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 June 30, 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 33-11479
SYNTHETIC INDUSTRIES, INC.
- -------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 58-1049400
- -------------------------------- --------------------------- ------------------
(State or other jurisdiction (I.R.S.Employer
of incorporation or organization) Identification No.)
309 LaFayette Road, Chickamauga, Georgia 30707
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (706) 375-3121
---------------------------
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
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 X No____
The number of shares of the Registrant's Common Stock, par value $1.00
per share, outstanding as of August 13, 1998 was 8,668,750.
<PAGE>
Part I-FINANCIAL INFORMATION SYNTHETIC INDUSTRIES, INC.
Item 1. Financial Information AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except share and per share amounts)
<TABLE>
June 30, September 30,
ASSETS 1998 1997
---- -----
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash ............................................................................$ 120 $ 338
Accounts receivable, net of allowance for
doubtful accounts of $2,740 and $2,707......................................... 64,912 60,031
Inventory (Note 3)............................................................... 60,235 54,139
Other current assets ............................................................ 18,022 17,200
------- -------
TOTAL CURRENT ASSETS......................................................... 143,289 131,708
PROPERTY, PLANT AND EQUIPMENT, net (Note 4)........................................216,071182,102
OTHER ASSETS....................................................................... 87,803 82,781
------- -------
$447,163$396,591
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................ $ 35,077 $ 27,030
Accrued expenses and other current liabilities................................... 11,010 11,613
Income taxes payable ............................................................ 3,305 52
Interest payable................................................................. 6,078 2,467
Current maturities of long-term debt (Note 5).................................... 1,479 718
-------- ---------
TOTAL CURRENT LIABILITIES.................................................... 56,949 41,880
LONG-TERM DEBT (Note 5)............................................................ 245,832 220,464
DEFERRED INCOME TAXES ............................................................. 29,930 28,430
STOCKHOLDERS' EQUITY:
Common stock (par value $1.00 per share, authorized 25,000,000,
Issued and outstanding 8,668,750 and 8,656,250, respectively)................. 8,669 8,656
Treasury stock (82,056 shares outstanding) (Note 7).............................. (1,759) -
Additional paid-in capital ...................................................... 94,397 94,325
Cumulative translation adjustments............................................... 77 107
Retained earnings................................................................ 13,068 2,729
------ ------
TOTAL STOCKHOLDERS' EQUITY................................................... 114,452 105,817
------- -------
$447,163 $396,591
</TABLE>
See notes to consolidated financial statements
<PAGE>
SYNTHETIC INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of dollars, except share and per share amounts)
(Unaudited)
<TABLE>
Three Months Ended Nine Months Ended
June 30 June 30
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales................................................... $104,531 $ 99,112 $260,383 $245,327
-------- -------- -------- --------
Costs and expenses:
Cost of sales............................................. 68,482 65,762 176,199 166,928
Selling expenses.......................................... 10,666 8,296 28,067 22,480
General and administrative expenses....................... 6,867 6,583 22,099 19,474
Amortization of excess purchase price over net
assets acquired and other intangibles................... 761 648 2,073 1,944
-------- ------- -------- --------
86,776 81,289 228,438 210,826
------- ------- ------- --------
Operating income...................................... 17,755 17,823 31,945 34,501
------- -------- -------- ---------
Other expenses:
Interest expense ......................................... 4,574 4,947 14,079 15,722
Amortization of deferred financing costs.................. 189 150 527 489
------- ------ -------- -------
............................................................ 4,763 5,097 14,606 16,211
------- ------- -------- -------
Income before income tax provision
and extraordinary item.................................. 12,992 12,726 17,339 18,290
Income tax provision........................................ 5,237 5,050 7,000 7,550
------- ------- -------- -------
Income before extraordinary item............................ 7,755 7,676 10,339 10,740
Extraordinary item - Loss from early extinguishment of
debt (net of tax benefit of $7,481).................... - - - 11,950
------- ------- -------- -------
NET INCOME (LOSS)........................................... $ 7,755 $ 7,676 $ 10,339 $ (1,210)
======== ======== ========= ==========
Basic earnings per share:
Income before extraordinary item........................ $ 0.90 $ 0.89 $ 1.19 $ 1.28
Extraordinary loss per share............................ $ - $ - $ - (1.43)
------- -------- ------- --------
Net income (loss) per share................................. $ 0.90 $ 0.89 $ 1.19 $ (0.15)
======= ======== ======= ========
Diluted earnings per share:
Income before extraordinary item....................... $ 0.87 $ 0.86 $ 1.14 $ 1.25
Extraordinary loss per share........................... - $ - $ - $ (1.39)
------ -------- ------- --------
Net income (loss) per share................................. $ 0.87 $ 0.86 $ 1.14 $ (0.14)
====== ======== ======= ========
Average shares outstanding:
Basic.................................................. 8,668,750 8,656,250 8,665,972 8,336,805
Diluted................................................ 8,940,674 8,969,031 9,046,468 8,598,959
</TABLE>
See notes to consolidated financial statements
<PAGE>
SYNTHETIC INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
(Unaudited)
<TABLE>
Nine Months Ended June 30,
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................... $ 10,339 $ (1,210)
Adjustments to reconcile net income to net cash provided by operations:
Extraordinary loss on early extinguishment of debt................. - 19,431
Depreciation and amortization...................................... 15,735 13,687
Provision for bad debts............................................ 33 473
Deferred income taxes.............................................. 1,500 597
Change in operating assets and liabilities, net of acquisition:
Accounts receivable............................................. (3,183) (6,797)
Inventories..................................................... (4,442) (17,965)
Other current assets............................................ (1,989) 638
