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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to .
Commission File Number 0-21548
SYNTHETIC INDUSTRIES, INC.
- - --------------------------------------------------------------------------------
(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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (706) 375-3121
--------------------------
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(Former name,former address and formerfiscal 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 SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except limited partnership units outstanding)
<TABLE>
December 31, September 30,
ASSETS 1998 1998
---- -----
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash............................................................................$ 147 $ 287
Accounts receivable, net of allowance for
doubtful accounts of $2,630 and $2,714....................................... 49,513 64,251
Inventory (Note 3)............................................................... 54,885 52,450
Other current assets............................................................. 17,165 16,644
------- -------
TOTAL CURRENT ASSETS......................................................... 121,710 133,632
PROPERTY, PLANT AND EQUIPMENT, net (Note 4)........................................ 220,199 218,449
OTHER ASSETS....................................................................... 87,184 87,770
-------- -------
$429,093 $439,851
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................ $ 23,807 $ 26,438
Accrued expenses and other current liabilities................................... 9,837 13,653
Income taxes payable (Note 6).................................................... 54 285
Interest payable................................................................. 6,051 2,154
Current maturities of long-term debt (Note 5).................................... 1,274 5,500
-------- ---------
TOTAL CURRENT LIABILITIES.................................................... 41,023 48,030
LONG-TERM DEBT (Note 5)............................................................ 232,118 236,843
DEFERRED INCOME TAXES (Note 6)..................................................... 32,996 32,996
MINORITY INTEREST IN SUBSIDIARY.................................................... 41,806 41,437
PARTNERS' CAPITAL:
General Partner capital.......................................................... 810 805
Limited Partners' capital, 800 units issued and outstanding...................... 80,340 79,740
------ ------
TOTAL PARTNERS' CAPITAL...................................................... 81,150 80,545
------ -------
$429,093 $439,851
</TABLE>
See notes to consolidated financial statements
<PAGE>
SYNTHETIC INDUSTRIES L.P.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of dollars, except net income per partnership unit and limited
partnership units)
(Unaudited)
<TABLE>
Three Months Ended December 31,
1998 1997
---- -----
<S> <C> <C>
Net sales.................................................. $87,162 $76,581
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Costs and expenses:
Cost of sales............................................ 59,794 53,197
Selling expenses......................................... 9,789 8,327
General and administrative expenses...................... 8,594 7,375
Plant consolidation costs (Note 7)....................... 1,619 -
Amortization of excess of purchase price over net
assets acquired and other intangibles................. 726 648
---------- ----------
80,522 69,547
-------- --------
Operating income..................................... 6,640 7,034
--------- ---------
Other expenses:
Interest expense, net ................................... 4,948 4,790
Amortization of deferred financing costs................. 196 151
---------- ----------
5,144 4,941
--------- ---------
Income before income tax provision and minority
Interest in subsidiary net income........................ 1,496 2,093
Income tax provision (Note 6).............................. 652 935
---------- ----------
Income before minority interest in subsidiary net income... 844 1,158
Minority interest in net income............................ 324 448
---------- ----------
NET INCOME................................................. $ 520 $ 710
========= =========
Net income attributable to:
General Partner....................................... $ 5 $ 5
Limited Partner....................................... $ 516 $ 705
----- -----
Net income............................................ $ 520 $ 710
===== =====
Net income per partnership unit........................... $ 645 $ 881
Limited Partnership units outstanding..................... 800 800
</TABLE>
See notes to consolidated financial statements
<PAGE>
SYNTHETIC INDUSTRIES L.P.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
(Unaudited)
<TABLE>
Three Months Ended December 31,
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................ $ 520 $ 710
Adjustments to reconcile net income to net cash
provided by operations:
Minority interest in subsidiary net income.......................... 324 448
Depreciation and amortization....................................... 5,714 5,021
Provision for bad debts............................................. (81) 212
Deferred income taxes .............................................. - 500
Change in assets and liabilities:
Accounts receivable................................................. 14,823 17,040
Inventory........................................................... (2,430) (4,128)
Other assets........................................................ (854) (1,069)
