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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 15, 1998
REGISTRATION NO. 333-61041
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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STEEL HEDDLE GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION
OF INCORPORATION OR ORGANIZATION)
3552
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER)
57-1067030
(I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
1801 RUTHERFORD ROAD
GREENVILLE, SC 29607
TELEPHONE: (864) 244-4110
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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JERRY B. MILLER
1801 RUTHERFORD ROAD
GREENVILLE, SC 29607
TELEPHONE: (864)244-4110
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
Copy to:
JACK M. FEDER, ESQ.
KIRKLAND & ELLIS
655 15TH STREET, N.W.
WASHINGTON, D.C. 20005
TELEPHONE: (202) 879-5100
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]________
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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PROSPECTUS SUBJECT TO COMPLETION DATED OCTOBER 15, 1998
$29,250,000
LOGO
STEEL HEDDLE GROUP, INC.
OFFER TO EXCHANGE ITS 13 3/4% SERIES B SENIOR DISCOUNT
DEBENTURES DUE 2009 FOR ANY AND ALL OF ITS
OUTSTANDING 13 3/4% SERIES A SENIOR DISCOUNT DEBENTURES DUE 2009
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON , 1998, UNLESS EXTENDED
Steel Heddle Group, Inc., a Delaware corporation ("SH Group"), 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 of its 13 3/4%
Series B Senior Discount Debentures due 2009 (the "New Debentures"), 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 of its outstanding 13 3/4% Series A Senior Discount Debentures
due 2009 (the "Old Debentures"), of which $29,250,000 principal amount at
maturity is outstanding on the date hereof. The form and terms of the New
Debentures are the same as the form and terms of the Old Debentures (which they
replace) except that the New Debentures will bear a Series B designation and
will have been registered under the Securities Act and, therefore, will not bear
legends restricting their transfer and will not contain certain provisions
relating to an increase in the interest rate which were included in the terms of
the Old Debentures in certain circumstances relating to the timing of the
Exchange Offer. The New Debentures will evidence the same debt as the Old
Debentures (which they replace) and will be issued under and be entitled to the
benefits of the Indenture (the "Indenture") dated as of May 26, 1998 among SH
Group and United States Trust Company of New York, as trustee, governing the Old
Debentures. See "The Exchange Offer" and "Description of Debentures."
The New Debentures will mature on June 1, 2009. The New Debentures will
accrete at a rate of 13 3/4%, compounded semi-annually, to an aggregate
principal amount at maturity of $29.25 million on June 1, 2003. Cash interest
will not accrue on the New Debentures prior to June 1, 2003. Commencing on
December 1, 2003, cash interest on the New Debentures will be payable, at a rate
of 13 3/4% per annum, semi-annually in arrears on each June 1, and December 1.
See "Description of Debentures."
The New Debentures will be redeemable at the option of SH Group, in whole or
in part, at any time on or after June 1, 2003 in cash at the redemption prices
set forth herein, plus accrued and unpaid interest, if any, thereon to the date
of redemption. In addition, at any time prior to June 1, 2001, SH Group may, at
its option, on any one or more occasions, redeem up to 35% of the aggregate
principal amount at maturity of the New Debentures originally issued at a
redemption price equal to 113.750% of the Accreted Value (as defined herein)
thereof, with the Net Cash Proceeds (as defined herein) received by SH Group of
one or more Equity Offerings (as defined herein); provided that, in each case,
at least 65% of the aggregate principal amount at maturity of the New Debentures
originally issued will remain outstanding immediately following each such
redemption. Upon the occurrence of a Change of Control (as defined herein), each
holder of New Debentures will have the right to require SH Group to repurchase
the New Debentures at a price in cash equal to 101% of the Accreted Value
thereof in the case of any such purchase prior to June 1, 2003 or 101% of the
aggregate principal amount at maturity thereof, plus accrued and unpaid
interest, if any, thereon to the date of repurchase in the case of any such
purchase on or after June 1, 2003. See "Description of Debentures."
The New Debentures will be senior obligations of SH Group. The New Debentures
will rank pari passu in right of payment to all future senior indebtedness of SH
Group and will rank senior in right of payment to all subordinated indebtedness
of SH Group. The New Debentures will be effectively subordinated to all
liabilities of SH Group's subsidiaries. As of June 27, 1998, SH Group had
outstanding $15.2 million of Indebtedness (as defined herein) consisting solely
of the Old Debentures, which would rank pari passu with the New Debentures, and
SH Group's subsidiaries had $165.5 million of liabilities outstanding, including
Indebtedness under the Old Notes (as defined herein) and the New Credit
Agreement and including trade payables and other accrued liabilities.
Concurrently with the Exchange Offer, Steel Heddle Mfg. Co. (the "Company"),
the wholly-owned subsidiary of SH Group, is offering to exchange pursuant to a
separate prospectus $100.0 million aggregate principal amount of its Series B
10 5/8% Senior Subordinated Notes due 2008 (the "New Notes") for each $1,000
principal amount of its outstanding Series A 10 5/8% Senior Subordinated Notes
due 2008 ("Old Notes" and together with the New Notes, the "Notes").
SH Group will accept for exchange any and all Old Debentures validly tendered
and not withdrawn prior to 5:00 p.m., New York City time, on , 1998,
unless extended by SH Group in its sole discretion (the "Expiration Date").
Tenders of Old Debentures 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.
The Old Debentures were issued on May 26, 1998 to the Initial Purchaser (as
defined herein) in a transaction not registered under the Securities Act in
reliance upon an exemption under the Securities Act. The Initial Purchaser
subsequently placed the Old Debentures with qualified institutional buyers in
reliance upon Rule 144A under the Securities Act. Accordingly, the Old
Debentures 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 Debentures are being offered hereunder in order to satisfy the
obligations of SH Group under the Registration Rights Agreement (as defined
herein) entered into by SH Group in connection with the original transfer of the
Old Debentures to the Initial Purchaser. See "The Exchange Offer."
The proceeds from the issuance and sale of the Old Debentures and the Common
Equity Contribution (as defined herein), together with the net proceeds of the
issuance of the Old Debentures and borrowings under the New Credit Agreement (as
defined herein) by the Company were used by SH Group to (i) pay the aggregate
purchase price payable to certain affiliates of Butler Capital Corporation and
certain other stockholders (collectively, the "Sellers") for the acquisition
(the "Acquisition") of the capital stock of SH Holdings Corp. ("Old Holdings"),
(ii) repay existing indebtedness of Old Holdings and (iii) pay related fees and
expenses. See "Acquisition Transactions."
Based on no-action letters issued by the staff of the Securities and Exchange
Commission (the "Commission") to third parties, SH Group believes the New
Debentures issued pursuant to the Exchange Offer may be offered for resale,
resold and otherwise transferred by any holder thereof (other than any such
holder that is an "affiliate" of SH Group 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 Debentures 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 New Debentures. See "The Exchange Offer--Purpose and Effect of the Exchange
Offer" and "The Exchange Offer--Resale of the New Debentures." Each
broker-dealer (a "Participating Broker-Dealer") that receives New Debentures 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 Debentures. 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 Debentures
received in exchange for Old Debentures where such Old Debentures were acquired
by such Participating Broker-Dealer as a result of market-making activities or
other trading activities. SH Group has agreed that, for a period of one year
after the thirtieth business day following the Expiration Date (or such shorter
period as will terminate when all of the Old Debentures offered hereby for
exchange have been sold), it will make this Prospectus available to any
Participating Broker-Dealer for use in connection with any such resale. See
"Plan of Distribution."
Holders of Old Debentures not tendered and accepted in the Exchange Offer
will continue to hold such Old Debentures and will be entitled to all the rights
and benefits and will be subject to the limitations applicable thereto under the
Indenture and with respect to transfer under the Securities Act. SH Group will
pay all the expenses incurred by it incident to the Exchange Offer. See "The
Exchange Offer."
There has not previously been any public market for the Old Debentures or the
New Debentures. SH Group does not intend to list the New Debentures on any
securities exchange or to seek approval for quotation through any automated
quotation system. There can be no assurance that an active market for the New
Debentures will develop. See "Risk Factors -- Lack of a Public Market for the
Debentures." Moreover, to the extent that Old Debentures are tendered and
accepted in the Exchange Offer, the trading market for untendered and tendered
but unaccepted Old Debentures could be adversely affected.
SEE "RISK FACTORS," BEGINNING ON PAGE 15, FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY HOLDERS WHO TENDER THEIR OLD DEBENTURES 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.
The date of this Prospectus is , 1998.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF ANY OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
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AVAILABLE INFORMATION
SH Group 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 New
Debentures being offered hereby. This Prospectus does not contain all the
information set forth in the Exchange Offer Registration Statement. For further
information with respect to 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, 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, at the Regional Offices of the Commission at 75 Park
Place, New York, New York 10007 and at Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such 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. Additionally, the
Commission maintains a web site (http://www.sec.gov) that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission, including SH Group.
As a result of the filing of the Exchange Offer Registration Statement with
the Commission, SH Group will become subject to the informational requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith will be required to file periodic reports and other
information with the Commission. The obligation of SH Group to file periodic
reports and other information with the Commission will be suspended if the New
Debentures are held of record by fewer than 300 holders as of the beginning of
any fiscal year of SH Group other than the fiscal year in which the Exchange
Offer Registration Statement is declared effective. SH Group will nevertheless
be required to continue to file reports with the Commission if the New
Debentures are listed on a national securities exchange. In the event SH Group
ceases to be subject to the informational requirements of the Exchange Act, SH
Group will be required under the Indenture to continue to file with the
Commission the annual and quarterly reports, information, documents or other
reports, including, without limitation, reports on Forms 10-K, 10-Q and 8-K,
which would be required pursuant to the informational requirements of the
Exchange Act. Under the Indenture, SH Group shall file with the Trustee annual,
quarterly and other reports within fifteen days after it files such reports with
the Commission. Further, to the extent that annual, quarterly or other financial
reports are furnished by SH Group to shareholders generally it will mail such
reports to holders of New Debentures. SH Group will furnish annual and quarterly
financial reports to shareholders of SH Group and will mail such reports to
holders of New Debentures pursuant to the Indenture, thus holders of New
Debentures will receive financial reports every quarter. Annual reports
delivered to the Trustee and the holders of New Debentures will contain
financial information that has been examined and reported upon, with an opinion
expressed by an independent public or certified public accountant. SH Group will
also furnish such other reports as may be required by law.
The New Debentures will be available initially only in book-entry form. SH
Group expects that the New Debentures issued pursuant to the Exchange Offer will
be issued in the form of Global Debentures (as defined herein) that will be
deposited with, or on behalf of, DTC and registered in its name or in the name
of Cede & Co., its nominee. Beneficial interests in such Debentures will be
shown on, and transfers thereof will be effected through, records maintained by
DTC and its participants. Beneficial interests in the New Debentures issued
pursuant to Regulation S may be held only through Euroclear (as defined herein)
or CEDEL (as defined herein). See "Description of Debentures-Book-Entry;
Delivery; Form and Transfer."
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus including the "Summary," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business"
sections, contains forward-looking statements that can
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be identified by the use of forward-looking terminology, such as "may,"
"intend," "will," "expect," "anticipate," "estimate" or "continue" or the
negative thereof or other variations thereon or comparable terminology. In
particular, any statement, express or implied, concerning future operating
results or the ability to generate revenues, income or cash flow to service the
New Debentures are forward-looking statements. Although SH Group believes that
the expectations reflected in such forward-looking statements are reasonable,
there can be no assurance that such expectations will prove to have been
correct. All forward-looking statements are expressly qualified by such
cautionary statements.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO BUY ANY DEBENTURES BY ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL FOR SUCH PERSON TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY DATE
SUBSEQUENT TO THE DATE HEREOF.
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The terms "SH(R)", "Duralite(R)", "Draw-O(R)" and "Jet Eye(R)" are
trademarks of the Company. All other trademarks, service marks or trade names
referred to in this Prospectus are the property of their respective owners.
Market data used throughout this Prospectus were obtained from internal
Company surveys, industry publications or other publicly available information.
Although the SH Group believes that such sources are reliable, the accuracy and
completeness of such information is not guaranteed and has not been
independently verified.
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[This page intentionally left blank]
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SUMMARY
The following is a summary of certain information contained herein and is
qualified in its entirety by, and should be read in conjunction with, the more
detailed information and financial data, including the consolidated financial
statements and notes thereto, included elsewhere in this Prospectus. Unless the
context indicates otherwise, all references to the "Company" or "Steel Heddle"
shall mean Steel Heddle Mfg. Co. and its consolidated subsidiaries. References
to the Company's "fiscal year" are to the 52-week or 53-week period ending on
the Saturday closest to December 31 of each year.
THE COMPANY
The Company, founded in 1898, is one of the world's leading manufacturers
of precision textile loom accessories. The Company designs, manufactures and
markets virtually all of the loom accessories necessary to operate a commercial
weaving loom, including heddles, dropwires, harness frames, reeds and shuttles
and bobbins, which are used to hold or guide individual yarns during the weaving
process. Textile loom accessories are highly engineered and often customized
products which require a high degree of precision to ensure a uniform weave and
to achieve desired fabric patterns while being able to withstand the stresses of
modern, high-speed weaving looms. While technology and performance
specifications vary, all commercial weaving looms require these accessories.
Because loom manufacturers do not produce these accessories, all woven fabric
producers must purchase textile loom accessories from third-party suppliers. In
addition to textile loom accessories, the Company manufactures precision rolled,
heat treated, bare and tinned flat wire used in the electronics, automotive,
solar power and other industries.
The Company has achieved operating income margins exceeding 14% in each of
the last ten years. Beginning in 1995 and continuing through 1996, the Company
implemented a profitability-enhancing cost-reduction program. This program
contributed to an increase in operating income margin to 23.1% in 1997 on net
sales of $73.0 million.
As the only North American manufacturer of heddles, frames and shuttles,
and one of only three North American manufacturers of reeds, Steel Heddle is a
critical supplier to virtually all North American textile weaving mills,
including such companies as WestPoint Stevens, Inc., Milliken & Co. and
Burlington Industries, Inc., many of which have been customers for decades. In
North America, management estimates that the Company holds substantial market
shares in all of its major product lines and estimates that it supplies over 80%
of the market for heddles, dropwires and harness frames, over 50% of reeds and
over 90% of the market for shuttles and bobbins. Although international markets
such as Europe and Asia have different competitive dynamics than the North
American market, the Company also has a strong presence in many international
markets in which it perceives the opportunity for profitable growth.
International sales accounted for approximately 21.9%, 23.6%, 22.0% and 19.2% of
the Company's net sales in 1995, 1996, 1997 and the first six months of 1998,
respectively.
Textile loom accessories have represented a steady source of revenue and
cash flow because these parts require frequent replacement due to wear and
changes in production runs. Approximately 75% of the Company's net sales were
derived from the sale of replacement parts in 1997. The Company estimates that
more than 90% of all looms installed in North America are delivered
"unaccessorized," with the accessories being designed and supplied by a
third-party supplier such as Steel Heddle. Once the Company has outfitted new
looms with its accessories, its has generally been able to continue to supply
replacement parts for the life of the loom. The Company believes it has achieved
its leading position in the industry primarily because of its willingness and
ability to work closely with its customers, both before and after the
installation of new looms, to design the appropriate accessories to meet
specific manufacturing needs and then continue to meet those needs on an ongoing
basis.
In addition to its textile loom accessories business, the Company converts
round rod to flat wire through a rolling process which results in a flat wire
with a round edge. Originally developed to satisfy in-house heddle manufacturing
needs, the Company recognized that its ability to produce these products to
extremely tight tolerances could be tailored to meet similar needs in other
industries and began to pursue outside sales.
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Because these rolled products are custom-made for specific applications, they
have historically commanded attractive margins. The Company's rolled products
can be found in a variety of other industries, including electronics, automotive
and solar power. Among the end-use applications for the Company's products are
notebook computers, cellular telephones, electronic control devices and
automotive applications such as control mechanisms for air bags, turn signals
and cruise controls. Major customers include Kemet Corporation, Parlex
Corporation, AMP Incorporated and Siemens Corporation. Rolled products generated
approximately $9.0 million in net sales in 1997.
The Company's headquarters are located at 1801 Rutherford Road, Greenville,
S.C. 29607, and its telephone number is (864) 244-4110.
LOOM ACCESSORY INDUSTRY OVERVIEW
The textile industry is comprised of several subsectors: (i) apparel
production (consisting primarily of "cut and sew" business), (ii) synthetic and
natural yarn production, (iii) knitted fabric and (iv) woven fabric production.
Woven fabric production is the focus of the Company's customers. The end users
of weaving looms and weaving loom accessories are textile mills which utilize
looms to produce woven fabric. The U.S. weaving market is estimated at
approximately $19.5 billion and accounted for approximately 16.4 billion square
yards of fabric in 1997. This output has remained relatively stable since 1986,
varying between 15.2 billion and 16.6 billion square yards annually.
The U.S. textile industry experienced a significant restructuring during
the 1980s and early 1990s. Annual capital expenditures by woven fabric mills,
while subject to fluctuations in the demand for woven fabric, have risen in the
1990s, from approximately $550 million in 1991 to approximately $850 million in
1996. In order to maintain their competitive position in the world markets, U.S.
textile mills are expected to continue to invest heavily in faster, newer
generations of loom technology. With modern equipment and increased automation,
labor cost differentials are not a significant factor in the competitiveness of
U.S. producers. In addition, the advantages of producing in the U.S., one of the
world's largest end-markets, have increased with manufacturers' demands for
rapid response times and retailers' desire to reduce inventories.
The U.S. installed textile loom base has shifted away from older-technology
shuttle looms towards faster, shuttleless looms such as air-jet and water-jet
looms. This trend benefits the Company in two ways. Higher weaving speeds lead
to faster wear of loom accessories, driving an increase in unit demand for
replacement parts. In addition, faster looms require a higher degree of
precision and performance from accessories, increasing the dollar value of
accessories sold per loom and the demand for the higher-priced, quality
accessories for which Steel Heddle is known.
LOOM ACCESSORY PRODUCT OVERVIEW
Heddles and Dropwires. Heddles are flat, specially-designed, stamped parts
manufactured to precise tolerances (as tight as two thousandths of an inch) from
high-performance steel. Heddles are designed to guide and hold individual yarns
during high-speed weaving. Dropwires are precision-made plated-carbon steel or
stainless steel stamped parts specially engineered to trigger a loom shutdown in
the event of broken yarn. The Company estimates that 50% to 60% of heddles and
dropwires are made to order, and approximately 75% of the Company's net sales of
heddles and dropwires are derived from replacement sales. Heddles and dropwires
accounted for approximately 37.9% of the Company's 1997 net sales.
Harness Frames. Harness frames are specialized carriages constructed from
special aluminum alloys and composite materials which raise and lower heddles
during the weaving process, creating a woven fabric pattern. As modern,
high-performance looms operate at 650 to 1,000 picks per minute (two to four
times faster than older technology), harness frames must withstand the
tremendous stress from continuous acceleration and deceleration without buckling
or breaking. The Company estimates that 90% of harness frames are made to order
and approximately 65% of harness frame revenue results from replacement sales.
Harness frames accounted for approximately 20.6% of the Company's 1997 net
sales.
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Reeds. Reeds are precision-made, comb-like devices used to evenly space
yarn on the loom. Individual, specially designed, flat wire spacers called
"dents" are assembled in a reed to yield a particular fabric pattern or style.
Reed production requires exacting manufacturing processes as absolutely smooth,
straight and precisely spaced dents are critical to the production of quality
woven fabric. Reeds must be replaced each time a loom is used to weave a new
fabric pattern. Virtually all reeds are made to order and replacement sales
accounted for approximately 90% of reed net sales. Reeds accounted for
approximately 24.6% of the Company's 1997 net sales.
Shuttles and Bobbins. Shuttles, used in older, slower looms, are specially
fabricated from composite materials to carry "pick" or "filling" yarns across
the loom as the main yarn or "warp" yarn is pulled through the reed. Bobbins are
cylindrical wooden yarn carriers held by the shuttle. Shuttles and bobbins are
exclusively made to order. All shuttle and bobbin sales are made as
replacements. Shuttles and bobbins accounted for approximately 3.5% of the
Company's 1997 net sales.
THE ACQUISITION
ORGANIZATIONAL CHARTS BEFORE AND AFTER THE ACQUISITION AND THE MERGERS
The following charts present in simplified form the organizational
structure of the Company before the Acquisition and the Mergers and after the
Acquisition and the Mergers. The transactions are described in greater detail
after the charts.
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BEFORE THE ACQUISITION AND THE MERGERS
Fair and accurate description of Flow Chart on pages 4 and 5:
[Pursuant to a stock purchase agreement dated May 1, 1998 (the "Stock
Purchase Agreement"), SH Group, a corporation formed by American Industrial
Partners Capital Fund II, L.P. (together with its affiliates, "AIP") in
contemplation of the Acquisition, acquired all of the issued and outstanding
capital stock of Old Holdings, in a purchase accounting transaction, from
certain affiliates of Butler Capital Corporation and certain other stockholders
for an aggregate purchase price (including the repayment of outstanding
indebtedness of the Company and transaction expenses of approximately $8.6
million) of approximately $175.2 million. Immediately after the consummation of
the Acquisition, (i) SH Intermediate Corp. was merged with and into the Company
("Merger I"), (ii) Old Holdings was merged with and into the Company ("Merger
II") and (iii) Merger Sub was merged with and into the Company ("Merger III"
and, together with Merger I and Merger II, the "Mergers"). After each Merger,
the Company remained as the surviving corporation. The Company is a direct,
wholly owned subsidiary of SH Group, and SH Group is controlled by AIP.]
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<PAGE> 10
AFTER THE ACQUISITION AND THE MERGERS
Fair and accurate description of Flow Chart on pages 4 and 5:
[Pursuant to a stock purchase agreement dated May 1, 1998 (the "Stock
Purchase Agreement"), SH Group, a corporation formed by American Industrial
Partners Capital Fund II, L.P. (together with its affiliates, "AIP") in
contemplation of the Acquisition, acquired all of the issued and outstanding
capital stock of Old Holdings, in a purchase accounting transaction, from
certain affiliates of Butler Capital Corporation and certain other stockholders
for an aggregate purchase price (including the repayment of outstanding
indebtedness of the Company and transaction expenses of approximately $8.6
million) of approximately $175.2 million. Immediately after the consummation of
the Acquisition, (i) SH Intermediate Corp. was merged with and into the Company
("Merger I"), (ii) Old Holdings was merged with and into the Company ("Merger
II") and (iii) Merger Sub was merged with and into the Company ("Merger III"
and, together with Merger I and Merger II, the "Mergers"). After each Merger,
the Company remained as the surviving corporation. The Company is a direct,
wholly owned subsidiary of SH Group, and SH Group is controlled by AIP. After
giving effect to the Acquisition and the Mergers, the following entities are
wholly-owned subsidiaries of the Company: Heddle Capital Corp., Steel Heddle
International, Inc., Steel Heddle International, Ltd., Steel Heddle (Canada)
Ltee/Ltd., Steel Heddle International de Mexico S.A. de C.V., and Steel Heddle
Weaving Machine Accessories, Ltd. (China). The Company also has a Japan branch.]
5
<PAGE> 11
Pursuant to a stock purchase agreement dated May 1, 1998 (the "Stock
Purchase Agreement"), SH Group, a corporation formed by American Industrial
Partners Capital Fund II, L.P. (together with its affiliates, "AIP") in
contemplation of the Acquisition, acquired all of the issued and outstanding
capital stock of Old Holdings, in a purchase accounting transaction, from
certain affiliates of Butler Capital Corporation and certain other stockholders
for an aggregate purchase price (including the repayment of outstanding
indebtedness of the Company and transaction expenses of approximately $8.6
million) of approximately $175.2 million. Immediately after the consummation of
the Acquisition, (i) SH Intermediate Corp. was merged with and into the Company
("Merger I"), (ii) Old Holdings was merged with and into the Company ("Merger
II") and (iii) Merger Sub was merged with and into the Company ("Merger III"
and, together with Merger I and Merger II, the "Mergers"). After each Merger,
the Company remained as the surviving corporation. The Company is a direct,
wholly owned subsidiary of SH Group, and SH Group is controlled by AIP.
In order to finance the Acquisition and to repay the existing indebtedness
of the Company, (i) AIP and certain members of management contributed $25.0
million in exchange for common equity of SH Group (the "Common Equity
Contribution"), (ii) SH Group contributed proceeds of approximately $15.0
million from the issuance and sale of Old Debentures, (iii) the Company (as
successor by merger to Merger Sub) entered into syndicated senior secured loan
facilities (the "New Credit Agreement") providing for term loan borrowings in
the aggregate principal amount of $30.0 million and revolving loan borrowings of
up to $20.0 million and borrowed all term loans available and approximately $3.6
million of revolving loans and (iv) the Company (as successor by merger to
Merger Sub) issued and sold $100.0 million aggregate principal amount of Old
Notes. The Acquisition, the Mergers, the Offering, the Common Equity
Contribution, the issuance and sale by the Company of the Old Notes and the
execution of, and initial borrowings under, the New Credit Agreement are
referred to herein collectively as the "Acquisition Transactions." Upon
consummation of the Mergers, the Company succeeded to the obligations of Merger
Sub under the New Credit Agreement and the Note Indenture (as defined herein).
AIP is a private investment fund based in San Francisco and New York which,
together with its affiliates, has committed capital of approximately $800
million. AIP does not seek to play a role in daily management; rather, AIP seeks
to provide its portfolio companies with access to the management expertise of
its operating partners, all of whom are former Chief Executive Officers of
Fortune 500 corporations, through active board-level participation as well as
on-call advice when desired. Robert Purdum, an operating partner of AIP and
former Chairman of Armco, Inc., is the Company's Non-Executive Chairman of the
Board.
6
<PAGE> 12
THE INITIAL OFFERING
OLD DEBENTURES............. The Old Debentures were sold by SH Group on May 26,
1998 (the "Issue Date") to Donaldson, Lufkin &
Jenrette Securities Corporation (the "Initial
Purchaser") pursuant to a Purchase Agreement dated
as of May 21, 1998. The Initial Purchaser
subsequently resold the Old Debentures to qualified
institutional buyers pursuant to Rule 144A under
the Securities Act.
REGISTRATION RIGHTS
AGREEMENT.................. Pursuant to the Purchase Agreement, SH Group and
the Initial Purchaser entered into a Registration
Rights Agreement dated May 26, 1998 (the
"Registration Rights Agreement"), which grants the
holders of the Old Debentures certain exchange and
registration rights. The Exchange Offer is intended
to satisfy such exchange and registration rights
which terminate upon the consummation of the
Exchange Offer.
THE EXCHANGE OFFER
SECURITIES OFFERED......... $29,250,000 aggregate principal amount at maturity
of 13 3/4% Series B Senior Discount Debentures due
2009.
THE EXCHANGE OFFER......... $1,000 principal amount of the New Debentures in
exchange for each $1,000 principal amount of Old
Debentures. As of the date hereof, $29,250,000
aggregate principal amount at maturity of Old
Debentures are outstanding. SH Group will issue the
New Debentures 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, SH Group believes that New
Debentures issued pursuant to the Exchange Offer in
exchange for Old Debentures may be offered for
resale, resold and otherwise transferred by any
holder thereof (other than any such holder which is
an "affiliate" of SH Group 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 Debentures 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
Debentures.
Any Participating Broker-Dealer that acquired Old
Debentures 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
Debentures 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 Debentures. 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
Debentures received in exchange for Old Debentures
where such Old Debentures were acquired by such
Participating Broker-Dealer as a result of
market-making activities or other trading
activities.
7
<PAGE> 13
SH Group has agreed to use its best efforts to keep
the Exchange Offer Registration Statement,
including this Prospectus, continuously effective
for one year from consummation of the Exchange
Offer.
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
Debentures 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 SH Group.
EXPIRATION DATE............ 5:00 p.m., New York City time, on , 1998
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.
CONDITIONS TO THE EXCHANGE
OFFER.................... The Exchange Offer is subject to certain customary
conditions, which may be waived by SH Group. See
"The Exchange Offer -- Conditions."
PROCEDURES FOR TENDERING
OLD DEBENTURES........... Each holder of Old Debentures wishing to accept the
Exchange Offer must complete, sign and date the
accompanying Letter of Transmittal, or a facsimile
thereof or transmit an Agent's Message (as defined
herein) in connection with a book-entry transfer,
in accordance with the instructions contained
herein and therein, and mail or otherwise deliver
such Letter of Transmittal, or such facsimile or
such Agent's Message, together with the Old
Debentures and any other required documentation to
the Exchange Agent (as defined herein) at the
address set forth herein. By executing the Letter
of Transmittal or Agent's Message, each holder will
represent to SH Group that, among other things, the
New Debentures acquired pursuant to the Exchange
Offer are being obtained in the ordinary course of
business of the person receiving such New
Debentures, whether or not such person is the
holder, that neither the holder nor any such other
person (i) has any arrangement or understanding
with any person to participate in the distribution
of such New Debentures, (ii) is engaging or intends
to engage in the distribution of such New
Debentures or (iii) is an "affiliate," as defined
under Rule 405 of the Securities Act, of SH Group.
See "The Exchange Offer--Purpose and Effect of the
Exchange Offer" and "--Procedures for Tendering."
UNTENDERED DEBENTURES...... Following the consummation of the Exchange Offer,
holders of Old Debentures eligible to participate
but who do not tender their Old Debentures will not
have any further exchange rights and such Old
Debentures will continue to be subject to certain
restrictions on transfer. Accordingly, the
liquidity of the market for such Old Debentures
could be adversely affected.
CONSEQUENCES OF FAILURE TO
EXCHANGE................. The Old Debentures that are not exchanged pursuant
to the Exchange Offer will remain restricted
securities. Accordingly, Old Debentures may be
resold only (i) to SH Group, (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
8
<PAGE> 14
pursuant to the requirements of Rule 904 under the
Securities Act, or (iv) pursuant to an effective
registration statement under the Securities Act.
See "The Exchange Offer -- Consequences of Failure
to Exchange."
SHELF REGISTRATION
STATEMENT.................. If any holder of the Old Debentures (other than any
such holder which is an "affiliate" of SH Group
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 provided information regarding such
holder and the distribution of such holder's Old
Debentures to SH Group for use therein, SH Group
has agreed to register the Old Debentures 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. SH Group 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 Debentures held by any such
holders.
SPECIAL PROCEDURES FOR
BENEFICIAL OWNERS.......... Any beneficial owner whose Old Debentures 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 Debentures, either make
appropriate arrangements to register ownership of
the Old Debentures 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. SH Group will keep the
Exchange Offer open for not less than twenty
business days in order to provide for the transfer
of registered ownership.
GUARANTEED DELIVERY
PROCEDURES................. Holders of Old Debentures who wish to tender their
Old Debentures and whose Old Debentures are not
immediately available or who cannot deliver their
Old Debentures, 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
Debentures 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 DEBENTURES
AND DELIVERY OF NEW
DEBENTURES............... SH Group will accept for exchange any and all Old
Debentures which are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York City
time, on the Expiration Date. The New Debentures
issued pursuant to the Exchange Offer will be
delivered promptly following the Expiration Date.
See "The Exchange Offer -- Terms of the Exchange."
9
<PAGE> 15
FEDERAL INCOME TAX
CONSEQUENCES............. The exchange pursuant to the Exchange Offer will
not be a taxable event for federal income tax
purposes. See "Certain Federal Income Tax
Consequences."
USE OF PROCEEDS............ There will be no cash proceeds to SH Group from the
exchange pursuant to the Exchange Offer.
EXCHANGE AGENT............. United States Trust Company of New York.
THE NEW DEBENTURES
GENERAL.................... The form and terms of the New Debentures are the
same as the form and terms of the Old Debentures
(which they replace) except that (i) the New
Debentures bear a Series B designation, (ii) the
New Debentures have been registered under the
Securities Act and, therefore, will not bear
legends restricting the transfer thereof, and (iii)
the holders of New Debentures will not be entitled
to certain rights under the Registration Rights
Agreement, including the provisions providing for
an increase in the interest rate on the Old
Debentures 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 Debentures will
evidence the same debt as the Old Debentures and
will be entitled to the benefits of the Indenture.
See "Description of Debentures." The Old Debentures
and the New Debentures are referred to herein
collectively as the "Debentures."
SECURITIES OFFERED......... $29,250,000 in aggregate principal amount at
maturity of 13 3/4% Series B Senior Discount
Debenture Notes due 2009.
ISSUER..................... The Debentures will be the obligations of SH Group.
MATURITY DATE.............. June 1, 2009.
YIELD AND INTEREST......... 13 3/4% (computed on a semi-annual bond equivalent
basis) calculated from May 26, 1998. The New
Debentures will accrete at a rate of 13 3/4%,
compounded semi-annually, to an aggregate principal
amount of $29,250,000 on June 1, 2003. Cash
interest will not accrue on the New Debentures
prior to June 1, 2003. Commencing June 1, 2003 cash
interest on the New Debentures will accrue and be
payable, at a rate of 13 3/4% per annum,
semi-annually in arrears on each June 1 and
December 1.
OPTIONAL REDEMPTION........ The New Debentures will be redeemable at the option
of SH Group, in whole or in part, at any time on or
after June 1, 2003 in cash at the redemption prices
set forth herein, plus accrued and unpaid interest,
if any, thereon to the applicable date of
redemption. In addition, at any time prior to June
1, 2001, SH Group may, at its option, on any one or
more occasions, redeem up to 35% of the aggregate
principal amount at maturity of the New Debentures
originally issued at a redemption price equal to
113.750% of the Accreted Value thereof, with the
Net Cash Proceeds received by SH Group from one or
more Equity Offerings; provided, that in each case
at least 65% of the original aggregate principal
amount at maturity of the New Debentures will
remain outstanding immediately following each such
redemption. See "Description of
Debentures -- Optional Redemption."
10
<PAGE> 16
CHANGE OF CONTROL.......... Upon the occurrence of a Change of Control, each
holder of the New Debentures will have the right to
require SH Group to repurchase New Debentures at a
price in cash equal to 101% of the Accreted Value
thereof, in the case of any such purchase prior to
June 1, 2003 or 101% of the aggregate principal
amount at maturity thereof, plus accrued and unpaid
interest, if any, thereon to the date of repurchase
in the case of any such purchase on or after June
1, 2003. SH Group does not have, and may not in the
future have, any assets other than common stock of
the Company. As a result, SH Group's ability to
repurchase all or any part of the New Debentures
upon the occurrence of a Change of Control will be
dependent upon the receipt of dividends or other
distributions from its direct and indirect
subsidiaries. The New Credit Agreement and the
Notes restrict the Company from paying dividends
and making any other distributions to SH Group. If
SH Group is unable to obtain dividends from the
Company sufficient to permit the repurchase of the
New Debentures or does not refinance such
Indebtedness, SH Group will likely not have the
financial resources to purchase New Debentures upon
the occurrence of a Change of Control. In any
event, there can be no assurance that SH Group's
subsidiaries will have the resources available to
pay any such dividend or make any such
distribution. Furthermore, the New Credit Agreement
provides that certain change of control events
constitute a default thereunder and the Old Notes
provide that, in the event of a Change of Control,
the Company is required to offer to repurchase the
Notes at the price specified therefor. SH Group's
failure to make a Change of Control Offer (as
defined herein) when required or to purchase
tendered New Debentures when tendered would
constitute an Event of Default (as defined herein)
under the Indenture (as defined herein). See
"Description of Debentures."
RANKING.................... The New Debentures will be senior obligations of SH
Group. The New Debentures will rank pari passu in
right of payment with all future senior
indebtedness of SH Group and will rank senior in
right of payment to all future subordinated
indebtedness of SH Group. The New Debentures will
be effectively subordinate to all liabilities of SH
Group's subsidiaries. As of June 27, 1998, SH Group
had outstanding approximately $15.2 million of
Indebtedness and SH Group's subsidiaries had $165.5
million of total liabilities outstanding, including
Indebtedness under the Notes and the New Credit
Agreement and including trade payables and other
accrued liabilities.
ORIGINAL ISSUE DISCOUNT.... The New Debentures are being offered at an original
issue discount for United States federal income tax
purposes. Thus, although cash interest will not be
payable on the New Debentures prior to December 1,
2003 original issue discount will accrue from the
issue date (the "Issue Date") of the New Debentures
and will be included as interest income
periodically (including for periods ending prior to
June 1, 2003) 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.
11
<PAGE> 17
CERTAIN COVENANTS.......... The Indenture contains certain covenants that,
among other things, limit the ability of SH Group
and its Subsidiaries (as defined herein) to (i)
incur indebtedness and issue preferred stock; (ii)
repurchase Capital Stock (as defined herein) and
certain Indebtedness; (iii) engage in transactions
with affiliates; (iv) incur or suffer to exist
certain liens; (v) pay dividends or other
distributions; (vi) make certain investments; (vii)
sell assets; and (ix) engage in certain mergers and
consolidations.
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered before deciding whether to tender Old Debentures for the New
Debentures offered hereby.
12
<PAGE> 18
SUMMARY CONSOLIDATED HISTORICAL FINANCIAL DATA
The following table sets forth summary consolidated historical financial,
operating and other data of the Company and its subsidiaries. The summary
consolidated financial data for each of the fiscal years in the three-year
period ended January 3, 1998 has been derived from the audited Consolidated
Financial Statements of the Company and the related notes thereto included
elsewhere herein. The summary financial data for the six months ended June 27,
1998 and June 28, 1997 have been derived from the Unaudited Consolidated
Financial Statements of the Company and include, in the opinion of management,
all adjustments necessary to present fairly the data for such periods. The
results for the six months ended June 27, 1998 are not necessarily indicative of
the results to be expected for the year ending January 2, 1999 or for any future
period. On May 26, 1998, a transaction whereby SH Group acquired the stock of
Old Holdings, was consummated. As a result of the transaction, the assets and
liabilities of Old Holdings were revalued to their respective fair values under
the principles of APB 16, "Business Combinations." The most significant effects
were to increase property, plant, and equipment, certain intangibles, inventory
and certain liabilities. Accordingly, financial information for periods prior to
May 26, 1998 (Predecessor) is not comparable with that for periods subsequent to
May 26, 1998 (Successor). The data presented below should be read in conjunction
with the Consolidated Financial Statements and the related notes thereto
included elsewhere herein, the other financial information included elsewhere
herein and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------------------------
FISCAL YEAR JUNE 27, 1998 JUNE 28, 1997
--------------------------- ------------------------ -------------
PREDECESSOR COMPANY SUCCESSOR PREDECESSOR PREDECESSOR
--------------------------- COMPANY COMPANY COMPANY
1997 1996 1995 (5 WEEKS) (20 WEEKS) (26 WEEKS)
------- ------- ------- ---------- ----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales........................... $72,983 $64,484 $68,118 $7,161 $29,631 $35,751
Gross profit........................ 26,535 20,410 20,412 2,188 11,003 12,582
Selling, general and administrative
expenses.......................... 8,489 8,875 8,667 845 3,824 4,212
Operating income(a)................. 16,842 10,081 9,920 1,048 6,758 7,669
Interest expense, net............... 5,148 5,844 6,307 2,442 1,549 2,843
Net income (loss)(b)................ 4,714 2,599 1,130 (949) 3,341 385
OTHER DATA:
EBITDA(c)........................... $21,121 $15,928 $15,810 $2,100 $ 8,564 $ 9,874
EBITDA margin(d).................... 28.9% 24.7% 23.2% 29.3% 28.9% 27.6%
Capital expenditures................ $ 2,558 $ 2,809 $ 3,455 $ 199 $ 968 $ 958
Depreciation and amortization....... 4,409 6,019 6,096 2,093 1,863 2,431
</TABLE>
<TABLE>
<CAPTION>
AS OF
JUNE 27, 1998
SH GROUP
-------------
<S> <C>
BALANCE SHEET DATA:
Working capital........................................... $ 20,561
Net property, plant and equipment......................... 40,726
Total assets.............................................. 198,197
Long-term debt (including current portion)................ 148,805
Redeemable common stock................................... 2
Shareholders' equity...................................... 17,534
</TABLE>
- ------------------------------
(a) Operating income includes restructuring charges of $0.8 million in 1995
relating to a reduction in the domestic workforce, closure of the Company's
Canadian operation and writedown of certain assets.
(b) Includes cumulative effect of change in method of accounting for
postretirement benefits of $0.9 million, net of taxes, in fiscal 1995 and
extraordinary loss on early extinguishment of debt of $2.8 million, net of
taxes, in fiscal 1997.
(c) EBITDA represents operating income plus depreciation and amortization and is
calculated in a manner consistent with the definition of "Consolidated
EBITDA" in the Note Indenture. See "Description of Notes -- Certain
Definitions." Adjusted EBITDA, presented below, represents EBITDA plus items
which management believes to be unusual, including, but not limited to,
13
<PAGE> 19
management and transaction fees paid to BCC Industrial Services, Inc. ("BCC")
and AIP, non-recurring restructuring charges, supplemental bonus compensation,
compensation expense for certain eliminated management positions and incremental
increases in obsolete inventory reserves. Adjusted EBITDA is calculated in a
manner substantially consistent with the definition of "Consolidated EBITDA"
in the New Credit Agreement. The following is a summary of historical
adjustments to operating income to determine EBITDA and Adjusted EBITDA:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------------------------
FISCAL YEAR JUNE 27, 1998 JUNE 28, 1997
--------------------------- ----------------------- -------------
PREDECESSOR COMPANY SUCCESSOR PREDECESSOR PREDECESSOR
--------------------------- COMPANY COMPANY COMPANY
1997 1996 1995 (5 WEEKS) (20 WEEKS) (26 WEEKS)
------- ------- ------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Operating income........................... $16,842 $10,081 $ 9,920 $1,048 $6,758 $ 7,669
Depreciation............................... 3,550 5,118 5,161 746 1,517 1,841
Amortization(e)............................ 729 729 729 306 289 364
------- ------- ------- ------ ------ -------
EBITDA................................... 21,121 15,928 15,810 2,100 8,564 9,874
Unusual items:
Management and transaction fees.......... 475 725 275 74 132 337
Non-recurring restructuring charges...... -- -- 821 -- -- --
Supplemental bonus compensation.......... 775 870 -- -- -- 355
Compensation expense for certain
eliminated management positions........ 260 -- -- -- -- 130
Incremental increases in obsolete
inventory reserves..................... 210 -- -- -- -- 210
------- ------- ------- ------ ------ -------
Adjusted EBITDA........................ $22,841 $17,523 $16,906 $2,174 $8,696 $10,906
======= ======= ======= ====== ====== =======
</TABLE>
EBITDA and Adjusted EBITDA are included herein as they are a basis upon
which the Company assesses its financial performance, and certain covenants
in the Credit Agreement will be tied to similar measures. EBITDA and
Adjusted EBITDA are not intended to represent cash flow from operations as
defined by GAAP (as defined herein) and should not be used as an
alternative to net income as an indicator of operating performance or to
cash flows as a measure of liquidity. EBITDA and Adjusted EBITDA, as
presented, represent a useful measure of assessing the Company's ongoing
operating activities without the impact of financing activities and unusual
items. While EBITDA and Adjusted EBITDA are frequently used as a measure of
operations and the ability to meet debt service requirements, it is not
necessarily comparable to other similarly titled captions of other
companies due to potential inconsistencies in the method of calculation.
(d) EBITDA as a percentage of net sales.
(e) Excludes amortization of financing costs.
14
<PAGE> 20
RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective investors should consider carefully the following factors before
deciding whether to tender their Old Debentures for New Debentures offered
hereby. This Prospectus, including the "Summary," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and "Business"
sections, contains forward-looking statements that can be identified by the use
of forward-looking terminology, such as "may," "intend," "will," "expect,"
"anticipate," "estimate," or "continue" or the negative thereof or other
variations thereon or comparable terminology. In particular, any statements,
express or implied, concerning future operating results or the ability to
generate revenues, income or cash flow to service the New Debentures are
forward-looking statements. The matters set forth below constitute cautionary
statements identifying important factors with respect to such forward-looking
statements, including certain risks and uncertainties, that could cause actual
results to differ materially from those in such forward-looking statements.
FAILURE TO EXCHANGE OLD DEBENTURES
New Debentures will be issued in exchange for Old Debentures only after
timely receipt by the Exchange Agent of such Old Debentures, a properly
completed and duly executed Letter of Transmittal and all other required
documentation. Therefore, holders of Old Debentures desiring to tender such Old
Debentures in exchange for New Debentures should allow sufficient time to ensure
timely delivery. Neither the Exchange Agent nor SH Group are under any duty to
give notification of defects or irregularities with respect to tenders of Old
Debentures for exchange. Old Debentures that are not tendered or that are
tendered but not accepted will, following consummation of the Exchange Offer,
continue to be subject to the existing restrictions upon transfer thereof. In
addition, any holder of Old Debentures who tenders in the Exchange Offer for the
purpose of participating in a distribution of the New Debentures will be
required to comply with the registration and prospectus delivery requirements of
the Securities Act in connection with any resale transaction. Each Participating
Broker-Dealer that received New Debentures for its own account in exchange for
Old Debentures, where such Old Debentures were acquired by such Participating
Broker-Dealer as a result of market-making activities or any other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such New Debentures. To the extent that Old Debentures are
tendered and accepted in the Exchange Offer, the trading market for untendered
and tendered but unaccepted Old Debentures could be adversely affected due to
the limited amount, or "float," of the Old Debentures that are expected to
remain outstanding following the Exchange Offer. Generally, a lower "float" of a
security could result in less demand to purchase such security and could,
therefore, result in lower prices for such security. For the same reason, to the
extent that a large amount of Old Debentures are not tendered or are tendered
and not accepted in the Exchange Offer, the trading market for the New
Debentures could be adversely affected. See "Plan of Distribution" and "The
Exchange Offer."
SUBSTANTIAL LEVERAGE; LIQUIDITY
SH Group and the Company have a significant amount of indebtedness. As of
June 27, 1998, SH Group and the Company had $148.8 million of indebtedness. In
addition, subject to the restrictions in the New Credit Agreement, the Note
Indenture and the Indenture, SH Group and the Company may incur additional
senior or other indebtedness from time to time to finance acquisitions or
capital expenditures or for other general corporate purposes. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources," "Description of Debentures" and
"Description of Other Indebtedness."
The level of SH Group's and the Company's indebtedness could have important
consequences to the holders of the Debentures, including, but not limited to,
the following: (i) SH Group's and the Company's ability to obtain additional
financing in the future for working capital, capital expenditures, acquisitions,
product development, general corporate purposes or other purposes may be
materially limited or impaired; (ii) a significant portion of SH Group's and the
Company's cash flow from operations must be dedicated to the payment of
principal and interest on its indebtedness, thereby reducing the funds available
to SH Group and the Company for their operations and future business
opportunities; (iii) significant amounts of
15
<PAGE> 21
SH Group's and the Company's borrowings bear interest at variable rates, which
could result in higher interest expense in the event of increases in interest
rates; (iv) the Indenture, the Note Indenture and the New Credit Agreement
contain financial and restrictive covenants, the failure to comply with which
may result in an event of default which, if not cured or waived, could have a
material adverse effect on SH Group and the Company; (v) the indebtedness
outstanding under the New Credit Agreement is secured and matures prior to the
maturity of the Debentures; (vi) SH Group and the Company may be substantially
more leveraged than certain of their competitors, which may place SH Group and
the Company at a competitive disadvantage; and (vii) SH Group's and the
Company's substantial degree of leverage may limit their flexibility to adjust
to changing market conditions, reduce their ability to withstand competitive
pressures and make them more vulnerable to a downturn in general economic
conditions or in their business or be unable to carry out capital spending that
is important to their growth and productivity improvement programs. See
"Description of Debentures" and "Description of Other Indebtedness."
