-----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, Pb1tLH79p6dGqmRtDolF4oTfBlEiC6vPtjpkpPuRmwMMusjyF4c00jIr8+U1Odp7 FEy4uaZGK+WSPLfLLe8ODg== 0000910195-99-000202.txt : 19990405 0000910195-99-000202.hdr.sgml : 19990405 ACCESSION NUMBER: 0000910195-99-000202 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19990103 FILED AS OF DATE: 19990402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERFACE INC CENTRAL INDEX KEY: 0000715787 STANDARD INDUSTRIAL CLASSIFICATION: CARPETS AND RUGS [2273] IRS NUMBER: 581451243 STATE OF INCORPORATION: GA FISCAL YEAR END: 0103 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-12016 FILM NUMBER: 99586612 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-K405 1 INTERFACE,INC. ====================================================================== 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 3, 1999 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. /X/ Aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant as of March 11, 1999 (assuming conversion of Class B Common Stock into Class A Common Stock): $443.9 million (47,038,895 shares valued at the last sales price of $9.44 on March 10, 1999). See Item 12. Number of shares outstanding of each of the registrant's classes of Common Stock, as of March 10, 1999:
Class Number of Shares ----- ---------------- Class A Common Stock, $0.10 par value per share ................................... 46,179,492 Class B Common Stock, $0.10 par value per share ................................... 6,585,158 (/TABLE> DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Shareholders for the fiscal year ended January 3, 1999 are incorporated by reference into Parts I and II. Portions of the Proxy Statement for the 1999 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 MILLS, PRINCE STREET and FIRTH 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 Interface Americas Workplace Solutions. The Company's Interior Fabrics Group includes the leading U.S. manufacturer of panel fabrics for use in open plan office furniture systems, with a market share in excess of 60%. 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 and HEUGA in modular carpet; BENTLEY MILLS, PRINCE STREET and FIRTH in broadloom carpets; GUILFORD OF MAINE, STEVENS LINEN, TOLTEC, INTEK, CAMBORNE and GLENSIDE in interior fabrics and upholstery products; Intersept in chemicals; and C-TEC, ATLANTIC and INTERCELL 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 (68% of 1998 net sales), Europe (28% of 1998 net sales), and Asia-Pacific (4% of 1998 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, according to CB Commercial/Torto Wheaton Research. Although the U.S. commercial office market has recently experienced 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, with the exception of the U.K., the commercial office markets in both Europe and Asia-Pacific have recently shown signs of recovery. For 1998, the Company had net sales and net income of $1.281 billion and $46.4 million (excluding restructuring charges), respectively. Net sales were composed of sales of floorcovering products and related services ($1.019 billion), interior fabrics sales ($213.3 million) and chemical and specialty product sales ($48.8 million), accounting for 79%, 17% and 4% 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) of 15% and 30%, respectively, over the five-year period from 1994 to 1998. Recent Developments In 1999, the Company introduced a new flooring product marketed under the brand name SOLENIUM. 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 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(TM) backing. Solenium will be offered initially in one-meter modular format. 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 287 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, which it expects to complete by the end of the third quarter of 1999, 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 1998 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 pre-eminent brand names in carpet tiles for commercial and institutional use worldwide. The PRINCE STREET and BENTLEY MILLS 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. Internationally, 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 to Interface in serving the needs of multinational corporate customers who require uniform products and services at their 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 Interior Fabrics Group has resulted in significant efficiencies and cost savings, as well as new product capabilities. In addition, this has 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 WORKPLACE SOLUTIONS. The Company's Workplace Solutions services network includes 21 owned and approximately 120 affiliated commercial floorcovering contractors. The Company believes that the service, marketing and distribution capabilities added by Workplace Solutions 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. Workplace Solutions also provides a channel for delivery of a variety of additional services and products offered by the Company. See "Modular and Broadloom Carpet; Other 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 80 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 - SEASONED MANAGEMENT TEAM AND COMMITTED EMPLOYEES. An important component of the Company's recent success has been the continued strengthening of its management team and its commitment to developing and maintaining an enthusiastic and collaborative work force. In 1993, Ray C. Anderson, the Company's Chairman and Chief Executive Officer, hired industry veteran Charles R. Eitel to manage the Company's domestic carpet tile operations. Mr. Eitel became President and Chief Operating Officer of the Company in February 1997. Mr. Anderson and Mr. Eitel have put in place a team of seasoned executives to manage the Company's continued growth and diversification. In addition, over the past three years, the Company has made a substantial investment in its approximately 7,500 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 1998, FORTUNE magazine once again 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 diverse but 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 45-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 1998. Management believes the Company can eliminate an additional $10 million of such waste in 1999. 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 in 1998, while its 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 division of Springs Industries, Inc. in 1995, Camborne in 1997 and Glenside 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 Workplace Solutions services - 3 - network through acquisitions in 1996, 1997 and 1998 have enabled the Company to expand rapidly into a variety of commercial interior services. The Company's 1998 acquisitions of the flooring business of Scan-Lock A/S and Atlantic Access Flooring 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. The Company believes that its cash flow from operations will enable it to continue to capitalize on attractive strategic acquisition opportunities. Modular and Broadloom Carpet; Other 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. Through a joint venture arrangement with the principals of Condor Carpets, the Company also has a 40% interest in Vebe Floorcoverings, which management believes is the low-cost European manufacturer of needlepunch carpet. The Company also offers a vinyl hard flooring product in Europe under the brand SCAN-LOCK. 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 percent of the Company's modular carpet sales are custom or made-to-order products designed to meet particular 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(R) antimicrobial, static-controlling nylon yarns, and thermally pigmented, colorfast yarns -- making it suitable for use in such facilities in lieu of hard surface flooring. - 4 - 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. They 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 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 obtained 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 MILLS 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. Vebe Floorcoverings, one of the largest needlepunch carpet producers in Europe, focuses its business on volume sales to large distributors of carpet products. VINYL FLOORING. In 1998, the Company acquired the flooring business of Scan-Lock A/S, a Denmark-based manufacturer of extruded vinyl products using recycled and post-industrial waste. The SCAN- LOCK product is a high performance interlocking hard flooring for heavy duty applications, including factories and sports facilities. As a result of the acquisition, the Company is, to its knowledge, the only manufacturer of vinyl floorcoverings in Europe utilizing 100% recycled raw materials. SERVICES The Company provides commercial carpet installation services through the Workplace Solutions services network. The network includes approximately 140 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. Workplace Solutions also provides carpet maintenance services using the Company's IMAGE maintenance system. The IMAGE system includes a custom-engineered maintenance methodology and a line of cleaning chemicals manufactured by Re:Source Technologies. 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 services 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, Workplace Solutions 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 and raised/access flooring systems. The Company intends to begin offering an increased array of leasing and financing services related to its floorcovering products in 1999. 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 - 5 - architects and has enhanced the Company's ability to target those and other specifiers at the critical design stage of commercial projects. The 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 MILLS, 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 that 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 3 days in 1998, and the average number of carpet samples produced per month has increased from 90 per month in 1993 to over 1,500 per month in 1998. This 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 services network to bolster its sales efforts. The Company maintains a Creative Services staff that works directly with clients on major design projects. The efforts of these personnel in helping with product selection, customer specifications and unique approaches to design and styling issues are an important component of the marketing aspect of the Company's mass customization approach. 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 continue 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, and it manufactures 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 terms for 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 Company currently obtains a significant percentage of its requirements for synthetic fiber (the principal raw material used in the Company's carpet products) from 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, in addition to offering 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 manufacture and ship products from facilities in several foreign countries reduces the risks of foreign currency fluctuations - 6 - 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 treatment of its modular carpet with the INTERSEPT antimicrobial chemical agent is a material factor 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 for 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 Workplace Solutions services network, and the resulting improvement in customer service, has further enhanced the Company's competitive position. Interior Fabrics PRODUCTS The Company, through its Interior 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 59% of total U.S. fabrics sales in fiscal 1998. 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 LINENTM lines added decorative, upscale upholstery fabrics and specialty textile products to the Interior Fabrics Group's traditional product offerings. The Company's June 1995 acquisition of Toltec Fabrics, 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 Interior Fabrics Group's capabilities in that market. All of these developments have reinforced the Interior 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 Interior Fabrics Group's product offering. In 1998, the Company acquired Glenside Fabrics Ltd., a United Kingdom based manufacturer of upholstery fabrics for the contract furnishings and leisure markets. The Glenside acquisition further enhances the Interior Fabrics Group's European presence. As part of its recently announced restructuring, the Company intends to consolidate 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 TERRATEXTM line of panel fabrics. The TERRATEX label is intended to denote fabrics manufactured from 100% recycled polyester, and will include both new products and traditional product offerings. The first fabric to bear the TERRATEX label is Guilford of Maine's FR701(R) line. The Company intends for all of the Interior Fabrics Group's companies to manufacture and market products using the TERRATEX label. 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 Interior Fabrics Group sells to essentially all of the major office furniture manufacturers. The Interior 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 sales are made through the Interior 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 Interior 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 fabric sales offices are located in New York, New York, Grand Rapids, Michigan and the United Kingdom. The Interior 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. 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 relatively complex and requires many steps. Raw fiber and yarn are placed in pressurized vats, and dyes are then forced into the fiber. - 8 - Particular attention is devoted to the 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 Interior Fabrics Group has recently begun using 100% recycled fiber manufactured from PET soda bottles in its manufacturing process. In response to a shift in the Interior 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 Interior Fabrics Group's yarn manufacturing processes. The program improved the Interior Fabrics Group's cost effectiveness in producing such lighter weight fabrics, reduced manufacturing cycle time, and enabled the Interior 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. In September 1998, the environmental management system of the Interior Fabrics Group's largest facility, in Guilford, Maine, was granted ISO 14001 certification. The Company's West Yorkshire fabrics manufacturing facility is also certified under ISO 14001. The Company offers textile processing services through the Interior 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 Interior 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 Interior Fabrics Group has been able to specialize its manufacturing capabilities, product offerings and service functions, resulting in a leading market position. Through Interface Interior Fabrics, Inc. (formerly Guilford of Maine, Inc.), Toltec and Intek, 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: Re:Source Technologies, which develops, manufactures and markets specialty chemical products and which includes the Company's INTERSEPT antimicrobial sales and licensing program; Pandel, which produces vinyl carpet tile backing and specialty mat and foam products; and Interface Architectural Resources, which produces and markets raised/access flooring systems. 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. 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. - 9 - The Company also 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. In addition, the Company produces and markets PROTEKT(2)TM, a proprietary soil and stain retardant treatment; water-proof sheathing for the fiber optic cable industry and other applications; accelerators, used to speed the curing process for rubber used in tires, hoses and other products; and FATIGUE FIGHTER(R), an impact-absorbing modular flooring system typically used where people stand for extended periods. The Company manufactures cable management raised/access flooring systems, a specialty product which it markets through Interface Architectural Resources. The initial product offering, marketed under the trademark INTERCELL, 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 SYSTEMSTM 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 and TEC-CRETE), 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. One World Learning In 1997, the Company created One World Learning, 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 the sustainability principles of The Natural Step. Interface Research Corporation Interface Research Corporation provides technical support and research and development for the entire family of Interface companies. Interface Research Corporation also provides significant support to the Company's ECOSENSE initiative, primarily through its efforts in identifying recyclable products and raw materials and procedures to achieve, ultimately, closed-loop recycling of the Company's carpet products. A major technical effort has been launched to define optimum recycling processes for the Company's carpet and fabric products. See "Environmental Initiatives". 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 80 new carpet designs during the last five 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 its related costs because of the Company's more rapid and flexible production capabilities. - 10 - 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), professional service organizations and design professionals. 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 initiative, pursuant to which the Company realized an aggregate of $10 million in savings in 1998. See "Business Strategy and Principal Initiatives -- Ecological Sustainability Through War-on-Waste 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, THE NEXT ECONOMY; Bill McDonough, principal of McDonough Braungart Design Chemistry, LLC; Amory Lovins, energy consultant, co-founder of Rocky Mountain Institute; Hunter Lovins, President and Executive Director of Rocky Mountain Institute, Daniel Quinn, author of ISHMAEL, PROVIDENCE, and THE STORY OF B; John Picard, President of E(2), American environmental consultant; David Brower, former executive director of the Sierra Club, and 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; and Dr. Karl-Henrik Robert, founder of The Natural Step. 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 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 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. - 11 - Backlog The Company's backlog of unshipped orders was approximately $170 million at February 21, 1999, compared to approximately $153 million at February 22, 1998. 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 21, 1999 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 carpet 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, and Japan. Some of the more prominent registered trademarks of the Company include: INTERFACE, HEUGA, INTERSEPT, GLASBAC, GUILFORD OF MAINE, BENTLEY and PRINCE STREET TECHNOLOGIES. 