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 April 3, 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)
Pennsylvania 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 May 17, 1999.
<PAGE>
STEEL HEDDLE GROUP INC.
Table of Contents
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION
<S> <C>
Item 1. Consolidated Balance Sheet:
as of April 3, 1999 (Unaudited) and January 2, 1999.............................3
Unaudited Consolidated Statement of Operations and Comprehensive Income (Loss):
for the Three Months Ended April 3, 1999 (Successor) and April 4, 1998
(Predecessor)...................................................................5
Unaudited Consolidated Statements of Cash Flows:
for the Three Months Ended April 3, 1999 (Successor) and April 4, 1998
(Predecessor)...................................................................6
Notes to Unaudited Consolidated Financial Statements.................................7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations..................................................................15
Item 3. Quantitative and Qualitative Disclosures about Market Risk..........................20
PART II OTHER INFORMATION...................................................................21
</TABLE>
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STEEL HEDDLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
SUCCESSOR SUCCESSOR
COMPANY COMPANY
APRIL 3, 1999 JANUARY 2, 1999
--------------------- ----------------------
(Unaudited) (1)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,064 $ 1,182
Accounts receivable, net 11,193 9,873
Income taxes receivable 1,279 1,279
Inventories 19,174 19,730
Prepaid expenses 73 125
--------------------- ----------------------
Total current assets 32,783 32,189
PROPERTY, PLANT & EQUIPMENT:
Cost 46,040 46,014
Less accumulated depreciation (6,704) (4,510)
--------------------- ----------------------
39,336 41,504
OTHER ASSETS:
Prepaid pension costs 2,136 2,185
Goodwill, net 106,445 107,124
Identifiable intangible assets, net 11,947 12,203
Sundry 4,534 4,696
--------------------- ----------------------
125,062 126,208
--------------------- ----------------------
TOTAL ASSETS $197,181 $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>
SUCCESSOR SUCCESSOR
COMPANY COMPANY
APRIL 3, 1999 JANUARY 2, 1999
-------------------- ----------------------
(Unaudited) (1)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,429 $ 2,423
Accrued and sundry liabilities 8,468 6,081
Deferred income taxes 1,902 2,049
Income taxes payable 132 143
Current portion of long-term debt 6,985 6,328
-------------------- ----------------------
Total current liabilities 19,916 17,024
LONG-TERM DEBT, LESS CURRENT PORTION 145,054 146,957
RETIREMENT BENEFITS PAYABLE 7,225 7,317
DEFERRED INCOME TAXES 14,214 15,111
MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARY 1,788 1,960
REDEEMABLE COMMON STOCK:
$0.01 par value per share - authorized 300,000
shares, issued and outstanding 234,949 shares
at April 3, 1999 and January 2, 1999 2 2
SHAREHOLDERS' EQUITY:
Additional paid-in capital 23,375 23,375
Deficit (9,320) (6,915)
Notes receivable - shareholders (350) (350)
Carryover basis of management's interest (4,494) (4,494)
Accumulated other comprehensive loss (229) (86)
-------------------- ----------------------
Total shareholders' equity 8,982 11,530
-------------------- ----------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $197,181 $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 INCOME (LOSS)
(Dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
APRIL 3, 1999 APRIL 4, 1998
------------- ---------------
SUCCESSOR PREDECESSOR
COMPANY COMPANY
(13 WEEKS) (13 WEEKS)
<S> <C> <C>
NET SALES $ 18,529 $ 19,266
COST OF GOODS SOLD 14,121 11,930
------------- ---------------
GROSS PROFIT 4,408 7,336
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,790 2,178
MANAGEMENT FEES 281 68
AMORTIZATION OF GOODWILL 679 182
------------- ---------------
OPERATING INCOME 658 4,908
OTHER INCOME (EXPENSE):
Interest income 33 17
Interest expense, including amortization of deferred
financing costs (4,043) (1,027)
Other financing expense - (50)
------------- ---------------
INCOME (LOSS) BEFORE MINORITY INTEREST AND INCOME
TAXES (3,352) 3,848
MINORITY INTEREST IN LOSS OF CONSOLIDATED SUBSIDIARY 15 -
------------- ---------------
INCOME (LOSS) BEFORE INCOME TAXES (3,337) 3,848
