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 SEPTEMBER 30, 1999 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 333-64669 GLOBE HOLDINGS, INC. (Exact name of registrant as specified in its charter) Massachusetts 04-2017769 (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 September 30, 1999, the Registrant had 2,179,150 shares of Common Stock outstanding. TABLE OF CONTENTS PART I FINANCIAL INFORMATION PAGE Item 1. Financial Statements Condensed Consolidated Balance Sheets - September 30, 1999 (Unaudited) and December 31, 1998.....................................................1 Condensed Consolidated Statements of Income (Unaudited) - Three Months Ended September 30, 1999 and 1998; Nine Months Ended September 30, 1999 and 1998...............................................2 Condensed Consolidated Statements of Cash Flows (Unaudited) - Nine Months Ended September 30, 1999 and 1998.............................3 Notes to Condensed Consolidated Financial Statements (Unaudited) - September 30, 1999........................................................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..............8 PART II OTHER INFORMATION Item 1. Legal Proceedings......................................................8 Item 2. Changes in Securities and Use of Proceeds..............................9 Item 3. Defaults Upon Senior Securities........................................9 Item 4. Submission of Matters to a Vote of Security Holders....................9 Item 5. Other Information......................................................9 Item 6. Exhibits and Reports on Form 8-K.......................................9 PART I ------ GLOBE HOLDINGS, INC Condensed Consolidated Balance Sheets (Dollars in thousands) (Unaudited) (Note A) September 30, December 31, 1999 1998 ------------- ------------ Assets Current assets: Cash and cash equivalents $ 3,369 $ 1,439 Accounts receivable, net 39,518 22,510 Inventories 19,421 18,380 Prepaid taxes and other assets 9,464 8,852 --------- --------- Total current assets 71,772 51,181 Property, plant and equipment 166,485 157,436 Less accumulated depreciation (81,407) (74,107) --------- --------- Net property, plant and equipment 85,078 83,329 Other assets 11,599 12,526 --------- --------- Total assets $ 168,449 $ 147,036 ========= ========= Liabilities and stockholders' equity (deficit) Current liabilities: Accounts payable $ 8,036 $ 6,012 Accrued interest expense 4,064 7,773 Other current liabilities 12,152 5,010 Note payable 29,600 11,300 --------- --------- Total current liabilities 53,852 30,095 Other long-term liabilities 7,271 5,908 Long-term debt 109,450 115,000 Senior subordinated notes 150,000 150,000 Senior discount notes 28,722 25,855 Stockholders' equity (deficit) Common stock, Class A, voting, $.01 par value 5,000,000 shares authorized 22 22 Paid in capital 44,017 44,017 Retained earnings (224,885) (223,861) --------- --------- Total stockholders' equity (deficit) (180,846) (179,822) --------- --------- Total liabilities and stockholders' equity (deficit) $ 168,449 $ 147,036 ========= ========= See notes to condensed consolidated financial statements. -1- GLOBE HOLDINGS, INC Condensed Consolidated Statements of Income (Dollars in thousands) Three months ended Nine months ended -------------------------- -------------------------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) September 30, September 30, September 30, September 30, 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Net Sales $ 43,102 $ 40,831 $ 131,060 $ 133,321 Cost and expenses: Cost of sales 28,098 25,126 88,023 84,682 Selling, general & administrative expenses 6,264 7,255 17,999 19,265 Research & development expenses 812 1,031 3,147 3,144 Interest, net 8,220 4,951 24,053 6,739 Transaction compensation expense - 5,778 - 5,778 Transaction commitment fee expense - 1,000 - 1,000 Miscellaneous (357) 8 (574) (647) --------- --------- --------- --------- 43,037 45,149 132,648 119,961 --------- --------- --------- --------- Income before incomes taxes and extraordinary item 65 (4,318) (1,588) 13,360 Provision for income taxes 26 (1,245) (563) 5,393 --------- --------- --------- --------- Income/(loss) before extraordinary item 39 (3,073) (1,025) 7,967 Loss from write-off of deferred financing cost, net of income taxes - 187 - 187 --------- --------- --------- --------- Net income/(loss) $ 39 $ (3,260) $ (1,025) $ 7,780 ========= ========= ========= ========= See notes to condensed consolidated financial statements. -2- GLOBE HOLDINGS, INC Condensed Consolidated Statements of Cash Flows (Dollars in thousands) Nine Months Ending -------------------------- (Unaudited) (Unaudited) September 30, September 30, 1999 1998 ------------- ------------- Cash from (used in) operations ($9,901) $ 19,595 Investing Activities Capital expenditures (6,080) (26,317) Other (265) 173 ------- -------- (6,345) (26,144) ------- -------- Financing Activities Net change in note payable 18,300 3,325 Principal payments on long-term debt -- (3,750) Net effect of recapitalization transaction -- 7,012 Other (124) (219) ------- -------- 18,176 6,368 ------- -------- Net increase (decrease) in cash and cash equivalents 1,930 (181) Cash and cash equivalents at beginning of year 1,439 1,947 ------- -------- Cash and cash equivalents at end of period $3,369 $ 1,766 ======= ======== See notes to condensed consolidated financial statements. -3- Globe Holdings, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (Dollars in thousands) September 30, 1999 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 10-Q 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 