FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
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 0-21340
MARTIN COLOR-FI, INC.
-------------------------------------------------
(Exact name of registrant as specified in its charter)
South Carolina 57-0879569
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
306 Main Street, Edgefield, South Carolina 29824
(Address of principal executive offices)
(803) 637-7000
------------------------------------------
(Registrant's telephone number, including area code)
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 ___
As of August 13, 1996, there were 6,657,483 shares of the registrant's
common stock issued and outstanding.
<PAGE>
MARTIN COLOR-FI, INC.
INDEX
Page No.
Part I - Financial Information
Item 1 - Financial Statements (unaudited)
Condensed Consolidated Statements of Operations -
Three and six months ended July 2, 1995 and June 30, 1996.............2
Condensed Consolidated Balance Sheets -
December 31, 1995 and June 30, 1996...................................3
Condensed Consolidated Statements of Cash Flows -
For the six months ended July 2, 1995 and June 30, 1996...............4
Notes to Condensed Consolidated Financial Statements -
June 30, 1996.........................................................5
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................6-9
Part II - Other Information...................................................10
Signatures....................................................................11
<PAGE>
MARTIN COLOR-FI, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 2, June 30, July 2, June 30,
1995 1996 1995 1996
------- -------- ------- ------
<S> <C> <C> <C> <C>
Net sales $31,855 $29,582 $66,601 $55,205
Cost of sales 25,202 24,215 53,840 46,135
------- ------- ------- -------
Gross profit 6,653 5,367 12,761 9,070
Selling, general and administrative expenses 2,715 2,831 5,853 5,593
------- ------- ------- -------
Operating income 3,938 2,536 6,908 3,477
Interest expense (1,188) (1,123) (2,506) (2,227)
Other income 75 62 102 122
------- ------- ------- -------
Income before income taxes 2,825 1,475 4,504 1,372
Provision for income taxes 1,034 543 1,672 515
------- ------- ------- -------
Net income $ 1,791 $ 932 $ 2,832 $ 857
======= ======= ======= =======
Net income per share $ 0.27 $ 0.14 $ 0.43 $ 0.13
======== ======= ======== =======
Weighted average shares outstanding 6,657 6,657 6,657 6,657
======= ======= ======== =======
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE>
MARTIN COLOR-FI, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 1995 and June 30, 1996
(In thousands, except per share data)
<TABLE>
<CAPTION>
December 31, June 30,
1995 1996
---- ----
(unaudited)
Assets
Current assets:
<S> <C> <C>
Cash $ 12 $ 37
Accounts receivable, net of allowance of $150
and $150, respectively, for doubtful accounts 10,403 14,462
Inventories 36,922 35,856
Prepaid expenses 652 994
Income tax receivable 51 51
--------- --------
Total current assets 48,040 51,400
Property, plant, and equipment, net 40,214 42,018
Goodwill 4,852 4,748
Other assets 1,860 2,133
--------- --------
Total assets $ 94,966 $100,299
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 15,599 $ 16,344
Current portion of long-term debt 4,472 25,057
-------- --------
Total current liabilities 20,071 41,401
Deferred income taxes 4,061 4,483
Long-term debt 45,168 27,926
Other non-current liabilities 34 0
Shareholders' equity:
Common stock, no par value:
Authorized shares - 50,000,000 in 1996 and 1995
Issued and outstanding shares - 6,657,483
in 1996 and 1995 832 832
Additional paid-in capital 19,754 19,754
Retained earnings 5,046 5,903
-------- --------
Total shareholders' equity 25,632 26,489
-------- --------
Total liabilities and shareholders' equity $ 94,966 $100,299
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
MARTIN COLOR-FI, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JULY 2, 1995 AND JUNE 30, 1996
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
July 2, June 30,
1995 1996
---- ----
Operating activities:
<S> <C> <C>
Net income $ 2,832 $ 857
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,014 2,187
Deferred income taxes 859 422
Changes in operating assets and liabilities:
Accounts receivable (1,849) (4,059)
Income tax receivable 964 -
Inventories 5,622 1,066
Prepaid expenses (569) (342)
Other assets 115 -
Accounts payable and accrued expenses (1,837) 745
-------- -------
Net cash provided by operating activities 8,151 876
Investing activities:
Purchases of property, plant and equipment (3,369) (3,658)
