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 April 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 May 8, 2001: Class Number of Shares ----- ---------------- Class A Common Stock, $.10 par value per share 43,824,876 Class B Common Stock, $.10 par value per share 7,088,503 1
2 INTERFACE, INC. INDEX <TABLE> <CAPTION> PAGE ---- <S> <C> PART I. FINANCIAL INFORMATION Item 1. Financial Statements 3 Consolidated Condensed Balance Sheets - 3 April 1, 2001 and December 31, 2000 Consolidated Condensed Statements of Operations - Three Months Ended 4 April 1, 2001 and April 2, 2000 Consolidated Condensed Statements of Comprehensive Income (Loss) - Three 4 Months Ended April 1, 2001 and April 2, 2000 Consolidated Condensed Statements of Cash Flows - Three Months 5 Ended April 1, 2001 and April 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 15 Item 2. Changes in Securities and Use of Proceeds 16 Item 3. Defaults Upon Senior Securities 16 Item 4. Submission of Matters to a Vote of Security Holders 16 Item 5. Other Information 16 Item 6. Exhibits and Reports on Form 8-K 17 </TABLE> 2
3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS INTERFACE, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS) <TABLE> <CAPTION> APRIL 1, DECEMBER 31, 2001 2000 ----------- ----------- (Unaudited) <S> <C> <C> ASSETS - ------ CURRENT ASSETS: Cash and Cash Equivalents $ 1,283 $ 7,861 Accounts Receivable 201,682 204,886 Inventories 207,280 198,063 Prepaid Expenses 31,188 22,765 Deferred Income Taxes 13,005 13,533 ----------- ----------- TOTAL CURRENT ASSETS 454,438 447,108 PROPERTY AND EQUIPMENT, less accumulated depreciation 256,532 258,245 EXCESS OF COST OVER NET ASSETS ACQUIRED 258,874 264,656 OTHER ASSETS 68,116 64,840 ----------- ----------- $ 1,037,960 $ 1,034,849 ----------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES: Accounts Payable $ 89,329 $ 97,874 Accrued Expenses 102,386 107,467 Current Maturities of Long-Term Debt 359 808 ----------- ----------- TOTAL CURRENT LIABILITIES 192,074 206,149 LONG-TERM DEBT, less current maturities 177,456 146,550 SENIOR NOTES 150,000 150,000 SENIOR SUBORDINATED NOTES 125,000 125,000 DEFERRED INCOME TAXES and OTHER 23,920 29,551 ----------- ----------- TOTAL LIABILITIES 668,450 657,250 Minority Interest 4,109 5,164 Common Stock 5,815 5,831 Additional Paid-In Capital 217,364 218,261 Retained Earnings 243,543 241,400 Accumulated Other Comprehensive Income - Foreign Currency Translation (83,575) (72,952) Treasury Stock, 7,200 and 7,493 shares, respectively, at cost (17,746) (20,105) ----------- ----------- $ 1,037,960 $ 1,034,849 ----------- ----------- </TABLE> 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) <TABLE> <CAPTION> THREE MONTHS ENDED --------------------------------- APRIL 1, APRIL 2, 2001 2000 -------- --------- <S> <C> <C> NET SALES $306,511 $ 293,218 Cost of Sales 217,593 204,552 -------- --------- GROSS PROFIT ON SALES 88,918 88,666 Selling, General and Administrative Expenses 71,813 70,443 Restructuring Charge -- 20,095 -------- --------- OPERATING INCOME (LOSS) 17,105 (1,872) Interest Expense 9,564 9,284 Other Expense (Income) - Net 273 745 -------- --------- INCOME BEFORE TAXES ON INCOME 7,268 (11,901) Income Tax Expense 2,838 (3,097) -------- --------- NET INCOME (LOSS) $ 4,430 $ (8,804) ======== ========= Basic Earnings Per Share $ 0.09 $ (0.17) ======== ========= DILUTED EARNINGS PER SHARE $ 0.09 $ (0.17) ======== ========= Average Shares Outstanding -- Basic 49,972 51,826 ======== ========= Average Shares Outstanding -- Diluted 50,945 51,826 ======== ========= </TABLE> See accompanying notes to consolidated condensed financial statements. INTERFACE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED) (IN THOUSANDS) <TABLE> <CAPTION> THREE MONTHS ENDED --------------------------------- APRIL 1, APRIL 2, 2001 2000 -------- --------- <S> <C> <C> Net Income (Loss) $ 4,430 $ (8,804) Other Comprehensive Income, Foreign Currency Translation Adjustment (10,623) (5,225) -------- -------- Comprehensive Income (Loss) $ (6,193) $(14,029) ========= ======== </TABLE> See accompanying notes to consolidated condensed financial statements. 4
