UNITED STATES
5/13/99 6:35 PM
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 March 31, 1999
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 SYNTHETIC INDUSTRIES, L.P.
Item 1. Financial Information AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except limited partnership units outstanding)
<TABLE>
<CAPTION>
March 31, September 30,
ASSETS 1999 1998
---- -----
(Unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash ............................................................................$ 336 $ 287
Accounts receivable, net of allowance for
doubtful accounts of $2,700 and $2,714......................................... 54,674 64,251
Inventory (Note 3)............................................................... 57,636 52,450
Other current assets ............................................................ 17,759 16,644
------- -------
TOTAL CURRENT ASSETS......................................................... 130,405 133,632
PROPERTY, PLANT AND EQUIPMENT, net (Note 4)........................................ 225,801 218,449
OTHER ASSETS....................................................................... 85,962 87,770
-------- -------
$442,168 $439,851
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................ $ 18,585 $ 26,438
Accrued expenses and other current liabilities................................... 13,432 13,653
Income taxes payable............................................................. - 285
Interest payable................................................................. 2,181 2,154
Current maturities of long-term debt (Note 5).................................... 1,235 5,500
-------- -------
TOTAL CURRENT LIABILITIES.................................................... 35,433 48,030
LONG-TERM DEBT (Note 5)............................................................ 249,888 236,843
DEFERRED INCOME TAXES (Note 6)..................................................... 32,996 32,996
MINORITY INTEREST IN SUBSIDIARY.................................................... 42,209 41,437
PARTNERS' CAPITAL:
General Partner capital.......................................................... 812 805
Limited Partners' capital, 800 units issued and outstanding...................... 80,830 79,740
------- ---------
TOTAL PARTNERS' CAPITAL...................................................... 81,642 80,545
------ ---------
$442,168 $439,851
</TABLE>
See notes to consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31 March 31
1999 1998 1999 1998
------ ----- ---- -----
<S> <C> <C> <C> <C>
Net sales................................................... $ 84,525 $ 79,271 $171,687 $155,852
-------- -------- -------- --------
Costs and expenses:
Cost of sales............................................. 55,745 54,522 115,539 107,718
Selling expenses.......................................... 9,866 9,074 19,655 17,401
General and administrative expenses....................... 9,820 8,224 18,414 15,599
Plant consolidation charges............................... 1,761 - 3,380 -
Amortization of excess purchase price over net
assets acquired and other intangibles................... 754 663 1,480 1,311
-------- -------- --------- ---------
77,946 72,488 158,468 142,029
------- ------- -------- --------
Operating income...................................... 6,579 6,788 13,219 13,823
-------- -------- --------- ---------
Other expenses:
Interest expense ......................................... 4,904 4,716 9,852 9,506
Amortization of deferred financing costs.................. 198 185 394 336
-------- -------- ---------- ----------
............................................................ 5,102 4,901 10,246 9,842
Income before income tax provision and minority
Interest in subsidiary net income ....................... 1,477 1,887 2,973 3,981
Income tax provision ....................................... 640 828 1,292 1,763
-------- ------ ----------- ---------
Income before minority interest in subsidiary net
Income.................................................... 837 1,059 1,681 2,218
Minority interest in subsidiary net income.................. 383 412 707 860
-------- ------ ---------- -------
NET INCOME ................................................. $ 454 $ 647 $ 974 $ 1,358
====== ====== ======== =======
Net income attributable to:
General Partner......................................... $ 7 $ 6 $ 9 $ 14
Limited Partner......................................... $ 447 $ 641 $ 965 $ 1,344
------ ------ ------- -------
$ 454 $ 647 $ 974 $ 1,358
Net income per partnership unit............................. $ 559 $ 801 $ 1,206 $ 1,680
====== ======= ======== =======
</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>
<CAPTION>
Six Months Ended March 31,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income ........................................................... $ 974 $ 1,358
Adjustments to reconcile income before extraordinary item
to net cash provided by (used in) operations:
Minority interest in subsidiary net income.......................... 707 860
Depreciation and amortization....................................... 12,771 10,313
Write off of assets in connection with plant consolidation ......... 790 -
Provision for bad debts............................................. 260 61
Deferred income taxes............................................... - -
Change in assets and liabilities, net of acquisitions:
Accounts receivable................................................ 9,328 14,867
Inventory.......................................................... (5,175) (11,216)
Other assets....................................................... (1,302) (1,975)
Accounts payable................................................... (7,939) (2,799)
Accrued expenses and other current liabilities..................... (221) (808)
Income taxes payable............................................... (285) 907
Interest payable................................................... 27 (198)
---------- ------------
Cash provided by (used in) operating activities.................. 9,935 11,370
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment............................ (17,035) (27,405)
Acquisitions (Note 7)................................................. - (6,000)
------------ -------------
Cash used in investing activities ................................ (17,035) (33,405)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments under term loan............................................ - (25,000)
Borrowings under the Credit Facility.................................. 8,901 55,219
Redemption of 12 3/4% Senior subordinated debentures.................. - (7,403)
Proceeds from sale of treasury stock under the Employee
Stock Purchase Plan................................................. 358 -
Proceeds from exercise of stock options............................... 38 85
Deferred financing costs.............................................. - (649)
Repayments of capital lease obligation and other long-term debt....... (2,004) (367)
-------- ------------
Cash provided by financing activities............................. 7,293 21,885
Effect of exchange rate changes on cash................................. (144) 75
---------- ------------
NET CHANGE IN CASH...................................................... 49 (75)
CASH AT BEGINNING OF PERIOD............................................. 287 340
---------- -----------
CASH AT END OF PERIOD................................................... $ 336 $ 265
========= ==========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION Cash paid during the year for:
Interest ............................................................. $ 10,518 $ 9,704
Income taxes.......................................................... 3,641 856
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Net capital obligation for purchase of equipment...................... 1,884 -
Acquisition of business:
Fair value of assets acquired......................................... - $5,293
Liabilities assumed and incurred...................................... - 4,880
Cash paid............................................................. - 6,000
</TABLE>
See notes to consolidated financial statement
<PAGE>
15
SYNTHETIC INDUSTRIES, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars)
(Information as of March 31, 1999 and for the
periods ending March 31, 1999 and 1998 are 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 its shares of the
Company. The Company had 8,671,778 shares of Common Stock outstanding at March
31, 1999, 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 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 March 31, 1999 and for the periods
ended March 31, 1999 and 1998 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 March
31, 1999 and 1998, and the results of operations for the three and six 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 included in
the Partnership's Annual Report on Form 10-K for the fiscal year ended September
30, 1998. Operating results for the three and six months ended March 31, 1999
may not necessarily be indicative of the results that may be expected for the
full year.
3. INVENTORY
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
---- -------
<S> <C> <C>
Finished goods........................ $42,881 $ 37,689
Work in process....................... 6,901 7,107
Raw materials......................... 7,854 7,654
--------- --------
$ 57,636 $ 52,450
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
---- ------
<S> <C> <C>
Land.................................... $ 4,585 $ 4,585
Buildings and improvements.............. 44,966 42,588
Equipment under capital lease........... 12,800 12,500
Machinery and equipment and
leasehold improvements................ 282,064 266,972
------- --------
344,415 326,645
Accumulated depreciation................ 118,614 108,196
------- --------
$225,801 $218,449
</TABLE>
5. LONG-TERM DEBT
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
----- ----
<S> <C> <C>
Credit facility:
Securitization................................ $24,508 $ 29,162
Revolver...................................... 43,577 30,022
9 1/4% senior subordinated
notes, due 2007................................. 170,000 170,000
Capital lease obligation......................... 11,857 10,647
Other............................................ 1,181 2,512
--------- ---------
251,123 242,343
Less current portion............................. 1,235 5,500
-------- ----------
Total long term portion........................ $249,888 $ 236,843
</TABLE>
At March 31, 1999, interest rates under the Securitization and Revolver
ranged from 5.66% to 7.75%, respectively with letters of credit
outstanding of $356, and availability under the Credit Facility was
approximately $16,000.
