-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RYiN7qCsNCdVEHH1OQ346rj4Aw+3n/R9z9Wa5xayhzvDkyrSiqMR/wOxg8uaDS2H S8VQ053BRSvgcQya7fUsRQ== 0000910195-98-000137.txt : 19980330 0000910195-98-000137.hdr.sgml : 19980330 ACCESSION NUMBER: 0000910195-98-000137 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19971228 FILED AS OF DATE: 19980327 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERFACE INC CENTRAL INDEX KEY: 0000715787 STANDARD INDUSTRIAL CLASSIFICATION: CARPETS AND RUGS [2273] IRS NUMBER: 581451243 STATE OF INCORPORATION: GA FISCAL YEAR END: 0103 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-12016 FILM NUMBER: 98575144 BUSINESS ADDRESS: STREET 1: 2859 PACES FERRY RD STREET 2: STE 2000 CITY: ATLANTA STATE: GA ZIP: 30339 BUSINESS PHONE: 7704376800 FORMER COMPANY: FORMER CONFORMED NAME: INTERFACE FLOORING SYSTEMS INC DATE OF NAME CHANGE: 19870817 10-K 1 10K FOR INTERFACE, INC. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 28, 1997 Commission File No: 0-12016 INTERFACE, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Georgia 58-1451243 - ------------------------ ------------------------------------ (State of incorporation) (I.R.S. Employer Identification No.) 2859 Paces Ferry Road Suite 2000 Atlanta, Georgia 30339 - --------------------------------------- ---------- (Address of principal executive offices) (zip code) Registrant's telephone number, including area code: (770) 437-6800 -------------- Securities Registered Pursuant to Section 12(b) of the Act: None ---- Securities Registered Pursuant to Section 12(g) of the Act: CLASS A COMMON STOCK, $0.10 PAR VALUE PER SHARE ----------------------------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / Aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant as of March 12, 1998 (assuming conversion of Class B Common Stock into Class A Common Stock): $881,000,000 (22,025,960 shares valued at the last sales price of $40.00 on March 11, 1998). See Item 12. Number of shares outstanding of each of the registrant's classes of Common Stock, as of March 12, 1998: Class Number of Shares ----- ---------------- Class A Common Stock, $0.10 par value per share ................. 21,477,996 Class B Common Stock, $0.10 par value per share ................. 2,783,470 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Shareholders for the fiscal year ended December 28, 1997 are incorporated by reference into Parts I and II. Portions of the Proxy Statement for the 1998 Annual Meeting of Shareholders are incorporated by reference into Part III. PART I ITEM 1. BUSINESS GENERAL Interface, Inc. ("Interface" or the "Company") is a global manufacturer, marketer, installer and servicer of products for the commercial and institutional interiors market. With a 40% market share, the Company is the worldwide leader in the modular carpet segment, which includes both carpet tile and two-meter roll goods. The Company's BENTLEY MILLS, PRINCE STREET and FIRTH brands are leaders in the high quality, designer-oriented sector of the broadloom segment. The Company provides carpet installation and maintenance services through its domestic dealer network, Re:Source Americas, and provides specialized carpet replacement services through its Renovisions subsidiary. The Company's Interior Fabrics Group includes the leading U.S. manufacturer of panel fabrics for use in open plan office furniture systems, with a market share in excess of 60%. The Company's specialty products operations produce raised/access flooring systems, antimicrobial additives, adhesives and various other chemical compounds and products. These complementary product offerings, together with an integrated marketing philosophy, enable Interface to take a "total interior solutions" approach to serving the diverse needs of its customers around the world. The Company markets products in over 100 countries around the world under such established brand names as Interface and Heuga in modular carpet; BENTLEY MILLS, PRINCE STREET and FIRTH in broadloom carpets; GUILFORD OF MAINE, STEVENS LINEN, CAMBORNE, TOLTEC and INTEK in interior fabrics and upholstery products; INTERSEPT in chemicals; and C-Tec and Intercell in raised/access flooring systems. The Company utilizes an internal marketing and sales force of over 1,100 experienced personnel (the largest in the commercial floorcovering industry), stationed at over 100 locations in over 35 countries, to market the Company's carpet products and services in person to its customers. The Company's principal geographic markets are North America (70% of 1997 net sales), the United Kingdom and Western Europe (23% of 1997 net sales), and Asia-Pacific (7% of 1997 net sales). The Company is aggressively developing opportunities in Greater China and Southeast Asia, South America, and Central and Eastern Europe, which management believes represent significant growth markets for the Company. While the Company's net sales from U.S. operations have historically been derived primarily from the renovation market, Interface believes that the recovery in the U.S. commercial office market, which began in the mid 1990's, will drive growth in the new construction market over the next several years. From a high of nearly 24% in 1986, suburban office vacancy rates dropped to a decade low of 9.7% as of September 1997, according to CB Commercial/Torto Wheaton Research. In addition, CB Commercial/Torto Wheaton Research reports that 34 out of 54 major metropolitan areas were below the 10% vacancy level in September 1997. The Company believes that a 10% vacancy level is a critical threshold which drives new construction. Given the decade-long downturn in the office market, the Company believes the recovery should continue for a number of years. The Company expects that all of its domestic operations will benefit from these industry developments. In its international markets, the Company expects to benefit from both increased use and acceptance of its products as well as recoveries in the commercial office markets, 2 particularly in Europe. The Company also believes that, within the overall floorcovering market, the demand for modular carpet is increasing worldwide as more customers recognize its advantages in terms of greater design options and flexibility, longer average life, and ease of access to sub-floor wiring. For 1997, the Company had net sales and net income of $1.135 billion and $37.5 million, respectively, the highest in the Company's history. Net sales were composed of floorcovering sales ($898.2 million), interior fabrics sales ($184.7 million) and chemical and specialty product sales ($52.4 million), accounting for 79%, 16% and 5% of total net sales, respectively. The Company achieved a compound annual growth rate in its net sales and net income of 16% and 28%, respectively, over the five-year period from 1993 to 1997. RECENT ACQUISITION On December 30, 1997 (subsequent to the end of fiscal 1997), the Company completed the acquisition of the European carpet businesses of Readicut International plc ("Readicut"), for approximately $50 million, subject to final adjustment. After the planned divestiture of certain assets of Readicut, including its Network Flooring dealer division and Joseph, Hamilton & Seaton Ltd., a contract carpet distributor, the Company's final investment for the retained Readicut businesses is expected to be less than $15 million. The retained businesses will include Firth Carpets Ltd., based in West Yorkshire, England, a leading manufacturer of high quality woven and tufted carpet primarily for the contract markets; and a 40% interest in Vebe Floorcoverings BV, located in the Netherlands, a leading manufacturer of needlepunch carpet. Firth Carpets is located in close proximity to the Company's Camborne Holdings Ltd. fabrics facility and its Shelf, England modular carpet facility, which is expected to allow Interface to realize significant synergies with these existing operations. In February 1998, the Company consummated a joint venture arrangement with the principals of Condor Carpets BV, the Company's commission tufter in Europe, pursuant to which the principals of Condor Carpets acquired a 60% interest in Vebe Floorcoverings. COMPANY STRENGTHS Management believes that the Company benefits from several significant competitive advantages, which will assist it in sustaining and enhancing its position as a market leader. The Company's principal strengths include: STRONG BRAND NAMES WITH REPUTATION FOR QUALITY AND RELIABILITY. The Company's products are known in the industry for their high quality and reliability. The Company's strong brand names in carpets, interior fabrics, and raised/access flooring systems are leaders in the industry. INTERFACE AND HEUGA are the pre-eminent brand names in carpet tiles for commercial and institutional use worldwide. The PRINCE STREET and BENTLEY MILLS brands are rated the number one and two brands, respectively, for carpet design in the U.S. according to a 1997 survey of interior designers published in the Floor Focus industry publication. Internationally, Firth Carpets has a reputation in Europe for manufacturing high-quality woven and tufted products. GUILFORD AND CAMBORNE are leading brand names in their respective markets for interior fabrics. 3 EFFICIENT AND LOW-COST GLOBAL MANUFACTURING OPERATIONS. The Company's global manufacturing capabilities are an important competitive advantage to Interface in serving the needs of multinational corporate customers who require uniform products and services at their various locations around the world. Global manufacturing locations enable the Company to compete effectively with local producers in its international markets, while also affording international customers more favorable delivery times and freight costs. The Company's capital investment program to consolidate and modernize the yarn manufacturing operations of its Interior Fabrics Group has resulted in significant efficiencies and cost savings, as well as new product capabilities. In addition, this has allowed Interface to respond to a shift in demand towards lighter weight, less expensive fabrics by original equipment manufacturer (OEM) panel fabric customers. The Company's new, state-of-the-art yarn manufacturing facility in Guilford, Maine began operating in 1996, and became fully operational in July 1997. DEDICATED DISTRIBUTION AND SERVICE CAPABILITY THROUGH RE: SOURCE AMERICAS. The Company's dealer network, Re:Source Americas, now consists of 18 owned and 75 affiliated dealers. The Company believes that the service, and marketing and distribution capabilities added by Re:Source Americas have resulted in (i) increased sales of Company products as dealers in the network have begun to supply Company products on a preferred basis, (ii) enhanced customer satisfaction by assisting customers in the process of selecting, purchasing, installing, maintaining and recycling carpet products, (iii) improved pricing for the Company's floorcovering products and (iv) increased operating margins by consolidating administrative functions and coordinating and streamlining sales efforts by Company and dealer sales personnel. STRONG CUSTOMER AND ARCHITECTURAL AND DESIGN COMMUNITY RELATIONSHIPS. The Company focuses its sales efforts at the design phase of commercial projects. Interface personnel cultivate relationships both with the owners and users of the facilities involved in the projects and with specifiers such as architects, engineers, interior designers and contracting firms who are directly involved in specifying products and often make or significantly influence purchase decisions. The Company emphasizes its product design and styling capabilities and its ability to provide creative, high-value solutions to its customers' needs. Interface marketing and sales personnel also serve as a primary technical resource for the Company's customers, both with respect to product maintenance and service as well as design matters. AWARD-WINNING AND INNOVATIVE PRODUCT DESIGN AND DEVELOPMENT CAPABILITIES. The Company's product design and development capabilities give Interface a significant competitive advantage. Interface has an exclusive consulting contract with the leading design firm Oakey Designs to augment the Company's internal research, development and design staff. Since engaging Oakey Designs in 1994, the Company has introduced more than 130 new carpet designs in the U.S. and has enjoyed considerable success in winning U.S. carpet industry design awards bestowed by the International Interior Design Association (IIDA), 4 particularly in the carpet tile division. In 1996, Oakey Designs' services were extended to the Company's international carpet operations, and an affiliate of that firm was engaged to provide similar design services to the Company's interior fabrics business. SEASONED MANAGEMENT TEAM AND COMMITTED EMPLOYEES. An important component of the Company's recent success has been the continued strengthening of its management team and its commitment to developing and maintaining an enthusiastic and collaborative work force. In 1993, Ray C. Anderson, the Company's Chairman and Chief Executive Officer, hired industry veteran Charles R. Eitel to manage the Company's domestic carpet tile operations. Mr. Eitel became President and Chief Operating Officer of the Company in February 1997. Mr. Anderson and Mr. Eitel have put in place a team of seasoned executives to manage the Company's continued growth and diversification. In addition, over the past three years, the Company has made a substantial investment in its approximately 7,300 employees worldwide. In 1997, for example, the Company created an internal employee training and education team, known as One World Learning, which implements corporate-wide learning programs. In December 1997, Fortune Magazine rated Interface one of the top 100 employers in the U.S. on the strength of the Company's commitment to its employees. BUSINESS STRATEGY AND PRINCIPAL INITIATIVES Interface's long-standing corporate strategy has been to diversify and integrate worldwide. The Company seeks to diversify by developing internally or acquiring related product lines and businesses in the commercial interiors field; and to integrate by identifying and developing synergies and operating efficiencies among the Company's products and global businesses. In continuing that strategy, the Company is pursuing the following principal strategic initiatives: GLOBALIZATION OF THE "MASS CUSTOMIZATION" PRODUCTION STRATEGY. The Company is implementing aspects of its successful U.S. mass customization production initiative at its floorcovering operations in Europe and Asia-Pacific and at its interior fabrics operations. Through mass customization the Company is able to respond to customers' requirements for custom or highly styled products by quickly and efficiently producing both custom samples and the ultimate products, and to more readily determine proven "winners" that can be manufactured for inventory for broader distribution. Mass customization was introduced to the Company's U.S. carpet tile business in 1994, and its principal components include (i) developing a simplified but versatile yarn utilization system, (ii) investing in highly efficient, state-of-the-art tufting and custom sampling equipment, and (iii) utilizing innovative design and styling to create products. This strategy has resulted in substantial operating improvements in the U.S. carpet tile business, including increased margins and reduced inventory levels of both raw materials and standard products. "TOTAL INTERIOR SOLUTIONS". The Company's objective is to use the diverse but complementary nature of its product lines to offer "total interior solutions" to its customers worldwide, meeting their diverse needs for products and 5 services. The Company combines its global marketing and manufacturing capabilities to successfully target multinational companies and compete effectively in local markets worldwide. The Company has organized a 45-person global account team with responsibility for the Company's largest multinational customers and prospects, and is implementing a marketing communications network to link its worldwide marketing and sales force. The Company has also consolidated management responsibility for certain key operational areas, which has significantly increased global cooperation and coordination in product planning, production and marketing activities--in effect, "hooking it up" worldwide. In addition, the new Re:Source Americas network provides a channel for delivery of a variety of services and products offered by the Company in addition to commercial carpet, including carpet replacement and reclamation services, furniture moving and installation, adhesives and cleaning chemicals, specialty products, and raised/access flooring systems. ECOLOGICAL SUSTAINABILITY THROUGH WAR-ON-WASTE AND ECOSENSE PROGRAMS. In January 1995, the Company began a worldwide war-on-waste initiative referred to internally as "QUEST". Applying a zero-based definition of waste (broadly defined as any measurable cost that goes into manufacturing a product but does not result in identifiable value to the customer), the Company realized an aggregate of approximately $50 million in savings through eliminating such waste from 1995 to 1997. Management has identified an additional $80 million of waste and believes the Company can eliminate half of such waste by the end of 2001. The war-on-waste represents a first step in the Company's broader EcoSense initiative, which is the Company's long-range program to achieve greater resource efficiency and, ultimately, ecological "sustainability"--that is, the point at which Interface is no longer a net "taker" from the earth. The Company believes that its pursuit of these initiatives provides a competitive advantage in marketing its products to an increasing number of customers. SELECTIVE STRATEGIC ACQUISITIONS. The Company has successfully expanded its business and product lines through strategic acquisitions. The Company expanded its carpet operations with the acquisitions of Heuga Holdings B.V. (now Interface Europe B.V.) in 1988, Bentley Mills, Inc. in 1993, Prince Street Technologies, Ltd. in 1994 and Firth Carpets in 1998, while its fabrics business has been expanded significantly with the acquisitions of certain assets of Stevens Linen Associates, Inc. in 1993, Toltec Fabrics, Inc. and the Intek division of Springs Industries, Inc. in 1995 and Camborne in 1997. In addition, the Company's acquisitions of Renovisions, Inc. in 1996 and Facilities Resource Group, Inc. in 1997, and the formation of the Re:Source Americas dealer network through acquisitions primarily in 1996 and 1997, have enabled the Company to expand rapidly into a variety of commercial interior services. The Company intends to continue to selectively target companies and product lines that complement existing product lines and further the Company's ability to provide total interior solutions for its customers. The Company believes that its cash flow from operations will enable it to continue to capitalize on attractive strategic acquisition opportunities. 6 MODULAR AND BROADLOOM CARPET PRODUCTS The Company is the world's largest manufacturer and marketer of modular carpet, which includes carpet tile and two-meter roll goods, with a 40% worldwide market share. Broadloom carpet generally consists of tufted carpet sold primarily in twelve-foot rolls. The Company's broadloom carpet operations--Bentley Mills, Prince Street and Firth Carpets--focus on the high quality, designer-oriented sector of the U.S. and U.K. broadloom carpet markets. Through a joint venture arrangement with the principals of Condor Carpets, the Company also has a 40% interest in Vebe Floorcoverings, which management believes is the low-cost European manufacturer of needlepunch carpet. MODULAR CARPET. Marketed under the leading global brands INTERFACE and HEUGA, the Company's free-lay modular carpet system utilizes carpet tiles cut in precise, dimensionally stable squares (usually 50 square centimeters) to produce a floorcovering which combines the appearance and texture of broadloom carpet with the advantages of a modular carpet system. The growing use of open plan interiors and modern office arrangements utilizing demountable, movable partitions and modular furniture systems has encouraged the use of carpet tile, as compared to other soft surface flooring products. The Company's GLASBAC(R) echnology employs a unique, fiberglass-reinforced polymeric composite backing that allows the tile to be installed and remain flat on the floor without the need for general application of adhesives or use of fasteners. This type of carpet tile thus may be easily removed and replaced, permitting rearrangement of office partitions and modular furniture systems without the inconvenience and expense associated with removing, replacing or repairing other soft surface flooring products, including broadloom carpeting. Carpet tile facilitates access to sub-floor telephone, electrical, computer and other wiring by lessening disruption of operations, and also eliminates the cumulative damage and unsightly appearance commonly associated with frequent cutting of conventional carpet as utility connections and disconnections are made. Because a relatively small portion of a carpet installation often receives the bulk of traffic and wear, the ability to rotate carpet tiles between high traffic and low traffic areas and to selectively replace worn tiles can significantly increase the average life and cost efficiency of the floorcovering. The Company uses a number of conventional and technologically advanced methods of carpet construction to produce carpet tiles in a wide variety of colors, patterns, textures, pile heights and densities designed to meet both the practical and aesthetic needs of a broad spectrum of commercial interiors--particularly offices, health care facilities, airports, educational and other institutions, and retail facilities. The Company's carpet tile systems permit distinctive styling and patterning that can be used to complement interior designs, to set off areas for particular purposes and to convey graphic information. While the Company continues to manufacture and sell the major portion of its carpet tile in standard styles, an increasing volume of the Company's modular carpet sales are custom or made-to-order products designed to meet particular customer specifications. 7 The Company produces and sells carpet tile specially adapted for the health care facilities market. The Company's carpet tile possesses characteristics--such as the use of the INTERSEPT(R) antimicrobial, static-controlling nylon yarns, and thermally pigmented, colorfast yarns--making it suitable for use in such facilities in lieu of hard surface flooring. The Company also manufactures and sells two-meter roll goods which are structure-backed and offer many of the advantages of both carpet tiles and broadloom carpet. They are often used in conjunction with carpet tiles to create special design effects. The Company's current principal customers for such products are in the education, health care and government sectors. The Company believes, however, that the demand for two-meter roll goods is increasing generally within the commercial and institutional interiors market, and expects two-meter roll goods to account for a growing percentage of its U.S. modular carpet sales in the future. BROADLOOM CARPET. The Company has obtained a significant share of the high-end, designer-oriented broadloom carpet segment by combining innovative product design and styling capabilities and short production and delivery times with a marketing strategy geared toward serving and working closely with interior designers, architects and other specifiers. Prince Street's design-sensitive broadloom products center around unique, multi-dimensional textured carpets with a hand-tufted look, while Bentley Mills' designs emphasize the dramatic use of color. The PRINCE STREET and BENTLEY MILLS brands were rated the number one and two brands, respectively, for carpet design in the U.S. according to a 1997 survey of interior designers published in the FLOOR FOCUS industry publication. In addition, Firth Carpets has a reputation for manufacturing high-quality woven and tufted products, mostly using woolen spun blends. Vebe Floorcoverings, one of the largest needlepunch carpet producers in Europe, focuses its business on volume sales to large distributors of carpet products. SERVICES The Company provides commercial carpet installation and maintenance services through the Re:Source Americas network. The Re:Source Americas network presently comprises approximately 93 owned or affiliated commercial floorcovering dealers strategically located throughout the major metropolitan areas of the United States. The new network: (i) allows the Company to influence and monitor customer satisfaction throughout the product ownership cycle, from specification through reclamation; (ii) reduces the Company's cost of selling by bolstering efforts of sales representatives at the mill level with dealer-level support; (iii) improves pricing for products; and (iv) achieves efficiencies by augmenting administrative functions of dealers. The Re:Source Americas network also provides a channel for delivery of a variety of services and products offered by the Company in addition to commercial carpet, including carpet replacement services offered by Renovisions, Inc., adhesives and cleaning chemicals manufactured by Rockland React-Rite, Inc., specialty products manufactured by Pandel, Inc., raised/access flooring systems produced by Interface Architectural Resources, Inc., furniture installation by Facilities Resource Group, and carpet maintenance through the Company's IMAGE(R) maintenance system. 8 Renovisions, acquired by the Company in February 1996, is a nationwide installation services firm that has pioneered a new method of carpet replacement. The RENOVISIONS(R) process utilizes patented lifting equipment and specialty tools to lift office equipment and modular workstations in place, permitting the economical replacement of existing carpet with virtually no disruption of the customer's business. Other proprietary products facilitate the movement of file cabinets, office furniture, and even complete workstations without the inefficiency and disruption associated with unloading and dismantling the items being moved. Facilities Resource Group, acquired by the Company in July 1997, is a Chicago, Illinois-based provider of furniture installation and related services. The Company intends to replicate Facilities Resource Group's business in various other markets throughout the United States. In the U.S., the Company also provides carpet maintenance services through its IMAGE maintenance system. The IMAGE system includes a custom-engineered maintenance methodology and a line of cleaning chemicals manufactured by Rockland React-Rite. In Europe, the Company has recently re-launched the European version of the IMAGE program, pursuant to which the Company has licensed selected independent service contractors to provide carpet maintenance services. MARKETING AND SALES The Company traditionally has focused its carpet marketing strategy on major accounts, seeking to build lasting relationships with national and multinational end-users, and on specifiers, such as architects, engineers, interior designers, and contracting firms who often make or significantly influence the purchase decision. The acquisitions of Bentley Mills and Prince Street significantly strengthened the Company's relationships with interior designers and architects and has enhanced the Company's ability to target those and other specifiers at the critical design stage of commercial projects. The Company emphasizes sales to the commercial office sector, both new construction and renovation, as well as to health care facilities, governmental institutions and public facilities, including libraries, museums, convention and hospitality centers, airports, schools and hotels. The Company's marketing efforts are enhanced by the well-known brand names of its carpet products, including INTERFACE and HEUGA in modular carpet, and BENTLEY MILLS, PRINCE STREET and FIRTH in broadloom carpet. An important part of the Company's marketing and sales efforts involves the preparation of custom made samples of requested carpet designs, in conjunction with the development of innovative product designs and styles that meet the customer's particular needs. (See "Business Strategy and Principal Initiatives", above, and "Product Design, Research and Development", below.) The Company's mass customization initiative, implemented for its U.S. modular carpet operations in 1994, included the simplification of the Company's carpet manufacturing operations and the purchase of five custom sample production machines, which significantly improved its ability to respond quickly and efficiently to requests for samples. The turnaround time for the Company to produce made-to-order carpet samples to customer specifications has been reduced from an average of 30 days in 1993 to 3 days in 1997, and the average number of carpet samples produced per month has increased from 90 per month in 1993 to over 1,400 per month in 1997. This ability 9 has significantly enhanced the Company's marketing and sales efforts, and has increased the Company's volume of higher margin custom or made-to-order sales. The Company primarily uses its internal marketing and sales force of over 1,100 persons to market its carpet products, and it also relies on Re:Source Americas network dealers to bolster its sales efforts. The Company maintains a Creative Services staff that works directly with clients on major design projects. The efforts of these personnel in helping with product selection, customer specifications and unique approaches to design and styling issues are an important component of the marketing aspect of the Company's mass customization approach. In order to implement its global marketing efforts, the Company has product and design studios in the United States, England, France, Germany, Spain, Norway, the Netherlands, Australia, Japan and Singapore. The Company expects to continue to open such offices in other locations around the world as necessary to capitalize on emerging marketing opportunities. As part of its full service approach to marketing, the Company maintains a field services staff to provide on-site customer service for both in-progress and completed installations. In the U.S., the Re:Source Americas network significantly enhances the Company's ability to provide customer service and derive marketing benefits. MANUFACTURING The Company manufactures carpet in the United States, the Netherlands, the United Kingdom, Canada, Australia and Southeast Asia. In addition to enhancing the Company's ability to develop a strong local presence in foreign markets, having foreign manufacturing operations enables the Company to supply its customers with carpet from the location offering the most advantageous terms for delivery times, exchange rates, duties and tariffs and freight expense. The Company believes that the ability to offer consistent products and services on a worldwide basis at attractive prices is an important competitive advantage in servicing multinational customers seeking global supply relationships. Consistent with this strategy, the Company in 1996 entered into a joint venture (owned 70% by the Company) with BASF Corporation and Shanghai China Textile International Science & Technological Industrial City Development Company, a Chinese government-sponsored company, to build a carpet tile manufacturing facility in China, which is expected to be operational in April 1998. The Company will consider additional locations for manufacturing operations in other parts of the world as necessary to meet the demands of customers in growing international markets. The Company currently obtains a significant percentage of its requirements for synthetic fiber (the principal raw material used in the Company's carpet products) from DuPont. The Company believes that its arrangements with DuPont permit the Company to obtain favorable terms. However, the Company currently purchases fiber from other long-term suppliers, and there are adequate alternative sources of supply from which the Company could fulfill its synthetic fiber requirements if its arrangements with DuPont should change. Other raw materials used by the Company are also readily available from a number of sources. 