-----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, LBpW8Q/CYHueBFVJbCyPnZcB626KQ4OzjRgRjMLp6UX5w/DBjS05DCPvk/8nC8Dc AiR6mklCwZh+h7eflLCajQ== 0000950144-96-008596.txt : 19961122 0000950144-96-008596.hdr.sgml : 19961122 ACCESSION NUMBER: 0000950144-96-008596 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19961121 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/A SEC ACT: SEC FILE NUMBER: 000-12016 FILM NUMBER: 96670351 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/A 1 INTERFACE INC. FORM 10-K405/A 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1995 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 (zip code) executive offices) 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 peiod 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 15, 1996 (assuming conversion of Class B Common Stock into Class A Common Stock): $206,275,757 (16,668,748) shares valued at the last sales price of $12.375). See Item 12. Number of shares outstanding of each of the registrant's classes of Common Stock, as of March 15, 1996: CLASS NUMBER OF SHARES ----- ---------------- Class A Common Stock, $0.10 par value per share ....................................15,512,710 Class B Common Stock, $0.10 par value per share .....................................2,980,694 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Shareholders for the fiscal year ended December 31, 1995 are incorporated by reference into Parts I and II. Portions of the Proxy Statement for the 1996 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 now 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, through its Guilford of Maine, Inc. ("Guilford") 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 chemicals and specialty products operations produce a variety of products, including chemical compounds and additives for use in various rubber and plastic products, 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, and raised/access flooring systems. In fiscal 1995, the Company had total sales of $802 million, with carpet sales of $654 million, fabric sales of $124 million, and chemicals and specialty products sales of $24 million, accounting for 82%, 15% and 3% 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; and Intersept in chemicals. The Company's principal geographic markets are North America (58% of 1995 sales), the United Kingdom and Western Europe (32% of 1995 sales), and Japan and Australia (5% of 1995 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 24 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 60 locations in 40 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 80 persons) for marketing the Company's interior fabrics products. The Company also utilizes independent 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. The Company has recently enhanced its management, both by adding experienced industry executives in key management positions and by consolidating responsibilities for certain operational areas. Charles Eitel, who was hired in November 1993, was promoted to the newly created position of President and Chief Executive Officer of the Company's worldwide Floorcoverings Group in October 1994; Brian DeMoura was hired as President and Chief Executive Officer of the Interior Fabrics Group in March 1994; and Roman Oakey, Inc. and its affiliates have been engaged to consult on product design matters for all floorcovering and fabric operations. 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 begun to rebound 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 3 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. 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. Roman Oakey's design services are being extended to the Company's international carpet operations and an affiliate of that firm has been 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, including increased margins and reduced inventory levels of both raw materials and standard products. The Company is extending the mass customization production initiative to its floorcovering operations in Europe and Australia. 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 Guilford 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. 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 Guilford 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 Guilford's growing 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), the Company has identified $70 million of such waste. While a major part of such waste cannot be eliminated using currently available technologies and production systems, management believes the Company can eliminate approximately $35 million of such waste over time. The Company realized in excess of $7 million in savings (through eliminating such waste) during fiscal 1995. 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 -2- 4 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 increased global cooperation and coordination in product planning and production as well as marketing activities. 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. The Company constructed a carpet tile manufacturing facility in Thailand which became operational in March 1996, and it is exploring establishment of manufacturing operations in Greater 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. New Distribution Channel and Dealer Network. In January 1996, the Company announced a nationwide initiative to strengthen and streamline the distribution channels for its commercial carpet products. Under this program, the Company intends to acquire approximately 15 strategically located commercial floorcovering contractors, and form preferred distributorship alliances with a significantly higher number of 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 launch this initiative and build its dealer network, which the Company will operate under the name Re: Source Americas(TM). The program's primary goals are to (i) increase sales of Company products as dealers in the network seek to supply Company products on a preferred basis, (ii) enhance customer satisfaction by providing hassle-free service throughout the process of selecting, purchasing, installing and maintaining carpet products, and (iii) 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. The Company closed the simultaneous acquisitions of three key dealerships (owned by certain of the former members of the StarNet management team) in March 1996, and expects to complete the majority of its planned acquisitions and investments in the second and third quarters of 1996. 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, acquired in 1993 and 1994, respectively, 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 18 inches or 50 centimeters square) 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 patented 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 -3- 5 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 educational, health care and governmental institutions 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 recently 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.) 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 four days in 1995, and the average number of carpet samples produced per month has increased from 90 per month in 1993 to over 1,000 per month in 1995. 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 uses independent dealers to broaden its sales efforts. The Company recently embarked on a program to create a network of owned and allied dealers. (See "-- Business Strategy and Principal Initiatives", above.) 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. (Actual installation services are generally performed by -4- 6 independent dealers, although the Company recently acquired three dealerships and intends to acquire others.) In Europe, the Company has licensed selected independent service contractors to provide carpet maintenance services under the mark, IMAGESM (Interface Maintenance Advisory Group of Europe). Manufacturing The Company manufactures carpet in the United States, the Netherlands, the United Kingdom, Canada, Australia and, beginning in 1996, 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 1994 entered into a joint venture (owned 70% by the Company) with Modernform Group Public Co., Ltd., a large Thailand-based diversified building products company, to build a carpet tile manufacturing facility in Thailand, which became operational in March 1996. The Company will consider additional locations for manufacturing operations in other parts of the world as necessary to meet the demands of customers in growing international markets. The Company is already exploring establishment of manufacturing operations in Greater China. 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. Management believes that the Company is the only company with the current ability 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. Operations commenced at the Company's new Prince Street facility in Cartersville, Georgia in November 1995. The design of the new facility is a manifestation of the Company's EcoSense initiative. The state-of-the-art facility will introduce new systems for energy efficiency, increased human productivity, waste reduction and water purification, and will incorporate the use of both recycled and non-toxic building materials. (See "-- Environmental Initiatives".) 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. -5- 7 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 and, increasingly, in other commercial markets. INTERIOR FABRICS Products The Company, through Guilford 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 62% of total fabrics sales in fiscal 1994 and 57% in fiscal 1995). 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 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 recently diversified and expanded significantly both its product offerings and markets for interior fabrics. The Company's 1993 acquisition of the Stevens LinenTM lines added decorative, upscale upholstery fabrics and specialty textile products to Guilford's traditional product offerings. The Company's June 1995 acquisition of Toltec Fabrics, a manufacturer and marketer of fabric for the contract and home furnishings upholstery markets, enhanced the Company's presence in the contract jobber market. In addition, the December 1995 acquisition of the Intek division of Springs Industries, a manufacturer experienced in the production of lighter-weight panel fabrics, is expected to strengthen Guilford's capabilities in that market. All of these developments complement Guilford's dominant position with OEMs of movable office furniture systems. The Company manufactures fabrics made of 100% polyester, as well as wool-polyester blends and numerous other natural and man-made blends, which are either woven or knitted. Its products feature a high degree of color consistency, natural dimensional stability and fire retardancy, in addition to their overall aesthetic appeal. All of the Company's product lines are color and texture coordinated. The Company seeks continuously to enhance product performance and attractiveness through experimentation with different fibers, dyes, chemicals and manufacturing processes. Product innovation in the interior fabrics market (similar to the floorcoverings market) is important to achieving and maintaining market share. (See "-- Business Strategy and Principal Initiatives", above, and "-- Product Design, Research and Development", below.) In both 1995 and 1994, the number of new products introduced by the Company nearly doubled the number introduced in the preceding year. 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. Guilford 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). Guilford 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 Linens, 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 Guilford's own sales force. Guilford's sales force also markets open line products for the retrofitting and refurbishing segment of the industry directly to specifiers under the trade -6- 8 name Guilford of Maine Textile Resources. In addition, the Company uses independent dealers to assist with sales of its non-panel fabric products. Guilford's 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 market and design ideas that are incorporated into its development of product offerings. Guilford maintains a design studio in Dudley, Massachusetts which facilitates coordination between its in-house designers and the design staffs of major customers. Guilford's design capabilities are expected to benefit from the recent expansion of the scope of David Oakey's product design services to the Company's fabrics business. (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. Guilford 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. Guilford's international sales increased by approximately 25% in 1995. 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. In response to a shift in Guilford's traditional panel fabric market toward lighter weight, less expensive products, the Company implemented a major capital investment program in 1994 (which included the construction of a new facility and the acquisition of equipment) to enhance the efficiency and breadth of Guilford's yarn manufacturing processes. The program, which will be completed in phases during 1996, is designed to improve Guilford's cost effectiveness in producing such lighter weight fabrics, reduce manufacturing cycle time, and enable Guilford to reinforce its product leadership position with its OEM customers. The Company anticipates that the program will allow Guilford to achieve significant cost savings in the production of its traditional fabric product line. 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 offers textile processing services through Guilford's Component Technologies division in Grand Rapids, Michigan. Such services include the lamination of fabrics onto substrates for pre-formed office furniture system panels, facilitating easier and more cost effective assembly of the system components by Guilford's OEM customers. Competition The Company competes in the interior fabrics market on the basis of product design, quality, reliability, price and service. By electing to concentrate on the open plan office furniture systems segment, Guilford has been able to specialize its manufacturing capabilities, product offerings and service functions, resulting in a leading market position. Through Guilford and Intek, the Company is the largest U.S. manufacturer of panel fabric for use in open plan office furniture systems. Drawing on Guilford's 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. -7- 9 CHEMICALS AND SPECIALTY PRODUCTS The Interface Specialty Resources Group is composed of: Rockland React-Rite, Inc., which develops, manufactures and markets specialty chemical products; Pandel, Inc., 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., which produces and markets raised/access flooring systems. This Group was reconstituted in January 1996 and placed under the corporate direction of Don Russell, a 23 year veteran with the Company. While the Specialty Resources Group's revenues represent a relatively small portion of total Company revenues (approximately 3% in fiscal 1995), 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 recently began to market cable management raised/access flooring systems, a specialty product which it markets through its 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 early 1995, the Company acquired the rights to the Interstitial Systems(TM) access flooring product, a patented, multiple plenum system that serves to separate pressurized, climate-controlled air flow from the electrical and telecommunications cables included within the same access flooring system. In February 1996, the Company acquired C-Tec, Inc., the second largest manufacturer of raised/access flooring in the United States, with net sales in 1995 of over $20 million. C-Tec, based in Grand Rapids, Michigan, will be able to produce the Company's Intercell and Interstitial Systems products in addition to its own advanced line of access flooring systems. INTERFACE RESEARCH CORPORATION Under the leadership of acting President, Dr. Ray Berard, Interface Research Corporation provides technical support and research & development for the entire family of Interface companies. Developments in 1995 included special monomer products for use in the UV-curable coatings industry, and a more resilient polycarbite polymer carpet tile backing currently being installation tested by the Company. The advanced materials used to manufacture the new polycarbite carpet products exhibit superior performance ratings at lower costs, and the extent of their suitability for use throughout the Company's business groups and product lines is under careful study. Interface Research 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. (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 in 1995. 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 -8- 10 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. For most of the past two years, the Company's 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 are now being extended to the Company's international carpet tile operations and domestic broadloom companies, and an affiliate of that firm has been engaged to provide similar design services to the Company's interior fabrics business (which already has 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 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 $78,900,000 at December 31, 1995, compared to approximately $78,500,000 at January 1, 1995. 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 31, 1995 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. 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. 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. 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. -9- 11 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, 1996, the Company employed a total of approximately 4,850 employees worldwide. Of such employees, approximately 2,100 were clerical, sales, supervisory and management personnel and the balance were manufacturing personnel. 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. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company, their ages as of March 15, 1996, 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 61 Chairman of the Board, President and Chief Executive Officer Charles R. Eitel 46 Executive Vice President Brian L. DeMoura 50 Senior Vice President David Milton 60 Senior Vice President Don E. Russell 58 Senior Vice President John H. Walker 51 Senior Vice President Gordon D. Whitener 33 Senior Vice President Daniel T. Hendrix 41 Senior Vice President - Finance, Chief Financial Officer and Treasurer David W. Porter 49 Senior Vice President, General Counsel and Secretary F. Colville Harrell 61 Vice President - Planning & Analysis Alan S. Kabus 38 Vice President John R. Wells 34 Vice President Raymond S. Willoch 37 Vice President, Corporate Counsel and Assistant Secretary
Mr. Anderson founded the Company in 1973, and has served as the Company's Chairman and Chief Executive Officer since its founding. 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 appointed to the newly created position of President and CEO of the Floorcoverings Group, thereby assuming overall responsibility for the Company's worldwide carpet business. 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. DeMoura became a Senior Vice President of the Company and President and Chief Executive Officer of Guilford 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. From December 1988 until January 1990, he served as Vice President and General Manager of the Yarn Sales Division of Doran Textiles, Inc., a Shelby, North Carolina based producer of novelty yarns for the apparel and home furnishing markets. Mr. Milton joined the Company in January 1992 as a Senior Vice President. Upon joining the Company, he also became President of Interface Asia-Pacific, Inc. (a wholly-owned U.S. holding company) and assumed responsibility for the -10- 12 Company's operations in Japan, China, Southeast Asia, Australia, New Zealand and the Pacific Islands. Prior to joining the Company, Mr. Milton was an independent management consultant. Mr. Russell has served in various executive capacities since 1973. He became a Senior Vice President in 1986. He currently serves as President and Chief Executive Officer of the Company's Specialty Resources Group, composed of the Company's chemical and specialty surfaces subsidiaries (Rockland React-Rite, Inc. and Pandel, Inc.), 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. 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, and assumed responsibility for the Company's modular carpet operations throughout North, Central and South America. In July 1995, Mr. Whitener also assumed corporate responsibility for Bentley Mills. From April 1988 until joining the Company, Mr. Whitener served in various sales management capacities with Collins & Aikman (Floorcoverings Division), including Vice President - Marketing from March 1993. Mr. Hendrix joined the Company as Financial Manager in 1983. He became 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. Porter has served as Vice President and General Counsel since joining the Company in 1986, and as Secretary since 1987. He became a Senior Vice President in October 1995. 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. 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 became Assistant Secretary in 1991, Assistant Vice President in 1993 and Vice President in January 1996. Mr. Willoch's varied duties include primary responsibility for investor relations and communications. ITEM 2. PROPERTIES The Company maintains its corporate headquarters in Atlanta, Georgia in approximately 11,465 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 City of Industry, California............................ Broadloom carpet 539,641 LaGrange, Georgia....................................... Modular carpet 326,666 West Point, Georgia..................................... Modular carpet 108,380 Athens, Tennessee....................................... Modular carpet 71,577 Scherpenzeel, the Netherlands........................... Modular carpet 292,142 Shelf, England.......................................... Modular carpet 223,342 Sanquhar, Scotland...................................... Modular carpet 43,594 Craigavon, N. Ireland................................... Modular carpet 125,060 Ontario (Belleville), Canada............................ Modular carpet 77,000 Picton, Australia....................................... Modular carpet 89,560
