UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year end January 2,1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES 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
Securities registered under Section 12(b) of the Act: None.
Securities registered under Section 12(g) of the Act: None.
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K ( 229.405 of this chapter) is not contained herein, and will
not be contained, to the best of the registrant's knowledge, in definite proxy
or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to the
price at which the stock sold, or the average bid and asked prices of such
stock, as of a specified date within 60 days prior to the date of filing.
As of January 2, 1999, there was no voting stock of the Registrant held by
non-affiliates.
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STEEL HEDDLE GROUP, INC.
Table of Contents
PART I
Item 1. BUSINESS..............................................................3
Item 2. DESCRIPTION OF PROPERTY..............................................10
Item 3 LEGAL PROCEEDINGS....................................................11
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................11
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
. MATTERS..............................................................11
Item 6. SELECTED FINANCIAL DATA..............................................11
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................................13
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK............21
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA...........................22
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..................................55
PART III
.......
Item 10. DIRECTORS AND EXECUTIVE OFFICERS.....................................55
Item 11. EXECUTIVE COMPENSATION...............................................57
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT...........................................................59
Item 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................60
PART IV
Item 14 EXHIBITS, FINANCIAL SCHEDULE AND REPORTS ON FORM 8-K.................61
SIGNATURES...........................................................63
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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."
PART I
ITEM 1. BUSINESS
BACKGROUND
Steel Heddle Group, Inc. ("SH Group", together with its subsidiaires, the
"Company") is a Delaware corporation incorporated in 1998. SH Group is a holding
company that wholly-owns Steel Heddle Mfg. Co. ("Steel Heddle"), a Pennsylvania
corporation incorporated in 1898. The Company's principle executive offices are
located at 1801 Rutherford Road, Greenville, South Carolina 29607. The Company's
telephone number is (864) 244-4110.
Prior to December 6, 1988, Steel Heddle's stock was publicly traded. On December
6, 1988, pursuant to an acquisition proposal by Butler Capital Corporation
("Butler"), SHMC Acquisition Corp purchased 100% of the outstanding shares of
the Company. SH Holdings Corp., was the sole shareholder of SHMC Acquisition
Corp., which was merged into the Steel Heddle.
On May 26, 1998, SH Group consummated the acquisition of SH Holdings Corp. 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 effectuate the acquisition of all of the outstanding common stock of SH
Holdings Corp. (the "Acquisition"). 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 of the ownership
interest of certain members of management), approximately $15 million in
proceeds from SH Group's issuance of $29.25 million 13 3/4% Senior Discount
Debentures ("Debentures"), issuance of $100 million of 10 5/8% Senior
Subordinated Notes (the "Notes") of Steel Heddle and borrowings of $33.6 million
under a bank credit facility (the "Credit Facility") of Steel Heddle.
On October 23, 1998, Steel Heddle, through its wholly owned subsidiary,
Millentex Investment Corporation, acquired a 49% ownership interest in
Millentex, N.V., an entity organized under the laws of the Kingdom of Belgium.
Millentex N.V. 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. The financial information of Millentex
N.V. has been consolidated with the financial information of Steel Heddle from
the date of acquisition. The Company believes consolidation is appropriate due
to a call option that allows the Company to acquire the remaining 51% interest
at its discretion.
GENERAL
The Company is one of the world's leading manufacturers of precision textile
loom accessories. The Company designs, manufactures and markets virtually all of
the loom accessories necessary to operate a commercial weaving loom, including
heddles, dropwires, harness frames, reeds and shuttles and bobbins, which are
used to hold or guide individual yarns during the weaving process. Textile loom
accessories are highly engineered and often customized products which require a
high degree of precision to ensure a uniform weave and to achieve desired fabric
patterns while being able to withstand the stresses of modern, high-speed
weaving looms. While technology and performance specifications vary, all
commercial weaving looms require these accessories. Because loom manufacturers
do not produce these accessories, all woven fabric producers must purchase
textile loom accessories from third-party suppliers. In addition to textile loom
accessories, the Company manufactures
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precision rolled heat treated, bare and tinned flat wire used in the
electronics, automotive solar power and other industries.
As the only North American manufacturer of heddles, frames and shuttles and one
of only three North American manufacturers of reeds, Steel Heddle is a critical
supplier to virtually all North American textile weaving mills, many of which
have been customers for decades. In North America, management estimates that the
Company holds substantial market shares in all of its major products. Although
international markets such as Europe and Asia have different competitive
dynamics than the North American market, the Company also has a strong presence
in many international markets in which it perceives the opportunity for
profitable growth.
Textile loom accessories have represented a steady source of revenue and cash
flow because these parts require frequent replacement due to wear and changes in
production runs. Approximately 75% of the Company's net sales are derived from
the sale of replacement parts. The Company estimates that more than 90% of all
looms installed in North America are delivered "unaccessorized", with the
accessories being designed and supplied by a third-party supplier such as Steel
Heddle. Once the Company has outfitted new looms with its accessories it has
generally been able to continue to supply replacement parts for the life of the
loom. The Company believes it has achieved its leading position in the industry
primarily because of its willingness and ability to work closely with its
customers, both before and after the installation of new looms, to design the
appropriate accessories to meet specific manufacturing needs and then continue
to meet those needs on an ongoing basis.
In addition to its textile loom accessories business, the Company converts round
rod to flat wire through a rolling process which results in a flat wire with a
round edge. Originally developed to satisfy in-house heddle manufacturing needs,
the Company recognized that its ability to produce these products to extremely
tight tolerances could be tailored to meet similar needs in other industries and
began to pursue outside sales. Because these rolled products are custom-made for
specific applications, they have historically commanded attractive margins. The
Company's rolled products can be found in a variety of other industries,
including electronics, automotive and solar power. Among the end-use
applications for the Company's products are notebook computers, cellular
telephones, electronic control devices and automotive applications such as
control mechanisms for air bags, turn signals and cruise controls.
PRODUCTS
The Company's core business strategy is to manufacture a full range of
technically advanced textile loom accessories capable of fulfilling its
customers' varying weaving requirements. The Company manufactures the broadest
range of loom accessories in the textile industry, providing the Company with a
distinct competitive advantage. The accessories that are essential to the
successful operation of a loom include heddles, dropwires, harness frames and
reeds. Each of these accessories has differing demand and replacement dynamics.
HEDDLES AND DROPWIRES
Steel Heddle manufactures a full range of high-quality heddles and dropwires for
all types of looms. Heddles and dropwires are precision-made to perform within
tight parameters. Stamped from flat-rolled steel and polished to be extremely
smooth, heddles and dropwires require exacting manufacturing specifications,
thorough quality control and expert metal-working capabilities. All of the
Company's heddles and dropwires are produced to precision tolerances of
two-thousandths to three-thousandths of an inch. The Company estimates that
50-60% of heddles and dropwires are made to order, and approximately 75% of net
sales of heddles and dropwires are derived from replacement sales. Both products
are generally shipped within one to three days of order if from stock and four
to six weeks if custom manufactured.
HEDDLES
Heddles are flat, specifically designed stamped parts that guide and hold
individual yarn during the high-speed weaving process. Steel Heddle produces a
wide variety of heddle types, each designed to meet specific performance
parameters. The Company's heddles accommodate a vast range of customer
specifications. All of the Company's heddles are available in two material
types: stainless steel and plated carbon steel.
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DROPWIRES
Dropwires are precision-made plated-carbon steel or stainless steel stamped
parts which detect broken yarns and trigger a loom to shut down, minimizing
energy and yarn used in the production of imperfect cloth. The Company's
dropwires are precision manufactured from similar flat rolled steel as is used
to manufacture heddles and are held to the same exacting tolerances. The Company
believes the use of its tempered steel dropwires contributes to the production
of superior cloth, increased machine running time and lower operating costs.
HARNESS FRAMES
Steel Heddle manufactures a full range of harness frames for all types of looms.
Harness frames are specialized carriages for heddles constructed from special
aluminum alloys and composite materials. Each frame holds between 200 and 1,500
heddles, and each loom holds between 2 and 28 harness frames, depending upon the
complexity of the final woven fabric. Harness frames raise and lower the
heddles, creating the woven fabric pattern. As modern, high-performance looms
operate at 650 to 1,000 picks per minute (two to four times faster than older
technology), harness frames must be precision engineered in order to withstand
the tremendous stress caused by continuous acceleration and deceleration without
buckling or bending. Approximately 90% of harness frames are made to order, and
approximately 65% of net sales of harness frames are derived from replacement
sales.
The Company manufactures the following four types of harness frames: high speed
jet frames; standard aluminum frames; projectile frames; and section frames. In
addition, the Company manufactures supporting hardware and components and offers
frame repair and frame reconditioning services.
REEDS
Reeds are precision-manufactured, comb-like devices used to evenly space yarns
on the loom. One reed per loom is mounted on the loom's drive mechanism which
moves the reed forward to beat up, or press, the pick into the finished fabric.
Each reed is composed of a series of dents. Dents are specially designed flat
wire spacers and are assembled in a reed to yield a particular fabric pattern or
style. Reed production requires exacting manufacturing processes as absolutely
smooth, straight and precisely spaced dents are critical to the production of
quality woven fabric.
While the demand for most loom accessories is driven by the purchase of new
looms or replacement of worn accessories, reed purchases are primarily driven by
style changes. Reeds must be replaced each time a loom is used to weave a new
fabric pattern. Thus, reeds are rarely used for their entire useful life. To
remain competitive, the Company's customers must react quickly to fabric style
changes and as a result, frequently purchase new reeds. For reeds, the Company
fulfills its customers' exacting demands for product performance and rapid
delivery through its three U.S.-based reed manufacturing facilities located in
the primary U.S. woven-textile producing regions of Virginia/North Carolina,
South Carolina, and Georgia/Alabama.
The Company custom manufactures reeds for use in all types of looms. The Company
produces two types of reeds: profile and flat. The Company's profile reeds are
required in air-jet weaving looms and are manufactured using precision
engineering. In addition to close tolerance assembly, these reeds require
precision stamped and polished profile dents and specific air management
settings. As a result, profile reeds are sold at prices that are four to six
times higher than prices of flat reeds. Profile reeds currently account for
approximately 60% of net sales of reeds, but the Company expects demand to
increase for these reeds as weaving mills continue to purchase the more
technically advanced air jet looms. In comparison, the Company's flat reeds are
comprised of flat dents (i.e., without profiles or contours) and are used
primarily on shuttle, projectile, rapier and water jet weaving looms. Flat reeds
accounted for approximately 33% of net sales of reeds. In addition to the
Company's profile and flat reeds, the Company produces warp preparation
products, which are used for preparing the warp prior to the weaving process.
Warp preparation products consist of expansion combs, slasher combs, comb
panels, fan reeds, hook reeds and lease rods. Warp preparation products account
for approximately 10% of net sales of reeds.
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SHUTTLES AND BOBBINS
Shuttles, used in older, slower looms, are specially fabricated from composite
materials to carry "pick" or "filling" yarns across the loom as the main yarn or
"warp" yarn is pulled through the reed. Bobbins are cylindrical wood yarn
carriers held by the shuttle. Shuttles and bobbins account for approximately 80%
of the net sales in this product line, with the remaining 20% derived from the
sale of tension products. Most of the Company's shuttles and bobbins are
consumed domestically, but approximately 18% are exported primarily to South
America. Steel Heddle is the sole supplier of automatic shuttles and bobbins to
textile mills in the United States. All shuttles and bobbins sales are
replacement sales.
ROLLED PRODUCTS
The Company manufactures precision rolled ferrous and non-ferrous, heat treated,
bare and tinned flat wire. The finished flat wire is then precision wound and
packaged to customer specifications. Because the Company rolls rather than slits
the flat wire, it benefits from the product advantages of round, smooth edges
and long continuous strand lengths. Through its vertical integration, the
Company supplies its internal annual requirements of tempered stainless and
carbon steel of approximately 2.9 million pounds.
Originally established to satisfy in-house needs, the Company recognized that it
possessed the technical expertise to produce rolled products to exacting
tolerances and, as a result, has opportunistically pursued outside sales. The
Company manufactures approximately 63% of its rolled products for in-house use,
with the remainder for outside sales. With no commodity-oriented or standard
inventory production, the Company's rolled products are custom-produced for
specific applications, generating attractive gross margins for the Company.
Excluding internal consumption, the Company sells to customers in the
electronics, automotive and solar power industries and in a variety of other
industries in which tight tolerances and smooth edges are required. The
Company's rolled products can be found in a variety of end-use products,
including notebook computers, cellular phones, electronic control devices,
automotive applications such as control mechanisms for air bags, turn signals
and cruise controls.
All rolled products are custom-manufactured for specific applications and can be
grouped into three broad categories: flat rolled steel, copper wire and aluminum
wire. The Company manufactures flat rolled steel wire which is used for
specialty applications such as garment stays, orthopedic braces and saw blades.
Flat rolled steel wire is also used internally in the production of heddles and
drop wires. The Company manufactures tinned and bare copper flat wire for use in
a variety of applications including capacitor leads and laminated cable in which
smooth wire edges are necessary to prevent the cutting of layers which cause
short circuits. The Company also manufactures flat wire which is used as wire
connectors and conductors in electronic products and tin-coated copper wire used
in solar cells. In addition, the Company rolls aluminum flat wire for use in a
variety of applications, including capacitor leads and carrier bars for
capacitor manufacturing.
RAW MATERIALS
Aluminum extrusions, aluminum and copper rod and wire, and stainless and carbon
steel in rod, round wire and flat wire form are the primary raw materials used
by the Company. All raw materials are readily available from multiple sources.
The Company does not experience much volatility in its raw material prices.
Steel Heddle has well-established long-term relationships with each of its raw
material suppliers.
INTELLECTUAL PROPERTY
The Company has numerous trademarks and patents effective in the United States
and several trademarks effective in several foreign countries for varying
lengths of time. Company trademarks include "SH(R)", "Duralite(R)", "Draw-O(R)",
and "Jet Eye(R)" under which it markets certain weaving accessory products. The
Company also has a number of applications for trademarks pending in the United
States and abroad. Management considers its various trademarks, trademark
applications and patents to be valuable assets but believes that the loss of any
one trademark or patent would not have a material adverse effect on the
Company's operations.
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TEXTILE INDUSTRY DEPENDENCE; CYCLICALITY
The principal operations of the Company have been, and will continue to be,
directly dependent upon domestic and foreign production of woven fabric.
Historically, the textile industry has experienced periodic, cyclical downturns.
Industry sales and production can be affected by the general strength of the
economy and by other factors, including the cost of raw materials such as cotton
and the demand for woven fabric, which may have an effect on the level of the
Company's sales.
COMPETITIVE POSITION
The Company's objective is to maintain and enhance its competitive position as
the foremost supplier of loom accessories in the U.S. while broadening its
presence in international markets. The Company intends to achieve its objectives
by capitalizing on the following competitive strengths:
LEADING MARKET POSITION. The Company is a supplier to virtually all North
American textile weaving mills, with leading market shares across all of its
product lines in North America. The Company is the sole domestic manufacturer of
heddles, dropwires, harness frames, shuttles and bobbins. Steel Heddle is also
the largest domestic manufacturer of reeds. In addition, the Company has a
strong presence in those international markets in which it sees profitable
growth opportunities.
COST-EFFICIENT MANUFACTURING. The Company believes it is the only producer of
loom accessories that also manufactures the component parts of those accessories
(i.e., vertical integration). The Company has developed and tooled proprietary
production machinery and produces its own heat-treated, flat-rolled carbon and
stainless steel wire which is the key raw material in the production of heddles
and dropwires. In 1995 and continuing through 1996, the Company implemented a
comprehensive profitability enhancing cost-reduction program which, among other
things, eliminated 120 full time positions and decreased pension and benefit
costs. Because of its vertical integration, proprietary production machinery,
experienced low-cost labor force and economies of scale, the Company believes it
is one of the most efficient producers in the textile loom accessory industry.
However, certain of these advantages may be offset by the freight costs and
duties associated with export sales.
LONG-STANDING AND DIVERSE CUSTOMER RELATIONSHIPS. The Company has developed and
maintained long-term relationships with its customers, in some cases for over 50
years. The Company has built its customer relationships by providing consistent
quality, a broad product line and technical support as well as maintaining a
strong customer service orientation. The Company's sales people visit each
customer every two to four weeks, enabling the Company to gain early knowledge
of a customer's intent to purchase new looms and accessories. In addition, the
Company's technical personnel work closely with the weaving mills and original
equipment manufacturers ("OEMs") to help them select the appropriate accessories
and resolve design or engineering issues. The Company's ability to work closely
with international customers is limited to a certain extent by the fact that the
Company did not have manufacturing operations in Europe until its investment in
Millentex N. V. on October 23, 1998 and does not have manufacturing operations
in Asia. The Company's customer base is diversified, with no one customer
representing more than 10% of the Company's net sales. Management believes the
loss of any one customer would not have a material adverse effect on the
Company.
STRONG BRAND NAME. The Company's brand name enjoys significant worldwide
recognition in the textile industry as a result of its 100-year old history.
Since it introduced flat steel heddles to U.S. weaving mills in 1898, the
Company has manufactured high-quality loom accessories. Because of its
longevity, product innovation, high-quality reputation, strong service
orientation and broad product line, the Company has built and maintained its
significant market share in the North American market and has built a strong
presence internationally.
Textile loom accessories are highly engineered products, requiring precision
manufacturing to ensure a uniform weave and to achieve the desired fabric
patterns. In addition, given the high speeds at which shuttleless looms operate,
the parts must be extremely smooth to avoid snags or breakages in the yarn. Any
unintended variance in a reed, heddle or frame can result in broken or damaged
yarn, unusable cloth, or wasted weaving time.
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The loom accessory market is driven by four primary factors: (i) faster loom
speeds; (ii) flexible production requirements; (iii) new loom purchases; and
(iv) weaving mill utilization rates.
