SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 28, 1997
Commission File No: 0-12016
INTERFACE, INC.
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(Exact name of registrant as specified in its charter)
Georgia 58-1451243
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(State of incorporation) (I.R.S. Employer Identification No.)
2859 Paces Ferry Road
Suite 2000
Atlanta, Georgia 30339
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(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (770) 437-6800
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Securities Registered Pursuant to Section 12(b) of the Act: None
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Securities Registered Pursuant to Section 12(g) of the Act:
CLASS A COMMON STOCK, $0.10 PAR VALUE PER SHARE
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /x/ No / /
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
Aggregate market value of the voting and non-voting stock
held by non-affiliates of the registrant as of March 12, 1998
(assuming conversion of Class B Common Stock into Class A Common
Stock): $881,000,000 (22,025,960 shares valued at the last sales
price of $40.00 on March 11, 1998). See Item 12.
Number of shares outstanding of each of the registrant's
classes of Common Stock, as of March 12, 1998:<PAGE>
Class Number of Shares
----- ----------------
Class A Common Stock,
$0.10 par value per share ................. 21,477,996
Class B Common Stock,
$0.10 par value per share ................. 2,783,470
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the fiscal year
ended December 28, 1997 are incorporated by reference into Parts I and
II.
Portions of the Proxy Statement for the 1998 Annual Meeting of
Shareholders are incorporated by reference into Part III.
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Interface, Inc. ("Interface" or the "Company") is a
global manufacturer, marketer, installer and servicer of
products for the commercial and institutional interiors market.
With a 40% market share, the Company is the worldwide leader
in the modular carpet segment, which includes both carpet tile
and two-meter roll goods. The Company's BENTLEY MILLS, PRINCE
STREET and FIRTH brands are leaders in the high quality,
designer-oriented sector of the broadloom segment. The Company
provides carpet installation and maintenance services through
its domestic dealer network, Re:Source Americas, and provides
specialized carpet replacement services through its Renovisions
subsidiary. The Company's Interior Fabrics Group includes the
leading U.S. manufacturer of panel fabrics for use in open plan
office furniture systems, with a market share in excess of 60%.
The Company's specialty products operations produce raised/access
flooring systems, antimicrobial additives, adhesives and various
other chemical compounds and products. These complementary
product offerings, together with an integrated marketing philosophy,
enable Interface to take a "total interior solutions" approach to
serving the diverse needs of its customers around the world.
The Company markets products in over 100 countries around
the world under such established brand names as Interface and
Heuga in modular carpet; BENTLEY MILLS, PRINCE STREET and FIRTH
in broadloom carpets; GUILFORD OF MAINE, STEVENS LINEN, CAMBORNE,
TOLTEC and INTEK in interior fabrics and upholstery products;
INTERSEPT in chemicals; and C-Tec and Intercell in raised/access
flooring systems. The Company utilizes an internal marketing and
sales force of over 1,100 experienced personnel (the largest in
the commercial floorcovering industry), stationed at over 100
locations in over 35 countries, to market the Company's carpet
products and services in person to its customers. The Company's
principal geographic markets are North America (70% of 1997 net
sales), the United Kingdom and Western Europe (23% of 1997 net
sales), and Asia-Pacific (7% of 1997 net sales). The Company is
aggressively developing opportunities in Greater China and
Southeast Asia, South America, and Central and Eastern Europe,
which management believes represent significant growth markets
for the Company.
While the Company's net sales from U.S. operations have
historically been derived primarily from the renovation market,
Interface believes that the recovery in the U.S. commercial
office market, which began in the mid 1990's, will drive growth
in the new construction market over the next several years. From
a high of nearly 24% in 1986, suburban office vacancy rates
dropped to a decade low of 9.7% as of September 1997, according
to CB Commercial/Torto Wheaton Research. In addition, CB
Commercial/Torto Wheaton Research reports that 34 out of 54 major
metropolitan areas were below the 10% vacancy level in September
1997. The Company believes that a 10% vacancy level is a critical
threshold which drives new construction. Given the decade-long
downturn in the office market, the Company believes the recovery
should continue for a number of years. The Company expects that
all of its domestic operations will benefit from these industry
developments. In its international markets, the Company expects
to benefit from both increased use and acceptance of its products
as well as recoveries in the commercial office markets,
2<PAGE>
particularly in Europe. The Company also believes that, within
the overall floorcovering market, the demand for modular carpet
is increasing worldwide as more customers recognize its
advantages in terms of greater design options and flexibility,
longer average life, and ease of access to sub-floor wiring.
For 1997, the Company had net sales and net income of $1.135
billion and $37.5 million, respectively, the highest in the
Company's history. Net sales were composed of floorcovering sales
($898.2 million), interior fabrics sales ($184.7 million) and
chemical and specialty product sales ($52.4 million), accounting
for 79%, 16% and 5% of total net sales, respectively. The Company
achieved a compound annual growth rate in its net sales and net
income of 16% and 28%, respectively, over the five-year period
from 1993 to 1997.
RECENT ACQUISITION
On December 30, 1997 (subsequent to the end of fiscal 1997),
the Company completed the acquisition of the European carpet
businesses of Readicut International plc ("Readicut"), for
approximately $50 million, subject to final adjustment. After the
planned divestiture of certain assets of Readicut, including its
Network Flooring dealer division and Joseph, Hamilton & Seaton
Ltd., a contract carpet distributor, the Company's final investment
for the retained Readicut businesses is expected to be less than $15
million. The retained businesses will include Firth Carpets Ltd.,
based in West Yorkshire, England, a leading manufacturer of high
quality woven and tufted carpet primarily for the contract markets;
and a 40% interest in Vebe Floorcoverings BV, located in the
Netherlands, a leading manufacturer of needlepunch carpet. Firth
Carpets is located in close proximity to the Company's Camborne
Holdings Ltd. fabrics facility and its Shelf, England modular carpet
facility, which is expected to allow Interface to realize significant
synergies with these existing operations. In February 1998, the
Company consummated a joint venture arrangement with the
principals of Condor Carpets BV, the Company's commission tufter
in Europe, pursuant to which the principals of Condor Carpets
acquired a 60% interest in Vebe Floorcoverings.
COMPANY STRENGTHS
Management believes that the Company benefits from several
significant competitive advantages, which will assist it in
sustaining and enhancing its position as a market leader. The
Company's principal strengths include:
STRONG BRAND NAMES WITH REPUTATION FOR QUALITY AND
RELIABILITY. The Company's products are known in the
industry for their high quality and reliability. The
Company's strong brand names in carpets, interior fabrics,
and raised/access flooring systems are leaders in the
industry. INTERFACE AND HEUGA are the pre-eminent brand
names in carpet tiles for commercial and institutional use
worldwide. The PRINCE STREET and BENTLEY MILLS brands are
rated the number one and two brands, respectively, for
carpet design in the U.S. according to a 1997 survey of
interior designers published in the Floor Focus industry
publication. Internationally, Firth Carpets has a reputation
in Europe for manufacturing high-quality woven and tufted
products. GUILFORD AND CAMBORNE are leading brand names in
their respective markets for interior fabrics.
3<PAGE>
EFFICIENT AND LOW-COST GLOBAL MANUFACTURING OPERATIONS.
The Company's global manufacturing capabilities are an
important competitive advantage to Interface in serving the
needs of multinational corporate customers who require
uniform products and services at their various locations
around the world. Global manufacturing locations enable the
Company to compete effectively with local producers in its
international markets, while also affording international
customers more favorable delivery times and freight costs.
The Company's capital investment program to consolidate and
modernize the yarn manufacturing operations of its Interior
Fabrics Group has resulted in significant efficiencies and
cost savings, as well as new product capabilities. In
addition, this has allowed Interface to respond to a shift
in demand towards lighter weight, less expensive fabrics by
original equipment manufacturer (OEM) panel fabric customers.
The Company's new, state-of-the-art yarn manufacturing facility
in Guilford, Maine began operating in 1996, and became fully
operational in July 1997.
DEDICATED DISTRIBUTION AND SERVICE CAPABILITY THROUGH
RE: SOURCE AMERICAS. The Company's dealer network, Re:Source
Americas, now consists of 18 owned and 75 affiliated
dealers. The Company believes that the service, and
marketing and distribution capabilities added by Re:Source
Americas have resulted in (i) increased sales of Company
products as dealers in the network have begun to supply
Company products on a preferred basis, (ii) enhanced
customer satisfaction by assisting customers in the process
of selecting, purchasing, installing, maintaining and
recycling carpet products, (iii) improved pricing for the
Company's floorcovering products and (iv) increased
operating margins by consolidating administrative functions
and coordinating and streamlining sales efforts by Company
and dealer sales personnel.
STRONG CUSTOMER AND ARCHITECTURAL AND DESIGN COMMUNITY
RELATIONSHIPS. The Company focuses its sales efforts at the
design phase of commercial projects. Interface personnel
cultivate relationships both with the owners and users of
the facilities involved in the projects and with specifiers
such as architects, engineers, interior designers and
contracting firms who are directly involved in specifying
products and often make or significantly influence purchase
decisions. The Company emphasizes its product design and
styling capabilities and its ability to provide creative,
high-value solutions to its customers' needs. Interface
marketing and sales personnel also serve as a primary
technical resource for the Company's customers, both with
respect to product maintenance and service as well as design
matters.
AWARD-WINNING AND INNOVATIVE PRODUCT DESIGN AND
DEVELOPMENT CAPABILITIES. The Company's product design and
development capabilities give Interface a significant
competitive advantage. Interface has an exclusive consulting
contract with the leading design firm Oakey Designs to
augment the Company's internal research, development and
design staff. Since engaging Oakey Designs in 1994, the
Company has introduced more than 130 new carpet designs in
the U.S. and has enjoyed considerable success in winning
U.S. carpet industry design awards bestowed by the
International Interior Design Association (IIDA),
4<PAGE>
particularly in the carpet tile division. In 1996, Oakey
Designs' services were extended to the Company's international
carpet operations, and an affiliate of that firm was engaged
to provide similar design services to the Company's interior
fabrics business.
SEASONED MANAGEMENT TEAM AND COMMITTED EMPLOYEES. An
important component of the Company's recent success has been
the continued strengthening of its management team and its
commitment to developing and maintaining an enthusiastic and
collaborative work force. In 1993, Ray C. Anderson, the
Company's Chairman and Chief Executive Officer, hired
industry veteran Charles R. Eitel to manage the Company's
domestic carpet tile operations. Mr. Eitel became President
and Chief Operating Officer of the Company in February 1997.
Mr. Anderson and Mr. Eitel have put in place a team of
seasoned executives to manage the Company's continued growth
and diversification. In addition, over the past three years,
the Company has made a substantial investment in its
approximately 7,300 employees worldwide. In 1997, for
example, the Company created an internal employee training
and education team, known as One World Learning, which
implements corporate-wide learning programs. In December
1997, Fortune Magazine rated Interface one of the top 100
employers in the U.S. on the strength of the Company's
commitment to its employees.
BUSINESS STRATEGY AND PRINCIPAL INITIATIVES
Interface's long-standing corporate strategy has been to
diversify and integrate worldwide. The Company seeks to diversify
by developing internally or acquiring related product lines and
businesses in the commercial interiors field; and to integrate by
identifying and developing synergies and operating efficiencies
among the Company's products and global businesses. In continuing
that strategy, the Company is pursuing the following principal
strategic initiatives:
GLOBALIZATION OF THE "MASS CUSTOMIZATION" PRODUCTION
STRATEGY. The Company is implementing aspects of its
successful U.S. mass customization production initiative at
its floorcovering operations in Europe and Asia-Pacific and
at its interior fabrics operations. Through mass
customization the Company is able to respond to customers'
requirements for custom or highly styled products by quickly
and efficiently producing both custom samples and the
ultimate products, and to more readily determine proven
"winners" that can be manufactured for inventory for broader
distribution. Mass customization was introduced to the
Company's U.S. carpet tile business in 1994, and its
principal components include (i) developing a simplified but
versatile yarn utilization system, (ii) investing in highly
efficient, state-of-the-art tufting and custom sampling
equipment, and (iii) utilizing innovative design and styling
to create products. This strategy has resulted in
substantial operating improvements in the U.S. carpet tile
business, including increased margins and reduced inventory
levels of both raw materials and standard products.
"TOTAL INTERIOR SOLUTIONS". The Company's objective is
to use the diverse but complementary nature of its product
lines to offer "total interior solutions" to its customers
worldwide, meeting their diverse needs for products and
5<PAGE>
services. The Company combines its global marketing and
manufacturing capabilities to successfully target
multinational companies and compete effectively in local
markets worldwide. The Company has organized a 45-person
global account team with responsibility for the Company's
largest multinational customers and prospects, and is
implementing a marketing communications network to link its
worldwide marketing and sales force. The Company has also
consolidated management responsibility for certain key
operational areas, which has significantly increased global
cooperation and coordination in product planning, production
and marketing activities--in effect, "hooking it up"
worldwide. In addition, the new Re:Source Americas network
provides a channel for delivery of a variety of services and
products offered by the Company in addition to commercial
carpet, including carpet replacement and reclamation
services, furniture moving and installation, adhesives and
cleaning chemicals, specialty products, and raised/access
flooring systems.
ECOLOGICAL SUSTAINABILITY THROUGH WAR-ON-WASTE AND
ECOSENSE PROGRAMS. In January 1995, the Company began a
worldwide war-on-waste initiative referred to internally as
"QUEST". Applying a zero-based definition of waste (broadly
defined as any measurable cost that goes into manufacturing
a product but does not result in identifiable value to the
customer), the Company realized an aggregate of
approximately $50 million in savings through eliminating
such waste from 1995 to 1997. Management has identified an
additional $80 million of waste and believes the Company can
eliminate half of such waste by the end of 2001. The
war-on-waste represents a first step in the Company's
broader EcoSense initiative, which is the Company's
long-range program to achieve greater resource efficiency
and, ultimately, ecological "sustainability"--that is, the
point at which Interface is no longer a net "taker" from the
earth. The Company believes that its pursuit of these
initiatives provides a competitive advantage in marketing
its products to an increasing number of customers.
SELECTIVE STRATEGIC ACQUISITIONS. The Company has
successfully expanded its business and product lines through
strategic acquisitions. The Company expanded its carpet
operations with the acquisitions of Heuga Holdings B.V. (now
Interface Europe B.V.) in 1988, Bentley Mills, Inc. in 1993, Prince
Street Technologies, Ltd. in 1994 and Firth Carpets in 1998, while
its fabrics business has been expanded significantly with the acquisitions
of certain assets of Stevens Linen Associates, Inc. in 1993, Toltec
Fabrics, Inc. and the Intek division of Springs Industries, Inc.
in 1995 and Camborne in 1997. In addition, the Company's acquisitions
of Renovisions, Inc. in 1996 and Facilities Resource Group, Inc. in 1997,
and the formation of the Re:Source Americas dealer network through
acquisitions primarily in 1996 and 1997, have enabled the Company
to expand rapidly into a variety of commercial interior
services. The Company intends to continue to selectively
target companies and product lines that complement existing
product lines and further the Company's ability to provide
total interior solutions for its customers. The Company
believes that its cash flow from operations will enable it to
continue to capitalize on attractive strategic acquisition
opportunities.
6<PAGE>
MODULAR AND BROADLOOM CARPET
PRODUCTS
The Company is the world's largest manufacturer and marketer
of modular carpet, which includes carpet tile and two-meter roll
goods, with a 40% worldwide market share. Broadloom carpet
generally consists of tufted carpet sold primarily in twelve-foot
rolls. The Company's broadloom carpet operations--Bentley Mills,
Prince Street and Firth Carpets--focus on the high quality,
designer-oriented sector of the U.S. and U.K. broadloom carpet
markets. Through a joint venture arrangement with the principals
of Condor Carpets, the Company also has a 40% interest in Vebe
Floorcoverings, which management believes is the low-cost
European manufacturer of needlepunch carpet.
MODULAR CARPET. Marketed under the leading global brands
INTERFACE and HEUGA, the Company's free-lay modular carpet system
utilizes carpet tiles cut in precise, dimensionally stable
squares (usually 50 square centimeters) to produce a
floorcovering which combines the appearance and texture of
broadloom carpet with the advantages of a modular carpet system.
The growing use of open plan interiors and modern office
arrangements utilizing demountable, movable partitions and
modular furniture systems has encouraged the use of carpet tile,
as compared to other soft surface flooring products. The
Company's GLASBAC(R) echnology employs a unique,
fiberglass-reinforced polymeric composite backing that allows the
tile to be installed and remain flat on the floor without the
need for general application of adhesives or use of fasteners.
This type of carpet tile thus may be easily removed and replaced,
permitting rearrangement of office partitions and modular
furniture systems without the inconvenience and expense
associated with removing, replacing or repairing other soft
surface flooring products, including broadloom carpeting. Carpet
tile facilitates access to sub-floor telephone, electrical,
computer and other wiring by lessening disruption of operations,
and also eliminates the cumulative damage and unsightly
appearance commonly associated with frequent cutting of
conventional carpet as utility connections and disconnections are
made. Because a relatively small portion of a carpet installation
often receives the bulk of traffic and wear, the ability to
rotate carpet tiles between high traffic and low traffic areas
and to selectively replace worn tiles can significantly increase
the average life and cost efficiency of the floorcovering.
The Company uses a number of conventional and
technologically advanced methods of carpet construction to
produce carpet tiles in a wide variety of colors, patterns,
textures, pile heights and densities designed to meet both the
practical and aesthetic needs of a broad spectrum of commercial
interiors--particularly offices, health care facilities,
airports, educational and other institutions, and retail
facilities. The Company's carpet tile systems permit distinctive
styling and patterning that can be used to complement interior
designs, to set off areas for particular purposes and to convey
graphic information. While the Company continues to manufacture
and sell the major portion of its carpet tile in standard styles,
an increasing volume of the Company's modular carpet sales are
custom or made-to-order products designed to meet particular
customer specifications.
7<PAGE>
The Company produces and sells carpet tile specially adapted
for the health care facilities market. The Company's carpet tile
possesses characteristics--such as the use of the INTERSEPT(R)
antimicrobial, static-controlling nylon yarns, and thermally
pigmented, colorfast yarns--making it suitable for use in such
facilities in lieu of hard surface flooring.
The Company also manufactures and sells two-meter roll goods
which are structure-backed and offer many of the advantages of
both carpet tiles and broadloom carpet. They are often used in
conjunction with carpet tiles to create special design effects.
The Company's current principal customers for such products are
in the education, health care and government sectors. The Company
believes, however, that the demand for two-meter roll goods is
increasing generally within the commercial and institutional
interiors market, and expects two-meter roll goods to account for
a growing percentage of its U.S. modular carpet sales in the
future.
