1
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 1, 2001
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
9, 2001:
Class Number of Shares
----- ----------------
Class A Common Stock, $.10 par value per share 43,732,024
Class B Common Stock, $.10 par value per share 7,088,503
2
INTERFACE, INC.
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Consolidated Condensed Balance Sheets - July 1, 2001 3
and December 31, 2000
Consolidated Condensed Statements of Operations - Three Months 4
and Six Months Ended July 1, 2001 and July 2, 2000
Consolidated Statements of Comprehensive Income (Loss) - Three 4
Months and Six Months Ended July 1, 2001 and July 2, 2000
Consolidated Condensed Statements of Cash Flows - Six Months 5
Ended July 1, 2001 and July 2, 2000
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition 13
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
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 18
- 2 -
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
ASSETS JULY 1, DECEMBER 31,
2001 2000
----------- -----------
(Unaudited)
CURRENT ASSETS:
Cash and Cash Equivalents $ -- $ 7,861
Accounts Receivable 187,058 204,886
Inventories 208,475 198,063
Prepaid Expenses 30,453 22,765
Deferred Tax Asset 13,191 13,533
----------- -----------
TOTAL CURRENT ASSETS 439,177 447,108
PROPERTY AND EQUIPMENT, less
accumulated depreciation 261,608 258,245
EXCESS OF COST OVER NET ASSETS ACQUIRED 254,719 264,656
OTHER ASSETS 71,769 64,840
----------- -----------
$ 1,027,273 $ 1,034,849
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable $ 89,458 $ 97,874
Accrued Expenses 92,681 107,467
Current Maturities of Long-Term Debt 682 808
----------- -----------
TOTAL CURRENT LIABILITIES 182,821 206,149
LONG-TERM DEBT, less current maturities 181,650 146,550
SENIOR NOTES 150,000 150,000
SENIOR SUBORDINATED NOTES 125,000 125,000
DEFERRED INCOME TAXES and OTHER 25,204 29,551
----------- -----------
TOTAL LIABILITIES 664,675 657,250
Minority Interest 4,258 5,164
Common Stock 5,802 5,831
Additional Paid-In Capital 217,065 218,261
Retained Earnings 242,521 241,400
Accumulated Other Comprehensive Income - Foreign Currency
Translation (89,302) (72,952)
Treasury Stock, 7,200 and 7,493 shares, respectively, at cost (17,746) (20,105)
----------- -----------
$ 1,027,273 $ 1,034,849
=========== ===========
See accompanying notes to consolidated condensed financial statements.
- 3 -
4
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
THREE SIX
----- ---
MONTHS MONTHS
------ ------
ENDED ENDED
----- -----
JULY 1, JULY 2, JULY 1, JULY 2,
2001 2000 2001 2000
-------- -------- -------- ---------
NET SALES $287,285 $323,725 $593,796 $ 616,943
Cost of Sales 204,387 226,180 421,980 430,732
-------- -------- -------- ---------
GROSS PROFIT ON SALES 82,898 97,545 171,816 186,211
Selling, General and Administrative Expenses 71,476 76,144 143,289 146,587
Restructuring Charge -- -- -- 20,095
-------- -------- -------- ---------
OPERATING INCOME 11,422 21,401 28,527 19,529
Interest Expense 9,298 9,834 18,862 19,118
Other Expense (Income) - Net 2 22 275 767
-------- -------- -------- ---------
INCOME BEFORE TAXES ON INCOME 2,122 11,545 9,390 (356)
Income Tax (Benefit) Expense 850 4,503 3,688 1,405
-------- -------- -------- ---------
NET INCOME (LOSS) $ 1,272 $ 7,042 $ 5,702 $ (1,761)
======== ======== ======== =========
Basic Earnings Per Share $ .03 $ .14 $ .11 $ (.03)
======== ======== ======== =========
DILUTED EARNINGS PER SHARE $ .03 $ .14 $ .11 $ (.03)
======== ======== ======== =========
Average Shares Outstanding -- Basic 49,822 51,352 49,920 51,572
======== ======== ======== =========
Average Shares Outstanding -- Diluted 50,471 51,355 50,739 51,572
======== ======== ======== =========
See accompanying notes to consolidated condensed financial statements.