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. COMPREHENSIVE INCOME
Effective October 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income", which requires additional disclosure of amounts
comprising comprehensive income. Comprehensive income is broadly defined as
the change in the equity of a business enterprise for translation and other
events and circumstances from nonowner sources. The Company has other
comprehensive income in the form of foreign currency cumulative translation
adjustments which resulted in total comprehensive income, net of tax of
$1,025 and $1,230 for the quarters ended March 31, 1999 and 1998,
respectively, and $1,936 and $2,629 for the six months ended March 31, 1999
and 1998, respectively.
7. INCOME TAXES
The provision for income taxes in the consolidated statements of operations
reflects the effective tax rate of 36% and 39% for the three and six months
ended March 31, 1999, respectively.
8. PLANT CONSOLIDATION COSTS
On November 18, 1998 the Company announced its plans to combine its
non-woven manufacturing facility in Spartanburg, SC into its modern
facility in Ringgold, GA. As a result, the Company recorded pretax charges
of $1,761 and $3,380 ($0.12 and $0.23 per diluted share on an after tax
basis) for the three and six months ended March 31, 1999, respectively. The
charges reflect severance provisions of $1,132 related to workforce
reductions of approximately 105 employees, equipment relocation expenses of
$1,458 and a charge of $790 (net of $479 accumulated depreciation) for the
write off of abandoned assets. As of March 31, 1999, payments of
approximately $3,000 have been made for these charges.
9. 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
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.
On April 16, 1999, preliminary approval of a settlement agreement in
connection with these lawsuits was granted by the United States District
Court for the Northern District of California. The settlement will not
become final until after notice is given to the limited partners of the
Partnership and stockholders of the Company and the Court holds a hearing
at which limited partners and stockholders will be given an opportunity to
object to the terms of the settlement.
If, after the hearing, final approval of the settlement agreement is
granted by the Court, the General Partner will resign, a trustee will be
appointed for the Partnership, and an independent committee of the
Company's Board of Directors (the "Committee") will commence a six-month
sales process during which the committee, with the help of a financial
advisor will seek offers from qualified buyers to purchase the Company. The
primary objective of the sale process will be to maximize value for the
Company's shareholders. If an acceptable offer to acquire the Company is
not received during the process, the Partnership will be liquidated and its
shares of the Company's common stock will be distributed in an orderly
manner (after satisfaction of liabilities). The settlement agreement is not
an admission by the Company of any liability or wrongdoing.
Prior to March 23, 1999, approximately 158 plaintiffs filed claims against
Kaufman and Broad Home Corporation (including its subsidiaries and
affiliates) ("Kaufman and Broad") in two Los Angeles County Superior Court
cases in connections with claims of alleged defects in fiber reinforced
concrete slabs. On or about March 23, 1999, the plaintiffs settled claims
against Kaufman and Broad. On April 29, 1999, the plaintiffs filed amended
complaints naming the Company as a defendant in these actions. The relief
sought has not yet been specified. The Company has denied any allegations
of wrongdoing and intends to vigorously defend against all claims by the
plaintiffs in these complaints.
On October 1, 1998, a class action complaint was filed against Kaufman and
Broad in Los Angeles County Superior Court, again in connection with
alleged defects in fiber reinforcedd concrete slabs. Kaufman and Broad
denied the plaintiffs' allegations and filed a cross-complaint against the
Company. The relief has not yet been specified. The Company answered
Kaufman and Broad cross-complaint, denying generally and specifically the
allegations that Kaufman and Broad had been injured or was entitled to any
relief by any reason, act or omission by or on behalf of the Company. The
Company intends to vigorously defend against all claims by the plaintiffs
in this complaint.
<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 8,672,382 shares of Common Stock outstanding
as of March 31, 1999, 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 Partnershi's financial statements are
substantially identical to those of the Company, with the exception of the
minority interest, amounts paid by and due to the Company on behalf of the
Partnership of $1,046. 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 the three and
six months refer to the Company's fiscal quarters.
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 expenditure 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 amounted to $9,935 and $11,370 for the six months ended
March 31, 1999 and 1998, respectively. These amounts for the periods ended March
31, 1999 and 1998 reflect net income of $2,064 and $2,584, respectively, after
deducting noncash charges of $13,701 and $10,374 and net working capital changes
of ($5,830) and ($1,588) for each respective period.
