-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SNN2BDFPzObQ8aoFXqcx09F5pKSUitCqYF+DP47V/0Ty+GW4PKtaoFa3n2bRuCWD dN2bRIk4pNBSxWfbeqhz+w== 0001107049-00-000080.txt : 20000425 0001107049-00-000080.hdr.sgml : 20000425 ACCESSION NUMBER: 0001107049-00-000080 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20000102 FILED AS OF DATE: 20000331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERFACE INC CENTRAL INDEX KEY: 0000715787 STANDARD INDUSTRIAL CLASSIFICATION: 2273 IRS NUMBER: 581451243 STATE OF INCORPORATION: GA FISCAL YEAR END: 0103 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-12016 FILM NUMBER: 590500 BUSINESS ADDRESS: STREET 1: 2859 PACES FERRY RD STREET 2: STE 2000 CITY: ATLANTA STATE: GA ZIP: 30339 BUSINESS PHONE: 7704376800 FORMER COMPANY: FORMER CONFORMED NAME: INTERFACE FLOORING SYSTEMS INC DATE OF NAME CHANGE: 19870817 10-K 1 ANNUAL REPORT ON FORM 10-K ============================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 2, 2000 COMMISSION FILE NO: 0-12016 INTERFACE, INC. ---------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Georgia 58-1451243 ------------------------ ----------------------------------- (State of incorporation) (I.R.S. Employer Identification No.) 2859 Paces Ferry Road Suite 2000 Atlanta, Georgia 30339 ------------------------------------ ---------- (Address of principal executive offices) (zip code) Registrant's telephone number, including area code: (770) 437-6800 -------------- Securities Registered Pursuant to Section 12(b) of the Act: NONE Securities Registered Pursuant to Section 12(g) of the Act: Class A Common Stock, $0.10 Par Value Per Share ----------------------------------------------- (Title of Class) 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 /_/ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /_/ Aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant as of March 28, 2000 (assuming conversion of Class B Common Stock into Class A Common Stock): $202,795,057 (47,716,484 shares valued at the last sales price of $4.25 on March 28, 2000). See Item 12. Number of shares outstanding of each of the registrant's classes of Common Stock, as of March 28, 2000: Class Number of Shares ----- ---------------- Class A Common Stock, $0.10 par value per share ......................... 45,150,760 Class B Common Stock, $0.10 par value per share ......................... 6,664,441 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Shareholders for the fiscal year ended January 2, 2000 are incorporated by reference into Parts I and II. Portions of the Proxy Statement for the 2000 Annual Meeting of Shareholders are incorporated by reference into Part III. ============================================================================= PART I ITEM 1. BUSINESS General - - ------- Interface, Inc. ("Interface" or the "Company ") is a global manufacturer, marketer, installer and servicer of products for the commercial and institutional interiors market. With a 40% market share, the Company is the worldwide leader in the modular carpet segment, which includes both carpet tile and two-meter roll goods. The Company's BENTLEY(R), PRINCE STREET(R) and FIRTH(TM) brands are leaders in the high quality, designer-oriented sector of the broadloom segment. The Company provides specialized carpet replacement, installation and maintenance services through its Re:Source Americas service network. The Company's Fabrics Group includes the leading U.S. manufacturer of panel fabrics for use in open plan office furniture systems, with a North American market share of approximately 57%. The Company's specialty products operations produce raised/access flooring systems, antimicrobial additives, adhesives and various other chemical compounds and products. These complementary product offerings, together with an integrated marketing philosophy, enable Interface to take a "total interior solutions" approach to serving the diverse needs of its customers around the world. The Company markets products in over 100 countries around the world under such established brand names as INTERFACE(R) and HEUGA(R) in modular carpet; BENTLEY, PRINCE STREET and FIRTH in broadloom carpets; GUILFORD OF MAINE(R), STEVENS LINEN(TM), TOLTEC(TM), INTEK(TM), CAMBORNE(TM) and GLENSIDE(TM) in interior fabrics and upholstery products; INTERSEPT(R) in chemicals; and C-TEC(R), ATLANTIC(TM) and INTERCELL(R) in raised/access flooring systems. The Company utilizes an internal marketing and sales force of over 1,100 experienced personnel (the largest in the commercial floorcovering industry), stationed at over 100 locations in over 35 countries, to market the Company's carpet products and services in person to its customers. The Company's principal geographic markets are the Americas (69% of 1999 net sales), Europe (26% of 1999 net sales), and Asia-Pacific (5% of 1999 net sales). While the Company's net sales from U.S. operations have historically been derived primarily from the renovation market, Interface believes that the recovery in the U.S. commercial office market, which began in the mid 1990's, will drive growth in the new construction market over the next several years. From a high of nearly 24% in 1986, suburban office vacancy rates dropped to a twelve year low of 9.0% as of March 1998 but had risen again to 10.1% as of September, 1999, according to CB Commercial/Torto Wheaton Research. Thus, although the U.S. commercial office market has recently experienced some weakness in demand, the Company nonetheless believes that this weakness is temporary and that the recovery has not yet run its course. In its international markets, the Company expects to benefit from increased use and acceptance of its products. In addition, the commercial office markets in both Europe and Asia-Pacific have recently shown signs of recovery. For 1999, the Company had net sales and net income of $1.228 billion and $23.5 million, respectively. Net sales were composed of sales of floorcovering products and related services ($974 million), interior fabrics sales ($197.1 million) and raised/access flooring and other specialty product sales ($57.1 million), accounting for 79.3%, 16.0% and 4.7% of total net sales, respectively. The Company achieved a compound annual growth rate in its net sales and net income (excluding the 1998 restructuring charge, discussed below) of 11.3% and 8.8%, respectively, over the five-year period from 1995 to 1999. Recent Developments - - ------------------- In 1999, the Company introduced a new flooring product marketed under the brand name SOLENIUM(TM). The Company believes that this new product essentially creates a new flooring product category, as it combines the benefits of resilient flooring products, such as hardwoods or linoleum (greater durability and lower maintenance), with those of carpet (increased styling, sound absorption and comfort). SOLENIUM floorcovering is manufactured from a specialized fiber which the Company believes provides superior stain resistance qualities. The fiber is woven to create a highly-styled textile flooring product that is supported by the Company's NEXSTEP(R) backing. During the fourth quarter of 1998, the Company recorded a pre-tax restructuring charge, the first in the Company's history, of $25.3 million ($0.31 per diluted share after tax) related to plant closures and consolidations, an aggregate headcount reduction of approximately 253 salaried and hourly employees in Europe, Asia and the United States, and the write-down and disposal of certain assets. The restructuring charge is comprised of approximately $13 million of cash expenditures for severance benefits and relocation costs and approximately $12.3 million of non-cash charges, primarily for the write-down of impaired assets. The Company anticipates that the restructuring will result in annual savings of approximately $8 million. Further discussion concerning the restructuring appears in the Company's Consolidated Financial Statements and Notes thereto contained in the Company's 1999 Annual Report to Shareholders. See Item 8 below. Company Strengths - - ----------------- Management believes that the Company benefits from several significant competitive advantages, which will assist it in sustaining and enhancing its position as a market leader. The Company's principal strengths include: STRONG BRAND NAMES WITH REPUTATION FOR QUALITY AND RELIABILITY. The Company's products are known in the industry for their high quality and reliability. The Company's strong brand names in carpets, interior fabrics, and raised/access flooring systems are leaders in the industry. INTERFACE and HEUGA are the preeminent brand names in carpet tiles for commercial and institutional use worldwide. The PRINCE STREET and BENTLEY brands are rated the number two and three brands, respectively, for carpet design in the U.S. according to a 1998 survey of interior designers published in the FLOOR FOCUS industry publication. On the international front, Firth Carpets has a reputation in Europe for manufacturing high-quality woven and tufted products. GUILFORD and CAMBORNE are leading brand names in their respective markets for interior fabrics. EFFICIENT AND LOW-COST GLOBAL MANUFACTURING OPERATIONS. The Company's global manufacturing capabilities are an important competitive advantage in serving the needs of multinational corporate customers who require products and services at various locations around the world. Global manufacturing locations enable the Company to compete effectively with local producers in its international markets, while also affording international customers more favorable delivery times and freight costs. The Company's capital investment program to consolidate and modernize the yarn manufacturing operations of its Fabrics Group has resulted in significant efficiencies and cost savings, as well as new product capabilities. In addition, these investments have allowed Interface to respond to a shift in demand towards lighter-weight, less expensive fabrics by original equipment manufacturer (OEM) panel fabric customers. DEDICATED DISTRIBUTION AND SERVICE CAPABILITY THROUGH RE:SOURCE PROVIDER NETWORK. The Company's Re:Source Americas service network includes 19 owned and approximately 78 affiliated commercial floorcovering contractors. The Company believes that the service, marketing and distribution capabilities added by Re:Source Americas have resulted in (i) increased sales of Company products as contractors in the network have begun to supply Company products on a preferred basis, (ii) enhanced customer satisfaction by assisting customers in the process of selecting, purchasing, installing, maintaining and recycling carpet products, (iii) improved pricing for the Company's floorcovering products, and (iv) increased operating margins by consolidating administrative functions and coordinating and streamlining sales efforts by Company and contractor sales personnel. Re:Source Americas also provides a channel for delivery of a variety of additional services and products offered by the Company. See "Floorcovering Products -- Services." STRONG CUSTOMER AND ARCHITECTURAL AND DESIGN COMMUNITY RELATIONSHIPS. The Company focuses its sales efforts at the design phase of commercial projects. Interface personnel cultivate relationships both with the owners and users of the facilities involved in the projects and with specifiers such as architects, engineers, interior designers and contracting firms who are directly involved in specifying products and often make or significantly influence purchase decisions. The Company emphasizes its product design and styling capabilities and its ability to provide creative, high-value solutions to its customers' needs. Interface marketing and sales personnel also serve as a primary technical resource for the Company's customers, both with respect to product maintenance and service as well as design matters. AWARD-WINNING AND INNOVATIVE PRODUCT DESIGN AND DEVELOPMENT CAPABILITIES. The Company's product design and development capabilities give Interface a significant competitive advantage. Interface has an exclusive consulting contract with the leading design firm David Oakey Designs, Inc. ("Oakey Designs") to augment the Company's internal research, development and design staff. Since engaging Oakey Designs in 1994, the Company has introduced more than 104 new carpet designs in the U.S. and has enjoyed considerable success in winning U.S. carpet industry design awards bestowed by the International Interior Design Association (IIDA), particularly in the carpet tile division. In 1996, Oakey Designs' services were extended to the Company's international carpet operations. - 2 - SKILLED MANAGEMENT TEAM AND COMMITTED EMPLOYEES. An important component of the Company's competitive advantage is the continued strengthening of its management team and its commitment to developing and maintaining an enthusiastic and collaborative work force. The Company has a team of skilled and dedicated executives to guide the Company's continued growth and diversification. In addition, over the past four years, the Company has made a substantial investment in its approximately 7,250 employees worldwide. In 1997, for example, the Company created an internal employee training and education team, known as One World Learning, which implements corporate-wide learning programs. In both 1998 and 1999, FORTUNE magazine rated Interface one of the top 100 employers in the U.S. on the strength of the Company's commitment to its employees. FORTUNE has also rated Interface one of the "10 Most Admired Companies" in its industry category. Business Strategy and Principal Initiatives - - ------------------------------------------- Interface's long-standing corporate strategy has been to diversify and integrate worldwide. The Company seeks to diversify by developing internally or acquiring related product lines and businesses in the commercial interiors field and to integrate by identifying and developing synergies and operating efficiencies among the Company's products and global businesses. In continuing that strategy, the Company is pursuing the following principal strategic initiatives: "MASS CUSTOMIZATION". The Company has implemented aspects of its successful U.S. mass customization production initiative at its floorcovering operations in Europe and Asia-Pacific and at its interior fabrics operations. Through mass customization the Company is able to respond to customers' requirements for custom or highly styled products by quickly and efficiently producing both custom samples and the ultimate products, and to more readily determine proven "winners" that can be manufactured for inventory for broader distribution. Mass customization was introduced to the Company's U.S. carpet tile business in 1994, and its principal components include (i) developing a simplified but versatile yarn utilization system, (ii) investing in highly efficient, state-of-the-art tufting and custom sampling equipment, and (iii) utilizing innovative design and styling to create products. This strategy has resulted in substantial operating improvements in the Company's floorcovering operations, including increased margins and reduced inventory levels of both raw materials and standard products. GLOBAL MARKETING AND MANUFACTURING CAPABILITIES. The Company's objective is to use the complementary nature of its product lines to offer "total interior solutions" to its customers worldwide, meeting their diverse needs for products and services. The Company combines its global marketing and manufacturing capabilities to successfully target multinational companies and compete effectively in local markets worldwide. The Company has a seven-person global account team with responsibility for the Company's largest multinational customers and prospects, and it has implemented a marketing communications network to link its worldwide marketing and sales force. The Company has also consolidated management responsibility for certain key operational areas, which has significantly increased global cooperation and coordination in product planning, production and marketing activities - in effect, "hooking it up" worldwide. ECOLOGICAL SUSTAINABILITY THROUGH QUEST AND ECOSENSE PROGRAMS. In January 1995, the Company began a worldwide war-on-waste initiative referred to internally as "QUEST". Applying a zero-based definition of waste (broadly defined as any measurable cost that goes into manufacturing a product but does not result in identifiable value to the customer), the Company realized an aggregate of approximately $10 million in savings in 1999. Management believes the Company can eliminate an additional $10 million of such waste in 2000. Since its inception in 1995, the cumulative savings attributable to the QUEST initiative as of the end of fiscal year 1999 were $124 million. The war-on-waste represents a first step in the Company's broader EcoSense initiative, which is the Company's long-range program to achieve greater resource efficiency and, ultimately, ecological "sustainability" - that is, the point at which Interface is no longer a net "taker" from the earth. The Company believes that its pursuit of these initiatives provides a competitive advantage in marketing its products to an increasing number of customers. SELECTIVE STRATEGIC ACQUISITIONS. The Company has successfully expanded its business and product lines through strategic acquisitions. The Company expanded its carpet operations with the acquisitions of Heuga Holding B.V. (now Interface Europe B.V.) in 1988, Bentley Mills, Inc. in 1993, Prince Street Technologies, Ltd. in 1994 and Firth Carpets Ltd. in 1998. Its interior fabrics business has been expanded significantly with the acquisitions of certain assets of Stevens Linen Associates, Inc. in 1993, Toltec Fabrics, Inc. and the Intek - 3 - division of Springs Industries, Inc. in 1995, Camborne Holdings, Ltd. in 1997 and Glenside Fabrics Limited in 1998. In addition, the Company's acquisitions of Renovisions, Inc. in 1996 and Facilities Resource Group, Inc. in 1997, and the formation of the Re:Source Americas services network through acquisitions in 1996- 1999 have enabled the Company to expand rapidly into a variety of commercial interior services. The Company's 1998 acquisitions of the vinyl floorcoverings business of Scan-Lock A/S and the raised/access flooring business of Atlantic Access Flooring, Inc. have broadened the Company's lines of floorcovering products and raised/access flooring systems, respectively. The Company intends to continue to selectively target companies and product lines that complement existing product lines and further the Company's ability to provide total interior solutions for its customers. Floorcovering Products - - ---------------------- Products The Company is the world's largest manufacturer and marketer of modular carpet, which includes carpet tile and two-meter roll goods, with a 40% worldwide market share. Broadloom carpet generally consists of tufted carpet sold primarily in twelve-foot rolls. The Company's broadloom carpet operations - Bentley Mills, Prince Street and Firth Carpets - focus on the high quality, designer-oriented sector of the U.S. and U.K. broadloom carpet markets. The Company also offers a vinyl hard flooring product in Europe under the brand SCAN-LOCK(TM). MODULAR CARPET. Marketed under the leading global brands INTERFACE and HEUGA, the Company's free-lay modular carpet system utilizes carpet tiles cut in precise, dimensionally stable squares (usually 50 square centimeters) to produce a floorcovering which combines the appearance and texture of broadloom carpet with the advantages of a modular carpet system. The growing use of open plan interiors and modern office arrangements utilizing demountable, movable partitions and modular furniture systems has encouraged the use of carpet tile, as compared to other soft surface flooring products. The Company's GLASBAC(R) technology employs a unique, fiberglass-reinforced polymeric composite backing that allows the tile to be installed and remain flat on the floor without the need for general application of adhesives or use of fasteners. This type of carpet tile thus may be easily removed and replaced, permitting rearrangement of office partitions and modular furniture systems without the inconvenience and expense associated with removing, replacing or repairing other soft surface flooring products, including broadloom carpeting. Carpet tile facilitates access to sub-floor telephone, electrical, computer and other wiring by lessening disruption of operations, and also eliminates the cumulative damage and unsightly appearance commonly associated with frequent cutting of conventional carpet as utility connections and disconnections are made. Because a relatively small portion of a carpet installation often receives the bulk of traffic and wear, the ability to rotate carpet tiles between high traffic and low traffic areas and to selectively replace worn tiles can significantly increase the average life and cost efficiency of the floorcovering. The Company believes that, within the overall floorcovering market, the demand for modular carpet is increasing worldwide as more customers recognize these advantages. The Company uses a number of conventional and technologically advanced methods of carpet construction to produce carpet tiles in a wide variety of colors, patterns, textures, pile heights and densities designed to meet both the practical and aesthetic needs of a broad spectrum of commercial interiors - particularly offices, health care facilities, airports, educational and other institutions, and retail facilities. The Company's carpet tile systems permit distinctive styling and patterning that can be used to complement interior designs, to set off areas for particular purposes and to convey graphic information. While the Company continues to manufacture and sell a substantial portion of its carpet tile in standard styles, an increasing percentage of the Company's modular carpet sales is custom or made-to-order products designed to meet customer specifications. The Company produces and sells carpet tile specially adapted for the health care facilities market. The Company's carpet tile possesses characteristics - such as the use of the INTERSEPT antimicrobial, static-controlling nylon yarns, and thermally pigmented, colorfast yarns - making it suitable for use in such facilities in lieu of hard surface flooring. The Company also manufactures and sells two-meter roll goods which are structure-backed and offer many of the advantages of both carpet tile and broadloom carpet. These roll goods are often used in conjunction with carpet tiles to create special design effects. The Company's current principal customers for such products are in the education, health care and government sectors. The Company believes, however, that the demand for two-meter roll - 4 - goods is increasing generally within the commercial and institutional interiors market and expects two-meter roll goods to account for a growing percentage of its U.S. modular carpet sales in the future. BROADLOOM CARPET. The Company has garnered a significant share of the high-end, designer-oriented broadloom carpet segment by combining innovative product design and styling capabilities and short production and delivery times with a marketing strategy geared toward serving and working closely with interior designers, architects and other specifiers. Prince Street's design-sensitive broadloom products center around unique, multi-dimensional textured carpets with a hand-tufted look, while Bentley Mills' designs emphasize the dramatic use of color. The PRINCE STREET and BENTLEY brands were rated the number two and three brands, respectively, for carpet design in the U.S. according to a 1998 survey of interior designers published in the FLOOR FOCUS industry publication. In addition, Firth Carpets has a reputation for manufacturing high-quality woven and tufted products, mostly using woolen spun blends. RESILIENT TEXTILE FLOORING. In 1999, the Company introduced SOLENIUM resilient textile flooring, a new category of product which combines the functional and aesthetic benefits of resilient flooring and carpet. SOLENIUM is highly stain-resistant, has carpet-like softness, yet is as easy to maintain as vinyl flooring. SOLENIUM is manufactured using one-third less material and energy than carpet and is designed to be completely recyclable. The Company believes Solenium fills an unmet need within health care, retail and education markets. VINYL FLOORING. In 1998, the Company acquired the flooring business of Denmark-based Scan-Lock A/S, a manufacturer of extruded vinyl products using recycled and post-industrial waste, and has moved this business to the U.K. The SCAN-LOCK product is a high performance interlocking hard flooring suitable for heavy duty applications, including factories and sports facilities. Services The Company provides commercial carpet installation services through the Re:Source Americas services network. The network includes approximately 97 owned or affiliated commercial floorcovering contractors strategically located throughout the major metropolitan areas of the United States. The network: (i) allows the Company to monitor and enhance customer satisfaction throughout the product ownership cycle, resulting in fewer claims; (ii) reduces the Company's cost of selling by bolstering efforts of sales representatives at the mill level with contractor-level support; (iii) improves pricing for products; and (iv) achieves efficiencies by augmenting administrative functions of contractors. The Re:Source Americas service network also provides carpet maintenance services using the Company's IMAGE(TM) maintenance system. The IMAGE system includes a custom-engineered maintenance methodology and a line of cleaning chemicals manufactured by Interface Americas Re:Source Technologies, Inc. In Europe, the Company has re-launched the European version of the IMAGE program, pursuant to which the Company has licensed selected independent service contractors to provide carpet maintenance services. The Re:Source Americas service network also provides carpet replacement services using its RENOVISIONS(R) process. This process utilizes patented lifting equipment and specialty tools to lift office equipment and modular workstations in place, permitting the economical replacement of existing carpet with virtually no disruption of the customer's business. Other proprietary products facilitate the movement of file cabinets, office furniture, and even complete workstations, without the inefficiency and disruption associated with unloading and dismantling the items being moved. Finally, the Re:Source Americas service network provides a channel for delivery of a variety of additional services and products offered by the Company, including furniture moving and installation, furniture refurbishment, project management, carpet reclamation and recycling through the Company's RE:ENTRY(TM) reclamation system, adhesives manufactured by Re:Source Technologies, specialty products manufactured by Pandel, Inc. and raised/access flooring systems manufactured by Interface Architectural Resources, Inc. Marketing and Sales The Company traditionally has focused its carpet marketing strategy on major accounts, seeking to build lasting relationships with national and multinational end-users, and on specifiers, such as architects, engineers, interior designers, and contracting firms who often make or significantly influence the purchase decision. The acquisitions of Bentley Mills and Prince Street significantly strengthened the Company's relationships with interior designers and architects and have enhanced the Company's ability to target those and other specifiers at the critical design stage of commercial projects. The - 5 - Company emphasizes sales to the commercial office sector, both new construction and renovation, as well as to health care facilities, governmental institutions and public facilities, including libraries, museums, convention and hospitality centers, airports, schools and hotels. The Company's marketing efforts are enhanced by the well-known brand names of its carpet products, including INTERFACE and HEUGA in modular carpet, and BENTLEY, PRINCE STREET and FIRTH in broadloom carpet. An important part of the Company's marketing and sales efforts involves the preparation of custom-made samples of requested carpet designs, in conjunction with the development of innovative product designs and styles to meet the customer's particular needs. (See "Business Strategy and Principal Initiatives", above, and "Product Design, Research, and Development", below.) The Company's mass customization initiative simplified the Company's carpet manufacturing operations, which significantly improved its ability to respond quickly and efficiently to requests for samples. The turnaround time for the Company to produce made-to-order carpet samples to customer specifications has been reduced from an average of 30 days in 1993 to approximately 3 days in 1999, and the average number of carpet samples produced per month has increased from 90 per month in 1993 to approximately 1,200 per month in 1999. This sample production ability has significantly enhanced the Company's marketing and sales efforts and has increased the Company's volume of higher margin custom or made-to-order sales. The Company primarily uses its internal marketing and sales force of over 1,100 persons to market its carpet products, and it also relies on contractors in its Re:Source Americas service network to bolster its sales efforts. In order to implement its global marketing efforts, the Company has product and design studios in the United States, England, France, Germany, Spain, Norway, the Netherlands, Australia, Japan and Singapore. The Company expects to open such offices in other locations around the world as necessary to capitalize on emerging marketing opportunities. Manufacturing The Company manufactures carpet in the United States, the Netherlands, the United Kingdom, Canada, Australia and Southeast Asia, SOLENIUM resilient textile flooring in the United States and the United Kingdom, and vinyl flooring in the United Kingdom. In addition to enhancing the Company's ability to develop a strong local presence in foreign markets, having foreign manufacturing operations enables the Company to supply its customers with carpet from the location offering the most advantageous delivery times, exchange rates, duties and tariffs and freight expense. The Company believes that the ability to offer consistent products and services