Other assets.................................................... (974) -
Accounts payable................................................ 5,496 9,507
Accrued expenses and other current liabilities.................. (598) 706
Income taxes payable............................................ 3,253 (1,392)
Interest payable................................................ 3,611 65
----------- ----------
Net cash provided by operating activities......................... 28,781 17,740
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment............................ (38,879) (35,253)
Acquisition of business (Note 6)..................................... (6,000) (9,354)
------- ----------
Net cash used in investing activities ............................ (44,879) (44,607)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments under term loan............................................ (25,000) (20,000)
Net borrowings (repayments) under long term debt...................... 50,304 (1,867)
Issuance of 9 1/4% Senior subordinated debentures..................... - 170,000
Redemption of 12 3/4% Senior subordinated notes....................... (7,403) (132,597)
Repayment costs on early extinguishment of debt....................... - (15,920)
Proceeds from underwritten public offering............................ - 33,681
Proceeds from exercise of stock options............................... 85 -
Debt issuance costs................................................... (649) (5,540)
Repayments of capital lease obligation and other long-term debt....... (1,427) (489)
-------- ----------
Net cash provided by financing activities......................... 15,910 27,268
Effect of exchange rate changes on cash........................... (30) (3)
--------- ---------
NET (DECREASE) INCREASE IN CASH ........................................ (218) 398
CASH AT BEGINNING OF PERIOD............................................. 338 101
---------- --------
CASH AT END OF PERIOD................................................... $ 120 $ 499
========= ========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION Cash paid during the year for:
Interest ............................................................. $ 10,468 $ 15,657
Income taxes.......................................................... 2,224 876
Acquisition of business:
Fair value of assets acquired......................................... $5,293 $9,830
Liabilities assumed and incurred...................................... 4,880 476
Cash paid............................................................. 6,000 9,354
Capital lease obligation incurred for purchase of equipment............. $7,500 $ -
Treasury stock conversion............................................... $1,759 $ -
</TABLE>
See notes to consolidated financial statements
<PAGE>
SYNTHETIC INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of
dollars, except share and per share amounts)
(Information as of June 30, 1998 and for the
periods ending June 30, 1998 and 1997 is unaudited)
1. ORGANIZATION
Synthetic Industries, Inc., a Delaware corporation (the "Company"), was a wholly
owned subsidiary of Synthetic Industries L.P. (the "Partnership") until November
1, 1996. On that day, the Company completed the underwritten public offering
(the "Offering") of 2,875,000 shares of its common stock, par value $1.00 per
share ("Common Stock"). Immediately following the Offering, the Partnership
owned 5,781,250 shares, or approximately 67%, of the issued and outstanding
shares of Common Stock.
The Company manufactures and markets a wide range of primarily
polypropylene-based materials designed for support, strength and stabilization
applications. The Company's products replace commonly used materials in diverse
applications including: floor covering, geotextiles, erosion control, concrete
reinforcement and furniture construction fabrics. The Company manufactures and
sells more than two thousand products in over 65 end-use markets predominately
in North America, Europe and the Far East.
2. INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements as of June 30, 1998 and for the periods
ended June 30, 1998 and 1997 included herein have been prepared, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the financial position at June
30, 1998 and 1997, and the results of operations for the three and nine months
then ended, have been made on a consistent basis. Certain information and
footnote disclosures included in consolidated financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although management believes
that the disclosures herein are adequate to make the information presented not
misleading. It is suggested that these consolidated financial statements be read
in conjunction with Management's Discussion and Analysis of Financial Condition
and Results of Operations and the consolidated financial statements included in
the Company's Annual Report on Form 10-K for the fiscal year ended September 30,
1997. Operating results for the three and nine months ended June 30, 1998 may
not necessarily be indicative of the results that may be expected for the full
year.
<PAGE>
3. INVENTORY
June 30, September 30,
1998 1997
---- ----
Finished goods.......................... $40,320 $33,572
Work in process......................... 7,092 7,427
Raw materials........................... 12,823 13,140
------- --------
$60,235 $54,139
4. PROPERTY, PLANT AND EQUIPMENT
June 30, September 30,
1998 1997
---- ----
Land.................................... $ 4,585 $ 4,585
Buildings and improvements.............. 44,128 35,398
Machinery and equipment and
leasehold improvements................ 271,190 232,277
---------- --------
319,903 272,260
Accumulated depreciation................ 103,832 90,158
------- --------
$216,071 $182,102
5. LONG-TERM DEBT
June 30, September 30,
1998 1997
---- ----
Credit facility:
Securitization.................... $ 27,767 -
Revolver.......................... 37,324 $ 13,420
Term loan portion................. - 25,000
9 1/4% Senior Subordinated
Notes, due 2007................... 170,000 170,000
12 3/4% Senior Subordinated
Debentures, due 2002 .......... - 7,403
Capital lease obligation................ 10,997 4,083
Other................................... 1,223 1,276
--------- ----------
247,311 221,182
Less current portion.................... 1,479 718
--------- ----------
Total long term portion................. $245,832 $ 220,464
======== =========
<PAGE>
On December 18, 1997, the Company and its lenders, with BankBoston as
agent, entered into a new five-year credit facility (the "Credit
Facility"). Proceeds from the Credit Facility were used to repay the
Fourth Amended and Restated Revolving Credit Agreement dated October
20, 1995 . The Credit Facility consists of up to a $40 million asset
based securitization program (the "Securitization"), with amounts
borrowed through a newly formed subsidiary, Synthetic Funding
Corporation, and a $60 million senior secured revolver facility (the
"Revolver"). In conjunction with the Securitization, the Company
entered into a five-year agreement with its subsidiary providing for
the sale of substantially all of its receivables on a revolving basis.
