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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 7, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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STEEL HEDDLE MFG. CO.
STEEL HEDDLE INTERNATIONAL, INC.
HEDDLE CAPITAL CORP.
(EXACT NAME OF REGISTRANTS AS SPECIFIED IN THEIR RESPECTIVE CHARTERS)
PENNSYLVANIA 3552 23-1120950
SOUTH CAROLINA 3552 57-0543389
DELAWARE 3552 57-2024146
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
1801 RUTHERFORD ROAD
GREENVILLE, SC 29607
TELEPHONE: (864) 244-4110
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
JERRY B. MILLER
STEEL HEDDLE MFG. CO.
1801 RUTHERFORD ROAD
GREENVILLE, SC 29607
TELEPHONE: (864)244-4110
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
Copy to:
JACK M. FEDER, ESQ.
KIRKLAND & ELLIS
655 15TH STREET, N.W.
WASHINGTON, D.C. 20005
TELEPHONE: (202) 879-5100
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]________
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH PROPOSED MAXIMUM PROPOSED MAXIMUM
CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED PER UNIT(1) PRICE(1) REGISTRATION FEE
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10 5/8% Series B Senior
Subordinated Notes due
2008..................... $100,000,000 $1,000 principal amount $100,000,000 $29,500
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Guarantees of 10 5/8%
Series B
Senior Subordinated Notes
due 2008................. $100,000,000 (2) (2) None
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(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(f).
(2) No further fee is payable pursuant to Rule 457(n).
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THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF ANY OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION DATED AUGUST 7, 1998
PROSPECTUS
[STEEL HEDDLE MFG. CO. LOGO]
$100,000,000
STEEL HEDDLE MFG. CO.
OFFER TO EXCHANGE ITS 10 5/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2008 FOR
ANY AND ALL OF ITS OUTSTANDING 10 5/8% SERIES A SENIOR SUBORDINATED NOTES DUE
2008
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON , 1998, UNLESS EXTENDED
Steel Heddle Mfg. Co., a Pennsylvania corporation (the "Company"), hereby
offers (the "Exchange Offer"), upon the terms and conditions set forth in this
Prospectus (the "Prospectus") and the accompanying Letter of Transmittal (the
"Letter of Transmittal"), to exchange $1,000 principal amount of its 10 5/8%
Series B Senior Subordinated Notes due 2008 (the "New Notes"), registered under
the Securities Act of 1933, as amended (the "Securities Act"), pursuant to a
Registration Statement of which this Prospectus is a part, for each $1,000
principal amount of its outstanding 10 5/8% Series A Senior Subordinated Notes
due 2008 (the "Old Notes"), of which $100,000,000 principal amount is
outstanding on the date hereof. The form and terms of the New Notes are the same
as the form and terms of the Old Notes (which they replace) except that the New
Notes will bear a Series B designation and will have been registered under the
Securities Act and, therefore, will not bear legends restricting their transfer
and will not contain certain provisions relating to an increase in the interest
rate which were included in the terms of the Old Notes in certain circumstances
relating to the timing of the Exchange Offer. The New Notes will evidence the
same debt as the Old Notes (which they replace) and will be issued under and be
entitled to the benefits of the Indenture (the "Indenture") dated as of May 26,
1998 among the Company, the Guarantors (as defined herein) and United States
Trust Company of New York, as trustee, governing the New Notes. See "The
Exchange Offer" and "Description of Notes."
Interest on the New Notes will be payable semi-annually in arrears on June 1
and December 1 of each year, commencing December 1, 1998. The New Notes will
mature on June 1, 2008. The New Notes will be redeemable at the option of the
Company, in whole or in part, at any time on or after June 1, 2003, at the
redemption prices set forth herein, plus accrued and unpaid interest thereon, if
any, to the date of redemption. In addition, at any time, prior to June 1, 2001,
the Company may, at its option, on any one or more occasions, redeem up to 35%
of the aggregate principal amount of the New Notes at a redemption price equal
to 110.625% of the aggregate principal amount thereof, plus accrued and unpaid
interest thereon, if any, there unto the redemption date, with the Net Cash
Proceeds (as defined herein) received by the Company from one or more Equity
Offerings (as defined herein). Upon the occurrence of a Change of Control (as
defined herein), each holder of the New Notes will have the right to require the
Company to purchase such holder's New Notes at 101% of the aggregate principal
amount thereof, plus accrued and unpaid interest thereon, if any, to the date of
repurchase. See "Description of Notes -- Optional Redemption."
The New Notes will be senior subordinated, unsecured, general obligations of
the Company, will rank subordinate in right of payment to all existing and
future Senior Indebtedness (as defined herein) of the Company and will rank
senior or pari passu in right of payment to all existing and future subordinated
indebtedness of the Company. On the Issue Date (as defined herein), the New
Notes will be guaranteed (the "Subsidiary Guarantees") on a senior subordinated
basis by each of the Company's subsidiaries (other than Foreign Subsidiaries and
Unrestricted Subsidiaries (each as defined herein)) (each a "Guarantor" and
collectively the "Guarantors"). Each Subsidiary Guarantee will be a general
unsecured obligation of the Guarantor, subordinated in rights of payment to all
Guarantor Senior Indebtedness (as defined herein) of such Guarantor. As of April
4, 1998, on a pro forma basis after giving effect to the Acquisition
Transactions (as defined herein), the Company and its subsidiaries would have
had approximately $34.9 million of Senior Indebtedness and Guarantor Senior
Indebtedness, all of which would effectively rank senior in right of payment to
the New Notes and the Subsidiary Guarantees. The Indenture permits the Company
and its subsidiaries to incur additional indebtedness, including Senior
Indebtedness and Guarantor Senior Indebtedness subject to certain limitations.
See "Description of Notes -- Certain Covenants."
Concurrently with the Exchange Offer, Steel Heddle Group, Inc. ("SH Group"),
the Company's sole shareholder, is offering to exchange pursuant to a separate
prospectus $15.0 million gross proceeds amount of its 13 3/4 Series B Senior
Discount Debentures due 2009 for each $1,000 principal amount of its outstanding
Series A 13 3/4 Senior Discount Debentures due 2009 ("Old SH Group Debentures").
The Company will accept for exchange any and all Old Notes validly tendered
and not withdrawn prior to 5:00 p.m., New York City time, on , 1998,
unless extended by the Company in its sole discretion (the "Expiration Date").
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m. on the
Expiration Date. The Exchange Offer is subject to certain customary conditions.
The Old Notes were issued on May 26, 1998 to the Initial Purchasers (as defined
herein) in a transaction not registered under the Securities Act in reliance
upon an exemption under the Securities Act. The Initial Purchasers subsequently
placed the Old Notes with qualified institutional buyers in reliance upon Rule
144A under the Securities Act. Accordingly, the Old Notes may not be reoffered,
resold or otherwise transferred in the United States unless registered under the
Securities Act or unless an applicable exemption from the registration
requirements of the Securities Act is available. The New Notes are being offered
hereunder in order to satisfy the obligations of the Company and the Guarantors
under the Registration Rights Agreement (as defined herein) entered into by the
Company and the Guarantors in connection with the original transfer of the Old
Notes to the Initial Purchasers. See "The Exchange Offer."
The Old Notes were offered by SH-AIP Acquisition Corporation ("Merger Sub"),
a corporation formed by AIP (as defined herein) to partially fund the
acquisition (the "Acquisition") by Merger Sub's parent, SH Group, of all of the
capital stock of SH Holdings Corp. ("Old Holdings"). After the Acquisition and
related transactions, the Company, successor by merger to Merger Sub, became a
direct wholly-owned subsidiary of SH Group.
Based on no-action letters issued by the staff of the Securities and
Exchange Commission (the "Commission") to third parties, the Company believes
the New Notes issued pursuant to the Exchange Offer may be offered for resale,
resold and otherwise transferred by any holder thereof (other than any such
holder that is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such holder's business and such
holder has no arrangement or understanding with any person to participate in the
distribution of such New Notes. See "The Exchange Offer -- Purpose and Effect of
the Exchange Offer" and "The Exchange Offer -- Resale of the New Notes." Each
broker-dealer (a "Participating Broker-Dealer") that receives New Notes for its
own account pursuant to the Exchange Offer must acknowledge that it will deliver
a prospectus in connection with any resale of such New Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
participating Broker-Dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a Participating
Broker-Dealer in connection with resales of New Notes received in exchange for
Old Notes where such Old Notes were acquired by such Participating Broker-Dealer
as a result of market-making activities or other trading activities. The Company
has agreed that, for a period of one year after the thirtieth business day
following the Expiration Date (or such shorter period as will terminate when all
of the Old Notes offered hereby for exchange have been sold), it will make this
Prospectus available to any Participating Broker-Dealer for use in connection
with any such resale. See "Plan of Distribution."
Holders of Old Notes not tendered and accepted in the Exchange Offer will
continue to hold such Old Notes and will be entitled to all the rights and
benefits and will be subject to the limitations applicable thereto under the
Indenture and with respect to transfer under the Securities Act. The Company
will pay all the expenses incurred by it incident to the Exchange Offer. See
"The Exchange Offer."
There has not previously been any public market for the Old Notes or the New
Notes. The Company does not intend to list the New Notes on any securities
exchange or to seek approval for quotation through any automated quotation
system. There can be no assurance that an active market for the New Notes will
develop. See "Risk Factors -- Lack of a Public Market for the Notes." Moreover,
to the extent that Old Notes are tendered and accepted in the Exchange Offer,
the trading market for untendered and tendered but unaccepted Old Notes could be
adversely affected.
SEE "RISK FACTORS," BEGINNING ON PAGE , FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY HOLDERS WHO TENDER THEIR OLD NOTES IN THE
EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is , 1998.
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AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (the "Exchange Offer Registration Statement," which term shall encompass all
amendments, exhibits, annexes and schedules thereto) pursuant to the Securities
Act, and the rules and regulations promulgated thereunder, covering the New
Notes being offered hereby. This Prospectus does not contain all the information
set forth in the Exchange Offer Registration Statement. For further information
with respect to the Exchange Offer, reference is made to the Exchange Offer
Registration Statement. Statements made in this Prospectus as to the contents of
any contract, agreement or other document referred to are not necessarily
complete. With respect to each such contract, agreement or other document filed
as an exhibit to the Exchange Offer Registration Statement, reference is made to
the exhibit for a more complete description of the document or matter involved,
and each such statement shall be deemed qualified in its entirety by such
reference. The Exchange Offer Registration Statement, including the exhibits
thereto, can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, at the Regional Offices of the Commission at 75 Park Place, New
York, New York 10007 and at Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such materials can be obtained
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. Additionally, the Commission
maintains a web site (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission, including the Company.
As a result of the filing of the Exchange Offer Registration Statement with
the Commission, the Company will become subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith will be required to file periodic reports and
other information with the Commission. The obligation of the Company to file
periodic reports and other information with the Commission will be suspended if
the New Notes are held of record by fewer than 300 holders as of the beginning
of any fiscal year of the Company other than the fiscal year in which the
Exchange Offer Registration Statement is declared effective. The Company will
nevertheless be required to continue to file reports with the Commission if the
New Notes are listed on a national securities exchange. In the event the Company
ceases to be subject to the informational requirements of the Exchange Act, the
Company will be required under the Indenture to continue to file with the
Commission the annual and quarterly reports, information, documents or other
reports, including, without limitation, reports on Forms 10-K, 10-Q and 8-K,
which would be required pursuant to the informational requirements of the
Exchange Act. Under the Indenture, the Company shall file with the Trustee
annual, quarterly and other reports within fifteen days after it files such
reports with the Commission. Further, to the extent that annual, quarterly or
other financial reports are furnished by the Company to shareholders generally
it will mail such reports to holders of New Notes. The Company will furnish
annual and quarterly financial reports to shareholders of the Company and will
mail such reports to holders of New Notes pursuant to the Indenture, thus
holders of New Notes will receive financial reports every quarter. Annual
reports delivered to the Trustee and the holders of New Notes will contain
financial information that has been examined and reported upon, with an opinion
expressed by an independent public or certified public accountant. The Company
will also furnish such other reports as may be required by law.
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The New Notes will be available initially only in book-entry form. The
Company expects that the New Notes issued pursuant to this Exchange Offer will
be issued in the form of Global Notes (as defined herein) and will be deposited
with, or on behalf of, DTC and registered in its name or in the name of Cede &
Co., its nominee. Beneficial interests in the Global Notes will be shown on, and
transfers thereof will be effected through, records maintained by DTC and its
participants. Beneficial interests in the New Notes issued pursuant to
Regulation S may be held only through Euroclear (as defined herein) or CEDEL (as
defined herein). See "Description of Notes--Book-Entry; Delivery; Form and
Transfer."
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus, including the "Summary," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business"
sections, contains "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995, which can be identified by the
use of forward-looking terminology, such as "may," "intend," "will," "expect,"
"anticipate," "estimate" or "continue" or the negative thereof or other
variations thereon or comparable terminology. In particular, any statement,
express or implied, concerning future operating results or the ability to
generate revenues, income or cash flow to service the New Notes are
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, there can be no
assurance that such expectations will prove to have been correct. All
forward-looking statements are expressly qualified by such cautionary
statements.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO BUY, ANY NOTES BY ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL FOR SUCH PERSON TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY DATE
SUBSEQUENT TO THE DATE HEREOF.
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The terms "SH(R)", "Duralite(R)", "Draw-O(R)" and "Jet Eye(R)" are
trademarks of the Company. All other trademarks, service marks or trade names
referred to in the Prospectus are the property of their respective owners.
Market data used throughout the Prospectus were obtained from internal
Company surveys, industry publications or other publicly available information.
Although the Company believes that such sources are reliable, the accuracy and
completeness of such information is not guaranteed and has not been
independently verified.
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SUMMARY
The following is a summary of certain information contained herein and is
qualified in its entirety by, and should be read in conjunction with, the more
detailed information and financial data, including the consolidated financial
statements and notes thereto, included elsewhere in this Prospectus. Unless the
context indicates otherwise, all references to the "Company" or "Steel Heddle"
shall mean Steel Heddle Mfg. Co. and its consolidated subsidiaries. References
to the Company's "fiscal year" are to the 52-week or 53-week period ending on
the Saturday closest to December 31 of each year.
THE COMPANY
The Company, founded in 1898, is one of the world's leading manufacturers
of precision textile loom accessories. The Company designs, manufactures and
markets virtually all of the replaceable wear parts necessary to operate a
commercial weaving loom, including heddles, dropwires, harness frames, reeds and
shuttles and bobbins, which are used to hold or guide individual yarns during
the weaving process. Textile loom accessories are highly engineered and often
customized products which require a high degree of precision to ensure a uniform
weave and to achieve desired fabric patterns while being able to withstand the
stresses of modern, high-speed weaving looms. While technology and performance
specifications vary, all commercial weaving looms require these accessories.
Because loom manufacturers do not produce these accessories, all woven fabric
producers must purchase textile loom accessories from third-party suppliers. In
addition to textile loom accessories, the Company manufactures precision rolled,
heat treated, bare and tinned flat wire used in the electronics, automotive,
solar power and other industries.
The Company has achieved adjusted EBITDA (as defined herein) margins
exceeding 24% in each of the last ten years. Beginning in 1995 and continuing
through 1996, the Company implemented a profitability-enhancing cost-reduction
program. This program contributed to an increase in adjusted EBITDA margin to
31.3% in 1997. For the 52-week period ended April 4, 1998, the Company had net
sales, Adjusted EBITDA and operating income of $73.6 million, $23.3 million and
$17.9 million, respectively.
Steel Heddle is a critical supplier to virtually all North American textile
weaving mills, including such companies as WestPoint Stevens, Inc., Milliken &
Co. and Burlington Industries, Inc., many of which have been customers for
decades. In North America, management estimates that the Company holds
substantial market shares in all of its major product lines and estimates that
it supplies over 80% of the market for heddles, dropwires and harness frames,
over 50% of reeds and over 90% of the market for shuttles and bobbins. Although
international markets such as Europe and Asia have different competitive
dynamics than the North American market, the Company also has a strong presence
in many international markets in which it perceives the opportunity for
profitable growth. International sales accounted for approximately 22% of the
Company's net sales in 1997.
Textile loom accessories have represented a steady source of revenue and
cash flow because these parts require frequent replacement due to wear and
changes in production runs. Approximately 75% of the Company's net sales were
derived from the sale of replacement parts in 1997. The Company estimates that
more than 90% of all looms installed in North America are delivered
"unaccessorized," with the accessories being designed and supplied by a
third-party supplier such as Steel Heddle. Once the Company has outfitted new
looms with its accessories, its has generally been able to continue to supply
replacement parts for the life of the loom. The Company believes it has achieved
its leading position in the industry primarily because of its willingness and
ability to work closely with its customers, both before and after the
installation of new looms, to design the appropriate accessories to meet
specific manufacturing needs and then continue to meet those needs on an ongoing
basis.
In addition to its textile loom accessories business, the Company converts
round rod to flat wire through a rolling process which results in a flat wire
with a round edge. Originally developed to satisfy in-house heddle manufacturing
needs, the Company recognized that its ability to produce these products to
extremely tight tolerances could be tailored to meet similar needs in other
industries and began to pursue outside sales. 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
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control mechanisms for air bags, turn signals and cruise controls. Major
customers include Kemet Corporation, Parlex Corporation, AMP Incorporated and
Siemens Corporation. Rolled products generated approximately $9.0 million in net
sales in 1997.
LOOM ACCESSORY INDUSTRY OVERVIEW
The textile industry is comprised of several subsectors: (i) apparel
production (consisting primarily of "cut and sew" business), (ii) synthetic and
natural yarn production, (iii) knitted fabric and (iv) woven fabric production.
Woven fabric production is the focus of the Company's customers. The end users
of weaving looms and weaving loom accessories are textile mills which utilize
looms to produce woven fabric. The U.S. weaving market is estimated at
approximately $19.5 billion and accounted for approximately 16.4 billion square
yards of fabric in 1997. This output has remained relatively stable since 1986,
varying between 15.2 and 16.6 billion square yards annually.
The U.S. textile industry, after having undergone significant restructuring
during the 1980s and early 1990s, has emerged as one of the most
capital-intensive, modern and efficient producers in the world. Annual capital
expenditures by woven fabric mills, while subject to fluctuations in the demand
for woven fabric, have risen in the 1990s, from approximately $550 million in
1991 to approximately $850 million in 1996. In order to maintain their
competitive position in the world markets, U.S. textile mills are expected to
continue to invest heavily in faster, newer generations of loom technology. With
modern equipment and increased automation, labor cost differentials are not a
significant factor in the competitiveness of U.S. producers. In addition, the
advantages of producing in the U.S., one of the world's largest end-markets,
have increased with manufacturers' demands for rapid response times and
retailers' desire to reduce inventories.
The U.S. installed textile loom base has shifted away from older-technology
shuttle looms towards faster, shuttleless looms such as air-jet and water-jet
looms. This trend benefits the Company in two ways. Higher weaving speeds lead
to faster wear of loom accessories, driving an increase in unit demand for
replacement parts. In addition, faster looms require a higher degree of
precision and performance from accessories, increasing the dollar value of
accessories sold per loom and the demand for the higher-priced, quality
accessories for which Steel Heddle is known.
LOOM ACCESSORY PRODUCT OVERVIEW
Heddles and Dropwires. Heddles are flat, specially-designed, stamped parts
manufactured to precise tolerances (as tight as two thousandths of an inch) from
high-performance steel. Heddles are designed to guide and hold individual yarns
during high-speed weaving. Dropwires are precision-made plated-carbon steel or
stainless steel stamped parts specially engineered to trigger a loom shutdown in
the event of broken yarn. The Company estimates that 50% to 60% of heddles and
dropwires are made to order, and approximately 75% of the Company's net sales of
heddles and dropwires are derived from replacement sales. Heddles and dropwires
accounted for approximately 37.9% of the Company's 1997 net sales.
Harness Frames. Harness frames are specialized carriages constructed from
special aluminum alloys and composite materials which raise and lower heddles
during the weaving process, creating a woven fabric pattern. As modern,
high-performance looms operate at 650 to 1,000 picks per minute (two to four
times faster than older technology), harness frames must withstand the
tremendous stress from continuous acceleration and deceleration without buckling
or breaking. The Company estimates that 90% of harness frames are made to order
and approximately 65% of harness frame revenue results from replacement sales.
Harness frames accounted for approximately 20.6% of the Company's 1997 net
sales.
Reeds. Reeds are precision-made, comb-like devices used to evenly space
yarn on the loom. Individual, specially designed, flat wire spacers called
"dents" are assembled in a reed to yield a particular fabric pattern or style.
Reed production requires exacting manufacturing processes as absolutely smooth,
straight and precisely spaced dents are critical to the production of quality
woven fabric. Reeds must be replaced each time a loom is used to weave a new
fabric pattern. Virtually all reeds are made to order and replacement sales
accounted for approximately 90% of reed net sales. Reeds accounted for
approximately 24.6% of the Company's 1997 net sales.
Shuttles and Bobbins. Shuttles, used in older, slower looms, are specially
fabricated from composite materials to carry "pick" or "filling" yarns across
the loom as the main yarn or "warp" yarn is pulled through
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the reed. Bobbins are cylindrical wooden yarn carriers held by the shuttle.
Shuttles and bobbins are exclusively made to order. All shuttle and bobbin sales
are made as replacements. Shuttles and bobbins accounted for approximately 3.5%
of the Company's 1997 net sales.
COMPETITIVE STRENGTHS
The Company's objective is to maintain and enhance its competitive position
as the foremost supplier of loom accessories in the U.S. while broadening its
presence in international markets. The Company intends to achieve its objectives
by capitalizing on the following competitive strengths:
Leading Market Position. The Company is a critical supplier to virtually
all North American textile weaving mills, with leading market shares across all
of its product lines in North America. The Company is the sole domestic
manufacturer of heddles, dropwires, harness frames, shuttles and bobbins, with
estimated market share in North America in each category of over 80%, and over
90% market share in shuttles and bobbins. Steel Heddle is also the largest
domestic manufacturer of reeds, with an estimated 50% market share in North
America. In addition, the Company has a strong presence in those international
markets in which it sees profitable growth opportunities.
Cost-efficient Manufacturing. The Company is the only vertically-integrated
producer of loom accessories in the world. 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.
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
customer base is diversified, with no one customer representing more than 6.6%
of net sales. Sales to top ten customers represented approximately 31.2% of the
Company's net sales in 1997.
Strong Brand Name. The Company's brand name enjoys significant worldwide
recognition in the textile industry as a result of its 100-year history. Since
it introduced flat steel heddles to U.S. weaving mills in 1898, the Company has
manufactured high-quality loom accessories. Because of its longevity, product
innovation, high-quality reputation, strong service orientation and broad
product line, the Company has built and maintained its significant market share
in the North American market and has built a strong presence internationally.
The Company's headquarters are located at 1801 Rutherford Road, Greenville,
S.C. 29607, and its telephone number is (864) 244-4110.
THE ACQUISITION
Pursuant to a stock purchase agreement dated May 1, 1998 (the "Stock
Purchase Agreement"), SH Group, a corporation formed by American Industrial
Partners Capital Fund II, L.P. (together with its affiliates, "AIP") in
contemplation of the Acquisition, acquired all of the issued and outstanding
capital stock of Old Holdings from certain affiliates of Butler Capital
Corporation and certain other stockholders (collectively, the "Sellers"), in a
purchase accounting transaction, for an aggregate purchase price (including the
repayment of outstanding indebtedness of the Company, transaction expenses of
approximately $8.6 million and an estimated purchase price adjustment of
approximately $1.1 million) of approximately $175.2 million, subject to
post-closing adjustments. Immediately after the consummation of the Acquisition,
(i) SH Intermediate Corp., a direct, wholly-owned subsidiary of Old Holdings,
was merged with and into its
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direct, wholly owned subsidiary, the Company, with the Company being the
surviving corporation ("Merger I"), (ii) Old Holdings was merged with and into
its direct wholly-owned subsidiary, the Company, with the Company being the
surviving corporation ("Merger II"), and (iii) Merger Sub was merged with and
into the Company, with the Company being the surviving corporation ("Merger III"
and, together with Merger I and Merger II, the "Mergers"). The Company is a
direct, wholly owned subsidiary of SH Group.
In order to finance the Acquisition and to repay certain existing
indebtedness of the Company, (i) AIP and certain members of management
contributed $25.0 million in exchange for common equity of SH Group, including
management's rollover of approximately $1.7 million of securities of Old
Holdings in the Acquisition (the "Common Equity Contribution"), (ii) SH Group
contributed proceeds of approximately $15.0 million from the issuance and sale
of Old SH Group Debentures, (iii) the Company (as successor by merger to Merger
Sub) entered into syndicated senior secured loan facilities (the "New Credit
Agreement") providing for term loan borrowings in the aggregate principal amount
of $30.0 million and revolving loan borrowings of up to $20.0 million (including
letters of credit) and borrowed all term loans available and approximately $4.9
million of revolving loans, (iv) the Company (as successor by merger to Merger
Sub) issued and sold $100.0 million aggregate principal amount of Old Notes and
(v) the Company loaned approximately $66.0 million of the net proceeds from the
issuance and sale of the Old Notes and borrowings under the New Credit Agreement
to SH Group pursuant to an intercompany note (the "Intercompany Note") to pay
part of the purchase price of the Acquisition. Upon consummation of the
Acquisition, the Company forgave the Intercompany Note. The Acquisition, the
Mergers, the Offering, the Common Equity Contribution, the issuance and sale of
the Old SH Group Debentures and the execution of, and initial borrowings under,
the New Credit Agreement are referred to herein collectively as the "Acquisition
Transactions." Upon consummation of the Mergers, the Company succeeded to the
obligations of Merger Sub under the New Credit Agreement and the Indenture.
AIP is a private investment fund based in San Francisco and New York which,
together with its affiliates, has committed capital of approximately $800
million. AIP does not seek to play a role in daily management; rather, AIP seeks
to provide its portfolio companies with access to the management expertise of
its operating partners, all of whom are former Chief Executive Officers of
Fortune 500 corporations, through active board-level participation as well as
on-call advice when desired. Robert Purdum, an operating partner of AIP and
former Chairman of Armco, Inc., is the Company's Non-Executive Chairman of the
Board.
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THE INITIAL OFFERING
OLD NOTES.................. The Old Notes were sold by the Company on May 26,
1998 (the "Issue Date") to Donaldson, Lufkin &
Jenrette Securities Corporation and NationsBanc
Montgomery Securities LLC (the "Initial
Purchasers") pursuant to a Purchase Agreement dated
as of May 21, 1998. The Initial Purchasers
subsequently resold the Old Notes to qualified
institutional buyers pursuant to Rule 144A under
the Securities Act.
REGISTRATION RIGHTS
AGREEMENT.................. Pursuant to the Purchase Agreement, the Company,
the Guarantors and the Initial Purchasers entered
into a Registration Rights Agreement dated May 26,
1998 (the "Registration Rights Agreement"), which
grants the holders of the Old Notes certain
exchange and registration rights. The Exchange
Offer is intended to satisfy such exchange and
registration rights which terminate upon the
consummation of the Exchange Offer.
THE EXCHANGE OFFER
SECURITIES OFFERED......... $100,000,000 aggregate principal amount of 10 5/8%
Series B Senior Subordinated Notes due 2008.
THE EXCHANGE OFFER......... $1,000 principal amount of the New Notes in
exchange for each $1,000 principal amount of Old
Notes. As of the date hereof, $100,000,000
aggregate principal amount of Old Notes are
outstanding. The Company will issue the New Notes
on or promptly after the Expiration Date.
Based on an interpretation by the staff of the
Commission set forth in no-action letters issued to
third parties, the Company believes that New Notes
issued pursuant to the Exchange Offer in exchange
for Old Notes may be offered for resale, resold and
otherwise transferred by any holder thereof (other
than any such holder which is an "affiliate" of the
Company within the meaning of Rule 405 under the
Securities Act) without compliance with the
registration and prospectus delivery provisions of
the Securities Act, provided that such New Notes
are acquired in the ordinary course of such
holder's business and that such holder does not
intend to participate and has no arrangement or
understanding with any person to participate in the
distribution of such New Notes.
Any Participating Broker-Dealer that acquired Old
Notes for its own account as a result of
market-making activities or other trading
activities may be a statutory underwriter. Each
Participating Broker-Dealer that receives New Notes
for its own account pursuant to the Exchange Offer
must acknowledge that it will deliver a prospectus
in connection with any resale of such New Notes.
The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a
Participating Broker-Dealer will not be deemed to
admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to
time, may be used by a Participating Broker-Dealer
in connection with resales of New Notes received in
exchange for Old Notes where such Old Notes were
acquired by such Participating Broker-Dealer as a
result of market-making activities or other trading
activities.
The Company and the Guarantors have agreed to use
their best efforts to keep the Exchange Offer
Registration Statement, including this Prospectus,
continuously effective for one year from the
consummation of the Exchange Offer.
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Any holder who tenders in the Exchange Offer with
the intention to participate, or for the purpose of
participating, in a distribution of the New Notes
could not rely on the position of the staff of the
Commission enunciated in no-action letters and, in
the absence of an exemption therefrom, must comply
with the registration and prospectus delivery
requirements of the Securities Act in connection
with any resale transaction. Failure to comply with
such requirements in such instance may result in
such holder incurring liability under the
Securities Act for which the holder is not
indemnified by the Company.
EXPIRATION DATE............ 5:00 p.m., New York City time, on , 1998
unless the Exchange Offer is extended, in which
case the term "Expiration Date" means the latest
date and time to which the Exchange Offer is
extended.
ACCRUED INTEREST ON THE NEW
NOTES AND THE OLD NOTES.. Each New Note will bear interest from its issuance
date. Holders of Old Notes that are accepted for
exchange will receive, in cash, accrued interest
thereon to, but not including, the issuance date of
the New Notes. Such interest will be paid with the
first interest payment on the New Notes. Interest
on the Old Notes accepted for exchange will cease
to accrue upon issuance of the New Notes.
CONDITIONS TO THE EXCHANGE
OFFER.................... The Exchange Offer is subject to certain customary
conditions, which may be waived by the Company. See
"The Exchange Offer -- Conditions."
PROCEDURES FOR TENDERING
OLD NOTES................ Each holder of Old Notes wishing to accept the
Exchange Offer must complete, sign and date the
accompanying Letter of Transmittal, or a facsimile
thereof or transmit an Agent's Message (as defined
herein) in connection with a book-entry transfer,
in accordance with the instructions contained
herein and therein, and mail or otherwise deliver
such Letter of Transmittal, or such facsimile or
such Agent's Message, together with the Old Notes
and any other required documentation to the
Exchange Agent (as defined herein) at the address
set forth herein. By executing the Letter of
Transmittal or Agent's Message, each holder will
represent to the Company that, among other things,
the New Notes acquired pursuant to the Exchange
Offer are being obtained in the ordinary course of
business of the person receiving such New Notes,
whether or not such person is the holder, that
neither the holder nor any such other person (i)
has any arrangement or understanding with any
person to participate in the distribution of such
New Notes, (ii) is engaging or intends to engage in
the distribution of such New Notes or (iii) is an
"affiliate," as defined under Rule 405 of the
Securities Act, of the Company. See "The Exchange
Offer -- Purpose and Effect of the Exchange Offer"
and "-- Procedures for Tendering."
UNTENDERED NOTES........... Following the consummation of the Exchange Offer,
holders of Old Notes eligible to participate but
who do not tender their Old Notes will not have any
further exchange rights and such Old Notes will
continue to be subject to certain restrictions on
transfer. Accordingly, the liquidity of the market
for such Old Notes could be adversely affected.
CONSEQUENCES OF FAILURE TO
EXCHANGE................. The Old Notes that are not exchanged pursuant to
the Exchange Offer will remain restricted
securities. Accordingly, such Old Notes may be
resold only (i) to the Company, (ii) pursuant to
Rule 144A or Rule 144
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under the Securities Act or pursuant to some other
exemption under the Securities Act, (iii) outside
the United States to a foreign person pursuant to
the requirements of Rule 904 under the Securities
Act, or (iv) pursuant to an effective registration
statement under the Securities Act. See "The
Exchange Offer -- Consequences of Failure to
Exchange."
SHELF REGISTRATION
STATEMENT................ If any holder of the Old Notes (other than any such
holder which is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities
Act) is not eligible under applicable securities
laws to participate in the Exchange Offer, and such
holder has provided information regarding such
holder and the distribution of such holder's Old
Notes to the Company for use therein, the Company
has agreed to register the Old Notes on a shelf
registration statement (the "Shelf Registration
Statement") and use its best efforts to cause it to
be declared effective by the Commission as promptly
as practical on or after the consummation of the
Exchange Offer. The Company and the Guarantors have
agreed to maintain the effectiveness of the Shelf
Registration Statement for, under certain
circumstances, a maximum of two years, to cover
resales of the Old Notes held by any such holders.
SPECIAL PROCEDURES FOR
BENEFICIAL OWNERS........ Any beneficial owner whose Old Notes are registered
in the name of a broker, dealer, commercial bank,
trust company or other nominee and who wishes to
tender should contact such registered holder
promptly and instruct such registered holder to
tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's
own behalf, such owner must, prior to completing
and executing the Letter of Transmittal and
delivering its Old Notes, either make appropriate
arrangements to register ownership of the Old Notes
in such owner's name or obtain a properly completed
bond power from the registered holder. The transfer
of registered ownership may take considerable time.
The Company will keep the Exchange Offer open for
not less than twenty business days in order to
provide for the transfer of registered ownership.
GUARANTEED DELIVERY
PROCEDURES............... Holders of Old Notes who wish to tender their Old
Notes and whose Old Notes are not immediately
available or who cannot deliver their Old Notes,
the Letter of Transmittal or any other documents
required by the Letter of Transmittal to the
Exchange Agent (or comply with the procedures for
book-entry transfer) prior to the Expiration Date
must tender their Old Notes according to the
guaranteed delivery procedures set forth in "The
Exchange Offer -- Guaranteed Delivery Procedures."
WITHDRAWAL RIGHTS.......... Tenders may be withdrawn at any time prior to 5:00
p.m., New York City time, on the Expiration Date.
ACCEPTANCE OF NOTES AND
DELIVERY OF NEW NOTES.... The Company will accept for exchange any and all
Old Notes which are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York City
time, on the Expiration Date. The New Notes issued
pursuant to the Exchange Offer will be delivered
promptly following the Expiration Date. See "The
Exchange Offer -- Terms of the Exchange."
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FEDERAL INCOME TAX
CONSEQUENCES............. The exchange pursuant to the Exchange Offer should
not be a taxable event for federal income tax
purposes. See "Certain Federal Income Tax
Consequences."
USE OF PROCEEDS............ There will be no cash proceeds to the Company from
the exchange pursuant to the Exchange Offer.
EXCHANGE AGENT............. United States Trust Company of New York.
THE NEW NOTES
GENERAL.................... The form and terms of the New Notes are the same as
the form and terms of the Old Notes (which they
replace) except that (i) the New Notes bear a
Series B designation, (ii) the New Notes have been
registered under the Securities Act and, therefore,
will not bear legends restricting the transfer
thereof, and (iii) the holders of New Notes will
not be entitled to certain rights under the
Registration Rights Agreement, including the
provisions providing for an increase in the
interest rate on the Old Notes in certain
circumstances relating to the timing of the
Exchange Offer, which rights will terminate when
the Exchange Offer is consummated. See "The
Exchange Offer -- Purpose and Effect of the
Exchange Offer." The New Notes will evidence the
same debt as the Old Notes and will be entitled to
the benefits of the Indenture. See "Description of
Notes." The Old Notes and the New Notes are
referred to herein collectively as the "Notes."
SECURITIES OFFERED......... $100 million aggregate principal amount of 10 5/8%
Series B Senior Subordinated Notes due 2008.
MATURITY DATE.............. June 1, 2008.
INTEREST RATE.............. The New Notes will bear interest at the rate of
10 5/8% per annum, payable semi-annually in arrears
on June 1 and December 1 of each year, commencing
December 1, 1998.
SUBORDINATION.............. The New Notes will be senior subordinated,
unsecured, general obligations of the Company, will
rank subordinate in right of payment to all
existing and future Senior Indebtedness and will
rank senior or pari passu in right of payment to
all existing and future subordinated indebtedness
of the Company. On the Issue Date, the New Notes
will be guaranteed on a senior subordinated basis
pursuant to the Subsidiary Guarantees by the
Guarantors. Each Subsidiary Guarantee will be a
general, unsecured obligation of the Guarantor,
subordinate in right of payment to all Guarantor
Senior Indebtedness of such Guarantor. In addition,
the New Notes will be effectively subordinated to
the Indebtedness of Foreign Subsidiaries (as
defined herein), which, except in limited
circumstances, will not be Guarantors. On the Issue
Date, no Indebtedness of Foreign Subsidiaries will
be outstanding. As of April 4, 1998, on a pro forma
basis after giving effect to the Acquisition
Transactions, the New Notes and the Subsidiary
Guarantees would have been subordinated to $34.9
million of Senior Indebtedness and Guarantor Senior
Indebtedness. See "Risk Factors--Subordination."
OPTIONAL REDEMPTION........ The New Notes will be redeemable at the option of
the Company, in whole or in part, at any time on or
after June 1, 2003, at the redemption prices set
forth herein, plus accrued and unpaid interest, if
any, thereon to the applicable date of redemption.
In addition, at any time prior to June 1, 2001, the
Company may, on any one or more occasions, redeem
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14
up to 35% of the aggregate principal amount of New
Notes originally issued at a redemption price equal
to 110.625% of the principal amount thereof, plus
accrued and unpaid interest, if any, thereon to the
date of redemption with the Net Cash Proceeds
received by the Company from one or more Equity
Offerings. See "Description of Notes."
CHANGE OF CONTROL.......... Upon the occurrence of a Change of Control, each
holder of New Notes will have the right to require
the Company to repurchase all or any part of such
holder's New Notes at an offer price in cash equal
to 101% of the aggregate principal amount thereof,
plus accrued and unpaid interest, if any, thereon
to the date of repurchase. See "Description of
Notes--Repurchase at the Option of Holders--Change
of Control." There can be no assurance that, in the
event of a Change of Control, the Company would
have sufficient funds to repurchase all New Notes
tendered. See "Risk Factors--Possible Inability to
Repurchase New Notes Upon Change of Control."
NOTE GUARANTEES............ The New Notes will be guaranteed on a senior
subordinated basis by all Guarantors of the
Company. The Subsidiary Guarantees will be general
unsecured obligations of the Guarantors,
subordinated in right of payment to all Guarantor
Senior Indebtedness. Unrestricted Subsidiaries (as
defined herein) and, except under certain limited
circumstances, Foreign Subsidiaries will not be
Guarantors.
CERTAIN COVENANTS.......... The Indenture contains certain covenants that
limit, among other things, the ability of the
Company and its Subsidiaries to (i) pay dividends,
redeem capital stock or make certain other
restricted payments or investments; (ii) incur
additional indebtedness or issue certain preferred
equity interests; (iii) merge, consolidate or sell
all or substantially all of its assets; (iv) create
liens on assets and (v) enter into certain
transactions with affiliates or related persons.
See "Description of Notes--Certain Covenants."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered before deciding whether to tender Old Notes for the New Notes offered
hereby.
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SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table sets forth summary consolidated historical and pro
forma financial, operating and other data of the Company and its subsidiaries.
The summary consolidated financial data for each of the fiscal years in the
three-year period ended January 3, 1998 has been derived from the audited
Consolidated Financial Statements of the Company and the related notes thereto
included elsewhere herein. The summary financial data for the fiscal quarters
ended April 4, 1998 and April 5, 1997 have been derived from the Unaudited
Consolidated Financial Statements of the Company and include, in the opinion of
management, all adjustments necessary to present fairly the data for such
periods. The results for the fiscal quarter ended April 4, 1998 are not
necessarily indicative of the results to be expected for the year ending January
2, 1999 or for any future period. The summary consolidated pro forma balance
sheet data give effect to the Acquisition Transactions as if they had occurred
as of April 4, 1998. The data presented below should be read in conjunction with
the Consolidated Financial Statements and the related notes thereto included
elsewhere herein, the other financial information included elsewhere herein and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
FISCAL QUARTER
FISCAL YEAR ENDED
------------------------------ -------------------
APRIL 4, APRIL 5,
1997 1996 1995 1998 1997
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
OPERATING DATA:
Net sales............................................. $72,983 $64,484 $68,118 $19,266 $18,606
Gross profit.......................................... 26,535 20,410 20,412 7,336 6,525
Selling, general and administrative expenses.......... 8,489 8,875 8,667 2,178 2,231
Operating income(a)................................... 16,842 10,081 9,920 4,908 3,844
Interest expense, net................................. 5,148 5,844 6,307 1,010 1,459
Net income (loss)(b).................................. 4,714 2,599 1,130 2,501 (1,316)
OTHER DATA:
Adjusted EBITDA(c).................................... $22,841 $17,523 $16,906 $ 6,149 $ 5,697
Adjusted EBITDA margin(d)............................. 31.3% 27.2% 24.8% 31.9% 30.6%
Capital expenditures.................................. $ 2,558 $ 2,809 $ 3,455 $ 618 $ 416
Depreciation and amortization......................... 4,409 6,019 6,096 1,139 1,337
AS OF APRIL 4, 1998
----------------------
HISTORICAL PRO FORMA
---------- ---------
BALANCE SHEET DATA:
Net working capital(f)............................................................... $18,953 $ 23,131
Net property, plant and equipment.................................................... 16,298 40,815
Total assets......................................................................... 66,394 196,562
Long-term debt (including current portion)........................................... 53,492 134,907
Redeemable common stock.............................................................. 1,366 --
Shareholders' equity (deficit)....................................................... (2,008) 33,185
- ------------------------------
(a) Operating income includes restructuring charges of $0.8 million in 1995
relating to a reduction in the domestic workforce, closure of the Company's
Canadian operation and writedown of certain assets.
(b) Includes a cumulative effect of change in method of accounting for
postretirement benefits of $0.9 million, net of taxes, in fiscal 1995 and
an extraordinary loss on early extinguishment of debt of $2.8 million, net
of taxes, in fiscal 1997 and fiscal quarter ended April 5, 1997.
(c) Adjusted EBITDA, as presented herein, represents operating income plus
depreciation, amortization and items which management believes to be
unusual, including, but not limited to, management and transaction fees
paid to BCC Industrial Services, Inc. ("BCC") and AIP, director's fees,
non-recurring restructuring charges, supplemental bonus compensation,
compensation expense
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for certain eliminated management positions and incremental increases in
obsolete inventory reserves. EBITDA represents operating income plus
depreciation and amortization. The following is a summary of historical
adjustments to operating income:
FISCAL QUARTER
ENDED
FISCAL YEAR ---------------------
--------------------------- APRIL 4, APRIL 5,
1997 1996 1995 1998 1997
------- ------- ------- --------- ---------
(DOLLARS IN THOUSANDS)
Operating income............................................ $16,842 $10,081 $ 9,920 $4,908 $3,844
Depreciation................................................ 3,550 5,118 5,161 924 943
Amortization................................................ 729 729 729 182 182
------- ------- ------- ------ ------
EBITDA.................................................... 21,121 15,928 15,810 6,014 4,969
Unusual items:
Management and transaction fees........................... 475 725 275 68 268
Director's fees........................................... -- -- -- -- --
Non-recurring restructuring charges....................... -- -- 821 -- --
Supplemental bonus compensation........................... 775 870 -- -- 185
Compensation expense for certain eliminated management
positions............................................... 260 -- -- 67 65
Incremental increases in obsolete inventory reserves...... 210 -- -- -- 210
------- ------- ------- ------ ------
Adjusted EBITDA......................................... $22,841 $17,523 $16,906 $6,149 $5,697
======= ======= ======= ====== ======
EBITDA and Adjusted EBITDA are not intended to represent cash flow from
operations as defined by GAAP (as defined herein) and should not be used as
an alternative to net income as an indicator of operating performance or to
cash flows as a measure of liquidity. EBITDA and Adjusted EBITDA are not
defined in the same manner as "Consolidated EBITDA" in the Indenture or in
the "Description of Notes" herein. See "Description of Notes -- Certain
Definitions." EBITDA and Adjusted EBITDA are included herein as it is a
basis upon which the Company assesses its financial performance, and
certain covenants in the Company's borrowing arrangements are tied to
similar measures. EBITDA and Adjusted EBITDA, as presented, represent a
useful measure of assessing the Company's ongoing operating activities
without the impact of financing activities and unusual items. While EBITDA
and Adjusted EBITDA are frequently used as a measure of operations and the
ability to meet debt service requirements, it is not necessarily comparable
to other similarly titled captions of other companies due to potential
inconsistencies in the method of calculation.