10 In 1995 and 1996, the Company implemented a manufacturing plan in which it standardized its worldwide manufacturing procedures. In connection with the implementation of this plan, the Company adopted global standards for its tufting equipment, yarn systems and product styling, and changed its standard carpet tile size from 18 square inches to 50 square centimeters. The Company believes that changing its standard carpet tile size has allowed it to reduce operational waste and fossil fuel energy consumption, in addition to offering consistent product sizing for its global customers. The Company's significant international operations are subject to various political, economic and other uncertainties, including risks of restrictive taxation policies, foreign exchange restrictions, changing political conditions and governmental regulations. The Company also receives a substantial portion of its revenues in currencies other than U.S. dollars, which makes it subject to the risks inherent in currency translations. Although the Company's ability to manufacture and ship products from facilities in several foreign countries reduces the risks of foreign currency fluctuations it might otherwise experience, and the Company also engages from time to time in hedging programs intended to reduce further those risks, the scope and volume of the Company's global operations make it impossible to eliminate completely all foreign currency translation risks as a factor for the Company's financial results. COMPETITION The commercial floorcovering industry is highly competitive. The Company competes, on a global basis, in the sale of its modular and broadloom carpet with other carpet manufacturers and manufacturers of vinyl and other types of floorcoverings. Although the industry recently has experienced significant consolidation, a large number of manufacturers remain in the industry. Management believes that the Company is the largest manufacturer of modular carpet in the world, possessing a global market share that is more than two times that of its nearest competitor. However, a number of domestic and foreign competitors manufacture modular carpet as one segment of their business, and certain of these competitors have financial resources in excess of the Company's. The Company believes the principal competitive factors in its primary floorcovering markets are quality, design, service, broad product lines, product life, marketing strategy, and pricing. In the commercial office market, modular carpet competes with various floorcoverings, of which broadloom carpet is the most common. In the health care facilities market, the Company's products compete primarily with resilient tile. The Company believes that treatment of its modular carpet with the INTERSEPT antimicrobial chemical agent is a material factor in its ability to compete successfully in the health care market. The quality, service, design, longer average life, flexibility (design options, selective rotation or replacement, use in combination with roll goods) and convenience of the Company's modular carpet are its principal competitive advantages, which are offset in part by its higher initial cost for comparable grades of broadloom carpet. The acquisitions of Bentley Mills, Prince Street and Firth Carpets, with their broadloom carpet product lines, have enhanced the Company's competitive position by 11 enabling the Company to offer one-stop shopping to commercial carpet customers, and thus, to capture some sales that would have gone to competitors. In addition, the Company believes that its global manufacturing capabilities are an important competitive advantage in serving the needs of multinational corporate customers. Finally, the Company believes that the formation of the Re:Source Americas network, and the resulting improvement in customer service, has further enhanced the Company's competitive position. INTERIOR FABRICS PRODUCTS The Company, through its Interior Fabrics Group, designs, manufactures and markets specialty fabrics for open plan office furniture systems and commercial interiors. Sales of panel fabrics to OEMs of movable office furniture systems constitute approximately 50% of total U.S. fabrics sales in fiscal 1997. In addition, the Company produces woven and knitted seating fabrics, wall covering fabrics, fabrics used for vertical blinds in office interiors, and fabrics used for cubicle curtains in health care facilities. Open plan office furniture systems are typically panel-enclosed work stations customized to particular work environments. The open plan concept offers a number of advantages over conventional office designs, including more efficient floor space utilization, reduced energy consumption and greater flexibility to redesign existing space. Since carpet and fabrics are used in the same types of commercial interiors, the Company's carpet and interior fabrics operations are able to coordinate the color, design and marketing of both product lines to their respective customers as part of the Company's "total interior solutions" approach. The Company, in recent years, has diversified and expanded significantly both its product offerings and markets for interior fabrics. The Company's 1993 acquisition of the STEVENS LINEN(TM) lines added decorative, upscale upholstery fabrics and specialty textile products to the Interior Fabrics Group's traditional product offerings. The Company's June 1995 acquisition of Toltec Fabrics, a manufacturer and marketer of fabric for the contract and home furnishings upholstery markets, enhanced the Company's presence in the contract jobber market; and its December 1995 acquisition of the Intek division of Springs Industries, a manufacturer experienced in the production of lighter-weight panel fabrics, has strengthened the Interior Fabrics Group's capabilities in that market. In addition, the June 1997 acquisition of Camborne Holdings Ltd., the United Kingdom's leading textile manufacturer for the office and contract furnishings markets, has enhanced the Company's access to the European and Asia-Pacific markets. The Camborne acquisition also added wool upholstery fabrics specifically designed for the European market to the Interior Fabrics Group's product offering. All of these developments have reinforced the Interior Fabrics Group's dominant position with OEMs of movable office furniture systems. The Company manufactures fabrics made of 100% polyester, as well as wool-polyester blends and numerous other natural and 12 man-made blends, which are either woven or knitted. Its products feature a high degree of color consistency, natural dimensional stability and fire retardancy, in addition to their overall aesthetic appeal. All of the Company's product lines are color and texture coordinated. The Company seeks continuously to enhance product performance and attractiveness through experimentation with different fibers, dyes, chemicals and manufacturing processes. Product innovation in the interior fabrics market (similar to the floorcoverings market) is important to achieving and maintaining market share. (See "Business Strategy and Principal Initiatives", above, and "Product Design, Research and Development", below.) In 1997, the Company introduced its TERRATEX(TM) line of panel fabrics. The TERRATEX label is intended to denote fabrics manufactured from 100% recycled polyester, and will include both new products and traditional product offerings. The first fabric to bear the TERRATEX label is Guilford of Maine's FR701(R) Line. The Company intends for all of the Interior Fabrics Group's companies to manufacture and market products using the TERRATEX label. The Company anticipates that future growth opportunities will arise from the growing market for retrofitting services, where fabrics are used to re-cover existing panels. In addition, the increased importance being placed on the aesthetic design of office space should lead to a significant increase in upholstery fabric sales. Management also believes that significant growth opportunities exist in international sales, in domestic health care markets, in contract wallcoverings, and in the provision of ancillary textile processing services such as the lamination of fabrics onto substrates for pre-formed panels. MARKETING AND SALES The Company's principal interior fabrics customers are OEMs of movable office furniture systems. The Interior Fabrics Group sells to essentially all of the major office furniture manufacturers. The Interior Fabrics Group also sells to manufacturers and distributors of wallcoverings, vertical blinds, cubicle curtains, acoustical wallboards, ceiling tiles and residential furniture, and, since the acquisition of Toltec Fabrics, to contract jobbers. The GUILFORD OF MAINE, STEVENS LINEN, TOLTEC, INTEK and CAMBORNE brand names are well-known in the industry and enhance the Company's fabric marketing efforts. The majority of the Company's sales are made through the Interior Fabrics Group's own sales force. The sales team works closely with designers, architects, facility planners and other specifiers who influence the purchasing decisions of buyers in the interior fabrics segment. In addition to facilitating sales, the resulting relationships also provide the Company with marketing and design ideas that are incorporated into the development of new product offerings. The Interior Fabrics Group maintains a design studio in Dudley, Massachusetts which facilitates coordination between its in-house designers and the design staffs of major customers. The Interior Fabrics Group's design capabilities have also benefited from the product design services provided to it by an affiliate of Oakey Designs. (See "Business Strategy and Principal Initiatives", above, and "Product Design, Research and Development", below.) 13 The Company's fabric sales offices are located in Saddle Brook, New Jersey, Grand Rapids, Michigan and the United Kingdom. The Interior Fabrics Group also has marketing and distribution facilities in Canada and Hong Kong, and sales representatives in Japan, Hong Kong, Singapore, Korea and South Africa. The Company has sought increasingly, over the past several years, to expand its export business and international operations in the fabrics segment, both to accommodate the demand of principal OEM customers that are expanding their businesses overseas, and to facilitate additional coordinated marketing to multinational customers of the Company's carpet business as part of the Company's "total interior solutions" approach. MANUFACTURING The Company's fabrics manufacturing facilities are located in Maine, Massachusetts, Michigan, North Carolina and West Yorkshire, England. The production of synthetic and wool blended fabrics is relatively complex and requires many steps. Raw fiber is placed in pressurized vats, and dyes are then forced into the fiber. Particular attention is devoted to the dyeing process, which requires a high degree of expertise in order to achieve color consistency. Following dyeing, the fiber is blended and proceeds through multiple steps, including carding, spinning, cone winding, twisting, dressing, weaving and finishing. All raw materials used by the Company are readily available from a number of sources. The Interior Fabrics Group has recently begun using 100% recycled fiber manufactured from PET soda bottles in its manufacturing process. In response to a shift in the Interior Fabrics Group's traditional panel fabric market toward lighter weight, less expensive products, the Company implemented a major capital investment program in 1994 which included the construction of a new facility and the acquisition of equipment to enhance the efficiency and breadth of the Interior Fabrics Group's yarn manufacturing processes. The program is designed to improve the Interior Fabrics Group's cost effectiveness in producing such lighter weight fabrics, reduce manufacturing cycle time, and enable the Interior Fabrics Group to reinforce its product leadership position with its OEM customers. The Interior Fabrics Group already has begun to achieve cost savings as a result of this program. The acquisition of Intek in December 1995 provided the Company with immediate and significant capabilities in the efficient production of lighter weight, less expensive panel fabrics and the acquisition of Camborne provided a European-based manufacturing facility and much needed expertise in the production of wool fabrics. The Company believes that it has recently been successful in designing fabrics that have simplified the manufacturing process, thereby reducing complexity while improving efficiency and quality. Through the use of existing raw materials, new fabrics are being manufactured using the mass customization production strategy. By employing the capabilities that are now available with the Company's new manufacturing facility, the Company anticipates that its ability to apply the mass customization production strategy to the manufacture of fabrics will be expanded. See "Business Strategy and Principal Initiatives", above. 14 The Company offers textile processing services through the Interior Fabrics Group's Component Technologies division in Grand Rapids, Michigan. Such services include the lamination of fabrics onto substrates for pre-formed office furniture system panels, facilitating easier and more cost effective assembly of the system components by the Interior Fabrics Group's OEM customers. COMPETITION The Company competes in the interior fabrics market on the basis of product design, quality, reliability, price and service. By electing to concentrate on the open plan office furniture systems segment, the Interior Fabrics Group has been able to specialize its manufacturing capabilities, product offerings and service functions, resulting in a leading market position. Through Interface Interior Fabrics, Inc. (formerly Guilford of Maine, Inc.), Toltec, Camborne and Intek, the Company is the largest U.S. manufacturer of panel fabric for use in open plan office furniture systems. Drawing upon its dominant position in the panel fabric segment and through its strategic acquisitions, the Company has been successfully diversifying its product offerings for the commercial interiors market to include a variety of non-panel fabrics, including upholstery, cubicle curtains, wallcoverings, ceiling fabrics and window treatments. The competition in these segments of the market is highly fragmented and includes both large, diversified textile companies, several of which have greater financial resources than the Company, as well as smaller, non-integrated specialty manufacturers. However, the Company's capabilities and strong brand names in these segments should enable it to continue to compete successfully. SPECIALTY PRODUCTS The Interface Specialty Products Group is composed of: Rockland React-Rite, which develops, manufactures and markets specialty chemical products and which includes the Company's INTERSEPT antimicrobial sales and licensing program; Pandel, which produces vinyl carpet tile backing and specialty mat and foam products; and Interface Architectural Resources, which produces and markets raised/access flooring systems. One of the Company's leading chemical products, in terms of applicability for the commercial and institutional interiors market, is its proprietary antimicrobial chemical compound, sold under the registered trademark INTERSEPT. The Company uses Intersept in many of its carpet products and has licensed Intersept to other companies for use in a number of products that are noncompetitive with the Company's products, such as paint, vinyl wallcoverings, ceiling tiles and air filters. The Company also manufactures a line of adhesives for carpet installation, as well as a line of carpet cleaning and maintenance chemicals, which it markets as part of its IMAGE maintenance system. In addition, the Company produces and markets PROTEKT(2)(TM), a proprietary soil and stain retardant treatment; water-proof sheathing for the fiber optic cable industry and other applications; accelerators, used to speed the curing process for rubber used in tires, hoses and other products; and FATIGUE FIGHTER(R), an impact-absorbing modular flooring system typically used where people stand for extended periods. 15 The Company manufactures cable management raised/access flooring systems, a specialty product which it markets through Interface Architectural Resources. The initial product offering, marketed under the name INTERCELL(R), is a low-profile (total height of less than three inches) cable management flooring system, particularly well suited for use in the renovation of existing buildings. In 1995, the Company acquired the rights to the INTERSTITIAL SYSTEMS(TM) access flooring product, a patented, multiple plenum system that serves to separate pressurized, climate-controlled air flow from the electrical and telecommunications cables included within the same access flooring system. In February 1996, the Company acquired C-Tec, Inc., the second largest manufacturer of raised/access flooring systems in the United States. Interface Architectural Resources markets the successful C-TEC line of products (TEC-COR and TEC-CRETE), which combine the tensile strength of steel and the compressive strength of concrete to create a durable, uniform and sound-absorbent panel which comes in a variety of surfaces. In September 1997, Interface Architectural Resources and Herman Miller, Inc. announced their intent to form a joint venture company to produce integrated work environment solutions for commercial environments. Herman Miller is a globally recognized leader in the design and manufacture of innovative office furniture systems for a wide range of commercial and health care environments. The Company believes that the joint venture, which is subject to the negotiation and execution of a definitive agreement, will effectively combine Herman Miller's expertise in flexible office furniture systems with the Company's command of architectural flooring products. Interface Architectural Resources and Herman Miller have begun to develop the joint venture's initial product concept. INTERFACE RESEARCH CORPORATION Interface Research Corporation provides technical support and research and development for the entire family of Interface companies. Recent developments by Interface Research include a new polycarbite polymer carpet tile backing, which has demonstrated excellent performance in field tests conducted to date. The new backing material has also proved to be useful as an improved and lower cost precoat for broadloom applications. Interface Research Corporation also provides significant support to the Company's ECOSENSE initiative, primarily through its efforts in identifying recyclable products and raw materials and procedures to achieve, ultimately, closed-loop recycling of the Company's carpet products. A major technical effort has been launched to define optimum recycling processes for the Company's carpet and fabric products. See "Environmental Initiatives". PRODUCT DESIGN, RESEARCH AND DEVELOPMENT The Company maintains an active research, development and design staff of approximately 100 persons, and also draws on the research and development efforts of its suppliers, particularly in the areas of fibers, yarns and modular carpet backing materials. Innovation and increased customization in product design and styling are the principal focus of the Company's product development efforts. The Company's carpet design and development team is recognized as the industry leader in carpet design and 16 product engineering for the commercial and institutional markets. Under the leadership of David Oakey since January 1994 (pursuant to the Company's exclusive consulting contract with Oakey Designs), the Company has introduced over 130 new carpet designs during the last four years and has enjoyed considerable success in winning U.S. carpet industry awards bestowed by the IIDA. In addition, PRINCE STREET and BENTLEY MILLS were rated the number one and two brands, respectively, for carpet design in the U.S., according to a 1997 survey by the FLOOR FOCUS industry publication. Mr. Oakey was also instrumental in the Company's implementation of a new product development concept--"simple inputs, pretty outputs"--resulting in the ability to efficiently produce many products from a single yarn system. The Company's mass customization production approach evolved, in major part, from this concept. In addition to increasing the number and variety of product designs (which enables the Company to increase high margin custom sales), the mass customization approach increases inventory turns and reduces inventory levels (for both raw materials and standard products) and its related costs because of the Company's more rapid and flexible production capabilities. Oakey Designs' services have been extended to the Company's international carpet tile operations and its domestic and international broadloom companies. An affiliate of Oakey Designs has been engaged to provide similar design services to the Company's interior fabrics business. The Company expects increased levels of innovation in product design and development for those divisions to be achieved in the future. ENVIRONMENTAL INITIATIVES An important initiative of the Company over the past several years has been the development of the Envirosense Consortium, an organization of companies concerned with addressing workplace environmental issues, particularly poor indoor air quality. The Consortium now totals 14 member organizations, including interior products manufacturers (a number of which are licensees of the Company's Intersept antimicrobial agent), professional service organizations and design professionals. In the latter part of 1994, the Company commenced a new industrial ecology initiative called ECOSENSE, inspired in major part by the interest of important customers concerned about the environmental implications of how they and their suppliers do business. ECOSENSE is directed towards the elimination of energy and raw materials waste in the Company's businesses, and, on a broader and more long-term scale, the practical reclamation--and ultimate restoration--of shared environmental resources. The initiative involves a commitment by the Company (i) to learn to meet its raw material and energy needs through recycling of carpet and other petrochemical products and harnessing benign energy sources, and (ii) to pursue the creation of new processes to help sustain the earth's non-renewable natural resources. The ECOSENSE initiative includes the Company's war-on-waste, pursuant to which the Company realized an aggregate of $50 million in savings from 1995 to 1997. See "Business Strategy and Principal Initiatives--Ecological Sustainability through War-on-Waste and EcoSense Programs". 17 The Company has engaged some of the world's leading authorities on global ecology as environmental consultants. The current list of consultants includes: Paul Hawken, author of THE ECOLOGY OF COMMERCE, THE NEXT ECONOMY, and Chairman of The Natural Step, U.S.A.; Bill McDonough, Dean of Architecture, University of Virginia; Amory Lovins, energy consultant, director of Rocky Mountain Institute; Daniel Quinn, author of ISHMAEL, PROVIDENCE, and THE STORY OF B; John Picard, President of E2, American environmental consultant; David Brower, former executive director of the Sierra Club, and founder of The Earth Island Institute; Jonathan Porritt, director of Forum for the Future; Bernadette Cozart, founder of the Greening of Harlem Coalition; and Bill Browning, the director of the Rocky Mountain Institute's Green Development Services. The Company believes that its environmental initiatives are valued by its employees and an increasing number of its important customers and provide a competitive advantage in marketing products to such customers. The Company also believes that the resulting long-term resource efficiency (reduction of wasted environmental resources) will ultimately produce cost savings to the Company. ENVIRONMENTAL MATTERS The Company's operations are subject to federal, state and local laws and regulations relating to the generation, storage, handling, emission, transportation and discharge of materials into the environment. Management believes that the Company is in substantial compliance with all applicable federal, state and local provisions relating to the protection of the environment. The costs of complying with environmental protection laws and regulations have not had a material adverse impact on the Company's financial condition or results of operations in the past and are not expected to have a material adverse impact in the future. BACKLOG The Company's backlog of unshipped orders was approximately $153.4 million at February 22, 1998, compared to approximately $123.2 million at February 23, 1997. Historically, backlog is subject to significant fluctuations due to the timing of orders for individual large projects and currency fluctuations. All of the backlog of orders at February 22, 1998 is expected to be shipped during the succeeding six to nine months. PATENTS AND TRADEMARKS The Company owns numerous patents in the United States and abroad on its modular carpet and manufacturing processes and on the use of its INTERSEPT antimicrobial chemical agent in various products. The duration of United States patents is between 14 and 20 years from the date of filing of a patent application or issuance of the patent; the duration of patents issued in other countries varies from country to country. The Company considers its know-how and technology more important to its current business than patents, and, accordingly, believes that expiration of existing patents or nonissuance of patents under pending applications would not have a material adverse effect on its operations. However, the Company maintains an active patent and trade secret program in order to protect its proprietary technology, know-how and trade secrets. 18 The Company also owns numerous trademarks in the United States and abroad. In addition to the United States, the primary countries in which the Company has registered its trademarks are the United Kingdom, Germany, Italy, France, Canada, Australia, and Japan. Some of the more prominent registered trademarks of the Company include: INTERFACE, HEUGA, INTERSEPT, GLASBAC, GUILFORD OF MAINE, BENTLEY and PRINCE STREET TECHNOLOGIES. Trademark registrations in the United States are valid for a period of 10 years and are renewable for additional 10-year periods as long as the mark remains in actual use. The duration of trademarks registered in other countries varies from country to country. FINANCIAL INFORMATION BY GEOGRAPHIC AREAS The Notes to the Company's Consolidated Financial Statements sets forth information concerning the Company's sales, income and assets by geographic areas. See Item 8. EMPLOYEES At February 28, 1998, the Company employed a total of approximately 7,300 employees worldwide. Of such employees, approximately 2,000 are clerical, sales, supervisory and management personnel and the balance are manufacturing personnel. The Company's Facilities Resource Group subsidiary and six of the commercial flooring dealers recently acquired by the Company have employee groups that are represented by unions. In addition, certain of the Company's production employees in Australia and the United Kingdom are represented by unions. As required by the laws of the Netherlands, a Works Council, the members of which are Company employees, is required to be consulted by management with respect to certain matters relating to the Company's operations in that country, such as a change in control of Interface Europe B.V. (the Company's modular carpet subsidiary based in the Netherlands), and the approval of such Council is required for certain actions, including changes in compensation scales or employee benefits. Management believes that its relations with the Works Council, the unions and all of its employees are good. SECURITIES LITIGATION REFORM ACT This Form 10-K and other statements issued or made from time to time by the Company or its representatives contain statements which may constitute "forward-looking statements" within the meaning of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act of 1995. Those statements include statements regarding the intent, belief or current expectations of the Company and members of its management team, as well as the assumptions on which such statements are based. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. Important factors currently known to management that could cause actual results to differ materially from those in forward-looking statements are set forth in the Safe Harbor Compliance Statement for Forward-Looking Statements included as Exhibit 99.1 to this Form 10-K, and are hereby incorporated by reference. The Company undertakes no obligation to update or 19 revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company, their ages as of March 15, 1998, and principal positions with the Company are as follows. Executive officers serve at the pleasure of the Board of Directors. 20
Name Age Principal Position(s) ---- --- --------------------- Ray C. Anderson 63 Chairman of the Board and Chief Executive Officer Charles R. Eitel 48 President and Chief Operating Officer Michael D. Bertolucci 57 Senior Vice President Brian L. DeMoura 52 Senior Vice President Daniel T. Hendrix 43 Senior Vice President - Finance, Chief Financial Officer and Treasurer Don E. Russell 60 Senior Vice President John H. Walker 53 Senior Vice President Gordon D. Whitener 35 Senior Vice President Raymond S. Willoch 39 Senior Vice President, General Counsel and Secretary Alan S. Kabus 40 Vice President John R. Wells 36 Vice President Jeffrey A. Goldberg 56 Vice President Joyce D. LaValle 53 Vice President
Mr. Anderson founded the Company in 1973, and has served as the Company's Chairman and Chief Executive Officer since its founding. Mr. Anderson was appointed by President Clinton to the President's Council on Sustainable Development in 1996 and currently serves as Co-Chair. Mr. Anderson is a member of the Board of Directors of NationsBank Corporation. He also serves on the Boards of numerous nonprofit organizations. Mr. Eitel joined the Company in November 1993 as President of Interface Flooring Systems, Inc. ("IFS", the Company's principal U.S. modular carpet subsidiary) and Interface Americas, Inc. (a wholly-owned U.S. holding company), with responsibility for the Company's modular carpet operations throughout the Americas. In October 1994, Mr. Eitel was promoted to Executive Vice President of the Company and President and Chief Executive Officer of the Floorcoverings Group, thereby assuming overall responsibility for the Company's worldwide carpet business. In February 1997, Mr. Eitel was promoted to President and Chief Operating Officer of the Company. From July 1987 until joining the Company, Mr. Eitel served as President of the Floorcoverings Division (based in Dalton, Georgia) of Collins & Aikman Corporation, a diversified textile producer headquartered in North Carolina. Mr. Eitel also serves as a director of Weeks Corporation, an industrial real estate company based in Atlanta and Ladd Furniture, Inc., a North Carolina-based furniture manufacturer. Mr. Bertolucci joined the Company in April 1996 as President of Interface Research Corporation and Senior Vice President of the Company. From October 1989 until joining the Company, he was Vice President of Technology for Highland Industries, an industrial fabric company located in Greensboro, North Carolina. Mr. DeMoura joined the Company in March 1994 as President and Chief Executive Officer of Guilford of Maine, Inc. (now Interface Interior Fabrics) and Senior Vice President of the Company. He is currently responsible for the entire Interior Fabrics Group, which includes Interface Interior Fabrics, Toltec, Intek, and Camborne. From August 1990 until joining the Company, 21 Mr. DeMoura served as President and CEO of Fashion Fabrics of America, Inc., an Orangeburg, South Carolina based producer of fabrics for the upscale men's and women's apparel markets. Mr. Hendrix, who previously was with a national accounting firm, joined the Company in 1983. He was promoted to Treasurer of the Company in 1984, Chief Financial Officer in 1985, Vice President Finance in 1986, and Senior Vice President Finance in October 1995. Mr. Russell has served in various executive capacities since 1973. He became a Senior Vice President in 1986. From September 1995 until April 1997, Mr. Russell served as President and Chief Executive Officer of the Company's Specialty Products Group, composed of the Company's chemical and specialty surfaces subsidiaries (Rockland and Pandel), INTERSEPT antimicrobial sales and licensing program, and Interface Architectural Resources business unit. Mr. Russell served as President and CEO of Interface Europe, Inc. (the Company's U.S. holding company for its subsidiaries in Europe) and Interface Europe B.V. from 1991 until August 1995. Mr. Russell intends to retire in April 1998. Mr. Walker began his career with the Company as Financial Controller of the U.K. Division of Heuga Holding B.V. (now Interface Europe B.V.), a Netherlands-based carpet tile manufacturer, which was acquired by the Company in 1988. He later served as Vice President Sales & Marketing of Interface Europe, B.V. and in July 1995 was promoted to the position of Senior Vice President of the Company and President and Chief Executive Officer of Interface Europe, Inc. In his current position, he has responsibility for the Company's floorcovering operations in both Europe and the Asia-Pacific region. Mr. Whitener joined the Company in November 1993 as Senior Vice President - Sales & Marketing of IFS. In October 1994, he became a Senior Vice President of the Company and President and Chief Executive Officer of IFS and Interface Americas, assuming responsibility for both the Company's modular carpet operations in North America, and Prince Street, the Company's commercial broadloom carpet operation based in Cartersville, Georgia. Mr. Whitener also assumed corporate responsibility for Bentley Mills in July 1995 and the Specialty Products Group in April 1997. He is thus responsible for all of the Company's operations in the Americas, except the Interior Fabrics Group. From April 1988 until joining the Company, Mr. Whitener served in various sales management capacities with Collins & Aikman (Floorcoverings Division), including Vice President Marketing. Mr. Whitener also serves as a director of The Carpet & Rug Institute, a national trade association headquartered in Dalton, Georgia, representing the carpet and rug industry, and Aviation Group, Inc., a Texas-based provider of products and services to airline companies and other aviation firms. Mr. Willoch, who previously practiced with an Atlanta law firm, joined the Company in June 1990 as Corporate Counsel. He was promoted to Assistant Secretary in 1991, Assistant Vice President in 1993, Vice President in January 1996, and Secretary and General Counsel in August 1996. In February 1998, Mr. Willoch was promoted to Senior Vice President. 22 Mr. Kabus joined the Company in 1993 as a result of the Company's acquisition of Bentley Mills, which he had joined as a salesman in 1984. At the time of the acquisition, Mr. Kabus was serving as Regional Sales Manager-Northeast Region of Bentley Mills. He was promoted to Vice President of the Company in July 1995. From July 1995 until February 1998, Mr. Kabus served as President and Chief Executive Officer of Bentley Mills. In March 1998, Mr. Kabus assumed responsibility for the Company's Re:Source Americas dealer network and its other service companies. Mr. Wells joined the Company in February 1994 as Vice President-Sales of IFS and was promoted to Senior Vice President- Sales and Marketing of IFS in October 1994. He was promoted to Vice President of the Company and President and Chief Executive Officer of IFS in July 1995. In March 1998, Mr. Wells was also named President and CEO of both Prince Street and Bentley Mills, making him President and CEO of all three of the Company's U.S. carpet mills. Prior to joining the Company, Mr. Wells worked with the commercial division of Shaw Industries for 13 years, where he was a key member of the management team that started the NETWORX Modular Carpet Division of that company and where he also held various sales management responsibilities for the Shaw Commercial and Stratton Commercial Divisions. Mr. Goldberg joined the Company as Senior Vice President- Finance of IFS in March 1994. He became Senior Vice President- Finance of Interface Americas Services, Inc. (the holding company for the Company's Re:Source Americas dealer network and its other service companies) in September 1994. He became a Vice President of the Company in April 1997. From November 1996 until March 1998, he served as President and Chief Executive Officer of Interface Americas Services. In March 1998, Mr. Goldberg was named Senior Vice President and Chief Strategic Officer of Interface Americas. Prior to joining the Company, Mr. Goldberg served as Vice President-Finance & Administration for Collins & Aikman (Floorcovering Division). Ms. LaValle joined the Company as Regional Vice President of IFS in February 1993. She became Senior Vice President-Sales & Marketing of Prince Street in July 1995. She became a Vice President of the Company in April 1997. From November 1995 until March 1998, she served as President and Chief Executive Officer of Prince Street. In March 1998, Ms. LaValle was named Senior Vice President and Chief Innovations Officer of Interface Americas. 23 ITEM 2. PROPERTIES PROPERTIES The Company maintains its corporate headquarters in Atlanta, Georgia in approximately 16,697 square feet of leased space. The following table lists the Company's principal manufacturing facilities, all of which are owned by the Company except as otherwise noted:
Location Primary Products Floor Space (Sq.Ft.) -------- ---------------- -------------------- Athens, Tennessee ......................................... Modular carpet 71,577 Bangkok, Thailand ......................................... Modular carpet 66,072 Craigavon, N. Ireland ......................................... Modular carpet 125,060 Heckmondwike, England ......................................... Modular carpet 90,000 LaGrange, Georgia ............................................. Modular carpet 326,666 Ontario (Belleville), Canada .................................. Modular carpet 77,000 Picton, Australia ............................................. Modular carpet 89,560 Scherpenzeel, the Netherlands.................................. Modular carpet; Specialty products 292,142 Shanghai, China........................................ Modular carpet 106,962 Shelf, England ................................................ Modular carpet 223,342 West Point, Georgia ........................................... Modular carpet 161,000 Cartersville, Georgia ......................................... Broadloom carpet 210,000 Cartersville, Georgia ......................................... Broadloom carpet 45,000 City of Industry, California............................... Broadloom carpet 539,641 Genemuiden, the Netherlands................................ Broadloom carpet 36,788 West Yorkshire, England ....................................... Broadloom carpet 674,666 Aberdeen, North Carolina ...................................... Interior fabrics 88,000 Dudley, Massachusetts ......................................... Interior fabrics 300,000 East Douglas, Massachusetts.................................... Interior fabrics 301,772 Grand Rapids, Michigan(.................................... Interior fabrics 55,800 Greensboro, North Carolina................................. Interior fabrics 63,700 Guilford, Maine ............................................... Interior fabrics 396,690 Guilford, Maine ............................................... Interior fabrics 96,200 Lancashire, England........................................ Interior fabrics 54,000 Newport, Maine ................................................ Interior fabrics 208,932 West Yorkshire, England ....................................... Interior fabrics 135,000 Cartersville, Georgia...................................... Specialty products 124,500 Grand Rapids, Michigan..................................... Access flooring 120,000 Rockmart, Georgia ............................................. Chemicals 37,500 ______________________________________ Leased. Owned by a joint venture in which the Company has a 70% interest. Expected to be operational in April 1998. Owned by a joint venture in which the Company has a 40% interest.
