EX-13 15 ex13.txt CERTAIN INFO. CONTAINED IN THE ANNUAL REPORT Exhibit 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -------------------------------------------------------------------------- FORWARD-LOOKING STATEMENTS This report contains statements which may constitute "forward-looking statements" under applicable securities laws, including statements regarding the intent, belief or current expectations of Interface, Inc. (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 December 31, 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 2000, the Company had net sales and net income of $1.284 billion and $17.3 million, respectively. Net sales were made up of sales of floorcovering products (primarily modular and broadloom carpet) and related services ($951.7 million), interior fabrics sales ($252.7 million) and raised/access flooring and other specialty product sales ($79.6 million), accounting for 74.1%, 19.7% and 6.2% of total sales, respectively. The Company achieved a compound annual growth rate in its net sales and net income, excluding restructuring charges, of 5.1% and 3.8%, respectively, over the five-year period from 1996 to 2000. 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, experienced decreased demand levels during 1999, 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 the translation of European revenue levels to U.S. dollars during 1999 and 2000. During 2000, the Company recorded a pre-tax restructuring charge of $21.0 million. The charge reflects: (i) the integration of the U.S. broadloom operations; (ii) the consolidation of certain administrative, manufacturing, and back-office functions; (iii) the divestiture of certain non-strategic Re:Source service network operations; and (iv) the abandonment of manufacturing equipment utilized in the production of discontinued product lines. The foregoing resulted in an aggregate headcount reduction in the U.S. and Europe of 425 people. The restructuring charge is comprised of $12.8 million of cash expenditures for severance benefits and relocation costs and $8.2 million of non-cash charges, primarily for the write-down of impaired assets. The Company substantially completed the restructuring by year end. The restructuring is expected to yield annual cost savings of approximately $15 million; however, the amount of any actual costs savings could be affected by the factors discussed under the headings "Cyclical Nature of Industry" and "Risks of Foreign Operations," in particular, in Exhibit 99.1. Further discussion on the restructuring charge appears in the notes to the consolidated financial statements on page 51 [page 23 of this Exhibit 13]. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -------------------------------------------------------------------------- RESULTS OF OPERATIONS The following table presents, as a percentage of net sales, certain items included in the Company's consolidated statements of income. Fiscal Year Ended --------------------------------- 2000 1999 1998 ---------------------------------------------------------------------- Net sales 100.0% 100.0% 100.0% Cost of sales 69.8 68.9 66.2 ---------------------------------------------------------------------- Gross profit on sales 30.2 31.1 33.8 Selling, general and administrative expenses 23.2 24.8 24.8 Restructuring charge 1.6 .1 2.0 ---------------------------------------------------------------------- Operating income 5.4 6.2 7.0 Other expense 3.1 3.1 3.2 ---------------------------------------------------------------------- Income before taxes on income 2.3 3.1 3.8 Taxes on income 1.0 1.2 1.5 ---------------------------------------------------------------------- Net income 1.3 1.9 2.3 ====================================================================== Fiscal 2000 Compared With Fiscal 1999 ------------------------------------- The Company's net sales increased $55.7 million (4.5%) compared with 1999. The increase is attributable primarily to increased sales volume within (i) the Company's interior fabrics segment as a result of the acquisition of certain assets of the Chatham Manufacturing division of CMI Industries, Inc.; (ii) the Company's modular floorcovering business in the U.S., Europe and Asia; and (iii) the Company's architectural products division in the U.S. These increases were somewhat offset by (i) decreased sales volume in the Company's broadloom operations in the U.S. and Europe; (ii) the planned reduction of sales volume in the Company's Re:Source service network as it focuses on profitability; and (iii) the decline in value of the euro against the U.S. dollar. Cost of sales as a percentage of net sales increased to 69.8% in 2000 compared to 68.9% in 1999. The increase was attributable to (i) increased raw material prices, (ii) manufacturing inefficiencies in our U.S. and European broadloom operations, and (iii) the increase in the relative sales by the Company's architectural products division and Chatham operations, which historically have had lower gross profit margins than the Company's other product sales. Selling, general and administrative expenses as a percentage of net sales declined to 23.2% in 2000 from 24.8% in 1999. The decrease was attributable to (i) the Company's cost reduction efforts through the introduction of the shared services approach in the Americas, and (ii) the inclusion of recently acquired companies which have historically had lower SG&A costs as a percentage of sales. Other expense increased $.7 million in 2000 compared to 1999, due primarily to the non-recurring gain realized in 1999 as a result of the divestiture of certain operating assets of the Company. The effective tax rate was 42.0% for 2000, compared to 38.0% in 1999. The increase in the effective rate was primarily due to the write-off of certain non-deductible amounts as part of the restructuring charge taken in the first quarter of 2000, and lower pre-tax income in 2000. As a result of the aforementioned factors, excluding the restructuring charge, the Company's net income increased 38% to $31.8 million in 2000 versus $23.5 million in 1999. Further discussion of the restructuring charge appears in the notes to the consolidated financial statements on page 52 [page 24 of this Exhibit 13]. 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, 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -------------------------------------------------------------------------- (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 at (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 had 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's improved cost containment measures worldwide were offset by costs associated with the integration of the Re:Source service 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 to the consolidated financial statements on page 53 [page 25 of this Exhibit 13]. 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 2000, operating activities generated $71.4 million of cash compared with $71.1 million and $71.9 million in 1999 and 1998, 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, (iv) expenditures related to the Company's share repurchase program, and (v) repayments on debt and lines of credit. For the three years ended December 31, 2000, acquisitions of businesses (net of dispositions) required $91.6 million, the aggregate additions to property and equipment required cash expenditures of $113.0 million, dividends required $27.2 million, share repurchases required $20.0 million and repayments on debt and lines of credit required $691.9 million. 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -------------------------------------------------------------------------- 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 December 31, 2000, the Company had repurchased an aggregate of 2,794,813 shares of Class A Common Stock under this program, at prices ranging from $3.41 to $16.78. At the end of fiscal 2000, the Company estimated capital expenditure requirements for 2001 of approximately $30 million and had purchase commitments of approximately $9.5 million for 2001. 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. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market Risk ----------- As a result of the scope 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 counter-party credit guidelines and enters into transactions only with financial institutions with a rating of investment grade or better. As a result, the Company considers the risk of counter-party 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 65% and 35% of its total long-term debt in fixed and variable interest rates, respectively. 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. 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -------------------------------------------------------------------------- The Company had no outstanding agreements to hedge fluctuations in interest or foreign currency exchange rates as of December 31, 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 multicurrency 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. At December 31, 2000, the Company recognized a $19.3 million decrease in its foreign currency translation adjustment account compared to January 2, 2000, 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. 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 December 31, 2000. The values that result from these computations are then compared with the market values of the financial instruments. The differences 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 decrease of $14.6 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 $15.2 million. Foreign Currency Exchange Rate Risk ----------------------------------- As of December 31, 2000, a 10% decrease or increase 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 $7.5 million or an increase in the fair value of the Company's financial instruments of $7.4 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. 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -------------------------------------------------------------------------- RECENT ACCOUNTING PRONOUNCEMENTS In March 2000, the Financial Accounting Standards Board issued Interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation," an interpretation of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees." Interpretation No. 44 clarifies the application of APB No. 25 to the definition of an employee for purposes of applying APB No. 25, the criteria for determining whether a plan qualifies as a noncompensatory plan, the accounting consequences of various modifications to the terms of a previously fixed stock option or award and the accounting for an exchange of stock compensation awards in a business combination. This interpretation did not have a material impact on the Company's consolidated financial statements. Pursuant to the Securities and Exchange Commission's Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements," the Company has reviewed its accounting policies for the recognition of revenue. SAB No. 101 was required to be implemented in fourth quarter 2000. SAB No. 101 provides guidance on applying generally accepted accounting principles to revenue recognition in financial statements. The Company's policies for revenue recognition are consistent with the views expressed within SAB No. 101. 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 the fair value of a derivative that affects 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. SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, Amendment of SFAS 133," liberalized the application of SFAS 133 in a number of areas. The Company adopted the new standards on January 1, 2001, and does not expect the new standards to have a significant impact on its results of operations or financial position. Effective January 1, 2001, the Company adopted SFAS 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities--a replacement of SFAS 125." This statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities and revises the accounting standards for securitizations and transfers of financial assets and collateral. Management does not expect the adoption to have a material effect on the Company's results of operations and financial position. This standard also required new disclosures in 2000. Such requirements were not applicable to the Company. 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS) CONSOLIDATED STATEMENTS OF INCOME
