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 March 30, 1997
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 9, 1997:
Class Number of Shares
----- ----------------
Class A Common Stock, $.10 par value per share 20,844,050
Class B Common Stock, $.10 par value per share 2,719,838
2
INTERFACE, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION ----
Item 1. Financial Statements 3
Balance Sheets - March 30, 1997 and December 29, 1996 3
Statements of Income - Three Months 4
Ended March 30, 1997 and March 31, 1996
Statements of Cash Flows - Three Months 5
Ended March 30, 1997 and March 31, 1996
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 11
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 16
- 2 -
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
MARCH 30, DECEMBER 29,
ASSETS 1997 1996
------ ---- ----
CURRENT ASSETS:
Cash and Cash Equivalents $ - $ 8,762
Accounts Receivable 157,562 167,817
Inventories 152,956 146,678
Deferred Tax Asset 7,002 7,057
Prepaid Expenses 25,833 22,986
-------- --------
TOTAL CURRENT ASSETS 343,353 353,300
PROPERTY AND EQUIPMENT, less
accumulated depreciation 210,964 208,791
EXCESS OF COST OVER NET ASSETS ACQUIRED 244,850 249,070
OTHER ASSETS 55,608 51,385
-------- --------
$854,775 $862,546
======== ========
LIABILITIES AND COMMON SHAREHOLDERS' EQUITY
-------------------------------------------
CURRENT LIABILITIES:
Notes Payable $ 12,186 $ 14,918
Accounts Payable 70,643 74,960
Accrued Expenses 69,989 70,919
Current Maturities of Long-Term Debt 2,206 2,919
-------- --------
TOTAL CURRENT LIABILITIES 155,024 163,716
LONG-TERM DEBT, less current maturities 255,892 254,353
SENIOR SUBORDINATED NOTES 125,000 125,000
DEFERRED INCOME TAXES 23,403 23,484
------- --------
TOTAL LIABILITIES 559,319 566,553
------- --------
Minority Interest 3,125 3,125
Redeemable Preferred Stock - 19,750
Common Stock 2,698 2,536
Additional Paid-In Capital 148,014 124,557
Retained Earnings 173,182 166,828
Foreign Currency Translation Adjustment (13,817) (3,057)
Treasury Stock, 3,600
Class A Shares, at Cost (17,746) (17,746)
-------- --------
$854,775 $862,546
======== ========
See accompanying notes to consolidated condensed financial statements.
- 3 -
4
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
-----------------------
MARCH 30, MARCH 31,
1997 1996
-------- --------
Net Sales $257,345 $205,017
Cost of Sales 174,432 142,104
-------- --------
Gross Profit on Sales 82,913 62,913
Selling, General and Administrative Expenses 62,956 49,342
-------- --------
Operating Income 19,957 13,571
Other (Expense) Income - Net (9,543) (7,591)
-------- --------
Income before Taxes on Income 10,414 5,980
Taxes on Income 4,061 2,272
-------- --------
Net Income 6,353 3,708
Less: Preferred Dividends -- 437
-------- --------
Net Income Applicable to Common Shareholders $ 6,353 $ 3,271
======== ========
Primary Earnings Per Common Share $ 0.28 $ 0.18
======== ========
Weighted Average Common Shares Outstanding 22,584 18,475
======== ========
See accompanying notes to consolidated condensed financial statements.
