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 April 5, 1998
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 May 11, 1998:
Class Number of Shares
----- ----------------
Class A Common Stock, $.10 par value per share 23,262,196
Class B Common Stock, $.10 par value per share 2,840,440
1
INTERFACE, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Balance Sheets - April 5, 1998 and December 28, 1997 3
Statements of Income - Three Months Ended 4
April 5, 1998 and March 30, 1997
Statements of Comprehensive Income - Three Months Ended 4
April 5, 1998 and March 30, 1997
Statements of Cash Flows - Three Months 5
Ended April 5, 1998 and March 30, 1997
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security
Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
____________________________________
THIS FORM 10-Q CONTAINS STATEMENTS WHICH MAY CONSTITUTE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE SECURITIES ACT OF 1933 AND THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED BY THE PRIVATE SECURITIES\
LITIGATION REFORM ACT OF 1995. ANY SUCH FORWARD-LOOKING STATEMENTS
INVOLVE RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD-LOOKING
STATEMENTS, INCLUDING THE RISKS AND UNCERTAINTIES DISCUSSED 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 DECEMBER 28, 1997, WHICH DISCUSSION IS INCORPORATED
HEREIN BY THIS REFERENCE.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
ASSETS APRIL 5, DECEMBER 28,
- ------ 1998 1997
--------- ------------
CURRENT ASSETS:
Cash and Cash Equivalents $ 9,352 $ 10,212
Accounts Receivable 184,719 177,977
Inventories 191,646 157,630
Deferred Tax Asset 5,176 5,156
Prepaid Expenses 29,885 24,265
--------- ---------
TOTAL CURRENT ASSETS 420,778 375,240
PROPERTY AND EQUIPMENT, less
accumulated depreciation 239,912 228,781
EXCESS OF COST OVER NET ASSETS ACQUIRED 288,425 278,597
OTHER ASSETS 53,114 46,945
---------- --------
$1,002,229 $929,563
========== ========
LIABILITIES AND COMMON SHAREHOLDERS' EQUITY
- -------------------------------------------
CURRENT LIABILITIES:
Notes Payable $ 19,922 $ 22,264
Accounts Payable 84,553 79,279
Accrued Expenses 82,877 87,543
Current Maturities of Long-Term Debt 2,950 2,751
--------- ---------
TOTAL CURRENT LIABILITIES 190,302 191,837
LONG-TERM DEBT, less current maturities 261,261 264,499
SENIOR SUBORDINATED NOTES 125,000 125,000
DEFERRED INCOME TAXES 31,391 28,873
--------- ---------
TOTAL LIABILITIES 607,954 610,209
--------- ---------
Minority Interest 2,989 2,989
Common Stock 2,961 2,776
Additional Paid-In Capital 233,395 161,584
Retained Earnings 206,369 197,906
Accumulated Other Comprehensive Income - Foreign Currency
Translation (33,693) (28,155)
Treasury Stock, 3,600
Class A Shares, at Cost (17,746) (17,746)
--------- ---------
$1,002,229 $ 929,563
========== =========
See accompanying notes to consolidated condensed financial statements.
3
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
--------------------------
APRIL 5, MARCH 30,
1998 1997
-------- ---------
Net Sales $318,952 $257,345
Cost of Sales 211,191 174,432
-------- --------
Gross Profit on Sales 107,761 82,913
Selling, General and Administrative Expenses 80,623 62,956
-------- --------
Operating Income 27,138 19,957
Other (Expense) Income - Net (10,418) (9,543)
-------- --------
Income before Taxes on Income 16,720 10,414
Taxes on Income 6,437 4,061
-------- --------
Net Income $ 10,283 $ 6,353
======== ========
Basic Earnings Per Share $0.42 $0.28
======== ========
Diluted Earnings Per Share $0.41 $0.27
======== ========
Average Shares Outstanding -- Basic 24,279 22,584
======== ========
Average Shares Outstanding -- Diluted 25,389 23,494
======== ========
See accompanying notes to consolidated condensed financial statements.
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
--------------------------
APRIL 5, MARCH 30,
1998 1997
Net Income $10,283 $6,353
Other Comprehensive Income, Net of Tax
Foreign Currency Translation Adjustment (5,538) (10,760)
------- ---------
Comprehensive Income $ 4,745 $ (4,407)
======= =========
See accompanying notes to consolidated condensed financial statements.