nine month period ended September 30, 1999 are not necessarily indicative of the results that may be expected for the year ended December 31, 1999. The balance sheet at December 31, 1998 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, 1998. Note B. Inventories The components of inventory consist of the following: September 30, December 31, ------------- ------------ 1999 1998 ------------- ------------ Raw materials $ 3,418 $ 2,688 Finished goods 16,811 16,500 ------- ------- $20,229 $19,118 Less LIFO reserve (808) (808) ------- ------- $19,421 $18,380 -4- Note C. Debt Long-term debt consists of the following: September 30 December 31 ------------ ----------- 1999 1998 ------------ ----------- Term loan A, principal due in variable semi-annual installments through 2005; variable rate interest $ 60,000 $ 60,000 Term loan B, principal due in variable semi-annual installments through 2006; variable rate interest 55,000 55,000 Senior Subordinated Notes, due 2008; interest at 10% 150,000 150,000 Senior Discount Notes, due 2009; semiannual cash interest payments at 14% beginning February 2004, less original issue discount of $20,364 and $23,231 28,722 25,855 -------- -------- Less current maturities 293,721 290,855 5,550 - -------- -------- $288,171 $290,855 On March 23, 1999 the Company exchanged all of its outstanding 14% Senior Discount Notes due 2009 for an equal amount of its Series B 14% Senior Discount Notes due 2009. On March 23, 1999 the Company's wholly-owned subsidiary, Globe Manufacturing Corp., exchanged all of its outstanding 10% Senior Subordinated Notes due 2008 for an equal amount of its Series B 10% Senior Subordinated Notes due 2008. On October 20, 1999, the Company amended its existing Senior Credit Facility. The amendment revises covenant ratios, establishes a minimum EBITDA test, determines the availability of the revolving loan based on a leverage ratio test, subjects the Code Hennessy and Simmons management fee to a leverage ratio test, and increases interest rate margins. The amendment was necessary because the Company was not able to meet certain covenants under its Senior Credit Facility. Note D. Segment Information Globe Holdings, Inc., together with its subsidiaries (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. September 30, September 30, ------------- ------------- 1999 1998 ------------- ------------- United States................. $ 85,937 $ 90,351 Europe........................ 25,305 25,217 Asia.......................... 8,458 4,740 Central and South America..... 3,515 2,865 Other......................... 7,845 10,148 -------- -------- Total Sales................... $131,060 $133,321 ======== ======== -5- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Net sales of the Company were $43.1 million for the third quarter of 1999 and $131.1 million for the nine months ended September 30, 1999, representing an increase of 5.6% and a decrease of 1.7%, respectively, over the corresponding periods of 1998. The increase in the third quarter from the corresponding periods of 1998, is directly related to the increase in sales volume of fine denier spandex that were partially offset by marginal decreases in sales volumes of heavy denier spandex and latex fiber. The slight decrease for the nine month period compared to the corresponding period of 1998 is attributed to decreases in selling prices of fine denier spandex and latex fibers. Gross margin for the third quarter was $15.0 million and $43.0 million for the nine months ended September 30, 1999, representing decreases of 4.5% and 11.5%, respectively, over the corresponding periods of 1998. The Company's gross margin as a percentage of net sales was 34.8% for the third quarter and 32.8% for the nine month period, compared to 38.4% and 36.5%, respectively, for the corresponding periods in 1998. The decrease in gross margin was primarily due to a decrease in pricing on fine denier spandex. Selling, general and administrative expenses were $6.3 million for the third quarter of 1999, and $18.0 million for the nine months ended September 30, 1999, representing decreases of 13.7% and 6.6%, respectively, over the corresponding periods of 1998. As a percentage of net sales, selling, general and administrative expenses were 14.5% for the third quarter and 13.7% for the nine month period, compared to 17.8% and 14.4%, respectively, for the corresponding periods in 1998. Research and development expenses were $0.8 million for the third quarter of 1999, and $3.1 million for the nine months ended September 30, 1999, compared to $1.0 million and $3.1 million, respectively, for the corresponding periods in 1998. Research and development expenses for the Company as a percentage of net sales were 1.9% for the third quarter and 2.4% for the nine month period, compared to 2.5% and 2.3% for the corresponding periods in 1998. Net interest expense was $8.2 million for the third quarter and $24.1 million for the nine months ended September 30, 1999, compared to $5.0 million and $6.7 million, respectively, for the corresponding periods in 1998. The increase in interest expense was directly attributable to the recapitalization of the Company. -6- Liquidity and Capital Resources Cash used by operating activities was $9.9 million for the nine months ended September 30, 1999 as compared to cash provided by operating activities of $19.6 million for the comparable prior year period. The reduction in cash provided by operating activities for the nine months ended September 30, 1999 was due to increases in interest expense, accounts receivable, inventories, prepaid