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 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
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(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 12, 1998:
Class Number of Shares
----- ----------------
Class A Common Stock, $.10 par value per share 46,707,733
Class B Common Stock, $.10 par value per share 5,710,106
INTERFACE, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Balance Sheets - July 5, 1998 and 3
December 28, 1997
Statements of Income - Three Months and 4
Six Months Ended
July 5, 1998 and June 29, 1997
Statements of Comprehensive Income - 4
Three Months and Six Months Ended July 5,
1998 and June 29, 1997
Statements of Cash Flows - Six Months 5
Ended July 5, 1998 and June 29, 1997
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of 11
Financial Condition and Results of
Operations
Item 3. Quantitative and Qualitative 13
Disclosures about Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of 14
Security Holders
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
ASSETS JULY 5, DECEMBER 28,
- ------ 1998 1997
-------- ------------
CURRENT ASSETS:
Cash and Cash Equivalents $ 10,633 $ 10,212
Accounts Receivable 201,690 177,977
Inventories 191,446 157,630
Deferred Tax Asset 5,176 5,156
Prepaid Expenses 35,887 24,265
---------- --------
TOTAL CURRENT ASSETS 444,832 375,240
PROPERTY AND EQUIPMENT, less
accumulated depreciation 244,094 228,781
EXCESS OF COST OVER NET ASSETS ACQUIRED 287,894 278,597
OTHER ASSETS 48,457 46,945
---------- --------
$1,025,277 $929,563
========== ========
LIABILITIES AND COMMON SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes Payable $ 27,726 $ 22,264
Accounts Payable 77,622 79,279
Accrued Expenses 83,634 87,543
Current Maturities of Long-Term Debt 2,887 2,751
---------- --------
TOTAL CURRENT LIABILITIES 191,869 191,837
LONG-TERM DEBT, less current maturities 268,194 264,499
SENIOR SUBORDINATED NOTES 125,000 125,000
DEFERRED INCOME TAXES 31,975 28,873
---------- --------
TOTAL LIABILITIES 617,038 610,209
---------- --------
Minority Interest 2,989 2,989
Common Stock 5,593 2,776
Additional Paid-In Capital 233,221 161,584
Retained Earnings 216,079 197,906
Accumulated Other Comprehensive Income - Foreign Currency
Translation (31,897) (28,155)
Treasury Stock, 7,200
Class A Shares, at Cost (17,746) (17,746)
---------- --------
$1,025,277 $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 SIX MONTHS ENDED
JULY 5, JUNE 29, JULY 5, JUNE 29,
1998 1997 1998 1997
---- ---- ---- ----
Net Sales $ 316,864 $ 271,746 $ 635,816 $ 529,091
Cost of Sales 211,218 182,342 422,409 356,774
--------- --------- --------- ---------
Gross Profit on Sales 105,646 89,404 213,407 172,317
Selling, General and Administrative Expenses 77,577 66,855 158,200 129,811
--------- --------- --------- ---------
Operating Income 28,069 22,549 55,207 42,506
Other (Expense) Income - Net (9,072) (9,606) (19,490) (19,149)
--------- --------- --------- ---------
Income before Taxes on Income 18,997 12,943 35,717 23,357
Taxes on Income 7,333 4,983 13,770 9,044
--------- --------- --------- ---------
Net Income $ 11,664 $ 7,960 $ 21,947 $ 14,313
========= ========= ========= =========
Basic Earnings Per Share .22 .17 .43 .31
========= ========= ========= =========
Diluted Earnings Per Share .22 .17 .42 .31
========= ========= ========= =========
Average Shares Outstanding -- Basic 52,183 47,240 51,099 46,204
========= ========= ========= =========
Average Shares Outstanding -- Diluted 54,015 48,150 52,930 47,856
========= ========= ========= =========
See accompanying notes to consolidated condensed financial statements.
