<PAGE>
As Filed June 25, 1998
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (Amendment No. 1)
Filed by the Registrant [ ]
Filed by a Party other than the Registrant [ X ]
Check the appropriate box:
[ X ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
SYNTHETIC INDUSTRIES L.P.
- ------------------------------------------------
(Name of Registrant as Specified in Its Charter)
CHARLENE E. SUTHERLAND
- -----------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
[ X ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
<PAGE>
(3) Per unit price or other underlying value of transaction applies:
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
(1) Amount previously paid:
(2) Form, schedule or registration statement no.:
(3) Filing party:
(4) Date filed:
2
<PAGE>
As Filed June 25, 1998
CHARLENE E. SUTHERLAND
4512 BIRD OF PARADISE LANE
LA MESA, CA 91941
E-MAIL: [email protected]
June [ ], 1998
TO: LIMITED PARTNERS OF SYNTHETIC INDUSTRIES, L.P.
Re: REMOVAL OF GENERAL PARTNER AND DISSOLUTION OF SYNTHETIC INDUSTRIES, L.P.
------------------------------------------------------------------------
Dear Limited Partners:
As a limited partner of Synthetic Industries, L.P. (the "Partnership"), I am
soliciting your proxy to authorize me to execute on behalf of limited partners a
written consent to the removal of the Partnership's general partner, SI
Management, L.P., the dissolution of the Partnership, and the winding up of the
Partnership under the stewardship of an independent liquidating trustee. I
believe such a course of action will maximize the return to limited partners
within the shortest practical time frame.
Like many of you, I have been a limited partner since the inception of the
Partnership. As a licensed securities principal, registered representative, and
certified financial planner, I believed that the Partnership represented a sound
investment. In 1993, control of the Partnership's general partner was acquired
by members of management of Synthetic Industries, Inc. (the "Company"). At that
time, the Partnership owned 100% of the Company.
Since management of the Company acquired control of the Partnership, I have been
concerned about the inherent conflict between the interests of the management of
the Company and the interests of the Partnership and its limited partners.
Since 1994, the general partner has sanctioned, and in some cases affirmatively
approved on behalf of the Partnership, actions by the Company and the
Partnership that I believe have not, on balance, been in the best interests of
the Partnership and its limited partners. These actions are described in the
accompanying Proxy Statement under the heading "Background and Purpose of the
Proposed Dissolution."
Recently, the general partner proposed a plan of withdrawal and dissolution (the
"GP Plan"), described in a proxy statement dated September 19, 1997. The GP
Plan was enjoined by the Court of Chancery of the State of Delaware and by the
United States District Court for the Northern District of California. On May
14, 1998, the general partner announced that it had withdrawn the GP Plan and
that the Partnership would continue to own stock of the Company as it has in the
past.
I believe that, if the Partnership's controlling block of stock in the Company
were diligently marketed, it is likely that one or more buyers will be willing
to pay a significant premium over market price for the stock. However, in view
of what I see as an inherent conflict of interest faced by the general partner,
I do not believe the general partner will take the steps necessary to identify
and implement any change of control transaction that might provide the
Partnership and limited partners with an opportunity to obtain a premium for the
Partnership's controlling interest in the Company. Under the plan of
dissolution described in the accompanying Proxy Statement, an independent
liquidating trustee would be required to attempt to identify and implement a
change of control transaction as a way of maximizing the value received by the
Partnership for its assets before distributing the Partnership's assets to
limited partners.
<PAGE>
For these and other reasons, which are more fully discussed in the accompanying
Proxy Statement, I am proposing that limited partners exercise their contractual
and statutory rights to remove the general partner, to dissolve the Partnership,
to elect a liquidating trustee (the "Trustee") and to adopt a plan of
dissolution pursuant to which the Trustee will seek to maximize the value of the
Partnership's stock ownership of the Company. I believe this plan (the
"Proposed Dissolution") will optimize limited partners' chances of maximizing in
the shortest practical time frame their return on their investment in the
Partnership.
Please review carefully the accompanying Proxy Statement, which describes in
detail the Proposed Dissolution. Please do not hesitate to call Georgeson &
Co., Inc., my proxy solicitation agent, at (212) 440-9800 for information
concerning the plan described in the Proxy Statement.
Very truly yours,
/s/ Charlene E. Sutherland
- --------------------------
Charlene E. Sutherland
<PAGE>
- --------------------------------------------------------------------------------
PROXY STATEMENT TO THE LIMITED PARTNERS OF
SYNTHETIC INDUSTRIES, L.P.
by
Charlene E. Sutherland
4512 Bird of Paradise Lane
La Mesa, CA 91941
e-mail: [email protected]
- --------------------------------------------------------------------------------
You are being sent this Proxy Statement by Charlene E. Sutherland
("Sutherland"), a limited partner in Synthetic Industries, L.P., a Delaware
limited partnership ( the "Partnership"), to describe a proposed plan of
dissolution of the Partnership and to solicit your proxy to authorize
Sutherland to execute a written consent in favor of the proposed plan of
dissolution.
The plan of dissolution proposed by Sutherland and described in this Proxy
Statement involves the following four principal actions: (1) the removal of S.I.
Management L.P. as the Partnership's sole general partner, which under the terms
of the partnership agreement would automatically dissolve the Partnership after
90 days, (2) the determination by a majority in interest of limited partners to
dissolve the Partnership immediately, (3) the election of [name] as a statutory
liquidating trustee (the "Trustee") pursuant to Section 17-803(a) of the
Delaware Revised Uniform Limited Partnership Act (the "Act") and (4) the
approval of a plan of dissolution to direct the Trustee in connection with
settling the business and affairs of the Partnership. In addition, limited
partners must select a special counsel to render an opinion required by the
partnership agreement as a condition to the right of limited partners to consent
to or vote on the proposed dissolution and must also approve the opinion
rendered by such counsel. In this Proxy Statement, the term "Proposed
Dissolution" refers to the plan of dissolution as a whole, including the
approval of the dissolution of the Partnership, the removal of the general
partner, the appointment of the Trustee, the adoption of the plan of
dissolution, the selection of special counsel, and the approval of the opinion
rendered by special counsel.
For the Proposed Dissolution described in this Proxy Statement to be
adopted, the holders of a majority of the Partnership's outstanding limited
partnership interests must give their proxies to Sutherland. Sutherland intends
to execute a written consent to the Proposed Dissolution as soon as practicable
after receiving the necessary proxies from the holders of at least a majority of
the Partnership's outstanding limited partnership interests. The Partnership
has outstanding 800 units of limited partnership interest held by approximately
1,900 limited partners. Under Delaware law and the Partnership Agreement, there
is no specified time by which proxies to execute a written consent must be
submitted. Sutherland intends at present to solicit proxies until she receives
proxies from the holders of at least a majority in interest of the outstanding
limited partnership interests. However, Sutherland reserves the right to
abandon the solicitation of proxies in the event she determines (i) that she
will be unable to obtain sufficient proxies to enable her to execute a written
consent in favor of the Proposed Dissolution or (ii) that an alternative
transaction has arisen that Sutherland believes would be comparable to the
Proposed Dissolution in benefit to limited partners.
If you grant a proxy to Sutherland, you may revoke your proxy at any time
prior to the execution and delivery to the Partnership of a written consent in
favor of the Proposed Dissolution on behalf of holders of a majority of the
outstanding limited partnership interests. To revoke your proxy, you must send
to the Solicitation Agent (at the address set forth herein) a letter or other
written notice stating your name and that
<PAGE>
you wish to revoke a previously executed proxy. Any such letter or other
written notice must be executed and bear a later date than your previously filed
proxy.
Sutherland has retained Georgeson & Co., Inc. (the "Solicitation Agent")
to assist in the solicitation of proxies. To request additional copies of this
Proxy Statement, please contact the Solicitation Agent at the following address:
Georgeson & Co., Inc.
Wall Street Plaza
New York, NY 10005
This Proxy Statement is dated [June __], 1998. It is first being sent to
limited partners of the Partnership on or about [June __], 1998.
- --------------------------------------------------------------------------------
YOU ARE URGED TO GRANT YOUR PROXY TO SUTHERLAND TO CONSENT TO THE PROPOSED
DISSOLUTION BY COMPLETING, SIGNING, DATING AND MAILING THE ENCLOSED PROXY IN
THE ENVELOPE THAT HAS BEEN INCLUDED FOR YOUR CONVENIENCE.
PLEASE RESPOND. YOUR PROXY IS IMPORTANT.
- --------------------------------------------------------------------------------
2
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE PROPOSED DISSOLUTION
Q. WHO IS SUTHERLAND?
Like you, Charlene E. Sutherland is a limited partner of the Partnership.
She beneficially owns two quarter-units of limited partnership interest.
She acquired one of her quarter-units in the Partnership's original sale of
limited partnership interests and her other quarter-unit on the secondary
market. She is a licensed securities principal, a registered
representative, a certified financial planner, and a licensed tax
practitioner in the State of California. Her father-in-law, Judge Kenneth
E. Sutherland (retired), owns one-quarter of a unit, and certain of her
clients own in the aggregate four and three-quarters units.
Q. WHAT IS THE PROPOSED TRANSACTION?
The transaction proposed is to dissolve and liquidate the Partnership in a
manner intended to maximize the return to limited partners. Under
Sutherland's Proposed Dissolution, a majority in interest of limited
partners will exercise their right under the partnership agreement to
remove the general partner and to dissolve the Partnership. Although
removal of the general partner would cause the automatic dissolution of
the Partnership after the expiration of 90 days, by also dissolving the
Partnership by consent of the limited partners, the effective date of
dissolution will be the same as the date on which the general partner is
removed. At the same time, limited partners will elect [name] as a
liquidating trustee to liquidate the Partnership's assets in accordance
with a plan of dissolution approved by the limited partners.
Q. WHAT WILL THE TRUSTEE DO?
The Partnership owns a controlling interest in Synthetic Industries, Inc.
(the "Company") and thus has the ability to transfer control of the Company
to another person. In transactions involving a change of control of a
company, the price paid for the stock of the company typically exceeds the
prevailing market price for the company's stock. The difference between
the market price and the price paid in a change of control transaction is
commonly referred to as a "control premium." The Trustee will seek to
obtain such a control premium for the Partnership. There is no assurance
that a control premium can be obtained in connection with the Proposed
Dissolution. The reasons why Sutherland believes that the Partnership
should be able to obtain a control premium are discussed in the response to
the question below of "Why does Sutherland believe a change of control
transaction may be possible?" as well as under the headings "Summary -
Background and Purpose of the Proposed Dissolution - Attractiveness of the
Company as an Acquisition Candidate" and "The Proposed Dissolution -
Background and Purpose of the Proposed Dissolution - Attractiveness of the
Company as an Acquisition Candidate" that appear later in this Proxy
Statement. Limited partners should read the foregoing sections of the
Proxy Statement carefully. No specific financial analyses, such as
discounted cash flow analyses or comparable company transaction analyses,
have been performed by or on behalf of Sutherland.
Q. WHY IS SUTHERLAND PROPOSING THE DISSOLUTION?
The existing general partner is closely affiliated with management of the
Company. Sutherland believes that the directors and officers of the
Company who control the general partner have caused the general partner to
place their own interests ahead of the interests of the Partnership and its
limited partners. In particular, since January of 1994, the general
partner has made only one limited effort to explore a sale of the Company.
In addition, Sutherland believes that the existing general partner
3
<PAGE>
(i) diluted the Partnership's interest in the Company from 100% to 67% by
permitting a public offering of stock by the Company in 1996, (ii)
permitted the Company to implement various measures that may impede a
change of control, one effect of which may be to entrench existing
management, (iii) tried to dispose of the Partnership's controlling stock
interest in a public offering (by their nature, public offerings do not
involve any control premium because one person does not acquire a
controlling interest as a result of a public offering) and (iv) tried in
1997 to implement a plan of dissolution that Sutherland believes was not in
the best interests of the Partnership or its limited partners. These
actions by the general partner, and their principal advantages and
disadvantages to the Partnership and limited partners, are discussed under
the headings "Summary - Background and Purpose of the Proposed Dissolution"
and "The Proposed Dissolution - Background and Purpose of the Proposed
Dissolution." For example, as a result of the 1996 public offering by the
Company, the Company received cash proceeds from the offering that were
used to reduce debt, and the net tangible book value of a share of stock of
the Company increased. Also, a public market was established for the
Company's stock. The Partnership benefitted from these events. However,
to the extent the stock of the Company was offered at a price that may not
have reflected improved performance by the Company, the Partnership did not
benefit. While net tangible book value per share increased, it is not
generally recognized as an indicator of the actual value of stock. The
Partnership derives only limited value from the existence of a public
market for the Company's stock because of restrictions on the Partnership's
ability to sell its shares of stock in the public market. The reduction of
the Partnership's ownership interest from 100% to 67% may have the effect
of lessening the control premium the Partnership might otherwise obtain.
The public offering by the Company also created public minority
stockholders. As a result, the board of directors no longer owes fiduciary
duties only to the Partnership as the sole stockholder. To the extent that
the interests of the Partnership conflict with those of the public minority
stockholders, the board of directors of the Company face a conflict of
interest that did not exist prior to the public offering.
Q. WHY DOES SUTHERLAND BELIEVE A CHANGE OF CONTROL TRANSACTION MAY BE
POSSIBLE?
The Partnership's 67% stock ownership represents a controlling interest in
the Company. The courts have recognized as a general principle that a
control block of stock will command a premium over market. The courts have
also recognized that publicly traded stock trades at a minority discount to
fair value. These judicially recognized principles of corporate finance
suggest that the Partnership's 67% controlling interest in the Company is
likely to command a premium over current market prices. In Delaware
Chancery Court litigation involving the Partnership, Joel S. Lawson III, a
partner and Chief Executive Officer of Howard, Lawson & Co., an investment
banking firm, submitted an affidavit in
4
<PAGE>
which he expressed the opinion that the Partnership "would be able to
realize a significant premium over the current market price for its
holdings of Synthetic Industries, Inc. common stock in either a sale of its
controlling block of stock in the Company or a sale of the entire Company."
In reaching his opinion, Mr. Lawson relied on various factors in addition
to his firm's investment banking and valuation experience. See
"Attractiveness of the Company as an Acquisition Candidate." Mr. Lawson
did not conduct any quantitative analyses, such as a discounted cash flow
analysis or a comparable company transaction analysis. Counsel for
Sutherland has contacted four investment banking firms, each of which is
experienced in valuations and acquisitions. Each has informally expressed
to counsel the view that the Company's stock trades at a price well below
comparable public company valuations and that the Partnership's control
block of stock could likely be sold at a substantial premium over current
market price for the stock. Such views are based on internal analyses, if
any, done by such firms. No such analyses, if performed, have been
disclosed to Sutherland or her counsel.
[The identity of the four investment banking firms and additional
information relating to the possibility of a change of control transaction
will be added by amendment.]
Neither Sutherland, her attorneys nor any advisers retained by her or her
attorneys has undertaken any qualitative or quantitative analysis, such as
a discounted cash flow analysis or comparable company transactions
analysis.
Q. WHAT EFFECT WILL THE PROPOSED DISSOLUTION HAVE ON ME?
If approved, the Proposed Dissolution will result in the termination of the
Partnership. This will mean that the Partnership's property will be
disposed of as soon as practicable pursuant to the Proposed Dissolution and
the proceeds will be distributed to limited partners. The Partnership and
the Company are parties to a registration rights agreement pursuant to
which the Company must at the request of the Partnership register at the
Company's expense the Company stock owned by the Partnership. Accordingly,
if the Trustee cannot dispose of the Company's stock owned by the
Partnership at a premium over its market value, the Trustee will either
sell the stock in a registered offering and distribute cash to limited
partners or will distribute the stock pro rata to limited partners. If
stock is distributed to limited partners, you will be able to decide
whether to retain the stock distributed to you or sell such stock in the
open market. The Company is a reporting company under the Securities
Exchange Act of 1934 and its common stock is listed on the NASDAQ National
Market. Shares of the Company's common stock distributed to limited
partners in a liquidating distribution should be freely transferrable.
Should the stock not be registered pursuant to the registration rights
agreement, Sutherland nevertheless expects that the stock will be
unrestricted stock or, if restricted stock, will be freely tradable under
SEC Rule 144(k) by limited partners who are not affiliates of the Company.
Q. HOW MUCH WILL I RECEIVE?
There is no way to predict how much you will receive on dissolution of the
Partnership. The type and amount of distribution will depend on the type
of control premium transaction, if any, that
5
<PAGE>
the Trustee is able to structure. If such a transaction occurs, limited
partners may receive cash or stock or other securities of a company that
acquires the Partnership's stock in the Company. If no transaction
providing a control premium occurs, then limited partners will receive
either (a) a pro rata distribution of the Company's stock owned by the
Partnership or (b) a pro rata distribution of the cash proceeds of a
registered offering of the Company's stock. In addition, the expenses of
dissolution and liquidation will be paid by the Partnership. Such expenses
will depend in part on the type of transaction that the Trustee is able to
arrange, and accordingly they cannot be determined at present. They are
expected to be in the range of [$ ]. Such expenses will reduce the
amount distributed to limited partners. Thus, the actual value to be
received in connection with the Proposed Dissolution cannot be determined
at this time.
Q. WHAT VOTE OF LIMITED PARTNERS IS REQUIRED TO APPROVE THE PROPOSED
DISSOLUTION?
The holders of at least a majority of the outstanding limited partnership
interests must approve the Proposed Dissolution.
Q. WHAT WILL HAPPEN TO THE GENERAL PARTNER'S INTEREST?
Under the partnership agreement, upon the removal of the general partner,
the general partner ceases to function as a general partner of the
Partnership. The general partner's interest is automatically converted
into that of a special limited partner entitled only to certain
distributions, and having no voting rights. In addition, the Partnership
has the option to purchase the general partner's interest, subject to the
general partner's right to retain a 7.5% interest in the Partnership after
the limited partners receive their Priority Return. The Proposed
Dissolution contemplates that the Trustee will cause the Partnership to
exercise its option to purchase the general partner's interest.
Q. AM I ENTITLED TO APPRAISAL RIGHTS? Neither Delaware law nor the Partnership
Agreement provides limited partners with appraisal rights in connection
with dissolution of the Partnership or the sale or other disposition of its
assets. In the event that a transaction implemented by the Trustee would
involve a limited partnership roll-up under federal law, appraisal rights
may be made available in connection with such a transaction.
Q. WILL I HAVE A VOTE ON ANY DISPOSITION OF PARTNERSHIP ASSETS?
Probably not. Approval of the Proposed Dissolution will authorize the
Trustee to dispose of the Partnership's assets in whatever transaction the
Trustee determines in its discretion will provide the greatest value to the
Partnership and its partners. It is possible, however, that the Trustee
could enter into certain transactions, such as a merger of the Partnership
into another entity, that may be subject to federal law regulating limited
partnership roll-ups, and that may require approval by a vote of the
limited partners.
Q. WHAT DO I NEED TO DO NOW?
If you are in favor of the Proposed Dissolution described in this Proxy
Statement, you must execute and return to Sutherland the form of proxy
accompanying this Proxy Statement. If you abstain from granting a proxy,
you will in effect be voting against the Proposed Dissolution.
Q. WHEN DO YOU EXPECT THE PROPOSED DISSOLUTION TO BE COMPLETED?
Sutherland cannot predict whether or when sufficient proxies will be
received
6
<PAGE>
to effect the Proposed Dissolution. However, if it is effected, the
Trustee will endeavor to identify, enter into and consummate a change of
control transaction as soon as practicable. It is not possible to predict
how long it may take the Trustee to do so or to determine that such a
transaction is not reasonably likely to occur. It is also possible that
even if such a transaction is entered into soon after the Proposed
Dissolution is effected, other circumstances, such as the need for
regulatory approvals, any litigation instituted challenging the Proposed
Dissolution, a material adverse change in the business prospects of the
Company or a material adverse change in the economy generally, may delay
implementation of any change of control transaction.
Q. WHAT HAPPENS IF THE TRUSTEE CANNOT STRUCTURE A CHANGE OF CONTROL
TRANSACTION?
If after having attempted to identify and structure a change of control
transaction the Trustee determines that it is not reasonably likely that
any such transaction can be effected, the Trustee will as soon thereafter
as practical dispose of shares of the Company's common stock in order to
discharge the Partnership's obligations. The Partnership and the Company
are parties to a registration rights agreement pursuant to which the
Company must at the request of the Partnership register at the Company's
expense the Company stock owned by the Partnership. Accordingly, if the
Trustee cannot dispose of the Company's stock owned by the Partnership at a
premium over its market value, the Trustee will either sell the stock in a
registered offering and distribute cash to limited partners or will
distribute the stock pro rata to limited partners. If stock is distributed
to limited partners, you will be able to decide whether to retain the stock
distributed to you or sell such stock in the open market. The Company is a
reporting company under the Securities Exchange Act of 1934 and its common
stock is listed on the NASDAQ National Market. Shares of the Company's
common stock distributed to limited partners in a liquidating distribution
should be freely transferrable. Should the stock not be registered
pursuant to the registration rights agreement, Sutherland nevertheless
expects that the stock will be unrestricted stock or, if restricted stock,
will be freely tradable under SEC Rule 144(k) by limited partners who are
not affiliates of the Company.
Q. ARE THERE ANY MATERIAL RISKS ASSOCIATED WITH THE PROPOSED DISSOLUTION?
Yes. These are described under the headings "Risk Factors" and "The
Proposed Dissolution - Risks." The principal risks involved include: no
change of control transaction may occur or no material change of control
premium may be obtained; the Company and the general partner may oppose the
Proposed Dissolution; the Company, the general partner or other limited
partners may institute litigation challenging the Proposed Dissolution;
limited partners may fail to approve the Proposed Dissolution; the general
partner will receive a portion of the Partnership's assets after limited
partners receive their Priority Return (the limited partners will receive
their priority return if they receive approximately $190,000 per unit);
there may be a decline in the price of the Company's stock that may
adversely affect the value of any control premium; there are tax
consequences to the Proposed Dissolution that may result in adverse tax
consequences to limited partners, depending on their individual tax
circumstances; an additional vote of limited partners may be needed in
connection with a change of control transaction sought to be implemented by
the Trustee; there may be delays in
7
<PAGE>
implementing the Proposed Dissolution caused by litigation, by changes in
the economy or the stock market, by efforts to identify and negotiate a
change of control transaction, or other similar factors; once the
dissolution of the Partnership is approved by the limited partners, it
cannot be undone; limited partners are not entitled to appraisal rights in
connection with the dissolution of the Partnership and are not likely to
have appraisal rights in connection with a change of control transaction
implemented by the Trustee; there are material costs and expenses that the
Partnership will incur if the Proposed Dissolution is adopted, including
the fees and expenses of the Trustee, transaction expenses in connection
with any change of control transaction (which will likely include fees to a
business broker or investment banking firm), and reimbursement of the
out-of-pocket expenses incurred by or on behalf of Sutherland in connection
with the preparation of the Proposed Dissolution and the solicitation of
proxies (see "The Proposed Dissolution - Expenses of the Plan of
Dissolution"). Limited partners are encouraged to read the sections of
this Proxy Statement that discuss such risks and to consider them carefully
before deciding whether to grant their proxies to Sutherland.
Q. WHERE CAN I FIND MORE INFORMATION ABOUT THE PARTNERSHIP AND SYNTHETIC
INDUSTRIES, INC.?
