<PAGE>
PROSPECTUS Filed Pursuant to Rule 424(b)(3)
February 16, 1999 File Number 333-64669
Globe Holdings, Inc.
Offer to Exchange its 14% Senior Discount Notes due 2009, Series B
for any and all of its outstanding 14% Senior Discount Notes due 2009.
The Exchange Offer will expire at 5:00 p.m., New York City time, on March 23,
1999, unless extended.
Globe Holdings, Inc., a Massachusetts corporation ( the "Company") hereby
offers (the "Exchange Offer"), upon the terms and conditions set forth in this
Prospectus (the "Prospectus") and the accompanying Letter of Transmittal (the
"Letter of Transmittal"), to exchange $1,000 principal amount at maturity of
its 14% Senior Discount Notes due 2009, Series B (the "New Notes"), registered
under the Securities Act of 1933, as amended (the "Securities Act"), pursuant
to a Registration Statement of which this Prospectus is a part, for each
$1,000 principal amount at maturity of its outstanding 14% Senior Discount
Notes due 2009 (the "Old Notes") of which $49,086,000 principal amount at
maturity is outstanding. The form and terms of the New Notes are the same as
the form and term of the Old Notes except that (i) the New Notes will bear a
Series B designation and a different CUSIP number, (ii) the New Notes will
have been registered under the Securities Act and, therefore, will not bear
legends restricting the transfer thereof and (iii) holders of the New Notes
will not be entitled to certain rights of holders of Old Notes under the
Registration Rights Agreement (as defined). The New Notes will evidence the
same debt as the Old Notes (which they replace) and will be issued under and
be entitled to the benefits of the Indenture dated as of August 6, 1998 (the
"Indenture") by and among the Company and Norwest Bank Minnesota, National
Association, as trustee, governing the Old Notes and the New Notes. The Old
Notes and the New Notes are sometimes referred to herein collectively as the
"Notes." See "The Exchange Offer" and "Description of the Notes."
The Company will accept for exchange any and all Old Notes validly tendered
and not withdrawn prior to 5:00 p.m., New York City time on March 23, 1999,
unless extended by the Company in its sole discretion (the "Expiration Date").
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m. on the
Expiration Date. The Exchange Offer is subject to certain customary
conditions. See "The Exchange Offer."
The Notes were issued at a discount of $24,704,070 from their principal
amount. The Notes will accrete in value until August 1, 2003 at a rate of 14%
per annum, compounded semiannually on February 1 and August 1 of each year to
an aggregate principal amount of $49,086,000. Cash interest on the Notes will
not accrue prior to August 1, 2003. Thereafter, the Notes will bear interest
at a rate of 14% per annum, payable semiannually in arrears on February 1 and
August 1 of each year, commencing on February 1, 2004.
The Notes may be redeemed, in whole or in part, at any time on or after
August 1, 2003 at the option of the Company, at the redemption prices set
forth herein, plus, in each case, accrued and unpaid interest and Liquidated
Damages (as defined), if any, to the date of redemption. In addition, at any
time prior to August 1, 2001, the Company may, at its option, redeem up to 35%
in aggregate principal amount at maturity of the Notes at a redemption price
equal to 114.0% of the Accreted Value (as defined) thereof, plus Liquidated
Damages, if any, to the date of redemption, with the net cash proceeds of one
or more Equity Offerings (as defined); provided that not less than 65% of the
aggregate principal amount at maturity of the Notes remain outstanding
immediately after the occurrence of any such redemption. At any time prior to
August 1, 2003, the Notes may be redeemed, in whole but not in part, at the
option of the Company at any time within 180 days after a Change in Control
(as defined), at a redemption price equal to the sum of (i) 100% of the
Accreted Value thereof, together with Liquidated Damages, if any, to the date
of redemption, plus (ii) the Applicable Premium (as defined). See "Description
of the Notes--Optional Redemption."
The New Notes will be, as the Old Notes (which they replace) are, general
unsecured obligations of the Company, and will, as the Old Notes (which they
replace), be effectively subordinated to all secured obligations
(Cover continued on following page)
---------------------
See "Risk Factors" beginning on page 14 for a description of certain risks
to be considered by holders who tender their Old Notes in the Exchange Offer.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
of the Company and all obligations of the subsidiaries of the Company. The
Notes will rank pari passu with any existing and future Senior Debt (as
defined) of the Company and will rank senior to all Subordinated Debt (as
defined) of the Company. As of January 28, 1999, (i) the Company had no
outstanding Senior Debt (other than the Notes and its guarantee under the
Senior Credit Facility (as defined), (ii) the Company had no outstanding debt
that was junior to the Notes and (iii) the Company's subsidiaries had total
debt and other liabilities of $275.4 million (excluding unused commitments of
$39.7 million under the Senior Credit Facility). See "Description of the
Notes."
The Old Notes were sold by the Company on August 6, 1998 to BancAmerica
Robertson Stephens (the "Initial Purchaser") in a transaction not registered
under the Securities Act in reliance upon an exemption under the Securities
Act (the "Initial Offering"). The Initial Purchaser subsequently placed the
Old Notes with qualified institutional buyers in reliance upon Rule 144A under
the Securities Act. Accordingly, the Old Notes may not be reoffered, resold or
otherwise transferred in the United States unless registered under the
Securities Act or unless an applicable exemption from the registration
requirements of the Securities Act is available. The New Notes are being
offered hereunder in order to satisfy the obligations of the Company under the
Registration Rights Agreement entered into by the Company and the Initial
Purchaser in connection with the Initial Offering (the "Registration Rights
Agreement"). See "The Exchange Offer."
Based upon an interpretation by the staff of the Securities and Exchange
Commission (the "Commission") set forth in certain no-action letters issued to
third parties, the Company believes that the New Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by any holder thereof (other than any such holder that
is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus
delivery requirements of the Securities Act, provided that such New Notes are
acquired in the ordinary course of such holder's business and such holder has
no arrangement or understanding with any person to participate in the
distribution of such New Notes. See "The Exchange Offer--Resale of the New
Notes." Holders of Old Notes wishing to accept the Exchange Offer must
represent to the Company, as required by the Registration Rights Agreements,
that such conditions have been met. Each broker-dealer (a "Participating
Broker-Dealer") that receives New Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a participating
Broker-Dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a Participating Broker-Dealer
in connection with resales of New Notes received in exchange for Old Notes
where such Old Notes were acquired by such Participating Broker-Dealer as a
result of market-making activities or other trading activities. The Company
has agreed that, for a period of 180 days after the Expiration Date, it will
make this Prospectus available to any Participating Broker-Dealer for use in
connection with any such resale. See "Plan of Distribution."
Shortly before the Initial Offering, Globe Manufacturing Corp. ("Globe
Manufacturing"), a subsidiary of Globe Holdings, sold $150 million in initial
aggregate principal amount of its 10% Senior Subordinated Notes due 2008 (the
"Old Senior Subordinated Notes").
Concurrent with this Note Exchange Offer, Globe Manufacturing is offering to
exchange $1,000 principal amount of its 10% Senior Subordinated Notes due
2008, Series B (the "New Senior Subordinated Notes," and, together with the
Old Senior Subordinated Notes, the "Senior Subordinated Notes") registered
under the Securities Act pursuant to a registration statement, for each $1,000
principal amount of its outstanding Old Senior Subordinated Notes, of which
$150 million in initial aggregate principal amount is outstanding. See "The
Transactions" and "Description of the Notes."
The Company will not receive any proceeds from the Exchange Offer. The
Company has agreed to bear the expenses of the Exchange Offer. No underwriter
is being used in connection with the Exchange Offer.
There has not previously been any public market for the Old Notes or the New
Notes. The Company does not intend to list the New Notes on any securities
exchange or to seek approval for quotation through any
ii
<PAGE>
automated quotation system. The Old Notes are currently eligible for trading
in the Private Offerings, Resales and Trading through Automatic Linkages
("PORTAL"). There can be no assurance that an active market for the New Notes
will develop. See "Risk Factors--Absence of a Public Market Could Adversely
Affect the Value of New Notes." Moreover, to the extent that Old Notes are
tendered and accepted in the Exchange Offer, the trading market for untendered
and tendered but unaccepted Old Notes could be adversely affected.
The New Notes will be available initially only in book-entry form. Except as
described under "Book-Entry Procedures and Transfer," the Company expects that
the New Notes issued pursuant to the Exchange Offer will be represented by one
or more Global Notes (as defined), which will be deposited with, or on behalf
of, the Depository Trust Company ("DTC") and registered in its name or in the
name of Cede & Co., its nominee. Beneficial interests in the Global Notes
representing the New Notes will be shown on, and transfers thereof will be
effected through, records maintained by DTC and its participants. After the
initial issuance of the Global Notes, Notes in certificated form will be
issued in exchange for Global Notes only under limited circumstances as set
forth in the Indenture. See "Book-Entry Procedures and Transfer."
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN
WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING HEREBY TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS OR
THE ACCOMPANYING LETTER OF TRANSMITTAL, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY.
PROSPECTIVE INVESTORS IN THE NEW NOTES ARE NOT TO CONSTRUE THE CONTENTS OF
THIS PROSPECTUS AS INVESTMENT, LEGAL OR TAX ADVICE. EACH INVESTOR SHOULD
CONSULT ITS OWN COUNSEL, ACCOUNTANT AND OTHER ADVISORS AS TO LEGAL, TAX,
BUSINESS, FINANCIAL AND RELATED ASPECTS OF THE NEW NOTES. THE COMPANY IS NOT
MAKING ANY REPRESENTATION TO ANY PROSPECTIVE INVESTOR IN THE NEW NOTES
REGARDING THE LEGALITY OF AN INVESTMENT THEREIN BY SUCH PERSON UNDER
APPROPRIATE LEGAL INVESTMENT OR SIMILAR LAWS.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (the "Exchange Offer Registration Statement," which term shall encompass
all amendments, exhibits, annexes and schedules thereto) pursuant to the
Securities Act, and the rules and regulations promulgated thereunder, covering
the Exchange Offer contemplated hereby. This Prospectus does not contain all
the information set forth in the Exchange Offer Registration Statement. For
further information with respect to the Company and the Exchange Offer,
reference is made to the Exchange Offer Registration Statement. Statements
made in this Prospectus as to the contents of any contract, agreement or other
document referred to are not necessarily complete. With respect to each such
contract, agreement or other document filed as an exhibit to the Exchange
Offer Registration Statement, reference is made to the exhibit for a more
complete description of the document or matter involved, and each such
statement shall be deemed qualified in its entirety by such reference.
The Exchange Offer Registration Statement, including the exhibits thereto,
and periodic reports and other information filed by the Company with the
Commission can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and inspected at the Commission's regional offices at 7 World
Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, Suite
1400, 500 West Madison Street, Chicago, Illinois 60601. Copies of such
iii
<PAGE>
materials can be obtained from the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants that file
electronically with the Commission. The address of such site is
http://www.sec.gov.
In addition, the Company has agreed that, whether or not it is required to
do so by the rules and regulations of the Commission, for so long as any Notes
remain outstanding, it will furnish to the holders of the Notes and, to the
extent permitted by applicable law or regulation, file with the Commission (i)
all quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K if the
Company were required to file such Forms, including for each a "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and,
with respect to the annual information only, a report thereof by the Company's
independent certified public accountants and (ii) all reports that would be
required to be filed on Form 8-K if it were required to file such reports. In
addition, for so long as any of the Notes remain outstanding, the Company has
agreed to make available to any prospective purchaser of the Notes or
beneficial owner of the Notes, in connection with any sale thereof, the
information required by Rule 144A(d)(4) under the Securities Act.
The Company is a Massachusetts corporation with its principal executive
offices located at 456 Bedford Street, Fall River, Massachusetts 02720, and
its telephone number is (508) 674-3585.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All reports and other documents filed by the Company pursuant to Sections
13(a), 13(c), 14 and 15(d) of the Exchange Act after the date of this
Prospectus and prior to the Expiration Date shall be deemed to be incorporated
by reference herein and to be a part hereof from the date of the filing of
such reports and documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained
herein (or in any other subsequently filed document which also is incorporated
or deemed to be incorporated by reference herein) modifies or supersedes such
previous statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus and the Exchange Offer Registration Statement.
This Prospectus incorporates documents by reference which are not presented
herein or delivered herewith. These documents are available without charge
upon request from Lawrence R. Walsh, Vice President of Finance and
Administration of Globe Holdings, Inc., 456 Bedford Street, Fall River,
Massachusetts 02720, telephone (508) 674-3585. In order to ensure timely
delivery of the documents, any request should be made by March 17, 1999 (five
business days prior to the expiration date).
MARKET SHARE AND INDUSTRY DATA
The market share and industry data presented herein are based upon estimates
by management of the Company, utilizing various third party sources, where
available. While management believes that such estimates are reasonable and
reliable, in certain cases such estimates cannot be verified by information
available from independent sources. Accordingly, no assurance can be given
that such market share and industry data are accurate in all material
respects.
iv
<PAGE>
CERTAIN TERMINOLOGY
As used herein, the following terms have the meanings specified below:
circular knit: a type of weft knit in which the fabric is produced in the
form of a tube, with threads running continuously around the fabric. In
weft knit fabrics, the thread runs crosswise in the fabric, as opposed to
lengthwise in warp knits. Circular knits are used in active wear, swimwear,
casual wear and dress wear.
denier: a weight per unit of length measure of any linear material. In
fibers, a weight numerically equal to the weight in grams of 9,000 meters
of the material. Lower numbers represent finer sizes, and higher numbers
represent coarser sizes.
elastomeric: describes any material (including yarn, fiber, film and
sheets) which exhibits pronounced elastic properties, such elastic
properties being the material's primary value attributes.
gauge: the number of needles, fibers or other elements in a determined
unit of length. For latex thread, gauge means the number of individual
rubber threads which, when placed cross-sectionally beside one another, fit
into a length of one inch. Lower numbers represent coarser sizes and higher
numbers represent finer sizes.
narrow fabric: any knit or woven fabric that is twelve inches or less in
width and has a selvage on each side (other than ribbon and seam bindings).
Narrow fabric applications include waist bands and straps.
nonwoven: a type of fabric in which the fibers are fused or bonded in a
random web or mat, as opposed to interlacing sets as in woven fabric.
Nonwovens are employed in diapers, adult incontinence products, feminine
hygiene products and medical bandages.
spandex: a manufactured fiber in which the fiber-forming substance is a
long-chain synthetic polymer comprised of at least 85% segmented
polyurethane.
warp knit: a type of knit in which the threads run lengthwise in the
fabric, as opposed to crosswise in weft knits. Examples of warp knits
include milanese knits, raschel knits and tricot knits. Warp knit
applications include intimate apparel, body shaping garments, swimwear and
footwear.
woven: a type of fabric generally composed of two sets of yarns, warp and
filling, that is formed by weaving interlacing sets of these yarns.
v
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by and should be read in
conjunction with the detailed information and consolidated financial statements
and notes thereto appearing elsewhere in this Prospectus. As used in this
Prospectus, unless the context otherwise indicates, "Company" or "Globe" or
"Globe Holdings" refers to Globe Holdings, Inc. (formerly known as Globe
Manufacturing Co.) and its subsidiaries, and "Globe Manufacturing" refers to
Globe Manufacturing Corp. (formerly known as Globe Elastic Co., Inc.), the
Company's wholly owned subsidiary. Except as otherwise set forth herein,
references to "pro forma" information for a period ending on a specified date
means information that gives pro forma effect to the Transactions as if the
Transactions had occurred on such date for balance sheet data and as of the
beginning of the period for statement of income data. See "--The Transactions."
The Company
Overview
Globe 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 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 25.4% of total revenue during the 1997 fiscal year.
During the twelve months ended September 30, 1998, the Company had net sales of
$177.0 million, Adjusted EBITDA (as defined) of $46.7 million and net income of
$12.8 million. See Summary Consolidated Financial Data, footnotes 3 and 5.
Spandex fiber, which accounted for 80% of the Company's 1997 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.
Based on management's knowledge and experience in the industry, management
estimates that in 1997 the worldwide market for spandex fiber was approximately
240 million pounds, representing approximately $2.0 billion in sales. From 1993
to 1997, worldwide sales of spandex fiber increased at an estimated 11%
compound annual growth rate, and the worldwide spandex fiber market is expected
to grow at approximately 9% over the next three years. Since 1993, demand for
fine denier spandex has increased faster than the overall market due to its
growing use in lightweight and high quality apparel applications and this trend
is expected to continue.
The Company operates three manufacturing facilities, which are located in
Fall River, Massachusetts, Tuscaloosa, Alabama and Gastonia, North Carolina.
Since 1993, Globe has invested $97.5 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
1
<PAGE>
capacity increased from 2.6 million to 10.6 million pounds. As a result of the
Company's capital investment program and continuous improvement initiatives in
its manufacturing facilities, Globe's fine denier spandex fiber production
yields have improved by 35% and sales per employee have increased by 43% since
1993.
Tuscaloosa Plant Expansion
Globe is expanding production capacity at its Tuscaloosa, Alabama fine denier
spandex fiber manufacturing facility in response to existing demand from
current customers (the "Tuscaloosa Plant Expansion"). Through September 30,
1998, Globe had spent approximately $19.2 million of the estimated $22.1
million project cost. The Tuscaloosa facility, built in 1994, has undergone
three prior capacity expansions. The Tuscaloosa Plant Expansion will increase
the Company's fine denier manufacturing capacity by 3.6 million pounds per
annum, or 34%, with approximately half of this increased capacity expected to
be on line in the fourth quarter of 1998 and the balance expected to be on line
in the first quarter of 1999. As of September 30, 1998, Globe's list price for
40 denier spandex fiber, the primary product currently produced at the
Company's Tuscaloosa facility, was $12.99 per pound.
Competitive Strengths
The Company's exclusive focus on elastomeric fibers for over 50 years has
enabled it to develop the following competitive strengths:
Long-Term Customer Relationships and Superior Customer Service. Globe has
established long-term relationships with its principal customers by focusing on
superior technical and customer service. The Company has been a supplier to
Fruit of the Loom, Inc., Kimberly-Clark Corporation, Minnesota Mining and
Manufacturing Company, Sara Lee Hosiery, Unifi, Inc. and Worldtex, Inc. for
over ten years. Seven of the Company's ten largest customers have selected
Globe as their preferred supplier of spandex fiber. Globe provides analytical
laboratory services and on-site technical assistance to improve customers'
manufacturing and engineering processes. As a result, a number of the Company's
major customers have selected it as a technology partner to assist in the
development of new spandex applications.
Broad Product Line. The Company believes that it offers the broadest line of
spandex and latex elastomeric fibers in the world. The Company produces a full
line of spandex fibers in deniers ranging from 15 to 5040. These products
feature an assortment of stretch, strength and other performance
characteristics that may be customized for specific applications and
manufacturing processes. Globe also manufactures a wide variety of latex
threads in multiple gauges and formulations. This broad range of product
offerings differentiates the Company in the industry and represents a
competitive advantage, as many customers purchase multiple deniers of spandex
fiber, as well as various gauges of latex thread, and prefer to utilize one
vendor for their elastomeric fiber requirements. The proprietary technologies
and customized equipment used by Globe in its multiple manufacturing processes
enable the Company to cost-effectively produce this broad product line.
Strong Positions in Growing Markets. The Company has established a strong
market position in each of its principal product lines. The Company has an
estimated 16% share of the domestic spandex fiber market and an estimated 7%
share of the worldwide spandex fiber market (based on pounds produced).
Management estimates that worldwide sales of spandex fiber will increase at a
compound annual growth rate of approximately 9% over the next three years and
that fine denier spandex sales will exceed the overall market growth rate
during this period. Fine denier spandex demand has been driven by strong
consumer demand for lightweight and high quality apparel and technological
advances allowing for the use of spandex fibers in the manufacture of such
apparel.
Cost-Efficient Manufacturing. Management believes that the Company's
manufacturing operations are among the most efficient in the industry, allowing
the Company to become one of the world's lowest cost producers of high quality
spandex fiber. Globe has developed proprietary chemical formulations and highly
2
<PAGE>
efficient manufacturing processes that utilize sophisticated process control
systems and custom fabricated manufacturing equipment designed and built by the
Company's engineers. Management believes that Globe's in-house capability to
design, engineer and build its own manufacturing equipment distinguishes the
Company from many of its competitors and provides it with an important
competitive advantage in maintaining product quality as well as controlling
design, development and maintenance costs. In addition, increased production
volume at the Company's facilities has enabled the Company to achieve
significant economies of scale and raw material purchasing power.
Experienced Management Team. The Company is led by an experienced management
team with a track record of achieving profitable growth, developing new
manufacturing processes and expanding the Company's customer base. Between 1993
and the twelve months ended September 30, 1998, the Company's net sales
increased from $107.6 million to $177.0 million, Adjusted EBITDA increased from
$23.7 million to $46.7 million and net income increased from $9.2 million to
$12.8 million. See Summary Consolidated Financial Data, footnotes 3 and 5. The
Company's executive officers average approximately 20 years with the Company.
The Company's senior management team has a substantial financial interest in
the Company's continued success through their direct investment in the Company.
Business Strategy
The Company's business objective is to become the leading global supplier of
elastomeric fiber for use in selected apparel and non-apparel markets. The
Company seeks to achieve this objective by pursuing the following strategies:
Continue Shift in Product Mix to Higher Growth, More Profitable Fine Denier
Products. Since 1993, Globe has expanded its annual production capacity of
higher growth fine denier spandex fiber from 2.6 million to 10.6 million
pounds. Fine denier spandex fiber is used in applications requiring lightweight
or high quality fabric, and has been generally more profitable than heavy
denier spandex fiber due to the complexity of the manufacturing process
required and strong market demand. Fine denier spandex fiber sales accounted
for approximately 49% of Globe's 1997 total sales, up from 25% in 1993. The
Tuscaloosa Plant Expansion, which will increase the Company's annual production
capacity for fine denier spandex fiber to 14.2 million pounds, will enable the
Company to further address the increase in demand for fine denier spandex
fiber.
Develop Innovative Spandex Fiber Applications. Globe's product managers and
research and development engineers work closely with existing and prospective
customers to develop innovative applications for spandex fiber. For example,
the Company worked with a fleece manufacturer for over two years to develop a
new four-way stretch fleece product for outerwear that incorporates Globe's
spandex fiber. Cooperative efforts such as this have enabled Globe to enhance
its relationships with existing customers and attract new customers.
Improve Manufacturing Productivity; Reduce Production Costs. The Company
seeks to continually improve manufacturing efficiency and reduce production
costs in order to maintain its position as one of the world's lowest cost
producers of high quality spandex fiber. The Company seeks to improve
manufacturing yields, increase equipment utilization, and reduce production
costs by upgrading process monitoring equipment, enhancing production processes
and increasing throughput. Each of the Company's manufacturing facilities is
certified under ISO 9001, and the Company actively incorporates the principles
of continuous improvement.
Increase International Sales. Globe estimates that the international market
accounts for two-thirds of the worldwide spandex fiber market. International
spandex fiber markets are growing rapidly due to increasing consumerism of the
world's population, coupled with increases in personal disposable income. From
1993 to 1997, Globe's international sales increased from 19% of sales to 28% of
sales (primarily in western Europe and Latin America) as the Company expanded
the size and geographic scope of its international sales to 46 countries. The
Company seeks to further expand its international sales by leveraging its
existing sales and marketing infrastructure and capitalizing on Globe's
expanded manufacturing capacity.
3
<PAGE>
The Transactions
The consummation of the Initial Offering occurred shortly after the
effectiveness of the recapitalization (the "Recapitalization") of the Company.
The Recapitalization was effected pursuant to an agreement and plan of merger
dated June 23, 1998 (the "Merger Agreement") between the Company and Globe
Acquisition Company ("MergerCo"), a newly formed affiliate of Code Hennessy &
Simmons, pursuant to which MergerCo merged with and into the Company (the
"Merger"). As a result of the Merger and the Recapitalization, Code Hennessy &
Simmons, certain members of management and certain other investors have an
aggregate investment of $75.0 million in the Company, comprised of a rollover
of approximately $7.2 million (the "Retained Investment") by management and
other pre-Merger shareholders of the Company (the "Pre-Merger Shareholders"),
an equity investment by Code Hennessy & Simmons and certain other investors in
an aggregate amount equal to $42.8 million (the "New Investment" and, together
with the Retained Investment, the "Equity Investment") and the CHS Loan of
$25.0 million to the Company, which was repaid with the proceeds of the Initial
Offering. Immediately prior to the Merger, the Company transferred
substantially all of its assets and liabilities to Globe Manufacturing (the
"Asset Drop Down").
Pursuant to the Merger and the Recapitalization: (i) Globe Manufacturing
incurred approximately $120.0 million of borrowings (consisting of $115.0
million in term loans and approximately $5.0 million in revolving loans) under
a new senior secured credit facility (as amended, the "Senior Credit
Facility"); (ii) Globe Manufacturing received gross proceeds of $150.0 million
from the offering (the "Initial Senior Subordinated Note Offering") of the Old
Senior Subordinated Notes; (iii) Code Hennessy & Simmons provided the CHS Loan
to the Company; (iv) Globe Holdings repaid its indebtedness outstanding under
certain loan credit facilities (collectively, the "Old Credit Facility"); (v)
holders of the shares of common stock of the Company outstanding prior to the
Recapitalization received cash (including the payment by the Company 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 as of the date of the
Merger and (y) the amount of the Retained Investment (the "Cash Merger
Consideration"); and (vi) the Company deposited $15.0 million (the "Escrow
Amount") into escrow to secure certain indemnification and other obligations of
the Pre-Merger Shareholders under the Merger Agreement. See "Recent
Developments," "Use of Proceeds," "Certain Relationships and Related
Transactions--Recapitalization," and "Description of Senior Credit Facility."
The Initial Offering, the Asset Drop Down, the Initial Senior Subordinated
Note Offering, the CHS Loan (and the repayment thereof with the proceeds of the
Initial Offering), the Equity Investment, the Recapitalization, the Merger, the
initial borrowings under the Senior Credit Facility and the repayment of
borrowings under the Old Credit Facility are collectively referred to herein as
the "Transactions." See "Use of Proceeds" and "Description of Senior Credit
Facility."
RECENT DEVELOPMENTS
On August 6, 1998 the Company consummated the Initial Offering under Rule
144A of the Securities Act, pursuant to which the Company issued and sold
49,086 units (the "Units"), each consisting of one Old Note and one warrant (a
"Warrant") to purchase 1.4155 shares of Class A Common Stock, $.01 par value,
of the Company. The Units were initially sold to BancAmerica Robertson
Stephens. The aggregate purchase price of the Units was $25,000,000 and the net
proceeds to the Company were $24,562,490, after deducting underwriting
discounts and commissions and other expenses payable by the Company. The Old
Notes were issued pursuant to the terms of the Indenture and have a total
original issue discount of $24,704,070. See "Risk Factors--Original Issue
Discount." Concurrently with the consummation of the private placement, the
Company and BancAmerica Robertson Stephens entered into the Registration Rights
Agreement, which grants the holders of the Old Notes certain exchange and
registration rights. The Exchange Offer is intended to satisfy such exchange
rights which terminate upon the consummation of the Exchange Offer. On January
3, 1999, the Company will begin incurring Liquidated Damages at a rate of .50%
per annum if the Registration Statement has not been declared effective.
4
<PAGE>
As of January 28, 1999, in response to lower than expected earnings, 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
the term loans and revolving loans were increased and (iii) the management fee
due to an affiliate of Code Hennessy & Simmons LLC may only be paid if certain
leverage tests are met. As a result of the amendment, the applicable borrowing
margin under the Senior Credit Facility for Base Rate (as defined in the Senior
Credit Facility) borrowings increased from 1.25% to 2.00% for the Term Loan A
and the Revolving Loan and from 1.75% to 2.50% for the Term Loan B and the
applicable borrowing margin for Eurodollar Rate (as defined in the Senior
Credit Facility) borrowings increased from 2.25% to 3.00% for the Term Loan A
and the Revolving Loan and from 2.75% to 3.50% for the Term Loan B. See
"Description of the Senior Credit Facility." This increase in interest margins
will increase the Company's interest expense by approximately 3%, which is not
expected to have a material effect on the Company's operating results.
5
<PAGE>
The Exchange Offer
Securities Offered........ $49,086,000 aggregate principal amount at maturity
of 14% Senior Discount Notes due 2009, Series B.
The Exchange Offer........ $1,000 principal amount of New Notes in exchange
for each $1,000 principal amount of Old Notes. As
of the date hereof, $49,086,000 aggregate principal
amount at maturity of Old Notes are outstanding.
The Company will issue the New Notes to holders on
or promptly after the Expiration Date.
Based on an interpretation by the staff of the
Commission set forth in no-action letters issued to
third parties, the Company believes that New Notes
issued pursuant to the Exchange Offer in exchange
for Old Notes may be offered for resale, resold and
otherwise transferred by any holder thereof (other
than any such holder which is an "affiliate" of the
Company within the meaning of Rule 405 under the
Securities Act) without compliance with the
registration and prospectus delivery provisions of
the Securities Act, provided that such New Notes
are acquired in the ordinary course of such
holder's business and that such holder does not
intend to participate and has no arrangement or
understanding with any person to participate in the
distribution of such New Notes.
Any Participating Broker-Dealer that acquired Old
Notes for its own account as a result of market-
making activities or other trading activities may
be a statutory underwriter. Each Participating
Broker-Dealer that receives New Notes for its own
account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The
Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a
Participating Broker-Dealer will not be deemed to
admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to
time, may be used by a Participating Broker-Dealer
in connection with resales of New Notes received in
exchange for Old Notes where such Old Notes were
acquired by such Participating Broker-Dealer as a
result of market-making activities or other trading
activities. The Company has agreed that, for a
period of 180 days after the Expiration Date, it
will make this Prospectus available to any
Participating Broker-Dealer for use in connection
with any such resale. See "Plan of Distribution."
Any holder who tenders in the Exchange Offer with
the intention to participate, or for the purpose of
participating, in a distribution of the New Notes
could not rely on the position of the staff of the
Commission enunciated in no-action letters and, in
the absence of an exemption therefrom, must comply
with the registration and prospectus delivery
requirements of the Securities Act in connection
with any resale transaction. Failure to comply with
such requirements in such instance may result in
such holder incurring liability under the
Securities Act for which the holder is not
indemnified by the Company.
6
<PAGE>
Expiration Date........... 5:00 p.m., New York City time, on March 23, 1999
unless the Exchange Offer is extended, in which
case the term "Expiration Date" means the latest
date and time to which the Exchange Offer is
extended.
Accrued Interest on the
New Notes and the Old
Notes.....................
No cash interest will be payable in respect of the
New Notes prior to August 1, 2003. Thereafter, cash
interest on the New Notes will accrue on the
principal amount at maturity at the rate of 14% per
annum and will be payable semi-annually on February
1 and August 1 of each year, commencing February 1,
2004. The Old Notes will continue to accrete at the
rate of 14% per annum to, but excluding, the date
of issuance of the New Notes. Any Old Notes not
tendered or accepted for exchange will continue to
accrete at the rate of 14% per annum in accordance
with their terms. The Accreted Value of New Notes
upon issuance will equal the Accreted Value of the
Old Notes accepted for exchange immediately prior
to issuance of the New Notes.
Conditions to the The Exchange Offer is subject to certain customary
Exchange Offer............ conditions, which may be waived by the Company. See
"The Exchange Offer--Conditions."
Procedures for Tendering Each holder of Old Notes wishing to accept the
Old Notes................. Exchange Offer must complete, sign and date the
accompanying Letter of Transmittal, or a facsimile
thereof, in accordance with the instructions
contained herein and therein, and mail or otherwise
deliver such Letter of Transmittal, or such
facsimile, together with the Old Notes and any
other required documentation to the Exchange Agent
(as defined) at the address set forth herein. By
executing the Letter of Transmittal, each holder
will represent to the Company that, among other
things, the New Notes acquired pursuant to the
Exchange Offer are being obtained in the ordinary
course of business of the person receiving such New
Notes, whether or not such person is the holder,
that neither the holder nor any such other person
has any arrangement or understanding with any
person to participate in the distribution of such
New Notes and that neither the holder nor any such
other person is an "affiliate," as defined under
Rule 405 of the Securities Act, of the Company. See
"The Exchange Offer--Purpose and Effect of the
Exchange Offer" and "--Procedures for Tendering."
Untendered Old Notes...... Following the consummation of the Exchange Offer,
holders of Old Notes eligible to participate but
who do not tender their Old Notes will not have any
further exchange rights and such Old Notes will
continue to be subject to certain restrictions on
transfer. Accordingly, the liquidity of the market
for such Old Notes could be adversely affected.
Consequences of Failure
to Exchange...............
The Old Notes that are not exchanged pursuant to
the Exchange Offer will remain restricted
securities. Accordingly, such Old Notes may be
resold only (i) to the Company, (ii) pursuant to
Rule 144A or Rule 144 under the Securities Act or
pursuant to some other exemption under
the Securities Act, (iii) outside the United States
to a foreign person pursuant to the requirements of
Rule 904 under the Securities Act, or
7
<PAGE>
(iv) pursuant to an effective registration
statement under the Securities Act. See "The
Exchange Offer--Consequences of Failure to
Exchange."
Shelf Registration If any holder of the Old Notes (other than any such
Statement................. holder which is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities
Act) is not eligible under applicable securities
laws to participate in the Exchange Offer, and such
holder has satisfied certain conditions relating to
the provision of information to the Company for use
therein, the Company has agreed to register the Old
Notes on a shelf registration statement (the "Shelf
Registration Statement") and use its best efforts
to cause it to be declared effective by the
Commission as promptly as practical on or after the
consummation of the Exchange Offer. The Company has
agreed to maintain the effectiveness of the Shelf
Registration Statement for, under certain
circumstances, a maximum of two years, to cover
resales of the Old Notes held by any such holders.
Special Procedures for
Beneficial Owners.........
Any beneficial owner whose Old Notes are registered
in the name of a broker, dealer, commercial bank,
trust company or other nominee and who wishes to
tender should contact such registered holder
promptly and instruct such registered holder to
tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's
own behalf, such owner must, prior to completing
and executing the Letter of Transmittal and
delivering its Old Notes, either make appropriate
arrangements to register ownership of the Old Notes
in such owner's name or obtain a properly completed
bond power from the registered holder. The transfer
of registered ownership may take considerable time.
Guaranteed Delivery Holders of Old Notes who wish to tender their Old
Procedures................ Notes and whose Old Notes are not immediately
available or who cannot deliver their Old Notes,
the Letter of Transmittal or any other documents
required by the Letter of Transmittal to the
Exchange Agent (or comply with the procedures for
book-entry transfer) prior to the Expiration Date
must tender their Old Notes according to the
guaranteed delivery procedures set forth in "The
Exchange Offer--Guaranteed Delivery Procedures."
Withdrawal Rights......... Tenders may be withdrawn at any time prior to 5:00
p.m., New York City time, on the Expiration Date.
Acceptance of Old Notes
and Delivery of New
Notes..................... The Company will accept for exchange any and all
Old Notes which are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York City
time, on the Expiration Date. The New Notes issued
pursuant to the Exchange Offer will be delivered
promptly following the Expiration Date. See "The
Exchange Offer--Terms of the Exchange Offer."
Use of Proceeds........... There will be no cash proceeds to the Company from
the exchange pursuant to the Exchange Offer.
Exchange Agent............ Norwest Bank Minnesota, National Association is
serving as Exchange Agent in connection with the
exchange offer of New Notes for Old Notes.
8
<PAGE>
The New Notes
General................... The form and terms of the New Notes are the same as
the form and terms of the Old Notes (which they
replace) except that (i) the New Notes bear a
Series B designation and have a different CUSIP
number than the Old Notes, (ii) the New Notes have
been registered under the Securities Act and,
therefore, will not bear legends restricting the
transfer thereof, and (iii) the holders of New
Notes will not be entitled to certain rights under
the Registration Rights Agreement, including the
provisions providing for liquidated damages in
certain circumstances relating to the timing of the
Exchange Offer, which rights will terminate when
the Exchange Offer is consummated. See "The
Exchange Offer--Purpose and Effect of the Exchange
Offer." The New Notes will evidence the same debt
as the Old Notes and will be entitled to the
benefits of the Indentures. See "Description of New
Notes."
Issuer.................... Globe Holdings, Inc.
Securities Offered........ $49,086,000 aggregate principal amount at maturity
of 14% Senior Discount Notes due 2009, Series B.
Maturity Date............. August 1, 2009.
Interest Payment Dates.... Cash interest will not accrue or be payable on the
New Notes prior to August 1, 2003. Thereafter, cash
interest on the New Notes will accrue at a rate of
14% per annum and will be payable semi-annually in
arrears on February 1 and August 1 of each year,
commencing February 1, 2004.
Original Issue Discount... The New Notes are being offered with original issue
discount for United States federal income tax
purposes. The Notes have a total original issue
discount of $24,704,070. See "Risk Factors--
Original Issue Discount." Although cash interest
will not be due on the New Notes prior to February
1, 2004, original issue discount will accrue from
the Issue Date and will be included as interest
income periodically (including for periods ending
prior to February 1, 2004) in a holder's gross
income for United States federal income tax
purposes in advance of receipt of the cash payments
to which the income is attributable.
Mandatory Sinking Fund or
Redemption................
None.
Optional Redemption....... The New Notes may be redeemed, in whole or in part,
at any time on or after August 1, 2003, at the
option of the Company, at the redemption prices set
forth herein, plus, in each case, accrued and
unpaid interest and Liquidated Damages, if any, to
the date of redemption. In addition, at any time
prior to August 1, 2001, the Company may, at its
option, redeem up to 35% in aggregate principal
amount at maturity of the New Notes at a redemption
price of 114% of the Accreted Value thereof, plus
Liquidated Damages, if any, to the date of
redemption, with the net cash proceeds of one or
more Equity Offerings, provided that not less than
65% of the aggregate principal amount at maturity
of the New Notes remain outstanding immediately
after the occurrence of any such redemption.
9
<PAGE>
Change of Control......... In the event of a Change of Control, each Holder
will have the right to require the Company to make
an offer to repurchase such Holder's New Notes, in
whole or in part, at a price, on or prior to August
1, 2003, equal to 101% of the Accreted Value
thereof, together with Liquidated Damages, if any,
to the date of repurchase and thereafter at a price
equal to 101% of the aggregate principal amount
thereof, plus accrued and unpaid interest and
Liquidated Damages, if any, to the date of
repurchase. In addition, upon the occurrence of a
Change of Control at any time prior to August 1,
2003, the New Notes may be redeemed, in whole but
not in part, at the option of the Company at a
redemption price equal to the sum of (i) 100% of
the Accreted Value thereof, together with
Liquidated Damages, if any, to the date of
redemption, plus (ii) the Applicable Premium. At
the time of a Change in Control, the Company may
not have sufficient funds to redeem the New Notes
(or the Class A Preferred Stock). In addition, the
Company's ability to repurchase the New Notes may
be limited by the Senior Credit Facility and the
terms of any future Senior Debt. See "Description
of the New Notes--Change of Control."
Ranking................... The New Notes will be senior unsecured obligations
of the Company and will be effectively subordinated
to all obligations of the subsidiaries of the
Company (including Globe Manufacturing) and to all
secured obligations of the Company to the extent of
the value of the assets securing such obligations.
The New Notes will rank pari passu with any
existing and future Senior Debt of the Company and
will rank senior to all Subordinated Debt of the
Company. As of September 30, 1998, the maximum
amount of Senior Debt that could be incurred by the
Company based on the most restrictive covenants was
$303.3 million. The Company is a holding company
with no operations of its own and its only material
asset is the capital stock of Globe Manufacturing
(all of which is pledged to secure obligations
under the Senior Credit Facility). As a result of
this holding company structure, the New Notes will
effectively rank junior in right of payment to all
creditors of Globe Manufacturing and its
subsidiaries, including the lenders under the
Senior Credit Facility, holders of the Senior
Subordinated Notes and trade creditors. As of
January 28, 1999, (i) the Company had no
outstanding Senior Debt (other than the New Notes
and its guarantee under the Senior Credit Facility)
and (ii) the Company's subsidiaries had total debt
and other liabilities of $275.4 million (excluding
unused commitments of $39.7 million under the
Senior Credit Facility). The Indenture (as defined)
permits the Company and its subsidiaries to incur
additional debt, subject to certain limitations.
See "Description of the New Notes."
Guarantees................ None.
Certain Covenants......... The Indenture pursuant to which the New Notes will
be issued (the "Indenture"), among other things,
limits the ability of the Company and its
Restricted Subsidiaries to: (i) incur additional
debt; (ii) issue Disqualified Stock; (iii) make
certain restricted payments; (iv) grant liens on
assets; (v) merge, consolidate or transfer
substantially all of
10
<PAGE>
their assets; (vi) enter into transactions with
Related Persons; (vii) impose restrictions on any
Restricted Subsidiary's ability to pay dividends or
make certain other payments to the Company and its
Restricted Subsidiaries; (viii) enter into certain
guarantees; (ix) sell assets; and (x) issue capital
stock of Restricted Subsidiaries.
A description of the terms of the Notes, including definitions of terms which
are capitalized above, is set forth herein under "Description of the Notes."
Risk Factors
See "Risk Factors" for a discussion of certain factors that should be
considered before tendering Old Notes in exchange for New Notes, including
factors affecting forward-looking statements. These risk factors are generally
applicable to the Old Notes as well as the New Notes.
11
<PAGE>
Summary Consolidated Financial Data
The following information is qualified in its entirety by the consolidated
financial statements of the Company. The following summary consolidated
financial data as of the dates and for the periods indicated were derived from
the audited and unaudited consolidated financial statements of the Company
contained elsewhere in this Prospectus. The unaudited consolidated financial
data at September 30, 1998 and for the nine months ended September 30, 1997 and
September 30, 1998 include all adjustments (consisting only of normal recurring
adjustments) which management considers necessary for a fair presentation of
the financial information for these unaudited periods. The results of
operations for the nine months ended September 30, 1998 are not necessarily
indicative of the results of operations that may be expected for the full
fiscal year 1998. The unaudited pro forma consolidated financial data as of
September 30, 1998 give effect to the Transactions as if they had occurred at
the beginning of the period. None of the pro forma consolidated financial data
set forth below purport to be indicative of the results that actually would
have been obtained had all of the events been completed as of the date assumed
and for the periods presented and are not intended to be a projection of the
Company's future results or financial position. The following summary
consolidated financial information should be read in conjunction with
"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.