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED SIX MONTH ENDED
JULY 5, JUNE 29, JULY 5, JUNE 29,
1998 1997 1998 1997
---- ---- ---- ----
Net Income $ 11,664 $ 7,960 $ 21,947 $ 14,313
Other Comprehensive Income, Net of Tax
Foreign Currency Translation Adjustment 1,796 (4,692) (3,742) (15,452)
--------- --------- --------- ---------
Comprehensive Income $ 13,460 $ 3,268 $ 18,205 $ (1,139)
========= ========= ========= =========
See accompanying notes to consolidated condensed financial statements.
4
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JULY 5, JUNE 29,
1998 1997
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES: $(6,361) $20,003
------- -------
INVESTING ACTIVITIES:
Capital expenditures (20,831) (22,038)
Acquisitions of businesses (42,559) (14,468)
Other (3,347) (4,366)
------- -------
(66,737) (41,102)
------- -------
FINANCING ACTIVITIES:
Net borrowing (reduction) of long-term debt 8,487 16,086
Issuance of common stock 69,581 9,458
Dividends paid (3,774) (3,061)
------- -------
74,294 22,483
------- -------
Net cash provided by (used for) operating,
investing and financing activities 1,196 1,384
Effect of exchange rate changes on cash (775) (330)
------- -------
CASH AND CASH EQUIVALENTS:
Net increase (decrease) during the period 421 1,054
Balance at beginning of period 10,212 8,762
------- -------
Balance at end of period $10,633 $ 9,816
======= =======
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:
JULY 5, DECEMBER 28,
1998 1997
---- ----
Finished Goods $119,505 $91,016
Work in Process 31,446 29,094
Raw Materials 40,495 37,520
-------- --------
$191,446 $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 four floorcovering contractors: Canaan Corporation, based in
Connecticut; Carpet Services of Tampa, Inc., based in Florida; 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. The Company also acquired
100% of the outstanding capital stock of Facilities Resource Group, Inc.,
an office furniture installation company. As consideration, the Company
issued 515,168 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 255,612 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 3.450 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 - STOCK SPLIT
On June 15, 1998, the Company paid a two-for-one stock split,
effected in the form of a 100% stock dividend, to all common shareholders
of record as of June 1, 1998. In connection with the stock split, the
Company issued 26,079,136 shares of Common Stock in the aggregate. All
references to shares of the Company's Common Stock contained elsewhere in
these Notes have been retroactively adjusted to reflect the stock split.
NOTE 6 - 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 51,099 shares and 46,204 shares outstanding for the
periods ended July 5, 1998 and June 29, 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 52,930 shares and 47,284 shares
outstanding for the periods ended July 5, 1998 and June 29, 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 (7,200,000 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
For the Six-Month Shares Earnings
Period Ended Net Income Outstanding Per Share
- --------------------------------------------------------------------------------------------------------------
July 5, 1998 $ 21,947 51,099 $ .43
Effect of Dilution:
Options -- 1,831
-----------------------------------------------------
Diluted $ 21,947 52,930 $ .42
=====================================================
- --------------------------------------------------------------------------------------------------------------
June 29, 1997 $ 14,313 46,204 $ .31
Effect of Dilution:
Options -- 910
Convertible Debt 80 170
-----------------------------------------------------
Diluted $ 14,393 47,284 $ .31
=====================================================
7
NOTE 7 - 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 cash flows.
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.