-11- 13
Location Primary Products Floor Space (Sq. Ft.) ----------------------------- ---------------- --------------------- Bangkok, Thailand....................................... Modular carpet 66,072 Guilford, Maine(1)...................................... Interior fabrics 511,441 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 63,000 Greensboro, North Carolina.............................. Interior fabrics 63,700 Cartersville, Georgia................................... Specialty products 124,500 Grand Rapids, Michigan.................................. Access flooring 120,000 Rockmart, Georgia....................................... Chemicals 37,500 Chatom, Alabama......................................... Chemicals 7,500
____________________________ (1) Includes new facility under construction, expected to become operational in phases during 1996. The Company owns all of its manufacturing facilities, except Guilford's facility and a portion of C-Tec's 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 80 locations in 40 countries and distribution facilities in 19 locations in nine 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. ITEM 3. LEGAL PROCEEDINGS The Company is not aware of any material pending legal proceedings involving it or any of its property. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this Report. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS The information concerning the market prices for the Company's Class A Common Stock and dividends on the Company's Common Stock included in Notes 12 and 18 of the Notes to the Company's Consolidated Financial Statements in the Company's 1995 Annual Report to Shareholders is incorporated herein by reference. As of March 20, 1996, the Company had 463 holders of record of its Class A Common Stock and 48 holders of record of its Class B Common Stock. ITEM 6. SELECTED FINANCIAL DATA Selected Financial Information on page 63 of the Company's 1995 Annual Report to Shareholders is incorporated herein by reference. -12- 14 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 41 through 45 of the Company's 1995 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 are presented below. The Supplemental Guarantor Condensed Consolidating Financial Statements required pursuant to Rule 3-10(a) of Regulation S-X are included on pages 40 through 45 of this Report. The Supplemental Consolidating 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 relevant guarantees, and the Company believes the Supplemental Consolidating Financial Statements presented are more meaningful in understanding the financial position of the Guarantors. (See Note 9 of the notes to Consolidated Financial Statements for a description of the notes guaranteed.) There are no significant restrictions on the ability of the Guarantors to make distributions to the Company. -13- 15 INTERFACE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
December 31, January 1, January 2, 1995 1995 1994 ------------ ------------ ------------- (in thousands, except share data) Net sales........................................... $802,066 $725,283 $625,067 Cost of sales....................................... 551,643 504,098 427,321 -------- -------- -------- Gross profit on sales.............................. 250,423 221,185 197,746 Selling, general and administrative expenses........ 188,880 170,375 151,576 -------- -------- -------- Operating income................................... 61,543 50,810 46,170 -------- -------- -------- Other expense Interest expense................................... 26,753 24,094 22,840 Other.............................................. 3,114 1,003 2,026 -------- -------- -------- Total other expense............................... 29,867 25,097 24,866 -------- -------- -------- Income before taxes on income and extraordinary item .............................................. 31,676 25,713 21,304 Taxes on income..................................... 11,336 9,257 7,455 -------- -------- -------- Income before extraordinary item.................... 20,340 16,456 13,849 Extraordinary loss on early extinguishment of debt (net of tax)....................................... 3,512 - - -------- -------- -------- Net income......................................... 16,828 16,456 13,849 Preferred stock dividends........................... 1,750 1,750 913 -------- -------- -------- Net income applicable to common shareholders....... $ 15,078 $ 14,706 12,936 ======== ======== -------- Primary earnings per common share Income before extraordinary item................... $ 1.02 $ 0.82 $ 0.75 Extraordinary loss on early extinguishment of debt (net of tax)....................................... 0.19 - - -------- -------- -------- Net income.......................................... $ 0.83 $ 0.82 $ 0.75 ======== ======== ========
See accompanying notes to consolidated financial statements. 14 16 INTERFACE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, January 1, Assets 1995 1995 ----------------------------------- (in thousands, except share data) Current Cash and cash equivalents........................... $ 8,750 $ 4,389 Escrowed and restricted funds....................... - 2,663 Accounts receivable................................. 111,386 133,536 Inventories......................................... 134,504 132,650 Prepaid expenses.................................... 15,748 15,110 Deferred income taxes............................... 3,998 3,767 -------- -------- Total current assets............................... 274,386 292,115 -------- -------- Property and equipment, less accumulated depreciation........................................ 183,299 152,874 Miscellaneous........................................ 30,980 31,895 Deferred income taxes................................ 6,861 3,672 Excess of cost over net assets....................... 218,825 202,852 -------- -------- $714,351 $683,408 ======== ======== Liabilities and Common Shareholders Equity Current liabilities Notes payable....................................... $ 8,546 $ 5,501 Accounts payable.................................... 55,101 54,201 Accrued expenses.................................... 50,148 56,940 Current maturities of long-term debt................ 1,560 853 -------- -------- Total current liabilities.......................... 115,355 117,495 -------- -------- Long-term debt, less current maturities.............. 199,022 209,663 Senior subordinated notes............................ 125,000 - Convertible subordinated debentures.................. - 103,925 Deferred income taxes................................ 18,060 13,235 -------- -------- Total liabilities.................................. 457,437 444,318 Redeemable preferred stock........................... 25,000 25,000 Common stock......................................... 2,203 2,179 Additional paid-in capital........................... 96,863 93,450 Retained earnings.................................... 147,039 136,343 Foreign currency translation adjustment.............. 3,555 (136) Treasury stock, 3,600,000 Class A shares, at cost.... (17,746) (17,746) -------- -------- $714,351 $683,408 ======== ========
See accompanying notes to consolidated financial statements. 15 17 INTERFACE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
December 31, January 1, January 2, 1995 1995 1994 ------------ -------------- ---------- (in thousands) Operating activities Net income............................................. $16,828 $16,456 $13,849 Adjustments to reconcile net income to cash provided by operating activities Depreciation and amortization.......................... 28,944 28,180 24,512 Extraordinary loss on early extinguishment of debt (net of tax).......................................... 3,512 - - Deferred income taxes.................................. 1,431 (1,994) (5,853) Cash provided by (used for) Accounts receivable.................................... 25,978 (2,788) (1,569) Inventories............................................ 5,979 (6,849) 3,147 Prepaid expenses and other............................. 8 (1,671) (6,374) Accounts payable and accrued expenses.................. (6,132) 2,061 12,870 --------- -------- -------- 76,548 33,395 40,582 --------- -------- -------- Investing activities Capital expenditures................................... (42,123) (21,315) (20,639) Acquisitions of businesses............................. (27,554) (1,409) (15,209) Changes in escrowed and restricted funds............... 2,663 1,352 404 Other.................................................. (5,145) (5,030) (7,039) --------- -------- -------- (72,159) (26,402) (42,483) --------- -------- -------- Financing activities Principal borrowings (payments) on long-term debt...... (11,935) 75,011 (11,500) Proceeds from issuance of subordinated notes........... 121,543 - - Extinguishment of convertible subordinated debentures.. (106,419) - - Net borrowing (payments) under lines of credit......... 1,965 (75,233) 15,572 Proceeds from issuance of common stock................. 984 678 1,898 Dividends paid......................................... (6,132) (6,073) (5,063) Other.................................................. - (2,026) - --------- -------- -------- 6 (7,643) 907 --------- -------- -------- Net cash provided by (used for) operating, investing, and financing activities............................... 4,395 (650) (994) Effect of exchange rate changes on cash................ (34) 365 (156) --------- -------- -------- Cash and cash equivalents.............................. Net increase (decrease)................................ 4,361 (285) (1,150) Balance, beginning of year............................. 4,389 4,674 5,824 --------- -------- -------- Balance, end of year................................... $8,750 $4,389 $4,674 ========= ======== ========
See accompanying notes to consolidated financial statements. 16 18 INTERFACE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Summary of Significant Accounting Policies 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 interest costs of approximately $1.4 million and $0.3 million for the years ended December 31, 1995 and January 1, 1995, respectively. Depreciation expense amounted to approximately $18.2 million, $20.8 million and $17.6 million for the years ended December 31, 1995, January 1, 1995 and January 2, 1994, respectively. The Company plans to adopt Statement of Financial Accounting Standards No. 121 "Accounting for Impairment of Long-Term Assets and for Long-Lived Assets to Be Disposed Of". After adoption, the operational policy of the Company will be to evaluate long-lived assets and certain identifiable intangibles and goodwill whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. This statement, when adopted by the Company during 1996 is not expected to have a material impact on operating results. Goodwill The excess of purchase price over fair value of net assets of acquired businesses arises in connection with business combinations accounted for as purchases and is amortized on a straight-line basis, generally over forty years. Accumulated amortization amounted to approximately $33.2 million and $27.1 million at December 31, 1995 and January 1, 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 of its goodwill and determine whether the goodwill should be completely or partially written off or the amortization period accelerated. The Company will recognize an impairment of goodwill if undiscounted estimated future operating cash flows of the acquired business are determined to be less than the carrying amount of goodwill. If the Company determines that goodwill has been impaired, the measurement of the impairment will be equal to the excess of the carrying amount of the goodwill over the amount of the undiscounted estimated operating cash flows. If an impairment of goodwill were to occur, the Company would reflect the impairment through a reduction in the carrying value of goodwill. 17 19 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 the tax laws or rates. 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 Preferred Stock is not considered to be a common stock equivalent because at the date of issuance the stated rate of interest was greater than 66-2/3% of the then Aa+ corporate bond yield. In computing primary earnings per common share, the Preferred Stock dividend reduces net income applicable to common shareholders. Primary earnings per common share are based upon 18,254,965 shares, 18,012,722 shares and 17,302,000 shares for the years ended December 31, 1995, January 1, 1995, and January 2, 1994, respectively. For fiscal 1995, 1994, and 1993 fully diluted earnings per common share were antidilutive. 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). Revenue Recognition Revenues are recognized when products are shipped. 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. Income and expense items are translated at average exchange rates for the year. Assets and liabilities of these subsidiaries are translated into U.S. dollars at the exchange rate in effect at each year end. The resulting translation adjustments are recorded in the foreign currency translation adjustment account. In the event of a divestiture of a foreign net investment or an investment being no longer considered long-term in nature, the related foreign currency translation results are reversed from equity to income. Foreign currency translation gains and losses are included in income. Exchange gains and losses are not material in amount in any year. Derivatives 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. The fiscal years ended December 31, 1995, January 1, 1995 and January 2, 1994 each comprised 52 weeks. Reclassifications Certain reclassifications have been made to the 1994 and 1993 financial statements to conform to the 1995 presentation. Note 2 - Business Acquisitions In December 1995, the Company acquired substantially all of the assets of the Intek division of Springs Industries for approximately $13.9 million. Intek, based in North Carolina, manufactures and markets panel fabrics. The transaction was accounted for as a purchase. The excess of the purchase price over the fair value of the net assets acquired was approximately $5.1 million and is being amortized over 40 years. The results of operations of Intek since the acquisition date have been included within the consolidated financial statements. 18 20 INTERFACE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In June 1995, the Company acquired substantially all of the assets of Toltec Fabrics, Inc. a manufacturer of panel fabrics based in North Carolina, for approximately $13.3 million, which was comprised of $7.7 million in cash and $5.6 million in notes. The transaction was accounted for as a purchase. The excess of the purchase price over the fair value of the net assets acquired was approximately $6.9 million and is being amortized over 40 years. The results of operations of Toltec since the acquisition date have been included within the consolidated financial statements. 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. The Company, through a series of stock purchases in June 1993, acquired 100% of the outstanding capital stock of Bentley Mills, Inc., a manufacturer of broadloom and modular carpet, for the aggregate consideration of approximately $34.0 million, which was comprised of $9.0 million in cash and $25.0 million of newly issued Series A Cumulative Convertible Preferred Stock. The results of the operations of Bentley since the acquisition date have been included within the consolidated financial statements. In February 1993, the Company acquired the assets of the fabric division of Stevens Linen Associates, Inc., based in Massachusetts, for approximately $4.9 million. Note 3 - Cash and Cash Equivalents Cash and cash equivalents consisted of the following: December 31, January 1, 1995 1995 ------------------ ------------------ Cash.............. $7,261 $3,496 Cash equivalents.. 1,489 893 ------------------ ------------------ $8,750 $4,389 ================== ================== Cash equivalents, carried at cost which approximate market, consist of short-term, highly liquid investments which are readily convertible into cash and have initial maturities of three months or less. The Company does not believe it is exposed to any significant credit risk on cash and cash equivalents. The Company has classified all its securities as "available for sale". Fair value of these securities, comprised primarily of repurchase agreements with commercial banks, approximates cost. 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 considered reductions of cash or accounts payable until presented to the bank for payment. At December 31, 1995 and January 1, 1995, checks not yet presented to the bank totaled approximately $7.7 million and $6.3 million, respectively. Prior to December 1995, in accordance with a workers' compensation self-insurance arrangement in the State of Maine, the Company was required by state law to maintain a trust account to pay workers' compensation claims. At January 1, 1995, the trust account had a balance of approximately $2.4 million, and was segregated from cash and cash equivalents and reflected as escrowed and restricted funds. In December 1995, the Company received a refund of all previously escrowed funds in exchange for obtaining a $4.4 million irrevocable letter of credit. Cash payments for interest amounted to approximately $27.9 million, $24.0 million and $23.4 million for the years ended December 31, 1995, January 1, 1995, and January 2, 1994, respectively. Income tax payments amounted to approximately $8.2 million, $6.5 million and $16.3 million, respectively, for the years ended December 31, 1995, January 1, 1995, and January 2, 1994. 19 21 INTERFACE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4 - Receivables In August 1995, the Company commenced an Accounts Receivable securitization program that provides the Company up to $65.0 million of funding from the sale of trade accounts receivable generated by certain of its operating subsidiaries. As of December 31, 1995, the Company had sold accounts receivable under this agreement for which proceeds of approximately $33.9 million were received. As of December 31, 1995 and January 1, 1995, the allowance for bad debts amounted to approximately $5.9 million and $6.5 million respectively for all accounts receivable of the Company. Note 5 - Inventories Inventories consisted of the following:
December 31, January 1, 1995 1995 ----------- ---------- (in thousands) Finished goods.......... $ 76,407 $ 74,542 Work-in-process......... 26,168 20,250 Raw materials........... 31,929 37,858 -------- -------- $134,504 $132,650 ======== ========
Note 6 - Property and Equipment Property and equipment consisted of the following:
December 31, January 1, 1995 1995 ----------- ---------- (in thousands) Land.................... $ 11,109 $ 8,623 Buildings............... 82,189 71,752 Equipment............... 200,312 200,937 Construction-in-process. 41,635 6,283 --------- --------- 335,245 287,595 Accumulated depreciation. (151,946) (134,721) --------- --------- $ 183,299 $ 152,874 ========= =========
The estimated cost to complete construction-in-process for which the Company was committed at December 31, 1995 was approximately $10.0 million. 20 22 INTERFACE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 7 - Accrued Expenses Accrued expenses consisted of the following:
December 31, January 1, 1995 1995 ------------ ---------- (in thousands) Taxes...................... $10,130 $17,989 Compensation............... 13,692 12,312 Interest................... 2,229 3,200 Other...................... 24,097 23,439 ------- ------- $50,148 $56,940 ======= =======
Note 8 - Long-Term Debt Long-term debt consisted of the following:
December 31, January 1, 1995 1995 ------------ ---------- (in thousands) Secured term loans......... $ 50,000 $ 50,000 Revolving credit agreements................. 143,209 156,165 Other...................... 7,373 4,351 -------- -------- Total long-term debt....... 200,582 210,516 Less current maturities.... (1,560) (853) -------- -------- $199,022 $209,663 ======== ========
During February 1996, the Company entered into an agreement to amend and restate its revolving credit and term loan facilities. The amendment provides for an increase in the revolving credit facilities by $50 million to fund the implementation of the Company's planned new distribution network. The amended and restated revolving credit and secured term loans are 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 secured term loans are payable in two equal installments of $25 million at December 29, 2000 and December 31, 2001, plus accrued interest. 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 3/8% to 1 1/4%, depending upon the Company's ability to meet certain performance criteria; or the bank's prime lending rate (8.5% at December 31, 1995). The Company is also required to pay a commitment fee of 3/8% per annum on the unused portion of the revolving credit loans depending upon the Company's ability to meet certain performance criteria. 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 31, 1995, approximately $18.2 million of the Company's retained earnings were unrestricted and available for payment of dividends under the most restrictive terms of the agreement. 21 23 INTERFACE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Future maturities of long-term debt and senior subordinated notes (Note 9), 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 (in thousands): Fiscal Year - ----------- 1996................... $ 1,560 1997................... 1,563 1998................... 1,550 1999................... 144,759 2000................... 26,150 Thereafter............. 150,000 -------- $325,582 ========