Securitization and Revolver borrowings are collateralized by the
Company's accounts receivable and substantially all of the assets of
the Company, excluding real property, respectively.
Interest on the Securitization is based on the applicable commercial
paper rate in effect plus a spread. The Revolver permits borrowings
which bear interest, at the Company's option, (i) for domestic
borrowings based on the lender's base rate or (ii) for Eurodollar
borrowings based on a spread over the Interbank Eurodollar rate at the
time of conversion. Spreads for the Securitization and the Eurodollar
borrowings are determined by the operational performance of the
Company. At June 30, 1998, the balances under the Securitization and
Revolver were $27,767 and $37,324, respectively, at interest rates
ranging from 6.59% to 8.5%.
The Revolver provides for borrowings under letters of credit of up to
$10,000, which borrowings reduce amounts available under the Revolver.
At June 30, 1998, letters of credit of $402 were outstanding.
The Credit Facility contains covenants related to the maintenance of
certain operating ratios and limitations as to the amount of capital
expenditures. The Company's ability to pay dividends on Common Stock
is restricted by both the Credit Facility and the 9 1/4% Senior
Subordinated Notes due 2007.
On April 7, 1998, the Company entered into an eight-year capital lease
agreement to finance $7,500 of equipment at 7.25%
6. BUSINESS ACQUISITION
On March 18, 1998, the Company acquired all of the outstanding shares of
Novocon International, Inc., a manufacturer and marketer of steel concrete
reinforcing fibers, for $6,000 in cash. The acquisition has been accounted
for using the purchase method of accounting and, accordingly, the purchase
price has been allocated to the assets acquired of $5,293 and the
liabilities assumed of $4,880 based upon the fair market value at the date
of acquisition. The excess purchase price over the fair values of the net
assets acquired has been recorded as goodwill, which is being amortized on
a straight-line basis over 20 years. The operating results of the acquired
business have been included in the consolidated statement of operations
from the date of acquisition.
<PAGE>
7. TREASURY STOCK
In May 1998, the Company acquired 82,056 shares of common stock from the
Partnership in exchange for $1,759 of amounts receivable from the
Partnership, in partial settlement of expenses incurred by the Company on
behalf of the Partnership during the last several years. The common shares
were acquired at their fair market value and are held in treasury. At June
30, 1998, the remaining balance due the Company was $434.
8. LITIGATION
The Company and its subsidiaries are parties to litigation arising out of
their business operations. Such litigation primarily involves claims for
personal injury, property damage, breach of contract and claims involving
employee relations and certain administrative proceedings. The Company
believes such claims are either adequately covered by insurance or do not
involve a risk of material loss to the Company.
In connection with the proposed dissolution of the Partnership, pursuant to
an Agreement and Plan of Withdrawal and Dissolution (the "Plan"), the
Company, its directors and certain other of the Company's officers who are
affiliated with the General Partner have been named in two putative class
and derivative action lawsuits filed by certain limited partners of the
Partnership. In the first action, filed on February 11, 1997 in the
Delaware Court of Chancery and thereafter amended, the plaintiffs have
alleged, among other things, breach of contract with respect to the
Partnership Agreement which governs the Partnership, breach of the
defendants' fiduciary duty to the limited partners and the Company, that
the Plan was unlawfully coercive, that the General Partner has allegedly
failed to satisfy certain conditions precedent to the right of limited
partners to amend the partnership agreement and that certain amendments
necessary to implement the Plan violate the terms of the partnership
agreement. The plaintiffs sought, among other equitable and legal remedies,
removal of the General Partner, dissolution of the Partnership, appointment
of a liquidating trustee, to enjoin the implementation of the Plan and
compensatory damages in an undetermined amount. On October 23, 1997, the
Court preliminarily enjoined the implementation of the Plan, although the
Plan was subsequently approved by limited partners on November 7, 1997. On
November 7, 1997, the Delaware Supreme Court accepted the defendants'
petition for an expedited appeal of this injunction, and briefing and oral
argument on the appeal was completed as of January 6, 1998. On March 19,
1998, the Delaware Supreme Court issued an opinion affirming the Court of
Chancery's grant of a preliminary injunction and remanded the case for
further proceedings. On April 27, 1998, the Court of Chancery granted the
motion of certain pro-Plan intervenors to intervene in the action, but
denied their motion to disqualify plaintiffs' counsel. On May 14, 1998, the
General Partner withdrew the Plan. After the withdrawal of the Plan,
plaintiffs, on June 3, 1998, filed a Consolidated Third Amended and
Supplemental Class and Derivative Complaint (the "Third Amended
Complaint"). The Third Amended Complaint, among other things, eliminated
certain requests for relief related to the Plan and added certain
allegations related to the Company's Employee Stock Purchase Plan and
certain options granted to certain directors and officers of the Company.
In addition to the relief sought in prior complaints, the Third Amended
Complaint seeks declaratory relief with respect to certain provisions of
the Partnership Agreement, the invalidation of the Company's Employee Stock
Purchase Plan, the invalidation of certain options granted to the Company's
directors and officers, and the invalidation of certain amendments to the
Company's certificate of incorporation and bylaws relating to voting by
consent and the calling of special meetings. On July 20, 1998, defendants
filed a motion to dismiss the Third Amended Complaint. The defendants have
denied any allegation of wrongdoing.
