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 31, 2002 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 10, 2002: <TABLE> <CAPTION> Class Number of Shares ----- ---------------- <S> <C> Class A Common Stock, $.10 par value per share 43,879,339 Class B Common Stock, $.10 par value per share 7,188,598 </TABLE>
INTERFACE, INC. INDEX <TABLE> <CAPTION> PAGE ---- <S> <C> <C> PART I. FINANCIAL INFORMATION Item 1. Financial Statements 3 Consolidated Condensed Balance Sheets - 3 March 31, 2002 and December 30, 2001 Consolidated Condensed Statements of Operations - Three Months 4 Ended March 31, 2002 and April 1, 2001 Consolidated Statements of Comprehensive Income (Loss) - 4 Three Months Ended March 31, 2002 and April 1, 2001 Consolidated Condensed Statements of Cash Flows - 5 Three Months Ended March 31, 2002 and April 1, 2001 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 15 PART II. OTHER INFORMATION Item 1. Legal Proceedings 16 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-
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS INTERFACE, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (IN THOUSANDS) <TABLE> <CAPTION> MARCH 31, DECEMBER 30, 2002 2001 --------- ------------ (UNAUDITED) <S> <C> <C> ASSETS CURRENT ASSETS: Cash and Cash Equivalents $ 2,111 $ 793 Accounts Receivable 157,067 161,070 Inventories 170,733 168,249 Prepaid Expenses 38,028 31,018 Deferred Income Tax 16,718 17,640 --------- --------- TOTAL CURRENT ASSETS 384,657 378,770 PROPERTY AND EQUIPMENT, less accumulated depreciation 251,387 260,327 GOODWILL 251,130 251,874 OTHER ASSETS 71,166 63,783 --------- --------- $ 958,340 $ 954,754 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts Payable $ 68,494 $ 65,805 Accrued Expenses 94,758 100,566 Current Maturities of Long-Term Debt -- 1,667 --------- --------- TOTAL CURRENT LIABILITIES 163,252 168,038 LONG-TERM DEBT, less current maturities 13,188 178,327 SENIOR NOTES 325,000 150,000 SENIOR SUBORDINATED NOTES 125,000 125,000 DEFERRED INCOME TAXES and OTHER 26,516 26,474 --------- --------- TOTAL LIABILITIES 652,956 647,839 --------- --------- Minority Interest 4,546 4,440 --------- --------- SHAREHOLDERS' EQUITY: Common Stock 5,099 5,082 Additional Paid-In Capital 219,818 219,490 Retained Earnings 175,078 175,940 Accumulated Other Comprehensive Income - Foreign Currency Translation (88,096) (86,976) Minimum pension liability (11,061) (11,061) --------- --------- TOTAL SHAREHOLDERS' EQUITY 300,838 302,475 --------- --------- $ 958,340 $ 954,754 </TABLE> See accompanying notes to consolidated condensed financial statements. -3-
INTERFACE, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> THREE MONTHS ENDED ------------------------------ MARCH 31, APRIL 1, 2002 2001 --------- -------- <S> <C> <C> NET SALES $ 234,425 $306,511 Cost of Sales 168,084 217,593 --------- -------- GROSS PROFIT ON SALES 66,341 88,918 Selling, General and Administrative Expenses 55,865 71,813 --------- -------- OPERATING INCOME 10,476 17,105 Interest Expense 10,375 9,564 Other Expense (Income) - Net 309 273 --------- -------- INCOME (LOSS) BEFORE TAXES ON INCOME (208) 7,268 Income Tax (Benefit) Expense (102) 2,838 --------- -------- NET INCOME (LOSS) $ (106) $ 4,430 ========= ======== Basic Earnings (Loss) Per Share $ 0.00 $ 0.09 ========= ======== DILUTED EARNINGS (LOSS) PER SHARE $ 0.00 $ 0.09 ========= ======== Average Shares Outstanding -- Basic 50,017 49,972 ========= ======== Average Shares Outstanding -- Diluted 50,017 50,945 ========= ======== </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 ---------------------------- MARCH 31, APRIL 1, 2002 2001 -------- -------- <S> <C> <C> Net Income (Loss) $ (106) $ 4,430 Other Comprehensive Income, Foreign Currency Translation Adjustment (1,120) (10,623) ------- -------- Comprehensive Income (Loss) $(1,226) $ (6,193) ======= ======== </TABLE> See accompanying notes to consolidated condensed financial statements. -4-
INTERFACE, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS) <TABLE> <CAPTION> THREE MONTHS ENDED ------------------------------ MARCH 31, APRIL 1, 2002 2001 --------- -------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: $ 3,784 $(23,004) --------- -------- INVESTING ACTIVITIES: Capital expenditures (2,444) (10,771) Acquisitions/Divestitures of businesses -- -- Other (5,830) (1,394) --------- -------- (8,274) (12,165) --------- -------- FINANCING ACTIVITIES: Net borrowing (repayment) of long-term debt (168,413) 32,737 Proceeds from issuance of bonds 175,000 -- Proceeds from issuance of common stock 77 -- Repurchase of common stock -- (1,407) Dividends paid (762) (2,291) --------- -------- 5,902 29,039 --------- -------- Net cash provided by (used for) operating, investing and financing activities 1,412 (6,130) Effect of exchange rate changes on cash (94) (448) --------- -------- CASH AND CASH EQUIVALENTS: Net change during the period 1,318 (6,578) Balance at beginning of period 793 7,861 --------- -------- Balance at end of period $ 2,111 $ 1,283 ========= ======== </TABLE> See accompanying notes to consolidated condensed financial statements. -5-
