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 October 1, 1995 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 October 18, 1995: Class Number of Shares - ---------------------------------------------- ---------------- Class A Common Stock, $.10 par value per share 15,274,659 Class B Common Stock, $.10 par value per share 2,994,694 Page 1 of _______ Pages The Exhibit Index appears at page _____.
2 INTERFACE, INC. INDEX <TABLE> <CAPTION> Page ---- <S> <C> Part I. FINANCIAL INFORMATION Item 1. Consolidated Condensed Financial Statements Balance Sheets - October 1, 1995 and January 1, 1995 3 Statements of Income - Three Months and Nine Months Ended October 1, 1995 and October 2, 1994 4 Statements of Cash Flows - Nine Months Ended October 1, 1995 and October 2, 1994 5 Notes to Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Part II. OTHER INFORMATION Item 1. Legal Proceedings 11 Item 2. Changes in the Rights of the Company's Security Holders 11 Item 3. Defaults by the Company on Its Senior Securities 11 Item 4. Submission of Matters to a Vote of Security Holders 11 Item 5. Other Information 11 Item 6. Exhibits and Reports on Form 8-K 12 </TABLE> 2
3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS INTERFACE, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED) <TABLE> <CAPTION> (In thousands, except share data) - ------------------------------------------------ October 1, January 1, ASSETS 1995 1995 - ------------------------------------------------ ---------- ---------- <S> <C> <C> CURRENT ASSETS: Cash and Cash Equivalents $ 3,034 $ 4,389 Escrowed and Restricted Funds 2,413 2,663 Accounts Receivable 113,145 133,536 Inventories 138,801 132,650 Deferred Tax Asset 4,485 3,767 Prepaid Expenses 18,055 15,110 -------- -------- TOTAL CURRENT ASSETS 279,933 292,115 PROPERTY AND EQUIPMENT, less accumulated depreciation 170,218 152,874 EXCESS OF COST OVER NET ASSETS ACQUIRED 212,446 202,852 OTHER ASSETS 43,155 40,093 -------- -------- $705,752 $687,934 ======== ======== LIABILITIES AND COMMON SHAREHOLDERS' EQUITY - ----------------------------------------------- CURRENT LIABILITIES: Accounts Payable $ 54,673 $ 59,702 Accrued Expenses 55,892 56,940 Current Maturities of Long-Term Debt 1,550 853 -------- -------- TOTAL CURRENT LIABILITIES 112,115 117,495 LONG-TERM DEBT, less current maturities 207,979 209,663 CONVERTIBLE SUBORDINATED DEBENTURES 103,925 103,925 DEFERRED INCOME TAXES 19,635 17,761 -------- -------- TOTAL LIABILITIES 443,654 448,844 -------- -------- Redeemable Preferred Stock 25,000 25,000 Common Stock: Class A 1,887 1,871 Class B 300 308 Additional Paid-In Capital 94,186 93,450 Retained Earnings 146,160 136,343 Foreign Currency Translation Adjustment 12,311 (136) Treasury Stock, 3,600,000 Class A Shares, at Cost (17,746) (17,746) -------- -------- $705,752 $687,934 ======== ======== </TABLE> See accompanying notes to consolidated condensed financial statements. 3
4 INTERFACE, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED) <TABLE> <CAPTION> (In thousands except per share amounts) - --------------------------------------- Three Months Ended Nine Months Ended --------------------------------------------------- October 1, October 2, October 1, October 2, 1995 1994 1995 1994 --------------------- ---------------------- <S> <C> <C> <C> <C> Net Sales $203,269 $184,959 $597,414 $527,343 Cost of Sales 139,574 129,149 412,636 367,641 --------------------- ---------------------- Gross Profit on Sales 63,695 55,810 184,778 159,702 Selling, General and Administrative Expenses 47,373 42,246 139,613 123,559 --------------------- ---------------------- Operating Income 16,322 13,564 45,165 36,143 Other Expense - Net 7,730 6,930 21,909 19,316 --------------------- ---------------------- Income before Taxes on Income 8,592 6,634 23,256 16,827 Taxes on Income 3,265 2,387 8,838 6,057 --------------------- ---------------------- Net Income 5,327 4,247 14,418 10,770 Less: Preferred Dividends 438 438 1,312 1,313 --------------------- ---------------------- Net Income Applicable to Common Shareholders $ 4,889 $ 3,809 $ 13,106 $ 9,457 ===================== ====================== Earnings Per Share Primary $ 0.27 $ 0.21 $ 0.72 $ 0.53 ===================== ====================== Fully Diluted* $ 0.26 $ 0.21 * $ 0.71 $ 0.53 * ===================== ====================== Weighted Average Common Shares Outstanding Primary 18,252 18,191 18,237 17,953 ===================== ====================== Fully Diluted 26,087 26,027 26,072 25,786 ===================== ====================== </TABLE> * For the three month and nine month periods ended October 2, 1994, earnings per share on a fully dilutive basis were antidilutive. See accompanying notes to consolidated condensed financial statements. 4