THE NORTH AMERICAN LOOM ACCESSORY MARKET. In North America, more than 90% of
looms are purchased by mills from OEMs without accessories. No loom maker
produces accessories. The Company believes that several factors deter OEMs from
manufacturing accessories. Among these are: (i) limited possibilities for growth
or economies of scale because OEMs are reluctant to buy accessories produced by
their competitors; (ii) the focus of OEMs on original equipment/capital goods
markets rather than the after-market/replacement business; (iii) worldwide
competition among accessory manufacturers resulting in stable supplies of
competitively priced accessories; (iv) the cost of investment in proprietary
tooling and production machinery; and (v) the incompatibility of accessory
manufacturing and OEM production schemes. In addition, the Company believes that
U.S. textile mills prefer the flexibility to select accessories that are
engineered to meet their individual needs. Textile mills base purchases of loom
accessories on (a) product performance, (b) service and technical support
provided by the accessory manufacturer, (c) long-term business relationships and
(d) price. In addition, a local manufacturing presence providing timely response
is important to textile manufacturers.
THE GLOBAL MARKET FOR LOOM ACCESSORIES. The global loom accessory market is
divided into four major regional markets: North America, Europe, Asia, and Latin
America. Asia is, by far, the largest market for textile loom accessories. Of
textile loom accessories, generally only heddles are sold internationally.
Harness frames, reeds and shuttles and bobbins are produced and sold within
regional markets and competition tends to be among smaller local companies.
However, the Company does pursue, on an opportunistic basis, sales of all of its
loom accessories into the international loom accessory market.
COMPETITION AND MARKET SHARE
Over the past ten years, the U.S. woven textile industry has consolidated and
invested in modern loom technology. Today, loom accessories are highly
engineered products that require sophisticated manufacturing techniques. Steel
Heddle's capabilities in producing a broad range of accessories, its reputation
for quality and service and its long-term customer relationships, provide it
with an important competitive advantage. None of Steel Heddle's domestic
competition has its breadth of products, established relationships or ability to
customize its products to its customers' needs.
NORTH AMERICAN COMPETITION AND MARKET SHARE. Steel Heddle is the leading
supplier of loom accessories in the North American market. Grob & Co. AG
("Grob") is the Company's only significant competitor. The Company believes Grob
is at a significant cost and delivery disadvantage in the U.S. compared to Steel
Heddle because, among other things, Grob does not have manufacturing operations
in the U.S. In addition, Steel Heddle believes it is more flexible and
responsive to customer needs than Grob. With manufacturing and technical
personnel located in Switzerland, it is difficult for Grob to service the U.S.
market. Although Grob has sold into the U.S. market since 1960 and has had a
sales office in the U.S. since 1972, its manufacturing operations have remained
outside of North America, and it has been largely unsuccessful at obtaining
incremental market share.
The Company estimates it has a significant market share of the domestic reed
market. The nearest competitor, Palmetto Loom Reed, Inc. ("Palmetto) is a
privately-held family-run business based in Greenville, South Carolina. There
are only two other reed manufacturers in the U.S. which split the remaining
market. Reed sales are affected by timeliness of delivery, making competition
regional. Consequently, the reed market is slightly more fragmented than any of
the other accessory markets.
Steel Heddle is the major producer of automatic shuttles and bobbins serving the
North American market. Demand for shuttles and bobbins has decreased over the
last several years as shuttle looms have been retired or replaced with more
efficient shuttleless technology.
INTERNATIONAL COMPETITION AND MARKET SHARE. Steel Heddle is the number two
producer of tempered heddles worldwide. The Company's only significant
competitor, Grob,is the leading global provider of accessories in terms of
volume. The Company differentiates itself from Grob by its ability to service
all weaving accessory
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requirements and its technical expertise that it uses to solve its customers'
weaving problems. Management also believes that Grob incurs higher production
costs than the Company. The Company believes it is poised to capture additional
worldwide market share from Grob as customers seek better service and technical
support.
Steel Heddle has been building relationships with OEMs (which are more important
internationally than domestically), foreign textile mills and trading companies
over the last several years as part of its international strategy. Management
expects its international market share to grow over time. Steel Heddle's
international strategy is focused on (i) building long-term relationships, (ii)
customer service and technical support, (iii) acquisitions such as Millentex and
(iv) providing superior quality. In addition, the Company continues to
strengthen its international sales agent networks. The Company believes that as
it strengthens its relationships with its international customers and becomes a
critical partner in their success, as it has done in the U.S., its international
sales will increase.
EMPLOYEES AND EMPLOYEE RELATIONS
As of January 2, 1999, the Company employed approximately 580 employees in the
United States and approximately 130 employees outside the United States. None of
the Company's hourly employees are covered by collective bargaining agreements.
All salary and hourly employees of Millentex N.V. have open ended contracts with
the Company. The Company may terminate the employee contracts with severance
payments to be paid to the terminated employee based upon the classification of
the employee and his or her tenure with the Company. The Company believes its
employee and labor relationships are good.
ENVIRONMENTAL MATTERS
The Company is subject to federal, state and local environmental requirements,
including those governing discharges to the air and water, the handling and
disposal of solid and hazardous wastes, and the remediation of contamination
associated with releases of hazardous substances. Based on a review conducted by
independent environmental consultants in connection with the Acquisition, the
Company believes that it is currently in substantial compliance with
environmental requirements, except as would not be expected to have a material
adverse effect on the Company. Nevertheless, the Company's manufacturing
operations involve the use of hazardous substances and, as is the case with the
manufacturers in general, if a release of hazardous substances occurs or has
occurred on or from the Company's facilities, the Company may be held liable and
may be required to pay the cost of remedying the condition. The amount of any
such liability could be material.
The Company has made, and will continue to make, expenditures to comply with
current and future environmental requirements. The Company does not anticipate
material capital expenditures for environmental controls in the current or
succeeding fiscal year. However, because environmental requirements are becoming
increasingly stringent, the Company's expenditures for environmental compliance
or clean up may increase in the future.
In 1987, the United States Environmental Protection Agency certified the closure
of three former wastewater lagoons at the Company's Greenville, S. C. facility
under the Resource Conservation and Recovery Act ("RCRA"). In 1989, the Company
began a groundwater remediation program at the facility in accordance with RCRA
requirements. In 1996, the Company received a post-closure care permit for the
former lagoons. This permit requires post-closure care for the former lagoons,
continued groundwater remediation, and investigation of certain areas of the
facility. As required by RCRA, the Company has posted financial assurance in the
amount of $671,000 to ensure funds are available to complete the permit
requirements. As required by the permit, the Company is continuing to
investigate certain areas of the facility. It is possible that, based on the
results of such investigation, additional actions could be required, in which
case the costs could materially increase.
The Company is involved as a potentially responsible party ("PRP") under the
Comprehensive Environmental Response, Compensation, and Liability act ("CERCLA")
with regard to past waste disposal at the Aqua Tech Superfund site in Greer, S.
C. Some risk of similar environmental liability is inherent in the nature of the
Company's current and former operations. While strict joint and several
liability is authorized under CERCLA, cleanup costs are usually allocated among
the PRPs. The Company has settled two lawsuits and paid its share
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of past cleanup costs with respect to the site. Because the amount of future
cleanup costs at the site is not yet known, the Company cannot predict with
certainty the amount of its share of these future costs. However, based on its
allocated share of past cleanup costs, the Company does not expect its share of
these future costs to be material.
In connection with the Acquisition, Butler and certain other stockholders
(collectively, the "Sellers") have indemnified the Company, subject to time and
dollar limitations, for breaches of certain representations and warranties
pertaining to environmental matters. There can be no assurance, however, that
Sellers will have the ability to indemnify the Company if called upon to do so.
The Sellers also agreed to clean up a past release of mineral spirits at the
Company's Oconee County, S. C. facility. To pay for this clean up, $350,000 of
the purchase price has been placed in an escrow account. The Sellers' cleanup
obligation is limited to the escrow amount. The clean up work was completed by
the Company at a cost of approximately $38,000. The Company received a letter
dated January 19, 1999, from the South Carolina Department of Health and
Environmental Control ("DHEC") stating the Company has adequately addressed the
known environmental contamination at the mineral spirits area of contamination
based upon their review of the data.
BACKLOG
Unfilled orders, which the Company believes are firm, were approximately $10.5
million at January 2, 1999 and approximately $13.7 million at January 3, 1998.
The Company generally fills its open orders in the following fiscal year and the
Company expects that all of the open orders as of January 2, 1999 will be filled
in the year ended January 1, 2000. The Company believes that the amount of
backlog provides some indication of the sales volume that can be expected in the
coming months, although changes in economic conditions may result in deferral or
acceleration of orders which may affect sales volumes for a period.
No significant portion of the Company's business is subject to renegotiations of
profits, or termination of contracts or subcontracts at the election of the
government.
Financial information about the Textile Products group ("Textile Products") and
the Metal Products group ("Metal Products") and financial information about
foreign and domestic operations and export sales is set forth in Item 8 of this
Form 10-K under the caption "Financial Statements and Supplemental Data".
Information regarding the Company's working capital position and practices is
set forth in Item 7 of this Form 10-K under the caption "Liquidity and Capital
Resources."
ITEM 2. DESCRIPTION OF PROPERTY
Steel Heddle is headquartered in Greenville, South Carolina and conducts its
primary operations through a manufacturing facility located adjacent to the
Company's headquarters. In addition, rolled products are manufactured in Oconee
County, South Carolina, and reeds are manufactured in North Carolina, Georgia
and Mexico. Below is a summary of the Company's existing facilities:
<TABLE>
<CAPTION>
Square Owned/
Location Function Footage Leased
------------ -------------
<S> <C> <C> <C>
Greenville, SC Corporate Offices, Heddle, Frame, Reed, Shuttle and 474,036 Owned
Bobbin Manufacturing
Oconee County, SC Rolled Products Manufacturing 123,312 Owned
Greensboro, NC Reed Manufacturing 12,000 Owned
Meriwether County, GA Reed Manufacturing 18,000 Owned
Mexico City, Mexico Reed Manufacturing 6,000 Leased(1)
Flanders, Belgium Heddle, Frame and Reed Manufacturing 119,000 Leased(2)
</TABLE>
(1) Terms of the lease are year to year with annual rental of approximately
$17,000.
(2) Terms of the leases are for 9 years with annual rentals of approximately
$210,000. The leases may be terminated with notice of up to twelve
months and penalties of up to six months rent.
10
<PAGE>
Substantially all of the Company's assets are used to produce Textile Products
except for the assets located in Oconee which are used to produce Metal
Products. The Company believes that its manufacturing operations are among the
most efficient in the textile loom accessory industry. Most of the machinery
used by the Company has been specifically designed and/or manufactured by the
Company and most of its products are made-to-order. The Company believes that
all of its facilities are suitable and adequate for the current and anticipated
conduct of its operations.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's authorized capital stock consists of 300,000 shares of common
stock, par value $0.01 per share (the "Common Stock"). On January 2, 1999,
234,949 shares of the Company's common stock were outstanding. There is no
established public trading market for the Company's common stock. AIP, its
related investors and management of Steel Heddle own all of the outstanding
common stock of SH Group. Dividends have not been paid since the Acquisition.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
The following table sets forth selected consolidated historical financial,
operating, other and balance sheet data of the Company for each of the fiscal
years in the five-year period ended January 2, 1999, derived from the
Consolidated Financial Statements of the Company which have been audited. On May
26, 1998, a transaction whereby SH Group acquired the stock of SH Holdings Corp.
was consummated (the "Acquisition"). As a result of the transaction, the assets
and liabilities of SH Holdings Corp. were revalued to their respective fair
values under the principles of APB 16, "Business Combinations." The most
significant effects were to increase property, plant, and equipment, certain
intangibles, inventory and certain liabilities. Accordingly, financial
information for periods prior to May 26, 1998 (Predecessor) is not comparable
with that for periods subsequent to May 26, 1998 (Successor). The data presented
below should be read in conjunction with the Consolidated Financial Statements
and the related notes thereto, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" presented elsewhere herein.
The balance sheet data of the Predecessor Company for fiscal years 1994 through
1997 has been restated for an understatement of retirement benefits payable. See
Restatement of Financial Statements included in "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
11
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year
-------------------------------------------------------
January 2, 1999
-----------------
Successor | Predecessor
Company | Company Predecessor Company
| -------------------------------------
| 1997 1996 1995 1994
(32 Weeks) | (20 Weeks)
---------- | -----------------------------------------------
| (Dollars in Thousands)
|
STATEMENT OF OPERATIONS DATA: |
<S> <C> | <C> <C> <C> <C> <C>
Net Sales $ 38,783 | $29,631 $ 72,983 $64,484 $68,118 $ 68,302
Cost of goods sold 31,623 | 18,628 46,448 44,074 47,706 47,996
-------- | -------- --------- -------- -------- ---------
Gross profit 7,160 | 11,003 26,535 20,410 20,412 20,306
Selling, general and administrative expenses 4,611 | 3,824 8,489 8,875 8,667 8,198
Management fees 534 | 132 475 725 275 275
Amortization of goodwill 1,585 | 289 729 729 729 936
Restructuring charges (a) - | - - - 821 -
-------- | -------- --------- -------- -------- ---------
Operating income 430 | 6,758 16,842 10,081 9,920 10,897
Interest expense, net (10,590) | (1,499) (5,148) (5,844) (6,307) (7,061)
Other financing expense - | (50) (212) - - -
Minority interest in loss of |
consolidated subsidiary 106 | - - - - -
-------- | -------- --------- -------- -------- ---------
Income (loss) before taxes, extraordinary |
item and cumulative effect of change in |
accounting principle (10,054) | 5,209 11,482 4,237 3,613 3,836
Income tax (benefit) expense (3,139) | 1,868 4,015 1,638 1,628 1,788
-------- | -------- --------- -------- -------- ---------
Income (loss) before extraordinary item |
and cumulative effect of change in |
accounting principle (6,915) | 3,341 7,476 2,599 1,985 2,048
Extraordinary item (b) - | - (2,753) - - -
Cumulative effect of change in |
accounting principle (c) - | - - - (855) -
========= | ======== ======== ======== ======== =========
Net income (loss) $ (6,915) | $ 3,341 $ 4,714 $ 2,599 $ 1,130 $ 2,048
========= | ======== ======== ======== ======== =========
OPERATING AND OTHER DATA: |
Net cash provided by operating activities $ 1,619 | $ 2,210 $ 9,960 $11,236 $ 7,612 $ 9,623
Net cash (used in) investing activities (115,887) | (730) (2,529) (2,767) (3,357) (2,784)
Net cash provided by (used in) financing |
activities 113,899 | (308) (11,697) (4,700) (5,000) (10,262)
EBITDA (d) 8,445 | 8,564 21,121 15,928 15,810 16,550
EBITDA margin (e) 21.8% | 28.9% 28.9% 24.7% 23.2% 24.2%
Depreciation and amortization $ 7,915 | $ 1,863 $ 4,409 $ 6,019 $ 6,096 $ 5,859
Capital expenditures 1,110 | 968 2,558 2,809 3,455 2,839
Ratio of earnings to fixed charges (f) - | 4.4x 3.2x 1.7x 1.6x 1.5x
|
BALANCE SHEET DATA (AT PERIOD END): |
Working capital $ 15,166 | $19,328 $ 8,847 $ 8,380 $11,576 $ 11,677
Net property, plant and equipment 41,504 | 15,898 16,685 17,756 20,106 21,911
Total assets 199,901 | 67,052 64,340 68,716 68,771 71,890
Long-term debt (including current portion) 153,285 | 52,492 52,800 50,000 52,700 59,700
Redeemable common stock - | 1,366 1,366 1,350 1,350 1,350
Shareholders' equity (deficit) (As restated - |
See Note 15 of Notes to Consolidated |
Financial Statements) 11,530 | (1,234) (5,957) (2,743) (5,345) (6,459)
</TABLE>
(a) Includes restructuring charges of $0.8 million in 1995 related to a
reduction in the domestic workforce, closure of the Company's Canadian
operation and writedown of certain assets.
(b) Extraordinary item relates to a loss on early extinguishment of debt,
net of taxes of $1.7 million.
(c) Includes a cumulative effect of change in method of accounting for
postretirement benefits of $0.9 million net of taxes in fiscal year
1995.
(d) EBITDA represents operating income plus depreciation and amortization
and is calculated in a manner consistent with the definition of
"Consolidated EBITDA" in the Company's debt agreement. 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, non-recurring restructuring
charges, supplemental bonus compensation, compensation expense for
certain eliminated management positions and incremental increases in
obsolete inventory reserves. Adjusted EBITDA is calculated in a manner
substantially consistent with the definition of "Consolidated EBITDA" as
defined in the credit facility. The following is a summary of historical
adjustments to operating income to determine EBITDA and Adjusted EBITDA:
12
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year
----------------------------------------------------------
January 2, 1999
-------------------
Successor | Predecessor
Company | Company Predecessor Company
----------| ------------------------------------------------
(32 Weeks)| (20 Weeks) 1997 1996 1995 1994
----------| ------------------------------------------------
| (Dollars in Thousands)
<S> <C> | <C> <C> <C> <C> <C>
Operating Income $ 430 | $6,758 $16,842 $10,081 $ 9,920 $10,897
Depreciation 4,468 | 1,517 3,550 5,118 5,161 4,924
Amortization (including inventory write-up) 3,547 | 289 729 729 729 729
--------- | --------- --------- -------- --------- ---------
EBITDA 8,445 | 8,564 21,121 15,928 15,810 16,550
|
Unusual items: |
Management and transaction costs 918 | 132 475 725 275 275
Write-off of foreign investment 300 | - - - - -
Millentex N.V. shareholder costs 412 | - - - - -
Non-recurring restructuring charges - | - - - 821 -
Supplemental bonus compensation - | - 775 870 - -
Compensation expense for certain |
eliminated management positions - | - 260 - - -
Incremental increases in obsolete |
inventory reserves - | - 210 - -
========= | ========= ========= ======== ========= =========
Adjusted EBITDA $10,075 | $8,696 $22,841 $17,523 $16,906 $16,825
========= | ========= ========= ======== ========= =========
</TABLE>
EBITDA and Adjusted EBITDA are a basis upon which the Company assesses
its financial performance, and certain covenants in the credit agreement
are tied to similar measures. EBITDA and Adjusted EBITDA are not
intended to represent cash flow from operations as defined by GAAP and
should not be used as an alternative to net income as an indicator of
operating performance or to cash flows as a measure of liquidity. EBITDA
and Adjusted EBITDA, as presented, represent a useful measure of
assessing the Company's ongoing operating activities without the impact
of financing activities and unusual items. While EBITDA and Adjusted
EBITDA are frequently used as a measure of operations and the ability to
meet debt service requirements, it is not necessarily comparable to
other similarly titled captions of other companies due to potential
inconsistencies in the method of calculation.
