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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.
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(Exact name of registrant as specified in its charter)
Georgia 58-1451243
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(State of incorporation) (I.R.S. Employer Identification No.)
2859 Paces Ferry Road
Suite 2000
Atlanta, Georgia 30339
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(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
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(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:
<PAGE>
<TABLE>
<CAPTION>
Class Number of Shares
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<S> <C>
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.
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<PAGE>
<PAGE>
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)<PAGE>
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<PAGE>
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.
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<PAGE>
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,<PAGE>
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
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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<PAGE>
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.
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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<PAGE>
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
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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<PAGE>
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
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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<PAGE>
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 -<PAGE>
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<PAGE>
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 -<PAGE>
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<PAGE>
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 -
<PAGE>
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.
<PAGE>
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 -<PAGE>
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<PAGE>
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 -
<PAGE>
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.
<PAGE>
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 -<PAGE>
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.
</TABLE>
<TABLE>
<CAPTION>
Name Age Principal Position(s)
---- --- ---------------------
<S> <C> <C>
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.
<PAGE>
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 -<PAGE>
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:
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
Location Primary Products Floor Space (Sq.Ft.)
-------- ----------------- --------------------
<S> <S> <C>
Bangkok, Thailand <F1> . . . . . . . . . . . . . . . . . . . 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 <F2>. . . . . . . . . . . . . . Broadloom carpet 539,641
Genemuiden, the Netherlands <F3> . . . . . . . . . . . . . . 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 <F2>. . . . . . . . . . . . . . . . . Interior fabrics 55,800
Guilford, Maine . . . . . . . . . . . . . . . . . . . . . . Interior fabrics 396,690
Guilford, Maine . . . . . . . . . . . . . . . . . . . . . . Interior fabrics 96,200
Lancashire, England <F2> . . . . . . . . . . . . . . . . . . Interior fabrics 54,000
Newport, Maine . . . . . . . . . . . . . . . . . . . . . . Interior fabrics 208,932
West Yorkshire, England . . . . . . . . . . . . . . . . . . Interior fabrics 135,000
Cartersville, Georgia <F2> . . . . . . . . . . . . . . . . . Specialty products 124,500
Grand Rapids, Michigan <F2>. . . . . . . . . . . . . . . . . Access flooring 120,000
Baltimore, Maryland <F2> . . . . . . . . . . . . . . . . . . Access flooring 39,000
Rockmart, Georgia . . . . . . . . . . . . . . . . . . . . . Chemicals 37,500
______________________________________
<FN>
<F1> Owned by a joint venture in which the Company has a 70%
interest.
<F2> Leased.
<F3> Owned by a joint venture in which the Company has a 40%
interest.
</TABLE>
- 14 -<PAGE>
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 -
<PAGE>
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<PAGE>
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 -<PAGE>
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<PAGE>
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 -
<PAGE>
3. Exhibits
The following exhibits are included as part of this Report:
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
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 -<PAGE>
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).*
<PAGE>
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 -<PAGE>
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 -<PAGE>
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 -<PAGE>
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
</TABLE>
<TABLE>
<CAPTION>
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<F1><F2> accounts (describe)<F3> of year
________________________________________________________________________________________________________________________
(in thousands)
<S> <C> <C> <C> <C> <C>
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
<FN>
<F1> Includes changes in foreign currency exchange rates.
<F2> 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.
<F3> Write off of bad debt.
</FN>
(/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 -
<PAGE>
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.
</TABLE>
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <S> <C>
/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
<PAGE>
/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 -
<PAGE>
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.