(d) Adjusted EBITDA as a percentage of net sales.
(e) Excludes amortization of financing costs.
(f) Net working capital represents (i) current assets excluding cash less (ii)
current liabilities excluding the current portion of long-term debt.
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RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective investors should consider carefully the following factors before
deciding whether to tender their Old Notes for New Notes offered hereby. This
Prospectus, including the "Summary," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and "Business" sections,
contains "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995, which can be identified by the use of
forward-looking terminology, such as "may," "intend," "will," "expect,"
"anticipate," "estimate" or "continue" or the negative thereof or other
variations thereon or comparable terminology. In particular, any statements,
express or implied, concerning future operating results or the ability to
generate revenues, income or cash flow to service the New Notes are
forward-looking statements. The matters set forth below constitute cautionary
statements identifying important factors with respect to such forward-looking
statements, including certain risks and uncertainties, that could cause actual
results to differ materially from those in such forward-looking statements.
FAILURE TO EXCHANGE OLD NOTES
New Notes will be issued in exchange for Old Notes only after timely
receipt by the Exchange Agent of such Old Notes, a properly completed and duly
executed Letter of Transmittal and all other required documentation. Therefore,
holders of Old Notes desiring to tender such Old Notes in exchange for New Notes
should allow sufficient time to ensure timely delivery. Neither the Exchange
Agent nor the Company are under any duty to give notification of defects or
irregularities with respect to tenders of Old Notes for exchange. Old Notes that
are not tendered or are tendered but not accepted will, following consummation
of the Exchange Offer, continue to be subject to the existing restrictions upon
transfer thereof. In addition, any holder of Old Notes who tenders in the
Exchange Offer for the purpose of participating in a distribution of the New
Notes will be required to comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
Each Participating Broker-Dealer that received New Notes for its own account in
exchange for Old Notes, where such Old Notes were acquired by such Participating
Broker-Dealer as a result of market-making activities or any other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. To the extent that Old Notes are tendered and
accepted in the Exchange Offer, the trading market for untendered and tendered
but unaccepted Old Notes could be adversely affected due to the limited amount,
or "float," of the Old Notes that are expected to remain outstanding following
the Exchange Offer. Generally, a lower "float" of a security could result in
less demand to purchase such security and could, therefore, result in lower
prices for such security. For the same reason, to the extent that a large amount
of Old Notes are not tendered or are tendered and not accepted in the Exchange
Offer, the trading market for the New Notes could be adversely affected. See
"Plan of Distribution" and "The Exchange Offer."
SUBSTANTIAL LEVERAGE; LIQUIDITY
The Company has a significant amount of indebtedness. As of April 4, 1998,
on a pro forma basis after giving effect to the Acquisition Transactions, the
Company would have had $134.9 million of indebtedness. In addition, subject to
the restrictions in the New Credit Agreement and the Indenture, the Company may
incur additional senior or other indebtedness from time to time to finance
acquisitions or capital expenditures or for other general corporate purposes.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources," "Description of Notes" and
"Description of New Credit Agreement."
The level of the Company's indebtedness could have important consequences
to the holders of the Notes, 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)
a significant portion of the Company's cash flow from operations must be
dedicated to the payment of principal and interest on its indebtedness, thereby
reducing the funds available to the Company for its operations and future
business opportunities; (iii) 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; (iv) the Indenture and the New
Credit Agreement contain financial and restrictive covenants, the failure to
comply with which may result in an event
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of default which, if not cured or waived, could have a material adverse effect
on the Company; (v) the indebtedness outstanding under the New Credit Agreement
is secured and matures prior to the maturity of the Notes; (vi) the Company may
be substantially more leveraged than certain of its competitors, which may place
the Company at a competitive disadvantage and (vii) 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. See "Description of Notes" and
"Description of New Credit Agreement."
The Company's ability to make scheduled payments or to refinance its debt
obligations will depend upon its future financial and operating performance,
which will be affected by prevailing economic conditions and financial, business
and other factors, certain of which are beyond its control. There can be no
assurance that the Company's operating results, cash flow and capital resources
will be sufficient for payment of its indebtedness in the future. In the absence
of such operating results and capital resources, the Company could face
substantial liquidity problems, may be forced to reduce or delay capital
expenditures, dispose of material assets or operations, reduce, restructure or
refinance its indebtedness or seek additional equity capital to meet its debt
service and other obligations. There can be no assurance that any of these
actions could be effected on satisfactory terms, if at all.
RESTRICTIVE DEBT COVENANTS
The Indenture and the New Credit Agreement contain a number of significant
covenants that, among other things, restrict the ability of the Company and its
subsidiaries to dispose of assets, incur additional indebtedness, prepay other
indebtedness (including the Notes), amend certain debt instruments (including
the Indenture), pay dividends, create liens on assets, enter into sale and
leaseback transactions, make investments, loans or advances, make acquisitions,
engage in mergers or consolidations, make capital expenditures, change the
business conducted by the Company or its subsidiaries, or engage in certain
transactions with affiliates and otherwise restrict certain corporate
activities. In addition, under the New Credit Agreement, the Company is required
to maintain specified financial ratios and tests, including leverage ratio tests
and interest coverage levels. See "Description of Notes" and "Description of New
Credit Agreement."
The Company's ability to comply with such agreements may be affected by
events beyond its control, including prevailing economic, financial and industry
conditions. The breach of any of such covenants or restrictions could result in
a default under the New Credit Agreement and/or the Indenture, which would
permit the senior lenders, or the holders of the Notes, or both, as the case may
be, to declare all amounts borrowed thereunder to be due and payable, together
with accrued and unpaid interest, and the commitments of the senior lenders to
make further extensions of credit under the New Credit Agreement could be
terminated. If the Company were unable to repay its indebtedness to its senior
lenders, such lenders could proceed against the collateral securing such
indebtedness as described under "Description of New Credit Agreement."
SUBORDINATION
The New Notes will be unsecured and subordinated to the prior payment in
full of all Senior Indebtedness of the Company, whether existing upon the
consummation of the Offering or thereafter incurred, including borrowings under
the New Credit Agreement. The New Notes will also be effectively subordinated to
all secured indebtedness of either the Company or any of its subsidiaries to the
extent of the assets securing such indebtedness. The Subsidiary Guarantees are
subordinated to all Guarantor Senior Indebtedness of each Guarantor (which
includes the Guarantors' guarantees under the New Credit Agreement) to the same
extent that the New Notes are subordinated to Senior Indebtedness of the
Company, and the ability to collect under the Subsidiary Guarantees may
therefore be similarly limited. In addition, the Company's Foreign Subsidiaries,
none of which will be Guarantors, are permitted to incur Indebtedness (as
defined herein), subject to certain limitations. The New Notes will be
effectively subordinated in such Indebtedness. As of April 4, 1998, on a pro
forma basis and after giving effect to the Acquisition Transactions, the
aggregate outstanding principal amount of all Senior Indebtedness of the Company
and the Guarantors would have been approximately $34.9 million. By reason of
such subordination, in the event of a bankruptcy, liquidation or
13
19
reorganization of the Company, the assets of the Company and the Guarantors will
be available to pay obligations on the Notes and the Subsidiary Guarantees only
after all such Senior Indebtedness and Guarantor Senior Indebtedness has been
paid in full, and there may not be sufficient assets remaining to pay amounts
due on any or all of the Notes or under the Subsidiary Guarantees. In addition,
the Company may not pay principal or premium, or Liquidated Damages, if any, or
interest on the Notes if any Senior Indebtedness is not paid when due or any
other default on any Senior Indebtedness occurs and the maturity of such Senior
Indebtedness is accelerated in accordance with its terms, unless, in either
case, such amount has been paid in full or the default has been cured or waived
and such acceleration has been rescinded. Moreover, if any default occurs with
respect to certain Senior Indebtedness and certain other conditions are
satisfied, the Company may not make any payments on the Notes for up to 179
days.
POSSIBLE INABILITY TO REPURCHASE NOTES UPON CHANGE OF CONTROL
The New Credit Agreement generally prohibits the Company from purchasing
any of the Notes, including upon the occurrence of a Change of Control, and also
provides that certain change of control events with respect to the Company will
constitute a default thereunder. Any future credit agreements or other
agreements relating to Senior Indebtedness to which the Company becomes a party
may contain similar restrictions and provisions. In the event a Change of
Control occurs at a time when the Company is prohibited from purchasing the
Notes, the Company could seek the consent of its lenders to the purchase of the
Notes or could attempt to refinance the borrowings that contain such
prohibition. If the Company does not obtain such consent or repay such
borrowings, the Company will remain prohibited from purchasing the Notes by the
terms of the relevant Senior Indebtedness. In such case, the Company's failure
to purchase the tendered Notes would constitute an event of default under the
Indenture which would, in turn, constitute a default under the New Credit
Agreement and could constitute a default under other Senior Indebtedness. In
such circumstances, the subordination provisions in the Indenture would likely
restrict payments to the holders of the Notes. Furthermore, no assurance can be
given that the Company will have sufficient resources to satisfy its repurchase
obligation with respect to the Notes following a Change of Control. See
"Description of Notes" and "Description of New Credit Agreement."
FRAUDULENT TRANSFER CONSIDERATIONS
The Company's obligations under the New Notes may be subject to review
under state or federal fraudulent transfer laws in the event of the bankruptcy
or other financial difficulty of the Company.
Under those laws, if a court, in a lawsuit by an unpaid creditor or
representative of creditors of the Company, such as a trustee in bankruptcy or
the Company as a Chapter 11 debtor in possession, were to find that when the
Company issued the New Notes, it (a) received less than fair consideration or
reasonably equivalent value therefor and (b) either (i) was or was rendered
insolvent, (ii) was engaged in a business or transaction for which its remaining
unencumbered assets constituted unreasonably small capital or (iii) intended to
incur or believed (or reasonably should have believed) that it would incur debts
beyond its ability to pay as such debts matured, the court could avoid the Notes
and the Company's obligations thereunder, or subordinate the New Notes to all of
the Company's other obligations, and in either case direct the return of any
amounts paid thereunder to the Company or to a fund for the benefit of its
creditors. It should be noted that a court could avoid the New Notes and the
Company's obligations thereunder without regard to factors (a) and (b) above if
it found that the Company issued the New Notes with actual intent to hinder,
delay, or defraud its creditors.
Similarly, a Subsidiary Guarantee may be subject to review in the event of
the bankruptcy or financial difficulty of any Guarantor. In that event, if a
court found that when a Guarantor issued its guarantee (or, in some
jurisdictions, when it became liable to make payments thereunder), factors (a)
and (b) above applied to the Guarantor (or if the court found that the Guarantor
had issued its guarantee with actual intent to hinder, delay, or defraud its
creditors), then the court could avoid the respective Subsidiary Guarantee and
direct the repayment of any amounts paid thereunder. A court will likely find
that a Guarantor did not receive fair consideration or reasonably equivalent
value for its guarantee to the extent that its liability thereunder exceeds any
direct benefit it received from the issuance of the Notes.
The Indenture limits the liability of each Guarantor under its guarantee to
the maximum amount that it could pay without the guarantee being deemed a
fraudulent transfer. See "Description of Notes." There can
14
20
be no assurance that (if this limitation is effective) the limited amount so
guaranteed will suffice to pay amounts owed under the New Notes in full.
The measure of insolvency for purposes of the foregoing will vary depending
on the law of the jurisdiction being applied. Generally, however, an entity
would be considered insolvent if the sum of its debts (including contingent or
unliquidated debts) is greater than all of its property at a fair valuation or
if the present fair salable value of its assets is less than the amount that
will be required to pay its probable liability on its existing debts as they
become absolute and matured.
LACK OF A PUBLIC MARKET FOR THE NOTES
As of the date hereof, the only registered holder of Old Notes is Cede &
Co., as the nominee of DTC. Prior to the offering of the Old Notes, there had
been no market for the Notes and there can be no assurance that such a market
will develop, or if such market develops, as to the liquidity of such market.
The New Notes will not be listed on any securities exchange, but the Old Notes
are eligible for trading in the PORTAL market. The Initial Purchasers have
advised the Company that they currently intend to make a market in the Notes, as
permitted by applicable laws and regulations; however, the Initial Purchasers
are not obligated to do so and may discontinue such market-making at any time
without notice to the holders of the Notes. In addition, such market-making
activities may be limited during the Exchange Offer and the pendency of the
Shelf Registration Statement. Accordingly, there can be no assurance that a
trading market for the Notes will develop or will provide liquidity to the
holders thereof. Historically, the market for non-investment grade debt has been
subject to disruptions that have caused substantial volatility in the prices of
securities similar to the Notes. There can be no assurance that, if a market for
the Notes were to develop, such a market would not be subject to similar
disruptions. See "The Exchange Offer" and "Plan of Distribution."
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 and the demand
for woven fabric, which may have an effect on the level of the Company's sales.
There is no assurance that the demand for textile products will continue. A
substantial decrease in demand for woven fabric would have a material adverse
effect on the Company's financial condition and operating results.
ASIAN MARKET INSTABILITY
Economies and financial markets in Asia have recently experienced
significant turmoil. Approximately 12% of the Company's 1997 revenues were
derived from sales to Asian customers. The recent turmoil in the Asian financial
markets has not had a material impact on the Company's sales orders. However,
the financial instability in this region may have an adverse impact on the
financial position of customers in the region which could impact future orders
from such customers and/or the ability of such customers to pay the Company. If
the Company's customers in Asia are unable to maintain sales or current margins
on their sales, then the Company's sales and/or sales margins may be adversely
affected.
COMPETITION
The market for textile loom accessories is competitive. One of the
Company's international competitors is larger and has greater financial and
other resources available to it than the Company. There can be no assurance that
the Company's products will continue to compete successfully with the products
of other companies. The Company has a leading market share in the U.S., but the
Company could face additional competition as other established and emerging
companies enter the textile loom accessory market. Increased competition could
result in price reductions, fewer customer orders, reduced gross margins and
loss of market share, any of which could materially adversely affect the
Company's business, financial condition and operating results. The Company faces
substantially greater competition in foreign markets. See "Business--
Competition and Market Share."
15
21
YEAR 2000
The Company uses software that will be affected by the date change in the
year 2000 and recognizes that the arrival of the year 2000 poses challenges that
will require modifications of portions of its software to enable it to function
properly. As the year 2000 approaches, date sensitive systems will recognize the
year 2000 as 1900, or not at all. This may cause systems to process critical
financial and operational information incorrectly. The Company, like may other
companies, is expected to incur expenditures over the next year to address this
issue. The Company has taken various actions to understand the nature and work
required to make its systems year 2000 compliant. The Company continues to
evaluate the estimated costs and has commenced portions of the work required to
achieve compliance. While compliance has and will involve additional costs,
estimated to be $1.0 million in total, the Company believes, based on current
information, it will achieve year 2000 compliance without a material adverse
effect on its operations, cash flows or financial position. The Company's
failure to address successfully year 2000 issues could have a material adverse
effect on the Company's business, financial condition or results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the continued services of its senior management
team. Although the Company believes it could replace key employees in an orderly
fashion should the need arise, the loss of such key personnel could have a
material adverse effect on the Company's financial condition or results of
operations. See "Management--Directors and Executive Officers".
CONTROL OF THE COMPANY BY AIP
Upon consummation of the Acquisition Transactions, the Company became a
wholly-owned subsidiary of SH Group. AIP owns a substantial majority of the
outstanding capital stock of SH Group which allows AIP to elect the directors of
SH Group and indirectly control the Company. AIP is in a position to cause the
Company to enter into transactions that in its judgment could ultimately enhance
shareholder value but involve risks to holders of the Notes. See "Acquisition
Transactions" and "Certain Relationships and Related Transactions."
RISKS RELATED TO POSSIBLE ACQUISITIONS
The Company may, from time to time, seek to expand its operations through
the acquisition of competing or complimentary businesses. There can be no
assurance that the Company will be able to finance, acquire, profitably manage
or successfully integrate into the Company any such business without incurring
substantial expenses (including additional indebtedness), delays or other
operational or financial problems. Further, acquisitions may involve a number of
special risks, including diversion of management's attention, failure to retain
key acquired personnel, increased costs to improve managerial, operational,
financial and administrative systems, legal liabilities, and increased interest
expense and amortization of acquired intangible assets, some or all of which
could materially and adversely affect the Company's business, operating results
and financial condition.
ENVIRONMENTAL MATTERS
The Company's facilities are subject to federal, state and local
environmental requirements, including those governing discharges to the air and
water, the handling and disposal of solid and hazardous wastes, and the
remediation of contamination associated with releases of hazardous substances.
The Company's manufacturing operations involve the use of hazardous substances
and, as is the case with manufacturers in general, if a release of hazardous
substances occurs or has occurred on or from the Company's facilities, the
Company may be held liable and may be required to pay the cost of remedying the
condition. The amount of any such liability could be material. In 1989, the
Company began a groundwater remediation program at the Company's Greenville, SC
facility under the federal Resource Conservation and Recovery Act ("RCRA"). As
required by RCRA, the Company has posted financial assurance in the amount of
$671,000 to ensure funds are available to complete the permit requirements.
Nonetheless, the Company is continuing to investigate certain areas of the
facility. It is possible that, based on the results of such investigation,
additional actions could be required, in which case the costs could materially
increase. See "Business -- Environmental Matters."
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LEGAL PROCEEDINGS
Although the Company may be subject to litigation from time to time in the
ordinary course of its business, it is not a party to any pending or threatened
legal proceedings that it believes will have a material impact on its business.
The risks, costs and uncertainties associated with litigation, include legal
fees and expenses, disruption of executive schedules and focus, the possibility
that the Company may be called upon to satisfy a judgment and the possibility
that the Company will be unable to realize proceeds from any judgment it may
obtain.
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23
ACQUISITION TRANSACTIONS
Pursuant to the Stock Purchase Agreement, SH Group, a corporation formed by
AIP in contemplation of the Acquisition, acquired all of the issued and
outstanding capital stock of Old Holdings from the Sellers, in a purchase
accounting transaction, for an aggregate purchase price (including the repayment
of outstanding indebtedness of the Company, transaction expenses of
approximately $8.6 million and an estimated purchase price adjustment of
approximately $1.1 million) of approximately $175.2 million, subject to
post-closing adjustments. Immediately after the consummation of the Acquisition,
the Mergers were consummated. Immediately after the consummation of the Mergers,
the Company became a direct wholly owned subsidiary of SH Group.
In order to finance the Acquisition and to repay the existing indebtedness
of the Company, (i) AIP and certain members of management contributed the Common
Equity Contribution, (ii) SH Group contributed the proceeds from the issuance
and sale of the Old SH Group Debentures, (iii) the Company (as successor by
merger to Merger Sub) entered into the New Credit Agreement and borrowed all
term loans available and approximately $4.9 million of revolving loans, (iv) the
Company (as successor by merger to Merger Sub) issued and sold $100.0 million
aggregate principal amount of Old Notes and (v) the Company loaned approximately
$66.0 million of the net proceeds from the issuance and sale of the Old Notes
and the New Credit Agreement to SH Group pursuant to the Intercompany Note to
pay part of the purchase price of the Acquisition. Shortly after the
consummation of the Acquisition, the Company forgave the Intercompany Note.
The Stock Purchase Agreement contains provisions customary for transactions
of this size and type, including representations and warranties with respect to
the condition and operations of the business, covenants with respect to the
conduct of the business prior to the consummation of the Acquisition and the
receipt of all material consents and approvals. The Stock Purchase Agreement
provides that, subject to certain time and dollar limitations, the Sellers shall
indemnify the Company and SH Group for liabilities arising from inaccuracies of
representations and warranties and breaches of covenants or agreements contained
in the Stock Purchase Agreement. With respect to certain matters relating to
environmental liabilities, see "Business--Environmental Matters."
AIP is a private investment fund based in San Francisco and New York which,
together with its affiliates, has committed capital of approximately $800
million. AIP does not seek to play a role in daily management; rather, AIP seeks
to provide its portfolio companies with access to the management expertise of
its operating partners, all of whom are former Chief Executive Officers of
Fortune 500 corporations, through active board-level participation as well as
on-call advice when desired. Following consummation of the Acquisition, Robert
Purdum, an operating partner of AIP and former Chairman of Armco, Inc., became
the Company's Non-Executive Chairman of the Board.
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USE OF PROCEEDS
USE OF PROCEEDS OF THE NEW NOTES
The Exchange Offer is intended to satisfy certain obligations of the
Company under the Registration Rights Agreement. The Company will not receive
any proceeds from the issuance of the New Notes offered hereby. In consideration
for issuing the New Notes as contemplated in this Prospectus, the Company will
receive, in exchange, Old Notes in like principal amount. The form and terms of
the New Notes are substantially identical in all material respects to the form
and terms of the Old Notes, except as otherwise described herein under "The
Exchange Offer -- Terms of the Exchange." The Old Notes surrendered in exchange
for the New Notes will be retired and canceled and cannot be reissued.
Accordingly, issuance of the New Notes will not result in any increase in the
outstanding indebtedness of the Company
USE OF PROCEEDS OF THE OLD NOTES
The gross proceeds from the sale of the Old Notes, estimated to be $100.0
million, together with the borrowings under the New Credit Agreement, the Common
Equity Contribution and the proceeds from the issuance and sale of Old SH Group
Debentures were used to finance the Acquisition Transactions and to pay related
fees and expenses and certain expenses of the Sellers (including discounts and
commissions and estimated expenses of the Offering). See "Acquisition
Transactions."
The following table sets forth the estimated sources and uses of funds as
if the Acquisition Transactions, including the application of the proceeds
therefrom, occurred and were completed on April 4, 1998:
(DOLLARS IN THOUSANDS)
Total Sources:
Existing cash............................................. $ 260
Borrowings under New Credit Agreement(a).................. 34,907
Old Notes................................................. 100,000
Old SH Group Debentures................................... 15,016
Common Equity Contribution(b)............................. 25,000
--------
Total Sources......................................... $175,183
========
Total Uses:
Purchase Price of Acquisition(c).......................... $165,451
Estimated purchase price adjustment(d).................... 1,130
Estimated transaction fees and expenses................... 8,602
--------
Total Uses............................................ $175,183
========
- ------------------------------
(a) The New Credit Agreement provides for a $30 million Term Loan Facility (as
defined herein) and a $20 million Revolving Credit Facility (as defined
herein). All available amounts under the Term Loan Facility and
approximately $4.9 million under the Revolving Credit Facility were drawn at
closing. The Revolving Credit Facility is expected to be used to finance
working capital and capital expenditures. See "Description of New Credit
Agreement."
(b) Includes the value of management's rollover interest of approximately $1.7
million.
(c) Estimate of amounts payable to the Sellers under the Stock Purchase
Agreement and approximately $53.5 million used to repay outstanding
indebtedness of the Company.
(d) Based upon preliminary findings of net working capital, as defined, at May
25, 1998.
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CAPITALIZATION
The following table sets forth the unaudited consolidated capitalization of
the Company as of April 4, 1998 and as adjusted to give effect to the
consummation of the Acquisition Transactions, including the sale of the Old
Notes, as of such date. The following table should be read in conjunction with
the "Unaudited Pro Forma Condensed Consolidated Financial Data" and the related
notes thereto included elsewhere herein and the "Selected Consolidated
Historical Financial Data" and the related notes thereto included elsewhere
herein.
AS OF APRIL 4, 1998
-------------------------
ACTUAL AS ADJUSTED
------- -----------
(DOLLARS IN THOUSANDS)
Cash and short-term cash investments........................ $ 276 $ 16
======= ========
Debt:
Existing credit facility.................................. $53,492 $ --
New Revolving Credit Facility(a).......................... -- 4,907
New Term Loan Facility.................................... -- 30,000
Old Notes................................................. -- 100,000
------- --------
Total debt............................................. 53,492 134,907
Redeemable common stock..................................... 1,366 --
Shareholders' equity (deficit).............................. (2,008) 33,185
------- --------
Total capitalization................................... $52,850 $168,092
======= ========
- ------------------------------
(a) The Revolving Credit Facility provides for up to $20 million of borrowing
availability, $4.9 million of which was drawn at closing. See "Description
of New Credit Agreement."
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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The following Unaudited Pro Forma Condensed Consolidated Financial Data
have been derived by the application of pro forma adjustments to the Company's
historical financial data included elsewhere herein. The pro forma consolidated
statements of operations for the periods presented give effect to the
Acquisition Transactions as if such Acquisition Transactions were consummated as
of the beginning of each of the periods presented. The pro forma consolidated
balance sheet gives effect to the Acquisition Transactions as if such
Acquisition Transactions had occurred as of April 4, 1998. The adjustments are
described in the accompanying notes and reflect a preliminary allocation of the
purchase price. The Unaudited Pro Forma Condensed Consolidated Financial Data do
not purport to represent what the Company's results of operations or financial
position actually would have been if the Acquisition Transactions had been
consummated on the date indicated, or what such results will be as of any future
date or for any future period. The Unaudited Pro Forma Condensed Consolidated
Financial Data should be read in conjunction with the "Selected Consolidated
Historical Financial Data" and the related notes thereto included elsewhere
herein.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEAR ENDED JANUARY 3, 1998
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(DOLLARS IN THOUSANDS)
Net sales................................................. $72,983 -- $ 72,983
Cost of goods sold........................................ 46,448 $ 2,479(a) 48,927
------- -------- --------
Gross profit......................................... 26,535 (2,479) 24,056
Selling, general and administrative expenses(b)........... 8,489 150(c) 8,639
Management fees........................................... 475 420(d) 895
Amortization of goodwill.................................. 729 1,894(e) 2,623
------- -------- --------
Operating income..................................... 16,842 (4,943) 11,899
Other income (expense):
Interest income......................................... 136 -- 136
Interest expense........................................ (5,284) (9,004)(f) (14,288)
Other financing expense................................. (212) -- (212)
------- -------- --------
Income (loss) before income taxes and extraordinary
item............................................... 11,482 (13,947) (2,465)
Income tax expense (benefit).............................. 4,015 (3,955)(g) 60
------- -------- --------
Income (loss) before extraordinary item.............. $ 7,467 $ (9,992) $ (2,525)
======= ======== ========
Adjusted EBITDA(h)........................................ $22,841 $ -- $ 22,841
======= ======== ========
Net cash flow provided by operating activities............ $ 9,960 $ -- $ 9,960
======= ======== ========
See accompanying notes to the unaudited pro forma statements of operations and
"Selected Consolidated Historical Financial Data."
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27
FISCAL QUARTER ENDED APRIL 4, 1998
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(DOLLARS IN THOUSANDS)
Net sales.................................................. $19,266 -- $19,266
Cost of goods sold......................................... 11,930 $ 584 (a) 12,514
------- ------- -------
Gross profit.......................................... 7,336 (584) 6,752
Selling, general and administrative expenses(b)............ 2,178 38 (c) 2,216
Management fees............................................ 68 156 (d) 224
Amortization of goodwill................................... 182 474 (e) 656
------- ------- -------
Operating income...................................... 4,908 (1,252) 3,656
Other income (expense):
Interest income.......................................... 17 -- 17
Interest expense......................................... (1,027) (2,479)(f) (3,506)
Other financing expense.................................. (50) -- (50)
------- ------- -------
Income (loss) before income taxes..................... 3,848 (3,731) 117
Income tax expense (benefit)............................... 1,347 (1,053)(g) 294
------- ------- -------
Net income (loss)..................................... $ 2,501 $(2,678) $ (177)
======= ======= =======
Adjusted EBITDA(h)......................................... $ 6,149 $ -- $ 6,149
======= ======= =======
Net cash flow used in operating activities................. $ (258) $ -- $ (258)
======= ======= =======
See accompanying notes to the unaudited pro forma statements of operations and
"Selected Consolidated Historical Financial Data."
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NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
(a) The following table summarizes the pro forma adjustments to cost of
goods sold:
FISCAL YEAR FISCAL QUARTER
ENDED ENDED
JANUARY 3, 1998 APRIL 4, 1998
--------------- --------------
(DOLLARS IN THOUSANDS)
Pro forma depreciation for property, plant and equipment
(estimated useful lives ranging from six to thirty
years)................................................... $ 5,071 $1,268
Pro forma amortization for identifiable intangible assets
(estimated useful lives of thirteen years)............... 959 240
Less: Historical depreciation expense...................... (3,551) (924)
------- ------
$ 2,479 $ 584
======= ======
(b) The pro forma financial statements do not include non-recurring
charges of approximately $3.6 million of fees associated with
identifying a buyer, $3.8 million of bonuses to management and $1.1
million of fees associated with bridge financing.
(c) Represents director's fees.
(d) Represents the difference between the new subordinated management fee
and the historical management fee.
(e) Represents the estimated increase in amortization expense on
assignment of purchase price to goodwill which is amortized over forty
years.
(f) The following table reflects the pro forma adjustments to interest
expense:
FISCAL YEAR FISCAL QUARTER
ENDED ENDED
JANUARY 3, 1998 APRIL 4, 1998
--------------- --------------
(DOLLARS IN THOUSANDS)
Old Notes and New Credit Agreement at rates ranging from
8.0% to 10.625%.......................................... $13,668 $ 3,354
Amortization of debt issuance costs........................ 620 152
Less: Historical interest expense.......................... (5,284) (1,027)
------- -------
Total............................................ $ 9,004 $ 2,479
======= =======
(g) Reflects the adjustment to income tax expense to arrive at pro forma
income tax expense (benefit) equal to pro forma pre-tax income (loss)
plus non-deductible goodwill expense multiplied by the effective rate
of 38%.
(h) Adjusted EBITDA, as presented herein, represents operating income plus
depreciation, amortization and items which management believes to be
unusual, including, but not limited to, management and transaction
fees paid to BCC and AIP, director's fees, non-recurring restructuring
charges, supplemental bonus compensation, compensation expense for
certain eliminated management positions and incremental increases in
obsolete inventory reserves. EBITDA represents operating income plus
depreciation and amortization. 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 are not defined in the same manner as
"Consolidated EBITDA" in the Indenture or in the "Description of
Notes" herein. See "Description of Notes -- Certain Definitions."
EBITDA and Adjusted EBITDA are included in the Prospectus as it is a
basis upon which the Company assesses its financial performance, and
certain covenants in the Company's borrowing arrangements are tied to
similar measures. 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.
23
29
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF APRIL 4, 1998
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents........................ $ 276 $ (260)(b) $ 16
Accounts receivable, net......................... 11,115 -- 11,115
Inventories...................................... 15,071 4,512(a) 19,583
Prepaid expenses and other assets................ 50 -- 50
------- -------- --------
Total current assets........................ 26,512 4,252 30,764
Property, plant and equipment, net.................... 16,298 24,517(a) 40,815
Intangible and other assets, net...................... 22,355 99,398(a) 121,753
Other................................................. 1,229 2,001(a) 3,230
------- -------- --------
Total assets................................ $66,394 $130,168 $196,562
======= ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................. $ 2,194 $ -- $ 2,194
Accrued liabilities.............................. 3,130 281(a) 3,411
Current maturities of long-term debt............. 6,500 (5,500)(b) 1,000
Income taxes payable............................. 1,289 -- 1,289
Deferred income taxes............................ 670 53(a) 723
------- -------- --------
Total current liabilities........................ 13,783 (5,166) 8,617
Long-term debt, excluding current maturities.......... 46,992 86,915(b) 133,907
Deferred taxes........................................ 1,120 14,592(a) 15,712
Other noncurrent liabilities.......................... 5,141 -- 5,141
------- -------- --------
Total liabilities................................ 67,036 96,341 163,377
Redeemable common stock............................... 1,366 (1,366)(d) --
Total shareholders' equity (deficit).................. (2,008) 35,193(c) 33,185
------- -------- --------
Total liabilities and shareholders' equity
(deficit)...................................... $66,394 $130,168 $196,562
======= ======== ========
See accompanying notes to the unaudited pro forma balance sheet.
24
30
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(a) The acquisition will be accounted for as a purchase, applying the
provisions of Accounting Principles Board Opinion No. ("APB") 16. The purchase
cost will be allocated to the acquired assets and liabilities based on their
relative fair values at the closing date, based on valuations and other studies
which are not yet complete. Furthermore, the aggregate purchase price is subject
to adjustment as set forth in the Stock Purchase Agreement. Accordingly, the
excess of the purchase cost over the book value of the net assets acquired has
not yet been allocated to individual assets and liabilities. The Company does
not expect the final allocation to differ significantly from amounts reflected
in the pro forma presentation.
The purchase cost and preliminary allocation of the excess of cost over the
net book value of assets acquired is as follows (dollars in thousands):
Purchase cost pursuant to the Stock Purchase Agreement:
Enterprise value..................................... $164,150
Add: Compensation tax benefit........................ 1,301
Add: Estimated purchase price adjustment............. 1,130
Less: Existing indebtedness to be repaid............. (53,492)
Less: Unpaid seller's expenses....................... (7,457)
Less: Value of management's rollover securities...... (1,655)
--------
Purchase of stock of Old Holdings...................... 103,977
Transaction fees and expenses.......................... 8,602
--------
Total purchase cost.................................... 112,579
Book value of redeemable common stock................ 1,366
Book value of net assets acquired (deficit).......... (2,008)
--------
Excess of purchase price over the net book value of
assets acquired..................................... $113,221
========
Allocated to:
Increase in value of property, plant and equipment... $ 24,517
Increase in value of inventory....................... 4,512
Increase in pension cost to the projected benefit
obligation.......................................... 2,001
Increase in value of identifiable intangible
assets.............................................. 11,983
Elimination of existing goodwill..................... (22,355)
Liabilities assumed for unpaid seller's expenses..... (7,457)
Increase in environmental liability accrual.......... (281)
Adjustment of deferred taxes for step-up in asset
bases............................................... (15,063)
Deferred debt issuance costs......................... 5,200
Bridge loan financing costs.......................... 1,100
Adjustment to equity for carryover stockholder
basis............................................... 4,494
Remaining excess purchase cost over the net book
value of assets acquired............................ 104,570
--------
Total allocation....................................... $113,221
========
25
31
Adjustments to intangibles include:
Excess of purchase cost over the net book value of
assets acquired..................................... $104,570
Adjustment to increase value of identifiable
intangible assets................................... 11,983
Deferred debt issuance costs......................... 5,200
Less: Goodwill written off........................... (22,355)
--------
$ 99,398
========
Adjustments to deferred income taxes:
Adjustment of deferred taxes for step-up in asset
bases............................................... $(15,063)
Tax effect of bridge loan financing costs............ 418
--------
Total............................................. (14,645)
Current liability.................................... (53)
--------
Noncurrent liability................................. $(14,592)
========
b) The net effect on cash and cash equivalents reflects the
following:
TOTAL SOURCES:
Existing cash.......................................... $ 260
New Credit Agreement proceeds.......................... 34,907
Old Notes.............................................. 100,000
Common Equity Contribution............................. 23,345
SH Group Debentures.................................... 15,016
--------
$173,528
========
TOTAL USES:
Total assets acquired.................................. $103,977
Payment of seller's expenses........................... 7,457
Repayment of existing debt............................. 53,492
Estimated transaction fees and expenses................ 8,602
--------
$173,528
========
c) Represents the net change in stockholders' equity as a
result of the Acquisition Transactions:
Equity contribution.................................... $ 38,361
Adjustment to equity for carryover stockholder basis... (4,494)
Write-off of bridge loan financing expenses, net of
income tax............................................ (682)
--------
Pro forma stockholders' equity......................... 33,185
Book value of net assets acquired (deficit)............ (2,008)
--------
Pro forma adjustments to stockholders' equity.......... $ 35,193
========
d) Represents elimination of redeemable common stock sold
in the transaction.
26
32
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
The following table sets forth selected consolidated historical financial,
operating, other and balance sheet data of the Company for each of the fiscal
years in the five-year period ended January 3, 1998, derived from the audited
Consolidated Financial Statements of the Company and the related notes thereto
included elsewhere herein. The selected consolidated financial data for the
fiscal quarters ended April 4, 1998 and April 5, 1997 have been derived from the
Unaudited Consolidated Financial Statements of the Company, and include, in the
opinion of management, all adjustments necessary to present fairly the data for
such periods. The results for the fiscal quarter ended April 4, 1998 are not
necessarily indicative of the results to be expected for the fiscal year 1998 or
for any future period. The data presented below should be read in conjunction
with the Consolidated Financial Statements and the related notes thereto
included elsewhere herein, the unaudited condensed consolidated financial
statements and notes thereto, the other financial information included elsewhere
herein and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
FISCAL QUARTER
ENDED
FISCAL YEAR -------------------
------------------------------------------------- APRIL 4, APRIL 5,
1997 1996 1995 1994 1993 1998 1997
-------- ------- ------- -------- ------- -------- --------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Net sales...................................... $ 72,983 $64,484 $68,118 $ 68,302 $67,115 $19,266 $18,606
Cost of goods sold............................. 46,448 44,074 47,706 47,996 46,389 11,930 12,081
-------- ------- ------- -------- ------- ------- -------
Gross profit................................. 26,535 20,410 20,412 20,306 20,726 7,336 6,525
Selling, general and administrative expenses... 8,489 8,875 8,667 8,198 7,712 2,178 2,231
Management fees................................ 475 725 275 275 275 68 268
Amortization of goodwill....................... 729 729 729 936 943 182 182
Restructuring charges(a)....................... -- -- 821 -- -- -- --
-------- ------- ------- -------- ------- ------- -------
Operating income............................. 16,842 10,081 9,920 10,897 11,796 4,908 3,844
Interest expense, net.......................... (5,148) (5,844) (6,307) (7,061) (6,672) (1,010) (1,459)
Other financing expense........................ (212) -- -- -- (112) (50) (175)
-------- ------- ------- -------- ------- ------- -------
Income before taxes, extraordinary item and
cumulative effect of change in
accounting................................. 11,482 4,237 3,613 3,836 5,012 3,848 2,210
Income tax expense............................. 4,015 1,638 1,628 1,788 1,916 1,347 773
-------- ------- ------- -------- ------- ------- -------
Income before extraordinary item and
cumulative effect of change in
accounting................................. 7,467 2,599 1,985 2,048 3,096 2,501 1,437
Extraordinary item(b).......................... (2,753) -- -- -- -- -- (2,753)
Effect of change in accounting(c).............. -- -- 855 -- -- -- --
-------- ------- ------- -------- ------- ------- -------
Net income (loss)............................ $ 4,714 $ 2,599 $ 1,130 $ 2,048 $ 3,096 $ 2,501 $(1,316)
======== ======= ======= ======== ======= ======= =======
OPERATING AND OTHER DATA:
Net cash provided by (used in) operating
activities................................... $ 9,960 $11,236 $ 7,612 $ 9,623 $10,857 $ (258) $(1,345)
Net cash provided by (used in) investing
activities................................... (2,529) (2,767) (3,357) (2,784) (3,174) (537) (416)
Net cash provided by (used in) financing
activities................................... (11,697) (4,700) (5,000) (10,262) (7,341) 692 (2,537)
Adjusted EBITDA(d)............................. 22,841 17,523 16,906 16,825 17,512 6,149 5,697
Adjusted EBITDA margin(e)...................... 31.3% 27.2% 24.8% 24.6% 26.1% 31.9% 30.6%
Depreciation and amortization.................. $ 4,409 $ 6,019 $ 6,096 $ 5,859 $ 5,728 $ 1,139 $ 1,337
Capital expenditures........................... 2,558 2,809 3,455 2,839 3,200 618 416
Ratio of earnings to fixed charges(f).......... 3.2x 1.7x 1.6x 1.5x 1.7x 4.7x 2.5x
BALANCE SHEET DATA (AT PERIOD END):
Net working capital(g)......................... $ 14,968 $10,235 $11,169 $ 13,401 $15,530 $18,953 $17,046
Net property, plant and equipment.............. 16,685 17,756 20,106 21,911 24,050 16,298 17,229
Total assets................................... 64,340 68,716 68,771 71,890 79,072 66,394 64,909
Long-term debt (including current portion)..... 52,800 50,000 52,700 59,700 70,000 53,492 61,875
Redeemable common stock........................ 1,366 1,350 1,350 1,350 1,316 1,366 1,366
Shareholders' equity (deficit)................. (4,523) (1,309) (3,911) (5,025) (7,042) (2,008) (10,654)
- ------------------------------
(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.
27
33
(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) Adjusted EBITDA, as presented herein, represents operating income plus
depreciation, amortization and items which management believes to be
unusual, including, but not limited to, management and transaction fees paid
to BCC and AIP, non-recurring restructuring charges, supplemental bonus
compensation, compensation expense for certain eliminated management
positions and incremental increases in obsolete inventory reserves. EBITDA
represents operating income plus depreciation and amortization. The
following is a summary of historical adjustments to operating income:
FISCAL QUARTER
ENDED
FISCAL YEAR ---------------------
---------------------------------------------------- APRIL 4, APRIL 5,
1997 1996 1995 1994 1993 1998 1997
-------- -------- -------- -------- -------- --------- ---------
(DOLLARS IN THOUSANDS)
Operating income................................. $16,842 $10,081 $ 9,920 $10,897 $11,796 $4,908 $3,844
Depreciation..................................... 3,550 5,118 5,161 4,924 4,785 924 943
Amortization..................................... 729 729 729 729 656 182 182
------- ------- ------- ------- ------- ------ ------
EBITDA......................................... 21,121 15,928 15,810 16,550 17,237 6,014 4,969
Unusual items:
Management and transaction fees................ 475 725 275 275 275 68 268
Non-recurring restructuring charges............ -- -- 821 -- -- -- --
Supplemental bonus compensation................ 775 870 -- -- -- -- 185
Compensation expense for certain eliminated
management positions......................... 260 -- -- -- -- 67 65
Incremental increases in obsolete inventory
reserves..................................... 210 -- -- -- -- -- 210
------- ------- ------- ------- ------- ------ ------
Adjusted EBITDA.............................. $22,841 $17,523 $16,906 $16,825 $17,512 $6,149 $5,697
======= ======= ======= ======= ======= ====== ======
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 are not defined in the
same manner as "Consolidated EBITDA" in the Indenture or in the
"Description of Notes" herein. See "Description of Notes -- Certain
Definitions." EBITDA and Adjusted EBITDA are included in this Prospectus as
it is a basis upon which the Company assesses its financial performance,
and certain covenants in the Company's borrowing arrangements are tied to
similar measures. 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) Adjusted EBITDA as a percentage of net sales.
(f) For purposes of this computation, fixed charges consist of interest expense
and amortization of deferred financing fees. Earnings consist of income
before income taxes, extraordinary item and cumulative effect of changes in
accounting principles, plus fixed charges. Pro forma fixed charges exceeded
pro forma earnings by $2.5 million for the year ended January 3, 1998. The
ratio of earnings to fixed charges for the quarter ended April 4, 1998 was
1.0x.
(g) Net working capital represents (i) current assets excluding cash less (ii)
current liabilities excluding the current portion of long-term debt.
28
34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Historical Financial Data" and the Consolidated Financial
Statements and the related notes thereto included elsewhere herein.
GENERAL
The Company, founded in 1898, is one of the world's leading manufacturers
of precision textile loom accessories. The Company manufactures and markets
virtually all of the replaceable wear parts necessary to operate a commercial
weaving loom including heddles, dropwires, harness frames, reeds and shuttles
and bobbins. In addition to textile loom accessories, the Company also
manufactures precision rolled, heat treated, bare, ferrous and nonferrous and
tinned flat wire used in the electronics, automotive, solar power and other
industries. The Company has achieved adjusted EBITDA margins exceeding 24% in
each of the last ten years. For the 52-week period ended April 4, 1998, the
Company had net sales, adjusted EBITDA and operating income of $73.6 million,
$23.3 million and $17.9 million, respectively.
In November 1995, after a comprehensive review of the business, the Company
initiated a cost reduction plan which was completed in December 1996. As part of
the cost reduction plan, the Company eliminated 120 full-time positions from its
work force including 36 direct labor positions and 84 indirect and
administrative positions. The Company's headcount reduction has not resulted in
any unforeseen effects on operations, and the Company has not found it necessary
to replace any of the eliminated positions. In addition, the Company also
undertook other cost savings initiatives in its manufacturing and administrative
functions, including aggressively renegotiating certain raw material supply
contracts, reconfiguring manufacturing space, outsourcing certain manufacturing
functions and modifying certain employee benefit programs. The Company's
financial results for fiscal 1997 represent the first full fiscal year to
benefit from this cost-reduction plan. Primarily as a result of these cost
savings initiatives, gross profit margins increased to 36.4% in fiscal 1997 from
31.7% in fiscal 1996 and 30.0% in 1995. In addition, selling, general and
administrative expenses ("SG&A") as a percentage of net sales decreased to 11.6%
in fiscal 1997 from 13.8% in fiscal 1996 and 12.7% in 1995.