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 on borrowings outstanding at December 31, 1995 for the year was approximately 6.4%. Approximately $8.5 million and $5.5 million was outstanding under these lines at December 31, 1995 and January 1, 1995, respectively. Note 9 - Senior Subordinated Notes In November 1995, the Company issued $125 million in 9 1/2% Senior Subordinated Notes due 2005 (the "Notes"). Interest is payable semi-annually on May 15 and November 15, commencing May 15, 1996. Cash proceeds of approximately $121.5 million (after underwriting discount of approximately $3.5 million) from the issuance were used to retire $101.5 million aggregate principal amount of 8% Convertible Subordinated Debentures. The remaining proceeds were used to reduce outstanding borrowings under revolving credit agreements. 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, Ltd. and several other smaller domestic subsidiaries. The Notes are redeemable for cash at any time on or after November 15, 2000 at the Company's option, in whole or in part, initially at a redemption price equal to 104.75% of the principal amount, declining to 100% of the principal amount on November 15, 2003, plus accrued interest thereon to the date fixed for redemption. The fair value of these obligations approximates their carrying value. Note 10 - Convertible Subordinated Debentures The Company previously had outstanding $103.9 million aggregate principal amount of Convertible Subordinated Debentures ("Debentures") maturing in 2013, which were sold in a public offering. The Debentures were unsecured obligations of the Company with interest at 8%. They were convertible into shares of the Company's Class A Common Stock at a conversion price of approximately $16.92 per share. Sinking fund payments starting in 1999, were required to retire 70% of the Debentures prior to maturity. The Debentures were redeemable, at the option of the Company, at a price of 102.4% during fiscal 1995. Approximately $101.5 million aggregate principal amount of the Debentures was extinguished with the proceeds from the issuance of the Notes (See Note 9). Approximately $2.5 million aggregate principal amount of the Debentures was converted into 145,034 shares of Class A Common Stock. This extinguishment was a non-cash transaction and, accordingly is not included in the statement of cash flows. The Company recorded an extraordinary loss of approximately $3.5 million ($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. 22 24 INTERFACE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 11 - Redeemable Preferred Stock The Company is authorized to issue 5.0 million 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 Bentley acquisition, 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 is entitled to a 7% annual cumulative cash dividend ($7.00 per preferred share) that is payable quarterly. Series A Preferred Stock is non-voting, except as required by law or in limited circumstances to protect its preferential rights. The Series A Preferred Stock is 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. At December 31, 1995, the Series A Preferred Stock and accrued dividends thereon were convertible into 1,720,204 shares of Class A Common Stock. The Company, at its sole option, may redeem any of the then outstanding Series A Preferred Stock by paying in cash for each share redeemed the face value thereof, plus all accrued but unpaid dividends. Until May 31,1996, such redemption is allowable if the market price of Class A Common Stock exceeds approximately $17.75 for ten consecutive trading days. No limitations exist as to redemption subsequent to May 31, 1996. Upon any liquidation, dissolution, or winding up of the Company, record holders of Series A Preferred Stock are entitled to receive cash equal to the face value of outstanding Series A Preferred Stock plus the amount of accrued but unpaid dividends accumulated thereon, to the date of payment of such liquidating distribution. Preferred shareholders have the right to redeem after May 31, 2003, the then outstanding shares of Series A Preferred Stock at face value plus accrued dividends. The Company is not required to establish any sinking or retirement fund with respect to the Series A Preferred Stock. During the year ended December 31, 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 the Nasdaq National Market System. The Company's Class B Common Stock and Series A Cumulative Convertible Preferred Stock are 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 and the Series A Preferred Stock carries a 7% dividend rate (see Note 8 for discussion of restrictions on the payment of dividends). Cash dividends on Common Stock were $.24 per share for each of the years ended December 31, 1995, January 1, 1995, and January 2, 1994. 23 25 INTERFACE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Changes in common shareholders' equity were (in thousands):
Foreign Class A Class B Additional Currency ------------------ ------------------ Paid-In Retained Translation Shares Amount Shares Amount Capital Earnings Adjustment -------- ------ -------- -------- ---------- -------- ----------- Balance January 3, 1993..... 17,560 $1,756 3,294 $329 $82,110 $117,174 $2,725 Net income.......... - - - - - 13,849 - Conversion of common stock............... 173 17 (173) (17) - - - Issuance of common stock............... 185 19 - - 1,879 - - Cash dividends paid. - - - - - (5,063) - Foreign currency translation adjustment.......... - - - - - - (15,148) ------ ------ ----- ---- ------- -------- ------ Balance 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 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, December 31, 1995 19,044 $1,903 2,989 $300 $96,863 $147,039 $3,555 ====== ====== ===== ==== ======= ======== ======
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 granted pursuant to the 1993 Plan 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 for five years from the date of the grant and the options generally expire ten years from the date of the grant. An aggregate of 1,050,000 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. Options are granted pursuant to the Offshore Plan to key employees and the directors of the Company's foreign subsidiaries. These options may be exercised for shares of Class A or Class B Common Stock as determined by the Compensation Committee of the Board of Directors. An aggregate of 1,000,000 shares of Common Stock (Class A or Class B) have been reserved for issuance under this Plan. 24 26 INTERFACE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes 1995 activity on all stock options:
Outstanding Options Exercisable Options Shares Option Price Shares Option Price ------------------------------ -------------------------------- Balance, January 1, 1995 1,808,000 $6.50 - $18.63 731,000 $6.50 - $18.63 Granted 360,000 12.25 - 16.25 - - - - Became exercisable - - - - - 339,000 9.00 - 18.63 Exercised (96,000) 6.50 - 16.50 (96,000) 6.50 - 16.50 Forfeited or cancelled (125,000) 11.00 - 18.63 (125,000) 11.00 - 18.63 ---------- ----- ------ -------- ----- ------ Balance, December 31, 1995 1,947,000 $9.00 - $18.63 849,000 $9.00 - $18.63 ========== ===== ====== ======== ===== ======
New Accounting Standard In October 1995, the Financial Accounting Standards Board (FASB") issued Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS No. 123"), which the Company is required to adopt 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. The Company's management has not yet determined its method of adoption or the financial statement impact of adopting SFAS No. 123. Note 13 - Taxes on Income Provisions for federal, foreign, and state income taxes in the consolidated statements of income consisted of the following components:
Fiscal Year Ended -------------------------------------------- December 31, January 1, January 2, 1995 1995 1994 -------------------------------------------- (in thousands) Current: Federal....................................................... $5,331 $ 4,878 $6,115 Foreign....................................................... 5,844 4,660 6,028 State......................................................... 1,592 1,713 1,165 -------- ------- ------- 12,767 11,251 13,308 -------- ------- ------- Deferred (reduction): Federal....................................................... 1,495 (445) (1,271) Foreign....................................................... (1,189) (2,522) (4,757) State......................................................... (316) (875) (242) -------- ------- ------- (10) (3,842) (6,270) -------- ------- ------- Increase (decrease) in valuation allowance (1,421) 1,848 417 -------- ------- ------- $11,336 $ 9,257 $ 7,455 ======= ======= =======
25 27 INTERFACE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Income before taxes on income consisted of the following:
Fiscal Year Ended -------------------------------------------------------------- December 31, January 1, January 2, 1995 1995 1994 -------------- --------------------- ----------- (in thousands) U.S. Operations.................................... $20,212 $18,072 $17,717 Foreign Operations................................. 11,464 7,641 3,587 ------- ------- ------- $31,676 $25,713 $21,304 ======= ======= =======
Deferred income taxes for the years ended December 31, 1995 and January 1, 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 31, 1995 and January 1, 1995, are as follows:
December 31, 1995 January 1, 1995 ------------------------------- --------------------------- Assets Liabilities Assets Liabilities ------ ----------- ------ ----------- (in thousands) Basis difference of property and equipment.......... $ - $19,607 $ - $17,761 Net operating loss carryforwards.................... 8,015 - 12,720 - Other basis difference of assets and liabilities....................................... 4,391 - 4,252 - Valuation allowance................................. - - (5,007) - ------- ------- ------- ------- $12,406 $19,607 $11,965 $17,761 ======= ======= ======= =======
During the year ended December 31, 1995, the valuation allowance decreased approximately $5.0 million. Approximately $3.6 million of the reduction was associated with the elimination of net operating loss carryforwards upon the completion of the liquidation of one of the Company's foreign subsidiaries. The Company also reduced the allowance approximately $1.4 million due to changes in foreign tax laws and changes in economic circumstances which made the utilization of net operating loss carryforwards more likely than not in certain foreign countries. For the year ended January 1, 1995, the valuation allowance increased approximately $1.8 million. At December 31, 1995, the Company's foreign subsidiaries had approximately $18.4 million in net operating losses available for carryforward. Of this amount, $17.1 million is available for an unlimited period while $1.3 million expires at various times through 1999. Additionally, the Company had approximately $39.4 million in state net operating losses expiring at various times through 2009. 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 December 31, 1995
Fiscal Year Ended ----------------------------------------------- December 31, January 1, January 2, 1995 1995 1994 ------------- ------------------ ------------ (in thousands) Taxes on income at U.S. statutory rate.......................... 35.0% 35.0% 35.0% Increase (reduction) in taxes resulting from: State income taxes, net of federal benefit.................... 2.6 2.2 2.8 Amortization of excess of cost over net assets acquired and related purchase accounting adjustments................. 3.6 4.5 3.9 Foreign and U.S. tax effects attributable to foreign operations.......................................... (0.1) (6.9) (5.4) Valuation allowance........................................... (4.5) 2.2 0.2 Other......................................................... (1.0) (1.0) (1.5) ----- ----- ----- Taxes on income at effective rates.............................. 35.8% 36.0% 35.0% ===== ===== =====
26 28 INTERFACE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Undistributed earnings of the Company's foreign subsidiaries amounted to approximately $45.9 million at December 31, 1995. 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 $3.1 million would be payable upon remittance of all previously unremitted earnings at December 31, 1995. 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 these derivative financial instruments through the use of market and credit risk limits, and timely reports to senior management according to prescribed guidelines. The Company has established strict counterparty credit guidelines and only enters into transactions with financial institutions of investment grade or better. As a result, the Company considers the risk of counterparty default to be minimal. Interest Rate Management Management of the Company has developed and implemented a policy to maintain the percentage of fixed and variable rate debt within certain parameters. The Company enters into interest rate swap agreements, which maintain the fixed/variable mix within these defined parameters. In these swaps, the Company agrees to exchange, at specified intervals, the difference between fixed and variable interest amounts calculated by reference to an agreed-upon notional principal linked to LIBOR. Any differences paid or received on interest rate swap agreements are recognized as adjustments to interest expense over the life of each swap, thereby adjusting the effective interest rate on the underlying obligation. At December 31, 1995, the Company utilized interest rate swap agreements to effectively convert approximately $73 million of variable rate debt to fixed rate debt. The weighted average rate on borrowings was 6.9% at December 31, 1995. The interest rate swap agreements have maturity dates ranging from nine to 24 months. Foreign Currency Exchange Rate Management The purpose of the Company's foreign currency hedging activities is to reduce the risk that the eventual net dollar inflows resulting from sales to foreign customers will be adversely affected by changes in exchange rates. The Company enters into forward exchange contracts and currency swap contracts to hedge certain firm sales commitments denominated in foreign currencies (principally European currencies and Japanese yen). 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 31, 1995. The contracts and options served to hedge firmly committed Dutch guilder, German mark, Japanese yen, French franc, British pound sterling, and other foreign currency revenues. The contracts and options generally have maturity dates of six to nine 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 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. 27 29 INTERFACE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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.
December 31, 1995 January 1, 1995 -------------------------------------------------- Notional Fair Notional Fair Amounts Values Values Values --------- --------- -------- --------- (in thousands) Interest Rate Management Swap agreements: Liabilities................ $73,000 $ (426) $23,000 $ (17) Foreign Currency Management Forward contracts: Assets..................... - - 6,499 (367) Liabilities................ 3,427 102 23,423 (29) Swap agreement: Liabilities................ 65,000 (7,328) 35,000 (5,504)
Note 15 - Commitments and Contingencies The Company leases certain marketing locations, distribution facilities, and equipment. At December 31, 1995, aggregate minimum commitments under operating leases with initial or remaining terms of one year or more consisted of the following (in thousands):
Fiscal year - ----------- 1996............................................. $ 5,102 1997............................................. 4,920 1998............................................. 1,281 1999............................................. 928 2000............................................. 613 Thereafter....................................... 251 ------- $13,095 =======
Rental expense amounted to approximately $9.3 million, $11.8 million and $10.2 million for the fiscal years ended December 31, 1995, January 1, 1995, and January 2, 1994, respectively. 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 $1.1 million, $0.8 million, and $1.5 million for the years ended December 31, 1995, January 1, 1995, and January 2, 1994, respectively. 28 30 INTERFACE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The ranges of assumptions used for the actuarial determinations reflect the different economic environments within the various countries where the Plans exist. In fiscal 1995, 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 8.0% and long-term rate of compensation increases of 4.7%. During fiscal 1994, assets and obligations related to a contributory profit sharing plan were combined with the trusteed defined benefit retirement plans in Interface Europe B.V. The impact upon the accumulated benefit obligation and the projected benefit obligation was immaterial; however, the Plan assets increased $10.0 million. In fiscal 1994, the assumed weighted average rate of return on Plan assets was 8.7% and the measurement of the projected benefit obligation was based on an assumed weighted average discount rate of 8.9% and long-term rate of compensation increases of 6.3%. The Company has 401(k) retirement investment plans, which are open to all its U.S. employees with one or more years of service. The 401(k) Plans call for Company contributions on a sliding scale based on the level of the employee's contribution. Approximately 70% of eligible employees are enrolled in the 401(k) Plans. The Company's contributions are funded monthly by payment to the 401(k) Plan administrators. Company contributions totalled approximately $560,000, $557,000 and $492,000 for the years ended December 31, 1995, January 1, 1995, and January 2, 1994, respectively. 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. 29 31 INTERFACE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 January 1, 1995 -------------------- -------------------- (in thousands) Plan assets at fair value, primarily equity and fixed income securities .......... ............ $66,392 $ 53,838 ------- -------- Actuarial present value of benefit obligations: Vested benefits................................ 52,339 37,681 Nonvested benefits............................. 1,124 987 ------- -------- Accumulated benefit obligation................... 53,463 38,668 Effect of projected future salary increases.... 4,082 3,813 ------- -------- Projected benefit obligation..................... 57,545 42,481 ------- -------- Plan assets in excess of projected benefit obligation............................. 8,847 11,357 Unrecognized net gain from past experience different from that assumed.................... (8,645) (10,594) Unrecognized prior service cost.................. 362 427 Unrecognized net asset existing at the date of initial application of SFAS 87................. 1,733 1,670 ------- -------- Prepaid pension cost............................. $ 2,297 $ 2,860 ======= ======== Net pension cost included the following components: Service cost - benefits earned during the period................................... $ 1,780 $ 1,524 Interest cost on projected benefit obligation.. 4,315 3,821 Actual return on plan assets................... (9,568) 1,887 Net amortization and deferral.................... 4,611 (6,435) ------- -------- Net pension cost................................. $ 1,138 $ 797 ======= ========
30 32 INTERFACE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 17 - Business and Foreign Operations The Company and its subsidiaries are engaged predominantly in the manufacture and sale of commercial and institutional interior finishing. Financial information by geographic area for the years ended December 31, 1995, January 1, 1995 and January 2, 1994 is as follows:
Fiscal Year Ended ------------------------------------------------------ December 31, January 1, January 2, 1995 1995 1994 -------------- ------------------- ------------- (in thousands) Sales to unaffiliated customers (by source operation) United States...................................... $440,715 $394,605 $308,367 Americas, excluding the United States.............. 23,165 22,325 20,027 Europe............................................. 267,116 246,376 235,643 Asia-Pacific......................................... 71,070 61,977 61,030 -------- -------- -------- $802,066 $725,283 $625,067 ======== ======== ======== Operating income United States...................................... $ 40,608 $ 34,111 $ 34,411 Americas, excluding the United States.............. 1,170 522 (259) Europe............................................. 26,046 20,707 13,638 Asia-Pacific....................................... 134 185 1,747 Corporate expenses................................. (6,415) (4,715) (3,367) -------- -------- -------- $ 61,543 $ 50,810 $ 46,170 ======== ======== ======== Identifiable assets United States...................................... $366,128 $332,653 $322,379 Americas, excluding the United States.............. 8,313 7,951 9,262 Europe............................................. 290,486 304,894 274,928 Asia-Pacific....................................... 49,424 37,910 35,750 -------- -------- -------- $714,351 $683,408 $642,319 ======== ======== ========
31 33 INTERFACE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 Quarter Quarter Quarter Quarter ---------------------------------------------------------------------------------- (in thousands, except share amounts) First Year Ended December 31, 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 Fully diluted earnings per common share before extraordinary item............... 0.20 0.25 0.26 0.30 Primary earnings per common share......... 0.20 0.25 0.27 0.11 Fully diluted earnings per common share... 0.20 0.25 0.26 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 Fiscal Year Ended January 1, 1995 Net sales................................. $160,219 $181,665 $184,959 $198,440 Gross profit.............................. 48,344 55,548 55,810 61,483 Net income................................ 2,812 3,711 4,247 5,686 Net income applicable to common shareholders............................ 2,374 3,274 3,809 5,249 Primary earnings per common share*........ 0.14 0.18 0.21 0.29 Share prices: High...................................... 16 1/8 14 13 5/8 13 3/8 Low....................................... 12 1/2 11 1/4 11 1/8 9 3/4 Dividends per common share.................. 0.06 0.06 0.06 0.06 * For the year ended January 1, 1995, earnings per share on a fully diluted basis were antidilutive.
