SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For Quarterly Period Ended July 2, 2000
Commission File Number 0-12016
------------------------------
INTERFACE, INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
GEORGIA 58-1451243
------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2859 PACES FERRY ROAD, SUITE 2000, ATLANTA, GEORGIA 30339
---------------------------------------------------------
(Address of principal executive offices and zip code)
(770) 437-6800
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Shares outstanding of each of the registrant's classes of common stock at
August 11, 2000:
Class Number of Shares
---------------------------------------------- ----------------
Class A Common Stock, $.10 par value per share 44,094,348
Class B Common Stock, $.10 par value per share 7,034,544
<PAGE>
INTERFACE, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements 3
Balance Sheets - July 2, 2000 and January 2, 2000 3
Statements of Operations - Three Months and Six Months 4
Ended July 2, 2000 and July 4, 1999
Statements of Comprehensive Income (Loss) - Three 5
Months and Six Months Ended July 2, 2000 and July 4, 1999
Statements of Cash Flows - Six Months 6
Ended July 2, 2000 and July 4, 1999
Notes to Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition 14
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 19
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
JULY 2, JANUARY 2,
2000 2000
----------- ----------
(Unaudited)
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and Cash Equivalents $ 1,890 $ 2,548
Accounts Receivable 204,814 203,550
Inventories 195,684 176,918
Prepaid Expenses 26,185 27,845
Deferred Tax Asset 10,265 9,917
----------- -----------
TOTAL CURRENT ASSETS 438,838 420,778
PROPERTY AND EQUIPMENT, less
accumulated depreciation 257,594 253,436
EXCESS OF COST OVER NET ASSETS ACQUIRED 270,066 278,772
OTHER ASSETS 59,745 75,509
----------- -----------
$ 1,026,243 $ 1,028,495
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes Payable $ 90 $ 4,173
Accounts Payable 89,628 90,318
Accrued Expenses 91,598 107,287
Current Maturities of Long-Term Debt 715 1,974
----------- -----------
TOTAL CURRENT LIABILITIES 182,031 203,752
LONG-TERM DEBT, less current maturities 155,158 125,144
SENIOR NOTES 150,000 150,000
SENIOR SUBORDINATED NOTES 125,000 125,000
DEFERRED INCOME TAXES and OTHER 38,599 33,395
----------- -----------
TOTAL LIABILITIES 650,788 637,291
Minority Interest 2,100 2,012
Common Stock 5,906 5,902
Additional Paid-In Capital 223,031 222,373
Retained Earnings 226,920 233,322
Accumulated Other Comprehensive Income - Foreign Currency
Translation (62,176) (53,671)
Treasury Stock, 7,584 and 7,300 shares, respectively, at cost (20,326) (18,734)
----------- -----------
$ 1,026,243 $ 1,028,495
=========== ===========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE>
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JULY 2, JULY 4, JULY 2, JULY 4,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $ 323,725 $ 305,452 $ 616,943 $ 613,318
Cost of Sales 226,180 209,793 430,732 421,051
--------- --------- --------- ---------
GROSS PROFIT ON SALES 97,545 95,659 186,211 192,267
Selling, General and Administrative Expenses 76,144 75,396 146,587 152,098
Restructuring Charge -- -- 20,095 --
--------- --------- --------- ---------
OPERATING INCOME 21,401 20,263 19,529 40,169
Interest Expense 9,834 9,281 19,118 18,786
Other Expense (Income) - Net 22 690 767 1,900
--------- --------- --------- ---------
INCOME BEFORE TAXES ON INCOME 11,545 10,292 (356) 19,483
Income Tax (Benefit) Expense 4,503 3,963 1,405 7,548
--------- --------- --------- ---------
NET INCOME (LOSS) $ 7,042 $ 6,329 $ (1,761) $ 11,935
========= ========= ========= =========
Basic Earnings Per Share $ .14 $ .12 $ (.03) $ .23
========= ========= ========= =========
DILUTED EARNINGS PER SHARE $ .14 $ .12 $ (.03) $ .23
========= ========= ========= =========
Average Shares Outstanding -- Basic 51,352 52,987 51,572 52,941
========= ========= ========= =========
Average Shares Outstanding -- Diluted 51,355 52,987 51,572 52,953
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE>
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JULY 2, JULY 4, JULY 2, JULY 4,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income (Loss) $ 7,042 $ 6,329 $ (1,761) $ 11,935
Other Comprehensive Income, Foreign
Currency Translation Adjustment (3,250) 1,392 (8,505) (7,380)
-------- -------- -------- --------
Comprehensive Income (Loss) $ 3,792 $ 7,721 $(10,266) $ 4,555
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
<PAGE>
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------------
JULY 2, JULY 4,
2000 1999
------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: $ 9,482 $(28,883)
-------- --------
INVESTING ACTIVITIES:
Capital expenditures (10,264) (18,209)
Acquisitions/Divestiture of businesses (25,000) 6,217
Other (518) (9,859)
-------- --------
(35,782) (21,851)
-------- --------
FINANCING ACTIVITIES:
Net borrowing (reduction) of long-term debt 32,047 57,837
Issuance/Repurchase of common stock (1,602) (6,621)
Dividends paid (4,663) (4,738)
-------- --------
25,782 46,478
-------- --------
Net cash provided by (used for) operating,
investing and financing activities (518) (4,256)
Effect of exchange rate changes on cash (140) (568)
-------- --------
CASH AND CASH EQUIVALENTS:
Net change during the period (658) (4,824)
Balance at beginning of period 2,548 9,910
-------- --------
Balance at end of period $ 1,890 $ 5,086
======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
6
<PAGE>
INTERFACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1 - CONDENSED FOOTNOTES
As contemplated by the Securities and Exchange Commission (the
"Commission") instructions to Form 10-Q, the following footnotes have been
condensed and, therefore, do not contain all disclosures required in connection
with annual financial statements. Reference should be made to the notes to the
Company's year-end financial statements contained in its Annual Report to
Shareholders for the fiscal year ended January 2, 2000, as filed with the
Commission.