You may obtain more information from various sources described under "Where
You Can Find More Information" on page [__] of this Proxy Statement.
8
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Questions and Answers About the Proposed Dissolution . . . . . . . . . . . . . 3
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
Charlene E. Sutherland . . . . . . . . . . . . . . . . . . . . . . . . .12
The Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
The General Partner . . . . . . . . . . . . . . . . . . . . . . . . . . .13
Synthetic Industries, Inc. . . . . . . . . . . . . . . . . . . . . . . .13
Background and Purpose of the Proposed Dissolution . . . . . . . . . . .13
Lack of Distributions . . . . . . . . . . . . . . . . . . . . . . .13
Failure of General Partner to Protect the Interests of Limited
Partners . . . . . . . . . . . . . . . . . . . . . . . . . . .13
Failure of General Partner to Seek Out a Control Premium . . . . . .16
Attractiveness of the Company as an Acquisition Candidate . . . . .16
General Partner Hindered by Conflicts of Interests . . . . . . . . .17
Need for Independent Trustee . . . . . . . . . . . . . . . . . . . .17
Proposed Dissolution . . . . . . . . . . . . . . . . . . . . . . . . . .17
Consent to the Proposed Dissolution . . . . . . . . . . . . . . . . . . .19
Selection and Approval of Opinion of Counsel . . . . . . . . . . . . . .20
Conditions to the Proposed Dissolution . . . . . . . . . . . . . . . . .20
Summary of Certain United States Income Tax Considerations . . . . . . .20
Expenses of the Proposed Dissolution . . . . . . . . . . . . . . . . . .21
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
Possible Lack of Change of Control Transaction . . . . . . . . . . . . .21
Possible Opposition by the Company . . . . . . . . . . . . . . . . . . .21
Possible Failure to Approve Proposed Dissolution . . . . . . . . . . . .22
Election to Dissolve Irrevocable . . . . . . . . . . . . . . . . . . . .23
Possible Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . .23
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Risk of Amount Due General Partner . . . . . . . . . . . . . . . . . . .23
Possible Decline of Market Price for the Company's Stock . . . . . . . .24
Certain Tax Risks and Possible Tax Gain . . . . . . . . . . . . . . . . .24
Possible Need for Additional Limited Partner Vote . . . . . . . . . . . .25
Possible Delay in Liquidation . . . . . . . . . . . . . . . . . . . . . .25
The Proposed Dissolution . . . . . . . . . . . . . . . . . . . . . . . . . . .26
Removal of General Partner . . . . . . . . . . . . . . . . . . . . . . .26
Dissolution of the Partnership . . . . . . . . . . . . . . . . . . . . .26
Appointment of Independent Liquidating Trustee . . . . . . . . . . . . .26
Approval of Plan of Dissolution . . . . . . . . . . . . . . . . . . . . .27
No Assurance of Change of Control Transaction . . . . . . . . . . . . . .27
Principal Intended Benefits . . . . . . . . . . . . . . . . . . . . . . .28
Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
Background and Purpose of the Proposed Dissolution . . . . . . . . . . .29
Lack of Distributions . . . . . . . . . . . . . . . . . . . . . . .29
Failure of General Partner to Protect the Interests of Limited
Partners . . . . . . . . . . . . . . . . . . . . . . . . . . .29
Failure of General Partner to Seek Out a Control Premium . . . . . .32
Attractiveness of the Company as an Acquisition Candidate . . . . .32
General Partner Hindered by Conflicts of Interests . . . . . . . . .33
Need for Independent Trustee . . . . . . . . . . . . . . . . . . . .33
Conditions to the Plan of Dissolution . . . . . . . . . . . . . . . . . .33
Expenses of the Plan of Dissolution . . . . . . . . . . . . . . . . . . .34
Solicitation of Proxies from Limited Partners . . . . . . . . . . . . . .34
Market Price for Units . . . . . . . . . . . . . . . . . . . . . . . . .35
Proxy Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35
Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Consent Required . . . . . . . . . . . . . . . . . . . . . . . . . . . .36
Probable Lack of Appraisal Rights . . . . . . . . . . . . . . . . . . . .36
Partnership Units and Principal Holders Thereof . . . . . . . . . . . . .37
The Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37
The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
Selected Financial Data Concerning the Partnership . . . . . . . . . . . . . .38
Certain Federal Income Tax Considerations . . . . . . . . . . . . . . . . . .39
Classification as a Partnership . . . . . . . . . . . . . . . . . . . . .40
Principles of Partnership Taxation Applicable to the Proposed
Dissolution . . . . . . . . . . . . . . . . . . . . . . . . . . . .40
Treatment of a Distribution . . . . . . . . . . . . . . . . . . . . . . .42
Treatment of Repayment of Partnership Liabilities and Plan Costs . . . .42
Other Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . .42
State and Other Tax Matters . . . . . . . . . . . . . . . . . . . . . . .42
Summary of Certain Provisions of the Partnership Agreement . . . . . . . . . .43
Dissolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43
Allocation of Profits, Losses and Distributions, Priority Return. . . . .43
Voting Rights of Limited Partners . . . . . . . . . . . . . . . . . . . .44
Removal, Withdrawal, Bankruptcy, Insolvency, Dissolution,
Retirement or Resignation of the General Partner . . . . . . . . . .45
Applicable Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45
About the Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45
Interest of Certain Persons in the Solicitation. . . . . . . . . . . . . . . .45
Charlene E. Sutherland. . . . . . . . . . . . . . . . . . . . . . . . . .46
The Mills Law Firm. . . . . . . . . . . . . . . . . . . . . . . . . . . .46
Smith, Katzenstein & Furlow LLP . . . . . . . . . . . . . . . . . . . . .47
Summary of Certain Pending Litigation. . . . . . . . . . . . . . . . . . . . .48
Delaware Court of Chancery . . . . . . . . . . . . . . . . . . . . . . .48
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
United States District Court for the Northern District of California. . .49
Financial Information about the Partnership. . . . . . . . . . . . . . . . . .52
Where You can Find More Information. . . . . . . . . . . . . . . . . . . . . .53
</TABLE>
Exhibits
Exhibit A Plan of Dissolution
Exhibit B Opinion of Roberts, Isaf & Summers
Exhibit C Form 10-K for Synthetic Industries, L.P. for the fiscal year
ending September 30, 1997
Exhibit D Form 10-Q for Synthetic Industries, L.P. for the quarter
ending March 31, 1998
12
<PAGE>
SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROXY STATEMENT AND
DOES NOT CONTAIN ALL OF THE INFORMATION THAT MAY BE IMPORTANT TO YOU. TO
UNDERSTAND THE PROPOSED DISSOLUTION FULLY AND FOR A MORE COMPLETE DESCRIPTION OF
THE PARTNERSHIP, SYNTHETIC INDUSTRIES, INC., AND THE METHOD OF IMPLEMENTING THE
PROPOSED DISSOLUTION, YOU SHOULD READ CAREFULLY THIS ENTIRE PROXY STATEMENT AND
THE DOCUMENTS TO WHICH YOU ARE REFERRED.
CHARLENE E. SUTHERLAND
Charlene E. Sutherland is a limited partner of the Partnership. She owns
two quarter-units of limited partnership interest. She acquired one of her
quarter-units in the Partnership's original offering of units, and she acquired
her other quarter-unit in the secondary market. She is a certified financial
planner and licensed tax practitioner in the State of California. Since January
of 1990 she has been a registered representative and a principal of a major
registered broker-dealer on an independent contractor basis. From 1986 to 1990,
Sutherland was a registered representative with Integrated Resources Equity
Corp., on an independent contractor basis. From 1979 to 1985, she was employed
by Equitec Securities Corp., as a senior account executive.
From 1990 to 1991, Sutherland served on the board of directors of the
American Association of Limited Partners, a lobbying group that engaged in
lobbying efforts in support of the Limited Partnership Rollup Reform Act of
1993. Between 1987 and 1990, Sutherland served as the producer and moderator of
a local public-access-cable, non-commercial television show called Wealth
Management, an informational show for investors.
Sutherland's father-in-law, Judge Kenneth E. Sutherland (retired), owns
one-quarter unit in the Partnership, and a number of her clients own in the
aggregate another four and three-quarter units. As a limited partner,
Sutherland had serious concerns about the GP Plan. She moved to intervene in
litigation involving the GP Plan in the United States District Court for the
Northern District of California, but that motion was denied. See "Summary of
Certain Pending Litigation -- United States District Court for the Northern
District of California."
Although it is Sutherland who is soliciting proxies pursuant to this Proxy
Statement, Sutherland's attorneys, The Mills Law Firm and Smith, Katzenstein &
Furlow LLP, are advancing all expenses associated with the solicitation of
proxies for the Plan of Dissolution, subject to being reimbursed by the
Partnership if the Proposed Dissolution is approved. Because Sutherland's
attorneys are advancing the expenses of the proxy solicitation, they are deemed
to be participants in the proxy solicitation. Neither The Mills Law Firm,
Smith, Katzenstein & Furlow LLP nor any partner or attorney associated with
either firm owns any units in the Partnership. However, The Mills Law Firm and
Smith, Katzenstein & Furlow LLP have financial incentives to try to cause the
limited partners to receive the highest possible return for their investment in
the Partnership and to try to cause them to adopt the Proposed Dissolution. See
"Interest of Certain Persons in the Solicitation - The Mills Law Firm" and
"Interest of Certain Persons in the Solicitation - Smith, Katzenstein & Furlow
LLP."
THE PARTNERSHIP
The Partnership is a Delaware limited partnership organized in 1986 for the
purpose of acquiring Synthetic Industries, Inc. (the "Company"). An aggregate
of 800 Units were issued for aggregate capital contributions of approximately
$78.4 million, which were used to fund a portion of the purchase price for 100%
of the stock of the Company. In November of 1996, the existing general partner
permitted the Company to make a public offering of common stock that diluted the
Partnership's ownership from 100% to
13
<PAGE>
approximately 67% of the Company's common stock. The Partnership owns no assets
other than its approximately 67% of the outstanding common stock of the Company.
Based on publicly available information, Sutherland believes that the
Partnership's only liability consists of a note payable to the Company for costs
incurred by the Company on the Partnership's behalf relating to the development
of earlier restructuring proposals that were not carried through. Sutherland has
not been able to determine the actual amount of such liability, but believes it
to be at least $650,000, though it may be substantially higher.
THE GENERAL PARTNER
The existing general partner of the Partnership is S.I. Management L.P., a
Delaware limited partnership whose sole general partner is Synthetic Management
G.P., a Georgia general partnership having five partners controlled,
respectively, by Leonard Chill, Ralph Kenner, William Gardner Wright, Jr., and
W. Wayne Freed, who are each current executive officers of the Company, and Jon
P. Beckman, a former executive officer of and currently a paid consultant to the
Company. The principal place of business of the general partner is located at
309 LaFayette Road, Chickamauga, Georgia 30707. The general partner's telephone
number is (706) 375-3121.
SYNTHETIC INDUSTRIES, INC.
The Company is a Delaware corporation founded in 1969 to produce
polypropylene-based primary carpet backing. Since that time the Company's
business has expanded into the manufacturing and sale of a full line of
polypropylene-based industrial fabrics, specialty yarns and geotextiles. As a
result of a public offering of common stock in November 1996, the Company
currently has 8,656,250 shares of common stock outstanding, of which
approximately 67% is owned by the Partnership. The Common Stock trades under the
symbol "SIND" on the Nasdaq National Market.
The principal executive office of the Company is located at 309 LaFayette
Road, Chickamauga, Georgia 30707. The Company's telephone number is (706)
375-3121.
BACKGROUND AND PURPOSE OF THE PROPOSED DISSOLUTION
LACK OF DISTRIBUTIONS. Since the inception of the Partnership, limited
partners have received no distributions on their investment. By comparison, the
persons controlling the general partner have received substantial benefits that
include not only substantial salaries and bonuses from the Company but also a
substantial number of options to acquire the Company's common stock at favorable
exercise prices. According to the Company's financial reports, Messrs. Chill,
Kenner, Wright, Freed, and Beckman collectively own 360,766 options to acquire
Company stock at $10.72 per share. Sutherland estimates that, as of June __,
1998, the collective value of these options was over $_____ million (based on
the June __, 1998 stock price of $_______ per share).
FAILURE OF GENERAL PARTNER TO PROTECT THE INTERESTS OF LIMITED PARTNERS.
Based on various actions by the general partner described below, Sutherland
believes that the general partner has subordinated the interests of limited
partners to those of the Company's management, some of whom control the general
partner, and to the interests of the Company's public stockholders.
1. In 1994 the general partner caused the Partnership as the sole
stockholder of the Company to approve stock option plans pursuant to which some
486,027 options were granted to directors and officers, some of whom control the
general partner, thereby diluting the Partnership's 100% ownership of the
Company. The existence of the options gave the directors and officers an
incentive to create and increase a public float for the Company's stock and to
liquidate the Partnership in a manner that will maximize the value of the
options. Although the Partnership might have benefited indirectly from an award
of options because of the incentives they provided to management, other
performance-based incentives could have been used to reward
14
<PAGE>
management for their performance without diluting the Partnership's 100%
ownership of the Company. Further, those directors and officers who control the
general partner already had a financial incentive to improve the Company's
performance by virtue of provisions in the partnership agreement that allocate
30% of distributions to the general partner after limited partners receive the
Priority Return. See "Risk Factors - Risk of Amount Due General Partner."
2. The general partner sought to cause the Partnership to sell its stock
in the Company in a public offering in August of 1996. While such a sale would
have liquidated the Partnership's assets and limited partners would have
received a distribution of net assets, such a sale would have precluded the
Partnership from realizing any control premium. Public offerings by their
nature do not involve the transfer of control to one person who will pay a
premium for control.
3. The general partner refused to call a meeting of limited partners to
vote on the proposed public offering after more than 10% in interest of the
limited partners requested such a meeting. Instead, in September of 1996, the
general partner abandoned the proposed offering and allowed the Company to
conduct a public offering of 2.8 million new shares of common stock. That
offering was completed in November of 1996.
4. The general partner permitted the 1996 public offering of stock by the
Company to be priced on November 1, 1996 at approximately $13.00 per share
rather than delaying the pricing until the Company had announced a significant
improvement in the Company's earnings. Shortly after public announcement on
November 25, 1996 that the Company's fourth quarter net sales were up 13.5%,
fourth quarter operating income was up 181%, and operating income for the fiscal
year ended September 30, 1996 was up 34.1%, the price of the Company's stock
increased to approximately $20.
5. A principal effect of the 1996 offering of stock by the Company was to
dilute the Partnership's stock ownership from 100% to approximately 67%. By
creating a 33% public stockholder minority, the Company (with the general
partner's cooperation) made it more difficult for the Partnership to dispose of
the Company as a whole. The 1996 public offering did result in the creation of
a public market for the Company's stock. However, the Partnership generally
cannot take advantage of that public market because the Partnership's ability to
sell its stock is limited because the Partnership owns a controlling interest in
the Company and its sales of stock are subject to restrictions under federal
law. The creation of a public market benefited holders of options to purchase
stock of the Company, such as the persons who control the general partner, as
the public market gave value to the options and a ready market into which to
sell shares acquired on exercise of options.
6. As a result of the 1996 public offering by the Company, the Company
received cash proceeds from the offering that were used to reduce debt, and the
net tangible book value of a share of stock of the Company increased. The
Partnership benefitted from these events. However, to the extent the stock of
the Company was offered at a price that may not have reflected the Company's
improved performance, the Partnership did not benefit. Moreover, while net
tangible book value per share increased, it is not generally recognized as an
indicator of the actual value of stock. In addition, the reduction of the
Partnership's ownership interest from 100% to 67% may have the effect of
lessening the control premium the Partnership might otherwise obtain. The
public offering by the Company also created public minority stockholders. As a
result, the board of directors no longer owes fiduciary duties only to the
Partnership as the sole stockholder. To the extent that the interests of the
Partnership conflict with those of the public minority stockholders, the board
of directors of the Company face a conflict of interest that did not exist prior
to the public offering.
7. Prior to the 1996 public offering by the Company, it was not subject
to Section 203 of the Delaware General Corporation Law. As a result of the
public offering in 1996 by the Company, the Company became subject to Section
203, a statute that makes it more difficult to effect a change of control
transaction. The general partner could have taken steps to cause the Company
not to become subject to Section 203, but
15
<PAGE>
did not.
8. On or about September 6, 1996, the general partner permitted the
Company to enter into employment agreements with executives of the Company, some
of whom also control the general partner, that provide for the payment of
substantial sums to them in the event of a change of control, thereby impeding
change of control transactions. On or about October 24, 1996, the general
partner also caused the Partnership to approve an amendment to the certificate
of incorporation of the Company that eliminated the right of stockholders to act
by written consent in lieu of a meeting. This weakened the Partnership's
control of the Company because it could no longer act at any time to replace the
board of directors. The amendment also may deter or make more difficult a
change of control because an acquiror of more than 50% of the stock cannot act
immediately to replace the board. Because the Partnership owned 100% of the
stock, and would continue to own an absolute majority after the November 1996
public offering by the Company, and directors and officers of the Company
controlled the general partner, the Partnership had no need for and received no
benefit from the adoption of any measures that would impede a change of control.
Because the Partnership can no longer act at any time to replace the board and
because the Company is now subject to Section 203, the Partnership's ability to
sell freely its controlling interest in the Company has been impeded.
9. In September of 1997, the general partner proposed a plan of
dissolution (the "GP Plan") that would have dissipated entirely any control
premium that might be obtained for the Partnership's 67% controlling interest in
the Company. Under the GP Plan, the Partnership Agreement was to be amended to
permit limited partners to withdraw their capital, those limited partners
desiring to do so could have exchanged their limited partnership units for their
pro rata share of stock of the Company, all shares so withdrawn had to be sold
immediately in an underwritten public offering, and all shares not withdrawn
would have remained in the Partnership for distribution to limited partners 360
to 720 days after commencement of implementation of the GP Plan. The general
partner's plan did not afford any opportunity for the Partnership (and
indirectly the limited partners) to capture a control premium. The compulsory
public offering would have forced those limited partners who chose to withdraw
their capital in the form of shares to sell the shares immediately at a discount
to market and to pay material underwriters' and brokers' fees and other
expenses. Those limited partners who elected not to withdraw their capital
would have been forced to wait from one to two years (and possibly longer) after
implementation commenced to receive a distribution of capital. A principal
effect of the GP Plan would have been that the Partnership's 67% ownership
interest would have been dispersed into the hands of a large number of public
holders of stock, which would have eliminated the concentration of ownership
that resides in the Partnership. Such a result would have precluded the
Partnership from having any opportunity of realizing a control premium for its
stock and would likely have aided incumbent management in retaining control of
the Company and fending off any change of control transaction.
10. The general partner permitted the Company to adopt an Employee Stock
Participation Plan ("ESPP") in February of 1998. The ESPP may benefit the
Company, and indirectly the Partnership, by reason of the incentives it may give
to employees eligible to participate in the ESPP. However, issuance of stock
pursuant to the ESPP would likely cause the Partnership's ownership to fall
below two-thirds of the outstanding stock. That would result in the Partnership
losing its ability as a 67% stockholder to cause the Company's certificate of
incorporation to be amended to delete certain provisions that require a
two-thirds vote for their amendment, including the provision that prohibits
stockholders from acting by written consent.
11. The general partner has failed to develop an alternative plan for the
dissolution and liquidation of the Partnership, even though the general partner
has stated that the Partnership serves no business purpose and provides no
benefit to limited partners.
Sutherland was also aware that certain limited partners had instituted two
lawsuits, one in the Court of Chancery of the State of Delaware (the "Chancery
Court") and one in the United States District Court for the Northern District of
California (the "District Court"), challenging the conduct of the general
partner and the persons controlling the general partner. The complaints in those
lawsuits were later amended to seek an
16
<PAGE>
injunction against the GP Plan. On October 23, 1997, the Chancery Court
preliminarily enjoined the GP Plan, finding that it was likely that the plan's
terms violated the partnership agreement. On March 19, 1998, the Delaware
Supreme Court affirmed the Chancery Court's grant of a preliminary injunction.
Neither the preliminary injunction nor its affirmance was a final determination
on the merits that the GP Plan violated the partnership agreement. On November
6, 1997, the District Court issued a temporary restraining order against
implementation of the GP Plan, finding that the plaintiff had raised serious
questions as to whether the plan violated federal law relating to limited
partnership roll-ups and as to whether the general partner failed to disclose
properly what actions limited partners needed to take to require the GP Plan to
be approved by two-thirds in interest of the limited partners. However, the
District Court never made a final determination on the merits regarding these
issues. Sutherland moved to intervene in the litigation in the District Court,
but that motion was denied. See "Summary of Certain Pending Litigation." On
May 14, 1998, the general partner announced that it had withdrawn the GP Plan
and that the Partnership would continue to hold the Company's stock as it has in
the past.
On December 29, 1997, limited partners commenced a second lawsuit in the
Chancery Court to challenge certain stock options granted by the Company to
certain of its current and former directors and executive officers, some of whom
control the general partner. On June 3, 1998, the plaintiffs in the two actions
in the Chancery Court moved to consolidate the two actions and to file a
consolidated third amended and supplemental class and derivative complaint. See
"Summary of Certain Pending Litigation."
In its proxy statement soliciting votes in favor of its now withdrawn plan,
the general partner indicated that the Partnership had outlived its purpose,
stating: "THERE IS NO BUSINESS PURPOSE OR BENEFIT TO INVESTORS HOLDING INTERESTS
IN A PARTNERSHIP, THE SOLE PURPOSE AND ACTIVITY OF WHICH IS TO HOLD PUBLICLY
TRADED SHARES OF A SINGLE CORPORATION." Sutherland agrees, but believes that the
Partnership should now take appropriate steps to ensure not only liquidity for
limited partners, but also that limited partners receive the maximum return
reasonably attainable on their investment. Sutherland believes that the best
return to limited partners is most likely to result from a sale of the
Partnership's 67% ownership interest in the Company in a change of control
transaction in which the Partnership (and possibly minority stockholders of the
Company) receives a higher price per share than the current market price for the
Company's common stock.
FAILURE OF GENERAL PARTNER TO SEEK OUT A CONTROL PREMIUM. Sutherland has
been advised that, in the pending Chancery Court litigation, the general partner
has consistently argued that there was no significant interest on the part of
any person in acquiring the Company. However, Sutherland has learned that, in
discovery in the Chancery Court litigation, the plaintiffs confirmed that the
general partner had made only one limited effort since January of 1994, at the
latest, to explore a sale of the Company or other change of control transaction,
even though the Company's results of operations had significantly improved since
1994, making it a more attractive acquisition candidate, and the stock market
had also improved significantly. Based on the proxy statement for the GP Plan
and discovery in the Chancery Court litigation, it appears that the only effort
relating to exploring a change of control transaction made by or on behalf of
the general partner within the last four years was that Bear Stearns & Co., one
of the general partner's prime advisers, made a limited inquiry in August 1996
concerning a sale of the Company. That inquiry, which apparently consisted only
of mailing a prospectus about the Company to seven industrial companies and
three financial institutions, was made prior to the Company's public offering
and prior to the announcement of significant increases in the Company's earnings
for the fourth quarter ended September 30, 1996. No such inquiry was made
contemporaneously with the GP Plan proposed in 1997.