on a worldwide basis at attractive prices is an important competitive advantage in servicing multinational customers seeking global supply relationships. The Company will consider additional locations for manufacturing operations in other parts of the world as necessary to meet the demands of customers in growing international markets. The environmental management systems of the Company's Northern Ireland, West Yorkshire, England (Don E. Russell Plant), Australian, the Netherlands and Canadian floorcoverings manufacturing facilities are certified under ISO 14001. The Company currently obtains a significant percentage of its requirements for synthetic fiber (the principal raw material used in the Company's carpet products) from E.I. DuPont de Nemours and Company ("Dupont"). The Company believes that its arrangements with DuPont permit the Company to obtain favorable terms. However, the Company currently purchases fiber from other long-term suppliers, and there are adequate alternative sources of supply from which the Company could fulfill its synthetic fiber requirements if its arrangements with DuPont should change. Other raw materials used by the Company are also readily available from a number of sources. In 1995 and 1996, the Company implemented a manufacturing plan in which it standardized its worldwide manufacturing procedures. In connection with the implementation of this plan, the Company adopted global standards for its tufting equipment, yarn systems and product styling, and changed its standard carpet tile size from 18 square inches to 50 square centimeters. The Company believes that changing its standard carpet tile size has allowed it to reduce operational waste and fossil fuel energy consumption and to offer consistent product sizing for its global customers. The Company's significant international 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 - 6 - 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. Competition The commercial floorcovering industry is highly competitive. The Company competes, on a global basis, in the sale of its floorcovering products with other carpet manufacturers and manufacturers of vinyl and other types of floorcoverings. Although the industry recently has experienced significant consolidation, a large number of manufacturers remain in the industry. Management believes that the Company is the largest manufacturer of modular carpet in the world, possessing a global market share that is more than two times that of its nearest competitor. However, a number of domestic and foreign competitors manufacture modular carpet as one segment of their business, and certain of these competitors have financial resources in excess of the Company's. The Company believes the principal competitive factors in its primary floorcovering markets are quality, design, service, broad product lines, product life, marketing strategy, and pricing. In the commercial office market, modular carpet competes with various floorcoverings, of which broadloom carpet is the most common. In the health-care facilities market, the Company's products compete primarily with resilient tile. The Company believes that SOLENIUM, its new resilient textile flooring product, and treatment of its modular carpet with the INTERSEPT antimicrobial chemical agent are material factors in its ability to compete successfully in the health care market. The quality, service, design, longer average life, flexibility (design options, selective rotation or replacement, use in combination with roll goods) and convenience of the Company's modular carpet are its principal competitive advantages, which are offset in part by its higher initial cost when compared to comparable grades of broadloom carpet. The acquisitions of Bentley Mills, Prince Street and Firth Carpets, with their broadloom carpet product lines, have enhanced the Company's competitive position by enabling the Company to offer one-stop shopping to commercial carpet customers and, thus, to capture some sales that would have gone to competitors. In addition, the Company believes that its global manufacturing capabilities are an important competitive advantage in serving the needs of multinational corporate customers. Finally, the Company believes that the formation of the Re:Source service provider network, and the resulting improvement in customer service, has further enhanced the Company's competitive position. Interior Fabrics - - ---------------- Products The Company, through its Fabrics Group, designs, manufactures and markets specialty fabrics for open plan office furniture systems and commercial interiors. Sales of panel fabrics to OEMs of movable office furniture systems constituted approximately 57% of total North American fabrics sales in fiscal 1999. In addition, the Company produces woven and knitted seating fabrics, wall covering fabrics, wool upholstery fabrics, fabrics used for vertical blinds in office interiors, and fabrics used for cubicle curtains in health care facilities. Open plan office furniture systems are typically panel-enclosed work stations customized to particular work environments. The open plan concept offers a number of advantages over conventional office designs, including more efficient floor space utilization, reduced energy consumption and greater flexibility to redesign existing space. Since carpet and fabrics are used in the same types of commercial interiors, the Company's carpet and interior fabrics operations are able to coordinate the color, design and marketing of both product lines to their respective customers as part of the Company's "total interior solutions" approach. The Company, in recent years, has diversified and expanded significantly both its product offerings and markets for interior fabrics. The Company's 1993 acquisition of the STEVENS LINEN lines added decorative, upscale upholstery fabrics and specialty textile products to the Fabrics Group's traditional product offerings. The Company's June 1995 acquisition of Toltec Fabrics, Inc., a manufacturer and marketer of fabric for the contract and home furnishings upholstery markets, enhanced the Company's presence in the contract jobber market; and its December 1995 acquisition of the Intek division of Springs Industries, a manufacturer experienced in the production of lighter-weight panel fabrics, has strengthened the Fabrics Group's capabilities in that market. All of these developments have reinforced the Fabrics Group's dominant position with OEMs of movable office furniture systems. - 7 - Internationally, the June 1997 acquisition of Camborne Holdings, Ltd., the United Kingdom's leading textile manufacturer for the office and contract furnishings markets, has enhanced the Company's access to the European and Asia-Pacific markets. The Camborne acquisition also added wool upholstery fabrics specifically designed for the European market to the Fabrics Group's product offering. In 1998, the Company acquired Glenside Fabrics Limited, a United Kingdom based manufacturer of upholstery fabrics for the contract furnishings and leisure markets. The Glenside acquisition further enhances the Fabrics Group's European presence. As part of its restructuring announced in the first quarter of 1999, the Company is in the process of consolidating Glenside's and Camborne's manufacturing operations. The Company manufactures fabrics made of 100% polyester, as well as wool-polyester blends and numerous other natural and man-made blends, which are either woven or knitted. Its products feature a high degree of color consistency, natural dimensional stability and fire retardancy, in addition to their overall aesthetic appeal. All of the Company's product lines are color and texture coordinated. The Company seeks continuously to enhance product performance and attractiveness through experimentation with different fibers, dyes, chemicals and manufacturing processes. Product innovation in the interior fabrics market (similar to the floorcoverings market) is important to achieving and maintaining market share. (See "Business Strategy and Principal Initiatives", above, and "Product Design, Research and Development", below.) In 1997, the Company introduced its TERRATEX(R) line of panel fabrics. The TERRATEX label is intended to denote fabrics manufactured from 100% recycled polyester, and includes both new products and traditional product offerings. The first fabric to bear the TERRATEX label was Guilford of Maine's FR701(R) line. Since 1997, several fabrics, including for the first time in 2000, seating fabrics, have carried the TERRATEX label. Each of the Fabrics Group's companies now markets fabrics in the TERRATEX line. The Company anticipates that future growth opportunities will arise from the growing market for retrofitting services, where fabrics are used to re-cover existing panels. In addition, the increased importance being placed on the aesthetic design of office space should lead to a significant increase in upholstery fabric sales. Management also believes that significant growth opportunities exist in international sales, in domestic health care markets, in contract wallcoverings, and in the provision of ancillary textile processing services such as the lamination of fabrics onto substrates for pre-formed panels. Marketing and Sales ------------------- The Company's principal interior fabrics customers are OEMs of movable office furniture systems. The Fabrics Group sells to essentially all of the major office furniture manufacturers. The Fabrics Group also sells to manufacturers and distributors of wallcoverings, vertical blinds, cubicle curtains, acoustical wallboards, ceiling tiles and residential furniture, and, since the acquisition of Toltec Fabrics, to contract jobbers. The GUILFORD OF MAINE, STEVENS LINEN, TOLTEC, INTEK, CAMBORNE and GLENSIDE brand names are well-known in the industry and enhance the Company's fabric marketing efforts. The majority of the Company's interior fabrics sales are made through the Fabrics Group's own sales force. The sales team works closely with designers, architects, facility planners and other specifiers who influence the purchasing decisions of buyers in the interior fabrics segment. In addition to facilitating sales, the resulting relationships also provide the Company with marketing and design ideas that are incorporated into the development of new product offerings. The Fabrics Group maintains a design studio in Grand Rapids, Michigan which facilitates coordination between its in-house designers and the design staffs of major customers. The Company's interior fabric sales offices are located in New York, New York, Grand Rapids, Michigan and the United Kingdom. The Fabrics Group also has marketing and distribution facilities in Canada and Hong Kong, and sales representatives in Japan, Hong Kong, Singapore, Malaysia, Korea and South Africa. The Company has sought increasingly, over the past several years, to expand its export business and international operations in the fabrics segment, both to accommodate the demand of principal OEM customers that are expanding their businesses overseas, and to facilitate additional coordinated marketing to multinational customers of the Company's carpet business as part of the Company's "total interior solutions" approach. - 8 - Manufacturing The Company's fabrics manufacturing facilities are located in Maine, Massachusetts, Michigan, North Carolina and West Yorkshire, England. The production of synthetic and wool blended fabrics is a relatively complex, multi-step process. Raw fiber and yarn are placed in pressurized vats in which dyes are forced into the fiber. Particular attention is devoted to this dyeing process, which requires a high degree of expertise in order to achieve color consistency. All raw materials used by the Company are readily available from a number of sources. The Fabrics Group also now uses 100% recycled fiber manufactured from PET soda bottles in its manufacturing process. In response to a shift in the Fabrics Group's traditional panel fabric market toward lighter-weight, less expensive products, the Company implemented a major capital investment program in 1994 which included the construction of a new facility and the acquisition of equipment to enhance the efficiency and breadth of the Fabrics Group's yarn manufacturing processes. The program improved the Fabrics Group's cost effectiveness in producing such lighter-weight fabrics, reduced manufacturing cycle time, and enabled the Fabrics Group to reinforce its product leadership position with its OEM customers. The acquisition of Intek in December 1995 provided the Company with immediate and significant capabilities in the efficient production of lighter-weight, less expensive panel fabrics and the acquisition of Camborne provided a European-based manufacturing facility and much needed expertise in the production of wool fabrics. The Company believes that it has recently been successful in designing fabrics that have simplified the manufacturing process, thereby reducing complexity while improving efficiency and quality. Through the use of existing raw materials, new fabrics are being manufactured using the mass customization production strategy. By employing the capabilities that are now available with the Company's new manufacturing facility, the Company anticipates that its ability to apply the mass customization production strategy to the manufacture of fabrics will be expanded. See "Business Strategy and Principal Initiatives", above. The environmental management system of the Fabrics Group's largest facility, in Guilford, Maine has been granted ISO 14001 certification. The Company's East Douglas, Maine and West Yorkshire, England fabrics manufacturing facilities are also certified under ISO 14001. The Company offers textile processing services through the Fabrics Group's Component Technologies division in Grand Rapids, Michigan. Such services include the lamination of fabrics onto substrates for pre-formed office furniture system panels, facilitating easier and more cost effective assembly of the system components by the Fabrics Group's OEM customers. Competition ----------- The Company competes in the interior fabrics market on the basis of product design, quality, reliability, price and service. By electing to concentrate on the open plan office furniture systems segment, the Fabrics Group has been able to specialize its manufacturing capabilities, product offerings and service functions, resulting in a leading market position. Through Interface Fabrics Group, Inc. (formerly Guilford of Maine, Inc. and Interface Interior Fabrics, Inc.), Toltec Fabrics, Inc. and Intek, Inc., the Company is the largest U.S. manufacturer of panel fabric for use in open plan office furniture systems. Drawing upon its dominant position in the panel fabric segment and through its strategic acquisitions, the Company has been successfully diversifying its product offerings for the commercial interiors market to include a variety of non-panel fabrics, including upholstery, cubicle curtains, wallcoverings, ceiling fabrics and window treatments. The competition in these segments of the market is highly fragmented and includes both large, diversified textile companies, several of which have greater financial resources than the Company, as well as smaller, non-integrated specialty manufacturers. However, the Company's capabilities and strong brand names in these segments should enable it to continue to compete successfully. Specialty Products ------------------ The Interface Specialty Products Group is composed of: Interface Architectural Resources, Inc., which produces and markets raised/access flooring systems; Interface Americas Re:Source Technologies, Inc. (formerly Rockland React-Rite), which develops, manufactures and markets adhesives and other specialty chemical products and which includes the Company's INTERSEPT antimicrobial sales and licensing program; and Pandel, Inc., which produces vinyl carpet tile backing and specialty mat and foam products. - 9 - The Company manufactures and markets cable management raised/access flooring systems through Interface Architectural Resources, Inc. The Company's initial product offering in this sector, marketed under the INTERCELL brand, is a low-profile (total height of less than three inches) cable management flooring system particularly well suited for use in the renovation of existing buildings. In 1995, the Company acquired the rights to the INTERSTITIAL SYSTEMS(TM) access flooring product, a patented, multiple plenum system that serves to separate pressurized, climate-controlled air flow from the electrical and telecommunications cables included within the same access flooring system. In February 1996, the Company acquired C-Tec, Inc., the second largest manufacturer of raised/access flooring systems in the United States. Interface Architectural Resources markets the successful C-TEC line of products (TEC-COR(TM) and TEC-CRETE(R)), which combines the tensile strength of steel and the compressive strength of concrete to create a durable, uniform and sound-absorbent panel which is available in a variety of surfaces. In July 1998, the Company acquired Atlantic Access Flooring, Inc., a manufacturer of steel panel raised/access flooring systems. With the acquisition of Atlantic, the Company believes that it now offers the broadest line of raised/access flooring systems in the industry. The Company manufactures a line of adhesives for carpet installation, as well as a line of carpet cleaning and maintenance chemicals, which it markets as part of its IMAGE maintenance system. One of the Company's leading chemical products, in terms of applicability for the commercial and institutional interiors market, is its proprietary antimicrobial chemical compound, sold under the registered trademark INTERSEPT(R). The Company uses INTERSEPT in many of its carpet products and has licensed INTERSEPT to other companies for use in a number of products that are noncompetitive with the Company's products, such as paint, vinyl wallcoverings, ceiling tiles and air filters. In addition, the Company produces and markets PROTEKT2(R), a proprietary soil and stain retardant treatment, and FATIGUE FIGHTER(R), an impact-absorbing modular flooring system typically used where people stand for extended periods. One World Learning - - ------------------ In 1997, the Company created One World Learning, Inc., an employee training and education company specializing in experiential learning methods. In addition to serving as the Company's internal learning facilitation resource, One World Learning markets its experiential programs to other companies. One World Learning also educates Interface associates on sustainability principles, including those of The Natural Step founded by Dr. Karl-Henrik Robert, currently engaged by the Company as a consultant. Interface Research Corporation - - ------------------------------ Interface Research Corporation ("IRC") provides technical support and advanced materials research and development for the entire family of Interface companies. Recent developments at IRC include NEXSTEP backing, a material based on moisture-impervious polycarbite precoating technology combined with a chlorine-free urethane foam secondary backing, and a recycled post-consumer, polyvinyl chloride ("PVC") extruded sheet process that has been successfully incorporated into the Company's modular carpet line. The Company's DEJA VU(TM) and RECYCLEBAC(TM) products use the PVC extruded sheet and exemplify the Company's commitment to "closing-the-loop" in recycling. With a goal of supporting sustainable product designs in both floorcoverings and interior fabrics applications, IRC is a frontrunner in evaluating 100% renewable polymers based on corn-derived polylactic acid polymers for the Company's products. IRC is the home of the Company's ECOSENSE initiative and supports the dissemination, consultancies and technical communication of the Company's global sustainability endeavors. In addition, IRC's president also serves as the Chairman of the Envirosense Consortium. IRC's laboratories provide all biochemical and technical support to INTERSEPT antimicrobial product initiatives, which initiatives were the basis for founding the Consortium and for its focus on indoor air quality. See "Environmental Initiatives" below. - 10 - Product Design, Research and Development - - ---------------------------------------- The Company maintains an active research, development and design staff of approximately 100 persons and also draws on the research and development efforts of its suppliers, particularly in the areas of fibers, yarns and modular carpet backing materials. Innovation and increased customization in product design and styling are the principal focus of the Company's product development efforts. The Company's carpet design and development team is recognized as the industry leader in carpet design and product engineering for the commercial and institutional markets. In cooperation with David Oakey since January 1994 (pursuant to the Company's exclusive consulting contract with Oakey Designs), the Company has introduced over 104 new carpet designs during the last six years and has enjoyed considerable success in winning U.S. carpet industry awards bestowed by the IIDA. Mr. Oakey also contributed to the Company's implementation of a new product development concept - "simple inputs, pretty outputs" - resulting in the ability to efficiently produce many products from a single yarn system. The Company's mass customization production approach evolved, in major part, from this concept. In addition to increasing the number and variety of product designs (which enables the Company to increase high margin custom sales), the mass customization approach increases inventory turns and reduces inventory levels (for both raw materials and standard products) and their related costs because of the Company's more rapid and flexible production capabilities. Oakey Designs' services have been extended to the Company's international carpet tile operations and its domestic and international broadloom companies. The Company expects increased levels of innovation in product design and development for those divisions to be achieved in the future. Environmental Initiatives - - ------------------------- An important initiative of the Company over the past several years has been the development of the Envirosense Consortium, an organization of companies concerned with addressing workplace environmental issues, particularly poor indoor air quality. The Consortium's member organizations include interior products manufacturers (some of which are licensees of the Company's INTERSEPT antimicrobial agent) and design professionals. The Consortium, in conjunction with Phillips & Linders International, recently developed an on-line continuing education course series entitled "Fundamentals of Indoor Air Quality." The series offers three course modules that are registered with the American Institute of Architects' Continuing Education System. The series is being offered in association with the faculty at the University of Florida M.E. Rinker, Sr. School of Building Construction and School of Architecture. In the latter part of 1994, the Company commenced a new industrial ecology initiative called EcoSense, inspired in major part by the interest of important customers concerned about the environmental implications of how they and their suppliers do business. EcoSense is directed towards the elimination of energy and raw materials waste in the Company's businesses, and, on a broader and more long-term scale, the practical reclamation - and ultimate restoration - of shared environmental resources. The initiative involves a commitment by the Company (i) to learn to meet its raw material and energy needs through recycling of carpet and other petrochemical products and harnessing benign energy sources, and (ii) to pursue the creation of new processes to help sustain the earth's non-renewable natural resources. EcoSense includes the Company's QUEST waste reduction initiative, pursuant to which the Company realized an aggregate of $10 million in savings in 1999. See "Business Strategy and Principal Initiatives - Ecological Sustainability Through Quest and EcoSense Programs". The Company has engaged some of the world's leading authorities on global ecology as environmental consultants. The current list of consultants includes: Paul Hawken, author of THE ECOLOGY OF COMMERCE and THE NEXT ECONOMY; Amory Lovins, energy consultant, co-founder of the Rocky Mountain Institute; Hunter Lovins, President and Executive Director of the Rocky Mountain Institute; John Picard, President of E2, American environmental consultant; David Brower, former executive director of the Sierra Club, founder of The Earth Island Institute; Jonathan Porritt, director of Forum for the Future; Bill Browning, director of the Rocky Mountain Institute's Green Development Services; Dr. Karl-Henrik Robert, founder of The Natural Step; Janine M. Benyus, author of BIOMIMICRY; and Walter Stahel, Swiss businessman and seminal thinker on environmentally responsible commerce. The Company believes that its environmental initiatives are valued by its employees and an increasing number of important customers and provide a competitive advantage in marketing products to such customers. The Company also believes that the resulting long-term resource efficiency (reduction of wasted environmental resources) will ultimately produce cost savings and advantages to the Company. Environmental Matters - - --------------------- The Company's operations are subject to federal, state and local laws and regulations relating to the generation, storage, handling, emission, transportation and discharge of materials into the environment. Management believes that the Company is in substantial compliance with all applicable federal, state and local provisions relating to the protection of the environment. The costs of complying with environmental protection laws and - 11 - regulations have not had a material adverse impact on the Company's financial condition or results of operations in the past and are not expected to have a material adverse impact in the future. Backlog - - ------- The Company's backlog of unshipped orders was approximately $158.3 million at February 27, 2000, compared to approximately $165.0 million at February 28, 1999. Historically, backlog is subject to significant fluctuations due to the timing of orders for individual large projects and currency fluctuations. All of the backlog of orders at February 27, 2000 is expected to be shipped during the succeeding six to nine months. Patents and Trademarks - - ---------------------- The Company owns numerous patents in the United States and abroad on its modular flooring and manufacturing processes and on the use of its INTERSEPT antimicrobial chemical agent in various products. The duration of United States patents is between 14 and 20 years from the date of filing of a patent application or issuance of the patent; the duration of patents issued in other countries varies from country to country. The Company considers its know-how and technology more important to its current business than patents, and, accordingly, believes that expiration of existing patents or nonissuance of patents under pending applications would not have a material adverse effect on its operations. However, the Company maintains an active patent and trade secret program in order to protect its proprietary technology, know-how and trade secrets. The Company also owns numerous trademarks in the United States and abroad. In addition to the United States, the primary countries in which the Company has registered its trademarks are the United Kingdom, Germany, Italy, France, Canada, Australia, Japan, and various countries in Central and South America. Some of the more prominent registered trademarks of the Company include: INTERFACE, HEUGA, INTERSEPT, GLASBAC, GUILFORD, GUILFORD OF MAINE, BENTLEY, PRINCE STREET, INTERCELL, FIRTH, CAMBORNE, GLENSIDE, TERRATEX and FR701. Trademark registrations in the United States are valid for a period of 10 years and are renewable for additional 10-year periods as long as the mark remains in actual use. The duration of trademarks registered in other countries varies from country to country. Financial Information by Operating Segments - - ------------------------------------------- The Notes to the Company's Consolidated Financial Statements sets forth information concerning the Company's sales, income and assets by operating segments. See Item 8. Employees - - --------- At January 2, 2000, the Company employed a total of approximately 7,250 employees worldwide. Of such employees, approximately 2,100 are clerical, sales, supervisory and management personnel and the balance are manufacturing personnel. Certain of the service businesses within the Re:Source Americas service network have employee groups that are represented by unions. In addition, certain of the Company's production employees in Australia and the United Kingdom are represented by unions. In the Netherlands, a Works Council, the members of which are Company employees, is required to be consulted by management with respect to certain matters relating to the Company's operations in that country, such as a change in control of Interface Europe B.V. (the Company's modular carpet subsidiary based in the Netherlands), and the approval of such Council is required for certain actions, including changes in compensation scales or employee benefits. Management believes that its relations with the Works Council, the unions and all of its employees are good. Securities Litigation Reform Act - - -------------------------------- This Form 10-K and other statements issued or made from time to time by the Company or its representatives contain 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. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. Important factors currently - 12 - known to management that could cause actual results to differ materially from those in forward-looking statements are set forth in the Safe Harbor Compliance Statement for Forward-Looking Statements included as Exhibit 99.1 to this Form 10-K, and are hereby incorporated by reference. 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. Executive Officers of the Registrant - - ------------------------------------ The executive officers of the Company, their ages as of March 15, 2000, and principal positions with the Company are as follows. Executive officers serve at the pleasure of the Board of Directors.