BROADLOOM CARPET. The Company has obtained a significant
share of the high-end, designer-oriented broadloom carpet segment
by combining innovative product design and styling capabilities
and short production and delivery times with a marketing strategy
geared toward serving and working closely with interior
designers, architects and other specifiers. Prince Street's
design-sensitive broadloom products center around unique,
multi-dimensional textured carpets with a hand-tufted look, while
Bentley Mills' designs emphasize the dramatic use of color. The
PRINCE STREET and BENTLEY MILLS brands were rated the number one
and two brands, respectively, for carpet design in the U.S.
according to a 1997 survey of interior designers published in the
FLOOR FOCUS industry publication. In addition, Firth Carpets has
a reputation for manufacturing high-quality woven and tufted
products, mostly using woolen spun blends. Vebe Floorcoverings,
one of the largest needlepunch carpet producers in Europe, focuses
its business on volume sales to large distributors of carpet
products.
SERVICES
The Company provides commercial carpet installation and
maintenance services through the Re:Source Americas network. The
Re:Source Americas network presently comprises approximately 93
owned or affiliated commercial floorcovering dealers strategically
located throughout the major metropolitan areas of the United
States. The new network: (i) allows the Company to influence and
monitor customer satisfaction throughout the product ownership cycle,
from specification through reclamation; (ii) reduces the Company's cost
of selling by bolstering efforts of sales representatives at the mill
level with dealer-level support; (iii) improves pricing for products;
and (iv) achieves efficiencies by augmenting administrative functions
of dealers. The Re:Source Americas network also provides a channel for
delivery of a variety of services and products offered by the Company
in addition to commercial carpet, including carpet replacement services
offered by Renovisions, Inc., adhesives and cleaning chemicals manufactured
by Rockland React-Rite, Inc., specialty products manufactured by Pandel, Inc.,
raised/access flooring systems produced by Interface Architectural
Resources, Inc., furniture installation by Facilities Resource Group,
and carpet maintenance through the Company's IMAGE(R) maintenance system.
8<PAGE>
Renovisions, acquired by the Company in February 1996, is a
nationwide installation services firm that has pioneered a new
method of carpet replacement. The RENOVISIONS(R) process utilizes
patented lifting equipment and specialty tools to lift office
equipment and modular workstations in place, permitting the
economical replacement of existing carpet with virtually no
disruption of the customer's business. Other proprietary products
facilitate the movement of file cabinets, office furniture, and
even complete workstations without the inefficiency and
disruption associated with unloading and dismantling the items
being moved. Facilities Resource Group, acquired by the Company
in July 1997, is a Chicago, Illinois-based provider of furniture
installation and related services. The Company intends to replicate
Facilities Resource Group's business in various other markets
throughout the United States.
In the U.S., the Company also provides carpet maintenance
services through its IMAGE maintenance system. The IMAGE system
includes a custom-engineered maintenance methodology and a line
of cleaning chemicals manufactured by Rockland React-Rite. In
Europe, the Company has recently re-launched the European version
of the IMAGE program, pursuant to which the Company has licensed
selected independent service contractors to provide carpet
maintenance services.
MARKETING AND SALES
The Company traditionally has focused its carpet marketing
strategy on major accounts, seeking to build lasting
relationships with national and multinational end-users, and on
specifiers, such as architects, engineers, interior designers, and
contracting firms who often make or significantly influence the
purchase decision. The acquisitions of Bentley Mills and Prince
Street significantly strengthened the Company's relationships
with interior designers and architects and has enhanced the
Company's ability to target those and other specifiers at the
critical design stage of commercial projects. The Company
emphasizes sales to the commercial office sector, both new
construction and renovation, as well as to health care
facilities, governmental institutions and public facilities,
including libraries, museums, convention and hospitality centers,
airports, schools and hotels. The Company's marketing efforts are
enhanced by the well-known brand names of its carpet products,
including INTERFACE and HEUGA in modular carpet, and BENTLEY
MILLS, PRINCE STREET and FIRTH in broadloom carpet.
An important part of the Company's marketing and sales
efforts involves the preparation of custom made samples of
requested carpet designs, in conjunction with the development of
innovative product designs and styles that meet the customer's
particular needs. (See "Business Strategy and Principal
Initiatives", above, and "Product Design, Research and
Development", below.) The Company's mass customization
initiative, implemented for its U.S. modular carpet operations in
1994, included the simplification of the Company's carpet
manufacturing operations and the purchase of five custom sample
production machines, which significantly improved its ability to
respond quickly and efficiently to requests for samples. The
turnaround time for the Company to produce made-to-order carpet
samples to customer specifications has been reduced from an
average of 30 days in 1993 to 3 days in 1997, and the average
number of carpet samples produced per month has increased from 90
per month in 1993 to over 1,400 per month in 1997. This ability
9<PAGE>
has significantly enhanced the Company's marketing and sales
efforts, and has increased the Company's volume of higher margin
custom or made-to-order sales.
The Company primarily uses its internal marketing and sales
force of over 1,100 persons to market its carpet products, and it
also relies on Re:Source Americas network dealers to bolster its
sales efforts. The Company maintains a Creative Services staff
that works directly with clients on major design projects. The
efforts of these personnel in helping with product selection,
customer specifications and unique approaches to design and
styling issues are an important component of the marketing aspect
of the Company's mass customization approach. In order to
implement its global marketing efforts, the Company has product
and design studios in the United States, England, France,
Germany, Spain, Norway, the Netherlands, Australia, Japan and
Singapore. The Company expects to continue to open such offices
in other locations around the world as necessary to capitalize on
emerging marketing opportunities.
As part of its full service approach to marketing, the
Company maintains a field services staff to provide on-site
customer service for both in-progress and completed
installations. In the U.S., the Re:Source Americas network
significantly enhances the Company's ability to provide customer
service and derive marketing benefits.
MANUFACTURING
The Company manufactures carpet in the United States, the
Netherlands, the United Kingdom, Canada, Australia and Southeast
Asia. In addition to enhancing the Company's ability to develop a
strong local presence in foreign markets, having foreign
manufacturing operations enables the Company to supply its
customers with carpet from the location offering the most
advantageous terms for delivery times, exchange rates, duties and
tariffs and freight expense. The Company believes that the
ability to offer consistent products and services on a worldwide
basis at attractive prices is an important competitive advantage
in servicing multinational customers seeking global supply
relationships. Consistent with this strategy, the Company in 1996
entered into a joint venture (owned 70% by the Company) with BASF
Corporation and Shanghai China Textile International Science &
Technological Industrial City Development Company, a Chinese
government-sponsored company, to build a carpet tile
manufacturing facility in China, which is expected to be
operational in April 1998. The Company will consider additional
locations for manufacturing operations in other parts of the
world as necessary to meet the demands of customers in growing
international markets.
The Company currently obtains a significant percentage of
its requirements for synthetic fiber (the principal raw material
used in the Company's carpet products) from DuPont. The Company
believes that its arrangements with DuPont permit the Company to
obtain favorable terms. However, the Company currently purchases
fiber from other long-term suppliers, and there are adequate
alternative sources of supply from which the Company could
fulfill its synthetic fiber requirements if its arrangements with
DuPont should change. Other raw materials used by the Company are
also readily available from a number of sources.
10<PAGE>
In 1995 and 1996, the Company implemented a manufacturing
plan in which it standardized its worldwide manufacturing
procedures. In connection with the implementation of this plan,
the Company adopted global standards for its tufting equipment,
yarn systems and product styling, and changed its standard carpet
tile size from 18 square inches to 50 square centimeters. The
Company believes that changing its standard carpet tile size has
allowed it to reduce operational waste and fossil fuel energy
consumption, in addition to offering consistent product sizing
for its global customers.
The Company's significant international operations are
subject to various political, economic and other uncertainties,
including risks of restrictive taxation policies, foreign
exchange restrictions, changing political conditions and
governmental regulations. The Company also receives a substantial
portion of its revenues in currencies other than U.S. dollars,
which makes it subject to the risks inherent in currency
translations. Although the Company's ability to manufacture and
ship products from facilities in several foreign countries
reduces the risks of foreign currency fluctuations it might
otherwise experience, and the Company also engages from time to
time in hedging programs intended to reduce further those risks,
the scope and volume of the Company's global operations make it
impossible to eliminate completely all foreign currency
translation risks as a factor for the Company's financial
results.
COMPETITION
The commercial floorcovering industry is highly competitive.
The Company competes, on a global basis, in the sale of its
modular and broadloom carpet with other carpet manufacturers and
manufacturers of vinyl and other types of floorcoverings.
Although the industry recently has experienced significant
consolidation, a large number of manufacturers remain in the
industry. Management believes that the Company is the largest
manufacturer of modular carpet in the world, possessing a global
market share that is more than two times that of its nearest
competitor. However, a number of domestic and foreign competitors
manufacture modular carpet as one segment of their business, and
certain of these competitors have financial resources in excess
of the Company's.
The Company believes the principal competitive factors in
its primary floorcovering markets are quality, design, service,
broad product lines, product life, marketing strategy, and
pricing. In the commercial office market, modular carpet competes
with various floorcoverings, of which broadloom carpet is the
most common. In the health care facilities market, the Company's
products compete primarily with resilient tile. The Company
believes that treatment of its modular carpet with the INTERSEPT
antimicrobial chemical agent is a material factor in its ability
to compete successfully in the health care market. The quality,
service, design, longer average life, flexibility (design
options, selective rotation or replacement, use in combination
with roll goods) and convenience of the Company's modular carpet
are its principal competitive advantages, which are offset in
part by its higher initial cost for comparable grades of
broadloom carpet. The acquisitions of Bentley Mills, Prince
Street and Firth Carpets, with their broadloom carpet product
lines, have enhanced the Company's competitive position by
11<PAGE>
enabling the Company to offer one-stop shopping to commercial
carpet customers, and thus, to capture some sales that would have
gone to competitors. In addition, the Company believes that its
global manufacturing capabilities are an important competitive
advantage in serving the needs of multinational corporate
customers. Finally, the Company believes that the formation of
the Re:Source Americas network, and the resulting improvement in
customer service, has further enhanced the Company's competitive
position.
INTERIOR FABRICS
PRODUCTS
The Company, through its Interior Fabrics Group, designs,
manufactures and markets specialty fabrics for open plan office
furniture systems and commercial interiors. Sales of panel
fabrics to OEMs of movable office furniture systems constitute
approximately 50% of total U.S. fabrics sales in fiscal 1997.
In addition, the Company produces woven and knitted seating fabrics,
wall covering fabrics, fabrics used for vertical blinds in office
interiors, and fabrics used for cubicle curtains in health care
facilities.
Open plan office furniture systems are typically
panel-enclosed work stations customized to particular work
environments. The open plan concept offers a number of advantages
over conventional office designs, including more efficient floor
space utilization, reduced energy consumption and greater
flexibility to redesign existing space. Since carpet and fabrics
are used in the same types of commercial interiors, the Company's
carpet and interior fabrics operations are able to coordinate the
color, design and marketing of both product lines to their
respective customers as part of the Company's "total interior
solutions" approach.
The Company, in recent years, has diversified and expanded
significantly both its product offerings and markets for interior
fabrics. The Company's 1993 acquisition of the STEVENS LINEN(TM)
lines added decorative, upscale upholstery fabrics and specialty
textile products to the Interior Fabrics Group's traditional
product offerings. The Company's June 1995 acquisition of Toltec
Fabrics, a manufacturer and marketer of fabric for the contract
and home furnishings upholstery markets, enhanced the Company's
presence in the contract jobber market; and its December 1995
acquisition of the Intek division of Springs Industries, a
manufacturer experienced in the production of lighter-weight
panel fabrics, has strengthened the Interior Fabrics Group's
capabilities in that market. In addition, the June 1997
acquisition of Camborne Holdings Ltd., the United Kingdom's
leading textile manufacturer for the office and contract
furnishings markets, has enhanced the Company's access to the
European and Asia-Pacific markets. The Camborne acquisition also
added wool upholstery fabrics specifically designed for the
European market to the Interior Fabrics Group's product offering.
All of these developments have reinforced the Interior Fabrics
Group's dominant position with OEMs of movable office furniture
systems.
The Company manufactures fabrics made of 100% polyester, as
well as wool-polyester blends and numerous other natural and
12<PAGE>
man-made blends, which are either woven or knitted. Its products
feature a high degree of color consistency, natural dimensional
stability and fire retardancy, in addition to their overall
aesthetic appeal. All of the Company's product lines are color
and texture coordinated. The Company seeks continuously to
enhance product performance and attractiveness through
experimentation with different fibers, dyes, chemicals and
manufacturing processes. Product innovation in the interior
fabrics market (similar to the floorcoverings market) is
important to achieving and maintaining market share. (See
"Business Strategy and Principal Initiatives", above, and
"Product Design, Research and Development", below.)
In 1997, the Company introduced its TERRATEX(TM) line of panel
fabrics. The TERRATEX label is intended to denote fabrics
manufactured from 100% recycled polyester, and will include both
new products and traditional product offerings. The first fabric
to bear the TERRATEX label is Guilford of Maine's FR701(R) Line. The
Company intends for all of the Interior Fabrics Group's companies
to manufacture and market products using the TERRATEX label.
The Company anticipates that future growth opportunities
will arise from the growing market for retrofitting services,
where fabrics are used to re-cover existing panels. In addition,
the increased importance being placed on the aesthetic design of
office space should lead to a significant increase in upholstery
fabric sales. Management also believes that significant growth
opportunities exist in international sales, in domestic health
care markets, in contract wallcoverings, and in the provision of
ancillary textile processing services such as the lamination of
fabrics onto substrates for pre-formed panels.
MARKETING AND SALES
The Company's principal interior fabrics customers are OEMs
of movable office furniture systems. The Interior Fabrics Group
sells to essentially all of the major office furniture
manufacturers. The Interior Fabrics Group also sells to
manufacturers and distributors of wallcoverings, vertical blinds,
cubicle curtains, acoustical wallboards, ceiling tiles and
residential furniture, and, since the acquisition of Toltec
Fabrics, to contract jobbers. The GUILFORD OF MAINE, STEVENS
LINEN, TOLTEC, INTEK and CAMBORNE brand names are well-known in
the industry and enhance the Company's fabric marketing efforts.
The majority of the Company's sales are made through the
Interior Fabrics Group's own sales force. The sales team works
closely with designers, architects, facility planners and other
specifiers who influence the purchasing decisions of buyers in
the interior fabrics segment. In addition to facilitating sales,
the resulting relationships also provide the Company with
marketing and design ideas that are incorporated into the
development of new product offerings. The Interior Fabrics Group
maintains a design studio in Dudley, Massachusetts which
facilitates coordination between its in-house designers and the
design staffs of major customers. The Interior Fabrics Group's
design capabilities have also benefited from the product design
services provided to it by an affiliate of Oakey Designs. (See
"Business Strategy and Principal Initiatives", above, and
"Product Design, Research and Development", below.)
13<PAGE>
The Company's fabric sales offices are located in Saddle Brook,
New Jersey, Grand Rapids, Michigan and the United Kingdom. The
Interior Fabrics Group also has marketing and distribution
facilities in Canada and Hong Kong, and sales representatives in
Japan, Hong Kong, Singapore, Korea and South Africa. The Company
has sought increasingly, over the past several years, to expand
its export business and international operations in the fabrics
segment, both to accommodate the demand of principal OEM
customers that are expanding their businesses overseas, and to
facilitate additional coordinated marketing to multinational
customers of the Company's carpet business as part of the
Company's "total interior solutions" approach.
MANUFACTURING
The Company's fabrics manufacturing facilities are located
in Maine, Massachusetts, Michigan, North Carolina and West
Yorkshire, England. The production of synthetic and wool blended
fabrics is relatively complex and requires many steps. Raw fiber
is placed in pressurized vats, and dyes are then forced into the
fiber. Particular attention is devoted to the dyeing process,
which requires a high degree of expertise in order to achieve
color consistency. Following dyeing, the fiber is blended and
proceeds through multiple steps, including carding, spinning,
cone winding, twisting, dressing, weaving and finishing. All raw
materials used by the Company are readily available from a number
of sources. The Interior Fabrics Group has recently begun using
100% recycled fiber manufactured from PET soda bottles in its
manufacturing process.
In response to a shift in the Interior Fabrics Group's
traditional panel fabric market toward lighter weight, less
expensive products, the Company implemented a major capital
investment program in 1994 which included the construction of a
new facility and the acquisition of equipment to enhance the
efficiency and breadth of the Interior Fabrics Group's yarn
manufacturing processes. The program is designed to improve the
Interior Fabrics Group's cost effectiveness in producing such
lighter weight fabrics, reduce manufacturing cycle time, and
enable the Interior Fabrics Group to reinforce its product
leadership position with its OEM customers. The Interior Fabrics
Group already has begun to achieve cost savings as a result of
this program. The acquisition of Intek in December 1995 provided
the Company with immediate and significant capabilities in the
efficient production of lighter weight, less expensive panel
fabrics and the acquisition of Camborne provided a European-based
manufacturing facility and much needed expertise in the
production of wool fabrics. The Company believes that it has
recently been successful in designing fabrics that have
simplified the manufacturing process, thereby reducing complexity
while improving efficiency and quality. Through the use of
existing raw materials, new fabrics are being manufactured using
the mass customization production strategy. By employing the capabilities
that are now available with the Company's new manufacturing facility,
the Company anticipates that its ability to apply the mass customization
production strategy to the manufacture of fabrics will be expanded.
See "Business Strategy and Principal Initiatives", above.
14<PAGE>
The Company offers textile processing services through the
Interior Fabrics Group's Component Technologies division in Grand
Rapids, Michigan. Such services include the lamination of fabrics
onto substrates for pre-formed office furniture system panels,
facilitating easier and more cost effective assembly of the
system components by the Interior Fabrics Group's OEM customers.
COMPETITION
The Company competes in the interior fabrics market on the
basis of product design, quality, reliability, price and service.
By electing to concentrate on the open plan office furniture
systems segment, the Interior Fabrics Group has been able to
specialize its manufacturing capabilities, product offerings and
service functions, resulting in a leading market position.
Through Interface Interior Fabrics, Inc. (formerly Guilford of
Maine, Inc.), Toltec, Camborne and Intek, the Company is the
largest U.S. manufacturer of panel fabric for use in open
plan office furniture systems.
Drawing upon its dominant position in the panel fabric
segment and through its strategic acquisitions, the Company has
been successfully diversifying its product offerings for the
commercial interiors market to include a variety of non-panel
fabrics, including upholstery, cubicle curtains, wallcoverings,
ceiling fabrics and window treatments. The competition in these
segments of the market is highly fragmented and includes both
large, diversified textile companies, several of which have
greater financial resources than the Company, as well as smaller,
non-integrated specialty manufacturers. However, the Company's
capabilities and strong brand names in these segments should
enable it to continue to compete successfully.
SPECIALTY PRODUCTS
The Interface Specialty Products Group is composed of:
Rockland React-Rite, which develops, manufactures and markets
specialty chemical products and which includes the Company's
INTERSEPT antimicrobial sales and licensing program; Pandel,
which produces vinyl carpet tile backing and specialty mat and
foam products; and Interface Architectural Resources, which produces
and markets raised/access flooring systems.