</TABLE>
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
<PAGE>
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 -
<PAGE>
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 -
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<PAGE>
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<PAGE>
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<PAGE>
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<PAGE>
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<PAGE>
(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
<PAGE>
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
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<PAGE>
<PAGE>
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<PAGE>
<PAGE>
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<PAGE>
<PAGE>
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<PAGE>
<PAGE>
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<PAGE>
<PAGE>
$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<PAGE>
<PAGE>
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<PAGE>
<PAGE>
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<PAGE>
<PAGE>
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<PAGE>
<PAGE>
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<PAGE>
<PAGE>
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<PAGE>
<PAGE>
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<PAGE>
<PAGE>
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
Consolidated Statements of Income
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------------
(in thousands, except share data) 1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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<F1>
Basic $ 0.58 $ 0.79 $ 0.62
============================================================================================
Diluted $ 0.56 $ 0.76 $ 0.60
============================================================================================
</TABLE>
Consolidated Statements of Comprehensive Income
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------------
(in thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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.
<FN>
<F1>Earnings per share have been restated to reflect a two-for-one stock
split in June 1998.
</FN>
</TABLE>
56<PAGE>
<PAGE>
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(in thousands, except share data) 1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C>
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
=============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
57
<PAGE>
<PAGE>
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------
(in thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
==============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
58
<PAGE>
<PAGE>
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<PAGE>
<PAGE>
$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
<PAGE>
<PAGE>
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<PAGE>
<PAGE>
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<PAGE>
<PAGE>
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<PAGE>
<PAGE>
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<PAGE>
<PAGE>
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<PAGE>
<PAGE>
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:
<TABLE>
<CAPTION>
Interest rate
(in thousands) at January 3, 1999 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
=============================================================================================
</TABLE>
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<PAGE>
<PAGE>
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<PAGE>
<PAGE>
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<PAGE>
<PAGE>
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<PAGE>
<PAGE>
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.
<TABLE>
<CAPTION>
Foreign
Class A Class B Additional Minimum Currency
--------------- --------------- Paid-In Retained Pension Translation
(in thousands) Shares Amount Shares Amount Capital Earnings Liability Adjustment
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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)
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
70<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Foreign
Class A Class B Additional Minimum Currency
--------------- --------------- Paid-In Retained Pension Translation
(in thousands) Shares Amount Shares Amount Capital Earnings Liability Adjustment
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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)
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
<PAGE>
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:
<TABLE>
<CAPTION>
Number Weighted average
of shares exercise price
- --------------------------------------------------------------------------------
<S> <C> <C>
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
- --------------------------------------------------------------------------------
</TABLE>
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<PAGE>
<PAGE>
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:
<TABLE>
<CAPTION>
Fiscal Year Ended
----------------------------------
(in thousands, except share data) 1998 1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
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
- ---------------------------------------------------------------------------
</TABLE>
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<PAGE>
<PAGE>
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:
<TABLE>
<CAPTION>
Net Income
Applicable to
Common Average Shares Earnings
(in thousands, except earnings per share) Shareholders Outstanding Per Share
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- ------------------------------------------------------------------------------------------------
</TABLE>
74
<PAGE>
<PAGE>
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<PAGE>
<PAGE>
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<PAGE>
<PAGE>
A summary of the restructuring activities is presented below:
<TABLE>
<CAPTION>
Asia/Pacific Europe US Totals
-------------------------------------------------------------------------------------
Floor- Floor- Floor- Floor- Grand
(in thousands) coverings Fabrics coverings Fabrics coverings Fabrics coverings Fabrics Total
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
==========================================================================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
Asia/Pacific Europe US Totals
-------------------------------------------------------------------------------------
Floor- Floor- Floor- Floor- Grand
(in thousands) coverings Fabrics coverings Fabrics coverings Fabrics coverings Fabrics Total
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Manufacturing 49 - 83 - - 100 132 100 232
Selling and
administrative 25 - 7 11 - 12 32 23 55
- --------------------------------------------------------------------------------------------------------------------------
74 - 90 11 - 112 164 123 287
==========================================================================================================================
</TABLE>
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<PAGE>
<PAGE>
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
<PAGE>
<PAGE>
The sources of the temporary differences and their effect on the
net deferred tax
liability are as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------- -------------------
(in thousands) Assets Liabilities Assets Liabilities
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
===========================================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
Fiscal Year Ended
----------------------
1998 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
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%
==================================================================================
</TABLE>
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<PAGE>
<PAGE>
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<PAGE>
<PAGE>
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.
