<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: March 16, 1998
INTERFACE, INC.
(Exact name of registrant as specified in its charter)
Georgia 0-12016 58-1451243
- ------------------------------------------------------------------
(State of Incorporation) (Commission File No.) (IRS Employer
Identification No.)
2859 Paces Ferry Road
Suite 2000
Atlanta, Georgia 30339
- --------------------------------------- -----------
(Address of principal executive offices (Zip Code)
(770) 437-6800
----------------------------------------------------
(Registrant's telephone number, including area code)
ITEM 5. OTHER EVENTS
PRESS RELEASE
On March 16, 1998, Interface, Inc. (the "Company") issued a press release
concerning the commencement of concurrent offerings of Senior Notes and Class A
Common Stock. A copy of such press release is filed as Exhibit 99.1 hereto and
incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statement of Business Acquired. None.
(b) Pro Forma Financial Information. None
(c) Exhibits.
The following exhibits are filed herewith:
23.1 Consent of BDO Seidman, LLP
99.1 Press Release dated March 16, 1998
99.2 Consolidated Financial Statements of the Registrant
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
INTERFACE, INC.
(Registrant)
Date: March 16, 1998 By: /s/ Daniel T. Hendrix
----------------------
Name: Daniel T. Hendrix
Title: Senior Vice President
and Chief Financial
Officer
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[BDO LOGO] BDO SEIDMAN,LLP 285 Peachtree Center Avenue, Suite 800
Accountants and Consultants Atlanta, Georgia 30903-12301
Telephone: (404) 688-6841
Fax: (404) 688-1075
</TABLE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTS
Interface, Inc.
Atlanta, Georgia
We hereby consent to the incorporation by reference in the Prospectus
constituting a part of this Registration Statement of our report dated February
17, 1998, relating to the consolidated financial statements of Interface, Inc.
and subsidiaries appearing in the Company's Report on form 8-K dated March 16,
1998.
We also consent to the reference to us under the caption "Experts" in
the Prospectus.
Atlanta, Georgia /s/ BDO SEIDMAN, LLP
March 16, 1998 --------------------
BDO SEIDMAN, LLP
<PAGE> 1
EXHIBIT 99.1
FOR IMMEDIATE RELEASE: CONTACT: Daniel T. Hendrix
Chief Financial Officer
770-437-6800
Morgen-Walke Associates
June Filingeri/John Blackwell
Media Contact: Stan Froelich
212-850-5600
INTERFACE COMMENCES OFFERING OF COMMON STOCK AND SENIOR NOTES
ATLANTA, Georgia, March 16, 1998--Interface, Inc. (Nasdaq: IFSIA) announced
today the commencement of concurrent offerings of debt and equity securities
pursuant to a previously filed universal shelf registration statement. The
Company proposes to sell $150,000,000 aggregate principal amount of senior
unsecured notes and 1,500,000 shares of Class A Common Stock in two separately
underwritten offerings. The Company expects to use the net proceeds from both
offerings to reduce existing bank debt and for general corporate purposes,
including working capital and future acquisitions. The Company anticipates that
the consummation of the stock offering will not impact its ability to achieve
consensus estimated levels of earnings per share for 1998.
Salomon Smith Barney will act as lead manager for both offerings. Serving as
co-managers for the notes offering are Merrill Lynch & Co., First Chicago
Capital Markets, First Union Capital Markets, NationsBanc Montgomery Securities
LLC, and The Robinson-Humphrey Company. Serving as co-managers for the stock
offering are Merrill Lynch & Co., The Robinson-Humphrey Company, and Wheat
First Union.
The Company's universal shelf registration statement, which covers an aggregate
of $300,000,000 of varied securities that can be offered from time to time, was
declared effective today by the Securities and Exchange Commission. The notes
offering and the stock offering are being made pursuant to separate preliminary
prospectus supplements. Copies of either such prospectus supplement may be
obtained from any of the respective co-managers named above. The notes
offering and the stock offering are not conditioned upon each other.
Interface, Inc. is a recognized leader in the worldwide commercial interiors
market, offering floorcoverings, fabrics, specialty chemicals, and interior
architectural products. The Company is the world's largest manufacturer of
modular carpet under the Interface, Heuga and Bentley brands, and through its
Bentley Mills, Prince Street and Firth subsidiaries, enjoys a leading position
in the high quality, designer-oriented segment of the broadloom and woven
carpet market. The Company now provides specialized carpet replacement services
through Renovisions and installation and maintenance services through Re:Source
Americas. The Company is also a leading producer of interior fabrics and
upholstery products, which it markets under the Guilford of Maine, Stevens
Linen,
<PAGE> 2
Toltec, Camborne, and Intek brands. In addition, the Company provides
chemicals used in various rubber and plastic products; offers Intersept(R), a
proprietary antimicrobial used in a variety of interior finishes; sponsors the
Envirosense(R) Consortium in its mission to address workplace environmental
issues; and produces raised/access flooring systems under the C-Tec,
Intercell(R) and Interstitial Systems brands.
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995: Except for historical information contained herein, the matters set forth
in this news release are forward-looking statements. The forward-looking
statements set forth above involve a number of risks and uncertainties that
could cause actual results to differ materially from any such statement,
including the risks and uncertainties discussed in the Company's Registration
Statement on Form S-3/A, filed March 12, 1998, under the caption "Risk Factors",
which discussion is incorporated herein by this reference.
<PAGE> 1
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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PAGE
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Report of Independent Certified Public Accountants.......... F-2
Consolidated Statements of Income -- years ended December
28, 1997, December 29, 1996 and December 31, 1995......... F-3
Consolidated Balance Sheets -- December 28, 1997 and
December 29, 1996......................................... F-4
Consolidated Statements of Cash Flow -- years ended December
28, 1997, December 29, 1996 and December 31, 1995......... F-5
Notes to Consolidated Financial Statements.................. F-6
</TABLE>
F-1
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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders of Interface, Inc.
Atlanta, Georgia
We have audited the accompanying consolidated balance sheets of Interface,
Inc. and subsidiaries as of December 28, 1997 and December 29, 1996, and the
related consolidated statements of income and cash flows for each of the three
years in the period ended December 28, 1997. The financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Interface, Inc.
and its subsidiaries as of December 28, 1997 and December 29, 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 28, 1997, in conformity with generally
accepted accounting principles.
BDO SEIDMAN, LLP
Atlanta, Georgia
February 17, 1998
F-2
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INTERFACE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
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FISCAL YEAR ENDED
----------------------------------
1997 1996 1995
---------- ---------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
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Net sales................................................... $1,135,290 $1,002,076 $802,066
Cost of sales............................................... 755,734 684,455 551,643
---------- ---------- --------
Gross profit on sales....................................... 379,556 317,621 250,423
Selling, general and administrative expenses................ 281,755 238,932 188,880
---------- ---------- --------
Operating income............................................ 97,801 78,689 61,543
---------- ---------- --------
Other expense
Interest expense.......................................... 35,038 32,772 26,753
Other..................................................... 1,492 2,490 3,114
---------- ---------- --------
Total other expense............................... 36,530 35,262 29,867
---------- ---------- --------
Income before taxes on income and extraordinary item........ 61,271 43,427 31,676
Taxes on income............................................. 23,757 17,032 11,336
---------- ---------- --------
Income before extraordinary item............................ 37,514 26,395 20,340
Extraordinary loss, net of tax.............................. -- -- 3,512
---------- ---------- --------
Net income........................................ 37,514 26,395 16,828
Preferred stock dividends................................... -- 1,678 1,750
---------- ---------- --------
Net income applicable to common shareholders...... $ 37,514 $ 24,717 $ 15,078
========== ========== ========
Basic earnings per common share
Income before extraordinary item.......................... $ 1.58 $ 1.23 $ 1.02
Extraordinary loss, net of tax............................ -- -- 0.19
---------- ---------- --------
Net Income........................................ $ 1.58 $ 1.23 $ 0.83
Diluted earnings per common share
Income before extraordinary item.......................... $ 1.53 $ 1.20 $ 1.00
Extraordinary loss, net of tax............................ -- -- 0.19
---------- ---------- --------
Net income........................................ $ 1.53 $ 1.20 $ 0.81
========== ========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
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INTERFACE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE DATA)
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ASSETS
Current
Cash...................................................... $ 10,212 $ 8,762
Accounts receivable....................................... 177,977 167,817
Inventories............................................... 157,630 146,678
Prepaid expenses.......................................... 24,265 22,986
Deferred income taxes..................................... 5,156 7,057
-------- --------
Total current assets.............................. 375,240 353,300
Property and equipment...................................... 228,781 208,791
Miscellaneous............................................... 46,945 51,385
Excess of cost over net assets acquired..................... 278,597 249,070
-------- --------
$929,563 $862,546
======== ========
LIABILITIES AND COMMON SHAREHOLDERS' EQUITY
Current liabilities
Notes payable............................................. $ 22,264 $ 14,918
Accounts payable.......................................... 79,279 74,960
Accrued expenses.......................................... 87,543 70,919
Current maturities of long-term debt...................... 2,751 2,919
-------- --------
Total current liabilities......................... 191,837 163,716
Long-term debt, less current maturities..................... 264,499 254,353
Senior subordinated notes................................... 125,000 125,000
Deferred income taxes....................................... 28,873 23,484
-------- --------
Total liabilities................................. 610,209 566,553
Minority interest........................................... 2,989 3,125
Series A redeemable preferred stock......................... -- 19,750
Common stock................................................ 2,776 2,536
Additional paid-in capital.................................. 161,584 124,557
Retained earnings........................................... 197,906 166,828
Foreign currency translation adjustment..................... (28,155) (3,057)
Treasury stock, 3,600,000 Class A shares, at cost........... (17,746) (17,746)
-------- --------
$929,563 $862,546
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
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INTERFACE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
