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 March 31, 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
Identification No.) of incorporation or organization)
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 $1.00
per share, outstanding as of May 13, 1998 was 8,668,750.
<PAGE>
Part I-FINANCIAL INFORMATION
Item 1. Financial Information
SYNTHETIC INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except share and per share amounts)
<TABLE>
<S> <C> <C>
March 31, September 30,
ASSETS 1998 1997
---- -----
(Unaudited)
CURRENT ASSETS:
Cash ............................................................................$ 263 $ 338
Accounts receivable, net of allowance for
doubtful accounts of $2,793 and $2,707......................................... 46,833 60,031
Inventory (Note 3)............................................................... 67,009 54,139
Other current assets ............................................................ 19,345 17,200
------- -------
TOTAL CURRENT ASSETS......................................................... 133,450 131,708
PROPERTY, PLANT AND EQUIPMENT, net (Note 4)........................................ 201,566 182,102
OTHER ASSETS....................................................................... 88,570 82,781
-------- -------
$423,586 $396,591
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................ $ 26,782 $ 27,030
Accrued expenses and other current liabilities................................... 10,800 11,613
Income taxes payable............................................................. 959 52
Interest payable................................................................. 2,269 2,467
Current maturities of long-term debt (Note 5).................................... 733 718
-------- ---------
TOTAL CURRENT LIABILITIES.................................................... 41,543 41,880
LONG-TERM DEBT (Note 5)............................................................ 245,052 220,464
DEFERRED INCOME TAXES (Note 6)..................................................... 28,430 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
Additional paid-in capital ...................................................... 94,397 94,325
Cumulative translation adjustments............................................... 182 107
Retained earnings................................................................ 5,313 2,729
-------- --------
TOTAL STOCKHOLDERS' EQUITY................................................... 108,561 105,817
$423,586 $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>
<S> <C> <C> <C> <C>
Three Months Ended Six Months Ended
March 31 March 31
1998 1997 1998 1997
----- ---- ---- ----
Net sales................................................... $ 79,271 $ 75,358 $155,852 $146,215
-------- -------- -------- --------
Costs and expenses:
Cost of sales............................................. 54,522 51,123 107,718 101,166
Selling expenses.......................................... 9,074 7,246 17,401 14,184
General and administrative expenses....................... 8,045 7,010 15,233 12,891
Amortization of excess purchase price over net
assets acquired and other intangibles................... 663 648 1,311 1,296
-------- ------- -------- --------
72,304 66,027 141,663 129,537
------- ------- --------- --------
Operating income...................................... 6,967 9,331 14,189 16,678
------ ------- -------- ---------
Other expenses:
Interest expense ......................................... 4,716 5,365 9,506 10,775
Amortization of deferred financing costs.................. 185 163 336 339
------- ------ -------- -------
............................................................ 4,901 5,528 9,842 11,114
Income before income tax provision
and extraordinary item.................................. 2,066 3,803 4,347 5,564
Income tax provision (Note 6)............................... 828 1,643 1,763 2,500
------- -------- --------- --------
Income before extraordinary item............................ 1,238 2,160 2,584 3,064
Extraordinary item - Loss from early extinguishment
of debt (net of tax benefit of $7,481)................. - 11,950 - 11,950
------- ------- --------- ------
NET INCOME (LOSS)........................................... $ 1,238 $ (9,790) $ 2,584 $ (8,886)
======== ========= ======== =========
Basic earnings per share:
Income before extraordinary item........................ $ 0.14 $ 0.25 $ 0.30 $ 0.37
Extraordinary loss per share............................ $ - $ (1.38) $ - $ (1.46)
------- -------- ------- --------
Net income (loss) per share................................. $ 0.14 $ (1.13) $ 0.30 $ (1.09)
======= ======== ======= ========
Diluted earnings per share:
Income before extraordinary item....................... $ 0.14 $ 0.24 $ 0.28 $ 0.36
Extraordinary loss per share........................... - $ (1.33) $ - $ (1.42)
------- -------- ------- --------
Net income (loss) per share................................. $ 0.14 $ (1.09) $ 0.28 $ (1.06)
======= ======== ======= ========
Average shares outstanding:
Basic.................................................. 8,668,750 8,656,250 8,662,500 8,177,083
Diluted................................................ 9,080,922 8,957,155 9,099,365 8,413,922
</TABLE>
See notes to consolidated financial statements
<PAGE>