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 February 28, 1999, the Company employed a total of approximately 7,500 employees worldwide. Of such employees, approximately 2,000 are clerical, sales, supervisory and management personnel and the balance are manufacturing personnel. Certain of the service businesses within Workplace Solutions 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 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. - 12 - Executive Officers of the Registrant The executive officers of the Company, their ages as of March 15, 1999, 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 64 Chairman of the Board and Chief Executive Officer Charles R. Eitel 49 President and Chief Operating Officer Michael D. Bertolucci 58 Senior Vice President Brian L. DeMoura 53 Senior Vice President Daniel T. Hendrix 44 Senior Vice President - Finance, Chief Financial Officer and Treasurer John H. Walker 54 Senior Vice President Gordon D. Whitener 36 Senior Vice President Raymond S. Willoch 40 Senior Vice President, General Counsel and Secretary Alan S. Kabus 41 Vice President John R. Wells 37 Vice President Jeffrey A. Goldberg 57 Vice President Joyce D. LaValle 54 Vice President (/TABLE> 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 appointed by President Clinton to the President's Council on Sustainable Development in 1996 and currently serves as Co- Chair. He also serves on the Boards of numerous nonprofit organizations. Mr. Eitel joined the Company in November 1993 as President of Interface Flooring Systems, Inc. ("IFS", the Company's principal U.S. modular carpet subsidiary) and Interface Americas, Inc. (a wholly- owned U.S. holding company), with responsibility for the Company's modular carpet operations throughout the Americas. In October 1994, Mr. Eitel was promoted to Executive Vice President of the Company and President and Chief Executive Officer of the Floorcoverings Group, thereby assuming overall responsibility for the Company's worldwide carpet business. In February 1997, Mr. Eitel was promoted to President and Chief Operating Officer of the Company. Mr. Eitel also serves as a director of Weeks Corporation, an industrial real estate company based in Atlanta, and Ladd Furniture, Inc., a North Carolina based furniture manufacturer. Dr. Bertolucci joined the Company in April 1996 as President of Interface Research Corporation and Senior Vice President of the Company. 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 Interior Fabrics) and Senior Vice President of the Company. He is responsible for the Interior 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 - Finance 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.), a Netherlands based carpet tile manufacturer, which was 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. In his current position, he has responsibility for the Company's floorcovering operations in both Europe and the Asia-Pacific region. Mr. Whitener joined the Company in November 1993 as Senior Vice President - Sales & Marketing of IFS. In October 1994, he became a Senior Vice President of the Company and President and Chief Executive Officer of Interface Americas, assuming responsibility for both the Company's modular carpet operations in North America, and Prince - 13 - Street, the Company's commercial broadloom carpet operation based in Cartersville, Georgia. Mr. Whitener also assumed corporate responsibility for Bentley Mills in July 1995 and the Specialty Products Group in April 1997. He is thus responsible for all of the Company's operations in the Americas, except the Interior Fabrics Group. Mr. Whitener also serves as a director of The Carpet & Rug Institute, a national trade association headquartered in Dalton, Georgia representing the carpet and rug industry, and Aviation Group, Inc., a Texas based provider of products and services to airline companies and other aviation firms. 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. Mr. Kabus joined the Company in 1993 as a result of the Company's acquisition of Bentley Mills, which he had joined as a salesman in 1984. At the time of the acquisition, Mr. Kabus was serving as Regional Sales Manager - Northeast Region of Bentley Mills. He was promoted to Vice President of the Company in July 1995, and from July 1995 until February 1998, served as President and Chief Executive Officer of Bentley Mills. In March 1998, Mr. Kabus assumed responsibility for the Company's Workplace Solutions services network. Mr. Wells joined the Company in February 1994 as Vice President - Sales of IFS 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. Mr. Goldberg joined the Company as Senior Vice President - Finance of IFS in March 1994. He became Senior Vice President - Finance of Interface Americas in September 1994. He became a Vice President of the Company in April 1997. From November 1996 until March 1998, he served as President and Chief Executive Officer of Interface Americas Workplace Solutions. In March 1998, Mr. Goldberg was named Senior Vice President and Chief Strategic Officer of Interface Americas. Ms. LaValle joined the Company as a Regional Vice President of IFS in February 1993. She became Senior Vice President-Sales & Marketing of Prince Street in July 1995. From November 1995 until March 1998, she served as President and Chief Executive Officer of Prince Street, and she became a Vice President of the Company in April 1997. In March 1998, Ms. LaValle was named Senior Vice President and Chief Innovations Officer of Interface Americas. At that time, Ms. LaValle also assumed responsibility for the Company's Washington, D.C. based service business, Re:Source Washington D.C., Inc. 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 Genemuiden, the Netherlands . . . . . . . . . . . . . . Broadloom carpet 36,788 West Yorkshire, England . . . . . . . . . . . . . . . . . . Broadloom carpet 674,666 Aberdeen, North Carolina . . . . . . . . . . . . . . . . . Interior fabrics 88,000 Dudley, Massachusetts . . . . . . . . . . . . . . . . . . . Interior fabrics 300,000 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 135,000 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. Owned by a joint venture in which the Company has a 40% interest.
- 14 - 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. ITEM 3. LEGAL PROCEEDINGS In February 1998, the Company sent two "cease and desist" letters to Collins & Aikman Floorcoverings, Inc. ("CAF"), demanding that CAF cease manufacturing certain carpet products which the Company believes infringe upon certain of its copyrighted product designs. The Company and CAF subsequently began settlement negotiations in an attempt to resolve the Company's claims. On July 28, 1998, CAF filed a complaint (the "Complaint") against the Company and certain other parties in the U.S. District Court for the Northern District of Georgia, Atlanta Division. In the Complaint, CAF alleges that the Company has infringed upon certain of CAF's copyrighted product designs. The Complaint also contains a claim against the Company for tortious interference with contractual rights relating to a consulting agreement between CAF and David Oakey, a former consultant of CAF and current consultant of the Company. CAF is seeking damages and injunctive relief in connection with the foregoing claims. On September 28, 1998, the Company filed its Answer and Counterclaims to the Complaint, which includes certain counterclaims against CAF for copyright infringement. The Company continues to believe that CAF's claims are unfounded and that the Company has meritorious defenses to such claims. Moreover, the Company intends to aggressively assert its claims against CAF. 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. - 15 - 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 1998 Annual Report to Shareholders is incorporated herein by reference. As of March 10, 1999, the Company had 418 holders of record of its Class A Common Stock and 71 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 1998, the Company issued an aggregate of 113,562 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 two individuals in the acquisitions of Kustom Carpet Services, Inc. and Oldtown Carpet Cleaning Service, Inc. The market prices on the dates of issuance ranged from $12.00 per share to $12.25 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. ITEM 6. SELECTED FINANCIAL DATA Selected Financial Information included in the Company's 1998 Annual Report to Shareholders 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 1998 Annual Report to Shareholders 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 1998 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 1998 Annual Report to Shareholders 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 1999 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 1998 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. - 16 - The information contained under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive Proxy Statement for the Company's 1999 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 1998 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 1999 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 1998 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 1999 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 1998 fiscal year, is incorporated herein by reference. 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" (second paragraph only) and "Certain Relationships and Related Transactions" in the Company's definitive Proxy Statement for the Company's 1999 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 1998 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 1998 Annual Report to Shareholders, are incorporated by reference in Item 8 of this Report: Consolidated Balance Sheets - January 3, 1999 and December 28, 1997 Consolidated Statements of Income - years ended January 3, 1999, December 28, 1997 and December 29, 1996 Consolidated Statements of Cash Flows - years ended January 3, 1999, December 28, 1997 and December 29, 1996 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 - 17 - 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). 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.* 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); and 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).* - 18 - 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); and Amendment thereto dated January 6, 1998 (included as Exhibit 10.2 to the 1998 First Quarter 10-Q and incorporated herein by reference).* 10.8 Employment Agreement of Charles R. Eitel dated April 1, 1997 (included as Exhibit 10.3 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 10.3 to the 1998 First Quarter 10-Q and incorporated herein by reference).* 10.9 Change in Control Agreement of Charles R. Eitel dated April 1, 1997 (included as Exhibit 10.4 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 10.4 to the 1998 First Quarter 10-Q and incorporated herein by reference).* 10.10 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); and Amendment thereto dated January 6, 1998 (included as Exhibit 10.5 to the 1998 First Quarter 10-Q and incorporated herein by reference).* 10.11 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); and Amendment thereto dated January 6, 1998 (included as Exhibit 10.6 to the 1998 First Quarter 10-Q and incorporated herein by reference).* 10.12 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); and Amendment thereto dated January 6, 1998 (included as Exhibit 10.7 to the 1998 First Quarter 10-Q and incorporated herein by reference).* 10.13 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); and Amendment thereto dated January 6, 1998 (included as Exhibit 10.8 to the 1998 First Quarter 10-Q and incorporated herein by reference).* 10.14 Employment Agreement of Gordon D. Whitener dated April 1, 1997 (included as Exhibit 10.9 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 10.9 to the 1998 First Quarter 10-Q and incorporated herein by reference).* 10.15 Change in Control Agreement of Gordon D. Whitener dated April 1, 1997 (included as Exhibit 10.10 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 10.10 to the 1998 First Quarter 10-Q and incorporated herein by reference).* 10.16 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); and Amendment thereto dated January 6, 1998 (included as Exhibit 10.11 to the 1998 First Quarter 10-Q and incorporated herein by reference).* 10.17 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); and Amendment thereto dated January 6, 1998 (included as Exhibit 10.12 to the 1998 First Quarter 10-Q and incorporated herein by reference).* 10.18 Employment Agreement of Jeffrey A. Goldberg dated April 1, 1997 (included as Exhibit 10.13 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 10.13 to the 1998 First Quarter 10-Q and incorporated herein by reference).* 10.19 Change in Control Agreement of Jeffrey A. Goldberg dated April 1, 1997 (included as Exhibit 10.14 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 10.14 to the 1998 First Quarter 10-Q and incorporated herein by reference).* - 19 - 10.20 Employment Agreement of Alan S. Kabus dated April 1, 1997 (included as Exhibit 10.15 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 10.15 to the 1998 First Quarter 10-Q and incorporated herein by reference).* 10.21 Change in Control Agreement of Alan S. Kabus dated April 1, 1997 (included as Exhibit 10.16 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 10.16 to the 1998 First Quarter 10-Q and incorporated herein by reference).* 10.22 Employment Agreement of Joyce D. LaValle dated April 1, 1997 (included as Exhibit 10.17 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 10.17 to the 1998 First Quarter 10-Q and incorporated herein by reference).* 10.23 Change in Control Agreement of Joyce D. LaValle dated April 1, 1997 (included as Exhibit 10.18 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 10.18 to the 1998 First Quarter 10-Q and incorporated herein by reference).* 10.24 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).* 10.25 Change in Control Agreement of John H. Walker dated April 1, 1997 (included as Exhibit 10.20 to the 1997 Second Quarter 10-Q, reviously 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).* 10.26 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); and Amendment thereto dated January 6, 1998 (included as Exhibit 10.23 to the 1998 First Quarter 10-Q and incorporated herein by reference).* 10.27 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); and Amendment thereto dated January 6, 1998 (included as Exhibit 10.24 to the 1998 First Quarter 10-Q and incorporated herein by reference).* 10.28 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); and Amendment thereto dated January 6, 1998 (included as Exhibit 10.25 to the 1998 First Quarter 10-Q and incorporated herein by reference).* 10.29 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); and Amendment thereto dated January 6, 1998 (included as Exhibit 10.26 to the 1998 First Quarter 10-Q and incorporated herein by reference).* - 20 - 10.30 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 1995 10-K, 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). 10.31 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). 10.32 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.* 10.33 Split Dollar Insurance Agreement, dated effective as of February 21, 1997, between the Company and Charles R. Eitel (included as Exhibit 10.1 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).* 10.34 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).* 10.35 Split Dollar Insurance Agreement, dated effective as of February 21, 1997, between the Company and Gordon T. Whitener (included as Exhibit 10.3 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 contained in the Company's Annual Report to Shareholders for the fiscal year ended January 3, 1999, which is expressly incorporated into this Report by direct reference thereto. 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. (/TABLE> (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. - 21 - REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Interface, Inc. Atlanta, Georgia The audits referred to in our Report dated February 22, 1999 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 3, 1999, 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 February 22, 1999
INTERFACE, INC. AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES ________________________________________________________________________________________________________________________ Column A Column B Column C Column D Column E ________________________________________________________________________________________________________________________ Balance, at Charge to Charged to Balance, beginning costs and other Deductions at end of year expenses accounts (describe) of year ________________________________________________________________________________________________________________________ (in thousands) Allowance for doubtful accounts: Year ended: January 3, 1999 .................................$7,351 $3,882 $ -- $3,443 $7,790 December 28, 1997 ...............................$7,349 $2,032 $ -- $2,030 $7,351 December 29, 1996 ...............................$5,870 $3,529 $ -- $2,050 $7,349 Restructuring Reserve: Year ended: January 3, 1999 .................................$ -- $13,017 $ -- $6,981 $6,036 Includes changes in foreign currency exchange rates. Includes allowance of $1,034 at acquisition date for Renovisions, C-Tec and certain of the companies in the Re:Source Americas network during 1996; $793 at acquisition date for Camborne, Carpet Solutions and certain of the companies in the Workplace Solutions services network during 1997; and $583 at acquisition date for Firth, Joseph Hamilton Seaton and certain of the companies in the Workplace Solutions services network during 1998. Write off of bad debt. (/TABLE> (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.) - 22 - 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 and Chief Executive Officer Date: March 31, 1999 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 and Chief Executive Officer March 31, 1999 Ray C. Anderson (Principal Executive Officer) /s/ Daniel T. Hendrix Senior Vice President, Chief Financial Officer, March 31, 1999 Daniel T. Hendrix Treasurer and Director (Principal Financial and Accounting Officer) /s/ Brian L. DeMoura Director March 31, 1999 Brian L. DeMoura /s/ Charles R. Eitel Director March 31, 1999 Charles R. Eitel /s/ John H. Walker Director March 31, 1999 John H. Walker /s/ Gordon D. Whitener Director March 31, 1999 Gordon D. Whitener /s/ Dianne Dillon-Ridgley Director March 31, 1999 Dianne Dillon-Ridgley /s/ Carl I. Gable Director March 31, 1999 Carl I. Gable /s/ June M. Henton Director March 31, 1999 June M. Henton /s/ J. Smith Lanier, II Director March 31, 1999 J. Smith Lanier, II /s/ Thomas R. Oliver Director March 31, 1999 Thomas R. Oliver /s/ Leonard G. Saulter Director March 31, 1999 Leonard G. Saulter /s/ Clarinus C.Th. van Andel Director March 31, 1999 Clarinus C.Th. van Andel (/TABLE> - 23 - Exhibit Index Exhibit Number Description of Exhibit ------- ---------------------- 10.2 Form of Amendment to Salary Continuation Agreement. 10.32 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. 13 Certain information contained in the Company's Annual Report to Shareholders for the fiscal year ended January 3, 1999, which is expressly incorporated into this Report by direct reference thereto. 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.
