-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, R0bdQmVByBc4v2IgSjH+znAuUNyDKaqbs3pEx7CbSZFPigcTfw5F3rHICAxDskYf osJMj9cS+2AviHAEsPH7KA== 0000809803-97-000014.txt : 19971224 0000809803-97-000014.hdr.sgml : 19971224 ACCESSION NUMBER: 0000809803-97-000014 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971223 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SYNTHETIC INDUSTRIES INC CENTRAL INDEX KEY: 0000809803 STANDARD INDUSTRIAL CLASSIFICATION: TEXTILE MILL PRODUCTS [2200] IRS NUMBER: 581049400 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-28914 FILM NUMBER: 97743087 BUSINESS ADDRESS: STREET 1: 309 LAFAYETTE RD CITY: CHICKAMAUGA STATE: GA ZIP: 30707 BUSINESS PHONE: 7063753121 MAIL ADDRESS: STREET 1: 309 LA FAYETTE ROAD CITY: CHICKAMAUGA STATE: GA ZIP: 30707 10-K 1 1997 ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 1997 [ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to _____________________ Commission File Number 33-11479 SYNTHETIC INDUSTRIES, INC. - -------------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) Delaware 58-1049400 - ----------------------------------------------------------- ------------------ (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) (706) 375-3121 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on which Title of class registered None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $1.00 par value (Title of Class) Indicate by check mark whether 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 ____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] At December 19, 1997, the aggregate market value of the common stock held by non-affiliates of the Registrant was approximately $72,100,000. The number of shares of the Registrant's Common Stock outstanding as of December 19, 1997 was 8,656,250. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held in February 1998 are incorporated by reference in Parts III and IV. PART I ITEM 1. BUSINESS General Synthetic Industries, Inc., a Delaware corporation (the "Company"), manufactures and markets a wide range of primarily polypropylene-based materials designed for support, strength and stabilization applications. The Company's products replace commonly used materials in diverse applications including: floor covering, geotextiles, erosion control, concrete reinforcement and furniture construction fabrics. The Company manufactures and sells more than 2,000 products in over 65 end-use markets predominantly in North America, Europe and the Far East. The Company's products are sold along three principal product lines: carpet backing, construction and civil engineering products, and technical textiles. The Company has a worldwide presence in carpet backing, a woven fabric used in all modern tufted carpets, and is one of the two leading manufacturers in the U.S. that produce a broad range of primary and secondary carpet backing. The Company's construction and civil engineering products include fiber additives for secondary concrete reinforcement and geosynthetic products used in environmental and infrastructure applications, with such end uses as landfill waste containment and soil stabilization. The Company's technical textile products are comprised of specialty fabrics, industrial yarns and fibers used in furniture and bedding construction, filtration (e.g., wastewater treatment, air filtration and bauxite mining), and agriculture (e.g., shade cloth and ground cover). The Company's products are principally sold through direct sales to customers by the Company's sales force and through a broad network of distributors located across North and South America, Europe and the Pacific Rim. History The Company was founded in 1969 to produce polypropylene-based primary carpet backing. Following the acquisition of the Company in 1976 by a group of private investors, the Company diversified into the manufacture and sale of polypropylene-based industrial fabrics and specialty yarns. Between 1981 and 1983, the Company entered the construction and civil engineering products market, initially by manufacturing woven geotextiles and later through its introduction of Fibermesh(R) fibers for concrete reinforcement. In 1985, the Company added secondary carpet backing to its product offerings. In fiscal 1991, the Company purchased a technical synthetic fabrics operation located in Gainesville, Georgia, from Chicopee, a subsidiary of Johnson & Johnson. In addition to broadening the Company's line of geotextile products, the acquisition gave the Company access to new markets for high performance technical textiles. As a result of improved fiber technology and increased fiber manufacturing capabilities, the Company opened its sixth facility, the nonwoven geotextile plant in Ringgold, Georgia, in 1992, enabling the Company to offer a full line of geotextile products. On February 27, 1997, the Company acquired certain assets of the Spartan Technologies division of Spartan Mills for $9.4 million (the "Spartan Acquisition"). The assets will be used primarily in the manufacturing of nonwoven fabrics used in the geotextile and furniture and bedding construction markets. The Company was acquired by Synthetic Industries L.P. (the "Partnership") in December 1986. Immediately prior to the November 1, 1996 completion of the Offering (as defined below), all of the issued and outstanding capital stock of the Company was owned by the Partnership. SI Management L.P. (the "General Partner") is the sole general partner of the Partnership. Synthetic Management G.P. is the sole general partner of SI Management L.P. By virtue of these relationships, Synthetic Management G.P. controls the management and affairs of the Partnership and, therefore, the Company. See "Security Ownership of Certain Beneficial Owners and Management" and "Certain Relationships and Related Transactions". On November 1, 1996, the Company sold 2,875,000 shares of common stock in an initial public offering (the "Offering"). The net proceeds to the Company from the sale (after payment of underwriting discounts and commissions and expenses) were $33,681,000. Immediately following the Offering, the Partnership owned 5,781,250 shares of Common Stock, or approximately 67% of the issued and outstanding shares of Common Stock. Employees, officers and directors have been granted options to purchase an additional 10% of the Common Stock on a fully diluted basis. The Company's principal executive offices are located at 309 LaFayette Road, Chickamauga, Georgia 30707, and its telephone number is (706) 375-3121. Products The Company develops, manufactures and sells a wide array of polypropylene-based industrial fibers and fabrics along its three principal product lines: carpet backing, construction and civil engineering, which comprises environmental/geotextile products and concrete reinforcement products, and technical textiles. The Company manufactures five basic yarn and fiber types, from which approximately 2,000 products are manufactured to serve in excess of 65 end-use markets. The following table sets forth the Company's net sales attributable to each product line, and the percentage of total net sales represented by each, for the past five fiscal years:
Year Ended September 30, 1997 1996 1995 1994 1993 (Thousands of dollars) Carpet Backing $166,219 48.1% $146,491 48.9%$ $133,025 49.0% $117,791 50.1% $106,406 50.5% Construction/ 114,611 33.2 97,043 32.4 82,933 30.6 68,706 29.3 47,899 22.8 Civil Engineering Technical Textiles 64,742 18.7 55,998 18.7 55,469 20.4 48,480 20.6 56,211 26.7 ------ ---- ------- ---- ------ ---- ------ ---- ------ ---- Net Sales $345,572 100.0% $299,532 100.0% $271,427 100.0% $234,977 100.0% $210,516 100.0% ======== ====== ======== ====== ======== ====== ======== ====== ======== ======
Carpet Backing Carpet backing is the Company's oldest and largest product line consisting of woven primary and secondary fabrics in a variety of styles and widths that are manufactured from polypropylene raw materials. Primary carpet backing is a tightly woven material into which carpet yarn is tufted in the manufacture of broadloom floorcoverings. Secondary carpet backing, which forms the base of the carpet, is the coarser woven fabric that is laminated to the back of tufted broadloom to insure both carpet integrity and dimensional stability. The Company produces a broad range of primary and secondary backing. The Company entered the modular carpet tile backing market in February 1997 through the Spartan Acquisition. Construction/Civil Engineering The Company's construction and civil engineering product line has two distinct product lines: geosynthetic products and concrete reinforcement fibers. Construction and civil engineering has achieved rapid growth since 1993 when the Company enhanced its channels of distribution for Fibermesh(R) and expanded into the production of nonwoven geotextiles. Within this product line, geotextile products principally serve the environmental and infrastructure markets, with end uses such as landfill waste containment, erosion control and soil stabilization, separation and reinforcement. Fibermesh(R) provides secondary reinforcement of conventional and pre-cast concrete. Geosynthetic Products. The Company's geosynthetic product line consists of erosion control fabrics, geotextiles, and soil fibers. These products control erosion and capture sediment; provide filtration, separation and reinforcement of soils; improve engineering properties of native soils; protect landfill liners; and extend pavement life. The specifications of the Company's geosynthetic fabrics and fibers vary depending on specific site conditions, including such factors as slope angles, water flow velocities, climate, runoff, soil profile and ultimate land use. The Company's geosynthetic products generally comply with state agency guidelines pertaining to geosynthetic products issued to date. The Company produces a variety of nonwoven and woven geotextiles for use in landfill roadway and mining construction. The Company's LANDLOK(R) erosion control products are used in storm water drainage channels, steep slopes and shoreline protection. These products hold the soil in place, while allowing and supporting vegetative growth. LANDLOK(R) products are an environmentally friendly and aesthetically pleasing alternative to rock or concrete erosion control methods. Concrete Reinforcement. The Company pioneered the practical use of polypropylene fibers as a secondary reinforcement for concrete with the development and introduction of Fibermesh(R) to the concrete industry in 1983. The addition of Fibermesh(R) polypropylene fibers to concrete inhibits the formation of early cracking while providing greater impact, abrasion, and shattering resistance from external forces. The hardened fibrous concrete has lower permeability and a level of toughness (residual strength) not found in plain concrete. Primary applications for fiber reinforced concrete are residential and commercial slabs, elevated decks, pre-cast products, shotcrete tunnels, canals and pools, and whitetopping restoration of deteriorated asphalt pavements and parking areas. Technical Textiles Technical textiles produced by the Company are products and systems that offer high performance solutions for niche markets consisting primarily of specialty fabrics, industrial yarns and fibers. The specialty fabrics are manufactured in a variety of widths, weights, permeability ranges and dimensional configurations primarily from polypropylene and other synthetic fibers. Customers use these fabrics to manufacture products used in diverse applications such as furniture and bedding construction, filtration and, agriculture. Furniture and bedding construction products consist of woven and nonwoven decking and padding, mattress ticking, dust covers, spring insulators, and flange materials. The Company also sells its industrial yarns and fibers directly to weavers, knitters, and non-woven manufacturers who produce niche market products, such as automobile upholstery, coat linings, geotextiles, air filters and water filtration media. Marketing and Sales Carpet Backing. The Company sells its carpet backing products to 91 customers in the carpet industry, most of whom are carpet manufacturers located in the United States. In fiscal 1997, the Company's ten largest carpet backing customers accounted for approximately 78% of its total net sales to the carpet industry. In fiscal 1997, sales to Shaw Industries, Inc. ("Shaw"), the Company's largest customer, accounted for approximately 41% of net carpet backing sales and approximately 20% of the Company's total net sales. Shaw is estimated to have 28% of the United States carpet market. The Company's carpet backing products are sold primarily through the Company's sales force that is directed from a central sales office in Calhoun, Georgia. All of the sales managers have significant industry experience and monitor ongoing product requirements, styling changes and competitive trends affecting their customers. Construction and Civil Engineering. The Company's broad product line is marketed in conjunction with its industry expertise in application and material engineering, as well as expertise in construction design and installation, as cost effective, longer lasting alternatives to traditional construction methods. Its ongoing marketing communications program for owners, architects, specifying agencies, including both the public and private sectors, and the engineering community as a whole, is designed to continue to build awareness of both product capabilities and in-house and technical expertise, and to expand interest in and use of concrete reinforcing fibers and geosynthetics. The Company's geosynthetic products are sold primarily in North America to regional and national distributors, installers of landfill liners and various governmental transportation departments, port authorities and waterway commissions. International sales, which comprise approximately 14% of geosynthetic sales, are sold through worldwide distribution networks. In fiscal 1997, the ten largest geosynthetic product customers accounted for approximately 36% of the Company's total net sales in this product line. Fibermesh(R) is sold through a direct sales force to ready-mix concrete companies and precast concrete product manufacturers located primarily in the North America and the United Kingdom. The Fibermesh(R) sales force operates out of ten regional offices in the United States and in Chesterfield, England. In addition, Fibermesh(R) is sold through a contract with Master Builders, Inc., a worldwide leader in concrete technology. Internationally, in addition to the United Kingdom sales force, construction industry product distributors market Fibermesh(R) in over 50 countries. In fiscal 1997, the ten largest Fibermesh(R) customers accounted for approximately 12% of the Company's total net sales of Fibermesh(R). Technical Textiles. The Company sells its specialty fabrics to a diverse group of approximately 400 manufacturers located primarily in North and Central America and the Pacific Rim countries. The Company sells its industrial yarns and fibers to a diverse group of approximately 100 manufacturers located in North America and Europe. In fiscal 1997, the Company's ten largest technical textile customers accounted for approximately 22% of the Company's total net sales of technical textiles. The Company's technical textiles are marketed by salespersons through sales offices in Gainesville and Calhoun, Georgia and Chesterfield, England and, beginning with the Spartan Acquisition, in Spartanburg, South Carolina, Hickory, North Carolina and Tupelo, Mississippi. Competition The markets for the Company's products are highly competitive. In the manufacture and sale of carpet backing, which represented approximately 48% and 49% of the Company's total sales in fiscal 1997 and 1996, respectively, the Company competes primarily with Amoco Fabrics and Fibers Co. ("Amoco"), and, to a lesser extent, Wayn-Tex Inc. and certain other companies. Amoco has the dominant position in the carpet backing market worldwide. In the United States, only the Company and Amoco produce a broad range of primary and secondary carpet backing in a variety of styles and widths. The Company competes in the carpet backing market primarily on the basis of quality, availability, service, price and product line variety, providing carpet manufacturers with a reliable alternative source of supply to Amoco. In the manufacture and