One of the Company's leading chemical products, in terms of
applicability for the commercial and institutional interiors
market, is its proprietary antimicrobial chemical compound, sold
under the registered trademark INTERSEPT. The Company uses
Intersept in many of its carpet products and has licensed
Intersept to other companies for use in a number of products that
are noncompetitive with the Company's products, such as paint,
vinyl wallcoverings, ceiling tiles and air filters.
The Company also manufactures a line of adhesives for carpet
installation, as well as a line of carpet cleaning and
maintenance chemicals, which it markets as part of its IMAGE
maintenance system. In addition, the Company produces and markets
PROTEKT(2)(TM), a proprietary soil and stain retardant treatment;
water-proof sheathing for the fiber optic cable industry and
other applications; accelerators, used to speed the curing
process for rubber used in tires, hoses and other products; and
FATIGUE FIGHTER(R), an impact-absorbing modular flooring system
typically used where people stand for extended periods.
15<PAGE>
The Company manufactures cable management raised/access
flooring systems, a specialty product which it markets through
Interface Architectural Resources. The initial product offering,
marketed under the name INTERCELL(R), is a low-profile (total
height of less than three inches) cable management flooring
system, particularly well suited for use in the renovation of
existing buildings. In 1995, the Company acquired the rights to
the INTERSTITIAL SYSTEMS(TM) access flooring product, a patented,
multiple plenum system that serves to separate pressurized,
climate-controlled air flow from the electrical and
telecommunications cables included within the same access
flooring system. In February 1996, the Company acquired C-Tec,
Inc., the second largest manufacturer of raised/access flooring
systems in the United States. Interface Architectural Resources
markets the successful C-TEC line of products (TEC-COR and
TEC-CRETE), which combine the tensile strength of steel and the
compressive strength of concrete to create a durable, uniform and
sound-absorbent panel which comes in a variety of surfaces.
In September 1997, Interface Architectural Resources and
Herman Miller, Inc. announced their intent to form a joint
venture company to produce integrated work environment solutions
for commercial environments. Herman Miller is a globally
recognized leader in the design and manufacture of innovative
office furniture systems for a wide range of commercial and
health care environments. The Company believes that the joint
venture, which is subject to the negotiation and execution of a
definitive agreement, will effectively combine Herman Miller's
expertise in flexible office furniture systems with the Company's
command of architectural flooring products. Interface
Architectural Resources and Herman Miller have begun to develop
the joint venture's initial product concept.
INTERFACE RESEARCH CORPORATION
Interface Research Corporation provides technical support
and research and development for the entire family of Interface
companies. Recent developments by Interface Research include a new
polycarbite polymer carpet tile backing, which has demonstrated
excellent performance in field tests conducted to date. The new
backing material has also proved to be useful as an improved and
lower cost precoat for broadloom applications. Interface Research
Corporation also provides significant support to the Company's
ECOSENSE initiative, primarily through its efforts in identifying
recyclable products and raw materials and procedures to achieve,
ultimately, closed-loop recycling of the Company's carpet
products. A major technical effort has been launched to define
optimum recycling processes for the Company's carpet and fabric
products. See "Environmental Initiatives".
PRODUCT DESIGN, RESEARCH AND DEVELOPMENT
The Company maintains an active research, development and
design staff of approximately 100 persons, and also draws on the
research and development efforts of its suppliers, particularly
in the areas of fibers, yarns and modular carpet backing
materials.
Innovation and increased customization in product design and
styling are the principal focus of the Company's product
development efforts. The Company's carpet design and development
team is recognized as the industry leader in carpet design and
16<PAGE>
product engineering for the commercial and institutional markets.
Under the leadership of David Oakey since January 1994 (pursuant
to the Company's exclusive consulting contract with Oakey
Designs), the Company has introduced over 130 new carpet designs
during the last four years and has enjoyed considerable success
in winning U.S. carpet industry awards bestowed by the IIDA. In
addition, PRINCE STREET and BENTLEY MILLS were rated the number
one and two brands, respectively, for carpet design in the U.S.,
according to a 1997 survey by the FLOOR FOCUS industry
publication.
Mr. Oakey was also instrumental in the Company's
implementation of a new product development concept--"simple
inputs, pretty outputs"--resulting in the ability to efficiently
produce many products from a single yarn system. The Company's
mass customization production approach evolved, in major part,
from this concept. In addition to increasing the number and
variety of product designs (which enables the Company to increase
high margin custom sales), the mass customization approach
increases inventory turns and reduces inventory levels (for both
raw materials and standard products) and its related costs
because of the Company's more rapid and flexible production
capabilities.
Oakey Designs' services have been extended to the Company's
international carpet tile operations and its domestic and international
broadloom companies. An affiliate of Oakey Designs has been engaged
to provide similar design services to the Company's interior fabrics
business. The Company expects increased levels of innovation in
product design and development for those divisions to be achieved
in the future.
ENVIRONMENTAL INITIATIVES
An important initiative of the Company over the past several
years has been the development of the Envirosense Consortium, an
organization of companies concerned with addressing workplace
environmental issues, particularly poor indoor air quality. The
Consortium now totals 14 member organizations, including interior
products manufacturers (a number of which are licensees of the
Company's Intersept antimicrobial agent), professional service
organizations and design professionals.
In the latter part of 1994, the Company commenced a new
industrial ecology initiative called ECOSENSE, inspired in major
part by the interest of important customers concerned about the
environmental implications of how they and their suppliers do
business. ECOSENSE is directed towards the elimination of energy
and raw materials waste in the Company's businesses, and, on a
broader and more long-term scale, the practical reclamation--and
ultimate restoration--of shared environmental resources. The
initiative involves a commitment by the Company (i) to learn to
meet its raw material and energy needs through recycling of
carpet and other petrochemical products and harnessing benign
energy sources, and (ii) to pursue the creation of new processes
to help sustain the earth's non-renewable natural resources. The
ECOSENSE initiative includes the Company's war-on-waste, pursuant
to which the Company realized an aggregate of $50 million in
savings from 1995 to 1997. See "Business Strategy and Principal
Initiatives--Ecological Sustainability through War-on-Waste and
EcoSense Programs".
17<PAGE>
The Company has engaged some of the world's leading
authorities on global ecology as environmental consultants. The
current list of consultants includes: Paul Hawken, author of THE
ECOLOGY OF COMMERCE, THE NEXT ECONOMY, and Chairman of The
Natural Step, U.S.A.; Bill McDonough, Dean of Architecture,
University of Virginia; Amory Lovins, energy consultant, director
of Rocky Mountain Institute; Daniel Quinn, author of ISHMAEL,
PROVIDENCE, and THE STORY OF B; John Picard, President of E2,
American environmental consultant; David Brower, former executive
director of the Sierra Club, and founder of The Earth Island
Institute; Jonathan Porritt, director of Forum for the Future;
Bernadette Cozart, founder of the Greening of Harlem Coalition;
and Bill Browning, the director of the Rocky Mountain Institute's
Green Development Services.
The Company believes that its environmental initiatives are
valued by its employees and an increasing number of its important
customers and provide a competitive advantage in marketing
products to such customers. The Company also believes that the
resulting long-term resource efficiency (reduction of wasted
environmental resources) will ultimately produce cost savings to
the Company.
ENVIRONMENTAL MATTERS
The Company's operations are subject to federal, state and
local laws and regulations relating to the generation, storage,
handling, emission, transportation and discharge of materials
into the environment. Management believes that the Company is in
substantial compliance with all applicable federal, state and
local provisions relating to the protection of the environment.
The costs of complying with environmental protection laws and
regulations have not had a material adverse impact on the
Company's financial condition or results of operations in the
past and are not expected to have a material adverse impact in
the future.
BACKLOG
The Company's backlog of unshipped orders was approximately
$153.4 million at February 22, 1998, compared to approximately
$123.2 million at February 23, 1997. Historically, backlog is
subject to significant fluctuations due to the timing of orders
for individual large projects and currency fluctuations. All of
the backlog of orders at February 22, 1998 is expected to be
shipped during the succeeding six to nine months.
PATENTS AND TRADEMARKS
The Company owns numerous patents in the United States and
abroad on its modular carpet and manufacturing processes and on
the use of its INTERSEPT antimicrobial chemical agent in various
products. The duration of United States patents is between 14 and
20 years from the date of filing of a patent application or
issuance of the patent; the duration of patents issued in other
countries varies from country to country. The Company considers
its know-how and technology more important to its current
business than patents, and, accordingly, believes that expiration
of existing patents or nonissuance of patents under pending
applications would not have a material adverse effect on its
operations. However, the Company maintains an active patent and
trade secret program in order to protect its proprietary
technology, know-how and trade secrets.
18<PAGE>
The Company also owns numerous trademarks in the United
States and abroad. In addition to the United States, the primary
countries in which the Company has registered its trademarks are
the United Kingdom, Germany, Italy, France, Canada, Australia,
and Japan. Some of the more prominent registered trademarks of
the Company include: INTERFACE, HEUGA, INTERSEPT, GLASBAC,
GUILFORD OF MAINE, BENTLEY and PRINCE STREET TECHNOLOGIES.
Trademark registrations in the United States are valid for a
period of 10 years and are renewable for additional 10-year
periods as long as the mark remains in actual use. The duration
of trademarks registered in other countries varies from country
to country.
FINANCIAL INFORMATION BY GEOGRAPHIC AREAS
The Notes to the Company's Consolidated Financial Statements
sets forth information concerning the Company's sales, income and
assets by geographic areas. See Item 8.
EMPLOYEES
At February 28, 1998, the Company employed a total of
approximately 7,300 employees worldwide. Of such employees,
approximately 2,000 are clerical, sales, supervisory and
management personnel and the balance are manufacturing personnel.
The Company's Facilities Resource Group subsidiary and six
of the commercial flooring dealers recently acquired by the
Company have employee groups that are represented by unions. In
addition, certain of the Company's production employees in
Australia and the United Kingdom are represented by unions. As
required by the laws of the Netherlands, a Works Council, the
members of which are Company employees, is required to be
consulted by management with respect to certain matters relating
to the Company's operations in that country, such as a change in
control of Interface Europe B.V. (the Company's modular carpet
subsidiary based in the Netherlands), and the approval of such
Council is required for certain actions, including changes in
compensation scales or employee benefits. Management believes
that its relations with the Works Council, the unions and all of
its employees are good.
SECURITIES LITIGATION REFORM ACT
This Form 10-K and other statements issued or made from time
to time by the Company or its representatives contain statements
which may constitute "forward-looking statements" within the
meaning of the Securities Act of 1933, as amended, and the
Securities Exchange Act of 1934, as amended by the Private
Securities Litigation Reform Act of 1995. Those statements
include statements regarding the intent, belief or current
expectations of the Company and members of its management team,
as well as the assumptions on which such statements are based.
Prospective investors are cautioned that any such forward-looking
statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ
materially from those contemplated by such forward-looking
statements. Important factors currently known to management that
could cause actual results to differ materially from those in
forward-looking statements are set forth in the Safe Harbor
Compliance Statement for Forward-Looking Statements included as
Exhibit 99.1 to this Form 10-K, and are hereby incorporated by
reference. The Company undertakes no obligation to update or
19<PAGE>
revise forward-looking statements to reflect changed assumptions,
the occurrence of unanticipated events or changes to future
operating results over time.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, their ages as of
March 15, 1998, and principal positions with the Company are as
follows. Executive officers serve at the pleasure of the Board
of Directors.
20<PAGE>
<TABLE>
<CAPTION>
Name Age Principal Position(s)
---- --- ---------------------
<S> <C> <d>
Ray C. Anderson 63 Chairman of the Board and Chief Executive Officer
Charles R. Eitel 48 President and Chief
Operating Officer
Michael D. Bertolucci 57 Senior Vice President
Brian L. DeMoura 52 Senior Vice President
Daniel T. Hendrix 43 Senior Vice President - Finance, Chief Financial Officer and
Treasurer
Don E. Russell 60 Senior Vice President
John H. Walker 53 Senior Vice President
Gordon D. Whitener 35 Senior Vice President
Raymond S. Willoch 39 Senior Vice President, General Counsel and Secretary
Alan S. Kabus 40 Vice President
John R. Wells 36 Vice President
Jeffrey A. Goldberg 56 Vice President
Joyce D. LaValle 53 Vice President
</TABLE>
Mr. Anderson founded the Company in 1973, and has served as
the Company's Chairman and Chief Executive Officer since its
founding. Mr. Anderson was appointed by President Clinton to the
President's Council on Sustainable Development in 1996 and
currently serves as Co-Chair. Mr. Anderson is a member of the
Board of Directors of NationsBank Corporation. He also serves on
the Boards of numerous nonprofit organizations.
Mr. Eitel joined the Company in November 1993 as President
of Interface Flooring Systems, Inc. ("IFS", the Company's
principal U.S. modular carpet subsidiary) and Interface Americas,
Inc. (a wholly-owned U.S. holding company), with responsibility
for the Company's modular carpet operations throughout the
Americas. In October 1994, Mr. Eitel was promoted to Executive
Vice President of the Company and President and Chief Executive
Officer of the Floorcoverings Group, thereby assuming overall
responsibility for the Company's worldwide carpet business. In
February 1997, Mr. Eitel was promoted to President and Chief
Operating Officer of the Company. From July 1987 until joining
the Company, Mr. Eitel served as President of the Floorcoverings
Division (based in Dalton, Georgia) of Collins & Aikman
Corporation, a diversified textile producer headquartered in
North Carolina. Mr. Eitel also serves as a director of Weeks
Corporation, an industrial real estate company based in Atlanta
and Ladd Furniture, Inc., a North Carolina-based furniture
manufacturer.
Mr. Bertolucci joined the Company in April 1996 as President
of Interface Research Corporation and Senior Vice President of
the Company. From October 1989 until joining the Company, he was
Vice President of Technology for Highland Industries, an
industrial fabric company located in Greensboro, North Carolina.
Mr. DeMoura joined the Company in March 1994 as President
and Chief Executive Officer of Guilford of Maine, Inc. (now
Interface Interior Fabrics) and Senior Vice President of the Company.
He is currently responsible for the entire Interior Fabrics Group,
which includes Interface Interior Fabrics, Toltec, Intek, and
Camborne. From August 1990 until joining the Company,
21<PAGE>
Mr. DeMoura served as President and CEO of Fashion Fabrics of
America, Inc., an Orangeburg, South Carolina based producer of
fabrics for the upscale men's and women's apparel markets.
Mr. Hendrix, who previously was with a national accounting
firm, joined the Company in 1983. He was promoted to Treasurer
of the Company in 1984, Chief Financial Officer in 1985, Vice
President Finance in 1986, and Senior Vice President Finance in
October 1995.
Mr. Russell has served in various executive capacities since
1973. He became a Senior Vice President in 1986. From September
1995 until April 1997, Mr. Russell served as President and Chief
Executive Officer of the Company's Specialty Products Group,
composed of the Company's chemical and specialty surfaces
subsidiaries (Rockland and Pandel), INTERSEPT antimicrobial sales
and licensing program, and Interface Architectural Resources
business unit. Mr. Russell served as President and CEO of
Interface Europe, Inc. (the Company's U.S. holding company for
its subsidiaries in Europe) and Interface Europe B.V. from 1991
until August 1995. Mr. Russell intends to retire in April 1998.
Mr. Walker began his career with the Company as Financial
Controller of the U.K. Division of Heuga Holding B.V. (now
Interface Europe B.V.), a Netherlands-based carpet tile
manufacturer, which was acquired by the Company in 1988. He
later served as Vice President Sales & Marketing of Interface
Europe, B.V. and in July 1995 was promoted to the position of
Senior Vice President of the Company and President and Chief
Executive Officer of Interface Europe, Inc. In his current
position, he has responsibility for the Company's floorcovering
operations in both Europe and the Asia-Pacific region.
Mr. Whitener joined the Company in November 1993 as Senior
Vice President - Sales & Marketing of IFS. In October 1994, he
became a Senior Vice President of the Company and President and
Chief Executive Officer of IFS and Interface Americas, assuming
responsibility for both the Company's modular carpet operations
in North America, and Prince Street, the Company's commercial
broadloom carpet operation based in Cartersville, Georgia.
Mr. Whitener also assumed corporate responsibility for Bentley
Mills in July 1995 and the Specialty Products Group in April 1997.
He is thus responsible for all of the Company's operations in the
Americas, except the Interior Fabrics Group. From April 1988 until
joining the Company, Mr. Whitener served in various sales management
capacities with Collins & Aikman (Floorcoverings Division),
including Vice President Marketing. Mr. Whitener also serves as
a director of The Carpet & Rug Institute, a national trade
association headquartered in Dalton, Georgia, representing the
carpet and rug industry, and Aviation Group, Inc., a
Texas-based provider of products and services to airline
companies and other aviation firms.
Mr. Willoch, who previously practiced with an Atlanta law
firm, joined the Company in June 1990 as Corporate Counsel. He
was promoted to Assistant Secretary in 1991, Assistant Vice
President in 1993, Vice President in January 1996, and Secretary
and General Counsel in August 1996. In February 1998, Mr.
Willoch was promoted to Senior Vice President.
22
<PAGE>
Mr. Kabus joined the Company in 1993 as a result of the
Company's acquisition of Bentley Mills, which he had joined as a
salesman in 1984. At the time of the acquisition, Mr. Kabus was
serving as Regional Sales Manager-Northeast Region of Bentley
Mills. He was promoted to Vice President of the Company in July
1995. From July 1995 until February 1998, Mr. Kabus served as
President and Chief Executive Officer of Bentley Mills. In March
1998, Mr. Kabus assumed responsibility for the Company's
Re:Source Americas dealer network and its other service
companies.
Mr. Wells joined the Company in February 1994 as Vice
President-Sales of IFS and was promoted to Senior Vice President-
Sales and Marketing of IFS in October 1994. He was promoted to
Vice President of the Company and President and Chief Executive
Officer of IFS in July 1995. In March 1998, Mr. Wells was also
named President and CEO of both Prince Street and Bentley Mills,
making him President and CEO of all three of the Company's U.S.
carpet mills. Prior to joining the Company, Mr. Wells worked with
the commercial division of Shaw Industries for 13 years, where he
was a key member of the management team that started the NETWORX
Modular Carpet Division of that company and where he also held
various sales management responsibilities for the Shaw Commercial
and Stratton Commercial Divisions.
Mr. Goldberg joined the Company as Senior Vice President-
Finance of IFS in March 1994. He became Senior Vice President-
Finance of Interface Americas Services, Inc. (the holding company
for the Company's Re:Source Americas dealer network and its other
service companies) in September 1994. He became a Vice President
of the Company in April 1997. From November 1996 until March 1998,
he served as President and Chief Executive Officer of Interface
Americas Services. In March 1998, Mr. Goldberg was named Senior Vice
President and Chief Strategic Officer of Interface Americas.
Prior to joining the Company, Mr. Goldberg served as Vice
President-Finance & Administration for Collins & Aikman
(Floorcovering Division).