EX-10.2 2 FORM OF AMENDMENT TO SALARY CONTINUATION AGR. Exhibit 10.2 FORM OF AMENDMENT TO SALARY CONTINUATION AGREEMENT This Amendment to Salary Continuation Agreement ("Amendment") is made and entered into as of the ____ day of __________, 1998, by and between Interface, Inc. (the "Company") and ______________________ ("Employee"). W I T N E S S E T H : WHEREAS, the Company and Employee did enter into that certain Salary Continuation Agreement dated as of ____________, 1998 (the "Agreement"); and WHEREAS, the parties hereto desire to amend 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 6(a) of the Agreement is hereby deleted in its entirety and the following is substituted in its place: (a) Acceleration of Payments. The Company shall not have a ------------------------- unilateral right to accelerate the payment of any benefits payable under this Agreement. Employee (or, in the case of Employee's death or mental incapacity, his Beneficiary or spouse, as applicable under Section 4(b), or the duly appointed representative of his person or estate) may request in writing an acceleration of the payment of any benefits payable under this Agreement, provided that the Company shall have the sole discretion to determine whether any such acceleration will be permitted and the Company may establish standards for permitting such accelerated distributions. In the event such acceleration is approved by the Company, the amount payable will be the single sum present value of the payments otherwise due Employee and shall be determined in accordance with the following: (i) If, at the time of such acceleration, Employee has already commenced receiving Early Retirement or Normal Retirement Payments, the amount payable shall be the single sum present value of the scheduled Early Retirement or Normal Retirement Payments (using the mortality table and interest rate assumptions set forth in clause (iv) below). (ii) If, at the time of such acceleration, Employee has not yet commenced receiving Early Retirement or Normal Retirement Payments, Employee shall be assumed to have continued his employment with the Company and elected to commence his retirement on the date ranging from age 55 to age 65 (the "Maximum Benefit Date") that will result in his receiving on the acceleration payment date the greatest single sum present value benefit (of Early Retirement or Normal Retirement Payments, as the case may be) that could be paid to Employee (using the mortality table and interest rate assumptions set forth in clause (iv) below). (iii) In addition, in the event Employee has been terminated without Cause at any time following a Change in Control (or a Voluntary Termination has occurred within six months prior to, or within 24 months following, the date of a Change in Control), and at the time of such acceleration Employee has not yet commenced receiving Early Retirement Payments, the single sum present value benefit otherwise payable to Employee under clause (ii) above shall be increased by a percentage equal to: (x) the average annual percentage increase in the U.S. consumer price index -- all cities -- urban consumers, published by the U.S. Department of Labor (or if no longer published, such other mutually agreed index) over the preceding 20 years, MULTIPLIED BY (y) the number of years (and partial years determined on a monthly basis) between the date of such termination and the Maximum Benefit Date. (iv) The calculations under this Section 6(a) shall be made by applying the mortality tables prescribed in Code Section 417(e), and an interest rate that is the lesser of (x) six percent or (y) the interest rate used by the Pension Benefit Guaranty Corporation (or its successor organization) as of the first day of the calendar year in which the acceleration occurs to value immediate annuities on termination of a Code Section 401(a) qualified defined benefit pension plan. 3. The sentence in Schedule A under the heading "Change in Control" is amended to read in its entirety as follows: Notwithstanding anything to the contrary contained herein, in the event of a Change in Control, the benefits described in this Schedule A are subject to certain protections and enhancements as described in Sections 6(a), 6(c), 8(b) and 10 of the Agreement. 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. - 2 - IN WITNESS WHEREOF, Employee has executed this Amendment, and the Company has caused this Amendment to be executed by its duly authorized officers, as of the date first written above. INTERFACE, INC. By: ____________________________________ Ray C. Anderson Chairman and CEO Attest:__________________________________ Raymond S. Willoch Secretary EMPLOYEE _________________________________________ - 3 - EX-10.32 3 SPLIT-DOLLAR AGREEMENT Exhibit 10.32 SPLIT-DOLLAR AGREEMENT THIS AGREEMENT made and entered into this 29th day of May, 1998, by and among Interface, Inc., a Georgia corporation, with principal offices and place of business in the State of Georgia (hereinafter referred to as the "Corporation"); Ray C. Anderson, of Atlanta, Georgia (hereinafter referred to as the "Employee"); and Mary Anne Anderson Lanier, of Atlanta, Georgia, as Trustee of the Ray C. Anderson Family Trust U/A dated 29 May, 1998 (hereinafter referred to as the "Owner"), WITNESSETH THAT: WHEREAS, the Employee is employed by the Corporation; WHEREAS, the Corporation is providing life insurance protection under a policy or policies of life insurance insuring the joint lives of the Employee and his spouse (hereinafter referred to as the "Policy"), which is described in Exhibit A attached hereto and by this reference made a part hereof (the issuer of a Policy is hereinafter referred to as the "Insurer"); WHEREAS, the Corporation is willing to pay the premiums due on the Policy as an additional employment benefit for the Employee until that certain date occurring on the later of the Death of the Employee or the Employee's spouse, on the terms and conditions hereinafter set forth; WHEREAS, Owner is the owner of the Policy and, as such, possesses all incidents of ownership in and to the Policy; WHEREAS, the Corporation wishes to have the Policy collaterally assigned to it by the Owner, in order to secure the repayment of the amounts which it will pay toward the premiums on the Policy; and WHEREAS, the parties intend that by such collateral assignment the Corporation shall receive only the right to such repayment, with the Owner retaining all other ownership rights in the Policy, as specified herein; NOW THEREFORE, in consideration of the premises and of the mutual promises contained herein the parties agree as follows: 1. Purchase of Policy. The Owner has purchased the Policy from ------------------ the Insurer in the face amount indicated in Exhibit A attached hereto. The parties hereto agree that they will take all necessary action to cause the Insurer to issue the Policy, and shall take any further action which may be necessary to cause the Policy to conform to the provisions of this Agreement. The parties hereto agree that the Policy shall be subject to the terms and conditions of this Agreement and of the collateral assignment filed with the Insurer relating to the Policy. 1 2. Ownership of Policy. ------------------- a. The Owner shall be the sole and absolute owner of the Policy, and may exercise all ownership rights granted to the owner thereof by the terms of the Policy, except as may otherwise be provided herein. b. It is the intention of the parties to this Agreement and the collateral assignment executed by the Owner to the Corporation in connection herewith that the Owner shall retain all rights which the policy grants to the owner thereof; the sole right of the Corporation hereunder shall be to be repaid the amounts which it has paid toward the premiums on the Policy. Specifically, but without limitation, the Corporation shall neither have nor exercise any right as collateral assignee of the Policy which could in any way defeat or impair the Owner's right to receive the cash surrender value or the death proceeds of the Policy in excess of the amount due the Corporation hereunder. All provisions of this Agreement and of such collateral assignment shall be construed so as to carry out such intention. 3. Payment of Premiums. On or before the due date of each ------------------- Policy premium, or within the grace period provided therein, the Corporation shall pay the full amount of the premium to the Insurer, and shall, upon request, promptly furnish the Employee evidence of timely payment of such premium. The Corporation shall annually furnish the Employee a statement of the amount of income reportable by the Employee for federal and state income tax purposes, as a result of the insurance protection provided the Owner as the Policy beneficiary. 4. Collateral Assignment. To secure the repayment to the --------------------- Corporation of the amount of the premiums on the Policy paid by it hereunder, the Owner has, contemporaneously herewith, assigned the Policy to the Corporation as collateral, under the form used by the Insurer for such assignments, which collateral assignment specifically provides that the sole right of the Corporation thereunder is to be repaid the amounts it has paid toward premiums on the Policy hereunder. Such repayment shall be made from the cash surrender value of the Policy (as defined therein) if this Agreement is terminated or if the Owner surrenders or cancels the Policy, or from the death proceeds of the Policy if the Employee and his spouse should die while the Policy and Agreement remain in force. In no event shall the Corporation have any rights to borrow against or make withdrawals from the Policy, to surrender or cancel the Policy, nor to take any other action which would impair or defeat the rights of the Owner in and to 2 the Policy. The collateral assignment of the Policy to the Corporation hereunder shall not be terminated, altered or amended by the Owner while this Agreement is in effect. The parties hereto agree to take all action necessary to cause such collateral assignment to conform to the provisions of this Agreement. 5. Limitations on Owner's Rights in Policy. --------------------------------------- a. The Owner shall take no action with respect to the Policy which would in any way compromise or jeopardize the Corporation's right to be repaid the amounts it has paid toward premiums on the Policy while this Agreement is in effect. b. The Owner shall have the sole right to surrender or cancel the Policy, and to receive the full cash surrender value of the Policy directly from the Insurer. Upon the surrender or cancellation of the Policy, the Corporation shall have the unqualified right to receive the lesser of the cash surrender value or the total amount of the premiums paid by it hereunder. Immediately upon receipt of the cash value of the Policy from the Insurer, the Owner shall pay to the Corporation the portion of such cash value to which it is entitled hereunder and shall retain the balance, if any; upon such receipt and payment, this Agreement shall thereupon terminate. 6. Collection of Death Proceeds. ---------------------------- a. Upon the death of the Employee and his spouse, the Corporation and the Owner shall cooperate to take whatever action is necessary to collect the death benefit provided under the Policy; when such benefit has been collected and paid as provided herein, this Agreement shall thereupon terminate. b. Upon the death of the Employee and his spouse, the Corporation shall have the unqualified right to receive a portion of such death benefit equal to the total amount of premiums paid by it hereunder. The balance of the death benefit provided under the Policy, if any, shall be paid directly to the Owner, in the manner and in the amount or amounts provided in the beneficiary designation provision of the Policy. In no event shall the amount payable to the Corporation hereunder exceed the Policy proceeds payable at the death of the Employee. No amount shall be paid from such death benefit to the owner until the full amount due the Corporation hereunder has been paid. The parties hereto agree that the beneficiary designation provision of the Policy shall conform to the provisions hereof. c. Notwithstanding any provision hereof to the contrary, in the event that, for any reason whatsoever, no death benefit is payable under the Policy upon the death of the Employee and his spouse, and in lieu thereof the Insurer refunds all or any part of the premiums paid for the Policy, the Corporation and the Owner shall have the unqualified right to share such premiums based on the amounts paid by the Corporation and the amounts paid by the Employee, if any. 3 7. Termination of the Agreement During the Employee's Lifetime. ----------------------------------------------------------- a. This Agreement shall terminate, during the Employee's lifetime, without notice, upon the occurrence of any of the following events: (a) total cessation of the Corporation's business or (b) bankruptcy, receivership or dissolution of the Corporation. b. In addition, the Owner may terminate this Agreement, while no premium under the Policy is overdue, by written notice to the other parties hereto. Such termination shall be effective as of the date of such notice. 8. Disposition of the Policy on Termination of the Agreement --------------------------------------------------------- During the Employee's Lifetime. - ------------------------------ a. For sixty (60) days after the date of the termination of this Agreement during the Employee's lifetime, the Owner shall have the option of obtaining the release of the collateral assignment of the Policy to the Corporation. To obtain such release, the Owner shall repay to the Corporation the total amount of the premium payment made by the Corporation hereunder. Upon receipt of such amount, the Corporation shall release the collateral assignment of the Policy, by the execution and delivery of an appropriate instrument of release. b. If the Owner fails to exercise such option within such sixty (60) day period, then, at the request of the Corporation, the Owner shall execute any document or documents required by the insurer to transfer the interest of the Owner in the Policy to the Corporation. Alternatively, the Corporation may enforce its right to be repaid the amount of the premiums on the Policy paid by it from the cash surrender value of the Policy under the collateral assignment of the Policy; provided that in the event the cash surrender value of the Policy exceeds the amount due the Corporation, such excess shall be paid to the Owner. Thereafter, neither the Owner nor the Owner's successors, assigns or beneficiaries shall have any further interest in and to the Policy, either under the terms thereof or under this Agreement. 9. Insurer Not a Party. The Insurer shall be fully discharged -------------------- from its obligations under the Policy by payment of the Policy death benefit to the beneficiary or beneficiaries named in the Policy, subject to the terms and conditions of the Policy. In no event shall the Insurer be considered a party to this Agreement, nor any modification or amendment hereof, shall in any way be construed as enlarging, changing, varying or in any other way affecting the obligations of the insurer as expressly provided in the Policy, except insofar as the provisions hereof are made a part of the Policy by the collateral assignment executed by the Owner and filed with the Insurer in connection herewith. 4 10. Named Fiduciary, Determination of Benefits, Claims Procedure ------------------------------------------------------------ and Administration. - ------------------ a. The Corporation is hereby designated as the named fiduciary under this Agreement. The named fiduciary shall have authority to control and manage the operation and administration of this Agreement, and it shall be responsible for establishing and carrying out a funding policy and method consistent with the objectives of this Agreement. b. (1) Claim. A person who believes that he or she is being denied a benefit to which he or she is entitled under this Agreement (hereinafter referred to as the "Claimant") may file with the Corporation a written request for such benefit, setting forth his or her claim. The request must be addressed to the President of the Corporation at its then principal place of business. (2) Claim Decision. Upon receipt of a claim, the Corporation shall advise the Claimant that a reply will be forthcoming within ninety (90) days and shall, in fact, deliver such reply within such period. The Corporation may, however, extend the reply period for an additional ninety (90) days for reasonable cause. If the claim is denied in whole or in part, the Corporation shall adopt a written opinion, setting forth: (a) the specific reason or reasons for such denial; (b) the specific reference to pertinent provisions of this Agreement on which such denial is based; (c) a description of any additional material or information necessary for the Claimant to perfect his or her claim and an explanation why such material or information is necessary; (d) appropriate information as to the steps to be taken if the Claimant wishes to submit the claim for review; and (e) the time limits for requesting a review under subsection (3) and for review under subsection (4) hereof. (3) Request for Review. Within sixty (60) days after the receipt by the Claimant of the written opinion described above, the Claimant may request in writing that the Secretary of the Corporation review the determination of the Corporation. Such request must be addressed to the Secretary of the Corporation, at its then principle place of business. The Claimant or his or her duly authorized representative may, but need not, review the pertinent documents and submit issues and comments in writing for consideration by the Corporation. If the Claimant does not request a review of the Corporation's determination by the Secretary of the Corporation within such sixty (60) day period, he or she shall be barred and estopped from challenging the Corporation's determination. 