INCOME TAX (BENEFIT) EXPENSE (932) 1,347
------------- ---------------
NET INCOME (LOSS) (2,405) 2,501
OTHER COMPREHENSIVE INCOME (LOSS) -
NET OF TAX:
Foreign currency translation adjustment (143) 14
------------- ---------------
COMPREHENSIVE INCOME (LOSS) $(2,548) $2,515
============= ===============
</TABLE>
See notes to unaudited consolidated financial statements
5
<PAGE>
STEEL HEDDLE GROUP INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
APRIL 3, 1999 APRIL 4, 1998
--------------- ---------------
SUCCESSOR PREDESSOR
COMPANY COMPANY
(13 WEEKS) (13 WEEKS)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (2,405) $ 2,501
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation 2,209 924
Amortization 1,059 215
Accretion of senior discount debentures 553 -
Minority interest in consolidated subsidiaries (172) -
Benefit for deferred income taxes (1,044) -
Accrued retirement benefit costs (43) 73
Changes in operating assets and liabilities:
Accounts receivable (1,320) (1,825)
Inventories 556 (1,041)
Prepaid expenses 52 49
Sundry assets 163 -
Accounts payable 6 28
Accrued and sundry liabilities 2,387 (2,169)
Income taxes payable (11) 987
--------------- ---------------
Net cash provided by (used in) operating
activities 1,990 (258)
INVESTING ACTIVITIES:
Purchase of property, plant and equipment, net (309) (618)
Proceeds on disposals of property, plant and equipment - 81
--------------- ---------------
Net cash used in investing activities (309) (537)
FINANCING ACTIVITIES:
Revolver borrowings (repayments), net (1,501) 692
Payments of debt (298) -
--------------- ---------------
Net cash provided by (used in) financing
activities (1,799) 692
--------------- ---------------
DECREASE IN CASH AND CASH EQUIVALENTS (118) (103)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,182 379
--------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,064 $ 276
=============== ===============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 713 $ 1,546
Income taxes paid $ 10 $ 380
</TABLE>
See notes to unaudited consolidated financial statements
6
<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 April 3, 1999 and January 2, 1999, and the results
of operations and comprehensive loss of Millentex for the three months ended
April 3, 1999 are included in the Company's consolidated statement of operations
and comprehensive loss for the three months ended April 3, 1999.
7
<PAGE>
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.
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.
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 $413 at April 3, 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 $2,265 on April 3, 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 $853 at April 3, 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
three months ended April 3, 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 Steel Heddle's Annual Report on Form 10-K for the year ended January 2, 1999.
2. INVENTORIES
<TABLE>
<CAPTION>
Unaudited
April 3, 1999 January 2, 1999
---------------- ----------------
<S> <C> <C>
Raw materials and component parts $ 6,777 $ 7,614
Work in process and finished goods 12,397 12,116
================ ================
$ 19,174 $ 19,730
================ ================
</TABLE>
Inventories priced by the LIFO method were approximately $10,580 at April 3,
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 $1,173 and $779 at April 3, 1999 and January
2, 1999, respectively.
8
<PAGE>
3. LONG-TERM DEBT
<TABLE>
<CAPTION>
Unaudited
April 3, 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") 16,815 16,262
Bank Credit Facility ("Credit Facility"):
Term loan 30,000 30,000
Revolving loan 2,000 3,200
Foreign Notes Payable 346 654
Foreign Revolving Lines of Credit 2,878 3,169
--------------- ----------------
152,039 153,285
Less current portion 6,985 6,328
=============== ================
$ 145,054 $ 146,957
=============== ================
</TABLE>
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 and accreted value of $16,815 at
April 3, 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 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 1.0 percent or Eurodollar rates (as defined) plus 2.25 percent, at the
Company's option. At April 3, 1999, the interest rates on the Credit Facility
borrowings ranged from 7.19% to 7.32% 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 April 3,
1999.