The Company maintains marketing offices in approximately 95 locations in 39 countries and distribution facilities in approximately 40 locations in six countries. Most of the marketing locations and many of the distribution facilities are leased. 24 The Company believes that its manufacturing and distribution facilities, and its marketing offices, are sufficient for its present operations. The Company will continue, however, to consider the desirability of establishing additional facilities and offices in other locations around the world as part of its business strategy to meet expanding global market demands. ITEM 3. LEGAL PROCEEDINGS The Company is not aware of any material pending legal proceedings involving it or any of its property. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this Report. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS The information concerning the market prices for the Company's Class A Common Stock and dividends on the Company's Common Stock included in the Notes to the Company's Consolidated Financial Statements in the Company's 1997 Annual Report to Shareholders is incorporated herein by reference. As of March 9, 1998, the Company had 425 holders of record of its Class A Common Stock and 46 holders of record of its Class B Common Stock. Management believes that there are in excess of 5,000 beneficial holders of the Class A Common Stock. During fiscal 1997, the Company issued an aggregate of 385,390 shares of its Common Stock that were not registered under the Securities Act of 1933 ("Securities Act"). The shares, in combination with cash, were issued as consideration in the acquisitions of Camborne Holdings, Ltd., Facilities Resource Group, Inc., Floormart, Inc. and Canaan Corporation, and were issued to an aggregate of six individuals and entities. The sales of the foregoing shares are exempt from registration under the Securities Act pursuant to Section 4(2) of the Securities Act, or Regulation D promulgated thereunder, as transactions by an issuer not involving a public offering. ITEM 6. SELECTED FINANCIAL DATA Selected Financial Information included in the Company's 1997 Annual Report to Shareholders is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's 1997 Annual Report to Shareholders is incorporated herein by reference. 25 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements and the Report of Independent Certified Public Accountants included in the Company's 1997 Annual Report to Shareholders are incorporated herein by reference. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information contained under the caption "Nomination and Election of Directors" in the Company's definitive Proxy Statement for the Company's 1998 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the Company's 1997 fiscal year, is incorporated herein by reference. Pursuant to Instruction 3 to Paragraph (b) of Item 401 of Regulation S-K, information relating to the executive officers of the Company is included in Item 1 of this Report. The information contained under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive Proxy Statement for the Company's 1998 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the Company's 1997 fiscal year, is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information contained under the caption "Executive Compensation and Related Items" in the Company's definitive Proxy Statement for the Company's 1998 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the Company's 1997 fiscal year, is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information contained under the caption "Principal Shareholders and Management Stock Ownership" in the Company's definitive Proxy Statement for the Company's 1998 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the Company's 1997 fiscal year, is incorporated herein by reference. 26 For purposes of determining the aggregate market value of the Company's voting and non-voting stock held by non-affiliates, shares held of record by directors and executive officers of the Company have been excluded. The exclusion of such shares is not intended to, and shall not, constitute a determination as to which persons or entities may be "affiliates" of the Company as that term is defined under federal securities laws. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information contained under the captions "Compensation Committee Interlocks and Insider Participation" (second paragraph only) and "Certain Relationships and Related Transactions" in the Company's definitive Proxy Statement for the Company's 1998 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the Company's 1997 fiscal year, is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. FINANCIAL STATEMENTS The following Consolidated Financial Statements and Notes thereto of Interface, Inc. and subsidiaries and related Report of Independent Certified Public Accountants contained in the Company's 1997 Annual Report to Shareholders, are incorporated by reference in Item 8 of this Report: Consolidated Balance Sheets - December 28, 1997 and December 29, 1996 Consolidated Statements of Income - years ended December 28, 1997, December 29, 1996 and December 31, 1995 Consolidated Statements of Cash Flows - years ended December 28, 1997, December 29, 1996 and December 31, 1995 Notes to Consolidated Financial Statements Report of Independent Certified Public Accountants 2. FINANCIAL STATEMENT SCHEDULE The following Consolidated Financial Statement Schedule of Interface, Inc. and subsidiaries and related Report of Independent Certified Public Accountants are included as part of this Report (see page 21): Report of Independent Certified Public Accountants Schedule II -- Valuation and Qualifying Accounts and Reserves 27 3. EXHIBITS The following exhibits are included as part of this Report: Exhibit Number Description of Exhibit ------- ---------------------- 3.1 Composite Articles of Incorporation (included as Exhibit 4.1 to the Company's current report on Form 8-K dated March 4, 1998, previously filed with the Commission and incorporated herein by reference). 3.2 Bylaws, as amended (included as Exhibit 3.2 to the Company's quarterly report on Form 10-Q for the quarter ended April 1, 1990, previously filed with the Commission and incorporated herein by reference). 4.1 See Exhibits 3.1 and 3.2 for provisions in the Company's Articles of Incorporation and Bylaws defining the rights of holders of Common Stock of the Company. 4.2 Indenture governing the Company's 9.5% Senior Subordinated Notes due 2005, dated as of November 15, 1995, among the Company, certain U.S. subsidiaries of the Company, as Guarantors, and First Union National Bank of Georgia, as Trustee (the "Indenture") (included as Exhibit 4.1 to the Company's registration statement on Form S-4, File No. 33-65201, previously filed with the Commission and incorporated herein by reference); and Supplement No. 1 to Indenture, dated as of December 27, 1996 (included as Exhibit 4.2(b) to the Company's Annual Report on Form 10-K, previously filed with the Commission and incorporated herein by reference.). 4.3 Form of Exchange Note (included as part of Exhibit 4.2). 10.1 Salary Continuation Plan, dated May 7, 1982 (included as Exhibit 10.20 to the Company's registration statement on Form S-1, File No. 2-82188, previously filed with the Commission and incorporated herein by reference).* 10.2 Form of Salary Continuation Agreement (included as Exhibit 10.1 to the Company's quarterly report on Form 10-Q/A for the quarter ended March 30, 1997, previously filed with the Commission and incorporated herein by reference).* 10.3 Interface, Inc. Omnibus Stock Incentive Plan (included as Exhibit 10.6 to the Company's annual report on Form 10-K for the year ended December 29, 1996, previously filed with the Commission and incorporated herein by reference).* 10.4 Interface, Inc. Nonqualified Savings Plan (included as Exhibit 4 to the Company's registration statement on Form S-8, file no. 333-38677, previously filed with the Commission and incorporated herein by reference).* 28 10.5 Second Amended and Restated Credit Agreement, dated as of June 25, 1997, among the Company (and certain direct and indirect subsidiaries), the lenders listed therein, SunTrust Bank, Atlanta and The First National Bank of Chicago (included as Exhibit 10.27 to the Company's quarterly report on Form 10-Q for the quarter ended June 29, 1997 (the "1997 Second Quarter 10-Q"), previously filed with the Commission and incorporated herein by reference); and First Amendment thereto dated December 2, 1997. 10.6 Term Loan Agreement, dated as of June 25, 1997, among the Company (and certain direct and indirect subsidiaries), the lenders listed therein, SunTrust Bank, Atlanta and The First National Bank of Chicago (included as Exhibit 10.28 to the 1997 Second Quarter 10-Q, previously filed with the Commission and incorporated herein by reference); and First Amendment thereto dated December 2, 1997. 10.7 Voting Agreement, dated April 13, 1993, among certain shareholders of the Company (included as Exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended April 4, 1993, previously filed with the Commission and incorporated herein by reference). 10.8 Employment Agreement of Ray C. Anderson dated April 1, 1997 (included as Exhibit 10.1 to the 1997 Second Quarter 10-Q, previously filed with the Commission and incorporated herein by reference).* 10.9 Change in Control Agreement of Ray C. Anderson dated April 1, 1997 (included as Exhibit 10.2 to the 1997 Second Quarter 10-Q, previously filed with the Commission and incorporated herein by reference).* 10.10 Employment Agreement of Charles R. Eitel dated April 1, 1997 (included as Exhibit 10.3 to the 1997 Second Quarter 10-Q, previously filed with the Commission and incorporated herein by reference).* 10.11 Change in Control Agreement of Charles R. Eitel dated April 1, 1997 (included as Exhibit 10.4 to the 1997 Second Quarter 10-Q, previously filed with the Commission and incorporated herein by reference).* 10.12 Employment Agreement of Brian L. DeMoura dated April 1, 1997 (included as Exhibit 10.5 to the 1997 Second Quarter 10-Q, previously filed with the Commission and incorporated herein by reference).* 10.13 Change in Control Agreement of Brian L. DeMoura dated April 1, 1997 (included as Exhibit 10.6 to the 1997 Second Quarter 10-Q, previously filed with the Commission and incorporated herein by reference).* 10.14 Employment Agreement of Daniel T. Hendrix dated April 1, 1997 (included as Exhibit 10.7 to the 1997 Second Quarter 10-Q, previously filed with the Commission and incorporated herein by reference).* 29 10.15 Change in Control Agreement of Daniel T. Hendrix dated April 1, 1997 (included as Exhibit 10.8 to the 1997 Second Quarter 10-Q, previously filed with the Commission and incorporated herein by reference).* 10.16 Employment Agreement of Gordon D. Whitener dated April 1, 1997 (included as Exhibit 10.9 to the 1997 Second Quarter 10-Q, previously filed with the Commission and incorporated herein by reference).* 10.17 Change in Control Agreement of Gordon D. Whitener dated April 1, 1997 (included as Exhibit 10.10 to the 1997 Second Quarter 10-Q, previously filed with the Commission and incorporated herein by reference).* 10.18 Employment Agreement of Raymond S. Willoch dated April 1, 1997 (included as Exhibit 10.11 to the 1997 Second Quarter 10-Q, previously filed with the Commission and incorporated herein by reference).* 10.19 Change in Control Agreement of Raymond S. Willoch dated April 1, 1997 (included as Exhibit 10.12 to the 1997 Second Quarter 10-Q, previously filed with the Commission and incorporated herein by reference).* 10.20 Employment Agreement of Jeffrey A. Goldberg dated April 1, 1997 (included as Exhibit 10.13 to the 1997 Second Quarter 10-Q, previously filed with the Commission and incorporated herein by reference).* 10.21 Change of Control Agreement of Jeffrey A. Goldberg dated April 1, 1997 (included as Exhibit 10.14 to the 1997 Second Quarter 10-Q, previously filed with the Commission and incorporated herein by reference).* 10.22 Employment Agreement of Alan S. Kabus dated April 1, 1997 (included as Exhibit 10.15 to the 1997 Second Quarter 10-Q, previously filed with the Commission and incorporated herein by reference).* 10.23 Change in Control Agreement of Alan S. Kabus dated April 1, 1997 (included as Exhibit 10.16 to the 1997 Second Quarter 10-Q, previously filed with the Commission and incorporated herein by reference).* 10.24 Employment Agreement of Joyce D. LaValle dated April 1, 1997 (included as Exhibit 10.17 to the 1997 Second Quarter 10-Q, previously filed with the Commission and incorporated herein by reference).* 10.25 Change of Control Agreement of Joyce D. LaValle dated April 1, 1997 (included as Exhibit 10.18 to the 1997 Second Quarter 10-Q, previously filed with the Commission and incorporated herein by reference).* 10.26 Employment Agreement of John H. Walker dated April 1, 1997 (included as Exhibit 10.19 to the 1997 Second Quarter 10-Q, previously filed with the Commission and incorporated herein by reference).* 10.27 Change in Control Agreement of John H. Walker dated April 1, 1997 (included as Exhibit 10.20 to the 1997 Second Quarter 10-Q, previously filed with the Commission and incorporated herein by reference).* 10.28 Employment Agreement of John L. Partridge dated April 1, 1997 (included as Exhibit 10.21 to the 1997 Second Quarter 10-Q, previously filed with the Commission and incorporated herein by reference).* 10.29 Change in Control Agreement of John L. Partridge dated April 1, 1997 (included as Exhibit 10.22 to the 1997 Second Quarter 10-Q, previously filed with the Commission and incorporated herein by reference).* 10.30 Employment Agreement of John R. Wells dated April 1, 1997 (included as Exhibit 10.23 to the 1997 Second Quarter 10-Q, previously filed with the Commission and incorporated herein by reference).* 30 10.31 Change in Control Agreement of John R. Wells dated April 1, 1997 (included as Exhibit 10.24 to the 1997 Second Quarter 10-Q, previously filed with the Commission and incorporated herein by reference).* 10.32 Employment Agreement of Michael D. Bertolucci dated April 1, 1997 (included as Exhibit 10.25 to the 1997 Second Quarter 10-Q, previously filed with the Commission and incorporated herein by reference).* 10.33 Change in Control Agreement of Michael D. Bertolucci dated April 1, 1997 (included as Exhibit 10.26 to the 1997 Second Quarter 10-Q, previously filed with the Commission and incorporated herein by reference).* 10.34 Receivables Sale Agreement, dated as of August 4, 1995, among Interface Securitization Corporation, Interface, Inc., Special Purpose Accounts Receivable Cooperative Corporation and Canadian Imperial Bank of Commerce (included as Exhibit 10.26 to the 1995 10-K, previously filed with the Commission and incorporated herein by reference) and Amendment thereto dated as of December 27, 1996 (included as Exhibit 10.24 to the Company's Annual Report on Form 10-K for the year ended December 29, 1996, previously filed with the Commission and incorporated herein by reference). 10.35 Receivables Sale Agreement, dated as of December 27, 1996, among Interface Securitization Corporation, Interface, Inc., certain financial institutions (as bank purchasers), and Canadian Imperial Bank of Commerce (as administrative agent) (included as Exhibit 10.25 to the Company's Annual Report on Form 10-K for the year ended December 29, 1996, previously filed with the Commission and incorporated herein by reference). 11 Computation of Earnings Per Share 13 Certain information contained in the Company's Annual Report to Shareholders for the fiscal year ended December 28, 1997, which is expressly incorporated into this Report by direct reference thereto. 21 Subsidiaries of the Company. 23 Consent of BDO Seidman, LLP. 31 27.1 Financial Data Schedule. 27.2 Restated Financial Data Schedule (years ended Dec. 31, 1995 and Dec. 29, 1996). 27.3 Restated Financial Data Schedule (quarters ended March 31, 1996, June 30, 1996 and Sept. 29, 1996). 27.4 Restated Financial Data Schedule (quarters ended March 30, 1997, June 29, 1997 and Sept. 28, 1997). 99.1 Safe Harbor Compliance Statement for Forward-Looking Statements. _______________________ * Management contract or compensatory plan or agreement required to be filed pursuant to Item 14(c) of this Report. (b) REPORTS ON FORM 8-K No reports on Form 8-K were filed by the Company during the fourth quarter of the fiscal year covered by this Report. REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Interface, Inc. Atlanta, Georgia The audits referred to in our Report dated February 17, 1998 relating to the Consolidated Financial Statements of Interface, Inc. and subsidiaries, incorporated in Item 8 of the Form 10-K by reference to the Annual Report to Shareholders for the fiscal year ended December 28, 1997, included the audit of Financial Statement Schedule II (Valuation and Qualifying Accounts and Reserves) set forth in the Form 10-K. The Financial Statement Schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the Financial Statement Schedule. In our opinion, such Schedule presents fairly, in all material respects, the information set forth therein. BDO SEIDMAN, LLP Atlanta, Georgia February 17, 1998 32 INTERFACE, INC. AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
_______________________________________________________________________________________________________________________________ Column A Column B Column C Column D Column E _______________________________________________________________________________________________________________________________ Balance at Charged to Charged to Deductions Balance at beginning costs and other (describe) end of of year expenses accounts year _______________________________________________________________________________________________________________________________ (in thousands) Allowance for doubtful accounts: Year ended: December 28, 1997 ............................$7,349 $2,032 $ -- $2,030 $7,351 December 29, 1996 ............................$5,870 $3,529 $ -- $2,050 $7,349 December 31, 1995 ............................$6,501 $2,448 $ -- $3,079 $5,870 - ----------------------- Includes changes in foreign currency exchange rates. Includes allowance of $1,034 at acquisition date for Renovisions, C- Tec and certain of the dealers in the Re:Source Americas network during 1996 and $793 at acquisition date for Camborne, Carpet Solutions and certain of the dealers in the Re:Source Americas Network during 1997. Write off bad debt.
(All other Schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are omitted because they are either not applicable or the required information is shown in the Company's Consolidated Financial Statements or the Notes thereto.) 33 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Company has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. INTERFACE, INC. By: /s/ Ray C. Anderson Ray C. Anderson Chairman of the Board and Chief Executive Officer Date: March 25, 1998 POWER OF ATTORNEY Know all men by these presents, that each person whose signature appears below constitutes and appoints Ray C. Anderson as attorney-in-fact, with power of substitution, for him in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Capacity Date --------- -------- ---- /s/ Ray C. Anderson Chairman of the Boardand Chief Executive Officer March 25, 1998 Ray C. Anderson (Principal Executive Officer) /s/ Daniel T. Hendrix Senior Vice President, Chief Financial Officer, March 25, 1998 Daniel T. Hendrix Treasurer and Director (Principal Financial and Accounting Officer) /s/ Brian L. DeMoura Director March 25, 1998 Brian L. DeMoura /s/ Charles R. Eitel Director March 25, 1998 Charles R. Eitel /s/ Donald E. Russell Director March 25, 1998 Donald E. Russell /s/ John H. Walker Director March 25, 1998 John H. Walker /s/ Gordon D. Whitener Director March 25, 1998 Gordon D. Whitener /s/ Dianne Dillon-Ridgley Director March 25, 1998 Dianne Dillon-Ridgley /s/ Carl I. Gable Director March 25, 1998 Carl I. Gable /s/ June M. Henton Director March 25, 1998 June M. Henton /s/ J. Smith Lanier, II Director March 25, 1998 J. Smith Lanier, II ___________________________ Director Leonard G. Saulter /s/ Clarinus C.Th. van Andel Director March 25, 1998 Clarinus C.Th. van Andel /TABLE Exhibit Index Exhibit Number Description of Exhibit ------- ---------------------- 10.5 First Amendment to Second Amended and Restated Credit Agreement dated December 2, 1997. 10.6 First Amendment to Term Loan Agreement dated December 2, 1997. 11 Computation of Earnings Per Share 13 Certain information contained in the Company's Annual Report to Shareholders for the fiscal year ended December 28, 1997, which is expressly incorporated into this Report by direct reference thereto. 21 Subsidiaries of the Company. 23 Consent of BDO Seidman, LLP. 27.1 Financial Data Schedule. 27.2 Restated Financial Data Schedule (years ended Dec. 31, 1995 and Dec. 29, 1996). 27.3 Restated Financial Data Schedule (quarters ended March 31, 1996, June 30, 1996 and Sept. 29, 1996). 27.4 Restated Financial Data Schedule (quarters ended March 30, 1997, June 29, 1997 and Sept. 28, 1997). 99.1 Safe Harbor Compliance Statement for Forward-Looking Statements. EX-10.5 2 1ST AMEND. TO 2ND AMENDED AND RESTATED CREDIT AGR. FIRST AMENDMENT TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT -------------------------------------------- THIS FIRST AMENDMENT TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT (this "First Amendment") made and entered into as of December 2, 1997, by and among INTERFACE, INC., a Georgia corporation ("Interface"), INTERFACE EUROPE B.V., a "besloten vennootschap met beperkte aansprakelijkheid" (private company with limited liability) incorporated and existing under the laws of The Netherlands with its registered seat in Scherpenzeel, Gld., The Netherlands ("Europe B.V."), INTERFACE EUROPE LIMITED, a private company limited by shares organized and existing under the laws of England and Wales ("Europe Limited"; Interface, Scherpenzeel B.V. and Europe Limited referred to collectively herein as the "Borrowers"), SUNTRUST BANK, ATLANTA, a banking corporation organized under the laws of the State of Georgia ("STBA"), THE FIRST NATIONAL BANK OF CHICAGO, a national banking association ("FNBC"), the other banks and lending institutions listed on the signature pages of the Credit Agreement (as hereinafter defined), and any assignees of STBA, FNBC, or such other banks and lending institutions which become "Lenders" as provided therein (STBA, FNBC, and such other banks, lending institutions, and assignees referred to collectively herein as the "Lenders"), SUNTRUST BANK, ATLANTA, in its capacity as agent for those Lenders having Domestic Syndicated Loan Commitments or Term Loan Commitments, or both, or having outstanding Domestic Syndicated Loans or Term Loans, or both, as provided herein, and each successor agent for such Lenders as may be appointed from time to time pursuant to Article XI of the Credit Agreement (the "Domestic Agent"), THE FIRST NATIONAL BANK OF CHICAGO, in its ca- pacity as agent for those Lenders having outstanding Multicurrency Syndicated Loan Commitments or having outstanding Multicurrency Syndicated Loans as provided herein, and each successor agent for such Lenders as may be appointed from time to time pursuant to Article XI of the Credit Agreement (the "Multicurrency Agent"; the Domestic Agent and the Multicurrency Agent referred to collectively herein as the "Co-Agents"), and SUNTRUST BANK, ATLANTA, in its capacity as collateral agent for the Co-Agents and Lenders and each successor collateral agent as may be appointed from time to time pursuant to Article XI of the Credit Agreement (the "Collateral Agent"); W I T N E S S E T H: ------------------- WHEREAS, the Borrowers, the Lenders, the Co-Agents, and the Collateral Agent are parties to a certain Second Amended and Restated Credit Agreement dated as of June 25, 1997 (the "Credit Agreement"); WHEREAS, the Borrowers have requested that certain covenants in the Credit Agreement be amended so as to facilitate their acquisition of the carpet-related businesses of Readicut International plc; NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the Borrowers, the Lenders, the Co- Agents and the Collateral Agent agree as follows: 1. DEFINED TERMS. Except as otherwise expressly defined herein, each capitalized term used in this First Amendment that is defined in the Credit Agreement is used herein with the meaning assigned to such capitalized term in the Credit Agreement. 2. AMENDMENTS TO SECTION 1.01 ("DEFINITIONS"). (a) Section 1.01 of the Credit Agreement is hereby amended by adding the following defined terms and definitions thereof in proper alphabetical order: "FIRST AMENDMENT TO CREDIT AGREEMENT" shall mean the First Amendment to Credit Agreement dated as of December 2, 1997, by and among the Borrowers, the Lenders, the Co-Agents, and the Collateral Agent, together with all exhibits and schedules thereto. "FIRST AMENDMENT EFFECTIVE DATE" shall mean the date on which the conditions to effectiveness of the First Amendment to Credit Agreement have been satisfied, as set forth in paragraph 11 of the First Amendment to Credit Agreement. "READICUT" shall mean Readicut International plc. "READICUT ACQUISITION" shall mean the purchase by Europe Limited and Europe B.V. of all issued and outstanding shares of T.F. Firth & Sons Ltd., Vebe Floorcoverings B.V., and Tayrich Limited, from Readicut. "READICUT DEBT" shall mean the Indebtedness in the approximate amount of U.S. $17,600,000 representing the deferred portion of the purchase price payable by Interface and/or its Subsidiaries in the Readicut Acquisition, such Indebtedness being due and payable on the first anniversary of the closing of the Readicut Acquisition and supported by a Letter of Credit issued under the Letter of Credit Agreement. "READICUT DIVESTITURES" shall mean, collectively, the sales or other disposition by Interface and/or its Subsidiaries of any assets (including, without limitation, shares of Subsidiaries) acquired as part of the Readicut Acquisition; provided, however, that the term Readicut Divestitures shall not include (i) any sales or other dispositions of any assets (other than the shares or assets of Network Flooring Ltd.) or any shares of T.F. Firth & Sons Ltd. or Firth Carpets Ltd., (ii) any sales or other dispositions of any of the assets or shares of Vebe Floorcoverings B.V. or Network Flooring Ltd. sold or disposed of after the first anniversary of the closing of the Readicut Acquisition, or (iii) any sales or other dispositions of any of the assets or shares of Tayrich Limited or Joseph, Hamilton & Seaton Ltd. sold or disposed of later than eighteen months after the closing of the Readicut Acquisition. "SECOND CLOSING DATE" shall mean the date on or before February 28, 1998, on which the conditions set forth in Section 4.03 of the 1997 Term Loan Agreement are satisfied or waived in accordance with Section 10.02 of the 1997 Term Loan Agreement. - 2 - (b) The defined terms and definitions listed below that appear in the Credit Agreement are hereby amended by deleting said defined terms and definitions in their entirety and substituting in lieu thereof the following defined terms and definitions: "1997 TERM LOAN AGREEMENT" shall mean the Term Loan Agreement dated as of June 25, 1997, among Interface, SunTrust Bank, Atlanta, as Administrative Agent and Collateral Agent, FNBC, as Syndication Agent, and the 1997 Term Lenders, as amended by the First Amendment to Term Loan Agreement dated as of December 2, 1997, as the same may be amended, restated, or supplemented from time to time, pursuant to which the 1997 Term Loans are made to Interface. "1997 TERM LOANS" shall mean, collectively, the term loans in an aggregate principal amount of $95,000,000 made to Interface by the 1997 Term Lenders pursuant to the terms of the 1997 Term Loan Agreement. 3. AMENDMENT TO SECTION 2.03 ("MANDATORY PREPAYMENTS"). Section 2.03 of the Credit Agreement is hereby amended as follows: The first sentence of subsection (a) of Section 2.03 is hereby deleted and the following sentence is hereby substituted in lieu thereof as the first sentence of subsection (a) of Section 2.03: No mandatory prepayment shall be required pursuant to this Section 2.03(a) until the aggregate amount of Asset Sales occurring after October 2, 1994 exceeds $10,000,000 (based on the Asset Values thereof, but excluding in the foregoing computation (i) Asset Sales resulting from loss, damage, destruction, or taking where the proceeds thereof are utilized so as to be excluded from the definition of Net Proceeds, (ii) Asset Sales occurring as a part of any sale and leaseback transactions permitted pursuant to Section 9.06, and (iii) Asset Sales made as part of the Readicut Divestitures). 