5 (4) Review of Decision. Within sixty (60) days after the Secretary's receipt of a request for review, he or she will review the Corporations determination. After considering all materials presented by the Claimant, the Secretary will render a written opinion, setting forth the specific reasons for the decision and containing specific references to the pertinent provisions of this Agreement on which the decision is based. If special circumstances require that the sixty (60) day time period be extended, the Secretary will so notify the Claimant and will render the decision as soon as possible, but no later than one hundred twenty (120) days after receipt of the request for review. 11. Amendment. This Agreement may not be amended, altered or --------- modified, except by a written instrument signed by the parties hereto, or their respective successors or assigns, and may not be otherwise terminated except as provided herein. 12. Binding Effect. This Agreement shall be binding upon and -------------- inure to the benefit of the Corporation and its successors and assigns, and the Employee, the Owner, and their respective successors, assigns, heirs, executors, administrators and beneficiaries. 13 Notice. Any notice, consent or demand required or permitted ------ to be given under the provisions of this Agreement by one party to another shall be in writing, shall be signed by the party giving or making the same and may be given either by delivering the same to such other personally, or by mailing the same, by United States certified mail, postage prepaid, to such party, addressed to his, her or its last known address as shown on the records of the Corporation. The date of such mailing shall be deemed the date of notice, consent or demand. 14. Governing Law. This Agreement, and the rights of the ------------- parties hereunder, shall be governed by and construed in accordance with the laws of the State of Georgia. 6 IN WITNESS WHEREOF, the parties hereto have executed this Agreement, in duplicate, as of the day and year first above written. INTERFACE, INC., a Georgia corporation By /s/David T. Hendrix Officer: Sr. V.P. (Title) ATTEST: /s/Raymond S. Willoch Secretary /s/ Ray C. Anderson Ray C. Anderson, Employee /s/ Mary Anne Anderson Lanier Mary Anne Anderson Lanier, Trustee, Owner 7 EX-13 4 PORTIONS OF ANNUAL REPORT Exhibit 13 INTERFACE, INC. AND SUBSIDIARIES 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 3, 1999, 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 1998, Interface, Inc. (the "Company") had net sales and net income of $1.281 billion and $46.4 million (excluding the 1998 restructuring charge), respectively. Including the restructuring charge, net income was $29.8 million. Net sales were made up of sales of floorcovering products (primarily modular and broadloom carpet) and related services ($1.019 billion), fabric sales ($213.3 million) and chemical and specialty product sales ($48.8 million), accounting for 79.5%, 16.7% and 3.8% of total sales, respectively. The Company achieved a compound annual growth rate in its net sales and net income (excluding the 1998 restructuring charge) of 15.3% and 29.6%, respectively, over the five- year period from 1994 to 1998. The Company's business, as well as the commercial interiors market in general, is somewhat cyclical in nature. The Company's strong financial performance in recent years is attributable in part to increased U.S. demand for its products and services, resulting from a recovery in the U.S. commercial office market which began in the mid- 1990's. The commercial interiors market as a whole has experienced decreased demand levels in recent months. A significant sustained downturn in the market could impair the Company's growth. 44 The Company's growth could also be impaired by international developments. Specifically, countries in the Asia-Pacific region have experienced weaknesses in their currency, banking and equity markets. These weaknesses have adversely affected demand for the Company's products. Excluding Australia, sales in the Asia-Pacific region represented only two percent of the Company's 1998 net sales. 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 headcount reduction of approximately 287 salaried and hourly employees and the write-down and disposal of certain assets. The restructuring charge is comprised of $13.0 million of cash expenditures for severance benefits and relocation costs (of which $6.0 million remained unpaid at January 3, 1999 and is included in accrued expenses) and $12.3 million of non-cash charges, primarily for the write-down of impaired assets. The Company anticipates that the restructuring will be completed by the end of the third quarter 1999. The restructuring is expected to yield annual cost savings of approximately $8 million. Further discussion on the restructuring charge appears in the notes to the consolidated financial statements on pages 75-77. RESULTS OF OPERATIONS - ---------------------------------------------------------------------------- Net sales of $1.281 billion during 1998 is the highest level in the Company's history. The following table shows, as a percentage of net sales, certain items included in the Company's consolidated statements of income. 1998 1997 1996 - ------------------------------------------------------------------------- Net sales 100.0% 100.0% 100.0% Cost of sales 66.2 66.6 68.3 - ------------------------------------------------------------------------ Gross profit on sales 33.8 33.4 31.7 Selling, general and administrative expense 24.8 24.8 23.8 Restructuring charge 2.0 - - - ------------------------------------------------------------------------ Operating income 7.0 8.6 7.9 Other expense 3.2 3.2 3.5 - ------------------------------------------------------------------------ Income before taxes on income 3.8 5.4 4.4 Taxes on income 1.5 2.1 1.8 - ------------------------------------------------------------------------ Net income 2.3 3.3 2.6 Preferred stock dividends - - 0.1 - ------------------------------------------------------------------------ Net income applicable to common shareholders 2.3% 3.3% 2.5% ======================================================================== 45 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 Workplace Solutions 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. 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 was 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 Workplace Solutions 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. 46 As a result of the aforementioned factors, the Company's net income (before 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. Fiscal 1997 Compared with Fiscal 1996 - ------------------------------------- The Company's net sales increased $133 million (13.3%) compared with 1996. The increase was attributable to increased sales volume (i) 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 Workplace Solutions services network, (ii) of floorcovering products (in local currency) in Continental Europe and Asia-Pacific and (iii) in the Company's interior fabrics operations due to increased U.S. and foreign demand for and increased market share of its fabric products, as well as the acquisition of Camborne Holdings, Ltd. during the year. These increases were offset somewhat by a weakening of certain key currencies (particularly the Dutch guilder, British pound sterling and Japanese yen) against the U.S. dollar, the Company's reporting currency. Cost of sales as a percentage of sales decreased to 66.6% in 1997 compared to 68.3% in 1996. Decreased manufacturing costs through the Company's mass customization production strategy and its war-on-waste initiative, as well as a shift to higher margin products, were the primary factors fueling the increased manufacturing efficiencies in the Company's floorcovering operations. 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. Additionally, the Company continued to experience improved pricing in its floorcovering operations. These benefits were somewhat offset by the higher cost of sales of the floorcovering contractors in the Workplace Solutions services network. Selling, general and administrative expenses as a percentage of net sales increased to 24.8% in 1997 compared to 23.8% in 1996. The increase was attributable primarily to (i) the continued development of the Workplace Solutions network infrastructure, (ii) consulting and development expenses associated with the Year 2000 compliance initiative, and (iii) increased marketing and sampling expenses in the Company's floorcovering operations associated with the introduction of new products as the Company continues to implement a mass customization strategy in both its domestic and international operations. The increase was somewhat offset by the lower selling, general and administrative ratios of the floorcovering contractors in the Workplace Solutions network. 47 Other expense increased $1.3 million in 1997, due primarily to an increase in the Company's interest expense associated with an increase in bank debt incurred as a result of the Company's acquisitions. The effective tax rate was 38.8% for 1997, compared to 39.2% in 1996. The decrease in the effective rate was primarily due to the effect of an increase 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 increased 42.1% to $37.5 million for fiscal 1997, compared to $26.4 for fiscal 1996. 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 1998, operating activities generated $71.9 million of cash compared with $74.7 million and $55.0 million in 1997 and 1996, respectively. The decrease in 1998 operating cash flows compared with 1997 was primarily caused by (i) a decrease in net income as a result of the restructuring charge and (ii) increased levels of inventory at year-end 1998. During 1998, the Company completed concurrent public offerings of $150 million aggregate principal amount of 7.3% Senior Notes due 2008 and 3.45 million shares of Class A Common Stock. The net proceeds of both offerings of $213.8 million were used to reduce amounts outstanding under the Company's senior credit facility, increase working capital and fund acquisitions. The Company amended its senior credit facility in 1998. The amendments, among other things, (i) eliminated the $120 million term portion of the facility, (ii) increased the revolving credit limit under the facility from $250 million to $300 million, and (iii) eliminated the requirement that the facility be secured by the pledge of the stock of the Company's operating subsidiaries. Further discussion of the credit facility and related borrowings is included in the notes to the consolidated financial statements on pages 66-67. 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, and (iii) cash dividends. For the three years ended January 3, 1999, acquisitions of businesses required $136.3 million, the aggregate additions to property and equipment required cash expenditures of $120.3 million and dividends required $21.5 million. In 1998, the Company adopted a share repurchase program, pursuant to which it is authorized to repurchase up to 2,000,000 shares of Class A Common Stock in the open market over the next two years. During the year, the Company repurchased an aggregate of 175,000 shares of Class A Common Stock under this program, at an average price of 48 $14.49 per share. Subsequent to year-end, the Company has repurchased an additional 793,000 shares of Class A Common Stock at an average price of $9.43 per share. At the end of fiscal 1998, the Company estimated capital expenditure requirements of approximately $35 million (excluding Year 2000 requirements) and had purchase commitments of approximately $7.3 million for 1999. The Company also intends to continue to selectively acquire companies and related product lines that complement its existing product lines and further its ability to provide total interior solutions for its customers. 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 is the case with other companies using computers in their operations, the Company is faced with the task of addressing the Year 2000 issue. The Year 2000 issue arises from the widespread use of computer programs that rely on two-digit codes to perform computations or decision-making functions. The Company has done a comprehensive review of its computer programs to identify the systems that would be affected by the Year 2000 issue. The Company has 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 currently estimates the total cost of modifying its IT Systems to be Year 2000 ready to be approximately $21.4 million. Of such amount, approximately $14 million is attributable to the cost of new hardware and software which will be required in connection with the global consolidation of the Company's management and financial accounting systems. This new equipment and upgraded technology will have a definable value lasting beyond the Year 2000. In these instances, where Year 2000 compliance is ancillary, the Company intends to capitalize and depreciate such costs. The remaining $7.4 million (based on current estimates) will be expensed as incurred. With respect to Non-IT Systems, the Company currently estimates the total cost of the modifications necessary to be Year 2000 ready to be approximately $2 million, although it could be more. The Company intends to fund these costs through operating cash flows. During 1998, the Company expensed approximately $4.6 million in regard to modifications of both IT Systems and Non-IT Systems. To date, the Company has expensed approximately $5.2 million in the aggregate in regard to such modifications. The Company does not separately track its internal costs related to Year 2000 compliance, the majority of which are compensation expenses for employees in its information technology department. 49 With the exception of Asia-Pacific, the Company currently anticipates that the modifications to both its IT Systems and its Non-IT Systems will be completed by the end of August 1999, although it could be later. (Modifications to Non-IT Systems in Asia-Pacific will not be completed until the fourth quarter of 1999). The balance of 1999 will then be available for testing the modifications, as well as for training employees in the use of new hardware and software. The Company has not deferred in any material respect any of its other information technology projects to accommodate its Year 2000 compliance efforts. The Company is still in the process of reviewing its Year 2000 exposure to third party suppliers and customers. Surveys have been sent to critical suppliers and, in certain cases, on-site Year 2000 audits are being performed. The Company's most reasonably likely worst-case Year 2000 scenario is that a key supplier's systems will malfunction and, as a result, the Company will suffer a period of business interruption during which it is unable to meet related obligations to its customers. The Company is currently unaware of any Year 2000 problems faced by any suppliers which are likely to have a material adverse effect on the Company. However, many third parties are reluctant to provide detailed information concerning the status of their Year 2000 readiness, particularly if they have not completed an analysis of their systems. The Company is in the process of developing and implementing contingency plans in the event of supply problems. The principal contingencies under consideration include identifying and qualifying substitute suppliers for key materials, stockpiling certain critical supplies and pursuing long-term supply contracts providing the Company with preferential treatment in the event of shortages. These plans are targeted for completion by the end of the third quarter of 1999. The Company believes that no single customer represents so significant a portion of its revenues that failure on the part of such a customer to plan effectively for Year 2000 would materially impact the Company's financial condition. In addition, the Company believes that the diversity of its customer base minimizes the potential financial impact of such an event. However, if broad customer buying trends are reduced due to Year 2000 issues, the Company's revenues could be adversely affected. There can be no guarantee that the foregoing cost estimates or deadlines will be achieved and actual results could differ from those anticipated. Specific factors that might cause differences include, but are not limited to, the ability to locate and correct all relevant computer codes, and the ability of suppliers, customers and other companies on which the Company relies to modify or convert their systems to be Year 2000 compliant. This risk is particularly acute with respect to non-U.S. third parties, as it is widely reported that many non-U.S. businesses and governments are not addressing their Year 2000 issues on a timely basis. 50 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. Introduction of 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 costs could 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 1, 1999, 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. 