- 4 -
5
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
--------------------------
MARCH 30, MARCH 31,
1997 1996
-------- --------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income $ 6,353 $ 3,708
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation and amortization 10,023 8,247
Deferred income taxes 40 14
Cash provided by (used for):
Accounts receivable 6,698 (10,576)
Inventories (8,633) (6,569)
Prepaid and other (8,578) (3,669)
Accounts payable and accrued expenses (7,786) 6,264
-------- --------
(1,883) (2,581)
-------- --------
INVESTING ACTIVITIES:
Capital expenditures (11,878) (10,111)
Acquisitions of businesses - (18,969)
Other (3,257) (4,978)
-------- --------
(15,135) (34,058)
-------- --------
FINANCING ACTIVITIES:
Net borrowing (reduction) of long-term debt 4,455 34,176
Issuance of common stock 3,869 490
Dividends paid - (1,547)
-------- --------
8,324 33,119
-------- --------
Net cash provided by (used for) operating,
investing and financing activities (8,694) (3,520)
Effect of exchange rate changes on cash (68) (2)
-------- --------
CASH AND CASH EQUIVALENTS:
Net increase (decrease) during the period (8,762) (3,522)
Balance at beginning of period 8,762 8,750
-------- --------
Balance at end of period $ - $ 5,228
-------- --------
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 29, 1996, 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:
MARCH 30, DECEMBER 29,
1997 1996
---- ----
Finished Goods $ 89,877 $ 81,034
Work-in-Process 30,360 30,464
Raw Materials 32,719 35,180
-------- --------
$152,956 $146,678
======== ========
NOTE 3 - BUSINESS ACQUISITIONS
During fiscal 1996, the Company acquired 100% of the outstanding
capital stock of fifteen floorcovering contractors -- Landry's Commercial
Flooring Co., Inc., based in Oregon, Reiser Associates, Inc., based in Texas,
Earl W. Bentley Operating Co., Inc., based in Oklahoma, Quaker City
International, Inc., based in Pennsylvania, Superior Holding Inc., based in
Texas, Flooring Consultants, Inc., based in Arizona, ParCom, Inc., based in
Virginia, Congress Flooring Corp., based in Massachusetts, Southern Contract
Systems, Inc., based in Georgia, B. Shehadi & Sons, Inc., based in New Jersey,
A & F Installation, Inc., based in New Jersey, Lasher/White Carpet Co., Inc.,
based in New York; Oldtown Carpet Center, Inc., based in North Carolina;
Architectural Floors, a division of Continental Office Furniture Corp., based
in Ohio; and Floor Concepts, Inc., based in Maryland. As consideration, the
Company issued 2,674,906 shares of Class A common stock valued at approximately
$19.3 million, $.8 million in 7% Notes and $23.0 million in cash. All the
acquisitions were accounted for as purchases, accordingly, the results of
operations for the acquired companies are included in the Company's
consolidated financial statements from the date of the acquisitions. The
excess of the purchase price over the fair value of the net liabilities was
approximately $33.9 million and is being amortized over 25 years.
- 6 -
7
In February 1996, the Company acquired the outstanding
common stock of Renovisions, Inc., a nationwide installation services firm
(based in Georgia) that has pioneered a new method of carpet replacement, for
approximately $4 million in cash and $1 million in guaranteed payments due
February 1, 1997. The acquisition was accounted for as a purchase and,
accordingly, the results of operations for Renovisions are included in the
Company's consolidated financial statements from the date of acquisition. The
excess of the purchase price over the fair value of net assets was
approximately $4.3 million, and is being amortized over 25 years.
In February 1996, the Company acquired the outstanding common
stock of C-Tec, Inc., a Michigan based producer of raised/access flooring
systems, for approximately $8.8 million (comprised of $4.5 million in cash and
$4.3 million in 6% subordinated convertible notes). The acquisition was
accounted for as a purchase and, accordingly, the results of operations for
C-Tec are included in the Company's consolidated financial statements from the
date of acquisition. The excess of the purchase price over the fair value of
net liabilities was approximately $3.1 million, and is being amortized over 25
years.