4. AMENDMENT TO SECTION 3.04 ("MANDATORY PREPAYMENTS OF DOMESTIC REVOLVING LOANS"). Section 3.04 of the Credit Agreement is hereby amended (i) by denominating the existing text of Section 3.04 as subsection (a) of Section 3.04, and (ii) by adding a new subsection (b) to Section 3.04 as follows: (b) Subject to the provisions of Section 2.03(c) regarding minimum prepayment amounts and rounding of prepayment amounts, all amounts received as Net Proceeds from any Asset Sales effected as part of the Readicut Divestitures shall be used to prepay the outstanding Domestic Revolving Loans or Multicurrency Revolving Loans hereunder as may be specified by Interface at the time of such prepayment or, if not so specified by Interface, then as specified by the Co-Agents. All such prepayments shall be - 3 - applied on a pro rata basis among the holders of such Domestic Revolving Loans or Multicurrency Revolving Loans, as the case may be. 5. AMENDMENTS TO SECTION 4.04 ("MANDATORY PREPAYMENTS OF MULTICURRENCY REVOLVING LOANS"). Section 4.04 of the Credit Agreement is hereby amended by adding a new subsection (d) to Section 4.04 as follows: (d) Subject to the provisions of Section 2.03(c) with respect to minimum prepayment amounts and the rounding of prepayment amounts, all amounts received as Net Proceeds from any Asset Sales effected as part of the Readicut Divestitures shall be used to prepay the outstanding Domestic Revolving Loans or Multicurrency Revolving Loans hereunder as may be specified by Interface at the time of such prepayment or, if not so specified by Interface, then as specified by the Co-Agents. All such prepayments shall be applied on a pro rata basis among the holders of such Domestic Revolving Loans or Multicurrency Revolving Loans, as the case may be. 6. AMENDMENT TO SECTION 9.01 ("INDEBTEDNESS"). Section 9.01 of the Credit Agreement is hereby amended (i) by deleting the word "and" from the end of subsection (l) thereof, and (ii) by deleting subsection (m) thereof in its entirety and substituting in lieu thereof new subsections (m), (n) and (o) as follows: (m) The Readicut Debt; (n) Indebtedness consisting of contingent obligations under indemnities, guarantees, and reimbursement agreements in favor of Persons issuing surety bonds, guarantees and similar undertakings issued to support performance obligations of any of the Consolidated Companies incurred in the ordinary course of business; and (o) Other Indebtedness not to exceed $15,000,000 at any one time outstanding. 7. AMENDMENT TO SECTION 9.03 ("MERGERS, ACQUISITIONS, SALES, ETC."). Section 9.03 of the Credit Agreement is hereby amended as follows: (a) The first parenthetical phrase in clause (ii) of Section 9.03 is hereby deleted in its entirety and the following parenthetical phrase substituted in lieu thereof: (but excluding Asset Sales occurring as part of the Readicut Divestitures or as part of any sale and leaseback transactions permitted by Section 9.06) (b) Clause (vi) of Section 9.03 is hereby amended by deleting clause (vi) in its entirety and substituting in lieu thereof the following clause (vi): - 4 - (vi) Asset Sales occurring as part of the Readicut Divestitures or as part of any sale and leaseback transactions permitted pursuant to Section 9.06, or 8. AMENDMENT TO ARTICLE X ("EVENTS OF DEFAULT"). Article X of the Credit Agreement is hereby amended (i) by deleting the period at the end of Section 10.15 and substituting in lieu thereof a semicolon, and (ii) by adding the following language at the end of Article X: then, and in any such event, and at any time thereafter if any Event of Default shall then be continuing, the Co-Agents may, and upon the written or telex request of the Required Lenders, shall, by written notice to the Borrowers, take any or all of the following actions, without prejudice to the rights of the Co-Agents, any Lender or the holder of any Note to enforce its claims against the Borrowers or any other Credit Party: (i) declare all Commitments terminated, whereupon the pro rata Commitments of each Lender shall terminate immediately and any commitment fee shall forthwith become due and payable without any other notice of any kind; and (ii) declare the principal of and any accrued interest on the Loans, and all other Obligations owing hereunder, to be, whereupon the same shall become, forthwith due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by each of the Borrowers; provided, that, if an Event of Default specified in Section 10.07 shall occur, the result which would occur upon the giving of written notice by the Co-Agents to the Borrowers and any other Credit Party, as specified in clauses (i) and (ii) above, shall occur automatically without the giving of any such notice. 9. SUPPLEMENT TO SCHEDULE 7.01 ("ORGANIZATION AND OWNERSHIP OF SUBSIDIARIES"). Effective upon the closing of the Readicut Acquisition, Schedule 7.01 to the Credit Agreement shall be supplemented to reflect the Readicut Acquisition by attaching thereto the Supplement to Schedule 7.01 in the form attached to this First Amendment. 10. REPRESENTATIONS AND WARRANTIES. Each of the Borrowers represents and warrants to the Co-Agents and the Lenders as follows: (a) All representations and warranties set forth in the Credit Agreement are, and after giving effect to the Readicut Acquisition will be, true and correct in all material respects with the same effect as though such representations and warranties have been made on and as of the date hereof and after giving effect to the Readicut Acquisition (except that the representation and warranty set forth in Section 7.19 of the Credit Agreement shall not be deemed to relate to any time subsequent to the date of the initial Loans under the Credit Agreement); (b) No Default or Event of Default has occurred and is continuing on the date hereof or will occur or exist as a result of the Readicut Acquisition; - 5 - (c) Since the date of the most recent financial statements of the Consolidated Companies submitted to the Lenders pursuant to Section 8.07(b) of the Credit Agreement, and after giving pro forma effect to the Readicut Acquisition, there has been no change which has had or could reasonably be expected to have a Materially Adverse Effect (whether or not notice with respect to such change has otherwise been furnished to the Lenders pursuant to Section 8.07); (d) Each of the Borrowers has the corporate power and authority to make, deliver and perform this First Amendment and has taken all necessary corporate action to authorize the execution, delivery and performance of this First Amendment. No consent or authorization of, or filing with, any Person (including, without limitation, any governmental authority), is required in connection with the execution, delivery or performance by it, or the validity or enforceablility against it, of this First Amendment, other than such consents, authorizations or filings which have been made or obtained; and (e) This First Amendment has been duly executed and delivered by each of the Borrowers and constitutes the legal, valid and binding obligations of each of the Borrowers enforceable against each of them in accordance with their respective terms, except as may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws affecting the enforcement of creditors' rights generally and by general principles of equity. 11. EFFECTIVENESS OF FIRST AMENDMENT. This First Amendment shall become effective upon the execution and delivery to the Domestic Agent of counterparts hereof (whether originals or facsimile transmissions thereof) on behalf of Interface, the Co- Agents, and the Lenders. 12. REFERENCES TO CREDIT AGREEMENT. On and after the date this First Amendment becomes effective as provided in paragraph 11 above, each and every reference in the Credit Documents to the Credit Agreement shall be deemed to refer to and mean the Credit Agreement as amended by this First Amendment and as the same may be further amended, restated and supplemented from time to time. The parties further confirm and agree that (i) except as expressly amended herein, the Credit Agreement remains in full force and effect in accordance with its terms, and (ii) all other Credit Documents remain in full force and effect in accordance with their respective terms. 13. COUNTERPARTS. This First Amendment may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. 14. MISCELLANEOUS. This First Amendment and the rights and obligations of the parties hereunder shall be construed in accordance with and be governed by the law (without giving effect to the conflict of law principles thereof) of the State of Georgia. This First Amendment shall be binding on and shall inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto. - 6 - IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be duly executed and delivered in Atlanta, Georgia, by their duly authorized officers as of the day and year first above written. Address for Notices: INTERFACE, INC. - ------------------- 2859 Paces Ferry Road Suite 2000 Atlanta, GA 30339 By: /s/ Daniel T. Hendrix Attention: Daniel T. Hendrix Daniel T. Hendrix Senior Vice President Telex No.: Answerback: Telecopy No.: 404/319-0070 Address for Notices: INTERFACE EUROPE LIMITED - ------------------- c/o Interface, Inc. 2859 Paces Ferry Road Suite 2000 Atlanta, GA 30339 By: /s/ Daniel T. Hendrix Attention: Daniel T. Hendrix Daniel T. Hendrix Senior Vice President Telex No.: Answerback: Telecopy No.: 404/319-0070 Address for Notices: INTERFACE EUROPE B.V. - ------------------- c/o Interface, Inc. 2859 Paces Ferry Road Suite 2000 Atlanta, GA 30339 By: /s/ Daniel T. Hendrix Attention: Daniel T. Hendrix Daniel T. Hendrix Senior Vice President Telex No.: Answerback: Telecopy No.: 404/319-0070 Address for Notices: SUNTRUST BANK, ATLANTA, - ------------------- as Administrative Agent and Collateral Agent 25 Park Place 23rd Floor Atlanta, GA 30303 Attention: Thomas R. Banks By: /s/ Thomas R. Banks Name: Thomas R. Banks Title: Assistant Vice President Telex No.: 542210 Answerback: TRUSCO INT ATL By: /s/ David W. Penter Telecopy No.: 404/588-8833 Name: David W. Penter Title: Group Vice President Payment Office: - -------------- 25 Park Place, N.E. Atlanta, GA 30303 - 8 - Address for Notices: THE FIRST NATIONAL BANK OF - ------------------- CHICAGO, as Syndication Agent One First National Plaza Chicago, Illinois 60670-0324 Attention: Judith L. Cornwell By: /s/ Courtenay R. Wood Name: Courtenay R. Wood Title: Vice President Telex No.: Answerback: Telecopy No.: 312/732-5296 Administrative Office: - --------------------- One First National Plaza Chicago, Illinois 60670-0324 Attention: Judith L. Cornwell Payment Offices: - --------------- (See Schedule 4.01) ------------- - 9 - Address for Notices: SUNTRUST BANK, ATLANTA - ------------------- 25 Park Place 23rd Floor Atlanta, GA 30303 Attention: Thomas R. Banks By: /s/ Thomas R. Banks Name: Thomas R. Banks Title: Assistant Vice President Telex No.: 542210 Answerback: TRUSCO INT ATL By: /s/ David W. Penter Telecopy No.: 404/588-8833 Name: David W. Penter Title: Group Vice President Domestic Lending Office: - ----------------------- One Park Place, N.E. Atlanta, GA 30303 Telex No.: 542210 Answerback: TRUSCO INT ATL Eurocurrency Lending Office: - --------------------------- One Park Place, N.E. Atlanta, Georgia 30303 Telex No. 542210 Answerback: TRUSCO INT ATL - 10 - Address for Notices: THE FIRST NATIONAL BANK OF CHICAGO - ------------------- Mail Suite 0324 One First National Plaza Chicago, Illinois 60670-0324 Attention: Judith L. Cornwell By: /s/ Courtenay R. Wood Name: Courtenay R. Wood Title: Vice President Telex No.: 4330253 Answerback: FNBC UI Telecopy No.: 312/732-5296 Administrative Office: - --------------------- One First National Plaza Chicago, Illinois 60670-0324 Attention: Judith L. Cornwell Payment Offices: - --------------- (See Schedule 4.01) ------------- - 11 - Address for Notices: ABN AMRO BANK N.V. - ------------------- ABN AMRO Bank N.V. 135 South LaSalle Street Suite 2805 Chicago, Illinois 60603 By: /s/ W.P. Fischer Attention: Credit Administration Name: W.P. Fischer Title: SVP Telephone: (312) 904-8835 Fax: (312) 904-8840 By: /s/ Steven J. Hipsman With a copy to: Name: Steven Hipsman - -------------- Title: Vice President ABN AMRO Bank N.V. Suite 1200, One Ravinia Drive Atlanta, GA 30346 Attention: Mark Clegg Telephone: 770/396-0066 Telex No.: 682 7258 Answerback: ABNBANKATL Telecopy No.: 770/395-9188 Domestic Lending Office: - ----------------------- ABN AMRO Bank N.V. 135 South LaSalle Street Suite 2805 Chicago, Illinois 60603 Attention: Credit Administration Eurocurrency Lending Office: - --------------------------- ABN AMRO Bank N.V. 135 South LaSalle Street Suite 2805 Chicago, Illinois 60603 Attention: Credit Administration - 12 - Address for Notices: THE BANK OF TOKYO-MITSUBISHI, - ------------------- LTD., ATLANTA AGENCY 133 Peachtree Street, N.E. 4970 Georgia-Pacific Center Atlanta, GA 30303 Attention: Brandon Meyerson By: /s/ Brenda A. Meyerson Name: Brenda A. Meyerson Telephone: 404/577-2960 Title: Assistant Vice President Telecopy No.: 404/577-1155 Telex No.: 6827300 Answerback: 6827300BOT ATL Domestic Lending Office: - ----------------------- 4970 Georgia-Pacific Center 133 Peachtree Street, N.E. Atlanta, Georgia 30303 Eurocurrency Lending Office: - --------------------------- 4970 Georgia-Pacific Center 133 Peachtree Street, N.E. Atlanta, Georgia 30303 - 13 - Address for Notices: CIBC INC. - ------------------- Canadian Imperial Bank of Commerce Two Paces West 2727 Paces Ferry Road, By: /s/ Roger Colden Suite 1200 Names: Roger Colden Atlanta, Georgia 30339 Title: Executive Director, CIBC Attention: William Humphries Oppenheimer Corp. as Agent Telephone: 770/319-4906 Telecopy No.: 770/319-4954 Domestic Lending Office: - ----------------------- Canadian Imperial Bank of Commerce Two Paces West 2727 Paces Ferry Road, Suite 1200 Atlanta, Georgia 30339 Eurocurrency Lending Office: - --------------------------- Canadian Imperial Bank of Commerce Two Paces West 2727 Paces Ferry Road, Suite 1200 Atlanta, Georgia 30339 - 14 - Address for Notices: CREDITANSTALT-BANKVEREIN - ------------------- Two Ravinia Drive Suite 1680 By: /s/ Stephen W. Hipp Atlanta, Georgia 30346 Name: Stephen W. Hipp Attention: Stephen W. Hipp Title: Assoc. Telephone: 770/390-1846 Telecopy No.: 770/390-1851 By: /s/ Craig Stamn Name: Craig Stamn Title: VP Domestic Lending Office: - ----------------------- Two Greenwich Plaza Greenwich, CT 06830-6353 Attn: Lisa Bruno Eurocurrency Lending Office: - --------------------------- Two Greenwich Plaza Greenwich, CT 06830-6353 - 15 - Address for Notices: CREDIT LYONNAIS ATLANTA AGENCY - ------------------- Credit Lyonnais Atlanta Agency 303 Peachtree Street, N.E. By: /s/ David M. Cawrse Suite 4400 Name: David M. Cawrse Atlanta, GA 30303 Title: First Vice President & Attention: David Cawrse Manager Telephone: 404/524-3700 Telecopy No.: 404/584-5249 Domestic Lending Office: - ----------------------- Credit Lyonnais Atlanta Agency 303 Peachtree Street, N.E. Suite 4400 Atlanta, GA 30303 Eurocurrency Lending Office: - --------------------------- Credit Lyonnais Atlanta Agency 303 Peachtree Street, N.E. Suite 4400 Atlanta, GA 30303 - 16 - Address for Notices: THE SUMITOMO BANK LIMITED - ------------------- 303 Peachtree Street, N.E. By: /s/ Roger N. Arsham Suite 4420 Name: Roger N. Arsham Atlanta, GA 30308 Title: Vice President Attention: Roger Arsham Telephone: 404/524-6544 Telecopy No.: 404/523-7983 By: /s/ Diane M. Rhoades Name: Diane M. Rhoades Domestic Lending Office: Title: Executive Officer - ----------------------- 233 South Wacker Drive Suite 5400 Chicago, Illinois 60606 Eurocurrency Lending Office: - --------------------------- 233 South Wacker Drive Suite 5400 Chicago, Illinois 60606 - 17 - Address for Notices: FIRST UNION NATIONAL BANK - ------------------- 999 Peachtree Street, N.E. By: /s/ Michalene Donagan 9th Floor Name: Michalene Donagen Atlanta, GA 30309 Title: Vice President Attention: Michalene Donegan Telephone: 404/827-7154 Telecopy No.: 404/827-7199 Domestic Lending Office: 999 Peachtree Street, N.E. 9th Floor Atlanta, GA 30309 Eurocurrency Lending Office: 999 Peachtree Street, N.E. 9th Floor Atlanta, GA 30309 - 18 - Address for Notices: FLEET BANK OF MAINE 80 Exchange Street By: /s/ Neil C. Buitenhugs Bangor, Maine 04401 Name: Neil C. Buitenhugs Attention: Neil C. Buitenhuys Title: Vice President Telephone: 207/941-6140 Telecopy No.: 207/941-6023 Domestic Lending Office: - ----------------------- 511 Congress Street, P. O. Box 1280 Portland, Maine 04104-5006 Eurocurrency Lending Office: - --------------------------- 511 Congress Street, P. O. Box 1280 Portland, Maine 04104-5006 - 19 - Address for Notices: NATIONSBANK, N.A. - ------------------- 100 North Tryon Street Mail Code NC1-007-08-11 By: /s/ David H. Dinkins Charlotte, NC 28255 Name: David H. Dinkins Attention: Title: Vice President Telephone: 704/386-2951 Telecopy No.: 704/386-1270 Domestic Lending Office: - ----------------------- One Independence Center 101 North Tryon Street Mail Code NC1-001-15-03 Charlotte, NC 28255 Eurocurrency Lending Office: - --------------------------- One Independence Center 101 North Tryon Street Mail Code NC1-001-15-03 Charlotte, NC 28255 - 20 - Address for Notices: PNC BANK, NATIONAL ASSOCIATION - ------------------- One PNC Plaza Fifth Avenue and Wood Street By: /s/ Robert J. Mitchell, Jr. Pittsburgh, PA 15265 Name: Robert J. Mitchell, Jr. Attention: Robert J. Mitchell, Jr. Title: Vice President Telephone: 412/762-6547 Telecopy No.: 412/762-6484 Domestic Lending Office: - ----------------------- One PNC Plaza Fifth Avenue and Wood Street Pittsburgh, PA 15265 Eurocurrency Lending Office: - --------------------------- One PNC Plaza Fifth Avenue and Wood Street Pittsburgh, PA 15265 - 21 - Address for Notices: WACHOVIA BANK, N.A. - ------------------- 191 Peachtree Street, N.E. 30th Floor Atlanta, GA 30383 Attention: Doug Strickland By: /s/ Douglas W. Strickland Name: Douglas W. Stickland Telephone: 404/332-1382 Title: Vice President Telecopy No.: 404/332-6920 Domestic Lending Office: - ----------------------- 191 Peachtree Street, N.E. Atlanta, Georgia 30383 Eurocurrency Lending Office: - --------------------------- 191 Peachtree Street, N.E. Atlanta, Georgia 30383 - 22 - EX-10.6 3 1ST AMEND TO TERM LOAN AGREEMENT FIRST AMENDMENT TO TERM LOAN AGREEMENT THIS FIRST AMENDMENT TO TERM LOAN AGREEMENT (this "First Amendment") made and entered into as of December 2, 1997, by and among INTERFACE, INC., a Georgia corporation ("Interface"), SUNTRUST BANK, ATLANTA, a banking corporation organized under the laws of the State of Georgia ("STBA"), THE FIRST NATIONAL BANK OF CHICAGO, a national banking association ("FNBC"), the other banks and lending institutions listed on the signature pages hereof, and any assignees of STBA, FNBC, or such other banks and lending institutions that become "Lenders" as provided herein (STBA, FNBC, and such other banks, lending institutions and assignees referred to collectively herein as the "Lenders"), SUNTRUST BANK, ATLANTA, in its capacity as administrative agent for the Lenders (the "Administrative Agent"), and each successor agent for such Lenders as may be appointed from time to time pursuant to Article IX of the Term Loan Agreement (as hereinafter defined), THE FIRST NATIONAL BANK OF CHICAGO, in its capacity as syndication agent hereunder (the "Syndication Agent"; the Administrative Agent and the Syndication Agent referred to collectively herein as the "Co- Agents"), and SUNTRUST BANK, ATLANTA, in its capacity as collateral agent for the Co-Agents and Lenders and each successor collateral agent as may be appointed from time to time pursuant to Article IX of the Term Loan Agreement (the "Collateral Agent"); W I T N E S S E T H: -------------------- WHEREAS, Interface, the Lenders, the Co-Agents, and the Collateral Agent are parties to a certain Term Loan Agreement dated as of June 25, 1997 (the "Term Loan Agreement"); WHEREAS, Interface has requested that additional term loans in the aggregate principal amount of $20,000,000 be made to it pursuant to the terms of the Term Loan Agreement, such additional term loans to mature and be payable in one installment on the first anniversary of the funding of such additional term loans, with the proceeds of such additional term loans being used by Interface to fund a portion of the purchase price payable in connection with its acquisition of certain carpet-related businesses of Readicut International plc; WHEREAS, Interface has further requested that certain covenants in the Term Loan Agreement be amended so as to facilitate its acquisition of such carpet-related businesses of Readicut International plc; WHEREAS, certain of the Lenders have agreed to make the additional term loans to Interface, and the Lenders and the Co- Agents have agreed to amend the Term Loan Agreement as requested by Interface, subject to the terms, conditions and requirements set forth in this First Amendment; NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, Interface, the Lenders, the Co-Agents and the Collateral Agent agree as follows: 1. DEFINED TERMS. Except as otherwise expressly defined herein, each capitalized term used in this First Amendment that is defined in the Term Loan Agreement is used herein with the meaning assigned to such capitalized term in the Term Loan Agreement. 2. AMENDMENTS TO SECTION 1.01 ("DEFINITIONS"). (a) Section 1.01 of the Term Loan Agreement is hereby amended by adding the following defined terms and definitions thereof in proper alphabetical order: "FIRST AMENDMENT TO TERM LOAN AGREEMENT" shall mean the First Amendment to Term Loan Agreement dated as of December 2, 1997, by and among Interface, the Lenders, the Co-Agents, and the Collateral Agent, together with all exhibits and schedules thereto. "FIRST AMENDMENT EFFECTIVE DATE" shall mean the date on which the conditions to effectiveness of the First Amendment to Term Loan Agreement have been satisfied, as set forth in paragraph 15 of the First Amendment to Term Loan Agreement. "READICUT" shall mean Readicut International plc. "READICUT ACQUISITION" shall mean the purchase by Interface Europe Ltd. and Interface Europe B.V. of all issued and outstanding shares of T.F. Firth & Sons Ltd., Vebe Floorcoverings B.V., and Tayrich Limited, from Readicut. "READICUT DEBT" shall mean the Indebtedness in the approximate amount of U.S. $17,600,000 representing the deferred portion of the purchase price payable by Interface and/or its Subsidiaries in the Readicut Acquisition, such Indebtedness being due and payable on the first anniversary of the closing of the Readicut Acquisition and supported by a letter of credit issued under the Letter of Credit Agreement. "READICUT DIVESTITURES" shall mean, collectively, the sales or other disposition by Interface and/or its Subsidiaries of any assets (including, without limitation, shares of Subsidiaries) acquired as part of the Readicut Acquisition; provided, however, that the term Readicut Divestitures shall not include (i) any sales or other dispositions of any assets (other than the shares or assets of Network Flooring Ltd.) or any shares of T.F. Firth & Sons Ltd. or Firth Carpets Ltd., (ii) any sales or other dispositions of any of the assets or shares of Vebe Floorcoverings B.V. or Network Flooring Ltd. sold or disposed of after the first anniversary of the closing of the Readicut Acquisition, or (iii) any sales or other dispositions of any of the assets or shares of Tayrich Limited or Joseph, Hamilton & Seaton Ltd. sold or disposed of later than eighteen months after the closing of the Readicut Acquisition. "SECOND CLOSING DATE" shall mean the date on or before February 28, 1998, on which the conditions set forth in Section 4.03 of the First Amendment to Term Loan Agreement are satisfied or waived in accordance with Section 10.02 of this Agreement. - 2 - "SERIES B LENDERS" shall mean, collectively, STBA, FNBC, the other banks and lending institutions listed on the signature pages of this Agreement, and each assignee thereof, if any, pursuant to Section 10.06(c), having made or had assigned to it any Series B Term Loans. "SERIES B TERM LOAN COMMITMENT" shall mean, at any time for any Series B Lender, the amount of such commitment set forth below such Series B Lender's name on the signature pages of the First Amendment to Term Loan Agreement, as the same may be increased or decreased from time to time as a result of any repayment of the Series B Term Loans, any assignment thereof pursuant to Section 10.06 of this Agreement, or any amendment thereof pursuant to Section 10.02 of this Agreement. "SERIES B TERM LOANS" shall mean, collectively, the term loans in the aggregate principal amount of $75,000,000 made to Interface by the Series B Lenders on the Closing Date pursuant to Section 2.01(a)(i). "SERIES B TERM NOTES" shall mean, collectively, the promissory notes evidencing the Series B Term Loans substantially in the form of Exhibit "A" attached to this Agreement and duly completed in accordance with the terms thereof. "SERIES C LENDERS" shall mean, collectively, STBA, FNBC, the other banks and lending institutions listed on the signature pages of the First Amendment to Term Loan Agreement, and each assignee thereof, if any, pursuant to Section 10.06(c) of this Agreement, having made or had assigned to it any Series C Term Loans. "SERIES C TERM LOAN COMMITMENT" shall mean, at any time for any Series C Lender, the amount of such commitment set forth below such Series C Lender's name on the signature pages of the First Amendment to Term Loan Agreement, as the same may be increased or decreased from time to time as a result of any repayment of the Series C Term Loans, any assignment thereof pursuant to Section 10.06 of this Agreement, or any amendment thereof pursuant to Section 10.02 of this Agreement. "SERIES C TERM LOAN MATURITY DATE" shall mean the first anniversary of the Second Closing Date. "SERIES C TERM LOANS" shall mean, collectively, the term loans in the aggregate principal amount of $20,000,000 to be made to Interface by the Series C Lenders on the Second Closing Date pursuant to Section 2.01(a)(ii). "SERIES C TERM NOTES" shall mean, collectively, the promissory notes evidencing the Series C Term Loans substantially in the form of Exhibit "I" attached to the First Amendment to Term Loan Agreement and duly completed in accordance with the terms thereof. - 3 - (b) The defined terms and definitions listed below that appear in the Term Loan Agreement are hereby amended by deleting said defined terms and definitions in their entirety and substituting in lieu thereof the following defined terms and definitions: "LENDER" shall mean any of the Series B Lenders and Series C Lenders, and "Lenders" shall mean, collectively, all of the Series B Lenders and Series C Lenders. "TERM LOAN COMMITMENT" shall mean, at any time for any Lender, the total amount of such Lender's Series B Term Loan Commitment and Series C Term Loan Commitment. "TERM LOANS" shall mean, collectively, the Series B Term Loans and the Series C Term Loans. "TERM NOTES" shall mean, collectively, the Series B Term Notes and the Series C Term Notes. 3. AMENDMENTS TO SECTION 2.01 ("AMOUNT OF TERM LOANS; USE OF PROCEEDS"). Section 2.01 of the Term Loan Agreement is hereby amended by deleting subsections (a) and (d) of Section 2.01 in their entirety and substituting in lieu thereof the following subsections (a) and (d): (a) Subject to and upon the terms and conditions herein set forth, (i) each Series B Lender agrees to make on the Closing Date a Series B Term Loan to Interface in an amount equal to its Series B Term Loan Commitment, and (ii) each Series C Lender agrees to make on the Second Closing Date a Series C Term Loan to Interface in an amount equal to its Series C Term Loan Commitment. All such Term Loans shall be repaid as set forth in Section 2.02(b). Interface shall not be entitled to reborrow any amounts repaid with respect to the Term Loans. . . . . (d) The proceeds from the Series B Term Loans shall be used (i) to repay outstanding "Domestic Revolving Loans" under the Credit Agreement by an aggregate principal amount equal to $50,000,000, and (ii) to prepay that portion of the outstanding "Term Loans" under the Credit Agreement in an aggregate principal amount equal to $25,000,000 that were otherwise scheduled to be repaid on December 31, 2001. The proceeds from the Series C Term Loans shall be used (i) to pay a portion of the purchase price payable by Interface and its Subsidiaries in respect of the Readicut Acquisition, and/or (ii) to repay outstanding "Domestic Revolving Loans" under the Credit Agreement. 