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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 2, 2000
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
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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. /_/
Aggregate market value of the voting and non-voting stock held by
non-affiliates of the registrant as of March 28, 2000 (assuming conversion of
Class B Common Stock into Class A Common Stock): $202,795,057 (47,716,484 shares
valued at the last sales price of $4.25 on March 28, 2000). See Item 12.
Number of shares outstanding of each of the registrant's classes of
Common Stock, as of March 28, 2000:
Class Number of Shares
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Class A Common Stock,
$0.10 par value per share ......................... 45,150,760
Class B Common Stock,
$0.10 par value per share ......................... 6,664,441
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the fiscal
year ended January 2, 2000 are incorporated by reference into Parts I and II.
Portions of the Proxy Statement for the 2000 Annual Meeting of
Shareholders are incorporated by reference into Part III.
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PART I
ITEM 1. BUSINESS
General
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Interface, Inc. ("Interface" or the "Company ") is a global
manufacturer, marketer, installer and servicer of products for the commercial
and institutional interiors market. With a 40% market share, the Company is the
worldwide leader in the modular carpet segment, which includes both carpet tile
and two-meter roll goods. The Company's BENTLEY(R), PRINCE STREET(R) and
FIRTH(TM) brands are leaders in the high quality, designer-oriented sector of
the broadloom segment. The Company provides specialized carpet replacement,
installation and maintenance services through its Re:Source Americas service
network. The Company's Fabrics Group includes the leading U.S. manufacturer of
panel fabrics for use in open plan office furniture systems, with a North
American market share of approximately 57%. The Company's specialty products
operations produce raised/access flooring systems, antimicrobial additives,
adhesives and various other chemical compounds and products. These complementary
product offerings, together with an integrated marketing philosophy, enable
Interface to take a "total interior solutions" approach to serving the diverse
needs of its customers around the world.
The Company markets products in over 100 countries around the world
under such established brand names as INTERFACE(R) and HEUGA(R) in modular
carpet; BENTLEY, PRINCE STREET and FIRTH in broadloom carpets; GUILFORD OF
MAINE(R), STEVENS LINEN(TM), TOLTEC(TM), INTEK(TM), CAMBORNE(TM) and
GLENSIDE(TM) in interior fabrics and upholstery products; INTERSEPT(R) in
chemicals; and C-TEC(R), ATLANTIC(TM) and INTERCELL(R) in raised/access flooring
systems. The Company utilizes an internal marketing and sales force of over
1,100 experienced personnel (the largest in the commercial floorcovering
industry), stationed at over 100 locations in over 35 countries, to market the
Company's carpet products and services in person to its customers. The Company's
principal geographic markets are the Americas (69% of 1999 net sales), Europe
(26% of 1999 net sales), and Asia-Pacific (5% of 1999 net sales).
While the Company's net sales from U.S. operations have historically
been derived primarily from the renovation market, Interface believes that the
recovery in the U.S. commercial office market, which began in the mid 1990's,
will drive growth in the new construction market over the next several years.
From a high of nearly 24% in 1986, suburban office vacancy rates dropped to a
twelve year low of 9.0% as of March 1998 but had risen again to 10.1% as of
September, 1999, according to CB Commercial/Torto Wheaton Research. Thus,
although the U.S. commercial office market has recently experienced some
weakness in demand, the Company nonetheless believes that this weakness is
temporary and that the recovery has not yet run its course.
In its international markets, the Company expects to benefit from
increased use and acceptance of its products. In addition, the commercial office
markets in both Europe and Asia-Pacific have recently shown signs of recovery.
For 1999, the Company had net sales and net income of $1.228 billion
and $23.5 million, respectively. Net sales were composed of sales of
floorcovering products and related services ($974 million), interior fabrics
sales ($197.1 million) and raised/access flooring and other specialty product
sales ($57.1 million), accounting for 79.3%, 16.0% and 4.7% of total net sales,
respectively. The Company achieved a compound annual growth rate in its net
sales and net income (excluding the 1998 restructuring charge, discussed below)
of 11.3% and 8.8%, respectively, over the five-year period from 1995 to 1999.
Recent Developments
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In 1999, the Company introduced a new flooring product marketed under
the brand name SOLENIUM(TM). The Company believes that this new product
essentially creates a new flooring product category, as it combines the benefits
of resilient flooring products, such as hardwoods or linoleum (greater
durability and lower maintenance), with those of carpet (increased styling,
sound absorption and comfort). SOLENIUM floorcovering is manufactured from a
specialized fiber which the Company believes provides superior stain resistance
qualities. The fiber is woven to create a highly-styled textile flooring product
that is supported by the Company's NEXSTEP(R) backing.
During the fourth quarter of 1998, the Company recorded a pre-tax
restructuring charge, the first in the Company's history, of $25.3 million
($0.31 per diluted share after tax) related to plant closures and
consolidations, an aggregate headcount reduction of approximately 253 salaried
and hourly employees in Europe, Asia and the United States, and the write-down
and disposal of certain assets. The restructuring charge is comprised of
approximately $13 million of cash expenditures for severance benefits and
relocation costs and approximately $12.3 million of non-cash charges, primarily
for the write-down of impaired assets. The Company anticipates that the
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restructuring will result in annual savings of approximately $8 million. Further
discussion concerning the restructuring appears in the Company's Consolidated
Financial Statements and Notes thereto contained in the Company's 1999 Annual
Report to Shareholders. See Item 8 below.
Company Strengths
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Management believes that the Company benefits from several significant
competitive advantages, which will assist it in sustaining and enhancing its
position as a market leader. The Company's principal strengths include:
STRONG BRAND NAMES WITH REPUTATION FOR QUALITY AND
RELIABILITY. The Company's products are known in the industry for their
high quality and reliability. The Company's strong brand names in
carpets, interior fabrics, and raised/access flooring systems are
leaders in the industry. INTERFACE and HEUGA are the preeminent brand
names in carpet tiles for commercial and institutional use worldwide.
The PRINCE STREET and BENTLEY brands are rated the number two and three
brands, respectively, for carpet design in the U.S. according to a 1998
survey of interior designers published in the FLOOR FOCUS industry
publication. On the international front, Firth Carpets has a reputation
in Europe for manufacturing high-quality woven and tufted products.
GUILFORD and CAMBORNE are leading brand names in their respective
markets for interior fabrics.
EFFICIENT AND LOW-COST GLOBAL MANUFACTURING OPERATIONS. The
Company's global manufacturing capabilities are an important
competitive advantage in serving the needs of multinational corporate
customers who require products and services at various locations around
the world. Global manufacturing locations enable the Company to compete
effectively with local producers in its international markets, while
also affording international customers more favorable delivery times
and freight costs. The Company's capital investment program to
consolidate and modernize the yarn manufacturing operations of its
Fabrics Group has resulted in significant efficiencies and cost
savings, as well as new product capabilities. In addition, these
investments have allowed Interface to respond to a shift in demand
towards lighter-weight, less expensive fabrics by original equipment
manufacturer (OEM) panel fabric customers.
DEDICATED DISTRIBUTION AND SERVICE CAPABILITY THROUGH
RE:SOURCE PROVIDER NETWORK. The Company's Re:Source Americas service
network includes 19 owned and approximately 78 affiliated commercial
floorcovering contractors. The Company believes that the service,
marketing and distribution capabilities added by Re:Source Americas
have resulted in (i) increased sales of Company products as contractors
in the network have begun to supply Company products on a preferred
basis, (ii) enhanced customer satisfaction by assisting customers in
the process of selecting, purchasing, installing, maintaining and
recycling carpet products, (iii) improved pricing for the Company's
floorcovering products, and (iv) increased operating margins by
consolidating administrative functions and coordinating and
streamlining sales efforts by Company and contractor sales personnel.
Re:Source Americas also provides a channel for delivery of a variety of
additional services and products offered by the Company. See
"Floorcovering Products -- Services."
STRONG CUSTOMER AND ARCHITECTURAL AND DESIGN COMMUNITY
RELATIONSHIPS. The Company focuses its sales efforts at the design
phase of commercial projects. Interface personnel cultivate
relationships both with the owners and users of the facilities involved
in the projects and with specifiers such as architects, engineers,
interior designers and contracting firms who are directly involved in
specifying products and often make or significantly influence purchase
decisions. The Company emphasizes its product design and styling
capabilities and its ability to provide creative, high-value solutions
to its customers' needs. Interface marketing and sales personnel also
serve as a primary technical resource for the Company's customers, both
with respect to product maintenance and service as well as design
matters.
AWARD-WINNING AND INNOVATIVE PRODUCT DESIGN AND DEVELOPMENT
CAPABILITIES. The Company's product design and development capabilities
give Interface a significant competitive advantage. Interface has an
exclusive consulting contract with the leading design firm David Oakey
Designs, Inc. ("Oakey Designs") to augment the Company's internal
research, development and design staff. Since engaging Oakey Designs in
1994, the Company has introduced more than 104 new carpet designs in
the U.S. and has enjoyed considerable success in winning U.S. carpet
industry design awards bestowed by the International Interior Design
Association (IIDA), particularly in the carpet tile division. In 1996,
Oakey Designs' services were extended to the Company's international
carpet operations.
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SKILLED MANAGEMENT TEAM AND COMMITTED EMPLOYEES. An important
component of the Company's competitive advantage is the continued
strengthening of its management team and its commitment to developing
and maintaining an enthusiastic and collaborative work force. The
Company has a team of skilled and dedicated executives to guide the
Company's continued growth and diversification. In addition, over the
past four years, the Company has made a substantial investment in its
approximately 7,250 employees worldwide. In 1997, for example, the
Company created an internal employee training and education team, known
as One World Learning, which implements corporate-wide learning
programs. In both 1998 and 1999, FORTUNE magazine rated Interface one
of the top 100 employers in the U.S. on the strength of the Company's
commitment to its employees. FORTUNE has also rated Interface one of
the "10 Most Admired Companies" in its industry category.
Business Strategy and Principal Initiatives
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Interface's long-standing corporate strategy has been to diversify and
integrate worldwide. The Company seeks to diversify by developing internally or
acquiring related product lines and businesses in the commercial interiors field
and to integrate by identifying and developing synergies and operating
efficiencies among the Company's products and global businesses. In continuing
that strategy, the Company is pursuing the following principal strategic
initiatives:
"MASS CUSTOMIZATION". The Company has implemented aspects of
its successful U.S. mass customization production initiative at its
floorcovering operations in Europe and Asia-Pacific and at its interior
fabrics operations. Through mass customization the Company is able to
respond to customers' requirements for custom or highly styled products
by quickly and efficiently producing both custom samples and the
ultimate products, and to more readily determine proven "winners" that
can be manufactured for inventory for broader distribution. Mass
customization was introduced to the Company's U.S. carpet tile business
in 1994, and its principal components include (i) developing a
simplified but versatile yarn utilization system, (ii) investing in
highly efficient, state-of-the-art tufting and custom sampling
equipment, and (iii) utilizing innovative design and styling to create
products. This strategy has resulted in substantial operating
improvements in the Company's floorcovering operations, including
increased margins and reduced inventory levels of both raw materials
and standard products.
GLOBAL MARKETING AND MANUFACTURING CAPABILITIES. The Company's
objective is to use the complementary nature of its product lines to
offer "total interior solutions" to its customers worldwide, meeting
their diverse needs for products and services. The Company combines its
global marketing and manufacturing capabilities to successfully target
multinational companies and compete effectively in local markets
worldwide. The Company has a seven-person global account team with
responsibility for the Company's largest multinational customers and
prospects, and it has implemented a marketing communications network to
link its worldwide marketing and sales force. The Company has also
consolidated management responsibility for certain key operational
areas, which has significantly increased global cooperation and
coordination in product planning, production and marketing activities -
in effect, "hooking it up" worldwide.
ECOLOGICAL SUSTAINABILITY THROUGH QUEST AND ECOSENSE PROGRAMS.
In January 1995, the Company began a worldwide war-on-waste initiative
referred to internally as "QUEST". Applying a zero-based definition of
waste (broadly defined as any measurable cost that goes into
manufacturing a product but does not result in identifiable value to
the customer), the Company realized an aggregate of approximately $10
million in savings in 1999. Management believes the Company can
eliminate an additional $10 million of such waste in 2000. Since its
inception in 1995, the cumulative savings attributable to the QUEST
initiative as of the end of fiscal year 1999 were $124 million. The
war-on-waste represents a first step in the Company's broader EcoSense
initiative, which is the Company's long-range program to achieve
greater resource efficiency and, ultimately, ecological
"sustainability" - that is, the point at which Interface is no longer a
net "taker" from the earth. The Company believes that its pursuit of
these initiatives provides a competitive advantage in marketing its
products to an increasing number of customers.
SELECTIVE STRATEGIC ACQUISITIONS. The Company has successfully
expanded its business and product lines through strategic acquisitions.
The Company expanded its carpet operations with the acquisitions of
Heuga Holding B.V. (now Interface Europe B.V.) in 1988, Bentley Mills,
Inc. in 1993, Prince Street Technologies, Ltd. in 1994 and Firth
Carpets Ltd. in 1998. Its interior fabrics business has been expanded
significantly with the acquisitions of certain assets of Stevens Linen
Associates, Inc. in 1993, Toltec Fabrics, Inc. and the Intek
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division of Springs Industries, Inc. in 1995, Camborne Holdings, Ltd.
in 1997 and Glenside Fabrics Limited in 1998. In addition, the
Company's acquisitions of Renovisions, Inc. in 1996 and Facilities
Resource Group, Inc. in 1997, and the formation of the Re:Source
Americas services network through acquisitions in 1996- 1999 have
enabled the Company to expand rapidly into a variety of commercial
interior services. The Company's 1998 acquisitions of the vinyl
floorcoverings business of Scan-Lock A/S and the raised/access flooring
business of Atlantic Access Flooring, Inc. have broadened the Company's
lines of floorcovering products and raised/access flooring systems,
respectively. The Company intends to continue to selectively target
companies and product lines that complement existing product lines and
further the Company's ability to provide total interior solutions for
its customers.
Floorcovering Products
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Products
The Company is the world's largest manufacturer and marketer of modular
carpet, which includes carpet tile and two-meter roll goods, with a 40%
worldwide market share. Broadloom carpet generally consists of tufted carpet
sold primarily in twelve-foot rolls. The Company's broadloom carpet operations -
Bentley Mills, Prince Street and Firth Carpets - focus on the high quality,
designer-oriented sector of the U.S. and U.K. broadloom carpet markets. The
Company also offers a vinyl hard flooring product in Europe under the brand
SCAN-LOCK(TM).
MODULAR CARPET. Marketed under the leading global brands INTERFACE and
HEUGA, the Company's free-lay modular carpet system utilizes carpet tiles cut in
precise, dimensionally stable squares (usually 50 square centimeters) to produce
a floorcovering which combines the appearance and texture of broadloom carpet
with the advantages of a modular carpet system. The growing use of open plan
interiors and modern office arrangements utilizing demountable, movable
partitions and modular furniture systems has encouraged the use of carpet tile,
as compared to other soft surface flooring products. The Company's GLASBAC(R)
technology employs a unique, fiberglass-reinforced polymeric composite backing
that allows the tile to be installed and remain flat on the floor without the
need for general application of adhesives or use of fasteners. This type of
carpet tile thus may be easily removed and replaced, permitting rearrangement of
office partitions and modular furniture systems without the inconvenience and
expense associated with removing, replacing or repairing other soft surface
flooring products, including broadloom carpeting. Carpet tile facilitates access
to sub-floor telephone, electrical, computer and other wiring by lessening
disruption of operations, and also eliminates the cumulative damage and
unsightly appearance commonly associated with frequent cutting of conventional
carpet as utility connections and disconnections are made. Because a relatively
small portion of a carpet installation often receives the bulk of traffic and
wear, the ability to rotate carpet tiles between high traffic and low traffic
areas and to selectively replace worn tiles can significantly increase the
average life and cost efficiency of the floorcovering. The Company believes
that, within the overall floorcovering market, the demand for modular carpet is
increasing worldwide as more customers recognize these advantages.
The Company uses a number of conventional and technologically advanced
methods of carpet construction to produce carpet tiles in a wide variety of
colors, patterns, textures, pile heights and densities designed to meet both the
practical and aesthetic needs of a broad spectrum of commercial interiors -
particularly offices, health care facilities, airports, educational and other
institutions, and retail facilities. The Company's carpet tile systems permit
distinctive styling and patterning that can be used to complement interior
designs, to set off areas for particular purposes and to convey graphic
information. While the Company continues to manufacture and sell a substantial
portion of its carpet tile in standard styles, an increasing percentage of the
Company's modular carpet sales is custom or made-to-order products designed to
meet customer specifications.
The Company produces and sells carpet tile specially adapted for the
health care facilities market. The Company's carpet tile possesses
characteristics - such as the use of the INTERSEPT antimicrobial,
static-controlling nylon yarns, and thermally pigmented, colorfast yarns -
making it suitable for use in such facilities in lieu of hard surface flooring.
The Company also manufactures and sells two-meter roll goods which are
structure-backed and offer many of the advantages of both carpet tile and
broadloom carpet. These roll goods are often used in conjunction with carpet
tiles to create special design effects. The Company's current principal
customers for such products are in the education, health care and government
sectors. The Company believes, however, that the demand for two-meter roll
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goods is increasing generally within the commercial and institutional interiors
market and expects two-meter roll goods to account for a growing percentage of
its U.S. modular carpet sales in the future.
BROADLOOM CARPET. The Company has garnered a significant share of the
high-end, designer-oriented broadloom carpet segment by combining innovative
product design and styling capabilities and short production and delivery times
with a marketing strategy geared toward serving and working closely with
interior designers, architects and other specifiers. Prince Street's
design-sensitive broadloom products center around unique, multi-dimensional
textured carpets with a hand-tufted look, while Bentley Mills' designs emphasize
the dramatic use of color. The PRINCE STREET and BENTLEY brands were rated the
number two and three brands, respectively, for carpet design in the U.S.
according to a 1998 survey of interior designers published in the FLOOR FOCUS
industry publication. In addition, Firth Carpets has a reputation for
manufacturing high-quality woven and tufted products, mostly using woolen spun
blends.
RESILIENT TEXTILE FLOORING. In 1999, the Company introduced SOLENIUM
resilient textile flooring, a new category of product which combines the
functional and aesthetic benefits of resilient flooring and carpet. SOLENIUM is
highly stain-resistant, has carpet-like softness, yet is as easy to maintain as
vinyl flooring. SOLENIUM is manufactured using one-third less material and
energy than carpet and is designed to be completely recyclable. The Company
believes Solenium fills an unmet need within health care, retail and education
markets.
VINYL FLOORING. In 1998, the Company acquired the flooring business of
Denmark-based Scan-Lock A/S, a manufacturer of extruded vinyl products using
recycled and post-industrial waste, and has moved this business to the U.K. The
SCAN-LOCK product is a high performance interlocking hard flooring suitable for
heavy duty applications, including factories and sports facilities.
Services
The Company provides commercial carpet installation services through
the Re:Source Americas services network. The network includes approximately 97
owned or affiliated commercial floorcovering contractors strategically located
throughout the major metropolitan areas of the United States. The network: (i)
allows the Company to monitor and enhance customer satisfaction throughout the
product ownership cycle, resulting in fewer claims; (ii) reduces the Company's
cost of selling by bolstering efforts of sales representatives at the mill level
with contractor-level support; (iii) improves pricing for products; and (iv)
achieves efficiencies by augmenting administrative functions of contractors.
The Re:Source Americas service network also provides carpet maintenance
services using the Company's IMAGE(TM) maintenance system. The IMAGE system
includes a custom-engineered maintenance methodology and a line of cleaning
chemicals manufactured by Interface Americas Re:Source Technologies, Inc. In
Europe, the Company has re-launched the European version of the IMAGE program,
pursuant to which the Company has licensed selected independent service
contractors to provide carpet maintenance services.
The Re:Source Americas service network also provides carpet replacement
services using its RENOVISIONS(R) process. This process utilizes patented
lifting equipment and specialty tools to lift office equipment and modular
workstations in place, permitting the economical replacement of existing carpet
with virtually no disruption of the customer's business. Other proprietary
products facilitate the movement of file cabinets, office furniture, and even
complete workstations, without the inefficiency and disruption associated with
unloading and dismantling the items being moved.
Finally, the Re:Source Americas service network provides a channel for
delivery of a variety of additional services and products offered by the
Company, including furniture moving and installation, furniture refurbishment,
project management, carpet reclamation and recycling through the Company's
RE:ENTRY(TM) reclamation system, adhesives manufactured by Re:Source
Technologies, specialty products manufactured by Pandel, Inc. and raised/access
flooring systems manufactured by Interface Architectural Resources, Inc.
Marketing and Sales
The Company traditionally has focused its carpet marketing strategy on
major accounts, seeking to build lasting relationships with national and
multinational end-users, and on specifiers, such as architects, engineers,
interior designers, and contracting firms who often make or significantly
influence the purchase decision. The acquisitions of Bentley Mills and Prince
Street significantly strengthened the Company's relationships with interior
designers and architects and have enhanced the Company's ability to target those
and other specifiers at the critical design stage of commercial projects. The
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Company emphasizes sales to the commercial office sector, both new construction
and renovation, as well as to health care facilities, governmental institutions
and public facilities, including libraries, museums, convention and hospitality
centers, airports, schools and hotels. The Company's marketing efforts are
enhanced by the well-known brand names of its carpet products, including
INTERFACE and HEUGA in modular carpet, and BENTLEY, PRINCE STREET and FIRTH in
broadloom carpet.
An important part of the Company's marketing and sales efforts involves
the preparation of custom-made samples of requested carpet designs, in
conjunction with the development of innovative product designs and styles to
meet the customer's particular needs. (See "Business Strategy and Principal
Initiatives", above, and "Product Design, Research, and Development", below.)
The Company's mass customization initiative simplified the Company's carpet
manufacturing operations, which significantly improved its ability to respond
quickly and efficiently to requests for samples. The turnaround time for the
Company to produce made-to-order carpet samples to customer specifications has
been reduced from an average of 30 days in 1993 to approximately 3 days in 1999,
and the average number of carpet samples produced per month has increased from
90 per month in 1993 to approximately 1,200 per month in 1999. This sample
production ability has significantly enhanced the Company's marketing and sales
efforts and has increased the Company's volume of higher margin custom or
made-to-order sales.
The Company primarily uses its internal marketing and sales force of
over 1,100 persons to market its carpet products, and it also relies on
contractors in its Re:Source Americas service network to bolster its sales
efforts. In order to implement its global marketing efforts, the Company has
product and design studios in the United States, England, France, Germany,
Spain, Norway, the Netherlands, Australia, Japan and Singapore. The Company
expects to open such offices in other locations around the world as necessary to
capitalize on emerging marketing opportunities.
Manufacturing
The Company manufactures carpet in the United States, the Netherlands,
the United Kingdom, Canada, Australia and Southeast Asia, SOLENIUM resilient
textile flooring in the United States and the United Kingdom, and vinyl flooring
in the United Kingdom. In addition to enhancing the Company's ability to develop
a strong local presence in foreign markets, having foreign manufacturing
operations enables the Company to supply its customers with carpet from the
location offering the most advantageous delivery times, exchange rates, duties
and tariffs and freight expense. The Company believes that the ability to offer
consistent products and services on a worldwide basis at attractive prices is an
important competitive advantage in servicing multinational customers seeking
global supply relationships. The Company will consider additional locations for
manufacturing operations in other parts of the world as necessary to meet the
demands of customers in growing international markets.
The environmental management systems of the Company's Northern Ireland,
West Yorkshire, England (Don E. Russell Plant), Australian, the Netherlands and
Canadian floorcoverings manufacturing facilities are certified under ISO 14001.
The Company currently obtains a significant percentage of its
requirements for synthetic fiber (the principal raw material used in the
Company's carpet products) from E.I. DuPont de Nemours and Company ("Dupont").
The Company believes that its arrangements with DuPont permit the Company to
obtain favorable terms. However, the Company currently purchases fiber from
other long-term suppliers, and there are adequate alternative sources of supply
from which the Company could fulfill its synthetic fiber requirements if its
arrangements with DuPont should change. Other raw materials used by the Company
are also readily available from a number of sources.
In 1995 and 1996, the Company implemented a manufacturing plan in which
it standardized its worldwide manufacturing procedures. In connection with the
implementation of this plan, the Company adopted global standards for its
tufting equipment, yarn systems and product styling, and changed its standard
carpet tile size from 18 square inches to 50 square centimeters. The Company
believes that changing its standard carpet tile size has allowed it to reduce
operational waste and fossil fuel energy consumption and to offer consistent
product sizing for its global customers.