NOTE 4 - EARNINGS PER SHARE AND DIVIDENDS
Earnings per share are computed by dividing net income applicable
to common shareholders by the combined weighted average number of shares of
Class A and Class B Common Stock outstanding during the particular reporting
period. The earnings computation does not give effect to the negligible
dilutive impact of outstanding stock options. The Series A Cumulative
Convertible Preferred Stock issued in June 1993 is not considered to be a
common stock equivalent because at the date of issuance the stated rate of
interest was greater than 66 2/3% of the AAA bond rate. In computing primary
earnings per share, the preferred stock dividend of 7% per annum reduces income
applicable to common shareholders. For the purposes of computing earnings per
share and dividends paid per 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).
NOTE 5 - REDEEMABLE PREFERRED STOCK
In December 1996, the Company notified its Series A preferred
shareholders that it intended to redeem up to $10 million of the approximately
$19.7 million (face value) Series A Preferred Stock then outstanding. As a
result of this notice, the Series A preferred shareholders, with one exception,
instead elected to convert their shares of Series A Preferred Stock into an
aggregate of approximately 1,360,000 shares of the Company's Class A Common
Stock. The shares of Series A Preferred Stock owned by the non-converting
shareholder were redeemed for approximately $6,000.
- 7 -
8
NOTE 6 - SUPPLEMENTAL GUARANTOR FINANCIAL STATEMENTS
The Guarantor Subsidiaries, which consist of the Company's
principal domestic subsidiaries, are guarantors of the Company's 9.5% senior
subordinated notes due 2005. The Supplemental Guarantor Financial Statements
are presented herein pursuant to requirements of the Securities and Exchange
Commission.
INTERFACE, INC. AND SUBSIDIARIES
NOTE 6 - SUPPLEMENTAL GUARANTOR FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 30, 1997
INTERFACE, CONSOLIDATION
NON- INC. AND
GUARANTOR GUARANTOR (PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTALS
------------ ------------ ------------ ------- ------
(IN THOUSANDS)
Net sales $204,115 $ 82,267 $ 0 (29,037) $257,345
Cost of sales 147,116 56,353 0 (29,037) 174,432
--------- --------- --------- --------- ---------
Gross profit on sales 56,999 25,914 0 0 82,913
Selling, general and 42,190 16,702 4,064 0 62,956
administrative expenses --------- --------- --------- --------- ---------
Operating income 14,809 9,212 (4,064) 0 19,957
Other expense (income)
Interest Expense 1,662 1,111 5,618 0 8,391
Other 1,556 664 (1,066) 0 1,154
--------- --------- --------- --------- ---------
Total other expense 3,218 1,775 4,552 0 9,545
--------- --------- --------- --------- ---------
Income before taxes on income and
equity in income of subsidiaries 11,591 7,437 (8,616) 0 10,412
Taxes on income 3,774 2,703 (2,418) 0 4,059
Equity in income of subsidiaries 0 0 12,551 (12,551) 0
--------- --------- --------- --------- ---------
Net income before
extraordinary items 7,817 4,734 6,353 (12,551) 6,353
Extraordinary loss (less applicable taxes) 0 0 0 0 0
--------- --------- --------- --------- ---------
Net income 7,817 4,734 6,353 (12,551) 6,353
Preferred stock dividends 0 0 0 0 0
--------- --------- --------- --------- ---------
Net income applicable to common shareholders $ 7,817 $ 4,734 $ 6,353 ($12,551) $ 6,353
========= ========= ========= ========= =========
- 8 -
9
MARCH 30, 1997
CONSOLIDATION
NON- INTERFACE, INC. AND
GUARANTOR GUARANTOR (PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTALS
------------ ------------ ------------ ------- ------
(in thousands)
ASSETS
Current Assets:
Cash and cash equivalents 1,517 4,960 (6,477) 0 0
Accounts receivable 112,048 59,363 (13,849) 0 157,562
Inventories 106,610 46,048 298 0 152,956
Miscellaneous 9,727 13,320 9,788 0 32,835
-------- -------- --------- -------- --------