32 34 Report of Independent Certified Public Accountants Board of Directors and Shareholders of Interface, Inc. Atlanta, Georgia We have audited the accompanying consolidated balance sheets of Interface, Inc. and subsidiaries as of December 31, 1995 and January 1, 1995, and the related consolidated statements of income and cash flows for each of the three years in the period ended December 31, 1995. 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 31, 1995 and January 1, 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. /S/ BDO SEIDMAN, LLP - -------------------- BDO SEIDMAN, LLP Atlanta, Georgia February 27, 1996 33 35 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 1996 Annual Meeting of Shareholders, filed with the Securities and Exchange Commission pursuant to Regulation 14A, 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 1996 Annual Meeting of Shareholders, filed with the Securities and Exchange Commission pursuant to Regulation 14A, 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 1996 Annual Meeting of Shareholders, filed with the Securities and Exchange Commission pursuant to Regulation 14A, 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. -34- 36 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 1996 Annual Meeting of Shareholders, filed with the Securities and Exchange Commission pursuant to Regulation 14A, is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. FINANCIAL STATEMENTS The following Consolidated Financial Statements and Notes thereto of Interface, Inc. and subsidiaries and related Report of Independent Certified Public Accountants contained in the Company's 1995 Annual Report to Shareholders, are included in Item 8 of this Report: Consolidated Balance Sheets -- December 31, 1995 and January 1, 1995 Consolidated Statements of Income -- years ended December 31, 1995, January 1, 1995 and January 2, 1994 Consolidated Statements of Shareholders' Equity -- years ended December 31, 1995, January 1, 1995, and January 2, 1994 Consolidated Statements of Cash Flows -- years ended December 31, 1995, January 1, 1995, and January 2, 1994 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 18): Report of Independent Certified Public Accountants Schedule II -- Valuation and Qualifying Accounts and Reserves 3. EXHIBITS The following exhibits are included as part of this Report: EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 3.1 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 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 -35- 37 of Georgia, as Trustee (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). 4.3 Registration Rights Agreement dated as of November 21, 1995, among the Company, certain subsidiaries of the Company as Guarantors and the Initial Purchasers of the Company's Notes (included as Exhibit 4.3 to the Company's registration statement on Form S-4, File No. 33-65201, previously filed with the Commission and incorporated herein by reference). 4.4 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 Amendment No. 3, dated July 28, 1992, to Interface, Inc. Key Employee Stock Option Plan dated March 1, 1983 (included as Exhibit 10.6 to the 1992 10-K, previously filed with the Commission and incorporated herein by reference).* 10.5 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 here in by reference); and Amendment No. 2 thereto, as approved by the Company on February 27, 1996.* 10.6 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).* 10.7 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 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, and Amendment No. 3 thereto dated February 28, 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). -36- 38 (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); and Joinder Agreement and Fifth Amendment thereto, dated as of June 30, 1995. 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 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 David Milton (included as Exhibit 10.3 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).* 10.14 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).* 10.15 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).* 10.17 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).* 10.18 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).* 10.19 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).* -37- 39 10.20 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).* 10.21 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).* 10.22 Employment Agreement of David W. Porter (included as Exhibit 10.10 to the Company's Third Quarter 1995 10-Q, previously filed with the Commission and incorporated herein by reference).* 10.23 Agreement (Change In Control) of David W. Porter (included as Exhibit 10.9 to the Company's Third Quarter 1995 10-Q, previously filed with the Commission and incorporated herein by reference).* 10.24 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).* 10.25 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).* 10.26 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.# 10.27 Receivables Sale Agreement, dated as of August 4, 1995, among Interface Securitization Corporation, Interface, Inc., certain Financial Institutions (as bank purchasers), SunTrust Bank and The First National Bank of Chicago (as co-agents), SunTrust Bank (as administrative agent) and The First National Bank of Chicago (as documentation and collateral agent).# 10.28 Joint Venture Agreement dated as of August 26, 1994 between Interface Asia-Pacific, Inc. and Modernform Group Public Co., Ltd. 13 Certain information contained in the Company's Annual Report to Shareholders for the fiscal year ended December 31, 1995, 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 27, 1996 into the prospectuses constituting parts of the Company's registration statements on Form S-8 (File Numbers 33-28305 and 33-28307). 24 Power of Attorney (See Signature page to Form 10-K) 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. # Previously filed. (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. -38- 40 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Interface, Inc. Atlanta, Georgia The audits referred to in our Report dated February 27, 1996 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 31, 1995, included the audit of Financial Statement Schedule II (Valuation and Qualifying Accounts and Reserves) and the Supplemental Guarantor Condensed Consolidating Financial Statements set forth in the Form 10-K. The Financial Statement Schedule and the Supplemental Guarantor Condensed Consolidating Financial Statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Financial Statement Schedule and the Supplemental Guarantor Condensed Consolidating Financial Statements. In our opinion, the Schedule and the Supplemental Guarantor Condensed Consolidating Financial Statements present fairly, in all material respects, the information set forth therein. BDO SEIDMAN, LLP Atlanta, Georgia February 27, 1996 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 beginning costs and other Deductions end of of year expenses(a) accounts (describe) year - -------------------------------------------------------------------------------------------------------------------------- (in thousands) Allowance for doubtful accounts: Year ended: December 31, 1995 ............................... $6,501 $2,448 $-- $3,079(d) $5,870 ====== ====== === ====== ====== January 1, 1995 ................................. $5,771 $3,562(b) $-- $2,832(d) $6,501 ====== ====== === ====== ====== January 2, 1994 ................................. $3,386 $4,026(c) $-- $1,641(d) $5,771 ====== ====== === ====== ======
- -------------- (a) Includes changes in foreign currency exchange rates. (b) Includes Prince Street allowance of $780 at acquisition date. (c) Includes Bentley Mills allowance of $1,300 at acquisition date. (d) Write off bad debt. (All other Schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are omitted because they are either not applicable or the required information is shown in the Company's Consolidated Financial Statements or the Notes thereto.) -39- 41 INTERFACE, INC. AND SUBSIDIARIES SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Year Ended December 31, 1995 Consolidation Non- Interface, Inc. and Guarantor Guarantor (Parent Elimination Consolidated Subsidiaries Subsidiaries Corporation) Entries Totals ------------------------------------------------------------------------ (in thousands) Net sales.................................... $ 499,398 $ 411,462 $ 246 $ (109,040) $ 802,066 Cost of sales................................ 351,209 308,994 193 (108,753) 551,643 ------------ ------------ --------------- ------------- ------------ Gross profit on sales.................... 148,189 102,468 53 (287) 250,423 Selling, general and administrative expenses. 98,372 77,242 13,266 - 188,880 ------------ ------------ --------------- ------------- ------------ Operating income......................... 49,817 25,226 (13,213) (287) 61,543 ------------ ------------ --------------- ------------- ------------ Other expense (income) Interest expense........................... 6,609 8,766 11,378 - 26,753 Other...................................... 17,715 (7,817) (6,784) - 3,114 ------------ ------------ --------------- ------------- ------------ Total other 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 ============ ============ =============== ============= ============
40 42 INTERFACE, INC. AND SUBSIDIARIES SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Year Ended January 1, 1995 Consolidation Non- Interface, Inc. and Guarantor Guarantor (Parent Elimination Consolidated Subsidiaries Subsidiaries Corporation) Entries Totals ------------------------------------------------------------------------- (in thousands) 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 ============ ============ =============== ============= ============ Year Ended January 2, 1994 Consolidation Non- Interface, Inc. and Guarantor Guarantor (Parent Elimination Consolidated Subsidiaries Subsidiaries Corporation) Entries Totals ------------------------------------------------------------------------ (in thousands) Net sales........................................ $ 345,157 $ 364,857 $ - $ (84,947) $ 625,067 Cost of sales.................................... 244,603 267,408 - (84,690) 427,321 ------------ ------------ --------------- ------------- ------------ Gross profit on sales........................ 100,554 97,449 - (257) 197,746 Selling, general and administrative expenses..... 71,075 80,501 - - 151,576 ------------ ------------ --------------- ------------- ------------ Operating income............................. 29,479 16,948 - (257) 46,170 ------------ ------------ --------------- ------------- ------------ Other expense (income) Interest expense............................... 4,201 11,078 7,561 - 22,840 Other.......................................... - 2,026 - - 2,026 ------------ ------------ --------------- ------------- ------------ Total other expenses......................... 4,201 13,104 7,561 - 24,866 ------------ ------------ --------------- ------------- ------------ Income before taxes on income and equity in income of subsidiaries.................. 25,278 3,844 (7,561) (257) 21,304 Taxes on income.................................. 9,975 1,688 (4,208) - 7,455 Equity in income of subsidiaries................ - - 17,459 (17,459) - ------------ ------------ --------------- ------------- ------------ Net income................................. 15,303 2,156 14,106 (17,716) 13,849 Preferred stock dividends........................ - - 913 - 913 ------------ ------------ --------------- ------------- ------------ Net income applicable to common shareholders.... $ 15,303 $ 2,156 $ 13,193 $ (17,716) $ 12,936 ============ ============ =============== ============= ============
41 43 INTERFACE, INC. AND SUBSIDIARIES SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
December 31, 1995 Consolidation Non- Interface, Inc. and Guarantor Guarantor (Parent Elimination Consolidated Subsidiaries Subsidiaries Corporation) Entries Totals --------------------------------------------------------------------------- (in thousands) ASSETS Current Cash and cash equivalents................... $ 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 Senior subordinated notes..................... - - 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 ============ ============ =============== =============== ============
42 44 INTERFACE, INC. AND SUBSIDIARIES SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
January 1, 1995 Interface, Inc. Consolidation Non- (Parent and Guarantor Guarantor Corporation) Elimination Consolidated Subsidiaries Subsidiaries (in thousands) Entries Totals ------------------------------------------------------------------------- ASSETS Current Cash and cash equivalents.................... $ 416 $ 3,972 $ 1 $ - $ 4,389 Escrowed and restricted funds................ 2,663 - - - 2,663 Accounts receivable.......................... 64,351 68,820 365 - 133,536 Inventories.................................. 72,455 60,195 - - 132,650 Miscellaneous................................ 7,019 11,805 53 - 18,877 ------------ ------------ --------------- ------------- ------------ Total current assets....................... 146,904 144,792 419 - 292,115 Property and equipment, less accumulated depreciation................................. 104,502 48,372 - - 152,874 Investments in subsidiaries.................... 108,978 17,746 316,101 (442,825) - Miscellaneous.................................. 52,610 20,473 304,510 (342,026) 35,567 Excess of cost over net assets acquired........ 129,354 73,498 - - 202,852 ------------ ------------ --------------- ------------- ------------ $ 542,348 $ 304,881 $ 621,030 $ (784,851) $ 683,408 ============ ============ =============== ============= ============ LIABILITIES AND COMMON SHAREHOLDERS' EQUITY Current Notes payable................................ $ 2,951 $ 2,550 $ - $ - $ 5,501 Accounts payable............................. 40,523 25,604 4,675 (16,601) 54,201 Accrued expenses............................. 21,724 23,981 11,235 - 56,940 Current maturities of long-term debt......... 853 - - - 853 ------------ ------------ --------------- ------------- ------------ Total current liabilities.................. 66,051 52,135 15,910 (16,601) 117,495 Long-term debt, less current maturities........ 108,992 76,700 231,866 (207,895) 209,663 Convertible subordinated debentures............ - - 103,925 - 103,925 Deferred income taxes.......................... 1,181 8,958 3,096 - 13,235 ------------ ------------ --------------- ------------- ------------ Total liabilities.............................. 176,224 137,793 354,797 (224,496) 444,318 Redeemable preferred stock..................... 57,891 - 25,000 (57,891) 25,000 Common stock................................... 66,607 88,791 2,179 (155,398) 2,179 Additional paid-in capital..................... 153,731 11,030 93,450 (164,761) 93,450 Retained earnings.............................. 86,285 67,685 146,932 (164,559) 136,343 Foreign currency translation adjustment........ 1,610 (418) (1,328) - (136) Treasury stock................................. - - - (17,746) (17,746) ------------ ------------ --------------- ------------- ------------ $ 542,348 $ 304,881 $ 621,030 $ (784,851) $ 683,408 ============ ============ =============== ============= ============
43 45 INTERFACE, INC. AND SUBSIDIARIES SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Year Ended December 31, 1995 Consolidation Interface, Inc. and Guarantor Non- Guarantor (Parent Elimination Consolidated Subsidiaries Subsidiaries Corporation) Entries Totals --------------------------------------------------------------------------- (in thousands) 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.............................. (64,098) (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............................ 57,954 (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 ============ ============== =============== ============ ============ Year Ended January 1, 1995 Consolidation Non- Interface, Inc. and Guarantor Guarantor (Parent Elimination Consolidated Subsidiaries Subsidiaries Corporation) Entries Totals --------------------------------------------------------------------------- (in thousands) 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 ============ ============== =============== ============= ============
44 46 INTERFACE, INC. AND SUBSIDIARIES SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Year Ended January 2, 1994 Consolidation Non- Interface, Inc. and Guarantor Guarantor (Parent Elimination Consolidated Subsidiaries Subsidiaries Corporation) Entries Totals -------------------------------------------------------------------------- (in thousands) Cash flows from operating activities..... $ 1,429 $ 35,844 $ 3,309 $ - $ 40,582 ============ ============ =============== ============== ============ Cash flows from investing activities: Purchase of plant and equipment........ (13,053) (7,586) - - (20,639) Acquisitions, net of cash acquired..... (15,209) - - - (15,209) Other.................................. (5,317) (10,359) 9,298 (257) (6,635) ------------ ------------ --------------- -------------- ------------ Net cash provided by (used in) investing activities............................. (33,579) (17,945) 9,298 (257) (42,483) ------------ ------------ --------------- -------------- ------------ Cash flows from financing activities: Net borrowings (repayments)............ 57,112 (137,219) 84,179 - 4,072 Proceeds from issuance of common stock. - - 1,898 - 1,898 Cash dividends paid.................... - - (5,063) - (5,063) Other.................................. (26,823) 120,066 (93,500) 257 - ------------ ------------ --------------- -------------- ------------ Net cash provided by (used in) financing activities............................... 30,289 (17,153) (12,486) 257 907 ------------ ------------ --------------- -------------- ------------ Effect of exchange rate changes on cash.. - (156) - - (156) ------------ ------------ --------------- -------------- ------------ Net increase (decrease) in cash.......... (1,861) 590 121 - (1,150) Cash at beginning of year................ 1,645 4,179 - - 5,824 ------------ ------------ --------------- -------------- ------------ Cash at end of year...................... $ (216) $ 4,769 $ 121 $ - $ 4,674 ============ ============ =============== ============== ============