In 1996, output of woven fabrics in the United States declined to 15.8
billion square yards, compared to an average annual output of 16.3 billion
square yards for the prior four years. This textile industry recession, which
began in 1995, was caused primarily by record high cotton prices as a result of
flooding and pest problems in the key cotton producing nations of India,
Pakistan and China. Consequently, many textile mills attempted to reduce non-raw
material costs by delaying the purchase of new weaving looms and loom
accessories. Despite such industry-related pressure on sales, as a result of the
Company's cost reductions program and related initiatives, the Company improved
its gross margin and operating income in fiscal 1996.
As weaving technology has evolved, and faster, more efficient, air-jet and
water-jet looms replace older, slower shuttle and bobbin looms, the demand for
shuttles and bobbins has decreased while demand for accessories of newer
technology looms has increased. The Company expects this trend to continue as
shuttle looms continue to be replaced. Commensurate with this decrease, the
Company expects net sales of shuttle and bobbins to decrease while net sales
related to newer technologies take their place. Net sales, excluding shuttle and
bobbin sales, have increased since fiscal 1993 from $61.0 million to $70.4
million while net sales of shuttles and bobbins during the same period decreased
from $6.1 million in fiscal 1993 to $2.6 million. Shuttles and bobbins
contributed $0.1 million to gross profit in fiscal 1997.
BASIS OF PRESENTATION
The Company's fiscal year ended January 3, 1998 was 53 weeks in duration
compared to 52 weeks for the fiscal year ended December 28, 1996. As a result,
the Company's results from operations for the fiscal year ended January 3, 1998
will include an additional week of financial results.
29
35
The following table summarizes the Company's historical results of
operations (in millions of dollars) and as a percentage of net sales for the
fiscal years 1997, 1996 and 1995 and the fiscal quarters ended April 4, 1998 and
April 5, 1997:
FISCAL YEAR
---------------------------------------------------------------
1997 1996 1995
------------------- ------------------- -------------------
Net sales...................... $73.0 100.0% $64.5 100.0% $68.1 100.0%
Cost of goods sold............. 46.4 63.6 44.1 68.3 47.7 70.0
Gross profit................... 26.5 36.4 20.4 31.7 20.4 30.0
SG&A........................... 8.5 11.6 8.9 13.8 8.7 12.7
Operating income............... 16.8 23.1 10.1 15.6 9.9 14.6
Net income (loss).............. 4.7 6.4 2.6 4.0 1.1 1.6
Adjusted EBITDA................ 22.8 31.3 17.5 27.2 16.9 24.8
FISCAL QUARTER ENDED
-----------------------------------------
APRIL 4, 1998 APRIL 5, 1997
------------------- -------------------
Net sales...................... $19.3 100.0% $18.6 100.0%
Cost of goods sold............. 11.9 61.9 12.1 64.9
Gross profit................... 7.3 38.1 6.5 35.1
SG&A........................... 2.2 11.3 2.2 12.0
Operating income............... 4.9 25.5 3.8 20.7
Net income (loss).............. 2.5 13.0 (1.3) (7.0)
Adjusted EBITDA................ 6.1 31.9 5.7 30.6
The costs of goods sold as a percentage of net sales partially decreased in
fiscal 1997 as compared to earlier years because certain fixed assets were fully
depreciated.
COMPARISON OF RESULTS OF OPERATIONS
FISCAL QUARTER ENDED APRIL 4, 1998 COMPARED TO FISCAL QUARTER ENDED APRIL 5,
1997
Net Sales. Net sales increased to $19.3 million for the first quarter of
1998 from $18.6 million for the first quarter of 1997, an increase of 3.5%. This
increase is primarily attributable to increased sales of rolled products which
increased 23% to $2.7 million. Due primarily to a decline in international sales
caused by the economic and monetary crisis in Asia, textile product sales were
flat at $16.2 million. The decline in international textile sales was offset by
an increase of $0.4 million in domestic sales.
Gross Profit. Gross profit increased to $7.3 million during the first
quarter of 1998 from $6.5 million in first quarter of 1997, an increase of
12.4%. As a percentage of net sales, gross profit margin increased to 38.1% from
35.1%. The increase in both gross profit and gross profit margin as a percentage
of sales is due primarily to the increase in sales of domestic textile products
and rolled products (both generally carrying higher margins than products sold
internationally), as well as cost savings derived from improved purchasing of
raw materials used in the production of rolled products.
Selling, General and Administrative Expenses. SG&A remained flat at $2.2
million for the first quarter of 1998 and 1997. As a percentage of net sales,
SG&A decreased to 11.3% from 12.0%. This decrease was due primarily to lower
executive bonuses of approximately $0.4 million, partially offset by increases
associated with the Company's year 2000 computer project, which is expected to
increase SG&A for 1998 by approximately $0.3 million.
Operating Income. Operating income increased to $4.9 million for the first
quarter of 1998 from $3.8 million in the first quarter of 1997, an increase of
27.7%. This increase in operating income resulted from the increase in net sales
and gross profit. As a percentage of net sales, operating income increased to
25.5% from 20.7%.
Net Income. Net income increased to $2.5 million for the quarter ended
April 4, 1998 from a net loss of $1.3 million for the prior year comparable
quarter. The increase in net income is attributable to the factors noted above.
Adjusted EBITDA. Adjusted EBITDA increased to $6.1 million in the first
quarter of 1998 from $5.7 million in the first quarter of 1997, an increase of
7.9%.
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
30
36
growth in net sales of loom accessories was partially offset by a 6.4% decrease
in shuttle sales as older-technology shuttle-type looms continued to be phased
out. Further contributing to the Company's strong growth in net sales, sales of
rolled products increased to $9.0 million in 1997 from $7.4 million in 1996, an
increase of 21.9%.
Gross Profit. Gross profit increased to $26.5 million in 1997 from $20.4
million in 1996, an increase of 30.0%. As a percentage of net sales, the
Company's gross profit margin increased to 36.4% from 31.7%. The increase in
both gross profit and gross profit margin was due primarily to the
implementation of the cost reduction plan which was implemented between August
1995 and December 1996 and efficiency gains resulting from increased unit
production. In addition, gross profit margin increased as a result of the
Company's shift in product mix towards more customized, higher margin loom
accessories and the reduction of depreciation expense associated with certain
assets which became fully depreciated in 1996.
Selling, General and Administrative Expenses. SG&A decreased from $8.9
million for 1996 to $8.5 million for 1997. As a percentage of net sales, SG&A
decreased to 11.6% from 13.8%. The improvement in SG&A as a percentage of net
sales primarily stems from the implementation of the Company's cost reduction
plan.
Operating Income. Operating income increased to $16.8 million in 1997 from
$10.1 million in 1996, an increase of 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 80.8%. The increase is a result of the items noted
above.
Adjusted EBITDA. Adjusted EBITDA increased to $22.8 million in 1997 from
$17.5 million in 1996, an increase of 30.3%.
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
Net Sales. Net sales decreased to $64.5 million in 1996 from $68.1 million
in 1995, a decrease of 5.3%. The decrease in net sales of loom accessories can
be attributed largely to the difficulties of the textile industry which began in
1995 and continued through 1996. Net sales of heddles declined 3.2%, frame sales
declined by approximately 9.2% although frame export sales increased due
primarily to an increase in higher-priced, higher-margin section frame sales.
Reed sales increased by 2.4% due to slight increases in both units and prices,
primarily attributable to a 8.0% increase in tunnel reed sales. Shuttle sales
declined as older-technology shuttle-type looms continued to be phased out.
Rolled product sales decreased to $7.4 in 1996 from $8.4 in 1995, a decline of
11.9% due primarily to two key customers decreasing inventory levels.
Gross Profit. Gross profit was flat at $20.4 million in 1995 and 1996. As a
percentage of net sales, gross profit increased to 31.7% from 30.0%. The
increase in gross profit margin was due primarily to the initiation of the
Company's cost-reduction plan in August 1995, which eliminated overhead and
direct labor positions and established tight controls over manufacturing costs.
The gross margin increases achieved through the cost-reduction plan were
partially offset by a decrease in heddle export prices.
Selling, General and Administrative Expenses. SG&A increased to $8.9
million in 1996 from $8.7 million in 1995, an increase of 2.4%. As a percentage
of net sales, SG&A increased to 13.8% from 12.7%. This increase is related to
performance bonuses paid during the year of approximately $1.3 million. No such
bonuses were paid in 1995. Excluding these bonuses, SG&A in 1996 would have been
$7.6 million, a decrease of $1.1 million, due primarily to the Company's cost
reduction plan.
Operating Income. Operating income increased to $10.1 million in 1996 from
$9.9 million in 1995, an increase of 1.6%. Included in 1995 operating income was
a one-time restructuring charge of $0.8 million related to a reduction of the
U.S. workforce, closure of the Company's Canadian operation and writedown of
certain assets. In addition, management fees paid to BCC increased to $0.7
million in 1996 from $0.3 million in 1995. Excluding the effects of these
charges, operating income decreased to $10.8 million in 1996 from $11.0 million
in 1995, a decrease of $0.2 million or 1.9%.
31
37
Net Income. Net income increased to $2.6 million in 1996 from $1.1 million
in 1995, an increase of $1.5 million. The increase is attributable to the
factors noted above.
Adjusted EBITDA. Adjusted EBITDA increased to $17.5 million in 1996 from
$16.9 million in 1995, an increase of 3.6%.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically generated sufficient internal cash flow from
operations to fund its operations, capital expenditures and working capital
requirements. Cash used in operating activities for the three months ended April
4, 1998 decreased to $0.3 million from $1.3 million for the three months ended
April 5, 1997. The decrease was primarily due to the improvement in net income
and reduction in working capital, partially offset by the extraordinary loss
incurred upon the early extinguishment of debt. Cash provided by operating
activities for the fiscal year ended January 3, 1998 decreased to $10.0 million
from $11.2 million for the fiscal year ended December 28, 1996. The decrease was
primarily due to an increase in working capital requirements, as the Company
increased its inventory levels due to the higher sales volume in 1997 and
reduced its accounts payable and accrued expense balances. The increase in
working capital requirements were partially offset by the increase in the
Company's net income.
Capital expenditures were $3.5 million, $2.8 million and $2.6 million in
1995, 1996 and 1997, respectively. These amounts primarily reflect cash outlays
for maintaining and upgrading the Company's manufacturing plant and equipment.
Management estimates that the Company will continue to spend, approximately $3.0
million annually to maintain and upgrade its plant and equipment.
In January 1997, the Company undertook a recapitalization led by Butler
Capital Corporation. In connection with this recapitalization, the Company
entered into a $67.5 million credit facility consisting of a $52.5 million term
loan and a $15.0 million revolving credit facility (the "Existing Credit
Facility"). Proceeds from the Existing Credit Facility were used to refinance
existing indebtedness of $55.7 million (including a prepayment penalty of $5.7
million) and pay shareholders a $7.9 million dividend.
Following the Acquisition, the Company's principal sources of liquidity
will be cash flow from operations supplemented by borrowings under the Revolving
Credit Facility.
In connection with the Acquisition, the Company issued Old Notes for $100.0
million in gross proceeds and entered into the Term Loan Facility and the
Revolving Credit Facility under the New Credit Agreement. The Revolving Credit
Facility provides revolving loans in an aggregate amount of up to $20.0 million
(including letters of credit). Upon closing of the Acquisition Transactions, the
Company borrowed $30.0 million available under the Term Loan Facility and
approximately $4.9 million under the Revolving Credit Facility. Proceeds to the
Company from the issuance of the Old Notes and from initial borrowings under the
New Credit Agreement were distributed to SH Group to finance, in part, the
Acquisition and the fees and expenses in connection therewith and the repayment
of outstanding indebtedness of the Company under the Existing Credit Facility.
To provide additional financing to fund the Acquisition, SH Group raised $25.0
million through an equity contribution by AIP and its related investors,
including certain members of management and an additional $15.0 million through
the offering of the Old SH Group Debentures.
Borrowings under the New Credit Agreement bear interest at a rate per annum
equal (at the Company's option) to a margin over either a base rate or LIBOR.
The Term Loan Facility and Revolving Credit Facility mature in six years. The
Company's obligations under the New Credit Agreement are guaranteed by each of
the Company's direct and indirect domestic subsidiaries. The New Credit
Agreement and the guarantees thereof are secured by a perfected first priority
security interest in substantially all assets of SH Group and its direct and
indirect domestic subsidiaries and, to the extent no adverse tax consequences
would result, foreign subsidiaries.
The New Credit Agreement contains a number of covenants that, among other
things, restrict the ability of SH Group, the Company and its subsidiaries to
dispose of assets, incur additional indebtedness, prepay other indebtedness or
amend certain debt instruments, pay dividends, create liens on assets, enter
into sale and leaseback transactions, make investments, loans or advances, make
acquisitions, engage in mergers or
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consolidations, make capital expenditures, change the business conducted by the
Company or its subsidiaries or engage in certain transactions with affiliates
and otherwise restrict certain corporate activities. In addition, under the New
Credit Agreement, the Company is required to maintain specified financial ratio
tests, including leverage ratios below a specified maximum and minimum interest
coverage levels. See "Risk Factors -- Restrictive Debt Covenants" and
"Description of New Credit Agreement."
Management believes that, upon completion of the Acquisition Transactions,
cash flow from operations and availability under the Revolving Credit Facility
will provide adequate funds for the Company's foreseeable working capital needs,
planned capital expenditures and debt service obligations. 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. See "Risk Factors."
YEAR 2000 MATTERS
Steel Heddle initiated the process of preparing its computer systems and
applications for the year 2000 in 1997. This process involves 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. Management expects to have
substantially all of the systems and applications changes completed by mid-year
1999 and believes that its level of preparedness is appropriate.
The Company will utilize both internal and external resources to reprogram
or replace, and test the software for year 2000 modifications. The Company
anticipates completing the year 2000 project by mid-year 1999, which is prior to
any anticipated impact on its operating systems. The cost of the year 2000
project is estimated at $1.0 million and is being funded through operating cash
flows. Of the total project cost, approximately $0.4 million is attributable to
the purchase of new software and hardware and will be capitalized. The remaining
$0.6 million, which is being expensed as incurred, is not expected to have a
material effect on the results of operations.
The Company has initiated communications with all of its significant
suppliers and large customers to determine the extent to which the Company's
interface systems are vulnerable to those third parties' failures to remediate
their own year 2000 issue.
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.
ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information." Additionally, in
February 1998, the FASB issued SFAS No. 132 "Employer's Disclosures about
Pensions and Other Postretirement Benefits." Each of these standards is
effective in 1998 but affects only the display and disclosure of financial
information in the Company's financial statements.
SFAS No. 130 requires comprehensive income to be displayed in a financial
statement with the same prominence as net income.
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SFAS No. 131 requires entities to disclose financial and detailed
information about its operating segments in a manner consistent with internal
reporting used by the Company to allocate resources and assess financial
performance. The Company has not completed the analyses required to determine
such segment disclosures or additional disclosure requirements, if any, arising
from the adoption of SFAS No. 131. The Company will adopt this statement
retroactively during the fiscal year ending January 2, 1999.
SFAS No. 132 standardizes the disclosures for pensions and other
postretirement liabilities, requires additional information on changes in the
benefit obligations and fair values of plan assets and eliminates certain other
disclosures.
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BUSINESS
THE COMPANY
The Company, founded in 1898, is one of the world's leading manufacturers
of precision textile loom accessories. The Company designs, manufactures and
markets virtually all of the replaceable wear parts necessary to operate a
commercial weaving loom, including heddles, dropwires, harness frames, reeds and
shuttles and bobbins, which are used to hold or guide individual yarns during
the weaving process. Textile loom accessories are highly engineered and often
customized products which require a high degree of precision to ensure a uniform
weave and to achieve desired fabric patterns while being able to withstand the
stresses of modern, high-speed weaving looms. While technology and performance
specifications vary, all commercial weaving looms require these accessories.
Because loom manufacturers do not produce these accessories, all woven fabric
producers must purchase textile loom accessories from third-party suppliers. In
addition to textile loom accessories, the Company manufactures precision rolled,
heat treated, bare and tinned flat wire used in the electronics, automotive,
solar power and other industries.
The Company has achieved adjusted EBITDA margins exceeding 24% in each of
the last ten years. Beginning in 1995 and continuing through 1996, the Company
implemented a profitability enhancing, cost-reduction program. This program
contributed to an increase in adjusted EBITDA margin to 31.3% in 1997. For the
52-week period ended April 4, 1998, the Company had net sales, adjusted EBITDA
and operating income of $73.6 million, $23.3 million and $17.9 million,
respectively.
Steel Heddle is a critical supplier to virtually all North American textile
weaving mills, including such companies as WestPoint Stevens, Inc., Milliken &
Co. and Burlington Industries, Inc., many of which have been customers for
decades. In North America, management estimates that the Company holds
substantial market shares in all of its major product lines and estimates that
it supplies over 80% of the market for heddles, dropwires and harness frames,
over 50% of reeds and over 90% of the market for shuttles and bobbins. Although
international markets such as Europe and Asia have different competitive
dynamics than the North American market, the Company also has a strong presence
in many international markets in which it perceives the opportunity for
profitable growth. International sales accounted for approximately 22% of the
Company's net sales in 1997.
Textile loom accessories have represented a steady source of revenue and
cash flow because these parts require frequent replacement due to wear and
changes in production runs. Approximately 75% of the Company's net sales were
derived from the sale of replacement parts in 1997. The Company estimates that
more than 90% of all looms installed in North America are delivered
"unaccessorized," with the accessories being designed and supplied by a
third-party supplier such as Steel Heddle. Once the Company has outfitted new
looms with its accessories it has generally been able to continue to supply
replacement parts for the life of the loom. The Company believes it has achieved
its leading position in the industry primarily because of its willingness and
ability to work closely with its customers, both before and after the
installation of new looms, to design the appropriate accessories to meet
specific manufacturing needs and then continue to meet those needs on an ongoing
basis.
In addition to its textile loom accessories business, the Company converts
round rod to flat wire through a rolling process which results in a flat wire
with a round edge. Originally developed to satisfy in-house heddle manufacturing
needs, the Company recognized that its ability to produce these products to
extremely tight tolerances could be tailored to meet similar needs in other
industries and began to pursue outside sales. Because these rolled products are
custom-made for specific applications, they have historically commanded
attractive margins. The Company's rolled products can be found in a variety of
other industries, including electronics, automotive and solar power. Among the
end-use applications for the Company's products are notebook computers, cellular
telephones, electronic control devices and automotive applications such as
control mechanisms for air bags, turn signals and cruise controls. Major
customers include Kemet Corporation, Parlex Corporation, AMP Incorporated and
Siemens Corporation. Rolled products generated approximately $9.0 million in net
sales in 1997.
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COMPETITIVE STRENGTHS
The Company's objective is to maintain and enhance its competitive position
as the foremost supplier of loom accessories in the U.S. while broadening its
presence in international markets. The Company intends to achieve its objectives
by capitalizing on the following competitive strengths:
Leading Market Position. The Company is a critical supplier to virtually
all North American textile weaving mills, with leading market shares across all
of its product lines in North America. The Company is the sole domestic
manufacturer of heddles, dropwires, harness frames, shuttles and bobbins, with
estimated market share in North America in each category of over 80%, and over
90% market share in shuttles and bobbins. Steel Heddle is also the largest
domestic manufacturer of reeds, with an estimated 50% market share in North
America. In addition, the Company has a strong presence in those international
markets in which it sees profitable growth opportunities.
Cost-efficient Manufacturing. The Company is the only vertically-integrated
producer of loom accessories in the world. 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.
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 OEMs to help them select the appropriate accessories and resolve design or
engineering issues. The Company's customer base is diversified, with no one
customer representing more than 6.6% of net sales. Sales to top ten customers
represented approximately 31.2% of the Company's net sales in 1997.
Strong Brand Name. The Company's brand name enjoys significant worldwide
recognition in the textile industry as a result of its 100-year history. Since
it introduced flat steel heddles to U.S. weaving mills in 1898, the Company has
manufactured high-quality loom accessories. Because of its longevity, product
innovation, high-quality reputation, strong service orientation and broad
product line, the Company has built and maintained its significant market share
in the North American market and has built a strong presence internationally.
LOOM ACCESSORY INDUSTRY OVERVIEW
The textile industry is comprised of several subsectors: (i) apparel
production (consisting primarily of "cut and sew" business), (ii) synthetic and
natural yarn production, (iii) knitted fabric and (iv) woven fabric production.
Woven fabric production is the focus of the Company's customers. The end users
of weaving looms and weaving loom accessories are textile mills which utilize
looms to produce woven fabric. The U.S. weaving market is estimated at
approximately $19.5 billion and accounted for approximately 16.4 billion square
yards of fabric in 1997. This output has remained relatively stable since 1986,
varying between 15.2 and 16.6 billion square yards annually.
The U.S. textile industry, after having undergone significant restructuring
during the 1980s and early 1990s, has emerged as one of the most
capital-intensive, modern and efficient producers in the world. Annual capital
expenditures by woven fabric mills, while subject to fluctuations in the demand
for woven fabric, have risen in the 1990s, from approximately $550 million in
1991 to approximately $850 million in 1996. In order to maintain their
competitive position in the world markets, U.S. textile mills are expected to
continue to invest heavily in faster, newer generations of loom technology. With
modern equipment and increased automation,
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labor cost differentials are not a significant factor in the competitiveness of
U.S. producers. In addition, the advantages of producing in the U.S., one of the
world's largest end-markets, have increased with manufacturers' demands for
rapid response times and retailers' desire to reduce inventories.
The U.S. installed textile loom base has shifted away from older-technology
shuttle looms towards faster, shuttleless looms such as air-jet and water-jet
looms. This trend benefits the Company in two ways. Higher weaving speeds lead
to faster wear of loom accessories, driving an increase in unit demand for
replacement parts. In addition, faster looms require a higher degree of
precision and performance from accessories, increasing the dollar value of
accessories sold per loom and the demand for the higher-priced, quality
accessories for which Steel Heddle is known.
TEXTILE LOOM TECHNOLOGY
Weaving is the process of forming a fabric by interlacing, at right angles,
two or more sets of yarn or other material. The first step in weaving is to
install the longitudinal yarns, called the warp. The pick, or filling yarn,
crosses the warp, to create fabric. After the installation of the warp, there
are three essential steps: (i) shedding -- raising every alternative warp yarn
or set of yarns to receive the pick, (ii) picking -- inserting the filling and
(iii) beating up -- pressing home the pick to make the fabric compact.
Fabric is woven on a loom. The fundamental accessories of a loom include:
(i) heddles, each with an eye through which is drawn a warp thread; (ii) the
harness frame, a rectangular frame set with a series of heddles operated to form
a shed between the warp threads for insertion of pick threads; (iii) the reed, a
comb-like frame that pushes the filling yarn firmly against the finished cloth
after each pick and (iv) the shuttle, a boat-shaped bobbin holder that carries
the pick through the shed. Modern looms are "shuttleless;" the pick is carried
through the shed by a stream of air ("air jet") or water ("water jet") or other
gripper device, permitting faster speeds of production. Steel Heddle
manufactures heddles, reeds, harness frames, and shuttles and bobbins.
Older technology involves the use of a shuttle to move the yarn through the
shed, known as a "shuttle loom." Since the late 1970s, shuttle looms have
steadily been replaced with faster shuttleless looms. Shuttleless looms can be
classified into four types: (i) air jet, (ii) water jet, (iii) rapier and (iv)
projectile. Loom technology is continually evolving--early shuttleless looms
installed in the 1980s are being replaced with even faster, more user-friendly
shuttleless looms. Faster looms require a high degree of precision and
performance from installed accessories. Higher loom speeds lead to faster wear
of loom accessories, increasing the demand for replacement parts. Accessories
sold as replacements generally carry higher margins as compared to accessories
sold with new looms.
TEXTILE LOOM ACCESSORIES
Textile loom accessories are highly engineered products, requiring
precision manufacturing to ensure a uniform weave and to achieve the desired
fabric patterns. In addition, given the high speeds at which shuttleless looms
operate, the parts must be extremely smooth to avoid snags or breakages in the
yarn. Any unintended variance in a reed, heddle or frame can result in broken or
damaged yarn, unusable cloth, or wasted weaving time.
The loom accessory market is driven by four primary factors: (i) faster
loom speeds; (ii) flexible production requirements; (iii) new loom purchases;
and (iv) weaving mill utilization rates.
The North American Loom Accessory Market. In North America, more than 90%
of looms are purchased by mills from OEMs without accessories. No loom maker
produces accessories. The Company believes that several factors deter OEMs from
manufacturing accessories. Among these are: (i) limited possibilities for growth
or economies of scale because OEMs are reluctant to buy accessories produced by
their competitors; (ii) the focus of OEMs on original equipment/capital goods
markets rather than the after-market/replacement business; (iii) worldwide
competition among accessory manufacturers resulting in stable 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
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addition, the Company believes that U.S. textile mills prefer the flexibility to
select accessories that are engineered to meet their individual needs. Textile
mills base purchases of loom accessories on (a) product performance, (b) service
and technical support provided by the accessory manufacturer, (c) long-term
business relationships and (d) price. In addition, a local manufacturing
presence providing timely response is important to textile manufacturers.
The Global Market for Loom Accessories. The global loom accessory market is
divided into four major regional markets: North America, Europe, Asia, and Latin
America. Asia is, by far, the largest market for textile loom accessories. Of
textile loom accessories, generally only heddles are sold internationally.
Harness frames, reeds and shuttles and bobbins are produced and sold within
regional markets and competition tends to be among smaller local companies.
However, the Company does pursue, on an opportunistic basis, sales of all of its
loom accessories into the international loom accessory market.
PRODUCTS
The Company's core business strategy is to manufacture a full range of
technically advanced textile loom accessories capable of fulfilling its
customers' varying weaving requirements. The Company manufactures the broadest
range of loom accessories in the textile industry, providing the Company with a
distinct competitive advantage. The accessories that are essential to the
successful operation of a loom include heddles, dropwires, harness frames and
reeds. Each of these accessories has differing demand and replacement dynamics.
HEDDLES AND DROPWIRES
Steel Heddle manufactures a full range of high-quality heddles and
dropwires for all types of looms. Heddles and dropwires are precision-made to
perform within tight parameters. Stamped from flat-rolled steel and polished to
be extremely smooth, heddles and dropwires require exacting manufacturing
specifications, thorough quality control and expert metal-working capabilities.
All of the Company's heddles and dropwires are produced to precise tolerances of
two-thousandths to three-thousandths of an inch. The Company estimates that
50-60% of heddles and dropwires are made to order, and approximately 75% of net
sales of heddles and dropwires are derived from replacement sales. Both products
are generally shipped within one to three days of order if from stock and four
to six weeks if custom manufactured. In 1997, heddles and dropwires formed the
largest single product line at Steel Heddle, accounting for approximately 37.9%
of net sales, with export sales accounting for approximately 41.0% of such net
sales.
HEDDLES
Heddles are flat, specially designed stamped parts that guide and hold
individual yarn during the high-speed weaving process. Steel Heddle produces a
wide variety of heddle types, each designed to meet specific performance
parameters. The Company's heddles accommodate a vast range of customer
specifications. All of the Company's heddles are available in two material
types: stainless steel and plated carbon steel. In 1997, heddles accounted for
approximately 84% of total heddle and dropwire net sales.
DROPWIRES
Dropwires are precision-made plated-carbon steel or stainless steel stamped
parts which detect broken yarns and trigger a loom to shut down, minimizing
energy and yarn used in the production of imperfect cloth. The Company's
dropwires are precision manufactured from similar flat rolled steel as is used
to manufacture heddles and are held to the same exacting tolerances. The Company
believes the use of its tempered steel dropwires contributes to the production
of superior cloth, increased machine running time and lower operating costs. In
1997, dropwires accounted for approximately 17% of total heddle and dropwire net
sales.
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
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upon the complexity of the final woven fabric. Harness frames raise and lower
the heddles, creating the woven fabric pattern. As modern, high-performance
looms operate at 650 to 1,000 picks per minute (two to four times faster than
older technology), harness frames must be precision engineered in order to
withstand the tremendous stress caused by continuous acceleration and
deceleration without buckling or bending. Approximately 90% of harness frames
are made to order, and approximately 65% of net sales of harness frames are
derived from replacement sales.
The Company manufactures the following four types of harness frames: high
speed jet frames; standard aluminum frames; projectile frames; and section
frames. In addition, the Company manufactures supporting hardware and components
and offers frame repair and frame reconditioning services. In 1997, harness
frames accounted for approximately 20.6% of Steel Heddle's total net sales, with
export sales accounting for approximately 17% of such net sales.
REEDS
Reeds are precision-manufactured, comb-like devices used to evenly space
yarns on the loom. One reed per loom is mounted on the loom's drive mechanism
which moves the reed forward to beat up, or press, the pick into the finished
fabric. Each reed is composed of a series of dents. Dents are specially designed
flat wire spacers and are assembled in a reed to yield a particular fabric
pattern or style. Reed production requires exacting manufacturing processes as
absolutely smooth, straight and precisely spaced dents are critical to the
production of quality woven fabric. In 1997, reeds accounted for approximately
24.6% of Steel Heddle's net sales, with only 4.0% derived from export sales of
domestically produced reeds.
While the demand for most loom accessories is driven by the purchase of new
looms or replacement of worn accessories, reed purchases are primarily driven by
style changes. Reeds must be replaced each time a loom is used to weave a new
fabric pattern. Thus, reeds are rarely used for their entire useful life. To
remain competitive, the Company's customers must react quickly to fabric style
changes and as a result, frequently purchase new reeds. For reeds, the Company
fulfills its customers' exacting demands for product performance and rapid
delivery through its three U.S.-based reed manufacturing facilities located in
the primary U.S. woven-textile producing regions of Virginia/North Carolina,
South Carolina, and Georgia/Alabama.
The Company custom manufactures reeds for use in all types of looms. The
Company produces two types of reeds: profile and flat. The Company's profile
reeds are required in air-jet weaving looms and are manufactured using precision
engineering. In addition to close tolerance assembly, these reeds require
precision stamped and polished profile dents and specific air management
settings. As a result, profile reeds are sold at prices that are four to six
times higher than prices of flat reeds. Profile reeds currently account for
approximately 60% of net sales of reeds, but the Company expects demand to
increase for these reeds as weaving mills continue to purchase the more
technically advanced air jet looms. In comparison, the Company's flat reeds are
comprised of flat dents (i.e., without profiles or contours) and are used
primarily on shuttle, projectile, rapier and water jet weaving looms. Flat reeds
accounted for approximately 33% of net sales of reeds in 1997. In addition to
the Company's profile and flat reeds, the Company produces warp preparation
products, which are used for preparing the warp prior to the weaving process.
Warp preparation products consist of expansion combs, slasher combs, comb
panels, fan reeds, hock reeds and lease rods. Warp preparation products
accounted for approximately 10% of net sales of reeds in 1997.
SHUTTLES AND BOBBINS
Shuttles, used in older, slower looms, are specially fabricated from
composite materials to carry "pick" or "filling" yarns across the loom as the
main yarn or "warp" yarn is pulled through the reed. Bobbins are cylindrical
wooden yarn carriers held by the shuttle. Shuttles and bobbins account for 80%
of the net sales in the product line, with the remaining 20% derived from the
sale of tension products. Most of the Company's shuttles and bobbins are
consumed domestically, but approximately 18% are exported primarily to South
America. Steel Heddle is the sole supplier of automatic shuttles and bobbins to
textile mills in the United States. All shuttles and bobbins sales are
replacement sales. Shuttles and bobbins accounted for 3.5% of the Company's net
sales in 1997.
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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. With
no commodity-oriented or standard inventory production, the Company's rolled
products are custom-produced for specific applications, generating attractive
gross margins to the Company. Excluding internal consumption, in 1997 the
Company sold approximately 1.7 million pounds to customers in the electronics,
automotive and solar power industries and in a variety of other industries in
which tight tolerances and smooth edges are required. The Company's rolled
products can be found in a variety of end-use products, including notebook
computers, cellular phones, electronic control devices, automotive applications
such as control mechanisms for air bags, turn signals and cruise controls. The
Company's major customers include Kemet Corporation, Paralex Corporation, AMP
Incorporated and Siemens Corporation. In 1997, outside rolled product sales
accounted for approximately 12.2% of the Company's net sales.
All rolled products are custom-manufactured for specific applications and
can be grouped into three broad categories: flat rolled steel, copper wire and
aluminum wire. The Company manufactures flat rolled steel wire which is used for
specialty applications such as garment stays, orthopaedic braces and saw blades.
Flat rolled steel wire is also used internally in the production of heddles and
dropwires. The Company manufactures tinned and bare copper flat wire for use in
a variety of applications including capacitor leads and laminated cable in which
smooth wire edges are necessary to prevent the cutting of layers which cause
short circuits. The Company also manufactures flat wire which is used as wire
connectors and conductors in electronic products and tin-coated copper wire used
in solar cells. In addition, the Company rolls aluminum flat wire for use in a
variety of applications, including capacitor leads and carrier bars for
capacitor manufacturing.
COMPETITION AND MARKET SHARE
Over the past ten years, the U.S. woven textile industry has consolidated
and invested in modern loom technology. Today, loom accessories are highly
engineered products that require sophisticated manufacturing techniques. Steel
Heddle's capabilities in producing a broad range of accessories, its reputation
for quality and service and its long-term customer relationships, provide it
with an important competitive advantage. None of Steel Heddle's domestic
competition has its breadth of products, established relationships or ability to
customize its products to its customers' needs.
North American Competition and Market Share. Steel Heddle is the leading
supplier of loom accessories in the North American market. The Company estimates
that its market share in North America exceeds 80% for all major product lines
other than reeds. In heddles, dropwires, and harness frames, Grob & Co. AG
("Grob"), holding an estimated 13% market share, 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 50% market share of the reed market and that
its nearest competitor, Palmetto Loom Reed, Inc. ("Palmetto"), has a market
share of approximately 30%. Palmetto is a privately-held, family-run business
based in Greenville, South Carolina. There are only two other reed manufacturers
in the U.S. which split the remaining 20% of the market. Reed sales are affected
by timeliness of delivery,
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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. With an estimated 30% global
market share (excluding the United States), Steel Heddle is the number two
producer of heddles and dropwires worldwide. The Company's only significant
competitor, Grob, has an estimated 45% global market share. The Company
differentiates itself from Grob by its ability to service all weaving accessory
requirements and its technical expertise that it uses to solve its customers'
weaving problems. Management also believes that Grob incurs higher production
costs than the Company. The Company believes it is poised to capture additional
worldwide market share from Grob as customers seek better service and technical
support.
Steel Heddle has been building relationships with OEMs (which are more
important internationally than domestically), foreign textile mills and trading
companies over the last several years as part of its international strategy.
Management expects its international market share to grow over time. Steel
Heddle's international strategy is focused on (i) building long-term
relationships, (ii) customer service and technical support and (iii) providing
superior quality. In addition, the Company continues to strengthen its
international sales agent networks. The Company believes that as it strengthens
its relationships with its international customers and becomes a critical
partner in their success, as it has done in the U.S., its international sales
will increase.
MANUFACTURING
Steel Heddle is headquartered in Greenville, South Carolina and conducts
its primary operations through a manufacturing facility located adjacent to the
Company's headquarters. In addition, rolled products are manufactured in Oconee
County, South Carolina, and reeds are manufactured in North Carolina, Georgia
and Mexico. Below is a summary of the Company's existing facilities:
SQUARE
LOCATION FUNCTION FOOTAGE OWNED/LEASED
-------- -------- ------- ------------
Greenville, S.C. Corporate offices; Heddle, Frame, Reed, Shuttle
and Bobbin Manufacturing..................... 474,036 Owned
Oconee County, SC Rolled Products Manufacturing.................. 123,312 Owned
Greensboro, NC Reed Manufacturing............................. 12,000 Owned
Meriwether County, GA Reed Manufacturing............................. 18,000 Owned
Mexico City, Mexico Reed Manufacturing............................. 6,000 Leased
The Company believes that its manufacturing operations are among the most
efficient in the textile loom accessory industry. Most of the machinery used by
the Company has been specifically designed and/or manufactured by the Company
and most of its products are made-to-order.
Heddles. Heddles are precision stamped from flat rolled, heat treated, high
carbon or stainless steel. Each heddle passes through eight to ten stamping
stations before being cut to length. Precision stamping tools are manufactured
in-house to support this stamping operation. Close dimensional control is
assured by computer-controlled optical measuring equipment. Thorough polishing
of each stamped area assures smooth yarn contact edges. Electroplating of nickel
or zinc on carbon steel or passivation of stainless steel provides the proper
resistance to corrosion.
Frames. Frames are assemblies of high strength aluminum alloy extrusions,
high carbon or stainless steel heddle carrying rods and precision machined loom
connection devices. Highly engineered material selection, along with precision
machining and assembly provide for frames suitable to withstand extreme stresses
associated with today's high speed looms.
Reeds. Profile reeds are assembled from individual dents that are held in
place by precision spacing wires and specially formulated thermoplastic
adhesive. The top and bottom edges of the reed are encased in steel or
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aluminum channel or bands. Proper air management specifications are then set
according to required weaving parameters. The individual dents are stamped from
precision wide strip steel then deburred and polished to achieve suitable yarn
contact surfaces. Flat reeds are similar assemblies, except straight dents are
cut from coils of wire and used in place of profile dents.
Rolled Products. Rolled products are produced by rolling round cross
section materials of copper, aluminum, carbon steel or stainless steel to flat
wire. As required, rolled materials then undergo heat treatment for annealing or
hardening. In addition, the copper products may be tin coated. A variety of
precision wound packages are tailored to customer requirements.
SALES, MARKETING AND CUSTOMERS
The Company markets its loom accessories through a 14-person sales force,
eight of whom are located in the United States and six of whom are located
abroad. In North America, sales are made directly to woven textile mills, the
end-users of the Company's loom accessories. In international markets, the
majority of sales are also made to end-users primarily through a network of (i)
ten agents located in Asia, (ii) seven agents located in Europe and Turkey and
(iii) 28 agents located throughout the rest of the world. Sales are also made to
OEMs, primarily manufacturers of textile machinery that also package accessories
with their new looms. Steel Heddle also cooperates with large Japanese trading
companies that are active in the weaving machinery business. Rolled products are
sold through a dedicated sales force of two people who also manage four
independent sales representatives.
The Company has long-term relationships with its customers, many of which
extend beyond 50 years. Steel Heddle's consistent quality, broad product line,
technical support and customer service orientation continue to underpin its
relationships. The Company's customer base is diversified, with no one customer
representing more than 6.6% of net sales. Sales to top ten customers represents
approximately 31.2% of total net sales.
RAW MATERIALS
Aluminum extrusions, aluminum and copper rod and wire, and stainless and
carbon steel in rod, round wire and flat wire form are the primary raw materials
used by the Company. All raw materials are readily available from multiple
sources. The Company does not experience much volatility in its raw materials
prices. Steel Heddle has well-established long-term relationships with each of
its raw material suppliers.
INTELLECTUAL PROPERTY
The Company has numerous trademarks and patents effective in the United
States and several trademarks effective in several foreign countries for varying
lengths of time. Company trademarks include "SH(R)", "Duralite(R)", "Draw-O(R)",
and "Jet Eye(R)" under which it markets certain weaving accessory products. The
Company also has a number of applications for trademarks pending in the United
States and abroad. Management considers its various trademarks, trademark
applications and patents to be valuable assets but believes that the loss of any
one trademark or patent would not have a material adverse effect on the
Company's operations.
EMPLOYEES AND EMPLOYEES RELATIONS
As of April 4, 1998, the Company employed approximately 626 employees in
the United States and approximately 17 employees outside the United States. None
of the Company's hourly employees are covered by collective bargaining
agreements. The Company believes its employee and labor relationships are good.
LEGAL PROCEEDINGS
From time to time, the Company is involved in various legal proceedings
arising in the ordinary course of business. Management believes that none of
these matters in which the Company is currently involved, either individually or
in the aggregate, are expected to have a material adverse effect on the
Company's business or financial condition. See "--Environmental Matters."
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ENVIRONMENTAL MATTERS
The Company is subject to federal, state and local environmental
requirements, including those governing discharges to the air and water, the
handling and disposal of solid and hazardous wastes, and the remediation of
contamination associated with releases of hazardous substances. Based on a
review conducted by independent environmental consultants in connection with the
Acquisition, the Company believes that it is currently in substantial compliance
with environmental requirements, except as would not be expected to have a
material adverse effect on the Company. Nevertheless, the Company's
manufacturing operations involve the use of hazardous substances and, as is the
case with manufacturers in general, if a release of hazardous substances occurs
or has occurred on or from the Company's facilities, the Company may be held
liable and may be required to pay the cost of remedying the condition. The
amount of any such liability could be material.
The Company has made, and will continue to make, expenditures to comply
with current and future environmental requirements. The Company does not
anticipate material capital expenditures for environmental controls in the
current or succeeding fiscal year. However, because environmental requirements
are becoming increasingly stringent, the Company's expenditures for
environmental compliance or clean up may increase in the future.
In 1987, the United States Environmental Protection Agency certified the
closure of three former wastewater lagoons at the Company's Greenville, SC
facility under RCRA. In 1989, the Company began a groundwater remediation
program at the facility in accordance with RCRA requirements. In 1996, the
Company received a post-closure care permit for the former lagoons. This permit
requires post-closure care for the former lagoons, continued groundwater
remediation, and investigation of certain areas of the facility. As required by
RCRA, the Company has posted financial assurance in the amount of $671,000 to
ensure funds are available to complete the permit requirements. Nonetheless, the
Company is continuing to investigate certain areas of the facility. It is
possible that, based on the results of such investigation, additional actions
could be required, in which case the costs could materially increase.
The Company is involved as a potentially responsible party ("PRP") under
the Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA") with regard to past waste disposal at the Aqua Tech Superfund site in
Greer, SC. Some risk of similar environmental liability is inherent in the
nature of the Company's current and former operations. While strict joint and
several liability is authorized under CERCLA, cleanup costs are usually
allocated among the PRPs. The Company has paid its share of past cleanup costs
for the site. Because the amount of future cleanup costs at the site is not yet
known, the Company cannot predict with certainty the amount of its share of
these future costs. However, based on its allocated share of past cleanup costs,
the Company does not expect its share of future costs to be material.
In connection with the Acquisition, Sellers have indemnified the Company,
subject to time and dollar limitations, for breaches of certain representations
and warranties pertaining to environmental matters. There can be no assurance,
however, that Sellers will have the ability to indemnify the Company if called
upon to do so. The Sellers also agreed to clean up a past release of mineral
spirits at the Company's Oconee County, SC facility. To pay for this clean up,
$350,000 of the purchase price has been placed in an escrow account. The
Sellers' cleanup obligation is limited to the escrow amount. Based on a
preliminary investigation of the area, the Company believes it is unlikely that
the clean up will exceed the escrow amount.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name, age as of April 4, 1998 and
position with the Company of each person who is expected to serve as director or
executive officer of the Company following the Acquisition Transactions.
NAME AGE POSITION
---- --- --------
Benjamin G. Team............................ 57 President, Chief Executive Officer and Director
Robert W. Dillon............................ 50 Executive Vice President and Director
Jerry B. Miller............................. 51 Vice President--Finance and Secretary
J. Brant Conner............................. 53 General Sales Manager
Thomas A. Korbutt........................... 55 Vice President--Frame Division
John D. Wright.............................. 53 Manager--Heddle Division
Randy Boggs................................. 38 Manager--Reed Division
Edward J. Treglia........................... 37 Manager--Rolled Products Division
Nathan L. Belden............................ 28 Director
Robert J. Klein............................. 33 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 1975-1984, as
a Controller for Carolina Tool & Equipment Company and as Vice President and
Controller of Ballenger Group, Inc. Mr. Miller holds a B.A. degree from Clemson
University, a Master's degree from the University of Georgia and is a Certified
Public Accountant.