ATTRACTIVENESS OF THE COMPANY AS AN ACQUISITION CANDIDATE. The Company
would appear to be an attractive candidate for acquisition. In the Delaware
Chancery Court litigation, Joel S. Lawson III, a partner and Chief Executive
Officer of Howard, Lawson & Co., an investment banking firm experienced in
fairness opinions, valuations, mergers, acquisitions and divestitures, submitted
an affidavit dated October 10, 1997 in which he expressed the opinion that the
Partnership "would be able to realize a significant premium over the current
market price for its holdings of Synthetic Industries, Inc. common stock in
either a sale of its
17
<PAGE>
controlling block of stock in the Company or a sale of the entire Company."
In reaching his opinion, Mr. Lawson relied on various factors in addition
to his firm's investment banking and valuation experience. Specifically, Mr.
Lawson considered the following: (i) as the 67% owner, the Partnership has the
ability to dispose of its interest in the Company through either a sale of its
controlling block of stock or a sale of the entire Company; (ii) acquisitions of
public companies are typically done at prices significantly above the recent
trading price of the acquired company, and the premium is observed in
acquisitions in all industries; (iii) the Company has been showing improved
operating results; (iv) for the twelve months ending September 30, 1997,
earnings per share were $1.85; (v) the Company's improving financial results
would be attractive to a potential acquiror of the Company; (vi) the Company's
rapid growth in earnings is expected to continue; (vii) the Company is a market
leader in its industry, a highly desirable characteristic for potential
acquirors; (viii) the Company's stock is neither actively traded nor well
followed by analysts, and those few analysts following the stock rate it a
strong buy; (ix) the Company's stock trades at only 15.4 times trailing 12
months adjusted earnings per share, while the average in the Standard & Poors
500 Index is 23.8 times trailing 12 months earnings, which suggests that
potential acquirors could pay a substantial premium without a dilutive impact on
their own earnings.
Counsel for Sutherland has contacted four investment banking firms, each of
which is experienced in valuations and acquisitions. Each has informally
expressed to counsel for Sutherland the view that the Company's stock trades at
a price well below comparable public company valuations and that the
Partnership's control block of stock could likely be sold at a substantial
premium over current market price for the stock. However, such views are based
on the internal analyses, if any, performed by these firms. These firms have
not been retained by Sutherland to express any views, and have not provided to
Sutherland or her counsel the basis on which they have arrived at their views.
[The identity of the four investment banking firms and additional
information supporting the possibility of a change of control transaction will
be added by amendment.]
Neither Sutherland, Sutherland's counsel or any other adviser retained by
Sutherland or her counsel has undertaken any other qualitative or quantitative
analysis, such as a discounted cash flow analysis or comparable company
transaction analysis. A discounted cash flow analysis can not be reliably done
without financial information from the Company that is not available to
Sutherland. The expense of retaining an adviser to conduct a comparable company
transaction analysis does not appear warranted under the circumstances.
GENERAL PARTNER HINDERED BY CONFLICTS OF INTEREST. Sutherland also
believes that the general partner has interests that materially conflict with
those of the Partnership and its limited partners. This conflict arises because
the general partner is dominated and controlled by individuals who are also
directors, principal executive officers, or both, of the Company. The interests
of the Company's management and public stockholders are not the same as the
interests of the Partnership and the limited partners. Sutherland believes that
this material conflict of interest may have contributed to the general partner's
failure to make any significant inquiries concerning a possible sale of the
Company as an alternative to the now withdrawn GP Plan.
NEED FOR INDEPENDENT TRUSTEE. Sutherland believes that the Partnership has
outlived its utility, that the general partner continues to refuse to explore
change of control transactions that might yield a premium for the Partnership's
67% stock ownership of the Company, and that the general partner has material
conflicts of interest. Thus, Sutherland believes that the affairs of the
Partnership would best be wound up by an independent liquidating trustee who
will not be hampered by any conflict of interest and who will actively seek out
change of control transactions in an effort to maximize the return to the
limited partners.
PROPOSED DISSOLUTION
18
<PAGE>
The Proposed Dissolution has four principal components, each of which is
contingent on limited partner approval of each of the other three components.
1. REMOVAL OF THE GENERAL PARTNER. The first component is the removal of the
general partner. Section 7(g) of the Partnership Agreement authorizes a
majority in interest of the limited partners to remove the general partner if
they determine in their discretion that the general partner is not performing in
the best interest of the Partnership or if they determine that it is otherwise
in the best interest of the Partnership to remove the general partner. For the
reasons discussed under "Failure of the General Partner to Protect the Interests
of the Limited Partners," Sutherland believes that it is in the best interests
of the Partnership and the limited partners to remove the general partner.
Under Section 11(a)(iv) of the Partnership Agreement, removal of the general
partner will result in the dissolution of the Partnership unless within 90 days
of the removal all limited partners vote to elect a successor general partner.
Because Sutherland will not vote in favor of the election of a successor general
partner, upon removal of the general partner the Partnership would after 90 days
be dissolved by virtue of Section 11(a)(iv) of the partnership agreement. In
addition, by removing the general partner, the Partnership will have the option
of acquiring a substantial portion of the general partner's interest in the
Partnership. Sutherland believes that such an acquisition of the general
partner's interest is likely (but not guaranteed) to decrease the distributions
which the general partner will be entitled to receive upon the dissolution and
liquidation of the Partnership and result in a corresponding increase in the
distributions to the limited partners. See "Proposed Dissolution - 4.
Approval of Plan of Dissolution" and "Summary of Certain Provisions of the
Partnership Agreement - Resignation, Withdrawal, Bankruptcy, Insolvency,
Dissolution, Retirement or Reorganization of the General Partner."
2. DISSOLUTION OF THE PARTNERSHIP. The second component of the Proposed
Dissolution is the determination by a majority in interest of limited partners
to dissolve the Partnership, contingent on removal of the general partner,
pursuant to their right to do so under Section 11(a)(iii) of the partnership
agreement. Although, as explained above, the removal of the general partner
would ultimately result in the dissolution of the Partnership, the determination
by a majority of limited partners to dissolve the Partnership will cause the
Partnership to be dissolved 90 days earlier than if limited partners only
removed the general partner. By causing dissolution to occur immediately upon
the removal of the general partner, limited partners are entitled under Section
17-803(a) of the Act to appoint immediately an independent liquidating trustee
to wind up the Partnership's business and affairs.
3. APPOINTMENT OF INDEPENDENT LIQUIDATING TRUSTEE. The third component of the
Proposed Dissolution is the appointment pursuant to Section 17-803(a) of the Act
of [name] as the independent liquidating trustee (the "Trustee") to carry out
the winding up of the Partnership's business and affairs. [Name] has no prior
relationship with the Partnership, the general partner, the Company, Sutherland,
The Mills Law Firm, Smith, Katzenstein & Furlow LLP or, to the knowledge of
Sutherland and her attorneys, any affiliates or associates of any of the
foregoing.
4. APPROVAL OF PLAN OF DISSOLUTION. The fourth component of the Proposed
Dissolution is the approval of a plan of dissolution that the Trustee will
follow in connection with winding up the Partnership's business and affairs.
See Exhibit A. Under that plan, the Trustee will hire a nationally recognized
investment banking or similar financial firm, or a qualified business broker, to
seek out and structure a change of control transaction that would maximize the
price received by the Partnership for its 67% of the Company's common stock.
The Trustee will seek to identify, enter into and consummate a change of control
transaction as soon as practical following approval of the plan. Factors such
as litigation, the need for regulatory approvals, or other circumstances may
delay implementation of a change of control transaction.
If no change of control or similar transaction is identified, or if
identified is not entered into or consummated, and the Trustee determines that
it is not reasonably likely that a change of control transaction can be
consummated within a reasonable period of time, the Trustee will as soon
thereafter as practical distribute pro rata to partners the common stock of the
Company owned by the Partnership, net of expenses
19
<PAGE>
of the plan of dissolution. Alternatively, because the Partnership and the
Company have a registration rights agreement pursuant to which the Company has
agreed to register at its expense the Company's common stock owned by the
Partnership, the Trustee may elect, if no change of control transaction is
consummated, to sell the Company's stock in a registered offering and distribute
net cash proceeds to limited partners.
If stock is distributed to limited partners, they will be able to decide
whether to retain the stock distributed to them or sell such stock in the open
market. The Company is a reporting company under the Securities Exchange Act of
1934 and its common stock is listed on the NASDAQ National Market. Shares of
the Company's common stock distributed to limited partners in a liquidating
distribution should be freely transferrable. Should the stock not be registered
pursuant to the registration rights agreement, Sutherland nevertheless expects
that the stock will be unrestricted stock or, if restricted stock, will be
freely tradable under SEC Rule 144(k) by limited partners who are not affiliates
of the Company.
Sutherland cannot predict whether a change of control transaction will be
identified by the Trustee or whether any such transaction will in fact be
consummated. However, if such a transaction is consummated, it may take the
form of a sale or exchange for cash or other property (including securities of
another entity) of the common stock of the Company owned by the Partnership, a
merger of the Partnership into another entity, or some other form of
transaction. To ensure liquidity for limited partners, the proposed plan of
dissolution requires the Trustee to dispose of the Partnership's assets only for
cash, cash equivalents, or securities that when distributed to limited partners
will be fully marketable without restriction.
In addition to the attempt to obtain a control premium for the common stock
of the Company owned by the Partnership, the plan of dissolution contemplates
that the Trustee will exercise the Partnership's option to acquire a substantial
portion of the general partner's interest in the Partnership following the
removal of the general partner. The partnership agreement provides in substance
that after the limited partners receive the Priority Return, any gain resulting
from the sale of all or substantially all of the Partnership's assets is to be
allocated 30% to the general partner and 70% to the limited partners. However,
the partnership agreement also provides that in the event that the general
partner is removed, the Partnership has the option of purchasing the general
partner's interest at its appraised value, subject to the right of the general
partner to retain a 7.5% interest in distributions after the Priority Return is
reached. Sutherland believes that the cost of acquiring the general partner's
interest in the Partnership will be substantially less that the amount of
distributions that the general partner would be entitled to receive if the
general partner retained its full interest. Thus, Sutherland believes that
distributions to limited partners would likely be increased if the Partnership
exercised its right to acquire a substantial portion of the general partner's
interest. Whether such an increase would occur will depend on a number of
factors not presently ascertainable, including the method used to appraise the
value of the general partner's interest. Whether the Partnership exercises the
option to acquire the general partner's interest will be determined by the
Trustee based on the circumstances. For example, if the Trustee determined that
the Priority Return was not likely to be achieved as a result of a change of
control transaction, or that no change of control transaction was likely and
that the common stock of the Company would thus likely be distributed to limited
partners or sold in a registered offering, the Trustee may also determine that
it is not in the best interests of the Partnership and the limited partners to
exercise the Partnership's option to acquire the general partner's interest.
CONSENT TO THE PROPOSED DISSOLUTION
By this Proxy Statement, each limited partner is being asked to grant to
Sutherland a proxy authorizing Sutherland to execute a written consent on behalf
of such limited partner to the Proposed Dissolution, which includes the removal
of the general partner, the dissolution of the Partnership, the appointment of
[name] as a liquidating trustee, and the adoption of the plan of dissolution
attached as Exhibit A hereto.
For the Proposed Dissolution to be adopted, it must be approved by the
holders of more than 50% of
20
<PAGE>
the Partnership's outstanding limited partnership interests. The Partnership
has outstanding 800 units of limited partnership interests. Holders of more
than 400 units must grant proxies to Sutherland for Sutherland to be able to
execute a written consent approving the Proposed Dissolution.
SELECTION AND APPROVAL OF OPINION OF COUNSEL
In addition to the consent necessary to adopt the Proposed Dissolution, the
Partnership Agreement requires that at least 10% in interest of limited partners
select counsel to render an opinion concerning certain legal matters and that a
majority in interest of limited partners approve the opinion of counsel as a
condition to the right of limited partners to exercise their right to vote or
consent to certain actions, including removal of the general partner. Sutherland
has obtained such an opinion from Roberts, Isaf & Summers, a law firm located in
Atlanta, Georgia. A copy of the opinion of Roberts, Isaf & Summers is attached
as Exhibit B to this Proxy Statement. The proxy solicited by Sutherland includes
a proxy to execute a written consent selecting Roberts, Isaf & Summers and
approving the opinion rendered by Roberts, Isaf & Summers.
CONDITIONS TO THE PROPOSED DISSOLUTION
As a condition to the Proposed Dissolution, a majority in interest of
limited partners must grant to Sutherland proxies to express their written
consent selecting Roberts, Isaf & Summers, approving the opinion rendered by
Roberts, Isaf & Summers, and adopting the Proposed Dissolution. In addition,
the Proposed Dissolution will not be consummated unless: (i) all necessary
regulatory approvals, if any, are obtained, (ii) no provision of applicable law
or regulations and no order or decree prohibits implementation or consummation
of the Proposed Dissolution and (iii) all actions by or filings with any
governmental body, agency or official authority required to permit the
consummation of the Proposed Dissolution have occurred.
SUMMARY OF CERTAIN UNITED STATES INCOME TAX CONSIDERATIONS
The tax consequences of the Proposed Dissolution cannot be predicted at the
present time. They will depend on the terms and conditions of the transaction
that is ultimately consummated by the Trustee.
Generally, if no change of control transaction were consummated, and shares
of common stock of the Company were to be distributed to limited partners, no
taxable gain or loss would be recognized on the shares distributed. A limited
partner's tax basis in the shares distributed to the limited partner should
equal the tax basis of the limited partner's units immediately prior to the
distribution.
In the event of a change of control or other transaction that resulted in a
sale by the Partnership of the shares of common stock of the Company owned by
the Partnership for cash, followed by a distribution of the cash consideration
(net of expenses of the sale and certain other Partnership expenses associated
with the Proposed Dissolution), each limited partner would recognize a long term
capital gain equal to the difference between the limited partner's basis in the
units owned by the limited partner and the amount of the gain allocated to the
limited partner pursuant to the partnership agreement.
In the event of a change of control transaction that resulted in an
exchange of the shares of common stock of the Company owned by the Partnership
for securities or other consideration, whether the transaction would require
limited partners to recognize any gain or loss in connection with the
transaction would depend on the nature of the transaction and the consideration
received. While it is possible that such a transaction might be structured to
avoid recognition of gain or loss for tax purposes, it is more likely that the
transaction would require limited partners to recognize gain or loss for tax
purposes.
In order to pay the liabilities of the Partnership and to fund expenses of
the Proposed Dissolution, including the fees of the Trustee, some of the shares
of stock of the Company owned by the Partnership will be sold. In connection
with such a sale of stock and the payment of expenses, a taxable gain or loss
will be
21
<PAGE>
recognized that will be allocated to limited partners in accordance with the
terms of the Partnership Agreement.
In addition to federal tax considerations, limited partners may be affected
by state tax laws in connection with Proposed Dissolution. Accordingly, limited
partners are advised to consult with their tax advisors concerning both the
federal and state tax law consequences to limited partners in the event the
Proposed Dissolution is effected.
EXPENSES OF THE PROPOSED DISSOLUTION
If the Proposed Dissolution is approved, the Partnership will be required
to discharge or make adequate provision for the payment of its liabilities prior
to making a distribution to limited partners. Based on information distributed
by the general partner in connection with the enjoined GP Plan, Sutherland
believes that the Partnership's only material liability consists of a promissory
note in favor of the Company in the amount of at least $650,000 evidencing cash
advances by the Company to the Partnership to fund the Partnership's expenses in
connection with the general partner's past efforts to dissolve the Partnership.
The Partnership has not reported the extent of its liability to the Company, and
thus it may be substantially greater than $650,000.
In addition to repayment of the foregoing note, if the Proposed Dissolution
is approved by the limited partners, the Partnership will reimburse Sutherland's
attorneys for the expenses advanced by them in connection with the solicitation
of proxies for the Proposed Dissolution. Sutherland expects that these expenses
will total approximately $[ ].
The Partnership will also be liable for the fees of the Trustee. The
Trustee will be compensated at an hourly rate of $[ ] per hour and will be
entitled to reimbursement of all expenses incurred on behalf of the Partnership.
The Trustee will also be entitled to be indemnified, including advancement of
all litigation expenses, for any loss or expense arising out of the Trustee's
performance of the Trustee's duties, except for any loss or expense resulting
from gross negligence or willful misconduct by the Trustee.
RISK FACTORS
Limited partners should consider carefully all of the information contained
in this Proxy Statement prior to executing and returning the enclosed form of
proxy. Summarized below are certain significant risk factors relating to the
Proposed Dissolution. These risk factors are not the only risks related to the
Proposed Dissolution, and the order in which they are discussed is not
indicative of their relative importance. The risk factors summarized below
should be considered in the context of all of the information contained in this
Proxy Statement. See also "The Proposed Dissolution - Risks."
POSSIBLE LACK OF CHANGE OF CONTROL TRANSACTION
Sutherland is proposing the Proposed Dissolution in part because she
believes that there is a significant chance that the Company, or the
Partnership's 67% stock interest in the Company, can be sold at a price that
reflects a material premium over the current market price for the Company's
common stock. However, there is the risk that, if the Proposed Dissolution were
adopted, the Trustee will be unable to locate a purchaser and negotiate and
implement a change of control transaction that will result in a control premium
being paid for the Company or the Partnership's 67% stock interest in the
Company. In such a case, limited partners would receive either a pro rata
distribution of the Company's stock, net of the expenses associated with the
Proposed Dissolution, or a pro rata distribution of the cash proceeds of a
registered offering of the Company's stock, net of the expenses of the Proposed
Dissolution.
POSSIBLE OPPOSITION BY THE COMPANY
22
<PAGE>
If the Trustee were to locate a prospective buyer, the board of directors
of the Company may oppose any change of control transaction. The Company's
certificate of incorporation and bylaws contain provisions that restrict the
ability of stockholders, including the Partnership, to call a special meeting or
take action by written consent. These provisions make it more difficult for the
Partnership to remove the incumbent directors in the event they oppose a change
of control transaction. Thus, such provisions may discourage, delay, or make
more difficult a change of control transaction.
The Company is also subject to Section 203 of the Delaware General
Corporation Law. Section 203 restricts certain business combinations with any
stockholder who acquires 15% or more of the Company's stock (called an
"Interested Stockholder") for a period of three years after a person becomes an
Interested Stockholder. Such restrictions do not apply if the board of
directors of the Company approve in advance either the person becoming an
Interested Stockholder or the business combination, or the business combination
is approved by the holders of at least two-thirds of the Company's stock
(excluding shares owned by directors, officers and certain employee benefit
plans). While the Partnership presently owns sufficient stock to meet the
two-thirds vote requirement to exempt a transaction from Section 203, there is
no assurance that the Partnership will continue to have sufficient shares to
meet that vote requirement. Issuance of stock pursuant to the ESPP adopted by
the Company in February of 1998 would likely cause the Partnership's stock
ownership in the Company to fall below two-thirds. Because the general partner
in the past approved an amendment to the certificate of incorporation of the
Company that took away the right of stockholders of the Company to act by
written consent in lieu of a meeting, the Partnership cannot use its stock
ownership to remove directors of the Company except at a meeting of
stockholders. Stockholders have no right to call a special meeting of
stockholders. It is most likely, therefore, that the Partnership could remove
directors only at an annual meeting of stockholders. The Company last held an
annual meeting in February of 1998, and therefore Sutherland assumes that the
Company's next annual meeting will be scheduled for February of 1999.
Consequently, if the board of directors of the Company opposes a change of
control transaction, Section 203 and the inability of the Partnership to elect a
new board of directors until 1999 may deter, discourage, delay, or make more
difficult a change of control transaction proposed by the Trustee.
POSSIBLE FAILURE TO APPROVE PROPOSED DISSOLUTION
If the Proposed Dissolution is not approved, Sutherland believes that the
general partner will simply continue to conduct the business of the Partnership
as currently conducted. The general partner stated in its proxy statement
relating to the now-withdrawn GP Plan that if that plan were not approved, the
general partner would continue the business of the Partnership as currently
being conducted. The general partner also stated that it was not then exploring
any alternatives to its plan of withdrawal and dissolution, but might from time
to time explore alternatives. In a May 14, 1998 press release and in a May 14,
1998 letter to limited partners, the general partner announced that the GP Plan
had been withdrawn and that the Partnership would continue to hold its stock in
the Company as it had done in the past.
The general partner also disclosed in its proxy statement relating to the
now withdrawn GP Plan that at some time in the future it might elect to withdraw
as general partner. Such a withdrawal would likely result in the dissolution of
the Partnership and could result in a distribution in kind to the limited
partners of the Company's stock owned by the Partnership. In such a case, the
Partnership and the limited partners would lose any opportunity to obtain a
control premium for the Partnership's 67% stock ownership of the Company. The
general partner has stated that a distribution of the Company's stock to limited
partners carries a risk that the market price for the Company's stock might
decline by reason of the sale by limited partners of a significant amount of the
Company's stock within a short period of time.
Sutherland believes it unlikely that the general partner will resign
because such a resignation would result in the general partner forfeiting any
right to wind up the affairs of the Partnership and permit limited partners to
appoint a liquidator or petition the Delaware Court of Chancery for the
appointment of a liquidator pursuant to Section 17-804(a) of the Act. Given the
identity between the persons controlling the general
23
<PAGE>
partner and the Company, Sutherland believes it is doubtful that they would
voluntarily relinquish control over the winding up of the Partnership's affairs.
In addition, resignation of the general partner would result in the Partnership
having the right to buy out a substantial portion of the general partner's
interest in the Partnership, which could reduce the total returns to the general
partner. For these reasons, Sutherland believes at present that it is unlikely
that the general partner would elect to resign.
ELECTION TO DISSOLVE IRREVOCABLE
The election by limited partners to dissolve the Partnership will be
irrevocable once Sutherland executes and delivers to the Partnership the written
consent of a majority in interest of the limited partners to dissolve the
Partnership. Thereafter, limited partners will not be able to revoke the
dissolution of the Partnership even if circumstances develop that make it more
advantageous to limited partners not to have dissolved the Partnership.
POSSIBLE LITIGATION
Sutherland had sought to intervene in the pending lawsuit in the U.S.
District Court for the Northern District of California against the general
partner, the persons controlling the general partner and the Company, and was
granted leave to intervene for the limited purpose of expressing her views on
class certification. Sutherland anticipates that the general partner and
management of the Company and/or certain limited partners who supported the GP
Plan will oppose the Proposed Dissolution to which this Proxy Statement relates
and may institute litigation in an effort to prevent Sutherland from soliciting
proxies in favor of the Proposed Dissolution or to enjoin implementation of the
Proposed Dissolution. It is also possible that the general partner will contest
the validity of its removal as general partner. Were any such litigation
commenced, it might delay execution of a written consent to the Proposed
Dissolution, deter, discourage or make more difficult a change of control
transaction or otherwise delay or prevent implementation of the Proposed
Dissolution.
RISK OF AMOUNT DUE GENERAL PARTNER
The partnership agreement provides that in the event of a sale of
substantially all of the Partnership's ownership interest in the Company, after
limited partners receive a "Priority Return," the gain realized by the
Partnership from the sale is to be allocated 70% to limited partners as a group
and 30% to the general partner. Under the partnership agreement, the Priority
Return occurs when limited partners have received distributions that in the
aggregate equal their original capital contributions plus interest at 6% per
annum, compounded annually. Because limited partners have received no
distributions from the Partnership, for the Priority Return to occur the limited
partners would have to receive, as of September 1998, approximately $190,000 in
respect of each unit.