4. AMENDMENT TO SECTION 2.02 ("TERM NOTES; REPAYMENT OF PRINCIPAL"). Section 2.02 of the Term Loan Agreement is hereby amended by deleting subsection (b) of Section 2.02 in its entirety and substituting in lieu thereof the following subsection (b): - 4 - (b) Interface shall repay all outstanding Series C Term Loans in full on the Series C Term Loan Maturity Date, and shall repay all outstanding Series B Term Loans in full on the Final Maturity Date. 5. AMENDMENT TO SECTION 2.03 ("MANDATORY PREPAYMENTS"). Section 2.03 of the Term Loan Agreement is hereby amended as follows: (a) The first sentence of subsection (a) of Section 2.03 is hereby deleted and the following sentence is hereby substituted in lieu thereof as the first sentence of subsection (a) of Section 2.03: No mandatory prepayment shall be required pursuant to this Section 2.03(a) until the aggregate amount of Asset Sales occurring after October 2, 1994 exceeds $10,000,000 (based on the Asset Values thereof, but excluding in the foregoing computation (i) Asset Sales resulting from loss, damage, destruction, or taking where the proceeds thereof are utilized so as to be excluded from the definition of Net Proceeds, (ii) Asset Sales occurring as a part of any sale and leaseback transactions permitted pursuant to Section 7.06, and (iii) Asset Sales made as part of the Readicut Divestitures). (b) A new subsection (e) is hereby added to Section 2.03 as follows: (e) Subject to the provisions of paragraph (c) of this Section 2.03, all amounts received as Net Proceeds from any Asset Sales effected as part of the Readicut Divestitures shall be used to prepay outstanding "Domestic Revolving Loans" or "Multicurrency Revolving Loans" under the Credit Agreement as may be specified by Interface at the time of such prepayment or, if not so specified by Interface, then as specified by the Co- Agents. All such prepayments shall be applied on a pro rata basis among the holders of such Domestic Revolving Loans or Multicurrency Revolving Loans, as the case may be. 6. AMENDMENT TO SECTION 3.04 ("INTEREST PERIODS"). Section 3.04 of the Term Loan Agreement is hereby amended by deleting clause (vi) thereof in its entirety and substituting in lieu thereof the following clause (vi): (vi) No Interest Period with respect to the Series C Term Loans shall extend beyond the Series C Term Loan Maturity Date, and no Interest Period with respect to the Series B Term Loans shall extend beyond the Final Maturity Date. 7. AMENDMENTS TO SECTION 4.01 ("CONDITIONS PRECEDENT TO FUNDING OF TERM LOANS"). Section 4.01 of the Term Loan Agreement is hereby amended by deleting each and every reference therein to the "Term Loans" and substituting in each instance a reference to the "Series B Term Loans." - 5 - 8. ADDITION OF NEW SECTION 4.03 ("CONDITIONS PRECEDENT TO FUNDING OF SERIES C TERM LOANS"). Article IV of the Term Loan Agreement is hereby amended by adding a new Section 4.03 to Article IV as follows: SECTION 4.03. CONDITIONS PRECEDENT TO FUNDING OF SERIES C TERM LOANS. At the time of the making of the Series C Term Loans hereunder on the Second Closing Date, all obligations of Interface hereunder incurred at or prior to such funding of the Series C Term Loans (including, without limitation, Interface's obligations to reimburse the reasonable fees and expenses of counsel to the Co-Agents and any fees and expenses payable to the Co-Agents and the Lenders as previously agreed with Interface) shall have been paid in full, and the Co-Agents shall have received the following, in form and substance satisfactory in all respects to the Co-Agents: (a) The duly executed counterparts of the First Amendment to Term Loan Agreement (including the Acknowledgment of Guarantors attached thereto); (b) The duly completed Series C Term Notes; (c) Certificate of Interface in substantially the form of Exhibit "J" attached to the First Amendment to Term Loan Agreement and appropriately completed; (d) Certificates of the Secretary or Assistant Secretary of Interface attaching and certifying a copy of the resolutions of its board of directors, authorizing the execution, delivery and performance of the documents described in clause (a) and (b) above; (e) Certificate of the Secretary or an Assistant Secretary of Interface certifying (i) the name, title and true signature of each officer of Interface executing the documents described in this Section 4.03, and (ii) the by-laws or comparable governing documents of Interface; (f) Certified copies of the articles of incorporation of Interface, together with a certificate of valid existence from the Secretary of State of Georgia; (g) Copies of all documents and instruments, including all consents, authorizations and filings, required or advisable under any Requirement of Law or by any material Contractual Obligation of the Credit Parties, in connection with the execution, delivery, performance, validity and enforceability of the documents described in this Section 4.03 and the other documents to be executed and delivered hereunder, together with the documents being executed and delivered as part of the Readicut Acquisition, and such consents, authorizations, filings and orders shall be in full force and effect and all applicable waiting periods shall have expired; - 6 - (h) The favorable opinion of (i) Kilpatrick Stockton LLP, United States counsel to Interface, substantially in the form of Exhibit "K" attached to the First Amendment to Term Loan Agreement addressed to the Co-Agents and each of the Lenders, and covering such other matters as either Co-Agent or any Lender may reasonably request; and (i) A certificate of the president, chief financial officer, or principal accounting officer of Interface as to the calculation and reasonable detail of the "Consolidated Fixed Charge Coverage Ratio" (as defined in the Senior Subordinated Notes Indenture) of Interface, demonstrating to the satisfaction of the Co- Agents and the Lenders that at the time of the funding of the Series C Term Loans, and after giving pro forma effect thereto, such "Consolidated Fixed Charge Coverage Ratio" of Interface exceeds 2.50:1.00, and that the Series C Term Loans will constitute "Senior Indebtedness" for all purposes under the Senior Subordinated Notes Indenture. In addition to the foregoing, the following conditions shall have been satisfied or shall have existed, all to the satisfaction of the Co-Agents, as of the time the Series C Term Loans were made hereunder: (j) The Series C Term Loans and the use of proceeds thereof shall not have contravened, violated or conflicted with, or involved the Co-Agents or any Lender in a violation of, any law, rule, injunction, or regulation, or determination of any court of law or other governmental authority; and (k) All corporate proceedings and all other legal matters in connection with the authorization, legality, validity and enforceability of the documents described in this Section 4.03 shall have been reasonably satisfactory in form and substance to the Required Lenders. 9. AMENDMENT TO SECTION 7.01 ("INDEBTEDNESS"). Section 7.01 of the Term Loan Agreement is hereby amended (i) by deleting the word "and" from the end of subsection (l) thereof, and (ii) by deleting subsection (m) thereof in its entirety and substituting in lieu thereof new subsections (m), (n) and (o) as follows: (m) The Readicut Debt; (n) Indebtedness consisting of contingent obligations under indemnities, guarantees, and reimbursement agreements in favor of Persons issuing surety bonds, guarantees and similar undertakings issued to support performance obligations of any of the Consolidated Companies incurred in the ordinary course of business; and - 7 - (o) Other Indebtedness not to exceed $15,000,000 at any one time outstanding. 10. AMENDMENT TO SECTION 7.03 ("MERGERS, ACQUISITIONS, SALES, ETC."). Section 7.03 of the Term Loan Agreement is hereby amended as follows: (a) The first parenthetical phrase in clause (ii) of Section 7.03 is hereby deleted in its entirety and the following parenthetical phrase substituted in lieu thereof: (but excluding Asset Sales occurring as part of the Readicut Divestitures or as part of any sale and leaseback transactions permitted by Section 7.06) (b) Clause (vi) of Section 7.03 is hereby amended by deleting clause (vi) in its entirety and substituting in lieu thereof the following clause (vi): (vi) Asset Sales occurring as part of the Readicut Divestitures or as part of any sale and leaseback transactions permitted pursuant to Section 7.06, or 11. AMENDMENT TO ARTICLE VIII ("EVENTS OF DEFAULT"). Article VIII of the Term Loan Agreement is hereby amended (i) by deleting the period at the end of Section 8.15 and substituting in lieu thereof a semicolon, and (ii) by adding the following language at the end of Article VIII: then, and in any such event, and at any time thereafter if any Event of Default shall then be continuing, the Co-Agents may, and upon the written or telex request of the Required Lenders, shall, by written notice to Interface, take any or all of the following actions, without prejudice to the rights of the Co-Agents, any Lender or the holder of any Term Note to enforce its claims against Interface or any other Credit Party: (i) declare all Term Loan Commitments terminated, whereupon the pro rata Term Loan Commitments of each Lender shall terminate immediately without any other notice of any kind; and (ii) declare the principal of and any accrued interest on the Term Loans, and all other Obligations owing hereunder, to be, whereupon the same shall become, forthwith due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by Interface; provided, that, if an Event of Default specified in Section 8.07 shall occur, the result which would occur upon the giving of written notice by the Co-Agents to Interface and any other Credit Party, as specified in clauses (i) and (ii) above, shall occur automatically without the giving of any such notice. 12. SUPPLEMENT TO SCHEDULE 5.01 ("ORGANIZATION AND OWNERSHIP OF SUBSIDIARIES"). Effective upon the closing of the Readicut Acquisition, Schedule 5.01 to the Term Loan Agreement shall be supplemented to reflect the Readicut Acquisition by attaching thereto the Supplement to Schedule 5.01 in the form attached to this First Amendment. - 8 - 13. ADDITIONAL EXHIBITS. The Term Loan Agreement is hereby amended by adding to the Term Loan Agreement the following exhibits attached to this First Amendment and made a part of the Term Loan Agreement by this reference: Exhibit "I" (form of Series C Term Notes), Exhibit "J" (form of Second Closing Certificate) and Exhibit "K" (form of Opinion of Kilpatrick Stock LLP). 14. REPRESENTATIONS AND WARRANTIES. Interface represents and warrants to the Co-Agents and the Lenders as follows: (a) All representations and warranties set forth in the Term Loan Agreement are, and after giving effect to the Readicut Acquisition will be, true and correct in all material respects with the same effect as though such representations and warranties have been made on and as of the date hereof and after giving effect to the Readicut Acquisition (except that the representation and warranty set forth in Section 5.19 of the Term Loan Agreement shall not be deemed to relate to any time subsequent to the date of the initial Series B Term Loans under the Term Loan Agreement); (b) No Default or Event of Default has occurred and is continuing on the date hereof or will occur or exist as a result of the Readicut Acquisition; (c) Since the date of the most recent financial statements of the Consolidated Companies submitted to the Lenders pursuant to Section 6.07(b) of the Term Loan Agreement, and after giving pro forma effect to the Readicut Acquisition, there has been no change which has had or could reasonably be expected to have a Materially Adverse Effect (whether or not notice with respect to such change has otherwise been furnished to the Lenders pursuant to Section 6.07); (d) Interface has the corporate power and authority to make, deliver and perform this First Amendment and has taken all necessary corporate action to authorize the execution, delivery and performance of this First Amendment and the documents described in Section 4.03 of the Term Loan Agreement as amended hereby. No consent or authorization of, or filing with, any Person (including, without limitation, any governmental authority), is required in connection with the execution, delivery or performance by it, or the validity or enforceablility against it, of this First Amendment and the other documents described in Section 4.03 the Term Loan Agreement as amended hereby, other than such consents, authorizations or filings which have been made or obtained; and (e) This First Amendment and the documents described in Section 4.03 of the Term Loan Agreement as amended hereby have been duly executed and delivered by Interface and constitute the legal, valid and binding obligations of Interface, enforceable against it in accordance with their respective terms, except as may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws affecting the enforcement of creditors' rights generally and by general principles of equity. - 9 - 15. EFFECTIVENESS OF FIRST AMENDMENT. This First Amendment shall become effective upon the execution and delivery to the Domestic Agent of counterparts hereof (whether originals or facsimile transmissions thereof) on behalf of Interface, the Co- Agents, and the Lenders. 16. REFERENCES TO TERM LOAN AGREEMENT. On and after the date this First Amendment becomes effective as provided in paragraph 15 above, each and every reference in the Credit Documents to the Term Loan Agreement shall be deemed to refer to and mean the Term Loan Agreement as amended by this First Amendment and as the same may be further amended, restated and supplemented from time to time. The parties further confirm and agree that (i) except as expressly amended herein, the Term Loan Agreement remains in full force and effect in accordance with its terms, and (ii) all other Credit Documents remain in full force and effect in accordance with their respective terms. 17. COUNTERPARTS. This First Amendment may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. 18. MISCELLANEOUS. This First Amendment and the rights and obligations of the parties hereunder shall be construed in accordance with and be governed by the law (without giving effect to the conflict of law principles thereof) of the State of Georgia. This First Amendment shall be binding on and shall inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto. - 10 - IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be duly executed and delivered in Atlanta, Georgia, by their duly authorized officers as of the day and year first above written. Address for Notices: INTERFACE, INC. - ------------------- 2859 Paces Ferry Road Suite 2000 Atlanta, GA 30339 By: /s/ Daniel T. Hendrix Attention: Daniel T. Hendrix Daniel T. Hendrix Senior Vice President Telex No.: Answerback: Telecopy No.: 404/319-0070 Address for Notices: SUNTRUST BANK, ATLANTA, - ------------------- as Administrative Agent and Collateral Agent 25 Park Place 23rd Floor Atlanta, GA 30303 Attention: Thomas R. Banks By: /s/ Thomas R. Banks Name: Thomas R. Banks Title: Assistant Vice President Telex No.: 542210 Answerback: TRUSCO INT ATL By: /s/ David W. Penter Telecopy No.: 404/588-8833 Name: David W. Penter Title: Group Vice President Payment Office: - --------------- 25 Park Place, N.E. Atlanta, GA 30303 Address for Notices: THE FIRST NATIONAL BANK - ------------------- OF CHICAGO, as Syndication Agent One First National Plaza Chicago, Illinois 60670-0324 Attention: Judith L. Cornwell By: /s/ Courtenay R. Wood Name: Courtenay R. Wood Title: Vice President Telex No.: Answerback: Telecopy No.: 312/732-5296 Administrative Office: - ---------------------- One First National Plaza Chicago, Illinois 60670-0324 Attention: Judith L. Cornwell Payment Offices: - ---------------- (See Schedule 4.01) Address for Notices: SUNTRUST BANK, ATLANTA - ------------------- 25 Park Place 23rd Floor Atlanta, GA 30303 Attention: Thomas R. Banks By: /s/ Thomas R. Banks Name: Thomas R. Banks Title: Assistant Vice President Telex No.: 542210 Answerback: TRUSCO INT ATL By: /s/ David W. Penter Telecopy No.: 404/588-8833 Name: David W. Penter Title: Group Vice President Domestic Lending Office: - ------------------------ One Park Place, N.E. Atlanta, GA 30303 Telex No.: 542210 Answerback: TRUSCO INT ATL Eurocurrency Lending Office: - ---------------------------- One Park Place, N.E. Atlanta, Georgia 30303 Telex No. 542210 Answerback: TRUSCO INT ATL PRO RATA AMOUNT SHARE ------ -------- SERIES B TERM LOAN COMMITMENT: $8,250,000 11.00000% SERIES C TERM LOAN COMMITMENT: $2,889,300 14.4465% Address for Notices: THE FIRST NATIONAL BANK - -------------------- OF CHICAGO Mail Suite 0324 One First National Plaza Chicago, Illinois 60670-0324 Attention: Judith L. Cornwell By: /s/ Courtenay R. Wood Name: Courtenay R. Wood Title: Vice President Telex No.: 4330253 Answerback: FNBC UI Telecopy No.: 312/732-5296 Administrative Office - --------------------- One First National Plaza Chicago, Illinois 60670-0324 Attention: Judith L. Cornwell Payment Offices: - ---------------- (See Schedule 4.01) PRO RATA AMOUNT SHARE ------ --------- SERIES B TERM LOAN COMMITMENT: $8,250,000 11.00000% SERIES C TERM LOAN COMMITMENT: $2,889,300 14.4465% Address for Notices: THE BANK OF TOKYO-MITSUBISHI, - -------------------- LTD., ATLANTA AGENCY 133 Peachtree Street, N.E. 4970 Georgia-Pacific Center Atlanta, GA 30303 Attention: Brandon Meyerson By: /s/ Brenda A. Meyerson Name: Brenda A. Meyerson Telephone: 404/577-2960 Title: Assistant Vice President Telecopy No.: 404/577-1155 Telex No.: 6827300 Answerback: 6827300BOT ATL Domestic Lending Office: - ------------------------ 4970 Georgia-Pacific Center 133 Peachtree Street, N.E. Atlanta, Georgia 30303 Eurocurrency Lending Office: - --------------------------- 4970 Georgia-Pacific Center 133 Peachtree Street, N.E. Atlanta, Georgia 30303 PRO RATA AMOUNT SHARE ------ --------- SERIES B TERM LOAN COMMITMENT: $5,100,000 6.80000% SERIES C TERM LOAN COMMITMENT: $1,435,720 7.1786% Address for Notices: CIBC INC. - ------------------------- Canadian Imperial Bank of Commerce Two Paces West 2727 Paces Ferry Road, Suite 1200 By: /s/ Roger Colden Atlanta, Georgia 30339 Name: Roger Colden Attention: William Humphries Title: Executive Director, CIBC Oppenheimer corp. as Agent Telephone: 770/319-4906 Telecopy No.: 770/319-4954 Domestic Lending Office: Canadian Imperial Bank of Commerce Two Paces West 2727 Paces Ferry Road, Suite 1200 Atlanta, Georgia 30339 Eurocurrency Lending Office: Canadian Imperial Bank of Commerce Two Paces West 2727 Paces Ferry Road, Suite 1200 Atlanta, Georgia 30339 PRO RATA AMOUNT SHARE ---------- -------- SERIES B TERM LOAN COMMITMENT: $5,600,000 7.46667% SERIES C TERM LOAN COMMITMENT: $0 0% Address for Notices: CREDITANSTALT-BANKVEREIN - ------------------- Two Ravinia Drive Suite 1680 By: /s/ Stephen W. Hipp Atlanta, Georgia 30346 Name: Stephen W. Hipp Attention: Stephen W. Hipp Title: Assoc. Telephone: 770/390-1846 By: /s/ Craig Stamn Telecopy No.: 770/390-1851 Name: Craig Stamn Title: VP Domestic Lending Office: - ------------------------ Two Greenwich Plaza Greenwich, CT 06830-6353 Attn: Lisa Bruno Eurocurrency Lending Office: - ---------------------------- Two Greenwich Plaza Greenwich, CT 06830-6353 PRO RATA AMOUNT SHARE ---------- -------- SERIES B TERM LOAN COMMITMENT: $6,250,000 8.33333% SERIES C TERM LOAN COMMITMENT: $1,771,420 8.8571% Address for Notices: CREDIT LYONNAIS ATLANTA AGENCY - ------------------- Credit Lyonnais Atlanta Agency 303 Peachtree Street, N.E. By: /s/ David M. Cawrse Suite 4400 Name: David M. Cawrse Atlanta, GA 30303 Title: First Vice President & Manager Attention: David Cawrse Telephone: 404/524-3700 Telecopy No.: 404/584-5249 Domestic Lending Office: - ------------------------ Credit Lyonnais Atlanta Agency 303 Peachtree Street, N.E. Suite 4400 Atlanta, GA 30303 Eurocurrency Lending Office: - ---------------------------- Credit Lyonnais Atlanta Agency 303 Peachtree Street, N.E. Suite 4400 Atlanta, GA 30303 PRO RATA AMOUNT SHARE --------- -------- SERIES B TERM LOAN COMMITMENT: $5,100,000 6.80000% SERIES C TERM LOAN COMMITMENT: $1,435,720 7.1786% Address for Notices: THE SUMITOMO BANK LIMITED - ------------------- 303 Peachtree Street, N.E. By: /s/ Roger N. Arsham Suite 4420 Name: Roger N. Arsham Atlanta, GA 30308 Title: Vice President Attention: Roger Arsham Telephone: 404/524-6544 Telecopy No.: 404/523-7983 By: /s/ Diane M. Rhoades Name: Diane M. Rhoades Domestic Lending Office: Title: Executive Officer - ----------------------- 233 South Wacker Drive Suite 5400 Chicago, Illinois 60606 Eurocurrency Lending Office: - ---------------------------- 233 South Wacker Drive Suite 5400 Chicago, Illinois 60606 PRO RATA AMOUNT SHARE ------ -------- SERIES B TERM LOAN COMMITMENT: $5,100,000 6.80000% SERIES C TERM LOAN COMMITMENT: $1,435,720 7.1786% Address for Notices: FIRST UNION NATIONAL BANK - ------------------- 999 Peachtree Street, N.E. By: /s/ Michalene Donegan 9th Floor Name: Michalene Donegan Atlanta, GA 30309 Title: Vice President Attention: Michalene Donegan Telephone: 404/827-7154 Telecopy No.: 404/827-7199 Domestic Lending Office: - ------------------------ 999 Peachtree Street, N.E. 9th Floor Atlanta, GA 30309 Eurocurrency Lending Office: - ---------------------------- 999 Peachtree Street, N.E. 9th Floor Atlanta, GA 30309 PRO RATA AMOUNT SHARE ------ -------- SERIES B TERM LOAN COMMITMENT: $6,350,000 8.46667% SERIES C TERM LOAN COMMITMENT: $1,771,420 8.8571% Address for Notices: FLEET BANK OF MAINE - -------------------- 80 Exchange Street By: /s/ Neil C. Buitenhuys Bangor, Maine 04401 Name: Neil C. Buitenhuys Attention: Neil C. Buitenhuys Title: Vice President Telephone: 207/941-6140 Telecopy No.: 207/941-6023 Domestic Lending Office: - ------------------------ 511 Congress Street, P. O. Box 1280 Portland, Maine 04104-5006 Eurocurrency Lending Office: - ---------------------------- 511 Congress Street, P. O. Box 1280 Portland, Maine 04104-5006 PRO RATA AMOUNT SHARE SERIES B TERM LOAN COMMITMENT: $8,800,000 11.73333% SERIES C TERM LOAN COMMITMENT: $1,771,420 8.8571% Address for Notices: NATIONSBANK, N.A. - ------------------- 100 North Tryon Street Mail Code NC1-007-08-11 By: /s/ David H. Dinkins Charlotte, NC 28255 Name: David H. Dinkins Attention: Title: Vice President Telephone: 704/386-2951 Telecopy No.: 704/386-1270 Domestic Lending Office: - ------------------------ One Independence Center 101 North Tryon Street Mail Code NC1-001-15-03 Charlotte, NC 28255 Eurocurrency Lending Office: - ---------------------------- One Independence Center 101 North Tryon Street Mail Code NC1-001-15-03 Charlotte, NC 28255 PRO RATA AMOUNT SHARE ------ -------- SERIES B TERM LOAN COMMITMENT: $6,350,000 8.46667% SERIES C TERM LOAN COMMITMENT: $1,771,420 8.8571% Address for Notices: PNC BANK, NATIONAL ASSOCIATION One PNC Plaza Fifth Avenue and Wood Street By: /s/ Robert J. Mitchell, Jr. Pittsburgh, PA 15265 Name: Robert J. Mitchell, Jr. Attention: Robert J. Mitchell, Jr. Title: Vice President Telephone: 412/762-6547 Telecopy No.: 412/762-6484 Domestic Lending Office: - ----------------------- One PNC Plaza Fifth Avenue and Wood Street Pittsburgh, PA 15265 Eurocurrency Lending Office: - ---------------------------- One PNC Plaza Fifth Avenue and Wood Street Pittsburgh, PA 15265 PRO RATA AMOUNT SHARE ------ -------- SERIES B TERM LOAN COMMITMENT: $3,500,000 4.66667% SERIES C TERM LOAN COMMITMENT: $1,057,140 5.2857% Address for Notices: WACHOVIA BANK, N.A. - ------------------- 191 Peachtree Street, N.E. 30th Floor Atlanta, GA 30383 Attention: Doug Strickland By: /s/ Douglas W. Strickland Name: Douglas W. Strickland Telephone: 404/332-1382 Title: Vice President Telecopy No.: 404/332-6920 Domestic Lending Office: - ------------------------ 191 Peachtree Street, N.E. Atlanta, Georgia 30383 Eurocurrency Lending Office: - ----------------------------- 191 Peachtree Street, N.E. Atlanta, Georgia 30383 PRO RATA AMOUNT SHARE --------- SERIES B TERM LOAN COMMITMENT: $6,350,000 8.46667% SERIES C TERM LOAN COMMITMENT: $1,771,420 8.8571% ACKNOWLEDGMENT OF GUARANTORS Each of the Guarantors acknowledges and agrees to the terms of the foregoing First Amendment to Term Loan Agreement, and further acknowledges and agrees that (i) all of the Series B Term Loans and Series C Term Loans shall constitute the "Term Loans" as used in the Subsidiary Guaranty Agreement dated as of June 25, 1997 executed by them, and shall be included in the "Guaranteed Obligations" covered by such Subsidiary Guaranty Agreement, and (ii) such Subsidiary Guaranty Agreement is and shall remain in full force and effect on and after the date hereof, and (iii) the First Amendment to Term Loan Agreement and the increase in the total amount of Term Loans thereunder shall in no way release, discharge, or otherwise limit the obligations of such Guarantor under such Subsidiary Guaranty Agreement. This Acknowledgment of Guarantors made and delivered as of December 2, 1997. EACH CORPORATION LISTED ON SCHEDULE I ATTACHED HERETO (the "Guarantors") By: /s/ Daniel T. Hendrix Daniel T. Hendrix Senior Vice President SCHEDULE I SUBSIDIARY GUARANTORS Interface Interior Fabrics, Inc., a Delaware corporation (Formerly Guilford of Maine, Inc.) Guilford (Delaware), Inc., a Delaware corporation Interface Flooring Systems, Inc., a Georgia corporation Rockland React-Rite, Inc., a Georgia corporation Interface Research Corporation, a Georgia corporation Interface Europe, Inc., a Delaware corporation Pandel, Inc., a Georgia corporation Interface Asia-Pacific, Inc., a Georgia corporation Bentley Mills, Inc., a Delaware corporation Prince Street Technologies, Ltd., a Georgia corporation Intek, Inc., a Georgia corporation Toltec Fabrics, Inc., a Georgia corporation Interface Architectural Resources, Inc., a Michigan corporation (Formerly C-Tec, Inc.) Guilford of Maine, Inc., a Nevada corporation Guilford of Maine Finishing Services, Inc., a Nevada corporation Guilford of Maine Decorative Fabrics, Inc., a Nevada corporation Guilford of Maine Marketing Co., a Nevada corporation Intek Marketing Co., a Nevada corporation Interface Holding Company, a Nevada corporation Interface Americas, Inc., a Georgia corporation Interface Americas Services, Inc., a Georgia corporation Interface Specialty Resources, Inc., a Nevada corporation Re:Source Americas Enterprises, Inc., a Georgia corporation Interface Royalty Company, a Nevada corporation Interface Licensing Company, a Nevada corporation Price Street Royalty Company, a Nevada corporation Bentley Royalty Company, a Nevada corporation Superior/Reiser Flooring Resources, Inc., a Texas corporation Quaker City International, Inc., a Pennsylvania corporation Commercial Flooring Systems, Inc., a Pennsylvania corporation Congress Flooring Corp., a Massachusetts corporation Flooring Consultants, Inc., an Arizona corporation Lasher/White Carpet Company, Inc., a New York corporation B. Shehadi & Sons, Inc., a New Jersey corporation EX-11 4 COMPUTATION OF EPS
Weighted Average Shares Earnings Per Net Income Outstanding Share --------- ---------------- ------------ 1997 Basic $ 37,514 23,708 $ 1.58 Effect of Dilution: Options 773 Convertible Debt 153 170 -------- ------ -------- Diluted $ 37,667 24,651 $ 1.53 ======== ====== ======== 1996 Basic $ 24,717 20,060 $ 1.23 Effect of Dilution: Contingently Issuable Shares 171 Options 256 Convertible Debt 153 170 -------- ------ -------- Diluted $ 24,870 20,657 $ 1.20 ======== ====== ======== 1995 Basic $ 18,590 18,255 $ 1.02 Effect of Dilution: Options 344 -------- ------ -------- Diluted $ 18,590 18,599 $ 1.00 ======== ====== ======== Before extraordinary loss on early extinguishment of debt (net of tax).
EX-13 5 1997 FINANCIAL REPORT Exhibit 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL For 1997, the Company had net sales and net income of $1.1 billion and $37.5 million, respectively, the highest in the Company's history. Net sales were made up of sales of floorcovering products (primarily modular and broadloom carpets) and related services ($898.2 million) interior fabrics sales ($184.7 million) and chemical and specialty product sales ($52.4 million), accounting for 79%, 16% and 5% of total net sales, respectively. The Company achieved a compound annual growth rate in its net sales and net income of 16% and 28%, respectively, over the five-year period from 1993 to 1997. The Company's business, as well as the commercial interiors market in general, is somewhat cyclical in nature. The Company's strong financial performance in recent years is attributable in part to increased U.S. demand for its products, resulting from a recovery in the U.S. commercial office market which began in the mid 1990's. The Company believes that this recovery will continue for a number of years, and that all of its domestic operations will continue to benefit from these industry developments. However, a downturn in the new construction sector of the market could lessen the overall demand for commercial interiors products and could impair the Company's growth. Management believes that the impact upon the Company of such a downturn would be less pronounced given that the predominant portion of its sales are generated from the renovation sector of the market as opposed to the new construction sector. The Company's growth could also be impacted by international developments. Specifically, certain countries in the Asia-Pacific region have recently experienced weaknesses in their currency, banking and equity markets. These weaknesses could adversely affect demand for the Company's products. Excluding Japan and Australia, sales in the Asia-Pacific region represented approximately 2% of the Company's 1997 net sales. The Company engages in hedging transactions to reduce its exposure to adverse fluctuations in foreign currency exchange rates. RESULTS OF OPERATIONS Net sales of $1.1 billion and net income of $37.5 million during 1997 were the highest levels in the Company's history. The following table shows, as a percentage of net sales, certain items included in the Company's consolidated statements of income.