5 INTERFACE, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> Nine Months Ended --------------------------- October 1, October 2, (In thousands) 1995 1994 - -------------- ---------- ---------- <S> <C> <C> OPERATING ACTIVITIES: Net income $ 14,418 $ 10,770 Adjustment to reconcile net income to cash provided by operating activities: Depreciation and amortization 21,285 22,047 Deferred income taxes 1,815 1,337 Cash provided by (used for): Accounts receivable 23,528 2,552 Inventories 647 (12,989) Prepaid and other (2,057) (647) Accounts payable and accrued expenses (3,818) (16,325) -------- -------- 55,818 6,745 -------- -------- INVESTING ACTIVITIES: Capital expenditures (26,186) (14,071) Acquisitions of businesses (15,203) (643) Other (2,798) 1,547 -------- -------- (44,187) (13,167) -------- -------- FINANCING ACTIVITIES: Net borrowing (reduction) of long-term debt (9,114) 9,490 Issuance of common stock 744 453 Dividends paid (4,597) (4,544) -------- -------- (12,967) 5,399 -------- -------- Net cash provided by operating, investing and financing activities (1,336) (1,023) Effect of exchange rate changes on cash (19) 406 -------- -------- CASH AND CASH EQUIVALENTS: Net increase (decrease) during the period (1,355) (617) Balance at beginning of period 4,389 4,674 -------- -------- Balance at end of period $ 3,034 $ 4,057 ======== ======== </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 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 January 1, 1995, as filed with the Securities and Exchange Commission. NOTE 2 - RECEIVABLES During August 1995, the Company entered into an agreement with a financial institution to sell up to $65 million of certain domestic accounts receivable under a continuous sale program. Under this agreement, undivided interests in designated receivable pools are sold to the purchaser with recourse limited to the receivables purchased. Fees paid by the Company under this agreement are based on certain variable rate indices and are recorded as Other Expense. As of October 1, 1995 the Company had sold accounts receivable under this agreement for which net proceeds of approximately $37.9 million were received. NOTE 3 - INVENTORIES Inventories are summarized as follows: <TABLE> <CAPTION> October 1, January 1, 1995 1995 ---------- ---------- <S> <C> <C> Finished Goods $ 72,746 $ 74,542 Work-in-Process 28,561 20,250 Raw Materials 37,494 37,858 -------- -------- $138,801 $132,650 ======== ======== </TABLE> NOTE 4 - BUSINESS ACQUISITIONS In June 1995, the Company acquired substantially all of the assets of Toltec Fabrics, Inc., a North Carolina based company, for approximately $13,280,000 (comprised of $7,530,000 in cash and $5,750,000 in notes). The acquisition was accounted for as a purchase and, accordingly, the results of operations are included in the Company's consolidated financial statements from the date of acquisition. 6
7 INTERFACE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS NOTE 5 - EARNINGS PER SHARE AND DIVIDENDS Earnings per share are computed by dividing net income applicable to common shareholders by the combined weighted average number of shares of Class A and Class B Common Stock outstanding during the particular reporting period. The computation does not include a negligible dilutive effect of outstanding stock options. Neither the Convertible Subordinated Debentures issued in September 1988 nor the Series A Cumulative Convertible Preferred Stock issued during June 1993 were determined to be common stock equivalents. In computing primary earnings per share, the preferred stock dividend reduces income applicable to common shareholders. For the purposes of computing earnings per share and dividends paid per share, the Company is treating as treasury stock (and therefore not outstanding) the shares that are owned by a wholly-owned subsidiary (3,600,000 Class A shares, recorded at cost). __________________________________________ 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. 7
8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS. For the three month and nine month periods ended October 1, 1995, the Company's net sales increased $18.3 million (9.9%) and $70.1 million (13.3%), respectively, compared with the same periods in 1994. The increase was primarily attributable to (i) increased sales volume in the Company's floorcoverings operations in the United States, United Kingdom, Southeast Asia and Greater China, (ii) continued improvement in unit volume in the Company's interior fabrics and chemical operations, (iii) sales generated by Toltec Fabrics, Inc., which was acquired in June 1995, and, (iv) the strengthening of certain key currencies (particularly the British pound sterling, Dutch guilder and Japanese yen) against the U.S. dollar, the Company's reporting currency. These increases were offset somewhat by a decrease in floorcoverings sales volume in Japan, Australia and certain markets within Continental Europe. Cost of sales decreased as a percentage of sales for the three and nine month periods ended October 1, 1995, compared with the same periods in 1994. The decrease was due primarily to (i) a reduction of manufacturing costs in the Company's carpet tile operations (particularly the U.S manufacturing facility) as the Company implemented