Accounts payable.................................................... (2,670) (4,994)
Accrued expenses and other current liabilities...................... (3,818) (3,825)
Income taxes payable................................................ (231) 320
Interest payable.................................................... 3,897 3,492
------ -----
Net cash provided by operating activities.......................... 15,194 13,727
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment............................ (4,658) (14,379)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments under term loan............................................ - (25,000)
(Repayments) borrowings under the Credit Facility..................... (9,218) 33,485
Redemption of 123/4% Senior subordinated debentures.................... - (7,403)
Repayments under capital lease obligations and
other long term debt................................................ (1,618) (189)
Deferred financing costs.............................................. - (422)
Proceeds from sale of treasury stock under the Employee
Stock Purchase Plan................................................. 148 -
Proceeds from exercise of stock options............................... 38 85
------- -------
Net cash (used) provided by financing activities................. (10,650) 556
Effect of exchange rate changes on cash........................... (26) 9
-------- -------
NET DECREASE IN CASH.................................................... (140) (87)
CASH AT BEGINNING OF PERIOD............................................. 287 340
------ -------
CASH AT END OF PERIOD................................................... $ 147 $ 253
========= =========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest.............................................................. $ 1,051 $ 1,298
Income taxes.......................................................... 883 115
Net capital obligation for purchase of equipment (Note 5)............. 1,884 -
</TABLE>
See notes to consolidated financial statements
<PAGE>
SYNTHETIC INDUSTRIES L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars)
(Information as of December 31, 1998 and for the
periods ending December 31, 1998 and 1997 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 shares of Synthetic Industries,
Inc. (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. The Company had 8,672,382 shares of Common Stock
outstanding at December 31, 1998, of which approximately 66% are owned by
the Partnership. 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 associated with a withdrawn common stock offering. As a result,
the footnote information presented below relates to that of the Company,
except as disclosed. Accordingly, all references to fiscal year refer to
the Company's fiscal year which ends on September 30th.
2. INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements as of December 31, 1998 and for the
periods ended December 31, 1998 and 1997 included herein have been
prepared, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of the financial position at December 31, 1998, and the
results of operations for the three months ended December 31, 1998 and
1997, have been made on a consistent basis. Certain information and
footnote disclosures included in consolidated financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although
management believes that the disclosures herein are adequate to make the
information presented not misleading. It is suggested that these
consolidated financial statements be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations
and the consolidated financial statements included in the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 1998. Operating
results for the three months ended December 31, 1998 may not necessarily be
indicative of the results that may be expected for the full year.
<PAGE>
3. INVENTORY
December 31, September 30,
1998 1998
Finished goods........................ $ 39,214 $ 37,689
Work in process....................... 7,443 7,107
Raw materials......................... 8,228 7,654
--------- --------
$ 54,885 $ 52,450
======== ========
4. PROPERTY, PLANT AND EQUIPMENT
December 31, September 30,
1998 1998
Land.................................... $ 4,585 $ 4,585
Buildings and improvements.............. 42,588 42,588
Equipment under capital lease........... 12,800 12,500
Machinery and equipment and
leasehold improvements................ 273,214 266,972
------- --------
333,187 326,645
Accumulated depreciation................ 112,988 108,196
------- --------
$220,199 $218,449
======== ========
5. LONG-TERM DEBT
December 31, September 30,
1998 1998
Credit facility:
Securitization........................ $24,262 $ 29,162
Revolver.............................. 25,704 30,022
9 1/4% senior subordinated
notes, due 2007........................ 170,000 170,000
Capital lease obligation................ 12,229 10,647
Other................................... 1,197 2,512
-------- --------
233,392 242,343
Less current portion.................... 1,274 5,500
-------- --------
Total long term portion................. $232,118 $236,843
======== ========
At December 31, 1998, interest rates under the Securitization and Revolver
ranged from 6.05% to 7.75%, respectively. Availability under the Credit
Facility was approximately $34,300 at December 31, 1998.
<PAGE>
On October 4, 1998, the Company entered into a 7.03% eight-year capital
lease for the acquisition of equipment of $5,300 and repaid the balance of
the May 15, 1996 capital lease of $3,416.
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, 1998 and 1997.