Total current assets 229,902 123,691 (10,240) 0 343,353
Property and equipment,
less accumulated depreciation 147,099 58,112 5,753 0 210,964
Investment in subsidiaries 108,977 17,760 381,670 (508,407) 0
Miscellaneous 152,610 43,115 378,702 (518,819) 55,608
Excess of cost over net
assets acquired 172,209 68,579 4,062 0 244,850
-------- -------- --------- -------- --------
810,797 311,257 759,947 (1,027,226) 854,775
======== ======== ========= ========== ---------
LIABILITIES AND COMMON
SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable 10,849 1,337 0 0 12,186
Accounts payable 45,707 22,776 2,160 0 70,643
Accrued expenses 46,177 27,398 (3,586) 0 69,989
Current maturities of
long-term debt 2,206 0 0 0 2,206
-------- -------- -------- -------- --------
Total current liabilities 104,939 51,511 (1,426) 0 155,024
Long-term debt, less
current maturities 240,939 43,457 304,271 (332,775) 255,892
Senior subordinated notes 0 0 125,000 0 125,000
Deferred income taxes 12,901 963 9,539 0 23,403
Minority interests 3,125 0 0 0 3,125
-------- -------- -------- -------- --------
Total liabilities 361,904 95,931 437,384 (332,775) 562,444
Redeemable preferred stock 57,891 0 0 (57,891) 0
Common stock 81,704 102,199 2,698 (183,903) 2,698
Additional paid-in capital 179,073 11,030 148,014 (190,103) 148,014
Retained earnings 135,294 108,412 173,812 (244,336) 173,182
Foreign currency
translation adjustment (5,071) (6,313) (1,961) (472) (13,817)
Treasury stock 0 0 0 (17,746) (17,746)
-------- -------- -------- -------- --------
810,795 311,259 759,947 (1,027,226) 854,775
======== ======== ======== ========== ========
- 9 -
10
FOR THE THREE MONTHS ENDED MARCH 30, 1997
INTERFACE, CONSOLIDATION
NON- INC. AND
GUARANTOR GUARANTOR (PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTALS
------------ ------------ ------------ ------- ------
(IN THOUSANDS)
Cash flows from operating
activities: 15,612 (9,727) (7,768) 0 (1,883)
------ ------ ------- --- --------
Cash flows from investing
activities:
Purchase of plant and equipment (8,270) (2,019) (1,589) 0 (11,878)
Acquisitions, net of cash acquired 0 0 0 0 0
Other 0 0 (3,257) 0 (3,257)
------ ------ ------- --- --------
Net cash provided by (used
in) investing activities (8,270) (2,019) (4,846) 0 (15,135)
------ ------ ------- -------
Cash flows from financing
activities:
Net borrowings (repayments) (9,306) 11,983 1,778 0 4,455
Proceeds from issuance of
common stock 0 0 3,869 0 3,869
Cash dividends paid 0 0 0 0 0
Other 0 0 0 0 0
------ ------ ------- --- --------
Net cash provided by (used in)
financing activities (9,306) 11,983 5,647 0 8,324
------ ------ ------- --- --------
Effect of exchange rate
change on cash 0 (68) 0 0 (68)
------ ------ ------- --- --------
Net increase (decrease) in cash (1,964) 169 (6,967) 0 (8,762)
Cash at beginning of year 3,481 4,791 490 0 8,762
------ ------ ------- --- --------
Cash at end of year 1,517 4,960 (6,477) 0 0
====== ====== ======= === ========
- 10 -
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS. For the three month period ended March 30,
1997, the Company's net sales increased $52.3 million (26.0%), compared with
the same period in 1996. The increase was primarily attributable to (i)
increased sales volume in the Company's floorcovering operations in the United
States (associated in part with the acquisitions of the commercial floorcovering
dealers in the Company's Re:Source Americas network) and China, (ii) increased
sales volume in the Company's interior fabrics operations in Continental Europe
and Australia and (iii) increased sales volume in the Company's specialty
products division associated with the acquisition of C-Tec, Inc. in February
1996. These increases were offset somewhat by a weakening of certain key
currencies (particularly the British pound sterling, Dutch guilder and Japanese
yen) against the U.S. dollar, the Company's reporting currency.