a make-to-order ("mass customization") production strategy and "war-on-waste" initiative, leading to increased manufacturing efficiencies, and an attendant shift in product mix to higher margin products, (ii) the weakening of the U.S. dollar against certain key currencies which lowered the cost of U.S. produced goods sold in export markets, and (iii) decreased manufacturing costs in the Company's interior fabrics business as a result of improved manufacturing efficiencies. These benefits were somewhat offset by raw material price increases in the interior fabrics and chemical operations, and the acquisitions of Prince Street Technologies, Ltd. and Toltec Fabrics, which, historically, had higher cost of sales ratios than the Company. Selling, general and administrative expenses as a percentage of sales increased to 23.3% for the three month period, and remained flat at 23.4% for the nine month period, ended October 1, 1995, compared to 22.8% and 23.4% for the same periods in 1994. The increase for the three month period was attributable to an increase in design, marketing and sampling costs for the Company's floorcovering operations (principally the U.S. carpet tile operation), and the acquisition of Toltec Fabrics which, historically, had a higher S G & A ratio than the Company. For the three month and nine month periods ended October 1, 1995, the Company's other expense increased $0.8 million and $2.6 million, respectively, compared to the same periods in 1994, primarily due to an increase in bank debt and increased interest rates. 8
9 As a result of the aforementioned factors, the Company's net income (after adjustment for preferred dividends) increased 28.4% to $4.9 million and 38.6% to $13.1 million, respectively, for the three month and nine month periods ended October 1, 1995, compared to the same periods in 1994. LIQUIDITY AND CAPITAL RESOURCES. The primary uses of cash during the nine months ended October 1, 1995 have been (i) $ 26.2 million for additions to property and equipment in the Company's manufacturing facilities, including the new carpet tile facility in Thailand (scheduled to become operational in early 1996) and new broadloom carpet facility for Prince Street in Atlanta (scheduled to be operational in November 1995), (ii) $14.0 million associated with the acquisition of Toltec Fabrics, (iii) $9.1 million for reduction of long-term debt, (iv) $1.2 million for business acquisitions in the Company's architectural resources unit, and (v) $4.6 million for dividends paid. These uses were funded by $55.8 million in operating activities which includes $37.9 million from the sale of domestic receivables under the securitization program. The Company, as of October 1, 1995, recognized a $12.4 million decrease in foreign currency translation adjustment compared to that of January 1, 1995. This improvement in translation adjustment was largely due to a significant quarter-end strengthening of the British pound sterling and the Dutch guilder compared to the U.S. dollar. The adjustment to shareholders' equity was converted by the guidelines of the Financial Accounting Standards Board (FASB) 52. The Company employs a variety of off-balance sheet financial instruments to reduce its exposure to adverse fluctuations in interest and foreign currency exchange rates, including foreign currency swap agreements and foreign currency exchange contracts. At October 1, 1995, the Company had approximately $45.0 million (notional amount) of foreign currency hedge contracts outstanding, consisting principally of forward exchange contracts. These contracts serve to hedge firmly committed Dutch guilder, German mark, Japanese yen, French franc, British pound sterling and other foreign currency revenues. At October 1, 1995, interest rate and currency swap agreements related to certain foreign currency denominated promissory notes effectively converted approximately $29 million of variable rate debt to fixed rate debt. At October 1, 1995, the weighted average fixed rate on the Dutch guilder and Japanese yen borrowings was 7.43%. The interest rate and currency swap agreements have maturity dates ranging from nine to twelve months. The Company continually monitors its position with, and the credit quality of, the financial institutions which are counterparties to its off-balance sheet financial instruments and does not anticipate nonperformance by the counterparties. 9