sale of the Company's other products, the Company generally competes with a number of other companies, some of which are significantly larger and have substantially greater resources than the Company. The Company's primary competitors in the construction and civil engineering market are Amoco and T.C. Mirafi Corporation with respect to geotextiles, North American Green, Inc. with respect to environmental and erosion control products, and W.R. Grace & Co., which markets but does not manufacture concrete reinforcement fibers, with respect to concrete reinforcement. The Company competes in the concrete reinforcement fiber market primarily on the basis of product design and technical service. In some applications, Fibermesh(R) also competes with welded wire fabric on the basis of product performance and cost. The Company competes in the construction and civil engineering market on the basis of product line breadth and quality, price, and the custom design, engineering and other services it provides to customers. With respect to technical textiles, competitors vary depending upon the specific market niche. The Company competes in each segment of the technical textiles market primarily on the basis of service, quality, innovation and product line variety. Manufacturing Process Polypropylene, a chemically inert plastic derived from petroleum is the basic raw material used in the manufacture of primarily all of the Company's products today. The Company believes it is a technological leader in the conversion of polypropylene into woven and nonwoven polypropylene products. The expertise of the Company's research and development and marketing staff has enabled the Company to develop innovative products, frequently in response to specific customer needs. Woven fabrics are produced by interlacing thousands of strands of extruded yarn at right angles to one another. The manner in which the yarn is interlaced determines the type of weave. Woven fabrics are characterized by strength and dimensional stability. The Company's woven fabric products include primary and secondary carpet backing, geotextiles, erosion control fabrics, and specialty fabrics for the filtration, construction and agricultural markets. Nonwoven fabrics are produced by first stacking several layers of webbed short length fibers and then entangling the layers by punching barbed needles through the layers. Nonwoven fabrics provide extensibility without rupture and dimensionality. The Company's nonwoven fabric products include geotextiles, erosion control fabrics, furniture and bedding construction fabrics, and spill control fabrics. The Company believes that it has state-of-the-art manufacturing capability in both its woven and nonwoven product lines and is one of the most cost-efficient producers in the markets in which it participates. The Company's three primary manufacturing processes are extrusion, weaving and needlepunching. Extrusion. Much of the Company's expertise has been developed in its extrusion processes. Engineering the polymeric raw materials during the extrusion process creates many of the product's specification properties. In addition to yarns and fibers for conventional end-uses, the Company has also developed value-added products through the use of additives including those that resist sunlight degradation. The Company owns and operates one of the world's largest polypropylene staple fiber lines. Most of the Company's extruded products are consumed internally and become value-added woven and nonwoven fabrics, but some are sold to weavers, knitters, nonwoven producers and convertors. Weaving. The yarns produced in the Company's extrusion and yarn spinning operations are woven on looms to produce the wide variety of fabrics that the Company sells through all of its marketing divisions. Fabric properties are engineered to industry specifications by altering constituent yarns and weave patterns. Looms are generally interchangeable to weave carpet backing, geotextiles and certain agricultural fabrics. Needlepunching. In fiscal 1993, the Company constructed a state-of-the-art needlepunched nonwoven fabric facility. This modern plant produces a new generation of engineered cost-effective fabrics for the geotextile, furniture and bedding construction and chemical spill cleanup markets. The assets acquired in the Spartan Acquisition will be used primarily in the manufacturing of needlepunched nonwoven fabrics for similar applications. The Company maintains a complete rigorous quality control program centered on statistical process control and customer key measures. Each stage of the process from the raw material to the final product is monitored using standard procedures and test methods which satisfy the quality control and consistency standards of ISO 9002 established by the International Standards Organization. In 1997, the Company received ISO 14001 certification for complying with internationally recognized environmental standards - one of the first companies in the United States to achieve such certification. The Company's production equipment is capable of manufacturing a variety of woven and nonwoven polypropylene products. This versatility enables the Company to alter the product mix within its woven and nonwoven product lines in response to market demand or to take advantage of specific product opportunities. The Company's plants are run on a continuous 24-hour per day basis, seven days a week, 350 days per year. Orders are typically filled from inventory. Research and Development The Company's research and market development is focused primarily on development and as such the Company engages in product design, development, and performance validation to improve existing products and to create new products. The Company expended approximately $4.2 million (approximately 1.2% of sales) and $2.9 million (approximately 1.0% of sales) on Company-sponsored research and development activities in fiscal 1997 and fiscal 1996, respectively. International Operations The Company conducts its foreign sales operations through subsidiaries in Europe and a network of distributors worldwide. In fiscal 1997, the aggregate sales (principally of construction and civil engineering products) by such foreign subsidiaries and marketing divisions were approximately $6.6 million. International sales from United States operations in fiscal 1997 were $30.1 million. Total international sales were approximately 10.6% of net sales. Raw Materials Polypropylene, which is a petroleum derivative, is the basic raw material used in the manufacture of substantially all of the Company's products. The Company currently purchases polypropylene in pellet form principally from five suppliers, with Fina Oil & Chemical Company being the Company's largest supplier of polypropylene. These purchases are generally made pursuant to long-standing arrangements. Polypropylene purchases account for approximately 50% of the Company's cost of sales. Increases in the price of polypropylene without offsetting increases in selling prices could have a significant negative effect on the Company's results of operations and financial condition. The Company believes that the sales prices of its products will adjust over time to reflect changes in polypropylene costs. The Company has not experienced production curtailment due to shortages of polypropylene supply at any time. Regulation The Company is subject to federal, state and local laws and regulations affecting its business, including those promulgated under the Occupational Safety and Health Act and by the Environmental Protection Agency or similar state agencies. Many of the Company's construction and civil engineering products have applications that are subject to building code association guidelines and specifications and highway department guidelines. Obtaining the necessary approvals can delay new product introductions in some areas. Moreover, the enactment of new legislation or the issuance of new guidelines may require the Company to modify its existing geotextile and erosion control fabric products and may also delay the Company's introduction of new geotextiles and erosion control fabric products. The Company's expenditures to date in connection with such federal, state and local laws and regulations have not been material to its operations. The Company believes it is currently in substantial compliance with applicable governmental regulations. Environmental Compliance The Company is subject to a broad range of federal, state, and local laws and regulations relating to the pollution and protection of the environment. Among the many environmental requirements applicable to the Company are laws relating to air emissions, wastewater discharges, and the handling, disposal , or release of solid and hazardous substances and wastes. Based on continuing internal review and advice from independent consultants, the Company believes that it is currently in substantial compliance with applicable environmental requirements. The Company is also subject to laws, such as the federal Comprehensive Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA"), that may impose liability retroactively and without fault for releases or threatened releases of hazardous substances at on-site or off-site locations. The Company is not aware of any releases for which it may be liable under CERCLA or any analogous provision. Actions by federal, state, and local governments in the United States and abroad concerning environmental matters could result in laws or regulations that could increase the cost of producing the products manufactured by the Company or otherwise adversely affect demand for its products. For example, certain local governments have adopted ordinances prohibiting or restricting the use or disposal of certain polypropylene products. Widespread adoption of such prohibitions or restrictions could adversely affect demand for the Company's products and thereby have a material adverse effect upon the Company. In addition, a decline in consumer preference for polypropylene products due to environmental considerations could have a material adverse effect upon the Company. Most of the Company's manufacturing processes are mechanical and are therefore considered to be environmentally benign. Polypropylene resins are readily recyclable, and the Company recycles post-industrial waste for certain of its products. In addition, each of the Company's manufacturing sites has equipment and procedures for reclaiming a majority of internally generated scrap, thus reducing the amount of waste sent to local landfills. As a result, the Company does not currently anticipate any material adverse effect on its operations, financial condition, or competitive position as a result of its efforts to comply with environmental requirements. Some risk of environmental liability is inherent, however, in the nature of the Company's business, and there can be no assurance that material environmental liabilities will not arise. It is also possible that future developments in environmental regulation could lead to material environmental compliance or cleanup costs. Order Backlog The Company generally sells its products pursuant to customer orders that are either satisfied out of inventory or from the shipment of newly manufactured products promptly following receipt of an order. Accordingly, the dollar amount of backlog orders believed to be firm is not significant or indicative of the Company's future sales and earnings. Employees As of September 30, 1997, the Company employed 2,502 persons in the United States, of whom 531 were salaried employees and the remainder were hourly employees. None of the Company's employees are unionized. The Company has never experienced any strikes and believes its relations with employees to be satisfactory. The Company employs 13 individuals in the United Kingdom. Patents and Trademarks The Company owns or is licensed under several United States and foreign patents. While these patents are helpful to the Company's business, it is believed that a loss of patent exclusivity would not be materially adverse to the Company's business. The Company has registered several of its trademarks, including FIBERGRIDS(R) , FIBERMESH(R) and LANDLOK(R), with the United States Patent and Trademark office and with several foreign trademark offices. ITEM 2. PROPERTIES The following table sets forth certain information concerning the Company's manufacturing and distribution facilities. The Company has the option to renew its leases expiring in 1997 and 1998 for additional periods.
Square Acreage of Location Feet Principal Function Property Owned Facilities Chickamauga, Georgia 1,285,089 Manufactures carpet backing, certain fabrics,geotextiles and fibers 88.0 Chattanooga, Tennessee 126,432 Manufactures specialty yarns and construction products 10.5 Dalton, Georgia 216,000 Distribution center and multi-product warehouse 13.6 Dalton, Georgia 44,945 Needlepunching of carpet backing 5.0 Ringgold, Georgia 309,150 Manufactures geotextiles and certain nonwoven fabrics 68.5 Alto, Georgia 117,300 Manufactures certain yarns 42.7 Leased Facilities Leased Through Chickamauga, Georgia 143,736 Manufactures carpet backing, certain fabrics, geotextiles and fibers January 2009 Gainesville, Georgia 200,000 Manufactures and warehouses certain fabrics December 2000 Westside, Georgia 86,440 Carpet backing warehouse January 1998 Dalton, Georgia Florence 36,000 Geosynthetic products warehouse July 1998 Dalton, Georgia 124 Keene 185,000 Woven, nonwoven and geotextile warehouse January 1999 Dalton, Georgia 1408 Coronet 31,500 Geosynthetic products warehouse July 1998 Dalton, Georgia 120 Keene 168,000 Geosynthetic products, fiber warehouse April 1998 Dalton, Georgia 2908 North Dug Gap 85,000 Carpet backing warehouse November 1997 Cornelia, Georgia 76,000 Assembly of certain fabrics February 1999 Dalton, Georgia Cleveland Highway 104,827 Specialty yarn warehouse January 1999 Dalton, Georgia 2640 Lakeland Drive 80,000 Nonwoven fabrics warehouse May 1999 Hickory, North Carolina 231 Ninth Street 46,000 Converting operation July 2000 Tupelo, Mississippi 13,500 Nonwoven fabrics warehouse April 1997 Chattanooga, Tennessee 4,800 Corporate support offices December 2000 Claremont, North Carolina Liberty Hill Church Rd 14,000 Nonwoven fabrics warehouse May 1997 Spartanburg, South Carolina One Mill Road 236,090 Manufactures certain nonwoven fabrics March 2002
