1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 3, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____ to ______.
Commission File Number 333-61043
STEEL HEDDLE MFG. CO.
(Exact name of registrant as specified in its charter)
Pennsylvania 57-0543389
- --------------------------------------------- ----------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification Number)
1801 Rutherford Road, Greenville, South Carolina 29607
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number (864) 244-4110
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
Requirements for the past 90 days. Yes No X
------ ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 100 shares of the Company's
Common Stock, par value $0.10 per share, were outstanding as of November 15,
1998.
2
STEEL HEDDLE MFG. CO.
INDEX
- ------------------------------------------------------------------------------------------------------
PAGE
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets:
October 3, 1998 (Unaudited) and January 3, 1998 4-5
Condensed Consolidated Statements of Operations and Comprehensive
Income (Loss):
Fourteen Weeks ("Three Months") Ended October 3, 1998 (Successor)
and Fourteen Weeks ("Three Months") Ended October 4, 1997
(Predecessor) (Unaudited) 6
Nineteen Weeks Ended October 3, 1998 (Successor), Twenty Weeks
Ended May 25, 1998 (Predecessor) (collectively, "Nine Months") and
the Forty Weeks ("Nine Months") Ended October 4, 1997 (Predecessor)
(Unaudited) 7
Condensed Consolidated Statements of Cash Flows:
Nineteen Weeks Ended October 3, 1998 (Successor), Twenty Weeks
Ended May 25, 1998 (Predecessor) (collectively, "Nine Months") and
Forty Weeks ("Nine Months") Ended October 4, 1997 (Predecessor) (Unaudited) 8-9
Notes to Unaudited Condensed Consolidated Financial Statements 10-20
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 21-27
PART II. OTHER INFORMATION 28
3
ITEM I. FINANCIAL STATEMENTS
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------
SUCCESSOR PREDECESSOR
COMPANY COMPANY
ASSETS OCTOBER 3, 1998 JANUARY 3, 1998
(UNAUDITED) (1)
CURRENT ASSETS:
Cash and cash equivalents $ 1,657 $ 379
Accounts receivable 8,972 9,290
Income taxes receivable 556 -
Inventories 17,690 14,030
Prepaid expenses 72 99
--------- ---------
Total current assets 28,947 23,798
--------- ---------
PROPERTY, PLANT & EQUIPMENT:
Cost 42,031 52,561
Less accumulated depreciation (2,730) (35,876)
--------- ---------
39,301 16,685
--------- ---------
OTHER ASSETS AND DEFERRED CHARGES:
Prepaid pension cost 2,390 546
Goodwill, net 106,172 22,537
Identifiable intangible assets, net 12,459 -
Sundry 3,776 774
--------- ---------
124,797 23,857
--------- ---------
TOTAL ASSETS $ 193,045 $ 64,340
========= =========
(1) Derived from January 3, 1998 audited financial statements.
See notes to unaudited condensed consolidated financial statements.
4
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
- -----------------------------------------------------------------------------------------------------------------------------
SUCCESSOR PREDECESSOR
LIABILITIES AND SHAREHOLDERS' EQUITY COMPANY COMPANY
(DEFICIT) OCTOBER 3, 1998 JANUARY 3, 1998
(UNAUDITED) (1)
CURRENT LIABILITIES:
Accounts payable $ 1,513 $ 2,166
Accrued and sundry liabilities 9,066 5,313
Deferred income taxes 1,122 670
Income taxes payable - 302
Current portion of long-term debt 1,000 6,500
-------- --------
Total current liabilities 12,701 14,951
LONG-TERM DEBT, LESS CURRENT PORTION 129,000 46,300
RETIREMENT BENEFITS PAYABLE 4,433 5,126
DEFERRED INCOME TAXES 16,890 1,120
PARENT COMPANY CLASS A - $.01 par value per share -
authorized 2,000,000 shares, issued and outstanding
91,080 shares at January 3, 1998 - 1,366
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock - $.10 par value per share - authorized
100 shares, issued and outstanding 100 shares at
October 3, 1998; and common stock - $1 par value per
share - authorized 1,500,000 shares, issued and
outstanding 10 shares at January 3, 1998 - -
Additional paid-in capital 37,943 13,689
Notes receivable - shareholders (350) -
Carryover basis of managements' interest (4,494) -
Accumulated other comprehensive income (48) (48)
(Deficit) (3,030) (18,164)
-------- --------
30,021 (4,523)
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT) $193,045 $ 64,340
======== ========
(1) Derived from January 3, 1998 audited financial statements.
See notes to unaudited condensed consolidated financial statements.
5
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(DOLLARS IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
----------------------------------------------
OCTOBER 3, 1998 OCTOBER 4, 1997
SUCCESSOR PREDECESSOR
COMPANY COMPANY
(14 WEEKS) (14 WEEKS)
NET SALES $16,584 $19,349
COST OF GOODS SOLD 13,010 12,085
------- -------
GROSS PROFIT 3,574 7,264
SELLING, GENERAL AND ADMINISTRATIVE COSTS 1,979 2,115
MANAGEMENT FEES 224 69
AMORTIZATION OF GOODWILL 671 182
------- -------
OPERATING INCOME 700 4,898
OTHER INCOME (EXPENSE):
Interest income 31 36
Interest expense, including amortization of deferred financing
costs (3,708) (1,368)
Other financing expense - (37)
------- -------
Income (loss) before income taxes (2,977) 3,529
INCOME TAX (BENEFIT) EXPENSE (771) 1,234
------- -------
NET INCOME (LOSS) (2,206) 2,295
OTHER COMPREHENSIVE INCOME - NET OF TAX:
Foreign currency translation adjustment - 3
COMPREHENSIVE INCOME (LOSS) $(2,206) $ 2,298
======= =======
See notes to unaudited condensed consolidated financial statements.
6
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(DOLLARS IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED
-----------------------------------------------------------------
OCTOBER 3, 1998 OCTOBER 4, 1997
------------------------------ --------------------------
SUCCESSOR PREDECESSOR PREDECESSOR
COMPANY COMPANY COMPANY
(19 WEEKS) (20 WEEKS) (40 WEEKS)
NET SALES $23,745 $29,631 $55,100
COST OF GOODS SOLD 17,983 18,628 35,254
------- ------- -------
GROSS PROFIT 5,762 11,003 19,846
SELLING, GENERAL AND ADMINISTRATIVE
COSTS 2,824 3,824 6,327
MANAGEMENT FEES 298 132 406
AMORTIZATION OF GOODWILL 892 289 546
------- ------- -------
OPERATING INCOME 1,748 6,758 12,567
OTHER INCOME (EXPENSE):
Interest income 51 29 103
Interest expense, including amortization of
deferred financing costs (5,978) (1,528) (4,103)
Other financing expense - (50) (212)
------- ------- -------
Income (loss) before income taxes and
extraordinary item (4,179) 5,209 8,355
INCOME TAX (BENEFIT) EXPENSE (1,149) 1,868 2,922
------- ------- -------
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM (3,030) 3,341 5,433
EXTRAORDINARY (LOSS) ON THE EARLY
EXTINGUISHMENT OF DEBT, NET OF
INCOME TAXES OF $1,688 - - (2,753)
------- ------- -------
NET INCOME (LOSS) (3,030) 3,341 2,680
OTHER COMPREHENSIVE INCOME (LOSS) -
NET OF TAX:
Foreign currency translation adjustment (16) 16 (4)
------- ------- -------
COMPREHENSIVE INCOME (LOSS) $(3,046) $ 3,357 $ 2,676
======= ======= =======
See notes to unaudited condensed consolidated financial statements.