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(IN THOUSANDS)
THREE SIX
----- ---
MONTHS MONTHS
------ ------
ENDED ENDED
----- -----
JULY 1, JULY 2, JULY 1, JULY 2,
2001 2000 2001 2000
-------- -------- -------- --------
Net Income (Loss) $ 1,272 $ 7,042 $ 5,702 $ (1,761)
Other Comprehensive Income, Foreign
Currency Translation Adjustment (5,727) (3,250) (16,350) (8,505)
-------- -------- -------- --------
Comprehensive Income (Loss) $ (4,455) $ 3,792 $(10,648) $(10,266)
======== ======== ======== ========
See accompanying notes to consolidated condensed financial statements.
- 4 -
5
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
SIX
---
MONTHS
------
ENDED
-----
JULY 1, JULY 2,
2001 2000
----- -----
CASH FLOWS FROM OPERATING ACTIVITIES: $ (15,486) $ 9,482
----------- -----------
INVESTING ACTIVITIES:
Capital expenditures (17,293) (10,264)
Acquisitions/Divestitures of businesses -- (25,000)
Other (5,877) (518)
----------- -----------
(23,170) (35,782)
----------- -----------
FINANCING ACTIVITIES:
Net borrowing (reduction) of long-term debt 38,479 32,047
Issuance/Repurchase of common stock (2,904) (1,602)
Dividends paid (4,579) (4,663)
----------- -----------
30,996 25,782
----------- -----------
Net cash provided by (used for) operating,
investing and financing activities (7,660) (518)
Effect of exchange rate changes on cash (201) (140)
----------- -----------
CASH AND CASH EQUIVALENTS:
Net change during the period (7,861) (658)
Balance at beginning of period 7,861 2,548
----------- -----------
Balance at end of period $ -- $ 1,890
=========== ===========
See accompanying notes to consolidated condensed financial statements.
- 5 -
6
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 31, 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 1, December 31,
2001 2000
---- ----
Finished Goods $123,629 $101,411
Work in Process 39,884 40,939
Raw Materials 44,962 55,713
-------- --------
$208,475 $198,063
======== ========
NOTE 3 - BUSINESS ACQUISITIONS AND DIVESTITURES
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 approximately $25 million in cash and assumption of certain
liabilities of approximately $13.8 million. 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.
NOTE 4 - RESTRUCTURING CHARGE
During 2000, the Company recorded a pre-tax restructuring charge of
$21.0 million. The charge reflects: (i) the integration of the U.S. broadloom
operations; (ii) the consolidation of certain administrative and back-office
functions; (iii) the divestiture of certain non-strategic Re:Source Americas
operations; and (iv) the abandonment of manufacturing equipment utilized in the
production of discontinued product lines.
Specific elements of the restructuring activities, the related costs
and current status of the plan are discussed below.
U.S.
Historically, the Company had operated two manufacturing facilities to
produce its Bentley and Prince Street brands of broadloom carpet. These
facilities, which were located in Cartersville, Georgia, and City of Industry,
California, had recently been operating at less than full capacity. In the first
quarter of 2000, the Company decided to integrate these two facilities to reduce
excess capacity. As a result, the facility in Cartersville, Georgia, was closed
and the manufacturing operations were relocated and integrated into the facility
in City of Industry, California. A charge of $4.1 million was recorded
representing the cost of consolidating these facilities and the reduction of
carrying value of the related property and equipment, inventories and other
related assets. Additionally, the Company recorded approximately $4.6 million of
termination benefits associated with the facility closure.
Between 1996 and 1999 the Company created a distribution channel
through the acquisition of twenty-nine service companies located throughout the
U.S. During 2000, the Company elected to divest of two of these businesses which
had failed to achieve satisfactory operating income levels. As a result, a
charge of approximately $7.6 million was recorded representing the reduction of
- 6 -
7
carrying value of the related property and equipment, impairment of intangible
assets and other costs to close or dispose of these operations.
Europe
Economic developments in Europe necessitated an organizational
realignment. During fiscal year 2000, the European operations were reorganized
in order to adapt to these changes. As a result, certain manufacturing, selling
and administrative positions were eliminated. The Company recorded approximately
$3.7 million of termination benefits related to this reorganization.