The Company's significant international operations are subject to various
political, economic and other uncertainties, including risks of restrictive
taxation policies, foreign exchange restrictions, changing political conditions
and governmental regulations. The Company also receives a substantial portion of
its revenues in currencies other than U.S. dollars, which makes it subject to
the risks inherent in currency translations. Although the Company's ability to
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manufacture and ship products from facilities in several foreign countries
reduces the risks of foreign currency fluctuations it might otherwise
experience, and the Company also engages from time to time in hedging programs
intended to further reduce those risks, the scope and volume of the Company's
global operations make it impossible to eliminate completely all foreign
currency translation risks as a factor for the Company's financial results.
Competition
The commercial floorcovering industry is highly competitive. The
Company competes, on a global basis, in the sale of its floorcovering products
with other carpet manufacturers and manufacturers of vinyl and other types of
floorcoverings. Although the industry recently has experienced significant
consolidation, a large number of manufacturers remain in the industry.
Management believes that the Company is the largest manufacturer of modular
carpet in the world, possessing a global market share that is more than two
times that of its nearest competitor. However, a number of domestic and foreign
competitors manufacture modular carpet as one segment of their business, and
certain of these competitors have financial resources in excess of the
Company's.
The Company believes the principal competitive factors in its primary
floorcovering markets are quality, design, service, broad product lines, product
life, marketing strategy, and pricing. In the commercial office market, modular
carpet competes with various floorcoverings, of which broadloom carpet is the
most common. In the health-care facilities market, the Company's products
compete primarily with resilient tile. The Company believes that SOLENIUM, its
new resilient textile flooring product, and treatment of its modular carpet with
the INTERSEPT antimicrobial chemical agent are material factors in its ability
to compete successfully in the health care market. The quality, service, design,
longer average life, flexibility (design options, selective rotation or
replacement, use in combination with roll goods) and convenience of the
Company's modular carpet are its principal competitive advantages, which are
offset in part by its higher initial cost when compared to comparable grades of
broadloom carpet. The acquisitions of Bentley Mills, Prince Street and Firth
Carpets, with their broadloom carpet product lines, have enhanced the Company's
competitive position by enabling the Company to offer one-stop shopping to
commercial carpet customers and, thus, to capture some sales that would have
gone to competitors. In addition, the Company believes that its global
manufacturing capabilities are an important competitive advantage in serving the
needs of multinational corporate customers. Finally, the Company believes that
the formation of the Re:Source service provider network, and the resulting
improvement in customer service, has further enhanced the Company's competitive
position.
Interior Fabrics
- - ----------------
Products
The Company, through its Fabrics Group, designs, manufactures and
markets specialty fabrics for open plan office furniture systems and commercial
interiors. Sales of panel fabrics to OEMs of movable office furniture systems
constituted approximately 57% of total North American fabrics sales in fiscal
1999. In addition, the Company produces woven and knitted seating fabrics, wall
covering fabrics, wool upholstery fabrics, fabrics used for vertical blinds in
office interiors, and fabrics used for cubicle curtains in health care
facilities.
Open plan office furniture systems are typically panel-enclosed work
stations customized to particular work environments. The open plan concept
offers a number of advantages over conventional office designs, including more
efficient floor space utilization, reduced energy consumption and greater
flexibility to redesign existing space. Since carpet and fabrics are used in the
same types of commercial interiors, the Company's carpet and interior fabrics
operations are able to coordinate the color, design and marketing of both
product lines to their respective customers as part of the Company's "total
interior solutions" approach.
The Company, in recent years, has diversified and expanded
significantly both its product offerings and markets for interior fabrics. The
Company's 1993 acquisition of the STEVENS LINEN lines added decorative, upscale
upholstery fabrics and specialty textile products to the Fabrics Group's
traditional product offerings. The Company's June 1995 acquisition of Toltec
Fabrics, Inc., a manufacturer and marketer of fabric for the contract and home
furnishings upholstery markets, enhanced the Company's presence in the contract
jobber market; and its December 1995 acquisition of the Intek division of
Springs Industries, a manufacturer experienced in the production of
lighter-weight panel fabrics, has strengthened the Fabrics Group's capabilities
in that market. All of these developments have reinforced the Fabrics Group's
dominant position with OEMs of movable office furniture systems.
- 7 -
<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 Fabrics Group's
product offering. In 1998, the Company acquired Glenside Fabrics Limited, a
United Kingdom based manufacturer of upholstery fabrics for the contract
furnishings and leisure markets. The Glenside acquisition further enhances the
Fabrics Group's European presence. As part of its restructuring announced in the
first quarter of 1999, the Company is in the process of consolidating Glenside's
and Camborne's manufacturing operations.
The Company manufactures fabrics made of 100% polyester, as well as
wool-polyester blends and numerous other natural and man-made blends, which are
either woven or knitted. Its products feature a high degree of color
consistency, natural dimensional stability and fire retardancy, in addition to
their overall aesthetic appeal. All of the Company's product lines are color and
texture coordinated. The Company seeks continuously to enhance product
performance and attractiveness through experimentation with different fibers,
dyes, chemicals and manufacturing processes. Product innovation in the interior
fabrics market (similar to the floorcoverings market) is important to achieving
and maintaining market share. (See "Business Strategy and Principal
Initiatives", above, and "Product Design, Research and Development", below.)
In 1997, the Company introduced its TERRATEX(R) line of panel fabrics.
The TERRATEX label is intended to denote fabrics manufactured from 100% recycled
polyester, and includes both new products and traditional product offerings. The
first fabric to bear the TERRATEX label was Guilford of Maine's FR701(R) line.
Since 1997, several fabrics, including for the first time in 2000, seating
fabrics, have carried the TERRATEX label. Each of the Fabrics Group's companies
now markets fabrics in the TERRATEX line.
The Company anticipates that future growth opportunities will arise
from the growing market for retrofitting services, where fabrics are used to
re-cover existing panels. In addition, the increased importance being placed on
the aesthetic design of office space should lead to a significant increase in
upholstery fabric sales. Management also believes that significant growth
opportunities exist in international sales, in domestic health care markets, in
contract wallcoverings, and in the provision of ancillary textile processing
services such as the lamination of fabrics onto substrates for pre-formed
panels.
Marketing and Sales
-------------------
The Company's principal interior fabrics customers are OEMs of movable
office furniture systems. The Fabrics Group sells to essentially all of the
major office furniture manufacturers. The Fabrics Group also sells to
manufacturers and distributors of wallcoverings, vertical blinds, cubicle
curtains, acoustical wallboards, ceiling tiles and residential furniture, and,
since the acquisition of Toltec Fabrics, to contract jobbers. The GUILFORD OF
MAINE, STEVENS LINEN, TOLTEC, INTEK, CAMBORNE and GLENSIDE brand names are
well-known in the industry and enhance the Company's fabric marketing efforts.
The majority of the Company's interior fabrics sales are made through
the Fabrics Group's own sales force. The sales team works closely with
designers, architects, facility planners and other specifiers who influence the
purchasing decisions of buyers in the interior fabrics segment. In addition to
facilitating sales, the resulting relationships also provide the Company with
marketing and design ideas that are incorporated into the development of new
product offerings. The Fabrics Group maintains a design studio in Grand Rapids,
Michigan which facilitates coordination between its in-house designers and the
design staffs of major customers.
The Company's interior fabric sales offices are located in New York,
New York, Grand Rapids, Michigan and the United Kingdom. The Fabrics Group also
has marketing and distribution facilities in Canada and Hong Kong, and sales
representatives in Japan, Hong Kong, Singapore, Malaysia, Korea and South
Africa. The Company has sought increasingly, over the past several years, to
expand its export business and international operations in the fabrics segment,
both to accommodate the demand of principal OEM customers that are expanding
their businesses overseas, and to facilitate additional coordinated marketing to
multinational customers of the Company's carpet business as part of the
Company's "total interior solutions" approach.
- 8 -
<PAGE>
Manufacturing
The Company's fabrics manufacturing facilities are located in Maine,
Massachusetts, Michigan, North Carolina and West Yorkshire, England. The
production of synthetic and wool blended fabrics is a relatively complex,
multi-step process. Raw fiber and yarn are placed in pressurized vats in which
dyes are forced into the fiber. Particular attention is devoted to this dyeing
process, which requires a high degree of expertise in order to achieve color
consistency. All raw materials used by the Company are readily available from a
number of sources. The Fabrics Group also now uses 100% recycled fiber
manufactured from PET soda bottles in its manufacturing process.
In response to a shift in the Fabrics Group's traditional panel fabric
market toward lighter-weight, less expensive products, the Company implemented a
major capital investment program in 1994 which included the construction of a
new facility and the acquisition of equipment to enhance the efficiency and
breadth of the Fabrics Group's yarn manufacturing processes. The program
improved the Fabrics Group's cost effectiveness in producing such lighter-weight
fabrics, reduced manufacturing cycle time, and enabled the Fabrics Group to
reinforce its product leadership position with its OEM customers. The
acquisition of Intek in December 1995 provided the Company with immediate and
significant capabilities in the efficient production of lighter-weight, less
expensive panel fabrics and the acquisition of Camborne provided a
European-based manufacturing facility and much needed expertise in the
production of wool fabrics. The Company believes that it has recently been
successful in designing fabrics that have simplified the manufacturing process,
thereby reducing complexity while improving efficiency and quality. Through the
use of existing raw materials, new fabrics are being manufactured using the mass
customization production strategy. By employing the capabilities that are now
available with the Company's new manufacturing facility, the Company anticipates
that its ability to apply the mass customization production strategy to the
manufacture of fabrics will be expanded. See "Business Strategy and Principal
Initiatives", above.
The environmental management system of the Fabrics Group's largest
facility, in Guilford, Maine has been granted ISO 14001 certification. The
Company's East Douglas, Maine and West Yorkshire, England fabrics manufacturing
facilities are also certified under ISO 14001.
The Company offers textile processing services through the Fabrics
Group's Component Technologies division in Grand Rapids, Michigan. Such services
include the lamination of fabrics onto substrates for pre-formed office
furniture system panels, facilitating easier and more cost effective assembly of
the system components by the Fabrics Group's OEM customers.
Competition
-----------
The Company competes in the interior fabrics market on the basis of
product design, quality, reliability, price and service. By electing to
concentrate on the open plan office furniture systems segment, the Fabrics Group
has been able to specialize its manufacturing capabilities, product offerings
and service functions, resulting in a leading market position. Through Interface
Fabrics Group, Inc. (formerly Guilford of Maine, Inc. and Interface Interior
Fabrics, Inc.), Toltec Fabrics, Inc. and Intek, Inc., the Company is the largest
U.S. manufacturer of panel fabric for use in open plan office furniture systems.
Drawing upon its dominant position in the panel fabric segment and
through its strategic acquisitions, the Company has been successfully
diversifying its product offerings for the commercial interiors market to
include a variety of non-panel fabrics, including upholstery, cubicle curtains,
wallcoverings, ceiling fabrics and window treatments. The competition in these
segments of the market is highly fragmented and includes both large, diversified
textile companies, several of which have greater financial resources than the
Company, as well as smaller, non-integrated specialty manufacturers. However,
the Company's capabilities and strong brand names in these segments should
enable it to continue to compete successfully.
Specialty Products
------------------
The Interface Specialty Products Group is composed of: Interface
Architectural Resources, Inc., which produces and markets raised/access flooring
systems; Interface Americas Re:Source Technologies, Inc. (formerly Rockland
React-Rite), which develops, manufactures and markets adhesives and other
specialty chemical products and which includes the Company's INTERSEPT
antimicrobial sales and licensing program; and Pandel, Inc., which produces
vinyl carpet tile backing and specialty mat and foam products.
- 9 -
<PAGE>
The Company manufactures and markets cable management raised/access
flooring systems through Interface Architectural Resources, Inc. The Company's
initial product offering in this sector, marketed under the INTERCELL brand, is
a low-profile (total height of less than three inches) cable management flooring
system particularly well suited for use in the renovation of existing buildings.
In 1995, the Company acquired the rights to the INTERSTITIAL SYSTEMS(TM) access
flooring product, a patented, multiple plenum system that serves to separate
pressurized, climate-controlled air flow from the electrical and
telecommunications cables included within the same access flooring system. In
February 1996, the Company acquired C-Tec, Inc., the second largest manufacturer
of raised/access flooring systems in the United States. Interface Architectural
Resources markets the successful C-TEC line of products (TEC-COR(TM) and
TEC-CRETE(R)), which combines the tensile strength of steel and the compressive
strength of concrete to create a durable, uniform and sound-absorbent panel
which is available in a variety of surfaces. In July 1998, the Company acquired
Atlantic Access Flooring, Inc., a manufacturer of steel panel raised/access
flooring systems. With the acquisition of Atlantic, the Company believes that it
now offers the broadest line of raised/access flooring systems in the industry.
The Company manufactures a line of adhesives for carpet installation,
as well as a line of carpet cleaning and maintenance chemicals, which it markets
as part of its IMAGE maintenance system. One of the Company's leading chemical
products, in terms of applicability for the commercial and institutional
interiors market, is its proprietary antimicrobial chemical compound, sold under
the registered trademark INTERSEPT(R). The Company uses INTERSEPT in many of its
carpet products and has licensed INTERSEPT to other companies for use in a
number of products that are noncompetitive with the Company's products, such as
paint, vinyl wallcoverings, ceiling tiles and air filters. In addition, the
Company produces and markets PROTEKT2(R), a proprietary soil and stain retardant
treatment, and FATIGUE FIGHTER(R), an impact-absorbing modular flooring system
typically used where people stand for extended periods.
One World Learning
- - ------------------
In 1997, the Company created One World Learning, Inc., an employee
training and education company specializing in experiential learning methods. In
addition to serving as the Company's internal learning facilitation resource,
One World Learning markets its experiential programs to other companies. One
World Learning also educates Interface associates on sustainability principles,
including those of The Natural Step founded by Dr. Karl-Henrik Robert, currently
engaged by the Company as a consultant.
Interface Research Corporation
- - ------------------------------
Interface Research Corporation ("IRC") provides technical support and
advanced materials research and development for the entire family of Interface
companies. Recent developments at IRC include NEXSTEP backing, a material based
on moisture-impervious polycarbite precoating technology combined with a
chlorine-free urethane foam secondary backing, and a recycled post-consumer,
polyvinyl chloride ("PVC") extruded sheet process that has been successfully
incorporated into the Company's modular carpet line. The Company's DEJA VU(TM)
and RECYCLEBAC(TM) products use the PVC extruded sheet and exemplify the
Company's commitment to "closing-the-loop" in recycling. With a goal of
supporting sustainable product designs in both floorcoverings and interior
fabrics applications, IRC is a frontrunner in evaluating 100% renewable polymers
based on corn-derived polylactic acid polymers for the Company's products.
IRC is the home of the Company's ECOSENSE initiative and supports the
dissemination, consultancies and technical communication of the Company's global
sustainability endeavors.
In addition, IRC's president also serves as the Chairman of the
Envirosense Consortium. IRC's laboratories provide all biochemical and technical
support to INTERSEPT antimicrobial product initiatives, which initiatives were
the basis for founding the Consortium and for its focus on indoor air quality.
See "Environmental Initiatives" below.
- 10 -
<PAGE>
Product Design, Research and Development
- - ----------------------------------------
The Company maintains an active research, development and design staff
of approximately 100 persons and also draws on the research and development
efforts of its suppliers, particularly in the areas of fibers, yarns and modular
carpet backing materials.
Innovation and increased customization in product design and styling
are the principal focus of the Company's product development efforts. The
Company's carpet design and development team is recognized as the industry
leader in carpet design and product engineering for the commercial and
institutional markets. In cooperation with David Oakey since January 1994
(pursuant to the Company's exclusive consulting contract with Oakey Designs),
the Company has introduced over 104 new carpet designs during the last six years
and has enjoyed considerable success in winning U.S. carpet industry awards
bestowed by the IIDA.
Mr. Oakey also contributed to the Company's implementation of a new
product development concept - "simple inputs, pretty outputs" - resulting in the
ability to efficiently produce many products from a single yarn system. The
Company's mass customization production approach evolved, in major part, from
this concept. In addition to increasing the number and variety of product
designs (which enables the Company to increase high margin custom sales), the
mass customization approach increases inventory turns and reduces inventory
levels (for both raw materials and standard products) and their related costs
because of the Company's more rapid and flexible production capabilities.
Oakey Designs' services have been extended to the Company's
international carpet tile operations and its domestic and international
broadloom companies. The Company expects increased levels of innovation in
product design and development for those divisions to be achieved in the future.
Environmental Initiatives
- - -------------------------
An important initiative of the Company over the past several years has
been the development of the Envirosense Consortium, an organization of companies
concerned with addressing workplace environmental issues, particularly poor
indoor air quality. The Consortium's member organizations include interior
products manufacturers (some of which are licensees of the Company's INTERSEPT
antimicrobial agent) and design professionals. The Consortium, in conjunction
with Phillips & Linders International, recently developed an on-line continuing
education course series entitled "Fundamentals of Indoor Air Quality." The
series offers three course modules that are registered with the American
Institute of Architects' Continuing Education System. The series is being
offered in association with the faculty at the University of Florida M.E.
Rinker, Sr. School of Building Construction and School of Architecture.
In the latter part of 1994, the Company commenced a new industrial
ecology initiative called EcoSense, inspired in major part by the interest of
important customers concerned about the environmental implications of how they
and their suppliers do business. EcoSense is directed towards the elimination of
energy and raw materials waste in the Company's businesses, and, on a broader
and more long-term scale, the practical reclamation - and ultimate restoration -
of shared environmental resources. The initiative involves a commitment by the
Company (i) to learn to meet its raw material and energy needs through recycling
of carpet and other petrochemical products and harnessing benign energy sources,
and (ii) to pursue the creation of new processes to help sustain the earth's
non-renewable natural resources. EcoSense includes the Company's QUEST waste
reduction initiative, pursuant to which the Company realized an aggregate of $10
million in savings in 1999. See "Business Strategy and Principal Initiatives -
Ecological Sustainability Through Quest and EcoSense Programs".
The Company has engaged some of the world's leading authorities on
global ecology as environmental consultants. The current list of consultants
includes: Paul Hawken, author of THE ECOLOGY OF COMMERCE and THE NEXT ECONOMY;
Amory Lovins, energy consultant, co-founder of the Rocky Mountain Institute;
Hunter Lovins, President and Executive Director of the Rocky Mountain Institute;
John Picard, President of E2, American environmental consultant; David Brower,
former executive director of the Sierra Club, founder of The Earth Island
Institute; Jonathan Porritt, director of Forum for the Future; Bill Browning,
director of the Rocky Mountain Institute's Green Development Services; Dr.
Karl-Henrik Robert, founder of The Natural Step; Janine M. Benyus, author of
BIOMIMICRY; and Walter Stahel, Swiss businessman and seminal thinker on
environmentally responsible commerce.
The Company believes that its environmental initiatives are valued by
its employees and an increasing number of important customers and provide a
competitive advantage in marketing products to such customers. The Company also
believes that the resulting long-term resource efficiency (reduction of wasted
environmental resources) will ultimately produce cost savings and advantages to
the Company.
Environmental Matters
- - ---------------------
The Company's operations are subject to federal, state and local laws
and regulations relating to the generation, storage, handling, emission,
transportation and discharge of materials into the environment. Management
believes that the Company is in substantial compliance with all applicable
federal, state and local provisions relating to the protection of the
environment. The costs of complying with environmental protection laws and
- 11 -
<PAGE>
regulations have not had a material adverse impact on the Company's financial
condition or results of operations in the past and are not expected to have a
material adverse impact in the future.
Backlog
- - -------
The Company's backlog of unshipped orders was approximately $158.3
million at February 27, 2000, compared to approximately $165.0 million at
February 28, 1999. Historically, backlog is subject to significant fluctuations
due to the timing of orders for individual large projects and currency
fluctuations. All of the backlog of orders at February 27, 2000 is expected to
be shipped during the succeeding six to nine months.
Patents and Trademarks
- - ----------------------
The Company owns numerous patents in the United States and abroad on
its modular flooring and manufacturing processes and on the use of its INTERSEPT
antimicrobial chemical agent in various products. The duration of United States
patents is between 14 and 20 years from the date of filing of a patent
application or issuance of the patent; the duration of patents issued in other
countries varies from country to country. The Company considers its know-how and
technology more important to its current business than patents, and,
accordingly, believes that expiration of existing patents or nonissuance of
patents under pending applications would not have a material adverse effect on
its operations. However, the Company maintains an active patent and trade secret
program in order to protect its proprietary technology, know-how and trade
secrets.
The Company also owns numerous trademarks in the United States and
abroad. In addition to the United States, the primary countries in which the
Company has registered its trademarks are the United Kingdom, Germany, Italy,
France, Canada, Australia, Japan, and various countries in Central and South
America. Some of the more prominent registered trademarks of the Company
include: INTERFACE, HEUGA, INTERSEPT, GLASBAC, GUILFORD, GUILFORD OF MAINE,
BENTLEY, PRINCE STREET, INTERCELL, FIRTH, CAMBORNE, GLENSIDE, TERRATEX and
FR701. Trademark registrations in the United States are valid for a period of 10
years and are renewable for additional 10-year periods as long as the mark
remains in actual use. The duration of trademarks registered in other countries
varies from country to country.
Financial Information by Operating Segments
- - -------------------------------------------
The Notes to the Company's Consolidated Financial Statements sets forth
information concerning the Company's sales, income and assets by operating
segments. See Item 8.
Employees
- - ---------
At January 2, 2000, the Company employed a total of approximately 7,250
employees worldwide. Of such employees, approximately 2,100 are clerical, sales,
supervisory and management personnel and the balance are manufacturing
personnel.
Certain of the service businesses within the Re:Source Americas service
network have employee groups that are represented by unions. In addition,
certain of the Company's production employees in Australia and the United
Kingdom are represented by unions. In the Netherlands, a Works Council, the
members of which are Company employees, is required to be consulted by
management with respect to certain matters relating to the Company's operations
in that country, such as a change in control of Interface Europe B.V. (the
Company's modular carpet subsidiary based in the Netherlands), and the approval
of such Council is required for certain actions, including changes in
compensation scales or employee benefits. Management believes that its relations
with the Works Council, the unions and all of its employees are good.
Securities Litigation Reform Act
- - --------------------------------
This Form 10-K and other statements issued or made from time to time by
the Company or its representatives contain statements which may constitute
"forward-looking statements" within the meaning of the Securities Act of 1933,
as amended, and the Securities Exchange Act of 1934, as amended by the Private
Securities Litigation Reform Act of 1995. Those statements include statements
regarding the intent, belief or current expectations of the Company and members
of its management team, as well as the assumptions on which such statements are
based. Prospective investors are cautioned that any such forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties, and that actual results may differ materially from those
contemplated by such forward-looking statements. Important factors currently
- 12 -
<PAGE>
known to management that could cause actual results to differ materially from
those in forward-looking statements are set forth in the Safe Harbor Compliance
Statement for Forward-Looking Statements included as Exhibit 99.1 to this Form
10-K, and are hereby incorporated by reference. The Company undertakes no
obligation to update or revise forward-looking statements to reflect changed
assumptions, the occurrence of unanticipated events or changes to future
operating results over time.
Executive Officers of the Registrant
- - ------------------------------------
The executive officers of the Company, their ages as of March 15, 2000,
and principal positions with the Company are as follows. Executive officers
serve at the pleasure of the Board of Directors.
<TABLE>
<CAPTION>
Name Age Principal Position(s)
---- --- ---------------------
<S> <C>
Ray C. Anderson 65 Chairman of the Board, President and Chief Executive
Officer
Michael D. Bertolucci 59 Senior Vice President
Brian L. DeMoura 54 Senior Vice President
Daniel T. Hendrix 45 Senior Vice President, Chief Financial Officer,
Treasurer and Assistant Secretary
John H. Walker 55 Senior Vice President
John R. Wells 38 Senior Vice President
Raymond S. Willoch 41 Senior Vice President, General Counsel and Secretary
</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 also re-named President of the Company in August 1999 upon the departure of
the Company's former President and Chief Operating Officer. Mr. Anderson was
appointed by President Clinton to the President's Council on Sustainable
Development in 1996 and served as Co-Chair until the Council's dissolution in
June 1999. He currently serves on the Boards of numerous nonprofit
organizations.
Dr. Bertolucci joined the Company in April 1996 as President of
Interface Research Corporation and Senior Vice President of the Company. Dr.
Bertolucci also serves as Chairman of the Envirosense Consortium which was
founded by Interface and focuses on addressing workplace environmental issues.
From October 1989 until joining the Company, he was Vice President of Technology
for Highland Industries, an industrial fabric company located in Greensboro,
North Carolina.
