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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.
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(Exact name of registrant as specified in its charter)
GEORGIA 58-1451243
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(State of incorporation) (I.R.S. Employer
Identification No.)
2859 PACES FERRY ROAD
SUITE 2000
ATLANTA, GEORGIA 30339
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(Address of principal (zip code)
executive offices)
Registrant's telephone number, including area code: (770) 437-6800
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Securities Registered Pursuant to Section 12(b) of the Act: NONE
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Securities Registered Pursuant to Section 12(g) of the Act: CLASS A COMMON
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STOCK, $0.10 PAR VALUE PER SHARE
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(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
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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
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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.
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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
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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
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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
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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
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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.
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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-
<PAGE> 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-
<PAGE> 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-
<PAGE> 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-
<PAGE> 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.
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL POSITION(S)
- ------------------------ --------------------------------------------------------------------------------------------------
<S> <C> <C>
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
</TABLE>
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
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<PAGE> 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:
<TABLE>
<CAPTION>
Location Primary Products Floor Space (Sq. Ft.)
----------------------------- ---------------- ---------------------
<S> <C> <C>
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
</TABLE>
-11-
<PAGE> 13
<TABLE>
<CAPTION>
Location Primary Products Floor Space (Sq. Ft.)
----------------------------- ---------------- ---------------------
<S> <C> <C>
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
</TABLE>
____________________________
(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-
<PAGE> 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-
<PAGE> 15
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
December 31, January 1, January 2,
1995 1995 1994
------------ ------------ -------------
(in thousands, except share data)
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE> 16
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, January 1,
Assets 1995 1995
-----------------------------------
(in thousands, except share data)
<S> <C> <C>
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
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE> 17
INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
December 31, January 1, January 2,
1995 1995 1994
------------ -------------- ----------
(in thousands)
<S> <C> <C> <C>
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
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
December 31, January 1,
1995 1995
----------- ----------
(in thousands)
<S> <C> <C>
Finished goods.......... $ 76,407 $ 74,542
Work-in-process......... 26,168 20,250
Raw materials........... 31,929 37,858
-------- --------
$134,504 $132,650
======== ========
</TABLE>
Note 6 - Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31, January 1,
1995 1995
----------- ----------
(in thousands)
<S> <C> <C>
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
========= =========
</TABLE>
The estimated cost to complete construction-in-process for which the
Company was committed at December 31, 1995 was approximately $10.0 million.
20
<PAGE> 22
INTERFACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Accrued Expenses
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
December 31, January 1,
1995 1995
------------ ----------
(in thousands)
<S> <C> <C>
Taxes...................... $10,130 $17,989
Compensation............... 13,692 12,312
Interest................... 2,229 3,200
Other...................... 24,097 23,439
------- -------
$50,148 $56,940
======= =======
</TABLE>
Note 8 - Long-Term Debt
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31, January 1,
1995 1995
------------ ----------
(in thousands)
<S> <C> <C>
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
======== ========
</TABLE>
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
<PAGE> 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):
<TABLE>
<S> <C>
Fiscal Year
- -----------
1996................... $ 1,560
1997................... 1,563
1998................... 1,550
1999................... 144,759
2000................... 26,150
Thereafter............. 150,000
--------
$325,582
========
</TABLE>
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
<PAGE> 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
<PAGE> 25
INTERFACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Changes in common shareholders' equity were (in thousands):
<TABLE>
<CAPTION>
Foreign
Class A Class B Additional Currency
------------------ ------------------ Paid-In Retained Translation
Shares Amount Shares Amount Capital Earnings Adjustment
-------- ------ -------- -------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
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
====== ====== ===== ==== ======= ======== ======
</TABLE>
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
<PAGE> 26
INTERFACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes 1995 activity on all stock options:
<TABLE>
<CAPTION>
Outstanding Options Exercisable Options
Shares Option Price Shares Option Price
------------------------------ --------------------------------
<S> <C> <C> <C> <C> <C>
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
========== ===== ====== ======== ===== ======
</TABLE>
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:
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------------
December 31, January 1, January 2,
1995 1995 1994
--------------------------------------------
(in thousands)
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
25
<PAGE> 27
INTERFACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income before taxes on income consisted of the following:
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------------------------------
December 31, January 1, January 2,
1995 1995 1994
-------------- --------------------- -----------
(in thousands)
<S> <C> <C> <C>
U.S. Operations.................................... $20,212 $18,072 $17,717
Foreign Operations................................. 11,464 7,641 3,587
------- ------- -------
$31,676 $25,713 $21,304
======= ======= =======
</TABLE>
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:
<TABLE>
<CAPTION>
December 31, 1995 January 1, 1995
------------------------------- ---------------------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
(in thousands)
<S> <C>
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
======= ======= ======= =======
</TABLE>
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
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------------------
December 31, January 1, January 2,
1995 1995 1994
------------- ------------------ ------------
(in thousands)
<S> <C> <C> <C>
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%
===== ===== =====
</TABLE>
26
<PAGE> 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
<PAGE> 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.