SH Group's and the Company's ability to make scheduled payments or to
refinance their debt obligations will depend upon their future financial and
operating performance, which will be affected by prevailing economic conditions
and financial, business and other factors, certain of which are beyond their
control, including interest rates, unscheduled plant shutdowns, increased
operating costs, regulatory developments and the ability of SH Group and the
Company to repatriate cash generated outside of the United States without
incurring a substantial tax liability. There can be no assurance that SH Group's
and the Company's operating results, cash flow and capital resources will be
sufficient for payment of their respective indebtedness in the future. In the
absence of such operating results and capital resources, SH Group and the
Company could face substantial liquidity problems, may be forced to reduce or
delay capital expenditures, and might be required to dispose of material assets
or operations to meet their respective debt service and other obligations, and
there can be no assurance as to the timing of such sales or the proceeds that SH
Group and the Company could realize therefrom. In addition, because significant
amounts of SH Group's and the Company's borrowings will bear interest at
variable rates, an increase in interest rates could adversely affect, among
other things, SH Group's and the Company's ability to meet their debt service
obligations. If SH Group and the Company are unable to service their respective
indebtedness, they may take actions such as reducing or delaying planned
expansion and capital expenditures, selling assets, restructuring or refinancing
their indebtedness or seeking additional equity capital. There can be no
assurance that any of these actions could be effected on satisfactory terms, if
at all.
RESTRICTIVE DEBT COVENANTS
The Indenture, the Note Indenture and the New Credit Agreement contain a
number of significant covenants that, among other things, restrict the ability
of SH Group and the Company and their subsidiaries to dispose of assets, incur
additional indebtedness, prepay indebtedness (including the New Debentures),
amend certain debt instruments (including the Indenture and the Note Indenture),
pay dividends, create liens on assets, enter into sale and leaseback
transactions, make investments, loans or advances, make acquisitions, engage in
mergers or consolidations, change the business conducted by SH Group, the
Company or its subsidiaries, or engage in certain transactions with affiliates
and otherwise restrict certain corporate activities. In addition, under the New
Credit Agreement, the Company is required to comply with specified financial
ratios and tests, including minimum interest coverage ratios, leverage ratios
below a specified maximum, minimum net worth levels and minimum ratios of
inventory to senior debt. See "Description of Debentures" and "Description of
Other Indebtedness."
SH Group's and the Company's ability to comply with such agreements may be
affected by events beyond their control, including prevailing economic,
financial and industry conditions. The breach of any of such covenants or
restrictions could result in a default under the New Credit Agreement, the Note
Indenture or the Indenture, which would permit the senior lenders, or the
holders of the Debentures, or both, as the case may be, to declare all amounts
borrowed thereunder to be due and payable, together with accrued and unpaid
interest, and the commitments of the senior lenders to make further extensions
of credit under the New Credit Agreement could be terminated. If the Company
were unable to repay its indebtedness to its senior lenders,
16
<PAGE> 22
such lenders could proceed against the collateral securing such indebtedness as
described under "Description of Other Indebtedness."
LIMITATION ON ACCESS TO CASH FLOW OF SUBSIDIARIES; HOLDING COMPANY STRUCTURE
SH Group is a holding company, and its ability to pay interest on the New
Debentures is dependent upon the receipt of dividends from its direct and
indirect subsidiaries. SH Group does not have and may not in the future have,
any assets other than the common stock of the Company. The Company and its
subsidiaries are parties to the New Credit Agreement and the Note Indenture,
each of which imposes substantial restrictions on the Company's ability to pay
dividends to SH Group. Any payment of dividends will be subject to the
satisfaction of certain financial conditions set forth in the Note Indenture and
the New Credit Agreement. The ability of the Company and its subsidiaries to
comply with such conditions in the Note Indenture may be affected by events that
are beyond the control of SH Group. The breach of any such conditions could
result in a default under the Note Indenture and the New Credit Agreement, and
in the event of any such default, the holders of the Notes or the lenders under
the New Credit Agreement could elect to accelerate the maturity of all the Notes
or the loans under the New Credit Agreement. If the maturity of the Notes or the
loans under the New Credit Agreement were to be accelerated, all such
outstanding debt would be required to be paid in full before the Company or its
subsidiaries would be permitted to distribute any assets or cash to SH Group.
There can be no assurance that the assets of SH Group would be sufficient to
repay all of such outstanding debt and to meet its obligations under the
Indenture. Future borrowings by the Company can be expected to contain
restrictions or prohibitions on the payment of dividends by the Company and its
subsidiaries to SH Group. The Company is incorporated under the laws of the
Commonwealth of Pennsylvania. Under Pennsylvania law, a corporation is permitted
to pay dividends on its capital stock only if after giving effect thereto the
corporation would be able to pay its debts as they become due in the usual
course of its business or the total assets of the corporation would be less than
the sum of its liabilities plus the amount that would be needed (if the
corporation were to be dissolved at the time as of which the distribution is
measured) to satisfy the preferential rights upon dissolution of shareholders
whose preferential rights are superior to those receiving the distribution. In
determining the Company's ability to pay dividends, Pennsylvania law permits the
board of directors of the Company to take into account in valuing the assets and
liabilities of the Company book value, unrealized appreciation and depreciation
or other changes, current value or any other reasonable valuation method. SH
Group cannot predict what the value of its subsidiaries' assets or the amounts
of their liabilities will be in the future and, accordingly, there can be no
assurance that SH Group will be able to pay its debt service obligations on the
New Debentures. In addition, indebtedness outstanding under the New Credit
Agreement will be secured by substantially all of the assets of the Company
(including the common stock of the Company.)
As a result of the holding company structure of SH Group, the holders of
the New Debentures will be structurally junior to all creditors of SH Group's
subsidiaries, except to the extent that SH Group is itself recognized as a
creditor of any such subsidiary, in which case the claims of SH Group would
still be subordinate to any security in the assets of such subsidiary and any
indebtedness of such subsidiary senior to that held by SH Group. In the event of
insolvency, liquidation, reorganization, dissolution or other winding-up of SH
Group's subsidiaries, SH Group will not receive any funds available to pay to
creditors of the subsidiaries. As of June 27, 1998, the aggregate amount of
indebtedness and other obligations of SH Group's subsidiaries (including trade
payables and other accrued liabilities) was $165.5 million.
POSSIBLE INABILITY TO REPURCHASE DEBENTURES UPON CHANGE OF CONTROL
In the event of a Change of Control, each holder of New Debentures will
have the right to require SH Group to repurchase all or any part of such
holder's New Debentures at the offer price specified therefore in the Debenture
Indenture. SH Group does not have, and may not in the future have, any assets
other than common stock of the Company (which will be pledged to secure the
Company's obligations under the New Credit Agreement). As a result, SH Group's
ability to repurchase all or any part of the Debentures upon the occurrence of a
Change of Control will be dependent upon the receipt of dividends or other
distributions from its direct and indirect subsidiaries. The New Credit
Agreement and the Notes restrict the Company from
17
<PAGE> 23
paying dividends and making any other distributions to SH Group. If SH Group
does not obtain dividends from the Company sufficient to permit the repurchase
of the New Debentures or does not refinance such Indebtedness, SH Group will
likely not have the financial resources to purchase New Debentures upon the
occurrence of a Change of Control. In any event, there can be no assurance that
SH Group's subsidiaries will have the resources available to pay such dividend
or make any such distribution. Furthermore, the New Credit Agreement provides
that certain change of control events will constitute a default thereunder, and
the Notes provide that, in the event of a Change of Control, the Company will be
required to offer to repurchase the Notes at the price specified therefor. SH
Group's failure to make a Change of Control offer when required or to purchase
tendered Debentures when tendered would constitute an Event of Default under the
Debenture Indenture. See "Description of Debentures" and "Description of Other
Indebtedness."
FRAUDULENT TRANSFER CONSIDERATIONS
SH Group's obligations under the New Debentures may be subject to review
under state or federal fraudulent transfer laws in the event of the bankruptcy
or other financial difficulty of SH Group.
Under those laws, if a court, in a lawsuit by an unpaid creditor or
representative of creditors of SH Group, such as a trustee in bankruptcy or SH
Group as a Chapter 11 debtor in possession, were to find that when SH Group
issued the New Debentures, it (a) received less than fair consideration or
reasonably equivalent value therefor and (b) either (i) was or was rendered
insolvent, (ii) was engaged in a business or transaction for which its remaining
unencumbered assets constituted unreasonably small capital or (iii) intended to
incur or believed (or reasonably should have believed) that it would incur debts
beyond its ability to pay as such debts matured, the court could avoid the New
Debentures and SH Group's obligations thereunder, or subordinate the New
Debentures to all of SH Group's other obligations, and in either case direct the
return of any amounts paid thereunder to SH Group or to a fund for the benefit
of its creditors. It should be noted that a court could avoid the New Debentures
and SH Group's obligations thereunder without regard to factors (a) and (b)
above if it found that SH Group issued the New Debentures with actual intent to
hinder, delay or defraud its creditors.
The measure of insolvency for purposes of the foregoing will vary depending
on the law of the jurisdiction being applied. Generally, however, an entity
would be considered insolvent if the sum of its debts (including contingent or
unliquidated debts) is greater than all of its property at a fair valuation or
if the present fair salable value of its assets is less than the amount that
will be required to pay its probable liability on its existing debts as they
become absolute and matured.
LACK OF A PUBLIC MARKET FOR THE DEBENTURES
As of the date hereof, the only registered holder of Old Debentures is Cede
& Co., as the nominee of DTC. Payments in respect of the principal, premium,
Liquidated Damages, if any, and any interest on the New Debentures will be
payable to DTC or its nominee as the record owner. Beneficial owners of the New
Debentures will not be considered the registered owners under the Indenture for
any purpose. Prior to the offering of the Old Debentures, there had been no
market for the Debentures and there can be no assurance that such a market will
develop, or if such market develops, as to the liquidity of such market. The New
Debentures will not be listed on any securities exchange, but the Old Debentures
are eligible for trading in the PORTAL market. The Initial Purchaser has advised
SH Group that it currently intends to make a market in the Debentures, as
permitted by applicable laws and regulations; however, the Initial Purchaser is
not obligated to do so and may discontinue such market-making at any time
without notice to the holders of the Debentures. In addition, such market-making
activities may be limited during the Exchange Offer and the pendency of the
Shelf Registration Statement. Accordingly, there can be no assurance that a
trading market for the Debentures will develop or will provide liquidity to the
holders thereof. Historically, the market for non-investment grade debt has been
subject to disruptions that have caused substantial volatility in the prices of
securities similar to the Debentures. There can be no assurance that, if a
market for the Debentures were to develop, such a market would not be subject to
similar disruptions. See "The Exchange Offer" and "Plan of Distribution."
18
<PAGE> 24
ORIGINAL ISSUE DISCOUNT; LIMITATIONS ON HOLDERS' CLAIMS
The New Debentures will be issued at a substantial original issue discount
from their principal amount at maturity. Consequently, purchasers of the New
Debentures will be required to include amounts in gross income for federal
income tax purposes in advance of receipt of the cash payments to which the
income is attributable. See "Certain Federal Income Tax Considerations" for a
more detailed discussion of the federal income tax consequences to the
purchasers of the New Debentures resulting from the purchase, ownership or
disposition thereof.
Under the Indenture, in the event of an acceleration of the maturity of the
Debentures upon the occurrence of an Event of Default, the holders of the
Debentures may be entitled to recover only the amount which may be declared due
and payable pursuant to the Indenture, which will be less than the principal
amount at maturity of such Debentures. See "Description of Debentures -- Certain
Covenants -- Events of Default and Remedies."
If a bankruptcy case is commenced by or against SH Group under the
Bankruptcy Code, the claim of a holder of Debentures with respect to the
principal amount thereof may be limited to an amount equal to the sum of (i) the
issue price of the Debentures as set forth on the cover page hereof and (ii)
that portion of the original issue discount (as determined on the basis of such
issue price) which is not deemed to constitute "unmature interest" for purposes
of the Bankruptcy Code. Accordingly, holders of the Debentures under such
circumstances may, even if sufficient funds are available, receive a lesser
amount than they would be entitled to under the express terms of the Indenture.
In addition, payments received by holders of Debentures in a bankruptcy case are
subject to the same rules as those used for the calculation of original issue
discount under federal income tax law and, accordingly, a holder might be
required to recognize gain or loss in the event of a distribution related to
such a bankruptcy case.
TEXTILE INDUSTRY DEPENDENCE; CYCLICALITY
The principal operations of the Company have been, and will continue to be,
directly dependent upon domestic and foreign production of woven fabric.
Historically, the textile industry has experienced periodic, cyclical downturns.
Industry sales and production can be affected by the general strength of the
economy and by other factors, including the cost of raw materials such as cotton
and the demand for woven fabric, which may have an effect on the level of the
Company's sales. There is no assurance that the demand for textile products will
continue. A substantial decrease in demand for woven fabric would have a
material adverse effect on the Company's and SH Group's financial condition and
operating results.
ASIAN MARKET INSTABILITY
Economies and financial markets in Asia have recently experienced
significant turmoil. Approximately 12% of the Company's 1997 revenues were
derived from sales to Asian customers. The recent turmoil in the Asian financial
markets has not had a material impact on the Company's sales orders. However,
the financial instability in this region may have an adverse impact on the
financial position of customers in the region which could impact future orders
from such customers and/or the ability of such customers to pay the Company. If
the Company's customers in Asia are unable to maintain sales or current margins
on their sales, then the Company's sales and/or sales margins may be adversely
affected.
COMPETITION
The market for textile loom accessories is competitive. One of the
Company's international competitors is larger and has greater financial and
other resources available to it than the Company. There can be no assurance that
the Company's products will continue to compete successfully with the products
of other companies. The Company has a leading market share in the U.S., but the
Company could face additional competition as other established and emerging
companies enter the textile loom accessory market. Increased competition could
result in price reductions, fewer customer orders, reduced gross margins and
loss of market share, any of which could materially adversely affect the
Company's business, financial condition and
19
<PAGE> 25
operating results. The Company faces substantially more competition in foreign
markets. See "Business -- Competition and Market Share."
RISKS RELATED TO YEAR 2000 ISSUES
The Company uses software that will be affected by the date change in the
year 2000 and recognizes that the arrival of the year 2000 poses challenges that
will require modifications of portions of its software to enable it to function
properly. As the year 2000 approaches, date sensitive systems may recognize the
year 2000 as 1900, or not at all. This may cause systems to process critical
financial and operational information incorrectly. The Company, like many other
companies, is expected to incur expenditures over the next year to address this
issue. The Company has taken various actions to understand the nature and work
required to make its systems year 2000 compliant. The Company continues to
evaluate the estimated costs and has commenced portions of the work required to
achieve compliance. While compliance has and will involve additional costs,
estimated to be $1.0 million in total, the Company believes, based on current
information, it will achieve year 2000 compliance without a material adverse
effect on its operations, cash flows or financial position. The Company has
surveyed all of its significant suppliers and large customers to determine the
extent to which the Company's interface systems are vulnerable to those third
parties' failures to remediate their own year 2000 issues. The Company has
received representations from its primary third-party vendors that they will
have resolved any year 2000 problems in their software prior to any impact on
their operating systems. However, no assurance can be given that the systems of
third parties will be successfully and timely reprogrammed. Further, the
Company's failure to address successfully year 2000 issues could have a material
adverse effect on the Company's business, financial condition or results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the continued services of its senior management
team. The Company has not obtained key-man life insurance covering any members
of its senior management team. The Company does not have employment contracts,
but does have severance and bonus arrangements with its senior management team.
Although the Company believes it could replace key employees in an orderly
fashion should the need arise, the loss of such key personnel could have a
material adverse effect on the Company's financial condition or results of
operations. See "Management -- Directors and Executive Officers" and "--
Employment Agreements".
CONTROL OF SH GROUP BY AIP
Upon consummation of the Acquisition Transactions, AIP became the owner of
a substantial majority of the outstanding capital stock of SH Group which allows
AIP to elect the directors of SH Group. AIP is in a position to cause the
Company or SH Group to enter into transactions that in its judgment could
ultimately enhance shareholder value but involve risks to holders of the
Debentures. See "Acquisition Transactions" and "Certain Relationships and
Related Transactions."
RISKS RELATED TO POSSIBLE ACQUISITIONS
The Company may, from time to time, seek to expand its operations through
the acquisition of competing or complimentary businesses. There can be no
assurance that the Company will be able to finance, acquire, profitably manage
or successfully integrate into the Company any such business without incurring
substantial expenses (including additional indebtedness), delays or other
operational or financial problems. Further, acquisitions may involve a number of
special risks, including diversion of management's attention, failure to retain
key acquired personnel, increased costs to improve managerial, operational,
financial and administrative systems, legal liabilities, and increased interest
expense and amortization of acquired intangible assets, some or all of which
could materially and adversely affect the Company's business, operating results
and financial condition.
20
<PAGE> 26
POTENTIAL LIABILITIES ARISING FROM ENVIRONMENTAL MATTERS
The Company's facilities are subject to federal, state and local
environmental requirements, including those governing discharges to the air and
water, the handling and disposal of solid and hazardous wastes, and the
remediation of contamination associated with releases of hazardous substances.
The Company's manufacturing operations involve the use of hazardous substances
and, as is the case with manufacturers in general, if a release of hazardous
substances occurs or has occurred on or from the Company's facilities, the
Company may be held liable and may be required to pay the cost of remedying the
condition. The amount of any such liability could be material. In 1989, the
Company began a groundwater remediation program at the Company's Greenville, SC
facility under the federal Resource Conservation and Recovery Act ("RCRA"). As
required by RCRA, the Company has posted financial assurance in the amount of
$671,000 to ensure funds are available to complete the permit requirements.
Nonetheless, the Company is continuing to investigate certain areas of the
facility. It is possible that, based on the results of such investigation,
additional actions could be required, in which case the costs could materially
increase. See "Business -- Environmental Matters."
21
<PAGE> 27
ACQUISITION TRANSACTIONS
Pursuant to the Stock Purchase Agreement, SH Group, a corporation formed by
AIP in contemplation of the Acquisition, acquired all of the issued and
outstanding capital stock of Old Holdings from the Sellers, in a purchase
accounting transaction, for an aggregate purchase price (including the repayment
of outstanding indebtedness of the Company and transaction expenses of
approximately $8.6 million) of approximately $175.2 million. Immediately after
the consummation of the Acquisition, (i) Merger I was consummated whereby SH
Intermediate Corp., a direct, wholly-owned subsidiary of Old Holdings was merged
with and into its direct, wholly-owned subsidiary, the Company, with the Company
being the surviving corporation, (ii) Merger II was consummated whereby Old
Holdings was merged with and into its direct, wholly-owned subsidiary, the
Company, with the Company being the surviving corporation and (iii) Merger III
was consummated whereby Merger Sub was merged with and into the Company, with
the Company being the surviving corporation. Immediately after the consummation
of the Mergers, the Company became a direct wholly-owned subsidiary of SH Group.
AIP, as the owner of a substantial majority of the outstanding capital stock of
SH Group, controls the Board of Directors of SH Group and the Company and
therefore controls the Company.
In order to finance the Acquisition and to repay the existing indebtedness
of the Company, (i) AIP and certain members of management contributed the Common
Equity Contribution, including management's rollover of approximately $1.7
million of securities of Old Holdings in the Acquisition, (ii) SH Group
contributed the proceeds from the issuance and sale of the Old Debentures, (iii)
the Company (as successor by merger to Merger Sub) entered into the New Credit
Agreement and borrowed all term loans available and approximately $3.6 million
of revolving loans, (iv) the Company (as successor by merger to Merger Sub)
issued and sold $100.0 million aggregate principal amount of Old Notes and (v)
the Company loaned approximately $66.0 million of the net proceeds from the
issuance and sale of the Old Notes and borrowings under the New Credit Agreement
to SH Group pursuant to an intercompany note (the "Intercompany Note") to pay
part of the purchase price of the Acquisition. Shortly after the consummation of
the Acquisition, the Company forgave the Intercompany Note.
The Stock Purchase Agreement contains provisions customary for transactions
of this size and type, including representations and warranties with respect to
the condition and operations of the business, covenants with respect to the
conduct of the business prior to the consummation of the Acquisition and the
receipt of all material consents and approvals. The Stock Purchase Agreement
provides that, subject to certain time and dollar limitations, the Sellers shall
indemnify the Company and SH Group for liabilities arising from inaccuracies of
representations and warranties and breaches of covenants or agreements contained
in the Stock Purchase Agreement. With respect to certain matters relating to
environmental liabilities, see "Business -- Environmental Matters."
AIP is a private investment fund based in San Francisco and New York which,
together with its affiliates, has committed capital of approximately $800
million. AIP does not seek to play a role in daily management; rather, AIP seeks
to provide its portfolio companies with access to the management expertise of
its operating partners, all of whom are former Chief Executive Officers of
Fortune 500 corporations, through active board-level participation as well as
on-call advice when desired. Following consummation of the Acquisition, Robert
Purdum, an operating partner of AIP and former Chairman of Armco, Inc., became
the Company's Non-Executive Chairman of the Board.
22
<PAGE> 28
USE OF PROCEEDS
USE OF PROCEEDS OF THE NEW DEBENTURES
The Exchange Offer is intended to satisfy certain obligations of SH Group
under the Registration Rights Agreement. SH Group will not receive any proceeds
from the issuance of the New Debentures offered hereby. In consideration for
issuing the New Debentures as contemplated in this Prospectus, SH Group will
receive, in exchange, Old Debentures in like principal amount. The form and
terms of the New Debentures are substantially identical in all material respects
to the form and terms of the Old Debentures, except as otherwise described
herein under "The Exchange Offer -- Terms of the Exchange." The Old Debentures
surrendered in exchange for the New Debentures will be retired and canceled and
cannot be reissued. Accordingly, issuance of the New Debentures will not result
in any increase in the outstanding indebtedness of SH Group.
USE OF PROCEEDS OF THE OLD DEBENTURES
The gross proceeds of approximately $15.0 million from the sale of the Old
Debentures, together with the borrowings under the New Credit Agreement, the
Common Equity Contribution, and the proceeds from the issuance of the Old Notes
were used to finance the Acquisition Transactions and to pay related fees and
expenses and certain expenses of the Sellers (including discounts and
commissions and estimated expenses of the Offering). See "Acquisition
Transactions."
The following table sets forth the sources and uses of funds for
Acquisition Transactions, including the application of the proceeds therefrom,
which were completed on May 26, 1998.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C>
Total Sources:
Existing cash............................................. $ 1,551
Borrowings under New Credit Agreement(a).................. 33,600
Old Notes................................................. 100,000
Old Debentures............................................ 15,016
Common Equity Contribution(b)............................. 25,000
--------
Total Sources..................................... $175,167
========
Total Uses:
Purchase Price of Acquisition(c).......................... $166,581
Estimated transaction fees and expenses................... 8,586
--------
Total Uses........................................ $175,167
========
</TABLE>
- ------------------------------
(a) The New Credit Agreement provides for a $30 million Term Loan Facility (as
defined herein) and a $20 million Revolving Credit Facility (as defined
herein). All available amounts under the Term Loan Facility and
approximately $3.6 million under the Revolving Credit Facility were drawn at
closing. The Revolving Credit Facility is expected to be used to finance
working capital and capital expenditures. See "Description of Other
Indebtedness."
(b) Includes the value of management's rollover interest of approximately $1.7
million.
(c) Amounts paid to the Sellers under the Stock Purchase Agreement and
approximately $52.5 million used to repay outstanding indebtedness of the
Company.
23
<PAGE> 29
CAPITALIZATION
The following table sets forth the unaudited consolidated capitalization of
the SH Group as of June 27, 1998. The following table should be read in
conjunction with the "Unaudited Pro Forma Condensed Consolidated Financial Data"
and the related notes thereto included elsewhere herein and the "Selected
Consolidated Historical Financial Data" and the related notes thereto included
elsewhere herein.
<TABLE>
<CAPTION>
AS OF JUNE 27, 1998
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Cash and short-term cash investments........................ $ 1,798
========
Debt:
New Revolving Credit Facility(a).......................... $ 3,600
New Term Loan Facility.................................... 30,000
Old Notes................................................. 100,000
Old Debentures............................................ 15,205
--------
Total debt............................................. 148,805
Redeemable common stock..................................... 2
Shareholders' equity (deficit).............................. 17,534
--------
Total capitalization $166,341
========
</TABLE>
- ------------------------------
(a) The Revolving Credit Facility provides for up to $20 million of borrowing
availability, $3.6 million of which is outstanding as of June 27, 1998. See
"Description of Other Indebtedness."
24
<PAGE> 30
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The following Unaudited Pro Forma Condensed Consolidated Financial Data
have been derived by the application of pro forma adjustments to the Company's
historical financial data included elsewhere herein. The pro forma consolidated
statements of operations for the periods presented give effect to the
Acquisition Transactions as if such Acquisition Transactions were consummated as
of December 29, 1996. The adjustments are described in the accompanying notes
and reflect a preliminary allocation of the purchase price. The Unaudited Pro
Forma Condensed Consolidated Financial Data do not purport to represent what SH
Group's results of operations or financial position actually would have been if
the Acquisition Transactions had been consummated on the date indicated, or what
such results will be as of any future date or for any future period. The
Unaudited Pro Forma Condensed Consolidated Financial Data should be read in
conjunction with the "Selected Consolidated Historical Financial Data" and the
related notes thereto included elsewhere herein.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
FISCAL YEAR ENDED JANUARY 3, 1998
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
COMPANY --------------------- SH GROUP
HISTORICAL COMPANY SH GROUP PRO FORMA
---------- -------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales...................................... $ 72,983 -- -- $ 72,983
Cost of goods sold............................. 46,448 $ 4,158(a) -- 50,606
-------- -------- ------- --------
Gross profit.............................. 26,535 (4,158) -- 22,377
Selling, general and administrative
expenses(b).................................. 8,489 641(c) -- 9,130
Management fees................................ 475 420(d) -- 895
Amortization of goodwill....................... 729 1,948(e) --(e) 2,677
-------- -------- ------- --------
Operating income.......................... 16,842 (7,167) -- 9,675
Other income (expense):
Interest income.............................. 136 -- -- 136
Interest expense............................. (5,284) (8,685)(f) $(2,150)(f) (16,119)
Other financing expense...................... (212) -- -- (212)
-------- -------- ------- --------
Income (loss) before income taxes.............. 11,482 (15,852) (2,150) (6,520)
Income tax expense(benefit)............... 4,015 (4,659)(g) (817)(g) (1,461)
-------- -------- ------- --------
Income (loss) before extraordinary item........ $ 7,467 $(11,193) $(1,333) $ (5,059)
======== ======== ======= ========
</TABLE>
See accompanying notes to the unaudited pro forma condensed consolidated
statements of operations and "Selected Consolidated Historical Financial Data."
25
<PAGE> 31
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 27, 1998
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
(20 WEEKS) --------------------- (20 WEEKS) (5 WEEKS)
PREDECESSOR SH GROUP SUCCESSOR SIX MONTHS
HISTORICAL COMPANY SH GROUP PRO FORMA HISTORICAL PRO FORMA
----------- ------- -------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $29,631 -- -- $29,631 $ 7,161 $36,792
Cost of goods sold...... 18,628 $ 1,541(a) -- 20,169 4,973 25,142
------- ------- ------- ------- ------- -------
Gross profit....... 11,003 (1,541) -- 9,462 2,188 11,650
Selling, general and
administrative
expenses(b)........... 3,824 254(c) -- 4,078 845 4,923
Management fees......... 132 238(d) -- 370 74 444
Amortization of
goodwill.............. 289 740(e) --(e) 1,029 221 1,250
------- ------- ------- ------- ------- -------
Operating income
(loss)........... 6,758 (2,773) -- 3,985 1,048 5,033
Other income (expense):
Interest income....... 29 -- -- 29 20 49
Interest expense...... (1,528) (3,743)(f) $ (812)(f) (6,083) (2,462) (8,545)
Other financing
costs.............. (50) -- -- (50) -- (50)
------- ------- ------- ------- ------- -------
Income (loss) before
income taxes.......... 5,209 (6,516) (812) (2,119) (1,394) (3,513)
Income tax expense
(benefit).......... 1,868 (1,968)(g) (314)(g) (414) (445) (859)
------- ------- ------- ------- ------- -------
Net income (loss)....... $ 3,341 $(4,548) $ (498) $(1,705) $ (949) $(2,654)
======= ======= ======= ======= ======= =======
</TABLE>
See accompanying notes to the unaudited pro forma condensed consolidated
statements of operations and "Selected Consolidated Historical Financial Data."
26
<PAGE> 32
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
(a) The following table summarizes the pro forma adjustments to cost of
goods sold:
<TABLE>
<CAPTION>
FISCAL YEAR SIX MONTHS
ENDED ENDED
JANUARY 3, 1998 JUNE 27, 1998
--------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Pro forma depreciation of property, plant and equipment
(estimated useful lives ranging from five to thirty
years)................................................... $ 6,685 $ 2,644
Pro forma amortization of identifiable intangible assets
(estimated useful lives of thirteen years)............... 1,024 394
Less: Historical depreciation and amortization expense..... (3,551) (1,497)
------- -------
$ 4,158 $ 1,541
======= =======
</TABLE>
(b) The pro forma financial statements do not include non-recurring charges
of approximately $3.6 million of fees associated with identifying a
buyer, $3.8 million of bonuses to management and $1.1 million of fees
associated with bridge financing.
(c) Represents director's fees.
(d) Represents the difference between the new subordinated management fee
and the historical management fee. The new subordinated management fee
is a contractually agreed upon annual amount of $895,000 paid to AIP by
SH Group in equal semi-annual installments until the earlier of May 26,
2008 or such other date upon which AIP and SH Group mutually agree.
(e) Represents the estimated increase in amortization expense on assignment
of purchase price to goodwill which is amortized over forty years.
(f) The following table reflects the pro forma adjustments to interest
expense:
<TABLE>
<CAPTION>
FISCAL YEAR SIX MONTHS
ENDED ENDED
JANUARY 3, 1998 JUNE 27, 1998
--------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Old Notes and New Credit Agreement at rates ranging from
8.0% to 10.625%..........................................
$13,569 $ 5,120
Senior Discount Debentures.................................
2,104 795
Amortization of debt issuance costs........................
446 168
Less: Historical interest expense..........................
(5,284) (1,528)
------- -------
Total............................................
$10,835 $ 4,555
======= =======
</TABLE>
(g) Reflects the adjustment to income tax expense to arrive at pro forma
income tax expense (benefit) equal to pro forma pre-tax income (loss)
plus non-deductible goodwill expense multiplied by the effective rate
of 38%.
27
<PAGE> 33
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
The following table sets forth selected consolidated historical financial,
operating, other and balance sheet data of the Company for each of the fiscal
years in the five-year period ended January 3, 1998, derived from the audited
Consolidated Financial Statements of the Company and the related notes thereto
included elsewhere herein. The selected consolidated financial data for the six
months ended June 27, 1998 and June 28, 1997 have been derived from the
Unaudited Consolidated Financial Statements of the Company, and include, in the
opinion of management, all adjustments necessary to present fairly the data for
such periods. The results for the six months ended June 27, 1998 are not
necessarily indicative of the results to be expected for the fiscal year 1998 or
for any future period. On May 26, 1998, a transaction whereby SH Group acquired
the stock of Old Holdings, was consummated. As a result of the transaction, the
assets and liabilities of Old Holdings were revalued to their respective fair
values under the principles of APB 16, "Business Combinations." The most
significant effects were to increase property, plant, and equipment, certain
intangibles, inventory and certain liabilities. Accordingly, financial
information for periods prior to May 26, 1998 (Predecessor) is not comparable
with that for periods subsequent to May 26, 1998 (Successor). The data presented
below should be read in conjunction with the Consolidated Financial Statements
and the related notes thereto, the unaudited condensed consolidated financial
statements and notes thereto included elsewhere herein, the other financial
information included elsewhere herein and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------------------------
FISCAL YEAR JUNE 27, 1998 JUNE 28, 1997
------------------------------------------------ ----------------------- -------------
PREDECESSOR COMPANY SUCCESSOR PREDECESSOR PREDECESSOR
------------------------------------------------ COMPANY COMPANY COMPANY
1997 1996 1995 1994 1993 (5 WEEKS) (20 WEEKS) (26 WEEKS)
-------- ------- ------- ------- ------- --------- ----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales......................... $ 72,983 $64,484 $68,118 $68,302 $67,115 $ 7,161 $29,631 $35,751
Cost of goods sold................ 46,448 44,074 47,706 47,996 46,389 4,973 18,628 23,169
-------- ------- ------- ------- ------- --------- ------- -------
Gross profit.................... 26,535 20,410 20,412 20,306 20,726 2,188 11,003 12,582
Selling, general and
administrative expenses......... 8,489 8,875 8,667 8,198 7,712 845 3,824 4,212
Management fees................... 475 725 275 275 275 74 132 337
Amortization of goodwill.......... 729 729 729 936 943 221 289 364
Restructuring charges(a).......... -- -- 821 -- -- -- -- --
-------- ------- ------- ------- ------- --------- ------- -------
Operating income................ 16,842 10,081 9,920 10,897 11,796 1,048 6,758 7,669
Interest expense, net............. (5,148) (5,844) (6,307) (7,061) (6,672) (2,442) (1,499) (2,668)
Other financing expense........... (212) -- -- -- (112) -- (50) (175)
-------- ------- ------- ------- ------- --------- ------- -------
Income (loss) before taxes,
extraordinary item and
cumulative effect of change in
accounting.................... 11,482 4,237 3,613 3,836 5,012 (1,394) 5,209 4,826
Income tax (benefit) expense...... 4,015 1,638 1,628 1,788 1,916 (445) 1,868 1,688
-------- ------- ------- ------- ------- --------- ------- -------
Income (loss) before
extraordinary item and
cumulative effect of change in
accounting.................... 7,467 2,599 1,985 2,048 3,096 (949) 3,341 3,138
Extraordinary item(b)............. (2,753) -- -- -- -- -- -- (2,753)
Effect of change in
accounting(c)................... -- -- (855) -- -- -- -- --
-------- ------- ------- ------- ------- --------- ------- -------
Net income (loss)............... $ 4,714 $ 2,599 $ 1,130 $ 2,048 $ 3,096 $ (949) $ 3,341 $ 385
======== ======= ======= ======= ======= ========= ======= =======
OPERATING AND OTHER DATA:
Net cash provided by (used in)
operating activities............ $ 9,960 $11,236 $ 7,612 $ 9,623 $10,857 $ (339) $ 2,210 $ 1,346
Net cash (used in)
investing activities............ (2,529) (2,767) (3,357) (2,784) (3,174) (113,155) (730) (958)
Net cash provided by (used in)
financing activities............ (11,697) (4,700) (5,000) (10,262) (7,341) 113,741 (308) (2,630)
EBITDA(d)......................... 21,121 15,928 15,810 16,550 17,237 2,100 8,564 9,874
EBITDA margin(e).................. 28.9% 24.7% 23.2% 24.2% 25.7% 29.3% 28.9% 27.6%
Depreciation and amortization..... $ 4,409 $ 6,019 $ 6,096 $ 5,859 $ 5,728 $ 2,093 $ 1,863 $ 2,431
Capital expenditures.............. 2,558 2,809 3,455 2,839 3,200 199 968 958
Ratio of earnings to fixed
charges(f)...................... 3.2x 1.7x 1.6x 1.5x 1.7x -- 4.4x 2.7x
BALANCE SHEET DATA (AT PERIOD END):
Working capital................... $ 8,847 $ 8,380 $11,576 $11,677 $15,274 $ 20,561 $19,328 $12,926
Net property, plant and
equipment....................... 16,685 17,756 20,106 21,911 24,050 40,726 15,898 16,982
Total assets...................... 64,340 68,716 68,771 71,890 79,072 198,197 67,052 68,190
Long-term debt (including
current portion)................ 52,800 50,000 52,700 59,700 70,000 148,805 52,492 61,875
Redeemable common stock........... 1,366 1,350 1,350 1,350 1,316 2 1,366 1,350
Shareholders' equity (deficit).... (4,523) (1,309) (3,911) (5,025) (7,042) 17,534 (1,166) (7,728)
</TABLE>
- ------------------------------
(a) Includes restructuring charges of $0.8 million in 1995 related to a
reduction in the domestic workforce, closure of the Company's Canadian
operation and writedown of certain assets.
28
<PAGE> 34
(b) Extraordinary item relates to a loss on the early extinguishment of debt,
net of taxes of $1.7 million.
(c) Includes a cumulative effect of change in method of accounting for
postretirement benefits of $0.9 million net of taxes in fiscal year 1995.
(d) EBITDA represents operating income plus depreciation and amortization and is
calculated in a manner consistent with the definition of "Consolidated
EBITDA" in the Note Indenture. Adjusted EBITDA, as presented below,
represents EBITDA plus items which management believes to be unusual,
including, but not limited to, management and transaction fees paid to BCC
and AIP, non-recurring restructuring charges, supplemental bonus
compensation, compensation expense for certain eliminated management
positions and incremental increases in obsolete inventory reserves. Adjusted
EBITDA is calculated in a manner substantially consistent with the
definition of "Consolidated EBITDA" in the Credit Agreement. The following
is a summary of historical adjustments to operating income:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------------------------
FISCAL YEAR JUNE 27, 1998 JUNE 28, 1997
----------------------------------------------- ----------------------- -------------
PREDECESSOR COMPANY SUCCESSOR PREDECESSOR PREDECESSOR
----------------------------------------------- COMPANY COMPANY COMPANY
1997 1996 1995 1994 1993 (5 WEEKS) (20 WEEKS) (26 WEEKS)
------- ------- ------- ------- ------- --------- ----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating income.................... $16,842 $10,081 $ 9,920 $10,897 $11,796 $1,048 $6,758 $ 7,669
Depreciation........................ 3,550 5,118 5,161 4,924 4,785 746 1,517 1,841
Amortization........................ 729 729 729 729 656 306 289 364
------- ------- ------- ------- ------- ------ ------ -------
EBITDA............................ 21,121 15,928 15,810 16,550 17,237 2,100 8,564 9,874
Unusual items:
Management and transaction fees... 475 725 275 275 275 74 132 337
Non-recurring restructuring
charges......................... -- -- 821 -- -- -- -- --
Supplemental bonus compensation... 775 870 -- -- -- -- -- 355
Compensation expense.............. 260 -- -- -- -- -- -- 130
Incremental increases in obsolete
inventory reserves.............. 210 -- -- -- -- -- -- 210
------- ------- ------- ------- ------- ------ ------ -------
Adjusted EBITDA................. $22,841 $17,523 $16,906 $16,825 $17,512 $2,174 $8,696 $10,906
======= ======= ======= ======= ======= ====== ====== =======
</TABLE>
EBITDA and Adjusted EBITDA are included in the Prospectus as they are a
basis upon which the Company assesses its financial performance, and certain
covenants in the Credit Agreement are tied to similar measures. EBITDA and
Adjusted EBITDA are not intended to represent cash flow from operations as
defined by GAAP and should not be used as an alternative to net income as an
indicator of operating performance or to cash flows as a measure of
liquidity. EBITDA and Adjusted EBITDA, as presented, represent a useful
measure of assessing the Company's ongoing operating activities without the
impact of financing activities and unusual items. While EBITDA and Adjusted
EBITDA are frequently used as a measure of operations and the ability to
meet debt service requirements, it is not necessarily comparable to other
similarly titled captions of other companies due to potential
inconsistencies in the method of calculation.
(e) EBITDA as a percentage of net sales.
(f) For purposes of this computation, fixed charges consist of interest expense
and amortization of deferred financing fees. Earnings consist of income
before income taxes, extraordinary item and cumulative effect of changes in
accounting principles, plus fixed charges. For the 5 weeks ended June 27,
1998, the deficiency in the coverage of fixed charges was approximately $1.4
million. On a pro forma basis, fixed charges exceeded pro forma earnings by
$6.5 million for the year ended January 3, 1998. Also on a pro forma basis,
the ratio of earnings to fixed charges for the 20 weeks ended May 25, 1998
was a deficiency in the coverage of fixed charges of approximately $2.1
million.
29
<PAGE> 35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Historical Financial Data" and the Consolidated Financial
Statements and the related notes thereto included elsewhere herein.
GENERAL
SH Group acquired the outstanding common stock of Old Holdings, the
Company's ultimate Parent, on May 26, 1998 for approximately $175.2 million. See
"The Acquisition" included elsewhere herein.
The Company, founded in 1898, is one of the world's leading manufacturers
of precision textile loom accessories. The Company manufactures and markets
virtually all of the replaceable wear parts necessary to operate a commercial
weaving loom including heddles, dropwires, harness frames, reeds and shuttles
and bobbins. In addition to textile loom accessories, the Company also
manufactures precision rolled, heat treated, bare, ferrous and nonferrous and
tinned flat wire used in the electronics, automotive, solar power and other
industries.
In November 1995, after a comprehensive review of the business, the Company
initiated a cost reduction plan which was completed in December 1996. As part of
the cost reduction plan, the Company eliminated 120 full-time positions from its
work force including 36 direct labor positions and 84 indirect and
administrative positions. The Company's headcount reduction has not resulted in
any unforeseen effects on operations, and the Company has not found it necessary
to replace any of the eliminated positions. In addition, the Company also
undertook other cost savings initiatives in its manufacturing and administrative
functions, including aggressively renegotiating certain raw material supply
contracts, reconfiguring manufacturing space, outsourcing certain manufacturing
functions and modifying certain employee benefit programs. The Company's
financial results for fiscal 1997 represent the first full fiscal year to
benefit from this cost-reduction plan. Primarily as a result of these cost
savings initiatives, gross profit margins increased to 36.4% in fiscal 1997 from
31.7% in fiscal 1996 and 30.0% in 1995. In addition, selling, general and
administrative expenses ("SG&A") as a percentage of net sales decreased to 11.6%
in fiscal 1997 from 13.8% in fiscal 1996 and 12.7% in 1995.
In 1996, output of woven fabrics in the United States declined to 15.8
billion square yards, compared to an average annual output of 16.3 billion
square yards for the prior four years. This textile industry recession, which
began in 1995 and ended in late 1996, was caused primarily by record high cotton
prices as a result of flooding and pest problems in the key cotton producing
nations of India, Pakistan and China. Consequently, many textile mills attempted
to reduce non-raw material costs by delaying the purchase of new weaving looms
and loom accessories. Despite such industry-related pressure on sales, as a
result of the Company's cost reductions program and related initiatives, the
Company improved its gross margin and operating income in fiscal 1996. In 1997,
output of woven fabrics in the United States rebounded from 1996 levels to 16.4
billion square yards.
As weaving technology has evolved, and faster, more efficient, air-jet and
water-jet looms replace older, slower shuttle and bobbin looms, the demand for
shuttles and bobbins has decreased while demand for accessories of newer
technology looms has increased. The Company expects this trend to continue as
shuttle looms continue to be replaced. Commensurate with this decrease, the
Company expects net sales of shuttle and bobbins to decrease while net sales
related to newer technologies take their place. Net sales, excluding shuttle and
bobbin sales, have increased since fiscal 1993 from $61.0 million to $70.4
million while net sales of shuttles and bobbins during the same period decreased
from $6.1 million in fiscal 1993 to $2.6 million. Shuttles and bobbins
contributed $0.1 million to gross profit in fiscal 1997. Total net sales in
fiscal 1997 were $73.0 million.
BASIS OF PRESENTATION
The Company's fiscal year ended January 3, 1998 was 53 weeks in duration
compared to 52 weeks for the fiscal year ended December 28, 1996. As a result,
the Company's results from operations for the fiscal year
30
<PAGE> 36
ended January 3, 1998 will include an additional week of financial results. On
May 26, 1998, a transaction whereby SH Group acquired the stock of Old Holdings,
was consummated. As a result of the transaction, the assets and liabilities of
Old Holdings were revalued to their respective fair values under the principles
of APB 16, "Business Combinations." The most significant effects were to
increase property, plant, and equipment, certain intangibles, inventory and
certain liabilities. Accordingly, financial information for periods prior to May
26, 1998 (Predecessor) is not comparable with that for periods subsequent to May
26, 1998 (Successor).
In addition to the historical six-month presentation, certain six month
information has been prepared on a pro forma basis for informational purposes
and to facilitate the understanding of the effects of the acquisition of Old
Holdings.
The pro forma financial information was prepared for comparison purposes
and gives effect to the acquisition of SH Holdings Corp. as if the transaction
had occurred on December 29, 1996. The unaudited pro forma financial information
was derived by adjusting the historical consolidated financial statements of the
Company for the effects of purchase accounting. Such adjustments primarily
relate to increased depreciation and amortization expense resulting from
write-up of the Company's fixed and intangible assets and goodwill and to
increased interest expense resulting from financing the transaction. This pro
forma information is provided for informational purposes only and should not be
construed to be indicative of operations of the Company had the transaction been
consummated on the respective dates indicated and are not intended to be
predictive of the results of operations of the Company for any future period.
The following tables summarize the Company's historical results of
operations (in millions of dollars and as a percentage of net sales) for the
fiscal years 1997, 1996 and 1995 and the historical and pro forma results of
operations for the five weeks ended June 27, 1998 (Successor), twenty weeks
ended May 25, 1998 (Predecessor) and the six months ended June 28, 1997
(Predecessor):
<TABLE>
<CAPTION>
FISCAL YEAR
---------------------------------------------------------------
PREDECESSOR COMPANY
---------------------------------------------------------------
1997 1996 1995
------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales................................................... $73.0 100.0% $64.5 100.0% $68.1 100.0%
Cost of goods sold.......................................... 46.4 63.6 44.1 68.3 47.7 70.0
Gross profit................................................ 26.5 36.4 20.4 31.7 20.4 30.0
SG&A........................................................ 8.5 11.6 8.9 13.8 8.7 12.7
Operating income............................................ 16.8 23.1 10.1 15.6 9.9 14.6
Net income.................................................. 4.7 6.5 2.6 4.0 1.1 1.7
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------------------------------------------------
JUNE 27, 1998 JUNE 28, 1997 PRO FORMA
----------------------------------------- ------------------- -------------------
SUCCESSOR PREDECESSOR PREDECESSOR SIX MONTHS ENDED
COMPANY COMPANY COMPANY -------------------
(5 WEEKS) (20 WEEKS) (26 WEEKS) JUNE 27, 1998
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales................................ $ 7.2 100.0% $29.6 100.0% $35.8 100.0% $36.8 100.0%
Cost of goods sold....................... 5.0 69.4 18.6 62.9 23.2 64.8 25.1 68.3
Gross profit............................. 2.2 30.6 11.0 37.1 12.6 35.2 11.7 31.7
SG&A..................................... 0.8 11.8 3.8 12.9 4.2 11.8 4.9 13.4
Operating income......................... 1.0 14.6 6.8 22.8 7.7 21.5 5.0 13.7
Net income (loss)........................ (0.9) (13.3) 3.3 11.3 0.4 1.1 (2.6) (7.2)
<CAPTION>
PRO FORMA
-------------------
SIX MONTHS ENDED
-------------------
JUNE 28, 1997
-------------------
<S> <C> <C>
Net sales................................ $35.8 100.0%
Cost of goods sold....................... 25.2 70.4
Gross profit............................. 10.6 29.6
SG&A..................................... 4.5 12.7
Operating income......................... 4.3 11.9
Net income (loss)........................ (2.8) (7.9)
</TABLE>
The costs of goods sold as a percentage of net sales partially decreased in
fiscal 1997 as compared to earlier years because certain fixed assets were fully
depreciated.
COMPARISON OF RESULTS OF OPERATIONS
ACTUAL SIX MONTHS ENDED JUNE 27, 1998 COMPARED TO ACTUAL SIX MONTHS ENDED JUNE
28, 1997
Net Sales. Net sales for the five-week period ended June 27, 1998 were $7.2
million, with sales for the twenty-week period ended May 25, 1998 of $29.6
million. Net sales for the six months ended June 28, 1997 were $35.8 million.