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OPERATING ACTIVITIES
Net income.................................................. $ 37,514 $ 26,395 $ 16,828
Adjustments to reconcile net income to cash provided by
operating activities
Depreciation and amortization............................... 38,605 35,305 28,944
Extraordinary loss on early extinguishment of debt, net of
tax....................................................... -- -- 3,512
Deferred income taxes....................................... 7,849 5,438 1,431
Working capital changes
Cash equivalents.......................................... -- 1,489 (596)
Accounts receivable....................................... (16,386) (17,465) 25,978
Inventories............................................... (16,233) (2,199) 5,979
Prepaid expenses and other................................ (2,273) (6,870) 8
Accounts payable and accrued expenses..................... 25,647 14,419 (6,132)
-------- -------- --------
74,723 56,512 75,952
-------- -------- --------
INVESTING ACTIVITIES
Capital expenditures........................................ (38,654) (36,436) (42,123)
Acquisitions of businesses.................................. (34,647) (30,151) (27,554)
Changes in escrowed and restricted funds.................... -- -- 2,663
Other....................................................... (17,902) (11,425) (5,145)
-------- -------- --------
(91,203) (78,012) (72,159)
-------- -------- --------
FINANCING ACTIVITIES
Borrowings on long-term debt................................ 153,624 154,224 61,471
Principal repayments on long-term debt...................... (142,884) (107,561) (73,406)
Proceeds from issuance of subordinated notes................ -- -- 121,543
Extinguishment of convertible subordinated debentures....... -- -- (106,419)
Borrowings (repayments) under lines of credit............... 7,617 (20,102) 1,965
Proceeds from issuance of common stock...................... 6,414 2,916 984
Dividends paid.............................................. (6,436) (6,606) (6,132)
-------- -------- --------
18,335 22,871 6
-------- -------- --------
Net cash provided by operating, investing, and financing
activities................................................ 1,855 1,371 3,799
Effect of exchange rate changes on cash..................... (405) 130 (34)
-------- -------- --------
CASH
Net increase................................................ 1,450 1,501 3,765
Balance, beginning of year.................................. 8,762 7,261 3,496
-------- -------- --------
Balance, end of year........................................ $ 10,212 $ 8,762 $ 7,261
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 6
INTERFACE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Interface, Inc. (the "Company") is a recognized leader in the worldwide
commercial interiors market, offering floorcoverings, fabrics, specialty
chemicals and interior architectural products. The Company manufactures modular
carpet under the Interface and Heuga brands. The Company's broadloom carpet
operations are conducted through Bentley Mills and Prince Street, both of which
focus on the high quality, designer-oriented sector of the U.S. broadloom carpet
market, and Firth Carpets in the United Kingdom. The Company also provides
specialized carpet replacement, installation, and maintenance services. The
Company also produces interior fabrics and upholstery products, which it markets
under the Guilford of Maine, Stevens Linen, Toltec, Intek, and Camborne brands.
In addition, the Company provides chemicals used in various rubber and plastic
products; licenses Intersept(R), a proprietary antimicrobial used in a host of
interior finishes; sponsors the Envirosense(R) Consortium in its mission to
address workplace environmental issues; and markets low-profile and multiple
plenum raised/access flooring systems under the C-Tec, Intercell and
Interstitial Systems brands.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All material intercompany accounts and transactions are
eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with Generally
Accepted Accounting Principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Examples include provisions for returns, bad debts, claims
reserves, inventory obsolescence and the length of product life cycles, income
tax exposures, and excess of cost over net assets acquired and fixed asset
lives. Actual results could vary from these estimates.
INVENTORIES
Inventories are valued at the lower of cost (standards which approximate
actual cost on a first-in, first-out basis) or market. Inventories include the
cost of raw materials, labor and manufacturing overhead. The Company makes
provisions for obsolete or slow moving inventories as necessary to properly
reflect inventory value.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is computed using
the straight-line method over the following estimated useful lives: buildings
and improvements -- ten to fifty years; furniture and equipment -- three to
twelve years. Interest costs for the construction of certain long-term assets
are capitalized and amortized over the related assets' estimated useful lives.
The Company capitalized net interest costs of approximately $0.4 million, $0.1
million, and $1.4 million for the years ended 1997, 1996, and 1995,
respectively. Depreciation expense amounted to approximately $25.7 million,
$25.0 million, and $18.2 million for the years ended 1997, 1996, and 1995,
respectively.
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If the
sum of the expected future undiscounted cash flows is less than the carrying
amount of the asset, a loss is recognized for the difference between the fair
value and carrying value of the asset.
F-6
<PAGE> 7
INTERFACE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EXCESS OF COST OVER NET ASSETS ACQUIRED
Excess of cost over net assets acquired is the excess of the purchase price
over the fair value of net assets acquired in business combinations accounted
for as purchases. Excess of cost over net assets acquired is amortized on a
straight-line basis over the periods benefited, principally twenty-five to forty
years. Accumulated amortization amounted to approximately $51.5 million and
$43.5 million at December 28, 1997 and December 29, 1996, respectively.
The Company's operational policy for the assessment and measurement of any
impairment in the value of excess of cost over net assets acquired which is
other than temporary is to evaluate the recoverability and remaining life and
determine whether it should be completely or partially written off or the
amortization period accelerated. The Company will recognize an impairment if
undiscounted estimated future operating cash flows of the acquired business are
determined to be less than the carrying amount. The amount of impairment, if
any, is measured based on projected discounted future operating cash flows using
a discount rate reflecting the Company's average cost of funds.
TAXES ON INCOME
The Company accounts for income taxes under an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. In estimating future tax
consequences, the Company generally considers all expected future events other
than enactments of changes in tax laws or rates. The effect on deferred tax
assets and liabilities of a change in tax rates will be recognized as income or
expense in the period that includes the enactment date.
EARNINGS PER COMMON SHARE AND DIVIDENDS
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share." The new Standard simplifies the computation of earnings per share and
requires presentation of two amounts, basic and diluted earnings per share. As
required by the Standard, the Company has retroactively restated earnings per
share data for all periods presented.
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted average number of shares of Class A and Class B
Common Stock outstanding during each year. Shares issued during the year and
shares reacquired during the year have been weighted for the portion of the year
that they were outstanding. Basic earnings per share are based upon 23,707,918
shares, 20,060,347 shares, and 18,254,965 shares for the years ended 1997, 1996,
and 1995, respectively. Diluted earnings per share is calculated in a manner
consistent with that of basic earnings per share while giving effect to all
dilutive potential common shares that were outstanding during the period.
Diluted earnings per share are based upon 24,651,014 shares, 20,657,105 shares,
and 18,598,965 shares for the years ended 1997, 1996, and 1995, respectively.
For the purposes of computing earnings per common share and dividends per common
share, the Company is treating as treasury stock (and therefore not outstanding)
the shares that are owned by a wholly owned subsidiary (3,600,000 Class A shares
recorded at cost).
REVENUE RECOGNITION
Revenue is generally recognized on the sale of products or services when
the products are shipped or the services performed, all significant contractual
obligations have been satisfied, and the collection of the resulting receivable
is reasonably assured. Revenues and estimated profits on long-term performance
contracts are recognized under the percentage of completion method of accounting
using the cost-to-cost methodology.
F-7
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INTERFACE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Profit estimates are revised periodically based upon changes in facts. Any
losses identified on contracts are recognized immediately.
CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS
Highly liquid investments with insignificant interest rate risk and with
original maturities of three months or less are classified as cash and cash
equivalents. Investments with maturities greater than three months and less than
one year are classified as short-term investments.
At December 28, 1997 and December 29, 1996, checks issued against future
deposits totaled approximately $12.8 million and $12.3 million, respectively.
Cash payments for interest amounted to approximately $33.8 million, $27.8
million, and $27.9 million for the years ended 1997, 1996, and 1995,
respectively. Income tax payments amounted to approximately $18.2 million, $9.8
million, and $8.2 million for the years ended 1997, 1996, and 1995,
respectively.
FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair values of cash and cash equivalents, short-term investments and
short-term debt approximate cost due to the short period of time to maturity.
Fair values of long-term investments, debt, swaps, forward currency contracts
and currency options are based on quoted market prices or pricing models using
current market rates.
TRANSLATION OF FOREIGN CURRENCIES
The financial position and results of operations of the Company's foreign
subsidiaries are measured generally using local currencies as the functional
currency. Assets and liabilities of these subsidiaries are translated into U.S.
dollars at the exchange rate in effect at each year end. Income and expense
items are translated at average exchange rates for the year. The resulting
translation adjustments are recorded in the foreign currency translation
adjustment account. In the event of a divestiture of a foreign subsidiary, the
related foreign currency translation results are reversed from equity to income.
Foreign currency exchange gains and losses which are not material are included
in income.
DERIVATIVES
The Company uses various financial instruments, including derivative
financial instruments, for purposes other than trading. The Company does not
enter into derivative financial instruments for speculative purposes.
Derivatives, used as a part of the Company's risk management strategy, are
designated at inception as hedges, and are measured for effectiveness both at
inception and on an ongoing basis. Gains and losses on hedges of existing assets
or liabilities are included in the carrying amounts of those assets or
liabilities and are ultimately recognized in income as part of those carrying
amounts. Gains or losses related to qualifying hedges of firm commitments or
anticipated transactions also are deferred and are recognized in income or as
adjustments of carrying amounts when the hedged transaction occurs.
