UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended October 2, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____ to _____.
Commission File number 333-61041
STEEL HEDDLE GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 57-1067030
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1801 Rutherford Road, Greenville, South Carolina 29607
(Address of principal executive offices)
Registrant's telephone number (864) 244-4110
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] yes [ ] no
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date. 234,949 shares of the Company's
Common Stock, par value $0.01 per share, were outstanding as of November 12,
1999.
<PAGE>
STEEL HEDDLE GROUP, INC.
Table of Contents
PART I FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1. Consolidated Balance Sheets
as of October 2, 1999 (Unaudited) and January 2, 1999...........................3
Unaudited Consolidated Statement of Operations and Comprehensive Loss
for the Three Months Ended October 2, 1999 and October 3, 1998..................5
Unaudited Consolidated Statement of Operations and Comprehensive Income (Loss)
for the Nine Months Ended October 2, 1999 (Successor), the Nineteen Weeks
Ended October 3, 1998 (Successor) and the Twenty Weeks Ended May 25, 1998
(Predecessor)...................................................................6
Unaudited Consolidated Statements of Cash Flows
for the Nine Months Ended October 2, 1999 (Successor), the Nineteen Weeks
Ended October 3, 1998 (Successor) and the Twenty Weeks Ended May 25, 1998
(Predecessor)...................................................................7
Notes to Unaudited Consolidated Financial Statements.................................8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................................20
Item 3. Quantitative and Qualitative Disclosures about Market Risk..........................27
PART II OTHER INFORMATION..................................................................28
</TABLE>
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STEEL HEDDLE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
OCTOBER 2, 1999 JANUARY 2, 1999
--------------- ---------------
(Unaudited) (1)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 254 $ 1,182
Accounts receivable, net 12,375 9,873
Income taxes receivable 33 1,279
Inventories 18,200 19,730
Prepaid expenses 200 125
------- ------
Total current assets 31,062 32,189
PROPERTY, PLANT & EQUIPMENT:
Cost 46,097 46,014
Less accumulated depreciation (10,821) (4,510)
------- -------
35,276 41,504
OTHER ASSETS:
Prepaid pension costs 2,005 2,185
Goodwill, net 105,086 107,124
Identifiable intangible assets, net 11,435 12,203
Assets held for sale 490 -
Sundry 4,236 4,696
------- -------
123,252 126,208
------- -------
TOTAL ASSETS $189,590 $199,901
======== ========
</TABLE>
(1) Derived from January 2, 1999 audited financial statements
See notes to unaudited consolidated financial statements
3
<PAGE>
STEEL HEDDLE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
OCTOBER 2, 1999 JANUARY 2, 1999
--------------- ---------------
(Unaudited) (1)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,198 $ 2,423
Accrued and sundry liabilities 8,831 6,081
Deferred income taxes 1,825 2,049
Income taxes payable 200 143
Current portion of long-term debt 7,452 6,328
-------- --------
Total current liabilities 20,506 17,024
LONG-TERM DEBT, LESS CURRENT PORTION 143,656 146,957
RETIREMENT BENEFITS PAYABLE 7,000 7,317
DEFERRED INCOME TAXES 12,227 15,111
MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARY 1,933 1,960
REDEEMABLE COMMON STOCK:
$0.01 par value per share - authorized 300,000 shares,
issued and outstanding 234,949 shares at October 2,
1999 and January 2, 1999 2 2
SHAREHOLDERS' EQUITY:
Additional paid-in capital 23,375 23,375
Deficit (14,022) (6,915)
Notes receivable - shareholders (350) (350)
Carryover basis of management's interest (4,494) (4,494)
Accumulated other comprehensive loss (243) (86)
-------- --------
Total shareholders' equity 4,266 11,530
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $189,590 $199,901
======== ========
</TABLE>
(1) Derived from January 2, 1999 audited financial statements.
See notes to unaudited consolidated financial statements
4
<PAGE>
STEEL HEDDLE GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(Dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 2, 1999 OCTOBER 3, 1998
----------------- ---------------
<S> <C> <C>
NET SALES 17,720 16,584
COST OF GOODS SOLD 13,376 13,010
-------- -------
GROSS PROFIT 4,344 3,574
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,332 1,979
MANAGEMENT FEES 224 224
AMORTIZATION OF GOODWILL 679 671
RESTRUCTURING COSTS 267 -
-------- -------
OPERATING INCOME 842 700
OTHER INCOME (EXPENSE):
Interest income 44 31
Interest expense, including amortization of deferred (4,398) (4,287)
financing costs
-------- -------
LOSS BEFORE MINORITY INTEREST AND INCOME TAXES (3,512) (3,556)
MINORITY INTEREST IN INCOME OF CONSOLIDATED
SUBSIDIARY (121) -
-------- -------
LOSS BEFORE INCOME TAXES (3,633) (3,556)
INCOME TAX BENEFIT (1,075) (974)
-------- -------
NET LOSS (2,558) (2,582)
OTHER COMPREHENSIVE INCOME -
NET OF TAX:
Foreign currency translation adjustment 51 -
-------- -------
COMPREHENSIVE LOSS $(2,507) $(2,582)
======== =======
</TABLE>
See notes to unaudited consolidated financial statements
5
<PAGE>
STEEL HEDDLE GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
OCTOBER 2,
1999 OCTOBER 3, 1998
------------ ----------------------------
SUCCESSOR SUCCESSOR PREDECESSOR
COMPANY COMPANY COMPANY
(39 WEEKS) (19 WEEKS) (20 WEEKS)
<S> <C> <C> <C>
NET SALES $ 53,860 $23,745 $ 29,631
COST OF GOODS SOLD 40,907 17,983 18,628
------------ ----------- -------------
GROSS PROFIT 12,953 5,762 11,003
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 7,555 2,824 3,824
MANAGEMENT FEES 775 298 132
AMORTIZATION OF GOODWILL 2,038 892 289
RESTRUCTURING COSTS 267 - -
------------ ----------- -------------
OPERATING INCOME 2,318 1,748 6,758
OTHER INCOME (EXPENSE):
Interest income 98 51 29
Interest expense, including amortization of deferred (12,431) (6,749) (1,528)
financing costs
Other financing expense - - (50)
------------ ----------- -------------
INCOME (LOSS) BEFORE MINORITY INTEREST AND
INCOME TAXES (10,015) (4,950) 5,209
MINORITY INTEREST IN INCOME OF CONSOLIDATED
SUBSIDIARY (146) - -
------------ ----------- -------------
INCOME (LOSS) BEFORE INCOME TAXES (10,161) (4,950) 5,209
INCOME TAX (BENEFIT) EXPENSE (3,054) (1,419) 1,868
------------ ----------- -------------
NET INCOME (LOSS) (7,107) (3,531) 3,341
OTHER COMPREHENSIVE INCOME (LOSS) -
NET OF TAX:
Foreign currency translation adjustment (157) (16) 16
------------ ----------- -------------
COMPREHENSIVE INCOME (LOSS) $(7,264) $ (3,547) $3,357
============ =========== =============
</TABLE>
See notes to unaudited consolidated financial statements
6
<PAGE>
STEEL HEDDLE GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
OCTOBER 2,
1999 OCTOBER 3, 1998
------------- ------------------------------
SUCCESSOR SUCCESSOR PREDECESSOR
COMPANY COMPANY COMPANY
(39 WEEKS) (19 WEEKS) (20 WEEKS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (7,107) $ (3,531) $ 3,341
Adjustments to reconcile net income (loss) to net
cash provided by
operating activities:
Depreciation 6,427 2,730 1,517
Amortization 3,178 2,341 346
Loss on disposal of property, plant and equipment 26 - -
Accretion of senior discount debentures 1,709 758 -
Minority interest in consolidated subsidiaries (27) - -
Benefit for deferred income taxes (3,108) (729) (83)
Accrued retirement benefit costs (137) (127) 176