7
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED
--------------------------------------------------------
OCTOBER 3, 1998 OCTOBER 4, 1997
--------------------------- --------------------
SUCCESSOR PREDECESSOR PREDECESSOR
COMPANY COMPANY COMPANY
(19 WEEKS) (20 WEEKS) (40 WEEKS)
OPERATING ACTIVITIES:
Net income (loss) $ (3,030) $ 3,341 $ 2,680
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation 2,730 1,517 2,631
Amortization 2,328 346 907
Benefit for deferred income taxes (729) (83) -
Accrued retirement benefit costs (127) 176 (4)
Extraordinary item - - 4,441
Changes in operating assets and liabilities:
Accounts receivable 1,683 (1,977) (2,700)
Inventories 1,129 (888) (340)
Prepaid expenses 31 (5) (56)
Income taxes receivable (556) - -
Accounts payable (856) 203 (499)
Accrued and sundry liabilities 1,131 (2,127) (1,958)
Income taxes payable (111) 1,707 (523)
-------- ------- -------
Net cash provided by operating activities 3,623 2,210 4,579
-------- ------- -------
INVESTING ACTIVITIES:
Acquisition of SH Holdings Corp.:
Current assets (31,128) - -
Property, plant and equipment, net (41,272) - -
Other assets (2,487) - -
Intangible assets (124,357) - -
Current and noncurrent liabilities 16,905 - -
Deferred income taxes 16,891 - -
Long-term debt 52,492 - -
-------- ------- -------
Net cash used to acquire SH Holdings Corp. (112,956) - -
Purchase of property, plant and equipment (702) (968) (1,499)
Proceeds on disposals of property, plant and
equipment - 238 -
-------- ------- -------
Net cash used in operating activities (113,658) (730) (1,499)
-------- ------- -------
8
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
(DOLLARS IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED
--------------------------------------------------------
OCTOBER 3, 1998 OCTOBER 4, 1997
--------------------------- --------------------
SUCCESSOR PREDECESSOR PREDECESSOR
COMPANY COMPANY COMPANY
(19 WEEKS) (20 WEEKS) (40 WEEKS)
FINANCING ACTIVITIES:
Proceeds from debt $133,600 $ 1,317 $ 62,500
Proceeds from sale of stock - - -
Payments of debt, including penalty (52,492) (1,625) (61,190)
Revolver borrowings (repayments), net (3,600) - (375)
Capital contribution 37,561 - -
Dividends paid - - (7,929)
Financing costs incurred (4,928) - (886)
-------- ------- --------
Net cash provided by (used in) operating
activities 110,141 (308) (7,880)
-------- ------- --------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 106 1,172 (4,800)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 1,551 379 4,645
-------- ------- --------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 1,657 $ 1,551 $ (155)
======== ======= ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 833 $ 1,893 $ 5,135
Income taxes paid $ 245 $ 270 $ 1,602
See notes to unaudited condensed consolidated financial statements.
9
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
DESCRIPTION OF BUSINESS - 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 ACQUISITION OF STEEL HEDDLE - On May 26, 1998, Steel Heddle Group,
Inc. ("SH Group") consummated the acquisition (the "Acquisition"), of SH
Holdings Corp. ("Old Holdings"). SH Group, a corporation formed by
American Industrial Partners Capital Fund II, L.P. (together with its
affiliates, "AIP"), was organized as a holding company to effectuate the
acquisition of all of the outstanding common stock of Old Holdings. The
purchase price, including transaction fees and expenses, of approximately
$175.2 million was financed with a $25 million capital contribution from
AIP (including rollover of the ownership interests of certain members of
management), approximately $15 million in proceeds from SH Group's
issuance of $29.25 million of 13 3/4% Senior Subordinated Discount
Debentures, issuance of $100 million of 10 5/8% Senior Subordinated Notes
(the "Notes") of Steel Heddle and borrowings of approximately $33.6
million under a new bank credit facility (the "Credit Facility") of Steel
Heddle. The acquisition was accounted for using the purchase method of
accounting.
In accordance with the purchase method of accounting, the purchase price
has been allocated to the underlying assets and liabilities of Old Holdings
based on their estimated respective fair values at the date of acquisition.
The preliminary fair values have been determined by independent appraisals,
valuations and other means deemed appropriate by management. Management
believes that adjustments, if any, resulting from the finalization of the
fair values will not have a significant effect on the allocation of the
purchase price or the determination of goodwill. Based on such preliminary
allocation, the purchase price exceeded the fair value of the net assets
acquired by approximately $107.0 million. In addition, certain options to
purchase the common stock of the Predecessor that were held by continuing
management employees prior to the time of the acquisition were converted
into options to acquire 17,707 shares of the common stock of SH Group at an
exercise price of $15 per share. On a fully-diluted basis, these options
represent approximately 5% of the ownership interest in SH Group
immediately following the acquisition. The historical predecessor basis of
such options has been considered in the allocation of the purchase cost and
in the initial basis of equity. Since the assets and liabilities of Old
Holdings have been adjusted to their fair values as of the date of
acquisition, the financial information for periods prior to May 26, 1998
("Predecessor Company") are not comparable with financial information for
periods subsequent to that date ("Successor Company").
The following unaudited pro forma financial information shows the results
of operations as though the acquisition occurred as of December 29, 1996.
These results include the straight-line amortization of the excess of
purchase price over the net assets acquired over a 40-year period, the
straight-line amortization of certain identifiable intangible assets over a
12 1/2 year period, an increase in management fees paid to a related party
due to a new contract with the new ownership group, an increase in interest
expense as a result of the debt issued and financing costs incurred to
finance the Acquisition, and a reduction in income tax expense as a result
of the reductions in income resulting from the above described increased
expenses.
10
PRO FORMA
NINE MONTHS ENDED
---------------------------------------
OCTOBER 3, 1998 OCTOBER 4, 1997
(IN THOUSANDS)
Revenue $ 53,376 $ 55,100
Income from continuing operations 5,634 6,228
Net loss (4,725) (4,076)
The pro forma financial information presented above does not purport to be
indicative of either (i) the results of operations had the acquisition
taken place on December 29, 1996 or (ii) future results of operations.