INTERFACE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS NOTE 1 - CONDENSED FOOTNOTES As contemplated by the Securities and Exchange Commission (the "Commission") instructions to Form 10-Q, the following footnotes have been condensed and, therefore, do not contain all disclosures required in connection with annual financial statements. Reference should be made to the notes to the Company's year-end financial statements contained in its Annual Report on Form 10-K for the fiscal year ended December 30, 2001, 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) March 31, December 30, 2002 2001 --------- ------------ <S> <C> <C> Finished Goods $ 90,724 $ 84,191 Work in Process 36,875 35,204 Raw Materials 43,134 48,854 -------- -------- $170,733 $168,249 ======== ======== </TABLE> NOTE 3 - RESTRUCTURING CHARGES During 2001, the Company recorded a pre-tax restructuring charge of $65.1 million. The charge reflected: (i) the withdrawal from the European broadloom market; (ii) the consolidation in the Company's raised/access flooring operations; (iii) the further rationalization of the U.S. broadloom operations; (iv) a worldwide workforce reduction of approximately 838 employees; and (v) the consolidation of certain non-strategic Re:Source Americas operations. The Company initially recorded a charge of $62.2 million during the third quarter of 2001, and in the fourth quarter of 2001 recorded an additional $2.9 million charge related to pension benefits for terminated European employees. Specific elements of the restructuring activities, the related costs and current status of the plan are discussed below. U.S. Recent economic developments have caused a decline in demand for raised/access flooring, panel fabric and certain of the Company's other products. In order to better match the cost structure to the expected revenue base, the Company closed two raised/access flooring plants and one panel fabric plant, eliminated certain product lines, consolidated certain under-performing distribution locations and made other head-count reductions. A charge of approximately $28.8 million was recorded representing the reduction of carrying value of the related property and equipment, impairment of intangible assets and other costs to close these operations. Additionally, the Company recorded approximately $5.3 million of termination benefits associated with the facility closures and other head-count reductions. Europe For the past several years the Company's European broadloom operations have had negative returns. The softening global economy during 2001, and the events of September 11, 2001 (which severely impacted consumers of broadloom carpet in the hospitality, leisure and airline businesses) led management to conclude that positive returns from this operation were unlikely for the near future. As a result, the Company elected to divest of this operation. The Company also elected to consolidate certain production and administrative facilities throughout Europe. A charge of approximately $19.0 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. Additionally, the Company recorded approximately $12.0 million of termination benefits associated with the facility closures. -6-
A summary of the restructuring activities is presented below: <TABLE> <CAPTION> U.S. EUROPE TOTAL ------- ------- ------- (IN THOUSANDS) <S> <C> <C> <C> Facilities consolidation $ 5,889 $ 8,685 $14,574 Workforce reduction 5,266 12,049 17,315 Product rationalization 15,735 1,070 16,805 Other impaired assets 6,997 9,394 16,391 ------- ------- ------- $33,887 $31,198 $65,085 ======= ======= ======= </TABLE> The restructuring charge was comprised of $24.0 million of cash expenditures for severance benefits and other costs and $41.1 million of non-cash charges, primarily for the write-down of carrying value and disposal of certain assets. The termination benefits of $17.3 million, primarily related to severance costs, are a result of aggregate reductions of approximately 838 employees. The staff reductions as originally planned were expected to be as follows: <TABLE> <CAPTION> U.S. EUROPE TOTAL ---- ------ ------ <S> <C> <C> <C> Manufacturing....................... 