Changes in operating assets and liabilities:
Accounts receivable (2,502) 1,683 (1,977)
Inventories 1,530 1,129 (888)
Prepaid expenses (75) 31 (5)
Sundry assets 238 - -
Income tax receivable 1,246 (826)
Accounts payable (225) (856) 203
Accrued and sundry liabilities 2,750 1,131 (2,127)
Income taxes payable 57 (111) 1,707
-------- -------- -------
Net cash provided by operating activities 3,980 3,623 2,210
INVESTING ACTIVITIES:
Acquisition of SH Holding 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, net (1,022) (702) (968)
Proceeds on disposals of property, plant and equipment - - 238
------- -------- -------
Net cash used in investing activities (1,022) (113,658) (730)
FINANCING ACTIVITIES:
Proceeds from debt 148,616 1,317
Capital contributions 22,995 -
Revolver repayments, net (1,522) (3,600) -
Payments of debt (2,364) (52,492) (1,625)
Financing costs incurred (5,378) -
------- ------- -------
Net cash provided by (used in) (3,886) 110,141 (308)
financing activities ------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (928) 106 1,172
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,182 1,551 379
------- -------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 254 $ 1,657 $1,551
======= ======== =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 7,949 $ 833 $1,893
Income taxes paid $ 31 $ 245 $ 270
</TABLE>
See notes to unaudited consolidated financial statements
7
<PAGE>
STEEL HEDDLE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
1. ORGANIZATION, ACQUISITIONS AND BASIS OF PRESENTATION
ORGANIZATION - Steel Heddle Group, Inc. ("SH Group" or together with its
subsidiaries, the "Company") is a Delaware corporation incorporated in 1998. SH
Group is a holding company whose wholly-owned subsidiary Steel Heddle Mfg. Co
("Steel Heddle"), a Pennsylvania corporation, manufactures products and loom
accessories used by textile weaving mills and processes metal products from its
wire rolling facilities for use in the electronics, solar power and automotive
industries, among others. The Company's manufacturing plants are located in the
southern United States, Mexico, and Belgium. The Company sells to foreign and
domestic companies.
THE ACQUISITION OF STEEL HEDDLE - On May 26, 1998, SH Group consummated the
acquisition (the "Acquisition"), of SH Holdings Corp. ("Old Holdings"). SH
Group, a corporation formed by American Industrial Partners Capital Fund II,
L.P. (together with its affiliates, "AIP"), was organized as a holding company
to effect the acquisition of all of the outstanding common stock of Old
Holdings. The purchase price, including transaction fees and expenses, of
approximately $175.2 million was financed with a $25 million capital
contribution from AIP (including rollover 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 (the "Notes") of Steel
Heddle and borrowings of approximately $33.6 million under a new bank credit
facility (the "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 was
allocated to the underlying assets and liabilities of Old Holdings based upon
their estimated respective fair values at the date of Acquisition. The fair
values were determined by independent appraisals, valuations and other means
deemed appropriate by management. Based on such allocations, the purchase price
exceeded the fair value of the net assets acquired by approximately $108.7
million. In addition, certain options ("Rollover 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 common stock of SH Group at an exercise price of $15
per share. On a fully-diluted basis, the Rollover Options represent
approximately 5% ownership interest in SH Group immediately following the
Acquisition. The carryover basis of management's interest in the Rollover
Options, $4,494, has been considered in the allocation of the purchase cost and
in the initial basis of equity. Since 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 ACQUISITION OF MILLENTEX - On October 23, 1998, Steel Heddle, through its
wholly-owned subsidiary, Millentex Investment Corporation, acquired a 49%
ownership interest in Millentex, N.V. ("Millentex"), an entity organized under
the laws of the Kingdom of Belgium. Millentex was established on August 16, 1998
to effect the acquisition of the outstanding common stock of a company (the
"Belgium Company") with operations in the loom accessories industry. The
purchase price of approximately $2 million was financed via a capital
contribution from Steel Heddle and was accounted for using the purchase method
of accounting. The financial position of Millentex is included in the Company's
consolidated balance sheet at October 2, 1999 and January 2, 1999, and the
results of operations and comprehensive loss of Millentex for the three and nine
months ended October 2, 1999 are included in the Company's consolidated
statement of operations and comprehensive loss for the three and nine months
ended October 2, 1999.
In accordance with the purchase method of accounting, the purchase price has
been allocated to the underlying assets and liabilities of Millentex based upon
their estimated respective fair values at the date of acquisition. The fair
values were determined by independent appraisals, valuations and other means
deemed appropriate by management. Based on such allocations, the purchase price
was allocated to the identifiable assets, and there was no goodwill.
8
<PAGE>
BASIS OF PRESENTATION - The accompanying unaudited 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. In addition,
certain other significant accounting policies arising from the Acquisition
include the following:
Deferred financing costs associated with the Acquisition financing were
approximately $4,378 and are being amortized using the interest method.
Accumulated amortization was approximately $660 at October 2, 1999.
Goodwill arising from the acquisition is approximately $108,710 and is
being amortized over forty years using the straight-line method.
Accumulated amortization was approximately $3,624 on October 2, 1999.
Identifiable intangible assets acquired in the Acquisition, consisting
principally of engineering drawings, were approximately $12,800 and are
being amortized on the straight-line method over 12.5 years.
Accumulated amortization was approximately $1,365 at October 2, 1999.
In the opinion of the management of the Company, these unaudited consolidated
financial statements contain all of the adjustments, consisting of a normal
recurring nature, necessary for fair presentation. Operating results for the
nine months ended October 2, 1999 are not necessarily indicative of the results
that may be expected for fiscal 1999. Certain amounts previously presented in
the Predecessor Company consolidated financial statements for the prior period
have been reclassified to conform to the 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. The notes included herein should be
read in conjunction with the audited consolidated financial statements included
in SH Group's Annual Report on Form 10-K for the year ended January 2, 1999.
2. INVENTORIES
<TABLE>
<CAPTION>
Unaudited
October 2, 1999 January 2, 1999
---------------- ----------------
<S> <C> <C>
Raw materials and component parts $ 6,792 $ 7,614
Work in process and finished goods 11,408 12,116
================ ================
$ 18,200 $ 19,730
================ ================
</TABLE>
Inventories priced by the LIFO method were approximately $9,851 at October 2,
1999 and approximately $11,067 at January 2, 1999. If all inventories had been
priced by the FIFO or average cost method, they would have been higher than the
amounts reported by approximately $1,125 and $779 at October 2, 1999 and January
2, 1999, respectively.
