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 March 29, 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 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 May 8, 1998, there were 6,730,284 shares of the registrant's
common stock issued and outstanding.
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MARTIN COLOR-FI, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
Part I - Financial Information
Item 1 - Financial Statements
<S> <C>
Condensed Consolidated Statements of Operations (unaudited) -
Three months ended March 30, 1997 and March 29, 1998.............................2
Condensed Consolidated Balance Sheets -
December 31, 1997 and March 29, 1998 (unaudited).................................3
Condensed Consolidated Statements of Cash Flows (unaudited) -
For the three months ended March 30, 1997 and March 29, 1998.....................4
Notes to Condensed Consolidated Financial Statements (unaudited) -
March 29, 1998...................................................................5
Item 2 - Management*s Discussion and Analysis of Financial Condition
and Results of Operations...............................................................6-7
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K..........................................................8
Signatures...................................................................................................9
Exhibit Index.....................................................................................10
</TABLE>
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MARTIN COLOR-FI, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 30, March 29,
1997 1998
---- ----
<S> <C> <C>
Net sales ........................................................................ $ 27,176 $ 28,126
Cost of sales .................................................................... 21,375 24,113
-------- --------
Gross profit ..................................................................... 5,801 4,013
Selling, general and administrative expenses ..................................... 3,269 3,895
-------- --------
Operating income ................................................................. 2,532 118
Interest expense ................................................................. (909) (1,186)
Other income (expense) ........................................................... 145 (9)
-------- --------
Income (loss) before income taxes ................................................ 1,768 (1,077)
Provision for income taxes ....................................................... 568 (374)
-------- --------
Net income (loss) ................................................................ $ 1,200 $ (703)
======== ========
Net income (loss) per share ...................................................... $ 0.18 $ (0.10)
======== ========
Net income (loss) per share - assuming dilution .................................. $ 0.18 $ (0.10)
======== ========
Weighted average shares outstanding .............................................. 6,686 6,730
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
2
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MARTIN COLOR-FI, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 1997 and March 29, 1998
(In thousands, except per share data)
<TABLE>
<CAPTION>
December 31, March 29,
1997 1998
---- ----
(unaudited)
Assets
Current assets:
<S> <C> <C>
Cash ............................................................................. $ 259 $ 60
Accounts receivable, net of allowance of $200
and $200, respectively, for doubtful accounts .................................. 15,789 15,710
Inventories ...................................................................... 48,430 47,518
Prepaid expenses ................................................................. 1,179 1,496
Income tax receivable ............................................................ 611 151
-------- --------
Total current assets ............................................................. 66,268 64,935
Property, plant, and equipment, net .............................................. 42,772 42,670
Goodwill ......................................................................... 5,446 5,511
Other assets ..................................................................... 1,361 1,343
-------- --------
Total assets ..................................................................... $115,847 $114,459
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expenses ............................................ $ 18,695 $ 19,056
Current portion of long-term debt ................................................ 9,149 8,595
-------- --------
Total current liabilities ........................................................ 27,844 27,651
Deferred income taxes .............................................................. 5,506 5,125
Long-term debt ..................................................................... 51,065 50,954
Shareholders' equity:
Common stock, no par value:
Authorized shares - 50,000,000 in 1997 and 1996
Issued and outstanding shares - 6,730,284 ........................................ 832 832
Additional paid-in capital ......................................................... 20,092 20,092
Retained earnings .................................................................. 10,508 9,805
-------- --------
Total shareholders' equity ......................................................... 31,432 30,729
-------- --------
Total liabilities and shareholders' equity ......................................... $115,847 $114,459
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
3
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MARTIN COLOR-FI, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 30, 1997 AND MARCH 29, 1998
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
March 30, March 29,
1997 1998
---- ----
Operating activities:
<S> <C> <C>
Net income (loss) .................................................................. $ 1,200 $ (703)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization .................................................. 1,089 1,249
Deferred income taxes .......................................................... 422 (381)
Changes in operating assets and liabilities:
Accounts receivable .......................................................... (2,767) 79
Income tax receivable ........................................................ - 460
Inventories .................................................................. (3,942) 912
Prepaid expenses ............................................................. (429) (317)
Other assets ................................................................. (316) (20)
Accounts payable and accrued expenses ........................................ 1,411 361
-------- --------
Net cash (used in) provided by operating activities ................................ (3,332) 1,640
Investing activities:
Purchases of property, plant and equipment ....................................... (641) (1,023)
Other ............................................................................ - (126)
-------- --------
Net cash used in investing activities .............................................. (641) (1,149)
Financing activities:
Borrowings under line of credit .................................................. 13,152 8,345
Payments on line of credit ....................................................... (10,400) (7,800)
Additional loan costs ............................................................ (19) (25)
Proceeds from issuance of long-term debt ......................................... 1,988 0
Principal payments on long-term debt ............................................. (887) (1,210)
Proceeds from issuance of common stock ........................................... 81 0
-------- --------
Net cash provided by (used in) financing activities .............................. 3,915 (690)
Net decrease in cash and cash equivalents .......................................... (58) (199)
Cash at beginning of period ........................................................ 272 259
-------- --------
Cash at end of period .............................................................. $ 214 $ 60
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of amounts capitalized) ............................................ $ 917 $ 1,218
Income taxes ..................................................................... 88 1
</TABLE>
See notes to condensed consolidated financial statements.