Cost of acquisitions, net of cash acquired (591) -
Other (173) (520)
-------- -------
Net cash used in investing activities (4,133) (4,178)
Financing activities:
Borrowings under line of credit 22,846 19,430
Payments on line of credit (25,077) (16,100)
Additional loan costs (30) (16)
Proceeds from issuance of long-term debt - 2,468
Principal payments on long-term debt (2,060) (2,455)
-------- -------
Net cash (used in) provided by financing activities (4,321) 3,327
Net (decrease) increase in cash and cash equivalents (303) 25
Cash and cash equivalents at beginning of period 311 12
-------- --
Cash and cash equivalents at end of period $ 8 $ 37
======== =======
Supplemental disclosures of cash flow information:
Cash paid during the period
for:
Interest (net of amounts capitalized) $ 2,532 $ 2,227
Income taxes 750 27
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
MARTIN COLOR-FI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information for the three and six months ended July 2, 1995 and June 30,
1996 is unaudited)
(In Thousands)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three and six
month periods ended June 30, 1996, are not necessarily indicative of the results
that may be expected for the year ended December 31, 1996. For further
information, refer to the financial statements and footnotes thereto included in
the Registrant Company's Form 10-K for the year ended December 31, 1995, filed
with the Securities and Exchange Commission on March 29, 1996.
2. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1995 1996
<S> <C> <C>
Raw materials $22,811 $25,423
Finished goods 14,111 10,433
------- -------
$36,922 $35,856
======= =======
</TABLE>
3. Contingent Liability
On March 16, 1995, the Company was served with a lawsuit by a
shareholder alleging violations of Federal securities laws and related state
laws and seeking an unspecified amount of damages. The shareholder requested to
have the case certified as a class action on behalf of other non-insider
shareholders.
The parties have agreed in principle to enter into a settlement
agreement to end the litigation. The agreement in principle requires the payment
of $2 million by the defendants. Final settlement of the matter is contingent
upon execution of a definitive settlement agreement and court approval of such
agreement. The Company's insurance carrier has agreed to contribute $850
thousand towards the settlement pending court approval.
At December 31, 1995, the Company accrued the estimated settlement
amount, which includes legal fees less insurance proceeds, as a liability. The
Company's portion of the settlement is expected to be funded by subordinated
debt.
5
<PAGE>
MARTIN COLOR-FI, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations:
Three months ended June 30, 1996 compared to the three months ended July 2,
1995.
Outlook:
During the third quarter of 1995, the market conditions for polyester fiber
changed rapidly as a result of a significant reduction in demand from China and
a corresponding redirection of production from other Asian countries from China
to European and U.S. markets. The Company believes this change caused its
international customers to delay purchases, relying instead on existing
inventories that they had built up during the second quarter due to their
perception of a shortage of polyester fiber. Also, the availability of
low-priced Asian imports caused a reduction in shipments of the Company's
commodity product lines.
The above market conditions resulted in a weakened demand for the Company's
polyester fibers. Demand has remained at a lower level during the first part of
1996, but is expected to return to normal levels in the last half of 1996. The
weakening of the polyester market has also resulted in decreasing recycled raw
material costs resulting in a downward pressure on polyester fiber selling
prices. The Company anticipates its polyester fiber selling prices will continue
to follow these general market trends.
The Company is installing a new production line which is expected to be
completed in the latter part of the third quarter of 1996 for the manufacture of
fine denier, solution-dyed fiber. The completion date was delayed until the
third quarter due to the failure of the equipment manufacturer to meet the
original delivery schedule. The new line will enhance the Company's diversity of
product mix in fibers for automotive and industrial fabrics, nonwovens, home
furnishings, and apparel. The fine denier line is expected to enable the Company
to produce in excess of 20 million pounds of 2 denier fiber each year.