Ms. LaValle joined the Company as Regional Vice President of
IFS in February 1993. She became Senior Vice President-Sales &
Marketing of Prince Street in July 1995. She became a Vice President
of the Company in April 1997. From November 1995 until March 1998,
she served as President and Chief Executive Officer of Prince Street.
In March 1998, Ms. LaValle was named Senior Vice President and Chief
Innovations Officer of Interface Americas.
23<PAGE>
ITEM 2. PROPERTIES
PROPERTIES
The Company maintains its corporate headquarters in Atlanta,
Georgia in approximately 16,697 square feet of leased space. The
following table lists the Company's principal manufacturing
facilities, all of which are owned by the Company except as
otherwise noted:
<TABLE>
<CAPTION>
Location Primary Products Floor Space (Sq.Ft.)
-------- ---------------- --------------------
<S> <S> <C>
Athens, Tennessee<F1> ......................................... Modular carpet 71,577
Bangkok, Thailand<F2> ......................................... Modular carpet 66,072
Craigavon, N. Ireland ......................................... Modular carpet 125,060
Heckmondwike, England ......................................... Modular carpet 90,000
LaGrange, Georgia ............................................. Modular carpet 326,666
Ontario (Belleville), Canada .................................. Modular carpet 77,000
Picton, Australia ............................................. Modular carpet 89,560
Scherpenzeel, the Netherlands.................................. Modular carpet; Specialty products 292,142
Shanghai, China<F2><F3>........................................ Modular carpet 106,962
Shelf, England ................................................ Modular carpet 223,342
West Point, Georgia ........................................... Modular carpet 161,000
Cartersville, Georgia ......................................... Broadloom carpet 210,000
Cartersville, Georgia ......................................... Broadloom carpet 45,000
City of Industry, California<F1>............................... Broadloom carpet 539,641
Genemuiden, the Netherlands<F4>................................ Broadloom carpet 36,788
West Yorkshire, England ....................................... Broadloom carpet 674,666
Aberdeen, North Carolina ...................................... Interior fabrics 88,000
Dudley, Massachusetts ......................................... Interior fabrics 300,000
East Douglas, Massachusetts.................................... Interior fabrics 301,772
Grand Rapids, Michigan(<F1>.................................... Interior fabrics 55,800
Greensboro, North Carolina<F1>................................. Interior fabrics 63,700
Guilford, Maine ............................................... Interior fabrics 396,690
Guilford, Maine ............................................... Interior fabrics 96,200
Lancashire, England<F1>........................................ Interior fabrics 54,000
Newport, Maine ................................................ Interior fabrics 208,932
West Yorkshire, England ....................................... Interior fabrics 135,000
Cartersville, Georgia<F1>...................................... Specialty products 124,500
Grand Rapids, Michigan<F1>..................................... Access flooring 120,000
Rockmart, Georgia ............................................. Chemicals 37,500
______________________________________
<FN>
<F1> Leased.
<F2> Owned by a joint venture in which the Company has a 70%
interest.
<F3> Expected to be operational in April 1998.
<F4> Owned by a joint venture in which the Company has a 40%
interest.
</FN>
</TABLE>
The Company maintains marketing offices in approximately 95
locations in 39 countries and distribution facilities in
approximately 40 locations in six countries. Most of the
marketing locations and many of the distribution facilities are
leased.
24<PAGE>
The Company believes that its manufacturing and distribution
facilities, and its marketing offices, are sufficient for its
present operations. The Company will continue, however, to
consider the desirability of establishing additional facilities
and offices in other locations around the world as part of its
business strategy to meet expanding global market demands.
ITEM 3. LEGAL PROCEEDINGS
The Company is not aware of any material pending legal
proceedings involving it or any of its property.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders
during the fourth quarter of the fiscal year covered by this
Report.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SHAREHOLDER MATTERS
The information concerning the market prices for the
Company's Class A Common Stock and dividends on the Company's
Common Stock included in the Notes to the Company's Consolidated
Financial Statements in the Company's 1997 Annual Report to
Shareholders is incorporated herein by reference. As of March 9,
1998, the Company had 425 holders of record of its Class A Common
Stock and 46 holders of record of its Class B Common Stock.
Management believes that there are in excess of 5,000 beneficial
holders of the Class A Common Stock.
During fiscal 1997, the Company issued an aggregate of
385,390 shares of its Common Stock that were not registered under
the Securities Act of 1933 ("Securities Act"). The shares, in
combination with cash, were issued as consideration in the
acquisitions of Camborne Holdings, Ltd., Facilities Resource
Group, Inc., Floormart, Inc. and Canaan Corporation, and were
issued to an aggregate of six individuals and entities. The
sales of the foregoing shares are exempt from registration under
the Securities Act pursuant to Section 4(2) of the Securities
Act, or Regulation D promulgated thereunder, as transactions by
an issuer not involving a public offering.
ITEM 6. SELECTED FINANCIAL DATA
Selected Financial Information included in the Company's
1997 Annual Report to Shareholders is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition
and Results of Operations included in the Company's 1997 Annual
Report to Shareholders is incorporated herein by reference.
25<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and the Report of
Independent Certified Public Accountants included in the
Company's 1997 Annual Report to Shareholders are incorporated
herein by reference.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained under the caption "Nomination and
Election of Directors" in the Company's definitive Proxy
Statement for the Company's 1998 Annual Meeting of Shareholders,
to be filed with the Securities and Exchange Commission pursuant
to Regulation 14A not later than 120 days after the end of the
Company's 1997 fiscal year, is incorporated herein by reference.
Pursuant to Instruction 3 to Paragraph (b) of Item 401 of
Regulation S-K, information relating to the executive officers of
the Company is included in Item 1 of this Report.
The information contained under the caption "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Company's
definitive Proxy Statement for the Company's 1998 Annual Meeting
of Shareholders, to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A not later than 120 days
after the end of the Company's 1997 fiscal year, is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the caption "Executive
Compensation and Related Items" in the Company's definitive
Proxy Statement for the Company's 1998 Annual Meeting of
Shareholders, to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A not later than 120 days
after the end of the Company's 1997 fiscal year, is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information contained under the caption "Principal
Shareholders and Management Stock Ownership" in the Company's
definitive Proxy Statement for the Company's 1998 Annual Meeting
of Shareholders, to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A not later than 120 days
after the end of the Company's 1997 fiscal year, is incorporated
herein by reference.
26<PAGE>
For purposes of determining the aggregate market value of
the Company's voting and non-voting stock held by non-affiliates,
shares held of record by directors and executive officers of the
Company have been excluded. The exclusion of such shares is not
intended to, and shall not, constitute a determination as to
which persons or entities may be "affiliates" of the Company as
that term is defined under federal securities laws.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the captions "Compensation
Committee Interlocks and Insider Participation" (second paragraph
only) and "Certain Relationships and Related Transactions" in the
Company's definitive Proxy Statement for the Company's 1998
Annual Meeting of Shareholders, to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A not later than
120 days after the end of the Company's 1997 fiscal year, is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The following Consolidated Financial Statements and Notes
thereto of Interface, Inc. and subsidiaries and related Report of
Independent Certified Public Accountants contained in the
Company's 1997 Annual Report to Shareholders, are incorporated by
reference in Item 8 of this Report:
Consolidated Balance Sheets - December 28, 1997 and December 29, 1996
Consolidated Statements of Income - years ended December 28,
1997, December 29, 1996 and December 31, 1995
Consolidated Statements of Cash Flows - years ended December 28,
1997, December 29, 1996 and December 31, 1995
Notes to Consolidated Financial Statements
Report of Independent Certified Public Accountants
2. FINANCIAL STATEMENT SCHEDULE
The following Consolidated Financial Statement Schedule
of Interface, Inc. and subsidiaries and related Report of
Independent Certified Public Accountants are included as
part of this Report (see page 21):
Report of Independent Certified Public Accountants
Schedule II -- Valuation and Qualifying Accounts and Reserves
27<PAGE>
3. EXHIBITS
The following exhibits are included as part of this
Report:
Exhibit
Number Description of Exhibit
------- ----------------------
3.1 Composite Articles of Incorporation (included as Exhibit 4.1
to the Company's current report on Form 8-K dated March 4, 1998,
previously filed with the Commission and incorporated herein
by reference).
3.2 Bylaws, as amended (included as Exhibit 3.2 to the Company's
quarterly report on Form 10-Q for the quarter ended April 1,
1990, previously filed with the Commission and incorporated
herein by reference).
4.1 See Exhibits 3.1 and 3.2 for provisions in the Company's
Articles of Incorporation and Bylaws defining the rights
of holders of Common Stock of the Company.
4.2 Indenture governing the Company's 9.5% Senior
Subordinated Notes due 2005, dated as of November 15,
1995, among the Company, certain U.S. subsidiaries of the
Company, as Guarantors, and First Union National Bank of
Georgia, as Trustee (the "Indenture") (included as
Exhibit 4.1 to the Company's registration statement on
Form S-4, File No. 33-65201, previously filed with the
Commission and incorporated herein by reference); and
Supplement No. 1 to Indenture, dated as of December 27,
1996 (included as Exhibit 4.2(b) to the Company's Annual
Report on Form 10-K, previously filed with the Commission
and incorporated herein by reference.).
4.3 Form of Exchange Note (included as part of Exhibit 4.2).
10.1 Salary Continuation Plan, dated May 7, 1982 (included as
Exhibit 10.20 to the Company's registration statement on
Form S-1, File No. 2-82188, previously filed with the
Commission and incorporated herein by reference).*
10.2 Form of Salary Continuation Agreement (included as
Exhibit 10.1 to the Company's quarterly report on Form
10-Q/A for the quarter ended March 30, 1997, previously
filed with the Commission and incorporated herein by
reference).*
10.3 Interface, Inc. Omnibus Stock Incentive Plan (included as
Exhibit 10.6 to the Company's annual report on Form 10-K
for the year ended December 29, 1996, previously filed
with the Commission and incorporated herein by
reference).*
10.4 Interface, Inc. Nonqualified Savings Plan (included as
Exhibit 4 to the Company's registration statement on Form
S-8, file no. 333-38677, previously filed with the
Commission and incorporated herein by reference).*
28<PAGE>
10.5 Second Amended and Restated Credit Agreement, dated as of
June 25, 1997, among the Company (and certain direct and
indirect subsidiaries), the lenders listed therein,
SunTrust Bank, Atlanta and The First National Bank of
Chicago (included as Exhibit 10.27 to the Company's
quarterly report on Form 10-Q for the quarter ended
June 29, 1997 (the "1997 Second Quarter 10-Q"),
previously filed with the Commission and incorporated
herein by reference); and First Amendment thereto dated
December 2, 1997.
10.6 Term Loan Agreement, dated as of June 25, 1997, among the
Company (and certain direct and indirect subsidiaries),
the lenders listed therein, SunTrust Bank, Atlanta and
The First National Bank of Chicago (included as Exhibit
10.28 to the 1997 Second Quarter 10-Q, previously filed
with the Commission and incorporated herein by
reference); and First Amendment thereto dated
December 2, 1997.
10.7 Voting Agreement, dated April 13, 1993, among certain
shareholders of the Company (included as Exhibit 10.1 to
the Company's quarterly report on Form 10-Q for the
quarter ended April 4, 1993, previously filed with the
Commission and incorporated herein by reference).
10.8 Employment Agreement of Ray C. Anderson dated April 1,
1997 (included as Exhibit 10.1 to the 1997 Second Quarter
10-Q, previously filed with the Commission and
incorporated herein by reference).*
10.9 Change in Control Agreement of Ray C. Anderson dated
April 1, 1997 (included as Exhibit 10.2 to the 1997
Second Quarter 10-Q, previously filed with the Commission
and incorporated herein by reference).*
10.10 Employment Agreement of Charles R. Eitel dated April 1,
1997 (included as Exhibit 10.3 to the 1997 Second Quarter
10-Q, previously filed with the Commission and
incorporated herein by reference).*
10.11 Change in Control Agreement of Charles R. Eitel dated
April 1, 1997 (included as Exhibit 10.4 to the 1997
Second Quarter 10-Q, previously filed with the Commission
and incorporated herein by reference).*
10.12 Employment Agreement of Brian L. DeMoura dated April 1,
1997 (included as Exhibit 10.5 to the 1997 Second Quarter
10-Q, previously filed with the Commission and
incorporated herein by reference).*
10.13 Change in Control Agreement of Brian L. DeMoura dated
April 1, 1997 (included as Exhibit 10.6 to the 1997
Second Quarter 10-Q, previously filed with the Commission
and incorporated herein by reference).*
10.14 Employment Agreement of Daniel T. Hendrix dated April 1,
1997 (included as Exhibit 10.7 to the 1997 Second Quarter
10-Q, previously filed with the Commission and
incorporated herein by reference).*
29<PAGE>
10.15 Change in Control Agreement of Daniel T. Hendrix dated
April 1, 1997 (included as Exhibit 10.8 to the 1997
Second Quarter 10-Q, previously filed with the Commission
and incorporated herein by reference).*
10.16 Employment Agreement of Gordon D. Whitener dated April 1,
1997 (included as Exhibit 10.9 to the 1997 Second Quarter
10-Q, previously filed with the Commission and
incorporated herein by reference).*
10.17 Change in Control Agreement of Gordon D. Whitener dated
April 1, 1997 (included as Exhibit 10.10 to the 1997
Second Quarter 10-Q, previously filed with the Commission
and incorporated herein by reference).*
10.18 Employment Agreement of Raymond S. Willoch dated April 1,
1997 (included as Exhibit 10.11 to the 1997 Second
Quarter 10-Q, previously filed with the Commission and
incorporated herein by reference).*
10.19 Change in Control Agreement of Raymond S. Willoch dated
April 1, 1997 (included as Exhibit 10.12 to the 1997
Second Quarter 10-Q, previously filed with the Commission
and incorporated herein by reference).*
10.20 Employment Agreement of Jeffrey A. Goldberg dated April 1,
1997 (included as Exhibit 10.13 to the 1997 Second Quarter
10-Q, previously filed with the Commission and incorporated
herein by reference).*
10.21 Change of Control Agreement of Jeffrey A. Goldberg dated
April 1, 1997 (included as Exhibit 10.14 to the 1997 Second
Quarter 10-Q, previously filed with the Commission and
incorporated herein by reference).*
10.22 Employment Agreement of Alan S. Kabus dated April 1, 1997
(included as Exhibit 10.15 to the 1997 Second Quarter
10-Q, previously filed with the Commission and
incorporated herein by reference).*
10.23 Change in Control Agreement of Alan S. Kabus dated
April 1, 1997 (included as Exhibit 10.16 to the 1997
Second Quarter 10-Q, previously filed with the Commission
and incorporated herein by reference).*
10.24 Employment Agreement of Joyce D. LaValle dated April 1, 1997
(included as Exhibit 10.17 to the 1997 Second Quarter 10-Q,
previously filed with the Commission and incorporated herein
by reference).*
10.25 Change of Control Agreement of Joyce D. LaValle dated April 1,
1997 (included as Exhibit 10.18 to the 1997 Second Quarter 10-Q,
previously filed with the Commission and incorporated herein by
reference).*
10.26 Employment Agreement of John H. Walker dated April 1,
1997 (included as Exhibit 10.19 to the 1997 Second
Quarter 10-Q, previously filed with the Commission and
incorporated herein by reference).*
10.27 Change in Control Agreement of John H. Walker dated
April 1, 1997 (included as Exhibit 10.20 to the 1997
Second Quarter 10-Q, previously filed with the Commission
and incorporated herein by reference).*
10.28 Employment Agreement of John L. Partridge dated April 1,
1997 (included as Exhibit 10.21 to the 1997 Second
Quarter 10-Q, previously filed with the Commission and
incorporated herein by reference).*
10.29 Change in Control Agreement of John L. Partridge dated
April 1, 1997 (included as Exhibit 10.22 to the 1997
Second Quarter 10-Q, previously filed with the Commission
and incorporated herein by reference).*
10.30 Employment Agreement of John R. Wells dated April 1, 1997
(included as Exhibit 10.23 to the 1997 Second Quarter
10-Q, previously filed with the Commission and
incorporated herein by reference).*
30<PAGE>
10.31 Change in Control Agreement of John R. Wells dated
April 1, 1997 (included as Exhibit 10.24 to the 1997
Second Quarter 10-Q, previously filed with the Commission
and incorporated herein by reference).*
10.32 Employment Agreement of Michael D. Bertolucci dated
April 1, 1997 (included as Exhibit 10.25 to the 1997
Second Quarter 10-Q, previously filed with the Commission
and incorporated herein by reference).*
10.33 Change in Control Agreement of Michael D. Bertolucci
dated April 1, 1997 (included as Exhibit 10.26 to the
1997 Second Quarter 10-Q, previously filed with the
Commission and incorporated herein by reference).*
10.34 Receivables Sale Agreement, dated as of August 4, 1995,
among Interface Securitization Corporation, Interface,
Inc., Special Purpose Accounts Receivable Cooperative
Corporation and Canadian Imperial Bank of Commerce
(included as Exhibit 10.26 to the 1995 10-K, previously
filed with the Commission and incorporated herein by
reference) and Amendment thereto dated as of
December 27, 1996 (included as Exhibit 10.24 to the
Company's Annual Report on Form 10-K for the year ended
December 29, 1996, previously filed with the Commission
and incorporated herein by reference).
10.35 Receivables Sale Agreement, dated as of December 27,
1996, among Interface Securitization Corporation,
Interface, Inc., certain financial institutions (as bank
purchasers), and Canadian Imperial Bank of Commerce (as
administrative agent) (included as Exhibit 10.25 to the
Company's Annual Report on Form 10-K for the year ended
December 29, 1996, previously filed with the
Commission and incorporated herein by reference).
11 Computation of Earnings Per Share
13 Certain information contained in the Company's Annual
Report to Shareholders for the fiscal year ended
December 28, 1997, which is expressly incorporated into
this Report by direct reference thereto.
21 Subsidiaries of the Company.
23 Consent of BDO Seidman, LLP.
31<PAGE>
27.1 Financial Data Schedule.
27.2 Restated Financial Data Schedule (years ended Dec. 31,
1995 and Dec. 29, 1996).
27.3 Restated Financial Data Schedule (quarters ended
March 31, 1996, June 30, 1996 and Sept. 29, 1996).
27.4 Restated Financial Data Schedule (quarters ended
March 30, 1997, June 29, 1997 and Sept. 28, 1997).
99.1 Safe Harbor Compliance Statement for Forward-Looking
Statements.
_______________________
* Management contract or compensatory plan or agreement required to
be filed pursuant to Item 14(c) of this Report.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the fourth
quarter of the fiscal year covered by this Report.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Interface, Inc.
Atlanta, Georgia
The audits referred to in our Report dated February 17, 1998
relating to the Consolidated Financial Statements of Interface,
Inc. and subsidiaries, incorporated in Item 8 of the Form 10-K by
reference to the Annual Report to Shareholders for the fiscal
year ended December 28, 1997, included the audit of Financial
Statement Schedule II (Valuation and Qualifying Accounts and
Reserves) set forth in the Form 10-K. The Financial Statement
Schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on the Financial
Statement Schedule.
