1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities - --- Exchange Act of 1934 For Quarterly Period Ended March 30, 1997 Commission File Number 0-12016 ------------------------------ INTERFACE, INC. --------------- (Exact name of registrant as specified in its charter) GEORGIA 58-1451243 ------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2859 PACES FERRY ROAD, SUITE 2000, ATLANTA, GEORGIA 30339 --------------------------------------------------------- (Address of principal executive offices and zip code) (770) 437-6800 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ------ Shares outstanding of each of the registrant's classes of common stock at May 9, 1997: Class Number of Shares ----- ---------------- Class A Common Stock, $.10 par value per share 20,844,050 Class B Common Stock, $.10 par value per share 2,719,838
2 INTERFACE, INC. INDEX <TABLE> PAGE PART I. FINANCIAL INFORMATION ---- <S> <C> <C> Item 1. Financial Statements 3 Balance Sheets - March 30, 1997 and December 29, 1996 3 Statements of Income - Three Months 4 Ended March 30, 1997 and March 31, 1996 Statements of Cash Flows - Three Months 5 Ended March 30, 1997 and March 31, 1996 Notes to Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial 11 Condition and Results of Operations PART II. OTHER INFORMATION Item 1. Legal Proceedings 13 Item 2. Changes in Securities 13 Item 3. Defaults Upon Senior Securities 13 Item 4. Submission of Matters to a Vote of Security Holders 13 Item 5. Other Information 13 Item 6. Exhibits and Reports on Form 8-K 16 </TABLE> - 2 -
3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS INTERFACE, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS) <TABLE> <CAPTION> MARCH 30, DECEMBER 29, ASSETS 1997 1996 ------ ---- ---- <S> <C> <C> CURRENT ASSETS: Cash and Cash Equivalents $ - $ 8,762 Accounts Receivable 157,562 167,817 Inventories 152,956 146,678 Deferred Tax Asset 7,002 7,057 Prepaid Expenses 25,833 22,986 -------- -------- TOTAL CURRENT ASSETS 343,353 353,300 PROPERTY AND EQUIPMENT, less accumulated depreciation 210,964 208,791 EXCESS OF COST OVER NET ASSETS ACQUIRED 244,850 249,070 OTHER ASSETS 55,608 51,385 -------- -------- $854,775 $862,546 ======== ======== LIABILITIES AND COMMON SHAREHOLDERS' EQUITY ------------------------------------------- CURRENT LIABILITIES: Notes Payable $ 12,186 $ 14,918 Accounts Payable 70,643 74,960 Accrued Expenses 69,989 70,919 Current Maturities of Long-Term Debt 2,206 2,919 -------- -------- TOTAL CURRENT LIABILITIES 155,024 163,716 LONG-TERM DEBT, less current maturities 255,892 254,353 SENIOR SUBORDINATED NOTES 125,000 125,000 DEFERRED INCOME TAXES 23,403 23,484 ------- -------- TOTAL LIABILITIES 559,319 566,553 ------- -------- Minority Interest 3,125 3,125 Redeemable Preferred Stock - 19,750 Common Stock 2,698 2,536 Additional Paid-In Capital 148,014 124,557 Retained Earnings 173,182 166,828 Foreign Currency Translation Adjustment (13,817) (3,057) Treasury Stock, 3,600 Class A Shares, at Cost (17,746) (17,746) -------- -------- $854,775 $862,546 ======== ======== </TABLE> See accompanying notes to consolidated condensed financial statements. - 3 -
4 INTERFACE, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> THREE MONTHS ENDED ----------------------- MARCH 30, MARCH 31, 1997 1996 -------- -------- <S> <C> <C> Net Sales $257,345 $205,017 Cost of Sales 174,432 142,104 -------- -------- Gross Profit on Sales 82,913 62,913 Selling, General and Administrative Expenses 62,956 49,342 -------- -------- Operating Income 19,957 13,571 Other (Expense) Income - Net (9,543) (7,591) -------- -------- Income before Taxes on Income 10,414 5,980 Taxes on Income 4,061 2,272 -------- -------- Net Income 6,353 3,708 Less: Preferred Dividends -- 437 -------- -------- Net Income Applicable to Common Shareholders $ 6,353 $ 3,271 ======== ======== Primary Earnings Per Common Share $ 0.28 $ 0.18 ======== ======== Weighted Average Common Shares Outstanding 22,584 18,475 ======== ======== </TABLE> See accompanying notes to consolidated condensed financial statements. - 4 -