Name Age Principal Position(s) ---- --- --------------------- Ray C. Anderson 65 Chairman of the Board, President and Chief Executive Officer Michael D. Bertolucci 59 Senior Vice President Brian L. DeMoura 54 Senior Vice President Daniel T. Hendrix 45 Senior Vice President, Chief Financial Officer, Treasurer and Assistant Secretary John H. Walker 55 Senior Vice President John R. Wells 38 Senior Vice President Raymond S. Willoch 41 Senior Vice President, General Counsel and Secretary
Mr. Anderson founded the Company in 1973 and has served as the Company's Chairman and Chief Executive Officer since its founding. Mr. Anderson was also re-named President of the Company in August 1999 upon the departure of the Company's former President and Chief Operating Officer. Mr. Anderson was appointed by President Clinton to the President's Council on Sustainable Development in 1996 and served as Co-Chair until the Council's dissolution in June 1999. He currently serves on the Boards of numerous nonprofit organizations. Dr. Bertolucci joined the Company in April 1996 as President of Interface Research Corporation and Senior Vice President of the Company. Dr. Bertolucci also serves as Chairman of the Envirosense Consortium which was founded by Interface and focuses on addressing workplace environmental issues. From October 1989 until joining the Company, he was Vice President of Technology for Highland Industries, an industrial fabric company located in Greensboro, North Carolina. Mr. DeMoura joined the Company in March 1994 as President and Chief Executive Officer of Guilford of Maine, Inc. (now Interface Fabrics Group, Inc.) and Senior Vice President of the Company. He is responsible for the Fabrics Group, which includes the following brands: GUILFORD OF MAINE, STEVENS LINEN, TOLTEC, INTEK, CAMBORNE and GLENSIDE. Mr. Hendrix, who previously was with a national accounting firm, joined the Company in 1983. He was promoted to Treasurer of the Company in 1984, Chief Financial Officer in 1985, Vice President - Finance in 1986, and Senior Vice President in October 1995. Mr. Walker began his career with the Company as Financial Controller of the U.K. Division of Heuga Holding B.V. (now Interface Europe B.V.), the Netherlands-based carpet tile manufacturer acquired by the Company in 1988. He later served as Vice President - Sales & Marketing of Interface Europe B.V. and in July 1995 was promoted to the position of Senior Vice President of the Company and President and Chief Executive Officer of Interface Europe, Inc. (now Interface Overseas Holdings, Inc.). In his current position, he has responsibility for the Company's floorcovering operations in both Europe and the Asia-Pacific region. Mr. Wells joined the Company in February 1994 as Vice President - Sales of Interface Flooring Systems, Inc. ("IFS", the Company's principal U.S. modular carpet subsidiary) and was promoted to Senior Vice President - Sales & Marketing of IFS in October 1994. He was promoted to Vice President of the Company and President and Chief Executive Officer of IFS in July 1995. In March 1998, Mr. Wells was also named President and CEO of both Prince Street and Bentley Mills, making him President and CEO of all three of the Company's U.S. carpet mills. In November 1999, Mr. Wells was named Senior Vice President of the Company and President and Chief Executive Officer of Interface Americas, thereby assuming responsibility for all of the Company's operations in the Americas, except for the Fabrics Group. - 13 - Mr. Willoch, who previously practiced with an Atlanta law firm, joined the Company in June 1990 as Corporate Counsel. He was promoted to Assistant Secretary in 1991, Assistant Vice President in 1993, Vice President in January 1996, and Secretary and General Counsel in August 1996. In February 1998, Mr. Willoch was promoted to Senior Vice President. ITEM 2. PROPERTIES Properties - - ---------- The Company maintains its corporate headquarters in Atlanta, Georgia in approximately 25,000 square feet of leased space. The following table lists the Company's principal manufacturing facilities, all of which are owned by the Company except as otherwise noted:
Location Primary Products Floor Space (Sq.ft.) -------- ---------------- -------------------- Bangkok, Thailand .....................................Modular carpet 66,072 Craigavon, N. Ireland......................................Modular carpet 125,060 LaGrange, Georgia..........................................Modular carpet 326,666 Ontario (Belleville), Canada...............................Modular carpet 77,000 Picton, Australia..........................................Modular carpet 89,560 Scherpenzeel, the Netherlands..............................Modular carpet; specialty products 292,142 Shelf, England.............................................Modular carpet; vinyl flooring 223,342 West Point, Georgia........................................Modular carpet 161,000 Cartersville, Georgia......................................Broadloom carpet 210,000 Cartersville, Georgia......................................Broadloom carpet 45,000 City of Industry, California ..........................Broadloom carpet 539,641 West Yorkshire, England....................................Broadloom carpet 674,666 Aberdeen, North Carolina...................................Interior fabrics 88,000 Dudley, Massachusetts......................................Interior fabrics 321,000 East Douglas, Massachusetts ...............................Interior fabrics 301,772 Grand Rapids, Michigan ................................Interior fabrics 55,800 Guilford, Maine............................................Interior fabrics 396,690 Guilford, Maine............................................Interior fabrics 96,200 Lancashire, England ...................................Interior fabrics 54,000 Newport, Maine.............................................Interior fabrics 208,932 West Yorkshire, England....................................Interior fabrics 177,000 Cartersville, Georgia .................................Specialty products 124,500 Grand Rapids, Michigan.................................Access flooring 120,000 Baltimore, Maryland....................................Access flooring 39,000 Rockmart, Georgia..........................................Chemicals 37,500 -------------------------------------- Owned by a joint venture in which the Company has a 70% interest. Leased.
The Company maintains marketing offices in approximately 95 locations in 39 countries and distribution facilities in approximately 40 locations in six countries. Most of the marketing locations and many of the distribution facilities are leased. The Company believes that its manufacturing and distribution facilities, and its marketing offices, are sufficient for its present operations. The Company will continue, however, to consider the desirability of establishing additional facilities and offices in other locations around the world as part of its business strategy to meet expanding global market demands. - 14 - ITEM 3. LEGAL PROCEEDINGS On July 28, 1998, Collins & Aikman Floorcoverings, Inc. ("CAF") -- in the wake of receiving "cease and desist" letters from the Company demanding that CAF cease manufacturing certain carpet products that the Company believes infringed upon certain of its copyrighted product designs -- filed a lawsuit against the Company asserting that certain of the Company's products, primarily its Caribbean(TM) design product line, infringed on certain of CAF's alleged copyrighted product designs. The lawsuit, which is pending in the United States District Court for the Northern District of Georgia, Atlanta Division, Civil Action No. 1:98-CV-2069, seeks injunctive relief and unspecified monetary damages. The lawsuit also asserts other claims against the Company and certain other parties, including for alleged tortious interference by the Company with CAF's contractual relationship with the Roman Oakey Designs firm. On September 28, 1998, the Company filed its answer denying all the claims asserted by CAF, and also asserting counterclaims against CAF for copyright infringement. The Company believes the claims asserted by CAF are unfounded and subject to meritorious defenses, and it is defending vigorously all the claims. At the present time, discovery has been limited by Court order to matters relating to CAF's motion for preliminary injunction, and both the Company and CAF have filed motions for summary judgment. As a result of Court-ordered mediation not leading to a resolution of the disputes between the parties, the Company expects the Court will soon set a schedule for arguments and a hearing on the pending motions. The Company's insurers have denied coverage under the Company's insurance policies, which annually would otherwise provide up to $100 million of coverage. On June 8, 1999, the Company filed suit against the insurers to challenge that denial. That lawsuit is pending in the United States District Court for the Northern District of Georgia, Atlanta Division, Civil Action No. 1:99-CV-1485, and is in the early stages of its proceedings. On January 20, 2000, the Company filed a motion for partial summary judgment to enforce the insurers' obligation to defend the Company against the claims by CAF, which motion is pending. Both the CAF infringement lawsuit and the Company's insurance coverage lawsuit involve complex legal and factual issues, and while the Company believes strongly in the merits of its legal positions, it is impossible to predict with accuracy the outcome of either such litigation matter at this stage. The Company intends to continue its aggressive pursuit of its positions in both actions. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this Report. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS The information concerning the market prices for the Company's Class A Common Stock and dividends on the Company's Common Stock included in the Notes to the Company's Consolidated Financial Statements (the "Notes") in the Company's 1999 Annual Report to Shareholders is incorporated herein by reference. As of March 15, 2000, the Company had 404 holders of record of its Class A Common Stock and 62 holders of record of its Class B Common Stock. Management believes that there are in excess of 5,000 beneficial holders of the Class A Common Stock. During fiscal 1999, the Company issued an aggregate of 79,950 shares of its Common Stock that were not registered under the Securities Act of 1933 ("Securities Act"). The shares, in combination with cash, were issued as consideration to four individuals in the acquisition of Premier Floors, Inc. The market price on the date of issuance was $9.875 per share. The issuance of the foregoing shares is exempt from registration under the Securities Act pursuant to Section 4(2) of the Securities Act, or Regulation D promulgated thereunder, as transactions by an issuer not involving a public offering. - 15 - ITEM 6. SELECTED FINANCIAL DATA Selected Financial Information included in the Company's 1999 Annual Report to Shareholders, being filed as Exhibit 13 hereto, is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") included in the Company's 1999 Annual Report to Shareholders, being filed as Exhibit 13 hereto, is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The information contained under the caption "Quantitative and Qualitative Disclosure About Market Risk" included in the MD&A section of the Company's 1999 Annual Report to Shareholders is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements and the Report of Independent Certified Public Accountants included in the Company's 1999 Annual Report to Shareholders, being filed as Exhibit 13 hereto, are incorporated herein by reference. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information contained under the caption "Nomination and Election of Directors" in the Company's definitive Proxy Statement for the Company's 2000 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the Company's 1999 fiscal year, is incorporated herein by reference. Pursuant to Instruction 3 to Paragraph (b) of Item 401 of Regulation S-K, information relating to the executive officers of the Company is included in Item 1 of this Report. The information contained under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive Proxy Statement for the Company's 2000 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the Company's 1999 fiscal year, is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information contained under the caption "Executive Compensation and Related Items" in the Company's definitive Proxy Statement for the Company's 2000 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the Company's 1999 fiscal year, is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information contained under the caption "Principal Shareholders and Management Stock Ownership" in the Company's definitive Proxy Statement for the Company's 2000 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the Company's 1999 fiscal year, is incorporated herein by reference. - 16 - For purposes of determining the aggregate market value of the Company's voting and non-voting stock held by non-affiliates, shares held of record by directors and executive officers of the Company have been excluded. The exclusion of such shares is not intended to, and shall not, constitute a determination as to which persons or entities may be "affiliates" of the Company as that term is defined under federal securities laws. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information contained under the captions "Compensation Committee Interlocks and Insider Participation" and "Certain Relationships and Related Transactions" in the Company's definitive Proxy Statement for the Company's 2000 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the Company's 1999 fiscal year, is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements -------------------- The following Consolidated Financial Statements and Notes thereto of Interface, Inc. and subsidiaries and related Report of Independent Certified Public Accountants contained in the Company's 1999 Annual Report to Shareholders, are incorporated by reference in Item 8 of this Report: Consolidated Statements of Income and Comprehensive Income -- years ended January 2, 2000, January 3, 1999 and December 28, 1997 Consolidated Balance Sheets-- January 2, 2000 and January 3, 1999 Consolidated Statements of Cash Flows -- years ended January 2, 2000, January 3, 1999 and December 28, 1997 Notes to Consolidated Financial Statements Report of Independent Certified Public Accountants 2. Financial Statement Schedule ---------------------------- The following Consolidated Financial Statement Schedule of Interface, Inc. and subsidiaries and related Report of Independent Certified Public Accountants are included as part of this Report (see page 22) Report of Independent Certified Public Accountants Schedule II -- Valuation and Qualifying Accounts and Reserves 3. Exhibits -------- The following exhibits are included as part of this Report: Exhibit Number Description of Exhibit ------ ---------------------- 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 July 5, 1998, previously filed with the Commission 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 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). - 17 - 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 (the "Indenture") (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). 10.1 Salary Continuation Plan, dated May 7, 1982 (included as Exhibit 10.20 to the Company's registration statement on Form S-1, File No. 2-82188, previously filed with the Commission and incorporated herein by reference).* 10.2 Form of Salary Continuation Agreement (included as Exhibit 10.27 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); and Form of Amendment to Salary Continuation Agreement (included as Exhibit 10.2 to the Company's annual report on Form 10-K for the year ended January 3, 1999, previously filed with the Commission and incorporated herein by reference).* 10.3 Interface, Inc. Omnibus Stock Incentive Plan (included as Exhibit 10.6 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).* 10.4 Interface, Inc. Nonqualified Savings Plan (included as Exhibit 4 to the Company's registration statement on Form S-8, file no. 333-38677, previously filed with the Commission and incorporated herein by reference).* 10.5 Third Amended and Restated Credit Agreement, dated as of June 30, 1998, among the Company (and certain direct and indirect subsidiaries), the lenders listed therein, SunTrust Bank, Atlanta and The First National Bank of Chicago (included as Exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended July 5, 1998, previously filed with the Commission and incorporated herein by reference). 10.6 Employment Agreement of Ray C. Anderson dated April 1, 1997 (included as Exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended June 29, 1997 (the "1997 Second Quarter 10-Q"), previously filed with the Commission and incorporated herein by reference); Amendment thereto dated January 6, 1998 (included as Exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended April 5, 1998 (the "1998 First Quarter 10-Q") and incorporated herein by reference); Second Amendment thereto dated January 14, 1999, the form of which is included herein as Exhibit 10.20; and Third Amendment thereto dated May 7, 1999.* 10.7 Change in Control Agreement of Ray C. Anderson dated April 1, 1997 (included as Exhibit 10.2 to the 1997 Second Quarter 10-Q, previously filed with the Commission and incorporated herein by reference); Amendment thereto dated January 6, 1998 (included as Exhibit 10.2 to the 1998 First Quarter 10-Q and incorporated herein by reference); Second Amendment thereto dated January 14, 1999, the form of which is included herein as Exhibit 10.21; and Third Amendment thereto dated May 7, 1999.* 10.8 Employment Agreement of Brian L. DeMoura dated April 1, 1997 (included as Exhibit 10.5 to the 1997 Second Quarter 10-Q, previously filed with the Commission and incorporated herein by reference); Amendment thereto dated January 6, 1998 (included as Exhibit 10.5 to the 1998 First Quarter 10-Q and incorporated herein by reference); and Second Amendment thereto dated January 14, 1999, the form of which is included herein as Exhibit 10.20.* - 18 - 10.9 Change in Control Agreement of Brian L. DeMoura dated April 1, 1997 (included as Exhibit 10.6 to the 1997 Second Quarter 10-Q, previously filed with the Commission and incorporated herein by reference); Amendment thereto dated January 6, 1998 (included as Exhibit 10.6 to the 1998 First Quarter 10-Q and incorporated herein by reference); and Second Amendment thereto dated January 14, 1999, the form of which is included herein as Exhibit 10.21.* 10.10 Employment Agreement of Daniel T. Hendrix dated April 1, 1997 (included as Exhibit 10.7 to the 1997 Second Quarter 10-Q, previously filed with the Commission and incorporated herein by reference); Amendment thereto dated January 6, 1998 (included as Exhibit 10.7 to the 1998 First Quarter 10-Q and incorporated herein by reference); and Second Amendment thereto dated January 14, 1999, the form of which is included herein as Exhibit 10.20.* 10.11 Change in Control Agreement of Daniel T. Hendrix dated April 1, 1997 (included as Exhibit 10.8 to the 1997 Second Quarter 10-Q, previously filed with the Commission and incorporated herein by reference); Amendment thereto dated January 6, 1998 (included as Exhibit 10.8 to the 1998 First Quarter 10-Q and incorporated herein by reference); and Second Amendment thereto dated January 14, 1999, the form of which is included herein as Exhibit 10.21.* 10.12 Employment Agreement of Raymond S. Willoch dated April 1, 1997 (included as Exhibit 10.11 to the 1997 Second Quarter 10-Q, previously filed with the Commission and incorporated herein by reference); Amendment thereto dated January 6, 1998 (included as Exhibit 10.11 to the 1998 First Quarter 10-Q and incorporated herein by reference); and Second Amendment thereto dated January 14, 1999, the form of which is included herein as Exhibit 10.20.* 10.13 Change in Control Agreement of Raymond S. Willoch dated April 1, 1997 (included as Exhibit 10.12 to the 1997 Second Quarter 10-Q, previously filed with the Commission and incorporated herein by reference); Amendment thereto dated January 6, 1998 (included as Exhibit 10.12 to the 1998 First Quarter 10-Q and incorporated herein by reference); and Second Amendment thereto dated January 14, 1999, the form of which is included herein as Exhibit 10.21.* 10.14 Employment Agreement of John H. Walker dated April 1, 1997 (included as Exhibit 10.19 to the 1997 Second Quarter 10-Q, previously filed with the Commission and incorporated herein by reference); and Amendment thereto dated January 6, 1998 (included as Exhibit 10.19 to the 1998 First Quarter 10-Q and incorporated herein by reference).* 10.15 Change in Control Agreement of John H. Walker dated April 1, 1997 (included as Exhibit 10.20 to the 1997 Second Quarter 10-Q, previously filed with the Commission and incorporated herein by reference); and Amendment thereto dated January 6, 1998 (included as Exhibit 10.20 to the 1998 First Quarter 10-Q and incorporated herein by reference).* 10.16 Employment Agreement of John R. Wells dated April 1, 1997 (included as Exhibit 10.23 to the 1997 Second Quarter 10-Q, previously filed with the Commission and incorporated herein by reference); Amendment thereto dated January 6, 1998 (included as Exhibit 10.23 to the 1998 First Quarter 10-Q and incorporated herein by reference); and Second Amendment thereto dated January 14, 1999, the form of which is included herein as Exhibit 10.20.* 10.17 Change in Control Agreement of John R. Wells dated April 1, 1997 (included as Exhibit 10.24 to the 1997 Second Quarter 10-Q, previously filed with the Commission and incorporated herein by reference); Amendment thereto dated January 6, 1998 (included as Exhibit 10.24 to the 1998 First Quarter 10-Q and incorporated herein by reference); and Second Amendment thereto dated January 14, 1999, the form of which is included herein as Exhibit 10.21.* 10.18 Employment Agreement of Michael D. Bertolucci dated April 1, 1997 (included as Exhibit 10.25 to the 1997 Second Quarter 10-Q, previously filed with the Commission and incorporated herein by reference); Amendment thereto dated January 6, 1998 (included as Exhibit 10.25 to the 1998 First Quarter 10-Q and incorporated herein by reference); and Second Amendment thereto dated January 14, 1999, the form of which is included herein as Exhibit 10.20.* - 19 - 10.19 Change in Control Agreement of Michael D. Bertolucci dated April 1, 1997 (included as Exhibit 10.26 to the 1997 Second Quarter 10-Q, previously filed with the Commission and incorporated herein by reference); Amendment thereto dated January 6, 1998 (included as Exhibit 10.26 to the 1998 First Quarter 10-Q and incorporated herein by reference); and Second Amendment thereto dated January 14, 1999, the form of which is included herein as Exhibit 10.21.* 10.20 Form of Second Amendment to Employment Agreement, dated January 14, 1999, amending Exhibits 10.6, 10.8, 10.10, 10.12, 10.16 and 10.18 to this Report. 10.21 Form of Second Amendment to Change in Control Agreement, dated January 14, 1999, amending Exhibits 10.7, 10.9, 10.11, 10.13, 10.17 and 10.19 to this Report. 10.22 Receivables Sale Agreement, dated as of August 4, 1995, among Interface Securitization Corporation, Interface, Inc., Special Purpose Accounts Receivable Cooperative Corporation and Canadian Imperial Bank of Commerce (included as Exhibit 10.26 to the Company's annual report on Form 10-K for the year ended December 31, 1995, previously filed with the Commission and incorporated herein by reference); and Amendment thereto dated as of December 27, 1996 (included as Exhibit 10.24 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). 10.23 Receivables Sale Agreement, dated as of December 27, 1996, among Interface Securitization Corporation, Interface, Inc., certain financial institutions (as bank purchasers), and Canadian Imperial Bank of Commerce (as administrative agent) (included as Exhibit 10.25 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). 10.24 Split Dollar Agreement, dated May 29, 1998, between the Company, Ray C. Anderson and Mary Anne Anderson Lanier, as Trustee of the Ray C. Anderson Family Trust (included as Exhibit 10.32 to the Company's annual report on Form 10-K for the year ended January 3, 1999, previously filed with the Commission and incorporated herein by reference).* 10.25 Split Dollar Insurance Agreement, dated effective as of February 21, 1997, between the Company and Daniel T. Hendrix (included as Exhibit 10.2 to the Company's quarterly report on Form 10-Q for the quarter ended October 4, 1998, previously filed with the Commission and incorporated herein by reference).* 13 Certain information, as follows, contained in the Company's 1999 Annual Report to Shareholders which is expressly incorporated into this Report by direct reference thereto. o Selected Financial Information o Management's Discussion and Analysis of Financial Condition and Results of Operations o Consolidated Financial Statements of the Company and Report of Independent Certified Public Accoutants thereon 21 Subsidiaries of the Company. 23 Consent of BDO Seidman, LLP. 27 Financial Data Schedule. 99.1 Safe Harbor Compliance Statement for Forward-Looking Statements. - - ---------- * Management contract or compensatory plan or agreement required to be filed pursuant to Item 14(c) of this Report. (b) Reports On Form 8-K ------------------- No reports on Form 8-K were filed by the Company during the fourth quarter of the fiscal year covered by this Report. - 20 - REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Interface, Inc. Atlanta, Georgia The audits referred to in our Report dated February 22, 2000 relating to the Consolidated Financial Statements of Interface, Inc. and subsidiaries, incorporated in Item 8 of the Form 10-K by reference to the Annual Report to Shareholders for the fiscal year ended January 2, 2000, included the audit of Financial Statement Schedule II (Valuation and Qualifying Accounts and Reserves) set forth in the Form 10-K. The Financial Statement Schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the Financial Statement Schedule. In our opinion, such Schedule presents fairly, in all material respects, the information set forth therein. BDO SEIDMAN, LLP Atlanta, Georgia INTERFACE, INC. AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
- - ---------------------------------------------------------------------------------------------------------------------------- Column A Column B Column C Column D Column E - - ---------------------------------------------------------------------------------------------------------------------------- Balance, At Charged to Charged to Balance Beginning Costs and Other Deductions End of Year Expenses Accounts (Describe) of Year - - ---------------------------------------------------------------------------------------------------------------------------- (In Thousands) Allowance for accounts: Year ended: January 2, 2000 .................................$7,790 $ 4,565 $-- $3,558 $8,797 ====== ======= === ====== ====== January 3, 1999 .................................$7,351 $ 3,882 $-- $3,443 $7,790 ====== ======= === ====== ====== December 28, 1997 ...............................$7,349 $ 2,032 $-- $2,030 $7,351 ====== ======= === ====== ====== Includes changes in foreign currency exchange rates. Includes allowance of $793 at acquisition date for Camborne, Carpet Solutions and certain of the companies in the Re:Source Americas network during 1997; and $583 at acquisition date for Firth, Joseph Hamilton & Seaton and certain of the companies in the Re:Source Americas network during 1998. Write off of bad debt.
- - ---------------------------------------------------------------------------------------------------------------------------- Column A Column B Column C Column D Column E - - ---------------------------------------------------------------------------------------------------------------------------- Balance, At Charged to Charged to Balance Beginning Costs and Other Deductions End of Year Expense Accounts (Describe) of Year - - ---------------------------------------------------------------------------------------------------------------------------- Restructuring reserve: Year ended: January 2, 2000............................ $6,036 $ 1,803 $-- $7,373 $ 466 January 3, 1999.............................$ -- $13,017 $-- $6,981 $6,036 ====== ======= === ====== ====== Cash payments of $6,701 and reversal of over-accrual of $672 in 1999; cash payments of $6,981 in 1998.