In our opinion, such Schedule presents fairly, in all
material respects, the information set forth therein.
BDO SEIDMAN, LLP
Atlanta, Georgia
February 17, 1998
32<PAGE>
INTERFACE, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
_______________________________________________________________________________________________________________________________
Column A Column B Column C Column D Column E
_______________________________________________________________________________________________________________________________
Balance at Charged to Charged to Deductions Balance at
beginning costs and other (describe) end of
of year expenses<F1><F2> accounts <F3> year
_______________________________________________________________________________________________________________________________
(in thousands)
<S> <S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended:
December 28, 1997 ............................$7,349 $2,032 $ -- $2,030 $7,351
December 29, 1996 ............................$5,870 $3,529 $ -- $2,050 $7,349
December 31, 1995 ............................$6,501 $2,448 $ -- $3,079 $5,870
- -----------------------
<FN>
<F1> Includes changes in foreign currency exchange rates.
<F2> Includes allowance of $1,034 at acquisition date for Renovisions, C-
Tec and certain of the dealers in the Re:Source Americas network
during 1996 and $793 at acquisition date for Camborne, Carpet
Solutions and certain of the dealers in the Re:Source Americas
Network during 1997.
<F3> Write off bad debt.
</FN>
</TABLE>
(All other Schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
omitted because they are either not applicable or the required
information is shown in the Company's Consolidated Financial Statements
or the Notes thereto.)
33<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
INTERFACE, INC.
By: /s/ Ray C. Anderson
Ray C. Anderson
Chairman of the Board
and Chief Executive Officer
Date: March 25, 1998
POWER OF ATTORNEY
Know all men by these presents, that each person whose
signature appears below constitutes and appoints Ray C. Anderson as
attorney-in-fact, with power of substitution, for him in any and all
capacities, to sign any amendments to this Report on Form 10-K, and to
file the same, with exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying
and confirming all that said attorney-in-fact may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ Ray C. Anderson Chairman of the Boardand Chief Executive Officer March 25, 1998
Ray C. Anderson (Principal Executive Officer)
/s/ Daniel T. Hendrix Senior Vice President, Chief Financial Officer, March 25, 1998
Daniel T. Hendrix Treasurer and Director (Principal Financial and
Accounting Officer)
/s/ Brian L. DeMoura Director March 25, 1998
Brian L. DeMoura
/s/ Charles R. Eitel Director March 25, 1998
Charles R. Eitel
/s/ Donald E. Russell Director March 25, 1998
Donald E. Russell
/s/ John H. Walker Director March 25, 1998
John H. Walker<PAGE>
/s/ Gordon D. Whitener Director March 25, 1998
Gordon D. Whitener
/s/ Dianne Dillon-Ridgley Director March 25, 1998
Dianne Dillon-Ridgley
/s/ Carl I. Gable Director March 25, 1998
Carl I. Gable
/s/ June M. Henton Director March 25, 1998
June M. Henton
/s/ J. Smith Lanier, II Director March 25, 1998
J. Smith Lanier, II
___________________________ Director
Leonard G. Saulter
/s/ Clarinus C.Th. van Andel Director March 25, 1998
Clarinus C.Th. van Andel
/TABLE
<PAGE>
Exhibit Index
Exhibit
Number Description of Exhibit
------- ----------------------
10.5 First Amendment to Second Amended and Restated Credit
Agreement dated December 2, 1997.
10.6 First Amendment to Term Loan Agreement dated December 2,
1997.
11 Computation of Earnings Per Share
13 Certain information contained in the Company's Annual
Report to Shareholders for the fiscal year ended
December 28, 1997, which is expressly incorporated into
this Report by direct reference thereto.
21 Subsidiaries of the Company.
23 Consent of BDO Seidman, LLP.
27.1 Financial Data Schedule.
27.2 Restated Financial Data Schedule (years ended Dec. 31,
1995 and Dec. 29, 1996).
27.3 Restated Financial Data Schedule (quarters ended March 31,
1996, June 30, 1996 and Sept. 29, 1996).
27.4 Restated Financial Data Schedule (quarters ended March 30,
1997, June 29, 1997 and Sept. 28, 1997).
99.1 Safe Harbor Compliance Statement for Forward-Looking
Statements.
FIRST AMENDMENT TO
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
--------------------------------------------
THIS FIRST AMENDMENT TO SECOND AMENDED AND RESTATED CREDIT
AGREEMENT (this "First Amendment") made and entered into as of
December 2, 1997, by and among INTERFACE, INC., a Georgia
corporation ("Interface"), INTERFACE EUROPE B.V., a "besloten
vennootschap met beperkte aansprakelijkheid" (private company with
limited liability) incorporated and existing under the laws of The
Netherlands with its registered seat in Scherpenzeel, Gld., The
Netherlands ("Europe B.V."), INTERFACE EUROPE LIMITED, a private
company limited by shares organized and existing under the laws of
England and Wales ("Europe Limited"; Interface, Scherpenzeel B.V.
and Europe Limited referred to collectively herein as the "Borrowers"),
SUNTRUST BANK, ATLANTA, a banking corporation organized under the
laws of the State of Georgia ("STBA"), THE FIRST NATIONAL BANK OF
CHICAGO, a national banking association ("FNBC"), the other banks
and lending institutions listed on the signature pages of the
Credit Agreement (as hereinafter defined), and any assignees of
STBA, FNBC, or such other banks and lending institutions which
become "Lenders" as provided therein (STBA, FNBC, and such other
banks, lending institutions, and assignees referred to collectively
herein as the "Lenders"), SUNTRUST BANK, ATLANTA, in its capacity as
agent for those Lenders having Domestic Syndicated Loan Commitments
or Term Loan Commitments, or both, or having outstanding Domestic
Syndicated Loans or Term Loans, or both, as provided herein, and
each successor agent for such Lenders as may be appointed from time
to time pursuant to Article XI of the Credit Agreement (the
"Domestic Agent"), THE FIRST NATIONAL BANK OF CHICAGO, in its ca-
pacity as agent for those Lenders having outstanding Multicurrency
Syndicated Loan Commitments or having outstanding Multicurrency
Syndicated Loans as provided herein, and each successor agent for
such Lenders as may be appointed from time to time pursuant to
Article XI of the Credit Agreement (the "Multicurrency Agent"; the
Domestic Agent and the Multicurrency Agent referred to collectively
herein as the "Co-Agents"), and SUNTRUST BANK, ATLANTA, in its
capacity as collateral agent for the Co-Agents and Lenders and each
successor collateral agent as may be appointed from time to time
pursuant to Article XI of the Credit Agreement (the "Collateral
Agent");
W I T N E S S E T H:
-------------------
WHEREAS, the Borrowers, the Lenders, the Co-Agents, and the
Collateral Agent are parties to a certain Second Amended and
Restated Credit Agreement dated as of June 25, 1997 (the "Credit
Agreement");
WHEREAS, the Borrowers have requested that certain covenants in
the Credit Agreement be amended so as to facilitate their
acquisition of the carpet-related businesses of Readicut
International plc;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the Borrowers, the Lenders, the Co-
Agents and the Collateral Agent agree as follows:
<PAGE>
1. DEFINED TERMS. Except as otherwise expressly defined
herein, each capitalized term used in this First Amendment that is
defined in the Credit Agreement is used herein with the meaning
assigned to such capitalized term in the Credit Agreement.
2. AMENDMENTS TO SECTION 1.01 ("DEFINITIONS").
(a) Section 1.01 of the Credit Agreement is hereby
amended by adding the following defined terms and definitions
thereof in proper alphabetical order:
"FIRST AMENDMENT TO CREDIT AGREEMENT" shall mean the First
Amendment to Credit Agreement dated as of December 2, 1997, by and
among the Borrowers, the Lenders, the Co-Agents, and the Collateral
Agent, together with all exhibits and schedules thereto.
"FIRST AMENDMENT EFFECTIVE DATE" shall mean the date on
which the conditions to effectiveness of the First Amendment to
Credit Agreement have been satisfied, as set forth in paragraph 11
of the First Amendment to Credit Agreement.
"READICUT" shall mean Readicut International plc.
"READICUT ACQUISITION" shall mean the purchase by Europe
Limited and Europe B.V. of all issued and outstanding shares of T.F.
Firth & Sons Ltd., Vebe Floorcoverings B.V., and Tayrich Limited,
from Readicut.
"READICUT DEBT" shall mean the Indebtedness in the
approximate amount of U.S. $17,600,000 representing the deferred
portion of the purchase price payable by Interface and/or its
Subsidiaries in the Readicut Acquisition, such Indebtedness being
due and payable on the first anniversary of the closing of the
Readicut Acquisition and supported by a Letter of Credit issued
under the Letter of Credit Agreement.
"READICUT DIVESTITURES" shall mean, collectively, the
sales or other disposition by Interface and/or its Subsidiaries of
any assets (including, without limitation, shares of Subsidiaries)
acquired as part of the Readicut Acquisition; provided, however,
that the term Readicut Divestitures shall not include (i) any sales
or other dispositions of any assets (other than the shares or assets
of Network Flooring Ltd.) or any shares of T.F. Firth & Sons Ltd. or
Firth Carpets Ltd., (ii) any sales or other dispositions of any of
the assets or shares of Vebe Floorcoverings B.V. or Network Flooring
Ltd. sold or disposed of after the first anniversary of the closing
of the Readicut Acquisition, or (iii) any sales or other
dispositions of any of the assets or shares of Tayrich Limited or
Joseph, Hamilton & Seaton Ltd. sold or disposed of later than
eighteen months after the closing of the Readicut Acquisition.
"SECOND CLOSING DATE" shall mean the date on or before
February 28, 1998, on which the conditions set forth in Section 4.03
of the 1997 Term Loan Agreement are satisfied or waived in
accordance with Section 10.02 of the 1997 Term Loan Agreement.
- 2 -
<PAGE>
(b) The defined terms and definitions listed below that
appear in the Credit Agreement are hereby amended by deleting said
defined terms and definitions in their entirety and substituting in
lieu thereof the following defined terms and definitions:
"1997 TERM LOAN AGREEMENT" shall mean the Term Loan
Agreement dated as of June 25, 1997, among Interface, SunTrust Bank,
Atlanta, as Administrative Agent and Collateral Agent, FNBC, as
Syndication Agent, and the 1997 Term Lenders, as amended by the
First Amendment to Term Loan Agreement dated as of December 2, 1997,
as the same may be amended, restated, or supplemented from time to
time, pursuant to which the 1997 Term Loans are made to Interface.
"1997 TERM LOANS" shall mean, collectively, the term loans
in an aggregate principal amount of $95,000,000 made to Interface by
the 1997 Term Lenders pursuant to the terms of the 1997 Term Loan
Agreement.
3. AMENDMENT TO SECTION 2.03 ("MANDATORY PREPAYMENTS").
Section 2.03 of the Credit Agreement is hereby amended as follows:
The first sentence of subsection (a) of Section 2.03 is
hereby deleted and the following sentence is hereby substituted in
lieu thereof as the first sentence of subsection (a) of Section
2.03:
No mandatory prepayment shall be required pursuant to this
Section 2.03(a) until the aggregate amount of Asset Sales
occurring after October 2, 1994 exceeds $10,000,000 (based
on the Asset Values thereof, but excluding in the foregoing
computation (i) Asset Sales resulting from loss, damage,
destruction, or taking where the proceeds thereof are
utilized so as to be excluded from the definition of Net
Proceeds, (ii) Asset Sales occurring as a part of any sale
and leaseback transactions permitted pursuant to Section
9.06, and (iii) Asset Sales made as part of the Readicut
Divestitures).
4. AMENDMENT TO SECTION 3.04 ("MANDATORY PREPAYMENTS OF
DOMESTIC REVOLVING LOANS"). Section 3.04 of the Credit Agreement is
hereby amended (i) by denominating the existing text of Section 3.04
as subsection (a) of Section 3.04, and (ii) by adding a new
subsection (b) to Section 3.04 as follows:
(b) Subject to the provisions of Section 2.03(c)
regarding minimum prepayment amounts and rounding of prepayment
amounts, all amounts received as Net Proceeds from any Asset Sales
effected as part of the Readicut Divestitures shall be used to
prepay the outstanding Domestic Revolving Loans or Multicurrency
Revolving Loans hereunder as may be specified by Interface at the
time of such prepayment or, if not so specified by Interface, then
as specified by the Co-Agents. All such prepayments shall be
- 3 -
<PAGE>
applied on a pro rata basis among the holders of such Domestic
Revolving Loans or Multicurrency Revolving Loans, as the case may
be.
5. AMENDMENTS TO SECTION 4.04 ("MANDATORY PREPAYMENTS OF
MULTICURRENCY REVOLVING LOANS"). Section 4.04 of the Credit
Agreement is hereby amended by adding a new subsection (d) to
Section 4.04 as follows:
(d) Subject to the provisions of Section 2.03(c) with
respect to minimum prepayment amounts and the rounding of prepayment
amounts, all amounts received as Net Proceeds from any Asset Sales
effected as part of the Readicut Divestitures shall be used to
prepay the outstanding Domestic Revolving Loans or Multicurrency
Revolving Loans hereunder as may be specified by Interface at the
time of such prepayment or, if not so specified by Interface, then
as specified by the Co-Agents. All such prepayments shall be
applied on a pro rata basis among the holders of such Domestic
Revolving Loans or Multicurrency Revolving Loans, as the case may
be.
6. AMENDMENT TO SECTION 9.01 ("INDEBTEDNESS"). Section 9.01
of the Credit Agreement is hereby amended (i) by deleting the word
"and" from the end of subsection (l) thereof, and (ii) by deleting
subsection (m) thereof in its entirety and substituting in lieu
thereof new subsections (m), (n) and (o) as follows:
(m) The Readicut Debt;
(n) Indebtedness consisting of contingent
obligations under indemnities, guarantees, and reimbursement
agreements in favor of Persons issuing surety bonds, guarantees and
similar undertakings issued to support performance obligations of
any of the Consolidated Companies incurred in the ordinary course of
business; and
(o) Other Indebtedness not to exceed $15,000,000 at
any one time outstanding.
7. AMENDMENT TO SECTION 9.03 ("MERGERS, ACQUISITIONS, SALES,
ETC."). Section 9.03 of the Credit Agreement is hereby amended as
follows:
(a) The first parenthetical phrase in clause (ii) of
Section 9.03 is hereby deleted in its entirety and the following
parenthetical phrase substituted in lieu thereof:
(but excluding Asset Sales occurring as part of the Readicut
Divestitures or as part of any sale and leaseback transactions
permitted by Section 9.06)
(b) Clause (vi) of Section 9.03 is hereby amended by
deleting clause (vi) in its entirety and substituting in lieu
thereof the following clause (vi):
- 4 -
<PAGE>
(vi) Asset Sales occurring as part of the Readicut
Divestitures or as part of any sale and leaseback transactions
permitted pursuant to Section 9.06, or
8. AMENDMENT TO ARTICLE X ("EVENTS OF DEFAULT"). Article X
of the Credit Agreement is hereby amended (i) by deleting the period
at the end of Section 10.15 and substituting in lieu thereof a
semicolon, and (ii) by adding the following language at the end of
Article X:
then, and in any such event, and at any time thereafter if
any Event of Default shall then be continuing, the Co-Agents may,
and upon the written or telex request of the Required Lenders,
shall, by written notice to the Borrowers, take any or all of the
following actions, without prejudice to the rights of the Co-Agents,
any Lender or the holder of any Note to enforce its claims against
the Borrowers or any other Credit Party: (i) declare all
Commitments terminated, whereupon the pro rata Commitments of each
Lender shall terminate immediately and any commitment fee shall
forthwith become due and payable without any other notice of any
kind; and (ii) declare the principal of and any accrued interest on
the Loans, and all other Obligations owing hereunder, to be,
whereupon the same shall become, forthwith due and payable without
presentment, demand, protest or other notice of any kind, all of
which are hereby waived by each of the Borrowers; provided, that, if
an Event of Default specified in Section 10.07 shall occur, the
result which would occur upon the giving of written notice by the
Co-Agents to the Borrowers and any other Credit Party, as specified
in clauses (i) and (ii) above, shall occur automatically without the
giving of any such notice.
9. SUPPLEMENT TO SCHEDULE 7.01 ("ORGANIZATION AND OWNERSHIP OF
SUBSIDIARIES"). Effective upon the closing of the Readicut Acquisition,
Schedule 7.01 to the Credit Agreement shall be supplemented to reflect the
Readicut Acquisition by attaching thereto the Supplement to Schedule 7.01 in
the form attached to this First Amendment.
10. REPRESENTATIONS AND WARRANTIES. Each of the Borrowers represents
and warrants to the Co-Agents and the Lenders as follows:
(a) All representations and warranties set forth in the
Credit Agreement are, and after giving effect to the Readicut
Acquisition will be, true and correct in all material respects with
the same effect as though such representations and warranties have
been made on and as of the date hereof and after giving effect to
the Readicut Acquisition (except that the representation and
warranty set forth in Section 7.19 of the Credit Agreement shall not
be deemed to relate to any time subsequent to the date of the
initial Loans under the Credit Agreement);
(b) No Default or Event of Default has occurred and is
continuing on the date hereof or will occur or exist as a result of
the Readicut Acquisition;
- 5 -
<PAGE>
(c) Since the date of the most recent financial
statements of the Consolidated Companies submitted to the Lenders
pursuant to Section 8.07(b) of the Credit Agreement, and after
giving pro forma effect to the Readicut Acquisition, there has been
no change which has had or could reasonably be expected to have a
Materially Adverse Effect (whether or not notice with respect to
such change has otherwise been furnished to the Lenders pursuant to
Section 8.07);
(d) Each of the Borrowers has the corporate power and
authority to make, deliver and perform this First Amendment and has
taken all necessary corporate action to authorize the execution,
delivery and performance of this First Amendment. No consent or
authorization of, or filing with, any Person (including, without
limitation, any governmental authority), is required in connection
with the execution, delivery or performance by it, or the validity
or enforceablility against it, of this First Amendment, other than
such consents, authorizations or filings which have been made or
obtained; and
(e) This First Amendment has been duly executed and
delivered by each of the Borrowers and constitutes the legal, valid
and binding obligations of each of the Borrowers enforceable against
each of them in accordance with their respective terms, except as
may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium, or similar laws affecting the enforcement of creditors'
rights generally and by general principles of equity.
11. EFFECTIVENESS OF FIRST AMENDMENT. This First Amendment
shall become effective upon the execution and delivery to the
Domestic Agent of counterparts hereof (whether originals or
facsimile transmissions thereof) on behalf of Interface, the Co-
Agents, and the Lenders.