Mr. DeMoura joined the Company in March 1994 as President and Chief
Executive Officer of Guilford of Maine, Inc. (now Interface Fabrics Group, Inc.)
and Senior Vice President of the Company. He is responsible for the Fabrics
Group, which includes the following brands: GUILFORD OF MAINE, STEVENS LINEN,
TOLTEC, INTEK, CAMBORNE and GLENSIDE.
Mr. Hendrix, who previously was with a national accounting firm, joined
the Company in 1983. He was promoted to Treasurer of the Company in 1984, Chief
Financial Officer in 1985, Vice President - Finance in 1986, and Senior Vice
President in October 1995.
Mr. Walker began his career with the Company as Financial Controller of
the U.K. Division of Heuga Holding B.V. (now Interface Europe B.V.), the
Netherlands-based carpet tile manufacturer acquired by the Company in 1988. He
later served as Vice President - Sales & Marketing of Interface Europe B.V. and
in July 1995 was promoted to the position of Senior Vice President of the
Company and President and Chief Executive Officer of Interface Europe, Inc. (now
Interface Overseas Holdings, Inc.). In his current position, he has
responsibility for the Company's floorcovering operations in both Europe and the
Asia-Pacific region.
Mr. Wells joined the Company in February 1994 as Vice President - Sales
of Interface Flooring Systems, Inc. ("IFS", the Company's principal U.S. modular
carpet subsidiary) and was promoted to Senior Vice President - Sales & Marketing
of IFS in October 1994. He was promoted to Vice President of the Company and
President and Chief Executive Officer of IFS in July 1995. In March 1998, Mr.
Wells was also named President and CEO of both Prince Street and Bentley Mills,
making him President and CEO of all three of the Company's U.S. carpet mills. In
November 1999, Mr. Wells was named Senior Vice President of the Company and
President and Chief Executive Officer of Interface Americas, thereby assuming
responsibility for all of the Company's operations in the Americas, except for
the Fabrics Group.
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<PAGE>
Mr. Willoch, who previously practiced with an Atlanta law firm, joined
the Company in June 1990 as Corporate Counsel. He was promoted to Assistant
Secretary in 1991, Assistant Vice President in 1993, Vice President in January
1996, and Secretary and General Counsel in August 1996. In February 1998, Mr.
Willoch was promoted to Senior Vice President.
ITEM 2. PROPERTIES
Properties
- - ----------
The Company maintains its corporate headquarters in Atlanta, Georgia in
approximately 25,000 square feet of leased space. The following table lists the
Company's principal manufacturing facilities, all of which are owned by the
Company except as otherwise noted:
<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
West Yorkshire, England....................................Broadloom carpet 674,666
Aberdeen, North Carolina...................................Interior fabrics 88,000
Dudley, Massachusetts......................................Interior fabrics 321,000
East Douglas, Massachusetts ...............................Interior fabrics 301,772
Grand Rapids, Michigan <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 177,000
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.
</FN>
</TABLE>
The Company maintains marketing offices in approximately 95 locations
in 39 countries and distribution facilities in approximately 40 locations in six
countries. Most of the marketing locations and many of the distribution
facilities are leased.
The Company believes that its manufacturing and distribution
facilities, and its marketing offices, are sufficient for its present
operations. The Company will continue, however, to consider the desirability of
establishing additional facilities and offices in other locations around the
world as part of its business strategy to meet expanding global market demands.
- 14 -
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
On July 28, 1998, Collins & Aikman Floorcoverings, Inc. ("CAF") -- in
the wake of receiving "cease and desist" letters from the Company demanding that
CAF cease manufacturing certain carpet products that the Company believes
infringed upon certain of its copyrighted product designs -- filed a lawsuit
against the Company asserting that certain of the Company's products, primarily
its Caribbean(TM) design product line, infringed on certain of CAF's alleged
copyrighted product designs. The lawsuit, which is pending in the United States
District Court for the Northern District of Georgia, Atlanta Division, Civil
Action No. 1:98-CV-2069, seeks injunctive relief and unspecified monetary
damages. The lawsuit also asserts other claims against the Company and certain
other parties, including for alleged tortious interference by the Company with
CAF's contractual relationship with the Roman Oakey Designs firm.
On September 28, 1998, the Company filed its answer denying all the
claims asserted by CAF, and also asserting counterclaims against CAF for
copyright infringement. The Company believes the claims asserted by CAF are
unfounded and subject to meritorious defenses, and it is defending vigorously
all the claims. At the present time, discovery has been limited by Court order
to matters relating to CAF's motion for preliminary injunction, and both the
Company and CAF have filed motions for summary judgment. As a result of
Court-ordered mediation not leading to a resolution of the disputes between the
parties, the Company expects the Court will soon set a schedule for arguments
and a hearing on the pending motions.
The Company's insurers have denied coverage under the Company's
insurance policies, which annually would otherwise provide up to $100 million of
coverage. On June 8, 1999, the Company filed suit against the insurers to
challenge that denial. That lawsuit is pending in the United States District
Court for the Northern District of Georgia, Atlanta Division, Civil Action No.
1:99-CV-1485, and is in the early stages of its proceedings. On January 20,
2000, the Company filed a motion for partial summary judgment to enforce the
insurers' obligation to defend the Company against the claims by CAF, which
motion is pending.
Both the CAF infringement lawsuit and the Company's insurance coverage
lawsuit involve complex legal and factual issues, and while the Company believes
strongly in the merits of its legal positions, it is impossible to predict with
accuracy the outcome of either such litigation matter at this stage. The Company
intends to continue its aggressive pursuit of its positions in both actions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during
the fourth quarter of the fiscal year covered by this Report.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SHAREHOLDER MATTERS
The information concerning the market prices for the Company's Class A
Common Stock and dividends on the Company's Common Stock included in the Notes
to the Company's Consolidated Financial Statements (the "Notes") in the
Company's 1999 Annual Report to Shareholders is incorporated herein by
reference. As of March 15, 2000, the Company had 404 holders of record of its
Class A Common Stock and 62 holders of record of its Class B Common Stock.
Management believes that there are in excess of 5,000 beneficial holders of the
Class A Common Stock.
During fiscal 1999, the Company issued an aggregate of 79,950 shares of
its Common Stock that were not registered under the Securities Act of 1933
("Securities Act"). The shares, in combination with cash, were issued as
consideration to four individuals in the acquisition of Premier Floors, Inc. The
market price on the date of issuance was $9.875 per share. The issuance of the
foregoing shares is exempt from registration under the Securities Act pursuant
to Section 4(2) of the Securities Act, or Regulation D promulgated thereunder,
as transactions by an issuer not involving a public offering.
- 15 -
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
Selected Financial Information included in the Company's 1999 Annual
Report to Shareholders, being filed as Exhibit 13 hereto, is incorporated herein
by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results
of Operations ("MD&A") included in the Company's 1999 Annual Report to
Shareholders, being filed as Exhibit 13 hereto, is incorporated herein by
reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The information contained under the caption "Quantitative and
Qualitative Disclosure About Market Risk" included in the MD&A section of the
Company's 1999 Annual Report to Shareholders is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and the Report of Independent
Certified Public Accountants included in the Company's 1999 Annual Report to
Shareholders, being filed as Exhibit 13 hereto, are incorporated herein by
reference.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained under the caption "Nomination and Election of
Directors" in the Company's definitive Proxy Statement for the Company's 2000
Annual Meeting of Shareholders, to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A not later than 120 days after the end of
the Company's 1999 fiscal year, is incorporated herein by reference. Pursuant to
Instruction 3 to Paragraph (b) of Item 401 of Regulation S-K, information
relating to the executive officers of the Company is included in Item 1 of this
Report.
The information contained under the caption "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's definitive Proxy Statement for
the Company's 2000 Annual Meeting of Shareholders, to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A not later than 120
days after the end of the Company's 1999 fiscal year, is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the caption "Executive Compensation and
Related Items" in the Company's definitive Proxy Statement for the Company's
2000 Annual Meeting of Shareholders, to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A not later than 120 days after the
end of the Company's 1999 fiscal year, is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained under the caption "Principal Shareholders and
Management Stock Ownership" in the Company's definitive Proxy Statement for the
Company's 2000 Annual Meeting of Shareholders, to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A not later than 120 days after
the end of the Company's 1999 fiscal year, is incorporated herein by reference.
- 16 -
<PAGE>
For purposes of determining the aggregate market value of the Company's
voting and non-voting stock held by non-affiliates, shares held of record by
directors and executive officers of the Company have been excluded. The
exclusion of such shares is not intended to, and shall not, constitute a
determination as to which persons or entities may be "affiliates" of the Company
as that term is defined under federal securities laws.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the captions "Compensation Committee
Interlocks and Insider Participation" and "Certain Relationships and Related
Transactions" in the Company's definitive Proxy Statement for the Company's 2000
Annual Meeting of Shareholders, to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A not later than 120 days after the end of
the Company's 1999 fiscal year, is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
--------------------
The following Consolidated Financial Statements and Notes thereto of
Interface, Inc. and subsidiaries and related Report of Independent Certified
Public Accountants contained in the Company's 1999 Annual Report to
Shareholders, are incorporated by reference in Item 8 of this Report:
Consolidated Statements of Income and Comprehensive Income --
years ended January 2, 2000, January 3, 1999 and
December 28, 1997
Consolidated Balance Sheets-- January 2, 2000 and January 3, 1999
Consolidated Statements of Cash Flows -- years ended January 2,
2000, January 3, 1999 and December 28, 1997
Notes to Consolidated Financial Statements
Report of Independent Certified Public Accountants
2. Financial Statement Schedule
----------------------------
The following Consolidated Financial Statement Schedule of Interface,
Inc. and subsidiaries and related Report of Independent Certified Public
Accountants are included as part of this Report (see page 22)
Report of Independent Certified Public Accountants
Schedule II -- Valuation and Qualifying Accounts and Reserves
3. Exhibits
--------
The following exhibits are included as part of this Report:
Exhibit
Number Description of Exhibit
------ ----------------------
3.1 Restated Articles of Incorporation (included as Exhibit 3.1
to the Company's quarterly report on Form 10-Q for the
quarter ended July 5, 1998, previously filed with the
Commission and incorporated herein by reference).
3.2 Bylaws, as amended (included as Exhibit 3.2 to the Company's
quarterly report on Form 10-Q for the quarter ended April 1,
1990, previously filed with the Commission and incorporated
herein by reference).
4.1 See Exhibits 3.1 and 3.2 for provisions in the Company's
Articles of Incorporation and Bylaws defining the rights of
holders of Common Stock of the Company.
4.2 Rights Agreement between the Company and Wachovia Bank,
N.A., dated as of March 4, 1998, with an effective date of
March 16, 1998 (included as Exhibit 10.1A to the Company's
registration statement on Form 8-A/A dated March 12, 1998,
previously filed with the Commission and incorporated herein
by reference).
- 17 -
<PAGE>
4.3 Indenture governing the Company's 9.5% Senior Subordinated
Notes due 2005, dated as of November 15, 1995, among the
Company, certain U.S. subsidiaries of the Company, as
Guarantors, and First Union National Bank of Georgia, as
Trustee (the "Indenture") (included as Exhibit 4.1 to the
Company's registration statement on Form S-4, File No.
33-65201, previously filed with the Commission and
incorporated herein by reference); and Supplement No. 1 to
Indenture, dated as of December 27, 1996 (included as
Exhibit 4.2(b) to the Company's annual report on Form 10-K
for the year ended December 29, 1996, previously filed with
the Commission and incorporated herein by reference).
4.4 Form of Indenture governing the Company's 7.3% Senior Notes
due 2008, among the Company, certain U.S. subsidiaries of
the Company, as Guarantors, and First Union National Bank,
as Trustee (included as Exhibit 4.1 to the Company's
registration statement on Form S-3/A, File No. 333-46611,
previously filed with the Commission and incorporated herein
by reference).
10.1 Salary Continuation Plan, dated May 7, 1982 (included as
Exhibit 10.20 to the Company's registration statement on
Form S-1, File No. 2-82188, previously filed with the
Commission and incorporated herein by reference).*
10.2 Form of Salary Continuation Agreement (included as Exhibit
10.27 to the Company's quarterly report on Form 10-Q for the
quarter ended April 5, 1998, previously filed with the
Commission and incorporated herein by reference); and Form
of Amendment to Salary Continuation Agreement (included as
Exhibit 10.2 to the Company's annual report on Form 10-K for
the year ended January 3, 1999, previously filed with the
Commission and incorporated herein by reference).*
10.3 Interface, Inc. Omnibus Stock Incentive Plan (included as
Exhibit 10.6 to the Company's annual report on Form 10-K for
the year ended December 29, 1996, previously filed with the
Commission and incorporated herein by reference).*
10.4 Interface, Inc. Nonqualified Savings Plan (included as
Exhibit 4 to the Company's registration statement on Form
S-8, file no. 333-38677, previously filed with the
Commission and incorporated herein by reference).*
10.5 Third Amended and Restated Credit Agreement, dated as of
June 30, 1998, among the Company (and certain direct and
indirect subsidiaries), the lenders listed therein, SunTrust
Bank, Atlanta and The First National Bank of Chicago
(included as Exhibit 10.1 to the Company's quarterly report
on Form 10-Q for the quarter ended July 5, 1998, previously
filed with the Commission and incorporated herein by
reference).
10.6 Employment Agreement of Ray C. Anderson dated April 1, 1997
(included as Exhibit 10.1 to the Company's quarterly report
on Form 10-Q for the quarter ended June 29, 1997 (the "1997
Second Quarter 10-Q"), previously filed with the Commission
and incorporated herein by reference); Amendment thereto
dated January 6, 1998 (included as Exhibit 10.1 to the
Company's quarterly report on Form 10-Q for the quarter
ended April 5, 1998 (the "1998 First Quarter 10-Q") and
incorporated herein by reference); Second Amendment thereto
dated January 14, 1999, the form of which is included herein
as Exhibit 10.20; and Third Amendment thereto dated May 7,
1999.*
10.7 Change in Control Agreement of Ray C. Anderson dated April
1, 1997 (included as Exhibit 10.2 to the 1997 Second Quarter
10-Q, previously filed with the Commission and incorporated
herein by reference); Amendment thereto dated January 6,
1998 (included as Exhibit 10.2 to the 1998 First Quarter
10-Q and incorporated herein by reference); Second Amendment
thereto dated January 14, 1999, the form of which is
included herein as Exhibit 10.21; and Third Amendment
thereto dated May 7, 1999.*
10.8 Employment Agreement of Brian L. DeMoura dated April 1, 1997
(included as Exhibit 10.5 to the 1997 Second Quarter 10-Q,
previously filed with the Commission and incorporated herein
by reference); Amendment thereto dated January 6, 1998
(included as Exhibit 10.5 to the 1998 First Quarter 10-Q and
incorporated herein by reference); and Second Amendment
thereto dated January 14, 1999, the form of which is
included herein as Exhibit 10.20.*
- 18 -
<PAGE>
10.9 Change in Control Agreement of Brian L. DeMoura dated April
1, 1997 (included as Exhibit 10.6 to the 1997 Second Quarter
10-Q, previously filed with the Commission and incorporated
herein by reference); Amendment thereto dated January 6,
1998 (included as Exhibit 10.6 to the 1998 First Quarter
10-Q and incorporated herein by reference); and Second
Amendment thereto dated January 14, 1999, the form of which
is included herein as Exhibit 10.21.*
10.10 Employment Agreement of Daniel T. Hendrix dated April 1,
1997 (included as Exhibit 10.7 to the 1997 Second Quarter
10-Q, previously filed with the Commission and incorporated
herein by reference); Amendment thereto dated January 6,
1998 (included as Exhibit 10.7 to the 1998 First Quarter
10-Q and incorporated herein by reference); and Second
Amendment thereto dated January 14, 1999, the form of which
is included herein as Exhibit 10.20.*
10.11 Change in Control Agreement of Daniel T. Hendrix dated April
1, 1997 (included as Exhibit 10.8 to the 1997 Second Quarter
10-Q, previously filed with the Commission and incorporated
herein by reference); Amendment thereto dated January 6,
1998 (included as Exhibit 10.8 to the 1998 First Quarter
10-Q and incorporated herein by reference); and Second
Amendment thereto dated January 14, 1999, the form of which
is included herein as Exhibit 10.21.*
10.12 Employment Agreement of Raymond S. Willoch dated April 1,
1997 (included as Exhibit 10.11 to the 1997 Second Quarter
10-Q, previously filed with the Commission and incorporated
herein by reference); Amendment thereto dated January 6,
1998 (included as Exhibit 10.11 to the 1998 First Quarter
10-Q and incorporated herein by reference); and Second
Amendment thereto dated January 14, 1999, the form of which
is included herein as Exhibit 10.20.*
10.13 Change in Control Agreement of Raymond S. Willoch dated
April 1, 1997 (included as Exhibit 10.12 to the 1997 Second
Quarter 10-Q, previously filed with the Commission and
incorporated herein by reference); Amendment thereto dated
January 6, 1998 (included as Exhibit 10.12 to the 1998 First
Quarter 10-Q and incorporated herein by reference); and
Second Amendment thereto dated January 14, 1999, the form of
which is included herein as Exhibit 10.21.*
10.14 Employment Agreement of John H. Walker dated April 1, 1997
(included as Exhibit 10.19 to the 1997 Second Quarter 10-Q,
previously filed with the Commission and incorporated herein
by reference); and Amendment thereto dated January 6, 1998
(included as Exhibit 10.19 to the 1998 First Quarter 10-Q
and incorporated herein by reference).*
10.15 Change in Control Agreement of John H. Walker dated April 1,
1997 (included as Exhibit 10.20 to the 1997 Second Quarter
10-Q, previously filed with the Commission and incorporated
herein by reference); and Amendment thereto dated January 6,
1998 (included as Exhibit 10.20 to the 1998 First Quarter
10-Q and incorporated herein by reference).*
10.16 Employment Agreement of John R. Wells dated April 1, 1997
(included as Exhibit 10.23 to the 1997 Second Quarter 10-Q,
previously filed with the Commission and incorporated herein
by reference); Amendment thereto dated January 6, 1998
(included as Exhibit 10.23 to the 1998 First Quarter 10-Q
and incorporated herein by reference); and Second Amendment
thereto dated January 14, 1999, the form of which is
included herein as Exhibit 10.20.*
10.17 Change in Control Agreement of John R. Wells dated April 1,
1997 (included as Exhibit 10.24 to the 1997 Second Quarter
10-Q, previously filed with the Commission and incorporated
herein by reference); Amendment thereto dated January 6,
1998 (included as Exhibit 10.24 to the 1998 First Quarter
10-Q and incorporated herein by reference); and Second
Amendment thereto dated January 14, 1999, the form of which
is included herein as Exhibit 10.21.*
10.18 Employment Agreement of Michael D. Bertolucci dated April 1,
1997 (included as Exhibit 10.25 to the 1997 Second Quarter
10-Q, previously filed with the Commission and incorporated
herein by reference); Amendment thereto dated January 6,
1998 (included as Exhibit 10.25 to the 1998 First Quarter
10-Q and incorporated herein by reference); and Second
Amendment thereto dated January 14, 1999, the form of which
is included herein as Exhibit 10.20.*
- 19 -
<PAGE>
10.19 Change in Control Agreement of Michael D. Bertolucci dated
April 1, 1997 (included as Exhibit 10.26 to the 1997 Second
Quarter 10-Q, previously filed with the Commission and
incorporated herein by reference); Amendment thereto dated
January 6, 1998 (included as Exhibit 10.26 to the 1998 First
Quarter 10-Q and incorporated herein by reference); and
Second Amendment thereto dated January 14, 1999, the form of
which is included herein as Exhibit 10.21.*
10.20 Form of Second Amendment to Employment Agreement, dated
January 14, 1999, amending Exhibits 10.6, 10.8, 10.10,
10.12, 10.16 and 10.18 to this Report.
10.21 Form of Second Amendment to Change in Control Agreement,
dated January 14, 1999, amending Exhibits 10.7, 10.9, 10.11,
10.13, 10.17 and 10.19 to this Report.
10.22 Receivables Sale Agreement, dated as of August 4, 1995,
among Interface Securitization Corporation, Interface, Inc.,
Special Purpose Accounts Receivable Cooperative Corporation
and Canadian Imperial Bank of Commerce (included as Exhibit
10.26 to the Company's annual report on Form 10-K for the
year ended December 31, 1995, previously filed with the
Commission and incorporated herein by reference); and
Amendment thereto dated as of December 27, 1996 (included
as Exhibit 10.24 to the Company's Annual Report on Form
10-K for the year ended December 29, 1996, previously filed
with the Commission and incorporated herein by reference).
10.23 Receivables Sale Agreement, dated as of December 27, 1996,
among Interface Securitization Corporation, Interface, Inc.,
certain financial institutions (as bank purchasers), and
Canadian Imperial Bank of Commerce (as administrative agent)
(included as Exhibit 10.25 to the Company's annual report on
Form 10-K for the year ended December 29, 1996, previously
filed with the Commission and incorporated herein by
reference).
10.24 Split Dollar Agreement, dated May 29, 1998, between the
Company, Ray C. Anderson and Mary Anne Anderson Lanier, as
Trustee of the Ray C. Anderson Family Trust (included as
Exhibit 10.32 to the Company's annual report on Form 10-K
for the year ended January 3, 1999, previously filed with
the Commission and incorporated herein by reference).*
10.25 Split Dollar Insurance Agreement, dated effective as of
February 21, 1997, between the Company and Daniel T. Hendrix
(included as Exhibit 10.2 to the Company's quarterly report
on Form 10-Q for the quarter ended October 4, 1998,
previously filed with the Commission and incorporated herein
by reference).*
13 Certain information, as follows, contained in the Company's
1999 Annual Report to Shareholders which is expressly
incorporated into this Report by direct reference thereto.
o Selected Financial Information
o Management's Discussion and Analysis of Financial
Condition and Results of Operations
o Consolidated Financial Statements of the Company
and Report of Independent Certified Public Accoutants
thereon
21 Subsidiaries of the Company.
23 Consent of BDO Seidman, LLP.
27 Financial Data Schedule.
99.1 Safe Harbor Compliance Statement for Forward-Looking
Statements.
- - ----------
* Management contract or compensatory plan or agreement required to be
filed pursuant to Item 14(c) of this Report.
(b) Reports On Form 8-K
-------------------
No reports on Form 8-K were filed by the Company during the fourth
quarter of the fiscal year covered by this
Report.
- 20 -
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Interface, Inc.
Atlanta, Georgia
The audits referred to in our Report dated February 22, 2000 relating
to the Consolidated Financial Statements of Interface, Inc. and subsidiaries,
incorporated in Item 8 of the Form 10-K by reference to the Annual Report to
Shareholders for the fiscal year ended January 2, 2000, included the audit of
Financial Statement Schedule II (Valuation and Qualifying Accounts and Reserves)
set forth in the Form 10-K. The Financial Statement Schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on the Financial Statement Schedule.
In our opinion, such Schedule presents fairly, in all material
respects, the information set forth therein.
BDO SEIDMAN, LLP
Atlanta, Georgia
INTERFACE, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- - ----------------------------------------------------------------------------------------------------------------------------
Balance, At Charged to Charged to Balance
Beginning Costs and Other Deductions End
of Year Expenses<F1><F2> Accounts (Describe) <F3> of Year
- - ----------------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Allowance for accounts:
Year ended:
January 2, 2000 .................................$7,790 $ 4,565 $-- $3,558 $8,797
====== ======= === ====== ======
January 3, 1999 .................................$7,351 $ 3,882 $-- $3,443 $7,790
====== ======= === ====== ======
December 28, 1997 ...............................$7,349 $ 2,032 $-- $2,030 $7,351
====== ======= === ====== ======
<FN>
<F1> Includes changes in foreign currency exchange rates.
<F2> Includes allowance of $793 at acquisition date for Camborne, Carpet
Solutions and certain of the companies in the Re:Source Americas network
during 1997; and $583 at acquisition date for Firth, Joseph Hamilton &
Seaton and certain of the companies in the Re:Source Americas network
during 1998.
<F3> Write off of bad debt.
</FN>
</TABLE>
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- - ----------------------------------------------------------------------------------------------------------------------------
Balance, At Charged to Charged to Balance
Beginning Costs and Other Deductions End
of Year Expense Accounts (Describe) <F1> of Year
- - ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Restructuring reserve:
Year ended:
January 2, 2000............................ $6,036 $ 1,803 $-- $7,373 $ 466
January 3, 1999.............................$ -- $13,017 $-- $6,981 $6,036
====== ======= === ====== ======
<FN>
<F1> Cash payments of $6,701 and reversal of over-accrual of $672 in 1999;
cash payments of $6,981 in 1998.
</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.)