Fiscal Year Ended --------------------------------------------------- (in thousands, except share data) 2000 1999 1998 ------------------------------------------------------------------------------------------------------ Net sales $ 1,283,948 $ 1,228,239 $ 1,281,129 Cost of sales 895,944 846,124 847,660 ------------------------------------------------------------------------------------------------------ Gross profit on sales 388,004 382,115 433,469 Selling, general and administrative expenses 297,948 304,553 318,495 Restructuring charges 21,047 1,131 25,283 ------------------------------------------------------------------------------------------------------ Operating income 69,009 76,431 89,691 ------------------------------------------------------------------------------------------------------ Other expense Interest expense 38,500 39,372 36,705 Other 670 (914) 3,875 ------------------------------------------------------------------------------------------------------ Total other expense 39,170 38,458 40,580 ------------------------------------------------------------------------------------------------------ Income before taxes on income 29,839 37,973 49,111 Taxes on income 12,518 14,428 19,288 ------------------------------------------------------------------------------------------------------ Net income 17,321 23,545 29,823 ====================================================================================================== Earnings per common share Basic $ 0.34 $ 0.45 $ 0.58 ====================================================================================================== Diluted $ 0.34 $ 0.45 $ 0.56 ======================================================================================================
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Fiscal Year Ended -------------------------------------------------- (in thousands) 2000 1999 1998 ------------------------------------------------------------------------------------------------------ Net income $ 17,321 $ 23,545 $ 29,823 Other comprehensive income Foreign currency translation adjustment (19,281) (22,003) (3,513) Minimum pension liability adjustment -- 6,399 (6,399) ------------------------------------------------------------------------------------------------------ Comprehensive income (loss) $ (1,960) $ 7,941 $ 19,911 ======================================================================================================
See accompanying notes to consolidated financial statements. 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS
(in thousands) 2000 1999 ------------------------------------------------------------------------------------------------ Assets ------ Current Cash $ 7,861 $ 2,548 Accounts receivable 204,886 203,550 Inventories 198,063 176,918 Prepaid expenses 22,765 27,845 Deferred income taxes 13,533 9,917 ------------------------------------------------------------------------------------------------ Total current assets 447,108 420,778 Property and equipment 258,245 253,436 Miscellaneous 64,840 75,509 Excess of cost over net assets acquired 264,656 278,772 ------------------------------------------------------------------------------------------------ $ 1,034,849 $ 1,028,495 ================================================================================================ Liabilities and Shareholders' Equity ------------------------------------ Current liabilities Notes payable $ -- $ 4,173 Accounts payable 97,874 90,318 Accrued expenses 107,467 107,287 Current maturities of long-term debt 808 1,974 ------------------------------------------------------------------------------------------------ Total current liabilities 206,149 203,752 Long-term debt, less current maturities 146,550 125,144 Senior notes 150,000 150,000 Senior subordinated notes 125,000 125,000 Deferred income taxes 29,551 33,395 ------------------------------------------------------------------------------------------------ Total liabilities 657,250 637,291 Minority interest 5,164 2,012 Shareholders' equity Preferred stock -- -- Common stock 5,831 5,902 Additional paid-in capital 218,261 222,373 Retained earnings 241,400 233,322 Foreign currency translation adjustment (72,952) (53,671) Treasury stock, 7,493 and 7,300 shares, respectively (20,105) (18,734) ------------------------------------------------------------------------------------------------ Total shareholders' equity 372,435 389,192 ------------------------------------------------------------------------------------------------ $ 1,034,849 $ 1,028,495 ================================================================================================
See accompanying notes to consolidated financial statements. 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended --------------------------------------------- (in thousands) 2000 1999 1998 ------------------------------------------------------------------------------------------------------ Operating Activities -------------------- Net income $ 17,321 $ 23,545 $ 29,823 Adjustments to reconcile net income to cash provided by operating activities Depreciation and amortization 50,625 45,789 42,586 Restructuring charges 8,210 -- 12,265 Deferred income taxes (7,209) 3,950 (8,362) Working capital changes Accounts receivable 3,160 (15,954) 4,972 Inventories (9,172) 16,559 (21,296) Prepaid expenses 3,272 (2,314) 3,235 Accounts payable and accrued expenses 5,225 (509) 8,677 ------------------------------------------------------------------------------------------------------ 71,432 71,066 71,900 ------------------------------------------------------------------------------------------------------ Investing Activities -------------------- Capital expenditures (30,495) (37,278) (45,227) Net proceeds from dispositions/cash paid for acquisitions of businesses (29,872) 9,826 (71,504) Other (10,876) (24,393) (16,485) ------------------------------------------------------------------------------------------------------ (71,243) (51,845) (133,216) ------------------------------------------------------------------------------------------------------ Financing Activities -------------------- Borrowings on long-term debt 211,323 148,900 198,080 Principal repayments on long-term debt (186,850) (134,459) (343,607) Proceeds from issuance of senior notes -- -- 146,991 Expenditures under share repurchase program (6,842) (10,615) (2,535) Borrowings (repayments) under lines of credit (4,173) (22,115) (684) Proceeds from issuance of common stock 496 1,044 70,630 Dividends paid (9,243) (9,453) (8,499) ------------------------------------------------------------------------------------------------------ 4,711 (26,698) 60,376 ------------------------------------------------------------------------------------------------------ Net cash provided (used) by operating, investing, and financing activities 4,900 (7,477) (940) Effect of exchange rate changes on cash 413 115 638 ------------------------------------------------------------------------------------------------------ Cash ---- Net increase (decrease) 5,313 (7,362) (302) Balance, beginning of year 2,548 9,910 10,212 ------------------------------------------------------------------------------------------------------ Balance, end of year $ 7,861 $ 2,548 $ 9,910 ======================================================================================================
See accompanying notes to consolidated financial statements. 9 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, environmental liabilities, carrying value of the excess of cost over net assets acquired and fixed assets. 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 $0.5 million, $0.4 million, and $1.0 million for the years ended 2000, 1999, and 1998, respectively. Depreciation expense amounted to approximately $37.9 million, $32.4 million, and $31.9 million for the years ended 2000, 1999, and 1998, respectively. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected future undiscounted cash 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 $78.5 million and $69.1 million at December 31, 2000 and January 2, 2000, respectively. 10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------- 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. Pursuant to the Securities and Exchange Commission's Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements," the Company has reviewed its accounting policies for the recognition of revenue. SAB No. 101 was required to be implemented in fourth quarter 2000. SAB No. 101 provides guidance on applying generally accepted accounting principles to revenue recognition in financial statements. The Company's policies for revenue recognition are consistent with the views expressed within SAB No. 101. 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 December 31, 2000 and January 2, 2000, checks issued against future deposits totaled approximately $11.0 million and $22.0 million, respectively. Cash payments for interest amounted to approximately $41.4 million, $36.6 million, and $30.7 million, for the years ended 2000, 1999, and 1998, respectively. Income tax payments amounted to approximately $11.8 million, $6.1 million, and $17.3 million, for the years ended 2000, 1999, and 1998, 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. 11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------- 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 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. 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 the fair value of a derivative that affects 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. SFAS 138, "Accounting For Certain Derivative Instruments and Certain Hedging Activities, Amendment of SFAS 133," liberalized the application of SFAS 133 in a number of areas. The Company adopted the new standards on January 1, 2001, and does not expect the new standards to have a significant impact on its results of operations or financial position. 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 "2000," "1999," and "1998," mean the fiscal years ended December 31, 2000, January 2, 2000, and January 3, 1999, respectively. Fiscal years 2000 and 1999 were comprised of 52 weeks, while 1998 was comprised of 53 weeks. 