taxes, and a decrease in accrued expenses. This reduction was partially offset by an increase in accounts payable, accretion on discounted notes, and depreciation and amortization. The average days sales outstanding for accounts receivable was approximately 72 days for the nine months ended September 30, 1999 compared to 56 days for the comparable prior year period. The increase in days sales outstanding is due to increases in export sales, and export sales made with extended terms. Export sales represented 34.3% and 31.6% of total sales for the nine months ended September 30, 1999 and 1998, respectively. Inventory balances increased $1.0 million from December 31, 1998, primarily due to an increase in unit sales volume of fine denier spandex compared to the fourth quarter of 1998, raising the level and value of inventory on hand. The note payable increased $18.3 million primarily due to interest payments due on the senior subordinated notes and working capital needs. Capital expenditure, including capital leases, were $9.1 million for the nine months ended September 30, 1999 compared to $26.3 million for the comparable prior year period. Capital expenditures for the nine months ended September 30, 1998 consisted primarily of expenditures for the expansion of the Tuscaloosa facility. As part of the recapitalization transaction, the Company entered into a Senior Credit Facility consisting of a $115.0 million term loan facility, which was fully drawn upon the consummation of the transaction and a $50.0 million revolving loan facility. The revolving loan facility is available for general corporate and working capital purposes. On October 20, 1999, the Company amended its existing Senior Credit Facility. The amendment revises covenant ratios, establishes a minimum EBITDA test, determines the availability of the revolving loan based on a leverage ratio test, subjects the Code Hennessy and Simmons management fee to a leverage ratio test, and inceases interest rate margins. The amendment was necessary because the Company was not able to meet certain covenants under its Senior Credit Facility. 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. Any of the Company's computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. If the Company, its significant customers or suppliers fail to make necessary modifications and conversions on a timely basis, the year 2000 issue could have a material adverse effect on Company operations. However, the impact cannot be quantified at this time. The Company believes that its competitors face similar risks. The Company has established a corporate-wide project team to identify non- compliant software and complete the corrections required for the year 2000 issue. The Company has successfully repaired existing manufacturing and the majority of the ancillary systems in all locations. The Company has also successfully implemented a new software system that is compliant with year 2000. The new system encompasses the Company's financial, inventory costing, and distribution systems. The Company also has made inquiry of its major customers and suppliers to assess their compliance. There can be no assurance that there will not be a material adverse effect on the Company if third party governmental or business entities do not convert or replace their systems in a timely manner and in a way that is compatible with the Company's systems. Costs related to the year 2000 issue are funded through operating cash flows. Through September 30, 1999, the Company expended approximately $350,000 in systems development and remediation efforts, and modifying the applicable code of existing software. The Company estimates remaining costs to be immaterial. The Company presently believes that the total cost of achieving year 2000 compliant systems will not be material to the Company's financial condition, liquidity or results of operations. -7- Time and cost estimates are based on currently available information. Developments that could affect estimates include, but are not limited to, the availability and cost of trained personnel, the ability to locate and correct all relevant computer code and systems and remediation success of the Company's customers and suppliers. 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 Disclosures about Market Risk. The Company's market risk disclosure set forth in the Company's Annual Report on Form 10-K has not changed significantly through the nine months ended September 30, 1999. 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 recapitalization transaction in 1998. This indemnity expires on December 31, 2001. -8- The U.S. Department of Commerce has imposed anti-dumping duties on Indonesian extruded latex producers. Additional duties of 28.29% have been levied on extruded latex thread imported from Indonesia from May 1999 going forward. 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 2. Changes in Securities None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.16* Second Amendment to the Credit Agreement, dated as of May 24, 1999. 10.17* Third Amendment and Waiver to the Credit Agreement, dated as of October 20, 1999. * Filed as an Exhibit to the Form 10-Q filed by Globe Manufacturing Corp. with the Securities and Exchange Commission on November 15, 1999. 27.1 Financial Data Schedule (b) Reports on Form 8-K None. -9- 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 HOLDINGS, INC. Date: November 12, 1999 By: /s/ LAWRENCE R. WALSH -------------------------------- Lawrence R. Walsh Vice President, Finance and Administration and duly authorized signatory on behalf of the Registrant