45 47 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Company has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. INTERFACE, INC. By: /s/ Ray C. Anderson ---------------------------- Ray C. Anderson Chairman of the Board, President and Chief Executive Officer Date: November 20, 1996 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, President and Chief November 20, 1996 - --------------------------- Executive Officer (Principal Executive Officer) Ray C. Anderson * Senior Vice President - Finance, Chief Financial November 20, 1996 - --------------------------- Officer, Treasurer and Director (Principal Financial Daniel T. Hendrix and Accounting Officer) * Director November 20, 1996 - --------------------------- Brian L. DeMoura * Director November 20, 1996 - --------------------------- Charles R. Eitel * Director November 20, 1996 - --------------------------- Donald E. Russell Director - --------------------------- ----------------- John H. Walker * Director November 20, 1996 - --------------------------- Gordon D. Whitener * Director November 20, 1996 - -------------------------- Carl I. Gable * Director November 20, 1996 - -------------------------- June M. Henton * Director November 20, 1996 - -------------------------- J. Smith Lanier, II * Director November 20, 1996 - -------------------------- Leonard G. Saulter * Director November 20, 1996 - -------------------------- David G. Thomas * Director November 20, 1996 - ------------------------------- Clarinus C.Th. van Andel * By /s/ Ray C. Anderson --------------------- Ray C. Anderson, pursuant to power of attorney
46 48 EXHIBIT INDEX
EXHIBIT SEQUENTIAL PAGE NUMBER DESCRIPTION OF EXHIBIT NUMBER - ---------------------------------------------------------------------------------------------------------------------------- 10.5 Amendment No. 2 to Key Employee Stock Option Plan (1993).* 10.8(b) Amendments No. 1, No. 2 and No. 3 to Amended and Restated Credit Agreement among the Company (and certain direct and indirect subsidiaries), SunTrust Bank (formerly Trust Company Bank) and The First National Bank of Chicago. 10.10 Joinder Agreement and Fifth Amendment to the Revolving Credit Loan Agreement between Interface Flooring Systems, Inc. and SunTrust Bank. 10.26 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. 10.27 Receivables Sale Agreement, dated as of August 4, 1995, among Interface Securitization Corporation, Interface, Inc., certain Financial Institutions (as bank purchasers), SunTrust Bank and The First National Bank of Chicago (as co-agents), SunTrust Bank (as administrative agent) and The First National Bank of Chicago (as documentation and collateral agent). 10.28 Joint Venture Agreement dated as of August 24, 1994 between Interface and Asia-Pacific, Inc. and Modernform Group Public Co., Ltd. 13 Certain information contained in the Company's Annual Report to Shareholders for the fiscal year ended December 31, 1995, 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 27, 1996 into the prospectuses constituting parts of the Company's registration statements on Form S-8 (File Numbers 33-28305 and 33-28307). 24 Power of Attorney (See Signature page to Form 10-K) 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. EX-10.28 2 JOINT VENTURE AGREEMENT 1 EXHIBIT 10.28 JOINT VENTURE AGREEMENT THIS JOINT VENTURE AGREEMENT is made and entered into as of the 26th day of August, 1994, by and between INTERFACE ASIA-PACIFIC, INC., a corporation organized and existing under the laws of the State of Georgia, U.S.A., having its principal office at Orchard Hill Road, LaGrange, Georgia 30240 (hereinafter referred to as "INTERFACE"), and MODERNFORM GROUP PUBLIC CO., LTD., a company organized and existing under the laws of Thailand, having its principal office at 33/2 Moo 7 Bangna-Trad Road, Bangplee, Samutprakarn 10540 Thailand (hereinafter referred to as "MODERNFORM"). RECITALS: INTERFACE is engaged in the business of manufacturing and marketing, among other things, modular carpet systems (including carpet tiles and six foot roll goods). MODERNFORM is engaged in Thailand in the business of manufacturing and marketing office furnishings and equipment. INTERFACE and MODERNFORM, after discussion and investigation, desire to establish a joint venture company in Thailand to manufacture carpet in Thailand. THEREFORE, in consideration of the mutual covenants and promises hereinafter set forth, and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged by both parties, the parties hereby agree as follows: 1. PURPOSE OF AGREEMENT 1.1 The main purpose of this Agreement is to establish a limited company under the laws of Thailand to conduct the business of manufacturing in Thailand and marketing there high quality modular carpet tiles (herein referred to as "carpet tiles"). The Company may later decide to market or manufacture other products. The carpet tiles shall be distributed exclusively by INTERFACE or its affiliates outside of Thailand and exclusively by MODERNFORM within Thailand. Details of the business objectives of the joint enterprise (the "Business Objectives") shall be generally in accordance with Exhibit "A" attached hereto, as amended from time to time by the Company's Board of Directors or shareholders, to the extent permitted by applicable law. 2. FORMATION OF COMPANY 2.1 The parties shall establish a limited company (Borisat Chamkad) (hereinafter referred to as the "Company"), in accordance with the laws of Thailand, in which INTERFACE will hold seventy percent (70%) of the ownership interest, and MODERNFORM will hold thirty percent (30%) of the ownership interest. The parties shall cooperate in seeking to obtain all governmental, regulatory and other consents and licenses 2 necessary for the formation of the Company and carrying out the purposes of this Agreement, under conditions which the parties deem to be feasible and profitable. 2.2 The name of the Company upon its incorporation shall be "Interface Modernform Company Limited", in English, which is " " in Thai. 2.3 The principal place of business of the Company shall be at Bangpakong Industrial Park, Thailand, or at such other location as the Company shall determine. The Company may establish branches elsewhere in Thailand, in accordance with and subject to the prevailing Thai laws and regulations, the requirements of the Articles of Association of the Company, and sound business judgment. 2.4 The Business Objectives pertaining to the Memorandum of Association and Articles of Association of the Company shall be those attached as Exhibit "A", as amended from time to time by the Board of Directors or the shareholders, to the extent permitted by applicable law. The Memorandum of Association and Articles of Association of the Company shall be those attached as Exhibit "B". 2.5 In the event the Business Objectives or the Memorandum of Association and Articles of Association of the Company ultimately registered contain provisions that conflict with or are inconsistent with any of the terms and conditions of this Agreement, the terms and conditions of this Agreement shall prevail insofar as they are not contrary to the law or public order of Thailand. 2.6 All necessary and appropriate fees and expenses (including, without limitation, attorney fees expended to form and incorporate the joint venture company, registration fees and expenses for that company, Board of Investment Application expenses, land acquisition expenses, Use of Land Application fees and expenses, all other legally required (statutory) or necessary fees and expenses) incurred by the parties in the initial formation of the Company, exclusive of those fees and expenses associated with the negotiation, preparation, and execution of this Agreement (which shall be borne by the party incurring such charges), shall be reimbursed by the Company to the parties pro tanto to the sums so expended by each party. 2.7 In the event the Company, through no fault of the parties, does not ultimately become registered as an existing de jure entity, the otherwise reimbursable fees and expenses described above relating to the formation of the Company shall be the responsibility of the party which paid or incurred them. - 2 - 3 3. CAPITAL STRUCTURE OF THE COMPANY 3.1 The initial registered capital of the Company shall initially be Baht two hundred million (Baht 200,000,000) divided into twenty (20) million ordinary shares, each with a par value of Baht ten (Baht 10). 3.2 The shares of the Company shall be divided into two groups, Group A shares and Group B shares. (a) The Group A shares shall constitute seventy percent (70%) of the total shares, or 14,000,000 shares, being share certificates numbered one through fourteen million inclusive, and shall be subscribed by INTERFACE, or its nominee, at par. (b) The Group B shares shall constitute thirty percent (30%) of the total shares, or 6,000,000 shares, being share certificates numbered fourteen million and one through twenty million inclusive, and shall be subscribed by MODERNFORM, or its nominee, at par. 3.3 The initial paid-up capital shall be twenty-five percent (25%) of the total registered capital, or Baht fifty Million (Baht 50,000,000). At the initial meeting of shareholders required by law (the "Statutory Meeting"), it will therefore be resolved that all of the initial paid up capital shall be paid to the Company by the parties on the date of the Statutory Meeting. Subsequent calls on the unpaid amount of each share shall be as authorized by resolution of all Directors, but shall not be required unless so authorized. 3.4 Following the initial issue of shares of the Company, according to the numbers and distributions specified above, any new issues of shares, options or other rights to purchase shares, transfers of shares, and all other rights, obligations and liabilities relating to ownership of shares of the Company, shall be in accordance with the terms of this Agreement and the Articles of Association of the Company. Neither the Company nor either party will take or permit any action that would serve to dilute the percentage ownership interest of either party, except as may be expressly permitted by the terms of this Agreement or subsequent mutual written agreement of the parties. 3.5 Additional required contributions in connection with the start up of the Company shall be as follows: (a) INTERFACE shall provide the use of intangible assets in the form of certain portions of its technology and know-how and provide such technical expertise and training as is reasonably necessary to specify, locate, obtain, transport, and install appropriate machinery and equipment and assist in beginning - 3 - 4 the manufacture of tufted carpet tiles. To the extent INTERFACE contributes equipment and machinery to the Company, the cost (if acquired from a third party) or fair market value (if acquired from INTERFACE's existing machinery and equipment inventory) thereof shall be credited to INTERFACE's capital contribution account in determining its required contribution to the Company's capital. Attached hereto as Exhibit "C" and made a part hereof by this reference is a list of the equipment and machinery, and its valuation, which will be contributed by INTERFACE and credited to its required capital contribution. It is acknowledged by the parties that INTERFACE's contribution of intangible assets (technology, technology transfer and practical "know-how" in manufacturing, marketing and selling carpet tiles) is essential to the success of the Company and this venture. In light of these circumstances, it is agreed that INTERFACE personnel and representatives will have continuous, immediate and complete access to all information, plans, strategies and other data relevant to the construction of the Company's manufacturing plant; acquisition, installation and operation of manufacturing equipment; purchase and use of raw materials; processing of materials and products; engineering, design, research and development; sales and marketing activities; administration and operation of the Company; and all other facets of the Company's activities. It is acknowledged and agreed by MODERNFORM that INTERFACE's contribution to the Company of the limited use of its trademarks, technology, technology assistance, "know-how" and other intangible assets is not a transfer of ownership, but is merely a right of use limited to the Company and limited strictly by the terms of this Agreement. 3.6 The purchase and installation of initial machinery and equipment, hiring employees, obtaining raw materials and supplies and paying other expenses reasonably necessary for the operation of the Company, shall be effectuated through in-kind contributions or cash capital contributions by the parties, loans, or other financing arrangements, as determined by the Board of Directors. 4. RESTRICTIONS ON SHARE TRANSFER 4.1 Except as set forth in Clause 4.2 and Clause 15.3 hereof, neither party shall sell, assign, transfer, pledge, or otherwise dispose of or encumber in any manner any of its shares in the Company without the prior approval (evidenced by written resolution) of all of the shareholders. 4.2 If a shareholder (hereinafter called the "Seller" for the purposes of this Clause) wishes to sell or transfer any or all of its shares to a third party, such Seller shall first have received a written, complete and - 4 - 5 bona fide purchase offer, which is in all respects acceptable to the Seller, from such third party. The price and other terms of such offer shall be identical to those contained in the Transfer Notice referred to below. The Seller, within ten (10) days of receipt of such offer, shall give written notice (hereinafter called the "Transfer Notice") of such desired transfer to the Company and all other shareholders. The Transfer Notice shall include a complete, true and correct copy of such third party's purchase offer. The Transfer Notice shall state the total number of shares for sale, all terms and conditions of the sale (and all terms necessary for a complete sale, without contingencies and requiring full payment in current funds within fifteen (15) days of acceptance of such offer), and the price of said shares, and shall invite each shareholder (called "Buyer" for the purposes of this Clause and Clause 4.3 below) to apply in writing to the Company and Seller, within forty-five (45) days of the date of delivery of such Transfer Notice, to purchase such shares in accordance with the terms stated in the Transfer Notice. Within such forty-five (45) day period, the Buyer shall notify Seller in writing of its election either to accept or reject the offer contained in the Transfer Notice. If Buyer fails to deliver an unqualified acceptance of the offer within such period, Buyer shall be deemed to have rejected it. If Buyer accepts Seller's offer, Buyer shall pay for Seller's shares within fifteen (15) days of the date of Buyer's acceptance, and shall discharge all obligations properly contained in the Transfer Notice, and the Seller shall be bound to do all things necessary to fully and properly transfer such shares of Seller to the Buyer immediately upon receipt of the purchase price therefor. If Buyer rejects the offer in Seller's Transfer Notice, then Seller shall be free to sell its shares to the third party, but Seller must do so strictly in accordance with every term set forth in the Transfer Notice to Buyer, otherwise such transfer shall be void, of no effect, and the Board of Directors shall take all actions necessary to avoid giving effect to such sale. If the sale to the third party is not completed within ninety (90) days of the date of last delivery of the Transfer Notice to a shareholder, then the third party's offer shall be deemed void and withdrawn, and any sale of shares thereafter must be carried out by completing from the outset all requirements of this Clause 4.2. 4.3 The shareholders may approve (by written resolution) any share transfer or sale without requiring the procedures set forth in this Article 4, provided that such resolution is approved by all shareholders. 4.4 Notwithstanding any provision to the contrary contained in this Agreement, INTERFACE and MODERNFORM agree that no shares or other interest in the Company or any of its assets (tangible or intangible) can (directly, indirectly or in any other manner whatsoever) be assigned or transferred to any other person or entity unless the assignee or transferee executes an agreement whereby such assignee or transferee unconditionally agrees to be bound by and adhere to all of - 5 - 6 the provisions of this Agreement (including, but without limitation, the provisions of this Article 4, Article 9 and Article 16) governing the actions of the party from which the assignee or transferee obtained such shares or other interest. In no event may shares of the Company be sold by a Seller (as defined in Clause 4.2 above) to a competitor of the non-selling shareholder(s) without said shareholder's written approval, which shall not be withheld unreasonably. The term "competitor" shall mean any person or entity engaged directly or indirectly in the manufacture, marketing, sale or distribution of product or service which competes with any identical or similar product or service manufactured, marketed, sold or distributed at the time of inquiry by the party who has the right to object hereunder to the sale of any shares to such a person or entity. Notwithstanding any contrary provision contained in this Article 4, neither party shall be allowed to exercise any of the rights contained in Clause 4.2 and Clause 4.3 above earlier than twenty-four (24) months after the latest of: (i) the date appearing at the beginning of this Agreement, and (ii) the last date of signature by a party hereto. 5. MANAGEMENT OF COMPANY 5.1 Management of the Company shall be carried out in accordance with the principles and policies established from time to time by the Board of Directors, under the control of the shareholders and according to the Articles of Association of the Company, which policies shall include, without limitation, the requirement that at least one representative of each party hereto (designated by such party in writing) must receive, on a monthly, quarterly and annual basis, current and accurate reports of the Company's financial and operating information, including without limitation Balance Sheet, Profit and Loss, and Cash Flow reports reflecting the results of the Company's operations. 5.2 The Board of Directors shall be composed of five (5) members, three (3) to be designated by the Group A shareholders ("Group A Directors") and two (2) to be designated by the Group B shareholders ("Group B Directors"). A vacancy on the Board shall be filled through election of a replacement nominated by the Group of shareholders who nominated the Director whose position is vacated. Each of the parties hereto agrees to vote all of its shares in favor of the nominees designated by the other party with respect to director positions entitled to be filled by such other party. 5.3 The Board of Directors shall elect a Chairman of the Board (the "Chairman") from among the Group A Directors; the Chairman shall hold the post until removed by action of the Board or by vote of the shareholders. The Group A Directors shall appoint the Managing Director. - 6 - 7 5.4 Except as otherwise noted in Clause 6.4 hereof, the signature of at least two (2) Group A Directors or one (1) Group A and one (1) Group B Director shall be required, together with the affixing of the Company's seal (if required by law), to bind the Company with respect to agreements, transactions and documents pertaining to the matters described in Clause 6.4 of this Agreement. 5.5 The Board of Directors shall appoint by a majority vote the operating officers of the Company. Any operating officer can be removed from office or terminated by a majority vote of the Directors. 6. BOARD OF DIRECTORS ACTION 6.1 The Board of Directors shall meet at least once every six (6) months, at such times and places as may be determined by the Board. Directors may participate at Board meetings via conference telephone and confirmed by circulation minutes signed by all directors. The minutes duly signed by all directors shall constitute the presence of such directors at the meeting for all purposes. Not less than twenty (20) days prior written notice of a meeting shall be given to each Director by registered airmail, cable, telex or telefax as appropriate (in the latter three cases an express delivery letter confirming the notice in writing shall be sent to each Director). Such notice to any Director may be waived in writing by the Director either before or after the meeting, and shall be deemed waived by his presence at the meeting either in person or by proxy unless the Director or proxy, at the beginning of the meeting (or promptly upon his arrival), states his objection to the calling of the meeting and the transaction of business and does not vote on the actions taken. 6.2 A special or extraordinary Board of Directors meeting shall be convened promptly upon the written request of a majority of Directors stating the matter(s) to be considered at the meeting. The procedure and timing for holding such a meeting shall be as set forth in this Article 6; provided, however, the meeting may be held upon only seven (7) days advance notice if three-fifths (3/5) of the Directors agree in writing to such shorter notice period. 6.3 The quorum for Board meetings shall be a majority of the entire Board of Directors present either in person or by proxy; provided, however, of the Directors present in person or by proxy, a majority of them must be Group A Directors, and at least one of them must be a Group B Director. In the event a quorum is not formed within one (1) hour after the scheduled time for a meeting, such meeting may be adjourned to any other reasonable date, time and place as may be fixed by the Chairman or his proxy, and at such meeting a Group B Director need not be present as long as there is present a majority of the entire - 7 - 8 Board, and the Group A Directors make up a majority of the quorum so formed. 6.4 Except as otherwise set forth herein, a resolution or action of the Board of Directors shall require the affirmative vote of three-fifths (3/5) of the Board of Directors. The Chairman shall have no second and casting vote. At least three (3) Directors' votes, including at least one (1) Group B Director, are required as to items (c), (g), (j), (k) and (m) immediately below; all other lettered items below shall require only three (3) Directors' (whether Group A or Group A and B) votes for passage: (a) Borrowing funds or pledging the credit of the Company for a period of more than ninety (90) days or for aggregate amounts (relating to a specific transaction, project or event) in excess of Forty Thousand U.S. Dollars (U.S. $40,000); (b) Sale or transfer of any interest in tangible assets of the Company otherwise than in the ordinary course of business, or having a value (individually or, in relation to any particular project or transaction to be undertaken by the Company, in aggregate) in excess of Forty Thousand U.S. Dollars (U.S. $40,000); (c) The execution of, or any other action binding the Company to, any guarantee, indemnity, contract of surety or similar instrument by or on behalf of the Company if it exceeds Forty Thousand U.S. Dollars (U.S. $40,000) in liability to the Company; (d) The execution of any mortgage, pledge, assignment, encumbrance or other security over or in respect to any property of the Company (other than security interests granted with respect to trade payables incurred in the ordinary course of business); (e) The signatories to, and the other terms of mandate governing, the bank account(s) of the Company; (f) The engagement or removal of accountants, auditors, solicitors, or taxation advisers by the Company or the adoption, discontinuance or variation of any accounting or taxation policy by the Company; (g) Agreements between the Company and any of the shareholders or between the Company and any company or juristic person in which a shareholder, alone or jointly with other persons (either natural or juristic), holds or otherwise controls or benefits from (directly or indirectly) any of the voting shares, financial interests or other rights of control; - 8 - 9 (h) All items of capital expenditure in excess of Forty Thousand U.S. Dollars (U.S. $40,000); (i) Approval of final annual profit and loss accounts and balance sheets; (j) Any proposal or agreement for the Company to enter into any partnership, joint venture, consortium, merger (amalgamation), business combination, profit-sharing or similar arrangement with any other company or person; (k) Sale or transfer of any interest in any intangible assets of the Company; (l) Payment of dividends in accordance with Clause 12 (Dividend Policy) below; and (m) Any change in the Transfer Pricing Formula (the "Formula") initially agreed on by the parties and attached hereto as Exhibit "D" and incorporated herein by this reference. The Formula reflects the price for carpet tiles to be charged by the Company to each party hereto. It is expressly understood that some of the above matters shall require subsequent approval of the shareholders in accordance with applicable law or when otherwise required by the Board of Directors. 6.5 The Board of Directors may adopt a resolution without holding a meeting if all Directors approve the action by placing their signatures on the original copy of the resolution. Any such resolution shall be effective and binding on the Company only after all of the Directors have signed the resolution, but may be made effective (by its terms) on an earlier date if so stated therein. The duly signed resolution shall be delivered to the Managing Director and placed in the Minute Book of the Company. 7. SHAREHOLDERS' ACTION 7.1 The first general (regular) meeting of shareholders shall be held within six (6) months after the date of registration of the Company, and a general meeting shall be held at least once every twelve (12) months thereafter, at such time and place as determined by the Board. Such general meetings are called "ordinary general meetings", and all other meetings of shareholders are called "extraordinary general meetings." The Chairman and any two Directors may summon extraordinary general meetings (by proper written notice) whenever they think fit. - 9 - 10 7.2 Not less than twenty (20) days prior written notice of every ordinary general meeting (seven (7) days in the case of extraordinary general meetings) shall be given to all shareholders whose names appear in the register of shareholders. This notice requirement may be waived in writing by the shareholder entitled to notice. Notice to shareholders in Thailand shall be given by post, and notice to shareholders abroad shall be sent by registered airmail, or cable, telex or telefax (in the three latter cases an express delivery letter confirming the notice in writing shall be sent to the shareholders). The notice shall specify the place, the date and the hour of the meeting, and the nature of the business to be transacted thereat. 7.3 A quorum of any meeting of shareholders shall require the presence of shareholders, in person or by proxy, representing seventy percent (70%) or more of all shares issued. 7.4 Each shareholder shall have one vote for each share of which it is the holder. Votes shall be cast by a show of hand, by poll or by written ballot, as directed by the Chairman. 7.5 Unless otherwise expressly provided herein or required by Thai law, all resolutions or actions of the shareholders shall require the affirmative vote of not less than seventy percent (70%) of the shares with voting rights present at the meeting. 7.6 The following matters shall be passed by two successive meetings of shareholders by affirmative votes of three-fourths (3/4) of the shares present at the first meeting and by not less than two-thirds (2/3) of the shares present at the second meeting: (a) To amend the Memorandum of Association or Articles of Association; (b) To increase or reduce the registered capital; (c) To dissolve the Company; (d) To merge or amalgamate with another company; and (e) To allot new shares as fully or partly paid up otherwise than in money. 8. USE OF NAMES 8.1 The parties acknowledge and agree that the names "INTERFACE", "Heuga", "Interface Heuga", and all other combinations of these names and other names or symbols constituting trademarks, style names or trade names used by INTERFACE or its Affiliates (hereinafter collectively referred to as the "Marks") in connection with their businesses and products, or their similar or comparable names or symbols in the Thai language or any other language, belong exclusively to INTERFACE (and its affiliates), and MODERNFORM shall make no - 10 - 11 claim of right or interest with respect thereto. A current list of such marks and names is attached hereto as Exhibit "E" and made a part hereof by this reference. "Affiliates" of INTERFACE shall include Interface, Inc. (the parent Company of INTERFACE) and all companies at least fifty percent (50%) of which are owned directly or indirectly by Interface, Inc. This obligation of MODERNFORM shall survive the termination of this Agreement. The Marks may be used by the Company to the extent INTERFACE specifically agrees in writing to such use; provided, however, the Marks shall be deleted and removed from the Company's name, seal, logos, stationery, business cards, advertisements, packaging materials, brochures, samples, telephone listings and all other items bearing such Marks, and proper formality shall be conducted immediately to remove or delete such Marks, if and when INTERFACE is no longer a shareholder of the Company or INTERFACE requests such action in writing to the Company's Managing Director or Board of Directors. INTERFACE will notify MODERNFORM and the Company of any Marks INTERFACE believes either of them may be using improperly, and MODERNFORM will seek INTERFACE's advice in case of any doubt by MODERNFORM about whether it or the Company may be violating INTERFACE's rights regarding a Mark. Both the Company and MODERNFORM shall take all actions and timely execute all documents requested by INTERFACE to effectuate the terms, substance and intent of this Clause. 8.2 MODERNFORM will not, and expressly undertakes to cause all other persons or entities over which MODERNFORM exercises control to not, commit any act or take any action at any time which would in any way impair the rights of INTERFACE to any of the Marks, both registered and unregistered, or claim, acquire, register or attempt at any time to claim, acquire or register any rights to any Marks by virtue of their Agreement or otherwise. MODERNFORM will, and will use its best efforts to cause all of its dealers or suppliers to, promptly cease using any of the Marks or any item, as well as any word, symbol, design, name or logo which in the sole opinion of INTERFACE, so nearly resembles any of the Marks as to lead to confusion or uncertainty or to mislead the public. 9. COMPETITIVE ACTIVITY 9.1 From the date of execution of this Agreement, and subject to the provisions of Clause 9.2 below, neither party shall commercially associate (directly or indirectly) with any other person or enterprise, nor shall either party become or remain a shareholder, partner, director, or managing partner, or obtain or retain any ownership interest (directly or indirectly) in other companies, partnerships, or other business entities whose activities are substantially similar in nature to or in any way competitive with the business or activities of the Company, nor shall either party itself engage (directly or indirectly) - 11 - 12 in such competitive activities, without the prior written consent of the other party (whose consent shall not be withheld unreasonably). This prohibition shall continue as to each party through and including the earlier of: (1) date which is twenty-four (24) months after the date on which MODERNFORM ceases to be a shareholder of the Company, or ceases to have rights under this Agreement by virtue of such rights properly having been terminated for cause or due to such party's material default of its obligations hereunder, or (2) the date on which neither party hereto is a shareholder of the Company or any successor entity, or (3) six (6) months after the date on which INTERFACE ceases to be a shareholder of the Company or any successor entity, or ceases to have rights under this Agreement by virtue of such rights properly having been terminated for cause or due to such party's material default of its obligations hereunder. Nothing contained in this Article 9 shall be deemed to relieve either party of its obligations under Article 16 hereof. 9.2 The non-competition obligations under this Article shall be applicable only in Thailand with respect to INTERFACE's activities, and throughout the world (including Thailand) with respect to MODERNFORM's activities. Notwithstanding the provisions of Clause 9.1, and subject only to contrary provisions which may appear in the Distribution Agreement among INTERFACE, MODERNFORM and the Company INTERFACE shall be entitled to sell its products directly to customers in Thailand until such time as the Company has a sales and marketing staff capable and willing to sell INTERFACE's products on terms mutually agreeable to the Company and INTERFACE and the Company is manufacturing carpet tiles of sufficient quantity and quality to satisfy the demands of customers in Thailand who desire to purchase carpet tiles. 9.3 Each party by executing this Agreement represents that it has obtained from the Board of Directors of such party all necessary written consents or approvals to enter into this Agreement to the extent required by applicable corporate by-laws, articles of association, laws or regulations. 10. PROJECT IMPLEMENTATION 10.1 The parties shall proceed promptly and in good faith to achieve the Business Objectives upon final execution of this Agreement. 11. FINANCING OF OPERATIONS 11.1 Necessary funds for the operation of the Company, not covered by the Company's paid up capital, shall be principally secured under the responsibility of the Company itself. However, if the Company is unable to secure such funds, the shareholders of the Company will - 12 - 13 cooperate reasonably in attempting to procure such necessary funds by means of increase of capital, direct loan, guarantee of Company obligations (unless prohibited by applicable laws, regulations or other agreements), or otherwise, as the case may be, but shall be responsible for such capital, direct loan, guarantee or other arrangement severally (not jointly), in proportion to their shareholdings of the Company. Notwithstanding the foregoing provisions, neither party hereto shall be required to supply directly, or obligate itself for the payment or guarantee of, such additional funds. 12. DIVIDEND POLICY 12.1 Within one hundred and twenty (120) days after the end of every financial year in which the Company has earned a profit and a fund has been properly reserved to meet the requirement of the laws, a Director may submit to the attention of the shareholders resolutions of the Board of Directors approving the payment of dividends. 12.2 By a vote of not less than a majority of all Directors, the Directors may from time to time pay to the shareholders an interim dividend in an amount justified by the profits of the Company. 12.3 No dividend shall be paid otherwise than out of profits. If the Company has incurred losses, no dividend may be paid until such losses have been made good. 13. ACCOUNT'S AND RECORDS 13.1 The parties hereto agree that the Company's books and records shall be maintained in the English language, with Thai translation if required by Thai law or by the parties, according to generally accepted international accounting principles (and Thai law). The original books and records shall be maintained at the Company's principal office. 13.2 The Company shall hire an auditing firm (or public registered auditors) designated by INTERFACE who at the end of each fiscal year, and at such other times as are considered necessary by any of the Directors or the shareholders, will audit the accounts and records of the Company at the expense of the Company. The auditor may be replaced only by a majority vote of the shareholders. 13.3 The fiscal year of the Company, unless otherwise determined at a general meeting of shareholders, will commence on January 1st and end on December 31st. 13.4 Authorized representatives of Group A and Group B shareholders, as designated by such shareholders, shall have reasonable access to the books of account and records of the Company and will be permitted to - 13 - 14 make extracts or copies therefrom during business hours of the Company. 