<TABLE>
<CAPTION>
Pro Forma
Fiscal Year Ended Nine Months Ended Nine Months
December 31, Pro Forma September 30, Ended
---------------------------- December 31, ------------------ September 30,
1995 1996 1997 1997 1997 1998 1998
-------- -------- -------- ------------ -------- -------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Income
Data:
Net sales............... $128,319 $152,603 $170,941 $170,941 $127,307 $133,321 $133,321
Cost of sales........... 97,182 110,609 115,099 115,099 86,187 84,682 84,682
-------- -------- -------- -------- -------- -------- --------
Gross margin........... 31,137 41,994 55,842 55,842 41,120 48,639 48,639
Selling, general and
administrative
expenses............... 18,515 21,705 24,381 24,286 15,808 19,265 19,217
Research and development
costs.................. 2,260 2,533 2,633 2,633 1,953 3,144 3,144
-------- -------- -------- -------- -------- -------- --------
Operating income....... 10,362 17,756 28,828 28,923 23,359 26,230 26,278
Other income (expenses):
Interest, net........... (6,030) (5,285) (3,968) (29,406) (3,076) (6,739) (21,563)
Loss in investment in
joint venture (1)...... (643) -- -- -- -- -- --
Transaction compensation
expense................ -- -- -- -- -- (5,778) --
Other income, etc....... 438 875 372 372 233 647 647
-------- -------- -------- -------- -------- -------- --------
Income before income
taxes and
extraordinary income.. 4,127 13,346 25,232 (111) 20,516 14,360 5,362
Provision for income
taxes.................. 1,718 4,784 8,383 (1,805) 7,715 5,393 1,776
-------- -------- -------- -------- -------- -------- --------
Income before
extraordinary item.... 2,409 8,562 16,849 1,694 12,801 8,967 3,586
Loss from write-off of
deferred financing
cost, net (2).......... 1,294 -- 301 301 301 187 187
-------- -------- -------- -------- -------- -------- --------
Net income.............. $ 1,115 $ 8,562 $ 16,548 $ 1,393 $ 12,500 $ 8,780 $ 3,399
======== ======== ======== ======== ======== ======== ========
Other Financial Data:
Gross margin %.......... 24.3% 27.5% 32.7% 32.7% 32.3% 36.5% 36.5%
Adjusted EBITDA (3) (5). $ 22,480 $ 28,960 $ 42,377 $ 42,377 $ 30,942 $ 35,131 $ 35,131
Adjusted EBITDA margin %
(4) (5)................ 17.5% 19.0% 24.8% 24.8% 24.3% 26.4% 26.4%
Depreciation and
amortization........... $ 10,688 $ 9,676 $ 12,208 $ 12,208 $ 6,654 $ 11,245 $ 11,245
Capital expenditures.... 8,640 5,806 17,101 17,230 10,513 26,317 26,412
Ratio of Earnings to
Fixed Charges.......... 1.6x 3.4x 6.3x N/A(6) 6.3x 2.8x 1.2x
Cash Provided (Used) By:
Operating activities.... $ 12,683 $ 21,898 $ 20,322 $ 20,451 $ 10,372 $ 20,595 $ 20,609
Investing activities.... $ (6,712) $ (5,527) $(18,810) $(18,939) $(11,904) $(26,144) $(26,239)
Financing activities.... $ (4,163) $(16,413) $ (2,666) $ 499 $ (309) $ 5,368 $ (169)
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
September 30, 1998
----------------------
(dollars in thousands)
<S> <C>
Balance Sheet Data:
Cash..................................................... $ 1,766
Working capital.......................................... 24,420
Property, plant and equipment, net....................... 76,707
Total assets............................................. 140,327
Total debt (7)........................................... 295,859
Shareholders' equity (deficit) (7)....................... (177,745)
</TABLE>
- ---------------------
(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) Adjusted EBITDA represents income before interest expense (net), income
taxes, depreciation and amortization adjusted as follows:
<TABLE>
<CAPTION>
Nine months
Ended
Year Ended December 31, September 30,
------------------------ ---------------
1995 1996 1997 1997 1998
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
EBITDA before adjustments............. $ 19,551 $28,307 $41,107 $29,945 $28,583
Adjustments to EBITDA
Non cash:
Postretirement benefit costs....... 992 653 515 315 378
Loss in joint venture.............. 643 0 0 0 0
Write off of deferred finance
costs............................. 1,294 0 301 301 187
Non-recurring legal expenses......... 0 0 454 381 67
Deal costs........................... 0 0 0 0 138
Transaction compensation expense..... 0 0 0 0 5,778
-------- ------- ------- ------- -------
Adjusted EBITDA....................... $ 22,480 $28,960 $42,377 $30,942 $35,131
======== ======= ======= ======= =======
</TABLE>
Adjusted 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. Adjusted 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. Management believes
that an increase in Adjusted EBITDA level is an indicator of the Company's
improved ability to service existing debt, to sustain potential future
increases in debt and to satisfy capital requirements. Given that Adjusted
EBITDA is not a measurement determined in accordance with generally accepted
accounting principles and is thus susceptible to varying calculations,
Adjusted EBITDA as presented may not be comparable to other similarly titled
measures of other companies.
(4) Adjusted EBITDA margin represents Adjusted EBITDA as calculated in footnote
(3) above as a percentage of net sales. The explanation and cautionary
statements regarding Adjusted EBITDA in footnote (3) above are also
applicable to Adjusted EBITDA Margin.
(5) The unaudited pro forma consolidated financial data and related ratios give
effect to the consummation of the Transactions as if they occurred on the
first day of such period. In connection with the Transaction the Company
incurred a one time compensation expense charge of $3,318,000 associated
with the vesting of stock options and $2,460,000 associated with bonuses
paid to certain members of management. Although the Company expects to
charge such amounts in the period following the transaction date, such
charge is not reflected in the accompanying pro forma financial
information. See "Management" and "Certain Relationships and Related
Transactions--Management Agreement" and "--Consulting Agreement."
(6) Earnings on a pro forma basis for the full year ended December 31, 1997
were inadequate to cover fixed charges by $746,000.
(7) Of the $25.0 million gross proceeds from the Offering, $24.4 million has
been allocated to the Notes and $0.6 million has been allocated to the
Warrants.
13
<PAGE>
RISK FACTORS
The following risk factors should be considered carefully in addition to the
other information contained in this Prospectus, before tendering the Old Notes
in exchange for the New Notes. In connection with the forward-looking
statements which appear in this Prospectus, prospective purchasers of New
Notes should carefully review the factors discussed below and the cautionary
statements referred to in "Disclosure Regarding Forward-Looking Statements."
The risk factors set forth below are generally applicable to the Old Notes as
well as the New Notes.
Consequences of Failure to Exchange
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes, as set forth in the legend thereon, as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or
in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. The Company does not
currently anticipate that it will register the Old Notes under the Securities
Act. Based on interpretations by the staff of the Commission set forth in no-
action letters issued to third parties, including Exxon Capital Holdings
Corporation, SEC No-Action Letter (available April 13, 1988) (the "Exxon
Capital Letter"), Morgan Stanley & Co. Incorporated, SEC No-Action Letter
(available June 5, 1991) (the "Morgan Stanley Letter"), and similar letters,
the Company believes that the New Notes issued pursuant to the Exchange Offer
may be offered for resale, resold or otherwise transferred by any holder
thereof (other than any such holder which is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act) without compliance
with the registration and prospectus delivery provisions of the Securities Act
provided that such New Notes are acquired in the ordinary course of such
holder's business and such Holder has no arrangement with any person to
participate in the distribution of such New Notes. Notwithstanding the
foregoing, each broker-dealer that receives New Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with any resale of New Notes received in exchange for Old Notes where such Old
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities (other than Old Notes acquired directly
from the Company). The Company has agreed that, for a period of 180 days from
the Expiration Date, it will make this Prospectus available to any broker-
dealer for use in connection with any such resale. See "Plan of Distribution."
Any holder who tenders in the Exchange Offer for the purpose of participating
in a distribution of the New Notes cannot rely on the Morgan Stanley Letter or
similar letters and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction. To the extent that Old Notes are tendered and accepted in the
Exchange Offer, the trading market, if any, for the Old Notes not so tendered
could be adversely affected. See "The Exchange Offer."
Absence of a Public Market Could Adversely Affect the Value of the Notes
The Old Notes were issued to, and the Company believes are currently owned
by, a relatively small number of beneficial owners. Prior to the Exchange
Offer, there has not been any public market for the Old Notes. The Old Notes
have not been registered under the Securities Act and will be subject to
restrictions on transferability to the extent that they are not exchanged for
New Notes by holders who are entitled to participate in this Exchange Offer.
The holders of Old Notes (other than any such holder that is an "affiliate" of
the Company within the meaning of Rule 405 under the Securities Act) who are
not eligible to participate in the Exchange Offer are entitled to certain
registration rights, and the Company is required to file a Shelf Registration
Statement with respect to such Old Notes. The New Notes will constitute new
issues of securities with no established trading market. The Company does not
intend to list the New Notes on any national securities exchange or seek the
admission thereof to trading in the National Association of Securities Dealers
Automated Quotation System.
14
<PAGE>
The Initial Purchaser has advised the Company that they currently intend to
make a market in the New Notes, but they are not obligated to do so and may
discontinue such market making at any time. In addition, such market making
activity will be subject to the limits imposed by the Securities Act and the
Exchange Act and may be limited during the Exchange Offer and the pendency of
the Shelf Registration Statement. Accordingly, no assurance can be given that
an active public or other market will develop for the New Notes or as to the
liquidity of the trading market for the New Notes. If a trading market does
not develop or is not maintained, holders of the New Notes may experience
difficulty in reselling the New Notes or may be unable to sell them at all. If
a market for the New Notes develops, any such market may be discontinued at
any time.
If a public trading market develops for the New Notes, future trading prices
of such securities will depend on many factors including, among other things,
prevailing interest rates, the Company's results of operations and market for
similar securities. Depending on prevailing interest rates, the market for
similar securities and other factors, including the financial condition of the
Company, the New Notes may trade at a discount from their principal amount.
Failure to Follow Exchange Offer Procedures Could Adversely Affect Holders
Issuance of the New Notes in exchange for the Old Notes pursuant to the
Exchange Offer will be made only after a timely receipt by the Company of such
Old Notes, a properly completed and duly executed Letter of Transmittal (or
Agent's Message) and all other required documents. Therefore, holders of the
Old Notes desiring to tender such Old Notes in exchange for New Notes should
allow sufficient time to ensure timely delivery. The Company is under no duty
to give notification of defects or irregularities with respect to the tenders
of Old Notes for exchange. Old Notes that are not tendered or are tendered but
not accepted will, following the consummation of the Exchange Offer, continue
to be subject to the existing restrictions upon transfer thereof, and, upon
consummation of the Exchange Offer certain registration rights under the
Registration Rights Agreement will terminate. In addition, any holder of Old
Notes who tenders in the Exchange Offer for the purpose of participating in a
distribution of the New Notes may be deemed to have received restricted
securities, and if so, will be required to comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction. Each broker-dealer that receives New Notes for its own
account in exchange for Old Notes, where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. See "Plan of Distribution." To the extent
that Old Notes are tendered and accepted in the Exchange Offer, the trading
market for untendered and tendered but unaccepted Old Notes could be adversely
affected. See "The Exchange Offer."
Substantial Leverage and Debt Service Requirements
The Company is highly leveraged. As a result of the Transactions, including
the Initial Offering and the Initial Senior Subordinated Note Offering and the
payment of a substantial portion of the net proceeds therefrom as the Cash
Merger Consideration, the Company's aggregate indebtedness for borrowed money
and interest expense increased and its shareholders' equity decreased. As of
September 30, 1998, the Company had total Debt (as defined) of $295.9 million
and total annual debt service (including noncash) of $30.1 million. In
addition, subject to the restrictions in the Senior Credit Facility, the
Indenture and the indenture governing the Senior Subordinated Notes (the
"Senior Subordinated Note Indenture"), the Company may incur additional Debt
from time to time to finance working capital, capital expenditures,
acquisitions, or for other purposes.
The Indenture, the Senior Subordinated Note Indenture and the Senior Credit
Facility (or any replacement facilities of the Company or any subsidiary of
the Company) contain certain restrictive financial and other covenants. The
Company's high degree of leverage and restrictions in its debt agreements
could have important consequences to the holders of the Securities, including
the following: (i) a substantial portion of the Company's cash flow from
operations will be dedicated to debt service and will not be available for
operations and other
15
<PAGE>
purposes; (ii) the Company's ability to obtain additional financing in the
future for working capital, capital expenditures, acquisitions or other
purposes may be limited or impaired; (iii) the Company's operating flexibility
with respect to certain matters will be limited by covenants contained in the
Indenture, the Senior Subordinated Note Indenture and the Senior Credit
Facility which will limit the ability of the Company and its Restricted
Subsidiaries to, among other things, incur additional indebtedness, grant
liens on assets, merge, consolidate or transfer substantially all of their
assets, enter into transactions with Related Persons, impose restrictions on
any Restricted Subsidiary's ability to pay dividends or make certain other
payments to the Company and its Restricted Subsidiaries, enter into certain
guarantees, sell assets and issue capital stock of Restricted Subsidiaries;
(iv) the Company will be substantially more leveraged than certain of its
competitors, which may place the Company at a competitive disadvantage; (v)
the Company's degree of leverage may make it more vulnerable to economic
downturns, may reduce its flexibility in responding to changing business and
economic conditions and may limit its ability to pursue other business
opportunities, to finance its future operations or capital needs, and to
implement its business strategy; and (vi) certain of the Company's borrowings
will be at variable rates of interest, which will expose the Company to the
risk of increased interest rates. See "Business--Business Strategy,"
"Description of Senior Credit Facility," "Description of Senior Subordinated
Notes" and "Description of the Notes."
Required payments of principal and interest on the Company's long-term debt
are expected to be financed from cash flow from operations and debt
financings. The Company's ability to generate cash for the repayment of debt
will be dependent upon the future performance of the Company's businesses,
which will in turn be subject to financial, business, economic, and other
factors affecting the business and operations of the Company, including
factors beyond its control, such as prevailing economic conditions. There can
be no assurance that cash flow from operations will be sufficient to enable
the Company to service its debt and meet its other obligations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
As of January 28, 1999, in response to lower than expected earnings, 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 the term loans and revolving loans were increased and (iii) the
management fee due to an affiliate of Code Hennessy & Simmons LLC may only be
paid if certain leverage tests are met. As a result of the amendment, the
applicable borrowing margin under the Senior Credit Facility for Base Rate (as
defined in the Senior Credit Facility) borrowings increased from 1.25% to
2.00% for the Term Loan A and the Revolving Loan and from 1.75% to 2.50% for
the Term Loan B and the applicable borrowing margin for Eurodollar Rate (as
defined in the Senior Credit Facility) borrowings increased from 2.25% to
3.00% for the Term Loan A and the Revolving Loan and from 2.75% to 3.50% for
the Term Loan B. See "Description of the Senior Credit Facility." This
increase in interest margins will increase the Company's interest expense by
approximately 3%, which is not expected to have a material effect on the
Company's operating results.
Holding Company Structure; Effective Subordination
Globe is a holding company and does not have any material operations or
assets other than ownership of Globe Manufacturing. Accordingly, the Notes are
effectively subordinated to all existing and future liabilities of the
Company's subsidiaries, including indebtedness under the Senior Credit
Facility and the Senior Subordinated Notes. As of January 28, 1999, the
aggregate amount of liabilities of the Company's subsidiaries to which holders
of the Notes would be effectively subordinated was approximately $275.4
million. The Company and its subsidiaries may incur additional indebtedness in
the future, subject to certain limitations contained in the instruments
governing their indebtedness.
Any right of the Company to participate in any distribution of assets of its
subsidiaries upon the liquidation, reorganization or insolvency of any such
subsidiary (and the consequent right of the holders of the Notes to
participate in the distribution of those assets) will be subject to the prior
claims of the respective subsidiary's creditors. See "Description of Senior
Credit Facility."
16
<PAGE>
Limitation on the Payment of Funds to the Company by its Subsidiaries
The Company's cash flow, and consequently its ability to service its debt,
including its obligations under the Indenture, is dependent upon the cash
flows of its subsidiaries and the payment of funds by such subsidiaries to the
Company in the form of loans, distributions or otherwise. The Company's
subsidiaries have no obligations, contingent or otherwise, to pay any amounts
due pursuant to the Notes or to make any funds available therefor. In
addition, the Senior Credit Facility and the Senior Subordinated Note
Indenture impose, and agreements entered into in the future may impose,
significant restrictions on distributions and the making of loans by Globe
Manufacturing to the Company. Accordingly, repayments of the Notes may depend
upon the ability of the Company to effect an equity offering or to refinance
the Notes.
Original Issue Discount
The Old Notes were issued at a substantial discount from their principal
amount. The New Notes are treated as a continuation of the Old Notes for
Federal income tax purposes and the New Notes will also be considered to have
been issued at a substantial discount. Consequently, holders generally will be
required to include amounts in gross income for U.S. Federal income tax
purposes in advance of receipt of any cash payment on the Notes to which the
income is attributable. In addition, the Notes will be subject to the
"applicable high yield discount obligation" rules under the Internal Revenue
Code of 1986, as amended, which will defer and, in part, eliminate the
Company's ability to deduct original issue discount that accrues with respect
to the Notes. Prospective investors should consult their own tax advisors with
respect to the application of the original discount rules and the "applicable
high yield discount obligation" rules (including the limited availability of a
dividends received deduction for a corporate holder). See "Material United
States Federal Tax Considerations" for a more detailed discussion of the U.S.
Federal income tax considerations relevant to holders with respect to the
purchase, ownership and disposition of the Notes.
If a bankruptcy case is commenced by or against the Company under the United
States Bankruptcy Code (the "Bankruptcy Code") after the issuance of the
Notes, the claim of a holder of Notes with respect to the principal amount
thereof will likely be limited to an amount equal to the sum of (i) the issue
price of the Notes and (ii) the original issue discount that is not deemed to
constitute "unmatured interest" for purposes of the Bankruptcy Code. Any
original issue discount that was not amortized as of any such bankruptcy
filing would likely constitute "unmatured interest."
Change of Control
A Change of Control (as defined) could require the Company and Globe
Manufacturing to refinance substantial amounts of indebtedness, including
indebtedness under the Notes, the Senior Subordinated Notes and the Senior
Credit Facility. Upon the occurrence of a Change of Control, the holders of
the Notes would be entitled to require the Company to repurchase the Notes at
a purchase price equal to 101% of the Accreted Value thereof plus Liquidated
Damages, if any (if such date of repurchase is prior to August 1, 2003) or
101% of the principal amount of such Notes, plus accrued and unpaid interest
and Liquidated Damages, if any, to the date of repurchase (if such date of
repurchase is on or after August 1, 2003). The source of funds for any such
repurchase would be cash dividended to the Company by Globe Manufacturing or
other sources, including borrowings, sales of equity or funds provided by a
new controlling person. The Senior Credit Facility and the Senior Subordinated
Note Indenture limit the ability of Globe Manufacturing to issue dividends,
and there can be no assurance that sufficient funds will be available at the
time of any Change of Control to make any required repurchases of the Notes
tendered. In addition, the Senior Credit Facility prohibits the repurchase of
the Notes by the Company in such an event, unless and until such time as the
indebtedness under the Senior Credit Facility is repaid in full. These
requirements and the effective subordination of the Notes will limit the
ability of the Company to repurchase the Notes. The Company's failure to make
such repurchases in such instances would result in a default under the Notes.
Future indebtedness of the Company may also contain restrictions or repayment
requirements with respect to certain events or transactions that would
constitute a Change of Control. In the event of a Change of Control, there can
be no assurance that the Company would have sufficient assets to satisfy all
of its obligations under the Notes. The effect of such requirements may make
it more difficult or delay attempts by
17
<PAGE>
others to obtain control of the Company. See "Description of the Notes--Change
in Control," "Description of Senior Credit Facility" and "Description of
Senior Subordinated Notes."
Competition
The elastomeric fiber industry is highly competitive. The Company competes
in the spandex fiber markets primarily with E.I. du Pont de Nemours and
Company ("DuPont") and Bayer AG ("Bayer"), both of which have domestic
facilities, and with a number of foreign competitors. The Company's primary
competitors in the latex thread markets are foreign producers. 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. There can be no assurance that the Company
will be able to compete successfully in the future against its competitors or
that the Company will not experience increased price competition, which could
materially and adversely affect the Company's results of operations, financial
condition and its ability to meet its obligations under the Notes. See
"Business--Competition."
Environmental Compliance
The Company is subject to comprehensive and evolving federal, state and
local 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. Violations of environmental, health and safety laws may result in
the imposition of significant fines and other penalties, and certain
environmental laws impose joint and several liability, without regard to
fault, on persons responsible for releases of hazardous substances to the
environment.
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, except as would
not be expected to have a material adverse effect on the Company's operations,
financial condition or competitive position. Some risk of environmental,
health and safety liability is inherent in the Company's business, however,
and there can be no assurance that material environmental, health or safety
costs will not arise in the future.
Since 1986, the Company has received requests for information and related
correspondence from the U.S. Environmental Protection Agency (the "U.S. EPA")
and other third parties indicating that the Company might be responsible under
the federal Comprehensive Environmental Response, Compensation, and Liability
Act of 1980 ("CERCLA") or equivalent state laws (collectively, the "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.
In December 1996, the Company's management learned that 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, which could have a material adverse effect on the
Company's results of operations, financial condition and its ability to meet
its obligations under the Notes. See "Business--Environmental, Health and
Safety Matters."
Dependence on Significant Customers
The Company's top ten customers accounted for approximately 48% of 1997
sales, with one customer, Unifi, Inc. (a manufacturer of covered yarns for
men's and women's hosiery and narrow fabrics), accounting for approximately 9%
of 1997 sales. As is customary in the elastomeric fiber industry, the Company
does not generally have long-term supply agreements with its customers. The
Company has pricing contracts with certain significant customers, however,
these contracts do not provide for any minimum purchase requirements. The
18
<PAGE>
Company's significant customers can cease doing business with the Company at
any time. While the Company believes its customer relationships are generally
good, a significant decrease or interruption in business from any of the
Company's significant customers could have a material adverse effect on the
Company's results of operations, financial condition and its ability to meet
its obligations under the Notes. See "Business--Customers."
Dependence on Suppliers
During 1997, raw materials represented 42% of the Company's total cost of
sales and 28% of net sales. The primary raw materials used by the Company are
polytetramethylene ether glycol (used for fine denier spandex), which the
Company purchases from BASF Corporation ("BASF"), and polyester resin (used
for heavy denier spandex), which the Company purchases from two suppliers. The
Company is heavily dependent upon these raw materials for spandex fiber
production. 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. There can be no assurance, however, that such materials
will continue to be available in adequate supply in the future or that
shortages or disruptions in supply will not result in a material adverse
effect on the Company's results of operations, financial condition or ability
to meet its obligations under the Notes. The Company's ten largest suppliers
accounted for approximately 93% of its total raw material purchases and 31% of
its total cost of sales in 1997, with BASF, Polyurethane Specialties Corp. and
Ennar-Latex, Inc. accounting for 39%, 24% and 16% of such raw material
purchases, respectively. Although the prices for the Company's raw materials
have generally been stable over the past five years, the prices of certain of
the raw materials used by the Company have fluctuated, and there can be no
assurance that the prices of the Company's raw materials will not fluctuate in
the future. A significant increase in the price of raw materials that cannot
be passed on to customers could have a material adverse effect on the
Company's results of operations, financial condition and its ability to meet
its obligations under the Notes.
Foreign Sales Risk
Sales to international customers represented approximately 28% of sales in
1997 and 47% of total receivables as of December 31, 1997, and the Company is
seeking to increase its international sales. Demand for the Company's products
is affected by economic and political conditions in each of the countries in
which it sells its products and by certain other risks of doing business
abroad, including fluctuations in the value of currencies (which may affect
demand for products priced in United States dollars), import duties, changes
to import and export regulations (including quotas), possible restrictions on
the transfer of funds, labor or civil unrest, long payment cycles, greater
difficulty in collecting accounts receivable and the burdens and cost of
compliance with a variety of foreign laws. Changes in policies by foreign
governments could result in, for example, increased duties, higher taxation,
currency conversion limitations, or limitations on imports or exports, any of
which could have a material adverse effect on the Company's results of
operations, financial condition and its ability to meet its obligations under
the Notes. Globe's principal export markets are Europe, Central/South America
and Asia. The current economic crisis in Asia has resulted in a flood of
fiber, fabric and apparel into Europe from Asia, which 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. A continued economic crisis may precipitate further downturns in
spandex fiber consumption in all of Globe's export markets.
Textile Industry and Cyclicality
In 1997, approximately 92% of the Company's sales were to the textile and
apparel industries. These industries are highly cyclical and are characterized
by rapid shifts in consumer demand, as well as competitive pressures and price
and demand volatility. The demand for the Company's products is principally
dependent upon the level of demand for certain types of apparel. The demand
for apparel is in turn dependent on consumer spending, which may be adversely
affected by economic downturns, changing retailer and consumer demands,
declines in consumer confidence or spending, and other factors beyond the
Company's control. A reduction in the level of demand for apparel or a
decrease in consumer demand for products containing elastomeric fibers could
have a material adverse effect on the Company's result of operations,
financial condition and its ability to meet its obligations under the Notes.
19
<PAGE>
Control by Principal Shareholder
Code Hennessy & Simmons owns approximately 75.6% of the outstanding voting
stock of the Company. Consequently, Code Hennessy & Simmons, through its
ability to designate all of the members of the board of directors of the
Company, exercises significant influence over the policies and direction of
the Company. Code Hennessy & Simmons' interests may differ from the interests
of the holders of the Notes. See "Management--Executive Officers and
Directors" and "Certain Relationships and Related Transactions."
Protection of Intellectual Property
The Company's success is dependent on the proprietary technology included in
its manufacturing processes. Much of this 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. There can be no assurance that
intellectual property laws will protect the confidentiality of the Company's
technology and processes. Despite the Company's efforts to protect its
proprietary rights, unauthorized parties may attempt to obtain and use
information that the Company regards as proprietary. Furthermore, there can be
no assurance that others will not independently develop similar technology or
design around any intellectual property rights held by the Company. In
addition, no assurance can be given that alternative technologies will not be
developed that are superior to or less costly than the Company's existing
technology.
The Company may in the future be notified that it is infringing certain
patent or other intellectual property rights of others, although there are no
such pending lawsuits against the Company or unresolved notices that it is
infringing intellectual property rights of others. No assurance can be given
that in the event of such infringement, licenses could be obtained on
commercially reasonable terms, if at all, or that litigation will not occur.
The failure to obtain necessary licenses or other rights or the occurrence of
litigation arising out of such claims could have a material adverse effect on
the Company's results of operations and financial condition and its ability to
meet its obligations under the Notes.
Expansion of Production Capacity
All of the Company's significant spandex fiber competitors have been engaged
in production expansion, product improvement and global marketing programs
since 1993. The Company's ability to achieve its strategic objectives and to
retain or increase its current share of the spandex fiber market will require
it to make significant capital expenditures in order to expand its production
capacity, particularly for fine denier spandex fiber. The Company is adding
3.6 million pounds of fine denier spandex fiber capacity to its facility in
Tuscaloosa, Alabama at an estimated cost of $22.1 million, with approximately
half of this increased capacity expected to be on line in the fourth quarter
of 1998 and the balance expected to be on line in the first quarter of 1999.
There can be no assurance that the expansion will be completed within the
Company's timetable or budget. A lengthy delay in the completion of the
Tuscaloosa plant expansion or significant cost over-runs in connection
therewith could have a material adverse effect on the Company's result of
operations, financial condition and its ability to meet its obligations under
the Notes.
Antitrust and Antidumping 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 the Company
then owned a 40% interest (the "Joint Venture"). The complaint alleges an
international conspiracy to restrain trade in, and fix prices of, the thread
in the United States ("U.S."). Neither the Company nor Globe Manufacturing has
been named as a defendant in the case. The Joint Venture has alleged in its
motion to dismiss that not all parties to the conspiracy have been joined, and
there can be no assurance that the Company will not be named in the future.
On March 31, 1998 a petition was filed with the U.S. Department of Commerce
alleging subsidization and dumping of Indonesian extruded latex thread. The
Department of Commerce is currently conducting an
20
<PAGE>
investigation into the allegations. The proceedings could result in additional
duties being levied on extruded latex thread imported from Indonesia. During
1996 and 1997, the Company purchased approximately $5.9 million and $9.9
million of latex thread from the Joint Venture for resale in the North
American market.
Dependence on Senior Management
The Company's success depends to a significant extent upon the efforts and
abilities of the Company's senior management employees. The loss of the
services of one or more of such persons could have a material adverse effect
on the Company. The Company believes that its continued future success will
depend on its ability to attract, retain or develop highly skilled managerial,
technical and marketing personnel. There can be no assurance that it will be
able to do so. See "Management."
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 completed its repairs for major manufacturing systems
in all locations. The Company also completed its repair of its major financial
systems. The Company's current target is to resolve compliance issues in its
distribution systems and other ancillary systems by March 31, 1999. The
Company also has made inquiry of its major customers and suppliers to assess
their compliance. Nevertheless, there can be no absolute 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, 1998, the Company expended approximately $108,000
in systems development and remediation efforts, including the cost of new
software and modifying the applicable code of existing software. The Company
estimates remaining costs to be between $50,000 and $100,000. The Company
presently believes that the total cost of achieving year 2000 compliant
systems is not expected to be material to the Company's financial condition,
liquidity or results of operations.
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.
Certain Insolvency Considerations
The incurrence by the Company of indebtedness such as the Notes to finance
the Transactions may be subject to review under relevant state and federal
fraudulent conveyance laws if a bankruptcy case or lawsuit is commenced by or
on behalf of unpaid creditors of the Company. Under these laws, if a court
were to find that, after giving effect to the sale of the Notes, or the
exchange of the Old Notes for New Notes, and the application of the proceeds
therefrom, either (a) the Company incurred such indebtedness with the intent
of hindering, delaying or defrauding creditors or (b) the Company received
less than reasonably equivalent value or consideration for incurring such
indebtedness and (i) was insolvent or was rendered insolvent by reason of such
transactions, (ii) was engaged in a business or transaction for which the
assets remaining with the Company constituted unreasonably small capital or
(iii) intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts as they matured, such court may subordinate such
indebtedness to presently existing and future indebtedness or obligations of
the Company, avoid the issuance of such indebtedness and direct the
21
<PAGE>
repayment of any amounts paid thereunder to the Company's creditors or take
other action detrimental to the holders of such indebtedness.
The measure of insolvency for purposes of determining whether a transfer is
avoidable as a fraudulent transfer varies depending upon the law of the
jurisdiction which is being applied. Generally, however, a debtor would be
considered insolvent if the sum of all its liabilities, including contingent
liabilities, were greater than the value of all its property at a fair
valuation, or if the present fair saleable value of the debtor's assets were
less than the amount required to repay its probable liabilities on its debts,
including contingent liabilities, as they become absolute and mature.
There can be no assurance as to what standard a court would apply in order
to determine insolvency. A court may find that the Company did not receive
fair consideration or reasonably equivalent value for the incurrence of the
indebtedness represented by the Old Notes. In addition, if a court were to
find that any of the components of the Transactions constituted a fraudulent
transfer, a court may find that the Company did not receive fair consideration
or reasonably equivalent value for the incurrence of the indebtedness
represented by the Old Notes and the New Notes.
The Company believes that it received equivalent value at the time the
indebtedness under the Notes was incurred. In addition, the Company does not
believe that, after giving effect to the Transactions, it (i) was or will be
insolvent or rendered insolvent, (ii) was or will be engaged in a business or
transaction for which its remaining assets constituted unreasonably small
capital or (iii) intends or intended to incur, or believes or believed that it
will or would incur, debts beyond its ability to pay such debts as they
mature. These beliefs are based on the Company's operating history and
analysis of internal cash flow projections and estimated values of assets and
liabilities of the Company at the time of the Initial Offering. There can be
no assurance, however, that a court passing on these issues would make the
same determination.
Absence of Established Public Market
The Notes are a new issue of securities for which there is no established
trading market. While application has been made to have the Notes accepted for
trading in the PORTAL market, there can be no assurance that an active trading
market for the Notes will develop in the PORTAL market or elsewhere. The
Company has been advised by the Initial Purchaser that the Initial Purchaser
currently intends to make a market in the Notes; however, it is not obligated
to do so and any market making activity may be discontinued at any time.
Therefore, there can be no assurance that an active public market for the
Notes will develop or, if developed, will continue to exist. If a public
trading market develops for the Notes, future trading prices of the Notes will
depend on many factors, including, among other things, prevailing interest
rates, the Company's results of operations and the markets for similar
securities. See "Plan of Distribution."
Risks Regarding Forward-Looking Statements
This Prospectus 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. Without limiting the
foregoing, forward-looking statements are set forth herein under the captions
"Prospectus Summary," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business." 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 identified under
"Risk Factors" and elsewhere in this Prospectus and other risks and
uncertainties indicated from time to time in the Company's filings with the
Securities and Exchange Commission. Actual results could differ materially
from these forward-looking statements.
22
<PAGE>
USE OF PROCEEDS
The proceeds to the Company ($25.0 million) from the sale of the Units, each
consisting of one Old Note and one Warrant, were used to repay the CHS Loan.
The CHS Loan, together with the initial borrowings under the Senior Credit
Facility ($120.0 million) and the proceeds of the Initial Senior Subordinated
Note Offering ($150.0 million) and the Equity Investment ($42.8 million), were
used (i) to pay the Cash Merger Consideration ($247.2 million); (ii) to repay
outstanding obligations under the Old Credit Facility and certain other
liabilities ($60.6 million); (iii) to fund the Escrow Amount deposited into
escrow to secure certain indemnification and other obligations of Pre-Merger
Shareholders of the Company under the Merger Agreement ($15.0 million); and
(iv) to pay fees and expenses related to the Transactions ($15.0 million). The
CHS Loan bore interest at a rate of 14% per annum and was scheduled to mature
on July 31, 2009. See "Certain Relationships and Related Transactions--
Recapitalization," "Description of Senior Credit Facility" and "Description of
Senior Subordinated Notes."
This Exchange Offer is intended to satisfy certain of the Company's
obligations under the Purchase Agreement and the Registration Rights
Agreement. The Company will not receive any cash proceeds from the issuance of
the New Notes offered hereby. In consideration for issuing the New Notes
contemplated in this Prospectus, the Company will receive Old Notes in like
principal amount, the form and terms of which are the same as the form and
terms of the New Notes (which replace the Old Notes), except as otherwise
described herein. The Old Notes surrendered in exchange for New Notes will be
retired and canceled and cannot be reissued. Accordingly, issuance of the New
Notes will not result in any increase or decrease in the indebtedness of the
Company. As such, no effect has been given to the Exchange Offer in the pro
forma statements or capitalization table.
23
<PAGE>
CAPITALIZATION
The following table sets forth the unaudited historical consolidated
capitalization of the Company as of September 30, 1998. See "Use of Proceeds."
This table should be read in conjunction with the "Selected Consolidated
Financial Data" and the related notes thereto, and the Company's consolidated
financial statements, including related notes thereto, included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
As of
September 30, 1998
----------------------
(dollars in thousands)
<S> <C>
Cash and cash equivalents........................ $ 1,766
=========
Long-term debt (including current maturities):
Senior Credit Facility: (1)
Revolving loan facility...................... 5,800
Term loan facility........................... 115,000
Old Senior Subordinated Notes.................. 150,000
Old Notes (2).................................. 24,970
Capital lease obligations...................... 89
---------
Total long-term debt....................... 295,859
---------
Shareholders' equity (deficit):
Series A Cumulative Preferred Stock, $0.01 par
value, 30,000 shares authorized, no shares
issued and outstanding........................ --
Class A Preferred stock, $0.01 par value,
40,000 shares authorized and 29,100 shares
issued and outstanding (3).................... --
Paid in capital on preferred stock............. 25,850
Common Stock:
Class A Common Stock, $0.01 par value,
5,000,000 shares authorized, 2,179,150 shares
issued and outstanding (4).................... --
Class B Common Stock, $0.01 par value, 350,000
shares authorized, no shares issued or
outstanding................................... --
Class C Common Stock, $0.01 par value, 600,000
shares authorized, no shares issued or
outstanding................................... 22
Paid in capital on common stock (2)............ 17,830
Less treasury stock.......................... --
---------
Retained earnings (deficit)................ (221,447)
---------
(177,745)
---------
Total capitalization....................... $ 118,114
=========
</TABLE>
- ----------------------
(1) The Senior Credit Facility provides for term loans in an aggregate
principal amount of $115.0 million and revolving loans of up to $50.0
million. See "Description of Senior Credit Facility."
(2) Of the $25.0 million gross proceeds from the Initial Offering, $24.4
million has been allocated to the Notes and $0.6 million has been
allocated to the Warrants.
(3) Excludes the 900 shares of Class A Preferred Stock issuable upon exercise
of options.
(4) Excludes the 69,481 shares of Common Stock issuable upon exercise of the
Warrants and the 67,395 shares of Common Stock issuable upon exercise of
stock options.
24
<PAGE>
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 data as of the dates and for the periods indicated were derived from
the audited and unaudited consolidated financial statements of the Company
contained elsewhere in this Prospectus, except data as of, and for the years
ended December 31, 1993, and 1994, which was derived from audited consolidated
financial statements of the Company not included in this Prospectus. The
unaudited consolidated financial statements for the nine months ended
September 30, 1997 and September 30, 1998 include all adjustments consisting
only of normal recurring adjustments which management considers necessary for
a fair presentation of results for these unaudited periods. The results of
operations for the nine months ended September 30, 1998 are not necessarily
indicative of results of operations that may be expected for the full fiscal
year 1998. The following selected consolidated financial information should be
read in conjunction with "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 appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
Nine Months
Fiscal Year Ended December 31, Ended September 30,
------------------------------------------------ ---------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- --------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Income
Data:
Net sales............... $107,612 $112,475 $128,319 $152,603 $170,941 $ 127,307 $ 133,321
Cost of sales........... 75,980 84,321 97,182 110,609 115,099 86,187 84,682
-------- -------- -------- -------- -------- --------- ----------
Gross margin........... 31,632 28,154 31,137 41,994 55,842 41,120 48,639
Selling, general and
administrative
expenses............... 13,467 14,152 18,515 21,705 24,381 15,808 19,265
Research and development
costs.................. 1,561 3,506 2,260 2,533 2,633 1,953 3,144
-------- -------- -------- -------- -------- --------- ----------
Operating income....... 16,604 10,496 10,362 17,756 28,828 23,359 26,230
Other income (expenses):
Interest, net........... (2,212) (3,514) (6,030) (5,285) (3,968) (3,076) (6,739)
Loss in investment in
joint venture (1)...... -- (617) (643) -- -- -- --
Transaction compensation
expense................ -- -- -- -- -- -- (5,778)
Other income, etc....... 492 341 438 875 372 233 647
-------- -------- -------- -------- -------- --------- ----------
Income before income
taxes and
extraordinary income.. 14,884 6,706 4,127 13,346 25,232 20,516 14,360
Provision for income
taxes.................. 5,680 2,882 1,718 4,784 8,383 7,715 5,393
-------- -------- -------- -------- -------- --------- ----------
Income before
extraordinary item.... 9,204 3,824 2,409 8,562 16,849 12,801 8,967
Loss from write-off of
deferred financing
cost,
net (2)................ -- -- 1,294 -- 301 301 187
-------- -------- -------- -------- -------- --------- ----------
Net income............. $ 9,204 $ 3,824 $ 1,115 $ 8,562 $ 16,548 $ 12,500 $ 8,780
======== ======== ======== ======== ======== ========= ==========
Other Financial Data:
Gross margin %.......... 29.4% 25.0% 24.3% 27.5% 32.7% 32.3% 36.5%
Adjusted EBITDA (3)..... $ 23,747 $ 20,508 $ 22,480 $ 28,960 $ 42,377 $ 30,942 $ 35,131
Adjusted EBITDA margin %
(4).................... 22.1% 18.2% 17.5% 19.0% 24.8% 24.3% 26.4%
Depreciation and
amortization........... $ 5,284 $ 8,228 $ 10,688 $ 9,676 $ 12,208 $ 6,654 $ 11,245
Capital expenditures.... $ 24,542 $ 24,284 $ 8,640 $ 5,806 $ 17,101 $ 10,513 $ 26,317
Ratio of earnings to
fixed charges (5)...... 6.4x 1.9x 1.6x 3.4x 6.3x 6.3x 2.8x
Cash provided (used) by:
Operating activities... $ 17,704 $ 5,932 $ 12,683 $ 21,898 $ 20,322 $ 10,372 $ 20,595
Investing activities... $(27,582) $(24,872) $ (6,712) $ (5,527) $(18,810) $ (11,904) $ (26,144)
Financing activities... $ 10,626 $(18,034) $ (4,163) $(16,413) $ (2,666) $ (309) $ 5,368
<CAPTION>
December 31, September 30,
------------------------------------------------ ---------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- --------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash.................... $ 2,241 $ 1,336 $ 3,143 $ 3,101 $ 1,947 $ 1,260 $ 1,766
Working capital......... 8,021 9,391 5,052 4,263 19,453 20,577 24,420
Property, plant and
equipment, net......... 40,332 56,323 53,499 50,122 57,950 54,078 76,707
Total assets............ 69,599 93,414 92,824 91,329 105,133 100,538 140,327
Total debt.............. 50,141 69,182 66,698 50,615 56,917 59,321 318,073
Redeemable cumulative
preferred stock........ 6,466 6,466 6,466 6,466 -- -- --
Shareholders' equity.... 2,324 5,298 5,563 13,594 31,109 58,428 (177,745)
</TABLE>
25
<PAGE>
- ----------------------
(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) Adjusted EBITDA represents income before interest expense (net), income
taxes, depreciation and amortization, adjusted as follows:
<TABLE>
<CAPTION>
Nine months
Ended
Year Ended December 31, September 30,
--------------------------------------- ---------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
EBITDA before
adjustments............ $22,380 $18,448 $19,551 $28,307 $41,107 $29,945 $28,583
Adjustments to EBITDA
Non cash:
Postretirement
benefit costs...... 1,367 1,443 992 653 515 315 378
Loss in joint
venture............ 0 617 643 0 0 0 0
Write off of
deferred finance
costs.............. 0 0 1,294 0 301 301 187
Non-recurring legal
expenses............. 0 0 0 0 454 381 67
Deal costs............ 0 0 0 0 0 0 138
Transaction
compensation expense. 0 0 0 0 0 0 5,778
------- ------- ------- ------- ------- ------- -------
Adjusted EBITDA......... $23,747 $20,508 $22,480 $28,960 $42,377 $30,942 $35,131
======= ======= ======= ======= ======= ======= =======
</TABLE>
Adjusted 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. Adjusted 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.
Management believes that an increase in Adjusted EBITDA level is an
indicator of the Company's improved ability to service existing debt, to
sustain potential future increases in debt and to satisfy capital
requirements. Given that Adjusted EBITDA is not a measurement determined in
accordance with generally accepted accounting principles and is thus
susceptible to varying calculations, Adjusted EBITDA as presented may not
be comparable to other similarly titled measures of other companies.
(4) Adjusted EBITDA margin represents Adjusted EBITDA as calculated in
footnote (3) above as a percentage of net sales. The explanation and
cautionary statements regarding Adjusted EBITDA in footnote (3) above are
also applicable to Adjusted EBITDA margin.
(5) For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as earnings before taxes plus fixed charges. Fixed
charges consist of interest expense, capitalized interest costs,
amortization of debt issuance costs and the portion of rental expense on
capital and operating leases deemed representative of the interest factor.
26
<PAGE>
GLOBE HOLDINGS, INC.
The following unaudited pro forma financial statements (the "Pro Forma
Financial Statements") are based on the historical financial statements of the
Company included elsewhere in this Prospectus.
The unaudited pro forma statement of operations for the year ended December
31, 1997 gives effect to the Transactions as if such events were consummated
on January 1, 1997. The unaudited pro forma statement of operations for the
nine months ended September 30, 1998 gives effect to the Transactions as if
such events were consummated on January 1, 1998. The pro forma adjustments are
based upon available information and certain assumptions that the Company
believes are reasonable.
The Pro Forma Financial Statements do not purport to be indicative of the
results that would have been obtained had such transactions described above
occurred as of the assumed dates. In addition, the Pro Forma Financial
Statements do not purport to project the Company's results of operations for
any future date or period.
The Pro Forma Financial Statements should be read in conjunction with the
financial statements of the Company and the notes thereto, included elsewhere
herein.
27
<PAGE>
GLOBE HOLDINGS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Fiscal Year Ended December 31,
-------------------------------------
1997 Adjustments Pro forma(d)
-------- ----------- ------------
(Dollars in thousands)
<S> <C> <C> <C>
Net sales................................. $170,941 $ -- $170,941
Cost of sales............................. 115,099 -- 115,099
-------- -------- --------
Gross margin.......................... 55,842 -- 55,842
Selling, general and administrative
expenses................................. 24,381 (95)(a) 24,286
Research and development costs............ 2,633 -- 2,633
-------- -------- --------
Operating income...................... 28,828 95 28,923
Other Income/(Expense)....................
Interest................................ (3,968) (25,438)(b) (29,406)
Loss in investment in joint venture..... -- -- --
Other income, net....................... 372 -- 372
-------- -------- --------
Income before income taxes and
extraordinary items.................. 25,232 (25,343) (111)
Provision for income taxes................ 8,383 (10,188)(c) (1,805)
-------- -------- --------
Income before extraordinary item...... $ 16,849 $(15,155) $ 1,694
======== ======== ========
</TABLE>
- --------
(a) Represents amortization of debt issuance costs associated with the old
credit facility.
(b) Adjustment to reflect pro forma interest expense calculated using (i)
7.94% per annum on $6,000 for the revolver; (ii) 7.94% on $60,000 for the
Term Loan A; (iii) 8.44% on $55,000 for the Term Loan B; (iv) 10.0% on
$150,000 for the Senior Subordinated Note; (v) accretion of the 14% senior
discount note; (vi) amortization of deferred finance charges; (vii) less
capitalized interest costs of $635. As of January 28, 1999 the applicable
borrowing margin under the Senior Credit Facility was increased by 0.75%;
such increase is not included in the pro forma adjustments. See "Recent
Developments."
(c) Reflects a statutory income tax rate of 40.2% for the pro forma
adjustments.