Indebtedness under the Company's Fourth Amended and Restated Revolving Credit and Security Agreement, dated as of October 20, 1995, as subsequently amended (the "Credit Facility") is secured by a lien on, and a security interest in, substantially all of the Company's assets, including all real estate, plants, equipment, inventory, accounts receivable and cash. Under the terms of the Credit Facility, the lenders thereunder may exercise certain remedies, including foreclosure, in the event of a default. ITEM 3. CLAIMS AND LEGAL PROCEEDINGS The Company and its subsidiaries are parties to litigation arising out of their business operations. Most of such litigation involves claims for personal injury, property damage, breach of contract and claims involving employee relations and certain administrative proceedings. The Company believes such claims are adequately covered by insurance or do not involve a risk of material loss to the Company. In connection with the proposed dissolution of the Partnership, pursuant to an Agreement and Plan of Withdrawal and Dissolution (the "Plan"), one director and certain of the Company's officers who are affiliated with the General Partner have been named in two putative class action lawsuits filed by certain limited partners of the Partnership. In the first action, to which the Company is not a party, filed on February 11, 1997 in the Delaware Court of Chancery and thereafter amended, the plaintiffs have alleged, among other things, breach of the defendants' fiduciary duty to the limited partners, that the Plan is unlawfully coercive, that the General Partner has allegedly failed to satisfy certain conditions precedent to the right of limited partners to amend the partnership agreement and that certain amendments necessary to implement the Plan violate the terms of the partnership agreement. The plaintiffs seek, among other equitable and legal remedies, removal of the General Partner, dissolution of the Partnership, appointment of a liquidating trustee, to enjoin 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 oral argument on the appeal was heard on December 2, 1997. The defendants have denied the allegations of the plaintiff and are vigorously contesting the lawsuit. The second lawsuit was filed in the U.S. District Court of the Northern District of California on May 1, 1997, and thereafter amended. The plaintiff has alleged in his amended complaint various federal securities and proxy violations allegedly arising out of the joint proxy statement and prospectus which was mailed to limited partners in connection with the solicitation of proxies for the vote on the Plan and other related documents. The plaintiff also added the Company as a named defendant, alleging that all defendants acted in concert with, and as agents of, each other; however, the plaintiff made no specific independant allegations with respect to the Company. The plaintiff seeks, among other equitable and legal remedies, to enjoin the implementation of the Plan and unspecified damages. On November 6, 1997, the Court granted in part the plaintiff's motion for a temporary restraining order enjoining the implementation of the Plan. The plaintiff's motion for a preliminary injunction has been briefed and an oral argument was heard on December 19, 1997. The defendants have denied the allegations of the plaintiff and are vigorously contesting the lawsuit. The Partnership is a principal stockholder of the Company and certain members of the Company's management control the General Partner. See "Certain Relationships and Related Transactions." 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 either action will have a material adverse effect on the Company's results of operations or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's security holders during the fourth quarter of the fiscal year covered by this Annual Report. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is listed on the Nasdaq National Market (the "NNM") under the symbol "SIND". The following table sets forth, for the periods indicated, the high and low closing bid prices per share of Common Stock as reported on the NNM. Common Stock Bid Price High Low -------------------- ------------------
Year Ended September 30, 1997 First Quarter (from November 1, 1996) $15.750 $12.000 Second Quarter 19.750 15.000 Third Quarter 21.250 17.750 Fourth Quarter 28.000 21.125 Year Ended September 30, 1998 First Quarter (through December 8, 1997) 30.000 24.500
At September 30, 1997, there were approximately 21 holders of record of Common Stock. The Company has not declared or paid any cash or other dividends on the Common Stock and intends for the foreseeable future to retain its earnings to finance the development of its business and for repayment of debt. The declaration and payment of dividends by the Company are subject to the discretion of the Board. Any future determination to pay dividends will depend on the Company's results of operations, financial condition, capital requirements, contractual restrictions and other factors deemed relevant by the Board. In addition, the Credit Facility and the Indenture governing the Company's 9 1/4% Senior Subordinated Notes due 2007 contain restrictions on the Company's ability to declare and pay dividends. ITEM 6. SELECTED FINANCIAL DATA The selected consolidated financial data presented below for, and as of the end of, each of the fiscal years in the five year period ended September 30, 1997 have been derived from the Company's audited consolidated financial statements. The consolidated financial statements of the Company as of September 30, 1997 and 1996 and for the three-year period ended September 30, 1997 and the accountant's reports thereon are included in Item 8 of this Form 10-K. Dollars are in thousands, except per share data. Year Ended September 30, 1997 1996 1995 1994 1993 ------ ------ ------ ----- ------
Summary of Operations Data: Net sales $345,572 $299,532 $271,427 $234,977 $210,516 Gross profit 112,385 91,211 76,721 82,672 68,335 Operating income 51,430 38,474 28,687 40,770 29,921 Income from continuing operations before provision for income taxes and extraordinary item 30,691 15,002 5,436 20,020 8,134 Income from continuing operations before extraordinary item 18,150 8,102 1,936 11,420 3,662 Income from discontinued operations - - - - 1,420 Extraordinary item - loss from early extinguishment of debt (11,950) - - - (8,892) Cumulative effect of accounting change - - - - (8,500) Net income (loss) 6,200 8,102 1,936 11,420 (12,310) Income per share from continuing operations before extraordinary item $2.08 $1.37 $0.33 $1.93 $0.63 Weighted average shares outstanding 8,719,458 5,930,502 5,930,502 5,930,502 5,781,250 Pro Forma Financial Data (1): Income before extraordinary item $18,784 $11,485 Income per share before extraordinary item 2.10 1.28 Weighted average shares outstanding 8,946,604 8,946,604 As of September 30, 1997 1996 1995 1994 1993 ----- ------ ------ ------ ------ Balance Sheet Data: Working capital $89,828 $64,077 $69,039 $44,114 $42,055 Total assets 396,591 324,058 312,300 287,933 260,372 Long-term debt 220,464 194,353 192,048 172,490 164,723 Stockholders' equity 105,817 65,844 57,756 55,817 44,423 - ------------ (1)Pro forma financial data reflect (i) the reduction in interest expense afte giving effect to the Offering and the application of net proceeds therefrom and (ii) the issuance of $170 million of 9 1/4% Senior Subordinated Notes due 2007 (the "Notes") on February 11, 1997 and the application of the net proceeds therefrom calculated as of the beginning of the period indicated.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. Overview The Company's net sales in recent years have increased due to a variety of factors, including generally increasing sales volumes as a result of growing demand for the Company's products and the Company's ability to expand its markets through development of new products. While the Company's sales have grown in each year, the Company's gross profit has fluctuated due to a variety of factors, primarily related to changes in the price of polypropylene. Polypropylene is the basic raw material used in the manufacture of substantially all of the Company's products today, accounting for approximately 50% of the Company's cost of sales. The Company believes that the selling prices of many of its products have adjusted over time to reflect changes in polypropylene prices. The price of polypropylene is determined by the supply and demand for the product. Historically, the creation of additional capacity has helped to relieve supply and pricing pressures although there can be no assurance that this will continue to be the case. In fiscal 1997 supply increased faster than demand, a trend that the Company expects to continue into fiscal 1998. According to a September 1997 report by Chemical Data Inc., a monthly petrochemical and plastics analysis publication, annual polypropylene capacity in North America as of December 31, 1996 was 12.6 billion pounds per year, up from 11.4 billion pounds at December 31, 1995. Total average annual capacity is expected to rise to 14.1 billion pounds per year for calendar 1997, and to 18.2 billion pounds per year by the year 2000, a 10% compounded growth rate. Demand is projected to increase from 4% to 9% from current levels through the year 2000. The following table sets forth the percentage relationships to net sales of certain statements of operations items: Year Ended September 30, 1997 1996 1995
Net sales................................. 100.0% 100.0% 100.0% Cost of sales............................. 67.5 69.5 71.7 ---- ---- ---- Gross profit........................... 32.5 30.5 28.3 Selling expenses.......................... 9.2 9.2 9.0 General and administrative expenses.......................... 7.7 7.6 7.8 Amortization of intangibles............... 0.7 0.9 0.9 --- --- --- Operating income........................ 14.9 12.8 10.6 Interest expense.......................... 5.8 7.6 8.3 Amortization of deferred financing costs.................. 0.2 0.2 0.3 --- --- --- Income before provision for income taxes and extraordinary item........ 8.9 5.0 2.0 Provision for income taxes................ 3.6 2.3 1.3 --- --- --- Income before extraordinary............. Item................................ 5.3% 2.7% 0.7% ==== ==== ====
Results of Operations Fiscal 1997 Compared to Fiscal 1996 Net sales for fiscal 1997 were $345,572 compared to $299,532 for fiscal 1996, an increase of $46,040, or 15.4%. Carpet backing sales for fiscal 1997 were $166,219 compared to $146,491 for fiscal 1996, an increase of $19,728, or 13.5%. This increase was primarily due to higher unit volume in both primary and secondary carpet backing. Construction and civil engineering product sales for fiscal 1997 were $114,611 compared to $97,043 for fiscal 1996, an increase of $17,568, or 18.1%. This increase was primarily due to an 10.5% increase in Fibermesh(R) sales and a 22.3% increase in geosynthetic sales. Technical textiles sales for fiscal 1997 were $64,742 compared to $55,998 for fiscal 1996, an increase of $8,744, or 15.6%, of which the Spartanburg Acquisition added approximately $8,600. Gross profit for fiscal 1997 was $112,385, compared to $91,211 for fiscal 1996, an increase of $21,174, or 23.2%. As a percentage of sales, gross profit increased to 32.5% from 30.5%. This increase was due to increased sales volume, slightly higher average selling prices and growth of higher margin business, coupled with slightly lower average polypropylene costs as compared to the prior year. The Company's improvement in gross profit performance also reflects its diversification strategy for its products as well as its primary raw material. The Company expects that construction and civil engineering and technical textiles will continue to be of increasing importance to the Company's overall sales. Reflecting the success of this strategy, sales of carpet backing, the Company's core product line, have decreased from 50.5% of total net sales in fiscal 1993 to approximately 47% of pro forma fiscal 1997 total net sales, adjusted to reflect for the Spartan Acquisition. In addition, the Company plans to expand its polyester-based product offerings, particularly in high strength geotextiles and furniture and bedding construction products. Selling expenses for fiscal 1997 were $31,801 compared to $27,488 for fiscal 1996, an increase of $4,313, or 15.7%. This increase was primarily due to increased expenditures associated with higher sales volume as well as increased marketing expenses. As a percentage of sales, selling expenses remained at 9.2%. General and administrative expenses for fiscal 1997 were $26,562 compared to $22,657 for fiscal 1996, an increase of $3,905, or 17.2%. As a percentage of sales, general and administrative expenses increased from 7.6% to 7.7%. The increase in general and administrative expenses was primarily due to infrastructure expenditures, to support anticipated Company growth, coupled with an increase in research and market development costs from $2,942 in fiscal 1996 to $4,208 in fiscal 1997. Any costs associated with modifying the Company's computer systems to be year 2000 compliant have been expensed as incurred. Costs incurred to date relating to year 2000 issues have not been material and have not had a material impact on the financial statements. Future costs associated with year 2000 issues are not expected to be material. Operating income for fiscal 1997 was $51,430 as compared to $38,474 for fiscal 1996, an increase of $12,956, or 33.7%. As a percentage of sales, operating income increased to 14.9% in fiscal 1997 from 12.8% in fiscal 1996. This increase was primarily due to improved gross profits, partially offset by slightly higher selling, general and administrative costs. Interest expense for fiscal 1997 was $20,084 compared to $22,773 for fiscal 1996, a decrease of $2,689, or 11.8%, due to lower average interest rates on the outstanding debt. The effective income tax rate before the effect of the extraordinary item was 41% and 46% in fiscal 1997 and 1996, respectively. The higher rate for 1996 was due primarily to the effect of nondeductible expenses, including the amortization of goodwill, on lower income in fiscal 1996. Income before extraordinary item for fiscal 1997 was $18,150 compared to $8,102 for fiscal 1996, an increase of $10,048. Earnings before interest, taxes, depreciation and amortization ("EBITDA") for fiscal 1997 was $69,011 compared to $54,074 for fiscal 1996, an increase of $14,937, or 27.6%. The increase in income before extraordinary item, as well as EBITDA, was primarily due to the factors discussed above. Income per share before extraordinary item for fiscal 1997 was $2.08 compared to $1.37 for fiscal 1996 on increased weighted average shares outstanding of 2,788,956 or 47.0%, resulting from the Offering. Pro forma income per share before extraordinary item, assuming the net proceeds from the Offering and the issuance of the Notes (as defined hereunder) were used to reduce outstanding indebtedness and the shares issued in the Offering were outstanding as of the beginning of each respective period, would have been $2.10 and $1.28 for fiscal 1997 and 1996, respectively. Fiscal 1996 Compared to Fiscal 1995 Net sales for fiscal 1996 were $299,532 compared to $271,427 for fiscal 1995, an increase of $28,105, or 10.4%. This increase was primarily due to increased sales of carpet backing and construction and civil engineering products. Carpet backing sales for fiscal 1996 were $146,491 compared to $133,025 for fiscal 1995, an increase of $13,466, or 10.1%. This increase was the result of higher unit volume in primary and secondary carpet backing, partially offset by lower average selling prices. Construction and civil engineering product sales for fiscal 1996 were $97,043 compared to $82,933 for fiscal 1995, an increase of $14,110, or 17.0%. This increase was due to an increase in sales of geotextile and erosion control fabrics of $13,018, or 30.7%, resulting primarily from nonwoven sales in the landfill and roadway and building site markets. Technical textiles sales for fiscal 1996 were $55,998 compared to $55,469 for fiscal 1995, a increase of $529, or 1.0%. Gross profit for fiscal 1996 was $91,211 compared to $76,721 in fiscal 1995, an increase of $14,490, or 18.9%. As a percentage of sales, gross profit increased to 30.5% from 28.3%. This was primarily due to higher sales volume and lower average polypropylene prices as compared to the prior year, partially offset by lower average selling prices. Selling expenses for fiscal 1996 were $27,488 compared to $24,273 for fiscal 1995, an increase of $3,215, or 13.2%. This increase was primarily due to increased expenditures associated with higher sales volume as well as increased marketing expenses. These expenses were related to the Company's expectation of higher sales in 1997 resulting from the completion of the 1996 capacity expansion program. As a percentage of sales, selling expenses increased from 9.0% to 9.2%. General and administrative expenses for fiscal 1996 were $22,657 compared to $21,195 for fiscal 1995, an increase of $1,462, or 6.9%. As a percentage of sales, general and administrative expenses decreased from 7.8% to 7.6%. In fiscal 1995, general and administrative expenses included a pre-tax charge of $2,852 related to an increase in the allowance for doubtful accounts taken to establish a reserve for a carpet backing customer who experienced severe financial difficulties. Without this charge, fiscal 1995 general and administrative expenses as a percentage of sales would have been 6.8% The increase in general and administrative expenses was primarily due to infrastructure expenditures, which included an increased investment in the Company's information technology department to support company growth. Operating income for fiscal 1996 was $38,474 as compared to $28,687 for fiscal 1995, an increase of $9,787, or 34.1%. As a percentage of sales, operating income increased to 12.8% in fiscal 1996 from 10.6% in fiscal 1995. This was primarily due to factors discussed above. Total interest expense for fiscal 1996 was $22,773 compared to $22,514 for fiscal 1995, an increase of $259, or 1.2%, due to higher average total debt outstanding. The effective income tax rate was 46% and 64% in fiscal 1996 and 1995, respectively. The decrease was primarily due to the effect of nondeductible expenses, including the amortization of goodwill, on higher taxable income in fiscal 1996. Net