BASIS OF PRESENTATION - The accompanying unaudited condensed consolidated
financial statements of the Company have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. It is suggested that these unaudited condensed financial
statements be read in conjunction with the financial statements and notes
thereto included in the Predecessor Company's consolidated financial
statements for the year ended January 3, 1998. In addition, certain other
significant accounting policies arising from the May 26, 1998 acquisition
include the following:
Goodwill - Goodwill associated with the May 26, 1998 acquisition is
approximately $107.0 million and is being amortized on a straight-line
basis over 40 years. Accumulated amortization was approximately $0.9
million as of October 3, 1998.
Identifiable Intangible Assets - Identifiable intangible assets
acquired in the May 26, 1998 acquisition, consisting principally of
engineering drawings, were approximately $12.8 million and are being
amortized on a straight-line basis over 12.5 years. Accumulated
amortization was approximately $0.3 million as of October 3, 1998.
Deferred Financing Costs - Deferred financing costs associated with
the acquisition financing were approximately $3.9 million and are
being amortized using the interest method over the life of the related
debt. Accumulated amortization was approximately $0.1 million as of
October 3, 1998 and the net deferred financing costs are classified as
sundry other assets and deferred charges in the accompanying condensed
consolidated balance sheet.
In the opinion of the management of the Company, these unaudited condensed
consolidated financial statements contain all of the adjustments consisting
of a normal recurring nature, necessary for fair presentation. Operating
results for the nine months ended October 3, 1998 (19 weeks of Successor
Company and 20 weeks of Predecessor Company) are not necessarily indicative
of the results that may be expected for fiscal 1998. Certain amounts
previously presented in the Predecessor Company consolidated financial
statements for prior periods have been reclassified to conform to current
classification. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of revenues and
expense during the reporting period. Actual results could differ from those
estimates.
ADOPTION OF NEW ACCOUNTING STANDARD - At January 4, 1998, the Company
adopted SFAS No. 130, Reporting Comprehensive Income, which requires
comprehensive income to be reported in a financial statement that is
displayed with the same prominence as other financial statements. Adoption
of this statement did not have a significant effect on the Company's
consolidated financial position, results of operations or cash flows for
the nine months ended October 3, 1998.
11
2. EXTRAORDINARY ITEM
On February 21, 1997, the Company entered into a credit arrangement with a
bank group consisting of a Term Loan Facility of $52.5 million and a $15
million Revolving Line of Credit. The Company utilized proceeds of the Term
Loan and Revolving Credit Facility to repay its senior notes in the
principal amount of $24.9 million plus a penalty of $2.5 million and to
repay its subordinated notes in the principal amount of $25.1 million plus
a penalty of $3.2 million. The total penalty net of other losses and gains
on the refinancing is reported as an extraordinary item, net of taxes of
approximately $1.7 million. Included in the net extraordinary loss is a
reversal of accrued interest of approximately $1.4 million. This reversal
resulted from the difference between the stated rate of interest and the
effective rate of interest.
3. BALANCE SHEET COMPONENTS
Certain balance sheet components are as follows (in thousands):
SUCCESSOR PREDECESSOR
COMPANY COMPANY
OCTOBER 3, 1998 JANUARY 3, 1998
(UNAUDITED)
Inventories:
Raw materials and component parts $ 6,040 $ 6,312
Work in process and finished goods 11,650 7,718
---------- -----------
$ 17,690 $ 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 $627 at
January 3, 1998; amounts are comparable at October 3, 1998.
SUCCESSOR PREDECESSOR
COMPANY COMPANY
OCTOBER 3, 1998 JANUARY 3, 1998
(UNAUDITED)
Property, plant and equipment:
Land $ 672 $ 855
Buildings and improvements 13,251 10,692
Machinery and equipment 22,550 32,362
Furniture and fixtures 4,534 7,640
Automotive equipment 534 827
Construction in progress 490 185
--------- ---------
42,031 52,561
Less: accumulated amortization (2,730) (35,876)
--------- ---------
Property, plant and equipment $ 39,301 $ 16,685
========= =========
Commitments to complete construction in progress total approximately $193
at October 3, 1998.
12
4. LONG-TERM DEBT
Long-term debt consists of the following:
SUCCESSOR PREDECESSOR
COMPANY COMPANY
OCTOBER 3, 1998 JANUARY 3, 1998
(UNAUDITED)
(IN THOUSANDS)
Senior Notes, due in 28 quarterly installments,
ranging from $1,600 to $2,400, commencing
March 1997 $ 46,000
Revolving line of credit 6,800
10 5/8% senior subordinated notes ("Notes") $ 100,000 -
Bank Credit Facility ("Credit Facility") -
term loan 30,000 -
--------- --------
130,000 52,800
Less current portion (1,000) (6,500)
--------- --------
$ 129,000 $ 46,300
========= ========
The Senior Notes and the Revolving Line of Credit were repaid in connection
with the new financing associated with the May 26, 1998 acquisition.
The Notes are due in full on June 1, 2008. Interest on the Notes is payable
semi-annually in arrears commencing on December 1, 1998.
The Credit Facility consists of a $30 million term loan and a $20 million
revolving loan commitment. The term loan is payable in quarterly
installments ranging from $1 million to $2 million beginning July 3, 1999
through April 3, 2004. The term loan and the revolving loan bear interest
at the bank's prime rate (as defined) plus one percent or Eurodollar rates
(as defined) plus 2.25 percent, at the Company's option. At October 3,
1998, the interest rate on the Credit Facility borrowings was 7.94% and
approximately $19.3 million was available for borrowing under the revolving
loan. Substantially all of the Company's assets are pledged as collateral
under the Credit Facility.
The Credit Facility and the Notes contain various financial and
non-financial covenants; including minimum levels of EBITDA, minimum
interest coverage ratio, and maximum capital expenditures and total
leverage ratio. The Company was in compliance with its various financial
and non-financial covenants at October 3, 1998.
See Note 8.
5. MANAGEMENT SERVICES AGREEMENT
On May 26, 1998, the Company and SH Group entered into a management
services agreement with AIP. Under the terms of the agreement, AIP will
provide general management, financial and other corporate advisory
services to the Company for $895,000 annually, payable in equal
semi-annual installments on May 30 and November 29. The agreement expires
on the earlier of May 26, 2008 or such other date as AIP and the Company
mutually agree.
13
6. STOCK OPTION PLAN
On May 26, 1998, SH Group adopted the Steel Heddle Group, Inc.