SYNTHETIC INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
(Unaudited)
<TABLE>
<S> <C> <C>
Six Months Ended March 31,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income before extraordinary item.................................. $ 2,584 $ 3,064
Adjustments to reconcile net income
to net cash provided by (used in) operations:
Depreciation and amortization....................................... 10,313 9,027
Provision for bad debts............................................. 61 141
Deferred income taxes............................................... - 3,110
Change in assets and liabilities, net of acquisitions:
Accounts receivable................................................ 14,867 58
Inventory.......................................................... (11,216) (20,501)
Other current assets............................................... (1,553) 577
Other assets....................................................... (788) -
Accounts payable................................................... (2,799) 8,459
Accrued expenses and other current liabilities..................... (808) 200
Income taxes payable............................................... 907 (1,407)
Interest payable................................................... (198) (3,636)
----------- -------------
Cash provided by (used in) operating activities.................. 11,370 (908)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment............................ (27,405) (18,909)
Acquisitions (Note 7)................................................. (6,000) (9,354)
------- -------------
Cash used in investing activities ................................ (33,405) (28,263)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments under term loan............................................ (25,000) (20,000)
Borrowings under long term debt....................................... 55,219 625
Issuance of 9 1/4% Senior subordinated debentures..................... - 170,000
Redemption of 12 3/4% Senior subordinated debentures.................. (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) (5,290)
Repayments of capital lease obligation and other long-term debt....... (367) (323)
--------- -----------
Cash provided by financing activities............................. 21,885 30,176
Effect of exchange rate changes on cash........................... 75 84
-------- ----------
NET CHANGE IN CASH...................................................... (75) 1,089
CASH AT BEGINNING OF PERIOD............................................. 338 101
-------- ----------
CASH AT END OF PERIOD................................................... $ 263 $ 1,190
======== ==========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION Cash paid during the year for:
Interest ............................................................. $ 9,704 $ 14,411
Income taxes.......................................................... 856 797
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
</TABLE>
See notes to consolidated financial statement
<PAGE>
SYNTHETIC INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except share and per share information)
(Information as of March 31, 1998 and for the
periods ending March 31, 1998 and 1997 are 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 March 31, 1998 and for the periods
ended March 31, 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 March
31, 1998 and 1997, and the results of operations for the three and six 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 six months ended March 31, 1998 may
not necessarily be indicative of the results that may be expected for the full
year.
<PAGE>
3. INVENTORY
March 31, September 30
1998 1997
---- ----
Finished goods.......................... $46,984 $33,572
Work in process......................... 7,083 7,427
Raw materials........................... 12,942 13,140
------- --------
$67,009 $54,139
4. PROPERTY, PLANT AND EQUIPMENT
March 31, September 30,
1998 1997
---- ----
Land.................................... $ 4,585 $ 4,585
Buildings and improvements.............. 42,648 35,398
Machinery and equipment and
leasehold improvements................ 253,696 232,277
--------- --------
300,929 272,260
Accumulated depreciation................ 99,363 90,158
------- -------
$201,566 $182,102
5. LONG-TERM DEBT
March 31, September 30,
1998 1997
---- ----
Credit facility:
Securitization...................... $ 22,146
Revolver............................ 48,648 $ 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.................. 3,756 4,083
Other..................................... 1,235 1,276
-------- --------
245,785 221,182
Less current portion...................... 733 718
-------- --------
Total long term portion................... $245,052 $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 March 31, 1998, the balances under the Securitization and
Revolver were $22,146 and $48,648, respectively, at interest rates
ranging from 6.34% 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 March 31, 1998, no letters of credit were outstanding under the
Credit Facility.
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.
6. INCOME TAXES
The provision for income taxes in the consolidated statements of operations
reflects the effective tax rate of 40% and 41% for the three and six months
ended March 31, 1998, respectively.