10 In August 1995, the Company and certain of its domestic subsidiaries entered into a continuous sale program (account receivable securitization facility) with a financial institution that provides for the sale of up to $65 million of trade receivables. Under this agreement, undivided interests in designated receivable pools are sold to the purchaser with recourse limited to the receivables purchased. Fees paid by the Company under this agreement are based on certain variable market rate indices and are recorded as Other Expense. The Company had received approximately $37.9 million under the arrangement as of October 1, 1995. In January 1995, the Company amended its existing revolving credit and term loan facilities. The amendment provided for, among other things, (i) an increase in the revolving credit facility from $125 million to $200 million (including a letter of credit facility of up to $40 million), (ii) a decrease in the secured term loans from approximately $135 million to $50 million, and (iii) a new accounts receivable securitization facility of up to $100 million. Additionally, the term of the agreement has been extended to June 30, 1999 for the revolving credit facilities, and December 31, 2001 for the term loans. Management believes that the cash provided by operations and available under long-term loan commitments will provide adequate funds for current commitments and other requirements in the foreseeable future. 10
11 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is not aware of any material pending legal proceedings involving it or any of its property. ITEM 2. CHANGES IN THE RIGHTS OF THE COMPANY'S SECURITY HOLDERS None ITEM 3. DEFAULTS BY THE COMPANY ON ITS SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION The Company is actively seeking financing to fund a call for the redemption of all its outstanding 8% Convertible Subordinated Debentures Due 2013 (the "Convertible Debentures"). Under their terms, the Convertible Debentures may be called for redemption at any time upon 30 days' notice at a price of 102.4% of their principal amount, plus accrued and unpaid interest. In the event of a call, debenture holders would be entitled to convert all or a portion of the principal amount into shares of Interface Class A Common Stock, at a price of $16.9125 per share, at any time up to two business days before the redemption date. Interface will not call the Convertible Debentures unless and until it has obtained financing that would cover the aggregate redemption price if 100% of the Convertible Debentures are redeemed, as opposed to being converted by their respective holders. An aggregate of approximately $106.5 million will be required to redeem 100% of the Convertible Debentures into shares of Interface Class A Common Stock. The Company has considered several options for obtaining the financing necessary to redeem the Convertible Debentures, and has commenced a private offering of senior subordinated notes to raise $125 million. There is no assurance that the private offering will be completed or that the financing necessary for a redemption of the Convertible Debentures will be available from any source on acceptable terms. Under applicable securities law requirements, certain terms about the private offering that the Company has commenced cannot be publicly disclosed unless and until the transaction is consummated. On October 31, 1995, the closing price of the Class A Common Stock on the Nasdaq National Market was $15.125 per share. The closing price of the Convertible Debentures on that date was $103.75. 11
12 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> 10.1 Agreement of Brian L. DeMoura (Change in Control) 10.2 Amendment No. 1 to the Employment Agreement of Brian L. DeMoura 10.3 Agreement of Charles R. Eitel (Change in Control) 10.4 Amendment No. 1 to the Employment Agreement of Charles R. Eitel 10.5 Agreement of F. Colville Harrell (Change in Control) 10.6 Employment Agreement of F. Colville Harrell 10.7 Agreement of Daniel T. Hendrix (Change in Control) 10.8 Employment Agreement of Daniel T. Hendrix 10.9 Agreement of David W. Porter (Change in Control) 10.10 Employment Agreement of David W. Porter 10.11 Agreement of Donald E. Russell (Change in Control) 10.12 Amendment No. 1 to the Employment Agreement of Donald E. Russell 10.13 Agreement of Gordon D. Whitener (Change in Control) 27 Financial Data Schedule (for SEC use only). </TABLE> (b) No reports on Form 8-K were filed during the quarter ended October 1, 1995. 12
13 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: November 1, 1995 By: /s/Daniel T. Hendrix -------------------------------- Daniel T. Hendrix Vice President (Principal Financial Officer) 13
14 EXHIBIT INDEX <TABLE> <CAPTION> EXHIBIT DESCRIPTION OF EXHIBIT SEQUENTIAL NUMBER PAGE NO. <S> <C> <C> 10.1 Agreement of Brian L. DeMoura (Change in Control) 10.2 Amendment No. 1 to the Employment Agreement of Brian L. DeMoura 10.3 Agreement of Charles R. Eitel (Change in Control) 10.4 Amendment No. 1 to the Employment Agreement of Charles R. Eitel 10.5 Agreement of F. Colville Harrell (Change in Control) 10.6 Employment Agreement of F. Colville Harrell 10.7 Agreement of Daniel T. Hendrix (Change in Control) 10.8 Employment Agreement of Daniel T. Hendrix 10.9 Agreement of David W. Porter (Change in Control) 10.10 Employment Agreement of David W. Porter 10.11 Agreement of Donald E. Russell (Change in Control) 10.12 Amendment No. 1 to the Employment Agreement of Donald E. Russell 10.13 Agreement of Gordon D. Whitener (Change in Control) 27 Financial Data Schedule (for SEC use only) </TABLE> 14