51 The Company employs derivative financial instruments as risk management tools and not for speculative or trading purposes. The Company monitors the use of derivative financial instruments through the use of objective measurable systems, well-defined market and credit risk limits, and timely reports to senior management according to prescribed guidelines. The Company has established strict counterparty credit guidelines and only enters into transactions with financial institutions with a rating of investment grade or better. As a result, the Company considers the risk of counterparty default to be minimal. Interest Rate Market Risk Exposure. Changes in interest rates ---------------------------------- affect the interest paid on certain of the Company's debt. To mitigate the impact of fluctuations in interest rates, management of the Company has developed and implemented a policy to maintain the percentage of fixed and variable rate debt within certain parameters. The Company maintains the fixed/variable rate mix within these parameters either by borrowing on a fixed-rate basis or entering into interest rate swap transactions. In the interest rate swaps, the Company agrees to exchange, at specified intervals, the difference between fixed and variable interest amounts calculated by reference to an agreed-upon notional principal linked to LIBOR. The interest rate swap agreements generally have maturity dates ranging from fifteen to twenty-four months. At 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, compared to $64.5 million at December 28, 1997. The Company anticipates that for fiscal 1999 it will utilize swap agreements or other derivative financial instruments to convert variable rate to fixed rate debt in amounts not materially different from those converted in past fiscal years. Foreign Currency Exchange Market Risk Exposure. A significant ---------------------------------------------- portion of the Company's operations consists of manufacturing and sales activities in foreign jurisdictions. The Company manufactures its products in the U.S., Canada, England, Northern Ireland, the Netherlands, Australia and Thailand, and sells its products in more than 100 countries. As a result, the Company's financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which the Company distributes its products. The Company's operating results are exposed to changes in exchange rates between the U.S. dollar and many other currencies, including the Dutch guilder, British pound sterling, German mark, French franc, Canadian dollar, Australian dollar, Thai baht, Japanese yen, and, beginning in 1999, the euro. When the U.S. dollar strengthens against a foreign currency, the value of anticipated sales in those currencies decreases, and vice-versa. Additionally, to the extent the Company's foreign operations with functional currencies other than the U.S. dollar transact business in countries other than the 52 U.S., exchange rate changes between two foreign currencies could ultimately impact the Company. Finally, because the Company reports in U.S. dollars on a consolidated basis, foreign currency exchange fluctuations can have a translation impact on the Company's financial position. To mitigate the short-term effect of changes in currency exchange rates on the Company's sales denominated in foreign currencies, the Company regularly hedges by entering into currency swap contracts to hedge certain firm sales commitments denominated in foreign currencies. In these currency swap agreements, the Company and a counterparty financial institution exchange equal initial principal amounts of two currencies at the spot exchange rate. Over the term of the swap contract, the Company and the counterparty exchange interest payments in their swapped currencies. At maturity, the principal amount is reswapped, at the contractual exchange rate. At January 3, 1999, the contracts served to hedge firmly committed sales in Dutch guilders and Japanese yen. The contracts generally have maturity dates of fifteen to twenty four months. At January 3, 1999, the Company had approximately $10.5 million (notional amount) of foreign currency hedge contracts outstanding, as compared to $14.5 million at December 28, 1997. The Company expects to hedge a comparable notional amount for fiscal 1999. The Company, as of January 3, 1999, recognized a $3.5 million decrease in its foreign currency translation adjustment account compared to December 28, 1997, 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 continental Europe. Sensitivity Analysis - -------------------- For purposes of specific risk analysis, the Company uses sensitivity analysis to measure the impact that market risk may have on the fair values of the Company's market sensitive instruments. To perform sensitivity analysis, the Company assesses the risk of loss in fair values associated with the impact of hypothetical changes in interest rates and foreign currency exchange rates on market- sensitive instruments. The market value of instruments affected by interest rate and foreign currency exchange rate risk is computed based on the present value of future cash flows as impacted by the changes in the rates attributable to the market risk being measured. The discount rates used for the present value computations were selected based on market interest and foreign currency exchange rates in effect at January 3, 1999. The market values that result from these computations are compared with the market values of these financial instruments at January 3, 1999. The differences in this comparison are the hypothetical gains or losses associated with each type of risk. 53 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 decrease of $15.7 million. Conversely, a 150 basis point decrease in interest rates would result in a net increase in the market value of the Company's fixed rate long-term debt of $25.9 million. Foreign Currency Exchange Rate Risk. As of January 3, 1999, a 10% ------------------------------------ movement in the levels of foreign currency exchange rates against the U.S. dollar with all other variables held constant would result in a decrease in the fair value of the Company's financial instruments of $1.3 million or an increase in the fair value of the Company's financial instruments of $1.1 million. 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 - --------------------------------------------------------------------------- During 1998, the Company adopted SFAS 130, "Reporting Comprehensive Income." This statement establishes rules for the reporting of comprehensive income and its components. Comprehensive income consists of net income, the foreign currency translation adjustment and the minimum pension liability adjustment. The adoption of SFAS 130 had no impact on total shareholders' equity. During 1998, the Company adopted SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS 131 establishes standards for the way that public business enterprises report information about operating segments in their financial statements. The standard defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company's chief operating decision maker aggregates operating segments based on the type of products produced by the segment. Based on the quantitative thresholds specified in SFAS 131, the Company has determined that it has two reportable segments. The two reportable segments are Floorcovering Products/Services and Interior Fabrics. The Floorcovering Products/Services segment manufactures, installs and services commercial, modular and broadloom carpet while the Interior Fabrics segment manufactures panel and upholstery fabrics. 54 During 1998, the Company adopted SFAS 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." This statement revised employers' disclosures about pension and other postretirement benefit plans but does not change measurement or recognition of those plans. Also, SFAS 132 requires additional information on changes in the benefit obligations and fair value of plan assets. 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 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company currently plans to adopt SFAS 133 on January 3, 2000. 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 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 98-5, "Reporting on the Costs of Start-up Activities." This SOP requires that the costs of start-up activities, including organization costs, be expensed as incurred. The guidance requires that the initial application should be reported as the cumulative effect of a change in accounting principle. SOP 98-5 is effective for fiscal years beginning after December 15, 1998. The Company is planning to adopt the provision of SOP 98-5 in fiscal year 1999. The Company is taking steps to meet the requirements of SOP 98-5 and expects that it will not have a material impact on the financial position and results of operations of the Company. 55 INTERFACE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME Consolidated Statements of Income
Fiscal Year Ended -------------------------------------------- (in thousands, except share data) 1998 1997 1996 - -------------------------------------------------------------------------------------------- Net sales $1,281,129 $1,135,290 $1,002,076 Cost of sales 847,660 755,734 684,455 - -------------------------------------------------------------------------------------------- Gross profit on sales 433,469 379,556 317,621 Selling, general and administrative expenses 318,495 281,755 238,932 Restructuring charge 25,283 - - Operating income 89,691 97,801 78,689 - -------------------------------------------------------------------------------------------- Other expense Interest expense 36,705 35,038 32,772 Other 3,875 1,492 2,490 - -------------------------------------------------------------------------------------------- Total other expense 40,580 36,530 35,262 - -------------------------------------------------------------------------------------------- Income before taxes on income 49,111 61,271 43,427 Taxes on income 19,288 23,757 17,032 - -------------------------------------------------------------------------------------------- Net income 29,823 37,514 26,395 Preferred stock dividends - - 1,678 - -------------------------------------------------------------------------------------------- Net income applicable to common shareholders $ 29,823 $ 37,514 $ 24,717 ============================================================================================ Earnings per common share Basic $ 0.58 $ 0.79 $ 0.62 ============================================================================================ Diluted $ 0.56 $ 0.76 $ 0.60 ============================================================================================
Consolidated Statements of Comprehensive Income
Fiscal Year Ended ----------------------------------------- (in thousands) 1998 1997 1996 - ------------------------------------------------------------------------------------------ Net income $29,823 $ 37,514 $ 26,395 Other comprehensive income Foreign currency translation adjustment (3,513) (25,098) (6,612) Minimum pension liability adjustment (6,399) - - - ------------------------------------------------------------------------------------------ Comprehensive income $19,911 $ 12,416 $ 19,783 ========================================================================================== See accompanying notes to consolidated financial statements. Earnings per share have been restated to reflect a two-for-one stock split in June 1998.
56 INTERFACE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(in thousands, except share data) 1998 1997 - ---------------------------------------------------------------------------- ASSETS Current assets Cash $ 9,910 $ 10,212 Accounts receivable 194,803 177,977 Inventories 199,338 157,630 Prepaid expenses 26,607 24,265 Deferred income taxes 7,866 5,156 - ----------------------------------------------------------------------------- Total current assets 438,524 375,240 Property and equipment 245,312 228,781 Miscellaneous 50,059 46,945 Excess of cost over net assets acquired 302,969 278,597 - ----------------------------------------------------------------------------- $1,036,864 $ 929,563 ============================================================================= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Notes payable $ 26,855 $ 22,264 Accounts payable 80,154 79,279 Accrued expenses 115,317 87,543 Current maturities of long-term debt 2,786 2,751 - ----------------------------------------------------------------------------- Total current liabilities 225,112 191,837 Long-term debt, less current maturities 112,651 264,499 Senior notes 150,000 - Senior subordinated notes 125,000 125,000 Deferred income taxes 23,482 28,873 - ----------------------------------------------------------------------------- Total liabilities 636,245 610,209 Minority interest 1,795 2,989 Shareholders' equity Preferred stock - - Common stock 5,983 2,776 Additional paid-in capital 231,959 161,584 Retained earnings 219,230 197,906 Foreign currency translation adjustment (31,668) (28,155) Minimum pension liability adjustment (6,399) - Treasury stock, 7,375,000 Class A shares, at cost (20,281) (17,746) - ----------------------------------------------------------------------------- Total shareholders' equity 398,824 316,365 - ----------------------------------------------------------------------------- $1,036,864 $ 929,563 =============================================================================
See accompanying notes to consolidated financial statements. 57 INTERFACE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW
Fiscal Year Ended ------------------------------------------ (in thousands) 1998 1997 1996 - ---------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 29,823 $ 37,514 $ 26,395 Adjustments to reconcile net income to cash provided by operating activities Depreciation and amortization 42,586 38,605 35,305 Restructuring charge 12,265 - - Deferred income taxes (8,362) 7,849 5,438 Working capital changes Accounts receivable 4,972 (16,386) (17,465) Inventories (21,296) (16,233) (2,199) Prepaid expenses 3,235 (2,273) (6,870) Accounts payable and accrued expenses 8,677 25,647 14,419 - ---------------------------------------------------------------------------------------------- 71,900 74,723 55,023 - ---------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Capital expenditures (45,227) (38,654) (36,436) Acquisitions of businesses (71,504) (34,647) (30,151) Other (16,485) (17,902) (11,425) - ---------------------------------------------------------------------------------------------- (133,216) (91,203) (78,012) - ---------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Borrowings on long-term debt 198,080 153,624 154,224 Principal repayments on long-term debt (343,607) (142,884) (107,561) Proceeds from issuance of senior notes 146,991 - - Expenditures under share repurchase program (2,535) - - Borrowings (repayments) under lines of credit (684) 7,617 (20,102) Proceeds from issuance of common stock 70,630 6,414 2,916 Dividends paid (8,499) (6,436) (6,606) - ---------------------------------------------------------------------------------------------- 60,376 18,335 22,871 - ---------------------------------------------------------------------------------------------- Net cash provided (used) by operating, investing, and financing activities (940) 1,855 (118) Effect of exchange rate changes on cash 638 (405) 130 - ---------------------------------------------------------------------------------------------- CASH Net increase (decrease) (302) 1,450 12 Balance, beginning of year 10,212 8,762 8,750 - ---------------------------------------------------------------------------------------------- Balance, end of year $ 9,910 $ 10,212 $ 8,762 ==============================================================================================
See accompanying notes to consolidated financial statements. 58 INTERFACE, INC. AND SUBSIDIARIES 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, and provides chemicals used in various rubber and plastic products. Additionally, the Company licenses Intersept(r), a proprietary antimicrobial used in a host of interior finishes; sponsors the Envirosense(r) Consortium in its mission to address workplace environmental issues; and markets low-profile and multiple plenum raised/access flooring systems. 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 $1.0 million, $0.4 million, and $0.1 million for the years ended 1998, 1997, and 1996, respectively. Depreciation expense amounted to approximately 59 $31.9 million, $25.7 million, and $25.0 million for the years ended 1998, 1997, and 1996, respectively. 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 flows 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 $59.7 million and $51.5 million at January 3, 1999 and December 28, 1997, 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 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. 60 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 3, 1999 and December 28, 1997, checks issued against future deposits totaled approximately $10.1 million and $12.8 million, respectively. Cash payments for interest amounted to approximately $30.7 million, $33.8 million, and $27.8 million for the years ended 1998, 1997, and 1996, respectively. Income tax payments amounted to approximately $17.3 million, $18.2 million, and $9.8 million for the years ended 1998, 1997, and 1996, 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, which are not material, 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 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 also are deferred and are recognized in income or as adjustments of carrying amounts when the hedged transaction occurs. 61 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 "1998," "1997," and "1996" mean the fiscal years ended January 3, 1999, December 28, 1997, and December 29, 1996, respectively. Fiscal year 1998 was comprised of 53 weeks. Recent Accounting Pronouncements - -------------------------------- During 1998, the Company adopted SFAS 130, "Reporting Comprehensive Income." This statement establishes rules for the reporting of comprehensive income and its components. Comprehensive income consists of net income, the foreign currency translation adjustment and the minimum pension liability adjustment. The adoption of SFAS 130 had no impact on total shareholders' equity. 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 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company currently plans to adopt SFAS 133 on January 3, 2000. 