4
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
-----------------------------
APRIL 5, MARCH 30,
1998 1997
-------- ---------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES: $ (8,415) $ (1,883)
-------- --------
INVESTING ACTIVITIES:
Capital expenditures (11,307) (11,878)
Acquisitions of businesses (40,853) -
Other (4,565) (3,257)
-------- --------
(56,725) (15,135)
-------- --------
FINANCING ACTIVITIES:
Net borrowing (reduction) of long-term debt (2,312) 4,455
Issuance of common stock 68,464 3,869
Dividends paid (1,820) -
-------- --------
64,332 8,324
-------- --------
Net cash provided by (used for) operating,
investing and financing activities (808) (8,694)
Effect of exchange rate changes on cash (52) (68)
-------- --------
CASH AND CASH EQUIVALENTS:
Net increase (decrease) during the period (860) (8,762)
Balance at beginning of period 10,212 8,762
-------- --------
Balance at end of period $ 9,352 $ -
======== ========
See accompanying notes to consolidated condensed financial statements.
5
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 December 28,
1997, 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:
APRIL 5, DECEMBER 28,
1998 1997
---- ----
Finished Goods $115,266 $91,016
Work in Process 34,022 29,094
Raw Materials 42,358 37,520
-------- --------
$191,646 $157,630
======== ========
NOTE 3 - BUSINESS ACQUISITIONS AND DIVESTITURES
On December 30, 1997, the Company completed the acquisition of
the European carpet businesses of Readicut International plc
("Readicut"), for an estimated $50 million, subject to final
adjustments. After the planned divestiture of certain assets of
Readicut, including its Network Flooring dealer division and
Joseph, Hamilton & Seaton Ltd., the Company's final investment
for the retained Readicut businesses are expected to be less than
$15 million. The retained businesses will include Firth Carpets
Ltd., based in Brighouse, West Yorkshire, a leading manufacturer
of high quality woven and tufted carpet primarily for the
contract markets; and a 40% interest in Vebe Floorcoverings BV,
located in the Netherlands, a leading manufacturer of needle
punch carpet.
In December 1997, the Company sold certain assets related to
the commercial manufacture of zinc diacrylate, a chemical
compound used in the production of golf balls, for $14.1 million
in cash. An immaterial gain was realized on the sale. The
Company generated 1997 sales of $7.9 million and operating income
of $1.1 million related to the manufacture of this chemical
compound.
During 1997, the Company acquired 100% of the outstanding
capital stock of five floorcovering contractors: Canaan
Corporation, based in Connecticut; Carpet Services of Tampa,
Inc., based in Florida; Facilities Resource Group, Inc., based in
Illinois; Floormart, Inc., based in California; and Carpet
Solutions Holdings Pty Ltd., based in Queensland, Australia.
These contractors are engaged primarily in the installation of
commercial floorcoverings. As consideration, the Company issued
257,584 shares of Class A Common Stock valued at approximately
$3.5 million and paid $11.1 million in cash. All 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 $17.5
million and is being amortized over 25 years.
In June 1997, the Company acquired 100% of the outstanding
common stock of Camborne Holdings, Ltd., a manufacturer of
interior fabrics based in West Yorkshire, U.K. for approximately
$19.9 million, which was comprised of $17.1 million in cash and
127,806 shares of Class B Common Stock valued at approximately
$2.8 million. The transaction was accounted for as a purchase.
The results of operations of Camborne have been included within
the consolidated financial statements since the acquisition date.
The excess of the purchase price over the fair value of the
assets was approximately $16.8 million and is being amortized
over 40 years.
6
NOTE 4 - CONCURRENT PUBLIC OFFERINGS
On April 2, 1998, the Company completed concurrent public
offerings of $150 million aggregate principal amount of 7.30%
Senior Notes due 2008 and 1.725 million shares of Class A Common
Stock. The Company intends to use the net proceeds of both
offerings of $212.7 million to reduce amounts outstanding under
its senior credit facility, and for general corporate purposes,
including working capital and future acquisitions.
NOTE 5 - EARNINGS PER SHARE AND DIVIDENDS
In March 1997, the FASB issued SFAS 128, "Earnings per Share."
The new Standard simplifies the computation of earnings per share
and requires presentation of two amounts, basic and diluted
earnings per share. As required by the Standard, the Company has
retroactively restated earnings per share data for all periods
presented.
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 24,279,000 shares and 22,584,000 shares outstanding for the
periods ended April 5, 1998 and March 30, 1997, 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
25,389,000 shares and 23,494,000 shares outstanding for the
periods ended April 5, 1998 and March 30, 1997, respectively.