The financial information included in this report has been prepared by
the Company, without audit, and should not be relied upon to the same extent as
audited financial statements. In the opinion of management, the financial
information included in this report contains all adjustments (all of which are
normal and recurring) necessary for a fair presentation of the results for the
interim periods. Nevertheless, the results shown for interim periods are not
necessarily indicative of results to be expected for the full year.
NOTE 2 - INVENTORIES
Inventories are summarized as follows:
(In thousands)
July 2, January 2,
2000 2000
-------- ----------
Finished Goods $105,537 $100,967
Work in Process 50,450 29,057
Raw Materials 39,697 46,894
-------- --------
$195,684 $176,918
======== ========
NOTE 3 - BUSINESS ACQUISITIONS AND DIVESTITURES
Subsequent to period end, the Company acquired Teknit, Ltd., a United
Kingdom company with a Michigan subsidiary, which manufactures three-dimensional
knits for the office furniture industry, for a purchase price of $3.9 million in
cash. The transaction will be accounted for as a purchase, and accordingly, the
results of operations will be included within the consolidated financial
statements as of the acquisition date.
During the second quarter of 2000, the Company acquired the furniture
fabric assets of the Chatham Manufacturing division of CMI Industries, Inc. for
a purchase price of $25 million in cash. The transaction was accounted for as a
purchase and, accordingly, the results of operations have been included within
the consolidated financial statements as of the acquisition date.
During 1999, the Company sold two operating entities which had been
acquired as part of the December 1997 acquisition of the European floorcovering
businesses of Readicut International plc. Joseph Hamilton & Seaton, Ltd., a
distributor of private label carpet, was sold for approximately $11.2 million in
cash during February. In November, the Company also sold its 40% interest in
Vebe Floorcoverings BV, a manufacturer of needlepunch carpet, for $8 million in
the form of a promissory note. The Company recognized the related immaterial
loss and gain, respectively, associated with these divestiture within other
expense.
During 1999, the Company purchased six service companies, all located
in the U.S. As consideration for the acquisitions, the Company issued common
stock valued at approximately $.8 million and paid $2.0 million in cash. All
such transactions have been accounted for as purchases and, accordingly, the
results of operations of the acquired companies since their acquisition dates
have been included within the consolidated financial statements. The excess of
the purchase price over the fair value of the net assets acquired was
approximately $1.2 million and is being amortized over 25 years.
NOTE 4 - RESTRUCTURING CHARGE
In the first quarter of 2000, the Company recorded a pre-tax
restructuring charge of $20.1 million. The charge reflects: (i) the
consolidation of certain administrative, manufacturing and back-office
functions; (ii) the divestiture of certain non-strategic Re:Source Americas
operations; and (iii) the abandonment of manufacturing equipment utilized in the
production of discontinued product lines.
7
<PAGE>
A summary of the completed and planned restructuring activities as of
July 2, 2000 is as follows:
<TABLE>
<CAPTION>
(In Thousands) U.S. EUROPE GRAND TOTAL
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Termination Benefits $ 5,637 $ 3,732 $ 8,369
Property, Plant & Equipment 1,750 -- 1,750
Intangible Assets 2,000 -- 2,000
Facilities Consolidation 2,358 -- 2,358
Divestiture of Non-Strategic
Re:Source Operations 4,618 -- 5,618
------- ------- -------
$16,363 $ 3,732 $20,095
======= ======= =======
</TABLE>
The restructuring charge is comprised of $9.4 million of cash
expenditures for severance benefits and other costs and $11.7 million of
non-cash charges, primarily for the write-down of impaired assets.
The termination benefits of $9.4 million, primarily related to
severance costs, are a result of aggregate reductions to date of 175 employees
and an additional headcount reduction of approximately 223 people starting in
the fourth quarter. The staff reductions are expected to be as follows:
<TABLE>
<CAPTION>
U.S. EUROPE TOTAL
<S> <C> <C> <C>
Manufacturing 286 21 307
Selling and Administrative 59 32 91
--- --- ---
345 53 398
=== === ===
</TABLE>
The Company anticipates that the restructuring will be completed by
year end. The restructuring is expected to yield annual cost savings of
approximately $15 million.