(All other Schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are omitted because they are either not applicable or the required information is shown in the Company's Consolidated Financial Statements or the Notes thereto.) - 21 - SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Company has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. INTERFACE, INC. By: /s/ Ray C. Anderson Ray C. Anderson Chairman of the Board President, and Chief Executive Officer Date: March 24, 2000 POWER OF ATTORNEY Know all men by these presents, that each person whose signature appears below constitutes and appoints Ray C. Anderson as attorney-in-fact, with power of substitution, for him in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Capacity Date --------- -------- ---- /s/ Ray C. Anderson Chairman of the Board, President and Chief March 24, 2000 ----------------------------------- Ray C. Anderson Executive Officer (Principal Executive Officer) /s/ Daniel T. Hendrix Senior Vice President, Chief Financial Officer, March 24, 2000 ----------------------------------- Daniel T. Hendrix Treasurer and Director (Principal Financial and Accounting Officer) /s/ Brian L. Demoura Director March 24, 2000 --------------------------------- Brian L. DeMoura /s/ John H. Walker Director March 24, 2000 ----------------------------------- John H. Walker /s/ Dianne Dillon-Ridgley Director March 24, 2000 --------------------------------- Dianne Dillon-Ridgley /s/ Carl I. Gable Director March 24, 2000 -------------------------------------- Carl I. Gable /s/ June M. Henton Director March 24, 2000 ------------------------------------ June M. Henton /s/ J. Smith Lanier, II Director March 24, 2000 ------------------------------------- J. Smith Lanier, II /s/ Thomas R. Oliver Director March 24, 2000 ---------------------------------- Thomas R. Oliver /s/ Leonard G. Saulter Director March 24, 2000 ----------------------------------- Leonard G. Saulter /s/ Clarinus C.th. Van Andel Director March 24, 2000 ------------------------------- Clarinus C.Th. van Andel
- 23 - Exhibit Index Exhibit Number Description of Exhibit ------ ---------------------- 10.6 Third Amendment, dated May 7, 1999, to Employment Agreement of Ray C. Anderson dated April 1, 1997. 10.7 Third Amendment, dated May 7, 1999, to Change in Control Agreement of Ray C. Anderson dated April 1, 1997. 10.20 Form of Second Amendment to Employment Agreement, dated January 14, 1999, amending Exhibits 10.6, 10.8, 10.10, 10.12, 10.16 and 10.18 to this Report. 10.21 Form of Second Amendment to Change in Control Agreement, dated January 14, 1999, amending Exhibits 10.7, 10.9, 10.11, 10.13, 10.17 and 10.19 to this Report. 13 Certain information, as follows, contained in the Company's 1999 Annual Report to Shareholders which is expressly incorporated into this Report by direct reference thereto. o Selected Financial Information o Management's Discussion and Analysis of Financial Condition and Results of Operations o Consolidated Financial Statements of the Company and Report of Independent Certified Public Accoutants thereon 21 Subsidiaries of the Company. 23 Consent of BDO Seidman, LLP. 27 Financial Data Schedule. 99.1 Safe Harbor Compliance Statement for Forward-Looking Statements. - 24 - EX-10.6 2 THIRD AMEND. EMPLOY AGR. OF RAY ANDERSON Exhibit 10.6 THIRD AMENDMENT TO EMPLOYMENT AGREEMENT This Third Amendment to Employment Agreement ("Amendment") is made and entered into as of the 7th day of May, 1999, by and between INTERFACE, INC. (the "Company") and RAY C. ANDERSON ("Executive"). W I T N E S S E T H : ------------------- WHEREAS, the Company and Executive did enter into that certain Employment Agreement dated as of April 1, 1997, as previously amended (the "Agreement"); and WHEREAS, the parties hereto desire to modify the Agreement in certain respects, as set forth in this Amendment. NOW, THEREFORE, in consideration of the mutual covenants and undertakings contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. The reference in Section 4 of the Agreement to "Executive's 63rd birthday" is hereby changed to "Executive's 65th birthday." 2. The Agreement, as expressly modified by this Amendment, shall remain in full force and effect in accordance with its terms and continue to bind the parties. IN WITNESS WHEREOF, Executive has executed this Amendment, and the Company has caused this Amendment to be executed by a duly authorized representative, as of the date first set forth above. INTERFACE, INC. By: /s/ Charles Eitel Charles R. Eitel President EXECUTIVE: /s/ Ray C. Anderson Ray C. Anderson EX-10.7 3 THIRD AMEND CHANGE IN CONTROL AGR. RAY ANDERSON Exhibit 10.7 THIRD AMENDMENT TO CHANGE IN CONTROL AGREEMENT This Third Amendment to Change in Control Agreement ("Amendment") is made and entered into as of the 7th day of May, 1999, by and between INTERFACE, INC. (the "Company") and RAY C. ANDERSON ("Executive"). W I T N E S S E T H : ------------------- WHEREAS, the Company and Executive did enter into that certain Change in Control Agreement dated as of April 1, 1997, as previously amended (the "Agreement"); and WHEREAS, the parties hereto desire to modify the Agreement in certain respects, as set forth in this Amendment. NOW, THEREFORE, in consideration of the mutual covenants and undertakings contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. The reference in Section 2 of the Agreement to "Executive's 63rd birthday" is hereby changed to "Executive's 65th birthday." 2. The Agreement, as expressly modified by this Amendment, shall remain in full force and effect in accordance with its terms and continue to bind the parties. IN WITNESS WHEREOF, Executive has executed this Amendment, and the Company has caused this Amendment to be executed by a duly authorized representative, as of the date first set forth above. INTERFACE, INC. By: /s/ Charles R. Eitel Charles R. Eitel President EXECUTIVE: /s/ Ray C. Anderson Ray C. Anderson EX-10.20 4 FORM OF SECOND AMEND. TO EMP. AGR. Exhibit 10.20 FORM OF SECOND AMENDMENT TO EMPLOYMENT AGREEMENT This Second Amendment to Employment Agreement ("Amendment") is made and entered into as of the 14th day of January, 1999, by and between INTERFACE, INC. (the "Company") and ___________________ ("Executive"). W I T N E S S E T H : ------------------- WHEREAS, the Company and Executive did enter into that certain Employment Agreement dated as of April 1, 1997, as previously amended (the "Agreement"); and WHEREAS, the parties hereto desire to modify the Agreement in certain respects, as set forth in this Amendment. NOW, THEREFORE, in consideration of the mutual covenants and undertakings contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. All capitalized terms used in this Amendment, unless otherwise defined herein, shall have the same meanings ascribed to such terms in the Agreement. 2. Section 5(c) of the Agreement is hereby amended to delete the language "Except to the extent provided in clause (x) hereof," which appears at the beginning of the penultimate sentence of Section 5(c). That sentence shall now read as follows: "Executive shall have no duty to mitigate any of the damages payable hereunder." 3. Section 5(c)(x) of the Agreement is hereby amended to delete all of clause (x) except the last sentence thereof. 4. The Agreement, as expressly modified by this Amendment, shall remain in full force and effect in accordance with its terms and continue to bind the parties. IN WITNESS WHEREOF, Executive has executed this Amendment, and the Company has caused this Amendment to be executed by a duly authorized representative, as of the date first set forth above. INTERFACE, INC. By: _______________________________ Ray C. Anderson Chairman and CEO EXECUTIVE: ------------------------------------ --------------------- EX-10.21 5 FORM OF SECOND AMEND. TO CHANGE IN CONTROL AGR. Exhibit 10.21 FORM OF SECOND AMENDMENT TO CHANGE IN CONTROL AGREEMENT This Second Amendment to Change in Control Agreement ("Amendment") is made and entered into as of the 14th day of January, 1999, by and between INTERFACE, INC. (the "Company") and ___________________ ("Executive"). W I T N E S S E T H : ------------------- WHEREAS, the Company and Executive did enter into that certain Change in Control Agreement dated as of April 1, 1997, as previously amended (the "Agreement"); and WHEREAS, the parties hereto desire to modify the Agreement in certain respects, as set forth in this Amendment. NOW, THEREFORE, in consideration of the mutual covenants and undertakings contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. All capitalized terms used in this Amendment, unless otherwise defined herein, shall have the same meanings ascribed to such terms in the Agreement. 2. Section 4(c) of the Agreement is hereby deleted in its entirety and the following is substituted in its place: (c) Benefits to be Provided. If Executive becomes eligible for benefits under subsection (b) above, the Company shall pay or provide to Executive the compensation and benefits set forth in this subsection (c); provided, however, that the compensation and benefits to be paid or provided pursuant to paragraphs (i) through (iv) of this subsection (c) shall be reduced to the extent that Executive receives or is entitled to receive upon Executive's termination the compensation and benefits (but only to the extent Executive actually receives such compensation and benefits) described in paragraphs (i) through (iv) of this subsection (c) pursuant to the terms of an employment agreement with the Company or as a result of a breach by the Company of the employment agreement; and, provided, further, after taking into consideration any such reductions, Executive shall continue to be entitled to receive in the aggregate under this Agreement and the employment agreement an amount of compensation and benefits equal to the full amount of compensation and benefits provided under this Agreement, and any amounts paid under paragraphs (i), (ii) and (iv) of this Agreement shall be paid in the manner provided in such paragraphs. 3. Section 5 of the Agreement is hereby deleted in its entirety and the following is substituted in its place: 5. Payments to Cover Excise Taxes. ------------------------------ (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined (as hereafter provided) that any payment or distribution to or for Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or pursuant to or by reason of any other agreement, policy, plan, program or arrangement (including, without limitation, any employment agreement, Stock Plan or salary continuation agreement), or similar right (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Code (or any successor provisions thereto), or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereafter collectively referred to as the "Excise Tax"), then Executive shall be entitled to receive an additional payment or payments (a "Gross-Up Payment") from the Company. The total amount of the Gross-Up Payment shall be an amount such that, after payment by (or on behalf of) Executive of any Excise Tax and all federal, state and other taxes (including any interest or penalties imposed with respect to such taxes) imposed upon the Gross-Up Payment, the remaining amount of the Gross-Up Payment is equal to the Excise Tax imposed upon the Payment(s). For purposes of clarity, the amount of the Gross-Up Payment shall be that amount necessary to pay the Excise Tax in full and all taxes assessed upon the Gross-Up Payment. (b) An initial determination as to whether a Gross-Up Payment is required pursuant to this Section 5 and the amount of such Gross-Up Payment shall be made by an accounting firm selected by the Company, and reasonably acceptable to Executive, which is then designated as one of the five largest accounting firms in the United States (the "Accounting Firm"). The Accounting Firm shall provide its determination (the "Determination"), together with detailed supporting calculations and documentation to the Company and Executive as promptly as practicable after such calculation is requested by the Company or by Executive with respect to a Payment (or Payments), and if the Accounting Firm determines that no Excise Tax is payable by Executive with respect to a Payment (or Payments), it shall furnish Executive with an opinion reasonably acceptable to Executive that no Excise Tax will be imposed with respect to any such Payment(s). Within 15 days of the delivery of the Determination to Executive, Executive shall have the right to dispute the Determination (the "Dispute"). The Gross-Up Payment, if any, as determined pursuant to this Section 5 shall be paid by the Company to Executive within 15 days of the receipt of the Accounting Firm's Determination. The existence of the Dispute shall not in any way affect the right of Executive to receive the Gross-Up Payment in accordance with the Determination. If there is no Dispute, the Determination shall be binding, final and conclusive upon the Company and Executive subject to the application of Section 5(c). - 2 - (c) As a result of the uncertainty in the application of Sections 4999 and 280G of the Code, it is possible that a Gross-Up Payment (or a portion thereof) will be paid which should not have been paid (an "Excess Payment") or a Gross-Up Payment (or a portion thereof) which should have been paid will not have been paid (an "Underpayment"). An Underpayment shall be deemed to have occurred upon the earliest to occur of the following events: (i) upon notice (formal or informal) to Executive from any governmental taxing authority that the tax liability of Executive (whether in respect of the then current taxable year of Executive or in respect of any prior taxable year of Executive) may be increased by reason of the imposition of the Excise Tax on a Payment (or Payments) with respect to which the Company has failed to make a sufficient Gross-Up Payment, (ii) upon a determination by a court, (iii) by reason of a determination by the Company (which shall include the position taken by the Company, or its consolidated group, on its federal income tax return), or (iv) upon the resolution to the satisfaction of Executive of the Dispute. If any Underpayment occurs, Executive shall promptly notify the Company and the Company shall pay to Executive within 15 days of the date the Underpayment is deemed to have occurred under (i), (ii), (iii) or (iv) above, but in no event less than 5 days prior to the date on which the applicable government taxing authority has requested payment, an additional Gross-Up Payment equal to the amount of the Underpayment plus any interest and penalties imposed on the Underpayment. An Excess Payment shall be deemed to have occurred upon a "Final Determination" (as hereinafter defined) that the Excise Tax shall not be imposed upon any Payment(s) (or portion of a Payment) with respect to which Executive had previously received a Gross-Up Payment. A Final Determination shall be deemed to have occurred when Executive has received from the applicable governmental taxing authority a refund of taxes or other reduction in his tax liability by reason of the Excess Payment and upon either (i) the date a determination is made by, or an agreement is entered into with, the applicable governmental taxing authority which finally and conclusively binds Executive and such taxing authority, or in the event that a claim is brought before a court of competent jurisdiction, the date upon which a final determination has been made by such court and either all appeals have been taken and finally resolved or the time for all appeals has expired, or (ii) the statute of limitations with respect to Executive's applicable tax return has expired. If an Excess Payment is determined to have been made, the amount of the Excess Payment shall be treated as a loan by the Company to Executive and Executive shall pay to the Company within 15 days following demand (but not less than 30 days after the determination of such Excess Payment) the amount of the Excess Payment plus interest at an annual rate equal to the rate provided for in Section 1274(b)(2)(B) of the Code from the date the Gross-Up Payment (to which the Excess Payment relates) was paid to Executive until the date of repayment to the Company. - 3 - (d) Notwithstanding anything contained in this Agreement to the contrary, in the event that, according to the Determination, an Excise Tax will be imposed on any Payment(s), the Company shall pay to the applicable government taxing authorities as Excise Tax withholding, the amount of any Excise Tax that the Company has actually withheld from the Payment(s); provided, that the Company's payment of withheld Excise Tax shall not alter the Company's obligation to pay the Gross-Up Payment required under this Section 5. (e) Executive and the Company shall each provide the Accounting Firm access to and copies of any books, records and documents in the possession of the Company or Executive, as the case may be, reasonably requested by the Accounting Firm, and otherwise cooperate with the Accounting Firm in connection with the preparation and issuance of the Determination contemplated by Section 5(b) hereof. (f) The fees and expenses of the Accounting Firm for its services in connection with the Determination and calculations contemplated by Section 5(b) shall be paid by the Company. 4. The Agreement, as expressly modified by this Amendment, shall remain in full force and effect in accordance with its terms and continue to bind the parties. IN WITNESS WHEREOF, Executive has executed this Amendment, and the Company has caused this Amendment to be executed by a duly authorized representative, as of the date first set forth above. INTERFACE, INC. By: _____________________________ Ray C. Anderson Chairman and CEO EXECUTIVE: ---------------------------------- ------------------- - 4 - EX-13 6 PORTIONS OF ANNUAL REPORT Exhibit 13 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" under applicable securities laws, including 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 such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and actual results may 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 are set forth in the Safe Harbor Compliance Statement for Forward-Looking Statements included as Exhibit 99.1 to the Company's Annual Report on Form 10-K for the fiscal year ended January 2, 2000, and are hereby incorporated by reference. The Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time. GENERAL For 1999, Interface, Inc. (the "Company") had net sales and net income of $1.228 billion and $23.5 million, respectively. Net sales were made up of sales of floorcovering products (primarily modular and broadloom carpet) and related services ($974 million), interior fabric sales ($197.1 million) and raised/access flooring and other specialty product sales ($57.1 million), accounting for 79.3%, 16.0% and 4.7% of total sales, respectively. The Company achieved a compound annual growth rate in its net sales and net income of 11.3% and 8.8%, respectively, over the five-year period from 1995 to 1999. The Company's business, as well as the commercial interiors market in general, is somewhat cyclical in nature. The Company's financial performance in recent years has been strongly tied to U.S. demand for its products and services. The commercial interiors market as a whole and the broadloom carpet market, in particular, have experienced decreased demand levels during the past year which continued into the first quarter of 2000. A significant sustained downturn in the market could impair the Company's growth. The Company's growth could also be impaired by international developments. Specifically, the weakening of the euro against the U.S. dollar has adversely affected European revenue levels during 1999. 1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table shows, as a percentage of net sales, certain items included in the Company's consolidated statements of income. 1999 1998 1997 - - ----------------------------------------------------------------- Net sales 100% 100.0% 100.0% Cost of sales 68.9 66.2 66.6 - - ---------------------------------------------------------------- Gross profit on sales 31.1 33.8 33.4 Selling, general and administrative expenses 24.8 24.8 24.8 Restructuring charge .1 2.0 -- - - ---------------------------------------------------------------- Operating income 6.2 7.0 8.6 Other expense 3.1 3.2 3.2 - - ---------------------------------------------------------------- Income before taxes on income 3.1 3.8 5.4 Taxes on income 1.2 1.5 2.1 - - ---------------------------------------------------------------- Net income 1.9 2.3 3.3 ================================================================ Fiscal 1999 Compared with Fiscal 1998 - - ------------------------------------- The Company's net sales decreased $52.9 million (4.1%) compared with 1998. The decrease was attributable primarily to (i) the divestiture of Joseph Hamilton & Seaton, Ltd., a U.K. wholesale distributor, (ii) decreased sales volume of products and related services in the Company's broadloom floorcovering operations, due to soft market conditions, and (iii) the weakness of the euro against the U.S. dollar. These decreases were offset somewhat by increased sales volume (i) the Company's Asia-Pacific division due mostly to the economic recovery in Asia, and (ii) the Company's architectural products division. Cost of sales as a percentage of net sales increased to 68.9% in 1999 compared to 66.2% in 1998. The increase was attributable to (i) lower sales volumes which caused a lower absorption of overhead costs, and (ii) a shift in sales mix towards a greater service component which traditionally has lower gross margins. Selling, general and administrative expenses as a percentage of net sales were 24.8% in 1999, unchanged from 1998 despite lower sales in 1999. The Company'simproved cost containment measures worldwide were offset by costs associated with the integration of the Re:Source Provider Network and expenses associated with the separation of certain senior officers from Interface Americas. Other expense decreased $2.1 million in 1999, due primarily to immaterial gains achieved as a result of the divestiture of certain operating assets of the Company. The effective tax rate was 38.0% for 1999, compared to 39.3% in 1998. The decrease in the effective rate was primarily due to the shift in pre-tax income levels to geographic regions which traditionally have lower statutory tax rates. As a result of the aforementioned factors, the Company's net income decreased 21.1% to $23.5 million versus $29.8 million in 1998. During the fourth quarter of 1998, the Company recorded a pre-tax restructuring charge in the amount of $25.3 million related to plant closures and consolidations of operations in Asia, Europe and the U.S., which resulted in an aggregate head count reduction of approximately 253 salaried and hourly employees and the write-down and disposal of certain assets. During 1999, the restructuring activities were largely completed. Further discussion of the restructuring charge appears in the notes of the consolidated financial statements on pages 62-63. Fiscal 1998 Compared with Fiscal 1997 - - ------------------------------------- The Company's net sales increased $145.8 million (12.8%) compared with 1997. The increase was attributable primarily to increased sales volume (i) of floorcovering products in the U.K. as a result of the acquisition of Firth Carpets in the first quarter of 1998, (ii) of products and related services in the Company's U.S. floorcovering operations, due to increased demand for and increased market share of its modular carpet products, as well as additional sales generated by the Re:Source services network, and (iii) in the Company's interior fabrics operations due to increased demand for the Company's lighter weight, higher margin fabric products, as well as the Camborne Holdings, Ltd. acquisition in June 1997. These increases were offset somewhat by decreased sales volume (i) in the Company's Asia-Pacific division due mostly to the economic turmoil in Asia, (ii) in the Company's architectural products division, and (iii) of modular carpet products in the U.K. Additionally, net sales in the fourth quarter of 1998 were negatively impacted by moderating demand levels in the commercial interiors market as a whole, particularly in the U.K., which caused downward pressure on margins. 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cost of sales as a percentage of net sales decreased to 66.2% in 1998 compared to 66.6% in 1997. The decrease was attributable to (i) economies of scale associated with increased sales volume in the Company's floorcovering and interior fabrics operations, (ii) decreased manufacturing costs in the Company's floorcovering and interior fabrics operations through the Company's QUEST waste reduction initiative, and (iii) a favorable product mix. The Company's interior fabrics business also experienced decreased manufacturing costs as a result of continued efficiencies generated from the new, state-of-the-art yarn manufacturing facility in Guilford, Maine. Selling, general and administrative expenses as a percentage of net sales were 24.8% in 1998, which is unchanged from 1997. The Company's improved cost containment measures worldwide were offset by costs associated with the continued development of the Re:Source services network infrastructure and consulting and development expenses associated with the Year 2000 initiative. Other expense increased $4.1 million in 1998, due primarily to higher overall levels of debt incurred as a result of the Company's acquisitions. The effective tax rate was 39.3% for 1998, compared to 38.8% in 1997. The increase in the effective rate was primarily due to the effect of a decrease in income before tax in proportion to the amortization expense of the Company's goodwill, which is not deductible for tax purposes. As a result of the aforementioned factors, the Company's net income (before the restructuring charge) increased 23.8% to $46.4 million versus $37.5 million in 1997. Including the restructuring charge, net income decreased 20.5% to $29.8 million. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of cash over the last three fiscal years have been funds provided by operating activities, proceeds from the issuance (net of repurchases) of common stock, and proceeds from additional long-term debt. In 1999, operating activities generated $71.1 million of cash compared with $71.9 million and $74.7 million in 1998 and 1997, respectively. The primary uses of cash during the last three fiscal years have been (i) acquisitions of businesses, (ii) additions to property and equipment at the Company's manufacturing facilities, (iii) cash dividends, and (iv) expenditures related to the Company's share repurchase program. For the three years ended January 2, 2000, acquisitions of businesses (net of dispositions) required $96.3 million, the aggregate additions to property and equipment required cash expenditures of $121.2 million, dividends required $24.4 million, and share repurchases required $13.2 million. The Company has in effect a share repurchase program, pursuant to which it is authorized to repurchase up to 4,000,000 shares of Class A Common Stock in the open market. As of February 25, 2000, the Company had repurchased an aggregate of 1,637,500 shares of Class A Common Stock under this program, at prices ranging from $4.50 to $16.78. At the end of fiscal 1999, the Company estimated capital expenditure requirements of approximately $36 million and had purchase commitments of approximately $5.3 million for 2000. The Company also intends to continue to selectively acquire companies and related product lines that complement its existing product lines and further geographic expansion into untapped markets. Management believes that cash provided by operations and long-term loan commitments will provide adequate funds for current commitments and other requirements in the foreseeable future. YEAR 2000 As was the case with other companies using computers in their operations, the Company was faced with the task of addressing the Year 2000 issue in anticipation of calendar year end 1999. The Year 2000 issue refers to the widespread use of computer programs that rely on two-digit codes to perform computations or decision-making functions. The Company performed a comprehensive review of its computer programs to identify the systems that would be affected by the Year 2000 issue. The Company retained IBM Corporation to assist in its Year 2000 conversion process. The Company categorizes its systems into one of two categories: those that are linked to the Company's AS-400 computer network ("IT Systems"), and those that are not ("Non-IT Systems"). The Company's total cost of modifying its IT Systems to be Year 2000 ready was approximately $23.8 million. Of such amount, approximately $15.9 million was attributable to the cost of new hardware and software which was required in connection with the global consolidation of the Company's management and financial accounting systems. This new equipment and upgraded technology has a definable value lasting beyond the Year 2000. In these instances, where Year 2000 compliance was ancillary, the Company capitalized and depreciated such costs. The remaining $7.9 million has been expensed as incurred. With respect to Non-IT Systems, the total cost of the modifications necessary to be Year 2000 ready was approximately $2 million. 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company did not experience any material disruptions in its operations or activities as a result of Year 2000 problems. In addition, the Company does not expect to encounter any such problems in the foreseeable future although it continues to monitor its IT and Non-IT Systems for signs or indications of such problems. Also, the Company is currently unaware of any Year 2000 problems faced by any suppliers or customers which are likely to have a material adverse effect on the Company. EURO CONVERSION A single currency called the euro was introduced in Europe on January 1, 1999. Eleven of the fifteen member countries of the European Union adopted the euro as their common legal currency as of that date. Fixed conversion rates between these participating countries' existing currencies (the "legacy currencies") and the euro were established as of that date. The legacy currencies will remain legal tender as denominations of the euro until at least January 1, 2002 (but not later than July 1, 2002). During this transition period, parties may settle transactions using either the euro or a participating country's legacy currency. The increased price transparency resulting from the use of a single currency in the eleven participating countries may affect the ability of the Company to price its products differently in various European markets. The euro may reduce the amount of the Company's exposure to changes in foreign exchange rates, due to the netting effect of having assets and liabilities denominated in a single currency as opposed to the various legacy currencies. As a result, the Company's foreign exchange hedging activity and related costs may be reduced in the future. Conversely, because there will be less diversity in the Company's exposure to foreign currencies, movements in the euro's value in U.S. dollars could have a more pronounced effect, whether positive or negative. Certain of the Company's business functions have introduced euro-capability as of January 2, 2000, including, for example, systems for making and receiving certain payments, pricing and invoicing. Other business functions will be converted for the euro by the end of the transition period (December 31, 2001), but may be converted earlier where operationally efficient or cost-effective or to meet customer needs. The Company does not expect the costs associated with these modifications to have a material adverse effect on future operations. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 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 currently maintains 68% and 32% of its total long-term debt in fixed and variable interest rates, respectively. Additionally, the Company historically has utilized interest rate swaps, which are exchanged, at specified intervals, the difference between fixed and variable interest amounts calculated by reference to an agreed-upon notional principal linked to LIBOR. The interest rate swap agreements generally have maturity dates ranging from fifteen to twenty-four months. As of January 2, 2000, the Company had no outstanding interest rate management swap agreements. At January 3, 1999, the Company had utilized interest rate swap agreements to effectively convert approximately $43.7 million of variable rate debt to fixed rate debt. 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 British pound sterling, Canadian dollar, Australian dollar, Thai baht, Japanese yen, and the euro. When the U.S. dollar strengthens against a foreign currency, the value of anticipated sales in those currencies decreases, and vice-versa. Additionally, to the extent the Company's foreign operations with functional currencies other than the U.S. dollar transact business in countries other than the U.S., exchange rate changes between two foreign currencies could ultimately impact the Company. Finally, because the Company reports in U.S. dollars on a consolidated basis, foreign currency exchange fluctuations can have a translation impact on the Company's financial position. To mitigate the short-term effect of changes in currency exchange rates on the Company's sales denominated in foreign currencies, the Company historically has hedged by entering into currency swap contracts to hedge certain firm sales commitments denominated in foreign currencies. In these currency swap agreements, the Company and a counterparty financial institution exchange equal initial principal amounts of two currencies at the spot exchange rate. Over the term of the swap contract, the Company and the counterparty exchange interest payments in their swapped currencies. At maturity, the principal amount is reswapped, at the contractual exchange rate. The contracts generally have maturity dates of fifteen to twenty four months. At January 2, 2000, the Company did not have any foreign currency hedge contracts outstanding, as compared to $10.5 million at January 3, 1999. The Company, as of January 2, 2000, recognized a $22.0 million decrease in its foreign currency translation adjustment account compared to January 3, 1999, because of the weakening of certain currencies against the U.S. dollar. The decrease was associated primarily with the Company's investments in certain foreign subsidiaries located within the U.K. and continental Europe. As mentioned above, the Company had no outstanding agreements to hedge fluctuations in interest and foreign currency exchange rates as of January 2, 2000. The Company believes that, at this time, such hedges are no longer necessary. During 1998, the Company restructured its borrowing facilities which provided for multi-currency loan agreements resulting in the Company's ability to borrow funds in the countries in which the funds are expected to be utilized. Further, the advent of the euro has provided additional currency stability within the Company's European markets. As such, these events have provided the Company natural hedges on currency fluctuations. Interest rate management swap agreements have also become unnecessary given the structure of the Company's unsecured $300 million revolving credit facility, which charges interest at varying rates based on the Company's ability to meet certain performance criteria. 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 January 2, 2000. The market values that result from these computations are compared with the market values of these financial instruments at January 2, 2000. The differences in this comparison are the hypothetical gains or losses associated with each type of risk. Interest Rate Risk. 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 increase of $1.0 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 $42.2 million. Foreign Currency Exchange Rate Risk. As of January 2, 2000, 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 $5.2 million or an increase in the fair value of the Company's financial instruments of $5.2 million. 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. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes new accounting and reporting standards for derivative financial instruments and for hedging activities. SFAS 133 requires an entity to measure all derivatives at fair value and to recognize them in the balance sheet as an asset or liability, depending on the entity's rights or obligations under the applicable derivative contract. The Company will designate each derivative as belonging to one of several possible categories, based on the intended use of the derivative. The recognition of changes in fair value of a derivative that affect the income statement will depend on the intended use of the derivative. If the derivative does not qualify as a hedging instrument, the gain or loss on the derivative will be recognized currently in earnings. If the derivative qualifies for special hedge accounting, the gain or loss on the derivative will either (i) be recognized in income along with an offsetting adjustment to the basis of the item being hedged or (ii) be deferred in other comprehensive income and reclassified to earnings in the same period or periods which the hedged transaction affects. SFAS 137 delayed the effective date of SFAS 133 to fiscal years beginning after June 15, 2000. The Company currently plans to adopt SFAS 133 on January 1, 2001. The Company is in the process of determining the impact that the adoption of SFAS 133 will have on its results of operations and financial position. During 1999, the Company adopted Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-up Activities." The SOP requires that the costs of start-up activities, including organization costs, be expensed as incurred. The adoption of SOP 98-5 had no material impact on the Company's financial statements. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME CONSOLIDATED STATEMENTS OF INCOME