For the purposes of computing earnings per common share and
dividends per common share, the Company is treating as treasury
stock (and therefore not outstanding) the shares that are owned
by a wholly-owned subsidiary (3,600,000 Class A shares recorded
at cost).
The following is a reconciliation from basic earnings per
share to diluted earnings per share for each of the periods
presented:
(In Thousands Except Per Share)
Average
Shares Earnings
Period Ended Net Income Outstanding Per Share
- --------------------------------------------------------------------------------------------------------------------
April 5, 1998 $ 10,283 24,279 $ .42
Effect of Dilution:
Options 1,110
- --------------------------------------------------------------------------------------------------------------------
Diluted $ 10,283 25,389 $ .41
=====================================================
- --------------------------------------------------------------------------------------------------------------------
March 30, 1997 $6,353 22,584 $ .28
Effect of Dilution:
Options 740
Convertible Debt 40 170
- --------------------------------------------------------------------------------------------------------------------
Diluted $6,393 23,494 $ .27
====================================================
NOTE 6 - COMPREHENSIVE INCOME
Effective the first quarter of 1998, the Company has adopted FAS
130, "Comprehensive Income". This statement has established the
standards for reporting and displaying comprehensive income and its
components (revenues, expenses, gains and losses) as part of a full set of
financial statements. This statement requires that all elements of
comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. Since
this statement applies only to the presentation of comprehensive income,
it does not have any impact upon results of operations, financial
position, or cashflows.
7
NOTE 7 - 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.
INTERFACE, INC. AND SUBSIDIARIES
NOTE 7 - SUPPLEMENTAL GUARANTOR FINANCIAL STATEMENTS
STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED APRIL 5, 1998
INTERFACE, CONSOLIDATION
NON- INC. AND
GUARANTOR GUARANTOR (PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTALS
------------ ------------ ----------- ----------- -------------
(IN THOUSANDS)
Net sales $241,245 $117,692 $ - $(39,985) $318,952
Cost of sales 174,647 76,529 - (39,985) 211,191
------- ------- --------- -------- --------
Gross profit on sales 66,598 41,163 - - 107,761
Selling, general and 50,050 24,907 5,666 - 80,623
administrative expenses ------- ------- --------- -------- --------
Operating income 16,548 16,256 (5,666) - 27,138
Other expense (income) 3,989 2,477 3,952 - 10,418
------- ------- --------- -------- --------
Income before taxes on income
and Equity in income of 12,559 13,779 (9,618) - 16,720
subsidiaries
Taxes on income 4,874 5,295 (3,732) - 6,437
Equity in income of - - 16,169 (16,169) -
subsidiaries ------- ------- --------- -------- --------
Net income applicable to $ 7,685 $ 8,484 $10,283 ($16,169) $ 10,283
common shareholders ======= ======= ========= ======== ========
8
BALANCE SHEET
APRIL 5, 1998
CONSOLIDATION
NON- INTERFACE, INC. AND
GUARANTOR GUARANTOR (PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTALS
(IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents $ 4,252 $ 6,748 $ (1,648) $ - $ 9,352
Accounts receivable 117,263 95,720 (28,264) - 184,719
Inventories 120,901 70,745 - - 191,646
Miscellaneous 9,190 19,820 6,051 - 35,061
---------- -------- ----------- ------------ ----------
Total current assets 251,606 193,033 (23,861) - 420,778
Property and equipment,
less accumulated depreciation 150,111 83,075 6,726 - 239,912
Investment in subsidiaries 138,088 15,799 373,895 (527,782) -
Other Assets 134,497 18,725 560,543 (660,651) 53,114
Excess of cost over net assets 181,397 103,192 3,836 - 288,425
acquired ---------- -------- ----------- ------------ ----------
$ 855,699 $413,824 $ 921,139 $ (1,188,433) $1,002,229
========== ======== =========== ============ ==========
LIABILITIES AND COMMON
SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 13,886 $ 6,036 $ - $ - $ 19,922
Accounts payable 35,671 48,361 521 - 84,553
Accrued expenses 43,805 52,499 (13,427) - 82,877
Current maturities of long- 1,799 1,151 - - 2,950
term debt
Total current liabilities 95,161 108,047 (12,906) - 190,302
Long-term debt, less
current maturities 240,932 78,972 344,769 (403,412) 261,261
Senior subordinated notes - - 125,000 - 125,000
Deferred income taxes 15,010 7,780 8,601 - 31,391
---------- -------- ----------- ------------ ----------
Total liabilities 351,103 194,799 465,464 (403,412) 607,954
Minority interests - 2,989 - - 2,989
Redeemable preferred stock 57,891 - - (57,891) -
Common stock 93,889 102,199 2,961 (196,088) 2,961
Additional paid-in capital 189,740 11,030 233,395 (200,770) 233,395