9
<PAGE>
3. LONG-TERM DEBT
<TABLE>
<CAPTION>
Unaudited
October 2, 1999 January 2, 1999
--------------- ----------------
<S> <C> <C>
10 5/8 % Senior Subordinated Notes ("Notes") $ 100,000 $ 100,000
10 3/4% Senior Discount Debentures ("Debentures") 17,971 16,262
Bank Credit Facility ("Credit Facility"):
Term loan 28,000 30,000
Revolving loan 2,000 3,200
Foreign Notes Payable 291 654
Foreign Revolving Lines of Credit 2,846 3,169
--------------- ----------------
151,108 153,285
Less current portion 7,452 6,328
=============== ================
$ 143,656 $ 146,957
=============== ================
</TABLE>
The Notes are due in full on June 1, 2008. Interest on the Notes is payable
semi-annually in arrears each June 1 and December 1.
The Debentures (original proceeds of $15,016 and accreted value of $17,971 at
October 2, 1999) will mature on June 1, 2009. The Debentures are accreting
interest, using the interest method, to a principal amount of $29,250 on June 1,
2003. 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 and a $20 million revolving
loan commitment. The term loan is payable in quarterly installments ranging from
$1 million to $2 million through April 3, 2004. The term loan and the revolving
loan bear interest at the bank's prime rate (as defined) plus 2.0 percent or
Eurodollar rates (as defined) plus 3.50 percent, at the Company's option. At
October 2, 1999, the interest rates on the Credit Facility borrowings ranged
from 7.65% to 7.78% and approximately $17.3 million was available for borrowing
under the revolving loan facility. Substantially all of the Company's assets are
pledged as collateral under the Credit Facility.
The Credit Facility and the Notes contain various financial covenants, including
minimum levels of EBITDA, minimum interest coverage ratio and maximum capital
expenditures and total leverage ratio. The non-financial covenants restrict the
ability of 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 or engage in certain transactions with
affiliates and otherwise restrict certain corporate activities. The Company was
in compliance with its various financial and non-financial covenants at October
2, 1999.
The foreign notes payable incur interest at a of 4.0% with interest payments due
quarterly. Principal payments of approximately $29 are due quarterly. At October
2, 1999, the foreign revolving lines of credit incurred interest at rates
ranging from 3.45% to 3.73%. The foreign subsidiary had approximately $528
available under these revolving lines of credit at October 2, 1999.
Substantially all of the foreign entity's current assets are pledged as
collateral under two of the foreign revolving lines of credit.
4. RESTRUCTURING COSTS
During the three months ended October 2, 1999, the Company initiated a
restructuring program, which will continue into the fourth quarter. This program
includes termination of positions at various levels within the Company and the
closing of the Meriwether plant and moving its operations to other locations.
Severance costs included in the expense amount during the three months ended
October 2, 1999 were approximately $267. Certain assets with a net book value of
approximately $224 from the Meriwether plant will be transferred to other
locations. The remaining assets with a net book value of approximately $490 from
the Meriwether plant
10
<PAGE>
will be sold and are treated as assets held for sale on the balance sheet. These
assets are included in the Textile Products Group.
5. RELATED PARTY TRANSACTIONS
On May 26, 1998, the Company and SH Group, Inc. entered into a management
services agreement with AIP. AIP provides general management, financial and
other corporate advisory services to the Company for $895 annually, payable in
semi-annual installments on May 30 and November 29 and will be reimbursed for
out-of-pocket expenses. The agreement expires on the earlier of May 26, 2008, or
such other date as AIP and the Company mutually agree. Per the fourth amendment
to the Credit Facility, the management fee due in November 1999 shall not be
paid until December 2000. The Company expensed $775 and $298 in such fees and
reimbursements during the nine months ended October 2, 1999 and the nineteen
weeks ended October 3, 1998, respectively.
BCC Industrial Services, Inc. ("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 $132 in the nine months ended October 3, 1998. Such Consulting
Services Agreement was terminated at the May 26, 1998 acquisition by AIP.
In connection with the Acquisition, certain officers of the Company purchased
shares of the SH Group's common stock which are secured by notes from the
officers. The amended notes bear interest at 6% per year, require annual
payments beginning in 2000 and mature on May 26, 2003. The notes have been
presented as a separate component of shareholders' equity.
6. COMMITMENTS AND 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.
COMMITMENT (RELATED PARTY) - Also in connection with the financing of the May
26, 1998 acquisition, SH Group issued $29,250 of 13 3/4% Senior Discounted
Debentures ("Debentures"). The Debentures are a legal obligation of SH Group;
however, SH Group is dependent on dividends from Steel Heddle to meet the debt
service requirements of the Debentures. The Debentures (original proceeds of
$15,016 and accreted value of $17,971 at October 2, 1999) will mature on June 1,
2009. The Debentures are accreting to a principal amount of $29,250 on June 1,
2003. Interest on the Debentures will be payable semi-annually in arrears
commencing on December 4, 2003. Cash flow requirements of Steel Heddle to
service SH Group's Debentures commence on December 4, 2003 and total
approximately $2,011 in 2003, $4,022 in each of 2004 to 2008, and $31,261
($2,011 representing interest and $29,250 representing principal) in 2009.
Payment of such dividends by Steel Heddle to SH Group are permitted under the
terms of the Credit Facility and Notes.
11
<PAGE>
7. SEGMENT INFORMATION
The Company has two reportable segments, the Textile Products Group ("Textile
Products") and the Metal Products Group ("Metal Products"). Textile Products
manufactures textile loom accessories including heddles, dropwires, harness
frames and reeds, all of which are used to hold or guide individual yarns during
the weaving process. Metal Products processes and sells rolled products. Metal
Product's wire rolling operation provides material used by Textile Products and
a variety of other industries, including electronics, automotive and solar
power. Included in other below are amounts associated with the Company's Mexican
subsidiary, the shuttle division, frame reconditioning, tools and molds and the
corporate division. The Company's reportable segments are business units that
offer different products or primarily generate sales from different customers.
No customer accounted for over 10% of the consolidated sales of the Company
during the nine months ended October 2, 1999 or the nine months ended October 3,
1998.
The Company evaluates performance and allocates resources based on gross profit
or loss before selling, general and administrative expenses, management fees,
amortization of goodwill, net interest expense and income tax expense or
benefit. The accounting policies of the reportable segments are the same as
those described in the summary of significant accounting policies. Intersegment
sales and transfers are recorded at cost. There is no intercompany profit or
loss on intersegment sales or transfers.