5 INTERFACE, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> THREE MONTHS ENDED -------------------------- MARCH 30, MARCH 31, 1997 1996 -------- -------- (IN THOUSANDS) <S> <C> <C> OPERATING ACTIVITIES: Net income $ 6,353 $ 3,708 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 10,023 8,247 Deferred income taxes 40 14 Cash provided by (used for): Accounts receivable 6,698 (10,576) Inventories (8,633) (6,569) Prepaid and other (8,578) (3,669) Accounts payable and accrued expenses (7,786) 6,264 -------- -------- (1,883) (2,581) -------- -------- INVESTING ACTIVITIES: Capital expenditures (11,878) (10,111) Acquisitions of businesses - (18,969) Other (3,257) (4,978) -------- -------- (15,135) (34,058) -------- -------- FINANCING ACTIVITIES: Net borrowing (reduction) of long-term debt 4,455 34,176 Issuance of common stock 3,869 490 Dividends paid - (1,547) -------- -------- 8,324 33,119 -------- -------- Net cash provided by (used for) operating, investing and financing activities (8,694) (3,520) Effect of exchange rate changes on cash (68) (2) -------- -------- CASH AND CASH EQUIVALENTS: Net increase (decrease) during the period (8,762) (3,522) Balance at beginning of period 8,762 8,750 -------- -------- Balance at end of period $ - $ 5,228 -------- -------- </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 29, 1996, as filed with the Commission. The financial information included in this report has been prepared by the Company, without audit, and should not be relied upon to the same extent as audited financial statements. In the opinion of management, the financial information included in this report contains all adjustments (all of which are normal and recurring) necessary for a fair presentation of the results for the interim periods. Nevertheless, the results shown for interim periods are not necessarily indicative of results to be expected for the full year. NOTE 2 - INVENTORIES Inventories are summarized as follows: <TABLE> <CAPTION> MARCH 30, DECEMBER 29, 1997 1996 ---- ---- <S> <C> <C> Finished Goods $ 89,877 $ 81,034 Work-in-Process 30,360 30,464 Raw Materials 32,719 35,180 -------- -------- $152,956 $146,678 ======== ======== </TABLE> NOTE 3 - BUSINESS ACQUISITIONS During fiscal 1996, the Company acquired 100% of the outstanding capital stock of fifteen floorcovering contractors -- Landry's Commercial Flooring Co., Inc., based in Oregon, Reiser Associates, Inc., based in Texas, Earl W. Bentley Operating Co., Inc., based in Oklahoma, Quaker City International, Inc., based in Pennsylvania, Superior Holding Inc., based in Texas, Flooring Consultants, Inc., based in Arizona, ParCom, Inc., based in Virginia, Congress Flooring Corp., based in Massachusetts, Southern Contract Systems, Inc., based in Georgia, B. Shehadi & Sons, Inc., based in New Jersey, A & F Installation, Inc., based in New Jersey, Lasher/White Carpet Co., Inc., based in New York; Oldtown Carpet Center, Inc., based in North Carolina; Architectural Floors, a division of Continental Office Furniture Corp., based in Ohio; and Floor Concepts, Inc., based in Maryland. As consideration, the Company issued 2,674,906 shares of Class A common stock valued at approximately $19.3 million, $.8 million in 7% Notes and $23.0 million in cash. All the acquisitions were accounted for as purchases, accordingly, the results of operations for the acquired companies are included in the Company's consolidated financial statements from the date of the acquisitions. The excess of the purchase price over the fair value of the net liabilities was approximately $33.9 million and is being amortized over 25 years. - 6 -
7 In February 1996, the Company acquired the outstanding common stock of Renovisions, Inc., a nationwide installation services firm (based in Georgia) that has pioneered a new method of carpet replacement, for approximately $4 million in cash and $1 million in guaranteed payments due February 1, 1997. The acquisition was accounted for as a purchase and, accordingly, the results of operations for Renovisions are included in the Company's consolidated financial statements from the date of acquisition. The excess of the purchase price over the fair value of net assets was approximately $4.3 million, and is being amortized over 25 years. In February 1996, the Company acquired the outstanding common stock of C-Tec, Inc., a Michigan based producer of raised/access flooring systems, for approximately $8.8 million (comprised of $4.5 million in cash and $4.3 million in 6% subordinated convertible notes). The acquisition was accounted for as a purchase and, accordingly, the results of operations for C-Tec are included in the Company's consolidated financial statements from the date of acquisition. The excess of the purchase price over the fair value of net liabilities was approximately $3.1 million, and is being amortized over 25 years. NOTE 4 - EARNINGS PER SHARE AND DIVIDENDS Earnings per share are computed by dividing net income applicable to common shareholders by the combined weighted average number of shares of Class A and Class B Common Stock