The Priority Return would be reached, as of September 1998, if the
Partnership receives approximately $27 per share for its stock in the Company.
Thus, if the Trustee liquidates the Partnership through a transaction in which
the Partnership receives more than $27 per share for its Company stock, the
General Partner would be entitled to 30 percent of the excess proceeds, subject
to the Partnership's right to buy out a substantial portion of the General
Partner's interest upon removal, as discussed below.
A clause in the partnership agreement provides that, after the Limited
Partners have received their Priority Return, gain received by the Partnership
in a sale of the Company or in the liquidation of the Partnership is to be
"allocated to the least extent necessary to cause the aggregate Capital Accounts
of the General Partner and of the Limited Partners to be in a ratio of 30% for
the General Partner and 70% for the Limited Partners." The general partner and
certain limited partners who claim to have participated in the development of
the GP Plan have contended, apparently relying on this clause, that the General
Partner would be entitled to approximately the first $60 or $65 million of
distributions made by the Partnership after the Priority Return is reached.
Sutherland believes that this contention by the general partner and the general
24
<PAGE>
partner's application of the clause in question are both incorrect and
inconsistent with representations made to limited partners in the Partnership's
original offering materials used in connection with the sale of limited
partnership units. The Mills Law Firm and Smith, Katzenstein & Furlow LLP,
Sutherland's attorneys, and an expert consulted by them, have concluded that
the capital accounts of the general partner and of the limited partners will be
actually or approximately equal to zero after distributions are made sufficient
to cause the Priority Return to be reached and that therefore the clause relied
on by the general partner will have no material monetary effect. The expert
consulted by Sutherland's attorneys, Kupperberg & Associates, is a certified
public accounting firm with significant audit, tax and business experience and
has testified in accounting matters in numerous state and federal courts.
Kupperberg & Associates has further advised Sutherland's attorneys that the
purpose of the clause in question was to adjust partnership distributions in the
event that the Priority Return was reached prior to a sale of the Partnership or
liquidation of the Company and the Partnership then owned assets such as
furniture or fixtures. If the Proposed Dissolution is approved, the Priority
Return will be reached, if at all, only as a result of the liquidation of the
Partnership and/or sale of the Company, because the Partnership has never made
any distributions. In addition, the Company's stock is the Partnership's only
substantial asset. Accordingly, Sutherland's attorneys have concluded that the
clause in question will not be implicated in a manner that would cause it to
significantly affect distributions to the limited partners. However, although
Sutherland's attorneys have concluded that it is unlikely that a court would
accept the general partner's application of the clause, their conclusion may not
be correct and a court may accept the general partner's application of the
clause. In that case, the return received by the limited partners in the
Proposed Dissolution could be significantly reduced.
The partnership agreement gives the Partnership the right to purchase the
general partner's interest following its removal as general partner, subject
only to the right of the general partner to retain a 7.5% interest in any gain
realized by the Partnership after the Priority Return has been paid to limited
partners. The purchase price for the general partner's interest is determined
by one appraiser appointed by the general partner, one appraiser appointed by
the Partnership, and one appraiser selected by the other appraisers in the event
the two appraisers cannot agree on the value of the general partner's interest.
Sutherland anticipates that the Trustee will exercise the Partnership's option
to acquire the general partner's interest as such an acquisition should decrease
the amount otherwise allocable to the general partner and increase
correspondingly the amount allocable to the limited partners. There can be no
assurance, however, that the Trustee will either elect or be able to cause the
Partnership to acquire the general partner's interest or that such acquisition
will materially benefit limited partners.
POSSIBLE DECLINE IN MARKET PRICE FOR THE COMPANY'S STOCK
The future market price for the Company's stock is inherently
unpredictable. General market and economic conditions may adversely affect the
trading price for the Company's stock, as may any adverse developments in the
business of the Company. Thus, there is a risk that the market price might
decline, with the result that the value of a change of control transaction may
decline. In the event that no change of control transaction is consummated,
such that the Company's stock owned by the Partnership is sold by the
Partnership in a registered offering or distributed in kind to limited partners,
the value of the stock at the time of such sale or distribution may be less than
its current market price. Moreover, if following a distribution of stock by the
Partnership a substantial amount of the distributed stock is sold in a short
period of time by limited partners, such sales may result in a decline in the
market price for the Company's stock. Sutherland believes any such decline
caused by sales of the Company's common stock by limited partners would be
temporary. Further, in the event that the Trustee distributes the Company's
common stock, the Trustee will include with such distribution a notice reminding
limited partners of the possible impact on the market value of the stock if a
substantial number of limited partners immediately sell substantial amounts of
the stock received by them.
CERTAIN TAX RISKS AND POSSIBLE TAX GAIN
The tax consequences to limited partners in connection with a change of
control transaction as
25
<PAGE>
contemplated by the Proposed Dissolution will depend on the specific terms of
the transaction. Thus, it is not possible to predict the actual federal and
state tax consequences. Generally, however, were the Partnership to dispose of
its stock interest in the Company for cash, recognizable gain would be incurred
by the Partnership in connection with the sale and allocated to limited partners
in accordance with the partnership agreement. Limited partners would be taxed
on the difference between their tax basis in their units and the gain allocated
to them.
It is possible, however, that a change of control transaction might take a
form, such as a like kind exchange or a merger, that would not require the
Partnership or limited partners to recognize any gain in connection with the
change of control transaction. In such a case, recognition of gain by limited
partners would be deferred until disposition of the property received by them.
Similarly, should no change of control transaction occur, and the Company's
stock owned by the Partnership be distributed to limited partners, no gain would
be recognized by limited partners until they sold the shares distributed to
them.
The Trustee will attempt to structure a transaction that achieves the best
return reasonably obtainable. While the Trustee will take into account the tax
consequences of a transaction, limited partners will have no control over the
transaction selected by the Trustee except to the extent that the transaction
itself takes a form, such as a merger of the Partnership into another entity,
that requires a vote of limited partners. Accordingly, limited partners may be
unable to avoid adverse tax consequences to them resulting from a change of
control transaction or the Proposed Dissolution.
POSSIBLE NEED FOR ADDITIONAL LIMITED PARTNER VOTE
The Proposed Dissolution confers broad power on the Trustee to dispose of
the assets of the Partnership. However, it is possible that the Trustee may
determine that the best return to the Partnership and limited partners may
involve a type of change of control transaction, such as a merger of the
Partnership into an acquiror in exchange for cash or other securities, that
requires the approval of the limited partners. It is also possible that a
transaction or series of transactions proposed by the Trustee will be subject to
federal legislation regulating limited partnership roll-ups. Certain
transactions subject to such federal roll-up legislation require approval by
two-thirds or three-fourths in interest of limited partners, depending on the
terms of the transaction. If the Trustee proposes such a transaction, the
appropriate amount in interest of limited partners would have to approve the
transaction for it to be implemented. If the transaction proposed by the Trustee
requires approval by a vote of the limited partners, the Partnership may bear
the additional expense of soliciting proxies in connection with such a
transaction. While the Trustee will endeavor to have such costs and expenses
borne by the other party to the transaction, there is no assurance that the
Trustee will be able to do so. Even if the Trustee is able to do so, there is
no assurance that such costs and expenses will not be borne indirectly by the
Partnership and the limited partners through a reduction in the amount of the
consideration paid for the stock of the Company owned by the Partnership.
POSSIBLE DELAY IN LIQUIDATION
The Proposed Dissolution and related Plan of Dissolution (see Exhibit A to
this Proxy Statement) do not impose time limitations on the Trustee to effect
any change of control transaction or distribute Partnership assets in kind
following dissolution. The Trustee will have considerable discretion in
determining whether a change of control transaction remains feasible, and
changes in the economy or the stock market may cause the Trustee to delay
implementation of a change of control transaction until the economy or market
conditions improve. Similarly, the Trustee will have considerable discretion in
determining whether to distribute the Partnership's assets in kind to limited
partners. It is likely that the Trustee will delay any distribution in kind
until such time as the Trustee is satisfied that it is not reasonably likely
that a change of control transaction providing a premium over market will be
entered into or consummated. Accordingly, the Proposed Dissolution
26
<PAGE>
carries the risk of a material delay between the approval of the Proposed
Dissolution and the receipt by limited partners of any liquidating
distributions.
THE PROPOSED DISSOLUTION
The dissolution proposed by Sutherland is set forth in a Plan of
Dissolution, a copy of which appears as Exhibit A to this Proxy Statement. The
Proposed Dissolution has four principal components, each of which is described
below. Limited partners should read the description below in conjunction with
the full text of the Plan of Dissolution. Implementation of each component of
the Proposed Dissolution is contingent on the receipt of proxies sufficient to
approve all components of the Proposed Dissolution.
REMOVAL OF GENERAL PARTNER. The first component is the removal of the
general partner. Section 7(g) of the Partnership Agreement authorizes a
majority in interest of the limited partners to remove the general partner if
they determine, in their discretion, that the general partner is not performing
in the best interest of the Partnership or if they determine that it is
otherwise in the best interest of the Partnership to remove the general partner.
For the reasons described under "Failure of General Partner to Protect the
Interests of Limited Partners," Sutherland believes that it is in the best
interests of the Partnership and the limited partners to remove the general
partner. Under Section 11(a)(iv) of the Partnership Agreement, removal of the
general partner will result in the dissolution of the Partnership unless within
90 days of the removal all limited partners vote to elect a successor general
partner. Because Sutherland will not vote in favor of the election of a
successor general partner, upon removal of the general partner the Partnership
would after 90 days be dissolved by virtue of Section 11(a)(iv) of the
partnership agreement. In addition, by removing the general partner, the
Partnership will have the option of acquiring a substantial portion of the
general partner's interest in the Partnership. Sutherland believes that such an
acquisition of the general partner's interest is likely (but not guaranteed) to
decrease the distributions to which the general partner will be entitled to
receive upon the dissolution and liquidation of the Partnership and result in a
corresponding increase in the distributions to the limited partners.
DISSOLUTION OF THE PARTNERSHIP. The second component of the plan of
dissolution is the determination by a majority in interest of limited partners,
contingent on removal of the general partner, to dissolve the Partnership,
pursuant to their right to do so under Section 11(a)(iii) of the partnership
agreement. Although, as explained above, the removal of the general partner
would ultimately result in the dissolution of the Partnership, the determination
by a majority of limited partners to dissolve the Partnership will cause the
Partnership to be dissolved 90 days earlier than if limited partners only
removed the general partner. By causing dissolution to occur immediately upon
the removal of the general partner, limited partners are entitled under Section
17-803(a) of the Act to immediately appoint an independent liquidating trustee
to wind up the Partnership's business and affairs.
APPOINTMENT OF INDEPENDENT LIQUIDATING TRUSTEE. The third component of the
Proposed Dissolution is the appointment pursuant to Section 17-803(a) of the Act
of [name] as the independent liquidating trustee (the "Trustee") to carry out
the winding up of the Partnership's business and affairs. The procedures that
the Trustee will follow in winding up the Partnership are described below in
"APPROVAL OF PLAN OF DISSOLUTION." [Name] has no prior relationship with the
Partnership, the general partner, the Company, Sutherland, Sutherland's
attorneys or, to the knowledge of Sutherland or her attorneys, any affiliates
or associates of any of the foregoing. For more information about [name], see
"About the Trustee." The Trustee will be compensated on an hourly basis at the
rate of $[ ] per hour. In addition, the Trustee will be reimbursed for all
expenses incurred on behalf of the Partnership in connection with the
dissolution and liquidation of the Partnership, including the identification,
negotiation and implementation of any change of control transaction. The
Trustee will be entitled to be indemnified for any loss arising out of the
performance by the Trustee of the Trustee's duties, except for any loss
resulting from the gross negligence or willful misconduct of the Trustee. In
the event the Trustee is sued or otherwise involved in any action, suit or
proceeding arising out of the Trustee's service as the liquidating trustee, the
Trustee will be entitled to have all litigation expenses, including attorneys'
fees, paid by the Partnership in advance of the final disposition of the action,
suit or proceeding,
27
<PAGE>
provided that the Trustee first furnishes the Partnership with an undertaking to
repay such advances in the event that it is ultimately determined that the
Trustee is not entitled to be indemnified by the Partnership for such expenses.
APPROVAL OF PLAN OF DISSOLUTION. The fourth component of the Proposed
Dissolution is the approval of a plan of dissolution that the Trustee will
follow in connection with winding up the Partnership's business and affairs.
Under that plan, the Trustee will hire a nationally recognized investment
banking or similar financial firm, or a qualified business broker, to seek out
and structure a change of control transaction that would maximize the price
received by the Partnership for its 67% of the Company's common stock. The
Trustee will seek to identify, enter into and consummate a change of control
transaction as soon as practicable following approval of the plan. Factors such
as litigation, the need for regulatory approvals, or other circumstances may
delay implementation of a change of control transaction.
If no change of control or similar transaction is identified, or if
identified is not entered into or consummated, and the Trustee determines that
it is not reasonably likely that a change of control transaction can be
consummated within a reasonable period of time, the Trustee will as soon
thereafter as practicable distribute pro rata to partners the common stock of
the Company owned by the Partnership, net of expenses of the plan of
dissolution. Alternatively, because the Partnership and the Company have a
registration rights agreement pursuant to which the Company has agreed to
register at its expense the Company's common stock owned by the Partnership, the
Trustee may elect, if no change of control transaction is consummated, to sell
the Company's stock in a registered offering and distribute net cash proceeds to
limited partners.
In addition to the attempt to obtain a control premium for the common stock
of the Company owned by the Partnership, the plan of dissolution contemplates
that the Trustee will exercise the Partnership's option to acquire a substantial
portion of the general partner's interest in the Partnership following the
removal of the general partner. The partnership agreement provides in substance
that after the limited partners receive the Priority Return, any gain resulting
from the sale of all or substantially all of the Partnership's assets is to be
allocated 30% to the general partner and 70% to the limited partners. However,
the partnership agreement also provides that in the event that the general
partner is removed, the Partnership has the option of purchasing the general
partner's interest at its appraised value, subject to the right of the general
partner to retain a 7.5% interest in distributions after the Priority Return is
reached. Sutherland believes that the cost of acquiring the general partner's
interest in the Partnership will be substantially less that the amount of
distributions that the general partner would be entitled to receive if the
general partner retained its full interest. Thus, Sutherland believes that
distributions to limited partners would likely be increased if the Partnership
exercised its right to acquire a substantial portion of the general partner's
interest. Whether such an increase would occur will depend on a number of
factors not presently ascertainable, including the method used to appraise the
value of the general partner's interest. Whether the Partnership exercises the
option to acquire the general partner's interest will be determined by the
Trustee based on the circumstances. For example, if the Trustee determined that
the Priority Return was not likely to be achieved as a result of a change of
control transaction, or that no change of control transaction was likely and
that the common stock of the Company would thus likely be distributed to limited
partners or sold in a registered offering, the Trustee may also determine that
it is not in the best interests of the Partnership and the limited partners to
exercise the Partnership's option to acquire the general partner's interest.
NO ASSURANCE OF CHANGE OF CONTROL TRANSACTION. Sutherland cannot predict
what, if any, change of control transaction may be identified by the Trustee, or
whether any such transaction will in fact be consummated. Accordingly, adoption
of the Proposed Dissolution carries a risk that the Partnership and limited
partners will not receive any premium over the current market price for the
Company's common stock owned by the Partnership. However, if such a transaction
is consummated, it may take the form of a sale or exchange for cash or other
property (including securities of another entity) of the common stock of the
Company owned by the Partnership, a merger of the Partnership into another
entity, or some other form of transaction. To ensure liquidity for limited
partners, the proposed plan of dissolution requires the Trustee to
28
<PAGE>
dispose of the Partnership's assets only for cash, cash equivalents, or
securities that when distributed to limited partners will be fully marketable
without restriction.
PRINCIPAL INTENDED BENEFITS. The Proposed Dissolution is intended to
provide the following principal benefits:
- Creating liquidity for limited partners on their investment, through
either a distribution in cash, cash equivalents or other marketable
securities received in a sale or other disposition of the
Partnership's assets or, if such a sale does not take place, through
the distribution of the common stock of the Company owned by the
Partnership.
- Acquirors typically pay a premium to obtain control over a company.
Entrusting the liquidation of the Partnership to an independent,
disinterested Trustee is intended to assure that material efforts
will be made to sell the common stock of the Company owned by the
Partnership in a transaction or series of transactions designed to
achieve such a control premium.
- As the general partner has observed, there is no business purpose or
benefit to limited partners from holding an interest in a partnership,
the sole purpose and activity of which is to hold publicly traded
shares of a single corporation. The dissolution of the Partnership
will eliminate the cost and inefficiency of maintaining such a
partnership entity and will simplify tax reporting for limited
partners.
While Sutherland believes the foregoing intended benefits will result from
adoption of the Proposed Dissolution, there can be no assurance that any of such
intended benefits will in fact result.
RISKS. Among the material risks of the Proposed Dissolution are the
following:
- It is not possible to predict whether a change of control transaction
will be consummated, and if consummated, when proceeds would be
distributed. There may be a material delay between approval of the
Proposed Dissolution and any distribution to the limited partners.
- At the time of any distribution in kind of the common stock of the
Company, its trading price may be significantly lower than the price
at the time limited partners execute proxies.
- Sale of the common stock of the Company by the Partnership will
prevent limited partners from realizing any potential increase in the
value of the stock as a result of the possible growth of the Company's
business or otherwise.
- The Proposed Dissolution could be the subject of litigation.
- The Proposed Dissolution of the Partnership will likely involve a
taxable event or result in other federal and state tax consequences to
limited partners.
- Once a dissolution is approved by limited partners it cannot be
undone.
- Because neither Delaware law nor the Partnership Agreement provides
limited partners with any right to dissent from or seek an independent
appraisal of the value of the limited partnership interests, limited
partners likely will be bound to accept the terms of the transaction
or transactions entered into on behalf of the Partnership by the
Trustee.
- If the Trustee enters into a form of transaction that is a merger of
the partnership into another
29
<PAGE>
entity or that is subject to federal legislation regulating limited
partnership roll-ups, it may be necessary for the Trustee to hold a
second vote to obtain the approval of limited partners.
- The out-of-pocket expenses advanced by Sutherland's attorneys in
connection with the solicitation of proxies for the Proposed
Dissolution, and the expenses and fees of the Trustee in effectuating
the Proposed Dissolution, collectively estimated at approximately
$______, will be paid by the Partnership.
See also "Risk Factors."
BACKGROUND AND PURPOSE OF THE PROPOSED DISSOLUTION
LACK OF DISTRIBUTIONS. Since the inception of the Partnership, limited
partners have received no distributions on their investment. By comparison, the
persons controlling the general partner have received substantial benefits that
include not only substantial salaries and bonuses from the Company but also a
substantial number of options to acquire the Company's common stock at favorable
exercise prices. According to the Company's financial reports, Messrs. Chill,
Kenner, Wright, Freed, and Beckman collectively own 360,766 options to acquire
Company stock at $10.72 per share. Sutherland estimates that, as of June __,
1998, the collective value of these options was over $___ million (based on the
June __, 1998 stock price of $______ per share).
FAILURE OF GENERAL PARTNER TO PROTECT THE INTERESTS OF LIMITED PARTNERS.
Based on various actions by the general partner described below, Sutherland
believes that the general partner has subordinated the interests of limited
partners to those of the Company's management, some of whom control the general
partner, and to the interests of the Company's public stockholders.
1. In 1994 the general partner caused the Partnership as the sole
stockholder of the Company to approve stock option plans pursuant to which some
486,027 options were granted to directors and officers, some of whom control the
general partner, thereby diluting the Partnership's 100% ownership of the
Company. The existence of the options gave the directors and officers an
incentive to create and increase a public float for the Company's stock and to
liquidate the Partnership in a manner that will maximize the value of the
options. Although the Partnership might have benefited indirectly from an award
of options because of the incentives they provided to management, other
performance-based incentives could have been used to reward management for their
performance without diluting the Partnership's 100% ownership of the Company.
Further, those directors and officers who control the general partner already
had a financial incentive to improve the Company's performance by virtue of
provisions in the partnership agreement that allocate 30% of distributions to
the general partner after limited partners receive the Priority Return. See
"Risk Factors - Risk of Amount Due General Partner."
2. The general partner sought to cause the Partnership to sell its stock
in the Company in a public offering in August of 1996. While such a sale would
have liquidated the Partnership's assets and limited partners would have
received a distribution of net assets, such a sale would have precluded the
Partnership from realizing any control premium because public offerings by their
nature do not involve the transfer of control to one person who will pay a
premium for control.
3. The general partner refused to call a meeting of limited partners to
vote on the proposed public offering after more than 10% in interest of the
limited partners requested such a meeting. Instead, in September of 1996, the
general partner abandoned the proposed offering and allowed the Company to
conduct a public offering of 2.8 million new shares of common stock. That
offering was completed in November of 1996.
4. The general partner permitted the 1996 public offering of stock by the
Company to be priced
30
<PAGE>
on November 1, 1996 at approximately $13.00 per share rather than delaying the
pricing until the Company had announced a significant improvement in the
Company's earnings. Shortly after public announcement on November 25, 1996 that
the Company's fourth quarter net sales were up 13.5%, fourth quarter operating
income was up 181%, and operating income for the fiscal year ended September 30,
1996 was up 34.1%, the price of the Company's stock increased to approximately
$20.
5. A principal effect of the 1996 offering of stock by the Company was to
dilute the Partnership's stock ownership from 100% to approximately 67%. By
creating a 33% public stockholder minority, the Company (with the general
partner's cooperation) made it more difficult for the Partnership to dispose of
the Company as a whole. The 1996 public offering did result in the creation of
a public market for the Company's stock. However, the Partnership generally
cannot take advantage of that public market because the Partnership's ability to
sell its stock is limited because the Partnership owns a controlling interest in
the Company and its sales of stock are subject to restrictions under federal
law. The creation of a public market benefited holders of options to purchase
stock of the Company, such as the persons who control the general partner, as
the public market gave value to the options and a ready market into which to
sell shares acquired on exercise of options.
6. As a result of the 1996 public offering by the Company, the Company
received cash proceeds from the offering that were used to reduce debt, and the
net tangible book value of a share of stock of the Company increased. The
Partnership benefitted from these events. However, to the extent the stock of
the Company was offered at a price that may not have reflected the Company's
improved performance, the Partnership did not benefit. Moreover, while net
tangible book value per share increased, it is not generally recognized as an
indicator of the actual value of stock. In addition, the reduction of the
Partnership's ownership interest from 100% to 67% may have the effect of
lessening the control premium the Partnership might otherwise obtain. The
public offering by the Company also created public minority stockholders. As a
result, the board of directors no longer owes fiduciary duties only to the
Partnership as the sole stockholder. To the extent that the interests of the
Partnership conflict with those of the public minority stockholders, the board
of directors of the Company face a conflict of interest that did not exist prior
to the public offering.
7. Prior to the 1996 public offering by the Company, it was not subject
to Section 203 of the Delaware General Corporation Law. As a result of the
public offering in 1996 by the Company, the Company became subject to Section
203, a statute that makes it more difficult to effect a change of control
transaction. The general partner could have taken steps to cause the Company
not to become subject to Section 203, but did not.