7. PLANT CONSOLIDATION COSTS
On November18,1998the Company announced its plans to combine its non- woven
manufacturing operations into one modern facility. As a result, in the
first quarter of 1999, the Company recorded a pretax charge of $1,619
($0.11 per share on an after tax basis). The charge primarily reflects
severance provisions incurred related with workforce reductions of
approximately 105 employees. As of December 31, 1998, payments of $274 have
been made for these charges.
8. LITIGATION
The Company and its subsidiaries are parties to litigation arising out of
their business operations. Such litigation primarily involves claims for
personal injury, property damage, breach of contract and claims involving
employee relations and certain administrative proceedings. The Company
believes such claims are either adequately covered by insurance or do not
involve a risk of material loss to the Company.
In connection with the proposed dissolution of the Partnership, pursuant to
an Agreement and Plan of Withdrawal and Dissolution (the "Plan"), the
Company, its directors and certain other of the Company's officers who are
affiliated with the General Partner have been named in two putative class
and derivative action lawsuits filed by certain limited partners of the
Partnership. In the first action, filed on February 11, 1997 in the
Delaware Court of Chancery and thereafter amended, the plaintiffs have
alleged, among other things, breach of contract with respect to the
Partnership Agreement which governs the Partnership, breach of the
defendants' fiduciary duty to the limited partners and the Company, that
the Plan was 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 sought, among other equitable and legal remedies,
removal of the General Partner, dissolution of the Partnership, appointment
of a liquidating trustee, to enjoin the implementation of the Plan and
compensatory damages in an undetermined amount. On October 23, 1997, the
Court preliminarily enjoined the implementation of the Plan, although the
Plan was subsequently approved by limited partners on November 7, 1997. On
November 7, 1997, the Delaware Supreme Court accepted the defendants'
petition for an expedited appeal of this injunction, and briefing and oral
argument on the appeal was completed as of January 6, 1998. On March 19,
1998, the Delaware Supreme Court issued an opinion affirming the Court of
<PAGE>
Chancery's grant of a preliminary injunction and remanded the case for
further proceedings. On April 27, 1998, the Court of Chancery granted the
motion of certain pro-Plan intervenors to intervene in the action, but
denied their motion to disqualify plaintiffs' counsel. On May 14, 1998, the
General Partner withdrew the Plan. After the withdrawal of the Plan,
plaintiffs, on June 3, 1998, filed a Consolidated Third Amended and
Supplemental Class and Derivative Complaint (the "Third Amended
Complaint"). The Third Amended Complaint, among other things, eliminated
certain requests for relief related to the Plan and added certain
allegations related to the Company's Employee Stock Purchase Plan and
certain options granted to certain directors and officers of the Company.
In addition to the relief sought in prior complaints, the Third Amended
Complaint seeks declaratory relief with respect to certain provisions of
the Partnership Agreement, the invalidation of the Company's Employee Stock
Purchase Plan, the invalidation of certain options granted to the Company's
directors and officers, and the invalidation of certain amendments to the
Company's certificate of incorporation and bylaws relating to voting by
consent and the calling of special meetings. On July 20, 1998, defendants
filed a motion to dismiss the Third Amended Complaint. The defendants have
denied any allegation of wrongdoing.
The second lawsuit was filed in the U.S. District Court of the Northern
District of California on May 1, 1997, and thereafter amended. The
plaintiff has alleged in his amended complaint various federal securities
and proxy violations allegedly arising out of the joint proxy statement and
prospectus that 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 sought, 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. After the withdrawal of the Plan, defendants, on June 19, 1998,
filed a motion to dismiss the claims as moot. On July 17, 1998, plaintiff
moved to amend his complaint purportedly to include an additional plaintiff
and additional claims for relief, including permanent injunctive relief for
any violations of the securities laws in the future. The amended complaint
also adds the Partnership as a nominal defendant. On September 24, 1998,
the Court denied the defendants' motion to dismiss and granted plaintiff's
motion to amend the complaint. The defendants have denied any allegation of
wrongdoing.
On December 29, 1997, a purported derivative action was filed in the
Delaware Chancery Court by a limited partner of the Partnership against
certain of the Company's officers and directors with regard to certain
stock options plans adopted by the Company in 1994. Both the Partnership
and the Company were named as nominal defendants. The plaintiff alleged
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. By order
dated June 23, 1998, this action was consolidated with the Delaware action
described above. 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.