FISCAL YEAR
The Company's fiscal year ends on the Sunday nearest December 31. All
references herein to "1997", "1996", and "1995" mean the fiscal years ended
December 28, 1997, December 29, 1996 and December 31, 1995, respectively, each
comprising 52 weeks. Quarterly financial results are based upon a 13 week
reporting period.
F-8
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INTERFACE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 and 1995 financial
statements to conform to the 1997 presentation.
2. BUSINESS ACQUISITIONS AND DIVESTITURES
In December 1997, the Company sold certain assets related to the commercial
manufacture of zinc diacrylate, a chemical compound used in the production of
golf balls, for $14.1 million in cash. An immaterial gain was realized on the
sale. The Company generated 1997 sales of $7.9 million and operating income of
$1.1 million related to the manufacture of this chemical compound.
During 1997, the Company acquired 100% of the outstanding capital stock of
five floorcovering contractors: Canaan Corporation, based in Connecticut; Carpet
Services of Tampa, Inc., based in Florida; Facilities Resource Group, Inc.,
based in Illinois; Floormart, Inc. based in California; and Carpet Solutions
Holdings Pty Ltd., based in Queensland, Australia. These contractors are engaged
primarily in the installation of commercial floorcoverings. As consideration,
the Company issued 257,584 shares of Class A Common Stock valued at
approximately $3.5 million and $11.1 million in cash. All transactions have been
accounted for as purchases, and accordingly, the results of operations of the
acquired companies since their acquisition dates have been included within the
consolidated financial statements. The excess of the purchase price over the
fair value of the net assets acquired was approximately $17.5 million and is
being amortized over 25 years.
In June 1997, the Company acquired 100% of the outstanding common stock of
Camborne Holdings, Ltd., a manufacturer of interior fabrics based in West
Yorkshire, U.K. for approximately $19.9 million, which was comprised of $17.1
million in cash and 127,806 shares of Class B Common Stock valued at
approximately $2.8 million. The transaction was accounted for as a purchase. The
results of operations of Camborne have been included with the consolidated
financial statements since the acquisition date. The excess of the purchase
price over the fair value of the assets was approximately $16.8 million and is
being amortized over 40 years.
During 1996, the Company acquired 100% of the outstanding capital stock of
fifteen floorcovering contractors: Earl W. Bentley Operating Co., Inc., based in
Oklahoma; Quaker City International, Inc., based in Pennsylvania; Superior
Holding Inc., based in Texas; Landry's Commercial Flooring Co., Inc., based in
Oregon; Reiser Associates, Inc., based in Texas; Southern Contract Systems, Inc.
based in Georgia; A & F Installations, Inc., based in New Jersey; ParCom, Inc.,
based in Virginia; Congress Flooring Corp., based in Massachusetts; Flooring
Consultants, Inc., based in Arizona; B. Shehadi & Sons, Inc., based in New
Jersey; Lasher/White Carpet Co., Inc., based in New York; Oldtown Carpet Center,
Inc., based in North Carolina; Architectural Floors, a division of Continental
Office Furniture Corp., based in Ohio; and Floor Concepts, Inc., based in
Maryland. These contractors are engaged primarily in the installation of
commercial floorcoverings. As consideration, the Company issued 2,674,906 shares
of Common Stock valued at approximately $19.3 million, $0.8 million in 7% notes
and $23.0 million in cash. All transactions have been accounted for as
purchases, and accordingly, the results of operations of the acquired companies
since their acquisition dates have been included within the consolidated
financial statements. The excess of the purchase price over the fair value of
the net assets acquired was approximately $33.9 million and is being amortized
over 25 years.
During 1997, the Company issued additional consideration of approximately
$2.5 million for the purchase of the floorcovering contractors which were
acquired during 1996. The additional consideration was recorded as excess of
cost over net assets acquired.
In February 1996, the Company acquired the outstanding common stock of
Renovisions, Inc., a nationwide installation services firm based in Georgia that
has pioneered a new method of carpet replacement, for approximately $4 million
in cash at closing and $1 million in guaranteed payments. The transaction was
accounted for as a purchase, and accordingly, the results of operations of
Renovisions since the acquisition
F-9
<PAGE> 10
INTERFACE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
date have been included within the consolidated financial statements. The excess
of the purchase price over the fair value of net assets acquired was
approximately $4.3 million and is being amortized over 25 years.
In February 1996, the Company acquired the outstanding common stock of
C-Tec, Inc., a Michigan based producer of raised/access flooring systems, for
approximately $8.8 million, which was comprised of $4.5 million in cash and $4.3
million in 6% subordinated convertible notes. The transaction was accounted for
as a purchase, and accordingly, the results of operations of C-Tec since the
acquisition date have been included within the consolidated financial
statements. The excess of the purchase price over the fair value of net assets
acquired was approximately $3.1 million and is being amortized over 25 years.
In December 1995, the Company acquired substantially all of the assets of
the Intek division of Spring Industries, a manufacturer of panel fabrics based
in Aberdeen, North Carolina, for approximately $13.9 million. The transaction
was accounted for as a purchase. The excess of the purchase price over the fair
value of the net assets was approximately $5.1 million and is being amortized
over 40 years. The results of operations of Intek have been included within the
consolidated financial statements since the acquisition date.
In June 1995, the Company acquired substantially all of the assets of
Toltec Fabrics, Inc., a manufacturer of panel fabrics based in North Carolina,
for approximately $13.3 million, which was comprised of $7.7 million in cash and
$5.6 million in notes. The transaction was accounted for as a purchase. The
excess of the purchase price over the fair value of the net assets was
approximately $6.9 million and is being amortized over 40 years. The results of
operations of Toltec have been included within the consolidated financial
statements since the acquisition date.
3. RECEIVABLES
The Company maintains an agreement with a financial institution to sell a
participating interest in a designated pool of commercial receivables, with
limited recourse, in amounts up to $65 million. The agreement relates to
specific operating subsidiaries of the Company. Under the agreement, a
participating interest in new receivables is sold as previous receivables are
collected. A service fee consisting of the financial institution's commercial
paper rate plus .45% is charged based upon the resulting participating interest.
This amount is included in other expense in the accompanying consolidated
statements of income. At December 28, 1997, the rate was 6.43%. The Company acts
as an agent for the purchaser by performing record keeping and collection
functions. The uncollected receivables sold at December 28, 1997 and December
29, 1996 amounted to $49.6 million and $31.7 million, respectively. As of
December 28, 1997 and December 29, 1996, the allowance for bad debts amounted to
approximately $7.4 million and $7.3 million, respectively, for all accounts
receivable of the Company.
The Company has adopted credit policies and standards intended to reduce
the inherent risk associated with potential increases in its concentration of
credit risk due to increasing trade receivables from sales to owners and users
of commercial office facilities and with specifiers such as architects,
engineers and contracting firms. Management believes that credit risks are
further moderated by the diversity of its end customers and geographic sales
areas. Interface performs ongoing credit evaluations of its customers' financial
condition and requires collateral as deemed necessary.
In June 1996, the FASB issued SFAS No 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." The Company's
adoption of this Standard had no impact on the consolidated results of
operations or financial position.
F-10
<PAGE> 11
INTERFACE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Finished goods.............................................. $ 91,016 $ 81,034
Work-in-process............................................. 29,094 30,464
Raw materials............................................... 37,520 35,180
-------- --------
$157,630 $146,678
======== ========
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Land........................................................ $ 12,485 $ 13,038
Buildings................................................... 130,450 98,706
Equipment................................................... 264,656 232,489
Construction-in-progress.................................... 6,890 32,078
--------- ---------
414,481 376,311
Accumulated depreciation.................................... (185,700) (167,520)
--------- ---------
$ 228,781 $ 208,791
========= =========
</TABLE>
The estimated cost to complete construction in progress for which the
Company was committed at December 28, 1997 was approximately $11.3 million.
6. ACCRUED EXPENSES
Accrued expenses are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Taxes....................................................... $21,482 $16,868
Compensation................................................ 25,671 20,541
Interest.................................................... 3,813 5,276
Other....................................................... 36,577 28,234
------- -------
$87,543 $70,919
======= =======
</TABLE>
7. SENIOR SUBORDINATED NOTES
The Company has outstanding $125 million in 9.5% Senior Subordinated Notes
due 2005 (the "Notes"). Interest is payable semi-annually on May 15 and November
15.
The Notes are guaranteed, jointly and severally, on an unsecured senior
subordinated basis, by each of the Company's principal domestic subsidiaries
(the "Guarantors"). The Guarantors include Interface Flooring Systems, Inc.,
Bentley Mills, Inc., Interface Interior Fabrics, Inc., Prince Street
Technologies, Inc. and several other smaller domestic subsidiaries. (See Note 18
for Supplemental Guarantor Condensed Consolidating Financial Statements.) The
Notes are redeemable for cash at any time on or after November 15, 2000 at the
Company's option and in whole or in part, initially at a redemption price equal
to 104.75% of the principal amount, declining to 100% of the principal amount on
November 15, 2003, plus accrued interest thereon to
F-11
<PAGE> 12
INTERFACE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the date fixed for redemption. At December 28, 1997 and December 29, 1996, the
estimated fair value of the notes was approximately $132.5 million and $135.2
million, respectively.