(d) In connection with the Transaction the Company incurred a one time
compensation expense charge of $3,318 associated with the vesting of stock
options and $2,460 associated with bonuses paid to certain members of
management. Although the Company expects to charge such amounts in the
period following the transaction date, such charge is not reflected in the
accompanying pro forma financial information.
28
<PAGE>
GLOBE HOLDINGS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
For Period Ended September 30,
----------------------------------
1998 Adjustments Pro forma
-------- ----------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Net sales.................................... $133,321 $ -- $133,321
Cost of sales................................ 84,682 -- 84,682
-------- -------- --------
Gross margin............................. 48,639 -- 48,639
Selling, general and administrative expenses. 19,265 (48)(a) 19,217
Research and development costs............... 3,144 -- 3,144
-------- -------- --------
Operating income......................... 26,230 48 26,278
Other Income/(Expense)
Interest................................... (6,739) (14,824)(b) (21,563)
Transaction compensation expense........... (5,778) 5,778 (d) --
Other income, net.......................... 647 -- 647
-------- -------- --------
Income before income taxes............... 14,360 (8,998) 5,362
Provision for income taxes................... 5,393 (3,617)(c) 1,776
-------- -------- --------
Income before extraordinary item............. $ 8,967 $ (5,381) $ 3,586
======== ======== ========
</TABLE>
- --------
(a) Represents amortization of debt issuance costs associated with the old
credit facility.
(b) Reflects pro forma interest expense calculated using (i) 7.94% per annum
on $6,800 for the revolver; (ii) 7.94% on $60,000 for the Term Loan A;
(iii) 8.44% on $55,000 for the Term Loan B; (iv) 10.0% on $150,000 for the
Senior Subordinated Note; (v) accretion of the 14% senior discount note;
(vi) amortization of deferred finance charges; (vii) less capitalized
interest costs of $959. As of January 28, 1999 the applicable borrowing
margin under the Senior Credit Facility was increased by 0.75%; such
increase is not included in the pro forma adjustments. See "Recent
Developments."
(c) Reflects a statutory income tax rate of 40.2% for the pro forma
adjustments.
(d) In connection with the Transaction the Company incurred a one time
compensation expense charge of $3,318 associated with the vesting of stock
options and $2,460 associated with bonuses paid to certain members of
management. Such changes are not included in the calculation of pro forma
income.
29
<PAGE>
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 elsewhere in this Prospectus. This discussion
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those anticipated in the
forward-looking statements as a result of certain factors including, but not
limited to, those discussed in "Risk Factors," "Business" and elsewhere in
this Prospectus. The Company disclaims any obligation to update information
contained in any forward-looking statement. See "Risk Factors--Risks Regarding
Forward-Looking Statements."
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.
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
December 31, September 30,
-------------------- -------------
1995 1996 1997 1997 1998
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net sales.................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................................ 75.7% 72.5% 67.3% 67.7% 63.5%
Gross margin................................. 24.3% 27.5% 32.7% 32.3% 36.5%
Selling, general & administrative expenses... 14.4% 14.2% 14.3% 12.4% 14.4%
Research and development expenses............ 1.8% 1.7% 1.5% 1.5% 2.4%
Operating income............................. 8.1% 11.6% 16.9% 18.3% 19.7%
</TABLE>
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September
30, 1997
Net sales of the Company for the nine months ended September 30, 1998
increased $6.0 million, or 4.7%, to $133.3 million from $127.3 million for the
corresponding period in 1997. The increase in sales was primarily attributable
to a 21.5% increase in fine denier spandex fiber volume and a 4.8% increase in
average heavy denier spandex fiber price associated with a change in mix
within the Company's heavy denier product line. This sales increase has been
offset by the current economic crisis in Asia which has resulted in an influx
of fiber, fabric and apparel into Europe from Asia, resulting in 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 the nine months ended September 30, 1998
increased $7.5 million, or 18.3%, to $48.6 million from $41.1 million for the
corresponding period in 1997. The Company's gross margin as a percentage of
net sales increased to 36.5% for the nine months ended September 30, 1998 from
32.3% for the corresponding period in 1997. The increase in gross margin was
primarily due to a 6% reduction in fine denier spandex fiber unit costs
attained through operating efficiencies and economies of scale resulting from
increased capacity at the Company's Tuscaloosa, Alabama facility and a
favorable shift in product mix towards higher margin fine denier spandex fiber
products. Fine denier spandex fiber sales represented 54.3% of total sales in
the nine months ended September 30, 1998, compared to 48.5% in the
corresponding period in 1997.
Selling, general and administrative expenses for the Company for the nine
months ended September 30, 1998 increased $3.5 million, or 21.9%, to $19.3
million from $15.8 million for the corresponding period in 1997. Selling,
general and administrative expenses for the Company as a percentage of net
sales increased to 14.4% for the nine months ended September 30, 1998 from
12.4% in the corresponding period in 1997. The change from the previous year
was primarily due to an increase in allowances for bad debt and additional
selling expenses associated with an increased level of foreign sales.
30
<PAGE>
Research and development expenses for the Company for the nine months ended
September 30, 1998 increased $1.2 million, or 61.0%, to $3.1 million from $1.9
million for the corresponding period in 1997. Research and development
expenses for the Company as a percentage of net sales increased to 2.4% for
the nine months ended September 30, 1998 from 1.5% for the corresponding
period in 1997. The increase in research and development expense was
associated with the development of new heavy denier spandex fiber products.
Net interest expense for the Company for the nine months ended September 30,
1998 increased $3.7 million to $6.7 million from $3.1 million in the
corresponding period in 1997. The increase in interest expense was directly
attributable to the recapitalization of the Company.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net sales of the Company for 1997 increased $18.3 million, or 12.0%, to
$170.9 million from $152.6 million in 1996. The increase in sales was
primarily due to a 5.3% increase in the Company's average fine denier spandex
fiber prices and a 17.7% increase in fine denier spandex fiber volume. The
increase in average spandex fiber prices was primarily due to stronger market
demand, improved acceptance of the Company's products in higher-priced
markets, and cost reductions related in improved efficiencies.
Gross margin of the Company for 1997 increased $13.8 million, or 32.9%, to
$55.8 million from $42.0 million in 1996. The Company's gross margin as a
percentage of net sales increased to 32.7% in 1997 from 27.5% in 1996. The
increase in gross margin reflects a reduction in fine denier spandex fiber
unit costs attributable to economies of scale created by an increase in fine
denier spandex fiber capacity at the Company's Tuscaloosa, Alabama facility,
gains in efficiencies achieved through improved production processes and a
decline in latex raw material costs. The increase in gross margin also
reflects a favorable shift in product mix toward higher margin fine denier
spandex fiber products. Fine denier spandex fiber sales represented 49.4% of
total net sales in 1997 compared to 44.2% in 1996.
Selling, general and administrative expenses for the Company in 1997
increased $2.7 million, or 12.4%, to $24.4 million from $21.7 million in 1996.
The increase in selling, general and administrative expenses was primarily
attributable to the higher level of net sales achieved in 1997. As a
percentage of net sales, selling, general and administrative expenses
increased to 14.3% in 1997 from 14.2% in 1996.
Research and development expenses for the Company in 1997 increased $0.1
million, or 4.0%, to $2.6 million from $2.5 million in 1996. Research and
development expenses for the Company as a percentage of net sales decreased to
1.5% in 1997 from 1.7% in 1996. The decrease was primarily due to the higher
level of net sales attained in 1997.
Net interest expense for the Company in 1997 decreased $1.3 million, or
24.5%, to $4.0 million from $5.3 million in 1996. The decrease in interest
expense was primarily due to a decline in interest rates and the
capitalization of $0.5 million of interest expense in 1997 in connection with
a capital expansion project.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net sales of the Company for 1996 increased $24.3 million, or 18.9%, to
$152.6 million from $128.3 million in 1995. The increase in sales was
primarily due to a 56.4% increase in fine denier spandex fiber volume related
to increased manufacturing capacity.
Gross margin of the Company for 1996 increased $10.9 million, or 35.0%, to
$42.0 million from $31.1 million for the corresponding period in 1995. The
Company's gross margin as a percentage of net sales increased to 27.5% in 1996
from 24.3% in 1995. 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 44.2% of total net sales
in 1996 compared to 34.8% in 1995. In addition, the Company's gross margin in
1995 was negatively impacted by Globe's first expansion of its Tuscaloosa
facility, which temporarily reduced
31
<PAGE>
manufacturing efficiencies, and by lower average selling prices of fine denier
spandex resulting from Bayer entering the domestic market.
Selling, general and administrative expenses for the Company in 1996
increased $3.2 million, or 17.3%, to $21.7 million from $18.5 million in 1995.
Selling, general and administrative expenses for the Company as a percentage
of net sales decreased to 14.2% in 1996 from 14.4% in 1995. The decrease in
selling, general and administrative expense as a percentage of net sales was
primarily attributable to the increase in sales noted above.
Research and development expenses for the Company in 1996 increased $0.2
million, or 8.7%, to $2.5 million from $2.3 million in 1995. Research and
development expenses for the Company as a percentage of net sales decreased to
1.7% in 1996 from 1.8% in 1995. The decrease in research and development
expense as a percentage of net sales reflects the higher level of net sales
achieved in 1996.
Net interest expense for the Company in 1996 decreased $0.7 million, or
11.7%, to $5.3 million from $6.0 million in 1995. The decrease in interest
expense was primarily due to a decrease in the average debt outstanding
throughout the year and a decline in interest rates.
The Company reported an extraordinary loss of $1.3 million, net of tax, in
1995 to reflect the write-off of unamortized deferred financing costs
associated with the restatement of its credit agreement.
Liquidity and Capital Resources
Cash provided by operating activities was $12.7 million in 1995, $21.9
million in 1996 and $20.3 million in 1997. The increase in cash provided by
operating activities for 1996 was primarily due to increases in profitability,
accounts payable, taxes payable, accrued expenses and a reduction of inventory
balances, partially offset by an increase in accounts receivable. The
reduction in cash provided by operating activities in 1997 was due to
increases in accounts receivable, inventory balances and deferred tax assets,
and a reduction in taxes payable, partially offset by an increase in
amortization of unearned compensation. For the nine months ended September 30,
1998, cash provided by operating activities was $20.6 million compared to
$10.4 million for the same period in 1997. This increase was primarily
attributable to increases in profitability, accounts payable and accrued
expenses and a reduction in inventory, partially offset by an increase in
accounts receivable. The average days' sales outstanding for accounts
receivable was approximately 44, 54 and 56 days for the years ended 1995, 1996
and 1997, respectively. Average days' sales outstanding was 56 days at
September 30, 1998. The increase in average days' sales outstanding was
primarily attributable to an increase 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 27.5% and 31.6% of sales for the year ended December 31, 1997 and
for the nine months ended September 30, 1998, respectively. Management does
not expect that the increasing days sales outstanding will have a material
impact on future results of operations and liquidity.
The Company's inventories decreased from $15.9 million at December 31, 1995
to $11.8 million at December 31, 1996. This decrease was primarily
attributable to a decrease in fine denier spandex fiber quantities and cost
aggregating to a 42%, or $2.3 million, decrease. The Company's inventory
increased from $11.8 million at December 31, 1996 to $13.8 million at December
31, 1997. This increase was primarily due to higher fine denier production
capacity and anticipated higher heavy denier sales levels. The Company's
inventories decreased from $13.2 million at September 30, 1997 to $14.8
million at September 30, 1998. This decrease was primarily due to lower fine
denier spandex thread manufacturing costs and reduced latex thread inventory.
The Company's accounts payable increased from $4.7 million at December 31,
1995 to $7.2 million at December 31, 1996. The Company's accounts payable
increased from $7.2 million at December 31, 1996 to $7.4 million at December
31, 1997. The increase in accounts payable was attributable to capital
expenditures incurred to increase fine denier spandex fiber capacity. The
Company's accounts payable increased from $6.3 million at September 30, 1997
to $8.5 million at September 30, 1998. The increase was primarily due to
capital expenditures incurred to increase fine denier capacity.
32
<PAGE>
The Company has historically financed its operations and acquisitions
through a combination of internally generated funds and borrowings under its
existing credit agreement. The Company financed the construction of the
Tuscaloosa plant, as well as the subsequent expansions of the facility, under
its existing credit facilities.
Capital expenditures were $5.8 million in 1996, $17.1 million in 1997 and
$26.3 million for the nine months ended September 30, 1998. Capital
expenditures incurred during 1996 consisted primarily of general maintenance
and process improvement expenditures, and the capital expenditures incurred
during 1997 consisted primarily of expenditures for the expansion of the
Tuscaloosa facility and general maintenance and process improvement
expenditures. The capital expenditures incurred during the first nine months
of 1998 included $19.2 million of plant expansion expenditures. The Company
anticipates that its capital expenditures for the balance of 1998 will be
approximately $10.0 million, of which $6.0 million is related to the
Tuscaloosa Plant Expansion and $1.5 million is related to the Company's new
enterprise resource planning system, which is expected to be installed in 1998
and 1999. The Company estimates that based on anticipated levels of operations
its capital expenditures will be approximately $6.0 million in each of 1999
and 2000.
In connection with the Transactions, Globe Manufacturing entered into the
Senior Credit Facility enabling Globe Manufacturing to borrow up to $165.0
million, subject to certain borrowing conditions. The Senior Credit Facility
is fully secured and consists of a $115.0 million term loan facility, which
was fully drawn upon the consummation of the Transactions, and a $50.0 million
revolving loan facility, $10.3 million of which was outstanding at January 28,
1999. The revolving loan facility is available for general corporate and
working capital purposes. The obligations of Globe Manufacturing under the
Senior Credit Facility are fully and unconditionally guaranteed by the
Company. See "Description of Senior Credit Facility." In connection with the
Transactions, Globe Manufacturing also issued $150.0 million in aggregate
principal amount of the Old Senior Subordinated Notes. See "Description of
Senior Subordinated Notes."
After consummation of the Initial Offering and the other Transactions, the
Company's total consolidated debt significantly increased. Interest payments
on the Senior Subordinated Notes and under the Senior Credit Facility
represent significant liquidity requirements for the Company. The Senior
Subordinated Notes require semi-annual interest payments and interest on the
loans under the Senior Credit Facility is due at least quarterly. The Company
is a holding company with no operations of its own and its only material asset
is the capital stock of Globe Manufacturing (all of which is pledged to secure
obligations under the Senior Credit Facility). The Senior Credit Facility and
the Senior Subordinated Note Indenture impose, and agreements entered into in
the future may impose, significant restrictions on distributions and the
making of loans by Globe Manufacturing to the Company. Accordingly, repayments
of the Notes may depend upon the ability of the Company to effect an equity
offering or to refinance the Notes.
Although there can be no assurance, the Company anticipates that its
consolidated cash flow generated from operations and borrowings under the
Senior Credit Facility will be sufficient to fund the Company's working
capital needs, planned capital expenditures, scheduled interest payments
(including interest payments on the Senior Subordinated Notes and amounts
outstanding under the Senior Credit Facility) and other cash needs for the
next twelve months. However, the Company may require additional funds if it
enters into strategic alliances, acquires significant assets or businesses or
makes significant investments in furtherance of its growth strategy. The
ability of the Company to satisfy its capital requirements will be dependent
upon the future financial performance of the Company, which in turn will be
subject to general economic conditions and to financial, business, and other
factors, including factors beyond the Company's control.
Instruments governing the Company's indebtedness, including the Indenture,
the Senior Credit Facility and the Senior Subordinated Note Indenture, 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
33
<PAGE>
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. See "Risk Factors--Substantial
Leverage and Debt Service Requirements."
As of January 28, 1999, in response to lower than expected earnings, 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 the term loans and revolving loans were increased and (iii) the
management fee due to an affiliate of Code Hennessy & Simmons LLC may only be
paid if certain leverage tests are met. As a result of the amendment, the
applicable borrowing margin under the Senior Credit Facility for Base Rate (as
defined in the Senior Credit Facility) borrowings increased from 1.25% to
2.00% for the Term Loan A and the Revolving Loan and from 1.75% to 2.50% for
the Term Loan B and the applicable borrowing margin Eurodollar Rate (as
defined in the Senior Credit Facility) borrowings increased from 2.25% to
3.00% for the Term Loan A and the Revolving Loan and from 2.75% to 3.50% for
the Term Loan B. See "Description of the Senior Credit Facility." This
increase in interest margins will increase the Company's interest expense by
approximately 3%, which is not expected to have a material effect on the
Company's operating results.
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 completed its repairs for major manufacturing systems
in all locations. The Company also completed its repair of its major financial
systems. The Company's current target is to resolve compliance issues in its
distribution systems and other ancillary systems by March 31, 1999. The
Company also has made inquiry of its major customers and suppliers to assess
their compliance. Nevertheless, there can be no absolute 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, 1998, the Company expended approximately $108,000
in systems development and remediation efforts, including the cost of new
software and modifying the applicable code of existing software. The Company
estimates remaining costs to be between $50,000 and $100,000. The Company
presently believes that the total cost of achieving year 2000 compliant
systems is not expected to be material to the Company's financial condition,
liquidity or results of operations.
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.
Inflation
The Company does not believe that inflation has had any material effect on
the Company's business over the past three years.
34
<PAGE>
Impact of New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income ("Statement 130"), which establishes standards for the reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. Statement 130 is effective for fiscal years
beginning after December 15, 1997. Disclosure of total comprehensive income is
required in interim period financial statements. Management does not believe
that comprehensive income for prior periods will differ significantly from net
income in those periods.
In June, 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise and Related Information
("Statement 131"), which is effective for years beginning after December 15,
1997. However, Statement 131 need not be applied to interim financial
statements in the initial year of application. Statement 131 establishes
standards for the way that public business enterprises report information
about operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports. It also establishes standards for related
disclosures about products and services, geographic areas, and major
customers. Since Statement 131 is effective for financial statements for
fiscal years beginning after December 15, 1997, the Company will adopt the new
requirements retroactively in 1998. Management has not yet determined the
impact Statement 131 will have on disclosures of the Company's reported
segments.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits ("Statement 132"), that revises disclosure
requirements of FASB Statements No. 87, Employers' Accounting for Pensions,
and No. 106, Employers' Accounting for Postretirement Benefits Other Than
Pensions. Statement 132 is effective for fiscal years beginning after December
15, 1997. The Statement does not change the recognition or measurement of
pension or post-retirement benefit plans, but standardizes disclosure
requirements for pensions and other post-retirement benefits, eliminates
certain disclosures and requires additional information. Management does not
anticipate that the adoption of Statement 132 will have a material impact on
its financial position or the results of its operations.
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, 1999. 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.
35
<PAGE>
BUSINESS
Overview
Globe 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 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 25.4% of total revenue during the 1997 fiscal year.
During the twelve months ended September 30, 1998, the Company had net sales
of $177.0 million, Adjusted EBITDA of $46.7 million and net income of $12.8
million. See Summary Consolidated Financial Data, footnotes 3 and 5.
Spandex fiber, which accounted for 80% of the Company's 1997 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 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.
Based on management's knowledge and experience in the industry, management
estimates that in 1997 the worldwide market for spandex fiber was
approximately 240 million pounds, representing approximately $2.0 billion in
sales. From 1993 to 1997, worldwide sales of spandex fiber increased at an
estimated 11% compound annual growth rate, and the worldwide spandex fiber
market is expected to grow at approximately 9% over the next three years.
Since 1993, demand for fine denier spandex has increased faster than the
overall market due to its growing use in lightweight and high quality apparel
applications and this trend is expected to continue.
The Company operates three manufacturing facilities, which are located in
Fall River, Massachusetts, Tuscaloosa, Alabama and Gastonia, North Carolina.
Since 1993, Globe has invested $97.5 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 10.6 million pounds. As a result of the Company's capital
investment program and continuous improvement initiatives in its manufacturing
facilities, Globe's fine denier spandex fiber production yields have improved
by 35%, and sales per employee have increased by 43% since 1993.
Tuscaloosa Plant Expansion
Globe is expanding production capacity at its Tuscaloosa, Alabama fine
denier spandex fiber manufacturing facility in response to existing demand
from current customers. Through September 30, 1998, Globe had spent
approximately $19.2 million of the estimated $22.1 million project cost. The
Tuscaloosa facility, built in 1994, has undergone three prior capacity
expansions. The Tuscaloosa Plant Expansion will increase the Company's fine
denier manufacturing capacity by 3.6 million pounds per annum, or 34%, with
approximately half of this increased capacity expected to be on line in the
fourth quarter of 1998 and the balance expected to be on line in the first
quarter of 1999. As of September 30, 1998, Globe's list price for 40 denier
spandex fiber, the primary product produced at the Company's Tuscaloosa
facility, was $12.99 per pound.
Competitive Strengths
The Company's exclusive focus on elastomeric fibers for over 50 years has
enabled it to develop the following competitive strengths:
36
<PAGE>
Long-Term Customer Relationships and Superior Customer Service. Globe has
established long-term relationships with its principal customers by focusing
on superior technical and customer service. The Company has been a supplier to
Fruit of the Loom, Inc., Kimberly-Clark Corporation, Minnesota Mining and
Manufacturing Company, Sara Lee Hosiery, Unifi, Inc. and Worldtex, Inc. for
over ten years. Seven of the Company's ten largest customers have selected
Globe as their preferred supplier of spandex fiber. Globe provides analytical
laboratory services and on-site technical assistance to improve customers'
manufacturing and engineering processes. As a result, a number of the
Company's major customers have selected it as a technology partner to assist
in the development of new spandex applications.
Broad Product Line. The Company believes that it offers the broadest line of
spandex and latex elastomeric fibers in the world. The Company produces a full
line of spandex fibers in deniers ranging from 15 to 5040. These products
feature an assortment of stretch, strength and other performance
characteristics that may be customized for specific applications and
manufacturing processes. Globe also manufactures a wide variety of latex
threads in multiple gauges and formulations. This broad range of product
offerings differentiates the Company in the industry and represents a
competitive advantage, as many customers purchase multiple deniers of spandex
fiber, as well as various gauges of latex thread, and prefer to utilize one
vendor for their elastomeric fiber requirements. The proprietary technologies
and customized equipment used by Globe in its multiple manufacturing processes
enable the Company to cost-effectively produce this broad product line.
Strong Positions in Growing Markets. The Company has established a strong
market position in each of its principal product lines. The Company has an
estimated 16% share of the domestic spandex fiber market and an estimated 7%
share of the worldwide spandex fiber market (based on pounds produced).
Management estimates that worldwide sales of spandex fiber will increase at a
compound annual growth rate of approximately 9% over the next three years and
that fine denier spandex sales will exceed the overall market growth rate
during this period. Fine denier spandex demand has been driven by strong
consumer demand for lightweight and high quality apparel and technological
advances allowing for the use of spandex fibers in the manufacture of such
apparel.
Cost-Efficient Manufacturing. Management believes that the Company's
manufacturing operations are among the most efficient in the industry,
allowing the Company to become one of the world's lowest cost producers of
high quality spandex fiber. Globe has developed proprietary chemical
formulations and highly efficient manufacturing processes that utilize
sophisticated process control systems and custom fabricated manufacturing
equipment designed and built by the Company's engineers. Management believes
that Globe's in-house capability to design, engineer and build its own
manufacturing equipment distinguishes the Company from many of its competitors
and provides it with an important competitive advantage in maintaining product
quality as well as controlling design, development and maintenance costs. In
addition, increased production volume at the Company's facilities has enabled
the Company to achieve significant economies of scale and raw material
purchasing power.
Experienced Management Team. The Company is led by an experienced management
team with a track record of achieving profitable growth, developing new
manufacturing processes and expanding the Company's customer base. Between
1993 and the twelve months ended September 30, 1998, the Company's net sales
increased from $107.6 million to $177.0 million, Adjusted EBITDA increased
from $23.7 million to $46.7 million and net income increased from $9.2 million
to $12.8 million. See Summary Consolidated Financial Data, footnotes 3 and 5.
The Company's executive officers average approximately 20 years with the
Company. The Company's senior management team has a substantial financial
interest in the Company's continued success through their direct investment in
the Company.
Business Strategy
The Company's business objective is to become the leading global supplier of
elastomeric fiber for use in selected apparel and non-apparel markets. The
Company seeks to achieve this objective by pursuing the following strategies:
Continue Shift in Product Mix to Higher Growth, More Profitable Fine Denier
Products. Since 1993, Globe has expanded its annual production capacity of
higher growth fine denier spandex fiber from 2.6 million to 10.6
37
<PAGE>
million pounds. Fine denier spandex fiber is used in applications requiring
lightweight or high quality fabric, and has been generally more profitable
than heavy denier spandex fiber due to the complexity of the manufacturing
process required and strong market demand. Fine denier spandex fiber sales
accounted for approximately 49% of Globe's 1997 total sales, up from 25% in
1993. The Tuscaloosa Plant Expansion, which will increase the Company's annual
production capacity for fine denier spandex fiber to 14.2 million pounds, will
enable the Company to further address the increase in demand for fine denier
spandex fiber.
Develop Innovative Spandex Fiber Applications. Globe's product managers and
research and development engineers work closely with existing and prospective
customers to develop innovative applications for spandex fiber. For example,
the Company worked with a fleece manufacturer for over two years to develop a
new four-way stretch fleece product for outerwear that incorporates Globe's
spandex fiber. Cooperative efforts such as this have enabled Globe to enhance
its relationships with existing customers and attract new customers.
Improve Manufacturing Productivity; Reduce Production Costs. The Company
seeks to continually improve manufacturing efficiency and reduce production
costs in order to maintain its position as one of the world's lowest cost
producers of high quality spandex fiber. The Company seeks to improve
manufacturing yields, increase equipment utilization, and reduce production
costs by upgrading process monitoring equipment, enhancing production
processes and increasing throughput. Each of the Company's manufacturing
facilities is certified under ISO 9001, and the Company actively incorporates
the principles of continuous improvement.
Increase International Sales. Globe estimates that the international market
accounts for two-thirds of the worldwide spandex fiber market. International
spandex fiber markets are growing rapidly due to increasing consumerism of the
world's population, coupled with increases in personal disposable income. From
1993 to 1997, Globe's international sales increased from 19% of sales to 28%
of sales (primarily in western Europe and Latin America) as the Company
expanded the size and geographic scope of its international sales to 46
countries. The Company seeks to further expand its international sales by
leveraging its existing sales and marketing infrastructure and capitalizing on
Globe's expanded manufacturing capacity.
Industry Overview
The Company competes primarily in the worldwide market for spandex fiber and
the domestic market for latex thread.
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.
38
<PAGE>
Management estimates that in 1997 the worldwide market for spandex fiber was
approximately 240 million pounds, representing approximately $2.0 billion in
sales. From 1993 to 1997, worldwide sales of spandex fiber increased at an
estimated 11% compound annual growth rate, and the worldwide spandex fiber
market is projected to grow at a compound annual growth rate of approximately
9% over the next three years. Since 1993, demand for fine denier spandex fiber
has increased faster than the overall market due to its growing use in
lightweight and high quality apparel applications and this trend is expected
to continue. Currently, approximately 61% of spandex fiber consumption occurs
in the major industrialized regions, including the U.S., Japan, and western
Europe. International spandex fiber markets are growing rapidly due to
increasing consumerism of the world's population, coupled with increases in
personal disposable income.
Spandex fiber is currently produced throughout the world. Management
estimates that there are approximately 16 spandex fiber manufacturers in the
world, with the top 5 manufacturers accounting for approximately 77% of the
worldwide market. These manufacturers are expected to increase capacity to
meet anticipated demand and maintain their respective market shares.
Latex Thread
The Company estimates that in 1997 the U.S. market for extruded latex thread
was approximately 35 million pounds. The primary markets 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.
Products and Customers
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 80% of the Company's sales
in 1997, and latex thread accounted for the remaining 20%.
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,
and the Company believes opportunities exist for additional uses for latex
thread.
39
<PAGE>
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 has recently begun selling products to
the stretch woven market for use in suiting fabrics and outerwear linings. The
following table lists the Company's principal product lines, applications for
these products, the fiber utilized in the products, and representative
customers.
<TABLE>
<CAPTION>
End Market and
Percentage of Representative
1997 Sales Product Applications Fiber Utilized Customers
-------------- ------------------------------ ----------------- --------------
<C> <C> <C> <S>
Hosiery Women's sheer hosiery 10-560 denier Unifi, Inc.
36% of sales Men's hosiery spandex fiber; Sara Lee Ho-
Athletic socks fine gauge latex siery
thread Kayser Roth
Hosiery, Inc.
McMichael
Mills, Inc.
Worldtex, Inc.
Tanofil A.G.
Golden Lady
S.P.A.
Americal Cor-
poration
Pennaco Ho-
siery, Inc.
Circular Knits Active wear 20-105 denier C.K.M. Indus-
35% of sales Swimwear spandex fiber tries, Inc.
Casual wear Textivision,
Dress wear SA de CV
Cotton athletic wear Tanofil,
A.G./Karl Na-
gele GmbH &
Co. K.G.
Texere 2000
Inc.
Elatex--D&S
International
Taiwan
Narrow Fabrics Waistband elastics 280-5040 denier Fruit of the
16% of sales Straps spandex fiber; Loom, Inc.
Insert elastics 22-50 gauge Asheboro Elas-
Accent laces latex thread tic Corp.
Hanes Mens-
wear, Inc.
Beech Island
Knitting Co.
North East
Knitting, Inc.
Sun Hing
Elastics &
Lace Flat A.C.
Nonwovens Diapers 280-1400 denier Kimberly-Clark
8% of sales Adult incontinence products spandex fiber; Corporation
Feminine hygiene products 30-50 gauge latex Minnesota Min-
Medical bandages thread ing & Manufac-
Industrial protective clothing turing Com-
pany
Paragon Trade
Brands, Inc.
Warp Knits Intimate apparel 20-560 denier Guilford Mills
5% of sales Body shaping garments spandex fiber Inc.
Swimwear The Moore Com-
Footwear pany, Inc.--
Darlington
Fabrics Divi-
sion
Liberty Fab-
rics, Inc.
Charbert Divi-
sion of NFA
Corp.-- Alton
Operating
Corp.
</TABLE>
The Company has historically maintained a strong position in the hosiery and
narrow fabrics markets. Based on management's knowledge and experience in the
industry, management estimates that Globe's spandex fibers are utilized in the
waistband of over 90% of the pantyhose sold in the United States. In addition,
the Company believes it is the leading domestic supplier of latex thread for
men's dress hosiery and men's underwear waistbands.
Fine denier spandex fiber accounted for approximately 49% of the Company's
total 1997 sales, up from 25% in 1993. 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.
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 Fruit of the Loom, Inc., Sara Lee Hosiery,
40
<PAGE>
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 48% of 1997 sales, with sales to Unifi,
Inc., a manufacturer of covered yarns for men's and women's hosiery and for
narrow fabrics, accounting for approximately 9% of 1997 sales. Export sales
represented approximately 28% of the Company's total sales in 1997. See Note 1
to the Company's Consolidated Financial Statements. 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 an extensive organization comprised of
26 individuals, including 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
35 commissioned agents or authorized distributors, covering 46 countries.
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.
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. The Company
seeks to differentiate its product offerings by providing a high level of
technical and customer service, and believes that DuPont and Bayer are the
only other major spandex fiber suppliers that provide similar levels of
technical and customer service.
41
<PAGE>
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. See "Risk
Factors--Competition."
Suppliers
During 1997, raw materials represented 42% of the Company's total cost of
sales and 28% 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 93% of its
total raw material purchases and 31% of its total cost of sales in 1997, with
BASF, Polyurethane Specialties Corp. and Ennar Latex, Inc. accounting for 39%,
24% and 16% 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.
See "Risk Factors--Dependence on Suppliers."
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. See "Risk Factors--Protection of Intellectual Property."
The Company owns certain brand names and trademarks used in its business,
including GLOSPAN(R) and CLEERSPAN(R).
Manufacturing
General. 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.
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
42
<PAGE>
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 10.6 million pounds of fine
denier spandex fiber annually using the dry-spin process. The Company's dry-
spin operations run 24 hours a day, 7 days a week, 52 weeks a year.
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.
Facilities
The following table sets forth certain information with respect to the
Company's principal facilities.
<TABLE>
<CAPTION>
Square
Location Footage Owned/Leased Principal Function
-------- ------- ------------ --------------------------
<S> <C> <C> <C>
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.................
</TABLE>
The Company believes that its facilities are adequate and suitable for the
purposes for which they are utilized by the Company. The Company is currently
expanding production capacity at its Tuscaloosa, Alabama fine denier spandex
fiber manufacturing facility in response to existing demand from current
customers. See "--Tuscaloosa Plant Expansion."
Employees
As of September 30, 1998, the Company had approximately 900 employees. Of
these, approximately 175 are salaried employees and 725 are hourly workers. Of
the approximately 175 salaried employees, 60 perform manufacturing functions,
50 are technical employees, 25 perform sales and marketing functions and 40
perform administrative functions. None of the Company's employees are covered
by a collective bargaining agreement. The Company believes its relationships
with its employees are good.
43
<PAGE>
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, except as would not be expected to have a
material adverse effect on the Company's operations, financial condition or
competitive position.
During 1996 and 1997, respectively, the Company spent approximately $0.3
million and $0.9 million on environmental, health and safety compliance
activities at its three operating locations. The Company estimates that
approximately $1.0 million will be spent in 1998 on such activities, including
efforts to resolve pending compliance issues relating to air emissions and
wastewater discharges from the Company's Fall River, Massachusetts facility.
Although the Company's management believes its estimate of 1998 costs to be
reasonable, there can be no assurances that actual expenditures will not
exceed the estimated amount.
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.
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 and its ability to
meet its obligations under the Notes. The Merger Agreement provides that the
Indemnification Escrow Fund will be available to indemnify the Company 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. This
indemnity expires on December 31, 2001. See "Certain Relationships and Related
Transactions--Recapitalization" and "Risk Factors--Environmental Compliance."
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
alleges an international conspiracy to restrain trade in, and fix prices of,
the thread in the U.S. Neither the Company nor Globe Manufacturing has been
named as a defendant in the case. The Joint Venture has alleged in its motion
to dismiss that not all parties to the conspiracy have been joined. There can
be no assurance that the Company will not be named in the future. The Merger
Agreement provides that the Indemnification Escrow Fund will be available to
indemnify the Company 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. This indemnity expires on December 31, 2001.
44
<PAGE>
On March 31, 1998 a petition was filed with the U.S. Department of Commerce
alleging subsidization and dumping of Indonesian extruded latex thread. The
Department of Commerce is currently conducting an investigation into the
allegations. The proceedings could result in additional duties being levied on
extruded latex thread imported from Indonesia. During 1996 and 1997, the
Company purchased approximately $5.9 million and $9.9 million 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 Notes.
45
<PAGE>
MANAGEMENT
Executive Officers and Directors
The executive officers and directors of the Company and Globe Manufacturing,
and their ages as of July 14, 1998 are set forth below:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Thomas A. Rodgers, Jr... 84 Chairman
Thomas A. Rodgers, III.. 53 President and Chief Executive Officer, Director
Lawrence R. Walsh....... 46 Vice President, Finance and Administration
Americo Reis............ 64 Vice President, Operations
Robert L. Bailey........ 60 Vice President, Sales and Marketing
William J. Girrier...... 42 Director of Marketing and Business Development
Kevin T. Cardullo....... 38 Director of Finance and Accounting
Andrew W. Code.......... 39 Director
Peter M. Gotsch......... 34 Director
Edward M. Lhee.......... 28 Director
</TABLE>
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 Globe Holdings in 1945. He has served as
Chairman since 1945, and served as President from 1945 to 1992.
Thomas A. Rodgers, III, is the son of Thomas A. Rodgers, Jr., and has served
as President of the Company since 1992. 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.
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.
Americo Reis joined the Company in 1959, and has served as the Company's
Vice President, Operations since 1982. From 1957 to 1959, he served in the
U.S. Army and from 1954 to 1957, he was employed by Goodyear Tire & Rubber 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.
William J. Girrier has been with the Company since 1990, first 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.
Kevin T. Cardullo has served as the Company's Director of Finance and
Accounting since 1992. 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.
46
<PAGE>
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 Company's directors serve a one-year term of office. The Company's
president, treasurer and clerk serve one-year terms of office, and all of the
Company's remaining officers serve terms of one year or less (unless otherwise
provided by the directors).
The following table summarizes the compensation paid by Globe Holdings and
its subsidiaries to the Company's Chief Executive Officer and four other most
highly compensated executive officers at December 31, 1997 (collectively, the
"Named Executive Officers") for services rendered to the Company in 1997.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
---------------------------- ------------
Other Annual Securities All Other
Name and Principal Salary Bonus Compensation Underlying Compensation
Position Year ($) ($) (1) Options/SARs ($) (2)
- ------------------ ---- ------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Thomas A. Rodgers, Jr... 1997 759,668 5,000 -- -- 198,796
Chairman
Thomas A. Rodgers, III.. 1997 549,042 197,500 -- 11,250 1,900
President
Americo Reis............ 1997 211,982 72,500 -- 3,750 1,900
Vice President,
Operations
Lawrence R. Walsh....... 1997 218,889 72,500 -- 3,750 3,166
Vice President, Finance
and Administration
Robert L. Bailey........ 1997 176,828 72,500 -- 3,750 1,900
Vice President, Sales
and Marketing
</TABLE>
- ----------------------
(1) Other Annual Compensation was not reportable.
(2) Reflects reimbursement of premiums for life insurance for Thomas A.
Rodgers, Jr. and Company contributions under a 401(k) plan for the other
Named Executive Officers.
The following table sets forth information with respect to all options
granted in fiscal 1997 to the Named Executive Officers.
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants Grant Date Value
- ------------------------------------------------------------------------- ----------------
Percent of
Number of Total
Securities Options/SARs
Underlying Granted to Exercise or Grant Date
Options/SARs Employees in Base Price Expiration Present Value
Name Granted (1) Fiscal Year ($/Sh) Date (2) ($)
- ---- ------------ ------------ ----------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Thomas A. Rodgers, Jr... -- -- -- -- --
Thomas A. Rodgers, III.. 11,250 50.0% 30.00 12/31/07 2,468,700
Americo Reis............ 3,750 16.7% 30.00 12/31/07 822,900
Lawrence R. Walsh....... 3,750 16.7% 30.00 12/31/07 822,900
Robert L. Bailey........ 3,750 16.7% 30.00 12/31/07 822,900
</TABLE>
- ----------------------
(1) The options vested upon consummation of the Recapitalization and the
Merger, and are exercisable for common stock and preferred stock of Globe
Holdings pursuant to the Recapitalization. See "Certain Relationships and
Related Transactions--Recapitalization." The Company expects to implement
a new stock option plan.
(2) The Black-Scholes option pricing model was used to determine the grant
date present value of the options. The grant date present value of the
options was calculated to be $219.44 per share, based on an expected life
of 5 years and an assumed risk-free interest rate of 5.7%.
47
<PAGE>
The following table sets forth information with respect to all options
exercised in fiscal 1997 and the year-end value of unexercised options held by
the Named Executive Officers.
Aggregated Option/SAR Exercises in Last Fiscal Year And
Fiscal Year-End Option/SAR Values
<TABLE>
<CAPTION>
Number of
Securities
Underlying
Unexercised Value of
Options/SARs Unexercised In-the-
at Fiscal Money Options/SAR's
Year End at Fiscal Year-End
------------- -------------------
Shares Acquired Value Exercisable/
on Exercise Realized Unexercisable Exercisable/
Name (#) ($) (#) Unexercisable ($)
- ---- --------------- -------- ------------- -------------------
<S> <C> <C> <C> <C>
Thomas A. Rodgers, Jr... -- -- -- --
Thomas A. Rodgers, III.. -- -- 11,250/11,250 2,385,000/2,385,000
Americo Reis............ -- -- 3,750/ 3,750 795,000/ 795,000
Lawrence R. Walsh....... -- -- 3,750/ 3,750 795,000/ 795,000
Robert L. Bailey........ -- -- 3,750/ 3,750 795,000/ 795,000
</TABLE>
Pension Plans
Globe maintains a Non-Qualified Pension Plan and a Deferred Compensation
Plan, pursuant to which each of Thomas A. Rodgers, III, Americo Reis, 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.
<TABLE>
<CAPTION>
Estimated Annual Benefit Upon
Retirement at Age 65
-------------------------------
Non-Qualified Deferred
Name Pension Plan Compensation Plan
---- ------------- -----------------
<S> <C> <C>
Thomas A. Rodgers, Jr. (1)................ $ -- $ --
Thomas A. Rodgers, III.................... $206,400 $90,000
Americo Reis.............................. $ 86,400 $25,000
Lawrence R. Walsh......................... $104,000 $15,000
Robert L. Bailey.......................... $ 96,000 $20,000
</TABLE>
- ----------------------
(1) Thomas A. Rodgers, Jr. does not participate in the Non-Qualified Pension
Plan or the Deferred Compensation Plan.
Employment Agreements
Each of Messrs. Thomas A. Rodgers, III, Americo Reis, 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 Globe Manufacturing pursuant to the Asset Drop
Down. The Employment Agreements provide for annual base salaries for Messrs.
Rodgers, Reis, Walsh and Bailey of at least $549,000, $212,000, $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.
48
<PAGE>
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 or the Initial Purchaser.
Recapitalization
The consummation of the Initial Offering occurred shortly after, and was
conditioned upon, the effectiveness of the Recapitalization. The
Recapitalization was effected pursuant to the Merger Agreement between the
Company and MergerCo, a newly formed affiliate of Code Hennessy & Simmons. In
connection with the Merger and the Recapitalization: (i) the Company
transferred substantially all of its assets and liabilities to Globe
Manufacturing 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; (iii) CHS made the CHS Loan in the
amount of $25.0 million; and (iv) Globe Manufacturing consummated the Initial
Senior Subordinated Note Offering. Pursuant to the Merger Agreement: (i)
MergerCo merged with and into the Company, with the Company 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 the Company outstanding prior to the Merger converted into or
became exercisable for New Common Stock and New Preferred Stock; (v) holders
of the remaining stock of the Company outstanding prior to the Merger received
the Cash Merger Consideration (including the payment by the Company of fees
and expenses on their behalf) in an aggregate amount equal to $315.0 million
less (x) the amount of the Company's 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. The proceeds to the
Company from the Initial Offering were used to repay the CHS Loan. Under the
Merger Agreement, the Cash Merger Consideration is subject to adjustment based
on consolidated net asset value as of the date of the Merger.
The Escrow Amount consists 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
Adjustment Escrow Fund is required to be applied and/or released upon the
determination of the final closing date consolidated net asset value of the
Company and the balance of 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 the Company and certain of its related parties for all liabilities
and other losses arising from, among other things, (i) any breach of
representations, warranties or pre-closing covenants of the Company 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 the Company's 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 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 the Company, the Pre-Merger Shareholders are not required to
indemnify the Company 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.
49
<PAGE>
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, the Company's
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 the Company 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 the Company on a fully-diluted basis. In addition,
Messrs. Bailey, Reis and Walsh beneficially owned, in the aggregate,
approximately 2% of the common stock of the Company 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, Globe Manufacturing 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 Globe
Manufacturing 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 Globe Manufacturing paid to CHS
Management $3.0 million at the closing of the Transactions as compensation for
services rendered by CHS Management to Globe Manufacturing in connection with
the Transactions. The Management Agreement also provides that when and as
Globe Manufacturing consummates the acquisition of other businesses, Globe
Manufacturing 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 Globe Manufacturing in
connection with the consummation of such acquisition. The Indenture provides
that no payments shall be made to CHS pursuant to the Management Agreement or
otherwise in respect of management, advisory or similar services if an Event
of Default exists under the Indenture. The term of the Management Agreement is
five years, subject to automatic renewal unless either CHS Management or Globe
Manufacturing elects to terminate. Globe Manufacturing believes that the fees
to be paid to CHS Management for the professional services to be rendered are
at least as favorable to Globe Manufacturing as those which could be
negotiated with an unrelated third party. Globe Manufacturing 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 Manufacturing under the Management Agreement.
Securityholders Agreement
In connection with the Recapitalization, the Company's shareholders entered
into a Securityholders Agreement. This agreement provides, among other things,
for the nomination of and voting for at least five directors of the Company by
the Company's shareholders. The Securityholders Agreement also provides that
Code Hennessy & Simmons will be entitled to appoint all of the directors of
the Company. The following individuals have been initially designated by Code
Hennessy & Simmons to serve as directors: Thomas A. Rodgers, Jr., Thomas A.
Rodgers, III, Andrew W. Code, Peter M. Gotsch and Edward M. Lhee. See
"Management."
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
the Company and Code Hennessy & Simmons which provides for, among other
things, repurchase rights with respect to the the Company securities held by
them upon termination of employment (other than retirement) and restrictions
on transfer of such securities.