Sales from the textile product segment comprised 85%, 85%, and 87% of net sales
for the
31
<PAGE> 37
five-week period ended June 27, 1998, the twenty-week period ended May 25, 1998,
and the six months ended June 28, 1997, respectively. Textile product sales were
flat due to a decline in international sales caused by the economic and monetary
crisis in Asia.
Gross Profit. Gross profit for the five weeks ended June 27, 1998, twenty
weeks ended May 25, 1998, and six months ended June 28, 1997, as a percentage of
net sales, was 30.6%, 37.1%, and 35.2%, respectively. The increase in the gross
profit margin for the twenty-week period ended May 25, 1998 over the six-month
period ended June 28, 1997 was due principally to an increase in the sale of
domestic textile mill accessories and rolled products, as both carry higher
margins than products sold in the international market. Gross profit margin in
the twenty-week period ended May 25, 1998 was additionally benefited by improved
purchasing costs of raw materials used in the production of rolled products. The
decrease in gross profit percentage for the twenty-week period ended May 25,
1998 to the five-week period ended June 27, 1998 is due primarily to additional
depreciation expense resulting from the write-up of the Company's fixed assets
in connection with the new basis of accounting used in the Acquisition.
Selling, General and Administrative Expenses. SG&A, as a percentage of net
sales, for the five weeks ended June 27, 1998, twenty weeks ended May 25, 1998,
and six months ended June 28, 1997 was 11.8%, 12.9%, and 11.8%, respectively.
The increase in SG&A as a percentage of net sales for the twenty weeks ended May
25, 1998 over the six months ended June 28, 1997 is due to the write-off of the
Company's investment in its China operation and costs incurred in connection
with the Company's year 2000 computer project.
Operating Income. Operating income for the five weeks ended June 27, 1998,
twenty weeks ended May 25, 1998, and six months ended June 28, 1997, as a
percentage of net sales, was 14.6%, 22.8%, and 21.5%, respectively. The increase
in operating income as a percentage of net sales for the twenty-week period
ended May 25, 1998 over the six-month period ended June 28, 1997 is due to the
increase in gross profit described above. The decrease in operating income as a
percentage of net sales for the five-week period ended June 27, 1998 from the
twenty-week period ended May 25, 1998 is due to decreased gross profit coupled
with increased amortization of intangible assets and goodwill in connection with
the new basis of accounting used in the Acquisition.
Net Income (Loss). Net income (loss), as a percentage of net sales, for the
five weeks ended June 27, 1998, twenty weeks ended May 25, 1998, and six months
ended June 28, 1997 was (11.5)%, 11.3%, and 8.8%, respectively. The increase in
net income as a percentage of net sales for the twenty weeks ended May 25, 1998
over the six months ended June 28, 1997 is attributable to the factors noted
above. The decrease in net income as a percentage of net sales to a net loss for
the five weeks ended June 27, 1998 over the twenty weeks ended May 25, 1998 is
due to the factors noted above in addition to an increase in interest expense
resulting from debt issued in connection with the Acquisition.
PRO FORMA SIX MONTHS ENDED JUNE 27, 1998 COMPARED TO PRO FORMA SIX MONTHS
ENDED JUNE 28, 1997
Net Sales. Pro forma net sales for the six months ended June 27, 1998
increased by $1.0 million, or 2.8%, to $36.8 million. All of the increase came
from higher sales volume in the Company's metal products segment which includes
rolled products and tool and die operations. Textile product sales were flat at
$31.2 million due primarily to a decline in international sales caused by the
economic and monetary crisis in Asia.
Gross Profit. Pro forma gross profit for the six-month period ended June
27, 1998 increased to $11.7 million from $10.6 million for the six months ended
June 28, 1997, an increase of 10.4%. As a percentage of net sales, pro forma
gross profit margin increased to 31.7% from 29.6%. The increase in both pro
forma gross profit and pro forma gross profit margin as a percentage of sales is
due primarily to the increase in sales of domestic textile mill accessories and
rolled products (both generally carrying higher margins than products sold
internationally), as well as cost savings derived from improved purchasing of
raw materials used in the production of rolled products.
Selling, General and Administrative Expenses. Pro forma SG&A expenses
increased $0.4 million to $4.9 million for the six months ended June 27, 1998,
an increase of 8.9%. As a percentage of net sales, pro forma SG&A increased to
13.3% from 12.7%. The increase in pro forma SG&A expenses is due primarily to
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the write-off of the Company's investment in its China operation and to costs
associated with the Company's year 2000 computer project, which is expected to
increase SG&A for 1998 by approximately $0.3 million.
Operating Income. Pro forma operating income increased to $5.0 million for
the six months ended June 27, 1998 from $4.3 million for the six months ended
June 28, 1997, an increase of 16.3%. This increase in pro forma operating income
resulted from the increase in pro forma net sales and pro forma gross profit,
partially offset by the increase in pro forma SG&A expenses. As a percentage of
pro forma net sales, pro forma operating income increased to 13.7% from 11.9%.
Net Loss. The pro forma net loss decreased to $2.6 million for the six
months ended June 27, 1998 from $2.8 million for the six months ended June 28,
1997. The decrease in pro forma net loss is attributable to the factors noted
above.
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
Net Sales. Net sales increased to $73.0 million in 1997 from $64.5 million
in 1996, an increase of 13.2%. The growth in net sales was primarily
attributable to increased sales of loom accessories driven by the emergence of
the U.S. textile industry from the recession of 1996. Of the Company's loom
accessory products, heddle and dropwire sales increased 12.4%, frame sales
increased 13.2% and reed sales increased 8.1%. The growth in net sales of loom
accessories was partially offset by a 6.4% decrease in shuttle sales as older-
technology shuttle-type looms continued to be phased out. Further contributing
to the Company's strong growth in net sales, sales of rolled products increased
to $9.0 million in 1997 from $7.4 million in 1996, an increase of 21.9%.
Gross Profit. Gross profit increased to $26.5 million in 1997 from $20.4
million in 1996, an increase of 30.0%. As a percentage of net sales, the
Company's gross profit margin increased to 36.4% from 31.7%. The increase in
both gross profit and gross profit margin was due primarily to the
implementation of the cost reduction plan which was implemented between August
1995 and December 1996 and efficiency gains resulting from increased unit
production. In addition, gross profit margin increased as a result of the
Company's shift in product mix towards more customized, higher margin loom
accessories and the reduction of depreciation expense associated with certain
assets which became fully depreciated in 1996.
Selling, General and Administrative Expenses. SG&A decreased from $8.9
million for 1996 to $8.5 million for 1997. As a percentage of net sales, SG&A
decreased to 11.6% from 13.8%. The improvement in SG&A as a percentage of net
sales primarily stems from the implementation of the Company's cost reduction
plan.
Operating Income. Operating income increased to $16.8 million in 1997 from
$10.1 million in 1996, an increase of 66.3%, primarily as a result of the
increase in net sales, as well as the improvement in gross profit margin. As a
percentage of net sales, operating income increased to 23.1% from 15.6%.
Net Income. Net income increased to $4.7 million in 1997 from $2.6 million
in 1996, an increase of 80.8%. The increase is a result of the items noted
above.
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
Net Sales. Net sales decreased to $64.5 million in 1996 from $68.1 million
in 1995, a decrease of 5.3%. The decrease in net sales of loom accessories can
be attributed largely to the difficulties of the textile industry which began in
1995 and continued through 1996. Net sales of heddles declined 3.2%, frame sales
declined by approximately 9.2% although frame export sales increased due
primarily to an increase in higher-priced, higher-margin section frame sales.
Reed sales increased by 2.4% due to slight increases in both units and prices,
primarily attributable to a 8.0% increase in tunnel reed sales. Shuttle sales
declined as older-technology shuttle-type looms continued to be phased out.
Rolled product sales decreased to $7.4 in 1996 from $8.4 in 1995, a decline of
11.9% due primarily to two key customers decreasing inventory levels.
Gross Profit. Gross profit was flat at $20.4 million in 1995 and 1996. As a
percentage of net sales, gross profit increased to 31.7% from 30.0%. The
increase in gross profit margin was due primarily to the initiation of
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the Company's cost-reduction plan in August 1995 which eliminated overhead and
direct labor positions and established tight controls over manufacturing costs.
The gross margin increases achieved through the cost-reduction plan were
partially offset by a decrease in heddle export prices.
Selling, General and Administrative Expenses. SG&A increased to $8.9
million in 1996 from $8.7 million in 1995, an increase of 2.4%. As a percentage
of net sales, SG&A increased to 13.8% from 12.7%. This increase is related to
performance bonuses paid during the year of approximately $1.3 million. No such
bonuses were paid in 1995. Excluding these bonuses, SG&A in 1996 would have been
$7.6 million, a decrease of $1.1 million, due primarily to the Company's
cost-reduction plan.
Operating Income. Operating income increased to $10.1 million in 1996 from
$9.9 million in 1995, an increase of 2.0%. Included in 1995 operating income was
a one-time restructuring charge of $0.8 million related to a reduction of the
U.S. workforce, closure of the Company's Canadian operation and writedown of
certain assets. In addition, management fees paid to BCC increased to $0.7
million in 1996 from $0.3 million in 1995. Excluding the effects of these
charges, operating income decreased to $10.8 million in 1996 from $11.0 million
in 1995, a decrease of $0.2 million or 1.9%.
Net Income. Net income increased to $2.6 million in 1996 from $1.1 million
in 1995, an increase of $1.5 million. The increase is attributable to the
factors noted above.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically generated sufficient internal cash flow from
operations to fund its operations, capital expenditures and working capital
requirements. Cash provided by operating activities for the six months ended
June 27, 1998 increased to $1.9 million from $1.3 million for the six months
ended June 28, 1997. The increase was primarily due to the improvement in net
income, increased depreciation and amortization and reduction in working capital
requirements, partially offset by the extraordinary loss incurred upon the early
extinguishment of debt in the prior year. Cash provided by operating activities
for the fiscal year ended January 3, 1998 decreased to $10.0 million from $11.2
million for the fiscal year ended December 28, 1996. The decrease was primarily
due to an increase in working capital requirements, as the Company increased its
inventory levels due to the higher sales volume in 1997 and reduced its accounts
payable and accrued expense balances. The increase in working capital
requirements was partially offset by the increase in the Company's net income.
Capital expenditures were $3.5 million, $2.8 million, $2.6 million and $1.2
million in 1995, 1996, 1997, and the first six months of 1998, respectively.
These amounts primarily reflect cash outlays for maintaining and upgrading the
Company's manufacturing plant and equipment. Management estimates that the
Company will continue to spend approximately $3.0 million annually to maintain
and upgrade its plant and equipment.
In January 1997, the Company undertook a recapitalization led by Butler
Capital Corporation. In connection with this recapitalization, the Company
entered into a $67.5 million credit facility consisting of a $52.5 million term
loan and a $15.0 million revolving credit facility (the "Existing Credit
Facility"). Proceeds from the Existing Credit Facility were used to refinance
existing indebtedness of $55.7 million (including a prepayment penalty of $5.7
million) and pay shareholders a $7.9 million dividend.
Following the Acquisition, the Company's principal sources of liquidity
will be cash flow from operations supplemented by borrowings under the Revolving
Credit Facility.
In connection with the Acquisition, the Company issued the Old Notes for
$100.0 million in gross proceeds and entered into the Term Loan Facility and the
Revolving Credit Facility under the New Credit Agreement. The Revolving Credit
Facility provides revolving loans in an aggregate amount of up to $20.0 million
(including letters of credit). Upon closing of the Acquisition Transactions, the
Company borrowed $30.0 million available under the Term Loan Facility and
approximately $3.6 million under the Revolving Credit Facility. Proceeds to the
Company from the issuance of the Old Notes and from initial borrowings under the
New Credit Agreement were distributed to SH Group to finance, in part, the
Acquisition and the fees and expenses in connection therewith, and the repayment
of outstanding indebtedness of the Company under the Existing Credit Facility.
To provide additional financing to fund the Acquisition,
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SH Group raised $23.0 million through an equity contribution by AIP and its
related investors, excluding the rollover interests of certain members of
management, and an additional $15.0 million through the offering of Old
Debentures.
Borrowings under the New Credit Agreement bear interest at a rate per annum
equal (at the Company's option) to a margin over either a base rate or LIBOR (as
defined herein). The Term Loan Facility and Revolving Credit Facility will
mature in six years. The Company's obligations under the New Credit Agreement
are guaranteed by each of the Company's direct and indirect domestic
subsidiaries. The New Credit Agreement and the guarantees thereof are secured by
a perfected first priority security interest in substantially all assets of SH
Group and its direct and indirect domestic subsidiaries and, to the extent no
adverse tax consequences would result, foreign subsidiaries.
The New Credit Agreement contains a number of covenants that, among other
things, restrict the ability of SH Group, the Company and its subsidiaries to
dispose of assets, incur additional indebtedness, prepay other indebtedness or
amend certain debt instruments, pay dividends, create liens on assets, enter
into sale and leaseback transactions, make investments, loans or advances, make
acquisitions, engage in mergers or consolidations, make capital expenditures,
change the business conducted by the Company or its subsidiaries or engage in
certain transactions with affiliates and otherwise restrict certain corporate
activities. In addition, under the New Credit Agreement, the Company is required
to maintain specified financial ratio tests, including leverage ratios below a
specified maximum and minimum interest coverage levels. The Company is in
compliance with all financial covenants contained in the New Credit Agreement.
See "Risk Factors -- Restrictive Debt Covenants" and "Description of Other
Indebtedness."
The Old Notes were issued by the Company, are guaranteed by each Subsidiary
(as defined herein) of the Company, other Foreign Subsidiaries (as defined
herein), but are not guaranteed by SH Group. The Old Notes mature on June 1,
2008. Interest on the Old Notes is payable semi-annually in cash. The Old Notes
contain customary covenants and events of default, including covenants that
limit the ability of the Company and its subsidiaries to incur debt, pay
dividends and make certain investments. See "Description of Other Indebtedness."
The Debentures mature on June 1, 2009. Cash interest will not accrue on the
Debentures prior to June 1, 2003. Thereafter, interest on the Debentures will be
payable semi-annually in cash.
SH Group is a holding company, and its ability to pay interest on the
Debentures is dependent upon the receipt of dividends from its direct and
indirect subsidiaries. SH Group does not have, and may not in the future have,
any assets other than the common stock of the Company (which were pledged to
secure the obligations of the Company and SH Group under the New Credit
Agreement). The Company and any Subsidiary of the Company (other than Foreign
Subsidiaries) are parties to the New Credit Agreement and the Note Indenture,
each of which imposes substantial restrictions on the Company's ability to pay
dividends to SH Group. See "Risk Factors -- Substantial Leverage; Liquidity."
Management believes that cash flow from operations and availability under
the Revolving Credit Facility will provide adequate funds for the Company's
foreseeable working capital needs, planned capital expenditures and debt service
obligations on both a short term and a long term basis. However, the level of
the Company's indebtedness could have important consequences, including, but not
limited to, the following: (i) the Company's ability to obtain additional
financing in the future for working capital, capital expenditures, acquisitions,
product development, general corporate purposes or other purposes may be
materially limited or impaired; (ii) significant amounts of the Company's
borrowings bear interest at variable rates, which could result in higher
interest expense in the event of increases in interest rates; (iii) the
Indenture, the Notes and the New Credit Agreement contain financial and
restrictive covenants, the failure to comply with which may result in an event
of default which, if not cured or waived, could have a material adverse effect
on the Company; (iv) the Company may be substantially more leveraged than
certain of its competitors, which may place the Company at a competitive
disadvantage; and (v) the Company's substantial degree of leverage may limit its
flexibility to adjust to changing market conditions, reduce its ability to
withstand competitive pressures and make it more vulnerable to a downturn in
general economic conditions or in its business or be unable to carry out capital
spending. The Company's ability to fund its operations and make planned capital
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expenditures, to make scheduled debt payments, to refinance indebtedness and to
remain in compliance with all of the financial covenants under its debt
agreements depends on its future operating performance and cash flow, which in
turn, are subject to prevailing economic conditions and to financial, business
and other factors, some of which are beyond its control. See "Risk Factors."
YEAR 2000 MATTERS
Steel Heddle initiated the process of preparing its computer systems and
applications for the year 2000 in 1997. This process involves addressing the
impacts on information technology (IT) systems plus non-IT systems involving
embedded chip technology. The process involves modifying or replacing certain
hardware and software maintained by the Company as well as communicating with
customers and suppliers to ensure that they are taking appropriate actions to
remedy their year 2000 issues. The Company has conducted an inventory of its IT
systems and currently is correcting these systems that it found to have
date-related deficiencies. In the case of non-IT systems, the Company is
conducting an inventory of its facilities and is beginning the correction of
date-related deficiencies. The Company will utilize both internal and external
resources to reprogram or replace, and test the software for year 2000
modifications. The Company anticipates completing the year 2000 project by
mid-year 1999, which is prior to any anticipated impact on its operating
systems. The Company will also prepare a contingency plan in the event there are
any system interruptions.
The Company has not yet established a contingency plan, but intends to
formulate one and expects it to be substantially complete by July 1999. The
contingency plan is anticipated to address mission-critical applications such as
purchasing and inventory management, production control, general ledger
accounting, billing and disbursements. The contingency plan will address these
issues through, among other actions, use of manual records and workarounds,
extra staffing, increased inventories and establishment of alternate sources of
raw materials.
The cost of the year 2000 project is estimated at $1.0 million and is being
funded through operating cash flows. Of the total project cost, approximately
$0.4 million is attributable to the purchase of new software and hardware and
will be capitalized. The remaining $0.6 million, which is being expensed as
incurred, is not expected to have a material effect on the results of
operations. The Company has incurred $0.3 million during fiscal 1998 of which
$0.2 million has been expensed.
The Company has surveyed all of its significant suppliers and large
customers to determine the extent to which the Company's interface systems are
vulnerable to those third parties' failures to remediate their own year 2000
issues. The Company has received representations from its primary third-party
vendors that they will have resolved any year 2000 problems in their software
prior to any impact on their operating systems.
The costs of the project and the date on which the Company believes it will
complete the year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third party modification plans
and other factors. However, there can be no guarantee that these estimates can
be achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes and similar
uncertainties. Further, there can be no assurance given that any or all of the
Company's systems are or will be year 2000 compliant or that the impact of any
failure to achieve substantial year 2000 compliance will not have a material
adverse effect on the Company's financial conditions. Furthermore, no assurance
can be given that the third parties important to Steel Heddle will successfully
and timely reprogram or replace, and test, all of their own computer hardware,
software and process control systems.
ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information." In February 1998, the FASB issued SFAS No. 132 "Employer's
Disclosures about Pensions and Other Postretirement Benefits." Additionally, in
June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities."
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SFAS Nos. 131 and 132 are effective in 1998 and principally affect the display
and disclosure of financial information in the Company's financial statements.
SFAS No. 133 is effective for fiscal quarters beginning after June 15, 1999.
SFAS No. 131 requires entities to disclose financial and detailed
information about its operating segments in a manner consistent with internal
reporting used by the Company to allocate resources and assess financial
performance. The Company has not completed the analyses required to determine
such segment disclosures or additional disclosure requirements, if any, arising
from the adoption of SFAS No. 131. The Company will adopt this statement
retroactively during the fiscal year ending January 2, 1999.
SFAS No. 132 standardizes the disclosures for pensions and other
postretirement liabilities, requires additional information on changes in the
benefit obligations and fair values of plan assets and eliminates certain other
disclosures.
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments. It requires that an entity recognize all derivatives as either
assets or liabilities in the balance sheet and measure those instruments at fair
value. At the present time, the Company does not engage in any derivative
instruments or hedging activities and therefore, management does not anticipate
that such adoption will have a material impact on its financial position,
results of operations or cash flows.
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BUSINESS
THE COMPANY
The Company, founded in 1898, is one of the world's leading manufacturers
of precision textile loom accessories. The Company designs, manufactures and
markets virtually all of the loom accessories necessary to operate a commercial
weaving loom, including heddles, dropwires, harness frames, reeds and shuttles
and bobbins, which are used to hold or guide individual yarns during the weaving
process. Textile loom accessories are highly engineered and often customized
products which require a high degree of precision to ensure a uniform weave and
to achieve desired fabric patterns while being able to withstand the stresses of
modern, high-speed weaving looms. While technology and performance
specifications vary, all commercial weaving looms require these accessories.
Because loom manufacturers do not produce these accessories, all woven fabric
producers must purchase textile loom accessories from third-party suppliers. In
addition to textile loom accessories, the Company manufactures precision rolled,
heat treated, bare and tinned flat wire used in the electronics, automotive,
solar power and other industries.
The Company has achieved operating income margins exceeding 14% in each of
the last ten years. Beginning in 1995 and continuing through 1996, the Company
implemented a profitability enhancing, cost-reduction program. This program
contributed to an increase in operating income margin to 23.1% in 1997 on net
sales of $73.0 million.
As the only North American manufacturer of heddles, frames and shuttles,
and one of only three North American manufacturers of reeds, Steel Heddle is a
critical supplier to virtually all North American textile weaving mills,
including such companies as WestPoint Stevens, Inc., Milliken & Co. and
Burlington Industries, Inc., many of which have been customers for decades. In
North America, management estimates that the Company holds substantial market
shares in all of its major product lines and estimates that it supplies over 80%
of the market for heddles, dropwires and harness frames, over 50% of reeds and
over 90% of the market for shuttles and bobbins. Although international markets
such as Europe and Asia have different competitive dynamics than the North
American market, the Company also has a strong presence in many international
markets in which it perceives the opportunity for profitable growth.
International sales accounted for approximately 21.9%, 23.6%, 22.0% and 19.2% of
the Company's net sales in 1995, 1996, 1997 and the first six months of 1998,
respectively.
Textile loom accessories have represented a steady source of revenue and
cash flow because these parts require frequent replacement due to wear and
changes in production runs. Approximately 75% of the Company's net sales were
derived from the sale of replacement parts in 1997. The Company estimates that
more than 90% of all looms installed in North America are delivered
"unaccessorized," with the accessories being designed and supplied by a
third-party supplier such as Steel Heddle. Once the Company has outfitted new
looms with its accessories it has generally been able to continue to supply
replacement parts for the life of the loom. The Company believes it has achieved
its leading position in the industry primarily because of its willingness and
ability to work closely with its customers, both before and after the
installation of new looms, to design the appropriate accessories to meet
specific manufacturing needs and then continue to meet those needs on an ongoing
basis.
In addition to its textile loom accessories business, the Company converts
round rod to flat wire through a rolling process which results in a flat wire
with a round edge. Originally developed to satisfy in-house heddle manufacturing
needs, the Company recognized that its ability to produce these products to
extremely tight tolerances could be tailored to meet similar needs in other
industries and began to pursue outside sales. Because these rolled products are
custom-made for specific applications, they have historically commanded
attractive margins. The Company's rolled products can be found in a variety of
other industries, including electronics, automotive and solar power. Among the
end-use applications for the Company's products are notebook computers, cellular
telephones, electronic control devices and automotive applications such as
control mechanisms for air bags, turn signals and cruise controls. Major
customers, based on 1997 sales, include Kemet Corporation, Parlex Corporation,
AMP Incorporated and Siemens Corporation. Rolled products generated
approximately $9.0 million in net sales in 1997.
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COMPETITIVE POSITION
The Company's objective is to maintain and enhance its competitive position
as the foremost supplier of loom accessories in the U.S. while broadening its
presence in international markets. The Company intends to achieve its objectives
by capitalizing on the following competitive strengths:
Leading Market Position. The Company is a critical supplier to virtually
all North American textile weaving mills, with leading market shares across all
of its product lines in North America. The Company is the sole domestic
manufacturer of heddles, dropwires, harness frames, shuttles and bobbins, with
estimated market share in North America in each category of over 80%, and over
90% market share in shuttles and bobbins. Steel Heddle is also the largest
domestic manufacturer of reeds, with an estimated 50% market share in North
America. In addition, the Company has a strong presence in those international
markets in which it sees profitable growth opportunities.
Cost-efficient Manufacturing. The Company believes it is the only producer
of loom accessories that also manufactures the component parts of these
accessories (i.e., vertical integration). The Company has developed and tooled
proprietary production machinery and produces its own heat-treated, flat-rolled
carbon and stainless steel wire which is the key raw material in the production
of heddles and dropwires. In 1995 and continuing through 1996, the Company
implemented a comprehensive profitability enhancing, cost-reduction program
which, among other things, eliminated 120 full time positions and decreased
pension and benefit costs. Because of its vertical integration, proprietary
production machinery, experienced low-cost labor force and economies of scale,
the Company believes it is one of the most efficient producers in the textile
loom accessory industry. However, certain of these advantages may be offset by
the freight costs and duties associated with export sales.
Long-standing and Diverse Customer Relationships. The Company has developed
and maintained long-term relationships with its customers, in some cases for
over 50 years. The Company has built its customer relationships by providing
consistent quality, a broad product line and technical support as well as
maintaining a strong customer service orientation. The Company's sales people
visit each customer every two to four weeks, enabling the Company to gain early
knowledge of a customer's intent to purchase new looms and accessories. In
addition, the Company's technical personnel work closely with the weaving mills
and original equipment manufacturers ("OEMs") to help them select the
appropriate accessories and resolve design or engineering issues. The Company's
ability to work closely with international customers is limited to a certain
extent by the fact that the Company does not have manufacturing operations in
Europe or Asia. The Company's customer base is diversified, with no one customer
representing more than 6.6% of net sales. Sales to top ten customers represented
approximately 31.2% of the Company's net sales in 1997.
Strong Brand Name. The Company's brand name enjoys significant worldwide
recognition in the textile industry as a result of its 100-year history. Since
it introduced flat steel heddles to U.S. weaving mills in 1898, the Company has
manufactured high-quality loom accessories. Because of its longevity, product
innovation, high-quality reputation, strong service orientation and broad
product line, the Company has built and maintained its significant market share
in the North American market and has built a strong presence internationally.
LOOM ACCESSORY INDUSTRY OVERVIEW
The textile industry is comprised of several subsectors: (i) apparel
production (consisting primarily of "cut and sew" business), (ii) synthetic and
natural yarn production, (iii) knitted fabric and (iv) woven fabric production.
Woven fabric production is the focus of the Company's customers. The end users
of weaving looms and weaving loom accessories are textile mills which utilize
looms to produce woven fabric. The U.S. weaving market is estimated at
approximately $19.5 billion and accounted for approximately 16.4 billion square
yards of fabric in 1997. This output has remained relatively stable since 1986,
varying between 15.2 and 16.6 billion square yards annually.
The U.S. textile industry experienced a significant restructuring during
the 1980s and early 1990s. Annual capital expenditures by woven fabric mills,
while subject to fluctuations in the demand for woven fabric, have risen in the
1990s, from approximately $550 million in 1991 to approximately $850 million in
1996. In order to
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maintain their competitive position in the world markets, U.S. textile mills are
expected to continue to invest heavily in faster, newer generations of loom
technology. With modern equipment and increased automation, labor cost
differentials are not a significant factor in the competitiveness of U.S.
producers. In addition, the advantages of producing in the U.S., one of the
world's largest end-markets, have increased with manufacturers' demands for
rapid response times and retailers' desire to reduce inventories.
The U.S. installed textile loom base has shifted away from older-technology
shuttle looms towards faster, shuttleless looms such as air-jet and water-jet
looms. This trend benefits the Company in two ways. Higher weaving speeds lead
to faster wear of loom accessories, driving an increase in unit demand for
replacement parts. In addition, faster looms require a higher degree of
precision and performance from accessories, increasing the dollar value of
accessories sold per loom and the demand for the higher-priced, quality
accessories for which Steel Heddle is known.
TEXTILE LOOM TECHNOLOGY
Weaving is the process of forming a fabric by interlacing, at right angles,
two or more sets of yarn or other material. The first step in weaving is to
install the longitudinal yarns, called the warp. The pick, or filling yarn,
crosses the warp, to create fabric. After the installation of the warp, there
are three essential steps: (i) shedding -- raising every alternative warp yarn
or set of yarns to receive the pick, (ii) picking -- inserting the filling and
(iii) beating up -- pressing home the pick to make the fabric compact.
Fabric is woven on a loom. The fundamental accessories of a loom include:
(i) heddles, each with an eye through which is drawn a warp thread; (ii) the
harness frame, a rectangular frame set with a series of heddles operated to form
a shed between the warp threads for insertion of pick threads; (iii) the reed, a
comb-like frame that pushes the filling yarn firmly against the finished cloth
after each pick and (iv) the shuttle, a boat-shaped bobbin holder that carries
the pick through the shed. Modern looms are "shuttleless;" the pick is carried
through the shed by a stream of air ("air jet") or water ("water jet") or other
gripper device, permitting faster speeds of production. Steel Heddle
manufactures heddles, reeds, harness frames, and shuttles and bobbins.
Older technology involves the use of a shuttle to move the yarn through the
shed, known as a "shuttle loom." Since the late 1970s, shuttle looms have
steadily been replaced with faster shuttleless looms. Shuttleless looms can be
classified into four types: (i) air jet, (ii) water jet, (iii) rapier and (iv)
projectile. Loom technology is continually evolving--early shuttleless looms
installed in the 1980s are being replaced with even faster, more user-friendly
shuttleless looms. Faster looms require a high degree of precision and
performance from installed accessories. Higher loom speeds lead to faster wear
of loom accessories, increasing the demand for replacement parts. Accessories
sold as replacements generally carry higher margins as compared to accessories
sold with new looms.
TEXTILE LOOM ACCESSORIES
Textile loom accessories are highly engineered products, requiring
precision manufacturing to ensure a uniform weave and to achieve the desired
fabric patterns. In addition, given the high speeds at which shuttleless looms
operate, the parts must be extremely smooth to avoid snags or breakages in the
yarn. Any unintended variance in a reed, heddle or frame can result in broken or
damaged yarn, unusable cloth, or wasted weaving time.
The loom accessory market is driven by four primary factors: (i) faster
loom speeds; (ii) flexible production requirements; (iii) new loom purchases;
and (iv) weaving mill utilization rates.
The North American Loom Accessory Market. In North America, more than 90%
of looms are purchased by mills from OEMs without accessories. No loom maker
produces accessories. The Company believes that several factors deter OEMs from
manufacturing accessories. Among these are: (i) limited possibilities for growth
or economies of scale because OEMs are reluctant to buy accessories produced by
their competitors; (ii) the focus of OEMs on original equipment/capital goods
markets rather than the after-market/replacement business; (iii) worldwide
competition among accessory manufacturers resulting in stable
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<PAGE> 46
supplies of competitively priced accessories; (iv) the cost of investment in
proprietary tooling and production machinery; and (v) the incompatibility of
accessory manufacturing and OEM production schemes. In addition, the Company
believes that U.S. textile mills prefer the flexibility to select accessories
that are engineered to meet their individual needs. Textile mills base purchases
of loom accessories on (a) product performance, (b) service and technical
support provided by the accessory manufacturer, (c) long-term business
relationships and (d) price. In addition, a local manufacturing presence
providing timely response is important to textile manufacturers.
The Global Market for Loom Accessories. The global loom accessory market is
divided into four major regional markets: North America, Europe, Asia, and Latin
America. Asia is, by far, the largest market for textile loom accessories. Of
textile loom accessories, generally only heddles are sold internationally.
Harness frames, reeds and shuttles and bobbins are produced and sold within
regional markets and competition tends to be among smaller local companies.
However, the Company does pursue, on an opportunistic basis, sales of all of its
loom accessories into the international loom accessory market.
PRODUCTS
The Company's core business strategy is to manufacture a full range of
technically advanced textile loom accessories capable of fulfilling its
customers' varying weaving requirements. The Company manufactures the broadest
range of loom accessories in the textile industry, providing the Company with a
distinct competitive advantage. The accessories that are essential to the
successful operation of a loom include heddles, dropwires, harness frames and
reeds. Each of these accessories has differing demand and replacement dynamics.
HEDDLES AND DROPWIRES
Steel Heddle manufactures a full range of high-quality heddles and
dropwires for all types of looms. Heddles and dropwires are precision-made to
perform within tight parameters. Stamped from flat-rolled steel and polished to
be extremely smooth, heddles and dropwires require exacting manufacturing
specifications, thorough quality control and expert metal-working capabilities.
All of the Company's heddles and dropwires are produced to precise tolerances of
two-thousandths to three-thousandths of an inch. The Company estimates that
50-60% of heddles and dropwires are made to order, and approximately 75% of net
sales of heddles and dropwires are derived from replacement sales. Both products
are generally shipped within one to three days of order if from stock and four
to six weeks if custom manufactured. In 1997, heddles and dropwires formed the
largest single product line at Steel Heddle, accounting for approximately 37.9%
of net sales, with export sales accounting for approximately 41.0% of such net
sales.
HEDDLES
Heddles are flat, specially designed stamped parts that guide and hold
individual yarn during the high-speed weaving process. Steel Heddle produces a
wide variety of heddle types, each designed to meet specific performance
parameters. The Company's heddles accommodate a vast range of customer
specifications. All of the Company's heddles are available in two material
types: stainless steel and plated carbon steel. In 1997, heddles accounted for
approximately 84% of total heddle and dropwire net sales.
DROPWIRES
Dropwires are precision-made plated-carbon steel or stainless steel stamped
parts which detect broken yarns and trigger a loom to shut down, minimizing
energy and yarn used in the production of imperfect cloth. The Company's
dropwires are precision manufactured from similar flat rolled steel as is used
to manufacture heddles and are held to the same exacting tolerances. The Company
believes the use of its tempered steel dropwires contributes to the production
of superior cloth, increased machine running time and lower operating costs. In
1997, dropwires accounted for approximately 17% of total heddle and dropwire net
sales.
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<PAGE> 47
HARNESS FRAMES
Steel Heddle manufactures a full range of harness frames for all types of
looms. Harness frames are specialized carriages for heddles constructed from
special aluminum alloys and composite materials. Each frame holds between 200
and 1,500 heddles, and each loom holds between 2 and 28 harness frames,
depending upon the complexity of the final woven fabric. Harness frames raise
and lower the heddles, creating the woven fabric pattern. As modern,
high-performance looms operate at 650 to 1,000 picks per minute (two to four
times faster than older technology), harness frames must be precision engineered
in order to withstand the tremendous stress caused by continuous acceleration
and deceleration without buckling or bending. Approximately 90% of harness
frames are made to order, and approximately 65% of net sales of harness frames
are derived from replacement sales.
The Company manufactures the following four types of harness frames:
high-speed jet frames; standard aluminum frames; projectile frames; and section
frames. In addition, the Company manufactures supporting hardware and components
and offers frame repair and frame reconditioning services. In 1997, harness
frames accounted for approximately 20.6% of Steel Heddle's total net sales, with
export sales accounting for approximately 17% of such net sales.
REEDS
Reeds are precision-manufactured, comb-like devices used to evenly space
yarns on the loom. One reed per loom is mounted on the loom's drive mechanism
which moves the reed forward to beat up, or press, the pick into the finished
fabric. Each reed is composed of a series of dents. Dents are specially designed
flat wire spacers and are assembled in a reed to yield a particular fabric
pattern or style. Reed production requires exacting manufacturing processes as
absolutely smooth, straight and precisely spaced dents are critical to the
production of quality woven fabric. In 1997, reeds accounted for approximately
24.6% of Steel Heddle's net sales, with only 4.0% derived from export sales of
domestically produced reeds.
While the demand for most loom accessories is driven by the purchase of new
looms or replacement of worn accessories, reed purchases are primarily driven by
style changes. Reeds must be replaced each time a loom is used to weave a new
fabric pattern. Thus, reeds are rarely used for their entire useful life. To
remain competitive, the Company's customers must react quickly to fabric style
changes and as a result, frequently purchase new reeds. For reeds, the Company
fulfills its customers' exacting demands for product performance and rapid
delivery through its three U.S.-based reed manufacturing facilities located in
the primary U.S. woven-textile producing regions of Virginia/North Carolina,
South Carolina, and Georgia/Alabama.
The Company custom manufactures reeds for use in all types of looms. The
Company produces two types of reeds: profile and flat. The Company's profile
reeds are required in air-jet weaving looms and are manufactured using precision
engineering. In addition to close tolerance assembly, these reeds require
precision stamped and polished profile dents and specific air management
settings. As a result, profile reeds are sold at prices that are four to six
times higher than prices of flat reeds. Profile reeds currently account for
approximately 60% of net sales of reeds, but the Company expects demand to
increase for these reeds as weaving mills continue to purchase the more
technically advanced air jet looms. In comparison, the Company's flat reeds are
comprised of flat dents (i.e., without profiles or contours) and are used
primarily on shuttle, projectile, rapier and water jet weaving looms. Flat reeds
accounted for approximately 33% of net sales of reeds in 1997. In addition to
the Company's profile and flat reeds, the Company produces warp preparation
products, which are used for preparing the warp prior to the weaving process.
Warp preparation products consist of expansion combs, slasher combs, comb
panels, fan reeds, hock reeds and lease rods. Warp preparation products
accounted for approximately 10% of net sales of reeds in 1997.
SHUTTLES AND BOBBINS
Shuttles, used in older, slower looms, are specially fabricated from
composite materials to carry "pick" or "filling" yarns across the loom as the
main yarn or "warp" yarn is pulled through the reed. Bobbins are cylindrical
wooden yarn carriers held by the shuttle. Shuttles and bobbins account for 80%
of the net sales in the product line, with the remaining 20% derived from the
sale of tension products. Most of the Company's
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<PAGE> 48
shuttles and bobbins are consumed domestically, but approximately 18% are
exported primarily to South America. Steel Heddle is the sole supplier of
automatic shuttles and bobbins to textile mills in the United States. All
shuttles and bobbins sales are replacement sales. Shuttles and bobbins accounted
for 3.5% of the Company's net sales in 1997.
ROLLED PRODUCTS
The Company manufactures precision rolled ferrous and non-ferrous, heat
treated, bare and tinned flat wire. The finished flat wire is then precision
wound and packaged to customer specifications. Because the Company rolls rather
than slits the flat wire, it benefits from the product advantages of round,
smooth edges and long continuous strand lengths. Through its vertical
integration, the Company supplies its internal annual requirements of tempered
stainless and carbon steel of approximately 2.9 million pounds.
Originally established to satisfy in-house needs, the Company recognized
that it possessed the technical expertise to produce rolled products to exacting
tolerances and, as a result, has opportunistically pursued outside sales. In
1997, the Company manufactured 63% of its rolled products for in-house use, with
the remainder for outside sales. With no commodity-oriented or standard
inventory production, the Company's rolled products are custom-produced for
specific applications, generating attractive gross margins to the Company.
Excluding internal consumption, in 1997 the Company sold approximately 1.7
million pounds to customers in the electronics, automotive and solar power
industries and in a variety of other industries in which tight tolerances and
smooth edges are required. The Company's rolled products can be found in a
variety of end-use products, including notebook computers, cellular phones,
electronic control devices, automotive applications such as control mechanisms
for air bags, turn signals and cruise controls. The Company's major customers,
based on 1997 sales, include Kemet Corporation, Paralex Corporation, AMP
Incorporated and Siemens Corporation. In 1997, outside rolled product sales
accounted for approximately 12.2% of the Company's net sales.
All rolled products are custom-manufactured for specific applications and
can be grouped into three broad categories: flat rolled steel, copper wire and
aluminum wire. The Company manufactures flat rolled steel wire which is used for
specialty applications such as garment stays, orthopaedic braces and saw blades.
Flat rolled steel wire is also used internally in the production of heddles and
dropwires. The Company manufactures tinned and bare copper flat wire for use in
a variety of applications including capacitor leads and laminated cable in which
smooth wire edges are necessary to prevent the cutting of layers which cause
short circuits. The Company also manufactures flat wire which is used as wire
connectors and conductors in electronic products and tin-coated copper wire used
in solar cells. In addition, the Company rolls aluminum flat wire for use in a
variety of applications, including capacitor leads and carrier bars for
capacitor manufacturing.
COMPETITION AND MARKET SHARE
Over the past ten years, the U.S. woven textile industry has consolidated
and invested in modern loom technology. Today, loom accessories are highly
engineered products that require sophisticated manufacturing techniques. Steel
Heddle's capabilities in producing a broad range of accessories, its reputation
for quality and service and its long-term customer relationships, provide it
with an important competitive advantage. None of Steel Heddle's domestic
competition has its breadth of products, established relationships or ability to
customize its products to its customers' needs.
North American Competition and Market Share. Steel Heddle is the leading
supplier of loom accessories in the North American market. The Company estimates
that its market share in North America exceeds 80% for all major product lines
other than reeds. Grob & Co. AG ("Grob"), is the Company's only significant
competitor, holding an estimated 5%, 4% and 13% market share in heddles, drop
wires and harness frames, respectively. The Company believes Grob is at a
significant cost and delivery disadvantage in the U.S. compared to Steel Heddle
because, among other things, Grob does not have manufacturing operations in the
U.S. In addition, Steel Heddle believes it is more flexible and responsive to
customer needs than Grob. With manufacturing and technical personnel located in
Switzerland, it is difficult for Grob to service the
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U.S. market. Although Grob has sold into the U.S. market since 1960 and has had
a sales office in the U.S. since 1972, its manufacturing operations have
remained outside of North America, and it has been largely unsuccessful at
obtaining incremental market share.
The Company estimates it has a 50% market share of the reed market and that
its nearest competitor, Palmetto Loom Reed, Inc. ("Palmetto"), has a market
share of approximately 30%. Palmetto is a privately-held, family-run business
based in Greenville, South Carolina. There are only two other reed manufacturers
in the U.S. which split the remaining 20% of the market. Reed sales are affected
by timeliness of delivery, making competition regional. Consequently, the reed
market is slightly more fragmented than any of the other accessory markets.
Steel Heddle is the major producer of automatic shuttles and bobbins
serving the North American market. Demand for shuttles and bobbins has decreased
over the last several years as shuttle looms have been retired or replaced with
more efficient shuttleless technology.
International Competition and Market Share. Steel Heddle is the number two
producer of tempered heddles worldwide, with an estimated 30% global market
share. The Company's only significant competitor, Grob, has an estimated 45%
global market share. The Company differentiates itself from Grob by its ability
to service all weaving accessory requirements and its technical expertise that
it uses to solve its customers' weaving problems. Management also believes that
Grob incurs higher production costs than the Company. The Company believes it is
poised to capture additional worldwide market share from Grob as customers seek
better service and technical support.
Steel Heddle has been building relationships with OEMs (which are more
important internationally than domestically), foreign textile mills and trading
companies over the last several years as part of its international strategy.
Management expects its international market share to grow over time. Steel
Heddle's international strategy is focused on (i) building long-term
relationships, (ii) customer service and technical support and (iii) providing
superior quality. In addition, the Company continues to strengthen its
international sales agent networks. The Company believes that as it strengthens
its relationships with its international customers and becomes a critical
partner in their success, as it has done in the U.S., its international sales
will increase.
MANUFACTURING
Steel Heddle is headquartered in Greenville, South Carolina and conducts
its primary operations through a manufacturing facility located adjacent to the
Company's headquarters. In addition, rolled products are manufactured in Oconee
County, South Carolina, and reeds are manufactured in North Carolina, Georgia
and Mexico. Below is a summary of the Company's existing facilities:
<TABLE>
<CAPTION>
SQUARE
LOCATION FUNCTION FOOTAGE OWNED/LEASED
-------- -------- ------- ------------
<S> <C> <C> <C>
Greenville, S.C. Corporate offices; Heddle, Frame, Reed, Shuttle
and Bobbin Manufacturing..................... 474,036 Owned
Oconee County, SC Rolled Products Manufacturing.................. 123,312 Owned
Greensboro, NC Reed Manufacturing............................. 12,000 Owned
Meriwether County, GA Reed Manufacturing............................. 18,000 Owned
Mexico City, Mexico Reed Manufacturing............................. 6,000 Leased(1)
</TABLE>
- ---------------
(1) Terms of the lease are year to year with annual rental of approximately $17
thousand.
The Company believes that its manufacturing operations are among the most
efficient in the textile loom accessory industry. Most of the machinery used by
the Company has been specifically designed and/or manufactured by the Company
and most of its products are made-to-order.
Heddles. Heddles are precision stamped from flat rolled, heat treated, high
carbon or stainless steel. Each heddle passes through eight to ten stamping
stations before being cut to length. Precision stamping tools are manufactured
in-house to support this stamping operation. Close dimensional control is
assured by computer-controlled optical measuring equipment. Thorough polishing
of each stamped area assures smooth
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yarn contact edges. Electroplating of nickel or zinc on carbon steel or
passivation of stainless steel provides the proper resistance to corrosion.
Frames. Frames are assemblies of high strength aluminum alloy extrusions,
high carbon or stainless steel heddle carrying rods and precision machined loom
connection devices. Highly engineered material selection, along with precision
machining and assembly provide for frames suitable to withstand extreme stresses
associated with today's high speed looms.
Reeds. Profile reeds are assembled from individual dents that are held in
place by precision spacing wires and specially formulated thermoplastic
adhesive. The top and bottom edges of the reed are encased in steel or aluminum
channel or bands. Proper air management specifications are then set according to
required weaving parameters. The individual dents are stamped from precision
wide strip steel then deburred and polished to achieve suitable yarn contact
surfaces. Flat reeds are similar assemblies, except straight dents are cut from
coils of wire and used in place of profile dents.
Rolled Products. Rolled products are produced by rolling round cross
section materials of copper, aluminum, carbon steel or stainless steel to flat
wire. As required, rolled materials then undergo heat treatment for annealing or
hardening. In addition, the copper products may be tin coated. A variety of
precision wound packages are tailored to customer requirements.
SALES, MARKETING AND CUSTOMERS
The Company markets its loom accessories through a 14-person sales force,
eight of whom are located in the United States and six of whom are located
abroad. In North America, sales are made directly to woven textile mills, the
end-users of the Company's loom accessories. In international markets, the
majority of sales are also made to end-users primarily through a network of (i)
ten agents located in Asia, (ii) seven agents located in Europe and Turkey and
(iii) 28 agents located throughout the rest of the world. Sales are also made to
OEMs, primarily manufacturers of textile machinery that also package accessories
with their new looms. Steel Heddle also cooperates with large Japanese trading
companies that are active in the weaving machinery business. Rolled products are
sold through a dedicated sales force of two people who also manage four
independent sales representatives.
The Company has long-term relationships with its customers, many of which
extend beyond 50 years. Steel Heddle's consistent quality, broad product line,
technical support and customer service orientation continue to underpin its
relationships. The Company's customer base is diversified, with no one customer
representing more than 6.6% of net sales. Sales to top ten customers represents
approximately 31.2% of total net sales.
RAW MATERIALS
Aluminum extrusions, aluminum and copper rod and wire, and stainless and
carbon steel in rod, round wire and flat wire form are the primary raw materials
used by the Company. All raw materials are readily available from multiple
sources. The Company does not experience much volatility in its raw materials
prices. Steel Heddle has well-established long-term relationships with each of
its raw material suppliers.
INTELLECTUAL PROPERTY
The Company has numerous trademarks and patents effective in the United
States and several trademarks effective in several foreign countries for varying
lengths of time. Company trademarks include "SH(R)", "Duralite(R)", "Draw-O(R)",
and "Jet Eye(R)" under which it markets certain weaving accessory products. The
Company also has a number of applications for trademarks pending in the United
States and abroad. Management considers its various trademarks, trademark
applications and patents to be valuable assets but believes that the loss of any
one trademark or patent would not have a material adverse effect on the
Company's operations.
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<PAGE> 51
EMPLOYEES AND EMPLOYEE RELATIONS
As of June 27, 1998, the Company employed approximately 626 employees in
the United States and approximately 17 employees outside the United States. None
of the Company's hourly employees are covered by collective bargaining
agreements. The Company believes its employee and labor relationships are good.