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 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 98-5, "Reporting on the Costs of Start-up Activities." This SOP requires that the costs of start-up activities, including organization costs, be expensed as incurred. The guidance requires that the initial application should be reported as the cumulative effect of a change in accounting principle. SOP 98-5 is effective for fiscal years beginning after December 15, 1998. The Company is planning to adopt the provision of SOP 98-5 in fiscal year 1999. The Company is taking steps to meet the requirements of SOP 98-5 and expects that it will not have a material impact on the financial position and results of operations of the Company. 62 BUSINESS ACQUISITIONS AND DIVESTITURES - --------------------------------------------------------------------------- On December 30, 1997, the Company completed the acquisition of the European carpet business of Readicut International plc ("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., a distributor of private label carpet. 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 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 - ------------------------------------------------------------- The amounts for 1997 are based upon certain assumptions and estimates and do not reflect any benefit from economies which might be 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, a leading manufacturer of needle punch carpet. The Company accounts for its interest in the joint venture using the equity method of accounting. During 1998, the Company 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 Scan-Lock A/S located in Denmark and 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 63 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. During 1997, the Company sold certain assets related to the commercial manufacture of zinc diacrylate, a chemical compound used in the production of golf balls, for $14.1 million in cash. An immaterial gain was realized on the sale. The Company generated 1997 sales of $7.9 million and operating income of $1.1 million related to the manufacture of this chemical compound. During 1997, the Company acquired 100% of the outstanding capital stock of five floorcovering contractors located in the U.S. and one floorcovering contractor located in Queensland, Australia. These contractors are engaged primarily in the installation of commercial floorcoverings. As consideration, the Company issued common stock valued at approximately $3.5 million and paid $11.1 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 $17.5 million and is being amortized over 25 years. During 1997, the Company also acquired 100% of the outstanding capital stock of Camborne Holdings, Ltd., a manufacturer of interior fabrics based in West Yorkshire, U.K., for approximately $19.9 million, which was comprised of $17.1 million in cash and common stock valued at approximately $2.8 million. The transaction was accounted for as a purchase. The results of operations of Camborne have been included within the consolidated financial statements since the acquisition date. The excess of the purchase price over the fair value of the assets was approximately $16.8 million and is being amortized over 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 3, 1999 and December 28, 1997 amounted to $45.6 million and $49.6 million, respectively. 64 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 3, 1999 and December 28, 1997, the allowance for bad debts amounted to approximately $7.8 million and $7.4 million, respectively, for all accounts receivable of the Company. INVENTORIES - --------------------------------------------------------------------------- Inventories are summarized as follows: (in thousands) 1998 1997 - --------------------------------------------------------------- Finished goods $123,941 $ 91,016 Work-in-process 31,908 29,094 Raw materials 43,489 37,520 - --------------------------------------------------------------- $199,338 $ 157,630 =============================================================== PROPERTY AND EQUIPMENT - -------------------------------------------------------------------------- Property and equipment consisted of the following: (in thousands) 1998 1997 - --------------------------------------------------------------- Land $ 14,669 $ 12,485 Buildings 136,105 130,450 Equipment 313,039 264,656 Construction-in-progress 16,813 6,890 - --------------------------------------------------------------- 480,626 414,481 Accumulated depreciation (235,314) (185,700) - --------------------------------------------------------------- $ 245,312 $ 228,781 =============================================================== The estimated cost to complete construction in progress for which the Company was committed at January 3, 1999 was approximately $7.3 million. 65 ACCRUED EXPENSES - --------------------------------------------------------------------------- Accrued expenses are summarized as follows: (in thousands) 1998 1997 - ------------------------------------------------------------------- Taxes $ 22,210 $ 21,482 Compensation 40,252 25,671 Interest 5,100 3,813 Other 47,755 36,577 - ------------------------------------------------------------------- $ 115,317 $ 87,543 =================================================================== BORROWINGS - ---------------------------------------------------------------------------- Long-Term Debt Long-term debt consisted of the following:
Interest rate (in thousands) at January 3, 1999 1998 1997 - --------------------------------------------------------------------------------------------- Senior term loans - $ - $ 100,000 Revolving credit facilities U.S. dollar 5.6% 45,000 116,100 Japanese yen 1.3% 8,957 7,669 British pound sterling 7.1% 41,478 20,028 Dutch guilder 4.2% 5,318 2,504 Other (3.0 - 7.8%) 14,684 20,949 - --------------------------------------------------------------------------------------------- Total long-term debt 115,437 267,250 Less current maturities (2,786) (2,751) - --------------------------------------------------------------------------------------------- $112,651 $264,499 =============================================================================================
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 3, 1999 are as follows: 1999-$2,786; 2000-$2,781; 2001-$637; 2002-$7,010; 2003-$101,238; 2004 and beyond-$985. 66 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 3, 1999, the estimated fair value of these notes was approximately $152.9 million. 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 3, 1999 and December 28, 1997, the estimated fair value of these notes was approximately $130.5 million and $132.5 million, respectively. Short-term Borrowings - --------------------- In addition to the amounts available under the revolving credit facility described above, the Company maintains approximately $60.5 million in complementary revolving lines of credit through several of its subsidiaries. Interest is generally charged at rates from 5% to 8%. The weighted average interest rate for 1998 related to the complimentary lines was approximately 7.8%. Approximately $26.8 million and $22.3 million was outstanding under these lines at January 3, 1999 and December 28, 1997, 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 67 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 the year, 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. 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. 68 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 3, 1999, the outstanding Class B shares constituted approximately 10.4% 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 $.165 per share for the year ended 1998, $.135 per share for the year ended 1997 and $.1225 per share for the year ended 1996. 69 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. Share amounts presented in the Consolidated Balance Sheets and the table of Common Shareholders' Equity Activity presented below reflect 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 is authorized to repurchase up to 2,000,000 shares of Class A Common Stock in the open market through May 19, 2000. During 1998, the Company repurchased 175,000 shares of Class A Common Stock under this program, at prices ranging from $12.86 to $16.78 per share. 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 Decem- ber 31, 1995 19,044 $1,903 2,989 $300 $ 96,863 $147,039 $ - $ 3,555 Net income - - - - - 26,395 - - Conversion of Common Stock 14 2 (14) (2) - - - - Stock issuance under employee plans, inclusive of tax benefit of $70 224 22 - - 2,964 - - - Other issuances of Common Stock 2,732 275 - - 19,464 - - - Conversion of Series A Preferred Stock 358 36 - - 5,266 - - - Cash dividends paid - - - - - (6,606) - - Foreign currency translation adjustment - - - - - - - (6,612) - --------------------------------------------------------------------------------------------------------------------- Balance at Decem- ber 29, 1996 22,372 $2,238 2,975 $298 $124,557 $166,828 $ - $(3,057) - ---------------------------------------------------------------------------------------------------------------------
70
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 Decem- ber 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 Foreign currency - - - - - (6,436) - - 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) - ---------------------------------------------------------------------------------------------------------------------
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 71 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:
Number Weighted average of shares exercise price - -------------------------------------------------------------------------------- Outstanding at December 31, 1995 4,070,000 $ 6.59 Granted 616,000 6.74 Exercised (448,000) 6.52 Forfeited or canceled (224,000) 6.88 - -------------------------------------------------------------------------------- Outstanding at December 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 December 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 January 3, 1999 3,404,000 $ 8.75 ================================================================================ Number Weighted average Options exercisable of shares exercise price - -------------------------------------------------------------------------------- January 3, 1999 1,553,000 $ 6.87 December 28, 1997 1,490,000 6.61 - --------------------------------------------------------------------------------
The weighted average fair value of options, calculated using the Black-Scholes option pricing model, granted during 1998 and 1997 is $5.15 and $9.29 per share, respectively. The weighted average remaining life of options outstanding at January 3, 1999 was 7.5 years. The range of exercise prices was $5.38 to $19.13. 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 1998 and 1997. If the Company 72 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) 1998 1997 1996 - --------------------------------------------------------------------------- Net income applicable to common shareholders as reported $29,823 $37,514 $24,717 pro forma 28,366 36,533 24,202 - --------------------------------------------------------------------------- Basic earnings per share as reported $ 0.58 $ 0.79 $ .62 pro forma 0.55 0.77 .60 - --------------------------------------------------------------------------- Diluted earnings per share as reported $ 0.56 $ 0.76 $ .60 pro forma 0.53 0.74 .59 - ---------------------------------------------------------------------------
The fair value of stock options used to compute pro forma net income applicable to common shareholders 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 1998 and 1997: Dividend yield of 1.9% in 1998 and .71% in 1997; expected volatility of 30% in 1998 and 35% in 1997; a risk-free interest rate of 5.46% in 1998 and 6.32% in 1997; and an expected option life of 6.0 years in both 1998 and 1997. Restricted Stock Awards - ----------------------- During fiscal years 1998 and 1997, restricted stock awards were granted for 203,772 and 407,512 shares of Class B Common Stock, respectively. These shares vest with respect to each employee over a nine-year period from 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 or in the event of a change in control of the Company. Compensation expense relating to these grants was recorded in the amount of approximately $294,000 and $390,000 during 1998 and 1997, respectively. As of January 3, 1999, no restricted shares of Class B Common Stock were issued on vested grants. During fiscal 1998, stock awards for 26,000 shares were canceled. At January 3, 1999, stock awards for 585,284 shares of Class B Common Stock remained outstanding. 73 EARNINGS PER SHARE - --------------------------------------------------------------------------- Basic earnings per share is computed by dividing net income available to common shareholders 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. Basic earnings per share are based upon 51,808,155, 47,415,836, and 40,120,694 shares for the years ended 1998, 1997, and 1996, respectively. 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. Diluted earnings per share is based upon 53,735,085, 49,302,028, and 41,314,210 shares for the years ended 1998, 1997, and 1996, respectively. For purposes of computing earnings and dividends per common share, the Company is treating as treasury stock (and therefore not outstanding) the 7.2 million Class A shares that are owned by a wholly owned subsidiary. The following is a reconciliation from basic earnings per share to diluted earnings per share for each of the last three years:
Net Income Applicable to Common Average Shares Earnings (in thousands, except earnings per share) Shareholders Outstanding Per Share - ------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------ 1996 Basic $24,717 40,121 $.62 Effect of dilution: Contingently issuable shares 341 Stock options 512 Convertible debt 153 340 - ------------------------------------------------------------------------------------------------ Diluted $24,870 41,314 $.60 - ------------------------------------------------------------------------------------------------
74 RESTRUCTURING CHARGE - --------------------------------------------------------------------------- During 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 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. The completion of all aspects of the restructuring activities is expected by the end of the third quarter 1999. Specific elements of the restructuring activities and related costs 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 are being transferred to manufacturing locations in Thailand and Australia. Presently, the Company is involved in negotiations with its China partner as to the terms and financial considerations of its decision to abandon the manufacturing facility and related miscellaneous assets associated with the operations in Shanghai. A charge in the amount of approximately $7.2 million has been 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 have been completely written off as future economic benefit is unlikely. Substantially all employees of the Shanghai operation have been given notice of termination. The Company has underachieved in Japan throughout the 1990's. Poor economic conditions have resulted in an eroding base of business and the Company has 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 commodity distributor relationships, most of whom are 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 will focus on selling high-end designer specified products targeted towards 75 a multinational customer base. The headcount reduction in Japan was completed by year-end. 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. have translated into slowing demand for the Company's products. Additionally, the Company has made several recent 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 will be closed and certain property and equipment located at this facility has been written off in anticipation of this action. The remaining operations will be transferred to a nearby facility. Additionally, modification of activities at the Company's Craigavon facility will result in the termination or relocation of other operations. The above noted actions result 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 is comprised of the following initiatives. The Company will cease manufacturing operations in Greensboro, North Carolina and transfer certain personnel and operations to an existing facility in Dudley, Massachusetts. Additionally, European fabric operations are being restructured by integrating the Camborne, Guilford, and Glenside operating units into a single manufacturing facility. Finally, the Company will abandon 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 in response to recent poor economic conditions in Asia. The aforementioned restructuring plans result in significant headcount reductions and abandonment of property, equipment and inventory, and require the Company to incur certain relocation costs. 76 A summary of the restructuring activities is presented below:
Asia/Pacific Europe US 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 Relocation costs 343 - - - - 400 343 400 743 Other costs 2,837 - - 27 - - 2,837 27 2,864 - -------------------------------------------------------------------------------------------------------------------------- $14,417 $ - $5,947 $1,669 $ 1,600 $ 1,650 $ 21,964 $3,319 $25,283 ==========================================================================================================================
Termination benefits of $7.6 million, primarily related to severance costs, are a result of an aggregate reduction of 287 employees. The staff reductions are expected to be as follows:
Asia/Pacific Europe US Totals ------------------------------------------------------------------------------------- Floor- Floor- Floor- Floor- Grand (in thousands) 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 of January 3, 1999, 29 employees were terminated while remaining reductions are expected to occur during the first and second quarters of 1999. The charge for termination benefits and other costs to exit activities have been reflected as a separately stated charge against operating income. The restructuring charge is comprised of $13.0 million of cash expenditures for severance benefits and relocation costs and $12.3 million of non-cash charges, primarily for the write- down of impaired assets. At January 3, 1999, $6.0 million of the restructuring charge remains unpaid and is included in accrued expenses. This was comprised of $3.7 million for termination benefits and $2.3 million for other costs to exit activities. 77 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) 1998 1997 1996 - --------------------------------------------------------------- Current: Federal $13,769 $ 5,569 $ 5,968 Foreign 8,460 9,052 3,284 State 3,070 1,192 2,418 - --------------------------------------------------------------- 25,299 15,813 11,670 - --------------------------------------------------------------- Deferred (reduction): Federal (3,032) 4,675 818 Foreign (2,171) 2,173 5,770 State (808) 1,096 (1,226) - --------------------------------------------------------------- (6,011) 7,944 5,362 - --------------------------------------------------------------- $19,288 $23,757 $17,032 =============================================================== Income before taxes on income consisted of the following: Fiscal Year Ended ------------------------------ (in thousands) 1998 1997 1996 - -------------------------------------------------------------- U.S. operations $30,353 $29,134 $17,186 Foreign operations 18,757 32,137 26,241 - -------------------------------------------------------------- $49,110 $61,271 $43,427 ============================================================== Deferred income taxes for the years ended January 3, 1999 and December 28, 1997, 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 3, 1999, the Company's foreign subsidiaries had approximately $1.5 million in net operating losses available for an unlimited carryforward period. Additionally, the Company had approximately $35 million in state net operating losses expiring at various times through 2013. 78 The sources of the temporary differences and their effect on the net deferred tax liability are as follows:
1998 1997 --------------------- ------------------- (in thousands) Assets Liabilities Assets Liabilities - ------------------------------------------------------------------------------------------- Basis difference of property and equipment $ - $26,174 $ - $23,886 Net operating loss carryforwards 2,200 - 2,853 - Other differences in bases of assets and liabilities 9,893 - - 525 - ------------------------------------------------------------------------------------------- $12,093 $26,174 $2,853 $24,411 ===========================================================================================
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 ---------------------- 1998 1997 1996 - ---------------------------------------------------------------------------------- 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 3.0 2.4 1.8 Amortization of excess of cost over net assets acquired and related purchase accounting adjustments 5.8 4.7 5.1 Foreign and U.S. tax effects attributable to foreign operations (3.2) (2.2) (2.1) Other (1.3) (1.1) (0.6) - ---------------------------------------------------------------------------------- Taxes on income at effective rates 39.3% 38.8% 39.2% ==================================================================================
Undistributed earnings of the Company's foreign subsidiaries amounted to approximately $63 million at January 3, 1999. 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 $2.0 million would be payable upon remittance of all previously unremitted earnings at January 3, 1999. 79 HEDGING TRANSACTIONS AND DERIVATIVE FINANCIAL INSTRUMENTS - --------------------------------------------------------------------------- The Company employs 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 are subject to fluctuations in value, such fluctuations are generally offset by the fluctuations in values of the underlying exposures being hedged. The Company does not hold or issue derivative financial instruments for 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 of investment grade or better. As a result, the Company considers the risk of counterparty default to be minimal. Interest Rate Management - ------------------------ 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 enters into interest rate swap agreements, which maintain the fixed/variable mix within these defined parameters. In these swaps, the Company agrees to exchange, at specified intervals, the difference between fixed and variable interest amounts calculated by reference to an agreed-upon notional principal linked to LIBOR. Any differences paid or received on interest rate swap agreements are recognized as adjustments to interest expense over the life of each swap, thereby adjusting the effective interest rate on the underlying obligation. At January 3, 1999 and December 28, 1997, the Company had utilized interest rate swap agreements to effectively convert approximately $43.7 million and $64.5 million, respectively, of variable rate debt to fixed rate debt. The weighted average rate on these borrowings was 7.8% at January 3, 1999 and 6.6% at December 28, 1997. Foreign Currency Exchange Rate Management - ----------------------------------------- The purpose of the Company's foreign currency hedging activities is to reduce the risk that the eventual local currency inflows resulting from sales to foreign customers will be adversely affected by changes in exchange rates. The Company enters into currency swap contracts to hedge certain firm sales commitments denominated in foreign currencies. Net gains and losses are deferred and recognized in income in the same period as the hedged transaction. Net deferred gains/ losses from hedging anticipated but not yet firmly committed transactions were not material at January 3, 1999 and December 28, 1997. The contracts served to hedge firmly committed Dutch guilder and Japanese yen revenues. The interest rate and currency swap agreements have maturity dates ranging from fifteen to twenty-four months. 80 The estimated fair values of derivatives used to hedge or modify the Company's risks will 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 for 1998 shown within the table under foreign currency management represent contracts under which the Company is required to deliver Dutch guilder currency at dates in the future. The amounts for 1997 represent contracts under which the Company was required to deliver Japanese yen and Dutch guilder currency at dates subsequent to December 28, 1997.
1998 1997 ---------------------- ---------------------- Notional Effect on Notional Effect on (in thousands) Amounts Fair Values Amounts Fair Values - ------------------------------------------------------------------------------------ Interest rate management Swap agreements $43,700 $ (69) $64,500 $(319) Foreign currency management Swap agreements $10,500 $(1,414) $14,500 $(751) - ------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES - ---------------------------------------------------------------------------- The Company leases certain marketing, production and distribution facilities and equipment. At January 3, 1999, 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) - ----------------------------- 1999 $13,075 2000 11,898 2001 9,611 2002 8,303 2003 6,513 Thereafter 28,830 - -------------------------- $78,230 ========================== Rental expense amounted to approximately $17.1 million, $20.7 million, and $16.2 million for the fiscal years ended 1998, 1997, and 1996, respectively. 81 EMPLOYEE BENEFIT PLANS - --------------------------------------------------------------------------- The Company and its subsidiaries have trusteed defined benefit retirement plans ("Plans") which cover substantially all of their employees except those of Interface Interior Fabrics, Inc. ("IIF"). The benefits are generally based on years of service and the employee's average monthly compensation. Pension expense was $4.2 million for the year ended 1998, pension benefit was $0.1 million for the year ended 1997 and pension expense was $1.3 million for the year ended 1996. 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 U.S. employees with one or more years of service, except for IIF, which has a separate plan. Effective October 1, 1996, all existing 401(k) plans of the Company's subsidiaries, except for IIF, were merged into one plan, "The Interface, Inc. Savings and Investment Plan and Trust." Effective January 1, 1999 IIF merged its plan into "The Interface, Inc. Savings and Investment Plan and Trust." 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. Approximately 72% of eligible employees were enrolled in the 401(k) Plans as of January 3, 1999. The Company's matching contributions are funded monthly and totaled approximately $1.6 million for the years ended 1998 and 1997, and $1.1 million for the year ended 1996. The Company's discretionary contributions totaled $3.5 million, $0.9 million, and $0.4 million for the years ended 1998, 1997, and 1996, 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 $2.8 million which was invested entirely in cash at January 3, 1999. 82 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 (amounts in thousands, except for weighted average assumptions).
Fiscal Year Ended ------------------------- 1998 1997 - -------------------------------------------------------------------------------- Change in benefit obligation Benefit obligation, beginning of year $ 76,744 $67,019 Service cost 3,010 2,156 Interest cost 6,851 5,187 Benefits paid (2,245) (2,586) Actuarial loss 18,759 8,850 Member contributions 1,312 760 Acquisition 16,523 - Curtailment - (2,565) Settlement (7,119) - Currency translation adjustment 854 (2,077) - -------------------------------------------------------------------------------- Benefit obligation, end of year $114,689 $76,744 ================================================================================ Change in plan assets Plan assets, beginning of year $ 79,879 $72,951 Actual return on assets 10,294 8,921 Company contributions 2,751 2,531 Member contributions 1,312 760 Benefits paid (2,245) (2,586) Administration expenses (586) (167) Acquisition 21,046 - Settlement (7,119) - Benefits paid due to excess assets (607) - Currency translation adjustment 846 (2,531) - -------------------------------------------------------------------------------- Plan assets, end of year $105,571 $79,879 ================================================================================ 1998 1997 - -------------------------------------------------------------------------------- Reconciliation to Balance Sheet Funded status $ (9,117) $ 3,135 Unrecognized actuarial loss 13,905 (1,653) Unrecognized prior service cost 275 320 Unrecognized transition adjustment 1,159 1,240 - -------------------------------------------------------------------------------- Net amount recognized $ 6,222 $ 3,042 ================================================================================
83
Fiscal Year Ended ------------------- 1998 1997 - --------------------------------------------------------------------------------- Amounts recognized in the consolidated balance sheets Prepaid benefit cost $ 6,222 $3,042 Accrued benefit liability (6,399) - Accumulated other comprehensive income 6,399 - - --------------------------------------------------------------------------------- Net amount recognized $ 6,222 $3,042 ================================================================================= Weighted average assumptions Discount rate 7.2% 7.4% Expected return on plan assets 7.6% 7.3% Rate of compensation 4.8% 4.1% - --------------------------------------------------------------------------------- Components of net periodic benefit cost Service cost $ 3,010 $2,156 Interest cost 6,851 5,187 Expected return on plan assets (7,725) (5,798) Amortization of prior service costs 43 (25) Recognized actuarial loss - (86) Amortization of transition obligation 151 153 Curtailment - (1,713) Settlement 1,859 - - --------------------------------------------------------------------------------- Net periodic benefit cost $ 4,189 $ (126) =================================================================================
The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for the pension plan with accumulated benefit obligations in excess of plan assets was $93.1 million, $89.5 million, and $83.8 million, respectively, as of January 3, 1999. 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 it is administered by the Compensation Committee, which has full discretion in choosing participants and the 84 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 (amounts in thousands, except for weighted average assumptions).
Fiscal Year Ended ----------------- 1998 1997 - ------------------------------------------------------------ Change in benefit obligation Benefit obligation, beginning of year $7,215 $6,765 Service cost 289 268 Interest cost 563 526 Benefits paid (344) (344) - ----------------------------------------------------------- Benefit obligation, end of year $7,723 $7,215 ============================================================ Weighted average assumptions Discount rate 8% 8% Rate of compensation 5% 5% - ----------------------------------------------------------- Components of net periodic benefit cost Service cost $ 289 $ 268 Interest cost 563 526 Amortization of transition obligation 259 259 - ----------------------------------------------------------- Net periodic benefit cost $1,111 $1,053 ===========================================================
Amounts recognized as SCP liabilities at January 3, 1999 and December 28, 1997 were $4.4 million and $4.2 million, respectively. SEGMENT INFORMATION - --------------------------------------------------------------------------- During 1998, the Company adopted SFAS 131 which establishes standards for the way that public business enterprises report information about operating segments in their financial statements. The standard defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company's chief operating decision maker aggregates operating segments based on the type of products 85 produced by the segment. Based on the quantitative thresholds specified in SFAS 131, the Company has determined that it has two reportable segments. The two reportable segments are Floorcovering Products/ Services and Interior Fabrics. The Floorcovering Products/Services segment manufactures, installs and services commercial, modular and broadloom carpet 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. 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 amounts, which are eliminated in consolidation. Segment Disclosures - ------------------- Summary information by segment follows:
Floorcovering Interior (in thousands) products/services fabrics Other Total - --------------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------------- 1996 Net sales $ 804,358 $149,508 $48,210 $1,002,076 Depreciation and amortization 21,520 9,882 1,829 33,231 Operating income 75,376 19,735 1,694 96,805 Total assets 757,112 172,004 45,324 974,440 - ---------------------------------------------------------------------------------------
86 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) 1998 1997 1996 - -------------------------------------------------------------------------------------- DEPRECIATION AND AMORTIZATION Total segment depreciation and amortization $ 40,239 $ 33,153 $ 33,231 Corporate depreciation and amortization 2,347 5,452 2,074 - -------------------------------------------------------------------------------------- Reported depreciation and amortization $ 42,586 $ 38,605 $ 35,305 ====================================================================================== OPERATING INCOME Total segment operating income $ 97,101 $ 111,634 $ 96,805 Corporate expenses and eliminations (7,410) (13,833) (18,116) - -------------------------------------------------------------------------------------- Reported operating income $ 89,691 $ 97,801 $ 78,689 ====================================================================================== ASSETS Total segment assets $1,207,473 $1,079,696 $ 974,440 Corporate assets and eliminations (170,609) (150,133) (111,894) - -------------------------------------------------------------------------------------- Reported total assets $1,036,864 $ 929,563 $ 862,546 ======================================================================================
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) 1998 1997 1996 - --------------------------------------------------------------------------------------------- Sales to Unaffiliated Customers United States $ 836,715 $ 772,559 $ 653,407 United Kingdom 206,111 114,215 90,660 Other foreign countries 238,303 248,516 258,009 - --------------------------------------------------------------------------------------------- Net sales $1,281,129 $1,135,290 $1,002,076 ============================================================================================= Long-lived assets United States 165,450 157,088 147,191 United Kingdom 46,347 32,238 21,694 Other foreign countries 33,515 39,455 39,906 - --------------------------------------------------------------------------------------------- Total long-lived assets $ 245,312 $ 228,781 $ 208,791 ============================================================================================= Revenue attributed to geographic areas is based on the location of the customer. Long-lived assets include tangible assets physically located in foreign countries.