Capital expenditures were $17,035 for the six months ended March 31,
1999 as compared to $27,405 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 the balance of
fiscal 1999 are approximately $10,000, primarily to expand the capacity of the
Company's nonwoven manufacturing facilities, 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 March 31, 1999, the balances under the Securitization
and Revolver were $24,508 and $43,577 at interest rates ranging from 5.66% to
7.75%, respectively with letters of credit outstanding of $356. Availability
under the Credit Facility was approximately $16,000 at March 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 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. The Company recorded pre-tax charges of
$1,761 and $3,380 ($0.12 and $0.23 per share on an after tax basis) for the
three and six month period ending March 31, 1999, respectively. These charges
were primarily related to severance and other employee related costs, equipment
relocation expenses and a charge to write off assets. As of March 31, 1999,
approximately $3,000 of payments have been made against these charges. The
Company expects 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 three and six months ended March 31, 1998
and 1997.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net sales................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales............................. 66.0 68.8 67.3 69.1
---- ---- ---- ----
Gross profit........................... 34.0 31.2 32.7 30.9
Selling expenses.......................... 11.7 11.4 11.4 11.2
General and administrative
expenses.......................... 11.3 10.2 10.5 9.8
Plant consolidation costs................. 2.1 0.0 2.0 0.0
Amortization of intangibles............... 0.9 0.8 0.9 0.8
--- --- --- ---
Operating profit....................... 8.0 8.8 7.9 9.1
Interest expense.......................... 5.8 6.0 5.7 6.1
Amortization of deferred
financing costs................... 0.2 0.2 0.2 0.2
--- --- --- ---
Income before
provision for taxes............ 2.0 2.6 2.0 2.8
Provision for
income taxes.................. 0.7 1.0 0.8 1.1
--- --- --- ---
Net income................................ 1.3% 1.6% 1.2% 1.7%
==== ==== ==== ====
</TABLE>
Results of Operations for the Three Months Ended March 31
Net sales for the second quarter of fiscal 1999 were $84,525 compared to
$79,271 for the same period of fiscal 1998, an increase of $5,254, or 6.6%.
Carpet backing sales for the second quarter of fiscal 1999 were $42,312 compared
to $40,960 for the same period of fiscal 1998, an increase of $1,351, or 3.3%,
reflecting a combination of higher unit volume offset by lower average selling
prices. Construction and civil engineering product sales for the second quarter
of fiscal 1999 were $24,758 compared to $20,352 for the same period of fiscal
1998, an increase of $4,406, or 21.6%, including $2,813 contributed by the
acquisition of Novocon International, Inc. Technical textiles sales for the
second quarter of fiscal 1999 were $17,455 compared to $17,959 for the same
period of fiscal 1998, a decrease of $504, or 2.8%.
Gross profit for the second quarter of fiscal 1999 was $28,780 compared to
$24,749 for the same period of fiscal 1998, an increase of $4,031, or 16.3%. As
a percentage of sales, gross profit increased to 34.0% from 31.2%. This increase
was primarily due to increased sales volume, growth of higher margin business
and lower on average polypropylene costs, partially offset by lower average
selling prices.
Selling, general and administrative expenses for the Company for the second
quarter of fiscal 1999 were $19,405 compared to $17,119 for the same period of
fiscal 1998, an increase of $2,286, or 13.4%. As a percentage of sales, selling,
general and administrative expenses increased from 21.6% to 23.0%. This increase
was primarily due to increased expenditures for sales and engineering support
staff as well as increased marketing expenses, particularly in Construction and
Civil Engineering. Included in general and administrative expenses for the
Partnership were $281, which is due the Company for expenses incurred on behalf
of the Partnership
Operating income for the Company for the second quarter of fiscal 1999 was
$6,860 as compared to $6,967 for the same period of fiscal 1998, a decrease of
$107, or 1.5%. As a percentage of sales, operating income decreased to 8.1% in
fiscal 1999 from 8.8% in fiscal 1998. This decrease was primarily due plant
consolidation costs in the second quarter of fiscal 1999 of $1,761. Operating
income, excluding plant consolidation costs, was $8,621.