The foreign notes payable incur interest at rates ranging from 4.0% to 7.2% with
interest payments due quarterly. Principal payments ranging from $11 to $29 are
due quarterly. At April 3, 1999, the foreign revolving lines of credit incurred
interest at rates ranging from 4.09% to 4.35%. The foreign subsidiary had
approximately $532 available under these revolving lines of credit at April 3,
1999. Substantially all of the foreign entity's current assets are pledged as
collateral under two of the foreign revolving lines of credit.
9
<PAGE>
4. 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. During the three months
ended April 3, 1999, $281 in such fees and reimbursements was expensed.
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 $68 in the three months ended April 4, 1998.
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 shareholder's equity (deficit).
5. 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 $16,815 at April 3, 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.
6. 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,
10
<PAGE>
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 three months ended April 3, 1999 (Successor) or
the three months ended April 4, 1998 (Predecessor).
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>
SUCCESSOR COMPANY
Unaudited
3 Months Ended Textile Metal
April 3, 1999 Products Products Other Total
- - ------------------------------------ -------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues from external
customers $15,275 $ 2,399 $ 855 $18,529
Intersegment revenues 80 1,810 31 1,921
Segment profit 3,452 890 66 4,408
PREDECESSOR COMPANY
Unaudited
3 Months Ended Textile Metal
April 4, 1998 Products Products Other Total
- - ------------------------------------ -------------- -------------- --------------- ---------------
Revenues from external
customers $ 15,287 $ 2,694 $ 1,285 $ 19,266
Intersegment revenues 186 1,549 75 1,810
Segment profit 5,713 1,303 320 7,336
</TABLE>
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
Unaudited Unaudited
3 Months 3 Months
Ended Ended
PROFIT April 3, 1999 April 4, 1998
---------------- ----------------
<S> <C> <C>
Total profit for reportable segments $ 4,342 $ 7,016
Other profit 66 320
Unallocated amounts:
Selling, general and administrative (2,790) (2,178)
Management fees (281) (68)
Amortization of goodwill (679) (182)
Interest, net (4,010) (1,010)
Other - (50)
---------------- ----------------
(Loss) income before minority interest
and income taxes $ (3,352) $ 3,848
================ ================
</TABLE>
11
<PAGE>
7. ADOPTION OF NEW ACCOUNTING STANDARDS
In January 1999, the Company adopted Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use", which provides guidance on accounting for the costs of computer
software developed or obtained for internal use. SOP 98-1 requires external and
internal indirect costs of developing or obtaining internal-use software to be
capitalized as a long-lived asset and also requires training costs included in
the purchase price of computer software costs associated with research and
development to be expensed as incurred. The Company's historical policy on
software costs has closely paralleled the SOP's requirements, therefore,
management believes adoption of this statement will not have a significant
effect on the Company's consolidated financial position, results of operations
or cash flows.
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
APRIL 3, 1999
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>
Assets:
Cash and cash equivalents $ 12 $ 247 $ 805 $ $ $1,064
Accounts receivable 3,394 7,799 11,193
Inventories 4,124 15,050 19,174
Income taxes receivable 28 1,251 1,279
Prepaid expenses 234 29 44 (234) 73
---------- --------- --------- ---------- ------------- ----------
Total current assets 246 7,822 24,949 (234) 32,783
Due from affiliates 3,323 73,255 (76,578) -
Notes receivable from affiliates 75,182 (75,182) -
Investments in subsidiaries 3,260 80,183 100,210 (183,653) -
Deferred taxes 614 (614) -
Property, plant & equipment, net 3,170 36,166 39,336
Other assets and deferred charges,
net 538 124,107 417 125,062
---------- --------- --------- ---------- ------------- ----------
Total assets $78,688 $14,853 $338,660 $101,241 $(336,261) $197,181
========== ========= ========= ========== ============= ==========
Liabilities and shareholders' equity:
Accounts payable and accrued and
sundry liabilities $ $ 2,108 $ 9,023 $ $ (234) $ 10,897
Due to affiliates, net 1,160 75,442 (76,602) -
Deferred income taxes 1,902 1,902
Income taxes 132 132
Current portion of long-term debt 2,985 4,000 6,985
---------- --------- --------- ---------- ------------- ----------
Total current liabilities 1,160 5,225 14,925 75,442 (76,836) 19,916
Long-term debt, less current
portion 239 203,182 16,815 (75,182) 145,054
Retirement benefits payable 557 6,668 7,225
Deferred income taxes 1,151 13,677 (614) 14,214
Redeemable common stock 2 2