<TABLE>
<CAPTION>
Unaudited Textile Metal
3 Months Ended October 2, 1999 Products Products Other Total
- -------------------------------------- -------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues from external customers $14,181 $ 2,558 $ 981 $17,720
Intersegment revenues 220 1,662 29 1,911
Segment profit 3,255 856 233 4,344
<CAPTION>
Unaudited Textile Metal
3 Months Ended October 3, 1998 Products Products Other Total
- -------------------------------------- -------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues from external customers $13,100 $ 2,523 $ 961 $16,584
Intersegment revenues 94 1,674 49 1,817
Segment profit 2,826 718 30 3,574
<CAPTION>
Unaudited Textile Metal
9 Months Ended October 2, 1999 Products Products Other Total
- -------------------------------------- -------------- -------------- --------------- ---------------
SUCCESSOR COMPANY
<S> <C> <C> <C> <C>
Revenues from external customers $43,926 $ 7,189 $ 2,745 $53,860
Intersegment revenues 365 5,148 91 5,604
Segment profit 9,849 2,565 539 12,953
<CAPTION>
Unaudited Textile Metal
9 Months Ended October 3, 1998 Products Products Other Total
- -------------------------------------- -------------- -------------- --------------- ---------------
SUCCESSOR COMPANY
19 Weeks Ended October 3, 1998
<S> <C> <C> <C> <C>
Revenues from external customers $18,890 $ 3,449 $ 1,406 $23,745
Intersegment revenues 139 2,209 67 2,415
Segment profit 4,659 986 117 5,762
12
<PAGE>
<CAPTION>
Textile Metal
Products Products Other Total
-------------- -------------- --------------- ---------------
PREDECESSOR COMPANY
20 Weeks Ended May 25, 1998
Revenues from external customers $ 23,781 $ 4,012 $ 1,838 $ 29,631
Intersegment revenues 263 2,561 113 2,937
Segment profit 8,695 1,800 508 11,003
</TABLE>
<TABLE>
<CAPTION>
Unaudited Unaudited
3 Months 3 Months
Ended Ended
October 2, 1999 October 3, 1998
----------------- -------------------
<S> <C> <C>
PROFIT
Total profit for reportable segments $ 4,111 $3,544
Other profit 233 30
Unallocated amounts:
Selling, general and administrative (2,332) (1,979)
Management fees (224) (224)
Amortization of goodwill (679) (671)
Restructuring costs (267) -
Interest, net (4,354) (4,256)
----------------- -------------------
Loss before minority interest and income taxes $(3,512) $ (3,556)
================= ===================
</TABLE>
<TABLE>
<CAPTION>
Unaudited
Unaudited 9 Months Ended October 3, 1998
9 Months ---------------------------------------
Ended 19 Weeks Ended 20 Weeks Ended
October 2, 1999 October 3, 1998 May 25, 1998
--------------- ----------------- -----------------
SUCCESSOR SUCCESSOR PREDECESSOR
<S> <C> <C> <C>
PROFIT
Total profit for reportable segments $ 12,414 $5,645 $10,495
Other profit 539 117 508
Unallocated amounts:
Selling, general and administrative (7,555) (2,824) (3,824)
Management fees (775) (298) (132)
Amortization of goodwill (2,038) (892) (289)
Restructuring costs (267) - -
Interest, net (12,333) (6,698) (1,499)
Other - - (50)
--------------- ----------------- -----------------
(Loss) income before minority interest
and income taxes $(10,015) $(4,950) $ 5,209
=============== ================= =================
</TABLE>
13
<PAGE>
8. PAYMENT OF STEEL HEDDLE'S SENIOR SUBORDINATED NOTES
Payment of the 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 condensed
consolidating financial statements of the guarantor and non-guarantor
subsidiaries.
UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
OCTOBER 2, 1999
<TABLE>
<CAPTION>
Combined
Combined Non- Reclassifications
Guarantor Guarantor Steel SH And
Subsidiaries Subsidiaries Heddle Group Eliminations Consolidated
------------ ------------ ------ ----- ------------ ------------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 11 $ 275 $ (32) $ $ $ 254
Accounts receivable, net 4,443 7,932 12,375
Income taxes receivable 33 33
Inventories, net 3,774 14,426 18,200
Prepaid expenses 164 79 121 (164) 200
---------- --------- --------- -------- ----------- ---------
Total current assets 175 8,604 22,447 (164) 31,062
Due from affiliates 3,325 78,273 (81,598) -
Notes receivable from affiliates 80,081 (80,081) -
Investments in subsidiaries 3,628 80,606 96,637 (180,871) -
Deferred taxes 1,068 (1,068) -
Property, plant & equipment, net 2,851 32,425 35,276
Other assets and deferred charges,
net 518 122,339 395 123,252
========== ========= ========== ========== =========== =========
Total assets $83,884 $15,298 $336,090 $98,100 $(343,782) $189,590
========== ========= ========== ========== =========== =========
Liabilities and shareholders' equity:
Accounts payable and accrued and
sundry liabilities $ 357 $ 2,285 $ 8,908 $ $ ( 164) $ 11,029
Due to affiliates, net 75,442 (75,799) -
Deferred income taxes - 1,825 1,825
Income taxes 2,517 200 (2,517) 200
Current portion of long-term debt 2,952 4,500 7,452
---------- --------- ---------- ---------- ------------- -----------
Total current liabilities 2,874 5,437 15,233 75,442 (78,480) 20,506
Long-term debt, less current
portion 185 205,581 17,971 (80,081) 143,656
Retirement benefits payable 556 6,444 7,000
Deferred income taxes 1,101 12,193 (1,067) 12,227
Minority interest 1,933 1,933
Redeemable common stock 2 2
Shareholders' equity 81,010 8,019 96,639 4,685 (186,087) 4,266
---------- --------- ---------- ---------- ------------- -----------
Total liabilities and share-
holders' equity $83,884 $15,298 $336,090 $98,100 $(343,782) $189,590
========== ========= ========== ========== ============= ===========
</TABLE>
14
<PAGE>
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED OCTOBER 2, 1999
<TABLE>
<CAPTION>
Combined
Combined Non- Reclassifications
Guarantor Guarantor Steel SH And
Subsidiaries Subsidiaries Heddle Group Eliminations Consolidated
------------ ------------ ------ ------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ $ 3,061 $14,659 $ $ $ 17,720
Cost of goods sold 2,563 10,813 13,376
----------- ------------ -------- ------- ------------ ----------
Gross profit 498 3,846 4,344
Selling, general and
Administrative expenses 1 158 2,173 2,332
Other expenses 1,170 1,170
----------- ----------- -------- ------- ------------ ----------
Operating income (loss) (1) 340 503 842
Other income (expense), net 2,641 (22) (6,371) (602) (4,354)
----------- ----------- -------- ------- ------------ ----------
Income (loss) before minority
interest and income taxes 2,640 318 (5,868) (602) (3,512)
Minority interest in income of
Consolidated subsidiary (121) (121)
----------- ----------- ---------- --------- ------------ ----------
Income (loss) before income taxes 2,519 318 (5,868) (602) (3,633)
Income tax expense (benefit) 924 47 (1,856) (190) (1,075)
Equity in earnings (losses) of
Subsidiaries 297 1,866 (2,146) (17) -
----------- ----------- ---------- --------- ------------- -----------
Net income (loss) $ 1,892 $271 $(2,146) $(2,558) $(17) $ (2,558)
=========== =========== ========== ========= ============= ===========
</TABLE>
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED OCTOBER 2, 1999
<TABLE>
<CAPTION>
Combined
Combined Non- Reclassifications
Guarantor Guarantor Steel SH And
Subsidiaries Subsidiaries Heddle Group Eliminations Consolidated
------------ ------------ ------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ $ 9,006 $ 44,854 $ $ $ 53,860
Cost of goods sold 7,525 33,382 40,907
-------- -------- -------- -------- -------- --------
Gross profit 1,481 11,472 12,953
Selling, general and
Administrative expenses 3 888 6,664 7,555