Net Sales: Net sales decreased 7.2% to $29.6 million in the second quarter of
1996 from $31.9 million in the second quarter of 1995. This net sales decrease
is primarily related to a decrease in the Fibers Division's revenue of $3.8
million. PET fiber sales decreased due to a decrease in demand. This resulted in
a decrease in shipments to 24.3 million pounds in the second quarter of 1996
from 26.2 million pounds in the second quarter of 1995 and a decrease in the
average PET fiber sales price per pound to $0.798 in the second quarter of 1996
from $0.814 in the second quarter of 1995.
Net sales in the Fibers Division involving non-PET fiber sales, which includes
nylon fiber, pellets, and trading materials, decreased to $528 thousand in the
second quarter of 1996 from $2.5 million in the second quarter of 1995. The
decrease in sales is a continuing result of management's decision in the third
quarter of 1995 to temporarily exit these markets due to current market
conditions.
Net sales of the Pigment, Yarn, and Carpet Divisions after intercompany
eliminations increased to $9.7 million in the second quarter of 1996 from $8.1
million in the second quarter of 1995. The increase relates primarily to
increased sales of the Carpet Division due to volume growth.
Gross profit: Gross profit decreased 19.3% to $5.4 million in the second quarter
of 1996 as compared to $6.7 million in the second quarter of 1995. As a
percentage of net sales, gross profit decreased to 18.1% in the second quarter
of 1996 as compared to 20.9% in the second quarter of 1995. The decrease in
gross profit is directly related to the decrease in net sales discussed above
and a decrease in the gross profit margin. The decrease in gross profit
percentage relates primarily to decreased margins in the Fibers Division
partially offset by increased margins in the Pigment and Carpet Divisions. The
lower sales and production volumes and the resulting higher unit costs produced
lower profit margins.
6
<PAGE>
Selling, general and administrative: Selling, general and administrative
expenses were $2.8 million or 9.6% of net sales in the second quarter of 1996 as
compared to $2.7 million or 8.5% of net sales in the second quarter of 1995. The
increase in selling, general and administrative expenses as a percentage of net
sales is due primarily to the decrease in net sales discussed above.
Interest expense: Interest expense decreased to $1.1 million in the second
quarter of 1996 from $1.2 million in the second quarter of 1995 due to a
decrease in the weighted average interest rate in the second quarter of 1996
compared to the second quarter of 1995.
Income tax provision: The income tax expense for the second quarter of 1996 was
$543 thousand compared to $1 million for the second quarter of 1995. The change
is directly due to the decrease in pretax income.
Net income and net income per share: Net income decreased to $932 thousand or
$0.14 per share for the second quarter of 1996 compared to a net income of $1.8
million or $0.27 per share for the second quarter of 1995. The decrease related
directly to the decrease in gross profit and gross profit percentage and an
increase in selling, general and administrative expenses which was partially
offset by a decrease in interest expense.
7
<PAGE>
Six months ended June 30, 1996 compared to the six months ended July 2, 1995.
Net Sales: Net sales decreased 17.1% to $55.2 million in the six months ended
June 30, 1996 from $66.6 million in the six months ended July 2, 1995. This net
sales decrease is primarily related to a decrease in the Fibers Division's
revenue of $11.7 million. PET fiber sales decreased due to a decrease in demand.
This resulted in a decrease in shipments to 44.3 million pounds in the six
months ended June 30, 1996 from 54 million pounds in the six months ended July
2, 1995, which was offset by an increase in the average PET fiber sales price
per pound to $0.814 in the six months ended June 30, 1996, from $0.776 in the
six months ended July 2, 1995.
Net sales in the Fibers Division involving non-PET fiber sales, which includes
nylon fiber, pellets, and trading materials, decreased to $881 thousand in the
six months ended June 30, 1996, from $6.8 million in the six months ended July
2, 1995. The decrease in sales is a continuing result of management's decision
in the third quarter of 1995 to temporarily exit these markets due to current
market conditions.
Net sales of the Pigment, Yarn, and Carpet Divisions after intercompany
eliminations increased slightly to $18.2 million in the six months ended June
30, 1996, from $17.9 million in the six months ended July 2, 1995.