This provision reflects the non-deductibility of certain expenses for
income tax purposes such as amortization of goodwill. Deferred income taxes
result from temporary differences between tax bases of assets and
liabilities and their reported amounts in the consolidated statements of
operations.
7. 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 are not material and have been included in the consolidated
statement of operations from the date of acquisition.
<PAGE>
8. EMPLOYEE STOCK PURCHASE PLAN
On February 25, 1998, the stockholders approved the Synthetic Industries,
Inc. Employee Stock Purchase Plan (the "Stock Purchase Plan"), reserving
325,000 shares of Common Stock for issuance under this Plan. The Company
adopted the Stock Purchase Plan with an initial option period commencing
effective April 1, 1998, and continuing in three-month option periods
thereafter. The Stock Purchase Plan permits eligible employees to purchase
Common Stock through payroll deductions or lump sum contributions, which
may not exceed $25 in a calendar year, at a price equal to 85% of the
Common Stock price as reported by NASDAQ at the beginning or end of each
option period, whichever is lower.
9. 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"), one
officer and director and certain other of the Company's officers who are
affiliated with the General Partner have been named in two putative class
action lawsuits filed by certain limited partners of the Partnership. In
the first action, to which the Company is not a party, filed on February
11, 1997 in the Delaware Court of Chancery and thereafter amended, the
plaintiffs have alleged, among other things, breach of the defendants'
fiduciary duty to the limited partners, that the Plan is 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
seek, 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. 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 which 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 seeks, 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. 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 have been named as nominal defendants. The plaintiff
alleges 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. 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 from
operating activities for the six months ended March 31, 1998 was $11,370, which
resulted primarily from net income of $2,584, noncash charges of $10,313 and net
of acquisition decreases in accounts receivable of $14,867, offset primarily by
decreases in accounts payable of $2,799 and increases in inventory and other
current assets of $12,769 due 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 March 31, 1998, the balances under the
Securitization and Revolver were $22,146 and $48,648, respectively, at interest
rates ranging from 6.34% 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 March 31, 1998, the availability under the Credit Facility was
approximately $8,170 with no letters of credit outstanding.On April 7, 1998, the
Company entered into an eight year capital lease agreement to finance $7,500 of
equipment at 7.5%. Availability under the Credit Facility at May 12, 1998 was
approximately $16,727.
<PAGE>
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 not material and have
been included in the consolidated statement of operations from the date of
acquisition.
Capital expenditures planned for fiscal 1998 are approximately $60,000, of
which $27,405 had been spent, primarily to expand capacity of the Company's
manufacturing facilities, subject to prevailing market conditions.
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 six months ended March 31, 1998
and 1997.
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended Six Months Ended
March 31, March 31,
1998 1997 1998 1997
Net sales................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales............................. 68.8 67.8 69.1 69.2
---- ---- ---- ----
Gross profit............................ 31.2 32.2 30.9 30.8
Selling expenses.......................... 11.4 9.6 11.2 9.7
General and administrative
expenses.............................. 10.2 9.3 9.8 8.8
Amortization of intangibles............... 0.8 0.9 0.8 0.9
--- --- --- ---
Operating income........................ 8.8 12.4 9.1 11.4
Interest expense.......................... 6.0 7.1 6.1 7.4
Amortization of deferred
financing costs....................... 0.2 0.2 0.2 0.2
--- --- --- ---
Income before
provision for taxes and
extraordinary item.................... 2.6 5.1 2.8 3.8
Provision for
income taxes.......................... 1.0 2.2 1.1 1.7
--- --- --- ---
Income before
extraordinary item.................... 1.6% 2.9% 1.7% 2.1%
==== ==== ==== ====
</TABLE>
<PAGE>
Results of Operations for the Three Months Ended March 31
Net sales for the second quarter of fiscal 1998 were $79,271 compared to
$75,358 for the same period of fiscal 1997, an increase of $3,913, or 5.2%.
Carpet backing sales for the second quarter of fiscal 1998 were $40,960 compared
to $40,206 for the same period of fiscal 1997, an increase of $754, or 1.9%,
reflecting a combination of 9.5% unit growth offset by selling price reductions.