50
<PAGE>
Registration Agreement
In connection with the Recapitalization, the Company's 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 the Company 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
the Company. The Company 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 the Company 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 the Company.
Executive Loan
In December 1992, the Company made a loan to Thomas A. Rodgers, III to
assist him in paying taxes incurred in a previous recapitalization of the
Company. As of June 30, 1998, the balance of such loan, including accrued
interest, was $285,397. The loan was repaid prior to the Merger.
Non-Competition Agreement
In connection with the Merger and the Recapitalization, each of the Named
Executive Officers entered into a Non-Competition Agreement with the Company
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 the Company or its subsidiaries, or to hire any person who was an
employee of the Company or any of its subsidiaries within twelve months after
such person's employment with the Company or any subsidiary is terminated. The
Named Executive Officers also agreed to maintain the confidentiality of
information regarding the business and affairs of the Company and its
subsidiaries.
Sale Bonus
In February 1998, the Company instituted a management reward program
pursuant to which each of the Named Executive Officers was entitled to receive
a cash bonus upon consummation of the Merger. The amount of the bonus paid was
based on a percentage of the consideration paid in connection with the Merger.
Pursuant to the program, Thomas A. Rodgers, Jr. and Thomas A. Rodgers, III
received an aggregate of $825,000; and Messrs. Reis, Walsh and Bailey each
received $412,500. In addition, Messrs. Cardullo and Girrier each received a
bonus of $50,000 upon consummation of the Merger.
Investment Banking Fees
Prior to the Merger, certain affiliates of Goldman, Sachs & Co. owned an
aggregate of approximately 46% of the common stock of the Company on a fully-
diluted basis prior to the consummation of the Merger, and three members of
the Board of Directors of the Company prior to the Merger were affiliates of
Goldman, Sachs & Co. Goldman, Sachs & Co. acted as financial advisor to the
Company in connection with the Transactions, for which it received a fee.
Tax Sharing Agreement
The operations of Globe Manufacturing are included in the Federal income tax
returns filed by the Company. Prior to the closing of the Initial Offering,
Globe Manufacturing and the Company entered into a Tax
51
<PAGE>
Sharing Agreement ("Tax Sharing Agreement") pursuant to which the Company
agreed to advance to the Company so long as the Company files consolidated
income tax returns that include Globe Manufacturing (i) payments for Globe
Manufacturing's share of income taxes assuming Globe Manufacturing 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 the Company in
respect of franchise or similar taxes and governmental charges incurred by it
relating to the business, operations or finances of Globe Manufacturing.
Consulting Agreement
In connection with the Merger and the Recapitalization, Thomas A. Rodgers,
Jr. entered into a consulting agreement with Globe Manufacturing, pursuant to
which he will be compensated at a rate of $100,000 per annum, and agreed to
perform special projects for Globe Manufacturing and such other matters as
Globe Manufacturing's Board of Directors or officers reasonably request.
CHS Loan
In connection with the Recapitalization, Code Hennessy & Simmons extended
the CHS Loan to Globe Holdings in the principal amount of $25.0 million. The
CHS Loan was repaid with the proceeds to Globe Holdings from the Initial
Offering. The CHS Loan bore interest at a rate of 14% per annum and would have
matured on July 31, 2009.
52
<PAGE>
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of September 15, 1998
regarding the beneficial ownership of the Company's capital stock 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.
<TABLE>
<CAPTION>
Common Stock Preferred Stock
--------------------- ---------------------
Name of Beneficial Owner Number (1) Percent(1) Number (1) Percent(1)
------------------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Code, Hennessy & Simmons III,
L.P. (2).................... 1,647,437 75.6 21,999.6 75.6
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
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
William J. Girrier........... -- -- -- --
Kevin T. Cardullo............ -- -- -- --
Andrew W. Code (5)........... 1,647,437 75.6 21,999.6 75.6
Peter M. Gotsch (5).......... 1,647,437 75.6 21,999.6 75.6
Edward M. Lhee............... 1,977 * 26.4 *
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 (9
persons).................... 1,806,671 80.4 24,126 80.4
</TABLE>
- --------
* Less than 1%
(1) Includes shares of Common Stock and Preferred Stock subject to options
which are exercisable within 60 days of September 15, 1998.
(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.
(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.
53
<PAGE>
DESCRIPTION OF SENIOR CREDIT FACILITY
General. As part of the Transactions, Globe Manufacturing entered into the
Senior Credit Facility with Bank of America National Trust and Savings
Association, as a lender and as administrative agent, BancAmerica Robertson
Stephens, as arranger, Merrill, Lynch, Pierce, Fenner & Smith, Inc. as
syndication agent, and certain other financial institutions (the "Lenders").
The Senior Credit Facility provides for two term loans to Globe
Manufacturing for $60.0 million and $55.0 million ("Term Loan A" and "Term
Loan B," respectively, and collectively, the "Term Loans") and revolving loans
to Globe Manufacturing for up to $50.0 million (including letters of credit)
(the "Revolving Loan" and, together with the Term Loans, the "Loans"). Subject
to certain restrictions, the Senior Credit Facility may be used to finance the
Transactions and for working capital and general corporate purposes of Globe
Manufacturing and its subsidiaries.
As of January 28, 1999, in response to lower than expected earnings, 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 the term loans and revolving loans were increased and (iii) the
management fee due to an affiliate of Code Hennessy & Simmons LLC may only be
paid if certain leverage tests are met. This increase in interest rates will
increase the Company's interest expense by approximately 3%, which is not
expected to have a material effect on the Company's operating results.
Repayment. Term Loan A and the Revolving Loan must be repaid six and one-
half years following the date of the closing of the Senior Credit Facility.
Term Loan B must be repaid eight years following the date of the closing of
the Senior Credit Facility. Loans made pursuant to the Senior Credit Facility
may be borrowed, repaid and, in the case of the Revolving Loans, reborrowed,
without premium or penalty (other than prepayments of Eurodollar Loans (as
defined in the Senior Credit Facility) which may be subject to customary
breakage costs), from time to time until maturity, subject to the satisfaction
of certain conditions on the date of any such borrowing. In addition, the
Senior Credit Facility provides for mandatory repayments (with corresponding
permanent reductions on Revolving Loan commitments) of any outstanding
borrowings out of any proceeds received from a sale of assets (other than
sales of inventory in the ordinary course of business, sales of certain
obsolete assets, and certain other exceptions), net cash proceeds of permitted
debt and equity issuances (subject to certain exceptions), net cash proceeds
from insurance recovery and condemnation events (subject to certain
reinvestment rights) and 75% of annual excess cash flow, reducing to 50% when
the ratio of total debt to EBITDA is less than 3.75:1.
Security; Guaranty. The obligations of Globe Manufacturing under the Senior
Credit Facility are guaranteed by Globe Holdings and will be guaranteed by
each of Globe Manufacturing's future direct and indirect domestic subsidiaries
and, so long as there are no adverse tax consequences, foreign subsidiaries.
The obligations of Globe Manufacturing under the Senior Credit Facility and
each of the guarantors under its guarantee is or will be secured by
substantially all of the assets of such person and the capital stock of
subsidiaries owned by Globe Manufacturing and the guarantors.
Interest. At Globe Manufacturing's option, the interest rates per annum
applicable to the loans under the Senior Credit Facility will be a fluctuating
rate of interest measured by reference to one or a combination (at Globe
Manufacturing's election) of the following: (i) the Base Rate (as defined in
the Senior Credit Facility), plus the applicable borrowing margin, or (ii) the
relevant Eurodollar Rate (as defined in the Senior Credit Facility), plus the
applicable borrowing margin. The applicable borrowing margin under the Senior
Credit Facility for Base Rate-based borrowings is 2.00% for the Term Loan A
and the Revolving Loan and 2.50% for the Term Loan B; the applicable borrowing
margin under the Senior Credit Facility for Eurodollar Rate-based borrowings
is 3.00% for the Term Loan A and the Revolving Loan and 3.50% for the Term
Loan B, subject to adjustment in each case based on the Company's Consolidated
Leverage Ratio (defined in the Senior Credit Facility as the ratio of
Consolidated Indebtedness (as defined in the Senior Credit Facility) to
Consolidated EBITDA (as defined in the Senior Credit Facility)).
54
<PAGE>
Fees. Globe Manufacturing has agreed to pay certain fees in connection with
the Senior Credit Facility, including: (i) letter of credit fees; (ii) agency
fees; and (iii) commitment fees. Commitment fees are payable at a rate per
annum of 0.5% on the undrawn amounts of the Senior Credit Facility, subject to
adjustment based on the Company's Leverage Ratio.
Covenants. The Senior Credit Facility contains negative covenants which,
among other things, restrict the ability of Globe Manufacturing and its
subsidiaries (subject to certain exceptions) to incur liens, transact with
affiliates, incur indebtedness, declare dividends or redeem or repurchase
capital stock, make loans and investments, engage in mergers, acquisitions and
asset sales, acquire assets, stock, or debt securities of any person, have
additional subsidiaries, amend its articles of incorporation and bylaws, and
make capital expenditures. The Senior Credit Facility also requires Globe
Manufacturing and its restricted subsidiaries to satisfy certain customary
affirmative covenants, including financial reporting, notice provisions, books
and records, inspection of property, maintenance of property and insurance,
maintenance of corporate rights, payment of taxes, contributions from Globe
Holdings to Globe Manufacturing, cash management systems, the pledges of
additional collateral, security and guarantees, use of proceeds and payment of
dividends on the Preferred Stock, and to make certain customary
indemnifications to the Lenders and the administrative agent under the Senior
Credit Facility.
The Senior Credit Facility further requires Globe Holdings and Globe
Manufacturing to maintain compliance with three financial covenants which are
tested at the end of each fiscal quarter of Globe Holdings (or, in the case of
the Consolidated Interest Coverage Ratio for the first fiscal year, the period
from the Closing Date to the last day of the fiscal quarter of Globe Holdings
then last ended). The Consolidated Interest Coverage Ratio (as defined in the
Senior Credit Facility) prohibits Globe Holdings and Globe Manufacturing from
exceeding specified minimum ratios (which increase over time) of Consolidated
EBITDA (as defined in the Senior Credit Facility) for the applicable period to
Consolidated Interest Expense (as defined in the Senior Credit Facility) for
such period. The second financial test, the Consolidated Fixed Charge Coverage
Ratio (as defined in the Senior Credit Facility), requires Globe Holdings and
Globe Manufacturing to maintain a minimum ratio of 1.10:1.00 for any
applicable period ending after December 31, 1999 of Consolidated EBITDA (as
adjusted pursuant to the Senior Credit Facility) to Consolidated Fixed Charges
(as defined in the Senior Credit Facility). Finally, the Consolidated Leverage
Ratio (as defined in the Senior Credit Facility) prohibits Globe Holdings and
Globe Manufacturing from exceeding specified ratios (which decline over time)
of Consolidated Indebtedness (as defined in the Senior Credit Facility) for
the applicable period to Consolidated EBITDA for such period. The Senior
Credit Facility provides that from January 28, 1999 until December 31, 1999 a
Senior Leverage Ratio (as defined in the Senior Credit Facility) will be used
in place of the Consolidated Leverage Ratio.
Events of Default. The Senior Credit Facility contains customary events of
default, including payment defaults, breach of representations and warranties,
covenant defaults, certain events of bankruptcy and insolvency, ERISA
violations, judgment defaults, cross-default to certain other indebtedness,
and a change in control of Globe Holdings or Globe Manufacturing.
55
<PAGE>
DESCRIPTION OF SENIOR SUBORDINATED NOTES
The Senior Subordinated Notes are limited in aggregate principal amount to
$300.0 million, of which $150.0 million was issued in the Initial Senior
Subordinated Note Offering, and will mature on August 1, 2008. The Senior
Subordinated Notes were issued pursuant to the Senior Subordinated Note
Indenture, and are general unsecured obligations of Globe Manufacturing,
subordinated in right of payment to all present and future Senior Debt (as
defined in the Senior Subordinated Note Indenture) of Globe Manufacturing. The
Senior Subordinated Notes are unconditionally guaranteed on a senior
subordinated basis by each of Globe Manufacturing's future Restricted Domestic
Subsidiaries (as defined in the Senior Subordinated Note Indenture). Interest
on the Senior Subordinated Notes accrues at the rate of 10% per annum from the
Issue Date and will be payable semi-annually in arrears on each February 1 and
August 1, commencing February 1, 1999, to the holders of record on the
immediately preceding January 15 and July 15, respectively. Additional Senior
Subordinated Notes may be issued from time to time after the Initial Senior
Subordinated Note Offering, subject to the provisions of the Senior
Subordinated Note Indenture.
The Senior Subordinated Notes are not redeemable at Globe Manufacturing's
option prior to August 1, 2003. Thereafter, the Senior Subordinated Notes are
subject to redemption at any time at the option of Globe Manufacturing, in
whole or in part, upon not less than 30 nor more than 60 days notice, at the
redemption prices (expressed as percentages of principal amount) set forth in
the Senior Subordinated Note Indenture plus accrued and unpaid interest
thereon to the applicable redemption date.
Notwithstanding the foregoing, at any time prior to August 1, 2001, Globe
Manufacturing may on any one or more occasions redeem from the net proceeds of
one or more Equity Offerings (as defined in the Senior Subordinated Note
Indenture) up to an aggregate of 35% of the aggregate principal amount of the
Senior Subordinated Notes at a redemption price of 110.0% of the principal
amount thereof, plus accrued and unpaid interest thereon to the redemption
date; provided that at least $97.5 million in aggregate principal amount of
the Senior Subordinated Notes issued remain outstanding immediately after the
occurrence of such redemption.
Upon the occurrence of a Change of Control (as defined in the Senior
Subordinated Note Indenture), each holder of Senior Subordinated Notes will
have the right to require Globe Manufacturing to repurchase all or any part
(equal to $1,000 or an integral multiple thereof) of such holder's Senior
Subordinated Notes at an offer price in cash equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest thereon to the date
of repurchase. In addition, upon the occurrence of certain asset sales,
holders of Senior Subordinated Notes may have the right to require Globe
Manufacturing to repurchase their Senior Subordinated Notes at an offer price
in cash equal to 100% of the aggregate principal amount thereof, plus accrued
and unpaid interest thereon to the date of repurchase.
The Senior Subordinated Note Indenture contains certain covenants that
limit, among other things, the ability of Globe Manufacturing and its
Restricted Subsidiaries to: (i) incur additional indebtedness; (ii) issue
Disqualified Stock; (iii) make certain restricted payments; (iv) grant liens
on assets; (v) merge, consolidate or transfer substantially all of their
assets; (vi) enter into transactions with Related Persons; (vii) impose
restrictions on any Restricted Subsidiary's ability to pay dividends or make
certain other payments to Globe Manufacturing and its Restricted Subsidiaries;
(viii) enter into certain guarantees; (ix) sell assets; and (x) issue capital
stock of Restricted Subsidiaries. The Senior Subordinated Note Indenture
contains certain customary events of default, which include the failure to pay
interest and principal, the failure to comply with certain covenants in the
Senior Subordinated Notes or the Senior Subordinated Note Indenture, a default
under certain indebtedness, the imposition of certain final judgements and
certain events occurring under bankruptcy laws.
Globe Manufacturing has agreed to file within 60 days after July 31 and to
cause to become effective within 150 days of July 31 (or later under certain
circumstances) a registration statement under the Securities Act with respect
to an offer to holders to exchange the Senior Subordinated Notes (and any
related guarantees) for registered notes (and any related guarantees). In the
event the registration requirements are not met, a registration default shall
be deemed to have occurred and additional interest (as defined in the Senior
Subordinated Note Indenture) will become payable with respect to the Senior
Subordinated Notes until such registration default has been cured.
Concurrent with this Exchange Offer, Globe Manufacturing is offering to
exchange $1,000 principal amount at maturity of its New Senior Subordinated
Notes for each $1,000 principal amount at maturity of its Old Senior
Subordinated Notes.
56
<PAGE>
DESCRIPTION OF THE NEW NOTES
The New Notes offered hereby are to be issued as a separate series under an
Indenture dated as of August 6, 1998 (the "Indenture") between the Company and
Norwest Bank Minnesota, National Association, as trustee (the "Trustee"). The
form and terms of the New Notes are the same as the form and terms of the Old
Notes (which they replace) except that (i) the New Notes bear a Series B
designation and a different CUSIP number than the Old Notes, (ii) the New
Notes have been registered under the Securities Act and, therefore, will not
bear legends restricting the transfer thereof, and (iii) the holders of New
Notes will not be entitled to certain rights under the Registration Rights
Agreement, including the provisions providing for Liquidated Damages in
certain circumstances relating to the timing of the Exchange Offer, which
rights will terminate when the Exchange Offer is consummated. The Old Notes
issued in the Initial Offering and the New Notes offered hereby are referred
to collectively as the "Notes." The following summary of the material
provisions of the Indenture does not purport to be complete and is subject to,
and is qualified in its entirety by reference to, all provisions of the
Indenture, a copy of which can be obtained from the Trustee upon request. Upon
the issuance of the New Notes, if any, or the effectiveness of the Shelf
Registration Statement, the Indenture will be subject to and governed by the
provisions of the Trust Indenture Act of 1939 (the "Trust Indenture Act" ).
The definitions of certain terms used in the following summary are set forth
below under "--Certain Definitions." Wherever particular sections or defined
terms of the Indenture not otherwise defined herein are referred to, such
Sections or defined terms shall be incorporated herein by reference, and those
terms made a part of the Indenture by the Trust Indenture Act also are
incorporated herein by reference.
General
The Notes, which mature on August 1, 2009, will be limited to $49,086,000 in
aggregate principal amount at maturity, all of which will be issued on the
Issue Date. The Notes will not be entitled to any sinking fund. The Notes will
be redeemable at the option of the Company as described below under "--
Optional Redemption."
The Notes will be issued at a discount to their aggregate principal amount
at maturity. The Notes will accrete in value until August 1, 2003 at a rate of
14% per annum, compounded semi-annually on August 1 and February 1 of each
year to an aggregate principal amount of $49,086,000. Cash interest on the
Notes will not accrue prior to August 1, 2003. Thereafter, the Notes will bear
interest at a rate of 14% per annum payable semiannually in arrears on
February 1 and August 1 of each year commencing on February 1, 2004 until the
principal thereof is paid or made available for payment to the Holders of
record at the close of business on the immediately preceding January 15 or
July 15, respectively. Interest (and accretion in value prior to August 1,
2003) will be computed on the basis of a 360-day year comprised of twelve 30-
day months. Under certain circumstances, Liquidated Damages (as defined) may
be payable with respect to the Notes as described under "--Exchange Offer;
Registration Rights."
Principal, premium, if any, and interest on the Notes will be payable at the
office or agency of the Trustee maintained for such purpose within the City
and State of New York or, at the option of the Company, payment of interest
may be made by check mailed to the Holders of the Notes at their respective
addresses set forth in the register of Holders of Notes; provided that all
payments of principal, premium, if any, and interest with respect to Notes the
Holders of which have given wire transfer instructions to the Company will be
required to be made by wire transfer of immediately available funds to the
accounts specified by the Holders thereof. Until otherwise designated by the
Company, the Company's office or agency in New York will be the office of the
Trustee maintained for such purpose. The Notes will be issued in denominations
of $1,000 and integral multiples thereof.
All references herein to payments of principal, premium, if any, and
interest on the Notes shall be deemed to include any applicable Liquidated
Damages (as defined) that may become payable in respect of the Notes. See "--
Exchange Offer; Registration Rights."
57
<PAGE>
Original Issue Discount
The Notes are being issued at a substantial discount from their principal
amount. Consequently, holders generally will be required to include amounts in
gross income for U.S. Federal income tax purposes in advance of receipt of any
cash payment on the Notes to which the income is attributable. In addition,
the Notes will be subject to the "applicable high yield discount obligation"
rules under the Internal Revenue Code of 1986, as amended, which will defer
and, in part, eliminate the Company's ability to deduct original issue
discount that accrues with respect to the Notes. Prospective investors should
consult their own tax advisors with respect to the application of the original
discount rules and the "applicable high yield discount obligation" rules
(including the limited availability of a dividends received deduction for a
corporate holder). See "Certain United States Federal Tax Considerations" for
a more detailed discussion of the U.S. Federal income tax considerations
relevant to holders with respect to the purchase, ownership and disposition of
the Notes.
If a bankruptcy case is commenced by or against the Company under the United
States Bankruptcy Code (the "Bankruptcy Code") after the issuance of the
Notes, the claim of a holder of Notes with respect to the principal amount
thereof will likely be limited to an amount equal to the sum of (i) the issue
price of the Notes and (ii) the original issue discount that is not deemed to
constitute "unmatured interest" for the purposes of the Bankruptcy Code. Any
original issue discount that was not amortized as of any such bankruptcy
filing would likely constitute "unmatured interest."
Ranking
The indebtedness evidenced by the Notes will represent general unsecured
obligations of the Company. The Notes will rank pari passu in right of payment
with all existing and future Senior Debt of the Company and will be senior in
right of payment to all existing and future Subordinated Debt of the Company.
The Notes will be effectively subordinated to any secured indebtedness of the
Company to the extent of the value of the assets securing such indebtedness.
The Company's only material asset is the capital stock of Globe Manufacturing,
all of which is pledged to secure obligations under the Senior Credit
Facility.
All of the operations of the Company are conducted through its Subsidiaries.
Claims of creditors of such Subsidiaries, including trade creditors, and
claims of preferred shareholders (if any) of such Subsidiaries generally will
have priority with respect to the assets and earnings of such Subsidiaries
over the claims of creditors of the Company, including the Holders of the
Notes. The Notes, therefore, will be effectively subordinated to creditors
(including trade creditors) and preferred shareholders (if any) of
Subsidiaries of the Company. As of September 30, 1998, on a pro forma basis
after giving effect to the Transactions, the Company's Subsidiaries would have
had Debt and other liabilities of $270.9 million (excluding unused commitments
of $44.2 million under the Senior Credit Facility). The Indenture permits the
Company and its Subsidiaries to incur additional debt, subject to certain
limitations.
As of September 30, 1998, the Company had no outstanding Senior Debt (other
than the Notes and its guarantee under the Senior Credit Facility). Although
the Indenture contains limitations on the amount of additional indebtedness
that the Company may incur, under certain circumstances the amount of such
indebtedness could be substantial and, in any case, such indebtedness may
constitute Senior Debt. See "--Certain Covenants--Incurrence of Debt and
Issuance of Preferred Stock."
Optional Redemption
The Notes will be redeemable at the option of the Company, in whole or in
part, at any time and from time to time on or after August 1, 2003 upon not
less than 30 nor more than 60 days notice, at the redemption prices (expressed
as percentages of principal amount at final maturity) set forth below plus
accrued and unpaid interest
58
<PAGE>
thereon to the applicable redemption date, if redeemed during the twelve-month
period beginning on August 1 of the years indicated below:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
2003.......................................................... 107.000%
2004.......................................................... 104.667%
2005.......................................................... 102.333%
2006 and thereafter........................................... 100.000%
</TABLE>
The Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
Optional Redemption with Net Proceeds of Equity Offerings
At any time prior to August 1, 2001, the Company may redeem up to 35% in
aggregate principal amount at maturity of the Notes at a redemption price of
114% of the Accreted Value thereof, together with Liquidated Damages, if any,
to the redemption date with the net cash proceeds of one or more Equity
Offerings, provided that not less than 65% of the aggregate principal amount
at maturity of the Notes remains outstanding immediately after the occurrence
of any such redemption.
Optional Redemption Following a Change of Control
At any time prior to August 1, 2003, the Notes may be redeemed, in whole but
not in part, at the option of the Company at any time within 180 days after a
Change of Control, at a redemption price equal to the sum of (i) 100% of the
Accreted Value thereof, together with Liquidated Damages, if any, to the
redemption date, plus (ii) the Applicable Premium.
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee on a pro rata basis, by lot
or by such method as the Trustee shall deem fair and appropriate; provided
that no Notes of $1,000 or less shall be redeemed in part. Notices of
redemption shall be mailed by first class mail at least 30 but not more than
60 days before the redemption date to each Holder of Notes to be redeemed at
its registered address. Notices of redemption may not be conditional. If any
Note is to be redeemed in part only, the notice of redemption that relates to
such Note shall state the portion of the principal amount thereof to be
redeemed. A new Note in principal amount equal to the unredeemed portion
thereof will be issued in the name of the Holder thereof upon cancellation of
the original Note. Notes called for redemption become due on the date fixed
for redemption. On and after the redemption date, interest ceases to accrue on
the Notes or portions of them called for redemption.
Change of Control
Upon the occurrence of a Change of Control, each Holder of Notes will have
the right to require the Company to repurchase all or any part (equal to
$1,000 or an integral multiple thereof) of such Holder's Notes pursuant to the
offer described below (the "Change of Control Offer") at an offer price in
cash, on or prior to August 1, 2003, equal to 101% of the Accreted Value
thereof, together with Liquidated Damages, if any, to the date of repurchase
and thereafter at a price in cash equal to 101% of the aggregate principal
amount thereof plus accrued and unpaid interest thereon, if any, to the date
of purchase (the "Change of Control Payment"). Within 30 days following any
Change of Control, the Company will mail a notice to each Holder describing
the transaction or transactions that constitute the Change of Control and
offering to repurchase Notes on the date specified in such notice, which date
shall be no earlier than 30 days and no later than 60 days from the date such
notice is mailed (the "Change of Control Payment Date"), pursuant to the
procedures required by the Indenture and described in such notice. The Company
will not be required to make a Change of Control Offer if all of the Notes
have been called for redemption pursuant to the provisions described under "--
Optional Redemption."
59
<PAGE>
On the Change of Control Payment Date, the Company will, to the extent
lawful, (i) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (ii) deposit with the Trustee an
amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered and (iii) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating
the aggregate principal amount of Notes or portions thereof being purchased by
the Company. The Trustee will promptly mail to each Holder of Notes so
tendered the Change of Control Payment for such Notes, and the Trustee will
promptly authenticate and mail (or cause to be transferred by book entry) to
each Holder a new Note equal in principal amount to any unpurchased portion of
the Notes surrendered, if any; provided, that each such new Note will be in a
principal amount of $1,000 or an integral multiple thereof. The Indenture
provides that, prior to complying with the provisions of this covenant
(including the mailing of the notice referred to above), but in any event
within 90 days following a Change of Control, the Company will either repay in
full in cash all outstanding Senior Debt or obtain the requisite consents, if
any, under all agreements governing outstanding Senior Debt to permit the
repurchase of Notes required by this covenant and the Company's failure to
comply with this covenant shall constitute an Event of Default under the
Indenture. The Company will publicly announce the results of the Change of
Control Offer on or as soon as practicable after the Change of Control Payment
Date.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as
described above with respect to a Change of Control, the Indenture does not
contain provisions that permit the Holders of the Notes to require that the
Company repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar transaction.
The Senior Credit Facility restricts the ability of the Company to purchase
any Notes and certain other indebtedness of the Company, and also provides
that certain change of control events with respect to the Company would
constitute a default thereunder. Any future credit agreements or other
agreements relating to Senior Debt to which the Company becomes a party may
contain similar restrictions and provisions. In the event any such
restrictions would prohibit the Company from purchasing Notes upon a Change of
Control, the Company could seek the consent of its lenders to the purchase of
Notes or could attempt to refinance the borrowings that contain such
restrictions. If the Company does not obtain such a consent or repay such
borrowings, the Company will remain prohibited from purchasing Notes. In such
case, the Company's failure to purchase tendered Notes would constitute an
Event of Default under the Indenture which would, in turn, constitute a
default under the Senior Credit Facility. The Senior Subordinated Note
Indenture also requires Globe Manufacturing to repurchase the Senior
Subordinated Notes upon the occurrence of certain change of control events.
See "Description of Senior Credit Facility" and "Description of the Senior
Subordinated Notes."
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the Indenture applicable to a Change of Control Offer made by the
Company and purchases all Notes validly tendered and not withdrawn under such
Change of Control Offer.
The Change of Control provision of the Notes may in certain circumstances
make it more difficult or discourage a takeover of the Company and, as a
result, may make removal of incumbent management more difficult. The Change of
Control provision is a result of negotiations between the Company and the
Initial Purchaser.
The provisions of the Indenture would not necessarily afford Holders of the
Notes protection in the event of a highly leveraged transaction,
reorganization, restructuring, merger or similar transaction involving the
Company that may adversely affect Holders of the Notes.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries taken as a whole. Although
there is a developing body of case law interpreting the phrase "substantially
all," there is no precise established definition of the phrase under
applicable law. Accordingly, the ability of a Holder of Notes to require the
Company to repurchase such Notes as a result of a sale, lease, transfer,
conveyance or other disposition of less than all of the assets of the Company
and its Subsidiaries taken as a whole to another person or group may be
uncertain.
60
<PAGE>
The Company will comply with the applicable tender offer rules, including
the requirements of Rule 14e-1 under the Exchange Act, and all other
applicable securities laws and regulations in connection with any Change of
Control Offer. To the extent that the provisions of any securities laws or
regulations conflict with the "Change of Control" provisions of the Indenture,
the Company shall comply with the applicable securities laws and regulations
and shall not be deemed to have breached its obligations under the "Change of
Control" provisions of the Indenture by virtue thereof.
Certain Covenants
Incurrence of Debt and Issuance of Preferred Stock.
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any Debt
(including Acquired Debt) and that the Company will not issue any Disqualified
Stock and will not permit any of its Restricted Subsidiaries to issue any
shares of preferred stock; provided, however, that if no Default or Event of
Default shall have occurred and be continuing at the time or as a consequence
thereof, the Company may incur Debt (including Acquired Debt) or issue shares
of Disqualified Stock and any Restricted Subsidiary may incur Debt (including
Acquired Debt) or issue preferred stock if the Consolidated Fixed Charge
Coverage Ratio for the Company's most recently ended four full fiscal quarters
for which financial statements are available immediately preceding the date on
which such additional Debt is incurred or such Disqualified Stock or preferred
stock is issued would have been at least 1.75 to 1.0, determined on a pro
forma basis (including a pro forma application of the net proceeds therefrom),
as if the additional Debt had been incurred, or the Disqualified Stock or
preferred stock had been issued, as the case may be, at the beginning of such
four-quarter period.
The provisions of the first paragraph of this covenant will not apply to the
incurrence of any of the following items of Debt (collectively, "Permitted
Debt"):
(i) the incurrence by the Company or any of the Restricted Subsidiaries
of Debt under the Senior Credit Facility (or if the Senior Credit Facility
has matured or been terminated or repaid in whole or in part, any other
Credit Facility) in an aggregate principal amount at any time outstanding
not to exceed $165.0 million, which amount shall be reduced by (A) any
required permanent repayments pursuant to the provisions of the covenant
described under the caption "--Asset Sales" (which are accompanied by a
corresponding permanent commitment reduction thereunder), (B) the aggregate
amount of any Debt constituting Limited Originator Recourse outstanding
pursuant to clause (xi) below and (C) the principal amount of Debt
outstanding pursuant to clause (x) below;
(ii) (A) the incurrence by the Company and its Restricted Subsidiaries of
Existing Debt and (B) the incurrence by Globe Manufacturing of Debt
represented by the Senior Subordinated Notes outstanding on the Issue Date
(and any notes issued in exchange therefor) and any Guarantee by any
Restricted Subsidiary of such notes;
(iii) the incurrence by the Company of Debt represented by the Notes;
(iv) the incurrence by the Company or any of its Restricted Subsidiaries
of Permitted Refinancing Debt in exchange for, or the net proceeds of which
are used to refund, refinance or replace, Debt that was permitted by the
Indenture to be incurred;
(v) the incurrence by the Company or any of its Restricted Subsidiaries
of intercompany Debt between or among the Company and any of its Restricted
Subsidiaries; provided, however, that (A) if the Company is the obligor on
such Debt, such Debt is expressly subordinated to the prior payment in full
in cash of all Obligations with respect to the Notes, and (B) (1) any
subsequent issuance or transfer (other than any bona fide pledge under the
Senior Credit Facility) of Equity Interests that results in any such Debt
being held by a Person other than the Company or a Restricted Subsidiary
and (2) any sale or other transfer (other than any bona fide pledge under
the Senior Credit Facility) of any such Debt to a Person that is not either
the
61
<PAGE>
Company or a Restricted Subsidiary shall be deemed, in each case, to
constitute an incurrence of such Debt by the Company or such Subsidiary, as
the case may be;
(vi) the incurrence by the Company or any of its Restricted Subsidiaries
of Hedging Obligations that are incurred for the purpose of fixing or
hedging interest rate risk with respect to any floating rate Debt that is
permitted by the terms of the Indenture to be outstanding or for the
purpose of fixing or hedging currency exchange risk with respect to any
currency exchanges;
(vii) Capitalized Lease Obligations and Purchase Money Obligations of the
Company and its Restricted Subsidiaries not to exceed $5.0 million in
aggregate principal amount (or accrued value, as applicable) at any time
outstanding;
(viii) guarantees by the Company of Debt of any Restricted Subsidiaries
otherwise permitted by this covenant and guarantees by any of the Company's
Restricted Subsidiaries of Debt of the Company or any of the Company's
Restricted Subsidiaries;
(ix) Debt of the Company or any Restricted Subsidiary in respect of
performance bonds, bankers' acceptances, trade letters of credit, workers'
compensation or self-insurance, surety bonds and guarantees provided by the
Company or any Restricted Subsidiary in the ordinary course of business;
(x) Debt of Foreign Restricted Subsidiaries incurred for working capital
purposes in an aggregate principal amount outstanding at any one time not
to exceed the sum of 85% of the net book value of such Subsidiaries'
accounts receivable determined in accordance with GAAP and 60% of the net
book value of their inventory determined in accordance with GAAP and
guarantees by Foreign Restricted Subsidiaries of such Debt (which Debt
shall reduce the aggregate Debt permitted pursuant to clause (i) above in
the manner contemplated thereby);
(xi) the incurrence by (A) a Securitization Entity of Debt in a Qualified
Securitization Transaction that is Non-Recourse Debt with respect to the
Company and its other Restricted Subsidiaries (except for Standard
Securitization Undertakings and Limited Originator Recourse) or (B) the
Company or any Restricted Subsidiary of Debt constituting Limited
Originator Recourse (which Debt shall reduce the aggregate Debt permitted
pursuant to clause (i) above in the manner contemplated thereby);
(xii) Debt arising from agreements of the Company or a Restricted
Subsidiary of the Company providing for indemnification, adjustment of
purchase price, earn-out or other similar obligations, in each case,
incurred or assumed in connection with the disposition of any business,
assets or a Restricted Subsidiary of the Company, other than guarantees of
Debt incurred by any Person acquiring all or any portion of such business,
assets or Restricted Subsidiary for the purpose of financing such
acquisition;
(xiii) the incurrence by the Company of Subordinated Debt to repurchase
Equity Interests in the Company from Persons who have ceased to be bona
fide officers or employees of the Company or one or more of its Restricted
Subsidiaries ("Employee Notes"), provided that the instrument governing any
such Employee Note shall expressly provide that any payments in respect of
such note may be made only to the extent permitted in accordance with the
covenant described under "--Restricted Payments"; and
(xiv) the incurrence by the Company or any of its Restricted Subsidiaries
of additional Debt in an aggregate principal amount (or accrued value, as
applicable) at any time outstanding, including all Permitted Refinancing
Debt incurred to refund, refinance or replace any other Debt incurred
pursuant to this clause (xiv), not to exceed $40.0 million (which amount
may, but need not, be incurred in whole or in part under the Senior Credit
Facility).
For purposes of determining compliance with this covenant, in the event that
an item of Debt meets the criteria of more than one of the categories of
Permitted Debt described in clauses (i) through (xiv) above or is entitled to
be incurred pursuant to the first paragraph of this covenant, the Company
shall, in its sole discretion, classify such item of Debt in any manner that
complies with this covenant and such item of Debt will be treated as having
been incurred pursuant to only one of such clauses or pursuant to the first
paragraph hereof. Accrual of interest, the accretion of accrued value and the
payment of interest in the form of additional Debt will not be deemed to be an
incurrence of Debt for purposes of this covenant.
62
<PAGE>
Restricted Payments.
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, make any Restricted
Payment, unless, at the time of and after giving effect to such Restricted
Payment:
(i) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof;
(ii) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable four-quarter period, have been permitted
to incur at least $1.00 of additional Debt pursuant to the Consolidated
Fixed Charge Coverage Ratio test set forth in the first paragraph of the
covenant described above under the caption "--Incurrence of Debt and
Issuance of Preferred Stock"; and
(iii) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Restricted
Subsidiaries after the date of the Indenture (including Restricted Payments
permitted by clauses (i) and (v) of the next succeeding paragraph and
excluding the Restricted Payments permitted by the other clauses therein),
is less than or equal to the sum of (A) 50% of the Consolidated Net Income
of the Company (or if Consolidated Net Income shall be a loss, minus 100%
of such loss) earned during the period beginning on the first day of the
first fiscal quarter immediately following the Issue Date and ending on the
last day of the fiscal quarter immediately preceding the date the
Restricted Payment is made (the "Reference Date") (treating such period as
a single accounting period) plus (B) 100% of the aggregate net proceeds
(including the fair market value of property other than cash (determined in
good faith by the Board of Directors as evidenced by an Officers'
Certificate filed with the Trustee, except that in the event the value of
any non-cash consideration shall be $10.0 million or more, the value shall
be as determined based on an opinion or appraisal issued by an accounting,
appraisal or investment banking firm of national standing)) received by the
Company from any Person (other than a Subsidiary of the Company) from the
issuance and sale subsequent to the Issue Date of Equity Interests of the
Company (other than Disqualified Stock) or from the issue or sale of
Disqualified Stock or debt securities of the Company that have been
converted into such Equity Interests (other than Equity Interests (or
Disqualified Stock or convertible debt securities) sold to a Subsidiary of
the Company); plus (C) without duplication of any amounts included in
clause (B) above, 100% of the aggregate net cash proceeds of any equity
contribution received by the Company from a holder of the Company's Capital
Stock (excluding, in the case of clauses (B) and (C), any net cash proceeds
from an Equity Offering to the extent used to redeem the Notes and any net
cash proceeds received by the Company from the sale of Equity Interests of
the Company or equity contribution which has been financed, directly or
indirectly using funds (1) borrowed from the Company or any of its
Subsidiaries, unless and until and to the extent such borrowing is repaid
or (2) contributed, extended, guaranteed or advanced by the Company or by
any of its Subsidiaries), plus (D) to the extent that any Restricted
Investment that was made after the Issue Date is sold by Company or any
Restricted Subsidiary for cash or otherwise liquidated or repaid for cash,
the lesser of (1) the fair market value of such Restricted Investment as of
the date of such Restricted Investment or (2) the cash return of capital
with respect to such Restricted Investment (less the cost of disposition,
if any), to the extent any such amount was not otherwise included in
Consolidated Net Income, plus (E) 50% of any dividends received by the
Company or a Restricted Subsidiary after the Issue Date from an
Unrestricted Subsidiary of the Company, to the extent that such dividends
were not otherwise included in Consolidated Net Income of the Company for
such period, plus (F) to the extent that any Unrestricted Subsidiary is
redesignated as a Restricted Subsidiary after the Issue Date, the fair
market value of the Investment made by the Company or any of its Restricted
Subsidiaries in such Subsidiary as of the date of such redesignation, plus
(G) $2.0 million. For purposes of this paragraph, the fair market value of
property other than cash shall be determined in good faith by the Board of
Directors and evidenced by an Officers' Certificate filed with the Trustee,
except that in the event the value of any non-cash consideration shall be
$10.0 million or more, the value shall be determined based on an opinion or
appraisal issued by an accounting, appraisal or investment banking firm of
national standing.
63
<PAGE>
The foregoing provisions will not prohibit (i) the payment of any dividend
or the consummation of any irrevocable redemption within 60 days after the
date of declaration thereof or giving of irrevocable redemption notice, if at
said date of declaration or giving of notice such payment or redemption would
have complied with the provisions of the Indenture; (ii) if no Default or
Event of Default shall have occurred and be continuing, the redemption,
repurchase, retirement or other acquisition of any Equity Interests of the
Company or any Restricted Subsidiary of the Company or any Subordinated Debt
of the Company or any Restricted Subsidiary, in each case in exchange for, or
out of the net proceeds of, the substantially concurrent sale (other than to a
Restricted Subsidiary of the Company) of other Equity Interests of the Company
(other than any Disqualified Stock); provided, however, that the amount of any
such net proceeds that are utilized for any such redemption, repurchase,
retirement or other acquisition shall be excluded from clauses (iii) (B) and
(iii) (C) of the preceding paragraph; (iii) the redemption, repurchase,
refinancing or defeasance of Subordinated Debt in exchange for, or with the
net cash proceeds from, an incurrence of Permitted Refinancing Debt; (iv) if
no Default or Event of Default shall have occurred and be continuing, the
payment in an amount up to $1.0 million in any period of four consecutive
quarters to fund repurchases of Equity Interests therein or Debt of the
Company issued in connection with such Equity Interests (including, without
limitation, any payments of principal, premium or interest in respect of
Employee Notes) held by Persons who have ceased to be bona fide officers or
employees of the Company or one of its Restricted Subsidiaries, provided that
any unused amount thereof may be carried forward to subsequent periods so long
as the total amount of such Restricted Payments shall not exceed $5.0 million
in the aggregate (and shall be increased by the amount of any net cash
proceeds (after deducting any premiums) to the Company from (A) sales of
Equity Interests of the Company to management employees subsequent to the
Issue Date and (B) any "key-man" life insurance policies which are used to
make such redemptions and repurchases); (v) repurchases of Equity Interests
deemed to occur upon the exercise of stock options if such Equity Interests
represent a portion of the exercise price thereof; and (vi) payments by the
Company to fund the Transactions (as described under "Use of Proceeds").
The Board of Directors of the Company may designate any Restricted
Subsidiary to be an Unrestricted Subsidiary if such designation would not
cause a Default or an Event of Default. For purposes of making such
determination, all outstanding Investments by the Company and its Restricted
Subsidiaries (except to the extent repaid in cash) in the Subsidiary so
designated will be deemed to be Restricted Payments at the time of such
designation and will reduce the amount available for Restricted Payments under
the first paragraph of this covenant. All such outstanding Investments will be
deemed to constitute Investments in an amount equal to the greater of (i) the
net book value of such Investments at the time of such designation and (ii)
the fair market value of such Investments at the time of such designation.
Such designation will only be permitted if such Restricted Payment would be
permitted at such time and if such Restricted Subsidiary otherwise meets the
definition of an Unrestricted Subsidiary.
Liens.
The Indenture provides that the Company will not directly or indirectly
create, incur, assume or suffer to exist any Lien (other than Permitted Liens)
that secures Debt or trade payables unless (i) in the case of Liens securing
Subordinated Debt, the Notes are secured on a senior basis to the obligations
so secured until such time as such obligations are no longer secured by a Lien
and (ii) in the case of Liens securing obligations under Pari Passu Debt, the
Notes are equally and ratably secured with the obligations so secured until
such time as such obligations are no longer secured by a Lien.
Merger, Consolidation or Sale of Assets.
The Indenture provides that the Company may not consolidate or merge with or
into, or sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of its properties or assets in one or more related
transactions, to another corporation, Person or entity unless: (i) the Company
is the surviving corporation or the Person (if other than the Company) formed
by such consolidation or into which the Company is merged or the Person that
acquires by conveyance, transfer or lease substantially all of the properties
and assets of the
64
<PAGE>
Company (the "Surviving Entity") shall be a corporation organized and validly
existing under the laws of the United States or any State thereof or the
District of Columbia; (ii) if the Company is not the surviving corporation,
the Surviving Entity assumes all the obligations of the Company under the
Notes and the Indenture pursuant to a supplemental indenture in a form
reasonably satisfactory to the Trustee; (iii) immediately after such
transaction, no Default or Event of Default exists; (iv) except in the case of
a merger of the Company with or into a Wholly Owned Restricted Subsidiary of
the Company or a merger entered into solely for the purpose of reincorporating
the Company in another jurisdiction, the Company or the Surviving Entity, as
the case may be, (A) will have Consolidated Net Worth immediately after the
transaction equal to or greater than the Consolidated Net Worth of the Company
immediately preceding the transaction and (B) will, at the time of such
transaction and after giving pro forma effect thereto as if such transaction
had occurred at the beginning of the applicable four-quarter period, be
permitted to incur at least $1.00 of additional Debt pursuant to the
Consolidated Fixed Charge Coverage Ratio test set forth in the first paragraph
of the covenant described above under the caption "--Incurrence of Debt and
Issuance of Preferred Stock"; and (v) the Company or the Surviving Entity, as
the case may be, shall have delivered to the Trustee an Officers' Certificate
and an opinion of counsel, each stating that such consolidation, merger, sale,
assignment transfer, lease, conveyance or other disposition and, if a
supplemental indenture is required in connection with such transaction, such
supplemental indenture comply with the applicable provisions of the Indenture
and that all conditions precedent in the Indenture relating to such
transaction have been satisfied.