Minority interest 1,788 1,788
Shareholders' equity 77,528 7,681 100,208 8,982 (185,417) 8,982
---------- --------- --------- ---------- ------------- ----------
Total liabilities and share-
holders' equity $78,688 $14,853 $338,660 $101,241 $(336,261) $197,181
========== ========= ========= ========== ============= ==========
</TABLE>
12
<PAGE>
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED APRIL 3, 1999
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 sales $ $ 2,752 $15,777 $ $ $ 18,529
Cost of goods sold 2,319 11,802 14,121
----------- ------------ ---------- --------- ------------- -----------
Gross profit 433 3,975 4,408
Selling, general and
administrative expenses 1 396 2,393 2,790
Other expenses 960 960
----------- ----------- ---------- --------- ------------- -----------
Operating income (loss) (1) 37 622 658
Other income (expense), net 2,363 (41) (5,769) (563) (4,010)
----------- ----------- ---------- --------- ------------- -----------
Income (loss) before minority
interest and income taxes 2,362 (4) (5,147) (563) (3,352)
Minority interest in loss of
consolidated subsidiary 15 15
----------- ----------- ---------- --------- ------------- -----------
Income (loss) before income taxes 2,377 (4) (5,147) (563) (3,337)
Income tax expense (benefit) 803 (11) (1,527) (197) (932)
Equity in earnings (losses) of
subsidiaries 6 1,586 (2,039) 447 -
----------- ----------- ---------- --------- ------------- -----------
Net income (loss) $ 1,580 $7 $(2,034) $(2,405) $ 447 $ (2,405)
=========== =========== ========== ========= ============= ===========
</TABLE>
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED APRIL 4, 1998
PREDECESSOR
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Combined Combined Reclassifications
Guarantor Non-Guarantor The And
Subsidiaries Subsidiaries Company Eliminations Consolidated
------------ ------------- -------- --------------- --------------
Net sales $ $ 230 $ 19,036 $ $ 19,266
Cost of goods sold 251 11,678 11,930
----------- -------------- ---------- ----------- ------------
Gross profit (21) 7,357 7,336
Selling, general and administrative
expenses 5 2,173 2,178
Other expenses 250 250
----------- -------------- ----------- ----------- ------------
Operating income (loss) (26) 4,934 4,908
Other income (expense), net 2,194 (3,254) (1,060)
----------- -------------- ----------- ----------- ------------
Income (loss) before income taxes 2,194 (26) 1,680 3,848
Income tax expense (benefit) 834 (9) 522 1,347
Equity in earnings (losses) of
subsidiaries 1,343 (1,343) -
----------- -------------- ----------- ----------- ------------
Net income (loss) $ 1,360 $ (17) $2,501 $(1,343) $2,501
=========== ============== ========== =========== ============
</TABLE>
13
<PAGE>
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED APRIL 3, 1999
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 $(342) $104 $ 2,228 $ - $ - $ 1,990
---------- ----------- ----------- ---------- ------------- -----------
Investing activities:
Purchase of property plant
and equipment (1) (308) (309)
---------- ----------- ----------- ---------- ------------- -----------
Net cash used in investing - (1) (308) - - (309)
activities
Financing activities:
Revolver borrowings
(payments), net (301) (1,200) (1,501)
Payments of debt (298) (298)
Intercompany transactions, net 342 (16) (326) -
---------- ----------- ----------- ---------- ------------- -----------
Net cash provided by (used in)
financing activities 342 (615) (973) - - (1,799)
---------- ----------- ----------- ---------- ------------- -----------
Net increase (decrease) in cash and
cash equivalents - (512) 394 - - (118)
Cash and cash equivalents at
beginning of period 12 759 411 - - 1,182
---------- ----------- ----------- ---------- ------------- -----------
Cash and cash equivalents at end
of period $ 12 $247 $ 805 $ - $ - $ 1,064
========== =========== =========== ========== ============= ===========
</TABLE>
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED APRIL 4, 1998
PREDECESSOR
<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 (used in)
operating activities $ 2,166 $ (49) $ (2,375) $ - $ (258)
Net cash used in investing activities (537) (537)
Financing activities:
Proceeds from debt 692 692
Intercompany transactions, net (2,165) (13) 2,178 -
----------- -------------- ------------ ------------- ------------
Net cash provided by (used in)
financing activities (2,165) (13) 2,870 - 692
----------- -------------- ------------ ------------- ------------
Net increase (decrease) in cash and
cash equivalents 1 (62) (42) - (103)
Cash and cash equivalents at
beginning of period 16 96 267 - 379
----------- -------------- ------------ ------------- ------------
Cash and cash equivalents at end
of period $ 17 $34 $ 225 $ - $276
=========== ============== ============ ============= ============
</TABLE>
14
<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, SH Group 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.