A summary of the restructuring activities which were planned as of
April 2, 2000 is presented below:
(In Thousands) U.S. Europe Grand Total
- -----------------------------------------------------------------------------------------------------
Termination Benefits $ 4,637 $ 3,732 $ 8,369
Impairment of Property, Plant & Equipment 1,750 -- 1,750
Facilities Consolidation 2,358 -- 2,358
Divestiture of Operations, including Impairment
of Intangible Assets 7,618 -- 7,618
------- ------- -------
$16,363 $ 3,732 $20,095
======= ======= =======
The restructuring charge was comprised of $11.9 million of cash
expenditures for severance benefits and other costs and $8.2 million of non-cash
charges, primarily for the write-down of impaired assets.
The termination benefits of $8.4 million, primarily related to
severance costs, resulted from an aggregate reduction of 425 employees through
December 31, 2000. There will not be any further terminations as a result of the
restructuring. The charge for termination benefits and other costs to exit
activities incurred during 2000 was reflected as a separately stated charge
against operating income. During the fourth quarter of 2000 the Company recorded
an additional charge of $.95 million related to the terminations. During the
first quarter of 2001, the Company completed the plan and the accrued liability
was zero at April 1, 2001.
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 during 2000. During the first six
months of 2001, the Company repurchased 280,300 shares of Class A Common Stock
under this program, at prices ranging from $6.02 to $9.44 per share. This is
compared to the repurchase of 1,177,313 shares of Class A Common Stock at prices
ranging from $3.41 to $8.94 during 2000. Total shares purchased under this
program are 3,075,113 at prices ranging from $3.41 to $16.78. 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
49,920,000 shares and 51,572,000 shares outstanding for the six-month period
ended July 1, 2001 and July 2, 2000, 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
50,739,000 shares and 51,572,000 shares outstanding for the six month period
ended July 1, 2001 and July 2, 2000, respectively. During the first six months
of 2000, there were vested, unexercised, in the money stock options for 9,000
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.
- 7 -
8
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 Amounts)
Average
For the Six-Month Shares Earnings
Period Ended Net Income Outstanding Per Share
- ---------------------------------------------------------------------------------------------------------
July 1, 2001 $ 5,702 49,920 $ 0.11
Effect of Dilution:
Options -- 819
--------------------------------------------------------
Diluted $ 5,702 50,739 $ 0.11
========================================================
==========================================================================================================
July 2, 2000 $(1,761) 51,572 $(0.03)
Effect of Dilution:
Options -- -- --
--------------------------------------------------------
Diluted $(1,761) 51,572 $(0.03)
========================================================
===========================================================================================================
NOTE 7 - SEGMENT INFORMATION
During 1998, the Company adopted SFAS No. 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: Floorcovering Products/Services and Interior
Fabrics. The Floorcovering Products/Services segment manufactures, installs and
services commercial modular and broadloom carpet, and 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 contained in
the Company's Annual Report to Shareholders for the fiscal year ended December
31, 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 interest expense and
income taxes. Corporate expenses are primarily comprised of corporate overhead
expenses. 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.
- 8 -
9
Segment Disclosures
Summary information by segment follows:
Floorcovering Interior Other (Includes
(in thousands) Products/Services Fabrics Architectural Products) Total
- -------------------------------------------------------------------------------------------------------------------------------
Six Months Ended
July 1, 2001
Net sales $ 445,676 $ 109,573 $ 38,547 $ 593,796
Depreciation and amortization 15,319 5,985 938 22,242
Operating income 23,088 5,107 (1,117) 27,078
Total assets 769,304 224,170 67,449 1,060,923
- -------------------------------------------------------------------------------------------------------------------------------
Six Months Ended
July 2, 2000
Net sales $ 468,959 $ 115,377 $ 32,607 $ 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
- -------------------------------------------------------------------------------------------------------------------------------
A reconciliation of the Company's total segment operating income, depreciation
and amortization and assets to the corresponding consolidated amounts follows:
Six Months Ended
-------------------------------------------------
(in thousands)
July 1, 2001 July 2, 2000
DEPRECIATION AND AMORTIZATION