- 21 -
<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
President, and
Chief Executive Officer
Date: March 24, 2000
POWER OF ATTORNEY
Know all men by these presents, that each person whose signature
appears below constitutes and appoints Ray C. Anderson as attorney-in-fact, with
power of substitution, for him in any and all capacities, to sign any amendments
to this Report on Form 10-K, and to file the same, with exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that said attorney-in-fact may
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <S> <C>
/s/ Ray C. Anderson Chairman of the Board, President and Chief March 24, 2000
-----------------------------------
Ray C. Anderson Executive Officer (Principal Executive Officer)
/s/ Daniel T. Hendrix Senior Vice President, Chief Financial Officer, March 24, 2000
-----------------------------------
Daniel T. Hendrix Treasurer and Director (Principal Financial and
Accounting Officer)
/s/ Brian L. Demoura Director March 24, 2000
---------------------------------
Brian L. DeMoura
/s/ John H. Walker Director March 24, 2000
-----------------------------------
John H. Walker
/s/ Dianne Dillon-Ridgley Director March 24, 2000
---------------------------------
Dianne Dillon-Ridgley
/s/ Carl I. Gable Director March 24, 2000
--------------------------------------
Carl I. Gable
/s/ June M. Henton Director March 24, 2000
------------------------------------
June M. Henton
/s/ J. Smith Lanier, II Director March 24, 2000
-------------------------------------
J. Smith Lanier, II
/s/ Thomas R. Oliver Director March 24, 2000
----------------------------------
Thomas R. Oliver
/s/ Leonard G. Saulter Director March 24, 2000
-----------------------------------
Leonard G. Saulter
/s/ Clarinus C.th. Van Andel Director March 24, 2000
-------------------------------
Clarinus C.Th. van Andel
</TABLE>
- 23 -
<PAGE>
Exhibit Index
Exhibit
Number Description of Exhibit
------ ----------------------
10.6 Third Amendment, dated May 7, 1999, to Employment
Agreement of Ray C. Anderson dated April 1, 1997.
10.7 Third Amendment, dated May 7, 1999, to Change in
Control Agreement of Ray C. Anderson dated April 1,
1997.
10.20 Form of Second Amendment to Employment Agreement,
dated January 14, 1999, amending Exhibits 10.6, 10.8,
10.10, 10.12, 10.16 and 10.18 to this Report.
10.21 Form of Second Amendment to Change in Control
Agreement, dated January 14, 1999, amending Exhibits
10.7, 10.9, 10.11, 10.13, 10.17 and 10.19 to this
Report.
13 Certain information, as follows, contained in the
Company's 1999 Annual Report to Shareholders which
is expressly incorporated into this Report by direct
reference thereto.
o Selected Financial Information
o Management's Discussion and Analysis of
Financial Condition and Results of Operations
o Consolidated Financial Statements of the
Company and Report of Independent Certified
Public Accoutants thereon
21 Subsidiaries of the Company.
23 Consent of BDO Seidman, LLP.
27 Financial Data Schedule.
99.1 Safe Harbor Compliance Statement for Forward-Looking
Statements.
- 24 -
Exhibit 10.6
THIRD AMENDMENT TO EMPLOYMENT AGREEMENT
This Third Amendment to Employment Agreement ("Amendment") is made and
entered into as of the 7th day of May, 1999, by and between INTERFACE, INC. (the
"Company") and RAY C. ANDERSON ("Executive").
W I T N E S S E T H :
-------------------
WHEREAS, the Company and Executive did enter into that certain
Employment Agreement dated as of April 1, 1997, as previously amended (the
"Agreement"); and
WHEREAS, the parties hereto desire to modify the Agreement in certain
respects, as set forth in this Amendment.
NOW, THEREFORE, in consideration of the mutual covenants and
undertakings contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. The reference in Section 4 of the Agreement to "Executive's 63rd
birthday" is hereby changed to "Executive's 65th birthday."
2. The Agreement, as expressly modified by this Amendment, shall remain
in full force and effect in accordance with its terms and continue to bind the
parties.
IN WITNESS WHEREOF, Executive has executed this Amendment, and the
Company has caused this Amendment to be executed by a duly authorized
representative, as of the date first set forth above.
INTERFACE, INC.
By: /s/ Charles Eitel
Charles R. Eitel
President
EXECUTIVE:
/s/ Ray C. Anderson
Ray C. Anderson
Exhibit 10.7
THIRD AMENDMENT TO CHANGE IN CONTROL AGREEMENT
This Third Amendment to Change in Control Agreement ("Amendment") is
made and entered into as of the 7th day of May, 1999, by and between INTERFACE,
INC. (the "Company") and RAY C. ANDERSON ("Executive").
W I T N E S S E T H :
-------------------
WHEREAS, the Company and Executive did enter into that certain Change
in Control Agreement dated as of April 1, 1997, as previously amended (the
"Agreement"); and
WHEREAS, the parties hereto desire to modify the Agreement in certain
respects, as set forth in this Amendment.
NOW, THEREFORE, in consideration of the mutual covenants and
undertakings contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. The reference in Section 2 of the Agreement to "Executive's 63rd
birthday" is hereby changed to "Executive's 65th birthday."
2. The Agreement, as expressly modified by this Amendment, shall remain
in full force and effect in accordance with its terms and continue to bind the
parties.
IN WITNESS WHEREOF, Executive has executed this Amendment, and the
Company has caused this Amendment to be executed by a duly authorized
representative, as of the date first set forth above.
INTERFACE, INC.
By: /s/ Charles R. Eitel
Charles R. Eitel
President
EXECUTIVE:
/s/ Ray C. Anderson
Ray C. Anderson
Exhibit 10.20
FORM OF SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
This Second Amendment to Employment Agreement ("Amendment") is made and
entered into as of the 14th day of January, 1999, by and between INTERFACE, INC.
(the "Company") and ___________________ ("Executive").
W I T N E S S E T H :
-------------------
WHEREAS, the Company and Executive did enter into that certain
Employment Agreement dated as of April 1, 1997, as previously amended (the
"Agreement"); and
WHEREAS, the parties hereto desire to modify the Agreement in certain
respects, as set forth in this Amendment.
NOW, THEREFORE, in consideration of the mutual covenants and
undertakings contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. All capitalized terms used in this Amendment, unless otherwise
defined herein, shall have the same meanings ascribed to such terms in the
Agreement.
2. Section 5(c) of the Agreement is hereby amended to delete the
language "Except to the extent provided in clause (x) hereof," which appears at
the beginning of the penultimate sentence of Section 5(c). That sentence shall
now read as follows: "Executive shall have no duty to mitigate any of the
damages payable hereunder."
3. Section 5(c)(x) of the Agreement is hereby amended to delete all of
clause (x) except the last sentence thereof.
4. The Agreement, as expressly modified by this Amendment, shall remain
in full force and effect in accordance with its terms and continue to bind the
parties.
IN WITNESS WHEREOF, Executive has executed this Amendment, and the
Company has caused this Amendment to be executed by a duly authorized
representative, as of the date first set forth above.
INTERFACE, INC.
By: _______________________________
Ray C. Anderson
Chairman and CEO
EXECUTIVE:
------------------------------------
---------------------
Exhibit 10.21
FORM OF SECOND AMENDMENT TO CHANGE IN CONTROL AGREEMENT
This Second Amendment to Change in Control Agreement ("Amendment") is
made and entered into as of the 14th day of January, 1999, by and between
INTERFACE, INC. (the "Company") and ___________________ ("Executive").
W I T N E S S E T H :
-------------------
WHEREAS, the Company and Executive did enter into that certain Change
in Control Agreement dated as of April 1, 1997, as previously amended (the
"Agreement"); and
WHEREAS, the parties hereto desire to modify the Agreement in certain
respects, as set forth in this Amendment.
NOW, THEREFORE, in consideration of the mutual covenants and
undertakings contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. All capitalized terms used in this Amendment, unless otherwise
defined herein, shall have the same meanings ascribed to such terms in the
Agreement.
2. Section 4(c) of the Agreement is hereby deleted in its entirety and
the following is substituted in its place:
(c) Benefits to be Provided. If Executive becomes eligible for
benefits under subsection (b) above, the Company shall pay or provide
to Executive the compensation and benefits set forth in this subsection
(c); provided, however, that the compensation and benefits to be paid
or provided pursuant to paragraphs (i) through (iv) of this subsection
(c) shall be reduced to the extent that Executive receives or is
entitled to receive upon Executive's termination the compensation and
benefits (but only to the extent Executive actually receives such
compensation and benefits) described in paragraphs (i) through (iv) of
this subsection (c) pursuant to the terms of an employment agreement
with the Company or as a result of a breach by the Company of the
employment agreement; and, provided, further, after taking into
consideration any such reductions, Executive shall continue to be
entitled to receive in the aggregate under this Agreement and the
employment agreement an amount of compensation and benefits equal to
the full amount of compensation and benefits provided under this
Agreement, and any amounts paid under paragraphs (i), (ii) and (iv) of
this Agreement shall be paid in the manner provided in such paragraphs.
3. Section 5 of the Agreement is hereby deleted in its entirety and the
following is substituted in its place:
<PAGE>
5. Payments to Cover Excise Taxes.
------------------------------
(a) Anything in this Agreement to the contrary
notwithstanding, in the event it shall be determined (as hereafter
provided) that any payment or distribution to or for Executive, whether
paid or payable or distributed or distributable pursuant to the terms
of this Agreement or pursuant to or by reason of any other agreement,
policy, plan, program or arrangement (including, without limitation,
any employment agreement, Stock Plan or salary continuation agreement),
or similar right (a "Payment"), would be subject to the excise tax
imposed by Section 4999 of the Code (or any successor provisions
thereto), or any interest or penalties with respect to such excise tax
(such excise tax, together with any such interest and penalties, are
hereafter collectively referred to as the "Excise Tax"), then Executive
shall be entitled to receive an additional payment or payments (a
"Gross-Up Payment") from the Company. The total amount of the Gross-Up
Payment shall be an amount such that, after payment by (or on behalf
of) Executive of any Excise Tax and all federal, state and other taxes
(including any interest or penalties imposed with respect to such
taxes) imposed upon the Gross-Up Payment, the remaining amount of the
Gross-Up Payment is equal to the Excise Tax imposed upon the
Payment(s). For purposes of clarity, the amount of the Gross-Up Payment
shall be that amount necessary to pay the Excise Tax in full and all
taxes assessed upon the Gross-Up Payment.
(b) An initial determination as to whether a Gross-Up Payment
is required pursuant to this Section 5 and the amount of such Gross-Up
Payment shall be made by an accounting firm selected by the Company,
and reasonably acceptable to Executive, which is then designated as one
of the five largest accounting firms in the United States (the
"Accounting Firm"). The Accounting Firm shall provide its determination
(the "Determination"), together with detailed supporting calculations
and documentation to the Company and Executive as promptly as
practicable after such calculation is requested by the Company or by
Executive with respect to a Payment (or Payments), and if the
Accounting Firm determines that no Excise Tax is payable by Executive
with respect to a Payment (or Payments), it shall furnish Executive
with an opinion reasonably acceptable to Executive that no Excise Tax
will be imposed with respect to any such Payment(s). Within 15 days of
the delivery of the Determination to Executive, Executive shall have
the right to dispute the Determination (the "Dispute"). The Gross-Up
Payment, if any, as determined pursuant to this Section 5 shall be paid
by the Company to Executive within 15 days of the receipt of the
Accounting Firm's Determination. The existence of the Dispute shall not
in any way affect the right of Executive to receive the Gross-Up
Payment in accordance with the Determination. If there is no Dispute,
the Determination shall be binding, final and conclusive upon the
Company and Executive subject to the application of Section 5(c).
- 2 -
<PAGE>
(c) As a result of the uncertainty in the application of
Sections 4999 and 280G of the Code, it is possible that a Gross-Up
Payment (or a portion thereof) will be paid which should not have been
paid (an "Excess Payment") or a Gross-Up Payment (or a portion thereof)
which should have been paid will not have been paid (an
"Underpayment"). An Underpayment shall be deemed to have occurred upon
the earliest to occur of the following events: (i) upon notice (formal
or informal) to Executive from any governmental taxing authority that
the tax liability of Executive (whether in respect of the then current
taxable year of Executive or in respect of any prior taxable year of
Executive) may be increased by reason of the imposition of the Excise
Tax on a Payment (or Payments) with respect to which the Company has
failed to make a sufficient Gross-Up Payment, (ii) upon a determination
by a court, (iii) by reason of a determination by the Company (which
shall include the position taken by the Company, or its consolidated
group, on its federal income tax return), or (iv) upon the resolution
to the satisfaction of Executive of the Dispute. If any Underpayment
occurs, Executive shall promptly notify the Company and the Company
shall pay to Executive within 15 days of the date the Underpayment is
deemed to have occurred under (i), (ii), (iii) or (iv) above, but in no
event less than 5 days prior to the date on which the applicable
government taxing authority has requested payment, an additional
Gross-Up Payment equal to the amount of the Underpayment plus any
interest and penalties imposed on the Underpayment.
An Excess Payment shall be deemed to have occurred upon a
"Final Determination" (as hereinafter defined) that the Excise Tax
shall not be imposed upon any Payment(s) (or portion of a Payment) with
respect to which Executive had previously received a Gross-Up Payment.
A Final Determination shall be deemed to have occurred when Executive
has received from the applicable governmental taxing authority a refund
of taxes or other reduction in his tax liability by reason of the
Excess Payment and upon either (i) the date a determination is made by,
or an agreement is entered into with, the applicable governmental
taxing authority which finally and conclusively binds Executive and
such taxing authority, or in the event that a claim is brought before a
court of competent jurisdiction, the date upon which a final
determination has been made by such court and either all appeals have
been taken and finally resolved or the time for all appeals has
expired, or (ii) the statute of limitations with respect to Executive's
applicable tax return has expired. If an Excess Payment is determined
to have been made, the amount of the Excess Payment shall be treated as
a loan by the Company to Executive and Executive shall pay to the
Company within 15 days following demand (but not less than 30 days
after the determination of such Excess Payment) the amount of the
Excess Payment plus interest at an annual rate equal to the rate
provided for in Section 1274(b)(2)(B) of the Code from the date the
Gross-Up Payment (to which the Excess Payment relates) was paid to
Executive until the date of repayment to the Company.
- 3 -
<PAGE>
(d) Notwithstanding anything contained in this Agreement to
the contrary, in the event that, according to the Determination, an
Excise Tax will be imposed on any Payment(s), the Company shall pay to
the applicable government taxing authorities as Excise Tax withholding,
the amount of any Excise Tax that the Company has actually withheld
from the Payment(s); provided, that the Company's payment of withheld
Excise Tax shall not alter the Company's obligation to pay the Gross-Up
Payment required under this Section 5.
(e) Executive and the Company shall each provide the
Accounting Firm access to and copies of any books, records and
documents in the possession of the Company or Executive, as the case
may be, reasonably requested by the Accounting Firm, and otherwise
cooperate with the Accounting Firm in connection with the preparation
and issuance of the Determination contemplated by Section 5(b) hereof.
(f) The fees and expenses of the Accounting Firm for its
services in connection with the Determination and calculations
contemplated by Section 5(b) shall be paid by the Company.
4. The Agreement, as expressly modified by this Amendment, shall remain
in full force and effect in accordance with its terms and continue to bind the
parties.
IN WITNESS WHEREOF, Executive has executed this Amendment, and
the Company has caused this Amendment to be executed by a duly authorized
representative, as of the date first set forth above.
INTERFACE, INC.
By: _____________________________
Ray C. Anderson
Chairman and CEO
EXECUTIVE:
----------------------------------
-------------------
- 4 -
Exhibit 13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report contains statements which may constitute "forward-looking
statements" under applicable securities laws, including statements regarding the
intent, belief or current expectations of the Company and members of its
management team, as well as the assumptions on which such statements are based.
Any such forward-looking statements are not guarantees of future performance and
involve risks and uncertainties, and actual results may differ materially from
those contemplated by such forward-looking statements. Important factors
currently known to management that could cause actual results to differ
materially from those in forward-looking statements are set forth in the Safe
Harbor Compliance Statement for Forward-Looking Statements included as Exhibit
99.1 to the Company's Annual Report on Form 10-K for the fiscal year ended
January 2, 2000, and are hereby incorporated by reference. The Company
undertakes no obligation to update or revise forward-looking statements to
reflect changed assumptions, the occurrence of unanticipated events or changes
to future operating results over time.
GENERAL
For 1999, Interface, Inc. (the "Company") had net sales and net income of $1.228
billion and $23.5 million, respectively. Net sales were made up of sales of
floorcovering products (primarily modular and broadloom carpet) and related
services ($974 million), interior fabric sales ($197.1 million) and
raised/access flooring and other specialty product sales ($57.1 million),
accounting for 79.3%, 16.0% and 4.7% of total sales, respectively. The Company
achieved a compound annual growth rate in its net sales and net income of 11.3%
and 8.8%, respectively, over the five-year period from 1995 to 1999.
The Company's business, as well as the commercial interiors market in
general, is somewhat cyclical in nature. The Company's financial performance in
recent years has been strongly tied to U.S. demand for its products and
services. The commercial interiors market as a whole and the broadloom carpet
market, in particular, have experienced decreased demand levels during the past
year which continued into the first quarter of 2000. A significant sustained
downturn in the market could impair the Company's growth.
The Company's growth could also be impaired by international
developments. Specifically, the weakening of the euro against the U.S. dollar
has adversely affected European revenue levels during 1999.
1
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table shows, as a percentage of net sales, certain items included
in the Company's consolidated statements of income.
1999 1998 1997
- - -----------------------------------------------------------------
Net sales 100% 100.0% 100.0%
Cost of sales 68.9 66.2 66.6
- - ----------------------------------------------------------------
Gross profit on sales 31.1 33.8 33.4
Selling, general and
administrative expenses 24.8 24.8 24.8
Restructuring charge .1 2.0 --
- - ----------------------------------------------------------------
Operating income 6.2 7.0 8.6
Other expense 3.1 3.2 3.2
- - ----------------------------------------------------------------
Income before taxes
on income 3.1 3.8 5.4
Taxes on income 1.2 1.5 2.1
- - ----------------------------------------------------------------
Net income 1.9 2.3 3.3
================================================================
Fiscal 1999 Compared with Fiscal 1998
- - -------------------------------------
The Company's net sales decreased $52.9 million (4.1%) compared with 1998. The
decrease was attributable primarily to (i) the divestiture of Joseph Hamilton &
Seaton, Ltd., a U.K. wholesale distributor, (ii) decreased sales volume of
products and related services in the Company's broadloom floorcovering
operations, due to soft market conditions, and (iii) the weakness of the euro
against the U.S. dollar. These decreases were offset somewhat by increased sales
volume (i) the Company's Asia-Pacific division due mostly to the economic
recovery in Asia, and (ii) the Company's architectural products division.
Cost of sales as a percentage of net sales increased to 68.9% in 1999
compared to 66.2% in 1998. The increase was attributable to (i) lower sales
volumes which caused a lower absorption of overhead costs, and (ii) a shift in
sales mix towards a greater service component which traditionally has lower
gross margins.
Selling, general and administrative expenses as a percentage of net
sales were 24.8% in 1999, unchanged from 1998 despite lower sales in 1999. The
Company'simproved cost containment measures worldwide were offset by costs
associated with the integration of the Re:Source Provider Network and expenses
associated with the separation of certain senior officers from Interface
Americas.
Other expense decreased $2.1 million in 1999, due primarily to
immaterial gains achieved as a result of the divestiture of certain operating
assets of the Company.
The effective tax rate was 38.0% for 1999, compared to 39.3% in 1998.
The decrease in the effective rate was primarily due to the shift in pre-tax
income levels to geographic regions which traditionally have lower statutory tax
rates.
As a result of the aforementioned factors, the Company's net income
decreased 21.1% to $23.5 million versus $29.8 million in 1998.
During the fourth quarter of 1998, the Company recorded a pre-tax
restructuring charge in the amount of $25.3 million related to plant closures
and consolidations of operations in Asia, Europe and the U.S., which resulted in
an aggregate head count reduction of approximately 253 salaried and hourly
employees and the write-down and disposal of certain assets.
During 1999, the restructuring activities were largely completed.
Further discussion of the restructuring charge appears in the notes of the
consolidated financial statements on pages 62-63.
Fiscal 1998 Compared with Fiscal 1997
- - -------------------------------------
The Company's net sales increased $145.8 million (12.8%) compared with 1997. The
increase was attributable primarily to increased sales volume (i) of
floorcovering products in the U.K. as a result of the acquisition of Firth
Carpets in the first quarter of 1998, (ii) of products and related services in
the Company's U.S. floorcovering operations, due to increased demand for and
increased market share of its modular carpet products, as well as additional
sales generated by the Re:Source services network, and (iii) in the Company's
interior fabrics operations due to increased demand for the Company's lighter
weight, higher margin fabric products, as well as the Camborne Holdings, Ltd.
acquisition in June 1997. These increases were offset somewhat by decreased
sales volume (i) in the Company's Asia-Pacific division due mostly to the
economic turmoil in Asia, (ii) in the Company's architectural products division,
and (iii) of modular carpet products in the U.K. Additionally, net sales in the
fourth quarter of 1998 were negatively impacted by moderating demand levels in
the commercial interiors market as a whole, particularly in the U.K., which
caused downward pressure on margins.
2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cost of sales as a percentage of net sales decreased to 66.2% in 1998
compared to 66.6% in 1997. The decrease was attributable to (i) economies of
scale associated with increased sales volume in the Company's floorcovering and
interior fabrics operations, (ii) decreased manufacturing costs in the Company's
floorcovering and interior fabrics operations through the Company's QUEST waste
reduction initiative, and (iii) a favorable product mix. The Company's interior
fabrics business also experienced decreased manufacturing costs as a result of
continued efficiencies generated from the new, state-of-the-art yarn
manufacturing facility in Guilford, Maine.
Selling, general and administrative expenses as a percentage of net
sales were 24.8% in 1998, which is unchanged from 1997. The Company's improved
cost containment measures worldwide were offset by costs associated with the
continued development of the Re:Source services network infrastructure and
consulting and development expenses associated with the Year 2000 initiative.
Other expense increased $4.1 million in 1998, due primarily to higher
overall levels of debt incurred as a result of the Company's acquisitions.
The effective tax rate was 39.3% for 1998, compared to 38.8% in 1997.
The increase in the effective rate was primarily due to the effect of a decrease
in income before tax in proportion to the amortization expense of the Company's
goodwill, which is not deductible for tax purposes.
As a result of the aforementioned factors, the Company's net income
(before the restructuring charge) increased 23.8% to $46.4 million versus $37.5
million in 1997. Including the restructuring charge, net income decreased 20.5%
to $29.8 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash over the last three fiscal years have been
funds provided by operating activities, proceeds from the issuance (net of
repurchases) of common stock, and proceeds from additional long-term debt. In
1999, operating activities generated $71.1 million of cash compared with $71.9
million and $74.7 million in 1998 and 1997, respectively.
The primary uses of cash during the last three fiscal years have been
(i) acquisitions of businesses, (ii) additions to property and equipment at the
Company's manufacturing facilities, (iii) cash dividends, and (iv) expenditures
related to the Company's share repurchase program. For the three years ended
January 2, 2000, acquisitions of businesses (net of dispositions) required $96.3
million, the aggregate additions to property and equipment required cash
expenditures of $121.2 million, dividends required $24.4 million, and share
repurchases required $13.2 million.
The Company has in effect a share repurchase program, pursuant to which
it is authorized to repurchase up to 4,000,000 shares of Class A Common Stock in
the open market. As of February 25, 2000, the Company had repurchased an
aggregate of 1,637,500 shares of Class A Common Stock under this program, at
prices ranging from $4.50 to $16.78.
At the end of fiscal 1999, the Company estimated capital expenditure
requirements of approximately $36 million and had purchase commitments of
approximately $5.3 million for 2000. The Company also intends to continue to
selectively acquire companies and related product lines that complement its
existing product lines and further geographic expansion into untapped markets.
Management believes that cash provided by operations and long-term loan
commitments will provide adequate funds for current commitments and other
requirements in the foreseeable future.
YEAR 2000
As was the case with other companies using computers in their operations, the
Company was faced with the task of addressing the Year 2000 issue in
anticipation of calendar year end 1999. The Year 2000 issue refers to the
widespread use of computer programs that rely on two-digit codes to perform
computations or decision-making functions. The Company performed a comprehensive
review of its computer programs to identify the systems that would be affected
by the Year 2000 issue. The Company retained IBM Corporation to assist in its
Year 2000 conversion process.