Construction and civil engineering product sales for the second quarter of
fiscal 1998 were $20,352 compared to $20,066 for the same period of fiscal 1997,
an increase of $286, or 1.4%. These products have been negatively affected by
extremely wet weather conditions. Technical textiles sales for the second
quarter of fiscal 1998 were $17,959 compared to $15,086 for the same period of
fiscal 1997, an increase of $2,873, or 19.0%. Approximately $2,000 of this
increase is related to the February 1997 acquisition of the Spartan Technologies
division of Spartan Mills.
Gross profit for the second quarter of fiscal 1998 was $24,749 compared to
$24,235 for the same period of fiscal 1997, an increase of $514, or 2.1%. As a
percentage of sales, gross profit decreased to 31.2% from 32.2%. This decrease
was primarily due to lower average selling prices in the carpet backing division
and a change in product mix to sales of lighter weight fabrics, partially offset
by lower average polypropylene costs.
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. Higher prices of polypropylene, however, 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 second quarter of fiscal 1998 were $9,074 compared
to $7,246 for the same period of fiscal 1997, an increase of $1,828, or 25.2%.
As a percentage of sales, selling expenses increased from 9.6% to 11.4%. 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 second quarter of fiscal 1998
were $8,045 compared to $7,010 for the same period of fiscal 1997, an increase
of $1,035, or 14.8%. As a percentage of sales, general and administrative
expenses increased from 9.3% to 10.2%. The increase in general and
administrative expenses was primarily due to increased investment in research
and market development and computer system upgrades to support anticipated
Company growth.
Operating income for the second quarter of fiscal 1998 was $6,967 as
compared to $9,331 for the same period of fiscal 1997, a decrease of $2,364, or
25.3%. As a percentage of sales, operating income decreased to 8.8% in fiscal
1998 from 12.4% in fiscal 1997. This decrease was primarily due to lower average
selling prices in the carpet backing division, a change in product mix to sales
of lighter weight fabrics, and increased selling, general and administrative
costs, partially offset by lower average polypropylene costs.
Interest expense for the second quarter of fiscal 1998 was $4,716 compared
to $5,365 for the same period of fiscal 1997, a decrease of $649, or 12.1%, due
to a lower average interest rate on the outstanding debt. The effective income
tax rate for the second quarter of fiscal 1998 was 40%.
<PAGE>
Income before extraordinary item for the second quarter of fiscal 1998 was
$1,237 compared to $2,160 for the same period of fiscal 1997, a decrease of
$923. Earnings before interest, taxes, depreciation and amortization ("EBITDA")1
for the second quarter of fiscal 1998 were $12,613 compared to $13,715 for the
same period of fiscal 1997, a decrease of $1,771, or 12.9%. The decrease in net
income, as well as EBITDA, was primarily due to factors discussed above.
Results of Operations for the Six Months Ended March 31
Net sales for the first six months of fiscal 1998 were $155,852 compared to
$146,215 for the same period of fiscal 1997, an increase of $9,637 or 6.6%.
Carpet backing sales for the first six months of fiscal 1998 were $79,874
compared to $77,128 for the same period of fiscal 1997, an increase of $2,746,
or 3.6%. Construction and civil engineering product sales for the first six
months of fiscal 1998 were $43,168 compared to $41,138 for the same period of
fiscal 1997, an increase of $2,030, or 4.9%. Technical textiles sales for the
first six months of fiscal 1998 were $32,810 compared to $27,949 for the same
period of fiscal 1997, an increase of $4,861, or 17.4%.
Gross profit for the first six months of fiscal 1998 was $48,134 compared
to $45,049 for the same period of fiscal 1997, an increase of $3,085, or 6.8%.
As a percentage of sales, gross profit increased to 30.9% from 30.8%.
Selling expenses for the first six months of fiscal 1998 were $17,401
compared to $14,184 for the same period of fiscal 1997, an increase of $3,217,
or 22.7%. 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.
As a percentage of sales, selling expenses increased from 9.7% to 11.2%.