Transactions with Related Persons.
The Company will not, nor will it permit any of its Restricted Subsidiaries
to, directly or indirectly (i) sell, lease, transfer or otherwise dispose of
any of its property to, (ii) purchase any property from, (iii) make any
Investment in, or (iv) enter into or amend any contract, agreement or
understanding with, or for the benefit of, any of its Related Persons (each a
"Related Person Transaction"), other than Related Person Transactions that are
no less favorable to the Company or such Restricted Subsidiary than those that
could be obtained in a comparable arm's length transaction by the Company or
such Restricted Subsidiary from an unrelated party; provided that the Company
delivers to the Trustee (A) with respect to any Related Person Transaction (or
series of Related Person Transactions which are similar or part of a common
plan) involving aggregate payments in excess of $5.0 million, a resolution of
the Board of Directors set forth in an Officers' Certificate certifying that
such Related Person Transaction complies with the preceding sentence and such
Related Person Transaction was approved by a majority of the disinterested
members of the Board of Directors of the Company and (B) with respect to any
Related Person Transaction (or series of Related Person Transactions which are
similar or part of a common plan) involving aggregate payments in excess of
$10.0 million, an affirmative opinion as to the fairness to the Company or
such Restricted Subsidiary, as the case may be, from a financial point of view
issued by a nationally recognized accounting, appraisal, investment banking or
consulting firm that is, in the judgment of the Board of Directors of the
Company, independent and qualified to render such opinion. The foregoing
restrictions shall not apply to: (i) any transactions between Wholly Owned
Restricted Subsidiaries of the Company, or between the Company and any Wholly
Owned Restricted Subsidiary of the Company, if such transaction is not
otherwise prohibited by the terms of the Indenture; (ii) Restricted Payments
permitted under the covenant described above under the caption "--Restricted
Payments"; (iii) customary directors' fees, indemnification and similar
arrangements, employee salaries, bonuses or employment agreements,
compensation or employee benefit arrangements and incentive arrangements with
any officer, director or employee of the Company or any Restricted Subsidiary
entered into in the ordinary course of business (including customary benefits
thereunder); (iv) transactions undertaken pursuant to the Executive Securities
Agreement, Registration Agreement, Securityholders Agreement or any similar
agreement entered into after the date of the Indenture to the extent the terms
of any such new agreement are not disadvantageous to the Holders of the Notes
in any material respect; (v) the issue and sale by the Company to its
shareholders of Equity Interests other than Disqualified Stock; (vi) the
incurrence of intercompany Debt permitted pursuant to "--Incurrence of Debt
and Issuance of Preferred Stock" above; (vii) the pledge of Equity Interests
of Unrestricted Subsidiaries to support the Debt thereof; (viii) transactions
that are permitted by the provisions of the Indenture described above under
the caption "--Merger, Consolidation and Sale of Assets;" (ix) transactions
effected as a part of a Qualified
65
<PAGE>
Securitization Transaction; (x) transactions with customers, clients,
suppliers, joint venture partners or purchasers or sellers of goods and
services, in each case in the ordinary course of business (including, without
limitation, pursuant to joint venture agreements) and otherwise in compliance
with the terms of the Indenture which are on terms at least as favorable as
might reasonably have been obtained at such time from an unaffiliated party;
(xi) payments made pursuant to the Consulting Agreement and the Tax Sharing
Agreement; (xii) subject to the limitation set forth in the following
sentence, payments made pursuant to the Management Agreement; and (xiii)
transactions undertaken pursuant to the Asset Drop Down. Without limiting the
foregoing, after the occurrence and during the continuance of an Event of
Default, the Company will not, nor will it permit any of its Restricted
Subsidiaries to, directly or indirectly, make any payment to any Related
Person in respect of management, advisory or similar services, including
without limitation, any payment pursuant to the Management Agreement;
provided, that the foregoing shall not limit the ability of the Company or any
Restricted Subsidiary to enter into transactions described in clauses (iii),
(iv) and (xi) above.
Payment Restrictions Affecting Restricted Subsidiaries.
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any encumbrance or restriction on
the ability of any Restricted Subsidiary to (i) (A) pay dividends or make any
other distributions to the Company or any of its Restricted Subsidiaries (1)
on its Capital Stock or (2) with respect to any other interest or
participation in, or measured by, its profits, or (B) pay any indebtedness
owed to the Company or any of its Restricted Subsidiaries, (ii) make loans or
advances to the Company or any of its Restricted Subsidiaries or (iii)
transfer any of its properties or assets to the Company or any of its
Restricted Subsidiaries, except for such encumbrances or restrictions existing
under or by reason of (A) Existing Debt, (B) the Senior Credit Facility as in
effect on the date of the Indenture, and any amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings thereof, provided that such amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacement or
refinancings are not materially more restrictive taken as a whole with respect
to such dividend and other payment restrictions than those contained in the
Senior Credit Facility as in effect on the date of the Indenture (as
determined by the Board of Directors of the Company in its reasonable and good
faith judgment), (C) (1) the Indenture and the Notes and (2) the Senior
Subordinated Note Indenture and the Senior Subordinated Notes, (D) applicable
law, (E) any instrument governing Debt or Capital Stock of a Person acquired
by the Company or any of its Restricted Subsidiaries as in effect at the time
of such acquisition (except to the extent such Debt was incurred or such
encumbrance or restriction was established in connection with or in
contemplation of such acquisition), which encumbrance or restriction is not
applicable to any Person, or the properties or assets of any Person, other
than the Person, or the property or assets of the Person, so acquired,
provided that, in the case of Debt, such Debt was permitted by the terms of
the Indenture to be incurred, (F) customary non-assignment provisions in
leases and other agreements entered into in the ordinary course of business
and consistent with past practices, restricting assignment or restricting
transfers of non-cash assets, (G) Purchase Money Obligations for property
acquired in the ordinary course of business and other Liens permitted by the
Indenture, in each case that impose restrictions of the nature described in
clause (iii) above on the property so acquired (or subject to such Liens), (H)
Debt permitted under clause (x) of the second paragraph under the covenant
described above under the caption "--Incurrence of Debt and Issuance of
Preferred Stock," (I) Permitted Refinancing Debt, provided that the
restrictions contained in the agreements governing such Permitted Refinancing
Debt are not materially more restrictive taken as a whole than those contained
in the agreements governing the Debt being refinanced (as determined by the
Board of Directors of the Company in its reasonable and good faith judgment),
(J) contracts for the sale of assets or Equity Interests to the extent that
any such contract imposes restrictions of the nature described in clause (iii)
above on the property to be sold, (K) any pledge by the Company or a
Restricted Subsidiary of the Equity Interests of an Unrestricted Subsidiary to
support the Debt thereof, (L) secured Debt otherwise permitted to be incurred,
or not otherwise restricted, pursuant to the provisions of the covenant
described above under the caption "--Liens" that limits the right of the
debtor to dispose of the assets securing such Debt, (M) provisions with
respect to the disposition or distribution of assets or property in joint
venture agreements and other similar agreements entered
66
<PAGE>
into in the ordinary course of business, (N) restrictions on cash or other
deposits or net worth imposed by customers under contracts entered into in the
ordinary course of business, (O) any Debt or other contractual requirements of
a Securitization Entity in connection with a Qualified Securitization
Transaction; provided that such restrictions apply only to such Securitization
Entity, (P) other Debt of a Restricted Subsidiary that is permitted to be
incurred subsequent to the date of the Indenture pursuant to the provisions of
the covenants described above under the caption "--Incurrence of Debt and
Issuance of Preferred Stock"; provided that any such restrictions are ordinary
and customary with respect to the type of Debt or preferred stock being
incurred or issued (under the relevant circumstances), or (Q) any encumbrances
or restrictions imposed by any amendments, modifications, restatements,
renewals, increases, supplements, refundings, replacements or refinancings of
the contracts, instruments or obligations referred to in clauses (A) through
(P) above, provided that such amendments, modifications, restatements,
renewals, increases, supplements, refundings, replacements or refinancings
are, in the good faith judgment of the Board of Directors, not materially more
restrictive with respect to such dividend and other payment restrictions than
those contained in the dividend or other payment restrictions prior to such
amendment, modification, restatement, renewal, increase, supplement,
refunding, replacement or refinancing.
Asset Sales.
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the
Company (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair market
value (evidenced by a resolution of the Board of Directors set forth in an
Officers' Certificate delivered to the Trustee) of the assets or Equity
Interests issued or sold or otherwise disposed of and (ii) at least 75% of the
consideration therefor received by the Company or such Restricted Subsidiary
is in the form of cash, Cash Equivalents or properties and assets to be used
in the Company's business or Equity Interests in a Person that becomes a
Restricted Subsidiary and is received at the time of such disposition;
provided that the amount of any Senior Debt (as shown on the most recent
consolidated balance sheet of the Company) of the Company or any Restricted
Subsidiary that is assumed by the transferee of any such assets pursuant to a
customary novation agreement or other agreement that releases or indemnifies
the Company or such Restricted Subsidiary from further liability shall be
deemed to be cash for purposes of this provision.
Within 365 days after the receipt of any Net Proceeds from an Asset Sale,
the Company or such Restricted Subsidiary may apply such Net Proceeds at its
option, (i) to permanently repay, reduce, or secure letters of credit in
respect of, indebtedness under the Senior Credit Facility or Senior Debt of
the Company or any Wholly Owned Restricted Subsidiary (and to correspondingly
reduce commitments with respect thereto in the case of revolving borrowings),
and/or (ii) to the acquisition of a controlling interest in another business,
the making of a capital expenditure or Permitted Investment or the acquisition
of other assets, in each case, for use in the same or a similar line of
business as the Company or any Restricted Subsidiary was engaged in on the
date of such Asset Sale or reasonable extensions thereof. Pending the final
application of any such Net Proceeds, the Company or such Restricted
Subsidiary may temporarily reduce indebtedness under the Senior Credit
Facility (or any alternative or subsequent revolving credit agreement where
borrowings thereunder constitute Senior Debt) or otherwise invest such Net
Proceeds in any manner that is not prohibited by the Indenture. Any Net
Proceeds from Asset Sales that are not applied or invested as provided in the
first sentence of this paragraph will be deemed to constitute "Excess
Proceeds."
When the aggregate amount of Excess Proceeds exceeds $10.0 million, the
Company will be required to make an offer (an "Asset Sale Offer") to all
Holders of Notes and holders of any other Pari Passu Debt outstanding with
provisions requiring the Company to make an offer to purchase or redeem such
indebtedness with the proceeds from any Asset Sale as follows: (i) the Company
will make an offer to purchase from all holders of the Notes in accordance
with the procedures set forth in the Indenture in the maximum principal amount
(expressed as a multiple of $1,000) of Notes that may be purchased out of an
amount (the "Note Amount") equal to the product of such Excess Proceeds
multiplied by a fraction, the numerator of which is the
67
<PAGE>
outstanding principal amount of the Notes, and the denominator of which is the
sum of the outstanding principal amount of the Notes and such Pari Passu Debt
(subject to proration in the event such amount is less than the aggregate
Asset Sale Offered Price (as defined herein) of all Notes tendered), and (ii)
to the extent required by such Pari Passu Debt to permanently reduce the
principal amount of such Pari Passu Debt, the Company will make an offer to
purchase or otherwise repurchase or redeem Pari Passu Debt (an "Asset Sale
Pari Passu Offer") in an amount (the "Pari Passu Debt Amount") equal to the
excess of the Excess Proceeds over the Note Amount; provided that in no event
will the Company be required to make an Asset Sale Pari Passu Offer in a Pari
Passu Debt Amount exceeding the principal amount of such Pari Passu Debt plus
the amount of any premium required to be paid to repurchase such Pari Passu
Debt. The offer price for the Notes will be payable in cash in an amount equal
to (a) 100% of the Accreted Value thereof, together with Liquidated Damages,
if any, at the date such Asset Sale is consummated, if consummated on or prior
to August 1, 2003 and (b) 100% of the principal amount of the Notes, plus
accrued and unpaid interest, if any, to the date such Asset Sale Offer is
consummated, if consummated after August 1, 2003, in each case, in accordance
with the procedures set forth in the Indenture. The date on which any Asset
Sale Offer is consummated is herein referred to as the "Asset Sale Offer Date"
and the offer price applicable to any Asset Sale Offer is herein referred to
as the "Asset Sale Offer Price." To the extent that the aggregate Asset Sale
Offered Price of the Notes tendered pursuant to the Asset Sale Offer is less
than the Note Amount relating thereto or the aggregate amount of Pari Passu
Debt that is purchased in an Asset Sale Pari Passu Offer is less than the Pari
Passu Debt Amount, the Company may use any remaining Excess Proceeds for any
purpose not otherwise prohibited by the Indenture. If the aggregate principal
amount of Notes and Pari Passu Debt surrendered by holders thereof exceeds the
amount of Excess Proceeds, the Trustee shall select the Notes to be purchased
on a pro rata basis. Upon the completion of the purchase of all the Notes
tendered pursuant to an Asset Sale Offer and the completion of a Pari Passu
Offer, the amount of Excess Proceeds, if any, shall be reset at zero.
The Indenture provides that, if the Company becomes obligated to make an
Asset Sale Offer pursuant to the immediately preceding paragraph, the Notes
and the Pari Passu Debt shall be purchased by the Company, at the option of
the holders thereof, in whole or in part in integral multiples of $1,000, on a
date that is not earlier than 30 days and not later than 60 days from the date
the notice of the Asset Sale Offer is given to holders, or such later date as
may be necessary for the Company to comply with the requirements under the
Exchange Act.
The Indenture provides that the Company will comply with the applicable
tender offer rules, including Rule 14e-1 under the Exchange Act, and any other
applicable securities laws or regulations in connection with an Asset Sale
Offer. To the extent that the provisions of any securities laws or regulations
conflict with the "Asset Sale" provisions of the Indenture, the Company shall
comply with the applicable securities laws and regulations and shall not be
deemed to have breached its obligations under such provisions of the Indenture
by virtue thereof.
Issuance and Sale of Capital Stock of Restricted Subsidiaries.
The Indenture provides that the Company (i) will not, and will not permit
any Restricted Subsidiary of the Company to, transfer, convey, sell, lease or
otherwise dispose of any Capital Stock of any Restricted Subsidiary to any
Person (other than to the Company or a Wholly Owned Restricted Subsidiary) and
(ii) will not permit any Restricted Subsidiary to issue any of its Capital
Stock to any Person other than to the Company or a Wholly Owned Restricted
Subsidiary, in each case unless the Net Proceeds from such transfer, sale or
other disposition are applied in accordance with "--Asset Sales."
Conduct of Business.
The Company and its Restricted Subsidiaries will not engage in any
businesses which are not the same, similar or related to the businesses in
which the Company and its Restricted Subsidiaries are engaged as of the Issue
Date (or any reasonable extension or expansion thereof), except to such extent
as would not be material to the Company and its Restricted Subsidiaries taken
as a whole.
68
<PAGE>
Limitation on Sale and Lease-Back Transactions.
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, enter into any Sale and Lease-Back
Transaction; provided that the Company or any Restricted Subsidiary may enter
into a Sale and Lease-Back Transaction if: (i) the Company, or such Restricted
Subsidiary, if applicable, could have (A) incurred Debt in an amount equal to
the Attributable Debt relating to such Sale and Lease-Back Transaction
pursuant to the Consolidated Fixed Charge Coverage Ratio test set forth in the
first paragraph of the covenant described above under the caption "--
Incurrence of Debt and Issuance of Preferred Stock" and (B) incurred a Lien to
secure such Debt pursuant to the covenant described above under the caption
"--Liens;" (ii) the gross cash proceeds of such Sale and Lease-Back
Transaction are at least equal to the fair market value (as determined in good
faith by the Board of Directors pursuant to a Board Resolution) of the
property that is the subject of such Sale and Lease-Back Transaction; and
(iii) the transfer of assets in such Sale and Lease-Back Transaction is
permitted by, and the Company applies the proceeds of such transaction in
compliance with, the covenant described above under the caption "--Asset
Sales."
Rule 144A Information Requirement.
The Company will furnish to the Holders or beneficial holders of the Notes
and prospective purchasers of Notes designated by the Holders, upon their
request, the information required to be delivered pursuant to Rule 144A(d)(4)
under the Securities Act for so long as is required for an offer or sale of
the Notes to qualify for an exemption under Rule 144A.
Reports.
The Company will deliver to the Trustee within 15 days after the filing of
the same with the Commission, copies of the quarterly and annual reports and
of the information, documents and other reports, if any, which the Company is
required to file with the Commission pursuant to Section 13 or 15(d) of the
Exchange Act. Notwithstanding that the Company may not be subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company
will file with the Commission, to the extent permitted, and provide the
Trustee and the Holders with such quarterly and annual reports and such
information, documents and other reports specified in Sections 13 and 15(d) of
the Exchange Act. The Company will also comply with the other provisions of
Section 314(a) of the Trust Indenture Act.
Certain Definitions
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"Accounts Receivable Subsidiary" means any Subsidiary of the Company that
is, directly or indirectly, wholly owned by the Company (other than director
qualifying shares) and organized solely for the purpose of and engaged in (i)
purchasing, financing and collecting accounts receivable obligations of
customers of the Company or its Subsidiaries, (ii) the sale or financing or
such accounts receivable or interest therein and (iii) other activities
incident thereto.
"Accreted Value" means for each $1,000 face amount of Notes, as of any date
of determination prior to August 1, 2003, the sum of (i) the initial offering
price of each Note ($509.31) and (ii) that portion of the excess of the
principal amount at maturity of each Note over such initial offering price
which shall have been accreted thereon through such date, such amount to be so
accreted on a daily basis and compounded semi-annually on each August 1 and
February 1 at the rate of 14% per annum from the date of issuance of the Notes
through the date of determination.
"Acquired Debt" means, with respect to any specified Person, (i) Debt of any
other Person existing at the time such other Person is merged with or into or
became a Restricted Subsidiary of such specified Person,
69
<PAGE>
including, without limitation, Debt incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Restricted Subsidiary of such specified Person, and (ii) Debt secured by a
Lien encumbering any asset acquired by such specified Person which, in each
case, is not repaid at or within five days following the date of such
acquisition.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling", "controlled
by" and "under common control with"), as used with respect to any Person,
shall mean the possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of such Person, whether
through the ownership of voting securities, by agreement or otherwise.
Notwithstanding the foregoing, no Person (other than the Company or any
Subsidiary of the Company) in whom a Securitization Entity makes an Investment
in connection with a Qualified Securitization Transaction shall be deemed to
be an Affiliate of the Company or any of its Subsidiaries solely by reason of
such Investment.
"Applicable Premium" means, with respect to a Note at any redemption date,
the greater of (i) 1.0% of the Accreted Value of such Note to the date of
redemption and (ii) the excess of (A) the present value at such time of the
redemption price of such Note at August 1, 2003 (such redemption price being
set forth in the table set forth under "--Optional Redemption") computed using
a discount rate equal to the Treasury Rate plus 50 basis points, over (B) the
Accreted Value of such Note as of the date of redemption.
"Asset Sale" means (i) the sale, lease (other than operating leases entered
into in the ordinary course of business), conveyance or other disposition of
any assets or rights (including, without limitation, by way of a Sale and
Lease-Back Transaction) other than in the ordinary course of business
(provided that the sale, lease, conveyance or other disposition of all or
substantially all of the assets of the Company and its Restricted Subsidiaries
taken as a whole will be governed by the provisions of the Indenture described
above under the caption "Repurchase at the Option of Holders Upon Change of
Control" and/or the provisions described above under the caption "--Certain
Covenants--Merger, Consolidation or Sale of Assets" and not by the provisions
of the Asset Sale covenant), and (ii) the issue or sale by the Company or any
of its Restricted Subsidiaries of Equity Interests of any of the Company's
Restricted Subsidiaries (to the extent such Equity Interests are held by the
Company or another Restricted Subsidiary of the Company), in the case of
either clause (i) or (ii), whether in a single transaction or a series of
related transactions that (x) have a fair market value in excess of $1.0
million or (y) generate net proceeds in excess of $1.0 million.
Notwithstanding the foregoing, the following shall not be deemed to constitute
Asset Sales: (i) sales of accounts receivable, equipment and related assets
(including contract rights) of the type specified in the definition of
"Qualified Securitization Transaction" to a Securitization Entity for the fair
market value thereof, including cash in an amount at least equal to 75% of the
fair market value thereof as determined in accordance with GAAP; (ii)
transfers of accounts receivable, equipment and related assets (including
contract rights) of the type specified in the definition of "Qualified
Securitization Transaction" (or a fractional undivided interest therein) by a
Securitization Entity in a Qualified Securitization Transaction (for the
purposes of this clause (ii), Purchase Money Notes shall be deemed to be
cash); (iii) a transfer of assets by the Company to a Restricted Subsidiary or
by a Restricted Subsidiary to the Company or to another Restricted Subsidiary;
(iv) a disposition of inventory held for sale in the ordinary course of
business or obsolete, worn out or damaged property or equipment in the
ordinary course of business; (v) an issuance of Equity Interests by a
Restricted Subsidiary to the Company or to another Restricted Subsidiary; (vi)
a Restricted Payment or Permitted Investment that is permitted by the covenant
described above under the caption "--Certain Covenants-- Restricted Payments";
(vii) the sale or discount, in each case without recourse, of accounts
receivable arising in the ordinary course of business, but only in connection
with the compromise or collection thereof; (viii) the grant in the ordinary
course of business of any non-exclusive license of patents, trademarks,
registrations therefor and other similar intellectual property and (ix) sales
of accounts receivable for cash at fair market value, and any sale, conveyance
or transfer of accounts receivable in the ordinary course of business to an
Accounts Receivable Subsidiary or to third parties that are not Affiliates of
the Company or any Subsidiary of the Company.
70
<PAGE>
"Asset Sale Offer" shall have the definition set forth under "--Certain
Covenants--Asset Sales."
"Asset Sale Offer Date" shall have the definition set forth under "--Certain
Covenants--Asset Sales."
"Asset Sale Offered Price" shall have the definition set forth under "--
Certain Covenants--Asset Sales."
"Asset Sale Pari Passu Offer" shall have the definition set forth under "--
Certain Covenants--Asset Sales."
"Attributable Debt" in respect of a Sale and Lease-Back Transaction means,
at the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such Sale and Lease-Back Transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).
"Board Resolution" means a copy of a resolution certified pursuant to an
Officers' Certificate to have been duly adopted by the Board of Directors of
the Company or a Restricted Subsidiary of the Company, as appropriate, and to
be in full force and effect, and delivered to the Trustee.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of,
the issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having maturities of not more than one
year from the date of acquisition, (iii) certificates of deposit and
Eurodollar time deposits with maturities of one year or less from the date of
acquisition, bankers' acceptances with maturities not exceeding one year and
overnight bank deposits, in each case with any lender party to the Senior
Credit Facility or with any domestic commercial bank having capital and
surplus in excess of $500.0 million and a Keefe Bank Watch Rating of "B" or
better, (iv) repurchase obligations with a term of not more than seven days
for underlying securities of the types described in clauses (ii) and (iii)
above entered into with any financial institution meeting the qualifications
specified in clause (iii) above, (v) commercial paper having the highest
rating obtainable from Moody's Investors Service, Inc. or Standard & Poor's
Corporation and in each case maturing within one year after the date of
acquisition, (vi) marketable direct obligations issued by any state of the
United States or any political subdivision, or public instrumentality of such
state, in each case having maturities of not more than one year from the date
of acquisition and, at the time of acquisition thereof, having one of the two
highest ratings obtainable from either Moody's Investors Service, Inc. or
Standard & Poor's Corporation, and (vii) money market, mutual or similar funds
which invest substantially all of their assets in securities of the type
described in clauses (i) through (vi) above.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all
or substantially all of the assets of the Company and its Subsidiaries taken
as a whole to any "person" (as such term is used in Section 13(d)(3) of the
Exchange Act), or group of related persons, together with any Affiliates
thereof (other than Permitted Holders); (ii) the adoption by the Company of a
plan relating to the liquidation or dissolution of the Company; (iii) the
first day on which a majority of the members of the Board of Directors of the
Company are not Continuing Directors; or (iv) the consummation of any
transaction (including,
71
<PAGE>
without limitation, any merger or consolidation) the result of which is that
any "person" (as defined above) or group of related persons, together with any
Affiliates thereof (other than Permitted Holders) becomes the "beneficial
owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the
Exchange Act), directly or indirectly, of more than 50% (measured by voting
power rather than number of shares) of the Voting Stock of the Company.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus, without
duplication, (i) an amount equal to any extraordinary loss plus any net loss
realized in connection with an Asset Sale (to the extent such losses were
deducted in computing such Consolidated Net Income and without regard to the
$1.0 million threshold in the definition thereof), plus (ii) provision for
taxes based on income or profits of such Person and its Subsidiaries for such
period, to the extent that such provision for taxes was included in computing
such Consolidated Net Income, plus (iii) consolidated interest expense of such
Person and its Restricted Subsidiaries for such period (including, without
limitation, amortization of debt issuance costs and original issue discount,
non-cash interest payments, the interest component of any deferred payment
obligations, the interest component of all payments associated with Capital
Lease Obligations, imputed interest with respect to Attributable Debt,
commissions, discounts and other fees and charges incurred in respect of
letter of credit or bankers' acceptance financings, and net payments (if any)
pursuant to Hedging Obligations) to the extent that any such expense was
deducted in computing such Consolidated Net Income, plus (iv) the consolidated
net interest expense of such Person and its Restricted Subsidiaries that was
capitalized during such period to the extent that any such expense was
deducted in computing such Consolidated Net Income, plus (v) depreciation,
amortization (including amortization of goodwill and other intangibles) and
other non-cash expenses (excluding any such non-cash expense to the extent
that it represents an accrual of or reserve for cash expenses in any future
period or amortization of a prepaid cash expense that was paid in a prior
period) of such Person and its Restricted Subsidiaries for such period to the
extent that such depreciation, amortization and other non-cash expenses were
deducted in computing such Consolidated Net Income, minus (vi) other non-
recurring non-cash items increasing such Consolidated Net Income for such
period (which will be added back to Consolidated Cash Flow in any subsequent
period to the extent cash is received in respect of such item in such
subsequent period), in each case, on a consolidated basis and determined in
accordance with GAAP. Notwithstanding the foregoing, "Consolidated Cash Flow"
shall be calculated without giving effect to amortization or depreciation of
any amounts required or permitted by Accounting Principles Board Opinion Nos.
16 (including non-cash write-ups and non-cash charges relating to inventory
and fixed assets, in each case arising in connection with any acquisition
permitted under the Indenture) and 17 (including non-cash charges relating to
intangibles and goodwill arising in connection with any such acquisition).
"Consolidated Fixed Charge Coverage Ratio" means with respect to any Person
for any period, the ratio of the Consolidated Cash Flow of such Person for
such period to the Consolidated Fixed Charges of such Person for such period.
In the event that the Company or any of its Restricted Subsidiaries incurs,
assumes, guarantees, repays or redeems any Debt (other than revolving credit
borrowings) or issues or redeems preferred stock subsequent to the
commencement of the period for which the Consolidated Fixed Charge Coverage
Ratio is being calculated but prior to the date on which the event for which
the calculation of the Consolidated Fixed Charge Coverage Ratio is made (the
"Calculation Date"), then the Consolidated Fixed Charge Coverage Ratio shall
be calculated giving pro forma effect to such incurrence, assumption,
guarantee, repayment or redemption of Debt, or such issuance or redemption of
preferred stock, as if the same had occurred at the beginning of the
applicable four-quarter reference period. In addition, for purposes of making
the computation referred to above, (i) acquisitions or Asset Sales that have
been made by the Company or any of its Restricted Subsidiaries, including
through mergers or consolidations and including any related financing
transactions, during the four-quarter reference period or subsequent to such
reference period and on or prior to the Calculation Date shall be deemed to
have occurred on the first day of the four-quarter reference period and
Consolidated Cash Flow for such reference period shall be calculated without
giving effect to clause (iii) of the proviso set forth in the definition of
Consolidated Net Income, and (ii) the Consolidated Cash Flow attributable to
discontinued operations, as determined in accordance with GAAP, and operations
or businesses disposed of prior to the Calculation Date,
72
<PAGE>
shall be excluded, and (iii) the Consolidated Fixed Charges attributable to
discontinued operations, as determined in accordance with GAAP, and operations
or businesses disposed of prior to the Calculation Date, shall be excluded,
but only to the extent that the obligations giving rise to such Consolidated
Fixed Charges will not be obligations of the referent Person or any of its
Restricted Subsidiaries following the Calculation Date. In calculating
"Consolidated Fixed Charges" for purposes of determining the denominator (but
not the numerator) of this "Consolidated Fixed Charge Coverage Ratio," (i)
interest on Debt determined on a fluctuating basis as of the Calculation Date
and which will continue to be so determined thereafter shall be deemed to have
accrued at a fixed rate per annum equal to the rate of interest on such Debt
in effect on the Calculation Date, (ii) if interest on any Debt actually
incurred on the Calculation Date may be optionally determined at an interest
rate based upon a factor of a prime or similar rate, a eurocurrency interbank
offered rate or other rates, then the interest rate in effect on the
Calculation Date will be deemed to have been in effect during the relevant
four-quarter period reference and (iii) notwithstanding the foregoing,
interest on Debt determined on a fluctuating basis, to the extent such
interest is covered by agreements relating to Interest Swap Obligations, shall
be deemed to accrue at the rate per annum resulting after giving effect to the
operation of such agreements.
"Consolidated Fixed Charges" means, with respect to any Person for any
period, the sum, without duplication, of (i) the consolidated interest expense
of such Person and its Restricted Subsidiaries for such period, whether paid
or accrued (including, without limitation, amortization of debt issuance costs
(other than those debt issuance costs incurred on the Issue Date in connection
with the Transactions) and original issue discount, non-cash interest
payments, the interest component of any deferred payment obligations, the
interest component of all payments associated with Capital Lease Obligations,
imputed interest with respect to Attributable Debt, commissions, discounts and
other fees and charges incurred in respect of letter of credit or bankers'
acceptance financings, and net payments (if any) pursuant to Hedging
Obligations), and (ii) the consolidated interest expense of such Person and
its Restricted Subsidiaries that was capitalized during such period, and (iii)
any interest expense on Debt of another Person that is guaranteed by such
Person or one of its Restricted Subsidiaries or secured by a Lien on assets of
such Person or one of its Subsidiaries (whether or not such guarantee or Lien
is called upon), and (iv) all dividend payments, whether or not in cash, on
any series of preferred stock of such Person or any of its Restricted
Subsidiaries (other than dividend payments on Equity Interests payable solely
in Equity Interests (other than Disqualified Stock) of the Company) paid or
accrued during such period.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided that (i) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Wholly Owned Restricted
Subsidiary thereof, (ii) the Net Income of any Restricted Subsidiary shall be
excluded to the extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not at the
date of determination permitted without any prior governmental approval (that
has not been obtained) or, directly or indirectly, by operation of the terms
of its charter or any agreement, instrument, judgment, decree, order, statute,
rule or governmental regulation applicable to that Restricted Subsidiary or
its shareholders, provided that such Net Income shall not be so excluded in
calculating Consolidated Net Income (A) as a component of Consolidated Cash
Flow for purposes of calculating the Consolidated Fixed Charge Coverage Ratio
in determining whether (1) a Restricted Subsidiary can incur additional Debt
or issue preferred stock pursuant to the Consolidated Fixed Charge Coverage
Ratio test set forth in the first paragraph of the covenant described under
the caption "--Incurrence of Debt and Issuance of Preferred Stock" or (2) the
Company can incur $1.00 of additional Debt pursuant to the Consolidated Fixed
Charge Coverage Ratio test set forth in the first paragraph of the covenant
described under the caption "--Incurrence of Debt and Issuance of Preferred
Stock" for purposes of (x) clause (ii) of the first paragraph of the covenant
described under the caption "Restricted Payments", (y) clause (iv) of the
covenant described under the caption "--Merger, Consolidation and Sale of
Assets" or (z) the definition of "Unrestricted Subsidiary" or (B) for purposes
of clause (iii) of the first paragraph of the covenant described under the
caption "Restricted Payments" in determining whether a Restricted Subsidiary
may make a Restricted Investment, (iii) the Net Income (or loss) of any Person
acquired in a pooling of interests transaction for any
73
<PAGE>
period prior to the date of such acquisition shall be excluded, (iv) the
cumulative effect of a change in accounting principles adopted after the Issue
Date shall be excluded, (v) any restoration to Net Income of any contingency
reserve of an extraordinary, nonrecurring or unusual nature, except to the
extent that provision for such reserve was made out of Consolidated Net Income
accrued at any time following the Issue Date, shall be excluded, (vi) in the
case of a successor to the referent Person by consolidation or merger or as a
transferee of the referent Person's assets, any earnings of the successor
corporation prior to such consolidation, merger or transfer of assets shall be
excluded, (vii) non-cash compensation charges arising upon the issuance or
exercise of employee stock options or Capital Stock (other than Disqualified
Stock) shall be excluded and (viii) all extraordinary gains and extraordinary
losses and any unusual or non-recurring charges recorded or accrued in
connection with the Transactions shall be excluded.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the ordinary shareholders of such
Person and its consolidated Subsidiaries as of such date and (ii) the
respective amounts reported on such Person's balance sheet as of such date
with respect to any series of preferred stock (other than Disqualified Stock)
that by its terms is not entitled to the payment of dividends unless such
dividends may be declared and paid only out of net earnings in respect of the
year of such declaration and payment, but only to the extent of any cash
received by such Person upon issuance of such preferred stock, less (A) all
write-ups (other than write-ups resulting from foreign currency translations
and write-ups of tangible assets of a going concern business made within 12
months after the acquisition of such business) subsequent to the date of the
Indenture in the book value of any asset owned by such Person or a
consolidated Subsidiary of such Person, (B) all investments as of such date in
unconsolidated Subsidiaries and in Persons that are not Subsidiaries (except,
in each case, Permitted Investments) and (C) all unamortized debt discount and
expense and unamortized deferred charges as of such date, all of the foregoing
determined in accordance with GAAP.
"Consulting Agreement" means the Consulting Agreement between the Company
and Thomas Rodgers, Jr. as in effect on the date of the Indenture or as
thereafter amended in a manner that is not adverse to the Company or the
Holders of Notes.
"Continuing Director" means, as of any date of determination, any member of
the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the Indenture, (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election or (iii) was nominated for election or elected to such
Board of Directors by or with the approval of the Permitted Holders.
"Credit Facilities" means, with respect to the Company or any Subsidiary,
one or more debt facilities (including, without limitation, the Senior Credit
Facility) or commercial paper facilities with banks or other lenders providing
for revolving credit loans, term loans, receivables financing (including
through the sale of receivables to such lenders or to special purpose entities
formed to borrow from such lenders against such receivables), bankers
acceptance or letters of credit, in each case, as amended, restated, modified,
renewed, refunded, replaced or refinanced in whole or in part from time to
time. Debt under Credit Facilities outstanding on the date on which Notes are
first issued and authenticated under the Indenture shall be deemed to have
been incurred on such date in reliance on the exception provided by clause (i)
of the definition of Permitted Debt.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any Restricted Subsidiary of the Company against fluctuations in
currency values.
"Debt" means, with respect to any Person, any indebtedness of such Person,
whether or not contingent, in respect of borrowed money or evidenced by bonds,
notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of
the purchase price of any property or representing any Hedging Obligations,
except any such balance that constitutes an accrued expense or trade payable,
if and to the extent any of the foregoing indebtedness (other than letters of
credit and Hedging Obligations) would appear as a
74
<PAGE>
liability upon a balance sheet of such Person prepared in accordance with
GAAP, as well as all Debt of others secured by a Lien on any asset of such
Person (whether or not such Debt is assumed by such Person) and, to the extent
not otherwise included, the guarantee by such Person of any Debt of any other
Person (but excluding, with respect to Debt of a Securitization Entity, any
Standard Securitization Undertakings that might be deemed to constitute
guarantees). The amount of any Debt outstanding as of any date shall be (i)
the accrued or accreted value thereof, in the case of any Debt that does not
require current payments of interest, and (ii) the principal amount thereof,
together with any interest thereon that is more than 30 days past due, in the
case of any other Debt. For purposes of calculating the amount of Debt of a
Securitization Entity outstanding as of any date, the face or notional amount
of any interest in receivables or equipment that is outstanding as of such
date shall be deemed to be Debt but any such interests held by Affiliates of
such Securitization Entity shall be excluded for purposes of such calculation.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable
at the option of the holder thereof, in whole or in part, on or prior to the
first anniversary of the Stated Maturity of the Notes; provided, however, that
any Capital Stock that would constitute Disqualified Stock solely because the
holders thereof have the right to require the Company to repurchase such
Capital Stock upon the occurrence of a Change of Control or an Asset Sale
shall not constitute Disqualified Stock if the terms of such Capital Stock
provide that the Company may not repurchase or redeem any such Capital Stock
pursuant to such provisions unless such repurchase or redemption complies with
the covenant described above under the caption "--Certain Covenants--
Restricted Payments."
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Equity Offering" means a bona fide underwritten sale to the public of
Equity Interests (other than Disqualified Stock) of the Company pursuant to a
registration statement (other than on Form S-8 or any other form relating to
securities issuable under any benefit plan of the Company) that is declared
effective by the Commission.
"Executive Securities Agreement" means each of the Executive Securities
Agreements between the Company and the other signatory thereto as in effect on
the date of the Indenture or as thereafter amended in a manner that is not
adverse to the Holders of Notes in any material respect.
"Existing Debt" means up to $500,000 in aggregate principal amount of Debt
of the Company and its Restricted Subsidiaries (other than Debt under the
Senior Credit Facility or Debt evidenced by the Senior Subordinated Notes) in
existence on the date of the Indenture, until such amounts are repaid.
"Foreign Subsidiary" means any Subsidiary not organized or validly existing
under the laws of the United States or any state thereof or the District of
Columbia.
"Foreign Restricted Subsidiary" means any Foreign Subsidiary that is a
Restricted Subsidiary.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the Issue Date.
"Globe Manufacturing" means Globe Manufacturing Corp., an Alabama
corporation, and its successors and assigns.
75
<PAGE>
"guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any Debt.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under Interest Swap Agreements and Currency Agreements.
"Interest Swap Agreements" means any interest rate swap agreement, interest
rate cap agreement, interest rate floor agreement, interest rate collar
agreement, treasury rate-lock agreement or other similar agreement or
arrangement designed to protect the Company or any Restricted Subsidiary of
the Company from fluctuations in interest rates.
"Interest Swap Obligations" means the obligations of any Person pursuant to
any Interest Swap Agreement with any other Person.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Debt or other obligations), advances
or capital contributions (excluding commission, travel and similar advances to
officers and employees and extensions of trade credit made in the ordinary
course of business), purchases or other acquisitions for consideration of
Debt, Equity Interests or other securities, together with all items that are
or would be classified as investments on a balance sheet prepared in
accordance with GAAP.
"Issue Date" means August 6, 1998, the date of original issuance of the
Notes.
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the
nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"Limited Originator Recourse" means a reimbursement obligation of the
Company or a Restricted Subsidiary in connection with a drawing on a letter of
credit, revolving loan commitment, cash collateral account or other such
credit enhancement issue to support Debt of a Securitization Entity under a
facility for the financing of trade receivables and the warehousing of
equipment loans and leases; provided that the available amount of any such
form of credit enhancement at any time shall not exceed 10.0% of the principal
amount of such Debt at such time.
"Management Agreement" means the Management Agreement between Globe
Manufacturing and CHS Management III, L.P., dated as of July 31, 1998, as in
effect on the date of the Indenture or as thereafter amended in a manner that
is not adverse to the Company or the Holders of the Notes.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but
not loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to Sale and Lease-Back Transactions) or (b)
the disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Debt of such Person or any of its
Restricted Subsidiaries and (ii) any extraordinary or nonrecurring gain (but
not loss), together with any related provision for taxes on such extraordinary
or nonrecurring gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash and Cash Equivalents received upon the sale or
other disposition of any non-cash consideration received in any Asset Sale),
net of (i) the direct costs relating to such Asset Sale (including, without
limitation, legal, accounting and investment banking fees,
76
<PAGE>
and sales commissions) and any relocation expenses incurred as a result
thereof, (ii) taxes paid or payable as a result thereof (after taking into
account any available tax credits or deductions and any tax sharing
arrangements), (iii) any reserve for adjustment in respect of the sale price
of such asset or assets established in accordance with GAAP, or against any
liabilities associated with the Asset Sale, or the assets subject thereto, and
retained by the Company or any Restricted Subsidiary, and (iv) amounts
required to be applied to the repayment of Debt secured by a Lien on the asset
or assets that were the subject of such Asset Sale, or to the satisfaction of
contractual obligations either existing at the date of the Indenture, or
entered into after the date of the Indenture in connection with the payment of
deferred purchase price of the properties or assets that were the subject of
such Asset Sale.
"Non-Recourse Debt" means Debt (i) as to which neither the Company nor any
of its Restricted Subsidiaries (A) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Debt), (B) is directly or indirectly liable (as guarantor or otherwise), or
(C) constitutes the lender and (ii) no default with respect to which
(including any rights that the holders thereof may have to take enforcement
action against an Unrestricted Subsidiary) would permit (upon notice, lapse of
time or both) any holder of any other Debt (other than the Notes being offered
hereby) of the Company or any of its Restricted Subsidiaries to declare a
default on such other Debt or cause the payment thereof to be accelerated or
payable prior to its Stated Maturity.
"Obligations" means any principal, premium, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Debt.
"Officers' Certificate" means with respect to any Person, a certificate
signed by the Chairman, Vice Chairman, Chief Executive Officer, the President
or any Vice President and the Chief Financial Officer, Controller or the
Treasurer of such Person that shall comply with applicable provisions of the
Indenture.
"Pari Passu Debt" shall mean any Debt of the Company that is pari passu in
right of payment to the Notes.
"Pari Passu Debt Amount" shall have the definition set forth under "--
Certain Covenants--Asset Sales."
"Permitted Holders" means (i) Code, Hennessy & Simmons, Inc., (ii) Code
Hennessy & Simmons LLC, (iii) Code, Hennessy & Simmons III, L.P. and (iv)
their respective affiliates.