8. LONG-TERM DEBT
Long-term debt, exclusive of the Company's 9.5% Senior Subordinated Notes
due 2005 (see Note 7), consisted of the following:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Senior term loans........................................... $100,000 $ 50,000
Revolving credit facility................................... 143,797 181,211
Other....................................................... 23,453 26,061
-------- --------
Total long-term debt........................................ 267,250 257,272
Less current maturities..................................... (2,751) (2,919)
-------- --------
$264,499 $254,353
======== ========
</TABLE>
At December 28, 1997 the Company maintained a revolving credit and term
facility which provided a maximum credit limit of $370 million. The facility is
collateralized by substantially all of the outstanding stock of the Company's
operating subsidiaries (except certain foreign subsidiaries, for which only 66%
of the outstanding stock is pledged). The $120 million term portion of the
facility consists of four separate notes of which $25 million and $75 million is
due December 29, 2000 and December 31, 2001, respectively. The revolving credit
facility matures and related borrowings are due December 31, 2001, concurrent
with the final installment of the term portion. Interest is charged, at the
Company's option, at a rate based on either the bank's certificate of deposit
rate or LIBOR (London Interbank Offered Rate), plus an applicable margin of .35%
to 1%, depending upon the Company's ability to meet certain performance
criteria; or the bank's prime lending rate (8.5% at December 28, 1997). For a
discussion of the Company's utilization of interest rate swap agreements to
convert approximately $64.5 million of variable rate debt to fixed rate debt see
Note 12.
The agreements require prepayment from specified excess cash flows or
proceeds from certain asset sales and provide for restrictions which, among
other things, require maintenance of certain financial ratios, restrict
encumbrance of assets and limit the payment of dividends. At December 28, 1997,
approximately $38.1 million of the Company's retained earnings were unrestricted
and available for payment of dividends under the most restrictive terms of the
agreement. Long-term debt recorded in the accompanying balance sheets
approximates fair value based on the borrowing rates currently available to the
Company for bank loans with similar terms and average maturities.
Future maturities of long-term debt based on fixed payments (amounts could
be higher if excess cash flows or asset sales require prepayment of debt under
the credit agreements) are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR (IN THOUSANDS)
- ----------- --------------
<S> <C>
1998........................................................ $ 2,751
1999........................................................ 5,772
2000........................................................ 31,621
2001........................................................ 657
2002........................................................ 225,954
Thereafter.................................................. 495
--------
$267,250
========
</TABLE>
In addition to the amounts available under the revolving credit facility
described above, the Company maintains approximately $38 million in
complementary revolving lines of credit through several of its
F-12
<PAGE> 13
INTERFACE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
subsidiaries. Interest is generally charged at the prime lending rate or LIBOR.
The weighted average interest rate for 1997 related to the complimentary lines
was approximately 7.9%. Approximately $22.3 million and $14.9 million was
outstanding under these lines at December 28, 1997 and December 29, 1996,
respectively.
9. PREFERRED STOCK
The Company is authorized to create and issue up to 5,000,000 shares of
$1.00 par value Preferred Stock in one or more series and to determine the
rights and preferences of each series, to the extent permitted by the Articles
of Incorporation, and to fix the terms of such preferred stock without any vote
or action by the shareholders. The issuance of any series of preferred stock may
have an adverse effect on the rights of holders of common stock, and could
decrease the amount of earnings and assets available for distribution to holders
of common stock. In addition, any issuance of preferred stock could have the
effect of delaying, deferring or preventing a change in control of the Company.
In conjunction with the acquisition of Bentley Mills in June 1993, the
Company issued 250,000 shares of Series A Cumulative Convertible Preferred Stock
with a face value of $100 per share. The Series A Preferred Stock was entitled
to a 7% annual cumulative cash dividend ($7.00 per preferred share) that was
payable quarterly. Series A Preferred Stock was non-voting, except as required
by law or in limited circumstances to protect its preferential rights. The
Series A Preferred Stock was convertible into shares of the Company's Class A
Common Stock at the rate of one share of Class A Common Stock for each $14.79
face value thereof plus the amount of any accrued but unpaid dividends. During
the period from September 1996 through January 1997, the Series A preferred
shareholders, with one exception, notified the Company of their intent to
convert all of their shares of Series A Preferred Stock into an aggregate of
1,715,900 shares of the Company's Class A Common Stock. During each of the years
ended 1996 and 1995, the Company paid cash dividends of approximately $7.00 per
preferred share.
Subsequent to year end, the Board of Directors of the Company declared a
dividend of one purchase right (a "Right") to be distributed in respect of each
outstanding share of Common Stock, payable to shareholders of record as of March
16, 1998. Each right will entitle the registered holder to purchase from the
Company one one-hundredth of a share (a "Unit") of newly created Series B
Participating Cumulative Preferred Stock (the "Series B Preferred Stock").
The Rights may have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that acquires more than 15% of the
outstanding shares of Common Stock or if other specified events occur without
the Rights having been redeemed or in the event of an exchange of the rights for
Common Stock as permitted under the Shareholder Rights Plan.
The dividend and liquidation rights of the Series B Preferred Stock are
designed so that the value of one one-hundredth of a share of Series B Preferred
Stock issuable upon exercise of each Right will approximate the same economic
value as one share of Common Stock, including voting rights. The exercise price
per right will be $180, subject to adjustment. Shares of Series B Preferred
Stock will entitle the holder to a minimum preferential dividend of $1.00 per
share, but will entitle the holder to an aggregate dividend payment of 100 times
the dividend declared on each share of Common Stock. In the event of
liquidation, each share of Series B Preferred Stock will be entitled to a
minimum preferential liquidation payment of $1.00, plus accrued and unpaid
dividends and distributions thereon, but will be entitled to an aggregate
payment of 100 times the payment made per share of Common Stock. In the event of
any merger, consolidation or other transaction in which Common Stock is
exchanged for or changed into other stock or securities, cash or other property,
each share of Series B Preferred Stock will be entitled to receive 100 times the
amount received per share of Common Stock. Series B Preferred Stock is not
convertible into Common Stock.
Each share of Series B Preferred Stock will be entitled to 100 votes on all
matters submitted to a vote of the shareholders of the Company, and shares of
Series B Preferred Stock will generally vote together as one
F-13
<PAGE> 14
INTERFACE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
class with the Common Stock and any other voting capital stock of the Company on
all matters submitted to a vote of the Company's shareholders. While the
Company's Class B Common Stock remains outstanding, holders of Series B
Preferred Stock will vote as a single class with the Class A Common Stock for
election of directors. Further, whenever dividends on the Series B Preferred
Stock are in arrears in an amount equal to six quarterly payments, the Series B
Preferred Stock, together with any other shares of preferred stock then entitled
to elect directors, shall have the right, as a single class, to elect one
director until the default has been cured.
10. COMMON STOCK AND STOCK OPTIONS
The Company is authorized to issue 40,000,000 shares of $.10 par value
Class A Common Stock and 40,000,000 shares of $.10 par value Class B Common
Stock. Class A and Class B Common Stock have identical voting rights except for
the election or removal of directors. Holders of Class B Common Stock are
entitled as a class to elect a majority of the Board of Directors. Under the
terms of the Class B Common Stock, its special voting rights to elect a majority
of the Board members would terminate irrevocably if the total outstanding shares
of Class B Common Stock ever comprises less than ten percent (10%) of the
Company's total issued and outstanding shares of Class A and Class B Common
Stock. On December 28, 1997, the outstanding Class B shares constituted
approximately 11.5% of the total outstanding shares of Class A and Class B
Common Stock. The Company's Class A Common Stock is traded in the over-the-
counter market under the symbol IFSIA and is quoted on Nasdaq. The Company's
Class B Common Stock is not publicly traded. Class B Common Stock is convertible
into Class A Common Stock on a one-for-one basis. Both classes of Common Stock
share in dividends available to common shareholders (see Note 8 for discussion
of restrictions on the payment of dividends). Cash dividends on Common Stock
were $.27 per share for the year ended 1997, $.245 per share for the year ended
1996 and $.24 per share for the year ended 1995.
The Company has Key Employee Stock Option Plans ("the 1983 Plan" and "the
1993 Plan"), an Offshore Stock Option Plan ("Offshore Plan"), and an Omnibus
Stock Incentive Plan ("Omnibus Plan") under which a committee of the Board of
Directors is authorized to grant key employees, including officers, options to
purchase the Company's Common Stock. Options are exercisable for shares of Class
A or Class B Common Stock at a price not less than 100% of the fair market value
on the date of grant. The options generally become exercisable 20% per year over
a five year period from the date of the grant and the options generally expire
ten years from the date of the grant. The 1983 Plan, the 1993 Plan and the
Offshore Plan were terminated effective January 20, 1997. There were no
additional awards issued under any of the terminated plans after effective
termination, however, outstanding awards issued prior to such date are not
affected. The maximum number of shares of Class A or Class B Common Stock that
may be issued under the Omnibus Plan is 1,800,000, plus any shares subject to
stock options granted under the terminated plans that are forfeited, terminated
or otherwise expire unexercised.