5 INTERFACE, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS) <TABLE> <CAPTION> THREE MONTHS ENDED --------------------------------- APRIL 1, APRIL 2, 2001 2000 -------- -------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: $(23,004) $ (1,934) -------- -------- INVESTING ACTIVITIES: Capital expenditures (10,771) (5,548) Other (1,394) 1,894 -------- -------- (12,165) (3,654) -------- -------- FINANCING ACTIVITIES: Net borrowing of long-term debt 32,737 10,376 Issuance/Repurchase of common stock (1,407) (643) Dividends paid (2,291) (2,332) -------- -------- 29,039 7,401 -------- -------- Net cash provided by (used in) operating, investing and financing activities (6,130) 1,813 Effect of exchange rate changes on cash (448) (175) -------- -------- CASH AND CASH EQUIVALENTS: Net change during the period (6,578) 1,638 Balance at beginning of period 7,861 2,548 -------- -------- Balance at end of period $ 1,283 $ 4,186 ======== ======== </TABLE> 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: <TABLE> <CAPTION> (In thousands) April 1, December 31, 2001 2000 -------- ------------ <S> <C> <C> Finished Goods $111,987 $101,411 Work in Process 39,719 40,939 Raw Materials 55,574 55,713 -------- -------- $207,280 $198,063 ======== ======== </TABLE> NOTE 3 - BUSINESS ACQUISITIONS AND DIVESTITURES During the third quarter of 2000, the Company acquired Teknit, Ltd., a United Kingdom company with a Michigan subsidiary, which manufactures three-dimensional knits for the office furniture industry, for a purchase price of $3.9 million in cash. The transaction was accounted for as a purchase, and, accordingly, the results of operations have been included within the consolidated financial statements as of the acquisition date. During 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 has 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, have 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. 6
7 Between 1996 and 1999 the Company created a distribution channel through the acquisition of twenty-nine service companies located throughout the U.S. Since that time two of these businesses have failed to achieve satisfactory operating income levels. During 2000, the Company elected to divest of these under-performing operations. As a result, a charge of approximately $7.6 million was recorded, representing the reduction of 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: <TABLE> <CAPTION> (In Thousands) U.S. Europe Grand Total - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> 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 ======= ======= ======= </TABLE> 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 three months of 2001, the Company repurchased 245,300 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 3,040,113 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 49,972,000 shares and 51,826,000 shares outstanding for the three-month period ended April 1, 2001 and April 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 50,945,000 shares and 51,826,000 shares outstanding for the three month period ended April 1, 2001 and April 2, 2000, respectively. 7
8 The following is a reconciliation from basic earnings per share to diluted earnings per share for each of the periods presented: <TABLE> <CAPTION> (In Thousands Except Per Share Amounts) Average For the Three-Month Shares Earnings Period Ended Net Income Outstanding Per Share - ----------------------------------------------------------------------------------------- <S> <C> <C> <C> April 1, 2001 $ 4,430 49,972 $ 0.09 Effect of Dilution: Options -- 973 -------------------------------------------------------- Diluted $ 4,430 50,945 $ 0.09 ======================================================== - ----------------------------------------------------------------------------------------- April 2, 2000 $(8,804) 51,826 $(0.17) Effect of Dilution: Options -- -- -------------------------------------------------------- Diluted $(8,804) 51,826 $(0.17) ======================================================== - ----------------------------------------------------------------------------------------- </TABLE> NOTE 7 - SEGMENT INFORMATION During 1998, the Company adopted SFAS 131 which establishes standards for the way that public business enterprises report information about operating segments in their financial statements. The standard defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company's chief operating decision maker aggregates operating segments based on the type of products produced by the segment. Based on the quantitative thresholds specified in SFAS 131, the Company has determined that it has two reportable segments. The two reportable segments are Floorcovering Products/Services and Interior Fabrics. The Floorcovering Products/Services segment manufactures, installs and services commercial modular and broadloom carpet, 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 