12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------- Reclassifications ----------------- Certain reclassifications have been made to the 1999 and 1998 financial statements to conform to the 2000 presentation. BUSINESS ACQUISITIONS AND DIVESTITURES During May 2000, the Company acquired certain assets and assumed certain liabilities of the Chatham Manufacturing division of CMI Industries, Inc. ("Chatham") for a purchase price of $25.0 million in cash and assumption of certain liabilities of approximately $13.8 million. Chatham, located in Elkin, North Carolina, manufactures fabric for the furniture industry. This transaction has been accounted for as a purchase and, accordingly, the results of operations of the acquired company since its acquisition date have been included within the consolidated financial statements of the Company. As part of the Chatham acquisition, the Company engaged environmental consultants to review potential environmental liabilities at all Chatham properties. Based on their review, the environmental consultants recommended certain environmental remedial actions, including groundwater monitoring, and estimated the costs thereof. The Company is currently taking steps to implement the recommended actions at Chatham. Based upon the cost estimates provided by the environmental consultants, the Company believes that the estimated range of the net present value of reasonably predictable costs of groundwater monitoring and other remedial actions is between $9.6 million and $11.7 million. The Company believes that the net present value of the expense for the ongoing groundwater monitoring will be approximately $3.3 million in the aggregate for the first ten years and $1.8 million in the aggregate for the following twenty years. The net present value of the cost of other remedial actions will be approximately $5.5 million in the aggregate. At December 31, 2000, the Company has accrued approximately $10.6 million, which represents the best estimate available of the net present value of these costs discounted at 6%. The following table presents the expected undiscounted payments over the next five years and the aggregate amount thereafter associated with the liability at December 31, 2000: Fiscal Year (in thousands) --------------------------------------------- 2001 $ 1,744 2002 450 2003 462 2004 476 2005 490 Thereafter 9,192 -------------------------------------------- $ 12,814 Amount representing interest (2,259) --------------------------------------------- $ 10,555 ============================================ Costs incurred during 2000 were insignificant. Actual costs incurred will depend upon numerous factors, including (i) the actual method and results of the remedial actions; (ii) the outcome of negotiations with regulatory authorities; (iii) changes in environmental laws and regulations; (iv) technological developments and advancements; and (v) the years of remedial activity required. Based on the information currently available, the Company does not expect that any unrecorded liability related to the above matters would materially affect the consolidated financial position or results of operations of the Company. Environmental accruals are routinely reviewed as events and developments warrant and are subjected to a comprehensive annual review. 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------- During 2000, the Company acquired Teknit, Ltd., a United Kingdom company with a Michigan subsidiary, which manufactures three-dimensional knitted fabrics for the office furniture industry, for a purchase price of $3.9 million in cash. This transaction has been accounted for as a purchase and, accordingly, the results of operations of the acquired company since its acquisition date have been included within the consolidated financial statements. The purchase price exceeded the fair value of the net assets acquired by approximately $3.7 million and is being amortized over 40 years. During 2000, the Company sold a service company for approximately $.9 million in cash and $1.3 million in the form of a loan. The Company recognized the related immaterial gain associated with this divestiture within other expense in the consolidated statements of income. During 1999, the Company sold two operating entities which had been acquired as part of the 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 needlepunch 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 aggregate purchase price exceeded the fair value of the net assets acquired by approximately $1.2 million and is being amortized over 25 years. RECEIVABLES The Company, through a separate single purpose corporate entity, Interface Securitization Corporation ("ISC"), maintains an agreement with a financial institution to sell commercial receivables in amounts up to $65 million. Cash proceeds from the sale and securitization of these receivables were $51.0 million and $41.6 million in 2000 and 1999, respectively. No significant gain or loss resulted from these transactions. The Company expects recourse amounts associated with the aforementioned sale and securitization activities to be minimal and has adequate reserves to cover potential losses. Prior to December 2000, the Company had a similar agreement with another financial institution and ISC. The uncollected receivables sold at December 31, 2000 and January 2, 2000 amounted to $54.0 million and $40.0 million, respectively. The assets of ISC are available first and foremost to satisfy the claims of its creditors. Effective January 1, 2001, the Company adopted SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities--a replacement of SFAS No. 125." This statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities and revises the accounting standards for securitizations and transfers of financial assets and collateral. Management does not expect the adoption to have a material effect on the Company's results of operations and financial position. This standard also required new disclosures in 2000. Such requirements were not applicable to the Company. 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------- 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 December 31, 2000 and January 2, 2000, the allowance for bad debts amounted to approximately $8.7 million and $8.8 million, respectively, for all accounts receivable of the Company. INVENTORIES Inventories are summarized as follows: (in thousands) 2000 1999 ----------------------------------------------- Finished goods $101,411 $100,967 Work-in-process 40,939 29,057 Raw materials 55,713 46,894 ----------------------------------------------- $198,063 $176,918 =============================================== PROPERTY AND EQUIPMENT Property and equipment consisted of the following: (in thousands) 2000 1999 ----------------------------------------------------------- Land $ 13,677 $ 14,652 Buildings 136,901 131,398 Equipment 339,507 316,870 Construction-in-progress 12,136 23,046 ----------------------------------------------------------- 502,221 485,966 Accumulated depreciation (243,976) (232,530) ----------------------------------------------------------- $ 258,245 $ 253,436 =========================================================== The estimated cost to complete construction-in-progress for which the Company was committed at December 31, 2000 was approximately $9.5 million. ACCRUED EXPENSES Accrued expenses are summarized as follows: (in thousands) 2000 1999 --------------------------------------------- Taxes $ 9,305 $ 5,723 Compensation 38,701 41,030 Interest 5,416 5,959 Environmental 10,555 -- Other 43,490 54,575 --------------------------------------------- $107,467 $107,287 ============================================= BORROWINGS Long-Term Debt -------------- Long-term debt consisted of the following:
Interest rate at (in thousands) Dec. 31, 2000 2000 1999 ---------------------------------------------------------------------------------------------- Revolving credit facilities U.S. dollar 7.7% $ 87,750 $ 64,700 Japanese yen 1.3% 8,000 8,000 British pound sterling 6.7% 34,455 40,296 Euro 5.6% 6,660 2,517 Other 4.0-7.5% 10,493 11,605 ---------------------------------------------------------------------------------------------- Total long-term debt 147,358 127,118 Less current maturities (808) (1,974) ---------------------------------------------------------------------------------------------- $ 146,550 $ 125,144 ==============================================================================================
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. 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------- The facility requires prepayment from specified excess cash flows or proceeds from certain asset sales and maintenance of certain financial ratios, and governs the ability of the Company to, among other things, encumber assets and pay 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 December 31, 2000 are as follows: 2001-$808; 2002-$949; 2003-$137,589; 2004-$426; 2005- $426; Thereafter-$7,160. 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 December 31, 2000 and January 2, 2000, the estimated fair value of these notes based on then current market prices was approximately $140.3 million and $117.3 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 became redeemable for cash 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 December 31, 2000 and January 2, 2000, the estimated fair value of these notes based on then current market prices was approximately $126.9 million and $115.4 million, 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. 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------- In addition, any issuance of preferred stock could have the effect of delaying, deferring or preventing a change in control of the Company. Preferred Share Purchase Rights ------------------------------- The Company has previously issued one purchase right (a "Right") in respect of each outstanding share of Common Stock. Each Right entitles the registered holder to purchase from the Company one two-hundredth of a share (a "Unit") of 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 (without the consent of the Company's Board of Directors) more than 15% of the outstanding shares of Common Stock or if other specified events occur without the Rights having been redeemed or in the event of an exchange of the Rights for Common Stock as permitted under the Shareholder Rights Plan. The dividend and liquidation rights of the Series B Preferred Stock are designed so that the value of one one-hundredth of a share of Series B Preferred Stock issuable upon exercise of each Right will approximate the same economic value as one share of Common Stock, including voting rights. The exercise price per Right is $90, subject to adjustment. Shares of Series B Preferred Stock will entitle the holder to a minimum preferential dividend of $1.00 per share, but will entitle the holder to an aggregate dividend payment of 200 times the dividend declared on each share of Common Stock. In the event of liquidation, each share of Series B Preferred Stock will be entitled to a minimum preferential liquidation payment of $1.00, plus accrued and unpaid dividends and distributions thereon, but will be entitled to an aggregate payment of 200 times the payment made per share of Common Stock. In the event of any merger, consolidation or other transaction in which Common Stock is exchanged for or changed into other stock or securities, cash or other property, each share of Series B Preferred Stock will be entitled to receive 200 times the amount received per share of Common Stock. Series B Preferred Stock is not convertible into Common Stock. 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. 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------- 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 December 31, 2000, the outstanding Class B shares constituted approximately 14.0% 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 years ended 2000 and 1999 and $.165 per share for the year ended 1998. 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 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. During 2000, the authorized share repurchase amount was increased to 4,000,000 shares and the program was extended through May 19, 2002. During 2000, the Company repurchased 1,177,313 shares of Class A Common Stock under this program, at prices ranging from $3.41 to $8.94 per share. This is compared to the repurchase of 1,442,500 shares of Class A Common Stock at prices ranging from $4.50 to $9.94 per share during 1999 and 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. 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------- The following table shows changes in common shareholders' equity.