<PAGE>
The Partnership is a principal stockholder of the Company and certain
members of the Company's management control the General Partner.
By letter dated October 22,1998, a demand for indemnification was received
from a customer with respect to utilization of Fibermesh (reserved) in
concrete slabs in the State of California. The demand for indemnification
pertained to any and all damages relating to their use of the Fibermesh
(reserved) product. No lawsuits have been filed against the Company and
based upon the information provided to the Company, the scope of liability
and potential damages, if any, cannot be ascertained at this time. The
Company has engaged outside counsel to investigate this claim and intends
to vigorously defend its product.
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
As previously discussed, since its organization in 1986 and subsequent
admission of Limited Partners, the Partnership has conducted no business except
owning and voting the Shares. The Company had 8,673,382 shares of Common Stock
outstanding as of December 31, 1998, of which approximately 66% was owned by the
Partnership. 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, $765 due the Company and amounts paid by the Company on
behalf of the Partnership relating to the Plan. As a result, the discussion and
analysis of financial condition and results of operations presented below
relates to the operations of the Company, except as disclosed. Accordingly, all
references to fiscal year refer to the Company's fiscal year which ends on
September 30th.
The following discussion of the financial condition and results of operations of
the Company should be read in conjunction with the information contained in the
Consolidated Financial Statements, including the notes thereto. The following
discussion includes forward-looking statements that involve certain risks and
uncertainties. See "Forward Looking Statements." Dollars are in thousands,
except per share data.
Liquidity and Capital Resources
To finance its capital expenditures 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 amounted to $15,194 and $13,727 for the three months ended December
31, 1998 and 1997, respectively. These amounts for the periods ending December
31, 1998 and 1997 reflect net income of $946 and $1,345, respectively, after
deducting noncash charges of $5,633 and $5,733 and net working capital changes
of $8,615 and $6,649 for each respective period.
Capital expenditures were $4,658 for the three months ended December 31, 1998 as
compared to $14,379 for the same period of fiscal 1998. In addition, on October
4, 1998, the Company entered into a 7.03% eight-year capital lease for the
acquisition of equipment of $5,300 and repaid the balance of the May 15, 1996
capital lease of $3,416. Capital expenditures planned for fiscal 1999 are
approximately $25,000, primarily to expand the Company's manufacturing capacity,
subject to prevailing market conditions.
Other sources of liquidity include the December 18, 1997 five-year credit
facility between the Company and its lenders, with BankBoston as agent (the
"Credit Facility") and the $170,000 aggregate principal amount of 9.25% Senior
Subordinated Notes due February 15, 2007 (the "Notes").
The Credit Facility consists of up to a $40 million asset based securitization
program (the "Securitization") and a $60 million senior secured revolver
facility (the "Revolver"), collateralized by the Company's accounts receivable
and substantially all of the Company's assets, excluding real property,
respectively. At December 31, 1998, the balances under the Securitization and
Revolver were $24,262 and $25,704 at interest rates ranging from 6.05% to 7.75%,
respectively. Availability under the Credit Facility was approximately $34,300
at December 31, 1998.
The Notes, which represent unsecured obligations of the Company, are redeemable
at the option of the Company at any time on or after February 15, 2002, at an
initial redemption price of 104.625% of their principal amount together with
accrued interest, with declining redemption prices thereafter. Interest on the
Notes is payable semi-annually on February 15 and August 15 in the amount of
$7,863.
Based on current levels of operations and anticipated growth, the Company's
management expects net cash from operations and available credit facilities to
be sufficient to fund the Company's short-term and long-term debt obligations,
permit anticipated capital expenditures and fund the working capital needs of
the Company for the next twelve months.
On November 18, 1998 the Company announced its plans to combine its non-woven
manufacturing facilities. The Company estimates that $5,000 to $6,000 of pre-tax
costs will be incurred relating to the plant combination. The move is expected
to increase operating efficiencies by reducing overhead costs and centralizing
production in a modern facility resulting in expected pre-tax savings of
approximately $1,500 to $2,000 annually. In the first quarter of fiscal 1999,
the Company recorded a $1,619 pre-tax charge ($0.11 per share on an after tax
basis) associated with this combination, reflecting primarily severance and
other employee related costs. As of December 31, 1998, payments of $274 have
been made for these charges. The Company anticipates that all remaining costs
will be incurred in fiscal 1999.