8. On or about September 6, 1996, the general partner permitted the
Company to enter into employment agreements with executives of the Company, some
of whom also control the general partner, that provide for the payment of
substantial sums to them in the event of a change of control, thereby impeding
change of control transactions. On or about October 24, 1996, the general
partner also caused the Partnership to approve an amendment to the certificate
of incorporation of the Company that eliminated the right of stockholders to act
by written consent in lieu of a meeting. This weakened the Partnership's
control of the Company because it could no longer act at any time to replace the
board of directors. The amendment also may deter or make more difficult a
change of control because an acquiror of more than 50% of the stock cannot act
immediately to replace the board. Because the Partnership owned 100% of the
stock, and would continue to own an absolute majority after the November 1996
public offering by the Company, and directors and officers of the Company
controlled the general partner, the Partnership had no need for and received no
benefit from the adoption of any measures that would impede a change of control.
Because the Partnership can no longer act at any time to replace the board and
because the Company is now subject to Section 203, the Partnership's ability to
sell freely its controlling interest in the Company has been impeded.
9. In September of 1997, the general partner proposed a plan of
dissolution (the "GP Plan") that would have dissipated entirely any control
premium that might be obtained for the Partnership's 67%
31
<PAGE>
controlling interest in the Company. Under the GP Plan, the Partnership
Agreement was to be amended to permit limited partners to withdraw their
capital, those limited partners desiring to do so could have exchanged their
limited partnership units for their pro rata share of stock of the Company, all
shares so withdrawn had to be sold immediately in an underwritten public
offering, and all shares not withdrawn would have remained in the Partnership
for distribution to limited partners 360 to 720 days after commencement of
implementation of the GP Plan. The general partner's plan did not afford any
opportunity for the Partnership (and indirectly the limited partners) to capture
a control premium. The compulsory public offering would have forced those
limited partners who chose to withdraw their capital in the form of shares to
sell the shares immediately at a discount to market and to pay material
underwriters' and brokers' fees and other expenses. Those limited partners who
elected not to withdraw their capital would have been forced to wait from one to
two years (and possibly longer) after implementation commenced to receive a
distribution of capital. A principal effect of the GP Plan would have been that
the Partnership's 67% ownership interest would have been dispersed into the
hands of a large number of public holders of stock, which would have eliminated
the concentration of ownership that resides in the Partnership. Such a result
would have precluded the Partnership from having any opportunity of realizing a
control premium for its stock and would likely have aided incumbent management
in retaining control of the Company and fending off any change of control
transaction.
10. The general partner permitted the Company to adopt an Employee Stock
Participation Plan ("ESPP") in February of 1998. The ESPP may benefit the
Company, and indirectly the Partnership, by reason of the incentives it may give
to employees eligible to participate in the ESPP. However, issuance of stock
pursuant to the ESPP would likely cause the Partnership's ownership to fall
below two-thirds of the Company's outstanding stock. That would result in the
Partnership losing its ability as a 67% stockholder to cause the Company's
certificate of incorporation to be amended to delete certain provisions that
require a two-thirds vote for their amendment, including the provision that
prohibits stockholders from acting by written consent.
11. The general partner has failed to develop an alternative plan for the
dissolution and liquidation of the Partnership, even though the general partner
has stated that the Partnership serves no business purpose and provides no
benefit to limited partners.
Sutherland was also aware that certain limited partners had instituted two
lawsuits, one in the Court of Chancery of the State of Delaware (the "Chancery
Court") and one in the United States District Court for the Northern District of
California (the "District Court"), challenging the conduct of the general
partner and the persons controlling the general partner. The complaints in those
lawsuits were later amended to seek an injunction against the GP Plan. On
October 23, 1997, the Chancery Court preliminarily enjoined the GP Plan, finding
that it was likely that the plan's terms violated the partnership agreement.
On March 19, 1998, the Delaware Supreme Court affirmed the Chancery Court's
grant of a preliminary injunction. Neither the preliminary injunction nor its
affirmance was a final determination on the merits that the GP Plan violated the
partnership agreement. On November 6, 1997, the District Court issued a
temporary restraining order against implementation of the GP Plan, finding that
the plaintiff had raised serious questions as to whether the plan violated
federal law relating to limited partnership roll-ups and as to whether the
general partner failed to disclose properly what actions limited partners needed
to take to require the GP Plan to be approved by two-thirds in interest of the
limited partners. However, the District Court never made a final determination
on the merits regarding these issues. Sutherland moved to intervene in the
litigation in the District Court, but that motion was denied. See "Summary of
Certain Pending Litigation." On May 14, 1998, the general partner announced
that it had withdrawn the GP Plan and that the Partnership would continue to
hold the Company's stock as it has in the past.
On December 29, 1997, limited partners commenced a second lawsuit in the
Chancery Court to challenge certain stock options granted by the Company to
certain of its current and former directors and executive officers, some of whom
control the general partner. On June 3, 1998, the plaintiffs in the two actions
in the Chancery Court moved to consolidate the two actions and to file a
consolidated third amended and supplemental class and derivative complaint. See
"Summary of Certain Pending Litigation."
32
<PAGE>
In its proxy statement soliciting votes in favor of its now withdrawn plan,
the general partner indicated that the Partnership had outlived its purpose,
stating: "THERE IS NO BUSINESS PURPOSE OR BENEFIT TO INVESTORS HOLDING INTERESTS
IN A PARTNERSHIP, THE SOLE PURPOSE AND ACTIVITY OF WHICH IS TO HOLD PUBLICLY
TRADED SHARES OF A SINGLE CORPORATION." Sutherland agrees, but believes that the
Partnership should now take appropriate steps to ensure not only liquidity for
limited partners, but also that limited partners receive the maximum return
reasonably attainable on their investment. Sutherland believes that the best
return to limited partners is most likely to result from a sale of the
Partnership's 67% ownership interest in the Company in a change of control
transaction in which the Partnership (and possibly minority stockholders of the
Company) receives a higher price per share than the current market price for the
Company's common stock.
FAILURE OF GENERAL PARTNER TO SEEK OUT A CONTROL PREMIUM. Sutherland has
been advised that, in the pending Chancery Court litigation, the general partner
has consistently argued that there was no significant interest on the part of
any person in acquiring the Company. However, Sutherland has learned that, in
discovery in the Chancery Court litigation, the plaintiffs confirmed that the
general partner had made only one limited effort since January of 1994, at the
latest, to explore a sale of the Company or other change of control transaction,
even though the Company's results of operations had significantly improved since
1994, making it a more attractive acquisition candidate, and the stock market
had also improved significantly. Based on the proxy statement for the GP Plan
and discovery in the Chancery Court litigation, it appears that the only effort
relating to exploring a change of control transaction made by or on behalf of
the general partner within the last four years was that Bear Stearns & Co., one
of the general partner's prime advisers, made a limited inquiry in August 1996
concerning a sale of the Company. That inquiry, which apparently consisted only
of mailing a prospectus about the Company to seven industrial companies and
three financial institutions, was made prior to the Company's public offering
and prior to the announcement of significant increases in the Company's earnings
for the fourth quarter ended September 30, 1996. No such inquiry was made
contemporaneously with the GP Plan proposed in 1997.
ATTRACTIVENESS OF THE COMPANY AS AN ACQUISITION CANDIDATE. The Company
would appear to be an attractive candidate for acquisition. In the Delaware
Chancery Court litigation, Joel S. Lawson III, a partner and Chief Executive
Officer of Howard, Lawson & Co., an investment banking firm experienced in
fairness opinions, valuations, mergers, acquisitions and divestitures, submitted
an affidavit dated October 10, 1997 in which he expressed the opinion that the
Partnership "would be able to realize a significant premium over the current
market price for its holdings of Synthetic Industries, Inc. common stock in
either a sale of its controlling block of stock in the Company or a sale of the
entire Company."
In reaching his opinion, Mr. Lawson relied on various factors in addition
to his firm's investment banking and valuation experience. Specifically, Mr.
Lawson considered the following: (i) as the 67% owner, the Partnership has the
ability to dispose of its interest in the Company through either a sale of its
controlling block of stock or a sale of the entire Company; (ii) acquisitions of
public companies are typically done at prices significantly above the recent
trading price of the acquired company, and the premium is observed in
acquisitions in all industries; (iii) the Company has been showing improved
operating results; (iv) for the twelve months ending September 30, 1997,
earnings per share were $1.85; (v) the Company's improving financial results
would be attractive to a potential acquiror of the Company; (vi) the Company's
rapid growth in earnings is expected to continue; (vii) the Company is a market
leader in its industry, a highly desirable characteristic for potential
acquirors; (viii) the Company's stock is neither actively traded nor well
followed by analysts, and those few analysts following the stock rate it a
strong buy; (ix) the Company's stock trades at only 15.4 times trailing 12
months adjusted earnings per share, while the average in the Standard & Poors
500 Index is 23.8 times trailing 12 months earnings, which suggests that
potential acquirors could pay a substantial premium without a dilutive impact on
their own earnings.
Mr. Lawson did not conduct any quantitative analysis, such as a discounted
cash flow analysis or a comparable company transaction analysis, in arriving at
his views.
33
<PAGE>
Counsel for Sutherland has contacted four investment banking firms, each of
which is experienced in valuations and acquisitions. Each has informally
expressed to counsel for Sutherland the view that the Company's stock trades at
a price well below comparable public company valuations and that the
Partnership's control block of stock could likely be sold at a substantial
premium over current market price for the stock. However, such views are based
on the internal analyses, if any, performed by such firms. These firms have not
been retained by Sutherland to express any views, and have not provided to
Sutherland or her counsel the basis on which they have arrived at their views.
[The identity of the four investment banking firms and additional
information supporting the possibility of a change of control transaction will
be added by amendment.]
Neither Sutherland, Sutherland's counsel or any other adviser retained by
Sutherland or her counsel has undertaken any other qualitative or quantitative
analysis, such as a discounted cash flow analysis or comparable company
transaction analysis. A discounted cash flow analysis can not be reliably done
without financial information from the Company that is not available to
Sutherland. The expense of retaining an adviser to conduct a comparable company
transaction analysis does not appear warranted under the circumstances.
GENERAL PARTNER HINDERED BY CONFLICTS OF INTEREST. Sutherland also
believes that the general partner has interests that materially conflict with
those of the Partnership and its limited partners. This conflict arises because
the general partner is dominated and controlled by individuals who are also
directors, principal executive officers, or both, of the Company. The interests
of the Company's management and public stockholders are not the same as the
interests of the Partnership and the limited partners. Sutherland believes that
this material conflict of interest may have contributed to the general partner's
failure to make any significant inquiries concerning a possible sale of the
Company as an alternative to the now withdrawn GP Plan.
NEED FOR INDEPENDENT TRUSTEE. Sutherland believes that the Partnership has
outlived its utility, that the general partner continues to refuse to explore
change of control transactions that might yield a premium for the Partnership's
67% stock ownership of the Company, and that the general partner has material
conflicts of interest. Thus, Sutherland believes that the affairs of the
Partnership would best be wound up by an independent liquidating trustee who
will not be hampered by any conflict of interest and who will actively seek out
change of control transactions in an effort to maximize the return to limited
partners.
CONDITIONS TO THE PLAN OF DISSOLUTION
The Proposed Dissolution will not be consummated unless the following
conditions are satisfied:
- Limited partners holding at least a majority of the outstanding units
grant to Sutherland a proxy to execute on their behalf a written
consent of limited partners removing the general partner, dissolving
the Partnership, appointing [name] as a liquidating trustee pursuant
to Section 17-803(a) of the Act, adopting the plan of dissolution,
selecting special counsel, and approving the opinion of special
counsel required by the partnership agreement;
- All necessary regulatory approvals, if any, shall have been obtained;
- No provision of applicable law or regulation and no judgment,
injunction, order or decree prohibits implementation or consummation
of the plan of dissolution; and
- All actions by or in respect of or filing with any governmental body,
agency or official authority required to permit the consummation of
the plan of dissolution shall have occurred.
34
<PAGE>
EXPENSES OF THE PLAN OF DISSOLUTION
The following table sets forth the material expenses estimated to be
incurred by the Partnership in connection with the implementation and
consummation of the Proposed Dissolution, exclusive of the expenses of
identifying, negotiating and consummating any change of control transaction and
the fees and expenses of any investment banking firm, brokerage firm or similar
professional hired by the Trustee to assist in attempting to identify and
consummate a change of control transaction:
<TABLE>
<CAPTION>
AMOUNT INCURRED OR
ESTIMATED TO BE INCURRED
------------------------
<S> <C>
SEC Registration Fees $ [ ]
Solicitation and Mailing Expenses(1) [ ]
Solicitation Agent Fee [ ]
Trustee's Fees (2) [ ]
Fees and Expenses of Opinion of Counsel (3) [ ]
Printing Costs [ ]
Repayment of Promissory Note Payable to the Company (4) [ ]
Miscellaneous [ ]
----------------
Total $ [ ]
</TABLE>
-----------------------------
1. Includes the estimated out-of-pocket expenses of Sutherland's
attorneys incurred in connection with the preparation of the Plan of
Dissolution and the solicitation of proxies, but excludes the amount
paid to the Solicitation Agent. Sutherland's attorneys will also be
reimbursed for the fees and expenses of the Solicitation Agent, which
are being advanced by Sutherland's attorneys. See "Interest of
Certain Persons in the Solicitation - The Mills Law Firm" and
"Interest of Certain Persons in the Solicitation - Smith, Katzenstein
& Furlow LLP."
2. The Trustee will receive fees based on an hourly rate of $[ ] per
hour. See "Plan of Dissolution; Trustee's Fees and Expenses" and
"About the Trustee."
3. Represents the fees and expenses incurred by Roberts, Isaf & Summers
in rendering their opinion pursuant to Section 12(d) of the
partnership agreement.
4. The general partner represented in its Joint Proxy Statement and
Prospectus dated September 19, 1997 in connection with the now
withdrawn GP Plan that $650,000 was due from the Partnership to the
Company in respect of expenses paid by the Company on behalf of the
Partnership. Sutherland does not have more current information on the
amount that may be actually due under such note or such other
undisclosed indebtedness of the Partnership to the Company, but
believes that the total amount of such indebtedness may be
substantially higher than $650,000.
SOLICITATION OF PROXIES FROM LIMITED PARTNERS
Limited partners are being asked to grant to Sutherland a proxy to execute
a written consent of limited partners adopting the Proposed Dissolution,
including the removal of the general partner for the reasons set forth in this
Proxy Statement, dissolution of the Partnership, appointment of [name] as
liquidating trustee for the Partnership, the adoption of the plan of dissolution
attached as Exhibit A to this Proxy Statement and incorporated herein by
reference, selection of special counsel, and approval of the opinion of counsel
attached as Exhibit B to this Proxy Statement. As a condition to the Proposed
Dissolution, holders of at least a majority in interest of outstanding
Partnership units must grant proxies to Sutherland in order for Sutherland to be
35
<PAGE>
authorized to execute a written consent of limited partners taking the actions
described above. Sutherland intends to execute a written consent of limited
partners as soon as practicable after receipt of proxies from the holders of at
least a majority of the outstanding units. As of the date of this Proxy
Statement, there were 800 units of limited partnership interest outstanding held
by approximately 1,900 limited partners of record.
- --------------------------------------------------------------------------------
YOU ARE URGED TO GRANT YOUR PROXY TO SUTHERLAND TO CONSENT TO THE PROPOSED
DISSOLUTION BY COMPLETING, SIGNING, DATING AND MAILING THE ENCLOSED PROXY IN
THE ENVELOPE THAT HAS BEEN INCLUDED FOR YOUR CONVENIENCE.
PLEASE RESPOND. YOUR PROXY IS IMPORTANT.
- --------------------------------------------------------------------------------
MARKET PRICE FOR UNITS
There is no established market for units of limited partnership interest.
The general partner has indicated that assignments of units have been extremely
limited and sporadic. The partnership agreement does not permit assignment of
units by limited partners without the consent of the general partner.
PROXY PROCEDURES
This Proxy Statement is furnished in connection with the solicitation of
proxies to authorize Sutherland to execute a written consent of limited partners
of the Partnership adopting the Proposed Dissolution. This Proxy Statement,
together with the enclosed proxy, were first mailed to limited partners on or
about [June ], 1998.
The costs of soliciting proxies are being advanced by attorneys for
Sutherland, who are also the attorneys representing certain limited partners in
litigation against the general partner and against the persons controlling the
general partner. The attorneys advancing such costs will be reimbursed by the
Partnership for such costs in the event that the Proposed Dissolution is
adopted. The attorneys will also reimburse custodians for their reasonable
expenses for forwarding proxy materials to beneficial owners of units, subject
to reimbursement by the Partnership in the event that the Proposed Dissolution
is adopted. Neither Sutherland, nor the Partnership, will reimburse the
attorneys for proxy solicitation costs if the Proposed Dissolution is not
adopted.
Georgeson & Co., Inc. (the "Solicitation Agent") has been retained to
assist Sutherland in the solicitation of proxies for a customary fee, the
estimated amount of which is included under "The Proposed Dissolution - Expenses
of the Plan of Dissolution." The Solicitation Agent's fees will be advanced by
the attorneys for Sutherland, who will be reimbursed by the Partnership for such
expense if the Proposed Dissolution is adopted.
RECORD DATE
The partnership agreement contains no provisions for the fixing of a record
date in connection with the solicitation of proxies or the execution of a
written consent. Accordingly, no record date has been fixed. Proxies granted
to Sutherland will be valid for one year or until their earlier revocation. In
the event that Sutherland receives proxies from the holders of at least a
majority in interest of outstanding units and executes a written consent to the
actions proposed in this Proxy Statement, Sutherland believes that to the extent
a record
36
<PAGE>
date is relevant, it will be the date on which the written consent is executed
and delivered to the Partnership.
The proxy granted to Sutherland will also be valid for voting at any
meeting of limited partners called for the purpose of voting on the Proposed
Dissolution. The proxy granted to Sutherland will not authorize Sutherland to
take any other action by written consent or to vote at any meeting on any matter
other than the Proposed Dissolution.
The solicitation of proxies will continue until Sutherland has received
sufficient proxies to take the action by written consent contemplated by this
Proxy Statement or Sutherland determines to abandon the solicitation by reason
of (i) the inability to obtain proxies from the requisite number of holders of
units or (ii) a determination by Sutherland that a transaction more beneficial
to limited partners than the Proposed Dissolution obviates the need for the
Proposed Dissolution.
Proxies given by limited partners pursuant to this Proxy Statement are
revocable at any time prior to the execution and delivery by Sutherland to the
Partnership of a written consent of limited partners taking the actions
described in this Proxy Statement. Revocation may be effected by delivering to
the Solicitation Agent a written revocation of a proxy, by delivering to the
Solicitation Agent a later dated proxy, or in the event that a meeting of
limited partners is called to consider the actions proposed to be taken by
written consent as described in this Proxy Statement, by attending such meeting
and voting in person.
Limited partners are requested to give their proxies to Sutherland by
completing the enclosed form of proxy and returning it signed and dated by mail,
overnight courier or hand delivery to the Solicitation Agent at the address set
forth below:
Georgeson & Co., Inc.
Wall Street Plaza
New York, New York 10005
CONSENT REQUIRED
To take action by written consent, Sutherland must receive proxies from the
holders of a majority of the outstanding units of limited partnership interest.
A failure to return a proxy to Sutherland or an abstention by a limited partner
is tantamount to a vote against the Proposed Dissolution. Therefore, each
limited partner who desires to consent to the plan of dissolution must return a
proxy to Sutherland so that Sutherland may execute on behalf of such limited
partner a written consent in favor of the Proposed Dissolution.
Each limited partner of record is entitled to give a proxy to Sutherland to
authorize Sutherland to execute a written consent on behalf of such limited
partner. Only proxies granted by limited partners who are limited partners on
the date they execute the proxy and remain limited partners of record on the
date on which Sutherland executes the written consent taking the actions
described in this Proxy Statement will be valid. Proxies solicited by
Sutherland will be voted in accordance with the directions on the proxy.
WHERE NO INSTRUCTIONS ARE INDICATED, THE PROXIES WILL BE VOTED FOR THE
PROPOSED DISSOLUTION.
PROBABLE LACK OF APPRAISAL RIGHTS
Neither the partnership agreement nor Delaware law provides any right to
limited partners to dissent from the Proposed Dissolution or to have their units
appraised or redeemed as a result of the adoption of the Proposed Dissolution.
In the event that the Trustee proposes a transaction or series of
transactions that constitute a limited partnership roll-up under federal law,
limited partners may be afforded appraisal rights. In connection with
37
<PAGE>
a limited partnership roll-up, limited partners must either (i) approve the
roll-up transaction by the affirmative vote of at least 75% in interest of the
limited partners, (ii) be afforded appraisal rights, (iii) appoint a committee
to review, negotiate about and/or recommend the transaction or (iv) be afforded
an opportunity to retain a comparable investment. In addition, certain
transactions that would otherwise be within the definition of a limited
partnership roll-up under federal law are exempt if they are approved by
two-thirds in interest of the limited partners.
Because it is not possible at this time to predict what transaction, if
any, the Trustee will enter into in connection with the disposition of the
Partnership's assets, it cannot be determined at this time whether the
transaction will be subject to the federal limited partnership roll-up rules and
regulations or, if subject to such rules and regulations, whether appraisal
rights will be offered to limited partners.
PARTNERSHIP UNITS AND PRINCIPAL HOLDERS THEREOF
As of the date of this Proxy Statement, the Partnership has reported that
there are 800 units of limited partnership interests outstanding held by
approximately 1,900 limited partners of record. As of the same date, no person
was reported by the Partnership, and no person is known to Sutherland, to own
beneficially more than 5% of the outstanding units.
THE PARTNERSHIP
The Partnership is a Delaware limited partnership organized in 1986 for the
purpose of acquiring the Company. An aggregate of 800 Units were issued for
aggregate capital contributions of approximately $78.4 million, which were used
to fund a portion of the purchase price for the Company. Since its formation,
the Partnership has conducted no business other than its ownership of the
Company, and the Partnership owns no assets other than common stock of the
Company. Based on publicly available information, Sutherland believes that the
Partnership's only material liability consists of a note payable to the Company
for costs incurred by the Company on the Partnership's behalf relating to the
development of earlier restructuring proposals that were not carried through.
Sutherland has not been able to determine the actual amount of such liability,
but believes it to be at least $650,000, though it may be substantially higher.
Since its acquisition, the Company has been highly leveraged and all cash
remaining after payment of debt service and operating costs has been reinvested
in the Company's business. Under certain loan agreements to which the Company
is a party, the Company is prohibited from paying dividends or making
distributions to its stockholders, including the Partnership. Consequently, the
Company has not paid a dividend or made any distributions since its acquisition
by the Partnership, and the Partnership has never made a cash distribution to
its partners.
Originally, the Partnership owned 100% of the common stock of the Company.
In November, 1996, the general partner of the Partnership permitted the Company
to make a public offering of stock. As a consequence, the Partnership's
ownership of the Company's stock was diluted to 5,781,250 shares, representing
about 67% of the Company's currently issued and outstanding common stock.
The sole general partner of the Partnership is SI Management, L.P., a
Delaware limited partnership. The sole general partner of SI Management, L.P.
is Synthetic Management G.P., a Georgia general partnership having five general
partners consisting of five Delaware corporations controlled, respectively, by
Leonard Chill, Ralph Kenner, William Gardner Wright, Jr. and W. Wayne Freed,
current executive officers of the Company, and Jon P. Beckman, a former
executive officer of the Company who is now a paid consultant to the Company.