Management Stock Option Plan (the "Plan"), a non-qualified stock option
plan. Under the terms of the Plan, options to purchase 13,172 shares of the
SH Group's common stock at an exercise price of $100 per share were granted
to certain members of management in conjunction with the acquisition. All
options vest on May 26, 2005, but may vest earlier if certain specified
annual EBITDA (as defined) targets are achieved from 1998 through 2001. In
addition, the Plan provides that options to purchase up to 5,645 shares of
the SH Group's common stock at an exercise price of $100 per share may be
granted to certain members of management on a discretionary basis. At
October 3, 1998, no such discretionary options were granted.
7. COMMITMENTS AND CONTINGENCIES
LITIGATION - Although the Company may be subject to litigation from time to
time in the ordinary course of business, it is not a party to any pending
or threatened legal proceedings that management believes will have a
material impact on its financial position or results of operations.
ENVIRONMENTAL - The Company is subject to various federal, state and local
government laws and regulations concerning, among other things, the
discharge, storage, handling and disposal of a variety of hazardous and
non-hazardous substances and wastes.
The Company believes that it is in substantial compliance with all existing
environmental laws and regulations to which it is subject. In addition, the
Company is subject to liability under environmental laws relating to the
past release or disposal of hazardous materials. The Company has included
in accrued and sundry liabilities an accrual for hazardous waste site
maintenance for the estimated total cost over an initial period of 30 years
to close out and monitor its inactive hazardous waste site. Payment is
secured by a standby letter of credit of approximately $671. To date, and
in management's belief for the foreseeable future, additional liability
under and compliance with, existing environmental laws has not had and will
not have a material adverse effect on the Company's financial position or
results of operations.
COMMITMENT (RELATED PARTY) - Also in connection with the financing of the
May 25, 1998 acquisition, SH Group sold $29.25 million of 13 3/4 Senior
Discounted Debentures ("Debentures"). The Debentures are a legal obligation
of SH Group, however, SH Group is dependent on dividends from Steel Heddle
to meet the debt service requirements of the Debentures. The Debentures
(original proceeds of $15.016 million and accreted value of $15.205 million
at June 27, 1998) will mature on June 1, 2009. The Debentures are accreting
to a principal amount of $29.25 million on June 1, 2003. Cash interest on
the Debentures will be payable semi-annually in arrears commencing on
December 4, 2003. Cash flow requirements of Steel Heddle to service SH
Group's Debentures commence on December 4, 2003 and total approximately
$2.011 million in 2003, $4.022 million in 2004 to 2008, and $31.261 million
($2.011 million representing interest and $29.25 million representing
principal) in 2009. Payment of such dividends by Steel Heddle to SH Group
are permitted under the terms of the Credit Facility and Notes.
14
8. SUBSEQUENT EVENT
INVESTMENT IN MILLENTEX - On October 23, 1998, Steel Heddle, through its
wholly owned subsidiary, Millentex Investment Corporation, acquired a 49%
ownership interest in Millentex, N.V., an entity organized under the laws
of the Kingdom of Belgium. Millentex, N.V. was established on August 16,
1998 to effect the acquisition of the outstanding common stock of a company
with operations in the loom accessories industry. The purchase price of
approximately $2 million was financed via a capital contribution from Steel
Heddle and will be accounted for using the purchase method of accounting.
An allocation of the purchase price has not yet been determined.
9. PAYMENT OF STEEL HEDDLE'S SENIOR SUBORDINATED NOTES
Payment of the Notes is unconditionally guaranteed, jointly and severally,
on a senior subordinated basis by certain of Steel Heddle's wholly owned
subsidiaries. Management has determined that separate complete financial
statements of the guarantor entities would not be material to users of the
financial statements, therefore, the following information sets forth
unaudited condensed consolidating financial statements of the guarantor
and non-guarantor subsidiaries.
15
UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
AS OF OCTOBER 3, 1998
(SUCCESSOR)
COMBINED COMBINED RECLASSIFICATIONS
GUARANTOR NON-GUARANTOR THE AND
SUBSIDIARIES SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
Assets:
Cash and cash equivalents $ 10 $ 67 $ 1,580 $ 1,657
Accounts receivable 266 8,706 8,972
Income tax receivable 16 1,667 $ (1,127) 556
Inventories 196 17,494 17,690
Prepaid expenses 225 2 70 (225) 72
------- ------ -------- --------- --------
Total current assets 235 547 29,517 (1,352) 28,947
Due from affiliates 3,519 72,280 (75,799) -
Notes receivable from affiliates 72,413 (72,413) -
Investments in subsidiaries (240) 75,293 (75,053) -
Property, plant and
equipment, net 65 39,236 39,301
Other assets and deferred
charges, net 124,797 124,797
------- ------ -------- --------- --------
Total assets $72,408 $4,131 $341,123 $(224,617) $193,045
======= ====== ======== ========= ========
Liabilities and shareholders'
equity:
Accounts payable and accrued
and sundry liabilities $ 2 $ 10,802 $ (225) $ 10,579
Due to affiliates, net $ 357 (357) -
Deferred income taxes 1,122 1,122
Income taxes payable 1,127 (1,127) -
Current portion of
long-term debt 1,000 1,000
------- ------ -------- --------- --------
Total current liabilities 1,484 2 12,924 (1,709) 12,701
Long-term debt 201,413 (72,413) 129,000
Retirement benefits payable 4,433 4,433
Deferred income taxes 16,890 16,890
Shareholders' equity (deficit) 70,924 4,129 105,463 (150,495) 30,021
------- ------ -------- --------- --------
Total liabilities and
shareholders' equity $72,408 $4,131 $341,123 $(224,617) $193,045
======= ====== ======== ========= ========
16
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED OCTOBER 3, 1998
(SUCCESSOR)
COMBINED COMBINED RECLASSIFICATIONS
GUARANTOR NON-GUARANTOR THE AND
SUBSIDIARIES SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
Net sales $ 248 $16,336 $16,584
Cost of goods sold 279 12,731 13,010
----- ------- -------
Gross profit (31) 3,605 3,574
Selling, general and
administrative costs $ 1 1,978 1,979
Other expenses 895 895
------ ----- ------- -------
Operating income (loss) (1) (31) 732 700
Other income (expense), net 1,732 (5,409) (3,677)
------ ----- ------- -------
Income before income taxes 1,731 (31) (4,677) (2,977)
Income tax expense (benefit) 582 (11) (1,342) (771)
Equity in earnings (losses)
of subsidiaries (20) 1,129 $ (1,109) -
------ ----- ------- -------- -------
Net income (loss) $1,129 $ (20) $(2,206) $ (1,109) $(2,206)
====== ===== ======= ======== =======
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINETEEN WEEKS ENDED OCTOBER 3, 1998
(SUCCESSOR)
COMBINED COMBINED RECLASSIFICATIONS
GUARANTOR NON-GUARANTOR THE AND
SUBSIDIARIES SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
Net sales $351 $23,394 $23,745
Cost of goods sold 353 17,630 17,983
---- ------- -------
Gross profit (2) 5,764 5,762
Selling, general and
administrative costs $ 1 2,823 2,824
Other expenses 1,190 1,190
------ ---- ------- -------
Operating income (loss) (1) (2) 1,751 1,748
Other income (expense), net 2,527 (8,454) (5,927)