<PAGE>
The second lawsuit was filed in the U.S. District Court of the Northern
District of California on May 1, 1997, and thereafter amended. The
plaintiff has alleged in his amended complaint various federal securities
and proxy violations allegedly arising out of the joint proxy statement and
prospectus that was mailed to limited partners in connection with the
solicitation of proxies for the vote on the Plan and other related
documents. The plaintiff also added the Company as a named defendant,
alleging that all defendants acted in concert with, and as agents of, each
other; however the plaintiff made no specific independent allegations with
respect to the Company. The plaintiff sought, among other equitable and
legal remedies, to enjoin the implementation of the Plan and unspecified
damages. On November 6, 1997, the Court granted in part the plaintiff's
motion for a temporary restraining order enjoining the implementation of
the Plan. The plaintiff's motion for a preliminary injunction has been
briefed and an oral argument was heard on December 19, 1997. On April 10,
1998, plaintiff filed a motion for class certification. After the
withdrawal of the Plan, defendants, on June 19, 1998, filed a motion to
dismiss the claims as moot. On July 17, 1998, plaintiff moved to amend his
complaint purportedly to include an additional plaintiff and additional
claims for relief, including permanent injunctive relief for any violations
of the securities laws in the future. This proposed amended complaint also
adds the Partnership as a nominal defendant. These motions are scheduled to
be heard on August 21, 1998. The defendants have denied any allegation of
wrongdoing.
On December 29, 1997, a purported derivative action was filed in the
Delaware Chancery Court by a limited partner of the Partnership against
certain of the Company's officers and directors with regard to certain
stock options plans adopted by the Company in 1994. Both the Partnership
and the Company were named as nominal defendants. The plaintiff alleged
that the defendants breached their fiduciary duties by adoption of the
stock option plans. The plaintiff seeks, among other things, a declaration
that the stock options granted under the plans are invalid, the
establishment of a constructive trust over the stock options, unspecified
compensatory damages and reasonable attorneys' fees and expenses. By order
dated June 23, 1998, this action was consolidated with the Delaware action
described above. The defendants deny any allegation of wrongdoing and
intend to vigorously contest the lawsuit.
Based on the Company's review of the allegations made in the above actions
to date, the Company does not believe that the ultimate resolution of these
actions will have a material adverse effect on the Company's results of
operations or financial condition.
The Partnership is a principal stockholder of the Company and certain
members of the Company's management control the General Partner.
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion of the financial condition and results of operations of
the Company should be read in conjunction with the information contained in the
Consolidated Financial Statements, including the notes thereto. The following
discussion includes forward-looking statements that involve certain risks and
uncertainties. See "Forward Looking Statements." Dollars are in thousands,
except per share data.
Liquidity and Capital Resources
To finance its capital expenditure program and fund its operational needs,
the Company has relied upon cash provided by operations, supplemented as
necessary by bank lines of credit and long-term indebtedness. Cash provided by
operating activities for the nine months ended June 30, 1998 was $28,781, which
resulted primarily from net income of $10,339, noncash charges of $17,268 and
net of acquisition increases in accounts payable, income taxes payable and
interest payable of $12,360, offset primarily by increases in accounts
receivable, inventory and other current assets of $9,614, due principally to
seasonal buildups.
On December 18, 1997, the Company and its lenders, with BankBoston as
agent, entered into a new five-year credit facility (the "Credit Facility").
Proceeds from this agreement were used to repay the Fourth Amended and Restated
Revolving Credit Agreement dated October 20, 1995. The Credit Facility consists
of up to a $40 million asset based securitization program (the
"Securitization"), with amounts borrowed through a newly formed wholly owned
subsidiary, Synthetic Funding Corporation, and a $60 million senior secured
revolver facility (the "Revolver"). Securitization and Revolver borrowings are
collateralized by the Company's accounts receivable and substantially all of the
assets of the Company, excluding real property and accounts receivable,
respectively.
Interest on the Securitization is based on the applicable commercial paper
rate in effect plus a spread. The Revolver permits borrowings which bear
interest, at the Company's option, (i) for domestic borrowings based on the
lender's base rate or (ii) for Eurodollar borrowings based on a spread over the
Interbank Eurodollar rate at the time of conversion. Spreads for the
Securitization and the Eurodollar borrowings are determined by the operational
performance of the Company. At June 30, 1998, the balances under the
Securitization and Revolver were $27,767 and $37,324, respectively, at interest
rates ranging from 6.59% to 8.5%.
The Credit Facility contains covenants related to the maintenance of
certain operating ratios and limitations as to the amount of capital
expenditures. The Company's ability to pay dividends on Common Stock is
restricted by both the Credit Facility and the 9 1/4% Senior Subordinated Notes
due 2007. At June 30, 1998, the availability under the Credit Facility was
approximately $22,274 with $402 in letters of credit outstanding.
On March 18, 1998, the Company acquired all of the outstanding shares of Novocon
International, Inc., a manufacturer and marketer of steel concrete reinforcing
fibers, for $6,000 in cash. The acquisition has been accounted for using the
purchase method of accounting and, accordingly, the purchase price has been
allocated to the assets acquired of $5,293 and the liabilities assumed of $4,880
based upon the fair market value at the date of acquisition. The excess purchase
price over the fair values of the net assets acquired has been recorded as
goodwill, which is being amortized on a straight-line basis over 20 years. The
operating results of the acquired business are included in the consolidated
statement of operations from the date of acquisition. <PAGE>
Capital expenditures planned for fiscal 1998 are approximately $60,000,
subject to prevailing market conditions. Of the planned amount, $46,379 had been
spent, primarily to expand capacity of the Company's manufacturing facilities.
On April 7, 1998, the Company entered into an eight-year capital lease
agreement to finance $7,500 of equipment at 7.25%.
Based on current levels of operations and anticipated growth, the
Company's management expects cash from operations to provide sufficient cash
flow to satisfy the debt service requirements of the Company's long-term debt
obligations, including the Amended Credit Facility and lease agreements, permit
anticipated capital expenditures and fund the Company's working capital
requirements for the next twelve months.