J. BRANT CONNER--GENERAL SALES MANAGER
Mr. Conner joined Steel Heddle in 1972 as a Sales Representative. He was
promoted to District Sales Manager for the Southwest Region in 1978. Mr. Conner
also served as plant manager for the Meriwether Reed Plant and was promoted to
his present position in 1994. Mr. Conner received his B.S. and Masters degrees
in Textiles from Georgia Tech and served in the U.S. Army for two years,
obtaining the rank of First Lieutenant.
THOMAS A. KORBUTT--VICE PRESIDENT-FRAME DIVISION
Mr. Korbutt joined Steel Heddle in 1973 as a project engineer after working
in various engineering and manufacturing positions in the automotive and
shipbuilding industries. He was appointed Engineering
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Manager in 1975. In 1984, he was promoted to his present position. Mr. Korbutt
received a degree in Tool Engineering Design from Henry Ford Community College.
JOHN D. WRIGHT--MANAGER-HEDDLE DIVISION
Mr. Wright joined Steel Heddle in early 1997 after overseeing engineering
and manufacturing at Freudenberg North America. Before Freudenberg, Mr. Wright
worked for twelve years at Johnson & Johnson in several engineering and
manufacturing positions. Mr. Wright holds a degree in Mechanical Engineering
from Texas Tech University and served as an engineering officer in the U.S.
Navy.
RANDY BOGGS--MANAGER-REED DIVISION
Mr. Boggs joined Steel Heddle in 1994 after leaving Palmetto Loom Reed,
Inc. where he was Plant Manager. Previously, he was Weaving Superintendent with
the Bibb Company's White Horse Plant. He was also employed with J.P. Stevens
where he held various management positions in the Greige Fabrics Division. He
has a B.A. in Business Administration from Southern Wesleyan College.
EDWARD J. TREGLIA--MANAGER-ROLLED PRODUCTS DIVISION
Mr. Treglia joined Steel Heddle in 1987 as an Industrial Engineer and in
1989 was transferred to the Rolled Products Division. In September 1996, he was
named Plant Manager. Before joining Steel Heddle, he worked with Southeastern
Kusan and Sheller-Globe. Mr. Treglia graduated from the University of Cincinnati
with a B.S. in Industrial Engineering. While working on his degree, he was a
co-op Industrial Engineer with IBM and Wierton Steel.
NATHAN L. BELDEN--DIRECTOR
Mr. Belden joined AIP in 1995 from the Mergers & Acquisitions Department of
Kidder, Peabody & Co., Inc. where he was employed since 1993.
ROBERT J. KLEIN--DIRECTOR
Mr. Klein is a Principal of AIP. He has been an employee of AIP since 1992.
From 1991 to 1992, he was an associate at The First Boston Corporation and prior
thereto was an associate with Rosecliff, Inc., an affiliate of Acadia Partners,
L.P. Mr. Klein is a director of Easco Corporation and RBX Corporation.
KIM A. MARVIN--DIRECTOR
Mr. Marvin is a Principal of AIP. He joined the San Francisco office of AIP
in 1997 from the Mergers & Acquisitions Department of Goldman, Sachs & Co. where
he was employed since 1994. Mr. Marvin is a director of Bucyrus International,
Inc.
ROBERT L. PURDUM--NON-EXECUTIVE CHAIRMAN AND DIRECTOR
Mr. Purdum is a Director and Managing Director of American Industrial
Partners Corporation. Mr. Purdum is expected to become the Non-Executive
Chairman of the Company's Board following the Acquisition Transactions. Mr.
Purdum retired as Chairman of Armco Inc., in 1994. From November 1990 to 1993,
Mr. Purdum was Chairman and Chief Executive Officer of Armco. Mr. Purdum has
been a director of AIP Management Co. since joining AIP in 1994. Mr. Purdum is
also a director of Bucyrus International, Inc., Holophane Corporation, Berlitz
International, Inc. and Kettering University.
THEODORE C. ROGERS--DIRECTOR
Mr. Rogers is a Director, the Chairman of the Board and the Secretary of
American Industrial Partners Corporation. He co-founded AIP and has been a
director and officer of the firm since 1989. He is currently a director of
Bucyrus International, Inc., Easco Corporation, Sweetheart Holdings, Inc., SF
Holdings, Inc., RBX Corporation, Stanadyne Automotive Corp. and Derby
International.
Directors are not expected to receive compensation for their services as
directors, except for the Non-Executive Chairman of the Board who will receive
$150,000 per year.
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EXECUTIVE COMPENSATION
The following table sets forth information concerning the annual and
long-term compensation for services in all capacities to the Company for each of
the three years ended December 31, 1997, of these persons who served as (i) the
chief executive officer during such years and (ii) the other four most highly
compensated executive officers of the Company during such years:
ANNUAL COMPENSATION
--------------------------------------------
OTHER
NAME AND PRINCIPAL ANNUAL
POSITION YEAR SALARY($) BONUS($)(a) COMPENSATION($)(b)
------------------ ---- --------- ----------- ------------------
Benjamin G. Team............................................ 1997 244,800 344,746 35,356
Chief Executive 1996 235,000 231,894 23,348
Officer and President 1995 235,000 -- 24,629
Robert W. Dillon............................................ 1997 182,200 249,102 28,297
Executive Vice President 1996 174,900 195,561 19,504
1995 174,900 -- 21,037
Jerry B. Miller............................................. 1997 155,200 222,837 28,376
Vice President Finance 1996 148,700 189,703 18,358
1995 148,700 -- 19,786
Thomas A. Korbutt........................................... 1997 121,400 124,727 21,536
Vice President Frame Division 1996 117,700 145,884 15,381
1995 117,700 -- 16,391
J.E. Merritt*............................................... 1997 120,100 104,727 21,973
1996 117,700 127,884 15,381
1995 117,700 -- 16,390
- ------------------------------
(a) Bonuses are reported in the year earned even if paid in a subsequent year.
(b) Other annual compensation includes the Company's contribution to the
Employee Thrift and Savings Plan and the Cash Balance Plan.
* Retired December 1997
OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL
REALIZABLE VALUE
AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
-------------------------------------------------------------------- -----------------
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED
OPTIONS TO EMPLOYEES IN EXERCISE OR BASE
NAME GRANTED FISCAL YEAR PRICE ($/sh) EXPIRATION DATE 5%($) 10%($)
---- ------------ --------------- ----------------- --------------- ------- -------
Benjamin G. Team................. 6,764 25.7 15 02/20/02 148,824 183,807
Robert W. Dillon................. 4,924 18.7 15 02/20/02 99,692 123,418
Jerry B. Miller.................. 4,924 18.7 15 02/20/02 99,692 123,418
Thomas A. Korbutt................ 2,204 8.4 15 02/20/02 27,060 34,147
J.E. Merritt..................... 2,204 8.4 15 02/20/02 27,060 34,147
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AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES (a)
NUMBER OF
SECURITIES
UNDERLYING
UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY
FISCAL YEAR END(#) OPTIONS AT
SHARES ACQUIRED ON EXERCISABLE/ FISCAL YEAR END($) EXERCISABLE/
NAME EXERCISE (#) VALUE REALIZED($) UNEXERCISABLE UNEXERCISABLE
---- ------------------ ----------------- ------------------ -------------------------------
Benjamin G. Team.............. 420 9,038 6,344 136,523
Robert W. Dillon.............. -- -- 4,924 105,964
Jerry B. Miller............... 660 14,203 4,264 91,761
Thomas A. Korbutt............. -- -- 2,204 47,430
J.E. Merritt.................. -- -- 2,204 47,430
- ------------------------------
(a) Options held by certain employees of the Company were converted at the
consummation of the Acquisition into options to purchase common stock of SH
Group. In addition, SH Group adopted a performance-based option plan
pursuant to which options to acquire up to 7% of SH Group's common stock (on
a fully diluted basis) were awarded to certain members of the Company's
management.
PENSION PLANS
The Company maintains a cash balance pension plan that provides a monthly
annuity payable at age 65. The amount of such annuity is the actuarial
equivalent of the value of an individual account balance which is comprised of
the following: (i) a participant's accrued benefit under the plan determined as
of December 31, 1994; (ii) a percentage (from 2.25% to 7.00%) of the
participant's annual earnings plus a percentage (from 3.0% to 5.0%) of the
participant's annual earnings in excess of 50% of the Social Security wage base
for the calendar year, with such percentages determined based on the
participant's age at the beginning of each year; and (iii) interest credits
based on an index weighted to reflect 60% of the return of the Lehman Brothers
Governmental/Corporate Bond Index and 40% of the return of the S&P 500 stock
index, determined as of December 31 of the calendar year in which the interest
is credited. The estimated annual benefit payable at age 65 for each of the
named executive officers is shown below. For purposes of determining such
benefit, no increases in salary or Social Security wage base were assumed, and a
5% interest rate was used for determining interest credits and for converting
the individual account balance to an annuity at age 65:
PROJECTED ANNUAL
ANNUITY PAYABLE AT
NORMAL
PROJECTED INDIVIDUAL RETIREMENT
NAME ACCOUNT BALANCE AGE
- ---- -------------------- ------------------
Benjamin G. Team................................... $442,924 $38,103
Robert W. Dillon................................... $563,832 $48,504
Jerry B. Miller.................................... $401,004 $34,479
Thomas A. Korbutt.................................. $309,992 $26,667
J.E. Merritt....................................... $309,144 $26,594
EMPLOYMENT AGREEMENTS
Messrs. Team, Miller and Dillon each are party to a severance arrangement
under which each will receive severance pay if his employment is terminated by
the Company (other than for cause) for the number of months between the date of
termination and December 31, 2000 if termination occurs on or before December
31, 1999 or for twelve months if termination occurs on or after January 1, 2000.
Messrs. Team, Miller and Dillon each are a party to a Sale Bonus Agreement dated
April 21, 1998, pursuant to which each received approximately $1.3 million upon
the consummation of a sale of the Company.
Messrs. Connor and Korbutt each are a party to a severance arrangement
under which each will receive severance pay if his employment is terminated by
the Company (other than for cause) for the number of months between the date of
termination and December 31, 1999 if termination occurs on or before December
31, 1998 or for twelve months if termination occurs on or after January 1, 1999.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ACQUISITION ARRANGEMENTS
In connection with the Acquisition Transactions, the Company, AIP and
management investors entered into a stockholders' agreement (the "Stockholders'
Agreement") pursuant to which such persons were granted certain registration
rights and participation rights. Pursuant to the Stockholders' Agreement, AIP
has the right to elect the majority of the directors of the Company.
At the close of the Acquisition Transactions, AIP was paid a fee of $2.0
million and reimbursed for out-of-pocket expenses in connection with the
negotiation of the Acquisition and for providing certain investment banking
services to the Company including the arrangement and negotiation of the terms
of the New Credit Agreement, the arrangement and negotiation of the terms of the
Old Notes and for other financial advisory and management consulting services.
Upon consummation of the Acquisition, Messrs. Team, Miller and Dillon each
received sale bonuses of approximately $1.3 million.
MANAGEMENT SERVICES AGREEMENTS
BCC, an affiliate of Butler Capital Corporation, provided consulting
services to the Company pursuant to a Consulting Services Agreement dated as of
January 1, 1996 and received remuneration of $275,000 in each of fiscal 1997,
1996 and 1995. In fiscal 1996, BCC received a special one-time payment of
$450,000. Such agreement was terminated upon consummation of the Acquisition
Transactions. In connection with the Company's refinancing in fiscal 1997, BCC
received payment of $200,000.
AIP expects to provide substantial ongoing financial and management
services to the Company utilizing the extensive operating and financial
experience of AIP's principals. AIP will receive an annual fee of $895,000 for
providing general management, financial and other corporate advisory services to
the Company and will be reimbursed for out-of-pocket expenses. The fees will be
paid to AIP pursuant to a management services agreement among AIP and the
Company and will be subordinated in right of payment to the Notes.
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DESCRIPTION OF COMPANY COMMON STOCK
The Company's authorized capital stock consists of 100 shares of common
stock, par value $0.10 per share (the "Common Stock"). SH Group owns all of the
outstanding Common Stock. AIP, its related investors and management of the
Company own all of the outstanding common stock of SH Group. In addition to the
management rollover interest, SH Group issued options to members of management
pursuant to an option plan established by its board of directors. Holders of
shares of Common Stock are entitled to one vote per share on all matters to be
voted on by shareholders. The holders of shares of Common Stock are entitled to
receive such dividends, if any, as may be declared from time to time by the
board of directors in its discretion from funds legally available therefor, and
upon liquidation or dissolution are entitled to receive all assets available for
distribution to the shareholders.
SECURITY OWNERSHIP
As of July 30, 1998, SH Group was the only holder of record of shares of
Common Stock. As of July 30, 1998, 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 July 30, 1998,
assuming the exercise of stock options exercisable within 60 days of such date,
by (i) each person who is known by SH Group to be the beneficial owner of more
than 5% of the common stock 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 executive officers as a group. To the knowledge of SH Group, each
stockholder has sole voting and investment power as to the shares of common
stock of SH Group shown unless otherwise noted. Except as indicated below, the
address for each such person is c/o Steel Heddle Mfg., Co., 1801 Rutherford
Road, Greenville, South Carolina 29607.
NAME NUMBER(1) PERCENTAGE(2)
---- --------- -------------
American Industrial Partners Capital Fund II, L.P.(3)....... 226,299 96.3
Nathan L. Belden(3)......................................... 200 *
Kim A. Marvin(3)............................................ 0 0
Theodore C. Rogers(4)....................................... 0 0
Robert J. Klein(4).......................................... 250 *
Robert L. Purdum(4)......................................... 1,000 *
Benjamin G. Team............................................ 6,334(5) *
Robert W. Dillon............................................ 4,916(5) *
Jerry B. Miller............................................. 4,257(5) *
Thomas A. Korbutt........................................... 2,200(5) *
All directors and executive officers as a group
(9 persons).............................................. 19,157(6) 7.6
- ---------------
* 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 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 July
30, 1998.
(3) The address of such entity or person is One Maritime Plaza, Suite 2525, San
Francisco, California 94111.
(4) The address of such person is 551 Fifth Avenue, Suite 3800, New York, New
York 10176.
(5) Represents shares of common stock of SH Group which are issuable upon
exercise of options within 60 days of the date hereof.
(6) 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 hereof.
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DESCRIPTION OF NOTES
GENERAL
The New Notes will be issued as a separate series pursuant to the Indenture
between Steel Heddle Mfg. Co. (the "Company") and United States Trust Company of
New York, as trustee (the "Trustee"). The terms of the New Notes include those
stated in the Indenture and those made part of the Indenture by reference to the
Trust Indenture Act of 1939 (the "Trust Indenture Act"). The New Notes are
subject to all such terms, and Holders of New Notes are referred to the
Indenture and the Trust Indenture Act for a statement thereof. The form and
terms of the New Notes are identical in all material respects to the form and
terms of the Old Notes (which they replace) except that (i) the New Notes bear a
Series B designation, (ii) the New Notes have been registered under the
Securities Act and, therefore, will not bear legends restricting the transfer
thereof and (iii) the holders of the New Notes will not be entitled to certain
rights under the Registration Rights Agreement, including the provisions
increasing the interest rate on the Old Notes in certain circumstances relating
to the timing of the Exchange Offer, which rights terminate when the Exchange
Offer is consummated. The following summary of certain provisions of the
Indenture does not purport to be complete and is qualified in its entirety by
reference to the Indenture, including the definitions therein of certain terms
used below. A copy of the proposed form of Indenture and Registration Rights
Agreement is available as set forth under "--Additional Information." The
definitions of certain terms used in the following summary are set forth below
under "--Certain Definitions."
The New Notes will be senior subordinated, unsecured, general obligations
of the Company, limited in aggregate principal amount to $100.0 million. The New
Notes will be jointly and severally irrevocably and unconditionally guaranteed
on a senior subordinated basis by each of the Company's present and future
domestic Subsidiaries (the "Guarantors"). The obligations of each Guarantor
under its guarantee, however, will be limited in a manner intended to avoid it
being deemed a fraudulent conveyance under applicable law. See "--Certain
Bankruptcy Limitations" below. The term "Subsidiaries" as used herein, however,
does not include Unrestricted Subsidiaries.
As of the date of the Indenture, none of the Company's Subsidiaries will be
Unrestricted Subsidiaries. However, under certain circumstances, the Company
will be able to designate current or future Subsidiaries as Unrestricted
Subsidiaries. Unrestricted Subsidiaries generally will not be subject to the
restrictive covenants set forth in the Indenture and will not be Guarantors.
Notwithstanding anything herein to the contrary, the provisions of the Indenture
shall not prevent or restrict consummation of any of the Acquisition
Transactions.
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $100.0 million and
will mature on June 1, 2008. Interest on the Notes will accrue at the rate of
10 5/8% per annum and will be payable semi-annually in arrears on June 1 and
December 1, commencing on December 1, 1998, to Holders of record on the
immediately preceding May 15 and November 15. Interest on the Notes will accrue
from the most recent date to which interest has been paid or, if no interest has
been paid, from the date of original issuance. Interest will be computed on the
basis of a 360-day year comprised of twelve 30-day months. Principal, premium if
any, and interest and Liquidated Damages, if any, on the Notes will be payable
at the office or agency of the Company maintained for such purpose within the
City and State of New York or, at the option of the Company, any payment of
interest and Liquidated Damages, if any, may be made by check mailed to the
Holders of the Notes at their respective addresses set forth in the register of
Holders of Notes; provided, that all payments with respect to Global Notes and
Certificated Notes, the Holders of whom have given wire transfer instructions to
the Company, will be required to be made by wire transfer of immediately
available funds to the accounts specified by the Holders thereof. Until
otherwise designated by the Company, the Company's office or agency in New York
will be the office of the Trustee maintained for such purpose. The Notes will be
issued in denominations of $1,000 and integral multiples thereof.
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SUBORDINATION
The payment of principal of, premium, if any, and interest on the Notes,
and Liquidated Damages, if any, are subordinated in right of payment, as set
forth in the Indenture, to the prior payment in full in cash or Cash Equivalents
of all Obligations in respect of Senior Indebtedness, whether outstanding on the
date of the Indenture or thereafter incurred. In addition, as set forth in
"Subsidiary Guarantees" below, the Subsidiary Guarantees are general unsecured
obligations of the Guarantors subordinated in right of payment to all
Obligations in respect of Guarantor Senior Indebtedness. Under certain
circumstances, the Indenture permits Foreign Subsidiaries to incur Indebtedness
to which the Notes would be effectively subordinated. As of April 4, 1998, on a
pro forma basis after giving effect to the Acquisition Transactions, the Company
and its subsidiaries would have had approximately $34.9 million of Senior
Indebtedness and Guarantor Senior Indebtedness and no indebtedness of Foreign
Subsidiaries.
Upon any distribution to creditors of the Company or a Guarantor in a
liquidation or dissolution of the Company or a Guarantor or in a bankruptcy,
reorganization, insolvency, receivership or similar proceeding relating to the
Company or a Guarantor or its property, whether voluntary or involuntary, an
assignment for the benefit of creditors or any marshalling of the Company's or
Guarantors' assets and liabilities, the holders of Senior Indebtedness or the
applicable Guarantor Senior Indebtedness, as applicable, will be entitled to
receive payment in full in cash or Cash Equivalents of all Obligations due in
respect of such Senior Indebtedness or the applicable Guarantor Senior
Indebtedness, as applicable (including interest after the commencement of any
such proceeding at the rate specified in the applicable Senior Indebtedness or
the applicable Guarantor Senior Indebtedness, as applicable, whether or not
allowable as a claim in any such proceeding), before the Holders of Notes or,
the applicable Subsidiary Guarantees, will be entitled to receive any payment
with respect to the Notes, or the applicable Subsidiary Guarantees, and until
all such Obligations with respect to the applicable Senior Indebtedness or the
applicable Guarantor Senior Indebtedness, as applicable, are paid in full in
cash or Cash Equivalents, any distribution to which the Holders of Notes or the
applicable Subsidiary Guarantees would be entitled shall be made to the holders
of the applicable Senior Indebtedness' or the applicable Guarantor Senior
Indebtedness, as applicable (except that Holders of Notes or the applicable
Subsidiary Guarantees may receive (i) securities that are subordinated at least
to the same extent as the Notes or the applicable Subsidiary Guarantees to
Senior Indebtedness or the applicable Guarantor Senior Indebtedness, as
applicable, and any securities issued in exchange for the applicable Senior
Indebtedness or the applicable Guarantor Senior Indebtedness, as applicable and
that have a final maturity date and weighted average life to maturity that is
the same as or greater than the Notes or the applicable Subsidiary Guarantees,
and that are not secured by any collateral and (ii) payments made from the trust
described under "--Legal Defeasance and Covenant Defeasance").
The Company and the Guarantors also may not make any payment upon or in
respect of the Notes or the applicable Subsidiary Guarantees (except in such
subordinated securities or from the trust described under "--Legal Defeasance
and Covenant Defeasance") if (i) a default in the payment of any Obligations due
in respect of Designated Senior Indebtedness occurs and is continuing beyond any
applicable grace period (a "Payment Default") or (ii) any other default occurs
and is continuing with respect to Designated Senior Indebtedness that permits
holders of the Designated Senior Indebtedness as to which such default relates
to accelerate its maturity (a "Nonpayment Default") and the Trustee receives a
notice of such default (a "Payment Blockage Notice") from the Company or the
representative of the holders of any Designated Senior Indebtedness. Payments on
the Notes may and shall be resumed (a) in the case of a Payment Default, upon
the date on which such default is cured or waived and (b) in case of a
Nonpayment Default, the earlier of the date on which such Nonpayment Default is
cured or waived or 179 days after the date on which the applicable Payment
Blockage Notice is received, unless the maturity of any Designated Senior
Indebtedness has been accelerated. No new period of payment blockage may be
commenced unless and until 360 days have elapsed since the commencement of the
immediately prior Payment Blockage Notice. No Nonpayment Default that existed or
was continuing on the date of delivery of any Payment Blockage Notice to the
Trustee shall be, or be made, the basis for a subsequent Payment Blockage Notice
(it being acknowledged that any subsequent action, or any breach of any
financial covenant for a period ending after the expiration of such payment
blockage period that, in either case, would give rise to a new event of default,
even though it is a
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breach pursuant to any provision under which a prior event of default previously
existed, shall constitute a new event of default for this purpose).
The Indenture further requires that the Company promptly notify holders of
Senior Indebtedness if payment of the Notes is accelerated because of an Event
of Default.
As a result of the subordination provisions described above, in the event
of a liquidation or insolvency, Holders of Notes may recover less ratably than
creditors of the Company and the Guarantors who are holders of Senior
Indebtedness and Guarantor Senior Indebtedness. See "Risk
Factors -- Subordination." The Indenture limits, subject to certain financial
tests, the amount of additional Indebtedness, including Senior Indebtedness and
Guarantor Senior Indebtedness that the Company and its subsidiaries can incur.
See "-- Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred
Stock."
No provision contained in the Indenture or the Notes will affect the
obligation of the Company and the Guarantors, which is absolute and
unconditional, to pay, when due, principal of, premium, if any, and interest on
the Notes. The subordination provisions of the Indenture and the Notes will not
prevent the occurrence of any Default or Event of Default under the Indenture or
limit the rights of the Trustee or any Holder to pursue any other rights or
remedies with respect to the Notes.
SUBSIDIARY GUARANTEES
The Company's Obligations under the Notes are guaranteed pursuant to the
Guarantees and any future subsidiary guarantees (collectively, the "Subsidiary
Guarantees") on a senior subordinated basis by the present Guarantors and any
other Subsidiaries that become guarantors (collectively, the "Guarantors") under
the covenant entitled "Additional Subsidiary Guarantees." The Subsidiary
Guarantees of the Guarantors are subordinated to the prior payment in full of
all Guarantor Senior Indebtedness, of which there would be $34.9 million as of
April 4, 1998 on a pro forma basis, and the amounts for which the Guarantors
will be liable under the Guarantees issued from time to time with respect to
Guarantor Senior Indebtedness. The obligations of each Guarantor under its
Subsidiary Guarantee are limited in a manner intended to not constitute a
fraudulent conveyance under applicable law. See, however, "Risk
Factors--Fraudulent Transfer Considerations," and "Certain Bankruptcy
Limitations" below.
The Indenture provides that no Guarantor (other than as provided in the
immediately following paragraph) may consolidate with or merge with or into
(whether or not such Guarantor is the surviving Person) another corporation,
Person or entity whether or not affiliated with such Guarantor unless (i)
subject to the provisions of the following paragraph, the Person formed by or
surviving any such consolidation or merger (if other than such Guarantor) is
organized under the laws of the United States or any state thereof, (ii) such
person assumes all the obligations of such Guarantor pursuant to a supplemental
indenture in form and substance reasonably satisfactory to the Trustee under the
Indenture; (iii) immediately after giving effect to such transaction no Default
or Event of Default exists; and (iv) such Guarantor, or any Person formed by or
surviving any such consolidation or merger, would be permitted by virtue of the
Company's pro forma Fixed Charge Coverage Ratio to incur, immediately after
giving effect to such transaction, at least $1.00 of additional Indebtedness
pursuant to the Fixed Charge Coverage Ratio test set forth in the covenant
described under the caption "--Incurrence of Indebtedness and Issuance of
Preferred Stock"; provided, however, that the foregoing may not apply to the
merger of two or more Guarantors with and into each other.
The Indenture provides that in the event of a sale or other disposition of
all of the assets of any Guarantor, by way of merger, consolidation or
otherwise, or a sale or other disposition of all of the capital stock of any
Guarantor, by way of merger, consolidation or otherwise, then such Guarantor (in
the event of a sale or other disposition of all of the capital stock of such
Guarantor) or the corporation acquiring the property (in the event of a sale or
other disposition of all of the assets of such Guarantor) will be released and
relieved of any obligations under its Subsidiary Guarantee; provided that the
Net Proceeds of such sale or other disposition are applied in accordance with
the applicable provisions of the Indenture. See "--Releases Following Sale of
Assets."
CERTAIN BANKRUPTCY LIMITATIONS
The Company conducts certain of its business through Guarantors, which have
guaranteed or will guarantee the Company's Obligations with respect to the Notes
and Unrestricted Subsidiaries and Foreign
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Subsidiaries, which Unrestricted Subsidiaries and Foreign Subsidiaries are not
required to guarantee the Notes. See "Risk Factors." Holders of the Notes will
be direct creditors of each Guarantor by virtue of its Subsidiary Guarantee.
Nonetheless, in the event of the bankruptcy or financial difficulty of a
Guarantor, such Guarantor's obligations under its Subsidiary Guarantee may be
subject to review and avoidance under state and federal fraudulent transfer
laws. Among other things, such obligations may be avoided if a court concludes
that such obligations were incurred for less than reasonably equivalent value or
fair consideration at a time when the Guarantor was insolvent, was rendered
insolvent, or was left with inadequate capital to conduct its business. A court
would likely conclude that a Guarantor did not receive reasonably equivalent
value or fair consideration to the extent that the aggregate amount of its
liability on its Subsidiary Guarantee exceeds the economic benefits it receives
in the Offering. The obligations of each Guarantor under its Subsidiary
Guarantee will be limited in a manner intended to cause it not to be a
fraudulent conveyance under applicable law, although no assurance can be given
that a court would give the holder the benefit of such provision. See "Risk
Factors--Fraudulent Transfer Considerations."
If the obligations of a Guarantor under its Subsidiary Guarantee were
avoided, Holders of Notes would have to look to the assets of any remaining
Guarantors for payment. There can be no assurance in that event that such assets
would suffice to pay the outstanding principal of, premium, if any and interest
on the Notes, and Liquidated Damages, if any.
OPTIONAL REDEMPTION
The Notes are not redeemable at the Company's option prior to June 1, 2003
except as provided below. Thereafter, the Notes are subject to redemption at the
option of the Company, in whole or in part, upon not less than 30 nor more than
60 days' notice, at the redemption prices (expressed as percentages of principal
amount) set forth below plus accrued and unpaid interest and Liquidated Damages,
if any, thereon to the applicable redemption date if redeemed during the
twelve-month period beginning on June 1 of the years indicated below:
YEAR PERCENTAGE
2003........................................................ 105.313%
2004........................................................ 103.542%
2005........................................................ 101.771%
2006 and thereafter......................................... 100.000%
Notwithstanding the foregoing, at any time on or prior to June 1, 2001, the
Company may (but shall not have the obligation to) redeem up to 35% of the
original aggregate principal amount of the Notes at a redemption price of
110.625% of the principal amount thereof, in each case plus accrued and unpaid
interest and Liquidated Damages, if any, thereon to the redemption date, with
the Net Cash Proceeds received by the Company from one or more Equity Offerings;
provided that, in each case at least 65% of the aggregate principal amount of
Notes originally issued remain outstanding immediately after the occurrence of
such redemption; and provided further, that such redemption shall occur within
60 days of the date of the closing of such Equity Offering.
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
Notes are listed, or, if the Notes are not so listed, on a pro rata basis, by
lot or by such method as the Trustee shall deem fair and appropriate; provided
that no Notes of $1,000 or less shall be redeemed in part. Notices of redemption
shall be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each Holder of Notes to be redeemed at its registered
address. If any Note is to be redeemed in part only, the notice of redemption
that relates to such Note shall state the portion of the principal amount
thereof to be redeemed. A new Note in principal amount equal to the unredeemed
portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note. On and after the redemption date, interest
ceases to accrue on the Notes or portions of them called for redemption unless
the Company defaults in such payments due on the redemption date.
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MANDATORY REDEMPTION
The Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of Notes will have
the right to require the Company to repurchase all or any part (equal to $1,000
or an integral multiple thereof) of such Holder's Notes pursuant to the offer
described below (the "Change of Control Offer") at an offer price in cash equal
to 101% of the aggregate principal amount thereof plus accrued and unpaid
interest and Liquidated Damages, if any, thereon to the date of purchase (the
"Change of Control Payment") on a date (the "Change of Control Payment Date") no
later than 60 Business Days after the occurrence of the Change of Control.
Within 35 days following any Change of Control, the Company will mail a notice
to each Holder describing the transaction or transactions that constitute the
Change of Control and offering to repurchase Notes pursuant to the procedures
required by the Indenture and described in such notice, which offer shall remain
open for at least 20 Business Days following its commencement, but in any event
no longer than 30 Business Days. The Company will comply with the requirements
of Rule 14e-1 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Notes as a result of a Change of Control. To the extent that
the provisions of any such securities laws or regulations conflict with the
provisions of this paragraph, compliance by the Company or any of the Guarantors
with such laws and regulations shall not in and of itself cause a breach of its
obligations under such covenant.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered and (3) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating the
aggregate principal amount of Notes or portions thereof being purchased by the
Company. The Paying Agent will promptly mail to each Holder of Notes so tendered
the Change of Control Payment for such Notes, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each Holder
a new Note equal in principal amount to any unpurchased portion of the Notes
surrendered, if any; provided that each such new Note will be in a principal
amount of $1,000 or an integral multiple thereof. The Company will publicly
announce the results of the Change of Control Offer on or as soon as practicable
after the Change of Control Payment Date.
The Indenture provides that, prior to complying with the provisions of this
covenant, but in any event within 30 days following a Change of Control, the
Company will either repay all outstanding Designated Senior Indebtedness or
obtain the requisite consents, if any, under all agreements governing
outstanding Designated Senior Indebtedness to permit the repurchase of Notes
required by this covenant. The Company will not be required to purchase any
Notes until it has complied with the preceding sentence, but the Company's
failure to make a Change of Control Offer when required or to purchase tendered
Notes when tendered would constitute an Event of Default. See "Risk Factors."
Except as described above with respect to a Change of Control, the
Indenture does not contain provisions that permit the Holders of the Notes to
require that the Company repurchase or redeem the Notes in the event of a
takeover, recapitalization or similar restructuring.
The Change of Control purchase feature of the Notes may make more difficult
or discourage a takeover of the Company, and, thus, the removal of incumbent
management.
The phrase "all or substantially all" of the assets of the Company will
likely be interpreted under applicable state law and will be dependent upon
particular facts and circumstances. As a result, there may be a degree of
uncertainty in ascertaining whether a sale or transfer of "all or substantially
all" of the assets of the Company has occurred. In addition, no assurances can
be given that the Company will be able to acquire Notes tendered upon the
occurrence of a Change of Control.
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If the Change of Control Payment Date hereunder is on or after an interest
payment Record Date and on or before the associated Interest Payment Date, any
accrued and unpaid interest (and Liquidated Damages, if any) due on such
Interest Payment Date will be paid to the person in whose name a Note is
registered at the close of business on such Record Date, and such interest (and
Liquidated Damages, if applicable) will not be payable to Holders who tender the
Notes pursuant to the Change of Control Offer.
The Credit Agreement provides that certain change of control events with
respect to the Company would constitute a default thereunder. Any future credit
agreements or other agreements relating to Senior Indebtedness to which the
Company becomes a party may contain similar restrictions and provisions. In the
event a Change of Control occurs at a time when the Company is prohibited from
purchasing Notes, the Company could seek the consent of its lenders to the
purchase of Notes or could attempt to refinance the borrowings that contain such
prohibition. If the Company does not obtain such a consent or repay such
borrowings, the Company will remain prohibited from purchasing Notes. In such
case, the Company's failure to purchase tendered Notes would constitute an Event
of Default under the Indenture which would, in turn, constitute a default under
the Credit Agreement. In such circumstances, the subordination provisions in the
Indenture would likely restrict payments to the Holders of Notes.
ASSET SALES
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, engage in an Asset Sale in excess of $1.0 million unless
(i) the Company (or such Subsidiary, as the case may be) receives consideration
at the time of such Asset Sale at least equal to the fair market value of the
assets or Equity Interests sold or otherwise disposed of and, in the case of a
lease of assets, a lease providing for rent and other conditions which are no
less favorable to the Company (or such Subsidiary, as the case may be) in any
material respect than the then prevailing market conditions (evidenced in each
case by a resolution of the Board of Directors of such entity set forth in an
Officers' Certificate delivered to the Trustee) and (ii) at least 75% (100% in
the case of lease payments) of the consideration therefor received by the
Company or such Subsidiary is in the form of cash or Cash Equivalents; provided
that the amount of (x) any liabilities (as shown on the Company's or such
Subsidiary's most recent balance sheet or in the notes thereto, but excluding
contingent liabilities and trade payables) of the Company or any Subsidiary
(other than liabilities that are by their terms subordinated to the Notes or any
Guarantee thereof) that are assumed by the transferee of any such assets and
from which the Company or such Subsidiary are unconditionally released from
liability and (y) any notes, securities or other obligations received by the
Company or any such Subsidiaries from such transferee that are promptly, but in
no event more than 30 days after receipt, converted by the Company or such
Subsidiary into cash shall (to the extent of the cash received) be deemed to be
cash for purposes of this provision and the receipt of such cash shall be
treated as cash received from the Asset Sale for which such notes or obligations
were received.
The Company or any of its Subsidiaries may apply the Net Proceeds from each
Asset Sale, at its option, within 360 days after the consummation of such Asset
Sale, (a) to permanently reduce any Senior Indebtedness, Guarantor Senior
Indebtedness or, in the case of an Asset Sale by a Foreign Subsidiary, to
permanently reduce Indebtedness of such Foreign Subsidiary (and in the case of
any senior revolving indebtedness to correspondingly permanently reduce
commitments with respect thereto), (b) to make capital expenditures, for the
acquisition of another business or the acquisition of other long-term assets, in
each case, in the same or a Related Business, or (c) to reimburse the Company or
its Subsidiaries for expenditures made, and costs incurred, to repair, rebuild,
replace or restore property subject to loss, damage or taking to the extent that
the Net Proceeds consist of insurance proceeds received on account of such loss,
damage or taking. Pending the final application of any such Net Proceeds, the
Company may temporarily reduce Senior Revolving Debt or otherwise invest such
Net Proceeds in any manner that is not prohibited by the Indenture. Any Net
Proceeds from Asset Sales that are not applied or invested as provided in the
first sentence of this paragraph will be deemed to constitute "Excess Proceeds."
When the aggregate amount of Excess Proceeds exceeds $5.0 million, the Company
will be required to make an offer to all Holders of Notes (an "Asset Sale
Offer") and to holders of other Indebtedness of the Company outstanding ranking
on a parity with the Notes with similar provisions requiring the Company to make
a similar offer with proceeds from asset sales, pro rata
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in proportion to the respective principal amounts (or accreted values in the
case of Indebtedness issued with an original issue discount) of the Notes and
such other Indebtedness then outstanding, to purchase the maximum principal
amount (or accreted value, as applicable) of Notes and such other Indebtedness,
if any, that may be purchased out of the Excess Proceeds, at an offer price in
cash in an amount equal to 100% of the principal amount (or accreted value, as
applicable) thereof plus accrued and unpaid interest and Liquidated Damages, if
any, thereon to the date of purchase, in accordance with the procedures set
forth in the Indenture. If the aggregate principal amount (or accreted value, as
applicable) of Notes and such Indebtedness surrendered by Holders thereof
exceeds the amount of Excess Proceeds, the Trustee shall select the Notes and
such Indebtedness to be purchased on a pro rata basis. Upon completion of such
offer to purchase, the amount of Excess Proceeds shall be reset at zero.
Any Asset Sale Offer shall remain open for at least 20 Business Days, in
any event no longer than 30 Business Days, and shall be made in compliance with
all applicable laws, rules, and regulations, including, if applicable,
Regulation 14E of the Exchange Act and the rules and regulations thereunder and
all other applicable Federal and state securities laws. To the extent that the
provisions of any securities laws or regulations conflict with the provisions of
this paragraph, compliance by the Company or any of its Subsidiaries with such
laws and regulations shall not in and of itself cause a breach of its
obligations under such covenant.
If the payment date in connection with an Asset Sale Offer hereunder is on
or after an interest payment Record Date and on or before the associated
Interest Payment Date, any accrued and unpaid interest (and Liquidated Damages,
if any, due on such Interest Payment Date) will be paid to the person in whose
name a Note is registered at the close of business on such Record Date, and such
interest (or Liquidated Damages, if applicable) will not be payable to Holders
who tender Notes pursuant to such Asset Sale Offer.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to directly or indirectly: (i) declare or pay any dividend
or make any distribution on account of the Company or any of its Subsidiaries'
or direct or indirect parent's Equity Interests (including, without limitation,
any payment in connection with any merger or consolidation involving the
Company) (other than dividends or distributions payable in Equity Interests
(other than Disqualified Stock) of the Company or dividends or distributions
payable to the Company or any Subsidiary of the Company); (ii) purchase, redeem
or otherwise acquire or retire for value any Equity Interests of the Company or
any direct or indirect parent of the Company or other Affiliate or Subsidiary of
the Company (other than any such Equity Interests owned by the Company or any
Subsidiary of the Company); (iii) make any principal payment on or purchase,
redeem, defease or otherwise acquire or retire for value any Indebtedness that
is subordinated to or pari passu (unless, in the case of pari passu Indebtedness
only, such purchase, redemption, defeasance, acquisition, or retirement is made,
or offered (if applicable), pro rata with the Notes or the Subsidiary
Guarantees, if applicable) with the Notes or any of the Subsidiary Guarantees,
as applicable (and other than Notes or the Subsidiary Guarantees, as
applicable), except for any scheduled repayment or at the final maturity
thereof; or (iv) make any Restricted Investment (all such payments and other
actions set forth in clauses (i) through (iv) above being collectively referred
to as "Restricted Payments"), unless at the time of and after giving effect to
such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof;
(b) the Company would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment had
been made at the beginning of the applicable four-quarter period, have been
permitted to incur at least $1.00 of additional Indebtedness pursuant to
the Fixed Charge Coverage Ratio test set forth in the first paragraph of
the covenant described below under the caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock"; and
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(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Company and its Subsidiaries after the
Issue Date (including Restricted Payments permitted by clauses (i), (vi),
(vii), (viii) and (ix), but excluding Restricted Payments permitted by
clauses (ii), (iii), (iv), (v) and (x) of the next succeeding paragraph),
is less than the sum of (i) 50% of the Consolidated Net Income (adjusted to
exclude any amounts that are otherwise included in this clause (c) to the
extent there would be, and to avoid, any duplication in the crediting of
any such amounts) of the Company for the period (taken as one accounting
period) from the beginning of the first fiscal quarter commencing after the
Issue Date to the end of the Company's most recently ended fiscal quarter
for which internal financial statements are available at the time of such
Restricted Payment (or, if such Consolidated Net Income for such period is
a deficit, less 100% of such deficit), plus (ii) 100% of the aggregate Net
Proceeds received by the Company after the Issue Date from a Capital
Contribution or from the issue or sale of Equity Interests of the Company
or of debt securities of the Company that have been converted into such
Equity Interests (other than Equity Interests (or convertible debt
securities) sold to a Subsidiary or an Unrestricted Subsidiary of the
Company and other than Disqualified Stock or debt securities that have been
converted into Disqualified Stock), plus (iii) 100% of any cash dividends
received by the Company or a Wholly Owned Subsidiary of the Company after
the Issue Date from an Unrestricted Subsidiary, plus (iv) 100% of the Net
Proceeds realized by the Company or a Wholly Owned Subsidiary of the
Company upon the sale of any Unrestricted Subsidiary (less the amount of
any reserve established for purchase price adjustments and less the maximum
amount of any indemnification or similar contingent obligation for the
benefit of the purchaser, any of its Affiliates or any other third party in
such sale, in each case as adjusted for any permanent reduction in any such
amount on or after the date of such sale, other than by virtue of a payment
made to such person) following the Issue Date, plus (v) to the extent that
any Restricted Investment that was made after the Issue Date is sold for
cash or otherwise liquidated or repaid for cash, the amount of Net Proceeds
received by the Company or a Wholly Owned Subsidiary of the Company with
respect to such Restricted Investment.
The foregoing provisions will not prohibit (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indenture; (ii) the payment of a fee to AIP or its designee on the Issue Date of
not more than $2.0 million for certain investment banking, advisory and
management services rendered to the Company in connection with the Acquisition
Transactions and if no Default or Event of Default shall have occurred and be
continuing (and shall not have been waived) or shall occur as a consequence
thereof, the payment by the Company (either directly or indirectly, e.g.,
through the Parent) of a management fee to AIP in an amount not to exceed
$895,000 in any year plus an additional amount in such year (not to exceed
$895,000) to the extent such management fee was not payable by reason of this
clause (ii) in any prior fiscal year and the reimbursement by the Company of
AIP's reasonable out-of-pocket expenses incurred in connection with the
rendering of management services to or on behalf of the Company; provided,
however, that the obligation of the Company to pay such management fee will be
subordinated to the payment of all Obligations with respect to the Notes (and
any Subsidiary Guarantee thereof); (iii) the making of any Restricted
Investment, directly or indirectly, in exchange for, or out of the Net Cash
Proceeds of, the substantially concurrent Capital Contribution or sale (other
than to a Subsidiary of the Company) of Equity Interests of the Company (other
than Disqualified Stock); provided, that any Net Cash Proceeds that are utilized
for any such Restricted Investment shall be excluded from clauses (c)(i) and
(c)(ii) of the preceding paragraph; (iv) the redemption, repurchase, retirement
or other acquisition of any Equity Interests of the Company in exchange for, or
out of the proceeds of, the substantially concurrent sale (other than to a
Subsidiary of the Company) of other Equity Interests of the Company (other than
any Disqualified Stock); provided that any Net Cash Proceeds that are utilized
for any such redemption, repurchase, retirement or other acquisition shall be
excluded from clauses (c)(i) and (c)(ii) of the preceding paragraph; (v) the
defeasance, redemption, repurchase, acquisition or other retirement of pari
passu or subordinated Indebtedness with the Net Cash Proceeds from an incurrence
of Permitted Refinancing Indebtedness or, in exchange for, or out of the Net
Cash Proceeds of, the substantially concurrent sale (other than to a Subsidiary
of the Company) of Equity Interests of the Company (other than Disqualified
Stock); provided, that any Net Cash Proceeds that are utilized for any such
defeasance, redemption, repurchase shall be excluded from clauses (c)(i) and
(c)(ii) of the preceding paragraph;
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(vi) the repurchase, redemption, or other acquisition or retirement for value of
any Equity Interests of the Company or any Subsidiary of the Company held by any
member of the Company's (or any Subsidiaries') management pursuant to any
management agreement or stock option agreement; provided that the aggregate
price paid for all such repurchased, redeemed, acquired or retired Equity
Interests shall not exceed $5.0 million in the aggregate (net of the Net Cash
Proceeds received by the Company from subsequent reissuances of such Equity
Interests to new members of management), and no Default or Event of Default
shall have occurred and be continuing immediately after such transaction; (vii)
so long as no Default or Event of Default shall have occurred and is continuing,
Restricted Payments in an aggregate amount not to exceed $1.0 million; (viii)
pro rata dividends and other distributions on the Capital Stock of any
Subsidiary of the Company by such Subsidiary; (ix) payments in lieu of
fractional shares in an amount not to exceed $250,000 in the aggregate; and (x)
Permitted Payments to Parent.