income for fiscal 1996 was $8,102 compared to net income of $1,936 for fiscal 1995, an increase of $6,166, or 318.5%. EBITDA for fiscal 1996 was $54,074 compared to $42,887 for fiscal 1995, an increase of $11,187, or 26.1%. The increase in net income, as well as EBITDA, was primarily due to higher sales volumes and lower average raw material cost offset by slightly lower average selling prices, higher manufacturing costs associated with plant shutdowns as a result of the winter ice storms in 1996 and increased selling and general and administrative costs. Liquidity and Capital Resources To finance its capital expenditures program and fund its operational needs, the Company has relied upon cash provided by operations, supplemented as necessary by bank lines of credit and long-term indebtedness. Net cash provided by (used in) operating activities was $25,129, $31,421, and ($35) for the years ended September 30, 1997, 1996 and 1995, respectively. Net cash provided by operating activities in fiscal 1997 consisted primarily of net income of $6,200, a pretax extraordinary loss of $19,431, and noncash charges of $21,026, as well as an increase in accounts payable of $6,803, which financed increases in accounts receivable and inventory of $9,687 and $13,634, respectively. These working capital requirements increased primarily due to higher sales volume in the fourth quarter of fiscal 1997 as compared to the comparable period in the prior year, as well as increased units in finished goods and raw materials, to support continued anticipated sales growth. Net cash provided by (used in) operating activities in fiscal 1996 and 1995 resulted primarily from net income of $8,102, and $1,936, respectively, after deducting non-cash charges of $20,723, and $17,945 and net working capital charges of approximately $2,596, and ($19,916), for each respective period. The increase in cash provided by operating activities for fiscal 1996 as compared to fiscal 1995 was principally due to fluctuations in net income and the Company's working capital requirements. The changes included reduced inventory and accounts payable balances in 1996 resulting primarily from lower inventory quantities and lower polypropylene costs. On February 11, 1997, the Company issued $170,000 aggregate principal amount of 9 1/4% Senior Subordinated Notes due February 15, 2007 (the "Notes"), which represent unsecured obligations of the Company. The Notes 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 are payable semi-annually on February 15 and August 15 in the amount of $7,863. On November 1, 1996, the Company received net proceeds of approximately $34,000 (after payment of underwriting discounts and commissions and expenses) from the sale of 2,875,000 shares of Common Stock in an underwritten public offering. These proceeds together with the proceeds received from the issuance of the Notes, were utilized primarily to retire approximately $133,000 of the Company's 12 3/4% Senior Subordinated Debentures due 2002 (the "Debentures"), pay the related call premium and prepayment costs and fees associated with the refinancing of $15,920, pay debt issuance costs of $5,525 and to repay approximately $21,900 of certain outstanding indebtedness under the Company's Fourth Amended and Restated Revolving Credit and Security Agreement, dated as of October 20, 1995, as subsequently amended, among the Company, the lenders party thereto and BankBoston, as agent (the "Credit Facility"). In connection therewith, the Company recorded an extraordinary loss of $11,950 during the second quarter of fiscal 1997. On December 1, 1997, the Company redeemed the remaining $7,403 aggregate principal amount of the Debentures at a redemption price of 106.375% of the principal amount thereof, together with accrued interest as of the redemption date. The net proceeds from financing and operating activities were also utilized to fund capital expenditures of approximately $54,000 and to acquire certain assets of the Spartan Technologies division of Spartan Mills for approximately $9,400. Capital expenditures planned for fiscal 1998 are approximately $41,000 primarily to expand the capacity of the Company's manufacturing facilities, subject to prevailing market conditions. Capital expenditures in fiscal 1996 and 1995 were approximately $34,200 and $13,300, respectively. The Credit Facility provides for potential borrowing capacity of up to $85,000 and is comprised of maximum term loan borrowings of $45,000 and a revolving credit loan portion (the "Revolver") of up to $40,000. The term loan balance at September 30, 1997 was $25,000, of which $10,000 is payable in 1999 and $15,000 is payable in 2000. The lenders under the Credit Facility are BankBoston, Sanwa Business Credit Corporation, and South Trust Bank of Georgia, N.A. The Revolver provides for availability based on a borrowing formula consisting of 85% of eligible accounts receivable and 50% of eligible inventory, subject to certain limitations and reserves which include the remaining balance due under the Debentures of approximately $7,400. At September 30, 1997, the maximum amount available for borrowing under the Revolver was $17,838. The Credit Facility expires on October 1, 2001. The Credit Facility permits borrowings which bear interest, at the Company's option, (i) for domestic borrowings based on the lender's base rate (8.50% at September 30, 1997) or (ii) for Eurodollar borrowings based on the Interbank Eurodollar rate at the time of conversion plus 2.0% or 1.75% for term loan or revolver advances, respectively (7.44% to 7.63% at September 30, 1997). In fiscal 1996, the Credit Facility permitted borrowings which bore interest, at the Company's option, (i) for domestic borrowings based on the lender's base rate plus .75% (9.00% at September 30, 1996) or (ii) for Eurodollar borrowings based on the Interbank Eurodollar rate at the time of conversion plus 2.5% or 2.75% for term loan or revolver advances, respectively (8.09% to 9.25% at September 30, 1996). The Credit Facility provides for borrowings under letters of credit of up to $3,000, which borrowings reduce amounts available under the Revolver. At September 30, 1997, no letters of credit were outstanding under the facility and $1,892 was outstanding at September 30, 1996. At September 30, 1997, the Company's total outstanding indebtedness amounted to $221,182. Such indebtedness consists of borrowings under the Credit Facility of $38,420, $170,000 aggregate principal amount of the Notes, $7,403 aggregate principal amount of the Debentures, an outstanding capital lease obligation of $4,083 dated as of May 28, 1996, and a mortgage obligation of $1,276. Cash interest paid during fiscal 1997, 1996 and 1995 was $23,642, $23,176, and $22,334, respectively. On December 18, 1997, the Company and its lenders, with BankBoston as agent, entered into a new five year credit facility (the "New Credit Facility"). The New Credit Facility consists of up to a $40 million asset based securitization program, with amounts borrowed through a newly formed subsidiary, Synthetic Industries Funding Corporation, (the "Securitization"), and a $60 million senior secured revolver facility (the "New Revolver"). Securitization and New Revolver borrowings are collateralized by the Company's accounts receivables and substantially all of the assets of the Company, excluding real property, respectively. Interest on the Securitization is based on the applicable commercial paper rate in effect plus a spread. The New Revolver permits borrowings which bear interest, at the Company's option, (i) for domestic borrowings based on the lender's base rate or (ii) for Eurodollar borrowings based on a spread over the Interbank Eurodollar rate at the time of conversion. Spreads for the Securitization and the Eurodollar borrowings are determined by the operational performance of the Company. At September 30, 1997, the interest rates under the Securitization and the Eurodollar borrowings would have been 6.23% and 7.09%, respectively. The New Credit Facility contains covenants related to the maintenance of certain operating ratios and limitations as to the amount of capital expenditures. The Company's ability to pay dividends on its common stock is restricted by both the New Credit Facility and the Notes. At September 30, 1997, the availability under the New Credit Facility would have been approximately $45,000. Based on current levels of operations and anticipated growth, the Company's management expects net cash from operations to provide sufficient cash flow to satisfy the debt service requirements of the Company's long-term debt obligations, including the Credit Facility and lease agreements, permit anticipated capital expenditures and fund the Company's working capital requirements for the next twelve months. Inflation and Seasonality The Company does not believe that its operations have been materially affected by inflation during the three most recent fiscal years. While the Company does not expect that inflation will have a material impact upon operating results, there is no assurance that its business will not be affected by inflation in the future. The Company's sales and income have historically been higher in the third and fourth quarters of its fiscal year. While sales and income in the carpet backing and technical textile product lines are not greatly affected by seasonal trends, sales of construction and civil engineering products are lower in the first and second quarters of any given fiscal year due to the impact of adverse weather conditions on the construction and civil engineering markets. Consequently, as sales from construction and civil engineering products continue to increase as a percentage of the Company's total sales, the seasonality of these products' sales will affect total sales and income of the Company to a greater degree. Presented below is a summary of the unaudited consolidated quarterly financial information for the years ended September 30, 1997 and 1996:
Three Months Ended Fiscal 1997 December 31 March 31 June 30 September 30 - ----------- ----------- -------- ------- ------------ Net sales $70,857 $75,358 $99,112 $100,245 Operating income 7,347 9,331 17,823 16,929 Income before extraordinary item 904 2,160 7,676 7,410 Net income (loss) 904 (a)(9,790) 7,676 7,410 Income (loss) per share 0.12 (a) (1.09) 0.86 0.82 Weighted average shares outstanding 7,847,168 8,957,155 8,969,031 9,080,956 Pro forma net income (b) 1,417 2,282 7,676 7,410 Pro forma income per share (b) 0.16 0.25 0.86 0.82 Fiscal 1996 Net sales $64,608 $64,609 $82,843 $87,472 Operating income 3,356 5,735 14,521 14,862 Net income (loss) (1,897) (410) 5,093 5,316 Income (loss) per share (0.32) (0.07) 0.86 0.90 Weighted average shares outstanding 5,930,502 5,930,502 5,930,502 5,930,502 Pro forma net income (loss) (b) (1,051) 436 5,939 6,162 Pro forma income (loss) per share (b) (0.12) 0.05 0.66 0.68 (a) Includes an extraordinary loss of $11,950, or $1.37 per share, from the early extinguishment of debt. See Note 9. (b) Pro forma financial data reflect (i) the reduction in interest expense after giving effect to the Offering and the application of net proceeds therefrom and (ii) the issuance of $170 million of 9 1/4% Senior Subordinated Notes due 2007 on February 11, 1997 and the application of the net proceeds therefrom calculated as of the beginning of the period indicated. For both fiscal 1997 and 1996, pro forma weighted average shares outstanding were 8,779,272; 8,957,155; 8,969,031; and 9,080,956 for the first, second, third, and fourth quarters, respectively.
Recent Accounting Pronouncements In February 1997, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standard No. 128, "Earnings Per Share" ("SFAS 128"). Under the new standard, which must be adopted for periods ending after December 15, 1997, the Company will be required to change the method used to compute earnings per share and to restate prior periods presented. A dual presentation of basic and diluted earnings per share will be required. The basic earnings per share calculation, which will replace primary earnings per share, will exclude the dilutive impact of stock options and other common share equivalents. The diluted earnings per share calculation, which will replace fully diluted earnings per share, will include common share equivalents. The adoption of SFAS 128 will not have a material impact on earnings per share for the three years ended September 30, 1998. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"), which must be adopted for fiscal years beginning after December 15, 1997. Under the new standard, companies will be required to report certain information about operating segments in consolidated financial statements. Operating segments will be determined based on the method that management organizes its businesses for making operating decisions and assessing performance. SFAS 131 also requires companies to report certain information about their products and services, the geographic areas in which they operate, and their major customers. The Company is currently evaluating the effect, if any, of implementing SFAS 131. Forward Looking Statements The discussion of the Company's business and operations in this report includes in several instances forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange 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 risks and uncertainties, 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information with respect to this Item is contained in the Company's consolidated financial statements indicated in the Index in Part IV, Item 14 of this Annual Report Form 10-K and is incorporated herein by reference. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. Executive Officers and Directors of the Company The information required by this item is incorporated herein by reference to the material appearing in the Company's definitive proxy statement for the annual meeting of stockholders to be held in 1998 (the "Proxy Statement") under the captions "Election of Directors" and "Executive Officers." ITEM 11. Renumeration of Directors and Officers The information required by this item is incorporated herein by reference to the material appearing in the Proxy Statement under the captions "Director Compensation" and "Executive Compensation and Other Information." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated herein by reference to the material appearing in the Proxy Statement under the caption "Voting Securities and Certain Beneficial Owners". ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS SI Management L.P. is the sole general partner of the Partnership. Synthetic Management G.P. is the sole general partner of SI Management L.P. By virtue of these relationships, Synthetic Management G.P. controls the management and affairs of the Partnership and therefore, the Company. The Partnership owns 5,781,250 shares of Common Stock, or approximately 67% of the issued and outstanding shares of Common Stock, and therefore, holds the voting power to determine the outcome of all matters upon which stockholders vote. The general partners of Synthetic Management G.P. are the following five Delaware corporations: Chill Investments, Inc., Beckman Investments, Inc., Freed Investments, Inc., Kenner Investments, Inc. and W.G. Wright Investments, Inc. Each of Messrs. Chill, Beckman, Freed, Kenner and Wright is the sole director and the sole stockholder of one of Synthetic Management G.P.'s general partners. For further information concerning Messrs. Chill, Freed, Kenner and Wright, see "Executive Officers and Directors of the Company." The Company and the Partnership have entered into a Registration Rights Agreement pursuant to which the Company has agreed that upon request of the Partnership the Company will register under the Securities Act and applicable state securities laws the sale of the Common Stock owned by the Partnership and as to which registration has been requested. The Company's obligation is subject to certain limitations relating to a minimum amount required for registration, the timing of a registration and other similar matters. The Company is obligated to pay any registration expenses incidental to such registration, excluding underwriters' commissions and discounts. In connection with the Offering, the Company incurred approximately $650,000 of such incidental registration expenses in the behalf of the Partnership. The above description is qualified in its entirety by reference to the Registration Rights Agreement, a copy of which has been filed as an exhibit to Amendment No. 1 to the Company's Registration Statement on Form S-1 (File No. 333-9377), filed with the Securities and Exchange Commission on September 13, 1996. In connection with the Offering on November 1, 1996, the Partnership entered into a "lock-up" agreement with Bear Stearns & Co., Inc. ("Bear Stearns") with respect to the sale of its 5,781,250 shares of Common Stock. Under this "lock-up" agreement, the Partnership agreed, with certain exceptions, not to sell or otherwise dispose of any shares of Common Stock without the consent of Bear Stearns for a period of 270 days after November 1, 1996, and thereafter until December 31, 1997, unless pursuant to an underwritten public offering. After December 31, 1997, the Partnership is entitled to sell, distribute or otherwise dispose of its shares of Common Stock. The Company does not, however, anticipate that the Partnership will sell or distribute any of its shares of Common Stock unless and until the Agreement and Plan of Withdrawal and Dissolution (the "Plan") of the Partnership has been implemented or terminated, as the case may be. On September 19, 1997, the Company and the Partnership entered into the Plan. Pursuant to the Plan, the Partnership is to be dissolved in two separate phases. The first phase is to be an underwritten public offering of the number of shares of Common Stock that limited partners have elected to sell, and the second phase is to be one to three liquidating distributions of the unsold portions of the Partnership's shares of Common Stock, beginning 180 days after the completion of the public offering. On November 7, 1997, the limited partners approved the adoption of the Plan. However, the implementation of the Plan has been enjoined by courts in Delaware and California in connection with two lawsuits filed by certain limited partners of the Partnership against the Partnership and its general partner (the "General Partner"), among others. See "Claims and Legal Proceedings." Among other equitable and legal remedies, the plaintiff is seeking the removal of the General Partner and the liquidation of the Partnership. The Company is not currently involved in these proceedings and does not presently possess any contractual rights with respect to their ultimate resolution. If, in connection with these lawsuits, the General Partner is removed or resigns, or the Partnership is liquidated under a court-appointed receiver, there can be no assurance that the resulting sale and/or distribution of the Partnership's share of Common Stock will be made in the same or similar manner as that contemplated by the Plan. The General Partner has denied the allegations of the plaintiff and is vigorously contesting the lawsuits; however, in the event of an adverse ruling, the Company cannot predict the volume and price at which the Common Stock trades might be affected. Lee J. Seidler, a director of the Company, is presently associated with Bear, Stearns & Co. Inc. as Managing Director Emeritus and from time to time receives fees in connection with consulting and referral services to Bear, Stearns & Co. Inc., including the Offering and the offering of $170,000,000 aggregate principal amount of the Notes. Dr. Seidler has received from Bear, Stearns & Co. Inc., in connection with such services, approximately $200,000 in fiscal 1997. Jon P. Beckman, a former executive officer of the Company and an affiliate of the General Partner, is being retained as a consultant to the Company. Pursuant to his consulting agreement with the Company, Mr. Beckman will receive, until January 31, 2000, or upon earlier termination of his consulting agreement, $125,000 per year and various insurance coverages, and will be authorized to exercise all stock options awarded to him, subject to applicable vesting provisions. Under this agreement, Mr. Beckman is required to provide the Company with 20 hours of consultation per month, has released the Company from any liability resulting from his employment and has also agreed not to compete against the Company. The Company leases office space under a five-year lease with William Gardner Wright, Jr., one of the Company's executive officers. The term of the lease expires on September 30, 1998 and the rent is approximately $4,000 per month, which the Company believes is within prevailing market rates. Pursuant to a licensing agreement with the Company, W. Wayne Freed, an executive officer of the Company, receives royalties related to the manufacture and sale of a certain product for which Mr. Freed owns all of the U.S. and foreign patents. Under this agreement, Mr. Freed received royalties of $12,646 and $12,269 in fiscal 1997 and 1996, respectively, and will continue to receive such royalties until 2012 or the earlier termination of the licensing agreement. During fiscal 1997 and 1996, the Company paid legal fees totaling approximately $241,000 and $232,000, respectively, to the law firm of Watson & Dana. Until May 21, 1997, Mr. Dana, a director of the Company, was a member of Watson & Dana and a member of the Compensation Committee. Effective May 21, 1997, Mr. Dana became employed as Chief Operating Officer and General Counsel of the Company. Mr. Dana continues to be a director of the Company, but is no longer a member of the Compensation Committee. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Index to Consolidated Financial Statements: Page No. of Financial Statement (1) Financial Statements: Independent Auditors' Report F-1 Consolidated Balance Sheets F-2 Consolidated Statements of Operations F-3 Consolidated Statements of Changes in Stockholders' Equity F-4 Consolidated Statements of Cash Flows F-5 Notes to Consolidated Financial Statements F-6 (b) The Company did not file a Current Report on Form 8-K during the last quarter of the fiscal year ended covered by this Annual Report. (c) Exhibits: See Exhibit Index immediately following Item 14. (d) No additional financial statements are required to be filed. EXHIBIT INDEX Location in Sequential Page Numbering System The following are the Exhibits as required by Item 14 (c). 1 2.1 Acquisition Agreement dated November 21, 1986 between Synthetic Industries, Inc., Synthetic Industries Limited, Polyweave Corporation, the shareholders of Synthetic Industries, Inc., Synthetic Industries Limited and SI Holding Inc. including exhibits thereto. 1 2.2 Plan and Agreement of Merger dated December 4, 1986. 2 2.3 Asset Purchase Agreement dated October 12, 1990 between Synthetic Industries, Inc. and Chicopee. 10 3.1 Certificate of Incorporation of Synthetic Industries, Inc. (including all amendments to date) filed with the Secretary of the State of Delaware. 10 3.2 Amended and Restated By-Laws of Synthetic Industries, Inc. (including all amendments to date). 4 4.1 Form of Indenture between Synthetic Industries, Inc. and United States Trust Company of New York, Trustee, in respect to the 12-3/4% Senior Subordinated Debentures due 2002. 18 4.2 Supplemental Form of Indenture between Synthetic Industries, Inc. and United States Trust Company of New York, Trustee, in respect to the 12-3/4% Senior Subordinated Debentures due 2002. 18 4.3 Supplemental Indenture dated as of February 11, 1997 between Synthetic Industries, Inc. and United States Trust Company of New York, Trustee, with respect to the 12 3/4% Senior Subordinated Debentures due 2002. 16 4.4 Indenture dated as of February 11, 1997 between Synthetic Industries, Inc. and United Stated Trust Company of New York, Trustee, with respect to the 9 1/4% Senior Subordinated Notes due 2007. 16 4.5 Registration Rights Agreement, dated as of February 11, 1997, between Synthetic Industries, Inc. and Bear Stearns & Co. Inc. 12 4.6 Registration Rights Agreement, dated as of October 31, 1996, between Synthetic Industries, Inc. and Synthetic Industries, L.P. 9 10.1 Fourth Amended and Restated Revolving Credit and Security Agreement dated as of October 20, 1995 among Synthetic Industries, Inc., The First National Bank of Boston and other Lenders listed on Schedule I thereto, and The First National Bank of Boston, as agent on behalf of the Lenders. 9 10.2 Amendment No. 1 to the Fourth Amended and Restated Revolving Credit and Security Agreement dated as of December 1, 1995 11 10.3 Amendment No. 2 to the Fourth Amended and Restated Revolving Credit and Security Agreement dated as of February 14, 1996. 9 10.4 Amendment No. 3 to the Fourth Amended and Restated Revolving Credit and Security Agreement dated as of March 16, 1996. 2 10.5 US Patent No. 4,867,614, Reinforced Soil and Method (Exp. December 13, 2003). 2 10.6 US Patent No. 4,790,691, Fiber Reinforced Soil and Method (Exp. December 13, 2003). 2 10.7 US Patent No. 5,007,766, Shaped Barrier for Erosion Control and Sediment Collection (Exp. April 16, 2008). 1 10.8 Lease agreement dated November 22, 1971 between Murray Sobel and Synthetic Industries, Inc. (including all amendments to date). 1 10.9 Lease agreement dated February 13, 1969, between Murray Sobel and wife, Marcela S. Sobel, and Joseph F. Decosimo, Frank M. Thompson and Murray Sobel, Trustees and Synthetic Industries, Inc. (including all amendments to date). 2 10.10 Lease agreement dated December 17, 1990 between Chicopee and Synthetic Industries, Inc. 2 10.11 Lease agreement dated January 17, 1991 between Herchel L. Webster and Allie Ree Webster and Synthetic Industries, Inc. (the "Lumite Lease"). 6 10.12 Amendment to the Lumite Lease dated October 1, 1992. 2 10.13 Consulting Agreement dated July 23, 1991 between Texpro Limitada y Cia S.C.A. and Synthetic Industries, Limited. 7 10.14 Supply Contract between Eastman Chemical Products, Inc. and Synthetic Industries, Inc. dated December 13, 1991. 13 10.15 Agreement dated September 6, 1996 between Leonard Chill and Synthetic Industries, Inc. 13 10.16 Agreement dated September 6, 1996 between W. Wayne Freed and Synthetic Industries, Inc. 13 10.17 Agreement dated September 6, 1996 between Ralph A. Kenner and Synthetic Industries, Inc. 13 10.18 Agreement dated September 6, 1996 between W. Gardner Wright, Jr. and Synthetic Industries, Inc. 13 10.19 Agreement dated September 6, 1996 between John M. Long and Synthetic Industries, Inc. 13 10.20 Agreement dated September 6, 1996 between Charles T. Koerner and Synthetic Industries, Inc. 13 10.21 Agreement dated September 6, 1996 between Joseph Sinicropi and Synthetic Industries, Inc. 13 10.22 Agreement dated September 6, 1996 between W.O. Falkenberry and Synthetic Industries, Inc. 13 10.23 Agreement dated September 6, 1996 between Bobby Callahan and Synthetic Industries, Inc. 8 10.24 1994 Stock Option Plan for Non-Employee Directors 8 10.25 1994 Stock Option Plan 11 10.26 1996 Stock Option Plan 11 10.27 Incentive Compensation Plan Fiscal Year 1994/1995 11 10.28 Incentive Compensation Plan Fiscal Year 1995/1996 13 10.29 Amendment No. 4 to the Fourth Amended and Restated Revolving Credit and Security Agreement dated as of September 27, 1996. 14 10.30 Amendment No. 5 to the Fourth Amended and Restated Revolving Credit and Security Agreement dated as of October 28, 1996. 15 10.31 Amendment No. 6 to the Fourth Amended and Restated Revolving Credit and Security Agreement dated as of January 29, 1997. 20 10.32 Amendment No. 7 to the Fourth Amended and Restated Revolving Credit and Security Agreement dated as of April 30, 1997. 20 10.33 Amendment No. 8 to the Fourth Amended and Restated Revolving Credit and Security Agreement dated as of June 30, 1997. 21 10.34 Amendment No. 9 to the Fourth Amended and Restated Revolving Credit and Security Agreement dated as of November 21, 1997. 19 10.35 Asset Sale Agreement by and between Spartan Mills and Synthetic Industries, Inc. dated as of February 27, 1997. 19 10.36 Lease Agreement by and between Spartan Mills and Synthetic Industries, Inc. dated as of February 27, 1997. 17 10.37 Agreement of Plan of Withdrawal and Dissolution by and between Synthetic Industries L.P. and Synthetic Industries, Inc. dated as of September 19, 1997. 19 10.38 Agreement dated May 21, 1997 between Joseph F. Dana and Synthetic Industries, Inc. 2 21. List of Subsidiaries of Synthetic Industries, Inc. 27. Financial Data Schedule - -------------- 1 Filed as an exhibit to the Company's Registration Statement on Form S-1 (33-11479) as filed with the Securities and Exchange Commission on January 23, 1987 and incorporated herein by reference. 2 Filed as an exhibit to the Company's Registration Statement on Form S-1 (33-51206) as filed with the Securities and Exchange Commission on August 24, 1992 and incorporated herein by reference. 3 Filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1993 and incorporated herein by reference. 4 Filed as an exhibit to the Company's Amendment No. 3 to the Registration on Form S-1 (33-51206) as filed with the Securities and Exchange Commission on December 4, 1992 and incorporated herein by reference. 5 Filed as an exhibit to the Partnership's Registration Statement on Form 10 (0-21548) as filed with the Securities and Exchange Commission on April 16, 1993 and incorporated herein by reference. 6 Filed as an exhibit to the Partnership's Amendment No. 1 to the Registration Statement on Form 10 (0-21548) as filed with the Securities and Exchange Commission on August 10, 1993 and incorporated herein by reference. 7 Pursuant to an order dated October 19, 1992, the Securities and Exchange Commission granted confidential treatment with respect to certain portions of this exhibit under Rule 406 of the Securities Act of 1933, as amended. 8 Filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994 and incorporated herein by reference. 9 Filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1995 and incorporated herein by reference. 10 Filed as an exhibit to the Company's Registration Statement on Form 8-A (0-12357) as filed with the Securities and Exchange Commission on October 24, 1996 and incorporated herein by reference. 11 Filed as an exhibit to the Company's Registration Statement on Form S-1 (333-09377) as filed with the Securities and Exchange Commission on August 1, 1996 and incorporated herein by reference. 12 Filed as an exhibit to Amendment No. 1 to the Company's Registration Statement on Form S-1 (333-09377) as filed with the Securities and Exchange Commission on September 13, 1996 and incorporated herein by reference. 13 Filed as an exhibit to Amendment No. 2 to the Company's Registration Statement on Form S-1 (333-09377) as filed with the Securities and Exchange Commission on October 2,1996 and incorporated herein by reference. 14 Filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996 and incorporated herein by reference. 15 Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1996 and incorporated herein by reference. 16 Filed as an exhibit to the Company's Registration Statement on Form S-4 (File No. 333-23167) as filed with the Securities and Exchange Commission on March 12, 1997 and incorporated herein by reference. 17 Filed as Annex A to the joint Proxy Statement and Prospectus forming a part of Amendment No. 3 to the Company's Registration Statement on Form S-4 (File No. 333-28817) as filed with the Securities and Exchange Commission on September 17, 1997. 18 Filed as an exhibit to Amendment No. 1 to the Company's Registration Statement on Form S-4 (File No. 333-28817) as filed with the Securities and Exchange Commission on August 8, 1997. 19 Filed as an exhibit to Amendment No. 3 to the Company's Registration Statement on Form S-4 (File No. 333-28817) as filed with the Securities and Exchange Commission on September 17, 1997. 20 Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 and incorporated herein by reference. 21 Filed herewith. INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Synthetic Industries, Inc. Chickamauga, Georgia We have audited the accompanying consolidated balance sheets of Synthetic Industries, Inc. and subsidiaries as of September 30, 1997 and 1996, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended September 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Synthetic Industries, Inc. and subsidiaries at September 30, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1997 in conformity with generally accepted accounting principles. /S/ Deloitte & Touche LLP Deloitte & Touche LLP New York, New York November 14, 1997 SYNTHETIC INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands of dollars, except per share amounts)