1995 1996 1997 ----- ----- ----- Net sales................................................... 100.0% 100.0% 100.0% Cost of sales............................................. 68.8 68.3 66.6 ----- ----- ----- Gross profit on sales..................................... 31.2 31.7 33.4 Selling general and administrative expense.................. 23.6 23.8 24.8 ----- ----- ----- Operating income............................................ 7.6 7.9 8.6 Other expense, net.......................................... 3.7 3.5 3.2 Income before taxes and extraordinary item................ 3.9 4.4 5.4 Taxes on income............................................. 1.4 1.8 2.1 ----- ----- ----- Income before extraordinary item.......................... 2.5 2.6 3.3 Extraordinary loss (net of tax)............................. 0.4 0.0 0.0 ----- ----- ----- Net income.................................................. 2.1 2.6 3.3 Preferred dividends......................................... 0.2 0.1 0.0 ----- ----- ----- Net Income applicable to common shareholders................ 1.9% 2.5% 3.3% ===== ===== =====
1 FISCAL 1997 COMPARED WITH FISCAL 1996 The Company's net sales increased $133 million (13.3%) compared with 1996. The increase was attributable primarily to increased sales volume (i) of products and related services in the Company's U.S. floorcovering operations, due to increased demand for and increased market share of its modular carpet products, as well as additional sales generated by the Re:Source Americas network, (ii) of floorcovering products (in local currency) in Continental Europe and Asia-Pacific and (iii) in the Company's interior fabrics operations due to increased U.S. demand for and increased market share of its fabric products, as well as the acquisition of Camborne Holdings, Ltd. during the year. These increases were offset somewhat by a weakening of certain key currencies (particularly the Dutch guilder, British pound sterling and Japanese yen) against the U.S. dollar, the Company's reporting currency. Cost of sales as a percentage of net sales decreased to 66.6% in 1997 compared to 68.3% in 1996. Decreased manufacturing costs through the Company's mass customization production strategy and its war-on-waste initiative, as well as a shift to higher margin products, were the primary factors fueling the increased manufacturing efficiencies in the Company's floorcovering operations. The Company's interior fabrics operations also experienced decreased manufacturing costs as a result of continued efficiencies generated from the new, state-of-the-art yarn manufacturing facility in Guilford, Maine. Additionally, the Company continued to experience improved pricing in its floorcovering operations. These benefits were somewhat offset by the higher cost of sales of the dealers comprising the Re:Source Americas network. Selling, general and administrative expenses as a percentage of net sales increased to 24.8% in 1997 compared to 23.8% in 1996. The increase was attributable primarily to (i) the continued development of the Re:Source Americas network infrastructure, (ii) consulting and development expenses associated with the Year 2000 compliance initiative, and (iii) increased marketing and sampling expenses in the Company's floorcovering operations associated with the introduction of new products as the Company continues to implement a mass customization strategy in both its domestic and international operations. The increase was somewhat offset by the lower selling, general and administrative ratios of the dealers comprising the Re:Source Americas network. Other expense increased $1.3 million in 1997, due primarily to an increase in the Company's interest expense associated with an increase in bank debt incurred as a result of the Company's acquisitions. The effective tax rate was 38.8% for 1997, compared to 39.2% in 1996. The decrease in the effective rate was primarily due to the effect of an increase in income before tax in proportion to the amortization expense of the Company's goodwill, which is not deductible for tax purposes. As a result of the aforementioned factors, the Company's net income increased 42.1% to $37.5 million for fiscal 1997, compared to $26.4 million for fiscal 1996. FISCAL 1996 COMPARED WITH FISCAL 1995 The Company's net sales increased $200 million (24.9%) compared with 1995. The increase was attributable primarily to increased sales volume in (i) the Company's floorcovering operations in the United States associated in part with the acquisitions of the commercial floorcovering dealers in the Company's Re:Source Americas network, (ii) the Company's floorcovering operations in Continental Europe and Australia, (iii) the Company's interior fabrics operations associated with the acquisitions of Toltec and Intek in June and December 1995, respectively, and (iv) the Company's specialty products division associated with the C-Tec (now Interface Architectural Resources) acquisition in 2 February, 1996. These increases were offset somewhat by a weakening of certain key currencies (particularly the British pound sterling, Dutch guilder and Japanese yen) against the U.S. dollar, the Company's reporting currency. Cost of sales decreased as a percentage of net sales to 68.3% in 1996 compared with 68.8% in 1995. The Company recognized a decrease in manufacturing costs in its floorcovering operations as a result of further benefits obtained from the Company's mass customization and war-on-waste strategies, which have continued to provide manufacturing efficiencies and help facilitate a shift to higher margin products. In addition, the Company achieved improved pricing in its floorcovering operations. These benefits were somewhat offset by the acquisitions of Toltec, Intek, C-Tec, and the commercial floorcovering dealers comprising the Company's new distribution network, which historically had higher cost of sales ratios than the Company. Selling, general and administrative expenses as a percentage of net sales increased to 23.8% in 1996 compared with 23.5% in 1995. The increase was due primarily to (i) administrative expenses associated with building an infrastructure to manage the Re:Source Americas network, (ii) increased marketing and sampling expenses in the Company's floorcovering operations associated with the introduction of new products as the Company moved to implement the mass customization production strategy in its European and Asia-Pacific operations, and continued to implement such strategy in its U.S. operations, and (iii) the acquisitions of Toltec and Intek, which historically had higher selling, general and administrative ratios than the Company. The increase was somewhat offset by the acquisitions of the commercial floorcovering dealers comprising the Company's new distribution and services network, which historically had lower selling, general and administrative ratios than the Company. Other expense increased $5.4 million in fiscal 1996, due primarily to an increase in the Company's interest expense associated with (i) an increase in bank debt incurred as a result of the Company's acquisitions, and (ii) higher interest rates associated with the Company's redemption of its 8% Convertible Subordinated Debentures in December 1995 and the issuance of $125 million in aggregate principal amount of 9.5% Senior Subordinated Notes in November 1995. The effective tax rate was 39.2% for fiscal 1996, compared to 35.8% in fiscal 1995. The increase in the effective income tax rate was due primarily to the elimination of valuation allowances associated with the Company's Dutch and Australian operations in 1995, which did not occur in 1996. This increase was offset somewhat by the effect of the increase in the Company's income before taxes in proportion to the amortization of the Company's goodwill, which is not deductible for tax purposes. As a result of the aforementioned factors, the Company's net income before extraordinary items increased 29.8% to $26.4 million for fiscal 1996, compared to $20.3 million for fiscal 1995. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of cash over the last three fiscal years have been funds provided by operating activities and proceeds from additional long-term debt. In 1997, operating activities generated $74.7 million of cash compared with $56.5 million and $76.0 million in 1996 and 1995, respectively. The increase in 1997 operating cash flows compared with 1996 was caused primarily by increased levels of net income, accounts payables and accruals. 3 The primary uses of cash during the three fiscal years ended December 28, 1997 have been (i) additions to property and equipment at the Company's manufacturing facilities, (ii) acquisitions of businesses, and (iii) cash dividends. For the three years ended December 28, 1997, the aggregate additions to property and equipment required cash outlays of $117.2 million, while acquisitions of businesses required $92.4 million, and dividends required $19.2 million. Management believes the capital investments will result in an expanded market presence and improved efficiency in the Company's production and distribution. In 1997, the Company issued 548,645 shares of Class A Common Stock or Class B Common Stock in addition to cash as consideration for acquisitions. Also, in January 1997, the Company issued 1,357,407 shares of Class A Common Stock in conjunction with the conversion of $19.8 million (face value) of its Series A Cumulative Convertible Preferred Stock. The Company is concurrently offering to the public $150 million aggregate principal amount of Notes and 1.5 million shares of Class A Common Stock. The Company intends to use the net proceeds of both offerings to reduce amounts outstanding under its $370 million Credit Facility, and for general corporate purposes, including working capital and future acquisitions. Amounts applied to the revolving credit portion of the Credit Facility will be available for reborrowing. At the end of fiscal 1997, the Company estimated capital expenditure requirements of approximately $40 million, excluding Year 2000 requirements, and had purchase commitments of approximately $13 million for 1998. The Company also intends to continue to selectively acquire companies and related product lines that complement its existing product lines and further its ability to offer total interior solutions to its customers. Management believes that cash provided by operations and long-term loan commitments, including the Credit Facility, will provide adequate funds for current commitments and other requirements in the foreseeable future. YEAR 2000 As is the case with other companies using computers in their operations, the Company is faced with the task of addressing the Year 2000 issue during the next two years. The Year 2000 issue arises from the widespread use of computer programs that rely on two-digit date codes to perform computations or decision- making functions. The Company has done a comprehensive review of its computer programs to identify the systems that would be affected by the Year 2000 issue, and is in the process of reviewing the Company's Year 2000 exposure to third party customers, distributors, suppliers, and banking institutions. The Company has also hired an outside consulting firm to assist in this conversion process and is beginning the process of modifying its computer program code to the four digit fields necessary to be Year 2000 compliant. The Company currently estimates the total cost of such modifications, excluding the cost of modifications to program logic control systems relative to manufacturing equipment, to be at least $17 million, although it could be significantly more. The Company and its outside consultants are currently evaluating the costs of modifications to these program logic control systems. Of the total project cost, approximately $10 million is attributable to the cost of new hardware and software which will be required in connection with the global consolidation of the Company's management and financial accounting systems. This new equipment and upgraded technology will have a definable value lasting beyond the Year 2000. In these instances, where Year 2000 compliance is ancillary, the Company may capitalize and depreciate such costs. The remaining $7 million will be expensed as incurred over the next two years. During the year ended December 28, 1997, the Company expensed approximately $0.6 million in regards to such modifications. 4 There can be no guarantee that these estimates will be achieved and actual results could differ from those anticipated. Specific factors that might cause differences include, but are not limited to, the ability of other companies on which the Company's systems rely to modify or convert their systems to be Year 2000 compliant, the ability to locate and correct all relevant computer codes and similar uncertainties. DERIVATIVE FINANCIAL INSTRUMENTS The Company employs the use of derivative financial instruments for the purpose of reducing its exposure to adverse fluctuations in interest and foreign currency exchange rates. While these hedging instruments are subject to fluctuations in value, such fluctuations are generally offset by the fluctuations in value of the underlying exposures being hedged. The Company does not hold or issue derivative financial instruments for trading purposes. The Company monitors the use of derivative financial instruments through the use of objective measurable systems, well-defined market and credit risk limits, and timely reports to senior management according to prescribed guidelines. The Company has established strict counterparty credit guidelines and only enters into transactions with financial institutions of investment grade or better. As a result, the Company considers the risk of counterparty default to be minimal. Management of the Company has developed and implemented a policy to maintain the percentage of fixed and variable rate debt within certain parameters. The Company enters into interest rate swap agreements, which maintain the fixed/variable mix within these defined parameters. In these swaps, the Company agrees to exchange, at specified intervals, the difference between fixed and variable interest amounts calculated by reference to an agreed-upon notional principal linked to LIBOR. At December 28, 1997, the Company had utilized interest rate swap agreements to effectively convert approximately $64.5 million of variable rate debt to fixed rate debt. The weighted average rate on these borrowings was 6.6% at December 28, 1997. The interest rate swap agreements have maturity dates ranging from five to twenty-four months. The purpose of the Company's foreign currency hedging activities is to reduce the risk that the eventual local currency inflows resulting from sales to foreign customers will be adversely affected by changes in exchange rates. The Company enters into forward exchange and currency swap contracts to hedge certain firm sales commitments denominated in foreign currencies. At December 28, 1997, the Company had approximately $14.5 million (notional amount) of foreign currency hedge contracts outstanding. The contracts served to hedge firmly committed Dutch guilder, German mark, Japanese yen, French franc, British pound sterling, and other foreign currency sales. The contracts generally have maturity dates of six to nine months. The Company recognized a $25.1 million decrease in its foreign currency translation adjustment account during 1997, because of the weakening of the Dutch guilder, British pound sterling, Thai baht and Japanese yen against the U.S. dollar. The 1997 decrease was associated primarily with the Company's investments in certain foreign subsidiaries located in the United Kingdom, Continental Europe and the Asia-Pacific region. The translation adjustment to shareholders' equity was converted by the guidelines of SFAS 52. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the FASB issued SFAS 131, Disclosures About Segments of an Enterprise and Related Information, which supersedes SFAS 14, Financial Reporting for Segments of a Business Enterprise. SFAS 131 establishes standards for the reporting by public companies of information about operating segments in annual financial statements and for the first time, requires reporting of selected information about operating segments in interim financial statements issued to the public. It also establishes standards for disclosures regarding 5 products and services, geographic areas and major customers. SFAS 131 defines operating segments as components of a company about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. SFAS 131 is effective for financial statements for periods beginning after December 15, 1997 and requires the restatement of comparative information for earlier periods. Management has been evaluating the impact the new statement will have on future financial statement disclosures and has determined that the Company will have three reportable segments: Floorcovering Products and Related Services, Interior Fabrics, and Chemical and Specialty Products. Historically, the Company has not reported information concerning operating segments. The Company's future reportable segments are strategic business units that offer different products and services. The results of operations and financial position will be unaffected by implementation of the standard. 6 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Independent Certified Public Accountants.......... F-2 Consolidated Statements of Income -- years ended December 28, 1997, December 29, 1996 and December 31, 1995......... F-3 Consolidated Balance Sheets -- December 28, 1997 and December 29, 1996......................................... F-4 Consolidated Statements of Cash Flow -- years ended December 28, 1997, December 29, 1996 and December 31, 1995......... F-5 Notes to Consolidated Financial Statements.................. F-6
F-1 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 28, 1997 and December 29, 1996, and the related consolidated statements of income and cash flows for each of the three years in the period ended December 28, 1997. The financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Interface, Inc. and its subsidiaries as of December 28, 1997 and December 29, 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 28, 1997, in conformity with generally accepted accounting principles. BDO SEIDMAN, LLP Atlanta, Georgia February 17, 1998 F-2 INTERFACE INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
FISCAL YEAR ENDED ---------------------------------- 1997 1996 1995 ---------- ---------- -------- (IN THOUSANDS, EXCEPT SHARE DATA) Net sales................................................... $1,135,290 $1,002,076 $802,066 Cost of sales............................................... 755,734 684,455 551,643 ---------- ---------- -------- Gross profit on sales....................................... 379,556 317,621 250,423 Selling, general and administrative expenses................ 281,755 238,932 188,880 ---------- ---------- -------- Operating income............................................ 97,801 78,689 61,543 ---------- ---------- -------- Other expense Interest expense.......................................... 35,038 32,772 26,753 Other..................................................... 1,492 2,490 3,114 ---------- ---------- -------- Total other expense............................... 36,530 35,262 29,867 ---------- ---------- -------- Income before taxes on income and extraordinary item........ 61,271 43,427 31,676 Taxes on income............................................. 23,757 17,032 11,336 ---------- ---------- -------- Income before extraordinary item............................ 37,514 26,395 20,340 Extraordinary loss, net of tax.............................. -- -- 3,512 ---------- ---------- -------- Net income........................................ 37,514 26,395 16,828 Preferred stock dividends................................... -- 1,678 1,750 ---------- ---------- -------- Net income applicable to common shareholders...... $ 37,514 $ 24,717 $ 15,078 ========== ========== ======== Basic earnings per common share Income before extraordinary item.......................... $ 1.58 $ 1.23 $ 1.02 Extraordinary loss, net of tax............................ -- -- 0.19 ---------- ---------- -------- Net Income........................................ $ 1.58 $ 1.23 $ 0.83 Diluted earnings per common share Income before extraordinary item.......................... $ 1.53 $ 1.20 $ 1.00 Extraordinary loss, net of tax............................ -- -- 0.19 ---------- ---------- -------- Net income........................................ $ 1.53 $ 1.20 $ 0.81 ========== ========== ========
See accompanying notes to consolidated financial statements. F-3 INTERFACE INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
1997 1996 --------- --------- (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS Current Cash...................................................... $ 10,212 $ 8,762 Accounts receivable....................................... 177,977 167,817 Inventories............................................... 157,630 146,678 Prepaid expenses.......................................... 24,265 22,986 Deferred income taxes..................................... 5,156 7,057 -------- -------- Total current assets.............................. 375,240 353,300 Property and equipment...................................... 228,781 208,791 Miscellaneous............................................... 46,945 51,385 Excess of cost over net assets acquired..................... 278,597 249,070 -------- -------- $929,563 $862,546 ======== ======== LIABILITIES AND COMMON SHAREHOLDERS' EQUITY Current liabilities Notes payable............................................. $ 22,264 $ 14,918 Accounts payable.......................................... 79,279 74,960 Accrued expenses.......................................... 87,543 70,919 Current maturities of long-term debt...................... 2,751 2,919 -------- -------- Total current liabilities......................... 191,837 163,716 Long-term debt, less current maturities..................... 264,499 254,353 Senior subordinated notes................................... 125,000 125,000 Deferred income taxes....................................... 28,873 23,484 -------- -------- Total liabilities................................. 610,209 566,553 Minority interest........................................... 2,989 3,125 Series A redeemable preferred stock......................... -- 19,750 Common stock................................................ 2,776 2,536 Additional paid-in capital.................................. 161,584 124,557 Retained earnings........................................... 197,906 166,828 Foreign currency translation adjustment..................... (28,155) (3,057) Treasury stock, 3,600,000 Class A shares, at cost........... (17,746) (17,746) -------- -------- $929,563 $862,546 ======== ========
See accompanying notes to consolidated financial statements. F-4 INTERFACE INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW
FISCAL YEAR ENDED ------------------------------ 1997 1996 1995 -------- -------- -------- (IN THOUSANDS) OPERATING ACTIVITIES Net income.................................................. $ 37,514 $ 26,395 $ 16,828 Adjustments to reconcile net income to cash provided by operating activities Depreciation and amortization............................... 38,605 35,305 28,944 Extraordinary loss on early extinguishment of debt, net of tax....................................................... -- -- 3,512 Deferred income taxes....................................... 7,849 5,438 1,431 Working capital changes Cash equivalents.......................................... -- 1,489 (596) Accounts receivable....................................... (16,386) (17,465) 25,978 Inventories............................................... (16,233) (2,199) 5,979 Prepaid expenses and other................................ (2,273) (6,870) 8 Accounts payable and accrued expenses..................... 25,647 14,419 (6,132) -------- -------- -------- 74,723 56,512 75,952 -------- -------- -------- INVESTING ACTIVITIES Capital expenditures........................................ (38,654) (36,436) (42,123) Acquisitions of businesses.................................. (34,647) (30,151) (27,554) Changes in escrowed and restricted funds.................... -- -- 2,663 Other....................................................... (17,902) (11,425) (5,145) -------- -------- -------- (91,203) (78,012) (72,159) -------- -------- -------- FINANCING ACTIVITIES Borrowings on long-term debt................................ 153,624 154,224 61,471 Principal repayments on long-term debt...................... (142,884) (107,561) (73,406) Proceeds from issuance of subordinated notes................ -- -- 121,543 Extinguishment of convertible subordinated debentures....... -- -- (106,419) Borrowings (repayments) under lines of credit............... 7,617 (20,102) 1,965 Proceeds from issuance of common stock...................... 6,414 2,916 984 Dividends paid.............................................. (6,436) (6,606) (6,132) -------- -------- -------- 18,335 22,871 6 -------- -------- -------- Net cash provided by operating, investing, and financing activities................................................ 1,855 1,371 3,799 Effect of exchange rate changes on cash..................... (405) 130 (34) -------- -------- -------- CASH Net increase................................................ 1,450 1,501 3,765 Balance, beginning of year.................................. 8,762 7,261 3,496 -------- -------- -------- Balance, end of year........................................ $ 10,212 $ 8,762 $ 7,261 ======== ======== ========
See accompanying notes to consolidated financial statements. F-5 INTERFACE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS Interface, Inc. (the "Company") is a recognized leader in the worldwide commercial interiors market, offering floorcoverings, fabrics, specialty chemicals and interior architectural products. The Company manufactures modular carpet under the Interface and Heuga brands. The Company's broadloom carpet operations are conducted through Bentley Mills and Prince Street, both of which focus on the high quality, designer-oriented sector of the U.S. broadloom carpet market, and Firth Carpets in the United Kingdom. The Company also provides specialized carpet replacement, installation, and maintenance services. The Company also produces interior fabrics and upholstery products, which it markets under the Guilford of Maine, Stevens Linen, Toltec, Intek, and Camborne brands. In addition, the Company provides chemicals used in various rubber and plastic products; licenses Intersept(R), a proprietary antimicrobial used in a host of interior finishes; sponsors the Envirosense(R) Consortium in its mission to address workplace environmental issues; and markets low-profile and multiple plenum raised/access flooring systems under the C-Tec, Intercell and Interstitial Systems brands. 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, claims reserves, inventory obsolescence and the length of product life cycles, income tax exposures, and excess of cost over net assets acquired and fixed asset lives. Actual results could vary from these estimates. INVENTORIES Inventories are valued at the lower of cost (standards which approximate actual cost on a first-in, first-out basis) or market. Inventories include the cost of raw materials, labor and manufacturing overhead. The Company makes provisions for obsolete or slow moving inventories as necessary to properly reflect inventory value. 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 of certain long-term assets are capitalized and amortized over the related assets' estimated useful lives. The Company capitalized net interest costs of approximately $0.4 million, $0.1 million, and $1.4 million for the years ended 1997, 1996, and 1995, respectively. Depreciation expense amounted to approximately $25.7 million, $25.0 million, and $18.2 million for the years ended 1997, 1996, and 1995, respectively. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between the fair value and carrying value of the asset. F-6 INTERFACE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 $51.5 million and $43.5 million at December 28, 1997 and December 29, 1996, respectively. The Company's operational policy for the assessment and measurement of any impairment in the value of excess of cost over net assets acquired which is other than temporary is to evaluate the recoverability and remaining life and determine whether it should be completely or partially written off or the amortization period accelerated. The Company will recognize an impairment if undiscounted estimated future operating cash flows of the acquired business are determined to be less than the carrying amount. The amount of impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. TAXES ON INCOME The Company accounts for income taxes under an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, the Company generally considers all expected future events other than enactments of changes in tax laws or rates. The effect on deferred tax assets and liabilities of a change in tax rates will be recognized as income or expense in the period that includes the enactment date. EARNINGS PER COMMON SHARE AND DIVIDENDS In March 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." The new Standard simplifies the computation of earnings per share and requires presentation of two amounts, basic and diluted earnings per share. As required by the Standard, the Company has retroactively restated earnings per share data for all periods presented. Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of shares of Class A and Class B Common Stock outstanding during each year. Shares issued during the year and shares reacquired during the year have been weighted for the portion of the year that they were outstanding. Basic earnings per share are based upon 23,707,918 shares, 20,060,347 shares, and 18,254,965 shares for the years ended 1997, 1996, and 1995, respectively. Diluted earnings per share is calculated in a manner consistent with that of basic earnings per share while giving effect to all dilutive potential common shares that were outstanding during the period. Diluted earnings per share are based upon 24,651,014 shares, 20,657,105 shares, and 18,598,965 shares for the years ended 1997, 1996, and 1995, respectively. For the purposes of computing earnings per common share and dividends per common share, the Company is treating as treasury stock (and therefore not outstanding) the shares that are owned by a wholly owned subsidiary (3,600,000 Class A shares recorded at cost). REVENUE RECOGNITION Revenue is generally recognized on the sale of products or services when the products are shipped or the services performed, all significant contractual obligations have been satisfied, and the collection of the resulting receivable is reasonably assured. Revenues and estimated profits on long-term performance contracts are recognized under the percentage of completion method of accounting using the cost-to-cost methodology. F-7 INTERFACE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Profit estimates are revised periodically based upon changes in facts. Any losses identified on contracts are recognized immediately. CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS Highly liquid investments with insignificant interest rate risk and with original maturities of three months or less are classified as cash and cash equivalents. Investments with maturities greater than three months and less than one year are classified as short-term investments. At December 28, 1997 and December 29, 1996, checks issued against future deposits totaled approximately $12.8 million and $12.3 million, respectively. Cash payments for interest amounted to approximately $33.8 million, $27.8 million, and $27.9 million for the years ended 1997, 1996, and 1995, respectively. Income tax payments amounted to approximately $18.2 million, $9.8 million, and $8.2 million for the years ended 1997, 1996, and 1995, respectively. FAIR VALUES OF FINANCIAL INSTRUMENTS Fair values of cash and cash equivalents, short-term investments and short-term debt approximate cost due to the short period of time to maturity. Fair values of long-term investments, debt, swaps, forward currency contracts and currency options are based on quoted market prices or pricing models using current market rates. TRANSLATION OF FOREIGN CURRENCIES The financial position and results of operations of the Company's foreign subsidiaries are measured generally using local currencies as the functional currency. Assets and liabilities of these subsidiaries are translated into U.S. dollars at the exchange rate in effect at each year end. Income and expense items are translated at average exchange rates for the year. The resulting translation adjustments are recorded in the foreign currency translation adjustment account. In the event of a divestiture of a foreign subsidiary, the related foreign currency translation results are reversed from equity to income. Foreign currency exchange gains and losses which are not material are included in income. DERIVATIVES The Company uses various financial instruments, including derivative financial instruments, for purposes other than trading. The Company does not enter into derivative financial instruments for speculative purposes. Derivatives, used as a part of the Company's risk management strategy, are designated at inception as hedges, and are measured for effectiveness both at inception and on an ongoing basis. Gains and losses on hedges of existing assets or liabilities are included in the carrying amounts of those assets or liabilities and are ultimately recognized in income as part of those carrying amounts. Gains or losses related to qualifying hedges of firm commitments or anticipated transactions also are deferred and are recognized in income or as adjustments of carrying amounts when the hedged transaction occurs. FISCAL YEAR The Company's fiscal year ends on the Sunday nearest December 31. All references herein to "1997", "1996", and "1995" mean the fiscal years ended December 28, 1997, December 29, 1996 and December 31, 1995, respectively, each comprising 52 weeks. Quarterly financial results are based upon a 13 week reporting period. F-8 INTERFACE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) RECLASSIFICATIONS Certain reclassifications have been made to the 1996 and 1995 financial statements to conform to the 1997 presentation. 2. BUSINESS ACQUISITIONS AND DIVESTITURES In December 1997, the Company sold certain assets related to the commercial manufacture of zinc diacrylate, a chemical compound used in the production of golf balls, for $14.1 million in cash. An immaterial gain was realized on the sale. The Company generated 1997 sales of $7.9 million and operating income of $1.1 million related to the manufacture of this chemical compound. During 1997, the Company acquired 100% of the outstanding capital stock of five floorcovering contractors: Canaan Corporation, based in Connecticut; Carpet Services of Tampa, Inc., based in Florida; Facilities Resource Group, Inc., based in Illinois; Floormart, Inc. based in California; and Carpet Solutions Holdings Pty Ltd., based in Queensland, Australia. These contractors are engaged primarily in the installation of commercial floorcoverings. As consideration, the Company issued 257,584 shares of Class A Common Stock valued at approximately $3.5 million and $11.1 million in cash. All transactions have been accounted for as purchases, and accordingly, the results of operations of the acquired companies since their acquisition dates have been included within the consolidated financial statements. The excess of the purchase price over the fair value of the net assets acquired was approximately $17.5 million and is being amortized over 25 years. In June 1997, the Company acquired 100% of the outstanding common stock of Camborne Holdings, Ltd., a manufacturer of interior fabrics based in West Yorkshire, U.K. for approximately $19.9 million, which was comprised of $17.1 million in cash and 127,806 shares of Class B Common Stock valued at approximately $2.8 million. The transaction was accounted for as a purchase. The results of operations of Camborne have been included with the consolidated financial statements since the acquisition date. The excess of the purchase price over the fair value of the assets was approximately $16.8 million and is being amortized over 40 years. During 1996, the Company acquired 100% of the outstanding capital stock of fifteen floorcovering contractors: Earl W. Bentley Operating Co., Inc., based in Oklahoma; Quaker City International, Inc., based in Pennsylvania; Superior Holding Inc., based in Texas; Landry's Commercial Flooring Co., Inc., based in Oregon; Reiser Associates, Inc., based in Texas; Southern Contract Systems, Inc. based in Georgia; A & F Installations, Inc., based in New Jersey; ParCom, Inc., based in Virginia; Congress Flooring Corp., based in Massachusetts; Flooring Consultants, Inc., based in Arizona; B. Shehadi & Sons, Inc., based in New Jersey; Lasher/White Carpet Co., Inc., based in New York; Oldtown Carpet Center, Inc., based in North Carolina; Architectural Floors, a division of Continental Office Furniture Corp., based in Ohio; and Floor Concepts, Inc., based in Maryland. These contractors are engaged primarily in the installation of commercial floorcoverings. As consideration, the Company issued 2,674,906 shares of Common Stock valued at approximately $19.3 million, $0.8 million in 7% notes and $23.0 million in cash. All transactions have been accounted for as purchases, and accordingly, the results of operations of the acquired companies since their acquisition dates have been included within the consolidated financial statements. The excess of the purchase price over the fair value of the net assets acquired was approximately $33.9 million and is being amortized over 25 years. During 1997, the Company issued additional consideration of approximately $2.5 million for the purchase of the floorcovering contractors which were acquired during 1996. The additional consideration was recorded as excess of cost over net assets acquired. In February 1996, the Company acquired the outstanding common stock of Renovisions, Inc., a nationwide installation services firm based in Georgia that has pioneered a new method of carpet replacement, for approximately $4 million in cash at closing and $1 million in guaranteed payments. The transaction was accounted for as a purchase, and accordingly, the results of operations of Renovisions since the acquisition F-9 INTERFACE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) date have been included within the consolidated financial statements. The excess of the purchase price over the fair value of net assets acquired was approximately $4.3 million and is being amortized over 25 years. In February 1996, the Company acquired the outstanding common stock of C-Tec, Inc., a Michigan based producer of raised/access flooring systems, for approximately $8.8 million, which was comprised of $4.5 million in cash and $4.3 million in 6% subordinated convertible notes. The transaction was accounted for as a purchase, and accordingly, the results of operations of C-Tec since the acquisition date have been included within the consolidated financial statements. The excess of the purchase price over the fair value of net assets acquired was approximately $3.1 million and is being amortized over 25 years. In December 1995, the Company acquired substantially all of the assets of the Intek division of Spring Industries, a manufacturer of panel fabrics based in Aberdeen, North Carolina, for approximately $13.9 million. The transaction was accounted for as a purchase. The excess of the purchase price over the fair value of the net assets was approximately $5.1 million and is being amortized over 40 years. The results of operations of Intek have been included within the consolidated financial statements since the acquisition date. In June 1995, the Company acquired substantially all of the assets of Toltec Fabrics, Inc., a manufacturer of panel fabrics based in North Carolina, for approximately $13.3 million, which was comprised of $7.7 million in cash and $5.6 million in notes. The transaction was accounted for as a purchase. The excess of the purchase price over the fair value of the net assets was approximately $6.9 million and is being amortized over 40 years. The results of operations of Toltec have been included within the consolidated financial statements since the acquisition date. 3. RECEIVABLES The Company maintains an agreement with a financial institution to sell a participating interest in a designated pool of commercial receivables, with limited recourse, in amounts up to $65 million. The agreement relates to specific operating subsidiaries of the Company. Under the agreement, a participating interest in new receivables is sold as previous receivables are collected. A service fee consisting of the financial institution's commercial paper rate plus .45% is charged based upon the resulting participating interest. This amount is included in other expense in the accompanying consolidated statements of income. At December 28, 1997, the rate was 6.43%. The Company acts as an agent for the purchaser by performing record keeping and collection functions. The uncollected receivables sold at December 28, 1997 and December 29, 1996 amounted to $49.6 million and $31.7 million, respectively. As of December 28, 1997 and December 29, 1996, the allowance for bad debts amounted to approximately $7.4 million and $7.3 million, respectively, for all accounts receivable of the Company. 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. Interface performs ongoing credit evaluations of its customers' financial condition and requires collateral as deemed necessary. In June 1996, the FASB issued SFAS No 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." The Company's adoption of this Standard had no impact on the consolidated results of operations or financial position. F-10 INTERFACE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. INVENTORIES Inventories are summarized as follows:
1997 1996 -------- -------- (IN THOUSANDS) Finished goods.............................................. $ 91,016 $ 81,034 Work-in-process............................................. 29,094 30,464 Raw materials............................................... 37,520 35,180 -------- -------- $157,630 $146,678 ======== ========
5. PROPERTY AND EQUIPMENT Property and equipment consisted of the following:
1997 1996 --------- --------- (IN THOUSANDS) Land........................................................ $ 12,485 $ 13,038 Buildings................................................... 130,450 98,706 Equipment................................................... 264,656 232,489 Construction-in-progress.................................... 6,890 32,078 --------- --------- 414,481 376,311 Accumulated depreciation.................................... (185,700) (167,520) --------- --------- $ 228,781 $ 208,791 ========= =========
The estimated cost to complete construction in progress for which the Company was committed at December 28, 1997 was approximately $11.3 million. 6. ACCRUED EXPENSES Accrued expenses are summarized as follows:
1997 1996 ------- ------- (IN THOUSANDS) Taxes....................................................... $21,482 $16,868 Compensation................................................ 25,671 20,541 Interest.................................................... 3,813 5,276 Other....................................................... 36,577 28,234 ------- ------- $87,543 $70,919 ======= =======
7. SENIOR SUBORDINATED NOTES The Company has outstanding $125 million in 9.5% Senior Subordinated Notes due 2005 (the "Notes"). 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 each of the Company's principal domestic subsidiaries (the "Guarantors"). The Guarantors include Interface Flooring Systems, Inc., Bentley Mills, Inc., Interface Interior Fabrics, Inc., Prince Street Technologies, Inc. and several other smaller domestic subsidiaries. (See Note 18 for Supplemental Guarantor Condensed Consolidating Financial Statements.) The Notes are redeemable for cash at any time on or after November 15, 2000 at the Company's option and 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 F-11 INTERFACE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the date fixed for redemption. At December 28, 1997 and December 29, 1996, the estimated fair value of the notes was approximately $132.5 million and $135.2 million, respectively. 8. LONG-TERM DEBT Long-term debt, exclusive of the Company's 9.5% Senior Subordinated Notes due 2005 (see Note 7), consisted of the following:
1997 1996 -------- -------- (IN THOUSANDS) Senior term loans........................................... $100,000 $ 50,000 Revolving credit facility................................... 143,797 181,211 Other....................................................... 23,453 26,061 -------- -------- Total long-term debt........................................ 267,250 257,272 Less current maturities..................................... (2,751) (2,919) -------- -------- $264,499 $254,353 ======== ========
At December 28, 1997 the Company maintained a revolving credit and term facility which provided a maximum credit limit of $370 million. The facility is collateralized by substantially all of the outstanding stock of the Company's operating subsidiaries (except certain foreign subsidiaries, for which only 66% of the outstanding stock is pledged). The $120 million term portion of the facility consists of four separate notes of which $25 million and $75 million is due December 29, 2000 and December 31, 2001, respectively. The revolving credit facility matures and related borrowings are due December 31, 2001, concurrent with the final installment of the term portion. Interest is charged, at the Company's option, at a rate based on either the bank's certificate of deposit rate or LIBOR (London Interbank Offered Rate), plus an applicable margin of .35% to 1%, depending upon the Company's ability to meet certain performance criteria; or the bank's prime lending rate (8.5% at December 28, 1997). For a discussion of the Company's utilization of interest rate swap agreements to convert approximately $64.5 million of variable rate debt to fixed rate debt see Note 12. The agreements require prepayment from specified excess cash flows or proceeds from certain asset sales and provide for restrictions which, among other things, require maintenance of certain financial ratios, restrict encumbrance of assets and limit the payment of dividends. At December 28, 1997, approximately $38.1 million of the Company's retained earnings were unrestricted and available for payment of dividends under the most restrictive terms of the agreement. 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 based on fixed payments (amounts could be higher if excess cash flows or asset sales require prepayment of debt under the credit agreements) are as follows:
FISCAL YEAR (IN THOUSANDS) - ----------- -------------- 1998........................................................ $ 2,751 1999........................................................ 5,772 2000........................................................ 31,621 2001........................................................ 657 2002........................................................ 225,954 Thereafter.................................................. 495 -------- $267,250 ========
In addition to the amounts available under the revolving credit facility described above, the Company maintains approximately $38 million in complementary revolving lines of credit through several of its F-12 INTERFACE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) subsidiaries. Interest is generally charged at the prime lending rate or LIBOR. The weighted average interest rate for 1997 related to the complimentary lines was approximately 7.9%. Approximately $22.3 million and $14.9 million was outstanding under these lines at December 28, 1997 and December 29, 1996, respectively. 9. PREFERRED STOCK The Company is authorized to create and issue up to 5,000,000 shares of $1.00 par value Preferred Stock in one or more series and to determine the rights and preferences of each series, to the extent permitted by the Articles of Incorporation, and to fix the terms of such preferred stock without any vote or action by the shareholders. The issuance of any series of preferred stock may have an adverse effect on the rights of holders of common stock, and could decrease the amount of earnings and assets available for distribution to holders of common stock. In addition, any issuance of preferred stock could have the effect of delaying, deferring or preventing a change in control of the Company. In conjunction with the acquisition of Bentley Mills in June 1993, the Company issued 250,000 shares of Series A Cumulative Convertible Preferred Stock with a face value of $100 per share. The Series A Preferred Stock was entitled to a 7% annual cumulative cash dividend ($7.00 per preferred share) that was payable quarterly. Series A Preferred Stock was non-voting, except as required by law or in limited circumstances to protect its preferential rights. The Series A Preferred Stock was convertible into shares of the Company's Class A Common Stock at the rate of one share of Class A Common Stock for each $14.79 face value thereof plus the amount of any accrued but unpaid dividends. During the period from September 1996 through January 1997, the Series A preferred shareholders, with one exception, notified the Company of their intent to convert all of their shares of Series A Preferred Stock into an aggregate of 1,715,900 shares of the Company's Class A Common Stock. During each of the years ended 1996 and 1995, the Company paid cash dividends of approximately $7.00 per preferred share. Subsequent to year end, the Board of Directors of the Company declared a dividend of one purchase right (a "Right") to be distributed in respect of each outstanding share of Common Stock, payable to shareholders of record as of March 16, 1998. Each right will entitle the registered holder to purchase from the Company one one-hundredth of a share (a "Unit") of newly created Series B Participating Cumulative Preferred Stock (the "Series B Preferred Stock"). The Rights may have certain anti-takeover effects. The Rights will cause substantial dilution to a person or group that acquires more than 15% of the outstanding shares of Common Stock or if other specified events occur without the Rights having been redeemed or in the event of an exchange of the rights for Common Stock as permitted under the Shareholder Rights Plan. The dividend and liquidation rights of the Series B Preferred Stock are designed so that the value of one one-hundredth of a share of Series B Preferred Stock issuable upon exercise of each Right will approximate the same economic value as one share of Common Stock, including voting rights. The exercise price per right will be $180, 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 100 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 100 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 100 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 100 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 F-13 INTERFACE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 Stock 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. 10. COMMON STOCK AND STOCK OPTIONS The Company is authorized to issue 40,000,000 shares of $.10 par value Class A Common Stock and 40,000,000 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 (10%) of the Company's total issued and outstanding shares of Class A and Class B Common Stock. On December 28, 1997, the outstanding Class B shares constituted approximately 11.5% 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 (see Note 8 for discussion of restrictions on the payment of dividends). Cash dividends on Common Stock were $.27 per share for the year ended 1997, $.245 per share for the year ended 1996 and $.24 per share for the year ended 1995. The Company has Key Employee Stock Option Plans ("the 1983 Plan" and "the 1993 Plan"), an Offshore Stock Option Plan ("Offshore Plan"), and an Omnibus Stock Incentive Plan ("Omnibus Plan") under which a committee of the Board of Directors is authorized to grant key employees, including officers, options to purchase the Company's Common Stock. Options are exercisable for shares of Class A or Class B Common Stock at a price not less than 100% of the fair market value on the date of grant. The options generally become exercisable 20% per year over a five year period from the date of the grant and the options generally expire ten years from the date of the grant. The 1983 Plan, the 1993 Plan and the Offshore Plan were terminated effective January 20, 1997. There were no additional awards issued under any of the terminated plans after effective termination, however, outstanding awards issued prior to such date are not affected. The maximum number of shares of Class A or Class B Common Stock that may be issued under the Omnibus Plan is 1,800,000, plus any shares subject to stock options granted under the terminated plans that are forfeited, terminated or otherwise expire unexercised. F-14 INTERFACE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table shows changes in common shareholders' equity:
FOREIGN CLASS A CLASS B ADDITIONAL CURRENCY --------------- --------------- PAID-IN RETAINED TRANSLATION SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT ------ ------ ------ ------ ---------- -------- ----------- (IN THOUSANDS) BALANCE AT JANUARY 1, 1995....... 18,715 $1,871 3,077 $308 $ 93,450 $136,343 $ (136) Net income..................... -- -- -- -- -- 16,828 -- Conversion of common stock..... 88 8 (88) (8) -- -- -- Issuance of common stock....... 241 24 -- -- 3,413 -- -- Cash dividends paid............ -- -- -- -- -- (6,132) -- Foreign currency translation adjustment.................. -- -- -- -- -- -- 3,691 ------ ------ ------ ---- -------- -------- -------- BALANCE AT DECEMBER 31, 1995..... 19,044 1,903 2,989 300 96,863 147,039 3,555 Net income..................... -- -- -- -- -- 26,395 -- Conversion of common stock..... 14 2 (14) (2) -- -- -- Issuance of common stock....... 2,956 297 -- -- 22,428 -- -- Conversion of Series A Preferred Stock............. 358 36 5,266 Cash dividends paid............ -- -- -- -- -- (6,606) -- Foreign currency translation adjustment.................. -- -- -- -- -- -- (6,612) ------ ------ ------ ---- -------- -------- -------- BALANCE AT DECEMBER 29, 1996..... 22,372 2,238 2,975 298 124,557 166,828 (3,057) Net income..................... -- -- -- -- -- 37,514 -- Conversion of common stock..... 381 38 (381) (38) -- -- -- Issuance of common stock....... 876 87 175 17 17,087 -- -- Conversion of Series A Preferred Stock............. 1,357 136 19,940 Cash dividends paid............ -- -- -- -- -- (6,436) -- Foreign currency translation adjustment.................. -- -- -- -- -- -- (25,098) ------ ------ ------ ---- -------- -------- -------- BALANCE AT DECEMBER 28, 1997..... 24,986 $2,499 2,769 $277 $161,584 $197,906 $(28,155) ====== ====== ====== ==== ======== ======== ========
F-15 INTERFACE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following tables summarize activity on stock options:
NUMBER WEIGHTED AVERAGE OF SHARES EXERCISE PRICE --------- ---------------- Outstanding at January 1, 1995............................. 1,896,000 $13.43 Granted.................................................. 360,000 14.49 Exercised................................................ (96,000) 10.53 Forfeited or canceled.................................... (125,000) 14.03 --------- Outstanding at December 31, 1995........................... 2,035,000 13.18 Granted.................................................. 308,000 13.47 Exercised................................................ (224,000) 13.04 Forfeited or canceled.................................... (112,000) 13.76 --------- Outstanding at December 29, 1996........................... 2,007,000 13.30 Granted.................................................. 314,000 20.09 Exercised................................................ (502,000) 13.03 Forfeited or canceled.................................... (70,000) 13.15 --------- Outstanding at December 28, 1997........................... 1,749,000 14.61 ========= Options exercisable at December 29, 1996................... 821,000 $13.35 Options exercisable at December 28, 1997................... 745,000 $13.22
WEIGHTED AVERAGE FAIR VALUE OF OPTIONS GRANTED DURING THE YEAR ENDED (IN THOUSANDS) - -------------------------------------- -------------- December 29, 1996........................................... $1,395 December 28, 1997........................................... $2,912
The weighted average remaining life of options outstanding at December 28, 1997 was 7.5 years. The range of exercise prices was $10.31 - $26.75. Interface has adopted the disclosure-only provisions of SFAS No. 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 was immaterial for 1997 and 1996. If Interface 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 No. 123, net income applicable to common shareholders and earnings per share would have been changed to the pro forma amounts indicated below:
YEAR ENDED --------------------- 1997 1996 --------- --------- (IN THOUSANDS, EXCEPT SHARE DATA) Net income applicable to common shareholders as reported............................................... $37,514 $24,717 pro forma................................................. $36,533 $24,202 Basic earnings per common share as reported............................................... $ 1.58 $ 1.23 pro forma................................................. $ 1.54 $ 1.21 Diluted earnings per common share as reported............................................... $ 1.53 $ 1.20 pro forma................................................. $ 1.49 $ 1.18
F-16 INTERFACE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The fair value of stock options used to compute pro forma net income applicable to common shareholders and earnings per share disclosures is the estimated present value at grant date using the Black-Scholes option-pricing model with the following weighted average assumptions for 1997 and 1996: Dividend yield of .71% in 1997 and .49% in 1996; expected volatility of 35% in 1997 and 30% in 1996; a risk free interest rate of 6.32% in 1997 and 6.11% in 1996; and an expected option life of 6.0 years in 1997 and 4.92 years in 1996. 11. TAXES ON INCOME Provisions for federal, foreign, and state income taxes in the consolidated statements of income consisted of the following components:
YEAR ENDED --------------------------- 1997 1996 1995 ------- ------- ------- (IN THOUSANDS) Current: Federal................................................. $ 5,569 $ 5,968 $ 5,331 Foreign................................................. 9,052 3,284 5,844 State................................................... 1,192 2,418 1,592 ------- ------- ------- 15,813 11,670 12,767 ======= ======= ======= Deferred (reduction): Federal................................................. 4,675 818 1,495 Foreign................................................. 2,173 5,770 (1,189) State................................................... 1,096 (1,226) (316) ------- ------- ------- 7,944 5,362 (10) ======= ======= ======= Decrease in valuation allowance........................... -- -- (1,421) ------- ------- ------- $23,757 $17,032 $11,336 ======= ======= =======
Income before taxes on income consisted of the following:
YEAR ENDED --------------------------- 1997 1996 1995 ------- ------- ------- (IN THOUSANDS) U.S. operations........................................... $29,134 $17,186 $20,212 Foreign operations........................................ 32,137 26,241 11,464 ------- ------- ------- $61,271 $43,427 $31,676 ======= ======= =======
Deferred income taxes for the years ended December 28, 1997 and December 29, 1996, 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. The sources of the temporary differences and their effect on the net deferred tax liability at December 28, 1997 and December 29, 1996, are as follows:
1997 1996 -------------------- --------------------- ASSETS LIABILITIES ASSETS LIABILITIES ------ ----------- ------- ----------- (IN THOUSANDS) Basis difference of property and equipment........ $ -- $23,886 $ -- $23,484 Net operating loss carryforwards.................. 2,853 -- 3,212 -- Other differences in bases of assets and liabilities..................................... -- 525 7,051 -- ------ ------- ------- ------- $2,853 $24,411 $10,263 $23,484 ====== ======= ======= =======
F-17 INTERFACE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) At December 28, 1997, the Company's foreign subsidiaries had approximately $1.4 million in net operating losses available for an unlimited carryforward period. Additionally, the Company had approximately $53 million in state net operating losses expiring at various times through 2012. The effective tax rate on income before taxes differs from the United States statutory rate. The following summary reconciles taxes at the United States statutory rate with the effective rates:
YEAR ENDED -------------------- 1997 1996 1995 ---- ---- ---- Taxes on income at U.S. statutory rate...................... 35.0% 35.0% 35.0% Increase (reduction) in taxes resulting from: State income taxes, net of federal benefit................ 2.4 1.8 2.6 Amortization of excess of cost over net assets acquired and related purchase accounting adjustments............ 4.7 5.1 6.1 Foreign and U.S. tax effects attributable to foreign operations............................................. (2.2) (2.1) (2.4) Valuation allowance....................................... -- -- (4.5) Other..................................................... (1.1) (0.6) (1.0) ---- ---- ---- Taxes on income at effective rates........................ 38.8% 39.2% 35.8% ==== ==== ====
Undistributed earnings of the Company's foreign subsidiaries amounted to approximately $86 million at December 28, 1997. Those earnings are considered to be indefinitely reinvested and, accordingly, no provision for United States 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 United States 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 United States income tax liability is not practicable because of the complexities associated with its hypothetical calculation. Withholding taxes of approximately $4.3 million would be payable upon remittance of all previously unremitted earnings at December 28, 1997. 12. HEDGING TRANSACTIONS AND DERIVATIVE FINANCIAL INSTRUMENTS The Company employs the use of derivative financial instruments for the purpose of reducing its exposure to adverse fluctuations in interest and foreign currency exchange rates. While these hedging instruments are subject to fluctuations in value, such fluctuations are generally offset by the fluctuations in values of the underlying exposures being hedged. The Company does not hold or issue derivative financial instruments for trading purposes. The Company monitors the use of derivative financial instruments through the use of objective measurable systems, well-defined market and credit risk limits, and timely reports to senior management according to prescribed guidelines. The Company has established strict counterparty credit guidelines and only enters into transactions with financial institutions of investment grade or better. As a result, the Company considers the risk of counterparty default to be minimal. INTEREST RATE MANAGEMENT Management of the Company has developed and implemented a policy to maintain the percentage of fixed and variable rate debt within certain parameters. The Company enters into interest rate swap agreements, which maintain the fixed/variable mix within these defined parameters. In these swaps, the Company agrees to exchange, at specified intervals, the difference between fixed and variable interest amounts calculated by reference to an agreed-upon notional principal linked to LIBOR. Any differences paid or received on interest rate swap agreements are recognized as adjustments to interest expense over the life of each swap, thereby adjusting the effective interest rate on the underlying obligation. At December 28, 1997 and December 29, 1996, the Company had utilized interest rate swap agreements to effectively convert F-18 INTERFACE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) approximately $64.5 million and $73.0 million, respectively, of variable rate debt to fixed rate debt. The weighted average rate on these borrowings was 6.6% at December 28, 1997 and 6.9% at December 29, 1996. FOREIGN CURRENCY EXCHANGE RATE MANAGEMENT The purpose of the Company's foreign currency hedging activities is to reduce the risk that the eventual local currency inflows resulting from sales to foreign customers will be adversely affected by changes in exchange rates. The Company enters into currency swap contracts to hedge certain firm sales commitments denominated in foreign currencies. Net gains and losses are deferred and recognized in income in the same period as the hedged transaction. Net deferred gains/losses from hedging anticipated but not yet firmly committed transactions were not material at December 28, 1997 and December 29, 1996. The contracts served to hedge firmly committed Dutch guilder, German mark, Japanese yen, French franc, British pound sterling, and other foreign currency revenues. The interest rate and currency swap agreements have maturity dates ranging from nine to twenty-four months. The estimated fair values of derivatives used to hedge or modify the Company's risks will fluctuate over time. These fair value amounts should not be viewed in isolation, but rather in relation to the fair values of the underlying hedged obligations and transactions and the overall reduction in the Company's exposure to adverse fluctuations in interest and foreign exchange rates. The notional amounts of the derivative financial instruments do not necessarily represent amounts exchanged by the parties and, therefore, are not a direct measure of the exposure of the Company through its use of derivatives. The amounts exchanged are calculated on the basis of the notional amounts and the other terms of the derivatives, which relate to interest rates or currency exchange rates. The following table represents the aggregate notional amounts, fair values, and maturities of the Company's derivative financial instruments. The liability amounts shown within the table under foreign currency management represent contracts under which the Company is required to deliver Japanese yen and Dutch guilder currency at dates in the future.
1997 1996 ----------------- ------------------ NOTIONAL FAIR NOTIONAL FAIR AMOUNTS VALUES AMOUNTS VALUES -------- ------ -------- ------- (IN THOUSANDS) Interest Rate Management Liabilities Swap agreements.......................................... $64,500 $(319) $73,000 $ (448) Foreign Currency Management Liabilities Swap agreements.......................................... $14,500 $(751) $40,063 $(3,864)
F-19 INTERFACE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 13. COMMITMENTS AND CONTINGENCIES The Company leases certain marketing, production and distribution facilities, and equipment. At December 28, 1997 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) - ----------- -------------- 1998........................................................ $17,848 1999........................................................ 13,990 2000........................................................ 11,748 2001........................................................ 8,535 2002........................................................ 5,948 Thereafter.................................................. 4,947 ------- $63,016 =======
Rental expense amounted to approximately $20.7 million, $16.2 million, and $15.8 million for the fiscal years ended 1997, 1996 and 1995, respectively. YEAR 2000 RISK As is the case with other companies using computers in their operations, the Company is faced with the task of addressing the Year 2000 issue during the next two years. The Year 2000 issue arises from the widespread use of computer programs that rely on two-digit date codes to perform computations or decision- making functions. The Company has done a comprehensive review of its computer programs to identify the systems that would be affected by the Year 2000 issue, and is in the process of reviewing the Company's Year 2000 exposure to third party customers, distributors, suppliers, and banking institutions. The Company has also hired an outside consulting firm to assist in this conversion process and is beginning the process of modifying its computer program code to the four digit fields necessary to be Year 2000 compliant. The Company currently estimates the total cost of such modifications, excluding the cost of modifications to program logic control systems relative to manufacturing equipment, to be at least $17 million, although it could be significantly more. The Company and its outside consultants are currently evaluating the costs of modifications to these program logic control systems. Of the total project cost, approximately $10 million is attributable to the cost of new hardware and software which will be required in connection with the global consolidation of the Company's management and financial accounting systems. This new equipment and upgraded technology will have a definable value lasting beyond the Year 2000. In these instances, where Year 2000 compliance is ancillary, the Company may capitalize and depreciate such costs. The remaining $7 million will be expensed as incurred over the next two years. During the year ended December 28, 1997 the Company expensed approximately $0.6 million in regards to such modifications. There can be no guarantee that these estimates will be achieved and actual results could differ from those anticipated. Specific factors that might cause differences include, but are not limited to, the ability of other companies on which the Company's systems rely to modify or convert their systems to be Year 2000 compliant, the ability to locate and correct all relevant computer codes and similar uncertainties. F-20 INTERFACE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 14. EMPLOYEE BENEFIT PLANS The Company and its subsidiaries have trusteed defined benefit retirement plans ("Plans") which cover substantially all of their employees except those of Interface Interior Fabrics, Inc.("IIF"). The benefits are generally based on years of service and the employee's average monthly compensation. Pension benefit was $0.1 million for the year ended 1997 and pension expense was $1.3 million and $1.1 million for the years ended 1996 and 1995, respectively. On November 1, 1997, the Company elected to freeze the defined benefit plan covering its United States employees. Accordingly, all further benefit accruals under the Plan will cease and all actively employed participants became 100% vested in their benefits. In connection with the election to freeze the Plan, a curtailment gain of $1.7 million was reflected in net periodic pension cost for 1997. The ranges of assumptions used to calculate the funded status of the Plans reflect the different economic environments within the various countries where the Plans exist. In fiscal 1997, the assumed weighted average rate of return on plan assets was 7.3% and the measurement of the projected benefit obligation at December 28, 1997 was based on an assumed weighted average discount rate of 7.4% and long-term rate of compensation increases of 4.1%. In fiscal 1996, the assumed weighted average rate of return on plan assets was 7.7% and the measurement of the projected benefit obligation at December 29, 1996 was based on an assumed weighted average discount rate of 7.8% and long-term rate of compensation increases of 4.3%. The Company has 401(k) retirement investment plans ("401(k) Plans"), which are open to all U.S. employees, except for IIF which has a separate Plan, with one or more years of service. Effective October 1, 1996, all existing 401(k) plans of the Company's subsidiaries, except for IIF, were merged into one plan, "The Interface, Inc. Savings and Investment Plan and Trust." The 401(k) Plans call for Company matching contributions on a sliding scale based on the level of the employee's contribution. The Company may, at its discretion, make additional contributions to the Plans based on the attainment of certain performance targets by its subsidiaries. Approximately 78% of eligible employees were enrolled in the 401(k) Plans as of December 28, 1997. The Company's matching contributions are funded monthly and totalled approximately $1.6 million, $1.1 million and $0.6 million for the years ended 1997, 1996 and 1995, respectively. The Company's discretionary contributions totalled $0.9 million, $0.4 million and $1.0 million for the years ended 1997, 1996 and 1995, respectively. F-21 INTERFACE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The table presented below sets forth the funded status of the Company's significant domestic and foreign defined benefit plans and amounts recognized in the consolidated financial statements.
1997 1996 ------- ------- (IN THOUSANDS) Plan assets at fair value, primarily equity and fixed income securities................................................ $79,879 $72,951 Actuarial present value of benefit obligations: Vested benefits........................................... 71,329 59,558 Nonvested benefits........................................ 1,469 1,454 ------- ------- Accumulated benefit obligation.............................. 72,798 61,012 Effect of projected future salary increases................. 3,946 6,007 ------- ------- Projected benefit obligation................................ 76,744 67,019 ------- ------- Plan assets in excess of projected benefit obligation....... 3,135 5,932 Unrecognized net gain from past experience different from that assumed.............................................. (1,653) (7,165) Unrecognized prior service cost............................. 320 327 Unrecognized net liability existing at the date of initial application of SFAS 87.................................... 1,240 1,503 ------- ------- Prepaid pension cost........................................ $ 3,042 $ 597 ======= ======= Net pension cost included the following components: Service cost -- benefits earned during the period......... $ 2,177 $ 1,928 Interest cost on projected benefit obligation............. 5,228 4,893 Actual return on plan assets.............................. (8,987) (6,124) Net amortization and deferral............................. 3,178 642 Curtailment gain.......................................... (1,713) -- ------- ------- Net pension cost (benefit).................................. $ (117) $ 1,339 ======= =======
15. SUBSEQUENT EVENTS On December 30, 1997, the Company completed the acquisition of the European carpet business of Readicut International plc ("Readicut"), for an estimated $50 million, subject to final adjustments. After the planned divestiture of certain assets of Readicut, including its Network Flooring dealer division and Joseph, Hamilton & Seaton Ltd., the Company's final investment for the retained Readicut businesses are expected to be less than $15 million. The retained businesses will include Firth Carpets Ltd., based in Brighouse, West Yorkshire, a leading manufacturer of high quality woven and tufted carpet primarily for the contract markets; and Vebe Floorcoverings BV, located in the Netherlands, a leading manufacturer of needlepunch carpet. During February 1998, the Company filed a Universal Shelf Registration for the issuance of up to $300 million of debt securities, Preferred Stock, and Class A Common Stock. The Company contemplates an offering of approximately $150 million of Senior Notes which will be due in 2008, and an offering of approximately 1.5 million shares of Class A Common Stock. Proceeds of any offering would be used for general corporate purposes, which may include future acquisitions and the repayment of outstanding debt. Also, subsequent to year end, the Board of Directors adopted a Rights Agreement pursuant to which holders of Common Stock will be entitled to purchase from the Company a fraction of a share of the Company's Series B Participating Cumulative Preferred Stock (see Note 9) if a third party acquires beneficial ownership of 15% or more of the Common Stock and will be entitled to purchase the stock of an Acquiring Person at a discount upon the occurrence of certain triggering events. F-22 INTERFACE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 16. BUSINESS AND FOREIGN OPERATIONS The Company operates predominantly in one industry segment. The Company and its subsidiaries are engaged predominantly in the manufacture and sale of commercial and institutional interior finishings. The Company's principal markets are in the United States, Europe, Asia Pacific and Canada, with the U.S. and Europe being the largest based on revenues. Financial information by geographic area for the years ended 1997, 1996 and 1995 is as follows:
1997 1996 1995 ---------- ---------- -------- (IN THOUSANDS) Sales to Unaffiliated Customers United States..................................... $ 774,718 $ 656,044 $440,715 Americas, excluding the United States............. 23,991 22,030 23,165 Europe............................................ 259,829 257,243 267,116 Asia-Pacific...................................... 76,752 66,759 71,070 ---------- ---------- -------- Total..................................... $1,135,290 $1,002,076 $802,066 ========== ========== ======== Operating Income United States..................................... $ 65,985 $ 51,251 $ 40,608 Americas, excluding the United States............. 2,906 1,519 1,170 Europe............................................ 29,440 30,815 26,046 Asia-Pacific...................................... 7,389 2,286 134 Corporate expenses................................ (7,919) (7,182) (6,415) ---------- ---------- -------- Total..................................... $ 97,801 $ 78,689 $ 61,543 ========== ========== ======== Identifiable Assets United States..................................... $ 545,144 $ 523,635 $366,128 Americas, excluding the United States............. 8,448 11,985 8,313 Europe............................................ 315,513 273,094 290,486 Asia-Pacific...................................... 60,458 53,832 49,424 ---------- ---------- -------- Total..................................... $ 929,563 $ 862,546 $714,351 ========== ========== ========
In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information ("SFAS 131"), which supersedes SFAS No. 14, Financial Reporting for Segments of a Business Enterprise. SFAS 131 establishes standards for the reporting by public companies of information about operating segments in annual financial statements and for the first time, requires reporting of selected information about operating segments in interim financial statements issued to the public. It also establishes standards for disclosures regarding products and services, geographic areas and major customers. SFAS 131 defines operating segments as components of a company about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. SFAS 131 is effective for financial statements for periods beginning after December 15, 1997 and requires the restatement of comparative information for earlier periods. Management has been evaluating the impact the new statement will have on future financial statement disclosures and has determined that the Company will have three reportable segments: Floorcovering Products and Related Services, Interior Fabrics, and Chemical and Specialty Products. Historically, the Company has not reported information concerning operating segments. The Company's future reportable segments are strategic business units that offer different products and services. The results of operations and financial position will be unaffected by implementation of the standard. F-23 INTERFACE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 17. 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.