------ ---- ------- -------
Income (loss) before income
taxes 2,526 (2) (6,703) (4,179)
Income tax expense (benefit) 884 (1) (2,032) (1,149)
Equity in earnings (losses)
of subsidiaries (1) 1,641 $ (1,640) -
------ ---- ------- -------- -------
Net income (loss) $1,641 $ (1) $(3,030) $ (1,640) $(3,030)
====== ==== ======= ======== =======
17
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE TWENTY WEEKS ENDED MAY 25, 1998
(PREDECESSOR)
COMBINED COMBINED RECLASSIFICATIONS
GUARANTOR NON-GUARANTOR THE AND
SUBSIDIARIES SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
Net sales $354 $29,277 $29,631
Cost of goods sold 392 18,236 18,628
---- ------- -------
Gross profit (38) 11,041 11,003
Selling, general and
administrative costs 5 3,819 3,824
Other expenses 421 421
---- ------- -------
Operating income (loss) (43) 6,801 6,758
Other income (expense), net $3,417 (19) (4,947) (1,549)
------ ---- ------- -------
Income (loss) before income
taxes 3,417 (62) 1,854 5,209
Income tax expense 1,299 23 546 1,868
Equity in earnings (losses)
of subsidiaries (255) 2,033 $(1,778) -
------ ---- ------- ------- -------
Net income (loss) $1,863 $(85) $ 3,341 $(1,778) $ 3,341
====== ==== ======= ======= =======
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED OCTOBER 4, 1997
(PREDECESSOR)
COMBINED COMBINED RECLASSIFICATIONS
GUARANTOR NON-GUARANTOR THE AND
SUBSIDIARIES SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
Net sales $281 $19,068 $19,349
Cost of goods sold 223 11,862 12,085
---- ------- -------
Gross profit 58 7,206 7,264
Selling, general and
administrative costs $ 1 2,114 2,115
Other expenses 251 251
------ ---- ------- -------
Operating income (loss) (1) 58 4,841 4,898
Other income (expense) 2,217 151 (3,737) (1,369)
------ ---- ------- -------
Income before income taxes
and extraordinary item 2,216 209 1,104 3,529
Income tax expense 842 18 374 1,234
Equity in earnings of subsidiaries 58 1,565 $ (1,623) -
------ ---- ------- -------- -------
Net income $1,432 $191 $ 2,295 $ (1,623) $ 2,295
====== ==== ======= ======== =======
18
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED OCTOBER 4, 1997
(PREDECESSOR)
COMBINED COMBINED RECLASSIFICATIONS
GUARANTOR NON-GUARANTOR THE AND
SUBSIDIARIES SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
Net sales $702 $54,398 $55,100
Cost of goods sold 607 34,647 35,254
---- ------- -------
Gross profit 95 19,751 19,846
Selling, general and $ 1 5 6,321 6,327
administrative costs
Other expenses 952 952
------ ---- ------- -------
Operating income (loss) (1) 90 12,478 12,567
Other income (expense), net 5,014 304 (9,530) (4,212)
------ ---- ------- -------
Income before income taxes
and extraordinary item 5,013 394 2,948 8,355
Income tax expense 1,905 36 981 2,922
------ ---- ------- -------
Income before extraordinary item 3,108 358 1,967 5,433
Extraordinary (loss) on early
extinguishment of debt, net
of income taxes (2,753) (2,753)
Equity in earnings of
subsidiaries 95 3,466 $ (3,561) -
------ ---- ------- -------- -------
Net income $3,203 $358 $ 2,680 $ (3,561) $ 2,680
====== ==== ======= ======== =======
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINETEEN WEEKS ENDED OCTOBER 3, 1998
(SUCCESSOR)
COMBINED COMBINED
GUARANTOR NON-GUARANTOR THE
SUBSIDIARIES SUBSIDIARIES COMPANY CONSOLIDATED
Net cash provided by (used in) operating activities $ 4,467 $(45) $ (799) $ 3,623
------- ---- --------- ---------
Investing activities:
Purchase of business (112,956) (112,956)
Purchases of property, plant and equipment (13) (689) (702)
---- --------- ---------
Net cash used in investing activities (13) (113,645) (113,658)
Financing activities:
Payments of debt (56,092) (56,092)
Proceeds from debt 133,600 133,600
Intercompany transactions, net (4,468) 99 4,369 -
Capital (contribution) 37,561 37,561
Other (4,928) (4,928)
------- ---- --------- ---------
Net cash provided by (used in) financing activities (4,468) 99 114,510 110,141
------- ---- --------- ---------
Net increase (decrease) in cash and equivalents (1) 41 66 106
Cash and cash equivalents at beginning of period 11 26 1,514 1,551
------- ---- --------- ---------
Cash and cash equivalents at end of period $ 10 67 $ 1,580 $ 1,657
======= ==== ========= =========
19
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE TWENTY WEEKS ENDED MAY 25, 1998
(PREDECESSOR)
COMBINED COMBINED
GUARANTOR NON-GUARANTOR THE
SUBSIDIARIES SUBSIDIARIES COMPANY CONSOLIDATED
Net cash provided by operating activities $ 1,158 $ 220 $ 832 $ 2,210
------- ----- ------- -------
Investing activities:
Purchases of property, plant and equipment (20) (948) (968)
Proceeds from sale of property, plant and equipment 238 238
----- ------- -------
Net cash used in investing activities (20) (710) (730)
Financing activities:
Revolver borrowings, net 1,317 1,317
Payments of debt (1,625) (1,625)
Intercompany transactions, net (1,163) (270) 1,433 -
------- ----- ------- -------
Net cash provided by (used in) financing activities (1,163) (270) 1,125 (308)
------- ----- ------- -------
Net increase (decrease) in cash and equivalents (5) (70) 1,247 1,172
Cash and cash equivalents at beginning of period 16 96 267 379
------- ----- ------- -------
Cash and cash equivalents at end of period $ 11 26 $ 1,514 $ 1,551
======= ===== ======= =======
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED OCTOBER 4, 1997
(PREDECESSOR)
COMBINED COMBINED RECLASSIFICATIONS
GUARANTOR NON-GUARANTOR THE AND
SUBSIDIARIES SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
Net cash provided by (used
in) operating activities $ 4,784 $ 225 $ (430) $ 4,579
-------- ----- -------- --------
Investing activities:
Purchases of property,
plant and equipment (3) (1,496) (1,499)
Advances to subsidiaries (67,297) $ 67,297 -
-------- ----- -------- -------- --------
Net cash used in investing
activities (67,297) (3) (1,496) 67,297 (1,499)
Financing activities:
Proceeds from debt 129,797 (67,297) 62,500
Payments of debt,
including penalty (61,565) (61,565)
Dividends paid (7,929) (7,929)
Intercompany transactions,
net (3) (256) 259 -
Capital accounts 62,531 (62,531) -
Other (886) (886)
-------- ----- -------- -------- --------
Net cash provided by (used
in) financing activities 62,528 (256) (2,855) (67,297) (7,880)
-------- ----- -------- -------- --------
Net increase (decrease) in
cash and equivalents 15 (34) (4,781) (4,800)
Cash and equivalents at
beginning of period 105 4,540 4,645
-------- ----- -------- -------- --------
Cash and equivalents at
end of period $ 15 $ 71 $ (241) $ - $ (155)
======== ===== ======== ======= ========
20
STEEL HEDDLE MFG. CO. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS
OVERVIEW
The Company has two reportable segments, the Textile Products Group ("Textile
Products") and the Metal Products Group ("Metal Products"). The Textile Products
Group manufactures textile loom accessories including heddles, dropwires,
harness frames, reeds and shuttles and bobbins, all of which are used to hold or
guide individual yarns during the weaving process. In its Metal Products Group,
the Company processes and sells rolled products and tool and die services to
industrial users. In its wire rolling operations, the Company converts round rod
to flat wire through a rolling process which results in a flat wire with a round
edge. Originally developed to satisfy in-house heddle manufacturing needs, the
Company's rolled products can also be found in a variety of other industries,
including electronics, automotive and solar power.