NOTE 5 - STOCK REPURCHASE PROGRAM
During 1998, the Company adopted a share repurchase program, pursuant
to which it was authorized to repurchase up to 2,000,000 shares of Class A
Common Stock in the open market through May 19, 2000 (since extended to May 19,
2002). This amount was increased to 4,000,000 shares subsequent to January 2,
2000. During the first six months of 2000, the Company has repurchased 384,313
shares of Class A Common Stock under this program, at prices ranging from $3.42
to $4.50 per share. This is compared to the repurchase of 1,442,500 shares of
Class A Common Stock at prices ranging from $4.50 to $9.94 during 1999. All
treasury stock is accounted for using the cost method.
NOTE 6 - EARNINGS PER SHARE AND DIVIDENDS
Basic earnings per share is computed by dividing income available to
common shareholders by the weighted average number of shares of Class A and
Class B Common Stock outstanding during the period. Shares issued or reacquired
during the period have been weighted for the portion of the period that they
were outstanding. Basic earnings per share has been computed based upon
51,572,000 shares and 52,941,000 shares outstanding for the six-month period
ended July 2, 2000 and July 4, 1999, respectively. Diluted earnings per share is
calculated in a manner consistent with that of basic earnings per share while
giving effect to all dilutive potential common shares that were outstanding
during the period. Diluted earnings per share has been computed based upon
51,572,000 shares and 52,953,000 shares outstanding for the six-month period
ended July 2, 2000 and July 4, 1999, respectively. During the first six months
of 2000, there were vested, unexercised, in the money stock options for 9000
common shares. These shares were not included in the computation of the diluted
per share amount for the respective period because the Company was in a net loss
position and, thus, any such potentially outstanding common shares were
anti-dilutive.
8
<PAGE>
The following is a reconciliation from basic earnings per share to
diluted earnings per share for each of the periods presented:
<TABLE>
<CAPTION>
(In Thousands Except Per Share Amounts)
Average
For the Six-Month Shares Earnings
Period Ended Net Income Outstanding Per Share
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
July 2, 2000 $ (1,761) 51,572 $ (.03)
Effect of Dilution:
Options -- --
-------------------------------------------------------
Diluted $ (1,761) 51,572 $ (.03)
=======================================================
July 4, 1999 $ 11,935 52,941 $ .23
Effect of Dilution:
Options -- 12
-------------------------------------------------------
Diluted $ 11,935 52,953 $ .23
=======================================================
</TABLE>
NOTE 7 - SEGMENT INFORMATION
During 1998, the Company adopted SFAS 131 which establishes
standards for the way that public business enterprises report information about
operating segments in their financial statements. The standard defines operating
segments as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. The Company's chief operating decision maker aggregates operating
segments based on the type of products produced by the segment. Based on the
quantitative thresholds specified in SFAS 131, the Company has determined that
it has two reportable segments. The two reportable segments are Floorcovering
Products/Services and Interior Fabrics. The Floorcovering Products/Services
segment manufactures, installs and services commercial modular and broadloom
carpet, while the Interior Fabrics segment manufactures panel and upholstery
fabrics.
The accounting policies of the operating segments are the same as
those described in the Summary of Significant Accounting Policies as contained
in the Company's Annual Report to Shareholders for the fiscal year ended January
2, 2000, as filed with the Commission. Segment amounts disclosed are prior to
any elimination entries made in consolidation. The chief operating decision
maker evaluates performance of the segments based on operating income. Costs
excluded from this profit measure primarily consist of allocated corporate
expenses, interest expense and income taxes. Corporate expenses are primarily
comprised of corporate overhead expenses. Thus, operating income includes only
the costs that are directly attributable to the operations of the individual
segment. Assets not identifiable to any individual segment are corporate assets,
which are primarily comprised of cash and cash equivalents, short-term
investments, intangible assets and intercompany amounts, which are eliminated in
consolidation.