Gross profit: Gross profit decreased 28.9% to $9.1 million in the six months
ended June 30, 1996, as compared to $12.8 million in the six months ended July
2, 1995. As a percentage of net sales, gross profit decreased to 16.4% in the
six months ended June 30, 1996, as compared to 19.2% in the six months ended
July 2, 1995. The decrease in gross profit is directly related to the decrease
in net sales discussed above and a decrease in the gross profit margin. The
decrease in gross profit percentage relates directly to decreased margins in all
divisions. The lower sales and production volumes and the resulting higher unit
costs produced lower profit margins.
Selling, general and administrative: Selling, general and administrative
expenses were $5.6 million or 10.1% of net sales in the six months ended June
30, 1996, as compared to $5.9 million or 8.8% of net sales in the six months
ended July 2, 1995. The decrease in selling, general and administrative expenses
is due primarily to a reduction in professional fees.
Interest expense: Interest expense decreased to $2.2 million in the six months
ended June 30, 1996, from $2.5 million in the six months ended July 2, 1995, due
primarily to a decrease in the average outstanding debt balance and weighted
average interest rate during the six months ended June 30, 1996, compared to the
six months ended July 2, 1995.
Income tax provision: The income tax expense for the six months ended June 30,
1996, was $515 thousand compared to $1.7 million for the six months ended July
2, 1995. The change is directly due to the decrease in pretax income.
Net income and net income per share: Net income decreased to $857 thousand or
$0.13 per share for the six months ended June 30, 1996, compared to a net income
of $2.8 million or $0.43 per share for the six months ended July 2, 1995. The
decrease related directly to the decrease in gross profit and gross profit
percentage which was partially offset by decreases in selling, general and
administrative and interest expenses.
8
<PAGE>
Financial Condition
Current assets increased to $51.4 million from $48 million. Accounts receivable
increased $4.1 million, and inventories decreased $1.1 million. The above
changes resulted directly from second quarter sales of $29.6 million being
higher than fourth quarter sales of $23.1 million. The decrease in inventories
was related to a decrease in finished goods inventories resulting from shipments
exceeding production in the first half of the year.
The increase in accounts payable and accrued expenses was primarily related to
increased purchases of raw material and the timing of purchases and cash
disbursements. The increase in debt related to the purchase of property, plant,
and equipment was primarily attributable to the new production line discussed
above.
Liquidity and capital resources: The Company generated cash from operations of
$876 thousand for the second quarter of 1996 compared to $8.1 million for the
second quarter of 1995. The decrease in cash provided by operations was
primarily the result of a decrease in net income and increases in net operating
assets and liabilities, primarily an increase in accounts receivable.
Net cash used in investing activities amounted to $4.2 million in the second
quarter of 1996 compared to $4.1 million in the second quarter of 1995. The
Company increased its investment in property, plant, and equipment during the
second quarter of 1996 by $289 thousand compared to the second quarter of 1995.
During the second quarter of 1996, the Company funded the majority of capital
additions from the term loan agreement.
Net cash provided by financing activities amounted to $3.3 million for the
second quarter of 1996 compared to net cash used in financing activities of $4.3
million for the second quarter of 1995. The change occurred primarily due to the
reduction in net cash provided by operating activities discussed above.
The Company believes that the financial resources available to it under its
revolving line of credit, $532 thousand available under the term loan for 1996
capital additions at June 30, 1996, and other internally generated funds will be
sufficient to adequately meet its foreseeable working capital and capital
expenditures requirements.
The current portion of long-term debt increased to $25 million during the second
quarter of 1996 from $4.47 million at year end 1995, and long-term debt
decreased to $27.9 million from $45.16 million. Those changes were a result of
the classification of the Company's revolving line of credit agreement as
current due to the maturity date being June 2, 1997. The balance of the
revolving line of credit was $20.6 million at June 30, 1996. The Company expects
to seek an extension of the revolving line of credit agreement before the
current portion is due. Although the Company does not anticipate any
difficulties in obtaining such an extension, there can, of course, be no
assurances that the lender will agree to the extension or that alternative
financing will be available if the lender does not agree to the extension.