87 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 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 applicable to common shareholders 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 85 5/16 Fiscal Year Ended 1997 ---------------------------------------------------------- First Second Third Fourth (in thousands, except share data) Quarter Quarter Quarter Quarter - --------------------------------------------------------------------------------------------------------- Net sales $257,345 $ 271,746 $ 297,352 $308,847 Gross profit 82,913 89,404 100,653 106,586 Net income applicable to common shareholders 6,353 7,960 10,511 12,690 - --------------------------------------------------------------------------------------------------------- Earnings per common share Basic $ 0.14 $ 0.17 $ 0.22 $ 0.26 Diluted 0.14 0.17 0.21 0.25 - --------------------------------------------------------------------------------------------------------- Dividends per common share $ 0.0325 $ 0.0325 $ 0.0325 $ 0.0375 - --------------------------------------------------------------------------------------------------------- Share prices High $ 12 13/16 $ 12 1/2 $ 15 5/16 $15 13/16 Low 9 1/4 10 1/2 11 1/16 12 1/2 - ----------------------------------------------------------------------------------------------------------
88 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 Preferred stock dividends - - - - - - -------------------------------------------------------------------------------------------------------------------------- Net income applicable to common shareholders $ 35,126 $ 10,483 $ 29,822 $ (45,608) $ 29,823 ========================================================================================================================== 89
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 applicable to common shareholders $ 30,550 $ 18,440 $ 37,515 $ (48,991) $ 37,514 =================================================================================================================== (/TABLE> 90 SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS - -------------------------------------------------------------------
Year Ended 1996 -------------------------------------------------------------------------------- Interface, Inc. Consolidation Guarantor Nonguarantor (Parent & Elimination Consolidated (in thousands) Subsidiaries Subsidiaries Corporation) Entries Totals - ------------------------------------------------------------------------------------------------------------------ Net sales $738,812 $406,020 $ - $(142,756) $1,002,076 Cost of sales 524,584 302,318 - (142,447) 684,455 - ------------------------------------------------------------------------------------------------------------------ Gross profit on sales 214,228 103,702 - (309) 317,621 Selling, general and administrative expenses 152,484 69,227 17,221 - 238,932 - ------------------------------------------------------------------------------------------------------------------ Operating income 61,744 34,475 (17,221) (309) 78,689 Other expense (income) Interest expense 8,679 5,263 18,830 - 32,772 Other 10,380 4,001 (11,891) - 2,490 - ------------------------------------------------------------------------------------------------------------------ Total other expense 19,059 9,264 6,939 - 35,262 - ------------------------------------------------------------------------------------------------------------------ Income before taxes on income and equity in income of subsidiaries 42,685 25,211 (24,160) (309) 43,427 Taxes on income (benefit) 13,029 8,842 (4,839) - 17,032 Equity in income of subsidiaries - - 46,025 (46,025) - - ------------------------------------------------------------------------------------------------------------------ Net income 29,656 16,369 26,704 (46,334) 26,395 Preferred stock dividends - - 1,678 - 1,678 - ------------------------------------------------------------------------------------------------------------------ Net income applicable to common shareholders $ 29,656 $ 16,369 $ 25,026 $ (46,334) $ 24,717 ==================================================================================================================
91
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 =================================================================================================================
92
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 ================================================================================================================
93
SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS - -------------------------------------------------------------------- Year Ended 1996 ------------------------------------------------------------------------------- Interface, Inc. Consolidation Guarantor Nonguarantor (Parent & Elimination Consolidated (in thousands) Subsidiaries Subsidiaries Corporation) Entries Totals - ---------------------------------------------------------------------------------------------------------------- ASSETS Current Cash $ 3,481 $ 4,791 $ 490 $ - $ 8,762 Accounts receivable 124,118 61,479 (17,780) - 167,817 Inventories 100,305 45,777 596 - 146,678 Miscellaneous 6,414 12,231 11,398 - 30,043 - ---------------------------------------------------------------------------------------------------------------- Total current assets 234,318 124,278 (5,296) - 353,300 Property and equipment, less accumulated depreciation 143,599 60,924 4,268 - 208,791 Investments in subsidiaries 108,977 17,768 379,992 (506,737) - Miscellaneous 142,228 44,637 374,105 (509,585) 51,385 - ---------------------------------------------------------------------------------------------------------------- Excess of cost over net assets acquired 171,526 74,512 3,032 - 249,070 - ---------------------------------------------------------------------------------------------------------------- $800,648 $322,119 $756,101 $(1,016,322) $862,546 ================================================================================================================ LIABILITIES AND COMMON SHAREHOLDERS' EQUITY Current liabilities 108,006 56,996 (1,286) - 163,716 Long-term debt, less current maturities 234,697 42,756 424,156 (322,256) 379,353 Deferred income taxes 12,936 1,009 9,539 - 23,484 - ---------------------------------------------------------------------------------------------------------------- Total liabilities 355,639 100,761 432,409 (322,256) 566,553 Minority interest 3,125 - - - 3,125 Series A redeemable preferred stock 57,891 - 19,750 (57,891) 19,750 Common stock 81,704 102,199 2,535 (183,902) 2,536 Additional paid-in capital 179,073 11,030 124,556 (190,102) 124,557 Retained earnings 127,477 103,678 181,219 (245,546) 166,828 Foreign currency translation adjustment (4,261) 4,451 (4,368) 1,121 (3,057) Treasury stock - - - (17,746) (17,746) - ---------------------------------------------------------------------------------------------------------------- $800,648 $322,119 $756,101 $(1,016,322) $862,546 ================================================================================================================
94
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 ================================================================================================================
95
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 ================================================================================================================
96
SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS - -------------------------------------------------------------------- Year Ended 1996 ------------------------------------------------------------------------------- Interface, Inc. Consolidation Guarantor Nonguarantor (Parent & Elimination Consolidated (in thousands) Subsidiaries Subsidiaries Corporation) Entries Totals - ---------------------------------------------------------------------------------------------------------------- Cash flows from operating activities $31,207 $61,218 $(35,913) - $56,512 - ---------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Purchase of plant and equipment (21,671) (11,459) (3,306) - (36,436) Acquisitions, net of cash acquired - - (30,151) - (30,151) Other - (3,518) (7,907) - (11,425) - ---------------------------------------------------------------------------------------------------------------- (21,671) (14,977) (41,364) - (78,012) - ---------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net borrowings (repayments) (7,550) (46,718) 80,829 - 26,561 Proceeds from issuance of common stock - - 2,916 - 2,916 Cash dividends paid - - (6,606) - (6,606) (7,550) (46,718) 77,139 - 22,871 - ---------------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash - 130 - - 130 - ---------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash 1,986 (347) (138) - 1,501 Cash, at beginning of year 1,495 5,138 628 - 7,261 - ---------------------------------------------------------------------------------------------------------------- Cash, at end of year $ 3,481 $ 4,791 $ 490 - $ 8,762 ================================================================================================================
97 INTERFACE, INC. AND SUBSIDIARIES 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 judgements 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 Atlanta, Georgia 98 INTERFACE, INC. AND SUBSIDIARIES 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 3, 1999 and December 28, 1997, 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 3, 1999. 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 3, 1999 and December 28, 1997, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended January 3, 1999, in conformity with generally accepted accounting principles. /s/ BDO Seidman, LLP Atlanta, Georgia February 22, 1999 99
INTERFACE, INC. AND SUBSIDIARIES SELECTED FINANCIAL INFORMATION (In thousands, except share data) 1998 1997 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------- Annual Operating Data Net sales $1,281,129 $1,135,290 $1,002,076 $802,066 $725,283 Cost of sales 847,660 755,734 684,455 551,643 504,098 Operating income 89,691 97,801 78,689 61,543 50,810 Income before extraordinary item 29,823 37,514 26,395 20,340 16,456 - ----------------------------------------------------------------------------------------------------------------- Net income 29,823 37,514 26,395 16,828 16,456 Earnings per common share Basic $ .58 $ .79 $ .62 $ .51 $ .41 Diluted $ .56 $ .76 $ .60 $ .50 $ .41 Average Shares Outstanding Basic 51,808 47,416 40,121 36,510 36,026 Diluted 53,735 49,302 41,315 37,198 36,026 Cash dividends per common share $ .165 $ .135 $ .1225 $ .12 $ .12 Property additions 66,145 51,489 40,387 48,929 24,376 Depreciation and amortization 42,586 38,605 35,305 28,944 28,180 - ----------------------------------------------------------------------------------------------------------------- Balance Sheet Data Working capital $ 213,412 $ 183,403 $ 189,584 $159,031 $174,620 Total assets 1,036,864 929,563 862,546 714,351 683,408 Total long-term debt 390,437 392,250 382,272 325,582 314,441 Shareholders' equity 398,824 316,365 273,118 231,914 214,090 Book value per share 7.60 6.55 6.28 6.29 5.88 Current ratio 1.9 2.0 2.2 2.4 2.5 - ----------------------------------------------------------------------------------------------------------------- Before extraordinary loss, net of tax, of $0.09. Includes property and equipment obtained in acquisitions of businesses.
100 EX-21 5 LIST OF SUBSIDIARIES Exhibit 21
SUBSIDIARIES OF INTERFACE, INC. Jurisdiction of Subsidiary Organization Bentley Mills, Inc. Delaware (USA) Guilford (Delaware), Inc. Delaware (USA) Interface Interior Fabrics, Inc. Delaware (USA) Interface Securitization Corporation Delaware (USA) Intek, Inc. Georgia (USA) Interface Americas, Inc. Georgia (USA) Interface Overseas Holdings, Inc. Georgia (USA) Interface Flooring Systems, Inc. Georgia (USA) Interface Research Corporation Georgia (USA) Interface Yarns, Inc. Georgia (USA) Pandel, Inc. Georgia (USA) Prince Street Technologies, Ltd. Georgia (USA) Re:Source Americas Enterprises, Inc. Georgia (USA) Interface Americas Re:Source Technologies, Inc. Georgia (USA) Toltec Fabrics, Inc. Georgia (USA) Facilities Resource Group, Inc. Illinois (USA) Interface Architectural Resources, Inc. Michigan (USA) Interface Americas Workplace Solutions, Inc. Georgia (USA) Renovisions, Inc. Pennsylvania (USA) Interface Flooring Systems Commercial Ltda. Brazil Interface Flooring Systems (Canada), Inc. Canada Interface Europe B.V. Netherlands Interface Europe, Ltd. United Kingdom 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 Interior Fabrics, Inc. (formerly Guilford of Maine, Inc.) is the parent of eight direct subsidiaries organized and operating in Canada and the United States (including Toltec Fabrics, Inc. and Intek, Inc.). Interface Overseas Holdings, Inc. is the parent of 10 direct subsidiaries organized and operating in Europe, Australia, Japan, Hong Kong, Singapore, Thailand, China and the British Virgin Islands. Re:Source Americas Enterprises, Inc. is the parent of 23 subsidiaries organized and operating in the United States. All of such subsidiaries are commercial floorcovering contractors. Interface Europe B.V. (formerly Interface Heuga B.V.) is the parent of seven direct or indirect subsidiaries organized and operating in the Netherlands, and 14 direct or indirect subsidiaries organized and operating outside of the Netherlands. Interface Europe, Ltd. (formerly Interface Flooring Systems, Ltd.) is the parent of 15 direct or indirect subsidiaries organized and operating in the United Kingdom and eight direct or indirect subsidiaries organized and operating outside the United Kingdom. (/TABLE>
EX-23 6 ACCOUNTANT'S CONSENT 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, 1999, 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 3, 1999, 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, 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. BDO SEIDMAN, LLP Atlanta, Georgia March 31, 1999 EX-27 7 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 3, 1999, and is qualified in its entirety by reference to such financial statements. 0000715787 INTERFACE, INC. 1,000 YEAR JAN-03-1999 JAN-03-1999 9,910 0 202,593 7,790 199,338 438,524 480,626 235,314 1,036,864 225,112 390,437 0 0 5,983 392,841 1,036,864 1,281,129 1,281,129 847,660 847,660 343,778 3,299 36,705 49,111 19,288 29,823 0 0 0 29,823 .58 .56
EX-99.1 8 SAFE HARBOR COMPLIANCE STATEMENT 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 and Chief Executive Officer; Charles R. Eitel, President and Chief Operating Officer; and Gordon D. Whitener, Senior Vice President. Each of Messrs. Anderson, Eitel and Whitener have entered into employment agreements with the Company containing certain covenants of non-competition, and the Company currently maintains key- man insurance on each of Messrs. Anderson and Eitel. 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 all or some of such personnel could have an adverse impact on the Company. Risks of Foreign Operations The Company has substantial international operations. In fiscal 1998, approximately 25% 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, recent economic events in Asia, 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. The Company has recently announced certain workforce reductions and plant closures and consolidations in Asia. See "Business -- Recent Development". 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 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 Election of a Majority of Board The Company's Chairman and Chief Executive Officer, Ray C. Anderson, beneficially owns approximately 50% 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. Many of these programs may fail due to an inability to properly interpret date codes beginning January 1, 2000. For example, such programs may 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 is evaluating its computer systems with the help of outside consultants to determine which modifications and expenditures will be necessary to make its systems compatible with year 2000 requirements. The Company believes that its systems will be year 2000-compliant upon implementation of such modifications. The Company is also evaluating its Year 2000 exposure to third party suppliers and customers. However, there can be no assurance that all necessary modifications will be identified and corrected or that unforeseen difficulties or costs will not arise. In addition, there can be no assurance that the systems of other companies on which the Company's systems rely will be modified on a timely basis, or that the failure by another company (such as a key supplier) to properly modify its systems will not negatively impact the Company's systems or operations. This risk is particularly acute with respect to non-U.S. third parties, as it is widely reported that many non-U.S. businesses and governments are not addressing their Year 2000 issues on a timely basis. 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 Workplace Solutions 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 3, 1999, the Company's long-term debt (net of current portion) totaled $388 million or approximately 49% 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-----