9
<PAGE>
SEGMENT DISCLOSURES
Summary information by segment follows:
<TABLE>
<CAPTION>
Floorcovering Interior Other (Includes
(IN THOUSANDS) Products/Services Fabrics Architectural Products) Total
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
July 2, 2000
Net sales $477,380 $115,377 $24,186 $616,943
Depreciation and amortization 13,967 4,834 638 19,439
Operating income 11,544 12,735 198 24,477
Total assets 803,585 255,027 48,396 1,107,008
-------------------------------------------------------------------------------------------------------------------------------
July 4, 1999
Net sales $487,174 $99,050 $27,094 $613,318
Depreciation and amortization 16,159 4,713 954 21,826
Operating income 34,728 10,539 198 45,465
Total assets 929,996 211,345 46,838 1,188,179
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A reconciliation of the Company's total segment operating income, depreciation
and amortization and assets to the corresponding consolidated amounts follows:
<TABLE>
<CAPTION>
Period Ended
---------------------------------------
(IN THOUSANDS) July 2,2000 July 4, 1999
<S> <C> <C>
DEPRECIATION AND AMORTIZATION
Total segment depreciation and amortization $ 19,439 $ 21,826
Corporate depreciation and amortization 2,261 310
----------- -----------
Reported depreciation and amortization $ 21,700 $ 22,136
-----------------------------------------------------------------------------------------------------------------------
OPERATING INCOME
Total segment operating income $ 24,477 $ 45,465
Corporate expenses and other reconciling amounts (4,948) (5,296)
----------- -----------
Reported operating income $ 19,529 $ 40,169
-----------------------------------------------------------------------------------------------------------------------
ASSETS
Total segment assets $ 1,107,008 $ 1,188,179
Corporate assets and eliminations (80,765) (129,533)
----------- -----------
Reported total assets $ 1,026,243 $ 1,058,646
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
NOTE 8 - SUPPLEMENTAL GUARANTOR FINANCIAL STATEMENTS
The Guarantor Subsidiaries, which consist of the Company's principal
domestic subsidiaries, are guarantors of the Company's 7.3% senior notes due
2008 and its 9.5% senior subordinated notes due 2005. The Supplemental Guarantor
Financial Statements are presented herein pursuant to requirements of the
Commission.
<TABLE>
<CAPTION>
INTERFACE, INC. AND SUBSIDIARIES
STATEMENT OF INCOME (LOSS)
FOR THE SIX MONTHS ENDED JULY 2, 2000
INTERFACE, CONSOLIDATION
NON- INC. AND
GUARANTOR GUARANTOR (PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTALS
------------ ------------ ------------ ------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales $ 479,501 $ 190,283 $ -- $ (52,841) $ 616,943
Cost of sales 353,092 130,481 -- (52,841) 430,732
--------- --------- --------- --------- ---------
Gross profit on sales 126,409 59,802 -- -- 186,211
Selling, general and
administrative expenses 87,715 45,516 13,356 -- 146,587
Restructuring Charge 16,363 3,732 -- -- 20,095
--------- --------- --------- --------- ---------
Operating Income 22,331 10,554 (13,356) 19,529
Other expense 9,425 4,054 6,406 -- 19,885
--------- --------- --------- --------- ---------
Income before taxes on income 12,906 6,500 (19,762) -- (356)
and Equity in income of subsidiaries
Taxes on income 5,033 2,535 (6,163) -- 1,405
Equity in income of subsidiaries -- -- 11,838 (11,838) --
--------- --------- --------- --------- ---------
Net income (loss) applicable to $ 7,873 $ 3,965 $ (1,761) $ (11,838) $ (1,761)
common shareholders ========= ========= ========= ========= =========
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
BALANCE SHEET
July 2, 2000
CONSOLIDATION
NON- INTERFACE, INC. AND
GUARANTOR GUARANTOR (PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTALS
------------ ------------ ------------ ------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 3,411 $ 4,857 $ (6,378) $ -- $ 1,890
Accounts receivable 164,998 80,143 (40,327) -- 204,814
Inventories 132,621 63,063 -- -- 195,684
Miscellaneous 16,196 28,830 (8,576) -- 36,450
----------- ----------- ----------- ----------- -----------
Total current assets 317,226 176,893 (55,281) -- 438,838
Property and equipment
less accumulated depreciation 164,907 74,482 18,205 -- 257,594
Investment in subsidiaries 47,752 4,830 834,800 (887,382) 0
Other assets 2,529 5,924 51,292 -- 59,745
Excess of cost over net assets 177,135 89,386 3,545 -- 270,066
acquired ----------- ----------- ----------- ----------- -----------
$ 709,549 $ 351,515 $ 852,561 $ (887,382) $ 1,026,243
=========== =========== =========== =========== ===========
LIABILITIES AND COMMON
SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 90 $ -- $ -- $ -- $ 90
Accounts payable 52,688 37,759 (819) -- 89,628
Accrued expenses 51,214 20,540 19,844 -- 91,598
Current maturities of long-term 31 684 0 -- 715
debt ----------- ----------- ----------- ----------- -----------
Total current liabilities 104,023 58,983 19,025 -- 182,031
Long-term debt, less current
maturities 6,511 46,472 102,175 -- 155,158
Senior notes and senior
subordinated notes -- -- 275,000 -- 275,000
Deferred income taxes/other 14,790 9,076 14,733 -- 38,599
Minority interests -- 2,100 -- -- 2,100
----------- ----------- ----------- ----------- -----------
Total liabilities 125,324 116,631 410,933 -- 652,888
Redeemable preferred stock 57,891 -- -- (57,891) --
Common stock 94,145 102,199 5,903 (196,341) 5,906
Additional paid-in capital 191,411 12,525 222,373 (203,278) 223,031
Retained earnings 237,090 158,562 220,612 (389,344) 226,920
Foreign currency translation
adjustment income 3,688 (38,402) (7,260) (20,202) (62,176)
Treasury stock, 7,584,000 Class A
shares, at cost -- -- -- (20,326) (20,326)
----------- ----------- ----------- ----------- -----------
$ 709,549 $ 351,515 $ 852,561 $ (887,382) $ 1,026,243
=========== =========== =========== =========== ===========
</TABLE>
12
<PAGE>
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS
ENDED JULY 2, 2000
<TABLE>
<CAPTION>