F-14
<PAGE> 15
INTERFACE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table shows changes in common shareholders' equity:
<TABLE>
<CAPTION>
FOREIGN
CLASS A CLASS B ADDITIONAL CURRENCY
--------------- --------------- PAID-IN RETAINED TRANSLATION
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT
------ ------ ------ ------ ---------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1995....... 18,715 $1,871 3,077 $308 $ 93,450 $136,343 $ (136)
Net income..................... -- -- -- -- -- 16,828 --
Conversion of common stock..... 88 8 (88) (8) -- -- --
Issuance of common stock....... 241 24 -- -- 3,413 -- --
Cash dividends paid............ -- -- -- -- -- (6,132) --
Foreign currency translation
adjustment.................. -- -- -- -- -- -- 3,691
------ ------ ------ ---- -------- -------- --------
BALANCE AT DECEMBER 31, 1995..... 19,044 1,903 2,989 300 96,863 147,039 3,555
Net income..................... -- -- -- -- -- 26,395 --
Conversion of common stock..... 14 2 (14) (2) -- -- --
Issuance of common stock....... 2,956 297 -- -- 22,428 -- --
Conversion of Series A
Preferred Stock............. 358 36 5,266
Cash dividends paid............ -- -- -- -- -- (6,606) --
Foreign currency translation
adjustment.................. -- -- -- -- -- -- (6,612)
------ ------ ------ ---- -------- -------- --------
BALANCE AT DECEMBER 29, 1996..... 22,372 2,238 2,975 298 124,557 166,828 (3,057)
Net income..................... -- -- -- -- -- 37,514 --
Conversion of common stock..... 381 38 (381) (38) -- -- --
Issuance of common stock....... 876 87 175 17 17,087 -- --
Conversion of Series A
Preferred Stock............. 1,357 136 19,940
Cash dividends paid............ -- -- -- -- -- (6,436) --
Foreign currency translation
adjustment.................. -- -- -- -- -- -- (25,098)
------ ------ ------ ---- -------- -------- --------
BALANCE AT DECEMBER 28, 1997..... 24,986 $2,499 2,769 $277 $161,584 $197,906 $(28,155)
====== ====== ====== ==== ======== ======== ========
</TABLE>
F-15
<PAGE> 16
INTERFACE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables summarize activity on stock options:
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Outstanding at January 1, 1995............................. 1,896,000 $13.43
Granted.................................................. 360,000 14.49
Exercised................................................ (96,000) 10.53
Forfeited or canceled.................................... (125,000) 14.03
---------
Outstanding at December 31, 1995........................... 2,035,000 13.18
Granted.................................................. 308,000 13.47
Exercised................................................ (224,000) 13.04
Forfeited or canceled.................................... (112,000) 13.76
---------
Outstanding at December 29, 1996........................... 2,007,000 13.30
Granted.................................................. 314,000 20.09
Exercised................................................ (502,000) 13.03
Forfeited or canceled.................................... (70,000) 13.15
---------
Outstanding at December 28, 1997........................... 1,749,000 14.61
=========
Options exercisable at December 29, 1996................... 821,000 $13.35
Options exercisable at December 28, 1997................... 745,000 $13.22
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED AVERAGE FAIR VALUE OF OPTIONS
GRANTED DURING THE YEAR ENDED (IN THOUSANDS)
- -------------------------------------- --------------
<S> <C>
December 29, 1996........................................... $1,395
December 28, 1997........................................... $2,912
</TABLE>
The weighted average remaining life of options outstanding at December 28,
1997 was 7.5 years. The range of exercise prices was $10.31 - $26.75.
Interface has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," but applies Accounting Principles
Board Opinion No. 25 and related interpretations in accounting for its stock
option plans. Compensation expense was immaterial for 1997 and 1996. If
Interface had elected to recognize compensation cost based on the fair value at
the grant dates for options issued under the plans described above, consistent
with the method prescribed by SFAS No. 123, net income applicable to common
shareholders and earnings per share would have been changed to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED
---------------------
1997 1996
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Net income applicable to common shareholders
as reported............................................... $37,514 $24,717
pro forma................................................. $36,533 $24,202
Basic earnings per common share
as reported............................................... $ 1.58 $ 1.23
pro forma................................................. $ 1.54 $ 1.21
Diluted earnings per common share
as reported............................................... $ 1.53 $ 1.20
pro forma................................................. $ 1.49 $ 1.18
</TABLE>
F-16
<PAGE> 17
INTERFACE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of stock options used to compute pro forma net income
applicable to common shareholders and earnings per share disclosures is the
estimated present value at grant date using the Black-Scholes option-pricing
model with the following weighted average assumptions for 1997 and 1996:
Dividend yield of .71% in 1997 and .49% in 1996; expected volatility of 35% in
1997 and 30% in 1996; a risk free interest rate of 6.32% in 1997 and 6.11% in
1996; and an expected option life of 6.0 years in 1997 and 4.92 years in 1996.
11. TAXES ON INCOME
Provisions for federal, foreign, and state income taxes in the consolidated
statements of income consisted of the following components:
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal................................................. $ 5,569 $ 5,968 $ 5,331
Foreign................................................. 9,052 3,284 5,844
State................................................... 1,192 2,418 1,592
------- ------- -------
15,813 11,670 12,767
======= ======= =======
Deferred (reduction):
Federal................................................. 4,675 818 1,495
Foreign................................................. 2,173 5,770 (1,189)
State................................................... 1,096 (1,226) (316)
------- ------- -------
7,944 5,362 (10)
======= ======= =======
Decrease in valuation allowance........................... -- -- (1,421)
------- ------- -------
$23,757 $17,032 $11,336
======= ======= =======
</TABLE>
Income before taxes on income consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
U.S. operations........................................... $29,134 $17,186 $20,212
Foreign operations........................................ 32,137 26,241 11,464
------- ------- -------
$61,271 $43,427 $31,676
======= ======= =======
</TABLE>
Deferred income taxes for the years ended December 28, 1997 and December
29, 1996, reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes.
The sources of the temporary differences and their effect on the net
deferred tax liability at December 28, 1997 and December 29, 1996, are as
follows:
<TABLE>
<CAPTION>
1997 1996
-------------------- ---------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Basis difference of property and equipment........ $ -- $23,886 $ -- $23,484
Net operating loss carryforwards.................. 2,853 -- 3,212 --
Other differences in bases of assets and
liabilities..................................... -- 525 7,051 --
------ ------- ------- -------
$2,853 $24,411 $10,263 $23,484
====== ======= ======= =======
</TABLE>
F-17
<PAGE> 18
INTERFACE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 28, 1997, the Company's foreign subsidiaries had approximately
$1.4 million in net operating losses available for an unlimited carryforward
period. Additionally, the Company had approximately $53 million in state net
operating losses expiring at various times through 2012.
The effective tax rate on income before taxes differs from the United
States statutory rate. The following summary reconciles taxes at the United
States statutory rate with the effective rates:
<TABLE>
<CAPTION>
YEAR ENDED
--------------------
1997 1996 1995
---- ---- ----
<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................ 2.4 1.8 2.6
Amortization of excess of cost over net assets acquired
and related purchase accounting adjustments............ 4.7 5.1 6.1
Foreign and U.S. tax effects attributable to foreign
operations............................................. (2.2) (2.1) (2.4)
Valuation allowance....................................... -- -- (4.5)
Other..................................................... (1.1) (0.6) (1.0)
---- ---- ----
Taxes on income at effective rates........................ 38.8% 39.2% 35.8%
==== ==== ====
</TABLE>
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $86 million at December 28, 1997. Those earnings are considered to
be indefinitely reinvested and, accordingly, no provision for United States
federal and state income taxes has been provided thereon. Upon distribution of
those earnings in the form of dividends or otherwise, the Company would be
subject to both United States income taxes (subject to an adjustment for foreign
tax credits) and withholding taxes payable to the various foreign countries.
Determination of the amount of unrecognized deferred United States income tax
liability is not practicable because of the complexities associated with its
hypothetical calculation. Withholding taxes of approximately $4.3 million would
be payable upon remittance of all previously unremitted earnings at December 28,
1997.
12. HEDGING TRANSACTIONS AND DERIVATIVE FINANCIAL INSTRUMENTS
The Company employs the use of derivative financial instruments for the
purpose of reducing its exposure to adverse fluctuations in interest and foreign
currency exchange rates. While these hedging instruments are subject to
fluctuations in value, such fluctuations are generally offset by the
fluctuations in values of the underlying exposures being hedged. The Company
does not hold or issue derivative financial instruments for trading purposes.
The Company monitors the use of derivative financial instruments through the use
of objective measurable systems, well-defined market and credit risk limits, and
timely reports to senior management according to prescribed guidelines. The
Company has established strict counterparty credit guidelines and only enters
into transactions with financial institutions of investment grade or better. As
a result, the Company considers the risk of counterparty default to be minimal.
INTEREST RATE MANAGEMENT
Management of the Company has developed and implemented a policy to
maintain the percentage of fixed and variable rate debt within certain
parameters. The Company enters into interest rate swap agreements, which
maintain the fixed/variable mix within these defined parameters. In these swaps,
the Company agrees to exchange, at specified intervals, the difference between
fixed and variable interest amounts calculated by reference to an agreed-upon
notional principal linked to LIBOR. Any differences paid or received on interest
rate swap agreements are recognized as adjustments to interest expense over the
life of each swap, thereby adjusting the effective interest rate on the
underlying obligation. At December 28, 1997 and December 29, 1996, the Company
had utilized interest rate swap agreements to effectively convert
F-18
<PAGE> 19
INTERFACE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
approximately $64.5 million and $73.0 million, respectively, of variable rate
debt to fixed rate debt. The weighted average rate on these borrowings was 6.6%
at December 28, 1997 and 6.9% at December 29, 1996.