Other expenses 3,080 3,080
-------- -------- -------- -------- -------- --------
Operating income (loss) (3) 593 1,728 2,318
Other income (expense), net 7,194 (112) (17,675) (1,740) (12,333)
-------- -------- -------- -------- -------- --------
Income (loss) before minority
interest and income taxes 7,191 481 (15,947) (1,740) (10,015)
Minority interest in income of
Consolidated subsidiary (146) (146)
-------- -------- -------- -------- -------- --------
Income (loss) before income taxes 7,045 481 (15,947) (1,740) (10,161)
Income tax expense (benefit) 2,517 107 (5,026) (652) (3,054)
Equity in earnings (losses) of
Subsidiaries 409 4,902 (6,019) 708 --
-------- -------- -------- -------- -------- --------
Net income (loss) $ 4,937 $ 374 $ (6,019) $ (7,107) $ 708 $ (7,107)
======== ======== ======== ======== ======== ========
</TABLE>
15
<PAGE>
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED OCTOBER 3, 1998
<TABLE>
<CAPTION>
Combined
Combined Non- Reclassifications
Guarantor Guarantor Steel SH And
Subsidiaries Subsidiaries Heddle Group Eliminations Consolidated
------------ ------------ ------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ $ 248 $ 16,336 $ $ $ 16,584
Cost of goods sold 279 12,731 13,010
-------- -------- -------- -------- -------- --------
Gross profit (31) 3,605 3,574
Selling, general and
administrative expenses 1 1,978 1,979
Other expenses 895 895
-------- -------- -------- -------- -------- --------
Operating income (loss) (1) (31) 732 700
Other income (expense), net 1,732 (5,409) (579) (4,256)
-------- -------- -------- -------- -------- --------
Income (loss) before income taxes 1,731 (31) (4,677) (579) (3,556)
Income tax expense (benefit) 582 (11) (1,342) (203) (974)
Equity in earnings (losses) of
subsidiaries (20) 1,129 (2,206) 1,097 --
-------- -------- -------- -------- -------- --------
Net income (loss) $ 1,129 $ (20) $ (2,206) $ (2,582) $ 1,097 $ (2,582)
======== ======== ======== ======== ======== ========
</TABLE>
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINETEEN WEEKS ENDED OCTOBER 3, 1998
SUCCESSOR
<TABLE>
<CAPTION>
Combined Combined Reclassifications
Guarantor Non-Guarantor Steel And
Subsidiaries Subsidiaries Heddle SH Group Eliminations Consolidated
------------ ------------- ------ -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ $ 351 $ 23,394 $ $ 23,745
Cost of goods sold 353 17,630 17,983
-------- -------- -------- -------- -------- --------
Gross profit (2) 5,764 5,762
Selling, general and administrative
expenses 1 2,823 2,824
Other expenses 1,190 1,190
-------- -------- -------- -------- -------- --------
Operating income (loss) (1) (2) 1,751 1,748
Other income (expense), net 2,527 (8,454) $ (771) (6,698)
-------- -------- -------- -------- -------- --------
Income (loss) before income taxes 2,526 (2) (6,703) (771) (4,950)
Income tax expense 884 (1) (2,032) (270) (1,419)
Equity in earnings (losses) of
subsidiaries (1) 1,641 (3,030) 1,390 --
-------- -------- -------- -------- -------- --------
Net income (loss) $ 1,641 $ (1) $ (3,030) $ (3,531) $ 1,390 $ (3,531)
======== ======== ======== ======== ======== ========
</TABLE>
16
<PAGE>
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE TWENTY WEEKS ENDED MAY 25, 1998
PREDECESSOR
<TABLE>
<CAPTION>
Combined
Combined Non- Reclassifications
Guarantor Guarantor Steel And
Subsidiaries Subsidiaries Heddle 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 expenses 5 3,819 3,824
Other expenses 421 421
-------- -------- -------- -------- --------
Operating income (loss) (43) 6,801 6,758
Other income (expense), net 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>
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED OCTOBER 2, 1999
<TABLE>
<CAPTION>
Combined
Combined Non- Reclassifications
Guarantor Guarantor Steel SH And
Subsidiaries Subsidiaries Heddle Group Eliminations Consolidated
------------ ------------ ------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities $ 4,663 $ 262 $ (945) $ -- $ -- $ 3,890
------- ------- ------- ------- ------- -------
Investing activities:
Purchase of property plant
and equipment (42) (980) (1,022)
------- ------- ------- ------- ------- -------
Net cash used in investing -- (42) (980) -- -- (1,022)
activities
Financing activities:
Revolver repayments, net (481) (1,041) (1,522)
Payments of debt (205) (2,159) (2,364)
Intercompany transactions, net (4,664) (18) 4,682 --
------- ------- ------- ------- ------- -------
Net cash provided by (used in)
financing activities (4,664) (704) 1,482 -- -- (3,886)
------- ------- ------- ------- ------- -------
Net increase (decrease) in cash and
cash equivalents (1) (484) (443) -- -- (928)
Cash and cash equivalents at
beginning of period 12 759 411 -- -- 1,182
------- ------- ------- ------- ------- -------
Cash and cash equivalents at end
of period $ 11 $ 275 $ (32) $ -- $ -- $ 254
======= ======= ======= ======= ======= =======
</TABLE>
17
<PAGE>
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINETEEN WEEKS ENDED OCTOBER 3, 1998
SUCCESSOR
<TABLE>
<CAPTION>
Combined
Combined Non- Reclassifications
Guarantor Guarantor Steel SH And
Subsidiaries Subsidiaries Heddle Group Eliminations Consolidated
------------ ------------ ------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities $ 4,467 $ (45) $ (752) $ (47) $ -- $ 3,623
--------- --------- --------- --------- --------- ---------
Investing activities:
Purchase of property plant
and Equipment (13) (689) (702)
Purchase of business (112,956) (112,956)
--------- --------- --------- --------- --------- ---------
Net cash used in investing -- (13) (689) (112,956) -- (113,658)
activities
Financing activities:
Payments of debt (56,092) (56,092)
Proceeds from issuance of debt 133,600 15,016 148,616
Intercompany transactions, net (4,468) 99 (71,073) 75,442 --
Proceeds from sale of stock 22,995 22,995
Other (4,928) (450) (5,378)
--------- --------- --------- --------- --------- ---------
Net cash provided by
financing activities (4,468) 99 1,507 113,003 -- 110,141
--------- --------- --------- --------- --------- ---------
Net increase (decrease) in cash and
cash equivalents (1) 41 66 -- -- 106
Cash and cash equivalents at
beginning of period 11 26 1,514 -- -- 1,551
--------- --------- --------- --------- --------- ---------
Cash and cash equivalents at end
of period $ 10 $ 67 $ 1,580 $ -- $ -- $ 1,657
========= ========= ========= ========= ========= =========
</TABLE>
18
<PAGE>
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE TWENTY WEEKS ENDED MAY 25, 1998
PREDECESSOR
<TABLE>
<CAPTION>
Combined Combined
Guarantor Non-Guarantor Steel
Subsidiaries Subsidiaries Heddle 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
cash equivalents (5) (70) 1,247 1,172
Cash and cash equivalents at
beginning of period 16 96 267 379
------- ------- ------- -------
Cash and cash equivalents at end
of period $ 11 $ 26 $ 1,514 $ 1,551
======= ======= ======= =======
</TABLE>
19
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
This document contains forward-looking statements within the meaning of the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Although the Registrant believes its plans are based upon reasonable assumptions
as of the current date, it can give no assurances that such expectations can be
attained. Factors that could cause actual results to differ materially from the
Registrant's expectations can be found in the Registrant's Registration
Statement on Form S-4 (File No. 333-61041) under the heading "Risk Factors."
