will be necessary for the Company to continue as a going concern. However, it is not possible to predict whether any such arrangements will be obtained or negotiated or of the terms thereof. The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplated 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. Note C. Inventories The components of inventory consist of the following: June 30, December 31, ------------ -------------- 2000 1999 ------------ -------------- Raw materials $ 3,014 $ 3,282 Finished goods 12,077 14,945 ------------ -------------- $ 15,091 $ 18,227 Less LIFO reserve (436) (436) ------------ -------------- $ 14,655 $ 17,791 Note D. Debt Long-term debt consists of the following:
June 30 December 31 ---------- ----------- 2000 1999 ---------- ----------- Term loan A, principal due in variable semi-annual installments through 2005; variable rate interest $ 57,500 $ 60,000 Term loan B, principal due in variable semi-annual installments through 2006; variable rate interest 54,725 55,000 Senior Subordinated Notes, due 2008; interest at 10% 150,000 150,000 --------- --------- 262,225 265,000 --------- --------- Less current maturities 262,225 265,000 --------- --------- $ -- $ --
Note E. 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 of financial condition. Note F. Restructuring Costs In February, 2000 the Company entered into an agreement with North American Rubber Thread Company to sell its Latex thread operation and on July 25, 2000 the Company completed the transaction. The selling price was $1.5 million and the Company received $1.1 million in cash, and $0.4 million in a term note. There is also a $1.0 million contingency payment from North American Rubber Thread Company based on their future sales volume of Latex thread. The contingency payment will be recognized when received in future periods and has not been contemplated in determining the loss or gain on the sale of Latex thread operation. The loss from the sale is approximately $800, of which $0.4 million is attributable to a write down of Latex inventory and $0.4 million associated with an impairment of Latex manufacturing equipment. The write down of inventory has been recorded in costs of goods sold and the loss from the impairment of manufacturing equipment has been recorded in miscellaneous expense. In connection with this sale and other reorganization efforts the Company has reduced its work force by 248 employees and has offered an early retirement program to employees. The Early retirement program reduces the number of employees accumulating benefits under the plan, resulting in a reduction of the projected benefit obligation of $1,406. The Company has incurred a one time charge of $2,200, of which includes $2,000 of severance cost and a net curtailment loss of $200 resulting from the early retirement program. As of June 30, 2000, the Companyhas paid $1,515 of severance cost. On July 21, 2000 the Company established an employee retention program for key individuals who have been deemed critical to operations of the Company. The program calls for payments up to a maximum of $951, with the first disbursement of $317 taking place on July 21, 2000, and the remainder contingent upon specific events taking place. Note G. Income Taxes The Company's tax provision (benefit) for the period ended June 30, 2000 differs from the statutory rate, primarily as a result of nonrecurring expense items related to the Company's forbearance agreement, a decrease in the valuation allowance, the result of which is partially offset by disqualified original issue discount and state taxes. The Company's tax provision (benefit) for the quarter ended June 30, 1999 differs from the statutory rate, primarily as a result of nonrecurring expense items related to the Company's forbearance agreement, the Company's Foreign Sales Corporation, the result of which is partially offset by disqualified original issue discount and state taxes. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 EDITDA. 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 were 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 has not met the Consolidated Interest Coverage Ratio, Consolidated Fixed Charge Coverage Ratio, Maximum Leverage Ratio, and Minimum EBITDA covenant in the bank credit agreement during the first six months of, and does not expect to meet such covenants during the remainder of, 2000. The Company failed to pay a principal loan payment due July 15, 2000. To date, the lenders under the bank credit agreement have not accelerated the Company's debt under the credit agreement. The lenders have entered into a forbearance agreement for the credit facility. The forbearance agreement expires on September 15, 2000, and precludes the Company from borrowing on its credit facility, require interest on term loans and bank fees to be paid monthly, precludes interest payments on the Senior Subordinated Notes, and requires that certain covenant ratios be met during the forbearance period. Because of the payment default on its bank credit facility, The Company has not made an interest payment due August 1, 2000 on the Senior Subordinated Notes. 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 would suffer substantial impairment in a restructuring. In February 2000, the Company entered into an agreement with North American Rubber Thread Company to sell its Latex thread operation and on July 25, 2000 the Company completed the transaction. The selling price was $1.5 million and the Company received $1.1 million in cash and $0.4 million in a term note. There is also a $1.0 million contingency payment from North American Rubber Thread Company based on their future sales volume of Latex thread. The contingency payment will be recognized when received in future periods and has not been contemplated in determining the loss or gain on the sale of the Latex thread operation. The loss from the sale is approximately $800, of which $0.4 million is attributable to a write down of Latex inventory and $0.4 million associated with an impairment of Latex manufacturing equipment. The write down of inventory has been recorded in cost of goods sold and the loss from the impairment of manufacturing equipment has been recorded in miscellaneous expenses. In connection with the 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 has incurred a one time charge of $2.2 million, in the first quarter for the work force reduction. Results of Operations Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999 Net Sales of the Company were $31.8 million for the second quarter of 2000 and $73.3 million for the first six months of 2000, compared to $44.4 million and $88.0 million, respectively, for the corresponding periods in 1999, representing a decrease of 28.4% and 16.7%. The decrease is primarily due to a decrease in latex fiber sales, along with a decrease in the net selling price for fine denier and heavy denier spandex. Gross margin for the second quarter was $8.2 million and $20.9 million for the first six months of 2000, compared to $14.4 million and $28.0 million, respectively, for the corresponding periods in 1999, representing decreases of 43.1% and 25.6%. The Company's gross margin as a percentage of net sales was 25.7% for the second quarter and 28.5% for the first six months of 2000, compared to 32.4% and 31.9%, respectively, for the corresponding periods in 1999. The decrease in gross margin was primarily due to a decrease in both heavy and fine denier spandex net selling price. 