Results of Operations
The following table sets forth the percentage relationships to net
sales of certain income statement items for the three and nine months ended June
30, 1998 and 1997. <TABLE>
Three Months Ended Nine Month Ended
June 30,. June 30,
1998 1997 1998 1997
----- ----- ---- ----
<S> <C> <C> <C> <C>
Net sales................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales............................. 65.5 66.4 67.7 68.0
---- ---- ---- ----
Gross profit........................... 34.5 33.6 32.3 32.0
Selling expenses.......................... 10.2 8.4 10.8 9.2
General and administrative
expenses.......................... 6.6 6.6 8.5 7.9
Amortization of intangibles............... 0.7 0.6 0.8 0.8
--- --- --- ---
Operating income.......................... 17.0 18.0 12.2 14.1
Interest expense.......................... 4.4 5.0 5.4 6.4
Amortization of deferred
financing costs................... 0.2 0.2 0.2 0.2
--- --- --- ---
Income before provision
for taxes and
extraordinary item................ 12.4 12.8 6.6 7.5
Provision for income taxes................ 5.0 5.1 2.7 3.1
--- --- --- ---
Income before extraordinary item.......... 7.4% 7.7% 3.9% 4.4%
==== ==== ==== ====
</TABLE>
<PAGE>
Results of Operations for the Three Months Ended June 30
Net sales for the third quarter of fiscal 1998 were $104,531 compared to
$99,112 for the same period of fiscal 1997, an increase of $5,419, or 5.5%.
Carpet backing sales for the third quarter of fiscal 1998 were $44,438 compared
to $44,962 for the same period of fiscal 1997, a decrease of $524, or 1.2%,
reflecting a combination of 11.4% unit growth offset by selling price
reductions. Construction and civil engineering product sales for the third
quarter of fiscal 1998 were $40,662 compared to $35,183 for the same period of
fiscal 1997, an increase of $5,479, or 15.6%, reflecting unit volume growth.
Approximately, $3,300 of this increase was related to the Novocon International,
Inc. acquisition. Technical textiles sales for the third quarter of fiscal 1998
were $19,431 compared to $18,967 for the same period of fiscal 1997, an increase
of $464, or 2.4%.
Gross profit for the third quarter of fiscal 1998 was $36,049 compared to
$33,350 for the same period of fiscal 1997, an increase of $2,699, or 8.1%. As a
percentage of sales, gross profit increased to 34.5% from 33.6%. This increase
was primarily due to lower average polypropylene costs and higher sales volume,
partially offset by lower on average carpet backing selling prices.
Polypropylene is the basic raw material used in the manufacture of
substantially all of the Company's products, accounting for approximately 50% of
the Company's cost of goods sold. The Company believes that the selling prices
of its products have adjusted over time to reflect changes in polypropylene
prices. However, higher prices of polypropylene without offsetting selling price
increases could have a significant negative effect on the Company's results of
operations and financial condition. Due to the level of competition, the
Company, historically, has been able to pass through only a portion of the
polypropylene cost increases through higher selling prices of certain product
lines. The Company has not experienced any shortage of supply of polypropylene;
however, continuous increases in demand or major supply disruptions without
offsetting increases in manufacturing capacities could cause future supply
shortages.
Selling expenses for the third quarter of fiscal 1998 were $10,666 compared
to $8,296 for the same period of fiscal 1997, an increase of $2,370, or 28.6%.
As a percentage of sales, selling expenses increased from 8.4% to 10.2%. This
increase was primarily due to increased expenditures for sales and support staff
as well as increased marketing expenses to promote future revenue growth.
General and administrative expenses for the third quarter of fiscal 1998
were $6,867 compared to $6,583 for the same period of fiscal 1997, an increase
of $284, or 4.3%. As a percentage of sales, general and administrative expenses
remained constant at 6.6%. The increase in general and administrative expenses
was primarily due to increased investment in research and market development,
partially offset by the timing of certain expenditures.
Operating income for the third quarter of fiscal 1998 was $17,755 as
compared to $17,823 for the same period of fiscal 1997, a decrease of $68, or
0.4%. As a percentage of sales, operating income decreased to 17.0% in fiscal
1998 from 18.0% in fiscal 1997. This decrease was primarily due to higher
selling, general and administrative costs, partially offset by increased sales
volume and lower on average polypropylene costs. <PAGE>
Interest expense for the third quarter of fiscal 1998 was $4,574 compared
to $4,947 for the same period of fiscal 1997, a decrease of $373, or 7.5%, as a
result of lower on average interest rates on an increased level of outstanding
debt. The effective income tax rate for the three months ended June 30, 1998 and
1997 was approximately 40%.
Net income for the third quarter of fiscal 1998 was $7,755 compared to
$7,676 for the third quarter of fiscal 1997, an increase of $79, or 1.0%.
Earnings before interest, taxes, depreciation and amortization ("EBITDA")1 for
the third quarter of fiscal 1998 were $22,985 compared to $22,331 for the same
period of fiscal 1997, an increase of $654, or 2.9%. The increase in net income,
as well as EBITDA, was primarily due to the factors discussed above.
Results of Operations for the Nine Months Ended June 30
Net sales for the first nine months of fiscal 1998 were $260,383 compared
to $245,327 for the same period of fiscal 1997, an increase of $15,056, or 6.1%.
Carpet backing sales for the first nine months of fiscal 1998 were $124,312
compared to $122,090 for the same period of fiscal 1997, an increase of $2,222,
or 1.8%. Construction and civil engineering product sales for the first nine
months of fiscal 1998 were $83,365 compared to $75,930 for the same period of
fiscal 1997, an increase of $7,435, or 9.8%. Technical textiles sales for the
first nine months of fiscal 1998 were $52,706 compared to $47,307 for same
period of fiscal 1997, an increase of $5,399, or 11.4%.