Fiscal Year Ended - - ------------------------------------------------------------------------------------------- (in thousands, except share data) 1999 1998 1997 - - ------------------------------------------------------------------------------------------- Net sales $ 1,228,239 $1,281,129 $1,135,290 Cost of sales 846,124 847,660 755,734 - - ------------------------------------------------------------------------------------------- Gross profit on sales 382,115 433,469 379,556 Selling, general and administrative expenses 304,553 318,495 281,755 Restructuring charge 1,131 25,283 -- Operating income 76,431 89,691 97,801 - - ------------------------------------------------------------------------------------------- Other expense Interest expense 39,372 36,705 35,038 Other (914) 3,875 1,492 - - ------------------------------------------------------------------------------------------- Total other expense 38,458 40,580 36,530 - - ------------------------------------------------------------------------------------------- Income before taxes on income 37,973 49,111 61,271 Taxes on income 14,428 19,288 23,757 - - ------------------------------------------------------------------------------------------- Net income 23,545 29,823 37,514 =========================================================================================== Earnings per common share Basic $ 0.45 $ 0.58 $ 0.79 =========================================================================================== Diluted $ 0.45 $ 0.56 $ 0.76 =========================================================================================== 1997 earnings per share have been restated to reflect a two-for-one stock split that occurred in June 1998.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Fiscal Year Ended - - ------------------------------------------------------------------------------------------- (in thousands) 1999 1998 1997 - - ------------------------------------------------------------------------------------------- Net income $ 23,545 $ 29,823 $ 37,514 Other comprehensive income Foreign currency translation adjustment (22,003) (3,513) (25,098) Minimum pension liability adjustment 6,399 (6,399) -- - - ------------------------------------------------------------------------------------------- Comprehensive income $ 7,941 $ 19,911 $ 12,416 ===========================================================================================
See accompanying notes to consolidated financial statements. 6 CONSOLIDATED BALANCE SHEETS
(in thousands) 1999 1998 - - ---------------------------------------------------------------------------------------- ASSETS Current assets Cash $ 2,548 $ 9,910 Accounts receivable 203,550 194,803 Inventories 176,918 199,338 Prepaid expenses 27,845 26,607 Deferred income taxes 9,917 7,866 - - ---------------------------------------------------------------------------------------- Total current assets 420,778 438,524 Property and equipment 253,436 245,312 Miscellaneous 75,509 50,059 Excess of cost over net assets acquired 278,772 302,969 - - ---------------------------------------------------------------------------------------- $ 1,028,495 $ 1,036,864 ======================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Notes payable $ 4,173 $ 26,855 Accounts payable 90,318 80,154 Accrued expenses 107,287 115,317 Current maturities of long-term debt 1,974 2,786 - - ---------------------------------------------------------------------------------------- Total current liabilities 203,752 225,112 Long-term debt, less current maturities 125,144 112,651 Senior notes 150,000 150,000 Senior subordinated notes 125,000 125,000 Deferred income taxes 33,395 23,482 - - ---------------------------------------------------------------------------------------- Total liabilities 637,291 636,245 Minority interest 2,012 1,795 Shareholders' equity Preferred stock -- -- Common stock 5,902 5,983 Additional paid-in capital 222,373 231,959 Retained earnings 233,322 219,230 Foreign currency translation adjustment (53,671) (31,668) Minimum pension liability adjustment -- (6,399) Treasury stock, 7,300 and 7,375 shares, respectively (18,734) (20,281) - - ---------------------------------------------------------------------------------------- Total shareholders' equity 389,192 398,824 - - ---------------------------------------------------------------------------------------- $ 1,028,495 $ 1,036,864 ========================================================================================
See accompanying notes to consolidated financial statements. 7 CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended - - --------------------------------------------------------------------------------------------- (in thousands) 1999 1998 1997 - - --------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 23,545 $ 29,823 $ 37,514 Adjustments to reconcile net income to cash provided by operating activities Depreciation and amortization 45,789 42,586 38,605 Restructuring charge -- 12,265 -- Deferred income taxes 3,950 (8,362) 7,849 Working capital changes Accounts receivable (15,954) 4,972 (16,386) Inventories 16,559 (21,296) (16,233) Prepaid expenses (2,314) 3,235 (2,273) Accounts payable and accrued expenses (509) 8,677 25,647 - - --------------------------------------------------------------------------------------------- 71,066 71,900 74,723 - - --------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Capital expenditures (37,278) (45,227) (38,654) Net proceeds from dispositions/ acquisitions of businesses 9,826 (71,504) (34,647) Other (24,393) (16,485) (17,902) - - --------------------------------------------------------------------------------------------- (51,845) (133,216) (91,203) - - --------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Borrowings on long-term debt 148,900 198,080 153,624 Principal repayments on long-term debt (134,459) (343,607) (142,884) Proceeds from issuance of senior notes -- 146,991 -- Expenditures under share repurchase program (10,615) (2,535) -- Borrowings (repayments) under lines of credit (22,115) (684) 7,617 Proceeds from issuance of common stock 1,044 70,630 6,414 Dividends paid (9,453) (8,499) (6,436) - - --------------------------------------------------------------------------------------------- (26,698) 60,376 18,335 - - --------------------------------------------------------------------------------------------- Net cash provided (used) by operating, investing, and financing activities (7,477) (940) 1,855 Effect of exchange rate changes on cash 115 638 (405) - - --------------------------------------------------------------------------------------------- Cash Net increase (decrease) (7,362) (302) 1,450 Balance, beginning of year 9,910 10,212 8,762 - - --------------------------------------------------------------------------------------------- Balance, end of year $ 2,548 $ 9,910 $ 10,212 =============================================================================================
See accompanying notes to consolidated financial statements. 8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations - - -------------------- The Company is a recognized leader in the worldwide commercial interiors market, offering floorcoverings, fabrics, specialty products and services. The Company manufactures modular and broadloom carpet focusing on the high quality, designer-oriented sector of the market, and provides specialized carpet replacement, installation, and maintenance services. The Company also produces interior fabrics and upholstery products. Additionally, the Company produces raised/access flooring systems; provides chemicals used in various rubber and plastic products; offers Intersept(R), a proprietary antimicrobial used in a number of interior finishes; and sponsors the Envirosense Consortium in its mission to address workplace environmental issues. Principles of Consolidation - - --------------------------- The consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany accounts and transactions are eliminated. Use of Estimates - - ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Examples include provisions for returns, bad debts, product claims reserves, inventory obsolescence and the length of product life cycles, accruals associated with restructuring activities, income tax exposures, excess of cost over net assets acquired and fixed asset lives. Actual results could vary from these estimates. Inventories - - ----------- Inventories are valued at the lower of cost (standards which approximate actual cost on a first-in, first-out basis) or market. Property and Equipment - - ---------------------- Property and equipment are carried at cost. Depreciation is computed using the straight-line method over the following estimated useful lives: buildings and improvements - ten to fifty years; furniture and equipment - three to twelve years. Interest costs for the construction/development of certain long-term assets are capitalized and amortized over the related assets' estimated useful lives. The Company capitalized net interest costs of approximately $0.4 million, $1.0 million, and $0.4 million for the years ended 1999, 1998, and 1997, respectively. Depreciation expense amounted to approximately $32.4 million, $31.9 million, and $25.7 million for the years ended 1999, 1998, and 1997, respectively. 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected future undiscounted cash flow is less than the carrying amount of the asset, a loss is recognized for the difference between the fair value and carrying value of the asset. Excess of Cost Over Net Assets Acquired - - --------------------------------------- Excess of cost over net assets acquired is the excess of the purchase price over the fair value of net assets acquired in business combinations accounted for as purchases. Excess of cost over net assets acquired is amortized on a straight-line basis over the periods benefited, principally twenty-five to forty years. Accumulated amortization amounted to approximately $69.1 million and $59.7 million at January 2, 2000 and January 3, 1999, respectively. The Company's operational policy for the assessment and measurement of any impairment in the value of excess of cost over net assets acquired, which is other than temporary, is to evaluate the recoverability and remaining life and determine whether it should be completely or partially written off or the amortization period accelerated. The Company will recognize an impairment if undiscounted estimated future operating cash flows of the acquired business are determined to be less than the carrying amount. The amount of impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. Taxes on Income - - --------------- The Company accounts for income taxes under an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, the Company generally considers all expected future events other than enactments of changes in tax laws or rates. The effect on deferred tax assets and liabilities of a change in tax rates will be recognized as income or expense in the period that includes the enactment date. Revenue Recognition - - ------------------- Revenue is recognized on the sale of products or services when the products are shipped or the services are performed, all significant contractual obligations have been satisfied, and the collection of the resulting receivable is reasonably assured. Revenues and estimated profits on long-term performance contracts are recognized under the percentage of completion method of accounting using the cost-to-cost methodology. Profit estimates are revised periodically based upon changes in facts. Any losses identified on contracts are recognized immediately. Cash, Cash Equivalents, and Short-Term Investments - - -------------------------------------------------- Highly liquid investments with insignificant interest rate risk and with original maturities of three months or less are classified as cash and cash equivalents. Investments with maturities greater than three months and less than one year are classified as short-term investments. At January 2, 2000 and January 3, 1999, checks issued against future deposits totaled approximately $22.0 million and $10.1 million, respectively. Cash payments for interest amounted to approximately $36.6 million, $30.7 million, and $33.8 million, for the years ended 1999, 1998, and 1997, respectively. Income tax payments amounted to approximately $6.1 million, $17.3 million, and $18.2 million, for the years ended 1999, 1998, and 1997, respectively. Fair Values of Financial Instruments - - ------------------------------------ Fair values of cash and cash equivalents, short-term investments and short-term debt approximate cost due to the short period of time to maturity. Fair values of long-term investments, debt, swaps, forward currency contracts and currency options are based on quoted market prices or pricing models using current market rates. Translation of Foreign Currencies - - --------------------------------- The financial position and results of operations of the Company's foreign subsidiaries are measured generally using local currencies as the functional currency. Assets and liabilities of these subsidiaries are translated into U.S. dollars at the exchange rate in effect at each year-end. Income and expense items are translated at average exchange rates for the year. The resulting translation adjustments are recorded in the foreign currency translation adjustment account. In the event of a divestiture of a foreign subsidiary, the related foreign currency translation results are reversed from equity to income. Foreign currency exchange gains and losses are included in income. Derivative Financial Instruments - - -------------------------------- The Company uses various financial instruments, including derivative financial instruments, for purposes other than trading. The Company does not enter into derivative financial instruments for speculative purposes. Derivatives, used as a part of the Company's risk management strategy, are designated at inception as hedges, and are measured for effectiveness both at inception and on an ongoing basis. Gains and losses on hedges of existing assets or liabilities are included 10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS in the carrying amounts of those assets or liabilities and are ultimately recognized in income as part of those carrying amounts. Gains or losses related to qualifying hedges of firm commitments or anticipated transactions are also deferred and are recognized in income or as adjustments of carrying amounts when the hedged transaction occurs. Fiscal Year - - ----------- The Company's fiscal year is the 52 or 53 week period ending on the Sunday nearest December 31. All references herein to "1999," "1998," and "1997" mean the fiscal years ended January 2, 2000, January 3, 1999, and December 28, 1997, respectively. Fiscal years 1999 and 1997 were comprised of 52 weeks, while 1998 was comprised of 53 weeks. Recent Accounting Pronouncements - - -------------------------------- In June 1998, the Financial Accounting Standards Board issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes new accounting and reporting standards for derivative financial instruments and for hedging activities. SFAS 133 requires an entity to measure all derivatives at fair value and to recognize them in the balance sheet as an asset or liability, depending on the entity's rights or obligations under the applicable derivative contract. The Company will designate each derivative as belonging to one of several possible categories, based on the intended use of the derivative. The recognition of changes in fair value of a derivative that affect the income statement will depend on the intended use of the derivative. If the derivative does not qualify as a hedging instrument, the gain or loss on the derivative will be recognized currently in earnings. If the derivative qualifies for special hedge accounting, the gain or loss on the derivative will either (i) be recognized in income along with an offsetting adjustment to the basis of the item being hedged or (ii) be deferred in other comprehensive income and reclassified to earnings in the same period or periods during which the hedged transaction affects. SFAS 137 delayed the effective date of SFAS 133 to fiscal years beginning after June 15, 2000. The Company currently plans to adopt SFAS 133 on January 1, 2001. The Company is in the process of determining the impact that the adoption of SFAS 133 will have on its results of operations and financial position. BUSINESS ACQUISITIONS AND DIVESTITURES 1999 - - ---- During 1999, the Company sold two operating entities which had been acquired as part of the December 1997 Readicut International plc ("Readicut") acquisition transaction. Joseph Hamilton & Seaton, Ltd., a distributor of private label carpet, was sold for approximately $11.2 million in cash during February. In November the Company also sold its 40% interest in Vebe Floorcoverings BV, a manufacturer of needle-punch carpet, for $8 million in the form of a promissory note. The Company recognized the related immaterial loss and gain, respectively, associated with these divestitures within other expense. During 1999, the Company purchased six service companies, all located in the U.S. As consideration for the acquisitions, the Company issued common stock valued at approximately $.8 million and paid $2.0 million in cash. All transactions have been accounted for as purchases and, accordingly, the results of operations of the acquired companies since their acquisition dates have been included within the consolidated financial statements. The excess of the purchase price over the fair value of the net assets acquired was approximately $1.2 million and is being amortized over 25 years. 1998 - - ---- On December 30, 1997, the Company completed the acquisition of the European carpet business of Readicut. The acquired portion of Readicut was essentially comprised of two operating companies: Firth Carpets Ltd., based in Brighouse, West Yorkshire, U.K., a leading manufacturer of high quality woven and tufted carpet primarily for the contract markets, and Joseph Hamilton Seaton, Ltd., based in Birmingham, U.K. As consideration, the Company paid $54.6 million in cash. The transaction was accounted for as a purchase and, accordingly, the results of operations of the acquired companies since their acquisition date have been included within the consolidated financial statements. The purchase price exceeded the fair value of the net assets acquired by approximately $15.2 million and is being amortized over 40 years. The following summarized unaudited pro forma financial information assumes the acquisition occurred at December 30, 1996. The information for 1998 reflects actual results as if the acquisition actually occurred on the first day of the year. For the year ended January 3, 1999, the acquired businesses of Readicut recorded a net loss of $3.3 million. Fiscal Year Ended - - --------------------------------------------------------------- (in thousands, except share data) 1998 1997 - - --------------------------------------------------------------- Net sales $1,281,129 $1,241,526 Net income 29,823 38,569 Diluted earnings per common share .56 .79 - - --------------------------------------------------------------- 11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The amounts for 1997 are based upon certain assumptions and estimates and do not reflect any benefit from economies which might have been achieved from combined operations. The pro forma results do not necessarily represent results which would have occurred if the acquisition had taken place on the basis assumed above, nor are they indicative of the results of future combined operations. As part of the Readicut transaction, the Company also acquired a 40% interest in Vebe Floorcoverings BV, located in the Netherlands. The Company accounted for its interest in the joint venture using the equity method of accounting. The Company also acquired four floorcovering contractors, four carpet maintenance companies, two additional service companies, and a raised/access flooring manufacturer, all located in the U.S. The Company also purchased the vinyl floorcoverings business of Denmark based Scan-Lock A/S, and acquired Glenside Fabrics Limited, a manufacturer of upholstery fabrics, located in Meltham, U.K. As consideration for the acquisitions, the Company issued common stock valued at approximately $1.0 million, $16.9 million in cash, and $.2 million in a note receivable. All transactions have been accounted for as purchases and, accordingly, the results of operations of the acquired companies since their acquisition dates have been included within the consolidated financial statements. The excess of the purchase price over the fair value of the net assets acquired was approximately $11.7 million and is being amortized over periods of 25 to 40 years. RECEIVABLES The Company maintains an agreement with a financial institution to sell a participating interest in a designated pool of commercial receivables in amounts up to $65 million. Under the agreement, a participating interest in new receivables is sold as previous receivables are collected. The uncollected receivables sold at January 2, 2000 and January 3, 1999 amounted to $40.0 million and $45.6 million, respectively. The Company has adopted credit policies and standards intended to reduce the inherent risk associated with potential increases in its concentration of credit risk due to increasing trade receivables from sales to owners and users of commercial office facilities and with specifiers such as architects, engineers and contracting firms. Management believes that credit risks are further moderated by the diversity of its end customers and geographic sales areas. The Company performs ongoing credit evaluations of its customers' financial condition and requires collateral as deemed necessary. As of January 2, 2000 and January 3, 1999, the allowance for bad debts amounted to approximately $8.8 million and $7.8 million, respectively, for all accounts receivable of the Company. INVENTORIES Inventories are summarized as follows: (in thousands) 1999 1998 - - ------------------------------------------------ Finished goods $100,967 $123,941 Work-in-process 29,057 31,908 Raw materials 46,894 43,489 - - ------------------------------------------------ $176,918 $199,338 ================================================ PROPERTY AND EQUIPMENT Property and equipment consisted of the following: (in thousands) 1999 1998 - - ----------------------------------------------------- Land $ 14,652 $ 14,669 Buildings 131,398 136,105 Equipment 316,870 313,039 Construction-in-progress 23,046 16,813 - - ----------------------------------------------------- 485,966 480,626 Accumulated depreciation (232,530) (235,314) - - ----------------------------------------------------- $ 253,436 $ 245,312 ===================================================== The estimated cost to complete construction-in-progress for which the Company was committed at January 2, 2000 was approximately $5.3 million. ACCRUED EXPENSES Accrued expenses are summarized as follows: (in thousands) 1999 1998 - - -------------------------------------- Taxes $ 5,723 $ 22,210 Compensation 41,030 40,252 Interest 5,959 5,100 Other 54,575 47,755 - - -------------------------------------- $107,287 $115,317 ====================================== BORROWINGS Long-Term Debt - - -------------- Long-term debt consisted of the following: Interest Rate at (in thousands) Jan. 2, 2000 1999 1998 - - ------------------------------------------------------------------------- Revolving credit facilities U.S. dollar 6.7% $ 64,700 $ 45,000 Japanese yen 1.3% 8,000 8,957 British pound sterling 7.0% 40,296 41,478 Dutch guilder 4.2% -- 5,318 Euro 4.5% 2,517 -- Other (3.0 - 7.8%) 11,605 14,684 - - ------------------------------------------------------------------------- Total long-term debt 127,118 115,437 Less current maturities (1,974) (2,786) - - ------------------------------------------------------------------------- $ 125,144 $ 112,651 ========================================================================= 12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company maintains an unsecured $300 million revolving credit facility which matures June 30, 2003. Interest is charged at varying rates based on the Company's ability to meet certain performance criteria. The facility requires prepayment from specified excess cash flows or proceeds from certain asset sales and provides for restrictions which, among other things, require maintenance of certain financial ratios, restrict encumbrance of assets and limit the payment of dividends. Long-term debt recorded in the accompanying balance sheets approximates fair value based on the borrowing rates currently available to the Company for bank loans with similar terms and average maturities. Future maturities of long-term debt are based on fixed payments (amounts could be higher if excess cash flows or asset sales require prepayment of debt under the credit agreements). Annual maturities (in thousands of dollars) of long-term debt outstanding at January 2, 2000 are as follows: 2000-$1,974; 2001-$52,268; 2002-$484; 2003-$65,162; 2004-$462; 2005 and beyond-$6,768. 7.3% Senior Notes - - ----------------- In April of 1998, the Company issued $150 million in 7.3% Senior Notes due 2008. Interest is payable semi-annually on April 1 and October 1. The Senior Notes are unsecured, senior subordinated notes and are guaranteed, jointly and severally, by certain of the Company's domestic subsidiaries. The Senior Notes are redeemable, in whole or in part, at the option of the Company, at any time or from time to time, at a redemption price equal to the greater of (i) 100% of the principal amount of the Notes to be redeemed or (ii) the sum of the present value of the remaining scheduled payments, discounted on a semi-annual basis at the treasury rate plus 50 basis points, plus, in the case of each of (i) and (ii) above, accrued interest to the date of redemption. At January 2, 2000 and January 3, 1999, the estimated fair value of these notes was approximately $117.3 and $152.9 million, respectively. 9.5% Senior Subordinated Notes The Company has outstanding $125 million in 9.5% Senior Subordinated Notes due 2005. Interest is payable semi-annually on May 15 and November 15. The Notes are guaranteed, jointly and severally, on an unsecured senior subordinated basis by certain of the Company's domestic subsidiaries. The Notes are redeemable for cash at any time on or after November 15, 2000 at the Company's option, in whole or in part, initially at a redemption price equal to 104.75% of the principal amount, declining to 100% of the principal amount on November 15, 2003, plus accrued interest thereon to the date fixed for redemption. At January 2, 2000 and January 3, 1999, the estimated fair value of these notes was approximately $115.4 million and $130.5 million, respectively. Short-term Borrowings - - --------------------- In addition to the amounts available under the revolving credit facility described above, the Company currently maintains approximately $9.0 million in complementary revolving lines of credit through several of its subsidiaries. This is compared to $60.5 million during 1998. Interest is generally charged at rates from 7% to 9%. The weighted average interest rate related to the complimentary lines was approximately 8.5% and 7.8% for 1999 and 1998, respectively. Approximately $4.2 million and $26.8 million was outstanding under these lines at January 2, 2000 and January 3, 1999, respectively. PREFERRED STOCK The Company is authorized to create and issue up to 5,000,000 shares of $1.00 par value Preferred Stock in one or more series and to determine the rights and preferences of each series, to the extent permitted by the Articles of Incorporation, and to fix the terms of such preferred stock without any vote or action by the shareholders. The issuance of any series of preferred stock may have an adverse effect on the rights of holders of common stock and could decrease the amount of earnings and assets available for distribution to holders of common stock. In addition, any issuance of preferred stock could have the effect of delaying, deferring or preventing a change in control of the Company. Series A Cumulative Convertible Preferred Stock - - ----------------------------------------------- In June 1993, the Company issued 250,000 shares of Series A Cumulative Convertible Preferred Stock with a face value of $100 per share. During the period from September 1996 through January 1997, the Series A Cumulative Convertible Preferred Stock was converted into an aggregate of 3,431,800 shares of the Company's Class A Common Stock. Preferred Share Purchase Rights - - ------------------------------- During 1998, the Board of Directors of the Company declared a dividend of one purchase right (a "Right") to be distributed in respect of each outstanding share of Common Stock, payable to shareholders of record as of March 16, 1998. Each Right entitles the registered holder to purchase from the Company one two-hundredth of a share (a "Unit") of newly created Series B Participating Cumulative Preferred Stock (the "Series B Preferred Stock"). The Rights may have certain anti-takeover effects. The Rights will cause substantial dilution to a person or group that acquires more than 15% of the outstanding shares of Common Stock or if other specified events occur without the Rights having been redeemed or in the event of an exchange of the Rights for Common Stock as permitted under the Shareholder Rights Plan. 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The dividend and liquidation rights of the Series B Preferred Stock are designed so that the value of one one-hundredth of a share of Series B Preferred Stock issuable upon exercise of each Right will approximate the same economic value as one share of Common Stock, including voting rights. The exercise price per Right is $90, subject to adjustment. Shares of Series B Preferred Stock will entitle the holder to a minimum preferential dividend of $1.00 per share, but will entitle the holder to an aggregate dividend payment of 200 times the dividend declared on each share of Common Stock. In the event of liquidation, each share of Series B Preferred Stock will be entitled to a minimum preferential liquidation payment of $1.00, plus accrued and unpaid dividends and distributions thereon, but will be entitled to an aggregate payment of 200 times the payment made per share of Common Stock. In the event of any merger, consolidation or other transaction in which Common Stock is exchanged for or changed into other stock or securities, cash or other property, each share of Series B Preferred Stock will be entitled to receive 200 times the amount received per share of Common Stock. Series B Preferred Stock is not convertible into Common Stock. Each share of Series B Preferred Stock will be entitled to 200 votes on all matters submitted to a vote of the shareholders of the Company, and shares of Series B Preferred Stock will generally vote together as one class with the Common Stock and any other voting capital stock of the Company on all matters submitted to a vote of the Company's shareholders. While the Company's Class B Common Stock remains outstanding, holders of Series B Preferred Stock will vote as a single class with the Class A Common Stockholders for election of directors. Further, whenever dividends on the Series B Preferred Stock are in arrears in an amount equal to six quarterly payments, the Series B Preferred Stock, together with any other shares of preferred stock then entitled to elect directors, shall have the right, as a single class, to elect one director until the default has been cured. The Rights expire on March 15, 2008 unless extended or unless the Rights are earlier redeemed or exchanged by the Company. SHAREHOLDERS' EQUITY Common Stock - - ------------ The Company is authorized to issue 80 million shares of $.10 par value Class A Common Stock and 40 million shares of $.10 par value Class B Common Stock. Class A and Class B Common Stock have identical voting rights except for the election or removal of directors. Holders of Class B Common Stock are entitled as a class to elect a majority of the Board of Directors. Under the terms of the Class B Common Stock, its special voting rights to elect a majority of the Board members would terminate irrevocably if the total outstanding shares of Class B Common Stock ever comprises less than ten percent of the Company's total issued and outstanding shares of Class A and Class B Common Stock. On January 2, 2000, the outstanding Class B shares constituted approximately 12.1% of the total outstanding shares of Class A and Class B Common Stock. The Company's Class A Common Stock is traded in the over-the-counter market under the symbol IFSIA and is quoted on NASDAQ. The Company's Class B Common Stock is not publicly traded. Class B Common Stock is convertible into Class A Common Stock on a one-for-one basis. Both classes of common stock share in dividends available to common shareholders. Cash dividends on common stock were $.18 per share for the year ended 1999, $.165 per share for the year ended 1998 and $.135 per share for the year ended 1997. Stock Split - - ----------- On May 19, 1998, the shareholders of the Company approved an increase in the number of authorized shares of Class A Common Stock from 40 million to 80 million. The increase was necessary to affect a two-for-one stock split which was declared by the Board of Directors on June 15, 1998. Shareholders of record as of June 1, 1998, received one additional share for each share held. All references to share and per share data prior to the second quarter of 1998 have been restated to reflect this stock split. The table of Common Shareholders' Equity Activity presented below reflects the actual share amounts outstanding for each period presented. Stock Repurchase Program - - ------------------------ During 1998, the Company adopted a share repurchase program, pursuant to which it was authorized to repurchase up to 2,000,000 shares of Class A Common Stock in the open market through May 19, 2000. This amount was increased to 4,000,000 shares subsequent to January 2, 2000. During 1999, the Company repurchased 1,442,500 shares of Class A Common Stock under this program, at prices ranging from $4.50 to $9.94 per share. This is compared to the repurchase of 175,000 shares of Class A Common Stock at prices ranging from $12.86 to $16.78 during 1998. All treasury stock is accounted for using the cost method. 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Common Shareholders' Equity Activity - - ------------------------------------ The following table shows changes in common shareholders' equity.