Results of Operations
The following table sets forth the percentage relationships to net sales of
certain income statement items for the Company for the quarters ended December
31, 1998 and 1997.
<TABLE>
Three months ended December 31,
1998 1997
<S> <C> <C>
Net sales........................... 100.0% 100.0%
Cost of sales....................... 68.6 69.5
---- ----
Gross profit..................... 31.4 30.5
Selling expenses.................... 11.2 10.9
General and administrative
expenses.................... 9.8 9.4
Plant consolidation costs........... 1.9 -
Amortization of intangibles......... 0.8 0.8
--- ---
Operating income.................... 7.7 9.4
Interest expense.................... 5.7 6.3
Amortization of deferred
financing costs............ 0.2 0.2
--- ---
Income before
provision for taxes. 1.8 2.9
Provision for income taxes.......... 0.7 1.2
--- ---
Net income ......................... 1.1% 1.7%
==== ====
</TABLE>
<PAGE>
Results of Operations for the Three Months Ended December 31, 1998
Net sales for the first quarter of 1999 were $87,162 compared to $76,581 for the
same period in 1998, an increase of $10,581, or 13.8%. Carpet backing sales for
the first quarter of fiscal 1999 were $41,047 compared to $38,913 for the same
period of fiscal 1998, an increase of $2,134, or 5.5%. This increase was
primarily 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 1999 were $30,127
compared to $22,664 for the same period of fiscal 1998, an increase of $7,463,
or 32.9%, including $3,681 contributed by the Novocon steel fiber acquisition.
Technical textiles sales for the first quarter of fiscal 1999 were $15,988
compared to $15,004 for the same period of fiscal 1998, an increase of $984, or
6.6%.
Gross profit for the first quarter of fiscal 1999 was $27,368 compared to
$23,384 for the same period of fiscal 1998, an increase of $3,984, or 17.0%. As
a percentage of sales, gross profit increased to 31.4% from 30.5%. This increase
was primarily due to increased sales volume, growth of higher margin business
and lower on average polypropylene costs, offset by lower selling prices,
principally in carpet backing.
Selling, general and administrative expenses for the Company for the first
quarter of fiscal 1999 were $18,281 compared to $15,515 for the same period of
fiscal 1998, an increase of $2,766, or 17.8%. As a percentage of sales, selling,
general and administrative expenses increased from 20.3% to 21.0%. The increase
was primarily due to the increased construction and civil engineering sales and
a $400 increase in research and market development costs. Included in general
and administrative expenses for the Partnership were $102, which is due the
Company for expenses incurred on behalf of the Partnership.
Operating Income for the Company for the first quarter of fiscal 1999 was $6,742
compared to $7,221 for the same period of fiscal 1998, a decrease of $479 or,
6.6%. As a percentage of sales, operating income decreased from 9.4% to 7.7%.
The decrease in operating income was primarily due to plant consolidation costs
of $1,619 (see Note 7) and increased selling, general and administrative costs,
partially offset by improved margins. Excluding the plant consolidation costs,
operating income for the first quarter of fiscal 1999 would have been $8,361,
an increase of $1,140, or 15.8%, over operating income for the same period of
fiscal 1998.
Interest expense for the first quarter of fiscal 1999 was $4,948 compared to
$4,790 for the same period of fiscal 1998, an increase of $158, or 3.3%, due to
lower average interest rates on higher outstanding debt. The effective income
tax rate was 41% for the first quarter of each of fiscal 1999 and 1998.
Net income for the Company for the first quarter of fiscal 1999 was $946
compared to net income of $1,345 for the same period of fiscal 1998, a decrease
of $399, or 29.7%. Earnings before interest, taxes, depreciation and
amortization ("EBITDA")1 for the Company for the first quarter of fiscal 1999
were $12,260 compared to $12,091 for the same period of fiscal 1998, an increase
of $169, or 1.4%. The decrease in net income was primarily due to the factors
discussed above. Excluding the plant consolidation costs, net income would have
been $1,901, an increase of $556, or 41.3%, over net income for the same period
of fiscal 1998. Net income for the first quarter of fiscal 1999 for the
Partnership was $520, which included 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.