INTERFACE, CONSOLIDATION
NON- INC. AND
GUARANTOR GUARANTOR (PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTALS
------------ ------------ ------------ ---------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net cash provided by operating activities $ 12,435 $(10,069) $ 7,116 $ -- $ 9,482
Cash flows from investing activities:
Purchase of plant and equipment (7,553) (2,711) -- -- (10,264)
Acquisitions, net of cash acquired -- -- (25,000) -- (25,000)
Other assets (5,590) 775 4,297 -- (518)
-------- -------- -------- ----- --------
Net cash provided by (used in)
investing activities (13,143) (1,936) (20,703) -- (35,782)
-------- -------- -------- ----- --------
Cash flows from financing activities:
Net borrowings (repayments) (18) 10,590 21,475 -- 32,047
Proceeds from issuance/repurchase of
common stock -- -- (1,602) -- (1,602)
Cash dividends paid -- -- (4,663) -- (4,663)
-------- -------- -------- ----- --------
Net cash provided by (used in)
financing activities (18) 10,590 15,210 -- 25,782
-------- -------- -------- ----- --------
Effect of exchange rate change on cash -- (140) -- -- (140)
-------- -------- -------- ----- --------
Net increase (decrease) in cash (726) (1,555) 1,623 -- (658)
Cash at beginning of period 4,137 6,412 (8,001) -- 2,548
-------- -------- -------- ----- --------
Cash at end of period $ 3,411 $ 4,857 $ (6,378) $ -- $ 1,890
======== ======== ======== ===== ========
</TABLE>
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward Looking Statements
This report contains statements which may constitute "forward-looking
statements" under applicable securities laws, including statements regarding the
intent, belief or current expectations of the Company and members of its
management team, as well as the assumptions on which such statements are based.
Any such forward-looking statements are not guarantees of future performance and
involve risks and uncertainties, and actual results may differ materially from
those contemplated by such forward-looking statements. Important factors
currently known to management that could cause actual results to differ
materially from those in forward-looking statements are set forth in the Safe
Harbor Compliance Statement for Forward-Looking Statements included as Exhibit
99.1 to the Company's Annual Report on Form 10-K for the fiscal year ended
January 2, 2000, and are hereby incorporated by reference. The Company
undertakes no obligation to update or revise forward-looking statements to
reflect changed assumptions, the occurrence of unanticipated events or changes
to future operating results over time.
General
The Company's revenues are derived from sales of commercial
floorcovering products (primarily modular and broadloom carpet) and related
services, interior fabrics, and architectural products and other specialty
products. During the six month period ended July 2, 2000, the Company had
revenues of $616.9 million and net income of $12.2 million, or $.24 per diluted
share, before a non-recurring, pre-tax restructuring charge of approximately $20
million ($.27 per diluted share after tax), compared to revenues of $613.3
million and $11.9 million, or $.23 per diluted share, in the comparable period
last year.
The Company's business, as well as the commercial interiors market in
general, is somewhat cyclical in nature. Several of the Company's business
segments experienced decreased demand levels over recent quarters. As a result,
the Company's results of operations were adversely affected in those quarters.
However, during the second quarter 2000, the Company began to see a rebound in
demand levels. Nevertheless, a significant sustained downturn in the market
would materially impair the Company's revenues and earnings prospects.
In the first quarter of 2000, the Company recorded a pre-tax
restructuring charge of $20.1 million. The charge reflects: (i) the
consolidation of certain administrative, manufacturing, and back-office
functions; (ii) the divestiture of certain non-strategic Re:Source Americas
operations; and (iii) the abandonment of manufacturing equipment utilized in the
production of discontinued product lines. The foregoing resulted in an aggregate
headcount reduction in the U.S. and Europe of approximately 175 people and will
result in an additional headcount reduction in the U.S., starting in the fourth
quarter, of approximately 223 people. The restructuring charge is comprised of
$9.4 million of cash expenditures for severance benefits and relocation costs
and $11.7 million of non-cash charges, primarily for the write-down of impaired
assets. The Company anticipates that the restructuring will be completed by year
end. The restructuring is expected to yield annual cost savings of approximately
$15 million.
Results of Operations
For the three-month and six-month periods ended July 2, 2000, the
Company's net sales increased $18.3 million (6.0%) and $3.6 million (1.0%)
compared with the same periods in 1999. The second quarter increase was
primarily attributable to increased sales volume in the Company's (i)
Asia-Pacific division, which continues to show improvement as the economies in
that region recover, (ii) architectural products division, driven in part by the
1998 acquisition of Atlantic Access Flooring and its line of steel panel
products, (iii) U.S. Fabrics operations, as the industry recovers from the Y2K
hangover, and due to initial sales from the furniture fabrics business of
Chatham acquired in the second quarter, and (iv) U.S. tile operations, which is
up over 20% for the comparable period in the prior year. The increase was offset
somewhat by (i) a decline in sales of broadloom carpet in the United Kingdom, as
Firth rebuilt its sales force and repositioned itself in that market by shifting
its focus to corporate accounts and reducing its emphasis on the hospitality and
transportation market segments, (ii) the selectivity of more profitable sales
opportunities in Re:Source Americas, and (iii) the continued decline of the Euro
against the U.S. dollar.