Foreign Class A Class B Additional Minimum Currency ----------------- -------------------- Paid-In Retained Pension Translation (in thousands) Shares Amount Shares Amount Capital Earnings Liability Adjustment - - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 29, 1996 22,372 $ 2,238 2,975 $ 298 $ 124,557 $ 166,828 $ -- $ (3,057) Net income -- -- -- -- -- 37,514 -- -- Conversion of Common Stock 381 38 (381) (38) -- -- -- -- Stock issuance under employee plans, inclusive of tax benefit of $1,318 502 50 -- -- 7,813 -- -- -- Other issuances of Common Stock 374 37 175 17 9,274 -- -- -- Conversion of Series A Preferred Stock 1,357 136 -- -- 19,940 -- -- -- Cash dividends paid -- -- -- -- -- (6,436) -- -- Foreign currency translation adjustment -- -- -- -- -- -- -- (25,098) - - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 28, 1997 24,986 $ 2,499 2,769 $ 277 $ 161,584 $ 197,906 $ -- $(28,155) Net income -- -- -- -- -- 29,823 -- -- Conversion of Common Stock 333 33 (333) (33) -- -- -- -- Stock issuance under employee plans, inclusive of tax benefit of $638 677 68 -- -- 5,107 -- -- -- Other issuances of Common Stock 1,343 134 367 36 68,237 -- -- -- Cash dividends paid -- -- -- -- -- (8,499) -- -- Minimum pension liability adjustment -- -- -- -- -- -- (6,399) -- Foreign currency translation adjustment -- -- -- -- -- -- -- (3,513) Two-for-one stock split 26,881 2,688 2,811 281 (2,969) -- -- -- - - ----------------------------------------------------------------------------------------------------------------------------------- Balance at January 3, 1999 54,220 $ 5,422 5,614 $ 561 $ 231,959 $ 219,230 $(6,399) $(31,668) Net income -- -- -- -- -- 23,545 -- -- Conversion of Common Stock (190) (19) 190 19 -- -- -- -- Stock issuance and forfeiture under employee plans, inclusive of tax benefit of $15 274 27 (402) (40) (2,498) -- -- -- Other issuances of Common Stock 85 9 912 91 10,414 -- -- -- Cash dividends paid -- -- -- -- -- 9,453) -- -- Unamortized stock compensation related to restricted stock awards -- -- -- -- (8,784) -- -- -- Compensation expense related to restricted stock awards -- -- -- -- 1,070 -- -- -- Forfeiture and vesting of restricted stock awards -- -- -- -- 3,664 -- -- -- Retirement of treasury stock (1,678) (168) -- -- (13,452) -- -- -- Minimum pension liability adjustment -- -- -- -- -- -- 6,399 -- Foreign currency translation adjustment -- -- -- -- -- -- -- (22,003) - - ----------------------------------------------------------------------------------------------------------------------------------- Balance at January 2, 2000 52,711 $ 5,271 6,314 $ 631 $ 222,373 $ 233,322 $ -- $(53,671) - - -----------------------------------------------------------------------------------------------------------------------------------
15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Stock Options - - ------------- The Company has an Omnibus Stock Incentive Plan ("Omnibus Plan") under which a committee of the Board of Directors is authorized to grant key employees, including officers, options to purchase the Company's common stock. Options are exercisable for shares of Class A or Class B Common Stock at a price not less than 100% of the fair market value on the date of grant. The options generally become exercisable 20% per year over a five-year period from the date of the grant and the options generally expire ten years from the date of the grant. An aggregate of 3,600,000 shares of common stock not previously authorized for issuance under any plan, plus the number of shares subject to outstanding stock options granted under predecessor plans minus the number of shares issued on or after the effective date pursuant to the exercise of such outstanding stock options granted under predecessor plans, are available to be issued under the Omnibus Plan. The following tables summarize activity on stock options under the Omnibus Plan and predecessor plans: Weighted Number Average of Shares Exercise Price - - ----------------------------------------------------------- Outstanding at Dec. 29, 1996 4,014,000 $ 6.65 Granted .................... 628,000 10.05 Exercised .................. (1,004,000) 6.52 Forfeited or canceled ...... (140,000) 6.58 - - ---------------------------------------------------------- Outstanding at Dec. 28, 1997 3,498,000 $ 7.31 Granted .................... 651,000 14.15 Exercised .................. (677,000) 6.70 Forfeited or canceled ...... (68,000) 6.81 - - ---------------------------------------------------------- Outstanding at Jan. 3, 1999 3,404,000 $ 8.75 Granted .................... 576,000 7.84 Exercised .................. (324,000) 6.20 Forfeited or canceled ...... (50,000) 15.26 - - ---------------------------------------------------------- Outstanding at Jan. 2, 2000 3,606,000 $ 8.74 ========================================================== Weighted Number average Options exercisable of shares exercise price - - ------------------------------------------------------ January 2, 2000 1,916,000 $7.63 January 3, 1999 1,553,000 $6.87 - - ------------------------------------------------------
Options Outstanding Options Exercisable -------------------------------------------- --------------------------- Weighted Weighted Weighted Range of Number Average Average Number Average Exercise Outstanding at Remaining Exercise Exercisable at Exercise Prices Jan. 2, 2000 Contractual Life Price Jan. 2, 2000 Price - - ------------------------------------------------------------------------------------------------- $ 4.25 - $ 6.88 1,180,000 5.90 $ 5.85 869,000 $ 5.97 7.00 - 9.56 1,697,000 7.43 8.35 855,000 7.96 10.06 - 19.13 729,000 8.69 14.33 192,000 13.67 - - ------------------------------------------------------------------------------------------------- 3,606,000 7.18 $ 8.74 1,916,000 $ 7.63 - - -------------------------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The weighted average fair value of options, calculated using the Black-Scholes option pricing model, granted during 1999 and 1998 is $2.12 and $5.15 per share, respectively. The Company has adopted the disclosure-only provisions of SFAS 123, "Accounting for Stock-Based Compensation," but applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock option plans. Compensation expense related to stock option plans described above was immaterial for 1999, 1998, and 1997. If the Company had elected to recognize compensation cost based on the fair value at the grant dates for options issued under the plans described above, consistent with the method prescribed by SFAS 123, net income applicable to common shareholders and earnings per share would have been changed to the pro forma amounts indicated below: Fiscal Year Ended - - --------------------------------------------------------------------------- (in thousands, except share data) 1999 1998 1997 - - --------------------------------------------------------------------------- Net income as reported ........... $ 23,545 $ 29,823 $ 37,514 pro forma ............. 22,185 28,366 36,533 - - --------------------------------------------------------------------------- Basic earnings per share as reported ........... $ .45 $ 0.58 $ 0.79 pro forma ............. .42 0.55 0.77 - - --------------------------------------------------------------------------- Diluted earnings per share as reported ........... $ .45 $ 0.56 $ 0.76 pro forma ............. .42 0.53 0.74 - - --------------------------------------------------------------------------- The fair value of stock options used to compute pro forma net income and earnings per share disclosures is the estimated present value at grant date using the Black-Scholes option pricing model with the following weighted average assumptions for 1999, 1998, and 1997: Dividend yield of 3.6% in 1999, 1.9% in 1998, and .71% in 1997; expected volatility of 31% in 1999, 30% in 1998, and 35% in 1997; a risk-free interest rate of 5.72% in 1999, 5.46% in 1998, and 6.32% in 1997; and an expected option life of 6.0 years in 1999, 1998, and 1997. Restricted Stock Awards - - ----------------------- During fiscal years 1999, 1998 and 1997 restricted stock awards were granted for 310,563, 212,412 and 424,872, shares of Class B Common Stock, respectively. These shares vest with respect to each employee over a nine-year period from the date of grant, provided the individual remains in the employ of the Company at the vesting date. Additionally, these shares could vest upon the attainment of certain share performance criteria; in the event of a change in control of the Company; or, in the case of the awards granted in 1997, upon involuntary termination. Compensation expense relating to these grants was approximately $1,070,000, $760,000 and $90,000 during 1999, 1998, and 1997, respectively. During fiscal year 1999, the shares were issued and as a result unamortized stock compensation for the value of the awards was recorded as a reduction to additional paid-in capital. Due to severance agreements offered during 1999, 247,647 shares were forfeited and 210,538 shares became vested (of which 109,818 were repurchased by the Company). During 1998, 26,000 shares were canceled. At January 2, 2000 and January 3, 1999, stock awards for 463,662 and 611,284 shares of Class B Common Stock remained outstanding, respectively. EARNINGS PER SHARE Basic earnings per share is computed by dividing net income by the weighted average number of shares of Class A and Class B Common Stock outstanding during each year. Shares issued during the year and shares reacquired during the year are weighted for the portion of the year that they were outstanding. Diluted earnings per share is computed in a manner consistent with that of basic earnings per share while giving effect to all potentially dilutive common shares that were outstanding during the period. The following is a reconciliation from basic earnings per share to diluted earnings per share for each of the last three years: Weighted Average (in thousands, Shares Earnings except earnings per share) Net Income Outstanding Per Share - - --------------------------------------------------------------------- 1999 Basic $23,545 52,562 $ .45 Effect of dilution: Stock options 241 - - ------------------------------------------------------------------ Diluted $23,545 52,803 $ .45 - - ------------------------------------------------------------------ 1998 Basic $29,823 51,808 $ .58 Effect of dilution: Stock options and awards 1,927 - - ------------------------------------------------------------------ Diluted $29,823 53,735 $ .56 - - ------------------------------------------------------------------ 1997 Basic $37,514 47,416 $ .79 Effect of dilution: Stock options and awards 1,546 Convertible debt 153 340 - - ------------------------------------------------------------------ Diluted $37,667 49,302 $ .76 - - ------------------------------------------------------------------ 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In 1999, 1,817,309 stock options were excluded from the computation of diluted earnings per share due to their antidilutive effect. RESTRUCTURING CHARGE In the fourth quarter of 1998, the Company recorded a pre-tax restructuring charge of $25.3 million. The charge was initiated in response to (i) the slow-down in the Asian economy coupled with the severe decline in value of most Asia/ Pacific currencies; (ii) the Company's decision to exit the commodity-end products business in Japan; (iii) the implementation of the Company's shared services strategy in the U.K.; (iv) the closure of a fabrics manufacturing facility in North Carolina and a non-woven carpet manufacturing facility in the U.K.; and (v) the abandonment of manufacturing equipment utilized in the production of an abandoned product line within the Company's U.S. floorcovering operations. Specific elements of the restructuring activities, the related costs, and the current status of the plan are discussed below. Floorcoverings - - -------------- Asia/Pacific ------------ In reaction to the economic slowdown in the Asia region, the severe decline in most Asia/Pacific currencies, the lack of demand for local production, and the exiting of the commodity-end products business in Japan, the Company decided to consolidate its floorcovering manufacturing operations. As a result, the Company decided to liquidate its Shanghai operation. Where possible, certain manufacturing assets were transferred to manufacturing locations in Thailand and Australia. During 1998, a charge in the amount of approximately $7.2 million was recorded representing the reduction in carrying value of the manufacturing facility, related property and equipment, inventories, and other related assets. Pre-opening costs, intangible assets (including land rights), and other miscellaneous assets totaling approximately $1.9 million were completely written off as future economic benefit was unlikely. The Company had underachieved in Japan throughout the 1990s. Poor economic conditions had resulted in an eroding base of business and the Company had been unable to profitably compete with the volume-based local manufacturers at the commodity-end of the market. The Company's strategy to exit the commodity-end of the Japanese market required several actions: (i) termination of relationships with commodity oriented distributors, most of whom were financially dependent on the Company; (ii) downsizing of the Japan operations, including the termination of personnel; and (iii) relocation of existing office space. The downsized operation now focuses on selling high-end, designer-specified products targeted towards a multinational customer base. The headcount reduction in Japan was completed by the end of 1998. Costs related to the termination of commodity distributor relationships and abandonment of certain related intangible assets and inventory totaled approximately $3.5 million. Europe - - ------ Weak economic conditions in the U.K. translated into slowing demand for the Company's products. Additionally, the Company had made several acquisitions in the U.K., offering the opportunity to reorganize the various acquired business units to utilize a shared services approach to manufacturing and back office support functions. As a result, the Company's manufacturing facility in Heckmondwicke was closed and certain property and equipment located at this facility was written off in anticipation of this action. The remaining operations were transferred to a nearby facility. The modification of activities at the Company's Craigavon facility also resulted in the termination or relocation of other operations. The above noted actions resulted in significant headcount reductions within the U.K. U.S. - - ----- A charge totaling approximately $1.6 million was recorded to reduce the carrying value of manufacturing equipment utilized in the production of an abandoned product line to estimated salvage value. Interior Fabrics - - ---------------- The Interior Fabrics Group's restructuring plan was comprised of the following actions: (i) the Company ceased manufacturing operations in Greensboro, North Carolina and transferred certain personnel and operations to an existing facility in Dudley, Massachusetts; (ii) the European fabric operations were restructured by integrating the Camborne, Guilford, and Glenside operating units into a single manufacturing facility; and (iii) the Company abandoned its warehousing operations in Singapore and Malaysia, in favor of establishing exclusive distributor arrangements. These decisions were prompted by the opportunity to assimilate recently acquired entities as well as a response to recent poor economic conditions in Asia. The aforementioned restructuring plans resulted in significant headcount reductions and abandonment of property, equipment and inventory. 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A summary of the restructuring activities which were planned as of January 3, 1999 is presented below:
Asia/Pacific Europe U.S. Totals ------------------------------------------------------------------------------------------- Floor- Floor- Floor- Floor- Grand (in thousands) coverings Fabrics coverings Fabrics coverings Fabrics coverings Fabrics Total - - ----------------------------------------------------------------------------------------------------------------------------------- Termination benefits $ 1,438 $ -- $4,323 $1,123 $ -- $ 750 $ 5,761 $ 1,873 $ 7,634 Property, plant and equipment 7,098 -- 1,119 66 1,600 500 9,817 566 10,383 Intangibles assets 2,049 -- -- -- -- -- 2,049 -- 2,049 Inventory 652 -- -- 453 -- -- 652 453 1,105 Contract obligation -- -- 505 -- -- -- 505 -- 505 Other costs 3,180 -- -- 27 -- 400 3,180 427 3,607 - - ---------------------------------------------------------------------------------------------------------------------------------- $14,417 $ -- $5,947 $1,669 $1,600 $1,650 $21,964 $ 3,319 $25,283 ==================================================================================================================================
The restructuring charge was comprised of $13.0 million of cash expenditures for severance benefits and other costs and $12.3 million of non-cash charges, primarily for the write-down of impaired assets. Termination benefits of $7.6 million, primarily related to severance costs, resulted from an aggregate expected reduction of 287 employees. The staff reductions as originally planned were expected to be as follows:
Asia/Pacific Europe U.S. Totals ------------------------------------------------------------------------------------------- Floor- Floor- Floor- Floor- Grand coverings Fabrics coverings Fabrics coverings Fabrics coverings Fabrics Total - - ----------------------------------------------------------------------------------------------------------------------------------- Manufacturing 49 -- 83 -- -- 100 132 100 232 Selling and administrative 25 -- 7 11 -- 12 32 23 55 74 -- 90 11 -- 112 164 123 287
As a result of the restructuring, a total of 253 employees were terminated through January 2, 2000. Of this amount 29 were terminated during 1998. There will not be any further terminations as a result of the restructuring. The charge for termination benefits and other costs to exit activities incurred during 1999 and 1998 were 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 components of the accrued restructuring liability for January 3, 1999 to January 2, 2000: Termination Benefits - - --------------------
Asia/Pacific Europe U.S. Totals ------------------------------------------------------------------------------------------- Floor- Floor- Floor- Floor- Grand (in thousands) coverings Fabrics coverings Fabrics coverings Fabrics coverings Fabrics Total - - ----------------------------------------------------------------------------------------------------------------------------------- January 3, 1999 $ 600 $ -- $ 2,367 $ 18 $ -- $ 750 $ 2,967 $ 768 $ 3,735 Additional expense -- -- 767 -- -- 705 767 705 1,472 Payments (600) -- (2,246) (18) -- (1,455) (2,846) (1,473) (4,319) Reversal of over-accrual -- -- (672) -- -- -- (672) -- (672) - - ---------------------------------------------------------------------------------------------------------------------------------- January 2, 2000 $ -- $ -- $ 216 $ -- $ -- $ -- $ 216 $ -- $ 216 ===================================================================================================================================
Other Costs to Exit Activities - - ------------------------------
Asia/Pacific Europe U.S. Totals ------------------------------------------------------------------------------------------- Floor- Floor- Floor- Floor- Grand (in thousands) coverings Fabrics coverings Fabrics coverings Fabrics coverings Fabrics Total - - ----------------------------------------------------------------------------------------------------------------------------------- January 3, 1999 $ 1,361 $ -- $ 505 $ 33 $ -- $ 400 $ 1,866 $ 433 $ 2,299 Additional expense -- -- -- -- -- 331 -- 331 331 Payments (1,111) -- (505) (33) -- (731) (1,616) (764) (2,380) Reversal of over-accrual -- -- -- -- -- -- -- -- -- - - ----------------------------------------------------------------------------------------------------------------------------------- January 2, 2000 $ 250 $ -- $ -- $ -- $ -- $ -- $ 250 $ -- $ 250 ====================================================================================================================================
19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TAXES ON INCOME Provisions for federal, foreign, and state income taxes in the consolidated statements of income consisted of the following components: Fiscal Year Ended - - ------------------------------------------------------------------- (in thousands) 1999 1998 1997 - - ------------------------------------------------------------------- Current: Federal $ 3,868 $ 13,769 $ 5,569 Foreign 4,493 8,460 9,052 State 2,210 3,070 1,192 - - ------------------------------------------------------------------- 10,571 25,299 15,813 - - ------------------------------------------------------------------- Deferred (reduction): Federal 3,620 (3,032) 4,675 Foreign 2,120 (2,171) 2,173 State (1,883) (808) 1,096 - - ------------------------------------------------------------------- 3,857 (6,011) 7,944 - - ------------------------------------------------------------------- $ 14,428 $ 19,288 $23,757 =================================================================== Income before taxes on income consisted of the following: Fiscal Year Ended - - ------------------------------------------------------------------- (in thousands) 1999 1998 1997 - - ------------------------------------------------------------------- U.S. operations $ 7,434 $30,353 $29,134 Foreign operations 30,539 18,758 32,137 - - ------------------------------------------------------------------- $37,973 $49,111 $61,271 ==================================================================== Deferred income taxes for the years ended January 2, 2000 and January 3, 1999 reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. At January 2, 2000, the Company's foreign subsidiaries had approximately $9.2 million in net operating losses available for an unlimited carryforward period. Additionally, the Company had approximately $69 million in state net operating losses expiring at various times through 2014. The sources of the temporary differences and their effect on the net deferred tax liability are as follows: 1999 1998 ----------------------- --------------------- (in thousands) Assets Liabilities Assets Liabilities - - ----------------------------------------------------------------------------- Basis differences of property and equipment $ -- $27,259 $ -- $26,174 Net operating loss carryforwards 5,962 -- 2,200 -- Other differences in basis of assets and liabilities 4,329 -- 9,893 -- - - ----------------------------------------------------------------------------- $10,291 $27,259 $12,093 $26,174 ============================================================================= The effective tax rate on income before taxes differs from the U.S. statutory rate. The following summary reconciles taxes at the U.S. statutory rate with the effective rates: Fiscal Year Ended - - ----------------------------------------------------------------------- (in thousands) 1999 1998 1997 - - ----------------------------------------------------------------------- Taxes on income at U.S. statutory rate 35.0% 35.0% 35.0% Increase in taxes resulting from: State income taxes, net of federal benefit 1.0 3.0 2.4 Amortization of excess of cost over net assets acquired and related purchase accounting adjustments 7.9 5.8 4.7 Foreign and U.S. tax effects attributable to foreign operations (6.4) (3.2) (2.2) Other 0.5 (1.3) (1.1) - - ----------------------------------------------------------------------- Taxes on income at effective rates 38.0% 39.3% 38.8% ======================================================================= Undistributed earnings of the Company's foreign subsidiaries amounted to approximately $79 million at January 2, 2000. Those earnings are considered to be indefinitely reinvested and, accordingly, no provision for U.S. federal and state income taxes has been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various foreign countries. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable because of the complexities associated with its hypothetical calculation. Withholding taxes of approximately $1.0 million would be payable upon remittance of all previously unremitted earnings at January 2, 2000. HEDGING TRANSACTIONS AND DERIVATIVE FINANCIAL INSTRUMENTS The Company has employed the use of derivative financial instruments for the purpose of reducing its exposure to adverse fluctuations in interest and foreign currency exchange rates. While these hedging instruments were subject to fluctuations in value, such fluctuations were generally offset by the fluctuations in values of the underlying exposures being hedged. The Company has not held or issued derivative financial instruments for trading purposes. The 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Company has historically monitored 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 has only entered into transactions with financial institutions of investment grade or better. As a result, the Company has historically considered the risk of counterparty default to be minimal. Interest Rate Management - - ------------------------ In order to maintain the percentage of fixed and variable rate debt within certain parameters, the Company has previously entered into interest rate swap agreements. In these swaps, the Company agreed 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. Any differences paid or received on interest rate swap agreements were recognized as adjustments to interest expense over the life of each swap, thereby adjusting the effective interest rate on the underlying obligation. As of January 2, 2000, the Company had no outstanding interest rate management swap agreements. At January 3, 1999, the Company had utilized interest rate swap agreements to effectively convert approximately $43.7 million of variable rate debt to fixed rate debt. The weighted average rate on these borrowings was 7.8% at January 3, 1999. Foreign Currency Exchange Rate Management - - ----------------------------------------- The purpose of the Company's foreign currency hedging activities was to reduce the risk that the eventual local currency inflows resulting from sales to foreign customers would be adversely affected by changes in exchange rates. The Company entered into currency swap contracts to hedge certain firm sales commitments denominated in foreign currencies. Net gains and losses were deferred and recognized in income in the same period as the hedged transaction. As of January 2, 2000, the Company had no outstanding foreign currency management swap agreements. As of January 3, 1999, net deferred gains/losses from hedging anticipated but not yet firmly committed transactions were not material. The estimated fair values of derivatives used to hedge or modify the Company's risks fluctuate over time. These fair value amounts should not be viewed in isolation, but rather in relation to the fair values of the underlying hedged obligations and transactions and the overall reduction in the Company's exposure to adverse fluctuations in interest and foreign exchange rates. The notional amounts of the derivative financial instruments do not necessarily represent amounts exchanged by the parties and, therefore, are not a direct measure of the exposure of the Company through its use of derivatives. The amounts exchanged are calculated on the basis of the notional amounts and the other terms of the derivatives, which relate to interest rates or currency exchange rates. The following table represents the aggregate notional amounts, fair values, and maturities of the Company's derivative financial instruments. The amounts shown within the table under foreign currency management represent contracts under which the Company was required to deliver Dutch guilder currency at dates subsequent to January 3, 1999. 