Retained earnings 165,712 130,603 222,580 (312,526) 206,369
Accumulated Other Comprehensive (2,636) (27,796) (3,261) - (33,693)
Income
Treasury stock - - - (17,746) (17,746)
---------- -------- ----------- ------------ ----------
$ 855,699 $413,824 $ 921,139 $ (1,188,433) $1,002,229
========== ======== =========== ============ ==========
9
STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS
ENDED APRIL 5, 1998
INTERFACE, CONSOLIDATION
NON- INC. AND
GUARANTOR GUARANTOR (PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTALS
------------ ------------ ------------ -------------- ------------
(IN THOUSANDS)
Cash flows from operating activities: $ 6,422 $( 29,163) $ 14,326 $ - $(8,415)
------- --------- --------- -------- -------
Cash flows from investing activities:
Purchase of plant and equipment (6,074) (5,088) (145) - (11,307)
Acquisitions, net of cash acquired - - (40,853) - (40,853)
Other - - (4,565) - (4,565)
------- --------- --------- -------- -------
Net cash provided by (used in) investing (6,074) (5,088) (45,563) - (56,725)
activities ------- --------- --------- -------- -------
Cash flows from financing activities:
Net borrowings (repayments) (457) 34,549 (36,404) - (2,312)
Proceeds from issuance of common - - 68,464 - 68,464
stock
Cash dividends paid - - (1,820) - (1,820)
Other - - - - -
------- --------- --------- -------- -------
Net cash provided by (used in) (457) 34,549 30,240 - 64,332
financing activities ------- --------- --------- -------- -------
Effect of exchange rate change on - (52) - - (52)
cash ------- --------- --------- -------- -------
Net increase (decrease) in cash (109) 246 (997) - (860)
Cash at beginning of year 4,361 6,502 (651) - 10,212
------- --------- --------- -------- -------
Cash at end of year $ 4,252 $ 6,748 $ (1,648) $ - $ 9,352
======= ========== ========= ======== =======
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS General
The Company's revenues are derived from sales of commercial
floorcovering products (primarily modular and broadloom carpet)
and related services, interior fabrics and specialty products.
During the quarter ended April 5, 1998 (which was a 14-week period),
the Company had revenues and net income of $319.0 million and $10.3
million, respectively, the highest in the Company's history.
The Company's business, as well as the commercial interiors
market in general, is somewhat cyclical in nature. The Company's
strong financial performance in recent years is attributable inpart
to increased U.S. demand for its products, resulting from a recovery
in the U.S. commercial office market which began in the mid-1990's.
The Company believes that this recovery will continue for a number of
years, and that all of its domestic operations will continue to benefit
from these industry developments. However, a downturn in the market
could lessen the overall demand for commercial interiors products and
could impair the Company's growth. Management believes that the impact upon
the Company of such a downturn would be less pronounced given that the
predominant portion of its sales are generated from the renovations sector
of the market as opposed to the new construction sector.
The Company's growth could also be impacted by international
developments. Specifically, countries in the Asia-Pacific region have
recently experienced weaknesses in their currency, banking and equity
markets. These weaknesses could adversely affect demand for the
Company's products. However, excluding Japan and Australia, sales in the
Asia-Pacific region represented only 1%of the Company's sales during the
quarter ended April 5, 1998. The Company engages in hedging transactions
to reduce its exposure to adverse fluctuations in foreign currency
exchange rates.
RESULTS OF OPERATIONS
For the quarter ended April 5, 1998, the Company's net sales increased
$61.6 million, or 24%, compared with the first quarter of 1997, which was
a 13-week period. The increase was attributable to increased sales
volume (i) of products and related services in the Company's U.S.
floorcovering operations, due to increased demand for and increased
market share of its modular carpet products, as well as additional sales
generated by the Re:Source Americas network, (ii) of floorcovering
products in Europe due in part to the acquisition of Firth Carpets early
in the quarter, and (iii) in the Company's interior fabrics operations
due to increased U.S. and foreign demand for and increased market share
of its fabric products, as well as the acquisition of Camborne Holdings,
Ltd. during 1997. These increases were offset somewhat by (i) decreased
sales volume in the Company's Asia-Pacific division due to the economic
turmoil in Asia, and (ii) a weakening of certain key currencies
(particularly the Dutch guilder) against the U.S. dollar, the Company's
reporting currency.