Cost of sales, as a percentage of net sales, increased to 69.9% and
69.8% for both the three-month and six-month periods ended July 2, 2000,
respectively, compared to 68.7% and 68.6% for the comparable periods in 1999.
The increase was primarily attributable to (i) the failure to fully absorb
overhead expenses, (ii) the shift in the relative mix of sales towards service
revenues, which historically have had lower gross profit margins than product
sales, and (iii) off-quality problems in the Company's broadloom operations.
14
<PAGE>
Selling, general and administrative expenses, as a percentage of net
sales, declined to 23.5% and 23.8% for the three and six month periods ended
July 2, 2000, respectively, compared to 24.7% and 24.8% in the same periods in
1999, primarily as a result of the Company's recent restructuring activities, as
well as the consolidation of certain of its operations in Interface Americas
through a "shared services" approach.
For the three-month and six-month periods ended July 2, 2000, interest
expense increased $.6 million and $.3 million, respectively, compared to the
same period in 1999, due primarily to higher overall levels of bank debt
resulting from the Chatham acquisition during the second quarter of 2000.
Liquidity and Capital Resources
The Company's primary source of cash during the six months ended July
2, 2000 was $32.0 million from long-term financing. The primary uses of cash
during the six month period ended July 2, 2000 were (i) $25.0 million for the
acquisition of the furniture fabrics assets of Chatham Manufacturing, (ii) the
reduction of accounts payables and other accrued expenses; (iii) $10.3 million
for additions to property and equipment in the Company's manufacturing
facilities, and (iv) $4.7 million for the payment of dividends. Management
believes that cash provided by operations and long-term loan commitments will
provide adequate funds for current commitments and other requirements in the
foreseeable future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a result of the scope and volume of its global operations, the
Company is exposed to an element of market risk from changes in interest rates
and foreign currency exchange rates. The Company's results of operations and
financial condition could be impacted by this risk. The Company manages its
exposure to market risk through its regular operating and financial activities
and, to the extent appropriate, through the use of derivative financial
instruments.
The Company employs derivative financial instruments as risk management
tools and not for speculative or trading purposes. The Company monitors the use
of derivative financial instruments through the use of objective measurable
systems, well-defined market and credit risk limits, and timely reports to
senior management according to prescribed guidelines. The Company has
established strict counterparty credit guidelines and only enters into
transactions with financial institutions with a rating of investment grade or
better. As a result, the Company considers the risk of counterparty default to
be minimal.
INTEREST RATE MARKET RISK EXPOSURE. Changes in interest rates affect
the interest paid on certain of the Company's debt. To mitigate the impact of
fluctuations in interest rates, management of the Company has developed and
implemented a policy to maintain the percentage of fixed and variable rate debt
within certain parameters. The Company maintains the fixed/variable rate mix
within these parameters either by borrowing on a fixed-rate basis or entering
into interest rate swap transactions. In the interest rate swaps, the Company
agrees to exchange, at specified intervals, the difference between fixed and
variable interest amounts calculated by reference to an agreed-upon notional
principal linked to LIBOR. The interest rate swap agreements generally have
maturity dates ranging from fifteen to twenty-four months.
At July 2, 2000, the Company had utilized interest rate swap agreements
to effectively convert approximately $43.7 million of variable rate debt to
fixed rate debt. The Company anticipates that for the balance of fiscal 2000 it
will utilize swap agreements or other derivative financial instruments to
convert comparable amounts of variable rate to fixed rate debt.
FOREIGN CURRENCY EXCHANGE MARKET RISK EXPOSURE. A significant portion
of the Company's operations consists of manufacturing and sales activities in
foreign jurisdictions. The Company manufactures its products in the U.S.,
Canada, England, Northern Ireland, the Netherlands, Australia and Thailand, and
sells its products in more than 100 countries. As a result, the Company's
financial results could be significantly affected by factors such as changes in
foreign currency exchange rates or weak economic conditions in the foreign
markets in which the Company distributes its products. The Company's operating
results are exposed to changes in exchange rates between the U.S. dollar and
many other currencies, including the Dutch guilder, British pound sterling,
German mark, French franc, Canadian dollar, Australian dollar, Thai baht,
Japanese yen, and, since the beginning of 1999, the euro. When the U.S. dollar
strengthens against a foreign currency, the value of anticipated sales in those
15
<PAGE>
currencies decreases, and vice-versa. Additionally, to the extent the Company's
foreign operations with functional currencies other than the U.S. dollar
transact business in countries other than the U.S., exchange rate changes
between two foreign currencies could ultimately impact the Company. Finally,
because the Company reports in U.S. dollars on a consolidated basis, foreign
currency exchange fluctuations can have a translation impact on the Company's
financial position.