September 30, ASSETS 1997 1996 -------- ------ CURRENT ASSETS: Cash....................................................................... $ 338 $ 101 Accounts receivable, net (Note 4).......................................... 60,031 48,165 Inventory (Note 5)......................................................... 54,139 39,142 Other current assets (Note 6).............................................. 17,200 14,655 --------- -------- TOTAL CURRENT ASSETS................................................... 131,708 102,063 PROPERTY, PLANT AND EQUIPMENT, net (Note 7).................................. 182,102 137,974 OTHER ASSETS (Note 8)........................................................ 82,781 84,021 --------- -------- $396,591 $324,058 ........LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable........................................................... $ 27,030 $ 20,227 Accrued expenses and other current liabilities............................. 11,613 9,669 Income taxes payable (Note 10)............................................. 52 1,407 Interest payable........................................................... 2,467 6,024 Current maturities of long-term debt (Note 9).............................. 718 659 ---------- ----------- TOTAL CURRENT LIABILITIES........................................... 41,880 37,986 LONG-TERM DEBT (Note 9)...................................................... 220,464 194,353 DEFERRED INCOME TAXES (Note 10).............................................. 28,430 25,875 COMMITMENTS AND CONTINGENCIES (Note 14) STOCKHOLDERS' EQUITY (Note 12) Common stock (par value $1.00 per share, authorized 25,000,000, issued and outstanding 8,656,250 and 5,781,250, respectively) ........... 8,656 5,781 Additional paid-in capital ................................................ 94,325 63,519 Cumulative translation adjustments......................................... 107 15 Retained earnings (deficit)................................................ 2,729 (3,471) --------- --------- TOTAL STOCKHOLDERS' EQUITY............................................. 105,817 65,844 --------- --------- $396,591 $324,058
See notes to consolidated financial statements SYNTHETIC INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands of dollars, except per share amounts)
Year ended September 30, 1997 1996 1995 -------------- -------------- -------- Net sales............................................................... $ 345,572 $299,532 $271,427 --------- -------- -------- Costs and expenses: Cost of sales ........................................................ 233,187 208,321 194,706 Selling expenses...................................................... 31,801 27,488 24,273 General and administrative expenses................................... 26,562 22,657 21,195 Amortization of excess of purchase price over net assets acquired and other intangibles............................. 2,592 2,592 2,566 -------- -------- -------- 294,142 261,058 242,740 ------- -------- -------- Operating income....................................................... 51,430 38,474 28,687 -------- --------- -------- Other expenses: Interest expense, net................................................. 20,085 22,773 22,514 Amortization of deferred financing costs.............................. 654 699 737 -------- ------- -------- 20,739 23,472 23,251 ------- -------- -------- Income before provision for income taxes and extraordinary item......... 30,691 15,002 5,436 Provision for income taxes (Note 10).................................... 12,541 6,900 3,500 -------- -------- -------- Income before extraordinary item........................................ 18,150 8,102 1,936 Extraordinary item - Loss from early extinguishment of debt (net of tax benefit of $7,481) (Note 9)........................................... 11,950 - - ------ ----------- ----------- NET INCOME.............................................................. $ 6,200 $ 8,102 $ 1,936 ======= ======= ======= Per share amounts: Income before extraordinary item (Note 9)............................. $ 2.08 $ 1.37 $ .33 Extraordinary loss ................................................... (1.37) . - . - ---------- --------- -------- Net income ........................................................... $ .71 $ 1.37 $ .33 ======== ======== ========= Weighted average shares outstanding .................................... 8,719,458 5,930,502 5,930,502 ========= ========= =========
See notes to consolidated financial statements SYNTHETIC INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (In thousands of dollars)
Additional Cumulative Retained Common paid-in translation earnings stock capital adjustments (deficit) Total Balance, October 1, 1994................................ $ 5,781 $ 63,519 $ 26 $ (13,509) $ 55,817 Net income.............................................. - - - 1,936 1,936 Foreign currency translation............................ - - 3 - 3 -------- -------- -------- -------- -------- Balance, September 30, 1995............................. 5,781 63,519 29 (11,573) 57,756 Net income.............................................. - - - 8,102 8,102 Foreign currency translation............................ - - (14) - (14) -------- -------- ---------- --------- ----------- Balance, September 30, 1996............................. 5,781 63,519 15 ( 3,471) 65,844 Net income.............................................. - - - 6,200 6,200 Issuance of common stock................................ 2,875 30,806 - - 33,681 Foreign currency translation............................ - - 92 - 92 -------- -------- ------- --------- --------- Balance, September 30, 1997............................. $ 8,656 $ 94,325 $ 107 $ 2,729 $105,817 ======= ======== ======= ======= ========
See notes to consolidated financial statements SYNTHETIC INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands of dollars)
Year ended September 30, 1997 1996 1995 ------ ----- ----- CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................................................ $ 6,200 $ 8,102 $ 1,936 Adjustments to reconcile net income to cash provided by operations: Extraordinary loss on early extinguishment of debt.................. 19,431 - - Depreciation and amortization....................................... 18,236 16,299 14,937 Deferred income taxes............................................... 2,270 3,400 (355) Provision for bad debts............................................. 520 1,024 3,363 Change in operating assets and liabilities, net of acquisition: Accounts receivable................................................. (9,687) (1,247) (12,212) Inventory........................................................... (13,634) 6,451 (13,076) Other current assets................................................ (1,566) (647) (1,469) Accounts payable.................................................... 6,803 (3,801) 5,254 Accrued expenses and other current liabilities...................... 1,468 2,291 434 Income taxes payable................................................ (1,355) (48) 973 Interest payable.................................................... (3,557) (403) 180 ---------- ----------- -------- Net cash provided by (used in) operating activities............... 25,129 31,421 (35) CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment............................ (53,980) (29,253) (13,313) Acquisition of business............................................... (9,354) - - ------- ------------ ----------- Net cash used in investing activities .............................. (63,334) (29,253) (13,313) CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under term loan............................................ - 19,500 11,000 Repayments under term loan............................................ (20,000) (500) (6,000) Borrowings (repayments) under revolving credit line................... 9,427 (20,734) 8,598 Issuance of 9 1/4% Senior subordinated notes.......................... 170,000 - - Redemption of 12 3/4% Senior subordinated debentures.................. (132,597) - - Prepayment costs on early extinguishment of debt...................... (15,920) - - Proceeds from underwritten public offering............................ 33,681 - - Repayments of capital lease obligation and other long-term debt....... (660) (342) (36) Debt issuance costs................................................... (5,525) (101) (221) --------- ---------- --------- Net cash provided by (used in) financing activities................. 38,406 (2,177) 13,341 Effect of exchange rate changes on cash........................... 36 2 (2) ----------- ----------- ---------- NET INCREASE (DECREASE) IN CASH......................................... 237 (7) (9) CASH AT BEGINNING OF PERIOD............................................. 101 108 117 --------- --------- -------- CASH AT END OF PERIOD................................................... $ 338 $ 101 $ 108 ======== ======== ======== SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION Cash paid during the year for: Interest ............................................................. $ 23,642 $ 23,176 $ 22,334 Income taxes.......................................................... 4,145 3,548 2,882 SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITY Capital lease obligation incurred for purchase of equipment.............$ - $ 5,000 $ -
See notes to consolidated financial statements SYNTHETIC INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of dollars, except per share information) 1. ORGANIZATION Synthetic Industries, Inc., a Delaware corporation (the "Company") was a wholly owned subsidiary of Synthetic Industries L.P. (the "Partnership") until November 1, 1996. On that day, the Company completed the underwritten public offering (the "Offering") of 2,875,000 shares of its common stock ("Common Stock"). Immediately following the Offering, the Partnership owned 5,781,250 shares of Common Stock, or approximately 67% of the issued and outstanding shares of Common Stock. The Company manufactures and markets a wide range of primarily polypropylene-based materials designed for support, strength and stabilization applications. The Company's products replace commonly used materials in diverse applications including: floor covering, geotextiles, erosion control, concrete reinforcement and furniture construction fabrics. The Company manufactures and sells more than two thousand products in over 65 end-use markets predominately in North America, Europe and the Far East. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All significant intercompany transactions and balances have been eliminated. Revenue recognition Revenue from product sales is recognized at the time of shipment. Foreign currency translation The assets and liabilities of foreign subsidiaries are translated at the fiscal year-end rates of exchange, and the results of operations are translated at the average rates of exchange for the years presented. Gains or losses resulting from translating foreign currency financial statements are accumulated in the cumulative translation adjustments account in the stockholders' equity section of the accompanying consolidated balance sheets. Foreign currency transaction gains and losses are included in results of operations. Foreign currency realized and unrealized gains and losses for the years presented were not material. Inventory Inventory is stated at the lower of cost, determined using the first-in, first-out method, or market. Property, plant and equipment Property, plant and equipment is stated at cost less accumulated depreciation and amortization. Depreciation is provided on the straight-line method based on estimated useful lives, as follows: Building and improvements 25 years Machinery and equipment 14 years Leasehold improvements are amortized over the shorter of the useful life of the asset or the term of the lease. Expenses for repairs, maintenance and renewals are charged to operations as incurred. Expenditures which improve an asset or extend its useful life are capitalized. When properties are retired or otherwise disposed of, the related cost and accumulated depreciation and amortization are removed from the accounts and any gain or loss is included in the results of operations. Capitalized interest is charged to machinery and equipment and amortized over the lives of the related assets. Interest capitalized during fiscal 1997, 1996 and 1995 was $838, $392 and $729, respectively. Income taxes The Company accounts for income taxes using an asset and liability approach in accordance with Statement of Financial Accounting Standards No. 109 ("SFAS 109"). Under SFAS 109, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in the statement of operations for the period that includes the enactment date. Excess of purchase price over net assets acquired The excess of purchase price over net assets acquired is amortized on a straight-line basis over a period of 40 years. Excess of purchase price over net assets acquired is assessed for recoverability on a regular basis. In evaluating the value and future benefits of goodwill, its carrying value would be reduced by the excess, if any, of the balance over management's best estimate of undiscounted future operating income before amortization of the related intangible assets over the remaining amortization period. Deferred financing and intangible assets Deferred financing costs are amortized over periods from 5 to 12 years. Intangible assets consist primarily of a Fibermesh(R) trademark and patents on civil engineering products, which are amortized on a straight-line basis over 40 and 15 years, respectively. Income per share Income per share was computed by dividing net income by the weighted average number of common shares and common equivalent shares outstanding during each period, as adjusted for the stock splits. Common equivalent shares include options calculated using the treasury stock method. Weighted average shares outstanding increased from 5,930,502 in fiscal 1996 to 8,719,458 at September 30, 1997, as a result of the November 1, 1996 underwritten public offering. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Recent accounting pronouncements In February 1997, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standard No. 128, "Earnings Per Share" ("SFAS 128"). Under the new standard, which must be adopted for periods ending after December 15, 1997, the Company will be required to change the method used to compute earnings per share and to restate prior periods presented. A dual presentation of basic and diluted earnings per share will be required. The basic earnings per share calculation, which will replace primary earnings per share, will exclude the dilutive impact of stock options and other common share equivalents. The diluted earnings per share calculation, which will replace fully diluted earnings per share, will include common share equivalents. The adoption of SFAS 128 will not have a material impact on earnings per share for the three years ended September 30, 1998. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"), which must be adopted for fiscal years beginning after December 15, 1997. Under the new standard, companies will be required to report certain information about operating segments in consolidated financial statements. Operating segments will be determined based on the method that management organizes its businesses for making operating decisions and assessing performance. SFAS 131 also requires companies to report certain information about their products and services, the geographic areas in which they operate, and their major customers. The Company is currently evaluating the effect, if any, of implementing SFAS 131. Research and development The Company's research and market development is focused primarily on development and as such the Company engages in product design, development and performance validation to improve existing products and to create new products. The Company expended $4,208, $2,942, and $2,795 in fiscal 1997, 1996, and 1995, respectively. Research and development costs are expensed as incurred and included in general and administrative expenses. Reclassification of prior financial statements Certain reclassifications have been made to previous years' financial statements to conform with 1997 classifications. Proceeds received from the underwritten public offering The $33,861 net proceeds received from the November 1, 1996 Offering were used to repay certain outstanding indebtedness. 3. BUSINESS ACQUISITION On February 27, 1997, the Company acquired certain assets of the Spartan Technologies division of Spartan Mills (the "Acquisition") for approximately $9,400. The acquisition has been accounted for using the purchase method of accounting, and, accordingly, the purchase price has been allocated to the net assets acquired (accounts receivable, inventory, and property, plant and equipment) based on the fair market value (which approximated cost) at the date of acquisition. The operating results of the acquired business have been included in the consolidated statement of operations from the date of acquisition. The Acquisition did not have a material impact on the Company's financial statements. 4. ACCOUNTS RECEIVABLE Accounts receivable are presented net of the doubtful allowances of $2,707, $3,036 and $4,053 for fiscal 1997, 1996 and 1995, respectively. Amounts written off against established allowances were $849, $2,041 and $511 for the years ended September 30, 1997, 1996 and 1995, respectively. The Company grants uncollateralized trade terms to most U.S. customers. A majority of the Company's carpets backing sales are with customers located in the state of Georgia. As of September 30, 1997 and 1996, $26,126 and $21,916, respectively of the Company's accounts receivable balances were due from customers located in this state. Net sales to one customer represented approximately 20% of consolidated net sales for 1997 and approximately 18% of consolidated net sales for 1996 and 1995, respectively. 5. INVENTORY