4
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MARTIN COLOR-FI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information for the three months ended March
30, 1997 and March 29, 1998 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 month period
ended March 29, 1998, are not necessarily indicative of the results that may be
expected for the year ended December 31, 1998. 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, 1997, filed with the
Securities and Exchange Commission on March 31, 1998.
2. Inventories
Inventories consist of the following:
December 31, March 29,
1997 1998
Raw materials ............. $28,868 $27,637
Finished goods ............ 19,562 19,881
------- -------
$48,430 $47,518
======= =======
3. Litigation
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.
A definitive written settlement agreement was reached with the class
plaintiff under which the Company's settlement liability was fixed at $2,000. By
order dated March 12, 1997, the United States District Court certified the class
in the matter, appointed the class plaintiffs' counsel as settlement
administrator and gave preliminary approval to the settlement. The settlement
was funded by the Company on March 20, 1997. In exchange for a written release,
the Company's insurance carrier provided $850 of the settlement amount. Final
settlement of the matter was approved by the court on September 10, 1997.
5
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MARTIN COLOR-FI, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Statements included in Management's Discussion and Analysis of Financial
Condition and Results of Operations which are not historical in nature, are
intended to be, and are hereby identified as, "forward looking statements" for
purposes of the safe harbor provided by Section 21E of the Securities Exchange
Act of 1934, as amended. The Company cautions readers that forward looking
statements, including without limitation, those relating to the Company's future
business prospects, revenues, working capital, liquidity, capital needs,
interest costs, and income, are subject to certain risks and uncertainties that
could cause actual results to differ materially from those indicated in the
forward looking statements, due to several important factors herein identified,
among others, and other risks and factors identified from time to time in the
Company's reports filed with the Securities and Exchange Commission.
Outlook for 1998
Demand for polyester fibers is expected to remain relatively stable for 1998.
The large declines in worldwide selling prices of polyester fiber throughout
1996 and 1997 are expected to stabilize for 1998. The strong demand for the
Company's carpet production that has been experienced over the last three years
is expected to decrease in 1998. The Company has based its plans for 1998 on
these expectations. These matters are, however, beyond the Company's control and
could vary substantially from the Company's expectations.
Results of Operations:
Three months ended March 29, 1998, compared to the three months ended March 30,
1997.
Net Sales: Net sales increased 3.5% to $28.1 million in the first quarter of
1998 from $27.2 million in the first quarter of 1997. This net sales increase is
related primarily to an increase in net sales of the Pigment, Yarn, and Carpet
Divisions, after intercompany eliminations, to $14.0 million in the first
quarter of 1998 from $13.5 million in the first quarter of 1997. The increase
resulted primarily from an increased volume of sales in the Carpet Division.
Net sales in the Fibers Division increased by $420 thousand due to an increase
in non-PET revenue. PET fiber sales decreased due to a decrease in shipments to
19.7 million pounds in the first quarter of 1998 from 22.0 million pounds in the
first quarter of 1997. The decrease was, however, offset by an increase in the
average PET fiber sales price per pound to $0.704 in the first quarter of 1998
from $0.663 in the first quarter of 1997.
Gross profit: Gross profit decreased 30.8% to $4.0 million in the first quarter
of 1998 as compared to $5.8 million in the first quarter of 1997. As a
percentage of net sales, gross profit decreased to 14.3% in the first quarter of
1998 as compared to 21.3% in the first quarter of 1997. The decrease in gross
profit relates to decreased margins in all divisions, which is partially offset
by the increase in net sales discussed above.
Selling, general and administrative: Selling, general and administrative
expenses were $3.9 million or 13.8% of net sales in the first quarter of 1998 as
compared to $3.3 million or 12.0% of net sales in the first quarter of 1997. The
increase in selling, general and administrative expenses is due primarily to the
increase in net sales discussed above primarily related to the Carpet Division.
The Carpet Division typically incurs higher selling, general and administrative
expenses for its revenue than the other divisions.
6
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Interest expense: Interest expense increased to $1.2 million in the first
quarter of 1998 from $909 thousand in the first quarter of 1997 due primarily to
increases in the weighted average interest rate and average outstanding debt
balance in the first quarter of 1998 compared to the first quarter of 1997 and a
decrease in the amount of interest capitalized.
Income tax provision: The income tax benefit for the first quarter of 1998 was
$374 thousand compared to an income tax expense of $568 thousand for the first
quarter of 1997. The change is directly due to the decrease in pretax income.
Net income (loss) and net income (loss) per share: A net loss of $703 thousand
or $0.10 per share for the first quarter of 1998 was incurred compared to a net
income of $1.2 million or $0.18 per share for the first quarter of 1997. The
decrease related directly to the decrease in gross profit and gross profit
percentage, an increase in interest expense, and an increase in selling, general
and administrative expenses.