On May 26, 1998, SH Group consummated the Acquisition. SH Group, a corporation
formed by AIP, was organized as a holding company to effectuate the acquisition
of substantially all the outstanding stock of Old Holdings. The Acquisition has
been accounted for using the purchase method of accounting, whereby the
purchase cost has been allocated to the fair value of the tangible and
identifiable intangible assets acquired and liabilities assumed with the excess
identified as goodwill.
As a result of the transaction, the assets and liabilities of Old Holdings were
revalued to their respective fair values under the principles of APB No. 16,
"Business Contributions." The most significant effects were to increase
property, plant and equipment, certain intangibles, inventory and certain
liabilities. Accordingly, financial information for periods prior to May 26,
1998 (Predecessor) is not comparable with that for periods subsequent to May 26,
1998 (Successor). The principal changes in the Company's Successor periods'
statement of operations resulting from the change in basis of accounting from
that of the Predecessor periods include increased depreciation and amortization
expense resulting from write-up of the Company's fixed and intangible assets and
goodwill and increased interest expense resulting from financing the
transaction.
BASIS OF PRESENTATION
The following table sets forth certain unaudited performance details for the
periods shown. Net sales, costs of sales, gross profit, SG&A, operating income
and net income of the company are presented in millions of dollars and as a
percentage of sales.
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------------------------- -------------------------------------------------------------
OCTOBER 3, 1998 OCTOBER 4, 1997 OCTOBER 3, 1998 OCTOBER 4, 1997
-------------------- ----------------------- ---------------------------------------- --------------------
SUCCESSOR PREDECESSOR SUCCESSOR PREDECESSOR PREDECESSOR
COMPANY COMPANY COMPANY COMPANY COMPANY
(14 WEEKS) (14 WEEKS) (19 WEEKS) (20 WEEKS) (40 WEEKS)
-------------------- ----------------------- --------------------- ------------------ --------------------
Net Sales $ 16.6 100.0% $ 19.4 100.0% $ 23.8 100.0% $ 29.6 100.0% $ 55.1 100.0%
Cost of sales 13.0 78.4 12.1 62.5 18.0 75.7 18.6 62.9 35.3 64.0
Gross profit 3.6 21.6 7.3 37.5 5.8 24.3 11.0 37.1 19.8 36.0
SG&A 2.0 11.9 2.1 10.9 2.8 11.9 3.8 12.9 6.3 11.5
Operating income 0.7 4.2 4.9 25.3 1.7 7.4 6.8 22.8 12.6 22.8
Net income (loss) (2.2) (13.3) 2.3 11.9 (3.1) (12.8) 3.4 2.7 2.7 4.9
21
COMPARISON OF RESULTS OF OPERATIONS
THREE MONTHS (THIRD QUARTER) ENDED OCTOBER 3, 1998 (SUCCESSOR) COMPARED TO THREE
MONTHS (THIRD QUARTER) ENDED OCTOBER 4, 1997 (PREDECESSOR)
NET SALES - Net sales declined $2.8 million (14.3%) in the third quarter of 1998
compared to the third quarter of 1997. The decrease results primarily from a
decrease in domestic Textile Product sales of $1.5 million and export Textile
Product sales of $1.1 million to $10.5 million and $3.4 million, respectively.
Metal Products sales remained flat at $2.7 million.
The decease in export sales of Textile Products is attributable to several
factors. Demand from Asia has been reduced as new loom installations in that
region have been significantly curtailed due to the currency devaluations and
the lack of credit. This results in lower demand for the Company's Textile
Products. The difficulties associated with opening commercial letters of credit
to support international purchases has forced local textile mills to operate
with existing accessories - mainly heddles - even if loom operating speeds and
efficiency are reduced. In addition, the amount of secondhand accessories has
increased due to reduced operating levels and some mill closings.
The decrease in domestic sales of Textile Products is attributable to a number
of factors. Mill operating rates in the filament sector have been adversely
affected by a surge in low cost fabric imports from Asia. Fewer new looms are
being purchased, along with the Company's associated products. This comes after
record levels of new loom purchases in 1997. As the record number of new looms
were installed - replacing older looms - an increased amount of used accessories
became available within the large companies to support their remaining older
looms. Finally, mill managers have been reducing operating costs and
expenditures of new accessories in reaction to uncertainties created in the
textile market by the Asia crisis.
GROSS PROFIT - Gross profit for the quarter ended October 3, 1998 decreased $3.7
million to $3.6 million, a decrease of 51%. The decrease is primarily due to the
decline in sales volume in the Textile Products segment, lower export prices for
Textile Products sold in Asian markets due to heightened competition for fewer
orders, and to additional depreciation and amortization expense resulting from
the write-up of the Company's assets in connection with the new basis of
accounting used in the Acquisition. Depreciation and amortization totaled $2.8
million and $.8 million during the third quarter of 1998 and 1997, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - SG&A expenses for the quarter
ended October 3, 1998 decreased $0.1 million to $2.0 million, from $2.1 million
for the quarter ended October 4, 1997. The decrease in SG&A expenses during the
quarter ended October 3, 1998 was primarily due to decreased incentive
compensation resulting from declining business levels partially offset by costs
incurred in connection with the Company's year 2000 computer project.