12. REFERENCES TO CREDIT AGREEMENT. On and after the date
this First Amendment becomes effective as provided in paragraph 11
above, each and every reference in the Credit Documents to the
Credit Agreement shall be deemed to refer to and mean the Credit
Agreement as amended by this First Amendment and as the same may be
further amended, restated and supplemented from time to time. The
parties further confirm and agree that (i) except as expressly
amended herein, the Credit Agreement remains in full force and
effect in accordance with its terms, and (ii) all other Credit
Documents remain in full force and effect in accordance with their
respective terms.
13. COUNTERPARTS. This First Amendment may be executed in any
number of counterparts and by the different parties hereto on
separate counterparts, each of which when so executed and delivered
shall be an original, but all of which shall together constitute one
and the same instrument.
14. MISCELLANEOUS. This First Amendment and the rights and
obligations of the parties hereunder shall be construed in
accordance with and be governed by the law (without giving effect to
the conflict of law principles thereof) of the State of Georgia.
This First Amendment shall be binding on and shall inure to the
benefit of and be enforceable by the respective successors and
assigns of the parties hereto.
- 6 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this First
Amendment to be duly executed and delivered in Atlanta, Georgia, by
their duly authorized officers as of the day and year first above
written.
Address for Notices: INTERFACE, INC.
- -------------------
2859 Paces Ferry Road
Suite 2000
Atlanta, GA 30339 By: /s/ Daniel T. Hendrix
Attention: Daniel T. Hendrix Daniel T. Hendrix
Senior Vice President
Telex No.:
Answerback:
Telecopy No.: 404/319-0070
Address for Notices: INTERFACE EUROPE LIMITED
- -------------------
c/o Interface, Inc.
2859 Paces Ferry Road
Suite 2000
Atlanta, GA 30339 By: /s/ Daniel T. Hendrix
Attention: Daniel T. Hendrix Daniel T. Hendrix
Senior Vice President
Telex No.:
Answerback:
Telecopy No.: 404/319-0070
Address for Notices: INTERFACE EUROPE B.V.
- -------------------
c/o Interface, Inc.
2859 Paces Ferry Road
Suite 2000
Atlanta, GA 30339 By: /s/ Daniel T. Hendrix
Attention: Daniel T. Hendrix Daniel T. Hendrix
Senior Vice President
Telex No.:
Answerback:
Telecopy No.: 404/319-0070
<PAGE>
Address for Notices: SUNTRUST BANK, ATLANTA,
- ------------------- as Administrative Agent and Collateral
Agent
25 Park Place
23rd Floor
Atlanta, GA 30303
Attention: Thomas R. Banks By: /s/ Thomas R. Banks
Name: Thomas R. Banks
Title: Assistant Vice President
Telex No.: 542210
Answerback: TRUSCO INT ATL
By: /s/ David W. Penter
Telecopy No.: 404/588-8833 Name: David W. Penter
Title: Group Vice President
Payment Office:
- --------------
25 Park Place, N.E.
Atlanta, GA 30303
- 8 -
<PAGE>
Address for Notices: THE FIRST NATIONAL BANK OF
- ------------------- CHICAGO, as Syndication Agent
One First National Plaza
Chicago, Illinois 60670-0324
Attention: Judith L. Cornwell
By: /s/ Courtenay R. Wood
Name: Courtenay R. Wood
Title: Vice President
Telex No.:
Answerback:
Telecopy No.: 312/732-5296
Administrative Office:
- ---------------------
One First National Plaza
Chicago, Illinois 60670-0324
Attention: Judith L. Cornwell
Payment Offices:
- ---------------
(See Schedule 4.01)
-------------
- 9 -
<PAGE>
Address for Notices: SUNTRUST BANK, ATLANTA
- -------------------
25 Park Place
23rd Floor
Atlanta, GA 30303
Attention: Thomas R. Banks By: /s/ Thomas R. Banks
Name: Thomas R. Banks
Title: Assistant Vice President
Telex No.: 542210
Answerback: TRUSCO INT ATL
By: /s/ David W. Penter
Telecopy No.: 404/588-8833 Name: David W. Penter
Title: Group Vice President
Domestic Lending Office:
- -----------------------
One Park Place, N.E.
Atlanta, GA 30303
Telex No.: 542210
Answerback: TRUSCO INT ATL
Eurocurrency Lending Office:
- ---------------------------
One Park Place, N.E.
Atlanta, Georgia 30303
Telex No. 542210
Answerback: TRUSCO INT ATL
- 10 -
<PAGE>
Address for Notices: THE FIRST NATIONAL BANK OF CHICAGO
- -------------------
Mail Suite 0324
One First National Plaza
Chicago, Illinois 60670-0324
Attention: Judith L. Cornwell
By: /s/ Courtenay R. Wood
Name: Courtenay R. Wood
Title: Vice President
Telex No.: 4330253
Answerback: FNBC UI
Telecopy No.: 312/732-5296
Administrative Office:
- ---------------------
One First National Plaza
Chicago, Illinois 60670-0324
Attention: Judith L. Cornwell
Payment Offices:
- ---------------
(See Schedule 4.01)
-------------
- 11 -
<PAGE>
Address for Notices: ABN AMRO BANK N.V.
- -------------------
ABN AMRO Bank N.V.
135 South LaSalle Street
Suite 2805
Chicago, Illinois 60603 By: /s/ W.P. Fischer
Attention: Credit Administration Name: W.P. Fischer
Title: SVP
Telephone: (312) 904-8835
Fax: (312) 904-8840
By: /s/ Steven J. Hipsman
With a copy to: Name: Steven Hipsman
- -------------- Title: Vice President
ABN AMRO Bank N.V.
Suite 1200, One Ravinia Drive
Atlanta, GA 30346
Attention: Mark Clegg
Telephone: 770/396-0066
Telex No.: 682 7258
Answerback: ABNBANKATL
Telecopy No.: 770/395-9188
Domestic Lending Office:
- -----------------------
ABN AMRO Bank N.V.
135 South LaSalle Street
Suite 2805
Chicago, Illinois 60603
Attention: Credit Administration
Eurocurrency Lending Office:
- ---------------------------
ABN AMRO Bank N.V.
135 South LaSalle Street
Suite 2805
Chicago, Illinois 60603
Attention: Credit Administration
- 12 -
<PAGE>
Address for Notices: THE BANK OF TOKYO-MITSUBISHI,
- ------------------- LTD., ATLANTA AGENCY
133 Peachtree Street, N.E.
4970 Georgia-Pacific Center
Atlanta, GA 30303
Attention: Brandon Meyerson By: /s/ Brenda A. Meyerson
Name: Brenda A. Meyerson
Telephone: 404/577-2960 Title: Assistant Vice President
Telecopy No.: 404/577-1155
Telex No.: 6827300
Answerback: 6827300BOT ATL
Domestic Lending Office:
- -----------------------
4970 Georgia-Pacific Center
133 Peachtree Street, N.E.
Atlanta, Georgia 30303
Eurocurrency Lending Office:
- ---------------------------
4970 Georgia-Pacific Center
133 Peachtree Street, N.E.
Atlanta, Georgia 30303
- 13 -
<PAGE>
Address for Notices: CIBC INC.
- -------------------
Canadian Imperial Bank of
Commerce
Two Paces West
2727 Paces Ferry Road, By: /s/ Roger Colden
Suite 1200 Names: Roger Colden
Atlanta, Georgia 30339 Title: Executive Director, CIBC
Attention: William Humphries Oppenheimer Corp. as Agent
Telephone: 770/319-4906
Telecopy No.: 770/319-4954
Domestic Lending Office:
- -----------------------
Canadian Imperial Bank of
Commerce
Two Paces West
2727 Paces Ferry Road, Suite 1200
Atlanta, Georgia 30339
Eurocurrency Lending Office:
- ---------------------------
Canadian Imperial Bank of
Commerce
Two Paces West
2727 Paces Ferry Road, Suite 1200
Atlanta, Georgia 30339
- 14 -
<PAGE>
Address for Notices: CREDITANSTALT-BANKVEREIN
- -------------------
Two Ravinia Drive
Suite 1680 By: /s/ Stephen W. Hipp
Atlanta, Georgia 30346 Name: Stephen W. Hipp
Attention: Stephen W. Hipp Title: Assoc.
Telephone: 770/390-1846
Telecopy No.: 770/390-1851 By: /s/ Craig Stamn
Name: Craig Stamn
Title: VP
Domestic Lending Office:
- -----------------------
Two Greenwich Plaza
Greenwich, CT 06830-6353
Attn: Lisa Bruno
Eurocurrency Lending Office:
- ---------------------------
Two Greenwich Plaza
Greenwich, CT 06830-6353
- 15 -
<PAGE>
Address for Notices: CREDIT LYONNAIS ATLANTA AGENCY
- -------------------
Credit Lyonnais Atlanta Agency
303 Peachtree Street, N.E. By: /s/ David M. Cawrse
Suite 4400 Name: David M. Cawrse
Atlanta, GA 30303 Title: First Vice President &
Attention: David Cawrse Manager
Telephone: 404/524-3700
Telecopy No.: 404/584-5249
Domestic Lending Office:
- -----------------------
Credit Lyonnais Atlanta Agency
303 Peachtree Street, N.E.
Suite 4400
Atlanta, GA 30303
Eurocurrency Lending Office:
- ---------------------------
Credit Lyonnais Atlanta Agency
303 Peachtree Street, N.E.
Suite 4400
Atlanta, GA 30303
- 16 -
<PAGE>
Address for Notices: THE SUMITOMO BANK LIMITED
- -------------------
303 Peachtree Street, N.E. By: /s/ Roger N. Arsham
Suite 4420 Name: Roger N. Arsham
Atlanta, GA 30308 Title: Vice President
Attention: Roger Arsham
Telephone: 404/524-6544
Telecopy No.: 404/523-7983 By: /s/ Diane M. Rhoades
Name: Diane M. Rhoades
Domestic Lending Office: Title: Executive Officer
- -----------------------
233 South Wacker Drive
Suite 5400
Chicago, Illinois 60606
Eurocurrency Lending Office:
- ---------------------------
233 South Wacker Drive
Suite 5400
Chicago, Illinois 60606
- 17 -
<PAGE>
Address for Notices: FIRST UNION NATIONAL BANK
- -------------------
999 Peachtree Street, N.E. By: /s/ Michalene Donagan
9th Floor Name: Michalene Donagen
Atlanta, GA 30309 Title: Vice President
Attention: Michalene Donegan
Telephone: 404/827-7154
Telecopy No.: 404/827-7199
Domestic Lending Office:
999 Peachtree Street, N.E.
9th Floor
Atlanta, GA 30309
Eurocurrency Lending Office:
999 Peachtree Street, N.E.
9th Floor
Atlanta, GA 30309
- 18 -
<PAGE>
Address for Notices: FLEET BANK OF MAINE
80 Exchange Street By: /s/ Neil C. Buitenhugs
Bangor, Maine 04401 Name: Neil C. Buitenhugs
Attention: Neil C. Buitenhuys Title: Vice President
Telephone: 207/941-6140
Telecopy No.: 207/941-6023
Domestic Lending Office:
- -----------------------
511 Congress Street, P. O. Box 1280
Portland, Maine 04104-5006
Eurocurrency Lending Office:
- ---------------------------
511 Congress Street, P. O. Box 1280
Portland, Maine 04104-5006
- 19 -<PAGE>
Address for Notices: NATIONSBANK, N.A.
- -------------------
100 North Tryon Street
Mail Code NC1-007-08-11 By: /s/ David H. Dinkins
Charlotte, NC 28255 Name: David H. Dinkins
Attention: Title: Vice President
Telephone: 704/386-2951
Telecopy No.: 704/386-1270
Domestic Lending Office:
- -----------------------
One Independence Center
101 North Tryon Street
Mail Code NC1-001-15-03
Charlotte, NC 28255
Eurocurrency Lending Office:
- ---------------------------
One Independence Center
101 North Tryon Street
Mail Code NC1-001-15-03
Charlotte, NC 28255
- 20 -
<PAGE>
Address for Notices: PNC BANK, NATIONAL ASSOCIATION
- -------------------
One PNC Plaza
Fifth Avenue and Wood Street By: /s/ Robert J. Mitchell, Jr.
Pittsburgh, PA 15265 Name: Robert J. Mitchell, Jr.
Attention: Robert J. Mitchell, Jr. Title: Vice President
Telephone: 412/762-6547
Telecopy No.: 412/762-6484
Domestic Lending Office:
- -----------------------
One PNC Plaza
Fifth Avenue and Wood Street
Pittsburgh, PA 15265
Eurocurrency Lending Office:
- ---------------------------
One PNC Plaza
Fifth Avenue and Wood Street
Pittsburgh, PA 15265
- 21 -
<PAGE>
Address for Notices: WACHOVIA BANK, N.A.
- -------------------
191 Peachtree Street, N.E.
30th Floor
Atlanta, GA 30383
Attention: Doug Strickland By: /s/ Douglas W. Strickland
Name: Douglas W. Stickland
Telephone: 404/332-1382 Title: Vice President
Telecopy No.: 404/332-6920
Domestic Lending Office:
- -----------------------
191 Peachtree Street, N.E.
Atlanta, Georgia 30383
Eurocurrency Lending Office:
- ---------------------------
191 Peachtree Street, N.E.
Atlanta, Georgia 30383
- 22 -
FIRST AMENDMENT TO TERM LOAN AGREEMENT
THIS FIRST AMENDMENT TO TERM LOAN AGREEMENT (this "First
Amendment") made and entered into as of December 2, 1997, by and
among INTERFACE, INC., a Georgia corporation ("Interface"),
SUNTRUST BANK, ATLANTA, a banking corporation organized under the
laws of the State of Georgia ("STBA"), THE FIRST NATIONAL BANK OF
CHICAGO, a national banking association ("FNBC"), the other banks
and lending institutions listed on the signature pages hereof,
and any assignees of STBA, FNBC, or such other banks and lending
institutions that become "Lenders" as provided herein (STBA,
FNBC, and such other banks, lending institutions and assignees
referred to collectively herein as the "Lenders"), SUNTRUST BANK,
ATLANTA, in its capacity as administrative agent for the Lenders
(the "Administrative Agent"), and each successor agent for such
Lenders as may be appointed from time to time pursuant to Article
IX of the Term Loan Agreement (as hereinafter defined), THE FIRST
NATIONAL BANK OF CHICAGO, in its capacity as syndication agent
hereunder (the "Syndication Agent"; the Administrative Agent and
the Syndication Agent referred to collectively herein as the "Co-
Agents"), and SUNTRUST BANK, ATLANTA, in its capacity as
collateral agent for the Co-Agents and Lenders and each successor
collateral agent as may be appointed from time to time pursuant
to Article IX of the Term Loan Agreement (the "Collateral
Agent");
W I T N E S S E T H:
--------------------
WHEREAS, Interface, the Lenders, the Co-Agents, and the
Collateral Agent are parties to a certain Term Loan Agreement
dated as of June 25, 1997 (the "Term Loan Agreement");
WHEREAS, Interface has requested that additional term loans
in the aggregate principal amount of $20,000,000 be made to it
pursuant to the terms of the Term Loan Agreement, such additional
term loans to mature and be payable in one installment on the
first anniversary of the funding of such additional term loans,
with the proceeds of such additional term loans being used by
Interface to fund a portion of the purchase price payable in
connection with its acquisition of certain carpet-related
businesses of Readicut International plc;
WHEREAS, Interface has further requested that certain
covenants in the Term Loan Agreement be amended so as to
facilitate its acquisition of such carpet-related businesses of
Readicut International plc;
WHEREAS, certain of the Lenders have agreed to make the
additional term loans to Interface, and the Lenders and the Co-
Agents have agreed to amend the Term Loan Agreement as requested
by Interface, subject to the terms, conditions and requirements
set forth in this First Amendment;
NOW, THEREFORE, in consideration of the premises and the
mutual covenants herein contained, Interface, the Lenders, the
Co-Agents and the Collateral Agent agree as follows:
<PAGE>
1. DEFINED TERMS. Except as otherwise expressly defined
herein, each capitalized term used in this First Amendment that
is defined in the Term Loan Agreement is used herein with the
meaning assigned to such capitalized term in the Term Loan
Agreement.
2. AMENDMENTS TO SECTION 1.01 ("DEFINITIONS").
(a) Section 1.01 of the Term Loan Agreement is hereby
amended by adding the following defined terms and definitions
thereof in proper alphabetical order:
"FIRST AMENDMENT TO TERM LOAN AGREEMENT" shall mean the
First Amendment to Term Loan Agreement dated as of December
2, 1997, by and among Interface, the Lenders, the Co-Agents,
and the Collateral Agent, together with all exhibits and
schedules thereto.
"FIRST AMENDMENT EFFECTIVE DATE" shall mean the date on
which the conditions to effectiveness of the First Amendment
to Term Loan Agreement have been satisfied, as set forth in
paragraph 15 of the First Amendment to Term Loan Agreement.
"READICUT" shall mean Readicut International plc.
"READICUT ACQUISITION" shall mean the purchase by
Interface Europe Ltd. and Interface Europe B.V. of all
issued and outstanding shares of T.F. Firth & Sons Ltd.,
Vebe Floorcoverings B.V., and Tayrich Limited, from
Readicut.
"READICUT DEBT" shall mean the Indebtedness in the
approximate amount of U.S. $17,600,000 representing the
deferred portion of the purchase price payable by Interface
and/or its Subsidiaries in the Readicut Acquisition, such
Indebtedness being due and payable on the first anniversary
of the closing of the Readicut Acquisition and supported by
a letter of credit issued under the Letter of Credit
Agreement.
"READICUT DIVESTITURES" shall mean, collectively, the
sales or other disposition by Interface and/or its
Subsidiaries of any assets (including, without limitation,
shares of Subsidiaries) acquired as part of the Readicut
Acquisition; provided, however, that the term Readicut
Divestitures shall not include (i) any sales or other
dispositions of any assets (other than the shares or assets
of Network Flooring Ltd.) or any shares of T.F. Firth & Sons
Ltd. or Firth Carpets Ltd., (ii) any sales or other
dispositions of any of the assets or shares of Vebe
Floorcoverings B.V. or Network Flooring Ltd. sold or
disposed of after the first anniversary of the closing of
the Readicut Acquisition, or (iii) any sales or other
dispositions of any of the assets or shares of Tayrich
Limited or Joseph, Hamilton & Seaton Ltd. sold or disposed
of later than eighteen months after the closing of the
Readicut Acquisition.
"SECOND CLOSING DATE" shall mean the date on or before
February 28, 1998, on which the conditions set forth in
Section 4.03 of the First Amendment to Term Loan Agreement
are satisfied or waived in accordance with Section 10.02 of
this Agreement.
- 2 -<PAGE>
"SERIES B LENDERS" shall mean, collectively, STBA,
FNBC, the other banks and lending institutions listed on the
signature pages of this Agreement, and each assignee
thereof, if any, pursuant to Section 10.06(c), having made
or had assigned to it any Series B Term Loans.