as 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: <TABLE> <CAPTION> Floorcovering Interior Other (Includes (in thousands) Products/Services Fabrics Architectural Products) Total - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Three Months Ended April 1, 2001 Net sales $ 230,237 $ 58,991 $ 17,283 $ 306,511 Depreciation and amortization 7,817 2,988 295 11,100 Operating income 11,638 3,843 (129) 15,352 Total assets 785,224 233,466 42,207 1,060,897 - -------------------------------------------------------------------------------------------------------------------- Three Months Ended April 2, 2000 Net sales $ 230,570 $ 51,378 $ 11,270 $ 293,218 Depreciation and amortization 6,812 2,261 294 9,367 Operating income (4,415) 5,225 (208) 602 Total assets 789,442 218,577 49,069 1,057,088 - -------------------------------------------------------------------------------------------------------------------- </TABLE> A reconciliation of the Company's total segment operating income, depreciation and amortization and assets to the corresponding consolidated amounts follows: <TABLE> <CAPTION> Three Months Ended (in thousands) --------------------------------------- April 1, 2001 April 2, 2000 <S> <C> <C> DEPRECIATION AND AMORTIZATION Total segment depreciation and amortization $ 11,100 $ 9,367 Corporate depreciation and amortization 1,410 1,350 ----------- ----------- Reported depreciation and amortization $ 12,510 $ 10,717 - ------------------------------------------------------------------------------------------------------- OPERATING INCOME Total segment operating income $ 15,352 $ 602 Corporate expenses and other reconciling amounts 1,753 (2,474) ----------- ----------- Reported operating income $ 17,105 $ (1,872) - ------------------------------------------------------------------------------------------------------- ASSETS Total segment assets $ 1,060,897 $ 1,057,088 Corporate assets and eliminations (22,937) (62,832) ----------- ----------- Reported total assets $ 1,037,960 $ 994,256 - ------------------------------------------------------------------------------------------------------- </TABLE> 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 THREE MONTHS ENDED APRIL 1, 2001 <TABLE> <CAPTION> CONSOLIDATION NON- INTERFACE, INC. AND GUARANTOR GUARANTOR (PARENT ELIMINATION CONSOLIDATED SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTALS ------------ ------------ --------------- -------------- ------------ (IN THOUSANDS) <S> <C> <C> <C> <C> <C> Net sales $234,336 $97,026 $ -- $(24,851) $306,511 Cost of sales 175,406 67,038 -- (24,851) 217,593 -------- ------- -------- -------- -------- Gross profit on sales 58,930 29,988 -- -- 88,918 Selling, general and administrative expenses 45,048 21,243 5,522 -- 71,813 Restructuring charge -- -- -- -- -- -------- ------- -------- -------- -------- Operating income 13,882 8,745 (5,522) 17,105 Other expense 4,306 3,097 2,434 -- 9,837 -------- ------- -------- -------- -------- Income before taxes on income and equity in income of subsidiaries 9,576 5,648 (7,956) -- 7,268 Taxes on income 3,261 1,940 (2,363) -- 2,838 Equity in income of subsidiaries -- -- 10,023 (10,023) -- -------- ------- -------- -------- -------- Net income (loss) applicable to $ 6,315 $ 3,708 $ 4,430 $(10,023) $ 4,430 common shareholders ======== ======= ======== ======== ======== </TABLE> 10
11 BALANCE SHEET APRIL 1, 2001 <TABLE> <CAPTION> CONSOLIDATION NON- INTERFACE, INC. AND GUARANTOR GUARANTOR (PARENT ELIMINATION CONSOLIDATED SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTALS ------------ ------------ --------------- ------------- ------------ (IN THOUSANDS) <S> <C> <C> <C> <C> <C> ASSETS Current Assets: Cash and cash equivalents $ 7,236 $ 3,397 $ (9,350) $ -- $ 1,283 Accounts receivable 162,677 82,288 (43,283) -- 201,682 Inventories 142,302 64,978 -- -- 207,280 Miscellaneous 13,632 32,805 (2,244) -- 44,193 ----------- ----------- ----------- ----------- ----------- Total current assets 325,847 183,468 (54,877) -- 454,438 Property and equipment less accumulated depreciation 167,070 73,103 16,359 -- 256,532 Investment in subsidiaries 77,722 1,909 902,686 (982,317) -- Excess of cost over net assets acquired 171,602 85,867 1,405 -- 258,874 Other assets 7,652 13,642 46,822 -- 68,116 ----------- ----------- ----------- ----------- ----------- $ 749,893 $ 357,989 $ 912,395 $ (982,317) $ 1,037,960 =========== =========== =========== =========== =========== LIABILITIES AND COMMON SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 48,852 $ 43,880 $ (3,403) $ -- $ 89,329 Accrued expenses 59,199 26,213 16,974 -- 102,386 Current maturities of long-term debt 4 355 -- -- 359 ----------- ----------- ----------- ----------- ----------- Total current liabilities 108,055 70,448 13,571 -- 192,074 Long-term debt, less current maturities 7,011 50,695 119,750 -- 177,456 Senior notes and senior subordinated notes -- -- 275,000 -- 275,000 Deferred income taxes/other 15,007 2,394 6,519 -- 23,920 ----------- ----------- ----------- ----------- ----------- Total liabilities 130,073 123,537 414,840 -- 668,450 Minority interests -- 4,109 -- -- 4,109 Redeemable preferred stock 57,891 -- -- (57,891) -- Common stock 94,145 102,199 5,815 (196,344) 5,815 Additional paid-in capital 191,411 12,525 217,364 (203,936) 217,364 Retained earnings 277,037 164,522 284,827 (482,843) 243,543 Foreign currency translation adjustment income (664) (48,903) (10,451) (23,557) (83,575) Treasury stock, 7,200,000 Class A -- shares, at cost -- -- -- (17,746) (17,746) ----------- ----------- ----------- ----------- ----------- $ 749,893 $ 357,989 $ 912,395 $ (982,317) $ 1,037,960 =========== =========== =========== =========== =========== </TABLE> 11
12 STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED APRIL 1, 2001 <TABLE> <CAPTION> CONSOLIDATION NON- INTERFACE, INC. AND GUARANTOR GUARANTOR (PARENT ELIMINATION CONSOLIDATED SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTALS ------------ ------------ ------------ -------------- ------------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> Net cash provided by (used for) operating activities $ 9,480 $(16,330) $(16,154) $ -- $(23,004) Cash flows from investing activities: Purchase of plant and equipment (8,738) (1,113) (920) -- (10,771) Acquisitions, net of cash acquired -- -- -- -- -- Other assets 2.365 (2,651) (1,108) -- (1,394) ------- -------- -------- --------- -------- Net cash provided by (used for) investing activities (6,373) (3,764) (2,028) -- (12,165) ------- -------- -------- --------- -------- Cash flows from financing activities: Net borrowings (repayments) (340) 19,986 13,091 -- 32,737 Proceeds from issuance/repurchase of common stock -- -- (1,407) -- (1,407) Cash dividends paid -- -- (2,291) -- (2,291) ------- -------- -------- --------- -------- Net cash provided by (used for) financing activities (340) 19,986 9,393 -- 29,039 ------- -------- -------- --------- -------- Effect of exchange rate change on cash -- (448) -- -- (448) ------- -------- -------- --------- -------- Net increase (decrease) in cash 2,767 (556) (8,789) -- (6,578) Cash at beginning of period 4,469 3,953 (561) -- 7,861 ------- -------- -------- --------- -------- Cash at end of period $ 7,236 $ 3,397 $ (9,350) $ -- $ 1,283 ======= ======== ======== ========= ======== </TABLE> NOTE 9 - DERIVATIVES The Company uses foreign currency forward contracts to hedge a portion of its forecasted transactions. These forward contracts are designated as foreign currency cash flow hedges and recorded at fair value in the statement of financial position. The recorded fair value is balanced by an entry to other comprehensive income (loss) in the statement of financial position until the underlying forecasted foreign currency transaction occurs. When the transaction occurs, the gain or loss from the derivative designated as a hedge of the transaction is reclassified from accumulated other comprehensive income (loss) to the same income statement line item in which the foreign currency gain or loss on the underlying hedged transaction is recorded. If the underlying forecasted transaction does not occur, the amount recorded in accumulated other comprehensive income (loss) is reclassified to the other expense (income) line of the income statement in the then-current period. Because the amounts and the maturities of the derivatives approximate those of the forecasted exposures, changes in the fair value of the derivatives are highly effective in offsetting changes in the cash flows of the hedged items. An ineffective portion of the derivatives is recognized in current earnings. The ineffective portion of the derivatives, which was immaterial for the period presented, primarily results from discounts or premiums on forward contracts. As of April 1, 2001, the Company had contracts maturing through August 1, 2001 to purchase and sell the equivalent of approximately $1.1 million of various currencies to hedge future foreign currency purchases and sales. The Company recorded an immaterial net loss from cash flow hedges related to forecasted foreign currency transactions in the three months ended April 1, 2001. These losses were offset by equivalent gains on the underlying hedged items. The amount as of April 1, 2001, that will be reclassified from accumulated other comprehensive income (loss) to earnings within the next twelve months that is associated with these hedges is not material. 12