OPERATING INCOME - Operating income for the quarter ended October 3, 1998
decreased $4.2 million to $0.7 million from $4.9 million for the quarter ended
October 4, 1997. The decrease in operating income for the quarter ended October
4, 1998 is principally due to the decrease in gross profit as described above,
coupled with increased amortization of goodwill in connection with the new basis
of accounting used in the Acquisition. Goodwill amortization was $.7 million for
the third quarter 1998, an increase of $.5 million compared to the third quarter
1997.
NET INCOME (LOSS) - The Company incurred a loss of $2.2 million for the quarter
ended October 3, 1998, due primarily to increased interest expense and to the
factors described above. Interest expense for the third quarter of 1998
increased by $2.3 million from the third quarter of 1997 due to the increased
borrowings associated with the Acquisition. The effective tax rate for third
quarter of 1998 was 25.9% compared to 34.9% for the same period in 1997. The
1998 rate is significantly different from the statutory rate due to an increase
in the amount of nondeductible goodwill amortization related to the Acquisition.
22
NINE MONTHS ENDED OCTOBER 3, 1998 (SUCCESSOR) COMPARED TO NINE MONTHS ENDED
OCTOBER 4, 1997 (PREDECESSOR)
NET SALES - Net sales declined $1.7 million (3.1%) to $53.4 million during the
nine months ended October 3, 1998 compared to $55.1 million during the nine
months ended October 4, 1997.
The decrease in net sales for the nine-month period result primarily from a
decline in Textile Product sales of $2.6 million to $45.1 million. This decrease
was partially offset by an increase in sales of Metal Products to $8.3 million.
Domestic and export Textile Products sales declined $1.0 million and $1.6
million, respectively, due primarily to a worldwide decrease in new loom sales,
and the economic and monetary crisis in Asia, and reduced replacement sales as
customers work off of record new loom purchases in 1997 as discussed above.
23
GROSS PROFIT - Gross profit for the nine months ended October 3, 1998 decreased
$3.0 million to $16.8 million compared to $19.8 million for the nine months
ended October 4, 1997. The decrease is primarily due to the decline in sales
volume in the Textile Products business segment, lower export prices for textile
products sold in Asian markets, and to additional depreciation and amortization
expense resulting from the write-up of the Company's assets in connection with
the new basis of accounting used in the Acquisition. Depreciation and
amortization totaled $4.9 million for the nine months ended October 3, 1998, an
increase of $2.5 million compared to the comparable period of 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - SG&A expenses for the nine months
ended October 3, 1998 increased $0.3 million to $6.6 million from $6.3 million
for the nine months ended October 4, 1997. The increase is due primarily to the
write off of the Company's investment in its China operation of $.3 million and
costs incurred in connection with the Company's year 2000 computer project of
$.3 million, partially offset by decreased incentive compensation resulting from
declining business levels.
OPERATING INCOME - Operating income for the nine months ended October 3, 1998
was $8.5 million, 15.9% of net sales, compared to $12.6 million, 22.8% of net
sales, for the nine months ended October 4, 1997. The decrease of $4.1 million
is due to the decrease in gross profit as described above and to an increase of
$.6 million in amortization of goodwill in connection with the new basis of
accounting used in the acquisition.
NET INCOME (LOSS) - The Company incurred a net loss of $0.3 million for the nine
months ended October 3, 1998 compared to net income of $2.7 million for the nine
months ended October 4, 1997. The loss during 1998 is due primarily to increased
interest expense resulting from debt issued in connection with the Acquisition
and to the factors noted above. Included in 1997 net income was an extraordinary
charge for early extinguishment of debt of $2.8 million, net of income taxes of
$1.7 million, incurred in connection with the refinancing of the Company's debt.
The effective tax rate for the nine month period in 1998 is significantly
different from the statutory rate due to an increase in the amount of
nondeductible goodwill amortization related to the acquisition.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FROM OPERATING ACTIVITIES - The Company has historically generated
sufficient internal cash flow from operations to fund its operations, capital
expenditures and working capital requirements. Cash provided by operating
activities for the nine months ended October 3, 1998 increased to $5.8 million
from $4.6 million for the nine months ended October 4, 1997. The increase was
primarily due to increased depreciation and amortization and reduction in
working capital requirements, partially offset by the decrease in net income in
1998 and by the extraordinary loss incurred upon the early extinguishment of
debt in the prior year.
CASH FLOWS FROM INVESTING ACTIVITIES - Net cash used in investing activities for
the nine months ended October 3, 1998 reflect the acquisition of substantially
all of the Company's tangible and intangible assets and is not comparable to the
prior period. The Company's capital expenditures for the nine months ended
October 3, 1998 were $1.7 million, an increase of $0.2 million compared to the
same period in 1997. These expenditures were primarily for the replacement of
machinery and equipment.
Subsequent to October 3, 1998, the Company acquired a 49% ownership interest in
Millentex, N.V., a Belgium company with operations in the loom accessories
industry and annual sales of $13 million. The purchase price of approximately $2
million was financed via a capital contribution from Steel Heddle.
CASH FLOWS FROM FINANCING ACTIVITIES - Cash flows from financing activities for
the nine months ended October 3, 1998 reflect the initial capitalization of the
Company through the issuance of Common Stock, Senior Discount Debentures, Senior
Subordinated Notes and bank debt, all net of associated fees, and is not
directly comparable to the prior year.
24
ADJUSTED EBITDA - EBITDA represents operating income plus depreciation and
amortization and is calculated in a manner consistent with the definition of
"Consolidated EBITDA" in the Indenture dated as of May 26, 1998 among the
Company, Steel Heddle International, Inc., Heddle Capital Corp. and United
States Trust Company (the "Indenture"). Adjusted EBITDA, as presented below,
represents EBITDA plus items which management believes to be unusual,
including, but not limited to, management and transaction fees paid to Butler
Capital Corporation and AIP, supplemental bonus compensation, compensation
expense for certain eliminated management positions and incremental increases
in obsolete inventory reserves. Adjusted EBITDA is calculated in a manner
substantially consistent with the definition of "Consolidated EBITDA" in the
Credit Agreement. Adjusted EBITDA was $15.5 million for the nine months ended
October 3, 1998, $17.1 million for the nine months ended October 4, 1997, and
$21.2 million for the twelve months ended October 3, 1998. The decrease of $1.5
million or 9.3% for the nine-month period is a result of the factors discussed
above.
Adjusted EBITDA is included herein as it is a basis upon which the Company
assesses its financial performance, and certain covenants that are part of the
Credit Facility are tied to similar measures. Adjusted EBITDA is not intended
to represent cash flow from operations as defined by GAAP and should not be
used as an alternative to net income as an indicator of operating performance
or to cash flows as a measure of liquidity. Adjusted EBITDA, as presented,
represents a useful measure of assessing the Company's ongoing operating
activities without the impact of financing activities and unusual items. While
EBITDA and Adjusted EBITDA are frequently used as a measure of operations and
the ability to meet debt service requirements, it is not necessarily comparable
to other similarly titled captions of other companies due to potential
inconsistencies in the method of calculation.