outstanding during the particular reporting period. The earnings computation does not give effect to the negligible dilutive impact of outstanding stock options. The Series A Cumulative Convertible Preferred Stock issued in June 1993 is not considered to be a common stock equivalent because at the date of issuance the stated rate of interest was greater than 66 2/3% of the AAA bond rate. In computing primary earnings per share, the preferred stock dividend of 7% per annum reduces income applicable to common shareholders. For the purposes of computing earnings per share and dividends paid per share, the Company is treating as treasury stock (and therefore not outstanding) the shares that are owned by a wholly-owned subsidiary (3,600,000 Class A shares, recorded at cost). NOTE 5 - REDEEMABLE PREFERRED STOCK In December 1996, the Company notified its Series A preferred shareholders that it intended to redeem up to $10 million of the approximately $19.7 million (face value) Series A Preferred Stock then outstanding. As a result of this notice, the Series A preferred shareholders, with one exception, instead elected to convert their shares of Series A Preferred Stock into an aggregate of approximately 1,360,000 shares of the Company's Class A Common Stock. The shares of Series A Preferred Stock owned by the non-converting shareholder were redeemed for approximately $6,000. - 7 -
8 NOTE 6 - SUPPLEMENTAL GUARANTOR FINANCIAL STATEMENTS The Guarantor Subsidiaries, which consist of the Company's principal domestic subsidiaries, are guarantors of the Company's 9.5% senior subordinated notes due 2005. The Supplemental Guarantor Financial Statements are presented herein pursuant to requirements of the Securities and Exchange Commission. INTERFACE, INC. AND SUBSIDIARIES NOTE 6 - SUPPLEMENTAL GUARANTOR FINANCIAL STATEMENTS <TABLE> <CAPTION> FOR THE THREE MONTHS ENDED MARCH 30, 1997 INTERFACE, CONSOLIDATION NON- INC. AND GUARANTOR GUARANTOR (PARENT ELIMINATION CONSOLIDATED SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTALS ------------ ------------ ------------ ------- ------ (IN THOUSANDS) <S> <C> <C> <C> <C> <C> Net sales $204,115 $ 82,267 $ 0 (29,037) $257,345 Cost of sales 147,116 56,353 0 (29,037) 174,432 --------- --------- --------- --------- --------- Gross profit on sales 56,999 25,914 0 0 82,913 Selling, general and 42,190 16,702 4,064 0 62,956 administrative expenses --------- --------- --------- --------- --------- Operating income 14,809 9,212 (4,064) 0 19,957 Other expense (income) Interest Expense 1,662 1,111 5,618 0 8,391 Other 1,556 664 (1,066) 0 1,154 --------- --------- --------- --------- --------- Total other expense 3,218 1,775 4,552 0 9,545 --------- --------- --------- --------- --------- Income before taxes on income and equity in income of subsidiaries 11,591 7,437 (8,616) 0 10,412 Taxes on income 3,774 2,703 (2,418) 0 4,059 Equity in income of subsidiaries 0 0 12,551 (12,551) 0 --------- --------- --------- --------- --------- Net income before extraordinary items 7,817 4,734 6,353 (12,551) 6,353 Extraordinary loss (less applicable taxes) 0 0 0 0 0 --------- --------- --------- --------- --------- Net income 7,817 4,734 6,353 (12,551) 6,353 Preferred stock dividends 0 0 0 0 0 --------- --------- --------- --------- --------- Net income applicable to common shareholders $ 7,817 $ 4,734 $ 6,353 ($12,551) $ 6,353 ========= ========= ========= ========= ========= </TABLE> - 8 -
9 <TABLE> <CAPTION> MARCH 30, 1997 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 1,517 4,960 (6,477) 0 0 Accounts receivable 112,048 59,363 (13,849) 0 157,562 Inventories 106,610 46,048 298 0 152,956 Miscellaneous 9,727 13,320 9,788 0 32,835 -------- -------- --------- -------- -------- Total current assets 229,902 123,691 (10,240) 0 343,353 Property and equipment, less accumulated depreciation 147,099 58,112 5,753 0 210,964 Investment in subsidiaries 108,977 17,760 381,670 (508,407) 0 Miscellaneous 152,610 43,115 378,702 (518,819) 55,608 Excess of cost over net assets acquired 172,209 68,579 4,062 0 244,850 -------- -------- --------- -------- -------- 810,797 311,257 759,947 (1,027,226) 854,775 ======== ======== ========= ========== --------- LIABILITIES AND COMMON SHAREHOLDERS' EQUITY Current Liabilities: Notes payable 10,849 1,337 0 0 12,186 Accounts payable 45,707 22,776 2,160 0 70,643 Accrued expenses 46,177 27,398 (3,586) 0 69,989 Current maturities of long-term debt 2,206 0 0 0 2,206 -------- -------- -------- -------- -------- Total current liabilities 104,939 51,511 (1,426) 0 155,024 Long-term debt, less current