THE COMPANY
38
<PAGE>
The Company is a Delaware corporation founded in 1969 to produce
polypropylene-based primary carpet backing. Since that time the Company's
business has expanded into the manufacturing and sale of a full line of
polypropylene-based industrial fabrics, specialty yarns and geotextiles.
The Company is one of the world's leading producers of polypropylene
fabrics and fibers for the home furnishing, construction, environmental,
recreational and agricultural industries. The Company manufactures and sells
more than 2,000 products in over 65 end-use markets. The Company believes that
it is the second largest producer of carpet backing in the world and is the
largest producer of synthetic fiber additives for concrete reinforcement through
its Fibermesh-Registered Trademark- line of products. The Company also produces
polypropylene products for the geotextile and erosion control markets and is a
leader in designing innovative products for speciality applications. The
Company's products are engineered to meet specific customer criteria such as
strength, flexibility, resistance to sunlight and water/air permeability. The
Company aims to compete in markets in which it can be the primary or secondary
provider of such products, with over 93% of its products meeting this criterion.
The Company's consolidated sales have grown from $195 million in fiscal 1992 to
net sales in excess of $345 million in fiscal 1997.
As a result of its public offering of common stock in November 1996, the
Company currently has 8,656,250 shares of common stock outstanding, of which the
Partnership owns 5,781,250 shares or approximately 67%. The Common Stock trades
under the symbol "SIND" on the Nasdaq National Market.
The principal executive office of the Company is located at 309 LaFayette
Road, Chickamauga, Georgia 30707, and its telephone number is (706) 375-3121.
SELECTED FINANCIAL DATA CONCERNING THE PARTNERSHIP
Since its inception in 1986, the Partnership has conducted no business
other than to own and vote its shares of common stock of the Company. In the
partnership's annual report to the Securities and Exchange Commission on Form
10-K for the fiscal year ended September 30, 1997, the general partner stated
that because the Partnership has no independent operations or assets other than
its investment in the Company, the Partnership's financial statements are
substantially identical to those of the Company, with the exception of the
publicly-owned minority interest in the Company and the amount due to the
Company for expenses of the Partnership paid by the Company on behalf of the
Partnership. Sutherland believes that the amount of the Partnership's
indebtedness to the Company is at least $650,000, and that it may be
substantially higher.
The selected financial data presented below is reproduced from the
Partnership's annual report to the Securities and Exchange Commission on Form
10-K for the fiscal year ended September 30, 1997. Sutherland disclaims any
responsibility for the completeness or accuracy of the information reproduced
below. SEE ALSO "Financial Information About the Partnership" and Exhibits C
and D to this Proxy Statement.
<TABLE>
<CAPTION>
Year Ended September 30,
1997 1996 1995 1994 1993
SUMMARY OF OPERATIONS
DATA:
<S> <C> <C> <C> <C> <C>
Net sales $345,572 $299,532 $271,427 $234,977 $210,516
Gross profit 112,385 91,211 76,721 82,672 68,335
Operating income 50,291 37,813 28,687 41,007 29,921
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
Year Ended September 30,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Income from continuing
operations before
provision for income
taxes, minority interest
in subsidiary net income
and extraordinary item 29,552 14,341 5,436 20,257 8,134
Income from continuing
operations before
minority interest in
subsidiary net income
and extraordinary item 17,011 7,441 1,936 11,657 3,662
Income from continuing
operations attributable
to limited partners 3,165 7,367 1,917 11,540 3,625
Income from discontinued
operations - - - - 1,420
Extraordinary item -
loss from early
extinguishment of debt (11,950) - - - (8,892)
Cumulative effect of
accounting change - - - - (8,500)
Net Income (loss) 3,197 7,441 1,936 11,657 (12,310)
Income from continuing
operations per limited
partnership unit $3.96 $9.21 $2.40 $14.43 $4.53
Limited partnership
units outstanding 800 800 800 800 800
BALANCE SHEET DATA:
Working capital $88,032 $63,418 $69,041 $44,116 $42,057
Total assets 394,795 323,756 312,302 287,935 260,374
Long-term debt 220,464 194,353 192,048 172,490 164,723
Partners' capital 68,876 65,185 57,758 55,819 44,425
</TABLE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The discussion below is based on the Internal Revenue Code of 1986 (as
amended) (the "Code"), Treasury Regulations (including proposed regulations)
promulgated thereunder, administrative pronouncements and judicial decisions,
each as now in effect, all of which are subject to change, possibly with
retroactive effect. The discussion below does not purport to address federal
income tax consequences applicable to particular categories of persons, some of
which (for example, financial institutions, insurance companies, foreign
investors or persons who acquired their Partnership interests generally within a
two-year period of the implementation of the Proposed Dissolution) may be
subject to special rules. No ruling on any of the issues discussed below will
be sought from the Internal Revenue Service, and the description of the income
tax consequences below is not binding on the Internal Revenue Service. Limited
partners should
40
<PAGE>
consult their own tax advisors in determining the specific federal, state,
local, foreign and any other tax consequences to them of the implementation of
the Proposed Dissolution. The limited partners are not indemnified for any
federal income taxes or other taxes that may be imposed upon them and the
imposition of any such taxes could reduce the value of the Proposed Dissolution
to any particular limited partner.
The following discussion of federal income tax considerations assumes that
pursuant to the Proposed Dissolution either cash resulting from a sale by the
Partnership of its common stock of the Company or the shares of the Company's
common stock owned by the Partnership will be distributed to limited partners.
It is possible that the Trustee may determine that some other transaction will
result in a greater return to the Partnership and the limited partners. Any
such transaction may have tax consequences that are materially different from
those discussed below. Accordingly, there is no assurance that the actual tax
consequences from implementation of the Proposed Dissolution will be as
described below. Because Sutherland cannot determine at this time what
transaction the Trustee may in fact consummate, it is not possible to predict
the tax consequences of the transaction.
CLASSIFICATION AS A PARTNERSHIP
The federal income tax consequences of the Proposed Dissolution depend, in
part, on the Partnership being classified as a partnership for federal tax
purposes. On December 17, 1996, the Internal Revenue Service issued Treasury
Regulation Sections 301.7701-1 through 301.7701-3 (the "Check-the-Box
Regulations"), thereby changing the longstanding entity classifications
regulations that were in effect at the time the Partnership was formed. Under
the Check-the-Box Regulations, a domestic entity formed under a state limited
partnership law is by default a partnership for federal income tax purposes,
unless such entity elects to be taxed as a corporation. The Partnership is a
limited partnership that was validly formed and has been recognized as a limited
partnership at all times since its inception under the Act. The Partnership has
claimed to be a partnership for federal income tax purposes since its inception.
Sutherland has no reason to believe that the classification of the Partnership
was or is under examination by the Internal Revenue Service. Assuming the
general partner does not cause or otherwise permit the Partnership to elect to
be taxable as a corporation, the Partnership will remain a partnership for
federal income tax purposes.
If, for any reason, the Partnership were treated for federal income tax
purposes as a corporation, the federal income tax consequences of the
implementation of the Proposed Dissolution would be different from the
description in this "Certain United States Federal Income Tax Considerations."
The Partnership would be required to pay federal income tax at corporate tax
rates on any net gain realized upon the sale or other disposition or the
distribution of the Common Stock to the Partners. Limited partners generally
would recognize gain or loss upon the distribution of Common Stock.
PRINCIPLES OF PARTNERSHIP TAXATION APPLICABLE TO THE PROPOSED DISSOLUTION
Subject to exceptions not applicable to the implementation of the Proposed
Dissolution and the discussion of Section 731(c) of the Code below, a partner
does not recognize gain upon the distribution of property by a partnership to
the partner, except to the extent that any money distributed exceeds the
adjusted basis of the partner's interest in the partnership immediately before
the distribution. The partner does not recognize loss upon any such
distribution, except when only money and certain other assets not applicable to
the implementation of the Proposed Dissolution are distributed. As a general
rule, partnerships recognize no gain or loss on the distribution of any property
to its partners.
The basis of property (other than money) distributed by a partnership to a
partner other than in liquidation of such partner's interest generally is the
partnership's adjusted basis in the property immediately before the distribution
but, in no event, shall it exceed the distributee partner's adjusted basis of
such partner's interest reduced by any money distributed in the same
transaction. In the context of a liquidation of a partner's interest in a
partnership, the basis of property distributed to a partner generally is an
amount equal to the
41
<PAGE>
adjusted basis of such partner's interest in the partnership, generally
determined immediately before the liquidation (adjusted to reflect any
partnership tax items subsequently allocated to such partner), reduced by any
money distributed by the partnership to the partner as part of the same
transaction.
Under Section 731(c) of the Code, marketable securities generally will be
treated as money for purposes of determining whether partners recognize gain
with respect to partnership distributions as described above. Marketable
securities are defined to include, in part, (i) financial instruments that are
actively traded within the meaning of Section 1092(d)(1) of the Code, (ii)
financial instruments the value of which is determined substantially by
reference to marketable securities, (iii) financial instruments that are readily
convertible into, or exchangeable for, money or marketable securities, and (iv)
any interest in an equity if, at the time the interest is distributed by the
partnership, substantially all (i.e., 90 percent or more) of the assets of the
entity consist of money, marketable securities or both. In addition, any
interest in an entity will be treated as a marketable security at the time the
interest is distributed by the partnership. This latter provision applies only
if less than 90 percent but 20 percent or more of the assets of the entity
(determined by value) at the time the interest in the entity is distributed
consist of money, marketable securities or both.
The Company's common stock is currently listed on the Nasdaq National
Market and Sutherland believes it likely that it will be so listed if and when
distributed by the Partnership under the Proposed Dissolution. In such event,
the common stock will be a marketable security within the meaning of Section
731(c) of the Code at that time. Applicable Treasury Regulations provide that
Section 731(c) of the Code does not apply, however, to marketable securities if
the following conditions are met: (1) such securities must not have been
marketable when acquired by a partnership, (2) the entity that issued the
securities had no outstanding marketable securities at the time such securities
were acquired by the partnership, and (3) the partnership distributed such
securities within five years of the date the securities became marketable. To
the best of Sutherland's knowledge the first two of these three conditions have
been met. Therefore, if the Company's common stock is distributed under the
Proposed Dissolution, the distribution should qualify for this exception to
Section 731(c) of the Code provided that the distribution is completed in
accordance with the Proposed Dissolution.
Despite qualifying for the exception discussed in the immediately preceding
paragraph, the common stock could be a marketable security in whole or in part
subject to Section 731(c) of the Code if 20 percent or more of the Company's
assets consist(ed) of marketable securities, cash or both at the time the common
stock was acquired by the Partnership or at the time it is distributed by the
Partnership. Sutherland believes, based on prior representations of the general
partner and the Company, that, at the time the Partnership acquired the common
stock and at all times since then, the Company has not held money, marketable
securities, or both having a total value equal to or exceeding 20 percent of the
total value of all assets of the Company ("excessive money and marketable
securities"). Provided that the Company does not acquire excessive money and
marketable securities and the Partnership does not acquire money or marketable
securities prior to completion of the Proposed Dissolution, if the Company's
stock is distributed to the limited partners under the Proposed Dissolution,
such distribution will not be subject to the application of Section 731(c) of
the Code.
This discussion assumes that the Proposed Dissolution will be completed (1)
by March 1, 2002; (2) at a time when less than 20 percent of the Company's
assets consist of marketable securities, cash or both; and (3) at a time when
the Partnership does not hold or own money or other marketable securities. If
the Proposed Dissolution is approved by the limited partners, the distribution
of the Company's common stock will occur, if at all, as described in this Proxy
Statement. Depending on all of the facts and circumstances, the federal income
tax consequences of failing to meet those conditions may be minimal. Any gain
recognized by a limited partner under Section 731(c) of the Code upon a later
distribution of common stock (or other marketable securities) generally would be
reduced by an amount equal to the excess of such limited partner's share of
total net gain in the Partnership's marketable securities that would be
recognized if the Partnership sold all of its marketable securities before such
distribution over such limited partners' share of such gain immediately after
the distribution.
42
<PAGE>
TREATMENT OF A DISTRIBUTION
Based on the discussion above, neither the Partnership nor any partner will
recognize gain or loss in the event of the distribution of common stock
pursuant to the Proposed Dissolution. The total tax basis of the common stock
distributed to each limited partner will equal the total tax basis of such
limited partner's Units as determined immediately before a distribution of stock
made pursuant to the Proposed Dissolution (as adjusted to reflect any
Partnership tax items subsequently allocated to such limited partner).
TREATMENT OF REPAYMENT OF PARTNERSHIP LIABILITIES AND PLAN COSTS
As part of the implementation of the Proposed Dissolution, the Partnership
will repay all of its outstanding liabilities (including costs that it has
incurred in connection with the Proposed Dissolution) by selling shares of the
Company's common stock. The use of common stock to repay such liabilities will
result in the recognition of taxable gain or loss which (along with the costs of
the Proposed Dissolution) will be allocated to the partners in accordance with
the terms of the partnership agreement. The partners will recognize taxable
gain or loss resulting from the use of common stock to repay the liabilities.
It is also not expected that the Partnership's costs materially will exceed the
estimated costs. Nevertheless, any such variance could result in additional
taxable income being recognized by the partners. In addition, any other
expenses of the partners paid by the Partnership pursuant to the terms of the
Proposed Dissolution could result in additional taxable income being recognized
by the partners. Each limited partner should consult such limited partner's own
tax advisor regarding the tax consequences of the repayment of Partnership
liabilities and costs of the Proposed Dissolution relevant to such limited
partner.
OTHER TAX MATTERS
Sutherland cannot guarantee that any federal income tax consequences
described in this section will be available. The availability of the federal
income tax considerations as described above is, in large part, dependent on
past, present and future facts and circumstances. Thus, the views of Sutherland
represent only Sutherland's best judgment. The views cannot be relied upon if
any of the material facts contained in the relevant documents or if any of the
assumptions are, or later become, materially inaccurate. The views have no
binding effect or official status of any kind, so that no assurance can be given
that the views would be sustained by a court, if contested, or that legislative
or administrative changes or court decisions will not be forthcoming which would
require modifications of the statements and conclusions expressed herein.
Moreover, Sutherland has not requested and will not request a private ruling
from the Internal Revenue Service regarding the classification of the
Partnership as a partnership for federal income tax purposes or regarding any of
the tax consequences of the Proposed Dissolution. The Internal Revenue Service
is not precluded from challenging the tax consequences of the Proposed
Dissolution described above.
EACH PARTNER ALSO SHOULD BE AWARE THAT THE FOREGOING SUMMARY DOES NOT
DISCUSS ALL ASPECTS OF UNITED STATES FEDERAL INCOME TAXATION THAT MAY BE
RELEVANT TO A PARTICULAR PARTNER IN LIGHT OF HIS OR HER CIRCUMSTANCES AND INCOME
TAX SITUATION. FOR THESE REASONS, EACH PARTNER SHOULD CONSULT HIS OR HER OWN
TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO SUCH PARTNER OF THE
IMPLEMENTATION OF THE PLAN.
STATE AND OTHER TAX MATTERS
In addition to the federal income tax consequences described in "Certain
United States Federal Income Tax Considerations," the limited partners should
consider the foreign, state and local tax consequences of the implementation of
the Proposed Dissolution. Foreign, state and local tax law may differ
substantially from federal income tax law, and the discussion above does not
describe any aspect of foreign, state or local taxation. Each partner should
consult his, her or its own tax advisor with respect to such tax matters.
43
<PAGE>
SUMMARY OF CERTAIN PROVISIONS OF THE PARTNERSHIP AGREEMENT
The Partnership Agreement governs the relationship among the partners and
establishes the respective rights and obligations of the general partner and the
limited partners. Some of the principal provisions of the Partnership Agreement
have been summarized elsewhere in this Proxy Statement. Certain other
provisions of the Partnership Agreement are summarized below. For complete
information, however, limited partners should read the Partnership Agreement
itself, a copy of which was provided to each limited partner in connection with
the original sale of Units by the Partnership and is on file with the Securities
and Exchange Commission as a part of the Registration Statement relating to the
original offering of Units. Sutherland will provide free of charge a copy of the
partnership agreement to any limited partner requesting a copy.
The following statements and other statements in this Proxy Statement
concerning the Partnership Agreement and related matters are merely a summary,
do not purport to be complete and are subject to, and qualified in their
entirety by reference to, the Partnership Agreement. Such statements do not and
cannot modify or amend the Partnership Agreement.
DISSOLUTION
Section 11(a) of the partnership agreement provides that the Partnership
shall continue its existence until December 31, 2035, unless terminated earlier
as a result of:
(1) the sale or other disposition of all or substantially all of the
assets of the Company (other than to an entity owned in whole or in
part, directly or indirectly, and controlled by, the Partnership);
(2) a determination to dissolve the Partnership by a majority in interest
of the limited partners;
(3) the removal, retirement, death, dissolution, insanity or resignation
of the general partner or the bankruptcy or insolvency of the general
partner which is not discharged or vacated within 90 days from the
date thereof, unless all of the limited partners agree to continue the
business of the Partnership within 120 days of the occurrence of such
an event; or
(4) the occurrence of any other event causing the dissolution of the
Partnership under the laws of the State of Delaware.
ALLOCATION OF PROFITS, LOSSES AND DISTRIBUTIONS, PRIORITY RETURN
The Partnership Agreement provides that income, gains, losses, deductions,
credits and distributions of the Partnership will generally be allocated among
and credited 99% to the Limited Partners in proportion to their respective
capital account contributions and 1% to the General Partner until such time as
the aggregate of distributions of cash and other property to all of the Partners
is equal to the aggregate capital account contributions of all of the Partners
plus an amount equivalent to a return thereon of 6%, compounded annually
(referred to in the Partnership Agreement as the "Priority Return"). As of
September 1998, the Priority Return would be reached if the Partnership
distributed approximately $190,000 per unit, which amount would be distributed
if the Partnership received approximately $27 per share for its stock in the
Company in a sale of that stock. After the Priority Return has occurred and
until the liquidation and termination of the Partnership, income, gains, losses,
deductions, credits and distributions of the Partnership will be allocated 70%
to the limited
44
<PAGE>
partners in proportion to their respective capital contributions and 30% to the
general partner. Upon the liquidation and termination of the Partnership,
distributions will be allocated 99% to the limited partners in proportion to
their respective capital account contributions and 1% to the general partner
until the Priority Return is paid. After the Priority Return is paid,
distributions generally will be allocated 70% to the limited partners in
proportion to their respective capital account contributions and 30% to the
general partner. A clause in the partnership agreement provides that, after the
Limited Partners have received the Priority Return in a sale of the Company or
in the liquidation of the Partnership, the balance of the gain received by the
Partnership in such a sale or liquidation is to be "allocated to the least
extent necessary to cause the aggregate Capital Accounts of the General Partner
and of the Limited Partners to be in a ratio of 30% for the General Partner and
70% for the Limited Partners." The general partner and certain limited partners
who claim to have participated in the development of the GP Plan have contended,
apparently relying on this clause, that the General Partner would be entitled to
approximately the first $60 or $65 million of distributions made by the
Partnership after the Priority Return is reached. Sutherland believes that this
contention by the general partner and the general partner's application of the
clause in question are both incorrect and inconsistent with representations made
to limited partners in the Partnership's original offering materials used in
connection with the sale of limited partnership units. The Mills Law Firm and
Smith, Katzenstein & Furlow LLP, Sutherland's attorneys, and an expert consulted
by them, have concluded that the capital accounts of the general partner and of
the limited partners will be actually or approximately equal to zero after
distributions are made sufficient to cause the Priority Return to be reached and
that therefore the clause relied on by the general partner will have no material
monetary effect. Kupperberg & Associates, the expert consulted by Sutherland's
attorneys, is a certified public accounting firm with significant audit, tax and
business experience and has testified in accounting matters in numerous state
and federal courts. Kupperberg & Associates has further advised Sutherland's
attorneys that the purpose of the clause in question was to adjust partnership
distributions in the event that the Priority Return was reached prior to a sale
of the Partnership or liquidation of the Company and the Partnership then owned
assets such as furniture and fixtures. If the Proposed Dissolution is approved,
the Priority Return will be reached, if at all, only as a result of the
liquidation of the Partnership and/or sale of the Company, because the
Partnership has never made any distributions. In addition, the Company's stock
is the Partnership's only substantial asset. Accordingly, Sutherland's
attorneys have concluded that the clause in question will not be implicated in a
manner that would cause it to significantly affect distributions to the limited
partners. However, although Sutherland's attorneys have concluded that it is
unlikely that a court would accept the general partner's application of the
clause, their conclusion may not be correct and a court may accept the general
partner's application of the clause. In that case, the return received by the
limited partners in the Proposed Dissolution could be significantly reduced.
VOTING RIGHTS OF LIMITED PARTNERS
The limited partners do not have the right to participate in the management
or control of the Partnership's business. The partnership agreement provides
that the limited partners may, by vote of the limited partners whose interests
in the aggregate exceed fifty percent (50%) of the interests of the limited
partners who are then partners in the Partnership, (i) dissolve the Partnership;
or (ii) remove any general partner.
Meetings may be called by limited partners holding more than ten percent
(10%) of the then outstanding partnership interests for any matters for which
the partners may vote as set forth in the partnership agreement. If limited
partners desire to exercise their voting rights with respect to (a) a proposed
sale, exchange, mortgage, pledge, transfer, financing or refinancing of all or
substantially all of the assets of the Partnership or (b) removal of the general
partner, an opinion must be delivered to the Partnership by counsel selected by
limited partners whose aggregate interests exceed ten percent (10%) of the
aggregate interests of all of the limited partners. The opinion must state that
the actions to be taken (i) are legal, (ii) may be effected without subjecting
any limited partner to liability as a general partner under the laws of the
State of Delaware or of any other jurisdiction in which the Partnership is doing
business and (iii) may be effected without changing the status of the
Partnership for tax purposes. In addition, the partnership agreement requires
that such opinion be affirmatively approved in writing by limited partners whose
aggregate interests in the Partnership equal at least the same percentage in
interest of the limited partners as is required to take the action to which the
opinion relates.
45
<PAGE>
The partnership agreement, however, provides that an opinion need not be
obtained as regards matters referenced in clause (ii) of the preceding paragraph
if a court having appropriate jurisdiction has entered a judgment that the
actions to be taken may be effected without subjecting any limited partner to
liability as a general partner under the laws of the State of Delaware or any
other jurisdiction in which the Partnership is doing business. Likewise, an
opinion need not be obtained as regards matters referenced in clause (iii) of
the preceding paragraph if a court having appropriate jurisdiction has entered a
judgment, or the Internal Revenue Service has issued a ruling, that the actions
to be taken may be effected without changing the status of the Partnership for
tax purposes.
Sutherland has obtained the opinion of such counsel as required by the
partnership agreement. A copy of the opinion appears as Exhibit B to this Proxy
Statement. In addition to seeking proxies in favor of the Proposed Dissolution,
this Proxy Statement also solicits proxies granting Sutherland the authority to
execute a written consent of limited partners selecting Roberts, Isaf & Summers
as counsel for purposes of rendering the opinion called for by the partnership
agreement and approving the opinion of counsel rendered by Roberts, Isaf &
Summers.