Total segment depreciation and amortization $ 22,242 $19,439
Corporate depreciation and amortization 2,815 2,261
---------- ----------
Reported depreciation and amortization $ 25,057 $21,700
- ----------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME
Total segment operating income $ 27,078 $ 24,477
Corporate expenses and other reconciling amounts 1,449 (4,948)
---------- ------
Reported operating income $ 28,527 $19,529
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Total segment assets $ 1,060,923 $ 1,107,008
Corporate assets and eliminations (33,650) (80,765)
------------- ----------
Reported total assets $ 1,027,273 $ 1,026,243
- ----------------------------------------------------------------------------------------------------------------------------------
- 9 -
10
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
STATEMENT OF INCOME (LOSS)
FOR THE SIX MONTHS ENDED JULY 1, 2001
CONSOLIDATION
NON- INTERFACE, INC. AND
GUARANTOR GUARANTOR (PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTALS
------------ ------------ ------------ ------------- -------------
(IN THOUSANDS)
Net sales $447,192 $ 188,118 $ -- $ (41,514) $593,796
Cost of sales 334,131 129,363 -- (41,514) 421,980
-------- --------- -------- --------- --------
Gross profit on sales 113,061 58,755 -- -- 171,816
Selling, general and administrative
expenses 89,601 42,077 11,611 -- 143,289
Restructuring charge -- -- -- -- --
-------- --------- -------- --------- --------
Operating income 23,460 16,678 (11,611) -- 28,527
Other expense 7,617 5,277 6,243 -- 19,137
-------- --------- -------- --------- --------
Income before taxes on income 15,843 11,401 (17,854) -- 9,390
and equity in income of subsidiaries
Income tax (benefit) expense 4,611 3,982 (4,905) -- 3,688
Equity in income of subsidiaries -- -- 18,651 (18,651) --
-------- --------- -------- --------- --------
Net income (loss) applicable to $ 11,232 $ 7,419 $ 5,702 $ (18,651) $ 5,702
common shareholders ======== ========= ======== ========= ========
- 10 -
11
BALANCE SHEET
JULY 1, 2001
CONSOLIDATION
NON- INTERFACE, INC. AND
GUARANTOR GUARANTOR (PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTALS
--------- ------------ -------------- ------------- ---------
ASSETS (IN THOUSANDS)
Current Assets:
Cash and cash equivalents $ 4,273 $ 2,358 $ (6,631) $ -- $ --
Accounts receivable 148,642 79,654 (41,238) -- 187,058
Inventories 142,914 65,561 -- -- 208,475
Miscellaneous 13,072 37,875 (7,303) -- 43,644
--------- --------- --------- ----------- ---------
Total current assets 308,901 185,448 (55,172) -- 439,177
Property and equipment
less accumulated depreciation 172,521 72,436 16,651 -- 261,608
Investment in subsidiaries 89,157 1,496 906,063 (996,716) --
Excess of cost over net assets acquired 169,584 83,752 1,383 -- 254,719
Other assets 10,577 5,802 55,390 -- 71,769
--------- --------- --------- ----------- -----------
$ 750,740 $ 348,934 $ 924,315 $ (996,716) $ 1,027,273
========= ========= ========= =========== ===========
LIABILITIES AND COMMON
SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 46,204 $ 44,811 $ (1,557) $ -- $ 89,458
Accrued expenses 52,189 27,464 13,028 -- 92,681
Current maturities of long-term debt 335 347 -- -- 682
--------- --------- --------- ----------- ---------
Total current liabilities 98,728 72,622 11,471 -- 182,821
Long-term debt, less
current maturities 6,500 44,900 130,250 -- 181,650
Senior notes and senior
subordinated notes -- -- 275,000 -- 275,000
Deferred income taxes/other 14,672 4,013 6,519 -- 25,204
--------- --------- --------- ----------- ---------
Total liabilities 119,900 121,535 423,240 -- 664,675
Minority interests -- 4,258 -- -- 4,258
Redeemable preferred stock 57,891 -- -- (57,891) --
Common stock 94,145 102,199 5,802 (196,344) 5,802
Additional paid-in capital 191,411 12,525 217,065 (203,936) 217,065
Retained earnings 288,269 171,941 290,529 (508,218) 242,521
Foreign currency translation
adjustment income (876) (63,524) (12,321) (12,581) (89,302)
Treasury stock, 7,200,000 Class A
shares, at cost -- -- -- (17,746) (17,746)
--------- --------- --------- ----------- ---------
$ 750,740 $ 348,934 $ 924,315 $ (996,716) $ 1,027,273
========= ========= =========== =========== ===========
- 11 -
12
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS
ENDED JULY 1, 2001
CONSOLIDATION
NON- INTERFACE, INC. AND
GUARANTOR GUARANTOR (PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTALS
------------ ------------ -------------- ------------- ------------
(IN THOUSANDS)
Net cash provided by (used for)
operating activities $ 14,427 $(1,529) $(28,384) $ -- $(15,486)
Cash flows from investing activities:
Purchase of plant and equipment (14,014) (2,184) (1,095) -- (17,293)
Acquisitions, net of cash -- -- -- -- --
acquired
Other assets (2,169) (2,600) (1,108) -- (5,877)
-------- ------- -------- -------- --------
Net cash provided by (used for)
investing activities (16,183) (4,784) (2,203) -- (23,170)
-------- ------- -------- -------- --------
Cash flows from financing activities:
Net borrowings (repayments) 1,560 4,919 32,000 -- 38,479
Proceeds from issuance/
repurchase of common stock -- -- (2,904) -- (2,904)