Foreign Class A Class B Additional Minimum Currency --------------------- ------------------- Paid-In Retained Pension Tranlation (in thousands) Shares Amount Shares Amount Capital Earnings Liability Adjustment -------------------------------------------------------------------------------------------------------------------------------- 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 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 issuances and forfeitures 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) ===============================================================================================================================
19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --------------------------------------------------------------------------
Foreign Class A Class B Additional Minimum Currency ------------------- ------------------- Paid-In Retained Pension Translation (in thousands) Shares Amount Shares Amount Capital Earnings Liability Adjustment ------------------------------------------------------------------------------------------------------------------------- Balance, at January 2, 2000 52,711 $ 5,271 6,314 $ 631 $ 222,373 $ 233,322 $-- $ (53,671) Net income -- -- -- -- -- 17,321 -- -- Conversion of common stock (602) (60) 602 60 -- -- -- -- Stock issuances under employee plans 56 6 25 3 581 -- -- -- Other issuances of common stock 33 3 162 16 787 -- -- -- Retirement of treasury stock (984) (99) -- -- (5,363) -- -- -- Cash dividends paid -- -- -- -- -- (9,243) -- -- Unamortized stock compensation expense related to restricted stock awards -- -- -- -- (719) -- -- -- Compensation expense related to restricted stock awards -- -- -- -- 602 -- -- -- Foreign currency translation adjustment -- -- -- -- -- -- -- (19,281) ------------------------------------------------------------------------------------------------------------------------ Balance, at December 31, 2000 51,214 $ 5,121 7,103 $ 710 $ 218,261 $ 241,400 $-- $ (72,952) ========================================================================================================================
20 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 directors and 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, were initially available to be issued under the Omnibus Plan. The following tables summarize stock option activity under the Omnibus Plan and predecessor plans: Weighted Average Number Exercise of Shares Price ----------------------------------------------------------------- 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 Granted 1,642,000 4.98 Exercised (93,000) 6.36 Forfeited or canceled (1,256,000) 10.97 ----------------------------------------------------------------- Outstanding at Dec. 31, 2000 3,899,000 $ 6.53 ================================================================ Weighted Average Number Exercise Options exercisable of Shares Price --------------------------------------------------- December 31, 2000 1,732,000 $ 7.30 January 2, 2000 1,916,000 $ 7.63 ---------------------------------------------------
Options Outstanding Options Exercisable ------------------------------------------------- ----------------------------- Weighted Weighted Range of Number Average Average Number Average Exercise Outstanding at Remaining Exercise Exercisable at Exercise Prices Dec. 31, 2000 Contractual Life Price Dec. 31, 2000 Price ---------------------------------------------------------------------------------------------------------------- $ 3.69 -- $ 6.88 2,241,000 7.99 $ 5.02 754,000 $ 5.85 7.00 -- 9.56 1,472,000 6.93 8.20 880,000 8.06 10.06 -- 14.44 186,000 7.46 11.35 98,000 11.48 ---------------------------------------------------------------------------------------------------------------- 3,899,000 7.57 $ 6.53 1,732,000 $ 7.30 ----------------------------------------------------------------------------------------------------------------
The weighted average fair value of options, calculated using the Black-Scholes option-pricing model, granted during 2000 and 1999 is $2.55 and $2.12 per share, respectively. 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------- 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 2000, 1999, and 1998. 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: (in thousands Fiscal Year Ended -------------------------------------------- except share data) 2000 1999 1998 --------------------------------------------------------------------------- Net income as reported $ 17,321 $ 23,545 $ 29,823 pro forma 15,295 22,185 28,366 --------------------------------------------------------------------------- Basic earnings per share as reported $ 0.34 $ 0.45 $ 0.58 pro forma 0.30 0.42 0.55 --------------------------------------------------------------------------- Diluted earnings per share as reported $ 0.34 $ 0.45 $ 0.56 pro forma 0.30 0.42 0.53 --------------------------------------------------------------------------- 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 2000, 1999, and 1998: Dividend yield of 2.1% in 2000, 3.6% in 1999 and 1.9% in 1998; expected volatility of 40% in 2000, 31% in 1999 and 30% in 1998; a risk-free interest rate of 6.38% in 2000, 5.72% in 1999 and 5.46% in 1998; and an expected option life of 6.5 years in 2000 and 6.0 years in 1999 and 1998. In March 2000, the Financial Accounting Standards Board issued Interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation," an interpretation of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees." Interpretation No. 44 clarifies the application of APB No. 25 to the definition of an employee for purposes of applying APB No. 25, the criteria for determining whether a plan qualifies as a noncompensatory plan, the accounting consequences of various modifications to the terms of a previously fixed stock option or award and the accounting for an exchange of stock compensation awards in a business combination. This interpretation did not have a material impact on the Company's consolidated financial statements. Restricted Stock Awards ----------------------- During fiscal years 2000, 1999 and 1998 restricted stock awards were granted for 161,514, 310,563 and 212,412 shares, respectively, of Class B Common Stock. These shares vest with respect to each employee after a nine-year period from the date of grant, provided the individual remains in the employment of the Company as of 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 204,984 awards granted in 1997 that have neither vested or been forfeited, upon involuntary termination. Compensation expense relating to these grants was approximately $602,000, $1,070,000 and $760,000 during 2000, 1999, and 1998, respectively. During 2000 and 1999, 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 December 31, 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------- 2000 and January 2, 2000, stock awards for 625,176 and 463,662 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 ---------------------------------------------------------------------------- 2000 Basic $17,321 50,558 $ .34 Effect of dilution: Stock options and awards 266 ---------------------------------------------------------------------------- Diluted $17,321 50,824 $ .34 ---------------------------------------------------------------------------- 1999 Basic $23,545 52,562 $ .45 Effect of dilution: Stock options and awards 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 ---------------------------------------------------------------------------- In 2000 and 1999, 2,461,383 and 1,817,309 stock options, respectively, were excluded from the computation of diluted earnings per share due to their antidilutive effect. RESTRUCTURING CHARGES 2000 Restructuring ------------------ During 2000, the Company recorded a pre-tax restructuring charge of $21.0 million. The charge reflects: (i) the integration of the U.S. broadloom operations; (ii) the consolidation of certain administrative and back-office functions; (iii) the divestiture of certain non-strategic Re:Source Americas operations; and (iv) the abandonment of manufacturing equipment utilized in the production of discontinued product lines. Specific elements of the restructuring activities, the related costs and current status of the plan are discussed below. U.S. ---- Historically, the Company has operated two manufacturing facilities to produce its Bentley and Prince Street brands of broadloom carpet. These facilities, which were located in Cartersville, Georgia, and City of Industry, California, have recently been operating at less than full capacity. In the first quarter of 2000, the Company decided to integrate these two facilities to reduce excess capacity. As a result, the facility in Cartersville, Georgia, was closed and the manufacturing operations were relocated and integrated into the facility in City of Industry, California. A charge of $4.1 million was recorded representing the cost of consolidating these facilities and the reduction of carrying value of the related property and equipment, inventories and other related assets. Additionally, the company recorded approximately $4.6 million of termination benefits associated with the facility closure. 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------- Between 1996 and 1999 the Company created a distribution channel through the acquisition of twenty-nine service companies located throughout the U.S. Since that time two of these businesses have failed to achieve satisfactory operating income levels. During 2000, the Company elected to divest of these under-performing operations. As a result, a charge of approximately $7.6 million was recorded representing the reduction of carrying value of the related property and equipment, impairment of intangible assets and other costs to close or dispose of these operations. Europe Recent economic developments in Europe necessitated an organizational re-alignment. During fiscal year 2000, the European operations were reorganized in order to adapt to these changes. As a result, certain manufacturing, selling and administrative positions were eliminated. The Company recorded approximately $3.7 million of termination benefits related to this reorganization. A summary of the restructuring activities which were planned as of April 2, 2000 is presented below: (in thousands) U.S. Europe Total ----------------------------------------------------------------------- Termination benefits $ 4,637 $ 3,732 $ 8,369 Impairment of property, plant and equipment 1,750 -- 1,750 Facilities consolidation 2,358 -- 2,358 Divestiture of operations, including impairment of intangible assets 7,618 -- 7,618 ----------------------------------------------------------------------- $16,363 $ 3,732 $20,095 ======================================================================= The restructuring charge was comprised of $11.9 million of cash expenditures for severance benefits and other costs and $8.2 million of non-cash charges, primarily for the write-down of impaired assets. The termination benefits of $8.4 million, primarily related to severance costs, resulted from aggregate expected reductions of 175 employees. The staff reductions as originally planned were expected to be as follows: U.S. Europe Total ------------------------------------------------------------ Manufacturing 63 21 84 Selling and administrative 59 32 91 ----------------------------------------------------------- 122 53 175 =========================================================== As a result of the restructuring, a total of 425 employees were terminated through December 31, 2000. 