9
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings
In March 1995, litigation was commenced by a shareholder of the Company
against the Company and James F. Martin, Chairman and Chief Executive Officer of
the Company, in the United States District Court for the District of South
Carolina, Greenville Division. In the litigation, the plaintiff alleges, among
other things, that the Company failed to prepare its financial statements in
accordance with generally accepted accounting principles and issued false and
misleading business and financial information to the investing public which
misstated the Company's financial condition, earnings and prospects, in
violation of the Federal securities laws and common law. The plaintiff seeks to
have the action certified as a class action on behalf of non-insider
shareholders who purchased the common stock of the Company from April 21, 1993,
through February 28, 1995. The parties have agreed in principle to enter into a
settlement agreement to end the litigation. The agreement in principle requires
the payment of $2 million by the defendants. Final settlement of the matter is
contingent upon execution of a definitive settlement agreement and court
approval of such agreement. The Company's insurance carrier has agreed to
contribute $850 thousand towards the settlement pending court approval.
At December 31, 1995, the Company accrued the estimated settlement
amount, which includes legal fees less insurance proceeds, as a liability. The
Company's portion of the settlement is expected to be funded by subordinated
debt.
Item 4. Submission of Matters to a Vote of Security Holders:
(a) An annual meeting of the shareholders of the Company was held on May
9, 1996.
(b) The names of the directors elected at the meeting are as follows:
James F. Martin, George L. Rainsford, and Bettis C. Rainsford (for
terms expiring in 1999). The terms of the following directors
continued after the meeting: Russell T. Lyon, Gregory W. Anderson, and
W. Fred Davis (for terms expiring in 1997); James C. Hite, Jack J.
Jackson, and Henry M. Poston (whose term expires in 1998).
(c) The items voted upon at the annual meeting of shareholders were as
follows:
(1) the election of directors;
(2) the ratification of the appointment of Ernst & Young LLP as
independent auditors for the Company's fiscal year ending
December 31, 1996;
The number of votes cast for, against or withheld and the number of
its abstentions or broker non-votes as to each matter is as follows:
<TABLE>
<CAPTION>
Item No. Votes Against Abstentions or
(see above) Name Votes for or Withheld Broker Non-Votes
- ----------- ---- --------- ----------- ----------------
<S> <C> <C> <C>
(1) James F. Martin 5,814,055 31,330
George L. Rainsford 5,811,055 34,330
Bettis C. Rainsford 5,811,055 34,330
(2) 5,814,785 26,400 4,200
</TABLE>
(d) Not applicable.
Item 6.
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K - None
10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MARTIN COLOR-FI, INC.
Dated: 8-14-96 By: /s/ James F. Martin
James F. Martin
Chairman, Chief Executive Officer
Dated: 8-14-96 By: /s/ Henry M. Poston
Henry M. Poston
President, Chief Operating Officer
Dated: 8-14-96 By: /s/ Bret J. Harris
Bret J. Harris*
Treasurer, Chief Financial Officer
* Principal Financial and Accounting Officer
11
<PAGE>
Exhibit No. Description
- ------------ ------------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
the Condensed Consolidated Balance Sheet at June 30, 1996, and the
Condensed Consolidated Statement of Operations for the Six Months
Ended June 30, 1996 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 37
<SECURITIES> 0
<RECEIVABLES> 14,612
<ALLOWANCES> 150
<INVENTORY> 35,856
<CURRENT-ASSETS> 51,400
<PP&E> 42,018
<DEPRECIATION> 16,675
<TOTAL-ASSETS> 100,299
<CURRENT-LIABILITIES> 41,401
<BONDS> 27,926
0
0
<COMMON> 832
<OTHER-SE> 25,657
<TOTAL-LIABILITY-AND-EQUITY> 100,299
<SALES> 55,205
<TOTAL-REVENUES> 55,327
<CGS> 46,135
<TOTAL-COSTS> 51,728
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,227
<INCOME-PRETAX> 1,372
<INCOME-TAX> 515
<INCOME-CONTINUING> 857
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 857
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.13
</TABLE>