Cost of sales as a percentage of sales decreased to 66.2% in the
quarter ended April 5, 1998 compared to 67.8% in the same period in 1997.
The decrease was attributable to (i) economies of scale associated with
increased sales volume in the Company's floorcovering and interior
fabrics operations, and (ii) decreased manufacturing costs in the
Company's floorcovering and interior fabrics operations through the
Company's mass customization production strategy and its "war-on-waste"
initiative. The Company's interior fabrics business also experienced
decreased manufacturing costs as a result of continued efficiencies
generated from the new, state-of-the-art yarn manufacturing facility in
Guilford, Maine. These benefits were somewhat offset by the higher cost
of sales of the dealers comprising the Re:Source Americas network.
Selling, general and administrative expenses, as a percentage of net
sales, increased to 25.3% in the quarter ended April 5, 1998 compared to
24.5% in the same period in 1997. The increase was attributable
primarily to (i) the continued development of the Re:Source Americas
network infrastructure and (ii) consulting and development expenses
associated with the Year 2000 initiative. The increase was somewhat
offset by the lower SG&A ratios of the dealers comprising the Re:Source
Americas network.
Other expense increased $0.9 million in the first quarter of 1998
compared to the first quarter of 1997, due primarily to an increase in
bank debt incurred as a result of the Company's acquisitions.
11
As a result of the aforementioned factors, the Company's net income
increased 62% to $10.3 million for the quarter ended April 5, 1998,
compared to $6.4 for the same period in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash during the quarter ended
April 5, 1998 were proceeds from issuance of securities and funds
provided by operating activities. During the quarter, the Company
completed concurrent public offerings of $150 million aggregate principal
amount of 7.30% Senior Notes due 2008 and 1.725 million shares of Class A
Common Stock. The Company intends to use the net proceeds of both
offerings of $212.7 million to reduce amounts outstanding under its
senior credit facility, and for general corporate purposes, including
working capital and future acquisitions. Amounts applied to the
revolving credit portion of the facility will be available for
reborrowing.
The primary uses of cash during the quarter ended April 5,1998 were
(i) $40 million associated with acquisitions and (ii) $11 million for
additions to property and equipment in the Company's manufacturing
facilities.
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.
YEAR 2000
As is the case with other companies using computers in their
operations, the Company is faced with the task of addressing the Year
2000 issue during the next seven quarters. The Year 2000 issue arises
from the widespread use of computer programs that rely on two-digit codes
to perform computations or decision-making functions. The Company has
done a comprehensive review of its computer programs to identify the
systems that would be affected by the Year 2000 issue, and is in the
process of reviewing, on a global basis, the Company's Year 2000 position
and exposure to third party customers, distributors, suppliers, and
banking institutions. The Company has also hired an outside consulting
firm to assist in this conversion process and is beginning the process of
modifying its computer program code to the four digit fields necessary to
be Year 2000 ready.
The Company currently estimates the total cost of such modifications,
excluding the cost of modifications to program logic control systems
relative to manufacturing equipment, to be at least $19 million, although
it could be significantly more. The Company and its outside consultants
are currently evaluating the costs of modifications to these program
logic control systems. Of the total project cost, approximately $10
million is attributable to the cost of new hardware and software which
will be required in connection with the global consolidation of the
Company's management and financial accounting systems. This new
equipment and upgraded technology will have a definable value lasting
beyond the Year 2000. In these instances, where Year 2000 compliance is
ancillary, the Company intends to capitalize and depreciate such costs.
The remaining $9 million (based on current estimates) will be expensed as
incurred. During the quarter ended April 5, 1998, the Company expensed
approximately $1.0 million in regards to such modifications. There can
be no guarantee that these estimates will be achieved and actual results
could differ from those anticipated. Specific factors that might cause
differences include, but are not limited to, the ability of suppliers,
customers and other companies on which the Company's systems rely to
modify or convert their systems to be Year 2000 ready, the ability to
locate and correct all relevant computer codes and similar uncertainties.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company employs the use of derivative financial instruments for
the purpose of reducing its exposure to adverse fluctuations in interest
and foreign currency exchange rates. While these hedging instruments are
subject to fluctuations in value, such fluctuations are generally offset
by the fluctuations in value of the underlying exposures being hedged.