243 436 679 Selling and administrative.......... 62 97 159 --- --- --- 305 533 838 === === === </TABLE> As a result of the restructuring, approximately 800 employees were terminated through March 31, 2002. The charge for termination benefits and other costs to exit activities incurred during 2001 was reflected as a separately stated charge against operating income. The Company believes the remaining provisions are adequate to complete the plan. The following table displays the activity within the accrued restructuring liability for the period ended March 31, 2002: Termination Benefits <TABLE> <CAPTION> U.S. EUROPE TOTAL ------- ------- -------- (IN THOUSANDS) <S> <C> <C> <C> Balance, at December 30, 2001 ... $ 1,971 $ 9,352 $ 11,323 Cash payments ................... (800) (4,715) (5,515) ------- ------- -------- Balance, at March 31, 2002 ...... $ 1,171 $ 4,637 $ 5,808 ======= ======= ======== </TABLE> Other Costs to Exit Activities <TABLE> <CAPTION> U.S. EUROPE TOTAL ------- ------- ------- (IN THOUSANDS) <S> <C> <C> <C> Balance, at December 30, 2001 ... $ 1,199 $ 6,114 $ 7,313 Costs incurred .................. (600) (1,176) (1,776) ------- ------- ------- Balance, at March 31, 2002 ...... $ 599 $ 4,938 $ 5,537 ======= ======= ======= </TABLE> NOTE 4 - EARNINGS PER SHARE AND DIVIDENDS Basic earnings per share is computed by dividing net income (or loss) 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 50,017,000 shares and 49,972,000 shares outstanding for the three-month periods ended March 31, 2002 and April 1, 2001, 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 50,017,000 shares and 50,945,000 shares outstanding for the three month period ended March 31, 2002 and April 1, 2001, respectively. During the first three months of 2002, there were vested, unexercised, in the money stock options for 2,100,000 shares. These shares were not included in the computation of the diluted per share amount because the Company was in a net loss position and, thus, any potential common shares were anti-dilutive. -7-
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) For the Three-Month Average Shares Earnings Period Ended Net Income Outstanding Per Share ---------- -------------- --------- <S> <C> <C> <C> March 31, 2002 $ (106) 50,017 $0.00 Effect of Dilution: Options -- -- -- ------- ------ ----- Diluted $ (106) 50,017 $0.00 ======= ====== ===== April 1, 2001 $ 4,430 49,972 $0.09 Effect of Dilution: Options -- 973 -- ------- ------ ----- Diluted $ 4,430 50,945 $0.09 ======= ====== ===== </TABLE> NOTE 5 - SEGMENT INFORMATION 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 on Form 10-K for the fiscal year ended December 30, 2001, 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-
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 March 31, 2002 Net Sales $174,277 $ 52,394 $ 7,754 $ 234,425 Depreciation and amortization 4,412 2,932 241 7,585 Operating Income 8,926 1,564 (106) 10,384 Total Assets $674,240 $252,323 $ 34,866 $ 961,429 Three Months Ended April 1, 2001 Net Sales $230,237 $ 58,991 $ 17,283 $ 306,511 Depreciation and amortization 7,817 2,988 285 11,100 Operating Income 11,638 3,843 (129) 15,352 Total Assets $785,224 $233,466 $ 42,207 $1,060,897 </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) March 31, 2002 April 1, 2001 --------------- ------------- DEPRECIATION AND AMORTIZATION <S> <C> <C> Total segment depreciation and amortization $ 7,585 $ 11,100 Corporate depreciation and amortization 1,618 1,410 --------- ----------- Reported depreciation and amortization $ 9,203 $ 12,510 OPERATING INCOME (LOSS) Total segment operating income (loss) $ 10,384 $ 15,352 Corporate expenses and other reconciling amounts 92 1,753 --------- ----------- Reported operating income $ 10,476 $ 17,105 ASSETS Total segment assets $ 961,429 $ 1,060,897 Corporate assets and eliminations (3,089) (22,937) --------- ----------- Reported total assets $ 958,340 $ 1,037,960 </TABLE> -9-