September 30, 1997 1996 ---- ---- Finished goods.......................... $ 33,572 $ 22,555 Work in process......................... 7,427 7,937 Raw materials........................... 13,140 8,650 -------- ------- $ 54,139 $ 39,142
6. OTHER CURRENT ASSETS
September 30, 1997 1996 ---- ---- Prepaid supplies........................ $ 9,003 $ 7,250 Deferred tax assets (Note 10)........... 5,050 4,765 Receivable from Synthetic Industries L.P. (Note 14)............. 1,800 661 Other................................... 1,347 1,979 --------- --------- $ 17,200 $ 14,655
7. PROPERTY, PLANT AND EQUIPMENT
September 30, 1997 1996 ---- ---- Land.................................... $ 4,585 $ 4,458 Buildings and improvements.............. 35,398 29,298 Machinery and equipment and leasehold improvements................ 232,277 179,386 ------- -------- 272,260 213,142 Accumulated depreciation................ 90,158 75,168 --------- -------- $182,102 $137,974
Depreciation expense on property, plant and equipment was $14,990, $13,008 and $11,634 in fiscal 1997, 1996 and 1995, respectively. 8. OTHER ASSETS
September 30, 1997 1996 ---- ---- Excess of purchase price over net assets acquired...................... $99,818 $99,818 Intangible assets................................ 3,546 3,546 Deferred financing costs......................... 11,651 12,331 --------- --------- 115,015 115,695 Accumulated amortization........................ 32,234 31,674 -------- ------- $ 82,781 $ 84,021 ======== ========
The excess of purchase price over net assets acquired arose from the December 4, 1986 purchase of the Company's Common Stock by Synthetic Industries L.P., a Delaware limited partnership. This acquisition was accounted for using the purchase method of accounting. Accordingly, the purchase price was allocated to the net assets acquired based on estimates by independent appraisals and other valuations of fair market value as of December 4, 1986, and resulted in a purchase price in excess of net assets acquired of $99,818. In conjunction with refinancing of long-term debt (Note 9), deferred financing costs of $5,525 were incurred. Previously incurred costs of $6,205 and associated amortization of $2,686 were written off, the effect of which is included in the extraordinary loss from early extinguishment of debt. Amortization expense was $3,246, $3,291 and $3,303 in fiscal 1997, 1996 and 1995, respectively. 9. LONG-TERM DEBT
September 30, 1997 1996 ---- ---- Credit facility: Revolving credit portion $ 13,420 $ 3,993 Term loan portion 25,000 45,000 9 1/4% senior subordinated notes, due 2007 170,000 - 12 3/4% senior subordinated debentures, due 2002 7,403 140,000 Capital lease obligation (Note 14) 4,083 4,698 Other 1,276 1,321 --------- --------- 221,182 195,012 Less current portion 718 659 --------- --------- Total long-term portion $ 220,464 $ 194,353 ========= =========
Credit Facility On October 20, 1995, the Company and its lenders entered into a Fourth Amended and Restated Revolving Credit Agreement (as amended to date, the "Credit Facility"). The Credit Facility, with a termination date of October 1, 2001, provided for potential borrowing capacity of up to $85,000 comprised of term loan borrowings of $45,000 and a revolving credit loan portion (the "Revolver") of $40,000. The term loan balance at September 30, 1997 was $25,000, of which $10,000 is payable in 1999 and $15,000 is payable in 2000. The Revolver provides for availability based on a borrowing formula consisting of 85% of eligible accounts receivable and 50% of eligible inventory, subject to certain limitations and reserves which include the remaining balance due under the Debentures of $7,403. At September 30, 1997, availability under the Revolver was $17,838. The Credit Facility permits borrowings which bear interest, at the Company's option, (i) for domestic borrowings based on the lender's base rate (8.50% at September 30, 1997) or (ii) for Eurodollar borrowings based on the Interbank Eurodollar rate at the time of conversion plus 2.0% or 1.75% for term loan or revolver advances, respectively (7.44% to 7.63% at September 30, 1997). In fiscal 1996, the Credit Facility permitted borrowings which bore interest, at the Company's option, (i) for domestic borrowings based on the lender's base rate plus .75% (9.0% at September 30, 1996) or (ii) for Eurodollar borrowings based on the Interbank Eurodollar rate at the time of conversion plus 2.5% or 2.75% for term loan or revolver advances, respectively (8.09% to 9.25% at September 30, 1996). The Credit Facility provides for borrowings under letters of credit of up to $3,000, which borrowings reduce amounts available under the Revolver. At September 30, 1997, no letters of credit were outstanding under the facility. The Credit Facility is collateralized by substantially all of the Company's assets and contains covenants related to the maintenance of certain operating and working capital levels and limitations as to the amount of capital expenditures. The Company's ability to pay dividends on its common stock is restricted by both the Credit Facility and the indenture relating to the Senior Subordinated Debentures discussed above. Senior Subordinated Debentures and Notes On February 11, 1997, the Company issued $170,000 in aggregate principal amount of 9 1/4% Senior Subordinated Notes due 2007 (the "Notes"), which represent unsecured obligations of the Company. The Notes are redeemable at the option of the Company at any time on or after February 15, 2002, initially at 104.625% of their 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 connection with the issuance of the Notes, the Company redeemed approximately $132,600 principal amount of its 12 3/4% Senior Subordinated Debentures due 2002 (the "Debentures") at a redemption price of 111.07% of the principal amount thereof. In addition, the Company repaid $20,000 of its outstanding term loan borrowings as of March 5, 1997. In connection with the early extinguishment of debt, the Company recorded an extraordinary loss of $11,950 (representing call premium and prepayment fees of $15,920 and write off of deferred financing costs of $3,511, net of an income tax benefit of $7,481) during the second quarter of fiscal 1997. On December 1, 1997 the Company redeemed the remaining $7,403 aggregate principal amount of Debentures outstanding at a redemption price of 106.375% of the principal amount thereof, together with accrued interest as of the redemption date. Aggregate Minimum Payments and Fair Value Approximate aggregate minimum annual payments due on long term debt and the capital lease, for the subsequent five years are as follows: 1998, $718; 1999, $10,783; 2000, $29,273; 2001, $1,971; 2002, $177,483; and thereafter, $954. The fair value of the Company's Notes is estimated to be $176,375 at September 30, 1997. The fair value of the Debentures are estimated to be $7,875 and $149,800 at September 30, 1997 and 1996, respectively. The fair values are based on quoted market prices for the Notes and Debentures in the over-the-counter market. 10. INCOME TAXES The sources of income before provision for income taxes are as follows:
Year Ended September 30, 1997 1996 1995 ---- ---- ---- United States $29,609 $14,083 $4,546 Foreign 1,082 919 890 ----- --- ----- Earnings before income taxes $30,691 $15,002 $5,436 ======= ======= ======
The provision for income taxes contributable to the amounts shown above consists of the following:
Year Ended September 30, 1997 1996 1995 ---- ---- ---- Current: Federal............................................ $8,796 $2,600 $ 3,180 State.............................................. 1,120 600 400 Foreign............................................ 355 300 275 -------- -------- -------- 10,271 3,500 3,855 ------ ------- ------- Deferred: Federal............................................ 1,900 3,200 (218) State.............................................. 370 200 (137) -------- -------- --------- 2,270 3,400 (355) ------- ------- --------- Total ................................................. $12,541 $6,900 $3,500 ======= ====== ======
As described in Note 9, the Company recorded a current tax benefit of $7,481 in fiscal 1997 as a result of the early extinguishment of debt. A reconciliation of US income tax computed at the statutory rate and actual tax expense is as follows:
Year Ended September 30, 1997 1996 1995 ---- ---- ---- Amount computed at statutory rate...................... $10,742 $5,250 $1,900 State and local taxes less applicable federal income tax benefit........................... 998 550 270 Amortization of goodwill............................... 873 873 873 Other nondeductible expenses........................... 181 115 210 Other, net............................................. (253) 112 247 ----------- -------- -------- $12,541 $6,900 $3,500 ======= ====== ======
The tax effects of significant items comprising the Company's net deferred tax liability are as follows:
September 30, 1997 1996 ----- ---- Property, plant and equipment.......................... $27,345 $24,819 Trademarks and patents................................. 1,085 1,056 ------ ------ Total deferred tax liabilities......................... 28,430 25,875 ------ ------ Accounts receivable.................................... 1,018 996 Inventory.............................................. 815 626 Accrued expenses....................................... 2,013 1,829 AMT credit carryforward (no expiration date)........... 1,204 1,314 ------- ------ Total deferred tax assets.............................. 5,050 4,765 ------- -------- Net deferred tax liability............................. $23,380 $21,110 ========== =======
11. RETIREMENT PROGRAMS For US employees, the Company maintains a trusteed profit-sharing plan ("Plan") which is qualified under Section 401(k) of the Internal Revenue Code. All full-time employees over the age of 21 who have been employed continuously for at least one year are eligible for participation in the Plan. The Company may, but has not elected to, contribute a portion of its profits to the Plan, as determined by the Board of Directors. Employer contributions vest over 1 to 5 years. The Company has elected to match employee contributions to the Plan on a 50% basis but not to exceed 3% of the employee's annual compensation. During fiscal years 1997, 1996 and 1995, the Company contributed $1,098, $999 and $921, respectively. The Plan provides for the Company to bear the expense of the administration of the Plan. Pension expense on the foreign plans is not significant. 12. STOCK OPTIONS Director's plan In August 1994, the Company adopted a stock option plan (the "Director's Plan") pursuant to which non-qualified stock options to purchase an aggregate of 125,261 shares of Common Stock were granted to the four non-employee Directors of the Company at an exercise price of $6.83 per share which was determined by reference to the fair market value of the Company's equity at the time such Directors joined the Board. The stock options were fully vested as of October 1, 1996 and have a term which expires on August 4, 2004. The Director's Plan does not provide for any further grants or options thereunder. Management plan The Company's 1994 and 1996 Stock Option Plans (collectively, the "Management Plans") for its key employees, provided for the granting of incentive stock options ("ISOs"), as provides in Section 422A of the Internal Revenue Code, and non-qualified stock options. The maximum aggregate number of shares of Common Stock that may be issued under the 1994 Plan and the 1996 Plan is 491,413 and 289,062 , respectively. Stock option transactions during 1997, 1996 and 1995 are summarized as follows:
Shares reserved for issuance Shares Shares Weighted under the granted available Price average Management Plans for grant price Initial grant December 14, 1994 491,413 316,697 174,716 $10.72 $10.72 - ------------------------------------------------------------------------------------------------------------------------- Balance at September 30, 1995 491,413 316,697 174,716 $10.72 $10.72 Options granted 289,062 196,439 $10.72 $10.72 - ------------------------------------------------------------------------------------------------------------------------- Balance at September 30, 1996 780,475 513,136 267,339 $10.72 $10.72 Options granted - 175,500 $17.875-$21.375 $18.77 - ------------------------------------------------------------------------------------------------------------------------- Balance at September 30, 1997 780,475 688,636 91,839 $10.720-$21.375 $12.77