INTERFACE, INC. AND SUBSIDIARIES
NOTE 7 - SUPPLEMENTAL GUARANTOR FINANCIAL STATEMENTS
STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JULY 5, 1998
INTERFACE, CONSOLIDATION
NON- INC. AND
GUARANTOR GUARANTOR (PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTALS
------------ ------------ ------------ ------------- ------------
(IN THOUSANDS)
Net sales $484,521 $225,200 $ - $ (73,905) $635,816
Cost of sales 341,474 154,840 - (73,905) 422,409
-------- -------- ----------- --------- --------
Gross profit on sales 143,047 70,360 - - 213,407
Selling, general and 101,255 44,425 12,520 - 158,200
administrative -------- -------- ----------- --------- --------
expenses
Operating income 41,792 25,935 (12,520) - 55,207
Other expense (income) 9,218 3,675 6,597 - 19,490
-------- -------- ----------- --------- --------
Income before taxes on income 32,574 22,260 (19,117) 35,717
and Equity in income of -
subsidiaries
Taxes on income 12,541 8,570 (7,341) - 13,770
Equity in income of - - 33,723 (33,723) -
subsidiaries -------- -------- ----------- --------- --------
Net income applicable to $ 20,033 $ 13,690 $ 21,947 $ (33,723) $ 21,947
common shareholders ======== ======== =========== ========= ========
8
BALANCE SHEET
JULY 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 $ 4,731 $ 5,866 $ 36 $ - $ 10,633
Accounts receivable 128,093 94,609 (21,012) - 201,690
Inventories 120,601 70,845 - - 191,446
Miscellaneous 10,487 23,236 7,340 - 41,063
-------- -------- -------- ------------ ----------
Total current assets 263,912 194,556 (13,636) - 444,832
Property and equipment,
less accumulated depreciation 151,503 84,415 8,176 - 244,094
Investment in subsidiaries 138,088 15,799 373,895 (527,782) -
Other Assets 166,181 14,607 570,054 (702,385) 48,457
Excess of cost over net assets
acquired 179,947 103,480 4,467 - 287,894
-------- -------- -------- ------------ ----------
$899,631 $412,857 $942,956 $(1,230,167) $1,025,277
======== ======== ======== =========== ==========
LIABILITIES AND COMMON
SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 15,086 $ 12,640 $ - $ - $ 27,726
Accounts payable 37,494 38,780 1,348 - 77,622
Accrued expenses 55,592 41,448 (13,406) - 83,634
Current maturities of long-
term debt 1,739 1,148 - - 2,887
-------- -------- -------- ------------ ----------
Total current liabilities 109,911 94,016 (12,058) - 191,869
Long-term debt, less
current maturities 249,914 75,743 341,873 (399,336) 268,194
Senior subordinated notes - - 125,000 - 125,000
Deferred income taxes 15,055 8,319 8,601 - 31,975
-------- -------- -------- ------------ ----------
Total liabilities 374,880 178,078 463,416 (399,336) 617,038
Minority interests - 2,989 - - 2,989
Redeemable preferred stock 57,891 - - (57,891) -
Common stock 93,889 102,199 5,593 (196,088) 5,593
Additional paid-in capital 189,740 11,030 233,221 (200,770) 233,221
Retained earnings 185,745 144,293 244,377 (358,336) 216,079
Accumulated Other Comprehensive
Income (2,514) (25,732) (3,651) - (31,897)
Treasury stock - - - (17,746) (17,746)
-------- -------- -------- ------------ ----------
$899,631 $412,857 $942,956 $(1,230,167) $1,025,277
======== ======== ======== =========== ==========
9
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS
ENDED JULY 5, 1998
INTERFACE, CONSOLIDATION
NON- INC. AND
GUARANTOR GUARANTOR (PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTALS
(IN THOUSANDS)
Cash flows from operating activities: $10,876 $10,984 $(28,221) $ - $ (6,361)
------- ------- -------- ------------- --------
Cash flows from investing activities:
Purchase of plant and equipment (12,641) (7,616) (574) - (20,831)
Acquisitions, net of cash acquired - - (42,559) - (42,559)
Other - - (3,347) - (3,347)
------- ------- -------- ------------- --------
Net cash provided by (used in)
investing activities (12,641) (7,616) (46,480) - $(66,737)
------- ------- -------- ------------- --------
Cash flows from financing activities:
Net borrowings (repayments) 2,135 (3,229) 9,581 - 8,487
Proceeds from issuance of common - - 69,581 - 69,581
stock
Cash dividends paid - - (3,774) - (3,774)
Net cash provided by (used in)
financing activities 2,135 (3,229) 75,388 - 74,294
------- ------- -------- ------------- --------
Effect of exchange rate change on - (775) - - (775)
cash ------- ------- -------- ------------- --------
Net increase (decrease) in cash 370 (636) 687 - 421
Cash at beginning of year 4,361 6,502 (651) - 10,212
------- ------- -------- ------------- --------
Cash at end of year $ 4,731 $ 5,866 $ 36 $ - $ 10,633
======= ======= ======= ============= ========
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 July 5, 1998, the
Company had revenues and net income of $316.9 million and $11.7
million, respectively.