General and administrative expenses for the first six months of fiscal 1998
were $15,233 compared to $12,891 for the same period of fiscal 1997, an increase
of $2,342, or 18.2%. As a percentage of sales, general and administrative
expenses increased from 8.8% to 9.8%. 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 six months of fiscal 1998 was $14,189 as
compared to $16,678 for the same period of fiscal 1997, a decrease of $2,489, or
14.9%. As a percentage of sales, operating income decreased to 9.1% in fiscal
1998 from 11.4% in fiscal 1997. This decrease was primarily due to increased
selling, general and administrative costs partially offset by higher sales
volume.
<PAGE>
Interest expense for the first six months of fiscal 1998 was $9,506
compared to $10,775 for the same period of fiscal 1997, a decrease of $1,269, or
11.8%, due to lower average interest rates on the outstanding debt. The
effective income tax rate for the six months ended March 31, 1998 was 41%.
Income before extraordinary item for the first six months of fiscal 1998,
was $2,584 compared to $3,064 for the same period of fiscal 1997, a decrease of
$480. EBITDA for the first six months of fiscal 1998 were $24,705 compared to
$25,366 for the same period of fiscal 1997, a decrease of $1,492, or 5.9%. The
decrease in income, as well as EBITDA, was primarily due to factors discussed
earlier.
Recent Accounting Pronouncement
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive
Income" ("SFAS130"), 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.
Forward Looking Statements
The discussion of the Company's business and operations in this report
includes several instances of forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Act of 1934, as amended, 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 pronouncements,
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"), one
officer and director and certain other of the Company's officers who are
affiliated with the General Partner have been named in two putative class
action lawsuits filed by certain limited partners of the Partnership. In
the first action, to which the Company is not a party, filed on February
11, 1997 in the Delaware Court of Chancery and thereafter amended, the
plaintiffs have alleged, among other things, breach of the defendants'
fiduciary duty to the limited partners, that the Plan is 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
seek, 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. The defendants have denied any allegation
of wrongdoing.
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 which 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 seeks, 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. The defendants have
denied any allegation of wrongdoing.
<PAGE>
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 have been named as nominal defendants. The plaintiff
alleges 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. 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.
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
On March 23, 1998, the Company filed a Current Report on Form 8-K reporting the
decision of the Delaware Supreme Court affirming the Chancery Court's grant of a
preliminary injunction with respect to the implementation of the Plan of
Dissolution of Synthetic Industries L. P.
<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: May 13, 1998
By: /s/ Joseph Sinicropi
Joseph Sinicropi
Chief Financial Officer
Dated: May 13, 1998
<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
March 31, 1997, and the related condensed consolidated statement of income
and cash flows for the three months ended March 31, 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> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1.000
<CASH> 263
<SECURITIES> 0
<RECEIVABLES> 49,626
<ALLOWANCES> 2,793
<INVENTORY> 67,009
<CURRENT-ASSETS> 133,450
<PP&E> 300,929
<DEPRECIATION> 99,363
<TOTAL-ASSETS> 423,586
<CURRENT-LIABILITIES> 41,543
<BONDS> 170,000
0
0
<COMMON> 8,669
<OTHER-SE> 99,892
<TOTAL-LIABILITY-AND-EQUITY> 423,586
<SALES> 155,852
<TOTAL-REVENUES> 155,852
<CGS> 107,718
<TOTAL-COSTS> 141,663
<OTHER-EXPENSES> 336
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,506
<INCOME-PRETAX> 9,842
<INCOME-TAX> 1,763
<INCOME-CONTINUING> 2,584
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,584
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.28
</TABLE>
AMENDMENT NO. 2
to
LOAN AND SECURITY AGREEMENT
dated as of December 18, 1997
THIS AMENDMENT NO. 2 dated as of April 15, 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 (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 requested that the Loan Agreement
be amended to permit certain sale/leaseback transactions and certain other
changes, and the Lenders and the Agent have agreed, upon and subject to 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 Amendment
Effective Date, subject to satisfaction of the conditions set forth in Section
2, the Loan Agreement is hereby amended as follows:
(a) by amending the provisions of SECTION 1.1 Definitions thereof
(i) by amending the definition Capitalized Lease
Obligations by inserting the phrase "incurred after the Agreement Date"
immediately after the phrase "Capitalized Lease" appearing therein; and
(ii)by adding the following additional definitions to
read as follows:
Permitted Sale/Leaseback means any Asset Disposition
structured as an arrangement, in form and substance acceptable to the
Agent in its reasonable business judgement and pursuant to documents
provided to and approved by the Agent prior to such Asset Disposition,
with any Person providing for the leasing by the Borrower from such
Person of certain personal property which has been or is to be sold or
transferred, directly or indirectly, by the Borrower to such Person,
and which results in the incurrence of a Capitalized Lease Obligation
by the Borrower.