At September 30, 1997, 207,458 options were exercisable at a weighted average exercise price of $10.72 per share. The purchase price of the shares of Common Stock subject to options under the Management Plans must be no less than the fair market value of the Common stock at the date of grant; provided, however, that the purchase price of shares of Common Stock subject to ISOs granted to any optionee who owns shares possessing more than 10% of the combined voting power of the Company ("Ten Percent Shareholder') must not be less that 110% of the fair market value of the Common Stock at the date of the grant. The maximum term of an option may not exceed ten years from the date of the grant, except with respect to ISOs granted to Ten Percent Shareholders which must expire within five years of the date of grant. The Company has elected to continue measuring stock-based compensation using the intrinsic value approach under APB Opinion No. 25 and has adopted the disclosure-only provision of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Accordingly, no compensation expense has been recognized for the options described above. Had compensation costs for the options been determined based on the fair value on the grant date consistent with the provisions of SFAS 123, the Company's net income and income per share would have been changed to the following pro forma amounts: 1997 1996 ---- ---- Pro forma net income $6,009 $8,012 Pro forma income per share 0.69 1.35 The fair values for both years were determined using a Black-Scholes option-pricing model with the following weighted average assumptions: 1997 1996 ---- ---- Dividend yield None None Volatility 33% 33% Risk-free interest rate 6.4% to 6.8% 5.8% to 6.7% Expected life 4 years 4 years 13. RELATED PARTY TRANSACTIONS Synthetic Industries, L.P. (the "Partnership") owns 5,781,250 shares of Common Stock, or approximately 67% of the issued and outstanding shares of Common Stock. Four of the Company's executive officers, including its chief executive officer, and a former executive officer are sole stockholders of corporations which indirectly control the sole general partner of the Partnership. The Company and the Partnership entered into a Registration Rights Agreement pursuant to which the Company has agreed that upon request of the Partnership the Company will register under the Securities Act and applicable state securities laws the sale of the Common Stock owned by the Partnership and as to which registration has been requested. The Company's obligation is subject to certain limitations relating to a minimum amount required for registration, the timing of a registration and other similar matters. The Company is obligated to pay any registration expenses incidental to such registration, excluding underwriters' commissions and discounts. In connection with the November 1, 1996 underwritten public offering the Company incurred approximately $650 of such incidental expenses. On September 19, 1997, the Company and the Partnership entered into an Agreement and Plan of Withdrawal and Dissolution of the Partnership ("the Plan"). Pursuant to the Plan, the Partnership is to be dissolved in two separate phases. The first phase is to be an underwritten public offering of the number of shares of Common Stock that limited partners have elected to sell, and the second phase is to be one to three liquidating distributions of the unsold portions of the Partnership's shares of Common Stock, beginning 180 days after the completion of the public offering. On November 7, 1997, the limited partners approved the adoption of the Plan. However, the implementation of the Plan has been enjoined by courts in Delaware and California in connection with two lawsuits filed by certain limited partners of the Partnership against the Partnership and its general partner (the "General Partner"), among others. See "Claims and Legal Proceedings". Among other equitable and legal remedies, the plaintiff is seeking the removal of the General Partner and the liquidation of the Partnership. The Company is not currently involved in these proceedings and does not presently possess any contractual rights with respect to their ultimate resolution. If, in connection with these lawsuits, the General Partner is removed or resigns, or the Partnership is liquidated under a court-appointed receiver, there can be no assurance that the resulting sale and/or distribution of the Partnership's share of Common Stock will be made in the same or similar manner as that contemplated by the Plan. The General Partner has denied the allegations of the plaintiff and is vigorously contesting the lawsuits; however, in the event of an adverse ruling, the Company cannot predict the volume or price at which the Common Stock trades might be affected. In connection with the Plan the Company incurred approximately $1,150 of expenses on the behalf of the Partnership. These amounts are reimbursable to the Company and included in other current assets (Note 6). A former executive officer of the Company and an affiliate of the Partnership, is being retained as a consultant to the Company. Pursuant to his consulting agreement with the Company, the former executive officer will receive, until January 31, 2000, or upon earlier termination of his consulting agreement, $125 per year and various insurance coverages, and will be authorized to exercise all stock options awarded to him, subject to applicable vesting provisions. Under this agreement, the former executive officer is required to provide the Company with 20 hours of consultation per month, has released the Company from any liability resulting from his employment and has also agreed not to compete against the Company. The Company leases office space under a five-year lease with one of the Company's executive officers. The term of the lease expires on September 30, 1998 and the rent is approximately $48 per year, which the Company believes is within prevailing market rates. Pursuant to a licensing agreement with the Company, an executive officer of the Company, receives royalties related to the manufacture and sale of a certain product for which the executive officer owns all of the U.S. and foreign patents. Under this agreement, the Company paid royalties of approximately $13 and $12 in fiscal 1997 and 1996, respectively, and will continue to receive such royalties until 2012 or the earlier termination of the licensing agreement. During fiscal 1997 and 1996 the Company paid fees of approximately $241 and $232, respectively, to a law firm in which Mr. Joseph Dana, a director of the Company was a member until May 21, 1997. Effective May 21, 1997, Mr. Dana became employed as Chief Operating Officer and General Counsel of the Company. 14. COMMITMENTS AND CONTINGENCIES a. Lease commitments On May 15, 1996, the Company entered into a five-year capital lease for equipment which provides for payments over a five-year period at an interest rate of 8.42%. The Company also leases certain factory and warehouse buildings and equipment under long-term operating leases expiring periodically through 2009. Future minimum lease payments under noncancelable lease obligations at September 30, 1997 are as follows:
Capital Operating Year leases leases 1998........................................................ $ 986 $ 2,961 1999....................................................... 986 2,399 2000....................................................... 986 1,638 2001....................................................... 1,993 662 2002.................................................... - 307 Thereafter................................................. - 635 ------ ------ Total minimum lease payments................................ $4,951 $ 8,602 ======= Less amount representing interest............................ 868 --- Present value of net minimum lease payments.................. 4,083 Less current maturities of capital lease obligation........................................ 614 ------- Long-term capital lease obligation........................... $3,469
Total rental expense for the above operating leases and other short-term leases for the fiscal years 1997, 1996 and 1995 was $4,112, $4,499 and $3,731, respectively. b. Capital Expenditures In fiscal 1998, the Company plans a $41,000 expansion of its existing manufacturing facilities, primarily to expand capacity, subject to prevailing market conditions, of which $8,128 is committed at September 30, 1997. 15. LITIGATION The Company and its subsidiaries are parties to litigation arising out of their business operations. Most of such litigation involves claims for personal injury, property damage, breach of contract and claims involving employee relations and certain administrative proceedings. The Company believes such claims are adequately covered by insurance or do not involve a risk of material loss to the Company. In connection with the proposed dissolution of the Partnership, pursuant to an Agreement and Plan of Withdrawal and Dissolution (the "Plan"), one director and certain of the Company's officers who are affiliated with the General Partner have been named in two putative class action lawsuits filed by certain limited partners of the Partnership. In the first action, to which the Company is not a party, filed on February 11, 1997 in the Delaware Court of Chancery and thereafter amended, the plaintiffs have alleged, among other things, breach of the defendants' fiduciary duty to the limited partners, that the Plan is unlawfully coercive, that the General Partner has allegedly failed to satisfy certain conditions precedent to the right of limited partners to amend the partnership agreement and that certain amendments necessary to implement the Plan violate the terms of the partnership agreement. The plaintiffs seek, among other equitable and legal remedies, removal of the General Partner, dissolution of the Partnership, appointment of a liquidating trustee, to enjoin the implementation of the Plan and compensatory damages in an undetermined amount. On October 23, 1997, the Court preliminarily enjoined the implementation of the Plan, although the Plan was subsequently approved by limited partners on November 7, 1997. On November 7, 1997, the Delaware Supreme Court accepted the defendants' petition for an expedited appeal of this injunction, and oral argument on the appeal was heard on December 2, 1997. The defendants have denied the allegations of the plaintiff and are vigorously contesting the lawsuit. The second lawsuit was filed in the U.S. District Court of the Northern District of California on May 1, 1997, and thereafter amended. The plaintiff has alleged in his amended complaint various federal securities and proxy violations allegedly arising out of the joint proxy statement and prospectus which was mailed to limited partners in connection with the solicitation of proxies for the vote on the Plan and other related documents. The plaintiff also added the Company as a named defendant, alleging that all defendants acted in concert with, and as agents of, each other; however, the plaintiff made no specific indepndent allegations with respect to the Company. The plaintiff seeks, among other equitable and legal remedies, to enjoin the implementation of the Plan and unspecified damages. On November 6, 1997, the Court granted in part the plaintiff's motion for a temporary restraining order enjoining the implementation of the Plan. The plaintiff's motion for a preliminary injunction has been briefed and an oral argument was heard on December 19, 1997. The defendants have denied the allegations of the plaintiff and are vigorously contesting the lawsuit. The Partnership is a principal stockholder of the Company and certain members of the Company's management control the General Partner. See "Certain Relationships and Related Transactions." 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 either action will have a material adverse effect on the Company's results of operations or financial condition. 16. Subseqent Event On December 18, 1997, the Company and its lenders, with BankBoston as agent entered into a new five year credit facility (the "New Credit Facility"). The New Credit Facility consists of up to a $40 million asset based securitization program, with amounts borrowed through a newly formed subsidiary, Synthetic Industries Funding Corporation, (the "Securitization"), and a $60 million senior secured revolver facility (the "New Revolver"). Securitization and New Revolver borrowings are collateralized by the Company's accounts receivables and substantially all of the assets of the Company, excluding real property, respectively. Interest on the Securitization is based on the applicable commercial paper rate in effect plus a spread. The New Revolver permits borrowings which bear interest, at the Company's option, (i)for domestic borrowings based on the lender's base rate or (ii) for Eurodollar borrowings based on a spread over the Interbank Eurodollar rate at the time of conversion. Spreads for the Securitization and the Eurodollar borrowings are determined by the operational performance of the Company. At September 30, 1997, the interest rates under the Securitization and the Eurodollar borrowings would have been 6.23% and 7.09%, respectively. The New Credit Facility contains covenants related to the maintenance of certain operating ratios and limitations as to the amount of capital expenditures. The Company's ability to pay dividends on its common stock is restricted by both the New Credit Facility and the Notes. At September 30, 1997,the availability under the New Credit Facility would have been approximately $45,000. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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, INC. By: /s/ Leonard Chill Leonard Chill President Dated: December 8, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on the behalf of the Registrant and in the capacities and on the dates indicated. /s/ Leonard Chill Leonard Chill President, Chief Executive Officer and Director Dated: December 8, 1997 /s/ Joseph F. Dana Joseph F. Dana Chief Operating Officer, General Counsel and Director Dated: December 8, 1997 /s/Joseph Sinicropi Joseph Sinicropi Secretary and Chief Financial Officer Dated: December 8, 1997 (Principal Financial and Accounting Officer) /s/ Lee J. Siedler Lee J. Seidler Director Dated: December 8, 1997 /s/William J. Shortt William J. Shortt Director Dated: December 8, 1997 /s/Robert L. Voigt Robert L. Voigt Director Dated: December 8, 1997 EX-99 2 [EXECUTION COPY] AMENDMENT NO. 9 to FOURTH AMENDED AND RESTATED REVOLVING CREDIT AND SECURITY AGREEMENT dated as of October 20, 1995 THIS AMENDMENT NO. 9 dated November 14, 1997 is made by and among SYNTHETIC INDUSTRIES, INC., a Delaware corporation (the "Borrower"), the Lenders parties from time to time to the Credit Agreement (as hereinafter defined), and BANKBOSTON, N.A. (formerly known as The First National Bank of Boston)("BankBoston"), as the agent (the "Agent") for the Lenders. Preliminary Statements The Borrower, the Lenders and the Agent are parties to a Fourth Amended and Restated Revolving Credit and Security Agreement dated as of October 20, 1995, (as amended and in effect, the "Credit Agreement"; terms defined therein and not otherwise defined herein being used herein as therein defined). The Borrower has requested, and the Lenders and the Agent have agreed, upon and subject to the terms, conditions and provisions of this Amendment, to increase the Dollar amount of Capital Expenditures of the Borrower permitted under the Credit Agreement. Accordingly, in consideration of the Credit Agreement, the Loans made by the Lenders and outstanding thereunder, the mutual promises hereinafter set forth and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: Section 1. Amendments to Credit Agreement. From and after the date hereof, subject only to receipt by the Agent of at least six counterparts of this Amendment signed by the duly authorized representatives of each Lender and the Borrower, the Credit Agreement is hereby amended by amending Section 10.5 Capital Expenditures by amending clauses (c) and (d) thereof in their entirety to read as follows: (c) for the fiscal year of the Borrower ending September 30, 1997, $57,000,000; (d) for the fiscal year of the Borrower ending September 30, 1998, $10,000,000 plus the lesser of $3,000,000 and the amount, if any, by which $57,000,000 exceeds the actual amount of Capital Expenditures of the Borrower and its Consolidated Subsidiaries made during the fiscal year of the Borrower ending September 30, 1997; and Section 2. Effect of Amendment. From and after the effectiveness of this Amendment, all references in the Credit Agreement and in any other Loan Document to "this Agreement," "the Credit Agreement," "hereunder," "hereof" and words of like import referring to the Credit Agreement, shall mean and be references to the Credit Agreement as amended by this Amendment. Except as expressly amended hereby, the Credit Agreement and all terms, conditions and provisions thereof remain in full force and effect and are hereby ratified and confirmed. The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of any Lender or the Agent under any of the Loan Documents, nor constitute a waiver of any provision of any of the Loan Documents. Section 3. Counterpart Execution; Governing Law. (a) Execution in Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement. (b) Governing Law. This Amendment shall be governed by and construed in accordance withthe laws of the State of Georgia. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized, as of the date first above written. SYNTHETIC INDUSTRIES, INC. [Corporate Seal] By:/s/ Leonard Chill Leonard Chill ATTEST: President & CEO By:/s/ Joseph Sinicropi - ------------------------------ [Assistant] Secretary BANKBOSTON, N.A., as the Agent and as a Lender By: /s/ Stephen Y. McGehee Stephen Y. McGehee Director SANWA BUSINESS CREDIT CORPORATION By: /s/ Peter L. Skavla Peter L. Skavla Vice President SOUTHTRUST BANK, NATIONAL ASSOCIATION By: /s/ Babara A. Gewert Babara A. Gewert Vice President EX-27 3 FDS --
5 This schedule contains summary financial information extracted from the condensed consolidated balance sheet of Synthetic Industries, Inc. as of September 30, 1997, and the related statements of operations and cash flows for the fiscal year ended September 30, 1997, and is qualified in its entirity by reference to such financial statements. 0000809803 SYNTHETIC INDUSTRIES, INC. 1000 USD 12-Mos SEP-30-1997 OCT-01-1996 SEP-30-1997 1.000 338 0 62,738 2,707 54,139 131,708 272,260 90,158 396,591 41,880 177,403 0 0 8,656 97,161 396,591 345,572 345,572 233,187 233,187 20,739 0 20,085 30,691 12,541 18,150 0 (11,950) 0 6,200 0 0.71
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