Cash dividends paid -- -- (4,579) -- (4,579)
-------- ------- -------- -------- --------
Net cash provided by (used for)
financing activities 1,560 4,919 24,517 -- 30,996
-------- ------- -------- -------- --------
Effect of exchange rate change
on cash -- (201) -- -- (201)
-------- ------- -------- -------- --------
Net increase (decrease) in cash (196) (1,595) (6,070) -- (7,861)
Cash at beginning of period 4,469 3,953 (561) -- 7,861
Cash at end of period $ 4,273 $ 2,358 $ (6,631) $ -- $ --
======== ======= ======== ======== ========
- 12 -
13
NOTE 9 - NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 141 (entitled "Business Combinations") and SFAS No. 142 (entitled
"Goodwill and Other Intangible Assets"). SFAS No. 141 requires business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method of accounting, and broadens the criteria for recording
intangible assets separately from goodwill. Recorded goodwill and intangibles
will be evaluated against this new criteria and may result in certain
intangibles being subsumed into goodwill, or alternatively, amounts initially
recorded as goodwill may be separately identified and recognized apart from
goodwill. SFAS No. 142 requires the use of a nonamortization approach to account
for purchased goodwill and certain intangibles. Under a nonamortization
approach, goodwill and certain intangibles will not be amortized into results of
operations, but instead will be reviewed for impairment and written down and
charged to results of operations only in the periods in which the recorded value
of goodwill and certain intangibles is more than its fair value. The provisions
of each accounting standard which apply to goodwill and intangible assets
acquired prior to June 30, 2001 will be adopted by the Company on December 31,
2001 (the first day of fiscal year 2002). The Company expects that the adoption
of these accounting standards will result in certain of its intangibles being
subsumed into goodwill and will have the impact of reducing its amortization of
goodwill and intangibles commencing December 31, 2001; however, impairment
reviews may result in future periodic write-downs.
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" within the meaning of the Securities Act of 1933, as amended, and
the Securities Exchange Act of 1934, as amended by the Private Securities
Litigation Reform Act of 1995. Those statements include 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 forward-looking statements are not guarantees of future performance and
involve a number of risks and uncertainties that could cause actual results to
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 include risks and
uncertainties associated with economic conditions in the commercial interiors
industry as well as 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 31,
2000, which discussion is hereby incorporated by reference, including but not
limited to the discussion of specific risks and uncertainties under the headings
"Strong Competition: The Company competes with a large number of other
manufacturers in the highly competitive commercial floorcovering products
market, and certain of these competitors have financial resources in excess of
the Company's," "Cyclical Nature of Industry: Sales of the Company's principal
products may be affected by cycles in the construction and renovation of
commercial and institutional buildings," "Reliance on Key Personnel: The
Company's continued success depends to a significant extent upon the efforts,
abilities and continued service of its senior management executives and its
design consultants," "Risks of Foreign Operations: The Company's substantial
international operations are subject to various political, economic and other
uncertainties, such as foreign currency exchange restrictions," "Control of
Election of a Majority of Board: The Company's Chairman, together with other
insiders, currently has sufficient voting power to elect a majority of the Board
of Directors of the Company," "Reliance on Petroleum-Based Raw Materials: Large
increases in the cost of petroleum-based raw materials, which the Company is
unable to pass through to its customers, could adversely affect the Company,"
"Reliance on Third Party for Supply of Fiber: Unanticipated termination or
interruption of the Company's arrangement with its primary third-party supplier
of synthetic fiber could have a material adverse effect on the Company,"
"Restrictions Due to Substantial Indebtedness: The Company's indebtedness, which
is substantial in relation to its shareholders' equity, requires the Company to
dedicate a substantial portion of its cash flow from operations to service debt
and governs certain other activities of the Company", and "Anti-Takeover Effects
of Shareholder Rights Plan: The Company's Rights Agreement, which is triggered
if a third party acquires (without the consent of the Company) beneficial
ownership of 15% or more of the Common Stock of the Company, could discourage
tender offers or other transactions that would result in shareholders receiving
a premium over the market price for the Common Stock." 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.