Cost of sales, as a percentage of sales, decreased slightly to 67.8%,
for the three month period ended March 30, 1997, when compared to 69.3% for the
same period in 1996. The Company recognized a decrease in manufacturing costs
in its floorcovering operations as a result of further benefits obtained from
the Company's mass customization production strategy and its "war-on-waste"
initiative, which have continued to provide manufacturing efficiencies as well
as a shift to higher margin products. In addition, the Company achieved
improved pricing in its floorcovering operations. These benefits were somewhat
offset by the acquisitions of C-Tec and the commercial floorcovering dealers
comprising the Company's distribution network, which historically had higher
cost of sales ratios than the Company.
Selling, general and administrative expenses as a percentage of net
sales increased slightly to 24.5% for the three month period ended March 30,
1997, compared to 24.1% for the same period in 1996. The increase for the
three month period was attributable to (i) administrative expenses associated
with continued building of an infrastructure to manage the Re:Source Americas
network, (ii) increased marketing and sampling expenses in the Company's
floorcovering operations associated with the introduction of new products as
the Company moved to implement the mass customization strategy in its European
and Asia-Pacific operations, and continued to impelement such strategy in its
U.S. operations. The increase was somewhat offset by the acquisitions of the
commercial floorcovering dealers comprising the Company's distribution network,
which historically had lower SG&A ratios than the Company.
For the three month period ended March 30, 1997, the Company's other
expense increased $1.9 million compared to the same period in 1996, primarily
due to an increase in bank debt incurred as a result of the Company's
acquisitions.
As a result of the aforementioned factors, the Company's net income
increased 94.0% to $6.4 million for the three month period ended March 30,
1997, compared to the same period in 1996. This increase is also partly due to
the Company no longer having to pay preferred dividends as a result of the
elimination of its Series A Preferred Stock in December 1996.
- 11 -
12
LIQUIDITY AND CAPITAL RESOURCES. The primary uses of cash during the
three month period ended March 30, 1997 have been (i) $ 11.9 million for
additions to property and equipment in the Company's manufacturing facilities,
and (ii) $3.3 million related to various deposits and other long-term assets.
These uses were funded primarily by $4.5 million from long-term financing and
$3.9 million from the issuance of common stock.
Cash provided by operating activities increased to ($1.9) million
during the three month period ended March 30, 1997 from ($2.6) million during
the corresponding period in the prior year. This increase was caused primarily
by a decrease in accounts receivable resulting from the sale of additional
domestic receivables under the Company's securitization program. This decrease
was somewhat offset by an increase in inventories and prepaid expenses which
are traditionally paid during the first quarter.
The Company, as of March 30, 1997, recognized a $ 10.8 million decrease
in foreign currency translation adjustment compared to that of December 29,
1996. The decrease was associated primarily with the Company's investments in
subsidiaries located in the United Kingdom and 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.
The Company employs a variety of off-balance sheet financial
instruments, including foreign currency swap agreements and foreign currency
exchange contracts, to reduce its exposure to adverse fluctuations in interest
and foreign currency exchange rates. At March 30, 1997, the Company had
approximately $40 million (notional amount) of foreign currency hedge contracts
outstanding, consisting principally of currency swap contracts to hedge firmly
committed Dutch guilder and Japanese yen currency revenues. At March 30, 1997,
the Company utilized interest rate swap agreements to effectively convert
approximately $73 million of variable rate debt to fixed rate debt. The
interest rate swap agreements have maturity dates ranging from nine to
twenty-four months.
The Company continually monitors its position with, and the credit
quality of, the financial institutions which are counterparties to its
off-balance sheet financial instruments and does not currently anticipate
nonperformance by the counterparties.