LEGAL PROCEEDINGS
From time to time, the Company is involved in various legal proceedings
arising in the ordinary course of business. Management believes that none of
these matters in which the Company is currently involved, either individually or
in the aggregate, are expected to have a material adverse effect on the
Company's business or financial condition. See "--Environmental Matters."
ENVIRONMENTAL MATTERS
The Company is subject to federal, state and local environmental
requirements, including those governing discharges to the air and water, the
handling and disposal of solid and hazardous wastes, and the remediation of
contamination associated with releases of hazardous substances. Based on a
review conducted by independent environmental consultants in connection with the
Acquisition, the Company believes that it is currently in substantial compliance
with environmental requirements, except as would not be expected to have a
material adverse effect on the Company. Nevertheless, the Company's
manufacturing operations involve the use of hazardous substances and, as is the
case with manufacturers in general, if a release of hazardous substances occurs
or has occurred on or from the Company's facilities, the Company may be held
liable and may be required to pay the cost of remedying the condition. The
amount of any such liability could be material.
The Company has made, and will continue to make, expenditures to comply
with current and future environmental requirements. The Company does not
anticipate material capital expenditures for environmental controls in the
current or succeeding fiscal year. However, because environmental requirements
are becoming increasingly stringent, the Company's expenditures for
environmental compliance or clean up may increase in the future.
In 1987, the United States Environmental Protection Agency certified the
closure of three former wastewater lagoons at the Company's Greenville, SC
facility under RCRA. In 1989, the Company began a groundwater remediation
program at the facility in accordance with RCRA requirements. In 1996, the
Company received a post-closure care permit for the former lagoons. This permit
requires post-closure care for the former lagoons, continued groundwater
remediation, and investigation of certain areas of the facility. As required by
RCRA, the Company has posted financial assurance in the amount of $671,000 to
ensure funds are available to complete the permit requirements. As required by
the permit, the Company is continuing to investigate certain areas of the
facility. It is possible that, based on the results of such investigation
described above, additional actions could be required, in which case the costs
could materially increase.
The Company is involved as a potentially responsible party ("PRP") under
the Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA") with regard to past waste disposal at the Aqua Tech Superfund site in
Greer, SC. Some risk of similar environmental liability is inherent in the
nature of the Company's current and former operations. While strict joint and
several liability is authorized under CERCLA, cleanup costs are usually
allocated among the PRPs. The Company has settled two lawsuits and paid its
share of past cleanup costs with respect to the site. Because the amount of
future cleanup costs at the site is not yet known, the Company cannot predict
with certainty the amount of its share of these future costs. However, based on
its allocated share of past cleanup costs, the Company does not expect its share
of future costs to be material.
In connection with the Acquisition, Sellers have indemnified the Company,
subject to time and dollar limitations, for breaches of certain representations
and warranties pertaining to environmental matters. There can be no assurance,
however, that Sellers will have the ability to indemnify the Company if called
upon to do so. The Sellers also agreed to clean up a past release of mineral
spirits at the Company's Oconee County, SC facility. To pay for this clean up,
$350,000 of the purchase price has been placed in an escrow account. The
Sellers' cleanup obligation is limited to the escrow amount. Based on a
preliminary investigation of the area, the Company believes it is unlikely that
the clean up will exceed the escrow amount.
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<PAGE> 52
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name, age as of June 27, 1998 and
position with the Company of each person who is expected to serve as director or
executive officer of the Company following the Acquisition Transactions.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Benjamin G. Team............................ 57 President, Chief Executive Officer and Director
Robert W. Dillon............................ 51 Executive Vice President and Director
Jerry B. Miller............................. 52 Vice President--Finance and Secretary
J. Brant Conner............................. 53 General Sales Manager
Thomas A. Korbutt........................... 55 Vice President--Frame Division
John D. Wright.............................. 54 Manager--Heddle Division
Randy Boggs................................. 38 Manager--Reed Division
Edward J. Treglia........................... 37 Manager--Rolled Products Division
Nathan L. Belden............................ 28 Director
Robert J. Klein............................. 34 Director
Kim A. Marvin............................... 35 Director
Robert L. Purdum............................ 62 Non-Executive Chairman and Director
Theodore C. Rogers.......................... 63 Director
</TABLE>
BENJAMIN G. TEAM--PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR
Mr. Team joined Steel Heddle after seven years with Textile Loom Reed
Company which was acquired by Steel Heddle in 1969. He began with Steel Heddle
as Manager of the Greensboro Reed Plant in 1969 and was later named Manager of
the Company's Reed Division in 1975. Mr. Team was elected Vice President in 1978
and was named head of all textile products manufacturing in 1986. Mr. Team was
appointed President in 1992.
ROBERT W. DILLON--EXECUTIVE VICE PRESIDENT AND DIRECTOR
Mr. Dillon joined Steel Heddle in 1969 after receiving a B.S. degree from
Philadelphia College of Textile and Science. Mr. Dillon has held positions of
increasing responsibility in the sales, administrative, and manufacturing areas
of the Company. He was promoted to Vice President-Heddle Division in 1988 and
Executive Vice President in 1992.
JERRY B. MILLER--VICE PRESIDENT-FINANCE AND SECRETARY
Mr. Miller joined Steel Heddle in 1988 in his present position. He had
previously worked as an audit supervisor for Ernst & Whinney from 1975-1984, as
a Controller for Carolina Tool & Equipment Company and as Vice President and
Controller of Ballenger Group, Inc. Mr. Miller holds a B.A. degree from Clemson
University, a Master's degree from the University of Georgia and is a Certified
Public Accountant.
J. BRANT CONNER--GENERAL SALES MANAGER
Mr. Conner joined Steel Heddle in 1972 as a Sales Representative. He was
promoted to District Sales Manager for the Southwest Region in 1978. Mr. Conner
also served as plant manager for the Meriwether Reed Plant and was promoted to
his present position in 1994. Mr. Conner received his B.S. and Masters degrees
in Textiles from Georgia Tech and served in the U.S. Army for two years,
obtaining the rank of First Lieutenant.
THOMAS A. KORBUTT--VICE PRESIDENT-FRAME DIVISION
Mr. Korbutt joined Steel Heddle in 1973 as a project engineer after working
in various engineering and manufacturing positions in the automotive and
shipbuilding industries. He was appointed Engineering
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<PAGE> 53
Manager in 1975. In 1984, he was promoted to his present position. Mr. Korbutt
received a degree in Tool Engineering Design from Henry Ford Community College.
JOHN D. WRIGHT--MANAGER-HEDDLE DIVISION
Mr. Wright joined Steel Heddle in early 1997 after overseeing engineering
and manufacturing at Freudenberg North America. Before Freudenberg, Mr. Wright
worked for twelve years at Johnson & Johnson in several engineering and
manufacturing positions. Mr. Wright holds a degree in Mechanical Engineering
from Texas Tech University and served as an engineering officer in the U.S.
Navy.
RANDY BOGGS--MANAGER-REED DIVISION
Mr. Boggs joined Steel Heddle in 1994 after leaving Palmetto Loom Reed,
Inc. where he was Plant Manager. Previously, he was Weaving Superintendent with
the Bibb Company's White Horse Plant. He was also employed with J.P. Stevens
where he held various management positions in the Greige Fabrics Division. He
has a B.A. in Business Administration from Southern Wesleyan College.
EDWARD J. TREGLIA--MANAGER-ROLLED PRODUCTS DIVISION
Mr. Treglia joined Steel Heddle in 1987 as an Industrial Engineer and in
1989 was transferred to the Rolled Products Division. In September 1996, he was
named Plant Manager. Before joining Steel Heddle, he worked with Southeastern
Kusan and Sheller-Globe. Mr. Treglia graduated from the University of Cincinnati
with a B.S. in Industrial Engineering. While working on his degree, he was a
co-op Industrial Engineer with IBM and Wierton Steel.
NATHAN L. BELDEN--DIRECTOR
Mr. Belden joined AIP in 1995 from the Mergers & Acquisitions Department of
Kidder, Peabody & Co., Inc. where he was employed since 1993.
ROBERT J. KLEIN--DIRECTOR
Mr. Klein is a Principal of AIP. He has been an employee of AIP since 1992.
From 1991 to 1992, he was an associate at The First Boston Corporation and prior
thereto was an associate with Rosecliff, Inc., an affiliate of Acadia Partners,
L.P. Mr. Klein is a director of Easco Corporation and RBX Corporation.
KIM A. MARVIN--DIRECTOR
Mr. Marvin is a Principal of AIP. He joined the San Francisco office of AIP
in 1997 from the Mergers & Acquisitions Department of Goldman, Sachs & Co. where
he was employed since 1994. Mr. Marvin is a director of Bucyrus International,
Inc.
ROBERT L. PURDUM--NON-EXECUTIVE CHAIRMAN AND DIRECTOR
Mr. Purdum is a Director and Managing Director of American Industrial
Partners Corporation. Mr. Purdum is expected to become the Non-Executive
Chairman of the Company's Board following the Acquisition Transactions. Mr.
Purdum retired as Chairman of Armco Inc., in 1994. From November 1990 to 1993,
Mr. Purdum was Chairman and Chief Executive Officer of Armco. Mr. Purdum has
been a director of AIP Management Co. since joining AIP in 1994. Mr. Purdum is
also a director of Bucyrus International, Inc., Holophane Corporation, Berlitz
International, Inc. and Kettering University.
THEODORE C. ROGERS--DIRECTOR
Mr. Rogers is a Director, the Chairman of the Board and the Secretary of
American Industrial Partners Corporation. He co-founded AIP and has been a
director and officer of the firm since 1989. He is currently a director of
Bucyrus International, Inc., Easco Corporation, Sweetheart Holdings, Inc., SF
Holdings, Inc., RBX Corporation, Stanadyne Automotive Corp. and Derby
International.
Directors are not expected to receive compensation for their services as
directors, except for the Non-Executive Chairman of the Board who will receive
$150,000 per year.
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<PAGE> 54
EXECUTIVE COMPENSATION
The following table sets forth information concerning the annual and
long-term compensation for services in all capacities to the Company for the
fiscal year ended January 3, 1998, of these persons who served as (i) the chief
executive officer during such years and (ii) the other four most highly
compensated executive officers of the Company during such years:
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------------------------
LONG-TERM COMPENSATION
AWARDS OTHER
NAME AND PRINCIPAL SECURITIES UNDERLYING ANNUAL
POSITION YEAR SALARY($) BONUS($)(a) OPTIONS (#) COMPENSATION($)(b)
------------------ ---- --------- ----------- ---------------------- ------------------
<S> <C> <C> <C> <C> <C>
Benjamin G. Team....................... 1997 244,800 344,746 6,344 35,356
Chief Executive
Officer and President
Robert W. Dillon....................... 1997 182,200 249,102 4,924 28,297
Executive Vice President
Jerry B. Miller........................ 1997 155,200 222,837 4,264 28,376
Vice President Finance
Thomas A. Korbutt...................... 1997 121,400 124,727 2,204 21,536
Vice President Frame
Division
J.E. Merritt*.......................... 1997 120,100 104,727 2,204 21,973
</TABLE>
- ------------------------------
(a) Bonuses are reported in the year earned even if paid in a subsequent year.
(b) Other annual compensation includes the Company's contribution to the
Employee Thrift and Savings Plan and the Cash Balance Plan.
* Retired December 1997
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
-------------------------------------------------------------------- -----------------
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED
OPTIONS TO EMPLOYEES IN EXERCISE OR BASE
NAME GRANTED FISCAL YEAR PRICE ($/SH) EXPIRATION DATE 5%($) 10%($)
---- ------------ --------------- ----------------- --------------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Benjamin G. Team................. 6,764 25.7 15 02/20/02 148,824 183,807
Robert W. Dillon................. 4,924 18.7 15 02/20/02 99,692 123,418
Jerry B. Miller.................. 4,924 18.7 15 02/20/02 99,692 123,418
Thomas A. Korbutt................ 2,204 8.4 15 02/20/02 27,060 34,147
J.E. Merritt..................... 2,204 8.4 15 02/20/02 27,060 34,147
</TABLE>
49
<PAGE> 55
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES (a)
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING
UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY
FISCAL YEAR END(#) OPTIONS AT
SHARES ACQUIRED ON EXERCISABLE/ FISCAL YEAR END($) EXERCISABLE/
NAME EXERCISE (#) VALUE REALIZED($) UNEXERCISABLE UNEXERCISABLE
---- ------------------ ----------------- ------------------ -------------------------------
<S> <C> <C> <C> <C>
Benjamin G. Team.............. 420 9,038 6,344/0 136,523/$0
Robert W. Dillon.............. 0 0 4,924/0 105,964/$0
Jerry B. Miller............... 660 14,203 4,264/0 91,761/$0
Thomas A. Korbutt............. 0 0 2,204/0 47,430/$0
J.E. Merritt.................. 0 0 2,204/0 47,430/$0
</TABLE>
- ------------------------------
(a) Options held by certain employees of the Company were converted at the
consummation of the Acquisition into options to purchase common stock of SH
Group. In addition, SH Group adopted a performance-based option plan
pursuant to which options to acquire up to 7% of SH Group's common stock (on
a fully diluted basis) were awarded to certain members of the Company's
management.
PENSION PLANS
The Company maintains a cash balance pension plan that provides a monthly
annuity payable at age 65. The amount of such annuity is the actuarial
equivalent of the value of an individual account balance which is comprised of
the following: (i) a participant's accrued benefit under the plan determined as
of December 31, 1994; (ii) a percentage (from 2.25% to 7.00%) of the
participant's annual earnings plus a percentage (from 3.0% to 5.0%) of the
participant's annual earnings in excess of 50% of the Social Security wage base
for the calendar year, with such percentages determined based on the
participant's age at the beginning of each year; and (iii) interest credits
based on an index weighted to reflect 60% of the return of the Lehman Brothers
Governmental/Corporate Bond Index and 40% of the return of the S&P 500 stock
index, determined as of December 31 of the calendar year in which the interest
is credited. The estimated annual benefit payable at age 65 for each of the
named executive officers is shown below. For purposes of determining such
benefit, no increases in salary or Social Security wage base were assumed, and a
5% interest rate was used for determining interest credits and for converting
the individual account balance to an annuity at age 65:
<TABLE>
<CAPTION>
PROJECTED ANNUAL
ANNUITY PAYABLE AT
NORMAL
PROJECTED INDIVIDUAL RETIREMENT
NAME ACCOUNT BALANCE AGE
---- -------------------- ------------------
<S> <C> <C>
Benjamin G. Team................................... $442,924 $38,103
Robert W. Dillon................................... $563,832 $48,504
Jerry B. Miller.................................... $401,004 $34,479
Thomas A. Korbutt.................................. $309,992 $26,667
J.E. Merritt....................................... $309,144 $26,594
</TABLE>
EMPLOYMENT AGREEMENTS
Messrs. Team, Miller and Dillon each are party to a severance arrangement
under which each will receive severance pay if his employment is terminated by
the Company (other than for cause) for the number of months between the date of
termination and December 31, 2000 if termination occurs on or before December
31, 1999 or for twelve months if termination occurs on or after January 1, 2000.
Messrs. Team, Miller and Dillon each are a party to a Sale Bonus Agreement dated
April 21, 1998, pursuant to which each received approximately $1.3 million upon
the consummation of a sale of the Company.
Messrs. Connor and Korbutt each are a party to a severance arrangement
under which each will receive severance pay if his employment is terminated by
the Company (other than for cause) for the number of months between the date of
termination and December 31, 1999 if termination occurs on or before December
31, 1998 or for twelve months if termination occurs on or after January 1, 1999.
50
<PAGE> 56
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ACQUISITION ARRANGEMENTS
In connection with the Acquisition Transactions, the Company, AIP and
management investors entered into a stockholders' agreement (the "Stockholders'
Agreement") pursuant to which such persons were granted certain registration
rights and participation rights. Pursuant to the Stockholders' Agreement, AIP
has the right to elect the majority of the directors of the Company.
At the close of the Acquisition Transactions, AIP was paid a fee of $2.0
million and reimbursed for out-of-pocket expenses in connection with the
negotiation of the Acquisition and for providing certain investment banking
services to the Company including the arrangement and negotiation of the terms
of the New Credit Agreement, the arrangement and negotiation of the terms of the
Old Notes and for other financial advisory and management consulting services.
Upon consummation of the Acquisition, Messrs. Team, Miller and Dillon each
received sale bonuses of approximately $1.3 million.
MANAGEMENT SERVICES AGREEMENTS
BCC, an affiliate of Butler Capital Corporation, provided consulting
services to the Company pursuant to a Consulting Services Agreement dated as of
January 1, 1996 and received remuneration of $275,000 in each of fiscal 1997,
1996 and 1995. In fiscal 1996, BCC received a special one-time payment of
$450,000. Such agreement was terminated upon consummation of the Acquisition
Transactions. In connection with the Company's refinancing in fiscal 1997, BCC
received payment of $200,000.
AIP expects to provide substantial ongoing financial and management
services to the Company utilizing the extensive operating and financial
experience of AIP's principals. AIP will receive an annual fee of $895,000 for
providing general management, financial and other corporate advisory services to
the Company and will be reimbursed for out-of-pocket expenses. The fees will be
paid to AIP pursuant to a management services agreement among AIP and the
Company and will be subordinated in right of payment to the Old Notes.
51
<PAGE> 57
DESCRIPTION OF SH GROUP COMMON STOCK
SH Group is authorized by its Certificate of Incorporation to issue 300,000
shares of common stock, par value $0.01 per share (the "Common Stock"), 234,949
of which were issued upon consummation of the Acquisition Transactions, all of
which are owned by AIP, its related investors and certain members of management
of the Company. In addition, SH Group issued options to certain members of
management of the Company pursuant to an option plan to be established by its
board of directors. See "Management--Executive Compensation." The holders of
shares of Common Stock are entitled to receive such dividends, if any, as may be
declared from time to time by the board of directors in its discretion from
funds legally available therefor and, upon liquidation or dissolution are
entitled to receive all assets available for distribution to the shareholders.
SECURITY OWNERSHIP
As of July 30, 1998, there were 13 holders of record of shares of Common
Stock. The following table sets forth certain information regarding beneficial
ownership of Common Stock as of July 30, 1998, assuming the exercise of stock
options exercisable within 60 days of such date, by (i) each person who is known
by SH Group to be the beneficial owner of more than 5% of the Common Stock, (ii)
each of SH Group's directors and the named executive officers in the Summary
Compensation Table and (iii) all directors and executive officers as a group. To
the knowledge of SH Group, each stockholder has sole voting and investment power
as to the shares of Common Stock shown unless otherwise noted. Except as
indicated below, the business address for each such person is c/o Steel Heddle
Mfg., Co., 1801 Rutherford Road, Greenville, South Carolina, 29607.
<TABLE>
<CAPTION>
NAME NUMBER(1) PERCENTAGE(2)
---- --------- -------------
<S> <C> <C>
American Industrial Partners Capital Fund II, L.P.(3)....... 226,299 96.3
Nathan L. Belden(3)......................................... 200 *
Robert L. Purdum(4)......................................... 1,000 *
Kim A. Marvin(4)............................................ 0 0
Robert J. Klein(4).......................................... 250 *
Theodore C. Rogers(5)....................................... 226,299 96.3
Benjamin G. Team............................................ 6,334(6) *
W. Richard Bingham(5)....................................... 226,299 96.3
Robert W. Dillon............................................ 4,916(6) *
Jerry B. Miller............................................. 4,257(6) *
Thomas A. Korbutt........................................... 2,200(6) *
All directors and executive officers as a group (9
persons).................................................. 19,157(7) 7.6
</TABLE>
- ---------------
* Represents less than 1%.
(1) Beneficial ownership is determined in accordance with Rule 13d-3 of the
Securities and Exchange Commission. In computing the number of shares of
Common Stock beneficially owned by a person and the percentage of beneficial
ownership of that person, shares of Common Stock subject to options held by
that person that are currently exercisable or exercisable within 60 days are
deemed outstanding. Such shares, however, are not deemed outstanding for the
purposes of computing the percentage ownership of each other person. The
persons named in this table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them,
subject to community property laws where applicable and except as indicated
in the other footnotes to this table.
(2) Based upon 234,949 shares of Common Stock outstanding as of July 30, 1998.
(3) The business address of such person or entity is One Maritime Plaza, Suite
2525, San Francisco, CA, 94111.
(4) The business address of such person is 551 Fifth Avenue, Suite 3800, New
York, New York.
52
<PAGE> 58
(5) Messrs. Rogers and Bingham share investment and voting power with respect to
the securities owned by American Industrial Partners Capital Fund II, L.P.,
but each disclaims beneficial ownership of any shares of common stock of SH
Group. The business address of Mr. Rogers is 551 Fifth Avenue, Suite 3800,
New York, New York 10176. The business address of Mr. Bingham is One
Maritime Plaza, Suite 2525, San Francisco, California 94111.
(6) Represents shares of Common Stock which are issuable upon exercise of
options within 60 days of the date hereof.
(7) Includes an aggregate of 17,707 shares of Common Stock held by directors and
executive officers which are issuable upon exercise of options exercisable
within 60 days of the date hereof.
53
<PAGE> 59
DESCRIPTION OF DEBENTURES
GENERAL
The New Debentures will be issued as a separate series pursuant to an
Indenture (the "Indenture") between Steel Heddle Group, Inc. and United States
Trust Company of New York, as trustee (the "Trustee"). The terms of the New
Debentures include those stated in the Indenture by reference to the Trust
Indenture Act of 1939 (the "Trust Indenture Act"). The New Debentures are
subject to all such terms, and Holders of New Debentures are referred to the
Indenture and the Trust Indenture Act for a statement thereof. The form and
terms of the New Debentures are identical in all material respects to the form
and terms of the Old Debentures (which they replace) except that (i) the New
Debentures bear a Series B designation, (ii) the New Debentures have been
registered under the Securities Act and, therefore, will not bear legends
restricting the transfer thereof and (iii) the holders of the New Debentures
will not be entitled to certain rights under the Registration Rights Agreement,
including the provisions increasing the interest rate on the Old Debentures in
certain circumstances relating to the timing of the Exchange Offer, which rights
terminate when the Exchange Offer is consummated. The following summary of
certain provisions of the Indenture does not purport to be complete and is
qualified in its entirety by reference to the Indenture, including the
definitions therein of certain terms used below. A copy of the proposed form of
Indenture and Registration Rights Agreement is available as set forth under
"--Additional Information." The definitions of certain terms used in the
following summary are set forth below under "--Certain Definitions."
The New Debentures will be senior, unsecured, general obligations of SH
Group, limited in aggregate principal amount at maturity to $29.25 million. The
New Debentures will rank senior in right of payment to all existing and future
subordinated Indebtedness of SH Group and pari passu in right of payment with
all existing and future senior obligations of SH Group. As of June 27, 1998, the
aggregate amount of Indebtedness of SH Group was $15.2 million (all of which was
attributable to the Old Debentures). SH Group in addition, however, is a
guarantor under the Credit Agreement, which guarantee will be secured by a
pledge of the common stock of the Company. SH Group conducts all of its
operations through its subsidiaries. The New Debentures will be effectively
subordinated to all existing and future Indebtedness and other liabilities and
commitments (including trade payables and lease obligations) of SH Group's
subsidiaries. As of June 27, 1998, SH Group's subsidiaries had $165.5 million of
Indebtedness outstanding, including Indebtedness under the Old Notes and the
Credit Agreement, in addition to trade payables and other accrued liabilities.
As of the date of the Indenture, none of SH Group's Subsidiaries will be
Unrestricted Subsidiaries. However, under certain circumstances, SH Group will
be able to designate current or future Subsidiaries as Unrestricted
Subsidiaries. Unrestricted Subsidiaries generally will not be subject to the
restrictive covenants set forth in the Indenture. The term "Subsidiaries" as
used herein does not include Unrestricted Subsidiaries. Notwithstanding anything
herein to the contrary, the Indenture shall not prevent or restrict consummation
of any of the Acquisition Transactions.
PRINCIPAL, MATURITY AND INTEREST
The Debentures are limited in aggregate principal amount at maturity to
$29.25 million and will mature on June 1, 2009. The Old Debentures were issued
at a substantial discount from their principal amount at maturity to generate
gross proceeds of $15.0 million. Until June 1, 2003, no interest will accrue on
the Debentures, but the Accreted Value will increase (representing amortization
of original issue discount) between the date of original issuance and June 1,
2003, on a semi-annual bond equivalent basis using a 360-day year comprised of
twelve 30-day months, such that the Accreted Value shall be equal to the full
principal amount at maturity of the Debentures on June 1, 2003. Beginning on
June 1, 2003, interest on the Debentures will accrue at the rate of 13 3/4% per
annum and will be payable semi-annually in arrears on June 1 and December 1,
commencing on December 1, 2003, to Holders of record on the immediately
preceding May 15 and November 15, respectively. Interest on the Debentures will
accrue from the most recent date to which interest has been paid, or, if no
interest has been paid, from June 1, 2003. Interest will be computed on the
basis of a 360-day year comprised of twelve 30-day months. Principal, premiums
if any, and interest and
54
<PAGE> 60
Liquidated Damages, if any, on the Debentures will be payable at the office or
agency of SH Group maintained for such purpose within the City and State of New
York or, at the option of SH Group, any payment of interest and Liquidated
Damages, if any, may be made by check mailed to the Holders of the Debentures at
their respective addresses set forth in the register of Holders of Debentures;
provided, that all payments with respect to all Global Notes and Certificated
Notes (as defined herein) the Holders of whom have given wire transfer
instructions to SH Group 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 SH Group, SH Group's office or agency in New York
will be the office of the Trustee maintained for such purpose. The Debentures
will be issued in denominations of $1,000 and integral multiples thereof.
OPTIONAL REDEMPTION
The Debentures are not redeemable at SH Group's option prior to June 1,
2003, except as provided below. Thereafter, the Debentures will be subject to
redemption at the option of SH Group, in whole or in part, upon not less than 30
nor more than 60 days' notice, at the redemption prices (expressed as
percentages of Accreted Value) set forth below plus accrued and unpaid interest
and Liquidated Damages, if any, thereon to the applicable redemption date if
redeemed during the twelve-month period beginning on June 1 of the years below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
<S> <C>
2003........................................................ 106.875%
2004........................................................ 104.583%
2005........................................................ 102.292%
2006 and thereafter......................................... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time on or prior to June 1, 2001, SH
Group may (but shall not have the obligation to) redeem up to 35% of the
original aggregate principal amount at maturity of the Debentures at a
redemption price equal to 113.750% of the Accreted Value thereof, plus accrued
and unpaid interest and Liquidated Damages, if any, thereon to the redemption
date, with the Net Cash Proceeds received by SH Group from one or more Equity
Offerings; provided that, in each case at least 65% of the aggregate principal
amount at maturity of Debentures originally issued remain outstanding
immediately after the occurrence of such redemption; and provided further, that
such redemption shall occur within 60 days of the date of the closing of such
Equity Offering.
If less than all of the Debentures are to be redeemed at any time,
selection of Debentures for redemption will be made by the Trustee in compliance
with the requirements of the principal national securities exchange, if any, on
which the Debentures are listed, or, if the Debentures are not so listed, on a
pro rata basis, by lot or in accordance with any other method as the Trustee
shall deem fair and appropriate; provided that no Debentures 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 whose Debentures are to be redeemed at its registered address. If any
Debenture is to be redeemed in part only, the notice of redemption that relates
to such Debenture shall state the portion of the principal amount thereof to be
redeemed, and, after the redemption date upon surrender of such Debenture, a new
Debenture in principal amount equal to the unredeemed portion thereof will be
issued in the name of the Holder thereof upon cancellation of the original
Debenture. On and after the redemption date, interest ceases to accrue on
Debentures or portions of them called for redemption unless SH Group defaults in
making redemption payments due on such redemption date.
MANDATORY REDEMPTION
SH Group is not required to make mandatory redemption or sinking fund
payments with respect to the Debentures.
55
<PAGE> 61
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control (including transactions
requiring approval by the Board of Directors of SH Group in certain cases), each
Holder of Debentures will have the right to require SH Group to repurchase all
or any part (equal to $1,000 or an integral multiple thereof) of such Holder's
Debentures pursuant to the offer described below (the "Change of Control Offer")
at an offer price in cash equal to 101% of the aggregate principal amount
thereof plus accrued and unpaid interest and Liquidated Damages if any, thereon
to the date of purchase or, in the case of repurchases of Debentures prior to
June 1, 2003, at a purchase price equal to 101%, of the Accreted Value thereof
as of the date of repurchase plus Liquidated Damages, if any, thereon to the
date of purchase (the "Change of Control Payment") on a date (the "Change of
Control Payment Date") no later than 60 Business Days after the occurrence of
the Change of Control. Within 35 days following any Change of Control, SH Group
will mail a notice to each Holder describing the transaction or transactions
that constitute the Change of Control and offering to repurchase Debentures
pursuant to the procedures required by the Indenture and described in such
notice, which offer shall remain open for at least 20 Business Days following
its commencement, but in any event no longer than 30 Business Days. SH Group
will comply with the requirements of Rule 14e-1 under the Exchange Act and any
other securities laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the repurchase of the Debentures
as a result of a Change of Control. To the extent that the provisions of any
such securities laws or regulations conflict with the provisions of this
paragraph, compliance by SH Group with such laws and regulations shall not in
and of itself cause a breach of its obligations under such covenant.
On the Change of Control Payment Date, SH Group will, to the extent lawful,
(1) accept for payment all Debentures or portions thereof properly tendered
pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all Debentures or
portions thereof so tendered and (3) deliver or cause to be delivered to the
Trustee the Debentures so accepted together with an Officers' Certificate
stating the aggregate principal amount of Debentures or portions thereof being
purchased by SH Group. The Paying Agent will promptly mail to each Holder of
Debentures so tendered the Change of Control Payment for such Debentures, and
the Trustee will promptly authenticate and mail (or cause to be transferred by
book entry) to each Holder a new Debenture equal in principal amount to any
unpurchased portion of the Debentures surrendered, if any; provided that each
such new Debenture will be in a principal amount of $1,000 or an integral
multiple thereof. SH Group will announce publicly the results of the Change of
Control Offer on or as soon as practicable after the Change of Control Payment
Date.
Except as described above with respect to a Change of Control, the
Indenture does not contain provisions that permit the Holders of the Debentures
to require that SH Group repurchase or redeem the Debentures in the event of a
takeover, recapitalization or similar restructuring.
The Change of Control purchase feature of the Debentures may make more
difficult or discourage a takeover of SH Group, and, thus, the removal of
incumbent management.
The phrase "all or substantially all" of the assets of SH Group will likely
be interpreted under applicable state law and will be dependent upon particular
facts and circumstances. As a result, there may be a degree of uncertainty in
ascertaining whether a sale or transfer of "all or substantially all" of the
assets of SH Group has occurred. In addition, no assurances can be given that SH
Group will be able to acquire Debentures tendered upon the occurrence of a
Change of Control.
If the Change of Control Payment Date hereunder is on or after an interest
payment Record Date and on or before the associated Interest Payment Date, any
accrued and unpaid interest (and Liquidated Damages, if any), due on such
Interest Payment Date will be paid to the person in whose name a Debenture is
registered at the close of business on such Record Date, and such interest (and
Liquidated Damages, if applicable) will not be payable to Holders who tender the
Debentures pursuant to the Change of Control Offer.
The Credit Agreement and the Note Indenture restrict the Company from
paying dividends or making other distributions to SH Group. If SH Group is
unable to obtain dividends from the Company sufficient to permit the repurchase
of the Debentures or does not refinance such Indebtedness, SH Group will likely
not
56
<PAGE> 62
have the financial resources to purchase Debentures. In any event, there can be
no assurance that SH Group's Subsidiaries will have the resources to pay any
such dividend or make any such distribution.
Prior to complying with the provisions of the preceding paragraphs, but in
any event within 30 days following a Change of Control, SH Group will either
repay all outstanding Indebtedness of its Subsidiaries (including the Company)
or obtain the requisite consents, if any, under such Indebtedness (including
Indebtedness under the New Credit Agreement and the Notes) to permit the
repurchase of the Debentures required by this covenant. SH Group will not be
required to purchase any Debentures until it has complied with the preceding
sentence, but SH Group's failure to make a Change of Control Offer when required
or to purchase tendered Debentures when tendered would constitute an Event of
Default under the Indenture which would, in turn, constitute a default under the
Credit Agreement. See "Risk Factors--Substantial Leverage; Liquidity" and
"--Limitation on Access to Cash Flow of Subsidiaries; Holding Company
Structure."
ASSET SALES
The Indenture provides that SH Group will not, and will not permit any of
its Subsidiaries to, engage in an Asset Sale in excess of $1.0 million unless
(i) SH Group (or such Subsidiary, as the case may be) receives consideration at
the time of such Asset Sale at least equal to the fair market value of the
assets or Equity Interests sold or otherwise disposed of or, in the case of a
lease of assets, a lease providing for rent and other conditions which are no
less favorable to SH Group (or such Subsidiary, as the case may be) in any
material respect than the then prevailing market conditions (evidenced in each
case by a resolution of the Board of Directors of such entity set forth in an
Officers' Certificate delivered to the Trustee) and (ii) at least 75% (100% in
the case of lease payments) of the consideration therefor received by SH Group
or such Subsidiary is in the form of cash or Cash Equivalents; provided that the
amount of (x) any liabilities (as shown on SH Group's or such Subsidiary's most
recent balance sheet or in the notes thereto, but excluding contingent
liabilities and trade payables) of SH Group or any Subsidiary (other than
liabilities that are by their terms subordinated to the Debentures) that are
assumed by the transferee of any such assets and from which SH Group or such
Subsidiary are released and (y) any notes or other obligations received by SH
Group or any such Subsidiaries from such transferee that are promptly, but in no
event more than 30 days after receipt, converted by SH Group or such Subsidiary
into cash (to the extent of the cash received), shall be deemed to be cash for
purposes of this provision and the receipt of such cash shall be treated as cash
received from the Asset Sale for which such notes or obligations were received.
SH Group or any of its Subsidiaries may apply the Net Proceeds from each
Asset Sale, at its option, within 395 days after the consummation of such Asset
Sale, (a) to permanently reduce any Indebtedness of any Subsidiary of SH Group
(and in the case of any senior revolving indebtedness to correspondingly
permanently reduce commitments with respect thereto), (b) to make capital
expenditures, for the acquisition of another business or the acquisition of
other long-term assets, in each case, in the same or a Related Business, or (c)
to reimburse SH Group or its Subsidiaries for expenditures made, and costs
incurred, to repair, rebuild, replace or restore property subject to loss,
damage or taking to the extent that the Net Proceeds consist of insurance
proceeds received on account of such loss, damage or taking. Pending the final
application of any such Net Proceeds, SH Group may temporarily reduce any senior
revolving 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 $5.0 million, SH Group will be required to make an offer to all
Holders of Debentures (an "Asset Sale Offer") and to holders of other
Indebtedness of SH Group outstanding ranking on a parity with the Debentures
with similar provisions requiring SH Group to make a similar offer with proceeds
from asset sales, pro rata in proportion to the respective principal amounts (or
accreted values in the case of Indebtedness issued with an original issue
discount) of the Debentures and such other Indebtedness then outstanding, to
purchase the maximum principal amount (or accreted value, as applicable) of
Debentures and such other Indebtedness, if any, that may be purchased out of the
Excess Proceeds, at an offer price in cash in an amount equal to 100% of the
principal amount thereof plus accrued and unpaid interest and Liquidated
Damages, if any, thereon to the date
57
<PAGE> 63
of purchase, or, in the case of repurchases of Debentures prior to June 1, 2003,
at a purchase price equal to 100% of the Accreted Value thereof plus Liquidated
Damages, if any, as of the date of repurchase in accordance with the procedures
set forth in the Indenture. If the aggregate principal amount at maturity, or
Accreted Value, as the case may be, of the Debentures and such Indebtedness
surrendered by Holders thereof exceeds the amount of Excess Proceeds, the
Trustee shall select the Debentures and such Indebtedness to be purchased on a
pro rata basis. Upon completion of such offer to purchase, the amount of Excess
Proceeds shall be reset at zero.
The Credit Agreement and the Note Indenture restrict the Company from
paying any dividends or making any other distributions to SH Group. If SH Group
is unable to obtain dividends from the Company sufficient to permit the
repurchase of the Debentures or does not refinance such Indebtedness, SH Group
will likely not have the financial resources to purchase Debentures. In any
event, there can be no assurance that SH Group's Subsidiaries will have the
resources available to pay any such dividend or make any such distribution. SH
Group's failure to make an Asset Sale Offer when required or to purchase
tendered Debentures when tendered would constitute an Event of Default under the
Indenture. See "Risk Factors--Substantial Leverage; Liquidity" and "--Limitation
on Access to Cash Flow of Subsidiaries; Holding Company Structure."
Any Asset Sale Offer shall remain open for at least 20 Business Days, in
any event no longer than 30 Business Days, and shall be made in compliance with
all applicable laws, rules, and regulations, including, if applicable,
Regulation 14E of the Exchange Act and the rules and regulations thereunder and
all other applicable Federal and state securities laws. To the extent that the
provisions of any securities laws or regulations conflict with the provisions of
this paragraph, compliance by SH Group or any of its Subsidiaries with such laws
and regulations shall not in and of itself cause a breach of its obligations
under such covenant.
If the payment date in connection with an Asset Sale Offer hereunder is on
or after an interest payment Record Date and on or before the associated
Interest Payment Date, any accrued and unpaid interest (and Liquidated Damages,
if any), due on such Interest Payment Date will be paid to the person in whose
name a Debenture is registered at the close of business on such Record Date, and
such interest (or Liquidated Damages, if applicable) will not be payable to
Holders who tender Debentures pursuant to such Asset Sale Offer.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Indenture provides that SH Group will not, and will not permit any of
its Subsidiaries to, directly or indirectly: (i) declare or pay any dividend or
make any distribution on account of SH Group or any of its Subsidiaries' or
direct or indirect parent's Equity Interests (including, without limitation, any
payment in connection with any merger or consolidation involving SH Group)
(other than dividends or distributions payable in Equity Interests (other than
Disqualified Stock) of SH Group or dividends or distributions payable to SH
Group or any Subsidiary of SH Group); (ii) purchase, redeem or otherwise acquire
or retire for value any Equity Interests of SH Group or any direct or indirect
parent of SH Group or other Affiliate or Subsidiary of SH Group (other than any
such Equity Interests owned by SH Group or any Wholly Owned Subsidiary of SH
Group); (iii) make any principal payment on or purchase, redeem, defease or
otherwise acquire or retire for value any Indebtedness that is subordinated to
or pari passu (unless, in the case of pari passu Indebtedness only, such
purchase, redemption, defeasance, acquisition, or retirement is made, or offered
(if applicable), pro rata with the Debentures) with the Debentures (and other
than Debentures), except for any scheduled repayment or at the final maturity
thereof; or (iv) make any Restricted Investment (all such payments and other
actions set forth in clauses (i) through (iv) above being collectively referred
to as "Restricted Payments"), unless at the time of and after giving effect to
such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof;
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(b) SH Group 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 Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of the covenant
described below under the caption "--Incurrence of Indebtedness and
Issuance of Preferred Stock"; and
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by SH Group and its Subsidiaries after the Issue
Date (including Restricted Payments permitted by clauses (i), (vi), (vii),
(viii) and (ix), but excluding Restricted Payments permitted by clauses
(ii), (iii), (iv) and (v), of the next succeeding paragraph), is less than
the sum of (i) 50% of the Consolidated Net Income (adjusted to exclude any
amounts that are otherwise included in this clause (c) to the extent there
would be, and to avoid, any duplication in the crediting of any such
amounts) of SH Group for the period (taken as one accounting period) from
the beginning of the first fiscal quarter commencing after the Issue Date
to the end of SH Group's most recently ended fiscal quarter for which
internal financial statements are available at the time of such Restricted
Payment (or, if such Consolidated Net Income for such period is a deficit,
less 100% of such deficit), plus (ii) 100% of the aggregate Net Proceeds
received by SH Group after the Issue Date from a Capital Contribution or
from the issue or sale of Equity Interests of SH Group or of debt
securities of SH Group that have been converted into such Equity Interests
(other than Equity Interests (or convertible debt securities) sold to a
Subsidiary or an Unrestricted Subsidiary of SH Group and other than
Disqualified Stock or debt securities that have been converted into
Disqualified Stock), plus (iii) 100% of any cash dividends received by SH
Group or any of its Wholly Owned Subsidiaries after the Issue Date from an
Unrestricted Subsidiary of SH Group, plus (iv) 100% of the Net Proceeds
realized by SH Group or a Wholly Owned Subsidiary of SH Group upon the sale
of any Unrestricted Subsidiary (less the amount of any reserve established
for purchase price adjustments and less the maximum amount of any
indemnification or similar contingent obligation for the benefit of the
purchaser, any of its Affiliates or any other third party in such sale, in
each case as adjusted for any permanent reduction in any such amount on or
after the date of such sale, other than by virtue of a payment made to such
person) following the Issue Date, plus (v) to the extent that any
Restricted Investment that was made after the Issue Date is sold for cash
or otherwise liquidated or repaid for cash, the amount of Net Proceeds
received by SH Group or any of its Subsidiaries with respect to such
Restricted Investment.
Notwithstanding the foregoing, SH Group's Subsidiaries are permitted to
make any Restricted Payment not prohibited by the Note Indenture as in effect on
the Issue Date, so long as any Notes remain outstanding and the Company is a
consolidated Subsidiary of SH Group.
The foregoing provisions do not prohibit (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indenture; (ii) the payment of a fee to AIP or its designee on the date of the
Indenture in an aggregate amount, together with any fees paid by any Subsidiary
of SH Group on the date of the Indenture, not to exceed $2.0 million for certain
investment banking, advisory and management services rendered to SH Group and
its Subsidiaries in connection with the Acquisition Transactions and if no
Default or Event of Default shall have occurred and be continuing (and shall not
have been waived) or shall occur as a consequence thereof, the payment by SH
Group (either directly or indirectly, e.g., through the Parent) of a management
fee to AIP in an aggregate amount, together with any management fees paid to AIP
by any Subsidiary of SH Group during or in respect of such period, not to exceed
$895,000 in any year plus an additional amount in such year (not to exceed
$895,000) to the extent such management fee was not payable by reason of this
clause (ii) in any prior fiscal year and the reimbursement by SH Group of AIP's
reasonable out-of-pocket expenses incurred in connection with the rendering of
management services to or on behalf of SH Group; provided, however, that the
obligation of SH Group to pay such management fee will be subordinated to the
payment of all Obligations with respect to the Debentures; (iii) the making of
any Restricted Investment, directly or indirectly, in exchange for, or out of
the Net Cash Proceeds received by SH Group after the Issue Date from a
substantially concurrent Capital Contribution or sale (other than to a
Subsidiary of SH Group) of Equity Interests of SH Group (other than Disqualified
Stock); provided, that any Net Cash Proceeds that are
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utilized for any such Restricted Investment shall be excluded from clauses
(c)(i) and (c)(ii) of the preceding paragraph; (iv) the redemption, repurchase,
retirement or other acquisition of any Equity Interests of SH Group in exchange
for, or out of the proceeds of, the substantially concurrent sale (other than to
a Subsidiary of SH Group) of other Equity Interests of SH Group (other than any
Disqualified Stock); provided that any Net Cash Proceeds that are utilized for
any such redemption, repurchase, retirement or other acquisition shall be
excluded from clauses (c)(i) and (c)(ii) of the preceding paragraph; (v) the
defeasance, redemption, repurchase, acquisition or other retirement of pari
passu or subordinated Indebtedness with the Net Cash Proceeds from an incurrence
of Permitted Refinancing Indebtedness or, in exchange for, or out of the Net
Cash Proceeds of, the substantially concurrent sale (other than to a Subsidiary
of SH Group) of Equity Interests of SH Group (other than Disqualified Stock);
provided, that any Net Cash Proceeds that are utilized for any such defeasance,
redemption, repurchase shall be excluded from clauses (c)(i) and (c)(ii) of the
preceding paragraph; (vi) the repurchase, redemption, or other acquisition or
retirement for value of any Equity Interests of SH Group or any Subsidiary of SH
Group held by any member of SH Group's (or any Subsidiaries') management
pursuant to any management agreement or stock option agreement; provided that
the aggregate price paid for all such repurchased, redeemed, acquired or retired
Equity Interests shall not exceed $5.0 million in the aggregate (net of the Net
Cash Proceeds received by SH Group from subsequent reissuances of such Equity
Interests to new members of management), and no Default or Event of Default
shall have occurred and be continuing immediately after such transaction; (vii)
so long as no Default or Event of Default shall have occurred and is continuing,
Restricted Payments in an aggregate amount not to exceed $1.0 million; (viii)
pro rata dividends and other distributions on the Capital Stock of any
Subsidiary of SH Group by such Subsidiary; and (ix) payments in lieu of
fractional shares in an amount not to exceed $250,000 in the aggregate.
The Board of Directors may designate any Subsidiary to be an Unrestricted
Subsidiary if such designation would not cause a Default. For purposes of making
such determination, all outstanding Investments by SH Group and its 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 greatest of (x) the net book value of such
Investments at the time of such designation, (y) the fair market value of such
Investments at the time of such designation and (z) the original fair market
value of such Investments at the time they were made. Such designation will only
be permitted if such Restricted Payment would be permitted at such time and if
such Subsidiary otherwise meets the definition of an Unrestricted Subsidiary.