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 2000 was reflected as a separately stated charge against operating income. During the fourth quarter of 2000 the Company recorded an additional charge of $.95 million related to the terminations. The Company believes the remaining provisions are adequate to complete the plan. The following table displays the components of the accrued restructuring liability for the period ended December 31, 2000: Termination Benefits -------------------- (in thousands) U.S. Europe Total ---------------------------------------------------------------------------- Balance, at April 2, 2000 $ 4,637 $ 3,732 $ 8,369 Additional expense 952 -- 952 Payments (5,463) (3,732) (9,195) ---------------------------------------------------------------------------- Balance, at December 31, 2000 $ 126 $ -- $ 126 ============================================================================ 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------- Other Costs to Exit Activities ------------------------------ (in thousands) U.S. Europe Total -------------------------------------------------------------------------- Balance, at April 2, 2000 $ 11,726 $-- $ 11,726 Payments (11,239) -- (11,239) ------------------------------------------------------------------------- Balance, at December 31, 2000 $ 487 $-- $ 487 ========================================================================= 1998 Restructuring ------------------ 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 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------- 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. A summary of the restructuring activities which were planned as of January 3, 1999 is presented below:
Asia/Pacific Europe ---------------------------------------------------------- Floor- Floor- (in thousands) coverings Fabrics coverings Fabrics ---------------------------------------------------------------------------------------------- Termination benefits $ 1,438 $ -- $ 4,323 $ 1,123 Property, plant and equipment 7,098 -- 1,119 66 Intangible assets 2,049 -- -- -- Inventory 652 -- -- 453 Contract obligation -- -- 505 -- Other costs 3,180 -- -- 27 ---------------------------------------------------------------------------------------------- $14,417 $ -- $ 5,947 $ 1,669 ----------------------------------------------------------------------------------------------
(Continued) U.S. Totals ------------------------------------------------------ Floor- Floor- Grand (in thousands) coverings Fabrics coverings Fabrics Total -------------------------------------------------------------------------------------------------------- Termination benefits $ -- $ 750 $ 5,761 $ 1,873 $ 7,634 Property, plant and equipment 1,600 500 9,817 566 10,383 Intangible assets -- -- 2,049 -- 2,049 Inventory -- -- 652 453 1,105 Contract obligation -- -- 505 -- 505 Other costs -- 400 3,180 427 3,607 -------------------------------------------------------------------------------------------------------- $ 1,600 $ 1,650 $21,964 $ 3,319 $25,283 ---------------------------------------------------------------------------------------------------------
26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------- The restructuring charge was comprised of $13.0 million of cash expenditures for severance benefits and other costs and $12.3 million of non-cash charges, primarily for the write-down of impaired assets. Termination benefits of $7.6 million, primarily related to severance costs, resulted from an aggregate expected reduction of 287 employees. The staff reductions as originally planned were expected to be as follows: Asia/Pacific Europe ------------------------------------------ Floor- Floor- coverings Fabrics coverings Fabrics --------------------------------------------------------------- Manufacturing 49 -- 83 -- Selling and administrative 25 -- 7 11 -------------------------------------------------------------- 74 -- 90 11 -------------------------------------------------------------- U.S. Totals ------------------------------------------ Floor- Floor- Grand coverings Fabrics coverings Fabrics Total ------------------------------------------------------------------------ Manufacturing -- 100 132 100 232 Selling and administrative -- 12 32 23 55 ----------------------------------------------------------------------- -- 112 164 123 287 ----------------------------------------------------------------------- As a result of the restructuring, a total of 253 employees were terminated. 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 was reflected as a separately stated charge against operating income. The following table displays the components of the accrued restructuring liability: Termination Benefits --------------------
Asia/Pacific Europe ------------------------------------------------------ Floor- Floor- (in thousands) coverings Fabrics coverings Fabrics ------------------------------------------------------------------------------------------- Balance, at January 3, 1999 $ 600 $-- $ 2,367 $ 18 Additional expense -- -- 767 -- Payments (600) -- (2,246) (18) Reversal of over-accrual -- -- (672) -- ------------------------------------------------------------------------------------------- Balance, at January 2, 2000 -- -- 216 -- Payments -- -- (216) -- ------------------------------------------------------------------------------------------- Balance, at December 31, 2000 $ -- $-- $ -- $ -- ===========================================================================================
(CONTINUED)
U.S. Totals --------------------------------------------------------- Floor- Floor- Grand (in thousand) coverings Fabrics coverings Fabrics Total ------------------------------------------------------------------------------------------------------- Balance, at January 3, 1999 $ -- $ 750 $ 2,967 $ 768 $ 3,735 Additional expense -- 705 767 705 1,472 Payments -- (1,455) (2,846) (1,473) (4,319) Reversal of over-accrual -- -- (672) -- (672) ------------------------------------------------------------------------------------------------------- Balance, at January 2, 2000 -- -- 216 -- 216 Payments -- -- (216) -- (216) ------------------------------------------------------------------------------------------------------- Balance, at December 31, 2000 -- $ -- $ -- $ -- $ -- =======================================================================================================
Other Costs to Exit Activities ------------------------------
Asia/Pacific Europe ------------------------------------------------------- Floor- Floor- (in thousands) coverings Fabrics coverings Fabrics -------------------------------------------------------------------------------------------- Balance, at January 3, 1999 $ 1,361 $ -- $ 505 $ 33 Additional expense -- -- -- -- Payments (1,111) -- (505) (33) -------------------------------------------------------------------------------------------- Balance, at January 2, 2000 250 -- -- -- Payments (250) -- -- -- -------------------------------------------------------------------------------------------- Balance, at December 31, 2000 $ -- $ -- $ -- $ -- ============================================================================================
U.S. Totals ------------------------------------------------------------- Floor- Floor- Grand (in thousand) coverings Fabrics coverings Fabrics Total ------------------------------------------------------------------------------------------------------------ Balance, at January 3, 1999 $ -- $ 400 $ 1,866 $ 433 $ 2,299 Additional expense -- 331 -- 331 331 Payments -- (731) (1,616) (764) (2,380) ------------------------------------------------------------------------------------------------------------- Balance, at January 2, 2000 -- -- 250 -- 250 Payments -- -- (250) -- (250) ------------------------------------------------------------------------------------------------------------- Balance, at December 31, 2000 $ -- $ -- $ -- $ -- $ -- =============================================================================================================
27 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) 2000 1999 1998 ----------------------------------------------------------------------- Current: Federal $ 12,719 $ 3,868 $ 13,769 Foreign 5,805 4,493 8,460 State 2,052 2,210 3,070 ----------------------------------------------------------------------- 20,576 10,571 25,299 ======================================================================= Deferred (reduction): Federal (5,458) 3,620 (3,032) Foreign (1,484) 2,120 (2,171) State (1,116) (1,883) (808) ------------------------------------------------------------------------ (8,058) 3,857 (6,011) ------------------------------------------------------------------------ $ 12,518 $ 14,428 $ 19,288 ======================================================================= Income before taxes on income consisted of the following: Fiscal Year Ended ------------------------------------- (in thousands) 2000 1999 1998 --------------------------------------------------------------- U.S. operations $16,762 $ 7,434 $30,353 Foreign operations 13,077 30,539 18,758 --------------------------------------------------------------- $29,839 $37,973 $49,111 =============================================================== Deferred income taxes for the years ended December 31, 2000 and January 2, 2000 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 December 31, 2000, the Company's foreign subsidiaries had approximately $5.4 million in net operating losses available for an unlimited carryforward period. Additionally, the Company had approximately $70 million in state net operating losses expiring at various times through 2015. The sources of the temporary differences and their effect on the net deferred tax liability are as follows:
2000 1999 ------------------------------------------------------ (in thousands) Assets Liabilities Assets Liabilities --------------------------------------------------------------------------------- Basis differences of property and equipment $ -- $30,760 $ -- $27,259 Net operating loss carry- forwards 5,179 -- 5,962 -- Other differences in basis of assets and liabilities 15,895 -- 4,329 -- ------------------------------------------------------------------------------- $21,074 $30,760 $10,291 $27,259 ================================================================================