The Company does not hold or issue derivative financial instruments
for 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 of investment grade or better.
As a result, the Company considers the risk of counterparty default to be
minimal.
12
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 enters into interest rate swap agreements, which
maintain the fixed/variable mix within these defined parameters. In
these 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 (London
Interbank Offered Rate). At April 5, 1998, the Company had utilized
interest rate swap agreements to effectively convert approximately $64.5
million of variable rate debt to fixed rate debt. The weighted average
rate on these borrowings was 6.6% at April 5, 1998. The interest rate
swap agreements have maturity dates ranging from five to twenty-four
months.
The purpose of the Company's foreign currency hedging activities is
to reduce the risk that the eventual local currency inflows resulting
from sales to foreign customers will be adversely affected by changes in
exchange rates. The Company enters into forward exchange and currency
swap contracts to hedge certain firm sales commitments denominated in
foreign currencies. At April 5, 1998, the Company had approximately $14.5
million (notional amount) of foreign currency hedge contracts
outstanding. The contracts served to hedge firmly committed Dutch
guilder, German mark, Japanese yen, French franc, British pound sterling,
and other foreign currency revenues. The contracts generally have
maturity dates of six to nine months.
The Company, as of April 5, 1998, recognized a $5.5 million increase
in its foreign currency translation adjustment account compared to
December 27, 1998, because of the weakening of the Dutch guilder and
certain other currencies against the U.S. dollar. The increase was
associated primarily with the Company's investments in certain foreign
subsidiaries located in Continental Europe. The translation adjustment
to shareholders' equity was converted by the guidelines of the Financial
Accounting Standards Board's Statement of Financial Accounting Standards
No. 52.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.
Not applicable.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not aware of any material pending legal
proceedings involving it or any of its property.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On February 24, 1998, the Company's Board of Directors declared a
dividend of one preferred share purchase right (a "Right") for each share
of Common Stock of the Company. Each Right entitles the registered
holder to purchase from the Company one one-hundredth (1/100) of a share
of Series B Participating Cumulative Preferred Stock (the "Preferred
Shares"), of the Company at a price of $180.00 per one one-hundredth of a
Preferred Share (the "Purchase Price"), subject to adjustment to the
exercise price and the number of Preferred Shares issuable upon exercise
from time to time to prevent dilution. The Rights are not exercisable
until the earlier to occur of (i) 10 days following a public announcement
that a person or group of affiliated or associated persons (an "Acquiring
Person") have acquired beneficial ownership of 15% or more of the
outstanding Common Stock or (ii) 10 business days following the
commencement of, or announcement of an intention to make, a tender offer
or exchange offer the consummation of which would result in the
beneficial ownership by a person or group of 15% or more of the
outstanding shares of Common Stock (the earlier of such dates being
called the "Distribution Date").
In the event that the Company is acquired in a merger or other
business combination transaction or 50% or more of its consolidated
assets or earning power is sold after a person or group has become an
Acquiring Person, proper provision will be made so that each holder of a
Right will thereafter have the right to receive, upon the exercise
thereof at the then current exercise price of the Right, that number of
shares of common stock of the acquiring company which at the time of such
transaction will have a market value of two times the exercise price of
the Right. In the event that any person or group of affiliated or
associated persons becomes an Acquiring Person, proper provision shall be
made so that each holder of a Right, other than Rights beneficially owned
by the Acquiring Person (which will thereafter be void), will thereafter
have the right to receive upon exercise that number of shares of Common
Stock having a market value of two times the exercise price of the Right.
13
Preferred Shares purchasable upon exercise of the Rights will
not be redeemable. Each Preferred Share will be entitled to a minimum
preferential quarterly dividend payment of $1.00 per share but will be
entitled to an aggregate dividend of 100 times the dividend declared per
share of Common Stock. In the event of liquidation, the holders of the
Preferred Shares will be entitled to a minimum preferential liquidation
payment of $100.00 per share but will be entitled to an aggregate payment
of 100 times the payment made per share of Common Stock. Each Preferred
Share will have 100 votes, voting together with the shares of Common
Stock. Finally, in the event of any merger, consolidation or other
transaction in which shares of Common Stock are exchanged, each Preferred
Share will be entitled to receive 100 times the amount received per share
of Common Stock. These rights are protected by customary antidilution
provisions.