"Permitted Investments" means: (i) any Investment in the Company or in a
Restricted Subsidiary of the Company that is engaged in the same or a similar
line of business as the Company and its Restricted Subsidiaries (or reasonable
extensions or expansions thereof); (ii) any Investment in Cash Equivalents;
(iii) any Investment by the Company or any Restricted Subsidiary of the
Company in a Person, if as a result of such Investment (A) such Person becomes
a Restricted Subsidiary of the Company that is engaged in the same or a
similar line of business as the Company and its Restricted Subsidiaries (or
reasonable extensions or expansions thereof) or (B) such Person is merged,
consolidated or amalgamated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into, the Company or a
Restricted Subsidiary of the Company that is engaged in the same or a similar
line of business as the Company and its Restricted Subsidiaries (or reasonable
extensions or expansions thereof); (iv) any Investment made as a result of the
receipt of non-cash consideration from an Asset Sale that was made pursuant to
and in compliance with the covenant described above under the caption "--
Certain Covenants--Asset Sales"; (v) any acquisition of assets solely in
exchange for the issuance of Equity Interests (other than Disqualified Stock)
of the Company; (vi) Investments made in exchange for accounts receivable
arising in the ordinary course of business which have not been collected for
180 days and which are, in the good faith of the Company, substantially
uncollectible; provided that any such Investments in excess of $500,000 shall
be approved by the Board of Directors (evidenced by a Board Resolution set
forth in an Officers' Certificate delivered to the Trustee); (vii) loans and
advances to employees of the Company and its Restricted Subsidiaries in the
ordinary course of business for bona fide business purposes not to exceed $1.0
million in the aggregate at any one time outstanding; (viii) Investments in
Permitted Joint Ventures and Investments in suppliers to the Company and its
Restricted Subsidiaries in an aggregate amount when taken together with all
other Investments pursuant to this clause (viii) does not exceed the greater
of $10.0 million or 10% of Total
77
<PAGE>
Assets at any one time outstanding; (ix) Hedging Obligations entered into in
the ordinary course of business and otherwise in compliance with the
Indenture; (x) other Investments in any Person having an aggregate fair market
value (measured on the date each such Investment was made and without giving
effect to subsequent changes in value), when taken together with all other
Investments made pursuant to this clause (x) that are at the time outstanding,
not to exceed $10.0 million; (xi) Investments in securities of trade creditors
or customers received pursuant to any plan of reorganization or similar
arrangement upon the bankruptcy or insolvency of such trade creditors or
customers; (xii) guarantees by the Company or any Restricted Subsidiary of
Debt otherwise permitted to be incurred under the Indenture; (xiii) any
Investment by the Company or a Wholly Owned Subsidiary of the Company in a
Securitization Entity or any Investment by a Securitization Entity in any
other Person in connection with a Qualified Securitization Transaction;
provided that any Investment in a Securitization Entity is in the form of a
Purchase Money Note or an Equity Interest; and (xiv) Investments received by
the Company or its Restricted Subsidiaries as consideration for asset sales,
including Asset Sales; provided that in the case of an Asset Sale, such Asset
Sale is effected in compliance with the "Limitations on Asset Sales" covenant;
and (xv) Investments by Foreign Subsidiaries of the Company in currencies of
countries in which such subsidiaries conduct business, provided that such
currencies are freely convertible into United States dollars. For purposes of
calculating the aggregate amount of Permitted Investments permitted to be
outstanding at any one time pursuant to clauses (viii) and (x) of the
preceding sentence, (i) to the extent the consideration for any such
Investment consists of Equity Interests (other than Disqualified Stock) of the
Company, the value of the Equity Interests so issued will be ignored in
determining the amount of such Investment and (ii) the aggregate amount of
such Investments made by the Company and its Restricted Subsidiaries on or
after the date of the Indenture will be decreased (but not below zero) by an
amount equal to the lesser of (A) the cash return of capital to the Company or
a Restricted Subsidiary with respect to such Investment that is sold for cash
or otherwise liquidated or repaid for cash (less the cost of disposition,
including applicable taxes, if any) and (B) the initial amount of such
Investment.
"Permitted Joint Venture" means any Person which is, directly or indirectly
through its Subsidiaries or otherwise, engaged principally in the principal
business of the Company, or a reasonably related business, and the Capital
Stock of which is owned by the Company and one or more Persons other than the
Company or any Affiliate of the Company.
"Permitted Liens" means (i) Liens to secure obligations in respect of
workers compensation, unemployment, social security, statutory obligations,
surety or appeal bonds or other obligations of a like nature incurred in the
ordinary course of business, (ii) Liens for taxes, assessments or governmental
charges or claims that are not yet delinquent or that are being contested in
good faith by appropriate proceedings promptly instituted and diligently
conducted, (iii) Liens in favor of the Company, (iv) carriers',
warehousemen's, mechanics', landlords', materialmen's, repairmen's or other
like Liens arising in the ordinary course of business in respect of
obligations not overdue for a period in excess of 30 days or which are being
contested in good faith by appropriate proceedings promptly instituted and
diligently prosecuted; provided that any reserve or other appropriate
provision as shall be required to conform with GAAP shall have been made
therefor, (v) Liens securing the Senior Credit Facility, (vi) Liens on
property of a Person existing at the time such Person is merged into or
consolidated with the Company; provided that such Liens were in existence
prior to the contemplation of such merger or consolidation and do not extend
to any assets other than those of the Person merged into or consolidated with
the Company (vii) Liens on property existing at the time of acquisition
thereof by the Company; provided that such liens were in existence prior to
the contemplation of such acquisition, (viii) purchase money Liens to finance
property or assets of the Company acquired in the ordinary course of business;
provided, however, that (A) the related Purchase Money Obligations shall not
exceed the cost of such property or assets and shall not be secured by any
property or assets of the Company other than the property or assets so
acquired and (B) the Lien securing such Debt shall be created within 90 days
of such acquisition, (ix) Liens existing on the date of the Indenture, (x)
judgment Liens not giving rise to an Event of Default, (xi) easements, rights-
of-way, zoning and similar restrictions and other similar encumbrances or
title defects incurred or imposed, as applicable, in the ordinary course of
business and consistent with industry practices which, in the aggregate, are
not substantial in amount, and which do not in any case materially detract
from the value of the
78
<PAGE>
property subject thereto (as such property is used by the Company) or
interfere with the ordinary conduct of business of the Company; provided,
however, that any such Liens are not incurred in connection with any borrowing
of money or commitment to loan any money to or to extend any credit, (xii)
Liens on assets transferred to a Securitization Entity or on assets of a
Securitization Entity, in either case incurred in connection with a Qualified
Securitization Transaction, (xiii) Liens incurred in the ordinary course of
business of the Company with respect to obligations that do not exceed $5.0
million at any one time outstanding and that (A) are not incurred in
connection with the borrowing of money or the obtaining of advances or credit
(other than trade credit in the ordinary course of business) and (B) do not in
the aggregate materially detract from the value of property or materially
impair the use thereof in the operation of business by the Company, (xiv) any
interest or title of a lessor under any Capital Lease Obligation, (xv) Liens
upon specific items of inventory or other goods and proceeds of any Person
securing such Person's obligations in respect of bankers' acceptances issued
or created for the account of such Person to facilitate the purchase, shipment
or storage of such inventory or other goods, (xvi) Liens securing
reimbursement obligations with respect to commercial letters of credit which
encumber documents and other property relating to such letters of credit and
products and proceeds thereof, (xvii) Liens encumbering deposits made to
secure obligations arising from statutory, regulatory, contractual or warranty
requirements of the Company, including rights of offset and set-off, (xviii)
Liens securing Hedging Obligations, (xix) leases or subleases granted to
others that do not materially interfere with the ordinary course of business
of the Company, (xx) Liens arising from filing Uniform Commercial Code
financing statements regarding operating leases entered into in the ordinary
course of business and (xxi) Liens in favor of customs and revenue authorities
arising as a matter of law to secure payments of customer duties in connection
with the importation of goods.
"Permitted Refinancing Debt" means any Debt of the Company or any of its
Restricted Subsidiaries or any Disqualified Stock issued in exchange for, or
the net proceeds of which are used to extend, refinance, renew, replace,
defease or refund other Debt of the Company or any of its Restricted
Subsidiaries; provided that: (i) the principal amount (or accrued value, if
applicable) of such Permitted Refinancing Debt does not exceed the principal
amount of (or accrued value, if applicable), plus accrued interest on, the
Debt so extended, refinanced, renewed, replaced, defeased or refunded (plus
the amount of reasonable fees and expenses incurred in connection therewith);
(ii) such Permitted Refinancing Debt has a final maturity date later than the
final maturity date of, and has a Weighted Average Life to Maturity equal to
or greater than the Weighted Average Life to Maturity of, the Debt being
extended, refinanced, renewed, replaced, defeased or refunded; (iii) if the
Debt being extended, refinanced, renewed, replaced, defeased or refunded is
subordinated in right of payment to the Notes, such Permitted Refinancing Debt
has a final maturity date later than the final maturity date of, and is
subordinated in right of payment to the Notes on terms at least as favorable
to the Holders of Notes, as applicable, as those contained in the
documentation governing the Debt being extended, refinanced, renewed,
replaced, defeased or refunded; and (iv) such Debt is incurred either by the
Company or by the Restricted Subsidiary who is the obligor on the Debt being
extended, refinanced, renewed, replaced, defeased or refunded or is
Disqualified Stock.
"Purchase Money Notes" means a promissory note of a Securitization Entity
evidencing a line of credit, which may be irrevocable, from the Company or any
Subsidiary of the Company in connection with a Qualified Securitization
Transaction to a Securitization Entity which note shall be repaid from cash
available to the Securitization Entity, other than amounts required to be
established as reserves pursuant to agreements, amounts paid to investors in
respect of interest, principal and other amounts owing to such investors and
amounts paid in connection with the purchase of newly generated receivables or
newly acquired equipment.
"Purchase Money Obligations" of a Person means Debt of such Person incurred
in connection with the purchase, construction or improvement of property,
plant or equipment used in the business of such Person (whether through the
direct purchase of the assets or the Equity Interests of any Person owning
such assets).
"Qualified Securitization Transaction" means any transaction or series of
transactions pursuant to which the Company or any of its Restricted
Subsidiaries may sell, convey or otherwise transfer to (i) a Securitization
Entity (in the case of a transfer by the Company or any of its Restricted
Subsidiaries) and (ii) any other Person (in the case of a transfer by a
Securitization Entity), or may grant a security interest in, any receivables
or
79
<PAGE>
equipment loans (whether now existing or arising or acquired in the future) of
the Company or any of its Restricted Subsidiaries, and any assets related
thereto including, without limitation, all collateral securing such
receivables and equipment loans, all contracts and contract rights and all
guarantees or other obligations in respect of such receivables and equipment
loans, proceeds of such receivables and equipment loans and other assets
(including contract rights) which are customarily transferred or in respect of
which security interests are customarily granted in connection with asset
securitization transaction involving receivables and equipment (collectively,
"transferred assets"); provided that in the case of any such transfer by the
Company or any of its Restricted Subsidiaries, the transferor receives cash or
Purchase Money Notes in an amount which (when aggregated with the cash and
Purchase Money Notes received by the Company and its Restricted Subsidiaries
upon all other such transfers of transferred assets during the ninety days
preceding such transfer) is at least equal to 75.0% of the aggregate face
amount of all receivables so transferred during such day and the ninety
preceding days.
"Registration Agreement" means the Registration Agreement among the Company
and the other signatories thereto as in effect on the date of the Indenture or
as thereafter amended in a manner that is not disadvantageous to the Holders
of Notes in any material respect.
"Related Person" means with respect to any Person (i) any Affiliate of such
Person, (ii) any individual or other Person who directly or indirectly is the
registered or beneficial owner of 5% or more of any class of Capital Stock of
such Person or warrants, rights, options or other rights to acquire more than
5% of any class of Capital Stock of such Person, (iii) any relative of such
individual by blood, marriage or adoption not more remote than first cousin
and (iv) any officer or director of such Person.
"Restricted Domestic Subsidiary" means a Restricted Subsidiary organized and
validly existing under the laws of the United States or any state thereof or
the District of Columbia.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Payment" means: (i) any dividend or any other payment or
distribution on account of the Company's or any of its Restricted
Subsidiaries' Equity Interests or to the direct or indirect holders of the
Company's or any of its Restricted Subsidiaries' Equity Interests in their
capacity as such (other than (A) dividends or distributions payable in Equity
Interests (other than Disqualified Stock) of the Company or such Restricted
Subsidiary or (B) dividends or distributions payable to the Company or any
Wholly Owned Restricted Subsidiary); (ii) any payment to purchase, redeem or
otherwise acquire or retire for value any Equity Interests of the Company, any
direct or indirect parent of the Company or any Restricted Subsidiary of the
Company (other than any Equity Interests owned by the Company or any Wholly
Owned Restricted Subsidiary); (iii) any payment to purchase, redeem, defease
or otherwise acquire or retire for value any Subordinated Debt of the Company
or a Restricted Subsidiary, except a payment of interest or principal at
Stated Maturity; (iv) any payment in respect of Employee Notes other than
payments in the form of additional Employee Notes or Equity Interests (other
than Disqualified Stock) of the Company; and (v) any Restricted Investment.
"Restricted Subsidiary" of any Person means any Subsidiary of such Person
which at the time of determination is not an Unrestricted Subsidiary.
"Sale and Lease-Back Transaction" means any arrangement with any Person
providing for the leasing by the Company or any Restricted Subsidiary of the
Company of any real or tangible personal property, which property has been or
is to be sold or transferred by the Company or such Restricted Subsidiary to
such Person in contemplation of such leasing.
"Securitization Entity" means a Wholly Owned Subsidiary of the Company (or
another Person in which the Company or any Restricted Subsidiary of the
Company makes an Investment and to which the Company or any Restricted
Subsidiary of the Company transfers receivables or equipment and related
assets) that engages in no activities other than in connection with the
financing of receivables or equipment and that is designated by
80
<PAGE>
the Board of Directors of the Company (as provided below) as a Securitization
Entity (i) no portion of the Debt or any other Obligations (contingent or
otherwise) of which (A) is guaranteed by the Company or any Restricted
Subsidiary of the Company (other than the Securitization Entity) in any way
other than pursuant to Standard Securitization Undertakings or Limited
Originator Recourse, (B) is recourse to or obligates the Company or any
Restricted Subsidiary of the Company (other than the Securitization Entity) in
any way other than pursuant to Standard Securitization Undertakings or Limited
Originator Recourse or (C) subjects any property or asset of the Company or
any Restricted Subsidiary of the Company (other than the Securitization
Entity), directly or indirectly, contingently or otherwise, to the
satisfaction thereof, other than pursuant to Standard Securitization
Undertakings or Limited Originator Recourse, (ii) with which neither the
Company nor any Restricted Subsidiary of the Company has any material
contract, agreement, arrangement or understanding other than on terms no less
favorable to the Company or such Restricted Subsidiary than those that might
be obtained at the time from Persons that are not Affiliates of the Company,
other than fees payable in the ordinary course of business in connection with
servicing receivables of such entity and (iii) to which neither the Company
nor any Restricted Subsidiary of the Company has any obligation to maintain or
preserve such entity's financial condition or cause such entity to achieve
certain levels of operating results. Any such designation by the Board of
Directors of the Company shall be evidenced by the filing with the Trustee a
Board Resolution of the Company giving effect to such designation and an
Officer's Certificate certifying that such designation complied with the
foregoing conditions.
"Securityholders Agreement" means the Securityholders Agreement among the
Company and the other signatories thereto as in effect on the date of the
Indenture or as thereafter amended in a manner that is not disadvantageous to
the Holders of Notes in a material respect.
"Senior Credit Facility" means, the Credit Agreement dated as of July 31,
1998, among the Company, Globe Manufacturing, the lenders party thereto in
their capacity as such, Bank of America National Trust and Savings
Association, as administrative agent, Merrill Lynch, Pierce, Fenner & Smith,
Inc., as syndication agent, and BancAmerica Robertson Stephens, as arranger,
together with the related documents thereto (including, without limitation,
any guarantee agreements and security documents), in each case as such
agreements may be amended (including any amendment and restatement thereof),
supplemented or otherwise modified from time to time, including any agreement
extending the maturity of, refinancing, replacing or otherwise restructuring
(including, without limitation, increasing the amount of available borrowings
thereunder or adding Subsidiaries of the Company as additional borrowers or
guarantors thereunder) all or any portion of the indebtedness under such
agreement or any successor or replacement agreement, whether by the same or
any other agent, lender or group of lenders, whether contained in one or more
agreements.
"Senior Debt" means, with respect to any Person, the principal of, premium
(if any) and accrued and unpaid interest (including interest accruing on or
after the filing of any petition in bankruptcy or for reorganization of such
Person, regardless of whether or not a claim for post-filing interest is
allowed in such proceedings) on, and fees and other amounts owning in respect
of, Debt of such Person, whether outstanding on the Issue Date or thereafter
incurred, unless in the instrument creating or evidencing the same or pursuant
to which the same is outstanding it is provided that such obligations are
subordinated in right of payment to the Notes; provided, however, that Senior
Debt shall not include (i) any obligation of the Company to any Subsidiary,
(ii) any liability for Federal, state, local or other taxes owed or owing by
the Company, (iii) any accounts payable or other liability to trade creditors
arising in the ordinary course of business (including guarantees thereof or
instruments evidencing such liabilities), (iv) any Debt or obligation of the
Company (and any accrued and unpaid interest in respect thereof) that by its
terms is subordinate or junior in any respect to any other Debt or obligation
of the Company, including any Subordinated Debt, (v) any payment obligations
with respect to any Equity Interests, or (vi) any Debt incurred in violation
of the Indenture.
"Significant Subsidiary" means any Restricted Subsidiary of the Company that
would be a "significant subsidiary" as defined in Article 1, Rule 1-02 of
Regulation S-X, promulgated pursuant to the Act, as such Regulation is in
effect on the Issue Date.
81
<PAGE>
"Standard Securitization Undertakings" means representations, warranties,
covenants and indemnitees entered into by the Company or any Subsidiary of the
Company that are reasonably customary in receivables or equipment loan
transactions.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Debt, the date on which such payment of interest or
principal was scheduled to be paid in the original documentation governing
such Debt, and shall not include any contingent obligations to repay, redeem
or repurchase any such interest or principal prior to the date originally
scheduled for the payment thereof.
"Subordinated Debt" means any Debt of the Company (whether outstanding on
the Issue Date or thereafter incurred) which is by its terms subordinated in
right of payment to the Notes.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total
voting power of shares of Capital Stock entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers
or trustees thereof is at the time owned or controlled, directly or
indirectly, by such Person or one or more of the other Subsidiaries of that
Person (or a combination thereof) and (ii) any partnership (A) the sole
general partner or the managing general partner of which is such Person or a
Subsidiary of such Person or (B) the only general partners of which are such
Person or one or more Subsidiaries of such Person (or any combination
thereof).
"Tax Sharing Agreement" means the Tax Sharing Agreement between the Company
and Globe Manufacturing as in effect on the date of the Indenture or as
thereafter amended in a manner that is not adverse to the Company or the
Holders of Notes.
"Total Assets" means, with respect to any date of determination, the total
assets of the Company and its Restricted Subsidiaries shown on the Company's
consolidated balance sheet prepared in accordance with GAAP on the last day of
the fiscal quarter prior to the date of determination.
"Treasury Rate" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled by,
and published in, the most recent Federal Reserve Statistical Release H.15
(519) which has become publicly available at least two Business Days prior to
the date fixed for redemption of the Notes following a Change of Control (or,
if such Statistical Release is no longer published, any publicly available
source of similar market data)) most nearly equal to the period from the
redemption date to August 1, 2003; provided, however, that if the period from
the redemption date to August 1, 2003 is not equal to the constant maturity of
a United States Treasury security for which a weekly average yield is given,
the Treasury Rate shall be obtained by linear interpolation (calculated to the
nearest one-twelfth of a year) from the weekly average yields of United States
Treasury securities for which such yields are given, except that if the period
from the redemption date to August 1, 2003 is less than one year, the weekly
average yield on actually traded United States Treasury securities adjusted to
a constant maturity of one year shall be used.
"Unrestricted Subsidiary" of any Person means (i) any Subsidiary of such
Person that as of the time of determination shall be or continue to be
designated an Unrestricted Subsidiary in the manner provided below and (ii)
any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may
designate any Subsidiary (including any newly acquired or newly formed
Subsidiary) to be an Unrestricted Subsidiary unless such Subsidiary owns any
Capital Stock of the Company or any Restricted Subsidiary or holds any Lien on
any property of the Company or any other Subsidiary of the Company that is not
a Subsidiary of the Subsidiary to be so designated; provided that (i) the
Company certifies to the Trustee that such designation complies with the
provisions of the covenant described under the caption "--Certain Covenants--
Restricted Payments" and (ii) each Subsidiary to be so designated and each of
its Subsidiaries has not at the time of designation, and does not thereafter,
create, incur, issue, assume, guarantee or otherwise become directly or
indirectly liable with respect to, any indebtedness pursuant to which the
lender has recourse to any of the assets of the Company or any of its
Restricted Subsidiaries. The Board of Directors may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary only if (i) immediately after giving
effect to such designation, the Company is able to incur at least
82
<PAGE>
$1.00 of additional Debt pursuant to the Consolidated Fixed Charge Coverage
Ratio set forth in the first paragraph of the covenant described under the
caption "--Incurrence of Debt and Issuance of Preferred Stock" and (ii)
immediately before and immediately after giving effect to such designation, no
Default or Event of Default shall have occurred and be continuing. Any such
designation by the Board of Directors shall be evidenced to the Trustee by
promptly filing with the Trustee a copy of the Board Resolution giving effect
to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing provisions.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors, managers, trustees or other governing body, as applicable, of such
Person.
"Weighted Average Life to Maturity" means, when applied to any Debt at any
date, the number of years obtained by dividing (i) the sum of the products
obtained by multiplying (A) the amount of each then remaining installment,
sinking fund, serial maturity or other required payments of principal
including payment at final maturity, in respect thereof, by (B) the number of
years (calculated to the nearest one-twelfth) that will elapse between such
date and the making of such payment, by (ii) the then outstanding principal
amount of such Debt.
"Wholly Owned Restricted Subsidiary" of any Person means any Restricted
Subsidiary of such Person that is a Wholly Owned Subsidiary of such Person.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person, by one or more Wholly Owned Subsidiaries of such Person or by such
Person and one or more Wholly Owned Subsidiaries of such Person.
Events of Default and Remedies
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on the
Notes; (ii) default in payment when due of the principal of or premium, if
any, on the Notes; (iii) failure by the Company or any of its Restricted
Subsidiaries for 30 days after notice from either the Trustee or the Holders
of at least 25% in principal amount of the then outstanding Notes to comply
with the provisions described under the captions "--Repurchase at the Option
of Holders Upon Change of Control", "--Certain Covenants--Asset Sales", or "--
Certain Covenants--Merger, Consolidation or Sale of Assets"; (iv) failure by
the Company or any of its Restricted Subsidiaries for 60 days after notice
from either the Trustee or the Holders of at least 25% in principal amount at
maturity of the then-outstanding Notes to comply with any of its other
agreements or covenants in the Indenture or the Notes; (v) a default under any
mortgage, indenture, agreement or instrument under which there may be issued
or by which there may be secured or evidenced any Debt for money borrowed by
the Company or any of its Restricted Subsidiaries (other than a Securitization
Entity) (or the payment of which is guaranteed by the Company or any of its
Restricted Subsidiaries (other than a Securitization Entity)) whether such
Debt or guarantee now exists, or is created after the date of the Indenture,
which default (A) is caused by a failure to pay at final Stated Maturity
(giving effect to any applicable grace periods and any extensions thereof) the
principal amount of such Debt (a "Payment Default") or (B) results in the
acceleration of such Debt prior to its final Stated Maturity and, in the case
of either clause (A) or (B), the principal amount of any such Debt, together
with the principal amount of any other such Debt under which there has been a
Payment Default or the maturity of which has been so accelerated, aggregates
$7.5 million or more; (vi) failure by the Company or any of its Significant
Subsidiaries to pay final judgments aggregating in excess of $7.5 million (to
the extent not covered by third party insurance as to which the insurance
company has acknowledged coverage), which judgments are not paid, discharged
or stayed for a period of 60 days; and (vii) certain events of bankruptcy or
insolvency with respect to the Company or any of its Significant Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount at maturity of the then outstanding Notes
may declare (a) the Accreted Value of all the Notes, together
83
<PAGE>
with Liquidated Damages, if any, if on or prior to August 1, 2003 or (b) the
principal of and accrued but unpaid interest on all the Notes if after August
1, 2003, to be due and payable by notice in writing to the Company and the
Trustee specifying the respective Event of Default and that it is a "notice of
acceleration" (the "Acceleration Notice") and the same shall become
immediately due and payable. In the event of a declaration of acceleration
because an Event of Default set forth in clause (v) of the preceding paragraph
has occurred and is continuing, such declaration of acceleration shall be
automatically annulled if (i) the missed payments in respect of the applicable
Debt have been paid or if the holders of the Debt that is subject to
acceleration have rescinded their declaration of acceleration, in each case
within 30 days thereof and (ii) all existing Events of Default, except non-
payment of principal or interest which have become due solely because of the
acceleration of the Notes, have been cured or waived. Notwithstanding the
foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to the Company, any Significant
Subsidiary or any group of Restricted Subsidiaries that, taken together, would
constitute a Significant Subsidiary, (a) the Accreted Value of all the Notes,
together with Liquidated Damages, if any, if on or prior to August 1, 2003 or
(b) the principal of and accrued but unpaid interest on all the Notes if after
August 1, 2003, will become due and payable without further action or notice.
Holders of the Notes may not enforce the Indenture or the Notes except as
provided in the Indenture. Subject to certain limitations, Holders of a
majority in principal amount of the then outstanding Notes may direct the
Trustee in its exercise of any trust or power.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have
had to pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Notes. If an Event of Default occurs by reason of
any willful action (or inaction) taken (or not taken) by or on behalf of the
Company with the intention of avoiding the prohibition on redemption of the
Notes, then the premium specified in the Indenture shall also become
immediately due and payable to the extent permitted by law upon the
acceleration of the Notes. If an Event of Default occurs prior to August 1,
2003, by reason of any willful action (or inaction) taken (or not taken) by or
on behalf of the Company with the intention of avoiding the prohibition on
redemption of the Notes prior to such date, then the amount payable for
purposes of this paragraph shall be the amount that would otherwise be due but
for the provisions of this sentence, plus the Applicable Premium determined as
of the date of payment.
The Holders of a majority in aggregate principal amount at maturity of the
Notes then outstanding by notice to the Trustee may on behalf of the Holders
of all of the Notes waive any existing Default or Event of Default and its
consequences under the Indenture except a continuing Default or Event of
Default in the payment of interest on, or the principal of, the Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
All references herein to payments of principal, premium, if any, and
interest on the Notes shall be deemed to include any applicable Liquidated
Damages that may become payable in respect of the Notes.
Modification of the Indenture
Except as provided in the two succeeding paragraphs, the Indenture or the
Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount at maturity of the Notes then outstanding
(including, without limitation, consents obtained in connection with a
purchase of, or tender offer or exchange offer for, Notes), and any existing
default or compliance with any provision of the Indenture or the Notes may be
waived with the consent of the Holders of a majority in principal amount of
the then outstanding Notes (including consents obtained in connection with a
tender offer or exchange offer for Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount at maturity of Notes whose Holders must
84
<PAGE>
consent to an amendment, supplement or waiver, (ii) reduce the principal or
Accreted Value of or change the fixed maturity of any Note or alter the
provisions with respect to the redemption of the Notes, (iii) reduce the rate
of or change the time for payment of interest on any Note, (iv) waive a
Default or Event of Default in the payment of principal, premium, if any, or
interest on the Notes (except a rescission of acceleration of the Notes by the
Holders of at least a majority in aggregate principal amount of the Notes and
a waiver of the payment default that resulted from such acceleration), (v)
make any Note payable in money other than that stated in the Notes, (vi) make
any change in the provisions of the Indenture relating to waivers of past
Defaults or the rights of Holders of Notes to receive payments of principal of
or premium, if any, or interest on the Notes, (vii) waive a redemption payment
with respect to any Note (other than a payment required by the covenant
described above under the caption "--Change of Control"), (viii) modify or
change any provision of the Indenture or the related definitions, affecting
the subordination or ranking of the Notes in any manner that adversely affects
the Holders, or (ix) make any change in the foregoing amendment and waiver
provisions.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes
to cure any ambiguity, defect or inconsistency, to provide for uncertificated
Notes in addition to or in place of certificated Notes, to provide for the
assumption of the Company's obligations to Holders of Notes in the case of a
merger or consolidation, to make any change that would provide any additional
rights or benefits to the Holders of Notes or that does not adversely affect
the legal rights under the Indenture of any such Holder, or to comply with
requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act.
Payments for Consent
Neither the Company nor any of its Subsidiaries shall, directly or
indirectly, pay or cause to be paid any consideration, whether by way of
interest, fee or otherwise, to any holder of any Notes for or as an inducement
to any consent, waiver or amendment of any of the terms or provisions of the
Indenture or the Notes unless such consideration is offered to be paid or
agreed to be paid to all holders of the Notes that consent, waive or agree to
amend in the time frame set forth in the solicitation documents relating to
such consent, waiver or agreement, which solicitation documents must be mailed
to all Holders of the Notes a reasonable length of time prior to the
expiration of the solicitation.
No Personal Liability of Directors, Officers, Employees and Shareholders
No director, officer, employee, incorporator or shareholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Notes, the Indenture or for any claim based on, in respect of, or by reason
of, such obligations or their creation. Each Holder of Notes by accepting a
Note waives and releases all such liability. The waiver and release are part
of the consideration for issuance of the Notes. Such waiver may not be
effective to waive liabilities under the federal securities laws and it is the
view of the Commission that such a waiver is against public policy.
Legal Defeasance and Covenant Defeasance
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance") except for (i) the rights of Holders of outstanding Notes to
receive payments in respect of the principal, premium, if any, and interest on
such Notes when such payments are due from the trust referred to below, (ii)
the Company's obligations with respect to the Notes concerning issuing
temporary Notes, registration of Notes, mutilated, destroyed, lost or stolen
Notes and the maintenance of an office or agency for payment and money for
security payments held in trust, (iii) the rights, powers, trusts, duties and
immunities of the Trustee, and the Company's obligations in connection
therewith and (iv) the Legal Defeasance provisions of the Indenture. In
addition, the Company may, at its option and at any time, elect to have the
obligations of the Company released with respect to certain covenants that are
described in the Indenture ("Covenant Defeasance") and thereafter any omission
to comply with such obligations shall not constitute a Default or Event of
Default with respect to the Notes. In the event Covenant Defeasance occurs,
certain events (not including non-payment, bankruptcy, receivership,
rehabilitation and insolvency events) described under "Events of Default" will
no longer constitute an Event of Default with respect to the Notes.
85
<PAGE>
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient,
in the opinion of a nationally recognized firm of independent public
accountants, to pay the principal, premium, if any, and interest on the
outstanding Notes at their Stated Maturity or on the applicable redemption
date, as the case may be, and the Company must specify whether the Notes are
being defeased to maturity or to a particular redemption date; (ii) in the
case of Legal Defeasance, the Company shall have delivered to the Trustee an
opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that (A) the Company has received from, or there has been published
by, the Internal Revenue Service a ruling or (B) since the date of the
Indenture, there has been a change in the applicable federal income tax law,
in either case to the effect that, and based thereon such opinion of counsel
shall confirm that, the Holders of the outstanding Notes will not recognize
income, gain or loss for federal income tax purposes as a result of such Legal
Defeasance and will be subject to federal income tax on the same amounts, in
the same manner and at the same times as would have been the case if such
Legal Defeasance had not occurred; (iii) in the case of Covenant Defeasance,
the Company shall have delivered to the Trustee an opinion of counsel in the
United States reasonably acceptable to the Trustee confirming that the Holders
of the outstanding Notes will not recognize income, gain or loss for federal
income tax purposes as a result of such Covenant Defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at
the same times as would have been the case if such Covenant Defeasance had not
occurred; (iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit (other than a Default or Event of
Default resulting from the borrowing of funds to be applied to such deposit)
or insofar as Events of Default from bankruptcy or insolvency events are
concerned, at any time in the period ending on the 91st day after the date of
deposit; (v) such Legal Defeasance or Covenant Defeasance will not result in a
breach or violation of, or constitute a default under any material agreement
or instrument (other than the Indenture) to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries is
bound; (vi) the Company must have delivered to the Trustee an opinion of
counsel to the effect that after the 91st day following the deposit, the trust
funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally; (vii) the Company must deliver to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the
intent of preferring the Holders of Notes over the other creditors of the
Company with the intent of defeating, hindering, delaying or defrauding
creditors of the Company or others; and (viii) the Company must deliver to the
Trustee an Officers' Certificate and an opinion of counsel, each stating that
all conditions precedent provided for relating to the Legal Defeasance or the
Covenant Defeasance have been complied with.
Transfer and Exchange
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note
selected for redemption. Also, the Company is not required to transfer or
exchange any Note for a period of 15 days before a selection of Notes to be
redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
Governing Law
The Indenture, the Notes and the Registration Rights Agreement are governed
by, and construed in accordance with, the laws of the State of New York,
without giving effect to the conflicts of law principles thereof.
86
<PAGE>
Concerning the Trustee
Norwest Bank Minnesota, National Association is the Trustee under the
Indenture. Its address is Norwest Center, 6th and Marquette, Minneapolis,
Minnesota. The Company has also approved the Trustee as the initial Registrar,
Transfer Agent and Paying Agent under the Indenture. The Trustee is also the
trustee under the Senior Subordinated Note Indenture.
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage
in other transactions; however, if it acquires any conflicting interest it
must eliminate such conflict within 90 days, apply to the Commission for
permission to continue or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the
Indenture at the request of any Holder of Notes, unless such Holder shall have
offered to the Trustee security and indemnity satisfactory to it against any
loss, liability or expense.
Exchange Offer; Registration Rights
The Company and the Initial Purchaser entered into a registration rights
agreement (the "Registration Rights Agreement") on August 6, 1998 pursuant to
which the Company agreed, for the benefit of Holders of the Notes, that it
will, at its expense for the benefit of the Holders, (i) within 60 days after
the Issue Date, file the Exchange Offer Registration Statement with the
Commission with respect to the Exchange Offer and (ii) use its best effort to
cause the Exchange Offer Registration Statement to be declared effective under
the Securities Act within 150 days after the Issue Date. Upon the Exchange
Offer Registration Statement being declared effective, the Company will offer
to all holders of the Notes an opportunity to exchange their securities for a
like principal amount of the New Notes. The Company will keep the Exchange
Offer open for acceptance for not less than 20 business days (or longer if
required by applicable law) after the date notice of the Exchange Offer is
mailed to the Holders. For each Note surrendered to the Company for exchange
pursuant to the Exchange Offer, the Holder of such Note will receive a New
Note having a principal amount at maturity equal to that of the surrendered
Note. Interest on each New Note will accrue (i) from the last interest payment
date on which interest was paid on the Note surrendered in exchange therefor
or (ii) if no interest has been paid on such Note, from the Issue Date.
Under existing interpretations of the Commission contained in several no-
action letters to third parties, the New Notes will be freely transferable by
holders thereof (other than affiliates of the Company) after the Exchange
Offer without further registration under the Securities Act; provided,
however, that each Holder that wishes to exchange its Notes for New Notes will
be required to represent (i) that any New Notes to be received by it will be
acquired in the ordinary course of its business, (ii) that at the time of the
consummation of the Exchange Offer it has no arrangement or understanding with
any person to participate in the distribution (within the meaning of
Securities Act) of the New Notes in violation of the Securities Act, (iii)
that it is not an "affiliate" (as defined in Rule 405 promulgated under the
Securities Act) of the Company, (iv) if such Holder is not a broker-dealer,
that it is not engaged in, and does not intend to engage in, the distribution
of New Notes and (v) if such Holder is a broker-dealer (a "Participating
Broker-Dealer") that will receive New Notes for its own account in exchange
for Notes that were acquired as a result of market-making or other trading
activities, that it will deliver a prospectus in connection with any resale of
such New Notes. The Commission has taken the position that Participating
Broker-Dealers may fulfill their prospectus delivery requirements with respect
to the New Notes (other than a resale of an unsold allotment from the original
sale of the Notes) with the prospectus contained in the Exchange Offer
Registration Statement. The Company will agree to make available, during the
87
<PAGE>
period required by the Securities Act, a prospectus meeting the requirements
of the Securities Act for use by Participating Broker-Dealers and other
persons, if any, with similar prospectus delivery requirements for use in
connection with any resale of New Notes.
If, (i) because of any change in law or in currently prevailing
interpretations of the staff of the Commission, the Company is not permitted
to effect an Exchange Offer, (ii) the Exchange Offer is not consummated within
180 days of the Issue Date, (iii) in certain circumstances, certain holders of
unregistered New Notes so request, or (iv) in the case of any Holder that
participates in the Exchange Offer, such Holder does not receive New Notes on
the date of the exchange that may be sold without restriction under state and
federal securities laws (other than due solely to the status of such Holder as
an affiliate of the Company within the meaning of the Securities Act), then in
each case, the Company will (x) promptly deliver to the Holders and the
Trustee written notice thereof and (y) at their sole expense, (1) as promptly
as practicable, file a shelf registration statement covering resales of the
Notes (the "Shelf Registration Statement"), (2) use their best efforts to
cause the Shelf Registration Statement to be declared effective under the
Securities Act and (3) use their best efforts to keep effective the Shelf
Registration Statement until the earlier of two years after the date such
Shelf Registration Statement is declared effective or such time as all of the
applicable Notes have been sold thereunder. The Company will, in the event
that a Shelf Registration Statement is filed, provide to each Holder copies of
the prospectus that is a part of the Shelf Registration Statement, notify each
such Holder when the Shelf Registration Statement for the Notes has become
effective and take certain other actions as are required to permit
unrestricted resales of the Notes. A Holder that sells Old Notes pursuant to
the Shelf Registration Statement will be required to be named as a selling
security holder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the Registration Rights Agreement that are applicable to such
Holder (including certain indemnification rights and obligations).
If the Company fails to comply with the above provision or if the Exchange
Offer Registration Statement or the Shelf Registration Statement fails to
become effective, then liquidated damages ("Liquidated Damages") shall become
payable in respect of the Notes as follows:
(i) if the Exchange Offer Registration Statement or any Shelf
Registration Statement is not filed with the Commission on or prior to the
applicable Filing Date, Liquidated Damages shall accrue on the principal
amount at maturity of the Notes at a rate of .50% per annum for the first
90 days immediately following such Filing Date, such Liquidated Damages
increasing by an additional .25% per annum at the beginning of each
subsequent 90-day period; or
(ii) if the Exchange Offer Registration Statement is not declared
effective by the Commission within 150 days following the Issue Date or,
whether or not the Company and the Guarantors have consummated or will
consummate an Exchange Offer, the Company and the Guarantors are required
to file a Shelf Registration Statement and such Shelf Registration
Statement is not declared effective by the Commission on or prior to the
90th day following the applicable Filing Date with respect to such Shelf
Registration Statement, then, commencing on the day after either such
required effective date, Liquidated Damages shall accrue on the principal
amount at maturity of the Notes at a rate of .50% per annum for the first
90 days immediately following such date, such Liquidated Damages increasing
by an additional .25% per annum at the beginning of each subsequent 90-day
period; or
(iii) if (A) the Company has not exchanged New Notes for all Notes
validly tendered in accordance with the terms of the Exchange Offer on or
prior to the 180th day after the Issue Date, (B) the Exchange Offer
Registration Statement ceases to be effective for at least 30 days (or
longer if required by applicable law) after the date that notice of the
Exchange Offer is mailed to Holders or (C) if applicable, the Shelf
Registration Statement has been declared effective and such Shelf
Registration Statement ceases to be effective at any time prior to the
second anniversary of the date such Shelf Registration Statement was
declared effective (other than after such time as all Notes have been
disposed of thereunder), the Liquidated Damages shall accrue on the
principal amount at maturity of the Notes at a rate of .50% per annum for
the
88
<PAGE>
first 90 days commencing on (x) the 181st day after the Issue Date, in the
case of (A) above, (y) the day the Exchange Offer Registration Statement
ceases to be effective in the case of (B) above or (z) the day such Shelf
Registration Statement ceases to be effective in the case of (C) above,
such Liquidated Damages increasing by an additional .25% at the beginning
of each subsequent 90-day period;
provided, however, that the Liquidated Damages as a result of the provisions
of clauses (i), (ii) and (iii) above may not exceed in the aggregate 2.0% per
annum; provided, further, however, that (x) upon the filing of the Exchange
Offer Registration Statement or a Shelf Registration Statement (in the case of
clause (i) above), (y) upon the effectiveness of the Exchange Offer
Registration or a Shelf Registration Statement (in the case of clause (ii)
above), or (z) upon the exchange of New Notes for all Notes tendered (in the
case of clause (iii) (A) above), upon the effectiveness of the Exchange Offer
Registration Statement which had ceased to remain effective (in the case of
clause (iii) (B) above) or upon the effectiveness of the Shelf Registration
Statement which had ceased to remain effective (in the case of clause (iii)
(C) above), Liquidated Damages on the Notes as a result of such clause (or the
relevant subclause thereof), as the case may be, shall cease to accrue.
As used herein, "Filing Date" means (i) in the case of an Exchange Offer
Registration Statement, the 60th day after the Issue Date; or (ii) in the case
of a Shelf Registration Statement (which may be applicable notwithstanding the
consummation of the Exchange Offer), the 60th day after a notice regarding the
obligation to file a Shelf Registration Statement is required to be delivered.
Any amounts of Liquidated Damages due pursuant to clauses (i), (ii) or (iii)
above will be payable in cash, on February 1 and August 1 in each year. The
amount of Liquidated Damages will be determined by multiplying the applicable
rate of Liquidated Damages by the principal amount at maturity of the Notes,
multiplied by a fraction, the numerator of which is the number of days such
rate was applicable during such period (determined on the basis of a 360-day
year comprised of twelve 30-day months), and the denominator of which is 360.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified
in its entirety by, all the provisions of the Registration Rights Agreement, a
copy of which will be available upon request to the Company.
Additional Information
Anyone who receives this Prospectus may obtain a copy of the Indenture and
the Registration Rights Agreement without charge by writing to the Trustee.
THE EXCHANGE OFFER
Purpose and Effect of the Exchange Offer
The Old Notes were originally sold by the Company on August 6, 1998 to the
Initial Purchaser pursuant to the Purchase Agreement. The Initial Purchaser
subsequently resold the Old Notes to qualified institutional buyers in
reliance on Rule 144A under the Securities Act. As a condition to the Purchase
Agreement, the Company and the Initial Purchaser entered into the Registration
Rights Agreement on the date of the Initial Offering (the "Issue Date").
Following the consummation of the Exchange Offer, holders of the Old Notes
who were eligible to participate in the Exchange Offer but who did not tender
their Old Notes will not have any further registration rights and such Old
Notes will continue to be subject to certain restrictions on transfer.
Accordingly, the liquidity of the market for such Old Notes could be adversely
affected.
89
<PAGE>
Terms of the Exchange Offer
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Old
Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City
time, on the Expiration Date. The Company will issue $1,000 principal amount
of New Notes in exchange for each $1,000 principal amount at maturity of
outstanding Old Notes accepted in the Exchange Offer. Holders may tender some
or all of their Old Notes pursuant to the Exchange Offer. However, Old Notes
may be tendered only in integral multiples of $1,000.
The form and terms of the New Notes are the same as the form and terms of
the Old Notes except that (i) the New Notes bear a Series B designation and a
different CUSIP Number from the Old Notes, (ii) the New Notes have been
registered under the Securities Act and hence will not bear legends
restricting the transfer thereof and (iii) the holders of the New Notes will
not be entitled to certain rights under the Registration Rights Agreement,
including the provisions providing for liquidated damages in certain
circumstances relating to the timing of the Exchange Offer, all of which
rights will terminate when the Exchange Offer is consummated. The New Notes
will evidence the same debt as the Old Notes and will be entitled to the
benefits of the Indenture.
As of the date of this Prospectus, $49,086,000 aggregate principal amount at
maturity of Old Notes were outstanding. The Company has fixed the close of
business on February 12, 1999 as the record date for the Exchange Offer for
purposes of determining the persons to whom this Prospectus and the Letter of
Transmittal will be mailed initially.
Holders of Old Notes do not have any appraisal or dissenters' rights under
the General Corporation Law of Massachusetts, or the Indenture in connection
with the Exchange Offer. The Company intends to conduct the Exchange Offer in
accordance with the applicable requirements of the Exchange Act and the rules
and regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
for the purpose of receiving the New Notes from the Company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted Old Notes will be
returned, without expense, to the tendering holder thereof as promptly as
practicable after the Expiration Date.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Old
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than transfer taxes in certain circumstances, in connection
with the Exchange Offer. See "--Fees and Expenses."
Expiration Date; Extensions; Amendments
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
March 23, 1999, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will mail to the
registered holders an announcement thereof, each prior to 9:00 a.m., New York
City time, on the next business day after the previously scheduled expiration
date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, to extend the Exchange Offer or to terminate the
Exchange Offer if any of the conditions set forth below under
"--Conditions" shall not have been satisfied, by giving oral or written notice
of such delay, extension or
90
<PAGE>
termination to the Exchange Agent or (ii) to amend the terms of the Exchange
Offer in any manner. Any such delay in acceptance, extension, termination or
amendment will be followed as promptly as practicable by oral or written
notice thereof to the registered holders.
Interest on the New Notes
The Old Notes will continue to accrete at the rate of 14% per annum to, but
excluding the date of issuance of the New Notes and will cease to accrete upon
cancellation of the Old Notes and issuance of the New Notes. Any Old Notes not
tendered or accepted for exchange will continue to accrete at the rate of 14%
per annum in accordance with their terms. From and after the date of issuance
of the New Notes, the New Notes shall accrete at the rate of 14% per annum,
but no cash interest will be payable in respect of the New Notes prior to
August 1, 2003. Thereafter, cash interest on the New Notes will accrue at a
rate of 14% per annum and will be payable semi-annually in arrears on February
1 and August 1 of each year, commencing February 1, 2004.