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, which continued to exist in 2000 and resulted in price pressure from apparel manufactures. In addition over the past several years the elastomeric fiber industry has increased production capacity of spandex and such increase has out paced demand. Selling, general and administrative expenses were $8.9 million for the second quarter of 2000, and $15.2 million for the six months of 2000, compared to $5.6 million and $11.7 million, respectively, for the corresponding periods in 1999, representing increases of 60.4% and 29.8%. As a percentage of net sales, selling, general and administrative expenses were 28.1% for the second quarter of 2000, and 20.8% for the first six months of 2000, compared to 12.5% and 13.3%, respectively, for the corresponding periods in 1999. The increase in selling, general and administrative expenses is primarily due to increases in the reserve for doubtful accounts, to reflect managements decision to curtail or sever relationships with specific foreign distributors. Also, increases in fine denier spandex to foreign markets has increased. Returns and product claims, sales agent commissions and freight expense. These increases are attributable to the increase in sales volume of fine denier spandex to foreign markets. Research and development expenses were $1.1 million for the second quarter of 2000, and $1.8 million for the first six months of 2000, compared to $1.2 million and $2.3 million, respectively, for the corresponding periods in 1999. Research and development expenses as a percentage of net sales were 3.4% for the second quarter of 2000, and 2.5% for the first six months of 2000, compared to 2.7% and 2.7%, respectively, for the corresponding periods in 1999. The decrease in research and development expenses is attributed 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 was $7.6 million for the second quarter of 2000, and $15.1 million for the first six months of 2000, compared to $7.0 million and $13.9 million, respectively, for the corresponding periods in 1999. The increase in interest expense was primarily due to an increase in the level of outstanding debt and interest rates from the comparable prior year period. Liquidity and Capital Resources Cash provided by operating activities was $0.3 million for the six months ended June 30, 2000 as compared to cash used by operating activities of $4.2 million for the comparable prior year period. The increase in cash provided by operating activities for the six months ended June 30, 2000 was due to decreases in inventory balances and accounts receivable. This reduction was partially offset by decreases in accounts payable and accrued expenses, and increases in prepaid expenses. The average days sales outstanding for accounts receivable was approximately 104 days for the six months ended June 30, 2000 compared to 74 days for the comparable prior year period. The increase in days outstanding is due to extending payment terms to customers where competition has increased due to present market conditions of supply and demand, and export sales increasing to 36.6% from 33.6% in the comparable prior period. Inventory balances decreased $3.1 million from December 31, 1999, primarily due to a decrease in the latex finished goods and raw material inventory. The note payable increased $5.9 million from December 31, 1999, primarily due to an interest payment due on the senior subordinated notes and working capital needs. Capital expenditures were $2.5 million for the six months ended June 30, 2000 compared to $4.4 million in the comparable prior year period. Capital expenditures for the six months ended June 30, 2000 consisted primarily of operational expenditures. 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 had completed all aspects of its Y2K readiness program and, through June 30, 2000, the Company has not experienced any significant problems related to the Y2K issue. Forward-Looking Information This Quarterly Report on Form 10-Q 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 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, risks related to the year 2000 issue, 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 3. Quantitative and Qualitative Disclosure about Market Risk The Company's market risk disclosure set forth in the Company's Annual Report on Form 10K have not changed significantly through the six months ended June 30, 2000. Part II Other Information Item 1. 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 1999. During 1999, the Company purchased approximately $1.7 million of latex thread from the Joint Venture for resale in the North American market. Item 2. Changes in Securities None. Item 3. Defaults Upon Senior Securities See Note B to the Financial Statements included herein for a discussion of defaults under the Company's bank credit facility and forbearance agreement. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information In July 2000, the employment of Horst Hesshaug, Vice President, Operations, terminated. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.1 Forbearance Agreement dated as of July 17, 2000. 27.1 Financial Data Schedule (b) Reports on Form 8-K On June 7, 2000 the Company filed a Form 8-K disclosing the extension of the Forbearance Agreement in management effective as of January 1, 2000. On June 9, 2000 the Company filed a Form 8-K/A to file as an exhibit the Fourth Amendment and Forbearance Agreement dated as of May 31, 2000. SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GLOBE MANUFACTURING CORP. Date: May 12, 2000 By: /s/ LAWRENCE R. WALSH ---------------------------------------------- Lawrence R. Walsh Vice President, Finance and Administration and duly authorized signatory on behalf of the Registrant