Prior to the Distribution Date, the Rights may not be detached or
transferred separately from the Common Stock. The Rights will expire on
March 15, 2008 (the "Final Expiration Date"), unless the Final Expiration
Date is extended or unless the Rights are earlier redeemed or exchanged
by the Company. At any time prior to the acquisition by a person or
group of affiliated or associated persons of beneficial ownership of 15%
or more of the outstanding Common Stock, the Board of Directors of the
Company may redeem the Rights in whole, but not in part, at a price of
$0.01 per Right (the "Redemption Price"). Immediately upon any
redemption of the Rights, the right to exercise the Rights will terminate
and the only right of the holders of Rights will be to receive the
Redemption Price. A more detailed description and terms of the Rights
are set forth in a Rights Agreement between the Company and Wachovia
Bank, N.A. as Rights Agent.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed with this report:
EXHIBIT DESCRIPTION OF EXHIBIT
NUMBER
3.1 Composite Articles of Incorporation (included as Exhibit
4.1 to the Company's current report on Form 8-K dated
March 4, 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, as amended, and Bylaws defining the
rights of holders of Common Stock of the Company.
14
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 Amendment to Employment Agreement of Ray C. Anderson dated
January 6, 1998
10.2 Amendment to Change in Control Agreement of Ray C. Anderson
dated January 6, 1998.
10.3 Amendment to Employment Agreement of Charles R. Eitel dated
January 6, 1998.
10.4 Amendment to Change in Control Agreement of Charles R. Eitel
dated January 6, 1998.
10.5 Amendment to Employment Agreement of Brian L. DeMoura dated
January 6, 1998.
10.6 Amendment to Change in Control Agreement of Brian L. DeMoura
dated January 6, 1998.
10.7 Amendment to Employment Agreement of Daniel T. Hendrix dated
January 6, 1998.
10.8 Amendment to Change in Control Agreement of Daniel T. Hendrix
dated January 6, 1998.
10.9 Amendment to Employment Agreement of Gordon D. Whitener dated
January 6, 1998.
10.10 Amendment to Change in Control Agreement of Gordon D. Whitener
dated January 6, 1998.
10.11 Amendment to Employment Agreement of Raymond S. Willoch dated
January 6, 1998.
10.12 Amendment to Change in Control Agreement of Raymond S. Willoch
dated January 6, 1998.
10.13 Amendment to Employment Agreement of Jeffrey A. Goldberg dated
January 6, 1998.
10.14 Amendment to Change in Control Agreement of Jeffrey A. Goldberg
dated January 6, 1998.
10.15 Amendment to Employment Agreement of Alan S. Kabus dated
January 6, 1998.
10.16 Amendment to Change in Control Agreement of Alan S. Kabus dated
January 6, 1998.
10.17 Amendment to Employment Agreement of Joyce D. LaValle dated
January 6, 1998.
15
10.18 Amendment to Change in Control Agreement of Joyce D. LaValle
dated January 6, 1998.
10.19 Amendment to Employment Agreement of John H. Walker dated
January 6, 1998.
10.20 Amendment to Change in Control Agreement of John H. Walker dated
January 6, 1998.
10.21 Amendment to Employment Agreement of John L. Partridge dated
January 6, 1998.
10.22 Amendment to Change in Control Agreement of John L. Partridge
dated January 6, 1998.
10.23 Amendment to Employment Agreement of John R. Wells dated January 6, 1998.
10.24 Amendment to Change in Control Agreement of John R. Wells dated
January 6, 1998.
10.25 Amendment to Employment Agreement of Michael D. Bertolucci dated
January 6, 1998.
10.26 Amendment to Change in Control Agreement of Michael D. Bertolucci
dated January 6, 1998.
10.27 Form of Salary Continuation Agreement.
10.28 Consent and Waiver, dated as of March 20, 1998, related to (i)
Second Amended and Restated Credit Agreement, dated as of June 25,
1997, among the Company, Interface Europe B.V., Interface
Europe, Ltd., the lenders listed therein, SunTrust Bank, Atlanta
and the First National Bank of Chicago; and (ii) Term Loan
Agreement, dated as of June 25, 1997, among the Company, the
lenders listed therein, SunTrust Bank, Atlanta and the First
National Bank of Chicago. 10.29 Agreement for the sale and purchase
of the entire issued share capital of T. F. Firth & Sons Limited, Tayrich
Limited and Vebe Floorcoverings B.V., dated as of December 5, 1997, among
Readicut International PLC, Readicut Netherlands B.V., Interface
Europe Ltd. And Interface Europe B.V.