(b) by amending SECTION 12.2 Debt by deleting clause (d)
appearing therein in its entirety and redesignating clauses (e), (f),
(g), (h) and (i) appearing therein as clauses (d), (e), (f), (g), and
(h), respectively, and by amending the then-designated clause (h) in
its entirety to read as follows:
(h) in addition to Debt described in the foregoing
clauses (a) through (g), other Debt of the Borrower, the
outstanding principal amount of which does not exceed
$30,000,000 at any time.
(c) by amending SECTION 12.7 Merger, Consolidation and Sale of
Assets by redesignating clauses (d) and (e) appearing therein as
clauses (e) and (f), respectively, and inserting a new clause (d)
immediately after clause (c) thereof to read as follows:
(d) Permitted Sale/Leasebacks, to the extent permitted by the
provisions of Section 12.2(h),
(d) by amending SECTION 12.9 Liens by inserting the word
"Permitted" immediately before the phrase "Purchase Money Debt"
appearing therein.
Section 2. Effectiveness of Amendment. This Amendment shall
become effective on the first date (the "Amendment Effective Date") on which the
Agent has received each of the following, each in form and substance
satisfactory to the Agent and the Required Lenders:
(a) seven copies of this Amendment duly executed and delivered by the
Borrower and each Lender;
(b) a Consent and Confirmation of Guarantor in the form attached hereto as
Annex A duly executed and delivered by the Subsidiary Guarantor;
(c) a certificate of the Secretary of the Borrower as to the
articles or certificate of incorporation and bylaws of the Borrower,
corporate resolutions authorizing the transactions contemplated by this
Amendment and the incumbency of officers of the Borrower, all as in
effect on the Amendment Effective Date;
(d) a certificate of the Chief Operating Officer or the Chief
Financial Officer of the Borrower to the effect that both before and
after giving effect to this Amendment, the representations and
warranties of the Borrower set forth in the Loan Agreement are true and
correct in all material respects and that no Default or Event of
Default exists;
(e) an opinion of counsel for the Borrower as to the due
authorization, execution and delivery of this Amendment and the other
Loan Documents contemplated hereby to be delivered in connection with
the effectiveness hereof by the Borrower as to the enforceability of
this Amendment, the Loan Agreement as amended hereby and such other
Loan Documents, and such other matters as any Lender through the Agent
may reasonably request; and
(f) such other agreements, certificates, instruments and other
documents as any Lender through the Agent may reasonably request in
connection with the transactions contemplated hereby.
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:
ASSOCIATION SOUTHTRUST BANK, NATIONAL
By:
Name:
Title:
<PAGE>
ANNEX A
To Amendment No. 2
CONSENT AND CONFIRMATION OF GUARANTOR
The undersigned, in its capacity as a Guarantor under the
Guaranty (Subsidiary) dated as of March 11, 1998 (as modified or amended to
date, the "Guaranty"), in favor of the Lender, hereby expressly acknowledges and
confirms, for the benefit of the Borrower and the Lender, that (1) the Guarantor
has an economic interest in the financial success of the Borrower and the
transactions contemplated by the Loan Agreement and the Amendment, and hereby
confirms to the Lender the benefits to the Guarantor by reason of such
transactions, (2) such Guarantor has received a copy of Amendment No. 2 to Loan
and Security Agreement dated as of April 15, 1998 (the "Amendment") and consents
thereto and (3) the Guaranty of which such Guarantor is the maker constitutes a
continuing, unconditional guaranty of the Guaranteed Obligations under and as
defined in the Guaranty. The undersigned is and continues to be liable under the
Guaranty in accordance with the terms thereof, notwithstanding the execution and
delivery of the Amendment.
Dated: April ___, 1998
NOVOCON INTERNATIONAL, INC.
By:
Name:
Title:
Address:
