-----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, U5MtaOeRW0avnuEGGMwMbiDWtyPky3zElJEpAFPGYGV7xcQxGKecyeqeU0kvTiKB MjharOoKZo771X/BQ4SVhw== 0000950144-97-003221.txt : 19970329 0000950144-97-003221.hdr.sgml : 19970329 ACCESSION NUMBER: 0000950144-97-003221 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19961229 FILED AS OF DATE: 19970328 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-12016 FILM NUMBER: 97568044 BUSINESS ADDRESS: STREET 1: 2859 PACES FERRY RD STREET 2: STE 2000 CITY: ATLANTA STATE: GA ZIP: 30339 BUSINESS PHONE: 4043196471 FORMER COMPANY: FORMER CONFORMED NAME: INTERFACE FLOORING SYSTEMS INC DATE OF NAME CHANGE: 19870817 10-K405 1 INTERFACE INC 1 ================================================================================ 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 [NO FEE REQUIRED EFFECTIVE OCTOBER 7, 1996] FOR FISCAL YEAR ENDED DECEMBER 29, 1996 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. [X] Aggregate market value of the voting stock held by non-affiliates of the registrant as of March 11, 1997 (assuming conversion of Class B Common Stock into Class A Common Stock): $521,442,310 (21,670,330 shares valued at the last sales price of $24.0625). See Item 12. Number of shares outstanding of each of the registrant's classes of Common Stock, as of March 11, 1997:
Class Number of Shares ----- ---------------- Class A Common Stock, $0.10 par value per share .....................20,635,229 Class B Common Stock, $0.10 par value per share ..................... 2,855,482
DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Shareholders for the fiscal year ended December 29, 1996 are incorporated by reference into Parts I and II. Portions of the Proxy Statement for the 1997 Annual Meeting of Shareholders are incorporated by reference into Part III. ================================================================================ 2 PART I ITEM 1. BUSINESS GENERAL Interface, Inc. ("Interface" or the "Company") was founded in 1973 to pioneer the introduction of the carpet tile concept in the United States, and is a global manufacturer and marketer of products for the commercial and institutional interiors market. The Company is the worldwide leader in the modular carpet segment (which includes both carpet tile and six-foot roll goods) with a 40% market share. Through its strategic acquisitions of Bentley Mills, Inc. ("Bentley Mills") in 1993 and Prince Street Technologies, Ltd. ("Prince Street") in 1994, the Company entered the broadloom carpet segment with leading product lines for the high quality, designer-oriented sector of the broadloom segment. The Company now provides specialized carpet replacement services through its Renovisions, Inc. ("Renovisions") subsidiary and installation and maintenance services through its new domestic dealer network, which operates under the name Re:Source Americas. The Company, through its Interface Interior Fabrics, Inc. (formerly Guilford of Maine, Inc.) ("Interface Fabrics") subsidiary, is the leading U.S. manufacturer of panel fabrics for use in open plan office furniture systems, with a market share in excess of 50%. The Company's specialty products operations produce a variety of products, including chemical compounds and additives for use in various rubber and plastic products, and a proprietary antimicrobial additive that is used in the Company's carpet and fabrics products and licensed to others for use in interior finishing products that do not compete with the Company's products; the specialty products operations also manufacture raised/access flooring systems. In fiscal 1996, the Company had total sales of approximately $1 billion, with carpet sales of $804 million, fabric sales of $149 million, and chemicals and specialty products sales of $48 million, accounting for 80%, 15% and 5% of total sales, respectively. The Company markets products in over 100 countries around the world under such well-known brand names as Interface and Heuga in modular carpet; Bentley Mills and Prince Street in broadloom carpets; Guilford of Maine, Stevens Linen, Toltec and Intek in interior fabrics; Intersept in chemicals; and C-Tec, Intercell and Interstitial Systems in raised/access flooring systems. The Company's principal geographic markets are North America (68% of 1996 sales), the United Kingdom and Western Europe (25% of 1996 sales), and Japan and Australia (4% of 1996 sales). The Company is aggressively developing opportunities in Greater China and Southeast Asia, South America, and Central and Eastern Europe, which represent significant growth markets for the Company. The Company's worldwide marketing efforts are facilitated by having 27 manufacturing facilities at varied locations in North America, Europe, Southeast Asia and Australia. Worldwide manufacturing locations enable the Company to compete effectively with local producers in its international markets, while also providing advantages (such as affording international customers more favorable delivery times and freight costs) over competitors who must import their products into such markets. These 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. The Company utilizes an internal marketing and sales force of over 700 experienced personnel (the largest in the commercial floorcovering industry), stationed at over 90 locations in over 35 countries, to market the Company's carpet products and services in person to its customers. The Company's Fabrics Group has its own specialized marketing and sales force (approximately 100 persons) for marketing the Company's interior fabrics products. The Company also utilizes Re:Source Americas network dealers to achieve additional marketing coverage for all its products. 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, interior designers, engineers and contracting firms who are directly involved in specifying products and who 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. In 1996, the Company implemented a nationwide initiative to form a new distribution channel for its commercial carpet products through the formation of the Re:Source Americas network. Under this program, in 1996, the Company acquired or invested in 20 strategically located commercial floorcovering contractors, and formed preferred distributorship alliances with 59 select dealers throughout the United States. The Company has employed the former management team of StarNet (the largest consortium of floorcovering contractors in the U.S.) to help the Company integrate and manage the Re:Source Americas network. The Company believes that the program has 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 providing hassle-free service throughout the process of selecting, purchasing, installing and maintaining carpet products, and (iii) the opportunity to improve operating margins for owned dealers, as well as for the Company, by consolidating administrative functions of dealers and coordinating and streamlining sales efforts by Company and dealer sales personnel. INDUSTRY TRENDS AND COMPANY STRENGTHS In recent years, the Company's revenue has been derived primarily from the renovation market. The Company believes that the commercial and institutional market for floorcovering products, which experienced a significant decline in demand during the early 1990's, has rebounded significantly in the United States primarily due to renovation projects and, to a lesser extent, new construction. Excess office space from the 1980's is being absorbed, businesses are beginning to experience growth, and carpeting installed during the 1980's construction boom is beginning to be updated or replaced as part of remodeling projects. In international markets, overall demand for commercial floorcovering products is also beginning to increase, especially in certain countries in the Asia-Pacific region where new construction projects are increasing, and also in more developed markets where products are being used for an increasing number of remodeling or refurbishing projects. 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. 3 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: (i) an excellent reputation for quality, service and reliability; (ii) strong, well-known brand names; (iii) efficient and low-cost manufacturing operations in several locations around the world; (iv) strong customer and architectural and design community relationships; (v) award-winning and innovative product design and development capabilities; and (vi) state-of-the-art production equipment and technologically advanced systems. These strengths coupled with the Company's broad and diversified mix of product lines enable Interface to take a "total interior solution" approach to serving the needs of its customers around the world and position the Company to benefit from the recent industry developments. 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 diverse products and global businesses. In continuing that strategy, the Company is pursuing the following principal strategic initiatives: Enhancement of Design Capabilities. In January 1994, the Company engaged the leading design firm Roman Oakey, Inc. (under an exclusive consulting contract) to augment the Company's internal research, development and design staff. The Company introduced 57 new carpet designs in the U.S. in 1994 (the largest number in one year in the Company's history), and received eight (out of a possible 12) U.S. carpet industry design awards bestowed by the International Interior Design Association (IIDA), including all five awards in the carpet tile division. In 1995, the Company introduced over 35 new carpet designs and garnered three IIDA awards and, in 1996, the Company introduced over 30 new carpet designs. In 1996, Roman Oakey's design 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 (which already has significant capabilities in this area). Globalization of the "Mass Customization" Production Strategy. The goal of mass customization is to be 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 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 included (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. The initiative has resulted in substantial operating improvements in the U.S. carpet tile business in 1995 and 1996, including increased margins and reduced inventory levels of both raw materials and standard products. In 1996, the Company implemented aspects of the mass customization production initiative for its floorcovering operations in Europe and Australia, and its interior fabrics operations. Diversification, Expansion and Increased Efficiency in the Interior Fabrics Business. In response to a shift in demand towards lighter weight, less expensive fabrics by OEM panel fabric customers, the Company initiated a significant capital investment program at Interface Fabrics to consolidate and modernize its yarn manufacturing operations. This program should result in significant efficiencies and cost savings, which are expected to permit recovery of that capital investment in approximately two years, as well as new product capabilities. The Company's new state-of-the-art yarn manufacturing facility in Guilford, Maine began operating in 1996, and should be fully operational by March 1997. Interface's strategic acquisitions of Toltec Fabrics, Inc. ("Toltec Fabrics") in June 1995, and of the Intek division of Springs Industries (now operated as Intek, Inc.) in December 1995, provide further diversification into upholstery and seating fabrics; penetrate certain niche markets where Interface Fabrics has not previously been active; and provide operating efficiencies as a number of manufacturing processes currently outsourced by these businesses are brought in-house. Interface will also continue to devote resources to Interface Fabrics' export business. War-on-Waste and EcoSense Programs. In January 1995, the Company initiated a worldwide war-on-waste program. 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), management believes the Company can eliminate approximately $75 million of such waste by the end of 1998. The Company realized an aggregate of approximately $25 million in savings (through eliminating such waste) during fiscal 1995 and 1996. The war-on-waste program represents a first step in the Company's broader EcoSense initiative, which is inspired in major part by the interest of important customers who are concerned about the environmental implications of how they and their suppliers do business. EcoSense 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. Its key elements are closed loop recycling to obtain all principal raw materials; tapping benign sources of energy (other than fossil fuels) to drive production processes; and, most immediately, eliminating waste of raw materials and energy from all operations. The Company believes that its pursuit of these initiatives provides a competitive advantage in marketing its products to an increasing number of important customers. Increased Integration of Marketing Efforts and Operational Consolidations "Total Interior Solutions". The Company's objective is to use the complementary nature of its product lines to implement a "total interior solution" approach to serving the diverse needs of customers worldwide. Marketing and sales personnel are being trained in cross-marketing techniques, and the Company is implementing a marketing communications network to link its worldwide marketing and sales force. As a related initiative, the Company has 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". In addition, the new Re:Source Americas network provides a channel for delivery of a variety of -2- 4 services and products offered by the Company in addition to commercial carpet, including carpet replacement services, adhesives and cleaning chemicals, specialty products, and raised/access flooring systems. Geographic Expansion of Manufacturing in Developing Markets. A key element of the Company's worldwide focus is having manufacturing (as well as marketing and service) capabilities in important locations around the world that can produce the same product. The Company constructed a carpet tile manufacturing facility in Thailand which became operational in March 1996, and it has entered into a joint venture to manufacture carpet tile in China. The Company will consider additional locations for manufacturing operations in other parts of the world as necessary to meet the needs of its existing and future customers. Investment in Employees. An important component of the Company's recent success is its commitment to developing and maintaining an enthusiastic and collaberative work force. To that end, over the past three years, the Company has made a substantial investment in its 6,000 employees worldwide. In 1996, thousands of employees participated in a three-day session designed by Pecos River Learning Center, known as "Play to Win(R)" which combines classroom-style learning with physically challenging outdoor activities. The Company believes that this program promotes team-building, and results in increased levels of mutual trust and respect among employees. MODULAR AND BROADLOOM CARPET Products The Company's traditional business has centered on the development, manufacture, marketing and servicing of modular carpet, which includes carpet tile and six-foot roll goods. The Company is the world's largest manufacturer and marketer of modular carpet, 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 are conducted through Bentley Mills and Prince Street, both of which focus on the high quality, designer-oriented sector of the broadloom carpet market. Modular Carpet. The Company's free-lay modular carpet system utilizes carpet tiles cut in precise, dimensionally stable squares (usually 50 square centimeters) to produce a floorcovering which combines the appearance and texture of broadloom carpet with the advantages of a modular carpet system. The growing use of open plan interiors and modern office arrangements utilizing demountable, movable partitions and modular furniture systems has encouraged the use of carpet tile, as compared to other soft surface flooring products. The Company's GlasBac(R) technology employs a unique, fiberglass-reinforced polymeric composite backing that allows the tile to be installed and remain flat on the floor without the need for general application of adhesives or use of fasteners. 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. 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 fusion-bonded, tufted and needle-punched six-foot roll goods under the System Six(R) mark. Six-foot roll goods 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 System Six products are in the education, health care and government sectors. The Company believes, however, that the demand for six-foot roll goods is increasing generally within the commercial and institutional interiors market, and expects six-foot 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, multidimensional textured carpets with a hand-tufted look, while Bentley Mills' designs emphasize the dramatic use of color. Collectively, they won three APEX (a product of excellence) awards in 1994 and two in 1995, from the International Interior Design Association, and 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 1995 survey of interior designers published in the Floor Focus industry publication. (The Company's Interface Flooring Systems brand was rated number three.) -3- 5 Services The Company now provides commercial carpet installation and maintenance services through the Re:Source Americas network. As of December 29, 1996, the Re:Source Americas network was comprised of 79 commercial floorcovering dealers strategically located throughout the United States. The new network: (i) allows the Company to influence and monitor customer satisfaction throughout the 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; and (iii) achieves efficiencies by consolidating 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 (described below), adhesives and cleaning chemicals manufactured by Rockland React-Rite, specialty products manufactured by Pandel, and raised/access flooring systems produced by Interface Architectural Resources. 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 work stations without the inefficiency and disruption associated with unloading and dismantling the items being moved. 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, interior designers, engineers 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 and Prince Street 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 1996, and the average number of carpet samples produced per month has increased from 90 per month in 1993 to over 1,300 per month in 1996. This ability has significantly enhanced the Company's marketing and sales efforts, and has increased the Company's volume of higher margin custom or made-to-order sales. The Company primarily uses its internal marketing and sales force of over 700 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. (The Company's ability to provide customer service also has been significantly enhanced, and will continue to be enhanced in the future, through the formation and expansion of the Re:Source Americas network.) In Europe, the Company has licensed selected independent service contractors to provide carpet maintenance services under the mark, IMAGE(SM) (Interface Maintenance Advisory Group of Europe). 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. 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. -4- 6 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. The Company utilizes both conventional and technologically advanced methods of carpet construction. The use of multiple manufacturing processes enables the Company to manufacture carpet of a variety of designs and styles which can be sold over a broad range of prices to different sectors of its markets. The Company is able to manufacture carpet utilizing any of three different fusion-bonding processes, a tufting process and a needle-punching process. Tufted products currently account for the substantial majority of the Company's carpet sales. In 1994 and 1995, the Company made a major capital investment in high speed tufting technology to improve its tufting operations. 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 will allow it to reduce operational waste and fossil fuel energy consumption, in addition to offering consistent product sizing for its global customers. In 1994, the Company entered into arrangements with E. I. DuPont de Nemours and Company ("DuPont") pursuant to which the Company currently obtains a significant percentage of its requirements for synthetic fiber (the principal raw material used in the Company's carpet products). The Company believes that these arrangements, which reflect the Company's effort to consolidate purchasing, 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. 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 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, 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. 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 and Prince Street, with their broadloom carpet product lines, have enhanced the Company's competitive position by enabling the Company to offer one-stop shopping to commercial carpet customers and thus to capture some sales that would have gone to competitors. In addition, the Company believes that the formation of the Re:Source Americas network, and the attendant improvements in customer service, have further enhanced the Company's competitive position. 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. INTERIOR FABRICS Products The Company, through Interface Fabrics and its other Interior Fabrics Group subsidiaries, designs, manufactures and markets specialty fabrics for open plan office furniture systems and commercial interiors. Sales of panel fabrics to original equipment manufacturers (OEMs) of movable office furniture systems constitute the principal portion of the Company's interior fabric operations (approximately 59% of total fabrics sales in fiscal 1996). In addition, the Company produces woven and knitted seating fabrics, wall covering fabrics that are paper-backed for vertical wall surfaces or acrylic-backed for panel-wall application, ceiling fabrics used to cover tiles or for stretch ceiling construction, and fabrics used for vertical blinds in office interiors. 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 -5- 7 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 solution" 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 Interface Fabrics' 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. In addition, the December 1995 acquisition of the Intek division of Springs Industries, a manufacturer experienced in the production of lighter-weight panel fabrics, has strengthened Interface Fabrics' capabilities in that market. All of these developments complement Interface Fabrics' 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 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.) 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, and from the increased importance being placed on the aesthetic design of office space, with upholstery fabric being the segment of its non-panel fabric business with the greatest anticipated growth potential. 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. Interface Fabrics sells to essentially all of the major office furniture manufacturers, with the majority of its sales being made to a small number of companies located in the Grand Rapids, Michigan area (where domestic office furniture manufacturing is concentrated). Interface Fabrics 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 and Intek brand names are well-known in the industry and enhance the Company's fabric marketing efforts. The Company's sales to OEM customers are made through Interface Fabrics' own sales force. Interface Fabrics' sales force also markets open line products for the retrofitting and refurbishing segment of the industry directly to specifiers under the trade name Guilford of Maine Textile Resources. In addition, the Company uses independent dealers to assist with sales of its non-panel fabric products. Interface Fabrics' sales force also 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 its development of product offerings. Interface Fabrics maintains a design studio in Dudley, Massachusetts which facilitates coordination between its in-house designers and the design staffs of major customers. Interface Fabrics' design capabilities have also benefited from the product design services provided to it by an affiliate of Roman Oakey. (See "-Business Strategy and Principal Initiatives", above, and "-- Product Design, Research and Development", below.) The Company's U.S. sales offices are located in Saddle Brook, New Jersey and Grand Rapids, Michigan. Interface Fabrics also has marketing and distribution facilities in Canada and the United Kingdom, 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 overseas businesses, and to facilitate additional coordinated marketing to multinational customers of the Company's carpet business as part of the Company's "total interior solution" approach. Manufacturing The Company's fabrics manufacturing facilities are located in Maine, Massachusetts, Michigan and North Carolina. The production of synthetic and wool blended fabrics is relatively intricate and requires many steps. Raw fiber is placed in pressurized vats, and dyes and flame retardants 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. -6- 8 In response to a shift in Interface Fabrics' 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 Interface Fabrics' yarn manufacturing processes. The program, which will be completed in March 1997, is designed to improve Interface Fabrics' cost effectiveness in producing such lighter weight fabrics, reduce manufacturing cycle time, and enable Interface Fabrics to reinforce its product leadership position with its OEM customers. The Company anticipates that the program will allow Interface Fabrics to reduce annual operating costs by $7 million in the production of its traditional fabric product line; Interface Fabrics already has begun to achieve cost savings as a result of such 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. The Company believes that it has recently been successful in designing fabrics that have simplified the manufacturing process, thereby reducing complexity while improving efficiency and quality. Through the use of existing raw materials, new fabrics are being manufactured using the mass customization production strategy. By employing the capabilities that are now available with the Company's new manufacturing facility, the Company anticipates that its ability to apply the mass customization production strategy to the manufacture of fabrics will be expanded. See "-Business Strategy and Principal Initiatives", above. The Company offers textile processing services through Interface Fabrics' 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 Interface Fabrics' 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, Interface Fabrics has been able to specialize its manufacturing capabilities, product offerings and service functions, resulting in a leading market position. Through Interface Fabrics and Intek, the Company is the largest U.S. manufacturer of panel fabric for use in open plan office furniture systems. Drawing on 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, Inc. ("Rockland"), which develops, manufactures and markets specialty chemical products; Pandel, Inc. ("Pandel"), which produces vinyl carpet tile backing and specialty mat and foam products; the Company's Intersept antimicrobial sales and licensing program; and Interface Architectural Resources, Inc. ("Interface Architectural Resources"), which produces and markets raised/access flooring systems. As of April 1997, Gordon Whitener assumed corporate responsibility for the Specialty Products Group. While the Specialty Products Group's revenues represent a relatively small portion of total Company revenues (approximately 5% in fiscal 1996), certain operations within this Group traditionally have had the highest profit margins of any operating division. These subsidiaries, together with Interface Research Corporation, also serve as the research and development arm of the Company. The Company's leading chemical product, 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 and fabric 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 licensing arrangements are a component of the Company's Envirosense(R) program. (See "-- Environmental Initiatives".) The Company also produces and markets Protekt(2)(TM), a proprietary soil and stain retardant treatment; water-proofing sheathing for the fiber optic cable industry and other applications; acrylic monomers, for use in golf balls and other industrial products; accelerators, used to speed the curing process for rubber used in tires, hoses and other products; and Fatigue Fighter(R), an impact-absorbing modular flooring system typically used where people stand for extended periods. The Company also markets cable management raised/access flooring systems, a specialty product which it markets through its Interface Architectural Resources business unit. 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. (which was subsequently merged with Interface Architectural Resources and now operates under that name), the second largest manufacturer of raised/access flooring systems in the United States, with net sales in 1996 of approximately $28 million. Interface Architectural Resources markets the successful C-Tec line of products (Tec-Cor and Tec-Crete), which -7- 9 combine the tensile strength of steel and the compressive strength of concrete to create a safe, durable, strong, uniform and quiet panel which comes in a variety of surfaces. In 1996, Interface Architectural Resources entered into a marketing agreement with AMP, Inc., a supplier of electronic and electrical connectors, to sell Intergy(TM), a modular power delivery system that works in conjunction with all raised/access flooring systems. INTERFACE RESEARCH CORPORATION Under the leadership of President Michael D. Bertolucci, Interface Research Corporation provides technical support and research and development for the entire family of Interface companies. Interface Research Corporation has developed 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 product engineering. Under the leadership of David Oakey since January 1994 (pursuant to the Company's exclusive consulting contract with Mr. Oakey's design firm, Roman Oakey, Inc.), the Company's U.S. modular carpet subsidiary created 26 new modular carpet designs in 1994, the largest number in one year in the Company's history, and another 20 and 21 in 1995 and 1996, respectively. The new modular carpet designs, as well as broadloom designs introduced by Bentley Mills and Prince Street, were well-received by the targeted specifier market, and resulted in the Company receiving eight (out of a possible 12) U.S. carpet industry design awards bestowed by the International Interior Design Association in 1994, including all five awards in the carpet tile division, and three IIDA awards in 1995. 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. The Company's original focus for Roman Oakey's product design/production engineering services was principally on the Company's carpet tile products for the U.S. market. Roman Oakey's design services have been extended to the Company's international carpet tile operations and domestic broadloom companies, and an affiliate of that firm was engaged to provide similar design services to the Company's interior fabrics business (which already possessed significant capabilities in the design area). 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 24 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 to learn to meet its raw material and energy needs through recycling carpet and other petrochemical products and harnessing benign energy sources, and to pursue the creation of new processes to help sustain the earth's non-renewable natural resources. 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; and Jonathan Porritt, director of Forum for the Future. -8- 10 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 $122,300,000 at December 29, 1996, compared to approximately $78,900,000 at December 29, 1995. Backlog of unshipped orders increased in fiscal 1996 as a result of increased sales volume in the Company's floorcovering operations in the United States (particularly modular carpet) and the acquisitions of C-Tec and certain of the commercial floorcovering dealers comprising the Re:Source Americas network. 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 December 29, 1996 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 dates of filing of a patent application or issuance of the patent; the duration of patents issued in other countries varies from country to country. The Company considers its know-how and technology more important to its current business than patents and, accordingly, believes that expiration of existing patents or nonissuance of patents under pending applications would not have a material adverse effect on its operations. However, the Company maintains an active patent and trade secret program in order to protect its proprietary technology, know-how and trade secrets. The Company also owns numerous trademarks in the United States and abroad. In addition to the United States, the primary countries in which the Company has registered its trademarks are the United Kingdom, Germany, Italy, France, Canada, Australia, and Japan. Some of the more prominent registered trademarks of the Company include: Interface, Heuga, Intersept, GlasBac, System Six, Guilford of Maine, Bentley and Prince St. 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 Note 17 of 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 March 15, 1997, the Company employed a total of approximately 6,000 employees worldwide. Of such employees, approximately 1,900 are clerical, sales, supervisory and management personnel and the balance are manufacturing personnel. Three of the commercial flooring dealers acquired by the Company in 1996 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. -9- 11 EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company, their ages as of March 15, 1997, and principal positions with the Company are as follows. Executive officers serve at the pleasure of the Board of Directors.
NAME AGE PRINCIPAL POSITION(s) ---- --- --------------------- Ray C. Anderson 62 Chairman of the Board and Chief Executive Officer Charles R. Eitel 47 President and Chief Operating Officer Michael D. Bertolucci 56 Senior Vice President Brian L. DeMoura 51 Senior Vice President Daniel T. Hendrix 42 Senior Vice President - Finance, Chief Financial Officer and Treasurer Don E. Russell 59 Senior Vice President John H. Walker 52 Senior Vice President Gordon D. Whitener 34 Senior Vice President F. Colville Harrell 62 Vice President - Planning & Analysis Alan S. Kabus 39 Vice President John R. Wells 35 Vice President Raymond S. Willoch 38 Vice President, General Counsel and Secretary
Mr. Anderson founded the Company in 1973, and has served as the Company's Chairman and Chief Executive Officer since its founding. In 1996, Mr. Anderson was appointed by President Clinton to the President's Council on Sustainable Development. 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. He also became a Senior Vice President of the Company at that time. 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. Collins & Aikman is 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. 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 became a Senior Vice President of the Company and President and Chief Executive Officer of Guilford of Maine, Inc. (now Interface Fabrics) in March 1994. From August 1990 until joining the Company, 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 joined the Company as Financial Manager 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 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. 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 the Company's modular carpet operations throughout the Americas, and Prince Street Technologies, Ltd., 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. 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. Harrell joined the Company as a planning analyst in 1984, and became Vice President Planning and Analysis in 1986. He served as Senor Vice President Operations of IFS from September 1992 until October 1994, at which time he resumed his current position with the parent Company. -10- 12 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 and President and Chief Executive Officer of Bentley Mills in July 1995. 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. 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. Willoch joined the Company as Corporate Counsel in June 1990. 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. ITEM 2. PROPERTIES The Company maintains its corporate headquarters in Atlanta, Georgia in approximately 15,565 square feet of leased space. The following table lists the Company's principal manufacturing facilities:
Location Primary Products Floor Space (Sq. Ft.) -------- ---------------- --------------------- Cartersville, Georgia ........................ Broadloom carpet 210,000 Cartersville, Georgia ........................ Broadloom carpet 45,000 City of Industry, California ................. Broadloom carpet 539,641 LaGrange, Georgia ............................ Modular carpet 326,666 West Point, Georgia .......................... Modular carpet 179,300 Athens, Tennessee ............................ Modular carpet 71,577 Scherpenzeel, the Netherlands ................ Modular carpet; Specialty Products 292,142 Shelf, England ............................... Modular carpet 223,342 Heckmondwike, England ........................ Modular carpet 90,000 Craigavon, N. Ireland ........................ Modular carpet 125,060 Ontario (Belleville), Canada ................. Modular carpet 77,000 Picton, Australia ............................ Modular carpet 89,560 Bangkok, Thailand ............................ Modular carpet 66,072 Guilford, Maine .............................. Interior fabrics 396,690 Guilford, Maine............................... Interior fabrics 96,200 Eastport, Maine .............................. Interior fabrics 78,135 Newport, Maine ............................... Interior fabrics 208,932 Dudley, Massachusetts ........................ Interior fabrics 300,000 East Douglas, Massachusetts .................. Interior fabrics 301,772 Grand Rapids, Michigan ....................... Interior fabrics 55,800 Aberdeen, North Carolina ..................... Interior fabrics 88,000 Greensboro, North Carolina ................... Interior fabrics 63,700 Cartersville, Georgia ........................ Specialty products 124,500 Grand Rapids, Michigan........................ Access flooring 120,000 Grand Rapids, Michigan ....................... Access flooring 40,000 Rockmart, Georgia............................. Chemicals 37,500 Chatom, Alabama .............................. Chemicals 7,500
- ---------------------------- The Company owns all of its manufacturing facilities, except Interface Fabrics's facility and a portion of Interface Architectural Resources' facility in Grand Rapids, Michigan; Pandel's facility in Cartersville, Georgia; Bentley Mills' facilities in City of Industry, California and Athens, Tennessee; and Toltec's facility in Greensboro, North Carolina, which are leased. The Bangkok, Thailand facility is owned by a joint venture in which the Company has a 70% interest. The Company maintains marketing offices in 91 locations in 39 countries and distribution facilities in 37 locations in six countries. Most of the marketing locations and many of the distribution facilities are leased. The Company believes that its manufacturing and distribution facilities, and its marketing offices, are sufficient for its present operations. The Company will continue, however, to consider the desirability of establishing additional facilities and offices in other locations around the world as part of its business strategy to meet expanding global market demands. The Company expects to begin construction of a joint venture carpet tile manufacturing facility in Shanghai, China in the second quarter of 1997. ITEM 3. LEGAL PROCEEDINGS The Company is not aware of any material pending legal proceedings involving it or any of its property. -11- 13 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 Notes 12 and 18 of the Notes to the Company's Consolidated Financial Statements in the Company's 1996 Annual Report to Shareholders is incorporated herein by reference. As of March 20, 1997, the Company had 478 holders of record of its Class A Common Stock and 52 holders of record of its Class B Common Stock. ITEM 6. SELECTED FINANCIAL DATA Selected Financial Information on page 63 of the Company's 1996 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 on pages 32 through 36 of the Company's 1996 Annual Report to Shareholders is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA The Consolidated Financial Statements and the Report of Independent Certified Public Accountants included on pages 37 through 62 of the Company's 1996 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 1997 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 1996 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. 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 1997 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 1996 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 1997 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 1996 fiscal year, is incorporated herein by reference. For purposes of determining the aggregate market value of the Company's 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 1997 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 1996 fiscal year, is incorporated herein by reference. -12- 14 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 1996 Annual Report to Shareholders, are incorporated by reference in Item 8 of this Report: Consolidated Balance Sheets -- December 29, 1996 and December 31, 1995 Consolidated Statements of Income -- years ended December 29, 1996, December 31, 1995 and January 1, 1995 Consolidated Statements of Cash Flows -- years ended December 29, 1996, December 31, 1995 and January 1, 1995 Notes to Consolidated Financial Statements Report of Independent Certified Public Accountants 2. FINANCIAL STATEMENT SCHEDULES The following Consolidated Financial Statement Schedules of Interface, Inc. and subsidiaries and related Report of Independent Certified Public Accountants are included as part of this Report (see page 16): Report of Independent Certified Public Accountants Schedule II -- Valuation and Qualifying Accounts and Reserves 3. EXHIBITS The following exhibits are included as part of this Report: EXHIBIT NUMBER DESCRIPTION EXHIBIT ------ ------------------- 3.1 Articles of Incorporation (composite as of September 8, 1988) (included as Exhibit 3.1 to the Company's annual report on Form 10-K for the year ended January 3, 1993 (the "1992 10-K") previously filed with the Commission and incorporated herein by reference) and Articles of Amendment (Series A Preferred Stock Designation), dated June 17, 1993 (included as Exhibit 4.1 to the Company's current report on Form 8-K, filed with the Commission on July 7, 1993 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, as amended, and Bylaws defining the rights of holders of Common Stock of the Company. 4.2 (a) 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). (b) Supplement No. 1 to Indenture, dated as of December 27, 1996. 4.3 Form of Exchange Note (included as part of Exhibit 4.2). 10.1 Plan for Reimbursement of Medical and Dental Care Expenses, dated May 3, 1978 (included as Exhibit 10.19 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 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).* 10.3 Salary Continuation Agreement (included as Exhibit 10.23 to the Company's registration statement on Form S-1, File No. 2-82188, previously filed with the Commission and incorporated herein by reference).* 10.4 Interface, Inc. Key Employee Stock Option Plan (1993), effective as of March 1, 1993 (included as Exhibit 10.7 to the 1992 10-K, previously filed with the Commission and incorporated herein by reference); Amendment No. 1 thereto (included as Exhibit 10.7 to the Company's annual report on Form 10-K for the year ended January 2, 1994, previously filed with the Commission and incorporated herein by reference); and Amendment No. 2 thereto -13- 15 (included as Exhibit 10.5 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (the "1995 10-K"), previously filed with the Commission and incorporated herein by reference).* 10.5 Interface, Inc. Offshore Stock Option Plan (included as Exhibit 10.15 to the Company's annual report on Form 10-K for the year ended January 1, 1989, previously filed with the Commission and incorporated herein by reference), and Amendment No. 1 thereto (included as Exhibit 10.11 to the Company's annual report on Form 10-K for the year ended December 29, 1991, previously filed with the Commission and incorporated herein by reference).* 10.6 Interface, Inc. Omnibus Stock Incentive Plan. * 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 (a) Credit Agreement, dated as of January 9, 1995, among the Company (and certain direct and indirect subsidiaries), SunTrust Bank (formerly Trust Company Bank) and The First National Bank of Chicago (included as Exhibit 10.10(b) to the Company's annual report on Form 10-K for the year ended January 1, 1995 (the "1994 10-K"), previously filed with the Commission and incorporated herein by reference). (b) Amended and Restated Credit Agreement, dated as of June 30, 1995, among the Company (and certain direct and indirect subsidiaries), SunTrust Bank and The First National Bank of Chicago (included as Exhibit 10 to the Company's quarterly report on Form 10-Q for the quarter ended July 2, 1995, previously filed with the Commission and incorporated herein by reference); Amendment No. 1 thereto dated July 31, 1995, Amendment No. 2 thereto dated November 21, 1995, Amendment No. 3 thereto dated February 28, 1996 (Amendments No. 1, 2 and 3 were included as Exhibit 10.8(b) to the 1995 10-K, previously filed with the Commission and incorporated herein by reference); Amendment No. 4 thereto dated July 30, 1996 (included as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 29, 1996, previously filed with the Commission and incorporated herein by reference); and Fifth Amendment thereto dated December 29, 1996.* 10.9 (a) Loan Agreement, dated as of November 1, 1989, between Interface Flooring Systems, Inc. and West Point Development Authority (included as Exhibit 10.24(a) to the Company's annual report on Form 10-K for the year ended December 31, 1989 (the "1989 10-K"), previously filed with the Commission and incorporated herein by reference). (b) Indenture of Trust, dated as of November 1, 1989, between West Point Development Authority and SunTrust Bank, as Trustee (included as Exhibit 10.24(b) to the Company's 1989 10-K, previously filed with the Commission and incorporated herein by reference). (c) Letter of Credit Agreement, dated as of November 1, 1989, among Interface Flooring Systems, Inc., the Company and SunTrust Bank (included as Exhibit 10.24(c) to the Company's 1989 10-K, previously filed with the Commission and incorporated herein by reference). (d) Irrevocable Letter of Credit, dated November 2, 1989, established by SunTrust Bank in favor of SunTrust Bank, as Trustee, in the initial principal amount of $4,000,000 (included as Exhibit 10.24(d) to the Company's 1989 10-K, previously filed with the Commission and incorporated herein by reference). (e) Pledge and Security Agreement, dated as of November 1, 1989, by Interface Flooring Systems, Inc. in favor of SunTrust Bank (included as Exhibit 10.24(e) to the Company's 1989 10-K, previously filed with the Commission and incorporated herein by reference). (f) Security Deed and Security Agreement, dated as of November 1, 1989, between Interface Flooring Systems, Inc. and SunTrust Bank, as Credit Bank (included as Exhibit 10.24(f) to the Company's 1989 10-K, previously filed with the Commission and incorporated herein by reference). 10.10 Revolving Credit Loan Agreement, dated as of August 5, 1991, between Interface Flooring Systems, Inc. and SunTrust Bank (included as Exhibit 10.2 to the Company's quarterly report on Form 10-Q for the quarter ended September 29, 1991, previously filed with the Commission and incorporated herein by reference); Amendment No. 1 thereto dated June 30, 1992 (included as Exhibit 10.19 to the Company's 1992 10-K, previously filed with the Commission and incorporated herein by reference); Second Amendment, dated August 5, 1993 (included as Exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended October 3, 1993, previously filed with the Commission and incorporated herein by reference); Third Amendment, dated June 15, 1994 (included as Exhibit 10.2 to the Company's quarterly report on Form 10-Q for the quarter ended July 3, 1994, previously filed with the Commission and incorporated herein by reference; Fourth Amendment, dated August 5, 1994 (included as Exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended October 2, 1994, previously filed with the Commission and incorporated herein by reference); Joinder Agreement and Fifth Amendment thereto, dated as of June 30, 1995 (included as Exhibit 10.10 to the 1995 10-K, previously filed with the Commission and incorporated herein by reference); and Sixth Amendment thereto dated August 5, 1996 (included as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 29, 1996, previously filed with the Commission and incorporated herein by reference). 10.11 Employment Agreement of Charles R. Eitel (included as Exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended April 3, 1994, previously filed with the Commission and incorporated herein by reference); Amendment No. 1 thereto (included as Exhibit 10.4 to the Company's quarterly report on Form 10-Q -14- 16 for the quarter ended October 1, 1995 (the "Third Quarter 1995 10-Q,"), previously filed with the Commission and incorporated herein by reference).* 10.12 Agreement (Change In Control) of Charles R. Eitel (included as Exhibit 10.3 to the Company's Third Quarter 1995 10-Q, previously filed with the Commission and incorporated herein by reference)* 10.13 Employment Agreement of Brian L. DeMoura (included as Exhibit 10.4 to the Company's quarterly report on Form 10-Q for the quarter ended July 3, 1994, previously filed with the Commission and incorporated herein by reference); Amendment No. 1 thereto (included as Exhibit 10.2 to the Company's Third Quarter 1995 10-Q, previously filed with the Commission and incorporated herein by reference).* 10.14 Agreement (Change In Control) of Brian L. DeMoura (included as Exhibit 10.1 to the Company's Third Quarter 1995 10-Q, previously filed with the Commission and incorporated herein by reference).* 10.15 Employment Agreement of Don E. Russell (included as Exhibit 10.17 to the Company's 1994 10-K, previously filed with the Commission and incorporated by reference); Amendment No. 1 thereto (included as Exhibit 10.12 to the Company's Third Quarter 1995 10-Q, previously filed with the Commission and incorporated herein by reference).* 10.16 Agreement (Change In Control) of Don E. Russell (included as Exhibit 10.11 to the Company's Third Quarter 1995 10-Q, previously filed with the Commission and incorporated herein by reference).* 10.17 Agreement (Change In Control) of Gordon D. Whitener (included as Exhibit 10.13 to the Company's Third Quarter 1995 10-Q, previously filed with the Commission and incorporated herein by reference).* 10.18 Employment Agreement of Daniel T. Hendrix (included as Exhibit 10.8 to the Company's Third Quarter 1995 10-Q, previously filed with the Commission and incorporated herein by reference).* 10.19 Agreement (Change In Control) of Daniel T. Hendrix (included as Exhibit 10.7 to the Company's Third Quarter 1995 10-Q, previously filed with the Commission and incorporated herein by reference).* 10.20 Employment Agreement of F. Colville Harrell (included as Exhibit 10.6 to the Company's Third Quarter 1995 10-Q, previously filed with the Commission and incorporated herein by reference).* 10.21 Agreement (Change In Control) of F. Colville Harrell (included as Exhibit 10.5 to the Company's Third Quarter 1995 10-Q, previously filed with the Commission and incorporated herein by reference).* 10.22 Employment Agreement of Raymond S. Willoch (included as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 29, 1996, previously filed with the Commission and incorporated herein by reference).* 10.23 Agreement (Change In Control) of Raymond S. Willoch (included as Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 29, 1996, previously filed with the Commission and incorporated herein by reference).* 10.24 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. 10.25 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). 13 Certain information contained in the Company's Annual Report to Shareholders for the fiscal year ended December 29, 1996, which is expressly incorporated into this Report by direct reference thereto. 21 Subsidiaries of the Company. 23 Consent of BDO Seidman, LLP to the incorporation by reference of certain reports dated February 20, 1997 into the prospectuses constituting parts of the Company's registration statements on Form S-8 (File Numbers 33-28305, 33-28307, 33-69808, 333-10379 and 333-10377). 27 Financial Data Schedule (for SEC use only). - ---------------- * 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. -15- 17 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Interface, Inc. Atlanta, Georgia The audits referred to in our Report dated February 20, 1997 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 29, 1996, 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 20, 1997 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 Balance at Balance at beginning costs and other Deductions end of of year expenses(a) accounts (describe) year - ----------------------------------------------------------------------------------------------------------------------- (in thousands) Allowance for doubtful accounts: Year ended: December 29, 1996 ............. $5,870 $ 3,529(b) $ -- $2,050(c) $7,349 ====== ========= ====== ====== ====== December 31, 1995 ............. $6,501 $ 2,448 $ -- $3,079(c) $5,870 ====== ========= ====== ====== ====== January 1, 1995 ............... $5,771 $ 3,562(d) $ -- $2,832(c) $6,501 ====== ========= ======= ====== ======
- --------------- (a) Includes changes in foreign currency exchange rates. (b) Includes allowance of $1,034 at acquisition date for Renovisions, C-Tec and certain of the dealers in the Re:Source Americas network. (c) Write off bad debt. (d) Includes Prince Street allowance of $780 at acquisition date. (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.) -16- 18 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 27, 1997 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 Board and Chief Executive Officer March 27, 1997 --------------------------------- (Principal Executive Officer) Ray C. Anderson /s/ Daniel T. Hendrix Senior Vice President, Chief Financial Officer, March 27, 1997 --------------------------------- Treasurer and Director (Principal Financial and Daniel T. Hendrix Accounting Officer) /s/ Brian L. DeMoura Director March 27, 1997 --------------------------------- Brian L. DeMoura /s/ Charles R. Eitel Director March 27, 1997 --------------------------------- Charles R. Eitel /s/ Donald E. Russell Director March 27, 1997 --------------------------------- Donald E. Russell /s/ John H. Walker Director March 27, 1997 --------------------------------- John H. Walker /s/ Gordon D. Whitener Director March 27, 1997 --------------------------------- Gordon D. Whitener /s/ Dianne Dillon-Ridgley Director March 27, 1997 --------------------------------- Dianne Dillon-Ridgley /s/ Carl I. Gable Director March 27, 1997 --------------------------------- Carl I. Gable /s/ June M. Henton Director March 27, 1997 --------------------------------- June M. Henton /s/ J. Smith Lanier, II Director March 27, 1997 --------------------------------- J. Smith Lanier, II /s/ Leonard G. Saulter Director March 27, 1997 --------------------------------- Leonard G. Saulter /s/ Clarinus C.Th. van Andel Director March 27, 1997 --------------------------------- Clarinus C.Th. van Andel
-17- 19 EXHIBIT INDEX
EXHIBIT SEQUENTIAL PAGE NUMBER DESCRIPTION OF EXHIBIT NUMBER ------ ---------------------- ------ 4.2(b) Supplement No. 1 to Indenture, dated as of December 27, 1996. 10.6 Interface, Inc. Omnibus Stock Incentive Plan.* 10.8(b) Fifth Amendment to Amended and Restated Credit Agreement, dated as of December 29, 1996. 10.24 Amendment dated as of December 27, 1996, to Receivables Sale Agreement, dated as of August 4, 1995, amont Interface Securitization Corporation, Interface, Inc., Special Purpose Account Receivable Cooperative Corporation and Canadian Imperial Bank of Commerce. 10.25 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). 13 Certain information contained in the Company's Annual Report to Shareholders for the fiscal year ended December 29, 1996, which is expressly incorporated into this Report by direct reference thereto. 21 Subsidiaries of the Company. 23 Consent of BDO Seidman, LLP to the incorporation by reference of certain reports dated February 20, 1997 into the prospectuses constituting parts of the Company's registration statements on Form S-8 (File Numbers 33-28305, 33-28307, 33-69808, 333-10379 and 333-10377). 27 Financial Data Schedule (for SEC only). - ------------------ * Management contract or compensatory plan or agreement required to be filed pursuant to Item 14(c) of this Report.
EX-4.2.B 2 SUPPLEMENT #1 TO INDENTURE 1 EXHIBIT 4.2(b) SUPPLEMENT NO. 1 TO INDENTURE THIS SUPPLEMENT NO. I TO INDENTURE (this "SUPPLEMENT"), dated as of December 27, 1996, among Interface Holding Company, a corporation incorporated under the laws of the State of Nevada ("HOLDING"); Interface Royalty Company, a Nevada corporation ("ROYALTY"); Interface Licensing Company, a Nevada corporation ("LICENSING"); Interface Americas, Inc., a Georgia corporation ("AMERICAS"); Interface Specialty Resources, Inc., a Nevada corporation ("SPECIALTY RESOURCES"); Interface Americas Services, Inc., a Georgia corporation ("AMERICAS SERVICES"); Bentley Royalty Company, a Nevada corporation ("BENTLEY ROYALTY"); Prince Street Royalty Company, a Nevada corporation ("PRINCE STREET ROYALTY"); Re:Source Americas Enterprises, Inc., a Georgia corporation ("RE:SOURCE AMERICAS"); Guilford of Maine, Inc., a Nevada corporation ("GOM"); Guilford of Maine Decorative Fabrics, Inc., a Nevada corporation ("DECORATIVE FABRICS"); Guilford of Maine Finishing Services, Inc., a Nevada corporation ("FINISHING SERVICES"); Guilford of Maine Marketing Company, a Nevada corporation ("GOM MARKETING"); Interface Architectural Resources, Inc., a Georgia corporation ("ARCHITECTURAL RESOURCES"); Toltec Fabrics, Inc., a Georgia corporation ("TOLTEC"); Intek, Inc., a Georgia corporation ("INTEK"); Intek Marketing Company, a Nevada corporation ("INTEK MARKETING"); Superior Holding, Inc., a Texas corporation ("SUPERIOR HOLDING"); Quaker City International, Inc., a Pennsylvania corporation (QUAKER CITY"); Commercial Flooring Systems, Inc., a Pennsylvania corporation ("COMMERCIAL FLOORING"); and Congress Flooring Corp., a Massachusetts corporation ("CONGRESS FLOORING") and First Union National Bank of Georgia, a national banking association, as trustee under the Indenture defined below (the "TRUSTEE"). W I T N E S S E T H: WHEREAS, Interface, Inc., a Georgia corporation (the "COMPANY"), the Trustee, and the other signatories thereto, are party to that certain Indenture, dated as of November 15, 1995, relating to $125,000,000 in initial aggregate principal amount of the Company's 9 1/2 % Senior Subordinated Notes due 2005 and the Company's 9 1/2 % Series B Senior Subordinated Notes due 2005 (the "Indenture"); and WHEREAS, in accordance with Sections 12.03(b) and 4.16 of the Indenture the signatories hereto, other than the Trustee, desire to supplement the Indenture for purposes of becoming "Guarantors" of the Securities and the Indenture, subject to and in accordance with the terms of the Indenture, including without limitation, Article Twelve of the Indenture; and NOW, THEREFORE, in consideration of the premises, and for other good and valuable 2 consideration, the receipt and adequacy of which are hereby acknowledged, each of the Additional Guarantors (as defined below) covenants and agrees as follows for the benefit of each other party to this Supplement and to the Indenture and for the equal and ratable benefit of the Holders of the Securities: 1.DEFINED TERMS Holding, Royalty, Licensing, Americas, Specialty Resources, Americas Services, Bentley Royalty, Prince Street Royalty, Re:Source Americas, GOM, Decorative Fabrics, Finishing Services, GOM Marketing, Architectural Resources, Toltec, Intek, Intek Marketing, Superior Holding, Quaker City, Commercial Flooring and Congress Flooring are collectively referred to herein as the "ADDITIONAL GUARANTORS" and individually as a "GUARANTOR". Other capitalized terms used but not otherwise defined are used herein with the meaning specified for such terms in the Indenture. 2.ADDITIONAL GUARANTORS Each of the Additional Guarantors agrees that it shall be and become a Guarantor for all purposes of the Indenture and the Securities issued pursuant thereto and in accordance therewith and shall be fully liable thereunder and therefor, subject to the provisions of Article Twelve of the Indenture, to each Holder of a Security authenticated and delivered by the Trustee and to the Trustee and its successors and assigns, irrespective of the validity and enforceability of the Indenture, the Securities, or the obligations of the Company or any other Guarantors to the Holders or the Trustee hereunder or thereunder to the extent and with the same effect as though each Additional Guarantor had been one of the Guarantors originally executing and delivering the Indenture and the Guarantee. All references in the Indenture and each Security to "Guarantors" or any "Guarantor" shall be deemed to include and to refer to each and every Additional Guarantor. 3.GUARANTEE In furtherance of the foregoing and not in limitation thereof, and for value received, each of the undersigned Additional Guarantors hereby unconditionally guarantees to the Holder of a Security the payments of principal of, premium, if any, and interest on, each Security in the amounts and at the time when due, and interest on the overdue principal, premium, if any, and interest, if any, of a Security, if lawful, and the payment or performance of all other obligations of the Company under the Indenture or the Securities, to each Holder of a Security and the Trustee, all in accordance with and subject to the terms and limitations of each Security, Article Twelve of the Indenture, and the Guarantee (of which the Guarantee set forth in this Section 3 of this Supplement shall be, and shall be deemed to be, a part). The validity and enforceability of the Guarantee set forth in this Section 3 of this Supplement shall not be affected by the fact that it is not affixed to any Security or all of the Securities. The obligations of each of the undersigned Additional Guarantors to the Holders of Securities 2 3 and to the Trustee pursuant to the Guarantee and the Indenture are expressly set forth in Article Twelve of the Indenture, and reference is hereby made to the Indenture for the precise terms of the Guarantee and all of the other provisions of the Indenture to which this Guarantee relates. The indebtedness evidenced by this Guarantee is, to the extent and the manner provided in the Indenture, subordinate and subject in right of payment to the prior payment in full in cash or Cash Equivalents, of all Guarantor Senior Indebtedness as defined in the Indenture, and this Guarantee is issued subject to such provisions. Each Holder of a Security by accepting same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee, on behalf of such Holder, to take such action as may be necessary and appropriate to effectuate the subordination as provided in the Indenture, and (c) appoints the Trustee attorney-in-fact of such Holder for such purpose; provided, however, that such subordination provision shall cease to affect amounts deposited in accordance with the defeasance provisions of the Indenture upon the terms and conditions set forth therein. This Guarantee is subject to release upon the terms set forth in the Indenture. 4.DUPLICATE ORIGINALS The parties may sign any number of copies of this Supplement. Each signed copy shall be an original, but all such executed copies together represent the same agreement. 5.GOVERNING LAW The laws of the State of New York shall govern this Supplement and the Guarantees set forth herein. Each Additional Guarantor agrees to submit to the jurisdiction of the courts of the State of New York in any action or proceeding arising out of or relating to the Indenture, this Supplement, the Guarantees, or the Securities. IN WITNESS WHEREOF, the parties hereto have caused this Supplement to be duly executed, and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first above written. 3 4 INTERFACE HOLDING COMPANY By: /s/ DANIEL T. HENDRIX -------------------------------- Name: Daniel T. Hendrix Title: Senior Vice President INTERFACE ROYALTY COMPANY By: /s/ DANIEL T. HENDRIX -------------------------------- Name: Daniel T. Hendrix Title: Senior Vice President INTERFACE LICENSING COMPANY By: /s/ DANIEL T. HENDRIX -------------------------------- Name: Daniel T. Hendrix Title: Senior Vice President INTERFACE AMERICAS, INC. By: /s/ DANIEL T. HENDRIX -------------------------------- Name: Daniel T. Hendrix Title: Senior Vice President INTERFACE SPECIALTY RESOURCES, INC. By: /s/ DANIEL T. HENDRIX -------------------------------- Name: Daniel T. Hendrix Title: Senior Vice President INTERFACE AMERICAS SERVICES, INC. 4 EX-10.6 3 OMNIBUS STOCK INCENTIVE PLAN 1 EXHIBIT 10.6 INTERFACE, INC. OMNIBUS STOCK INCENTIVE PLAN (JANUARY 20, 1997) 2 INTERFACE, INC. OMNIBUS STOCK INCENTIVE PLAN TABLE OF CONTENTS 1. Purpose..................................................................................................1 2. Definitions..............................................................................................1 3. Shares Available Under this Plan.........................................................................4 4. Administration of this Plan..............................................................................4 5. Stock Options............................................................................................4 6. Stock Appreciation Rights................................................................................6 7. Restricted Shares........................................................................................7 8. Deferred Shares..........................................................................................8 9. Performance Shares and Performance Units.................................................................9 10. Transferability.........................................................................................10 11. Adjustments.............................................................................................11 12. Fractional Shares.......................................................................................11 13. Withholding Taxes.......................................................................................11 14. Certain Termination Events, Hardship and Approved Leaves of Absence..............................................................................12 15. Foreign Employees.......................................................................................12 16. Amendments and Other Matters............................................................................12 17. Effective Date and Shareholder Approval.................................................................13 18. Regulation and Other Approvals..........................................................................13 19. Deferral................................................................................................14 20. Termination.............................................................................................14
3 INTERFACE, INC. OMNIBUS STOCK INCENTIVE PLAN 1. PURPOSE. The purpose of this Plan is to attract and retain key employees and directors for Interface, Inc. (the "Company") and its subsidiaries and to provide such persons with incentives and rewards for superior performance. 2. DEFINITIONS. As used in this Plan, the following terms shall be defined as set forth below: "AWARD" means any Appreciation Right, Deferred Share, Restricted Share, Stock Option, Performance Share or Performance Unit. "BASE PRICE" means the price to be used as the basis for determining the Spread upon the exercise of a Freestanding Stock Appreciation Right. "BOARD" means the Board of Directors of the Company. "CODE" means the Internal Revenue Code of 1986, as amended from time to time. "COMMITTEE" means the committee described in Section 4 of this Plan. "COMPANY" means Interface, Inc., a Georgia corporation, or any successor corporation. "DEFERRAL PERIOD" means the period of time during which Deferred Shares are subject to deferral limitations under Section 8 of this Plan. "DEFERRED SHARES" means an award pursuant to Section 8 of this Plan of the right to receive Shares at the end of a specified Deferral Period. "EMPLOYEE" means any person, including an officer, employed by the Company or a Subsidiary. "EXERCISE PRICE" means the purchase price payable upon the exercise of a Stock Option. "FAIR MARKET VALUE" means the fair market value of the Shares which, unless otherwise specified by the Committee with respect to any Award, shall be determined, for any valuation date, as the closing price of the Class A Shares on Nasdaq (or, if the Class A Shares are not traded on Nasdaq, such other national exchange on which the Class A Shares are traded). 4 For purposes hereof, the closing price on the applicable valuation date shall be used; provided, however, if the Class A Shares are not traded on such valuation date, the closing price on the immediately preceding trading date for the Class A Shares shall be used. "FREESTANDING STOCK APPRECIATION RIGHT" means a Stock Appreciation Right granted pursuant to Section 6 of this Plan that is not granted in tandem with a Stock Option or similar right. "GRANT DATE" means the date specified by the Committee on which a grant of an Award shall become effective, which shall not be earlier than the date on which the Committee takes action with respect thereto. "INCENTIVE STOCK OPTIONS" means any Stock Option that is intended to qualify as an "incentive stock option" under Section 422 of the Code or any successor provision. "NONQUALIFIED STOCK OPTION" means any Stock Option that is not intended to qualify as an Incentive Stock Option. "OPTIONEE" means the person so designated in an agreement evidencing an outstanding Stock Option. "OUTSIDE DIRECTOR" means a member of the Board who is not an Employee. "PARTICIPANT" means an Employee or Outside Director, or any consultant, outside director of a Subsidiary or independent contractor performing bona fide services for the Company or a Subsidiary, who is selected by the Committee to receive benefits under this Plan, provided, however, that only Employees shall be eligible to receive grants of Incentive Stock Options. "PERFORMANCE OBJECTIVES" means the objectives established pursuant to this Plan for Participants who have received Awards of Performance Shares or Performance Units or, when so determined by the Committee, Deferred Shares or Restricted Shares. Performance Objectives may be described in terms of Company-wide objectives, or objectives that are related to the performance of the individual Participant or of the Subsidiary, division, department or function within the Company in which the Participant is employed. The Performance Objectives applicable to Awards intended to qualify as "performance-based compensation" under Section 162(m) of the Code shall be selected from among the following measures: return on equity, earnings per share, total earnings, earnings growth, return on capital, return on assets, economic value added ("EVA"), sales growth, waste reduction, increase in the Fair Market Value of the Shares, or any combination thereof. The Award agreement may provide that if the Committee determines that a change in the business, operations, corporate structure or capital structure of the Company, an acquisition or divestiture, or other events or circumstances render the specified Performance Objectives unsuitable or unfair, the Committee may modify such Performance Objectives or the related minimum acceptable level of achievement, in whole or in part, as the Committee deems appropriate and 2 5 equitable. For Employees subject to the restrictions of Code Section 162(m), such changes shall be made in a manner consistent with Code Section 162(m). "PERFORMANCE PERIOD" means a period of time established under Section 9 of this Plan within which the Performance Objectives relating to Performance Shares, Performance Units, Deferred Shares or Restricted Shares are to be achieved. "PERFORMANCE SHARE" means a bookkeeping entry that records the equivalent of one Share awarded pursuant to Section 9 of this Plan. "PERFORMANCE UNIT" means a bookkeeping entry that records a unit equivalent to $1.00 awarded pursuant to Section 9 of this Plan. "PREDECESSOR PLANS" means the Interface, Inc. Key Employee Stock Option Plan (1993) and the Interface, Inc. Offshore Stock Option Plan, which have been terminated (as to new grants) as of the effective date of this Plan specified in Section 17. "RESTRICTED SHARES" means Shares granted under Section 7 of this Plan subject to a substantial risk of forfeiture. "SHARES" means shares of the Class A or Class B common stock of the Company, $.10 par value per share, or any security into which Shares may be converted by reason of any transaction or event of the type referred to in Section 11 of this Plan. Each Award granted under this Plan shall specify whether it relates to Class A Shares, Class B Shares, or a combination thereof. "SPREAD" means, in the case of a Freestanding Stock Appreciation Right, the amount by which the Fair Market Value on the date when any such right is exercised exceeds the Base Price specified in such right or, in the case of a Tandem Stock Appreciation Right, the amount by which the Fair Market Value on the date when any such right is exercised exceeds the Exercise Price specified in the related Stock Option. "STOCK APPRECIATION RIGHT" means a right granted under Section 6 of this Plan, including a Freestanding Stock Appreciation Right or a Tandem Stock Appreciation Right. "STOCK OPTION" means a right to purchase Shares granted under Section 5 of this Plan. "SUBSIDIARY" means either: (i) a corporation of which more than 50 percent of the outstanding shares or securities (representing the right to vote for the election of directors) are now or hereafter owned or controlled, directly or indirectly, by the Company, or (ii) a noncorporate entity which does not have outstanding shares or securities (as may be the case in a partnership, joint venture or unincorporated association), but of which more than 50 percent of the ownership interests (representing the right generally to make decisions for such other entity) are now or hereafter owned 3 6 or controlled, directly or indirectly, by the Company; provided, however, for purposes of determining whether any person may be a Participant for purposes of any grant of Incentive Stock Options, "Subsidiary" means any corporation in which the Company owns or controls, directly or indirectly, more than 50 percent of the total combined voting power represented by all classes of stock issued by such corporation and outstanding at the time of such grant. "TANDEM STOCK APPRECIATION RIGHT" means a Stock Appreciation Right that is granted pursuant to Section 6 of this Plan in tandem with a Stock Option or any similar right granted under any other plan of the Company. 3. SHARES AVAILABLE UNDER THIS PLAN. Subject to adjustment as provided in Section 11 of this Plan, the number of Shares that may be issued or transferred under this Plan shall not in the aggregate exceed the sum of (a) 1,800,000 Shares not previously authorized for issuance under any plan, plus (b) (i) the number of Shares subject to outstanding stock options granted under the Predecessor Plans, minus (ii) the number of Shares issued on or after the effective date hereof pursuant to the exercise of such outstanding stock options granted under the Predecessor Plans. The (w) Shares subject to any unexercised portion of terminated Stock Options, (x) Shares subject to any unexercised portion of terminated stock options that were outstanding under the Predecessor Plans on the effective date hereof, (y) Shares forfeited under this Plan and Shares withheld in payment of the Exercise Price or withholding taxes, and (z) Shares subject to any terminated or surrendered Awards as to which no Participant has received any payment or other benefit of ownership, may again be subject to new Awards under this Plan. Such Shares may be Shares of original issuance, Shares held in treasury, or Shares that have been reacquired by the Company. No Participant may receive Awards representing more than 500,000 Shares in any one calendar year. In addition, the maximum number of Performance Units that may be granted to a Participant in any one calendar year is 1,000,000. 4. ADMINISTRATION OF THIS PLAN. (a) This Plan shall be administered by one or more committees appointed by the Board. (b) The interpretation and construction by the Committee of any provision of this Plan or of any agreement or document evidencing the grant of any Award, and any determination by the Committee pursuant to any provision of this Plan or any such agreement, notification or document, shall be final and conclusive. No member of the Committee shall be liable to any person for any such action taken or determination made in good faith. 5. STOCK OPTIONS. The Committee may from time to time authorize grants to Participants of Stock Options to purchase Shares upon such terms and conditions as the Committee may determine in accordance with the following provisions: (a) Each grant shall specify the number of Shares to which it pertains. 4 7 (b) Each grant shall specify an Exercise Price per Share; provided, however, the Exercise Price per Share for any Incentive Stock Option shall be equal to or greater than the Fair Market Value (110 percent of Fair Market Value for any 10-percent shareholder, within the meaning of Section 422 of the Code) on the Grant Date. (c) The form of consideration to be paid in satisfaction of the Exercise Price and the manner of payment of such consideration may be (i) cash in the form of currency, check or other cash equivalent acceptable to the Company; (ii) nonforfeitable, unrestricted Shares that have been owned by the Optionee for at least six months and have a value at the time of exercise that is equal to the Exercise Price, (iii) any other legal consideration that the Committee may deem appropriate and may specify in a grant, including, without limitation, any form of consideration authorized under Section 5(d) below, on such basis as the Committee may determine in accordance with this Plan, or (iv) any combination of the foregoing. (d) On or after the Grant Date of any Stock Option other than an Incentive Stock Option, the Committee may determine that payment of the Exercise Price may also be made in whole or in part in the form of Restricted Shares or other Shares that are subject to risk of forfeiture or restrictions on transfer. Unless otherwise determined by the Committee, whenever any Exercise Price is paid in whole or in part by means of any of the forms of consideration specified in this Section 5(d), the Shares received by the Optionee upon the exercise of the Stock Options shall be subject to the same risks of forfeiture or restrictions on transfer as those that applied to the consideration surrendered by the Optionee; provided, however, such risks of forfeiture and restrictions on transfer shall apply only to the same number of Shares received by the Optionee as applied to the forfeitable or restricted Shares surrendered by the Optionee. (e) On or after the Grant Date of any Stock Option, the Committee may provide for the automatic grant to the Optionee of a "reload" Stock Option in the event the Optionee surrenders Shares in satisfaction of the Exercise Price upon the exercise of a Stock Option as authorized under Sections 5(c) and (d) above. Each reload Stock Option shall pertain to a number of Shares equal to the number of Shares utilized by the Optionee to exercise the original Stock Option. Each reload Stock Option shall have an exercise price equal to Fair Market Value on the date it is granted and shall expire on the stated expiration date of the original Stock Option. (f) Each Stock Option grant shall specify the period of continuous employment or service of the Optionee with the Company or any Subsidiary (or, in the case of an Outside Director, service on the Board) that is necessary before the Stock Option or installments thereof shall become exercisable, and any grant may provide for the earlier exercise of such rights in the event of a change in control of the Company (as defined in the agreement evidencing the Stock Option) or other similar transaction or event. (g) Stock Options granted under this Plan may be Incentive Stock Options, Nonqualified Stock Options or a combination of the foregoing; provided, however, only Nonqualified Stock Options may be granted to Outside Directors or other non-Employee Participants. Each grant shall 5 8 specify whether (or the extent to which) the Stock Option is an Incentive Stock Option or a Nonqualified Stock Option. Notwithstanding any such designation, to the extent that the aggregate Fair Market Value (determined as of the Grant Date) of the Shares with respect to which Stock Options designated as Incentive Stock Options are exercisable for the first time by an Optionee during any calendar year (under all plans of the Company) exceeds $100,000, such Stock Options shall be treated as Nonqualified Stock Options. (h) No Stock Option granted under this Plan may be exercised more than 10 years from the Grant Date. (i) Each Stock Option grant shall be evidenced by an agreement executed on behalf of the Company by a senior officer (vice president level or higher) thereof and delivered to and accepted by the Optionee, and containing such terms and provisions as the Committee may determine, consistent with this Plan. Unless the Committee specifies other terms consistent with the provisions of this Plan, the terms of any Stock Option shall be substantially the same as set forth in the sample Incentive Stock Option Agreement attached hereto as Exhibit A. 6. STOCK APPRECIATION RIGHTS. The Committee may also authorize grants to Participants of Stock Appreciation Rights. A Stock Appreciation Right is the right of the Participant to receive from the Company an amount, which shall be determined by the Committee, expressed as a percentage (not exceeding 100 percent) of the Spread at the time of the exercise of such right. Any grant of Stock Appreciation Rights under this Plan shall be upon such terms and conditions as the Committee may determine in accordance with the following provisions: (a) Any grant may specify that the amount payable upon the exercise of a Stock Appreciation Right may be paid by the Company in cash, Shares, or a combination thereof, and may either (i) grant to the Participant or reserve to the Committee the right to elect among those alternatives, or (ii) preclude the right of the Participant to receive and the Company to issue Shares or other equity securities in lieu of cash. (b) Any grant may specify that the amount payable upon the exercise of a Stock Appreciation Right shall not exceed a maximum specified by the Committee on the Grant Date. (c) Any grant may specify (i) a waiting period or periods before Stock Appreciation Rights shall become exercisable, and (ii) permissible dates or periods on or during which Stock Appreciation Rights shall be exercisable. (d) Any grant may specify that a Stock Appreciation Right may be exercised only in the event of a change in control of the Company (as defined in the agreement evidencing the Stock Appreciation Right) or other similar transaction or event. 6 9 (e) On or after the Grant Date of any Stock Appreciation Rights, the Committee may provide for the payment to the Participant of dividend equivalents thereon, in cash or Shares, and on a current, deferred or contingent basis. (f) Each grant shall be evidenced by an agreement executed on behalf of the Company by a senior officer (vice president level or higher) thereof and delivered to and accepted by the Optionee, which shall describe the subject Stock Appreciation Rights, identify any related Stock Options, state that the Stock Appreciation Rights are subject to all of the terms and conditions of this Plan and contain such other terms and provisions as the Committee may determine, consistent with this Plan. (g) Each grant of a Tandem Stock Appreciation Right shall provide that such Tandem Stock Appreciation Right may be exercised only (i) at a time when the related Stock Option (or any similar right granted under any other plan of the Company) is also exercisable and the Spread is positive, and (ii) by surrender of the related Stock Option (or such other right) for cancellation. (h) Regarding Freestanding Stock Appreciation Rights only: (i) Each grant shall specify for each Freestanding Stock Appreciation Right a Base Price per Share, which shall be equal to or greater than the Fair Market Value on the Grant Date. (ii) Successive grants may be made to the same Participant regardless of whether any Freestanding Stock Appreciation Rights previously granted to such Participant remain unexercised. (iii) Each grant shall specify the period or periods of continuous employment or service of the Participant with the Company or any Subsidiary that are necessary before the Freestanding Stock Appreciation Rights or installments thereof shall become exercisable, and any grant may provide for the earlier exercise of such rights in the event of a change in control of the Company (as defined in the agreement evidencing the Stock Appreciation Rights) or other similar transaction or event. (iv) No Freestanding Stock Appreciation Right granted under this Plan may be exercised more than 10 years from the Grant Date. 7. RESTRICTED SHARES. Unless otherwise determined by the Committee, each grant of Restricted Shares shall be made with substantially the same terms as provided in Section 8 of this Plan as if such Restricted Shares were Deferred Shares, and the terms of any Award of Restricted Shares shall be substantially the same as set forth in the sample Restricted Stock Agreement attached hereto as Exhibit B. Alternately, the Committee may authorize grants to Participants of Restricted Shares upon such terms and conditions as the Committee may determine in accordance with the following provisions: 7 10 (a) Each grant shall, unless otherwise determined by the Committee, constitute an immediate transfer of the ownership of Shares to the Participant in consideration of the performance of services, entitling such Participant to dividend, voting and other ownership rights, subject to the substantial risk of forfeiture and restrictions on transfer hereinafter referred to. (b) Each grant may be made without additional consideration from the Participant or in consideration of a payment by the Participant that is less than the Fair Market Value on the Grant Date. (c) Each grant shall provide that the Restricted Shares covered thereby shall be subject to a "substantial risk of forfeiture" within the meaning of Section 83 of the Code for a period to be determined by the Committee on the Grant Date, and any grant (or sale) may provide for the earlier termination of such risk of forfeiture in the event of a change in control of the Company (as defined in the agreement evidencing the Restricted Shares) or other similar transaction or event. (d) Each grant shall provide that, during the period for which such substantial risk of forfeiture is to continue, the transferability of the Restricted Shares shall be prohibited or restricted in the manner and to the extent prescribed by the Committee on the Grant Date. Such restrictions may include, without limitation, rights of repurchase or first refusal rights of the Company, or provisions subjecting the Restricted Shares to a continuing substantial risk of forfeiture in the hands of any transferee. (e) Any grant may be further conditioned upon the attainment of Performance Objectives established by the Committee in accordance with the applicable provisions of Section 9 of this Plan regarding Performance Shares and Performance Units. (f) Any grant may require that any or all dividends or other distributions paid on the Restricted Shares during the period of such restrictions be automatically sequestered and reinvested on an immediate or deferred basis in additional Shares, which may be subject to the same restrictions as the underlying Award or such other restrictions as the Committee may determine. (g) Each grant shall be evidenced by an agreement executed on behalf of the Company by a senior officer (vice president level or higher) thereof and delivered to and accepted by the Participant, and containing such terms and provisions as the Committee may determine, consistent with this Plan. Unless otherwise directed by the Committee, all certificates representing Restricted Shares, together with a stock power that shall be endorsed in blank by the Participant with respect to such shares, shall be held in custody by the Company until all restrictions thereon lapse. 8. DEFERRED SHARES. The Committee may authorize grants of Deferred Shares to Participants upon such terms and conditions as the Committee may determine in accordance with the following provisions: 8 11 (a) Each grant shall constitute the agreement by the Company to issue or transfer Shares to the Participant in the future in consideration of the performance of services, subject to the fulfillment during the Deferral Period of such conditions as the Committee may specify. (b) Each grant may be made without additional consideration from the Participant or in consideration of a payment by the Participant that is less than the Fair Market Value on the Grant Date. (c) Each grant shall provide that the Deferred Shares covered thereby shall be subject to a Deferral Period, which shall be fixed by the Committee on the Grant Date, and any grant (or sale) may provide for the earlier termination of such Deferral Period in the event of a change in control of the Company (as defined in the agreement evidencing the Deferred Shares) or other similar transaction or event. (d) During the Deferral Period, the Participant shall not have any right to transfer any rights under the subject Award, shall not have any rights of ownership in the Deferred Shares and shall not have any right to vote such shares, but the Committee may, on or after the Grant Date, authorize the payment of dividend equivalents on such shares, in cash or additional Shares, and on a current, deferred or contingent basis. (e) Any grant may be further conditioned upon the attainment of Performance Objectives established by the Committee in accordance with the applicable provisions of Section 9 of this Plan regarding Performance Shares and Performance Units. (f) Each grant shall be evidenced by an agreement executed on behalf of the Company by a senior officer (vice president level or higher) thereof and delivered to and accepted by the Participant, and containing such terms and provisions as the Committee may determine, consistent with this Plan. 9. PERFORMANCE SHARES AND PERFORMANCE UNITS. The Committee may also authorize grants of Performance Shares and Performance Units, which shall become payable to the Participant upon the achievement of specified Performance Objectives, upon such terms and conditions as the Committee may determine in accordance with the following provisions: (a) Each grant shall specify the number of Performance Shares or Performance Units to which it pertains, which may be subject to adjustment to reflect changes in compensation or other factors. (b) The Performance Period with respect to each Performance Share or Performance Unit shall commence on the Grant Date and may be subject to earlier termination in the event of a change in control of the Company (as defined in the agreement evidencing the Performance Share or Performance Unit) or other similar transaction or event. 9 12 (c) Each grant shall specify the Performance Objectives that are to be achieved by the Participant. (d) Each grant may specify for the established Performance Objectives a minimum acceptable level of achievement below which no payment will be made, and in such event shall set forth a formula for determining the amount of any payment to be made if performance is at or above such minimum acceptable level but falls short of the maximum or full achievement of the established Performance Objectives. (e) Each grant shall specify the time and manner of payment of Performance Shares or Performance Units that shall have been earned, and any grant may specify that any such amount may be paid by the Company in cash, Shares, or a combination thereof, and may either grant to the Participant or reserve to the Committee the right to elect among those alternatives. (f) Any grant of Performance Shares may specify that the amount payable with respect thereto may not exceed a maximum specified by the Committee on the Grant Date. Any grant of Performance Units may specify that the amount payable, or the number of Shares to be issued, with respect thereto may not exceed maximums specified by the Committee on the Grant Date. (g) Any grant of Performance Shares may provide for the payment to the Participant of dividend equivalents thereon, in cash or additional Shares, and on a current, deferred or contingent basis. (h) The Committee may adjust Performance Objectives and the related minimum acceptable level of achievement if, in the judgment of the Committee, events or transactions have occurred after the Grant Date that are unrelated to the performance of the Participant and result in distortion of the Performance Objectives or the related minimum acceptable level of achievement. (i) Each grant shall be evidenced by an agreement executed on behalf of the Company by a senior officer (vice president level or higher) thereof and delivered to and accepted by the Participant, which shall state that the Performance Shares or Performance Units are subject to all of the terms and conditions of this Plan and such other terms and provisions as the Committee may determine, consistent with this Plan. 10. TRANSFERABILITY. (a) Except as provided in Section 10(b) below, no Award granted under this Plan shall be transferable by a Participant other than by will or the laws of descent and distribution, and, during a Participant's lifetime, Stock Options and Stock Appreciation Rights shall be exercisable only by the Participant or, in the event of the Participant's legal incapacity, by his or her guardian or legal representative acting in a fiduciary capacity on behalf of the Participant under state law and court supervision. 10 13 (b) The Committee may expressly provide in an Award agreement (or an amendment to an Award agreement) that a Participant may transfer such Award (other than an Incentive Stock Option) to a spouse or lineal descendant (a "Family Member"), a trust for the exclusive benefit of Family Members, a partnership or other entity in which all the beneficial owners are Family Members, or any other entity affiliated with the Participant that may be approved by the Committee. Subsequent transfers of Awards shall be prohibited except in accordance with this Section 10(b). All terms and conditions of the Award, including provisions relating to the termination of the Participant's employment or service with the Company or a Subsidiary, and the effect thereof, shall continue to apply following a transfer made in accordance with this Section 10(b). (c) Any Award made under this Plan may provide that all or any part of the Shares that are (i) to be issued or transferred by the Company upon the exercise of Stock Options or Stock Appreciation Rights, upon the termination of the Deferral Period applicable to Deferred Shares or upon achievement of the Performance Objectives specified for Performance Shares or Performance Units, or (ii) no longer subject to the substantial risk of forfeiture and restrictions on transfer referred to in Section 7 of this Plan, shall be subject to further restrictions upon transfer. 11. ADJUSTMENTS. The Committee may make or provide for such adjustments in the (i) number of Shares covered by outstanding Stock Options, Stock Appreciation Rights, Deferred Shares and Performance Shares granted hereunder; (ii) Exercise and Base Prices per share applicable to such Stock Options and Stock Appreciation Rights; and (iii) kind of Shares covered thereby, as the Committee in its discretion may in good faith determine to be equitably required in order to prevent dilution or enlargement of the rights of Optionees that otherwise would result from (x) any stock dividend, stock split, combination of shares, recapitalization or other change in the capital structure of the Company; (y) any merger, consolidation, spin-off, spin-out, split-off, split-up, reorganization, partial or complete liquidation or other distribution of assets, or issuance of rights or warrants to purchase securities; or (z) any other corporate transaction or event having an effect similar to any of the foregoing. Moreover, except as limited by Code Section 162(m), in the event of any such transaction or event, the Committee may provide in substitution for any or all outstanding Awards under this Plan such alternative consideration as it may in good faith determine to be equitable under the circumstances and may require in connection therewith the surrender of all Awards so replaced. The Committee may also make or provide for such adjustments in the number of Shares specified in Section 3 of this Plan as the Committee in its discretion may in good faith determine to be appropriate in order to reflect any transaction or event described in this Section 11. 12. FRACTIONAL SHARES. The Company shall not be required to issue any fractional Shares pursuant to this Plan. The Committee may provide for the elimination of fractions or for the settlement thereof in cash. 13. WITHHOLDING TAXES. To the extent that the Company is required to withhold federal, state, local or foreign taxes in connection with any payment made or benefit realized by a Participant or other person under this Plan, it shall be a condition to the receipt of such payment or the realization of such benefit that the Participant or such other person make arrangements satisfactory 11 14 to the Company for payment of all such taxes required to be withheld. At the discretion of the Committee, such arrangements may include relinquishment of a portion of such benefit or delivery of Shares in payment of such taxes. 14. CERTAIN TERMINATION EVENTS, HARDSHIP AND APPROVED LEAVES OF ABSENCE. In the event of termination of employment by reason of death, disability, normal retirement, or early retirement with the consent or agreement of the Company, or a leave of absence approved by the Company, or in the event of hardship or other special circumstances, of a Participant who holds (i) a Stock Option or Stock Appreciation Right that is not immediately and fully exercisable, (ii) any Restricted Shares as to which the substantial risk of forfeiture or the prohibition or restriction on transfer has not lapsed, (iii) any Deferred Shares as to which the Deferral Period is not complete, (iv) any Performance Shares or Performance Units that have not been fully earned, or (v) any Shares that are subject to any transfer restriction pursuant to Section 10(c) of this Plan, the Committee may in its discretion take any action that it deems to be equitable under the circumstances or in the best interests of the Company, including, without limitation, waiving or modifying any limitation or requirement with respect to any Award under this Plan. Notwithstanding the foregoing, the Committee may not waive or modify any Performance Objective relating to an Award, or modify a Stock Option, intended to satisfy the requirements for "performance-based compensation" in a manner consistent with Section 162(m) of the Code. 15. FOREIGN EMPLOYEES. In order to facilitate the making of any grant or combination of grants under this Plan, the Committee may provide for such special terms for Awards to Participants who are foreign nationals, or who are employed by the Company or any Subsidiary outside of the United States of America, as the Committee may consider necessary or appropriate to accommodate differences in local law, tax policy or custom. Moreover, the Committee may approve such supplements to, or amendments, restatements or alternative versions of, this Plan as it may consider necessary or appropriate for such purposes without thereby affecting the terms of this Plan as in effect for any other purpose; provided, however, that no such supplements, amendments, restatements or alternative versions shall include any provisions that are inconsistent with the terms of this Plan, as then in effect, unless this Plan could have been amended to eliminate such inconsistency without further approval by the shareholders of the Company. 16. AMENDMENTS AND OTHER MATTERS. (a) This Plan may be amended from time to time by the Board or the Executive Committee of the Board, but no such amendment shall increase any of the amounts or limitations specified in Section 3 of this Plan, other than to reflect an adjustment made in accordance with Section 11, without the further approval of the shareholders of the Company. (b) With the concurrence of the affected Optionee, the Committee may cancel any agreement evidencing Stock Options or any other Award granted under this Plan. In the event of such cancellation, the Committee may authorize the granting of new Stock Options or other Awards hereunder, which may or may not cover the same number of Shares that had been the subject of the 12 15 prior Award, in such manner, at such Exercise Price and subject to such other terms, conditions and discretions, as would have been applicable under this Plan had the canceled Stock Options or other Award not been granted. (c) This Plan shall not confer upon any Participant any right with respect to continuance of employment or other service with the Company or any Subsidiary and shall not interfere in any way with any right that the Company or any Subsidiary would otherwise have to terminate any Participant's employment or other service at any time. (d) To the extent that any provision of this Plan would prevent any Stock Option that was intended to qualify under particular provisions of the Code from so qualifying, such provision of this Plan shall be null and void with respect to such Stock Option, provided, however, that such provision shall remain in effect with respect to other Stock Options, and there shall be no further effect on any provision of this Plan. 17. EFFECTIVE DATE AND SHAREHOLDER APPROVAL. This Plan shall be effective as of the date of its approval by the Board or the Executive Committee of the Board (January 20, 1997), subject to approval by the shareholders of the Company at the next Annual Meeting of Shareholders. The Committee may grant Awards subject to the condition that this Plan shall have been approved by the shareholders of the Company. 18. REGULATION AND OTHER APPROVALS. (a) The obligation of the Company to sell or deliver Shares with respect to Stock Options and Awards granted under the Plan shall be subject to all applicable laws, rules and regulations, including all applicable federal and state securities laws, and the obtaining of all such approvals by governmental agencies as may be deemed necessary or appropriate by the Committee. (b) The Plan is intended to comply with Rule 16b-3 promulgated under the Securities Exchange Act of 1934 and the Committee shall interpret and administer the provisions of the Plan or any agreement setting forth an Award in a manner consistent therewith. Any provisions inconsistent with such Rule shall be inoperative and shall not affect the validity of the Plan. (c) Each Stock Option and Award is subject to the requirement that, if at any time the Committee determines, in its discretion, that the listing, registration or qualification of Shares issuable pursuant to the Plan is required by any securities exchange (including Nasdaq) or under any state or federal law, or the consent or approval of any governmental regulatory body is necessary or desirable as a condition of, or in connection with, the grant of a Stock Option or the issuance of Shares, no Stock Options shall be granted or payment made or Shares issued, in whole or in part, unless listing, registration, qualification, consent or approval has been effected or obtained in a manner acceptable to the Committee. 13 16 (d) Notwithstanding anything contained in the Plan to the contrary, in the event that the disposition of Shares acquired pursuant to the Plan is not covered by a then current registration statement under the Securities Act of 1933, as amended, and is not otherwise exempt from such registration, such Shares shall be restricted against transfer to the extent required by the Securities Act of 1933, as amended, and Rule 144 or other regulations thereunder. The Committee may require any individual receiving Shares pursuant to the Plan, as a condition precedent to receipt of such Shares (including upon exercise of a Stock Option), to represent and warrant to the Company in writing that the Shares acquired by such individual are acquired without a view to any distribution thereof and will not be sold or transferred other than pursuant to an effective registration thereof under the Securities Act or pursuant to an exemption applicable under the Securities Act, or the rules and regulations promulgated thereunder. The certificates evidencing any of such Shares shall be appropriately legended to reflect their status as restricted securities as aforesaid. (e) In the event that changes are made to Code Section 162(m) to permit greater flexibility with respect to any Award or Stock Option under the Plan, the Committee may, subject to this Section 18, make any adjustments it deems appropriate in such Award or Stock Option. 19. DEFERRAL. The Committee may permit a Participant to defer to another plan or program such Participant's receipt of Shares or cash that would otherwise be due to such Participant by virtue of the exercise, vesting or achievement of an Award. If any such deferral election is required or permitted, the Committee shall, in its sole discretion, establish rules and procedures for such payment deferrals. 20. TERMINATION. This Plan shall terminate on January 19, 2007, and no Award shall be granted after that date. 14 EX-10.8.B 4 FIFTH AMENDMENT TO RESTATED CREDIT AGREEMENT 1 EXHIBIT 10.8(b) FIFTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT THIS FIFTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (this "Fifth Amendment") made and entered into as of December 29, 1996, by and among INTERFACE, INC., a Georgia corporation ("Interface"), INTERFACE SCHERPENZEEL 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 ("Scherpenzeel 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 (formerly Trust Company Bank), a banking corporation organized under the laws of the State of Georgia ("TCB"), THE FIRST NATIONAL BANK OF CHICAGO, a national banking association ("FNBC"), the other banks and lending institutions listed on the signature pages hereof (TCB, FNBC, and such other banks and lending institutions referred to collectively herein as the "Lenders"), SUNTRUST BANK, ATLANTA (formerly Trust Company Bank), in its capacity as agent for those Lenders having outstanding Domestic Syndicated Loan Commitments or having outstanding Domestic Revolving Loans or Term Loans as provided in the Credit Agreement defined below (the "Domestic Agent"), THE FIRST NATIONAL BANK OF CHICAGO, in its capacity as agent for those Lenders having outstanding Multicurrency Syndicated Loan Commitments or having outstanding Multicurrency Revolving Loans as provided in the Credit Agreement defined below (the "Multicurrency Agent"; the Domestic Agent and the Multicurrency Agent referred to collectively herein as the "Co-Agents"), and SUNTRUST BANK, ATLANTA (formerly Trust Company Bank), in its capacity as collateral agent for the Co-Agents and the Lenders (the "Collateral Agent"); W I T N E S S E T H: WHEREAS, the Borrowers, the Co-Agents, the Collateral Agent, and the Lenders are parties to a certain Credit Agreement dated as of January 9, 1995, as amended and restated by a certain Amended and Restated Credit Agreement dated as of June 30, 1995, and as further amended by a certain First Amendment to Amended and Restated Credit Agreement dated as of July 31, 1995, by a certain Second Amendment to Amended and Restated Credit Agreement dated as of November 21, 1995, by a certain Third Amendment to Amended and Restated Credit Agreement dated as of February 28, 1996, and by a certain Fourth Amendment to Amended and 2 Restated Credit Agreement dated as of July 30, 1996 (as so amended and restated, the "Credit Agreement"); WHEREAS, Interface has advised the Lenders of a proposed corporate reorganization involving Interface and certain of its existing Subsidiaries, such corporate reorganization to be effected by the transactions more particularly described on Schedule 1.01 attached hereto and by this reference made a part hereof (collectively, the "1996 Reorganization Transactions"); WHEREAS, the Co-Agents and the Lenders are willing to consent to the 1996 Reorganization Transactions, subject to the terms, conditions, and requirements set forth in this Fifth Amendment. 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 Fifth 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: "Fifth Amendment to Credit Agreement" shall mean the Fifth Amendment to Amended and Restated Credit Agreement dated as of December 29, 1996, by and among the Borrowers, the Lenders, the Co-Agents, and the Collateral Agent, together with all Schedules and Exhibits thereto. "1996 Reorganization Credit Parties" shall mean, collectively, 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, Prince Street Royalty Company, a Nevada corporation, Bentley Royalty Company, a Nevada corporation, Superior Holding, Inc., a Texas -2- 3 corporation, Quaker City International, Inc., a Pennsylvania corporation, Commercial Flooring Systems, Inc., a Pennsylvania corporation, Congress Flooring Corp., a Massachusetts corporation, and their respective successors and permitted assigns. "1996 Reorganization Transactions" shall mean those transactions more particularly described on Schedule 1.01 attached hereto and by this reference made a part hereof. (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: "Bank Purchasers" shall mean, collectively, CIBC and each other financial institution, if any, that becomes a party to the Receivables Backup Purchase Agreements, and their respective successors and assigns. "Credit Parties" shall mean, collectively, each of the Borrowers, the Guarantors, and the L/C Account Parties (including all Persons that are currently Borrowers, Guarantors, and L/C Account Parties and all Persons who may at any time in the future become Borrowers, Guarantors, or L/C Account Parties), and every other Person who from time to time executes a Security Document with respect to all or any portion of the Obligations. "Guarantors" shall mean, collectively, Interface, Interface Interior Fabrics, Inc. (formerly Guilford of Maine, Inc.), Guilford (Delaware), Inc., Interface Flooring Systems, Inc., Rockland React-Rite Inc., Interface Research Corporation, Interface Europe, Inc., Pandel, Inc., Interface Asia-Pacific, Inc., Bentley, Prince Street, Intek, Inc., Toltec Fabrics, Inc., C-Tec, Inc. (now Interface Architectural Resources, Inc.), the 1996 Reorganization Credit Parties, and all other Material Subsidiaries (other than Interface SPC) that are not Foreign Subsidiaries, and their respective successors and permitted assigns. "Pledge Agreements" shall mean, collectively, those certain Pledge and Security Agreements (including supplements thereto and all assumptions, amendments and/or restatements thereof), Agreement of Pledge, and Deed of Pledge, executed in favor of the Collateral Agent, substantially in the forms of Exhibits E-1 through E-16, providing for the grant of first priority Liens on the Pledged Stock, as the same may be further supplemented, amended or restated from time to time. "Pledged Stock" shall mean, collectively, (i) all issued and outstanding capital stock, together with all warrants, stock options, and other purchase and conversion rights with respect to such capital stock, of each of Interface Interior Fabrics, Inc. (formerly Guilford of Maine, Inc.), Guilford (Delaware) Inc., Interface Flooring Systems, Inc., Interface Research -3- 4 Corporation, Rockland React-Rite, Inc., Pandel, Inc., Interface Europe, Inc., Interface Asia- Pacific, Inc., Bentley, Prince Street, Intek, Inc., Toltec Fabrics, Inc., C-Tec, Inc. (now Interface Architectural Resources, Inc.), the 1996 Reorganization Credit Parties, and all other Material Subsidiaries of Interface organized in the United States, and (ii) 66% of all issued and outstanding capital stock, together with 66% of all warrants, stock options, and other purchase and conversion rights with respect to such capital stock, of Europe Limited, Interface Europe B.V., Interface Heuga Singapore Pte Ltd., Guilford of Maine (Canada), Inc., Interface Flooring Systems (Canada), Inc., Interface Heuga Hong Kong Ltd., Interface Heuga Australia Pty Limited, and all other Material Subsidiaries that are Foreign Subsidiaries directly owned by Interface and/or one or more other Subsidiaries organized in the United States. "Receivables Backup Purchase Agreements" shall mean the agreements among Interface SPC, as seller, Interface, as collection agent, and the Bank Purchasers, as purchasers, providing for the sale by Interface SPC, and the purchase by the Bank Purchasers, of accounts receivable (or undivided ownership interests therein) originated by certain of the Consolidated Companies, as in effect on December 31, 1996, and as the same may be amended, restated or supplemented from time to time. 3. DOCUMENTS TO BE DELIVERED PURSUANT TO THE FIFTH AMENDMENT. Interface shall execute and deliver, or shall cause to be executed and delivered, the following documents to the Co-Agents and the Collateral Agent for the benefit of the Lenders: (a) The Fourth Supplement to Subsidiary Guaranty Agreement substantially in the form of Exhibit D-3 attached to this Fifth Amendment, as executed on behalf of each of the 1996 Reorganization Credit Parties; (b) The Supplement No. 4 to the Contribution Agreement in the form of Exhibit I-2 attached to this Fifth Amendment, as executed on behalf of each of the 1996 Reorganization Credit Parties; (c) The Fourth Master Amendment of Credit Documents as executed on behalf of each of the Credit Parties; (d) The Pledge and Security Agreement in the form of Exhibit E-7 attached to this Fifth Amendment, as executed on behalf of Interface, accompanied by (i) all stock certificates representing the shares of Interface Holding Company, Interface Royalty Company, and Interface Licensing Company constituting the Pledged Stock subject thereto that has not been previously delivered to the Collateral Agent, (ii) stock powers for those shares duly executed in blank, (iii) Uniform Commercial Code financing statements relating thereto, and (iv) any other documentation requested by the Collateral Agent in order to assure -4- 5 the perfection of a first priority Lien on such Pledged Stock in favor of the Collateral Agent for the benefit of the Lenders; (e) The Pledge and Security Agreement in the form of Exhibit E-8 attached to this Fifth Amendment, as executed on behalf of Bentley, accompanied by (i) all stock certificates representing the shares of Bentley Royalty Company constituting the Pledged Stock subject thereto, (ii) stock powers for those shares duly executed in blank, (iii) Uniform Commercial Code financing statements relating thereto, and (iv) any other documentation requested by the Collateral Agent in order to assure the perfection of a first priority Lien on such Pledged Stock in favor of the Collateral Agent for the benefit of the Lenders; (f) The Pledge and Security Agreement in the form of Exhibit E-9 attached to this Fifth Amendment, as executed on behalf of Prince Street, accompanied by (i) all stock certificates representing the shares of Prince Street Royalty Company constituting the Pledged Stock subject thereto, (ii) stock powers for those shares duly executed in blank, (iii) Uniform Commercial Code financing statements relating thereto, and (iv) any other documentation requested by the Collateral Agent in order to assure the perfection of a first priority Lien on such Pledged Stock in favor of the Collateral Agent for the benefit of the Lenders; (g) The Pledge and Security Agreement in the form of Exhibit E-10 attached to this Fifth Amendment, as executed on behalf of Re:Source Americas Enterprises, Inc., accompanied by (i) all stock certificates representing the shares of Superior Holding, Inc., Quaker City International, Inc., and Congress Flooring Corp. constituting the Pledged Stock subject thereto, (ii) stock powers for those shares duly executed in blank, (iii) Uniform Commercial Code financing statements relating thereto, and (iv) any other documentation requested by the Collateral Agent in order to assure the perfection of a first priority Lien on such Pledged Stock in favor of the Collateral Agent for the benefit of the Lenders; (h) The Assumption, Amendment and Restatement of Pledge and Security Agreement in the form of Exhibit E-11 attached to this Fifth Amendment, as executed on behalf of Interface Holding Company, accompanied by (i) all stock certificates representing the shares of Interface Specialty Resources, Inc. and Interface Americas, Inc. constituting the portion of the Pledged Stock subject thereto that has not been previously delivered to the Collateral Agent, (ii) stock powers for all Pledged Stock subject thereto duly executed in blank, (iii) Uniform Commercial Code financing statements relating thereto, and (iv) any other documentation requested by the Collateral Agent in order to assure the perfection of a first priority Lien on such Pledged Stock in favor of the Collateral Agent for the benefit of the Lenders; -5- 6 (i) The Assumption, Amendment and Restatement of Pledge and Security Agreement in the form of Exhibit E-12 attached to this Fifth Amendment, as executed on behalf of Interface Interior Fabrics, Inc. (formerly Guilford of Maine, Inc.), accompanied by (i) all stock certificates representing the shares of Guilford of Maine, Inc., Guilford of Maine Finishing Services, Inc., Guilford of Maine Decorative Fabrics, Inc., Guilford of Maine Marketing Co., and Intek Marketing Co. constituting the portion of the Pledged Stock subject thereto that has not been previously delivered to the Collateral Agent, (ii) stock powers for all Pledged Stock subject thereto duly executed in blank, (iii) Uniform Commercial Code financing statements relating thereto, and (iv) any other documentation requested by the Collateral Agent in order to assure the perfection of a first priority Lien on such Pledged Stock in favor of the Collateral Agent for the benefit of the Lenders; (j) The Assumption, Amendment and Restatement of Pledge and Security Agreement in the form of Exhibit E-13 attached to this Fifth Amendment, as executed on behalf of Interface Americas, Inc., accompanied by (i) all stock certificates representing the shares of Interface Americas Services, Inc. constituting the Pledged Stock subject thereto that has not been previously delivered to the Collateral Agent, (ii) stock powers for all Pledged Stock subject thereto duly executed in blank, (iii) Uniform Commercial Code financing statements relating thereto, and (iv) any other documentation requested by the Collateral Agent in order to assure the perfection of a first priority Lien on such Pledged Stock in favor of the Collateral Agent for the benefit of the Lenders; (k) The Pledge and Security Agreement in the form of Exhibit E-14 attached to this Fifth Amendment, as executed on behalf of Interface Americas Services, Inc., accompanied by (i) all stock certificates representing the shares of Re:Source Americas Enterprises, Inc. constituting the Pledged Stock subject thereto, (ii) stock powers for those shares duly executed in blank, (iii) Uniform Commercial Code financing statements relating thereto, and (iv) any other documentation requested by the Collateral Agent in order to assure the perfection of a first priority Lien on such Pledged Stock in favor of the Collateral Agent for the benefit of the Lenders; (l) The Assumption, Amendment and Restatement of Pledge and Security Agreement in the form of Exhibit E-15 attached to this Fifth Amendment, as executed on behalf of Interface Specialty Resources, Inc., accompanied by (i) stock powers for all Pledged Stock subject thereto duly executed in blank, (ii) Uniform Commercial Code financing statements relating thereto, and (iii) any other documentation requested by the Collateral Agent in order to assure the perfection of a first priority Lien on such Pledged Stock in favor of the Collateral Agent for the benefit of the Lenders; (m) The Pledge and Security Agreement in the form of Exhibit E-16 attached to this Fifth Amendment, as executed on behalf of Quaker City International, Inc., accompanied by (i) all stock certificates representing the shares of Commercial Flooring Systems, Inc. -6- 7 constituting the Pledged Stock subject thereto, (ii) stock powers for those shares duly executed in blank, (iii) Uniform Commercial Code financing statements relating thereto, and (iv) any other documentation requested by the Collateral Agent in order to assure the perfection of a first priority Lien on such Pledged Stock in favor of the Collateral Agent for the benefit of the Lenders; (n) Certificates of the Secretary or Assistant Secretary of each of Interface, Bentley, Prince Street, Interface Interior Fabrics, Inc. (formerly Guilford of Maine, Inc.), and the 1996 Reorganization Credit Parties (x) attaching and certifying copies of the resolutions of the board of directors (or, if applicable, the executive committee thereof) of each such Consolidated Company, authorizing as applicable (A) the execution, delivery and performance of the documents by such Consolidated Company as provided in this Section 3, and (B) the granting of the pledges and security interests granted pursuant to the documents described in clauses (d) through (k) of this Section 3, and (y) certifying the by-laws of such Consolidated Company and the name, title and true signature of each officer of such Consolidated Company executing such documents; (o) Copies of the certificate or articles of incorporation of each of the 1996 Reorganization Credit Parties, as certified by the Secretary of State of the state of incorporation of such corporation, and certificates of the Secretary or an Assistant Secretary of each of Interface, Bentley, Prince Street, and Interface Interior Fabrics, Inc. (formerly Guilford of Maine, Inc.) certifying as to the absence of any amendments, restatements, or other changes to the certificates or articles of incorporation of such Consolidated Companies since June 30, 1995; (p) Certificates of good standing or existence, as may be available from the Secretary of State of the jurisdictions of incorporation of each of Interface, Bentley, Prince Street, Interface Interior Fabrics, Inc. (formerly Guilford of Maine, Inc.), and the 1996 Reorganization Credit Parties; (q) Examination reports from the appropriate Uniform Commercial Code records in Georgia (with respect to Interface, Interface Holding Company, Bentley, Prince Street, Interface Americas, Inc., Interface Americas Services, Inc., Interface Specialty Resources, Inc., Re:Source Americas Enterprises, Inc., Interface Interior Fabrics, Inc., and Guilford of Maine, Inc.), the Secretary of State of California (with respect to Bentley), the Secretary of State of Maine (with respect to Interface Interior Fabrics, Inc., and Guilford of Maine, Inc.), and the Secretary of State of Pennsylvania (with respect to Quaker City International, Inc.), in each case showing no Liens granted by any such Consolidated Companies other than (x) Liens permitted by Section 9.02 of the Credit Agreement, and (y) Liens in favor of the Collateral Agents; -7- 8 (r) Copies of all documents and instruments, including all consents, authorizations and filings, required under any Requirement of Law or by any material Contractual Obligation of Interface, Bentley, Prince Street, Interface Interior Fabrics, Inc. (formerly Guilford of Maine, Inc.), or any of the 1996 Reorganization Credit Parties, in connection with the execution, delivery, performance, validity and enforceability of the documents described in this Section 3, and such consents, authorizations, filings and orders shall be in force and effect and all applicable waiting periods shall have expired; (s) Certified copies of the Intercompany Loan Documents; (t) Acknowledgments from each of G. Kimbrough Taylor, Jr. and Kilpatrick & Cody as to their appointment as agent for service of process for the various 1996 Reorganization Credit Parties; and (u) The favorable opinion of Kilpatrick & Cody, United States counsel to Interface, Bentley, Prince Street, Interface Interior Fabrics, Inc. (formerly Guilford of Maine, Inc.), and the 1996 Reorganization Credit Parties, substantially in the form of Exhibit CC attached to this Fifth Amendment. In addition to the foregoing, all corporate proceedings, and all other legal matters in connection with the authorization, legality, validity, and enforceability of the documents described in this Section 3, shall have been reasonably satisfactory in form and substance to the Co-Agents. 4. AMENDMENT TO SECTION 9.03 ("MERGERS, ACQUISITIONS, SALES, ETC."). Section 9.03 of the Credit Agreement is hereby amended by deleting the word "or" immediately preceding clause (vi) of Section 9.03 and inserting the word "or" and an additional clause (vii) immediately following clause (vi) of Section 9.3 as follows: (vii) The 1996 Reorganization Transactions; 5. WRITTEN CONSENT OF CO-AGENTS. Each of the Co-Agents, acting pursuant to the provisions of Sections 9.08 and 9.13 of the Credit Agreement, hereby consents to the actions to be taken with respect to the Intercompany Loans as expressly provided in the 1996 Reorganization Transactions, notwithstanding any restrictions or limitations otherwise applicable to such actions pursuant to Sections 9.08 and 9.13 of the Credit Agreement. 6. AMENDMENT TO SCHEDULE 7.01 ("ORGANIZATION AND OWNERSHIP OF SUBSIDIARIES"). Schedule 7.01 to the Credit Agreement is hereby amended by deleting said Schedule 7.01 in its entirety and substituting in lieu thereof the Schedule 7.01 attached to this Fifth Amendment. -8- 9 7. AMENDMENT TO SCHEDULE 7.20 ("INTERCOMPANY LOANS"). Schedule 7.20 to the Credit Agreement is hereby amended by deleting said Schedule 7.20 in its entirety and substituting in lieu thereof the Schedule 7.20 attached to this Fifth Amendment. 8. ADDITIONAL EXHIBITS. The Credit Agreement is hereby amended by adding to the Credit Agreement the following exhibits attached to this Fifth Amendment and made a part of the Credit Agreement by this reference: Exhibit D-3 (Form of Fourth Supplement to Subsidiary Guaranty Agreement from 1996 Reorganization Credit Parties), Exhibit I-2 (Form of Supplement No. 4 to the Contribution Agreement from 1996 Reorganization Credit Parties), Exhibit E-7 (Form of Pledge and Security Agreement from Interface), Exhibit E-8 (Form of Pledge and Security Agreement from Bentley), Exhibit E-9 (Form of Pledge and Security Agreement from Prince Street), Exhibit E-10 (Form of Pledge and Security Agreement from Re:Source Americas Enterprises, Inc.), Exhibit E-11 (Form of Assumption, Amendment and Restatement of Pledge and Security Agreement from Interface Holding Company), Exhibit E-12 (Form of Assumption, Amendment and Restatement of Pledge and Security Agreement from Interface Interior Fabrics, Inc.), Exhibit E-13 (Form of Assumption, Amendment and Restatement of Pledge and Security Agreement from Interface Americas, Inc.), Exhibit E-14 (Form of Pledge and Security Agreement from Interface Americas Services, Inc.), Exhibit E-15 (Form of Assumption, Amendment and Restatement of Pledge and Security Agreement from Interface Specialty Resources, Inc.), Exhibit E-16 (Form of Pledge and Security Agreement from Quaker City International, Inc.), and Exhibit CC (Form of Opinion of Kilpatrick & Cody). 9. REPRESENTATIONS AND WARRANTIES. Each of Interface (as to itself and all other Consolidated Companies) and each of the other Borrowers (as to itself and all of its Subsidiaries) represents and warrants to the Lenders as follows: (a) All representations and warranties set forth in the Credit Agreement are 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 (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; (c) Since the date of the most recent financial statements of the Consolidated Companies submitted to the Lenders pursuant to Section 8.07(b), there has been no change which has had or -9- 10 could reasonably be expected to have a Materially Adverse Effect (whether or not any 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 Fifth Amendment and has taken all necessary corporate action to authorize the execution, delivery and performance of this Fifth 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 any Borrower, or the validity or enforceability against any Borrower, of this Fifth Amendment, other than such consents, authorizations or filings which have been made or obtained (including without limitation, any necessary consultations with any Borrower's supervisory board, works council ("Ondernemingsraad") or similar body); and (e) This Fifth Amendment has been duly executed and delivered by each of the Borrowers and this Fifth Amendment constitutes the legal, valid and binding obligations of the Borrowers, respectively, enforceable against the Borrowers 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. 10. EFFECTIVENESS OF FIFTH AMENDMENT. This Fifth Amendment shall become effective upon (i) the execution and delivery to the Domestic Agent of counterparts hereof (whether originals or facsimile transmissions thereof) on behalf of each of the Borrowers, the Co-Agents, and the Lenders, (ii) the execution and delivery to the Domestic Agent of the documents described in Section 3 of this Third Amendment, and (iii) the execution and delivery to the Domestic Agent of a certificate from an officer of Interface confirming to the Lenders and the Co-Agents that (x) each of the 1996 Reorganization Transactions has been consummated consistent with the description thereof as set forth in Schedule 1.01 attached to this Fifth Amendment, and (y) after giving effect to the 1996 Reorganization Transactions and this Fifth Amendment, no Default or Event of Default has occurred and is continuing, and the representations and warranties set forth in Section 9 are true and correct as of such date. 11. REFERENCES TO CREDIT AGREEMENT. On and after the date this Fifth Amendment becomes effective as provided in Section 10 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 Fifth Amendment and as the same may be further amended, restated or 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. -10- 11 12. COUNTERPARTS. This Fifth 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. 13. MISCELLANEOUS. This Fifth 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 Fifth 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. IN WITNESS WHEREOF, the parties hereto have caused this Fifth Amendment to be duly executed and delivered in Atlanta, Georgia, by their duly authorized officers as of the day and year first above written. INTERFACE, INC. By: /s/ DANIEL T. HENDRIX --------------------------- Daniel T. Hendrix Vice President INTERFACE SCHERPENZEEL, B.V. By: /s/ DANIEL T. HENDRIX --------------------------- Daniel T. Hendrix Attorney-in-Fact INTERFACE EUROPE LIMITED By: /s/ DANIEL T. HENDRIX -------------------------- Daniel T. Hendrix Attorney-in-Fact - 11 - 12 SUNTRUST BANK, ATLANTA (FORMERLY TRUST COMPANY BANK), AS DOMESTIC AGENT AND COLLATERAL AGENT By: /s/ --------------------------- Name: Title: By: /s/ --------------------------- Name: Title: -12- 13 THE FIRST NATIONAL BANK OF CHICAGO, AS MULTICURRENCY AGENT By: /s/ --------------------------- Name: Title: -13- 14 Address for Notices: SUNTRUST BANK, ATLANTA (FORMERLY TRUST COMPANY BANK) One Park Place, N.E. Atlanta, Georgia 30303 Attn: John K. Shoffner By: /s/ --------------------------- Name: Title: Telex No.: 542210 Answerback: TRUSCO INT ATL By: /s/ --------------------------- Name: Title: Domestic Lending Office: One Park Place, N.E. Atlanta, Georgia 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 -14- 15 Address for Notices: THE FIRST NATIONAL BANK Mail Suite 0324 OF CHICAGO One First National Plaza Chicago, Illinois 60670-0324 Attention: Al R. Chircop By: /s/ -------------------------- Name: Telex No.: 4330253 Title: Answerback: FNBC UI Telecopy No.: 312/732-3885 Administrative Office: One First National Plaza Chicago, Illinois 60670 Attention: Al R. Chircop Payment Offices: (See Schedule 4.01) -15- 16 Address for Notices: ABN AMRO BANK N.V. Suite 1200, One Ravinia Drive Atlanta, Georgia 30346 Attn: Mark Clegg By: /s/ ------------------------------ Name: Telephone: 770/396-0066 Title: Telecopy: 770/395-9188 Telex: 682 7258 By: /s/ ------------------------------ Answerback: ABNBANKATL Name: Title: Domestic Lending Office: ABN AMRO Bank N.V., Atlanta Agency Suite 1200, One Ravinia Drive Atlanta, GA 30346 Eurocurrency Lending Office: ABN AMRO Bank N.V., Atlanta Agency Suite 1200, One Ravinia Drive Atlanta, GA 30346 -16- 17 Address for Notices: BANK SOUTH, A DIVISION OF NATIONSBANK, N.A. (SOUTH) 600 Peachtree Street, 19th Floor (SUCCESSOR BY MERGER TO BANK SOUTH, Atlanta, GA 30308-2214 N.A.) Attention: George Hodges Telephone: 404/607-4591 By: /s/ Telecopy: 404/607-6323 ------------------------------ Name: David H. Dinkins Title: Vice President By: /s/ ------------------------------ Name: Title: With a copy to: c/o NationsBank, N.A. 100 North Tryon Street Mail Code NC1-007-08-11 Charlotte, NC 28255 Attention: Lance Walton Domestic Lending Office: 600 Peachtree Street 19th Floor Atlanta, GA 30308-2214 Eurodollar Lending Office: 600 Peachtree Street 19th Floor Atlanta, GA 30308-2214 -17- 18 Address for Notices: THE BANK OF TOKYO-MITSUBISHI, LIMITED, ATLANTA AGENCY 4970 Georgia-Pacific Center 133 Peachtree Street, N.E. Atlanta, Georgia 30303 By: /s/ ------------------------------ Attn: Gary L. England Name: Title: Telephone: 404/577-2960 Telecopy: 404/577-1155 Telex No.: 6827300 Answerback: 6827300BOT ATL Domestic Lending Office: 5050 Georgia-Pacific Center 133 Peachtree Street, N.E. Atlanta, Georgia 30303 Eurodollar Lending Office: 5050 Georgia-Pacific Center 133 Peachtree Street, N.E. Atlanta, Georgia 30303 -18- 19 Address for Notices: CIBC, INC. Canadian Imperial Bank of Commerce Two Paces West By: /s/ 2727 Paces Ferry Road, Suite 1200 ------------------------------ Atlanta, Georgia 30339 Name: Attn: William C. Humphries Title: Vice President Telephone: 404/319-4999 Telecopy: 404/319-4950 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 -19- 20 Address for Notices: CREDITANSTALT-BANKVEREIN Two Ravinia Drive, Suite 1680 Atlanta, Georgia 30346 Attention: Carl Drake By: /s/ ------------------------------ Name: Telephone: 770/390-1850 Title: Telecopy: 770/389-1851 By: /s/ ------------------------------ Name: Title: Domestic Lending Office: 245 Park Avenue New York, New York 10167 Eurodollar Lending Office: 245 Park Avenue New York, New York 10167 -20- 21 Address for Notices: CREDIT LYONNAIS NEW YORK BRANCH Credit Lyonnais Atlanta Agency 303 Peachtree Street, N.E. Suite 4400 By: /s/ Atlanta, GA 30308 ------------------------------ Attn: David Cawrse Name: Title: Telephone: 404/524-3700 Telecopy: 404/584-5249 CREDIT LYONNAIS ATLANTA AGENCY By: /s/ ------------------------------ Name: Title: Domestic Lending Office: Credit Lyonnais New York Branch 1301 Avenue of the Americas New York, New York 10019 and/or Credit Lyonnais Atlanta Agency 303 Peachtree Street, N.E. Suite 4400 Atlanta, GA 30308 Eurodollar Lending Office: Credit Lyonnais Atlanta Agency 303 Peachtree Street, N.E. Suite 4400 Atlanta, GA 30308 and/or Credit Lyonnais New York Branch 1301 Avenue of the Americas New York, New York 10019 -21- 22 Address for Notices: THE SUMITOMO BANK, LIMITED (ASSIGNEE OF THE DAIWA BANK, LIMITED) 233 South Wacker Drive Suite 5400 Chicago, Illinois 60606 By: /s/ Attn: Operations Manager ------------------------------ Name: Title: Telephone: 312/876-0181 Telecopy: 312/876-1995 By: /s/ ------------------------------ Name: Title: Domestic Lending Office: 233 South Wacker Drive Suite 5400 Chicago, Illinois 60606 Eurodollar Lending Office: 233 South Wacker Drive Suite 5400 Chicago, Illinois 60606 -22- 23 Address for Notices: FIRST UNION NATIONAL BANK OF GEORGIA 999 Peachtree Street, N.E. 6th Floor Atlanta, Georgia 30309 Attn: Irene Barton By: /s/ ------------------------------ Name: Title: Telephone: 404/827-7986 Telecopy: 404/827-7199 Domestic Lending Office: 999 Peachtree Street, N.E. 6th Floor Atlanta, Georgia 30309 Eurodollar Lending Office: 999 Peachtree Street, N.E. 6th Floor Atlanta, Georgia 30309 -23- 24 Address for Notices: FLEET BANK OF MAINE 80 Exchange Street Bangor, Maine 04401 Attn: Neil Buitenhuys By: /s/ ------------------------------ Name: Title: Telephone: 207/941-6140 or 6180 Telecopy: 207/941-6023 Domestic Lending Office: 511 Congress St., P.O. Box 1280 Portland, Maine 04104-5006 Eurodollar Lending Office: 511 Congress St., P.O. Box 1280 Portland, Maine 04104-5006 -24- 25 Address for Notices: NATIONSBANK, N.A. (FORMERLY KNOWN AS NATIONSBANK, N.A. (CAROLINAS) AND NATIONSBANK OF NORTH 100 North Tryon Street CAROLINA, N.A.) Mail Code NC1-007-08-11 Charlotte, NC 28255 By: /s/ ------------------------------ Attention: Lance Walton Name: David H. Dinkins Title: Vice President Telephone: 704/386-6744 Telecopy: 704/386-1270 Domestic Lending Office: One Independence Center 101 North Tryon Street Mail Code NC1-001-15-03 Charlotte, North Carolina 28255 Eurocurrency Lending Office: One Independence Center 101 North Tryon Street Mail Code NC1-001-15-03 Charlotte, North Carolina 28255 -25- 26 Address for Notices: PNC BANK, N.A. One PNC Plaza Fifth Avenue and Wood Street Pittsburgh, PA 15265 Attn: Robert J. Mitchell, Jr. By: /s/ ------------------------------ Name: Title: Telephone: 412/762-6547 Telecopy: 412/762-6484 Domestic Lending Office: One PNC Plaza Fifth Avenue and Wood Street Pittsburgh, PA 15265 Eurodollar Lending Office: One PNC Plaza Fifth Avenue and Wood Street Pittsburth, PA 15265 -26- 27 Address for Notices: WACHOVIA BANK OF GEORGIA, N.A. 191 Peachtree Street, N.E. 30th Floor Atlanta, Georgia 30383 Attn: Doug Strickland By: /s/ ------------------------------ Name: Title: By: /s/ ------------------------------ Name: Telecopy: 404/332-1382 Title: Telex: 404/332-6920 Answerback: FNBAINTL Domestic Lending Office: 191 Peachtree Street, N.E. Atlanta, Georgia 30383 Eurocurrency Lending Office: 191 Peachtree Street, N.E. Atlanta, Georgia 30383 -27- EX-10.24 5 AMENDED SALE AGREEMENT 1 EXHIBIT 10.24 AMENDMENT Dated as of December 27, 1996 to RECEIVABLES SALE AGREEMENT Dated as of August 4, 1995 THIS AMENDMENT ("Amendment") dated as of December 27, 1996 is entered into among Interface Securitization Corporation (the "Seller"), Interface, Inc. ("Interface"), as the initial "Collection Agent" under the Sale Agreement referred to below, Special Purpose Accounts Receivable Cooperative Corporation (the "Purchaser") and Canadian Imperial Bank of Commerce, as servicing agent (the "Servicing Agent"). PRELIMINARY STATEMENT. The Seller has entered into a Receivables Sale Agreement dated as of August 4, 1995 with Interface, the Purchaser and the Servicing Agent (as heretofore amended, the "Sale Agreement"). Capitalized terms used herein that are not otherwise defined herein shall have the meanings assigned to such terms in the Sale Agreement. The Seller, Interface, the Purchaser and the Servicing Agent have agreed, on the terms and conditions stated below, to amend the Sale Agreement as hereinafter set forth. SECTION 1. Amendments to the Sale Agreement. Subject to the satisfaction of the conditions precedent set forth in Section 2 hereof, the Sale Agreement is, effective the date hereof, amended as set forth below: 1.1 Article I of the Sale Agreement is amended as follows: (a) The definition therein of "Consent and Acknowledgment" is amended to delete the phrase "dated as of the date hereof" appearing therein. (b) The definition therein of "Guilford" is amended to delete such definition in its entirety and to substitute the following new definition therefor: 2 " 'Guilford' means Interface Interior Fabrics, Inc. (formerly known as Guilford of Maine, Inc.), a Delaware corporation." (c) The definition therein of "Originator" is amended to delete such definition in its entirety and to substitute the following new definition therefor: " 'Originator' means any of Bentley, Guilford, Interface Flooring, Prince Street, Toltec, Intek, Intek Marketing and Guilford Marketing; provided that, for purposes of determining the Aged Receivables Ratio, the Dilution Horizon, the Dilution Ratio or the Loss Reserve Ratio on any date, such determination shall be made without regard to the net sales made, or the Receivables originated, by Guilford or Intek on or after (i) in the case of Guilford, the 'Effective Date' under and as defined in the Guilford Assumption Agreement and (ii) in the case of Intek, the 'Effective Date' under and as defined in the Intek Assumption Agreement." (d) The definition therein of "Parallel Sale Agreement" is amended to delete such definition in its entirety and to substitute the following new definition therefor: " 'Parallel Sale Agreement' means that certain Receivables Sale Agreement dated as of December 27, 1996 among the Seller, Interface, certain financial institutions parties thereto, and the PSA Agent, as the same may from time to time be amended, restated supplemented or otherwise modified in accordance with the terms of this Agreement." (e) The definition therein of "PSA Agent" is amended to delete such definition in its entirety and to substitute the following new definition therefor: " 'PSA Agent' means Canadian Imperial Bank of Commerce, in its capacity as 'Administrative Agent' for the PSA Purchasers under the Parallel Sale Agreement, and any successor thereto in such capacity." 2 3 (f) The definition therein of "Related Rights" is amended to add, in the parenthetical clause, immediately after the word "therewith", the following: " including, without limitation, each Assumption Agreement". (g) The definition therein of "Sale Documents" is amended to delete such definition in its entirety and to substitute the following new definition therefor: " 'Sale Documents' means this Agreement, the Parallel Sale Agreement, the Transfer Agreements, the Assumption Agreements, the Inventory Transfer Agreements, the Exhibits hereto and thereto, and all other certificates, agreements and documents executed from time to time by any Transaction Party in favor of or otherwise for the benefit of the Purchaser, the Servicing Agent, the PSA Purchasers, the PSA Agent or any Transaction Party in connection with the transactions contemplated in any of the foregoing." (h) The definition therein of "Transfer Agreement" is amended to add, immediately after the phrase "between the Seller and such Originator", the following parenthetical clause: " (whether such Originator is an original signatory thereto or became a party to such agreement pursuant to an Assumption Agreement)". 1.2 Article I of the Sale Agreement is further amended to add, in appropriate alphabetical order, the following new definitions thereto: " 'Assumption Agreement' means either the Guilford Assumption Agreement or the Intek Assumption Agreement." " 'Guilford Marketing' means Guilford of Maine Marketing Co., a Nevada corporation." 3 4 " 'Guilford Assumption Agreement' means that certain Assumption and Amendment Agreement dated as of December 27, 1996 among Guilford, Guilford Marketing and the Seller." " 'Intek' means Intek, Inc., a Georgia corporation." " 'Intek Marketing' means Intek Marketing Co., a Nevada corporation." "'Intek Assumption Agreement' means that certain Assumption and Amendment Agreement dated as of December 27, 1996 among Intek, Intek Marketing and the Seller." " 'Inventory Transfer Agreement' means either (i) that certain Bill of Sale and Assignment and Assumption Agreement effective as of December 29, 1996 between Guilford and Guilford Marketing or (ii) that certain Asset Purchase Agreement effective as of December 29, 1996 between Intek and Intek Marketing, in each case as such agreement may be amended, modified, extended or waived from time to time with the consent of the Majority Bank Purchasers and the Administrative Agent." " 'Prince Street' means Prince Street Technologies, Ltd., a Georgia corporation." " 'Toltec' means Toltec Fabrics, Inc., a Georgia corporation." 1.3 The Schedules to the Sale Agreement are amended in the following manner: (a) Schedule C to the Sale Agreement is amended to add to the list of Lock-Box Banks and Lock-Boxes set forth therein the Lock-Box Banks and Lock-Boxes identified on Schedule 1 attached hereto. (b) Schedule D to the Sale Agreement is amended to add to the list of addresses of Transaction Parties set forth therein the addresses identified on Schedule 2 attached hereto. 4 5 (c) Schedule E to the Sale Agreement is amended to add to the list of assumed names set forth therein the assumed names identified on Schedule 3 attached hereto. SECTION 2. Conditions Precedent. This Amendment shall become effective and be deemed effective as of the date hereof upon receipt by the Servicing Agent of each of the following: (a) counterparts of this Amendment executed by the Seller, Interface and the Purchaser, (b) an Amended and Restated Performance Guaranty, substantially in the form of Exhibit A hereto, executed by Interface, (c) evidence acceptable to the Servicing Agent (including Uniform Commercial Code search reports) that all Receivables originated by any of Prince Street Technologies, Ltd., Toltec Fabrics, Inc., Intek, Inc., Intek Marketing Co. or Guilford of Main Marketing Co. (each a "New Originator" and collectively the "New Originators") and all proceeds thereof are free and clear of liens, security interests, claims and encumbrances other than Permitted Liens, (d) acknowledgment copies of UCC-1 financing statements, and all other documents reasonably requested by the Servicing Agent, to perfect, evidence and protect (i) the Purchaser's Ownership Interest in the Receivables originated by the New Originators, and (ii) the Seller's ownership interest in the Receivables originated by the New Originators, (e) with respect to each Lock-Box identified on Schedule 1 attached hereto, an original Lock-Box Agreement for such Lock-Box substantially in the form of Exhibit E to the Sale Agreement executed by the Seller and the appropriate New Originator and Lock-Box Bank, (f) a certificate of the Seller's secretary or assistant secretary attesting to: (i) resolutions of the Seller's Board of Directors authorizing the execution by the Seller of the Sale Documents (including this Amendment) to be executed by the Seller; (ii) the names and signatures of 5 6 the officers of the Seller authorized to execute the Sale Documents (including this Amendment) to be executed by the Seller; and (iii) the completeness and correctness of the attached articles or certificate of incorporation and by-laws of the Seller, (g) a certificate of the secretary or assistant secretary of each of Interface and each New Originator attesting to: (i) resolutions of such Transaction Party's Board of Directors (or a duly authorized committee thereof) authorizing the execution by such Transaction Party of the Sale Documents to be executed by it; (ii) the names and signatures of the officers of such Transaction Party authorized to execute the Sale Documents to be executed by it; and (iii) the completeness and correctness of the attached articles or certificate of incorporation (certified, in the case of each New Originator, by the appropriate Secretary of State) and by-laws of such Transaction Party, (h) opinions from counsel for the Transaction Parties, substantially in the respective forms attached hereto as Exhibit B, and covering such other matters as the Servicing Agent or the Purchaser may reasonably request, (i) certificates of recent date issued by the Secretary of State of the States of each New Originator's jurisdiction of incorporation as to the legal existence and good standing of such New Originator, (j) an executed Transfer Agreement between the Seller and each New Originator (other than Guilford of Maine Marketing Co. and Intek Marketing Co.), respectively, (k) executed Assumption and Amendment Agreements in the form attached hereto as Exhibit C among (i) the Seller, Guilford and Guilford of Maine Marketing Co. and (ii) the Seller, Intek and Intek Marketing Co., and (l) Consent and Acknowledgment executed by each New Originator. 6 7 SECTION 3. Covenants, Representations and Warranties of the Seller. 3.1 Upon the effectiveness of this Amendment, each of the Seller and the Collection Agent hereby reaffirms all covenants, representations and warranties made by it in the Sale Agreement and agrees that all such covenants, representations and warranties shall be deemed to have been remade as of the effective date of this Amendment. 3.2 Each of the Seller and the Collection Agent hereby represents and warrants that (i) this Amendment constitutes a legal, valid and binding obligation of such Person, enforceable against such Person in accordance with its terms and (ii) upon the effectiveness of this Amendment, no Event of Termination or event or circumstance which, with the giving of notice or the passage of time or both, would constitute an Event of Termination, shall exist under the Sale Agreement. SECTION 4. Reference to and Effect on the Sale Agreement. 4.1 Upon the effectiveness of this Amendment, each reference in the Sale Agreement to "this Agreement", "hereunder", "hereof", "herein", or words of like import shall mean and be a reference to the Sale Agreement as amended hereby, and each reference to the Sale Agreement in any other document, instrument or agreement executed and/or delivered in connection therewith shall mean and be a reference to the Sale Agreement as amended hereby. 4.2 Except as specifically amended above, the Sale Agreement and all other documents, instruments and agreements executed and/or delivered in connection therewith shall remain in full force and effect and are hereby ratified and confirmed. 4.3 The execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right, power or remedy of the Purchaser or the Servicing Agent under the Sale Agreement or any other document, instrument or agreement executed in connection therewith, nor constitute a waiver of any provision contained therein, except as specifically set forth herein. 7 8 SECTION 5. Execution in Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. SECTION 6. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York. SECTION 7. Headings. Section headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose. 8 9 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized as of the date first above written. INTERFACE SECURITIZATION CORPORATION By: /s/ Daniel T. Hendrix --------------------------------- Daniel T. Hendrix Title: Senior Vice President and Treasurer INTERFACE, INC., as Collection Agent By: /s/ Daniel T. Hendrix --------------------------------- Daniel T. Hendrix Title: Senior Vice President and Treasurer SPECIAL PURPOSE ACCOUNTS RECEIVABLE COOPERATIVE CORPORATION, as Purchaser By: /s/ --------------------------------- Title: Assistant Treasurer CANADIAN IMPERIAL BANK OF COMMERCE, as Servicing Agent By: /s/ --------------------------------- Title: Authorized Signatory 9 EX-10.25 6 RECEIVABLES SALES AGREEMENT 1 EXHIBIT 10.25 RECEIVABLES SALE AGREEMENT among INTERFACE SECURITIZATION CORPORATION as Seller INTERFACE, INC. as Collection Agent CERTAIN FINANCIAL INSTITUTIONS as Bank Purchasers and CANADIAN IMPERIAL BANK OF COMMERCE as Administrative Agent Dated as of December 27, 1996 2 TABLE OF CONTENTS
Page ---- ARTICLE I: DEFINITIONS ..................................................... 1 SECTION 1.1 ........................................................ 1 ARTICLE II: THE FACILITY .................................................... 26 ARTICLE III:WHAT IS SOLD .................................................... 26 SECTION 3.1 Determination of Ownership Interest ................. 26 SECTION 3.2 Frequency of Determining Ownership Interest ......... 27 SECTION 3.3 Maximum Ownership Interest and Investment ........... 28 SECTION 3.4 Reduction of Commitments ............................ 28 SECTION 3.5 Extension of Stated Termination Date ................ 29 ARTICLE IV: PURCHASE PRICE .................................................. 29 SECTION 4.1 Determination of Cash Component of Purchase Price ............................................... 29 SECTION 4.2 Satisfaction of Deferred Payment Component of Purchase Price ...................................... 30 SECTION 4.3 Several Obligations ................................. 30 ARTICLE V: FEES AND EXPENSES ............................................... 32 SECTION 5.1 [Intentionally left blank] .......................... 32 SECTION 5.2 Settlement Date Payments ............................ 32 SECTION 5.2.1 Purchase Discount ................................... 32 SECTION 5.2.2 Purchase Premium .................................... 32 SECTION 5.2.3 Commitment Fee ...................................... 32 SECTION 5.2.4 Collection Agent Fee ................................ 33 SECTION 5.3 Legal Fees and Other Expenses ....................... 33 SECTION 5.4 Interest on Unpaid Amounts .......................... 33 ARTICLE VI: PURCHASE PROCEDURES ............................................. 33
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Page ---- SECTION 6.1 Types of Purchases ................................. 33 SECTION 6.2 Notice Requirements ................................ 34 SECTION 6.3 Selection of Tranche Periods and Discount Rates .............................................. 34 SECTION 6.4 Conditions Precedent to Initial Purchase ........... 37 SECTION 6.5 Condition Precedent to all Incremental Purchases .......................................... 40 SECTION 6.6 Conditions Precedent to All Purchases .............. 40 ARTICLE VII: SETTLEMENT PROCEDURES ........................................ 40 SECTION 7.1 Settlement Dates ................................... 40 SECTION 7.2 Application of Collections ......................... 41 SECTION 7.2.1 Application of Collections on Days That Are Not Settlement Dates ............................... 41 SECTION 7.2.2 Application of Collections on Settlement Dates .............................................. 42 SECTION 7.3 Adjustments due to Dilution, Etc ................... 43 SECTION 7.4 Receivables Activity Report ........................ 43 SECTION 7.5 Payments Generally ................................. 43 ARTICLE VIII: ADMINISTRATIVE AGENT AND COLLECTION AGENT .................... 44 SECTION 8.1 Appointment of Administrative Agent ................ 44 SECTION 8.2 Appointment of Collection Agent .................... 47 SECTION 8.2.1 Replacement of Collection Agent; Notification of Obligors ........................................ 48 ARTICLE IX: REPRESENTATIONS AND WARRANTIES ............................... 49 SECTION 9.1 Representations and Warranties of the Seller and the Collection Agent ........................... 49 SECTION 9.2 Representations and Warranties of Interface .......................................... 53 ARTICLE X: COVENANTS .................................................... 54 SECTION 10.1 Affirmative Covenants of the Seller and the Collection Agent ................................... 54
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Page ---- SECTION 10.2 Reporting Requirements of the Seller and the Collection Agent ................................... 56 SECTION 10.3 Negative Covenants of the Seller and the Collection Agent ................................... 58 SECTION 10.4 Covenants of the Seller and Interface Relating to Separate Legal Identity ................ 61 SECTION 10.5 Covenants of Interface ............................. 63 ARTICLE XI: INDEMNIFICATIONS; INCREASED COSTS ............................. 64 SECTION 11.1 Indemnification by the Seller of the Bank Purchasers, etc .................................... 64 SECTION 11.2 Indemnification Due to Failure to Consummate Purchase or Certain Reductions in Investment ......................................... 66 SECTION 11.3 Increased Costs; Capital Adequacy .................. 67 SECTION 11.4 Notices ............................................ 69 SECTION 11.5 Purchasing Offices ................................. 69 SECTION 11.6 Limitations on Certain Payment Obligations ........................................ 69 ARTICLE XII: EVENTS OF TERMINATION ........................................ 70 SECTION 12.1 Events of Termination .............................. 70 SECTION 12.2 Remedies ........................................... 74 ARTICLE XIII: MISCELLANEOUS ............................................... 75 SECTION 13.1 Amendments, Etc .................................... 75 SECTION 13.2 Notices, Etc ....................................... 76 SECTION 13.3 Payments Net of Taxes .............................. 76 SECTION 13.4 No Waiver; Remedies ................................ 80 SECTION 13.5 Binding Effect; Assignability; Continuing Obligation ......................................... 80 SECTION 13.6 Governing Law ...................................... 83 SECTION 13.7 Security Interest .................................. 83 SECTION 13.8 Construction of the Agreement ...................... 83 SECTION 13.9 Confidentiality .................................... 83
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Page ---- SECTION 13.10 Agent Determinations on Concentration Limits ............................................. 84 SECTION 13.11 Not a Joint Venture ................................ 84 SECTION 13.12 Execution in Counterparts .......................... 84 SECTION 13.13 Submission to Jurisdiction, Appointment of Agent to Accept Service of Process ................. 84 SECTION 13.14 Change in Accounting Principles, Fiscal Year or Tax Laws ........................................ 85
iv 6 Schedules Schedule A - Special Concentration Limits Schedule B - Credit and Collection Policy Schedule C - List of Lock-Box Banks Schedule D - List of Addresses of the Transaction Parties Schedule E - List of Assumed Names Schedule F - Existing Shareholder Group Schedule G - Fiscal Month Closing Dates -v- 7 Exhibits Exhibit A - Form of Notice for Initial and Incremental Purchases Exhibit B - Form of Notice of Election Not to Make Reinvestment Purchases Exhibit C - Form of Notice of Payment to Reduce Investment Exhibit D - Form of Notice to Lock-Box Bank Exhibit E - Form of Lock-Box Agreement Exhibit F - Form of Receivables Activity Report Exhibit G - Form of Legal Opinion of Counsel for the Transaction Parties Exhibit H - Form of Transfer Agreement Exhibit I - Form of Consent and Acknowledgment Exhibit J - Form of Assumption Agreement -vi- 8 RECEIVABLES SALE AGREEMENT dated as of December 27, 1996 among: (i) INTERFACE SECURITIZATION CORPORATION, a Delaware corporation (the "Seller"), (ii) INTERFACE, INC., a Georgia corporation ("Interface"), as the initial "Collection Agent," (iii) CERTAIN FINANCIAL INSTITUTIONS PARTIES HERETO (each, a "Bank Purchaser"), and (iv) CANADIAN IMPERIAL BANK OF COMMERCE, as administrative agent (the "Administrative Agent") for the Bank Purchasers. ARTICLE I: DEFINITIONS SECTION 1.1 Definitions. In addition to any other terms defined herein, the following terms used herein shall have the meanings herein specified (to be equally applicable to both the singular and plural forms of the terms defined): "Accrued Finance Charges" means, with respect to the Investment allocated to any Tranche Period on any date of determination, an amount calculated in the manner set forth below: AFC = (PD + PP + CAF) X DSP X AI --- 360 where AFC = Accrued Finance Charges PD = Purchase Discount in respect of such Tranche Period PP = Purchase Premium in respect of such Tranche Period CAF = Collection Agent Fee 9 DSP = the number of days in the Tranche Period preceding such date of determination AI = such Investment (or if such Investment allocated to such Tranche Period has changed during such Tranche Period, the average daily Investment allocated to such Tranche Period) "Adjusted LIBO Rate" means, with respect to each Tranche Period in respect of which the Purchase Discount and the related Yield Reserve for the Investment allocated thereto is to be calculated in reference to LIBOR, a rate per annum equal to the rate obtained by dividing (a) LIBOR for such Tranche Period by (b) a percentage equal to 1 minus the then stated maximum rate (stated as a decimal) of all reserves requirements (including, without limitation, any marginal, emergency, supplemental, special or other reserves) applicable to any member bank of the Federal Reserve System in respect of Eurocurrency liabilities as defined in Regulation D (or against any successor category of liabilities as defined in Regulation D). "Administrative Agent" means CIBC, acting in such capacity, and any replacement thereof under Section 8.1. "Affiliate" means, with respect to any Person, a Person: (i) that directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, such Person; (ii) that beneficially owns or holds 10% or more of any class of the voting stock (or, in the case of a Person that is not a corporation, 10% or more of the equity interest) of such Person; or (iii) 10% or more of the voting stock (or, in the case of a Person that is not a corporation, 10% or more of the equity interest) of which is beneficially owned or held, directly or indirectly, by such Person. The term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting stock or an equity interest, by contract or otherwise. -2- 10 "Aged Receivables Ratio" means, as of any date of determination, a fraction, expressed as a percentage, (i) the numerator of which is the aggregate unpaid balance of Receivables that were either (a) past due (from the original due date) 61 days to 90 days as of the end of the fiscal month then most recently ended (or ending on such date of determination), or (b) were less than 91 days past due (from the original due date) as of such date but which were Defaulted Receivables as of such date and (ii) the denominator of which is the aggregate amount of net sales of the Originators during the third full fiscal month prior to such fiscal month. "Aggregate Ownership Interest" means, at any time, a percentage equal to the sum at such time of the Bank Group Ownership Interest hereunder and the "Ownership Interest" under and as defined in the Parallel Sale Agreement. "Agreement" means this Receivables Sale Agreement, as it may be amended, restated, supplemented or otherwise modified from time to time. "Applicable Margin" means, during any fiscal quarter of Interface, the percentage determined for such fiscal quarter from the chart set forth below based on Interface's Interest Coverage Ratio and Leverage Ratio determined as of the last day of the second fiscal quarter immediately preceding the then current fiscal quarter: Interest Coverage Ratio
Less Than Greater Than Greater Than or Equal 3.0:1.00 and Less or Equal Leverage Ratio to 3.0:1.0 Than 5.0:1.0 to 5.0:1.0 - -------------- ---------- ------------------- -------------- Greater than or equal to 50% 1.000% 0.875% 0.750% Greater than 35% and less than 50% 0.875% 0.750% 0.500% Less than or equal to 35% 0.750% 0.500% 0.375%
provided, however, if Interface fails to deliver its financial statements, for such second preceding fiscal quarter pursuant to Section 10.2 prior to the first day of the then-current fiscal quarter, the Applicable Margin during such current fiscal quarter shall be 1.000%. "Assumption Agreement" means either the Guilford Assumption Agreement or the Intek Assumption Agreement. "Bank Group Ownership Interest" means, at any time, a percentage equal to the aggregate Ownership Interests then held by the Bank Purchasers hereunder. -3- 11 "Bank Purchaser" means any financial institution party hereto as of the date hereof and identified as being a "Bank Purchaser" on the signature pages hereto, and any successor or assign thereof. "Bankruptcy Code" means the Bankruptcy Reform Act of 1978 (11 U.S.C. ss.ss.101 et seq.), as amended. "Base Rate" means the higher of the following two rates (with any change in the Base Rate to be effective as of the date of change of either of the following rates): (a) the rate which the New York Agency of CIBC publicly announces from time to time as its base rate, as in effect from time to time, and (b) the Federal Funds Rate, as in effect from time to time, plus one-half to one percent (0.50%) per annum. CIBC's base rate is a reference rate and does not necessarily represent the lowest or best rate charged to customers; CIBC may make commercial loans or other loans at rates of interest at, above or below its base rate. "Bentley" means Bentley Mills, Inc., a Delaware corporation. "Business Day" means any day on which banks are not authorized or required to close in New York, New York or Atlanta, Georgia and, if the applicable Business Day relates to a Tranche Period in respect of which the Discount Rate is the Adjusted LIBO Rate, on which trading is carried on by and between banks in the London interbank market. "Certificate of Deposit Rate" means, with respect to each Tranche Period in respect of which the Purchase Discount and the related Yield Reserve for the Investment allocated thereto is to be calculated in reference to the Certificate of Deposit Rate, the rate (rounded, if necessary, to the next higher 1/16 of 1.0%, if the rate is not such a multiple), as determined by the Administrative Agent at approximately 9:00 A.M. (local time for the Administrative Agent) on the first day of such Tranche Period -4- 12 and identified on Telerate as the consensus bid rate for secondary certificates of deposit in an amount approximately comparable to the Pro Rata Share of the Administrative Agent (as a Bank Purchaser) in the aggregate Investment allocated to such Tranche Period and with a maturity equal to such Tranche Period. As of the date of the execution of this Agreement, such consensus bid rate appears on page 5 of Telerate. If the foregoing rate is unavailable on Telerate for any reason, then such rate shall be determined by the Administrative Agent from the comparable rate quoted on another interest rate reporting service of recognized standing as designated by the Administrative Agent to the Collection Agent, the Seller and the Bank Purchasers. "Change in Control Provision" means any term or provision contained in any indenture, debenture, note, or other agreement or document evidencing or governing Interface Control Debt which requires, or permits the holder(s) of such Interface Control Debt to require, that such Interface Control Debt be redeemed, repurchased, defeased, prepaid or repaid, either in whole or in part, or the maturity of such Interface Control Debt to be accelerated in any respect, as a result of a change in ownership of the capital stock of Interface or voting rights with respect thereto. "CIBC" means Canadian Imperial Bank of Commerce, and its successors and assigns. "Class B Shareholders' Agreement" means that certain Voting Agreement for Interface, Inc. Class B Common Stock Shareholders dated as of April 13, 1993 by and among Ray C. Anderson and approximately 38 other holders of Class B common stock of Interface, pursuant to which Ray C. Anderson is entitled to direct the voting of the shares of Class B common stock subject thereto. "Code" means the Internal Revenue Code of 1986, as amended. "Collection" means any amount paid by an Obligor or any other party with respect to a Receivable. -5- 13 "Collection Agent" means Interface or any replacement thereof under Section 8.2.1. "Collection Agent Fee" means the percentage used to determine the fee payable by the Bank Purchasers to the Collection Agent, as described in Section 5.2.4. "Commitment" means, in respect of any Bank Purchaser, the amount set opposite such Bank Purchaser's name on the signature pages hereto, as such amount may be reduced from time to time in accordance with Section 3.4 or modified in accordance with Section 13.1 or 13.5. "Commitment Fee" has the meaning assigned to such term in Section 5.2.3. "Commitment Termination Date" means the earliest to occur of (i) any Business Day designated by the Seller as the Commitment Termination Date on not less than three Business Days' prior written notice given by the Seller to the Administrative Agent, (ii) the Business Day on which the Commitments of the Bank Purchasers shall be reduced to zero in accordance with the terms of Section 3.4, (iii) the date on which the Administrative Agent shall declare the Commitment Termination Date to have occurred pursuant to Section 12.2, (iv) the date of the occurrence of a Termination Event of the type described in Section 12.1(f) or (v) the Stated Termination Date. "Consent and Acknowledgment" means a letter agreement made by an Originator in favor of the Bank Purchasers pursuant to which, among other things, such Originator consents to, and acknowledges, the transactions contemplated hereby, in substantially the form attached hereto as Exhibit I, as such letter agreement may be amended, restated, supplemented or otherwise modified from time to time. "Consolidated Companies" means, collectively, Interface and all of its Subsidiaries. "Consolidated EBITA" means, for any fiscal period of Interface, an amount equal to (A) the sum for such fiscal period of Consolidated Net Income (Loss) plus, to the extent subtracted -6- 14 in determining such Consolidated Net Income (Loss), provisions for taxes based on income, Consolidated Interest Expense, and amortization of goodwill and deferred financing costs, minus (B) any items of gain (or plus any items of loss) which were included in determining such Consolidated Net Income (Loss) and were (x) not realized in the ordinary course of business or (y) the result of any sale of assets. "Consolidated Interest Expense" means, for any fiscal period of Interface, total interest expense of the Consolidated Companies (including without limitation, interest expense attributable to capitalized leases in accordance with GAAP, all capitalized interest, all commissions, discounts and other fees and charges owed with respect to bankers acceptance financing, and total interest expense (whether shown as interest expense, or as loss and expenses on sale of receivables) under a receivables purchase facility) determined on a consolidated basis in accordance with GAAP. "Consolidated Net Income (Loss)" means, for any fiscal period of Interface, the net income (or loss) of the Consolidated Companies on a consolidated basis for such period (taken as a single accounting period) determined in conformity with GAAP, but excluding therefrom (to the extent otherwise included therein) (i) any gains or losses, together with any related provision for taxes, realized upon any sale of assets other than in the ordinary course of business, (ii) any income or loss of any Person accrued prior to the date such Person becomes a Subsidiary of Interface or is merged into or consolidated with any Consolidated Company or all of substantially all of such Person's assets are acquired by any Consolidated Company, and (iii) the income of any Consolidated Company to the extent that the declaration or payment of dividends or similar distributions by such Consolidated Company of that income is not at the time permitted by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation. "Consolidated Net Worth" means, as of any date of determination, Shareholders' Equity of Interface, excluding (i) the effects of foreign currency translation adjustments under Financial Accounting Standards Board Statement No. 52 as in -7- 15 effect on the date hereof, and (ii) after-tax gains on the sales of assets outside the ordinary course of business of the Consolidated Companies and any after-tax gains with respect to pension reversions, in any case with respect to (i) and (ii) above, as such adjustments or gains occur subsequent to December 29, 1991. "Convertible Preferred Stock" means Interface's Series A Cumulative Convertible Preferred Stock having an aggregate liquidation value of $25,000,000 and 7.0% cumulative dividend, being convertible into shares of Interface's Class A common stock at the rate of one share of Class A common stock for each $14.7875 of "conversion value" of such Preferred Stock (as defined in the Articles of Amendment of Interface executed with respect to such Preferred Stock and subject to adjustments as provided therein), and being subject to redemption at the option of the holders thereof not earlier than June 1, 2003, on the terms and conditions set forth in such Articles of Amendment. "Credit and Collection Policy" means, in the case of any Originator, the written credit and collection policy utilized by such Originator as of the date hereof, a copy of which is attached hereto in Schedule B, as the same may be amended or otherwise modified in strict compliance with this Agreement. "Currency Contracts" means any forward contracts, futures contracts, foreign exchange contracts, currency swap agreements, and other similar agreements and arrangements entered into by any Consolidated Company designed to protect any Consolidated Company against fluctuations in foreign exchange rates. "Defaulted Receivable" means any Receivable which: (1) has been or should have been charged-off in conformity with the applicable Credit and Collection Policy; or (2) is owed by an Obligor who is in bankruptcy, reorganization, insolvency or similar proceedings. -8- 16 "Dilution Horizon" means, as of any date of determination, a fraction, expressed as a percentage, the numerator of which shall be the aggregate net sales by all of the Originators during the fiscal month then most recently ended (or ending on such date of determination) and the denominator of which shall be the aggregate Eligible Receivables originated by Originators and outstanding as of the last day of such fiscal month. "Dilution Ratio" means, as of any date of determination, a fraction, expressed as a percentage, the numera tor of which is the aggregate amount of Dilutions in respect of Receivables for the fiscal month then most recently completed (or ending on such date of determination) and the denominator of which is the aggregate amount of net sales by all of the Originators occurring during the fiscal month prior to such fiscal month then most recently completed (or then ending). "Dilution Reserve" means, as of any date of determination, a percentage equal to the following: DPR = (2.25 x DH x ADP) + ((HDP - ADP) x HDP/ADP) where: DPR = the Dilution Reserve; DH = the Dilution Horizon; ADP = the average Dilution Ratio during the period of twelve consecutive full fiscal months immmediately preceding (or ending on) such date of determination; and HDP = the highest Dilution Ratio during the twelve consecutive full fiscal months immediately preceding (or ending on) such date of determination. "Dilutions" means the aggregate amount of any reductions and cancellations of Receivables which have been reduced or cancelled, respectively, for any reason other than that (1) the Obligors have made payments thereon or (2) the Seller has charged-off such Receivables in accordance with the applicable Credit and Collection Policy. The term "Dilutions" shall include, without limitation, credits, rebates, freight charges, cash discounts, volume discounts, cooperative adver tising expenses, royalty payments, warranties, allowances, disputes, chargebacks, returned or repossessed goods, and allowances for early payments. "Discount Rate" means, in the case of any Tranche Period, the Adjusted LIBO Rate, the Base Rate or the Fixed CD Rate, as applicable. "Dollars" or "$" means, unless another currency is expressly identified, the lawful currency of the United States. "Earlier Sale Agreement" means that certain Receivables Sale Agreement dated as of August 4, 1995 among the Seller, -9- 17 Interface, certain financial institutions parties thereto, Trust Company Bank and The First National Bank of Chicago, as co-agents for such financial institutions, Trust Company Bank, as administrative agent, and The First National Bank of Chicago, as documentation and collateral agent, as the same has been amended, supplemented or otherwise modified prior to the date hereof. "Eligible Receivable" means any Receivable: (1) which is not unpaid for more than 60 days past the date on which it was due; (2) which is required to be paid in full within 31 days of the invoice date; provided that a Receivable that meets the criteria set forth in this definition but for this clause (2) may nonetheless constitute an "Eligible Receivable" if (a) such Receivable is required to be paid in full within 61 days of the invoice date and (b) the outstanding balance of such Receivable, together with the aggregate outstanding balance of all other Receivables that constitute "Eligible Receivables" by reason of this proviso, does not at any time exceed an amount equal to 30% of the aggregate outstanding balance of all Receivables that constitute Eligible Receivables at such time (including Receivables that are Eligible Receivables by reason of this proviso); (3) which is denominated in, and payable only in, U.S. Dollars; (4) which is not a Defaulted Receivable; (5) the Obligor of which has had no Defaulted Receiv able at any time during the immediately preceding twelve-month period; (6) the Obligor of which does not then have more than 10% of its total Receivables unpaid for more than 120 days past the dates on which they were due; -10- 18 (7) the Obligor of which is not an Affiliate of any of the Transaction Parties, any of the Bank Purchasers or the Administrative Agent; (8) the Obligor of which is not a government or subdivision or agency of a government; provided that a Receivable that meets the criteria set forth in this definition but for this clause (8) may nonetheless constitute an "Eligible Receivable" if (a) the Obligor thereon is a governmental entity acceptable to the Administrative Agent and (b) the outstanding balance of such Receivable, together with the aggregate outstanding balance of all other Receivables that constitute "Eligible Receivables" by reason of this proviso, does not at any time exceed an amount equal to 8% of the aggregate Investment of all Bank Purchasers hereunder (net of the aggregate amount, if any, owed by the Seller to one or more of the Bank Purchasers under Article XI) at such time; (9) the Obligor of which is a resident of the United States; provided that a Receivable that meets the criteria set forth in this definition but for this clause (9) may nonetheless constitute an "Eligible Receivable" if: (a) the outstanding balance of such Receivable, together with the aggregate outstanding balance of all other Receivables that constitute "Eligible Receivables" by reason of this proviso, does not exceed an amount equal to that portion of the aggregate Reserve at such time representing the components described in clauses (1) and (3) of the definition of "Reserve"; (b) in addition to the restrictions set forth in clause (a): in the case of any Receivable owing by an Obligor that is located in a country in respect of which the -11- 19 "sovereign rating" assigned by S&P is "investment grade", the outstanding balance thereof, together with the aggregate outstanding balance of all other Receivables that constitute "Eligible Receivables" by reason of this proviso and that are owed by Obligors in such countries, does not exceed a sublimit equal to that portion of the aggregate Reserve at such time representing the component described in clause (1) of the definition of "Reserve"; (c) in addition to the restrictions set forth in clause (a): in the case of any Receivable owing by an Obligor that is located in a country in respect of which the "sovereign rating" assigned by S&P is less than "investment grade" (or in respect of which S&P has not assigned a "sovereign rating"), the outstanding balance thereof, together with the aggregate outstanding balance of all other Receivables that constitute "Eligible Receivables" by reason of this proviso and that are owed by Obligors in such countries, does not exceed a sublimit equal to the Standard Concentration Limit then in effect; and (d) the Seller is in compliance with the terms of Section 3.3 at such time; (10) which is not (i) subject to any dispute, claim, defense or offset and which has not been compromised, adjusted or modified (including by extension of time for payment or the granting of any discounts, allowances or credits) or (ii) evidenced by any note or other instrument; (11) which arises out of a "current transaction", and the purchase of which with the proceeds of notes having a maturity at the time of issuance not exceeding 270 days would constitute a "current -12- 20 transaction", as such term is defined in Section 3(a)(3) of the Securities Act of 1933, as amended; (12) which is an "account" within the meaning of the Uniform Commercial Code of the State in which is located the Seller's principal place of business or, if the Seller has more than one place of business, its chief executive office; (13) which arose from a bona fide sale of merchandise or insurance or the rendering of services accepted by the Obligor of that Receivable, the performance and delivery of which has been completed by the applicable Originator and by all parties other than the Obligor; without limiting the generality of the foregoing, such sale is not a "bill and hold", consignment, "sale on approval", conditional sale or similar arrangement; (14) in which each Bank Purchaser shall, upon the Purchase by it of an Ownership Interest therein, acquire good and marketable title to such Ownership Interest therein, free and clear of all liens, security interests and encumbrances (other than Permitted Liens); (15) that is the legal, valid and binding payment obligation of the Obligor thereon; (16) that represents the sales price of merchandise, insurance or services, within the meaning of Section 3(c)(5) of the Investment Company Act of 1940, as amended; (17) which does not contravene any applicable law, rule or regulation in any material respect (including, without limitation, laws, rules and regulations relating to truth in lending, fair credit billing, fair credit reporting, equal credit opportunity, fair debt collection practices and privacy); -13- 21 (18) which is not subject to any restrictions on the transfer, assignability or sale thereof; (19) which has been generated in accordance with the terms and conditions of, and otherwise satisfies, the applicable Credit and Collection Policy; (20) other than to the extent any portion thereof is payable on account of sales taxes; (21) which was generated in the ordinary course of business of the applicable Originator; (22) in respect of which no cash deposit or other advance payment shall have been received by the applicable Originator or any other Person thereon or in respect thereof; and (23) which shall have been purchased by the Seller from an Originator for reasonably equivalent value (other than by the extinguishment or reduction of antecedent debt) pursuant to a Transfer Agreement and all rights of the Seller, as transferee thereunder, are fully assignable to the Bank Pur chasers without any restriction on such assignment. "ERISA" means the Employee Retirement Income Security Act of 1974 and the rules and regulations thereunder, as amended from time to time. "ERISA Affiliate" means any trade or business (whether or not incorporated) that is treated as a single employer with the Seller under Section 414 of the Code. "Event of Termination" shall have the meaning assigned to that term in Section 12.1. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, and any successor statute thereto. -14- 22 "Excluded Taxes" has the meaning assigned to such term in Section 13.3. "Existing Shareholder Group" means (i) for so long as Ray C. Anderson shall be living and is performing the duties of chairman and chief executive officer of Interface, Ray C. Anderson and each other party to the Class B Shareholders' Agreement, David Milton, Daniel T. Hendrix, Charles R. Eitel, Royce R. Renfroe, Brian L. DeMoura, and David W. Porter, and (ii) at all times thereafter, the individuals listed on Schedule F; provided that in the case of each individual referred to in the preceding clauses (i) and (ii), for purposes of this definition the reference to such individual shall be deemed to include the members of such individual's immediate family, such individual's estate, and any trusts established by such individual (whether inter vivos or testamentary) for the benefit of members of such individual's immediate family. "Federal Funds Rate" means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with member banks of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by the Administrative Agent. "fiscal" means, when used in respect of any period, such fiscal period of Interface. "Fixed CD Rate" means, with respect to any Tranche Period, a rate per annum equal to the sum of (i) the rate obtained by dividing (x) the Certificate of Deposit Rate for such Tranche Period by (y) a percentage equal to 1 minus the stated maximum rate (stated as a decimal) of all reserve requirements as specified in Regulation D (including, without limitation, any marginal, emergency, supplemental, special or other reserves) applicable during such Tranche Period to new nonpersonal time -15- 23 deposits in the United States in and amount equal to or in excess of $100,000 with a maturity comparable to such Tranche Period of any member bank of the Federal Reserve System, plus (ii) the then daily net annual assessment rate as estimated by the Administrative Agent for determining the then current annual assessment payable to the Federal Deposit Insurance Corporation for insuring time deposits of the Administrative Agent in the United States. "Foreign Subsidiary" shall mean each Consolidated Company that is organized under the laws of a jurisdiction other than the United States of America or any state thereof. "Funded Debt" means all Indebtedness for money borrowed, Indebtedness evidenced or secured by purchase money Liens, capitalized leases, conditional sales contracts and similar title retention debt instruments, and Indebtedness evidenced by bonds, debentures, notes or other similar instruments, including all current maturities of such Indebtedness. The calculation of Funded Debt shall include all Funded Debt of the Consolidated Companies, plus (i) all Funded Debt of other Persons to the extent guaranteed by a Consolidated Company, to the extent supported by a letter of credit issued for the account of a Consolidated Company, or as to which and to the extent which a Consolidated Company or its assets otherwise have become liable for payment thereof, (ii) the aggregate "Investment" from time to time outstanding under, and as defined in, the Parallel Sale Agreement, (iii) the aggregate Investment from time to time outstanding hereunder plus (iv) any other amounts due and owing to the Bank Purchasers hereunder. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession, which are applicable to the circumstances as of the date of determination. "Guaranty" means any contractual obligation, contingent or otherwise, of a Person with respect to any Indebtedness or -16- 24 other obligation or liability of another Person, including without limitation, any such Indebtedness, obligation or liability directly or indirectly guaranteed, endorsed, co-made or discounted or sold with recourse by that Person, or in respect of which that Person is otherwise directly or indirectly liable, including contractual obligations (contingent or otherwise) arising through any agreement to purchase, repurchase, or otherwise acquire such Indebtedness, obligation or liability or any security therefor, or any agreement to provide funds for the payment or discharge thereof (whether in the form of loans, advances, stock purchases, capital contributions or otherwise), or to maintain solvency, assets, level of income, or other financial condition, or to make any payment other than for value received. The amount of any Guaranty shall be deemed to be an amount equal to the stated or determinable amount of the primary obligation in respect of which guaranty is made or, if not so stated or determinable, the maximum reasonably anticipated liability in respect thereof (assuming such Person is required to perform thereunder) as determined by such Person in good faith. "Guilford" means Interface Interior Fabrics, Inc. (formerly known as Guilford of Maine, Inc.). "Guilford Marketing" means Guilford of Maine Marketing Co., a Nevada corporation. "Guilford Assumption Agreement" means that certain Assumption and Amendment Agreement dated as of December 27, 1996 among Guilford, Guilford Marketing and the Seller. "Incremental Purchase" means any Purchase (other than the Initial Purchase) which causes the amount of the Investment of any Bank Purchaser, or the aggregate Investment of all Bank Purchasers, to increase. "Indebtedness" of any Person means, without duplication (i) all obligations of such Person which in accordance with GAAP would be shown on the balance sheet of such Person as a liability (including, without limitation, obligations for borrowed money and for the deferred purchase price of property or services, and obligations evidenced by bonds, debentures, notes or other similar instruments); (ii) all rental obligations under leases -17- 25 required to be capitalized under GAAP; (iii) all Guaranties of such Person (including contingent reimbursement obligations under undrawn letters of credit); (iv) Indebtedness of others secured by any Lien upon property owned by such Person, whether or not assumed; and (v) obligations or other liabilities under Currency Contracts, Interest Rate Contracts, or similar agreements or combinations thereof. "Initial Purchase" means the first Purchase made under this Agreement. "Intek" means Intek, Inc., a Georgia corporation. "Intek Marketing" means Intek Marketing Co., a Nevada corporation. "Intek Assumption Agreement" means that certain Assumption and Amendment Agreement dated as of December 27, 1996 among Intek, Intek Marketing and the Seller. "Interest Coverage Ratio" means the ratio of Consolidated EBITA to Consolidated Interest Expense. "Interest Rate Contracts" means any forward contracts, futures contracts, interest rate exchange agreements, interest rate cap agreements, interest rate collar agreements, and other similar agreements and arrangements entered into by any Consolidated Company designed to protect any Consolidated Company against fluctuations in interest rates. "Interface" means Interface, Inc., a Georgia corporation. "Interface Control Debt" means, at any time, debt of Interface for borrowed money in an aggregate principal amount outstanding at such time in excess of $10,000,000 which is subject to Change in Control Provisions, excluding debt of Interface arising under (i) the Interface Credit Agreement or (ii) any Guaranty or any security or collateral document of Interface delivered pursuant to the Interface Credit Agreement and guaranteeing or securing the "Obligations" under the Interface Credit Agreement. -18- 26 "Interface Credit Agreement" means that certain Amended and Restated Credit Agreement dated as of June 30, 1995 among Interface, certain Affiliates thereof, certain lenders, Trust Company Bank and The First National Bank of Chicago, as "Co-Agents", and Trust Company Bank, as "Collateral Agent", as the same may from time to time be amended, restated, supplemented or otherwise modified. If at any time the Interface Credit Agreement shall be terminated or shall otherwise cease to be in effect, (i) the term "Interface Credit Agreement" shall mean, for purposes of the definition herein of "Interface Control Debt", any revolving credit agreement or similar credit facility that shall have been used to refinance the indebtedness under, or otherwise replace, the Interface Credit Agreement; (ii) for purposes of Section 12.2(k)(i), an Event of Termination shall exist hereunder, at any time following such termination or cessation, upon the occurrence of any event or circumstance that would, but for such termination or cessation, have constituted an "Event of Default" under the Interface Credit Agreement (as amended, restated, supplemented or otherwise modified prior to the date of such termination or cessation) by reason of the failure of any Person to comply with any of the following provisions of the Interface Credit Agreement: Section 8.09 ["Financial Covenants"], 8.10 ["Notices Under Certain Other Indebtedness"] or 9.03 ["Mergers, Acquisitions, Sales, Etc."], or by reason of Section 10.09 ["Money Judgment"] of the Interface Credit Agreement; it being understood that (A) each such provision shall, following such termination or cessation, be deemed to survive such termination or cessation and be incorporated herein by this reference thereto and (B) to the extent any notice shall be required to be given by any co-agent or lender under the Interface Credit Agreement in order for an "Event of Default" thereunder to exist, such notice may be given by the Administrative Agent or any Bank Purchaser hereunder; (iii) for purposes of Section 13.5(d), Section 8.05 of the Interface Credit Agreement (as amended, -19- 27 restated, supplemented or otherwise modified prior to the date of such termination or cessation) shall survive the termination or cessation of the Interface Credit Agreement and shall be deemed incorporated herein by this reference thereto upon any such termination or cessation, and (iv) for purposes of Section 13.5(b), clause (ii) of the proviso thereof shall cease to have effect. "Interface Flooring" means Interface Flooring Systems, Inc., a Georgia corporation. "Inventory Transfer Agreement" means either (i) that certain Bill of Sale and Assignment and Assumption Agreement effective as of December 29, 1996 between Guilford and Guilford Marketing or (ii) that certain Asset Purchase Agreement effective as of December 29, 1996 between Intek and Intek Marketing, in each case as such agreement may be amended, modified, extended or waived from time to time with the consent of the Majority Bank Purchasers and the Administrative Agent. "Investment" means, in respect of any Bank Purchaser at any time, the sum of: (1) the aggregate amount of cash paid by such Bank Purchaser to the Seller for its Initial Purchase (if applicable) and all Incremental Purchases, less the amount of all Collections received and applied to such Bank Purchaser's Investment pursuant to Sections 6.2(c) or Section 7.2.2(c)(ii)(A) and of all payments made by the Seller and applied to such Bank Purchaser's Investment under Sections 3.3 and 7.3; and (2) any amounts owed by the Seller to such Bank Purchaser under Article XI. "Leverage Ratio" means the ratio, expressed as a percentage, of Funded Debt to Total Capitalization for the Consolidated Companies. -20- 28 "LIBOR" means, for any Tranche Period, the offered rate for deposits in Dollars, for a period comparable to such Tranche Period and in an amount comparable to the Pro Rata Share of the Administrative Agent (as a Bank Purchaser) in the aggregate Investment allocated to such Tranche Period and appearing on the Reuters Screen LIBO Page as of 11:00 A.M. (London, England time) on the day that is two Business Days prior to the first day of such Tranche Period. If two or more of such rates appear on the Reuters Screen LIBO Page, the rate shall be the arithmetic mean of such rates. If the foregoing rate is unavailable from the Reuters Screen for any reason, then such rate shall be determined by the Administrative Agent from Telerate Page 3750 or, if such rate is also unavailable on such service, then on any other interest rate reporting service of recognized standing designated in writing by the Administrative Agent to the Collection Agent, the Seller and the Bank Purchasers. In each case such rate shall be rounded, if necessary, to the next higher 1/16 of 1.0%, if the rate is not such a multiple. "Lien" means any mortgage, pledge, security interest, lien, charge, hypothecation, assignment, deposit arrangement, title retention, preferential right, trust or other arrangement having the practical effect of the foregoing and shall include the interest of a vendor or lessor under any conditional sale agreement, capitalized lease or other title retention agreement. "Lock-Box" means any lock-box(es) or account(s) to which the Obligors remit Collections or into which Collections are otherwise deposited upon receipt by a Lock-Box Bank. "Lock-Box Bank" means any institution at which a Lock-Box is kept or by which a Lock-Box is maintained. "Loss Reserve Ratio" means, as of any date, a percentage equal to the following: LRR = 2.25 x ARR x S where: LRR = the Loss Reserve Ratio; ARR = the highest average, determined for each of twelve consecutive full fiscal months immediately preceding (or ending on) such date of determination, of the Aged Receivables Ratio for three full consectutive fiscal months during such period; S = a fraction, expressed as a percentage, the numerator of which is the aggregate amount of net sales of the Originators during the three full fiscal months then most recently ended (or ending on such date of determination), and the denominator of which is the aggregate unpaid balance of all Eligible Receivables originated by the Originators and outstanding as of the last day of the fiscal month then most recently ended (or ending on such date of determination). "Majority Bank Purchasers" means Bank Purchasers at any time holding at least 66-2/3% of the then aggregate outstanding Investment hereunder or, if no Investment is then outstanding, Bank Purchasers having at least 66-2/3% of the Commitments at such time. -21- 29 "Maximum Ownership Interest" means 100%. "Monthly Settlement Date" means each date (or, if any such date is not a Business Day, the first Business Day following such date) set forth on Schedule G hereto. "Moody's" means Moody's Investors Service, Inc. "Obligor" means any Person which is obligated to make payment on a Receivable. "Originator" means any of Bentley, Guilford, Interface Flooring, Prince Street, Toltec, Intek, Intek Marketing and Guilford Marketing; provided that, for purposes of determining the Aged Receivables Ratio, the Dilution Horizon, the Dilution Ratio or the Loss Reserve Ratio on any date, such determination shall be made without regard to the net sales made, or the Receivables originated, by Guilford or Intek on or after (i) in the case of Guilford, the "Effective Date" under and as defined in the Guilford Assumption Agreement and (ii) in the case of Intek, the "Effective Date" under and as defined in the Intek Assumption Agreement. "Originator Entity shall have the meaning assigned to that term in Section 10.4. "Ownership Interest" means, at any time, an undivided percentage ownership interest of a Bank Purchaser in the Receivables, the related Collections and the Related Rights, as described in Section 3.1(a). "Parallel Sale Agreement" means that certain Receivables Sale Agreement dated as of August 4, 1995 among the Seller, Interface, SPARC and CIBC, as "Servicing Agent" thereunder, as the same has been on or prior to the date hereof, or may from time to time hereafter be, amended, restated, supplemented or otherwise modified in accordance with the terms of this Agreement. "PBGC" means the Pension Benefit Guaranty Corporation and any successor thereto. -22- 30 "Permitted Liens" means any lien, claim or encumbrance (i) arising under this Agreement in favor of the Administrative Agent, for the benefit of the Bank Purchasers, or under the Parallel Sale Agreement in favor of the PSA Agent, for the benefit of SPARC, (ii) in respect of taxes that are not delinquent or (iii) constituting a Permitted Tax Lien. "Permitted Tax Lien" means at any time any lien, claim or encumbrance in respect of taxes the payment of which is being contested by the Seller or Interface in good faith and in respect of which adequate reserves shall have been set aside; provided that any such lien, claim or encumbrance shall cease to be a Permitted Tax Lien if a material risk of loss or forfeiture of any Receivable by reason of such lien, claim or encumbrance shall then exist. "Person" means an individual, partnership, corporation business trust, joint stock company, trust, unincorporated association, joint venture or other entity, or a government or any political subdivision or agency thereof. "Plan" means each employee benefit plan (as defined in Section 3(3) of ERISA) currently sponsored, maintained or contributed to by any Transaction Party or any ERISA Affiliate or with respect to which any Transaction Party or any ERISA Affiliate has any liability. "Prince Street" means Prince Street Technologies, Ltd., a Georgia corporation. "Pro Rata Share" means, with respect to any Bank Purchaser at any time, a fraction (expressed as a percentage) the numerator of which shall be the Commitment of such Bank Purchaser at such time and the denominator of which shall be the aggregate Commitments at such time. In the event the Commitments shall have been terminated, the Pro Rata Share of each Bank Purchaser at any time shall be (i) if any Ownership Interests shall then be outstanding, a fraction (expressed as a percentage) the numerator of which shall be the Ownership Interest of such Bank Purchaser at such time and the denominator of which shall be the aggregate Ownership Interests hereunder at such time and (ii) if no Ownership Interests shall then be outstanding, the Pro Rata Share -23- 31 of such Bank Purchaser immediately prior to the termination of the Commitments. "PSA Agent" means CIBC, in its capacity as "Servicing Agent" under the Parallel Sale Agreement, and any successor thereto in such capacity. "Purchase" means any purchase by any Bank Purchaser of an Ownership Interest from the Seller under this Agreement, and includes its participation in the Initial Purchase, any Incremental Purchase and any Reinvestment Purchase. The terms "Purchase", "Initial Purchase", "Incremental Purchase" and "Reinvestment Purchase" shall generally refer to the collective action of the Bank Purchasers in effecting purchases of (or increases in) Ownership Interests at the same time and in an amount corresponding to their respective Pro Rata Shares at such time. When used with respect to any Bank Purchaser, such term shall mean such Bank Purchaser's participation in such Purchase. "Purchase Discount" has the meaning assigned to such term in Section 5.2.1. "Purchase Premium" has the meaning assigned to such term in Section 5.2.2. "Purchasing Office" shall mean, for each Bank Purchaser, the office such Bank Purchaser may designate in writing from time to time to the Seller and the Administrative Agent for purposes of all allocations of such Bank Purchaser's Investment to a Discount Rate of a particular type. "Receivable" means the obligation of an Obligor to pay for merchandise sold or services rendered by an Originator, and includes the rights in connection therewith to payment of any interest or finance charges and in the merchandise (including returned goods) and contracts relating to such Receivable, all security interests, guaranties and property securing or supporting payment of such Receivable, all books and records relating to the Receivables and all proceeds of the foregoing. -24- 32 "Receivables Activity Report" means the report in the form of Exhibit F hereto to be provided by the Collection Agent in accordance with Section 7.4 of this Agreement. "Receivables Pool" means all Receivables that shall have been purchased by the Seller from Originators. "Reinvestment Purchase" means any Purchase made with Collections. "Reinvestment Suspension Period" means a period beginning on, as applicable, the Commitment Termination Date or the date that Reinvestment Purchases shall cease for any other reason (whether pursuant to Section 6.2(b), 6.6 or otherwise) and ending on the initial date thereafter (if any) on which Reinvestment Purchases shall recommence. "Related Rights" means all rights and remedies of the Seller under each Transfer Agreement (or any instrument, document or agreement executed in connection therewith including, without limitation, each Assumption Agreement) pursuant to which any Receivable shall have been transferred by an Originator to the Seller. "Reserve" means, as of any date, an amount equal to the aggregate investment on such date multiplied by the greater of (a) 10% and (b) the sum of the items set forth below (each expressed as a percentage): (1) the higher of (i) the Loss Reserve Ratio as of such date and (ii) the product of (x) the quotient, expressed as a percentage, of the Standard Concentration Limit divided by the aggregate outstanding balance of all Eligible Receivables as of such date, multiplied by (y) five (5); (2) 1%; (3) Yield Reserve as of such date and (4) the Dilution Reserve as of such date. In the event that any Pemitted Tax Lien shall have attached to any Receivable in the Receivables Pool, the Reserve shall be increased by an amount equal to the related tax that is then being contested. "Reuters Screen" means, when used in connection with any designated page and LIBOR, the display page so designated on the Reuters Monitor Money Rates Service (or such other page as may replace that page on that service for the purpose of displaying rates comparable to LIBOR). "S&P" means Standard & Poor's Ratings Group, a division of The McGraw-Hill Companies, Inc. "Sale Documents" means this Agreement, the Parallel Sale Agreement, the Transfer Agreements, the Assumption Agreements, the Inventory Transfer Agreements, the Exhibits hereto and thereto and all other certificates, agreements and documents executed from time to time by any Transaction Party in favor of or otherwise for the benefit of the Bank Purchasers, the Administrative Agent, SPARC, the PSA Agent or any Transaction -25- 33 Party in connection with the transactions contemplated in any of the foregoing. "Seller" means Interface Securitization Corporation, a Delaware corporation, and its successors and permitted assigns. "Settlement Date" means any date, as described in Section 7.1 of this Agreement, on which the Collection Agent is required to remit specified payments to the Bank Purchasers. "Shareholders' Equity" means, with respect to any Person as at any date of determination, shareholders' equity of such Person determined on a consolidated basis in conformity with GAAP. "SPARC" means Special Purpose Accounts Receivable Cooperative Corporation, a California cooperative corporation, and its successors and assigns. "Special Concentration Limit" means, with respect to any Obligor listed on Schedule A (together with its Affiliates and subsidiaries), the amount indicated opposite the name of such Obligor; provided that the Administrative Agent may, at any time in its discretion but subject to Section 13.10, reduce or increase the Special Concentration Limit for any such Obligor, or add the name of any other Obligor to Schedule A, through the delivery by the Administrative Agent to the Seller of an amended Schedule A; provided that, in the event any increase in a Special Concentration Limit would cause such limit to exceed the Standard Concentration Limit then in effect, the consent of the Majority Bank Purchasers shall be required prior to giving effect to such increase. "Standard Concentration Limit" means, with respect to all of the Receivables owing from a single Obligor (except for an Obligor listed on Schedule A), together with Receivables owing from its Affiliates or subsidiaries, an amount equal to $1,800,000; provided that (i) the Administrative Agent may, at any time in its discretion but subject to Section 13.10, reduce the Standard Concentration Limit for any Obligor through the delivery of a notice by the Administrative Agent to the Seller, and (ii) the Administrative Agent may, at any time on the direction of the -26- 34 Majority Bank Purchasers, increase the Standard Concentration Limit for any Obligor through the delivery of a notice by the Administrative Agent to the Seller. "Stated Termination Date" means December 26, 1997 or such later date determined in accordance with Section 3.5. "Subordinated Note" means that certain Subordinated Noted dated December 27, 1996 executed by the Seller to the order of Interface and evidencing advances made from time to time by Interface to the Seller, as the same may be amended, restated, supplemented or otherwise modified from time to time in accordance with the terms of this Agreement. "Subsidiary" means, with respect to any Person, any corporation or other entity (including, without limitation, partnerships, joint ventures, and associations) regardless of its jurisdiction of organization or formation, at least a majority of the total combined voting power of all classes of voting stock or other ownership interests of which shall, at the time as of which any determination is being made, be owned by such Person, either directly or indirectly through one or more other Subsidiaries. "Taxes" has the meaning assigned to such term in Section 13.3. "Telerate" means, when used in connection with any designated page and the Certificate of Deposit Rate or LIBOR, the display page so designated on the Dow Jones Telerate Service (or such other page as may replace that page on that service for the purpose of displaying rates comparable to the Certificate of Deposit Rate or LIBOR). "Toltec" means Toltec Fabrics, Inc., a Georgia corporation. "Total Capitalization" means the sum of Funded Debt and Consolidated Net Worth for the Consolidated Companies. "Tranche Period" means, with respect to any allocation of Investment for which the Discount Rate shall be: (a) the Base Rate, a period of days not to exceed 30 days; (b) the Adjusted -27- 35 LIBO Rate, a period of one, two, three or six months, with such Tranche Period ending on the day in the applicable succeeding calendar month which corresponds numerically to the beginning day of such Tranche Period; provided, however, that if there is no such numerically corresponding day in such succeeding month, such Tranche Period shall end on the last Business Day of such succeeding month; and (c) the Fixed CD Rate, a period of 30, 60, 90 or 180 days commencing on a Business Day selected by the Seller; provided that: (i) The initial Tranche Period for any new Investment (whether in connection with the Initial Purchase or any Incremental Purchase) shall commence on the date of the applicable Purchase and each Tranche Period occurring thereafter in respect of such Investment shall commence on the day on which the next preceding Tranche Period expires. (ii) If any Tranche Period would end on a day which is not a Business Day, such Tranche Period shall end on the next succeeding Business Day; provided, however, that in the case of Tranche Periods in respect of which the Adjusted LIBO Rate shall apply, if such next succeeding Business Day falls in a new month, such Tranche Period shall end on the immediately preceding Business Day. (iii) In the case of any Tranche Period which commences before the Commitment Termination Date and would otherwise end on a date occurring after the Commitment Termination Date, such Tranche Period shall end on the Termination Date. The duration of each Tranche Period which commences after the Commitment Termination Date shall be of such duration as shall be selected by the Administrative Agent. "Transaction Parties" means, collectively, the Seller, Interface and the Originators. "Transfer Agreement" means, in the case of any Originator, an agreement, in substantially the form attached hereto as Exhibit H, between the Seller and such Originator (whether such Originator is an original signatory thereto or became a party to such agreement pursuant to an Assumption -28- 36 Agreement) pursuant to which the Seller will purchase Receivables from such Originator, as such agreement may be amended, modified, extended or waived from time to time with the consent of the Majority Bank Purchasers and the Administrative Agent. "Yield Reserve" means, as of any date of determination (i) the product of (a) the sum of the then highest Discount Rate and Applicable Margin and (b) 120/360 plus (ii) all unpaid Accrued Finance Charges as of such date. SECTION 1.2 Accounting Terms and Determination. Unless otherwise defined or specified herein, all accounting terms shall be construed herein, all accounting determinations hereunder shall be made, all financial statements required to be delivered hereunder shall be prepared, and all financial records required hereunder shall be maintained in accordance with GAAP, except that financial records of Foreign Subsidiaries may be maintained in accordance with generally accepted accounting principles in effect from time to time in the jurisdiction of organization of such Foreign Subsidiary; provided, however, that any financial covenant calculations made for the purpose of determining the "Applicable Margin" hereunder shall be made in accordance with GAAP and such generally accepted accounting principles in such foreign jurisdictions, as the case may be, as in effect on the date of this Agreement and applied on a basis consistent with the preparation of the financial statements referred to in Section 9.1(k) unless and until the parties enter into an agreement with respect thereto in accordance with Section 13.14; and provided further, that for purpose of such calculations, the Convertible Preferred Stock shall be considered as capital stock of Interface and not as Funded Debt. ARTICLE II: THE FACILITY Prior to the Commitment Termination Date, the Seller may from time to time, in its sole discretion, offer to sell Ownership Interests in the Receivables Pool to the Bank Purchasers, and may from time to time thereafter offer to increase such Ownership Interests. Each Bank Purchaser severally agrees, subject to the terms and conditions of this Agreement, to purchase an Ownership Interest and from time to time to increase such Ownership Interest. -29- 37 ARTICLE III: WHAT IS SOLD SECTION 3.1. Determination of Ownership Interest. (a) A Bank Purchaser shall acquire, upon payment of the cash component of the purchase price in respect of any Purchase hereunder, an undivided percentage ownership interest in the Receivables Pool at such time, including in all Receivables therein, any Collections relating to such Receivables and all Related Rights with respect thereto. The undivided percentage interest of any Bank Purchaser in the Receivables Pool covered by this Agreement and Collections and Related Rights with respect thereto shall be referred to in this Agreement as the "Ownership Interest" of such Bank Purchaser. The Ownership Interest of any Bank Purchaser on any date, except as provided in paragraph (b) below, shall be equal to a fraction (expressed as a percentage) calculated in the following manner: I + R ----------- ER where: I = the Investment of such Bank Purchaser as of such date; R = the Reserve in respect of the Investment of such Bank Purchaser on such date; ER = the outstanding balance of all Eligible Receivables on such date in the Receivables Pool, minus the aggregate amount by which the outstanding balance of Eligible Receivables of each Obligor in the Receivables Pool exceeds the Standard Concentration Limit (or, if applicable, the Special Concentration Limit for such Obligor). The Ownership Interest in respect of any Bank Purchaser will change from time to time, except as provided in paragraphs (b) or (c) of this Section, whenever the Investment of such Bank Purchaser, the related Reserve, the Eligible Receivables, or the Standard Concentration Limit or Special Concentration Limit with respect to any Obligor changes. -30- 38 (b) During any Reinvestment Suspension Period, the Ownership Interest of each Bank Purchaser will remain fixed at the percentage in effect as of the close of business on the Business Day immediately preceding the commencement of that period. (c) The Ownership Interest of each Bank Purchaser in the Receivables will be reduced to zero when such Bank Purchaser receives the following amounts: (1) its Investment; (2) the amounts payable to such Bank Purchaser pursuant to Section 7.2.2(b); (3) all accrued and unpaid Commitment Fee in respect of such Bank Purchaser; and (4) all other amounts payable to such Bank Purchaser under this Agreement. When the Ownership Interest in respect of any Bank Purchaser is reduced to zero, such Bank Purchaser shall not be entitled to receive any additional Collections from the Receivables. (d) Subject to the provisions of Section 8.2(d), upon any Bank Purchaser's purchase of an Ownership Interest, (i) the Collection Agent shall be entitled to endorse all drafts, checks and other forms of payment on account of the Receivables and to settle, adjust and forgive any amounts payable on the Receivables and (ii) the Bank Purchasers (and the Administrative Agent on their behalf) shall be entitled to exercise all other incidences of ownership in the Receivables. SECTION 3.2. Frequency of Determining Ownership Interest. The Collection Agent shall determine or be deemed to determine each Ownership Interest daily and report it to the Administrative Agent at the following times: (a) on the date of the Initial Purchase; (b) on the last Business Day of each week; -31- 39 (c) on each Settlement Date; (d) on the date of an Incremental Purchase; (e) on the Business Day immediately preceding any Reinvestment Suspension Period; (f) on the last Business Day of any Reinvestment Suspension Period; (g) when the Administrative Agent has reason to believe that the Maximum Ownership Interest has been exceeded; and (h) at the reasonable request of any Bank Purchaser. SECTION 3.3. Maximum Ownership Interest and Investment. (a) If at any time the Aggregate Ownership Interest exceeds the Maximum Ownership Interest, the Seller shall immediately make a payment to the Collection Agent in an aggregate amount sufficient to reduce the Aggregate Ownership Interest to the Maximum Ownership Interest, such payment to be applied ratably (determined on the basis of the respective investments outstanding on the date of such payment) to the Investment hereunder and the "Investment" under the Parallel Sale Agreement. The calculation of such payment at any time shall take into account the corresponding reduction in the Reserve hereunder and the reduction in the "Reserve" under the Parallel Sale Agreement that shall occur at the time of the reduction in Investment hereunder and under the Parallel Sale Agreement. (b) If at any time (i) the Investment of any Bank Purchaser exceeds the Commitment then in effect with respect to such Bank Purchaser or (ii) the aggregate Investment hereunder exceeds the aggregate Commitments then in effect hereunder, the Seller shall immediately make a payment to the Administrative Agent in an amount sufficient to reduce the aggregate Investment or Bank Purchaser's Investment, as applicable, to the extent necessary to cause such condition to cease to exist. Any such payment to the Administrative Agent will be used to reduce the Investment of the Bank Purchasers, ratably in accordance with their respective Commitments (in the case of a reduction by -32- 40 reason of the circumstances described in clause (ii) above), or such Bank Purchaser (in the case of a reduction by reason of the circumstances described in clause (i) above). SECTION 3.4. Reduction of Commitments. The Seller may at any time elect to terminate in whole or reduce in part the unused portion of the Commitments by giving the Administrative Agent not less than three Business Days' written notice; provided, however, that each partial reduction shall be in an amount equal to $5,000,000 or an integral multiple of $1,000,000 in excess thereof; and provided further that any partial reduction shall be applied ratably to the Commitments of all of the Bank Purchasers in accordance with their respective Pro Rata Shares at such time. SECTION 3.5. Extension of the Stated Termination Date. On or prior to the date (an "Extension Request Date") occurring sixty days prior to the Stated Termination Date then in effect, the Seller may, by written notice thereof to the Administrative Agent, request that the Bank Purchasers agree to extend the Stated Termination Date. Each Bank Purchaser, in its sole discretion, shall determine for itself whether to extend the Stated Termination Date in respect of its Commitment and shall advise the Administrative Agent of its determination. In the event that all of the Bank Purchasers shall elect to extend the Stated Termination Date, the Administrative Agent shall so advise the Seller by not later than the Stated Termination Date otherwise then in effect. In the event the Administrative Agent shall fail to advise the Seller (or any Bank Purchaser shall fail to notify the Administrative Agent) in response to any extension request, such extension request shall be deemed to have been denied. Upon issuance by the Administrative Agent of notice to the Seller of the consent on the part of all of the Bank Purchasers to any extension request, the "Stated Termination Date" shall thereupon become the date which is 364 days following the date of such notice from the Administrative Agent. ARTICLE IV: PURCHASE PRICE The purchase price payable by each Bank Purchaser for its Ownership Interest in the Receivables and any Collections -33- 41 shall be comprised of a cash component and a deferred payment component. SECTION 4.1. Determination of Cash Component of Purchase Price. Upon satisfaction of the conditions precedent to the making of a Purchase hereunder, each Bank Purchaser shall accept an offer from the Seller to make a Purchase, and in connection therewith such Bank Purchaser will pay the following amounts in cash to the Seller: (a) for Initial and Incremental Purchases, its Pro Rata Share of the amount specified in the notice required to be delivered by the Seller under Section 6.2(a); or (b) for a Reinvestment Purchase, the amount obtained by multiplying (i) the dollar amount of the Collections received on the date of such Purchase by (ii) the Ownership Interest of such Bank Purchaser on that date, and subtracting from such amount any amounts required to be set aside in accordance with Section 7.2.1(a)(ii) or then payable to the Administrative Agent for the account of such Bank Purchaser under Section 7.2.2(b); provided that the payment of any amount described in (a) or (b) above would not cause (and such amount shall be reduced so as not to cause) any of the following to occur: (1) the Investment of such Bank Purchaser to exceed the Commitment of such Bank Purchaser; or (2) the aggregate Investment of all Bank Purchasers to exceed the aggregate Commitments hereunder; or (3) the Aggregate Ownership Interest to exceed the Maximum Ownership Interest. SECTION 4.2. Satisfaction of Deferred Payment Component of Purchase Price. Upon and after the reduction of the Ownership Interest of any Bank Purchaser to zero as described in Section 3.1(c), all Collections or other cash received by such Bank Purchaser on account of Receivables and the interest of such Bank Purchaser therein and all Receivables held by or on behalf of such Bank Purchaser will be transmitted in the form received -34- 42 by such Bank Purchaser to the Seller. After the reduction of the Ownership Interest of any Bank Purchaser to zero as described in Section 3.1(c), such Bank Purchaser will reassign to the Seller the Ownership Interest of such Bank Purchaser in the Receivables, without recourse, representation or warranty (except as to such Bank Purchaser's own title thereto), by an assignment acceptable to the Seller and such Bank Purchaser. Upon such reassignment to the Seller, the deferred payment component of the purchase price in respect of such Bank Purchaser's Ownership Interest under this Article IV shall be deemed to be satisfied. SECTION 4.3. Several Obligations. (a) Unless the Administrative Agent shall have received notice from a Bank Purchaser prior to the date of the Initial Purchase or any Incremental Purchase that such Bank Purchaser will not make available to the Administrative Agent such Bank Purchaser's Pro Rata Share of the aggregate Purchase Price for such Purchase, the Administrative Agent may assume that such Bank Purchaser has made such portion available to the Administrative Agent on the date of such Purchase in accordance with Section 4.1(a) and the Administrative Agent may, in reliance upon such assumption, make available to the Seller on such date a corresponding amount. If and to the extent that such Bank Purchaser shall not have so made such Pro Rata Share available to the Administrative Agent, such Bank Purchaser and the Seller severally agree to repay to the Administrative Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Seller until the date such amount is repaid to the Administrative Agent, at (i) in the case of the Seller, a rate equal to the sum of the Purchase Premium plus the Purchase Discount applicable at the time to the Investment allocated to the making of such Purchase by each of the complying Bank Purchasers and (ii) in the case of such Bank Purchaser, the Federal Funds Rate. If such Bank Purchaser shall repay to the Administrative Agent such corresponding amount, such amount so repaid shall constitute such Bank Purchaser's Purchase for purposes of this Agreement. (b) The failure of any Bank Purchaser to make the payment of its Pro Rata Share of any Purchase Price to be made by it as part of the Initial Purchase or any Incremental Purchase shall not relieve any other Bank Purchaser of its obligation, if -35- 43 any, hereunder to make its Purchase of an Ownership Interest on the date thereof, but no Bank Purchaser shall be responsible for the failure of any other Bank Purchaser to pay its Pro Rata Share of any Purchase Price on the date of any Purchase. (c) If any Bank Purchaser shall obtain any payment or reduction (including, without limitation, any amounts received as adequate protection of a deposit treated as cash collateral under the Bankruptcy Code) of its Investment or of any obligation of the Seller or the Collection Agent hereunder (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) in excess of its Pro Rata Share of payments or reductions on account of the aggregate Investment or on account of such obligations obtained by all the Bank Purchasers, such Bank Purchaser shall forthwith (i) notify each of the other Bank Purchasers and the Administrative Agent of such receipt, and (ii) purchase from the other Bank Purchasers such participations in the affected Investment or obligations as shall be necessary to cause such purchasing Bank Purchaser to share the excess payment or reduction, net of costs incurred in connection therewith, ratably with each of them, provided that if all or any portion of such excess payment or reduction is thereafter recovered from such purchasing Bank Purchaser or additional costs are incurred, the purchase shall be rescinded and the purchase price restored to the extent of such recovery or such additional costs, but without interest unless the Bank Purchaser obligated to return such funds is required to pay interest on such funds. The Seller agrees that any Bank Purchaser so purchasing a participation from another Bank Purchaser may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off) with respect to such participation as fully as if such Bank Purchaser were the initial holder of the underlying Investment or obligation. ARTICLE V: FEES AND EXPENSES SECTION 5.1. [Intentionally left blank]. SECTION 5.2. Settlement Date Payments. On each Settlement Date, the Seller will pay to the Administrative Agent, -36- 44 for the account of the Bank Purchasers, the following, in accordance with, and in the manner provided in, Section 7.2.2: SECTION 5.2.1. Purchase Discount. A "Purchase Discount" equal to, in the case of the aggregate Investment allocated to any Tranche Period, a rate per annum equal to the Discount Rate selected for such Tranche Period in accordance with Section 6.3; provided, that no provision of this Agreement shall require the payment or permit the collection of Purchase Discount in excess of the maximum permitted by applicable law; provided, further, that if on any Settlement Date during any period in which the Investment of any Bank Purchaser is being reduced, the sum of (A) the aggregate amount of Receivables that cease to be Eligible Receivables during such period and (B) all amounts pursuant to clauses (2) and (3) of Section 3.1(c) which accrued and were unpaid during such period, is equal to or greater than 75% of the aggregate Reserve as of the last Business Day on which such Bank Purchaser's Investment was not being reduced, then the Purchase Discount shall equal 1.5% per annum in excess of the Base Rate. Changes in the rate payable hereunder shall be effective on each day on which a change in the applicable Discount Rate occurs. SECTION 5.2.2. Purchase Premium. A "Purchase Premium" equal to, in the case of the aggregate Investment allocated to any Tranche Period, (i) if the Discount Rate selected therefor shall be the Adjusted LIBOR Rate or the Fixed CD Rate, the Applicable Margin, and (ii) if the Discount Rate selected therefor shall be the Base Rate, zero. SECTION 5.2.3. Commitment Fee. If such Settlement Date is a Monthly Settlement Date, a "Commitment Fee" for the period from the immediately preceding Settlement Date (or, in the case of the initial payment of such fee, from the date hereof) to such Monthly Settlement Date equal to, in respect of each Bank Purchaser, (i) a rate per annum equal 0.125%, multiplied by (ii) an amount equal to (A) the average daily Commitment of such Bank Purchaser during such period minus (B) the average daily outstanding Investment of such Bank Purchaser during such period. The Commitment Fee shall be calculated on the basis of a year of 360 days for actual days elapsed, and shall be payable by the Seller from sources other than Collections allocable to the Bank Purchasers. -37- 45 SECTION 5.2.4. Collection Agent Fee. A Collection Agent Fee equal to 1.0% per annum, which fee shall be remitted by the Administrative Agent (for the account of the Bank Purchasers) to the Collection Agent in arrears on each Settlement Date. If Interface or the Seller is acting as the Collection Agent, the Collection Agent shall retain an amount equal to the Collection Agent Fee (in full satisfaction of the payment of such fee to the Collection Agent) out of amounts required to be remitted by the Collection Agent in accordance with Section 7.2.2(b). SECTION 5.3. Legal Fees and Other Expenses. In addition to all other amounts payable by the Seller under this Agreement, the Seller agrees to pay, by no later than 30 days after presentation of a bill, (i) the actual and reasonable fees and expenses of counsel for the Administrative Agent in connection with the negotiation, preparation, execution, amendment and enforcement of the Sale Documents and advice with respect to the rights and remedies of the Administrative Agent and the Bank Purchasers thereunder, (ii) all other actual and reasonable out-of-pocket costs and expenses incurred by the Administrative Agent in connection with the administration of the Sale Documents (including periodic auditing of the Transaction Parties in connection with the transactions contemplated in the Sale Documents), and (iii) from and after the occurrence of an Event of Termination, the actual and reasonable fees and expenses of counsel for each Bank Purchaser in connection with the enforcement of the Sale Documents and advice with respect to the rights and remedies of such Bank Purchaser thereunder. SECTION 5.4. Interest on Unpaid Amounts. To the extent that the Seller or Collection Agent fails to pay when due (without regard to any grace period therefor permitted under Section 12.1) to the Administrative Agent or any Bank Purchaser any fee, expense or other amount payable hereunder or under any Sale Document, interest shall be due and payable on such unpaid amount, for each day until paid in full, at the rate of one and one-half percent (1.5%) in excess of the Base Rate. Changes in the rate payable hereunder shall be effective oneach date on which a change in the Base Rate occurs. -38- 46 ARTICLE VI: PURCHASE PROCEDURES SECTION 6.1. Types of Purchases. The three types of Purchases which can be made under this Agreement are the Initial Purchase, an Incremental Purchase and a Reinvestment Purchase. The aggregate amount of the Initial Purchase and each Incremental Purchase made by the Bank Purchasers at the same time shall be not less than $4,000,000 or an integral multiple of $100,000 in excess thereof. SECTION 6.2. Notice Requirements. (a) In the case of the Initial Purchase or an Incremental Purchase, the Seller will give the Administrative Agent three Business Days' prior written notice of its offer to sell Ownership Interests in Receivables to the Bank Purchasers. The notice will be in the form of Exhibit A, and will include the amount of the aggregate new Investment requested and the Business Day on which the Purchase will be made. The Administrative Agent shall, promptly following its receipt of any such notice, notify the Bank Purchasers thereof. (b) The Seller may elect to have Reinvestment Purchases cease by notifying the Administrative Agent to such effect. Such notice shall be given by no later than 1:00 P.M. (New York City time) on the third Business Day preceding the date on which the Reinvestment Purchase was contemplated to be made. The notice will be in the form of Exhibit B, and will specify (i) the date on which Reinvestment Purchases shall cease and (ii) the amount to which the Investment shall be reduced before Reinvestment Purchases will recommence. The Administrative Agent shall, promptly following its receipt of any such notice, notify the Bank Purchasers thereof. (c) Upon notice to the Administrative Agent in the form of Exhibit C (by no later than 1:00 P.M. (New York City time) on the third Business Day preceding a Settlement Date), the Seller may, on such Settlement Date, reduce the dollar amount of the aggregate Investment hereunder in addition to the reduction which would take place by the application of Collections in the amount determined in accordance with the provisions of Section 6.2(b) above by paying to the Administrative Agent, for the -39- 47 ratable distribution thereof to the Bank Purchasers, by 3:00 P.M. (New York City time) on the Settlement Date, the dollar amount by which the aggregate Investment is to be reduced, after giving effect to the application of Collections received and applied to the reduction of the aggregate Investment on such Settlement Date. SECTION 6.3. Selection of Tranche Periods and Discount Rates. (a) The Investment with respect to each Ownership Interest shall at all times be allocated to one or more Tranche Periods, each of which Tranche Periods shall have an associated Discount Rate. In any notice issued under Section 6.2(a) and requesting the Initial Purchase or any Incremental Purchase, the Seller shall specify the initial Tranche Period or Periods for the Investment then being requested and a Discount Rate for each such Tranche Period. Thereafter, the Seller shall by 11:00 a.m. (New York City time): (i) at least three Business Days prior to the expiration of any then existing Tranche Period, in the event that the Adjusted LIBO Rate is being requested as the Discount Rate for the next following Tranche Period, (ii) at least two Business Days prior to the expiration of any then existing Tranche Period, in the event that the Fixed CD Rate is being requested as the Discount Rate for the next following Tranche Period and (iii) at least one Business Day prior to the expiration of any then existing Tranche Period, in the event that the Base Rate is being requested as the Discount Rate for the next following Tranche Period, give the Administrative Agent irrevocable notice of the duration of the Tranche Period that shall commence on the expiration of the then applicable existing Tranche Period and the Discount Rate for the Investment allocated to such Tranche Period. In the event that the Seller shall for any reason fail to provide notice to the Administrative Agent prior to 11:00 a.m. (New York City time) one Business Day prior to the expiration of any then existing Tranche Period, the Tranche Period commencing upon such -40- 48 expiration shall have a duration of 3 Business Days and the Discount Rate with respect thereto shall be the Base Rate. (b) Each Tranche Period shall have allocated to it Investment from each Bank Purchaser in an amount corresponding to the respective Pro Rata Share of such Bank Purchaser. In the case of any Tranche Period in respect of which the Adjusted LIBO Rate or the Fixed CD Rate shall apply, the aggregate Investment of all Bank Purchasers allocated thereto shall be an amount not less than $4,000,000 or an integral multiple of $100,000 in excess thereof. (c) So long as any Event of Termination (or other event which, with the giving of notice or passage of time or both, would constitute an Event of Termination) shall have occurred and be continuing, the Seller may only select the Base Rate as the Discount Rate for all new Tranche Periods. (d) In the event that the Administrative Agent shall have determined (which determination shall be made in good faith and, absent manifest error, shall be final, conclusive and binding upon all parties) that, on any date for determining the Adjusted LIBO Rate or the Fixed CD Rate for any Tranche Period, by reason of any changes arising after the date of this Agreement affecting the London interbank market or the United States secondary certificate of deposit market, as the case may be, or the Administrative Agent's position in such markets, adequate and fair means do not exist for ascertaining such rate on the basis provided for in the definition of Adjusted LIBO Rate or Fixed CD Rate, as the case may be, then, and in any such event, the Administrative Agent shall forthwith give notice (by telephone confirmed in writing) to the Seller and the Bank Purchasers of such determination and a summary of the basis for such deter mination. Until the Administrative Agent notifies the Seller that the circumstances giving rise to the suspension described herein no longer exist, the right of the Seller hereunder to select or continue to use the Adjusted LIBO Rate or the Fixed CD Rate (as the case may be) as the Discount Rate for current or future Tranche Periods shall be suspended and the Base Rate instead shall be used as the Discount Rate for such current or future Tranche Periods. -41- 49 (e) If any Bank Purchaser shall advise the Administrative Agent that at any time, because of any circumstances described in clause (x) or (y) of Section 11.3(a) or any other circumstances beyond such Bank Purchaser's reasonable control arising after the date of this Agreement and affecting such Bank Purchaser or the London interbank market or the United States secondary certificate of deposit market or such Bank Purchaser's position in such markets, the Adjusted LIBO Rate or Fixed CD Rate (as the case may be) as determined by the Administrative Agent will not adequately and fairly reflect the cost to such Lender of funding its portion of the aggregate Investment allocated to any Tranche Period at the Adjusted LIBO Rate or the Fixed CD Rate (as the case may be), then, and in any such event: (i) the Administrative Agent shall forthwith give notice (by telephone confirmed in writing) to the Seller and the other Bank Purchasers of such advice; and (ii) the Seller's right to allocate any portion of such Bank Purchaser's Investment to any Tranche Period at the Adjusted LIBO Rate or the Fixed CD Rate (as the case may be) shall be immediately suspended and such Bank Purchaser's Investment thereafter shall be allocated to an unaffected type of Discount Rate, and if any affected Tranche Period is then outstanding, the Seller shall immediately allocate the affected portion of such Bank Purchaser's Investment to a replacement Tranche Period which has an unaffected type of Discount Rate and which ends on the date on which the affected Tranche Period would have expired; provided that if more than one Bank Purchaser is so affected any time, then all affected Bank Purchasers must be treated the same pursuant to this paragraph. (f) In the event that any Bank Purchaser shall have determined (which determination shall be made in good faith and, absent manifest error, shall be final, conclusive and binding upon all parties) at any time that the funding of its Pro Rata Share of the aggregate Investment allocated to any Tranche Period at the Adjusted LIBO Rate has become unlawful or inconsistent with the compliance by such Bank Purchaser in good faith with any applicable law, government rule, regulation, guideline or order (whether or not having the force of law and whether or not failure to comply therewith would be unlawful), then, in any such event, such Bank Purchaser shall give prompt notice (by telephone confirmed in writing) to the Seller and to the Administrative Agent of such determination and a summary of the basis for such -42- 50 determination (which notice the Administrative Agent shall promptly transmit to the other Bank Purchasers). Upon the giving of the notice to the Seller referred to in this paragraph, the Seller's right to allocate any portion of such Bank Purchaser's Investment to any Tranche Period at the Adjusted LIBO Rate shall be immediately suspended and such Bank Purchaser's Investment thereafter shall be allocated to Tranche Periods which have the Fixed CD Rate or the Base Rate as their Discount Rates, and if any affected Tranche Period is then outstanding, the Seller shall immediately allocate the affected portion of such Bank Purchaser's Investment to a replacement Tranche Period which has either the Fixed CD Rate or the Base Rate as its Discount Rate and which ends on the date on which the affected Tranche Period would have expired; provided that if more than one Bank Purchaser is so affected at any time, then all affected Bank Purchasers must be treated the same pursuant to this paragraph. SECTION 6.4. Conditions Precedent to Initial Purchase. The following conditions must be satisfied before the Bank Purchasers shall make the Initial Purchase: (a) Conditions Precedent to Amendment of Parallel Sale Agreement. Each of the conditions precedent to the effectiveness of that certain Amendment to the Parallel Sale Agreement dated as of the date hereof among the Seller, Interface, SPARC and CIBC, as "servicing agent," will have been satisfied. (b) Termination of Earlier Sale Agreement. The Administrative Agent shall have received evidence satisfactory to it that the commitments and obligations of the Seller, the "Agents" and "Bank Purchasers" under the Earlier Sale Agreement shall have been (or, immediately following the making of the Initial Purchase hereunder, shall be) terminated and that all liens, security interests, ownership interests, claims and encumbrances arising thereunder upon or with respect to the Receivables, the Related Rights and the Collections shall have been (or, immediately following the making of the Initial Purchase hereunder, shall be) released. -43- 51 (c) Absence of Liens. The Administrative Agent will have received evidence acceptable to it (including Uniform Commercial Code search reports) that all Receivables and all proceeds thereof are free and clear of liens, security interests, claims and encumbrances, except for Permitted Liens. (d) Financing Statements. The Administrative Agent will have received acknowledgment copies of UCC-1 financing statements, and all other documents reasonably requested by the Administrative Agent, to perfect, evidence and protect (i) the Ownership Interest of the Bank Purchasers in the Receivables, and (ii) the Seller's ownership interest in the Receivables purchased by it from the Originators. (e) Lock-Box Agreements. The Administrative Agent will have received original Lock-Box Agreements in the form of Exhibit E executed by the appropriate Transaction Parties and each of the Lock-Box Banks. (f) Receivables Activity Report and Calculation of Ownership Interests. The Administrative Agent will have received (i) a Receivables Activity Report covering (A) the fiscal month ending most recently prior to the date on which this Agreement is executed and (B) the period thereafter to the date that is two days prior to the date on which the initial Purchase hereunder is proposed to occur, and (ii) a report setting forth the calculation of each Bank Purchaser's Ownership Interest upon giving effect to the Initial Purchase. (g) Resolutions. The Administrative Agent will have received: (i) a certificate of the Seller's secretary or assistant secretary attesting to: (A) resolutions of the Seller's Board of Directors authorizing the execution by the Seller of the Sale Documents to be executed by the Seller; (B) the names and signatures of the officers of the Seller authorized to execute the Sale Documents to be executed by the Seller; and (C) -44- 52 the completeness and correctness of the attached articles or certificate of incorporation (certified by the appropriate Secretary of State) and by-laws of the Seller; and (ii) a certificate of the secretary or assistant secretary of each of Interface and each Originator attesting to: (A) resolutions of such Transaction Party's Board of Directors (or a duly authorized committee thereof) authorizing the execution by such Transaction Party of the Sale Documents to be executed by it; (B) the names and signatures of the officers of such Transaction Party authorized to execute the Sale Documents to be executed by it; and (C) the completeness and correctness of the attached articles or certificate of incorporation (certified by the appropriate Secretary of State) and by-laws of such Transaction Party. (h) Legal Opinion of Seller's Counsel. The Administrative Agent will have received opinions from counsel for the Transaction Parties, substantially in the respective forms attached hereto as Exhibit G, and covering such matters as (i) that the transfers under each Transfer Agreement constitute "true sales", (ii) that the Seller should not be substantively consolidated with Interface or any other Transaction Party in any bankruptcy or insolvency proceeding involving the Seller, Interface or such Transaction Party, (iii) general corporate matters relating to the execution, delivery and performance by the Transaction Parties of the Sale Documents and (iv) the perfection of the Ownership Interest of each Bank Purchaser, together with such other matters as the Administrative Agent or any Bank Purchaser may reasonably request. (i) Good Standing Certificates. With respect to each of the following Persons, the Administrative Agent will have received a certificate of recent date issued by the Secretary of State of the State of such Person's jurisdiction of incorporation as to the legal existence and good standing of such Person: Intek, Intek Marketing, Prince Street, Guilford Marketing and Toltec. -45- 53 (j) Subordinated Note. The Administrative Agent will have received a copy of the Subordinated Note, which note shall provide for the subordination of the indebtedness evidenced thereby to the obligations and liabilities of the Seller hereunder on such terms as shall be satisfactory to the Bank Purchasers and the Administrative Agent. (k) Transfer Agreements. The Administrative Agent shall have received (i) an executed Transfer Agreement between the Seller and each Originator (other than Guilford Marketing and Intek Marketing), respectively and (ii) a Consent and Acknowledgment executed by the Seller and each Originator. (l) Assumption Agreements. The Administrative Agent shall have received an executed Assumption Agreement in the form attached hereto as Exhibit J among (i) the Seller, Guilford and Guilford Marketing and (ii) the Seller, Intek and Intek Marketing. SECTION 6.5. Condition Precedent to all Incremental Purchases. Before any Bank Purchaser will make an Incremental Purchase, the Administrative Agent will have received a Receivables Activity Report covering the period from the date on which the last such report was delivered under Section 7.4 to the Business Day preceding the date of such Incremental Purchase. SECTION 6.6. Conditions Precedent to All Purchases. The following conditions must be satisfied before any Bank Purchaser will make any Purchase: (a) Representations and Covenants. On and as of the date of such Purchase (i) the representations of the Seller, Interface and the Collection Agent in Article IX shall be true and correct in all material respects with the same effect as if made on such date, (ii) the Seller, Interface and the Collection Agent shall be in compliance with the covenants set forth in this Agreement, (iii) the representations of each Originator set forth in the applicable Transfer Agreement and the Consent and Acknowledgment shall be true and correct in all material respects with the same effect as if made on such date and -46- 54 (iv) each Originator shall be in compliance with the covenants set forth in each of the Sale Documents executed by it. No Event of Termination or event which, with the passage of time or the giving of notice or both, would constitute an Event of Termination shall have occurred and then be continuing. (b) Other Documents. Each Transfer Agreement and the related Consent and Acknowledgment shall be in full force and effect in respect of all Persons then named as parties thereto (including, as applicable, after giving effect to any Assumption Agreement), and the Administrative Agent and the Bank Purchasers will have received such additional opinions, certificates and agreements as the Administrative Agent or any Bank Purchaser shall have reasonably requested. ARTICLE VII: SETTLEMENT PROCEDURES SECTION 7.1. Settlement Dates. Each of the following shall constitute a Settlement Date: (a) each Monthly Settlement Date; (b) during any Reinvestment Suspension Period, the first Business Day of each week; (c) following the occurrence of an Event of Termination, each day designated as a Settlement Date by the Administrative Agent; (d) each Business Day on which any Bank Purchaser's Investment is reduced in accordance with Section 6.2(c); (e) any date on which a reduction in the aggregate Investment of the Bank Purchasers is required to prevent the Aggregate Ownership Interest from exceeding the Maximum Ownership Interest; -47- 55 (f) each date on which any payment due to any Bank Purchaser or Agent from the Seller under Article XI has not been made; and (g) the last day of each Tranche Period. SECTION 7.2. Application of Collections. The Collection Agent will apply the Collections as provided in Sections 7.2.1 and 7.2.2, as applicable. SECTION 7.2.1. Application of Collections on Days That Are Not Settlement Dates. (a) The Collection Agent will, on any Business Day (other than a Settlement Date), from Collections received on such day: (i) first, remit to the Seller or its designee (for the account of the Seller and any interests that may then exist under the Parallel Sale Agreement) an aggregate amount equal to the product of (1) 100% minus the Bank Group Ownership Interest and (2) total Collections; and (ii) second, pay to the Seller for a Reinvestment Purchase an amount equal to the product of (1) the Bank Group Ownership Interest and (2) an amount equal to (A) total Collections less (B) the aggregate amount, calculated in reference to each Tranche Period, respectively, necessary to cause the total amount then set aside in accordance with this paragraph (ii) in respect of each Tranche Period to be equal to the Accrued Finance Charges in respect of such Tranche Period for the period from the beginning of such Tranche Period through the date of such determination. That portion of the Collections described in subparagraph (ii)(B) in respect of Accrued Finance Charges for each Tranche Period shall be set aside and held in trust by the Collection Agent for the benefit of the Bank Purchasers until, in the case of each Tranche -48- 56 Period, the last day of such Tranche Period and disbursement in accordance with Section 7.2.2(b) below. (b) Notwithstanding paragraph (ii) of subsection (a) above, if Reinvestment Purchases have ceased in accordance with Section 6.2(b), the Collection Agent will set aside and hold in trust for the benefit of the Bank Purchasers prior to application as provided in Section 7.2.2 the amount which would otherwise have been paid to the Seller pursuant to paragraph (ii) of subsection (a) above. SECTION 7.2.2. Application of Collections on Settlement Dates. The Collection Agent will, by 11:00 A.M. (New York City time) on each Settlement Date: (a) first, remit to the Seller or its designee (for the account of the Seller and any interests that may then exist under the Parallel Sale Agreement) an amount equal to the product of (i) 100% minus the Bank Group Ownership Interest and (ii) total Collections; and (b) second, from the amounts set aside in accordance with Section 7.2.1(a)(ii) or 7.2.1(b) above with respect to any such Tranche Period (as supplemented, to the extent necessary, by amounts available from the Bank Group Ownership Interest in the Collections), pay to the Administrative Agent, for the account of each Bank Purchaser in respect of each Tranche Period then ending, an amount equal to the Accrued Finance Charges for such Tranche Period; and (c) third, from the remaining Bank Group Ownership Interest in the Collections, (i) set aside and hold in trust, for the benefit of each Bank Purchaser in respect of each Tranche Period that is not then ending, an amount necessary to cause the total amount then set aside for such Tranche Period in accordance with Section 7.2.1(a)(ii) to be -49- 57 equal to the Accrued Finance Charges in respect of such Tranche Period for the period from the beginning of such Tranche Period through such Settlement Date, and (ii) then, (A) if a Reinvestment Suspension Period shall then be in effect, all remaining Collections will be paid to the Bank Purchasers as a return of Investment; or (B) if a Reinvestment Suspension Period shall not then be in effect, all remaining Collections shall be paid to the Seller for Reinvestment Purchases. SECTION 7.3. Adjustments due to Dilution, Etc. If on any day, with respect to any Receivable in which any Bank Purchaser has an Ownership Interest, (i) the representation and warranty contained in Section 9.1(f) is no longer true, (ii) the outstanding balance thereof is reduced, adjusted or cancelled as a result of defective, rejected or returned merchandise or services or in connection with a claim, dispute or offset asserted against such Receivable by an Obligor, (iii) the Seller, the Collection Agent or any Originator shall otherwise amend, modify or waive any term or condition of such Receivable or (iv) the Seller, the Collection Agent or any Originator shall otherwise suffer any Dilution to occur, then in each such case (x) the Seller shall be deemed to have received on such day a Collection of the outstanding balance (before giving effect to the related dilution event) of such Receivable and (y) the Ownership Interest of each Bank Purchaser shall thereupon be automatically adjusted by decreasing "ER" in the denominator of the fraction described in Section 3.1(a) by the amount of such deemed Collection. SECTION 7.4. Receivables Activity Report. The Collection Agent will provide the Administrative Agent (in sufficient copies for distribution to each Bank Purchaser) with a Receivables Activity Report covering the most recently completed Tranche Period no later than 15 days following each Monthly -50- 58 Settlement Date; provided that, the Administrative Agent may at any time request, and the Collection Agent shall thereafter provide, a Receivables Activity Report (i) on a weekly basis during any Reinvestment Suspension Period, and (ii) promptly following each Settlement Date if an Event of Termination shall have occurred and then be continuing. SECTION 7.5. Payments Generally. Notwithstanding anything herein to the contrary, no reduction in Investment shall be considered effected, and no amount of Purchase Discount, Purchase Premium, Collection Agent Fee or other amount due hereunder shall be considered paid by any distribution to the extent that at any time all or a portion of such distribution is rescinded or must otherwise be returned for any reason. ARTICLE VIII: ADMINISTRATIVE AGENT AND COLLECTION AGENT SECTION 8.1. Appointment of Administrative Agent. (a) Each Bank Purchaser hereby appoints and authorizes CIBC as its Administrative Agent to take such action as agent on behalf of such Bank Purchaser and to exercise such powers under this Agreement and any of the other Sale Documents as are delegated to the Administrative Agent by the terms hereof or thereof, together with such powers as are reasonably incidental thereto. The Administrative Agent is responsible for fulfilling all duties expressly assigned to it in this Agreement or any of the other Sale Documents and shall serve as nominee "secured party", for the benefit of each of the Bank Purchasers and the Administrative Agent hereunder, on all Uniform Commercial Code and similar filings and related collateral documentation. Each Bank Purchaser has granted to the Administrative Agent the authority to take all actions necessary to assure the Seller's compliance with the terms of this Agreement and to take all actions required or permitted to be performed by such Bank Purchaser under this Agreement. The Administrative Agent may, prior to taking any action hereunder or exercising any discretion hereunder, request instructions from the Majority Bank Purchasers (or, if applicable, all Bank Purchasers) with respect thereto and shall be entitled to refrain from taking such action or exercising such discretion until it shall have received instructions from such Bank Purchasers, and the Administrative Agent shall not incur any -51- 59 liability to any Person by reason of so refraining. As to any matters not expressly provided for by this Agreement, the Administrative Agent shall not be required to exercise any discretion or take any action, but shall be fully protected in so acting or refraining from acting upon the instructions of the Majority Bank Purchasers and such instructions shall be binding upon all Bank Purchasers. Without limiting the generality of the foregoing, no Person shall have any right of action whatsoever against the Administrative Agent as a result of the Administrative Agent acting or refraining from acting hereunder in accordance with the instructions of the Majority Bank Purchasers (or, where the context expressly requires, all Bank Purchasers). The Administrative Agent shall not be required to take any action hereunder or in connection herewith which exposes the Administrative Agent to personal liability or which is contrary to this Agreement or applicable law. The Administrative Agent agrees to give to each Bank Purchaser prompt notice of each notice given to it by the Seller, the Collection Agent or Interface pursuant to the terms of this Agreement. (b) Neither the Administrative Agent, nor any of its directors, officers, agents or employees, shall be liable for any action taken or omitted to be taken by it or them under or in connection with this Agreement, except for its or their own gross negligence or willful misconduct. Without limitation of the generality of the foregoing, (i) the Administrative Agent may treat the payee in respect of any Ownership Interest as the holder thereof until it receives advice satisfactory to it that such Ownership Interest has been assigned to another payee; (ii) the Administrative Agent may consult with legal counsel (including counsel for the Seller or Interface), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (iii) the Administrative Agent does not make any warranty or representation to any Bank Purchaser, nor shall it be responsible to any Bank Purchaser for any statements, warranties or representations (whether written or oral) made in or in connection with this Agreement; (iv) the Administrative Agent shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Agreement or any other Sale Document on the -52- 60 part of the Seller or the Collection Agent or to inspect the property (including the books and records) of the Seller; (v) the Administrative Agent shall not be responsible to any Bank Purchaser for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement, any other Sale Document or any other instrument or document furnished pursuant hereto or in connection herewith; and (vi) the Administrative Agent shall not incur any liability under or in respect of this Agreement or any other Sale Document by acting upon any notice, consent, certificate or other instrument or writing (which may be by telecopier, telegram, cable or telex) believed by it to be genuine and signed or sent by the proper party or parties. (c) With respect to its Commitment, the Investment made by it and the Ownership Interest held by it, the Bank Purchaser that is acting as Administrative Agent hereunder shall have the same rights and powers under this Agreement as any other Bank Purchaser and may exercise the same as though it were not the Administrative Agent; and the term "Bank Purchaser" and "Bank Purchasers" shall, unless otherwise expressly indicated, include the Person that is acting as Administrative Agent in its individual capacity. The Bank Purchaser that is then acting as the Administrative Agent hereunder, and its affiliates, may accept deposits from, lend money to, act as trustee under indentures of, and generally engage in any kind of business with, the Seller, Interface or any of their subsidiaries, all as if such Person were not the Administrative Agent and without any duty to account therefor to the Bank Purchasers. (d) Each Bank Purchaser acknowledges that it has, independently and without reliance upon either the Administrative Agent or any other Bank Purchaser and based on such documents and information as it has deemed appropriate, made its own purchase analysis and decision to enter into this Agreement. Each Bank Purchaser also acknowledges that it will, independently and without reliance upon the Administrative Agent or any other Bank Purchaser and based on such documents and information as it shall deem appropriate at the time, continue to make its own decisions in taking or not taking action under this Agreement. -53- 61 (e) The Bank Purchasers agree to indemnify the Administrative Agent (to the extent not reimbursed by the Seller) according to the Bank Purchasers' respective Pro Rata Shares from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against the Administrative Agent in any way relating to or arising out of this Agreement or any other Sale Document or any action taken or omitted by the Administrative Agent under this Agreement, provided that no Bank Purchaser shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Administrative Agent's gross negligence or willful misconduct. Without limitation of the foregoing, each Bank Purchaser agrees to reimburse the Administrative Agent promptly upon demand for its Pro Rata Share of any out-of-pocket expenses (including counsel fees) incurred by the Administrative Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, to the extent that the Administrative Agent is not reimbursed for such expenses by the Seller. (f) The Administrative Agent may resign at any time by giving written notice thereof to the Bank Purchasers and the Seller and may be removed at any time with or without cause by the Majority Bank Purchasers. Upon any such resignation or removal, the Majority Bank Purchasers shall have the right to appoint a successor for the Administrative Agent. If no successor Administrative Agent shall have been so appointed by the Majority Bank Purchasers, and shall have accepted such appointment, within 30 days after the retiring Administrative Agent's giving of notice of resignation or the Majority Bank Purchasers' removal of the retiring Administrative Agent, then the retiring Administrative Agent may, on behalf of the Bank Purchasers, appoint a successor Administrative Agent, which shall be a commercial bank organized under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $50,000,000. Upon the acceptance of any appointment as the Administrative Agent hereunder by a -54- 62 successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations under this Agreement. After any retiring Administrative Agent's resignation or removal hereunder as Administrative Agent, the provisions of this Section 8.1 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was the Administrative Agent under this Agreement. SECTION 8.2. Appointment of Collection Agent. (a) The Bank Purchasers severally and collectively appoint Interface as their Collection Agent and the Collection Agent accepts such appointment. The Collection Agent shall be responsible for collecting the Receivables, tracking, holding and remitting the Collections and fulfilling all other duties expressly assigned to it in this Agreement. The Collection Agent shall hold all documents, instruments and records relating to the Receivables for the benefit of the Bank Purchasers and the Administrative Agent, to the extent of their respective interests therein. Interface may delegate its duties under this Agreement as Collection Agent in respect of any Receivables to the Originator of such Receivables and, to the extent such delegation occurs, references to the Collection Agent shall be deemed to include references to such Originator. The delegation by Interface of its duties as Collection Agent shall not relieve Interface of any of its obligations as Collection Agent hereunder. (b) The Collection Agent shall, on each day on which Collections are received by it, set aside and hold in trust for the Bank Purchasers, segregated from other funds of the Collection Agent, the Bank Purchasers' share of such Collections. (c) The Bank Purchasers severally and collectively grant the Collection Agent the authority necessary to carry out its duties under this Agreement for so long as it is acting as Collection Agent. -55- 63 (d) The Bank Purchasers severally and collectively grant, to the extent each Bank Purchaser has authority to make such grant, to the Collection Agent, for so long as it is acting in that capacity, an irrevocable power of attorney to endorse all drafts, checks and other forms of payment made out in any Transaction Party's name and to settle, adjust and forgive any Receivable, subject to the provisions of Section 10.3(b) hereof. Upon any replacement of the Collection Agent, such power of attorney in favor of the replaced Collection Agent will terminate and have no further force or effect. (e) The Collection Agent shall exercise reasonable care in the performance of its duties under this Agreement and shall use the same degree of care and skill which it applies to its own property. If and to the extent that any Originator is performing functions of the Collection Agent, Interface agrees to cause such Originator to exercise substantially the same degree of care and skill which Interface is required to apply hereunder. SECTION 8.2.1. Replacement of Collection Agent; Notification of Obligors. (a) At any time following the occurrence of an Event of Termination, the Administrative Agent, if directed to do so by the Majority Bank Purchasers, may remove Interface (or any successor thereto in such capacity) as the Collection Agent (whereupon all authority delegated by Interface (or such successor) to any Originator or any other Person in respect of the responsibilities of the Collection Agent shall immediately terminate), appoint a new Collection Agent, take control of the Lock-Boxes (by delivering to the Lock-Box Banks notice in substantially the form of Exhibit D), notify Obligors of the Bank Group Ownership Interest in the Receivables and exercise all other incidences of ownership in the Receivables. (b) If Interface is removed as Collection Agent, Interface and the Seller shall (i) transfer to the Administrative Agent or any successor servicer designated by the Administrative Agent all records, correspondence and documents relating to the collection, administration or monitoring of the Receivables that may from time to time be requested by the Administrative Agent or such successor and (ii) permit such Persons to have access to, -56- 64 and to copy, all software used by Interface or the Seller in the collection, administration or monitoring of the Receivables. Interface and the Seller each hereby grant to the Bank Purchasers and the Administrative Agent, for use by any Collection Agent that may be designated hereunder following the removal of Interface as Collection Agent, a non-exclusive license to use all computer software now or hereafter being utilized by it in connection with the collection, administration or monitoring of the Receivables; provided that use by any such successor Collection Agent of such computer software shall be limited to that reasonably necessary to collect, administer or monitor the Receivables. Such license shall expire upon the later to occur of the reduction to zero of the Bank Group Ownership Interest and the termination of this Agreement. In the case of software that is licensed by, or otherwise made available to, Interface or the Seller from or by any third party, Interface or the Seller, as applicable, shall have obtained such consents and otherwise taken all actions necessary in order to enable any Collection Agent hereunder to succeed to all rights of Interface and the Seller to the quiet use and enjoyment of such software for the purpose of discharging its obligations under or in connection with the Sale Documents. ARTICLE IX: REPRESENTATIONS AND WARRANTIES SECTION 9.1. Representations and Warranties of the Seller and the Collection Agent. The Seller makes, and where applicable the Collection Agent (with respect to itself) makes, the following representations and warranties to the Bank Purchasers and the Administrative Agent on the date hereof and on the date of each Purchase hereunder: (a) Each of the Seller and the Collection Agent is a corporation duly incorporated, validly existing and in good standing under the laws of the jurisdiction of its incorporation and is duly qualified in good standing as a foreign corporation in each jurisdiction where the failure to be so qualified could materially adversely affect its ability to perform its obligations hereunder. (b) The execution, delivery and performance by the Seller and the Collection Agent of the Sale Documents, and the -57- 65 Seller's use of the proceeds of the Purchases, are within the Seller's and the Collection Agent's respective corporate powers, have been duly authorized by all necessary corporate action, do not contravene (i) the Seller's or the Collection Agent's respective charters or by-laws or (ii) law or any contractual restriction binding on or affecting the Seller or the Collection Agent, and do not result in or require the creation of any lien (other than pursuant hereto) upon or with respect to any of its properties; and no transaction contemplated hereby requires compliance with any bulk sales act or similar law. (c) No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for (i) the due execution, delivery and performance by the Seller or the Collection Agent of the Sale Documents, (ii) the perfection, or the exercise by the Bank Purchasers and the Administrative Agent, of their respective rights and remedies under the Sale Documents, or (iii) the perfection, or the exercise by the Seller, of the Seller's rights and remedies under any Transfer Agreement or the related Consent and Acknowledgment, except in each case for the filing of the financing statements referred to in Section 6.4.4. (d) Each Sale Document is (or, when executed and delivered by each Transaction Party that is named as party thereto, will be) the legal, valid and binding obligation of each Transaction Party that is named as party thereto (whether originally or upon and as a result of the effectiveness of any Assumption Agreement), enforceable in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency or other similar laws or by general principles of equity. (e) There is no pending or threatened action or proceeding affecting the Seller or the Collection Agent or any of their respective subsidiaries before any court, governmental agency or arbitrator which may materially adversely affect (i) the financial condition or operations of the Seller or (ii) the ability of the Seller or the Collection Agent to perform its obligations under the Sale Documents, or which could affect the legality, validity or enforceability of any Sale Document or of the Ownership Interest of any Bank Purchaser. -58- 66 (f) The Seller is the legal and beneficial owner of the Receivables free and clear of any lien, security interest, claim or encumbrance, except Permitted Liens; upon each Purchase, each Bank Purchaser will acquire a valid and perfected first priority ownership interest (or, if applicable as contemplated in Section 13.7 or Section 13.8, a valid and perfected first priority security interest) in the Receivables then existing or thereafter arising and in the Related Rights and the Collections with respect thereto, free and clear of any lien, security interest, claim or encumbrance, except Permitted Liens. (g) The information provided by the Seller to the Collection Agent for use in each Receivables Activity Report prepared under Section 7.4 and all information and Sale Documents furnished or to be furnished at any time by the Seller or the Collection Agent to the Administrative Agent or any Bank Purchaser in connection with this Agreement is or will be accurate in all material respects as of its date, and no such document will contain any untrue statement of a material fact or will omit to state a material fact. (h) Each Receivables Activity Report prepared by the Collection Agent under Section 7.4 will be accurate in all material respects as of its date, and no such document will contain any untrue statement of a material fact or will omit to state a material fact. (i) The chief place of business and chief executive office of each Transaction Party and the office where each Transaction Party keeps its records concerning the Receivables are located at the respective addresses specified on Schedule D hereto. (j) A complete and accurate list of the names and addresses of the Lock-Box Banks, together with the account numbers of the Lock-Boxes, is set forth in Schedule C hereto (with such additions after the date hereof of other Lock-Box Banks and/or with such other Lock-Boxes as have been notified to the Administrative Agent and in respect of which, in each case, a Lock-Box Agreement in the form of Exhibit E shall have been duly executed by each of the appropriate Transaction Party and such Lock-Box Bank). -59- 67 (k) The balance sheets of the Collection Agent and its subsidiaries as at December 31, 1994, and the related statements of income and retained earnings of the Collection Agent and its subsidiaries for the fiscal year then ended, copies of which have been furnished to the Administrative Agent, fairly present the financial condition of the Collection Agent and its subsidiaries as at such date and the results of the operations of the Collection Agent and its subsidiaries for the period ended on such date, all in accordance with generally accepted accounting principles consistently applied, and since December 31, 1994, there has been no material adverse change in such condition or operations. The Seller further represents that since December 31, 1994, there has been no material adverse change in the collectibility of the Receivables taken as a whole. (l) The Seller is treating the conveyance of each Ownership Interest in the Receivables, the Related Rights and the Collections under this Agreement as a sale for purposes of generally accepted accounting principles. (m) The Seller does not sponsor, maintain or contribute to any Plan. Each Plan is in compliance with all of the applicable material provisions of ERISA and each Plan intended to be qualified under Section 401(a) of the Code is so qualified. No Plan has incurred an "accumulated funding deficiency" (within the meaning of Section 302 of ERISA or Section 412 of the Code) whether or not waived. Neither the Collection Agent nor any ERISA Affiliate (i) has incurred or expects to incur any liability under Title IV of ERISA, with respect to any Plan, which could give rise to a lien in favor of the PBGC, other than liability for the payment of premiums, all of which have been timely paid when due in accordance with Section 4007 of ERISA, (ii) has incurred or expects to incur any withdrawal liability, within the meaning of Section 4201 of ERISA, (iii) is subject to any lien under Section 412(n) of the Code or Sections 302(f) or 4068 of ERISA or arising out of any action brought under Sections 4070 or 4301 of ERISA, or (iv) is required to provide security to a Plan under Section 401(a)(29) of the Code. The PBGC has not instituted proceedings to terminate any Plan or to appoint a trustee or administrator of any such Plan and no circumstances exist that constitute grounds under Section 4042 of ERISA to commence any such proceedings. -60- 68 (n) Prior to each transfer pursuant to any Transfer Agreement, the applicable Originator thereunder shall be the legal and beneficial owner of the Receivables sold by it to the Seller thereunder, free and clear of any lien, security interest or encumbrance, and such Transfer Agreement is effective to, and shall, transfer to the Seller (and the Seller shall acquire) from such Originator all right, title and interest of such Originator in each such Receivable, and all Related Rights and Collections with respect thereto, free and clear of any lien, security interest or encumbrance. (o) With respect to each Receivable sold or purported to be sold by an Originator under any Transfer Agreement, the Seller shall have given to such Originator at the time of such sale reasonably equivalent value in consideration of the transfer of such Receivable, and each such transfer shall not have been made for or on account of an antecedent debt owed by such Originator to the Seller and no such transfer is or may be voidable under any Section of the Bankruptcy Code. Each Originator under a Transfer Agreement is treating the conveyance of receivables thereunder as a sale for purposes of generally accepted accounting principles. (p) Except as described in Schedule E, no Transaction Party has any trade name, fictitious name, assumed name or "doing business as" name. (q) Neither the Seller nor any other Transaction Party is (i) an "investment company" within the meaning of the Investment Company Act of 1940, as amended from time to time, or any successor statute, or (ii) a "holding company" or a "subsidiary company" or an "affiliate" of a "holding company" within the meaning of the Public Utility Holding Company Act of 1935, as amended from time to time, or any successor statute. Neither the Seller nor any other Transaction Party owns, controls, operates or manages real estate fixtures or personal property in connection with or to facilitate the production, generation, transmission, delivery or furnishing of electricity for light, heat or power, for public use except where electricity is generated on or distributed by the producer through private property alone solely for its own use or the use of its tenants and not for sale to others. -61- 69 (r) The Seller and each Originator, both prior to and after giving effect to the Initial Purchase hereunder, and after giving effect to each Purchase, as well as each transfer under any Transfer Agreement, (i) is not "insolvent" (as such term is defined in ss.101(31)(A) of the Bankruptcy Code); (ii) is able to pay its debts as they become due; and (iii) does not have unreasonably small capital for the business in which it is engaged or for any business or transaction in which it is about to engage. (s) All Obligors have been instructed to remit payments for Receivables to a Lock-Box in respect of which a Lock-Box Agreement in the form of Exhibit E has been duly executed and delivered. (t) A true, accurate and complete copy of the Credit and Collection Policy of each Originator as of the date of this Agreement is attached hereto in Schedule B, and in each case such Credit and Collection Policy has not been amended, restated, supplemented or otherwise modified since such respective date without the prior written consent of the Majority Bank Purchasers and the Administrative Agent. (u) All of the outstanding capital stock of the Seller and each Originator is directly or indirectly owned of record by Interface, all of which capital stock is fully paid and nonassessable. (v) At all times from and after the earlier to occur of the Initial Purchase hereunder and the "Initial Purchase" under the Parallel Sale Agreement, the Seller has a net worth, as determined in accordance with generally accepted accounting principles, in an amount not less than three percent (3%) of the outstanding balance of the Receivables Pool. SECTION 9.2. Representations and Warranties of Interface. In support of the obligations of Interface under Section 10.4, and the other covenants of Interface set forth in Section 10.5, Interface makes, with respect to itself, the following representations and warranties to the Bank Purchasers on the date hereof and on the date of each Purchase hereunder: -62- 70 (a) It is a corporation duly incorporated, validly existing and in good standing under the laws of the jurisdiction of its incorporation and is duly qualified in good standing as a foreign corporation in each jurisdiction where the failure to be so qualified could materially adversely affect its ability to perform its obligations hereunder. (b) The execution, delivery and performance by Interface of this Agreement are within the Interface's corporate powers, have been duly authorized by all necessary corporate action, and do not contravene (i) Interface's charter or by-laws or (ii) law or any contractual restriction binding on or affecting Interface. (c) No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution, delivery and performance by Interface of this Agreement. (d) This Agreement, when executed and delivered by Interface, will be the legal, valid and binding obligation of Interface, enforceable in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency or other similar laws or by general principles of equity. (e) There is no pending or threatened action or proceeding affecting Interface or any of its subsidiaries before any court, governmental agency or arbitrator which may materially adversely affect its ability to perform its obligations under this Agreement, or which could affect the legality, validity or enforceability of this Agreement as against Interface. (f) Interface is not (i) an "investment company" within the meaning of the Investment Company Act of 1940, as amended from time to time, or any successor statute, or (ii) a "holding company" or a "subsidiary company" or an "affiliate" of a "holding company" within the meaning of the Public Utility Holding Company Act of 1935, as amended from time to time, or any successor statute. Interface does not own, control, operate or manage real estate fixtures or personal property in connection with or to facilitate the production, generation, transmission, -63- 71 delivery or furnishing of electricity for light, heat or power, for public use except where electricity is generated on or distributed by the producer through private property alone solely for its own use or the use of its tenants and not for sale to others. ARTICLE X: COVENANTS SECTION 10.1. Affirmative Covenants of the Seller and the Collection Agent. Until the Bank Group Ownership Interest is reduced to zero as described in Section 3.1(c) and no further Purchases are to be made, the Seller will, and the Collection Agent (with respect to itself) will, unless the Majority Bank Purchasers have otherwise consented in writing: (a) Comply with all applicable laws, rules, regulations and orders with respect to it, its business and properties and all Receivables, the Related Rights and Collections the failure to comply with which may materially adversely affect its financial condition or operations, or its ability to perform its obligations under the Sale Documents, or which may affect the legality, validity or enforceability of any Sale Document or of any Ownership Interest. (b) Maintain its corporate existence in the jurisdic tion of its incorporation, and qualify and remain qualified in good standing as a foreign corporation in each jurisdiction where the failure to be so qualified could materially adversely affect its ability to perform its obligations hereunder. (c) At any reasonable time, upon prior notice to such Person, permit any Bank Purchaser or Agent or their respective agents or representatives to visit and inspect any of its properties, to examine its books of account and other records and files relating to Receivables (including, without limitation, computer tapes and disks) and to discuss its affairs, business, finances and accounts with its officers and employees. (d) Maintain and implement administrative and operating procedures (including, without limitation, an ability to recreate records evidencing Receivables in the event of the -64- 72 destruction of the originals thereof), and keep and maintain all records and other information, reasonably necessary, or in any material respect advisable, for the collection of Receivables (including, without limitation, records reasonably adequate to permit the daily identification of Receivables and all Collections and adjustments to Receivables). (e) At its expense timely and fully perform and comply with all material provisions and covenants required to be observed by the Seller under the contracts related to the Receivables. (f) Keep its place of business or chief executive office (if it has more than one place of business) and the office where it keeps the originals of its records concerning the Receivables at the address therefor listed in Schedule D or, upon 30 days' prior written notice to the Administrative Agent, at any other location in a jurisdiction where all UCC financing or continuation statements, or amendments thereto, and such other instruments and documents, that may be necessary or desirable, or that the Administrative Agent may reasonably request, to perfect, protect or evidence the Ownership Interest of each Bank Purchaser, have been filed. (g) Comply in all material respects with the applicable Credit and Collection Policy in regard to each Receivable and any contract related to such Receivable. (h) Instruct all Obligors to cause all Collections to be deposited directly into a Lock-Box. (i) File and maintain in effect all filings, and take all such other actions, as may be necessary to protect the validity and perfection of (i) the Ownership Interests of the Bank Purchasers and (ii) the ownership interest of each Originator under a Transfer Agreement in the receivables purportedly transferred thereunder. (j) Cause each Plan to comply in all material respects with all applicable provisions of ERISA. (k) Treat the conveyance of each Ownership Interest -65- 73 in the Receivables, the Related Rights and the Collections under this Agreement as a sale for purposes of generally accepted accounting principles. (l) In the case of the Seller, at all times from and after the earlier to occur of the Initial Purchase hereunder and the "Initial Purchase" under the Parallel Sale Agreement, have a net worth, as determined in accordance with generally accepted accounting principles, in an amount not less than three percent (3%) of the outstanding balance of the Receivables Pool at such time. (m) In the case of the Seller, give to each transferor under each Transfer Agreement to which it is a party reasonably equivalent value in consideration of the transfer of each Receivable thereunder. (n) In the case of the Seller, require each transferor under a Transfer Agreement to hold in trust and promptly turn over to the Collection Agent any Collections received by such transferor on the Seller's behalf. (o) In the case of the Seller, assign to the Bank Purchasers, consistent with the Consent and Acknowledgment, all rights of the Seller under each Transfer Agreement and the Seller agrees that (i) the Bank Purchasers shall be a third party beneficiary of the Seller's rights under such Transfer Agreement, (ii) the Seller will enforce its rights as transferee under such Transfer Agreement on behalf of the Bank Purchasers and (iii) the Bank Purchasers shall be entitled to enforce such rights against the applicable transferor as if the Bank Purchasers had been party to such Transfer Agreement. SECTION 10.2. Reporting Requirements of the Seller and the Collection Agent. Until the Bank Group Ownership Interest is reduced to zero as described in Section 3.1(c) and no further Purchases are to be made, the Seller and the Collection Agent will, unless the Majority Bank Purchasers shall otherwise consent in writing, furnish to the Administrative Agent (or, in the case of clause (e) below, assist the Collection Agent in furnishing to the Administrative Agent) (in sufficient copies for distribution by the Administrative Agent to the Bank Purchasers): -66- 74 (a) as soon as available and in any event within 60 days after the end of each of the first three quarters of each fiscal year of Interface, balance sheets of Interface and its subsidiaries as of the end of such quarter and statements of income and retained earnings of Interface and its subsidiaries for the period commencing at the end of the previous fiscal year and ending with the end of such quarter, certified by the chief financial officer of Interface and prepared on a consolidated and a "line of business" basis; (b) as soon as available and in any event within 120 days after the end of each fiscal year of Interface, a copy of the annual report for such year for Interface and its subsidiaries, containing audited financial statements for such year certified in a manner acceptable to the Administrative Agent by BDO Seidman or other independent public accountants acceptable to the Administrative Agent and prepared on a consolidated and a "line of business" basis; (c) promptly after the sending or filing thereof, copies of all reports which Interface sends to the holders, as such, of any of its securities (as a class), and copies of all regular or periodic reports (including all reports filed on Form 10-K, 10-Q and 8-K and all other reports required to be filed under Section 13 or Section 15(d) of the Exchange Act) and all registration statements (without exhibits) which Interface or any subsidiary files with the Securities and Exchange Commission or any national securities exchange; (d) (i) promptly and in any event within 30 Business Days after Interface or any ERISA Affiliate knows or has reason to know that a "reportable event" (as defined in Section 4043 of ERISA) has occurred with respect to any Plan, a statement of the chief financial officer of Interface setting forth details as to such reportable event and the action that Interface or an ERISA Affiliate proposes to take with respect thereto, together with a copy of the notice of such reportable event, if any, given to the PBGC, the Internal Revenue Service or the Department of Labor; (ii) promptly and in any event within 10 Business Days after receipt thereof, a copy of any notice Interface or any ERISA Affiliate may receive from the PBGC relating to the intention of the PBGC to terminate any Plan or to appoint a trustee to -67- 75 administer any such Plan; (iii) promptly and in any event within 10 Business Days after a filing with the PBGC pursuant to Section 412(n) of the Code of a notice of failure to make a required installment or other payment with respect to a Plan, a statement of the chief financial officer of Interface setting forth details as to such failure and the action that Interface or an ERISA Affiliate proposes to take with respect thereto, together with a copy of such notice given to the PBGC; and (iv) promptly and in any event within 30 Business Days after receipt thereof by Interface or any ERISA Affiliate from the sponsor of a multiemployer plan (as defined in Section 3(37) of ERISA), a copy of each notice received by Interface or any ERISA Affiliate concerning the imposition of withdrawal liability or a determination that a multiemployer plan is, or is expected to be, terminated or reorganized; (e) the Receivables Activity Report as required under Section 7.4; (f) forthwith upon the occurrence of any of the following, notice of (i) the occurrence of any Event of Termination, (ii) any change in the credit rating assigned by S&P or Moody's to any indebtedness of any Transaction Party, and (iii) any change in any Credit and Collection Policy; and (g) such other information, documents, records or reports respecting the Receivables or the condition or operations, financial or otherwise, of the Seller, the Collection Agent, the Originators or any of their respective subsidiaries as any Bank Purchaser or the Administrative Agent may from time to time reasonably request. SECTION 10.3. Negative Covenants of the Seller and the Collection Agent. Until the Bank Group Ownership Interest is reduced to zero as described in Section 3.1(c) and no further Purchases are to be made, neither the Seller nor the Collection Agent will, unless the Majority Bank Purchasers otherwise consent in writing: (a) Except as provided herein, sell, assign (by operation of law or otherwise) or otherwise dispose of, or create or suffer to exist any security interest, lien or encumbrance -68- 76 (other than any Permitted Lien) upon or with respect to, (i) in the case of the Seller, any of its assets, properties or interests in property, including, without limitation, any of the Receivables, the Related Rights, the Collections, or any Lock-Box, or assign any right to receive income in respect thereof, and (ii) in the case of the Collection Agent, any of the Receivables, the Related Rights, the Collections or any Lock-Box, or assign any right to receive income in respect thereof. (b) Amend or otherwise modify the terms of any Receivable that is (or shall have been at any time) an Eligible Receivable, or amend, modify or waive any term or condition of any contract related thereto, except in a manner consistent with the applicable Credit and Collection Policy and other ordinary course practices in effect on the date hereof. (c) Make any change in the character of the business of the Seller, any material change in the character of the business of the Collection Agent, or any change in any Credit and Collection Policy which change in any of the foregoing cases would be reasonably likely to materially impair the collectibility of any Receivable. (d) Add or terminate any bank as a Lock-Box Bank from those listed on Schedule C hereto, or make any change in its instructions to Obligors regarding payments to be made on any Receivable or payments to be made to any Lock-Box Bank, unless the Administrative Agent shall have received notice of such addition, termination or change and, with respect to the addition of any Lock-Box Bank, shall have received a Lock-Box Bank Agreement in substantially the form of Exhibit E executed by the Seller, the applicable Originator, and such Lock-Box Bank. (e) Deposit or otherwise credit, or cause or permit to be so deposited or credited, to any Lock-Box cash or cash proceeds other than Collections or other proceeds of Receivables; provided, it is understood that from time to time an obligor may mistakenly cause a remittance that is not a Collection to be directed to a Lock-Box, and in such case the Seller shall, promptly following its becoming aware of such mistake, so advise the Collection Agent. -69- 77 (f) (i) In the case of the Seller or the Collection Agent, permit any accumulated funding deficiency (as defined in Section 302 of ERISA or Section 412 of the Code) to exist with respect to any Plan, whether or not waived, (ii) fail, or permit any ERISA Affiliate to fail, to pay any required installment or any other payment required under Section 412 of the Code with respect to any Plan on or before the due date for such installment or other payment, (iii) terminate, or permit any ERISA Affiliate to terminate, any Plan which would result in any liability of the Collection Agent or any ERISA Affiliate under Title IV of ERISA, (iv) take any action or fail to take any action, or permit any ERISA Affiliate to take any action or fail to take any action, with respect to any multiemployer plan (as defined in Section 3(37) of ERISA) that will result in withdrawal liability of the Seller or any ERISA Affiliate, or (v) amend, or permit any ERISA Affiliate to amend, a Plan resulting in an increase in liabilities such that the Seller or any ERISA Affiliate is required to provide security to such Plan under Section 401(a)(29) of the Code. (g) In the case of the Seller, (i) enter into or be a party to any agreement or instrument other than this Agreement, the other Sale Documents and the Subordinated Note, and such other agreements ("Operating Agreements") in the ordinary course of its limited business affairs as shall be necessary to effect the purposes of Section 10.4, (ii) amend, modify or waive any provision in any Sale Document, the Subordinated Note or (if any Affiliate of the Seller shall be party thereto) any Operating Agreement, or give any approval or consent of permission provided for in any thereof; provided that, in the case of the Parallel Sale Agreement, the Seller may agree to amend or modify such agreement without the prior written consent of any party hereto to the extent that such amendment or modification (x) corresponds and conforms to an amendment then being made to this Agreement, (y) relates to any reduction of the pricing applicable to the Seller thereunder or (z) permits or consents to the assignment by any financial institution party thereto of all or any portion of its interest thereunder, or (iii) unless thirty (30) days' prior written notice thereof shall have been given by the Seller to the Administrative Agent, amend, modify or waive any provision in any other Operating Agreement; provided that, upon any such notice, the Administrative Agent may require that, prior to giving effect -70- 78 to any such amendment, modification or waiver, the Seller shall have provided to the Bank Purchasers and the Administrative Agent (x) an opinion of counsel affirming that such action shall not adversely affect the conclusions set forth in the opinion required to be delivered under Section 6.4(h)(ii) and (y) a certificate of a senior officer of the Seller certifying that, after giving effect to such action, no Event of Termination shall have occurred and then be continuing. (h) In the case of the Seller, engage in any business or enterprise or enter into any transaction other than as contemplated by this Agreement and the other Sale Documents. (i) Amend the Certificate of Incorporation or By-Laws of the Seller. (j) In the case of the Seller, create, incur, guarantee, assume or suffer to exist any indebtedness or other liabilities, whether direct or contingent, other than (i) as a result of the indorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business, (ii) the incurrence of obligations under this Agreement, the Parallel Sale Agreement, the Subordinated Note and the Transfer Agreements, (iii) the incurrence of operating expenses in the ordinary course of business of the type otherwise contemplated in this Agreement and (iv) the issuance of a guaranty in favor of the transferees of interests in receivables originated by Interface Europe Ltd. and transferred to such transferees by a special purpose corporation ("UKSPC"), provided that such guaranty (A) is issued contemporaneously with the issuance by the UKSPC of a guaranty in favor of the Bank Purchasers and SPARC, (B) may not be drawn upon at any time prior to the reduction to zero of the Bank Group Ownership Interest and the termination of this Agreement, and (C) is limited in the amount of guaranteed obligations and subordinated on terms and conditions satisfactory to the Administrative Agent. (k) In the case of the Seller, merge or consolidate with any other Person, or purchase, lease or otherwise acquire all or substantially all of the property or assets of any Person. -71- 79 (l) In the case of the Seller, permit the principal amount evidenced by the Subordinated Note to exceed at any time an amount equal to the sum of (i) the Reserve at such time, (ii) the "Reserve" then in effect under the Parallel Sale Agreement, and (iii) the aggregate face amount of all Receivables then outstanding that are neither Defaulted Receivables nor Eligible Receivables. SECTION 10.4. Covenants of the Seller and Interface Relating to Separate Legal Identity. The Seller and Interface hereby acknowledge that the Bank Purchasers are entering into the transactions contemplated by this Agreement in reliance upon the Seller's identity as a separate legal entity from Interface, each Originator and each Originator Entity (as defined below). Therefore, from and after the date of execution and delivery of this Agreement and so long as this Agreement is in effect, the Seller and Interface shall take all reasonable steps including, without limitation, all steps that the Administrative Agent may from time to time reasonably request to maintain the Seller's identity as a separate legal entity and to make it manifest to third parties that the Seller is an entity with assets and liabilities distinct from those of Interface, each Originator and any Affiliates (other than the Seller) thereof (each of Interface, each Originator and each of their respective Affiliates (other than the Seller) shall be referred to herein as an "Originator Entity"), and not just a division of any Originator Entity. Without limiting the generality of the foregoing and in addition to and consistent with the covenant set forth in Section 10.1(b) above, the Seller shall (and Interface shall take all actions necessary to permit or enable the Seller to): (i) conduct its own business in its own name and require that all full-time employees of the Seller identify themselves as such and not as employees of any Originator Entity (including, without limitation, by means of providing such employees with business or identification cards identifying such employees as the Seller's employees); (ii) compensate all employees, consultants and agents directly, from the Seller's bank accounts, for services provided to the Seller by such employees, consultants and -72- 80 agents and, to the extent any employee, consultant or agent of the Seller is also an employee, consultant or agent of any Originator Entity, allocate the compensation of such employee, consultant or agent between the Seller and such Originator Entity on a basis which reflects the services rendered to the Seller and such Originator Entity; (iii) clearly identify its offices (by signage or otherwise) as its offices, and all such offices will occupy space that is separate and distinct from any space occupied by any Originator Entity even if such office space is leased or subleased from, or is on or near premises occupied by any Originator Entity; (iv) have a separate telephone number, which will be answered only in its name and separate checks in its own name; (v) conduct all transactions with any Originator Entity strictly on an arm's-length basis, allocate all overhead expenses (including, without limitation, telephone and other utility charges) for items shared between the Seller and any Originator Entity on the basis of actual use to the extent practicable and, to the extent such allocation is not practicable, on a basis reasonably related to actual use; (vi) at all times have at least one member of its Board of Directors who is not (A) a director, officer or employee of any Originator Entity, (B) a person related to any officer or director of any Originator Entity, (C) a holder (directly or indirectly) of more than 5% of any voting securities of any Originator Entity, or (D) a person related to a holder (directly or indirectly) of more than 5% of any voting securities of any Originator Entity; (vii) observe all corporate formalities as a distinct entity, and ensure that all corporate actions are duly authorized by unanimous vote of its Board of Directors; (viii) maintain the Seller's books and records separate from those of any Originator Entity; -73- 81 (ix) prepare its financial statements separately from those of other Originator Entities and insure that any consolidated financial statements of any Originator Entity that include the Seller have detailed notes clearly stating that the Seller is a separate corporate entity and that its assets will be available first and foremost to satisfy the claims of its creditors; (x) except as herein specifically otherwise provided, not commingle funds or other assets of the Seller with those of any Originator Entity and not maintain bank accounts or other depository accounts to which any Originator Entity is an account party, into which any Originator Entity makes deposits or from which any Originator Entity has the power to make withdrawals; (xi) not permit any Originator Entity to pay any of the Seller's operating expenses (except pursuant to allocation arrangements that comply with the requirements of subparagraph (v) above; and (xii) take such other actions as are necessary on its part to ensure that the facts and assumptions set forth in the opinion letter of even date herewith issued by Kilpatrick & Cody relating to substantive consolidation, or set forth in any certificate relied upon by Kilpatrick & Cody in issuing such opinion letter, remain true and correct in all material respects at all times. SECTION 10.5. Covenants of Interface. Until the Bank Group Ownership Interest is reduced to zero as described in Section 3.1(c) and no further Purchases are to be made, Interface, in support of its obligations set forth in Section 10.4, will, unless the Majority Bank Purchasers have otherwise consented in writing: (a) Comply with all applicable laws, rules, regulations and orders with respect to it, its business and properties, the failure to comply with which may materially adversely affect its ability to perform its obligations under this Agreement, or which may affect the legality, validity or enforceability of this Agreement as against Interface. -74- 82 (b) Maintain its corporate existence in the jurisdiction of its incorporation, and qualify and remain qualified in good standing as a foreign corporation in each jurisdiction where the failure to be so qualified could materially adversely affect its ability to perform its obligations hereunder. (c) At any reasonable time, upon prior notice to Interface, permit any Bank Purchaser or the Administrative Agent or their respective agents or representatives to visit and inspect any of its properties, to examine its books of account and other records and files relating to this Agreement (including, without limitation, computer tapes and disks) and to discuss its affairs, business, finances and accounts with its officers and employees. (d) Forthwith upon the occurrence thereof, provide notice to the Administrative Agent of the occurrence of any Event of Termination relating to the performance by Interface of its obligations under this Agreement. (e) Not amend the Certificate of Incorporation or By-Laws of the Seller. (f) Not permit the principal amount evidenced by Subordinated Note to exceed at any time an amount equal to the sum of (i) the Reserve at such time, (ii) the "Reserve" then in effect under the Parallel Sale Agreement, and (iii) the aggregate face amount of all Receivables then outstanding that are neither Defaulted Receivables nor Eligible Receivables. ARTICLE XI: INDEMNIFICATIONS; INCREASED COSTS SECTION 11.1. Indemnification by the Seller of the Bank Purchasers, etc. Without limiting any other rights which the Bank Purchasers, the Administrative Agent and their respective officers, directors, employees, agents and Affiliates may have hereunder or under applicable law, the Seller hereby indemnifies such parties and holds them harmless from and against any and all damages, losses, claims, liabilities and related costs and expenses (including attorneys' fees and disbursements) incurred by any of them arising out of or resulting from this -75- 83 Agreement or the purchase by any Bank Purchaser of any Ownership Interest in Receivables, including, without limitation: (a) the reliance by the Administrative Agent or any Bank Purchaser on any representation or warranty made by the Seller, Interface or any Originator (or any of their respective officers) under or in connection with this Agreement or any Sale Document, which was incorrect when made (it being understood that the Administrative Agent and each Bank Purchaser shall, for purposes of this Section 11.1, be entitled to rely on the truth, accuracy and completeness of each representation and warranty made under this Agreement at the time of each Purchase, without regard to any qualifying language in the limited context of a condition precedent to the effect that any representation or warranty shall be true and correct "in all material respects" or words of like import); (b) the failure by the Seller, Interface or the Collection Agent (or any Person to whom the Collection Agent may have delegated any of its duties or responsibilities as Collection Agent) to comply with any covenant set forth in this Agreement (including, without limitation, any covenant relating to the payment, remittance or deposit of any amount hereunder) or the failure by any party to any Transfer Agreement to comply with any obligation or covenant on its part to be performed thereunder or under the related Consent and Acknowledgment; (c) the failure to vest and maintain in any Bank Purchaser, or to transfer to any Bank Purchaser, legal and equitable title to, and ownership of, an undivided percentage ownership interest (to the extent of such Bank Purchaser's Ownership Interest) in the Receivables, free and clear of any security interest, lien, claim or encumbrance; (d) the transfer by the Seller of an undivided percentage ownership interest in any Receivables other than the Ownership Interest hereunder and the "Ownership Interest" under the Parallel Sale Agreement; (e) the Seller's or any Originator's use of proceeds of the Purchases; -76- 84 (f) the failure by the Seller or the Collection Agent timely to file financing statements or other similar instruments or documents under the Uniform Commercial Code (or other applicable law relating to the transfer of interests in the Receivables) of any applicable jurisdiction or other applicable laws with respect to any Receivables, whether at the time of a Purchase or otherwise; (g) the return or transfer by the Collection Agent of any portion of Collections to the Seller or any other person for any reason whatsoever, other than as authorized in Section 7.2.1 or 7.2.2; (h) any dispute, claim, offset or defense of any obligor to the payment of any Receivable (including a defense based on such Receivable's or the related contract's not being a legal, valid and binding obligation of such Obligor enforceable against it in accordance with its terms but excluding any discharge (as distinguished from avoidance) in bankruptcy or any similar insolvency proceeding of any Obligor due to the financial inability of such Obligor to pay its debts as they mature), or any other claim resulting from the sale, use, operation or ownership of or defects in or breaches of warranties with respect to, the merchandise or services relating to such Receivable or the furnishing or failure to furnish such merchandise or services; (i) the Seller's or any Originator's failure to pay when due any taxes (including sales, excise or personal property taxes) payable by such Person in connection with the Receivables; (j) the commingling of Collections with other funds of the Seller, the Collection Agent or any Originator Entity; (k) the failure by the Seller, the Collection Agent or any Originator to comply with any applicable law, rule or regulation with respect to any Receivable, or the nonconformity of any Receivable with any such applicable law, rule or regulation; (l) the failure to vest all right, title and interest in the Seller in the Receivables purchased by the Seller from any -77- 85 Originator under a Transfer Agreement, in each case free and clear of any security interest, lien, claim or encumbrance; (m) any failure of the Seller to give reasonably equivalent value to any Originator under any Transfer Agreement in consideration of the transfer by such Originator to the Seller of any Receivables, or any attempt by any Person to void any such transfer under statutory provisions or common law or equitable action, including, without limitation, any provision of the Bankruptcy Code; or (n) any information provided by the Seller, Interface, any Originator or the Collection Agent or any Sale Document furnished to any Bank Purchaser or the Administrative Agent in connection with this Agreement which shall have been incorrect in any respect or which shall have omitted any material fact. Notwithstanding anything herein to the contrary, however, the Seller shall not be obligated under this Section 11.1 to indemnify any Person against or hold any Person harmless from any damage, loss, claim, liability, cost or expense to the extent that the same arises out of or results from (i) such Person's own gross negligence or wilful misconduct, (ii) the negligence or wilful misconduct of the Collection Agent (if other than Interface or any Affiliate thereof), or (iii) the fact that any Receivable proves to be uncollectible (unless the Seller is otherwise expressly liable therefor under the terms of this Agreement or any other Sale Document). If and to the extent that the foregoing undertaking may be unenforceable for any reason, the Seller hereby agrees to make the maximum contribution to the payment of the amounts indemnified against in this Section which is permissible under applicable law. To the extent that any claim arises against the Seller under this Section 11.1 in respect of any action taken or omitted to be taken by the Collection Agent in its capacity as Collection Agent, the Collection Agent agrees that (i) it shall be jointly and severally liable to the Bank Purchasers and the Administrative Agent in respect of such claim and (ii) the Seller shall have a corresponding claim against the Collection Agent for any payments made by the Seller to any indemnified party hereunder. -78- 86 SECTION 11.2. Indemnification Due to Failure to Consummate Purchase or Certain Reductions in Investment. Each notice of an offer to sell given by the Seller in accordance with Section 6.2(a) and each notice of election to reduce the Investment given by the Seller in accordance with Section 6.2(c) shall be irrevocable and binding on the Seller. The Seller shall indemnify each Bank Purchaser against any loss, cost or expense incurred by such Bank Purchaser as a result of (i) any failure to fulfill, on or before the date specified in any notice given pursuant to Section 6.2(a), the applicable conditions precedent for the making of the related Purchase, (ii) any failure of the Seller to make the reduction in the aggregate Investment contemplated in any notice given pursuant to Section 6.2(c) to the extent and on the date specified in such notice, or (iii) any remittance by the Seller or the Collection Agent of any Collections for application as a reduction of the aggregate Investment on any date other than a Settlement Date or on any Settlement Date to the extent such remittance exceeds the aggregate Investment allocated to Tranche Periods ending on such Settlement Date, in each such case including, without limitation, any loss (including loss of anticipated profits), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Bank Purchaser to fund or maintain the affected or proposed Purchase or Investment; provided, however, that in each such case the Seller's indemnity obligations under this sentence shall apply only if and to the extent the affected or proposed Purchase or Investment relates to a Tranche Period having the Adjusted LIBO Rate or the Fixed CD Rate as its Discount Rate. SECTION 11.3. Increased Costs; Capital Adequacy. (a) If, by reason of (x) after the date hereof, the introduction of or any change (including, without limitation, any change by way of imposition or increase of reserve requirements) in or in the interpretation or administration of any law, rule or regulation, or (y) the compliance with any guideline, request or directive from any central bank or other governmental authority or quasi- governmental authority exercising control over banks or financial institutions generally (whether or not having the force of law): (i) any Bank Purchaser shall be subject to any tax, duty or other charge or withholding with respect to its -79- 87 Investment hereunder or its obligation to make Purchases hereunder or on or with respect to the Receivables or its Ownership Interest hereunder, or the basis of taxation of payments to any Bank Purchaser of any amount hereunder or its obligation to make Purchases hereunder shall have changed (except for changes in the tax on the overall net income of such Bank Purchaser imposed by the jurisdiction in which such Bank Purchaser's principal executive office or applicable Purchasing Office is located); or (ii) any reserve (including, without limitation, any imposed by the Board of Governors of the Federal Reserve System), assessment, insurance charge, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Bank Purchaser shall be imposed or deemed applicable or any other condition affecting its Investment hereunder or its obligation to make Purchases shall be imposed on any Bank Purchaser, its applicable Purchasing Office or the London interbank market or the United States secondary certificate of deposit market; and as a result thereof there shall be any increase in the cost to such Bank Purchaser of agreeing to make or making Purchases hereunder, or funding or maintaining its Investment hereunder (except to the extent already included in the determination of the applicable Fixed CD Rate or Adjusted LIBO Rate, if applicable), or there shall be a reduction in the amount received or receivable by such Bank Purchaser, then the Seller shall from time to time, upon written notice from and demand by such Bank Purchaser to the Seller, pay to the Administrative Agent for the account of such Bank Purchaser, within five Business Days after the date of such notice and demand, additional amounts sufficient to indemnify such Bank Purchaser against such increased cost; provided, however, that the Seller's indemnity obligations, under this Section shall apply only if and to the extent the affected Purchase or Investment relates to a Tranche Period having the Adjusted LIBO Rate or the Fixed CD Rate as its Discount Rate. A certificate as to the amount of such increased cost, submitted to the Seller by such Bank Purchaser in good faith and accompanied by a statement prepared by such Bank Purchaser describing in reasonable detail the basis for and calculation of such increased -80- 88 cost, shall, except for manifest error, be final, conclusive and binding for all purposes. (b) Without limiting any other provision of this Agreement, in the event that any Bank Purchaser shall have determined that any law, treaty, governmental (or quasi-governmental) rule, regulation, guideline or order regarding capital adequacy not currently in effect or fully applicable as of the date hereof, or any change therein or in the interpretation or application thereof, or compliance by such Bank Purchaser with any request or directive regarding capital adequacy not currently in effect or fully applicable as of the date hereof (whether or not having the force of law and whether or not failure to comply therewith would be unlawful) from a central bank or governmental authority or body having jurisdiction, does or shall have the effect or reducing the rate of return on such Bank Purchaser's capital as a consequence of its obligations hereunder to a level below that which such Bank Purchaser could have achieved but for such law, treaty, rule, regulation, guideline or order, or such change or compliance (taking into consideration such Bank Purchaser's policies with respect to capital adequacy) by an amount deemed by such Bank Purchaser to be material, then within ten Business Days after written notice and demand by such Bank Purchaser (with copies thereof to the Administrative Agent), the Seller shall from time to time pay to such Bank Purchaser additional amounts sufficient to compensate such Bank Purchaser for such reduction. Each certificate as to the amount payable under this Section 11.3(b) (which certificate shall set forth the basis for requesting such amounts in reasonable detail), submitted to the Seller by any Bank Purchaser in good faith, shall, absent manifest error, be final, conclusive and binding for all purposes. SECTION 11.4. Notices. Each Bank Purchaser agrees to notify the Seller and the Administrative Agent upon its knowledge of a claim for which it intends to seek indemnification under Section 11.1 or reimbursement under Section 11.2 or 11.3 from the Seller. The Seller agrees to assist the parties indemnified under Section 11.1, to the extent requested by them, in any action, suit or proceeding brought by or against them in connection with the indemnification granted herein. -81- 89 SECTION 11.5. Purchasing Offices. (a) Each Bank Purchaser agrees that, if requested by the Seller, it will use reasonable efforts (subject to overall policy considerations of such Bank Purchaser) to designate an alternate Purchasing Office with respect to any of its Purchases or Investments affected by the matters or circumstances described in Section 6.3(e), Section 6.3(f) or Section 11.3 to reduce the liability of the Seller or to avoid the results provided thereunder, so long as such designation is not disadvantageous to such Bank Purchaser as determined by such Bank Purchaser, which determination, if made in good faith, shall be conclusive and binding on all parties hereto. Nothing in this Section 11.15 shall affect or postpone any of the obligations of the Seller or any right of any Bank Purchaser provided hereunder. (b) If any Bank Purchaser that is organized under the laws of a jurisdiction other than the United States of America or any state or other political subdivision thereof (including the District of Columbia) issues a public announcement with respect to the closing of its offices in the United States such that any withholdings or deductions and additional payments with respect to Taxes may be required to be made by the Seller thereafter pursuant to (and as the term "Taxes" is defined in) Section 13.3, such Bank Purchaser shall use reasonable efforts to furnish the Seller and the Collection Agent notice thereof as soon as practical thereafter; provided, however, that no delay or failure to furnish such notice shall in any event release or discharge the Seller from its obligations to such Bank Purchaser pursuant to Section 13.3 or otherwise result in any liability of such Bank Purchaser. SECTION 11.6. Limitations on Certain Payment Obligations. (a) Each Bank Purchaser or the Administrative Agent (as the case may be) shall make written demand on the Seller for indemnification of compensation on account of any Taxes pursuant to (and as such term is defined in) Section 13.3 no later than 90 days after the earlier of (i) the date on which such Person makes payment of such Taxes and (ii) the date on which the relevant -82- 90 taxing authority or other governmental authority makes written demand upon such Person for payment of such Taxes. (b) Each Bank Purchaser or the Administrative Agent (as the case may be) shall make written demand on the Seller for indemnification or compensation pursuant to Section 11.2 no later than 90 days after the event giving rise to indemnification or compensation occurs. (c) Each Bank Purchaser or the Administrative Agent (as the case may be) shall make written demand on the Seller for indemnification or compensation pursuant to Section 11.3 no later than 90 days after such Person receives actual notice or obtains actual knowledge of the promulgation of the relevant law, rule, order or interpretation or occurrence of any other event giving rise to a claim pursuant to such section. (d) In the event that any Bank Purchaser or the Administrative Agent (as the case may be) fails to give the Seller notice within the applicable time limitation described in paragraph (a) or (b) above (as the case may be), the Seller shall not have any obligation to pay such claim for compensation or indemnification. In the event that any Bank Purchaser or the Administrative Agent fails to give the Seller notice within the time limitation prescribed in paragraph (c) above, the Seller shall not have any obligation to pay any amount with respect to claims accruing prior to the 90th day preceding such written demand. ARTICLE XII: EVENTS OF TERMINATION SECTION 12.1. Events of Termination. Each of the following shall constitute an "Event of Termination": (a) The Collection Agent (if Interface or any of its Affiliates) shall fail to (i) perform or observe any term, covenant or agreement hereunder (other than as referred to in clause (ii) of this Section 12.1(a)) and such failure shall remain unremedied for three Business Days or (ii) make any payment or deposit to be made by it hereunder when due (and, in the case of any failure to make a timely payment or deposit solely by reason of any mechanical delay in or malfunction of the -83- 91 Fedwire system, such failure shall remain unremedied for one Business Day); or (b) The Seller shall fail to (i) make any payment when due under Section 3.3, Section 7.3 or otherwise hereunder (and, in the case of any failure to make a timely payment solely by reason of any mechanical delay in or malfunction of the Fedwire system, such failure shall remain unremedied for one Business Day) or (ii) perform or observe any term, covenant or agreement contained in Section 10.1(f) or (l) or Section 10.3(a), (g)(ii), (i), (j), (k) or (l); or (c) Any representation or warranty or statement made by the Seller or any other Transaction Party (or any of their respective officers) under or in connection with this Agreement or any other Sale Document shall prove to have been incorrect in any material respect when made (other than any representation or warranty made by an Originator under Section 5(f) of any Transfer Agreement which is subsequently cured in accordance with the terms of the proviso set forth therein); or (d) The Seller, Interface, the Collection Agent or any other Transaction Party shall fail to perform or observe any other term, covenant or agreement contained in this Agreement or any other Sale Document on its part to be performed or observed and any such failure shall remain unremedied for 10 days after any Transaction Party first becoming aware of such failure; or (e) Any Purchase shall for any reason (other than pursuant to the terms hereof) cease to create, or any Ownership Interest shall for any reason cease to be, a valid and perfected first priority undivided percentage ownership or security interest to the extent contemplated herein in each Receivable, and in the Related Rights and Collections with respect thereto; or (f) The Seller, Interface, the Collection Agent or any Originator shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against the Seller, Interface, the Collection Agent or any Originator -84- 92 seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its property; or the Seller, Interface, the Collection Agent or any Originator shall take any corporate action to authorize any of the actions set forth above in this clause (f); or (g) The aggregate outstanding balance of Receivables that are more than 60 days past due (from the respective due dates thereof) shall at any time exceed an amount equal to 11% of the aggregate outstanding balance of all Receivables at such time; or (h) The aggregate outstanding balance of Defaulted Receivables during any monthly period shall at any time exceed an amount equal to 0.75% of the aggregate outstanding balance of all Receivables as of the last day of such period; or (i) The aggregate Dilutions during any monthly period shall at any time exceed an amount equal to 6.0% of the aggregate outstanding balance of Eligible Receivables as of the last day of such period; or (j) The "Portfolio Turnover" (as required to be set forth in, and as computed in accordance with, any Receivables Activity Report) shall at any time exceed 90 days; or (k) (i) Any "Event of Default" shall occur under (and as defined in) the Interface Credit Agreement; or (ii) Interface shall fail to pay any principal of or premium or interest on any indebtedness for borrowed money which is outstanding in a principal amount of at least $2,500,000 in the aggregate when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such -85- 93 indebtedness; or any other event shall occur or default condition shall exist under any agreement or instrument relating to any such indebtedness and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such event or default condition is to accelerate, or to permit the acceleration of, the maturity of such indebtedness; or any such indebtedness shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), redeemed, purchased or defeased, or an offer to prepay, redeem, purchase or defease such indebtedness shall be required to be made, in each case prior to the stated maturity thereof or the scheduled due date therefor; or (iii) the Seller shall fail to pay any principal of or or premium or interest on the Subordinated Note or on any other indebtedness for borrowed money when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise but, in the case of the indebtedness evidenced by the Subordinated Note, other than by reason of the operation of the subordination provisions therein), and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such indebtedness; or any other event shall occur or default condition shall exist under any agreement or instrument relating to any such indebtedness and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such event or default condition is to accelerate, or to permit the acceleration of, the maturity of such indebtedness; or any such indebtedness shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), redeemed, purchased or defeased, or an offer to prepay, redeem, purchase or defease such indebtedness shall be required to be made, in each case prior to the stated maturity thereof or the scheduled due date therefor; or (l) any "Event of Termination" shall occur under, and as defined in, the Parallel Sale Agreement; or -86- 94 (m) The senior, long-term, unsecured, non-credit enhanced debt of Interface shall at any time have a credit rating by S&P of less than BB- or a credit rating by Moody's of less than Ba3 or, in the event that neither S&P nor Moody's shall then be rating such debt, the imputed equivalent of such ratings as determined by the Administrative Agent; or (n) (i) So long as the holders of Interface's Class B common stock are entitled to elect a majority of Interface's board of directors, the Existing Shareholder Group shall at any time fail to be the "beneficial owners" (as defined in Rule 13d-3 under the Exchange Act) of a majority of the issued and outstanding shares of Interface's Class B common stock; or (ii) at any time during which the holders of Interface's Class B common stock have ceased to be entitled to elect a majority of Interface's board of Directors (A) any "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act), other than the Existing Shareholder Group, shall become the "beneficial owner(s)" (as defined in said Rule 13d-3) of sufficient shares of the then outstanding common stock of Interface entitled to vote for members of Interface's board of directors so as to possess effective control (as such term is defined in the second sentence of the definition of "Affiliate" in Article I) of Interface, or (B) during any period of twenty-four (24) consecutive calendar months, individuals who at the beginning of such period constituted Interface's board of directors (together with any new directors whose election by Interface's board of directors or whose nomination for election by Interface's shareholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the directors then in office; or (iii) any event or condition shall occur or exist which, pursuant to the terms of any Change in Control Provision, requires or permits the holder(s) of Interface Control Debt to require that such Interface Control Debt be redeemed, repurchased, defeased, prepaid or repaid, in whole or in part, or the maturity of such Interface Control Debt to be accelerated in any respect; provided, however, that no Event of Termination hereunder shall be deemed to exist upon the occurrence of any event or condition described in the foregoing clauses -87- 95 (i), (ii) or (iii) of this subsection (n) until ninety (90) days after the first occurrence or existence of such event or condition; or (o) Interface shall at any time cease to own and hold, or cease to control all voting rights in respect of, all of the issued and outstanding capital stock of the Seller; or (p) Interface shall for any reason (other than the removal thereof by the Bank Purchasers in accordance with the terms of this Agreement) cease to be or to serve as Collection Agent hereunder. SECTION 12.2. Remedies. Upon the occurrence of any Event of Termination, (a) the Administrative Agent may at any time (and, upon the direction at any time of the Majority Bank Purchasers, the Administrative Agent shall) declare the Commitment Termination Date to have occurred, whereupon the commitment of each Bank Purchaser to make any further Purchases of any type hereunder shall terminate without further notice to or demand upon the Seller or any other Person, all of which are hereby waived by the Seller; provided that upon the occurrence of any of the events described in clause (f) in respect of the Seller or the Collection Agent, the Commitment Termination Date shall thereupon automatically occur without notice, and the commitment of each Bank Purchaser to make further Purchases of any type hereunder shall thereupon terminate automatically; and (b) the Administrative Agent, upon the direction of the Majority Bank Purchasers, may (i) remove the Person then acting as Collection Agent hereunder from its rights and responsibilities as Collection Agent and may designate any other Person (including, without limitation, the Administrative Agent or any Bank Purchaser) to be Collection Agent hereunder, (ii) take control of the Lock-Boxes (by delivering to the Lock-Box Banks notice in substantially the form of Exhibit D), and (iii) notify Obligors of the Bank Group Ownership Interest in the Receivables. The Bank Purchasers and the Administrative Agent shall have, in addition to all other rights and remedies under this Agreement or otherwise, all other rights and remedies provided under the Uniform Commercial Code of the applicable jurisdiction and other applicable laws, which rights shall be cumulative. -88- 96 ARTICLE XIII: MISCELLANEOUS SECTION 13.1. Amendments, Etc. No amendment or waiver of, or consent to the Seller's, Interface's or the Collection Agent's departure from, any provision of this Agreement shall be effective unless it is in writing in accordance with this Section 13.1, and then such amendment, waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. The Seller, the Collection Agent and the Administrative Agent, at the direction of the Majority Bank Purchasers, may enter into written modifications or waivers of any provisions of this Agreement; provided, however, that no such modification or waiver shall: (i) without the consent of each affected Bank Purchaser, (a) extend the Commitment Termination Date or the date of any payment or deposit of Collections by the Seller or the Collection Agent, (b) reduce the rate or extend the time of payment of any amount due under Article V or Article VII (or any component thereof), (c) reduce any fee payable to the Administrative Agent for the benefit of the Bank Purchasers, (d) except as expressly contemplated herein, change the amount of the Investment, Pro Rata Share or Commitment of any Bank Purchaser, (e) amend, modify or waive any provision of the definition of "Majority Bank Purchasers" or this Section 13.1, (f) consent to or permit the assignment or transfer by the Seller or the Collection Agent of any of its rights or obligations under this Agreement, (g) change the definition of "Dilution Reserve," "Eligible Receivable," "Loss Reserve Ratio," "Ownership Interest," "Reserve" or "Yield Reserve," or (h) amend or modify any defined term (or any defined term used directly or indirectly in such defined term) used in clauses (a) through (h) above in a manner which would circumvent the intention of the restrictions set forth in such clauses; or (ii) without the written consent of the then Administrative Agent, amend, modify or waive any provision of this Agreement if the effect thereof is to affect the rights or duties of the Administrative Agent. -89- 97 Notwithstanding the foregoing, the Administrative Agent may, without the consent of the Bank Purchasers or the Majority Bank Purchasers, enter into amendments, consents or waivers with the Seller and the Collection Agent that are, in the judgment of the Administrative Agent, ministerial or administrative in nature. Any modification or waiver made in accordance with this Section 13.1 shall apply to each of the Bank Purchasers equally and shall be binding upon the Seller, the Collection Agent, the Bank Purchasers and the Administrative Agent. SECTION 13.2. Notices, Etc. All notices and other communications provided for hereunder shall, unless otherwise stated herein, be in writing (including facsimile, telegraphic, telex or cable communication) and shall be given to the applicable party at its address or applicable facsimile, telegraphic, telex or cable number or address set forth on the signature pages hereto or such other address or number as shall be designated by such party in a written notice to the other parties hereto. Each such notice or other communication shall be effective (i) if given by telex, when such telex is transmitted to the telex number specified in this Section and the appropriate answerback is received, (ii) if given by mail, 72 hours after such communication is deposited in the mails with first-class postage prepaid, addressed as aforesaid, (iii) if given by telecopy, when such telecopy is transmitted to the telecopy number specified in this Section and the appropriate confirmation is received, or (iv) if given by any other means (including, without limitation, by air courier), when delivered or received at the address specified in this Section, except that notices and communications to the Administrative Agent pursuant to Section 6.2, Section 7.4 and Section 10.2(f) shall only be effective when received by the Administrative Agent. SECTION 13.3. Payments Net of Taxes. (a) All payments by the Seller payable under this Agreement shall be made free and clear of and without deduction for any present or future income, stamp or other taxes, fees, levies, imposts, deductions, duties, withholdings or other charges imposed by any taxing authority, and all liabilities with respect thereto, excluding, in the case of each Bank Purchaser, taxes imposed on or measured by its net income, and franchise -90- 98 taxes and branch profit taxes, imposed on it (i) by the jurisdiction under the laws of which such Bank Purchaser is organized or any political subdivision thereof and, in the case of each Bank Purchaser, taxes imposed on or measured by its net income, and franchise taxes and branch profit taxes imposed on it, by the jurisdiction of such Bank Purchaser's appropriate Purchasing Office or any political subdivision thereof, and (ii) by a jurisdiction in which any payments are to be made by the Seller hereunder, other than the United States of America, the United Kingdom, or The Netherlands, or any political subdivision of any thereof, and that would not have been imposed but for the existence of a connection between such Bank Purchaser and the jurisdiction imposing such taxes (other than a connection arising as a result of this Agreement or the transactions contemplated by this Agreement), except in the case of taxes described in this clause (ii) to the extent such taxes are imposed as a result of a change in the law or regulations of any jurisdiction or any applicable treaty or regulations or in the official interpretation of any such law, treaty or regulations by any governmental authority charged with the interpretation or administration thereof after the date of this Agreement (all such excluded net income taxes, franchise taxes and branch profit taxes being herein collectively referred to as the "Excluded Taxes"; all such non-excluded taxes, fees, levies, imposts, deductions, duties, withholdings or other charges or liabilities being herein collectively referred to as "Taxes"). If the Seller shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder to any Bank Purchaser or the Administrative Agent, (x) the sum so payable shall be increased by such amount (the "Gross-up Amount") as may be necessary so that after making all required deductions (including deductions with respect to Taxes owed by such Bank Purchaser or the Administrative Agent (as the case may be) on any Gross-up Amount payable under this Section 13.3) such Bank Purchaser or the Administrative Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (y) the Seller shall make such deductions and (z) the Seller shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law. -91- 99 (b) The Seller will indemnify each Bank Purchaser and the Administrative Agent for the full amount of Taxes (together with any Taxes or Excluded Taxes owed by such Bank Purchaser or the Administrative Agent (as the case may be) applicable to any Gross-up Amount or on the indemnification payments made by the Seller under this Section 13.3(b), but without duplication thereof), and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto, whether or not such Taxes or Excluded Taxes were correctly or legally asserted so as to compensate such Bank Purchaser or the Administrative Agent (as the case may be) for any loss, cost, expense or liability incurred as a consequence of any such Taxes. Payment pursuant to such indemnification shall be made within ten (10) Business Days from the date such Bank Purchaser or the Administrative Agent makes written demand therefor on the Seller. (c) Within thirty (30) days after the date of the Seller's payment of Taxes, the Seller will furnish the relevant Bank Purchaser, at its appropriate Purchasing Office, with the original or a certified copy of a receipt evidencing payment thereof. (d) Each Bank Purchaser that is a foreign Person (that is, a Person other than a United States Person as defined in the Internal Revenue Code of 1986, as amended) hereby agrees that: (i) Such Bank Purchaser shall, prior to the time it becomes a Bank Purchaser hereunder, deliver to the Seller: (x) for each Purchasing Office of such Bank Purchaser located in the United States of America three (3) accurate and complete signed originals of Internal Revenue Service Form 4224 or any successor thereto ("Form 4224"), and/or (y) for each Purchasing Office of such Bank Purchaser located outside the United States of America, three (3) accurate and complete signed originals of Internal Revenue service form 1001 or any successor thereto ("Form 1001"); in each case indicating that such Bank Purchaser, on the date of delivery thereof, is entitled to receive payments for the account of such Purchasing Office -92- 100 under this Agreement free from withholding of United States federal income tax; provided, that if the Form 4224 or Form 1001, as the case may be, supplied by a Bank Purchaser fails to establish a complete exemption from United States withholding tax as of the date such Bank Purchaser becomes a Bank Purchaser, such Bank Purchaser shall, within 15 days after a written request from the Seller deliver to the requesting party the forms or other documents necessary to establish a complete exemption from United States withholding tax as of such date; (ii) If at any time such Bank Purchaser changes its Purchasing Office or selects an additional Purchasing Office, it shall, at the same time or reasonably promptly thereafter (but only to the extent the forms previously delivered by it hereunder are no longer effective) deliver to the Seller in replacement for the forms previously delivered by it hereunder: (x) for each changed or additional Purchasing Office located in the United States of America, three (3) accurate and complete signed originals of Form 4224; or (y) otherwise, three (3) accurate and complete signed originals of Form 1001; in each case indicating that such Bank Purchaser is on the date of delivery thereof entitled to receive payments for the account of such changed or additional Purchasing Office under this Agreement free from withholding of United States Federal income tax. (e) In addition to the documents to be furnished pursuant to Section 13.3(d) above, each Bank Purchaser shall, promptly upon the reasonable request of the Seller to that effect, deliver to the requesting party such other accurate and complete forms or similar documentation as such Bank Purchaser is legally able to provide and as may be required from time to time by any applicable law, treaty, rule or regulation of any jurisdiction in order to establish such Bank Purchaser's tax status for withholding purposes or as may otherwise be appropriate to eliminate or minimize any Taxes on payments under -93- 101 this Agreement. Each Bank Purchaser furnishing forms to the Seller or Interface pursuant to the requirements of Section 13.3(d) or this subsection (e), shall furnish copies of such forms to the Administrative Agent at the same time delivery of such forms is made to the Seller. (f) The Seller shall not be required to pay any amounts pursuant to Section 13.3(a) or (b) above to any Bank Purchaser for the account of any Purchasing Office of such Bank Purchaser in respect of any United States withholding taxes payable hereunder (and the Seller, if required by law to do so, shall be entitled to withhold such amounts and pay such amount to the United States government) if the obligation to pay such amounts would not have arisen but for a failure by such Bank Purchaser to comply with its obligations under Section 13.3(d), and if such Bank Purchaser shall not be entitled to exemption from deduction or withholding of United States Federal income tax in respect of the payment of such sum by the Seller hereunder for the account of such Purchasing Office for, in each such case, any reason other than a change in United States law or regulations or any applicable tax treaty or regulations or in the official interpretation of any such law, treaty or regulations by any governmental authority charged with the interpretation or administration thereof (whether or not having the force of law) after the date such Bank Purchaser became a Bank Purchaser hereunder. (g) Within sixty (60) days of the written request of the Seller, each Bank Purchaser shall execute and deliver such certificates, forms and other documents, which can be reasonably furnished consistent with the facts and which are reasonably necessary to assist the Seller in applying for refunds of Taxes remitted by the Seller hereunder. (h) Each Bank Purchaser shall use reasonable efforts to avoid or minimize any amounts which might otherwise be payable by the Seller pursuant to this Section 13.3, except to the extent that a Bank Purchaser determines that such efforts would be disadvantageous to such Bank Purchaser, as determined by such Bank Purchaser and which determination, if made in good faith, shall be binding and conclusive on all parties hereto. -94- 102 (i) To the extent that the payment of any Bank Purchaser's Taxes by the Seller hereunder gives rise from time to time to a Tax Benefit (as hereinafter defined) to such Bank Purchaser in any jurisdiction other than the jurisdiction which imposed such Taxes, such Bank Purchaser shall pay to the Seller the amount of each such Tax Benefit so recognized or received. The amount of each Tax Benefit and, therefore, payment to the Seller will be determined from time to time by the relevant Bank Purchaser in its sole discretion, which determination shall be binding and conclusive on all parties hereto. Each such payment will be due and payable by such Bank Purchaser to the Seller within a reasonable time after the filing of the income tax return in which such Tax Benefit is recognized or, in the case of any tax refund, after the refund is received; provided, however, if at any time thereafter such Bank Purchaser is required to rescind such Tax Benefit or such Tax Benefit is otherwise disallowed or nullified, the Seller shall promptly, after notice thereof from such Bank Purchaser, repay to such Bank Purchaser the amount of such Tax Benefit previously paid to it and rescinded, disallowed or nullified. For purposes of this subsection, the term "Tax Benefit" shall mean the amount by which any Bank Purchaser's income tax liability for the taxable period in question is reduced below that which would have been payable had the Seller not been required to pay the Bank Purchaser's Taxes. In case of any dispute with respect to the amount of any payment due by any Bank Purchaser to the Seller under this subsection (i), the Seller shall not have any right to any offset or withholding with respect to future payments due to such Bank Purchaser under this Agreement. (j) Without prejudice to the survival of any other agreements of the parties hereunder, the agreements and obligations of the Seller and the Bank Purchasers contained in this Section 13.3 shall survive the termination of this Agreement and the payment in full of the Investments and all other amounts owing by the Seller to the Bank Purchasers or the Administrative Agent hereunder. SECTION 13.4. No Waiver; Remedies. No failure on the part of the Administrative Agent or any Bank Purchaser to exercise, and no delay in exercising, any right hereunder or under any Sale Document shall operate as a waiver thereof; nor -95- 103 shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. SECTION 13.5. Binding Effect; Assignability; Continuing Obligation. (a) This Agreement shall be binding upon and inure to the benefit of the Seller, Interface, each Bank Purchaser, the Administrative Agent and their respective successors and assigns, except that neither the Seller nor Interface shall have the right to assign any interest herein without the prior written consent of the Majority Bank Purchasers and the Administrative Agent. (b) Each Bank Purchaser may assign all or any portion of its interests, rights and obligations under this Agreement (including all or a portion of any of its Commitment, its Investment and its Ownership Interest at the time held by it); provided, however, that in the case of any proposed assignment by a Bank Purchaser of its Commitment or Investment hereunder, the Administrative Agent, Interface and the Seller must give their prior written consent to such assignment (which consent shall not be unreasonably withheld). (c) Each Bank Purchaser may, without the consent of the Seller, Interface or the Administrative Agent, sell participations to one or more banks or other entities in all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment, its Investment or its Ownership Interest); provided, however, that (i) no Bank Purchaser may sell a participation in its Commitment (after giving effect to any permitted assignment hereof) in an amount in excess of fifty percent (50%) of such aggregate Commitment, except that no such maximum amount shall be applicable to any such participation sold at any time there exists an Event of Termination hereunder, (ii) such Bank Purchaser's obligations under this Agreement shall remain unchanged, (iii) such Bank Purchaser shall remain solely responsible to the other parties hereto for the performance of such obligations, and (iv) the participating bank or other entity shall not be entitled to the benefit (except through its selling Bank Purchaser) of the cost protection provisions contained in Section 11.3 of this -96- 104 Agreement, and (v) the Seller and the Administrative Agent and other Bank Purchasers shall continue to deal solely and directly with such Bank Purchaser in connection with such Bank Purchaser's rights and obligations under this Agreement and the other Sale Documents, and such Bank Purchaser shall retain the sole right to enforce the obligations of the Seller and Interface relating to its Investment and Ownership Interest, and to approve any amendment, modification or waiver of any provisions of this Agreement. (d) Any Bank Purchaser or participant may, in connection with the assignment or participation or proposed assignment or participation, pursuant to this Section, disclose to the assignee or participant or proposed assignee or participant any information relating to the Seller, Interface or the other Consolidated Companies furnished to such Bank Purchaser by or on behalf of the Seller, Interface or any other Consolidated Company; provided that, prior to any such disclosure of information designated by the Seller or Interface as confidential, the Bank Purchaser proposing to make such assignment or sell such participation shall obtain from such prospective assignee or participant an agreement whereby such prospective assignee or participant shall agree to preserve the confidentiality of such confidential information consistent with the provisions of Section 8.05 of the Interface Credit Agreement. (e) Any Bank Purchaser may at any time assign all or any portion of its rights in this Agreement to a Federal Reserve Bank; provided that no such assignment shall release the Bank Purchaser from any of its obligations hereunder. (f) If (i) any Taxes referred to in Section 13.3 have been levied or imposed so as to require withholding or deductions by the Seller or Interface (as the case may be) and payment by the Seller or Interface (as the case may be) of additional amounts to any Bank Purchaser or the Administrative Agent as a result thereof, (ii) any Bank Purchaser or the Administrative Agent shall make demand for payment of any material additional amounts as compensation for its increased costs or for its reduced rate of return pursuant to Section 11.3 hereof, or (iii) any Bank Purchaser shall decline to consent to a modification or waiver of the terms of this Agreement or any -97- 105 other Sale Document requested by the Seller, then and in such event, upon request from the Seller delivered to such Bank Purchaser and the Administrative Agent, such Bank Purchaser shall assign, in accordance with the provisions of Section 13.5(b), all of its rights and obligations under this Agreement and the other Sale Documents to such assignee as may be selected by the Seller and may be acceptable to the Administrative Agent, in consideration for the payment by such assignee to the affected Bank Purchaser of the amount of the outstanding Investment together with all Accrued Finance Charges thereon owing to such Bank Purchaser through the date of such assignment, and the assumption of the affected Bank Purchaser's commitment hereunder, together with any and all other amounts owing to such Bank Purchaser under any provisions of this Agreement or the other Sale Documents accrued to the date of such assignment. (g) This Agreement shall create and constitute the continuing obligation of the parties hereto in accordance with its terms, and shall remain in full force and effect until such time as the Ownership Interest of each Bank Purchaser is reduced to zero as described in Section 3.1(c) and no further Purchases are committed to be made hereunder, at which time this Agreement shall terminate; provided, however, that rights and remedies of each Bank Purchaser and the Administrative Agent under Article XI and Section 5.3 and the provisions of Section 13.12 shall survive any termination of this Agreement. Notwithstanding the foregoing, to the extent that the Seller or the Collection Agent makes a payment, deposit or remittance to any Bank Purchaser or the Administrative Agent, or any Bank Purchaser or the Administrative Agent receives any proceeds of the Receivables or Collections, which payment, deposit, remittance or any part thereof is subsequently invalidated, declared to be fraudulent or preferential, set aside and/or required to be repaid to the Seller or the Collection Agent, or any other Person, or their respective estates, trustees, receivers or any other Person, under any bankruptcy law, state or federal law, common law or equitable cause, then to the extent of such payment the obligation or part thereof which has been paid, reduced or satisfied by such amount (and the corresponding Ownership Interest) shall be reinstated and continued in full force and effect as of the time immediately preceding such initial payment, -98- 106 reduction or satisfaction and this Agreement shall continue in full force and effect with respect thereto. SECTION 13.6. Governing Law. THIS AGREEMENT AND THE SALE DOCUMENTS SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. SECTION 13.7. Security Interest. The Seller hereby grants to the Administrative Agent, for the benefit of the Bank Purchasers, a continuing security interest in the Seller's right, title and interest in and to the Receivables and Collections to secure the obligations of the Seller to the Bank Purchasers hereunder, which security interest shall continue in effect until termination of this Agreement (and be subject to reinstatement) in accordance with Section 13.5. SECTION 13.8. Construction of the Agreement. The parties hereto intend that the conveyance of Ownership Interests in Receivables by the Seller to the Bank Purchasers shall be treated as sales for all purposes. If, despite such intention, a determination is made that such transactions shall not be treated as sales, then this Agreement shall be interpreted to constitute a security agreement and the transactions effected hereby shall be deemed to constitute secured loans by the Bank Purchasers to the Seller under applicable law. For such purpose, the Seller hereby grants to the Administrative Agent, for the benefit of the Bank Purchasers, a continuing security interest in the Receivables and Collections to secure the repayment of the Investment of each Bank Purchaser and the payment and performance of the obligations of the Seller to each Bank Purchaser hereunder. SECTION 13.9. Confidentiality. Each of the Administrative Agent and each Bank Purchaser agrees to maintain the confidentiality of any information regarding the Seller or Interface obtained in accordance with the terms of this Agreement which is not publicly available, but the Administrative Agent or such Bank Purchaser may reveal such information (a) to applicable rating agencies, liquidity providers and credit providers, (b) as necessary or appropriate in connection with the administration or enforcement of this Agreement or the funding of Purchases under this Agreement, (c) as required by law, government regulation, -99- 107 court proceeding or subpoena or (d) to bank regulatory agencies and examiners. SECTION 13.10. Agent Determinations on Concentration Limits. The Administrative Agent is granted certain authority hereunder to reduce the Special Concentration Limit or Standard Concentration Limit for any Obligor (each such reduction being a "Redesignation"). Any act of Redesignation by the Administrative Agent shall be based upon a determination by the Administrative Agent or the Majority Bank Purchasers that either (i) in the exercise of its or their reasonable credit judgment, such Redesignation is appropriate, based upon such factors as the Administrative Agent has, or the Majority Bank Purchasers have, determined to be relevant, including, without limitation, any of the following factors: any change in, or change in the credit analysis as to, the nature, business, prospects, condition (financial or other), operations, properties or management of an Obligor or the Seller or the applicable Originator; any lack of sufficient and reliable information with respect to any of the foregoing; any change in, or change in the credit analysis as to, the credit or collateral support for any Receivable or any class of Receivables; the aggregate portfolio exposure of the Administrative Agent or any Bank Purchaser to such Obligors or Receivables of such type; or any change in the credit or collection policy of the Seller or the applicable Originator, or (ii) compliance with any law or regulation or any guideline, directive or request from any central bank or other governmental authority (whether or not having the force of law), or that compliance with any guideline, directive or request of any rating agency, requires such Redesignation. SECTION 13.11. Not a Joint Venture. Nothing contained in this Agreement or in any other Sale Document, and no action taken by any Bank Purchaser, the Administrative Agent or the Collection Agent pursuant hereto or thereto, shall be deemed to constitute the Seller (or any other Transaction Party) and the Bank Purchasers a partnership, association, joint venture or other entity. SECTION 13.12. Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which -100- 108 when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement. SECTION 13.13. Submission to Jurisdiction, Appointment of Agent to Accept Service of Process. (a) THE SELLER, INTERFACE AND THE COLLECTION AGENT HEREBY SUBMIT TO THE NON-EXCLUSIVE JURISDICTION OF ANY FEDERAL COURT LOCATED IN THE SOUTHERN DISTRICT OF NEW YORK IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. EACH OF THE SELLER, INTERFACE AND THE COLLECTION AGENT IRREVOCABLY WAIVES ANY OBJECTION WHICH IT MAY HAVE TO THE LAYING OF VENUE OF ANY SUCH PROCEEDING AND ANY CLAIM THAT ANY SUCH PROCEEDING HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. (b) Each of the Seller, Interface and the Collection Agent has irrevocably appointed CT Corporation as its agent to receive, accept and acknowledge for and on its behalf, service of any and all legal process, summons, notices and documents which may be served in any such proceeding brought in any such court which may be made on such agent. If for any reason such agent shall cease to be available to act as such, each of the Seller, Interface and the Collection Agent agrees to designate a new agent in The City of New York the terms and for the purposes of this Section 13.13 satisfactory to the Purchaser. SECTION 13.14. Change in Accounting Principles, Fiscal Year or Tax Laws. If (i) any preparation of the financial statements referred to in Section 10.2 hereafter occasioned by the promulgation of rules, regulations, pronouncements and opinions by or required by the Financial Accounting Standards Board or the American Institute of Certified Public Accountants (or successors thereto or agencies with similar functions) result in a material change in the method of calculation of financial covenants, standards or terms found in this Agreement, (ii) if there is any change in Interface's fiscal quarter of fiscal year, or (iii) there is a material change in federal tax laws which materially affects the Seller's ability to comply with the financial covenants, standards or terms found in this Agreement, the parties agree to enter into negotiations in order to amend -101- 109 such provisions so as to equitably reflect such changes with the desired result that the criteria for evaluating financial condition shall be the same after such changes as if such changes had not been made. Unless and until such provisions have been so amended, the provision of this Agreement shall govern. -102- 110 IN WITNESS WHEREOF, the parties have caused this Agreement to be signed by their duly authorized officers as of the date set forth on the cover page of this Agreement. INTERFACE SECURITIZATION CORPORATION, as Seller By /s/ Daniel T. Hendrix --------------------------------- Name: Daniel T. Hendrix Title: Senior Vice President & Treasurer Address: 100 Chastain Center Boulevard Suite 165 Kennesaw, Georgia 30144 Facsimile: (770) 319-0070 INTERFACE, INC., individually and as initial Collection Agent By /s/ Daniel T. Hendrix --------------------------------- Name: Daniel T. Hendrix Title: Senior Vice President & Treasurer Address: 2859 Paces Ferry Road Suite 2000 Atlanta, Georgia 30339 Facsimile: (770) 319-0070 -103- 111 CANADIAN IMPERIAL BANK OF COMMERCE, as Administrative Agent By /s/ Barbara Duberstein ----------------------------------- Name: Barbara Duberstein Title: Authorized Signatory 425 Lexington Avenue New York, New York Attn: Bryan Wickware Telecopy: (212) 856-3866 Commitment BANK PURCHASER $47,500,000 CANADIAN IMPERIAL BANK OF COMMERCE By /s/ ----------------------------------- Name: Title: 425 Lexington Avenue New York, New York Attn: Bryan Wickware Telecopy: (212) 856-3866 -104- EX-13 7 1996 FINANCIAL REPORT 1 EXHIBIT 13 INTERFACE, INC. 1996 FINANCIAL REPORT 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 32 The Company's revenues are derived from sales of commercial floorcovering products (primarily modular and broadloom carpet), interior fabrics, and specialty products. Sales of commercial floorcovering products and interior fabrics accounted for approximately 80% and 15%, respectively, of total net sales for fiscal 1996. The Company's 1996 revenues were $1 billion as compared to $802 million in fiscal 1995. The revenue increase of 25% is primarily the result of certain initiatives discussed below. HISTORICAL OPERATING TRENDS The Company pioneered the introduction of the modular carpet concept in the United States in 1973. Following its initial public offering in 1983, the Company's sales grew at an annual compound rate of 34.1% from 1983 to 1990, with sales increasing from $80 million to $623 million. The Company's growth during this period was fueled by diversification from the new construction market into the renovation market and other market segments, global expansion into the United Kingdom and Western Europe, Asia and Australia (including the 1988 strategic acquisition of Heuga Holding B.V., now known as Interface Europe B.V.), and diversification into interior fabrics with the acquisition of Guilford Industries, Inc. (now known as Interface Interior Fabrics, Inc.) in December 1986. The period from 1991 to 1994, however, was characterized by (i) weak demand for all floorcovering products in domestic and international commercial markets, (ii) poor worldwide economic conditions highlighted by an economic recession in Europe, (iii) increased competition, particularly in the U.S. modular carpet market, and (iv) a shift in demand away from the Company's fusion bonded carpet products towards tufted carpet products. During this period, the Company's operating results initially declined from peak levels that had been achieved in fiscal 1990. The adverse conditions of the 1991 to 1994 period tested the Company's resiliency, and the Company responded with initiatives that enabled it to achieve (after the 1991 decline in sales of 6.7%) sales and operating income increases totaling 24.7% and 33.9%, respectively, for the three-year period. The Company during this period implemented strict cost control measures and diversified and expanded its product offerings to include (through internal production changes) tufted modular carpet products that had increased in popularity and (through the strategic acquisitions of Bentley Mills in June 1993 and Prince Street in March 1994) high style, designer-oriented commercial broadloom carpet products. The Company also made strategic acquisitions to diversify and strengthen its position in other commercial interiors markets, including the acquisition of the Stevens Linen fabrics product line in 1993. In late 1993, the Company began implementation of the product design and development process and reengineering program for its U.S. modular floorcovering business that led to the Company's "mass customization" and "war-on-waste" initiatives. In 1995, the Company significantly enhanced its strategic position in the domestic interior fabrics market with the acquisitions of Toltec Fabrics, Inc. and the Intek division of Springs Industries. In 1996, the Company implemented a nationwide initiative to form a new distribution network, operating under the name Re:Source Americas. Pursuant to this initiative, the Company acquired and invested in 20 strategically located commercial floorcovering dealers, and formed preferred distributorship alliances with 59 select dealers throughout the United States. The Company also acquired Renovisions, Inc., a provider of specialized carpet replacement services. In addition, the Company continued to expand its specialty products operations by acquiring C-Tec, Inc. (now known as Interface Architectural Resources, Inc.), the second largest manufacturer of raised/access flooring systems in the United States. These initiatives have assisted the Company in achieving substantial growth in both sales and operating income, particularly in 1996 when the Company achieved sales and operating income increases of 24.9% and 27.9%, respectively, over 1995. During 1996, the Company derived approximately 35% of its sales from operations outside the United States. The Company believes that the geographic diversity of its sales reduces its dependence on any particular region and represents a significant competitive advantage. To better support its global marketing operations, the Company has manufacturing facilities in strategic locations around the world. An additional result of this strategy is that the Company's foreign currency risk is reduced somewhat because certain revenues are derived from products manufactured at facilities which incur their operating costs in the same foreign currency. 3 33 RESULTS OF OPERATIONS For fiscal 1996, the Company reported the highest net sales and net income in the Company's history. This was achieved through sales growth in all divisions (floorcoverings, interior fabrics, and specialty products), the formation of the Re:Source Americas network, the acquisitions of Renovisions and C-Tec in February 1996, and the acquisitions of Toltec Fabrics in June 1995, and Intek in December 1995. The sales growth of 24.9% in 1996 was achieved despite the weakening of the currencies of certain key markets compared to the U.S. dollar, the Company's reporting currency. During 1996, the Company experienced a decrease in cost of sales as a percentage of sales due to the reduction of manufacturing costs in the Company's carpet operations (particularly the U.S. carpet tile manufacturing facility) as the Company benefited from its make-to-order ("mass customization") production strategy and "war-on-waste" initiative, leading to increased manufacturing efficiencies and an attendant shift in product mix to higher margin products. The Company's interior fabrics business also decreased manufacturing costs as a result of improved manufacturing efficiencies associated with a similar waste reduction program and the Company's new state-of-the-art yarn manufacturing facility in Guilford, Maine. These factors more than offset the impact of raw material price increases experienced in the company's operations. The Company's capital expenditures program will continue to focus on (i) new and expanded manufacturing facilities worldwide and (ii) product innovation and development, which has been designed to address the market requirement for increased product flexibility while also reducing product cost through simplification. The following table shows, as a percentage of net sales, certain items included in the Company's consolidated statements of income.
Fiscal Year Ended 1996 1995 1994 - ----------------------------------------------------------------------------------------- Net Sales 100.0% 100.0% 100.0% Cost of sales 68.3 68.8 69.5 ----------------------------------------------- Gross profit on sales 31.7 31.2 30.5 Selling general and administrative expense 23.8 23.6 23.5 ----------------------------------------------- Operating income 7.9 7.6 7.0 Other expense, net 3.5 3.7 3.5 ----------------------------------------------- Income before taxes and extraordinary item 4.4 3.9 3.5 Taxes on income 1.8 1.4 1.2 ----------------------------------------------- Income before extraordinary item 2.6 2.5 2.3 Extraordinary loss on early extinguishment of debt (net of tax) 0.0 0.4 0.0 ----------------------------------------------- Net income 2.6 2.1 2.3 Preferred dividends 0.1 0.2 0.3 Net income applicable to common shareholders 2.5% 1.9% 2.0% - ------------------------------------------------------------------------------------------
FISCAL 1996 COMPARED WITH FISCAL 1995 The Company's net sales increased $200 million (24.9%) compared with 1995. The increase was attributable to (i) increased sales volume in 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) increased sales volume in the Company's floorcovering operations in Continental Europe and Australia; (iii) increased sales volume in the Company's interior fabrics operations associated with the acquisitions of Toltec and Intek in June and December 1995, respectively, and (iv) increased sales volume in the Company's specialty products division associated with the C-Tec acquisition in 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 sales to 68.3% in 1996 compared with 68.8% in 1995. The Company recognized a decrease in manufacturing costs in its floorcoverings operations as a result of further benefits obtained from the Company's mass customization production strategy and its "war-on-waste" initiative, which have continued to provide manufacturing efficiencies as well as a shift to higher 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 34 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 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 a mass customization 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 SG&A ratios than the Company. The increase was somewhat offset by the acquisitions of the commercial floorcovering dealers comprising the Company's new distribution network, which historically had lower SG&A 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 by the effect of the increase in the Company's income before taxes in proportion to the amortization of the Company's non-deductible goodwill. 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. FISCAL 1995 COMPARED WITH FISCAL 1994 In fiscal 1995, the Company's net sales increased $77 million (10.6%) compared with fiscal 1994. The increase was primarily attributable to (i) increased sales volume in the Company's floorcoverings operations in the United States, Southeast Asia and Greater China, (ii) continued improvement in unit volume in the Company's interior fabrics and chemical operations, (iii) sales generated by Toltec, which was acquired in June 1995, and (iv) the strengthening of certain key currencies (particularly the British pound sterling, Dutch guilder and Japanese yen) against the U.S. dollar, the Company's reporting currency. These increases were offset somewhat by a decrease in floorcoverings sales volume in Australia, Japan and certain markets within Europe. Cost of sales decreased as a percentage of net sales to 68.8% in 1995 compared with 69.5% in 1994. The decrease was due primarily to (i) a reduction of manufacturing costs in the Company's carpet operations (particularly the U.S. carpet tile manufacturing facility) as the Company implemented its mass customization program and "war-on-waste" initiative, (ii) the weakening of the U.S. dollar against certain key currencies, which lowered the cost of U.S. produced goods sold in export markets, and (iii) decreased manufacturing costs in the Company's interior fabrics business as a result of improved manufacturing efficiencies achieved mainly through waste reduction efforts. These benefits were somewhat offset by raw material price increases in the interior fabrics and chemical operations, and the acquisitions of Prince Street and Toltec, which, historically, had higher cost of sales ratios than the Company. Selling, general and administrative expenses, as a percentage of net sales, remained constant in fiscal 1995 as compared to fiscal 1994. Selling, general and administrative expenses did not decrease with the increase in volume due primarily to the increase in design and sampling costs associated with the mass customization initiative for which the full impact of the increased sales had not yet been realized. Other expense increased $4.8 million in fiscal 1995, due, by in large, to an increase in the Company's interest expense associated with an increase in bank debt and higher interest rates. The effective income tax rate was 35.8% for fiscal 1995, 5 35 compared to 36.0% in fiscal 1994. The decrease in the effective income tax rate was due primarily to (i) the elimination of certain valuation allowances associated with the Company's Dutch and Australian operations and (ii) the effect of the increase in the Company's income before taxes in proportion to the amortization of the Company's non-deductible goodwill. This decrease was offset by an increase in 1995, as compared to 1994, in foreign and U.S. tax effects attributable to foreign operations. Income before extraordinary items increased 23.6% to $20.3 million for fiscal 1995, compared to $16.5 million for fiscal 1994, due to the factors discussed above. The Company recognized an extraordinary charge of $3.5 million (net of applicable taxes) in the fourth quarter of fiscal 1995. The charge was attributed to the early extinguishment of the Company's Convertible Subordinated Debentures which were redeemed in December 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 1996, operating activities generated $55.0 million of cash compared with $76.5 million and $33.4 million in 1995 and 1994, respectively. The reduction in 1996 operating cash flows compared with 1995 was caused primarily by an increase in accounts receivable, subsequent to the Company's sale of $33.9 million of domestic receivables under a securitization program in 1995. The primary uses of cash during the three fiscal years ended December 29, 1996 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 1996, the aggregate additions to property and equipment required cash outlays of $99.9 million, while the acquisitions of businesses required $59.1 million, and dividends required $18.8 million. Management believes these capital investments will result in an expanded market presence and improved efficiency in the Company's production and distribution. The Company amended its existing revolving credit and term loan facilities and its accounts receivable securitization facility in 1996. The amendments, among other things, (i) increased the existing domestic revolving credit facility by $50 million to fund the implementation of the Company's new distribution network, (ii) provided for additional domestic subsidiaries to be included in the accounts receivable securitization facility, (iii) allowed for an internal corporate reorganization involving the Company and certain of its subsidiaries, and (iv) provided certain pricing and administrative enhancements. The Company, in connection with its acquisitions, issued 2,732,505 shares of Class A Common Stock in 1996. In addition, in December 1996, the Company notified its holders of Series A Cumulative Convertible Preferred Stock that it intended to redeem up to $10 million of the approximately $19.8 million (face value) Series A Preferred Stock then outstanding. As a result of this notice, subsequent to year end, 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 approximately 1,360,000 shares of the Company's Class A Common Stock. At the end of fiscal 1996, the Company estimated capital expenditure requirements of approximately $36 million for 1997, and had purchase commitments of $17.5 million. Management believes that the cash provided by operations and long-term borrowing arrangements will provide adequate funds for current commitments and other requirements in the foreseeable future. The Company recognized a $6.6 million decrease in its foreign currency translation adjustment account during 1996, because of the weakening of the Dutch guilder, British pound sterling and Japanese yen against the U.S. dollar. The Company utilizes foreign hedging contracts in order to match anticipated cash flows from foreign operations with local currency debt obligations. The Company employs a variety of off-balance sheet financial instruments to reduce its exposure to adverse fluctuations in interest and foreign currency exchange rates, including foreign currency swap agreements and foreign currency exchange contracts. At December 29, 1996, the Company had approximately $40.1 million (notional amount) of foreign currency hedge contracts outstanding, consisting principally of currency swap contracts. These contracts serve to hedge firmly committed Dutch guilder and Japanese yen currency revenues. At December 29, 1996, the Company utilized interest rate swap agreements to effectively convert approxi- 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 36 mately $73 million of variable rate debt to fixed rate debt. At December 29, 1996, the weighted average rate on borrowings was 6.9%. The interest rate swap agreements have maturity dates ranging from nine to 24 months. IMPACT OF INFLATION Petroleum-based products comprise approximately 90% of the cost of raw materials used by the Company in manufacturing. The Company historically has been able to offset at least some portion of increases in the cost of such petroleum-based products with finished product price increases. During 1996, the Company experienced raw material price increases in the interior fabrics and chemical operations which could not be entirely offset with finished product price increases. Management cannot predict with certainty the extent to which it will be able to pass through any future cost increases. RECENT ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board (FASB) has issued Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets being Disposed of," which provides guidance on how and when impairment losses are recognized on certain long-lived assets. This statement requires that long-lived assets and certain identifiable intangibles and goodwill be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, and that the asset be reported at the lower of carrying amount, or fair value less cost to sell. This Statement, which was adopted by the Company during 1996, did not have a material impact on operating results. The FASB has also issued SFAS No. 123, "Accounting for Stock-Based Compensation," which the Company also adopted in 1996. SFAS No. 123 requires companies to estimate the value of all stock-based compensation using a recognized pricing model. Companies have the option of recognizing this value as an expense or disclosing its effects on net income and earnings per share in the notes to their financial statements. The company has recognized this value by disclosing its effects in the notes to its financial statements. In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This Standard provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. This Standard is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996. The adoption of this Standard is not expected to impact Interface's consolidated financial statements. In March 1997, the FASB issued SFAS No. 128, "Earnings per Share." The new Standard simplifies the standards for computing earnings per share and requires presentation of two new amounts, basic and diluted earnings per share. The Company will be required to retroactively adopt this standard when it reports its operating results for the quarter and year ended December 1997. When the Company presents this information, it expects to report the restated amounts for 1996 and 1995 as shown in the following table.
1996 1995 - ---------------------------------------- Basic earnings per share: Income before extraordinary item $1.23 $1.02 Net income 1.23 .83 Diluted earnings per share: Income before extraordinary item 1.22 1.02 Net income 1.22 .83 - ----------------------------------------
SECURITIES LITIGATION REFORM ACT Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: Except for the historical information contained herein, the matters discussed in this annual report are forward-looking statements that involve risk and uncertainties, including but not limited to (i) economic, competitive, governmental and technological factors affecting the Company's operations, markets, products, services and prices, and (ii) other factors discussed in the Company's filings with the Securities and Exchange Commission. 7 Interface Inc. and Subsidiaries Consolidated Statements of Income 37
Fiscal Year Ended (in thousands, except share data) 1996 1995 1994 - -------------------------------------------------------------------------------------- Net sales $1,002,076 $802,066 $725,283 Cost of sales 684,455 551,643 504,098 ------------------------------ Gross profit on sales 317,621 250,423 221,185 Selling, general and administrative expenses 238,932 188,880 170,375 ------------------------------ Operating income 78,689 61,543 50,810 ------------------------------ Other expense Interest expense 32,772 26,753 24,094 Other 2,490 3,114 1,003 ------------------------------ Total other expense 35,262 29,867 25,097 ------------------------------ Income before taxes on income and extraordinary item 43,427 31,676 25,713 Taxes on income 17,032 11,336 9,257 ------------------------------ Income before extraordinary item 26,395 20,340 16,456 Extraordinary loss (net of tax) -- 3,512 -- ------------------------------ Net income 26,395 16,828 16,456 Preferred stock dividends 1,678 1,750 1,750 ------------------------------ Net income applicable to common shareholders $ 24,717 $ 15,078 $ 14,706 ------------------------------ Primary earnings per common share Income before extraordinary item $ 1.23 $ 1.02 $ 0.82 Extraordinary loss (net of tax) -- 0.19 -- ------------------------------ Net income $ 1.23 $ 0.83 $ 0.82 - --------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 8 Interface Inc. and Subsidiaries Consolidated Balance Sheets 38
(in thousands, except share data) 1996 1995 - -------------------------------------------------------------------------- ASSETS Current Cash and cash equivalents $ 8,762 $ 8,750 Accounts receivable 167,817 111,386 Inventories 146,678 134,504 Prepaid expenses 22,986 15,748 Deferred income taxes 7,057 3,998 ------------------- Total current assets 353,300 274,386 Property and equipment 208,791 183,299 Miscellaneous 51,385 37,841 Excess of cost over net assets acquired 249,070 218,825 ------------------- $862,546 $714,351 ------------------- LIABILITIES AND COMMON SHAREHOLDERS' EQUITY Current liabilities Notes payable $ 14,918 $ 8,546 Accounts payable 74,960 55,101 Accrued expenses 70,919 50,148 Current maturities of long-term debt 2,919 1,560 ------------------- TOTAL CURRENT LIABILITIES 163,716 115,355 Long-term debt, less current maturities 254,353 199,022 Senior subordinated notes 125,000 125,000 Deferred income taxes 23,484 18,060 ------------------- TOTAL LIABILITIES 566,553 457,437 Minority interest 3,125 -- Redeemable preferred stock 19,750 25,000 Common stock 2,536 2,203 Additional paid-in capital 124,557 96,863 Retained earnings 166,828 147,039 Foreign currency translation adjustment (3,057) 3,555 Treasury stock, 3,600,000 Class A shares, at cost (17,746) (17,746) ------------------- $862,546 $714,351 - --------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 9 Interface Inc. and Subsidiaries Consolidated Statements of Cash Flow 39
Fiscal Year Ended (in thousands) 1996 1995 1994 - ------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES Net income $ 26,395 $ 16,828 $ 16,456 Adjustments to reconcile net income to cash provided by operating activities Depreciation and amortization 35,305 28,944 28,180 Extraordinary loss on early extinguishment of debt (net of tax) -- 3,512 -- Deferred income taxes 5,438 1,431 (1,994) Working capital changes Accounts receivable (17,465) 25,978 (2,788) Inventories (2,199) 5,979 (6,849) Prepaid expenses and other (6,870) 8 (1,671) Accounts payable and accrued expenses 14,419 (6,132) 2,061 --------------------------------------- $ 55,023 $ 76,548 $ 33,395 --------------------------------------- INVESTING ACTIVITIES Capital expenditures (36,436) (42,123) (21,315) Acquisitions of businesses (30,151) (27,554) (1,409) Changes in escrowed and restricted funds -- 2,663 1,352 Other (11,425) (5,145) (5,030) --------------------------------------- $ (78,012) $ (72,159) $(26,402) --------------------------------------- FINANCING ACTIVITIES Borrowings on long-term debt 154,224 61,471 -- Principal repayments on long-term debt (107,561) (73,406) -- Proceeds from issuance of subordinated notes -- 121,543 -- Extinguishment of convertible subordinated debentures -- (106,419) -- Borrowing under lines of credit 24,410 12,620 75,011 Repayments of lines of credit (44,512) (10,655) (75,233) Proceeds from issuance of common stock 2,916 984 678 Dividends paid (6,606) (6,132) (6,073) Other -- -- (2,026) --------------------------------------- $ 22,871 $ 6 $ (7,643) --------------------------------------- Net cash provided by (used for) operating, investing, and financing activities (118) 4,395 (650) Effect of exchange rate changes on cash 130 (34) 365 --------------------------------------- CASH AND CASH EQUIVALENTS Net increase (decrease) 12 4,361 (285) Balance, beginning of year 8,750 4,389 4,674 --------------------------------------- Balance, end of year $ 8,762 $ 8,750 $ 4,389 - ------------------------------------------------------------------------------------------------
10 40 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS Interface, Inc. 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, Bentley and Heuga brands and, through its Bentley Mills and Prince Street subsidiaries participates in the high quality, designer-oriented segment of the broadloom carpet market, and now 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, and Intek 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 Interface, Inc. ("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. 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 $0.1 million and $1.4 million for the years ended 1996 and 1995, respectively. Depreciation expense amounted to approximately $25.0 million, $18.2 million and $20.8 million for the years ended 1996, 1995 and 1994, respectively. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between the fair value and carrying value of the asset. EXCESS OF COST OVER NET ASSETS ACQUIRED Excess of cost over net assets acquired is the excess of the purchase price over the fair value of net assets acquired in business combinations accounted for as purchases. Excess of cost over net assets acquired is amortized on a straight-line basis over the periods benefitted, principally twenty-five to forty years. Accumulated amortization amounted to approximately $43.5 million and $33.2 million at December 29, 1996 and December 31, 1995, 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. 11 41 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 Earnings per common share are computed by dividing net income applicable to common shareholders by the combined weighted average number of shares of Class A and Class B Common Stock outstanding during each year. The redeemable Series A Preferred Stock is not considered to be a common stock equivalent because at the date of issuance, the stated dividend rate was greater than 66 2/3% of the then current average Aa corporate bond yield. In computing primary earnings per share, the preferred stock dividend reduces income applicable to common shareholders. Primary earnings per share are based upon 20,060,347 shares, 18,254,965 shares and 18,012,722 shares for the years ended 1996, 1995 and 1994, respectively. Fully diluted earnings per share have not been presented because the differences are insignificant during 1996 and were antidilutive during 1995 and 1994. For the purposes of computing earnings per common share and dividends paid 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). In March 1997, the FASB issued SFAS No. 128, "Earnings per Share." The new Standard simplifies the standards for computing earnings per share and requires presentation of two new amounts, basic and diluted earnings per share. The Company will be required to retroactively adopt this standard when it reports its operating results for the quarter and year ended December 1997. When the Company presents this information, it expects to report the following restated amounts for 1996 and 1995:
Year Ended - ----------------------------------------------------- 1996 1995 - ----------------------------------------------------- Basic earnings per share: Income before extraordinary item $1.23 $1.02 Net income 1.23 .83 Diluted earnings per share: Income before extraordinary item 1.22 1.02 Net income 1.22 .83 =====================================================
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. Profit estimates are revised periodically based upon changes in facts. Any losses identified on contracts are recognized immediately. 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 debt, swaps, forward currency contracts and currency options are based on quoted market prices or pricing models using current market rates. TRANSLATION OF FOREIGN CURRENCIES The financial position and results of operations of the Company's foreign subsidiaries are measured generally using local currencies as the functional currency. Assets and liabilities of these subsidiaries are translated into U.S. dollars at the exchange rate in effect at each year end. Income and expense items are translated at average exchange rates for the year. The resulting translation adjustments are recorded in the foreign currency translation adjustment account. In the event of a divestiture of a foreign subsidiary, the related foreign currency translation results are reversed from equity to income. Foreign currency exchange gains and losses are included in income. However, amounts are not material in any year. 12 Interface Inc. and Subsidiaries Notes to Consolidated Financial Statements 42 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 "1996", "1995", and "1994" mean the fiscal years ended December 29, 1996, December 31, 1995 and January 1, 1995, respectively, each comprising 52 weeks. Quarterly financial results are based upon a 13 week reporting period. RECLASSIFICATIONS Certain reclassifications have been made to the 1995 and 1994 financial statements to conform to the 1996 presentation. NOTE 2 BUSINESS ACQUISITIONS 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 Class A 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. The following unaudited pro forma information presents the consolidated results of operations of the Company as if the acquisitions described above had occurred at the beginning of 1995. The acquisitions described below would not materially affect the pro forma financial information. The pro forma financial information is not necessarily indicative of what would have occurred had the acquisitions been made as of that date, nor is it indicative of future results of operations. The pro forma amounts give effect to appropriate adjustments for the fair value of the net assets acquired, amortization of the excess of the purchase price over the net assets acquired, interest expense, income taxes and the issuance of common stock.
Year Ended (in thousands, except share data) 1996 1995 - -------------------------------------------------------------------------------------------------------- Net sales $1,086,229 $988,655 Income before extraordinary item 26,264 19,985 Net income applicable to common shareholders 24,586 14,723 - -------------------------------------------------------------------------------------------------------- Primary earnings per common share: Income before extraordinary item $ 1.16 $ 0.87 Extraordinary loss on early extinguishment of debt (net of tax) -- 0.17 - -------------------------------------------------------------------------------------------------------- Net income $ 1.16 $ 0.70 ========================================================================================================
13 43 Note 2 BUSINESS ACQUISITIONS (CONTINUED) The fair values of the net assets acquired and liabilities assumed were as follows:
(in thousands) - -------------------------------------------------------------------------------------------------------- Property and equipment $ 3,951 Inventories 10,213 Accounts receivable 35,428 Goodwill 33,882 Other assets 3,090 Accounts payable and accrued expenses (23,190) Long-term debt (21,563) -------- 41,811 Value of stock and notes issued (20,160) -------- Cash used for acquisitions $ 21,651 =======================================================================================================
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, due in February 1997. The transaction was accounted for as a purchase, and accordingly, the results of operations of Renovisions 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 $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. ("Toltec"), 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. In March 1994, the Company acquired 100% of the outstanding capital stock of Prince Street Technologies, Ltd., a manufacturer of broadloom carpet. As consideration, the Company issued 674,953 shares of Class A Common Stock valued at approximately $8.9 million. The transaction was accounted for as a purchase. At the acquisition date, the fair value of the net liabilities of Prince Street exceeded the fair value of the net assets by approximately $0.6 million. Accordingly, the excess of the purchase price ($9.3 million) over the fair value of the net liabilities assumed was approximately $9.9 million and is being amortized over 40 years. The results of the operations of Prince Street since the acquisition date have been included within the consolidated financial statements. Note 3 CASH AND CASH EQUIVALENTS Cash and cash equivalents consisted of the following:
(in thousands) 1996 1995 - --------------------------------------------- Cash $8,762 $7,261 Cash equivalents --- 1,489 - --------------------------------------------- $8,762 $8,750 =============================================
The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. Under the Company's cash management program, which provides for daily replenishment of major bank accounts for check clearing requirements, checks in transit are not con 14 Interface Inc. and Subsidiaries Notes to Consolidated Financial Statements 44 Note 3 CASH AND CASH EQUIVALENTS (CONTINUED) sidered reductions of cash or accounts payable until presented to the bank for payment. At December 29, 1996 and December 31, 1995, checks not yet presented to the bank totaled approximately $12.3 and $7.7 million, respectively. Cash payments for interest amounted to approximately $27.8 million, $27.9 million and $24.0 million for the years ended 1996, 1995 and 1994, respectively. Income tax payments amounted to approximately $9.8 million, $8.2 million and $6.5 million for the years ended 1996, 1995 and 1994, respectively. NOTE 4 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. The participating interest is sold at a discount. The purchase discount is the financial institution's commercial paper rate plus .45% and is included in other expense in the accompanying consolidated statements of income. At December 29, 1996, the rate was 6.084%. The Company acts as an agent for the purchaser by performing record keeping and collection functions. The uncollected receivables sold at December 29, 1996 and December 31, 1995 amounted to $31.7 million and $33.9 million, respectively. As of December 29, 1996 and December 31, 1995, the allowance for bad debts amounted to approximately $7.3 million and $5.9 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." This Standard provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. This Standard is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996. The adoption of this Standard is not expected to impact Interface's consolidated financial statements. Note 5 INVENTORIES Inventories are summarized as follows:
(in thousands) 1996 1995 - ------------------------------------------------ Finished goods $ 81,034 $ 76,407 Work-in-process 30,464 26,168 Raw materials 35,180 31,929 - ------------------------------------------------ $146,678 $134,504 ================================================
Note 6 PROPERTY AND EQUIPMENT Property and equipment consisted of the following:
(in thousands) 1996 1995 - -------------------------------------------------------------- Land $ 13,038 $ 11,109 Buildings 98,706 82,189 Equipment 232,489 200,312 Construction-in-process 32,078 41,635 - -------------------------------------------------------------- 376,311 335,245 Accumulated depreciation (167,520) (151,946) - -------------------------------------------------------------- $ 208,791 $ 183,299 ==============================================================
The estimated cost to complete construction in progress for which the Company was committed at December 29, 1996 was approximately $17.5 million. Note 7 ACCRUED EXPENSES Accrued expenses are summarized as follows:
(in thousands) 1996 1995 - ------------------------------------------------------- Taxes $16,868 $10,130 Compensation 20,541 13,692 Interest 5,276 2,229 Other 28,234 24,097 - ------------------------------------------------------- $70,919 $50,148 - -------------------------------------------------------
Note 8 LONG-TERM DEBT Long-term debt, exclusive of the Company's 9.5% Senior 15 45 Subordinated Notes due 2005 (see Note 9), consisted of the following:
(in thousands) 1996 1995 - --------------------------------------------------- Secured term loan $50,000 $ 50,000 Revolving credit agreement 181,211 143,209 Other 26,061 7,373 - --------------------------------------------------- Total long-term debt 257,272 200,582 Less current maturities (2,919) (1,560) - --------------------------------------------------- $254,353 $199,022 ===================================================
The Company maintains a revolving credit and secured term loan facility which provides a maximum credit limit of $250 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 $50 million term portion of the facility is to be repaid in two equal installments of $25 million at December 29, 2000 and December 31, 2001, plus accrued interest. The revolving credit facility 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, 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 (8.25% at December 29, 1996). 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 29, 1996, approximately $25.8 million of the Company's retained earnings were unrestricted and available for payment of dividends under the most restrictive terms of the agreement. The Company considers the fair value of long-term debt to approximate its current value. 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) - ----------------------------------------------------- 1997 $ 2,919 1998 2,218 1999 1,963 2000 30,663 2001 -- Thereafter 219,509 - ----------------------------------------------------- $257,272 =====================================================
Additionally, the Company maintains approximately $38 million in revolving lines of credit through several of its subsidiaries. Interest is generally charged at the prime lending rate or LIBOR. The weighted average interest rate for 1996 was approximately 7.2%. Approximately $14.9 million and $8.5 million was outstanding under these lines at December 29, 1996 and December 31, 1995, respectively. NOTE 9 SENIOR SUBORDINATED NOTES In November 1995, the Company issued $125 million in 9.5% Senior Subordinated Notes due 2005 (the "Notes"). Interest, which commenced on May 15, 1996, 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., Guilford of Maine, Inc., Prince Street Technologies, Inc. and several other smaller domestic subsidiaries. (See Note 19 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 the date fixed for redemption. At December 29, 1996, the estimated fair value of the notes was approximately $135.2 million. NOTE 10 CONVERTIBLE SUBORDINATED DEBENTURES The Company had $103.9 million aggregate principal amount of Convertible Subordinated Debentures ("Debentures"). The Debentures were unsecured obligations of the Company with interest, payable semi-annually, at 8%. They were convertible into shares of the Company's 16 Interface Inc. and Subsidiaries Notes to Consolidated Financial Statements 46 NOTE 10 CONVERTIBLE SUBORDINATED DEBENTURES (CONTINUED) Class A Common Stock at a conversion price of approximately $16.92 per share. During 1995, approximately $101.5 million aggregate principal amount of the Debentures were extinguished with the proceeds from the issuance of the Company's 9.5% Senior Subordinated Notes (see Note 9). Approximately $2.5 million aggregate principal amount of the Debentures were extinguished with the issuance of 145,034 shares of Class A Common Stock. This portion of the extinguishment was a non-cash transaction and accordingly not included in the statement of cash flows. The Company recorded an extraordinary loss of approximately $3,512,000 ($0.19 per common share), net of income taxes of approximately $2.2 million, consisting of redemption premiums and the write-off of deferred financing costs, related to the early extinguishment of this debt. NOTE 11 REDEEMABLE PREFERRED STOCK The Company is authorized to issue 5,000,000 shares of $1.00 par value preferred stock 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 September and November 1996, approximately $5.3 million (face value) Series A Preferred Stock was converted into 358,493 shares of Class A Common Stock. In December 1996, the Company notified its Series A preferred shareholders that it intended to redeem up to $10 million of the approximately $19.7 million (face value) Series A Preferred Stock then outstanding. As a result of this notice, subsequent to year end, 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 approximately 1,360,000 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. NOTE 12 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. 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 $.245 per share for the year ended 1996 and $.24 per share for the years ended 1995 and 1994. 17 47 NOTE 12 COMMON STOCK AND STOCK OPTIONS (CONTINUED) The following table shows changes in common shareholders' equity.
Foreign Class A Class B Additional Currency -------------- -------------- Paid-In Retained Translation (in thousands) Shares Amount Shares Amount Capital Earnings Adjustment - -------------------------------------------------------------------------------------------------- Balance at January 2, 1994 17,918 $1,792 3,121 $312 $ 83,989 $125,960 $(12,423) Net income -- -- -- -- -- 16,456 -- Conversion of common stock 44 4 (44) (4) -- -- -- Issuance of common stock 753 75 -- -- 9,461 -- -- Cash dividends paid -- -- -- -- -- (6,073) -- Foreign currency translation adjustment -- -- -- -- -- -- 12,287 ------------------------------------------------------------------- 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 3,314 333 -- -- 27,694 -- -- 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) =================================================================================================
18 Interface Inc. and Subsidiaries Notes to Consolidated Financial Statements 48 NOTE 12 COMMON STOCK AND STOCK OPTIONS (CONTINUED) The Company has Key Employee Stock Option Plans ("the 1983 Plan" and "the 1993 Plan") and an Offshore Stock Option Plan ("Offshore Plan"), under which a committee of the Board of Directors is authorized to grant key employees, including officers, options to purchase the Company's Common Stock. Options are exercisable for shares of Class A or Class B Common Stock at a price not less than 100% of the fair market value on the date of grant. The options generally become exercisable 20% per year over a five year period from the date of the grant and the options generally expire ten years from the date of the grant. An aggregate of 1,500,000 shares of Common Stock (Class A or Class B) have been reserved for issuance under the 1993 Plan. No options are available to be granted under the 1983 Plan. An aggregate of 830,674 shares of Class A Common Stock have been reserved for issuance under the 1983 Plan. An aggregate of 1,000,000 shares of Common Stock (Class A or Class B) have been reserved for issuance under the Offshore Plan. The following tables summarize activity on stock options:
number weighted average of shares exercise price - ------------------------------------------------------------------------- Outstanding at January 1, 1995, 1,808,000 $13.43 Granted 360,000 14.49 Exercised (96,000) 10.53 Forfeited or cancelled (125,000) 14.03 - ------------------------------------------------------------------------- Outstanding at December 31, 1995 1,947,000 13.18 Granted 308,000 13.47 Exercised (224,000) 13.04 Forfeited or cancelled (112,000) 13.76 - ------------------------------------------------------------------------- Outstanding at December 29, 1996 1,919,000 $13.30 ========================================================================= Options exercisable at December 31, 1995 849,000 $13.45 December 29, 1996 821,000 13.35 ========================================================================= Weighted average fair value of options granted during the year ended (in thousands) - ------------------------------------------------------------------------- December 31, 1995 $1,823 December 29, 1996 1,395 - -------------------------------------------------------------------------
The weighted average remaining life of options outstanding at December 29, 1996 was 5.8 years. The range of exercise prices was $10.31-$16.50. 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 1996 and 1995. 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 (in thousands, except share data) 1996 1995 - ------------------------------------------------------ Net income applicable to common shareholders as reported $24,717 $15,078 pro forma 24,202 14,786 - ------------------------------------------------------ Earnings per share as reported $ 1.23 $ 0.83 pro forma 1.21 0.81 - ------------------------------------------------------
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 1996 and 1995: Dividend yield of .49% for both years; expected volatility of 30% for both years; a risk free interest rate of 6.11% in 1996 and 6.53% in 1995; and an expected option life of 4.92 years in 1996 and 4.38 years in 1995. 19 49 Note 13 TAXES ON INCOME Provisions for federal, foreign, and state income taxes in the consolidated statements of income consisted of the following components:
Year Ended (in thousands) 1996 1995 1994 - ----------------------------------------------------- Current: Federal $ 5,968 $ 5,331 $ 4,878 Foreign 3,284 5,844 4,660 State 2,418 1,592 1,713 - ----------------------------------------------------- 11,670 12,767 11,251 ===================================================== Deferred (reduction): Federal 818 1,495 (445) Foreign 5,770 (1,189) (2,522) State (1,226) (316) (875) - ----------------------------------------------------- 5,362 (10) (3,842) ===================================================== Increase (decrease) in valuation allowance -- (1421) 1848 - ----------------------------------------------------- $17,032 $11,336 $ 9,257 =====================================================
Income before taxes on income consisted of the following:
Year Ended (in thousands) 1996 1995 1994 - --------------------------------------------------------------------- U.S. operations $17,186 $20,212 $18,072 Foreign operations 26,241 11,464 7,641 - --------------------------------------------------------------------- $43,427 $31,676 $25,713 =====================================================================
Deferred income taxes for the years ended December 29, 1996 and December 31, 1995, 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 29, 1996 and December 31, 1995, are as follows:
(in thousands) 1996 1995 - ------------------------------------------------------------- ASSETS LIABILITIES Assets Liabilities Basis difference of property and equipment $ -- $23,484 $ -- $19,607 Net operating loss carry forwards 3,212 -- 8,015 -- Other differences in bases of assets and liabilities 7,051 -- 4,391 -- - ------------------------------------------------------------- $10,263 $23,484 $12,406 $19,607 =============================================================
At December 29, 1996, the Company's foreign subsidiaries had approximately $2 million in net operating losses available for an unlimited carryforward period. Additionally, the Company had approximately $57 million in state net operating losses expiring at various times through 2011. 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 1996 1995 1994 - ---------------------------------------------------------- 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 1.8 2.6 2.2 Amortization of excess of cost over net assets acquired and related purchase accounting adjustments 5.1 6.1 7.6 Foreign and U.S. tax effects attributable to foreign operations (2.1) (2.4) (10.0) Valuation allowance -- (4.5) 2.2 Other (0.6) (1.0) (1.0) - ---------------------------------------------------------- Taxes on income at effective rates 39.2% 35.8% 36.0% - ----------------------------------------------------------
20 Interface Inc. and Subsidiaries Notes to Consolidated Financial Statements 50 Note 13 TAXES ON INCOME(CONTINUED) Undistributed earnings of the Company's foreign subsidiaries amounted to approximately $67.5 million at December 29, 1996. 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 $3.4 million would be payable upon remittance of all previously unremitted earnings at December 29, 1996. Note 14 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 (London Interbank Offered Rate). 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 29, 1996 and December 31, 1995, the Company had utilized interest rate swap agreements to effectively convert approximately $73 million of variable rate debt to fixed rate debt. The weighted average rate on these borrowings was 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 forward exchange and 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 29, 1996 and December 31, 1995. The contracts served to hedge firmly committed Dutch guilder, German mark, Japanese yen, French franc, British pound sterling, and other foreign currency revenues. The contracts generally have maturity dates of six to nine months. 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 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. 21 51 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.
(in thousands) 1996 1995 - ----------------------------------------------------- NOTIONAL FAIR Notional Fair AMOUNTS VALUES Amounts Values Interest Rate Management Liabilities Swap agreement $73,000 $ (448) $73,000 $ (426) Foreign Currency Management Liabilities Forward contracts -- -- 3,427 102 Swap agreement 40,063 (3,864) 65,000 (7,328) =====================================================
Note 15 Commitments and Contingencies The Company leases certain marketing locations, distribution facilities, and equipment. At December 29, 1996 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) - ------------------------------------ 1997 $11,154 1998 9,831 1999 7,293 2000 4,612 2001 1,597 Thereafter 1,754 - ------------------------------------ $36,241 ====================================
Rental expense amounted to approximately $9.4 million, $9.3 million and $11.8 million for the fiscal years ended 1996, 1995 and 1994, respectively. In accordance with a Workers' Compensation self-insurance arrangement in the State of Maine, the Company is required by state law to maintain a $4.4 million irrevocable letter of credit. NOTE 16 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 Guilford, which has a 401(k) retirement investment plan. The benefits are generally based on years of service and the employee's average monthly compensation. Pension expense was $1.3 million, $1.1 million and $0.8 million for the years ended 1996, 1995 and 1994, respectively. The ranges of assumptions used for the actuarial determinations reflect the different economic environments within the various countries where the Plans exist. In fiscal 1996, the weighted average rate of return on plan assets was 7.7% and the measurement of the projected benefit obligation was based on an assumed weighted average discount rate of 7.8% and long-term rate of compensation increases of 4.3%. In fiscal 1995, the assumed weighted average rate of return on plan assets was 7.7% and the measurement of the projected benefit obligation was based on an assumed weighted average discount rate of 8% and long-term rate of compensation increases of 4.7%. The Company has 401(k) retirement investment plans ("401(k) Plans"), which are open to all U.S. employees with one or more years of service. Effective October 1, 1996, all existing 401(k) plans of the Company's subsidiaries were merged into a new plan, "The Interface, Inc. Savings and Investment Plan and Trust." The new 401(k) Plans call for Company contributions on a sliding scale based on the level of the employee's contribution. Approximately 68% of eligible employees were enrolled in the 401(k) Plans as of December 29, 1996. The Company's contributions are funded monthly by payment to the 401(k) Plan administrators. Company contributions totalled approximately $1.5 million, $0.6 million and $0.6 million for the years ended 1996, 1995 and 1994, respectively. 22 Interface Inc. and Subsidiaries Notes to Consolidated Financial Statements 52 Note 16 EMPLOYEE BENEFIT PLANS (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.
(in thousands) 1996 1995 - --------------------------------------------------------------------- Plan assets at fair value, primarily equity and fixed income securities $72,951 $66,392 Actuarial present value of benefit obligations: Vested benefits 59,558 52,339 Nonvested benefits 1,454 1,124 ----------------- Accumulated benefit obligation 61,012 53,463 Effect of projected future salary increases 6,007 4,082 ----------------- Projected benefit obligation 67,019 57,545 ----------------- Plan assets in excess of projected benefit obligation 5,932 8,847 Unrecognized net gain from past experience different from that assumed (7,165) (8,645) Unrecognized prior service cost 327 362 Unrecognized net liability existing at the date of initial application of SFAS 87 1,503 1,733 ----------------- Prepaid pension cost $ 597 $ 2,297 ----------------- Net pension cost included the following components: Service cost - benefits earned during the period $ 1,928 $ 1,780 Interest cost on projected benefit obligation 4,893 4,315 Actual return on plan assets (6,124) (9,568) Net amortization and deferral 642 4,611 ----------------- Net pension cost $ 1,339 $ 1,138 =====================================================================
23 53 Note 17 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 1996, 1995 and 1994 is as follows:
(in thousands) 1996 1995 1994 - ---------------------------------------------------------------------------- Sales to Unaffiliated Customers United States $ 656,044 $440,715 $394,605 Americas, excluding the United States 22,030 23,165 22,325 Europe 257,243 267,116 246,376 Asia-Pacific 66,759 71,070 61,977 -------------------------------- Total $1,002,076 $802,066 $725,283 -------------------------------- Operating Income United States $ 51,251 $ 40,608 $ 34,111 Americas, excluding the United States 1,519 1,170 522 Europe 30,815 26,046 20,707 Asia-Pacific 2,286 134 185 Corporate expenses (7,182) (6,415) (4,715) -------------------------------- Total $ 78,689 $ 61,543 $ 50,810 -------------------------------- Identifiable Assets United States $ 523,635 $366,128 $332,653 Americas, excluding the United States 11,985 8,313 7,951 Europe 273,094 290,486 304,894 Asia-Pacific 53,832 49,424 37,910 -------------------------------- Total $ 862,546 $714,351 $683,408 ============================================================================
24 Interface Inc. and Subsidiaries Notes to Consolidated Financial Statements 54 Note 18 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.
First Second Third Fourth (in thousands, except share amounts) Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------- YEAR ENDED 1996 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 Primary earnings per common share 0.18 0.29 0.35 0.41 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 - ------------------------------------------------------------------------------------------- Year Ended 1995 Net sales $191,327 $202,818 $203,269 $204,652 Gross profit 58,355 62,728 63,695 65,645 Income before extraordinary item 4,016 5,075 5,327 5,922 Net income 4,016 5,075 5,327 2,410 Net income applicable to common shareholders 3,579 4,638 4,889 1,972 Primary earnings per common share before extraordinary item 0.20 0.25 0.27 0.30 Primary earnings per common share 0.20 0.25 0.27 0.11 Share prices: High 15 1/8 15 1/8 18 17 3/8 Low 11 5/8 11 7/8 12 1/4 15 Dividends per common share 0.06 0.06 0.06 0.06 - -------------------------------------------------------------------------------------------
25 55 Note 19 SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING Financial Statements
Interface, Inc. Consolidation Guarantor Non-Guarantor (Parent and Elimination Consolidated (in thousands) Subsidiaries Subsidiaries Corporation) Entries Totals - ------------------------------------------------------------------------------------------------------------------------ YEAR ENDED 1996 Net sales $738,812 399,499 - (136,235) $1,002,076 Cost of sales 524,584 296,105 - (136,235) 684,454 ----------------------------------------------------------------- Gross profit on sales 214,228 103,394 - - 317,622 Selling, general and administrative expenses 152,484 69,227 17,221 - 238,932 ----------------------------------------------------------------- Operating income 61,744 34,167 (17,221) - 78,690 Other expense (income) Interest expense 8,679 5,263 18,830 - 32,272 Other 10,380 4,002 (11,891) - 2,491 ----------------------------------------------------------------- Total other expenses 19,059 9,265 6,939 - 35,263 ----------------------------------------------------------------- Income before taxes on income and equity in income of subsidiaries 42,685 24,902 (24,160) - 43,427 Taxes on income 13,029 8,842 (4,839) - 17,032 Equity in income of subsidiaries - - 45,716 (45,716) - ----------------------------------------------------------------- Income before extraordinary items 29,656 16,060 26,395 (45,716) 26,395 Extraordinary loss (net of tax) - - - - - Net income 29,656 16,060 26,395 (45,716) 26,395 Preferred stock dividends - - 1,678 - 1,678 ----------------------------------------------------------------- Net income applicable to common shareholders $ 29,656 $ 16,060 $ 24,717 $(45,716) $ 24,717 - ------------------------------------------------------------------------------------------------------------------------
26 Interface Inc. and Subsidiaries Notes to Consolidated Financial Statements 56
Interface, Inc. Consolidation Guarantor Non-Guarantor (Parent and Elimination Consolidated (in thousands) Subsidiaries Subsidiaries Corporation) Entries Totals - ---------------------------------------------------------------------------------------------------------------------------- YEAR ENDED 1995 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 expenses 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 ============================================================================================================================
27 57
Interface, Inc. Consolidation Guarantor Non-Guarantor (Parent and Elimination Consolidated (in thousands) Subsidiaries Subsidiaries Corporation) Entries Totals - ------------------------------------------------------------------------------------------------------------------------------------ YEAR ENDED 1994 Net sales $434,580 $389,823 $ - $(99,120) $725,283 Cost of sales 310,493 292,394 - (98,789) 504,098 ---------------------------------------------------------------------------------- Gross profit on sales 124,087 97,429 - (331) 221,185 Selling, general and administrative expenses 93,303 76,965 107 - 170,375 ---------------------------------------------------------------------------------- Operating income 30,784 20,464 (107) (331) 50,810 ---------------------------------------------------------------------------------- Other expense (income) Interest expense 7,673 9,287 7,134 - 24,094 Other 2,468 3,205 (4,670) - 1,003 ---------------------------------------------------------------------------------- Total other expenses 10,141 12,492 2,464 - 25,097 ---------------------------------------------------------------------------------- Income before taxes on income and equity in income of subsidiaries 20,643 7,972 (2,571) (331) 25,713 Taxes on income 7,355 3,986 (2,084) - 9,257 Equity in income of subsidiaries - - 17,274 (17,274) - ---------------------------------------------------------------------------------- Net income 13,288 3,986 16,787 (17,605) 16,456 Preferred stock dividends - - 1,750 - 1,750 ---------------------------------------------------------------------------------- Net income applicable to common shareholders $ 13,288 $ 3,986 $15,037 $(17,605) $ 14,706 ====================================================================================================================================
28 Interface Inc. and Subsidiaries Notes to Consolidated Financial Statements 58
Interface, Inc. Consolidation Guarantor Non-Guarantor (Parent and Elimination Consolidated (in thousands) Subsidiaries Subsidiaries Corporation) Entries Totals - ----------------------------------------------------------------------------------------------------------------------- YEAR ENDED 1996 ASSETS Current Cash and cash equivalents $ 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 17,768 381,670 (508,415) - 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 $757,779 $(1,018,000) $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 48,176 27,581 (2,272) - 73,485 Current maturities of long-term debt 2,244 22 - - 2,266 -------------------------------------------------------------------------- Total current liabilities 109,919 56,996 (1,286) - 165,629 Long-term debt, less current maturities 235,909 42,756 299,156 (322,256) 255,565 Senior subordinated notes - - 125,000 - 125,000 Deferred income taxes 12,936 1,009 9,539 - 23,484 -------------------------------------------------------------------------- Total liabilities 358,764 100,761 432,409 (322,256) 569,678 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 11,030 124,566 (190,102) 124,557 Retained earnings 127,477 103,678 182,897 (247,224) 166,828 Foreign currency translation adjustment (4,261) 4,451 (4,368) 1,121 (3,057) Treasury stock - - - (17,746) (17,746) -------------------------------------------------------------------------- $800,648 322,119 757,779 (1,018,000) 862,546 =======================================================================================================================
29 59
Interface, Inc. Consolidation Guarantor Non-Guarantor (Parent and Elimination Consolidated (in thousands) Subsidiaries Subsidiaries Corporation) Entries Totals - ----------------------------------------------------------------------------------------------------------------------------- 1995 ASSETS Current Cash and cash equivalents Escrowed and restricted funds $ 2,984 $ 5,138 $ 628 $ - $ 8,750 Accounts receivable 69,897 63,361 (21,872) - 111,386 Inventories 82,381 52,123 - - 134,504 Miscellaneous 2,281 11,359 6,106 - 19,746 ----------------------------------------------------------------------------- Total current assets 157,543 131,981 (15,138) - 274,386 Property and equipment, less accumulated depreciation 128,859 53,136 1,304 - 183,299 Investments in subsidiaries 112,820 17,746 300,688 (431,254) - Miscellaneous 59,374 22,631 304,249 (348,413) 37,841 Excess of cost over net assets acquired 137,602 81,223 - - 218,825 ----------------------------------------------------------------------------- $596,198 $306,717 $591,103 $(779,667) $714,351 ============================================================================================================================= LIABILITIES AND COMMON SHAREHOLDERS' EQUITY Current Notes payable $ 745 $ 7,801 $ - $ - $ 8,546 Accounts payable 30,439 23,923 739 - 55,101 Accrued expenses 22,018 21,742 6,388 - 50,148 Current maturities of long-term debt 1,550 10 - - 1,560 ----------------------------------------------------------------------------- Total current liabilities 54,752 53,476 7,127 - 115,355 Long-term debt, less current maturities 146,231 47,081 171,000 (165,290) 199,022 Convertible subordinated debentures - - 125,000 - 125,000 Deferred income taxes 12,237 550 5,273 - 18,060 ----------------------------------------------------------------------------- Total liabilities 213,220 101,107 308,400 (165,290) 457,437 Redeemable preferred stock 57,891 - 25,000 (57,891) 25,000 Common stock 62,054 92,634 2,203 (154,688) 2,203 Additional paid-in capital 165,022 11,030 96,963 (176,152) 96,863 Retained earnings 97,821 87,617 161,430 (199,829) 147,039 Foreign currency translation adjustment 190 14,329 (2,893) (8,071) 3,555 Treasury stock - - - (17,746) (17,746) ----------------------------------------------------------------------------- $596,198 $306,717 591,103 (779,667) $ 714,351 =============================================================================================================================
30 Interface Inc. and Subsidiaries Notes to Consolidated Financial Statements 60
Interface, Inc. Consolidation Guarantor Non-Guarantor (Parent and Elimination Consolidated (in thousands) Subsidiaries Subsidiaries Corporation) Entries Totals - ------------------------------------------------------------------------------------------------------------------------- YEAR ENDED 1996 Cash flows from operating activities $ 29,718 $ 61,218 $(35,913) $ - $ 55,023 -------------------------------------------------------------------- Cash flows from investing activities: Purchase of plant and equipment (21,671) (11,459) (3,306) - (36,436) Acquisitions, net of cash acquired - - (58,447) - (58,447) Other - (3,518) - - (3,518) -------------------------------------------------------------------- Net cash provided by (used in) investing activities (21,671) (11,459) (65,271) - (98,401) -------------------------------------------------------------------- Cash flows from financing activities: Net borrowings (repayments) (7,550) (50,236) 104,738 - 46,952 Proceeds from issuance of common stock - - 2,916 - 2,916 Cash dividends paid - - (6,608) - (6,608) Other - - - - - -------------------------------------------------------------------- Net cash provided by (used in) financing activities (7,550) (50,236) 101,046 - 43,260 -------------------------------------------------------------------- Effect of exchange rate changes on cash - 130 - - 130 -------------------------------------------------------------------- Net increase (decrease) in cash 497 (347) (138) - 12 Cash at beginning of year 2,984 5,138 628 - 8,750 -------------------------------------------------------------------- Cash at end of year $ 3,481 $ 4,791 $ 490 $ - $ 8,762 ========================================================================================================================= Interface, Inc. Consolidation Guarantor Non-Guarantor (Parent and Elimination Consolidated (in thousands) Subsidiaries Subsidiaries Corporation) Entries Totals - ------------------------------------------------------------------------------------------------------------------------ YEAR ENDED 1995 Cash flows from operating activities $ 15,522 $ 64,428 $ (3,402) $ - $ 76,548 ------------------------------------------------------------------- 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) ------------------------------------------------------------------- Net cash provided by (used in) investing activities (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 - - ------------------------------------------------------------------- Net cash provided by (used in) financing activities 51,954 (38,123) (13,825) - 6 ------------------------------------------------------------------- Effect of exchange rate changes on cash - (34) - - (34) ------------------------------------------------------------------- Net increase (decrease) in cash 2,568 1,166 627 - 4,361 Cash at beginning of year 416 3,972 1 - 4,389 ------------------------------------------------------------------- Cash at end of year $ 2,984 $ 5,138 $ 628 $ - $ 8,750 =========================================================================================================================
31 61
Interface, Inc. Consolidation Guarantor Non-Guarantor (Parent and Elimination Consolidated (in thousands) Subsidiaries Subsidiaries Corporation) Entries Totals - ---------------------------------------------------------------------------------------------------------------------------- YEAR ENDED 1994 Cash flows from operating activities $ 16,314 $ 7,372 $ 9,709 $ - $ 33,395 Cash flows from investing activities: Purchase of plant and equipment (15,689) (5,626) - - (21,315) Acquisitions, net of cash acquired - - (1,409) - (1,409) Other 19,028 (28,605) 6,230 (331) (3,678) ------------------------------------------------------------------ Net cash provided by (used in) investing activities 3,339 (34,231) 4,821 (331) (26,402) ------------------------------------------------------------------ Cash flows from financing activities: Net borrowings (repayments) (67,714) 105,524 (38,032) - (222) Proceeds from issuance of common stock - - 678 - 678 Cash dividends paid - - (6,073) - (6,073) Other 48,693 (79,827) 28,777 331 (2,026) ------------------------------------------------------------------ Net cash provided by (used in) financing activities (19,021) 25,697 (14,650) 331 (7,643) ------------------------------------------------------------------ Effect of exchange rate changes on cash - 365 - - 365 ------------------------------------------------------------------ Net increase (decrease) in cash 632 (797) (120) - (285) Cash at beginning of year (216) 4,769 121 - 4,674 ------------------------------------------------------------------ Cash at end of year $ 416 $ 3,972 $ 1 $ - $ 4,389 - ----------------------------------------------------------------------------------------------------------------------------
The condensed consolidated financial statements of the Company (a holding company) and the Guarantors should be read in conjunction with the consolidated financial statements of the Company. Separate financial statements of the Guarantors are not presented because the Guarantors are jointly, severally and unconditionally liable under the guarantees, and the Company believes the condensed consolidating financial statements presented are more meaningful in understanding the financial position of the Guarantors (See Note 9). There are no significant restrictions on the ability of the Guarantors to make distributions to Interface, Inc. 32 Interface Inc. and Subsidiaries Management Statement and Auditors' Report 62 MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS The management of Interface, Inc. is responsible for the accuracy and consistency of of all the information contained in the annual report, including the accompanying consolidated financial statements. The statements have been prepared to conform with the generally accepted accounting principles appropriate to the circumstances of the Company. The statements include amounts based on estimates and judgments as required. Interface, Inc. maintains internal accounting controls designed to provide reasonable assurance that the financial records are accurate, that the assets of the Company are safeguarded, and that the financial statements present fairly the consolidated financial position, results of operations, and cash flows of the Company. The Audit Committee of the Board of Directors reviews the scope of the audits and findings of the independent certified public accountants. The auditors meet regularly with the Audit Committee to discuss audit and financial issues, with and without management present. BDO Seidman, LLP, the Company's independent certified public accountants, have audited the financial statements prepared by management. Their opinion on the financial statements is presented as follows. Ray C. Anderson Chairman of the Board and Chief Executive Officer Daniel T. Hendrix Senior Vice President, Chief Financial Officer and Treasurer Atlanta, Georgia 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 29, 1996 and December 31, 1995, and the related consolidated statements of income and cash flows for each of the three years in the period ended December 29, 1996. 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Interface, Inc. and subsidiaries as of December 29, 1996 and December 31, 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 29, 1996, in conformity with generally accepted accounting principles. Atlanta, Georgia February 20, 1997 [BDO LOGO] 33 Interface Inc. and Subsidiaries Selected Financial Information 63
(In thousands,except share data) 1996 1995 1994 1993 1992 1991 1990 1989 1988 - ------------------------------------------------------------------------------------------------------------------------------- Annual Operating Data Net sales $1,002,076 $802,066 $725,283 $625,067 $594,078 $581,786 $623,467 $581,756 $396,651 Cost of sales 684,455 551,643 504,098 427,321 404,130 393,733 410,652 382,455 263,508 Selling, general, and administrative expenses 238,932 188,880 170,375 151,576 149,509 150,100 153,317 135,468 87,445 Operating income 78,689 61,543 50,810 46,170 40,439 37,953 59,498 63,833 45,698 Income before taxes on income and extraordinary items 43,427 31,676 25,713 21,304 18,561 14,330 37,680 40,631 34,111 Taxes on income 17,032 11,336 9,257 7,455 6,311 5,409 14,078 16,084 13,926 Income before extraordinary items 26,395 20,340 16,456 13,849 12,250 8,921 23,602 24,547 20,185 Net income 26,395 16,828 16,456 13,849 12,250 8,921 23,602 24,547 20,185 Earnings per common share before extraordinary items Primary 1.23 1.02 .82 .75 .71 .52 1.37 1.43 1.18 Fully diluted * * * * * * 1.24 1.27 1.15 Earnings per common share Primary 1.23 .83 .82 .75 .71 .52 1.37 1.43 1.18 Fully diluted * * * * * * 1.24 1.27 1.15 Dividends Cash dividends paid (A) 6,606 6,132 6,073 5,063 4,142 4,136 4,133 3,600 2,649 Cash dividends per common share .245 .24 .24 .24 .24 .24 .24 .21 .16 Property additions (B) 40,387 48,929 24,376 28,829 14,476 15,375 23,705 25,333 49,261 Depreciation and amortization 35,305 28,944 28,180 24,512 22,257 19,723 21,570 17,243 11,621 Weighted Average Shares Outstanding Primary 20,060 18,255 18,013 17,302 17,253 17,230 17,214 17,146 17,109 Fully diluted 21,989 19,946 25,848 24,352 23,398 23,375 23,359 23,291 18,726 At Year End Working capital 189,584 159,031 174,620 140,575 138,834 150,541 156,638 131,953 127,328 Current ratio 2.2 2.4 2.5 2.1 2.5 2.3 2.4 2.2 2.3 Net property and equipment 208,791 183,299 152,874 145,125 137,605 139,406 141,125 126,917 119,006 Total assets 862,546 714,351 683,408 642,319 534,120 569,438 582,371 525,814 493,371 Total long-term debt 382,272 325,582 314,441 291,637 235,488 240,137 254,578 244,158 249,136 Redeemable preferred stock 19,750 25,000 25,000 25,000 -- -- -- -- -- Common shareholders' equity 273,118 231,914 214,090 181,884 186,349 198,977 198,409 157,001 135,985 Book value per common share 12.56 12.58 11.89 10.42 10.79 11.55 11.52 9.14 7.94 ===============================================================================================================================
(In thousands,except share data) 1987 - ---------------------------------------------- Annual Operating Data Net sales $267,008 Cost of sales 176,813 Selling, general, and administrative expenses 56,884 Operating income 33,311 Income before taxes on income and extraordinary items 25,722 Taxes on income 11,742 Income before extraordinary items 13,700 Net income 13,700 Earnings per common share before extraordinary items Primary .87 Fully diluted N/A Earnings per common share Primary .87 Fully diluted N/A Dividends Cash dividends paid (A) 2,081 Cash dividends per common share .13 Property additions (B) 14,152 Depreciation and amortization 8,270 Weighted Average Shares Outstanding Primary 15,740 Fully diluted N/A At Year End Working capital 55,586 Current ratio 2.2 Net property and equipment 72,818 Total assets 233,165 Total long-term debt 62,949 Redeemable preferred stock -- Common shareholders' equity 115,990 Book value per common share 6.80 ==============================================
* For fiscal years 1996, 1995, 1994, 1993, 1992 and 1991, fully diluted earnings per common share were antidilutive or the differences from primary earnings per share were insignificant. (A) Includes preferred stock dividends of $1,678,000 in 1996, $1,750,000 in 1995 and 1994 and $913,000 in 1993. (B) Includes property and equipment obtained in acquisitions of businesses. EX-21 8 INTERFACE INC SUBSIDIARIES 1 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 Interface Fabrics, Inc.(1) Delaware (USA) Interface Securitization Corporation Delaware (USA) Intek, Inc. Georgia (USA) Interface Americas, Inc. Georgia (USA) Interface Asia-Pacific, Inc.(2) Georgia (USA) Interface Flooring Systems, Inc. Georgia (USA) Interface Leasing, 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.(3) Georgia (USA) Rockland React-Rite, Inc. Georgia (USA) Toltec Fabrics, Inc. Georgia (USA) Interface Architectural Resources, Inc. Michigan (USA) Interface Americas Services, Inc. Nevada (USA) Interface Holding Company Nevada (USA) Interface Specialty Resources, Inc. Nevada (USA) Renovisions, Inc. Pennsylvania (USA) Interface International (Barbados), Inc. Barbados Interface Flooring Systems (Canada), Inc. Canada Interface Europe B.V.(4) Netherlands Interface Europe, Ltd.(5) United Kingdom
- ------------------- (1) Interface Interior Fabrics, Inc. (formerly Guilford of Maine, Inc.) is the parent of eight subsidiaries organized and operating in Canada and the United States (including Toltec Fabrics, Inc. and Intek, Inc.). (2) Interface Asia-Pacific, Inc. is the parent of nine subsidiaries organized and operating in Australia, Japan, Hong Kong, Singapore, Thailand and China. (3) Re:Source Americas Enterprises, Inc. is the parent of 15 subsidiaries organized and operating in the United States. (4) Interface Europe B.V. (formerly Interface Heuga B.V.) is the parent of six subsidiaries organized and operating in the Netherlands, and 12 subsidiaries organized and operating outside of the Netherlands (none of which are organized or operating in the United States). (5) Interface Europe, Ltd. (formerly Interface Flooring Systems, Ltd.) is the parent of five subsidiaries organized and operating in the United Kingdom, Ireland and Hong Kong. EX-23 9 BDO SEIDMAN, LLP CONSENT 1 Exhibit 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Interface, Inc. Atlanta, Georgia We hereby consent to the incorporation by reference in the Prospectuses constituting a part of the Company's Registration Statements on Form S-8 (File Numbers 33-28305, 33-28307, 33-69808, 333-10379 and 333-10377) of our reports dated February 20, 1997, relating to the consolidated financial statements and schedules of Interface, Inc. appearing in the Company's Form 10-K for the year ended December 29, 1996. We also consent to the reference to us under the caption "Experts" in the Prospectuses. BDO SEIDMAN, LLP Atlanta, Georgia March 28, 1997 EX-27 10 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMAITON EXTRACTED FROM FINANCIAL STATEMENTS INCORPORATED BY REFERENCE INTO THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 29, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-29-1996 DEC-29-1996 8,782 0 175,166 7,349 146,678 353,300 408,956 200,165 862,546 163,716 379,353 19,750 0 2,536 270,582 862,546 1,002,076 1,002,076 684,455 923,387 2,490 0 32,772 26,395 1,678 24,717 0 0 0 26,395 1.23 1.23
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