The Company categorizes its systems into one of two categories: those
that are linked to the Company's AS-400 computer network ("IT Systems"), and
those that are not ("Non-IT Systems"). The Company's total cost of modifying its
IT Systems to be Year 2000 ready was approximately $23.8 million. Of such
amount, approximately $15.9 million was attributable to the cost of new hardware
and software which was required in connection with the global consolidation of
the Company's management and financial accounting systems. This new equipment
and upgraded technology has a definable value lasting beyond the Year 2000. In
these instances, where Year 2000 compliance was ancillary, the Company
capitalized and depreciated such costs. The remaining $7.9 million has been
expensed as incurred. With respect to Non-IT Systems, the total cost of the
modifications necessary to be Year 2000 ready was approximately $2 million.
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company did not experience any material disruptions in its
operations or activities as a result of Year 2000 problems. In addition, the
Company does not expect to encounter any such problems in the foreseeable future
although it continues to monitor its IT and Non-IT Systems for signs or
indications of such problems. Also, the Company is currently unaware of any Year
2000 problems faced by any suppliers or customers which are likely to have a
material adverse effect on the Company.
EURO CONVERSION
A single currency called the euro was introduced in Europe on January 1, 1999.
Eleven of the fifteen member countries of the European Union adopted the euro as
their common legal currency as of that date. Fixed conversion rates between
these participating countries' existing currencies (the "legacy currencies") and
the euro were established as of that date. The legacy currencies will remain
legal tender as denominations of the euro until at least January 1, 2002 (but
not later than July 1, 2002). During this transition period, parties may settle
transactions using either the euro or a participating country's legacy currency.
The increased price transparency resulting from the use of a single
currency in the eleven participating countries may affect the ability of the
Company to price its products differently in various European markets.
The euro may reduce the amount of the Company's exposure to changes in
foreign exchange rates, due to the netting effect of having assets and
liabilities denominated in a single currency as opposed to the various legacy
currencies. As a result, the Company's foreign exchange hedging activity and
related costs may be reduced in the future. Conversely, because there will be
less diversity in the Company's exposure to foreign currencies, movements in the
euro's value in U.S. dollars could have a more pronounced effect, whether
positive or negative.
Certain of the Company's business functions have introduced
euro-capability as of January 2, 2000, including, for example, systems for
making and receiving certain payments, pricing and invoicing. Other business
functions will be converted for the euro by the end of the transition period
(December 31, 2001), but may be converted earlier where operationally efficient
or cost-effective or to meet customer needs. The Company does not expect the
costs associated with these modifications to have a material adverse effect on
future operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Market Risk
- - -----------
As a result of the scope and volume of its global operations, the Company is
exposed to an element of market risk from changes in interest rates and foreign
currency exchange rates. The Company's results of operations and financial
condition could be impacted by this risk. The Company manages its exposure to
market risk through its regular operating and financial activities and, to the
extent appropriate, through the use of derivative financial instruments.
The Company employs derivative financial instruments as risk management
tools and not for speculative or trading purposes. The Company monitors the use
of derivative financial instruments through the use of objective measurable
systems, well-defined market and credit risk limits, and timely reports to
senior management according to prescribed guidelines. The Company has
established strict counterparty credit guidelines and only enters into
transactions with financial institutions with a rating of investment grade or
better. As a result, the Company considers the risk of counterparty default to
be minimal.
Interest Rate Market Risk Exposure. Changes in interest rates affect the
---------------------------------
interest paid on certain of the Company's debt. To mitigate the impact of
fluctuations in interest rates, management of the Company has developed and
implemented a policy to maintain the percentage of fixed and variable rate debt
within certain parameters. The Company currently maintains 68% and 32% of its
total long-term debt in fixed and variable interest rates, respectively.
Additionally, the Company historically has utilized interest rate swaps, which
are exchanged, at specified intervals, the difference between fixed and variable
interest amounts calculated by reference to an agreed-upon notional principal
linked to LIBOR. The interest rate swap agreements generally have maturity dates
ranging from fifteen to twenty-four months.
As of January 2, 2000, the Company had no outstanding interest rate
management swap agreements. At January 3, 1999, the Company had utilized
interest rate swap agreements to effectively convert approximately $43.7 million
of variable rate debt to fixed rate debt.
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Foreign Currency Exchange Market Risk Exposure. A significant portion of
----------------------------------------------
the Company's operations consists of manufacturing and sales activities in
foreign jurisdictions. The Company manufactures its products in the U.S.,
Canada, England, Northern Ireland, the Netherlands, Australia and Thailand, and
sells its products in more than 100 countries. As a result, the Company's
financial results could be significantly affected by factors such as changes in
foreign currency exchange rates or weak economic conditions in the foreign
markets in which the Company distributes its products. The Company's operating
results are exposed to changes in exchange rates between the U.S. dollar and
many other currencies, including the British pound sterling, Canadian dollar,
Australian dollar, Thai baht, Japanese yen, and the euro. When the U.S. dollar
strengthens against a foreign currency, the value of anticipated sales in those
currencies decreases, and vice-versa. Additionally, to the extent the Company's
foreign operations with functional currencies other than the U.S. dollar
transact business in countries other than the U.S., exchange rate changes
between two foreign currencies could ultimately impact the Company. Finally,
because the Company reports in U.S. dollars on a consolidated basis, foreign
currency exchange fluctuations can have a translation impact on the Company's
financial position.
To mitigate the short-term effect of changes in currency exchange rates
on the Company's sales denominated in foreign currencies, the Company
historically has hedged by entering into currency swap contracts to hedge
certain firm sales commitments denominated in foreign currencies. In these
currency swap agreements, the Company and a counterparty financial institution
exchange equal initial principal amounts of two currencies at the spot exchange
rate. Over the term of the swap contract, the Company and the counterparty
exchange interest payments in their swapped currencies. At maturity, the
principal amount is reswapped, at the contractual exchange rate. The contracts
generally have maturity dates of fifteen to twenty four months.
At January 2, 2000, the Company did not have any foreign currency hedge
contracts outstanding, as compared to $10.5 million at January 3, 1999. The
Company, as of January 2, 2000, recognized a $22.0 million decrease in its
foreign currency translation adjustment account compared to January 3, 1999,
because of the weakening of certain currencies against the U.S. dollar. The
decrease was associated primarily with the Company's investments in certain
foreign subsidiaries located within the U.K. and continental Europe.
As mentioned above, the Company had no outstanding agreements to hedge
fluctuations in interest and foreign currency exchange rates as of January 2,
2000. The Company believes that, at this time, such hedges are no longer
necessary. During 1998, the Company restructured its borrowing facilities which
provided for multi-currency loan agreements resulting in the Company's ability
to borrow funds in the countries in which the funds are expected to be utilized.
Further, the advent of the euro has provided additional currency stability
within the Company's European markets. As such, these events have provided the
Company natural hedges on currency fluctuations. Interest rate management swap
agreements have also become unnecessary given the structure of the Company's
unsecured $300 million revolving credit facility, which charges interest at
varying rates based on the Company's ability to meet certain performance
criteria.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Sensitivity Analysis
- - --------------------
For purposes of specific risk analysis, the Company uses sensitivity analysis to
measure the impact that market risk may have on the fair values of the Company's
market sensitive instruments.
To perform sensitivity analysis, the Company assesses the risk of loss
in fair values associated with the impact of hypothetical changes in interest
rates and foreign currency exchange rates on market-sensitive instruments. The
market value of instruments affected by interest rate and foreign currency
exchange rate risk is computed based on the present value of future cash flows
as impacted by the changes in the rates attributable to the market risk being
measured. The discount rates used for the present value computations were
selected based on market interest and foreign currency exchange rates in effect
at January 2, 2000. The market values that result from these computations are
compared with the market values of these financial instruments at January 2,
2000. The differences in this comparison are the hypothetical gains or losses
associated with each type of risk.
Interest Rate Risk. Based on a hypothetical immediate 150 basis point
------------------
increase in interest rates, with all other variables held constant, the market
value of the Company's fixed rate long-term debt would be impacted by a net
increase of $1.0 million. Conversely, a 150 basis point decrease in interest
rates would result in a net increase in the market value of the Company's fixed
rate long-term debt of $42.2 million.
Foreign Currency Exchange Rate Risk. As of January 2, 2000, a 10%
--------------------------------------
movement in the levels of foreign currency exchange rates against the U.S.
dollar with all other variables held constant would result in a decrease in the
fair value of the Company's financial instruments of $5.2 million or an increase
in the fair value of the Company's financial instruments of $5.2 million. As the
impact of offsetting changes in the fair market value of the Company's net
foreign investments is not included in the sensitivity model, these results are
not indicative of the Company's actual exposure to foreign currency exchange
risk.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes new accounting and
reporting standards for derivative financial instruments and for hedging
activities. SFAS 133 requires an entity to measure all derivatives at fair value
and to recognize them in the balance sheet as an asset or liability, depending
on the entity's rights or obligations under the applicable derivative contract.
The Company will designate each derivative as belonging to one of several
possible categories, based on the intended use of the derivative. The
recognition of changes in fair value of a derivative that affect the income
statement will depend on the intended use of the derivative. If the derivative
does not qualify as a hedging instrument, the gain or loss on the derivative
will be recognized currently in earnings. If the derivative qualifies for
special hedge accounting, the gain or loss on the derivative will either (i) be
recognized in income along with an offsetting adjustment to the basis of the
item being hedged or (ii) be deferred in other comprehensive income and
reclassified to earnings in the same period or periods which the hedged
transaction affects. SFAS 137 delayed the effective date of SFAS 133 to fiscal
years beginning after June 15, 2000. The Company currently plans to adopt SFAS
133 on January 1, 2001. The Company is in the process of determining the impact
that the adoption of SFAS 133 will have on its results of operations and
financial position.
During 1999, the Company adopted Statement of Position ("SOP") 98-5,
"Reporting on the Costs of Start-up Activities." The SOP requires that the costs
of start-up activities, including organization costs, be expensed as incurred.
The adoption of SOP 98-5 had no material impact on the Company's financial
statements.
CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
Fiscal Year Ended
- - -------------------------------------------------------------------------------------------
(in thousands, except share data) 1999 1998 1997
- - -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 1,228,239 $1,281,129 $1,135,290
Cost of sales 846,124 847,660 755,734
- - -------------------------------------------------------------------------------------------
Gross profit on sales 382,115 433,469 379,556
Selling, general and administrative expenses 304,553 318,495 281,755
Restructuring charge 1,131 25,283 --
Operating income 76,431 89,691 97,801
- - -------------------------------------------------------------------------------------------
Other expense
Interest expense 39,372 36,705 35,038
Other (914) 3,875 1,492
- - -------------------------------------------------------------------------------------------
Total other expense 38,458 40,580 36,530
- - -------------------------------------------------------------------------------------------
Income before taxes on income 37,973 49,111 61,271
Taxes on income 14,428 19,288 23,757
- - -------------------------------------------------------------------------------------------
Net income 23,545 29,823 37,514
===========================================================================================
Earnings per common share <F1>
Basic $ 0.45 $ 0.58 $ 0.79
===========================================================================================
Diluted $ 0.45 $ 0.56 $ 0.76
===========================================================================================
<FN>
<F1> 1997 earnings per share have been restated to reflect a two-for-one
stock split that occurred in June 1998.
</FN>
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<CAPTION>
Fiscal Year Ended
- - -------------------------------------------------------------------------------------------
(in thousands) 1999 1998 1997
- - -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 23,545 $ 29,823 $ 37,514
Other comprehensive income
Foreign currency translation adjustment (22,003) (3,513) (25,098)
Minimum pension liability adjustment 6,399 (6,399) --
- - -------------------------------------------------------------------------------------------
Comprehensive income $ 7,941 $ 19,911 $ 12,416
===========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(in thousands) 1999 1998
- - ----------------------------------------------------------------------------------------
ASSETS
Current assets
<S> <C> <C>
Cash $ 2,548 $ 9,910
Accounts receivable 203,550 194,803
Inventories 176,918 199,338
Prepaid expenses 27,845 26,607
Deferred income taxes 9,917 7,866
- - ----------------------------------------------------------------------------------------
Total current assets 420,778 438,524
Property and equipment 253,436 245,312
Miscellaneous 75,509 50,059
Excess of cost over net assets acquired 278,772 302,969
- - ----------------------------------------------------------------------------------------
$ 1,028,495 $ 1,036,864
========================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Notes payable $ 4,173 $ 26,855
Accounts payable 90,318 80,154
Accrued expenses 107,287 115,317
Current maturities of long-term debt 1,974 2,786
- - ----------------------------------------------------------------------------------------
Total current liabilities 203,752 225,112
Long-term debt, less current maturities 125,144 112,651
Senior notes 150,000 150,000
Senior subordinated notes 125,000 125,000
Deferred income taxes 33,395 23,482
- - ----------------------------------------------------------------------------------------
Total liabilities 637,291 636,245
Minority interest 2,012 1,795
Shareholders' equity
Preferred stock -- --
Common stock 5,902 5,983
Additional paid-in capital 222,373 231,959
Retained earnings 233,322 219,230
Foreign currency translation adjustment (53,671) (31,668)
Minimum pension liability adjustment -- (6,399)
Treasury stock, 7,300 and 7,375 shares, respectively (18,734) (20,281)
- - ----------------------------------------------------------------------------------------
Total shareholders' equity 389,192 398,824
- - ----------------------------------------------------------------------------------------
$ 1,028,495 $ 1,036,864
========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal Year Ended
- - ---------------------------------------------------------------------------------------------
(in thousands) 1999 1998 1997
- - ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 23,545 $ 29,823 $ 37,514
Adjustments to reconcile net income to cash
provided by operating activities
Depreciation and amortization 45,789 42,586 38,605
Restructuring charge -- 12,265 --
Deferred income taxes 3,950 (8,362) 7,849
Working capital changes
Accounts receivable (15,954) 4,972 (16,386)
Inventories 16,559 (21,296) (16,233)
Prepaid expenses (2,314) 3,235 (2,273)
Accounts payable and accrued expenses (509) 8,677 25,647
- - ---------------------------------------------------------------------------------------------
71,066 71,900 74,723
- - ---------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (37,278) (45,227) (38,654)
Net proceeds from dispositions/
acquisitions of businesses 9,826 (71,504) (34,647)
Other (24,393) (16,485) (17,902)
- - ---------------------------------------------------------------------------------------------
(51,845) (133,216) (91,203)
- - ---------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Borrowings on long-term debt 148,900 198,080 153,624
Principal repayments on long-term debt (134,459) (343,607) (142,884)
Proceeds from issuance of senior notes -- 146,991 --
Expenditures under share repurchase program (10,615) (2,535) --
Borrowings (repayments) under lines of credit (22,115) (684) 7,617
Proceeds from issuance of common stock 1,044 70,630 6,414
Dividends paid (9,453) (8,499) (6,436)
- - ---------------------------------------------------------------------------------------------
(26,698) 60,376 18,335
- - ---------------------------------------------------------------------------------------------
Net cash provided (used) by operating, investing,
and financing activities (7,477) (940) 1,855
Effect of exchange rate changes on cash 115 638 (405)
- - ---------------------------------------------------------------------------------------------
Cash
Net increase (decrease) (7,362) (302) 1,450
Balance, beginning of year 9,910 10,212 8,762
- - ---------------------------------------------------------------------------------------------
Balance, end of year $ 2,548 $ 9,910 $ 10,212
=============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
- - --------------------
The Company is a recognized leader in the worldwide commercial interiors market,
offering floorcoverings, fabrics, specialty products and services. The Company
manufactures modular and broadloom carpet focusing on the high quality,
designer-oriented sector of the market, and provides specialized carpet
replacement, installation, and maintenance services. The Company also produces
interior fabrics and upholstery products. Additionally, the Company produces
raised/access flooring systems; provides chemicals used in various rubber and
plastic products; offers Intersept(R), a proprietary antimicrobial used in a
number of interior finishes; and sponsors the Envirosense Consortium in its
mission to address workplace environmental issues.
Principles of Consolidation
- - ---------------------------
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All material intercompany accounts and transactions are
eliminated.
Use of Estimates
- - ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Examples include provisions for returns, bad debts, product claims reserves,
inventory obsolescence and the length of product life cycles, accruals
associated with restructuring activities, income tax exposures, excess of cost
over net assets acquired and fixed asset lives. Actual results could vary from
these estimates.
Inventories
- - -----------
Inventories are valued at the lower of cost (standards which approximate actual
cost on a first-in, first-out basis) or market.
Property and Equipment
- - ----------------------
Property and equipment are carried at cost. Depreciation is computed using the
straight-line method over the following estimated useful lives: buildings and
improvements - ten to fifty years; furniture and equipment - three to twelve
years. Interest costs for the construction/development of certain long-term
assets are capitalized and amortized over the related assets' estimated useful
lives. The Company capitalized net interest costs of approximately $0.4 million,
$1.0 million, and $0.4 million for the years ended 1999, 1998, and 1997,
respectively. Depreciation expense amounted to approximately $32.4 million,
$31.9 million, and $25.7 million for the years ended 1999, 1998, and 1997,
respectively.
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-lived assets are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount may not be recoverable. If
the sum of the expected future undiscounted cash flow is less than the carrying
amount of the asset, a loss is recognized for the difference between the fair
value and carrying value of the asset.
Excess of Cost Over Net Assets Acquired
- - ---------------------------------------
Excess of cost over net assets acquired is the excess of the purchase price over
the fair value of net assets acquired in business combinations accounted for as
purchases. Excess of cost over net assets acquired is amortized on a
straight-line basis over the periods benefited, principally twenty-five to forty
years. Accumulated amortization amounted to approximately $69.1 million and
$59.7 million at January 2, 2000 and January 3, 1999, respectively.
The Company's operational policy for the assessment and measurement of
any impairment in the value of excess of cost over net assets acquired, which is
other than temporary, is to evaluate the recoverability and remaining life and
determine whether it should be completely or partially written off or the
amortization period accelerated. The Company will recognize an impairment if
undiscounted estimated future operating cash flows of the acquired business are
determined to be less than the carrying amount. The amount of impairment, if
any, is measured based on projected discounted future operating cash flows using
a discount rate reflecting the Company's average cost of funds.
Taxes on Income
- - ---------------
The Company accounts for income taxes under an asset and liability approach that
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the Company's
financial statements or tax returns. In estimating future tax consequences, the
Company generally considers all expected future events other than enactments of
changes in tax laws or rates. The effect on deferred tax assets and liabilities
of a change in tax rates will be recognized as income or expense in the period
that includes the enactment date.
Revenue Recognition
- - -------------------
Revenue is recognized on the sale of products or services when the products are
shipped or the services are performed, all significant contractual obligations
have been satisfied, and the collection of the resulting receivable is
reasonably assured. Revenues and estimated profits on long-term performance
contracts are recognized under the percentage of completion method of accounting
using the cost-to-cost methodology. Profit estimates are revised periodically
based upon changes in facts. Any losses identified on contracts are recognized
immediately.
Cash, Cash Equivalents, and Short-Term Investments
- - --------------------------------------------------
Highly liquid investments with insignificant interest rate risk and with
original maturities of three months or less are classified as cash and cash
equivalents. Investments with maturities greater than three months and less than
one year are classified as short-term investments.
At January 2, 2000 and January 3, 1999, checks issued against future
deposits totaled approximately $22.0 million and $10.1 million, respectively.
Cash payments for interest amounted to approximately $36.6 million, $30.7
million, and $33.8 million, for the years ended 1999, 1998, and 1997,
respectively. Income tax payments amounted to approximately $6.1 million, $17.3
million, and $18.2 million, for the years ended 1999, 1998, and 1997,
respectively.
Fair Values of Financial Instruments
- - ------------------------------------
Fair values of cash and cash equivalents, short-term investments and short-term
debt approximate cost due to the short period of time to maturity. Fair values
of long-term investments, debt, swaps, forward currency contracts and currency
options are based on quoted market prices or pricing models using current market
rates.
Translation of Foreign Currencies
- - ---------------------------------
The financial position and results of operations of the Company's foreign
subsidiaries are measured generally using local currencies as the functional
currency. Assets and liabilities of these subsidiaries are translated into U.S.
dollars at the exchange rate in effect at each year-end. Income and expense
items are translated at average exchange rates for the year. The resulting
translation adjustments are recorded in the foreign currency translation
adjustment account. In the event of a divestiture of a foreign subsidiary, the
related foreign currency translation results are reversed from equity to income.
Foreign currency exchange gains and losses are included in income.
Derivative Financial Instruments
- - --------------------------------
The Company uses various financial instruments, including derivative financial
instruments, for purposes other than trading. The Company does not enter into
derivative financial instruments for speculative purposes. Derivatives, used as
a part of the Company's risk management strategy, are designated at inception as
hedges, and are measured for effectiveness both at inception and on an ongoing
basis. Gains and losses on hedges of existing assets or liabilities are included
10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
in the carrying amounts of those assets or liabilities and are ultimately
recognized in income as part of those carrying amounts. Gains or losses related
to qualifying hedges of firm commitments or anticipated transactions are also
deferred and are recognized in income or as adjustments of carrying amounts when
the hedged transaction occurs.
Fiscal Year
- - -----------
The Company's fiscal year is the 52 or 53 week period ending on the Sunday
nearest December 31. All references herein to "1999," "1998," and "1997" mean
the fiscal years ended January 2, 2000, January 3, 1999, and December 28, 1997,
respectively. Fiscal years 1999 and 1997 were comprised of 52 weeks, while 1998
was comprised of 53 weeks.
Recent Accounting Pronouncements
- - --------------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133
establishes new accounting and reporting standards for derivative financial
instruments and for hedging activities. SFAS 133 requires an entity to measure
all derivatives at fair value and to recognize them in the balance sheet as an
asset or liability, depending on the entity's rights or obligations under the
applicable derivative contract. The Company will designate each derivative as
belonging to one of several possible categories, based on the intended use of
the derivative. The recognition of changes in fair value of a derivative that
affect the income statement will depend on the intended use of the derivative.
If the derivative does not qualify as a hedging instrument, the gain or loss on
the derivative will be recognized currently in earnings. If the derivative
qualifies for special hedge accounting, the gain or loss on the derivative will
either (i) be recognized in income along with an offsetting adjustment to the
basis of the item being hedged or (ii) be deferred in other comprehensive income
and reclassified to earnings in the same period or periods during which the
hedged transaction affects. SFAS 137 delayed the effective date of SFAS 133 to
fiscal years beginning after June 15, 2000. The Company currently plans to adopt
SFAS 133 on January 1, 2001. The Company is in the process of determining the
impact that the adoption of SFAS 133 will have on its results of operations and
financial position.
BUSINESS ACQUISITIONS AND DIVESTITURES
1999
- - ----
During 1999, the Company sold two operating entities which had been acquired as
part of the December 1997 Readicut International plc ("Readicut") acquisition
transaction. Joseph Hamilton & Seaton, Ltd., a distributor of private label
carpet, was sold for approximately $11.2 million in cash during February. In
November the Company also sold its 40% interest in Vebe Floorcoverings BV, a
manufacturer of needle-punch carpet, for $8 million in the form of a promissory
note. The Company recognized the related immaterial loss and gain, respectively,
associated with these divestitures within other expense.
During 1999, the Company purchased six service companies, all located in
the U.S. As consideration for the acquisitions, the Company issued common stock
valued at approximately $.8 million and paid $2.0 million in cash. All
transactions have been accounted for as purchases and, accordingly, the results
of operations of the acquired companies since their acquisition dates have been
included within the consolidated financial statements. The excess of the
purchase price over the fair value of the net assets acquired was approximately
$1.2 million and is being amortized over 25 years.
1998
- - ----
On December 30, 1997, the Company completed the acquisition of the European
carpet business of Readicut. The acquired portion of Readicut was essentially
comprised of two operating companies: Firth Carpets Ltd., based in Brighouse,
West Yorkshire, U.K., a leading manufacturer of high quality woven and tufted
carpet primarily for the contract markets, and Joseph Hamilton Seaton, Ltd.,
based in Birmingham, U.K. As consideration, the Company paid $54.6 million in
cash. The transaction was accounted for as a purchase and, accordingly, the
results of operations of the acquired companies since their acquisition date
have been included within the consolidated financial statements. The purchase
price exceeded the fair value of the net assets acquired by approximately $15.2
million and is being amortized over 40 years.
The following summarized unaudited pro forma financial information
assumes the acquisition occurred at December 30, 1996. The information for 1998
reflects actual results as if the acquisition actually occurred on the first day
of the year. For the year ended January 3, 1999, the acquired businesses of
Readicut recorded a net loss of $3.3 million.
Fiscal Year Ended
- - ---------------------------------------------------------------
(in thousands, except share data) 1998 1997
- - ---------------------------------------------------------------
Net sales $1,281,129 $1,241,526
Net income 29,823 38,569
Diluted earnings per
common share .56 .79
- - ---------------------------------------------------------------
11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amounts for 1997 are based upon certain assumptions and estimates
and do not reflect any benefit from economies which might have been achieved
from combined operations. The pro forma results do not necessarily represent
results which would have occurred if the acquisition had taken place on the
basis assumed above, nor are they indicative of the results of future combined
operations.