(e) EBITDA as a percentage of net sales.
(f) For purposes of this computation, fixed charges consist of interest
expense and amortization of deferred financing expenses.
Earnings consist of income (loss) before taxes, extraordinary item and
cumulative effect of change in accounting principle,
plus fixed charges. For the 32 week period ended January 2, 1999, the
deficiency in the coverage of fixed charges was approximately $10.1
million.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Historical Financial Data" and the Consolidated Financial
Statements and the related notes thereto included elsewhere in this report.
OVERVIEW
The Company has two reportable segments, the Textile Products group and the
Metal Products group. The Textile Products group 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 its
Metal Products group, 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.
13
<PAGE>
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, N.V., an entity organized under the laws of the Kingdom of Belgium.
Millentex, N.V. 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 N.V. based
upon their estimated respective fair values at the date of acquisition. The
preliminary fair values have been determined by independent appraisals,
valuations and other means deemed appropriate by management. Management believes
that adjustments, if any, resulting from the finalization of the fair values
will not have a significant effect on the allocation of the purchase price.
Based on such preliminary allocation and subsequent adjustments, the purchase
price was allocated to identifiable assets and there was no goodwill.
The financial position at January 2, 1999, and the results of operations from
acquisition date through January 2, 1999 of Millentex N.V. are included in the
Company's consolidated financial statements for the 32 weeks ended January 2,
1999 except in the calculation of Adjusted EBITDA where results of Millentex
N.V. are included on a pro forma basis for the full twelve months in accordance
with the definition of consolidated EBITDA in the credit facility.
RESTATEMENT OF FINANCIAL STATEMENTS
The Company has an arrangement under which it provides life insurance benefits
for retired hourly and salaried employees. Statement of Financial Accounting
Standards ("SFAS") No. 106, "Employers' Accounting for Postretirement Benefits
Other than Pensions," requires that the liability be calculated at the actuarial
present value of the estimated ultimate cost of the benefit being provided. The
Company was informed by its actuary, in February 1999, (subsequent to the
issuance of the Company's fiscal 1997 financial statements) that the liability
for the postretirement life insurance had been incorrectly calculated, for
periods prior to the year ended January 2, 1999, because a blended insurance
premium rate for both active and retired employees was used, rather than the
premium rate attributable to retired employees, which resulted in an
understatement of the post retirement life insurance obligation.
The financial statements for the years ended January 3, 1998 and December 28,
1996 have been restated to correct the understatement of retirement benefits
payable. The effect of the restatement on the consolidated statements of
operations and comprehensive income (loss) and cash flows for the years ended
January 3, 1998 and December 28, 1996 was not material. The effect on the
consolidated balance sheet as of January 3, 1998 is as follows:
January 3, 1998
Originally
Reported Restated
------------ ------------
Retirement benefits payable $ 5,126 $ 7,439
Deferred income taxes, long-term 1,120 241
Deficit (18,164) (19,598)
14
<PAGE>
The effect on the deficit in the accompanying consolidated statements of
shareholders' equity (deficit) is as follows:
Originally
Reported Restated
--------------- ----------------
December 30, 1995 $ (17,548) $ (18,982)
December 28, 1996 (14,949) (16,383)
January 3, 1998 (18,164) (19,598)
May 25, 1998 (14,823) (16,257)
BASIS OF PRESENTATION
The following table sets forth certain unaudited performance details for the
periods shown. Net sales, costs of sales, gross profit, selling, general and
administrative expenses, operating income and net income (loss) of the Company
are presented in millions of dollars and as a percentage of sales.
<TABLE>
<CAPTION>
32 Weeks Ended 20 Weeks Ended Year Ended Year Ended
January 2, 1999 May 25, 1998 January 3, 1998 December 28, 1996
Successor Predecessor Predecessor Predecessor
--------------- -------------- --------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $38.7 100.0% $29.6 100.0% $73.0 100.0% $64.5 100.0%
Cost of sales 31.6 81.5 18.6 62.9 46.4 63.6 44.1 68.3
Gross profit 7.2 18.5 11.0 37.1 26.5 36.4 20.4 31.7
SG&A 4.6 11.9 3.8 12.9 8.5 11.6 8.9 13.8
Operating income .4 1.1 6.8 22.8 16.8 23.1 10.1 15.6
Net income (loss) (6.9) (17.8) 3.3 11.3 4.7 6.5 2.6 4.0
</TABLE>
COMPARISON OF RESULTS OF OPERATIONS
COMBINED YEAR ENDED JANUARY 2, 1999 COMPARED TO YEAR ENDED JANUARY 3, 1998
(PREDECESSOR)
For purposes of this discussion, the combined 32-week results of the Successor
and the 20-week results of the Predecessor are compared to the full year fiscal
1997 results of the Predecessor.
Net Sales. Net sales declined $4.6 million (6.3%) to $68.4 million during the
year ended January 2, 1999 compared to $73.0 million during the year ended
January 3, 1998. The decrease in net sales for the year resulted primarily from
a decline in Textile Product sales of $4.6 million from $59.6 to $55.0 million.
This decrease was partially offset by an increase in sales of Metal Products of
$.5 million from $9.0 million to $9.5 million and the inclusion of $1.9 million
of sales from Millentex N.V. Domestic and international Textile Products sales
declined $3.6 million and $1.0 million, respectively.
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. In addition, as the
significant number of new looms were installed in 1997 - replacing older looms -
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.
The decrease in international net sales of Textile Products is attributable to
several factors. Demand from Asia has been reduced as new loom installations as
well as operating levels in that region have been significantly curtailed due to
the currency devaluations and the lack of credit. This results in lower demand
for the Company's Textile Products. The difficulties associated with opening
commercial letters of credit to support international purchases has forced local
textile mills to operate with existing accessories - mainly heddles -
15
<PAGE>
even if loom operating speeds and efficiency are reduced. In addition, the
amount of secondhand accessories has increased due to reduced operating levels
and some mill closings. The decrease in international net sales of Textile
Products in 1998 was partially offset by an increase in net sales of $1.9
million from Millentex N.V.
Gross Profit. Gross profit for the year ended January 2, 1999 decreased $8.4
million to $18.2 million, 26.5% of net sales, compared to $26.5 million, 36.4%
of net sales, for the year ended January 3, 1998. The decrease is primarily due
to the decline in net sales volume 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 totaled $6.1 million for the year
ended January 2, 1999, an increase of $2.8 million compared to the comparable
period of 1997. Millentex N.V. contributed a gross loss of $0.1 million in 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended January 2, 1999 decreased $0.1
million to $8.4 million, 12.3% of net sales, from $8.5 million, 11.6% of net
sales, for the year ended January 3, 1998. The decrease is due primarily to
decreased incentive compensation resulting from declining business levels,
partially offset by the write off of the Company's investment in its China
operation of $0.3 million, an increase in depreciation expense of $0.2 million
associated with the write-up of the Company's assets in connection with the new
basis of accounting in the Acquisition and costs incurred in connection with the
Company's year 2000 computer project of $0.3 million.
Operating Income. Operating income for the year ended January 2, 1999 was $7.2
million, 10.5% of net sales, compared to $16.8 million, 23.1% of net sales, for
the year ended January 3, 1998. The decrease of $9.6 million, or 57.3% is due to
the decrease in gross profit as described above and to an increase of $1.1
million 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 $3.6 million, 5.2% of net
sales, for the year ended January 2, 1999 compared to net income of $4.7
million, 6.5% of net sales, for the year ended January 3, 1998. The loss during
1998 is due primarily to an increase in interest expense resulting from debt
issued in connection with the Acquisition and to the factors noted above.
Included in 1997 net income was an extraordinary charge for early extinguishment
of debt of $2.8 million, net of income taxes of $1.7 million, incurred in
connection with the refinancing of the Company's debt. The effective tax rate
for the year ended January 2, 1999 is significantly different from the statutory
rate due to an increase in the amount of nondeductible goodwill amortization
related to the Acquisition.
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
Net Sales. Net sales increased to $73.0 million in 1997 from $64.5 million in
1996, an increase of 13.2%. The growth in net sales was primarily attributable
to increased sales of loom accessories driven by the emergence of the U. S.
textile industry from the recession of 1996. Of the Company's loom accessory
products, heddle and dropwire sales increased 12.4%, frame sales increased 13.2%
and reed sales increased 8.1%. The growth in net sales of loom accessories was
partially offset by a 6.4% decrease in shuttle sales as older-technology
shuttle-type looms continued to be phased out. Further contributing to the
Company's strong growth in net sales, sales of rolled products increased to $9.0
million in 1997 from $7.4 million in 1996, an increase of 21.9%.
Gross Profit. Gross profit increased to $26.5 million in 1997 from $20.4 million
in 1996, an increase of 30.0%. As a percentage of net sales, the Company's gross
profit margin increased to 36.4% from 31.7%. The increase in both gross profit
and gross profit margin was due primarily to the implementation of the cost
reduction plan which was implemented between August 1995 and December 1996 and
efficiency gains resulting from increased unit production. In addition, gross
profit margin increased as a result of the Company's shift in product mix
towards more customized, higher margin loom accessories and the reduction of
depreciation expense associated with certain assets which became fully
depreciated in 1996.
Selling, General and Administrative Expenses. SG&A decreased from $8.9 million
for 1996 to $8.5 million for 1997. As a percentage of net sales, SG&A decreased
to 11.6% from 13.8%. The improvement in SG&A as a
16
<PAGE>
percentage of net sales primarily stems from the implementation of the Company's
cost reduction plan. In November 1995, after a comprehensive review of the
business, the Company initiated a cost reduction plan which was completed in
December 1996. As part of the cost reduction plan, the Company eliminated 120
full-time positions from its work force including 36 direct labor positions and
84 indirect and administrative positions. The Company's headcount reduction has
not resulted in any unforeseen effects on operations, and the Company has not
found it necessary to replace any of the eliminated positions. In addition, the
Company also undertook other cost savings initiatives in its manufacturing and
administrative functions, including aggressively renegotiating certain raw
material supply contracts, reconfiguring manufacturing space, outsourcing
certain manufacturing functions and modifying certain employee benefit programs.
The Company's financial results for fiscal 1997 represent the first fiscal year
to benefit from this cost-reduction plan.
Operating Income. Operating income increased to $16.8 million in 1997 from $10.1
million in 1996, an increase of 67.1%, primarily as a result of the increase in
net sales, as well as the improvement in gross profit margin. As a percentage of
net sales, operating income increased to 23.1% from 15.6%.
Net Income. Net income increased to $4.7 million in 1997 from $2.6 million in
1996, an increase of 81.4%. The increase is a result of the items noted above.
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
January 2, 1999, the interest rates on the Credit Facility borrowings ranged
from 7.57% to 7.82% and approximately $16.1 million was available for borrowing
under the revolving loan facility.
The Credit Facility, the Notes and the Debentures 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 January 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 fiscal 1998 decreased to $3.8 million from $10.0 million for the
year ended January 3, 1998. The decrease was primarily due to the Company's net
loss in 1998 compared to net income in 1997, and by the extraordinary loss
incurred upon the early extinguishment of debt in the prior year, partially
offset by increased depreciation and amortization and a reduction in working
capital requirements.
Cash Flows from Investing Activities. Net cash used in investing activities for
the year ended January 2, 1999 reflect the acquisition of substantially all of
the Company's tangible and intangible assets and the Company's investment in
Millentex N.V. and is not comparable to the prior period. The Company's capital
expenditures for fiscal 1998 were $2.1 million, a decrease of $0.5 million
compared to the same period in 1997. These expenditures were primarily for the
replacement of machinery and equipment.
Cash Flows from Financing Activities. Cash flows from financing activities for
the year ended January 2, 1999 reflect the initial capitalization of the Company
through the issuance of Common Stock, Senior Discount Debentures, Senior
Subordinated Notes and the Credit Facility, all net of associated fees, and is
not directly comparable to the prior year.
17
<PAGE>
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 $19.9 million for the year ended January 2, 1999 and $22.8 million
for the year ended January 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 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 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.
18
<PAGE>
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
will 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 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 $1.0 million and is being
funded through operating cash flows. Of the total project cost, an estimated
$0.4 million is attributable to the purchase of new software and hardware and
will be capitalized. The remaining estimated $0.6 million, will be expensed as
incurred and is not expected to have a material effect on the results of
operations. The Company has incurred $0.4 million of costs during fiscal 1998 of
which $0.3 million has been expensed.
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.
19
<PAGE>
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.
In March 1998, the American Institute of Certified Public Accountants (AICPA)
issued 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. SOP
98-1 will be effective for the Company in Fiscal 1999. 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.
20
<PAGE>
ITEM 7A. 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 $37,023 at January 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. Approximately 22% 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 January 2, 1999, the functional currency of the Belgium subsidiary was its
local currency while the functional currency of the Mexican subsidiary was the
U.S. dollar. 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 $2,246 at January
2, 1999. If the foreign currency exchange rates fluctuate by 10% from rates at
January 2, 1999, the effect on the Company's financial position and results of
operations would not be material.
21
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Steel Heddle Group, Inc.
We have audited the accompanying consolidated balance sheet of Steel Heddle
Group, Inc. and subsidiaries as of January 2, 1999 (Successor) and the related
consolidated statements of operations and comprehensive income (loss),
shareholders' equity (deficit), and cash flows for the period from May 26, 1998
through January 2, 1999 (Successor) and the period from January 4, 1998 through
May 25, 1998 (Predecessor). Our audits also included the financial statement
schedule listed in the index at page S-1. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Steel Heddle Group,
Inc. and subsidiaries at January 2, 1999 (Successor) and the results of their
operations and their cash flows for the period from May 26, 1998 through January
2, 1999 (Successor) and the period from January 4, 1998 through May 25, 1998
(Predecessor) in conformity with generally accepted accounting principles. Also,
in our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
As discussed in Note 15 to the consolidated financial statements, the
consolidated statement of shareholders' equity (deficit) for the period from
January 4, 1998 to May 25, 1998 has been restated.
/s/ Deloitte & Touche LLP
Greenville, South Carolina
March 5, 1999,
except for Note 15, as
to which the date is March 26, 1999
22
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Steel Heddle Group, Inc.
We have audited the accompanying consolidated balance sheet of Steel Heddle Mfg.
Co. and subsidiaries as of January 3, 1998 and the related consolidated
statements of operations and comprehensive income (loss), shareholders' equity
(deficit) and cash flows for each of the two years in the period ended January
3, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Steel Heddle Mfg.