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 in part 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. Demand for the Company's products
in the U.S. continues to be very strong. 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 2% of the Company's sales during the quarter
ended July 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 three month and six month periods ended July 5,
1998, the Company's net sales increased $45.2 million (16.6%) and
$106.7 million (20.2%), respectively, compared with the same
periods in 1997. These increases were primarily 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 and
broadloom 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 first quarter of 1998, 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 June 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, (ii) a weakening of certain
key currencies (particularly the Dutch guilder) against the U.S.
dollar, the Company's reporting currency, and (iii) decreased
sales volume in the Company's architectural products division.
Cost of sales, as a percentage of sales, decreased to
66.7% and 66.4%, respectively, for the three month and six month
periods ended July 5, 1998, when compared to 67.1% and 67.4% for
the same periods in 1997. The decrease was attributable to (i)
increased profitability in the Company's Interface Americas
Workplace Solutions unit (comprised of the Re:Source Americas
network and the Company's other service businesses), (ii)
economies of scale associated with increased sales volume in the
Company's floorcovering and interior fabrics operations, and
(iii) 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.
Selling, general and administrative expenses, as a
percentage of net sales, decreased to 24.5% in the quarter ended
July 5, 1998 compared to 24.6% in the same period in 1997,
primarily as a result of improved cost containment measures
worldwide in the second quarter. However, the SG&A cost-to-sales
ratio increased to 24.9% in the six-month period ended July 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.
Other expense decreased $0.5 million in the second quarter
of 1998 compared to the second quarter of 1997, due primarily to
a reduction in bank debt as a result of the application of the
proceeds of the Company's public offering of Class A Common Stock
early in the quarter. However, other expense increased $0.3
million in the first six months of 1998 compared to the first six
months of 1997, due primarily to higher overall levels of 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 46.5% to $11.7 million and 53.3% to $21.9
million, respectively, for the three month and six month periods
ended July 5, 1998, compared to the same periods in 1997.
Liquidity and Capital Resources
- -------------------------------
The Company's primary sources of cash during the six
months ended July 5, 1998 were (i) $69.6 from the issuance of
common stock, and (ii) $6.9 from long-term financing. The
primary uses of cash during the six months ended July 5, 1998
were (i) $36 million associated with acquisitions, (ii) $20.8
million for additions to property and equipment in the Company's
manufacturing facilities, and (iii) $6.3 million for working
capital purposes.
The Company amended its senior credit facility in the
second quarter of 1998. The amendments, among other things,
(i) eliminated the $120 million term portion of the facility,
(ii) increased the revolving credit limit under the facility from
$250 million to $300 million, and (iii) eliminated the
requirement that the facility be secured by the pledge of the
stock of the Company's operating subsidiaries. Management
believes that cash provided by operations and long-term loan
commitments (including the senior credit facility) 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. 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. The Company has retained IBM Corporation to assist in its
Year 2000 conversion process.
The Company categorizes its systems into one of two
categories: those that are linked to the Company's AS-400
computer network ("IT Systems"), and those that are not ("Non-IT
Systems"). The Company currently estimates the total cost of
modifying its IT Systems to be Year 2000 ready to be
approximately $19 million. Of such amount, 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. With respect to Non-IT Systems, the
Company currently estimates the total cost of the modifications
necessary to be Year 2000 ready to be approximately $2 million,
although it could be more.
During the quarter ended July 5, 1998, the Company
expensed approximately $1.5 million in regards to modifications
of both IT Systems and Non-IT Systems. To date, the Company has
expensed approximately $2.5 million in the aggregate in regards
to such modifications. The Company currently anticipates that
the modifications to both its IT Systems and its Non-IT Systems
will be completed by the end of the first quarter of 1999,
although it could be later. The balance of 1999 will then be
available for testing the modifications, as well as for training
employees in the use of new hardware and software.