As part of the Readicut transaction, the Company also acquired a 40%
interest in Vebe Floorcoverings BV, located in the Netherlands. The Company
accounted for its interest in the joint venture using the equity method of
accounting.
The Company also acquired four floorcovering contractors, four carpet
maintenance companies, two additional service companies, and a raised/access
flooring manufacturer, all located in the U.S. The Company also purchased the
vinyl floorcoverings business of Denmark based Scan-Lock A/S, and acquired
Glenside Fabrics Limited, a manufacturer of upholstery fabrics, located in
Meltham, U.K. As consideration for the acquisitions, the Company issued common
stock valued at approximately $1.0 million, $16.9 million in cash, and $.2
million in a note receivable. All transactions have been accounted for as
purchases and, accordingly, the results of operations of the acquired companies
since their acquisition dates have been included within the consolidated
financial statements. The excess of the purchase price over the fair value of
the net assets acquired was approximately $11.7 million and is being amortized
over periods of 25 to 40 years.
RECEIVABLES
The Company maintains an agreement with a financial institution to sell a
participating interest in a designated pool of commercial receivables in amounts
up to $65 million. Under the agreement, a participating interest in new
receivables is sold as previous receivables are collected. The uncollected
receivables sold at January 2, 2000 and January 3, 1999 amounted to $40.0
million and $45.6 million, respectively.
The Company has adopted credit policies and standards intended to reduce
the inherent risk associated with potential increases in its concentration of
credit risk due to increasing trade receivables from sales to owners and users
of commercial office facilities and with specifiers such as architects,
engineers and contracting firms. Management believes that credit risks are
further moderated by the diversity of its end customers and geographic sales
areas. The Company performs ongoing credit evaluations of its customers'
financial condition and requires collateral as deemed necessary. As of January
2, 2000 and January 3, 1999, the allowance for bad debts amounted to
approximately $8.8 million and $7.8 million, respectively, for all accounts
receivable of the Company.
INVENTORIES
Inventories are summarized as follows:
(in thousands) 1999 1998
- - ------------------------------------------------
Finished goods $100,967 $123,941
Work-in-process 29,057 31,908
Raw materials 46,894 43,489
- - ------------------------------------------------
$176,918 $199,338
================================================
PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
(in thousands) 1999 1998
- - -----------------------------------------------------
Land $ 14,652 $ 14,669
Buildings 131,398 136,105
Equipment 316,870 313,039
Construction-in-progress 23,046 16,813
- - -----------------------------------------------------
485,966 480,626
Accumulated depreciation (232,530) (235,314)
- - -----------------------------------------------------
$ 253,436 $ 245,312
=====================================================
The estimated cost to complete construction-in-progress for which the Company
was committed at January 2, 2000 was approximately $5.3 million.
ACCRUED EXPENSES
Accrued expenses are summarized as follows:
(in thousands) 1999 1998
- - --------------------------------------
Taxes $ 5,723 $ 22,210
Compensation 41,030 40,252
Interest 5,959 5,100
Other 54,575 47,755
- - --------------------------------------
$107,287 $115,317
======================================
BORROWINGS
Long-Term Debt
- - --------------
Long-term debt consisted of the following:
Interest Rate at
(in thousands) Jan. 2, 2000 1999 1998
- - -------------------------------------------------------------------------
Revolving credit facilities
U.S. dollar 6.7% $ 64,700 $ 45,000
Japanese yen 1.3% 8,000 8,957
British pound sterling 7.0% 40,296 41,478
Dutch guilder 4.2% -- 5,318
Euro 4.5% 2,517 --
Other (3.0 - 7.8%) 11,605 14,684
- - -------------------------------------------------------------------------
Total long-term debt 127,118 115,437
Less current maturities (1,974) (2,786)
- - -------------------------------------------------------------------------
$ 125,144 $ 112,651
=========================================================================
12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company maintains an unsecured $300 million revolving credit
facility which matures June 30, 2003. Interest is charged at varying rates based
on the Company's ability to meet certain performance criteria.
The facility requires prepayment from specified excess cash flows or
proceeds from certain asset sales and provides for restrictions which, among
other things, require maintenance of certain financial ratios, restrict
encumbrance of assets and limit the payment of dividends. Long-term debt
recorded in the accompanying balance sheets approximates fair value based on the
borrowing rates currently available to the Company for bank loans with similar
terms and average maturities.
Future maturities of long-term debt are based on fixed payments (amounts
could be higher if excess cash flows or asset sales require prepayment of debt
under the credit agreements). Annual maturities (in thousands of dollars) of
long-term debt outstanding at January 2, 2000 are as follows: 2000-$1,974;
2001-$52,268; 2002-$484; 2003-$65,162; 2004-$462; 2005 and beyond-$6,768.
7.3% Senior Notes
- - -----------------
In April of 1998, the Company issued $150 million in 7.3% Senior Notes due 2008.
Interest is payable semi-annually on April 1 and October 1.
The Senior Notes are unsecured, senior subordinated notes and are
guaranteed, jointly and severally, by certain of the Company's domestic
subsidiaries. The Senior Notes are redeemable, in whole or in part, at the
option of the Company, at any time or from time to time, at a redemption price
equal to the greater of (i) 100% of the principal amount of the Notes to be
redeemed or (ii) the sum of the present value of the remaining scheduled
payments, discounted on a semi-annual basis at the treasury rate plus 50 basis
points, plus, in the case of each of (i) and (ii) above, accrued interest to the
date of redemption. At January 2, 2000 and January 3, 1999, the estimated fair
value of these notes was approximately $117.3 and $152.9 million, respectively.
9.5% Senior Subordinated Notes
The Company has outstanding $125 million in 9.5% Senior Subordinated Notes due
2005. Interest is payable semi-annually on May 15 and November 15.
The Notes are guaranteed, jointly and severally, on an unsecured senior
subordinated basis by certain of the Company's domestic subsidiaries. The Notes
are redeemable for cash at any time on or after November 15, 2000 at the
Company's option, in whole or in part, initially at a redemption price equal to
104.75% of the principal amount, declining to 100% of the principal amount on
November 15, 2003, plus accrued interest thereon to the date fixed for
redemption. At January 2, 2000 and January 3, 1999, the estimated fair value of
these notes was approximately $115.4 million and $130.5 million, respectively.
Short-term Borrowings
- - ---------------------
In addition to the amounts available under the revolving credit facility
described above, the Company currently maintains approximately $9.0 million in
complementary revolving lines of credit through several of its subsidiaries.
This is compared to $60.5 million during 1998. Interest is generally charged at
rates from 7% to 9%. The weighted average interest rate related to the
complimentary lines was approximately 8.5% and 7.8% for 1999 and 1998,
respectively. Approximately $4.2 million and $26.8 million was outstanding under
these lines at January 2, 2000 and January 3, 1999, respectively.
PREFERRED STOCK
The Company is authorized to create and issue up to 5,000,000 shares of $1.00
par value Preferred Stock in one or more series and to determine the rights and
preferences of each series, to the extent permitted by the Articles of
Incorporation, and to fix the terms of such preferred stock without any vote or
action by the shareholders. The issuance of any series of preferred stock may
have an adverse effect on the rights of holders of common stock and could
decrease the amount of earnings and assets available for distribution to holders
of common stock. In addition, any issuance of preferred stock could have the
effect of delaying, deferring or preventing a change in control of the Company.
Series A Cumulative Convertible Preferred Stock
- - -----------------------------------------------
In June 1993, the Company issued 250,000 shares of Series A Cumulative
Convertible Preferred Stock with a face value of $100 per share. During the
period from September 1996 through January 1997, the Series A Cumulative
Convertible Preferred Stock was converted into an aggregate of 3,431,800 shares
of the Company's Class A Common Stock.
Preferred Share Purchase Rights
- - -------------------------------
During 1998, the Board of Directors of the Company declared a dividend of one
purchase right (a "Right") to be distributed in respect of each outstanding
share of Common Stock, payable to shareholders of record as of March 16, 1998.
Each Right entitles the registered holder to purchase from the Company one
two-hundredth of a share (a "Unit") of newly created Series B Participating
Cumulative Preferred Stock (the "Series B Preferred Stock").
The Rights may have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that acquires more than 15% of the
outstanding shares of Common Stock or if other specified events occur without
the Rights having been redeemed or in the event of an exchange of the Rights for
Common Stock as permitted under the Shareholder Rights Plan.
13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The dividend and liquidation rights of the Series B Preferred Stock are
designed so that the value of one one-hundredth of a share of Series B Preferred
Stock issuable upon exercise of each Right will approximate the same economic
value as one share of Common Stock, including voting rights. The exercise price
per Right is $90, subject to adjustment. Shares of Series B Preferred Stock will
entitle the holder to a minimum preferential dividend of $1.00 per share, but
will entitle the holder to an aggregate dividend payment of 200 times the
dividend declared on each share of Common Stock. In the event of liquidation,
each share of Series B Preferred Stock will be entitled to a minimum
preferential liquidation payment of $1.00, plus accrued and unpaid dividends and
distributions thereon, but will be entitled to an aggregate payment of 200 times
the payment made per share of Common Stock. In the event of any merger,
consolidation or other transaction in which Common Stock is exchanged for or
changed into other stock or securities, cash or other property, each share of
Series B Preferred Stock will be entitled to receive 200 times the amount
received per share of Common Stock. Series B Preferred Stock is not convertible
into Common Stock.
Each share of Series B Preferred Stock will be entitled to 200 votes on
all matters submitted to a vote of the shareholders of the Company, and shares
of Series B Preferred Stock will generally vote together as one class with the
Common Stock and any other voting capital stock of the Company on all matters
submitted to a vote of the Company's shareholders. While the Company's Class B
Common Stock remains outstanding, holders of Series B Preferred Stock will vote
as a single class with the Class A Common Stockholders for election of
directors. Further, whenever dividends on the Series B Preferred Stock are in
arrears in an amount equal to six quarterly payments, the Series B Preferred
Stock, together with any other shares of preferred stock then entitled to elect
directors, shall have the right, as a single class, to elect one director until
the default has been cured. The Rights expire on March 15, 2008 unless extended
or unless the Rights are earlier redeemed or exchanged by the Company.
SHAREHOLDERS' EQUITY
Common Stock
- - ------------
The Company is authorized to issue 80 million shares of $.10 par value Class A
Common Stock and 40 million shares of $.10 par value Class B Common Stock. Class
A and Class B Common Stock have identical voting rights except for the election
or removal of directors. Holders of Class B Common Stock are entitled as a class
to elect a majority of the Board of Directors. Under the terms of the Class B
Common Stock, its special voting rights to elect a majority of the Board members
would terminate irrevocably if the total outstanding shares of Class B Common
Stock ever comprises less than ten percent of the Company's total issued and
outstanding shares of Class A and Class B Common Stock. On January 2, 2000, the
outstanding Class B shares constituted approximately 12.1% of the total
outstanding shares of Class A and Class B Common Stock. The Company's Class A
Common Stock is traded in the over-the-counter market under the symbol IFSIA and
is quoted on NASDAQ. The Company's Class B Common Stock is not publicly traded.
Class B Common Stock is convertible into Class A Common Stock on a one-for-one
basis. Both classes of common stock share in dividends available to common
shareholders. Cash dividends on common stock were $.18 per share for the year
ended 1999, $.165 per share for the year ended 1998 and $.135 per share for the
year ended 1997.
Stock Split
- - -----------
On May 19, 1998, the shareholders of the Company approved an increase in the
number of authorized shares of Class A Common Stock from 40 million to 80
million. The increase was necessary to affect a two-for-one stock split which
was declared by the Board of Directors on June 15, 1998. Shareholders of record
as of June 1, 1998, received one additional share for each share held. All
references to share and per share data prior to the second quarter of 1998 have
been restated to reflect this stock split. The table of Common Shareholders'
Equity Activity presented below reflects the actual share amounts outstanding
for each period presented.
Stock Repurchase Program
- - ------------------------
During 1998, the Company adopted a share repurchase program, pursuant to which
it was authorized to repurchase up to 2,000,000 shares of Class A Common Stock
in the open market through May 19, 2000. This amount was increased to 4,000,000
shares subsequent to January 2, 2000. During 1999, the Company repurchased
1,442,500 shares of Class A Common Stock under this program, at prices ranging
from $4.50 to $9.94 per share. This is compared to the repurchase of 175,000
shares of Class A Common Stock at prices ranging from $12.86 to $16.78 during
1998. All treasury stock is accounted for using the cost method.
14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 December 29, 1996 22,372 $ 2,238 2,975 $ 298 $ 124,557 $ 166,828 $ -- $ (3,057)
Net income -- -- -- -- -- 37,514 -- --
Conversion of Common Stock 381 38 (381) (38) -- -- -- --
Stock issuance under employee
plans, inclusive of tax
benefit of $1,318 502 50 -- -- 7,813 -- -- --
Other issuances of Common Stock 374 37 175 17 9,274 -- -- --
Conversion of Series
A Preferred Stock 1,357 136 -- -- 19,940 -- -- --
Cash dividends paid -- -- -- -- -- (6,436) -- --
Foreign currency translation
adjustment -- -- -- -- -- -- -- (25,098)
- - -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 28, 1997 24,986 $ 2,499 2,769 $ 277 $ 161,584 $ 197,906 $ -- $(28,155)
Net income -- -- -- -- -- 29,823 -- --
Conversion of Common Stock 333 33 (333) (33) -- -- -- --
Stock issuance under employee
plans, inclusive of tax
benefit of $638 677 68 -- -- 5,107 -- -- --
Other issuances of Common Stock 1,343 134 367 36 68,237 -- -- --
Cash dividends paid -- -- -- -- -- (8,499) -- --
Minimum pension liability
adjustment -- -- -- -- -- -- (6,399) --
Foreign currency translation
adjustment -- -- -- -- -- -- -- (3,513)
Two-for-one stock split 26,881 2,688 2,811 281 (2,969) -- -- --
- - -----------------------------------------------------------------------------------------------------------------------------------
Balance at January 3, 1999 54,220 $ 5,422 5,614 $ 561 $ 231,959 $ 219,230 $(6,399) $(31,668)
Net income -- -- -- -- -- 23,545 -- --
Conversion of Common Stock (190) (19) 190 19 -- -- -- --
Stock issuance and forfeiture
under employee plans, inclusive
of tax benefit of $15 274 27 (402) (40) (2,498) -- -- --
Other issuances of Common Stock 85 9 912 91 10,414 -- -- --
Cash dividends paid -- -- -- -- -- 9,453) -- --
Unamortized stock compensation
related to restricted stock awards -- -- -- -- (8,784) -- -- --
Compensation expense related
to restricted stock awards -- -- -- -- 1,070 -- -- --
Forfeiture and vesting of
restricted stock awards -- -- -- -- 3,664 -- -- --
Retirement of treasury stock (1,678) (168) -- -- (13,452) -- -- --
Minimum pension liability
adjustment -- -- -- -- -- -- 6,399 --
Foreign currency translation
adjustment -- -- -- -- -- -- -- (22,003)
- - -----------------------------------------------------------------------------------------------------------------------------------
Balance at January 2, 2000 52,711 $ 5,271 6,314 $ 631 $ 222,373 $ 233,322 $ -- $(53,671)
- - -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Options
- - -------------
The Company has an Omnibus Stock Incentive Plan ("Omnibus Plan") under which a
committee of the Board of Directors is authorized to grant key employees,
including officers, options to purchase the Company's common stock. Options are
exercisable for shares of Class A or Class B Common Stock at a price not less
than 100% of the fair market value on the date of grant. The options generally
become exercisable 20% per year over a five-year period from the date of the
grant and the options generally expire ten years from the date of the grant. An
aggregate of 3,600,000 shares of common stock not previously authorized for
issuance under any plan, plus the number of shares subject to outstanding stock
options granted under predecessor plans minus the number of shares issued on or
after the effective date pursuant to the exercise of such outstanding stock
options granted under predecessor plans, are available to be issued under the
Omnibus Plan.
The following tables summarize activity on stock options under the
Omnibus Plan and predecessor plans:
Weighted
Number Average
of Shares Exercise Price
- - -----------------------------------------------------------
Outstanding at Dec. 29, 1996 4,014,000 $ 6.65
Granted .................... 628,000 10.05
Exercised .................. (1,004,000) 6.52
Forfeited or canceled ...... (140,000) 6.58
- - ----------------------------------------------------------
Outstanding at Dec. 28, 1997 3,498,000 $ 7.31
Granted .................... 651,000 14.15
Exercised .................. (677,000) 6.70
Forfeited or canceled ...... (68,000) 6.81
- - ----------------------------------------------------------
Outstanding at Jan. 3, 1999 3,404,000 $ 8.75
Granted .................... 576,000 7.84
Exercised .................. (324,000) 6.20
Forfeited or canceled ...... (50,000) 15.26
- - ----------------------------------------------------------
Outstanding at Jan. 2, 2000 3,606,000 $ 8.74
==========================================================
Weighted
Number average
Options exercisable of shares exercise price
- - ------------------------------------------------------
January 2, 2000 1,916,000 $7.63
January 3, 1999 1,553,000 $6.87
- - ------------------------------------------------------
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------- ---------------------------
Weighted Weighted Weighted
Range of Number Average Average Number Average
Exercise Outstanding at Remaining Exercise Exercisable at Exercise
Prices Jan. 2, 2000 Contractual Life Price Jan. 2, 2000 Price
- - -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 4.25 - $ 6.88 1,180,000 5.90 $ 5.85 869,000 $ 5.97
7.00 - 9.56 1,697,000 7.43 8.35 855,000 7.96
10.06 - 19.13 729,000 8.69 14.33 192,000 13.67
- - -------------------------------------------------------------------------------------------------
3,606,000 7.18 $ 8.74 1,916,000 $ 7.63
- - -------------------------------------------------------------------------------------------------
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The weighted average fair value of options, calculated using the
Black-Scholes option pricing model, granted during 1999 and 1998 is $2.12 and
$5.15 per share, respectively.
The Company has adopted the disclosure-only provisions of SFAS 123,
"Accounting for Stock-Based Compensation," but applies Accounting Principles
Board Opinion No. 25 and related interpretations in accounting for its stock
option plans. Compensation expense related to stock option plans described above
was immaterial for 1999, 1998, and 1997. If the Company had elected to recognize
compensation cost based on the fair value at the grant dates for options issued
under the plans described above, consistent with the method prescribed by SFAS
123, net income applicable to common shareholders and earnings per share would
have been changed to the pro forma amounts indicated below:
Fiscal Year Ended
- - ---------------------------------------------------------------------------
(in thousands, except share data) 1999 1998 1997
- - ---------------------------------------------------------------------------
Net income
as reported ........... $ 23,545 $ 29,823 $ 37,514
pro forma ............. 22,185 28,366 36,533
- - ---------------------------------------------------------------------------
Basic earnings per share
as reported ........... $ .45 $ 0.58 $ 0.79
pro forma ............. .42 0.55 0.77
- - ---------------------------------------------------------------------------
Diluted earnings per share
as reported ........... $ .45 $ 0.56 $ 0.76
pro forma ............. .42 0.53 0.74
- - ---------------------------------------------------------------------------
The fair value of stock options used to compute pro forma net income and
earnings per share disclosures is the estimated present value at grant date
using the Black-Scholes option pricing model with the following weighted average
assumptions for 1999, 1998, and 1997: Dividend yield of 3.6% in 1999, 1.9% in
1998, and .71% in 1997; expected volatility of 31% in 1999, 30% in 1998, and 35%
in 1997; a risk-free interest rate of 5.72% in 1999, 5.46% in 1998, and 6.32% in
1997; and an expected option life of 6.0 years in 1999, 1998, and 1997.
Restricted Stock Awards
- - -----------------------
During fiscal years 1999, 1998 and 1997 restricted stock awards were granted for
310,563, 212,412 and 424,872, shares of Class B Common Stock, respectively.
These shares vest with respect to each employee over a nine-year period from the
date of grant, provided the individual remains in the employ of the Company at
the vesting date. Additionally, these shares could vest upon the attainment of
certain share performance criteria; in the event of a change in control of the
Company; or, in the case of the awards granted in 1997, upon involuntary
termination. Compensation expense relating to these grants was approximately
$1,070,000, $760,000 and $90,000 during 1999, 1998, and 1997, respectively.
During fiscal year 1999, the shares were issued and as a result unamortized
stock compensation for the value of the awards was recorded as a reduction to
additional paid-in capital. Due to severance agreements offered during 1999,
247,647 shares were forfeited and 210,538 shares became vested (of which 109,818
were repurchased by the Company). During 1998, 26,000 shares were canceled. At
January 2, 2000 and January 3, 1999, stock awards for 463,662 and 611,284 shares
of Class B Common Stock remained outstanding, respectively.
EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the weighted
average number of shares of Class A and Class B Common Stock outstanding during
each year. Shares issued during the year and shares reacquired during the year
are weighted for the portion of the year that they were outstanding. Diluted
earnings per share is computed in a manner consistent with that of basic
earnings per share while giving effect to all potentially dilutive common shares
that were outstanding during the period.
The following is a reconciliation from basic earnings per share to
diluted earnings per share for each of the last three years:
Weighted
Average
(in thousands, Shares Earnings
except earnings per share) Net Income Outstanding Per Share
- - ---------------------------------------------------------------------
1999
Basic $23,545 52,562 $ .45
Effect of dilution:
Stock options 241
- - ------------------------------------------------------------------
Diluted $23,545 52,803 $ .45
- - ------------------------------------------------------------------
1998
Basic $29,823 51,808 $ .58
Effect of dilution:
Stock options
and awards 1,927
- - ------------------------------------------------------------------
Diluted $29,823 53,735 $ .56
- - ------------------------------------------------------------------
1997
Basic $37,514 47,416 $ .79
Effect of dilution:
Stock options
and awards 1,546
Convertible debt 153 340
- - ------------------------------------------------------------------
Diluted $37,667 49,302 $ .76
- - ------------------------------------------------------------------
17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 1999, 1,817,309 stock options were excluded from the computation of
diluted earnings per share due to their antidilutive effect.
RESTRUCTURING CHARGE
In the fourth quarter of 1998, the Company recorded a pre-tax restructuring
charge of $25.3 million. The charge was initiated in response to (i) the
slow-down in the Asian economy coupled with the severe decline in value of most
Asia/ Pacific currencies; (ii) the Company's decision to exit the commodity-end
products business in Japan; (iii) the implementation of the Company's shared
services strategy in the U.K.; (iv) the closure of a fabrics manufacturing
facility in North Carolina and a non-woven carpet manufacturing facility in the
U.K.; and (v) the abandonment of manufacturing equipment utilized in the
production of an abandoned product line within the Company's U.S. floorcovering
operations. Specific elements of the restructuring activities, the related
costs, and the current status of the plan are discussed below.
Floorcoverings
- - --------------
Asia/Pacific
------------
In reaction to the economic slowdown in the Asia region, the severe decline in
most Asia/Pacific currencies, the lack of demand for local production, and the
exiting of the commodity-end products business in Japan, the Company decided to
consolidate its floorcovering manufacturing operations. As a result, the Company
decided to liquidate its Shanghai operation. Where possible, certain
manufacturing assets were transferred to manufacturing locations in Thailand and
Australia. During 1998, a charge in the amount of approximately $7.2 million was
recorded representing the reduction in carrying value of the manufacturing
facility, related property and equipment, inventories, and other related assets.
Pre-opening costs, intangible assets (including land rights), and other
miscellaneous assets totaling approximately $1.9 million were completely written
off as future economic benefit was unlikely.
The Company had underachieved in Japan throughout the 1990s. Poor
economic conditions had resulted in an eroding base of business and the Company
had been unable to profitably compete with the volume-based local manufacturers
at the commodity-end of the market. The Company's strategy to exit the
commodity-end of the Japanese market required several actions: (i) termination
of relationships with commodity oriented distributors, most of whom were
financially dependent on the Company; (ii) downsizing of the Japan operations,
including the termination of personnel; and (iii) relocation of existing office
space. The downsized operation now focuses on selling high-end,
designer-specified products targeted towards a multinational customer base. The
headcount reduction in Japan was completed by the end of 1998. Costs related to
the termination of commodity distributor relationships and abandonment of
certain related intangible assets and inventory totaled approximately $3.5
million.
Europe
- - ------
Weak economic conditions in the U.K. translated into slowing demand for the
Company's products. Additionally, the Company had made several acquisitions in
the U.K., offering the opportunity to reorganize the various acquired business
units to utilize a shared services approach to manufacturing and back office
support functions. As a result, the Company's manufacturing facility in
Heckmondwicke was closed and certain property and equipment located at this
facility was written off in anticipation of this action. The remaining
operations were transferred to a nearby facility. The modification of activities
at the Company's Craigavon facility also resulted in the termination or
relocation of other operations. The above noted actions resulted in significant
headcount reductions within the U.K.