YEAR ENDED 1997 ------------------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- (IN THOUSANDS, EXCEPT SHARE AMOUNTS) Net sales................................. $257,345 $271,746 $297,352 $308,847 Gross profit.............................. 82,913 89,404 100,653 106,586 Net income applicable to common shareholders............................ 6,353 7,960 10,511 12,690 Basic earnings per common share........... 0.28 0.34 0.44 0.52 Diluted earnings per common share......... 0.27 0.33 0.42 0.51 Share prices: High.................................... 25 5/8 25 30 5/8 31 5/8 Low..................................... 18 1/2 21 22 1/8 25 Dividends per common share................ 0.065 0.065 0.065 0.075
YEAR ENDED 1996 ------------------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- (IN THOUSANDS, EXCEPT SHARE AMOUNTS) Net sales................................. $205,017 $237,488 $275,041 $284,530 Gross profit.............................. 62,913 74,664 87,460 92,584 Net income................................ 3,708 6,025 7,581 9,081 Net income applicable to common shareholders............................ 3,271 5,596 7,148 8,702 Basic earnings per common share........... 0.18 0.29 0.35 0.41 Diluted earnings per common share......... 0.18 0.29 0.33 0.40 Share prices: High.................................... 17 3/8 15 1/2 17 1/8 20 1/2 Low..................................... 12 11 5/8 13 7/16 16 1/8 Dividends per common share................ 0.06 0.06 0.06 0.065
F-24 INTERFACE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 18. SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
YEAR ENDED 1997 ------------------------------------------------------------------------------ INTERFACE, INC. CONSOLIDATION GUARANTOR NONGUARANTOR (PARENT AND ELIMINATION CONSOLIDATED SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTALS ------------ ------------ --------------- --------------- ------------ (IN THOUSANDS) Net sales......................... $900,825 $347,735 $ -- $(113,270) $1,135,290 Cost of sales..................... 640,308 228,696 -- (113,270) 755,734 -------- -------- ------- --------- ---------- Gross profit on sales... 260,517 119,039 -- -- 379,556 Selling, general and administrative expenses......... 184,559 78,124 19,072 -- 281,755 -------- -------- ------- --------- ---------- Operating income........ 75,958 40,915 (19,072) -- 97,801 Other expense (income) Interest expense................ 10,629 4,571 19,838 -- 35,038 Other........................... 15,438 6,212 (20,158) -- 1,492 -------- -------- ------- --------- ---------- Total other expense..... 26,067 10,783 (320) -- 36,530 -------- -------- ------- --------- ---------- Income before taxes on income and equity in income of subsidiaries.......... 49,891 30,132 (18,752) -- 61,271 Taxes on income................... 19,341 11,692 (7,276) -- 23,757 Equity in income of subsidiaries.................... -- -- 48,991 (48,991) -- -------- -------- ------- --------- ---------- Net income applicable to common shareholders.................... $ 30,550 $ 18,440 $37,515 $ (48,991) $ 37,514 ======== ======== ======= ========= ==========
F-25 INTERFACE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED 1996 ------------------------------------------------------------------------------- INTERFACE, INC. CONSOLIDATION GUARANTOR NON-GUARANTOR (PARENT AND ELIMINATION CONSOLIDATED SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTALS ------------ ------------- --------------- --------------- ------------ (IN THOUSANDS) Net sales........................ $738,812 $406,020 $ -- $(142,756) $1,002,076 Cost of sales.................... 524,584 302,318 -- (142,447) 684,455 -------- -------- -------- --------- ---------- Gross profit on sales................ 214,228 103,702 -- (309) 317,621 Selling, general and administrative expenses........ 152,484 69,227 17,221 -- 238,932 -------- -------- -------- --------- ---------- Operating income....... 61,744 34,475 (17,221) (309) 78,689 Other expense (income) Interest expense............... 8,679 5,263 18,830 -- 32,772 Other.......................... 10,380 4,001 (11,891) -- 2,490 -------- -------- -------- --------- ---------- Total other expense.... 19,059 9,264 6,939 -- 35,262 -------- -------- -------- --------- ---------- Income before taxes on income and equity in income of subsidiaries......... 42,685 25,211 (24,160) (309) 43,427 Taxes on income.................. 13,029 8,842 (4,839) -- 17,032 Equity in income of subsidiaries................... -- -- 46,025 (46,025) -- -------- -------- -------- --------- ---------- Net income............. 29,656 16,369 26,704 (46,334) 26,395 Preferred stock dividends........ -- -- 1,678 -- 1,678 -------- -------- -------- --------- ---------- Net income applicable to common shareholders................... $ 29,656 $ 16,369 $ 25,026 $ (46,334) $ 24,717 ======== ======== ======== ========= ==========
F-26 INTERFACE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED 1995 ------------------------------------------------------------------------------- INTERFACE, INC. CONSOLIDATION GUARANTOR NON-GUARANTOR (PARENT AND ELIMINATION CONSOLIDATED SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTALS ------------ ------------- --------------- --------------- ------------ (IN THOUSANDS) Net sales........................ $499,398 $411,462 $ 246 $(109,040) $ 802,066 Cost of sales.................... 351,209 308,994 193 (108,753) 551,643 -------- -------- -------- --------- ---------- Gross profit on sales................ 148,189 102,468 53 (287) 250,423 Selling, general and administrative expenses........ 98,372 77,242 13,266 -- 188,880 -------- -------- -------- --------- ---------- Operating income....... 49,817 25,226 (13,213) (287) 61,543 -------- -------- -------- --------- ---------- Other expense (income) Interest expense............... 6,609 8,766 11,378 -- 26,753 Other.......................... 17,715 (7,817) (6,784) -- 3,114 -------- -------- -------- --------- ---------- Total other expense.... 24,324 949 4,594 -- 29,867 -------- -------- -------- --------- ---------- Income before taxes on income and equity in income of subsidiaries......... 25,493 24,277 (17,807) (287) 31,676 Taxes on income.................. 13,957 4,343 (6,964) -- 11,336 Equity in income of subsidiaries................... -- -- 31,470 (31,470) -- -------- -------- -------- --------- ---------- Income before extraordinary items................ 11,536 19,934 20,627 (31,757) 20,340 Extraordinary loss (net of tax).............. -- -- 3,512 -- 3,512 -------- -------- -------- --------- ---------- Net income............. 11,536 19,934 17,115 (31,757) 16,828 Preferred stock dividends........ -- -- 1,750 -- 1,750 -------- -------- -------- --------- ---------- Net income applicable to common shareholders................... $ 11,536 $ 19,934 $ 15,365 $ (31,757) $ 15,078 ======== ======== ======== ========= ==========
F-27 INTERFACE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 28, 1997 -------------------------------------------------------------------------------- INTERFACE, INC. CONSOLIDATION AND GUARANTOR NONGUARANTOR (PARENT ELIMINATION CONSOLIDATED SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTALS ------------ ------------ --------------- ----------------- ------------ (IN THOUSANDS) ASSETS Current Cash............................... $ 4,362 $ 6,501 $ (651) $ -- $ 10,212 Accounts receivable................ 131,120 74,652 (27,795) -- 177,977 Inventories........................ 105,193 52,437 -- -- 157,630 Miscellaneous...................... 8,521 15,768 5,132 -- 29,421 -------- -------- -------- ----------- -------- Total current assets....... 249,196 149,358 (23,314) -- 375,240 Property and equipment, less accumulated depreciation........... 150,038 71,453 7,290 -- 228,781 Investments in subsidiaries.......... 129,033 15,799 381,670 (526,502) -- Miscellaneous........................ 121,361 20,871 472,083 (567,370) 46,945 Excess of cost over net assets acquired........................... 182,652 92,087 3,858 -- 278,597 -------- -------- -------- ----------- -------- $832,280 $349,568 $841,587 $(1,093,872) $929,563 ======== ======== ======== =========== ======== LIABILITIES AND COMMON SHAREHOLDERS' EQUITY Current Notes payable...................... $ 12,322 $ 9,942 $ -- $ -- $ 22,264 Accounts payable................... 40,158 38,363 758 -- 79,279 Accrued expenses................... 42,647 36,443 8,453 -- 87,543 Current maturities of long-term debt............................ 1,742 1,009 -- -- 2,751 -------- -------- -------- ----------- -------- Total current liabilities.............. 96,869 85,757 9,211 -- 191,837 Long-term debt, less current maturities......................... 240,475 44,423 321,169 (341,568) 264,499 Senior subordinated notes -- -- 125,000 -- 125,000 Deferred income taxes................ 12,852 3,483 12,538 -- 28,873 -------- -------- -------- ----------- -------- Total liabilities.......... 350,196 133,663 467,918 (341,568) 610,209 Minority interests................... 2,989 -- -- -- 2,989 Series A redeemable preferred stock.............................. 57,891 -- -- (57,891) -- Common stock......................... 81,704 102,199 2,776 (183,903) 2,776 Additional paid-in capital........... 187,195 11,030 161,584 (198,225) 161,584 Retained earnings.................... 158,027 122,120 212,298 (294,539) 197,906 Foreign currency translation adjustment......................... (5,722) (19,444) (2,989) -- (28,155) Treasury stock....................... -- -- -- (17,746) (17,746) -------- -------- -------- ----------- -------- $832,280 $349,568 $841,587 $(1,093,872) $929,563 ======== ======== ======== =========== ========
F-28 INTERFACE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 29, 1996 ------------------------------------------------------------------------------- INTERFACE, INC. CONSOLIDATION GUARANTOR NON-GUARANTOR (PARENT AND ELIMINATION CONSOLIDATED SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTALS ------------ ------------- --------------- --------------- ------------ (IN THOUSANDS) ASSETS Current Cash.......................... $ 3,481 $ 4,791 $ 490 $ -- $ 8,762 Accounts receivable........... 124,118 61,479 (17,780) -- 167,817 Inventories................... 100,305 45,777 596 -- 146,678 Miscellaneous................. 6,414 12,231 11,398 -- 30,043 -------- -------- -------- ----------- -------- Total current assets.............. 234,318 124,278 (5,296) -- 353,300 Property and equipment, less accumulated depreciation...... 143,599 60,924 4,268 -- 208,791 Investments in subsidiaries..... 108,977 17,768 379,992 (506,737) -- Miscellaneous................... 142,228 44,637 374,105 (509,585) 51,385 Excess of cost over net assets acquired...................... 171,526 74,512 3,032 -- 249,070 -------- -------- -------- ----------- -------- $800,648 $322,119 $756,101 $(1,016,322) $862,546 ======== ======== ======== =========== ======== LIABILITIES AND COMMON SHAREHOLDERS' EQUITY Current Notes payable................. $ 11,685 $ 3,233 $ -- $ -- $ 14,918 Accounts payable.............. 47,814 26,160 986 -- 74,960 Accrued expenses.............. 45,610 27,581 (2,272) -- 70,919 Current maturities of long-term debt............. 2,897 22 -- -- 2,919 -------- -------- -------- ----------- -------- Total current liabilities......... 108,006 56,996 (1,286) -- 163,716 Long-term debt, less current maturities.................... 234,697 42,756 299,156 (322,256) 254,353 Senior subordinated notes....... -- -- 125,000 -- 125,000 Deferred income taxes........... 12,936 1,009 9,539 -- 23,484 -------- -------- -------- ----------- -------- Total liabilities..... 355,639 100,761 432,409 (322,256) 566,553 Minority interest............... 3,125 -- -- -- 3,125 Series A redeemable preferred stock......................... 57,891 -- 19,750 (57,891) 19,750 Common stock.................... 81,704 102,199 2,535 (183,902) 2,536 Additional paid-in capital...... 179,073 11,030 124,556 (190,102) 124,557 Retained earnings............... 127,477 103,678 181,219 (245,546) 166,828 Foreign currency translation adjustment.................... (4,261) 4,451 (4,368) 1,121 (3,057) Treasury stock.................. -- -- -- (17,746) (17,746) -------- -------- -------- ----------- -------- $800,648 $322,119 $756,101 $(1,016,322) $862,546 ======== ======== ======== =========== ========
F-29 INTERFACE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED 1997 ------------------------------------------------------------------------------ INTERFACE, INC. CONSOLIDATION GUARANTOR NONGUARANTOR (PARENT AND ELIMINATION CONSOLIDATED SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTALS ------------ ------------ --------------- --------------- ------------ (IN THOUSANDS) Cash flows from operating activities... $ 29,585 $ 27,448 $ 17,690 $ -- $ 74,723 -------- -------- -------- -------- -------- Cash flows from investing activities: Purchase of plant and equipment...... (25,062) (10,177) (3,415) -- (38,654) Acquisitions, net of cash acquired... -- -- (34,647) -- (34,647) Other................................ -- -- (17,902) -- (17,902) -------- -------- -------- -------- -------- (25,062) (10,177) (55,964) -- (91,203) -------- -------- -------- -------- -------- Cash flows from financing activities: Net borrowings (repayments).......... (3,643) (15,155) 37,155 -- 18,357 Proceeds from issuance of common stock............................. -- -- 6,414 -- 6,414 Cash dividends paid.................. -- -- (6,436) -- (6,436) -------- -------- -------- -------- -------- (3,643) (15,155) 37,133 -- 18,335 -------- -------- -------- -------- -------- Effect of exchange rate changes on cash................................. -- (405) -- -- (405) -------- -------- -------- -------- -------- Net increase (decrease) in cash........ 880 1,711 (1,141) -- 1,450 Cash at beginning of year.............. 3,481 4,791 490 -- 8,762 -------- -------- -------- -------- -------- Cash at end of year.................... $ 4,361 $ 6,502 $ (651) $ -- $ 10,212 ======== ======== ======== ======== ========
YEAR ENDED 1996 ------------------------------------------------------------------------------- INTERFACE, INC. CONSOLIDATION GUARANTOR NON-GUARANTOR (PARENT AND ELIMINATION CONSOLIDATED SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTALS ------------ ------------- --------------- --------------- ------------ (IN THOUSANDS) Cash flows from operating activities.......................... $ 31,207 $ 61,218 $(35,913) $ -- $ 56,512 -------- -------- -------- -------- -------- Cash flows from investing activities: Purchase of plant and equipment..... (21,671) (11,459) (3,306) -- (36,436) Acquisitions, net of cash acquired......................... -- -- (30,151) -- (30,151) Other............................... -- (3,518) (7,907) -- (11,425) -------- -------- -------- -------- -------- (21,671) (14,977) (41,364) -- (78,012) -------- -------- -------- -------- -------- Cash flows from financing activities: Net borrowings (repayments)......... (7,550) (46,718) 80,829 -- 26,561 Proceeds from issuance of common stock............................ -- -- 2,916 -- 2,916 Cash dividends paid................. -- -- (6,606) -- (6,606) -------- -------- -------- -------- -------- (7,550) (46,718) 77,139 -- 22,871 -------- -------- -------- -------- -------- Effect of exchange rate changes on cash................................ -- 130 -- -- 130 -------- -------- -------- -------- -------- Net increase (decrease) in cash....... 1,986 (347) (138) -- 1,501 Cash at beginning of year............. 1,495 5,138 628 -- 7,261 -------- -------- -------- -------- -------- Cash at end of year................... $ 3,481 $ 4,791 $ 490 $ -- $ 8,762 ======== ======== ======== ======== ========
F-30 INTERFACE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED 1995 ------------------------------------------------------------------------------- INTERFACE, INC. CONSOLIDATION GUARANTOR NON-GUARANTOR (PARENT AND ELIMINATION CONSOLIDATED SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTALS ------------ ------------- --------------- --------------- ------------ (IN THOUSANDS) Cash flows from operating activities.......................... $ 14,926 $ 64,428 $ (3,402) $ -- $ 75,952 -------- -------- -------- -------- -------- Cash flows from investing activities: Purchase of plant and equipment..... (30,880) (9,886) (1,357) -- (42,123) Acquisitions, net of cash acquired......................... (27,554) -- -- -- (27,554) Other............................... (6,474) (15,219) 19,211 -- (2,482) -------- -------- -------- -------- -------- (64,908) (25,105) 17,854 -- (72,159) -------- -------- -------- -------- -------- Cash flows from financing activities: Net borrowings (repayments)......... 34,092 31,926 (60,864) -- 5,154 Proceeds from issuance of common stock............................ -- -- 984 -- 984 Cash dividends paid................. -- -- (6,132) -- (6,132) Other............................... 17,862 (70,049) 52,187 -- -- -------- -------- -------- -------- -------- 51,954 (38,123) (13,825) -- 6 -------- -------- -------- -------- -------- Effect of exchange rate changes on cash................................ -- (34) -- -- (34) -------- -------- -------- -------- -------- Net increase (decrease) in cash....... 1,972 1,166 627 -- 3,765 Cash at beginning of year............. (477) 3,972 1 -- 3,496 -------- -------- -------- -------- -------- Cash at end of year................... $ 1,495 $ 5,138 $ 628 $ -- $ 7,261 ======== ======== ======== ======== ========
F-31 EX-21 6 LIST OF SUBSIDIARIES Exhibit 21
SUBSIDIARIES OF INTERFACE, INC. Jurisdiction of Subsidiary Organization --------------- --------------- Bentley Mills, Inc. Delaware (USA) Guilford (Delaware), Inc. Delaware (USA) Interface Europe, Inc. Delaware (USA) Interface Interior Fabrics, Inc. Delaware (USA) Interface Securitization Corporation Delaware (USA) Intek, Inc. Georgia (USA) Interface Americas, Inc. Georgia (USA) Interface Asia-Pacific, Inc. Georgia (USA) Interface Flooring Systems, Inc. Georgia (USA) Interface Research Corporation Georgia (USA) Interface Yarns, Inc. Georgia (USA) Pandel, Inc. Georgia (USA) Prince Street Technologies, Ltd. Georgia (USA) Re:Source Americas Enterprises, Inc. Georgia (USA) Rockland React-Rite, Inc. Georgia (USA) Toltec Fabrics, Inc. Georgia (USA) Facilities Resource Group, Inc. Illinois (USA) Interface Architectural Resources, Inc. Michigan (USA) Interface Americas Services, Inc. Nevada (USA) Renovisions, Inc. Pennsylvania (USA) Interface Flooring Systems Commercial Ltda. Brazil Interface Flooring Systems (Canada), Inc. Canada Interface Europe B.V. Netherlands Interface Europe, Ltd. United Kingdom ____________________________________________ The names of certain subsidiaries which, if considered in the aggregate as a single subsidiary, would not constitute a "significant subsidiary", have been omitted. Interface Interior Fabrics, Inc. (formerly Guilford of Maine, Inc.) is the parent of nine direct or indirect subsidiaries organized and operating in Canada and the United States (including Toltec Fabrics, Inc. and Intek, Inc.). Interface Asia-Pacific, Inc. is the parent of 11 subsidiaries organized and operating in Australia, Japan, Hong Kong, Singapore, Thailand, China and the British Virgin Islands. Re: Source Americas Enterprises, Inc. is the parent of 19 subsidiaries organized and operating in the United States. All of such subsidiaries are commercial floorcovering contractors. Interface Europe B.V. (formerly Interface Heuga B.V.) is the parent of seven direct or indirect subsidiaries organized and operating in the Netherlands, and 14 direct or indirect subsidiaries organized and operating outside of the Netherlands. Interface Europe, Ltd. (formerly Interface Flooring Systems, Ltd.) is the parent of 15 direct or indirect subsidiaries organized and operating in the United Kingdom and eight direct or indirect subsidiaries organized and operating outside the United Kingdom.
EX-23 7 CONSENT OF BDO SEIDMAN, LLP Exhibit 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Interface, Inc. Atlanta, Georgia We hereby consent to the incorporation of our reports dated February 17, 1998, relating to the consolidated financial statements and schedule of Interface, Inc. included or incorporated by reference in this Form 10-K, into the Company's previously filed registration statements on Form S-8; Registration No. 33-28305, Form S-8; Registration No. 33-28307; Form S-8, Registration No. 33-69808, Form S-8; Registration No. 333-10377, Form S-8, Registration No. 333-10379, Form S-8, Registration No. 333-38675, and Form S-8, Registration No. 333-38677 relating to the Company's Key Employee Stock Option Plan, Offshore Stock Option Plan, Key Employee Stock Option Plan (1993), Savings and Investment Plan, Omnibus Stock Incentive Plan and Nonqualified Savings Plan, and Form S-3, Registration No. 333-46611, as amended by Form S-3/A, including the prospectuses therein. It should be noted that we have not audited any financial statements of the Company subsequent to December 28, 1997 or performed any audit procedures subsequent to the date of our report. BDO SEIDMAN, LLP Atlanta, Georgia March 25, 1998 EX-27.1 8 CURRENT FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from financial statements incorporated by reference into the Company's annual report on Form 10-K for the year ended December 28, 1997, and is qualified in its entirety by reference to such financial statements. 0000715787 INTERFACE, INC. 1,000 YEAR DEC-28-1997 DEC-28-1997 10,212 0 185,304 7,327 157,630 375,240 453,742 224,961 929,563 191,837 389,499 0 0 2,776 316,578 929,563 1,135,290 1,135,290 755,734 1,037,489 1,492 0 35,038 61,271 23,757 37,514 0 0 0 37,514 1.58 1.53
EX-27.2 9 RESTATED FDS (YEARS 1995 AND 1996)
5 This restated financial data schedule contains summary financial information extracted from financial statements incorporated by reference into the Company's annual reports on Form 10-K for the years ended December 31, 1995 and December 29, 1996, as subsequently restated, and is qualified in its entirety by reference to such restated financial statements. 0000715787 INTERFACE, INC. 1,000 12-MOS 12-MOS DEC-31-1995 DEC-29-1996 DEC-31-1995 DEC-29-1996 8,750 8,782 0 0 117,256 175,166 5,870 7,349 134,504 146,678 274,386 353,300 370,486 408,956 187,187 200,165 714,351 862,546 115,355 163,716 324,022 379,353 25,000 19,750 0 0 2,203 2,536 229,711 270,582 714,351 862,546 802,066 1,002,076 802,066 1,002,076 551,643 684,455 740,523 923,387 3,114 2,490 0 0 26,753 32,772 31,676 26,395 11,336 1,678 20,340 24,717 0 0 (3,512) 0 0 0 16,828 26,395 1.02 1.23 1.00 1.20 Before extraordinary loss on early extinguishment of debt, net of tax, of $0.19.
EX-27.3 10 RESTATED FDS (QUARTERS 1996)
5 This restated financial data schedule contains summary financial information extracted from financial statements incorporated by reference into the Company's quarterly reports on Form 10-Q for the quarters ended March 31, 1996, June 30, 1996, and September 29, 1996, as subsequently restated, and is qualified in its entirety by reference to such restated financial statements. 0000715787 INTERFACE, INC. 1,000 3-MOS 6-MOS 9-MOS DEC-29-1996 DEC-29-1996 DEC-29-1996 MAR-31-1996 JUN-30-1996 SEP-29-1996 5,228 8,826 154 0 0 0 143,579 140,681 170,736 5,870 5,870 5,870 143,335 146,734 154,579 310,304 313,501 346,282 389,076 341,327 399,394 193,226 194,593 197,141 781,183 794,675 844,260 137,144 140,120 151,801 360,116 366,825 391,307 25,000 25,000 24,751 0 0 0 2,275 2,363 2,425 235,635 239,277 252,058 781,183 794,675 844,260 205,017 442,505 717,546 205,017 442,505 717,546 142,104 304,928 492,509 191,446 409,905 663,396 (724) 401 81 0 0 0 8,316 16,177 25,602 5,980 16,022 28,467 2,272 6,289 11,153 3,708 9,733 17,314 0 0 0 0 0 0 0 0 0 3,708 9,733 17,314 0.18 0.47 .82 0.18 0.47 .80
EX-27.4 11 RESTATED FDS (QUARTERS 1997)
5 This restated financial data schedule contains summary financial information extracted from financial statements incorporated by reference into the Company's quarterly reports on Form 10-Q for the quarters ended March 30, 1997, June 29, 1997 and September 28, 1997, as subsequently restated, and is qualified in its entirety by reference to such restated financial statements. 0000715787 INTERFACE, INC. 1,000 3-MOS 6-MOS 9-MOS DEC-28-1997 DEC-28-1997 DEC-28-1997 MAR-30-1997 JUN-29-1997 SEP-28-1997 0 9,816 9,616 0 0 0 164,911 170,469 197,917 7,349 6,532 7,325 152,956 153,383 165,655 343,353 359,906 401,204 413,187 429,831 364,483 202,223 213,766 140,468 854,775 880,724 951,218 155,024 154,088 189,173 380,892 401,037 426,379 0 0 0 0 0 0 2,698 2,715 2,762 292,758 298,529 303,660 854,775 880,724 951,2118 257,345 529,091 826,443 257,345 529,091 826,443 174,432 356,774 553,473 237,388 486,585 757,340 1,154 19,149 28,393 0 0 0 8,389 17,476 26,303 10,414 23,357 40,710 4,061 9,044 15,886 6,353 14,313 24,824 0 0 0 0 0 0 0 0 0 6,353 14,313 24,824 0.28 0.62 1.06 0.27 0.60 1.02
EX-99.1 12 SAFE HARBOR COMPL. STATE. FOR FORWARD-LOOKING ST. Exhibit 99.1 PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR COMPLIANCE STATEMENT FOR FORWARD-LOOKING STATEMENTS In passing the Private Securities Litigation Reform Act of 1995 (the "Reform Act"), Congress encouraged public companies to make "forward-looking statements" by creating a safe harbor to protect companies from securities law liability in connection with forward-looking statements. Interface, Inc. ("Interface" or the "Company") intends to qualify both its written and oral forward-looking statements for protection under the Reform Act and any other similar safe harbor provisions. "Forward-looking statements" are defined by the Reform Act. Generally, forward-looking statements include expressed expectations of future events and the assumptions on which the expressed expectations are based. All forward-looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected. Due to those uncertainties and risks, the investment community is urged not to place undue reliance on written or oral forward-looking statements of Interface. The Company undertakes no obligation to update or revise this Safe Harbor Compliance Statement for Forward-Looking Statements (the "Safe Harbor Statement") to reflect future developments. In addition, Interface undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time. Interface provides the following risk factor disclosure in connection with its continuing effort to qualify its written and oral forward-looking statements for the safe harbor protection of the Reform Act and any other similar safe harbor provisions. Important factors currently known to management that could cause actual results to differ materially from those in forward-looking statements include the disclosures contained in the Annual Report on Form 10-K to which this statement is appended as an exhibit and also include the following: STRONG COMPETITION The commercial floorcovering industry is highly competitive. Globally, the Company competes for sales of its modular and broadloom carpet with other carpet manufacturers and manufacturers of vinyl and other types of floorcovering. Although the industry recently has experienced significant consolidation, a large number of manufacturers remain in the industry. Management believes that the Company is the largest manufacturer of modular carpet in the world, with a global market share over two times that of its nearest competitor. However, a number of domestic and foreign competitors manufacture modular carpet as one segment of their business, and certain of these competitors have financial resources in excess of the Company's. CYCLICAL NATURE OF INDUSTRY Sales of the Company's principal products are related to the construction and renovation of commercial and institutional buildings. Such activity is cyclical and can be affected by the strength of a country's general economy, prevailing interest rates and other factors that lead to cost control measures by businesses and other users of commercial or institutional space. The effects of such cyclicality upon the new construction sector of the market tend to be more pronounced than its effects upon the renovation sector. Although the predominant portion of the Company's sales are generated from the renovation sector, any such adverse cycle, in either sector of the market, would lessen the overall demand for commercial interiors products, which could impair the Company's growth. Reliance on Key Personnel The Company believes that its continued success will depend to a significant extent upon the efforts and abilities of its senior management executives, particularly Ray C. Anderson, Chairman of the Board and Chief Executive Officer; Charles R. Eitel, President and Chief Operating Officer; and Gordon D. Whitener, Senior Vice President. Each of Messrs. Anderson, Eitel and Whitener have entered into employment agreements with the Company containing certain covenants of non-competition, and the Company currently maintains key-man insurance on each of Messrs. Anderson and Eitel. In addition, the Company relies significantly on the leadership of its design staff by David Oakey of David Oakey Designs, Inc., which provides product design/production engineering services to the Company under an exclusive consulting contract that contains certain covenants of non-competition. The loss of all or some of such personnel could have an adverse impact on the Company. RISKS OF FOREIGN OPERATIONS The Company has substantial international operations. In fiscal 1997, approximately 32% of the Company's net sales and a significant portion of the Company's production were outside the United States, primarily in Europe but also in Asia. The Company's corporate strategy includes the expansion of its international business on a worldwide basis. As a result, the Company's operations are subject to various political, economic and other uncertainties, including risks of restrictive taxation policies, foreign exchange restrictions, changing political conditions and governmental regulations. In addition, recent economic events in Asia, including depreciation of certain Asian currencies, failures of financial institutions, stock market declines and reductions in planned capital investment at key enterprises, may adversely impact the Company's sales in the Asian markets. The Company also makes a substantial portion of its net sales in currencies other than U.S. dollars, which subjects it to the risks inherent in currency translations. The Company's ability to manufacture and ship products from facilities in several foreign countries reduces the risks of foreign currency fluctuations it might otherwise experience, and the Company also engages from time to time in hedging programs intended to further reduce those risks. Despite this, the scope and volume of the Company's global operations make it impossible to eliminate completely all foreign currency translation risks as an influence on the Company's financial results. CONTROL OF ELECTION OF A MAJORITY OF BOARD The Company's Chairman and Chief Executive Officer, Ray C. Anderson, beneficially owns approximately 60% of the Company's outstanding Class B Common Stock, and has entered into a voting agreement, which expires in April 1998, with certain other holders of Class B Common Stock pursuant to which such other holders have irrevocably appointed Mr. Anderson their proxy and attorney-in-fact to vote their shares. The holders of the Class B Common Stock are entitled, as a class, to elect a majority of the Board of Directors of the Company, which means that Mr. Anderson has sufficient voting power (which voting power will be unaffected by the expiration of the voting agreement) to elect a majority of the Board of Directors. The holders of the Class B Common Stock generally vote together as a single class with the holders of the Class A Common Stock on all other matters submitted to the shareholders for a vote, however, and Mr. Anderson's beneficial ownership of the outstanding Class A and Class B Common Stock combined is less than 10%. RELIANCE ON PETROLEUM-BASED RAW MATERIALS Petroleum-based products comprise the predominant portion of the cost of raw materials used by the Company in manufacturing. While the Company generally attempts to match cost increases with corresponding price increases, large increases in the cost of such petroleum-based raw materials could adversely affect the Company if the Company were unable to pass through to its customers such increases in raw material costs. RELIANCE ON THIRD PARTY FOR SUPPLY OF FIBER E. I. DuPont de Nemours and Company ("DuPont") currently supplies a significant percentage of the Company's requirements for synthetic fiber, the principal raw material used in the Company's carpet products. DuPont also competes with the Company's Re:Source Americas network through DuPont's own distribution channel and aligned carpet mills. While the Company believes that there are adequate alternative sources of supply from which it could fulfill its synthetic fiber requirements, the unanticipated termination or interruption of the supply arrangement with DuPont could have a material adverse effect on the Company because of the cost and delay associated with shifting more business to another supplier. RESTRICTIONS DUE TO SUBSTANTIAL INDEBTEDNESS The Company's indebtedness is substantial in relation to its shareholders' equity. As of December 28, 1997, the Company's long-term debt (net of current portion) totaled $389 million or approximately 55% of its total capitalization. As a consequence of its level of indebtedness a substantial portion of the Company's cash flow from operations must be dedicated to debt service requirements. The terms of the Company's outstanding indebtedness also restrict or limit the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments or investments in certain situations, consummate certain asset sales, enter into certain transactions with affiliates, incur liens, or merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of their assets. They also require the Company to meet certain financial tests and comply with certain other reporting, affirmative and negative covenants. YEAR 2000 RISK The "year 2000 issue" arises from the widespread use of computer programs that rely on two-digit date codes to perform computations or decision-making functions. Many of these programs may fail due to an inability to properly interpret date codes beginning January 1, 2000. For example, such programs may misinterpret "00" as the year 1900 rather than 2000. In addition, some equipment, being controlled by microprocessor chips, may not deal appropriately with the year "00". The Company is evaluating its computer systems with the help of outside consultants to determine which modifications and expenditures will be necessary to make its systems compatible with year 2000 requirements. The Company believes that its systems will be year 2000-compliant upon implementation of such modifications. The Company currently estimates the total cost of such modifications, excluding the cost of modifications to program logic control systems relating to manufacturing equipment, to be at least $17 million, although it could be significantly more. The Company and its outside consultants are currently evaluating the costs of modifications to these program logic control systems. Of the total project cost, approximately $10 million is attributable to the cost of new hardware and software which will be capitalized in connection with the consolidation globally of the Company's management and financial accounting systems. The remaining $7 million will be expensed as incurred over the next two years. However, there can be no assurance that all necessary modifications will be identified and corrected or that unforeseen difficulties or costs will not arise. In addition, there can be no assurance that the systems of other companies on which the Company's systems rely will be modified on a timely basis, or that the failure by another company to properly modify its systems will not negatively impact the Company's systems or operations. ANTI-TAKEOVER EFFECTS OF SHAREHOLDER RIGHTS PLAN The Board of Directors has adopted a Rights Agreement pursuant to which holders of Common Stock will be entitled to purchase from the Company a fraction of a share of the Company's Series B Participating Cumulative Preferred Stock if a third party acquires beneficial ownership of 15% or more of the Common Stock and will be entitled to purchase the stock of an Acquiring Person (as defined in the Rights Agreement) at a discount upon the occurrence of certain triggering events. These provisions of the Rights Agreement could have the effect of discouraging tender offers or other transactions that would result in shareholders receiving a premium over the market price for the Common Stock. -----END PRIVACY-ENHANCED MESSAGE-----