13 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, President and Chief Executive Officer, 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. 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 three month period ended April 1, 2001, the Company had revenues of $306.5 million and net income of $4.4 million, or $0.09 per diluted share, compared to revenues of $293.2 million and net loss of $8.8 million, or ($0.17) per diluted share, in the comparable period last year. Results of Operations For the three-month period ended April 1, 2001, the Company's net sales increased $13.3 million (4.5%) compared with the same period in 2000. The first quarter increase was primarily attributable to sales volume in the Company's (i) Chatham Fabrics operation which was purchased in May of 2000, (ii) architectural products division, and (iii) European modular and broadloom operations which increased 14% in local currencies. The increase was offset somewhat by (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, and (iii) 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 three-month period ended April 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 13
14 Company's architectural products division and Chatham operations, which historically have had lower gross profit margins than the Company's other product sales, and (iii) the energy situation in California which disrupted the Company's U.S. broadloom operations during the first quarter of 2001. Selling, general and administrative expenses, as a percentage of net sales, declined to 23.4% for the three month period ended April 1, 2001, compared to 24.0% in the same period in 2000, primarily as a result of the Company's recent restructuring activities, as well as the consolidation of certain of its operations in Interface Americas through a "shared services" approach. For the three-month period ended April 1, 2001, interest expense increased $.3 million compared to the same period in 2000, due primarily to higher overall levels of bank debt. Liquidity and Capital Resources The Company's primary source of cash during the three months ended April 1, 2001 was $32.8 million from long-term financing. The primary uses of cash during the three month period ended April 1, 2001 were (i) the increase in overall inventory balances and the reduction of accounts payable and accrued expenses, (ii) $10.8 million for additions to property and equipment in the Company's manufacturing facilities, and (iii) $2.3 million for the payment of dividends. Management believes that cash provided by operations and long-term loan commitments will provide adequate funds for current commitments and other requirements in the foreseeable future; 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. Interest Rate Market Risk Exposure. Changes in interest rates affect the interest paid on certain of the Company's debt. To mitigate the impact of fluctuations in interest rates, management of the Company has developed and implemented a policy to maintain the percentage of fixed and variable rate debt within certain parameters. The Company maintains the fixed/variable rate mix within these parameters either by borrowing on a fixed-rate basis or entering into interest rate swap transactions. In the interest rate swaps, the Company agrees to exchange, at specified intervals, the difference between fixed and variable interest amounts calculated by reference to an agreed-upon notional principal linked to LIBOR. The interest rate swap agreements generally have maturity dates ranging from fifteen to twenty-four months. At April 1, 2001, the Company had no interest rate swap agreements in place. However, at April 2, 2000, the Company had utilized interest rate swap agreements to effectively convert approximately $43.7 million of variable rate debt to fixed rate debt. The Company anticipates that for the balance of fiscal 2001 it will utilize swap agreements or other derivative financial instruments to convert comparable amounts of variable rate to fixed rate debt. Foreign Currency Exchange Market Risk Exposure. A significant portion of the Company's operations consists of manufacturing and sales activities in foreign jurisdictions. The Company manufactures its products in the U.S., Canada, England, Northern Ireland, the Netherlands, Australia and Thailand, and sells its products in more than 100 countries. As a result, the Company's financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which the Company distributes its products. The Company's operating results are exposed to changes in exchange rates between the U.S. dollar and many other currencies, including the Dutch guilder, British pound sterling, German mark, 14