Procedures for Tendering
Only a holder of Old Notes may tender such Old Notes in the Exchange Offer.
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal or submit an Agent's
Message (as defined below) in connection with a book-entry transfer, and mail
or otherwise deliver such Letter of Transmittal or such facsimile, or Agent's
Message, together with the Old Notes and any other required documents, to the
Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date.
To be tendered effectively, the Old Notes, Letter of Transmittal or Agent's
Message and other required documents must be completed and received by the
Exchange Agent at the address set forth below under "Exchange Agent" prior to
5:00 p.m., New York City time, on the Expiration Date. Delivery of the Old
Notes may be made by book-entry transfer in accordance with the procedures
described below. Confirmation of such book-entry transfer must be received by
the Exchange Agent prior to the Expiration Date.
The term "Agent's Message" means a message, transmitted by a book-entry
transfer facility to, and received by, the Exchange Agent forming a part of a
confirmation of a book-entry, which states that such book-entry transfer
facility has received an express acknowledgment from the participant in such
book-entry transfer facility tendering the Old Notes that such participant has
received and agrees: (i) to participate in the Automated Tender Option Program
("ATOP"); (ii) to be bound by the terms of the Letter of Transmittal; and
(iii) that the Company may enforce such agreement against such participant.
By executing the Letter of Transmittal (or transmitting an Agent's Message
in lieu thereof), each holder will make to the Company the representations set
forth above in the third paragraph under the heading "--Purpose and Effect of
the Exchange Offer."
The tender by a holder and the acceptance thereof by the Company will
constitute agreement between such holder and the Company in accordance with
the terms and subject to the conditions set forth herein and in the Letter of
Transmittal or Agent's Message.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL OR AGENT'S
MESSAGE AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE
ELECTION AND SOLE RISK OF THE HOLDER. AS AN ALTERNATIVE TO DELIVERY BY MAIL,
HOLDERS MAY WISH TO CONSIDER OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT
BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE
SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS,
COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS
FOR SUCH HOLDERS.
91
<PAGE>
Any beneficial owner whose Old Notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to
tender should contact the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. See
"Instructions to Registered Holder and/or Book-Entry Transfer Facility
Participant from Beneficial Owner" included with the Letter of Transmittal.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Old Notes tendered pursuant thereto are tendered (i) by a
registered holder who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal
or (ii) for the account of an Eligible Institution. In the event that
signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, are required to be guaranteed, such guarantee must be by a member firm
of the Medallion System (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
holder of any Old Notes listed therein, such Old Notes must be endorsed or
accompanied by a properly completed bond power, signed by such registered
holder as such registered holder's name appears on such Old Notes with the
signature thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, offices of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and evidence satisfactory to the
Company of their authority to so act must be submitted with the Letter of
Transmittal.
The Company understands that the Exchange Agent will make a request promptly
after the date of this Prospectus to establish accounts with respect to the
Old Notes at the book-entry transfer facility, The Depository Trust Company
(the "Book-Entry Transfer Facility"), for the purpose of facilitating the
Exchange Offer, and subject to the establishment thereof, any financial
institution that is a participant in the Book-Entry Transfer Facility's system
may make book-entry delivery of Old Notes by causing such Book-Entry Transfer
Facility to transfer such Old Notes into the Exchange Agent's account with
respect to the Old Notes in accordance with the Book-Entry Transfer Facility's
procedures for such transfer. Although delivery of the Old Notes may be
effected through book-entry transfer into the Exchange Agent's account at the
Book-Entry Transfer Facility, an appropriate Letter of Transmittal properly
completed and duly executed with any required signature guarantee (or, in the
case of book-entry transfer, an Agent's Message in lieu thereof) and all other
required documents must in each case be transmitted to and received or
confirmed by the Exchange Agent at its address set forth below on or prior to
the Expiration Date, or, if the guaranteed delivery procedures described below
are complied with, within the time period provided under such procedures.
Delivery of documents to the Book-Entry Transfer Facility does not constitute
delivery to the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Notes and withdrawal of tendered Old
Notes will be determined by the Company in its sole discretion, which
determination will be final and binding. The Company reserves the absolute
right to reject any and all Old Notes not properly tendered or any Old Notes
the Company's acceptance of which would, in the opinion of counsel for the
Company, be unlawful. The Company also reserves the right in their sole
discretion to waive any defects, irregularities or conditions of tender as to
particular Old Notes. The Company's interpretation of the terms and conditions
of the Exchange Offer (including the instructions in the Letter of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Old Notes must be
cured within such time as the Company shall determine. Although the Company
intends to notify holders of defects or irregularities with respect to tenders
of Old Notes, neither the Company, the Exchange Agent nor any other person
shall incur any liability for failure to give such notification. Tenders of
Old Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived. Any Old Notes received by the
Exchange Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering holders, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
92
<PAGE>
Guaranteed Delivery Procedures
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, (ii) who cannot deliver their Old Notes, the Letter of
Transmittal (or, in the case of book-entry transfer, an Agent's Message) or
any other required documents to the Exchange Agent or (iii) who cannot
complete the procedures for book-entry transfer, prior to the Expiration Date,
may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the certificate number(s)
of such Old Notes and the principal amount of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that, within three
New York Stock Exchange trading days after the Expiration Date, the Letter
of Transmittal (or facsimile thereof) together with the certificate(s)
representing the Old Notes (or a confirmation of book-entry transfer of
such Notes into the Exchange Agent's account at the Book-Entry Transfer
Facility), and any other documents required by the Letter of Transmittal
will be deposited by the Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal or
facsimile thereof (or, in the case of book-entry transfer, an Agent's
Message), as well as the certificate(s) representing all tendered Old Notes
in proper form for transfer (or a confirmation of book-entry transfer of
such Old Notes into the Exchange Agent's account at the Book-Entry Transfer
Facility), and all other documents required by the Letter of Transmittal
are received by the Exchange Agent upon three New York Stock Exchange
trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
Withdrawal of Tenders
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date.
To withdraw a tender of Old Notes in the Exchange Offer, a telegram, telex,
letter or facsimile transmission notice of withdrawal must be received by the
Exchange Agent at its address set forth herein prior to 5:00 p.m., New York
City time, on the Expiration Date. Any such notice of withdrawal must (i)
specify the name of the person having deposited the Old Notes to be withdrawn
(the "Depositor"), (ii) identify the Old Notes to be withdrawn (including the
certificate number(s) and principal amount of such Old Notes, or, in the case
of Old Notes transferred by book-entry transfer, the name and number of the
account at the Book-Entry Transfer Facility to be credited), (iii) be signed
by the holder in the same manner as the original signature on the Letter of
Transmittal by which such Old Notes were tendered (including any required
signature guarantees) or be accompanied by documents of transfer sufficient to
have the Trustee with respect to the Old Notes register the transfer of such
Old Notes into the name of the person withdrawing the tender and (iv) specify
the name in which any such Old Notes are to be registered, if different from
that of the Depositor. All questions as to the validity, form and eligibility
(including time of receipt) of such notices will be determined by the Company,
whose determination shall be final and binding on all parties. Any Old Notes
so withdrawn will be deemed not to have been validly tendered for purposes of
the Exchange Offer and no New Notes will be issued with respect thereto unless
the Old Notes so withdrawn are validly retendered. Any Old Notes which have
been tendered but which are not accepted for exchange will be returned to the
holder thereof without cost to such holder as soon as practicable after
withdrawal, rejection of tender or termination of the Exchange Offer. Properly
withdrawn Old Notes may be retendered by following one of the procedures
described above under "--Procedures for Tendering" at any time prior to the
Expiration Date.
93
<PAGE>
Conditions
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange New Notes for, any Old Notes,
and may terminate or amend the Exchange Offer as provided herein before the
acceptance of such Old Notes, if:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the Exchange Offer
which, in the reasonable judgment of the Company, might materially impair
the ability of the Company to proceed with the Exchange Offer or any
material adverse development has occurred in any existing action or
proceeding with respect to the Company or any of its subsidiaries; or
(b) any law, statute, rule, regulation or interpretation by the staff of
the Commission is proposed, adopted or enacted, which, in the reasonable
judgment of the Company, might materially impair the ability of the Company
to proceed with the Exchange Offer or materially impair the contemplated
benefits of the Exchange Offer to the Company; or
(c) any governmental approval has not been obtained, which approval the
Company shall, in its reasonable discretion, deem necessary for the
consummation of the Exchange Offer as contemplated hereby.
If the Company determines in its reasonable discretion that any of the
conditions are not satisfied, the Company may (i) refuse to accept any Old
Notes and return all tendered Old Notes to the tendering holders, (ii) extend
the Exchange Offer and retain all Old Notes tendered prior to the expiration
of the Exchange Offer, subject, however, to the rights of holders to withdraw
such Old Notes (see "--Withdrawal of Tenders") or (iii) waive such unsatisfied
conditions with respect to the Exchange Offer and accept all properly tendered
Old Notes which have not been withdrawn.
Exchange Agent
Norwest Bank Minnesota, National Association has been appointed as Exchange
Agent for the Exchange Offer. Questions and requests for assistance, requests
for additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notice of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
By Registered or Certified Mail: Overnight Courier:
Norwest Bank Minnesota, National Norwest Bank Minnesota, National
Association Association
P.O. Box 1517 Norwest Center
Minneapolis, Minnesota 55480-1517 6th and Marquette Avenue
Attention: Corporate Trust Services Minneapolis, Minnesota 55479-0113
Attention: Corporate Trust Services
By Hand: Facsimile Transmission:
Norwest Bank Minnesota, National (For Eligible Institutions Only)
Association (612) 667-4927
NorthStar East, 12th Floor Confirm by Telephone:
608 Second Avenue South, North Star (612) 667-9764
East
Minneapolis, Minnesota 55479-0113
DELIVERY TO AN ADDRESS OTHER THAN SET FORTH ABOVE OR TRANSMISSION OF
INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN THE ONE SET FORTH ABOVE WILL
NOT CONSTITUTE A VALID DELIVERY.
94
<PAGE>
Fees and Expenses
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telecopy, telephone or in person by officers and
regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers, or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of pocket expenses in connection
therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company. Such expenses include fees and expenses of the
Exchange Agent and Trustee, accounting and legal fees and printing costs,
among others.
Accounting Treatment
The New Notes will be recorded at the same carrying value as the Old Notes,
which is face value, as reflected in the Company's accounting records on the
date of exchange. Accordingly, no gain or loss for accounting purposes will be
recognized by the Company. The expenses of the Exchange Offer will be expensed
over the term of the New Notes.
Consequences of Failure to Exchange
The Old Notes that are not exchanged for New Notes pursuant to the Exchange
Offer will remain restricted securities. Accordingly, such Old Notes may be
resold only (i) to the Company (upon redemption thereof or otherwise), (ii) so
long as the Old Notes are eligible for resale pursuant to Rule 144A, to a
person inside the United States whom the seller reasonably believes is a
qualified institutional buyer within the meaning of Rule 144A under the
Securities Act in a transaction meeting the requirements of Rule 144A, in
accordance with Rule 144 under the Securities Act, or pursuant to another
exemption from the registration requirements of the Securities Act (and based
upon an opinion of counsel reasonably acceptable to the Company), (iii)
outside the United States to a foreign person in a transaction meeting the
requirements of Rule 904 under the Securities Act, or (iv) pursuant to an
effective registration statement under the Securities Act, in each case in
accordance with any applicable securities laws of any state of the United
States.
Resale of the New Notes
With respect to resales of New Notes, based on interpretations by the staff
of the Commission set forth in no-action letters issued to third parties, the
Company believes that a holder or other person who receives New Notes, whether
or not such person is the holder (other than a person that is an "affiliate"
of the Company within the meaning of Rule 405 under the Securities Act) who
receives New Notes in exchange for Old Notes in the ordinary course of
business and who is not participating, does not intend to participate, and has
no arrangement or understanding with any person to participate, in the
distribution of the New Notes, will be allowed to resell the New Notes to the
public without further registration under the Securities Act and without
delivering to the purchasers of the New Notes a prospectus that satisfies the
requirements of Section 10 of the Securities Act. However, if any holder
acquires New Notes in the Exchange Offer for the purpose of distributing or
participating in a distribution of the New Notes, such holder cannot rely on
the position of the staff of the Commission enunciated in such no-action
letters or any similar interpretive letters, and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction, unless an exemption from registration
is otherwise available. Further, each Participating Broker-Dealer that
receives New Notes for its own account in exchange for Old Notes, where such
Old Notes were acquired by such Participating Broker-Dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such New Notes.
95
<PAGE>
As contemplated by these no-action letters and the Registration Rights
Agreement, each holder accepting the Exchange Offer is required to represent
to the Company in the Letter of Transmittal that (i) the New Notes are to be
acquired by the holder or the person receiving such New Notes, whether or not
such person is the holder, in the ordinary course of business, (ii) the holder
or any such other person (other than a broker-dealer referred to in the next
sentence) is not engaging and does not intend to engage, in the distribution
of the New Notes, (iii) the holder or any such other person has no arrangement
or understanding with any person to participate in the distribution of the New
Notes, (iv) neither the holder nor any such other person is an "affiliate" of
the Company within the meaning of Rule 405 under the Securities Act, and (v)
the holder or any such other person acknowledges that if such holder or other
person participates in the Exchange Offer for the purpose of distributing the
New Notes it must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale of the New
Notes and cannot rely on those no-action letters. As indicated above, each
Participating Broker-Dealer that receives New Notes for its own account in
exchange for Old Notes must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. For a description of the
procedures for such resales by Participating Broker-Dealers, see "Plan of
Distribution."
DESCRIPTION OF THE WARRANTS
On August 6, 1998 the Company issued the Warrants pursuant to the Warrant
Agreement between the Company and Norwest Bank Minnesota, National
Association, as warrant agent (the "Warrant Agent"), in a private transaction
that is not subject to the registration requirements of the Securities Act.
The following summary of certain provisions of the Warrant Agreement and the
Warrant Registration Rights Agreement does not purport to be complete and is
qualified in its entirety by reference to the Warrant Agreement, the Warrants
and the Warrant Registration Rights Agreement, including the definitions
therein of certain terms.
General
The Warrants will become separately transferable from the Notes on the
earliest to occur of (i) the date that is six months following the Issue Date,
(ii) the commencement of the Exchange Offer, (iii) the date a Shelf
Registration Statement with respect to the Notes is declared effective, (iv) a
Change of Control and (v) such date as the Initial Purchaser may in its sole
discretion deem appropriate. See "Description of the Notes--Exchange Offer;
Registration Rights." The date on which the Notes and the Warrants become
separable is the "Separation Date." Prior to the Separation Date, the Notes
and the Warrants will bear legends restricting the separate transfer thereof.
On and after the Separation Date, the Notes and Warrants will be separably
transferrable and the registered holders thereof may exchange such securities
for separate certificates evidencing the Notes and the Warrants without such
legends.
Each Warrant, when exercised, will entitle the holder thereof to purchase
1.4155 shares of Common Stock of the Company at an Exercise Price of $0.01 per
share. The Exercise Price and the number of Warrant Shares issuable on
exercise of a Warrant are both subject to adjustment in certain cases referred
to below. The Warrants are exercisable at any time on or after the Separation
Date. Unless exercised, the Warrants will automatically expire on August 1,
2009 (the "Expiration Date"). The Warrants will entitle the holders thereof to
purchase in the aggregate approximately 3.0% of the outstanding Common Stock
of the Company on a fully diluted basis as of the Issue Date after giving
effect to the (i) consummation of the Transactions and (ii) exercise as of the
Issue Date of all outstanding options issued by the Company. The Company will
give notice of expiration not less than 90 nor more than 120 days prior to the
Expiration Date to the registered holders of the then outstanding Warrants. If
the Company fails to give this notice, the Warrants will not expire until 90
days after the Company gives such notice. In no event will holders be entitled
to any damages or other remedy for the Company's failure to give such notice
other than any such extension.
The Warrants may be exercised by surrendering to the Company the Warrant
certificates evidencing such Warrants, if any, with the accompanying form of
election to purchase, properly completed and executed together with payment of
the Exercise Price. Payment of the Exercise Price may be made in the form of
cash or a certified
96
<PAGE>
or official bank check, payable to the order of the Company, or by surrender
of additional Warrants. Upon surrender of the Warrant certificate and payment
of the Exercise Price, the Warrant Agent will deliver or cause to be
delivered, to or upon the written order of such holder, stock certificates
representing the number of whole Warrant Shares or other securities or
property to which such holder is entitled under the Warrants and Warrant
Agreement, including without limitation any cash payment to adjust for
fractional interests in Warrant Shares issuable upon such exercise. If less
than all of the Warrants evidenced by a Warrant certificate are exercised, a
new Warrant certificate will be issued for the remaining number of Warrants.
No fractional Warrant Share will be issued upon exercise of the Warrants. If
any fraction of a Warrant Share would, except for the foregoing provision, be
issuable on the exercise of any Warrants (or specified portion thereof), the
Company must pay to the holder an amount in cash equal to the current market
price per Warrant Share, as determined on the day immediately preceding the
date the Warrant is presented for exercise, multiplied by such fraction,
computed to the nearest whole cent.
Certificates for Warrants will be issued in registered form only, and no
service charge will be made for registration or transfer or exchange upon
surrender of any Warrant certificate at the office of the Warrant Agent
maintained for that purpose. The Company may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed
in connection with any registration or transfer or exchange of Warrant
certificates.
The holders of the Warrants have no right to vote on matters submitted to
the shareholders of the Company and have no right to receive dividends, except
as provided below. The holders of the Warrants are not entitled to share in
the assets of the Company in the event of the liquidation, dissolution or
winding up of the Company's affairs.
Adjustments
Both the number of Warrant Shares purchasable upon the exercise of the
Warrants and the Exercise Price will be subject to adjustment in certain
events including (i) the payment by the Company of dividends (or other
distributions) on Common Stock payable in Common Stock or other shares of the
Company's capital stock, (ii) subdivisions, combinations and reclassifications
of Common Stock, (iii) the issuance to all holders of Common Stock of rights,
options or warrants entitling them to subscribe for Common Stock, or for
securities convertible into or exchangeable for shares of Common Stock, in
either case for a consideration per share of Common Stock which is less than
the current market price per share (as defined in the Warrant Agreement) of
Common Stock, and (iv) the distribution to all holders of Common Stock of any
of the Company's assets, debt securities or any rights or warrants to purchase
securities (excluding those rights and warrants referred to in clause (iii)
above and excluding cash dividends or other cash distributions).
No adjustment in the Exercise Price will be required unless such adjustment
would require an increase or decrease of at least one percent (1%) in the
Exercise Price; provided, however, that any adjustment which is not made will
be carried forward and taken into account in any subsequent adjustment.
In case of certain consolidations or mergers of the Company, or the sale of
all or substantially all of the assets of the Company to another corporation,
each Warrant shall thereafter be exercisable for the right to receive the kind
and amount of shares of stock or other securities or property to which such
holder would have been entitled as a result of such consolidation, merger or
sale had the Warrant been exercised immediately prior thereto.
Reservation of Shares
The Company has authorized and reserved for issuance such number of shares
of Common Stock as will be issuable upon the exercise of all outstanding
Warrants. Such shares of Common Stock, when paid for and issued,
97
<PAGE>
will be duly and validly issued, fully paid and non-assessable, free of
preemptive rights and free from all taxes, liens, charges and security
interests with respect to the issue thereof.
Amendment
From time to time, the Company and the Warrant Agent, without consent of the
holders of the Warrants, may amend or supplement the Warrant Agreement for
certain purposes, including curing defects or inconsistencies or making
changes that do not materially and adversely affect the rights of any holder.
Any amendment or supplement to the Warrant Agreement that has a material
adverse effect on the interests of the holders of the Warrants requires the
written consent of the holders of a majority of the then outstanding Warrants.
The consent of each holder of the Warrants affected is required for any
amendment pursuant to which the Exercise Price would be increased or the
number of Warrant Shares purchasable upon exercise of Warrants would be
decreased (other than pursuant to adjustments provided for in the Warrant
Agreement as generally described above).
Reports
Whether or not required by the rules and regulations of the Commission, so
long as any of the Warrants remain outstanding, the Company shall cause copies
of the annual and quarterly reports and the other information, documents and
reports filed with the Commission, as described under "Description of the
Notes--Certain Covenants--Reports," to be filed with the Warrant Agent and
mailed to the holders at their addresses appearing in the register of Warrants
maintained by the Warrant Agent.
Registration Rights
Under the terms of the Warrant Registration Rights Agreement, the holders of
the Warrants will be entitled to piggy-back registration rights for the Common
Stock (or other securities) issuable upon exercise of the Warrants in
connection with (i) an initial public offering of the Common Stock (or other
securities) issuable upon exercise of the Warrants, if any shareholder of the
issuer participates in such public offering, or (ii) certain public offerings
of shares of Common Stock (or other securities) issuable upon exercise of the
Warrants conducted subsequent to the initial public offering of such stock. If
only the Company sells shares in the initial public offering or all of the
Warrant Shares (or other securities issuable upon exercise of the Warrants)
are not sold in the initial public offering or any subsequent offering, the
Company will be required to use its best efforts to cause to be declared
effective, no later than 180 days after the closing date of the initial public
offering (but in no event prior to the first anniversary of the Issue Date),
the Warrant Registration Statement with respect to the issuance of the Common
Stock (or other securities) issuable upon exercise of the Warrants. The
Company is required to use reasonable efforts to maintain the effectiveness of
the Warrant Registration Statement until the Expiration Date, or if earlier,
such time as all Warrants have been exercised. During any consecutive 365-day
period while the Warrants are exercisable, the Company will have the ability
to suspend the availability of such registration statement for (a) up to two
30-consecutive-day periods (except during the 30 days immediately prior to the
expiration of the Warrants) if the Company's Board of Directors determines in
good faith that there is a valid purpose for the suspension and provides
notice of such determination to the holders at their addresses appearing in
the register of Warrants maintained by the Warrant Agent and (b) five
additional, non-consecutive three-day periods, except during the 30-day period
immediately prior to the Expiration Date, if the Company's Board of Directors
determines in good faith that the Company cannot provide adequate disclosure
during such period due to circumstances beyond its control. Holders of
Warrants will not be named as selling securityholders in the Warrant
Registration Statement. The Warrant Agreement requires the Company to pay the
expenses associated with such registration.
98
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following summary of the terms of the Company's capital stock does not
purport to be complete and it is qualified in its entirety by reference to the
actual terms of the capital stock contained in the Company's Articles of
Organization and Bylaws and by the provisions of applicable law.
The Company's authorized capital stock consists of 5,000,000 shares of Class
A Common Stock, par value $0.01 per share (the "Class A Common"), 35,000
shares of Class B Common, par value $0.01 per share (the "Class B Common"),
600,000 shares of Class C Common, par value $0.01 per share (the "Class C
Common") and 40,000 shares of Class A Preferred Stock, par value $0.01 per
share (the "Preferred Stock"). The Class A Common, Class B Common and Class C
Common are collectively referred to in this "Description of Capital Stock" as
the "Company Common Stock." On June 30, 1998, on a pro forma basis after
giving effect to the Transactions, there were 2,179,150 shares of Class A
Common and 29,100 shares of Preferred Stock outstanding, and options
outstanding exercisable for 67,395 shares of Class A Common and 900 shares of
Preferred Stock.
Common Stock
The issued and outstanding shares of Class A Common are validly issued,
fully paid and nonassessable. Subject to the prior rights of the holders of
Preferred Stock, the holders of outstanding shares of Company Common Stock are
entitled to receive dividends out of assets legally available therefor at such
time and in such amounts as the Board of Directors may from time to time
determine. The Indenture restricts the ability of the Company to pay dividends
on the Company Common Stock. The shares of Company Common Stock are not
subject to mandatory redemption, and the holders thereof have no preemptive or
subscription rights to purchase any securities of the Company. Each holder of
Class A Common is entitled at any time to convert any or all of such shares
into an equal number of shares of Class C Common. Each share of Class B Common
converts automatically into a share of Class A Common upon any public offering
of Common Stock registered under the Securities Act. Each share of Class C
Common may be converted into Class A Common upon the occurrence of certain
events. Upon liquidation, dissolution or winding up of the Company, the
holders of Company Common Stock are entitled to receive pro rata the assets of
the Company which are legally available for distribution, after payment of all
debts and other liabilities and subject to the prior rights of any holders of
Preferred Stock then outstanding. Each outstanding share of Class A Common is
entitled to vote on all matters submitted to a vote of shareholders. The Class
B Common and Class C Common have no voting rights; except that the holders of
Class C Common have a right to vote as a separate class if they would be
treated differently from Class A Common shareholders in any merger,
consolidation, recapitalization or reorganization. At present, there is no
established trading market for the Company Common Stock.
Preferred Stock
Upon any liquidation, dissolution or winding up of the Company (whether
voluntary or involuntary), each holder of Preferred Stock is entitled to be
paid before any distribution or payment is made with respect to any other
class of the Company's capital stock, an amount in cash equal to the aggregate
Liquidation Value of all shares held by such holder. "Liquidation Value" of
any share of Preferred Stock is $1,000, subject to adjustment for stock
splits, stock dividends and similar transactions. The Preferred Stock accrues
dividends at a rate of 14% per annum, compounded annually, on the sum of the
Liquidation Value plus accumulated and unpaid dividends, is not currently
subject to mandatory or optional redemption, and is not convertible into any
other class of capital stock of the Company.
Limitations on Liability and Indemnification of Officers and Directors
The Company's Articles of Organization will limit the liability of directors
to the fullest extent permitted by Massachusetts law. This provision of the
Company's Articles of Organization has no effect on the availability of
equitable remedies such as injunction or rescission. Additionally, this
provision will not limit liability under state or federal securities laws. The
Articles of Organization also provide that the Company shall indemnify
directors and officers of the Company unless finally adjudicated not to have
acted in good faith in the reasonable belief that his action was in the best
interests of the Company. The Company believes that the indemnification
provisions in the Company's Articles of Organization will assist the Company
in attracting and retaining qualified individuals to serve as directors.
99
<PAGE>
MATERIAL UNITED STATES
FEDERAL TAX CONSIDERATIONS
The following is a discussion of material U.S. Federal income and estate tax
consequences of an exchange of Old Notes for New Notes and the ownership and
disposition of the New Notes. Unless otherwise stated, this discussion is
limited to the tax consequences to those persons who are original owners of
the Notes, who acquired such Notes at their issue price (as described below)
and who hold such Notes as capital assets ("Holders"). The discussion does not
purport to address specific tax consequences that may be relevant to
particular persons (including, for example, financial institutions, broker-
dealers, insurance companies, tax-exempt organizations, and persons in special
situations, such as those who hold Notes as part of a straddle, hedge,
conversion transaction, or other integrated investment). In addition, this
discussion does not address U.S. Federal alternative minimum tax consequences
or any aspect of state, local or foreign taxation. This discussion is based
upon the Internal Revenue Code of 1986, as amended (the "Code"), the Treasury
Department regulations promulgated thereunder (the "Treasury Regulations"),
and administrative and judicial interpretations thereof, all of which are
subject to change, possibly with retroactive effect. The Company will treat
the Notes as indebtedness for Federal income tax purposes, and the following
discussion assumes that such treatment is correct.
For purposes of this discussion, a "U.S. Holder" is a Holder of a Note or
Warrant who is a United States citizen or resident, a corporation or
partnership or other entity created or organized in or under the laws of the
United States or any political subdivision thereof, an estate the income of
which is subject to U.S. Federal income taxation regardless of its source, or
a trust if a United States court exercises primary jurisdiction over its
administration and one or more United States persons have the authority to
control all of its substantial decisions. A "Non-U.S. Holder" is a Holder of a
Note or Warrant who is not a U.S. Holder.
Exchange of Notes
The Company believes that the exchange of Old Notes for New Notes pursuant
to the Exchange Offer will not be treated as an "exchange" for federal income
tax purposes because the New Notes will not be considered to differ materially
in kind or extent from the Old Notes. Rather, the New Notes received by a
holder will be treated as a continuation of the Old Notes in the hands of such
holder. As a result, there will be no federal income tax consequences to
holders exchanging Old Notes for New Notes pursuant to the Exchange Offer.
PROSPECTIVE PURCHASERS OF THE NOTES ARE URGED TO CONSULT THEIR TAX ADVISORS
CONCERNING THE UNITED STATES FEDERAL INCOME AND ESTATE TAX CONSEQUENCES TO
THEM OF ACQUIRING, OWNING AND DISPOSING OF THE NOTES, AS WELL AS THE
APPLICATION OF STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.
Allocation of Purchase Price Between Old Notes and Warrants
For U.S. federal income tax purposes, an Old Note and the accompanying
Warrant will be treated as an investment unit. The issue price of a Unit for
U.S. federal income tax purposes will be the first price at which a
substantial amount of Units is sold for money (excluding sales to bond
holders, brokers or similar persons acting as underwriters, placement agents
or wholesalers). The issue price of a Unit must be allocated between the Old
Note and the Warrant based on the relative fair market values of each such
component of the Unit on the issue date. For this purpose, the Company intends
to allocate $496.72 to each Old Note and $12.59 to each Warrant. Pursuant to
Treasury Regulations issued under provisions of the Code relating to original
issued discount (the "OID Regulations"), each holder will be bound by such
allocation for U.S. federal income tax purposes unless such holder discloses,
on a statement attached to its tax return for the taxable year that includes
the acquisition date of such Unit, that its allocation differs from that of
the Company. No assurance can be given that the Internal Revenue Service (the
"Service") will accept the Company's allocation. If the Company's allocation
were
100
<PAGE>
successfully challenged by the Service, the issue price, original issue
discount accrual on the Old Note and gain or loss on the sale or disposition
of an Old Note or Warrant would be different from that resulting under the
allocation determined by the Company.
Tax Consequences to U.S. Holders
The Notes
Original Issue Discount
The Old Notes and New Notes (which for tax purposes are treated as a
continuation of the Old Notes) will have original issue discount ("OID") for
U.S. Federal income tax purposes. The Notes have a total original issue
discount of $24,704,070. A U.S. Holder will be required to include OID in
income as it accrues, regardless of such Holder's regular method of accounting
for Federal income tax purposes, and in advance of the receipt of cash to
which such income is attributable. OID generally will be treated as interest
income to the U.S. Holder and will accrue on a yield-to-maturity basis over
the life of the Note, as discussed below.
The amount of OID with respect to a New Note will be equal to the excess of
the "stated redemption price at maturity" of such New Note over its "issue
price." The stated redemption price at maturity of each New Note will include
all cash payments required to be made under the New Note through maturity,
whether denominated as principal or interest. The issue price of a New Note
will be as described for an Old Note above under "--Allocation of Purchase
Price between Old Notes and Warrants." The New Notes will be issued at a
substantial discount.
The amount of OID accruing to a Holder with respect to a Note will be the
sum of the "daily portions" of OID with respect to such Note for each day
during the taxable year (or portion thereof) on which such Holder owns such
Note ("accrued OID"). A daily portion is determined by allocating to each day
in an "accrual period" a pro rata portion of the OID allocable to that accrual
period. An accrual period of a Note may be of any length and may vary in
length over the term of a Note, provided that each accrual period is no longer
than one year and each scheduled payment of principal or interest occurs
either on the final day or on the first day of
an accrual period. The amount of OID accruing during any full accrual period
with respect to a Note will be equal to (i) the "adjusted issue price" of such
Note at the beginning of that accrual period, multiplied by (ii) the "yield-
to-maturity" of such Note (taking into account the length of the accrual
period). The adjusted issue price of a Note at the beginning of its first
accrual period will be equal to its issue price. The adjusted issue price at
the beginning of any subsequent accrual period will be equal to (i) the
adjusted issue price at the beginning of the preceding accrual period, plus
(ii) the amount of OID accrued during the preceding accrual period, minus
(iii) any payments on the Note during the preceding accrual period and on the
first day of such subsequent accrual period.
Under these rules, a Holder generally will have to include in income
increasingly greater amounts of OID in successive accrual periods. The yield-
to-maturity of a Note is the discount rate that, when used in computing the
present value of all payments to be made on a Note, produces an amount equal
to the issue price of the Note.
The Company does not intend to treat the possibility of an optional
redemption or repurchase of the Notes as giving rise to any additional accrual
of OID or recognition of ordinary income upon the redemption, sale or exchange
of a Note, and intends to report OID consistent with such treatment. Holders
may wish to consult their tax advisors with respect to Treasury Regulations
regarding the treatment of certain contingencies.
In certain cases, in the event the Company does not comply with certain
covenants set forth in the Registration Rights Agreement, the Company will be
obligated to pay specified Liquidated Damages to the Holders of the Notes. The
Company believes the contingency that the Company will pay such additional
amounts is "remote" or "incidental" within the meaning of applicable Treasury
Regulations. On that basis, the Company believes that the possibility that
such additional amounts may be paid should not be taken into account in
computing OID and intends to report OID consistent with such belief.
101
<PAGE>
The Company will report to Holders and to the Service each year the amount
of OID that accrued on the Notes for that year.
Applicable High Yield Discount Obligations
The Notes will be "applicable high yield discount obligations" ("AHYDOs")
for U.S. Federal income tax purposes. An AHYDO is a debt instrument that has a
yield-to-maturity, computed as of its issue date, that equals or exceeds the
sum of (i) the "applicable federal rate" (the "AFR") in effect for the month
in which the Notes are issued (for August 1998, the AFR is 5.64%, assuming
semi-annual compounding) and (ii) five percentage points, and that bears
"significant" OID (as determined under a formula prescribed in the Code).
Because the Notes are AHYDOs, the Company will not be entitled to claim a
deduction for OID that accrues with respect to such Notes, until amounts
attributable to such OID are actually paid. In addition, to the extent that
the yield-to-maturity of the Notes exceeds the sum of the AFR plus six
percentage points (the "non-deductible portion"), any deduction that is
attributable to the non-deductible portion will be permanently disallowed. To
the extent the non-deductible portion of OID would have been treated as a
dividend if it had been distributed with respect to stock of the Company, it
will be treated as a dividend for purposes of the rules relating to the
dividends received deduction for corporate Holders. U.S. Holders that are
corporations should consult their own tax advisors as to the applicability of
the dividends received deduction.
Sale, Exchange or Retirement of the Notes
Upon the sale, exchange or retirement of a Note, a U.S. Holder will
recognize gain or loss equal to the difference between the amount realized
upon such sale, exchange or retirement (except to the extent such amount is
attributable to accrued but unpaid interest which will be taxable as ordinary
income) and the U.S. Holder's adjusted tax basis in the Note. A U.S. Holder's
adjusted tax basis in a Note generally will be the U.S. Holder's cost
therefor, increased by the amount of OID previously included in income with
respect to such Note and decreased by all prior payments received on the Note.
In general, gain or loss recognized by a U.S. Holder on the sale, exchange
or retirement of the Notes will be capital gain or loss. The gain or loss will
be long-term capital gain or loss if the Notes have been held by the U.S.
Holder for more than 12 months. The deductibility of capital losses by U.S.
Holders is subject to limitation.
Liquidated Damages
The Company intends to take the position that any Liquidated Damages
described above under "Description of the Notes--Exchange Offer; Registration
Rights" will be taxable to a Holder of a Note as ordinary income at the time
such amounts are received or accrued in accordance with the Holder's usual
method of accounting for U.S. Federal income tax purposes. The Service may
take a different position, however, which could affect the timing of the
Holder's income with respect to Liquidated Damages.
Tax Consequences to Non-U.S. Holders
Taxation of Interest
A Non-U.S. Holder generally will not be subject to U.S. Federal income or
withholding tax on interest (including OID) paid on the Notes so long as such
interest is not effectively connected with the Non-U.S. Holder's conduct of a
trade or business within the United States, and the Non-U.S. Holder (i) does
not actually or constructively own 10% or more of the total combined voting
power of all classes of stock of the Company, (ii) is not a "controlled
foreign corporation" with respect to which the Company is a "related person"
within the meaning of the Code, and (iii) satisfies the requirements of
Sections 871(h) or 881(c) of the Code, as set forth below under "Owner
Statement Requirement." If the foregoing conditions are not satisfied, then
interest paid on the Notes will be subject to U.S. withholding tax at a rate
of 30%, unless such rate is reduced or eliminated pursuant to an applicable
tax treaty.
102
<PAGE>
Sale, Exchange or Retirement of the Notes
Any capital gain a Non-U.S. Holder realizes on the sale, exchange,
retirement or other taxable disposition of a Note generally will be exempt
from U.S. Federal income and withholding tax, provided that (i) the gain is
not effectively connected with the Non-U.S. Holder's conduct of a trade or
business within the United States or (ii) in the case of a Non-U.S. Holder
that is an individual, the Non-U.S. Holder is not present in the United States
for 183 days or more during the taxable year.
Effectively Connected Income
If the interest, gain or other income a Non-U.S. Holder recognizes on a Note
is effectively connected with the Non-U.S. Holder's conduct of a trade or
business within the United States, the Non-U.S. Holder (although exempt from
the withholding tax previously discussed if an appropriate statement is
furnished) generally will be subject to U.S. Federal income tax on the
interest, gain or other income at regular Federal income tax rates. In
addition, if the Non-U.S. Holder is a corporation, it may be subject to a
branch profits tax equal to 30% of its "effectively connected earnings and
profits," as adjusted for certain items, unless it qualifies for a lower rate
under an applicable tax treaty.
Federal Estate Taxes
A Note held by an individual who at the time of death is not a citizen or
resident of the United States will not be subject to United States Federal
estate tax as a result of such individual's death, provided that the
individual does not actually or constructively own 10% or more of the total
combined voting power of all classes of stock of the Company entitled to vote
and that the interest accrued on such Note was not effectively connected with
a United States trade or business.
Owner Statement Requirement
Sections 871(h) and 881(c) of the Code require that either the beneficial
owner of a Note or a securities clearing organization, bank or other financial
institution that holds customers' securities in the ordinary course of its
trade or business (a "Financial Institution") and that holds a Note on behalf
of such owner files a statement with the Company or its agent to the effect
that the beneficial owner is not a United States person in order to avoid
withholding of United States Federal income tax. Under current regulations,
this requirement will be satisfied if the Company or its agent receives (i) a
statement (an "Owner Statement") from the beneficial owner of a Note in which
such owner certifies, under penalties of perjury, that such owner is not a
United States person and provides such owner's name and address, or (ii) a
statement from the Financial Institution holding the Note on behalf of the
beneficial owner in which the Financial Institution certifies, under penalties
of perjury, that it has received the Owner Statement together with a copy of
the Owner Statement. The beneficial owner must inform the Company or its agent
(or, in the case of a statement described in clause (ii) of the immediately
preceding sentence, the Financial Institution) within 30 days of any change in
information on the Owner Statement. The Service has amended the transition
period relating to recently issued Treasury Regulations governing backup
withholding and information reporting requirements. Withholding certificates
or statements that are valid on December 31, 1999, may be treated as valid
until the earlier of its expiration or December 31, 2000. All existing
certificates or statements will fail to be effective after December 31, 2000.
Information Reporting and Backup Withholding
The Company will, where required, report to the Holders of Notes and to the
Service the amount of certain payments made in respect of the Notes in each
calendar year and the amounts of tax withheld, if any, with respect to such
payments. A non-corporate U.S. Holder may be subject to information reporting
and to backup withholding at a rate of 31% with respect to payments of
principal and interest made on a Note, or on proceeds of the disposition of a
Note before maturity, unless such U.S. Holder provides a correct taxpayer
identification number or proof of an applicable exemption, and otherwise
complies with applicable requirements of the information reporting and backup
withholding rules.
103
<PAGE>
In the case of payments of interest to Non-U.S. Holders, current Treasury
Regulations provide that the 31% backup withholding tax and certain
information reporting requirements will not apply to such payments with
respect to which either the requisite certification, as described above, has
been received or an exemption has otherwise been established, provided that
neither the Company nor its payment agent has actual knowledge that the Holder
is a United States person or that the conditions of any other exemption are
not in fact satisfied. Under current Treasury Regulations, these information
reporting and backup withholding requirements will apply, however, to the
gross proceeds paid to a Non-U.S. Holder on the disposition of the Notes by or
through a United States office of a United States or foreign broker, unless
the Non-U.S. Holder otherwise establishes an exemption. Information reporting
requirements, but not backup withholding, will also apply to payment of the
proceeds of a disposition of the Notes by or through a foreign office of a
United States broker or foreign brokers with certain types of relationships to
the United States unless such broker has documentary evidence in its file that
the Holder of the Notes is not a United States person and such broker has no
actual knowledge to the contrary, or the Holder establishes an exception.
Neither information reporting nor backup withholding generally will apply to
payment of the proceeds of a disposition of the Notes by or through a foreign
office of a foreign broker not subject to the preceding sentence.
The Treasury Department has released new Treasury Regulations governing the
backup withholding and information reporting requirements. The new regulations
would not generally alter the treatment of a Non-U.S. Holder who furnishes an
Owner Statement to the payor. The new regulations may change certain
procedures applicable to the foreign office of a United States broker or
foreign brokers with certain types of relationships to the United States. The
new regulations are generally effective for payments made after December 31,
1999. Non-U.S. Holders should consult their own tax advisors with respect to
the impact, if any, of the new final regulations.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules may be refunded or credited against the Holder's
United States Federal income tax liability, provided that the required
information is furnished to the Service.
104
<PAGE>
BOOK-ENTRY PROCEDURES AND TRANSFER
General
Except as set forth in the next paragraph, the Notes to be resold as set
forth herein will each be issued in the form of one or more Global Notes
(each, a "Global Note"). The Global Note will be deposited on the Issue Date
with, or on behalf of, The Depository Trust Company, New York, New York, as
depositary (the "Depository"), and registered in the name of Cede & Co., as
nominee of the Depository (such nominee being referred to herein as the
"Global Note Holder").
Notes that are issued as described below under "--Certificated Securities"
will be issued in the form of registered definitive certificates (the
"Certificated Securities"). Upon the transfer of Certificated Securities, such
Certificated Securities may, unless the Global Note has previously been
exchanged for Certificated Securities, be exchanged for an interest in the
Global Note representing the Notes being transferred.
The Depository is a limited-purpose trust company that was created to hold
securities for its participating organizations (collectively, the
"Participants" or the "Depository's Participants") and to facilitate the
clearance and settlement of transactions in such securities between
Participants through electronic book-entry changes in accounts of its
Participants. The Depository's Participants include securities brokers and
dealers (including the Initial Purchaser), banks and trust companies, clearing
corporations and certain other organizations. Access to the Depository's
system is also available to other entities such as banks, brokers, dealers and
trust companies (collectively, the "Indirect Participants" or the
"Depository's Indirect Participants") that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly.
Persons who are not Participants may beneficially own securities held by or on
behalf of the Depository only through the Depository's Participants or the
Depository's Indirect Participants.
The Company expects that pursuant to procedures established by the
Depository ownership of the Notes will be shown on, and the transfer of
ownership thereof will be effected only through, records maintained by the
Depository or its nominee (with respect to interests of Participants) and the
records of Participants (with respect to interests of persons other than
Participants).
So long as the Depository, or its nominee, is the registered owner or holder
of the Notes, the Depository or such nominee will be considered the sole owner
or holder of the Notes represented by the Global Note for all purposes under
the Indenture. No beneficial owner of an interest in the Global Note will be
able to transfer such interest except in accordance with the Depository's
applicable procedures, in addition to those provided for under the Indenture.
Payments of the principal of, and interest on the Global Note will be made
to the Depository or its nominee, as the case may be, as the registered owner
thereof. None of the Company, the Trustee nor any Paying Agent (as defined)
will have any responsibility or liability for any aspect of the records
relating to or payments made on account of beneficial ownership interests in
the Global Note or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interest.
The Company expects that the Depository or its nominee, upon receipt of any
payment of the principal and interest on the Global Note will credit
Participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such Global Note as
shown on the records of the Depository or its nominee. The Company also
expects that payments by Participants to owners of beneficial interests in any
such Global Notes held through such Participants will be governed by standing
instructions and customary practice, as is now the case with securities held
for the accounts of customers registered to the names of nominees for such
customers. Such payments will be the responsibility of such Participants.
Transfers between Participants in the Depository will be effected in the
ordinary way in accordance with Depository rules. If a holder requires
physical delivery of a Certificated Security for any reason, including to sell
Notes to persons in jurisdictions that require physical delivery of such
securities or to pledge such securities,
105
<PAGE>
such holder must transfer its interest in the applicable Global Note in
accordance with the normal procedures of the Depository and the provisions of
the Indenture.