Gross profit for the first nine months of fiscal 1998 was $84,184 compared
to $78,399 for the same period of fiscal 1997, an increase of $5,785, or 7.4%.
As a percentage of sales, gross profit increased to 32.3% from 32.0%.
Selling expenses for the first nine months of fiscal 1998 were $28,067
compared to $22,480 for the same period of fiscal 1997, an increase of $5,587,
or 24.9%. As a percentage of sales, selling expenses increased from 9.2% to
10.8%. This increase was primarily due to increased expenditures for sales and
engineering support staff, as well as increased marketing expenses to support
future sales growth.
General and administrative expenses for the first nine months of fiscal
1998 were $22,099 compared to $19,474 for the same period of fiscal 1997, an
increase of $2,625, or 13.5%. As a percentage of sales, general and
administrative expenses increased from 7.9% to 8.5%. The increase in general and
administrative expenses was primarily due to increased research and market
development activities and computer system upgrades to support anticipated
Company growth.
Operating income for the first nine months of fiscal 1998 was $31,945 as
compared to $34,501 for the same period of fiscal 1997, a decrease of $2,556, or
7.4%. As a percentage of sales, operating income decreased to 12.3% in fiscal
1998 from 14.1% in fiscal 1997. This decrease was primarily due to higher
selling, general and administrative costs partially offset by increased sales
volumes and lower on average polypropylene costs. <PAGE>
Interest expense for the first nine months of fiscal 1998 was $14,079
compared to $15,722 for the same period of fiscal 1997, a decrease of $1,643, or
10.5%, as a result of lower on average interest rates on an increased level of
outstanding debt. The effective income tax rate for the first nine months of
fiscal years 1998 and 1997 was approximately 40% and 41%, respectively.
Income before extraordinary item for the first nine months of fiscal 1998,
was $10,339 compared to $10,740 for the same period of fiscal 1997, a decrease
of $401. EBITDA for the first nine months of fiscal 1998 were $47,153 compared
to $47,694 for the first nine months of fiscal 1997, a decrease of $541, or
1.1%. The decrease in income before extraordinary item, as well as EBITDA, was
primarily due to higher selling, general and administrative costs, partially
offset by increased sales volumes and continued growth of higher margin
business.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"), which must be adopted for fiscal years
beginning after December 15, 1997. SFAS 130 establishes standards for reporting
and display of comprehensive income and its components in a full set of
general-purpose financial statements.
Also in June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"), which must be adopted for fiscal years beginning
after December 15, 1997. Under the new standard, companies will be required to
report certain information about operating segments in consolidated financial
statements. Operating segments will be determined based on the method that
management organizes its businesses for making operating decisions and assessing
performance. SFAS 131 also requires companies to report certain information
about their products and services, the geographic areas in which they operate,
and their major customers. The Company is currently evaluating the effect, if
any, of implementing SFAS 131.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), which must be adopted for fiscal quarters of fiscal years beginning after
June 15,1999. SFAS 133 requires the recognition of all derivatives as either
assets or liabilities in the statement of financial position and measurement of
those instruments at fair value. The Company is currently evaluating the effect,
if any, of implementing SFAS 133.
Forward Looking Statements
The discussion of the Company's business and operations in this report
includes several instances of forward-looking statements, which are based upon
management's good faith assumptions relating to the financial, market,
operating, and other relevant environments that will exist and affect the
Company's business and operations in the future. No assurance can be made that
the assumptions upon which management based its forward-looking statements will
prove to be correct, or that the Company's business and operations will not be
affected in any substantial manner by other factors not currently foreseeable by
management or beyond the Company's control. All forward-looking statements
involve risk and uncertainty, including those described in this report, and such
statements shall be deemed in the future to be modified in their entirety by the
Company's public pronouncement, including those contained in all future reports
and other documents filed by the company with the Securities and Exchange
Commission.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company and its subsidiaries are parties to litigation arising out of
their business operations. Such litigation primarily involves claims for
personal injury, property damage, breach of contract and claims involving
employee relations and certain administrative proceedings. The Company
believes such claims are either adequately covered by insurance or do not
involve a risk of material loss to the Company.
In connection with the proposed dissolution of the Partnership, pursuant to
an Agreement and Plan of Withdrawal and Dissolution (the "Plan"), the
Company, its directors and certain other of the Company's officers who are
affiliated with the General Partner have been named in two putative class
and derivative action lawsuits filed by certain limited partners of the
Partnership. In the first action, filed on February 11, 1997 in the
Delaware Court of Chancery and thereafter amended, the plaintiffs have
alleged, among other things, breach of contract with respect to the
Partnership Agreement which governs the Partnership, breach of the
defendants' fiduciary duty to the limited partners and the Company, that
the Plan was unlawfully coercive, that the General Partner has allegedly
failed to satisfy certain conditions precedent to the right of limited
partners to amend the partnership agreement and that certain amendments
necessary to implement the Plan violate the terms of the partnership
agreement. The plaintiffs sought, among other equitable and legal remedies,
removal of the General Partner, dissolution of the Partnership, appointment
of a liquidating trustee, to enjoin the implementation of the Plan and
compensatory damages in an undetermined amount. On October 23, 1997, the
Court preliminarily enjoined the implementation of the Plan, although the
Plan was subsequently approved by limited partners on November 7, 1997. On
November 7, 1997, the Delaware Supreme Court accepted the defendants'
petition for an expedited appeal of this injunction, and briefing and oral
argument on the appeal was completed as of January 6, 1998. On March 19,
1998, the Delaware Supreme Court issued an opinion affirming the Court of
Chancery's grant of a preliminary injunction and remanded the case for
further proceedings. On April 27, 1998, the Court of Chancery granted the
motion of certain pro-Plan intervenors to intervene in the action, but
denied their motion to disqualify plaintiffs' counsel. On May 14, 1998, the
General Partner withdrew the Plan. After the withdrawal of the Plan,
plaintiffs, on June 3, 1998, filed a Consolidated Third Amended and
Supplemental Class and Derivative Complaint (the "Third Amended
Complaint"). The Third Amended Complaint, among other things, eliminated
certain requests for relief related to the Plan and added certain
allegations related to the Company's Employee Stock Purchase Plan and
certain options granted to certain directors and officers of the Company.