FOREIGN CURRENCY EXCHANGE RATE MANAGEMENT
The purpose of the Company's foreign currency hedging activities is to
reduce the risk that the eventual local currency inflows resulting from sales to
foreign customers will be adversely affected by changes in exchange rates.
The Company enters into currency swap contracts to hedge certain firm sales
commitments denominated in foreign currencies. Net gains and losses are deferred
and recognized in income in the same period as the hedged transaction. Net
deferred gains/losses from hedging anticipated but not yet firmly committed
transactions were not material at December 28, 1997 and December 29, 1996. The
contracts served to hedge firmly committed Dutch guilder, German mark, Japanese
yen, French franc, British pound sterling, and other foreign currency revenues.
The interest rate and currency swap agreements have maturity dates ranging from
nine to twenty-four months.
The estimated fair values of derivatives used to hedge or modify the
Company's risks will fluctuate over time. These fair value amounts should not be
viewed in isolation, but rather in relation to the fair values of the underlying
hedged obligations and transactions and the overall reduction in the Company's
exposure to adverse fluctuations in interest and foreign exchange rates.
The notional amounts of the derivative financial instruments do not
necessarily represent amounts exchanged by the parties and, therefore, are not a
direct measure of the exposure of the Company through its use of derivatives.
The amounts exchanged are calculated on the basis of the notional amounts and
the other terms of the derivatives, which relate to interest rates or currency
exchange rates.
The following table represents the aggregate notional amounts, fair values,
and maturities of the Company's derivative financial instruments. The liability
amounts shown within the table under foreign currency management represent
contracts under which the Company is required to deliver Japanese yen and Dutch
guilder currency at dates in the future.
<TABLE>
<CAPTION>
1997 1996
----------------- ------------------
NOTIONAL FAIR NOTIONAL FAIR
AMOUNTS VALUES AMOUNTS VALUES
-------- ------ -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest Rate Management Liabilities
Swap agreements.......................................... $64,500 $(319) $73,000 $ (448)
Foreign Currency Management Liabilities
Swap agreements.......................................... $14,500 $(751) $40,063 $(3,864)
</TABLE>
F-19
<PAGE> 20
INTERFACE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. COMMITMENTS AND CONTINGENCIES
The Company leases certain marketing, production and distribution
facilities, and equipment. At December 28, 1997 aggregate minimum rent
commitments under operating leases with initial or remaining terms of one year
or more consisted of the following:
<TABLE>
<CAPTION>
FISCAL YEAR (IN THOUSANDS)
- ----------- --------------
<S> <C>
1998........................................................ $17,848
1999........................................................ 13,990
2000........................................................ 11,748
2001........................................................ 8,535
2002........................................................ 5,948
Thereafter.................................................. 4,947
-------
$63,016
=======
</TABLE>
Rental expense amounted to approximately $20.7 million, $16.2 million, and
$15.8 million for the fiscal years ended 1997, 1996 and 1995, respectively.
YEAR 2000 RISK
As is the case with other companies using computers in their operations,
the Company is faced with the task of addressing the Year 2000 issue during the
next two years. The Year 2000 issue arises from the widespread use of computer
programs that rely on two-digit date codes to perform computations or decision-
making functions. The Company has done a comprehensive review of its computer
programs to identify the systems that would be affected by the Year 2000 issue,
and is in the process of reviewing the Company's Year 2000 exposure to third
party customers, distributors, suppliers, and banking institutions. The Company
has also hired an outside consulting firm to assist in this conversion process
and is beginning the process of modifying its computer program code to the four
digit fields necessary to be Year 2000 compliant.
The Company currently estimates the total cost of such modifications,
excluding the cost of modifications to program logic control systems relative to
manufacturing equipment, to be at least $17 million, although it could be
significantly more. The Company and its outside consultants are currently
evaluating the costs of modifications to these program logic control systems. Of
the total project cost, approximately $10 million is attributable to the cost of
new hardware and software which will be required in connection with the global
consolidation of the Company's management and financial accounting systems. This
new equipment and upgraded technology will have a definable value lasting beyond
the Year 2000. In these instances, where Year 2000 compliance is ancillary, the
Company may capitalize and depreciate such costs. The remaining $7 million will
be expensed as incurred over the next two years. During the year ended December
28, 1997 the Company expensed approximately $0.6 million in regards to such
modifications.
There can be no guarantee that these estimates will be achieved and actual
results could differ from those anticipated. Specific factors that might cause
differences include, but are not limited to, the ability of other companies on
which the Company's systems rely to modify or convert their systems to be Year
2000 compliant, the ability to locate and correct all relevant computer codes
and similar uncertainties.
F-20
<PAGE> 21
INTERFACE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. EMPLOYEE BENEFIT PLANS
The Company and its subsidiaries have trusteed defined benefit retirement
plans ("Plans") which cover substantially all of their employees except those of
Interface Interior Fabrics, Inc.("IIF"). The benefits are generally based on
years of service and the employee's average monthly compensation. Pension
benefit was $0.1 million for the year ended 1997 and pension expense was $1.3
million and $1.1 million for the years ended 1996 and 1995, respectively.
On November 1, 1997, the Company elected to freeze the defined benefit plan
covering its United States employees. Accordingly, all further benefit accruals
under the Plan will cease and all actively employed participants became 100%
vested in their benefits. In connection with the election to freeze the Plan, a
curtailment gain of $1.7 million was reflected in net periodic pension cost for
1997.
The ranges of assumptions used to calculate the funded status of the Plans
reflect the different economic environments within the various countries where
the Plans exist. In fiscal 1997, the assumed weighted average rate of return on
plan assets was 7.3% and the measurement of the projected benefit obligation at
December 28, 1997 was based on an assumed weighted average discount rate of 7.4%
and long-term rate of compensation increases of 4.1%. In fiscal 1996, the
assumed weighted average rate of return on plan assets was 7.7% and the
measurement of the projected benefit obligation at December 29, 1996 was based
on an assumed weighted average discount rate of 7.8% and long-term rate of
compensation increases of 4.3%.
The Company has 401(k) retirement investment plans ("401(k) Plans"), which
are open to all U.S. employees, except for IIF which has a separate Plan, with
one or more years of service. Effective October 1, 1996, all existing 401(k)
plans of the Company's subsidiaries, except for IIF, were merged into one plan,
"The Interface, Inc. Savings and Investment Plan and Trust." The 401(k) Plans
call for Company matching contributions on a sliding scale based on the level of
the employee's contribution. The Company may, at its discretion, make additional
contributions to the Plans based on the attainment of certain performance
targets by its subsidiaries. Approximately 78% of eligible employees were
enrolled in the 401(k) Plans as of December 28, 1997. The Company's matching
contributions are funded monthly and totalled approximately $1.6 million, $1.1
million and $0.6 million for the years ended 1997, 1996 and 1995, respectively.
The Company's discretionary contributions totalled $0.9 million, $0.4 million
and $1.0 million for the years ended 1997, 1996 and 1995, respectively.
F-21
<PAGE> 22
INTERFACE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The table presented below sets forth the funded status of the Company's
significant domestic and foreign defined benefit plans and amounts recognized in
the consolidated financial statements.
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Plan assets at fair value, primarily equity and fixed income
securities................................................ $79,879 $72,951
Actuarial present value of benefit obligations:
Vested benefits........................................... 71,329 59,558
Nonvested benefits........................................ 1,469 1,454
------- -------
Accumulated benefit obligation.............................. 72,798 61,012
Effect of projected future salary increases................. 3,946 6,007
------- -------
Projected benefit obligation................................ 76,744 67,019
------- -------
Plan assets in excess of projected benefit obligation....... 3,135 5,932
Unrecognized net gain from past experience different from
that assumed.............................................. (1,653) (7,165)
Unrecognized prior service cost............................. 320 327
Unrecognized net liability existing at the date of initial
application of SFAS 87.................................... 1,240 1,503
------- -------
Prepaid pension cost........................................ $ 3,042 $ 597
======= =======
Net pension cost included the following components:
Service cost -- benefits earned during the period......... $ 2,177 $ 1,928
Interest cost on projected benefit obligation............. 5,228 4,893
Actual return on plan assets.............................. (8,987) (6,124)
Net amortization and deferral............................. 3,178 642
Curtailment gain.......................................... (1,713) --
------- -------
Net pension cost (benefit).................................. $ (117) $ 1,339
======= =======
</TABLE>
15. SUBSEQUENT EVENTS
On December 30, 1997, the Company completed the acquisition of the European
carpet business of Readicut International plc ("Readicut"), for an estimated $50
million, subject to final adjustments. After the planned divestiture of certain
assets of Readicut, including its Network Flooring dealer division and Joseph,
Hamilton & Seaton Ltd., the Company's final investment for the retained Readicut
businesses are expected to be less than $15 million. The retained businesses
will include Firth Carpets Ltd., based in Brighouse, West Yorkshire, a leading
manufacturer of high quality woven and tufted carpet primarily for the contract
markets; and Vebe Floorcoverings BV, located in the Netherlands, a leading
manufacturer of needlepunch carpet.
During February 1998, the Company filed a Universal Shelf Registration for
the issuance of up to $300 million of debt securities, Preferred Stock, and
Class A Common Stock. The Company contemplates an offering of approximately $150
million of Senior Notes which will be due in 2008, and an offering of
approximately 1.5 million shares of Class A Common Stock. Proceeds of any
offering would be used for general corporate purposes, which may include future
acquisitions and the repayment of outstanding debt.