Additionally, the foregoing provisions of this covenant will not prohibit,
so long as no Default or Event of Default shall have occurred and be continuing,
any payment to Parent (i) made not more than 10 Business Days after an Interest
Payment Date if the Company shall first have paid to the Holders all principal,
premium (if any) and interest (and Liquidated Damages, if any) due and owing on
the Notes on or prior to such Interest Payment Date and (ii) used by Parent
concurrently with such payment to make a scheduled interest payment on the SH
Group Debentures as required by the SH Group Debentures as they exist on the
Issue Date. The full amount of any Restricted Payments made pursuant to this
paragraph, however, will be deducted in the calculation of the aggregate amount
of Restricted Payments available to be made pursuant to clause (c) of the first
paragraph of this covenant.
The Board of Directors may designate any Subsidiary to be an Unrestricted
Subsidiary if such designation would not cause a Default. For purposes of making
such determination, all outstanding Investments by the Company and its
Subsidiaries (except to the extent repaid in cash) in the Subsidiary so
designated will be deemed to be Restricted Payments at the time of such
designation and will reduce the amount available for Restricted Payments under
the first paragraph of this covenant. All such outstanding Investments will be
deemed to constitute Investments in an amount equal to the greatest of (x) the
net book value of such Investments at the time of such designation, (y) the fair
market value of such Investments at the time of such designation and (z) the
original fair market value of such Investments at the time they were made. Such
designation will only be permitted if such Restricted Payment would be permitted
at such time and if such Subsidiary otherwise meets the definition of an
Unrestricted Subsidiary.
The amount of all Restricted Payments (other than cash) shall be the fair
market value (evidenced by a resolution of the Board of Directors set forth in
an Officers' Certificate delivered to the Trustee) on the date of the Restricted
Payment of the asset(s) proposed to be transferred by the Company or such
Subsidiary, as the case may be, pursuant to the Restricted Payment. Not later
than the date of making any Restricted Payment, the Company shall deliver to the
Trustee an Officers' Certificate stating that such Restricted Payment is
permitted and setting forth the basis upon which the calculations required by
the covenant "--Restricted Payments" were computed, which calculations may be
based upon the Company's latest available financial statements.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guaranty or otherwise become directly or indirectly liable, contingently or
otherwise, with respect to (collectively, "incur") any Indebtedness (including
Acquired Indebtedness) and that the Company will not issue any Disqualified
Stock and will not permit any of its Subsidiaries to issue any shares of
preferred stock or Disqualified Stock; provided, however, that the Company may
incur Indebtedness (including Acquired Indebtedness) and issue shares of
Disqualified Stock and the Company's Subsidiaries that are Guarantors may incur
Indebtedness and issue preferred stock or Disqualified Stock if, in each case:
(i) the Fixed Charge Coverage Ratio for the Company's most recently ended four
full fiscal quarters for which internal financial statements are available
immediately preceding the date on which such additional Indebtedness is incurred
or such Disqualified Stock or preferred stock is issued would have been at least
2.0 to 1, determined on a pro forma basis (including a pro forma application of
the net proceeds
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therefrom), as if the additional Indebtedness had been incurred, or the
Disqualified Stock or preferred stock had been issued, as the case may be, at
the beginning of such four-quarter period; and (ii) no Default or Event of
Default shall have occurred and be continuing or would occur as a consequence
thereof; provided, that no Guarantee may be incurred pursuant to this paragraph,
unless the guaranteed Indebtedness is incurred by the Company or a Subsidiary of
the Company pursuant to this paragraph. The foregoing provisions will not apply
to:
(i) the incurrence of Indebtedness by the Company or its Subsidiaries
under the Credit Agreement in an aggregate principal amount at any time
outstanding (with letters of credit being deemed to have a principal amount
equal to the maximum potential liability of the Company and its
Subsidiaries thereunder) not to exceed an amount (including any
Indebtedness incurred to refinance, retire, renew, defease, refund or
otherwise replace any such Indebtedness) equal to $70.0 million, less (i)
an amount equal to the cumulative mandatory amortization payments required
under the Credit Agreement in existence as of the Issue Date (irrespective
of whether any such payments are actually made or whether the Credit
Agreement remains in existence) and (ii) the aggregate amount of all Net
Proceeds of Asset Sales applied to permanently reduce the outstanding
amount or, as applicable, the commitments with respect to such Indebtedness
pursuant to the covenant described above under the caption "--Asset Sales;"
(ii) the Existing Indebtedness;
(iii) the incurrence by the Company of Indebtedness represented by the
Notes (up to an aggregate principal amount of $100.0 million) and by the
Subsidiaries of Indebtedness represented by the Subsidiary Guarantees of
such Notes;
(iv) the incurrence by the Company or any of its Subsidiaries of
Indebtedness represented by Capital Lease Obligations, mortgage financings
or Purchase Money Obligations, in each case incurred for the purpose of
financing all or any part of the purchase price or cost of construction or
improvement of property used in the business of the Company or such
Subsidiary, in an aggregate principal amount not to exceed $10.0 million at
any time outstanding (including any Indebtedness incurred to refinance,
retire, renew, defease, refund or otherwise replace any such Indebtedness);
(v) the incurrence by the Company or any of its Subsidiaries of
Permitted Refinancing Indebtedness in exchange for, or the net proceeds of
which are used to extend, refinance, renew, replace, defease or refund,
Indebtedness that was permitted by the Indenture to be incurred or was
outstanding on the Issue Date, after giving effect to the Acquisition
Transactions;
(vi) the incurrence by the Company or any of its Wholly Owned
Subsidiaries of intercompany Indebtedness between or among the Company and
any of its Wholly Owned Subsidiaries or between or among any Wholly Owned
Subsidiaries; provided, however, that (i) any subsequent issuance or
transfer of Equity Interests that results in any such Indebtedness being
held by a Person other than a Wholly Owned Subsidiary and (ii) any sale or
other transfer of any such Indebtedness to a Person that is not either the
Company or a Wholly Owned Subsidiary shall be deemed, in each case, to
constitute an incurrence of such Indebtedness by the Company or such
Subsidiary, as the case may be;
(vii) the incurrence by the Company or any of its Subsidiaries of
Hedging Obligations that are incurred for the purpose of fixing or hedging
interest rate risk with respect to any floating rate Indebtedness that is
permitted by the Indenture to be incurred;
(viii) the incurrence by the Company or any of its Subsidiaries of
Indebtedness in an aggregate principal amount at any time outstanding
(including any Indebtedness incurred to refinance, retire, renew, defease,
refund or otherwise replace any such Indebtedness) not to exceed $10.0
million;
(ix) the incurrence by the Company or any Subsidiary of Indebtedness
in respect of judgment, appeal, surety, performance and other like bonds,
bankers acceptance and letters of credit provided by the Company and its
Subsidiaries in the ordinary course of business in an aggregate amount
outstanding
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(including any indebtedness incurred to refinance, retire, renew, defease,
refund or otherwise replace any such indebtedness) at any time of not more
than $500,000; and
(x) Indebtedness incurred by the Company or any of its Subsidiaries
arising from agreements providing for indemnification, adjustment of
purchase price or similar obligations, or from guarantees of letters of
credit, surety bonds or performance bonds securing the performance of the
Company or any of its Subsidiaries to any person acquiring all or a portion
of such business or assets of a Subsidiary of the Company for the purpose
of financing such acquisition, in a principal amount not to exceed 25% of
the gross proceeds (with proceeds other than cash or Cash Equivalents being
valued at the fair market value thereof as determined by the Board of
Directors of the Company in good faith) actually received by the Company or
any of its Subsidiaries in connection with such disposition.
Notwithstanding any other provision of this covenant, a Guarantee by a
Guarantor of Indebtedness of the Company or another Guarantor permitted by the
terms of the Indenture at the time such Indebtedness was incurred will not
constitute a separate incurrence of Indebtedness.
Indebtedness or Disqualified Stock of any person which is outstanding at
the time such Person becomes a Subsidiary of the Company (including upon
designation of any subsidiary or other person as a Subsidiary) or is merged with
or into or consolidated with the Company or a Subsidiary of the Company shall be
deemed to have been incurred at the time such Person becomes such a Subsidiary
of the Company or is merged with or into or consolidated with the Company or a
Subsidiary of the Company, as applicable.
LIENS
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to directly or indirectly, create, incur, assume or suffer
to exist any Lien on any asset now owned or hereafter acquired, or any income or
profits therefrom or assign or convey any right to receive income therefrom,
except Permitted Liens, unless the Notes and the Subsidiary Guarantees of the
Guarantors are secured by such Lien on an equal and ratable basis; provided,
that if the Obligation secured by any Lien is subordinate or junior in right of
payment to the Notes or such Subsidiary Guarantees, the Lien securing such
Obligation shall be subordinate and junior to the Lien securing the Notes and
such Subsidiary Guarantees with the same or lesser relative priority as such
Obligation shall have been with respect to the Notes and such Subsidiary
Guarantees.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, directly or indirectly, create or otherwise cause or
suffer to exist or become effective any encumbrance or restriction on the
ability of any Subsidiary to (i)(a) pay dividends or make any other
distributions to the Company or any of its Subsidiaries (1) on its Capital Stock
or (2) with respect to any other interest or participation in, or measured by,
its profits, or (b) pay any indebtedness owed to the Company or any of its
Subsidiaries, (ii) make loans or advances to the Company or any of its
Subsidiaries or (iii) transfer any of its properties or assets to the Company or
any of its Subsidiaries, except for such encumbrances or restrictions existing
under or by reason of (a) Existing Indebtedness as in effect on the date of the
Indenture, (b) the Credit Agreement as in effect as of the date of the
Indenture, and any amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements or refinancings thereof; provided that
such amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings may be no more restrictive with respect
to such dividend and other payment restrictions than the most restrictive of
those contained in the Credit Agreement as in effect on the date of the
Indenture, (c) the Indenture and the Notes or Indebtedness permitted to be
incurred pursuant to the Indenture and ranking pari passu with the Notes or the
Guarantees, as applicable, to the extent such restrictions are no more
restrictive than those of the Indenture, (d) applicable law, (e) any instrument
governing Acquired Indebtedness or Capital Stock of a Person acquired by the
Company or any of its Subsidiaries as in effect at the time of such acquisition
(except to the extent such Acquired Indebtedness was incurred in connection with
or in contemplation of such acquisition), which encumbrance or restriction is
not applicable to any Person, or the properties or assets of any Person, other
than the Person, or the property or assets of the Person, so acquired, (f) by
reason of
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customary non-assignment provisions in leases and licenses entered into in the
ordinary course of business and consistent with past practices, (g) Purchase
Money Obligations or Capital Lease Obligations for property acquired in the
ordinary course of business that impose restrictions of the nature described in
clause (iii) above only on the property so acquired, (h) agreements relating to
the financing of the acquisition of real or tangible personal property acquired
after the date of the Indenture, provided, that such encumbrance or restriction
relates only to the property which is acquired and in the case of any
encumbrance or restriction that constitutes a Lien, such Lien constitutes a
Permitted Lien as set forth in clause (xi) of the definition of "Permitted
Lien," (i) any restriction or encumbrance contained in contracts for sale of
assets permitted by this Indenture in respect of the assets being sold pursuant
to such contract, (j) Senior Indebtedness, Guarantor Senior Indebtedness or
Indebtedness of a Foreign Subsidiary permitted to be incurred under the
Indenture and incurred on or after the date of the Indenture; provided, that
such encumbrances or restrictions in such Indebtedness are no more onerous than
the most restrictive of those contained in the Credit Agreement on the date of
the Indenture, or (k) Permitted Refinancing Indebtedness, provided that the
restrictions contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive than those contained in the agreements
governing the Indebtedness being refinanced.
LIMITATION ON LAYERING DEBT
The Indenture provides that (i) the Company will not incur, create, issue,
assume, guarantee or otherwise become liable for any Indebtedness that by its
terms or the terms of any document or instrument relating thereto is subordinate
or junior in right of payment to any Senior Indebtedness and senior in any
respect in right of payment to the Notes, and (ii) no Guarantor will incur,
create, issue, assume, guarantee or otherwise become liable for any Indebtedness
that by its terms or the terms of any document or instrument relating thereto is
subordinate or junior in right of payment to any Guarantor Senior Indebtedness
and senior in any respect in right of payment to any Subsidiary Guarantees.
MERGER, CONSOLIDATION, OR SALE OF ASSETS
The Indenture provides that the Company will not in a single transaction or
series of related transactions consolidate or merge with or into (whether or not
the Company is the surviving corporation), or directly or indirectly, sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of its properties or assets in one or more related transactions, to another
corporation, Person or entity unless (i) the Company is the surviving
corporation or the entity or the Person formed by or surviving any such
consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United States,
any state thereof or the District of Columbia; (ii) the entity or Person formed
by or surviving any such consolidation or merger (if other than the Company) or
the entity or Person to which such sale, assignment, transfer, lease, conveyance
or other disposition shall have been made assumes all the obligations of the
Company, as the case may be, under the Notes, the Subsidiary Guarantees and the
Indenture pursuant to a supplemental indenture in a form reasonably satisfactory
to the Trustee; (iii) immediately after such transaction no Default or Event of
Default exists; (iv) the Company, or the entity or Person formed by or surviving
any such consolidation or merger (if other than the Company), or to which such
sale, assignment, transfer, lease, conveyance or other disposition shall have
been made will, at the time of such transaction and after giving pro forma
effect thereto as if such transaction had occurred at the beginning of the
applicable four-quarter period, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the first paragraph of the covenant described above under the caption
"--Incurrence of Indebtedness and Issuance of Preferred Stock"; and (v) the
Company shall have delivered to the Trustee an Officer's Certificate and an
opinion of counsel, each stating that such consolidation, merger or transfer and
such supplemental indenture (if any) comply with the Indenture. Notwithstanding
the foregoing, the transactions comprising the Acquisition Transactions shall be
deemed to be expressly permitted under the Indenture and shall not require the
execution and delivery of a supplemental indenture.
Upon any consolidation or merger or any transfer of all or substantially
all of the assets of the Company in accordance with the foregoing, the successor
corporation formed by such consolidation or into which the
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Company is merged or to which such transfer is made shall succeed to and (except
in the case of a lease) be substituted for, and may exercise every right and
power of, the Company under the Indenture with the same effect as if such
successor corporation had been named therein as the Company, and (except in the
case of a lease) the Company shall be released from the obligations under the
Notes and the Indenture except with respect to any obligations that arise from,
or are related to, such transaction.
For the purposes of the foregoing, the transfer (by lease, assignment, sale
or otherwise) of all or substantially all of the properties and assets of one or
more Subsidiaries of the Company, the Company's interest in which constitutes
all or substantially all of the properties and assets of the Company shall be
deemed to be the transfer of all or substantially all of the properties and
assets of the Company.
TRANSACTIONS WITH AFFILIATES
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to enter into any transaction (including the sale, lease,
exchange, transfer or other disposition of any of its properties or assets or
services, or the purchase of any property, assets or services), or enter into or
make any contract, agreement, understanding, loan, advance or guarantee with, or
for the benefit of, any Affiliate (each of the foregoing, an "Affiliate
Transaction"), unless (i) such Affiliate Transaction is on terms that are no
less favorable to the Company or the relevant Subsidiary than those that would
have been obtained in a comparable transaction by the Company or such Subsidiary
with an unrelated Person and (ii) the Company delivers to the Trustee (a) with
respect to any Affiliate Transaction or series of related Affiliate Transactions
entered into after the date of the Indenture involving aggregate consideration
in excess of $5.0 million, a resolution of the Board of Directors set forth in
an officers' certificate certifying that such Affiliate Transactions comply with
clause (i) above and that such Affiliate Transactions have been approved by a
majority of the disinterested members of the Board of Directors and (b) with
respect to any Affiliate Transactions or series of related Affiliate
Transactions involving aggregate consideration in excess of $10.0 million, a
favorable written opinion as to the fairness to the Company or such Subsidiary
of such Affiliate Transactions from a financial point of view issued by an
investment banking firm of national standing in the United States, or in the
event such transaction is a type that investment bankers do not generally render
fairness opinions, a valuation or appraisal firm of national standing; provided,
that, the following shall not be deemed to be Affiliate Transactions: (w) the
provision of administrative or management services by the Company or any of its
officers to any of its Subsidiaries in the ordinary course of business
consistent with past practice, (x) any employment agreement entered into by the
Company or any of its Subsidiaries in the ordinary course of business and
consistent with the past practice of the Company or such Subsidiary, (y)
transactions between or among the Company and/or its Wholly Owned Subsidiaries
or Guarantors and (z) transactions permitted by the provisions of the Indenture
described above under the caption "Restricted Payments." In addition, none of
the Acquisition Transactions shall be deemed to be Affiliate Transactions.
ADDITIONAL SUBSIDIARY GUARANTEES
The Indenture provides that all Subsidiaries of the Company (other than
Foreign Subsidiaries) shall be Guarantors. Notwithstanding anything herein or in
the Indenture to the contrary, if any subsidiary of the Company that is not a
Guarantor guarantees any other Indebtedness of the Company or any Subsidiary of
the Company that is a Guarantor, or the Company or a Subsidiary of the Company
pledges more than 65% of the capital stock of such Subsidiary to a United States
lender, then such Subsidiary must become a Guarantor.
LINE OF BUSINESS
The Indenture provides that neither the Company nor any of its Subsidiaries
shall directly or indirectly engage to any substantial extent in any line or
lines of business activity other than that which, in the reasonable good faith
judgment of the Board of Directors of the Company, is a Related Business.
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REPORTS
The Indenture provides that, whether or not required by the rules and
regulations of the Commission so long as any Notes are outstanding, the Company
will furnish to the Holders of Notes (i) all quarterly and annual financial
information that would be required to be contained in a filing with the
Commission on Forms 10-Q and 10-K if the Company were required to file such
Forms, including a "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and, with respect to the annual information and a
report thereon by the Company's certified independent accountants and (ii) all
current reports that would be required to be filed with the Commission on Form
8-K if the Company were required to file such reports. In addition, whether or
not required by the rules and regulations of the Commission, at any time after
the effectiveness of a registration statement with respect to the Exchange
Offer, the Company will file a copy of all such information and reports with the
Commission for public availability (unless the Commission will not accept such a
filing) and make such information available to securities analysts and
prospective investors upon request. In addition, the Company and the Guarantors
have agreed that, for so long as any Transfer Restricted Notes remain
outstanding, they will furnish to the Holders and to securities analysts and
prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on, or
Liquidated Damages, if any, with respect to, the Notes (whether or not
prohibited by the subordination provisions of the Indenture); (ii) default in
payment when due of the principal of or premium, if any, on the Notes (whether
or not prohibited by the subordination provisions of the Indenture); (iii)
failure by the Company to comply with the provisions described under the
captions "Repurchase at the Option of Holders," which failure is not cured
within 30 days; (iv) failure by the Company to comply with any of its other
agreements or covenants in, or provisions of, the Indenture or the Notes; (v)
default under any mortgage, indenture or instrument under which there may be
issued or by which there may be secured or evidenced any Indebtedness for money
borrowed by the Company or any of its Subsidiaries (or the payment of which is
Guaranteed by the Company or any of its Subsidiaries) whether such Indebtedness
or Guarantee now exists, or is created after the date of the Indenture, which
default (a) is caused by a failure to pay principal of or premium on such
Indebtedness when due (after giving effect to any applicable grace period
provided in such Indebtedness) or (b) results in the acceleration of such
Indebtedness prior to its express maturity and, in each case, the principal
amount of any such Indebtedness, together with the principal amount of any other
such Indebtedness under which there has been such a payment default or the
maturity of which has been so accelerated, aggregates $5.0 million or more; (vi)
failure by the Company or any of its Significant Subsidiaries to pay
nonappealable final judgments (not fully covered by insurance) aggregating in
excess of $5.0 million, which judgments are not paid, bonded, discharged or
stayed within a period of 60 days; (vii) except as permitted by the Indenture,
any Subsidiary Guarantee shall be held in any judicial proceeding to be
unenforceable or invalid or shall cease for any reason to be in full force and
effect or any Guarantor, or any Person acting on behalf of any Guarantor, shall
deny or disaffirm its obligations under its Subsidiary Guarantee; and (viii)
certain events of bankruptcy or insolvency with respect to the Company or any of
its Significant Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in aggregate principal amount of the then outstanding
Notes may declare all the Notes to be due and payable immediately by notice in
writing to the Company (and to the Trustee if given by the Holders).
Notwithstanding the foregoing, in the case of an Event of Default arising from
certain events of bankruptcy or insolvency with respect to the Company, any
Significant Subsidiary or any group of Subsidiaries that, taken together, would
constitute a Significant Subsidiary, all outstanding Notes will become due and
payable without further action or notice. Holders of the Notes may not enforce
the Indenture or the Notes except as provided in the Indenture. Subject to
certain limitations, Holders of a majority in aggregate principal amount of the
then outstanding Notes may direct the Trustee in its exercise of any trust or
power. The Trustee may withhold from Holders of the Notes notice of any
continuing Default or Event of Default (except a Default or Event of
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Default relating to the payment of principal or interest) if it determines that
withholding notice is in their interest.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by written notice to the Trustee may on behalf of the Holders of all
of the Notes waive any existing Default or Event of Default and its consequences
under the Indenture, except a continuing Default or Event of Default in the
payment of interest on, or the principal of, or premium and Liquidated Damages,
if any, on the Notes.
The Company is required to deliver to the Trustee quarterly a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No past, present or future director, officer, employee, incorporator or
stockholder of the Company, as such, shall have any liability for any
obligations of the Company under the Notes, the Indenture or for any claim based
on, in respect of, or by reason of, such obligations or their creation. Each
Holder of Notes by accepting a Note waives and releases all such liability. The
waiver and release are part of the consideration for issuance of the Notes. Such
waiver may not be effective to waive liabilities under the federal securities
laws and it is the view of the Commission that such a waiver is against public
policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to all outstanding Notes ("Legal
Defeasance") except for the following provisions which shall survive until
otherwise terminated or discharged under the Indenture (i) the rights of Holders
of outstanding Notes to receive payments in respect of the principal of,
premium, if any, and interest and Liquidated Damages on such Notes when such
payments are due from the trust referred to below, (ii) the Company's
obligations with respect to the Notes concerning issuing temporary Notes,
registration of Notes, mutilated, destroyed, lost or stolen Notes and the
maintenance of an office or agency for payment and money for security payments
held in trust, (iii) the rights, powers, trusts, duties and immunities of the
Trustee under the Indenture, and the Company's obligations in connection
therewith and (iv) the Legal Defeasance and Covenant Defeasance provisions of
the Indenture. In addition, the Company may, at its option and at any time,
elect to have the obligations of the Company released with respect to certain
covenants that are described in the Indenture ("Covenant Defeasance") and
thereafter any omission to comply with such obligations shall not constitute a
Default or Event of Default with respect to the Notes. In the event Covenant
Defeasance occurs, certain events (not including nonpayment, bankruptcy,
receivership, rehabilitation and insolvency events) described under "Events of
Default" will no longer constitute an Event of Default with respect to the
Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium, if any, interest and Liquidated Damages, if
any, on the outstanding Notes on the stated maturity or on the applicable
redemption date, as the case may be, and the Company must specify whether the
Notes are being defeased to maturity or to a particular redemption date; (ii) in
the case of Legal Defeasance, the Company shall deliver to the Trustee an
opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that (A) the Company has received from, or there has been published
by, the Internal Revenue Service a ruling or (B) since the date of the
Indenture, there has been a change in the applicable federal income tax law, in
either case to the effect that, and based thereon such opinion of counsel shall
confirm that, the Holders of the outstanding Notes will not recognize income,
gain or loss for federal income tax purposes as a result of such Legal
Defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Legal
Defeasance had not occurred; (iii) in the case of Covenant Defeasance, the
Company shall have delivered to the Trustee an opinion of counsel in the United
States reasonably acceptable to the Trustee confirming that the Holders of the
outstanding Notes will not recognize income, gain or loss for federal income tax
purposes as a result of such Covenant Defeasance and
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will be subject to federal income tax on the same amounts, in the same manner
and at same times as would have been the case if such Covenant Defeasance had
not occurred; (iv) no Event of Default or Default shall have occurred and be
continuing on the date of such deposit (other than an Event of Default or
Default resulting from the borrowing of funds to be applied to such deposit);
(v) such Legal Defeasance or Covenant Defeasance will not result in a breach or
violation of, or constitute a default under the Senior Bank Debt or any other
material agreement or instrument (other than the Indenture) to which the Company
or any of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound; (vi) the Company must have delivered to the Trustee an
opinion of counsel to the effect that after the 91st day following the deposit,
the trust funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally; (vii) the Company must deliver to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the intent
of preferring the Holders of Notes over the other creditors of the Company with
the intent of defeating, hindering, delaying or defrauding creditors of the
Company or others; and (viii) the Company must deliver to the Trustee an
Officers' Certificate and an opinion of counsel, each stating that all
conditions precedent provided for, in the case of the Officers' Certificate, (i)
through (vii) and, in the case of the opinion of counsel, clauses (i) (with
respect to the validity and perfection of the trust), (ii), (iii) and (v) of
this paragraph relating to the Legal Defeasance or the Covenant Defeasance, as
applicable, have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note selected
for redemption. Also, the Company is not required to transfer or exchange any
Note for a period of 15 days before a selection of Notes to be redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the written consent of the Holders
of at least a majority in aggregate principal amount of the Notes then
outstanding (including consents obtained in connection with a tender offer or
exchange offer for Notes) and any existing Default or compliance with any
provision of the Indenture or the Notes may be waived with the written consent
of the Holders of at least a majority in aggregate principal amount of the then
outstanding Notes (including consents obtained in connection with a tender offer
or exchange offer for Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
aggregate principal amount of Notes whose Holders must consent to an amendment,
supplement or waiver, (ii) reduce the principal of or change the fixed maturity
of any Note or alter the provisions with respect to the redemption of the Notes
(other than provisions relating to the covenants described above under the
caption "--Repurchase at the Option of Holders"), (iii) reduce the rate of or
change the time for payment of interest on any Note, (iv) waive a Default or
Event of Default in the payment of Liquidated Damages, if any, or principal of
or premium, if any, or interest on the Notes (except a rescission of
acceleration of the Notes by the Holders of a majority in aggregate principal
amount of the then outstanding Notes and a waiver of the payment default that
resulted from such acceleration), (v) make any Note payable in money other than
that stated in the Notes, (vi) make any change in the provisions of the
Indenture relating to waivers of past Defaults or the rights of Holders of Notes
to receive payments of principal of or interest on the Notes, (vii) waive a
redemption payment with respect to any Note (other than a payment required by
one of the covenants described above under the caption "Repurchase at the Option
of Holders") or (viii) make any change in the foregoing amendment and waiver
provisions. In addition, any amendment to the subordination provisions of the
Indenture requires the consent
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of the holders of Designated Senior Indebtedness if the amendment would
adversely affect the holders of Designated Senior Indebtedness.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes:
(i) to cure any ambiguity, defect or inconsistency; (ii) to provide for
uncertificated Notes in addition to or in place of certificated Notes; (iii) to
provide for the assumption of the Company's obligations to Holders of Notes in
the case of a merger or consolidation; (iv) to provide for additional
Guarantors; (v) to make any change that would provide any additional rights or
benefits to the Holders of Notes (including the addition of any Subsidiary
Guarantors) or that does not adversely affect the legal rights under the
Indenture of any such Holder; or (vi) to comply with requirements of the
Commission in order to effect or maintain the qualification of the Indenture
under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
as trustee or resign. The Trustee will also serve as trustee under the Indenture
for the SH Group Debentures.
The Holders of a majority in aggregate principal amount of the then
outstanding Notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee,
subject to certain exceptions. The Indenture provides that in case an Event of
Default shall occur (which shall not be cured), the Trustee will be required, in
the exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the Indenture
at the request of any Holder of Notes, unless such Holder shall have offered to
the Trustee security and indemnity satisfactory to it against any loss,
liability or expense.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture and
Registration Rights Agreement without charge by writing to the Company at 1801
Rutherford Road, Greenville, South Carolina 29607, Attention: Chief Financial
Officer.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Acquired Indebtedness" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more
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of the voting securities of a Person shall be deemed to be control.
Notwithstanding the foregoing, the limited partners in AIP shall not be deemed
to be Affiliates of AIP solely by reason of their investment in such funds.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition
that does not constitute a Restricted Payment or an Investment by such person of
any of its non-cash assets (including, without limitation, by way of a sale and
leaseback and including the issuance, sale or other transfer of any of the
capital stock of any Subsidiary of such person but excluding Cash Equivalents
liquidated in the ordinary course of business) other than to the Company or to
any of its Wholly Owned Subsidiaries that is a Guarantor (including the receipt
of proceeds of insurance paid on account of the loss of or damage to any asset
and awards of compensation for any asset taken by condemnation, eminent domain
or similar proceeding, and including the receipt of proceeds of business
interruption insurance); and (ii) the issuance of Equity Interests in any
Subsidiaries or the sale of any Equity Interests in any Subsidiaries, in each
case, in one or a series of related transactions, provided, that notwithstanding
the foregoing, the term "Asset Sale" shall not include: (a) the sale, lease,
conveyance, disposition or other transfer of all or substantially all of the
assets of the Company, as permitted pursuant to the covenant entitled "Merger,
Consolidation or Sale of Assets," (b) the sale or lease of equipment, inventory,
accounts receivable or other assets in the ordinary course of business
consistent with past practice, (c) the sale or disposal of damaged, worn out or
other obsolete personal property in the ordinary course of business so long as
such property is no longer necessary for the proper conduct of the business of
the Company or such Subsidiary, as applicable; (d) a transfer of assets by the
Company to a Wholly Owned Subsidiary or by a Wholly Owned Subsidiary to the
Company or to another Wholly Owned Subsidiary, (e) an issuance of Equity
Interests by a Wholly Owned Subsidiary to the Company or to another Wholly Owned
Subsidiary, (f) the surrender or waiver of contract rights or the settlement,
release or surrender of contract, tort or other claims of any kind, (g) the
grant in the ordinary course of business of any non-exclusive license of
patents, trademarks, registrations therefor and other similar intellectual
property, or (h) Permitted Investments.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in New York are authorized or
obligated by law or executive order to close.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a Capital Lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Contribution" means any contribution to the equity of the Company
for which no consideration is given other than common stock with no redemption
rights and no special privileges, preferences, or special voting rights.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership, partnership interests
(whether general or limited) and (iv) any other interest or participation that
confers on a Person the right to receive a share of the profits and losses of,
or distributions of assets of, the issuing Person.
"Cash Equivalents" means (a) securities issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States is pledged in support thereof) having maturities not more than twelve
months from the date of acquisition, (b) U.S. dollar denominated (or foreign
currency fully hedged) time deposits, certificates of deposit, Eurodollar time
deposits or Eurodollar certificates of deposit of (i) any domestic commercial
bank of recognized standing having capital and surplus in excess of $100 million
or (ii) any bank whose short-term commercial paper rating from S&P is at least
A-1 or the equivalent thereof or from Moody's is at least P-1 or the equivalent
thereof (any such bank being an "Approved Lender"), in each case with maturities
of not more than twelve months from the date of acquisition, (c) commercial
paper and variable or fixed rate notes issued by any Approved Lender (or by the
parent company thereof) or any variable rate notes issued by, or guaranteed by,
any domestic corporation rated A-2 (or the equivalent thereof) or better by S&P
or P-2 (or the equivalent thereof) or better by Moody's and maturing within
twelve months of the date of acquisition, (d) repurchase agreements with a bank
or trust company or recognized securities dealer having capital and
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surplus in excess of $100 million for direct obligations issued by or fully
guaranteed by the United States of America in which the Company shall have a
perfected first priority security interest (subject to no other Liens) and
having, on the date of purchase thereof, a fair market value of at least 100% of
the amount of repurchase obligations, and (e) interests in money market mutual
funds which invest solely in assets or securities of the type described in
subparagraphs (a), (b), (c) or (d) hereof.
"Change of Control" means such time as (i) prior to the initial public
offering by the Company of any shares of its common stock (other than a public
offering pursuant to a registration statement on Form S-8), AIP and its
Affiliates (collectively, the "Initial Investors") cease to be, directly or
indirectly, the beneficial owners, in the aggregate of at least 51% of the
voting power of the voting common stock of the Company or (ii) after the initial
public offering by the Company of any shares of its common stock (other than a
public offering pursuant to a registration statement on Form S-8), (A) any
Schedule 13D, Form 13F or Schedule 13G under the Exchange Act, or any amendment
to such Schedule or Form, is received by the Company which indicates that, or
the Company otherwise becomes aware that, a "person" or "group" (within the
meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) (except, in the case
of the Company, the Parent) has become, directly or indirectly, the "beneficial
owner", by way of merger, consolidation or otherwise, of 35% or more of the
voting power of the voting capital stock of the Company and (B) any such person
or group has become, directly or indirectly, the beneficial owner of a greater
percentage of the voting capital stock of the Company than is beneficially owned
by the Initial Investors, or (iii) the sale, lease or transfer of all or
substantially all of the assets of the Company to any person or group (other
than the Initial Investors or their Related Parties (as defined below)), or (iv)
during any period of two consecutive calendar years, individuals who at the
beginning of such period constituted the Board of Directors of the Company
(together with any Continuing Directors) cease for any reason to constitute a
majority of the directors of the Company, then in office. "Related Party" with
respect to any Initial Investor means (A) any controlling stockholder, 80% (or
more) owned Subsidiary, or spouse, or immediate family member (in the case of
any individual) of such Initial Investor or (B) any trust, corporation,
partnership or other entity, the beneficiaries, stockholders, partners, owners
or persons beneficially holding an 80% or more controlling interest of which
consist of such Initial Investor and/or such other persons referred to in the
immediately preceding clause (A).
"Consolidated EBITDA" means, with respect to the Company and its
Subsidiaries for any period, the sum of, without duplication, (i) the
Consolidated Net Income for such period, plus (ii) the Fixed Charges for such
period, plus (iii) provision for taxes based on income or profits for such
period (to the extent such income or profits were included in computing
Consolidated Net Income for such period), plus (iv) consolidated depreciation,
amortization and other non-cash charges of the Company and its Subsidiaries
required to be reflected as expenses on the books and records of the Company,
minus (v) cash payments with respect to any non-recurring, non-cash charges
previously added back pursuant to clause (iv), and (vi) excluding the impact of
foreign currency translations. Notwithstanding the foregoing, the provision for
taxes based on the income or profits of, and the depreciation and amortization
and other non-cash charges of, a Subsidiary of a Person shall be added to
Consolidated Net Income to compute Consolidated EBITDA only to the extent (and
in the same proportion) that the Net Income of such Subsidiary was included in
calculating the Consolidated Net Income of such Person and only if a
corresponding amount would be permitted at the date of determination to be paid
as a dividend to the Company by such Subsidiary without prior approval (that has
not been obtained), pursuant to the terms of its charter and all agreements,
instruments, judgments, decrees, orders, statutes, rules and governmental
regulations applicable to that Subsidiary or its stockholders.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP; provided
that (i) the Net Income (but not loss) of any Person that is not a Subsidiary or
that is accounted for by the equity method of accounting shall be included only
to the extent of the amount of dividends or distributions paid in cash to the
referent Person or a Wholly Owned Subsidiary thereof, (ii) the Net Income of any
Subsidiary shall be excluded to the extent that the declaration or payment of
dividends or similar distributions by that Subsidiary of that Net Income is not
at the date of determination permitted without any prior governmental approval
(which has not been obtained) or, directly or indirectly, by operation
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of the terms of its charter or any agreement, instrument, judgment, decree,
order, statute, rule or governmental regulation applicable to that Subsidiary or
its stockholders, (iii) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition shall
be excluded, (iv) the cumulative effect of a change in accounting principles
shall be excluded, (v) the Net Income of, or any dividends or other
distributions from, any Unrestricted Subsidiary, to the extent otherwise
included, shall be excluded, whether or not distributed to the Company or one of
its Subsidiaries, and (vi) all other extraordinary gains and extraordinary
losses shall be excluded.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Company who (i) was a member of such Board of
Directors on the Issue Date, (ii) was nominated for election or elected to such
Board of Directors with the approval of a majority of the Continuing Directors
who were members of such Board of Directors at the time of such nomination or
election or (iii) was appointed by AIP pursuant to the Shareholders Agreement.
"Credit Agreement" means that certain Credit Agreement, dated as of the
date of the Indenture, by and among the Company and NationsBank, N.A., as
administrative agent, and the lenders parties thereto, including any related
notes, guarantees, collateral documents, instruments and agreements executed in
connection therewith, and in each case as amended, modified, renewed, refunded,
replaced, extended, restated or refinanced from time to time, including any
agreement restructuring or adding Subsidiaries of the Company as additional
borrowers or guarantors thereunder and whether by the same or any other agent,
lender or group of lenders; provided that the total amount of Senior
Indebtedness is not thereby increased beyond the amount that may then be
incurred at such time pursuant to the covenant described under the caption
"--Incurrence of Indebtedness and Issuance of Preferred Stock".
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Designated Senior Indebtedness" means (i) so long as the Senior Bank Debt
is outstanding, the Senior Bank Debt and (ii) thereafter, any other Senior
Indebtedness permitted under the Indenture the principal amount of which is
$25.0 million or more and that has been designated by the Company as "Designated
Senior Indebtedness."
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the Holder thereof, in whole or in part, on or prior to the date
on which the Notes mature.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Equity Offering" means an underwritten public offering of Equity Interests
of the Company, or the Parent, other than Disqualified Stock, pursuant to a
registration statement filed with the Commission in accordance with the
Securities Act.
"Existing Indebtedness" means the Indebtedness of the Company and its
Subsidiaries (other than Indebtedness under the Credit Agreement) in existence
on the date of the Indenture, until such amounts are repaid.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person and
its Subsidiaries for such period, whether paid or accrued (including, without
limitation, amortization of original issue discount, amortization of deferred
financing fees, non-cash interest payments, the interest component of any
deferred payment obligations, the interest component of all payments associated
with Capital Lease Obligations, commissions, discounts and other fees and
charges incurred in respect of letter of credit or bankers' acceptance
financings, and net payments (if any) pursuant to Hedging Obligations), (ii) the
consolidated interest expense of such Person and its Subsidiaries that was
capitalized during such period, (iii) any interest expense on Indebtedness of
another Person that is Guaranteed by such Person or one of its Subsidiaries or
secured by a Lien on assets of
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such Person or one of its Subsidiaries (whether or not such Guarantee or Lien is
called upon) and (iv) the product of (a) all cash dividend payments (and non
cash dividend payments in the case of a Person that is a Subsidiary) on any
series of preferred stock of such Person payable to a party other than the
Company or a Wholly Owned Subsidiary, times (b) a fraction, the numerator of
which is one and the denominator of which is one minus the then current combined
federal state and local statutory tax rate of such Person, expressed as a
decimal, on a consolidated basis and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means, with respect to any Person for any
period, the ratio of the Consolidated EBITDA of such Person and its Subsidiaries
for such period to the Fixed Charges of such Person and its Subsidiaries for
such period. In the event that the Company or any of its Subsidiaries incurs,
assumes, retires, Guarantees or redeems any Indebtedness (other than revolving
credit borrowings) or issues preferred stock subsequent to the commencement of
the four-quarter reference period for which the Fixed Charge Coverage Ratio is
being calculated but on or prior to the date on which the event for which the
calculation of the Fixed Charge Coverage Ratio is made (the "Calculation Date"),
then the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect
to such incurrence, assumption, retirement, Guarantee or redemption of
Indebtedness, or such issuance or redemption of preferred stock, as if the same
had occurred at the beginning of the applicable four-quarter reference period.
For purposes of making the computation referred to above, (i) acquisitions that
have been made by the Company or any of its Subsidiaries, including through
mergers or consolidations and including any related financing and refinancing
transactions, during the four-quarter reference period or subsequent to such
reference period and on or prior to the Calculation Date shall be deemed to have
occurred on the first day of the four-quarter reference period, (ii) the
Consolidated EBITDA attributable to discontinued operations, as determined in
accordance with GAAP, and operations or businesses disposed of on or prior to
the Calculation Date, shall be excluded, and (iii) the Fixed Charges
attributable to discontinued operations, as determined in accordance with GAAP,
and operations or businesses disposed of on or prior to the Calculation Date,
shall be excluded, but only to the extent that the obligations giving rise to
such Fixed Charges will not be obligations of the referent Person or any of its
Subsidiaries following the Calculation Date.
"Foreign Subsidiary" means any Wholly Owned Subsidiary organized and
incorporated in a jurisdiction outside of the United States that is not a
Guarantor.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the Indenture.
"Guarantee" means any obligation, contingent or otherwise, of any person
directly or indirectly guaranteeing any Indebtedness of any Person and any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness of such Person (whether arising by virtue of agreements to keep
well, to purchase assets, goods, letters of credit, reimbursement agreements,
securities or services, to take-or-pay or to maintain financial statement
conditions or otherwise) or (ii) entered into for the purpose of assuring in any
other manner the obligee of such Indebtedness of the payment thereof or to
protect such obligee against loss in respect thereof (in whole or in part);
provided, however, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has corresponding meaning.
"Guarantor Senior Indebtedness" means (i) the Senior Bank Debt and any
Guarantees by any Guarantor of the Senior Bank Debt and (ii) any other
Indebtedness permitted to be incurred by any Guarantor under the terms of the
Indenture, unless the instrument under which such Indebtedness is incurred
expressly provides that it is on a parity with or subordinated in right of
payment to the Subsidiary Guarantees. Notwithstanding anything to the contrary
in the foregoing, Guarantor Senior Indebtedness will not include (w) any
liability for federal, state, local, or other taxes owed or owing by any
Guarantor, (x) any Indebtedness of any Guarantor to
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any of its Subsidiaries or other Affiliates, (y) any trade payables or (z) any
Indebtedness that is incurred in violation of the Indenture.
"Guarantors" means each Subsidiary of the Company that executes a
Subsidiary Guarantee guaranteeing the Notes in accordance with the provisions of
the Indenture, and their respective successors and assigns.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) currency exchange or interest rate swap agreements,
interest rate cap agreements and interest rate collar agreements and (ii) other
agreements or arrangements designed to protect such Person against fluctuations
in interest rates or currency exchange rates.
"Holder" means a Person in whose name a Note is registered on the
Registrar's books.
"Indebtedness" means, with respect to any Person, any (i) indebtedness of
such Person, whether or not contingent, in respect of borrowed money or
evidenced by bonds, notes, debentures or similar instruments or letters of
credit (or reimbursement agreements in respect thereof) or banker's acceptances
or representing Capital Lease Obligations or the balance deferred and unpaid of
the purchase price of any property or representing any Hedging Obligations,
except any such balance that constitutes an accrued expense or trade payable
incurred in the ordinary course of business, but only (other than with respect
to, letters of credit and Hedging Obligations) if and to the extent any of the
foregoing indebtedness would appear as a liability upon a consolidated balance
sheet of such Person prepared in accordance with GAAP, (ii) all Obligations of
such Person with respect to any conditional sale or title retention agreement,
(iii) the amount of all Obligations of such Person with respect to redemption,
repayment or other repurchase of any Disqualified Stock or, with respect to any
Subsidiary of such Person, any preferred stock, (iv) all indebtedness of others
secured by a Lien on any asset of such Person (whether or not such indebtedness
is assumed by such Person), and (v) to the extent not otherwise included, the
Guarantee by such Person of any indebtedness of any other Person.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations, but
excluding guarantees of Indebtedness of the Company or any Subsidiary to the
extent such guarantee is permitted by the covenant "Incurrence of Indebtedness
and Issuance of Preferred Stock"), advances or capital contributions (excluding
commission, travel and similar advances to officers and employees made in the
ordinary course of business), transfers of assets outside the ordinary course of
business other than Asset Sales, purchases or other acquisitions for
consideration of Indebtedness, Equity Interests or other securities and all
other items that are or would be classified, as investments on a balance sheet
prepared in accordance with GAAP; provided that an acquisition of assets, Equity
Interests or other securities by the Company for consideration consisting of
common equity securities of the Company shall not be deemed to be an Investment.