maturities 240,939 43,457 304,271 (332,775) 255,892 Senior subordinated notes 0 0 125,000 0 125,000 Deferred income taxes 12,901 963 9,539 0 23,403 Minority interests 3,125 0 0 0 3,125 -------- -------- -------- -------- -------- Total liabilities 361,904 95,931 437,384 (332,775) 562,444 Redeemable preferred stock 57,891 0 0 (57,891) 0 Common stock 81,704 102,199 2,698 (183,903) 2,698 Additional paid-in capital 179,073 11,030 148,014 (190,103) 148,014 Retained earnings 135,294 108,412 173,812 (244,336) 173,182 Foreign currency translation adjustment (5,071) (6,313) (1,961) (472) (13,817) Treasury stock 0 0 0 (17,746) (17,746) -------- -------- -------- -------- -------- 810,795 311,259 759,947 (1,027,226) 854,775 ======== ======== ======== ========== ======== </TABLE> - 9 -
10 <TABLE> <CAPTION> FOR THE THREE MONTHS ENDED MARCH 30, 1997 INTERFACE, CONSOLIDATION NON- INC. AND GUARANTOR GUARANTOR (PARENT ELIMINATION CONSOLIDATED SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTALS ------------ ------------ ------------ ------- ------ (IN THOUSANDS) <S> <C> <C> <C> <C> <C> Cash flows from operating activities: 15,612 (9,727) (7,768) 0 (1,883) ------ ------ ------- --- -------- Cash flows from investing activities: Purchase of plant and equipment (8,270) (2,019) (1,589) 0 (11,878) Acquisitions, net of cash acquired 0 0 0 0 0 Other 0 0 (3,257) 0 (3,257) ------ ------ ------- --- -------- Net cash provided by (used in) investing activities (8,270) (2,019) (4,846) 0 (15,135) ------ ------ ------- ------- Cash flows from financing activities: Net borrowings (repayments) (9,306) 11,983 1,778 0 4,455 Proceeds from issuance of common stock 0 0 3,869 0 3,869 Cash dividends paid 0 0 0 0 0 Other 0 0 0 0 0 ------ ------ ------- --- -------- Net cash provided by (used in) financing activities (9,306) 11,983 5,647 0 8,324 ------ ------ ------- --- -------- Effect of exchange rate change on cash 0 (68) 0 0 (68) ------ ------ ------- --- -------- Net increase (decrease) in cash (1,964) 169 (6,967) 0 (8,762) Cash at beginning of year 3,481 4,791 490 0 8,762 ------ ------ ------- --- -------- Cash at end of year 1,517 4,960 (6,477) 0 0 ====== ====== ======= === ======== </TABLE> - 10 -
11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS. For the three month period ended March 30, 1997, the Company's net sales increased $52.3 million (26.0%), compared with the same period in 1996. The increase was primarily attributable to (i) increased sales volume in the Company's floorcovering operations in the United States (associated in part with the acquisitions of the commercial floorcovering dealers in the Company's Re:Source Americas network) and China, (ii) increased sales volume in the Company's interior fabrics operations in Continental Europe and Australia and (iii) increased sales volume in the Company's specialty products division associated with the acquisition of C-Tec, Inc. in February 1996. These increases were offset somewhat by a weakening of certain key currencies (particularly the British pound sterling, Dutch guilder and Japanese yen) against the U.S. dollar, the Company's reporting currency. Cost of sales, as a percentage of sales, decreased slightly to 67.8%, for the three month period ended March 30, 1997, when compared to 69.3% for the same period in 1996. The Company recognized a decrease in manufacturing costs in its floorcovering operations as a result of further benefits obtained from the Company's mass customization production strategy and its "war-on-waste" initiative, which have continued to provide manufacturing efficiencies as well as a shift to higher margin products. In addition, the Company achieved improved pricing in its floorcovering operations. These benefits were somewhat offset by the acquisitions of C-Tec and the commercial floorcovering dealers comprising the Company's distribution network, which historically had higher cost of sales ratios than the Company. Selling, general and administrative expenses as a percentage of net sales increased slightly to 24.5% for the three month period ended March 30, 1997, compared to 24.1% for the same period in 1996. The increase for the three month period was attributable to (i) administrative expenses associated with continued building of an infrastructure to manage the Re:Source Americas network, (ii) increased marketing and sampling expenses in the Company's floorcovering operations associated with the introduction of new products as the Company moved to implement the mass customization strategy in its European and Asia-Pacific operations, and continued