The amount of all Restricted Payments (other than cash) shall be the fair
market value (evidenced by a resolution of the Board of Directors set forth in
an Officers' Certificate delivered to the Trustee) on the date of the Restricted
Payment of the asset(s) proposed to be transferred by SH Group or such
Subsidiary, as the case may be, pursuant to the Restricted Payment. Not later
than the date of making any Restricted Payment, SH Group shall deliver to the
Trustee an Officers' Certificate stating that such Restricted Payment is
permitted and setting forth the basis upon which the calculations required by
this covenant were computed, which calculations may be based upon SH Group's
latest available financial statements.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The Indenture provides that SH Group will not, and will not permit any of
its Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guaranty or otherwise become directly or indirectly liable, contingently or
otherwise, with respect to (collectively, "incur") any Indebtedness (including
Acquired Indebtedness) and that SH Group will not issue any Disqualified Stock
and will not permit any of its Subsidiaries to issue any shares of preferred
stock or Disqualified Stock; provided, however, that SH Group may incur
Indebtedness (including Acquired Indebtedness) or issue shares of Disqualified
Stock and SH Group's Subsidiaries may incur Indebtedness and issue preferred
stock or Disqualified Stock, if: (i) the Fixed Charge Coverage Ratio for SH
Group's most recently ended four full fiscal quarters for which internal
financial statements are available immediately preceding the date on which such
additional Indebtedness is incurred or such Disqualified Stock or preferred
stock is issued would have been at least 2.0 to 1, determined on a pro forma
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basis (including a pro forma application of the net proceeds therefrom), as if
the additional Indebtedness 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; and (ii) no Default or Event of Default shall have occurred
and be continuing or would occur as a consequence thereof; provided, that no
Guarantee may be incurred pursuant to this paragraph, unless the guaranteed
Indebtedness is incurred by SH Group or a Subsidiary of SH Group pursuant to
this paragraph. The foregoing provisions will not apply to:
(i) the incurrence of Indebtedness by SH Group or its Subsidiaries
under the New Credit Agreement in an aggregate principal amount at any time
outstanding (with letters of credit being deemed to have a principal amount
equal to the maximum potential liability of SH Group and its Subsidiaries
thereunder) not to exceed an amount (including any Indebtedness incurred to
refinance, retire, renew, defease, refund or otherwise replace any such
Indebtedness) equal to $70.0 million, less (i) an amount equal to the
cumulative mandatory amortization payments required under the New Credit
Agreement in existence as of the Issue Date (irrespective of whether any
such payments are actually made or whether the New Credit Agreement remains
in existence) and (ii) the aggregate amount of all Net Proceeds of Asset
Sales applied to permanently reduce the outstanding amount or, as
applicable, the commitments with respect to such Indebtedness pursuant to
the covenant described above under the caption "--Asset Sales,"
(ii) the Existing Indebtedness;
(iii) the incurrence by SH Group of Indebtedness represented by the
Debentures and the incurrence by the Company and its Subsidiaries of
Indebtedness represented by the Notes and any Guarantee thereof;
(iv) the incurrence by SH Group or any of its Subsidiaries of
Indebtedness represented by Capital Lease Obligations, mortgage financings
or Purchase Money Obligations, in each case incurred for the purpose of
financing all or any part of the purchase price or cost of construction or
improvement of property used in the business of SH Group or such
Subsidiary, in an aggregate principal amount not to exceed $10.0 million at
any time outstanding (including any Indebtedness incurred to refinance,
retire, renew, defease, refund or otherwise replace any such Indebtedness);
(v) the incurrence by SH Group or any of its Subsidiaries of Permitted
Refinancing Indebtedness in exchange for, or the net proceeds of which are
used to extend, refinance, renew, replace, defease or refund, Indebtedness
that was permitted to be incurred by the Indenture or by the Note
Indenture, including the Notes and any Guarantees thereof, or was
outstanding on the Issue Date, after giving effect to the Acquisition
Transactions;
(vi) the incurrence by SH Group or any of its Wholly Owned
Subsidiaries of intercompany Indebtedness between or among SH Group and any
of its Wholly Owned Subsidiaries or between or among any Wholly Owned
Subsidiaries; provided, however, that (i) any subsequent issuance or
transfer of Equity Interests that results in any such Indebtedness being
held by a Person other than a Wholly Owned Subsidiary and (ii) any sale or
other transfer of any such Indebtedness to a Person that is not either SH
Group or a Wholly Owned Subsidiary shall be deemed, in each case, to
constitute an incurrence of such Indebtedness by SH Group or such
Subsidiary, as the case may be;
(vii) the incurrence by SH Group or any of its Subsidiaries of Hedging
Obligations that are incurred for the purpose of fixing or hedging interest
rate risk with respect to any floating rate Indebtedness that is permitted
by the Indenture to be incurred;
(viii) the incurrence by SH Group or any of its Subsidiaries of
Indebtedness in an aggregate principal amount at any time outstanding
(including any Indebtedness incurred to refinance, retire, renew, defease,
refund or otherwise replace any such Indebtedness) not to exceed $10.0
million;
(ix) the incurrence by SH Group or any Subsidiary of Indebtedness in
respect of judgment, appeal, surety, performance and other like bonds,
bankers acceptances and letters of credit provided by SH Group and its
Subsidiaries in the ordinary course of business in an aggregate amount
outstanding
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(including any indebtedness incurred to refinance, retire, renew, defease,
refund or otherwise replace any such Indebtedness) at any time of not more
than $500,000; and
(x) Indebtedness incurred by SH Group or any of its Subsidiaries
arising from agreements providing for indemnification, adjustment of
purchase price or similar obligations, or from guarantees of letters of
credit, surety bonds or performance bonds securing the performance of SH
Group or any of its Subsidiaries to any person acquiring all or a portion
of such business or assets of a Subsidiary of SH Group for the purpose of
financing such acquisition, in a principal amount not to exceed 25% of the
gross proceeds (with proceeds other than cash or Cash Equivalents being
valued at the fair market value thereof as determined by the Board of
Directors of SH Group in good faith) actually received by SH Group or any
of its Subsidiaries in connection with such disposition.
Notwithstanding any other provision of this covenant, a Guarantee by a
Subsidiary of Indebtedness of SH Group or a Wholly Owned Subsidiary of SH Group
permitted by the terms of the Indenture at the time such Indebtedness was
incurred will not constitute a separate incurrence of Indebtedness.
The Indenture also provides that SH Group will not incur any Indebtedness
that is contractually subordinated to any Indebtedness unless it is subordinated
to the Debentures at least to the same extent as it is to such other
Indebtedness.
Notwithstanding the foregoing, (i) the SH Group's Subsidiaries will be
permitted to incur any Indebtedness to the extent such incurrence is not
prohibited by the Note Indenture, as in effect on the Issue Date, so long as any
Notes remain outstanding, and (ii) SH Group may incur Indebtedness to the extent
such incurrence would not be prohibited if incurred by SH Group's Subsidiaries
under the Debt Incurrence Ratio in the first paragraph of the covenant
"Incurrence of Indebtedness and Issuance of Preferred Stock" in the Note
Indenture, as in effect on the Issue Date, so long as any Notes remain
outstanding (for the purposes of this clause (ii) only, any debt incurred
pursuant to this clause shall be deemed to have been incurred under the Note
Indenture for the purposes of determining whether any additional Indebtedness
may be incurred pursuant to this clause (ii)).
Indebtedness or Disqualified Stock of any person which is outstanding at
the time such Person becomes a Subsidiary of SH Group (including upon
designation of any subsidiary or other person as a Subsidiary) or is merged with
or into or consolidated with SH Group or a Subsidiary of SH Group shall be
deemed to have been incurred at the time such Person becomes such a Subsidiary
of SH Group or is merged with or into or consolidated with SH Group or a
Subsidiary of SH Group, as applicable.
LIENS
The Indenture provides that SH Group will not, and will not permit any of
its Subsidiaries to, directly or indirectly, create, incur, assume or suffer to
exist any Lien on any asset now owned or hereafter acquired, or any income or
profits therefrom or assign or convey any right to receive income therefrom,
except Permitted Liens, unless the Debentures are secured by such Lien on an
equal and ratable basis; provided, that, if the Obligation secured by any Lien
is subordinate or junior in right of payment to the Debentures, the Lien
securing such Obligation shall be subordinate and junior to the Lien securing
the Debentures with the same or lesser relative priority as such Obligation
shall have been with respect to the Debentures.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Indenture provides that SH Group will not, and will not permit any of
its 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 Subsidiary to (i)(a) pay dividends or make any other distributions to SH
Group or any of its 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 SH Group or any of its Subsidiaries, (ii) make loans or
advances to SH Group or any of its Subsidiaries or (iii) transfer any of its
properties or assets to SH Group or any of its Subsidiaries, except for such
encumbrances or restrictions existing under or by reason of (a) Existing
Indebtedness as in effect on the date of the Indenture, (b) the Credit Agreement
and the Note
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Indenture, in each case as in effect as of 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,
replacements or refinancings may be no more restrictive with respect to such
dividend and other payment restrictions than the most restrictive of those
contained in the Credit Agreement or the Note Indenture, in each case as in
effect on the date of the Indenture, (c) the Indenture and the Debentures or
Indebtedness permitted to be incurred pursuant to the Indenture and ranking pari
passu with the Debentures, as applicable, to the extent such restrictions are no
more restrictive than those of the Indenture, (d) applicable law, (e) any
instrument governing Acquired Indebtedness or Capital Stock of a Person acquired
by SH Group or any of its Subsidiaries as in effect at the time of such
acquisition (except to the extent such Acquired Indebtedness was incurred 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, (f) by reason of customary non-assignment provisions in leases and
licenses entered into in the ordinary course of business and consistent with
past practices, (g) Purchase Money Obligations or Capital Lease Obligations for
property acquired in the ordinary course of business that impose restrictions of
the nature described in clause (iii) above only on the property so acquired, (h)
agreements relating to the financing of the acquisition of real or tangible
personal property acquired after the date of the Indenture, provided, that such
encumbrance or restriction relates only to the property which is acquired and in
the case of any encumbrance or restriction that constitutes a Lien, such Lien
constitutes a Permitted Lien as set forth in clause (xi) of the definition of
"Permitted Lien," (i) any restriction or encumbrance contained in contracts for
sale of assets permitted by this Indenture in respect of the assets being sold
pursuant to such contract, (j) Indebtedness permitted to be incurred under the
Indenture and incurred on or after the date of the Indenture; provided, that
such encumbrances or restrictions in such Indebtedness are no more onerous than
the most restrictive of those contained in the Credit Agreement or the Note
Indenture, in each case as in effect on the date of the Indenture, or (k)
Permitted Refinancing Indebtedness, provided that the restrictions contained in
the agreements governing such Permitted Refinancing Indebtedness are no more
restrictive than those contained in the agreements governing the Indebtedness
being refinanced.
MERGER, CONSOLIDATION, OR SALE OF ASSETS
The Indenture provides that SH Group will not in a single transaction or
series of related transactions consolidate or merge with or into (whether or not
SH Group is the surviving corporation), or directly or indirectly, 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) SH Group is the surviving corporation
or the entity or the Person formed by or surviving any such consolidation or
merger (if other than SH Group) or to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made is a corporation
organized or existing under the laws of the United States, any state thereof or
the District of Columbia; (ii) the entity or Person formed by or surviving any
such consolidation or merger (if other than SH Group) or the entity or Person to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made assumes all the obligations of SH Group, as the case may
be, under the Debentures 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) SH Group, or the entity
or Person formed by or surviving any such consolidation or merger (if other than
SH Group), or to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made 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 Indebtedness pursuant to the Fixed Charge Coverage Ratio
test set forth in the first paragraph of the covenant described above under the
caption "--Incurrence of Indebtedness and Issuance of Preferred Stock"; and (v)
SH Group shall have delivered to the Trustee an Officer's Certificate and an
opinion of counsel, each stating that such consolidation, merger or transfer and
such supplemental indenture (if any) comply with the Indenture. Notwithstanding
the foregoing, the transactions comprising the Acquisition Transactions shall be
deemed to be expressly permitted under the Indenture and shall not require the
execution and delivery of a supplemental indenture.
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Upon any consolidation or merger or any transfer of all or substantially
all of the assets of SH Group in accordance with the foregoing, the successor
corporation formed by such consolidation or into which SH Group is merged or to
which such transfer is made shall succeed to and (except in the case of a lease)
be substituted for, and may exercise every right and power of, SH Group under
the Indenture with the same effect as if such successor corporation had been
named therein as SH Group, and (except in the case of a lease) SH Group shall be
released from the obligations under the Debentures and the Indenture except with
respect to any obligations that arise from, or are related to, such transaction.
For the purposes of the foregoing, the transfer (by lease, assignment, sale
or otherwise) of all or substantially all of the properties and assets of one or
more Subsidiaries of SH Group, SH Group's interest in which constitutes all or
substantially all of the properties and assets of SH Group shall be deemed to be
the transfer of all or substantially all of the properties and assets of SH
Group.
TRANSACTIONS WITH AFFILIATES
The Indenture provides that SH Group will not, and will not permit any of
its Subsidiaries to enter into any transaction (including the sale, lease,
exchange, transfer or other disposition of any of its properties or assets or
services, or the purchase of any property, assets or services), or enter into or
make any contract, agreement, understanding, loan, advance or guarantee with, or
for the benefit of, any Affiliate (each of the foregoing, an "Affiliate
Transaction"), unless (i) such Affiliate Transaction is on terms that are no
less favorable to SH Group or the relevant Subsidiary than those that would have
been obtained in a comparable transaction by SH Group or such Subsidiary with an
unrelated Person and (ii) SH Group delivers to the Trustee (a) with respect to
any Affiliate Transaction or series of related Affiliate Transactions entered
into after the date of the Indenture involving aggregate consideration in excess
of $5.0 million, a resolution of the Board of Directors set forth in an
Officers' Certificate certifying that such Affiliate Transactions comply with
clause (i) above and that such Affiliate Transactions have been approved by a
majority of the disinterested members of the Board of Directors and (b) with
respect to any Affiliate Transactions or series of related Affiliate
Transactions involving aggregate consideration in excess of $10.0 million, a
favorable written opinion as to the fairness to SH Group or such Subsidiary of
such Affiliate Transactions from a financial point of view issued by an
investment banking firm of national standing in the United States, or in the
event such transaction is a type that investment bankers do not generally render
fairness opinions, a valuation or appraisal firm of national standing; provided,
that, the following shall not be deemed to be Affiliate Transactions: (w) the
provision of administrative or management services by SH Group or any of its
officers to any of its Subsidiaries in the ordinary course of business
consistent with past practice, (x) any employment agreement entered into by SH
Group or any of its Subsidiaries in the ordinary course of business and
consistent with the past practice of SH Group or such Subsidiary, (y)
transactions between or among SH Group and/or its Wholly Owned Subsidiaries and
(z) transactions permitted by the provisions of the Indenture described above
under the caption "Restricted Payments." In addition, none of the Acquisition
Transactions shall be deemed to be Affiliate Transactions.
LINE OF BUSINESS
The Indenture provides that neither SH Group nor any of its Subsidiaries
shall directly or indirectly engage to any substantial extent in any line or
lines of business activity other than that which, in the reasonable good faith
judgment of the Board of Directors of SH Group, is a Related Business.
REPORTS
The Indenture provides that, whether or not required by the rules and
regulations of the Commission so long as any Debentures are outstanding, SH
Group will furnish to the Holders of Debentures (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 SH Group were required to file such
Forms, including a "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and, with respect to the annual information only, a
report thereon by SH Group's certified independent accountants and (ii) all
current reports that would be required to be filed with the Commission on Form
8-K if SH Group were required to file such reports. In
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addition, whether or not required by the rules and regulations of the
Commission, at any time after the effectiveness of a registration statement with
respect to the Exchange Offer, SH Group will file a copy of all such information
and reports with the Commission for public availability (unless the Commission
will not accept such a filing) and make such information available to securities
analysts and prospective investors upon request. In addition, SH Group has
agreed that, for so long as any Debentures remain outstanding, it will furnish
to the Holders and to securities analysts and prospective investors, upon their
request, the information required to be delivered pursuant to Rule 144A(d)(4)
under the Securities Act.
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, or
Liquidated Damages, if any, with respect to, the Debentures; (ii) default in
payment when due of the principal of or premium, if any, on the Debentures;
(iii) failure by SH Group to comply with the provisions described under the
captions "Repurchase at the Option of Holders" for a period of 30 days; (iv)
failure by SH Group to comply with any of its other agreements or covenants in,
or provisions of, the Indenture or the Debentures; (v) default under any
mortgage, indenture or instrument under which there may be issued or by which
there may be secured or evidenced any Indebtedness for money borrowed by SH
Group or any of its Subsidiaries (or the payment of which is Guaranteed by SH
Group or any of its Subsidiaries) whether such Indebtedness or Guarantee now
exists, or is created after the date of the Indenture, which default (a) is
caused by a failure to pay principal of or premium on such Indebtedness when due
(after giving effect to any applicable grace period provided in such
Indebtedness) or (b) results in the acceleration of such Indebtedness prior to
its express maturity and, in each case, the principal amount of any such
Indebtedness, together with the principal amount of any other such Indebtedness
under which there has been such a payment default or the maturity of which has
been so accelerated, aggregates $5.0 million or more; (vi) failure by SH Group
or any of its Significant Subsidiaries to pay nonappealable final judgments (not
fully covered by insurance) aggregating in excess of $5.0 million, which
judgments are not paid, bonded, discharged or stayed within a period of 60 days;
and (vii) certain events of bankruptcy or insolvency with respect to SH Group 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 aggregate principal amount of the then outstanding
Debentures may declare all the Debentures to be due and payable immediately by
notice in writing to SH Group (and to the Trustee if given by the Holders) (an
"Acceleration Notice"). Notwithstanding the foregoing, in the case of an Event
of Default arising from certain events of bankruptcy or insolvency with respect
to SH Group, any Significant Subsidiary or any group of Subsidiaries that, taken
together, would constitute a Significant Subsidiary, all outstanding Debentures
will become due and payable without further action or notice. Upon any
acceleration of maturity of the Debentures, all principal of and accrued
interest and Liquidated Damages, if any, on (if subsequent to June 1, 2003) or
Accreted Value of and Liquidated Damages, if any, on (if prior to June 1, 2003)
the Debentures shall be due and payable immediately. Holders of the Debentures
may not enforce the Indenture or the Debentures except as provided in the
Indenture. Subject to certain limitations, Holders of not less than a majority
in aggregate principal amount of the then outstanding Debentures may direct the
Trustee in its exercise of any trust or power. The Trustee may withhold from
Holders of the Debentures notice of any continuing Default or Event of Default
(except a Default or Event of Default relating to the payment of principal or
interest) if it determines that withholding notice is in their interest.
The Holders of not less than a majority in aggregate principal amount of
the Debentures then outstanding by written notice to the Trustee may on behalf
of the Holders of all of the Debentures 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
Debentures.
SH Group is required to deliver to the Trustee quarterly a statement
regarding compliance with the Indenture, and SH Group 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.
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NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No past, present or future director, officer, employee, incorporator or
stockholder of SH Group, as such, shall have any liability for any obligations
of SH Group under the Debentures, the Indenture or for any claim based on, in
respect of, or by reason of, such obligations or their creation. Each Holder of
Debentures by accepting a Debenture waives and releases all such liability. The
waiver and release are part of the consideration for issuance of the Debentures.
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
SH Group may, at the option of its Board of Directors, at any time, elect
to have all of its obligations discharged with respect to all outstanding
Debentures ("Legal Defeasance") except for (i) the rights of Holders of
outstanding Debentures to receive payments in respect of the principal of,
premium, if any, and interest and Liquidated Damages on such Debentures when
such payments are due from the trust referred to below, (ii) SH Group's
obligations with respect to the Debentures concerning issuing temporary
Debentures, registration of Debentures, mutilated, destroyed, lost or stolen
Debentures 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 under the Indenture, and SH Group's obligations in
connection therewith and (iv) the Legal Defeasance provisions of the Indenture.
In addition, SH Group may, at the option of its Board of Directors, at any time,
elect to have the obligations of SH Group 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 Debentures. In the event
Covenant Defeasance occurs, certain events (not including nonpayment,
bankruptcy, receivership, rehabilitation and insolvency events) described under
"Events of Default" will no longer constitute an Event of Default with respect
to the Debentures.
In order to exercise either Legal Defeasance or Covenant Defeasance: (i) SH
Group must irrevocably deposit with the Trustee, in trust, for the benefit of
the Holders of the Debentures, 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 of, premium, if any, interest and Liquidated Damages on the
outstanding Debentures on the stated maturity or on the applicable redemption
date, as the case may be, and SH Group must specify whether the Debentures are
being defeased to maturity or to a particular redemption date; (ii) in the case
of Legal Defeasance, SH Group shall deliver to the Trustee an opinion of counsel
in the United States reasonably acceptable to the Trustee confirming that (A) SH
Group 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 Debentures 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, SH Group 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 Debentures 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 same times as would have been the case if
such Covenant Defeasance had not occurred; (iv) no Event of Default or Default
shall have occurred and be continuing on the date of such deposit (other than an
Event of Default or Default resulting from the borrowing of funds to be applied
to such 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 SH Group or any of
its Subsidiaries is a party or by which SH Group or any of its Subsidiaries is
bound; (vi) SH Group 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) SH
Group must deliver to the Trustee an Officers' Certificate stating that the
deposit was not
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made by SH Group with the intent of preferring the Holders of Debentures over
the other creditors of SH Group with the intent of defeating, hindering,
delaying or defrauding creditors of SH Group or others; and (viii) SH Group must
deliver to the Trustee an Officers' Certificate and an opinion of counsel, each
stating that all conditions precedent provided for, in the case of the Officers'
Certificate, (i) through (vii) and, in the case of the opinion of counsel,
clauses (i) (with respect to the validity and perfection of the security
interest), (ii), (iii) and (v) of this paragraph relating to the Legal
Defeasance or the Covenant Defeasance, as applicable, have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Debentures 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 SH Group
may require a Holder to pay any taxes and fees required by law or permitted by
the Indenture. SH Group is not required to transfer or exchange any Debenture
selected for redemption. Also, SH Group is not required to transfer or exchange
any Debenture for a period of 15 days before a selection of Debentures to be
redeemed.
The registered Holder of a Debenture will be treated as the owner of it for
all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Debentures may be amended or supplemented with the consent of the Holders of
a majority in aggregate principal amount of the Debentures then outstanding
(including consents obtained in connection with a tender offer or exchange offer
for Debentures) and any existing Default or Event of Default or compliance with
any provision of the Indenture or the Debentures may be waived with the consent
of the Holders of a majority in aggregate principal amount of the then
outstanding Debentures (including consents obtained in connection with a tender
offer or exchange offer for Debentures).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Debentures held by a non-consenting Holder): (i) reduce the
aggregate principal amount of Debentures whose Holders must consent to an
amendment, supplement or waiver, (ii) reduce the principal of or change the
fixed maturity of any Debenture or alter the provisions with respect to the
redemption of the Debentures (other than provisions relating to the covenants
described above under the caption "Repurchase at the Option of Holders"), (iii)
reduce the rate of or change the time for payment of interest on any Debenture,
(iv) waive a Default or Event of Default in the payment of Liquidated Damages or
principal of or premium, if any, or interest on the Debentures (except a
rescission of acceleration of the Debentures by the Holders of a majority in
aggregate principal amount of the Debentures and a waiver of the payment default
that resulted from such acceleration), (v) make any Debenture payable in money
other than that stated in the Debentures, (vi) make any change in the provisions
of the Indenture relating to waivers of past Defaults or the rights of Holders
of Debentures to receive payments of principal of or premium, if any, or
interest on the Debentures, (vii) waive a redemption payment with respect to any
Debenture (other than a payment required by one of the covenants described above
under the caption "Repurchase at the Option of Holders") or (viii) make any
change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any Holder of
Debentures, SH Group and the Trustee may amend or supplement the Indenture or
the Debentures to cure any ambiguity, defect or inconsistency, to provide for
uncertificated Debentures in addition to or in place of certificated Debentures,
to provide for the assumption of SH Group's obligations to Holders of Debentures
in the case of a merger or consolidation, to make any change that would provide
any additional rights or benefits to the Holders of Debentures or that does not
adversely affect the legal rights under the Indenture of any such Holder, to
comply with requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act, or to evidence,
and provide for acceptance of, the appointment of a successor Trustee under the
Indenture.
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CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of SH Group, 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
as trustee or resign. The Trustee will also serve as trustee under the Note
Indenture.
The Holders of a majority in aggregate principal amount of the then
outstanding Debentures 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 Debentures, unless such Holder shall have
offered to the Trustee security and indemnity satisfactory to it against any
loss, liability or expense.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture and
Registration Rights Agreement without charge by writing to SH Group at 1801
Rutherford Road, Greenville, South Carolina 29607, Attention: Chief Financial
Officer.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Accreted Value" means, as of any date of determination, the sum (rounded
to the nearest whole dollar) of (a) the initial offering price of each $1,000 in
principal amount at maturity of Debentures and (b) the portion of the excess of
the principal amount of Debentures over such initial offering price which shall
have been accreted thereon through such date, such amount to be so accreted on a
daily basis at the rate of 13 3/4% per annum compounded semi-annually on each
June 1 and December 1 from the date of issuance of the Debentures through the
date of determination. On or after June 1, 2003, the Accreted Value of each
Debenture shall be equal to its principal amount at maturity.
"Acquired Indebtedness" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"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; provided that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control. Notwithstanding the foregoing, the limited partners in
AIP shall not be deemed to be Affiliates of AIP solely by reason of their
investment in such funds.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition
that does not constitute a Restricted Payment or an Investment by such person of
any of its non-cash assets (including, without limitation, by way of a sale and
leaseback and including the issuance, sale or other transfer of any of the
capital stock of any Subsidiary of such person but excluding Cash Equivalents
liquidated in the ordinary course of
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business) other than to SH Group or to any of its Wholly Owned Subsidiaries
(including the receipt of proceeds of insurance paid on account of the loss of
or damage to any asset and awards of compensation for any asset taken by
condemnation, eminent domain or similar proceeding, and including the receipt of
proceeds of business interruption insurance); and (ii) the issuance of Equity
Interests in any Subsidiaries or the sale of any Equity Interests in any
Subsidiaries, in each case, in one or a series of related transactions,
provided, that notwithstanding the foregoing, the term "Asset Sale" shall not
include: (a) the sale, lease, conveyance, disposition or other transfer of all
or substantially all of the assets of SH Group, as permitted pursuant to the
covenant entitled "Merger, Consolidation or Sale of Assets," (b) the sale or
lease of equipment, inventory, accounts receivable or other assets in the
ordinary course of business consistent with past practice, (c) the sale or
disposal of damaged, worn out or other obsolete personal property in the
ordinary course of business so long as such property is no longer necessary for
the proper conduct of the business of SH Group or such Subsidiary, as
applicable; (d) a transfer of assets by SH Group to a Wholly Owned Subsidiary or
by a Wholly Owned Subsidiary to SH Group or to another Wholly Owned Subsidiary,
(e) an issuance of Equity Interests by a Wholly Owned Subsidiary to SH Group or
to another Wholly Owned Subsidiary, (f) the surrender or waiver of contract
rights or the settlement, release or surrender of contract, tort or other claims
of any kind, (g) the grant in the ordinary course of business of any
non-exclusive license of patents, trademarks, registrations therefor and other
similar intellectual property, or (h) Permitted Investments.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in New York are authorized or
obligated by law or executive order to close.
"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 Contribution" means any contribution to the equity of SH Group for
which no consideration is given other than common stock with no redemption
rights and no special privileges, preferences, or special voting rights.
"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, partnership 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 (a) securities issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States is pledged in support thereof) having maturities not more than twelve
months from the date of acquisition, (b) U.S. dollar denominated (or foreign
currency fully hedged) time deposits, certificates of deposit, Eurodollar time
deposits or Eurodollar certificates of deposit of (i) any domestic commercial
bank of recognized standing having capital and surplus in excess of $100 million
or (ii) any bank whose short-term commercial paper rating from S&P is at least
A-1 or the equivalent thereof or from Moody's is at least P-1 or the equivalent
thereof (any such bank being an "Approved Lender"), in each case with maturities
of not more than twelve months from the date of acquisition, (c) commercial
paper and variable or fixed rate notes issued by any Approved Lender (or by the
parent company thereof) or any variable rate notes issued by, or guaranteed by,
any domestic corporation rated A-2 (or the equivalent thereof) or better by S&P
or P-2 (or the equivalent thereof) or better by Moody's and maturing within
twelve months of the date of acquisition, (d) repurchase agreements with a bank
or trust company or recognized securities dealer having capital and surplus in
excess of $100 million for direct obligations issued by or fully guaranteed by
the United States of America in which SH Group shall have a perfected first
priority security interest (subject to no other Liens) and having, on the date
of purchase thereof, a fair market value of at least 100% of the amount of
repurchase obligations, and (e) interests in money market mutual funds which
invest solely in assets or securities of the type described in subparagraphs
(a), (b), (c) or (d) hereof.
"Change of Control" means such time as (i) prior to the initial public
offering by SH Group of any shares of its common stock (other than a public
offering pursuant to a registration statement on Form S-8),
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AIP and its Affiliates (collectively, the "Initial Investors") cease to be,
directly or indirectly, the beneficial owners, in the aggregate of at least 51%
of the voting power of the voting common stock of SH Group or (ii) after the
initial public offering by SH Group of any shares of its common stock (other
than a public offering pursuant to a registration statement on Form S-8), (A)
any Schedule 13D, Form 13F or Schedule 13G under the Exchange Act, or any
amendment to such Schedule or Form, is received by SH Group which indicates
that, or SH Group otherwise becomes aware that, a "person" or "group" (within
the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) has become,
directly or indirectly, the "beneficial owner", by way of merger, consolidation
or otherwise, of 35% or more of the voting power of the voting capital stock of
SH Group and (B) any such person or group has become, directly or indirectly,
the beneficial owner of a greater percentage of the voting capital stock of SH
Group than is beneficially owned by the Initial Investors, or (iii) the sale,
lease or transfer of all or substantially all of the assets of SH Group to any
person or group (other than the Initial Investors or their Related Parties (as
defined below)), or (iv) during any period of two consecutive calendar years,
individuals who at the beginning of such period constituted the Board of
Directors of SH Group (together with any Continuing Directors) cease for any
reason to constitute a majority of the directors of SH Group, then in office.
"Related Party" with respect to any Initial Investor means (A) any controlling
stockholder, 80% (or more) owned Subsidiary, or spouse, or immediate family
member (in the case of any individual) of such Initial Investor or (B) any
trust, corporation, partnership or other entity, the beneficiaries,
stockholders, partners, owners or persons beneficially holding an 80% or more
controlling interest of which consist of such Initial Investor and/or such other
persons referred to in the immediately preceding clause (A).
"Consolidated EBITDA" means, with respect to SH Group and its Subsidiaries
for any period, the sum of, without duplication, (i) the Consolidated Net Income
for such period, plus (ii) the Fixed Charges for such period, plus (iii)
provision for taxes based on income or profits for such period (to the extent
such income or profits were included in computing Consolidated Net Income for
such period), plus (iv) consolidated depreciation, amortization and other
non-cash charges of SH Group and its Subsidiaries required to be reflected as
expenses on the books and records of SH Group, minus (v) cash payments with
respect to any non-recurring, non-cash charges previously added back pursuant to
clause (iv), and (vi) excluding the impact of foreign currency translation.
Notwithstanding the foregoing, the provision for taxes based on the income or
profits of, and the depreciation and amortization and other non-cash charges of,
a Subsidiary of a Person shall be added to Consolidated Net Income to compute
Consolidated EBITDA only to the extent (and in the same proportion) that the Net
Income of such Subsidiary was included in calculating the Consolidated Net
Income of such Person and only if a corresponding amount would be permitted at
the date of determination to be paid as a dividend to SH Group by such
Subsidiary without prior approval (that has not been obtained), pursuant to the
terms of its charter and all agreements, instruments, judgments, decrees,
orders, statutes, rules and governmental regulations applicable to that
Subsidiary or its stockholders.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its 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 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 Subsidiary thereof, (ii) the Net Income of any
Subsidiary shall be excluded to the extent that the declaration or payment of
dividends or similar distributions by that Subsidiary of that Net Income is not
at the date of determination permitted without any prior governmental approval
(which 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 Subsidiary or its
stockholders, (iii) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition shall
be excluded, (iv) the cumulative effect of a change in accounting principles
shall be excluded, (v) the Net Income of, or any dividends or other
distributions from, any Unrestricted Subsidiary, to the extent otherwise
included, shall be excluded, whether or not distributed to SH Group or one of
its Subsidiaries, and (vi) all other extraordinary gains and extraordinary
losses shall be excluded.
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"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of SH Group who (i) was a member of such Board of
Directors on the Issue Date, (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 of Directors at the time of such nomination or
election or (iii) was appointed by AIP pursuant to the Shareholders Agreement.
"Credit Agreement" means that certain Credit Agreement, dated as of the
date of the Indenture, by and among the Company and NationsBank, N.A., as
administrative agent, and the lenders parties thereto, including any related
notes, guarantees, collateral documents, instruments and agreements executed in
connection therewith, and in each case as amended, modified, renewed, refunded,
replaced, extended, restated or refinanced from time to time, including any
agreement restructuring or adding SH Group or any of its Subsidiaries as
additional borrowers or guarantors thereunder and whether by the same or any
other agent, lender or group of lenders; provided that the total amount of
Indebtedness is not thereby increased beyond the amount that may then be
incurred at such time pursuant to the covenant described under the caption "--
Incurrence of Indebtedness and Issuance of Preferred Stock".
"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 date
on which the Debentures mature.
"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 an underwritten public offering of Equity Interests
of SH Group, other than Disqualified Stock, pursuant to a registration statement
filed with the Commission in accordance with the Securities Act.
"Existing Indebtedness" means the Indebtedness of SH Group and its
Subsidiaries (other than Indebtedness under the Credit Agreement) in existence
on the date of the Indenture, until such amounts are repaid.
"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 Subsidiaries for such period, whether paid or accrued (including, without
limitation, amortization of original issue discount, amortization of deferred
financing fees, non-cash interest payments, the interest component of any
deferred payment obligations, the interest component of all payments associated
with Capital Lease Obligations, 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), (ii) the
consolidated interest expense of such Person and its Subsidiaries that was
capitalized during such period, (iii) any interest expense on Indebtedness of
another Person that is Guaranteed by such Person or one of its 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) the product of (a) all
cash dividend payments (and non cash dividend payments in the case of a Person
that is a Subsidiary) on any series of preferred stock of such Person payable to
a party other than SH Group or a Wholly Owned Subsidiary, times (b) a fraction,
the numerator of which is one and the denominator of which is one minus the then
current combined federal state and local statutory tax rate of such Person,
expressed as a decimal, on a consolidated basis and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means, with respect to any Person for any
period, the ratio of the Consolidated EBITDA of such Person and its Subsidiaries
for such period to the Fixed Charges of such Person and its Subsidiaries for
such period. In the event that SH Group or any of its Subsidiaries incurs,
assumes, retires, Guarantees or redeems any Indebtedness (other than revolving
credit borrowings) or issues preferred stock subsequent to the commencement of
the four-quarter reference period for which the Fixed Charge Coverage Ratio is
being calculated but on or prior to the date on which the event for which the
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calculation of the Fixed Charge Coverage Ratio is made (the "Calculation Date"),
then the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect
to such incurrence, assumption, retirement, Guarantee or redemption of
Indebtedness, or such issuance or redemption of preferred stock, as if the same
had occurred at the beginning of the applicable four-quarter reference period.
For purposes of making the computation referred to above, (i) acquisitions that
have been made by SH Group or any of its Subsidiaries, including through mergers
or consolidations and including any related financing and refinancing
transactions, during the four-quarter reference period 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 (ii) the
Consolidated EBITDA attributable to discontinued operations, as determined in
accordance with GAAP, and operations or businesses disposed of on or prior to
the Calculation Date, shall be excluded, and (iii) the Fixed Charges
attributable to discontinued operations, as determined in accordance with GAAP,
and operations or businesses disposed of on or prior to the Calculation Date,
shall be excluded, but only to the extent that the obligations giving rise to
such Fixed Charges will not be obligations of the referent Person or any of its
Subsidiaries following the Calculation Date.
"Foreign Subsidiary" means any Wholly Owned Subsidiary organized and
incorporated in a jurisdiction outside of the United States.
"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 date of the Indenture.
"Guarantee" means any obligation, contingent or otherwise, of any person
directly or indirectly guaranteeing any Indebtedness of any Person and any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness of such Person (whether arising by virtue of agreements to keep
well, to purchase assets, goods, letters of credit, reimbursement agreements,
securities or services, to take-or-pay or to maintain financial statement
conditions or otherwise) or (ii) entered into for the purpose of assuring in any
other manner the obligee of such Indebtedness of the payment thereof or to
protect such obligee against loss in respect thereof (in whole or in part);
provided, however, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has corresponding meaning.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) currency exchange or interest rate swap agreements,
interest rate cap agreements and interest rate collar agreements and (ii) other
agreements or arrangements designed to protect such Person against fluctuations
in interest rates or currency exchange rates.
"Holder" means a Person in whose name a Debenture is registered on the
Registrar's books.
"Indebtedness" means, with respect to any Person, any (i) 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
incurred in the ordinary course of business, but only (other than with respect
to, letters of credit and Hedging Obligations) if and to the extent any of the
foregoing indebtedness would appear as a liability upon a consolidated balance
sheet of such Person prepared in accordance with GAAP, (ii) all Obligations of
such Person with respect to any conditional sale or title retention agreement,
(iii) the amount of all Obligations of such Person with respect to redemption,
repayment or other repurchase of any Disqualified Stock or, with respect to any
Subsidiary of such Person, any preferred stock, (iv) all indebtedness of others
secured by a Lien on any asset of such Person (whether or not such indebtedness
is assumed by such Person) and, (v) to the extent not otherwise included, the
Guarantee by such Person of any indebtedness of any other Person.
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"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 Indebtedness or other obligations, but
excluding guarantees of Indebtedness of SH Group or any Wholly Owned Subsidiary
to the extent such guarantee is permitted by the covenant "Incurrence of
Indebtedness and Issuance of Preferred Stock"), advances or capital
contributions (excluding commission, travel and similar advances to officers and
employees made in the ordinary course of business), transfers of assets outside
the ordinary course of business other than Asset Sales, purchases or other
acquisitions for consideration of Indebtedness, Equity Interests or other
securities and all other items that are or would be classified, as investments
on a balance sheet prepared in accordance with GAAP; provided that an
acquisition of assets, Equity Interests or other securities by SH Group for
consideration consisting of common equity securities of SH Group shall not be
deemed to be an Investment.
"Issue Date" means the date of first issuance of the Debentures under the
Indenture.
"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).
"Liquidated Damages" means, the amounts payable by SH Group, if any,
pursuant to the provisions described under "Registration Rights; Liquidated
Damages."
"Net Cash Proceeds" means the aggregate amount of cash or Cash Equivalents
received by SH Group in the case of a sale or equity contribution in respect of
Qualified Capital Stock plus, in the case of an issuance of Qualified Capital
Stock upon any exercise, exchange or conversion of securities (including
options, warrants, rights and convertible or exchangeable debt) of SH Group that
were issued for cash after the Issue Date, the amount of cash originally
received by SH Group upon the issuance of such securities (including options,
warrants, rights and convertible or exchangeable debt) less, the sum of all
payments, fees, commissions, and customary and reasonable expenses (including,
without limitation, the fees and expenses of legal counsel and investment
banking fees and expenses) incurred in connection with such sale or equity
contribution in respect of Qualified Capital Stock.
"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 leaseback transactions) or (b) the
disposition of any securities by such Person or any of its Subsidiaries or the
extinguishment of any Indebtedness of such Person or any of its 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 and Cash Equivalents received by SH
Group or any of its Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
noncash consideration received in any Asset Sale) and, with respect to the
covenant "Restricted Payments," by SH Group or any Subsidiary in respect of the
sale of an Unrestricted Subsidiary and the sale, liquidation or repayment for
cash of a Restricted Investment, in each case, net of the direct costs relating
thereto (including, without limitation, legal, accounting and investment banking
fees, and sales commissions) and any relocation expenses incurred as a result
thereof, taxes paid or payable as a result thereof (after taking into account
any available tax credits or deductions and any tax-sharing arrangements), and
any reserve for adjustment in respect of the sale price of such asset or assets
established in accordance with GAAP.
"Note Indenture" means the Indenture governing the Senior Subordinated
Notes.
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"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damage and other liabilities payable under the
documentation governing any Indebtedness.
"Permitted Investments" means (a) any Investments in any of the Senior
Subordinated Notes, (b) any Investments in SH Group or in a Wholly Owned
Subsidiary of SH Group and that is engaged in one or more Related Businesses,
(c) any Investments in Cash Equivalents; (d) Investments by SH Group or any
Subsidiary of SH Group in a Person if as a result of such Investment (i) such
Person becomes a Wholly Owned Subsidiary of SH Group that is engaged in one or
more Related Businesses or (ii) such Person is merged, consolidated or
amalgamated with or into, or transfers or conveys substantially all of its
assets to, or is liquidated into, SH Group or a Wholly Owned Subsidiary of SH
Group and that is engaged in one or more Related Businesses; (e) Investments
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 "--Repurchase at the Option of Holders--Asset Sales"; (f)
Investments outstanding as of the date of the Indenture; (g) Investments in the
form of promissory notes of members of SH Group's management in consideration of
the purchase by such members of Equity Interests (other than Disqualified Stock)
in SH Group; (h) Investments which constitute Existing Indebtedness of SH Group
or any of its Subsidiaries; (i) accounts receivable, endorsements for collection
or deposits arising in the ordinary course of business; and (j) other
Investments in any Person or Persons that do not in the aggregate exceed $10.0
million at any time outstanding; provided, however, that to the extent there
would be, and to avoid, any duplication in determining the amounts of
investments outstanding under this clause (j), any amounts which were credited
under clause (c) of the covenant "Restricted Payments" shall reduce the amounts
outstanding under this clause (j).
"Permitted Liens" means (i) Liens securing Indebtedness outstanding under
the Credit Agreement in an aggregate principal amount at any time outstanding
not to exceed amounts permitted under the covenant entitled "Incurrence of
Indebtedness and Issuance of Preferred Stock"; (ii) Liens in favor of SH Group
or a Subsidiary of SH Group; (iii) Liens on property of a Person existing at the
time such Person is merged into or consolidated with SH Group or any Subsidiary
of SH Group, including Liens securing Permitted Refinancing Indebtedness with
respect thereto; 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 SH Group; (iv)
Liens on property existing at the time of acquisition thereof by SH Group or any
Subsidiary of SH Group, provided that such Liens were in existence prior to the
contemplation of such acquisition; (v) Liens to secure the performance of
statutory obligations, surety or appeal bonds, performance bonds or other
obligations of a like nature incurred in the ordinary course of business; (vi)
Liens existing on the date of the Indenture; (vii) 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 concluded, provided that any reserve or other appropriate provision
as shall be required in conformity with GAAP shall have been made therefor;
(viii) Liens incurred in the ordinary course of business of SH Group or any
Subsidiary of SH Group with respect to obligations that do not exceed in the
aggregate $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 the property or materially
impair the use thereof in the operation of business by SH Group or such
Subsidiary; (ix) Liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance and
other types of social security; (x) easements, rights-of-way, restrictions,
minor defects or irregularities in title and other similar charges or
encumbrances not interfering in any material respect with the business of SH
Group or any of its Subsidiaries, (xi) Purchase Money Liens (including
extensions and renewals thereof); (xii) Liens securing reimbursement obligations
with respect to letters of credit which encumber only documents and other
property relating to such letters of credit and the products and proceeds
thereof; (xiii) judgment and attachment Liens not giving rise to an Event of
Default; (xiv) Liens encumbering deposits made to secure obligations arising
from statutory, regulatory, contractual or warranty requirements; (xv) Liens
arising out of consignment or similar arrangements for the sale of goods; (xvi)
any interest or title of a lessor in property subject to any capital lease
obligation or operating lease; and (xvii) Liens on assets of Subsidiaries with
respect to Acquired Indebtedness (including Permitted Refinancing Indebtedness
with respect thereto), provided, such Liens are only on assets or property
acquired with such Acquired Indebtedness and that such
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Liens were not created in contemplation of or in connection with such
Acquisition; and (xviii) Liens granted by a Foreign Subsidiary to secure
Indebtedness of such Foreign Subsidiary.
"Permitted Refinancing Indebtedness" means any Indebtedness of SH Group or
any of its Subsidiaries issued in exchange for, or the net proceeds of which are
used to extend, refinance, renew, replace, defease or refund other Indebtedness
of SH Group or any of its Subsidiaries; provided that: (a) the principal amount
of such Permitted Refinancing Indebtedness does not exceed (after deduction of
reasonable and customary fees and expenses incurred in connection with such
refinancing and the amount of any premium or prepayment penalty paid in
connection with such refinancing transaction to the extent in accordance with
the terms of the document governing such Indebtedness (except for any
modification to any such document made in connection with or in contemplation of
such refinancing) the lesser of (i) the principal amount of the Indebtedness so
extended refinanced, renewed, replaced, defeased or refunded; and (ii) if such
Indebtedness being refinanced was issued with an original issue discount, the
accreted value thereof (as determined in accordance with GAAP) at the time of
such refinancing, plus, in each case accrued interest on such Indebtedness being
refinanced; (b) such Permitted Refinancing Indebtedness has a Weighted Average
Life to Maturity equal to or greater than the Weighted Average Life to Maturity
of, the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; (c) if the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded is subordinated in right of payment to the Debentures, such
Permitted Refinancing Indebtedness has a final maturity date later than the
final maturity date of, and is subordinated in right of payment to, the
Debentures on terms at least as favorable to the Holders of Debentures as those
contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; and (d) such Indebtedness
is incurred either by SH Group or by the Subsidiary who is the obligor on the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded.
"Purchase Money Lien" means a Lien granted on an asset or property to
secure a Purchase Money Obligation permitted to be incurred under the Indenture
and incurred solely to finance the acquisition, including, in the case of a
Capital Lease, the lease, of such asset or property; provided, however, that
such Lien encumbers only such asset or property and is granted within 180 days
of such acquisition.
"Purchase Money Obligations" of any person means any obligations of such
person to any seller or any other person incurred or assumed to finance solely
the acquisition, including, in the case of a Capital Lease, the lease, of real
or personal property to be used in the business of such person or any of its
Subsidiaries in an amount that is not more than 100% of the cost of such
property, and incurred within 180 days after the date of such acquisition
(excluding accounts payable to trade creditors incurred in the ordinary course
of business).
"Qualified Capital Stock" means any Capital Stock of SH Group that is not
Disqualified Stock.
"Related Business" means the business conducted (or proposed to be
conducted) by SH Group and its Subsidiaries as of the Issue Date and any and all
businesses that in the good faith judgment of the Board of Directors of SH Group
are materially related businesses, including reasonable extensions or expansions
thereof.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Senior Subordinated Notes" means the 10 5/8% Senior Subordinated Notes due
2008 of Steel Heddle Mfg. Co.
"Shareholders Agreement" means the shareholders agreement by and between SH
Group and certain of its shareholders.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Exchange Act, as such Regulation is in effect on the date
hereof.
"Stated Maturity" when used with respect to any Debenture, means June 1,
2009.
"Steel Heddle Mfg. Co." means Steel Heddle Mfg. Co., a Pennsylvania
corporation.
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"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 of one or more
Subsidiaries of such Person (or any combination thereof). Unrestricted
Subsidiaries shall not be included in the definition of Subsidiary for any
purposes of the Indenture (except, as the context may otherwise require, for
purposes of the definition of "Unrestricted Subsidiary").
"Unrestricted Subsidiary" means (i) any Subsidiary that is designated by
the Board of Directors as an Unrestricted Subsidiary pursuant to a Board
Resolution; but only to the extent that such Subsidiary: (a) has no Indebtedness
other than Non-Recourse Debt; (b) is not party to any agreement, contract,
arrangement or understanding with SH Group or any Subsidiary of SH Group unless
the terms of any such agreement, contract, arrangement or understanding are no
less favorable to SH Group or such Subsidiary than those that might be obtained
at the time from Persons who are not Affiliates of SH Group; (c) is a Person
with respect to which neither SH Group nor any of the Subsidiaries has any
direct or indirect obligation to subscribe for additional Equity Interests or
maintain or preserve such Person's financial condition or to cause such Person
to achieve any specified level of operating results; and (d) has not guaranteed
or otherwise directly or indirectly provided credit support for any Indebtedness
of SH Group or any of its Subsidiaries, and (ii) any Subsidiary of an
Unrestricted Subsidiary. Any such designation by the Board of Directors shall be
evidenced to the Trustee by filing with the Trustee a certified copy of the
Board Resolutions giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing conditions and was
permitted by the covenant described above under the caption "Certain
Covenants--Restricted Payments." If, at any time, any Unrestricted Subsidiary
would fail to meet the foregoing requirements as an Unrestricted Subsidiary, it
shall thereafter cease to be an Unrestricted Subsidiary for purposes of the
Indenture and any Indebtedness of such Subsidiary shall be deemed to be incurred
by a Subsidiary of SH Group as of such date (and, if such Indebtedness is not
permitted nor incurred as of such date under the covenant described under the
caption "Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred
Stock," SH Group shall be in default of such covenant). The Board of Directors
of SH Group may at any time designate any Unrestricted Subsidiary to be a
Subsidiary; provided, that such designation shall be deemed to be an incurrence
of Indebtedness by a Subsidiary of SH Group of any outstanding Indebtedness of
such Unrestricted Subsidiary and such designation shall only be permitted if (i)
such Indebtedness is permitted under the covenant described under the caption
"Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock,"
and (ii) no Default or Event of Default would be in existence following such
designation.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each of the 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-twentieth) that will elapse
between such date and the making of such payment, by (ii) the then outstanding
principal amount of such Indebtedness.