15
<PAGE>
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 April 3, 1999 and the results of operations for the
three months ended April 3, 1999 of Millentex are included in the Company's
consolidated financial statements at April 3, 1999. In the calculation of
Adjusted EBITDA for the twelve months ended April 3, 1999, in accordance with
the definition of consolidated EBITDA in the credit facility, 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.
Three Months Three Months
Ended Ended
April 3, 1999 April 4, 1998
Successor Predecessor
------------------ -----------------
Net sales $18,529 100.0% $19,266 100.0%
Cost of sales 14,121 76.2 11,930 61.9
Gross profit 4,408 23.8 7,336 38.1
SG&A 2,790 15.1 2,178 11.3
Operating income 658 3.6 4,908 25.5
Net income (loss) (2,405) 13.0 2,501 13.0
COMPARISON OF RESULTS OF OPERATIONS
THREE MONTHS ENDED APRIL 3, 1999 (SUCCESSOR) COMPARED TO THREE MONTHS ENDED
APRIL 4, 1998 (PREDECESSOR)
Net Sales. Net sales decreased $737 or 3.8% for the three months ended April 3,
1999 compared to the three months ended April 4, 1998. This decrease in net
sales resulted from a decrease in Textile Products net sales of $12 or 0.1% to
$15,275, a decrease in Metal Products net sales of $295 or 11.0% to $2,399 and a
decrease in other net sales of $430 or 33.5% to $855. Textile Products net sales
includes net sales of Millentex (acquired October 23, 1998) of $2,524 during the
three months ended April 3, 1999. Net sales for Textile Products, Metal Products
and other decreased due to a decrease in domestic net sales as foreign net sales
have increased with the acquisition of Millentex.
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 April 3, 1999. During the three months ended April 4, 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 previously
installed, 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 Asian
economic downturn.
16
<PAGE>
Metal Products net sales declined as a result of pricing pressures and as a
large customer began efforts to reduce inventory levels.
The decrease in other net sales for the three months ended April 3, 1999 is due
to a decrease in shuttle and tool and die net sales. Shuttle net sales decreased
as fewer shuttle looms remain as these looms are being replaced by faster more
efficient shuttleless looms. Tool and die net sales decreased during the three
months ended April 3, 1999 as certain large projects for a customer were
completed.
Gross Profit. Gross profit for the three months ended April 3, 1999 decreased
$2,928 to $4,408, or 23.8% of nets sales, compared to gross profit of $7,336 or
38.1% of net sales for the three months ended April 4, 1998. Included in gross
profit for the three months ended April 3, 1999 is gross profit of $399 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 $164, charged to cost of goods sold totaled
$2,264 for the three months ended April 3, 1999, an increase of $1,431 compared
to the comparable period of 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended April 3, 1999 increased $612
to $2,790 or 15.1% of net sales from $2,178 or 11.3% of net sales for the three
months ended April 4, 1998. The increase is due to the inclusion of Millentex
selling, general and administrative expenses of $396, an increase in
depreciation expense of $109 associated with the write-up of the Company's
assets in connection with the new basis of accounting in the Acquisition and an
increase in costs incurred in connection with the Company's year 2000 computer
project of $40.