"SERIES B TERM LOAN COMMITMENT" shall mean, at any time
for any Series B Lender, the amount of such commitment set
forth below such Series B Lender's name on the signature
pages of the First Amendment to Term Loan Agreement, as the
same may be increased or decreased from time to time as a
result of any repayment of the Series B Term Loans, any
assignment thereof pursuant to Section 10.06 of this
Agreement, or any amendment thereof pursuant to Section
10.02 of this Agreement.
"SERIES B TERM LOANS" shall mean, collectively, the
term loans in the aggregate principal amount of $75,000,000
made to Interface by the Series B Lenders on the Closing
Date pursuant to Section 2.01(a)(i).
"SERIES B TERM NOTES" shall mean, collectively, the
promissory notes evidencing the Series B Term Loans
substantially in the form of Exhibit "A" attached to this
Agreement and duly completed in accordance with the terms
thereof.
"SERIES C LENDERS" shall mean, collectively, STBA,
FNBC, the other banks and lending institutions listed on the
signature pages of the First Amendment to Term Loan
Agreement, and each assignee thereof, if any, pursuant to
Section 10.06(c) of this Agreement, having made or had
assigned to it any Series C Term Loans.
"SERIES C TERM LOAN COMMITMENT" shall mean, at any time
for any Series C Lender, the amount of such commitment set
forth below such Series C Lender's name on the signature
pages of the First Amendment to Term Loan Agreement, as the
same may be increased or decreased from time to time as a
result of any repayment of the Series C Term Loans, any
assignment thereof pursuant to Section 10.06 of this
Agreement, or any amendment thereof pursuant to Section
10.02 of this Agreement.
"SERIES C TERM LOAN MATURITY DATE" shall mean the first
anniversary of the Second Closing Date.
"SERIES C TERM LOANS" shall mean, collectively, the
term loans in the aggregate principal amount of $20,000,000
to be made to Interface by the Series C Lenders on the
Second Closing Date pursuant to Section 2.01(a)(ii).
"SERIES C TERM NOTES" shall mean, collectively, the
promissory notes evidencing the Series C Term Loans
substantially in the form of Exhibit "I" attached to the
First Amendment to Term Loan Agreement and duly completed in
accordance with the terms thereof.
- 3 -<PAGE>
(b) The defined terms and definitions listed below
that appear in the Term Loan Agreement are hereby amended by
deleting said defined terms and definitions in their entirety and
substituting in lieu thereof the following defined terms and
definitions:
"LENDER" shall mean any of the Series B Lenders and
Series C Lenders, and "Lenders" shall mean, collectively,
all of the Series B Lenders and Series C Lenders.
"TERM LOAN COMMITMENT" shall mean, at any time for any
Lender, the total amount of such Lender's Series B Term Loan
Commitment and Series C Term Loan Commitment.
"TERM LOANS" shall mean, collectively, the Series B
Term Loans and the Series C Term Loans.
"TERM NOTES" shall mean, collectively, the Series B
Term Notes and the Series C Term Notes.
3. AMENDMENTS TO SECTION 2.01 ("AMOUNT OF TERM LOANS; USE
OF PROCEEDS"). Section 2.01 of the Term Loan Agreement is hereby
amended by deleting subsections (a) and (d) of Section 2.01 in
their entirety and substituting in lieu thereof the following
subsections (a) and (d):
(a) Subject to and upon the terms and conditions
herein set forth, (i) each Series B Lender agrees to make on
the Closing Date a Series B Term Loan to Interface in an
amount equal to its Series B Term Loan Commitment, and (ii)
each Series C Lender agrees to make on the Second Closing
Date a Series C Term Loan to Interface in an amount equal to
its Series C Term Loan Commitment. All such Term Loans
shall be repaid as set forth in Section 2.02(b). Interface
shall not be entitled to reborrow any amounts repaid with
respect to the Term Loans.
. . . .
(d) The proceeds from the Series B Term Loans shall be
used (i) to repay outstanding "Domestic Revolving Loans"
under the Credit Agreement by an aggregate principal amount
equal to $50,000,000, and (ii) to prepay that portion of the
outstanding "Term Loans" under the Credit Agreement in an
aggregate principal amount equal to $25,000,000 that were
otherwise scheduled to be repaid on December 31, 2001. The
proceeds from the Series C Term Loans shall be used (i) to
pay a portion of the purchase price payable by Interface and
its Subsidiaries in respect of the Readicut Acquisition,
and/or (ii) to repay outstanding "Domestic Revolving Loans"
under the Credit Agreement.
4. AMENDMENT TO SECTION 2.02 ("TERM NOTES; REPAYMENT OF
PRINCIPAL"). Section 2.02 of the Term Loan Agreement is hereby
amended by deleting subsection (b) of Section 2.02 in its
entirety and substituting in lieu thereof the following
subsection (b):
- 4 -<PAGE>
(b) Interface shall repay all outstanding Series C
Term Loans in full on the Series C Term Loan Maturity Date,
and shall repay all outstanding Series B Term Loans in full
on the Final Maturity Date.
5. AMENDMENT TO SECTION 2.03 ("MANDATORY PREPAYMENTS").
Section 2.03 of the Term Loan Agreement is hereby amended as
follows:
(a) The first sentence of subsection (a) of Section
2.03 is hereby deleted and the following sentence is hereby
substituted in lieu thereof as the first sentence of
subsection (a) of Section 2.03:
No mandatory prepayment shall be required pursuant to
this Section 2.03(a) until the aggregate amount of
Asset Sales occurring after October 2, 1994 exceeds
$10,000,000 (based on the Asset Values thereof, but
excluding in the foregoing computation (i) Asset Sales
resulting from loss, damage, destruction, or taking
where the proceeds thereof are utilized so as to be
excluded from the definition of Net Proceeds, (ii)
Asset Sales occurring as a part of any sale and
leaseback transactions permitted pursuant to Section
7.06, and (iii) Asset Sales made as part of the
Readicut Divestitures).
(b) A new subsection (e) is hereby added to Section
2.03 as follows:
(e) Subject to the provisions of paragraph (c) of
this Section 2.03, all amounts received as Net Proceeds
from any Asset Sales effected as part of the Readicut
Divestitures shall be used to prepay outstanding
"Domestic Revolving Loans" or "Multicurrency Revolving
Loans" under the Credit Agreement as may be specified
by Interface at the time of such prepayment or, if not
so specified by Interface, then as specified by the Co-
Agents. All such prepayments shall be applied on a pro
rata basis among the holders of such Domestic Revolving
Loans or Multicurrency Revolving Loans, as the case may
be.
6. AMENDMENT TO SECTION 3.04 ("INTEREST PERIODS").
Section 3.04 of the Term Loan Agreement is hereby amended by
deleting clause (vi) thereof in its entirety and substituting in
lieu thereof the following clause (vi):
(vi) No Interest Period with respect to the Series C
Term Loans shall extend beyond the Series C Term Loan
Maturity Date, and no Interest Period with respect to the
Series B Term Loans shall extend beyond the Final Maturity
Date.
7. AMENDMENTS TO SECTION 4.01 ("CONDITIONS PRECEDENT TO
FUNDING OF TERM LOANS"). Section 4.01 of the Term Loan Agreement
is hereby amended by deleting each and every reference therein to
the "Term Loans" and substituting in each instance a reference to
the "Series B Term Loans."
- 5 -<PAGE>
8. ADDITION OF NEW SECTION 4.03 ("CONDITIONS PRECEDENT TO
FUNDING OF SERIES C TERM LOANS"). Article IV of the Term Loan
Agreement is hereby amended by adding a new Section 4.03 to
Article IV as follows:
SECTION 4.03. CONDITIONS PRECEDENT TO FUNDING OF
SERIES C TERM LOANS. At the time of the making of the
Series C Term Loans hereunder on the Second Closing Date,
all obligations of Interface hereunder incurred at or prior
to such funding of the Series C Term Loans (including,
without limitation, Interface's obligations to reimburse the
reasonable fees and expenses of counsel to the Co-Agents and
any fees and expenses payable to the Co-Agents and the
Lenders as previously agreed with Interface) shall have been
paid in full, and the Co-Agents shall have received the
following, in form and substance satisfactory in all
respects to the Co-Agents:
(a) The duly executed counterparts of the First
Amendment to Term Loan Agreement (including the
Acknowledgment of Guarantors attached thereto);
(b) The duly completed Series C Term Notes;
(c) Certificate of Interface in substantially the
form of Exhibit "J" attached to the First Amendment to
Term Loan Agreement and appropriately completed;
(d) Certificates of the Secretary or Assistant
Secretary of Interface attaching and certifying a copy
of the resolutions of its board of directors,
authorizing the execution, delivery and performance of
the documents described in clause (a) and (b) above;
(e) Certificate of the Secretary or an Assistant
Secretary of Interface certifying (i) the name, title
and true signature of each officer of Interface
executing the documents described in this Section 4.03,
and (ii) the by-laws or comparable governing documents
of Interface;
(f) Certified copies of the articles of
incorporation of Interface, together with a certificate
of valid existence from the Secretary of State of
Georgia;
(g) Copies of all documents and instruments,
including all consents, authorizations and filings,
required or advisable under any Requirement of Law or
by any material Contractual Obligation of the Credit
Parties, in connection with the execution, delivery,
performance, validity and enforceability of the
documents described in this Section 4.03 and the other
documents to be executed and delivered hereunder,
together with the documents being executed and
delivered as part of the Readicut Acquisition, and such
consents, authorizations, filings and orders shall be
in full force and effect and all applicable waiting
periods shall have expired;
- 6 -<PAGE>
(h) The favorable opinion of (i) Kilpatrick
Stockton LLP, United States counsel to Interface,
substantially in the form of Exhibit "K" attached to
the First Amendment to Term Loan Agreement addressed to
the Co-Agents and each of the Lenders, and covering
such other matters as either Co-Agent or any Lender may
reasonably request; and
(i) A certificate of the president, chief
financial officer, or principal accounting officer of
Interface as to the calculation and reasonable detail
of the "Consolidated Fixed Charge Coverage Ratio" (as
defined in the Senior Subordinated Notes Indenture) of
Interface, demonstrating to the satisfaction of the Co-
Agents and the Lenders that at the time of the funding
of the Series C Term Loans, and after giving pro forma
effect thereto, such "Consolidated Fixed Charge
Coverage Ratio" of Interface exceeds 2.50:1.00, and
that the Series C Term Loans will constitute "Senior
Indebtedness" for all purposes under the Senior
Subordinated Notes Indenture.
In addition to the foregoing, the following conditions shall
have been satisfied or shall have existed, all to the
satisfaction of the Co-Agents, as of the time the Series C
Term Loans were made hereunder:
(j) The Series C Term Loans and the use of
proceeds thereof shall not have contravened, violated
or conflicted with, or involved the Co-Agents or any
Lender in a violation of, any law, rule, injunction, or
regulation, or determination of any court of law or
other governmental authority; and
(k) All corporate proceedings and all other legal
matters in connection with the authorization, legality,
validity and enforceability of the documents described
in this Section 4.03 shall have been reasonably
satisfactory in form and substance to the Required
Lenders.
9. AMENDMENT TO SECTION 7.01 ("INDEBTEDNESS"). Section
7.01 of the Term Loan Agreement is hereby amended (i) by deleting
the word "and" from the end of subsection (l) thereof, and (ii)
by deleting subsection (m) thereof in its entirety and
substituting in lieu thereof new subsections (m), (n) and (o) as
follows:
(m) The Readicut Debt;
(n) Indebtedness consisting of contingent
obligations under indemnities, guarantees, and
reimbursement agreements in favor of Persons issuing
surety bonds, guarantees and similar undertakings
issued to support performance obligations of any of the
Consolidated Companies incurred in the ordinary course
of business; and
- 7 -<PAGE>
(o) Other Indebtedness not to exceed $15,000,000
at any one time outstanding.
10. AMENDMENT TO SECTION 7.03 ("MERGERS, ACQUISITIONS,
SALES, ETC."). Section 7.03 of the Term Loan Agreement is hereby
amended as follows:
(a) The first parenthetical phrase in clause (ii) of
Section 7.03 is hereby deleted in its entirety and the
following parenthetical phrase substituted in lieu thereof:
(but excluding Asset Sales occurring as part of the
Readicut Divestitures or as part of any sale and
leaseback transactions permitted by Section 7.06)
(b) Clause (vi) of Section 7.03 is hereby amended by
deleting clause (vi) in its entirety and substituting in
lieu thereof the following clause (vi):
(vi) Asset Sales occurring as part of the Readicut
Divestitures or as part of any sale and leaseback
transactions permitted pursuant to Section 7.06, or
11. AMENDMENT TO ARTICLE VIII ("EVENTS OF DEFAULT").
Article VIII of the Term Loan Agreement is hereby amended (i) by
deleting the period at the end of Section 8.15 and substituting
in lieu thereof a semicolon, and (ii) by adding the following
language at the end of Article VIII:
then, and in any such event, and at any time thereafter
if any Event of Default shall then be continuing, the
Co-Agents may, and upon the written or telex request of
the Required Lenders, shall, by written notice to
Interface, take any or all of the following actions,
without prejudice to the rights of the Co-Agents, any
Lender or the holder of any Term Note to enforce its
claims against Interface or any other Credit Party:
(i) declare all Term Loan Commitments terminated,
whereupon the pro rata Term Loan Commitments of each
Lender shall terminate immediately without any other
notice of any kind; and (ii) declare the principal of
and any accrued interest on the Term Loans, and all
other Obligations owing hereunder, to be, whereupon the
same shall become, forthwith due and payable without
presentment, demand, protest or other notice of any
kind, all of which are hereby waived by Interface;
provided, that, if an Event of Default specified in
Section 8.07 shall occur, the result which would occur
upon the giving of written notice by the Co-Agents to
Interface and any other Credit Party, as specified in
clauses (i) and (ii) above, shall occur automatically
without the giving of any such notice.
12. SUPPLEMENT TO SCHEDULE 5.01 ("ORGANIZATION AND
OWNERSHIP OF SUBSIDIARIES"). Effective upon the closing of the
Readicut Acquisition, Schedule 5.01 to the Term Loan Agreement
shall be supplemented to reflect the Readicut Acquisition by
attaching thereto the Supplement to Schedule 5.01 in the form
attached to this First Amendment.
- 8 -<PAGE>
13. ADDITIONAL EXHIBITS. The Term Loan Agreement is hereby
amended by adding to the Term Loan Agreement the following
exhibits attached to this First Amendment and made a part of the
Term Loan Agreement by this reference: Exhibit "I" (form of
Series C Term Notes), Exhibit "J" (form of Second Closing
Certificate) and Exhibit "K" (form of Opinion of Kilpatrick
Stock LLP).
14. REPRESENTATIONS AND WARRANTIES. Interface represents
and warrants to the Co-Agents and the Lenders as follows:
(a) All representations and warranties set forth in
the Term Loan Agreement are, and after giving effect to the
Readicut Acquisition will be, true and correct in all material
respects with the same effect as though such representations and
warranties have been made on and as of the date hereof and after
giving effect to the Readicut Acquisition (except that the
representation and warranty set forth in Section 5.19 of the Term
Loan Agreement shall not be deemed to relate to any time
subsequent to the date of the initial Series B Term Loans under
the Term Loan Agreement);
(b) No Default or Event of Default has occurred and
is continuing on the date hereof or will occur or exist as a
result of the Readicut Acquisition;
(c) Since the date of the most recent financial
statements of the Consolidated Companies submitted to the Lenders
pursuant to Section 6.07(b) of the Term Loan Agreement, and after
giving pro forma effect to the Readicut Acquisition, there has
been no change which has had or could reasonably be expected to
have a Materially Adverse Effect (whether or not notice with
respect to such change has otherwise been furnished to the
Lenders pursuant to Section 6.07);
(d) Interface has the corporate power and authority to
make, deliver and perform this First Amendment and has taken all
necessary corporate action to authorize the execution, delivery
and performance of this First Amendment and the documents
described in Section 4.03 of the Term Loan Agreement as amended
hereby. No consent or authorization of, or filing with, any
Person (including, without limitation, any governmental
authority), is required in connection with the execution,
delivery or performance by it, or the validity or enforceablility
against it, of this First Amendment and the other documents
described in Section 4.03 the Term Loan Agreement as amended
hereby, other than such consents, authorizations or filings which
have been made or obtained; and
(e) This First Amendment and the documents described
in Section 4.03 of the Term Loan Agreement as amended hereby have
been duly executed and delivered by Interface and constitute the
legal, valid and binding obligations of Interface, enforceable
against it in accordance with their respective terms, except as
may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, or similar laws affecting the
enforcement of creditors' rights generally and by general
principles of equity.
- 9 -<PAGE>
15. EFFECTIVENESS OF FIRST AMENDMENT. This First Amendment
shall become effective upon the execution and delivery to the
Domestic Agent of counterparts hereof (whether originals or
facsimile transmissions thereof) on behalf of Interface, the Co-
Agents, and the Lenders.
16. REFERENCES TO TERM LOAN AGREEMENT. On and after the
date this First Amendment becomes effective as provided in
paragraph 15 above, each and every reference in the Credit
Documents to the Term Loan Agreement shall be deemed to refer to
and mean the Term Loan Agreement as amended by this First
Amendment and as the same may be further amended, restated and
supplemented from time to time. The parties further confirm and
agree that (i) except as expressly amended herein, the Term Loan
Agreement remains in full force and effect in accordance with its
terms, and (ii) all other Credit Documents remain in full force
and effect in accordance with their respective terms.
17. COUNTERPARTS. This First Amendment may be executed in
any number of counterparts and by the different parties hereto on
separate counterparts, each of which when so executed and
delivered shall be an original, but all of which shall together
constitute one and the same instrument.
18. MISCELLANEOUS. This First Amendment and the rights and
obligations of the parties hereunder shall be construed in
accordance with and be governed by the law (without giving effect
to the conflict of law principles thereof) of the State of
Georgia. This First Amendment shall be binding on and shall
inure to the benefit of and be enforceable by the respective
successors and assigns of the parties hereto.
- 10 -<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
First Amendment to be duly executed and delivered in Atlanta,
Georgia, by their duly authorized officers as of the day and year
first above written.
Address for Notices: INTERFACE, INC.