to impelement such strategy in its U.S. operations. The increase was somewhat offset by the acquisitions of the commercial floorcovering dealers comprising the Company's distribution network, which historically had lower SG&A ratios than the Company. For the three month period ended March 30, 1997, the Company's other expense increased $1.9 million compared to the same period in 1996, primarily due to an increase in bank debt incurred as a result of the Company's acquisitions. As a result of the aforementioned factors, the Company's net income increased 94.0% to $6.4 million for the three month period ended March 30, 1997, compared to the same period in 1996. This increase is also partly due to the Company no longer having to pay preferred dividends as a result of the elimination of its Series A Preferred Stock in December 1996. - 11 -
12 LIQUIDITY AND CAPITAL RESOURCES. The primary uses of cash during the three month period ended March 30, 1997 have been (i) $ 11.9 million for additions to property and equipment in the Company's manufacturing facilities, and (ii) $3.3 million related to various deposits and other long-term assets. These uses were funded primarily by $4.5 million from long-term financing and $3.9 million from the issuance of common stock. Cash provided by operating activities increased to ($1.9) million during the three month period ended March 30, 1997 from ($2.6) million during the corresponding period in the prior year. This increase was caused primarily by a decrease in accounts receivable resulting from the sale of additional domestic receivables under the Company's securitization program. This decrease was somewhat offset by an increase in inventories and prepaid expenses which are traditionally paid during the first quarter. The Company, as of March 30, 1997, recognized a $ 10.8 million decrease in foreign currency translation adjustment compared to that of December 29, 1996. The decrease was associated primarily with the Company's investments in subsidiaries located in the United Kingdom and Continental Europe. The translation adjustment to shareholders' equity was converted by the guidelines of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 52. The Company employs a variety of off-balance sheet financial instruments, including foreign currency swap agreements and foreign currency exchange contracts, to reduce its exposure to adverse fluctuations in interest and foreign currency exchange rates. At March 30, 1997, the Company had approximately $40 million (notional amount) of foreign currency hedge contracts outstanding, consisting principally of currency swap contracts to hedge firmly committed Dutch guilder and Japanese yen currency revenues. At March 30, 1997, the Company utilized interest rate swap agreements to effectively convert approximately $73 million of variable rate debt to fixed rate debt. The interest rate swap agreements have maturity dates ranging from nine to twenty-four months. The Company continually monitors its position with, and the credit quality of, the financial institutions which are counterparties to its off-balance sheet financial instruments and does not currently anticipate nonperformance by the counterparties. Management believes that the cash provided by operations and available under long-term loan commitments will provide adequate funds for current commitments and other requirements in the foreseeable future. -12-
13 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is not aware of any material pending legal proceedings involving it or any of its property. ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION CERTAIN FACTORS AFFECTING FORWARD LOOKING STATEMENTS Many of the matters discussed in this Quarterly Report on Form 10-Q and in the Company's other reports and filings with the Commission are forward looking statements. These statements involve a number of risks and uncertainties that could cause actual results to differ materially from any such statement. In addition to various other matters discussed elsewhere in this report and in the Company's other reports and filings with the Commission, the following is a nonexclusive list of factors that could cause actual results to differ materially: Substantial Indebtedness The Company's indebtedness is substantial in relation to its shareholders' equity. As of March 30, 1997, the Company's total long-term debt, (net of current portion), and its 9.5% senior subordinated notes due 2005, totaled $380.9 million or approximately 45% of its total capitalization. The Company's indebtedness could have several important consequences, including but not limited to the following: (i) a substantial portion of the Company's cash flow from operations must be dedicated to debt service requirements on its indebtedness and will not be available for other purposes; (ii) the Company's ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, or to refinance indebtedness or for general corporate purposes may be impaired; (iii) the Company's leverage may increase the effects of economic downturns on it and limit its ability to withstand competitive pressures; and (iv) the Company's ability to capitalize on significant business opportunities may be limited. -13-
