Exhibit 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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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
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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
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Net sales 100.0% 100.0% 100.0%
Cost of sales 69.8 68.9 66.2
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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
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Operating income 5.4 6.2 7.0
Other expense 3.1 3.1 3.2
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Income before taxes
on income 2.3 3.1 3.8
Taxes on income 1.0 1.2 1.5
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Net income 1.3 1.9 2.3
======================================================================
Fiscal 2000 Compared With Fiscal 1999
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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
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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
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(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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)
CONSOLIDATED STATEMENTS OF INCOME
Fiscal Year Ended
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(in thousands, except share data) 2000 1999 1998
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Net sales $ 1,283,948 $ 1,228,239 $ 1,281,129
Cost of sales 895,944 846,124 847,660
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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
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Operating income 69,009 76,431 89,691
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Other expense
Interest expense 38,500 39,372 36,705
Other 670 (914) 3,875
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Total other expense 39,170 38,458 40,580
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Income before taxes on income 29,839 37,973 49,111
Taxes on income 12,518 14,428 19,288
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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
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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)
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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
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CONSOLIDATED BALANCE SHEETS
(in thousands) 2000 1999
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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
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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
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$ 1,034,849 $ 1,028,495
================================================================================================
Liabilities and Shareholders' Equity
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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
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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
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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
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$ 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
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended
---------------------------------------------
(in thousands) 2000 1999 1998
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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
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71,432 71,066 71,900
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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)
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(71,243) (51,845) (133,216)
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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)
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4,711 (26,698) 60,376
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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
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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
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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
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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