"Issue Date" means the date of first issuance of the Notes under the
Indenture.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
"Liquidated Damages" means, the amounts payable by the Company, if any,
pursuant to the provisions described under "Registration Rights; Liquidated
Damages."
"Net Cash Proceeds" means the aggregate amount of cash or Cash Equivalents
received by the Company in the case of a sale or equity contribution in respect
of Qualified Capital Stock plus, in the case of an issuance of Qualified Capital
Stock upon any exercise, exchange or conversion of securities (including
options, warrants, rights and convertible or exchangeable debt) of the Company
that were issued for cash after the Issue Date, the amount of cash originally
received by the Company upon the issuance of such securities (including options,
warrants, rights and convertible or exchangeable debt) less, the sum of all
payments, fees,
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commissions, and customary and reasonable expenses (including, without
limitation, the fees and expenses of legal counsel and investment banking fees
and expenses) incurred in connection with such sale or equity contribution in
respect of Qualified Capital Stock.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b) the
disposition of any securities by such Person or any of its Subsidiaries or the
extinguishment of any Indebtedness of such Person or any of its Subsidiaries and
(ii) any extraordinary or nonrecurring gain (but not loss), together with any
related provision for taxes on such extraordinary or nonrecurring gain (but not
loss).
"Net Proceeds" means the aggregate cash and Cash Equivalents received by
the Company or any of its Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale) and, with respect to the
covenant "Restricted Payments," by the Company or any Subsidiary in respect of
the sale of an Unrestricted Subsidiary and the sale, liquidation or repayment
for cash of a Restricted Investment, in each case, net of the direct costs
relating thereto (including, without limitation, legal, accounting and
investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof, taxes paid or payable as a result thereof (after
taking into account any available tax credits or deductions and any tax-sharing
arrangements), and any reserve for adjustment in respect of the sale price of
such asset or assets established in accordance with GAAP.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damage and other liabilities payable under the
documentation governing any Indebtedness.
"Parent" means Steel Heddle Group, Inc. or its successor.
"Permitted Investments" means (a) any Investments in the Company or in a
Wholly Owned Subsidiary of the Company and that is engaged in one or more
Related Businesses; (b) any Investments in Cash Equivalents; (c) Investments by
the Company or any Subsidiary of the Company in a Person if as a result of such
Investment (i) such Person becomes a Wholly Owned Subsidiary of the Company that
is engaged in one or more Related Businesses or (ii) such Person is merged,
consolidated or amalgamated with or into, or transfers or conveys substantially
all of its assets to, or is liquidated into, the Company or a Wholly Owned
Subsidiary of the Company that is engaged in one or more Related Businesses; (d)
Investments made as a result of the receipt of non-cash consideration from an
Asset Sale that was made pursuant to and in compliance with the covenant
described above under the caption "--Repurchase at the Option of Holders--Asset
Sales"; (e) Investments outstanding as of the date of the Indenture; (f)
Investments in the form of promissory notes of members of the Company's
management in consideration of the purchase by such members of Equity Interests
(other than Disqualified Stock) in the Company; (g) Investments which constitute
Existing Indebtedness of the Company or any of its Subsidiaries; (h) accounts
receivable, endorsements for collection or deposits arising in the ordinary
course of business; and (i) other Investments in any Person or Persons that do
not in the aggregate exceed $10.0 million at any time outstanding; provided,
however, that to the extent there would be, and to avoid, any duplication in
determining the amounts of investments outstanding under this clause (i) any
amounts which were credited under clause (c) of the covenant "Restricted
Payments" shall reduce the amounts outstanding under this clause (i).
"Permitted Liens" means (i) Liens securing Senior Indebtedness or Guarantor
Senior Indebtedness in an aggregate principal amount at any time outstanding not
to exceed amounts permitted under the covenant "Incurrence of Indebtedness and
Issuance of Preferred Stock"; (ii) Liens in favor of the Company; (iii) Liens on
property of a Person existing at the time such Person is merged into or
consolidated with the Company or any Subsidiary of the Company, including any
Permitted Refinancings with respect thereto; provided, that such Liens were in
existence prior to the contemplation of such merger or consolidation and do not
extend to any assets other than those of the Person merged into or consolidated
with the Company; (iv) Liens on property existing at the time of acquisition
thereof by the Company or any Subsidiary of the Company;
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provided, that such Liens were in existence prior to the contemplation of such
acquisition; (v) Liens to secure the performance of statutory obligations,
surety or appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business; (vi) Liens existing on the date of
the Indenture; (vii) Liens for taxes, assessments or governmental charges or
claims that are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently concluded; provided,
that any reserve or other appropriate provision as shall be required in
conformity with GAAP shall have been made therefor; (viii) Liens incurred in the
ordinary course of business of the Company or any Subsidiary of the Company with
respect to obligations that do not exceed in the aggregate $5.0 million at any
one time outstanding and that (a) are not incurred in connection with the
borrowing of money or the obtaining of advances or credit (other than trade
credit in the ordinary course of business) and (b) do not in the aggregate
materially detract from the value of the property or materially impair the use
thereof in the operation of business by the Company or such Subsidiary; (ix)
Liens incurred or deposits made in the ordinary course of business in connection
with workers' compensation, unemployment insurance and other types of social
security; (x) easements, rights-of-way, restrictions, minor defects or
irregularities in title and other similar charges or encumbrances not
interfering in any material respect with the business of the Company or any of
its Subsidiaries, (xi) Purchase Money Liens (including extensions and renewals
thereof); (xii) Liens securing reimbursement obligations with respect to letters
of credit which encumber only documents and other property relating to such
letters of credit and the products and proceeds thereof; (xiii) judgment and
attachment Liens not giving rise to an Event of Default; (xiv) Liens encumbering
deposits made to secure obligations arising from statutory, regulatory,
contractual or warranty requirements; (xv) Liens arising out of consignment or
similar arrangements for the sale of goods; (xvi) any interest or title of a
lessor in property subject to any capital lease obligation or operating lease;
(xvii) Liens on assets of Subsidiaries with respect to Acquired Indebtedness
(including Liens securing Permitted Refinancing Indebtedness with respect
thereto;) provided such Liens are only on assets or property acquired with such
Acquired Indebtedness and that such Liens were not created in contemplation of
or in connection with such Acquisition; and (xviii) Liens granted by a Foreign
Subsidiary to secure Indebtedness of such Foreign Subsidiary.
"Permitted Payments to Parent" means without duplication, (a) payments to
Parent in an amount sufficient to permit Parent to pay reasonable and necessary
operating expenses and other general corporate expenses to the extent such
expenses relate or are fairly allocable to the Company and its Subsidiaries
including any reasonable professional fees and expenses, but excluding all
expenses payable to or to be paid to or on behalf of AIP, its other Affiliates
and its Related Parties, not in excess of $500,000 in any fiscal year, and (b)
payments to Parent to enable Parent to pay foreign, federal, state or local tax
liabilities ("Tax Payment"), not to exceed the amount of any tax liabilities
that would be otherwise payable by the Company and its Subsidiaries and
Unrestricted Subsidiaries to the appropriate taxing authorities if they filed
separate tax returns, to the extent that Parent has an obligation to pay such
tax liabilities relating to the operations, assets or capital of the Company or
its Subsidiaries and Unrestricted Subsidiaries; provided, however, that (i),
notwithstanding the foregoing, in the case of determining the amount of a Tax
Payment that is permitted to be paid by Company and any of its United States
subsidiaries in respect of their Federal income tax liability, such payment
shall be determined assuming that the Company is the parent company of an
affiliated group (the "Company Affiliated Group") filing a consolidated Federal
income tax return and that Parent and each such United States subsidiary is a
member of the Company Affiliated Group and (ii) any Tax Payments shall either be
used by Parent to pay such tax liabilities within 90 days of Parent's receipt of
such payment or refunded to the payee.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Subsidiaries issued in exchange for, or the net proceeds of which
are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of the Company or any of its Subsidiaries; provided, that: (a) the
principal amount of such Permitted Refinancing Indebtedness does not exceed
(after deduction of reasonable and customary fees and expenses incurred in
connection with such refinancing and the amount of any premium or prepayment
penalty paid in connection with such refinancing transaction to the extent in
accordance with the terms of the document governing such Indebtedness (except
for any modification to any such document made in connection with or in
contemplation of such refinancing) the lesser of (i) the principal amount of the
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Indebtedness so extended refinanced, renewed, replaced, defeased or refunded;
and (ii) if such Indebtedness being refinanced was issued with an original issue
discount, the accreted value thereof (as determined in accordance with GAAP) at
the time of such refinancing, plus, in each case accrued interest on such
Indebtedness being refinanced; (b) such Permitted Refinancing Indebtedness has a
Weighted Average Life to Maturity equal to or greater than the Weighted Average
Life to Maturity of, the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded; (c) if the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded is subordinated in right of
payment to the Notes, such Permitted Refinancing Indebtedness has a final
maturity date later than the final maturity date of, and is subordinated in
right of payment to, the Notes on terms at least as favorable to the Holders of
Notes as those contained in the documentation governing the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded; and (d) such
Indebtedness is incurred either by the Company or by the Subsidiary who is the
obligor on the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded.
"Purchase Money Lien" means a Lien granted on an asset or property to
secure a Purchase Money Obligation permitted to be incurred under the Indenture
and incurred solely to finance the acquisition, including, in the case of a
Capital Lease, the lease, of such asset or property; provided, however, that
such Lien encumbers only such asset or property and is granted within 180 days
of such acquisition.
"Purchase Money Obligations" of any person means any obligations of such
person to any seller or any other person incurred or assumed to finance solely
the acquisition, including, in the case of a Capital Lease, the lease, of real
or personal property to be used in the business of such person or any of its
Subsidiaries in an amount that is not more than 100% of the cost of such
property, and incurred within 180 days after the date of such acquisition
(excluding accounts payable to trade creditors incurred in the ordinary course
of business).
"Qualified Capital Stock" means any Capital Stock of the Company, or, if
expressly applicable, the Parent, that is not Disqualified Stock.
"Related Business" means the business conducted (or proposed to be
conducted) by the Company and its Subsidiaries as of the Issue Date and any and
all businesses that in the good faith judgment of the Board of Directors of the
Company are materially related businesses, including reasonable extensions or
expansions thereof.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Senior Bank Debt" means all Obligations in respect of the Indebtedness
(including, without limitation, interest accruing after filing of a petition in
bankruptcy, whether or not such interest is an allowable claim in such
proceeding) outstanding under the Credit Agreement.
"Senior Indebtedness" means (i) the Senior Bank Debt and (ii) any other
Indebtedness permitted to be incurred by the Company under the terms of the
Indenture, unless the instrument under which such Indebtedness is incurred
expressly provides that it is on a parity with or subordinated in right of
payment to the Notes. Notwithstanding anything to the contrary in the foregoing,
Senior Indebtedness will not include (w) any liability for federal, state, local
or other taxes owed or owing by the Company, (x) any Indebtedness of the Company
to any of its Subsidiaries or other Affiliates, (y) any trade payables or (z)
any Indebtedness that is incurred in violation of the Indenture.
"Senior Revolving Debt" means revolving credit borrowings and letters of
credit under the Credit Agreement and/or any successor facility or facilities.
"Senior Term Debt" means term loans under the Credit Agreement and/or any
successor facility or facilities.
"Shareholders Agreement" means the shareholders agreement by and between
Parent and certain of its shareholders.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Exchange Act, as such Regulation is in effect on the date
hereof.
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"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof). Unrestricted
Subsidiaries shall not be included in the definition of Subsidiary for any
purposes of the Indenture (except, as the context may otherwise require, for
purposes of the definition of "Unrestricted Subsidiary").
"Subsidiary Guarantor" means, a Subsidiary which has guaranteed the Notes
in accordance with the Indenture.
"Unrestricted Subsidiary" means (i) any Subsidiary (other than Guarantors
or any successors) that is designated by the Board of Directors as an
Unrestricted Subsidiary pursuant to a Board Resolution; but only to the extent
that such Subsidiary: (a) has no Indebtedness other than Non-Recourse Debt; (b)
is not party to any agreement, contract, arrangement or understanding with the
Company or any Subsidiary of the Company unless the terms of any such agreement,
contract, arrangement or understanding are no less favorable to the Company or
such Subsidiary than those that might be obtained at the time from Persons who
are not Affiliates of the Company; (c) is a Person with respect to which neither
the Company nor any of the Subsidiaries has any direct or indirect obligation to
subscribe for additional Equity Interests or maintain or preserve such Person's
financial condition or to cause such Person to achieve any specified level of
operating results; and (d) has not guaranteed or otherwise directly or
indirectly provided credit support for any Indebtedness of the Company or any of
its Subsidiaries, and (ii) any Subsidiary of an Unrestricted Subsidiary. Any
such designation by the Board of Directors shall be evidenced to the Trustee by
filing with the Trustee a certified copy of the Board Resolutions giving effect
to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing conditions and was permitted by the
covenant described above under the caption "Certain Covenants--Restricted
Payments." If, at any time, any Unrestricted Subsidiary would fail to meet the
foregoing requirements as an Unrestricted Subsidiary, it shall thereafter cease
to be an Unrestricted Subsidiary for purposes of the Indenture and any
Indebtedness of such Subsidiary shall be deemed to be incurred by a Subsidiary
of the Company as of such date (and, if such Indebtedness is not permitted nor
incurred as of such date under the covenant described under the caption "Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock," the
Company shall be in default of such covenant). The Board of Directors of the
Company may at any time designate any Unrestricted Subsidiary to be a
Subsidiary; provided, that such designation shall be deemed to be an incurrence
of Indebtedness by a Subsidiary of the Company of any outstanding Indebtedness
of such Unrestricted Subsidiary and such designation shall only be permitted if
(i) such Indebtedness is permitted under the covenant described under the
caption "Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred
Stock," and (ii) no Default or Event of Default would be in existence following
such designation.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each of the remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twentieth) that will elapse
between such date and the making of such payment, by (ii) the then outstanding
principal amount of such Indebtedness.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person. Unrestricted
Subsidiaries shall not be included in the definition of Wholly Owned Subsidiary
for any purposes of the Indenture (except, as the context may otherwise require,
for purposes of the definition of "Unrestricted Subsidiary.")
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REGISTRATION RIGHTS; LIQUIDATED DAMAGES
The Company, the Guarantors and the Initial Purchasers entered into the
Registration Rights Agreement on May 26, 1998. In the Registration Rights
Agreement, the Company and the Guarantors agreed to file this Registration
Statement with the Commission within 75 days of the Closing Date and to use
their best efforts to have it declared effective within 150 days of the Closing
Date. The Company also agreed to use its best efforts to cause the Exchange
Offer Registration Statement (of which this Prospectus is a part) to be
effective continuously, to keep the Exchange Offer open for a period of not less
than 20 business days and cause the Exchange Offer to be consummated no later
than the 30th business day after it is declared effective by the Commission. To
participate in the Exchange Offer, each Holder must represent that it is not an
affiliate of the Company, it is not engaged in, and does not intend to engage
in, and has no arrangement or understanding with any person to participate in, a
distribution of the New Notes and it is acquiring the New Notes in the Exchange
Offer in its ordinary course of business.
If (i) the Exchange Offer is not permitted by applicable law or Commission
policy or (ii) any Holder of Old Notes which are Transfer Restricted Securities
notifies the Company prior to the 20th business day following the consummation
of the Exchange Offer that (a) it is prohibited by law or Commission policy from
participating in the Exchange Offer, (b) it may not resell the New Notes
acquired by it in the Exchange Offer to the public without delivering a
prospectus, and the Prospectus contained in this Registration Statement is not
appropriate or available for such resales by it or (c) it is a broker-dealer and
holds the Old Notes acquired directly from the Company or any of the Company's
affiliates, the Company will file with the Commission a Shelf Registration
Statement to register for public resale the Transfer Restricted Securities held
by any such Holder who provides the Company with certain information for
inclusion in the Shelf Registration Statement.
For the purposes of the Registration Rights Agreement, "Transfer Restricted
Securities" means each Old Note until the earliest of the date of which (i) such
Old Note is exchanged hereby and entitled to be resold to the public by the
Holder thereof without complying with the prospectus delivery requirements of
the Securities Act, (ii) such Old Note has been disposed of in accordance with
the Shelf Registration Statement, (iii) such Old Note is disposed of by a
broker-dealer pursuant to the "Plan of Distribution" contemplated by the
Exchange Offer Registration Statement (including delivery of the Prospectus
contained therein) or (iv) such Old Note is distributed to the public pursuant
to Rule 144 under the Securities Act.
The Registration Rights Agreement provides that (i) if the Company fails to
file an Exchange Offer Registration Statement with the Commission on or prior to
the 75th day after the Closing Date, (ii) if the Exchange Offer Registration
Statement is not declared effective by the Commission on or prior to the 150th
day after the Closing Date, (iii) the Exchange Offer is not consummated on or
before the 30th business day after the Exchange Offer Registration Statement is
declared effective, (iv) if obligated to file the Shelf Registration Statement
and the Company fails to file the Shelf Registration Statement with the
Commission on or prior to the 30th business day after such filing obligation
arises, (v) if obligated to file a Shelf Registration Statement and the Shelf
Registration Statement is not declared effective on or prior to the 90th day
after the obligation to file a Shelf Registration Statement arises or (vi) if
the Exchange Offer Registration Statement or the Shelf Registration Statement,
as the case may be, is declared effective but thereafter ceases to be effective
or useable in connection with resales of the Transfer Restricted Securities,
such time of non-effectiveness or non-useability (each, a "Registration
Default"), the Company agrees to pay to each Holder of Transfer Restricted
Securities affected thereby liquidated damages ("Liquidated Damages") in an
amount equal to $0.05 per week per $1,000 in principal amount of Transfer
Restricted Securities held by such Holder for each week or portion thereof that
the Registration Default continues for the first 90-day period immediately
following the occurrence of such Registration Default. The amount of the
Liquidated Damages shall increase by an additional $0.05 per week per $1,000 in
principal amount of Transfer Restricted Securities with respect to each
subsequent 90 day period until all Registration Defaults have been cured, up to
a maximum amount of Liquidated Damages of $0.50 per week, per $1,000 in
principal amount of Transfer Restricted Securities. The Company shall not be
required to pay Liquidated Damages for more than one Registration Default at any
given time. Following the cure of all Registration Defaults, the accrual of
Liquidated Damages will cease.
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All accrued Liquidated Damages shall be paid by the Company to Holders
entitled thereto in the same manner as interest payments on the Notes on
semi-annual damages payment dates which correspond to interest payment dates for
the Notes.
BOOK-ENTRY; DELIVERY; FORM AND TRANSFER
The Notes sold to Qualified Institutional Buyers initially will be in the
form of one or more registered global notes without interest coupons
(collectively, the "U.S. Global Notes"). Upon issuance, the U.S. Global Notes
will be deposited with the Trustee, as custodian for DTC, in New York, New York,
and registered in the name of DTC or its nominee, in each case for credit to the
accounts of DTC's Direct and Indirect Participants (as defined below). The Notes
being offered and sold in offshore transactions in reliance on Regulation S, if
any, initially will be in the form of one or more temporary, registered, global
book-entry notes without interest coupons (the "Reg S Temporary Global Notes").
The Reg S Temporary Global Notes will be deposited with the Trustee, as
custodian for the DTC, in New York, New York, and registered in the name of a
nominee of DTC (a "Nominee") for credit to the accounts of Indirect Participants
at the Euroclear System ("Euroclear") and Cedel Bank, societe anonyme ("CEDEL").
During the 40-day period commencing on the day after the later of the Offering
and the original Issue Date (as defined) of the Notes (the "40-Day Restricted
Period"), beneficial interests in the Reg S Temporary Global Note may be held
only through Euroclear or CEDEL, and, pursuant to DTC's procedures, Indirect
Participants that hold a beneficial interest in the Reg S Temporary Global Note
will not be able to transfer such interest to a person that takes delivery
thereof in the form of an interest in the U.S. Global Notes. Within a reasonable
time after the expiration of the 40-Day Restricted Period, the Reg S Temporary
Global Notes will be exchanged for one or more permanent global notes (the "Reg
S Permanent Global Notes"; collectively with the Reg S Temporary Global Notes,
the "Reg S Global Notes") upon delivery to DTC of certification of compliance
with the transfer restrictions applicable to the Notes and pursuant to
Regulation S as provided in the Indenture. After the 40-Day Restricted Period,
(i) beneficial interests in the Reg S Permanent Global Notes may be transferred
to a person that takes delivery in the form of an interest in the U.S. Global
Notes and (ii) beneficial interests in the U.S. Global Notes may be transferred
to a person that takes delivery in the form of an interest in the Reg S
Permanent Global Notes, provided, in each case, that the certification
requirements described below are complied with. See "--Transfers of Interests in
One Global Note for Interests in Another Global Note." All registered global
notes are referred to herein collectively "Global Notes."
Beneficial interests in all Global Notes and all Certificated Notes, if
any, will be subject to certain restrictions on transfer and will bear a
restrictive legend. In addition, transfer of beneficial interests in any Global
Notes will be subject to the applicable rules and procedures of DTC and its
Direct or Indirect Participants (including, if applicable, those of Euroclear
and CEDEL), which may change from time to time.
The Global Notes may be transferred, in whole and not in part, only to
another nominee of DTC or to a successor of DTC or its nominee in certain
limited circumstances. Beneficial interests in the Global Notes may be exchanged
for Notes in certificated form in certain limited circumstances. See
"--Transfers of Interests in Global Notes for Certificated Notes."
Initially, the Trustee will act as Paying Agent and Registrar. The Notes
may be presented for registration of transfer and exchange at the offices of the
Registrar.
DEPOSITARY PROCEDURES
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Direct Participants") and to facilitate the clearance and settlement of
transactions in those securities between Direct Participants through electronic
book-entry changes in accounts of Participants. The Direct Participants include
securities brokers and dealers (including the Initial Purchaser), banks, trust
companies, clearing corporations and certain other organizations, including
Euroclear and CEDEL. Access to DTC's system is also available to other entities
that clear through or maintain a direct or indirect, custodial relationship with
a Direct Participant (collectively, the "Indirect Participants"). DTC may hold
securities beneficially owned by other persons only through the Direct
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Participants or Indirect Participants and such other persons' ownership interest
and transfer of ownership interest will be recorded only on the records of the
Direct Participant and/or Indirect Participant, and not on the records
maintained by DTC.
DTC has also advised the Company that, pursuant to DTC's procedures, (i)
upon deposit of the Global Notes, DTC will credit the accounts of the Direct
Participants designated by the Initial Purchaser with portions of the principal
amount of the Global Notes allocated by the Initial Purchaser to such Direct
Participants, and (ii) DTC will maintain records of the ownership interests of
such Direct Participants in the Global Notes and the transfer of ownership
interests by and between Direct Participants. DTC will not maintain records of
the ownership interests of, or the transfer of ownership interests by and
between, Indirect Participants or other owners of beneficial interests in the
Global Notes. Direct Participants and Indirect Participants must maintain their
own records of the ownership interests of, and the transfer of ownership
interests by and between, Indirect Participants and other owners of beneficial
interests in the Global Notes.
Investors in the U.S. Global Notes may hold their interests therein
directly through DTC if they are Direct Participants in DTC or indirectly
through organizations that are Direct Participants in DTC. Investors in the Reg
S Temporary Global Notes may hold their interests therein directly through
Euroclear or CEDEL or indirectly through organizations that are participants in
Euroclear or CEDEL. After the expiration of the 40-Day Restricted Period (but
not earlier), investors may also hold interests in the Reg S Permanent Global
Notes through organizations other than Euroclear and CEDEL that are Direct
Participants in the DTC system. Morgan Guaranty Trust Company of New York,
Brussels office, is the operator and depository of Euroclear and Citibank, N.A.
is the depository of CEDEL (each a "Nominee" of Euroclear and CEDEL,
respectively). Therefore, they will each be recorded on DTC's records as the
holders of all ownership interests held by them on behalf of Euroclear and
CEDEL, respectively. Euroclear and CEDEL will maintain on their records the
ownership interests, and transfers of ownership interests by and between, their
own customer's securities accounts. DTC will not maintain records of the
ownership interests of, or the transfer of ownership interests by and between,
customers of Euroclear or CEDEL. All ownership interests in any Global Notes,
including those of customers' securities accounts held through Euroclear or
CEDEL, may be subject to the procedures and requirements of DTC.
The laws of some states require that certain persons take physical delivery
in definitive, certificated form of securities that they own. This may limit or
curtail the ability to transfer beneficial interests in a Global Note to such
persons. Because DTC can act only on behalf of Direct Participants, which in
turn act on behalf of Indirect Participants and others, the ability of a person
having a beneficial interest in a Global Note to pledge such interest to persons
or entities that are not Direct Participants in DTC, or to otherwise take
actions in respect of such interests, may be affected by the lack of physical
certificates evidencing such interests. For certain other restrictions on the
transferability of the Notes see "--Reg S Temporary and Reg S Permanent Global
Notes" and "--Transfers of Interests in Global Notes for Certificated Notes."
EXCEPT AS DESCRIBED IN "TRANSFERS OF INTERESTS IN GLOBAL NOTES FOR
CERTIFICATED NOTES," OWNERS OF BENEFICIAL INTERESTS IN THE GLOBAL NOTES WILL NOT
HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF
NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR
HOLDERS THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Under the terms of the Indenture, the Company and the Trustee will treat
the persons in whose names the Notes are registered (including Notes represented
by Global Notes) as the owners thereof for the purpose of receiving payments and
for any and all other purposes whatsoever. Payments in respect of the principal,
premium, Liquidated Damages, if any, and interest on Global Notes registered in
the name of DTC or its nominee will be payable by the Trustee to DTC or its
nominee as the registered holder under the Indenture. Consequently, neither the
Company, the Trustee nor any agent of the Company or the Trustee has or will
have any responsibility or liability for (i) any aspect of DTC's records or any
Direct Participant's or Indirect Participant's records relating to or payments
made on account of beneficial ownership interests in the Global Notes or for
maintaining, supervising or reviewing any of DTC's records or any Direct
Participant's or Indirect Participant's records relating to the beneficial
ownership interests in any Global Note or (ii) any other matter relating to the
actions and practices of DTC or any of its Direct Participants or Indirect
Participants.
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DTC has advised the Company that its current payment practice (for payments
of principal, interest and the like) with respect to securities such as the
Notes is to credit the accounts of the relevant Direct Participants with such
payment on the payment date in amounts proportionate to such Direct
Participant's respective ownership interests in the Global Notes as shown on
DTC's records. Payments by Direct Participants and Indirect Participants to the
beneficial owners of the Notes will be governed by standing instructions and
customary practices between them and will not be the responsibility of DTC, the
Trustee or the Company. Neither the Company nor the Trustee will be liable for
any delay by DTC or its Direct Participants or Indirect Participants in
identifying the beneficial owners of the Notes, and the Company and the Trustee
may conclusively rely on and will be protected in relying on instructions from
DTC or its nominee as the registered owner of the Notes for all purposes.
The Global Notes will trade in DTC's Same-Day Funds Settlement System and,
therefore, transfers between Direct Participants in DTC will be effected in
accordance with DTC's procedures, and will be settled in immediately available
funds. Transfers between Indirect Participants (other than Indirect Participants
who hold an interest in the Notes through Euroclear or CEDEL) who hold an
interest through a Direct Participant will be effected in accordance with the
procedures of such Direct Participant but generally will settle in immediately
available funds. Transfers between and among Indirect Participants who hold
interests in the Notes through Euroclear and CEDEL will be effected in the
ordinary way in accordance with their respective rules and operating procedures.
Subject to compliance with the transfer restrictions applicable to the
Notes described herein, crossmarket transfers between Direct Participants in
DTC, on the one hand, and Indirect Participants who hold interests in the Notes
through Euroclear or CEDEL, on the other hand, will be effected by Euroclear or
CEDEL's respective Nominee through DTC in accordance with DTC's rules on behalf
of Euroclear or CEDEL; however, delivery of instructions relating to crossmarket
transactions must be made directly to Euroclear or CEDEL, as the case may be, by
the counterparty in accordance with the rules and procedures of Euroclear or
CEDEL and within their established deadlines (Brussels time for Euroclear and
United Kingdom time for CEDEL). Indirect Participants who hold interest in the
Notes through Euroclear and CEDEL may not deliver instructions directly to
Euroclear's or CEDEL's Nominee. Euroclear or CEDEL will, if the transaction
meets its settlement requirements, deliver instructions to its respective
Nominee to deliver or receive interests on Euroclear's or CEDEL's behalf in the
relevant Global Note in DTC, and make or receive payment in accordance with
normal procedures for same-day fund settlement applicable to DTC.
Because of time zone differences, the securities accounts of an Indirect
Participant who holds an interest in the Notes through Euroclear or CEDEL
purchasing an interest in a Global Note from a Direct Participant in DTC will be
credited, and any such crediting will be reported to Euroclear or CEDEL, during
the European business day immediately following the settlement date of DTC in
New York. Although recorded in DTC's accounting records as of DTC's settlement
date in New York. Euroclear and CEDEL customers will not have access to the cash
amount credited to their accounts as a result of a sale of an interest in a Reg
S Permanent Global Note to a DTC Participant until the European business day for
Euroclear or CEDEL immediately following DTC's settlement date.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Notes only at the direction of one or more Direct
Participants to whose account interests in the Global Notes are credited and
only in respect of such portion of the aggregate principal amount of the Notes
as to which such Direct Participant or Direct Participants has or have given
direction. However, if there is an Event of Default under the Notes, DTC
reserves the right to exchange Global Notes (without the direction of one or
more of its Direct Participants) for legended Notes in certificated form, and to
distribute such certificated forms of Notes to its Direct Participants. See
"--Transfers of Interests in Global Notes for Certificated Notes."
Although DTC, Euroclear and CEDEL have agreed to the foregoing procedures
to facilitate transfers of interests in the Reg S Permanent Global Notes and in
the U.S. Global Notes among Direct Participants, Euroclear and CEDEL, they are
under no obligation to perform or to continue to perform such procedures, and
such procedures may be discontinued at any time. None of the Company, the
Initial Purchaser or the Trustee will have any responsibility for the
performance by DTC, Euroclear or CEDEL or their respective
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Direct and Indirect Participants of their respective obligations under the rules
and procedures governing any of their operations.
The information in this section concerning DTC, Euroclear and CEDEL and
their book-entry systems has been obtained from sources that the Company
believes to be reliable, but the Company takes no responsibility for the
accuracy thereof.
REG S TEMPORARY AND REG S PERMANENT GLOBAL NOTES
An Indirect Participant who holds an interest in the Reg S Temporary Global
Notes through Euroclear or CEDEL must provide Euroclear or CEDEL, as the case
may be, with a certificate in the form required by the Indenture certifying that
such Indirect Participant is either not a U.S. Person (as defined below) or has
purchased such interests in a transaction that is exempt from the registration
requirements under the Securities Act, and Euroclear or CEDEL, as the case may
be, must provide to the Trustee (or the Paying Agent, if other than the Trustee)
a certificate in the form required by the Indenture prior to (i) the payment of
interest or principal with respect to such Indirect Participant's beneficial
interests in such Reg S Temporary Global Notes or (ii) any exchange of such
beneficial interests for beneficial interests in Reg S Permanent Global Notes.
"U.S. Person" means (i) any individual resident in the United States, (ii)
any partnership or corporation organized or incorporated under the laws of the
United States, (iii) any estate of which an executor or administrator is a U.S.
Person (other than an estate governed by foreign law and of which at least one
executor or administrator is a non-U.S. Person who has sole or shared investment
discretion with respect to its assets), (iv) any trust of which any trustee is a
U.S. Person (other than a trust of which at least one trustee is a non-U.S.
Person who has sole or shared investment discretion with respect to its assets
and no beneficiary of the trust (and no settlor, if the trust is revocable) is a
U.S. Person), (v) any agency or branch of a foreign entity located in the United
States, (vi) any non-discretionary or similar account (other than an estate or
trust) held by a dealer or other fiduciary for the benefit or account of a U.S.
Person, (vii) any discretionary or similar account (other than an estate or
trust) held by a dealer or other fiduciary organized, incorporated or (if an
individual) resident in the United States (other than such an account held for
the benefit or account of a non-U.S. Person), (viii) any partnership or
corporation organized or incorporated under the laws of a foreign jurisdiction
and formed by a U.S. Person principally for the purpose of investing in
securities not registered under the Securities Act (unless it is organized or
incorporated and owned, by "accredited investors" within the meaning of Rule 501
(a) under the Securities Act who are not natural persons, estates or trusts);
provided however that the term "U.S. Person" shall not include (A) a branch or
agency of a U.S. Person that is located and operating outside the United States
for valid business purposes as a locally regulated branch or agency engaged in
the banking or insurance business, (B) any employee benefit plan established and
administered in accordance with the law, customary practices and documentation
of a foreign country and (C) the international organizations set forth in
Section 902(o)(vii) of Regulation S under the Securities Act and any other
similar international organizations, and their agencies, affiliates and pension
plans.
TRANSFERS OF INTERESTS IN ONE GLOBAL NOTE FOR INTERESTS IN ANOTHER GLOBAL NOTE
Prior to the expiration of the 40-Day Restricted Period, an Indirect
Participant who holds an interest in the Reg S Temporary Global Note through
Euroclear or CEDEL will not be permitted to transfer its interest to a U.S.
Person who takes delivery in the form of an interest in U.S. Global Notes. After
the expiration of the 40-Day Restricted Period, an Indirect Participant who
holds an interest in Reg S Permanent Global Notes will be permitted to transfer
its interest to a U.S. Person who takes delivery in the form of an interest in
U.S. Global Notes only upon receipt by the Trustee of a written certification
from the transferor to the effect that such transfer is being made in accordance
with the restrictions on transfer set forth in the legend printed on the Reg S
Permanent Global Notes.
Prior to the expiration of the 40-Day Restricted Period, a Direct or
Indirect Participant who holds an interest in the U.S. Global Note will not be
permitted to transfer its interests to any person that takes delivery thereof in
the form of an interest in the Reg S Temporary Global Notes. After the
expiration of the 40-Day Restricted Period, a Direct or Indirect Participant who
holds an interest in U.S. Global Notes may transfer its interests to a person
who takes delivery in the form of an interest in Reg S Permanent Global Notes
only upon
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receipt by the Trustee of a written certification from the transferor to the
effect that such transfer is being made in accordance with Rule 904 of
Regulation S.
Transfers involving an exchange of a beneficial interest in Reg S Global
Notes for a beneficial interest in U.S. Global Notes or vice versa will be
effected by DTC by means of an instruction originated by the Trustee through
DTC/Deposit Withdraw at Custodian (DWAC) system. Accordingly, in connection with
such transfer, appropriate adjustments will be made to reflect a decrease in the
principal amount of the one Global Note and a corresponding increase in the
principal amount of the other Global Note, as applicable. Any beneficial
interest in the one Global Note that is transferred to a person who takes
delivery in the form of the other Global Note will, upon transfer, cease to be
an interest in such first Global Note and become an interest in such other
Global Note and, accordingly, will thereafter be subject to all transfer
restrictions and other procedures applicable to beneficial interests in such
other Global Note for as long as it remains such an interest.
TRANSFERS OF INTERESTS IN GLOBAL NOTES FOR CERTIFICATED NOTES
An entire Global Note may be exchanged for definitive Notes in registered,
certificated form without interest coupons ("Certificated Notes") if (i) DTC (x)
notifies the Company that it is unwilling or unable to continue as depositary
for the Global Notes and the Company thereupon fails to appoint a successor
depositary within 90 days or (y) has ceased to be a clearing agency registered
under the Exchange Act, (ii) the Company, at its option, notifies the Trustee in
writing that it elects to cause the issuance of Certificated Notes or (iii)
there shall have occurred and be continuing a Default or an Event of Default
with respect to the Notes. In any such case, the Company will notify the Trustee
in writing that, upon surrender by the Direct and Indirect Participants of their
interest in such Global Note, Certificated Notes will be issued to each person
that such Direct or Indirect Participants and the DTC identify as being the
beneficial owner of the related Notes.
Beneficial interests in Global Notes held by any Direct or Indirect
Participant may be exchanged for Certificated Notes upon request to DTC, by such
Direct Participant (for itself or on behalf of an Indirect Participant), to the
Trustee in accordance with customary DTC procedures. Certificated Notes
delivered in exchange for any beneficial interest in any Global Note will be
registered in the names, and issued in any approved denominations, requested by
DTC on behalf of such Direct or Indirect Participants (in accordance with DTC's
customary procedures).
In all cases described herein, such Certificated Notes will bear a
restrictive legend unless the Company determines otherwise in compliance with
applicable law.
Neither the Company, nor the Trustee will be liable for any delay by the
holder of the Global Notes or DTC in identifying the beneficial owners of Notes,
and the Company and the Trustee may conclusively rely on, and will be protected
in relying on, instructions from the holder of the Global Note or DTC for all
purposes.
TRANSFERS OF CERTIFICATED NOTES FOR INTERESTS IN GLOBAL NOTES
Certificated Notes may only be transferred if the transferor first delivers
to the Trustee a written certificate (and in certain circumstances, an opinion
of counsel) confirming that, in connection with such transfer, it has complied
with the restrictions on transfer required by applicable law.
SAME DAY SETTLEMENT AND PAYMENT
The Indenture requires that payments in respect of the Notes represented by
the Global Notes (including principal, premium, if any, interest and Liquidated
Damages, if any) be made by wire transfer of immediately available same day
funds to the accounts specified by the holder of interests in such Global Note.
With respect to Certificated Notes, the Company will make all payments of
principal, premium, if any, interest and Liquidated Damages, if any, by wire
transfer of immediately available same day funds to the accounts specified by
the holders thereof or, if no such account is specified, by mailing a check to
each such holder's registered address. The Company expects that secondary
trading in the Certificated Notes will also be settled in immediately available
funds.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Notes were originally sold by the Company on May 26, 1998 to the
Initial Purchasers pursuant to the Purchase Agreement. The Initial Purchasers
subsequently resold the Old Notes to qualified institutional buyers in reliance
on Rule 144A under the Securities Act. As a condition to the Purchase Agreement,
the Company and the Guarantors entered into the Registration Rights Agreement
with the Initial Purchasers pursuant to which the Company and the Guarantors
agreed, for the benefit of the holders of the Old Notes, to, among other things,
(i) file with the Commission the Exchange Offer Registration Statement within 75
days after the Closing Date of the Exchange Offer and (ii) cause the Exchange
Offer Registration Statement to be declared effective under the Securities Act
within 150 days after the Closing Date. The Company will keep the Exchange Offer
open for not less than 20 business days (or longer if required by applicable
law) after the date on which notice of the Exchange Offer is mailed to the
holders of the Old Notes. For each Old Note surrendered to the Company pursuant
to the Exchange Offer, the holder of such Old Note will receive a New Note
having a principal amount equal to that of the surrendered Old Note. Interest on
each New Note will accrue from the date of its original issue.
Under existing interpretations of the staff of the Commission contained in
several no-action letters to third parties, the New Notes would in general be
freely tradeable after the Exchange Offer without further registration under the
Securities Act. However, any purchaser of Old Notes who is an "affiliate" of the
Company or who intends to participate in the Exchange Offer for the purpose of
distributing the New Notes (i) will not be able to rely on the interpretation of
the staff of the Commission, (ii) will not be able to tender its Old Notes in
the Exchange Offer and (iii) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any sale or
transfer of the Old Notes, unless such sale or transfer is made pursuant to an
exemption from such requirements.
As contemplated by these no-action letters and the Registration Rights
Agreement, each holder accepting the Exchange Offer is required to represent to
the Company in the Letter of Transmittal that (i) the New Notes are to be
acquired by the holder or the person receiving such New Notes, whether or not
such person is the holder, in the ordinary course of business, (ii) the holder
or any such other person (other than a broker-dealer referred to in the next
sentence) is not engaging and does not intend to engage, in the distribution of
the New Notes, (iii) the holder or any such other person has no arrangement or
understanding with any person to participate in the distribution of the New
Notes, (iv) neither the holder nor any such other person is an "affiliate" of
the Company within the meaning of Rule 405 under the Securities Act and (v) the
holder or any such other person acknowledges that if such holder or other person
participates in the Exchange Offer for the purpose of distributing the New Notes
it must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale of the New Notes and cannot rely on
such no-action letters. As indicated above, each Participating Broker-Dealer
that receives a New Note for its own account in exchange for Old Notes must
acknowledge that it (i) acquired the Old Notes for its own account as a result
of market-making activities or other trading activities, (ii) has not entered
into any arrangement or understanding with the Company or any "affiliate" of the
Company (within the meaning of Rule 405 under the Securities Act) to distribute
the New Notes to be received in the Exchange Offer and (iii) will deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resale of such New Notes. For a description of the procedures for such resales
by Participating Broker-Dealers, see "Plan of Distribution."
In the event that changes in the law or the applicable interpretations of
the staff of the Commission do not permit the Company to effect such an Exchange
Offer, or if for any other reason the Exchange Offer is not consummated or if
any holder of the Old Notes (other than an "affiliate" of the Company or the
Initial Purchasers) is not eligible to participate in the Exchange Offer, the
Company will (a) file the Shelf Registration Statement covering resales of the
Old Notes, (b) use its reasonable best efforts to cause the Shelf Registration
Statement to be declared effective under the Securities Act and (c) use its
reasonable best efforts to keep effective the Shelf Registration Statement until
the earlier of two years after its effective date and such time as all of the
applicable Old Notes have been sold thereunder. The Company will, in the event
of the filing
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of the Shelf Registration Statement, provide to each applicable holder of the
Old Notes copies of the prospectus which is a part of the Shelf Registration
Statement, notify each such holder when the Shelf Registration Statement has
become effective and take certain other actions as are required to permit
unrestricted resales of the Old Notes. A holder of Old Notes that sells such Old
Notes pursuant to the Shelf Registration Statement generally will be required to
be named as a selling securityholder in the related prospectus and to deliver a
prospectus to purchasers, will be subject to certain of the civil liability
provisions under the Securities Act in connection with such sales and will be
bound by the provisions of the Registration Rights Agreement which are
applicable to such a holder (including certain indemnification obligations). In
addition, each holder of the Old Notes will be required to deliver information
to be used in connection with the Shelf Registration Statement and to provide
comments on the Shelf Registration Statement within the time periods set forth
in the Registration Rights Agreement in order to have their Old Notes included
in the Shelf Registration Statement and to benefit from the provisions set forth
in the following paragraph.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by, all the provisions of the Registration Rights Agreement, a copy
of which is filed as an exhibit to the Exchange Offer Registration Statement of
which this Prospectus is a part.
Following the consummation of the Exchange Offer, holders of the Old Notes
who were eligible to participate in the Exchange Offer but who did not tender
their Old Notes will not have any further registration rights and such Old Notes
will continue to be subject to certain restrictions on transfer. Accordingly,
the liquidity of the market for such Old Notes could be adversely affected.
TERMS OF THE EXCHANGE
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Old Notes
validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
the Expiration Date. The Company will issue $1,000 principal amount of New Notes
in exchange for each $1,000 principal amount of outstanding Old Notes accepted
in the Exchange Offer. Holders may tender some or all of their Old Notes
pursuant to the Exchange Offer. However, Old Notes may be tendered only in
integral multiples of $1,000.
The form and terms of the New Notes are the same as the form and terms of
the Old Notes except that (i) the New Notes bear a Series B designation and a
different CUSIP Number from the Old Notes, (ii) the New Notes have been
registered under the Securities Act and hence will not bear legends restricting
the transfer thereof and (iii) the holders of the New Notes will not be entitled
to certain rights under the Registration Rights Agreement, including the
provisions providing for an increase in the interest rate on the Old Notes in
certain circumstances relating to the timing of the Exchange Offer, all of which
rights will terminate when the Exchange Offer is terminated. The New Notes will
evidence the same debt as the Old Notes and will be entitled to the benefits of
the Indenture.
As of the date of this Prospectus, $100,000,000 aggregate principal amount
of Old Notes were outstanding. This Prospectus and the Letter of Transmittal
will be mailed initially to the holders of record of the Old Notes as of the
close of business on , 1998.