Management believes that the cash provided by operations and available
under long-term loan commitments will provide adequate funds for current
commitments and other requirements in the foreseeable future.
-12-
13
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
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
CERTAIN FACTORS AFFECTING FORWARD LOOKING STATEMENTS
Many of the matters discussed in this Quarterly Report on Form 10-Q and
in the Company's other reports and filings with the Commission are forward
looking statements. These statements involve a number of risks and
uncertainties that could cause actual results to differ materially from any
such statement. In addition to various other matters discussed elsewhere in
this report and in the Company's other reports and filings with the Commission,
the following is a nonexclusive list of factors that could cause actual results
to differ materially:
Substantial Indebtedness
The Company's indebtedness is substantial in relation to its
shareholders' equity. As of March 30, 1997, the Company's total long-term debt,
(net of current portion), and its 9.5% senior subordinated notes due 2005,
totaled $380.9 million or approximately 45% of its total capitalization. The
Company's indebtedness could have several important consequences, including but
not limited to the following: (i) a substantial portion of the Company's cash
flow from operations must be dedicated to debt service requirements on its
indebtedness and will not be available for other purposes; (ii) the Company's
ability to obtain additional financing in the future for working capital,
capital expenditures, acquisitions, or to refinance indebtedness or for general
corporate purposes may be impaired; (iii) the Company's leverage may increase
the effects of economic downturns on it and limit its ability to withstand
competitive pressures; and (iv) the Company's ability to capitalize on
significant business opportunities may be limited.
-13-
14
Restrictions Imposed by Terms of Indebtedness
The terms of the Company's outstanding indebtedness restrict the
ability of the Company and its subsidiaries to, among other things, incur
additional indebtedness, pay dividends or make certain other restricted
payments or investments, consummate certain asset sales, enter into certain
transactions with affiliates, incur liens, or merge or consolidate with any
other person or sell, assign, transfer, lease, convey or otherwise dispose of
all or substantially all of their assets. They also require the Company to
meet certain financial tests and comply with certain other reporting,
affirmative and negative covenants. In an event of default under such
indebtedness, the lenders thereunder could elect to declare all amounts
borrowed, together with accrued interest, to be immediately due and payable and
the lenders under the Company's credit agreement could terminate all
commitments thereunder. If any such indebtedness were to be accelerated, there
can be no assurance that the assets of the Company would be sufficient to repay
in full such indebtedness and the other indebtedness of the Company.
Holding Company Structure
The Company derives all of its operating income and cash flow from its
subsidiaries. The Company must rely upon cash distributions from its
subsidiaries to generate the funds necessary to meet its obligations. Although
there currently are no material restrictions on the Company's ability to
control its receipt of dividends or other payments from its subsidiaries, there
can be no assurance that the Company will not in the future be subject to legal
and/or contractual restrictions which restrict its ability to do so, including
but not limited to those factors discussed in "Risks of Foreign Operations"
below. In addition, the participation by the Company and certain of its
subsidiaries in an accounts receivable securitization program affects the
Company's receipt of certain collections on accounts receivable that are
covered by that program.
-14-
15
Cyclical Nature of Industry
Sales of the Company's principal products are related to the
construction and renovation of commercial and institutional buildings. Such
activity is cyclical and can be affected by the strength of a country's general
economy, prevailing interest rates and other factors that lead to cost control
measures by businesses and other users of commercial or institutional space.
The effects of such cyclicality upon the new construction sector of the market
tends to be more pronounced than its effects upon the renovation sector.
Although the predominant portion of the Company's sales are generated from the
renovation sector, any such adverse cycle, in either sector of the market,
would lessen the overall demand for commercial interiors products, which could
impair the Company's growth.
Reliance on Key Personnel
The Company believes that its continued success will depend to a
significant extent upon the efforts and abilities of its senior management
executives, particularly Ray C. Anderson, Chairman of the Board and Chief
Executive Officer; Charles R. Eitel, President and Chief Operating Officer; and
Brian L. DeMoura, Senior Vice President of the Company. Each of Messrs.