13.5 Copies of all audited financial statements of the Company shall be furnished to the shareholders for review and approval, as required by Thai law. 14. DEFAULT 14.1 A party shall be in default under this Agreement if it shall fail to pay or properly and timely perform any of its material obligations under or pursuant to this Agreement, or the Distribution Agreement between that party and the Company. In addition, specific events of default shall include the following relative to a party: (a) appointment of a trustee or receiver for all or any substantial part of its assets or property, (b) its insolvency or bankruptcy; (c) a general assignment for the benefit of its creditors; (d) attachment of any substantial part of its assets; (e) dissolution or liquidation of it. 14.2 Except for those events itemized in subparts (a) - (e) in Clause 14.1 above (upon the occurrence of which termination shall occur immediately upon written notice), no default under Clause 14.1 hereof shall be deemed to have occurred until the nondefaulting party has first given notice of such default to the defaulting party, and the party in default has failed to cure such default within thirty (30) days after receipt of such written notice, or the default cannot be cured within such time. 14.3 If a party defaults and fails to cure such default pursuant to Clauses 14.1 and 14.2 hereof, the other party shall have the right to immediately exercise one or more of the following rights or such other rights as may be available: (a) Terminate this Agreement (and exercise the additional rights provided in Clauses 15.2 and 15.3 hereof); (b) Recover any actual damages or costs which have been incurred by the nondefaulting party as a result of the other party's default, except damages arising from special circumstances or causes beyond the defaulting party's control; and (c) Obtain an award of specific performance or injunctive relief (as provided in Article 17) in appropriate circumstances. - 14 - 15 15. TERM AND TERMINATION OF AGREEMENT 15.1 This Agreement shall become effective on the date of signing of this Agreement (first set forth above) and shall continue in effect through the corporate life of the Company, unless earlier terminated as provided in this Agreement; provided, however, that if any shareholder directly or indirectly sells or transfers all of its shares in the Company in accordance with the provisions of this Agreement, the rights, obligations and liabilities of such selling party shall terminate (except for those rights, obligations and liabilities existing prior to the sale or transfer of shares or otherwise identified herein as continuing obligations). 15.2 This Agreement may be terminated by the indicated party for the following reasons: (a) Default. If a party has defaulted pursuant to the provisions of Clause 14 hereof, the other party shall have the right to terminate this Agreement as provided therein. (b) Mutual Agreement. Upon the mutual written agreement of each party hereto, this Agreement may be terminated at any time. Any of the effects of termination, as provided in this Article 15 or elsewhere in this Agreement, may be expressly waived in conjunction with such termination by mutual written consent. (c) Bankruptcy or Insolvency. In the event that a party enters, applies to enter, or an application is made by a third party intending to force that party to enter, into bankruptcy, composition or reorganization, or if a party becomes insolvent due to its being unable to pay its debts as they become due, then the other party shall have the right to terminate this Agreement. (d) Deadlock. In the event that the Board of Directors is deadlocked (i.e., less than the required number of total votes, or Group A and B votes, are cast in favor of a motion or resolution to assure its passage) on one or more material issues relevant to the management of any of the essential corporate affairs of the Company and the shareholders are unable to break the deadlock within one hundred twenty (120) days of being notified in writing by the Chairman of the deadlock and the specific issue(s) over which there is a deadlock, either party may terminate this Agreement. (e) Acquisition of Shares. In the event that one of the parties acquires all of the shares of the Company pursuant to Article 4 (or through any other arrangement agreed to in writing by the parties), this Agreement shall terminate automatically as to the - 15 - 16 party which thereafter does not own any company shares, but it shall remain in effect as to the other party (if that party so elects), and any new party which replaces the other original party. Notwithstanding any contrary provision herein, the provisions of this Agreement which by their terms are intended to survive termination of this Agreement shall remain binding on each of the parties hereto. 15.3 In the event this Agreement is terminated pursuant to the provisions of this Article 15 (and notwithstanding any contrary provisions in Clause 4.2 above), the parties shall have the following rights, in addition to and without prejudice to any other rights, remedies and obligations of the parties existing at the time of termination. (a) Option to Purchase or Sell Shares. If the termination is effected by (i) a default under Clause 15.2(a), or (ii) bankruptcy or insolvency under Clause 15.2(c), or (iii) deadlock under Clause 15.2(d), then the nondefaulting party in the case of (i), or the solvent party in the case of (ii), or INTERFACE in the case of (iii), shall have the right to exercise one of the following options: (1) Purchase all the shares of stock in the Company owned by the other party at a price equalling the fair market value of such shares (determined as provided below), or require the other party to purchase all the shares in the Company owned by the invoking party at the same price per share. The purchase price shall be paid in full promptly upon transfer of the shares, unless the parties agree to other terms of sale. The parties, as shareholders, shall consent to and approve the aforesaid transfer of shares. (2) Sell all (but not less than all) of the shares of stock owned by the invoking party (i.e., the non-defaulting party, the solvent party, or INTERFACE, as the case may be) to a third party, at such price (which is not limited to a fair market valuation by the Company's auditor) and upon such other terms and conditions as may be agreed with such third party. The parties, as shareholders, shall consent to and approve the aforesaid transfer of shares. (3) Require the dissolution and liquidation of the Company in accordance with the procedure set forth in Clause 15.3(b) below. The "fair market value" referred to in Clause 15.2(a)(1) shall mean the value determined by the Company's auditor in - 16 - 17 accordance with internationally accepted accounting standards, which shall include the value of goodwill of the Company. The fair market value so determined shall be final and binding on both parties. The "third party" referred to in Clause 15.3(a)(2) shall mean any person, juristic or natural, whether or not such person engages in the same line of business as the Company. (b) Dissolution and Liquidation. If the termination is effected by mutual agreement under Clause 15.2(b) without a written agreement to sell shares to either party (or to a permitted third party), or to sell the Company as a going concern, or is elected by a party under Clause 15.3(a)(3) above, then the Company shall be dissolved and liquidated. In such cases the parties shall, in their capacities as shareholders, vote for a special resolution at a general meeting of shareholders in favor of such dissolution and liquidation, and the liquidation of the Company shall commence in accordance with the laws of Thailand. 15.4 The indefinite duration of the term of this Agreement shall not operate to extend or otherwise alter the specified duration of any other agreements between the parties or among the Company and the parties hereto. 15.5 Notwithstanding any contrary provision in this Agreement, in the event that INTERFACE is no longer a shareholder of the Company or the Company is dissolved, INTERFACE shall be entitled to remove all equipment and other property and documents from the Company and all facilities owned, leased or used by the Company which use, contain, reflect or reveal any of the Confidential Information (as defined in Paragraph 16.1 below) of INTERFACE, and all such equipment, property and documents shall be delivered to INTERFACE's custody by the Company; provided, however, as to equipment and machinery so removed, INTERFACE will pay the appropriate party the fair market value thereof, as determined by use of Clause 15.3. 16. CONFIDENTIALITY 16.1 Each party agrees to treat as secret and confidential all documents, formulae, processes, trade secrets, proprietary information or equipment, know-how and other materials and information concerning technical, manufacturing, financial, sales or marketing information (collectively referred to herein as "Confidential Information") of the other party which they may obtain during the course of this Agreement and the business relationship between the parties, unless disclosure of such information is expressly permitted by written agreement of the - 17 - 18 party whose Confidential Information is subject to being disclosed, or is unequivocally required by law. 16.2 Acting in their capacities as shareholders, the parties shall cause the Company to adopt measures to ensure that the Company, and its Directors, officers, employees and agents who are given access to such Confidential Information, shall treat all such Confidential Information as secret and confidential, and that they also shall be bound by and shall fulfill the obligations of the parties set forth in Clause 16.3 below, so as to ensure that such information will not be made available to or used by any unauthorized third party. 16.3 Each party hereto agrees that it shall not use (directly or indirectly) or disclose (directly or indirectly) to any other person or entity any written or oral Confidential Information obtained from the other party or from the Company for any purposes whatsoever except in connection with accomplishing the Business Objectives and for the sole and exclusive benefit of the Company. Any patent rights or other intellectual property rights developed solely by employees of the Company without reference to, use of, or reliance on any Confidential Information of INTERFACE shall remain exclusively the property of the Company unless the Board of Directors decides otherwise by affirmative vote of at least three fourths (3/4) of all Directors. Any other patent rights or intellectual property rights developed by the Company or employees or representatives of the Company shall be and remain the property of INTERFACE. The parties shall cause the Directors and employees of the Company to take all actions necessary to perfect and preserve such rights. 16.4 The covenants and agreements of this Article 16 shall survive the termination of this Agreement and be binding on each party hereto, the Directors, officers, employees and agents of the Company, and any other person or entity which becomes an owner of shares in the Company, for a period of ten (10) years after such party, and such other person or entity, ceases to own any shares of the Company, and such Directors, officers employees and agents cease to be employed by or serve the Company. 17. SPECIFIC PERFORMANCE 17.1 The parties hereby agree that notwithstanding anything to the contrary contained in the Articles of Association of the Company, either now or in the future, the provisions of this Agreement shall be binding upon the parties and they agree to exercise their respective voting rights in such a manner as may be necessary to ensure that the provisions contained herein are honored. - 18 - 19 17.2 In the event any party fails to abide by the provisions of this Agreement, the other party may commence an action against such party to obtain any equitable remedy available, including but not limited to an award of specific performance or injunctive relief. 17.3 Notwithstanding any contrary provision in this Agreement, the enforcement of this Clause 17 may be obtained in the Civil Court of Bangkok according to the provisions of Thai law. 18. FORCE MAJEURE 18.1 Neither party hereto shall be liable for any breach or failure to perform hereunder where such failure is caused by contingencies beyond the control of such party, including but not limited to acts of God, fire, flood, storms, typhoons, wars, civil strike, sabotage, and governmental actions of either the Government of Thailand or the U.S.A. (including but not limited to currency import or export prohibitions). The party so prevented from complying herewith shall immediately give notice thereof to the other party and shall continue to take all actions reasonably within its power to comply as fully as reasonably possible with the terms of this Agreement. 19. NON-ASSIGNMENT 19.1 Neither this Agreement nor any rights or obligations hereunder may be assigned by either party without the prior written consent of the other party. Neither party hereto shall unreasonably withhold its consent to an assignment of any rights or obligations under this Agreement by the other party to an Affiliate of the party seeking such assignment, provided that the Affiliate assumes all of the obligations of such party, and such party also remains bound to perform (or cause to be performed) all of its obligations hereunder. The term "Affiliate" as used in this Agreement means another company, legal person or entity, partnership, joint venture or other similar enterprise more than fifty percent (50%) of which is owned or controlled, directly or indirectly, by the party hereto of which it is an Affiliate. 20. COSTS AND EXPENSES 20.1 Except as otherwise expressly provided herein, each of the parties shall bear its own costs and expenses incurred in the negotiation, arrangement and preparation of all documentation relating to any transaction stipulated in this Agreement. - 19 - 20 21. NOTICE 21.1 Any notice, report or other communication to be given by one party to the other (or to shareholders) in connection with this Agreement shall be given in English and, unless otherwise specifically indicated herein, shall be transmitted by registered or certified airmail, postage prepaid, return receipt requested, addressed to the receiving party at the address set forth below (or at such other address of which the sending party shall have been previously advised in writing pursuant to this Article), or by telex or telefax addressed to such address, followed by a confirmation letter express mailed in the above manner. Any such notice shall be considered to have been delivered, received and made effective seven (7) days after its dispatch, except for notice by telex and telefax which shall be deemed effective on the date on which it is sent, provided, in the case of telex notices, that the answer back of the receiving party is recorded at the end of the message indicating that the telex has been received. To INTERFACE: Mr. David Milton President Interface Asia-Pacific, Inc. Shui on Centre 1413-1418 8 Harbour Road Hong Kong Fax: 011/852-810-6474 With a copy to: David W. Porter Vice President-General Counsel Interface, Inc. 2859 Paces Ferry Road, Suite 2000 Atlanta, Georgia 30339 Fax: (404) 956-9764 To MODERNFORM: Khun Chareon Usanachitt Vice Chairman and Executive Director Modernform Group Public Company Limited 81/16 Moo 16 Srinakarindr Road Bangkok 10250 Thailand Fax: 011/662-379-3461 To the Company: The General Manager Interface Modernform Co., Ltd. 81/16 Moo 16 Srinakarindr Road Bangkok 10250 Thailand Fax: 011/662-379-3461 - 20 - 21 With a copy to: Mr. David Milton President Interface Asia-Pacific, Inc. Shui on Centre 1413-1418 8 Harbour Road Hong Kong Fax: 011/852-810-6474 And a copy to: Khun Chareon Usanachitt Vice Chairman and Executive Director Modernform Group Public Company Limited 81/16 Moo 16 Srinakarindr Road Bangkok 10250 Thailand Fax: 011/662-379-3461 22. GOVERNING LAW 22.1 Subject to Clause 17.3 hereof, the validity, interpretation and performance of this Agreement shall be determined and enforced insofar as is possible in accordance with the laws of the State of Georgia, United States of America. 23. DISPUTES 23.1 Except as allowed in Clause 15.3 (relating to procedures in the event of deadlock) and Article 17 (relating to equitable remedies), and any other Clause allowing a party to seek specific performance or injunctive relief, any dispute, controversy or claim arising out of or in connection with this Agreement, or the breach, termination or alleged invalidity hereof, cannot be amicably settled by the parties, then the matter shall be settled by (and solely by) arbitration. The award of the arbitrators shall be final and binding upon the parties. 23.2 The arbitration shall be conducted under the jurisdiction of the United Kingdom, and will be conducted in accordance with the International Chamber of Commerce rules and procedure and evidence. The venue shall be London, England, and the laws of the State of Georgia and the United States of America shall be the governing substantive law. All proceedings shall be conducted exclusively in the English language. The parties agree that all decisions rendered by the arbitrators shall be binding and enforceable in accordance with the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958, as amended. In connection with all such arbitrations conducted pursuant to this Article, if the party requesting or demanding such arbitration is not awarded in substantial part the relief requested by such party in its request or demand for arbitration, then such party shall be - 21 - 22 obligated to pay all costs of the arbitration as assessed by the arbitrators. 23.3 Judgment on the arbitration award may be entered in any Court of law having jurisdiction. 23.4 Unless manifestly impossible or impractical, the parties shall continue to perform their obligations under this Agreement without any suspension or delay while such arbitration is in process. 24. SEVERABILITY 24.1 If any provision of this Agreement shall be deemed illegal or unenforceable, such illegality or unenforceability shall not affect the validity and enforceability of any other legal and enforceable provisions hereof, which shall be construed as if such illegal or unenforceable provision or provisions had not been inserted herein, unless the severance of such illegal or unenforceable provisions would destroy the underlying business proposes of this Agreement. 25. WAIVER 25.1 No failure or delay on the part of a party hereto to exercise any right, power or remedy hereunder shall operate as a waiver thereof by such party, nor shall a single or partial exercise of any right, power or remedy by a party preclude any further exercise thereof or the exercise of any other right, power or remedy by such party. No express waiver or assent by a party hereto to any breach of or default in any term or condition of this Agreement by the other party shall constitute a waiver of or assent to any subsequent breach of or default in the same or any other term or condition hereof. 26. HEADINGS 26.1 The headings of Articles and paragraphs used in this Agreement are inserted for convenience of reference only and shall not affect the interpretation of the respective provisions of this Agreement. 