In addition to the relief sought in prior complaints, the Third Amended
Complaint seeks declaratory relief with respect to certain provisions of
the Partnership Agreement, the invalidation of the Company's Employee Stock
Purchase Plan, the invalidation of certain options granted to the Company's
directors and officers, and the invalidation of certain amendments to the
Company's certificate of incorporation and bylaws relating to voting by
consent and the calling of special meetings. On July 20, 1998, defendants
filed a motion to dismiss the Third Amended Complaint. The defendants have
denied any allegation of wrongdoing.
<PAGE>
The second lawsuit was filed in the U.S. District Court of the Northern
District of California on May 1, 1997, and thereafter amended. The
plaintiff has alleged in his amended complaint various federal securities
and proxy violations allegedly arising out of the joint proxy statement and
prospectus that was mailed to limited partners in connection with the
solicitation of proxies for the vote on the Plan and other related
documents. The plaintiff also added the Company as a named defendant,
alleging that all defendants acted in concert with, and as agents of, each
other; however the plaintiff made no specific independent allegations with
respect to the Company. The plaintiff sought, among other equitable and
legal remedies, to enjoin the implementation of the Plan and unspecified
damages. On November 6, 1997, the Court granted in part the plaintiff's
motion for a temporary restraining order enjoining the implementation of
the Plan. The plaintiff's motion for a preliminary injunction has been
briefed and an oral argument was heard on December 19, 1997. On April 10,
1998, plaintiff filed a motion for class certification. After the
withdrawal of the Plan, defendants, on June 19, 1998, filed a motion to
dismiss the claims as moot. On July 17, 1998, plaintiff moved to amend his
complaint purportedly to include an additional plaintiff and additional
claims for relief, including permanent injunctive relief for any violations
of the securities laws in the future. This proposed amended complaint also
adds the Partnership as a nominal defendant. These motions are scheduled to
be heard on August 21, 1998. The defendants have denied any allegation of
wrongdoing.
On December 29, 1997, a purported derivative action was filed in the
Delaware Chancery Court by a limited partner of the Partnership against
certain of the Company's officers and directors with regard to certain
stock options plans adopted by the Company in 1994. Both the Partnership
and the Company were named as nominal defendants. The plaintiff alleged
that the defendants breached their fiduciary duties by adoption of the
stock option plans. The plaintiff seeks, among other things, a declaration
that the stock options granted under the plans are invalid, the
establishment of a constructive trust over the stock options, unspecified
compensatory damages and reasonable attorneys' fees and expenses. By order
dated June 23, 1998, this action was consolidated with the Delaware action
described above. The defendants deny any allegation of wrongdoing and
intend to vigorously contest the lawsuit.
Based on the Company's review of the allegations made in the above actions
to date, the Company does not believe that the ultimate resolution of these
actions will have a material adverse effect on the Company's results of
operations or financial condition.
The Partnership is a principal stockholder of the Company and certain
members of the Company's management control the General Partner.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
1 27.0 Financial Data Schedule
- --------------
1 Filed herewith
(b) Reports of Form 8-K
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SYNTHETIC INDUSTRIES, INC.
By: /s/ Leonard Chill
Leonard Chill
President
Dated: August 13, 1998
By: /s/ Joseph Sinicropi
Joseph Sinicropi
Chief Financial Officer
Dated: August 13, 1998
- --------
0 The Company believes that EBITDA is helpful in understanding cash flow from
operations that is available for debt service, taxes and capital expenditures.
EBITDA is not a concept recognized under generally accepted accounting
principles and is not a substitute for operating income, net income or cash
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
condensed consolidated balance sheet of Synthetic Industries, Inc. as of
June 30, 1997, and the related condensed consolidated statement of income
and cash flows for the three months ended June 30, 1998, and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000809803
<NAME> Synthetic Industries, Inc.
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1.0
<CASH> 120
<SECURITIES> 0
<RECEIVABLES> 67,652
<ALLOWANCES> 2,740
<INVENTORY> 60,235
<CURRENT-ASSETS> 143,289
<PP&E> 319,903
<DEPRECIATION> 103,832
<TOTAL-ASSETS> 447,163
<CURRENT-LIABILITIES> 56,949
<BONDS> 170,000
0
0
<COMMON> 8,669
<OTHER-SE> 105,783
<TOTAL-LIABILITY-AND-EQUITY> 447,163
<SALES> 260,383
<TOTAL-REVENUES> 260,383
<CGS> 176,199
<TOTAL-COSTS> 228,438
<OTHER-EXPENSES> 14,606
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,079
<INCOME-PRETAX> 17,339
<INCOME-TAX> 7,000
<INCOME-CONTINUING> 10,339
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,339
<EPS-PRIMARY> 1.19
<EPS-DILUTED> 1.14
</TABLE>
AMENDMENT NO. 3
to
LOAN AND SECURITY AGREEMENT
dated as of December 18, 1997
THIS AMENDMENT NO. 3 dated as of June ____, 1998 is made by and among
SYNTHETIC INDUSTRIES, INC., a Delaware corporation (the "Borrower"), the Lenders
parties from time to time to the Loan Agreement (as hereinafter defined), and
BANKBOSTON, N.A. ("BankBoston"), as the agent (the "Agent") for the Lenders.