Interest expense for the second quarter of fiscal 1999 was $4,904 compared
to $4,716 for the same period of fiscal 1998, an increase of $188, or 4.0%, due
to a lower average interest rate applied on higher outstanding debt. The
effective income tax rate for the second quarter of fiscal 1999 was 36.4%.
Net income for for the Company for the second quarter of fiscal 1999 was
$1,118 compared to $1,238 for the same period of fiscal 1998, a decrease of
$120, or 9.7%. Excluding the plant consolidation costs, net income would have
been $2,238, an increase of $1,000, or 80.8%, over net income for the same
period of fiscal 1998. Earnings before interest, taxes, depreciation and
amortization ("EBITDA")1 for the second quarter of fiscal 1999 were $13,719
compared to $12,613 for the same period of fiscal 1998, an increase of $1,106,
or 8.8%. Excluding plant consolidation costs, EBITDA increased $2,867.
Results of Operations for the Six Months Ended March 31
Net sales for the first six months of fiscal 1999 were $171,687 compared to
$155,852 for the same period of fiscal 1998, an increase of $15,835 or 10.2%.
Carpet backing sales for the first six months of fiscal 1999 were $83,359
compared to $79,874 for the same period of fiscal 1998, an increase of $3,485,
or 4.4%. Construction and civil engineering product sales for the first six
months of fiscal 1999 were $55,216 compared to $43,168 for the same period of
fiscal 1998, an increase of $12,048, or 27.9%. Technical textiles sales for the
first six months of fiscal 1999 were $33,112 compared to $32,810 for the same
period of fiscal 1998, an increase of $302, or 0.9%.
Gross profit for the first six months of fiscal 1999 was $56,148 compared
to $48,134 for the same period of fiscal 1998, an increase of $8,014, or 16.6%.
As a percentage of sales, gross profit increased to 32.7% from 30.9%.
Selling, general and administrative expenses for the Company for the first
six months of fiscal 1999 were $37,686 compared to $32,634 for the same period
of fiscal 1998, an increase of $5,052, or 15.5%, reflecting increased
expenditures for sales and support staff. As a percentage of sales, selling,
general and administrative expenses increased from 20.9% to 22.0% reflecting
lower on average selling prices. Included in general and administrative expenses
for the Partnership for the first six months of fiscal 1999 were $383, which are
due the Company for expenses incurred on behalf of the Partnership.
Operating income for the Company for the first six months of fiscal 1999
was $13,602 as compared to $14,189 for the same period of fiscal 1998, a
decrease of $587, or 4.1%. As a percentage of sales, operating income decreased
to 7.9% in fiscal 1999 from 9.1% in fiscal 1998. Excluding plant consolidation
costs, operating income was $16,982.
Interest expense for the first six months of fiscal 1999 was $9,852
compared to $9,506 for the same period of fiscal 1998, an increase of $346, or
3.6%, due to lower average interest rates on higher outstanding debt. The
effective income tax rate for the six months ended March 31, 1999 was 38.5%.
Net income for the Company for the first six months of fiscal 1999, was
$2,064 compared to $2,584 for the same period of fiscal 1998, a decrease of
$520, or 20.1%. Excluding the plant consolidation costs, net income would have
been $4,143, an increase of $1,559, or 60.3%, over net income for the same
period of fiscal 1998. EBITDA for the first six months of fiscal 1999 were
$25,979 compared to $24,705 for the same period of fiscal 1998, an increase of
$1,274, or 5.2%. Excluding plant consolidation costs, EBITDA increased $4,645.
The increase in EBITDA was primarily due to higher depreciation expense as
compared to the same period of fiscal 1998.
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. 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 evaluated and tested business and technical
information system hardware and software as to year 2000 compliance and
functionality. The Company's basic integrated software applications, Infinium
and CAMS, are represented to be year 2000 compliant by their respective vendors.