1998 ---------------------- Notional Effect on (in thousands) Amounts Fair Values - - ---------------------------------------------------------- Interest rate management Swap agreements $43,700 $ (69) Foreign currency management Swap agreements $10,500 $(1,414) - - ---------------------------------------------------------- As mentioned above, the Company had no outstanding agreements to hedge fluctuations in interest and foreign currency exchange rates as of January 2, 2000. The Company believes that, at this time, such hedges are no longer necessary. During 1998, the Company restructured its borrowing facilities which provided for multi-currency loan agreements resulting in the Company's ability to borrow funds in the countries in which the funds are expected to be utilized. Further, the advent of the euro has provided additional currency stability within the Company's European markets. As such, these events have provided the Company natural hedges on currency fluctuations. Interest rate management swap agreements have also become unnecessary given the structure of the Company's unsecured $300 million revolving credit facility, which charges interest at varying rates based on the Company's ability to meet certain performance criteria. 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMITMENTS AND CONTINGENCIES The Company leases certain marketing, production and distribution facilities and equipment. At January 2, 2000, aggregate minimum rent commitments under operating leases with initial or remaining terms of one year or more consisted of the following: Fiscal Year (in thousands) - - -------------------------------- 2000 $16,077 2001 13,701 2002 10,902 2003 8,494 2004 6,151 Thereafter 29,184 - - ------------------------------- $84,509 =============================== Rental expense amounted to approximately $17.5 million, $17.1 million, and $20.7 million for the fiscal years ended 1999, 1998, and 1997, respectively. EMPLOYEE BENEFIT PLANS The Company has trusteed defined benefit retirement plans ("Plans") which cover many of its European employees. The benefits are generally based on years of service and the employee's average monthly compensation. Pension expense was $3.3 million and $4.2 million for the years ended 1999 and 1998, respectively. Pension benefit was $.1 million for the year ended 1997. Plan assets are primarily invested in equity and fixed income securities. On November 1, 1997, the Company elected to freeze the defined benefit plan covering its U.S. employees. Accordingly, benefit accruals under this plan have ceased and all actively employed participants became 100% vested in their benefits. In connection with the election to freeze the plan, a curtailment gain of $1.7 million was reflected in net periodic benefit cost for 1997. In 1998, this plan was terminated and benefits were distributed to participants. The Company has 401(k) retirement investment plans ("401(k) Plans"), which are open to all otherwise eligible U.S. employees with at least six months of service. The 401(k) Plans call for Company matching contributions on a sliding scale based on the level of the employee's contribution. The Company may, at its discretion, make additional contributions to the Plans based on the attainment of certain performance targets by its subsidiaries. The Company's matching contributions are funded monthly and totaled approximately $1.7 million for the year ended 1999 and $1.6 million for each of the years ended 1998 and 1997. The Company's discretionary contributions totaled $2.3 million, $3.5 million, and $0.9 million for the years ended 1999, 1998, and 1997, respectively. Under the Interface, Inc. Nonqualified Savings Plan ("NSP"), the Company will provide eligible employees the opportunity to enter into agreements for the deferral of a specified percentage of their compensation, as defined in the NSP. The obligations of the Company under such arrangements to pay the deferred compensation in the future in accordance with the terms of the NSP will be unsecured general obligations of the Company. Participants have no right, interest or claim in the assets of the Company, except as unsecured general creditors. The Company has established a Rabbi Trust to hold, invest and reinvest deferrals and contributions under the NSP. If a change in control of the Company occurs, as defined in the NSP, the Company will contribute an amount to the Rabbi Trust sufficient to pay the obligation owed to each Participant. Deferred compensation in connection with the NSP totaled $5.5 million which was invested in cash and marketable securities at January 2, 2000. Deferred compensation at January 3, 1999 in regards to NSP totaled $2.8 million which was invested entirely in cash. The table presented below sets forth the funded status of the Company's significant domestic and foreign defined benefit plans and required disclosures in accordance with SFAS 132. Fiscal Year Ended - - ------------------------------------------------------------------------ (in thousands, except for weighted average assumptions) 1999 1998 - - ------------------------------------------------------------------------ Change in benefit obligation Benefit obligation, beginning of year $ 114,689 $ 76,744 Service cost 3,665 3,010 Interest cost 6,549 6,851 Benefits paid (7,089) (2,245) Actuarial loss 10,938 18,759 Member contributions 1,153 1,312 Acquisition -- 16,523 Settlement -- (7,119) Currency translation adjustment (6,416) 854 - - ------------------------------------------------------------------------ Benefit obligation, end of year $ 123,489 $ 114,689 ======================================================================== Change in plan assets Plan assets, beginning of year $ 105,571 $ 79,879 Actual return on assets 31,099 10,294 Company contributions 7,247 2,751 Member contributions 1,153 1,312 Benefits paid (7,089) (2,245) Administration expenses (455) (586) Acquisition -- 21,046 Settlement -- (7,119) Benefits paid due to excess assets -- (607) Currency translation adjustment (6,181) 846 - - ------------------------------------------------------------------------ Plan assets, end of year $ 131,345 $ 105,571 ======================================================================== 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1999 1998 - - ------------------------------------------------------------------------ Reconciliation to Balance Sheet Funded status $ 7,857 $ (9,117) Unrecognized actuarial loss 816 13,905 Unrecognized prior service cost 227 275 Unrecognized transition adjustment 859 1,159 - - ----------------------------------------------------------------------- Net amount recognized $ 9,759 $ 6,222 ======================================================================= Amounts recognized in the consolidated balance sheets Prepaid benefit cost $ 9,759 $ 6,222 Accrued benefit liability -- (6,399) Accumulated other comprehensive income -- 6,399 - - ----------------------------------------------------------------------- Net amount recognized $ 9,759 $ 6,222 ======================================================================= Fiscal Year Ended - - ----------------------------------------------------------------------- 1999 1998 - - ----------------------------------------------------------------------- Weighted average assumptions Discount rate 6.0% 7.2% Expected return on plan assets 7.1% 7.6% Rate of compensation 3.9% 4.8% - - ----------------------------------------------------------------------- Components of net periodic benefit cost Service cost $ 3,665 $ 3,010 Interest cost 6,549 6,851 Expected return on plan assets (7,328) (7,725) Amortization of prior service costs 233 43 Amortization of transition obligation 144 151 Settlement -- 1,859 - - ----------------------------------------------------------------------- Net periodic benefit cost $ 3,263 $ 4,189 ======================================================================= The Company maintains a nonqualified salary continuation plan ("SCP") which is designed to induce selected officers of the Company to remain in the employ of the Company by providing them with retirement, disability and death benefits in addition to those which they may receive under the Company's pension plans and other benefit programs. The SCP entitles participants to (i) retirement benefits upon retirement at age 65 (or early retirement at age 55) after completing at least 15 years of service with the Company (unless otherwise provided in the SCP), payable for the remainder of their lives and in no event less than 10 years under the death benefit feature; (ii) disability benefits payable for the period of any pre-retirement total disability; and (iii) death benefits payable to the designated beneficiary of the participant for a period of up to 10 years. Benefits are determined according to one of three formulas contained in the SCP, and the SCP is administered by the Compensation Committee, which has full discretion in choosing participants and the benefit formula applicable to each. The Company's obligations under the SCP are currently unfunded (although the Company uses insurance instruments to hedge its exposure thereunder); however, the Company is required to contribute the present value of its obligations thereunder to an irrevocable grantor trust in the event of a change in control as defined in the SCP. The table presented below sets forth the required disclosures in accordance with SFAS 132 and amounts recognized in the consolidated financial statements related to the SCP. Fiscal Year Ended - - ------------------------------------------------------------------------ (in thousands, except for weighted average assumptions) 1999 1998 - - ------------------------------------------------------------------------ Change in benefit obligation Benefit obligation, beginning of year $ 7,723 $ 7,215 Service cost 300 289 Interest cost 605 563 Benefits paid (290) (344) - - ----------------------------------------------------------------------- Benefit obligation, end of year $ 8,338 $ 7,723 ======================================================================= Weighted average assumptions Discount rate 8% 8% Rate of compensation 5% 5% - - ----------------------------------------------------------------------- Components of net periodic benefit cost Service cost $ 300 $ 289 Interest cost 605 563 Amortization of transition obligation 259 259 - - ----------------------------------------------------------------------- Net periodic benefit cost $ 1,164 $ 1,111 ======================================================================= Amounts recognized as SCP liabilities at January 2, 2000 and January 3, 1999 were $5.2 million and $4.4 million, respectively. SEGMENT INFORMATION The Company has adopted SFAS 131, which establishes standards for the way that public business enterprises report information about operating segments in their financial statements. The standard defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company's chief operating decision maker aggregates operating segments based on the type of products produced by the segment. Based on the quantitative thresholds specified in SFAS 131, the Company has determined that it has two reportable segments. The two 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS reportable segments are Floorcovering Products/Services and Interior Fabrics. The Floorcovering Products/Services segment manufactures, installs and services commercial modular and commercial broadloom carpet while the Interior Fabrics segment manufactures panel and upholstery fabrics. The accounting policies of the operating segments are the same as those described in Summary of Significant Accounting Policies. Segment amounts disclosed are prior to any elimination entries made in consolidation, except in the case of Net Sales where intercompany sales have been eliminated. The chief operating decision maker evaluates performance of the segments based on operating income. Costs excluded from this profit measure primarily consist of allocated corporate expenses, interest expense and income taxes. Corporate expenses are primarily comprised of corporate overhead expenses. Thus, operating income includes only the costs that are directly attributable to the operations of the individual segment. Assets not identifiable to an individual segment are corporate assets, which are primarily comprised of cash and cash equivalents, short-term investments, intangible assets and intercompany receivables and loans (which are eliminated in consolidation). Segment Disclosures Summary information by segment follows: Floorcovering Products/ Interior (in thousands) Services Fabrics Other Total - - ------------------------------------------------------------------------- 1999 Net Sales $ 974,003 $197,120 $ 57,116 $1,228,239 Depreciation and amortization 28,657 11,081 2,100 41,838 Operating income 61,957 22,417 1,327 85,701 Total Assets 821,382 205,169 47,624 1,074,175 - - ------------------------------------------------------------------------- 1998 Net sales $1,018,992 $213,280 $ 48,857 $1,281,129 Depreciation and amortization 27,810 10,422 2,007 40,239 Operating income 73,944 27,339 (4,182) 97,101 Total assets 942,978 216,590 47,905 1,207,473 - - ------------------------------------------------------------------------- 1997 Net sales $ 896,394 $184,522 $ 54,374 $1,135,290 Depreciation and amortization 22,409 8,772 1,972 33,153 Operating income 84,986 25,660 988 111,634 Total assets 824,195 211,340 44,161 1,079,696 - - ------------------------------------------------------------------------- A reconciliation of the Company's total segment operating income, depreciation and amortization, and assets to the corresponding consolidated amounts follows: Fiscal Year Ended - - ------------------------------------------------------------------------------- (in thousands) 1999 1998 1997 - - ------------------------------------------------------------------------------- DEPRECIATION AND AMORTIZATION Total segment depreciation and amortization $ 41,838 $ 40,239 $ 33,153 Corporate depreciation and amortization 3,951 2,347 5,452 - - ------------------------------------------------------------------------------- Reported depreciation and amortization $ 45,789 $ 42,586 $ 38,605 =============================================================================== OPERATING INCOME Total segment operating income $ 85,701 $ 97,101 $ 111,634 Corporate expenses and eliminations (9,270) (7,410) (13,833) - - ------------------------------------------------------------------------------- Reported operating income $ 76,431 $ 89,691 $ 97,801 =============================================================================== ASSETS Total segment assets $ 1,074,175 $ 1,207,473 $ 1,079,696 Corporate assets and eliminations (45,680) (170,609) (150,133) - - ------------------------------------------------------------------------------- Reported total assets $ 1,028,495 $ 1,036,864 $ 929,563 ================================================================================ ENTERPRISE-WIDE DISCLOSURES Revenue and long-lived assets related to operations in the U.S. and other foreign countries are as follows: Fiscal Year Ended - - ------------------------------------------------------------------------------- (in thousands) 1999 1998 1997 - - ------------------------------------------------------------------------------- SALES TO UNAFFILIATED CUSTOMER United States $ 805,112 $ 836,715 $ 772,559 United Kingdom 194,132 206,111 114,215 Other foreign countries 228,995 238,303 248,516 - - ------------------------------------------------------------------------------- Net sales $1,228,239 $1,281,129 $1,135,290 =============================================================================== LONG-LIVED ASSETS United States $ 172,024 $ 165,450 $ 157,088 United Kingdom 47,953 46,347 32,238 Other foreign countries 33,459 33,515 39,455 - - ------------------------------------------------------------------------------- Total long-lived assets $ 253,436 $ 245,312 $ 228,781 =============================================================================== [FN] Revenue attributed to geographic areas is based on the location of the customer. Long-lived assets include tangible assets physically located in foreign countries. 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS QUARTERLY DATA AND SHARE INFORMATION (UNAUDITED) The following table sets forth, for the fiscal periods indicated, selected consolidated financial data and information regarding the market price per share of the Company's Class A Common Stock. The prices represent the reported high and low closing sale prices.
Fiscal Year Ended 1999 - - ------------------------------------------------------------------------------------------ First Second Third Fourth (in thousands, except share data) Quarter Quarter Quarter Quarter - - ------------------------------------------------------------------------------------------ Net sales $ 307,866 $ 305,452 $ 304,246 $ 310,675 Gross profit 96,608 95,659 94,340 95,508 Net income 5,606 6,329 5,259 6,351 - - ------------------------------------------------------------------------------------------ Earnings per common share Basic $ 0.11 $ 0.12 $ 0.10 $ 0.12 Diluted 0.11 0.12 0.10 0.12 - - ------------------------------------------------------------------------------------------ Dividends per common share $ 0.045 $ 0.045 $ 0.045 $ 0.045 - - ------------------------------------------------------------------------------------------ Share prices High $ 10 1/16 $11 6/32 $ 9 14/16 $ 5 12/16 Low 7 1/2 6 14/16 4 9/16 4 1/64
Fiscal Year Ended 1998 - - ------------------------------------------------------------------------------------------ First Second Third Fourth (in thousands, except share data) Quarter Quarter Quarter Quarter - - ------------------------------------------------------------------------------------------ Net sales $ 318,952 $ 316,864 $ 328,264 $ 317,049 Gross profit 107,761 105,646 113,259 106,803 Net income (loss) 10,283 11,664 14,360 (6,484) - - ------------------------------------------------------------------------------------------ Earnings per common share Basic $ 0.21 $ 0.22 $ 0.27 $ (0.12) Diluted 0.20 0.22 0.27 (0.12) Dividends per common share $ 0.0375 $ 0.0375 $ 0.045 $ 0.045 - - ------------------------------------------------------------------------------------------ Share prices High $ 21 1/8 $ 22 7/16 $ 20 17/32 $ 14 1/8 Low 14 7/16 16 1/8 10 1/4 8 5/16 - - ------------------------------------------------------------------------------------------
25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Year Ended 1999 - - ------------------------------------------------------------------------------------------------------------------------------------ Interface, Inc. Consolidation Guarantor Nonguarantor (Parent & Elimination Consolidated (in thousands) Subsidiaries Subsidiaries Corporation) Entries Totals - - ------------------------------------------------------------------------------------------------------------------------------------ Net sales $ 970,959 $ 383,385 $ -- $(126,105) $1,228,239 Cost of sales 714,452 257,777 -- (126,105) 846,124 - - ------------------------------------------------------------------------------------------------------------------------------------ Gross profit on sales 256,507 125,608 -- -- 382,115 Selling, general and administrative expenses 186,203 88,678 29,672 -- 304,553 Restructuring charge 1,036 95 -- -- 1,131 - - ------------------------------------------------------------------------------------------------------------------------------------ Operating income 69,268 36,835 (29,672) -- 76,431 - - ------------------------------------------------------------------------------------------------------------------------------------ Other expense (income) Interest expense 13,660 6,853 18,859 -- 39,372 Other (2,559) 1,645 -- -- (914) - - ------------------------------------------------------------------------------------------------------------------------------------ Total other expense 11,101 8,498 18,859 -- 38,458 - - ------------------------------------------------------------------------------------------------------------------------------------ Income before taxes on income and equity in income of subsidiaries 58,167 28,337 (48,531) -- 37,973 Taxes on income (benefit) 22,103 6,465 (14,140) -- 14,428 Equity in income of subsidiaries -- -- 57,936 (57,936) -- - - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 36,064 $ 21,872 $ 23,545 $ (57,936) $ 23,545 ====================================================================================================================================
Supplemental Guarantor Condensed Consolidating Financial Statements Year Ended 1998 - - ------------------------------------------------------------------------------------------------------------------------------------ Interface, Inc. Consolidation Guarantor Nonguarantor (Parent & Elimination Consolidated (in thousands) Subsidiaries Subsidiaries Corporation) Entries Totals - - ------------------------------------------------------------------------------------------------------------------------------------ Net sales $ 1,008,051 $ 448,569 $ -- $(175,491) $ 1,281,129 Cost of sales 713,520 309,631 -- (175,491) 847,660 - - ------------------------------------------------------------------------------------------------------------------------------------ Gross profit on sales 294,531 138,938 -- -- 433,469 Selling, general and administrative expenses 214,629 93,469 10,397 -- 318,495 Restructuring charge 3,250 22,033 -- -- 25,283 - - ------------------------------------------------------------------------------------------------------------------------------------ Operating income 76,652 23,436 (10,397) -- 89,691 - - ------------------------------------------------------------------------------------------------------------------------------------ Other expense (income) Interest expense 14,054 7,021 15,630 -- 36,705 Other 4,730 (855) -- -- 3,875 - - ------------------------------------------------------------------------------------------------------------------------------------ Total other expense 18,784 6,166 15,630 -- 40,580 - - ------------------------------------------------------------------------------------------------------------------------------------ Income before taxes on income and equity in income of subsidiaries 57,868 17,270 (26,027) -- 49,111 Taxes on income (benefit) 22,742 6,787 (10,241) -- 19,288 Equity in income of subsidiaries -- -- 45,608 (45,608) -- - - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 35,126 $ 10,483 $ 29,822 $ (45,608) $ 29,823 ====================================================================================================================================
26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Year Ended 1997 - - ------------------------------------------------------------------------------------------------------------------------------------ Interface, Inc. Consolidation Guarantor Nonguarantor (Parent & Elimination Consolidated (in thousands) Subsidiaries Subsidiaries Corporation) Entries Totals - - ------------------------------------------------------------------------------------------------------------------------------------ Net sales $900,825 $347,735 $ -- $(113,270) $1,135,290 Cost of sales 640,308 228,696 -- (113,270) 755,734 - - ------------------------------------------------------------------------------------------------------------------------------------ Gross profit on sales 260,517 119,039 -- -- 379,556 Selling, general and administrative expenses 184,559 78,124 19,072 -- 281,755 - - ------------------------------------------------------------------------------------------------------------------------------------ Operating income 75,958 40,915 (19,072) -- 97,801 - - ------------------------------------------------------------------------------------------------------------------------------------ Other expense (income) Interest expense 10,629 4,571 19,838 -- 35,038 Other 15,438 6,212 (20,158) -- 1,492 - - ------------------------------------------------------------------------------------------------------------------------------------ Total other expense 26,067 10,783 (320) -- 36,530 - - ------------------------------------------------------------------------------------------------------------------------------------ Income before taxes on income and equity in income of subsidiaries 49,891 30,132 (18,752) -- 61,271 Taxes on income (benefit) 19,341 11,692 (7,276) -- 23,757 Equity in income of subsidiaries -- -- 48,991 (48,991) -- - - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 30,550 $ 18,440 $ 37,515 $ (48,991) $ 37,514 ====================================================================================================================================
27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Year Ended 1999 - - ------------------------------------------------------------------------------------------------------------------------------------ Interface, Inc. Consolidation Guarantor Nonguarantor (Parent & Elimination Consolidated (in thousands) Subsidiaries Subsidiaries Corporation) Entries Totals - - ------------------------------------------------------------------------------------------------------------------------------------ ASSETS Current Cash $ 4,137 $ 6,412 $ (8,001) $ -- $ 2,548 Accounts receivable 170,248 71,569 (38,267) -- 203,550 Inventories 110,186 66,732 -- -- 176,918 Miscellaneous 10,871 20,425 6,466 -- 37,762 - - ------------------------------------------------------------------------------------------------------------------------------------ Total current assets 295,442 165,138 (39,802) -- 420,778 Property and equipment, less accumulated depreciation 151,956 81,312 20,168 -- 253,436 Investments in subsidiaries 38,100 9,758 861,459 (909,317) -- Miscellaneous 12,118 24,367 39,024 -- 75,509 Excess of cost over net assets acquired 183,942 91,241 3,589 -- 278,772 - - ------------------------------------------------------------------------------------------------------------------------------------ $ 681,558 $ 371,816 $ 884,438 $(909,317) $ 1,028,495 ==================================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities 91,559 83,888 28,305 -- 203,752 Long-term debt, less current maturities 6,529 37,915 355,700 -- 400,144 Deferred income taxes 15,006 6,111 12,278 -- 33,395 - - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities 113,094 127,914 396,283 -- 637,291 - - ------------------------------------------------------------------------------------------------------------------------------------ Minority interests -- 2,012 -- -- 2,012 Shareholders' equity Preferred stock 57,891 -- -- (57,891) -- Common stock 94,145 102,199 5,902 (196,344) 5,902 Additional paid-in capital 191,411 12,525 222,373 (203,936) 222,373 Retained earnings 229,217 154,597 265,641 (416,133) 233,322 Foreign currency translation adjustment (4,200) (27,431) (5,761) (16,279) (53,671) Treasury stock -- -- -- (18,734) (18,734) - - ------------------------------------------------------------------------------------------------------------------------------------ Total shareholders' equity 568,464 241,890 488,155 (909,317) 389,192 - - ------------------------------------------------------------------------------------------------------------------------------------ $ 681,558 $ 371,816 $ 884,438 $(909,317) $ 1,028,495 ===================================================================================================================================