- 13 -
14
General
The Company's revenues are derived from sales of commercial
floorcovering products (primarily modular and broadloom carpet) and related
services, interior fabrics, architectural products and other specialty products.
During the six month period ended July 1, 2001, the Company had revenues of
$593.8 million and net income of $5.7 million, or $0.11 per diluted share,
compared to revenues of $616.9 million and net loss (after giving effect to a
restructuring charge) of $1.8 million, or ($0.03) per diluted share, in the
comparable period last year.
Results of Operations
For the six-month period ended July 1, 2001, the Company's net sales
decreased $23.1 million (3.8%) compared with the same period in 2000. The
decrease was primarily attributable to (i) the decline of panel fabric sales to
certain OEM furniture manufacturers, (ii) the focus at Re:Source Americas on
increasing profitability which resulted in declining certain jobs with lower
margins, (iii) reduced demand for steel panel products made by the Company's
architectural products division, and (iv) the continued decline of the euro and
British pound sterling against the U.S. dollar.
Cost of sales, as a percentage of net sales, increased to 71.0% for the
six-month period ended July 1, 2001, compared to 69.8% in the comparable period
in 2000. The increase was primarily attributable to (i) the failure to fully
absorb overhead expenses in the Company's manufacturing operations as a result
of the decline in sales volume, (ii) the increase in the relative sales by the
Company's architectural products division and Chatham operations, which
historically have had lower gross profit margins than the Company's other
businesses, and (iii) the energy situation in California which disrupted the
Company's U.S. broadloom operations during the first half of 2001.
Selling, general and administrative expenses, as a percentage of net
sales, increased to 24.1% for the six month period ended July 1, 2001, compared
to 23.8% in the same period in 2000. Despite the slight increase in selling,
general and administrative expenses as a percentage of sales, those expenses in
absolute dollars have declined slightly as a result of cost-cutting initiatives
and other restructuring activities.
For the six-month period ended July 1, 2001, interest expense decreased
$.3 million compared to the same period in 2000, due primarily to lower LIBOR
interest rates.
Liquidity and Capital Resources
The Company's primary source of cash during the six months ended July
1, 2001 was $38.5 million from long-term debt financing. The primary uses of
cash during the six month period ended July 1, 2001 were (i) the increase in
overall inventory balances and the reduction of accounts payable and accrued
expenses, (ii) $17.3 million for additions to property and equipment in the
Company's manufacturing facilities, and (iii) stock repurchases and 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; however, those factors discussed under
the headings "Cyclical Nature of the Industry," "Strong Competition," "Risks of
Foreign Operations," "Reliance on Petroleum-Based Raw Materials," and "Reliance
on Third Party for Supply of Fibers," in particular, in Exhibit 99.1 could
affect the Company's free cash flow.
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.
- 14 -
15
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.
At July 1, 2001, the Company had no interest rate swap agreements in
place. The Company anticipates that for the second half of fiscal 2001 it will
utilize swap agreements or other derivative financial instruments to convert
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 euro, British pound sterling, Canadian
dollar, Australian dollar, Thai baht and Japanese yen. When the U.S. dollar
strengthens against a foreign currency, the value of anticipated sales in those
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.
The Company, as of July 1, 2001, recognized a $16.4 million increase in
its foreign currency translation adjustment account compared to December 31,
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 1, 2001. The market values that result from these computations are
compared with the market values of these financial instruments at July 1, 2001.
The differences in this comparison are the hypothetical gains or losses
associated with each type of risk.