14 Restrictions Imposed by Terms of Indebtedness The terms of the Company's outstanding indebtedness restrict the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments or investments, consummate certain asset sales, enter into certain transactions with affiliates, incur liens, or merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of their assets. They also require the Company to meet certain financial tests and comply with certain other reporting, affirmative and negative covenants. In an event of default under such indebtedness, the lenders thereunder could elect to declare all amounts borrowed, together with accrued interest, to be immediately due and payable and the lenders under the Company's credit agreement could terminate all commitments thereunder. If any such indebtedness were to be accelerated, there can be no assurance that the assets of the Company would be sufficient to repay in full such indebtedness and the other indebtedness of the Company. Holding Company Structure The Company derives all of its operating income and cash flow from its subsidiaries. The Company must rely upon cash distributions from its subsidiaries to generate the funds necessary to meet its obligations. Although there currently are no material restrictions on the Company's ability to control its receipt of dividends or other payments from its subsidiaries, there can be no assurance that the Company will not in the future be subject to legal and/or contractual restrictions which restrict its ability to do so, including but not limited to those factors discussed in "Risks of Foreign Operations" below. In addition, the participation by the Company and certain of its subsidiaries in an accounts receivable securitization program affects the Company's receipt of certain collections on accounts receivable that are covered by that program. -14-
15 Cyclical Nature of Industry Sales of the Company's principal products are related to the construction and renovation of commercial and institutional buildings. Such activity is cyclical and can be affected by the strength of a country's general economy, prevailing interest rates and other factors that lead to cost control measures by businesses and other users of commercial or institutional space. The effects of such cyclicality upon the new construction sector of the market tends to be more pronounced than its effects upon the renovation sector. Although the predominant portion of the Company's sales are generated from the renovation sector, any such adverse cycle, in either sector of the market, would lessen the overall demand for commercial interiors products, which could impair the Company's growth. Reliance on Key Personnel The Company believes that its continued success will depend to a significant extent upon the efforts and abilities of its senior management executives, particularly Ray C. Anderson, Chairman of the Board and Chief Executive Officer; Charles R. Eitel, President and Chief Operating Officer; and Brian L. DeMoura, Senior Vice President of the Company. Each of Messrs. Anderson, Eitel and DeMoura recently signed employment agreements with the Company containing certain covenants of non-competition. In addition, the Company relies significantly on the leadership of its design staff by David Oakey of the design firm Roman Oakey, Inc., which provides product design/production engineering services to the Company under a consulting contract. The loss of all or some of such personnel could have an adverse impact on the Company. -15-