Co. and subsidiaries at January 3, 1998, and the consolidated results of their
operations and their cash flows for each of the two years in the period ended
January 3, 1998 in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Greenville, SC
January 28, 1998, except for Note 16,
as to which the date is May 26, 1998,
and Note 15, as to which the date
is March 26, 1999
23
<PAGE>
<TABLE>
<CAPTION>
STEEL HEDDLE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
SUCCESSOR | PREDECESSOR
COMPANY | COMPANY
JANUARY 2, 1999 | JANUARY 3, 1998
----------------- | ------------------
| (As restated -
| see Note 15)
ASSETS |
<S> <C> | <C>
CURRENT ASSETS: |
Cash and cash equivalents $ 1,182 | $ 379
Accounts receivable, net 9,873 | 9,290
Income taxes receivable 1,279 | -
Inventories 19,730 | 14,030
Prepaid expenses 125 | 99
----------------- | ------------------
|
Total current assets 32,189 | 23,798
|
PROPERTY PLANT & EQUIPMENT: |
Cost 46,014 | 52,561
Less accumulated depreciation (4,510) | (35,876)
----------------- | ------------------
|
41,504 | 16,685
OTHER ASSETS: |
Prepaid pension costs 2,185 | 546
Goodwill, net 107,124 | 22,537
Identifiable intangible assets, net 12,203 | -
Sundry 4,696 | 774
----------------- | ------------------
|
126,208 | 23,857
----------------- | ------------------
|
TOTAL ASSETS $199,901 | $ 64,340
================= | ==================
</TABLE>
See notes to consolidated financial statements
24
<PAGE>
<TABLE>
<CAPTION>
STEEL HEDDLE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
SUCCESSOR | PREDECESSOR
COMPANY | COMPANY
JANUARY 2, 1999 | JANUARY 3, 1998
---------------- | ------------------
| (As restated -
| see Note 15)
LIABILITIES AND SHAREHOLDERS' EQUITY |
(DEFICIT) |
<S> <C> | <C>
CURRENT LIABILITIES: |
Accounts payable $ 2,423 | $ 2,166
Accrued and sundry liabilities 6,081 | 5,313
Deferred income taxes 2,049 | 670
Income taxes payable 143 | 302
Current portion of long-term debt 6,328 | 6,500
---------------- | ------------------
|
Total current liabilities 17,023 | 14,951
|
LONG-TERM DEBT, LESS CURRENT PORTION 146,957 | 46,300
|
RETIREMENT BENEFITS PAYABLE 7,317 | 7,439
|
DEFERRED INCOME TAXES 15,111 | 241
|
MINORITY INTEREST IN CONSOLIDATED |
SUBSIDIARY 1,960 | -
|
REDEEMABLE COMMON STOCK: |
$0.01 par value per share - authorized 300,000 |
shares, issued and outstanding 234,949 shares at |
January 2, 1999 (Successor) 2 | -
|
Parent Company Class A, $0.01 par value per share - |
authorized 2,000,000 shares, issued and outstanding |
91,080 shares at January 3, 1998 (Predecessor) - | 1,366
|
SHAREHOLDERS' EQUITY (DEFICIT): |
Common stock - $1 par value per share - authorized |
1,500,000 shares, issued and outstanding 10 shares |
at January 3, 1998 (Predecessor) - | -
Additional paid-in capital 23,375 | 13,689
Deficit (6,915) | (19,598)
Notes receivable - shareholders (350) | -
Carryover basis of management's interest (4,494) | -
Accumulated other comprehensive loss (86) | (48)
---------------- | ------------------
|
Total shareholders' equity (deficit) 11,530 | (5,957)
---------------- | ------------------
|
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY |
(DEFICIT) $199,901 | $64,340
================ | ==================
</TABLE>
See notes to consolidated financial statements
25
<PAGE>
<TABLE>
<CAPTION>
STEEL HEDDLE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
Period | Period
May 26, | January 4, FISCAL YEAR ENDED
1998 to | 1998 -------------------------
January 2, | to May 25, January 3, December 28,
1999 | 1998 1998 1996
----------- |-------------- ------------ -------------
SUCCESSOR | PREDECESSOR PREDECESSOR PREDECESSOR
COMPANY | COMPANY COMPANY COMPANY
(32 WEEKS) | (20 WEEKS) (53 WEEKS) (52 WEEKS)
<S> <C> | <C> <C> <C>
NET SALES $ 38,783 | $ 29,631 $ 72,983 $ 64,484
|
COST OF GOODS SOLD 31,623 | 18,628 46,448 44,074
----------- |-------------- ------------ -------------
|
GROSS PROFIT 7,160 | 11,003 26,535 20,410
|
SELLING, GENERAL AND ADMINISTRATIVE |
EXPENSES 4,611 | 3,824 8,489 8,875
|
MANAGEMENT FEES 534 | 132 475 725
|
AMORTIZATION OF GOODWILL 1,585 | 289 729 729
----------- |-------------- ------------ -------------
|
OPERATING INCOME 430 | 6,758 16,842 10,081
|
OTHER INCOME (EXPENSE): |
Interest income 83 | 29 136 110
Interest expense, including amortization of |
deferred financing costs (10,673) | (1,528) (5,284) (5,954)
Other financing expense - | (50) (212) -
----------- |-------------- ------------ -------------
|
INCOME (LOSS) BEFORE MINORITY |
INTEREST, INCOME TAXES, AND |
EXTRAORDINARY ITEM (10,160) | 5,209 11,482 4,237
|
MINORITY INTEREST IN LOSS OF |
CONSOLIDATED SUBSIDIARY 106 | - - -
----------- |-------------- ------------ -------------
|
INCOME (LOSS) BEFORE INCOME TAXES |
AND EXTRAORDINARY ITEM (10,054) | 5,209 11,482 4,237
|
INCOME TAX (BENEFIT) EXPENSE (3,139) | 1,868 4,015 1,638
----------- |-------------- ------------ -------------
|
INCOME (LOSS) BEFORE |
EXTRAORDINARY ITEM (6,915) | 3,341 7,467 2,599
|
EXTRAORDINARY LOSS ON THE EARLY |
EXTINGUISHMENT OF DEBT, NET OF |
INCOME TAXES OF $1,688 - | - (2,753) -
----------- |-------------- ------------ -------------
|
NET INCOME (LOSS) (6,915) | 3,341 4,714 2,599
|
OTHER COMPREHENSIVE INCOME (LOSS) - |
NET OF TAX: |
Foreign currency translation |
adjustment (54) | 16 1 3
----------- |-------------- ------------ -------------
|
COMPREHENSIVE INCOME (LOSS) $ (6,969) | $ 3,357 $ 4,715 $ 2,602
=========== |============== ============ =============
</TABLE>
See notes to consolidated financial statements
26
<PAGE>
<TABLE>
<CAPTION>
STEEL HEDDLE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(Dollars in thousands, except per share)
Carryover Accumulated
Additional Notes Basis of Other
Paid-in Receivable- Management's Comprehensive
Capital Deficit Shareholders Interest Loss Total
------ -------- ------------ --------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
PREDECESSOR COMPANY
Balance - December 30, 1995
(As restated - see Note 15) $13,689 $(18,982) - - $(52) $(5,345)
Foreign currency translation
adjustment - - - 3 3
Net income 2,599 - - - 2,599
------ -------- -------- --------- --------- -------
Balance - December 28, 1996
(As restated - see Note 15) 13,689 (16,383) - - (49) (2,743)
Foreign currency translation
adjustment - - - 1 1
Dividends paid (7,929) - - - (7,929)
Net income 4,714 - - - 4,714
------ -------- -------- --------- --------- -------
Balance - January 3, 1998
(As restated - see Note 15) 13,689 (19,598) - - (48) (5,957)
Foreign currency translation
adjustment - - - 16 16
Net income 3,341 - - - 3,341
------ -------- -------- --------- --------- -------
Balance - May 25, 1998
(As restated - see Note 15) 13,689 (16,257) - - (32) (2,600)
Purchase accounting
adjustments in connection
with the Acquisition 9,686 16,257 (350) (4,494) - 21,099
------ -------- -------- --------- --------- -------
- --------------------------------------------------------------------------------------------------------
SUCCESSOR COMPANY
Balance - May 26, 1998 23,375 - (350) (4,494) (32) 18,499
Foreign currency translation
adjustment - - - (54) (54)
Net loss (6,915) - - - (6,915)
------ -------- -------- --------- --------- -------
Balance - January 2, 1999 $23,375 $(6,915) $(350) $(4,494) $(86) $11,530
====== ======== ======== ========= ========= =======
</TABLE>
See notes to consolidated financial statements
27
<PAGE>
<TABLE>
<CAPTION>
STEEL HEDDLE GOUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Period | Period
May 26, | January 4, FISCAL YEAR ENDED
1998 to | 1998 -------------------------
January 2, | to May 26, January December 28,
1999 | 1998 3, 1998 1996
----------- | ----------- ----------- -----------
SUCCESSOR | PREDECESSOR PREDECESSOR PREDESSOR
COMPANY | COMPANY COMPANY COMPANY
(32 WEEKS) | (20 WEEKS) (53 WEEKS) (52 WEEKS)
<S> <C> | <C> <C> <C>
OPERATING ACTIVITIES: |
Net income (loss) $ (6,915)| $ 3,341 $ 4,714 $ 2,599
Adjustments to reconcile net |
income (loss) to net |
cash provided by operating |
activities: |
Depreciation 4,468 | 1,517 3,550 5,118
Amortization 3,472 | 346 859 901
Accretion of senior discount |
debentures 1,246 | - - -
Loss on disposal of property, |
plant and equipment 30 | - 50 -
Benefit for deferred income |
taxes (1,959)| (83) (610) (600)
Accrued retirement benefit |
costs 26 | 176 160 (220)
Extraordinary loss - | - 4,441 -
Changes in operating assets |
and liabilities: |
Accounts receivable 4,351 | (1,977) (428) (548)
Inventories 3,394 | (888) (1,060) 1,018
Prepaid expenses (4)| (5) 8 14
Income taxes receivable (1,279)| - - -
Sundry assets (607)| - - -
Accounts payable (713)| 203 (167) 303
Accrued and sundry |
liabilities (3,538)| (2,127) (1,498) 2,489
Income taxes payable (353)| 1,707 (59) 162
----------- | ----------- ----------- -----------
Net cash provided |
by operating activities 1,619 | 2,210 9,960 11,236
|
INVESTING ACTIVITIES: |
Acquisition of SH Holdings Corp.: |
Current assets (31,128)| - - -
Property, plant and |
equipment (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)| - - -
Acquisition of Millentex |
Investment Corp, net of cash |
acquired (1,821)| - - -
Purchase of property, plant and |
equipment, net (1,110)| (968) (2,558) (2,809)
Proceeds on disposals of |
property, plant and equipment - | 238 29 42
----------- | ----------- ----------- -----------
Net cash used in |
investing activities (115,887)| (730) (2,529) (2,767)
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
STEEL HEDDLE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
Period | Period
May 26, | January 4, FISCAL YEAR ENDED
1998 to | 1998 -------------------------
January 2, | to May 26, January December 28,
1999 | 1998 3, 1998 1996
----------- | ----------- ------------- -----------
SUCCESSOR | PREDECESSOR PREDECESSOR PREDESSOR
COMPANY | COMPANY COMPANY COMPANY
(32 WEEKS) | (20 WEEKS) (53 WEEKS) (52 WEEKS)
<S> <C> | <C> <C> <C>
FINANCING ACTIVITIES: |
Proceeds from issuance of debt 149,110 | 1,317 66,500 -
Payments of debt, including |
penalty (52,492)| (1,625) (69,390) (2,700)
Revolver borrowings |
(repayments), net (400)| - - (2,000)
Proceeds from sale of stock 22,995 | - 16 -
Dividends paid - | - (7,929) -
Investment by minority interest 64 | - - -
Financing costs incurred (5,378)| - (894) -
----------- | ----------- ----------- -----------
Net cash provided by (used |
in) financing activities 113,899 | (308) (11,697) (4,700)
----------- | ----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH |
EQUIVALENTS (369)| 1,172 (4,266) 3,769
|
CASH AND CASH EQUIVALENTS AT |
BEGINNING OF PERIOD 1,551 | 379 4,645 876
----------- | ----------- ----------- -----------
|
CASH AND CASH EQUIVALENTS AT |
END OF PERIOD $1,182 | $ 1,551 $ 379 $ 4,645
=========== | =========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $6,491 $ 1,893 $ 7,800 $ 4,700
Income taxes paid $ 258 $ 270 $ 2,954 $ 2,105
</TABLE>
See notes to consolidated financial statements
29
<PAGE>
STEEL HEDDLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
1. ORGANIZATION, OPERATIONS AND ACQUISITION
ORGANIZATION AND OPERATIONS - 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 Company has net assets of approximately $3.8
million located in Belgium, while the net assets in Mexico are not material.
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 Discount Debentures (the "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 has
been allocated to the underlying assets and liabilities of Old Holdings based
upon their estimated respective fair values at the date of Acquisition. The
preliminary fair values have been determined by independent appraisals,
valuations and other means deemed appropriate by management. Management believes
that adjustments, if any, resulting from the finalization of the fair values
will not have a significant effect on the allocation of the purchase price or
the determination of goodwill. Based on such preliminary allocation and
subsequent adjustments, 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 following unaudited pro forma financial information shows the results of
operations as though the Acquisition occurred as of the beginning of the 1998
and the 1997 fiscal years. These results include straight-line amortization of
the excess of the purchase price over the net assets acquired over a forty-year
period, the straight-line amortization of certain identifiable intangible assets
over a twelve and a half-year period, an increase in depreciation expense as a
result of the write-up of fixed assets to their fair market value, an increase
in management fees paid to a related party due to a new contract with the new
ownership group, an increase in interest expense as a result of the debt issued
and financing costs incurred to finance the Acquisition, and a reduction in
income tax expense as a result of the reductions in income resulting from the
above described increased expenses.
30
<PAGE>
UNAUDITED PRO FORMA
YEAR ENDED
January 2, January 3,
1999 1998
--------------- -------------
Revenue $ 68,414 $ 72,983
Operating income 4,312 8,845
Net loss (8,530) (5,533)
The unaudited pro forma financial information presented above does not purport
to be indicative of either (i) the results of operations had the acquisition
occurred at the beginning of the 1998 and the 1997 fiscal years or (ii) future
results of operations.
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 at January 2, 1999, and the results of
operations from acquisition date through January 2, 1999 of Millentex N.V. are
included in the Company's consolidated financial statements for the 32 weeks
ended January 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
preliminary fair values have been determined by independent appraisals,
valuations and other means deemed appropriate by management. Management believes
that adjustments, if any, resulting from the finalization of the fair values
will not have a significant effect on the allocation of the purchase price.
Based on such preliminary allocation and subsequent adjustments, the purchase
price was allocated to the identifiable assets and there was no goodwill.
The following unaudited pro forma financial information shows the results of
operations as though Millentex Investment Corporation's acquisition and
Millentex's acquisition of the Belgium Company occurred at the beginning of the
1998 and the 1997 fiscal years. These results include an increase in interest
expense as a result of the debt recorded on Millentex's books, an increase in
depreciation expense as a result of recording the assets at their fair values
upon Millentex's purchase of the Belgium Company and a reduction in income tax
expense as a result of the reductions in income resulting from the above
described increased expenses.
UNAUDITED PRO FORMA
YEAR ENDED
January 2, January 3,
1999 1998
--------------- ------------
Revenue $ 78,869 $ 85,983
Operating income 4,991 8,254
Net loss (8,610) (5,949)
The unaudited pro forma financial information presented above does not purport
to be indicative of either (i) the results of operations had the acquisition
occurred as of the beginning of the 1998 and the 1997 fiscal years or (ii)
future results of operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - All subsidiaries are wholly-owned except for
Millentex. The Company owns 49% of Millentex and believes consolidation is
appropriate due to a call option that allows the Company to acquire the
remaining 51% interest at its discretion. All subsidiaries' accounts are
included in the consolidated financial statements and all significant
intercompany items and transactions have been eliminated in consolidation.
Minority interest in consolidated loss of Millentex is included in the Company's
consolidated
31
<PAGE>
statement of operations and comprehensive loss and minority interest in net
assets of Millentex is reflected as an other liability in the Company's
consolidated balance sheet.
FISCAL YEAR - The Company's fiscal year ends on the Saturday closest to December
31. The Successor Company had a 32-week period from May 26, 1998, acquisition
date, to January 2, 1999. The Predecessor Company had a 20-week period ended May
25, 1998, a 53-week year ended January 3, 1998, and a 52-week year ended
December 28, 1996.
FOREIGN CURRENCY - Assets and liabilities of the Company's foreign subsidiaries
are translated into United States dollars at current exchange rates. Income and
expense accounts for these operations are translated at the average of exchange
rates during the period.
Effective December 29, 1996, the Predecessor Company changed the functional
currency for its Mexican subsidiary from the Mexican peso to the United States
dollar because the cumulative inflation index in Mexico had been approximately
100% over a three-year period ended December 28, 1996. In accordance with
Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency
Translation" the cumulative translation adjustment at December 29, 1996,
accumulated in shareholders' equity prior to this change in functional currency,
remained a separate component of shareholders' equity.
Upon adoption of SFAS No. 130 "Comprehensive Income," the foreign currency
translation adjustment is included as the only component of other comprehensive
income (loss) in the accompanying consolidated financial statements.
CASH EQUIVALENTS - The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents. Included
in cash equivalents at January 2, 1999 is approximately $569, which approximates
fair value, invested in an overnight investment fund with a bank.
INVENTORIES - Inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out (FIFO) method, average cost method or
last-in, first-out (LIFO) method.
IMPAIRMENT OF LONG-LIVED ASSETS - In accordance with SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," the Company reviews long-lived assets and certain identifiable intangibles
to be held and used for impairment whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable.
PROPERTY, PLANT AND EQUIPMENT -Property, plant and equipment is stated at cost.
The estimated useful lives used in the computation of depreciation expense are
as follows:
Buildings and improvements 5 to 40 years
Machinery and equipment 2 to 8 years
Furniture and fixtures 2 to 10 years
Automotive equipment 2 to 4 years
OTHER ASSETS - Deferred financing costs associated with the Acquisition
financing were approximately $4.4 million and are being amortized using the
interest method . Accumulated amortization was approximately $0.3 million at
January 2, 1999. Goodwill arising from the acquisition is approximately $108.7
million and is being amortized over forty years using the straight-line method.
Accumulated amortization was approximately $1.6 million on January 2, 1999.
Identifiable intangible assets acquired in the Acquisition, consisting
principally of engineering drawings, were approximately $12.8 million and are
being amortized on the straight-line method over 12.5 years. Accumulated
amortization was approximately $0.6 million at January 2, 1999. The Company
assesses the recoverability of goodwill and other assets by projecting future
net income related to the acquired business, before the effect of amortization
of intangible assets, over the remaining amortization period of such assets.
32
<PAGE>
INCOME TAXES - The Company accounts for income taxes under SFAS No. 109,
"Accounting for Income Taxes". Under SFAS No. 109, deferred taxes represent the
future income tax effect of temporary differences between the book and tax basis
of the Company's assets and liabilities, assuming they will be realized and
settled at the amount reported in the Company's financial statements.
REVENUE RECOGNITION - The Company recognizes revenue from product sales when it
has shipped the goods to the customer.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying value of cash and cash
equivalents, accounts receivable, accounts payable and accrued and sundry
liabilities approximate their fair value. The fair value of the Company's debt
is described in Note 7.
PENSION COSTS - The Company's funding policy is to contribute amounts to its
formal funded plans sufficient to meet the minimum funding requirements set
forth in the Employee Retirement Income Security Act of 1974, plus any
additional amounts as the Company may determine to be appropriate from time to
time.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that effect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
ADVERTISING - The Company expenses all advertising costs as incurred.
Advertising costs for the Company are immaterial.
CONCENTRATIONS OF CREDIT RISK - The Company principally sells to textile weaving
mills. Trade receivables are the financial instrument exposing the Company to
credit risk. Management evaluates the credit worthiness of its customers and
establishes credit limits for each customer considering many factors, including
historical experience and the current financial condition of each customer. The
Company does not generally have credit insurance or obtain collateral for its
domestic trade receivables. However, a majority of the foreign trade receivables
arising from domestic sales are insured or secured by letter of credit.
ADOPTION OF NEW ACCOUNTING STANDARDS - In 1998, the Company adopted SFAS No.