Preliminary Statements
The Borrower, the Lenders and the Agent are parties to a Loan
and Security Agreement dated as of December 18, 1997, as amended by Amendment
No. 1 dated as of March 11, 1998 and Amendment No. 2 dated as of April 15, 1998
(as so amended and in effect, the "Loan Agreement"; terms defined therein and
not otherwise defined herein being used herein as therein defined). The Borrower
has advanced and expects in the future to advance funds to Synthetic L.P. to
permit Synthetic L.P. to pay (and has paid directly on behalf of Synthetic L.P.)
certain transaction expenses and expenses of litigation in connection with the
pending corporate reorganization of Synthetic L.P. The Borrower proposes to
accept from Synthetic L.P. shares of the Borrower's capital stock as
reimbursement for such advances and direct payments and to hold such shares as
treasury stock. The Borrower has requested the consent of the Agent and the
Required Lenders to this arrangement and to the exclusion of such treasury stock
from computation of consolidated Net Worth for purposes of determining the
Borrower's compliance with the financial covenants contained in the Loan
Agreement and the Agent and the Lenders have agreed to grant such consent, upon
and subject to all of the terms, conditions and provisions of this Amendment.
Accordingly, in consideration of the Loan Agreement, the Loans
made by the Lenders and outstanding thereunder, the mutual promises hereinafter
set forth and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto hereby agree as follows:
Section 1. Amendments to Loan Agreement. From and after the date hereof,
subject to satisfaction of the conditions set forth in Section 2, the Loan
Agreement is hereby amended by
(a) amending Section 1.1. Definitions thereof by inserting in correct
alphabetical order the following additional definition:
Treasury Stock means shares of common stock of the Borrower
held by the Borrower in its treasury that have been acquired by the
Borrower in one or more transfers from Synthetic L.P. in payment of
certain intercompany loans and advances made by the Borrower to
Synthetic L.P., provided that the aggregate value of such shares, as
determined in good faith by the Borrower's Board of Directors with
respect to each transferred share at the time of transfer by reference
to recent market prices of such common stock, shall not exceed
$3,000,000.
(b) amending Section 12.1 Financial Ratios by amending
subsection (a) thereof in its entirety to read as follows:
(a) Minimum Net Worth. Consolidated Net Worth of the Borrower
and its Consolidated Subsidiaries (exclusive of the effect of the
Borrower's acquisition, disposition or holding of any Treasury Stock)
at any time after the Effective Date to be less than the sum of (i)
$102,817,000 plus (ii) an amount equal to 75% of consolidated New
Income of the Borrower and its Consolidated Subsidiaries for each
fiscal quarter of the Borrower ending after the Effective Date and on
or prior to the date of determination, on a cumulative basis (and
without deduction for any losses).
(c) amending Section 12.4 Investments by inserting therein
immediately after the phrase "this Section 12.4 shall not apply to Investments
in" the phrase "(a) Treasury Stock or (b)";
(d) amending Section 12.6 Restricted Distributions and Payments, Etc. by
adding at the end of the first sentence (immediately before the period following
the phrase "would at all times have been greater than $10,000,000"), the
following new clause (iii):
, or (iii) acquisition by the Borrower of the Treasury Stock
Section 2. Effectiveness of Amendment. This Amendment shall
become effective on the date (the "Amendment Effective Date") on which the Agent
has received seven copies of this Amendment duly executed and delivered by each
of the Borrower and the Required Lenders.
Section 3. Representations and Warranties. The Borrower hereby
represents and warrants to the Agent and the Lenders that it has the corporate
power and has taken all actions necessary to authorize it to execute and deliver
this Amendment and the other documents contemplated to be delivered by it
pursuant to this Amendment and to perform its obligations under the Loan
Agreement as amended by this Amendment and under such other documents; that this
Amendment has been and each such other document when executed and delivered by
the Borrower will have been, duly executed and delivered by the Borrower; and
that the Loan Agreement as amended hereby and each such other document,
constitute the legal, valid and binding obligations of the Borrower, enforceable
against the Borrower in accordance with their respective terms.
Section 4. Effect of Amendment. From and after the
effectiveness of this Amendment, all references in the Loan Agreement and in any
other Loan Document to "this Agreement," "the Loan Agreement," "hereunder,"
"hereof" and words of like import referring to the Loan Agreement, shall mean
and be references to the Loan Agreement as amended by this Amendment. Except as
expressly amended hereby, the Loan Agreement and all terms, conditions and
provisions thereof remain in full force and effect and are hereby ratified and
confirmed. The execution, delivery and effectiveness of this Amendment shall
not, except as expressly provided herein, operate as a waiver of any right,
power or remedy of any Lender or the Agent under any of the Loan Documents, nor
constitute a waiver of any provision of any of the Loan Documents.
Section 5. Counterpart Execution; Governing Law.
(a) Execution in Counterparts. This Amendment may be executed
in any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which taken together shall constitute but one and the
same agreement.
(b) Governing Law. This Amendment shall be governed by and construed in
accordance with the laws of the State of Georgia.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed by their respective officers thereunto duly authorized,
as of the date first above written.
SYNTHETIC INDUSTRIES, INC.
[Corporate Seal] By:
Name:
ATTEST: Title:
- ------------------------------
[Assistant] Secretary
BANKBOSTON, N.A., as the Agent and as a Lender
By:
Stephen Y. McGehee
Managing Director
SANWA BUSINESS CREDIT CORPORATION
By
Name:
Title:
SOUTHTRUST BANK, NATIONAL ASSOCIATION
By:
Name:
Title:
