UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
Commission File Number 0-21548
SYNTHETIC INDUSTRIES L.P.
- -------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 13-3397585
- -------------------------------- -------------------------- ------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
309 LaFayette Road, Chickamauga, Georgia 30707
- ----------------------------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (706) 375-3121
------------------------
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No____
<PAGE>
Part I-FINANCIAL INFORMATION
Item 1. Financial Information
SYNTHETIC INDUSTRIES L.P.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except limited partnership units outstanding)
<TABLE>
<CAPTION>
December 31, September 30,
ASSETS 1997 1997
---- -----
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash............................................................................$ 253 $ 340
Accounts receivable, net of allowance for
doubtful accounts of $2,891 and $2,707....................................... 42,858 60,031
Inventory (Note 3)............................................................... 58,267 54,139
Other current assets............................................................. 16,471 15,402
------- -------
TOTAL CURRENT ASSETS......................................................... 117,849 129,912
PROPERTY, PLANT AND EQUIPMENT, net (Note 4)........................................ 192,259 182,102
OTHER ASSETS....................................................................... 82,404 82,781
-------- -------
$ 392,512 $394,795
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Accounts payable................................................................ $ 22,036 $ 27,030
Accrued expenses and other current liabilities................................... 7,788 11,613
Income taxes payable ............................................................ 372 52
Interest payable................................................................. 5,959 2,467
Current maturities of long-term debt (Note 5).................................... 717 718
--------- ---------
TOTAL CURRENT LIABILITIES.................................................... 36,872 41,880
LONG-TERM DEBT (Note 5)............................................................ 221,358 220,464
DEFERRED INCOME TAXES ............................................................. 28,930 28,430
MINORITY INTEREST IN SUBSIDIARY.................................................... 35,707 35,145
PARTNERS' CAPITAL:
General Partner Capital.......................................................... 696 688
Limited Partners' Capital, 800 Units issued and outstanding...................... 68,949 68,188
------- --------
TOTAL PARTNERS' CAPITAL...................................................... 69,645 68,876
------- ---------
$392,512 $394,795
</TABLE>
See notes to consolidated financial statements
<PAGE>
SYNTHETIC INDUSTRIES L.P.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (In
thousands of dollars, except limited partnership units
outstanding)
(Unaudited)
<TABLE>
<CAPTION>
For Three Months Ended December 31,
1997 1996
----- -----
<S> <C> <C>
Net sales.................................................. $76,581 $70,857
------- -------
Costs and expenses:
Cost of sales............................................ 53,197 50,043
Selling expenses......................................... 8,327 6,938
General and administrative expenses...................... 7,375 5,896
Amortization of excess of purchase price over net
assets acquired and other intangibles................. 648 648
---------- ----------
69,547 63,525
--------- --------
Operating income..................................... 7,034 7,332
-------- ---------
Other expenses:
Interest expense, net ................................... 4,790 5,410
Amortization of deferred financing costs................. 151 176
---------- ----------
4,941 5,586
--------- ---------
Income before income tax provision and minority
interest in subsidiary net income....................... 2,093 1,746
Income tax provision (Note 6).............................. 935 857
--------- ---------
Income before minority interest in subsidiary net income... 1,158 889
Minority interest in subsidiary net income................. 448 300
----------- ----------
NET INCOME................................................. $ 710 $ 589
========== ===========
Net income attributable to:
General partner........................................ $ 7 $ 6
Limited partners...................................... $ 703 $ 583
--------- ---------
$ 710 $ 589
========== =========
Net income per limited partnership unit.................... $ 8.79 $ 7.29
========== ==========
Limited partnership units outstanding...................... 800 800
========= ========
</TABLE>
See notes to consolidated financial statements
<PAGE>
SYNTHETIC INDUSTRIES L.P.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended December 31,
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................ $ 710 $ 589
Adjustments to reconcile net income
to net cash provided by operations:
Minority interest in subsidiary net income.......................... 448 300
Depreciation and amortization....................................... 5,021 4,480
Provision for bad debts............................................. 212 49
Deferred income taxes .............................................. 500 27
Change in operating assets and liabilities:
Accounts receivable................................................. 17,040 10,490
Inventory........................................................... (4,128) (9,942)
Other current assets................................................ (1,069) 461
Accounts payable.................................................... (4,994) 8,504
Accrued expenses and other current liabilities...................... (3,825) (646)
Income taxes payable................................................ 320 59
Interest payable.................................................... 3,492 (4,549)
------ -------
Net cash provided by operating activities.......................... 13,727 9,822
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment............................ (14,379) (8,824)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments under term loan............................................ (25,000) -
Borrowings (repayments) under long term debt.......................... 33,485 (3,993)
Redemption of 123/4% Senior subordinated debentures.................... (7,403) -
Repayments of capital lease obligation and
other long term debt................................................ (189) (160)
Deferred financing costs.............................................. (422) -
Proceeds from underwritten public offering............................ 33,860
Proceeds from exercise of stock options............................... 85 -
--------- -----------
Net cash provided by financing activities........................ 556 29,707
Effect of exchange rate changes on cash........................... 9 -
--------- ----------
NET (DECREASE) INCREASE IN CASH......................................... (87) 30,705
CASH AT BEGINNING OF PERIOD............................................. 340 103
-------- -------
CASH AT END OF PERIOD................................................... $ 253 $ 30,808
========= ===========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION Cash paid during the year for:
Interest.............................................................. $ 1,298 $ 9,959
Income taxes.......................................................... 115 771
</TABLE>
See notes to consolidated financial statements
<PAGE>
SYNTHETIC INDUSTRIES L.P.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars)
(Information as of December 31, 1997 and for the
periods ending December 31, 1997 and 1996 is unaudited)
1. ORGANIZATION
Synthetic Industries L.P. (the "Partnership") is a limited partnership
organized under the laws of Delaware. In December 1986, the Partnership
acquired all of the issued and outstanding share of Synthetic Industries,
Inc., a Delaware Corporation, (the "Company"). The Company manufactures and
markets a wide range of polypropylene-based fabric and fiber products
designed for industrial applications. The Company's diverse mix of products
are marketed to the floor covering, construction and technical textile
markets for such end-use applications as carpet backing, geotextiles,
erosion control, concrete reinforcement and furniture construction fabrics.
Since its organization in 1986 and subsequent admission of limited
partners, the Partnership has conducted no business except owning and
voting the shares of the Company. As a result of the Company's public
offering of Common Stock in November 1996, the Partnership owns
approximately 67% of the shares outstanding. As 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 minority interest and certain
expenses recognized by the Partnership. As a result, the footnote
information presented below relates to that of the Company, except as
disclosed. Accordingly, all references to fiscal year and quarter refer to
the Company's fiscal year and quarter.
2. INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements as of December 31, 1997 and for the
periods ended December 31, 1997 and 1996 included herein have been
prepared, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of the financial position at December 31, 1997 and 1996, and
the results of operations for the three months then ended have been made on
a consistent basis. Certain information and footnote disclosures included
in consolidated financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
such rules and regulations, although management believes that the
disclosures herein are adequate to make the information presented not
misleading. It is suggested that these consolidated financial statements be
read in conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations and the consolidated financial
statements of the Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1997. Operating results for the three months ended
December 31, 1997 may not necessarily be indicative of the results that may
be expected for the full year.
3. INVENTORY
December 31, September 30,
1997 1997
Finished goods........................ $ 38,709 $ 33,572
Work in process....................... 6,820 7,427
Raw materials......................... 12,738 13,140
------- ---------
$ 58,267 $ 54,139
======== ========
4. PROPERTY, PLANT AND EQUIPMENT
December 31, September 30,
1997 1997
Land.................................... $ 4,585 $ 4,585
Buildings and improvements.............. 35,398 35,398
Machinery and equipment and
leasehold improvements................ 246,656 232,277
------- --------
286,639 272,260
Accumulated depreciation................ 94,380 90,158
-------- ---------
$192,259 $ 182,102
======== =========
5. LONG-TERM DEBT
December 31, September 30,
1997 1997
Asset Securitization.................... $20,000 $ -
Secured revolving credit facility:
Secured revolving credit portion....... 26,905 13,420
Term loan portion...................... - 25,000
9 1/4% senior subordinated
notes, due 2007........................ 170,000 170,000
123/4% senior subordinated
debentures, due 2002................... - 7,403
Capital lease obligation................ 3,922 4,083
Other................................... 1,248 1,276
------ -------
222,075 221,182
Less current portion.................... 717 718
------- -------
Total long term portion................. $221,358 $ 220,464
======== =========
On December 1, 1997 the Company redeemed the remaining $7,403 aggregate
principal amount of its outstanding 12 3/4% Senior Subordinated Debentures
due 2002 at a redemption price of 106.375% of the principal amount thereof,
together with accrued interest as of the redemption date.
On December 18, 1997, the Company and its lenders, with BankBoston as
agent, entered into a new five-year credit facility (the "Credit
Facility"). Proceeds from this agreement were used to repay the Fourth
Amended and Restated Revolving Credit Agreement dated October 20, 1995 .
The Credit Facility consists of up to a $40 million asset based
securitization program, with amounts borrowed through a newly formed
subsidiary, Synthetic Funding Corporation (the "Securitization"), and a $60
million senior secured revolver facility (the "Revolver"). In conjunction
with the Securitization, the Company entered into a five-year agreement
with its subsidiary providing for the sale of substantially all of its
receivables on a revolving basis. Securitization and Revolver borrowings
are collateralized by the Company's accounts receivable and substantially
all of the assets of the Company, excluding real property, respectively. In
connection with the Credit Facility, costs of $422 were capitalized.
Interest on the Securitization is based on the applicable commercial paper
rate in effect plus a spread. The Revolver permits borrowings which bear
interest, at the Company's option, (i) for domestic borrowings based on the
lender's base rate or (ii) for Eurodollar borrowings based on a spread over
the Interbank Eurodollar rate at the time of conversion. Spreads for the
Securitization and the Eurodollar borrowings are determined by the
operational performance of the Company. At December 31, 1997, the balances
under the Securitization and Revolver were $20,000 and $26,905 at interest
rates ranging from 6.33% to 8.5%, respectively.
The Revolver provides for borrowings under letters of credit of up to
$10,000, which borrowings reduce amounts available under the Revolver. At
December 31, 1997, no letters of credit were outstanding under the Credit
Facility.
The Credit Facility contains covenants related to the maintenance of
certain operating ratios and limitations as to the amount of capital
expenditures. The Company's ability to pay dividends on its common stock is
restricted by both the Credit Facility and the 9 1/4% Senior Subordinated
Notes due 2007. At December 31, 1997, availability under the Credit
Facility was approximately $33,095.
6. INCOME TAXES
The provision for income taxes in the consolidated statements of operations
reflects an effective tax rate of 41% for the three months ended December
31, 1997.
This provision reflects the non-deductibility of certain expenses for
income tax purposes such as amortization of goodwill. Deferred income taxes
result from temporary differences between tax bases of assets and
liabilities and their reported amounts in the consolidated statements of
operations.
7. LITIGATION
The Partnership is not a party to litigation arising out of its business
practices. The Company and its subsidiaries are parties to litigation
arising out of their business operations. Most of such litigation involves
claims for personal injury, property damage, breach of contract and claims
involving employee relations and certain administrative proceedings. The
Company believes such claims are adequately covered by insurance or do not
involve a risk of material loss to the Company or its subsidiaries.
In connection with the proposed dissolution of the Partnership, pursuant to
an Agreement and Plan of Withdrawal and Dissolution (the "Plan"), the
Partnership, SI Management L.P., a Delaware limited partnership (the
"General Partner") and one director and certain of the Company's officers
who are affiliated with the General Partner have been named in two putative
class action lawsuits filed by certain limited partners of the Partnership.
In the first action, to which the Company is not a party, filed on February
11, 1997 in the Delaware Court of Chancery and thereafter amended, the
plaintiffs have alleged, among other things, breach of the defendants'
fiduciary duty to the limited partners, that the Plan is unlawfully
coercive, that the General Partner has allegedly failed to satisfy certain
conditions precedent to the right of limited partners to amend the
partnership agreement and that certain amendments necessary to implement
the Plan violate the terms of the partnership agreement. The plaintiffs
seek, among other equitable and legal remedies, removal of the General
Partner, dissolution of the Partnership, appointment of a liquidating
trustee, to enjoin the implementation of the Plan and compensatory damages
in an undetermined amount. On October 23, 1997, the Court preliminarily
enjoined the implementation of the Plan, although the Plan was subsequently
approved by limited partners on November 7, 1997. On November 7, 1997, the
Delaware Supreme Court accepted the defendants' petition for an expedited
appeal of this injunction, and briefing and oral argument on the appeal was
completed as of January 6, 1998. The defendants have denied any allegation
of wrongdoing and are vigorously contesting the lawsuit.
The second lawsuit was filed in the U.S. District Court of the Northern
District of California on May 1, 1997, and thereafter amended. The
plaintiff has alleged in his amended complaint various federal securities
and proxy violations allegedly arising out of the joint proxy statement and
prospectus which was mailed to limited partners in connection with the
solicitation of proxies for the vote on the Plan and other related
documents. The plaintiff also added the Company as a named defendant,
alleging that all defendants acted in concert with, and as agents of, each
other; however the plaintiff made no specific independent allegations with
respect to the Company. The plaintiff seeks, among other equitable and
legal remedies, to enjoin the implementation of the Plan and unspecified
damages. On November 6, 1997, the Court granted in part the plaintiff's
motion for a temporary restraining order enjoining the implementation of
the Plan. The plaintiff's motion for a preliminary injunction has been
briefed and an oral argument was heard on December 19, 1997. The defendants
have denied any allegation of wrongdoing and are vigorously contesting the
lawsuit.
On December 29, 1997, a purported derivative action was filed in the
Delaware Chancery Court by a limited partner of the Partnership against
certain of the Company's officers and directors with regard to certain
stock options plans adopted by the Company in 1994. Both the Partnership
and the Company have been named as nominal defendants. The plaintiff
alleges that the defendants breached their fiduciary duties by adoption of
the stock option plans. The plaintiff seeks, among other things, a
declaration that the stock options granted under the plans are invalid, the
establishment of a constructive trust over the stock options, unspecified
compensatory damages and reasonable attorneys' fees and expenses. The
defendants deny any allegation of wrongdoing and intend to vigorously
contest the lawsuit.
Based on the Company's review of the allegations made in the above actions
to date, the Company does not believe that the ultimate resolution of these
actions will have a material adverse effect on the Company's results of
operations or financial condition.
The Partnership is a principal stockholder of the Company and certain
members of the Company's management control the General Partner.
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Since its organization in 1986 and subsequent admission of limited partners, the
Partnership has conducted no business except owning and voting the shares of the
Company. As a result of the Company's public offering of Common Stock in
November 1996, the Partnership owns approximately 67% of the shares outstanding.
As 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
minority interest and certain expenses recognized by the Partnership. As a
result, the discussion and analysis of financial condition and results of
operations presented below relates to that of the Company, except as disclosed.
The following discussion of the financial condition and results of operations of
the Company should be read in conjunction with the information contained in the
Consolidated Financial Statements, including the notes thereto. The following
discussion includes forward-looking statements that involve certain risks and
uncertainties. Dollars are in thousands, except per share data.
Liquidity and Capital Resources
To finance its capital expenditures program and fund its operational needs, the
Company has relied upon cash provided by operations, supplemented as necessary
by bank lines of credit and long-term indebtedness. Cash provided by operating
activities was $13,727 and $9,822 for the three months ended December 31, 1997
and 1996, respectively. Cash provided by operating activities for the quarter
ended December 31, 1997 resulted primarily from net income of $1,345 after
deducting non-cash charges of $5,733, a $17,040 decrease in accounts receivable
due to collections partially offset by a $4,994 decrease in accounts payable and
increased inventory quantities totaling $4,128. Cash provided by operating
activities for the three months ended December 31, 1996 resulted primarily from
net income of $904 after deducting non-cash charges of $4,556, a $10,794
decrease in accounts receivable due to collections, a $8,504 increase in
accounts payable balances due to higher inventory quantities, partially offset
by increased inventory quantities of $9,942 and interest payments of $4,549 on
the 12 3/4% Senior Subordinated Debentures due 2002 (the "Debentures").
On December 1, 1997 the Company redeemed the remaining $7,403 aggregate
principal amount of the outstanding Debentures at a redemption price of 106.375%
of the principal amount thereof, together with accrued interest as of the
redemption date.
On December 18, 1997, the Company and its lenders, with BankBoston as agent,
entered into a new five-year credit facility (the "Credit Facility"). Proceeds
from this agreement were used to repay the Fourth Amended and Restated Revolving
Credit Agreement dated October 20, 1995. The Credit Facility consists of up to a
$40 million asset based securitization program, with amounts borrowed through a
newly formed wholly owned subsidiary, Synthetic Funding Corporation (the
"Securitization"), and a $60 million senior secured revolver facility (the
"Revolver"). Securitization and Revolver borrowings are collateralized by the
Company's accounts receivable and substantially all of the assets of the
Company, excluding real property and accounts receivable, respectively.
Interest on the Securitization is based on the applicable commercial paper rate
in effect plus a spread. The Revolver permits borrowings which bear interest, at
the Company's option, (i) for domestic borrowings based on the lender's base
rate or (ii) for Eurodollar borrowings based on a spread over the Interbank
Eurodollar rate at the time of conversion. Spreads for the Securitization and
the Eurodollar borrowings are determined by the operational performance of the
Company. At December 31, 1997, the balances under the Securitization and
Revolver were $20,000 and $26,905, respectively, at interest rates ranging from
6.33% to 8.5%.
The Credit Facility contains covenants related to the maintenance of certain
operating ratios and limitations as to the amount of capital expenditures. The
Company's ability to pay dividends on its common stock is restricted by both the
Credit Facility and the 9 1/4% Senior Subordinated Notes due 2007. At December
31, 1997, the availability under the Revolver portion of the Credit Facility was
approximately $33,095 with no letters of credit outstanding.
Capital expenditures planned in fiscal 1998 of approximately $41,000, of which
$14,379 has been spent to date, are primarily to expand capacity of the
Company's manufacturing facilities, subject to prevailing market conditions.
Based on current levels of operations and anticipated growth, the Company's
management expects cash from operations to provide sufficient cash flow to
satisfy the debt service requirements of the Company's long-term debt
obligations, including the Credit Facility and lease agreement, permit
anticipated capital expenditures and fund the Company's working capital
requirements for the next twelve months.
Results of Operations for the First Quarter
Fiscal 1998 compared to Fiscal 1997
The following table sets forth the percentage relationships to net sales of
certain income statement items for the quarters ended December 31, 1997 and
1996.
<TABLE>
<CAPTION>
December 31,
1997 1996
<S> <C> <C>
Net sales........................... 100.0% 100.0%
Cost of sales....................... 69.5 70.6
---- ----
Gross profit..................... 30.5 29.4
Selling expenses.................... 10.9 9.8
General and administrative
expenses.................... 9.6 8.3
Amortization of intangibles......... 0.8 0.9
--- ---
Operating income ................. 9.2 10.4
Interest expense.................... 6.3 7.6
Amortization of deferred
financing costs............ 0.2 0.3
--- ---
Income before provision for taxes
and minority interest 2.7 2.5
Provision for income taxes.......... 1.2 1.2
--- ---
Income before minority interest..... 1.5 1.3
Minority interest in subsidiary..... 0.6 0.4
--- ---
Net income ....................... 0.9% 0.8%
==== ====
</TABLE>
Net sales for the first quarter of fiscal 1998 were $76,581 compared to $70,857
for the same period of fiscal 1997, an increase of $5,724, or 8.1%. Carpet
backing sales for the first quarter of fiscal 1998 were $38,913 compared to
$36,922 for the same period of fiscal 1997, an increase of $1,991, or 5.4%. This
increase was the result of higher unit volume in both primary and secondary
carpet backing offset by lower average selling prices. Construction and civil
engineering product sales for the first quarter of fiscal 1998 were $22,664
compared to $20,852 for the same period of fiscal 1997, an increase of $1,812,
or 8.7%. Technical textiles sales for the first quarter of fiscal 1998 were
$15,004 compared to $13,083 for fiscal 1997, an increase of $1,921, or 14.7%.
Gross profit for the first quarter of fiscal 1998 was $23,384 compared to
$20,814 for the same period of fiscal 1997, an increase of $2,570, or 12.3%. As
a percentage of sales, gross profit increased to 30.5% from 29.4%. This increase
was primarily due to increased sales volume, the growth of higher margin
business and lower average polypropylene costs offset by lower average selling
prices.
Polypropylene is the basic raw material used in the manufacture of substantially
all of the Company's products, accounting for approximately 50% of the Company's
cost of goods sold. The Company believes that the selling prices of its products
have adjusted over time to reflect changes in polypropylene prices. Higher
prices of polypropylene, however, without offsetting selling price increases
could have a significant negative effect on the Company's results of operations
and financial condition. Due to the level of competition, the Company,
historically, has been able to pass through only a portion of the polypropylene
cost increases through higher selling prices of certain product lines. The
Company has not experienced any shortage of supply of polypropylene; however,
continuous increases in demand or major supply disruptions without offsetting
increases in manufacturing capacities could cause future supply shortages.
Selling expenses for the first quarter of fiscal 1998 were $8,327 compared to
$6,938 for the same period of fiscal 1997, an increase of $1,389, or 20.0%. This
increase was primarily due to increased expenditures associated with higher
sales volume and increases in sales and support staff as well as increased
marketing expenses. As a percentage of sales, selling expenses increased from
9.8% to 10.9%.
General and administrative expenses for the Company for the first quarter of
fiscal 1998 were $7,188 compared to $5,881 for the same period of fiscal 1997,
an increase of $1,307, or 22.2%. As a percentage of sales, general and
administrative expenses increased from 8.3% to 9.4%. The increase in general and
administrative expenses was primarily due to increased research and market
development activities of $540 and $300 in other expenditures including
marketing and computer system upgrades. Included in general and administrative
expenses for the Partnership of $7,375 is $187, which is due the Company, for
expenses incurred on behalf of the Partnership.
Operating income for the Company for the first quarter of fiscal 1998 was $7,221
as compared to $7,347 for the same period of fiscal 1997, a decrease of $126, or
1.7%. As a percentage of sales, operating income decreased to 9.4% in fiscal
1998 from 10.4% in fiscal 1997. This was primarily due to the increased
investment in research and market development and other expenditures to support
future growth. Operating income for the Partnership for the first quarter of
fiscal 1998 was $7,034, which includes the additional general and administrative
expenses discussed above.
Total interest expense for the Company for the first quarter of fiscal 1998 was
$4,790 compared to $5,410 for the same period of fiscal 1997, a decrease of
$620, or 11.5%, due to lower average interest rates. The effective income tax
rate for the first quarter of fiscal 1998 was 41%.
Net income for the Company for the first quarter of fiscal 1998 was $1,345
compared to net income of $904 for the same period of fiscal 1997, an increase
of $441, or 48.8%. Earnings before interest, taxes, depreciation and
amortization ("EBITDA")1 for the Company for the first quarter of fiscal 1998
were $12,091 compared to $11,651 for the same period of fiscal 1997, an increase
of $440, or 3.8%. The increase in net income, as well as EBITDA, was primarily
due to factors discussed earlier. Net income for the first quarter of fiscal
1998 for the Partnership was $710, which includes the additional general and
administrative expenses and the minority interest in subsidiary net income.
- --------
1 The Company believes that EBITDA is helpful in understanding cash flow from
operations that is available for debt service, taxes and capital expenditures.
EBITDA is not a concept in accordance with generally accepted accounting
principles and is not a substitute for operating income, net income or cash
flows from operating activities.
Recent Accounting Pronouncement
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"), which must be adopted for fiscal years beginning after December
15, 1997. Under the new standard, companies will be required to report certain
information about operating segments in consolidated financial statements.
Operating segments will be determined based on the method that management
organizes its businesses for making operating decisions and assessing
performance. SFAS 131 also requires companies to report certain information
about their products and services, the geographic areas in which they operate,
and their major customers. The Company is currently evaluating the effect, if
any, of implementing SFAS 131.
Forward Looking Statements
The discussion of the Company's business and operations in this report includes
several instances of forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Act of 1934, as amended, which are based upon management's good faith
assumptions relating to the financial, market, operating, and other relevant
environments that will exist and affect the Company's business and operations in
the future. No assurance can be made that the assumptions upon which management
based its forward-looking statements will prove to be correct, or that the
Company's business and operations will not be affected in any substantial manner
by other factors not currently foreseeable by management or beyond the Company's
control. All forward-looking statements involve risk and uncertainty, including
those described in this report, and such statements shall be deemed in the
future to be modified in their entirety by the Company's public pronouncements,
including those contained in all future reports and other documents filed by the
Company with the Securities and Exchange Commission.
<PAGE>
Part II - OTHER INFORMATION
Item 1. Legal Proceedings.
In connection with the proposed dissolution of the Partnership, pursuant to
an Agreement and Plan of Withdrawal and Dissolution (the "Plan"), the
Partnership, the General Partner and one director and certain of the
Company's officers who are affiliated with the General Partner have been
named in two putative class action lawsuits filed by certain limited
partners of the Partnership. In the first action, to which the Company is
not a party, filed on February 11, 1997 in the Delaware Court of Chancery
and thereafter amended, the plaintiffs have alleged, among other things,
breach of the defendants' fiduciary duty to the limited partners, that the
Plan is unlawfully coercive, that the General Partner has allegedly failed
to satisfy certain conditions precedent to the right of limited partners to
amend the partnership agreement and that certain amendments necessary to
implement the Plan violate the terms of the partnership agreement. The
plaintiffs seek, among other equitable and legal remedies, removal of the
General Partner, dissolution of the Partnership, appointment of a
liquidating trustee, to enjoin the implementation of the Plan and
compensatory damages in an undetermined amount. On October 23, 1997, the
Court preliminarily enjoined the implementation of the Plan, although the
Plan was subsequently approved by limited partners on November 7, 1997. On
November 7, 1997, the Delaware Supreme Court accepted the defendants'
petition for an expedited appeal of this injunction, and briefing and oral
argument on the appeal was completed as of January 6, 1998. The defendants
have denied any allegation of wrongdoing and are vigorously contesting the
lawsuit.
The second lawsuit was filed in the U.S. District Court of the Northern
District of California on May 1, 1997, and thereafter amended. The
plaintiff has alleged in his amended complaint various federal securities
and proxy violations allegedly arising out of the joint proxy statement and
prospectus which was mailed to limited partners in connection with the
solicitation of proxies for the vote on the Plan and other related
documents. The plaintiff also added the Company as a named defendant,
alleging that all defendants acted in concert with, and as agents of, each
other; however the plaintiff made no specific independent allegations with
respect to the Company. The plaintiff seeks, among other equitable and
legal remedies, to enjoin the implementation of the Plan and unspecified
damages. On November 6, 1997, the Court granted in part the plaintiff's
motion for a temporary restraining order enjoining the implementation of
the Plan. The plaintiff's motion for a preliminary injunction has been
briefed and an oral argument was heard on December 19, 1997. The defendants
have denied any allegation of wrongdoing and are vigorously contesting the
lawsuit.
On December 29, 1997, a purported derivative action was filed in the
Delaware Chancery Court by a limited partner of the Partnership against
certain of the Company's officers and directors with regard to certain
stock options plans adopted by the Company in 1994. Both the Partnership
and the Company have been named as nominal defendants. The plaintiff
alleges that the defendants breached their fiduciary duties by adoption of
the stock option plans. The plaintiff seeks, among other things, a
declaration that the stock options granted under the plans are invalid, the
establishment of a constructive trust over the stock options, unspecified
compensatory damages and reasonable attorneys' fees and expenses. The
defendants deny any allegation of wrongdoing and intend to vigorously
contest the lawsuit.
Based on the Company's review of the allegations made in the above actions
to date, the Company does not believe that the ultimate resolution of these
actions will have a material adverse effect on the Company's results of
operations or financial condition.
The Partnership is a principal stockholder of the Company and certain
members of the Company's management control the General Partner.
Item 4. Submission of Matters to a Vote of Security Holders.
On November 1, 1997, a Special Meeting of the limited partners of the
Partnership was held to vote upon the proposed dissolution of the
Partnership pursuant to the Plan. Out of 800 limited partner units (the
"Units") outstanding, 565.75 Units, or 70.72%, voted in favor of the Plan,
108.25 Units, or 13.53%, voted against the Plan, and 4.875 Units, or 0.61%
abstained. Although the limited partners approved the adoption of the Plan,
the implementation of the Plan has been enjoined by courts in Delaware and
California. See "Item 1. Legal Proceedings."
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
1 10.1 Loan and Security Agreement dated as of December 18, 1997 between
Synthetic Industries, Inc., the financial institutions party thereto from time
to time, as lenders, and BankBoston, N.A., as Agent
1 10.2 Receivables Purchase and Sale Agreement, dated as of December 18,
1997, among Synthetic Industries, Inc. and Synthetic Funding Corporation
1 10.3 Receivables Purchase Agreement, dated as of December 18, 1997, among
Synthetic Funding Corporation, EagleFunding Capital Corporation, BankBoston
Securities Inc. and Synthetic Industries, Inc.
1 10.4 Intercreditor Agreement, dated as of December 18, 1997, among
BankBoston, N.A., Synthetic Funding Corporation, EagleFunding Capital
Corporation, BancBoston Securities Inc. and Synthetic Industries, Inc.
1 27. Financial Data Schedule
- --------------
1 Filed as an exhibit to Synthetic Industries, Inc.'s Quarterly Report on
Form 10-Q for the fiscal quarter ended December 31, 1997 as filed on
February 6, 1998 and incorporated herein by reference.
(b) Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SYNTHETIC INDUSTRIES L.P.
By: SI MANAGEMENT L.P.
General Partner
By: SYNTHETIC MANAGEMENT G.P.
General Partner
By: CHILL INVESTMENTS, INC.
Managing General Partner
By: /s/ Leonard Chill
Leonard Chill
President
Dated: February 11,1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
condensed consolidated balance sheet of Synthetic Industries L.P. as of Decmber
31, 1997 and the related condensed consolidated statement of income and cash
flows for the three months ended December 31, 1997 and is qualified in its
entirity by reference to such financial statements.
</LEGEND>
<CIK> 0000901175
<NAME> Synthetic Industries L.P.
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1.000
<CASH> 253
<SECURITIES> 0
<RECEIVABLES> 45,749
<ALLOWANCES> 2,891
<INVENTORY> 58,267
<CURRENT-ASSETS> 117,849
<PP&E> 286,639
<DEPRECIATION> 94,380
<TOTAL-ASSETS> 392,512
<CURRENT-LIABILITIES> 36,872
<BONDS> 170,000
0
0
<COMMON> 0
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<TOTAL-LIABILITY-AND-EQUITY> 392,512
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<INTEREST-EXPENSE> 4,790
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<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 710
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<EPS-DILUTED> 8.79
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