Internal testing was completed in March 1999 that verified vendor
representations. Minimal code renovations were necessary in CAMS and have been
completed. Validation processes will be ongoing in 1999, thereby providing
sufficient time to address unforeseen issues and develop contingency plans for
external supply chain dependencies that could 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
99% complete. The Company believes that the repair of this equipment is
approximately 98% complete, with completion scheduled by June 1999. Contingency
plans for production work arounds are in process and scheduled for completion by
October 1999. The Company has been proactive in contacting external business
partners to communicate and exchange status information.
Costs associated with required modification to become year 2000 compliant
have not been material to the company's financial position 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.
The Company is developing contingency plans to ensure that it will be able
to operate the critical areas of its business. Contingency plans include
developing alternative business processes for our business dependencies with
customers and suppliers who may experience year 2000 interruptions. . These
plans will be monitored for completion as we approach the year 2000. Although
the Company is making every reasonable effort to identify and successfully
resolve any year 2000 issues that are within our control, 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 Company's most recent annual report filed on Form 10-K (Item 7A). There
have been no material changes in the information provided therein from September
30, 1998 to March 31, 1999.
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.
On April 16, 1999, preliminary approval of a settlement agreement in
connection with these lawsuits was granted by the United States District
Court for the Northern District of California. The settlement will not
become final until after notice is given to the limited partners of the
Partnership and stockholders of the Company and the Court holds a hearing
at which limited partners and stockholders will be given an opportunity to
object to the terms of the settlement.
If, after the hearing, final approval of the settlement agreement is granted by
the Court, the General Partner will resign, a trustee will be appointed for the
Partnership, and an independent committee of the Company's Board of Directors
(the "Committee") will commence a six-month sales process during which the
committee, with the help of a financial advisor will seek offers from qualified
buyers to purchase the Company. The primary objective of the sale process will
be to maximize value for the Company's shareholders. If an acceptable offer to
acquire the Company is not received during the process, the Partnership will be
liquidated and its shares of the Company's common stock will be distributed in
an orderly manner (after satisfaction of liabilities). The settlement agreement
is not an admission by the Company of any liability or wrongdoing.
Prior to March 23, 1999, approximately 158 plaintiffs filed claims against
Kaufman and Broad Home Corporation (including its subsidiaries and
affiliates) ("Kaufman and Broad") in two Los Angeles County Superior Court
cases in connections with claims of alleged defects in fiber reinforced
concrete slabs. On or about March 23, 1999, the plaintiffs settled claims
against Kaufman and Broad. On April 29, 1999, the plaintiffs filed amended
complaints naming the Company as a defendant in these actions. The relief
sought has not yet been specified. The Company has denied any allegations
of wrongdoing and intends to vigorously defend against all claims by the
plaintiffs in these complaints.
On October 1, 1998, a class action complaint was filed against Kaufman and
Broad in Los Angeles County Superior Court, again in connection with
alleged defects in fiber reinforcedd concrete slabs. Kaufman and Broad
denied the plaintiffs' allegations and filed a cross-complaint against the
Company. The relief has not yet been specified. The Company answered
Kaufman and Broad cross-complaint, denying generally and specifically the
allegations that Kaufman and Broad had been injured or was entitled to any
relief by any reason, act or omission by or on behalf of the Company. The
Company intends to vigorously defend against all claims by the plaintiffs
in this complaint.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
1 27.0 Financial Data Schedule
- --------------
1 Filed herewith
(b) Reports of Form 8-K
None.
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: May 14, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The following table presents financial information for the six months and
period ended March 31, 1999.
</LEGEND>
<CIK> 0000901175
<NAME> Synthetic Industries LP
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 336
<SECURITIES> 0
<RECEIVABLES> 57,374
<ALLOWANCES> 2,700
<INVENTORY> 57,636
<CURRENT-ASSETS> 130,405
<PP&E> 344,415
<DEPRECIATION> 118,614
<TOTAL-ASSETS> 442,168
<CURRENT-LIABILITIES> 35,433
<BONDS> 170,000
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 442,168
<SALES> 171,687
<TOTAL-REVENUES> 171,687
<CGS> 115,539
<TOTAL-COSTS> 158,468
<OTHER-EXPENSES> 158,468
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,246
<INCOME-PRETAX> 2,973
<INCOME-TAX> 1,292
<INCOME-CONTINUING> 1,681
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 974
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
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