130, "Reporting Comprehensive Income," which requires comprehensive income to be
reported in a financial statement that is displayed with the same prominence as
other financial statements. The only comprehensive income (loss) the Company has
is foreign currency translation adjustment. The income tax effect of the foreign
currency translation adjustment is not material to the Company.
In 1998, the Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," which requires entities to disclose
detailed financial information about its operating segments in a manner
consistent with internal reporting used by the Company to allocate resources and
assess financial performance.
In 1998, the Company adopted SFAS No. 132, "Employers' Disclosures About
Pensions and Other Postretirement Benefits," which revises disclosures about
pensions and other postretirement benefit plans, but it does not change the
measurement or recognition of those plans.
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.
In March 1998, the American Institute of Certified Public Accountants (AICPA)
issued 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
33
<PAGE>
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. SOP 98-1 will be effective for the
Company in Fiscal 1999. 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.
3. EXTRAORDINARY ITEM
On February 21, 1997, the Predecessor Company entered into a credit arrangement
with a bank group consisting of a Term Loan Facility of $52.5 million and a $15
million Revolving Line of Credit. The Company utilized proceeds of the Term Loan
and Revolving Credit Facility to repay its senior notes in the principal amount
of $24.9 million plus a penalty of $2.5 million and to repay its subordinated
notes in the principal amount of $25.1 million plus a penalty of $3.2 million.
The total penalty net of other losses and gains on the refinancing is reported
as an extraordinary item, net of taxes of approximately $1.7 million. Included
in the net extraordinary loss is a reversal of accrued interest of approximately
$1.4 million. This reversal resulted from the difference between the stated rate
of interest and the effective rate of interest.
4. INVENTORIES
Successor Predecessor
Company Company
January 2, January 3,
1999 1998
------------- -------------
Raw materials and component parts $ 7,614 $ 6,312
Work in process and finished goods 12,116 7,718
------------- -------------
$ 19,730 $ 14,030
============= =============
Inventories priced by the LIFO method were approximately $10,866 at January 2,
1999 and approximately $11,100 at January 3, 1998. If all inventories had been
priced by the FIFO or average cost method, they would have been higher than the
amounts reported by approximately $779 and $600 at January 2, 1999 and January
3, 1998, respectively.
5. PROPERTY, PLANT AND EQUIPMENT
Successor Predecessor
Company Company
January 2, January 3,
1999 1998
------------- --------------
Land $ 672 $ 855
Buildings and improvements 13,369 10,692
Machinery and equipment 26,493 32,362
Furniture and fixtures 4,793 7,640
Automotive equipment 592 827
Construction in progress 95 185
------------- --------------
$ 46,014 $ 52,561
============= ==============
6. ACCRUED AND SUNDRY LIABILITIES
Successor Predecessor
Company Company
January 2, January 3,
1999 1998
------------- --------------
Wages, salaries and other compensation $ 2,627 $ 3,006
Accrual for hazardous waste site
maintenance 537 269
Interest 1,474 709
Group insurance 306 475
Other 1,137 854
------------- --------------
$ 6,081 $ 5,313
============= ==============
34
<PAGE>
7. LONG-TERM DEBT
<TABLE>
<CAPTION>
Successor Predecessor
Company Company
January 2, January 3,
1999 1998
------------- --------------
<S> <C> <C>
10 5/8 % Senior Subordinated Notes ("Notes") $100,000 $ -
10 3/4% Senior Discount Debentures ("Debentures") 16,262 -
Bank Credit Facility ("Credit Facility"):
Term loan 30,000 -
Revolving loan 3,200 -
Foreign Notes Payable 654 -
Foreign Revolving Lines of Credit 3,169 -
Senior Notes (repaid at the Acquisition) - 46,000
Revolving Line of Credit (repaid at the Acquisition) - 6,800
------------- --------------
153,285 52,800
Less current portion 6,328 6,500
------------- --------------
$146,957 $46,300
============= ==============
</TABLE>
The old senior notes and the old revolving line of credit were repaid in
connection with the new financing associated with the Acquisition.
The Notes are due in full on June 1, 2008. Interest on the Notes is payable
semi-annually in arrears commencing on December 1, 1998.
The Debentures (original proceeds of $15,016 and accreted value of $16,262 at
January 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 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 January 2, 1999, the interest rates on the Credit Facility
borrowings ranged from 7.57% to 7.82% and approximately $16.1 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, the Notes and the Debentures 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 January 2, 1999.
The foreign notes payable and foreign revolving lines of credit are borrowings
by an entity in which the Company has a 49% ownership interest. 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 January 2, 1999, the foreign revolving lines of credit incurred
interest at a rate of 4.35%. The foreign subsidiary had approximately $578
available under these revolving lines of credit at January 2, 1999.
Substantially all of the foreign entity's current assets are pledged as
collateral under two of the foreign revolving lines of credit.
35
<PAGE>
Future annual principal payments are due as follows:
1999 $ 6,328
2000 4,909
2001 5,909
2002 6,851
2003 7,793
Thereafter 121,495
-----------
$153,285
===========
The carrying amount of the Company's borrowings under its revolving credit
agreements approximates fair value based on the variable interest rates of this
debt. The fair value of the Company's long-term debt is estimated based on the
quoted prices for the same or similar issues or on the current notes offered to
the Company for the debt of the same or similar maturities. The fair values of
the Notes and the Debentures at January 2, 1999 were $70,000 and $8,778,
respectively. At January 3, 1998, the carrying amount of the long-term debt of
the Predecessor Company approximated its fair value.
8. RETIREMENT BENEFIT PLANS
The Company has a funded defined benefit noncontributory pension plan and an
unfunded postretirement benefit plan for employees meeting certain eligibility
requirements. Additionally, the Company provides an unfunded supplemental
pension plan which is a nonqualified plan under which direct payments are made
to certain retired personnel based on years of service and compensation.
Unfunded Postretirement Benefit Plan - The Company has an informal arrangement
under which it provides certain life insurance benefits for retired hourly and
salary employees. No separate funding is provided under this arrangement.
In addition to the above plan, the Company has an informal arrangement under
which it provides certain health care benefits for retired employees. No
separate funding is provided under this arrangement. Only those active employees
born before January 1, 1935 who have worked at least five years for the Company
may become eligible for these benefits. Expense for the life insurance benefits
and health care benefits is recognized by an annual computation of the present
value of the Company's liability for future payments for active and retired
employees and a charge to operations for the current year portion of the
computed liability.
401(k) Plan - The Company has an employee savings and investment plan qualified
under Section 401(k) of the Internal Revenue Code. This plan is funded in part
from member voluntary contributions, with the Company's contribution equal to
65.0% of the amount of member basic contributions, but limited to 3.9% of total
compensation of the members. The plan provides for additional member voluntary
contributions of up to 10.0% of member's total compensation. Contributions made
by the Successor Company for the period from May 26, 1998 through January 2,
1999 totaled approximately $358 while contributions made by the Predecessor
Company for the period January 4, 1998 through May 25, 1998 and the fiscal years
ended January 2, 1998 and December 28, 1996 totaled approximately $310, $669,
and $608, respectively.
36
<PAGE>
The following schedules reconcile benefit obligations and plan assets to the
amounts recorded on the consolidated balance sheets.
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
---------------------- ----------------------
Successor Predecessor Successor Predecessor
32 Weeks Year 32 Weeks Year
Ended Ended Ended Ended
January January January January 3,
2, 1999 3, 1998 2, 1999 1998
----------- ---------- --------- ------------
(Restated)
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of period $19,656 $17,787 $ 6,249 $ 6,875
Obligation assumed in the Millentex 1,073 - - -
acquisition
Service cost 458 642 22 4
Interest cost 804 1,328 217 307
Actuarial (gain) loss 1,664 298 (313) 219
Benefits paid (908) (1,847) (359) (828)
----------- ---------- --------- ------------
Benefit obligation at end of period 22,747 18,208 5,816 6,577
----------- ---------- --------- ------------
Change in plan assets:
Fair value of plan assets at beginning
of period 20,778 18,744 - -
Assets assumed in the Millentex
acquisition 494 - - -
Actual return on plan assets 1,753 3,073 - -
Employer contribution - - 359 828
Benefits paid (821) (1,704) (359) (828)
----------- ---------- --------- ------------
Fair Value of plan assets at end of 22,204 20,113 - -
period
----------- ---------- --------- ------------
Over (under) funded: (543) 1,905 (5,816) (6,577)
Unrecognized net actuarial loss (gain) 1,368 (1,597) - -
Unrecognized prior service costs - (540) - -
----------- ---------- --------- ------------
Prepaid (accrued) benefit costs $ 825 $ (232) $(5,816) $(6,577)
=========== ========== ========= ============
</TABLE>
Plan assets are invested in fixed income securities, equities and money market
securities. The projected benefit obligation and fair value of plan assets for
the pension plans with accumulated benefit obligations in excess of plan assets
were $1,854 and $494, respectively, as of January 2, 1999, and $778 and $0 as of
January 3, 1998.
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation, the rate of increase in compensation
and the expected long-term rate of return on assets for each year were as
follows:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
------------------------ ---------------------
Successor Predecessor Successor Predecessor
32 Weeks Year 32 Weeks Year
Ended Ended Ended Ended
January 2, January 3, January January
2, 3,
1999 1998 1999 1998
------------ ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Weighted-average assumptions at period end:
Discount rate 5.5 to 6.75% 7.75% 6.75% 7.75%
Expected return on plan assets 5.5 to 8.00% 8.00% - -
Rate of compensation increase 3.0 to 4.00% 4.75% 5.00% 5.00%
</TABLE>
37
<PAGE>
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 9.0% in 1998 gradually declining to 5.5%
in the year 2005 and remaining at that level thereafter. A 1% increase in the
per capita cost of health care benefits results in a $10 increase in the accrued
postretirement benefit obligation and a $1 increase in the total service and
interest cost components of the benefit expense for the thirty-two week period
ended January 2, 1999. A 1% decrease in the per capita cost of health care
benefits results in a $13 decrease in the accrued postretirement benefit
obligation and a $1 decrease in the total service and interest cost components
of the benefit expense for the 32 week period ended January 2, 1999.
Components of postretirement expense included the following:
<TABLE>
<CAPTION>
Pension Benefits
Successor Predecessor Predecessor Predecessor
32 Weeks 20 Weeks Year Year
Ended Ended Ended Ended
January 2, May 25, January 3, December 28,
1999 1998 1998 1996
------------ ----------- ------------ ---------------
<S> <C> <C> <C> <C>
Service cost $ 458 $ 327 $ 642 $ 337
Interest cost 804 575 1,328 1,297
Return on plan assets (897) (641) (1,433) (1,415)
Recognized actuarial gain (loss) 10 38 55 52
Net amortization - (31) (74) (74)
------------ ----------- ------------ ---------------
Net periodic benefit cost $ 375 $ 268 $ 518 $ 197
============ =========== ============ ===============
<CAPTION>
Other Benefits
Successor Predecessor Predecessor Predecessor
32 Weeks 20 Weeks Year Year
Ended Ended Ended Ended
January 2, May 28, January 3, December 28,
1999 1998 1998 1996
------------ ----------- ------------ ---------------
<S> <C> <C> <C> <C>
Service cost $ 22 $ 16 $ 4 $ 5
Interest cost 217 155 307 326
Recognized actuarial gain (loss) (313) (275) 219 (298)
------------ ----------- ------------ ---------------
Net periodic benefit cost (benefit) $ (74) $(104) $ 530 $ 33
============ =========== ============ ===============
</TABLE>
Total expense under all retirement plans was $659, for the Successor Company's
thirty-two week period ended January 2, 1999, and $627, $1,200, and $863 for the
Predecessor Company's twenty week period ended May 25, 1998, and the years ended
January 3, 1998 and December 28, 1996, respectively.
9. SHAREHOLDERS' EQUITY (DEFICIT)
In connection with the Acquisition, the Company issued 234,949 shares of $0.01
par value common stock. No shares have been issued or retired since the
Acquisition. From December 30, 1995 until the Acquisition, the Predecessor
Company had 10 shares of $1.00 par value common stock outstanding.
The common stock contains provisions that allow the holder or the estate of the
holder, upon disability or death of the holder, to require SH Group to redeem
such stock. Accordingly, such common stock is classified as redeemable common
stock in the accompanying consolidated balance sheet at January 2, 1999 and is
classified outside of the shareholders' equity (deficit) section. The redemption
price is equal to the lesser of (i) the fair value of such stock as determined
by the Company's Board of Directors, or (ii) the original cost of the stock plus
interest at 6% per annum. Further, the redeemable common stock contains certain
other provisions that allow SH Group to call such stock upon termination, as
defined, of an employee stockholder. The call price which ranges between
original cost, original cost plus interest at 6% per annum and fair market
value, as determined by the Board, is dependent on the reason for termination.
38
<PAGE>
In accordance with relevant accounting literature, such redeemable common stock
is recorded at its original cost basis with no accretion, as the events that
give rise to the redemption provisions are uncertain as to their occurrence.
On May 26, 1998, SH Group adopted the Steel Heddle Group, Inc. Management Stock
Option Plan (the "Plan"), a non-qualified stock option plan. Under the terms of
the plan, options to purchase 13,172 shares of SH Group's common stock at an
exercise price of $100 per share were granted to certain members of management
in conjunction with the Acquisition. All options vest on May 26, 2005, but
certain options may vest earlier if certain specified annual EBITDA (as defined)
targets are achieved from 1998 through 2001. In addition, the plan provides that
options to purchase up to 5,645 shares of SH Group's common stock at an exercise
price of $100 per share may be granted to certain members of management on a
discretionary basis. At January 2, 1999, no such discretionary options were
granted.
The 17,707 Rollover Options discussed in Note 1 were exercisable on the date of
grant and expire on the earlier of May 26, 2008 or the sale of the Company. At
January 2, 1999, none of the Rollover Options had been exercised.
In conjunction with the Acquisition, all outstanding warrants and options of the
Predecessor Company expired or were converted to new options of the Successor
Company.
A summary of the Company's stock option activity and related information for the
thirty-two week period ended January 2, 1999, and the Predecessor's Parent
Company stock option activity and related information for the twenty week period
ended May 25, 1998 and the years ended January 3, 1998 and December 28, 1996 are
as follows:
<TABLE>
<CAPTION>
32 Weeks Ended 20 Weeks Ended Year Ended Year Ended
January 2, 1999 May 25, 1998 January 3, 1998 December 28, 1996
---------------- ----------------- ----------------- -----------------
Successor Predecessor Predecessor Predecessor
Weighted Weighted Weighted Weighted
Average Average Average Average
Exercise Exercise Exercise Exercise
Options Price Options Price Options Price Options Price
------- -------- -------- -------- -------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding- beginning
of year - $ - 23,026 $15 24,620 $15 24,620 $15
Canceled - - (17,736) 15 (24,620) 15 - -
Granted 30,879 51 - - 26,310 15 - -
Exercised - - (5,290) 15 (1,080) 15 - -
Retired - - - - (2,204) 15 - -
------- -------- -------- -------- -------- -------- ------- ---------
Outstanding at end of
year 30,879 $51 - - 23,026 $15 24,620 $15
======= ======== ======== ======== ======== ======== ======= =========
Exercisable at end of
year 17,707 $15 - - 23,026 $15 - -
</TABLE>
At January 2, 1999, the weighted-average exercise price of the Rollover Options
was $15 per share while the weighted average exercise price of the Plan options
was $100 per share. The weighted-average remaining contractual life of
outstanding options at January 2, 1999 was 9.4 years as all options expire on
May 26, 2008 or upon sale of the Company.
The Company has elected to follow Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees", and related interpretations
in accounting for its employee stock options. Under APB No. 25, whenever the
exercise price of the Company's employee stock options equals or exceeds the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
In addition, SFAS No. 123, "Accounting for Stock-Based Compensation," requires
disclosure of the pro forma effect on net income if a Company continues to
account for stock options under the provisions of APB No. 25 rather than the
alternative fair value accounting provided under SFAS No. 123. The Company used
the minimum value method to develop the pro-forma effect. Assumptions used in
valuing stock options include a
39
<PAGE>
risk free rate of 6%, dividend yield of 0.0% and an expected life of 10 years.
Assumptions used to value the Predecessor Company's 1997 stock options included
a risk free rate of 6%, dividend yield of 0.0% and an expected life of 4 years.
Had compensation cost for the Successor Company's May 26, 1998 stock options and
the Predecessor Company's 1997 stock options been determined based upon the fair
value at the date of grant for such awards consistent with the provisions of
SFAS No. 123, the Company's net income would have been reduced to the pro-forma
amounts indicated below.
<TABLE>
<CAPTION>
32 Weeks Ended Year Ended
January 2, January 3,
1999 1998
-------------- -------------
<S> <C> <C>
Net income (loss):
As reported $ (6,915) $ 4,714
Pro forma (8,004) 4,431
Weighted average fair value of options per share
Plan Options $ 45.12
Rollover Options $ 91.77
1997 Options $ 17.34
</TABLE>
Included in the pro forma results for the 32-week period ended January 2, 1999
was expense, net of taxes, of $1,056 and $33 for the Rollover Options and the
Plan options, respectively.
10. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
Successor Predecessor
Company Company
January 2, January 3,
1999 1998
--------------- --------------
(Restated)
<S> <C> <C>
Deferred tax liabilities:
Funded pension $ 830 $ 219
LIFO 1,564 1,317
Property, plant and equipment 12,753 3,385
Identifiable intangible assets 4,632 -
Inventory basis adjustment 1,560 -
Other 778 37
--------------- --------------
Gross deferred tax liabilities 22,117 4,958
Deferred tax assets:
Unfunded pension 2,737 2,896
Vacation accrual 455 436
Healthcare accrual 116 190
Hazardous waste accrual 204 107
Inventory obsolescence 535 276
Original issue discount 408 -
Other 502 142
--------------- --------------
Gross deferred tax assets 4,957 4,047
--------------- --------------
Net deferred tax liabilities $ 17,160 $ 911
=============== ==============
Recognized as follows in the accompanying consolidated balance sheets:
Current deferred income tax liability $ 2,049 $ 670
Long-term deferred income tax liability 15,111 241
--------------- --------------
$ 17,160 $ 911
=============== ==============
</TABLE>
40
<PAGE>
Significant components of the provision for income taxes, including the tax
provision for extraordinary items are as follows:
<TABLE>
<CAPTION>
Successor Predecessor Predecessor Predecessor
Company Company Company Company
32 Weeks Ended 20 weeks Ended Year Ended Year Ended
January 2, 1999 May 25, 1998 January 3, 1998 December 28, 1996
-------------- ------------- ------------ ----------------
<S> <C> <C> <C> <C>
Current:
Federal $(1,253) $ 1,898 $ 2,964 $ 2,024
State - 53 (27) 214
Foreign (47) - - -
-------------- ------------- ------------ ----------------
(1,300) 1,951 2,937 2,238
Deferred:
Federal (1,053) (66) (521) (512)
State (663) (17) (89) (88)
Foreign (123) - - -
-------------- ------------- ------------ ----------------
(1,839) (83) (610) (600)
-------------- ------------- ------------ ----------------
$(3,139) $ 1,868 $ 2,327 $ 1,638
============== ============= ============ ================
</TABLE>
The reconciliation of income tax computed at the United States statutory rate to
income tax expense is shown below:
<TABLE>
<CAPTION>
Successor Company Predecessor Company
------------------------------------------------
32 Weeks Ended 20 Weeks Ended Year Ended Year Ended
January 2, 1999 May 25,1998 January 3, 1998 December 28, 1996
-----------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tax (benefit) at U.S.
statutory rates $(3,418) (34.0)% $1,771 34.0% $2,394 34.0% $1,440 34.0%
State income tax (benefit),
net of federal tax effect (438) (4.4) 21 0.4 (77) (1.1) 83 2.0
Goodwill amortization 539 5.4 97 1.8 248 3.5 248 5.9
Meals and entertainment 21 0.2 21 0.4 38 0.5 33 0.8
Benefit of foreign subsidiary (72) (0.7) (42) (0.8) (140) (2.0) (110) (2.6)
Foreign deemed dividend 246 2.5
Original issue discount 59 .6
AMT credit (76) (0.8)
Other, net (136) (1.9) (56) (1.4)
-----------------------------------------------------------------
$(3,139) (31.2)% $1,868 35.8% $2,327 32.9% $1,638 38.7%
=================================================================
</TABLE>
At January 2, 1999, the Company had a federal net operating loss which can be
carried back to the tax year ended January 3, 1998. A receivable is recorded in
the current tax account to reflect the expected benefit of this federal net
operating loss carryback. Also at January 2, 1999, the Company has state net
operating loss carryforwards of approximately $7.5 million, which begin to
expire in the year 2012.
11. RELATED PARTY TRANSACTIONS
On May 26, 1998, the Company 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 thirty-two weeks ended January 2, 1999,
AIP was paid $534 in such fees and expenses.
At the close of the Acquisition, AIP was paid a fee of $2.0 million and
reimbursed out-of-pocket expenses in connection with the negotiation of the
Acquisition and for providing certain investment banking services to the Company
including the arrangement and negotiation of the terms of the Credit Facility,
the arrangement and negotiation of the terms of the old notes and for other
financial advisory and management consulting services.
41
<PAGE>
In addition, at the close of the acquisition of Millentex, AIP was paid a fee of
$0.1 million and reimbursed out-of-pocket expenses in connection with the
negotiation of that acquisition.
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 twenty week period ended May 26, 1998 and $275 in
each of fiscal 1997 and 1996. In fiscal 1996, BCC received a special one-time
payment of $450. Such agreement was terminated upon consummation of the
Acquisition. In connection with the refinancing in fiscal 1997, BCC received a
one-time payment of $200.
Interest paid on the Senior Notes and the Subordinated Notes payable to
shareholders who collectively owned 100% of the Predecessor's parent company
outstanding Class B Common Stock was $8,492 (including prepayment penalty) and
$4,505 in 1997 and 1996, respectively.
On November 15, 1998, Millentex N.V. terminated the old leases and entered into
new leases for land and buildings used by Millentex N.V. in production. The new
leases have annual payments of approximately $210, increased annually by the
consumer price index on the anniversary date and expire on October 22, 2007. The
leased land and buildings are owned by an entity which is wholly-owned by the
entity that holds the remaining 51% investment in Millentex N.V.
In connection with the Acquisition, certain officers of the Company purchased
shares of the Company's common stock which are secured by notes from the
officers. The notes bear interest at 6% per year, require annual payments
beginning in 1999 and mature on May 26, 2003. The notes have been presented as a
separate component of shareholder's equity (deficit).
12. 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.
13. 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 any Successor or Predecessor period.
42
<PAGE>
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
32 Weeks Ended Textile Metal
January 2, 1999 Products Products Other Total
- ------------------------------ ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Revenues from external
customers $ 31,169 $ 5,457 $ 2,157 $ 38,783
Intersegment revenues 205 2,957 100 3,262
Depreciation and amortization 3,369 1,035 663 5,067
Segment profit 5,921 1,164 75 7,160
Segment assets 62,530 17,074 13,173 92,777
Segment capital expenditures 555 255 300 1,110
PREDECESSOR COMPANY
20 Weeks Ended Textile Metal
May 25, 1998 Products Products Other Total
- ------------------------------ ----------- ------------ ----------- -------------
Revenues from external
customers $ 23,781 $ 4,012 $ 1,838 $ 29,631
Intersegment revenues 263 2,561 113 2,937
Depreciation 1,020 257 240 1,517
Segment profit 8,695 1,800 508 11,003
Segment capital expenditures 453 198 317 968
Year Ended Textile Metal
January 3, 1998 Products Products Other Total
- ------------------------------ ----------- ------------ ----------- -------------
Revenues from external
customers $ 59,516 $ 8,960 $ 4,507 $ 72,983
Intersegment revenues 516 7,393 298 8,207
Depreciation 2,374 625 551 3,550
Segment profit 21,550 4,308 677 26,535
Segment assets 28,175 8,374 5,254 41,803
Segment capital expenditures 1,472 342 744 2,558
Year Ended Textile Metal
December 28, 1996 Products Products Other Total
- ------------------------------ ----------- ------------ ----------- -------------
Revenues from external
customers $ 53,481 $ 7,351 $ 3,652 $ 64,484
Intersegment revenues 458 6,023 352 6,833
Depreciation 3,399 1,070 649 5,118
Segment profit 16,897 2,805 708 20,410
Segment assets 27,719 8,418 9,313 45,450
Segment capital expenditures 1,836 633 340 2,809
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
Successor Predecessor
32 Weeks 20 Weeks Predecessor Predecessor
Ended Ended Year Ended Year Ended
REVENUES January May 25, January December
2, 1999 1998 3, 1998 28, 1996
----------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Total revenues for reportable segments $ 39,788 $ 30,617 $ 76,385 $ 67,313
Other revenues 2,257 1,951 4,805 4,004
Elimination of intersegment revenues (3,262) (2,937) (8,207) (6,833)
----------- ------------ ----------- -------------
Total consolidated revenues $ 38,783 $ 29,631 $ 72,983 $ 64,484
=========== ============ =========== =============
<CAPTION>
Successor Predecessor
32 Weeks 20 Weeks Predecessor Predecessor
Ended Ended Year Ended Year Ended
PROFIT January May 25, January December
2, 1999 1998 3, 1998 28, 1996
----------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Total profit for reportable segments $ 7,085 $10,495 $ 25,858 $ 19,702
Other profit 75 508 677 708
Unallocated amounts:
Selling, general and administrative (4,611) (3,824) (8,489) (8,875)
Management fees (534) (132) (475) (725)
Amortization of goodwill (1,585) (289) (729) (729)
Interest, net (10,590) (1,499) (5,148) (5,844)
Other - (50) (212) -
----------- ------------ ----------- -------------
(Loss) income before minority
interest, income taxes, and extraordinary
item $(10,160) $ 5,209 $ 11,482 $ 4,237
=========== ============ =========== =============
<CAPTION>
Successor Predecessor
ASSETS January 2, January 3,
1999 1998
-------------- --------------
<S> <C> <C>
Total assets for reportable segments $ 79,604 $ 36,549
Other assets 13,173 5,254
Assets not allocated to segments:
Goodwill 107,124 22,537
-------------- --------------
Total assets $199,901 $ 64,340
============== ==============
<CAPTION>
Successor Predecessor Predecessor Predecessor
32 Weeks 20 Weeks Year Ended Year Ended
Ended Ended
January 2, May 25, January 3, December 28,
1999 1998 1998 1996
------------- ------------ ------------- --------------
<S> <C> <C> <C> <C>
REVENUES
United States $ 29,959 $ 23,545 $ 56,951 $ 49,266
Foreign 8,824 6,086 16,032 15,218
------------- ------------ ------------- --------------
Total $ 38,783 $ 29,631 $ 72,983 $ 64,484
============= ============ ============= ==============
<CAPTION>
Successor Predecessor
January 2, January 3,
1999 1998
------------ -------------
<S> <C> <C>
LONG-LIVED ASSETS
United States $ 157,228 $ 38,888
Foreign 3,603 334
------------ -------------
Total $ 160,831 $ 39,222
============ =============
</TABLE>
44
<PAGE>
14. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The following table shows the activity for the allowance for doubtful accounts.
<TABLE>
<CAPTION>
Balance at Charges to Increase Balance at
Beginning Costs and due to Deductions End of
of Period Expenses Acquisition (1) Period
--------- --------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
SUCCESSOR COMPANY
32 Weeks ended January 2, 1999
Deducted from asset accounts:
Allowance for uncollectible
accounts $ 123 $ - $ 59 $(23) $ 159
========= ========= ========= ========== =========
PREDECESSOR COMPANY
20 Weeks Ended May 25, 1998
Deducted from asset accounts:
Allowance for uncollectible
accounts $ 125 $ 1 - $ (3) $ 123
========= ========= ========= ========== =========
Year Ended January 3, 1998
Deducted from asset accounts:
Allowance for uncollectible
accounts $ 100 $ 71 - $(46) $ 125
========= ========= ========= ========== =========
Year Ended December 28, 1996
Deducted from asset accounts:
Allowance for uncollectible
accounts $ 100 $ 8 $- $ (8) $ 100
========= ========= ========= ========== =========
</TABLE>
(1) Uncollectible accounts written off, net of recoveries
15. RESTATEMENT OF FINANCIAL STATEMENTS
The Company has an arrangement under which it provides life insurance benefits
for retired hourly and salaried employees. SFAS No. 106, "Employers' Accounting
for Postretirement Benefits Other than Pensions," requires that the liability be
calculated at the actuarial present value of the estimated ultimate cost of the
benefit being provided. The Company was informed by its actuary, in February
1999, (subsequent to issuance of the Company's fiscal 1997 financial statements)
that the liability for the postretirement life insurance had been incorrectly
calculated, for periods prior to the year ended January 2, 1999, because a
blended insurance premium rate for both active and retired employees was used,
rather than the premium rate attributable to retired employees, which resulted
in an understatement of the post retirement life insurance obligation.
The financial statements for the years ended January 3, 1998 and December 28,
1996 have been restated to correct the understatement of retirement benefits
payable. The effect of the restatement on the consolidated statements of
operations and comprehensive income (loss) and cash flows for the years ended
January 3, 1998 and December 28, 1996 was not material. The effect on the
consolidated balance sheet as of January 3, 1998 is as follows:
January 3, 1998
-------------------------
Originally
Reported Restated
------------ ------------
Retirement benefits payable $ 5,126 $ 7,439
Deferred income taxes, long-term 1,120 241
Deficit (18,164) (19,598)
45
<PAGE>
The effect on the deficit in the accompanying consolidated statements of
shareholders' equity (deficit) is as follows:
Originally
Reported Restated
----------- ------------
December 30, 1995 $(17,548) $(18,982)
December 28, 1996 (14,949) (16,383)
January 3, 1998 (18,164) (19,598)
May 25, 1998 (14,823) (16,257)
16. 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.
46
<PAGE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING BALANCE SHEET
JANUARY 2, 1999
SUCCESSOR
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 $ 759 $ 411 $ $ $ 1,182
Accounts receivable 3,179 6,694 9,873
Inventories 4,195 15,535 19,730
Income taxes receivable 28 1,251 1,279
Prepaid expenses 153 17 108 (153) 125
-------- ------- -------- -------- ----------- ---------
Total current assets 165 8,178 23,999 (153) 32,189
Due from affiliates 3,307 74,366 (77,673) -
Notes receivable from
affiliates 74,774 (74,774) -
Investments in subsidiaries 3,546 78,724 102,393 (184,663)) -
Deferred taxes 417 (417)
Property, plant & equipment,
net 3,604 37,900 41,504
Other assets and deferred
charges, net 580 125,201 427 126,208
-------- ------- -------- -------- ----------- ---------
Total assets $ 78,485 $15,669 $340,190 $103,237 $(337,680) $199,901
======== ======= ======== ======== =========== =========
Liabilities and shareholders'
equity:
Accounts payable and accrued
and sundry liabilities $ $ 1,856 $ 6,798 $ $ (151) $ 8,503
Due to affiliates, net 2,231 75,443 (77,674) -
Deferred income taxes 423 1,626 2,049
Income taxes 143 143
Current portion of long-term
debt 3,328 3,000 6,328
-------- ------- -------- -------- ----------- ---------
Total current
liabilities 2,231 5,750 11,424 75,443 (77,825) 17,023
Long-term debt, less current
portion 495 204,974 16,262 (74,773) 146,958
Retirement benefits payable 606 6,711 7,317
Deferred income taxes 840 14,688 (417) 15,111
Redeemable common stock 2 2
Minority interest 1,960 1,960
Shareholders' equity (deficit) 76,254 7,978 102,393 11,530 (186,625) 11,530
-------- ------- -------- -------- ----------- ---------
Total liabilities
and shareholders'
equity (deficit) $ 78,485 $15,669 $340,190 $103,237 $(337,680) $199,901
======== ======= ======== ======== =========== =========
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING BALANCE SHEET
JANUARY 3, 1998
PREDECESSOR
Combined Combined Reclassifications
Guarantor Non-Guarantor The And
Subsidiaries Subsidiaries Company Eliminations Consolidated
--------- ------------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 16 $ 96 $ 267 $ $ 379
Accounts receivable 212 294 8,784 9,290
Inventories 315 13,715 14,030
Prepaid expenses 5 94 99
--------- ----------- --------- ----------- ----------
Total current assets 228 710 22,860 23,798
Due from affiliates 3,348 (3,348)
Notes receivable from affiliates 69,443 (69,443)
Investments in subsidiaries 176 71,029 (71,205)
Property, plant & equipment, net 334 16,351 16,685
Other assets and deferred
charges, net 7 23,850 23,857
--------- ----------- --------- ----------- ----------
Total assets $ 69,847 $ 4,399 $134,090 $(143,996) $ 64,340
========= =========== ========= =========== ==========
Liabilities and shareholders'
equity:
Accounts payable and accrued and
sundry liabilities $ $ 23 $ 7,456 $ $ 7,479
Due to affiliates, net 3,018 330 (3,348)
Deferred income taxes 670 670
Income taxes 302 302
Current portion of long-term debt 6,500 6,500
--------- ----------- --------- ----------- ----------
Total current
liabilities 3,018 23 15,258 (3,348) 14,951
Long-term debt, less current
portion 115,743 (69,443) 46,300
Retirement benefits payable 7,439 7,439
Deferred income taxes 241 241
Redeemable common stock 1,366 1,366
Shareholders' equity (deficit) 66,829 4,376 (5,957) (71,205) (5,957)
--------- ----------- --------- ----------- ----------
Total liabilities and
shareholders' equity
(deficit) $ 69,847 $ 4,399 $134,090 $(143,996) $ 64,340
========= =========== ========= =========== ==========
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THIRTY-TWO WEEKS ENDED JANUARY 2, 1999
SUCCESSOR
Combined
Combined Non- Reclassifications
Guarantor Guarantor Steel SH And
Subsidiaries Subsidiaries Heddle Group Eliminations Consolidated
-------- ----------- -------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ $ 2,431 $36,352 $ $ $ 38,783
Cost of goods sold 2,496 29,127 31,623
--------- ----------- -------- ------- --------- --------
Gross profit (65) 7,225 7,160
Selling, general and
administrative expenses 4 270 4,337 4,611
Other expenses 2,119 2,119
--------- ----------- -------- ------- --------- --------
Operating income (loss) (4) (335) 769 430
Other income (expense), net 5,516 (45) (14,789) (1,272) (10,590)
--------- ----------- -------- ------- --------- --------
Income (loss) before
minority interest and income
taxes 5,512 (380) (14,020) (1,272) (10,160)
Minority interest in loss of
consolidated subsidiary 106 106
--------- ----------- -------- ------- --------- --------
Income (loss) before income
taxes 5,618 (380) (14,020) (1,272) (10,054)
Income tax expense (benefit) 1,874 (172) (4,424) (417) (3,139)
Equity in earnings (losses)
of subsidiaries (190) 3,538 (6,060) 2,712 -
--------- ----------- -------- ------- --------- --------
income (loss) $ 3,554 $ (208) $(6,058) $ (6,915) $2,712 $ (6,915)
========= =========== ======== ======= ========= ========
</TABLE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE TWENTY WEEKS ENDED MAY 25, 1998
PREDECESSOR
Combined Combined Reclassifications
Guarantor Non-Guarantor The And
Subsidiaries Subsidiaries Company 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>
49
<PAGE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JANUARY 3, 1998
PREDECESSOR