"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 or by one or more Wholly Owned Subsidiaries of such Person. Unrestricted
Subsidiaries shall not be included in the definition of Wholly Owned Subsidiary
for any purposes of the Indenture (except, as the context may otherwise require,
for purposes of the definition of "Unrestricted Subsidiary.")
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REGISTRATION RIGHTS; LIQUIDATED DAMAGES
SH Group and the Initial Purchaser entered into the Registration Rights
Agreement on May 26, 1998. In the Registration Rights Agreement, SH Group agreed
to file this Registration Statement with the Commission within 75 days of the
Closing Date and to use its best efforts to have it declared effective within
150 days of the Closing Date. SH Group also agreed to use its best efforts to
cause the Exchange Offer Registration Statement (of which this Prospectus is a
part) to be effective continuously, to keep the Exchange Offer open for a period
of not less than 20 business days and cause the Exchange Offer to be consummated
no later than the 30th business day after it is declared effective by the
Commission. To participate in the Exchange Offer, each Holder must represent
that it is not an affiliate of SH Group, it is not engaged in, and does not
intend to engage in, and has no arrangement or understanding with any person to
participate in, a distribution of the New Debentures and it is acquiring the New
Debentures in the Exchange Offer in its ordinary course of business.
If (i) the Exchange Offer is not permitted by applicable law or Commission
policy or (ii) any Holder of Old Debentures which are Transfer Restricted
Securities notifies SH Group prior to the 20th business day following the
consummation of the Exchange Offer that (a) it is prohibited by law or
Commission policy from participating in the Exchange Offer, (b) it may not
resell the New Debentures acquired by it in the Exchange Offer to the public
without delivering a prospectus, and the Prospectus contained in this
Registration Statement is not appropriate or available for such resales by it or
(c) it is a broker-dealer and holds the Old Debentures acquired directly from SH
Group or any of the SH Group's affiliates, SH Group will file with the
Commission a Shelf Registration Statement to register for public resale the
Transfer Restricted Securities held by any such Holder who provides SH Group
with certain information for inclusion in the Shelf Registration Statement.
For the purposes of the Registration Rights Agreement, "Transfer Restricted
Securities" means each Old Debenture until the earliest of the date of which (i)
such Old Debentures is exchanged hereby and entitled to be resold to the public
by the Holder thereof without complying with the prospectus delivery
requirements of the Securities Act, (ii) such Old Debentures has been disposed
of in accordance with the Shelf Registration Statement, (iii) such Old Debenture
is disposed of by a broker-dealer pursuant to the "Plan of Distribution"
contemplated by the Exchange Offer Registration Statement (including delivery of
the Prospectus contained therein) or (iv) such Old Debenture is distributed to
the public pursuant to Rule 144 under the Securities Act.
The Registration Rights Agreement provides that (i) if SH Group fails to
file an Exchange Offer Registration Statement with the Commission on or prior to
the 75th day after the Closing Date, (ii) if the Exchange Offer Registration
Statement is not declared effective by the Commission on or prior to the 150th
day after the Closing Date, (iii) the Exchange Offer is not consummated on or
before the 30th business day after the Exchange Offer Registration Statement is
declared effective, (iv) if obligated to file the Shelf Registration Statement
and SH Group fails to file the Shelf Registration Statement with the Commission
on or prior to the 30th business day after such filing obligation arises, (v) if
obligated to file a Shelf Registration Statement and the Shelf Registration
Statement is not declared effective on or prior to the 90th day after the
obligation to file a Shelf Registration Statement arises or (vi) if the Exchange
Offer Registration Statement or the Shelf Registration Statement, as the case
may be, is declared effective but thereafter ceases to be effective or useable
in connection with resales of the Transfer Restricted Securities, such time of
non-effectiveness or non-useability (each, a "Registration Default"), SH Group
agrees to pay to each Holder of Transfer Restricted Securities affected thereby
liquidated damages ("Liquidated Damages") in an amount equal to $0.05 per week
per $1,000 in principal amount of Transfer Restricted Securities held by such
Holder for each week or portion thereof that the Registration Default continues
for the first 90-day period immediately following the occurrence of such
Registration Default. The amount of the Liquidated Damages shall increase by an
additional $0.05 per week per $1,000 in principal amount of Transfer Restricted
Securities with respect to each subsequent 90 day period until all Registration
Defaults have been cured, up to a maximum amount of Liquidated Damages of $0.50
per week, per $1,000 in principal amount of Transfer Restricted Securities. SH
Group shall not be required to pay Liquidated Damages for more than one
Registration Default at any given time. Following the cure of all Registration
Defaults, the accrual of Liquidated Damages will cease.
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All accrued Liquidated Damages shall be paid by SH Group to Holders
entitled thereto in the same manner as interest payments on the Debentures on
semi-annual damages payment dates which correspond to interest payment dates for
the Debentures.
BOOK-ENTRY; DELIVERY; FORM AND TRANSFER
The Debentures sold to Qualified Institutional Buyers initially will be in
the form of one or more registered global notes without interest coupons
(collectively, the "U.S. Global Notes"). Upon issuance, the U.S. Global Notes
will be deposited with the Trustee, as custodian for DTC, in New York, New York,
and registered in the name of DTC or its nominee, in each case for credit to the
accounts of DTC's Direct and Indirect Participants (as defined below). The
Debentures being offered and sold in offshore transactions in reliance on
Regulation S, if any, initially will be in the form of one or more temporary,
registered, global book-entry notes without interest coupons (the "Reg S
Temporary Global Notes"). The Reg S Temporary Global Notes will be deposited
with the Trustee, as custodian for the DTC, in New York, New York, and
registered in the name of a nominee of DTC (a "Nominee") for credit to the
accounts of Indirect Participants at the Euroclear System ("Euroclear") and
Cedel Bank, societe anonyme ("CEDEL"). During the 40-day period commencing on
the day after the later of the Offering or the original Issue Date (as defined
herein) of the Debentures (the "40-Day Restricted Period"), beneficial interests
in the Reg S Temporary Global Note may be held only through Euroclear or CEDEL,
and, pursuant to DTC's procedures, Indirect Participants that hold a beneficial
interest in the Reg S Temporary Global Note will not be able to transfer such
interest to a person that takes delivery thereof in the form of an interest in
the U.S. Global Notes. Within a reasonable time after the expiration of the
40-Day Restricted Period, the Reg S Temporary Global Notes will be exchanged for
one or more permanent global notes (the "Reg S Permanent Global Notes";
collectively with the Reg S Temporary Global Notes, the "Reg S Global Notes")
upon delivery to DTC of certification of compliance with the transfer
restrictions applicable to the Debentures and pursuant to Regulation S as
provided in the Indenture. After the 40-Day Restricted Period, (i) beneficial
interests in the Reg S Permanent Global Notes may be transferred to a person
that takes delivery in the form of an interest in the U.S. Global Notes and (ii)
beneficial interests in the U.S. Global Notes may be transferred to a person
that takes delivery in the form of an interest in the Reg S Permanent Global
Notes, provided, in each case, that the certification requirements described
below are complied with. See "--Transfers of Interests in One Global Note for
Interests in Another Global Note." All registered global notes are referred to
herein collectively "Global Notes."
Beneficial interests in all Global Notes and all Certificated Notes, if
any, will be subject to certain restrictions on transfer and will bear a
restrictive legend. In addition, transfer of beneficial interests in any Global
Notes will be subject to the applicable rules and procedures of DTC and its
Direct or Indirect Participants (including, if applicable, those of Euroclear
and CEDEL), which may change from time to time.
The Global Notes may be transferred, in whole and not in part, only to
another nominee of DTC or to a successor of DTC or its nominee in certain
limited circumstances. Beneficial interests in the Global Notes may be exchanged
for Debentures in certificated form in certain limited circumstances. See
"--Transfers of Interests in Global Notes for Certificated Notes."
Initially, the Trustee will act as Paying Agent and Registrar. The
Debentures may be presented for registration of transfer and exchange at the
offices of the Registrar.
DEPOSITARY PROCEDURES
DTC has advised SH Group that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Direct Participants") and to facilitate the clearance and settlement of
transactions in those securities between Direct Participants through electronic
book-entry changes in accounts of Participants. The Direct Participants include
securities brokers and dealers (including the Initial Purchaser), banks, trust
companies, clearing corporations and certain other organizations, including
Euroclear and CEDEL. Access to DTC's system is also available to other entities
that clear through or maintain a direct or indirect, custodial relationship with
a Direct Participant (collectively, the "Indirect
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Participants"). DTC may hold securities beneficially owned by other persons only
through the Direct Participants or Indirect Participants and such other persons'
ownership interest and transfer of ownership interest will be recorded only on
the records of the Direct Participant and/or Indirect Participant, and not on
the records maintained by DTC.
DTC has also advised SH Group that, pursuant to DTC's procedures, (i) upon
deposit of the Global Notes, DTC will credit the accounts of the Direct
Participants designated by the Initial Purchaser with portions of the principal
amount of the Global Notes allocated by the Initial Purchaser to such Direct
Participants, and (ii) DTC will maintain records of the ownership interests of
such Direct Participants in the Global Notes and the transfer of ownership
interests by and between Direct Participants. DTC will not maintain records of
the ownership interests of, or the transfer of ownership interests by and
between, Indirect Participants or other owners of beneficial interests in the
Global Notes. Direct Participants and Indirect Participants must maintain their
own records of the ownership interests of, and the transfer of ownership
interests by and between, Indirect Participants and other owners of beneficial
interests in the Global Notes.
Investors in the U.S. Global Notes may hold their interests therein
directly through DTC if they are Direct Participants in DTC or indirectly
through organizations that are Direct Participants in DTC. Investors in the Reg
S Temporary Global Notes may hold their interests therein directly through
Euroclear or CEDEL or indirectly through organizations that are participants in
Euroclear or CEDEL. After the expiration of the 40-Day Restricted Period (but
not earlier), investors may also hold interests in the Reg S Permanent Global
Notes through organizations other than Euroclear and CEDEL that are Direct
Participants in the DTC system. Morgan Guaranty Trust Company of New York,
Brussels office, is the operator and depository of Euroclear and Citibank, N.A.
is the depository of CEDEL (each a "Nominee" of Euroclear and CEDEL,
respectively). Therefore, they will each be recorded on DTC's records as the
holders of all ownership interests held by them on behalf of Euroclear and
CEDEL, respectively. Euroclear and CEDEL will maintain on their records the
ownership interests, and transfers of ownership interests by and between, their
own customer's securities accounts. DTC will not maintain records of the
ownership interests of, or the transfer of ownership interests by and between,
customers of Euroclear or CEDEL. All ownership interests in any Global Notes,
including those of customers' securities accounts held through Euroclear or
CEDEL, may be subject to the procedures and requirements of DTC.
The laws of some states require that certain persons take physical delivery
in definitive, certificated form of securities that they own. This may limit or
curtail the ability to transfer beneficial interests in a Global Note to such
persons. Because DTC can act only on behalf of Direct Participants, which in
turn act on behalf of Indirect Participants and others, the ability of a person
having a beneficial interest in a Global Note to pledge such interest to persons
or entities that are not Direct Participants in DTC, or to otherwise take
actions in respect of such interests, may be affected by the lack of physical
certificates evidencing such interests. For certain other restrictions on the
transferability of the Debentures see "--Reg S Temporary and Reg S Permanent
Global Notes" and "--Transfers of Interests in Global Notes for Certificated
Notes."
EXCEPT AS DESCRIBED IN "TRANSFERS OF INTERESTS IN GLOBAL NOTES FOR
CERTIFICATED NOTES," OWNERS OF BENEFICIAL INTERESTS IN THE GLOBAL NOTES WILL NOT
HAVE DEBENTURES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF
DEBENTURES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS
OR HOLDERS THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Under the terms of the Indenture, SH Group and the Trustee will treat the
persons in whose names the Debentures are registered (including Debentures
represented by Global Notes) as the owners thereof for the purpose of receiving
payments and for any and all other purposes whatsoever. Payments in respect of
the principal, premium, Liquidated Damages, if any, and interest on Global Notes
registered in the name of DTC or its nominee will be payable by the Trustee to
DTC or its nominee as the registered holder under the Indenture. Consequently,
neither SH Group, the Trustee nor any agent of SH Group or the Trustee has or
will have any responsibility or liability for (i) any aspect of DTC's records or
any Direct Participant's or Indirect Participant's records relating to or
payments made on account of beneficial ownership interests in the Global Notes
or for maintaining, supervising or reviewing any of DTC's records or any Direct
Participant's or Indirect
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Participant's records relating to the beneficial ownership interests in any
Global Note or (ii) any other matter relating to the actions and practices of
DTC or any of its Direct Participants or Indirect Participants.
DTC has advised SH Group that its current payment practice (for payments of
principal, interest and the like) with respect to securities such as the
Debentures is to credit the accounts of the relevant Direct Participants with
such payment on the payment date in amounts proportionate to such Direct
Participant's respective ownership interests in the Global Notes as shown on
DTC's records. Payments by Direct Participants and Indirect Participants to the
beneficial owners of the Debentures will be governed by standing instructions
and customary practices between them and will not be the responsibility of DTC,
the Trustee or the Company. Neither the Company nor the Trustee will be liable
for any delay by DTC or its Direct Participants or Indirect Participants in
identifying the beneficial owners of the Debentures, and the Company and the
Trustee may conclusively rely on and will be protected in relying on
instructions from DTC or its nominee as the registered owner of the Debentures
for all purposes.
The Global Notes will trade in DTC's Same-Day Funds Settlement System and,
therefore, transfers between Direct Participants in DTC will be effected in
accordance with DTC's procedures, and will be settled in immediately available
funds. Transfers between Indirect Participants (other than Indirect Participants
who hold an interest in the Debentures through Euroclear or CEDEL) who hold an
interest through a Direct Participant will be effected in accordance with the
procedures of such Direct Participant but generally will settle in immediately
available funds. Transfers between and among Indirect Participants who hold
interests in the Debentures through Euroclear and CEDEL will be effected in the
ordinary way in accordance with their respective rules and operating procedures.
Subject to compliance with the transfer restrictions applicable to the
Debentures described herein, crossmarket transfers between Direct Participants
in DTC, on the one hand, and Indirect Participants who hold interests in the
Notes through Euroclear or CEDEL, on the other hand, will be effected by
Euroclear or CEDEL's respective Nominee through DTC in accordance with DTC's
rules on behalf of Euroclear or CEDEL; however, delivery of instructions
relating to crossmarket transactions must be made directly to Euroclear or
CEDEL, as the case may be, by the counterparty in accordance with the rules and
procedures of Euroclear or CEDEL and within their established deadlines
(Brussels time for Euroclear and United Kingdom time for CEDEL). Indirect
Participants who hold interest in the Notes through Euroclear and CEDEL may not
deliver instructions directly to Euroclear's or CEDEL's Nominee. Euroclear or
CEDEL will, if the transaction meets its settlement requirements, deliver
instructions to its respective Nominee to deliver or receive interests on
Euroclear's or CEDEL's behalf in the relevant Global Note in DTC, and make or
receive payment in accordance with normal procedures for same-day fund
settlement applicable to DTC.
Because of time zone differences, the securities accounts of an Indirect
Participant who holds an interest in the Debentures through Euroclear or CEDEL
purchasing an interest in a Global Note from a Direct Participant in DTC will be
credited, and any such crediting will be reported to Euroclear or CEDEL, during
the European business day immediately following the settlement date of DTC in
New York. Although recorded in DTC's accounting records as of DTC's settlement
date in New York. Euroclear and CEDEL customers will not have access to the cash
amount credited to their accounts as a result of a sale of an interest in a Reg
S Permanent Global Note to a DTC Participant until the European business day for
Euroclear or CEDEL immediately following DTC's settlement date.
DTC has advised SH Group that it will take any action permitted to be taken
by a Holder of Debentures only at the direction of one or more Direct
Participants to whose account interests in the Global Notes are credited and
only in respect of such portion of the aggregate principal amount of the
Debentures as to which such Direct Participant or Direct Participants has or
have given direction. However, if there is an Event of Default under the
Debentures, DTC reserves the right to exchange Global Notes (without the
direction of one or more of its Direct Participants) for legended Notes in
certificated form, and to distribute such certificated forms of Notes to its
Direct Participants. See "--Transfers of Interests in Global Notes for
Certificated Notes."
Although DTC, Euroclear and CEDEL have agreed to the foregoing procedures
to facilitate transfers of interests in the Reg S Permanent Global Notes and in
the U.S. Global Notes among Direct Participants,
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Euroclear and CEDEL, they are under no obligation to perform or to continue to
perform such procedures, and such procedures may be discontinued at any time.
None of the Company, the Initial Purchaser or the Trustee will have any
responsibility for the performance by DTC, Euroclear or CEDEL or their
respective Direct and Indirect Participants of their respective obligations
under the rules and procedures governing any of their operations.
The information in this section concerning DTC, Euroclear and CEDEL and
their book-entry systems has been obtained from sources that the Company
believes to be reliable, but the Company takes no responsibility for the
accuracy thereof.
REG S TEMPORARY AND REG S PERMANENT GLOBAL NOTES
An Indirect Participant who holds an interest in the Reg S Temporary Global
Notes through Euroclear or CEDEL must provide Euroclear or CEDEL, as the case
may be, with a certificate in the form required by the Indenture certifying that
such Indirect Participant is either not a U.S. Person (as defined below) or has
purchased such interests in a transaction that is exempt from the registration
requirements under the Securities Act, and Euroclear or CEDEL, as the case may
be, must provide to the Trustee (or the Paying Agent, if other than the Trustee)
a certificate in the form required by the Indenture prior to (i) the payment of
interest or principal with respect to such Indirect Participant's beneficial
interests in such Reg S Temporary Global Notes or (ii) any exchange of such
beneficial interests for beneficial interests in Reg S Permanent Global Notes.
"U.S. Person" means (i) any individual resident in the United States, (ii)
any partnership or corporation organized or incorporated under the laws of the
United States, (iii) any estate of which an executor or administrator is a U.S.
Person (other than an estate governed by foreign law and of which at least one
executor or administrator is a non-U.S. Person who has sole or shared investment
discretion with respect to its assets), (iv) any trust of which any trustee is a
U.S. Person (other than a trust of which at least one trustee is a non-U.S.
Person who has sole or shared investment discretion with respect to its assets
and no beneficiary of the trust (and no settlor, if the trust is revocable) is a
U.S. Person), (v) any agency or branch of a foreign entity located in the United
States, (vi) any non-discretionary or similar account (other than an estate or
trust) held by a dealer or other fiduciary for the benefit or account of a U.S.
Person, (vii) any discretionary or similar account (other than an estate or
trust) held by a dealer or other fiduciary organized, incorporated or (if an
individual) resident in the United States (other than such an account held for
the benefit or account of a non-U.S. Person), (viii) any partnership or
corporation organized or incorporated under the laws of a foreign jurisdiction
and formed by a U.S. Person principally for the purpose of investing in
securities not registered under the Securities Act (unless it is organized or
incorporated and owned, by "accredited investors" within the meaning of Rule 501
(a) under the Securities Act who are not natural persons, estates or trusts);
provided however that the term "U.S. Person" shall not include (A) a branch or
agency of a U.S. Person that is located and operating outside the United States
for valid business purposes as a locally regulated branch or agency engaged in
the banking or insurance business, (B) any employee benefit plan established and
administered in accordance with the law, customary practices and documentation
of a foreign country and (C) the international organizations set forth in
Section 902(k)(2)(vi) of Regulation S under the Securities Act and any other
similar international organizations, and their agencies, affiliates and pension
plans.
TRANSFERS OF INTERESTS IN ONE GLOBAL NOTE FOR INTERESTS IN ANOTHER GLOBAL NOTE
Prior to the expiration of the 40-Day Restricted Period, an Indirect
Participant who holds an interest in the Reg S Temporary Global Note through
Euroclear or CEDEL will not be permitted to transfer its interest to a U.S.
Person who takes delivery in the form of an interest in U.S. Global Notes. After
the expiration of the 40-Day Restricted Period, an Indirect Participant who
holds an interest in Reg S Permanent Global Notes will be permitted to transfer
its interest to a U.S. Person who takes delivery in the form of an interest in
U.S. Global Notes only upon receipt by the Trustee of a written certification
from the transferor to the effect that such transfer is being made in accordance
with the restrictions on transfer set forth in the legend printed on the Reg S
Permanent Global Notes.
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Prior to the expiration of the 40-Day Restricted Period, a Direct or
Indirect Participant who holds an interest in the U.S. Global Note will not be
permitted to transfer its interests to any person that takes delivery thereof in
the form of an interest in the Reg S Temporary Global Notes. After the
expiration of the 40-Day Restricted Period, a Direct or Indirect Participant who
holds an interest in U.S. Global Notes may transfer its interests to a person
who takes delivery in the form of an interest in Reg S Permanent Global Notes
only upon receipt by the Trustee of a written certification from the transferor
to the effect that such transfer is being made in accordance with Rule 904 of
Regulation S.
Transfers involving an exchange of a beneficial interest in Reg S Global
Notes for a beneficial interest in U.S. Global Notes or vice versa will be
effected by DTC by means of an instruction originated by the Trustee through
DTC/Deposit Withdraw at Custodian (DWAC) system. Accordingly, in connection with
such transfer, appropriate adjustments will be made to reflect a decrease in the
principal amount of the one Global Note and a corresponding increase in the
principal amount of the other Global Note, as applicable. Any beneficial
interest in the one Global Note that is transferred to a person who takes
delivery in the form of the other Global Note will, upon transfer, cease to be
an interest in such first Global Note and become an interest in such other
Global Note and, accordingly, will thereafter be subject to all transfer
restrictions and other procedures applicable to beneficial interests in such
other Global Note for as long as it remains such an interest.
TRANSFERS OF INTERESTS IN GLOBAL NOTES FOR CERTIFICATED NOTES
An entire Global Note may be exchanged for definitive Debentures in
registered, certificated form without interest coupons ("Certificated Notes") if
(i) DTC (x) notifies SH Group that it is unwilling or unable to continue as
depositary for the Global Notes and SH Group thereupon fails to appoint a
successor depositary within 90 days or (y) has ceased to be a clearing agency
registered under the Exchange Act, (ii) SH Group, at its option, notifies the
Trustee in writing that it elects to cause the issuance of Certificated Notes or
(iii) there shall have occurred and be continuing a Default or an Event of
Default with respect to the Notes. In any such case, SH Group will notify the
Trustee in writing that, upon surrender by the Direct and Indirect Participants
of their interest in such Global Note, Certificated Notes will be issued to each
person that such Direct or Indirect Participants and the DTC identify as being
the beneficial owner of the related Debentures.
Beneficial interests in Global Notes held by any Direct or Indirect
Participant may be exchanged for Certificated Notes upon request to DTC, by such
Direct Participant (for itself or on behalf of an Indirect Participant), to the
Trustee in accordance with customary DTC procedures. Certificated Notes
delivered in exchange for any beneficial interest in any Global Note will be
registered in the names, and issued in any approved denominations, requested by
DTC on behalf of such Direct or Indirect Participants (in accordance with DTC's
customary procedures).
In all cases described herein, such Certificated Notes will bear a
restrictive legend unless SH Group determines otherwise in compliance with
applicable law.
Neither SH Group, nor the Trustee will be liable for any delay by the
holder of the Global Notes or DTC in identifying the beneficial owners of Notes,
and SH Group and the Trustee may conclusively rely on, and will be protected in
relying on, instructions from the holder of the Global Note or DTC for all
purposes.
TRANSFERS OF CERTIFICATED NOTES FOR INTERESTS IN GLOBAL NOTES
Certificated Notes may only be transferred if the transferor first delivers
to the Trustee a written certificate (and in certain circumstances, an opinion
of counsel) confirming that, in connection with such transfer, it has complied
with the restrictions on transfer required by applicable law.
SAME DAY SETTLEMENT AND PAYMENT
The Indenture requires that payments in respect of the Debentures
represented by the Global Notes (including principal, premium, if any, interest
and Liquidated Damages, if any) be made by wire transfer of
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immediately available same day funds to the accounts specified by the holder of
interests in such Global Note. With respect to Certificated Notes, SH Group will
make all payments of principal, premium, if any, interest and Liquidated
Damages, if any, by wire transfer of immediately available same 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. SH Group expects
that secondary trading in the Certificated Notes will also be settled in
immediately available funds.
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Debentures were originally sold by SH Group on May 26, 1998 to the
Initial Purchaser pursuant to the Purchase Agreement. The Initial Purchaser
subsequently resold the Old Debentures to qualified institutional buyers in
reliance on Rule 144A under the Securities Act. As a condition to the Purchase
Agreement, SH Group entered into the Registration Rights Agreement with the
Initial Purchaser pursuant to which SH Group agreed, for the benefit of the
holders of the Old Debentures, to, among other things, (i) file with the
Commission the Exchange Offer Registration Statement within 75 days after the
Closing Date of the Exchange Offer and (ii) cause the Exchange Offer
Registration Statement to be declared effective under the Securities Act within
150 days after the Closing Date. SH Group will keep the Exchange Offer open for
not less than 20 business days (or longer if required by applicable law) after
the date on which notice of the Exchange Offer is mailed to the holders of the
Old Debentures. For each Old Debenture surrendered to SH Group pursuant to the
Exchange Offer, the holder of such Old Debenture will receive a New Debenture
having a principal amount equal to that of the surrendered Old Debenture.
Interest on each New Debenture will accrue from the date of its original issue.
Under existing interpretations of the staff of the Commission contained in
several no-action letters to third parties, the New Debentures would in general
be freely tradeable after the Exchange Offer without further registration under
the Securities Act. However, any purchaser of Old Debentures who is an
"affiliate" of SH Group or who intends to participate in the Exchange Offer for
the purpose of distributing the New Debentures (i) will not be able to rely on
the interpretation of the staff of the Commission, (ii) will not be able to
tender its Old Debentures in the Exchange Offer and (iii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any sale or transfer of the Old Debentures, unless such sale or
transfer is made pursuant to an exemption from such requirements.
As contemplated by these no-action letters and the Registration Rights
Agreement, each holder accepting the Exchange Offer is required to represent to
SH Group in the Letter of Transmittal that (i) the New Debentures are to be
acquired by the holder or the person receiving such New Debentures, 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 Debentures, (iii) the holder or any such other person
has no arrangement or understanding with any person to participate in the
distribution of the New Debentures, (iv) neither the holder nor any such other
person is an "affiliate" of SH Group 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 Debentures it must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale of the New Debentures and cannot rely on such no-action letters. As
indicated above, each Participating Broker-Dealer that receives a New Debenture
for its own account in exchange for Old Debentures must acknowledge that it (i)
acquired the Old Debentures for its own account as a result of market-making
activities or other trading activities, (ii) has not entered into any
arrangement or understanding with SH Group or any "affiliate" of SH Group
(within the meaning of Rule 405 under the Securities Act) to distribute the New
Debentures to be received in the Exchange Offer and (iii) will deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resale of such New Debentures. For a description of the procedures for such
resales by Participating Broker-Dealers, see "Plan of Distribution."
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In the event that changes in the law or the applicable interpretations of
the staff of the Commission do not permit SH Group to effect such an Exchange
Offer, or if for any other reason the Exchange Offer is not consummated or if
any holder of the Old Debentures (other than an "affiliate" of SH Group or the
Initial Purchaser) is not eligible to participate in the Exchange Offer, SH
Group will (a) file the Shelf Registration Statement covering resales of the Old
Debentures, (b) use its reasonable best efforts to cause the Shelf Registration
Statement to be declared effective under the Securities Act and (c) use its
reasonable best efforts to keep effective the Shelf Registration Statement until
the earlier of two years after its effective date and such time as all of the
applicable Old Debentures have been sold thereunder. SH Group will, in the event
of the filing of the Shelf Registration Statement, provide to each applicable
holder of the Old Debentures copies of the prospectus which is a part of the
Shelf Registration Statement, notify each such holder when the Shelf
Registration Statement has become effective and take certain other actions as
are required to permit unrestricted resales of the Old Debentures. A holder of
Old Debentures that sells such Old Debentures pursuant to the Shelf Registration
Statement generally will be required to be named as a selling securityholder 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 which are applicable to such a holder (including
certain indemnification obligations). In addition, each holder of the Old
Debentures will be required to deliver information to be used in connection with
the Shelf Registration Statement and to provide comments on the Shelf
Registration Statement within the time periods set forth in the Registration
Rights Agreement in order to have their Old Debentures included in the Shelf
Registration Statement and to benefit from the provisions set forth in the
following paragraph.
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 is filed as an exhibit to the Exchange Offer Registration Statement of
which this Prospectus is a part.
Following the consummation of the Exchange Offer, holders of the Old
Debentures who were eligible to participate in the Exchange Offer but who did
not tender their Old Debentures will not have any further registration rights
and such Old Debentures will continue to be subject to certain restrictions on
transfer. Accordingly, the liquidity of the market for such Old Debentures could
be adversely affected.
TERMS OF THE EXCHANGE
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, SH Group will accept any and all Old
Debentures validly tendered and not withdrawn prior to 5:00 p.m., New York City
time, on the Expiration Date. SH Group will issue $1,000 principal amount of New
Debentures in exchange for each $1,000 principal amount of outstanding Old
Debentures accepted in the Exchange Offer. Holders may tender some or all of
their Old Debentures pursuant to the Exchange Offer. However, Old Debentures may
be tendered only in integral multiples of $1,000.
The form and terms of the New Debentures are the same as the form and terms
of the Old Debentures except that (i) the New Debentures bear a Series B
designation and a different CUSIP Number from the Old Debentures, (ii) the New
Debentures have been registered under the Securities Act and hence will not bear
legends restricting the transfer thereof and (iii) the holders of the New
Debentures will not be entitled to certain rights under the Registration Rights
Agreement, including the provisions providing for an increase in the interest
rate on the Old Debentures in certain circumstances relating to the timing of
the Exchange Offer, all of which rights will terminate when the Exchange Offer
is terminated. The New Debentures will evidence the same debt as the Old
Debentures and will be entitled to the benefits of the Indenture.
As of the date of this Prospectus, $29,250,000 aggregate principal amount
at maturity of Old Debentures were outstanding. This Prospectus and the Letter
of Transmittal will be mailed initially to the holders of record of the Old
Debentures as of the close of business on , 1998.
Holders of Old Debentures do not have any appraisal or dissenters' rights
under the General Corporation Law of Delaware or the Indenture in connection
with the Exchange Offer. SH Group intends to conduct the
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Exchange Offer in accordance with the applicable requirements of the Exchange
Act and the rules and regulations of the Commission thereunder.
SH Group shall be deemed to have accepted validly tendered Old Debentures
when, as and if SH Group 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 Debentures from SH Group.
If any tendered Old Debentures 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 Debentures will be
returned, without expense, to the tendering holder thereof as promptly as
practicable after the Expiration Date.
Holders who tender Old Debentures 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
Debentures pursuant to the Exchange Offer. SH Group 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
, 1998, unless SH Group, 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, SH Group 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.
SH Group reserves the right, in its sole discretion, (i) to delay accepting
any Old Debentures, 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 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.
YIELD AND INTEREST ON THE NEW DEBENTURES
The yield and interest on the New Debentures is 13 3/4% (computed on a
semi-annual bond equivalent basis) calculated from May 26, 1998. The New
Debentures will accrete at a rate of 13 3/4% compounded semi-annually, to an
aggregate principal amount of $29,250,000 on June 1, 2003. Cash interest will
not accrue on the New Debentures prior to June 1, 2003. Commencing June 1, 2003,
cash interest on the New Debentures will accrue and be payable, at a rate of
13 3/4% per annum, semi-annually in arrears on each June 1 and December 1.
PROCEDURES FOR TENDERING
Only a holder of Old Debentures may tender such Old Debentures in the
Exchange Offer. To tender in the Exchange Offer, a properly completed and duly
executed Letter of Transmittal (or facsimile thereof), with any required
signature guarantee, or (in the case of a book-entry transfer), an Agent's
Message in lieu of the Letter of Transmittal, and any other required documents,
must be 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.
In addition, prior to 5:00 p.m. New York City time, on the Expiration Date
either (a) certificates for tendered Old Debentures must be received by the
Exchange Agent at such address or (b) such Old Debentures must be transferred
pursuant to the procedures for book-entry transfer described below (and a
confirmation of such tender received by the Exchange Agent, including an Agent's
Message if the tendering holder has not delivered a Letter of Transmittal).
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The term "Agent's Message" means a message transmitted by DTC, received by
the Exchange Agent and forming part of the confirmation of a book-entry
transfer, which states that DTC has received an express acknowledgment from the
participant in DTC tendering Old Debentures which are the subject of such book-
entry confirmation, that such participant has received and agrees to be bound by
the terms of the Letter of Transmittal and that SH Group may enforce such
agreement against such participant. In the case of an Agent's Message relating
to guaranteed delivery, the term means a message transmitted by DTC and received
by the Exchange Agent, which states that DTC has received an express
acknowledgment from the participant in DTC tendering Old Debentures that such
participant has received and agrees to be bound by the Notice of Guaranteed
Delivery.
By executing the Letter of Transmittal, each holder will make to SH Group
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 SH Group will
constitute agreement between such holder and SH Group in accordance with the
terms and subject to the conditions set forth herein and in the Letter of
Transmittal.
THE METHOD OF DELIVERY OF OLD DEBENTURES AND THE LETTER OF TRANSMITTAL 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 DEBENTURES SHOULD BE SENT TO SH GROUP.
HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST
COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Old Debentures 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 "Instruction
to Registered Holder and/or Book-Entry Transfer Facility Participant from 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 a member firm of the Medallion System (an
"Eligible Institution") unless the Old Debentures 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) 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 an
Eligible Institution.
If the Letter of Transmittal is signed by a person other than the
registered holder of any Old Debentures listed therein, such Old Debentures 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
Debentures with the signature thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Old Debentures or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and evidence
satisfactory to SH Group of their authority to so act must be submitted with the
Letter of Transmittal.
SH Group understands that the Exchange Agent will make a request promptly
after the date of this Prospectus to establish accounts with respect to the Old
Debentures 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 Debentures by causing such Book-Entry
Transfer Facility to transfer such Old Debentures into the Exchange Agent's
account with respect to the Old Debentures in accordance with the Book-Entry
Transfer Facility's procedures for such transfer. Although delivery of the Old
Debentures may be effected through book-entry transfer into the Exchange Agent's
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<PAGE> 92
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 a book-entry transfer) an Agent's Message in lieu
of the Letter of Transmittal, 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.
The Exchange Agent and DTC have confirmed that the Exchange Offer is
eligible for the DTC Automated Tender Offer Program ("ATOP"). Accordingly, DTC
participants may electronically transmit their acceptance of the Exchange Offer
by causing DTC to transfer Old Debentures to the Exchange Agent in accordance
with DTC's ATOP procedures for transfer. DTC will then send an Agent's Message
to the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Debentures and withdrawal of tendered Old
Debentures will be determined by SH Group in its sole discretion, which
determination will be final and binding. SH Group reserves the absolute right to
reject any and all Old Debentures not properly tendered or any Old Debentures SH
Group's acceptance of which would, in the opinion of counsel for SH Group, be
unlawful. SH Group also reserves the right in its sole discretion to waive any
defects, irregularities or conditions of tender as to particular Old Debentures.
SH Group'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 Debentures must be cured within such time as SH
Group shall determine. Although SH Group intends to notify holders of defects or
irregularities with respect to tenders of Old Debentures, neither SH Group, the
Exchange Agent nor any other person shall incur any liability for failure to
waive such notification. Tenders of Old Debentures will not be deemed to have
been made until such defects or irregularities have been cured or waived. Any
Old Debentures 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.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Debentures and (i) whose Old
Debentures are not immediately available, (ii) who cannot deliver their Old
Debentures, the Letter of Transmittal 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 Debentures and the principal amount of Old Debentures tendered,
stating that the tender is being made thereby and guaranteeing that, within
five 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 Debentures (or a confirmation of
book-entry transfer of such Old Debentures 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), as well as the certificate(s) representing all tendered
Old Debentures in proper form for transfer (or a confirmation of book-entry
transfer of such Old Debentures 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 within five New
York Stock Exchange trading days after the Expiration Date.
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<PAGE> 93
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Old Debentures according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Debentures 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 Debentures 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 Debentures to be
withdrawn (the "Depositor"), (ii) identify the Old Debentures to be withdrawn
(including the certificate number(s) and principal amount of such Old
Debentures, or, in the case of Old Debentures 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 Debentures
were tendered (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Trustee with respect to the Old
Debentures register the transfer of such Old Debentures into the name of the
person withdrawing the tender and (iv) specify the name in which any such Old
Debentures 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 SH Group whose determination shall be
final and binding on all parties. Any Old Debentures so withdrawn will be deemed
not to have been validly tendered for purposes of the Exchange Offer and no New
Debentures will be issued with respect thereto unless the Old Debentures so
withdrawn are validly retendered. Any Old Debentures 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
Debentures may be retendered by following one of the procedures described above
under "--Procedures for Tendering" at any time prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, SH Group shall not be
required to accept for exchange, or exchange New Debentures for, any Old
Debentures, and may terminate or amend the Exchange Offer as provided herein
before the acceptance of such Old Debentures, 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 SH Group, might materially impair the
ability of SH Group to proceed with the Exchange Offer or any material
adverse development has occurred in any existing action or proceeding with
respect to SH Group 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 SH Group, might materially impair the ability of SH Group to
proceed with the Exchange Offer or materially impair the contemplated
benefits of the Exchange Offer to SH Group; or
(c) any governmental approval has not been obtained, which approval SH
Group shall, in its reasonable discretion, deem necessary for the
consummation of the Exchange Offer as contemplated hereby.
If SH Group determines in its reasonable judgment that any of the
conditions are not satisfied, SH Group may (i) refuse to accept any Old
Debentures and return all tendered Old Debentures to the tendering holders, (ii)
extend the Exchange Offer and retain Old Debentures tendered prior to the
expiration of the Exchange Offer, subject, however, to the rights of holders to
withdraw such Old Debentures (see "--Withdrawal of Tenders") or (iii) waive such
unsatisfied conditions with respect to the Exchange Offer and accept all
properly tendered Old Debentures which have not been withdrawn.
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EXCHANGE AGENT
The United States Trust Company of New York has been appointed as Exchange
Agent for the Exchange Offer. Questions and requests for assistance, requests
for additional copies of this Prospectus or the Letter of Transmittal and
requests for Notice of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
<TABLE>
<S> <C>
By Mail: By Overnight Courier:
United States Trust Company of New York United States Trust Company of New York
P.O. Box 844 Cooper Station 700 Broadway, 13th Floor
New York, New York 10276-0844 Corporate Trust Operations Department
(registered or certified mail recommended) New York, New York 10003
By Hand: By Facsimile Transmission:
United States Trust Company of New York (212) 780-0592
111 Broadway, Lower Level (for Eligible Institutions Only)
New York, New York 10006 For Information or Confirmation by Telephone:
Attn: Corporate Trust Services (800) 548-6565
</TABLE>
DELIVERY OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by SH Group. 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 SH Group and its affiliates.
SH Group has not retained any dealer-manager in connection with the
Exchange Officer and will not make any payments to brokers, dealers, or others
soliciting acceptances of the Exchange Offer. SH Group, 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 SH Group. 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 Debentures will be recorded at the same carrying value as the Old
Debentures, which is face value, as reflected in SH Group's accounting records
on the date of exchange. Accordingly, no gain or loss for accounting purposes
will be recognized by SH Group. The expenses of the Exchange Offer will be
expensed over the term of the New Debentures.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Old Debentures that are not exchanged for New Debentures pursuant to
the Exchange Offer will remain restricted securities. Accordingly, such Old
Debentures may be resold only (i) to SH Group (upon redemption thereof or
otherwise), (ii) so long as the Old Debentures 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 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 SH Group), (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.
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RESALE OF THE NEW DEBENTURES
With respect to resales of New Debentures, based on interpretations by the
staff of the Commission set forth in no-action letters issued to third parties,
SH Group believes that a holder or other person who receives New Debentures,
whether or not such person is the holder (other than a person that is an
"affiliate" of SH Group within the meaning of Rule 405 under the Securities Act)
who receives New Debentures in exchange for Old Debentures 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 Debentures, will be allowed to resell the New Debentures
to the public without further registration under the Securities Act and without
delivering to the purchasers of the New Debentures a prospectus that satisfies
the requirements of Section 10 of the Securities Act. However, if any holder
acquires New Debentures in the Exchange Offer for the purpose of distributing or
participating in a distribution of the New Debentures, 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
Debentures for its own account in exchange for Old Debentures, where such Old
Debentures 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 Debentures.
As contemplated by these no-action letters and the Registration Rights
Agreement, each holder accepting the Exchange Offer is required to represent to
SH Group in the Letter of Transmittal that (i) the New Debentures are to be
acquired by the holder or the person receiving such New Debentures, 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 Debentures, (iii) the holder or any such other person
has no arrangement or understanding with any person to participate in the
distribution of the New Debentures, (iv) neither the holder nor any such other
person is an "affiliate" of SH Group 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 Debentures it must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale of the New Debentures and cannot rely on such no-action letters. As
indicated above, each Participating Broker-Dealer that receives a New Debenture
for its own account in exchange for Old Debentures must acknowledge that it (i)
acquired the Old Debentures for its own account as a result of market-making
activities or other trading activities, (ii) has not entered into any
arrangement with SH Group (within the meaning of Rule 405 under the Securities
Act or understanding with SH Group or any "affiliate" of the Securities Act) to
distribute the New Debentures to be received in the Exchange Offer and (iii)
will deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of such New Debentures. For a description of the
procedures for such resales by Participating Broker-Dealers, see "Plan of
Distribution."
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DESCRIPTION OF OTHER INDEBTEDNESS
THE NOTES
The Old Notes were issued in an aggregate principal amount of $100 million
and will mature on June 1, 2008. The Old Notes were issued pursuant to the
Indenture (the "Note Indenture"), and are senior, subordinated, unsecured,
general obligations of the Company. Interest on the Notes will accrue at the
rate of 10 5/8% per annum from the issue date and will be payable semi-annually
in arrears on each June 1 and December 1, commencing December 1, 1998, to the
holders of record on the immediately preceding May 15 and November 15,
respectively.
At any time on or after June 1, 2003, the Notes may be redeemed at the
option of the Company, 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 below plus accrued and unpaid interest and Liquidated Damages,
if any, thereon to the applicable redemption date if redeemed during the
twelve-month period commencing on June 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2003........................................................ 105.313%
2004........................................................ 103.542%
2005........................................................ 101.771%
2006 and thereafter......................................... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time on or prior to June 1, 2001, the
Company may (but shall not have the obligation to) redeem up to 35% of the
original aggregate principal amount of the Notes at a redemption price of
110.625% of the principal amount thereof in each case plus accrued and unpaid
interest and Liquidated Damages, if any, to the redemption date with Net Cash
Proceeds received by the Company from one or more Equity Offerings; provided,
however, that, in each case at least 65% of the aggregate principal amount of
the Notes originally issued remain outstanding immediately after the occurrence
of such redemption; and provided further, that such redemption shall occur
within 60 days of the date of the closing of each such Equity Offerings.
In the event of a Change of Control (as defined in the Note Indenture),
each holder of Notes will have the right to require the Company to repurchase
such holder's Notes at a purchase price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest, if any, to the purchase date.
The Note Indenture contains certain covenants that limit, among other
things, the ability of the Company to enter into certain mergers or
consolidations, incur additional indebtedness or issue certain preferred equity
interests, pay dividends, redeem capital stock or make certain other restricted
payments and engage in certain transactions with affiliates or related persons.
Under certain circumstances the Company will be required to make an offer to
purchase Notes at a price equal to 100% of the principal amount thereof, plus
accrued interest at the date of purchase with the proceeds of certain Asset
Sales (as defined therein). The 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 Notes or the Note Indenture, a default
under certain indebtedness, the imposition of certain final judgments or
warrants of attachment and certain events occurring under bankruptcy laws. See
"Risk Factors -- Limitation on Access to Cash Flow of Subsidiaries, Holding
Company Structure."
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NEW CREDIT AGREEMENT
The Company entered into the New Credit Agreement among the Company, the
Guarantors (as defined therein), the several lenders from time to time parties
thereto (collectively, the "Lenders"), NationsBank, N.A. as administrative agent
(the "Administrative Agent") and DLJ Capital Funding, Inc. as syndication agent
(collectively, the "Agents"). The following is a summary description of the
principal terms of the New Credit Agreement and the other loan documents. The
description set forth below does not purport to be complete and is qualified in
its entirety by reference to certain agreements setting forth the principal
terms and conditions of the New Credit Agreement, which are available upon
request from the Company. The Company's obligations under the New Credit
Agreement constitute Senior Indebtedness with respect to the Notes.
Structure. The Lenders committed to provide the Company with (i) senior
secured term loan facilities (the "Term Loan Facility") of up to $30.0 million
and (ii) a senior secured revolving credit facility (the "Revolving Credit
Facility") of up to $20.0 million (including letters of credit).
The Company borrowed the full amount of Term Loan Facility and
approximately $3.6 million of Revolving Credit Facility on the closing date
under the New Credit Agreement (i) to partially finance the Acquisition, (ii) to
repay certain existing outstanding indebtedness of the Company and (iii) to pay
certain fees and expenses related to the Acquisition. See "Use of Proceeds."
Thereafter, the New Credit Agreement may be utilized to fund the Company's
working capital requirements, including issuance of stand-by and trade letters
of credit and for other general corporate purposes.
The Term Loan Facility is a single tranche term facility of $30.0 million
which has a maturity of six years, subject to quarterly amortization commencing
in the thirteenth month after the Closing Date, in the following aggregate
annual amounts for the fiscal years ending in: 1999--$3.0 million; 2000--$4.75
million; 2001--$5.75 million; 2002--$6.75 million; 2003--$7.75 million and
2004--$2.0 million. Loans and letters of credit under the Revolving Credit
Facility are available at any time during its six-year term subject to the
fulfillment of customary conditions precedent including the absence of a default
under the New Credit Agreement.
Security; Guaranty. The Company's obligations under the New Credit
Agreement are guaranteed by each of the Company's direct and indirect domestic
subsidiaries. The New Credit Agreement and the guarantees thereof are secured by
a perfected first priority security interest in substantially all assets of the
Company and its direct and indirect domestic subsidiaries including: (i) all
real property; (ii) all accounts receivable, inventory and intangibles; and
(iii) all of the capital stock of the Company and its direct and indirect
domestic and, to the extent no adverse tax consequences would result, foreign
subsidiaries.
Interest, Maturity. Borrowings under the New Credit Agreement bear interest
at a rate per annum equal (at the Company's option) to: (i) the Administrative
Agent's reserve-adjusted LIBOR rate ("LIBOR") plus an applicable margin or (ii)
an alternate base rate equal to the highest of the Administrative Agent's prime
rate, plus an applicable margin. Initially, the applicable margin for the Term
Loan Facility and the Revolving Credit Facility is 2.25% per annum for LIBOR
loans and 1.00% per annum for alternate base rate loans and after the first six
months will be tied to a grid based on the Company's leverage ratio.
Fees. The Company is required to pay the Lenders, on a quarterly basis, a
commitment fee on the undrawn portion of the Revolving Credit Facility at a rate
equal to 0.50%. The Company is also obligated to pay (i) certain letter of
credit fees on the aggregate amount of outstanding letters of credit; (ii) a
fronting bank fee for the letter of credit issuing bank; and (iii) customary
agent, arrangement and other similar fees.
Covenants. The New Credit Agreement contains a number of covenants that,
among other things, restrict the ability of SH Group, the Company and its
subsidiaries to dispose of assets, incur additional indebtedness, prepay other
indebtedness or amend certain debt instruments (including the Indenture), pay
dividends, create liens on assets, enter into sale and leaseback transactions,
make investments, loans or advances, make acquisitions, engage in mergers or
consolidations, make capital expenditures, change the business conducted by the
Company or its subsidiaries or engage in certain transactions with affiliates
and otherwise restrict certain corporate activities. In addition, under the New
Credit Agreement, the Company is
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<PAGE> 98
required to maintain specified financial ratios and tests, including leverage
ratios below a specified maximum and minimum interest coverage levels. See "Risk
Factors--Restrictive Debt Covenants."