As of July 1, 2001, 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
- 15 -
16
long-term debt of $25.9 million. At December 31, 2000, a 150 basis point
movement would have resulted in the same approximate changes.
As of July 1, 2001, 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 December 31, 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
Collins & Aikman Litigation. On July 23, 1998, Collins & Aikman
Floorcoverings, Inc. ("CAF") -- in the wake of receiving "cease and desist"
letters from Interface demanding that CAF cease manufacturing certain carpet
products that Interface believes infringe upon certain of its copyrighted
product designs -- filed a lawsuit against Interface 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, sought injunctive
relief and claimed unspecified monetary 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, Inc. design firm, now known as David Oakey Designs, Inc.
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 filed motions for partial 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 David 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 (and some derivatives), 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 ordered the parties back into mediation and stayed all activity in the
case pending its completion. The mediation was held on May 23-24, 2001. The case
did not settle at that time, but meaningful settlement talks have been
continuing. 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 copyright infringement claims against CAF.
The Company's insurers denied defense and indemnity coverage related to
this matter 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. 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
cross-moved for summary judgment on this issue. On August 15, 2000, the Court
granted the Company's motion and denied the insurers' cross-motion, ordering the
insurers to pay the Company's costs of defense in this action to date, and to
pay these costs going forward. The insurers have begun complying with this
order. These motions did not address the insurers' obligation to indemnify the
Company in the event of a finding of liability against the Company.
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.
Tate Litigation. On August 24, 2000, Tate Access Floors, Inc. ("Tate")
filed suit against the Company's raised/access flooring subsidiary, Interface
Architectural Resources, Inc. ("IAR"), alleging that a feature of IAR's popular
Bevel Edge flooring
- 16 -
17
panel infringes a patent held by Tate. On November 3, 2000, Tate filed a motion
seeking a preliminary injunction to require IAR to cease manufacturing the Bevel
Edge product pending resolution of the suit on the merits. On March 9, 2001, the
court entered a preliminary injunction which permits IAR to continue producing
and selling its current trimless flooring panel product, but which limits its
ability to resume producing the previously abandoned Bevel Edge product
configuration. IAR has appealed the preliminary injunction order to the Federal
Circuit Court of Appeals, and has filed a request for re-examination of the Tate
patent with the United States Patent and Trademark Office. The Company believes
that IAR's Bevel Edge product does not infringe the Tate patent, that the Tate
patent should be held invalid due to prior existing art, and that IAR's defenses
to this action are meritorious. The Company intends to defend this action
vigorously.
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 22, 2001.
(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:
(i) Election of the following directors:
Class A For Withheld
----------------------------------- -------------------------------
Dianne Dillon-Ridgley 37,044,350 3,110,473
June M. Henton 37,044,150 3,110,673
Christopher G. Kennedy 37,067,850 3,086,973
James B. Miller, Jr. 37,067,850 3,086,973
Thomas R. Oliver 37,067,850 3,086,973
Class B For Withheld
----------------------------------- ------------------------------
Ray C. Anderson 4,843,658 0
Carl I. Gable 4,843,658 0
Daniel T. Hendrix 4,843,658 0
J. Smith Lanier, II 4,843,658 0
Leonard G. Saulter 4,828,935 14,723
Clarinus C. Th. van Andel 4,843,658 0
(ii) Proposal to approve amendment to the
Interface, Inc. Omnibus Stock Incentive Plan
to increase by 2,000,000 the number of
shares of common stock authorized for
issuance under such plan:
For: 33,720,432
Against: 11,145,830
Abstain: 132,219
(d) Not applicable.
- 17 -
18
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 (included as Exhibit 3.1 to
the Company's quarterly report on Form 10-Q for the quarter
ended April 5, 1998, previously filed with the Commission and
incorporated herein by reference).
3.2 Bylaws, as amended and restated (included as Exhibit 3.2 to
the Company's quarterly report on Form 10-Q for the quarter
ended April 1, 2001, previously filed with the Commission and
incorporated hereby 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. 4.4 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).
(b) No reports on Form 8-K were filed during the quarter ended July 1, 2001.
- 18 -
19
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 15, 2001 By: /s/ Patrick C. Lynch
---------------------------------
Patrick C. Lynch
Vice President
(Principal Financial Officer)
- 19 -