REMOVAL, WITHDRAWAL, BANKRUPTCY, INSOLVENCY, DISSOLUTION, RETIREMENT
OR RESIGNATION OF THE GENERAL PARTNER
The limited partners may, by vote of a majority in interest, remove any
general partner from the Partnership. The general partner is also permitted, at
its discretion, to resign at any time. Unless 100% in interest of the limited
partners designate a successor general partner within 90 days, the Partnership
will be dissolved. In the event of the removal or voluntary withdrawal of the
general partner, the general partner ceases to be a general partner of the
Partnership and a portion of its interest will be assigned, PRO RATA with the
limited partners, to any successor general partner so that the successor general
partner has not less than a 1% interest in the Partnership. Any such interest
not so assigned will, at the option of the Partnership, either be wholly
converted into a special limited partner interest and retained by the General
Partner or partially purchased by the Partnership for its appraised value in
accordance with the terms of the Partnership Agreement and partially converted
into a special limited partner interest entitling the removed or voluntarily
withdrawn general partner to receive 7.5% of all distributions to partners after
the Priority Return has occurred. In the event of the bankruptcy, insolvency,
dissolution, retirement or resignation of the General Partner, if 100% in
interest of the limited partners appoint a successor general partner, the
successor general partner shall succeed to the interest of the bankrupt,
insolvent, dissolved, retired or resigned General Partner without compensation
to the latter.
APPLICABLE LAW
The Partnership Agreement provides that it is to be construed and enforced
in accordance with the laws of the State of Delaware.
ABOUT THE TRUSTEE
[to be provided in amendment]
The Trustee has no prior relation with the Company, the Partnership,
Sutherland, Sutherland's attorneys or, to the knowledge of Sutherland and her
attorneys, any affiliate or associate of any of the foregoing.
INTEREST OF CERTAIN PERSONS IN THE SOLICITATION
46
<PAGE>
CHARLENE E. SUTHERLAND
Charlene E. Sutherland is a limited partner of the Partnership. She owns
two quarter-units of limited partnership interest. She acquired one of her
quarter-units in the Partnership's original offering of units, and she acquired
her other quarter-unit in the secondary market. She is a certified financial
planner and licensed tax practitioner in the State of California. Since January
of 1990 she has been a registered representative and a principal of a major
registered broker-dealer on an independent contractor basis. From 1986 to 1990,
Sutherland was a registered representative with Integrated Resources Equity
Corp., on an independent contractor basis. From 1979 to 1985, she was employed
by Equitec Securities Corp., as a senior account executive.
From 1990 to 1991, Sutherland served on the board of directors of the
American Association of Limited Partners, a lobbying group that engaged in
lobbying efforts in support of the Limited Partnership Rollup Reform Act of
1993. Between 1987 and 1990, Sutherland served as the producer and moderator of
a local public-access-cable, non-commercial television show called Wealth
Management, an informational show for investors.
Sutherland's father-in-law, Judge Kenneth E. Sutherland (retired), owns
one-quarter unit in the Partnership, and a number of her clients own in the
aggregate another four and three-quarter units. As a limited partner,
Sutherland had serious concerns about the GP Plan. She moved to intervene in
litigation involving the GP Plan in the United States District Court for the
Northern District of California, but that motion was denied. See "Summary of
Certain Pending Litigation -- United States District Court for the Northern
District of California."
In the event the Proposed Dissolution is approved, Sutherland will be
treated no differently than any other limited partner with respect to
distributions. However, the out-of-pocket expenses incurred by The Mills Law
Firm and Smith, Katzenstein & Furlow LLP on Sutherland's behalf in connection
with the solicitation of proxies, including the fees and expenses of the
Solicitation Agent, will be paid by the Partnership. If the Proposed
Dissolution is not approved, Sutherland will not be obligated to reimburse the
out-of-pocket expenses incurred by The Mills Law Firm and Smith, Katzenstein &
Furlow LLP in connection with their assistance to Sutherland in the solicitation
of proxies in favor of the Proposed Dissolution.
THE MILLS LAW FIRM
The Mills Law Firm, together with Smith, Katzenstein & Furlow LLP,
attorneys at law, represent Sutherland in connection with the solicitation of
proxies pursuant to this Proxy Statement. The Mills Law Firm owns no units in
the Partnership, and other than as described herein, has no interest in the
Partnership or in the Proposed Dissolution.
The Mills Law Firm, together with Smith, Katzenstein & Furlow LLP,
represents certain limited partners in the Chancery Court litigation, which is a
derivative action and a putative class action, and the District Court
litigation, which is a putative class action. See "Summary of Pending
Litigation."
The Mills Law Firm, together with Smith, Katzenstein & Furlow LLP, have
participated in the development of the Proposed Dissolution as a means of
protecting the interests of the Partnership and its limited partners. The Mills
Law Firm, together with Smith, Katzenstein & Furlow LLP, have advanced the costs
and expenses of the preparation of this Proxy Statement and the solicitation of
proxies by Sutherland, including the fees and expenses of the Solicitation
Agent. In the event that the Proposed Dissolution is approved and implemented,
The Mills Law Firm and Smith, Katzenstein & Furlow LLP will be entitled to be
reimbursed by the Partnership for the out-of-pocket expenses advanced by them in
connection with the solicitation of proxies by or on behalf of Sutherland. Such
costs and expenses are estimated to be approximately $[ ] in the aggregate.
47
<PAGE>
The Mills Law Firm and Smith, Katzenstein & Furlow LLP intend to seek
attorney's fees to compensate them for their efforts on behalf of limited
partners as allowed under the law. Certain limited partners have signed
contingency fee agreements with The Mills Law Firm. In addition, counsel who
represent plaintiffs in derivative and class actions may petition the court for
reasonable attorney's fees. The interests of The Mills Law Firm and Smith,
Katzenstein & Furlow LLP in receiving attorney's fees as compensation for their
efforts on behalf of limited partners give The Mills Law Firm and Smith,
Katzenstein & Furlow LLP an incentive to cause the return the limited partners
receive for their investment in the Partnership to be increased as much as
possible. The contingency fee agreements entered into with The Mills Law Firm
by certain limited partners provide that the attorney's fees of The Mills Law
Firm increase in proportion to the amount those limited partners receive in the
liquidation of the Partnership. Similarly, in derivative and class actions,
courts often, but not always, award attorney's fees in proportion to the benefit
generated by the attorneys on behalf of the class or the investors in the
corporation or partnership involved.
Although The Mills Law Firm believes that its efforts to date in the
pending litigation will entitle the firm to an award of fees and expenses by one
or both of the courts in which such litigation is pending, it is not possible to
predict the amount of fees and expenses, if any, that a court may ultimately
award. Fee awards vary significantly, and are often influenced by such factors
as the magnitude of the benefit achieved, the effort expended by counsel, the
difficulty of the issues, and the stage of proceedings (e.g., whether the
benefit was obtained through settlement or after trial on the merits). For
example, in the Delaware Court of Chancery, fee awards in derivative and class
actions have generally ranged from approximately 10% to approximately 25% of
the value of the benefit achieved in the litigation, as determined by the court.
The Mills Law Firm has an incentive to promote the adoption of the Proposed
Dissolution because to the extent that the Proposed Dissolution increases the
return to the Partnership or the limited partners, the benefit achieved as a
result of the pending litigation will also be increased. That may result in a
larger award of fees by the court(s). In addition, The Mills Law Firm has an
incentive to promote the Proposed Dissolution because the amount that The Mills
Law Firm will be entitled to under its contingency fee agreements will increase
should the Proposed Dissolution increase the amount received by limited partners
in the liquidation of the Partnership.
In the event the Proposed Dissolution is adopted, it is possible that the
Trustee may retain The Mills Law Firm to perform legal services for the
Partnership in connection with the dissolution and liquidation of the
Partnership, including the negotiation and implementation of a change of
control transaction. The Mills Law Firm has no understanding, arrangement or
agreement with the Trustee regarding any retention by the Trustee of The Mills
Law Firm to perform any services on behalf of the Partnership in the event the
Proposed Dissolution is adopted. Because implementation of the Proposed
Dissolution and any consequent change of control transaction is expected to
increase the fees that may be awarded in the pending litigation or received
through The Mills Law Firm's contingency fee agreements, The Mills Law Firm does
not intend to charge the Partnership or the Trustee for legal services in the
event the Trustee retains The Mills Law Firm in connection with the dissolution
and liquidation of the Partnership. However, The Mills Law Firm will expect
reimbursement of any out-of-pocket expenses incurred by it on behalf of the
Partnership or the Trustee. The amount of any such expenses cannot be estimated
at this time.
The Mills Law Firm is located at 300 Drake's Landing, Suite 155, Greenbrae,
California 94904. Its telephone number is (415) 464-4770.
SMITH, KATZENSTEIN & FURLOW LLP
Smith, Katzenstein & Furlow LLP ("SKF"), attorneys at law, together with
The Mills Law Firm, represent Sutherland in connection with the solicitation of
proxies pursuant to this Proxy Statement. SKF owns no units in the Partnership,
and other than as described herein, has no interest in the Partnership or in the
Proposed Dissolution.
48
<PAGE>
SKF, together with The Mills Law Firm, represents certain limited partners
in the Chancery Court litigation and the District Court litigation. See
"Summary of Pending Litigation."
SKF's interests in the Proposed Dissolution are substantially the same as
those of The Mills Law Firm, as described above.
In the event the Proposed Dissolution is adopted, it is possible that the
Trustee may retain SKF to perform legal services for the Partnership in
connection with the dissolution and liquidation of the Partnership, including
the negotiation and implementation of a change of control transaction. SKF has
no understanding, arrangement or agreement with the Trustee regarding any
retention by the Trustee of SKF to perform any services on behalf of the
Partnership in the event the Proposed Dissolution is adopted. Because
implementation of the Proposed Dissolution and any consequent change of control
transaction is expected to increase the fees that may be awarded in the pending
litigation or received as a result of The Mills Law Firm's contingency fee
agreements, SKF does not intend to charge the Partnership or the Trustee for
legal services in the event the Trustee retains SKF in connection with the
dissolution and liquidation of the Partnership. However, SKF will expect
reimbursement of any out-of-pocket expenses incurred by it on behalf of the
Partnership or the Trustee. The amount of any such expenses cannot be estimated
at this time.
SKF is located at 800 Delaware Avenue, Suite 7000, Wilmington, Delaware
19801. Their telephone number is (302) 652-8400.
SUMMARY OF CERTAIN PENDING LITIGATION
DELAWARE COURT OF CHANCERY
INITIAL PROCEEDINGS IN DELAWARE
Dr. Dwight E. Wininger, a limited partner, commenced on February 11, 1997 a
class and derivative action on behalf of limited partners against the general
partner and the persons controlling the general partner (the "First Delaware
Lawsuit"). He amended his complaint in the First Delaware Lawsuit on June 11,
1997, and again on October 3, 1997. Gary T. Charlebois, a limited partner,
became the second named plaintiff in the First Delaware Lawsuit when the
Delaware complaint was amended on October 3, 1997. On June 25, 1997, the
defendants filed a motion to dismiss the First Delaware Lawsuit. That motion
has not been decided.
On September 24, 1997, the plaintiffs filed a motion for a preliminary
injunction against the GP Plan. On October 23, 1997, the Delaware Chancery
Court granted the plaintiffs' motion for a preliminary injunction, and enjoined
the defendants from implementing the GP Plan. The defendants appealed the
preliminary injunction to the Delaware Supreme Court. On March 19, 1998, the
Delaware Supreme Court affirmed the order of the Court of Chancery enjoining the
GP Plan.
Certain limited partners favoring the GP Plan moved to intervene in the
First Delaware Lawsuit as defendants for the purpose of opposing the injunctive
relief granted by the Court of Chancery. These limited partners also moved to
disqualify The Mills Law Firm, one of the law firms representing Sutherland and
plaintiffs Wininger and Charlebois. The grounds alleged for disqualification
were that certain limited partners then or formerly represented by The Mills Law
Firm favored the GP Plan and that there was thus a conflict of interest between
those partners and the plaintiffs in the First Delaware Lawsuit. On April 27,
1998, the Chancery Court denied the motion to disqualify and granted the motion
to intervene as defendants.
On June 2, 1998, the intervening limited partners filed a counter claim
against the plaintiffs in the First Delaware Lawsuit. The counterclaim seeks
reconsideration of the injunction against the GP Plan, a declaration of the
validity of the GP Plan, an order requiring the plaintiffs to post a $5,000,000
bond, damages for the
49
<PAGE>
injunction against the GP Plan, disqualification of The Mills Law Firm, and
denial of the class certification of the action as pled by the plaintiffs. The
plaintiffs in the First Delaware Lawsuit believe that the allegations of the
counterclaim are moot in light of the withdrawal by the general partner of the
GP Plan, have already been decided against the intervenors by the Chancery
Court, and/or fail to state a cognizable legal claim.
CLAIMS ASSERTED AGAINST THE DEFENDANTS
The current central allegations of the plaintiffs in the First Delaware
Lawsuit, which are denied by the defendants, are that:
- The defendants have breached their fiduciary duties to the limited
partners by failing to adequately market the Partnership's controlling interest
in the Company as a block and to explore transactions which could realize a
control premium for the Partnership, such as transactions involving a sale of
the controlling interest to a single buyer.
- The individual defendants -- Leonard Chill, Ralph Kenner, W. Wayne
Freed, W. Gardner Wright, and Jon Beckman (collectively, "Management") -- have
conflicts of interest. The members of Management own and control the general
partner. Four of them also have executive positions with the Company which pay
them substantial salaries, bonuses, and benefits, and the fifth receives
$125,000 per year as a consultant to the Company. The First Delaware Lawsuit
alleges that Management has incentives not to explore transactions which could
involve a change of control of the Company and which could thereby realize a
control premium for the Partnership, because such a transaction could cause the
members of Management to lose their lucrative positions with the Company. The
First Delaware Lawsuit also alleges that defendants Chill, Kenner, Freed, and
Wright have fiduciary duties to the minority shareholders in the Company which
actually or potentially conflict with their fiduciary duties to the limited
partners.
- The defendants breached their fiduciary duties to the limited partners
by causing the Partnership to approve the granting of stock options to the
members of Management and to other officers of the Company at an exercise price
of $10.72 per share and to non-officer directors of the Company at an exercise
price of $6.83 per share.
- The defendants breached their fiduciary duties to the limited partners
by causing the Company to grant defendants Chill, Kenner, Freed, and Wright
employment agreements with lucrative "golden parachute" provisions which would
entitle the four men to receive lump sum payments in excess of twice their
annual salaries should they be terminated in connection with a change of control
of the Company.
- The defendants breached their fiduciary duties to the limited partners
by attempting to sell all the Partnership's stock in the Company in a public
offering in August 1996 prior to the announcement of significantly increased
Company earnings. (This proposal was abandoned after over ten percent in
interest of the limited partners requested a Partnership meeting to vote on the
proposal.)
- The defendants breached their fiduciary duties to the limited partners
by conducting a public offering in November 1996 of newly-issued Company stock
at $13 per share, prior to the announcement of significantly increased Company
earnings which caused the stock price to rise. (The First Delaware Lawsuit
alleges that this public offering, because of its timing, unfairly diminished
the value of the Partnership's stock in the Company.)
RELIEF REQUESTED
The principal remedies currently requested by the First Delaware Lawsuit
are:
- Removal of the General Partner.
50
<PAGE>
- Dissolution of the Partnership.
- Appointment of a liquidating trustee charged with ensuring that the
limited partners receive the highest possible return for their investment upon
dissolution.
- An order requiring the defendants to disgorge any profits they may
receive through their stock options or the "golden parachute" provisions of
their employment agreements.
- A declaratory judgment stating, among other things, that the
defendants' fiduciary duties require them to obtain the highest possible return
for the limited partners in the liquidation of the Partnership.
- Compensatory damages.
- An award of costs of suit, including attorney's fees and expenses.
ADDITIONAL LITIGATION IN DELAWARE
On December 29, 1997, Dr. Wininger, one of the plaintiffs in the First
Delaware Lawsuit, commenced a second derivative action on behalf of the
Partnership in the Delaware Court of Chancery (the "Second Delaware Lawsuit") in
which he seeks to invalidate stock options granted by the Company to current and
former officers and directors of the Company.
MOTION TO CONSOLIDATE THE FIRST AND SECOND DELAWARE LAWSUITS AND TO AMEND
On June 3, 1998, the plaintiffs in the First Delaware Lawsuit and the
Second Delaware Lawsuit filed a motion to consolidate the First Delaware Lawsuit
and the Second Delaware Lawsuit and for leave to file a consolidated third
amended and supplemental class and derivative complaint. In addition to
consolidating the two lawsuits, the proposed amended complaint deletes various
requests for relief relating to the GP Plan. The withdrawal by the general
partner of the GP Plan has made litigation of those issues unnecessary. The
proposed amended complaint adds claims that relate to the Proposed Dissolution.
Specifically, the proposed amended complaint seeks declaratory relief relating
to the allocation of profits between the general partner and the limited
partners following the Priority Return. The proposed amended complaint also
seeks an injunction against the implementation by the board of directors of the
Company of any measure that would impede a change of control transaction, states
claims of breach of fiduciary duty against the directors of the Company who are
not also controlling persons of the general partner, and seeks an injunction
against the issuance of stock pursuant to the ESPP.
UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA
PROCEEDINGS IN CALIFORNIA
Dr. Dwight E. Wininger, a limited partner, commenced on May 1, 1997, an
action in the United States District Court for the Northern District of
California (the "District Court") against the general partner and the persons
controlling the general partner (the "California Lawsuit"). In its initial
phase, the California Lawsuit alleged that the defendants violated the federal
securities laws by advocating for the GP Plan, in advance of the dissemination
of a proxy statement, in a letter dated March 21, 1997 and a press release dated
June 9, 1997. On May 23, 1997, the plaintiff moved for a preliminary injunction
to remedy these alleged violations.
On August 4, 1997, the District Court issued an order which decided the May
23 motion for a preliminary injunction. The District Court ruled that the
plaintiff demonstrated a likelihood of success on the merits on the California
Lawsuit's claims that the defendants violated the federal securities laws in
connection
51
<PAGE>
with their March 21 letter and their June 9 press release. The District Court's
August 4 order stated that "Defendants made statements that are probably
prohibited by SEC regulations." However, the District Court denied the May 23
motion for a preliminary injunction, ruling that the equities weighed against
granting injunctive relief as of August 4.
On August 19, 1997, the District Court appointed plaintiff Wininger as lead
plaintiff and appointed The Mills Law Firm as class counsel, though the District
Court stated that these appointments are subject to reconsideration at the time
class certification is determined. On September 19, 1997, the lead plaintiff
filed a motion for partial summary judgment that the defendants violated federal
securities regulations in connection with their March 21 letter and their June 9
press release.
On October 1, 1997, the lead plaintiff filed a motion for a temporary
restraining order and a preliminary injunction to prohibit the defendants from
implementing the GP Plan, holding the special meeting at which the GP Plan was
to be voted on, or continuing to solicit proxies for the GP Plan. On October
15, 1997, in the California Lawsuit, three limited partners, including
Sutherland, with the aid of another law firm, filed a motion to intervene in the
California Lawsuit and a motion for a temporary restraining order. The latter
motion requested that the limited partners be given at least 120 days to call
for a meeting of limited partners at which the GP Plan would have been required
to receive, in order to be passed, approval by two-thirds in interest of the
limited partners.
On November 6, 1997, the District Court issued a temporary restraining
order prohibiting the defendants from implementing the GP Plan, but did not
enjoin the defendants from proceeding with the special meeting. The District
Court found that the lead plaintiff had raised at least two serious questions.
First, the District Court found that the lead plaintiff raised serious questions
as to whether the defendants properly disclosed what the limited partners had to
do in order to require the GP Plan to be approved by two-thirds in interest of
the limited partners. Second, the District Court found that the lead plaintiff
raised serious questions regarding whether the GP Plan is a "roll-up
transaction" governed by the Limited Partnership Rollup Reform Act of 1993 ("the
Rollup Reform Act"). The District Court noted that one of the requirements of
the Rollup Reform Act is giving limited partners at least 60 days to vote on a
proposed transaction, and that limited partners were given less than 60 days to
decide how to vote on the GP Plan.
In issuing a temporary restraining order, the District Court considered the
papers filed by the three limited partners, including Sutherland, who moved to
intervene in the California Lawsuit. On November 14, 1997, the parties
stipulated that the lead plaintiff's complaint would be amended, effective as of
December 5, 1997, to add claims relating to the proxy solicitations for the GP
Plan.
Certain limited partners favoring the GP Plan moved to intervene in the
California Lawsuit for the purposes of opposing injunctive relief against the GP
Plan. These limited partners also moved to disqualify The Mills Law Firm, one
of the law firms representing Sutherland and plaintiff Wininger, based on
alleged conflicts of interest. The grounds alleged for disqualification were
that certain limited partners then or previously represented by The Mills Law
Firm favored the GP Plan and that there was thus a conflict of interest between
those limited partners and plaintiff Wininger. The plaintiff moved for class
certification on April 10, 1998.
On May 28, 1998, the District Court denied the motions to intervene of both
groups of limited partners who had sought to intervene (including the motion of
the group that included Sutherland), denied the plaintiff's motion for a
preliminary injunction as moot, ordered the defendants to file a motion to
dismiss the remaining claims in the case by June 19, 1997, and denied the
plaintiff's motion for class certification without prejudice to the motion being
refiled if the motion to dismiss is denied. On May 29, 1997, the District Court
gave notice of its tentative intent to deny the motion to disqualify The Mills
Law Firm. On June 1, 1998, the District Court gave notice of its tentative
intent to deny the plaintiff's motion for partial summary judgment.
52
<PAGE>
On June 19, 1998, the defendants moved to dismiss the California Lawsuit,
contending that the lawsuit is moot. This motion is scheduled to be heard on
July 24, 1998.
CLAIMS ASSERTED AGAINST THE DEFENDANTS
The current central allegations of the plaintiff in the California Lawsuit,
which are denied by the defendants, are as follows:
- Defendants failed to adequately disclose to the limited partners in
proxy solicitations the defendants' conflicts of interest.
- Defendants failed to disclose that the Partnership could receive a
control premium by engaging in a transaction involving a sale or other block
transfer of its controlling interest in the Company.
- Defendants falsely or misleadingly represented that, upon the
liquidation and termination of the Partnership, after the Priority Return is
reached, the general partner would be entitled to 100% of the profits of the
Partnership until the ratio of the aggregate capital accounts of all partners
reached 30% for the general partner and 70% for the limited partners. (The
California Lawsuit alleges that the general partner has no right to receive 100%
of the profits of the Partnership at any time and only has the right to receive
30% of the profits of the Partnership after the Priority Return is reached.)
- Defendants violated the federal securities laws by making numerous
false and misleading statements and failing to disclose many material facts (in
addition to the alleged misrepresentations and nondisclosures described above)
in the proxy solicitations they sent to limited partners in connection with the
GP Plan.
- Defendants violated the federal securities laws by advocating in favor
of the GP Plan, prior to disseminating a proxy statement, in their March 21
letter and their June 9 press release.
RELIEF REQUESTED
The main remedies currently requested by the California Lawsuit are:
- An injunction against future violations of the securities laws by the
defendants.
- A declaratory judgment stating that the defendants have violated the
federal securities laws.
- Damages.
- An award of costs of suit, including attorney's fees and expenses.