Combined Combined Reclassifications
Guarantor Non-Guarantor The And
Subsidiaries Subsidiaries Company Eliminations Consolidated
--------- ------------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ $ 1,601 $ 72,017 $ (635) $ 72,983
Cost of goods sold 927 45,521 46,448
--------- ----------- --------- ----------- ----------
Gross profit 674 26,496 (635) 26,535
Selling, general and
administrative expenses 4 18 9,102 (635) 8,489
Other operating expenses 1,204 1,204
--------- ----------- --------- ----------- ----------
Operating income (loss) (4) 656 16,190 16,842
Other income (expense), net 7,145 (12,505) (5,360)
--------- ----------- --------- ----------- ----------
Income before income taxes
and extraordinary item 7,141 656 3,685 11,482
Income tax expense 2,500 74 1,441 4,015
--------- ----------- --------- ----------- ----------
Income before extraordinary item 4,641 582 2,244 7,467
Extraordinary (loss) on the early
extinquishment of debt, net
of income taxes (2,753) (2,753)
Equity in earnings of
subsidiaries 26 5,223 (5,249)
--------- ----------- --------- ----------- ----------
Net income $ 4,667 $ 582 $ 4,714 $(5,249) $ 4,714
========= =========== ========= =========== ===========
</TABLE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 28, 1996
PREDECESSOR
Combined Combined Reclassifications
Guarantor Non-Guarantor The And
Subsidiaries Subsidiaries Company Eliminations Consolidated
--------- ------------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ $ 645 $ 63,839 $ $ 64,484
Cost of goods sold 598 43,476 44,074
--------- ----------- --------- ----------- ----------
Gross profit 47 20,363 20,410
Selling, general and
administrative
expenses 10 8,865 8,875
Other operating expenses 1,454 1,454
--------- ----------- --------- ----------- ----------
Operating income 37 10,044 10,081
Other income (expense), net 453 (6,297) (5,844)
--------- ----------- --------- ----------- ----------
Income before income taxes 490 3,747 4,237
Income tax expense 52 1,586 1,638
Equity in earnings of
subsidiaries 45 438 (483)
--------- ----------- --------- ----------- ----------
Net income $ 45 $ 438 $ 2,599 $ (483) $ 2,599
========= =========== ========= =========== ==========
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THIRTY-TWO WEEK PERIOD ENDED JANUARY 2, 1999
SUCCESSOR
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 $ 4,956 $ (70) $ (3,220) $ (47) $ - $ 1,619
-------- -------- --------- -------- ----------- ---------
Investing activities:
Purchase of businesses (1,821) (112,956) (114,777)
Purchase of property
plant and equipment (52) (1,058) (1,110)
-------- -------- --------- -------- ----------- ---------
Net cash used in investing
activities (1,821) (52) (1,058) (112,956) - (115,887)
Financing activities:
Payments of debt (52,892) (52,892)
Proceeds of debt 544 133,550 15,016 149,110
Intercompany
transactions, net (3,134) 311 (72,619) 75,442 -
Proceeds from sale of
stock 22,995 22,995
Investment of minority
interest 64 64
Other (4,928) (450) (5,378)
-------- -------- --------- -------- ----------- ---------
Net cash provided by (used
in) financing activities (3,134) 855 3,175 113,003 - 113,899
-------- -------- --------- -------- ----------- ---------
Net increase (decrease) in
cash and cash equivalents 1 733 (1,103) - - (369)
Cash and cash equivalents at
beginning of period 11 26 1,514 - - 1,551
-------- -------- --------- -------- ----------- ---------
Cash and cash equivalents at
end of period $ 12 $ 759 $ 411 - $ - $ 1,182
======== ======== ========= ======== =========== =========
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE TWENTY WEEK PERIOD ENDED MAY 25, 1998
PREDECESSOR
Combined Combined Reclassifications
Guarantor Non-Guarantor The And
Subsidiaries Subsidiaries Company Eliminations Consolidated
--------- ------------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by operating
activities $ 1,158 $ 220 $ 832 $ - $ 2,210
--------- ----------- --------- ----------- ----------
Investing activities:
Purchase 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>
52
<PAGE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED JANUARY 3, 1998
(PREDECESSOR)
Combined Combined Reclassifications
Guarantor Non-Guarantor The And
Subsidiaries Subsidiaries Company Eliminations Consolidated
--------- ------------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by operating
activities $ 4,431 $ 439 $ 5,090 $ - $ 9,960
Investing activities:
Purchase of property plant
and equipment, net (7) (2,522) (2,529)
Advances to subsidiaries (69,443) 69,443
--------- ----------- --------- ----------- ----------
Net cash provided by (used in)
Investing activities (69,443) (7) (2,522) 69,443 (2,529)
Financing activities:
Prepayment of debt,
including penalty (55,690) (55,690)
Proceeds from debt 135,943 (69,443) 66,500
Payments of debt (13,700) (13,700)
Dividends paid (7,929) (7,929)
Intercompany transactions,
net 2,498 (441) (2,057)
Capital contributions 62,530 (62,530)
Other (878) (878)
--------- ----------- --------- ----------- ----------
Net cash provided by (used in)
financing activities 65,028 (441) (6,841) (69,443) (11,697)
--------- ----------- --------- ----------- ----------
Net increase (decrease) in cash
and cash equivalents 16 (9) (4,273) - (4,266)
Cash and cash equivalents at
beginning of period 105 4,540 4,645
--------- ----------- --------- ----------- ----------
Cash and cash equivalents at end
of period $ 16 $ 96 $ 267 $ - $ 379
========= =========== ========= =========== ==========
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 28, 1996
(PREDECESSOR)
Combined Combined Reclassifications
Guarantor Non-Guarantor The And
Subsidiaries Subsidiaries Company Eliminations Consolidated
--------- ------------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by operating
activities $28 $ 414 $10,794 $ $ 11,236
Net cash used in investing
activities (4) (2,763) (2,767)
Financing activities:
Payments of debt (2,700) (2,700)
Short-term borrowings (2,000) (2,000)
Intercompany transactions,
net 30 (377) 347 -
Capital accounts (58) 10 48 -
-----------------------------------------------------------------
Net cash used in financing
activities (28) (367) (4,305) (4,700)
-----------------------------------------------------------------
Net increase in cash and
cash equivalents 43 3,726 3,769
Cash and cash equivalents at
beginning of period 62 814 876
-----------------------------------------------------------------
Cash and cash equivalents at end
of period $ - $ 105 $ 4,540 $ $ 4,645
=================================================================
</TABLE>
54
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On May 26, 1998, the Company changed its certified public accountants from Ernst
& Young, LLP, to Deloitte & Touche LLP. The report of Ernst & Young LLP dated
January 28, 1998, except for Note 16, as to which the date is May 26, 1998, and
Note 15, as to which the date is March 26, 1999, on the Company's financial
statements as of and for each of the two fiscal years in the period ended
January 3, 1998 did not contain an adverse opinion or disclaimer opinion;
further the Company had no disagreements with Ernst & Young LLP during that
period. The change in accountants was recommended by the Board of Directors of
the Company.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name, age as of January 2, 1999, and position
with the Company of each person who serves as a director or executive officer of
the Company.
- --------------------------------------------------------------------------------
Name Age Position
- --------------------------------------------------------------------------------
Benjamin G. Team 57 President, Chief Executive Officer and
Director
Robert W. Dillon 51 Executive Vice President and Director
Jerry B. Miller 52 Vice President - Finance and Secretary
J. Brant Conner 53 General Sales Manager
Thomas A. Korbutt 55 Vice President - Frame Division
John D. Wright 54 Manager - Heddle Division
C. Randy Boggs 38 Manager - Reed Division
Edward J. Treglia 37 Manager - Rolled Products Division
Nathan J. Belden 28 Director
Robert J. Klein 34 Director
Kim A. Marvin 35 Director
Robert L. Purdum 62 Non-Executive Chairman and Director
Theodore C. Rogers 63 Director
- --------------------------------------------------------------------------------
BENJAMIN G. TEAM - PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR
Mr. Team joined Steel Heddle after seven years with Textile Loom Reed Company
which was acquired by Steel Heddle in 1969. He began with Steel Heddle as
Manager of the Greensboro Reed Plant in 1969 and was later named Manager of the
Company's Reed Division in 1975. Mr. Team was elected Vice President in 1978 and
was named head of all textile products manufacturing in 1986. Mr. Team was
appointed President in 1992.
ROBERT W. DILLON - EXECUTIVE VICE PRESIDENT AND DIRECTOR
Mr. Dillon joined Steel Heddle in 1969 after receiving a B.S. degree from
Philadelphia College of Textile and Science. Mr. Dillon has held positions of
increasing responsibility in the sales, administrative, and manufacturing areas
of the Company. He was promoted to Vice President - Heddle Division in 1988 and
Executive Vice President in 1992.
JERRY B. MILLER - VICE PRESIDENT - FINANCE AND SECRETARY
Mr. Miller joined Steel Heddle in 1988 in his present position. He had
previously worked as an audit supervisor for Ernst & Whinney from 1975-l984, as
a controller for Carolina Tool & Equipment Company and as Vice President and
Controller of Ballenger Group, Inc. Mr. Miller holds a B.A. degree from Clemson
University, a Master's degree from the University of Georgia and is a Certified
Public Accountant.
55
<PAGE>
J. BRANT CONNER - GENERAL SALES MANAGER
Mr. Conner joined Steel Heddle in 1972 as a Sales Representative. He was
promoted to District Sales Manager for the Southwest Region in 1978. Mr. Conner
also served as plant manager for the Meriwether Reed Plant and was promoted to
his present position in 1994. Mr.Conner received his B.S. and Masters degrees in
Textiles from Georgia Tech and served in the U. S. Army for two years, obtaining
the rank of First Lieutenant.
THOMAS A. KORBUTT - VICE PRESIDENT - FRAME DIVISION
Mr. Korbutt joined Steel Heddle in 1973 as a project engineer after working in
various engineering and manufacturing positions in the automotive and
shipbuilding industries. He was appointed Engineering Manager in 1975. In 1984,
he was promoted to his present position. Mr. Korbutt received a degree in Tool
Engineering Design from Henry Ford Community College.
JOHN D. WRIGHT - MANAGER-HEDDLE DIVISION
Mr. Wright joined Steel Heddle in early 1997 after overseeing engineering and
manufacturing at Freudenberg North America. Before Freudenberg, Mr. Wright
worked for twelve years at Johnson & Johnson in several engineering and
manufacturing positions. Mr. Wright holds a degree in Mechanical Engineering
from Texas Tech University and served as an engineering officer in the U.S.
Navy.
C. RANDY BOGGS - MANAGER - REED DIVISION
Mr. Boggs joined Steel Heddle in 1994 after leaving Palmetto Loom Reed, Inc.
where he was Plant Manager. Previously, he was Weaving Superintendent with the
Bibb Company's White Horse Plant. He was also employed with J. P. Stevens where
he held various management positions in the Greige Fabrics Division. He has a
B.A. in Business Administration from Southern Wesleyan College.
EDWARD J. TREGLIA - MANAGER ROLLED PRODUCTS DIVISION
Mr. Treglia joined Steel Heddle in 1987 as an Industrial Engineer and in 1989
was transferred to the Rolled Products Division. In September 1996, he was named
Plant Manager. Before joining Steel Heddle, he worked with Southeastern Kusan
and Sheller-Globe. Mr. Treglia graduated from the University of Cincinnati with
a B.S. in Industrial Engineering. While working on his degree, he was a co-op
Industrial Engineer with IBM and Wierton Steel.
NATHAN L. BELDEN - DIRECTOR
Mr. Belden joined AIP in 1995 from the Mergers & Acquisition Department of
Kidder, Peabody & Co., Inc. where he was employed since 1993.
ROBERT J. KLEIN - DIRECTOR
Mr. Klein is a Managing Director of AIP. He has been an employee of AIP since
1992. From 1991 to 1992, he was an associate at The First Boston Corporation and
prior thereto was an associate with Rosecliff, Inc., an affiliate of Acadia
Partners, L.P. Mr. Klein is a director of Easco Corporation and RBX Corporation.
KIM A. MARVIN - DIRECTOR
Mr. Marvin is a Managing Director of AIP. He joined the San Francisco office of
AIP in 1997 from the Mergers & Acquisitions Department of Goldman, Sachs & Co.
where he was employed since 1994. Mr. Marvin is a director of Bucyrus
International, Inc. and Great Lakes Carbon Corp.
ROBERT L. PURDUM - NON-EXECUTIVE CHAIRMAN AND DIRECTOR
Mr. Purdum is a Director and Managing Director of American Industrial Partners
Corporation. Mr. Purdum became the Non-Executive Chairman of the Company's Board
following the Acquisition. Mr. Purdum retired as Chairman of Armco Inc. in 1994.
From November 1990 to 1993, Mr. Purdum was Chairman and Chief Executive Officer
of Armco. Mr. Purdum has been a director of AIP Management Co. since joining AIP
in 1994. Mr. Purdum is also a director of Bucyrus International, Inc., Holophane
Corporation, Berlitz International, Inc. and Kettering University.
56
<PAGE>
THEODORE C. ROGERS - DIRECTOR
Mr. Rogers is a Director, the Chairman of the Board and the Secretary of
American Industrial Partners Corporation. He co-founded AIP and has been a
director and officer of the firm since 1989. He is currently a director of
Bucyrus International Inc., Easco Corporation, Great Lakes Carbon Corp ,
Sweetheart Holdings, Inc., RBX Corporation, Stanadyne Automotive Corp., and
Derby International.
Directors are not expected to receive compensation for their services as
directors, except for the Non-Executive Chairman of the Board who receives
$150,000 per year.
ITEM 11. EXECUTIVE COMPENSATION
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards
Annual Compensation Securities All Other
Name and Principal -------------------------------- Underlying Compensation
Position Year Salary Bonus (a) Options (b)
- --------------------------- -------- ---------- ------------ ------------ -------------
(in 000s) (in 000s) (# of shares) (in 000s)
<S> <C> <C> <C> <C> <C>
Benjamin G. Team 1998 $ 294 $ 1,275 10,008 $ 51
Chief Executive Officer 1997 245 344 6,344 35
And President
Robert W. Dillon 1998 219 1,275 7,768 40
Executive Vice 1997 182 249 4,924 28
President
Jerry B. Miller 1998 187 1,275 6,727 37
Vice President Finance 1997 155 223 4,264 28
Thomas A. Korbutt 1998 125 - 3,476 24
Vice President Frame 1997 121 125 2,204 22
Division
J. Brant Conner 1998 135 - 1,160 21
General Sales Manager 1997 103 95 - 16
</TABLE>
(a) Bonuses are reported in the year earned even if paid in a subsequent
year. 1998 includes amounts paid in connection with the May 1998
Acquisition
(b) Other annual compensation includes the Company's contribution to the
Employee Thrift and Savings Plan and the cash Balance Plan
57
<PAGE>
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
Potential Realizable
Value at Assumed
Annual Rates of Stock Price
Appreciation
Individual Grants For Option Term
---------------------------------------- s -----------------------------
Percent of
Number of Total Options
Securities Granted Exercise
Underlying To Employees or Base
Options In Fiscal Price Expiration 0% 5% 10%
Granted Year Per Share Date in 000's in 000's in 000's
----------- ---------- --------- ----------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Benjamin G. Team (1) 3,674 27.9 $100 05-26-08 $ 231 $589
(2) 6,334 35.8 15 05-26-08 $ 538 937 1,548
Robert W. Dillon (1) 2,852 21.7 100 05-26-08 179 727
(2) 4,916 27.8 15 05-26-08 418 455 1,201
Jerry B. Miller (1) 2,470 18.8 100 05-26-08 155 630
(2) 4,257 24.0 15 05-26-08 362 394 1,040
Thomas A. Korbutt (1) 1,276 9.6 100 05-26-08 80 325
(2) 2,200 12.4 15 05-26-08 100 203 538
J. Brant Conner (1) 1,160 8.8 100 05-26-08 99 78 185
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised in-the-money
Options At Options At
Fiscal Year End Fiscal Year End
(#) Exercisable/ Exercisable/
Name Unexercisable Unexercisable
- ------------------- ---------------- -----------------
in 000's
<S> <C> <C>
Benjamin G. Team 6,334/3,674 538/0
Robert W. Dillon 7,768/2,852 660/0
Jerry B. Miller 6,727/2,470 572/0
Thomas A. Korbutt 3,476/1,276 295/0
J. Brant Conner 0/1,160 0/0
</TABLE>
(1) Management Stock Option Plan
(2) Rollover Options were held by certain employees of the Predecessor
Company, which were converted at the consummation of the Acquisition
into options to purchase common stock of SH Group.
PENSION PLANS
The Company maintains a cash balance pension plan that provides a monthly
annuity payable at age 65. The amount of such an annuity is the actuarial
equivalent of the value of an individual account balance which is comprised of
the following: (i) a participant's accrued benefit under the plan determined as
of December 31, 1994; (ii) a percentage (from 2.25% to 7.00%) of the
participant's annual earnings plus a percentage (from 3.0% to 5.0%) of the
participant's annual earnings in excess of 50% of the Social Security wage base
for the calendar year, with such percentages determined based on the
participant's age at the beginning of each year; and (iii) interest credits
based on an index weighted to reflect 60% of the return of the Lehman Brothers
Governmental/Corporate Bond Index and 40% of the return of the S&P 500 stock
index, determined as of December 31 of the calendar year in which the interest
is credited. The estimated annual benefit payable at age 65 for each of the
named executive officers is shown below. For purposes of determining such
benefit, no increases in salary or Social Security wage base were assumed, and a
5% interest rate was used for determining interest credits and for converting
the individual account balance to an annuity at age 65:
58
<PAGE>
Projected Annual
Projected Annuity Payable at
Individual Normal
Name Account Balance Retirement Age
---------------- ---------------------
in 000s in 000s
Benjamin G. Team $ 508 $ 44
Robert W. Dillon 611 53
Jerry B. Miller 453 39
Thomas A. Korbutt 362 31
J. Brant Conner 418 36
EMPLOYMENT AGREEMENTS
Messrs. Team, Miller and Dillon each are party to a severance agreement under
which each will receive severance pay if his employment is terminated by the
Company (other than for cause) for the number of months between that date of
termination and December 31, 2000 if termination occurs on or before December
31, 1999 or for twelve months if termination occurs on or after January 1, 2000.