<PAGE>
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"), which must be adopted for fiscal years beginning after
December 15, 1997. SFAS 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. SFAS 130 will not have a material effect on the Company's
results of operations or financial condition.
Also in June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"), which must be adopted for fiscal years beginning
after December 15, 1997. Under the new standard, companies will be required to
report certain information about operating segments in consolidated financial
statements. Operating segments will be determined based on the method that
management organizes its businesses for making operating decisions and assessing
performance. SFAS 131 also requires companies to report certain information
about their products and services, the geographic areas in which they operate,
and their major customers. SFAS 131 will not have a material effect on the
Company's results of operations or financial condition.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), which must be adopted for fiscal quarters of fiscal years beginning after
June 15, 1999. SFAS 133 requires the recognition of all derivatives as either
assets or liabilities in the statement of financial position and measurement of
those instruments at fair value. SFAS 133 will not have a material effect on the
Company's results of operations or financial condition.
Year 2000 Readiness Disclosures
The Company is preparing its computer systems and hardware to deal with the
issues related to the year 2000. This is necessary because certain computer
programs have been written using two digits rather than four to define the
applicable year. As a result, software may recognize a date using the two digits
"00" as the year 1900 rather than the year 2000. Computer programs that do not
recognize the proper date could generate erroneous data or cause systems to
fail. In addition, many of the Company's vendors and service providers are also
faced with similar issues related to the year 2000.
In January 1998, the Company formally implemented a plan to become year 2000
compliant. The Company is evaluating and testing business and technical
information system hardware and software as to year 2000 compliance and
functionality. Planned application testing is 70% complete. The Company's basic
integrated software applications, Infinium and CAMS, are represented to be year
2000 compliant by their respective vendors and testing to date has verified
vendor representations. Minimal code renovations were necessary in CAMS and have
been completed. The last phase of testing is scheduled to be completed on or
before March 1999, although test validation processes will be ongoing, thereby
providing sufficient time to handle unforeseen contingencies and respond to
external year 2000 issues that affect the Company and the Company's business
partners. The inventory process and assigning priorities are complete for
manufacturing process control, instrumentation and embedded systems.
Documentation from respective equipment manufacturers and resources is
approximately 92% complete. The Company believes that the repair of this
equipment is approximately 95% complete, with all testing of this equipment to
be scheduled and completed by mid 1999. Contingency planning for this equipment
is in process and scheduled for completion by fiscal year-end 1999. The Company
has also been proactive in contact with external business partners to
communicate and exchange status information.
<PAGE>
Additional costs for the first quarter of 1999 for addressing year 2000 issues
were approximately $25 and have been expensed as incurred. The Company does not
believe that future costs will have a material adverse effect on the Company's
results of operations or financial condition.
In the event that the efforts of this program do not address all potential
system problems, the Company is developing contingency plans to ensure that it
will be able to operate the critical areas of its business. This process
includes developing alternative plans to engage in business activities with
customers and suppliers who may not be year 2000 compliant. These plans will be
monitored for completion as we approach the year 2000. There can be no assurance
that the efforts or the contingency plans related to the Company's systems or
those of third parties relied upon will be successful or that any failure to
convert, upgrade, or appropriately plan for contingencies would not have a
material adverse effect on the Company's results of operations or financial
condition.
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.
Item 3. Quantitative and Qualitative
Disclosures About Market Risk
See the Partnership's annual report on Form 10-K for the fiscal year ended
September 30, 1998 (Item 7A). There has been no material change in the
information provided therein from September 30, 1998 to December 31, 1998.
<PAGE>
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company and its subsidiaries are parties to litigation arising out of their
business operations. Such litigation primarily involves claims for personal
injury, property damage, breach of contract and claims involving employee
relations and certain administrative proceedings. The Company believes such
claims are either adequately covered by insurance or do not involve a risk of
material loss to the Company.