NOTE 6 - LONG-TERM DEBT On January 17, 2002, the Company amended and restated its revolving credit facility. The amendment and restatement, among other things, substituted certain lenders, changed certain covenants, and reduced the maximum borrowing amount to $100 million. In connection with the amendment and restatement of the facility, the Company issued the 10.375% Senior Notes discussed below. The amended facility matures May 15, 2005, subject to a possible extension of that maturity date to January 17, 2007 if the Company meets certain conditions relating to the repayment of long-term debt. Interest is charged at varying rates based on the Company's ability to meet certain performance criteria. On January 17, 2002, the Company also completed a private offering of $175 million in 10.375% Senior Notes due 2010. Interest is payable semi-annually on February 1st and August 1st beginning August 1st, 2002. Proceeds from the issuance of these Notes were used to pay down the revolving credit facility. The Notes are guaranteed, jointly and severally, on an unsecured senior basis by certain of the Company's domestic subsidiaries. The Notes are redeemable up to 35% at any time prior to February 1, 2005 with the proceeds of one or more equity offerings at a price of 110 3/8% of the principal amount. NOTE 7 - SUPPLEMENTAL GUARANTOR FINANCIAL STATEMENTS The Guarantor Subsidiaries, which consist of the Company's principal domestic subsidiaries, are guarantors of the Company's 10.375% senior notes due 2010, its 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 MARCH 31, 2002 <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 $183,271 $68,903 $ -- $(17,749) $ 234,425 Cost of sales 139,968 45,865 -- (17,749) 168,084 -------- ------- -------- -------- --------- Gross profit on sales 43,303 23,038 -- -- 66,341 Selling, general and administrative Expenses 34,018 16,451 5,396 -- 55,865 Operating income (loss) 9,285 6,587 (5,396) 10,476 Other expense 4,122 815 5,747 -- 10,684 -------- ------- -------- -------- --------- Income (loss) before taxes on income and equity in income of subsidiaries 5,163 5,772 (11,143) -- (208) Income tax (benefit) expense 1,889 1,584 (3,575) -- (102) Equity in income of subsidiaries -- -- 7,462 (7,462) -- -------- ------- -------- -------- --------- Net income (loss) $ 3,274 $ 4,188 $ (106) $ (7,462) $ (106) ======== ======= ======== ======== ========= </TABLE> -10-
BALANCE SHEET MARCH 31, 2002 <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 $ 6,347 $ 8,455 $ (12,691) $ -- $ 2,111 Accounts receivable 116,771 65,874 (25,578) -- 157,067 Inventories 120,086 50,647 -- -- 170,733 Miscellaneous 8,519 18,225 28,002 -- 54,746 --------- --------- --------- --------- --------- Total current assets 251,723 143,201 (10,267) -- 384,657 Property and equipment less accumulated depreciation 168,961 68,122 14,304 -- 251,387 Investment in subsidiaries 120,092 (31,496) 828,828 (917,424) -- Goodwill 167,170 82,749 1,211 -- 251,130 Other assets 53,656 36,567 (19,057) -- 71,166 --------- --------- --------- --------- --------- $ 761,602 $ 299,143 $ 815,019 $(917,424) $ 958,340 ========= ========= ========= ========= ========= LIABILITIES AND COMMON SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 34,101 $ 34,133 $ 260 $ -- $ 68,494 Accrued expenses 76,699 83,775 (65,716) -- 94,758 --------- --------- --------- --------- --------- Total current liabilities 110,800 117,908 (65,456) -- 163,252 Long-term debt, less current maturities 6,587 55 6,546 -- 13,188 Senior notes and senior subordinated notes -- -- 450,000 -- 450,000 Deferred income taxes/other 15,343 (6,773) 17,946 -- 26,516 --------- --------- --------- --------- --------- Total liabilities 132,730 111,190 409,036 -- 652,956 Minority interests -- 4,546 -- -- 4,546 Redeemable preferred stock 57,891 -- -- (57,891) -- Common stock 94,145 102,199 5,082 (196,327) 5,099 Additional paid-in capital 191,411 12,525 219,818 (203,936) 219,818 Retained earnings 286,459 157,465 189,530 (458,376) 175,078 Foreign currency translation adjustment (1,034) (77,721) (8,447) (894) (88,096) Minimum pension liability -- (11,061) -- -- (11,061) --------- --------- --------- --------- --------- $ 761,602 $ 299,143 $ 815,019 $(917,424) $ 958,340 ========= ========= ========= ========= ========= </TABLE> -11-
STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2002 <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 $ 1,377 $ 6,849 $ (4,442) $ -- $ 3,784 Cash flows from investing activities: Purchase of plant and equipment (2,591) 1,312 (1,165) -- (2,444) Other assets (622) 156 (5,364) -- (5,830) ------- ------- --------- -------- --------- Net cash provided by (used for) investing activities (3, 213) 1,468 (6,529) -- (8,274) ------- ------- --------- -------- --------- Cash flows from financing activities: Net borrowings (repayments) 2,500 (4,527) (166,386) -- (168,413) Proceeds from issuance of bonds -- -- 175,000 -- 175,000 Proceeds from issuance/ repurchase of common stock -- -- 77 -- 77 Cash dividends paid -- -- (762) -- (762) ------- ------- --------- -------- --------- Net cash provided by (used for) financing activities 2,500 (4,527) 7,929 -- 5,902 ------- ------- --------- -------- --------- Effect of exchange rate change on cash (163) 69 -- -- (94) ------- ------- --------- -------- --------- Net increase (decrease) in cash 501 3,859 (3,042) -- 1,318 Cash at beginning of period 5,846 4,596 (9,649) -- 793 ------- ------- --------- -------- --------- Cash at end of period $ 6,347 $ 8,455 $ (12,691) $ -- $ 2,111 ======= ======= ========= ======== ========= </TABLE> NOTE 8 - NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board finalized Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations. SFAS 141 also requires the recognition of acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after June 30, 2001, and to purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142, the reclassification of the carrying amounts of intangible assets and goodwill based on the criteria in SFAS 141. SFAS 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires companies to identify reporting units for the purpose of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS 142 requires a transitional goodwill impairment test six months from the date of adoption. We also reassessed the useful lives of other intangible assets within the first quarter of 2002. -12-
The Company adopted the new standards on accounting for goodwill and other intangible assets beginning in the first quarter of fiscal 2002. The Company will complete the first step of the transitional goodwill impairment test in connection with the adoption of SFAS 142 during the second quarter of 2002, and is currently evaluating the effect that the impairment review may have on its consolidated results of operations and financial position. If an impairment is indicated, such amount will be recorded as a cumulative effect of accounting change effective December 30, 2001. In June 2001, the Financial Accounting Standards Board approved the issuance of SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS 143 establishes accounting standards for the recognition and measurement of legal obligations associated with the retirement of tangible long-lived assets and requires recognition of a liability for an asset retirement obligation in the period in which it is incurred. The provisions of this statement are effective for financial statements issued for fiscal years beginning after June 15, 2002. We are in the process of evaluating the impact this standard will have on our financial statements. In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 addresses financial accounting for the impairment or disposal of long-lived assets. The provisions of this satement are effective for financial statements issued for fiscal years beginning after December 15, 2001. We are in the process of evaluating the impact this standard will have on our financial statements. In April 2002, the Financial Accounting Standards Board issued SFAS No. 145, "Rescission of SFAS No. 4, 44, 64, Amendment of SFAS No. 13, and Technical Corrections." SFAS 4, which was amended by SFAS 64, required all gains and losses from the extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. As a result, the criteria in Opinion 30 will now be used to classify those gains and losses. SFAS 13 was amended to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. The adoption of SFAS 145 will not have a current impact on the Company's consolidated financial statements. 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 under the heading "Safe Harbor Compliance Statement for Forward-Looking Statements" included in Item 1 of the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 2001, which discussion is hereby incorporated by reference, including but not limited to the discussion of specific risks and uncertainties under the headings "We compete with a large number of manufacturers in the highly competitive commercial floorcovering products market, and some of these competitors have greater financial resources than we do," "Sales of our principal products may be affected by cycles in the construction and renovation of commercial and institutional buildings," "Our continued success depends significantly upon the efforts, abilities and continued service of our senior management executives and our design consultants," "Our substantial international