Also, subsequent to year end, the Board of Directors adopted a Rights
Agreement pursuant to which holders of Common Stock will be entitled to purchase
from the Company a fraction of a share of the Company's Series B Participating
Cumulative Preferred Stock (see Note 9) if a third party acquires beneficial
ownership of 15% or more of the Common Stock and will be entitled to purchase
the stock of an Acquiring Person at a discount upon the occurrence of certain
triggering events.
F-22
<PAGE> 23
INTERFACE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. BUSINESS AND FOREIGN OPERATIONS
The Company operates predominantly in one industry segment. The Company and
its subsidiaries are engaged predominantly in the manufacture and sale of
commercial and institutional interior finishings. The Company's principal
markets are in the United States, Europe, Asia Pacific and Canada, with the U.S.
and Europe being the largest based on revenues. Financial information by
geographic area for the years ended 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Sales to Unaffiliated Customers
United States..................................... $ 774,718 $ 656,044 $440,715
Americas, excluding the United States............. 23,991 22,030 23,165
Europe............................................ 259,829 257,243 267,116
Asia-Pacific...................................... 76,752 66,759 71,070
---------- ---------- --------
Total..................................... $1,135,290 $1,002,076 $802,066
========== ========== ========
Operating Income
United States..................................... $ 65,985 $ 51,251 $ 40,608
Americas, excluding the United States............. 2,906 1,519 1,170
Europe............................................ 29,440 30,815 26,046
Asia-Pacific...................................... 7,389 2,286 134
Corporate expenses................................ (7,919) (7,182) (6,415)
---------- ---------- --------
Total..................................... $ 97,801 $ 78,689 $ 61,543
========== ========== ========
Identifiable Assets
United States..................................... $ 545,144 $ 523,635 $366,128
Americas, excluding the United States............. 8,448 11,985 8,313
Europe............................................ 315,513 273,094 290,486
Asia-Pacific...................................... 60,458 53,832 49,424
---------- ---------- --------
Total..................................... $ 929,563 $ 862,546 $714,351
========== ========== ========
</TABLE>
In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information ("SFAS 131"), which supersedes SFAS No.
14, Financial Reporting for Segments of a Business Enterprise. SFAS 131
establishes standards for the reporting by public companies of information about
operating segments in annual financial statements and for the first time,
requires reporting of selected information about operating segments in interim
financial statements issued to the public. It also establishes standards for
disclosures regarding products and services, geographic areas and major
customers. SFAS 131 defines operating segments as components of a company about
which separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate resources and in
assessing performance.
SFAS 131 is effective for financial statements for periods beginning after
December 15, 1997 and requires the restatement of comparative information for
earlier periods. Management has been evaluating the impact the new statement
will have on future financial statement disclosures and has determined that the
Company will have three reportable segments: Floorcovering Products and Related
Services, Interior Fabrics, and Chemical and Specialty Products. Historically,
the Company has not reported information concerning operating segments. The
Company's future reportable segments are strategic business units that offer
different products and services. The results of operations and financial
position will be unaffected by implementation of the standard.
F-23
<PAGE> 24
INTERFACE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. QUARTERLY DATA AND SHARE INFORMATION (UNAUDITED)
The following table sets forth, for the fiscal periods indicated, selected
consolidated financial data and information regarding the market price per share
of the Company's Class A Common Stock. The prices represent the reported high
and low closing sale prices.
<TABLE>
<CAPTION>
YEAR ENDED 1997
-------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales................................. $257,345 $271,746 $297,352 $308,847
Gross profit.............................. 82,913 89,404 100,653 106,586
Net income applicable to common
shareholders............................ 6,353 7,960 10,511 12,690
Basic earnings per common share........... 0.28 0.34 0.44 0.52
Diluted earnings per common share......... 0.27 0.33 0.42 0.51
Share prices:
High.................................... 25 5/8 25 30 5/8 31 5/8
Low..................................... 18 1/2 21 22 1/8 25
Dividends per common share................ 0.065 0.065 0.065 0.075
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED 1996
-------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales................................. $205,017 $237,488 $275,041 $284,530
Gross profit.............................. 62,913 74,664 87,460 92,584
Net income................................ 3,708 6,025 7,581 9,081
Net income applicable to common
shareholders............................ 3,271 5,596 7,148 8,702
Basic earnings per common share........... 0.18 0.29 0.35 0.41
Diluted earnings per common share......... 0.18 0.29 0.33 0.40
Share prices:
High.................................... 17 3/8 15 1/2 17 1/8 20 1/2
Low..................................... 12 11 5/8 13 7/16 16 1/8
Dividends per common share................ 0.06 0.06 0.06 0.065
</TABLE>
F-24
<PAGE> 25
INTERFACE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL
STATEMENTS
<TABLE>
<CAPTION>
YEAR ENDED 1997
------------------------------------------------------------------------------
INTERFACE, INC. CONSOLIDATION
GUARANTOR NONGUARANTOR (PARENT AND ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTALS
------------ ------------ --------------- --------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales......................... $900,825 $347,735 $ -- $(113,270) $1,135,290
Cost of sales..................... 640,308 228,696 -- (113,270) 755,734
-------- -------- ------- --------- ----------
Gross profit on sales... 260,517 119,039 -- -- 379,556
Selling, general and
administrative expenses......... 184,559 78,124 19,072 -- 281,755
-------- -------- ------- --------- ----------
Operating income........ 75,958 40,915 (19,072) -- 97,801
Other expense (income)
Interest expense................ 10,629 4,571 19,838 -- 35,038
Other........................... 15,438 6,212 (20,158) -- 1,492
-------- -------- ------- --------- ----------
Total other expense..... 26,067 10,783 (320) -- 36,530
-------- -------- ------- --------- ----------
Income before taxes on
income and equity in
income of
subsidiaries.......... 49,891 30,132 (18,752) -- 61,271
Taxes on income................... 19,341 11,692 (7,276) -- 23,757
Equity in income of
subsidiaries.................... -- -- 48,991 (48,991) --
-------- -------- ------- --------- ----------
Net income applicable to common
shareholders.................... $ 30,550 $ 18,440 $37,515 $ (48,991) $ 37,514
======== ======== ======= ========= ==========
</TABLE>
F-25
<PAGE> 26
INTERFACE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED 1996
-------------------------------------------------------------------------------
INTERFACE, INC. CONSOLIDATION
GUARANTOR NON-GUARANTOR (PARENT AND ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTALS
------------ ------------- --------------- --------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales........................ $738,812 $406,020 $ -- $(142,756) $1,002,076
Cost of sales.................... 524,584 302,318 -- (142,447) 684,455
-------- -------- -------- --------- ----------
Gross profit on
sales................ 214,228 103,702 -- (309) 317,621
Selling, general and
administrative expenses........ 152,484 69,227 17,221 -- 238,932
-------- -------- -------- --------- ----------
Operating income....... 61,744 34,475 (17,221) (309) 78,689
Other expense (income)
Interest expense............... 8,679 5,263 18,830 -- 32,772
Other.......................... 10,380 4,001 (11,891) -- 2,490
-------- -------- -------- --------- ----------
Total other expense.... 19,059 9,264 6,939 -- 35,262
-------- -------- -------- --------- ----------
Income before taxes on
income and equity in
income of
subsidiaries......... 42,685 25,211 (24,160) (309) 43,427
Taxes on income.................. 13,029 8,842 (4,839) -- 17,032
Equity in income of
subsidiaries................... -- -- 46,025 (46,025) --
-------- -------- -------- --------- ----------
Net income............. 29,656 16,369 26,704 (46,334) 26,395
Preferred stock dividends........ -- -- 1,678 -- 1,678
-------- -------- -------- --------- ----------
Net income applicable to common
shareholders................... $ 29,656 $ 16,369 $ 25,026 $ (46,334) $ 24,717
======== ======== ======== ========= ==========
</TABLE>
F-26
<PAGE> 27
INTERFACE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED 1995
-------------------------------------------------------------------------------
INTERFACE, INC. CONSOLIDATION
GUARANTOR NON-GUARANTOR (PARENT AND 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 expense.... 24,324 949 4,594 -- 29,867
-------- -------- -------- --------- ----------
Income before taxes on
income and equity in
income of
subsidiaries......... 25,493 24,277 (17,807) (287) 31,676
Taxes on income.................. 13,957 4,343 (6,964) -- 11,336
Equity in income of
subsidiaries................... -- -- 31,470 (31,470) --
-------- -------- -------- --------- ----------
Income before
extraordinary
items................ 11,536 19,934 20,627 (31,757) 20,340
Extraordinary loss (net
of tax).............. -- -- 3,512 -- 3,512
-------- -------- -------- --------- ----------
Net income............. 11,536 19,934 17,115 (31,757) 16,828
Preferred stock dividends........ -- -- 1,750 -- 1,750
-------- -------- -------- --------- ----------
Net income applicable to common
shareholders................... $ 11,536 $ 19,934 $ 15,365 $ (31,757) $ 15,078
======== ======== ======== ========= ==========
</TABLE>
F-27
<PAGE> 28