The Depository has advised the Company that it will take any action
permitted to be taken by a holder of Notes only at the direction of one or
more Participants to whose account interests in the applicable Global Note is
credited and only in respect of such portion of the Global Note as to which
such Participant or Participants has or have given such direction.
Although the Depository has agreed to the foregoing procedures in order to
facilitate transfers of interests in the Global Notes among Participants of
the Depository, it is under no obligation to perform such procedures, and such
procedures may be discontinued at any time. Neither the Company nor the
Trustee will have any responsibility for the performance by the Depository or
its Participants or Indirect Participants of their respective obligations
under the rules and procedures governing their operations.
Certificated Securities.
Subject to certain conditions, any person having a beneficial interest in a
Global Security may, upon request to the Trustee exchange such beneficial
interest for Notes in the form of Certificated Securities. Upon any such
issuance, the Trustee is required to register such Certificated Securities in
the name of, and cause the same to be delivered to, such person or persons (or
the nominee of any thereof). In addition, if (i) the Company notifies the
Trustee in writing that the Depository is no longer willing or able to act as
a depository and the Company is unable to locate a qualified successor within
90 days or (ii) the Company, at its option, notifies the Trustee in writing
that it elects to cause the issuance of Notes in the form of Certificated
Securities, then, upon surrender by the Global Note Holder of its Global Note,
Notes in such form will be issued to each person that the Global Note Holder
and the Depository identify as being the beneficial owner of the related
Notes.
Neither the Company nor the Trustee will be liable for any delay by the
Global Note Holder or the Depository in identifying the beneficial owners of
the Notes and the Company and the Trustee may conclusively rely on, and will
be protected in relying on, instructions from the Global Note Holder or the
Depository for all purposes.
Next Day Settlement and Payment.
The Indenture will require that payments in respect of the Notes represented
by the Global Note (including principal and interest) be made by wire transfer
of immediately available next day funds to the accounts specified by the
Global Note Holder. With respect to Certificated Securities, the Company will
make all payments of principal and interest, by wire transfer of immediately
available next day funds to the accounts specified by the holders thereof or,
if no such account is specified, by mailing a check to each such holder's
registered address. The Company expects that secondary trading in the
Certificated Securities will also be settled in immediately available funds.
PLAN OF DISTRIBUTION
Each Participating Broker-Dealer that receives New Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. This Prospectus,
as it may be amended or supplemented from time to time, may be used by a
Participating Broker-Dealer in connection with resales of New Notes received
in exchange for Old Notes where such Old Notes were acquired as a result of
market-making activities or other trading activities. The Company has agreed
that for a period of 180 days after the Expiration Date, it will make this
Prospectus, as amended or supplemented, available to any Participating Broker-
Dealer for use in connection with any such resale. In addition, until May 20,
1999 (90 days after the commencement of the Exchange Offer), all dealers
effecting transactions in the New Notes may be required to deliver a
prospectus.
106
<PAGE>
The Company will not receive any proceeds from any sales of the New Notes by
Participating Broker-Dealers. New Notes received by Participating Broker-
Dealers for their own account pursuant to the Exchange Offer may be sold from
time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the New Notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such Participating Broker-Dealer and/or the purchasers of
any such New Notes. Any Participating Broker-Dealer that resells the New Notes
that were received by it for its own account pursuant to the Exchange Offer
and any broker or dealer that participates in a distribution of such New Notes
may be deemed to be an "underwriter" within the meaning of the Securities Act
and any profit on any such resale of New Notes and any commissions or
concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that
by acknowledging that it will deliver and by delivering a prospectus, a
Participating Broker-Dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date the Company will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any Participating Broker-Dealer that requests such
documents in the Letter of Transmittal.
LEGAL MATTERS
The validity of the New Notes offered hereby and certain other legal matters
will be passed upon on behalf of the Company by Kirkland & Ellis, Chicago,
Illinois.
EXPERTS
The consolidated financial statements of the Company at December 31, 1996
and 1997 and for each of the three years in the period ended December 31, 1997
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is not currently subject to the periodic reporting and other
informational requirements of the Exchange Act. The Company has agreed that,
whether or not it is required to do so by the rules and regulations of the
Commission, for so long as any of the Notes remain outstanding, it will
furnish to the holders of the Notes and file with the Commission, copies of
the financial and other information that would be contained in the annual
reports and quarterly reports that the Company would be required to file with
the Commission if it were subject to such requirements of the Exchange Act.
The Company will also make such reports available to prospective purchasers of
the Old Notes and the New Notes, as applicable, and to securities analysts and
broker-dealers upon their request. In addition, the Company has agreed to
furnish to holders of the Notes, and prospective purchasers of the Notes, upon
their request, the information required to be delivered pursuant to Rule
144A(d)(4) under the Securities Act until such time as the Company has
exchanged the Notes for the New Notes and which have been registered under the
Securities Act or the Shelf Registration Statement has been declared effective
by the Commission.
107
<PAGE>
GLOBE HOLDINGS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors............................................ F-2
Consolidated Balance Sheets at December 31, 1996 and 1997 and Unaudited
September 30, 1998....................................................... F-3
Consolidated Statements of Income for the Years Ended December 31, 1995,
1996 and 1997 and the Unaudited Nine Months Ended September 30, 1997 and
1998..................................................................... F-4
Consolidated Statements of Changes in Shareholders' Equity for the Years
Ended December 31, 1995, 1996 and 1997 and the Unaudited Nine Months
Ended September 30, 1998................................................. F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1995, 1996 and 1997 and the Unaudited Nine Months Ended September 30,
1997 and 1998............................................................ F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Globe Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Globe
Holdings, Inc. (formerly Globe Manufacturing Co.) as of December 31, 1996 and
1997, and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Globe
Holdings, Inc. (formerly Globe Manufacturing Co.) at December 31, 1996 and
1997, and the consolidated results of its operations and its cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
Ernst & Young LLP
Providence, Rhode Island
March 24, 1998
except for Note 12, as to which
the date is January 28, 1999
F-2
<PAGE>
GLOBE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended
December 31,
------------------ September 30,
ASSETS 1996 1997 1998
------ -------- -------- -------------
(unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................... $ 3,101 $ 1,947 $ 1,766
Accounts receivable, net.................... 20,517 23,953 25,633
Receivable from joint venture............... -- 213 319
Taxes receivable............................ -- -- 2,211
Inventories................................. 11,812 13,764 14,843
Prepaid expenses and other assets........... 445 484 449
Deferred income taxes....................... 1,395 2,449 2,848
-------- -------- ---------
Total current assets...................... 37,270 42,810 48,069
Property, plant and equipment:
Land and land improvements.................. 942 942 942
Building and building improvements.......... 31,575 33,122 35,344
Manufacturing equipment..................... 66,359 79,202 83,084
Furniture and equipment..................... 1,826 2,087 2,166
Autos and trucks............................ 319 319 319
Construction in progress.................... 3,460 5,959 26,156
-------- -------- ---------
104,481 121,631 148,011
Less accumulated depreciation............... (54,359) (63,681) (71,304)
-------- -------- ---------
Net property, plant and equipment......... 50,122 57,950 76,707
Deferred income taxes........................ 1,421 2,822 2,961
Cash surrender value of life insurance, net
of loans.................................... 1,523 927 1,054
Intangible assets............................ 214 -- --
Investment in joint venture.................. -- -- --
Notes receivable from officers............... 264 278 --
Other Assets................................. -- -- --
Deferred financing costs, net of
amortization................................ 515 346 11,536
-------- -------- ---------
Total assets.............................. $ 91,329 $105,133 $ 140,327
======== ======== =========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C>
Current liabilities:
Accounts payable............................ $ 7,177 $ 7,440 $ 8,466
Accrued expenses............................ 5,183 4,827 9,352
Payable to joint venture.................... 1,481 -- --
Dividend payable............................ 872 50 --
Note payable................................ 2,750 2,475 5,800
Taxes payable............................... 2,206 1,028 --
Long-term lease obligations due within one
year....................................... 88 37 31
Long-term debt obligations due within one
year....................................... 13,250 7,500 --
-------- -------- ---------
Total current liabilities................. 33,007 23,357 23,649
Long-term debt............................... 34,500 46,875 115,000
Senior subordinated notes.................... -- -- 150,000
Senior discount notes........................ -- -- 24,970
Long-term lease obligation................... 27 30 58
Other long-term postretirement liability..... 3,521 3,762 4,395
Minimum pension liability.................... 214 -- --
Commitments and contingencies (Note 7)....... -- -- --
Redeemable cumulative preferred stock, Series
A, redeemable at $8,000; 30,000 shares
authorized, 8,000 issued and outstanding at
December 31, 1996........................... 6,466 -- --
Shareholders' equity.........................
Common stock, Class A, voting, $.01 par
value...................................... 2 2 --
Common stock, Class B, nonvoting, $.01 par
value...................................... 16 16 --
Common stock, Class C, nonvoting, $.01 par
value...................................... -- -- 22
Paid in capital............................. 5,700 10,785 43,680
Retained earnings........................... 41,744 56,468 (221,447)
-------- -------- ---------
47,462 67,271 (177,745)
Less treasury stock, at cost:
Common, Class A, 99,000 shares.............. (4,187) (4,187) --
Common, Class B, 683,314 shares............. (28,657) (28,657) --
-------- -------- ---------
(32,844) (32,844) --
Unearned compensation........................ (1,024) (3,318) --
-------- -------- ---------
Total shareholders' equity................ 13,594 31,109 (177,745)
-------- -------- ---------
Total liabilities & shareholders' equity.. $ 91,329 $105,133 $ 140,327
======== ======== =========
</TABLE>
See accompanying notes.
F-3
<PAGE>
GLOBE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended December Nine Months Ended
31, September 30,
---------------------------- ------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net sales.................... $128,319 $152,603 $170,941 $127,307 $133,321
Cost of sales................ 97,182 110,609 115,099 86,187 84,682
-------- -------- -------- -------- --------
Gross margin............. 31,137 41,994 55,842 41,120 48,639
Selling, general and
administrative expenses..... 18,515 21,705 24,381 15,808 19,265
Research and development
costs....................... 2,260 2,533 2,633 1,953 3,144
-------- -------- -------- -------- --------
Operating income......... 10,362 17,756 28,828 23,359 26,230
Other Income/(Expense)
Interest................... (6,030) (5,285) (3,968) (3,076) (6,739)
Loss in investment in joint
venture................... (643) -- -- -- --
Transaction compensation
expenses.................. -- -- -- -- (5,778)
Other income, net.......... 438 875 372 233 647
-------- -------- -------- -------- --------
Income before income
taxes and extraordinary
items................... 4,127 13,346 25,232 20,516 14,360
Provision for income taxes... 1,718 4,784 8,383 7,715 5,393
-------- -------- -------- -------- --------
Income before
extraordinary item...... 2,409 8,562 16,849 12,801 8,967
Loss from write-off of
deferred financing costs,
net of applicable income
taxes of $822 in 1995 and
$176 in 1997................ 1,294 -- 301 301 187
-------- -------- -------- -------- --------
Net income............... $ 1,115 $ 8,562 $ 16,548 $ 12,500 $ 8,780
======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
GLOBE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(dollars in thousands)
<TABLE>
<CAPTION>
Shares Outstanding
-----------------------------
Common Stock Common Stock
----------------------------- Preferred ----------------------- Preferred Paid-In Retained
Class A Class B Class C Stock Class A Class B Class C Stock Capital Earnings
-------- -------- --------- --------- ------- ------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1994.. 100,000 931,404 -- -- $ 2 $ 16 $-- $-- $ 4,965 $ 33,789
Dividends...... -- -- -- -- -- -- -- -- -- (850)
Net income..... -- -- -- -- -- -- -- -- -- 1,115
-------- -------- --------- --- ---- ---- ---- ---- ------- ---------
Balances,
December 31,
1995............ 100,000 931,404 -- -- 2 16 -- -- 4,965 34,054
Dividends...... -- -- -- -- -- -- -- -- -- (872)
Unearned
compensation
relating to
the grant of
stock
options........ -- -- -- -- -- -- -- -- 735 --
Amortization
of unearned
compensation... -- -- -- -- -- -- -- -- -- --
Net income..... -- -- -- -- -- -- -- -- -- 8,562
-------- -------- --------- --- ---- ---- ---- ---- ------- ---------
Balances,
December 31,
1996............ 100,000 931,404 -- -- 2 16 -- -- 5,700 41,744
Dividends...... -- -- -- -- -- -- -- -- -- (290)
Redemption of
Series A
Cumulative
Preferred
Stock.......... -- -- -- -- -- -- -- -- -- (1,534)
Unearned
compensation
relating to
the grant of
stock
options........ -- -- -- -- -- -- -- -- 5,085 --
Amortization
of unearned
compensation... -- -- -- -- -- -- -- -- -- --
Net income..... -- -- -- -- -- -- -- -- -- 16,548
-------- -------- --------- --- ---- ---- ---- ---- ------- ---------
Balances,
December 31,
1997............ 100,000 931,404 -- -- 2 16 -- -- 10,785 56,468
Net effect of
recapitalization
transactions... (100,000) (931,404) 2,179,150 -- (2) (16) 22 -- 32,895 (286,695)
Net income
(unaudited).... -- -- -- -- -- -- -- -- -- 8,780
-------- -------- --------- --- ---- ---- ---- ---- ------- ---------
Balances,
September 30,
1998
(unaudited)..... -- -- 2,179,150 -- $-- $-- $ 22 $-- $43,680 $(221,447)
======== ======== ========= === ==== ==== ==== ==== ======= =========
<CAPTION>
Treasury Stock
------------------
Common Stock Total
------------------ Unearned Shareholders'
Class A Class B Compensation Equity
-------- --------- ------------ -------------
<S> <C> <C> <C> <C>
Balances, December 31, 1994.. $(4,187) $(28,657) $ (630) $ 5,298
Dividends...... -- -- -- (850)
Net income..... -- -- -- 1,115
-------- --------- ------------ -------------
Balances,
December 31,
1995............ (4,187) (28,657) (630) 5,563
Dividends...... -- -- -- (872)
Unearned
compensation
relating to
the grant of
stock
options........ -- -- (735) 0
Amortization
of unearned
compensation... -- -- 341 341
Net income..... -- -- -- 8,562
-------- --------- ------------ -------------
Balances,
December 31,
1996............ (4,187) (28,657) (1,024) 13,594
Dividends...... -- -- -- (290)
Redemption of
Series A
Cumulative
Preferred
Stock.......... -- -- -- (1,534)
Unearned
compensation
relating to
the grant of
stock
options........ -- -- (5,085) 0
Amortization
of unearned
compensation... -- -- 2,791 2,791
Net income..... -- -- -- 16,548
-------- --------- ------------ -------------
Balances,
December 31,
1997............ (4,187) (28,657) (3,318) 31,109
Net effect of
recapitalization
transactions... 4,187 28,657 3,318 (217,634)
Net income
(unaudited).... -- -- -- 8,780
-------- --------- ------------ -------------
Balances,
September 30,
1998
(unaudited)..... $ -- $ -- $ -- $(177,745)
======== ========= ============ =============
</TABLE>
See accompanying notes.
F-5
<PAGE>
GLOBE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended December Nine Months Ended
31, September 30,
---------------------------- -------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Operating Activities
Net Income................ $ 1,115 $ 8,562 $ 16,548 $ 12,500 $ 8,780
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization........... 10,688 9,335 9,417 6,654 7,926
Amortization of unearned
compensation........... -- 341 2,791 -- 3,319
Accretion on discounted
note................... -- -- -- -- 589
Extraordinary charge--
write-off of deferred
finance cost........... 1,801 -- 478 478 299
Provision for losses on
accounts receivable.... 336 1,093 691 277 1,363
Loss in joint venture... 643 -- -- -- --
Deferred income tax
provision (benefit).... (606) (958) (2,455) -- (538)
Other post-retirement
benefits charge........ 992 652 515 565 633
Increase (decrease) in
cash from changes in
assets and liabilities:
Accounts receivable... (1,296) (7,122) (4,127) (7,163) (3,044)
Inventories........... (4,008) 4,132 (1,952) (1,374) (1,079)
Prepaid expenses and
other assets......... 381 12 (38) 215 35
Refundable income
taxes................ 1,414 61 -- -- --
Accounts payable...... (214) 2,459 263 (923) 1,026
Accrued expenses...... 840 2,203 (357) 420 4,525
Taxes payable......... 772 1,434 (1,178) (1,277) (3,239)
Other long-term
postretirement
liability............ (175) (306) (274) -- --
-------- -------- -------- -------- ---------
Net cash provided by
operating
activities......... 12,683 21,898 20,322 10,372 20,595
Investing Activities
Capital expenditures...... (8,640) (5,806) (17,101) (4,182) (7,156)
Plant expansion capital
expenditures
Thirty-two cell expansion. -- -- -- (6,331) (98)
Fifty-six cell expansion.. -- -- -- -- (19,063)
Payable to (receivable
from) joint venture...... 1,259 293 (1,694) (1,391) (105)
Note receivable collected
from (issued to)
shareholders............. 669 (14) (15) -- 278
-------- -------- -------- -------- ---------
Net cash used in
investing
activities......... (6,712) (5,527) (18,810) (11,904) (26,144)
Financing Activities
Net change in note
payable.................. 3,000 (4,750) (275) 250 3,325
Borrowing on long-term
debt..................... 62,000 -- 15,000 60,000 119,400
Principal payments on
long-term debt........... (67,500) (11,250) (8,375) (51,500) (58,775)
Principal payments on
capital lease obligation. (75) (85) (97) (69) (42)
Redemption of preferred
stock.................... -- -- (8,000) (8,000) --
Deferred financing costs.. (754) -- (403) (350) (11,791)
Issuance of senior
subordinate notes........ -- -- -- -- 150,000
Issuance of senior
discount notes........... -- -- -- -- 25,000
Issuance of preferred
stock.................... -- -- -- -- 21,530
Issuance of common stock.. -- -- -- -- 14,353
Distribution to Company
stockholders for
recapitalization......... -- -- -- -- (257,455)
Cash surrender value of
life insurance, net...... 16 522 596 472 (127)
Payment of dividends...... (850) (850) (1,112) (1,112) (50)
-------- -------- -------- -------- ---------
Net cash provided by
(used in) financing
activities......... (4,163) (16,413) (2,666) (309) 5,368
Net decrease in cash and
cash equivalents......... 1,808 (42) (1,154) (1,841) (181)
Cash and cash equivalents
at beginning of year..... 1,335 3,143 3,101 3,101 1,947
-------- -------- -------- -------- ---------
Cash and cash equivalents
at end of period......... $ 3,143 $ 3,101 $ 1,947 $ 1,260 $ 1,766
======== ======== ======== ======== =========
</TABLE>
See accompanying notes.
F-6
<PAGE>
GLOBE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1997
(dollars in thousands, except per share data)
1. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of Globe
Holdings, Inc. (formerly Globe Manufacturing Co.) and its wholly-owned
subsidiaries, Globe Manufacturing Corp. (formerly Globe Elastic Co.) and Globe
Manufacturing FSC, Ltd. (collectively, the Company). All significant
intercompany accounts have been eliminated.
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
Segment Information and Concentration of Credit Risk
The Company operates in one dominant 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 performs credit
evaluations on all new customers and requires collateral in certain
circumstances.
For the years ended December 31, 1995, 1996 and 1997, respectively, sales to
foreign customers totaled 24%, 27% and 28%. During the years ended December
31, 1995, 1996 and 1997, the composition of sales made to the following
geographic areas was 6.3%, 7.6%, 13.8% in Europe; 7.7%, 8.7%, 4.0% in Asia;
and 3.4%, 3.4%, 2.1% in Central and South America; and 6.6%, 7.3%, 8.1% in
others, respectively. Historically, transfers of product between geographic
areas have not been significant. Sales to one customer represented 11%, 9% and
9% of total sales for the years ended December 31, 1995, 1996 and 1997,
respectively. Also for the years ended December 31, 1995, 1996 and 1997,
respectively, sales to five customers totaled 32%, 34% and 36%.
At December 31, 1996 and 1997, 48% and 47%, respectively, of total
receivables were from foreign customers. Balances owed from one customer
totaled 9% and 8% of total receivables at December 31, 1996 and 1997,
respectively. Also at December 31, 1996 and 1997, 33% and 39%, respectively,
of total receivables were from five customers of which 21% and 24% represented
receivables from foreign customers.
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.
Accounts Receivable
Accounts receivable at December 31, 1996 and 1997 are shown net of an
allowance for doubtful accounts of $1,346 and $1,870, respectively. At
December 31, 1994 and 1995, the allowance for doubtful accounts was $314 and
$416, respectively. Additions to the allowance for doubtful accounts charged
to costs and expenses were $333, $1,085 and $684, respectively, during each of
the years in the three-year period ended December 31, 1997. Deductions to the
allowance for doubtful accounts were $231, $155 and $160 during each of the
years in the three-year period ended December 31, 1997.
F-7
<PAGE>
GLOBE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(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 an accelerated method over estimated useful lives of the assets for
financial statement purposes, which range from 3 to 39.5 years. For the years
ended December 31, 1995, 1996 and 1997, the Company recorded depreciation
expense of $10,390, $9,183 and $9,322, respectively. The Company capitalizes
direct materials, labor and certain overhead costs for self-constructed
assets. In 1996 and 1997, the Company capitalized $0 and $506,007,
respectively, of interest costs incurred in connection with the expansion of
the manufacturing plant in Alabama. Total interest costs in 1996 and 1997
amounted to $5,347 and $4,573, respectively.
Intangible Asset
The intangible asset (and minimum pension liability) represents the
adjustment required to record the Company's minimum pension liability for a
defined benefit pension plan covering salaried employees of the Company at
December 31, 1996.
Investment in Joint Venture
The Company accounts for its 40% investment in a joint venture using the
equity method of accounting (see Note 10).
Deferred Financing Costs
Deferred financing costs are amortized over the term of the facility using
the straight line method of amortization. Use of the straight line method to
amortize deferred financing costs does not yield results that are materially
different from those that would result from the use of the interest method.
Stock Based Compensation
The Company accounts for its stock based compensation arrangements under the
provisions of APB 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
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
F-8
<PAGE>
GLOBE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(dollars in thousands, except per share data)
are measured using the currently enacted tax rates and laws that are in effect
for the period when the differences are expected to reverse.
Fair Value of Financial Instruments
The carrying amounts of accounts receivable, accounts payable, long term
debt, notes payable and other current 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 3).
Unaudited Interim Financial Data
The interim financial data relating to the nine months ended September 30,
1997 and 1998 are unaudited; however, in the opinion of the Company's
management, the interim data includes all adjustments, consisting of only
normal recurring adjustments, necessary for a fair statement of the results
for the interim periods. The results for the nine months ended September 30,
1998 are not necessarily indicative of the results to be expected for the full
year or any other interim period.
Research and Development Costs
The Company expenses research and development costs as incurred.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income (Statement 130), which establishes standards for the reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. Statement 130 is effective for fiscal years
beginning after December 15, 1997. Disclosure of total comprehensive income is
required in interim period financial statements. Management does not believe
that comprehensive income for prior periods will differ significantly from net
income in those periods as the Company had no material items of other
comprehensive income in any of the three years in the period ended December
31, 1997.
In June, 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise and Related Information
(Statement 131), which is effective for years beginning after December 15,
1997. However, Statement 131 need not be applied to interim financial
statements in the initial year of application. Statement 131 establishes
standards for the way that public business enterprises report information
about operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports. It also establishes standards for related
disclosures about products and services, geographic areas, and major
customers. Since Statement 131 is effective for financial statements for
fiscal years beginning after December 15, 1997, the Company will adopt the new
requirements retroactively in 1998. Management has not yet determined the
impact it will have on disclosures of the Company's reported segments.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits (Statement 132), that revises and improves
F-9
<PAGE>
GLOBE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(dollars in thousands, except per share data)
disclosure requirements of FASB Statements No. 87, Employers' Accounting for
Pensions, and No. 106, Employers' Accounting for Postretirement Benefits Other
Than Pensions. The Statement is effective for fiscal years beginning after
December 15, 1997. Statement 132 does not change the recognition or
measurement of pension or postretirement benefit plans, but standardizes
disclosure requirements for pensions and other postretirement benefits,
eliminates unnecessary disclosures and requires additional information.
Management does not anticipate that the adoption of Statement 132 will have a
material impact on the Company's financial position or the results of its
operations.
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,
1999. 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. Inventories
At December 31, 1996 and 1997, inventories totaling approximately $5,452 and
$6,465, 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 $786 and $(687) in 1995; $1,149
and $363 in 1996; and, $1,247 and $98 in 1997.
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31
----------------
1996 1997
------- -------
<S> <C> <C>
Raw materials........................................... $ 2,233 $ 2,460
Finished goods.......................................... 10,728 12,551
------- -------
12,961 15,011
Less LIFO reserve....................................... (1,149) (1,247)
------- -------
$11,812 $13,764
======= =======
</TABLE>
3. Debt
On June 9, 1995, the Company refinanced its existing debt by entering into a
new debt agreement with a group of banks consisting of a $62,000 term loan and
a $12,000 working capital facility. As a result of the refinancing, the
unamortized deferred financing costs totaling $1,801, relating to the prior
debt facility, and a fee associated with terminating the prior debt agreement
of $315, were charged to expense as an extraordinary item in 1995.
On April 16, 1997, the Company amended and restated its existing credit
agreement (as amended, the "Credit Agreement"). The Credit Agreement consists
of a new $60,000 term loan, extension of the $12,000 working capital facility
to March 31, 2002, and a reduction in interest rates and other fees charged on
the loans. The Credit Agreement allows for letters of credit to the extent of
the unused portion of the working capital facility up to a maximum of $3,000.
At December 31, 1996 and 1997, respectively, the Company had $2,750
F-10
<PAGE>
GLOBE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(dollars in thousands, except per share data)
and $2,475 outstanding under the working capital facility and $1,200 and
$1,000 outstanding under letters of credit to secure the Company's workers'
compensation self-insurance program (see Note 11).
In connection with the Credit Agreement, a portion of the additional
proceeds from the term note ($15,000) were used to redeem all outstanding
shares of Series A Cumulative Preferred Stock for $8,000 (see Note 5). As a
result of the amendment, the unamortized deferred financing costs totaling
$477, relating to the original term note, were charged to expense as an
extraordinary item in 1997.
Borrowings under the term loan bear interest at either the bank's prime rate
plus a margin ranging from .25% to 1.00% (.0% to .75% for advances under the
working capital facility) or the applicable Eurodollar rate plus a margin
ranging from 1.25% to 2.00% (1.125% to 1.875% for advances under the working
capital facility), as determined by the borrower. At December 31, 1996 and
1997, the weighted average interest rates on the working capital facility were
9.75% and 8.75%, respectively.
In February 1998, the Credit Agreement was modified so as to provide an
additional $14,000 in term loans beginning on June 30, 1998.
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31
---------------
1996 1997
------- -------
<S> <C> <C>
Term note, principal due in variable quarterly installments
through 2003; variable interest rates based on the base rate
(see above) (7.3125%-8.75% at December 31, 1997; 8.3789%-
8.5938% at December 31, 1996)................................. $47,750 $54,375
Less current maturities........................................ 13,250 7,500
------- -------
$34,500 $46,875
======= =======
</TABLE>
The Credit Agreement contains certain covenants that limit, among other
things, capital expenditures, investments, debt, and dividends declared and
distributed. The Credit Agreement also limits net extraordinary losses and
requires the maintenance of a minimum fixed charge coverage, leverage ratio,
and earnings before interest, income taxes, depreciation and amortization as
defined in the Credit Agreement. All of the Company's assets are pledged under
the Credit Agreement.
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, 1997, the
Company had outstanding interest rate swap agreements with a commercial bank,
having a total notional principal amount of $15 million. These agreements
effectively change the Company's interest rate exposure on $15 million of its
variable rate term notes to a fixed rate of 6.29%. The interest rate swap
agreements in effect at December 31, 1997 matured on March 18, 1998. 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 agreements in the event
of nonperformance by the counterparty, the Company does not anticipate
nonperformance by this party. The fair value of these agreements representing
the estimated amount that the Company would receive from a third party
assuming the Company's obligations under the interest rate agreements ceased
at December 31, 1997, is approximately $187. The fair value of the agreements
was determined by independent commercial bankers and represents the fair value
based on pricing models or formulas using current assumptions.
F-11
<PAGE>
GLOBE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(dollars in thousands, except per share data)
The term loan matures on a quarterly basis during the following years:
<TABLE>
<S> <C>
December 31
1998........................... $ 7,500
1999........................... 9,375
2000........................... 10,000
2001........................... 11,875
2002........................... 12,500
2003........................... 3,125
-------
$54,375
=======
</TABLE>
Cash paid for interest, net of amounts capitalized amounted to $6,182,
$5,469 and $4,192 in 1995, 1996 and 1997, respectively.
4. Lease Commitments
The Company leases certain assets under capital leases. At December 31, 1996
and 1997, leased assets, with a cost of approximately $316 and $366, have been
included in property, plant and equipment. Accumulated amortization was
approximately $256 and $302 at December 31, 1996 and 1997, respectively.
Future minimum lease payments relating to the equipment under the capital
lease are as follows:
<TABLE>
<S> <C>
1998............................................................... $40
1999............................................................... 15
2000............................................................... 9
2001............................................................... 6
2002............................................................... 4
---
Total minimum lease payments....................................... 74
Less amount representing interest.................................. 7
---
Present value of net minimum lease payments........................ 67
Lease payments due within one year................................. 37
---
Lease obligations due after one year............................... $30
===
</TABLE>
5. Redeemable Cumulative Preferred Stock and Warrants
At December 31, 1996, the Company had authorized 30,000 shares of Series A
Cumulative Preferred Stock with a redemption price of $1,000 per share.
Dividends were payable on December 22 of each year at a rate of 10% per annum,
to the extent that such dividends were paid in cash and 15% per annum, to the
extent that dividends were paid in additional shares of Series A Cumulative
Preferred Stock. In 1997, the Company redeemed all outstanding shares of
Series A Cumulative Preferred Stock at a price of $1,000 per share, plus
unpaid dividends at the time of redemption. In connection with the redemption,
the Company terminated any future vesting associated with its agreement to
issue warrants to purchase shares of Class B Common Stock at a price of $.01
per share. At December 31, 1996 and 1997, the Company had 59 and 50 of such
warrants issued and outstanding.
During the years ended December 31, 1995, 1996 and 1997, the Company paid
cash dividends on the preferred stock of $800, $822 and $240, respectively.
The preferred stock required redemption on the earlier of December 21, 1999 or
consummation of certain transactions.
F-12
<PAGE>
GLOBE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(dollars in thousands, except per share data)
6. Shareholders' Equity
Common Stock
The Company has authorized 2,000 shares of Class A Common Stock and 2,000
shares of Class B Common Stock. Class B Common Stock automatically converts
into Class A Common Stock if the Company sells stock pursuant to a registered
public offering and Class A Common Stock automatically converts into Class B
Common Stock upon certain transfers of Class A Common Stock. The Company paid
cash dividends of $0.05 per share in 1995, 1996 and 1997.
Stock Options
The Company has a Management Incentive Plan ("the Plan") which authorizes
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 exercise price of incentive stock options granted under the Plan may not
be less than 100% of the fair market value of the common stock as of the grant
date, as determined by the Board of Directors. The exercise price of
nonqualified stock options may not be less than $1.00 per share. Options
issued under the Plan generally have a five year vesting period, unless
otherwise determined by the Board of Directors. The term of stock options
granted under the Plan may not exceed ten years.
The following table presents the activity under the Plan for the years ended
December 31, as follows:
<TABLE>
<CAPTION>
1996 1997
------------------------- -------------------------
Weighted Average Weighted Average
Options Exercise Price(1) Options Exercise Price(1)
------- ----------------- ------- -----------------
<S> <C> <C> <C> <C>
Outstanding at January 1... 22,500 $30.00 22,500 $30.00
Granted.................. -- -- 22,500 30.00
Canceled................. -- -- -- --
------ ------ ------ ------
Outstanding at December 31. 22,500 $30.00 45,000 $30.00
====== ====== ====== ======
Options exercisable at
December 31............. 9,000 $30.00 22,500 $30.00
====== ====== ====== ======
</TABLE>
- --------
(1) All options were granted at an exercise price of $30 per share.
In connection with the grant of performance options, the Company recorded a
total of $5,820 of unearned compensation ($735 and $5,085 in 1996 and 1997,
respectively) of which $341 and $2,791 was earned and recognized as
compensation expense in 1996 and 1997, respectively. Options that did not vest
in the years 1994 and 1995 were vested in the current year since cumulative
five-year performance measurements were achieved for the option granted in
1993.
The weighted average remaining contractual life of options outstanding at
December 31, 1996 and 1997, is six and eight years, respectively.
FAS 123 Disclosures
The Company has only adopted the disclosure provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("Statement 123"). Had the compensation cost for options granted
under the Plan been determined based on the fair value at the grant date for
grants in 1997, consistent with the provisions of Statement 123, there would
have been no pro forma effect on net income for 1997, since the options
granted under the Plan will be earned and vest during the five-years January
1, 1998 to December 31, 2002 and, thus, have no impact on the determination of
consolidated net income during 1997.
F-13
<PAGE>
GLOBE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(dollars in thousands, except per share data)
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:
<TABLE>
<CAPTION>
Options
Granted
1997
-------
<S> <C>
Expected life (years)............ 5.0
Interest rate.................... 5.7%
Expected volatility.............. 0.0%
Expected dividend yield.......... $ --
</TABLE>
Stock Reserved
As of December 31, 1997, a total of 1,668,383 shares of Class A Common Stock
and 258,383 shares of Class B Common Stock are reserved for issuance under the
various capital stock conversion and warrant arrangements.
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.
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.
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.
Net periodic pension cost includes the following components:
<TABLE>
<CAPTION>
December 31
-----------------------
1995 1996 1997
------- ----- -------
<S> <C> <C> <C>
Service cost..................................... $ 258 $ 257 $ 303
Interest cost on projected benefit obligations... 471 427 477
Actual return on plan assets..................... (1,103) (669) (1,102)
Net amortization and deferral.................... 798 337 697
------- ----- -------
Net periodic pension cost........................ $ 424 $ 352 $ 375
======= ===== =======
</TABLE>
F-14
<PAGE>
GLOBE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(dollars in thousands, except per share data)
The following summarizes the funded status of the Company's pension plans,
measured as of:
<TABLE>
<CAPTION>
December 31
-----------------------------------------------
1996 1997
----------------------- -----------------------
Assets Accumulated Assets Accumulated
Exceed Benefits Exceed Benefits
Actuarial Present Value of Accumulated Exceed Accumulated Exceed
Benefit Obligations Benefits Assets Benefits Assets
-------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Vested benefit obligations..... $2,010 $3,856 $2,250 $3,631
====== ====== ====== ======
Accumulated benefit
obligations................... $2,071 $3,925 $2,309 $3,736
====== ====== ====== ======
Projected benefit obligations.. $2,071 $4,268 $2,309 $4,282
Less: Plan assets at fair
value, mutual funds........... 2,313 3,770 2,699 3,981
------ ------ ------ ------
Projected benefit obligations
(in excess of) less than plan
assets........................ 242 (498) 390 (301)
Unrecognized actuarial net
losses (gains)................ 123 159 (5) (13)
Prior service cost to be
recognized in future periods.. 14 204 12 179
Unrecognized initial net
(asset) obligation............ (123) 193 (104) 152
Adjustment required to
recognize minimum liability... -- (213) -- --
------ ------ ------ ------
Prepaid (accrued) pension cost
at end of period.............. $ 256 $ (155) $ 293 $ 17
====== ====== ====== ======
</TABLE>
In 1996 and 1997, the salaried and Massachusetts hourly plans had
distribution of $502 and $602, respectively. Inasmuch as the 1996 settlements
exceeded the 1996 service and interest cost components of the net periodic
pension cost, an additional loss of $89 has been recognized in the
accompanying statement of income.
Assumptions used in calculating the pension expense and the accumulated
benefit obligation, were as follows:
<TABLE>
<CAPTION>
December 31
--------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Discount rate.............................................. 7.5% 7.5% 7.5%
Rate of increase in compensation levels.................... 5.5% 5.5% 5.5%
Expected long-term rate of return on assets................ 7.5% 7.5% 7.5%
</TABLE>
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 $345 in
1995; $356 in 1996; and $384 in 1997.
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.
F-15
<PAGE>
GLOBE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(dollars in thousands, except per share data)
The following table provides information on the status of the postretirement
benefit plan as of December 31:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees............................................. $ 1,675 $ 1,505
Fully eligible plan participants..................... 1,077 1,186
Other active plan participants....................... 2,324 2,968
------- -------
Total.............................................. 5,076 5,659
Unrecognized net gain.................................. 1,594 1,055
Unrecognized transition obligation..................... (3,149) (2,952)
------- -------
Accrued postretirement benefit cost................ $ 3,521 $ 3,762
======= =======
</TABLE>
Net periodic postretirement benefit cost consisted of the following:
<TABLE>
<CAPTION>
1995 1996 1997
----- ----- ----
<S> <C> <C> <C>
Service cost--benefits attributed to service during
the period.......................................... $ 442 $ 284 $273
Interest cost on accumulated postretirement benefit
obligation.......................................... 550 347 366
Amortization of unrecognized net (gain) or loss...... (379) (175) (192)
Amortization of unrecognized transition obligation... 379 196 197
----- ----- ----
Net periodic postretirement benefit cost........... $ 992 $ 652 $644
===== ===== ====
</TABLE>
At December 31, 1995, 1996 and 1997, respectively, 951, 908 and 833 active
employees and 176, 185 and 181 retired employees are covered by the Plan.
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% in 1996 and 7.5% in 1997 and a health care cost trend rate
of 9.5%, declining each year to 4% in the year 2007 and thereafter. The effect
of a 1% annual increase in these assumed cost trend rates would increase the
accumulated postretirement benefit obligation by approximately $481 and the
annual net periodic postretirement benefit cost by approximately $74.
F-16
<PAGE>
GLOBE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(dollars in thousands, except per share data)
9. Income Taxes
Significant components of the Company's deferred tax assets and liabilities
as of December 31, are as follows:
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Deferred tax liabilities:
Pension................................................. $ 125 $ 126
Depreciation............................................ 235 249
------ ------
Total deferred tax liabilities........................ 360 375
Deferred tax assets:
Other postretirement benefits........................... 1,390 1,519
Joint venture........................................... 428 --
Professional fees, primarily financing fees............. 84 279
Inventories............................................. 231 639
Bad debts............................................... 534 759
Workers' compensation accrued........................... 344 491
Deferred compensation................................... 198 1,330
Vacation accrued........................................ 221 241
Other, net.............................................. 174 388
------ ------
Total deferred tax assets............................. 3,604 5,646
Valuation allowance for deferred tax assets............... (428) --
------ ------
Net deferred tax assets............................... $2,816 $5,271
====== ======
</TABLE>
The following table sets forth selected data with respect to the Company's
provision for income taxes from continuing operations for the years ended:
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ -------
<S> <C> <C> <C>
Current:
Federal....................................... $1,819 $4,683 $ 9,090
State......................................... 505 1,059 1,748
------ ------ -------
2,324 5,742 10,838
Deferred:
Federal....................................... (448) (820) (2,034)
State......................................... (158) (138) (421)
------ ------ -------
(606) (958) (2,455)
------ ------ -------
Total....................................... $1,718 $4,784 $ 8,383
====== ====== =======
</TABLE>
F-17
<PAGE>
GLOBE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(dollars in thousands, except per share data)
The reconciliation of income taxes computed at the U.S. federal statutory
tax rate to income tax expense for continuing operations is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------ ------------
Amount % Amount % Amount %
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Tax at statutory rate................ $1,403 34.0 $4,538 34.0 $8,831 35.0
State income tax expense, less
federal tax benefit................. 351 8.5 601 4.5 858 3.4
Foreign sales corporation............ (187) (4.5) (203) (1.5) (775) (3.0)
Change in valuation allowance........ 219 5.3 -- -- (428) (1.7)
Other, net........................... (68) (1.7) (152) (1.1) (103) (0.5)
====== ==== ====== ==== ====== ====
Total.............................. $1,718 41.6 $4,784 35.9 $8,383 33.2
====== ==== ====== ==== ====== ====
</TABLE>
Cash paid for income taxes amounted to $1,150, $4,247 and $11,833 in 1995,
1996 and 1997, respectively.
10. 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 manufacturer of rubber thread and
its related products. During 1997, the Company took steps to terminate 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, 1996 and 1997, respectively,
the Company purchased inventory totaling $5,912 and $9,854 from the Joint
Venture.
11. 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, 1996 and 1997, the Company had outstanding letters of credit
of $1,200 and $1,000, respectively, to secure the Company's workers'
compensation self-insurance program.
12. Subsequent Events
On June 23, 1998, the Company entered into an Agreement and Plan of Merger
(the Agreement) with an affiliate of Code, Hennessy & Simmons III, L.P. The
Agreement provides for the obtaining of additional debt and equity to be used
in a recapitalization transaction whereby Code, Hennessy & Simmons III, L.P.
will obtain a majority interest in the Company and certain continuing
shareholders will retain a minority interest. The recapitalization transaction
was financed with $50,000 of equity and $295,000 of debt. Prior to the closing
of the Merger, substantially all of the assets and liabilities of Globe
Manufacturing Co. were contributed to its wholly owned subsidiary, Globe
Elastic Co., Inc., which was renamed Globe Manufacturing Corp. Inasmuch as the
recapitalization transaction was among the Company's shareholders, some of
whom maintained a continuing interest in the Company, management expects the
assets and liabilities contributed to Globe Manufacturing Corp. to be carried
at their respective historical cost bases. Management also expects that the
distributions to certain of the Company's shareholders upon redemption of
their shares of Company stock will be recorded as a distribution from retained
earnings.
F-18
<PAGE>
GLOBE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
December 31, 1996 and 1997
(dollars in thousands, except per share data)
On July 31, 1998, Globe Manufacturing Corp. issued $150,000 of 10% Senior
Subordinated Notes due 2008 (the "Senior Subordinated Notes"). The proceeds of
the Senior Subordinated Notes were used to (i) pay consideration under the
Agreement to certain shareholders of the Company (ii) repay certain
indebtedness of the Company and (iii) repay related fees and expenses of the
recapitalization and refinancing.
On August 6, 1998 the Company issued and sold 49,086 units (the "Units"),
each consisting of one 14% Senior Discount Note due 2009 (the "Notes") and one
warrant (a "Warrant") to purchase 1.4155 shares of Class A Common Stock, $.01
par value, of the Company. The aggregate purchase price of the Units was
$25,000 and the net proceeds to the Company were $24,562 after deducting
underwriting discounts and commissions and other expenses payable by the
Company. The proceeds of these Units were used to repay a $25,000 loan made by
Code, Hennessy & Simmons, III, L.P. to the Company pursuant to the
recapitalization transaction.
As of January 28, 1999, in response to lower than expected earnings, 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 the term loans and revolving loans were increased and (iii) the
management fee due to an affiliate of Code Hennessy & Simmons LLC may only be
paid if certain leverage tests are met.
F-19
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
No dealer, salesperson or other person has been authorized to give any
information or to make any representations not contained in this Prospectus
and, if given or made, such information or representation must not be relied
upon as having been authorized by the Company. This Prospectus does not
constitute an offer to sell, or solicitation of an offer to buy to any person
in any jurisdiction where such an offer or solicitation would be unlawful.
Neither the delivery of this Prospectus nor any sale made hereunder shall,
under any circumstances, create any implication that the information contained
herein is correct as of any time subsequent to the date hereof.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 14
Use of Proceeds........................................................... 23
Capitalization............................................................ 24
Selected Consolidated Financial Data...................................... 25
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 30
Business.................................................................. 36
Management................................................................ 46
Certain Relationships and Related Transactions............................ 49
Security Ownership of Certain Beneficial Owners and Management............ 53
Description of Senior Credit Facility..................................... 54
Description of Senior Subordinated Notes.................................. 56
Description of the New Notes.............................................. 57
Description of the Warrants............................................... 96
Description of Capital Stock.............................................. 99
Material United States Federal Tax Considerations......................... 100
Book-Entry Procedures and Transfer........................................ 105
Plan of Distribution...................................................... 106
Legal Matters............................................................. 107
Experts................................................................... 107
Available Information..................................................... 107
Index to Consolidated Financial Statements................................ F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Globe Holdings, Inc.
Offer to Exchange its
14% Senior Discount Notes
due 2009, Series B for
any and all of its outstanding
14% Senior Discount Notes due 2009
-------------------
PROSPECTUS
FEBRUARY 16, 1999
-------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