To mitigate the short-term effect of changes in currency exchange rates
on the Company's sales denominated in foreign currencies, the Company regularly
hedges by entering into currency swap contracts to hedge certain firm sales
commitments denominated in foreign currencies. In these currency swap
agreements, the Company and a counterparty financial institution exchange equal
initial principal amounts of two currencies at the spot exchange rate. Over the
term of the swap contract, the Company and the counterparty exchange interest
payments in their swapped currencies. At maturity, the principal amount is
reswapped, at the contractual exchange rate. At July 2, 2000, the contracts
served to hedge firmly committed sales in Dutch guilders and Japanese yen. The
contracts generally have maturity dates of fifteen to twenty-four months.
At July 2, 2000, the Company had approximately $10.5 million (notional
amount) of foreign currency hedge contracts outstanding. The Company expects to
hedge a comparable notional amount for the balance of fiscal 2000. The Company,
as of July 2, 2000, recognized a $5.3 million increase in its foreign currency
translation adjustment account compared to January 2, 2000 because of the
weakening of certain currencies against the U.S. dollar and the transition to
the euro as the local reporting currency in Europe.
SENSITIVITY ANALYSIS. For purposes of specific risk analysis, the
Company uses sensitivity analysis to measure the impact that market risk may
have on the fair values of the Company's market sensitive instruments.
To perform sensitivity analysis, the Company assesses the risk of loss
in fair values associated with the impact of hypothetical changes in interest
rates and foreign currency exchange rates on market sensitive instruments. The
market value of instruments affected by interest rate and foreign currency
exchange rate risk is computed based on the present value of future cash flows
as impacted by the changes in the rates attributable to the market risk being
measured. The discount rates used for the present value computations were
selected based on market interest and foreign currency exchange rates in effect
at July 2, 2000. The market values that result from these computations are
compared with the market values of these financial instruments at July 2, 2000.
The differences in this comparison are the hypothetical gains or losses
associated with each type of risk.
As of July 2, 2000, based on a hypothetical immediate 150 basis point
increase in interest rates, with all other variables held constant, the market
value of the Company's fixed rate long-term debt would be impacted by a net
decrease of $15.7 million. Conversely, a 150 basis point decrease in interest
rates would result in a net increase in the market value of the Company's fixed
rate long-term debt of $25.9 million. At January 2, 2000, a 150 basis point
movement would have resulted in the same approximate changes.
As of July 2, 2000, a 10% movement in the levels of foreign currency
exchange rates against the U.S. dollar, with all other variables held constant,
would result in a decrease in the fair value of the Company's financial
instruments of $1.3 million or an increase in the fair value of the Company's
financial instruments of $1.1 million. At January 2, 2000, a 10% movement would
have resulted in the same changes. As the impact of offsetting changes in the
fair market value of the Company's net foreign investments is not included in
the sensitivity model, these results are not indicative of the Company's actual
exposure to foreign currency exchange risk.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 28, 1998, Collins & Aikman Floorcoverings, Inc. ("CAF") -- in
the wake of receiving "cease and desist" letters from the Company demanding that
CAF cease manufacturing certain carpet products that the Company believes
infringe upon certain of its copyrighted product designs -- filed a lawsuit
against the Company asserting that certain of the Company's products, primarily
its Caribbean(TM) design product line, infringed on certain of CAF's alleged
copyrighted product designs. The lawsuit, which is pending in the United States
District Court for the Northern District of Georgia, Atlanta Division, Civil
Action No. 1:98-CV-2069, seeks injunctive relief and unspecified monetary
16
<PAGE>
damages. The lawsuit also asserts other claims against the Company and certain
other parties, including for alleged tortious interference by the Company with
CAF's contractual relationship with the Roman Oakey Designs firm.
On September 28, 1998, the Company filed its answer denying all the
claims asserted by CAF, and also asserting counterclaims against CAF for
copyright infringement. The Company believes the claims asserted by CAF are
unfounded and subject to meritorious defenses, and it is defending vigorously
all the claims. Until recently (see below), discovery had been limited by Court
order to matters relating to CAF's motion for preliminary injunction. Both the
Company and CAF have filed motions for summary judgment. A Court-ordered
mediation in August, 1999 did not lead to a resolution of the disputes between
the parties.
On March 31, 2000, the Court granted partial summary judgment to the
Company and Roman Oakey Designs on all but one of CAF's copyright claims,
holding that David Oakey, not CAF, owned the designs that were the basis of
those claims. On the remaining copyright claim, which involves the Company's
very successful Caribbean product, the Court denied both the Company's and CAF's
motions for partial summary judgment, and also denied, without a hearing, CAF's
motion for preliminary injunction on this claim. The Court also ordered the
parties back into mediation and stayed all activity in the case pending its
completion. If the case is not resolved, discovery will resume on the remaining
claims in this case, including CAF's tort claims and the Company's and David
Oakey's recently asserted copyright infringement claims against CAF.