Operating Income. Operating income for the three months ended April 3, 1999 was
$658, or 3.6% of net sales compared to $4,908, or 25.5% of nets sales for the
three months ended April 4, 1998. Millentex contributed operating income of $3
during the three months ended April 3, 1999. The decrease of $4,250, or 86.6% is
due to the decrease in gross profit as described above, a $213 increase in
management fees and an increase of $497 in amortization of goodwill in
connection with the new basis of accounting used in the Acquisition.
Net Income (Loss). The Company incurred a net loss of $(2,405), 13.0% of net
sales, for the three months ended April 3, 1999 compared to net income of
$2,501, 13.0% of net sales, for the three months ended April 4, 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 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 1.0
percent or Eurodollar rates plus 2.25 percent, at the Company's option. At April
3, 1999, the interest rates on the Credit Facility borrowings ranged from 7.19%
to 7.32% and approximately $17.3 million was available for borrowing under the
revolving loan 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
17
<PAGE>
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 April 3, 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 three months ended April 3, 1999 increased to $1,990 from
cash used in operating activities of $258 for the three months ended April 4,
1998. The increase was primarily due to the Company's reduction in working
capital requirements.
Cash Flows used in Investing Activities. Net cash used in investing activities
for the three months ended April 3, 1999 decreased to $309 from $537 for the
three months ended April 4, 1998. The Company's capital expenditures for the
period were $309, a decrease of $309 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 three months ended April 3, 1999 was $1,799 compared to cash flows
provided by financing activities of $692 for the three months ended April 4,
1998. This change resulted from the net repayment of amounts borrowed under the
Company's revolving lines of credit and notes payable during the three months
ended April 3, 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 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. Adjusted
EBITDA was $4,120 for the three months ended April 3, 1999, $6,149 for the three
months ended April 4, 1998, $17,315 for the twelve months ended April 3, 1999
and $23,293 for the twelve months ended April 4, 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 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
18
<PAGE>
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 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 during
the third quarter of 1999, which is prior to any anticipated impact on its
operating systems. 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 approximately 90 % 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 will be replaced with a purchased system. Replacement and testing
is expected to be completed by August 31, 1999.
IT Infrastructure: The Company has completed the inventory, assessment and
planning phases and is currently in the implementation phase. Implementation
involves repairing or replacing infrastructure hardware and software and
obtaining vendor certifications. Implementation is expected to be completed by
June 30, 1999.
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 is expected to be completed by June
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
19
<PAGE>
Year 2000 problems in their software prior to any impact on their operating
systems. However, many of the responses will require follow-up, which is to be
completed during the third 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, will be expensed as incurred and is
not expected to have a material effect on the results of operations. The Company
has incurred $723 of costs, ($261 during fiscal 1999), of which $471 has been
expensed, ($131 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 third quarter of 1999. Once developed, Year 2000
contingency plans and related cost estimates 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. SFAS No. 133 will be effective for the Company
in Fiscal 2000. Adoption of this statement is not expected to have a material
impact on the Company's financial position, results of operations or cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 $34,878 at April 3, 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.
20
<PAGE>
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 three months ended April 3, 1999, approximately 32% 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 April 3, 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
$1,542 at April 3, 1999. If the foreign currency exchange rates fluctuate by 10%
from rates at April 3, 1999, the effect on the Company's financial position and
results of operations would not be material.
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) Current Reports on Form 8-K None
<PAGE>
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: May 18, 1999 By: /s/ Jerry B. Miller
----------------------------------------
Jerry B. Miller
Vice President Finance and Secretary
<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
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> JAN-03-1999
<PERIOD-END> APR-03-1999
<EXCHANGE-RATE> 1.00
<CASH> 1,064
<SECURITIES> 0
<RECEIVABLES> 11,358
<ALLOWANCES> (165)
<INVENTORY> 19,174
<CURRENT-ASSETS> 32,785
<PP&E> 46,040
<DEPRECIATION> (6,704)
<TOTAL-ASSETS> 197,181
<CURRENT-LIABILITIES> 19,916
<BONDS> 145,054
0
0
<COMMON> 0
<OTHER-SE> 8,982
<TOTAL-LIABILITY-AND-EQUITY> 197,181
<SALES> 18,529
<TOTAL-REVENUES> 18,529
<CGS> 14,121
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