U.S.
- - -----
A charge totaling approximately $1.6 million was recorded to reduce the carrying
value of manufacturing equipment utilized in the production of an abandoned
product line to estimated salvage value.
Interior Fabrics
- - ----------------
The Interior Fabrics Group's restructuring plan was comprised of the following
actions: (i) the Company ceased manufacturing operations in Greensboro, North
Carolina and transferred certain personnel and operations to an existing
facility in Dudley, Massachusetts; (ii) the European fabric operations were
restructured by integrating the Camborne, Guilford, and Glenside operating units
into a single manufacturing facility; and (iii) the Company abandoned its
warehousing operations in Singapore and Malaysia, in favor of establishing
exclusive distributor arrangements. These decisions were prompted by the
opportunity to assimilate recently acquired entities as well as a response to
recent poor economic conditions in Asia. The aforementioned restructuring plans
resulted in significant headcount reductions and abandonment of property,
equipment and inventory.
18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the restructuring activities which were planned as of January 3,
1999 is presented below:
<TABLE>
<CAPTION>
Asia/Pacific Europe U.S. 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
Other costs 3,180 -- -- 27 -- 400 3,180 427 3,607
- - ----------------------------------------------------------------------------------------------------------------------------------
$14,417 $ -- $5,947 $1,669 $1,600 $1,650 $21,964 $ 3,319 $25,283
==================================================================================================================================
</TABLE>
The restructuring charge was comprised of $13.0 million of cash expenditures for
severance benefits and other costs and $12.3 million of non-cash charges,
primarily for the write-down of impaired assets. Termination benefits of $7.6
million, primarily related to severance costs, resulted from an aggregate
expected reduction of 287 employees. The staff reductions as originally planned
were expected to be as follows:
<TABLE>
<CAPTION>
Asia/Pacific Europe U.S. Totals
-------------------------------------------------------------------------------------------
Floor- Floor- Floor- Floor- Grand
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 a result of the restructuring, a total of 253 employees were terminated
through January 2, 2000. Of this amount 29 were terminated during 1998. There
will not be any further terminations as a result of the restructuring. The
charge for termination benefits and other costs to exit activities incurred
during 1999 and 1998 were reflected as a separately stated charge against
operating income. The Company believes the remaining provisions are adequate to
complete the plan.
The following table displays the components of the accrued restructuring
liability for January 3, 1999 to January 2, 2000:
Termination Benefits
- - --------------------
<TABLE>
<CAPTION>
Asia/Pacific Europe U.S. 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>
January 3, 1999 $ 600 $ -- $ 2,367 $ 18 $ -- $ 750 $ 2,967 $ 768 $ 3,735
Additional expense -- -- 767 -- -- 705 767 705 1,472
Payments (600) -- (2,246) (18) -- (1,455) (2,846) (1,473) (4,319)
Reversal of over-accrual -- -- (672) -- -- -- (672) -- (672)
- - ----------------------------------------------------------------------------------------------------------------------------------
January 2, 2000 $ -- $ -- $ 216 $ -- $ -- $ -- $ 216 $ -- $ 216
===================================================================================================================================
</TABLE>
Other Costs to Exit Activities
- - ------------------------------
<TABLE>
<CAPTION>
Asia/Pacific Europe U.S. 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>
January 3, 1999 $ 1,361 $ -- $ 505 $ 33 $ -- $ 400 $ 1,866 $ 433 $ 2,299
Additional expense -- -- -- -- -- 331 -- 331 331
Payments (1,111) -- (505) (33) -- (731) (1,616) (764) (2,380)
Reversal of over-accrual -- -- -- -- -- -- -- -- --
- - -----------------------------------------------------------------------------------------------------------------------------------
January 2, 2000 $ 250 $ -- $ -- $ -- $ -- $ -- $ 250 $ -- $ 250
====================================================================================================================================
</TABLE>
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TAXES ON INCOME
Provisions for federal, foreign, and state income taxes in the consolidated
statements of income consisted of the following components:
Fiscal Year Ended
- - -------------------------------------------------------------------
(in thousands) 1999 1998 1997
- - -------------------------------------------------------------------
Current:
Federal $ 3,868 $ 13,769 $ 5,569
Foreign 4,493 8,460 9,052
State 2,210 3,070 1,192
- - -------------------------------------------------------------------
10,571 25,299 15,813
- - -------------------------------------------------------------------
Deferred (reduction):
Federal 3,620 (3,032) 4,675
Foreign 2,120 (2,171) 2,173
State (1,883) (808) 1,096
- - -------------------------------------------------------------------
3,857 (6,011) 7,944
- - -------------------------------------------------------------------
$ 14,428 $ 19,288 $23,757
===================================================================
Income before taxes on income consisted of the following:
Fiscal Year Ended
- - -------------------------------------------------------------------
(in thousands) 1999 1998 1997
- - -------------------------------------------------------------------
U.S. operations $ 7,434 $30,353 $29,134
Foreign operations 30,539 18,758 32,137
- - -------------------------------------------------------------------
$37,973 $49,111 $61,271
====================================================================
Deferred income taxes for the years ended January 2, 2000 and January 3, 1999
reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes.
At January 2, 2000, the Company's foreign subsidiaries had approximately
$9.2 million in net operating losses available for an unlimited carryforward
period. Additionally, the Company had approximately $69 million in state net
operating losses expiring at various times through 2014.
The sources of the temporary differences and their effect on the net
deferred tax liability are as follows:
1999 1998
----------------------- ---------------------
(in thousands) Assets Liabilities Assets Liabilities
- - -----------------------------------------------------------------------------
Basis differences
of property
and equipment $ -- $27,259 $ -- $26,174
Net operating loss
carryforwards 5,962 -- 2,200 --
Other differences
in basis of assets
and liabilities 4,329 -- 9,893 --
- - -----------------------------------------------------------------------------
$10,291 $27,259 $12,093 $26,174
=============================================================================
The effective tax rate on income before taxes differs from the U.S.
statutory rate. The following summary reconciles taxes at the U.S.
statutory rate with the effective rates:
Fiscal Year Ended
- - -----------------------------------------------------------------------
(in thousands) 1999 1998 1997
- - -----------------------------------------------------------------------
Taxes on income at U.S.
statutory rate 35.0% 35.0% 35.0%
Increase in taxes
resulting from:
State income taxes,
net of federal benefit 1.0 3.0 2.4
Amortization of excess
of cost over net assets
acquired and related
purchase accounting
adjustments 7.9 5.8 4.7
Foreign and U.S. tax
effects attributable
to foreign operations (6.4) (3.2) (2.2)
Other 0.5 (1.3) (1.1)
- - -----------------------------------------------------------------------
Taxes on income at
effective rates 38.0% 39.3% 38.8%
=======================================================================
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $79 million at January 2, 2000. Those earnings are considered to
be indefinitely reinvested and, accordingly, no provision for U.S. federal and
state income taxes has been provided thereon. Upon distribution of those
earnings in the form of dividends or otherwise, the Company would be subject to
both U.S. income taxes (subject to an adjustment for foreign tax credits) and
withholding taxes payable to the various foreign countries. Determination of the
amount of unrecognized deferred U.S. income tax liability is not practicable
because of the complexities associated with its hypothetical calculation.
Withholding taxes of approximately $1.0 million would be payable upon remittance
of all previously unremitted earnings at January 2, 2000.
HEDGING TRANSACTIONS AND
DERIVATIVE FINANCIAL INSTRUMENTS
The Company has employed the use of derivative financial instruments for the
purpose of reducing its exposure to adverse fluctuations in interest and foreign
currency exchange rates. While these hedging instruments were subject to
fluctuations in value, such fluctuations were generally offset by the
fluctuations in values of the underlying exposures being hedged. The Company has
not held or issued derivative financial instruments for trading purposes. The
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company has historically monitored the use of derivative financial instruments
through the use of objective measurable systems, well-defined market and credit
risk limits, and timely reports to senior management according to prescribed
guidelines. The Company has established strict counterparty credit guidelines
and has only entered into transactions with financial institutions of investment
grade or better. As a result, the Company has historically considered the risk
of counterparty default to be minimal.
Interest Rate Management
- - ------------------------
In order to maintain the percentage of fixed and variable rate debt within
certain parameters, the Company has previously entered into interest rate swap
agreements. In these swaps, the Company agreed to exchange, at specified
intervals, the difference between fixed and variable interest amounts calculated
by reference to an agreed-upon notional principal linked to LIBOR. Any
differences paid or received on interest rate swap agreements were recognized as
adjustments to interest expense over the life of each swap, thereby adjusting
the effective interest rate on the underlying obligation. As of January 2, 2000,
the Company had no outstanding interest rate management swap agreements. At
January 3, 1999, the Company had utilized interest rate swap agreements to
effectively convert approximately $43.7 million of variable rate debt to fixed
rate debt. The weighted average rate on these borrowings was 7.8% at January 3,
1999.
Foreign Currency Exchange Rate Management
- - -----------------------------------------
The purpose of the Company's foreign currency hedging activities was to
reduce the risk that the eventual local currency inflows resulting from sales to
foreign customers would be adversely affected by changes in exchange rates.
The Company entered into currency swap contracts to hedge certain firm
sales commitments denominated in foreign currencies. Net gains and losses were
deferred and recognized in income in the same period as the hedged transaction.
As of January 2, 2000, the Company had no outstanding foreign currency
management swap agreements. As of January 3, 1999, net deferred gains/losses
from hedging anticipated but not yet firmly committed transactions were not
material.
The estimated fair values of derivatives used to hedge or modify the
Company's risks fluctuate over time. These fair value amounts should not be
viewed in isolation, but rather in relation to the fair values of the underlying
hedged obligations and transactions and the overall reduction in the Company's
exposure to adverse fluctuations in interest and foreign exchange rates.
The notional amounts of the derivative financial instruments do not
necessarily represent amounts exchanged by the parties and, therefore, are not a
direct measure of the exposure of the Company through its use of derivatives.
The amounts exchanged are calculated on the basis of the notional amounts and
the other terms of the derivatives, which relate to interest rates or currency
exchange rates.
The following table represents the aggregate notional amounts, fair
values, and maturities of the Company's derivative financial instruments. The
amounts shown within the table under foreign currency management represent
contracts under which the Company was required to deliver Dutch guilder currency
at dates subsequent to January 3, 1999.
1998
----------------------
Notional Effect on
(in thousands) Amounts Fair Values
- - ----------------------------------------------------------
Interest rate management
Swap agreements $43,700 $ (69)
Foreign currency management
Swap agreements $10,500 $(1,414)
- - ----------------------------------------------------------
As mentioned above, the Company had no outstanding agreements to hedge
fluctuations in interest and foreign currency exchange rates as of January 2,
2000. The Company believes that, at this time, such hedges are no longer
necessary. During 1998, the Company restructured its borrowing facilities which
provided for multi-currency loan agreements resulting in the Company's ability
to borrow funds in the countries in which the funds are expected to be utilized.
Further, the advent of the euro has provided additional currency stability
within the Company's European markets. As such, these events have provided the
Company natural hedges on currency fluctuations. Interest rate management swap
agreements have also become unnecessary given the structure of the Company's
unsecured $300 million revolving credit facility, which charges interest at
varying rates based on the Company's ability to meet certain performance
criteria.
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMITMENTS AND CONTINGENCIES
The Company leases certain marketing, production and distribution facilities and
equipment. At January 2, 2000, aggregate minimum rent commitments under
operating leases with initial or remaining terms of one year or more consisted
of the following:
Fiscal Year (in thousands)
- - --------------------------------
2000 $16,077
2001 13,701
2002 10,902
2003 8,494
2004 6,151
Thereafter 29,184
- - -------------------------------
$84,509
===============================
Rental expense amounted to approximately $17.5 million, $17.1 million, and $20.7
million for the fiscal years ended 1999, 1998, and 1997, respectively.
EMPLOYEE BENEFIT PLANS
The Company has trusteed defined benefit retirement plans ("Plans") which cover
many of its European employees. The benefits are generally based on years of
service and the employee's average monthly compensation. Pension expense was
$3.3 million and $4.2 million for the years ended 1999 and 1998, respectively.
Pension benefit was $.1 million for the year ended 1997. Plan assets are
primarily invested in equity and fixed income securities.
On November 1, 1997, the Company elected to freeze the defined benefit
plan covering its U.S. employees. Accordingly, benefit accruals under this plan
have ceased and all actively employed participants became 100% vested in their
benefits. In connection with the election to freeze the plan, a curtailment gain
of $1.7 million was reflected in net periodic benefit cost for 1997. In 1998,
this plan was terminated and benefits were distributed to participants.
The Company has 401(k) retirement investment plans ("401(k) Plans"),
which are open to all otherwise eligible U.S. employees with at least six months
of service. The 401(k) Plans call for Company matching contributions on a
sliding scale based on the level of the employee's contribution. The Company
may, at its discretion, make additional contributions to the Plans based on the
attainment of certain performance targets by its subsidiaries. The Company's
matching contributions are funded monthly and totaled approximately $1.7 million
for the year ended 1999 and $1.6 million for each of the years ended 1998 and
1997. The Company's discretionary contributions totaled $2.3 million, $3.5
million, and $0.9 million for the years ended 1999, 1998, and 1997,
respectively.
Under the Interface, Inc. Nonqualified Savings Plan ("NSP"), the Company
will provide eligible employees the opportunity to enter into agreements for the
deferral of a specified percentage of their compensation, as defined in the NSP.
The obligations of the Company under such arrangements to pay the deferred
compensation in the future in accordance with the terms of the NSP will be
unsecured general obligations of the Company. Participants have no right,
interest or claim in the assets of the Company, except as unsecured general
creditors. The Company has established a Rabbi Trust to hold, invest and
reinvest deferrals and contributions under the NSP. If a change in control of
the Company occurs, as defined in the NSP, the Company will contribute an amount
to the Rabbi Trust sufficient to pay the obligation owed to each Participant.
Deferred compensation in connection with the NSP totaled $5.5 million which was
invested in cash and marketable securities at January 2, 2000. Deferred
compensation at January 3, 1999 in regards to NSP totaled $2.8 million which was
invested entirely in cash.
The table presented below sets forth the funded status of the Company's
significant domestic and foreign defined benefit plans and required disclosures
in accordance with SFAS 132.
Fiscal Year Ended
- - ------------------------------------------------------------------------
(in thousands, except for
weighted average assumptions) 1999 1998
- - ------------------------------------------------------------------------
Change in benefit obligation
Benefit obligation,
beginning of year $ 114,689 $ 76,744
Service cost 3,665 3,010
Interest cost 6,549 6,851
Benefits paid (7,089) (2,245)
Actuarial loss 10,938 18,759
Member contributions 1,153 1,312
Acquisition -- 16,523
Settlement -- (7,119)
Currency translation adjustment (6,416) 854
- - ------------------------------------------------------------------------
Benefit obligation, end of year $ 123,489 $ 114,689
========================================================================
Change in plan assets
Plan assets, beginning of year $ 105,571 $ 79,879
Actual return on assets 31,099 10,294
Company contributions 7,247 2,751
Member contributions 1,153 1,312
Benefits paid (7,089) (2,245)
Administration expenses (455) (586)
Acquisition -- 21,046
Settlement -- (7,119)
Benefits paid due to excess assets -- (607)
Currency translation adjustment (6,181) 846
- - ------------------------------------------------------------------------
Plan assets, end of year $ 131,345 $ 105,571
========================================================================
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1999 1998
- - ------------------------------------------------------------------------
Reconciliation to Balance Sheet
Funded status $ 7,857 $ (9,117)
Unrecognized actuarial loss 816 13,905
Unrecognized prior service cost 227 275
Unrecognized transition adjustment 859 1,159
- - -----------------------------------------------------------------------
Net amount recognized $ 9,759 $ 6,222
=======================================================================
Amounts recognized in the
consolidated balance sheets
Prepaid benefit cost $ 9,759 $ 6,222
Accrued benefit liability -- (6,399)
Accumulated other
comprehensive income -- 6,399
- - -----------------------------------------------------------------------
Net amount recognized $ 9,759 $ 6,222
=======================================================================
Fiscal Year Ended
- - -----------------------------------------------------------------------
1999 1998
- - -----------------------------------------------------------------------
Weighted average assumptions
Discount rate 6.0% 7.2%
Expected return on plan assets 7.1% 7.6%
Rate of compensation 3.9% 4.8%
- - -----------------------------------------------------------------------
Components of net periodic
benefit cost
Service cost $ 3,665 $ 3,010
Interest cost 6,549 6,851
Expected return on plan assets (7,328) (7,725)
Amortization of prior
service costs 233 43
Amortization of
transition obligation 144 151
Settlement -- 1,859
- - -----------------------------------------------------------------------
Net periodic benefit cost $ 3,263 $ 4,189
=======================================================================
The Company maintains a nonqualified salary continuation plan ("SCP") which is
designed to induce selected officers of the Company to remain in the employ of
the Company by providing them with retirement, disability and death benefits in
addition to those which they may receive under the Company's pension plans and
other benefit programs. The SCP entitles participants to (i) retirement benefits
upon retirement at age 65 (or early retirement at age 55) after completing at
least 15 years of service with the Company (unless otherwise provided in the
SCP), payable for the remainder of their lives and in no event less than 10
years under the death benefit feature; (ii) disability benefits payable for the
period of any pre-retirement total disability; and (iii) death benefits payable
to the designated beneficiary of the participant for a period of up to 10 years.
Benefits are determined according to one of three formulas contained in the SCP,
and the SCP is administered by the Compensation Committee, which has full
discretion in choosing participants and the benefit formula applicable to each.
The Company's obligations under the SCP are currently unfunded (although the
Company uses insurance instruments to hedge its exposure thereunder); however,
the Company is required to contribute the present value of its obligations
thereunder to an irrevocable grantor trust in the event of a change in control
as defined in the SCP.
The table presented below sets forth the required disclosures in
accordance with SFAS 132 and amounts recognized in the consolidated financial
statements related to the SCP.
Fiscal Year Ended
- - ------------------------------------------------------------------------
(in thousands, except for
weighted average assumptions) 1999 1998
- - ------------------------------------------------------------------------
Change in benefit obligation
Benefit obligation,
beginning of year $ 7,723 $ 7,215
Service cost 300 289
Interest cost 605 563
Benefits paid (290) (344)
- - -----------------------------------------------------------------------
Benefit obligation, end of year $ 8,338 $ 7,723
=======================================================================
Weighted average assumptions
Discount rate 8% 8%
Rate of compensation 5% 5%
- - -----------------------------------------------------------------------
Components of net
periodic benefit cost
Service cost $ 300 $ 289
Interest cost 605 563
Amortization of transition
obligation 259 259
- - -----------------------------------------------------------------------
Net periodic benefit cost $ 1,164 $ 1,111
=======================================================================
Amounts recognized as SCP liabilities at January 2, 2000 and January 3, 1999
were $5.2 million and $4.4 million, respectively.
SEGMENT INFORMATION
The Company has adopted SFAS 131, which establishes standards for the way that
public business enterprises report information about operating segments in their
financial statements. The standard defines operating segments as components of
an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. The Company's chief operating
decision maker aggregates operating segments based on the type of products
produced by the segment. Based on the quantitative thresholds specified in SFAS
131, the Company has determined that it has two reportable segments. The two
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
reportable segments are Floorcovering Products/Services and Interior Fabrics.
The Floorcovering Products/Services segment manufactures, installs and services
commercial modular and commercial broadloom carpet while the Interior Fabrics
segment manufactures panel and upholstery fabrics.
The accounting policies of the operating segments are the same as those
described in Summary of Significant Accounting Policies. Segment amounts
disclosed are prior to any elimination entries made in consolidation, except in
the case of Net Sales where intercompany sales have been eliminated. The chief
operating decision maker evaluates performance of the segments based on
operating income. Costs excluded from this profit measure primarily consist of
allocated corporate expenses, interest expense and income taxes. Corporate
expenses are primarily comprised of corporate overhead expenses. Thus, operating
income includes only the costs that are directly attributable to the operations
of the individual segment. Assets not identifiable to an individual segment are
corporate assets, which are primarily comprised of cash and cash equivalents,
short-term investments, intangible assets and intercompany receivables and loans
(which are eliminated in consolidation). Segment Disclosures Summary information
by segment follows:
Floorcovering
Products/ Interior
(in thousands) Services Fabrics Other Total
- - -------------------------------------------------------------------------
1999
Net Sales $ 974,003 $197,120 $ 57,116 $1,228,239
Depreciation and
amortization 28,657 11,081 2,100 41,838
Operating income 61,957 22,417 1,327 85,701
Total Assets 821,382 205,169 47,624 1,074,175
- - -------------------------------------------------------------------------
1998
Net sales $1,018,992 $213,280 $ 48,857 $1,281,129
Depreciation and
amortization 27,810 10,422 2,007 40,239
Operating income 73,944 27,339 (4,182) 97,101
Total assets 942,978 216,590 47,905 1,207,473
- - -------------------------------------------------------------------------
1997
Net sales $ 896,394 $184,522 $ 54,374 $1,135,290
Depreciation and
amortization 22,409 8,772 1,972 33,153
Operating income 84,986 25,660 988 111,634
Total assets 824,195 211,340 44,161 1,079,696
- - -------------------------------------------------------------------------
A reconciliation of the Company's total segment operating income,
depreciation and amortization, and assets to the corresponding consolidated
amounts follows:
Fiscal Year Ended
- - -------------------------------------------------------------------------------
(in thousands) 1999 1998 1997
- - -------------------------------------------------------------------------------
DEPRECIATION AND AMORTIZATION
Total segment
depreciation
and amortization $ 41,838 $ 40,239 $ 33,153
Corporate depreciation
and amortization 3,951 2,347 5,452
- - -------------------------------------------------------------------------------
Reported depreciation
and amortization $ 45,789 $ 42,586 $ 38,605
===============================================================================
OPERATING INCOME
Total segment
operating income $ 85,701 $ 97,101 $ 111,634
Corporate expenses
and eliminations (9,270) (7,410) (13,833)
- - -------------------------------------------------------------------------------
Reported operating
income $ 76,431 $ 89,691 $ 97,801
===============================================================================
ASSETS
Total segment assets $ 1,074,175 $ 1,207,473 $ 1,079,696
Corporate assets
and eliminations (45,680) (170,609) (150,133)
- - -------------------------------------------------------------------------------
Reported total assets $ 1,028,495 $ 1,036,864 $ 929,563
================================================================================
ENTERPRISE-WIDE DISCLOSURES
Revenue and long-lived assets related to operations in the U.S. and other
foreign countries are as follows:
Fiscal Year Ended
- - -------------------------------------------------------------------------------
(in thousands) 1999 1998 1997
- - -------------------------------------------------------------------------------
SALES TO UNAFFILIATED
CUSTOMER<F1>
United States $ 805,112 $ 836,715 $ 772,559
United Kingdom 194,132 206,111 114,215
Other foreign countries 228,995 238,303 248,516
- - -------------------------------------------------------------------------------
Net sales $1,228,239 $1,281,129 $1,135,290
===============================================================================
LONG-LIVED ASSETS<F2>
United States $ 172,024 $ 165,450 $ 157,088
United Kingdom 47,953 46,347 32,238
Other foreign countries 33,459 33,515 39,455
- - -------------------------------------------------------------------------------
Total long-lived assets $ 253,436 $ 245,312 $ 228,781
===============================================================================
[FN]
<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>
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERLY DATA AND SHARE INFORMATION (UNAUDITED)
The following table sets forth, for the fiscal periods indicated, selected
consolidated financial data and information regarding the market price per share
of the Company's Class A Common Stock. The prices represent the reported high
and low closing sale prices.