FINANCIAL INFORMATION ABOUT THE PARTNERSHIP
Since its inception in 1986, the Partnership has conducted no business
other than owning and voting its shares of common stock of the Company. The
general partner has stated that because the Partnership has no independent
operations or assets other than its investment in the Company, the Partnership's
financial statements are substantially identical to those of the Company, with
the exception of the publicly-owned minority interest in the Company and a debt
due to the Company for expenses of the Partnership paid by the Company on behalf
of the Partnership. Sutherland believes that the amount of the Partnership's
indebtedness to the Company is at least $650,000, and that it may be
substantially higher.
53
<PAGE>
The Partnership has furnished financial statements for the fiscal year
ended September 30, 1997 in its annual report on Form 10-K and interim financial
information in its quarterly reports on Form 10-Q for the quarters ended
December 31, 1997 and March 31, 1998 filed with the Securities and Exchange
Commission. Copies of the Partnership's annual report on Form 10-K for the
fiscal year ended September 30, 1997 and Form 10-Q for the second quarter ended
March 31, 1998 are attached as Exhibits C and D to this Proxy Statement. SEE
ALSO "Selected Financial Data Concerning the Partnership."
Sutherland has no access to the financial records of the Partnership other
than those made publicly available by the Partnership. Consequently, Sutherland
makes no representation as to the accuracy of the financial information
appearing in the Partnership's annual and quarterly reports attached as Exhibits
C and D to this Proxy Statement.
WHERE YOU CAN FIND MORE INFORMATION
The Partnership and the Company are subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). In accordance with the Exchange Act, the Partnership and the Company
file reports, proxy statements and other information with the Securities and
Exchange Commission (the "Commission"). Such reports, proxy statements and
other information may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Judiciary
Plaza, Washington, D.C. 20549, and at the Commission's Regional Offices in New
York (Seven World Trade Center, 13th Floor, New York, New York 10048), and
Chicago (Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661). Copies of these materials may be obtained from the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. In addition, such reports, proxy statements and other
information may be electronically accessed at the Commission's site on the World
Wide Web located at http://www.sec.gov. Such reports, proxy statements and
other information concerning the Company may also be inspected at the offices of
the Nasdaq National Market, 1735 K Street, N.W., Washington, D.C. 20006.
/s/ Charlene E. Sutherland
--------------------------
Charlene E. Sutherland
54
<PAGE>
EXHIBIT A
PLAN OF DISSOLUTION
For the purpose of dissolving and winding up and settling the affairs of
Synthetics Industries, L.P. (the "Partnership"), a limited partnership organized
and existing under the Delaware Revised Uniform Limited Partnership Act (the
"Act") and pursuant to applicable provisions of the Act and the Partnership's
Amended and Restated Limited Partnership Agreement dated as of November 11,
1986, including the Amendment to Amended and Restated Limited Partnership
Agreement of Synthetic Industries L.P. dated as of November 11, 1986 (as so
amended, the "Partnership Agreement"), a majority in interest of the limited
partners of the Partnership adopt this Plan of Dissolution.
1. REMOVAL OF GENERAL PARTNER.
Pursuant to Section 7(g)(i) of the Partnership Agreement, a majority in
interest of limited partners having determined in their discretion that SI
Management, L.P., the general partner of the Partnership, is not fully
performing its powers, duties and obligations in the best interest of the
Partnership and that it is otherwise in the best interest of the Partnership to
do so, the general partner is hereby removed as general partner of the
Partnership, such removal to be effective as of the Effective Date (as defined
in Section 5). From and after the removal of the general partner, it shall
cease to function as such.
2. DISSOLUTION.
Pursuant to Section 11(a)(iii) of the Partnership Agreement, the
Partnership shall, contingent upon the removal of the general partner, be
dissolved, such dissolution to be effective as of the Effective Date.
3. APPOINTMENT OF LIQUIDATING TRUSTEE.
Pursuant to Section 17-803(a) of the Act, and contingent upon the removal
of the general partner, [name] is hereby appointed as, and shall be, the
liquidating trustee (the "Trustee") to wind up the business and affairs of the
Partnership. The appointment of the Trustee shall be effective upon the later
to occur of the Trustee's written acceptance of appointment or the Effective
Date. Pursuant to Section 17-803(b) of the Act, the Trustee shall have the
power and authority to wind up the business and affairs of the Partnership, and
may, in the name of, and for and on behalf of, the Partnership, prosecute and
defend suits, whether civil, criminal or administrative, gradually settle and
close the Partnership's business, dispose of and convey the Partnership's
property, discharge or make reasonable provision for the Partnership's
liabilities, and in accordance with the provisions of the Partnership Agreement
distribute to the partners of the Partnership any remaining assets of the
Partnership. As provided in Section 17-803(b) of the Act, neither the
appointment of the Trustee by the limited partners, the acceptance by the
Trustee of the appointment as liquidating trustee, the Trustee's status as
liquidating trustee, nor the performance by the Trustee of the Trustee's duties
and responsibilities in connection with winding up the business and affairs of
the Partnership shall affect the limited liability of limited partners or impose
the liability of a general partner on the Trustee.
4. DISPOSITION OF PARTNERSHIP ASSETS BY TRUSTEE.
In connection with the winding up of the business and affairs of the
Partnership, the Trustee is authorized to dispose of the assets of the
Partnership in such manner and pursuant to such transaction or transactions or
series of related transactions as the Trustee in the Trustee's discretion
determines will result in the highest return to the Partnership and the partners
that the Trustee determines to be reasonably attainable. The Trustee shall, and
by the Trustee's acceptance of the Trustee's appointment as Trustee, the Trustee
agrees to, take the following actions:
A-1
<PAGE>
(a) As soon as practicable following the Effective Date, the Trustee shall
seek to dispose of the common stock of Synthetic Industries, Inc., a Delaware
corporation (the "Company"), owned by the Partnership in a transaction or series
of transactions (whether related or unrelated) that will in the Trustee's
judgment result in the realization by the Partnership of a premium over the
market price of common stock of the Company (a "change of control transaction").
The Trustee is expressly authorized to exercise all voting rights of the stock
of the Company held by the Partnership, and is further expressly authorized to
hire, and shall hire, a qualified investment banking firm or similar financial
institution or qualified business broker to assist the Trustee in identifying,
structuring and consummating a change of control transaction.
(b) As soon as practicable following the Effective Date, the Trustee shall
take all action deemed by the Trustee to be reasonably necessary, appropriate or
convenient for the purpose of enabling the Partnership to enter into one or more
agreements providing for a change of control transaction.
(c) If the Trustee enters into one or more agreements on behalf of the
Partnership as contemplated by subsection (b) above, the Trustee shall take all
action deemed by the Trustee to be reasonably necessary, appropriate or
convenient for the purpose of causing the change of control transaction to be
consummated as soon as reasonably practicable.
(d) Any change of control transaction entered into by the Trustee on
behalf of the Partnership, whether involving a sale of stock, exchange of stock,
merger of the Partnership or the Company, or other transaction of a similar or
different kind, shall provide that the consideration to be received by the
Partnership in such transaction shall consist of cash, cash equivalents or
marketable securities.
(e) In the event that the Trustee determines in the exercise of the
Trustee's good faith business judgment and after consultation with the
investment banking firm or similar financial institution or business broker
retained by the Trustee pursuant to Section 4(a) that a change of control
transaction is not reasonably likely to be entered into or consummated, the
Trustee shall liquidate such number of shares of common stock of the Company as
may be necessary to discharge the obligations of the Partnership and (1) sell as
soon as practicable the shares of common stock of the Company in a registered
offering and distribute the net cash proceeds pro rata to the partners or (2)
distribute as soon as practicable the remaining shares of common stock of the
Company pro rata to the partners as their interests may appear. In the event the
Trustee so distributes the Company's stock, the Trustee shall include with such
distribution a notice cautioning limited partners that if a substantial number
of limited partners immediately sell substantial amounts of the stock received
by them, this could cause a decline in the market price of the stock.
(f) As soon as practicable following the removal of the general partner,
the Trustee shall cause the Partnership to exercise its option to acquire the
interest of the removed general partner pursuant to and in accordance with
Section 7(g)(ii) of the Partnership Agreement unless the Trustee, based upon the
written opinion of a qualified expert, determines that in the absence of the
exercise of such option the amount distributable to the general partner in
respect of the general partner's interest in the Partnership would be less than
the sum of (i) the amount distributable to the general partner following the
exercise of such option and (ii) the exercise price of the option.
(g) In making any determination that it is reasonably likely that a change
of control transaction will occur, that it is reasonably likely that the
Trustee will be able to enter into one or more agreements relating to a change
of control transaction or that there is a reasonable likelihood that a change of
control transaction can be consummated, the Trustee may rely on the opinion,
either oral or written, of any investment banking firm or similar financial
institution or business broker retained by the Trustee pursuant to Section 4(a).
5. EFFECTIVE DATE.
This Plan of Dissolution shall become effective upon the approval of this
Plan of Dissolution by
A-2
<PAGE>
limited partners holding a majority in interest of the Partnership's outstanding
limited partnership interests (the "Effective Date"). The approval of a
majority in interest of the limited partners may be given by written consent or
by vote at a meeting of limited partners.
6. TIME FOR WINDING UP.
The limited partners and the Trustee recognize that, although the Trustee
will endeavor to identify, negotiate, enter into, and cause to be consummated a
change of control transaction as soon as reasonably practicable, the time within
which a change of control transaction can be effected, or a determination made
that such a transaction is not reasonably likely to occur, cannot be predicted
in light of possible changes in the economy in general or in the industry in
which the Company engages, delays caused by litigation challenging the plan of
dissolution or any change of control transaction, and other circumstances not
within the control of the Trustee. Accordingly, the Trustee shall be obligated
only to wind up the business and affairs of the Partnership within such period
of time as the Trustee may in the exercise of the Trustee's business judgment
determine is in the best interests of the Partnership and its partners as a
whole.
7. COMPENSATION OF TRUSTEE.
The Trustee shall be compensated out of the assets of the Partnership on an
hourly basis at the rate of $[amount] per hour. In addition, the Trustee shall
be reimbursed out of the assets of the Partnership for all expenses incurred by
the Trustee in the performance of the Trustee's duties or incurred on behalf of
the Partnership in connection with any change of control transaction or other
liquidation of Partnership assets. The Trustee shall look only to the assets of
the Partnership for payment of the Trustee's compensation and for reimbursement
of expenses. No partner shall have any personal liability for any compensation
due to the Trustee or for any expenses for which the Trustee is entitled to be
reimbursed.
8. INDEMNIFICATION OF TRUSTEE.
The Trustee shall not be liable to the Partnership or any general partner,
removed general partner or limited partner except for acts or omissions
constituting gross negligence or willful misconduct. The Trustee shall be
entitled to be indemnified out of the property of the Partnership to the fullest
extent that a director of a corporation may be indemnified under Section 145 of
the General Corporation Law of the State of Delaware. The right to be
indemnified shall include the right to payment of all litigation expenses,
including attorney's fees and expenses, in advance of the final disposition of
any action, suit or proceeding, provided that the Trustee first executes and
delivers to the Partnership an undertaking to repay such advances in the event
that it is ultimately determined that the Trustee is not entitled to be
indemnified as authorized by this Section 8.
9. REIMBURSEMENT OF PROXY SOLICITATION EXPENSES
If this Plan of Dissolution becomes effective, the Partnership shall
reimburse whatever party or parties incur the costs connected with soliciting
proxies for the Plan of Dissolution for such costs and expenses.
A-3
<PAGE>
EXHIBIT B
OPINION OF COUNSEL
_____________________, 1998
Synthetic Industries, L.P.
Ladies and Gentlemen:
This opinion is being rendered to you in our capacity as Special Counsel
selected by certain Limited Partners of Synthetic Industries, L.P. (the
"Partnership") acting pursuant to paragraph 7(g) and 11(a) of the Amended and
Restated Limited Partnership Agreement dated as of November 11, 1986 of
Synthetic Industries, L.P. (the "Agreement"), as amended by the Amendment to
Amended and Restated Limited Partnership Agreement dated May, 1987 (the
"Amendment"), and with respect to the actions sought to be taken by the Limited
Partners which require the opinion of counsel prescribed by paragraph 12(d) of
the Agreement.
We have reviewed unsigned copies of the Agreement and the Amendment which were
filed by the Partnership with the United States Securities and Exchange
Commission (the "SEC") on August 8, 1997, as Exhibit 3.1 to Amendment No. 1 to
Form S-4 Registration Statement of the Partnership. For purposes of this
opinion, we have assumed, but have not independently verified, that the
Agreement and the Amendment have been validly executed by the partners of the
Partnership, that the Agreement and the Amendment remain in full force and
effect, and that they have not been further amended. We have also assumed the
authenticity of the Agreement and the Amendment and all other documents
presented to us for our review and the conformity of all copies to the
originals.
In rendering this opinion we have examined paragraphs 7(g), 11(a) and 12(d) of
the Agreement and the Amendment. We have also examined the Proxy Statement to
the Limited Partners of the Partnership by Charlene E. Sutherland dated
_______________, 1998 (the "Proxy Statement").
For purposes of rendering this opinion, we have assumed that the Partnership is
not doing business in any states other than the States of Delaware and Georgia.
We understand that public filings made by the Partnership support this
assumption.
In addition, we have examined certain certificates and other documents, and we
have made such other inquiries with respect to matters of law and fact as we
have deemed relevant as a basis for this opinion.
Our opinion is limited to the opinion that (i) the removal of the General
Partner in accordance
B-1
<PAGE>
with paragraph 7(g) of the Agreement, (ii) the dissolution of the Partnership in
accordance with paragraph 11(a)(iii) of the Agreement, (iii) the appointment of
a liquidating trustee pursuant to Section 17-803(a) of the Delaware Revised
Uniform Limited Partnership Act (the "Act") to carry out the winding up of the
Partnership's business and affairs, and (iv) the approval of a plan of
dissolution for the Partnership pursuant to the Act (all of which are described
in the Proxy Statement, and are collectively hereinafter referred to as the
"Actions to be taken by Limited Partners"), and the authorization of the
foregoing four matters by the written consent of the Limited Partners in
accordance with the Section 17-302(e) of the Act (the "Consent"), as well as the
calling of a meeting of partners in accordance with paragraph 12(d) of the
Agreement for the purpose of voting on the Actions to be taken by Limited
Partners (hereinafter referred to as "the Calling of a Meeting"), should the
Calling of a Meeting take place, will not have certain results.
Based upon the foregoing, it is our opinion that:
The Actions to be taken by Limited Partners and the Consent, or if it occurs the
Calling of a Meeting, are consistent with the procedures set forth in the
Agreement and the Act and are legal, such may be effected without subjecting any
Limited Partner to liability as a general partner under the laws of the States
of Delaware and Georgia, and such may be effected without changing the status of
the Partnership for tax purposes. Of course, upon completion of the dissolution
the Partnership will no longer exist for tax purposes.
Our opinion is rendered as of the date hereof and is expressly limited as
stated. We assume no responsibility or obligation to withdraw or review our
opinion or notify anyone if a change occurs. This opinion is solely for your
benefit and for your use in connection with the transactions described in this
opinion and may not be reproduced or quoted or otherwise referred to in any
report or documents except to the extent necessary or appropriate to ensure
compliance with paragraphs 7(g), 11(a) and 12(d) of the Agreement.
We understand that our opinion will be filed with the SEC as an exhibit to the
Proxy Statement, and we consent to such filing and the inclusion of our opinion
as an exhibit to the Proxy Statement.
We are members of the State Bar of Georgia and, in addition, have examined
certain laws of the States of Delaware. We are not opining herein as to the
laws of any jurisdictions other than the laws of the United States and the laws
of the States of Georgia and Delaware. We render no opinion regarding
compliance with federal or state securities laws.
Very truly yours,
ROBERTS, ISAF & SUMMERS
A Professional Corporation
B-2
<PAGE>
EXHIBIT C
[Form 10-K for Synthetic Industries, L.P. for the fiscal year
ending on September 30, 1997.]
[Filed on December 29, 1997.]
C-1
<PAGE>
EXHIBIT D
[Form 10-Q For Synthetic Industries, L.P. for the quarter
ending on March 31, 1998. ]
[Filed on May 15, 1998.]
D-1
<PAGE>
PROXY
CHARLENE E. SUTHERLAND
4512 Bird of Paradise Lane
La Mesa, CA 91941
e-mail: [email protected]
THIS PROXY IS BEING SOLICITED BY CHARLENE E. SUTHERLAND, A LIMITED PARTNER IN
SYNTHETIC INDUSTRIES, L.P., A DELAWARE LIMITED PARTNERSHIP (THE "PARTNERSHIP").
THIS PROXY IS NOT BEING SOLICITED BY THE GENERAL PARTNER OF THE PARTNERSHIP.
The undersigned hereby appoints Charlene E. Sutherland ("Sutherland") as proxy,
with full power of substitution and resubstitution, and hereby authorizes
Sutherland to represent and to express written consent by the undersigned, as
designated below, with respect to the Proposed Dissolution. In the event that a
meeting of limited partners of the Partnership is called for the purpose of
voting on the Proposed Dissolution, this Proxy also appoints and authorizes
Sutherland to represent and to vote, as designated below, at any such meeting.
Capitalized terms used but not defined in this Proxy have the meanings given to
them in the Proxy Statement to which this Proxy relates.
YOU MAY AUTHORIZE SUTHERLAND TO EXPRESS YOUR WRITTEN CONSENT TO OR AGAINST, OR
TO VOTE IN FAVOR OF OR AGAINST, OR ABSTAIN FROM CONSENTING OR VOTING, WITH
RESPECT TO THE PROPOSED DISSOLUTION AND EACH OF THE PROPOSALS COMPRISING THE
PROPOSED DISSOLUTION. HOWEVER, THE ADOPTION OF EACH OF THE PROPOSALS COMPRISING
THE PROPOSED DISSOLUTION IS CONDITIONED ON THE ADOPTION OF ALL OF THE PROPOSALS
COMPRISING THE PROPOSED DISSOLUTION.
IN ORDER TO BE ADOPTED, ALL OF THE PROPOSALS COMPRISING THE PROPOSED DISSOLUTION
MUST RECEIVE THE APPROVAL OF LIMITED PARTNERS HOLDING IN EXCESS OF 50% OF THE
PARTNERSHIP'S OUTSTANDING UNITS OF LIMITED PARTNERSHIP INTEREST.
<PAGE>
PLEASE MARK (a), (b), OR (c) UNDER SECTION (1) BELOW TO VOTE ON THE PROPOSED
DISSOLUTION AS A WHOLE. IF YOU WISH TO VOTE SEPARATELY ON THE SIX INDIVIDUAL
PROPOSALS COMPRISING THE PROPOSED DISSOLUTION, YOU MAY DO SO UNDER SECTION (2)
BELOW.
1. PROPOSAL TO APPROVE THE PROPOSED DISSOLUTION
(By marking (a) or (b) below, you can vote to collectively adopt or reject
the six individual proposals comprising the Proposed Dissolution.)
a. / / FOR approval of all of the Proposed Dissolution
b. / / AGAINST approval of all of the Proposed Dissolution
c. / / ABSTAIN from voting on the Proposed Dissolution or any part
of the Proposed Dissolution
2. INDIVIDUAL PROPOSALS COMPRISING THE PROPOSED DISSOLUTION
PLEASE LEAVE THIS SECTION BLANK IF YOU MARK (a), (b), OR (c) IN SECTION (1)
ABOVE. If you do not mark (a), (b), or (c) in section (1) above, you can vote
separately on each of the six proposals comprising the Proposed Dissolution by
marking the appropriate boxes below. PLEASE NOTE THAT NONE OF THE FOLLOWING
PROPOSALS CAN BE ADOPTED ON ITS OWN. THE ADOPTION OF ANY OF THE PROPOSALS SET
FORTH IN THIS SECTION (2) IS CONDITIONED ON THE ADOPTION OF ALL OF THE OTHER
PROPOSALS SET FORTH IN THIS SECTION (2).
i. Removal of S.I. Management, L.P. as the sole general partner of the
Partnership.
/ / FOR
/ / AGAINST
/ / ABSTAIN
ii. Dissolution of the Partnership.
/ / FOR
/ / AGAINST
/ / ABSTAIN
iii. Election of [name] as Liquidating Trustee.
/ / FOR
/ / AGAINST
/ / ABSTAIN
2
<PAGE>
iv. Approval of the Plan of Dissolution (Exhibit A to the Proxy
Statement).
/ / FOR
/ / AGAINST
/ / ABSTAIN
v. Selection of [name] as counsel for purposes of the legal opinion
required by Section 12(d) of the Partnership Agreement.
/ / FOR
/ / AGAINST
/ / ABSTAIN
vi. Approval of the opinion of [name] (Exhibit B to the Proxy
Statement).
/ / FOR
/ / AGAINST
/ / ABSTAIN
This Proxy, when properly executed and duly returned, will be used to execute a
written consent of limited partners or, if applicable, voted, in the manner
directed above by the undersigned limited partner.
IF NO DIRECTION IS MADE ON THIS PROXY, THIS PROXY WILL AUTHORIZE EXECUTION OF A
WRITTEN CONSENT FOR ALL OF THE PROPOSED DISSOLUTION OR, IF VOTED AT A MEETING,
WILL BE VOTED FOR ALL OF THE PROPOSED DISSOLUTION.
DATED:
----------------- ----------------------------------
Signature
Name:
Title:
----------------------------------
Signature (if held jointly)
Name:
Title:
PLEASE SIGN EXACTLY AS YOUR NAME APPEARS ON THE LABEL AFFIXED TO THIS PROXY.
WHEN UNITS ARE HELD BY JOINT TENANTS, PLEASE MAKE
3
<PAGE>
SURE THAT THE PROXY IS SIGNED BY ALL THE JOINT TENANTS. WHEN SIGNING AS AN
ATTORNEY, EXECUTOR, ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE FULL TITLE
OF SUCH. IF A CORPORATION, PLEASE SIGN BY NAME BY AUTHORIZED OFFICER. IF A
PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP NAME BY AUTHORIZED PERSON.
Any limited partner desiring to return this proxy should deliver it to the
Solicitation Agent at the following address:
IF BY HAND: IF BY MAIL:
[address] [address]
If you have any questions, please call the Solicitation Agent at [telephone
number].
INSTRUCTIONS
1. SIGNATURES OF REGISTERED HOLDERS. In order to be valid, each proxy
must be signed by the registered Limited Partner or Limited Partners. The
signature must correspond exactly with the name(s) as written on the label
affixed to the proxy representing the Units without alteration. If Units are
owned of record by two or more joint owners, all such owners must sign a single
proxy in respect of such Units. If Units are registered in different names, it
will be necessary to complete, sign and submit as many separate proxies as there
are different registrations.
If a proxy is to be signed by a trustee, executor, administrator, guardian,
attorney-in-fact, agent, officer of a corporation or other person acting in a
fiduciary capacity, such person should so indicate when signing.
2. DELIVERY. Delivery of a proxy to an address other than the address
set forth on the proxy does not constitute a valid delivery. If a partnership
meeting is called to vote on the Proposed Dissolution, only proxies received at
such address on or prior to the meeting date will be valid. The method of
delivery of a proxy is at the option and risk of the tendering limited partner.
If delivery is by mail, registered mail with return receipt requested is
recommended. In all cases, sufficient time should be allowed to insure timely
delivery.
3. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Requests for
assistance or additional copies of the Proxy Statement or the proxy may be
directed to [name, address and telephone number of Solicitation Agent].
4