28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Year Ended 1998 - - ------------------------------------------------------------------------------------------------------------------------------------ Interface, Inc. Consolidation Guarantor Nonguarantor (Parent & Elimination Consolidated (in thousands) Subsidiaries Subsidiaries Corporation) Entries Totals - - ------------------------------------------------------------------------------------------------------------------------------------ ASSETS Current Cash $ 6,145 $ 5,234 $ (1,469) $ -- $ 9,910 Accounts receivable 139,718 80,276 (25,191) -- 194,803 Inventories 131,749 67,589 -- -- 199,338 Miscellaneous 8,138 17,386 8,949 -- 34,473 - - ------------------------------------------------------------------------------------------------------------------------------------ Total current assets 285,750 170,485 (17,711) -- 438,524 Property and equipment, less accumulated depreciation 151,782 79,862 13,668 -- 245,312 Investments in subsidiaries 37,030 871 791,289 (829,190) -- Miscellaneous 11,733 8,791 29,535 -- 50,059 Excess of cost over net assets acquired 187,412 112,650 2,907 -- 302,969 - - ------------------------------------------------------------------------------------------------------------------------------------ $ 673,707 $ 372,659 $ 819,688 $(829,190) $ 1,036,864 ==================================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities 117,311 102,059 5,742 -- 225,112 Long-term debt, less current maturities 8,342 41,622 337,687 -- 387,651 Deferred income taxes 15,085 6,037 2,360 -- 23,482 - - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities 140,738 149,718 345,789 -- 636,245 - - ------------------------------------------------------------------------------------------------------------------------------------ Minority interests -- 1,795 -- -- 1,795 Shareholders' equity Preferred stock 57,891 -- -- (57,891) -- Common stock 94,145 102,199 5,983 (196,344) 5,983 Additional paid-in capital 191,411 12,525 231,959 (203,936) 231,959 Retained earnings 193,153 132,580 242,119 (348,622) 219,230 Foreign currency translation adjustment (3,631) (19,759) (6,162) (2,116) (31,668) Minimum pension liability -- (6,399) -- -- (6,399) Treasury stock -- -- -- (20,281) (20,281) - - ------------------------------------------------------------------------------------------------------------------------------------ Total shareholders' equity 532,969 221,146 473,899 (829,190) 398,824 - - ------------------------------------------------------------------------------------------------------------------------------------ $ 673,707 $ 372,659 $ 819,688 $ (829,190) $ 1,036,864 ====================================================================================================================================
29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Year Ended 1997 - - ------------------------------------------------------------------------------------------------------------------------------------ Interface, Inc. Consolidation Guarantor Nonguarantor (Parent & Elimination Consolidated (in thousands) Subsidiaries Subsidiaries Corporation) Entries Totals - - ------------------------------------------------------------------------------------------------------------------------------------ ASSETS Current Cash $ 4,362 $ 6,501 $ (651) $ -- $ 10,212 Accounts receivable 131,120 74,652 (27,795) -- 177,977 Inventories 105,193 52,437 -- -- 157,630 Miscellaneous 8,521 15,768 5,132 -- 29,421 - - ------------------------------------------------------------------------------------------------------------------------------------ Total current assets 249,196 149,358 (23,314) -- 375,240 Property and equipment, less accumulated depreciation 150,038 71,453 7,290 -- 228,781 Investments in subsidiaries 129,033 15,799 381,670 (526,502) -- Miscellaneous 121,361 20,871 472,083 (567,370) 46,945 Excess of cost over net assets acquired 182,652 92,087 3,858 -- 278,597 - - ------------------------------------------------------------------------------------------------------------------------------------ $ 832,280 $ 349,568 $ 841,587 $(1,093,872) $ 929,563 ==================================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities 96,869 85,757 9,211 -- 191,837 Long-term debt, less current maturities 240,475 44,423 446,169 (341,568) 389,499 Deferred income taxes 12,852 3,483 12,538 -- 28,873 - - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities 350,196 133,663 467,918 (341,568) 610,209 - - ------------------------------------------------------------------------------------------------------------------------------------ Minority interests 2,989 -- -- -- 2,989 Shareholders' equity Preferred stock 57,891 -- -- (57,891) -- Common stock 81,704 102,199 2,776 (183,903) 2,776 Additional paid-in capital 187,195 11,030 161,584 (198,225) 161,584 Retained earnings 158,027 122,120 212,298 (294,539) 197,906 Foreign currency translation adjustment (5,722) (19,444) (2,989) -- (28,155) Treasury stock -- -- -- (17,746) (17,746) - - ------------------------------------------------------------------------------------------------------------------------------------ Total shareholders' equity 479,095 215,905 373,669 (752,304) 316,365 - - ------------------------------------------------------------------------------------------------------------------------------------ $ 832,280 $ 349,568 $ 841,587 $(1,093,872) $ 929,563 ====================================================================================================================================
SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Year Ended 1999 - - ----------------------------------------------------------------------------------------------------------------------------- Interface, Inc. Consolidation Guarantor Nonguarantor (Parent & Elimination Consolidated (in thousands) Subsidiaries Subsidiaries Corporation) Entries Totals - - ----------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities $ 22,336 $ 32,036 $ 16,694 -- $ 71,066 - - ----------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Purchase of plant and equipment (21,413) (7,813) (8,052) -- (37,278) Acquisitions, net of cash acquired -- -- 9,826 -- 9,826 Other 1,626 3,390 (29,409) -- (24,393) - - ----------------------------------------------------------------------------------------------------------------------------- (19,787) (4,423) (27,635) -- (51,845) - - ----------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net borrowings (repayments) (4,557) (26,550) 23,433 -- (7,674) Proceeds from issuance of common stock -- -- 1,044 -- 1,044 Cash dividends paid -- -- (9,453) -- (9,453) Repurchase of common shares -- -- (10,615) -- (10,615) - - ----------------------------------------------------------------------------------------------------------------------------- (4,557) (26,550) 4,409 -- (26,698) - - ----------------------------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash -- 115 -- -- 115 - - ----------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash (2,008) 1,178 (6,532) -- (7,362) - - ----------------------------------------------------------------------------------------------------------------------------- Cash, at beginning of year 6,145 5,234 (1,469) -- 9,910 - - ----------------------------------------------------------------------------------------------------------------------------- Cash, at end of year $ 4,137 $ 6,412 $ (8,001) -- $ 2,548 =============================================================================================================================
SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Year Ended 1998 - - ----------------------------------------------------------------------------------------------------------------------------- Interface, Inc. Consolidation Guarantor Nonguarantor (Parent & Elimination Consolidated (in thousands) Subsidiaries Subsidiaries Corporation) Entries Totals - - ----------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities $ 48,243 $ 51,909 $(28,252) -- $ 71,900 - - ----------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Purchase of plant and equipment (26,669) (16,839) (1,719) -- (45,227) Acquisitions, net of cash acquired -- -- (71,504) -- (71,504) Other 3,174 (11,070) (8,589) -- (16,485) - - ----------------------------------------------------------------------------------------------------------------------------- (23,495) (27,909) (81,812) -- (133,216) - - ----------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net borrowings (repayments) (22,964) (25,906) 49,650 -- 780 Proceeds from issuance of common stock -- -- 70,630 -- 70,630 Cash dividends paid -- -- (8,499) -- (8,499) Repurchase of common shares -- -- (2,535) -- (2,535) - - ----------------------------------------------------------------------------------------------------------------------------- (22,964) (25,906) 109,246 -- 60,376 - - ----------------------------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash -- 638 -- -- 638 - - ----------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash 1,784 (1,268) (818) -- (302) Cash, at beginning of year 4,361 6,502 (651) -- 10,212 - - ----------------------------------------------------------------------------------------------------------------------------- Cash, at end of year $ 6,145 $ 5,234 $ (1,469) -- $ 9,910 =============================================================================================================================
30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Year Ended 1997 - - ----------------------------------------------------------------------------------------------------------------------------- Interface, Inc. Consolidation Guarantor Nonguarantor (Parent & Elimination Consolidated (in thousands) Subsidiaries Subsidiaries Corporation) Entries Totals - - ----------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities $ 29,585 $ 27,448 $ 17,690 -- $ 74,723 - - ----------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Purchase of plant and equipment (25,062) (10,177) (3,415) -- (38,654) Acquisitions, net of cash acquired -- -- (34,647) -- (34,647) Other -- -- (17,902) -- (17,902) - - ----------------------------------------------------------------------------------------------------------------------------- (25,062) (10,177) (55,964) -- (91,203) - - ----------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net borrowings (repayments) (3,643) (15,155) 37,155 -- 18,357 Proceeds from issuance of common stock -- -- 6,414 -- 6,414 Cash dividends paid -- -- (6,436) -- (6,436) - - ----------------------------------------------------------------------------------------------------------------------------- (3,643) (15,155) 37,133 -- 18,335 - - ----------------------------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash -- (405) -- -- (405) - - ----------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash 880 1,711 (1,141) -- 1,450 Cash, at beginning of year 3,481 4,791 490 -- 8,762 Cash, at end of year $ 4,361 $ 6,502 $ (651) -- $ 10,212 =============================================================================================================================
31 MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS The management of Interface, Inc. is responsible for the accuracy and consistency of all the information contained in the annual report, including the accompanying consolidated financial statements. The statements have been prepared to conform with the generally accepted accounting principles appropriate to the circumstances of the Company. The statements include amounts based on estimates and judgments as required. Interface, Inc. maintains internal accounting controls designed to provide reasonable assurance that the financial records are accurate, that the assets of the Company are safeguarded, and that the financial statements present fairly the consolidated financial position, results of operations, and cash flows of the Company. The Audit Committee of the Board of Directors reviews the scope of the audits and findings of the independent certified public accountants. The auditors meet regularly with the Audit Committee to discuss audit and financial issues, with and without management present. BDO Seidman, LLP, the Company's independent certified public accountants, have audited the financial statements prepared by management. Their opinion on the financial statements is presented as follows. /s/ Ray C. Anderson Ray C. Anderson Chairman of the Board and Chief Executive Officer /s/ Daniel T. Hendrix Daniel T. Hendrix Senior Vice President, Chief Financial Officer and Treasurer 32 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Shareholders of Interface, Inc. Atlanta, Georgia We have audited the accompanying consolidated balance sheets of Interface, Inc. and subsidiaries as of January 2, 2000 and January 3, 1999, and the related consolidated statements of income and comprehensive income and cash flows for each of the three fiscal years in the period ended January 2, 2000. The financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Interface, Inc. and its subsidiaries as of January 2, 2000 and January 3, 1999 and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended January 2, 2000, in conformity with generally accepted accounting principles. Atlanta, Georgia February 22, 2000 /BDO 33 SELECTED FINANCIAL INFORMATION
(in thousands, except per share data) 1999 1998 1997 1996 1995 - - ------------------------------------------------------------------------------------------------------------------- ANNUAL OPERATING DATA Net sales $1,228,239 $1,281,129 $1,135,290 $1,002,076 $802,066 Cost of sale 846,124 847,660 755,734 684,455 551,643 Operating income 76,431 89,691 97,801 78,689 61,543 Income before extraordinary item 23,545 29,823 37,514 26,395 20,340 Net income 23,545 29,823 37,514 26,395 16,828 - - ------------------------------------------------------------------------------------------------------------------- Earnings per common share Basic $ .45 $ .58 $ .79 $ .62 $ .51 Diluted $ .45 $ .56 $ .76 $ .60 $ .50 AVERAGE SHARES OUTSTANDING Basic 52,562 51,808 47,416 40,121 36,510 Diluted 52,803 53,735 49,302 41,315 37,198 Cash dividends per common share $ .18 $ .165 $ .135 $ .1225 $ .12 Property additions Before extraordinary loss, net of tax, of $0.09. Includes property and equipment obtained in acquisition of business.
34 EX-21 7 SUBSIDIARIES OF INTERFACE, INC. Exhibit 21 SUBSIDIARIES OF INTERFACE, INC. Jurisdiction of Subsidiary Organization ---------- ------------ Bentley Mills, Inc. Delaware (USA) Facilities Resource Group, Inc. Illinois (USA) Intek, Inc. Georgia (USA) Interface Americas, Inc. Georgia (USA) Interface Americas Re:Source Technologies, Inc. Georgia (USA) Interface Architectural Resources, Inc. Michigan (USA) Interface Colombia Ltda. Columbia Interface de Mexico S.A. de C.V. Mexico Interface Europe B.V. Netherlands Interface Europe, Ltd. United Kingdom Interface Flooring Systems, Inc. Georgia (USA) Interface Flooring Systems (Canada), Inc. Canada Interface Flooring Systems Commercial Ltda. Brazil Interface Global Holdings ApS Denmark Interface Fabrics Group, Inc. Delaware (USA) Interface Overseas Holdings, Inc. Georgia (USA) Interface Research Corporation Georgia (USA) Interface Securitization Corporation Delaware (USA) Interface Yarns, Inc. Georgia (USA) one world learning, inc. Georgia (USA) Pandel, Inc. Georgia (USA) Prince Street Technologies, Ltd. Georgia (USA) Re:Source Americas Enterprises, Inc. Georgia (USA) Toltec Fabrics, Inc. Georgia (USA) - - ---------- [FN] The names of certain subsidiaries which, if considered in the aggregate as a single subsidiary, would not constitute a "significant subsidiary", have been omitted. Interface Europe B.V. (formerly Interface Heuga B.V.) is the parent of six direct or indirect subsidiaries organized and operating in the Netherlands, and 21 direct or indirect subsidiaries organized and operating outside of the Netherlands. Interface Europe, Ltd. (formerly Interface Flooring Systems, Ltd.) is the parent of 19 direct or indirect subsidiaries organized and operating in the United Kingdom and six direct or indirect subsidiaries organized and operating outside the United Kingdom. Interface Global Holdings ApS is the parent of six subsidiaries organized and operating in Europe, Canada, Singapore and Hong Kong. Interface Fabrics Group, Inc. (formerly Guilford of Maine, Inc. and Interface Interior Fabrics, Inc.) is the parent of seven direct subsidiaries organized and operating in the United States(including Toltec Fabrics, Inc. and Intek, Inc.) and the United Kingdom. Interface Overseas Holdings, Inc. is the parent of eight direct subsidiaries organized and operating in the United States, Europe, Japan, Thailand, China and the British Virgin Islands. Re:Source Americas Enterprises, Inc. is the parent of 19 subsidiaries organized and operating in the United States. All of such subsidiaries are commercial floorcovering contractors. EX-23 8 CONSENT OF BDO SEIDMAN Exhibit 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Interface, Inc. Atlanta, Georgia We hereby consent to the incorporation by reference of our reports dated February 22, 2000, relating to the consolidated financial statements appearing in the Company's Annual Report to Shareholders and schedule of Interface, Inc. which are, respectively, incorporated by reference to and included in the Company's Form 10-K for the year ended January 2, 2000, into the Company's previously filed registration statements on Form S-8, Registration No. 33-28305, Form S-8, Registration No. 33-28307, Form S-8, Registration No. 33-69808, Form S-8, Registration No. 333-10377, Form S-8, Registration No. 333-10379, Form S-8, Registration No. 333-38675, Form S-8, Registration No. 333-38677, Form S-8, Registration No. 333-93679, relating to the Company's Key Employee Stock Option Plan, Offshore Stock Option Plan, Key Employee Stock Option Plan (1993), Savings and Investment Plan, Omnibus Stock Incentive Plan and Nonqualified Savings Plan, and Form S-3, Registration No. 333-46611, as amended by Form S-3/A, including the prospectuses therein. We also consent to the reference to us under the caption "Experts" in the Prospectuses. /s/ BDO SEIDMAN, LLP BDO SEIDMAN, LLP Atlanta, Georgia March 30, 2000 EX-27 9 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from financial statements incorporated by reference into the Company's annual report on Form 10-K for the year ended January 2, 2000, and is qualified in its entirety by reference to such financial statements. 0000715787 INTERFACE, INC. 1,000 YEAR JAN-02-2000 JAN-03-1999 JAN-02-2000 2,548 0 212,347 (8,797) 176,918 420,778 485,966 (232,530) 1,028,495 203,752 402,118 0 0 5,902 383,290 1,028,495 1,228,239 1,228,239 846,124 846,124 305,484 4,565 39,372 37,973 14,428 23,545 0 0 0 23,545 0.45 0.45
EX-99.1 10 PRIVATE SECURITIES LITIGATION REFORM ACT Exhibit 99.1 PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR COMPLIANCE STATEMENT FOR FORWARD-LOOKING STATEMENTS In passing the Private Securities Litigation Reform Act of 1995 (the "Reform Act"), Congress encouraged public companies to make "forward-looking statements" by creating a safe harbor to protect companies from securities law liability in connection with forward-looking statements. Interface, Inc. ("Interface" or the "Company") intends to qualify both its written and oral forward-looking statements for protection under the Reform Act and any other similar safe harbor provisions. "Forward-looking statements" are defined by the Reform Act. Generally, forward-looking statements include expressed expectations of future events and the assumptions on which the expressed expectations are based. All forward-looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected. Due to those uncertainties and risks, the investment community is urged not to place undue reliance on written or oral forward-looking statements of Interface. The Company undertakes no obligation to update or revise this Safe Harbor Compliance Statement for Forward-Looking Statements (the "Safe Harbor Statement") to reflect future developments. In addition, Interface 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. Interface provides the following risk factor disclosure in connection with its continuing effort to qualify its written and oral forward-looking statements for the safe harbor protection of the Reform Act and any other similar safe harbor provisions. Important factors currently known to management that could cause actual results to differ materially from those in forward-looking statements include the disclosures contained in the Annual Report on Form 10-K to which this statement is appended as an exhibit and also include the following: STRONG COMPETITION The commercial floorcovering industry is highly competitive. Globally, the Company competes for sales of its floorcovering products with other carpet manufacturers and manufacturers of vinyl and other types of floorcovering. Although the industry recently has experienced significant consolidation, a large number of manufacturers remain in the industry. Management believes that the Company is the largest manufacturer of modular carpet in the world, with a global market share over two times that of its nearest competitor. However, a number of domestic and foreign competitors manufacture modular carpet as one segment of their business, and certain of these competitors have financial resources in excess of the Company's. CYCLICAL NATURE OF INDUSTRY Sales of the Company's principal products 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 tend 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. This risk is particularly acute for the Company's U.S. fabrics business, which relies heavily on sales to OEMs. 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, President and Chief Executive Officer. Mr. Anderson has entered into an employment agreement with the Company containing certain covenants of non-competition, and the Company currently maintains key-man insurance on Mr. Anderson. In addition, the Company relies significantly on the leadership provided to the Company's internal design staff by David Oakey of David Oakey Designs, Inc., which provides product design/production engineering services to the Company under an exclusive consulting contract that contains certain covenants of non-competition. The loss of one or both of such personnel could have an adverse impact on the Company. RISKS OF FOREIGN OPERATIONS The Company has substantial international operations. In fiscal 1999, approximately 31% of the Company's net sales and a significant portion of the Company's production were outside the United States, primarily in Europe but also in Asia. 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. In addition, economic events in Asia over the past two years, including depreciation of certain Asian currencies, failures of financial institutions, stock market declines and reductions in planned capital investment at key enterprises, have adversely impacted the Company's sales in the Asian markets. In fourth quarter 1998, the Company announced certain workforce reductions and plant closures and consolidations in Asia. See "Business -- Recent Developments". The Company also makes a substantial portion of its net sales in currencies other than U.S. dollars, which subjects it to the risks inherent in currency translations. 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. Despite this, the scope and volume of the Company's global operations make it impossible to eliminate completely all foreign currency translation risks as an influence on the Company's financial results. ADOPTION OF EURO A new currency, called the Euro, was introduced in Europe on January 1, 1999. Eleven of the fifteen member countries of the European Union adopted the Euro as their common legal currency as of that date. The increased price transparency resulting from the use of a single currency in the eleven participating countries could impair the ability of the Company to price its products differently in the various European markets. Additionally, because there will be less diversity in the Company's exposure to foreign currencies, movements in the Euro's value in U.S. dollars could increase the Company's exposure to changes in foreign exchange rates. CONTROL OF ELECTIONOF A MAJORITY OF BOARD The Company's Chairman, President and Chief Executive Officer, Ray C. Anderson, beneficially owns approximately 52.4% of the Company's outstanding Class B Common Stock. The holders of the Class B Common Stock are entitled, as a class, to elect a majority of the Board of Directors of the Company, which means that Mr. Anderson has sufficient voting power to elect a majority of the Board of Directors. The holders of the Class B Common Stock generally vote together as a single class with the holders of the Class A Common Stock on all other matters submitted to the shareholders for a vote, however, and Mr. Anderson's beneficial ownership of the outstanding Class A and Class B Common Stock combined is less than 10%. YEAR 2000 RISK The "year 2000 issue" arises from the widespread use of computer programs that rely on two-digit date codes to perform computations or decision-making functions. It was anticipated that many of these programs may fail due to an inability to properly interpret date codes beginning January 1, 2000. For example, such programs could misinterpret "00" as the year 1900 rather than 2000. In addition, some equipment, being controlled by microprocessor chips, may not deal appropriately with the year "00". The Company evaluated its computer systems with the help of outside consultants to determine which modifications and expenditures would be necessary to make its systems compatible with year 2000 requirements. The Company implemented such modifications and made such expenditures prior to the end of calendar year 1999. The Company did not experience any material disruptions in its operations or activities as a result of the year 2000 issue. In addition, the Company does not expect to encounter any such problems in the foreseeable future, although it continues to monitor its computer operations for signs or indications of such issues. It is possible, however, that if year 2000 issues arise for the customers or suppliers of the Company, such issues could have a negative impact on future operations and financial performance of the Company, although the Company has not been able to specifically identify any material issues among its customers or suppliers. Furthermore, the year 2000 issue may impact other entities with which the Company transacts business, and the Company cannot predict the effect of the year 2000 issue on such entities or the resulting effect on the Company. 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 services 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. RESTRICTIONS DUE TO SUBSTANTIAL INDEBTEDNESS The Company's indebtedness is substantial in relation to its shareholders' equity. As of January 2, 2000, the Company's long-term debt (net of current portion) totaled $400.1 million or approximately 51% of its total capitalization. As a consequence of its level of indebtedness a substantial portion of the Company's cash flow from operations must be dedicated to debt service requirements. The terms of the Company's outstanding indebtedness, although unsecured, restrict or limit 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 in certain situations, 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. ANTI-TAKEOVER EFFECTS OF SHAREHOLDER RIGHTS PLAN The Board of Directors has adopted a Rights Agreement pursuant to which holders of Common Stock will be entitled to purchase from the Company a fraction of a share of the Company's Series B Participating Cumulative Preferred Stock if a third party acquires beneficial ownership of 15% or more of the Common Stock and will be entitled to purchase the stock of an Acquiring Person (as defined in the Rights Agreement) at a discount upon the occurrence of certain triggering events. These provisions of the Rights Agreement could have the effect of discouraging tender offers or other transactions that would result in shareholders receiving a premium over the market price for the Common Stock. -----END PRIVACY-ENHANCED MESSAGE-----