INTERFACE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 28, 1997
--------------------------------------------------------------------------------
INTERFACE, INC. CONSOLIDATION AND
GUARANTOR NONGUARANTOR (PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTALS
------------ ------------ --------------- ----------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Current
Cash............................... $ 4,362 $ 6,501 $ (651) $ -- $ 10,212
Accounts receivable................ 131,120 74,652 (27,795) -- 177,977
Inventories........................ 105,193 52,437 -- -- 157,630
Miscellaneous...................... 8,521 15,768 5,132 -- 29,421
-------- -------- -------- ----------- --------
Total current assets....... 249,196 149,358 (23,314) -- 375,240
Property and equipment, less
accumulated depreciation........... 150,038 71,453 7,290 -- 228,781
Investments in subsidiaries.......... 129,033 15,799 381,670 (526,502) --
Miscellaneous........................ 121,361 20,871 472,083 (567,370) 46,945
Excess of cost over net assets
acquired........................... 182,652 92,087 3,858 -- 278,597
-------- -------- -------- ----------- --------
$832,280 $349,568 $841,587 $(1,093,872) $929,563
======== ======== ======== =========== ========
LIABILITIES AND COMMON SHAREHOLDERS' EQUITY
Current
Notes payable...................... $ 12,322 $ 9,942 $ -- $ -- $ 22,264
Accounts payable................... 40,158 38,363 758 -- 79,279
Accrued expenses................... 42,647 36,443 8,453 -- 87,543
Current maturities of long-term
debt............................ 1,742 1,009 -- -- 2,751
-------- -------- -------- ----------- --------
Total current
liabilities.............. 96,869 85,757 9,211 -- 191,837
Long-term debt, less current
maturities......................... 240,475 44,423 321,169 (341,568) 264,499
Senior subordinated notes -- -- 125,000 -- 125,000
Deferred income taxes................ 12,852 3,483 12,538 -- 28,873
-------- -------- -------- ----------- --------
Total liabilities.......... 350,196 133,663 467,918 (341,568) 610,209
Minority interests................... 2,989 -- -- -- 2,989
Series A redeemable preferred
stock.............................. 57,891 -- -- (57,891) --
Common stock......................... 81,704 102,199 2,776 (183,903) 2,776
Additional paid-in capital........... 187,195 11,030 161,584 (198,225) 161,584
Retained earnings.................... 158,027 122,120 212,298 (294,539) 197,906
Foreign currency translation
adjustment......................... (5,722) (19,444) (2,989) -- (28,155)
Treasury stock....................... -- -- -- (17,746) (17,746)
-------- -------- -------- ----------- --------
$832,280 $349,568 $841,587 $(1,093,872) $929,563
======== ======== ======== =========== ========
</TABLE>
F-28
<PAGE> 29
INTERFACE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 29, 1996
-------------------------------------------------------------------------------
INTERFACE, INC. CONSOLIDATION
GUARANTOR NON-GUARANTOR (PARENT AND ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTALS
------------ ------------- --------------- --------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Current
Cash.......................... $ 3,481 $ 4,791 $ 490 $ -- $ 8,762
Accounts receivable........... 124,118 61,479 (17,780) -- 167,817
Inventories................... 100,305 45,777 596 -- 146,678
Miscellaneous................. 6,414 12,231 11,398 -- 30,043
-------- -------- -------- ----------- --------
Total current
assets.............. 234,318 124,278 (5,296) -- 353,300
Property and equipment, less
accumulated depreciation...... 143,599 60,924 4,268 -- 208,791
Investments in subsidiaries..... 108,977 17,768 379,992 (506,737) --
Miscellaneous................... 142,228 44,637 374,105 (509,585) 51,385
Excess of cost over net assets
acquired...................... 171,526 74,512 3,032 -- 249,070
-------- -------- -------- ----------- --------
$800,648 $322,119 $756,101 $(1,016,322) $862,546
======== ======== ======== =========== ========
LIABILITIES AND COMMON SHAREHOLDERS' EQUITY
Current
Notes payable................. $ 11,685 $ 3,233 $ -- $ -- $ 14,918
Accounts payable.............. 47,814 26,160 986 -- 74,960
Accrued expenses.............. 45,610 27,581 (2,272) -- 70,919
Current maturities of
long-term debt............. 2,897 22 -- -- 2,919
-------- -------- -------- ----------- --------
Total current
liabilities......... 108,006 56,996 (1,286) -- 163,716
Long-term debt, less current
maturities.................... 234,697 42,756 299,156 (322,256) 254,353
Senior subordinated notes....... -- -- 125,000 -- 125,000
Deferred income taxes........... 12,936 1,009 9,539 -- 23,484
-------- -------- -------- ----------- --------
Total liabilities..... 355,639 100,761 432,409 (322,256) 566,553
Minority interest............... 3,125 -- -- -- 3,125
Series A redeemable preferred
stock......................... 57,891 -- 19,750 (57,891) 19,750
Common stock.................... 81,704 102,199 2,535 (183,902) 2,536
Additional paid-in capital...... 179,073 11,030 124,556 (190,102) 124,557
Retained earnings............... 127,477 103,678 181,219 (245,546) 166,828
Foreign currency translation
adjustment.................... (4,261) 4,451 (4,368) 1,121 (3,057)
Treasury stock.................. -- -- -- (17,746) (17,746)
-------- -------- -------- ----------- --------
$800,648 $322,119 $756,101 $(1,016,322) $862,546
======== ======== ======== =========== ========
</TABLE>
F-29
<PAGE> 30
INTERFACE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED 1997
------------------------------------------------------------------------------
INTERFACE, INC. CONSOLIDATION
GUARANTOR NONGUARANTOR (PARENT AND ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTALS
------------ ------------ --------------- --------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities... $ 29,585 $ 27,448 $ 17,690 $ -- $ 74,723
-------- -------- -------- -------- --------
Cash flows from investing activities:
Purchase of plant and equipment...... (25,062) (10,177) (3,415) -- (38,654)
Acquisitions, net of cash acquired... -- -- (34,647) -- (34,647)
Other................................ -- -- (17,902) -- (17,902)
-------- -------- -------- -------- --------
(25,062) (10,177) (55,964) -- (91,203)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Net borrowings (repayments).......... (3,643) (15,155) 37,155 -- 18,357
Proceeds from issuance of common
stock............................. -- -- 6,414 -- 6,414
Cash dividends paid.................. -- -- (6,436) -- (6,436)
-------- -------- -------- -------- --------
(3,643) (15,155) 37,133 -- 18,335
-------- -------- -------- -------- --------
Effect of exchange rate changes on
cash................................. -- (405) -- -- (405)
-------- -------- -------- -------- --------
Net increase (decrease) in cash........ 880 1,711 (1,141) -- 1,450
Cash at beginning of year.............. 3,481 4,791 490 -- 8,762
-------- -------- -------- -------- --------
Cash at end of year.................... $ 4,361 $ 6,502 $ (651) $ -- $ 10,212
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED 1996
-------------------------------------------------------------------------------
INTERFACE, INC. CONSOLIDATION
GUARANTOR NON-GUARANTOR (PARENT AND ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTALS
------------ ------------- --------------- --------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities.......................... $ 31,207 $ 61,218 $(35,913) $ -- $ 56,512
-------- -------- -------- -------- --------
Cash flows from investing activities:
Purchase of plant and equipment..... (21,671) (11,459) (3,306) -- (36,436)
Acquisitions, net of cash
acquired......................... -- -- (30,151) -- (30,151)
Other............................... -- (3,518) (7,907) -- (11,425)
-------- -------- -------- -------- --------
(21,671) (14,977) (41,364) -- (78,012)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Net borrowings (repayments)......... (7,550) (46,718) 80,829 -- 26,561
Proceeds from issuance of common
stock............................ -- -- 2,916 -- 2,916
Cash dividends paid................. -- -- (6,606) -- (6,606)
-------- -------- -------- -------- --------
(7,550) (46,718) 77,139 -- 22,871
-------- -------- -------- -------- --------
Effect of exchange rate changes on
cash................................ -- 130 -- -- 130
-------- -------- -------- -------- --------
Net increase (decrease) in cash....... 1,986 (347) (138) -- 1,501
Cash at beginning of year............. 1,495 5,138 628 -- 7,261
-------- -------- -------- -------- --------
Cash at end of year................... $ 3,481 $ 4,791 $ 490 $ -- $ 8,762
======== ======== ======== ======== ========
</TABLE>
F-30
<PAGE> 31
INTERFACE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED 1995
-------------------------------------------------------------------------------
INTERFACE, INC. CONSOLIDATION
GUARANTOR NON-GUARANTOR (PARENT AND ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTALS
------------ ------------- --------------- --------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities.......................... $ 14,926 $ 64,428 $ (3,402) $ -- $ 75,952
-------- -------- -------- -------- --------
Cash flows from investing activities:
Purchase of plant and equipment..... (30,880) (9,886) (1,357) -- (42,123)
Acquisitions, net of cash
acquired......................... (27,554) -- -- -- (27,554)
Other............................... (6,474) (15,219) 19,211 -- (2,482)
-------- -------- -------- -------- --------
(64,908) (25,105) 17,854 -- (72,159)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Net borrowings (repayments)......... 34,092 31,926 (60,864) -- 5,154
Proceeds from issuance of common
stock............................ -- -- 984 -- 984
Cash dividends paid................. -- -- (6,132) -- (6,132)
Other............................... 17,862 (70,049) 52,187 -- --
-------- -------- -------- -------- --------
51,954 (38,123) (13,825) -- 6
-------- -------- -------- -------- --------
Effect of exchange rate changes on
cash................................ -- (34) -- -- (34)
-------- -------- -------- -------- --------
Net increase (decrease) in cash....... 1,972 1,166 627 -- 3,765
Cash at beginning of year............. (477) 3,972 1 -- 3,496
-------- -------- -------- -------- --------
Cash at end of year................... $ 1,495 $ 5,138 $ 628 $ -- $ 7,261
======== ======== ======== ======== ========
</TABLE>
F-31