Financial Condition
Current assets decreased to $64.9 million at the end of the first quarter of
1998 from $66.3 million at the end of 1997. Inventories decreased $912 thousand
which was primarily related to a planned reduction in raw material inventories.
The increase in accounts payable and accrued expenses was primarily related to
the timing of purchases and cash disbursements. The decrease in debt relates
directly to the reduction in inventory discussed above.
Liquidity and capital resources: The Company provided cash from operations of
$1.6 million for the first quarter of 1998 compared to cash used in operations
of $3.3 million for the first quarter of 1997. The increase in cash provided by
operations was primarily the result of decreases in net operating assets and
liabilities, primarily a decrease in inventories.
Net cash used in investing activities amounted to $1.1 million in the first
quarter of 1998 compared to $641 thousand in the first quarter of 1997. The
Company increased its investment in property, plant, and equipment during the
first quarter of 1998 by $382 thousand compared to the first quarter of 1997.
Net cash used in financing activities amounted to $690 thousand for the first
quarter of 1998 compared to net cash provided by financing activities of $3.9
million for the first quarter of 1997. The change occurred primarily due to the
increase in net cash provided by operating activities discussed above.
The Company's loan agreements with financial institutions contain a number of
restrictive covenants. See Note 6 to Notes to Financial Statements included in
the 1997 Form 10-K. At March 29, 1998, the Company was in violation of certain
loan covenants under a debt agreement with NationsBank. The Bank, in a letter
dated May 8, 1998, agreed to waive those violations.
On March 4, 1998, the Company amended its revolving line of credit agreement to
increase its borrowings from $30 million, or an agreed upon borrowing base to
$32.5 million, or an agreed upon borrowing base until June 2, 1998.
The Company believes that the financial resources available to it under its
revolving line of credit and other internally generated funds will be sufficient
to adequately meet its foreseeable working capital and capital expenditures
requirements.
7
<PAGE>
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.47 - Letter, dated May 8, 1998, from NationsBank, N.A.
waiving violation of certain loan covenants.
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K - None
8
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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: 5-12-98 By: /s/ Bret J. Harris
Bret J. Harris*
Treasurer, Chief Financial Officer
* Principal Financial and Accounting Officer
9
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EXHIBIT INDEX
Exhibit No. Description
10.47 Letter, dated May 8, 1998, from NationsBank, N.A.
27 Financial Data Schedule
10
May 8, 1998
Mr. Bret J. Harris
Chief Financial Officer
Martin Color-Fi, Inc.
Star Fibers Corp.
Buchanan Industries, Inc.
P.O. Box 469
Edgefield, SC 29824
Dear Bret:
Re: Waiver of Violations of Covenants in the Fourth Amended and
Restated Loan and Security Agreement, as amended (as amended or
modified, the "Loan Agreement") dated as of September 30, 1997 by
and between NationsBank, N.A. ("Bank") and Martin Color-Fi, Inc.,
Star Fibers Corp. and Buchanan Industries, Inc. (collectively,
"Borrowers")
Dear Bret:
This letter is to confirm to Borrowers that Bank agrees to waive on a
one-time basis a violation of Section 7.1(o) of the Loan Agreement which
occurred by virtue of Borrowers' failure to meet the required Leverage Ratio at
March 29, 1998.
Please be advised that this waiver is expressly limited to the
violations outlined in this letter. NationsBank is under no obligation to grant
any additional waiver or waivers related to (1) any future violation of this
covenant, or (2) any other violation of any covenant contained in any of the
Loan Documents.
All capitalized terms not otherwise defined herein shall have the
meaning ascribed to such terms in the Loan Agreement.
Should you have any further questions or comments, please do not
hesitate to call me at (803) 255-7461.
Kindest Regards,
NATIONSBANK, N.A.
Greg A. Lapointe
Senior Vice President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27
This schedule contains summary financial information extracted from the
Condensed Consolidated Balance Sheet at March 29, 1998(unaudited), and the
Condensed Consolidated Statement of Operations for the Three Months Ended March
29, 1998 (unaudited), and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-29-1998
<CASH> 60
<SECURITIES> 0
<RECEIVABLES> 15,710
<ALLOWANCES> 200
<INVENTORY> 47,518
<CURRENT-ASSETS> 64,935
<PP&E> 42,670
<DEPRECIATION> 23,608
<TOTAL-ASSETS> 114,459
<CURRENT-LIABILITIES> 27,651
<BONDS> 50,954
0
0
<COMMON> 832
<OTHER-SE> 29,897
<TOTAL-LIABILITY-AND-EQUITY> 114,459
<SALES> 28,126
<TOTAL-REVENUES> 28,126
<CGS> 24,113
<TOTAL-COSTS> 28,008
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 12
<INTEREST-EXPENSE> 1,186
<INCOME-PRETAX> 1,077
<INCOME-TAX> 374
<INCOME-CONTINUING> 703
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 703
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10
</TABLE>