16 Risks of Foreign Operations The Company has substantial international operations. In fiscal 1996, approximately 35% of the Company's revenues and a significant portion of the Company's production were outside the United States, primarily in Europe, and the Company's corporate strategy includes the expansion of its international business on a worldwide basis. As a result, the Company's operations are subject to various political, economic and other uncertainties, including risks of restrictive taxation policies, foreign exchange restrictions, changing political conditions and governmental regulations. The Company also receives a substantial portion of its revenues in currencies other than U.S. Dollars, which makes it subject to the risks inherent in currency translations. Although the Company's ability to manufacture and ship products from facilities in several foreign countries reduces the risks of foreign currency fluctuations it might otherwise experience, and the Company also engages from time to time in hedging programs intended to further reduce those risks, the scope and volume of the Company's global operations make it impossible to eliminate completely all foreign currency translation risks as a factor for the Company's financial results. Reliance on Petroleum-Based Raw Materials Petroleum-based products comprise the predominant portion of the cost of raw materials used by the Company in manufacturing. While the Company generally attempts to match cost increases with corresponding price increases, large increases in the cost of such petroleum-based raw materials could adversely affect the Company if the Company were unable to pass through to its customers such increases in raw material costs. Reliance on Third Party for Supply of Fiber E. I. DuPont de Nemours and Company ("DuPont") currently supplies a significant percentage of the Company's requirements for synthetic fiber, the principal raw material used in the Company's carpet products. DuPont also competes with the Company's Re:Source Americas network through DuPont's own distribution channel and aligned carpet mills. While the Company believes that there are adequate alternative sources of supply from which it could fulfill its synthetic fiber requirements, the unanticipated termination or interruption of the supply arrangement with DuPont could have a material adverse effect on the Company because of the cost and delay associated with shifting more business to another supplier. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed with this report: <TABLE> <S> <C> EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------ ---------------------- 3.1 Articles of Incorporation (composite as of September 8, 1988) (included as Exhibit 3.1 to the Company's annual report on Form 10-K for the year ended January 3, 1993 previously filed with the Commission and incorporated herein by reference) and Articles of Amendment (Series A Preferred Stock Designation), dated June 17, 1993 (included as Exhibit 4.1 to the Company's current report on Form 8-K, filed with the Commission on July 7, 1993 and incorporated herein by reference). 3.2 Bylaws, as amended (included as Exhibit 3.2 to the Company's quarterly report on Form 10-Q for the quarter ended April 1, 1990, previously filed with the Commission and incorporated herein by reference). 4.1 See Exhibits 3.1 and 3.2 for provisions in the Company's Articles of Incorporation, as amended, and Bylaws defining the rights of holders of Common Stock of the Company. 4.2 Indenture governing the Company's 9.5% Senior Subordinated Notes due 2005, dated as of November 15, 1995, among the Company, certain U.S. subsidiaries of the Company, as Guarantors, and First Union National Bank of </TABLE> -16-
17 <TABLE> <S> <C> Georgia, as Trustee (included as Exhibit 4.1 to the Company's registration statement on Form S-4, File No. 33-65201, previously filed with the Commission and incorporated herein by reference). 4.3 Registration Rights Agreement dated as of November 21, 1995, among the Company, certain subsidiaries of the Company as Guarantors and the Initial Purchasers of the Company's Notes (included as Exhibit 4.3 to the Company's registration statement on Form S-4, File No. 33-65201, previously filed with the Commission and incorporated herein by reference). 4.4 Form of Exchange Note (included as part of Exhibit 4.2). 10.1 Form of Salary Continuation Agreement 27.1 Financial Data Schedule (for SEC use only). </TABLE> (b) No reports on Form 8-K were filed during the quarter ended March 30, 1997. - 17 -
18 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INTERFACE, INC. Date: May 13, 1997 By:/s/ Daniel T. Hendrix --------------------- Daniel T. Hendrix Senior Vice President (Principal Financial Officer) -18-
19 EXHIBIT INDEX <TABLE> <CAPTION> EXHIBIT DESCRIPTION OF EXHIBIT SEQUENTIAL NUMBER PAGE NO. <S> <C> 10.1 Form of Salary Continuation Agreement 27.1 Financial Data Schedule (for SEC use only) </TABLE> -19-