operations are subject to various political, economic and other uncertainties," "Our Chairman, together with other insiders, currently has sufficient voting power to elect a majority of our Board of Directors," "Large increases in the cost of petroleum-based raw materials, which we are unable to pass through to our customers, could adversely affect us," "Unanticipated termination or interruption of our arrangement with our primary third-party supplier of synthetic fiber could have a material adverse effect on us," "Our Rights Agreement, which is triggered if a third party acquires beneficial ownership of 15% or more of our common stock without our consent, could discourage tender offers or other transactions that could result in shareholders receiving a premium over the market price for our 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-
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 March 31, 2002, the Company had revenues of $234.4 million and net loss of $106,000, or $0.00 per diluted share, compared with revenues of $306.5 million and net income of $4.4 million, or $0.09 per diluted share, in the comparable period last year. Results of Operations For the three-month period ended March 31, 2002, the Company's net sales decreased $72.1 million (23.5%) compared with the same period in 2001. The decrease was primarily attributable to (i) the decline of panel fabric sales to certain OEM furniture manufacturers as a result of reduced demand in the commercial interiors market, (ii) poor macroeconomic conditions, and (iii) reduced demand for steel panel products made by our raised/access flooring division. Cost of sales, as a percentage of net sales, increased slightly to 71.7% for the three-month period ended March 31, 2002, compared with 71.0% in the comparable period in 2001. The percentage increase was primarily attributable to (i) the under-absorption of fixed manufacturing costs due to lower volume levels, (ii) a shift in our relative sales mix from products which have traditionally higher margins to those with traditionally lower margins, and (iii) other manufacturing costs associated with scaling production to meet current demand levels. Selling, general and administrative expenses, as a percentage of net sales, increased to 23.8% for the three month period ended March 31, 2002, compared with 23.4% in the same period in 2001. Despite the slight increase in selling, general and administrative expenses as a percentage of sales, those expenses in absolute dollars have declined as a result of cost-cutting initiatives and other restructuring activities. For the three-month period ended March 31, 2002, interest expense increased $0.1 million compared to the same period in 2001, due primarily to higher interest rates on our debt. Liquidity and Capital Resources On January 17, 2002, the Company amended and restated its revolving credit facility. The amendment and restatement, among other things, substituted certain lenders, changed certain covenants, and reduced the maximum borrowing amount to $100 million. In connection with the amendment and restatement of the facility, the Company issued the 10.375% Senior Notes discussed below. The amended facility matures May 15, 2005, subject to a possible extension of that maturity date to January 17, 2007 if the Company meets certain conditions relating to the repayment of long-term debt. Interest is charged at varying rates based on the Company's ability to meet certain performance criteria. On January 17, 2002, the Company also completed a private offering of $175 million in 10.375% Senior Notes due 2010. Interest is payable semi-annually on February 1st and August 1st beginning August 1st, 2002. Proceeds from the issuance of these Notes were used to pay down the revolving credit facility. The Company's primary source of cash during the three months ended March 31, 2002 was $6.9 million from long-term financing. The primary uses of cash during the three month period ended March 31, 2002 were (i) costs associated with the aforementioned private offering of Senior Notes, (ii) an increase in prepaid expenses, (iii) $2.4 million for additions to property and equipment in the Company's manufacturing facilities, and (iv) $0.8 million for the payment of stock dividends. Management believes that cash provided by operations and long-term loan commitments (including the issue of senior notes) will provide adequate funds for current commitments and other requirements in the foreseeable future; however, certain factors could