Messrs. Team, Miller and Dillon each are a party to a Sale Bonus Agreement dated
April 21, 1998, pursuant to which each received approximately $1.3 million upon
consummation of the Acquisition.
Messrs. Connor and Korbutt each are party to a severance agreement under which
each will receive severance pay if his employment is terminated by the Company
(other than for cause) for the number of months between that date of termination
and December 31, 1999 if termination occurs on or before December 31, 1998 or
for twelve months if termination occurs on or after January 1, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
As of January 2, 1999, there were 13 holders of record of shares of common stock
of SH Group. The following table sets forth certain information regarding
beneficial ownership of common stock of SH Group as of January 2, 1999, assuming
the exercise of stock options exercisable within 60 days of such date, by (i)
each person who is known by SH Group to be the beneficial owner of more than 5%
of the common stock of SH Group, (ii) each of SH Group's directors and the named
executive officers in the Summary Compensation Table and (iii) all directors and
officers as a group. To the knowledge of SH Group, each stockholder has sole
voting and investment power as to the shares of common stock of SH Group shown
unless otherwise noted. Except as indicated below, the business address for each
such person is c/o Steel Heddle Mfg., Co., 1801 Rutherford Road, Greenville,
South Carolina 29607.
<TABLE>
<CAPTION>
Name Number (1) Percentage
(2)
- --------------------------------------------------- ------------ -------------
<S> <C> <C>
American Industrial Partners Capital Fund II, L.P. (3) 226,299 96.3
Nathan L. Belden (3) 200 *
Kim A. Marvin (3) 0 0.0
Robert J. Klein (4) 250 *
Robert L. Purdum (4) 1,000 *
Theodore C. Rogers (5) 226,299 96.3
W. Richard Bingham (5) 226,299 96.3
Benjamin G. Team 6,334 (6) *
Robert W. Dillon 4,916 (6) *
Jerry B. Miller 4,257 (6) *
Thomas A. Korbutt 2,200 (6) *
J. Brant Conner 0 0.0
All directors and executive officers as a group 19,157 (7) 7.6
(9 persons)
</TABLE>
59
<PAGE>
* Represents less than 1%
(1) Beneficial ownership is determined in accordance with Rule 13d-3 of the
Securities and Exchange Commission. In computing the number of shares of
common stock of SH Group beneficially owned by a person and the
percentage of beneficial ownership of that person, shares of common
stock of SH Group subject to options held by that person that are
currently exercisable or exercisable within 60 days are deemed
outstanding. Such shares, however, are not deemed outstanding for the
purposes of computing the percentage ownership of each other person. The
persons named in this table have sole voting and investment power with
respect to all other shares of common stock of SH Group shown as
beneficially owned by them, subject to community property laws where
applicable and except as indicated in the other footnotes to this table.
(2) Based upon 234,949 shares of common stock of SH Group outstanding as of
January 2, 1999. (3) The business address of such entity or person is
One Maritime Plaza, Suite 2525, San Francisco, California 94111.
(4) The business address of such person is 551 Fifth Avenue, Suit 3800, New
York, New York 10176.
(5) Messrs. Rogers and Bingham share investment and voting power with
respect to the securities owned by American Industrial Partners capital
Fund II, L.P. but each disclaims beneficial ownership of any shares of
common stock of SH Group. The business address of Mr. Rogers is 551
Fifth Avenue, Suite 3800, New York, New York 10176. The business address
of Mr. Bingham is One Maritime Plaza, Suite 2525, San Francisco,
California 94111.
(6) Represents shares of common stock of SH Group which are issuable upon
exercise of options within 60 days of the date hereof.
(7) Includes an aggregate of 17,707 shares of common stock of SH Group held
by directors and executive officers which are issuable upon exercise of
options exercisable within 60 days of the date herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AIP has provided, and expects to provide, substantial ongoing financial and
management services to the Company utilizing the extensive operating and
financial experience of AIP principals. AIP will receive an annual fee of
$895,000 for providing general management, financial and other corporate
advisory services to the Company and will be reimbursed out-of-pocket expenses.
The fees are paid to AIP pursuant to a management services agreement among AIP
and the Company and are subordinated in right of payment to the Notes. During
the thirty-two weeks ended January 2, 1999, AIP was paid approximately $534,000
in such fees and reimbursements.
At the close of the Acquisition, AIP was paid a fee of $2.0 million and
reimbursed out-of-pocket expenses of $250,000 in connection with the negotiation
of the Acquisition and for providing certain investment banking services to the
Company including the arrangement and negotiation of the terms of the New Credit
Agreement, the arrangement and negotiation of the terms of the Notes and for
other financial advisory and management consulting services. In addition, at the
close of the acquisition of Millentex N.V., AIP was paid a fee of $100,000 and
reimbursed out-of-pocket expenses in connection with the negotiation of that
acquisition.
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 approximately $132,000 in the twenty-weeks
ended May 26, 1998.
On November 15, 1998, Millentex N.V. terminated the old leases and entered into
new leases for land and buildings used by Millentex N.V. in production. The new
leases have annual payments of approximately $210,000 increased annually by the
consumer price index on the anniversary date and expire on October 22, 2007. The
leased land and buildings are owned by an entity which is wholly owned by the
entity that holds the remaining 51% investment in Millentex N.V.
In connection with the Acquisition, certain officers of the Company purchased
shares of the Company's common stock which are secured by notes from the
officers. The notes bear interest at 6% per year, require annual payments
beginning in 1999 and mature on May 26, 2003. The notes have been presented as a
separate component of shareholder's equity (deficit).
60
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) The following financial statements are included in Item 8.
(i) Independent Auditors' Report
(ii) Independent Auditors' Report
(iii) Consolidated Balance Sheets as of January 2, 1999
(Successor) and January 3, 1998 (Predecessor)
(iv) Consolidated Statements of Operations and Comprehensive
Income (Loss) for the period from May 26, 1998 to January
2, 1999 (Successor), the period January 4, 1998 to May 25,
1998 (Predecessor), the fiscal year ended January 3, 1998
(Predecessor) and the fiscal year ended December 28, 1998
(Predecessor).
(v) Consolidated Statements of Shareholders' Equity (Deficit)
for the period from May 26, 1998 to January 2, 1999
(Successor), the period January 4, 1998 to May 25, 1998
(Predecessor), the fiscal year ended January 3, 1998
(Predecessor) and the fiscal year ended December 28, 1998
(Predecessor).
(vi) Consolidated Statements of Cash Flows for the period from
May 26, 1998 to January 2, 1999 (Successor), the period
January 4, 1998 to May 25, 1998 (Predecessor), the fiscal
year ended January 3, 1998 (Predecessor) and the fiscal
year ended December 28, 1998 (Predecessor).
(vii) Notes to consolidated Financial Statements.
The registrant is primarily a holding company.
(2) The financial statement schedule required by Item 8 is listed on
Index to Financial Statement Schedule, starting at page S-1 of
this report.
(b) No reports on form 8-K were filed during the quarter ended January 2, 1999.
61
<PAGE>
(c) Exhibits
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Certificate of Amended and Restated Certificate of Incorporation of SH
Group.*
3.2 By-laws of SH Group.*
4.1 Indenture, dated as of May 26, 1998, among SH Group and United States
Trust Company of New York, as trustee.*
4.2 Purchase Agreement, dated as of May 21, 1998, between SH Group and
Donaldson, Lufkin & Jenrette Securities Corporation.*
4.3 Registration Rights Agreement, dated as of May 26, 1998 between SH
Group and Donaldson, Lufkin & Jenrette Securities Corporation.*
4.4 Stockholders Agreement, dated as of May 26, 1998, among SH Group and
its stockholders.*
10.1 Pledge Agreement, dated as of May 26, 1998, among the Steel Heddle, SH
Group, Steel Heddle International, Inc. and Heddle Capital Corp. and
Nationsbank, N.A., as administrative agent and documentation agent. *
10.2 Stock Purchase Agreement, dated as of May 1, 1998, by and among SH
Holdings Corp., Butler Capital Corporation, SH Group and the Stock
holders of SH Holdings Corp.*
10.3 Management Services Agreement, dated as of May 26, 1998, by and among
Steel Heddle, Steel HeddleInternational, Inc., Heddle Capital Corp., SH
Group, Steel Heddle International Ltd., Steel Heddle (Canada) LTEE/LTD
and American Industrial Partners Corporation.*
10.4 Management Stock Option Plan adopted by the Board of Directors of SH
Group as of May 26, 1998.*
12.1 Computation of earnings to fixed charges.**
16.1 Letter re: Change in Certifying Accountant.*
21.1 Subsidiaries of the SH Group.**
27.1 Financial Data Schedule.**
* Previously filed with SH Groups' Registration Statement on Form S-4
(file No. 61041).
** Filed herewith.
62
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: April 1, 1999 By: /s/ Jerry B. Miller
----------------------------------------
Jerry B. Miller
Vice President Finance and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Benjamin G. Team President, Chief Executive Officer April 1 , 1999
- ----------------------------- and Director (principal executive
Benjamin G. Team officer)
/s/ Jerry B. Miller Vice President Finance and Secretary April 1 , 1999
- ----------------------------- (principal financial and accounting
Jerry B. Miller officer)
/s/ Robert W. Dillon Executive Vice President and April 1 , 1999
- ----------------------------- Director
Robert W. Dillon
/s/ Nathan L. Belden Director April 1 , 1999
- -----------------------------
Nathan L. Belden
/s/ Robert J. Klein Director April 1 , 1999
- -----------------------------
Robert J. Klein
/s/ Theodore C. Rogers Director April 1 , 1999
- -----------------------------
Theodore C. Rogers
/s/ Kenneth J. Diekroeger Director April 1 , 1999
- -----------------------------
Kenneth J. Diekroeger
/s/ Robert L. Purdum Chairman of the Board and Director April 1 , 1999
- -----------------------------
Robert L. Purdum
</TABLE>
63
<PAGE>
STEEL HEDDLE GROUP, INC.
TO SCHEDULE INDEX
INDEX TO FINANCIAL STATEMENT SCHEDULE
For the Thirty-two Week Period Ended
January 2, 1999
FINANCIAL STATEMENT SCHEDULE
I. Condensed Financial Information of Registrant S-2
Note: (1) Steel Heddle Group, Inc. was incorporated under the laws of the
State of Delaware in April 1998, accordingly, financial information
prior to May 25, 1998 (The Acquisition of SH Holdings Corp.) is not
presented.
(2) All other schedules are omitted because they are not applicable or
are not required, or the required information is shown either in the
consolidated financial statements or in the notes thereto.
S-1
<PAGE>
Schedule I
STEEL HEDDLE GROUP, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEET
(In thousands) January 2, 1999
----------------
Assets
Deferred financing costs, net of accumulated
amortization of $26 $ 427
Deferred income taxes 417
Investment in subsidiary 102,393
================
Total Assets $ 103,237
================
Liabilities and Equity
Long-term liabilities:
Senior Discount Debentures $ 16,262
Due to an affiliate 75,443
----------------
Total long-term liabilities 91,705
----------------
Redeemable Common Stock 2
Equity
Paid-in capital 23,375
Deficit (6,915)
Notes receivable - shareholders (350)
Carryover basis of management's interest (4,494)
Accumulated other comprehensive loss (86)
----------------
Total equity 11,530
----------------
$ 103,237
================
S-2
<PAGE>
SCHEDULE I
STEEL HEDDLE GROUP, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENT OF OPERATIONS
(In thousands) Period May 26, 1998
to January 2, 1999
-------------------
Equity in net loss of subsidiaries $(6,060)
Other income (expense)
Interest expense (1,272)
-------------------
Loss before income tax benefit (7,332)
Income tax benefit (417)
-------------------
Net loss $ (6,915)
===================
S-3
<PAGE>
SCHEDULE I
STEEL HEDDLE GROUP, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENT OF CASH FLOWS
(In thousands) Period May 26,
1998
to January 2,
1999
-----------------
Operating Activities:
Net loss $ (6,915)
Equity in loss of subsidiaries 6,060
Amortization of deferred financing costs 26
Accretion of senior discount debentures 1,246
Increase in deferred taxes (417)
Other (47)
-----------------
Net cash used in operating activities (47)
Investing Activities:
Acquisition of subsidiary (112,956)
-----------------
Net cash used in investing activities (112,956)
Financing Activities:
Proceeds from issuance of debt 90,458
Capital contribution 22,995
Financing costs incurred (450)
-----------------
Net cash provided by financing activities 113,003
-----------------
Increase (Decrease) in Cash and Cash Equivalents -
Cash and Cash Equivalents at Beginning of Period -
-----------------
Cash and Cash Equivalents at End of Period $ -
=================
NOTES TO CONDENSED FINANCIAL INFORMATION
Note 1. The condensed financial information included in this schedule reflects
Steel Heddle Group, Inc.'s ("SH Group") investment in its wholly-owned
subsidiary, Steel Heddle Mfg. Co., on the equity method. SH Group was formed to
acquire the stock of SH Holdings Corp. The acquisition occurred on May 26, 1998.
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 the issuance of $29.25 million of 13
3/4% Senior Discount Debentures ("Debentures"), issuance of $100 million of 10
5/8% Senior Subordinated Notes of Steel Heddle Mfg. Co. and borrowings of
approximately $33.6 million under a new bank credit facility (the "Credit
Facility") of Steel Heddle Mfg. Co.
Note 2. The Debentures (original proceeds of $15,016 and accreted value of
$16,262 at January 2, 1999) will mature on June 1, 2009. The Debentures are
accreting, using the interest method, to a principal amount of $29,250 on June
1, 2003. Cash interest on the Debentures will be payable semi-annually in
arrears commencing on December 1, 2003.
S-4
EXHIBIT 12.1
<TABLE>
<CAPTION>
STEEL HEDDLE GROUP, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
FISCAL YEAR ENDED
-------------------------------------------------------------
January 2, 1999
--------------------------
(SUCCESSOR) (PREDECESSOR)
32 WEEKS 20 WEEKS
ENDED ENDED
JANUARY 2, MAY 25,
1998 1998 1997 1996 1995 1994
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earnings (losses) from
continuing operations
before income taxes $(10,054) $5,209 $11,482 $ 4,237 $ 3,613 $ 3,836
Add:
Net interest expense excluding
capitalized interest 10,299 1,499 5,154 5,849 6,330 7,098
Amortization of debt
expense 291 50 130 105 105 105
------- ------ ------- ------ ------ ------
Total earnings $ 10,590 $6,758 $16,766 $10,191 $10,048 $11,039
======= ====== ====== ====== ====== ======
Fixed charges:
Net interest expense
including capitalized
interest $ 10,299 $1,499 $ 5,154 $ 5,849 $ 6,330 $ 7,098
Amortization of debt
expense 291 50 130 105 105 105
------- ------ ------- ------ ------ ------
Total fixed charges $ 10,590 $1,549 $ 5,284 $ 5,954 $ 6,435 $ 7,203
======= ====== ====== ====== ====== ======
Ratio of earnings to fixed
charges -- 4.4 3.2 1.7 1.6 1.5
======= ====== ====== ====== ====== ======
Deficiency in the coverage
of fixed charges $(10,054) $ -- $ -- $ -- $ -- $ --
======= ====== ====== ====== ====== ======
</TABLE>
For purposes of these computations, the ratio of earnings to fixed charges has
been calculated by dividing pretax earnings by fixed charges. Earnings, as used
to compute the ratio, equals the sum of income before income taxes and fixed
charges excluding capitalized interest. Fixed charges are the total interest
expenses including capitalized interest and amortization of debt expenses. The
interest factor on operating leases is insignificant.
Exhibit 21.1
Subsidiaries Jurisdiction
- ------------ ------------
Steel Heddle Mfg. Co. Pennsylvania
Steel Heddle International, Inc. South Carolina
Heddle Capital Corp. Delaware
Steel Heddle International, Ltd. Virgin Islands
Steel Heddle (Canada) Ltee/Ltd. Canada
Steel Heddle International de Mexico, S.A. de C.V. Mexico
Steel Heddle Weaving Machine Accessories Co., Ltd. China
Millentex Investment Corporation Delaware
Millentex N.V. Belgium
<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 referene to such financial
statements.
On May 26, 1998, Steel Heddle Group, Inc. consummated the acquisition of Old
Holdings (by a series of post-transaction mergers by the Steel Heddle Mfg. Co.)
and recorded such purchase in accordance with APB 16 "Business Combinations."
Accordingly, the financial information presented for the thirty-two weeks ended
January 2, 1999 is not comparable with that for prior periods.
</LEGEND>
<CIK> 0001065423
<NAME> STEEL HEDDLE GROUP, INC
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> JAN-02-1999 JAN-02-1999
<PERIOD-START> MAY-26-1998 JAN-04-1998
<PERIOD-END> JAN-02-1999 MAY-25-1998
<CASH> 1,182 0
<SECURITIES> 0 0
<RECEIVABLES> 10,032 0
<ALLOWANCES> (159) 0
<INVENTORY> 19,730 0
<CURRENT-ASSETS> 32,189 0
<PP&E> 46,014 0
<DEPRECIATION> (4,510) 0
<TOTAL-ASSETS> 199,901 0
<CURRENT-LIABILITIES> 17,023 0
<BONDS> 146,957 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 11,530 0
<TOTAL-LIABILITY-AND-EQUITY> 199,901 0
<SALES> 38,783 29,631
<TOTAL-REVENUES> 38,783 29,631
<CGS> 31,623 18,628
<TOTAL-COSTS> 31,623 18,628
<OTHER-EXPENSES> 2,119 421
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 10,590 1,549
<INCOME-PRETAX> (10,054) 5,209
<INCOME-TAX> (3,139) 1,868
<INCOME-CONTINUING> (6,915) 3,341
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (6,915) 3,341
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