Events of Default. The New Credit Agreement contains customary events of
default, including nonpayment of principal, interest or fees, material
inaccuracy of representations and warranties, violation of covenants,
cross-default and cross-acceleration to certain other indebtedness, certain
events of bankruptcy and insolvency, material judgments against the Company,
invalidity of any guarantee or security interest and a change of control of the
Company in certain circumstances as set forth therein.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion (including the opinion of special counsel
described below) is based upon current provisions of the Internal Revenue Code
of 1986, as amended, applicable Treasury regulations, judicial authority and
administrative rulings and practice. There can be no assurance that the Internal
Revenue Service (the "Service") will not take a contrary view, and no ruling
from the Service has been or will be sought. Legislative, judicial or
administrative changes or interpretations may be forthcoming that could alter or
modify the statements and conditions set forth herein. Any such changes or
interpretations may or may not be retroactive and could affect the tax
consequences to holders. Certain holders (including insurance companies,
tax-exempt organizations, financial institutions, broker-dealers, foreign
corporations and persons who are not citizens or residents of the United States)
may be subject to special rules not discussed below. SH Group recommends that
each holder consult such holder's own tax advisor as to the particular tax
consequences of exchanging such holder's Old Debentures for New Debentures,
including the applicability and effect of any state, local or foreign tax laws.
Kirkland & Ellis, special counsel to SH Group, has advised SH Group that in
its opinion, the exchange of the Old Debentures for New Debentures pursuant to
the Exchange Offer will not be treated as an "exchange" for federal income tax
purposes because the New Debentures will not be considered to differ materially
in kind or extent from the Old Debentures. Rather, the New Debentures received
by a holder will be treated as a continuation of the Old Debentures in the hands
of such holder. As a result, there will be no federal income tax consequences to
holders exchanging Old Debentures for New Debentures pursuant to the Exchange
Offer.
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<PAGE> 100
PLAN OF DISTRIBUTION
Each Participating Broker-Dealer that receives New Debentures 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 Debentures. 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 Debentures
received in exchange for Old Debentures where such Old Debentures were acquired
as a result of market-making activities or other trading activities. SH Group
has agreed that for a period of one year after the thirtieth business day
following the Expiration Date (or such shorter period as will terminate when all
of the Old Debentures offered for exchange hereby have been sold), it will make
this prospectus, as amended or supplemented, available to any Participating
Broker-Dealer for use in connection with any such resale.
SH Group will not receive any proceeds from any sales of the New Debentures
by Participating Broker-Dealers. New Debentures 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 Debentures 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 purchaser 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 Debentures. Any Participating Broker-Dealer that resells the New
Debentures 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 New
Debentures may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Debentures 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.
LEGAL MATTERS
The validity of the issuance of the New Debentures offered hereby and
certain federal income tax consequences will be passed upon for the Company by
Kirkland & Ellis, Washington, D.C.
EXPERTS
The balance sheet of SH Group as of May 4, 1998 included in this Prospectus
has been audited by Deloitte & Touche LLP, independent auditors, as stated in
their report appearing herein and elsewhere in the Registration Statement, and
is included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
The consolidated financial statements of the Company at January 3, 1998 and
December 28, 1996, and for each of the three years in the period ended January
3, 1998, 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.
CHANGE IN ACCOUNTANTS
On May 26, 1998, the Company dismissed its certified public accountants,
Ernst & Young LLP, and replaced them with Deloitte & Touche LLP. The report of
Ernst & Young LLP dated January 28, 1998, except for Note 14 as to which the
date is May 26, 1998, on the Company's financial statements as of and for the
two fiscal years in the period ended January 3, 1998 did not contain an adverse
opinion or a disclaimer opinion; further the Company had no disagreements with
Ernst & Young LLP during that time period. The change in accountants was
recommended by the Board of Directors of the Company.
95
<PAGE> 101
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
STEEL HEDDLE GROUP, INC.
REPORT OF INDEPENDENT AUDITORS.............................. F-2
Balance Sheet as of May 4, 1998............................. F-3
Notes to Balance Sheet...................................... F-4
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
REPORT OF INDEPENDENT AUDITORS.............................. F-5
CONSOLIDATED FINANCIAL STATEMENTS AS OF JANUARY 3, 1998 AND
DECEMBER 28, 1996 AND FOR EACH OF THE THREE FISCAL YEARS
IN THE PERIOD ENDED JANUARY 3, 1998:
Consolidated Balance Sheets as of January 3, 1998 and
December 28, 1996...................................... F-6
Consolidated Statements of Operations for the Years Ended
January 3, 1998, December 28, 1996 and December 30,
1995................................................... F-7
Consolidated Statements of Shareholders' Equity for the
Years Ended January 3, 1998, December 28, 1996 and
December 30, 1995...................................... F-8
Consolidated Statements of Cash Flows for the Years Ended
January 3, 1998, December 28, 1996 and December 30,
1995................................................... F-9
Notes to Consolidated Financial Statements................ F-10
STEEL HEDDLE GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF
JUNE 27, 1998 (SUCCESSOR) AND JANUARY 3, 1998
(PREDECESSOR):
Consolidated Balance Sheets as of June 27, 1998
(Successor) and
January 3, 1998 (Predecessor).......................... F-27
Consolidated Statements of Operations and Comprehensive
Income (Loss) for the Five Weeks Ended June 27, 1998
(Successor), the Twenty Weeks Ended May 25, 1998
(Predecessor) and the Six Months Ended June 28, 1997
(Predecessor).......................................... F-28
Consolidated Statements of Cash Flows for the Five Weeks
Ended June 27, 1998 (Successor), the Twenty Weeks Ended
May 25, 1998 (Predecessor) and the Six Months Ended
June 28, 1997 (Predecessor)............................ F-29
Notes to Unaudited Condensed Consolidated Financial
Statements............................................. F-30
</TABLE>
F-1
<PAGE> 102
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholder of
Steel Heddle Group, Inc.
We have audited the accompanying balance sheet of Steel Heddle Group, Inc.
(the "Company") as of May 4, 1998. This financial statement is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit of the balance sheet provides a reasonable basis for our
opinion.
In our opinion, such balance sheet presents fairly, in all material
respects, the financial position of the Company as of May 4, 1998 in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Greenville, South Carolina
May 4, 1998
F-2
<PAGE> 103
STEEL HEDDLE GROUP, INC.
BALANCE SHEET
MAY 4, 1998
<TABLE>
<S> <C>
ASSETS
Total assets................................................ $ --
=========
STOCKHOLDER'S EQUITY
STOCKHOLDER'S EQUITY:
Common stock, $.01 par value, 1,000 shares; authorized
issued and outstanding.................................... $ 10
Additional paid-in-capital.................................. 99,990
---------
100,000
Less subscription receivable................................ (100,000)
---------
Total stockholder's equity.................................. $ --
=========
</TABLE>
See notes to balance sheet.
F-3
<PAGE> 104
STEEL HEDDLE GROUP, INC.
NOTES TO BALANCE SHEET
MAY 4, 1998
1. ORGANIZATION AND BASIS OF PRESENTATION
Steel Heddle Group, Inc. ("SH Group") was incorporated under the laws of
the State of Delaware in April 1998. SH Group is a wholly-owned subsidiary of
American Industrial Partners Capital Fund II L.P. ("AIP") and was organized to
effectuate the acquisition of all of the outstanding common stock of SH Holdings
Corp. ("Old Holdings").
SH Group is organized as a holding company and owns the outstanding common
stock of Steel Heddle Mfg. Co. (the "Company"), a company that, through its
subsidiaries, manufactures loom accessories used by textile mills and other
metal products used in the electronics, automotive and solar power industries.
On May 1, 1998, SH Group entered into an agreement to purchase all of the
outstanding common stock of Old Holdings for approximately $173.9 million
(including repayment of certain indebtedness of Old Holdings and estimated
transaction fees and expenses of approximately $8.5 million) subject to
post-closing adjustments. The acquisition will be financed with (i) $25 million
in cash contributed by AIP and certain members of management of the Company in
exchange for common equity of SH Group, including management's rollover of an
estimated $1.8 million of securities of Old Holdings, (ii) proceeds from the
issuance of $15 million of Senior Discount Debentures, (iii) proceeds from the
issuance of $100 million of Senior Subordinated Notes to be issued by the
Company, (iv) proceeds of $33.6 million from borrowings under a $30 million term
loan and a $20 million revolving loan entered into by the Company, and (v)
existing cash of the Company of $0.3 million.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Financial Statement Estimates--The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the amounts of revenues and expenses during the
period reported. Actual results could differ from those estimates.
3. STOCK SUBSCRIPTION
On May 4, 1998, SH Group executed a stock subscription agreement with AIP
whereby AIP agreed to purchase 1,000 shares of SH Group common stock at a price
of $100 per share. The amount due from AIP for the stock subscription is
reflected as a deduction from stockholder's equity in the accompanying balance
sheet.
F-4
<PAGE> 105
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Steel Heddle Mfg. Co.
We have audited the accompanying consolidated balance sheets of Steel
Heddle Mfg. Co. and subsidiaries as of January 3, 1998 and December 28, 1996 and
the related consolidated statements of operations, shareholders'
equity/(deficit) and cash flows for each of the three years in the period ended
January 3, 1998. 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 Steel Heddle
Mfg. Co. and subsidiaries at January 3, 1998 and December 28, 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended January 3, 1998 in conformity with generally
accepted accounting principles.
As discussed in Note 6 to the consolidated financial statements, in 1995
the Company changed its method of accounting for postretirement benefits other
than pensions.
Ernst & Young LLP
Greenville, SC
January 28, 1998, except for Note 14,
as to which the date
is May 26, 1998
F-5
<PAGE> 106
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 28,
1998 1996
---------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 379 $ 4,645
Accounts receivable, net of allowance of $100 in 1997 and
1996................................................... 9,290 8,862
Inventories............................................... 14,030 12,970
Prepaid expenses.......................................... 99 108
-------- --------
Total current assets................................... 23,798 26,585
Property, plant and equipment:
Cost...................................................... 52,561 50,781
Less accumulated depreciation............................. 35,876 33,025
-------- --------
16,685 17,756
Other assets and deferred charges:
Prepaid pension costs..................................... 546 952
Goodwill, net............................................. 22,537 23,266
Sundry.................................................... 774 157
-------- --------
23,857 24,375
-------- --------
Total Assets........................................... $ 64,340 $ 68,716
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 2,166 $ 2,334
Accrued and sundry liabilities............................ 5,313 8,208
Deferred income taxes..................................... 670 802
Income taxes.............................................. 302 361
Current portion of long-term debt......................... 6,500 6,500
-------- --------
Total current liabilities.............................. 14,951 18,205
Long-term debt, less current portion........................ 46,300 43,500
Retirement benefits payable................................. 5,126 5,372
Deferred income taxes....................................... 1,120 1,598
Redeemable Common Stock:
Parent company class A, $.01 par value per
share--authorized 2,000,000 shares, issued and
outstanding 91,080 shares in 1997 and 90,000 shares in
1996................................................... 1,366 1,350
Shareholders' equity/(deficit):
Common Stock par value $1.00 per share--authorized
1,500,000 shares, issued and outstanding 10 shares..... -- --
Additional paid-in capital................................ 13,689 13,689
Foreign currency translation adjustment................... (48) (49)
(Deficit)................................................. (18,164) (14,949)
-------- --------
(4,523) (1,309)
-------- --------
Total liabilities and shareholders' equity (deficit)... $ 64,340 $ 68,716
======== ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 107
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
JANUARY 3, DECEMBER 28, DECEMBER 30,
1998 1996 1995
---------- ------------ ------------
<S> <C> <C> <C>
Net sales............................................. $72,983 $64,484 $68,118
Cost of goods sold.................................... 46,448 44,074 47,706
------- ------- -------
Gross profit.......................................... 26,535 20,410 20,412
Selling, general and administrative costs............. 8,489 8,875 8,667
Management fees....................................... 475 725 275
Amortization of goodwill.............................. 729 729 729
Restructuring charges................................. -- -- 821
------- ------- -------
Operating income...................................... 16,842 10,081 9,920
Other income (expense):
Interest income..................................... 136 110 128
Interest expense, including amortization of deferred
financing costs.................................. (5,284) (5,954) (6,435)
Other financing expenses............................ (212) -- --
------- ------- -------
Income before income taxes, extraordinary item and
cumulative effect of accounting change.............. 11,482 4,237 3,613
Income tax expense.................................... 4,015 1,638 1,628
------- ------- -------
Income before extraordinary item and cumulative effect
of accounting change................................ 7,467 2,599 1,985
Extraordinary (loss) on the early extinguishment of
debt,
net of income taxes of $1,688....................... (2,753) -- --
------- ------- -------
Income before cumulative effect of accounting
change.............................................. 4,714 2,599 1,985
Cumulative effect of change in method of accounting
for postretirement benefits net of taxes of $570.... -- -- 855
------- ------- -------
Net income............................................ $ 4,714 $ 2,599 $ 1,130
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 108
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CUMULATIVE
COMMON FOREIGN
STOCK-- ADDITIONAL RETAINED CURRENCY
$1.00 PAID-IN (DEFICIT) TRANSLATION
PAR VALUE CAPITAL EARNINGS ADJUSTMENTS TOTAL
--------- ---------- --------- ----------- -------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994............... $-- $13,689 $(18,678) $(35) $(5,024)
Foreign currency translation
adjustments........................... -- -- -- (17) (17)
Net income............................... -- -- 1,130 -- 1,130
------- ------- -------- ---- -------
Balance at December 30, 1995............... -- 13,689 (17,548) (52) (3,911)
Foreign currency translation
adjustments........................... -- -- -- 3 3
Net income............................... -- -- 2,599 -- 2,599
------- ------- -------- ---- -------
Balance at December 28, 1996............... -- 13,689 (14,949) (49) (1,309)
Foreign currency translation
adjustments........................... 1 1
Dividends paid........................... -- -- (7,929) -- (7,929)
Net income............................... -- -- 4,714 -- 4,714
------- ------- -------- ---- -------
Balance at January 3, 1998................. $-- $13,689 $(18,164) $(48) $(4,523)
======= ======= ======== ==== =======
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE> 109
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
JANUARY 3, DECEMBER 28, DECEMBER 30,
1998 1996 1995
---------- ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income................................................ $ 4,714 $ 2,599 $ 1,130
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 4,409 6,019 6,096
Loss on disposal of property, plant and equipment....... 50 -- --
Provision for deferred income taxes..................... (610) (600) (1,200)
Accrued retirement benefit costs........................ 160 (220) 150
Extraordinary item...................................... 4,441 -- --
Cumulative effect of accounting changes................. -- -- 1,425
Changes in operating assets and liabilities:
Accounts receivable.................................. (428) (548) 408
Inventories.......................................... (1,060) 1,018 (818)
Prepaid expenses..................................... 8 14 27
Accounts payable..................................... (167) 303 553
Accrued and sundry liabilities....................... (1,498) 2,489 241
Income taxes payable................................. (59) 162 (400)
-------- ------- -------
Net cash provided by operating activities................. 9,960 11,236 7,612
INVESTING ACTIVITIES:
Purchase of property, plant and equipment............... (2,558) (2,809) (3,455)
Proceeds on disposals of property, plant and equipment,
net.................................................. 29 42 98
-------- ------- -------
Net cash used in investing activities..................... (2,529) (2,767) (3,357)
FINANCING ACTIVITIES:
Issuance of parent company common stock................. 16 -- --
Prepayment of debt, including penalty................... (55,690) -- --
Proceeds from debt...................................... 66,500 -- --
Payments of debt........................................ (13,700) (2,700) (7,000)
Dividends paid.......................................... (7,929) -- --
Short-term borrowings................................... -- (2,000) 2,000
Loan acquisition costs.................................. (894) -- --
-------- ------- -------
Net cash used in financing activities................... (11,697) (4,700) (5,000)
-------- ------- -------
(Decrease) increase in cash and cash equivalents.......... (4,266) 3,769 (745)
Cash and cash equivalents at beginning of year............ 4,645 876 1,621
-------- ------- -------
Cash and cash equivalents at end of year.................. $ 379 $ 4,645 $ 876
======== ======= =======
</TABLE>
See notes to consolidated financial statements.
F-9
<PAGE> 110
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization--Steel Heddle Mfg. Co. ("Steel Heddle") is a wholly-owned
subsidiary of SH Intermediate Corp. ("Intermediate"). Intermediate is a
wholly-owned subsidiary of SH Holdings Corp. ("Holdings" or "Parent Company").
In accordance with Securities Exchange Commission Staff Accounting Bulletin No.
55, these financial statements include balances for debt and redeemable common
stock that are held at the Intermediate and Holdings level. Related interest
expense of $2,726, $3,093 and $3,057 in 1997, 1996 and 1995, respectively, has
also been reflected in these financial statements. Holdings, Intermediate, Steel
Heddle and Steel Heddle subsidiaries are collectively referred to hereinafter as
"the Company".
Operations -- Steel Heddle manufactures products and loom accessories used by
textile mills which accounted for approximately 85%, 88% and 87% of its sales in
1997, 1996 and 1995, respectively. It also processes and sells metal products
from its wire rolling facilities to industrial users. Steel Heddle sells to
foreign and domestic companies, with foreign sales making up approximately 22%,
24% and 22% of its sales in 1997, 1996 and 1995, respectively. The Company
generally does not require collateral for its domestic receivables. A majority
of the related foreign receivables are insured or secured by letters of credit.
Principles of Consolidation -- All subsidiaries are wholly-owned, and their
accounts are included in the consolidated financial statements. All significant
intercompany items and transactions have been eliminated in consolidation.
Fiscal Year--The Company's fiscal year ends on the Saturday closest to December
31. The years ended January 3, 1998, December 28, 1996 and December 30, 1995 are
53-weeks, 52-weeks and 52-week periods, respectively.
Foreign Currency--Assets and liabilities of the Company's foreign subsidiaries
are translated into United States dollars at current exchange rates. Income and
expense accounts of these operations are translated at the average of exchange
rates during the period.
Effective December 29, 1996, the Company changed the functional currency for its
Mexican subsidiary from the Mexican peso to the United States dollar because the
cumulative inflation index in Mexico has been approximately 100% over a three
year period ended December 28, 1996. In accordance with FAS 52, the cumulative
translation adjustment at December 28, 1996, accumulated in shareholders' equity
prior to this change in functional currency, remains as a separate component of
shareholders' equity.
Cash Equivalents--The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents. Included
in cash equivalents at January 3, 1998 is approximately $757, which approximates
fair value invested in an overnight investment fund with a bank.
Inventories--Inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out (FIFO) method, average cost method or
last-in, first-out (LIFO) method.
Property, Plant and Equipment--Property, plant and equipment is stated at cost.
Depreciation is computed by straight-line and accelerated methods based on
estimated useful lives of the assets. Depreciation expense for 1997, 1996 and
1995 was approximately $3,500, $5,100 and $5,100, respectively.
Other Assets and Deferred Charges--Deferred debt expense, included in sundry
other assets, is being amortized over the lives of the related debt. Goodwill
resulting from the purchase of Steel Heddle is being amortized over forty years
on the straight-line method.
Income Taxes--The Company accounts for income taxes under Statement of
Accounting Standards No. 109, "Accounting for Income Taxes".
F-10
<PAGE> 111
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Revenue Recognition--The Company recognizes revenue from product sales when it
has shipped the goods to the customer.
Fair Value of Financial Statements--The carrying value of cash and cash
equivalents, accounts receivable, accounts payable, accrued and sundry
liabilities and long-term debt approximate their fair values.
Pension Costs--The Company's funding policy is to contribute amounts to its
formal funded plans sufficient to meet the minimum funding requirements set
forth in the Employee Retirement Income Security Act of 1974, plus such
additional amounts as the Company may determine to be appropriate from time to
time.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
New Accounting Standards--In June 1997, the Financial Accounting Standards Board
issued SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." Both are
required for financial statements in fiscal years beginning after December 15,
1997.
SFAS No. 130 requires comprehensive income to be reported in a financial
statement that is displayed with the same prominence as other financial
statements. Adoption of this statement is not expected to have a material impact
on the Company's consolidated financial position, results of operations or cash
flows.
SFAS No. 131 requires entities to disclose financial and detailed
information about its operating segments in a manner consistent with internal
segment reporting used by the Company to allocate resources and assess financial
performance. The Company has not completed the analyses required to determine
the additional disclosures requirements, if any, for the adoption of SFAS No.
131, but the adoption of the statement will not affect results of operations or
financial position. It will affect the disclosure of segment reporting. The
Company will adopt this statement retroactively during the fiscal year ending
January 2, 1999.
2. INVENTORIES
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Raw materials and component parts........................... $ 6,312 $ 6,276
Work in process and finished goods.......................... 7,718 6,694
------- -------
$14,030 $12,970
======= =======
</TABLE>
Inventories priced by the LIFO method were approximately $11,100 at January 3,
1998, and $10,000 at December 28, 1996. If all inventories had been priced by
the FIFO or average cost method, they would have been higher than the amounts
reported by approximately $600 in 1997 and $1,700 in 1996.
F-11
<PAGE> 112
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Land........................................................ $ 855 $ 855
Buildings and improvements.................................. 10,692 10,449
Machinery and equipment..................................... 32,362 31,205
Furniture and fixtures...................................... 7,640 6,636
Automotive equipment........................................ 827 817
Construction in progress.................................... 185 819
------- -------
$52,561 $50,781
======= =======
</TABLE>
4. ACCRUED AND SUNDRY LIABILITIES
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Wages, salaries and other compensation...................... $3,006 $2,776
Accrual for hazardous waste site maintenance................ 269 276
Interest.................................................... 709 3,336
Group insurance............................................. 475 505
Other....................................................... 854 1,315
------ ------
$5,313 $8,208
====== ======
</TABLE>
The Company has included in accrued and sundry liabilities an accrual for
hazardous waste site maintenance for the estimated total cost over an initial
period of thirty years to close out and monitor its inactive hazardous waste
site. Payment is secured by a standby letter of credit of approximately $671.
5. LONG-TERM DEBT
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Senior Notes, due in 28 quarterly installments beginning in
March 1997 and ranging from $1,600 to $2,400 plus interest
payable as described below................................ $46,000 $ --
Revolving Line of Credit, interest payable quarterly, due in
February 2002............................................. 6,800 --
Senior Notes, plus interest, payable quarterly at 10%....... -- 24,900
Subordinated Notes, plus interest payable quarterly at
12.75%.................................................... -- 25,100
------- -------
52,800 50,000
Less current portion........................................ 6,500 6,500
------- -------
$46,300 $43,500
======= =======
</TABLE>
The $24,900 of Senior Notes and the Subordinated Notes were issued pursuant to
certain recapitalization and refinancing transactions and were payable to
shareholders who collectively own 100% of the Company's outstanding Class B
Common Stock.
On February 21, 1997, the Company entered into a credit arrangement with a bank
group consisting of a Term Loan Facility of $52,500 and a $15,000 Revolving Line
of Credit. The Company utilized proceeds of the Term Loan and the Revolving Line
of Credit to repay its senior notes with principal amount of $24,900 plus
penalty of $2,500 and to repay its subordinated notes with principal amount of
$25,100 plus penalty of $3,200. The total penalty net of other losses and gains
on the refinancing is reported as an extraordinary item, net of taxes
F-12
<PAGE> 113
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. LONG-TERM DEBT--(CONTINUED)
of approximately $1,700. Included in the net extraordinary loss is a reversal of
accrued interest of approximately $1,400. This reversal resulted from the
difference between the stated rate of interest and the effective rate of
interest.
The Term Loan and the Revolving Line of Credit bear interest at the bank's prime
rate plus 0.5% or at Eurodollar rates plus 1.5% per annum, at the Company's
option. Interest based on prime is payable quarterly; interest based on
Eurodollars is payable at the end of the elected interest period, but not less
often than the end of a three-month period. The weighted average interest rate
in effect at January 3, 1998 was 7.4%.
The agreement contains certain restrictive covenants which, among other matters,
require fixed charge coverage, interest coverage, and leverage coverage ratio
tests as defined in the agreement and limits payment of dividends. The agreement
also restricts change in control of the Company and requires mandatory principal
prepayments annually based on excess cash flow, as defined. Substantially all of
the Company's assets are pledged as collateral under the new debt agreement.
Future annual principal payments are due as follows:
<TABLE>
<S> <C>
1998........................................................ $ 6,500
1999........................................................ 6,500
2000........................................................ 7,000
2001........................................................ 8,000
2002........................................................ 15,300
Thereafter.................................................. 9,500
-------
$52,800
=======
</TABLE>
Interest paid totaled approximately $7,800, $4,700 and $5,800 for 1997, 1996 and
1995, respectively.
The carrying amount of the Company's borrowings under its short-term revolving
credit agreement approximates fair value. The fair value of the Company's
long-term debt is estimated based on the quoted market prices for the same or
similar issues or on the current notes offered to the Company for the debt of
the same remaining maturities. The carrying value of the debt approximates
market value at January 3, 1998.
6. RETIREMENT PLANS AND DEFERRED COMPENSATION AGREEMENTS
The Company has a funded defined benefit noncontributory pension plan for
employees meeting certain eligibility requirements and an unfunded Supplemental
Pension Plan which is a nonqualified plan under which direct payments are made
to certain retired personnel based on years of service and compensation.
A summary of the components of the net pension cost for the funded defined
benefit plan for 1997, 1996 and 1995 follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Service cost........................................ $ 642 $ 337 $ 138
Interest cost on projected benefit obligation....... 1,271 1,239 1,202
Return on plan assets............................... (1,433) (1,415) (3,562)
Net amortization.................................... (74) (74) 2,240
------- ------- -------
$ 406 $ 87 $ 18
======= ======= =======
</TABLE>
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation was 7.75% in 1997 and 7.50% in 1996.
The rate of increase in compensation was 4.75% for each year and the expected
long-term rate of return on assets was 8% in each year.
F-13
<PAGE> 114
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. RETIREMENT PLANS AND DEFERRED COMPENSATION AGREEMENTS--(CONTINUED)
Accumulated plan benefits and projected benefit obligations, as estimated by
consulting actuaries, and plan net assets and funded status for the funded
defined benefit plan as of January 3, 1998 and December 28, 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation................................. $17,316 $16,870
Nonvested benefit obligation.............................. 114 107
------- -------
Accumulated benefit obligation............................ $17,430 $16,977
======= =======
Projected benefit obligation................................ $17,430 $16,977
Plan assets at fair value................................... 20,113 18,744
------- -------
Funded status--projected benefit obligation less than plan
assets.................................................... $ 2,683 $ 1,767
======= =======
Comprised of:
Prepaid pension cost...................................... $ 546 $ 952
Unrecognized net gain..................................... 1,597 815
Unrecognized prior service cost........................... 540 --
------- -------
$ 2,683 $ 1,767
======= =======
</TABLE>
Plan assets are invested in fixed income securities, equities and money market
securities.
At January 3, 1998 and December 28, 1996, the projected benefit obligation (all
of which is vested) for the unfunded plan totaled approximately $778 and $809,
respectively, and is included in retirement benefits payable in the accompanying
consolidated balance sheet.
The Company has an employee savings and investment plan qualified under Section
401(k) of the Internal Revenue Code. This plan is funded in part from member
voluntary contributions, with the Company's contribution equal to 65% of the
amount of member basic contributions, but limited to 3.9% of the total
compensation of the members. The plan provides for additional member voluntary
contributions of up to 10% of member's total compensation.
The Company has an informal arrangement under which it provides certain life
insurance benefits for retired hourly and salary employees. No separate funding
is provided under this arrangement. Expense under the life insurance plan is
recognized by an annual computation of the present value of the Company's
liability for future payments for active and retired employees and a charge to
operations for the current year portion of the computed liability.
In addition to the above plan, the Company has an informal arrangement under
which it provides certain health care benefits for retired employees. No
separate funding is provided under this arrangement. Only those active employees
born before January 1, 1935 who have worked at least five years for the Company
may become eligible for these benefits. Prior to 1995, expense under the health
care plan was recognized by an annual computation of the present value of the
Company's liability for future payments based on current retirees only and a
charge to operations for the current portion of the computed liability.
Effective January 1, 1995, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions" whereby the cost of
providing the benefits is accrued during the employees' working years. The
Company elected to immediately recognize this obligation, resulting in a charge
of $1,425 ($855 after-tax) to 1995 operations.
F-14
<PAGE> 115
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. RETIREMENT PLANS AND DEFERRED COMPENSATION AGREEMENTS--(CONTINUED)
Components of postretirement expense for the years ended January 3, 1998,
December 28, 1996 and December 30, 1995 included the following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ------
<S> <C> <C> <C>
Service cost.............................................. $ 4 $ 5 $ 6
Interest cost on accumulated postretirement benefit
obligation.............................................. 307 326 342
Transition obligation..................................... -- -- 1,424
---- ---- ------
$311 $331 $1,772
==== ==== ======
</TABLE>
The following schedule reconciles the status of the Company's plans with the
unfunded postretirement benefit obligation included in its balance sheets at
January 3, 1998 and December 28, 1996:
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
MEDICAL LIFE MEDICAL LIFE
<S> <C> <C> <C> <C>
Retirees......................................... $3,649 $205 $3,680 $167
Fully eligible active plan participants.......... 239 171 517 198
------ ---- ------ ----
Accrued postretirement benefit obligation........ $3,888 $376 $4,197 $365
====== ==== ====== ====
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 9.5% in 1997, gradually declining to 5.5%
in the year 2005 and remaining at that level thereafter. A discount rate of
7.75% was used in determining the postretirement expense at December 28, 1996. A
discount rate of 7.75% was used to determine the postretirement benefit
obligation at January 3, 1998. A 1% increase in the per capita cost of health
care benefits results in a $25 increase in the accrued postretirement benefit
obligation and a $2 increase in postretirement benefit expense.
The Company's total expense under all retirement benefit plans was approximately
$1,200, $863 and $2,753 in 1997, 1996 and 1995, respectively.
7. SHAREHOLDERS' EQUITY
Upon the death of a holder of class A common stock of Parent Company, the estate
of such holder can require Parent Company to redeem such shares. This redemption
feature is not within the control of Parent Company; accordingly, all of the
class A common stock of Parent Company is presented outside the shareholders'
equity section of the balance sheet. There were 1,080 shares of Parent Company
class A common stock issued during the year ended January 3, 1998.
The holders of the class A and class B common stock of Parent Company are
entitled to the same powers, rights and privileges, except that with regards to
the election of the Board of Directors, the holders of class A stock are
entitled to elect two directors and the holders of class B stock are entitled to
elect four directors.
In connection with the debt refinancing completed in February 1997, the Board
reviewed the terms of the 1992 Stockholders Agreement and the options granted to
certain employee shareholders. The Board concluded that the Unallocated Shares
as described in the 1992 Stockholders Agreement should remain available for
issuance at $15.00 per share and that new employee options should be issued in
exchange for the employee stock options issued in 1992.
Accordingly, in September 1997 the Board issued rights to the 10,000 previously
Unallocated Shares to certain officers and members of management. At January 3,
1998, 1,080 of these shares had been exercised and 8,920 remained exercisable.
F-15
<PAGE> 116
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. SHAREHOLDERS' EQUITY--(CONTINUED)
In addition, the 1997 Stock Option Agreement canceled the outstanding options
under the 1992 Agreement and granted certain officers and members of management
options to purchase shares of Parent Company's class A common stock at an
exercise price of $15.00 per share. All options under the 1997 Agreement are
immediately exercisable and terminate February 20, 2002.
A summary of the Parent Company's stock option activity, including the
previously Unallocated Shares, and related information for the years ended
January 3, 1998, December 28, 1996 and December 30, 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------- -------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding--beginning of year........ 24,620 $15 24,620 $15 24,620 $15
Canceled............................ (24,620) 15
Granted............................. 26,310 15 -- -- -- --
Exercised........................... (1,080) -- -- -- -- --
Retired............................. (2,204) 15
------- --- ------ --- ------ ---
Outstanding at end of year............ 23,026 $15 24,620 $15 24,620 $15
======= === ====== === ====== ===
Exercisable at end of year............ 23,026 $15 -- $-- -- $--
</TABLE>
Exercise price of all options outstanding as of January 3, 1998 is $15. The
weighted-average remaining contractual life of those options is 4 years.
In addition, the Parent Company has outstanding warrants to purchase 30,928
shares of class A common stock of Parent Company at $15 per share. At January 3,
1998, 32,100 shares of class A common stock of Parent Company were reserved for
issuance under these warrants.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, whenever the exercise price of the Company's employee stock options
equals or exceeds the market price of the underlying stock on the date of grant,
no compensation expense is recognized.
The Company used the minimum value method to develop the pro-forma income
effect. Assumptions used in valuing stock options include a risk free rate of
6%, dividend yield of 0.0% and an expected life of 4 years. Had compensation
cost for the Company's 1997 Stock Option Agreement been determined based on the
fair value at the grant date for such awards in 1997 consistent with the
provisions of FAS 123, the Company's net income would have been reduced to the
pro forma amounts indicated below.
<TABLE>
<CAPTION>
YEAR ENDED
JANUARY 3, 1998
---------------
<S> <C>
Net income:
As reported............................................... $4,714
Pro forma................................................. $4,431
Weighted average fair value of options granted.............. $17.34
</TABLE>
F-16
<PAGE> 117
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. SHAREHOLDERS' EQUITY--(CONTINUED)
The pro forma impact of these options is not likely to be representative of the
effects on reported net income for future years.
The Company paid a dividend of $7,929 to shareholders on February 26, 1997.
8. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 28,
1998 1996
---------- ------------
<S> <C> <C>
Deferred tax liabilities:
Funded pension........................................... $ 219 $ 381
LIFO..................................................... 1,317 1,410
Tax over book depreciation............................... 3,385 3,610
Other.................................................... 37 237
------ ------
4,958 5,638
Deferred tax assets:
Unfunded pension......................................... 2,017 2,149
Vacation accrual......................................... 436 430
Healthcare accrual....................................... 190 202
Hazardous waste accrual.................................. 107 110
Inventory obsolescence................................... 276 186
Other.................................................... 142 161
------ ------
3,168 3,238
------ ------
$1,790 $2,400
====== ======
</TABLE>
Significant components of the provision for income taxes, including the tax
provision for extraordinary items and cumulative effects of change in method of
accounting are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ -------
<S> <C> <C> <C>
Current:
Federal............................................. $2,964 $2,024 $ 1,998
State............................................... (27) 214 260
------ ------ -------
2,937 2,238 2,258
Deferred:
Federal............................................. (521) (512) (1,025)
State............................................... (89) (88) (175)
------ ------ -------
(610) (600) (1,200)
------ ------ -------
$2,327 $1,638 $ 1,058
====== ====== =======
</TABLE>
F-17
<PAGE> 118
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. INCOME TAXES--(CONTINUED)
The reconciliation of income tax attributable to continuing operations computed
at the U.S. statutory rate to income tax expense is shown below:
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ----------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Tax at U.S. statutory
rates..................... $2,394 34.0% $1,440 34.0% $ 744 34.0%
State income tax (benefit),
net of federal tax
effect.................... (77) (1.1) 83 2.0 56 2.6
Goodwill amortization....... 248 3.5 248 5.9 248 11.3
Meals and entertainment..... 38 0.5 33 0.8 27 1.3
Benefit of foreign
subsidiary................ (140) (2.0) (110) (2.6) (84) (3.8)
Other, net.................. (136) (1.9) (56) (1.4) 67 2.9
------ ---- ------ ---- ------ ----
$2,327 33.0% $1,638 38.7% $1,058 48.3%
====== ==== ====== ==== ====== ====
</TABLE>
Income taxes paid in excess of tax refunds in 1997, 1996 and 1995 were $2,954,
$2,105 and $2,660, respectively.
9. BUSINESS SEGMENTS
The Company manufactures and sell products and loom accessories used by textile
mills. In addition, the Company processes and sells rolled products from its
wire, foundry and metal fabricating facilities to industrial users. Export sales
were approximately $15,066, $14,573 and $14,610 in 1997, 1996 and 1995,
respectively. Foreign operations are not significant.
F-18
<PAGE> 119
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. BUSINESS SEGMENTS--(CONTINUED)
The information required by Statement of Financial Standards No. 14 is shown
below:
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Net sales and other income
Textile mill accessories................................. $ 63,127 $56,588 $58,943
Metal products
Unaffiliated customers................................ 9,856 7,896 9,175
Intersegment(1)....................................... 7,393 6,023 6,990
Eliminations--intersegment sales(1)...................... (7,393) (6,023) (6,990)
-------- ------- -------
Total net sales and other income.................... $ 72,983 $64,484 $68,118
======== ======= =======
Operating profit (loss)
Textile mill accessories................................. $ 15,979 $11,861 $ 9,755
Metal products........................................... 3,885 2,289 2,671
-------- ------- -------
Total operating profit.............................. 19,864 14,150 12,426
General corporate expenses................................. (3,234) (4,069) (2,506)
Net interest (expense) income.............................. (5,148) (5,844) (6,307)
-------- ------- -------
Earnings before income taxes............................... $ 11,482 $ 4,237 $ 3,613
======== ======= =======
Identifiable assets
Textile mill accessories................................. $ 49,307 $50,469 $52,263
Metal products........................................... 12,770 12,163 13,660
Corporate assets(2)...................................... 2,263 6,084 2,848
-------- ------- -------
Total assets........................................ $ 64,340 $68,716 $68,771
======== ======= =======
Depreciation and amortization
Textile mill accessories................................. $ 3,220 $ 4,404 $ 4,388
Metal products........................................... 863 1,309 1,353
Corporate................................................ 326 306 355
-------- ------- -------
Total depreciation and amortization................. $ 4,409 $ 6,019 $ 6,096
======== ======= =======
Capital expenditures
Textile mill accessories................................. $ 1,329 $ 1,717 $ 2,108
Metal products........................................... 342 637 741
Corporate................................................ 887 455 606
-------- ------- -------
Total capital expenditures.......................... $ 2,558 $ 2,809 $ 3,455
======== ======= =======
</TABLE>
- ---------------
(1) Intersegment sales are accounted for substantially at cost and have been
eliminated in consolidation.
(2) Corporate assets shown are principally cash, short-term investments and
other assets and deferred charges.
10. RESTRUCTURING
During the fourth quarter of 1995, the Company initiated a restructuring program
which resulted in a one-time pretax expense of approximately $821. This program
includes the closing of the Company's Canadian operation, the write down of
certain assets to be disposed of and a reduction in work force in the Company's
domestic operations. Severance costs included in the one-time charge totaled
approximately $561.
F-19
<PAGE> 120
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. RELATED PARTY TRANSACTIONS
BCC, an affiliate of certain stockholders of the Parent Company, provided
consulting services to the Company pursuant to a consulting services agreement
and received fees of $275 in each of fiscal years 1997, 1996 and 1995. In
addition, BCC received a special one-time payment of $450 in 1996 and received a
payment of $200 in 1997 in connection with the Company's debt refinancing.
Interest paid on Senior Notes and Subordinated Notes which was payable to
shareholders who collectively owned 100% of Company's Class B Common Stock was
$8,492 (including prepayment penalty), $4,505 and $5,006 in 1997, 1996 and 1995,
respectively.
12. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The following table shows the activity for the allowance for doubtful accounts:
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
OF PERIOD EXPENSES DEDUCTIONS(1) PERIOD
---------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Year Ended January 3, 1998:
Deducted from asset accounts: Allowance for
uncollectible accounts....................... $100 $46 $(46) $100
==== === ==== ====
Year Ended December 28, 1996:
Deducted from asset accounts: Allowance for
uncollectible accounts....................... $100 $ 8 $ (8) $100
==== === ==== ====
Year Ended December 31, 1995:
Deducted from asset accounts: Allowance for
uncollectible accounts....................... $130 $66 $(96) $100
==== === ==== ====
</TABLE>
- ---------------
(1) Uncollectible accounts written off, net of recoveries.
13. CONTINGENCIES
Litigation -- Although the Company may be subject to litigation from time to
time in the ordinary course of business, it is not a party to any pending or
threatened legal proceedings that management believes will have a material
impact on its financial position or results of operations.
Environmental -- The Company is subject to various federal, state and local
government laws and regulations concerning, among other things, the discharge,
storage, handling and disposal of a variety of hazardous and non-hazardous
substances and wastes.
The Company believes that it is in substantial compliance with all existing
environmental laws and regulations to which it is subject. In addition, the
Company is subject to liability under environmental laws relating to the past
release or disposal of hazardous materials. The Company has included in accrued
and sundry liabilities an accrual for hazardous waste site maintenance for the
estimated total cost over an initial period of 30 years to close out and monitor
its inactive hazardous waste site. Payment is secured by a standby letter of
credit of approximately $671. To date, and in management's belief for the
foreseeable future, additional liability under and compliance with existing
environmental laws has not had and will not have a material adverse effect on
the Company's financial position or results of operations.
F-20
<PAGE> 121
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. SUBSEQUENT EVENT
On May 26, 1998, the Company and its subsidiaries were acquired in a purchase
transaction by Steel Heddle Group, Inc., a corporation formed in contemplation
of the purchase transaction. To partially fund the costs of the acquisition, the
Company issued 10 5/8% Senior Subordinated Notes due 2008 in the principal
amount of $100,000.
Payment of the Company's Senior Subordinated Notes is fully and
unconditionally guaranteed, jointly and severally, on a senior subordinated
basis by the Company's wholly-owned domestic subsidiaries. Management has
determined that separate complete financial statements of the guarantor entities
would not be material to readers of the financial statements; therefore, the
following sets forth condensed consolidating financial statements (dollars in
thousands):
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JANUARY 3, 1998
<TABLE>
<CAPTION>
COMBINED COMBINED RECLASSIFICATIONS
GUARANTOR NON-GUARANTOR THE AND
SUBSIDIARIES SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
------------ ------------- -------- ----------------- ------------
<S> <C> <C> <C> <C> <C>
Assets:
Cash and cash equivalents........ $ 16 $ 96 $ 267 $ $ 379
Accounts receivable.............. 212 294 8,784 9,290
Inventories...................... 315 13,715 14,030
Prepaid expenses................. 5 94 99
------- ------ -------- --------- -------
Total current assets... 228 710 22,860 23,798
Due from affiliates.............. 3,348 (3,348)
Notes receivable from
affiliates..................... 69,443 (69,443)
Investments in subsidiaries...... 176 71,029 (71,205)
Property, plant & equipment,
net............................ 334 16,351 16,685
Other assets and deferred
charges, net................... 7 23,850 23,857
------- ------ -------- --------- -------
Total assets........... $69,847 $4,399 $134,090 $(143,996) $64,340
======= ====== ======== ========= =======
Liabilities and shareholders'
equity:
Accounts payable and accrued and
sundry liabilities............. $ 23 $ 7,456 $ $ 7,479
Due to affiliates, net........... 3,018 330 (3,348)
Deferred income taxes............ 670 670
Income taxes..................... 302 302
Current portion of long-term
debt........................... 6,500 6,500
------- ------ -------- --------- -------
Total current
liabilities.......... 3,018 23 15,258 (3,348) 14,951
Long-term debt, less current
portion........................ 115,743 (69,443) 46,300
Retirement benefits payable...... 5,126 5,126
Deferred income taxes............ 1,120 1,120
Redeemable common stock.......... 1,366 1,366
Shareholders' equity (deficit)... 66,829 4,376 (4,523) (71,205) (4,523)
------- ------ -------- --------- -------
Total liabilities and
shareholders'
equity............... $69,847 $4,399 $134,090 $(143,996) $64,340
======= ====== ======== ========= =======
</TABLE>
F-21
<PAGE> 122
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. SUBSEQUENT EVENT--(CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 28, 1996
<TABLE>
<CAPTION>
COMBINED COMBINED RECLASSIFICATIONS
GUARANTOR NON-GUARANTOR THE AND
SUBSIDIARIES SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
------------ ------------- ------- ----------------- ------------
<S> <C> <C> <C> <C> <C>
Assets:
Cash and cash equivalents......... $ $ 105 $ 4,540 $ $ 4,645
Accounts receivable............... 164 8,698 8,862
Inventories....................... 234 12,736 12,970
Prepaid expenses.................. 10 98 108
----- ------ ------- ------- -------
Total current assets.... 513 26,072 26,585
Due from affiliates............... 2,907 (2,907)
Investments in subsidiaries....... 149 0 3,273 (3,422)
Property, plant & equipment,
net............................. 377 17,379 17,756
Other assets and deferred charges,
net............................. 10 24,365 24,375
----- ------ ------- ------- -------
Total assets............ $ 149 $3,807 $71,089 $(6,329) $68,716
===== ====== ======= ======= =======
Liabilities and shareholders'
equity:
Accounts payable and accrued and
sundry liabilities.............. $ 14 $10,528 $ $10,542
Due to affiliates, net............ 520 2,387 (2,907)
Deferred income taxes............. 802 802
Income taxes...................... 361 361
Current portion of long-term
debt............................ 6,500 6,500
----- ------ ------- ------- -------
Total current
liabilities........... 520 14 20,578 (2,907) 18,205
Long-term debt, less current
portion......................... 43,500 43,500
Retirement benefits payable....... 5,372 5,372
Deferred income taxes............. 1,598 1,598
Redeemable common stock........... 1,350 1,350
Shareholders' equity (deficit).... (371) 3,793 (1,309) (3,422) (1,309)
----- ------ ------- ------- -------
Total liabilities and
shareholders'
equity................ $(149) $3,807 $71,089 $(6,329) $68,716
===== ====== ======= ======= =======
</TABLE>
F-22
<PAGE> 123
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. SUBSEQUENT EVENT--(CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JANUARY 3, 1998
<TABLE>
<CAPTION>
COMBINED COMBINED RECLASSIFICATIONS
GUARANTOR NON-GUARANTOR THE AND
SUBSIDIARIES SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
------------ ------------- -------- ----------------- ------------
<S> <C> <C> <C> <C> <C>
Net sales........................ $ $1,601 $ 72,017 $ (635) $72,983
Cost of goods sold............... 927 45,521 46,448
------ ------ -------- ------- -------
Gross profit..................... 674 26,496 (635) 26,535
Selling, general and
administrative costs........... 4 18 9,102 (635) 8,489
Other operating expenses......... 1,204 1,204
------ ------ -------- ------- -------
Operating income (loss).......... (4) 656 16,190 16,842
Other income (expense)........... 7,145 (12,505) (5,360)
Income before income taxes and
extraordinary item............. 7,141 656 3,685 11,482
------ ------ -------- ------- -------
Income tax expense............... 2,500 74 1,441 4,015
------ ------ -------- ------- -------
Income before extraordinary
item........................... 4,641 582 2,244 7,467
Extraordinary (loss) on the early
extinquishment of debt, net of
income taxes................... (2,753) (2,753)
Equity in earnings of
subsidiaries................... 26 5,223 (5,249)
------ ------ -------- ------- -------
Net income (loss)................ $4,667 $ 582 $ 4,714 $(5,249) $ 4,714
====== ====== ======== ======= =======
</TABLE>
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 28, 1996
<TABLE>
<CAPTION>
COMBINED COMBINED RECLASSIFICATIONS
GUARANTOR NON-GUARANTOR THE AND
SUBSIDIARIES SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
------------ ------------- ------- ----------------- ------------
<S> <C> <C> <C> <C> <C>
Net sales......................... $ $645 $63,839 $ $64,484
Cost of goods sold................ 598 43,476 44,074
--- ---- ------- ----- -------
Gross profit...................... 47 20,363 20,410
Selling, general and
administrative costs............ 10 8,865 8,875
Other operating expenses.......... 1,454 1,454
--- ---- ------- ----- -------
Operating income.................. 37 10,044 10,081
Other income (expense)............ 453 (6,297) (5,844)
--- ---- ------- ----- -------
Income before income taxes........ 490 3,747 4,237
Income tax expense................ (52) (1,586) (1,638)
Equity in earnings of
subsidiaries.................... 45 438 (483)
--- ---- ------- ----- -------
Net income (loss)................. $45 $438 $ 2,599 $(483) $ 2,599
=== ==== ======= ===== =======
</TABLE>
F-23
<PAGE> 124
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. SUBSEQUENT EVENT--(CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 30, 1995
<TABLE>
<CAPTION>
COMBINED COMBINED RECLASSIFICATIONS
GUARANTOR NON-GUARANTOR THE AND
SUBSIDIARIES SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
------------ ------------- ------- ----------------- ------------
<S> <C> <C> <C> <C> <C>
Net sales......................... $ $625 $67,815 $(322) $68,118
Cost of goods sold................ 310 47,396 47,706
---- ---- ------- ----- -------
Gross profit...................... 315 20,419 (322) 20,412
Selling, general and
administrative costs............ 80 8,909 $(322) 8,667
Other operating expenses.......... 1,825 1,825
---- ---- ------- ----- -------
Operating income.................. 235 9,685 9,920
Other income (expense)............ (68) (6,239) (6,307)
Income before income taxes, and
cumulative effect of accounting
change.......................... 167 3,446 3,613
---- ---- ------- ----- -------
Income tax expense................ 18 1,610 1,628
---- ---- ------- ----- -------
Income before cumulative effect of
accounting change............... 149 1,836 1,985
Cumulative effect of change in
method of accounting for
postretirement benefits net of
taxes of $570................... (855) (855)
Equity in earnings (loss) of
subsidiaries.................... (81) 149 (68)
---- ---- ------- ----- -------
Net income (loss)............... $(81) $149 $ 1,130 $ (68) $ 1,130
==== ==== ======= ===== =======
</TABLE>
F-24
<PAGE> 125
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. SUBSEQUENT EVENT--(CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JANUARY 3, 1998
<TABLE>
<CAPTION>
COMBINED COMBINED RECLASSIFICATIONS
GUARANTOR NON-GUARANTOR THE AND
SUBSIDIARIES SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
------------ ------------- -------- ----------------- ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by operating
activities..................... $ 4,431 $ 439 $ 5,090 $ $ 9,960
Investing activities:
Purchases of property, plant
and equipment............... (7) (2,522) (2,529)
Advances to subsidiaries....... (69,443) 69,443
-------- ----- -------- -------- --------
Net cash provided by (used in)
investing activities........ (69,443) (7) (2,522) 69,443 (2,529)
Financing activities:
Prepayment of debt, including
penalty..................... (55,690) (55,690)
Proceeds from debt............. 135,943 (69,443) 66,500
Payments of debt............... (13,700) (13,700)
Dividends paid................. (7,929) (7,929)
Intercompany transactions,
net......................... 2,498 (441) (2,057)
Capital contributions.......... 62,530 (62,530)
Other.......................... (878) (878)
-------- ----- -------- -------- --------
Net cash used in financing
activities..................... 65,028 (441) (6,841) (69,443) (11,697)
-------- ----- -------- -------- --------
Net increase (decrease) in cash
and equivalents................ 16 (9) (4,273) (4,266)
Cash and equivalents at beginning
of year........................ 105 4,540 4,645
-------- ----- -------- -------- --------
Cash and equivalents at end of
year........................... $ 16 $ 96 $ 267 $ $ 379
======== ===== ======== ======== ========
</TABLE>
F-25
<PAGE> 126
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. SUBSEQUENT EVENT--(CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 28, 1996
<TABLE>
<CAPTION>
COMBINED COMBINED RECLASSIFICATIONS
GUARANTOR NON-GUARANTOR THE AND
SUBSIDIARIES SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
------------ ------------- ------- ----------------- ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by operating
activities...................... $ 28 $ 414 $10,794 $ $11,236
Net cash used in investing
activities...................... (4) (2,763) (2,767)
Financing activities:
Payments of debt............. (2,700) (2,700)
Short-term borrowings........ (2,000) (2,000)
Intercompany transactions,
net........................ 30 (377) 347
Capital accounts............. (58) 10 48
Other........................