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 -------------------------------- 2000 1999 1998 ---------------------------------------------------------------------------------- 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 2.0 1.0 3.0 Amortization of excess of cost over net assets acquired and related purchase accounting adjustments 12.7 7.9 5.8 Foreign and U.S. tax effects attributable to foreign operations (5.5) (6.4) (3.2) Other (2.2) 0.5 (1.3) ---------------------------------------------------------------------------------- Taxes on income at effective rates 42.0% 38.0% 39.3% ==================================================================================
28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------- Undistributed earnings of the Company's foreign subsidiaries amounted to approximately $46 million at December 31, 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 $1.2 million would be payable upon remittance of all previously unremitted earnings at December 31, 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 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 counter-party credit guidelines and has entered into transactions only with financial institutions of investment grade or better. As a result, the Company has historically considered the risk of counter-party 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 December 31, 2000 and January 2, 2000, the Company had no outstanding interest rate management swap agreements. 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 which the hedged transaction affected. As of December 31, 2000 and January 2, 2000, the Company had no outstanding foreign currency management swap agreements. As mentioned above, the Company had no outstanding agreements to hedge fluctuations in interest and foreign currency exchange rates as of December 31, 2000. The Company believes that, at this time, such hedges are not necessary. During 1998, the Company restructured its borrowing facilities which provided for multicurrency loan agreements resulting in the 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------- 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. COMMITMENTS AND CONTINGENCIES The Company leases certain marketing, production and distribution facilities and equipment. At December 31, 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) -------------------------------- 2001 $21,646 2002 17,316 2003 12,892 2004 9,677 2005 5,926 Thereafter 25,453 ------------------------------- $92,910 =============================== Rental expense amounted to approximately $23.6 million, $17.5 million, and $17.1 million for the fiscal years ended 2000, 1999, and 1998, respectively. EMPLOYEE BENEFIT PLANS The Company has a 401(k) retirement investment plan ("401(k) Plan"), which is open to all otherwise eligible U.S. employees with at least six months of service. The 401(k) Plan calls 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 Plan based on the attainment of certain performance targets by its subsidiaries. The Company's matching contributions are funded monthly and totaled approximately $2.7 million, $1.7 million and $1.6 million for the years ended 2000, 1999 and 1998, respectively. The Company's discretionary contributions totaled $4.0 million, $2.3 million, and $3.5 million for the years ended 2000, 1999, and 1998, 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 December 31, 2000. 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 $2.3 million, $3.3 million and $4.2 million for the years ended 2000, 1999 and 1998, respectively. Plan assets are primarily invested in equity and fixed income securities. 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------- 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) 2000 1999 --------------------------------------------------------------- Change in benefit obligation Benefit obligation, beginning of year $ 123,489 $ 114,689 Service cost 4,004 3,665 Interest cost 7,224 6,549 Benefits paid (4,489) (7,089) Actuarial (gain) loss (901) 10,938 Member contributions 1,079 1,153 Currency translation adjustment (8,989) (6,416) --------------------------------------------------------------- Benefit obligation, end of year $ 121,417 $ 123,489 =============================================================== Change in plan assets Plan assets, beginning of year $ 131,345 $ 105,571 Actual return on assets 105 31,099 Company contributions 999 7,247 Member contributions 1,079 1,153 Benefits paid (4,489) (7,089) Administration expenses (615) (455) Currency translation adjustment (9,418) (6,181) --------------------------------------------------------------- Plan assets, end of year $ 119,006 $ 131,345 =============================================================== (in thousands) 2000 1999 ------------------------------------------------------------------ Reconciliation to Balance Sheet Funded status $(2,411) $ 7,857 Unrecognized actuarial loss 9,680 816 Unrecognized prior service cost 170 227 Unrecognized transition adjustment 677 859 ------------------------------------------------------------------ Net amount recognized $ 8,116 $ 9,759 ================================================================== Amounts recognized in the consolidated balance sheets-- Prepaid benefit cost $ 8,116 $ 9,759 ================================================================== (in thousands, except for Fiscal Year Ended weighted average assumptions) -------------------------- 2000 1999 ------------------------------------------------------------------ Weighted average assumptions Discount rate 6.4% 6.0% Expected return on plan assets 7.5% 7.1% Rate of compensation 4.2% 3.9% ----------------------------------------------------------------- Components of net periodic benefit cost Service cost $ 4,004 $ 3,665 Interest cost 7,224 6,549 Expected return on plan assets 9,115) (7,328) Amortization of prior service costs 39 233 Amortization of transition obligation 125 144 ---------------------------------------------------------------- Net periodic benefit cost $ 2,277 $ 3,263 ================================================================ 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------- 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 other retirement plans and 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. (in thousands, except for Fiscal Year Ended weighted average assumptions) ------------------------- 2000 1999 ---------------------------------------------------------------- Change in benefit obligation Benefit obligation, beginning of year $ 8,338 $ 7,723 Service cost 196 300 Interest cost 705 605 Benefits paid (463) (290) Actuarial loss 707 -- ---------------------------------------------------------------- Benefit obligation, end of year $ 9,483 $ 8,338 ---------------------------------------------------------------- Weighted average assumptions Discount rate 8% 8% Rate of compensation 4% 5% ---------------------------------------------------------------- Components of net periodic benefit cost Service cost $ 196 $ 300 Interest cost 705 605 Amortization of transition obligation 259 259 ---------------------------------------------------------------- Net periodic benefit cost $ 1,160 $ 1,164 ================================================================ 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------- SEGMENT INFORMATION The Company has two reportable segments, 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 Interior (in thousands) Products/Services Fabrics Other Total ------------------------------------------------------------------------------------------------------ 2000 Net sales $ 951,664 $ 252,732 $ 79,552 $1,283,948 Depreciation and amortization 33,702 9,732 2,124 45,558 Operating income 35,426 28,275 4,543 68,244 Total Assets 834,101 216,718 65,842 1,116,661 ====================================================================================================== 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 55,054 21,306 (186) 76,174 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 66,976 24,775 (2,257) 89,494 Total assets 942,978 216,590 47,905 1,207,473 ======================================================================================================
33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------- 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) 2000 1999 1998 ------------------------------------------------------------------------------- Depreciation and Amortization ---------------- Total segment depreciation and amortization $ 45,558 $ 41,838 $ 40,239 Corporate depreciation and amortization 5,067 3,951 2,347 ------------------------------------------------------------------------------- Reported depreciation and amortization $ 50,625 $ 45,789 $ 42,586 =============================================================================== Operating Income ---------------- Total Segment operating income $ 68,244 $ 76,174 $ 89,494 Corporate expenses and eliminations 765 257 197 ------------------------------------------------------------------------------- Reported operating income $ 69,009 $ 76,431 $ 89,691 =============================================================================== Assets ------ Total segment assets $ 1,116,661 $ 1,074,175 $ 1,207,473 Corporate assets and eliminations (81,812) (45,680) (170,609) ------------------------------------------------------------------------------- Reported total assets $ 1,034,849 $ 1,028,495 $ 1,036,864 =============================================================================== 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) 2000 1999 1998 --------------------------------------------------------------------- Sales to Unaffiliated Customers (1) ------------- United States $ 880,477 $ 805,112 $ 836,715 United Kingdom 204,078 194,132 206,111 Other foreign countries 199,393 228,995 238,303 -------------------------------------------------------------------- Net sales $1,283,948 $1,228,239 $1,281,129 ==================================================================== Long-lived Assets (2) ---------- United States $ 180,318 $ 172,024 $ 165,450 United Kingdom 46,919 47,953 46,347 Netherlands 12,391 12,279 11,595 Other foreign countries 18,617 21,180 21,920 --------------------------------------------------------------------- Total long-lived assets $ 258,245 $ 253,436 $ 245,312 ===================================================================== (1) Revenue attributed to geographic areas is based on the location of the customer. (2) Long-lived assets include tangible assets physically located in foreign countries. 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------- QUARTERLY DATA AND SHARE INFORMATION (UNAUDITED) The following table sets forth, for the fiscal periods indicated, selected consolidated financial data and information regarding the market price per share of the Company's Class A Common Stock. The prices represent the reported high and low closing sale prices.