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------
Notional Effect on Notional Effect on
(in thousands) Amounts Fair Values Amounts Fair Values
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate management
Swap agreements $43,700 $ (69) $64,500 $(319)
Foreign currency management
Swap agreements $10,500 $(1,414) $14,500 $(751)
- ------------------------------------------------------------------------------------
</TABLE>
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
<PAGE>
<PAGE>
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
<PAGE>
<PAGE>
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).
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
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
================================================================================
</TABLE>
83<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------
1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C>
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)
=================================================================================
</TABLE>
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<PAGE>
<PAGE>
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).
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------
1998 1997
- ------------------------------------------------------------
<S> <C> <C>
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
===========================================================
</TABLE>
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<PAGE>
<PAGE>
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:
<TABLE>
<CAPTION>
Floorcovering Interior
(in thousands) products/services fabrics Other Total
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- ---------------------------------------------------------------------------------------
</TABLE>
86<PAGE>
<PAGE>
A reconciliation of the Company's total segment operating income,
depreciation and amortization and assets to the corresponding
consolidated amounts follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------------
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
======================================================================================
</TABLE>
Enterprise-wide Disclosures
- ---------------------------
Revenue and long-lived assets related to operations in the U.S. and
other foreign countries are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------------
(in thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales to Unaffiliated Customers<F1>
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<F2>
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
=============================================================================================
<FN>
<F1> Revenue attributed to geographic areas is based on the location of the customer.
<F2> Long-lived assets include tangible assets physically located in foreign countries.
</FN>
</TABLE>
87<PAGE>
<PAGE>
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.
<TABLE>
<CAPTION>
Fiscal Year Ended 1998
----------------------------------------------------------
First Second Third Fourth
(in thousands, except share data) Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- ----------------------------------------------------------------------------------------------------------
</TABLE>
88<PAGE>
<PAGE>
SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
===================================================================
<TABLE>
<CAPTION>
Year Ended 1998
---------------------------------------------------------------------------------
Interface, Inc. Consolidation
Guarantor Nonguarantor (Parent & Elimination Consolidated
(in thousands) Subsidiaries Subsidiaries Corporation) Entries Totals
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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<PAGE>
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
- -------------------------------------------------------------------
Year Ended 1997
----------------------------------------------------------------------------------
Interface, Inc. Consolidation
Guarantor Nonguarantor (Parent & Elimination Consolidated
(in thousands) Subsidiaries Subsidiaries Corporation) Entries Totals
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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<PAGE>
<PAGE>
SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
- -------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Year Ended 1996
--------------------------------------------------------------------------------
Interface, Inc. Consolidation
Guarantor Nonguarantor (Parent & Elimination Consolidated
(in thousands) Subsidiaries Subsidiaries Corporation) Entries Totals
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
==================================================================================================================
</TABLE>
91<PAGE>
<PAGE>
<TABLE>
<CAPTION>
SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
- --------------------------------------------------------------------
Year Ended 1998
--------------------------------------------------------------------------------
Interface, Inc. Consolidation
Guarantor Nonguarantor (Parent & Elimination Consolidated
(in thousands) Subsidiaries Subsidiaries Corporation) Entries Totals
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
=================================================================================================================
</TABLE>
92<PAGE>
<PAGE>
<TABLE>
<CAPTION>
SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