<TABLE>
<CAPTION>
December 31, 1995 January 1, 1995
--------------------------------------------------
Notional Fair Notional Fair
Amounts Values Values Values
--------- --------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C>
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)
</TABLE>
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):
<TABLE>
<CAPTION>
Fiscal year
- -----------
<S> <C>
1996............................................. $ 5,102
1997............................................. 4,920
1998............................................. 1,281
1999............................................. 928
2000............................................. 613
Thereafter....................................... 251
-------
$13,095
=======
</TABLE>
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
<PAGE> 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
<PAGE> 31
INTERFACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
December 31, 1995 January 1, 1995
-------------------- --------------------
(in thousands)
<S> <C> <C>
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
======= ========
</TABLE>
30
<PAGE> 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:
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------------------
December 31, January 1, January 2,
1995 1995 1994
-------------- ------------------- -------------
(in thousands)
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
31
<PAGE> 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.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------------------------------------------------------------------------------
(in thousands, except share amounts)
<S> <C> <C> <C> <C>
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.
</TABLE>
32
<PAGE> 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
<PAGE> 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-
<PAGE> 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-
<PAGE> 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-
<PAGE> 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-
<PAGE> 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-
<PAGE> 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
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(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
====== ====== === ====== ======
</TABLE>
- --------------
(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-
<PAGE> 41
INTERFACE, INC. AND SUBSIDIARIES
SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Year Ended December 31, 1995
Consolidation
Non- Interface, Inc. and
Guarantor Guarantor (Parent Elimination Consolidated
Subsidiaries Subsidiaries Corporation) Entries Totals
------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
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
============ ============ =============== ============= ============
</TABLE>
40
<PAGE> 42
INTERFACE, INC. AND SUBSIDIARIES
SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Year Ended January 1, 1995
Consolidation
Non- Interface, Inc. and
Guarantor Guarantor (Parent Elimination Consolidated
Subsidiaries Subsidiaries Corporation) Entries Totals
-------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
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
============ ============ =============== ============= ============
<CAPTION>
Year Ended January 2, 1994
Consolidation
Non- Interface, Inc. and
Guarantor Guarantor (Parent Elimination Consolidated
Subsidiaries Subsidiaries Corporation) Entries Totals
------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
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
============ ============ =============== ============= ============
</TABLE>
41
<PAGE> 43
INTERFACE, INC. AND SUBSIDIARIES
SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
December 31, 1995
Consolidation
Non- Interface, Inc. and
Guarantor Guarantor (Parent Elimination Consolidated
Subsidiaries Subsidiaries Corporation) Entries Totals
---------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
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
============ ============ =============== =============== ============
</TABLE>
42
<PAGE> 44
INTERFACE, INC. AND SUBSIDIARIES
SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
January 1, 1995
Interface, Inc. Consolidation
Non- (Parent and
Guarantor Guarantor Corporation) Elimination Consolidated
Subsidiaries Subsidiaries (in thousands) Entries Totals
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
============ ============ =============== ============= ============
</TABLE>
43
<PAGE> 45
INTERFACE, INC. AND SUBSIDIARIES
SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Year Ended December 31, 1995
Consolidation
Interface, Inc. and
Guarantor Non- Guarantor (Parent Elimination Consolidated
Subsidiaries Subsidiaries Corporation) Entries Totals
---------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
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
============ ============== =============== ============= ============
</TABLE>
44
<PAGE> 46
INTERFACE, INC. AND SUBSIDIARIES
SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Year Ended January 2, 1994
Consolidation
Non- Interface, Inc. and
Guarantor Guarantor (Parent Elimination Consolidated
Subsidiaries Subsidiaries Corporation) Entries Totals
--------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
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
============ ============ =============== ============== ============
</TABLE>
45
<PAGE> 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.
<TABLE>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
/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
</TABLE>
46
<PAGE> 48
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL PAGE
NUMBER DESCRIPTION OF EXHIBIT NUMBER
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C>
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).
</TABLE>
* Management contract or compensatory plan or agreement required to be filed
pursuant to Item 14(c) of this Report.
<PAGE> 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
<PAGE> 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.
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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
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<PAGE> 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
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<PAGE> 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
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<PAGE> 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.
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<PAGE> 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
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<PAGE> 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;
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<PAGE> 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.
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<PAGE> 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
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<PAGE> 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)
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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
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<PAGE> 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
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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 -
<PAGE> 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 -
<PAGE> 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 -
<PAGE> 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 -
<PAGE> 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 -
<PAGE> 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 -
<PAGE> 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 -
<PAGE> 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 -
<PAGE> 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 -
<PAGE> 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 -
<PAGE> 1
EXHIBIT 13
INTERFACE INC. AND SUBSIDIARIES
SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
(IN THOUSANDS,
EXCEPT SHARE DATA) 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
- -------------------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
- ---------------
* 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.
<PAGE> 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
<PAGE> 3
<TABLE>
<CAPTION>
Fiscal Year Ended
(in thousands, except share data) 12/31/95 1/1/95 1/2/94
- ------------------------------------ -------- ------ ------
<S> <C> <C> <C>
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%
===== ===== =====
</TABLE>
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
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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
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<PAGE> 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.
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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)
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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