The Company is still in the process of reviewing its Year
2000 exposure to third party customers, distributors and
suppliers. The Company's most reasonably likely worst case Year
2000 scenario is that a key supplier's systems will malfunction
and, as a result, the Company will suffer a period of business
interruption during which it is unable to meet related
obligations to its customers. The Company is currently unaware
of any Year 2000 problems faced by any third party customers,
distributors or suppliers which are likely to have a material
adverse effect on the Company. However, many third parties are
reluctant to provide detailed information concerning the status
of their Year 2000 readiness, particularly if they have not
completed their analysis of their systems.
There can be no guarantee that the foregoing cost
estimates or deadlines 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. The Company is in the process
of developing contingency plans for such scenarios, including
identifying substitute suppliers for key materials.
12
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.
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 July 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
July 5, 1998. The interest rate swap agreements have maturity
dates ranging from five to 24 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 July 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 July 5, 1998, recognized a $3.7 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.
Forward-Looking Statements
- --------------------------
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In February 1998, the Company sent two "cease and
desist" letters to Collins & Aikman Floorcoverings, Inc. ("CAF"),
demanding that CAF cease manufacturing certain carpet products
which the Company believes infringe upon certain of the Company's
copyrighted product designs. The Company and CAF subsequently
began settlement negotiations in an attempt to resolve the
Company's claims.
13
On July 28, 1998, CAF filed a complaint (the
"Complaint") against the Company and certain other parties in the
U.S. District Court for the Northern District of Georgia, Atlanta
Division. In the Complaint, CAF alleges that the Company has
infringed upon certain of CAF's copyrighted product designs. The
Complaint also contains a claim against the Company for tortious
interference with contractual rights relating to a consulting
agreement between CAF and David Oakey, a former consultant of CAF
and current consultant of the Company. CAF is seeking damages
and injunctive relief in connection with the foregoing claims.
Based upon investigations conducted to date, the Company believes
CAF's claims are unfounded and that the Company has meritorious
defenses to such claims. Moreover, the Company intends to
aggressively assert its various claims against CAF.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
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 19, 1998.
(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, relating to each matter, are
as follows:
(i) Election of the following directors:
Class A For Withheld
------- --- --------
Dianne Dillon-Ridgley 17,174,415 227,095
Carl I. Gable 16,776,215 625,295
Dr. June M. Henton 17,117,265 226,245
J. Smith Lanier, II 17,140,715 260,795
Clarinus C. Th. van Andel 17,175,265 226,245
Class B For Withheld
------- --- --------
Ray C. Anderson 2,233,566 0
Brian L. Demoura 2,233,566 0
Charles R. Eitel 2,233,566 0
Daniel T. Hendrix 2,233,566 0
Leonard G. Saulter 2,233,566 0
John H. Walker 2,233,566 0
Gordon Whitener 2,233,566 0
(ii) Proposal to amend the Company's Articles of
Incorporation to increase the number of authorized
shares of Class A Common Stock from 40,000,000 shares to
80,000,000 shares:
Class A
-------
For: 16,299,936
Against: 1,080,722
Abstain: 20,852
Class B
-------
For: 2,233,566
Against: 0
Abstain: 0
(d) Not applicable.
14
ITEM 5. OTHER INFORMATION
None
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.
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.
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 Third Amended and Restated Credit Agreement, dated as of June
30, 1998, among the company, Interface Europe, B.V., Interface
Europe, Ltd., the Lenders listed therein, SunTrust Bank, Atlanta
and the First National Bank of Chicago.
27.1 Financial Data Schedule (for SEC use only).
(b) No reports on Form 8-K were filed during the quarter ended April
5, 1998.
15
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 17, 1998 By: /s/ Daniel T. Hendrix
Daniel T. Hendrix
Senior Vice President
(Principal Financial Officer)
16
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
3.1 Restated Articles of Incorporation
10.1 Third Amended and Restated Credit Agreement, dated as of June 30,
1998, among the Company, Interface Europe, B.V., Interface Europe, Ltd.,
the Lenders listed therein, SunTrust Bank, Atlanta and the First
National Bank of Chicago.
27.1 Financial Data Schedule.