- --------------------------------------------------------------------
Year Ended 1997
-------------------------------------------------------------------------------
Interface, Inc. Consolidation
Guarantor Nonguarantor (Parent & Elimination Consolidated
(in thousands) Subsidiaries Subsidiaries Corporation) Entries Totals
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
================================================================================================================
</TABLE>
93<PAGE>
<PAGE>
<TABLE>
<CAPTION>
SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
- --------------------------------------------------------------------
Year Ended 1996
-------------------------------------------------------------------------------
Interface, Inc. Consolidation
Guarantor Nonguarantor (Parent & Elimination Consolidated
(in thousands) Subsidiaries Subsidiaries Corporation) Entries Totals
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
================================================================================================================
</TABLE>
94
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
- --------------------------------------------------------------------
Year Ended 1998
-------------------------------------------------------------------------------
Interface, Inc. Consolidation
Guarantor Nonguarantor (Parent & Elimination Consolidated
(in thousands) Subsidiaries Subsidiaries Corporation) Entries Totals
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
================================================================================================================
</TABLE>
95<PAGE>
<PAGE>
<TABLE>
<CAPTION>
SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
- --------------------------------------------------------------------
Year Ended 1997
-------------------------------------------------------------------------------
Interface, Inc. Consolidation
Guarantor Nonguarantor (Parent & Elimination Consolidated
(in thousands) Subsidiaries Subsidiaries Corporation) Entries Totals
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
================================================================================================================
</TABLE>
96<PAGE>
<PAGE>
<TABLE>
<CAPTION>
SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
- --------------------------------------------------------------------
Year Ended 1996
-------------------------------------------------------------------------------
Interface, Inc. Consolidation
Guarantor Nonguarantor (Parent & Elimination Consolidated
(in thousands) Subsidiaries Subsidiaries Corporation) Entries Totals
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
================================================================================================================
</TABLE>
97<PAGE>
<PAGE>
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<PAGE>
<PAGE>
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<PAGE>
<PAGE>
<TABLE>
<CAPTION>
INTERFACE, INC. AND SUBSIDIARIES
SELECTED FINANCIAL INFORMATION
(In thousands, except share data) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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<F1> $ .41
Diluted $ .56 $ .76 $ .60 $ .50<F1> $ .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 <F2> 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
- -----------------------------------------------------------------------------------------------------------------
<FN>
<F1> Before extraordinary loss, net of tax, of $0.09.
<F2> Includes property and equipment obtained in acquisitions of businesses.
</FN>
</TABLE>
100
<PAGE>
Exhibit 21
<TABLE>
<CAPTION>
SUBSIDIARIES OF INTERFACE, INC.
Jurisdiction of
Subsidiary <F1> Organization
<S> <C>
Bentley Mills, Inc. Delaware (USA)
Guilford (Delaware), Inc. Delaware (USA)
Interface Interior Fabrics, Inc.<F2> Delaware (USA)
Interface Securitization Corporation Delaware (USA)
Intek, Inc. Georgia (USA)
Interface Americas, Inc. Georgia (USA)
Interface Overseas Holdings, Inc.<F3> 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.<F4> 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.<F5> Netherlands
Interface Europe, Ltd.<F6> United Kingdom
<FN>
<F1> The names of certain subsidiaries which, if
considered in the aggregate as a single
subsidiary, would not constitute a "significant
subsidiary", have been omitted.
<F2> 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.).
<F3> 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.
<F4> 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.
<F5> 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.
<PAGE>
<F6> 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.
</FN>
(/TABLE>
</TABLE>
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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<CIK> 0000715787
<NAME> INTERFACE, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-03-1999
<PERIOD-END> JAN-03-1999
<CASH> 9,910
<SECURITIES> 0
<RECEIVABLES> 202,593
<ALLOWANCES> 7,790
<INVENTORY> 199,338
<CURRENT-ASSETS> 438,524
<PP&E> 480,626
<DEPRECIATION> 235,314
<TOTAL-ASSETS> 1,036,864
<CURRENT-LIABILITIES> 225,112
<BONDS> 390,437
0
0
<COMMON> 5,983
<OTHER-SE> 392,841
<TOTAL-LIABILITY-AND-EQUITY> 1,036,864
<SALES> 1,281,129
<TOTAL-REVENUES> 1,281,129
<CGS> 847,660
<TOTAL-COSTS> 847,660
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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<PAGE>
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<PAGE>
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.
<PAGE>
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.<PAGE>