27. ENTIRE AGREEMENT AND AMENDMENT 27.1 This Agreement, together with its exhibits attached hereto, constitutes the entire and only agreement between the parties with respect to the subject matter hereof, and supersedes any other commitments, agreements, or understandings, written or verbal, that the parties hereto may have had. No modification, change or amendment of this Agreement shall be binding upon the parties hereto except pursuant to - 22 - 23 a written document of subsequent date signed by an authorized officer or representative of each party hereto. 28. BINDING EFFECT 28.1 This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns. 29. COUNTERPARTS 29.1 This Agreement shall be executed in multiple counterparts (one in English and one in Thai for each party to this Agreement). Each counterpart will for all purposes be deemed an original and all such counterparts together shall constitute one and the same agreement. In the event of a dispute concerning the meaning of any provision herein, or in any document pertaining to this Joint Venture, the English language version shall control. IN WITNESS WHEREOF, this Agreement has been executed on behalf of the parties by their respective duly authorized representatives as of the date first appearing above. INTERFACE ASIA-PACIFIC, INC. (Seal) By: /s/ -------------------------------------- Title: President ----------------------------------- Witness: /s/ -------------------------------- Date: 23 August 1994 ----------------------------------- MODERNFORM GROUP PUBLIC CO., LTD. (Seal) By: /s/ Chareon Usanachitt ------------------------------------ Chareon Usanachitt Modernform Title: Vice Chairman and Executive Director Director MODERNFORM GROUP PUBLIC COMPANY LIMITED Witness: /s/ -------------------------------- Date: 26th August 1994 ---------------------- - 23 - EX-13 3 INTERFACE SELECTED FINANCIAL INFORMATION 1 EXHIBIT 13 INTERFACE INC. AND SUBSIDIARIES SELECTED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT SHARE DATA) 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 - -------------------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ANNUAL OPERATING DATA Net sales $802,066 $725,283 $625,067 $594,078 $581,786 $623,467 $581,756 $396,651 $267,008 $137,410 Cost of sales 551,643 504,098 427,321 404,130 393,733 410,652 382,455 263,508 176,813 87,783 Selling, general, and administrative expenses 188,880 170,375 151,576 149,509 150,100 153,317 135,468 87,445 56,884 36,186 Other expense (income) 29,867 25,097 24,806 21,878 23,623 21,818 23,202 11,587 7,589 (2,122) Income before taxes on income and extraordinary item 31,676 25,713 21,304 18,561 14,330 37,680 40,631 34,111 25,722 16,823 Taxes on income 11,336 9,257 7,455 6,311 5,409 14,078 16,084 13,926 11,742 6,315 Income before extraordinary item 20,340 16,456 13,849 12,250 8,921 23,602 24,547 20,185 13,700 8,576 Net income 16,828 16,456 13,849 12,250 8,921 23,602 24,547 20,185 13,700 8,576 Earnings per common share before extraordinary item Primary 1.02 .82 .75 .71 .52 1.37 1.43 1.18 .87 .68 Fully diluted * * * * * 1.24 1.27 1.15 N/A N/A Earnings per common share Primary .83 .82 .75 .71 .52 1.37 1.43 1.18 .87 .68 Fully diluted * * * * * 1.24 1.27 1.15 N/A N/A Dividends Cash dividends paid (A) 6,132 6,073 5,063 4,142 4,136 4,133 3,600 2,649 2,081 1,404 Cash dividends per common share .24 .24 .24 .24 .24 .24 .21 .16 .13 .11 Property additions (B) 48,929 24,376 28,829 14,476 15,375 23,705 25,333 49,261 14,152 40,941 Depreciation and amortization 28,944 28,180 24,512 22,257 19,723 21,570 17,243 11,621 8,270 3,187 WEIGHTED AVERAGE SHARES OUTSTANDING Primary 18,255 18,013 17,302 17,253 17,230 17,214 17,146 17,109 15,740 12,561 Fully diluted 19,946 25,848 24,352 23,398 23,375 23,359 23,291 18,726 N/A N/A AT YEAR END Working capital 159,031 174,620 140,575 138,834 150,541 156,638 131,953 127,328 55,586 44,720 Current ratio 2.4 2.5 2.1 2.5 2.3 2.4 2.2 2.3 2.2 2.3 Net property and equipment 183,299 152,874 145,125 137,605 139,406 141,125 126,917 119,006 72,818 63,490 Total assets 714,351 683,408 642,319 534,120 569,438 582,371 525,814 493,371 233,165 197,263 Total long term debt 325,582 314,441 291,637 235,488 240,137 254,578 244,158 249,136 62,949 96,468 Redeemable preferred stock 25,000 25,000 25,000 -- -- -- -- -- -- -- COMMON SHAREHOLDERS' EQUITY 231,914 214,090 181,884 186,349 198,977 198,409 157,001 135,985 115,990 51,731 Book value per common share 12.58 11.89 10.42 10.79 11.55 11.52 9.14 7.94 6.80 4.21
- --------------- * For fiscal years 1995, 1994, 1993, 1992 and 1991, fully diluted earnings per common share were antidilutive. (A) Includes preferred stock dividends of $1,750,000 in 1995 and 1994, and $913,000 in 1993. (B) Includes property and equipment obtained in acquisitions of businesses. 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company's revenues are derived from sales of commercial carpet (modular and broadloom, (interior fabrics, and chemicals and specialty products. Sales of commercial carper and interior fabrics accounted for approximately 82% and 15%, respectively, of total net sales for fiscal 1995. The Company's 1995 revenues were $802 million as compared to $725 million in fiscal 1994. The revenue increase of 10.6% is primarily the result of certain programs discussed below. HISTORICAL OPERATING TRENDS The Company pioneered the introduction of the carpet tile 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.), and diversification into interior fabrics with the acquisition of Guilford 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 high-lighted by an economic recession in Europe, (iii) increased competition particularly in the U.S. carpet tile market and (iv) a shift in demand away from the Company's fusion bonded 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 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 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 Linens 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. These programs have assisted the Company in achieving substantial growth in sales and in operating income, particularly in 1995 when the Company achieved sales and operating income increases of 10.6% and 21.1%, respectively, over 1994. During fiscal 1995, the Company derived approximately 45% 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 because certain revenues are derived from products manufactured at facilities which incur their operating costs in the same foreign currency. RESULTS OF OPERATIONS For fiscal 1995, the Company reported the highest net sales in the Company's history. This was achieved through sales growth in all divisions (floorcoverings, interior fabrics, chemicals and specialty surfaces), the acquisition of Toltec Fabrics, Inc. in June 1995, and the positive impact of strengthening currencies in several of the Company's major markets compared with the U.S. dollar, the Company's reporting currency. The sales increase was achieved despite a recessionary climate in certain markets in Europe, where modest sales growth was achieved, and in Japan and Australia, where the Company experienced a decline in sales volume. During 1995, 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 implemented a 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 through the implementation of a similar waste reduction program. These factors more than offset the impact of raw material price increases experienced in the interior fabrics and chemical 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. 41 3
Fiscal Year Ended (in thousands, except share data) 12/31/95 1/1/95 1/2/94 - ------------------------------------ -------- ------ ------ NET SALES 100.0% 100.0% 100.0% Cost of sales 68.8 69.5 68.4 ----- ----- ----- Gross profit on sales 31.2 30.5 31.6 Selling general and administrative expense 23.6 23.5 24.2 ----- ----- ----- OPERATING INCOME 7.6 7.0 7.4 Other expense, net 3.7 3.5 4.0 ----- ----- ----- INCOME BEFORE TAXES AND EXTRAORDINARY ITEM 3.9 3.5 3.4 Taxes on income 1.4 1.2 1.2 ----- ----- ----- INCOME BEFORE EXTRAORDINARY ITEM 2.5 2.3 2.2 Extraordinary loss on early extinguishment of debt (net of tax) 0.4 0.0 0.0 ----- ----- ----- NET INCOME 2.1 2.3 2.2 Preferred dividends 0.2 0.3 0.1 ----- ----- ----- NET INCOME APPLICABLE TO COMMON SHAREHOLDERS 1.9% 2.0% 2.1% ===== ===== =====
The table above shows, as a percentage of net sales, certain items included in the Company's consolidated statements of income for each of the three years through the period ended December 31, 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 Fabrics, 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 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 Fabrics, which, historically, had higher cost of sales 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 has not yet been realized. Other expense increased $4.8 million in fiscal 1995, due, by and large, to an increase in the Company's interest expense associated with an increase in bank debt and higher interest rates. As a result of the redemption of the Company's 8% Convertible Subordinated Debentures in December 1995 and the issuance of $125 million in aggregate principal amount of 9.5% Senior Subordinated Notes, the Company anticipates an increase in interest expense during 1996. The Convertible Debentures were redeemed to avoid the potentially 42 4 dilutive effect of approximately 6.1 million shares, which would have been issued had full conversion taken place. The effective income tax rate was 35.8% for fiscal 1995, compared to 36.0% in fiscal 1994. The decrease in the effective income tax rate is due to the release of certain valuation allowances associated with the Company's Dutch and Australian 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 Debentures which were redeemed in December 1995. FISCAL 1994 COMPARED WITH FISCAL 1993 In fiscal 1994, the Company's net sales increased $100 million (16.0%) compared with fiscal 1993. The increase was due in substantial part to the June 1993 acquisition of Bentley Mills, which had sales of $127 million for fiscal 1993, and the March 1994 acquisition of Prince Street, which had sales of $31 million for fiscal 1993. The Company achieved a price increase in floorcoverings of approximately 4%. The Company also achieved unit volume increases of approximately 4% and 6%, respectively, in its interior fabrics and chemical and specialty products operations. Despite adverse economic conditions in Japan and Europe, the Company generated an overall increase in net sales for the floorcoverings operations due to the strengthening of the major currencies of its foreign markets compared to the U.S. dollar, the Company's reporting currency, which caused net sales to be 1.0% higher than otherwise would have been the case. Cost of sales as a percentage of net sales increases slightly to 69.5% in 1994, compared with 68.4% in 1993, primarily because of margin decline in the interior fabrics area due to competitive pressures and a shift in product mix to lower weight, less expensive products which resulted in reduced efficiency. In addition, the acquisition of Bentley Mills also contributed to the increased cost of sales due to Bentley's historical cost of sales having been 7.0% higher than the Company's. Selling, general, and administrative expenses as a percentage of sales decreased to 23.5% in 1994 from 24.2% in 1993 primarily as a result of continued strict cost control efforts, particularly in Europe, in the area of discretionary marketing cost and fixed overhead expenditures. In addition, the acquisition of Bentley Mills also contributed to reduced selling, general, and administrative costs, due to Bentley's historical costs as a percentage of sales having been 10% less than the Company's. These factors combined to more than offset the increase in costs associated with the Company's reorganization of its U.S. modular carpet operations and development and introduction of new products. Other expense increased $231,000 in 1994, due to the impact of higher interest rates and a slight increase in bank debt, offset by other non-operating income items. During fiscal 1994, the Company's effective tax rate increased to 36.0% from 35.0% in 1993, primarily because in 1994 there was no utilization of excess foreign tax credit carryovers as compared with $1.5 million utilized in 1993. The lack of excess foreign tax credit usage was partially offset by the utilization of subsidiary net operating loss carryforwards. As a result of the aforementioned factors, the Company's net income increased 18.8% to $16.5 million in 1994 compared to $13.8 million in 1993. 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 1995, operating activities generated $76.5 million of cash compared with $33.4 million and $40.6 million in 1994 and 1993, respectively. The increase in 1995 operating cash flows compared with 1994 was caused primarily be a decrease in accounts receivable through the sale of $33.9 million of domestic receivables under a securization program, along with a reduction in inventory levels. The inventory decrease at the end of 1995 (excluding acquisitions) was the result of the implementation of the Company's mass customization program and other initiatives. The primary uses of cash during the three fiscal years ended December 31, 1995 have been (i) additions to property and equipment at the Company's manufacturing facilities, (ii) acquisitions of businesses, and (iii) cash dividends. The additions to property and equipment required cash outlays of $84.1 million, while the acquisitions of businesses required $44.2 million and dividends required $17.3 million. Management believes these capital investments will result in an expanded market presence and improved efficiency in the Company's production and distribution. In February 1996, the Company amended its existing revolving credit facilities. The amendment, among other thing, increased the existing domestic revolving credit facility by $50 million to fund the implementation of the Company's planned new distribution network. In January 1996, the Company announced a nationwide initiative to strengthen and streamline the distribution channels for its commercial carpet products. Under this program, the Company intends to acquire approximately 15 strategically located commercial floorcovering contractors, and form preferred distributor alliances with a significantly higher number of select dealers throughout the United States. The Company anticipates that 50-60% of the consideration paid to acquire these dealers will be in the form of the Company's Common Stock. The program's primary goals are to (i) increase sales of Company products as dealers in the network seek to supply Company products on a preferred basis, (ii) enhance customer satisfaction by providing hassel-free service throughout the process of selecting, purchasing, installing and 43 5 maintaining carpet products, and (iii) 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. The Company expects to complete the majority of its planned acquisitions in the second and third quarters of 1996. In November 1995, the Company issued, through a private placement to institutional investors, $125 million in aggregate principal amount of 9.5% Senior Subordinated Notes due 2005 (the "Notes"), of which the Company received proceeds of approximately $122 million which were used for the redemption of the Company's Convertible Debentures. In December 1995, the Company redeemed the outstanding Convertible Debentures by issuing 145,034 shares of the Company's common stock (to the holders who converted $2.453 million of debentures) and cash of approximately $106 million. The debentures were redeemed at 102.4% of the principal amount plus accrued interest to the date of redemption. The remainder of the proceeds from the Notes offering were used to reduce amounts outstanding under the Company's Credit Agreement and for other general corporate purposes. In August 1995, the Company commenced an accounts receivable securitization program that provides the Company up to $65 million of funding from the sale of trade accounts receivable generated by certain of its operating subsidiaries. Fees paid by the Company under this agreement are based on certain variable market rate indices and are recorded as Other Expense. The Company had received approximately $33.9 million under the arrangement at year-end. In January 1995, the Company amended and restated its existing revolving credit and term loan facilities. The amendment, among other things, (i) increased the revolving credit facilities by $75.0 million (including a letter of credit facility of $40.0 million), (ii) reduced the secured term loans by approximately $85.0 million, and (iii) provided for a new accounts receivable securitization facility (discussed above) of up to $100.0 million (currently limited to $65.0 million). Additionally, the term on the revolving credit agreement was extended to June 30, 1999 and the term loans to December 31, 2001. In July 1995, the Company again amended and restated its revolving credit and term loan facilities to provide certain pricing and administrative enhancements. At the end of fiscal 1995, the Company estimated capital expenditure requirements of approximately $30 million for 1996, and had purchase commitments of $10 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 $3.7 million increase in its foreign currency translation adjustment account during the year ended December 31, 1995, because of the strengthening of the Dutch guilder 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 31, 1995, the Company had approximately $68.4 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 31, 1995, the Company utilized interest rate swap agreements to effectively convert approximately $73 million of variable rate debt to fixed rate debt. At December 31, 1995, 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 these increases in the cost of such petroleum-based products with finished product price increases. During 1995, 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, when adopted by the Company during 1996, is not expected to have a material impact on operating results. 44 6 The FASB has also issued SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), which the Company is required to adopt 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. The Company's management has not yet determined its method of adoption or the financial statement impact of adopting SFAS No. 123. 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. (GRAPH) (GRAPH) (GRAPH) 45 EX-23 4 CONSENT OF BDO SEIDMAN 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 and 33-28307) of our reports dated February 27, 1996, relating to the consolidated financial statements and schedule II and the Supplemental Guarantor Condensed Consolidating Financial Statements of Interface, Inc. appearing in the Company's Form 10-K for the year ended December 31, 1995. We also consent to the reference to us under the caption "Experts" in the Prospectuses. BDO SEIDMAN, LLP Atlanta, Georgia November 20, 1996 -----END PRIVACY-ENHANCED MESSAGE-----