affect our free cash flow, including, but not limited to, the following factors discussed under the heading "Safe Harbor Compliance Statement for Forward-Looking Statements" in Item 1 of the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 2001: "Sales of our principal products may be affected by cycles in the construction and renovation of commercial and institutional buildings," "Our substantial international operations are subject to various political, economic and other uncertainties," "Large increases in the cost of petroleum-based raw materials, which we are unable to pass through to our customers, could adversely affect us," and "Unanticipated termination or interruption of our arrangement with our primary third-party supplier of synthetic fiber could have a material adverse effect on us." -14-
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. At March 31, 2002, the Company had utilized interest rate swap agreements to effectively convert approximately $125 million of fixed rate debt into variable rate debt. The Company anticipates that for the remainder of fiscal 2002 it will not utilize swap agreements or other derivative financial instruments to convert variable rate to fixed rate debt, or vice versa. 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 bath, 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 March 31, 2002, recognized a $1.1 million decrease in its foreign currency translation adjustment account compared to December 30, 2001 because of the weakening of certain currencies against the U.S. dollar. 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 March 31, 2002. The market values that result from -15-
these computations are compared with the market values of these financial instruments at March 31, 2002. The differences in this comparison are the hypothetical gains or losses associated with each type of risk. As of March 31, 2002, 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 $8.3 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 $9.2 million. At December 30, 2001, a 150 basis point movement would have resulted in the same approximate changes. As of March 31, 2002, 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 $6.7 million or an increase in the fair value of the Company's financial instruments of $6.7 million. At December 30, 2001, 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 Tate Litigation. On August 24, 2000, Tate Access Floors, Inc. ("Tate") filed suit in the United States District Court for the District of Maryland, Civil Action No. JFM-00-2543, against the Company's raised/access flooring subsidiary, Interface Architectural Resources, Inc. ("IAR"), alleging that a feature of IAR's Bevel Edge flooring panel infringes a patent held by Tate. The case has settled on confidential terms. The settlement had no material adverse impact on the Company. In addition, the United States Patent and Trademark Office has granted IAR's request for re-examination of the Tate patent, which is continuing. 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-
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> 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. 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). 4.5 Indenture governing the Company's 10.375% Senior Notes due 2010, among the Company, certain U.S. subsidiaries of the Company, as Guarantors, and First Union National Bank, as Trustee (included as Exhibit 4.5 to the Company's Annual Report on Form 10-K for the year ended December 30, 2001 (the "2001 10-K"), previously filed with the Commission and incorporated herein by reference). 4.6 Registration Rights Agreement, dated as of January 17, 2002, among the Company, certain U.S. subsidiaries of the Company, as Guarantors, Salomon Smith Barney, Inc. and First Union Securities, Inc. (included as Exhibit 4.6 to the 2001 10-K, previously filed with the Commission and incorporated herein by reference). </TABLE> (b) The following reports on Form 8-K were filed during the quarter ended March 31, 2002: <TABLE> <CAPTION> Date Filed Items Reported Financial Statements Filed ---------------- -------------------------------- -------------------------- <S> <C> <C> January 15, 2002 Commencement of Private Offering None January 24, 2002 Closing of Private Offering None </TABLE> -17-
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INTERFACE, INC. Date: May 14, 2002 By: /s/ Patrick C. Lynch -------------------------------------------- Patrick C. Lynch Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) -18-