Fiscal Year Ended 2000 ------------------------------------------------------------------------ First Second Third Fourth (in thousands, except share data) Quarter Quarter Quarter Quarter ----------------------------------------------------------------------------------------------------------- Net sales $ 293,218 $ 323,725 $ 336,663 $ 330,342 Gross profit 88,666 97,545 101,700 100,091 Net income (loss) (8,804) 7,042 9,759 9,322 ------------------------------------------------------------------------------------------------------------ Earnings per common share Basic $ (0.17) $ 0.14 $ 0.19 $ 0.19 Diluted (0.17) 0.14 0.19 0.18 ------------------------------------------------------------------------------------------------------------ Dividends per common share $ 0.045 $ 0.045 $ 0.045 $ 0.045 ------------------------------------------------------------------------------------------------------------ Share prices High $ 5 9/16 $ 4 3/8 $ 7 31/32 $ 10 Low 4 3 3/32 3 15/16 6 21/32 ===========================================================================================================
Fiscal Year Ended 1999 ------------------------------------------------------------------------------------------------------------ First Second Third Fourth (in thousands, except share data) Quarter Quarter Quarter Quarter ------------------------------------------------------------------------------------------------------------ Net sales $ 307,866 $ 305,452 $ 304,246 $ 310,675 Gross profit 96,608 95,659 94,340 95,508 Net income 5,606 6,329 5,259 6,351 ------------------------------------------------------------------------------------------------------------ Earnings per common share Basic $ 0.11 $ 0.12 $ 0.10 $ 0.12 Diluted 0.11 0.12 0.10 0.12 ------------------------------------------------------------------------------------------------------------ Dividends per common share $ 0.045 $ 0.045 $ 0.045 $ 0.045 ------------------------------------------------------------------------------------------------------------ Share prices High $ 10 1/16 $ 11 6/32 $ 9 14/16 $ 5 12/32 Low 7 1/2 6 14/16 4 9/16 4 1/64 ============================================================================================================
35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------- SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Year Ended 2000 ------------------------------------------------------------------------------------------------------------------------------- Interface, Inc. Consolidation Guarantor Nonguarantor (Parent & Elimination Consolidated (in thousands) Subsidiaries Subsidiaries Corporation) Entries Totals ------------------------------------------------------------------------------------------------------------------------------- Net sales $ 1,029,452 $ 380,195 $ -- $ (125,699) $ 1,283,948 Cost of sales 756,778 264,865 -- (125,699) 895,944 ------------------------------------------------------------------------------------------------------------------------------- Gross profit on sales 272,674 115,330 -- -- 388,004 Selling, general and administrative expenses 189,311 87,754 20,883 -- 297,948 Restructuring charge 16,815 3,732 500 -- 21,047 ------------------------------------------------------------------------------------------------------------------------------- Operating income 66,548 23,844 (21,383) -- 69,009 ------------------------------------------------------------------------------------------------------------------------------- Other expense (income) Interest expense 18,181 6,781 13,538 -- 38,500 Other (73) 743 -- -- 670 ------------------------------------------------------------------------------------------------------------------------------- Total other expense 18,108 7,524 13,538 -- 39,170 ------------------------------------------------------------------------------------------------------------------------------- Income before taxes on income and equity in income of subsidiaries 48,440 16,320 (34,921) -- 29,839 Taxes on income (benefit) 13,110 4,842 (5,434) -- 12,518 Equity in income of subsidiaries -- -- 46,808 (46,808) -- ------------------------------------------------------------------------------------------------------------------------------- Net income $ 35,330 $ 11,478 $ 17,321 $ (46,808) $ 17,321 ===============================================================================================================================
36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------- SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Year Ended 1999 -------------------------------------------------------------------------------------------------------------------------------- Interface, Inc. Consolidation Guarantor Nonguarantor (Parent & Elimination Consolidated (in thousands) Subsidiaries Subsidiaries Corporation) Entries Totals --------------------------------------------------------------------------------------------------------------------------------- Net sales $ 970,959 $ 383,385 $ -- $ (126,105) $ 1,228,239 Cost of sales 714,452 257,777 -- (126,105) 846,124 --------------------------------------------------------------------------------------------------------------------------------- Gross profit on sales 256,507 125,608 -- -- 382,115 Selling, general and administrative expenses 186,203 88,678 29,672 -- 304,553 Restructuring charge 1,036 95 -- -- 1,131 --------------------------------------------------------------------------------------------------------------------------------- Operating income 69,268 36,835 (29,672) -- 76,431 --------------------------------------------------------------------------------------------------------------------------------- Other expense (income) Interest expense 13,660 6,853 18,859 -- 39,372 Other (2,559) 1,645 -- -- (914) --------------------------------------------------------------------------------------------------------------------------------- Total other expense 11,101 8,498 18,859 -- 38,458 --------------------------------------------------------------------------------------------------------------------------------- Income before taxes on income and equity in income of subsidiaries 58,167 28,337 (48,531) -- 37,973 Taxes on income (benefit) 22,103 6,465 (14,140) -- 14,428 Equity in income of subsidiaries -- -- 57,936 (57,936) -- --------------------------------------------------------------------------------------------------------------------------------- Net income $ 36,064 $ 21,872 $ 23,545 $ (57,936) $ 23,545 ================================================================================================================================
37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------- SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Year Ended 1998 -------------------------------------------------------------------------------------------------------------------------------- Interface, Inc. Consolidation Guarantor Nonguarantor (Parent & Elimination Consolidated (in thousands) Subsidiaries Subsidiaries Corporation) Entries Totals -------------------------------------------------------------------------------------------------------------------------------- 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 ================================================================================================================================
38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------- SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
December 31, 2000 ----------------------------------------------------------------------------------------------------------------------------- Interface, Inc. Consolidation Guarantor Nonguarantor (Parent & Elimination Consolidated (in thousands) Subsidiaries Subsidiaries Corporation) Entries Totals ----------------------------------------------------------------------------------------------------------------------------- Assets ------ Current Cash $ 4,469 $ 3,953 $ (561) $ -- $ 7,861 Accounts receivable 177,641 77,992 (50,747) -- 204,886 Inventories 135,722 62,341 -- -- 198,063 Miscellaneous 12,912 11,743 11,643 -- 36,298 ----------------------------------------------------------------------------------------------------------------------------- Total current assets 330,744 156,029 (39,665) -- 447,108 Property and equipment, less accumulated depreciation 164,255 77,927 16,063 -- 258,245 Investments in subsidiaries 91,675 7,065 870,867 (969,607) -- Miscellaneous 2,418 22,085 40,337 -- 64,840 Excess of cost over net assets acquired 172,908 90,692 1,056 -- 264,656 ----------------------------------------------------------------------------------------------------------------------------- $ 762,000 $ 353,798 $ 888,658 $ (969,607) $ 1,034,849 ============================================================================================================================= Liabilities and Shareholders' Equity ------------------------------------ Current liabilities $ 124,137 $ 66,584 $ 15,428 $ -- $ 206,149 Long-term debt, less current maturities 6,659 44,141 370,750 -- 421,550 Deferred income taxes 17,802 3,371 8,378 -- 29,551 ------------------------------------------------------------------------------------------------------------------------------- Total liabilities 148,598 114,096 394,556 -- 657,250 ------------------------------------------------------------------------------------------------------------------------------- Minority interests -- 5,164 -- -- 5,164 Shareholders' equity Preferred stock 57,891 -- -- (57,891) -- Common stock 94,144 102,199 5,808 (196,320) 5,832 Additional paid-in capital 191,431 12,525 217,946 (203,641) 218,261 Retained earnings 270,699 160,814 280,393 (470,506) 241,400 Foreign currency translation adjustment (763) (41,000) (10,045) (21,144) (72,952) Treasury stock -- -- -- (20,105) (20,105) ------------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 613,402 234,538 494,102 (969,607) 372,435 ------------------------------------------------------------------------------------------------------------------------------- $ 762,000 $ 353,798 $ 888,658 $ (969,607) $ 1,034,849 ===============================================================================================================================
39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------------------------------------ SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
January 2, 2000 ------------------------------------------------------------------------------------------------------------------------------ Interface, Inc. Consolidation Guarantor Nonguarantor (Parent & Elimination Consolidated (in thousands) Subsidiaries Subsidiaries Corporation) Entries Totals ------------------------------------------------------------------------------------------------------------------------------ Assets ------ Current Cash $ 4,137 $ 6,412 $ (8,001) $ -- $ 2,548 Accounts receivable 170,248 71,569 (38,267) -- 203,550 Inventories 110,186 66,732 -- -- 176,918 Miscellaneous 10,871 20,425 6,466 -- 37,762 ------------------------------------------------------------------------------------------------------------------------------ Total current assets 295,442 165,138 (39,802) -- 420,778 Property and equipment, less accumulated depreciation 151,956 81,312 20,168 -- 253,436 Investments in subsidiaries 38,100 9,758 861,459 (909,317) -- Miscellaneous 12,118 24,367 39,024 -- 75,509 Excess of cost over net assets acquired 183,942 91,241 3,589 -- 278,772 ------------------------------------------------------------------------------------------------------------------------------ $ 681,558 $ 371,816 $ 884,438 $ (909,317) $ 1,028,495 ============================================================================================================================== Liabilities and Shareholders' Equity ------------------------------------ Current liabilities 91,559 83,888 28,305 -- 203,752 Long-term debt, less current maturities 6,529 37,915 355,700 -- 400,144 Deferred income taxes 15,006 6,111 12,278 -- 33,395 ------------------------------------------------------------------------------------------------------------------------------ Total liabilities 113,094 127,914 396,283 -- 637,291 ------------------------------------------------------------------------------------------------------------------------------ Minority interests -- 2,012 -- -- 2,012 Shareholders' equity Preferred stock 57,891 -- -- (57,891) -- Common stock 94,145 102,199 5,902 (196,344) 5,902 Additional paid-in capital 191,411 12,525 222,373 (203,936) 222,373 Retained earnings 229,217 154,597 265,641 (416,133) 233,322 Foreign currency translation adjustment (4,200) (27,431) (5,761) (16,279) (53,671) Treasury stock -- -- -- (18,734) (18,734) ------------------------------------------------------------------------------------------------------------------------------ Total shareholders' equity 568,464 241,890 488,155 (909,317) 389,192 ------------------------------------------------------------------------------------------------------------------------------ $ 681,558 $ 371,816 $ 884,438 $ (909,317) $ 1,028,495 ==============================================================================================================================