LIQUIDITY - The Company's principal sources of funds are cash provided by
operating activities and borrowings under its revolving credit facility. The
Company believes that such funds will be adequate for the Company's foreseeable
working capital needs, planned capital expenditures and debt service obligations
on both a short term and a long term basis. However, the level of the Company's
indebtedness could have important consequences, including, but not limited to,
the following: (i) the Company's ability to obtain additional financing in the
future for working capital, capital expenditures, acquisitions, product
development, general corporate purposes or other purposes may be materially
limited or impaired; (ii) significant amounts of the Company's borrowings bear
interest at variable rates, which could result in higher interest expense in the
event of increases in interest rates; (iii) the Indenture, the Notes and the
Credit Facility contain financial and restrictive covenants, the failure to
comply with which may result in an event of default which if not cured or
waived, could have a material adverse effect on the Company; (iv) the Company
may be substantially more leveraged than certain of its competitors, which may
place the Company at a competitive disadvantage; and (v) the Company's
substantial degree of leverage may limit its flexibility to adjust to changing
market conditions, reduce its ability to withstand competitive pressures and
make it more vulnerable to a downturn in general economic conditions or in its
business or be unable to carry out capital spending. The Company's ability to
fund its operations and make planned capital expenditures, to make scheduled
debt payments, to refinance indebtedness and to remain in compliance with all of
the financial covenants under its debt agreements depends on its future
operating performance and cash flow, which in turn, are subject to prevailing
economic conditions and to financial, business and other factors, some of which
are beyond its control.
YEAR 2000 MATTERS
Steel Heddle initiated the process of preparing its computer systems and
applications for the year 2000 in 1997. This process involves addressing the
impacts on information technology (IT) systems plus non-IT systems involving
embedded chip technology. The process involves modifying or replacing certain
hardware and software maintained by the Company as well as communicating with
customers and suppliers to ensure that they are taking appropriate actions to
remedy their year 2000 issues. The Company has conducted an inventory of its IT
systems and currently is correcting the systems that it found to have
date-related deficiencies. In the case of non-IT systems, the Company is
conducting an inventory of its facilities and is beginning the correction of
date-related deficiencies. The Company will utilize both internal and external
resources to reprogram or replace, and test the software for year 2000
modifications. The Company anticipates completing the year 2000 project by
mid-year 1999, which is prior to any anticipated impact on its
25
operating systems. The Company will also prepare a contingency plan in the event
there are any system interruptions.
The Company has not yet established a contingency plan, but intends to formulate
one and expects it to be substantially complete by July 1999. The contingency
plan is anticipated to address mission-critical applications such as purchasing
and inventory management, production control, general ledger accounting, billing
and disbursements. The contingency plan will address these issues through, among
other actions, use of manual records and workarounds, extra staffing, increased
inventories and establishment of alternate sources of raw materials.
The cost of the year 2000 project is estimated at $1.0 million and is being
funded through operating cash flows. Of the total project cost, approximately
$0.4 million is attributable to the purchase of new software and hardware and
will be capitalized. The remaining $0.6 million, which is being expensed as
incurred, is not expected to have a material effect on the results of
operations. The Company has incurred approximately $0.4 million during fiscal
1998 of which approximately $0.3 million has been expensed.
26
The Company has surveyed all of its significant suppliers and large customers to
determine the extent to which the Company's interface systems are vulnerable to
those third parties' failures to remediate their own year 2000 issues. The
Company has received representations from its primary third-party vendors that
they will have resolved any year 2000 problems in their software prior to any
impact on their operating systems.
The costs of the project and the date on which the Company believes it will
complete the year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third party modification plans
and other factors. However, there can be no guarantee that these estimates can
be achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes and similar
uncertainties. Further, there can be no assurance given that any or all of the
Company's systems are or will be year 2000 compliant or that the impact of any
failure to achieve substantial year 2000 compliance will not have a material
adverse effect on the Company's financial conditions. Furthermore, no assurance
can be given that the third parties important to Steel Heddle will successfully
and timely reprogram or replace, and test, all of their own computer hardware,
software and process control systems.
ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In June 1997, the Financial Accounting Standards Board (the "FASB") issued SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related Information."
In February 1998, the FASB issued SFAS No. 132 "Employer's Disclosures about
Pensions and Other Postretirement Benefits." Additionally, in June 1998, the
FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS Nos. 131 and 132 are effective in 1998 and principally affect
the display and disclosure of financial information in the Company's financial
statements. SFAS No. 133 is effective for fiscal quarters beginning after June
15, 1999.
SFAS No. 131 requires entities to disclose financial and detailed information
about its operating segments in a manner consistent with internal reporting used
by the Company to allocate resources and assess financial performance. The
Company has not completed the analyses required to determine such segment
disclosures or additional disclosure requirements, if any, arising from the
adoption of SFAS No. 131. The Company will adopt this statement retroactively
during the fiscal year ending January 2, 1999.
SFAS No. 132 standardizes the disclosures for pensions and other postretirement
liabilities, requires additional information on changes in the benefit
obligations and fair values of plan assets and eliminates certain other
disclosures. The Company will adopt this statement retroactively during the
fiscal year ending January 2, 1999.
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments. It requires that an entity recognize all derivatives as either
assets or liabilities in the balance sheet and measure those instruments at fair
value. At the present time, the Company does not engage in any derivative
instruments or hedging activities and therefore, management does not anticipate
that such adoption will have a material impact on its financial position,
results of operations or cash flows.
27
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10Q contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended that can be identified by the use
of forward-looking terminology, such as "may," "intend," will," "expect,"
anticipate," "estimate" or "continue" or the negative thereof or other
variations thereon or comparable terminology. In particular, any statement,
express or implied, concerning future operating results or the ability to
generate revenues, income or cash flow to service the Company's debt are
forward-looking statements. We refer you to documents the Company files from
time to time with Securities and Exchange Commission and specifically the "Risk
Factors" section of the Company's most recent Registration Statement on Form
S-4. 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.
28
STEEL HEDDLE MFG. CO.
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM
1. Legal Proceedings None
2. Changes in Securities and Use of Proceeds None
3. Defaults Upon Senior Securities and Use of Proceeds None
4. Submission of Matters to a Vote of Security Holders None
5. Other Information None
6. Exhibits and Reports on Form 8-K:
(a) Exhibit - (27) Financial Data Schedule
(b) Current Reports on Form 8-K None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STEEL HEDDLE MFG. CO.
Date: December 7, 1998 /s/ Jerry B. Miller
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Jerry B. Miller
Vice President - Finance and Secretary