In connection with the proposed dissolution of the Partnership, pursuant to an
Agreement and Plan of Withdrawal and Dissolution (the "Plan"), the Company, its
directors and certain other of the Company's officers who are affiliated with
the General Partner have been named in two putative class and derivative action
lawsuits filed by certain limited partners of the Partnership. In the first
action, filed on February 11, 1997 in the Delaware Court of Chancery and
thereafter amended, the plaintiffs have alleged, among other things, breach of
contract with respect to the Partnership Agreement which governs the
Partnership, breach of the defendants' fiduciary duty to the limited partners
and the Company, that the Plan was 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 sought, among other equitable and legal remedies, removal of the
General Partner, dissolution of the Partnership, appointment of a liquidating
trustee, to enjoin the implementation of the Plan and compensatory damages in an
undetermined amount. On October 23, 1997, the Court preliminarily enjoined the
implementation of the Plan, although the Plan was subsequently approved by
limited partners on November 7, 1997. On November 7, 1997, the Delaware Supreme
Court accepted the defendants' petition for an expedited appeal of this
injunction, and briefing and oral argument on the appeal was completed as of
January 6, 1998. On March 19, 1998, the Delaware Supreme Court issued an opinion
affirming the Court of Chancery's grant of a preliminary injunction and remanded
the case for further proceedings. On April 27, 1998, the Court of Chancery
granted the motion of certain pro-Plan intervenors to intervene in the action,
but denied their motion to disqualify plaintiffs' counsel. On May 14, 1998, the
General Partner withdrew the Plan. After the withdrawal of the Plan, plaintiffs,
on June 3, 1998, filed a Consolidated Third Amended and Supplemental Class and
Derivative Complaint (the "Third Amended Complaint"). The Third Amended
Complaint, among other things, eliminated certain requests for relief related to
the Plan and added certain allegations related to the Company's Employee Stock
Purchase Plan and certain options granted to certain directors and officers of
the Company. In addition to the relief sought in prior complaints, the Third
Amended Complaint seeks declaratory relief with respect to certain provisions of
the Partnership Agreement, the invalidation of the Company's Employee Stock
Purchase Plan, the invalidation of certain options granted to the Company's
directors and officers, and the invalidation of certain amendments to the
Company's certificate of incorporation and bylaws relating to voting by consent
and the calling of special meetings. On July 20, 1998, defendants filed a motion
to dismiss the Third Amended Complaint. The defendants have denied any
allegation of wrongdoing.
The second lawsuit was filed in the U.S. District Court of the Northern
District of California on May 1, 1997, and thereafter amended. The plaintiff has
alleged in his amended complaint various federal securities and proxy violations
allegedly arising out of the joint proxy statement and prospectus that 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 sought, 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. After the withdrawal of the Plan, defendants, on
June 19, 1998, filed a motion to dismiss the claims as moot. On July 17, 1998,
plaintiff moved to amend his complaint purportedly to include an additional
plaintiff and additional claims for relief, including permanent injunctive
relief for any violations of the securities laws in the future. The amended
complaint also adds the Partnership as a nominal defendant. On September 24,
1998, the Court denied the defendants' motion to dismiss and granted plaintiff's
motion to amend the complaint. The defendants have denied any allegation of
wrongdoing.
On December 29, 1997, a purported derivative action was filed in the Delaware
Chancery Court by a limited partner of the Partnership against certain of the
Company's officers and directors with regard to certain stock options plans
adopted by the Company in 1994. Both the Partnership and the Company were named
as nominal defendants. The plaintiff alleged 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. By
order dated June 23, 1998, this action was consolidated with the Delaware action
described above. 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.
By letter dated October 22, 1998, a demand for indemnification was received from
a customer with respect to utilization of Fibermesh(reserved) in concrete slabs
in the State of California. The demand for indemnification pertained to any and
all damages relating to their use of the Fibermesh(reserved) product. No
lawsuits have been filed against the Company and based upon the information
provided to the Company, the scope of liability and potential damages, if any,
cannot be ascertained at this time. The Company has engaged outside counsel to
investigate this claim and intends to vigorously defend its product.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
1 27. Financial Data Schedule
- - --------------
1 Filed herewith.
(b) Reports of 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 MANAGEMETN G.P.
General Partner
By: CHILL INVESTIMENTS, 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
December 31,1998, and the related condensed consolidated statement of income
and cash flows for the three months ended December 31,1998, and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
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<NAME> Synthetic Industries, LP
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