15 French franc, Canadian dollar, Australian dollar, Thai baht, Japanese yen, and, since the beginning of 1999, the euro. When the U.S. dollar strengthens against a foreign currency, the value of anticipated sales in those 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 contracts generally have maturity dates of fifteen to twenty-four months. At April 1, 2001, the Company had approximately $1.1 million (notional amount) of foreign currency hedge contracts outstanding. The Company expects to hedge a comparable notional amount for the balance of fiscal 2001. The Company, as of April 1, 2001, recognized a $10.6 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 April 1, 2001. The market values that result from these computations are compared with the market values of these financial instruments at April 1, 2001. The differences in this comparison are the hypothetical gains or losses associated with each type of risk. As of April 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 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 April 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. 15
16 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. Mediation is now scheduled for May 24-25, 2001. 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 coverage under the Company's insurance policies, which annually would otherwise provide up to $100 million of coverage. On June 8, 1999, the Company filed suit against the insurers to challenge that denial. That lawsuit is pending in the United States District Court for the Northern District of Georgia, Atlanta Division, Civil Action No. 1:99-CV-1485. 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 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. 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 None ITEM 5. OTHER INFORMATION None 16
17 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed with this report: <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - -------- ---------------------- <S> <C> <C> 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. 4.1 See Exhibits 3.1 and 3.2 for provisions in the Company's Articles of Incorporation and Bylaws defining the rights of holders of Common Stock of the Company. 4.2 Rights Agreement between the Company and Wachovia Bank, N.A., dated as of March 4, 1998, with an effective date of March 16, 1998 (included as Exhibit 10.1A to the Company's registration statement on Form 8-A/A dated March 12, 1998, previously filed with the Commission and incorporated herein by reference). 4.3 Indenture governing the Company's 9.5% Senior Subordinated Notes due 2005, dated as of November 15, 1995, among the Company, certain U.S. subsidiaries of the Company, as Guarantors, and First Union National Bank of Georgia, as Trustee (included as Exhibit 4.1 to the Company's registration statement on Form S-4, File No. 33-65201, previously filed with the Commission and incorporated herein by reference); and Supplement No. 1 to Indenture, dated as of December 27, 1996 (included as Exhibit 4.2(b) to the Company's Annual Report on Form 10-K for the year ended December 29, 1996, previously filed with the Commission and incorporated herein by reference). 4.4 Form of Indenture governing the Company's 7.3% senior notes due 2008, among the Company, certain U.S. subsidiaries of the Company, as Guarantors, and First Union National Bank, as trustee (included as Exhibit 4.1 to the Company's registration statement on Form S-3/A, File No. 333-46611, previously filed with the Commission and incorporated herein by reference). (b) No reports on Form 8-K were filed during the quarter ended April 1, 2001. </TABLE> 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 16, 2001 By: /s/ Daniel T. Hendrix ----------------------------------- Daniel T. Hendrix Executive Vice President and Chief Financial Officer (Principal Financial Officer) 18
19 EXHIBIT INDEX <TABLE> <CAPTION> Exhibit Number Description of Exhibit - -------- ---------------------- <S> <C> 3.2 Bylaws, as amended and restated. </TABLE> 19