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and the related notes thereto included
elsewhere in this Form 10-Q as well as the Company's Annual Report on Form 10-K
for the year ended January 2, 1999.
OVERVIEW
The Company has two reportable segments, Textile Products and Metal Products.
Textile Products manufactures textile loom accessories including heddles,
dropwires, harness frames and reeds, all of which are used to hold or guide
individual yarns during the weaving process. In Metal Products, the Company
processes and sells rolled products. In its wire rolling operations, 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's rolled products can also be found in a
variety of other industries, including electronics, automotive and solar power.
On May 26, 1998, Steel Heddle Group, Inc. consummated the acquisition of SH
Holdings Corp. ("Old Holdings"). SH Group, a corporation formed by AIP, was
organized as a holding company to effectuate the acquisition of substantially
all the outstanding stock of Old Holdings. The acquisition has been accounted
for using the purchase method of accounting, whereby the purchase cost has been
allocated to the fair value of the tangible and identifiable intangible assets
acquired and liabilities assumed with the excess identified as goodwill.
As a result of the Acquisition, the assets and liabilities of Old Holdings were
revalued to their respective fair values under the principles of APB No. 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 principal differences include increased depreciation and
amortization expense resulting from write-up of the Company's fixed and
intangible assets and goodwill and increased interest expense resulting from
financing the Acquisition.
On October 23, 1998, Steel Heddle, through its wholly owned subsidiary,
Millentex Investment Corporation, acquired a 49% ownership interest in
Millentex, an entity organized under the laws of the Kingdom of Belgium.
Millentex was established on August 16, 1998 to effect the acquisition of the
outstanding common stock of a company with operations in the loom accessories
industry. The purchase price of approximately $2 million was financed via a
capital contribution from Steel Heddle and 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 Millentex based upon
their estimated respective fair values at the date of acquisition. The fair
values have been determined by independent appraisals, valuations and other
means deemed appropriate by management. Based on such allocations, the purchase
price was allocated to identifiable assets and there was no goodwill.
The financial position at October 2, 1999 and the results of operations for the
three and nine months ended October 2, 1999 of Millentex are included in the
Company's consolidated financial statements at October 2,
20
<PAGE>
1999. In the calculation of Adjusted EBITDA for the twelve months ended October
2, 1999, the results of Millentex are included on a pro forma basis for the full
twelve months.
BASIS OF PRESENTATION
The following table sets forth certain unaudited performance details for the
periods shown. Net sales, cost of sales, gross profit, selling, general and
administrative expenses, operating income and net income (loss) of the Company
are presented in thousands of dollars and as a percentage of sales.
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------
October 2, 1999 October 3, 1998
(14 Weeks) (14 Weeks)
------------------ -----------------
<S> <C> <C> <C> <C>
Net sales $17,720 100.0% $16,584 100.0%
Cost of sales 13,376 75.5 13,010 78.4
Gross profit 4,344 24.5 3,574 21.6
SG&A 2,332 13.2 1,979 11.9
Operating income 842 4.8 700 4.2
Net loss (2,558) (14.4) (2,582) (15.6)
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------------------------------------
October 2, 1999 October 3, 1998
------------------ ---------------------------------------
Successor Successor Predecessor
(39 Weeks) (19 Weeks) (20 Weeks)
------------------ ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $53,860 100.0% $23,745 100.0% $29,631 100.0%
Cost of sales 40,907 76.0 17,983 75.7 18,628 62.9
Gross profit 12,953 24.0 5,762 24.3 11,003 37.1
SG&A 7,555 14.0 2,824 11.9 3,824 12.9
Operating income 2,318 4.3 1,748 7.4 6,758 22.8
Net income (loss) (7,107) (13.2) (3,531) (14.9) 3,341 11.3
</TABLE>
COMPARISON OF RESULTS OF OPERATIONS
THIRD QUARTER ENDED OCTOBER 2, 1999 COMPARED TO THIRD QUARTER ENDED OCTOBER 3,
1998
Net Sales. Net sales increased $1,136 or 6.8% for the three months ended October
2, 1999 compared to the three months ended October 3, 1998. This increase in net
sales resulted from an increase in Textile Products net sales of $1,081 or 8.3%
to $14,181, an increase in Metal Products net sales of $35 or 1.4% to $2,558 and
an increase in other net sales of $20 or 2.1% to $981. Textile Products net
sales includes net sales of Millentex (acquired October 23, 1998) of $2,809
during the three months ended October 2, 1999. Textile Products domestic net
sales have decreased $1,644 or 16.4% during the three months ended October 2,
1999. Net sales for Metal Products and other increased due to increases in
foreign net sales.
The decrease in domestic net sales of Textile Products is attributable to a
number of factors. Mill operating rates in the filament sector have been
adversely affected by a surge in low cost fabric imports from Asia. Fewer new
looms and the Company's associated products were purchased during the three
months ended October 2, 1999. In addition, as a significant number of new looms
were installed in prior years, an increased amount of used accessories became
available within larger mills to support their short-term accessory needs.
Finally, mill managers have been reducing operating costs and expenditures for
new accessories in reaction to uncertainties created in the domestic textile
market by the high levels of imported textiles and resulting price pressures.
Gross Profit. Gross profit for the three months ended October 2, 1999 increased
$770 to $4,344 or 24.5% of nets sales, compared to gross profit of $3,574 or
21.6% of net sales for the three months ended October 3, 1998.
21
<PAGE>
Included in gross profit for the three months ended October 2, 1999 is gross
profit of $438 related to Millentex. The increase is primarily due to the
increase in net sales as noted above and an increase in gross profit percentages
in Textile Products, Metal Products and other. Gross profit percentages have
improved primarily due to the Company's cost reduction measures. Also, other
gross profit improved $203 as shuttle sales, which have low gross profit
margins, decreased and were replaced with tool and die and Mexican sales, which
have higher gross profit margins. Depreciation and amortization, including
Millentex depreciation of $153, charged to cost of goods sold totaled $2,225 for
the three months ended October 2, 1999, a decrease of $493 compared to the
comparable period of 1998. This decrease is due to inventory amortization
recognized in 1998 related to the revaluation of the inventory associated with
the purchase of the Company.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended October 2, 1999 increased
$353 to $2,332 or 13.2% of net sales from $1,979 or 11.9% of net sales for the
three months ended October 3, 1998. Included in selling, general and
administrative expenses for the three months ended October 2, 1999 are Millentex
selling, general and administrative expenses of $129. Depreciation expense
increased during the period due to fixed asset additions related to Year 2000
compliance, most notably the new general ledger system. Professional services
increased for the three months ended October 2, 1999 due to an increase in audit
and legal expenses.
Operating Income. Operating income for the three months ended October 2, 1999
was $842, or 4.8% of net sales compared to $700 or 4.2% of net sales for the
three months ended October 3, 1998. Millentex contributed operating income of
$310 during the three months ended October 2, 1999. The increase was due to the
inclusion of Millentex operating income in 1999 and the increase in gross profit
as described above, which was offset by restructuring costs of $267 incurred
during the three months ended October 2, 1999.