Holders of Old Notes do not have any appraisal or dissenters' rights under
the General Corporation Law of Delaware or the Indenture in connection with the
Exchange Offer. The Company intends to conduct the Exchange Offer in accordance
with the applicable requirements of the Exchange Act and the rules and
regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
for the purpose of receiving the New Notes from the Company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted Old Notes will be
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returned, without expense, to the tendering holder thereof as promptly as
practicable after the Expiration Date.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than transfer taxes in certain circumstances, in connection with the
Exchange Offer. See "-- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
, 1998, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will mail to the registered
holders an announcement thereof, each prior to 9:00 a.m., New York City time, on
the next business day after the previously scheduled expiration date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, to extend the Exchange Offer or to terminate the
Exchange Offer if any of the conditions set forth below under "-- Conditions"
shall not have been satisfied, by giving oral or written notice of such delay,
extension or termination to the Exchange Agent or (ii) to amend the terms of the
Exchange Offer in any manner. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by oral or
written notice thereof to the registered holders.
INTEREST ON THE NEW NOTES
The New Notes will bear interest from their date of issuance. Holders of
Old Notes that are accepted for exchange will receive accrued interest thereon
to, but not including, the date of issuance of the New Notes. Such interest will
be paid with the first interest payment on the New Notes on December 1, 1998 in
the manner provided in the New Notes. Interest on the Old Notes accepted for
exchange will cease to accrue upon issuance of the New Notes. Interest on the
New Notes is payable semi-annually on each June 1 and December 1, commencing on
December 1, 1998.
PROCEDURES FOR TENDERING
Only a holder of Old Notes may tender such Old Notes in the Exchange Offer.
To tender in the Exchange Offer, a properly completed and duly executed Letter
of Transmittal (or facsimile thereof), with any required signature guarantee, or
(in the case of a book-entry transfer), an Agent's Message in lieu of the Letter
of Transmittal, and any other required documents, must be received by the
Exchange Agent at the address set forth below under "Exchange Agent" prior to
5:00 p.m., New York City time, on the Expiration Date. In addition, prior to
5:00 p.m. New York City time, on the Expiration Date either (a) certificates for
tendered Old Notes must be received by the Exchange Agent at such address or (b)
such Old Notes must be transferred pursuant to the procedures for book-entry
transfer described below (and a confirmation of such tender received by the
Exchange Agent, including an Agent's Message if the tendering holder has not
delivered a Letter of Transmittal).
The term "Agent's Message" means a message transmitted by DTC, received by
the Exchange Agent and forming part of the confirmation of a book-entry
transfer, which states that DTC has received an express acknowledgment from the
participant in DTC tendering Old Notes which are the subject of such book-entry
confirmation, that such participant has received and agrees to be bound by the
terms of the Letter of Transmittal and that the Company may enforce such
agreement against such participant. In the case of an Agent's Message relating
to guaranteed delivery, the term means a message transmitted by DTC and received
by the Exchange Agent, which states that DTC has received an express
acknowledgment from the participant in DTC tendering Old Notes that such
participant has received and agrees to be bound by the Notice of Guaranteed
Delivery.
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By executing the Letter of Transmittal, each holder will make to the
Company the representations set forth above in the third paragraph under the
heading "-- Purpose and Effect of the Exchange Offer."
The tender by a holder and the acceptance thereof by the Company will
constitute agreement between such holder and the Company in accordance with the
terms and subject to the conditions set forth herein and in the Letter of
Transmittal.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND SOLE RISK
OF THE HOLDER. AS AN ALTERNATIVE TO DELIVERY BY MAIL, HOLDERS MAY WISH TO
CONSIDER OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME
SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION
DATE. NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY.
HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST
COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Old Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. See "Instruction
to Registered Holder and/or Book-Entry Transfer Facility Participant from Owner"
included with the Letter of Transmittal.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by a member firm of the Medallion System (an
"Eligible Institution") unless the Old Notes tendered pursuant thereto are
tendered (i) by a registered holder who has not completed the box entitled
"Special Registration Instructions" or "Special Delivery Instructions" on the
Letter of Transmittal or (ii) the account of an Eligible Institution. In the
event that signatures on a Letter of Transmittal or a notice of withdrawal, as
the case may be, are required to be guaranteed, such guarantee must be by an
Eligible Institution.
If the Letter of Transmittal is signed by a person other than the
registered holder of any Old Notes listed therein, such Old Notes must be
endorsed or accompanied by a properly completed bond power, signed by such
registered holder as such registered holder's name appears on such Old Notes
with the signature thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and evidence satisfactory to the
Company of their authority to so act must be submitted with the Letter of
Transmittal.
The Company understands that the Exchange Agent will make a request
promptly after the date of this Prospectus to establish accounts with respect to
the Old Notes at the book-entry transfer facility, The Depository Trust Company
(the "Book-Entry Transfer Facility"), for the purpose of facilitating the
Exchange Offer, and subject to the establishment thereof, any financial
institution that is a participant in the Book-Entry Transfer Facility's system
may make book-entry delivery of Old Notes by causing such Book-Entry Transfer
Facility to transfer such Old Notes into the Exchange Agent's account with
respect to the Old Notes in accordance with the Book-Entry Transfer Facility's
procedures for such transfer. Although delivery of the Old Notes may be effected
through book-entry transfer into the Exchange Agent's account at the Book-Entry
Transfer Facility, an appropriate Letter of Transmittal properly completed and
duly executed with any required signature guarantee, or (in the case of a
book-entry transfer) an Agent's Message in lieu of the Letter of Transmittal,
and all other required documents must in each case be transmitted to and
received or confirmed by the Exchange Agent at its address set forth below on or
prior to the Expiration Date, or, if the guaranteed delivery procedures
described below are complied with, within the time period provided under such
procedures. Delivery of documents to the Book-Entry Transfer Facility does not
constitute delivery to the Exchange Agent.
The Exchange Agent and DTC have confirmed that the Exchange Offer is
eligible for the DTC Automated Tender Offer Program ("ATOP"). Accordingly, DTC
participants may electronically transmit
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their acceptance of the Exchange Offer by causing DTC to transfer Old Notes to
the Exchange Agent in accordance with DTC's ATOP procedures for transfer. DTC
will then send an Agent's Message to the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Notes and withdrawal of tendered Old Notes
will be determined by the Company in its sole discretion, which determination
will be final and binding. The Company reserves the absolute right to reject any
and all Old Notes not properly tendered or any Old Notes the Company's
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right in its sole discretion to waive
any defects, irregularities or conditions of tender as to particular Old Notes.
The Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes must be cured within such time as the
Company shall determine. Although the Company intends to notify holders of
defects or irregularities with respect to tenders of Old Notes, neither the
Company, the Exchange Agent nor any other person shall incur any liability for
failure to waive such notification. Tenders of Old Notes will not be deemed to
have been made until such defects or irregularities have been cured or waived.
Any Old Notes received by the Exchange Agent that are not properly tendered and
as to which the defects or irregularities have not been cured or waived will be
returned by the Exchange Agent to the tendering holders, unless otherwise
provided in the Letter of Transmittal, as soon as practicable following the
Expiration Date.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent or (iii) who
cannot complete the procedures for book-entry transfer, prior to the Expiration
Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the certificate number(s)
of such Old Notes and the principal amount of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that, within five
New York Stock Exchange trading days after the Expiration Date, the Letter
of Transmittal (or facsimile thereof) together with the certificate(s)
representing the Old Notes (or a confirmation of book-entry transfer of
such Old Notes into the Exchange Agent's account at the Book-Entry Transfer
Facility), and any other documents required by the Letter of Transmittal
will be deposited by the Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
Old Notes in proper form for transfer (or a confirmation of book-entry
transfer of such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility), and all other documents required by the
Letter of Transmittal are received by the Exchange Agent within five New
York Stock Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date.
To withdraw a tender of Old Notes in the Exchange Offer, a telegram, telex,
letter or facsimile transmission notice of withdrawal must be received by the
Exchange Agent at its address set forth herein prior to 5:00 p.m., New York City
time, on the Expiration Date. Any such notice of withdrawal must (i) specify the
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name of the person having deposited the Old Notes to be withdrawn (the
"Depositor"), (ii) identify the Old Notes to be withdrawn (including the
certificate number(s) and principal amount of such Old Notes, or, in the case of
Old Notes transferred by book-entry transfer, the name and number of the account
at the Book-Entry Transfer Facility to be credited), (iii) be signed by the
holder in the same manner as the original signature on the Letter of Transmittal
by which such Old Notes were tendered (including any required signature
guarantees) or be accompanied by documents of transfer sufficient to have the
Trustee with respect to the Old Notes register the transfer of such Old Notes
into the name of the person withdrawing the tender and (iv) specify the name in
which any such Old Notes are to be registered, if different from that of the
Depositor. All questions as to the validity, form and eligibility (including
time of receipt) of such notices will be determined by the Company whose
determination shall be final and binding on all parties. Any Old Notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer and no New Notes will be issued with respect thereto unless the
Old Notes so withdrawn are validly retendered. Any Old Notes which have been
tendered but which are not accepted for exchange will be returned to the holder
thereof without cost to such holder as soon as practicable after withdrawal,
rejection of tender or termination of the Exchange Offer. Properly withdrawn Old
Notes may be retendered by following one of the procedures described above under
"-- Procedures for Tendering" at any time prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange New Notes for, any Old Notes,
and may terminate or amend the Exchange Offer as provided herein before the
acceptance of such Old Notes, if:
(a) any action or proceeding is instituted or threatened in any court
or by or before any governmental agency with respect to the Exchange Offer
which, in the reasonable judgment of the Company, might materially impair
the ability of the Company to proceed with the Exchange Offer or any
material adverse development has occurred in any existing action or
proceeding with respect to the Company or any of its subsidiaries; or
(b) any law, statute, rule, regulation or interpretation by the staff
of the Commission is proposed, adopted or enacted, which, in the reasonable
judgment of the Company, might materially impair the ability of the Company
to proceed with the Exchange Offer or materially impair the contemplated
benefits of the Exchange Offer to the Company; or
(c) any governmental approval has not been obtained, which approval
the Company shall, in its reasonable discretion, deem necessary for the
consummation of the Exchange Offer as contemplated hereby.
If the Company determines in its reasonable judgment that any of the
conditions are not satisfied, the Company may (i) refuse to accept any Old Notes
and return all tendered Old Notes to the tendering holders, (ii) extend the
Exchange Offer and retain Old Notes tendered prior to the expiration of the
Exchange Offer, subject, however, to the rights of holders to withdraw such Old
Notes (see "-- Withdrawal of Tenders") or (iii) waive such unsatisfied
conditions with respect to the Exchange Offer and accept all properly tendered
Old Notes which have not been withdrawn.
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EXCHANGE AGENT
The United States Trust Company of New York has been appointed as Exchange
Agent for the Exchange Offer. Questions and requests for assistance, requests
for additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notice of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
By Mail: By Overnight Courier:
United States Trust Company of New York United States Trust Company of New York
P.O. Box 844 Cooper Station 770 Broadway, 13th Floor
New York, New York 10276-0844 Corporate Trust Operations Department
(registered or certified mail recommended) New York, New York 10003
By Hand: By Facsimile Transmission:
United States Trust Company of New York (212) 780-0592
111 Broadway (for Eligible Institutions only)
Lower Level
New York, New York 10006 For Information or Confirmation by Telephone:
Attention: Corporate Trust Services (800) 548-6565
DELIVERY OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID
DELIVERY.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telecopy, telephone or in person by officers and
regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Officer and will not make any payments to brokers, dealers, or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company. Such expenses include fees and expenses of the Exchange
Agent and Trustee, accounting and legal fees and printing costs, among others.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
which is face value, as reflected in the Company's accounting records on the
date of exchange. Accordingly, no gain or loss for accounting purposes will be
recognized by the Company. The expenses of the Exchange Offer will be expensed
over the term of the New Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Old Notes that are not exchanged for New Notes pursuant to the Exchange
Offer will remain restricted securities. Accordingly, such Old Notes may be
resold only (i) to the Company (upon redemption thereof or otherwise), (ii) so
long as the Old Notes are eligible for resale pursuant to Rule 144A, to a person
inside the United States whom the seller reasonably believes is a qualified
institutional buyer within the meaning of Rule 144A under the Securities Act in
meeting the requirements of Rule 144A, in accordance with Rule 144 under the
Securities Act, or pursuant to another exemption from the registration
requirements of the Securities Act (and based upon an opinion of counsel
reasonably acceptable to the Company), (iii) outside the United States to a
foreign person in a transaction meeting the requirements of Rule 904 under
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the Securities Act, or (iv) pursuant to an effective registration statement
under the Securities Act, in each case in accordance with any applicable
securities laws of any state of the United States.
RESALE OF THE NEW NOTES
With respect to resales of New Notes, based on interpretations by the staff
of the Commission set forth in no-action letters issued to third parties, the
Company believes that a holder or other person who receives NewNotes, whether or
not such person is the holder (other than a person that is an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act) who receives
New Notes in exchange for Old Notes in the ordinary course of business and who
is not participating, does not intend to participate, and has no arrangement or
understanding with any person to participate, in the distribution of the New
Notes, will be allowed to resell the New Notes to the public without further
registration under the Securities Act and without delivering to the purchasers
of the New Notes a prospectus that satisfies the requirements of Section 10 of
the Securities Act. However, if any holder acquires New Notes in the Exchange
Offer for the purpose of distributing or participating in a distribution of the
New Notes, such holder cannot rely on the position of the staff of the
Commission enunciated in such no-action letters or any similar interpretive
letters, and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction,
unless an exemption from registration is otherwise available. Further, each
Participating Broker-Dealer that receives New Notes for its own account in
exchange for Old Notes, where such Old Notes were acquired by such Participating
Broker-Dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes.
As contemplated by these no-action letters and the Registration Rights
Agreement, each holder accepting the Exchange Offer is required to represent to
the Company in the Letter of Transmittal that (i) the New Notes are to be
acquired by the holder or the person receiving such New Notes, whether or not
such person is the holder, in the ordinary course of business, (ii) the holder
or any such other person (other than a broker-dealer referred to in the next
sentence) is not engaging and does not intend to engage, in the distribution of
the New Notes, (iii) the holder or any such other person has no arrangement or
understanding with any person to participate in the distribution of the New
Notes, (iv) neither the holder nor any such other person is an "affiliate" of
the Company within the meaning of Rule 405 under the Securities Act and (v) the
holder or any such other person acknowledges that if such holder or other person
participates in the Exchange Offer for the purpose of distributing the New Notes
it must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale of the New Notes and cannot rely on
such no-action letters. As indicated above, each Participating Broker-Dealer
that receives a New Note for its own account in exchange for Old Notes must
acknowledge that it (i) acquired the Old Notes for its own account as a result
of market-making activities or other trading activities, (ii) has not entered
into any arrangement with the Company (within the meaning of Rule 405 under the
Securities Act or understanding with the Company or any "affiliate" of the
Securities Act) to distribute the New Notes to be received in the Exchange Offer
and (iii) will deliver a prospectus meeting the requirements of the Securities
Act in connection with any resale of such New Notes. For a description of the
procedures for such resales by Participating Broker-Dealers, see "Plan of
Distribution."
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DESCRIPTION OF NEW CREDIT AGREEMENT
The Company entered into the New Credit Agreement among the Company, SH
Group, the domestic subsidiaries of SH Group from time to time parties thereto,
the several lenders from time to time parties thereto (collectively, the
"Lenders"), NationsBank, N.A. as administrative agent (the "Administrative
Agent") and DLJ Capital Funding, Inc. as syndication agent (collectively, the
"Agents"). The following is a summary description of the principal terms of the
New Credit Agreement and the other loan documents. The description set forth
below does not purport to be complete and is qualified in its entirety by
reference to certain agreements setting forth the principal terms and conditions
of the New Credit Agreement, which are available upon request from the Company.
The Company's obligations under the New Credit Agreement constitute Senior
Indebtedness with respect to the Notes.
Structure. The Lenders committed to provide the Company with (i) senior
secured term loan facilities (the "Term Loan Facility") of up to $30.0 million
and (ii) a senior secured revolving credit facility (the "Revolving Credit
Facility") of up to $20.0 million (including letters of credit).
The Company borrowed the full amount of Term Loan Facility and
approximately $4.9 million of Revolving Credit Facility on the closing date
under the New Credit Agreement (i) to partially finance the Acquisition, (ii) to
repay certain existing outstanding indebtedness of the Company and (iii) to pay
certain fees and expenses related to the Acquisition. See "Use of Proceeds."
Thereafter, the New Credit Agreement may be utilized to fund the Company's
working capital requirements, including issuance of stand-by and trade letters
of credit and for other general corporate purposes.
The Term Loan Facility is a single tranche term facility of $30.0 million
which has a maturity of six years, subject to quarterly amortization commencing
in the thirteenth month after the Closing Date, in the following aggregate
annual amounts for the fiscal years ending in: 1999--$3.0 million; 2000--$4.75
million; 2001--$5.75 million; 2002--$6.75 million; 2003--$7.75 million and
2004--$2.0 million. Loans and letters of credit under the Revolving Credit
Facility are available at any time during its six-year term subject to the
fulfillment of customary conditions precedent including the absence of a default
under the New Credit Agreement.
Security; Guaranty. The Company's obligations under the New Credit
Agreement are guaranteed by each of the Company's direct and indirect domestic
subsidiaries. The New Credit Agreement and the guarantees thereof are secured by
a perfected first priority security interest in substantially all assets of the
Company and its direct and indirect domestic subsidiaries including: (i) all
real property; (ii) all accounts receivable, inventory and intangibles; and
(iii) all of the capital stock of the Company and its direct and indirect
domestic and, to the extent no adverse tax consequences would result, foreign
subsidiaries.
Interest, Maturity. Borrowings under the New Credit Agreement bear interest
at a rate per annum equal (at the Company's option) to: (i) the Administrative
Agent's reserve-adjusted LIBOR rate ("LIBOR") plus an applicable margin or (ii)
an alternate base rate equal to the highest of the Administrative Agent's prime
rate, plus an applicable margin. Initially, the applicable margin for the Term
Loan Facility and the Revolving Credit Facility is 2.25% per annum for LIBOR
loans and 1.00% per annum for alternate base rate loans and after the first six
months will be tied to a grid based on the Company's leverage ratio.
Fees. The Company is required to pay the Lenders, on a quarterly basis, a
commitment fee on the undrawn portion of the Revolving Credit Facility at a rate
equal to 0.50%. The Company is also obligated to pay (i) certain letter of
credit fees on the aggregate amount of outstanding letters of credit; (ii) a
fronting bank fee for the letter of credit issuing bank; and (iii) customary
agent, arrangement and other similar fees.
Covenants. The New Credit Agreement contains a number of covenants that,
among other things, restrict the ability of SH Group, the Company and its
subsidiaries to dispose of assets, incur additional indebtedness, prepay other
indebtedness or amend certain debt instruments (including the Indenture), pay
dividends, create liens on assets, enter into sale and leaseback transactions,
make investments, loans or advances, make acquisitions, engage in mergers or
consolidations, make capital expenditures, change the business conducted by the
Company or its subsidiaries or engage in certain transactions with affiliates
and otherwise restrict certain corporate activities. In addition, under the New
Credit Agreement, the Company is
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required to maintain specified financial ratios and tests, including leverage
ratios below a specified maximum and minimum interest coverage levels. See "Risk
Factors--Restrictive Debt Covenants."
Events of Default. The New Credit Agreement contains customary events of
default, including nonpayment of principal, interest or fees, material
inaccuracy of representations and warranties, violation of covenants,
cross-default and cross-acceleration to certain other indebtedness, certain
events of bankruptcy and insolvency, material judgments against the Company,
invalidity of any guarantee or security interest and a change of control of the
Company in certain circumstances as set forth therein.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion (including the opinion of special counsel
described below) is based upon current provisions of the Internal Revenue Code
of 1986, as amended, applicable Treasury regulations, judicial authority and
administrative rulings and practice. There can be no assurance that the Internal
Revenue Service (the "Service") will not take a contrary view, and no ruling
from the Service has been or will be sought. Legislative, judicial or
administrative changes or interpretations may be forthcoming that could alter or
modify the statements and conditions set forth herein. Any such changes or
interpretations may or may not be retroactive and could affect the tax
consequences to holders. Certain holders (including insurance companies,
tax-exempt organizations, financial institutions, broker-dealers, foreign
corporations and persons who are not citizens or residents of the United States)
may be subject to special rules not discussed below. The Company recommends that
each holder consult such holder's own tax advisor as to the particular tax
consequences of exchanging such holder's Old Notes for New Notes, including the
applicability and effect of any state, local or foreign tax laws.
Kirkland & Ellis, special counsel to the Company, has advised the Company
that in its opinion, the exchange of the Old Notes for New Notes pursuant to the
Exchange Offer will not be treated as an "exchange" for federal income tax
purposes because the New Notes will not be considered to differ materially in
kind or extent from the Old Notes. Rather, the New Notes received by a holder
will be treated as a continuation of the Old Notes in the hands of such holder.
As a result, there will be no federal income tax consequences to holders
exchanging Old Notes for New Notes pursuant to the Exchange Offer.
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PLAN OF DISTRIBUTION
Each Participating Broker-Dealer that receives New Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
Participating Broker-Dealer in connection with resales of New Notes received in
exchange for Old Notes where such Old Notes were acquired as a result of
market-making activities or other trading activities. The Company has agreed
that for a period of one year after the thirtieth business day following the
Expiration Date (or such shorter period as will terminate when all of the Old
Notes offered for exchange hereby have been sold), it will make this Prospectus,
as amended or supplemented, available to any Participating Broker-Dealer for use
in connection with any such resale.
The Company will not receive any proceeds from any sales of the New Notes
by Participating Broker-Dealers. New Notes received by Participating
Broker-Dealers for their own account pursuant to the Exchange Offer may be sold
from time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the New Notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchaser or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such Participating Broker-Dealer and/or the purchasers of
any such New Notes. Any Participating Broker-Dealer that resells the New Notes
that were received by it for its own account pursuant to the Exchange Offer and
any broker or dealer that participates in a distribution of New Notes may be
deemed to be an "underwriter" within the meaning of the Securities Act and any
profit on any such resale of New Notes and any commissions or concessions
received by any such persons may be deemed to be underwriting compensation under
the Securities Act. The Letter of Transmittal states that by acknowledging that
it will deliver and by delivering a prospectus, a Participating Broker-Dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act.
LEGAL MATTERS
The validity of the issuance of the New Notes offered hereby will be passed
upon for the Company by Kirkland & Ellis, Washington, D.C.
EXPERTS
The consolidated financial statements of the Company at January 3, 1998 and
December 28, 1996, and for each of the three years in the period ended January
3, 1998, appearing in this Prospectus and Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
CHANGE IN ACCOUNTANTS
On May 26, 1998, the Company dismissed its certified public accountants,
Ernst & Young LLP, and replaced them with Deloitte & Touche LLP. The report of
Ernst & Young LLP dated January 28, 1998, except for Note 11 as to which the
date is May 26, 1998, on the Company's financial statements as of and for the
two fiscal years in the period ended January 3, 1998 did not contain an adverse
opinion or a disclaimer opinion; further the Company had no disagreements with
Ernst & Young LLP during that time period. The change in accountants was
recommended by the Board of Directors of the Company.
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100
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
REPORT OF INDEPENDENT AUDITORS.............................. F-2
CONSOLIDATED FINANCIAL STATEMENTS AS OF JANUARY 3, 1998 AND
DECEMBER 28, 1996 AND FOR EACH OF THE THREE FISCAL YEARS
IN THE PERIOD ENDED JANUARY 3, 1998:
Consolidated Balance Sheets as of January 3, 1998 and
December 28, 1996...................................... F-3
Consolidated Statements of Operations for the Years Ended
January 3, 1998, December 28, 1996 and December 30,
1995................................................... F-4
Consolidated Statements of Shareholders' Equity for the
Years Ended January 3, 1998, December 28, 1996 and
December 30, 1995...................................... F-5
Consolidated Statements of Cash Flows for the Years Ended
January 3, 1998, December 28, 1996 and December 30,
1995................................................... F-6
Notes to Consolidated Financial Statements................ F-7
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF
APRIL 4, 1998 AND JANUARY 3, 1998:
Consolidated Balance Sheets as of April 4, 1998 and
January 3, 1998........................................ F-23
Consolidated Statements of Operations for the Fiscal
Quarter Ended April 4, 1998 and April 5, 1997.......... F-24
Consolidated Statements of Cash Flows for the Fiscal
Quarter Ended April 4, 1998 and April 5, 1997.......... F-25
Notes to Unaudited Consolidated Financial Statements...... F-26
F-1
101
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Steel Heddle Mfg. Co.
We have audited the accompanying consolidated balance sheets of Steel
Heddle Mfg. Co. and subsidiaries as of January 3, 1998 and December 28, 1996 and
the related consolidated statements of operations, shareholders'
equity/(deficit) and cash flows for each of the three years in the period ended
January 3, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Steel Heddle
Mfg. Co. and subsidiaries at January 3, 1998 and December 28, 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended January 3, 1998 in conformity with generally
accepted accounting principles.
As discussed in Note 6 to the consolidated financial statements, in 1995
the Company changed its method of accounting for postretirement benefits other
than pensions.
Ernst & Young LLP
Greenville, SC
January 28, 1998, except for Note 11,
as to which the date
is May 26, 1998
F-2
102
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
JANUARY 3, DECEMBER 28,
1998 1996
---------- ------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 379 $ 4,645
Accounts receivable....................................... 9,290 8,862
Inventories............................................... 14,030 12,970
Prepaid expenses.......................................... 99 108
-------- --------
Total current assets................................... 23,798 26,585
Property, plant and equipment:
Cost...................................................... 52,561 50,781
Less accumulated depreciation............................. 35,876 33,025
-------- --------
16,685 17,756
Other assets and deferred charges:
Prepaid pension costs..................................... 546 952
Goodwill, net............................................. 22,537 23,266
Sundry.................................................... 774 157
-------- --------
23,857 24,375
-------- --------
Total Assets........................................... $ 64,340 $ 68,716
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 2,166 $ 2,334
Accrued and sundry liabilities............................ 5,313 8,208
Deferred income taxes..................................... 670 802
Income taxes.............................................. 302 361
Current portion of long-term debt......................... 6,500 6,500
-------- --------
Total current liabilities.............................. 14,951 18,205
Long-term debt, less current portion........................ 46,300 43,500
Retirement benefits payable................................. 5,126 5,372
Deferred income taxes....................................... 1,120 1,598
Redeemable Common Stock:
Parent company class A, $.01 par value per
share--authorized 2,000,000 shares, issued and
outstanding 91,080 shares in 1997 and 90,000 shares in
1996--Note 7........................................... 1,366 1,350
Shareholders' equity/(deficit):
Common Stock par value $1.00 per share--authorized
1,500,000 shares, issued and outstanding 10 shares..... -- --
Additional paid-in capital................................ 13,689 13,689
Foreign currency translation adjustment................... (48) (49)
(Deficit)................................................. (18,164) (14,949)
-------- --------
(4,523) (1,309)
-------- --------
Total liabilities and shareholders' equity (deficit)... $ 64,340 $ 68,716
======== ========
See notes to consolidated financial statements.
F-3
103
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
YEAR ENDED
JANUARY 3, DECEMBER 28, DECEMBER 30,
1998 1996 1995
---------- ------------ ------------
Net sales............................................. $72,983 $64,484 $68,118
Cost of goods sold.................................... 46,448 44,074 47,706
------- ------- -------
Gross profit.......................................... 26,535 20,410 20,412
Selling, general and administrative costs............. 8,489 8,875 8,667
Management fees....................................... 475 725 275
Amortization of goodwill.............................. 729 729 729
Restructuring charges................................. -- -- 821
------- ------- -------
Operating income...................................... 16,842 10,081 9,920
Other income (expense):
Interest income..................................... 136 110 128
Interest expense, including amortization of deferred
financing costs.................................. (5,284) (5,954) (6,435)
Other financing expenses.............................. (212) -- --
------- ------- -------
Income before income taxes, extraordinary item and
cumulative effect of accounting change.............. 11,482 4,237 3,613
Income tax expense.................................... 4,015 1,638 1,628
------- ------- -------
Income before extraordinary item and cumulative effect
of accounting change................................ 7,467 2,599 1,985
Extraordinary (loss) on the early extinguishment of
debt,
net of income taxes of $1,688....................... (2,753) -- --
------- ------- -------
Income before cumulative effect of accounting
change.............................................. 4,714 2,599 1,985
Cumulative effect of change in method of accounting
for postretirement benefits net of taxes of $570.... -- -- 855
------- ------- -------
Net income............................................ $ 4,714 $ 2,599 $ 1,130
======= ======= =======
See notes to consolidated financial statements.
F-4
104
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
CUMULATIVE
COMMON FOREIGN
STOCK-- ADDITIONAL RETAINED CURRENCY
$1.00 PAID-IN (DEFICIT) TRANSLATION
PAR VALUE CAPITAL EARNINGS ADJUSTMENTS TOTAL
--------- ---------- --------- ----------- -------
Balance at December 31, 1994............... $-- $13,689 $(18,678) $(35) $(5,024)
Foreign currency translation
adjustments........................... -- -- -- (17) (17)
Net income............................... -- -- 1,130 -- 1,130
------- ------- -------- ---- -------
Balance at December 30, 1995............... -- 13,689 (17,548) (52) (3,911)
Foreign currency translation
adjustments........................... -- -- -- 3 3
Net income............................... -- -- 2,599 -- 2,599
------- ------- -------- ---- -------
Balance at December 28, 1996............... -- 13,689 (14,949) (49) (1,309)
Foreign currency translation
adjustments........................... 1 1
Dividends paid........................... -- -- (7,929) -- (7,929)
Net income............................... -- -- 4,714 -- 4,714
------- ------- -------- ---- -------
Balance at January 3, 1998................. $-- $13,689 $(18,164) $(48) $(4,523)
======= ======= ======== ==== =======
See notes to consolidated financial statements.
F-5
105
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED
JANUARY 3, DECEMBER 28, DECEMBER 30,
1998 1996 1995
---------- ------------ ------------
OPERATING ACTIVITIES:
Net income................................................ $ 4,714 $ 2,599 $ 1,130
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 4,409 6,019 6,096
Loss on disposal of property, plant and equipment....... 50 -- --
Provision for deferred income taxes..................... (610) (600) (1,200)
Accrued retirement benefit costs........................ 160 (220) 150
Extraordinary item...................................... 4,441 -- --
Cumulative effect of accounting changes................. -- -- 1,425
Changes in operating assets and liabilities:
Accounts receivable.................................. (428) (548) 408
Inventories.......................................... (1,060) 1,018 (818)
Prepaid expenses..................................... 8 14 27
Accounts payable..................................... (167) 303 553
Accrued and sundry liabilities....................... (1,498) 2,489 241
Income taxes payable................................. (59) 162 (400)
-------- ------- -------
Net cash provided by operating activities................. 9,960 11,236 7,612
INVESTING ACTIVITIES:
Purchase of property, plant and equipment............... (2,558) (2,809) (3,455)
Proceeds on disposals of property, plant and equipment,
net.................................................. 29 42 98
-------- ------- -------
Net cash used in investing activities..................... (2,529) (2,767) (3,357)
FINANCING ACTIVITIES:
Issuance of parent company common stock................. 16 -- --
Prepayment of debt, including penalty................... (55,690) -- --
Proceeds from debt...................................... 66,500 -- --
Payments of debt........................................ (13,700) (2,700) (7,000)
Dividends paid.......................................... (7,929) -- --
Short-term borrowings................................... -- (2,000) 2,000
Loan acquisition costs.................................. (894) -- --
-------- ------- -------
Net cash used in financing activities................... (11,697) (4,700) (5,000)
-------- ------- -------
(Decrease) increase in cash and cash equivalents.......... (4,266) 3,769 (745)
Cash and cash equivalents at beginning of year............ 4,645 876 1,621
-------- ------- -------
Cash and cash equivalents at end of year.................. $ 379 $ 4,645 $ 876
======== ======= =======
See notes to consolidated financial statements.
F-6
106
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization--Steel Heddle Mfg. Co. ("Steel Heddle") is a wholly-owned
subsidiary of SH Intermediate Corp. ("Intermediate"). Intermediate is a
wholly-owned subsidiary of SH Holdings Corp. ("Holdings" or "Parent Company").
In accordance with Securities Exchange Commission Staff Accounting Bulletin No.
55, these financial statements include balances for debt and redeemable common
stock that are held at the Intermediate and Holdings level. Related interest
expense has also been reflected in these financial statements. Holdings,
Intermediate, Steel Heddle and Steel Heddle subsidiaries are collectively
referred to hereinafter as "the Company".
Operations -- Steel Heddle manufactures products and loom accessories used by
textile mills which accounted for approximately 85%, 88% and 87% of its sales in
1997, 1996 and 1995, respectively. It also processes and sells metal products
from its wire rolling facilities to industrial users. Steel Heddle sells to
foreign and domestic companies, with foreign sales making up approximately 22%,
24% and 22% of its sales in 1997, 1996 and 1995, respectively. The Company
generally does not require collateral for its domestic receivables. A majority
of the related foreign receivables are insured or secured by letters of credit.
Principles of Consolidation -- All subsidiaries are wholly-owned, and their
accounts are included in the consolidated financial statements. All significant
intercompany items and transactions have been eliminated in consolidation.
Fiscal Year--The Company's fiscal year ends on the Saturday closest to December
31. The years ended January 3, 1998, December 28, 1996 and December 30, 1995 are
53-weeks, 52-weeks and 52-week periods, respectively.
Foreign Currency--Assets and liabilities of the Company's foreign subsidiaries
are translated into United States dollars at current exchange rates. Income and
expense accounts of these operations are translated at the average of exchange
rates during the period.
Effective December 29, 1996, the Company changed the functional currency for its
Mexican subsidiary from the Mexican peso to the United States dollar because the
cumulative inflation index in Mexico has been approximately 100% over a three
year period ended December 28, 1996. In accordance with FAS 52, the cumulative
translation adjustment at December 28, 1996, accumulated in shareholders' equity
prior to this change in functional currency, remains as a separate component of
shareholders' equity.
Cash Equivalents--The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents. Included
in cash equivalents at January 3, 1998 is approximately $757, which approximates
fair value invested in an overnight investment fund with a bank.
Inventories--Inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out (FIFO) method, average cost method or
last-in, first-out (LIFO) method.
Property, Plant and Equipment--Property, plant and equipment is stated at cost.
Depreciation is computed by straight-line and accelerated methods based on
estimated useful lives of the assets. Depreciation expense for 1997, 1996 and
1995 was approximately $3,500, $5,100 and $5,100, respectively.
Other Assets and Deferred Charges--Deferred debt expense, included in sundry
other assets, is being amortized over the lives of the related debt. Goodwill
resulting from the purchase of Steel Heddle is being amortized over forty years
on the straight-line method.
Income Taxes--The Company accounts for income taxes under Statement of
Accounting Standards No. 109, "Accounting for Income Taxes".
F-7
107
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Fair Value of Financial Statements--The carrying value of cash and cash
equivalents, accounts receivable, accounts payable, accrued and sundry
liabilities and long-term debt approximate their fair values.
Pension Costs--The Company's funding policy is to contribute amounts to its
formal funded plans sufficient to meet the minimum funding requirements set
forth in the Employee Retirement Income Security Act of 1974, plus such
additional amounts as the Company may determine to be appropriate from time to
time.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
New Accounting Standards--In June 1997, the Financial Accounting Standards Board
issued SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." Both are
required for financial statements in fiscal years beginning after December 15,
1997.
SFAS No. 130 requires comprehensive income to be reported in a financial
statement that is displayed with the same prominence as other financial
statements. Adoption of this statement is expected to have no impact on the
Company's consolidated financial position, results of operations or cash flows.
SFAS No. 131 requires entities to disclose financial and detailed
information about its operating segments in a manner consistent with internal
segment reporting used by the Company to allocate resources and assess financial
performance. The Company has not completed the analyses required to determine
the additional disclosures requirements, if any, for the adoption of SFAS No.
131, but the adoption of the statement will not affect results of operations or
financial position. It will affect the disclosure of segment reporting. The
Company will adopt this statement retroactively during the fiscal year ending
January 2, 1999.
2. INVENTORIES
1997 1996
------- -------
Raw materials and component parts........................... $ 6,312 $ 6,276
Work in process and finished goods.......................... 7,718 6,694
------- -------
$14,030 $12,970
======= =======
Inventories priced by the LIFO method were approximately $11,100 at January 3,
1998, and $10,000 at December 28, 1996. If all inventories had been priced by
the FIFO or average cost method, they would have been higher than the amounts
reported by approximately $600 in 1997 and $1,700 in 1996.
3. PROPERTY, PLANT AND EQUIPMENT
1997 1996
------- -------
Land........................................................ $ 855 $ 855
Buildings and improvements.................................. 10,692 10,449
Machinery and equipment..................................... 32,362 31,205
Furniture and fixtures...................................... 7,640 6,636
Automotive equipment........................................ 827 817
Construction in progress.................................... 185 819
------- -------
$52,561 $50,781
======= =======
F-8
108
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. ACCRUED AND SUNDRY LIABILITIES
1997 1996
------ ------
Wages, salaries and other compensation...................... $3,006 $2,776
Accrual for hazardous waste site maintenance................ 269 276
Interest.................................................... 709 3,336
Group insurance............................................. 475 505
Other....................................................... 854 1,315
------ ------
$5,313 $8,208
====== ======
The Company has included in accrued and sundry liabilities an accrual for
hazardous waste site maintenance for the estimated total cost over an initial
period of thirty years to close out and monitor its inactive hazardous waste
site. Payment is secured by a standby letter of credit of approximately $700.
5. LONG-TERM DEBT
1997 1996
------- -------
Senior Notes, due in 28 quarterly installments beginning in
March 1997 and ranging from $1,600 to $2,400 plus interest
payable as described below................................ $46,000 $ --
Revolving Line of Credit, interest payable quarterly, due in
February 2002............................................. 6,800 --
Senior Notes, plus interest, payable quarterly at 10%....... -- 24,900
Subordinated Notes, plus interest payable quarterly at
12.75%.................................................... -- 25,100
------- -------
52,800 50,000
Less current portion........................................ 6,500 6,500
------- -------
$46,300 $43,500
======= =======
The $24,900 of Senior Notes and the Subordinated Notes were issued pursuant to
certain recapitalization and refinancing transactions and were payable to
shareholders who collectively own 100% of the Company's outstanding Class B
Common Stock.
On February 21, 1997, the Company entered into a credit arrangement with a bank
group consisting of a Term Loan Facility of $52,500 and a $15,000 Revolving Line
of Credit. The Company utilized proceeds of the Term Loan and the Revolving Line
of Credit to repay its senior notes with principal amount of $24,900 plus
penalty of $2,500 and to repay its subordinated notes with principal amount of
$25,100 plus penalty of $3,200. The total penalty net of other losses and gains
on the refinancing is reported as an extraordinary item, net of taxes of
approximately $1,700. Included in the net extraordinary loss is a reversal of
accrued interest of approximately $1,400. This reversal resulted from the
difference between the stated rate of interest and the effective rate of
interest.
The Term Loan and the Revolving Line of Credit bear interest at the bank's prime
rate plus 0.5% or at Eurodollar rates plus 1.5% per annum, at the Company's
option. Interest based on prime is payable quarterly; interest based on
Eurodollars is payable at the end of the elected interest period, but not less
often than the end of a three-month period. The weighted average interest rate
in effect at January 3, 1998 was 7.4%.
The agreement contains certain restrictive covenants which, among other matters,
require fixed charge coverage, interest coverage, and leverage coverage ratio
tests as defined in the agreement and limits payment of dividends. The agreement
also restricts change in control of the Company and requires mandatory principal
F-9
109
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. LONG-TERM DEBT--(CONTINUED)
prepayments annually based on excess cash flow, as defined. Substantially all of
the Company's assets are pledged as collateral under the new debt agreement.
Future annual principal payments are due as follows:
1998........................................................ $ 6,500
1999........................................................ 6,500
2000........................................................ 7,000
2001........................................................ 8,000
2002........................................................ 15,300
Thereafter.................................................. 9,500
-------
$52,800
=======
Interest paid totaled approximately $7,800, $4,700 and $5,800 for 1997, 1996 and
1995, respectively.
The carrying amount of the Company's borrowings under its short-term revolving
credit agreement approximates fair value. The fair value of the Company's
long-term debt is estimated based on the quoted market prices for the same or
similar issues or on the current notes offered to the Company for the debt of
the same remaining maturities. The carrying value of the debt approximates
market value at January 3, 1998.
6. RETIREMENT PLANS AND DEFERRED COMPENSATION AGREEMENTS
The Company has a funded defined benefit noncontributory pension plan for
employees meeting certain eligibility requirements and an unfunded Supplemental
Pension Plan which is a nonqualified plan under which direct payments are made
to certain retired personnel based on years of service and compensation.
A summary of the components of the net pension cost for the funded defined
benefit plan for 1997, 1996 and 1995 follows:
1997 1996 1995
------- ------- -------
Service cost........................................ $ 642 $ 337 $ 138
Interest cost on projected benefit obligation....... 1,271 1,239 1,202
Return on plan assets............................... (1,433) (1,415) (3,562)
Net amortization.................................... (74) (74) 2,240
------- ------- -------
$ 406 $ 87 $ 18
======= ======= =======
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation was 7.75% in 1997 and 7.50% in 1996.
The rate of increase in compensation was 4.75% for each year and the expected
long-term rate of return on assets was 8% in each year.
F-10
110
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. RETIREMENT PLANS AND DEFERRED COMPENSATION AGREEMENTS--(CONTINUED)
Accumulated plan benefits and projected benefit obligations, as estimated by
consulting actuaries, and plan net assets and funded status for the funded
defined benefit plan as of January 3, 1998 and December 28, 1996 are as follows:
1997 1996
------- -------
Actuarial present value of benefit obligations:
Vested benefit obligation................................. $17,316 $16,870
Nonvested benefit obligation.............................. 114 107
------- -------
Accumulated benefit obligation............................ $17,430 $16,977
======= =======
Projected benefit obligation................................ $17,430 $16,977
Plan assets at fair value................................... 20,113 18,744
------- -------
Funded status--projected benefit obligation less than plan
assets.................................................... $ 2,683 $ 1,767
======= =======
Comprised of:
Prepaid pension cost...................................... $ 546 $ 952
Unrecognized net gain..................................... 1,597 815
Unrecognized prior service cost........................... 540 --
------- -------
$ 2,683 $ 1,767
======= =======
Plan assets are invested in fixed income securities, equities and money market
securities.
At January 3, 1998 and December 28, 1996, the projected benefit obligation (all
of which is vested) for the unfunded plan totaled approximately $778 and $809,
respectively, and is included in retirement benefits payable in the accompanying
consolidated balance sheet.
The Company has an employee savings and investment plan qualified under Section
401(k) of the Internal Revenue Code. This plan is funded in part from member
voluntary contributions, with the Company's contribution equal to 65% of the
amount of member basic contributions, but limited to 3.9% of the total
compensation of the members. The plan provides for additional member voluntary
contributions of up to 10% of member's total compensation.
The Company has an informal arrangement under which it provides certain life
insurance benefits for retired hourly and salary employees. No separate funding
is provided under this arrangement. Expense under the life insurance plan is
recognized by an annual computation of the present value of the Company's
liability for future payments for active and retired employees and a charge to
operations for the current year portion of the computed liability.
In addition to the above plan, the Company has an informal arrangement under
which it provides certain health care benefits for retired employees. No
separate funding is provided under this arrangement. Only those active employees
born before January 1, 1935 who have worked at least five years for the Company
may become eligible for these benefits. Prior to 1995, expense under the health
care plan was recognized by an annual computation of the present value of the
Company's liability for future payments based on current retirees only and a
charge to operations for the current portion of the computed liability.
Effective January 1, 1995, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions" whereby the cost of
providing the benefits is accrued during the employees' working years. The
Company elected to immediately recognize this obligation, resulting in a charge
of $1,425 ($855 after-tax) to 1995 operations.
F-11
111
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. RETIREMENT PLANS AND DEFERRED COMPENSATION AGREEMENTS--(CONTINUED)
Components of postretirement expense for the years ended January 3, 1998,
December 28, 1996 and December 30, 1995 included the following:
1997 1996 1995
---- ---- ------
Service cost.............................................. $ 4 $ 5 $ 6
Interest cost on accumulated postretirement benefit
obligation.............................................. 307 326 342
Transition obligation..................................... -- -- 1,424
---- ---- ------
$311 $331 $1,772
==== ==== ======
The following schedule reconciles the status of the Company's plans with the
unfunded postretirement benefit obligation included in its balance sheets at
January 3, 1998 and December 28, 1996:
1997 1996
--------------- ---------------
MEDICAL LIFE MEDICAL LIFE
Retirees......................................... $3,649 $205 $3,680 $167
Fully eligible active plan participants.......... 239 171 517 198
------ ---- ------ ----
Accrued postretirement benefit obligation........ $3,888 $376 $4,197 $365
====== ==== ====== ====
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 9.5% in 1997, gradually declining to 5.5%
in the year 2005 and remaining at that level thereafter. A discount rate of
7.75% was used in determining the postretirement expense at December 28, 1996. A
discount rate of 7.75% was used to determine the postretirement benefit
obligation at January 3, 1998. A 1% increase in the per capita cost of health
care benefits results in a $25 increase in the accrued postretirement benefit
obligation and a $2 increase in postretirement benefit expense.