27.1 Financial Data Schedule (for SEC use only).
(b) The following reports on Form 8-K were filed during the
quarter ended April 5, 1998.
Date Filed Items Reported Financial Statements Filed
---------- --------------- --------------------------
March 4, 1998 Adoption of Shareholder None
Rights Plan
March 17, 1998 Commencement of Concurrent Consolidated Balance Sheets of
Public Offerings the Company and subsidiaries
as of December 28, 1997 and December 29, 1996; and
related consolidated statements of income and cash
flows for each of the three years in the period ended
December 28, 1997
April 3, 1998 Closing of Concurrent Public None
Offerings
16
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: May 14, 1998 By: /s/ Daniel T. Hendrix
Daniel T. Hendrix
Senior Vice President
(Principal Financial Officer)
17
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------- ----------------------
10.1 Amendment to Employment Agreement of Ray C. Anderson dated January 6, 1998.
10.2 Amendment to Change in Control Agreement of Ray C. Anderson dated January 6, 1998.
10.3 Amendment to Employment Agreement of Charles R. Eitel dated January 6, 1998.
10.4 Amendment to Change in Control Agreement of Charles R. Eitel dated January 6, 1998.
10.5 Amendment to Employment Agreement of Brian L. DeMoura dated January 6, 1998.
10.6 Amendment to Change in Control Agreement of Brian L. DeMoura dated January 6, 1998.
10.7 Amendment to Employment Agreement of Daniel T. Hendrix dated January 6, 1998.
10.8 Amendment to Change in Control Agreement of Daniel T. Hendrix dated January 6, 1998.
10.9 Amendment to Employment Agreement of Gordon D. Whitener dated January 6, 1998.
10.10 Amendment to Change in Control Agreement of Gordon D. Whitener dated January 6, 1998.
10.11 Amendment to Employment Agreement of Raymond S. Willoch dated January 6, 1998.
10.12 Amendment to Change in Control Agreement of Raymond S. Willoch dated January 6, 1998.
10.13 Amendment to Employment Agreement of Jeffrey A. Goldberg dated January 6, 1998.
10.14 Amendment to Change in Control Agreement of Jeffrey A. Goldberg dated January 6, 1998.
10.15 Amendment to Employment Agreement of Alan S. Kabus dated January 6, 1998.
10.16 Amendment to Change in Control Agreement of Alan S. Kabus dated January 6, 1998.
10.17 Amendment to Employment Agreement of Joyce D. LaValle dated January 6, 1998.
10.18 Amendment to Change in Control Agreement of Joyce D. LaValle dated January 6, 1998.
10.19 Amendment to Employment Agreement of John H. Walker dated January 6, 1998.
10.20 Amendment to Change in Control Agreement of John H. Walker dated January 6, 1998.
10.21 Amendment to Employment Agreement of John L. Partridge dated January 6, 1998.
10.22 Amendment to Change in Control Agreement of John L. Partridge dated January 6, 1998.
10.23 Amendment to Employment Agreement of John R. Wells dated January 6, 1998.
10.24 Amendment to Change in Control Agreement of John R. Wells dated January 6, 1998.
10.25 Amendment to Employment Agreement of Michael D. Bertolucci dated January 6, 1998.
10.26 Amendment to Change in Control Agreement of Michael D. Bertolucci dated January 6, 1998.
10.27 Form of Salary Continuation Agreement.
10.28 Consent and Waiver, dated as of March 20, 1998, related to (i) Second Amended and
Restated Credit Agreement, dated as of June 25, 1997, among the Company, Interface
Europe B.V., Interface Europe, Ltd., the lenders listed therein, SunTrust Bank,
Atlanta and the First National Bank of Chicago; and (ii) Term Loan Agreement, dated as
of June 25, 1997, among the Company, the lenders listed therein, SunTrust Bank, Atlanta
and the First National Bank of Chicago.
10.29 Agreement for the sale and purchase of the entire issued share
capitals of T. F. Firth & Sons Limited, Tayrich Limited and Vebe
Floorcoverings B.V., dated as of December 5, 1997, among
Readicut International PLC, Readicut Netherlands B.V., Interface Europe Ltd.
And Interface Europe B.V.
27.1 Financial Data Schedule.