During the three months ended October 2, 1999, the Company initiated a
restructuring program, which will continue into the fourth quarter. This program
includes termination of positions at various levels within the Company and the
closing of the plant in Meriwether County, Georgia and moving its operations to
other locations. Severance costs included in the expense amount during the three
months ended October 2, 1999 were approximately $267. Certain assets with a net
book value of approximately $224 from the Meriwether plant will be transferred
to other locations. The remaining assets with a net book value of approximately
$490 from the Meriwether plant will be sold and are treated as assets held for
sale on the balance sheet. These assets are included in the Textile Products
Group.
Net Loss. The Company incurred a net loss of $2,558, 14.4% of net sales, for the
three months ended October 2, 1999 compared to a net loss of $2,852, 15.6% of
net sales, for the three months ended October 3, 1998. The decrease in net loss
is due to an increase in operating income as described above and an increase in
tax benefit, which are partially offset by an increase in interest expense for
the period. The effective tax rate for the year ended January 1, 2000 is
significantly different from the statutory rate due to an increase in the amount
of nondeductible goodwill amortization related to the Acquisition.
NINE MONTHS ENDED OCTOBER 2, 1999 (SUCCESSOR) COMPARED TO NINE MONTHS ENDED
OCTOBER 3, 1998 (COMBINED SUCCESSOR AND PREDECESSOR)
Net Sales. Net sales increased $484 or 0.9% for the nine months ended October 2,
1999 compared to the nine months ended October 3, 1998. This increase in net
sales resulted from an increase in Textile Products net sales of $1,255 or 2.9%
to $43,926. Textile Products net sales includes net sales of Millentex (acquired
October 23, 1998) of $8,348 during the nine months ended October 2, 1999.
Textile Products domestic net sales have decreased $5,113 or 22.1% during the
nine months ended October 2, 1999. Metal Products net sales decreased $272 or
3.6% to $7,189 and other net sales decreased $499 or 22.2% to $2,745.
The decrease in domestic net sales of Textile Products is attributable to a
number of factors. Mill operating rates in the filament and denim sectors have
been adversely affected by a surge in low cost fabric imports from Asia. Fewer
new looms and the Company's associated products were purchased during the nine
months ended October 2, 1999. During the nine months ended October 3, 1998, the
Company made some shipments related to the record number of new loom purchases
in 1997. In addition, as the significant number of new looms were installed in
prior years, an increased amount of used accessories became available within
larger mills to support
22
<PAGE>
their short-term accessory needs. Finally, mill managers have been reducing
operating costs and expenditures for new accessories in reaction to
uncertainties created in the domestic textile market by the Asian economic
downturn.
Metal Products net sales declined as a result of price reductions to some
customers in the electronics industry and as a large customer began efforts to
reduce inventory levels.
The decrease in other net sales for the nine months ended October 2, 1999 is due
to a decrease in shuttle net sales. Shuttle net sales decreased as fewer shuttle
looms remain as these looms are being replaced by faster more efficient
shuttleless looms.
Gross Profit. Gross profit for the nine months ended October 2, 1999 decreased
$3,812 to $12,953, or 22.7% of net sales, compared to gross profit of $16,765 or
31.4% of net sales for the nine months ended October 3, 1998. Included in gross
profit for the nine months ended October 2, 1999 is gross profit of $1,358
related to Millentex. The decrease is primarily due to the decline in domestic
sales in the Textile Products business segment, lower international prices for
Textile Products sold in Asian markets due to heightened competition for fewer
orders, underabsorption of fixed costs resulting from decreased units sold or
transferred intercompany and to additional depreciation and amortization expense
resulting from the write-up of the Company's assets in connection with the new
basis of accounting used in the Acquisition. Depreciation and amortization,
including Millentex depreciation of $469, charged to cost of goods sold totaled
$6,609 for the nine months ended October 2, 1999, an increase of $1,683 compared
to the comparable period of 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the nine months ended October 2, 1999 increased $907
to $7,555 or 14.0% of net sales from $6,648 or 12.5% of net sales for the nine
months ended October 3, 1998. The increase is due to the inclusion of Millentex
selling, general and administrative expenses of $848 and an increase in
depreciation expense of $172 associated with the write-up of the Company's
assets in connection with the new basis of accounting in the Acquisition and
asset additions related to Year 2000 compliance. These increases were partially
offset by cost reduction actions taken by the Company during the nine months
ended October 2, 1999.
Operating Income. Operating income for the nine months ended October 2, 1999 was
$2,318, or 4.3% of net sales compared to $8,506, or 15.9% of nets sales for the
nine months ended October 3, 1998. Millentex contributed operating income of
$510 during the nine months ended October 2, 1999. The decrease in operating
income of $6,188, or 72.7% is due to the decrease in gross profit and the
increase in selling, general and administrative expenses as described above, a
$345 increase in management fees, an increase of $857 in amortization of
goodwill in connection with the new basis of accounting used in the Acquisition
and the incurrence of restructuring costs of $267 as described above.
Net Loss. The Company incurred a net loss of $7,107, 13.2% of net sales, for the
nine months ended October 2, 1999 compared to net loss of $190, 0.4% of net
sales, for the nine months ended October 3, 1998. The loss during 1999 is due
primarily to an increase in interest expense resulting from debt issued in
connection with the Acquisition and to the factors noted above. The effective
tax rate for the year ended January 1, 2000 is significantly different from the
statutory rate due to an increase in the amount of nondeductible goodwill
amortization related to the Acquisition.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds are cash provided by operating
activities and borrowings under its revolving credit facility. The Credit
Facility consists of a $30 million term loan and a $20 million revolving loan
commitment. 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 plus 2.0
percent or Eurodollar rates plus 3.50 percent, at the Company's option. At
October 2, 1999, the interest rates on the Credit Facility borrowings ranged
from 7.65% to 7.78% and approximately $17.3 million was available for borrowing
under the revolving loan facility.
23
<PAGE>
The Credit Facility and the Notes contain various financial covenants, including
minimum levels of EBITDA, minimum interest coverage ratio and maximum capital
expenditures and total leverage ratio. The non-financial covenants restrict the
ability of 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 or engage in certain transactions with
affiliates and otherwise restrict certain corporate activities. The Company was
in compliance with its various financial and non-financial covenants at October
2, 1999.
Cash Flows from Operating Activities. 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 nine months ended October 2, 1999 decreased to $3,980 from
$5,833 for the nine months ended October 3, 1998. The decrease was primarily due
to the Company incurring a net loss for the nine months ended October 2, 1999
compared to net income for the nine months ended October 3, 1998.
Cash Flows used in Investing Activities. Net cash used in investing activities
for the nine months ended October 2, 1999 decreased to $1,022 from $114,388 for
the nine months ended October 3, 1998. Net cash used in investing activities for
the nine months ended October 3, 1998 reflect the acquisition of substantially
all of the Company's tangible and intangible assets and is not comparable to the
prior period. The Company's capital expenditures for the nine months ended
October 2, 1999 were $1,022, a decrease of $648 compared to the same period in
1998. These expenditures were primarily for the replacement of machinery and
equipment.
Cash Flows used in Financing Activities. Cash flows used in financing activities
for the nine months ended October 2, 1999 was $3,886 compared to cash flows
provided by financing activities of $109,833 for the nine months ended October
3, 1998. Cash flows from financing activities for the nine months ended October
3, 1998 reflect the initial capitalization of the Company through the issuance
of Common Stock, Senior Discount Debentures, Senior Subordinated Notes and bank
debt, all of the associated fees, and is not directly comparable to the current
nine months ended October 2, 1999.