<TABLE>
<CAPTION>
Fiscal Year Ended 1999
- - ------------------------------------------------------------------------------------------
First Second Third Fourth
(in thousands, except share data) Quarter Quarter Quarter Quarter
- - ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 307,866 $ 305,452 $ 304,246 $ 310,675
Gross profit 96,608 95,659 94,340 95,508
Net income 5,606 6,329 5,259 6,351
- - ------------------------------------------------------------------------------------------
Earnings per common share
Basic $ 0.11 $ 0.12 $ 0.10 $ 0.12
Diluted 0.11 0.12 0.10 0.12
- - ------------------------------------------------------------------------------------------
Dividends per common share $ 0.045 $ 0.045 $ 0.045 $ 0.045
- - ------------------------------------------------------------------------------------------
Share prices
High $ 10 1/16 $11 6/32 $ 9 14/16 $ 5 12/16
Low 7 1/2 6 14/16 4 9/16 4 1/64
</TABLE>
<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 (loss) 10,283 11,664 14,360 (6,484)
- - ------------------------------------------------------------------------------------------
Earnings per common share
Basic $ 0.21 $ 0.22 $ 0.27 $ (0.12)
Diluted 0.20 0.22 0.27 (0.12)
Dividends per common share $ 0.0375 $ 0.0375 $ 0.045 $ 0.045
- - ------------------------------------------------------------------------------------------
Share prices
High $ 21 1/8 $ 22 7/16 $ 20 17/32 $ 14 1/8
Low 14 7/16 16 1/8 10 1/4 8 5/16
- - ------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Year Ended 1999
- - ------------------------------------------------------------------------------------------------------------------------------------
Interface, Inc. Consolidation
Guarantor Nonguarantor (Parent & Elimination Consolidated
(in thousands) Subsidiaries Subsidiaries Corporation) Entries Totals
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 970,959 $ 383,385 $ -- $(126,105) $1,228,239
Cost of sales 714,452 257,777 -- (126,105) 846,124
- - ------------------------------------------------------------------------------------------------------------------------------------
Gross profit on sales 256,507 125,608 -- -- 382,115
Selling, general and administrative expenses 186,203 88,678 29,672 -- 304,553
Restructuring charge 1,036 95 -- -- 1,131
- - ------------------------------------------------------------------------------------------------------------------------------------
Operating income 69,268 36,835 (29,672) -- 76,431
- - ------------------------------------------------------------------------------------------------------------------------------------
Other expense (income)
Interest expense 13,660 6,853 18,859 -- 39,372
Other (2,559) 1,645 -- -- (914)
- - ------------------------------------------------------------------------------------------------------------------------------------
Total other expense 11,101 8,498 18,859 -- 38,458
- - ------------------------------------------------------------------------------------------------------------------------------------
Income before taxes on income and
equity in income of subsidiaries 58,167 28,337 (48,531) -- 37,973
Taxes on income (benefit) 22,103 6,465 (14,140) -- 14,428
Equity in income of subsidiaries -- -- 57,936 (57,936) --
- - ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 36,064 $ 21,872 $ 23,545 $ (57,936) $ 23,545
====================================================================================================================================
</TABLE>
<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>
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
====================================================================================================================================
</TABLE>
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
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 $ 30,550 $ 18,440 $ 37,515 $ (48,991) $ 37,514
====================================================================================================================================
</TABLE>
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Year Ended 1999
- - ------------------------------------------------------------------------------------------------------------------------------------
Interface, Inc. Consolidation
Guarantor Nonguarantor (Parent & Elimination Consolidated
(in thousands) Subsidiaries Subsidiaries Corporation) Entries Totals
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current
Cash $ 4,137 $ 6,412 $ (8,001) $ -- $ 2,548
Accounts receivable 170,248 71,569 (38,267) -- 203,550
Inventories 110,186 66,732 -- -- 176,918
Miscellaneous 10,871 20,425 6,466 -- 37,762
- - ------------------------------------------------------------------------------------------------------------------------------------
Total current assets 295,442 165,138 (39,802) -- 420,778
Property and equipment, less
accumulated depreciation 151,956 81,312 20,168 -- 253,436
Investments in subsidiaries 38,100 9,758 861,459 (909,317) --
Miscellaneous 12,118 24,367 39,024 -- 75,509
Excess of cost over net assets acquired 183,942 91,241 3,589 -- 278,772
- - ------------------------------------------------------------------------------------------------------------------------------------
$ 681,558 $ 371,816 $ 884,438 $(909,317) $ 1,028,495
====================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities 91,559 83,888 28,305 -- 203,752
Long-term debt, less current maturities 6,529 37,915 355,700 -- 400,144
Deferred income taxes 15,006 6,111 12,278 -- 33,395
- - ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 113,094 127,914 396,283 -- 637,291
- - ------------------------------------------------------------------------------------------------------------------------------------
Minority interests -- 2,012 -- -- 2,012
Shareholders' equity
Preferred stock 57,891 -- -- (57,891) --
Common stock 94,145 102,199 5,902 (196,344) 5,902
Additional paid-in capital 191,411 12,525 222,373 (203,936) 222,373
Retained earnings 229,217 154,597 265,641 (416,133) 233,322
Foreign currency translation adjustment (4,200) (27,431) (5,761) (16,279) (53,671)
Treasury stock -- -- -- (18,734) (18,734)
- - ------------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 568,464 241,890 488,155 (909,317) 389,192
- - ------------------------------------------------------------------------------------------------------------------------------------
$ 681,558 $ 371,816 $ 884,438 $(909,317) $ 1,028,495
===================================================================================================================================
</TABLE>
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
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>
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
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>
SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Year Ended 1999
- - -----------------------------------------------------------------------------------------------------------------------------
Interface, Inc. Consolidation
Guarantor Nonguarantor (Parent & Elimination Consolidated
(in thousands) Subsidiaries Subsidiaries Corporation) Entries Totals
- - -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash flows from operating activities $ 22,336 $ 32,036 $ 16,694 -- $ 71,066
- - -----------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of plant and equipment (21,413) (7,813) (8,052) -- (37,278)
Acquisitions, net of cash acquired -- -- 9,826 -- 9,826
Other 1,626 3,390 (29,409) -- (24,393)
- - -----------------------------------------------------------------------------------------------------------------------------
(19,787) (4,423) (27,635) -- (51,845)
- - -----------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings (repayments) (4,557) (26,550) 23,433 -- (7,674)
Proceeds from issuance of common stock -- -- 1,044 -- 1,044
Cash dividends paid -- -- (9,453) -- (9,453)
Repurchase of common shares -- -- (10,615) -- (10,615)
- - -----------------------------------------------------------------------------------------------------------------------------
(4,557) (26,550) 4,409 -- (26,698)
- - -----------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash -- 115 -- -- 115
- - -----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (2,008) 1,178 (6,532) -- (7,362)
- - -----------------------------------------------------------------------------------------------------------------------------
Cash, at beginning of year 6,145 5,234 (1,469) -- 9,910
- - -----------------------------------------------------------------------------------------------------------------------------
Cash, at end of year $ 4,137 $ 6,412 $ (8,001) -- $ 2,548
=============================================================================================================================
</TABLE>
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>
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>
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Year Ended 1997
- - -----------------------------------------------------------------------------------------------------------------------------
Interface, Inc. Consolidation
Guarantor Nonguarantor (Parent & Elimination Consolidated
(in thousands) Subsidiaries Subsidiaries Corporation) Entries Totals
- - -----------------------------------------------------------------------------------------------------------------------------
<S> <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>
31
<PAGE>
MANAGEMENT'S RESPONSIBILITY
FOR FINANCIAL STATEMENTS
The management of Interface, Inc. is responsible for the accuracy and
consistency of all the information contained in the annual report, including the
accompanying consolidated financial statements. The statements have been
prepared to conform with the generally accepted accounting principles
appropriate to the circumstances of the Company. The statements include amounts
based on estimates and judgments as required.
Interface, Inc. maintains internal accounting controls designed to
provide reasonable assurance that the financial records are accurate, that the
assets of the Company are safeguarded, and that the financial statements present
fairly the consolidated financial position, results of operations, and cash
flows of the Company.
The Audit Committee of the Board of Directors reviews the scope of the
audits and findings of the independent certified public accountants. The
auditors meet regularly with the Audit Committee to discuss audit and financial
issues, with and without management present.
BDO Seidman, LLP, the Company's independent certified public
accountants, have audited the financial statements prepared by management. Their
opinion on the financial statements is presented as follows.
/s/ Ray C. Anderson
Ray C. Anderson
Chairman of the Board and
Chief Executive Officer
/s/ Daniel T. Hendrix
Daniel T. Hendrix
Senior Vice President,
Chief Financial Officer and Treasurer
32
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors and Shareholders of Interface, Inc.
Atlanta, Georgia
We have audited the accompanying consolidated balance sheets of Interface, Inc.
and subsidiaries as of January 2, 2000 and January 3, 1999, and the related
consolidated statements of income and comprehensive income and cash flows for
each of the three fiscal years in the period ended January 2, 2000. The
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Interface, Inc. and its subsidiaries as of January 2, 2000 and January 3, 1999
and the consolidated results of their operations and their cash flows for each
of the three fiscal years in the period ended January 2, 2000, in conformity
with generally accepted accounting principles.
Atlanta, Georgia
February 22, 2000
/BDO
33
<PAGE>
<PAGE>
SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
(in thousands, except per share data) 1999 1998 1997 1996 1995
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ANNUAL OPERATING DATA
Net sales $1,228,239 $1,281,129 $1,135,290 $1,002,076 $802,066
Cost of sale 846,124 847,660 755,734 684,455 551,643
Operating income 76,431 89,691 97,801 78,689 61,543
Income before extraordinary item 23,545 29,823 37,514 26,395 20,340
Net income 23,545 29,823 37,514 26,395 16,828
- - -------------------------------------------------------------------------------------------------------------------
Earnings per common share
Basic $ .45 $ .58 $ .79 $ .62 $ .51 <F1>
Diluted $ .45 $ .56 $ .76 $ .60 $ .50<F1>
AVERAGE SHARES OUTSTANDING
Basic 52,562 51,808 47,416 40,121 36,510
Diluted 52,803 53,735 49,302 41,315 37,198
Cash dividends per common share $ .18 $ .165 $ .135 $ .1225 $ .12
Property additions<F2) 37,278 66,145 51,489 40,387 48,929
Depreciation and amortization 45,789 42,586 38,605 35,305 28,944
- - -------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Working capital $ 217,026 $ 213,412 $ 183,403 $ 189,584 $159,031
Total assets 1,028,495 1,036,864 929,563 862,546 714,351
Total long-term debt 402,118 390,437 392,250 382,272 325,582
Shareholders' equity 389,192 398,824 316,365 273,118 231,914
Book value per share 7.52 7.60 6.55 6.28 6.29
Current ratio 2.1 1.9 2.0 2.2 2.4
- - -------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Before extraordinary loss, net of tax, of $0.09.
<F2> Includes property and equipment obtained in acquisition of business.
</FN>
</TABLE>
34
Exhibit 21
SUBSIDIARIES OF INTERFACE, INC.
Jurisdiction of
Subsidiary <F1> Organization
---------- ------------
Bentley Mills, Inc. Delaware (USA)
Facilities Resource Group, Inc. Illinois (USA)
Intek, Inc. Georgia (USA)
Interface Americas, Inc. Georgia (USA)
Interface Americas Re:Source Technologies, Inc. Georgia (USA)
Interface Architectural Resources, Inc. Michigan (USA)
Interface Colombia Ltda. Columbia
Interface de Mexico S.A. de C.V. Mexico
Interface Europe B.V.<F2> Netherlands
Interface Europe, Ltd.<F3> United Kingdom
Interface Flooring Systems, Inc. Georgia (USA)
Interface Flooring Systems (Canada), Inc. Canada
Interface Flooring Systems Commercial Ltda. Brazil
Interface Global Holdings ApS <F4> Denmark
Interface Fabrics Group, Inc.<F5> Delaware (USA)
Interface Overseas Holdings, Inc.<F6> Georgia (USA)
Interface Research Corporation Georgia (USA)
Interface Securitization Corporation Delaware (USA)
Interface Yarns, Inc. Georgia (USA)
one world learning, inc. Georgia (USA)
Pandel, Inc. Georgia (USA)
Prince Street Technologies, Ltd. Georgia (USA)
Re:Source Americas Enterprises, Inc.<F7> Georgia (USA)
Toltec Fabrics, Inc. Georgia (USA)
- - ----------
[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 Europe B.V. (formerly Interface Heuga B.V.) is the parent of
six direct or indirect subsidiaries organized and operating in the
Netherlands, and 21 direct or indirect subsidiaries organized and
operating outside of the Netherlands.
<F3> Interface Europe, Ltd. (formerly Interface Flooring Systems, Ltd.) is
the parent of 19 direct or indirect subsidiaries organized and
operating in the United Kingdom and six direct or indirect subsidiaries
organized and operating outside the United Kingdom.
<F4> Interface Global Holdings ApS is the parent of six subsidiaries
organized and operating in Europe, Canada, Singapore and Hong Kong.
<F5> Interface Fabrics Group, Inc. (formerly Guilford of Maine, Inc. and
Interface Interior Fabrics, Inc.) is the parent of seven direct
subsidiaries organized and operating in the United States(including
Toltec Fabrics, Inc. and Intek, Inc.) and the United Kingdom.
<F6> Interface Overseas Holdings, Inc. is the parent of eight direct
subsidiaries organized and operating in the United States, Europe,
Japan, Thailand, China and the British Virgin Islands.
<F7> Re:Source Americas Enterprises, Inc. is the parent of 19 subsidiaries
organized and operating in the United States. All of such subsidiaries
are commercial floorcovering contractors.
</FN>
Exhibit 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Interface, Inc.
Atlanta, Georgia
We hereby consent to the incorporation by reference of our reports
dated February 22, 2000, relating to the consolidated financial statements
appearing in the Company's Annual Report to Shareholders and schedule of
Interface, Inc. which are, respectively, incorporated by reference to and
included in the Company's Form 10-K for the year ended January 2, 2000, into the
Company's previously filed registration statements on Form S-8, Registration No.
33-28305, Form S-8, Registration No. 33-28307, Form S-8, Registration No.
33-69808, Form S-8, Registration No. 333-10377, Form S-8, Registration No.
333-10379, Form S-8, Registration No. 333-38675, Form S-8, Registration No.
333-38677, Form S-8, Registration No. 333-93679, relating to the Company's Key
Employee Stock Option Plan, Offshore Stock Option Plan, Key Employee Stock
Option Plan (1993), Savings and Investment Plan, Omnibus Stock Incentive Plan
and Nonqualified Savings Plan, and Form S-3, Registration No. 333-46611, as
amended by Form S-3/A, including the prospectuses therein.
We also consent to the reference to us under the caption "Experts" in
the Prospectuses.
/s/ BDO SEIDMAN, LLP
BDO SEIDMAN, LLP
Atlanta, Georgia
March 30, 2000
<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 2, 2000, 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-02-2000
<PERIOD-START> JAN-03-1999
<PERIOD-END> JAN-02-2000
<CASH> 2,548
<SECURITIES> 0
<RECEIVABLES> 212,347
<ALLOWANCES> (8,797)
<INVENTORY> 176,918
<CURRENT-ASSETS> 420,778
<PP&E> 485,966
<DEPRECIATION> (232,530)
<TOTAL-ASSETS> 1,028,495
<CURRENT-LIABILITIES> 203,752
<BONDS> 402,118
0
0
<COMMON> 5,902
<OTHER-SE> 383,290
<TOTAL-LIABILITY-AND-EQUITY> 1,028,495
<SALES> 1,228,239
<TOTAL-REVENUES> 1,228,239
<CGS> 846,124
<TOTAL-COSTS> 846,124
<OTHER-EXPENSES> 305,484
<LOSS-PROVISION> 4,565
<INTEREST-EXPENSE> 39,372
<INCOME-PRETAX> 37,973
<INCOME-TAX> 14,428
<INCOME-CONTINUING> 23,545
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,545
<EPS-BASIC> 0.45
<EPS-DILUTED> 0.45
</TABLE>
Exhibit 99.1
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR COMPLIANCE STATEMENT
FOR FORWARD-LOOKING STATEMENTS
In passing the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"), Congress encouraged public companies to make "forward-looking
statements" by creating a safe harbor to protect companies from securities law
liability in connection with forward-looking statements. Interface, Inc.
("Interface" or the "Company") intends to qualify both its written and oral
forward-looking statements for protection under the Reform Act and any other
similar safe harbor provisions.
"Forward-looking statements" are defined by the Reform Act. Generally,
forward-looking statements include expressed expectations of future events and
the assumptions on which the expressed expectations are based. All
forward-looking statements are inherently uncertain as they are based on various
expectations and assumptions concerning future events and they are subject to
numerous known and unknown risks and uncertainties which could cause actual
events or results to differ materially from those projected. Due to those
uncertainties and risks, the investment community is urged not to place undue
reliance on written or oral forward-looking statements of Interface. The Company
undertakes no obligation to update or revise this Safe Harbor Compliance
Statement for Forward-Looking Statements (the "Safe Harbor Statement") to
reflect future developments. In addition, Interface undertakes no obligation to
update or revise forward-looking statements to reflect changed assumptions, the
occurrence of unanticipated events or changes to future operating results over
time.
Interface provides the following risk factor disclosure in connection
with its continuing effort to qualify its written and oral forward-looking
statements for the safe harbor protection of the Reform Act and any other
similar safe harbor provisions. Important factors currently known to management
that could cause actual results to differ materially from those in
forward-looking statements include the disclosures contained in the Annual
Report on Form 10-K to which this statement is appended as an exhibit and also
include the following:
STRONG COMPETITION
The commercial floorcovering industry is highly competitive. Globally,
the Company competes for sales of its floorcovering products with other carpet
manufacturers and manufacturers of vinyl and other types of floorcovering.
Although the industry recently has experienced significant consolidation, a
large number of manufacturers remain in the industry. Management believes that
the Company is the largest manufacturer of modular carpet in the world, with a
global market share over two times that of its nearest competitor. However, a
number of domestic and foreign competitors manufacture modular carpet as one
segment of their business, and certain of these competitors have financial
resources in excess of the Company's.
CYCLICAL NATURE OF INDUSTRY
Sales of the Company's principal products are related to the
construction and renovation of commercial and institutional buildings. Such
activity is cyclical and can be affected by the strength of a country's general
economy, prevailing interest rates and other factors that lead to cost control
measures by businesses and other users of commercial or institutional space. The
effects of such cyclicality upon the new construction sector of the market tend
to be more pronounced than its effects upon the renovation sector. Although the
predominant portion of the Company's sales are generated from the renovation
sector, any such adverse cycle, in either sector of the market, would lessen the
overall demand for commercial interiors products, which could impair the
Company's growth. This risk is particularly acute for the Company's U.S. fabrics
business, which relies heavily on sales to OEMs.
RELIANCE ON KEY PERSONNEL
The Company believes that its continued success will depend to a
significant extent upon the efforts and abilities of its senior management
executives, particularly Ray C. Anderson, Chairman of the Board, President and
Chief Executive Officer. Mr. Anderson has entered into an employment agreement
with the Company containing certain covenants of non-competition, and the
Company currently maintains key-man insurance on Mr. Anderson. In addition, the
Company relies significantly on the leadership provided to the Company's
internal design staff by David Oakey of David Oakey Designs, Inc., which
provides product design/production engineering services to the Company under an
exclusive consulting contract that contains certain covenants of
non-competition. The loss of one or both of such personnel could have an adverse
impact on the Company.
RISKS OF FOREIGN OPERATIONS
The Company has substantial international operations. In fiscal 1999,
approximately 31% of the Company's net sales and a significant portion of the
Company's production were outside the United States, primarily in Europe but
also in Asia. The Company's corporate strategy includes the expansion of its
international business on a worldwide basis. As a result, the Company's
operations are subject to various political, economic and other uncertainties,
including risks of restrictive taxation policies, foreign exchange restrictions,
changing political conditions and governmental regulations.
In addition, economic events in Asia over the past two years, including
depreciation of certain Asian currencies, failures of financial institutions,
stock market declines and reductions in planned capital investment at key
enterprises, have adversely impacted the Company's sales in the Asian markets.
In fourth quarter 1998, the Company announced certain workforce reductions and
plant closures and consolidations in Asia. See "Business -- Recent
Developments". The Company also makes a substantial portion of its net sales in
currencies other than U.S. dollars, which subjects it to the risks inherent in
currency translations. The Company's ability to manufacture and ship products
from facilities in several foreign countries reduces the risks of foreign
currency fluctuations it might otherwise experience, and the Company also
engages from time to time in hedging programs intended to further reduce those
risks. Despite this, the scope and volume of the Company's global operations
make it impossible to eliminate completely all foreign currency translation
risks as an influence on the Company's financial results.
ADOPTION OF EURO
A new currency, called the Euro, was introduced in Europe on January 1,
1999. Eleven of the fifteen member countries of the European Union adopted the
Euro as their common legal currency as of that date. The increased price
transparency resulting from the use of a single currency in the eleven
participating countries could impair the ability of the Company to price its
products differently in the various European markets. Additionally, because
there will be less diversity in the Company's exposure to foreign currencies,
movements in the Euro's value in U.S. dollars could increase the Company's
exposure to changes in foreign exchange rates.
CONTROL OF ELECTIONOF A MAJORITY OF BOARD
The Company's Chairman, President and Chief Executive Officer, Ray C.
Anderson, beneficially owns approximately 52.4% of the Company's outstanding
Class B Common Stock. The holders of the Class B Common Stock are entitled, as a
class, to elect a majority of the Board of Directors of the Company, which means
that Mr. Anderson has sufficient voting power to elect a majority of the Board
of Directors. The holders of the Class B Common Stock generally vote together as
a single class with the holders of the Class A Common Stock on all other matters
submitted to the shareholders for a vote, however, and Mr. Anderson's beneficial
ownership of the outstanding Class A and Class B Common Stock combined is less
than 10%.
YEAR 2000 RISK
The "year 2000 issue" arises from the widespread use of computer
programs that rely on two-digit date codes to perform computations or
decision-making functions. It was anticipated that many of these programs may
fail due to an inability to properly interpret date codes beginning January 1,
2000. For example, such programs could misinterpret "00" as the year 1900 rather
than 2000. In addition, some equipment, being controlled by microprocessor
chips, may not deal appropriately with the year "00".
The Company evaluated its computer systems with the help of outside
consultants to determine which modifications and expenditures would be necessary
to make its systems compatible with year 2000 requirements. The Company
implemented such modifications and made such expenditures prior to the end of
calendar year 1999. The Company did not experience any material disruptions in
its operations or activities as a result of the year 2000 issue. In addition,
the Company does not expect to encounter any such problems in the foreseeable
future, although it continues to monitor its computer operations for signs or
indications of such issues.
It is possible, however, that if year 2000 issues arise for the
customers or suppliers of the Company, such issues could have a negative impact
on future operations and financial performance of the Company, although the
Company has not been able to specifically identify any material issues among its
customers or suppliers. Furthermore, the year 2000 issue may impact other
entities with which the Company transacts business, and the Company cannot
predict the effect of the year 2000 issue on such entities or the resulting
effect on the Company.
RELIANCE ON PETROLEUM-BASED RAW MATERIALS
Petroleum-based products comprise the predominant portion of the cost of
raw materials used by the Company in manufacturing. While the Company generally
attempts to match cost increases with corresponding price increases, large
increases in the cost of such petroleum-based raw materials could adversely
affect the Company if the Company were unable to pass through to its customers
such increases in raw material costs.
RELIANCE ON THIRD PARTY FOR SUPPLY OF FIBER
E. I. DuPont de Nemours and Company ("DuPont") currently supplies a
significant percentage of the Company's requirements for synthetic fiber, the
principal raw material used in the Company's carpet products. DuPont also
competes with the Company's Re:Source services network through DuPont's own
distribution channel and aligned carpet mills. While the Company believes that
there are adequate alternative sources of supply from which it could fulfill its
synthetic fiber requirements, the unanticipated termination or interruption of
the supply arrangement with DuPont could have a material adverse effect on the
Company because of the cost and delay associated with shifting more business to
another supplier.
RESTRICTIONS DUE TO SUBSTANTIAL INDEBTEDNESS
The Company's indebtedness is substantial in relation to its
shareholders' equity. As of January 2, 2000, the Company's long-term debt (net
of current portion) totaled $400.1 million or approximately 51% of its total
capitalization. As a consequence of its level of indebtedness a substantial
portion of the Company's cash flow from operations must be dedicated to debt
service requirements. The terms of the Company's outstanding indebtedness,
although unsecured, restrict or limit the ability of the Company and its
subsidiaries to, among other things, incur additional indebtedness, pay
dividends or make certain other restricted payments or investments in certain
situations, consummate certain asset sales, enter into certain transactions with
affiliates, incur liens, or merge or consolidate with any other person or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of their assets. They also require the Company to meet certain financial tests
and comply with certain other reporting, affirmative and negative covenants.
ANTI-TAKEOVER EFFECTS OF SHAREHOLDER RIGHTS PLAN
The Board of Directors has adopted a Rights Agreement pursuant to which
holders of Common Stock will be entitled to purchase from the Company a fraction
of a share of the Company's Series B Participating Cumulative Preferred Stock if
a third party acquires beneficial ownership of 15% or more of the Common Stock
and will be entitled to purchase the stock of an Acquiring Person (as defined in
the Rights Agreement) at a discount upon the occurrence of certain triggering
events. These provisions of the Rights Agreement could have the effect of
discouraging tender offers or other transactions that would result in
shareholders receiving a premium over the market price for the Common Stock.