40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------- SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
January 3, 1999 -------------------------------------------------------------------------------------------------------------------------------- Interface, Inc. Consolidation Guarantor Nonguarantor (Parent & Elimination Consolidated (in thousands) Subsidiaries Subsidiaries Corporation) Entries Totals -------------------------------------------------------------------------------------------------------------------------------- Assets ------ Current Cash $ 6,145 $ 5,234 $ ( 1,469) $ -- $ 9,910 Accounts receivable 139,718 80,276 (25,191) -- 194,803 Inventories 131,749 67,589 -- -- 199,338 Miscellaneous 8,138 17,386 8,949 -- 34,473 -------------------------------------------------------------------------------------------------------------------------------- Total current assets 285,750 170,485 (17,711) -- 438,524 Property and equipment, less accumulated depreciation 151,782 79,862 13,668 -- 245,312 Investments in subsidiaries 37,030 871 791,289 (829,190) -- Miscellaneous 11,733 8,791 29,535 -- 50,059 -------------------------------------------------------------------------------------------------------------------------------- Excess of cost over net assets acquired 187,412 112,650 2,907 -- 302,969 -------------------------------------------------------------------------------------------------------------------------------- $ 673,707 $ 372,659 $ 819,688 $ (829,190) $ 1,036,864 ================================================================================================================================ Liabilities and Shareholders' Equity ------------------------------------ Current liabilities 117,311 102,059 5,742 -- 225,112 Long-term debt, less current maturities 8,342 41,622 337,687 -- 387,651 Deferred income taxes 15,085 6,037 2,360 -- 23,482 -------------------------------------------------------------------------------------------------------------------------------- Total liabilities 140,738 149,718 345,789 -- 636,245 -------------------------------------------------------------------------------------------------------------------------------- Minority interests -- 1,795 -- -- 1,795 Shareholders' equity Preferred stock 57,891 -- -- (57,891) -- Common stock 94,145 102,199 5,983 (196,344) 5,983 Additional paid-in capital 191,411 12,525 231,959 (203,936) 231,959 Retained earnings 193,153 132,580 242,119 (348,622) 219,230 Foreign currency translation adjustment (3,631) (19,759) (6,162) (2,116) (31,668) Minimum pension liability -- (6,399) -- -- (6,399) Treasury stock -- -- -- (20,281) (20,281) -------------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 532,969 221,146 473,899 (829,190) 398,824 -------------------------------------------------------------------------------------------------------------------------------- $ 673,707 $ 372,659 $ 819,688 $ (829,190) $ 1,036,864 ================================================================================================================================
41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------- SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Year Ended 2000 ------------------------------------------------------------------------------------------------------------------------------ Interface, Inc. Consolidation Guarantor Nonguarantor (Parent & Elimination Consolidated (in thousands) Subsidiaries Subsidiaries Corporation) Entries Totals ------------------------------------------------------------------------------------------------------------------------------ Cash flows from operating activities $ 50,417 $ 33,537 $(12,522) -- $ 71,432 ------------------------------------------------------------------------------------------------------------------------------ Cash flows from investing activities: Purchase of plant and equipment (19,661) (10,834) -- -- (30,495) Acquisitions, net of cash acquired (25,307) (4,565) -- -- (29,872) Other (1,135) (21,010) 11,269 -- (10,876) ------------------------------------------------------------------------------------------------------------------------------ (46,103) (36,409) 11,269 -- (71,243) ------------------------------------------------------------------------------------------------------------------------------ Cash flows from financing activities: Net borrowings (repayments) (3,982) -- 24,282 -- 20,300 Proceeds from issuance of common stock -- -- 496 -- 496 Cash dividends paid -- -- (9,243) -- (9,243) Repurchase of common shares -- -- (6,842) -- (6,842) ------------------------------------------------------------------------------------------------------------------------------ (3,982) -- 8,693 -- 4,711 ------------------------------------------------------------------------------------------------------------------------------ Effect of exchange rate changes on cash -- 413 -- -- 413 ------------------------------------------------------------------------------------------------------------------------------ Net increase (decrease) in cash 332 (2,459) 7,440 -- 5,313 Cash, at beginning of year 4,137 6,412 (8,001) -- 2,548 ------------------------------------------------------------------------------------------------------------------------------ Cash, at end of year $ 4,469 $ 3,953 $ (561) -- $ 7,861 ==============================================================================================================================
42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------- SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Year Ended 1999 ------------------------------------------------------------------------------------------------------------------------------ Interface, Inc. Consolidation Guarantor Nonguarantor (Parent & Elimination Consolidated (in thousands) Subsidiaries Subsidiaries Corporation) Entries Totals ------------------------------------------------------------------------------------------------------------------------------ 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 ==============================================================================================================================
43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------- SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Year Ended 1998 ------------------------------------------------------------------------------------------------------------------------------ Interface, Inc. Consolidation Guarantor Nonguarantor (Parent & Elimination Consolidated (in thousands) Subsidiaries Subsidiaries Corporation) Entries Totals ------------------------------------------------------------------------------------------------------------------------------ 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 ==============================================================================================================================
44 -------------------------------------------------------------------------- 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 maintains an effective internal control structure. It consists, in part, of organizational arrangements with clearly defined lines of responsibility and delegation of authority and comprehensive systems and control procedures. We believe this structure provides reasonable assurance that transactions are executed in accordance with management authorization, and that they are appropriately recorded in order to permit preparation of financial statements in conformity with generally accepted accounting principles and to adequately safeguard, verify and maintain accountability of assets. An important element of the control environment is an ongoing internal audit program. The Audit Committee of the Board of Directors, which is composed solely of outside directors, reviews the scope of the audits and findings of the independent certified public accountants. The Audit Committee meets periodically and privately with the independent accountants, with our internal auditors, as well as with management, to review accounting, auditing, internal control structure and financial reporting matters. 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, President and Chief Executive Officer /s/ Daniel T. Hendrix Daniel T. Hendrix Executive Vice President, Chief Financial Officer and Treasurer 45 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 December 31, 2000 and January 2, 2000, and the related consolidated statements of income and comprehensive income (loss) and cash flows for each of the three fiscal years in the period ended December 31, 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 auditing standards generally accepted in the United States. 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 December 31, 2000 and January 2, 2000, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. /s/ BDO Seidman, LLP Atlanta, Georgia February 20, 2001 46 SELECTED FINANCIAL INFORMATION
(in thousands, except share data) 2000 1999 1998 1997 1996 ------------------------------------------------------------------------------------------------------------------------- Annual Operating Data Net sales $1,283,948 $1,228,239 $1,281,129 $1,135,290 $1,002,176 Cost of sales 895,944 846,124 847,660 755,734 684,455 Operating income 69,009 76,431 89,691 97,801 78,689 Net income 17,321 23,545 29,823 37,514 26,395 ------------------------------------------------------------------------------------------------------------------------- Earnings per common share Basic $ 0.34 $ 0.45 $ 0.58 $ 0.79 $ 0.62 Diluted $ 0.34 $ 0.45 $ 0.56 $ 0.76 $ 0.60 Average Shares Outstanding Basic 50,558 52,562 51,808 47,416 40,121 Diluted 50,824 52,803 53,735 49,302 41,315 Cash dividends per common share $ 0.18 $ 0.18 $ 0.165 $ 0.135 $ 0.1225 Property additions (1) 46,406 37,278 66,145 51,489 40,387 Depreciation and amortization 50,625 45,789 42,586 38,605 35,305 ------------------------------------------------------------------------------------------------------------------------- Balance Sheet Data Working capital $ 240,959 $ 217,026 $ 213,412 $ 183,403 $ 189,584 Total assets 1,034,849 1,028,495 1,036,864 929,563 862,546 Total long-term debt 422,358 402,118 390,437 392,250 382,272 Shareholders' equity 372,435 389,192 398,824 316,365 273,118 Book value per share 7.33 7.52 7.60 6.55 6.28 Current ratio 2.2 2.1 1.9 2.0 2.2 ========================================================================================================================= (1) Includes property and equipment obtained in acquisition of business.
47