Anderson, Eitel and DeMoura recently signed employment agreements with the
Company containing certain covenants of non-competition. In addition, the
Company relies significantly on the leadership of its design staff by David
Oakey of the design firm Roman Oakey, Inc., which provides product
design/production engineering services to the Company under a consulting
contract. The loss of all or some of such personnel could have an adverse
impact on the Company.
-15-
16
Risks of Foreign Operations
The Company has substantial international operations. In fiscal 1996,
approximately 35% of the Company's revenues and a significant portion of the
Company's production were outside the United States, primarily in Europe, and
the Company's corporate strategy includes the expansion of its international
business on a worldwide basis. As a result, the Company's operations are
subject to various political, economic and other uncertainties, including risks
of restrictive taxation policies, foreign exchange restrictions, changing
political conditions and governmental regulations. The Company also receives a
substantial portion of its revenues in currencies other than U.S. Dollars,
which makes it subject to the risks inherent in currency translations.
Although the Company's ability to manufacture and ship products from facilities
in several foreign countries reduces the risks of foreign currency fluctuations
it might otherwise experience, and the Company also engages from time to time
in hedging programs intended to further reduce those risks, the scope and
volume of the Company's global operations make it impossible to eliminate
completely all foreign currency translation risks as a factor for the Company's
financial results.
Reliance on Petroleum-Based Raw Materials
Petroleum-based products comprise the predominant portion of the cost
of raw materials used by the Company in manufacturing. While the Company
generally attempts to match cost increases with corresponding price increases,
large increases in the cost of such petroleum-based raw materials could
adversely affect the Company if the Company were unable to pass through to its
customers such increases in raw material costs.
Reliance on Third Party for Supply of Fiber
E. I. DuPont de Nemours and Company ("DuPont") currently supplies a
significant percentage of the Company's requirements for synthetic fiber, the
principal raw material used in the Company's carpet products. DuPont also
competes with the Company's Re:Source Americas network through DuPont's own
distribution channel and aligned carpet mills. While the Company believes that
there are adequate alternative sources of supply from which it could fulfill
its synthetic fiber requirements, the unanticipated termination or interruption
of the supply arrangement with DuPont could have a material adverse effect on
the Company because of the cost and delay associated with shifting more
business to another supplier.
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 Articles of Incorporation (composite as of September 8, 1988) (included as Exhibit 3.1 to the
Company's annual report on Form 10-K for the year ended January 3, 1993 previously filed with the
Commission and incorporated herein by reference) and Articles of Amendment (Series A Preferred
Stock Designation), dated June 17, 1993 (included as Exhibit 4.1 to the Company's current report on
Form 8-K, filed with the Commission on July 7, 1993 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.
4.2 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
-16-
17
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).
4.3 Registration Rights Agreement dated as of November 21, 1995, among the Company, certain
subsidiaries of the Company as Guarantors and the Initial Purchasers of the Company's Notes
(included as Exhibit 4.3 to the Company's registration statement on Form S-4, File No. 33-65201,
previously filed with the Commission and incorporated herein by reference).
4.4 Form of Exchange Note (included as part of Exhibit 4.2).
10.1 Form of Salary Continuation Agreement
27.1 Financial Data Schedule (for SEC use only).
(b) No reports on Form 8-K were filed during the quarter ended March 30, 1997.
- 17 -
18
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 13, 1997 By:/s/ Daniel T. Hendrix
---------------------
Daniel T. Hendrix
Senior Vice President
(Principal Financial Officer)
-18-
19
EXHIBIT INDEX
EXHIBIT DESCRIPTION OF EXHIBIT SEQUENTIAL
NUMBER PAGE NO.
10.1 Form of Salary Continuation Agreement
27.1 Financial Data Schedule (for SEC use only)
-19-