---- ----- ------- ----- -------
Net cash used in financing
activities................. (28) (367) (4,305) (4,700)
---- ----- ------- ----- -------
Net increase (decrease) in cash
and equivalents................. 43 3,726 3,769
Cash and equivalents at beginning
of year......................... 62 814 876
---- ----- ------- ----- -------
Cash and equivalents at end of
year............................ $ $ 105 $ 4,540 $ $ 4,645
==== ===== ======= ===== =======
</TABLE>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 30, 1995
<TABLE>
<CAPTION>
COMBINED COMBINED RECLASSIFICATIONS
GUARANTOR NON-GUARANTOR THE AND
SUBSIDIARIES SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
------------ ------------- ------- ----------------- ------------
<S> <C> <C> <C> <C> <C>
Net cash provided (used) by
operating activities............. $(508) $ 508 $ 7,612 $ $ 7,612
Net cash used in investing
activities....................... (340) (3,017) (3,357)
Financing activities:
Payments of debt................. (7,000) (7,000)
Short-term borrowings............ 2,000 2,000
Intercompany transactions, net... 508 (169) (339)
Other............................
----- ----- ------- ----- -------
Net cash used in financing
activities.................... 508 (169) (5,339) (5,000)
----- ----- ------- ----- -------
Net increase (decrease) in cash and
equivalents...................... (1) (744) (745)
Cash and equivalents at beginning
of year.......................... 63 1,558 1,621
----- ----- ------- ----- -------
Cash and equivalents at end of
year............................. $ $ 62 $ 814 $ $ 876
===== ===== ======= ===== =======
</TABLE>
F-26
<PAGE> 127
STEEL HEDDLE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
COMPANY COMPANY
JUNE 27, JANUARY 3,
1998 1998
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,798 $ 379
Accounts receivable....................................... 10,658 9,290
Inventories............................................... 18,542 14,030
Prepaid expenses.......................................... 121 99
-------- --------
Total current assets........................................ 31,119 23,798
Property, plant and equipment:
Cost...................................................... 41,528 52,561
Less accumulated depreciation............................. (802) (35,876)
-------- --------
40,726 16,685
Other assets and deferred charges:
Prepaid pension costs..................................... 2,458 546
Goodwill, net............................................. 106,843 22,537
Identifiable intangible assets, net....................... 12,715 --
Sundry.................................................... 4,336 774
-------- --------
126,352 23,857
-------- --------
Total assets...................................... $198,197 $ 64,340
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 1,499 $ 2,166
Accrued and sundry liabilities............................ 7,561 5,313
Deferred income taxes..................................... 1,402 670
Income taxes.............................................. 96 302
Current portion of long-term debt......................... -- 6,500
-------- --------
Total current liabilities................................... 10,558 14,951
Long-term debt, less current portion........................ 148,805 46,300
Retirement benefits payable................................. 4,407 5,126
Deferred income taxes....................................... 16,891 1,120
Redeemable common stock -- $.01 par value per
share -- authorized 300,000 shares, issued and outstanding
234,949 shares at June 27, 1998; and Class A, $.01 par
value per share -- authorized 2,000,000 shares, issued and
outstanding 91,080 shares at January 3, 1998.............. 2 1,366
Contingencies (Note 8)
Shareholders' equity (deficit):
Class B common stock par value $1.00 per
share -- authorized 1,500,000 shares, issued and
outstanding 10 shares at January 3, 1998............... --
Additional paid-in capital................................ 23,375 13,689
Notes receivable -- shareholders.......................... (350) --
Carryover basis of managements' interest.................. (4,494) --
Accumulated other comprehensive income.................... (48) (48)
(Deficit)................................................. (949) (18,164)
-------- --------
17,534 (4,523)
-------- --------
Total liabilities and shareholders' equity
(deficit)....................................... $198,197 $ 64,340
======== ========
</TABLE>
- ---------------
Note: The condensed consolidated balance sheet at January 3, 1998 has been
extracted from the audited financial statements.
See notes to unaudited condensed consolidated financial statements.
F-27
<PAGE> 128
STEEL HEDDLE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------------------------
JUNE 27, 1998 JUNE 28, 1997
----------------------- -------------
SUCCESSOR
COMPANY PREDECESSOR PREDECESSOR
(5 COMPANY COMPANY
WEEKS) (20 WEEKS) (26 WEEKS)
--------- ----------- -------------
<S> <C> <C> <C>
Net sales................................................... $ 7,161 $29,631 $35,751
Cost of goods sold.......................................... 4,973 18,628 23,169
------- ------- -------
Gross profit................................................ 2,188 11,003 12,582
Selling, general and administrative costs................... 845 3,824 4,212
Management fees -- related parties.......................... 74 132 337
Amortization of goodwill.................................... 221 289 364
------- ------- -------
Operating income............................................ 1,048 6,758 7,669
Other income (expense):
Interest income........................................... 20 29 67
Interest expense, including amortization of deferred
financing costs........................................ (2,462) (1,528) (2,735)
Other financing expense................................... -- (50) (175)
------- ------- -------
Income (loss) before income taxes and extraordinary item.... (1,394) 5,209 4,826
Income tax expense (benefit)................................ (445) 1,868 1,688
------- ------- -------
Income (loss) before extraordinary item..................... (949) 3,341 3,138
Extraordinary (loss) on the early extinguishment of debt,
net of income taxes of $1,688............................. -- -- (2,753)
------- ------- -------
Net income (loss)........................................... (949) 3,341 385
Other comprehensive income (loss) -- net of tax:
Foreign currency translation adjustment................... (16) 16 (7)
------- ------- -------
Comprehensive income (loss)................................. $ (965) $ 3,357 $ 378
======= ======= =======
</TABLE>
See notes to unaudited condensed consolidated financial statements.
F-28
<PAGE> 129
STEEL HEDDLE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------------------------
JUNE 27, 1998 JUNE 28, 1997
------------------------ -------------
SUCCESSOR PREDECESSOR PREDECESSOR
COMPANY COMPANY COMPANY
(5 WEEKS) (20 WEEKS) (26 WEEK)
---------- ----------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)........................................... $ (949) $ 3,341 $ 385
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation................................................ 746 1,517 1,732
Amortization................................................ 1,347 346 699
Accretion of senior discount debentures..................... 189 -- --
Benefit for deferred income taxes........................... (448) (83) --
Accrued retirement benefit costs............................ (221) 176 (147)
Extraordinary item.......................................... -- -- 4,441
Changes in operating assets and liabilities:
Accounts receivable....................................... (3) (1,977) (1,907)
Inventories............................................... 277 (888) (117)
Prepaid expenses.......................................... (18) (5) (71)
Accounts payable.......................................... (870) 203 (544)
Accrued and sundry liabilities............................ (374) (2,127) (2,896)
Income taxes payable...................................... (15) 1,707 (229)
--------- ------- --------
Net cash provided by (used in) operating activities......... (339) 2,210 1,346
INVESTING ACTIVITIES:
Acquisition of SH Holdings Corp.:
Current assets............................................ (31,128) -- --
Property, plant and equipment, net........................ (41,272) -- --
Other assets.............................................. (2,487) -- --
Intangible assets......................................... (124,357) -- --
Current and noncurrent liabilities........................ 16,905 -- --
Deferred income taxes..................................... 16,891 -- --
Long-term debt............................................ 52,492 -- --
--------- ------- --------
Net cash used to acquire SH Holdings Corp. ................. (112,956) -- --
Purchase of property, plant and equipment................... (199) (968) (958)
Proceeds on disposals of property, plant and equipment,
net....................................................... -- 238 --
--------- ------- --------
Net cash used in investing activities....................... (113,155) (730) (958)
FINANCING ACTIVITIES:
Proceeds from debt.......................................... 148,616 1,317 62,500
Proceeds from sale of stock................................. 22,995 -- --
Prepayments of debt, including penalty...................... (52,492) (1,625) (56,315)
Dividends paid.............................................. -- -- (7,929)
Financing costs incurred.................................... (5,378) -- (886)
--------- ------- --------
Net cash provided by (used in) financing activities......... 113,741 (308) (2,630)
--------- ------- --------
Increase (decrease) in cash and cash equivalents............ 247 1,172 (2,242)
Cash and cash equivalents at beginning of period............ 1,551 379 4,645
--------- ------- --------
Cash and cash equivalents at end of period.................. $ 1,798 $ 1,551 $ 2,403
========= ======= ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid............................................. $ 294 $ 1,893 $ 3,837
Income taxes paid......................................... $ 19 $ 270 $ 251
</TABLE>
See notes to unaudited condensed consolidated financial statements.
F-29
<PAGE> 130
STEEL HEDDLE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business -- Steel Heddle Group, Inc. ("SH Group" or the
"Company") is a holding company whose wholly-owned subsidiary, Steel Heddle Mfg.
Co. ("Steel Heddle") manufactures products and loom accessories used by textile
mills. It also processes and sells metal products from its wire rolling
facilities to industrial users. Steel Heddle sells to foreign and domestic
companies.
The Acquisition of Steel Heddle -- On May 26, 1998, SH Group consummated
the acquisition of Old Holdings (through various mergers, Steel Heddle Mfg. Co.
and subsidiaries). SH Group, a corporation formed by American Industrial
Partners Fund II, L.P., together with its affiliate, American Industrial
Partners, Inc. ("AIP") was organized as a holding company to effectuate the
acquisition of all of the outstanding common stock of Old Holdings. The purchase
price of approximately $175.2 million was financed with a $25 million capital
contribution from AIP (including rollover of the ownership interests of certain
members of management), approximately $15 million in proceeds from SH Group's
issuance of $29.25 million of 13 3/4% Senior Subordinated Discount Debentures,
issuance of $100 million of 10 5/8% Senior Subordinated Notes of Steel Heddle
and borrowings of approximately $33.6 million under a new bank Credit Facility
of Steel Heddle. The acquisition was accounted for using the purchase method of
accounting.
In accordance with the purchase method of accounting, the purchase price
has been allocated to the underlying assets and liabilities of Old Holdings
based on their estimated respective fair values at the date of acquisition. The
preliminary fair values have been determined by independent appraisals,
valuations and other means deemed appropriate by management. Management believes
that adjustments, if any, resulting from the finalization of the fair values
will not have a significant effect on the allocation of the purchase price or
the determination of goodwill. Based on such preliminary allocation, the
purchase price exceeded the fair value of the net assets acquired by
approximately $107.0 million. In addition, certain options to purchase the
common stock of the Predecessor that were held by continuing management
employees prior to the time of the acquisition were converted into options to
acquire 17,707 shares of the common stock of SH Group at an exercise price of
$15 per share. On a fully-diluted basis, these options represent approximately
5% of the ownership interest in SH Group immediately following the acquisition.
The historical predecessor basis of such options has been considered in the
allocation of the purchase cost and in the initial basis of equity. Since the
assets and liabilities of Old Holdings have been adjusted to their fair values
as of the date of acquisition, the financial information for periods prior to
May 26, 1998 ("Predecessor Company") are not comparable with financial
information for periods subsequent to that date ("Successor Company").
The following unaudited pro forma financial information shows the results
of operations as though the acquisition occurred as of December 29, 1996. These
results include the straight-line amortization of the excess of purchase price
over the net assets acquired over a 40-year period, the straight-line
amortization of certain identifiable intangible assets over a 12 1/2 year
period, an increase in management fees paid to a related party due to a new
contract with the new ownership group, an increase in interest expense as a
result of the debt issued and financing costs incurred to finance the
Acquisition, and a reduction in income tax expense as a result of the reductions
in income resulting from the above described increased expenses.
<TABLE>
<CAPTION>
PRO FORMA
SIX MONTHS ENDED
----------------------
JUNE 27, JUNE 28,
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Revenue..................................................... $36,792 $35,751
Income from continuing operations........................... 5,033 4,262
Net loss.................................................... (2,654) (2,836)
</TABLE>
The pro forma financial information presented above does not purport to be
indicative of either (i) the results of operations had the acquisition taken
place on December 29, 1996 or (ii) future results of operations.
F-30
<PAGE> 131
STEEL HEDDLE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS -- (CONTINUED)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION -- (CONTINUED)
Basis of Presentation -- The accompanying unaudited condensed consolidated
financial statements of the Company have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
It is suggested that these unaudited condensed financial statements be read in
conjunction with the financial statements and notes thereto included in the
Predecessor Company's consolidated financial statements for the year ended
January 3, 1998. In addition, certain other significant accounting policies
arising from the May 26, 1998 acquisition include the following:
Goodwill -- Goodwill associated with the May 26, 1998 acquisition is
approximately $107.0 million and is being amortized on a straight-line
basis over 40 years. Accumulated amortization was approximately $0.2
million as of June 27, 1998.
Identifiable Intangible Assets -- Identifiable intangible assets
acquired in the May 26, 1998 acquisition, consisting principally of
engineering drawings, were approximately $12.8 million and are being
amortized on a straight-line basis over 12.5 years. Accumulated
amortization was approximately $0.1 million as of June 27, 1998.
Deferred Financing Costs -- Deferred financing costs associated with
the acquisition financing were approximately $4.4 million and are being
amortized using the interest method over the life of the related debt.
Accumulated amortization was approximately $0.1 million as of June 27, 1998
and the net deferred financing costs are classified as sundry other assets
and deferred charges in the accompanying condensed consolidated balance
sheet.
In the opinion of the management of the Company, these unaudited condensed
consolidated financial statements contain all of the adjustments consisting of a
normal recurring nature necessary for fair presentation. Operating results for
the six months ended June 27, 1998 (5 weeks of Successor Company and 20 weeks of
Predecessor Company) are not necessarily indicative of the results that may be
expected for fiscal 1998. Certain amounts previously presented in the
Predecessor Company consolidated financial statements for prior periods have
been reclassified to conform to current classification. The preparation of
financial statements in accordance with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of revenues and expense during the reporting period. Actual results
could differ from those estimates.
Adoption of New Accounting Standard -- At January 4, 1998, the Company
adopted SFAS No. 130, "Reporting Comprehensive Income", which requires
comprehensive income to be reported in a financial statement that is displayed
with the same prominence as other financial statements. Adoption of this
statement did not have a significant effect on the Company's consolidated
financial position, results of operations or cash flows for the six months ended
June 27, 1998.
2. EXTRAORDINARY ITEM
On February 21, 1997, the Company entered into a credit arrangement with a
bank group consisting of a Term Loan Facility of $52.5 million and a $15 million
Revolving Line of Credit. The Company utilized proceeds of the Term Loan and the
Revolving Credit Facility to repay its senior notes in the principal amount of
$24.9 million plus a penalty of $2.5 million and to repay its subordinated notes
in the principal amount of $25.1 million plus a penalty of $3.2 million. The
total penalty net of other losses and gains on the refinancing is reported as an
extraordinary item, net of taxes of approximately $1.7 million. Included in the
net extraordinary loss is a reversal of accrued interest of approximately $1.4
million. This reversal resulted from the difference between the stated rate of
interest and the effective rate of interest.
F-31
<PAGE> 132
STEEL HEDDLE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS -- (CONTINUED)
3. BALANCE SHEET COMPONENTS
Certain balance sheet components, after adjustment to fair values at the
May 26, 1998 acquisition date, are as follows (in thousands):
Inventories:
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
COMPANY COMPANY
JUNE 27, JANUARY 3,
1998 1998
----------- -----------
(UNAUDITED)
<S> <C> <C>
Raw materials and component parts........................... $ 5,801 $ 6,312
Work in process and finished goods.......................... 12,741 7,718
------- -------
$18,542 $14,030
======= =======
</TABLE>
If all inventories had been priced by FIFO or average cost method, they
would have been higher than the amounts reported by approximately $627 at
January 3, 1998 and amounts are comparable at June 27, 1998.
<TABLE>
<CAPTION>
Property, plant and equipment: SUCCESSOR PREDECESSOR
COMPANY COMPANY
JUNE 27, JANUARY 3,
1998 1998
----------- -----------
(UNAUDITED)
<S> <C> <C>
Land........................................................ $ 672 $ 855
Buildings and improvements.................................. 12,983 10,692
Machinery and equipment..................................... 22,202 32,362
Furniture and fixtures...................................... 4,367 7,640
Automotive equipment........................................ 491 827
Construction in progress.................................... 813 185
------- --------
41,528 52,561
Less: accumulated amortization.............................. (802) (35,876)
------- --------
$40,726 $ 16,685
======= ========
</TABLE>
Commitments to complete construction in progress total approximately $566
at June 27, 1998.
4. LONG-TERM DEBT
Long-Term Debt consists of the following:
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
COMPANY COMPANY
JUNE 27, JANUARY 3,
1998 1998
----------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Senior Notes, due in 28 quarterly installments, ranging from
$1,600 to $2,400, commencing March 1997................... -- $46,000
Revolving Line of Credit.................................... -- 6,800
10 5/8% Senior Subordinated Notes ("Notes")................. $100,000 --
13 3/4% Senior Discount Debentures ("Debentures")........... 15,205 --
Bank Credit Facility ("Credit Facility"):...................
Term Loan.............................................. 30,000 --
Revolving Loan......................................... 3,600 --
-------- -------
148,805 52,800
Less current portion........................................ -- (6,500)
-------- -------
$148,805 $46,300
======== =======
</TABLE>
F-32
<PAGE> 133
STEEL HEDDLE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS -- (CONTINUED)
4. LONG-TERM DEBT -- (CONTINUED)
The Senior Notes and the Revolving Line of Credit were repaid in connection
with the new financing associated with the May 26, 1998 acquisition.
The Notes are due in full on June 1, 2008. Interest on the Notes is payable
semi-annually in arrears commencing on December 1, 1998.
The Debentures (original proceeds of $15.016 million and accreted value of
$15.205 million at June 27, 1998) will mature on June 1, 2009. The Debentures
are accreting, using the interest method, to a principal amount of $29.25
million on June 1, 2003. Cash interest on the Debentures will be payable
semi-annually in arrears commencing on December 1, 2003.
The Credit Facility consists of a $30 million term loan and a $20 million
revolving loan commitment ($3.6 million borrowed on the revolving loan at June
27, 1998). The term loan is payable in quarterly installments ranging from $1
million to $2 million beginning July 3, 1999 through April 3, 2004. The term
loan and the revolving loan bear interest at the bank's prime rate (as defined)
plus one percent or Eurodollar rates (as defined) plus 2.25 percent, at the
Company's option. At June 27, 1998, the interest rate on the Credit Facility
borrowings was 7.91% and approximately $15.7 million was available for borrowing
under the revolving loan. Substantially all of the Company's assets are pledged
as collateral under the Credit Facility.
The Credit Facility, the Notes and the Debentures contain various financial
and non-financial covenants; including minimum levels of EBITDA, minimum
interest coverage ratio, and maximum capital expenditures and total leverage
ratio.
See Note 8.
5. MANAGEMENT SERVICES AGREEMENT
On May 26, 1998, the Company entered into a management services agreement
with AIP. Under the terms of the agreement, AIP will provide general management,
financial and other corporate advisory services to the Company for $895,000
annually, payable in equal semi-annual installments on May 30 and November 29.
The agreement expires on the earlier of May 26, 2008 or such other date as AIP
and the Company mutually agree.
6. REDEEMABLE COMMON STOCK
The common stock contains provisions that allow the holder or the estate of
the holder, upon disability or death of the holder, to require SH Group to
redeem such stock. Accordingly, such common stock is classified as redeemable
common stock in the accompanying condensed consolidated balance sheet at June
27, 1998 and is classified outside of the shareholders' equity section. The
redemption price is equal to the lesser of a) the fair value of such stock as
determined by the Board, or b) the original cost of the stock plus interest at
6% per annum. Further, the redeemable common stock contains certain other
provisions that allow SH Group to call such stock upon the termination, as
defined, of an employee stockholder. The call price which ranges between the
original cost, original cost plus interest at 6% per annum and fair market
value, as determined by the Board, is dependant on the reason for termination.
In accordance with relevant accounting literature, such redeemable common
stock is recorded at its original cost basis with no accretion, as the events
that give rise to the redemption provisions are uncertain as to their
occurrence.
F-33
<PAGE> 134
STEEL HEDDLE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS -- (CONTINUED)
7. STOCK OPTION PLAN
On May 26, 1998, the Company adopted the Steel Heddle Group, Inc.
Management Stock Option Plan (the "Plan"), a non-qualified stock option plan.
Under the terms of the Plan, options to purchase 13,172 shares of the Company's
Common Stock at an exercise price of $100 per share were granted to certain
members of management in conjunction with the acquisition. All options vest on
May 26, 2005, but may vest earlier if certain specified annual EBITDA (as
defined) targets are achieved from 1998 through 2001. In addition, the Plan
provides that options to purchase up to 5,645 shares of the Company's Common
Stock at an exercise price of $100 per share may be granted to certain members
of management on a discretionary basis. At June 27, 1998, no such discretionary
options were granted.
8. CONTINGENCIES
Litigation -- Although the Company may be subject to litigation from time
to time in the ordinary course of business, it is not a party to any pending or
threatened legal proceedings that management believes will have a material
impact on its financial position or results of operations.
Environmental -- The Company is subject to various federal, state and local
government laws and regulations concerning, among other things, the discharge,
storage, handling and disposal of a variety of hazardous and non-hazardous
substances and wastes.
The Company believes that it is in substantial compliance with all existing
environmental laws and regulations to which it is subject. In addition, the
Company is subject to liability under environmental laws relating to the past
release or disposal of hazardous materials. The Company has included in accrued
and sundry liabilities an accrual for hazardous waste site maintenance for the
estimated total cost over an initial period of 30 years to close out and monitor
its inactive hazardous waste site. Payment is secured by a standby letter of
credit of approximately $671. To date, and in management's belief for the
foreseeable future, additional liability under and compliance with existing
environmental laws has not had and will not have a material adverse effect on
the Company's financial position or results of operations.
9. PAYMENT OF STEEL HEDDLE'S SENIOR SUBORDINATED NOTES
Payment of Steel Heddle's Senior Subordinated Notes is unconditionally
guaranteed, jointly and severally, on a senior subordinated basis by certain of
Steel Heddle's wholly-owned subsidiaries. Management has determined that
separate complete financial statements of the guarantor entities would not be
material to users of the financial statements, therefore, the following
information sets forth unaudited condensed consolidating financial statements of
the guarantor and non-guarantor subsidiaries.
F-34
<PAGE> 135
STEEL HEDDLE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. PAYMENT OF STEEL HEDDLE'S SENIOR SUBORDINATED NOTES -- (CONTINUED)
UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JUNE 27, 1998
(SUCCESSOR)
<TABLE>
<CAPTION>
COMBINED COMBINED RECLASSIFICATIONS
GUARANTOR NON-GUARANTOR AND
SUBSIDIARIES SUBSIDIARIES STEEL HEDDLE SH GROUP ELIMINATIONS CONSOLIDATED
------------ ------------- ------------ -------- ----------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash and cash
equivalents............ $ 2,204 $ 27 $ (433) $ 1,798
Accounts receivable...... 320 10,338 10,658
Inventories.............. 254 18,288 18,542
Prepaid expenses......... 72 16 222 $ 67 $ (256) 121
------- ------ -------- -------- --------- --------
Total current
assets........ 2,276 617 28,415 67 (256) 31,119
Due from affiliates...... 3,477 74,170 (77,647)
Notes receivable from
affiliates............. 69,443 (69,443)
Investments in
subsidiaries........... (219) 73,735 108,019 (181,535)
Property, plant &
equipment, net......... 55 40,671 40,726
Other assets and deferred
charges, net........... 125,905 447 126,352
------- ------ -------- -------- --------- --------
Total assets.... $71,500 $4,149 $342,896 $108,533 $(328,881) $198,197
======= ====== ======== ======== ========= ========
Liabilities and
shareholders' equity:
Accounts payable and
accrued and sundry
liabilities............ $ 9,134 $ (74) $ 9,060
Due to affiliates, net... $ 1,855 $75,792 (77,647)
Deferred income taxes.... 1,402 1,402
Income taxes............. 278 (182) 96
------- ------ -------- -------- --------- --------
Total current
liabilities... 2,133 10,536 75,792 (77,903) 10,558
Long-term debt........... 203,043 15,205 (69,443) 148,805
Retirement benefits
payable................ 4,407 4,407
Deferred income taxes.... 16,891 16,891
Redeemable common stock.. 2 2
Shareholders' equity
(deficit).............. 69,367 $4,149 108,019 17,534 (181,535) 17,534
------- ------ -------- -------- --------- --------
Total
liabilities
and
shareholders'
equity........ $71,500 $4,149 $342,896 $108,533 $(328,881) $198,197
======= ====== ======== ======== ========= ========
</TABLE>
F-35
<PAGE> 136
STEEL HEDDLE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. PAYMENT OF STEEL HEDDLE'S SENIOR SUBORDINATED NOTES -- (CONTINUED)
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE FIVE WEEKS ENDED JUNE 27, 1998
(SUCCESSOR)
<TABLE>
<CAPTION>
COMBINED COMBINED RECLASSIFICATIONS
GUARANTOR NON-GUARANTOR AND
SUBSIDIARIES SUBSIDIARIES STEEL HEDDLE SH GROUP ELIMINATIONS CONSOLIDATED
------------ ------------- ------------ -------- ----------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales............. $103 $ 7,058 $ 7,161
Cost of goods sold.... 74 4,899 4,973
------ ---- ------- ------- ------- -------
Gross profit.......... 29 2,159 2,188
Selling, general and
administrative
costs............... 845 845
Other expenses........ 295 295
------ ---- ------- ------- ------- -------
Operating income...... 29 1,019 1,048
Other income
(expense)........... $ 796 (3,046) $ (192) (2,442)
------ ---- ------- ------- ------- -------
Income (loss) before
income taxes........ 796 29 (2,027) (192) (1,394)
Income tax expense
(benefit)........... 302 10 (690) (67) (445)
Equity in earnings
(losses) of
subsidiaries........ 19 513 (824) $ 292
------ ---- ------- ------- ------- -------
Net income (loss)..... $ 513 $ 19 $ (824) $ (949) $ 292 $ (949)
====== ==== ======= ======= ======= =======
</TABLE>
F-36
<PAGE> 137
STEEL HEDDLE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. PAYMENT OF STEEL HEDDLE'S SENIOR SUBORDINATED NOTES -- (CONTINUED)
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE TWENTY WEEKS ENDED MAY 25, 1998
(PREDECESSOR)
<TABLE>
<CAPTION>
COMBINED COMBINED RECLASSIFICATIONS
GUARANTOR NON-GUARANTOR THE AND
SUBSIDIARIES SUBSIDIARIES COMPANY(1) ELIMINATIONS CONSOLIDATED
------------ ------------- ---------- ----------------- ------------
<S> <C> <C> <C> <C> <C>
Net sales....................... $354 $29,277 $29,631
Cost of goods sold.............. 392 18,236 18,628
------ ---- ------- ------- -------
Gross profit.................... (38) 11,041 11,003
Selling, general and
administrative costs.......... 5 3,819 3,824
Other expenses.................. 421 421
------ ---- ------- ------- -------
Operating income (loss)......... (43) 6,801 6,758
Other income (expense).......... $3,417 (19) (4,947) (1,549)
------ ---- ------- ------- -------
Income (loss) before income
taxes......................... 3,417 (62) 1,854 5,209
Income tax expense.............. 1,299 23 546 1,868
Equity in earnings (losses) of
subsidiaries.................. (255) 2,033 $(1,778) --
------ ---- ------- ------- -------
Net income (loss)............... $1,863 $(85) $ 3,341 $(1,778) $ 3,341
====== ==== ======= ======= =======
</TABLE>
- ---------------
(1) For the periods marked as "Predecessor", "the Company" is comprised of the
financial information of Old Holdings, SH Intermediate, and Steel Heddle.
F-37
<PAGE> 138
STEEL HEDDLE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. PAYMENT OF STEEL HEDDLE'S SENIOR SUBORDINATED NOTES -- (CONTINUED)
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 28, 1997
(PREDECESSOR)
<TABLE>
<CAPTION>
COMBINED COMBINED RECLASSIFICATIONS
GUARANTOR NON-GUARANTOR THE AND
SUBSIDIARIES SUBSIDIARIES COMPANY(1) ELIMINATIONS CONSOLIDATED
------------ ------------- ---------- ----------------- ------------
<S> <C> <C> <C> <C> <C>
Net sales................. $421 $35,330 $35,751
Cost of goods sold........ 384 22,785 23,169
------ ---- ------- ------- -------
Gross profit.............. 37 12,545 12,582
Selling, general and
administrative costs.... 5 4,207 4,212
Other expenses............ 701 701
------ ---- ------- ------- -------
Operating income.......... 32 7,637 7,669
Other income (expense).... $2,797 153 (5,793) (2,843)
------ ---- ------- ------- -------
Income before income taxes
and extraordinary
item.................... 2,797 185 1,844 4,826
Income tax expense........ 1,063 18 607 1,688
------ ---- ------- ------- -------
Income before
extraordinary item...... 1,734 167 1,237 3,138
Extraordinary (loss)on
early extinguishment of
debt, net of income
taxes................... (2,753) (2,753)
Equity in earnings of
subsidiaries............ 37 1,901 $(1,938)
------ ---- ------- ------- -------
Net income................ $1,771 $167 $ 385 $(1,938) $ 385
====== ==== ======= ======= =======
</TABLE>
- ---------------
(1) For the periods marked as "Predecessor", "the Company" is comprised of the
financial information of Old Holdings, SH Intermediate, and Steel Heddle.
F-38
<PAGE> 139
STEEL HEDDLE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. PAYMENT OF STEEL HEDDLE'S SENIOR SUBORDINATED NOTES -- (CONTINUED)
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE FIVE WEEKS ENDED JUNE 27, 1998
(SUCCESSOR)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES STEEL HEDDLE SH GROUP CONSOLIDATION
------------ ------------- ------------ --------- -------------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities................. $2,193 $(140) $ (1,995) $ (397) $ (339)
Investing activities:..................
Purchases of property, plant and
equipment........................ (199) (199)
Purchase of business............... (112,956) (112,956)
------ ----- -------- --------- ----------
Net cash used in investing
activities....................... (199) (112,956) (113,155)
Financing activities:..................
Payments of debt................... (52,492) (52,492)
Proceeds from issuance of debt..... 133,600 15,016 148,616
Intercompany transactions, net..... 141 (75,933) 75,792
Proceeds from sale of stock........ 22,995 22,995
Other.............................. (4,928) (450) (5,378)
------ ----- -------- --------- ----------
Net cash provided by financing
activities....................... 141 247 113,353 113,741
------ ----- -------- --------- ----------
Net increase (decrease) in cash and
equivalents.......................... 2,193 1 (1,947) -- 247
Cash and equivalents at beginning of
year................................. 11 26 1,514 -- 1,551
------ ----- -------- --------- ----------
Cash and equivalents at end of year.... $2,204 $ 27 $ (433) -- $ 1,798
====== ===== ======== ========= ==========
</TABLE>
F-39
<PAGE> 140
STEEL HEDDLE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. PAYMENT OF STEEL HEDDLE'S SENIOR SUBORDINATED NOTES -- (CONTINUED)
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE TWENTY WEEKS ENDED MAY 25, 1998
(PREDECESSOR)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR THE
SUBSIDIARIES SUBSIDIARIES COMPANY(1) CONSOLIDATED
------------ ------------- ---------- ------------
<S> <C> <C> <C> <C>
Net cash provided by operating activities..... $ 1,158 $ 220 $ 832 $2,210
Investing activities:.........................
Purchases of property, plant and
equipment.............................. (20) (948) (968)
Proceeds from sale of property, plant and
equipment.............................. 238 238
------- ----- ------- ------
Net cash used in investing activities.... (20) (710) (730)
Financing activities:.........................
Revolver borrowings, net................. 1,317 1,317
Payments of debt......................... (1,625) (1,625)
Intercompany transactions, net........... (1,163) (270) 1,433
------- ----- ------- ------
Net cash provided by (used in) financing
activities............................. (1,163) (270) 1,125 (308)
------- ----- ------- ------
Net increase (decrease) in cash and
equivalents................................. (5) (70) 1,247 1,172
Cash and equivalents at beginning of year..... 16 96 267 379
------- ----- ------- ------
Cash and equivalents at end of year........... $ 11 $ 26 $ 1,514 $1,551
======= ===== ======= ======
</TABLE>
(1) For the periods marked as "Predecessor", "the Company" is comprised of the
financial information of Old Holdings, SH Intermediate, and Steel Heddle.
F-40
<PAGE> 141
STEEL HEDDLE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. PAYMENT OF STEEL HEDDLE'S SENIOR SUBORDINATED NOTES -- (CONCLUDED)
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 28, 1997
(PREDECESSOR)
<TABLE>
<CAPTION>
COMBINED COMBINED RECLASSIFICATIONS
GUARANTOR NON-GUARANTOR THE AND
SUBSIDIARIES SUBSIDIARIES COMPANY(1) ELIMINATIONS CONSOLIDATED
------------ ------------- ---------- ----------------- ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by
operating activities.... $ 2,659 $ 54 $ (1,367) $ 1,346
Investing activities:
Purchases of
property, plant and
equipment.......... (1) (957) (958)
Advances to
subsidiaries....... (65,172) -- $ 65,172 --
-------- ---- -------- -------- --------
Net cash used in
investing
activities......... (65,172) (1) (957) 65,172 (958)
Financing activities:
Dividends paid....... (7,929) (7,929)
Pre-payments of debt,
including
penalty............ (56,315) (56,315)
Proceeds from
issuance of debt... 127,672 (65,172) 62,500
Intercompany
transactions,
net................ (4) (24) 28
Capital
contributions...... 62,531 (62,531)
Other................ (886) (886)
-------- ---- -------- -------- --------
Net cash provided by
(used in) financing
activities......... 62,527 (24) 39 (65,172) (2,630)
-------- ---- -------- -------- --------
Net increase (decrease) in
cash and equivalents.... 14 29 (2,285) (2,242)
Cash and equivalents at
beginning of year....... 105 4,540 4,645
-------- ---- -------- -------- --------
Cash and equivalents at
end of year............. $ 14 $134 $ 2,255 $-- $ 2,403
======== ==== ======== ======== ========
</TABLE>
- ---------------
(1) For the periods marked as "Predecessor," "the Company" is comprised of the
financial information of Old Holdings, SH Intermediate, and Steel Heddle.
F-41
<PAGE> 142
[This page intentionally left blank]
<PAGE> 143
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING NOT
CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY SH GROUP OR
THE INITIAL PURCHASER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR
A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN SECURITIES OFFERED
HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. 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 OR THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF SH GROUP SINCE SUCH DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Available Information.................. i
Summary................................ 1
Risk Factors........................... 15
Acquisition Transactions............... 22
Use of Proceeds........................ 23
Capitalization......................... 24
Unaudited Pro Forma Condensed
Consolidated Financial Data.......... 25
Selected Consolidated Historical
Financial Data....................... 28
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 30
Business............................... 38
Management............................. 47
Certain Relationships and Related
Transactions......................... 51
Description of SH Group Common Stock... 52
Security Ownership..................... 52
Description of Debentures.............. 54
The Exchange Offer..................... 83
Description of Other Indebtedness...... 91
Certain Federal Income Tax
Considerations....................... 94
Plan of Distribution................... 95
Legal Matters.......................... 95
Experts................................ 95
Change in Accountants.................. 95
Index to Consolidated Financial
Statements........................... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
PROSPECTUS
$29,250,000
[STEEL HEDDLE LOGO]
STEEL HEDDLE GROUP, INC.
OFFER TO EXCHANGE $1,000 PRINCIPAL
AMOUNT OF ITS 13 3/4% SERIES B
SENIOR DISCOUNT DEBENTURES DUE 2009
WHICH HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT
FOR EACH $1,000 PRINCIPAL AMOUNT
OF ITS OUTSTANDING 13 3/4% SERIES A
SENIOR DISCOUNT DEBENTURES DUE 2009
,1998
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 144
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
SH Group is incorporated under the laws of the State of Delaware. Section
145 of the General Corporation Law of the State of Delaware, inter alia,
("Section 145") provides that a Delaware corporation may indemnify any persons
who were, are or are threatened to be made, parties to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of such corporation),
by reason of the fact that such person is or was an officer, director, employee
or agent of such corporation, or is or was serving at the request of such
corporation as a director, officer employee or agent of another corporation or
enterprise. The indemnity may include expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such action, suit or proceeding, provided such
person acted in good faith and in a manner he reasonably believed to be in or
not opposed to the corporation's best interests and, with respect to any
criminal action or proceeding, had no reasonable cause to believe that his
conduct was illegal. A Delaware corporation may indemnify any persons who are,
were or are threatened to be made, a party to any threatened, pending or
completed action or suit by or in the right of the corporation by reason of the
fact that such person was a director, officer, employee or agent of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection with the defense or settlement
of such action or suit, provided such person acted in good faith and in a manner
he reasonably believed to be in or not opposed to the corporation's best
interests, provided that no indemnification is permitted without judicial
approval if the officer, director, employee or agent is adjudged to be liable to
the corporation. Where an officer, director, employee or agent is successful on
the merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses which such officer or
director has actually and reasonably incurred.
SH Group's Certificate of Incorporation and By-laws provides for the
indemnification of directors and officers of SH Group to the fullest extent
permitted by the General Corporation Law of the State of Delaware, as it
currently exists or may hereafter be amended.
Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation or enterprise,
against any liability asserted against him and incurred by him in any such
capacity, arising out of his status as such, whether or not the corporation
would otherwise have the power to indemnify him under Section 145.
SH Group maintains and has in effect insurance policies covering all of SH
Group's directors and officers against certain liabilities for actions taken in
such capacities, including liabilities under the Securities Act of 1933.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<C> <C> <S>
3.1 -- Certificate of Amended and Restated Certificate of
Incorporation of SH Group.
3.2 -- By-laws of SH Group.
4.1 -- Indenture, dated as of May 26, 1998, among SH Group and
United States Trust Company of New York, as Trustee.
4.2 -- Purchase Agreement, dated as of May 21, 1998, between SH
Group and Donaldson, Lufkin & Jenrette Securities
Corporation.
4.3 -- Registration Rights Agreement, dated as of May 26, 1998
between SH Group and Donaldson, Lufkin & Jenrette Securities
Corporation.
4.4 -- Stockholders Agreement, dated as of May 26, 1998, among SH
Group and its stockholders.
</TABLE>
II-1
<PAGE> 145
<TABLE>
<C> <C> <S>
5.1 -- Opinion of Kirkland & Ellis re Legality.
8.1 -- Opinion of Kirkland & Ellis re Tax Matters.
10.1 -- Pledge Agreement, dated as of May 26, 1998, among the
Company, SH Group, Steel Heddle International, Inc. and
Heddle Capital Corp. and NationsBank, N.A., as
administrative agent and documentation agent.
10.2 -- Stock Purchase Agreement, dated as of May 1, 1998, by and
among SH Holdings Corp., Butler Capital Corporation, SH
Group and the stockholders of SH Holdings Corp.
10.3 -- Management Services Agreement, dated as of May 26, 1998, by
and among the Company, Steel Heddle International, Inc.,
Heddle Capital Corp., SH Group, Steel Heddle International
Ltd., Steel Heddle (Canada) LTEE/LTD and American Industrial
Partners Corporation.
10.4 -- Management Stock Option Plan adopted by the Board of
Directors of SH Group as of May 26, 1998.
12.1 -- Computation of earnings to fixed charges.
16.1 -- Letter re Change in Certifying Accountants
21.1 -- Subsidiaries of SH Group.
23.1 -- Consent of Ernst & Young LLP.
23.2 -- Consent of Deloitte & Touche LLP.
23.3 -- Consent of Kirkland & Ellis (included in Exhibit 5.1 and
Exhibit 8.1).
24.1 -- Power of Attorney (included in signature page).
25.1 -- Statement of Eligibility of Trustee on Form T-1.
27.1 -- Financial Data Schedule.
99.1 -- Form of Letter of Transmittal.
99.2 -- Form of Notice of Guaranteed Delivery.
99.3 -- Form of Tender Instructions.
</TABLE>
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at the time shall be deemed to
be the initial bona fide offering thereof.
II-2
<PAGE> 146
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) If the registrant is a foreign private issuer, to file a
post-effective amendment to the registration statement to include any
financial statements required by sec.210.3-19 of this chapter at the start
of any delayed offering or throughout a continuous offering. Financial
statements and information otherwise required by Section 10(a)(3) of the
Act need not be furnished, provided, that the registrant includes in the
prospectus, by means of a post-effective amendment, financial statements
required pursuant to this paragraph (a)(4) and other information necessary
to ensure that all other information in the prospectus is at least as
current as the date of those financial statements. Notwithstanding the
foregoing, with respect to registration statements on Form F-3, a
post-effective amendment need not be filed to include financial statements
and information required by Section 10(a)(3) of the Act or sec.210.3-19 of
this chapter if such financial statements and information are contained in
periodic reports filed with or furnished to the Commission by the
registrant pursuant to section 13 or section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the Form F-3.
(5) That for purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(6) That for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
(7) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this
form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding
to the request.
(8) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions described under
Item 20 or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-3
<PAGE> 147
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF GREENVILLE, STATE OF
SOUTH CAROLINA, ON OCTOBER 14, 1998.
STEEL HEDDLE GROUP, INC.
By: /s/ JERRY B. MILLER
------------------------------------
Name: Jerry B. Miller
Title: Vice President--Finance and
Secretary
------------------------
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Jerry B. Miller, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities (including
his capacity as a director and/or officer of Steel Heddle Group, Inc. ), to sign
any or all amendments (including post-effective amendments) to this registration
statement and any subsequent registration statement filed pursuant to Rule
462(b) under the Securities Act of 1933, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorney-in-fact and agent full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
------------------------
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement and power of attorney have been signed by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<C> <S> <C>
* President, Chief Executive October 14, 1998
- ----------------------------------------------------- Officer and Director
BENJAMIN G. TEAM (principal executive
officer)
/s/ JERRY B. MILLER Vice President--Finance and October 14, 1998
- ----------------------------------------------------- Secretary (principal
JERRY B. MILLER financial and accounting
officer)
* Executive Vice President October 14, 1998
- ----------------------------------------------------- and Director
ROBERT W. DILLON
* Director October 14, 1998
- -----------------------------------------------------
NATHAN L. BELDEN
* Director October 14, 1998
- -----------------------------------------------------
ROBERT J. KLEIN
* Director October 14, 1998
- -----------------------------------------------------
KIM A. MARVIN
* Director October 14, 1998
- -----------------------------------------------------
ROBERT L. PURDUM
* Director October 14, 1998
- -----------------------------------------------------
THEODORE C. ROGERS
*By: /s/ JERRY B. MILLER
-------------------------------------------------
Attorney in fact
</TABLE>
II-4
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Experts" and
"Change in Accountants" and to the use of our report dated January 28, 1998,
except for Note 14, as to which the date is May 26, 1998, with respect to the
financial statements of Steel Heddle Mfg. Co. included in Amendment No. 2 to the
Registration Statement (Form S-4 No. 333-61041) and related Prospectus of Steel
Heddle Group, Inc. for the registration of $29,250,000 in Series B 13 3/4%
Senior Discount Debentures due 2009.
/s/ Ernst & Young LLP
Greenville, S.C.
October 14, 1998
<PAGE> 1
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to Registration Statement No.
333-61041 on Form S-4 of Steel Heddle Group, Inc. of our report dated May 4,
1998, appearing in the Prospectus, which is part of such Registration Statement,
and to the reference to us under the heading "Experts" in such Prospectus.
/s/ DELOITTE & TOUCHE LLP
Greenville, South Carolina
October 14, 1998