The Company's insurers have denied coverage under the Company's
insurance policies, which annually would otherwise provide up to $100 million of
coverage. On June 8, 1999, the Company filed suit against the insurers to
challenge that denial. That lawsuit is pending in the United States District
Court for the Northern District of Georgia, Atlanta Division, Civil Action No.
1:99-CV-1485, and is in the early stages of its proceedings. On January 20,
2000, the Company filed a motion for partial summary judgment to enforce the
insurer's obligation to defend the Company against the claims by CAF. The
insurer has cross-moved for summary judgment on this issue. Both motions have
been fully briefed and are pending.
Both the CAF infringement lawsuit and the Company's insurance coverage
lawsuit involve complex legal and factual issues, and while the Company believes
strongly in the merits of its legal positions, it is impossible to predict with
accuracy the outcome of either such litigation matter at this stage. The Company
intends to continue its aggressive pursuit of its positions in both actions.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its annual meeting of shareholders on May 16,
2000.
(b) Not applicable.
(c) The matters considered at the annual meeting, and the
votes cast for, against or withheld, as well as the
number of abstentions and broker non-votes, relating
to each matter, are as follows:
17
<PAGE>
(i) Election of the following directors:
<TABLE>
<CAPTION>
CLASS A FOR WITHHELD
------- --- --------
<S> <C> <C>
Dianne Dillon-Ridgley 37,115,267 3,035,249
June M. Henton 37,093,467 3,057,049
Christopher G. Kennedy 37,225,142 2,925,374
James B. Miller, Jr. 37,219,673 2,930,843
Thomas R. Oliver 37,227,242 2,923,274
CLASS B FOR WITHHELD
------- --- --------
Ray C. Anderson 3,648,703 0
Carl I. Gable 3,648,703 0
Daniel T. Hendrix 3,648,703 0
J. Smith Lanier, II 3,648,703 0
Leonard G. Saulter 3,648,703 0
Clarinus C. Th. van Andel 3,648,703 0
</TABLE>
(ii) Proposal to implement the MacBride Principles:
For: 7,383,481
Against: 24,631,540
Abstain: 5,087,323
Broker Non-Votes: 6,696,875
(d) Not applicable.
ITEM 5. OTHER INFORMATION
None.
18
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed with this report:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
3.1 Restated Articles of Incorporation (included as Exhibit 3.1 to
the Company's quarterly report on Form 10-Q for the quarter
ended July 5, 1998, previously filed with the Commission and
incorporated herein by reference).
3.2 Bylaws, as amended (included as Exhibit 3.2 to the Company's
quarterly report on Form 10-Q for the quarter ended April 1,
1990, previously filed with the Commission and incorporated
herein by reference).
4.1 See Exhibits 3.1 and 3.2 for provisions in the Company's
Articles of Incorporation and Bylaws defining the rights of
holders of Common Stock of the Company.
4.2 Rights Agreement between the Company and Wachovia Bank, N.A.,
dated as of March 4, 1998, with an effective date of March 16,
1998 (included as Exhibit 10.1A to the Company's registration
statement on Form 8-A/A dated March 12, 1998, previously filed
with the Commission and incorporated herein by reference).
4.3 Indenture governing the Company's 9.5% Senior Subordinated
Notes due 2005, dated as of November 15, 1995, among the
Company, certain U.S. subsidiaries of the Company, as
Guarantors, and First Union National Bank of Georgia, as
Trustee (included as Exhibit 4.1 to the Company's registration
statement on Form S-4, File No. 33-65201, previously filed
with the Commission and incorporated herein by reference); and
Supplement No. 1 to Indenture, dated as of December 27, 1996
(included as Exhibit 4.2(b) to the Company's Annual Report on
Form 10-K for the year ended December 29, 1996, previously
filed with the Commission and incorporated herein by
reference).
4.4 Form of Indenture governing the Company's 7.3% senior notes
due 2008, among the Company, certain U.S. subsidiaries of the
Company, as Guarantors, and First Union National Bank, as
trustee (included as Exhibit 4.1 to the Company's registration
statement on Form S-3/A, File No. 333-46611, previously filed
with the Commission and incorporated herein by reference).
10.1 Asset Purchase Agreement by and among Interface Febrics Group,
Inc., CMI Industries, Inc. and Chatham Fabrics, LLC dated as
of May 1, 2000
27.1 Financial Data Schedule (for SEC use only).
(b) No reports on Form 8-K were filed during the quarter ended
July 2, 2000.
19
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
INTERFACE, INC.
Date: August 16, 2000 By: /s/ Daniel T. Hendrix
--------------------------
Daniel T. Hendrix
Senior Vice President
(Principal Financial Officer)
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------- ----------------------
10.1 Asset Purchase Agreement by and among Interface Febrics Group,
Inc., CMI Industries, Inc. and Chatham Fabrics, LLC dated as
of May 1, 2000
27.1 Financial Data Schedule.
<PAGE>