The Company's total expense under all retirement benefit plans was approximately
$1,200, $863 and $2,753 in 1997, 1996 and 1995, respectively.
7. SHAREHOLDERS' EQUITY
Upon the death of a holder of class A common stock of Parent Company, the estate
of such holder can require Parent Company to redeem such shares. This redemption
feature is not within the control of Parent Company; accordingly, all of the
class A common stock of Parent Company is presented outside the shareholders'
equity section of the balance sheet. There were 1,080 shares of Parent Company
class A common stock issued during the year ended January 3, 1998.
The holders of the class A and class B common stock of Parent Company are
entitled to the same powers, rights and privileges, except that with regards to
the election of the Board of Directors, the holders of class A stock are
entitled to elect two directors and the holders of class B stock are entitled to
elect four directors.
In connection with the debt refinancing completed in February 1997, the Board
reviewed the terms of the 1992 Stockholders Agreement and the options granted to
certain employee shareholders. The Board concluded that the Unallocated Shares
as described in the 1992 Stockholders Agreement should remain available for
issuance at $15.00 per share and that new employee options should be issued in
exchange for the employee stock options issued in 1992.
Accordingly, in September 1997 the Board issued rights to the 10,000 previously
Unallocated Shares to certain officers and members of management. At January 3,
1998, 1,080 of these shares had been exercised and 8,920 remained exercisable.
F-12
112
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. SHAREHOLDERS' EQUITY--(CONTINUED)
In addition, the 1997 Stock Option Agreement canceled the outstanding options
under the 1992 Agreement and granted certain officers and members of management
options to purchase shares of Parent Company's class A common stock at an
exercise price of $15.00 per share. All options under the 1997 Agreement are
immediately exercisable and terminate February 20, 2002.
A summary of the Parent Company's stock option activity, including the
previously Unallocated Shares, and related information for the years ended
January 3, 1998, December 28, 1996 and December 30, 1995 are as follows:
1997 1996 1995
------------------- ------------------- -------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- --------- ------- --------- ------- ---------
Outstanding--beginning of year........ 24,620 $15 24,620 $15 24,620 $15
Canceled............................ (24,620) 15
Granted............................. 26,310 15 -- -- -- --
Exercised........................... (1,080) -- -- -- -- --
Retired............................. (2,204) 15
------- --- ------ --- ------ ---
Outstanding at end of year............ 23,026 $15 24,620 $15 24,620 $15
======= === ====== === ====== ===
Exercisable at end of year............ 23,026 $15 -- $-- -- $--
Exercise price of all options outstanding as of January 3, 1998 is $15. The
weighted-average remaining contractual life of those options is 4 years.
In addition, the Parent Company has outstanding warrants to purchase 30,928
shares of class A common stock of Parent Company at $15 per share. At January 3,
1998, 32,100 shares of class A common stock of Parent Company were reserved for
issuance under these warrants.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, whenever the exercise price of the Company's employee stock options
equals or exceeds the market price of the underlying stock on the date of grant,
no compensation expense is recognized.
The Company used the minimum value method to develop the pro-forma income
effect. Assumptions used in valuing stock options include a risk free rate of
6%, dividend yield of 0.0% and an expected life of 4 years. The difference
between pro-forma net income and reported earnings is not material.
The Company paid a dividend of $7,929 to shareholders on February 26, 1997.
F-13
113
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows:
JANUARY 3, DECEMBER 28,
1998 1996
---------- ------------
Deferred tax liabilities:
Funded pension........................................... $ 219 $ 381
LIFO..................................................... 1,317 1,410
Tax over book depreciation............................... 3,385 3,610
Other.................................................... 37 237
------ ------
4,958 5,638
Deferred tax assets:
Unfunded pension......................................... 2,017 2,149
Vacation accrual......................................... 436 430
Healthcare accrual....................................... 190 202
Hazardous waste accrual.................................. 107 110
Inventory obsolescence................................... 276 186
Other.................................................... 142 161
------ ------
3,168 3,238
------ ------
$1,790 $2,400
====== ======
Significant components of the provision for income taxes, including the tax
provision for extraordinary items and cumulative effects of change in method of
accounting are as follows:
1997 1996 1995
------ ------ -------
Current:
Federal............................................. $2,964 $2,024 $ 1,998
State............................................... (27) 214 260
------ ------ -------
2,937 2,238 2,258
Deferred:
Federal............................................. (521) (512) (1,025)
State............................................... (89) (88) (175)
------ ------ -------
(610) (600) (1,200)
------ ------ -------
$2,327 $1,638 $ 1,058
====== ====== =======
F-14
114
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. INCOME TAXES--(CONTINUED)
The reconciliation of income tax attributable to continuing operations computed
at the U.S. statutory rate to income tax expense is shown below:
1997 1996 1995
----------------- ----------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
Tax at U.S. statutory
rates..................... $2,394 34.0% $1,440 34.0% $ 744 34.0%
State income tax (benefit),
net of federal tax
effect.................... (77) (1.1) 83 2.0 56 2.6
Goodwill amortization....... 248 3.5 248 5.9 248 11.3
Meals and entertainment..... 38 0.5 33 0.8 27 1.3
Benefit of foreign
subsidiary................ (140) (2.0) (110) (2.6) (84) (3.8)
Other, net.................. (136) (1.9) (56) (1.4) 67 2.9
------ ---- ------ ---- ------ ----
$2,327 33.0% $1,638 38.7% $1,058 48.3%
====== ==== ====== ==== ====== ====
Income taxes paid in excess of tax refunds in 1997, 1996 and 1995 were $2,954,
$2,105 and $2,660, respectively.
9. BUSINESS SEGMENTS
The Company manufactures and sell products and loom accessories used by textile
mills. In addition, the Company processes and sells rolled products from its
wire, foundry and metal fabricating facilities to industrial users. Export sales
were approximately $16,031, $15,218 and $14,911 in 1997, 1996 and 1995,
respectively. Foreign operations are not significant.
F-15
115
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. BUSINESS SEGMENTS--(CONTINUED)
The information required by Statement of Financial Standards No. 14 is shown
below:
1997 1996 1995
-------- ------- -------
Net sales and other income
Textile mill accessories................................. $ 63,127 $56,588 $58,943
Metal products
Unaffiliated customers................................ 9,856 7,896 9,175
Intersegment (1)...................................... 7,393 6,023 6,990
Eliminations--intersegment sales(1)...................... (7,393) (6,023) (6,990)
-------- ------- -------
Total net sales and other income.................... $ 72,983 $64,484 $68,118
======== ======= =======
Operating profit (loss)
Textile mill accessories................................. $ 15,979 $11,861 $ 9,755
Metal products........................................... 3,885 2,289 2,671
-------- ------- -------
Total operating profit.............................. 19,864 14,150 12,426
General corporate expenses................................. (3,234) (4,069) (2,506)
Net interest (expense) income.............................. (5,148) (5,844) (6,307)
-------- ------- -------
Earnings before income taxes............................... $ 11,482 $ 4,237 $ 3,613
======== ======= =======
Identifiable assets
Textile mill accessories................................. $ 49,307 $50,469 $52,263
Metal products........................................... 12,770 12,163 13,660
Corporate assets(2)...................................... 2,263 6,084 2,848
-------- ------- -------
Total assets........................................ $ 64,340 $68,716 $68,771
======== ======= =======
Depreciation and amortization
Textile mill accessories................................. $ 3,220 $ 4,404 $ 4,388
Metal products........................................... 863 1,309 1,353
Corporate................................................ 326 306 355
-------- ------- -------
Total depreciation and amortization................. $ 4,409 $ 6,019 $ 6,096
======== ======= =======
Capital expenditures
Textile mill accessories................................. $ 1,329 $ 1,717 $ 2,108
Metal products........................................... 342 637 741
Corporate................................................ 887 455 606
-------- ------- -------
Total capital expenditures.......................... $ 2,558 $ 2,809 $ 3,455
======== ======= =======
- ---------------
(1) Intersegment sales are accounted for substantially at cost and have been
eliminated in consolidation.
(2) Corporate assets shown are principally cash, short-term investments and
other assets and deferred charges.
10. RESTRUCTURING
During the fourth quarter of 1995, the Company initiated a restructuring program
which resulted in a one-time pretax expense of approximately $821. This program
includes the closing of the Company's Canadian operation, the write down of
certain assets to be disposed of and a reduction in work force in the Company's
domestic operations. Severance costs included in the one-time charge totaled
approximately $561.
11. SUBSEQUENT EVENT
On May 26, 1998, the Company and its subsidiaries were acquired in a purchase
transaction by Steel Heddle Group, Inc., a corporation formed in contemplation
of the purchase transaction. To partially fund the costs of
F-16
116
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the acquisition, the Company issued 10 5/8% Senior Subordinated Notes due 2008
in the principal amount of $100,000,000.
Payment of the Company's Senior Subordinated Notes is unconditionally
guaranteed, jointly and severally, on a senior subordinated basis by certain of
the Company's wholly-owned subsidiaries. Management has determined that separate
complete financial statements of the guarantor entities would not be material to
readers of the financial statements; therefore, the following sets forth
condensed consolidating financial statements (dollars in thousands):
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JANUARY 3, 1998
COMBINED COMBINED RECLASSIFICATIONS
GUARANTOR NON-GUARANTOR THE AND
SUBSIDIARIES SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
------------ ------------- -------- ----------------- ------------
Assets:
Cash and cash equivalents........ $ 16 $ 96 $ 267 $ $ 379
Accounts receivable.............. 212 294 8,784 9,290
Inventories...................... 315 13,715 14,030
Prepaid expenses................. 5 94 99
------- ------ -------- --------- -------
Total current assets... 228 710 22,860 23,798
Due from affiliates.............. 3,348 (3,348)
Notes receivable from
affiliates..................... 69,443 (69,443)
Investments in subsidiaries...... 176 71,029 (71,205)
Property, plant & equipment,
net............................ 334 16,351 16,685
Other assets and deferred
charges, net................... 7 23,850 23,857
------- ------ -------- --------- -------
Total assets........... $69,847 $4,399 $134,090 $(143,996) $64,340
======= ====== ======== ========= =======
Liabilities and shareholders'
equity:
Accounts payable and accrued and
sundry liabilities............. $ 23 $ 7,456 $ $ 7,479
Due to affiliates, net........... 3,018 330 (3,348)
Deferred income taxes............ 670 670
Income taxes..................... 302 302
Current portion of long-term
debt........................... 6,500 6,500
------- ------ -------- --------- -------
Total current
liabilities.......... 3,018 23 15,258 (3,348) 14,951
Long-term debt, less current
portion........................ 115,743 (69,443) 46,300
Retirement benefits payable...... 5,126 5,126
Deferred income taxes............ 1,120 1,120
Redeemable common stock.......... 1,366 1,366
Shareholders' equity (deficit)... 66,829 4,376 (4,523) (71,205) (4,523)
------- ------ -------- --------- -------
Total liabilities and
shareholders'
equity............... $69,847 $4,399 $134,090 $(143,996) $64,340
======= ====== ======== ========= =======
F-17
117
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 28, 1996
COMBINED COMBINED RECLASSIFICATIONS
GUARANTOR NON-GUARANTOR THE AND
SUBSIDIARIES SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
------------ ------------- ------- ----------------- ------------
Assets:
Cash and cash equivalents......... $ $ 105 $ 4,540 $ $ 4,645
Accounts receivable............... 164 8,698 8,862
Inventories....................... 234 12,736 12,970
Prepaid expenses.................. 10 98 108
----- ------ ------- ------- -------
Total current assets.... 513 26,072 26,585
Due from affiliates............... 2,907 (2,907)
Investments in subsidiaries....... 149 0 3,273 (3,422)
Property, plant & equipment,
net............................. 377 17,379 17,756
Other assets and deferred charges,
net............................. 10 24,365 24,375
----- ------ ------- ------- -------
Total assets............ $ 149 $3,807 $71,089 $(6,329) $68,716
===== ====== ======= ======= =======
Liabilities and shareholders'
equity:
Accounts payable and accrued and
sundry liabilities.............. $ 14 $10,528 $ $10,542
Due to affiliates, net............ 520 2,387 (2,907)
Deferred income taxes............. 802 802
Income taxes...................... 361 361
Current portion of long-term
debt............................ 6,500 6,500
----- ------ ------- ------- -------
Total current
liabilities........... 520 14 20,578 (2,907) 18,205
Long-term debt, less current
portion......................... 43,500 43,500
Retirement benefits payable....... 5,372 5,372
Deferred income taxes............. 1,598 1,598
Redeemable common stock........... 1,350 1,350
Shareholders' equity (deficit).... (371) 3,793 (1,309) (3,422) (1,309)
----- ------ ------- ------- -------
Total liabilities and
shareholders'
equity................ $(149) $3,807 $71,089 $(6,329) $68,716
===== ====== ======= ======= =======
F-18
118
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JANUARY 3, 1998
COMBINED COMBINED RECLASSIFICATIONS
GUARANTOR NON-GUARANTOR THE AND
SUBSIDIARIES SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
------------ ------------- -------- ----------------- ------------
Net sales........................ $ $1,601 $ 72,017 $ (635) $72,983
Cost of goods sold............... 927 45,521 46,448
------ ------ -------- ------- -------
Gross profit..................... 674 26,496 (635) 26,535
Selling, general and
administrative costs........... 4 18 9,102 (635) 8,489
Other operating expenses......... 1,204 1,204
------ ------ -------- ------- -------
Operating income (loss).......... (4) 656 16,190 16,842
Other income (expense)........... 7,145 (12,505) (5,360)
Income before income taxes and
extraordinary item............. 7,141 656 3,685 11,482
------ ------ -------- ------- -------
Income tax expense............... 2,500 74 1,441 4,015
------ ------ -------- ------- -------
Income before extraordinary
item........................... 4,641 582 2,244 7,467
Extraordinary (loss) on the early
extinquishment of debt, net of
income taxes................... (2,753) (2,753)
Equity in earnings of
subsidiaries................... 26 5,223 (5,249)
------ ------ -------- ------- -------
Net income (loss)................ $4,667 $ 582 $ 4,714 $(5,249) $ 4,714
====== ====== ======== ======= =======
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 28, 1996
COMBINED COMBINED RECLASSIFICATIONS
GUARANTOR NON-GUARANTOR THE AND
SUBSIDIARIES SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
------------ ------------- ------- ----------------- ------------
Net sales......................... $ $645 $63,839 $ $64,484
Cost of goods sold................ 598 43,476 44,074
--- ---- ------- ----- -------
Gross profit...................... 47 20,363 20,410
Selling, general and
administrative costs............ 10 8,865 8,875
Other operating expenses.......... 1,454 1,454
--- ---- ------- ----- -------
Operating income.................. 37 10,044 10,081
Other income (expense)............ 453 (6,297) (5,844)
--- ---- ------- ----- -------
Income before income taxes........ 490 3,747 4,237
Income tax expense................ (52) (1,586) (1,638)
Equity in earnings of
subsidiaries.................... 45 438 (483)
--- ---- ------- ----- -------
Net income (loss)................. $45 $438 $ 2,599 $(483) $ 2,599
=== ==== ======= ===== =======
F-19
119
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 30, 1995
COMBINED COMBINED RECLASSIFICATIONS
GUARANTOR NON-GUARANTOR THE AND
SUBSIDIARIES SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
------------ ------------- ------- ----------------- ------------
Net sales......................... $ $625 $67,815 $(322) $68,118
Cost of goods sold................ 310 47,396 47,706
---- ---- ------- ----- -------
Gross profit...................... 315 20,419 (322) 20,412
Selling, general and
administrative costs............ 80 8,909 $(322) 8,667
Other operating expenses.......... 1,825 1,825
---- ---- ------- ----- -------
Operating income.................. 235 9,685 9,920
Other income (expense)............ (68) (6,239) (6,307)
Income before income taxes, and
cumulative effect of accounting
change.......................... 167 3,446 3,613
---- ---- ------- ----- -------
Income tax expense................ 18 1,610 1,628
---- ---- ------- ----- -------
Income before cumulative effect of
accounting change............... 149 1,836 1,985
Cumulative effect of change in
method of accounting for
postretirement benefits net of
taxes of $570................... (855) (855)
Equity in earnings (loss) of
subsidiaries.................... (81) 149 (68)
---- ---- ------- ----- -------
Net income (loss)............... $(81) $149 $ 1,130 $ (68) $ 1,130
==== ==== ======= ===== =======
F-20
120
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JANUARY 3, 1998
COMBINED COMBINED RECLASSIFICATIONS
GUARANTOR NON-GUARANTOR THE AND
SUBSIDIARIES SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
------------ ------------- -------- ----------------- ------------
Net cash provided by operating
activities..................... $ 4,431 $ 439 $ 5,090 $ $ 9,960
Investing activities:
Purchases of property, plant
and equipment............... (7) (2,522) (2,529)
Advances to subsidiaries....... (69,443) 69,443
-------- ----- -------- -------- --------
Net cash provided by (used in)
investing activities........ (69,443) (7) (2,522) 69,443 (2,529)
Financing activities:
Prepayment of debt, including
penalty..................... (55,690) (55,690)
Proceeds from debt............. 135,943 (69,443) 66,500
Payments of debt............... (13,700) (13,700)
Dividends paid................. (7,929) (7,929)
Intercompany transactions,
net......................... 2,498 (441) (2,057)
Capital contributions.......... 62,530 (62,530)
Other.......................... (878) (878)
-------- ----- -------- -------- --------
Net cash used in financing
activities..................... 65,028 (441) (6,841) (69,443) (11,697)
-------- ----- -------- -------- --------
Net increase (decrease) in cash
and equivalents................ 16 (9) (4,273) (4,266)
Cash and equivalents at beginning
of year........................ 105 4,540 4,645
-------- ----- -------- -------- --------
Cash and equivalents at end of
year........................... $ 16 $ 96 $ 267 $ $ 379
======== ===== ======== ======== ========
F-21
121
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 28, 1996
COMBINED COMBINED RECLASSIFICATIONS
GUARANTOR NON-GUARANTOR THE AND
SUBSIDIARIES SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
------------ ------------- ------- ----------------- ------------
Net cash provided by operating
activities...................... $ 28 $ 414 $10,794 $ $11,236
Net cash used in investing
activities...................... (4) (2,763) (2,767)
Financing activities:
Payments of debt............. (2,700) (2,700)
Short-term borrowings........ (2,000) (2,000)
Intercompany transactions,
net........................ 30 (377) 347
Capital accounts............. (58) 10 48
Other........................
---- ----- ------- ----- -------
Net cash used in financing
activities................. (28) (367) (4,305) (4,700)
---- ----- ------- ----- -------
Net increase (decrease) in cash
and equivalents................. 43 3,726 3,769
Cash and equivalents at beginning
of year......................... 62 814 876
---- ----- ------- ----- -------
Cash and equivalents at end of
year............................ $ $ 105 $ 4,540 $ $ 4,645
==== ===== ======= ===== =======
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 30, 1995
COMBINED COMBINED RECLASSIFICATIONS
GUARANTOR NON-GUARANTOR THE AND
SUBSIDIARIES SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
------------ ------------- ------- ----------------- ------------
Net cash provided (used) by
operating activities............. $(508) $ 508 $ 7,612 $ $ 7,612
Net cash used in investing
activities....................... (340) (3,017) (3,357)
Financing activities:
Payments of debt................. (7,000) (7,000)
Short-term borrowings............ 2,000 2,000
Intercompany transactions, net... 508 (169) (339)
Other............................
----- ----- ------- ----- -------
Net cash used in financing
activities.................... 508 (169) (5,339) (5,000)
----- ----- ------- ----- -------
Net increase (decrease) in cash and
equivalents...................... (1) (744) (745)
Cash and equivalents at beginning
of year.......................... 63 1,558 1,621
----- ----- ------- ----- -------
Cash and equivalents at end of
year............................. $ $ 62 $ 814 $ $ 876
===== ===== ======= ===== =======
F-22
122
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
APRIL 4, JANUARY 3,
1998 1998
----------- ----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 276 $ 379
Accounts receivable....................................... 11,115 9,290
Inventories............................................... 15,071 14,030
Prepaid expenses.......................................... 50 99
-------- --------
Total current assets........................................ 26,512 23,798
Property, plant and equipment:
Cost...................................................... 52,368 52,561
Less accumulated depreciation............................. (36,070) (35,876)
-------- --------
16,298 16,685
Other assets and deferred charges:
Prepaid pension costs..................................... 488 546
Goodwill, net............................................. 22,355 22,537
Sundry.................................................... 741 774
-------- --------
23,584 23,857
-------- --------
Total Assets...................................... $ 66,394 $ 64,340
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 2,194 $ 2,166
Accrued and sundry liabilities............................ 3,130 5,313
Deferred income taxes..................................... 670 670
Income taxes.............................................. 1,289 302
Current portion of long-term debt......................... 6,500 6,500
-------- --------
Total current liabilities................................... 13,783 14,951
Long-term debt, less current portion........................ 46,992 46,300
Retirement benefits payable................................. 5,141 5,126
Deferred income taxes....................................... 1,120 1,120
Redeemable common stock:
Parent company class A, $.01 par value per
share -- authorized 2,000,000 shares, issued and
outstanding 91,080 shares in 1997 and 90,000 in 1996... 1,366 1,366
Shareholders' equity/(deficit):
Common Stock par value $1 per share -- authorized
1,500,000 shares, issued and outstanding 10 shares..... -- --
Additional paid-in capital................................ 13,689 13,689
Foreign currently translation adjustment.................. (34) (48)
(Deficit)................................................. (15,663) (18,164)
-------- --------
(2,008) (4,523)
-------- --------
Total liabilities and shareholders' equity
(deficit)....................................... $ 66,394 $ 64,340
======== ========
See notes to consolidated financial statements.
F-23
123
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(DOLLARS IN THOUSANDS)
FISCAL QUARTER ENDED
--------------------
APRIL 4, APRIL 5,
1998 1997
-------- --------
Net sales................................................... $19,266 $18,606
Cost of goods sold.......................................... 11,930 12,081
------- -------
Gross profit................................................ 7,336 6,525
Selling, general and administrative costs................... 2,178 2,231
Management fees............................................. 68 268
Amortization of goodwill.................................... 182 182
------- -------
Operating income............................................ 4,908 3,844
Other income (expense):
Interest income........................................... 17 44
Interest expense, including amortization of deferred
financing costs........................................ (1,027) (1,503)
Other financing expense................................... (50) (175)
------- -------
Income before income taxes and extraordinary item........... 3,848 2,210
Income tax expense.......................................... 1,347 773
------- -------
Income before extraordinary item............................ 2,501 1,437
Extraordinary (loss) on the early extinguishment of debt,
net of income taxes of $1,688............................. -- (2,753)
------- -------
Net income (loss)........................................... $ 2,501 $(1,316)
======= =======
See notes to consolidated financial statements.
F-24
124
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
FISCAL QUARTER ENDED
--------------------
APRIL 4, APRIL 5,
1998 1997
-------- --------
OPERATING ACTIVITIES:
Net income.................................................. $ 2,501 $ (1,316)
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.............................................. 924 943
Amortization.............................................. 215 394
Loss on disposal of property, plant and equipment......... -- --
Provision for deferred income taxes....................... -- --
Accrued retirement benefit costs.......................... 73 48
Extraordinary item........................................ -- 4,441
Changes in operating assets and liabilities:
Accounts receivable.................................... (1,825) (379)
Inventories............................................ (1,041) (327)
Prepaid expenses....................................... 49 86
Accounts payable....................................... 28 (421)
Accrued and sundry liabilities......................... (2,169) (3,696)
Income taxes payable................................... 987 (1,118)
------- --------
Net cash used in operating activities....................... (258) (1,345)
INVESTING ACTIVITIES:
Purchase of property, plant and equipment................. (618) (416)
Proceeds on disposals of property, plant and equipment,
net.................................................... 81 --
------- --------
Net cash used in investing activities....................... (537) (416)
FINANCING ACTIVITIES:
Prepayments of debt, including penalty.................... -- (56,315)
Proceeds from debt........................................ 692 62,500
Dividends paid............................................ -- (7,929)
Loan acquisition costs.................................... -- (793)
------- --------
Net cash provided by (used in) financing activities....... 692 (2,537)
------- --------
(Decrease) increase in cash and cash equivalents............ (103) (4,298)
Cash and cash equivalents at beginning of period............ 379 4,645
------- --------
Cash and cash equivalents at end of period.................. $ 276 $ 347
======= ========
See notes to consolidated financial statements.
F-25
125
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Steel Heddle Mfg. Co. ("Steel Heddle" or the "Company") manufactures
products and loom accessories used by textile mills. It also processes and sells
metal products from its wire rolling facilities to industrial users. The Company
sells to foreign and domestic companies.
The accompanying unaudited consolidated financial statements of the Company
have been prepared in accordance with generally accepted accounting principles
for interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of the management of Steel
Heddle, these unaudited consolidated financial statements contain all of the
adjustments of a normal recurring nature necessary for fair presentation.
Operating results for the fiscal quarter ended April 4, 1998 are not necessarily
indicative of the results that may be expected for fiscal 1998. Certain amounts
previously presented in the consolidated financial statements for prior periods
have been reclassified to conform to current classification. The preparation of
financial statements in accordance with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of revenues and expense during the reporting period. Actual results
could differ from those estimates.
During the quarter ended April 4, 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income," which requires comprehensive income to be
reported in a financial statement that is displayed with the same prominence as
other financial statements. Adoption of this statement did not have any impact
on the Company's consolidated financial position, results of operations or cash
flows.
2. EXTRAORDINARY ITEM
On February 21, 1997, the Company entered into a credit arrangement with a
bank group consisting of a Term Loan Facility of $52,500 and a $15,000 Revolving
Line of Credit. The Company utilized proceeds of the Term Loan and the Revolving
Credit Facility to repay its senior notes in the principal amount of $24,900
plus a penalty of $2,500 and to repay its subordinated notes in the principal
amount of $25,100 plus a penalty of $3,200. The total penalty net of other
losses and gains on the refinancing is reported as an extraordinary item, net of
taxes of approximately $1,700. Included in the net extraordinary loss is a
reversal of accrued interest of approximately $1,400. This reversal resulted
from the difference between the stated rate of interest and the effective rate
of interest.
3. INVENTORIES
Inventories consist of the following:
APRIL 4, JANUARY 3,
1998 1998
----------- ----------
(UNAUDITED)
Raw materials and component parts........................... $ 6,148 $ 6,312
Work in process and finished goods.......................... 8,923 7,718
------- -------
$15,071 $14,030
======= =======
If all inventories had been priced by FIFO or average cost method, they
would have been higher than the amounts reported by approximately $725 at April
4, 1998 and $627 at January 3, 1998.
F-26
126
4. SUBSEQUENT EVENT
On May 26, 1998, the Company and its subsidiaries were acquired in a
purchase transaction by Steel Heddle Group, Inc., a corporation formed in
contemplation of the purchase transaction. To partially fund the costs of the
acquisition, the Company issued 10 5/8% Senior Subordinated Notes due 2008 in
the principal amount of $100,000,000.
Payment of the Company's Senior Subordinated Notes is unconditionally
guaranteed, jointly and severally, on a senior subordinated basis by certain of
the Company'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 sets forth condensed
consolidating financial statements (in thousands):
CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)
AS OF APRIL 4, 1998
COMBINED COMBINED RECLASSIFICATIONS
GUARANTOR NON-GUARANTOR THE AND
SUBSIDIARIES SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
------------ ------------- -------- ----------------- ------------
Assets:
Cash and cash equivalents........ $ 17 $ 34 $ 225 $ $ 276
Accounts receivable.............. 240 265 10,610 11,115
Inventories...................... 351 14,720 15,071
Prepaid expenses................. 31 19 50
------- ------ -------- --------- -------
Total current assets... 257 681 25,574 26,512
Due from affiliates.............. 3,361 (3,361) --
Notes receivable from
affiliates..................... 69,443 (69,443) --
Investments in subsidiaries...... 163 72,371 (72,534) --
Property, plant & equipment,
net............................ 322 15,976 16,298
Other assets and deferred
charges, net................... 7 23,577 23,584
------- ------ -------- --------- -------
Total assets........... $69,863 $4,371 $137,498 $(145,338) $66,394
======= ====== ======== ========= =======
Liabilities and shareholders'
equity:
Accounts payable and accrued and
sundry liabilities............. $ $ 32 $ 5,292 $ $ 5,324
Due to affiliates, net........... 853 2,508 (3,361) --
Deferred income taxes............ 670 670
Income taxes..................... 834 (19) 474 1,289
Current portion of long-term
debt........................... 6,500 6,500
------- ------ -------- --------- -------
Total current
liabilities.......... 1,687 13 15,444 (3,361) 13,783
Long-term debt, less current
portion........................ 116,435 (69,443) 46,992
Retirement benefits payable...... 5,141 5,141
Deferred income taxes............ 1,120 1,120
Redeemable common stock.......... 1,366 1,366
Shareholders' equity (deficit)... 68,176 4,358 (2,008) (72,534) (2,008)
------- ------ -------- --------- -------
Total liabilities and
shareholders'
equity............... $69,863 $4,371 $137,498 $(145,338) $66,394
======= ====== ======== ========= =======
F-27
127
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE FISCAL QUARTER ENDED APRIL 4, 1998
COMBINED COMBINED RECLASSIFICATIONS
GUARANTOR NON-GUARANTOR THE AND
SUBSIDIARIES SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
------------ ------------- ------- ----------------- ------------
Net sales......................... $ $230 $19,036 $ $19,266
Cost of goods sold................ 251 11,678 11,930
------ ---- ------- ------- -------
Gross profit...................... (21) 7,357 7,336
Selling, general and
administrative costs............ 5 2,173 2,178
Other operating expenses.......... 250 250
------ ---- ------- ------- -------
Operating income (loss)........... (26) 4,934 4,908
Other income (expense)............ 2,194 (3,254) (1,060)
------ ---- ------- ------- -------
Income (loss) before income
taxes........................... 2,194 (26) 1,680 3,848
Income tax (expense) benefit...... (834) 9 (522) (1,347)
Equity in earnings of
subsidiaries.................... 1,343 (1,343) --
------ ---- ------- ------- -------
Net income (loss)................. $1,360 $(17) $ 2,501 $(1,343) $ 2,501
====== ==== ======= ======= =======
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE FISCAL QUARTER ENDED APRIL 5, 1997
COMBINED COMBINED RECLASSIFICATIONS
GUARANTOR NON-GUARANTOR THE AND
SUBSIDIARIES SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
------------ ------------- ------- ----------------- ------------
Net sales......................... $ $201 $18,405 $ $10,606
Cost of goods sold................ 174 11,907 12,081
---- ---- ------- ----- -------
Gross profit...................... 27 6,498 6,525
Selling, general and
administrative costs............ 5 2,226 2,231
Other operating expenses.......... 450 450
---- ---- ------- ----- -------
Operating income.................. 22 3,822 3,844
Other income (expense)............ 922 (2,556) (1,634)
---- ---- ------- ----- -------
Income before income taxes and
extraordinary item.............. 922 22 1,266 2,210
Income tax expense................ 351 8 414 773
---- ---- ------- ----- -------
Income before extraordinary
item............................ 571 14 852 1,437
Extraordinary (loss)on early
extinguishment of debt, net of
income taxes.................... (2,753) (2,753)
Equity in earnings of
subsidiaries.................... 17 585 (602) 3
---- ---- ------- ----- -------
Net income (loss)................. $588 $ 14 $(1,316) $(602) $(1,316)
==== ==== ======= ===== =======
F-28
128
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE FISCAL QUARTER ENDED APRIL 4, 1998
COMBINED COMBINED RECLASSIFICATIONS
GUARANTOR NON-GUARANTOR THE AND
SUBSIDIARIES SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
------------ ------------- ------- ----------------- ------------
Net cash provided by operating
activities...................... $ 2,166 $(49) $(2,375) $ $(258)
Net cash used in investing
activities...................... (537) (537)
Financing activities:
Proceeds from debt.............. 692 692
Dividends paid.................. --
Intercompany transactions,
net.......................... (2,165) (13) 2,178
Other........................... --
------- ---- ------- --------- -----
Net cash used in financing
activities...................... (2,165) (13) 2,870 692
------- ---- ------- --------- -----
Net increase (decrease) in cash
and equivalents................. 1 (62) (42) (103)
Cash and equivalents at beginning
of year......................... 16 96 267 379
------- ---- ------- --------- -----
Cash and equivalents at end of
year............................ $ 17 $ 34 $ 225 $ $ 276
======= ==== ======= ========= =====
F-29
129
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE FISCAL QUARTER ENDED APRIL 5, 1997
COMBINED COMBINED RECLASSIFICATIONS
GUARANTOR NON-GUARANTOR THE AND
SUBSIDIARIES SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
------------ ------------- -------- ----------------- ------------
Net cash provided by operating
activities..................... $ 706 $ 55 $ (2,106) $ $ (1,345)
Investing activities:
Purchases of property, plant
and equipment............. (416) (416)
Advances to subsidiaries.... (63,220) 63,220
-------- ---- -------- -------- --------
Net cash used in investing
activities................ (63,220) (416) 63,220 416
Financing activities:............
Dividends paid.............. (7,929) (7,929)
Pre-payments of debt,
including penalty......... (56,315) (56,315)
Proceeds from debt.......... 125,720 (63,220) 62,500
Intercompany transactions,
net....................... (3) (2) 5
Capital accounts............ 62,531 (62,531)
Other....................... (793) (793)
-------- ---- -------- -------- --------
Net cash used in financing
activities................ 62,528 (2) (1,843) (63,220) (2,537)
-------- ---- -------- -------- --------
Net increase (decrease) in cash
and equivalents................ 14 53 (4,365) (4,298)
Cash and equivalents at beginning
of year........................ 105 4,540 4,645
-------- ---- -------- -------- --------
Cash and equivalents at end of
year........................ $ 14 $158 $ 175 $ $ 347
======== ==== ======== ======== ========
F-30
130
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING NOT
CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE INITIAL PURCHASERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL,
OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN SECURITIES OFFERED
HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO
BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.
------------------------
TABLE OF CONTENTS
PAGE
Available Information.................. i
Summary................................ 1
Risk Factors........................... 12
Acquisition Transactions............... 18
Use of Proceeds........................ 19
Capitalization......................... 20
Unaudited Pro Forma Condensed
Consolidated Financial Data.......... 21
Selected Consolidated Historical
Financial Data....................... 27
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 29
Business............................... 35
Management............................. 44
Certain Relationships and Related
Transactions......................... 48
Description of Company Common Stock.... 49
Security Ownership..................... 49
Description of Notes................... 50
The Exchange Offer..................... 82
Description of New Credit Agreement.... 90
Certain Federal Income Tax
Considerations....................... 92
Plan of Distribution................... 93
Legal Matters.......................... 93
Experts................................ 93
Change in Accountants.................. 93
Index to Consolidated Financial
Statements........................... F-1
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
PROSPECTUS
$100,000,000
LOGO
STEEL HEDDLE MFG. CO.
OFFER TO EXCHANGE
$1,000 PRINCIPAL AMOUNT OF ITS
10 5/8% SERIES B SENIOR
SUBORDINATED NOTES DUE 2008
WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT FOR
EACH $1,000 PRINCIPAL AMOUNT
OF ITS OUTSTANDING
10 5/8% SERIES A SENIOR
SUBORDINATED NOTES DUE 2008
, 1998
- ------------------------------------------------------
- ------------------------------------------------------
131
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company is incorporated under the laws of the Commonwealth of
Pennsylvania. Pennsylvania law provides that a Pennsylvania corporation may
indemnify directors, officers, employees and agents of the corporation against
liabilities they may incur in such capacities for any action taken or any
failure to act, whether or not the corporation would have the power to indemnify
the person under any provisions of law, unless such action or failure to act is
determined by a court to have constituted recklessness or willful misconduct.
Pennsylvania law also permits the adoption of a bylaw amendment, approved by
shareholders, providing for the elimination of a director's liability for
monetary damages for any action taken or any failure to take any action unless
(1) the director has breached or failed to perform the duties of his office and
(2) the breach or failure to perform constitutes self-dealing, willful
misconduct or recklessness.
The bylaws of the Company provide for indemnification of directors,
officers, employees and agents of the Company and every fiduciary or
administrator of any of its deferred compensation or other employee benefit
plans to the full extent permitted by the Pennsylvania Business Corporation Act.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS.
3.1 Articles of Incorporation of the Company.
3.2 By-laws of the Company.
3.3 Articles of Incorporation of Steel Heddle International,
Inc.
3.4 By-Laws of Steel Heddle International, Inc.
3.5 Certificate of Incorporation of Heddle Capital Corp.
3.6 By-Laws of Heddle Capital Corp.
4.1 Indenture, dated as of May 26, 1998, among the Company, the
Guarantors and United States Trust Company of New York, as
Trustee.
4.2 Purchase Agreement, dated as of May 21, 1998, among the
Company, the Guarantors, Donaldson, Lufkin & Jenrette
Securities Corporation and NationsBanc Montgomery Securities
LLC.
4.3 Registration Rights Agreement, dated as of May 26, 1998, by
and among the Company, the Guarantors, Donaldson, Lufkin &
Jenrette Securities Corporation and NationsBanc Montgomery
Securities LLC
5.1 Opinion of Kirkland & Ellis.
10.1 Credit Agreement, dated as of May 26, 1998, among the
Company, the other credit parties from time to time parties
thereto, the lenders identified therein, NationsBank, N.A.,
as administrative agent and documentation agent (the
"Agent") and DLJ Capital Funding, Inc., as syndication
agent.
10.2 Security Agreement, dated as of May 26, 1998, made by the
Company and each of the Guarantors in favor of the Agent.
10.3 Pledge Agreement, dated as of May 26, 1998, among the
Company, Steel Heddle Group, Inc., the Guarantors and the
Agent.
10.4 Stock Purchase Agreement dated as of May 1, 1998, by and
among SH Holdings Corp., Butler Capital Corporation, Steel
Heddle Group, Inc. and the shareholders of SH Holdings Corp.
10.5 Management Services Agreement, dated as of May 26, 1998, by
and among the Company, the Guarantors, SH Group, Steel
Heddle International Ltd., Steel Heddle (Canada) LTEE/LTD
and American Industrial Partners Corporation.
10.6 Sale Bonus Agreement, dated April 21, 1998, among each of
Messrs. Dillon, Team and Miller and the Company and SH
Holdings Corp.
10.7 Bonus Agreement, dated as of January 5, 1998, among SH
Holdings Corp., the Company and employees of the Company
signatories thereto.
II-1
132
12.1 Computation of earnings to fixed charges.*
21.1 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Kirkland & Ellis (included in Exhibit 5.1).
24.1 Power of Attorney (included in signature page).
25.1 Statement of Eligibility of Trustee on Form T-1.*
27.1 Financial Data Schedule.*
99.1 Form of Letter of Transmittal.
99.2 Form of Notice of Guaranteed Delivery.
99.3 Form of Tender Instructions.
- ------------------
* to be filed by amendment
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at the time shall be deemed to
be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) If the registrant is a foreign private issuer, to file a
post-effective amendment to the registration statement to include any
financial statements required by sec. 210.3-19 of this chapter at the start
of any delayed offering or throughout a continuous offering. Financial
statements and information otherwise required by Section 10(a)(3) of the
Act need not be furnished, provided, that the registrant includes in the
prospectus, by means of a post-effective amendment, financial statements
required pursuant to this paragraph (a)(4) and other information necessary
to ensure that all other information in the prospectus is at least as
current as the date of those financial statements. Notwithstanding the
foregoing, with respect to registration statements on Form F-3, a
post-effective amendment need not be filed to include financial statements
and information required by Section 10(a)(3) of the Act or sec. 210.3-19 of
this chapter if such financial statements and information are contained in
periodic reports filed with or furnished to the Commission by the
registrant pursuant to section 13 or section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the Form F-3.
II-2
133
(5) That for purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(6) That for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
(7) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this
form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding
to the request.
(8) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions described under
Item 20 or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-3
134
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Greenville, State of
South Carolina, on August 7, 1998.
STEEL HEDDLE MFG. CO.
By: /s/ JERRY B. MILLER
------------------------------------
Name: Jerry B. Miller
Title: Vice President Finance and
Secretary
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Jerry B. Miller, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities (including
his capacity as a director and/or officer of Steel Heddle Mfg. Co.), to sign any
or all amendments (including post-effective amendments) to this registration
statement and any subsequent registration statement filed pursuant to Rule
462(b) under the Securities Act of 1933, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorney-in-fact and agent full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement and power of attorney have been signed by the following
persons in the capacities and on the dates indicated:
SIGNATURE CAPACITY DATE
--------- -------- ----
/s/ BENJAMIN G. TEAM President, Chief Executive Officer and August 7, 1998
- ------------------------------------------ Director (principal executive officer)
BENJAMIN G. TEAM
/s/ JERRY B. MILLER Vice President Finance and Secretary August 7, 1998
- ------------------------------------------ (principal financial and accounting
JERRY B. MILLER officer)
/s/ ROBERT W. DILLON Executive Vice President and Director August 7, 1998
- ------------------------------------------
ROBERT W. DILLON
/s/ NATHAN L. BELDEN Director August 7, 1998
- ------------------------------------------
NATHAN L. BELDEN
/s/ ROBERT J. KLEIN Director August 7, 1998
- ------------------------------------------
ROBERT J. KLEIN
/s/ KIM A. MARVIN Director August 7, 1998
- ------------------------------------------
KIM A. MARVIN
/s/ THEODORE C. ROGERS Director August 7, 1998
- ------------------------------------------
THEODORE C. ROGERS
/s/ ROBERT L. PURDUM Director August 7, 1998
- ------------------------------------------
ROBERT L. PURDUM
II-4
135
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Greenville, State of
South Carolina, on August 7, 1998.
STEEL HEDDLE INTERNATIONAL, INC.
By: /s/ JERRY B. MILLER
------------------------------------
Name: Jerry B. Miller
Title: Vice President Finance and
Secretary
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Jerry B. Miller, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities (including
his capacity as a director and/or officer of Steel Heddle International, Inc.),
to sign any or all amendments (including post-effective amendments) to this
registration statement and any subsequent registration statement filed pursuant
to Rule 462(b) under the Securities Act of 1933, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement and power of attorney have been signed by the following
persons in the capacities and on the dates indicated:
SIGNATURE CAPACITY DATE
--------- -------- ----
/s/ BENJAMIN G. TEAM President, Chief Executive Officer and August 7, 1998
- ------------------------------------------ Director (principal executive officer)
BENJAMIN G. TEAM
/s/ JERRY B. MILLER Vice President Finance and Secretary August 7, 1998
- ------------------------------------------ and Director (principal financial and
JERRY B. MILLER accounting officer)
/s/ ROBERT W. DILLON Executive Vice President and Director August 7, 1998
- ------------------------------------------
ROBERT W. DILLON
II-5
136
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Greenville, State of
South Carolina, on August 7, 1998.
HEDDLE CAPITAL CORP.
By: /s/ JERRY B. MILLER
------------------------------------
Name: Jerry B. Miller
Title: President
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Jerry B. Miller, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities (including
his capacity as a director and/or officer of Heddle Capital Corp.), to sign any
or all amendments (including post-effective amendments) to this registration
statement and any subsequent registration statement filed pursuant to Rule
462(b) under the Securities Act of 1933, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorney-in-fact and agent full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement and power of attorney have been signed by the following
persons in the capacities and on the dates indicated:
SIGNATURE CAPACITY DATE
--------- -------- ----
/s/ JERRY B. MILLER President and Director (principal August 7, 1998
- ------------------------------------------ executive officer)
JERRY B. MILLER
/s/ BENJAMIN G. TEAM Vice President, Treasurer and Director August 7, 1998
- ------------------------------------------
BENJAMIN G. TEAM
/s/ FRANCIS B. JACOBS Director August 7, 1998
- ------------------------------------------
FRANCIS B. JACOBS
II-6