Adjusted EBITDA. 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 Butler
and AIP, supplemental bonus compensation, compensation expense for certain
eliminated management positions, incremental increases in obsolete inventory
reserves and restructuring costs. Adjusted EBITDA was $4,480 and $12,726 for the
three and nine months ended October 2, 1999, respectively. Adjusted EBITDA was
$4,653 and $15,523 for the three and nine months ended October 3, 1998,
respectively. Adjusted EBITDA was $15,769 for the twelve months ended October 2,
1999 and $21,232 for the twelve months ended October 3, 1998.
Adjusted EBITDA is included herein as it is a basis upon which the Company
assesses its financial performance, and certain covenants in the credit
agreement are tied to similar measures. Adjusted EBITDA is 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. Adjusted EBITDA, as presented, represents 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.
Liquidity. The Company's principal sources of funds are cash provided by
operating activities and borrowings under its revolving credit facility. The
Company believes that such funds will be adequate 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
24
<PAGE>
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
Company's debt agreements 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 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.
YEAR 2000 MATTERS
Certain computer programs written with two digits rather than four to define the
applicable year may experience problems handling dates near the end of and
beyond the year 1999. This may cause computer applications to fail or to create
erroneous results unless corrective actions are taken.
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 utilizes both internal and external
resources to reprogram or replace, and test the software for Year 2000
modifications. The Year 2000 project is substantially complete and the Company
is now in the testing phase, which will continue through the end of the year.
The Company is also developing contingency plans in the event there are any
systems disruptions as a result of the Year 2000 problem.
With respect to IT systems, the plan includes programs relating to (i) computer
applications, including those for mainframes, client server systems and personal
computers and (ii) IT infrastructure, including hardware, software, network
technology and data communications. In the case of non-IT systems, the Year 2000
plan includes programs relating to equipment and processes used in manufacturing
and equipment and systems in buildings not encompassed by manufacturing
equipment.
The project is being conducted in phases, described as follows:
Inventory Phase - Identify hardware, software, processes or devices that use
or process date information.
Assessment Phase - Identify Year 2000 date processing deficiencies and
related implications.
Planning Phase - Determine for each deficiency an appropriate solution and
budget.
Implementation and Testing Phase - Implement designed solutions and conduct
appropriate testing.
IT Applications: The Company has completed the inventory, assessment and
planning phases for all IT applications considered to be mission-critical and is
currently in the implementation and testing phase. Implementation and testing
involves repair of existing systems, and in some cases, complete replacement
with purchased systems that are Year 2000 compliant. Modified systems are
subjected to rigorous testing in a non-production environment with production
data and moved to a production environment for further testing and monitoring.
Modifications to existing systems are substantially complete. Testing and
monitoring of those systems will continue throughout 1999. Mission-critical
systems scheduled for replacement include only the general ledger accounting
system, which was replaced with a purchased system. Replacement and testing was
completed during the third quarter of 1999.
IT Infrastructure: The Company has completed the inventory, assessment, planning
phases and implementation phase. Implementation involved repairing or replacing
infrastructure hardware and software and obtaining vendor certifications.
Implementation was completed during the second quarter of 1999.
25
<PAGE>
Non-IT Systems: Management has reviewed production and building infrastructure
equipment and systems used in its operations and has requested written
certification from vendors. Implementation was completed during the second
quarter of 1999.
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 parties' failures to remediate their 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, many of the responses will require follow-up,
which will be completed during the fourth quarter of 1999.
The cost of the Year 2000 project is estimated at $1,000 and is being funded
through operating cash flows. Of the total project cost, an estimated $400 is
attributable to the purchase of new software and hardware and will be
capitalized. The remaining estimated $600, is being expensed as incurred and is
not expected to have a material effect on the results of operations. The Company
has incurred $955 of costs, ($493 during fiscal 1999), of which $580 has been
expensed ($239 expensed in fiscal 1999).
The Company is preparing contingency plans relating specifically to identified
Year 2000 risks and developing cost estimates relating to these plans.
Contingency plans may include stockpiling raw materials, increasing inventory
levels, and securing alternative sources of materials and supplies and other
appropriate measures. Management anticipates completion of the Year 2000
contingency plans during the fourth quarter of 1999. Once developed, Year 2000
contingency plans will be tested and continually refined as additional
information becomes available.
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 condition. 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. However, the Company believes that its Year 2000
readiness program, including related contingency planning, should significantly
reduce the possibility of significant interruptions of normal operations.
ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities- Deferral of the
Effective date of FASB Statement No. 133 - an amendment of FASB Statement No.
133", which delays the effective date of FASB No. 133 for the Company until
2001. The Company has not yet completed its analysis of the effects of SFAS No.
133, however, adoption of this statement is not expected to have a material
impact on the Company's financial position, results of operations or cash flows.
26
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(amounts in thousands)
Market risk relating to the Company's operations result primarily from
volatility in interest rates and foreign currency exchange rates.
Interest rate risk. The Company has exposure to interest rate changes primarily
relating to its bank term debt and revolver and its foreign debt. The bank debt
bears interest at rates which vary with changes in (i) the bank's prime rate, or
(ii) Eurodollar Rate. The foreign debt bears interest at rates which vary with
changes in the Belgium Interbank Offered Rate. The total of all such
variable-rate debt was approximately $32,846 at October 2, 1999. A 100 basis
point change in interest rates would not have a material impact on the Company's
consolidated financial position or results of operations.
Foreign currency risk. The Company has two foreign subsidiaries located in
Mexico and Belgium and conducts business in a number of other countries. Sales
by foreign subsidiaries are denominated in the local currency of the subsidiary,
and international sales from U.S. operations are generally denominated in U.S.
dollars. For the nine months ended October 2, 1999, approximately 35% of the
Company's revenues are generated outside the United States. The Company's
ability to sell its products in these foreign markets may be affected by changes
in economic, political, and market conditions.
At October 2, 1999, the functional currency of the Belgium subsidiary and the
Mexican subsidiary was their respective local currency. At the beginning of
fiscal 1999, the functional currency of the Mexican subsidiary changed from the
US dollar to the local currency (peso) due to the fact that Mexico is no longer
considered highly inflationary. Gains or losses from translation of foreign
operations where the local currency is the functional currency are included as a
separate component of shareholder's equity. To date, translation losses have not
been significant. The Company's net investment in its foreign subsidiaries was
$1,770 at October 2, 1999. If the foreign currency exchange rates fluctuate by
10% from rates at October 2, 1999, the effect on the Company's financial
position and results of operations would not be material.
27
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None
ITEM 5. OTHER INFORMATION None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit - (27) Financial Data Schedule
(b) Reports on Form 8-K None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
STEEL HEDDLE GROUP, INC.
Date: November 15, 1999 By: /s/ Jerry B. Miller
------------------------------
Jerry B. Miller
Vice President Finance and Secretary
28
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements contained in the body of the accompanying Registration
Statement and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<CIK> 0001065423
<NAME> STEEL HEDDLE GROUP, INC.
<MULTIPLIER> 1,000
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<FISCAL-YEAR-END> JAN-01-2000
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<PERIOD-END> OCT-02-1999
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