- -------------------
2859 Paces Ferry Road
Suite 2000
Atlanta, GA 30339 By: /s/ Daniel T. Hendrix
Attention: Daniel T. Hendrix Daniel T. Hendrix
Senior Vice President
Telex No.:
Answerback:
Telecopy No.: 404/319-0070
<PAGE>
Address for Notices: SUNTRUST BANK, ATLANTA,
- ------------------- as Administrative Agent and
Collateral Agent
25 Park Place
23rd Floor
Atlanta, GA 30303
Attention: Thomas R. Banks By: /s/ Thomas R. Banks
Name: Thomas R. Banks
Title: Assistant Vice President
Telex No.: 542210
Answerback: TRUSCO INT ATL
By: /s/ David W. Penter
Telecopy No.: 404/588-8833 Name: David W. Penter
Title: Group Vice President
Payment Office:
- ---------------
25 Park Place, N.E.
Atlanta, GA 30303<PAGE>
Address for Notices: THE FIRST NATIONAL BANK
- ------------------- OF CHICAGO, as Syndication Agent
One First National Plaza
Chicago, Illinois 60670-0324
Attention: Judith L. Cornwell
By: /s/ Courtenay R. Wood
Name: Courtenay R. Wood
Title: Vice President
Telex No.:
Answerback:
Telecopy No.: 312/732-5296
Administrative Office:
- ----------------------
One First National Plaza
Chicago, Illinois 60670-0324
Attention: Judith L. Cornwell
Payment Offices:
- ----------------
(See Schedule 4.01)
<PAGE>
Address for Notices: SUNTRUST BANK, ATLANTA
- -------------------
25 Park Place
23rd Floor
Atlanta, GA 30303
Attention: Thomas R. Banks By: /s/ Thomas R. Banks
Name: Thomas R. Banks
Title: Assistant Vice President
Telex No.: 542210
Answerback: TRUSCO INT ATL
By: /s/ David W. Penter
Telecopy No.: 404/588-8833 Name: David W. Penter
Title: Group Vice President
Domestic Lending Office:
- ------------------------
One Park Place, N.E.
Atlanta, GA 30303
Telex No.: 542210
Answerback: TRUSCO INT ATL
Eurocurrency Lending Office:
- ----------------------------
One Park Place, N.E.
Atlanta, Georgia 30303
Telex No. 542210
Answerback: TRUSCO INT ATL
PRO RATA
AMOUNT SHARE
------ --------
SERIES B TERM LOAN
COMMITMENT: $8,250,000 11.00000%
SERIES C TERM LOAN
COMMITMENT: $2,889,300 14.4465%
<PAGE>
Address for Notices: THE FIRST NATIONAL BANK
- -------------------- OF CHICAGO
Mail Suite 0324
One First National Plaza
Chicago, Illinois 60670-0324
Attention: Judith L. Cornwell
By: /s/ Courtenay R. Wood
Name: Courtenay R. Wood
Title: Vice President
Telex No.: 4330253
Answerback: FNBC UI
Telecopy No.: 312/732-5296
Administrative Office
- ---------------------
One First National Plaza
Chicago, Illinois 60670-0324
Attention: Judith L. Cornwell
Payment Offices:
- ----------------
(See Schedule 4.01)
PRO RATA
AMOUNT SHARE
------ ---------
SERIES B TERM LOAN
COMMITMENT: $8,250,000 11.00000%
SERIES C TERM LOAN
COMMITMENT: $2,889,300 14.4465%<PAGE>
Address for Notices: THE BANK OF TOKYO-MITSUBISHI,
- -------------------- LTD., ATLANTA AGENCY
133 Peachtree Street, N.E.
4970 Georgia-Pacific Center
Atlanta, GA 30303
Attention: Brandon Meyerson By: /s/ Brenda A. Meyerson
Name: Brenda A. Meyerson
Telephone: 404/577-2960 Title: Assistant Vice President
Telecopy No.: 404/577-1155
Telex No.: 6827300
Answerback: 6827300BOT ATL
Domestic Lending Office:
- ------------------------
4970 Georgia-Pacific Center
133 Peachtree Street, N.E.
Atlanta, Georgia 30303
Eurocurrency Lending Office:
- ---------------------------
4970 Georgia-Pacific Center
133 Peachtree Street, N.E.
Atlanta, Georgia 30303
PRO RATA
AMOUNT SHARE
------ ---------
SERIES B TERM LOAN
COMMITMENT: $5,100,000 6.80000%
SERIES C TERM LOAN
COMMITMENT: $1,435,720 7.1786%
<PAGE>
Address for Notices: CIBC INC.
- -------------------------
Canadian Imperial Bank of
Commerce
Two Paces West
2727 Paces Ferry Road, Suite 1200 By: /s/ Roger Colden
Atlanta, Georgia 30339 Name: Roger Colden
Attention: William Humphries Title: Executive Director, CIBC
Oppenheimer corp. as Agent
Telephone: 770/319-4906
Telecopy No.: 770/319-4954
Domestic Lending Office:
Canadian Imperial Bank of
Commerce
Two Paces West
2727 Paces Ferry Road, Suite 1200
Atlanta, Georgia 30339
Eurocurrency Lending Office:
Canadian Imperial Bank of
Commerce
Two Paces West
2727 Paces Ferry Road, Suite 1200
Atlanta, Georgia 30339
PRO RATA
AMOUNT SHARE
---------- --------
SERIES B TERM LOAN
COMMITMENT: $5,600,000 7.46667%
SERIES C TERM LOAN
COMMITMENT: $0 0%
<PAGE>
Address for Notices: CREDITANSTALT-BANKVEREIN
- -------------------
Two Ravinia Drive
Suite 1680 By: /s/ Stephen W. Hipp
Atlanta, Georgia 30346 Name: Stephen W. Hipp
Attention: Stephen W. Hipp Title: Assoc.
Telephone: 770/390-1846 By: /s/ Craig Stamn
Telecopy No.: 770/390-1851 Name: Craig Stamn
Title: VP
Domestic Lending Office:
- ------------------------
Two Greenwich Plaza
Greenwich, CT 06830-6353
Attn: Lisa Bruno
Eurocurrency Lending Office:
- ----------------------------
Two Greenwich Plaza
Greenwich, CT 06830-6353
PRO RATA
AMOUNT SHARE
---------- --------
SERIES B TERM LOAN
COMMITMENT: $6,250,000 8.33333%
SERIES C TERM LOAN
COMMITMENT: $1,771,420 8.8571%
<PAGE>
Address for Notices: CREDIT LYONNAIS ATLANTA AGENCY
- -------------------
Credit Lyonnais Atlanta Agency
303 Peachtree Street, N.E. By: /s/ David M. Cawrse
Suite 4400 Name: David M. Cawrse
Atlanta, GA 30303 Title: First Vice President & Manager
Attention: David Cawrse
Telephone: 404/524-3700
Telecopy No.: 404/584-5249
Domestic Lending Office:
- ------------------------
Credit Lyonnais Atlanta Agency
303 Peachtree Street, N.E.
Suite 4400
Atlanta, GA 30303
Eurocurrency Lending Office:
- ----------------------------
Credit Lyonnais Atlanta Agency
303 Peachtree Street, N.E.
Suite 4400
Atlanta, GA 30303
PRO RATA
AMOUNT SHARE
--------- --------
SERIES B TERM LOAN
COMMITMENT: $5,100,000 6.80000%
SERIES C TERM LOAN
COMMITMENT: $1,435,720 7.1786%
<PAGE>
Address for Notices: THE SUMITOMO BANK LIMITED
- -------------------
303 Peachtree Street, N.E. By: /s/ Roger N. Arsham
Suite 4420 Name: Roger N. Arsham
Atlanta, GA 30308 Title: Vice President
Attention: Roger Arsham
Telephone: 404/524-6544
Telecopy No.: 404/523-7983 By: /s/ Diane M. Rhoades
Name: Diane M. Rhoades
Domestic Lending Office: Title: Executive Officer
- -----------------------
233 South Wacker Drive
Suite 5400
Chicago, Illinois 60606
Eurocurrency Lending Office:
- ----------------------------
233 South Wacker Drive
Suite 5400
Chicago, Illinois 60606
PRO RATA
AMOUNT SHARE
------ --------
SERIES B TERM LOAN
COMMITMENT: $5,100,000 6.80000%
SERIES C TERM LOAN
COMMITMENT: $1,435,720 7.1786%
<PAGE>
Address for Notices: FIRST UNION NATIONAL BANK
- -------------------
999 Peachtree Street, N.E. By: /s/ Michalene Donegan
9th Floor Name: Michalene Donegan
Atlanta, GA 30309 Title: Vice President
Attention: Michalene Donegan
Telephone: 404/827-7154
Telecopy No.: 404/827-7199
Domestic Lending Office:
- ------------------------
999 Peachtree Street, N.E.
9th Floor
Atlanta, GA 30309
Eurocurrency Lending Office:
- ----------------------------
999 Peachtree Street, N.E.
9th Floor
Atlanta, GA 30309
PRO RATA
AMOUNT SHARE
------ --------
SERIES B TERM LOAN
COMMITMENT: $6,350,000 8.46667%
SERIES C TERM LOAN
COMMITMENT: $1,771,420 8.8571%
<PAGE>
Address for Notices: FLEET BANK OF MAINE
- --------------------
80 Exchange Street By: /s/ Neil C. Buitenhuys
Bangor, Maine 04401 Name: Neil C. Buitenhuys
Attention: Neil C. Buitenhuys Title: Vice President
Telephone: 207/941-6140
Telecopy No.: 207/941-6023
Domestic Lending Office:
- ------------------------
511 Congress Street, P. O. Box 1280
Portland, Maine 04104-5006
Eurocurrency Lending Office:
- ----------------------------
511 Congress Street, P. O. Box 1280
Portland, Maine 04104-5006
PRO RATA
AMOUNT SHARE
SERIES B TERM LOAN
COMMITMENT: $8,800,000 11.73333%
SERIES C TERM LOAN
COMMITMENT: $1,771,420 8.8571%
<PAGE>
Address for Notices: NATIONSBANK, N.A.
- -------------------
100 North Tryon Street
Mail Code NC1-007-08-11 By: /s/ David H. Dinkins
Charlotte, NC 28255 Name: David H. Dinkins
Attention: Title: Vice President
Telephone: 704/386-2951
Telecopy No.: 704/386-1270
Domestic Lending Office:
- ------------------------
One Independence Center
101 North Tryon Street
Mail Code NC1-001-15-03
Charlotte, NC 28255
Eurocurrency Lending Office:
- ----------------------------
One Independence Center
101 North Tryon Street
Mail Code NC1-001-15-03
Charlotte, NC 28255
PRO RATA
AMOUNT SHARE
------ --------
SERIES B TERM LOAN
COMMITMENT: $6,350,000 8.46667%
SERIES C TERM LOAN
COMMITMENT: $1,771,420 8.8571%
<PAGE>
Address for Notices: PNC BANK, NATIONAL
ASSOCIATION
One PNC Plaza
Fifth Avenue and Wood Street By: /s/ Robert J. Mitchell, Jr.
Pittsburgh, PA 15265 Name: Robert J. Mitchell, Jr.
Attention: Robert J. Mitchell, Jr. Title: Vice President
Telephone: 412/762-6547
Telecopy No.: 412/762-6484
Domestic Lending Office:
- -----------------------
One PNC Plaza
Fifth Avenue and Wood Street
Pittsburgh, PA 15265
Eurocurrency Lending Office:
- ----------------------------
One PNC Plaza
Fifth Avenue and Wood Street
Pittsburgh, PA 15265
PRO RATA
AMOUNT SHARE
------ --------
SERIES B TERM LOAN
COMMITMENT: $3,500,000 4.66667%
SERIES C TERM LOAN
COMMITMENT: $1,057,140 5.2857%
<PAGE>
Address for Notices: WACHOVIA BANK, N.A.
- -------------------
191 Peachtree Street, N.E.
30th Floor
Atlanta, GA 30383
Attention: Doug Strickland By: /s/ Douglas W. Strickland
Name: Douglas W. Strickland
Telephone: 404/332-1382 Title: Vice President
Telecopy No.: 404/332-6920
Domestic Lending Office:
- ------------------------
191 Peachtree Street, N.E.
Atlanta, Georgia 30383
Eurocurrency Lending Office:
- -----------------------------
191 Peachtree Street, N.E.
Atlanta, Georgia 30383
PRO RATA
AMOUNT SHARE
---------
SERIES B TERM LOAN
COMMITMENT: $6,350,000 8.46667%
SERIES C TERM LOAN
COMMITMENT: $1,771,420 8.8571%
<PAGE>
ACKNOWLEDGMENT OF GUARANTORS
Each of the Guarantors acknowledges and agrees to
the terms of the foregoing First Amendment to Term Loan
Agreement, and further acknowledges and agrees that (i) all of
the Series B Term Loans and Series C Term Loans shall constitute
the "Term Loans" as used in the Subsidiary Guaranty Agreement
dated as of June 25, 1997 executed by them, and shall be included
in the "Guaranteed Obligations" covered by such Subsidiary
Guaranty Agreement, and (ii) such Subsidiary Guaranty Agreement
is and shall remain in full force and effect on and after the
date hereof, and (iii) the First Amendment to Term Loan Agreement
and the increase in the total amount of Term Loans thereunder
shall in no way release, discharge, or otherwise limit the
obligations of such Guarantor under such Subsidiary Guaranty
Agreement.
This Acknowledgment of Guarantors made and
delivered as of December 2, 1997.
EACH CORPORATION LISTED ON
SCHEDULE I ATTACHED HERETO
(the "Guarantors")
By: /s/ Daniel T. Hendrix
Daniel T. Hendrix
Senior Vice President
<PAGE>
SCHEDULE I
SUBSIDIARY GUARANTORS
Interface Interior Fabrics, Inc., a Delaware corporation
(Formerly Guilford of Maine, Inc.)
Guilford (Delaware), Inc., a Delaware corporation
Interface Flooring Systems, Inc., a Georgia corporation
Rockland React-Rite, Inc., a Georgia corporation
Interface Research Corporation, a Georgia corporation
Interface Europe, Inc., a Delaware corporation
Pandel, Inc., a Georgia corporation
Interface Asia-Pacific, Inc., a Georgia corporation
Bentley Mills, Inc., a Delaware corporation
Prince Street Technologies, Ltd., a Georgia corporation
Intek, Inc., a Georgia corporation
Toltec Fabrics, Inc., a Georgia corporation
Interface Architectural Resources, Inc., a Michigan corporation
(Formerly C-Tec, Inc.)
Guilford of Maine, Inc., a Nevada corporation
Guilford of Maine Finishing Services, Inc., a Nevada corporation
Guilford of Maine Decorative Fabrics, Inc., a Nevada corporation
Guilford of Maine Marketing Co., a Nevada corporation
Intek Marketing Co., a Nevada corporation
Interface Holding Company, a Nevada corporation
Interface Americas, Inc., a Georgia corporation
Interface Americas Services, Inc., a Georgia corporation
Interface Specialty Resources, Inc., a Nevada corporation
Re:Source Americas Enterprises, Inc., a Georgia corporation
Interface Royalty Company, a Nevada corporation
Interface Licensing Company, a Nevada corporation
Price Street Royalty Company, a Nevada corporation
Bentley Royalty Company, a Nevada corporation
Superior/Reiser Flooring Resources, Inc., a Texas corporation
<PAGE>
Quaker City International, Inc., a Pennsylvania corporation
Commercial Flooring Systems, Inc., a Pennsylvania corporation
Congress Flooring Corp., a Massachusetts corporation
Flooring Consultants, Inc., an Arizona corporation
Lasher/White Carpet Company, Inc., a New York corporation
B. Shehadi & Sons, Inc., a New Jersey corporation
<TABLE>
<CAPTION>
Weighted Average
Shares Earnings Per
Net Income Outstanding Share
--------- ---------------- ------------
<S> <C> <C> <C>
1997
Basic $ 37,514 23,708 $ 1.58
Effect of Dilution:
Options 773
Convertible Debt 153 170
-------- ------ --------
Diluted $ 37,667 24,651 $ 1.53
======== ====== ========
1996
Basic $ 24,717 20,060 $ 1.23
Effect of Dilution:
Contingently Issuable Shares 171
Options 256
Convertible Debt 153 170
-------- ------ --------
Diluted $ 24,870 20,657 $ 1.20
======== ====== ========
1995
Basic $ 18,590 <F1> 18,255 $ 1.02
Effect of Dilution:
Options 344
-------- ------ --------
Diluted $ 18,590 <F1> 18,599 $ 1.00
======== ====== ========
<FN>
<F1> Before extraordinary loss on early extinguishment of debt (net of tax).
</FN>
</TABLE>
Exhibit 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
For 1997, the Company had net sales and net income of $1.1 billion
and $37.5 million, respectively, the highest in the Company's history.
Net sales were made up of sales of floorcovering products (primarily
modular and broadloom carpets) and related services ($898.2 million)
interior fabrics sales ($184.7 million) and chemical and specialty
product sales ($52.4 million), accounting for 79%, 16% and 5% of total
net sales, respectively. The Company achieved a compound annual growth
rate in its net sales and net income of 16% and 28%, respectively, over
the five-year period from 1993 to 1997.
The Company's business, as well as the commercial interiors market
in general, is somewhat cyclical in nature. The Company's strong
financial performance in recent years is attributable in part to
increased U.S. demand for its products, resulting from a recovery in the
U.S. commercial office market which began in the mid 1990's. The Company
believes that this recovery will continue for a number of years, and that
all of its domestic operations will continue to benefit from these
industry developments. However, a downturn in the new construction sector
of the market could lessen the overall demand for commercial interiors
products and could impair the Company's growth. Management believes that
the impact upon the Company of such a downturn would be less pronounced
given that the predominant portion of its sales are generated from the
renovation sector of the market as opposed to the new construction
sector.
The Company's growth could also be impacted by international
developments. Specifically, certain countries in the Asia-Pacific region
have recently experienced weaknesses in their currency, banking and
equity markets. These weaknesses could adversely affect demand for the
Company's products. Excluding Japan and Australia, sales in the
Asia-Pacific region represented approximately 2% of the Company's 1997
net sales. The Company engages in hedging transactions to reduce its
exposure to adverse fluctuations in foreign currency exchange rates.
RESULTS OF OPERATIONS
Net sales of $1.1 billion and net income of $37.5 million during
1997 were the highest levels in the Company's history. The following
table shows, as a percentage of net sales, certain items included in the
Company's consolidated statements of income.
<TABLE>
<CAPTION>
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Net sales................................................... 100.0% 100.0% 100.0%
Cost of sales............................................. 68.8 68.3 66.6
----- ----- -----
Gross profit on sales..................................... 31.2 31.7 33.4
Selling general and administrative expense.................. 23.6 23.8 24.8
----- ----- -----
Operating income............................................ 7.6 7.9 8.6
Other expense, net.......................................... 3.7 3.5 3.2
Income before taxes and extraordinary item................ 3.9 4.4 5.4
Taxes on income............................................. 1.4 1.8 2.1
----- ----- -----
Income before extraordinary item.......................... 2.5 2.6 3.3
Extraordinary loss (net of tax)............................. 0.4 0.0 0.0
----- ----- -----
Net income.................................................. 2.1 2.6 3.3
Preferred dividends......................................... 0.2 0.1 0.0
----- ----- -----
Net Income applicable to common shareholders................ 1.9% 2.5% 3.3%
===== ===== =====
</TABLE>
1
<PAGE>
FISCAL 1997 COMPARED WITH FISCAL 1996
The Company's net sales increased $133 million (13.3%) compared with 1996.
The increase was attributable primarily to increased sales volume (i) of
products and related services in the Company's U.S. floorcovering operations,
due to increased demand for and increased market share of its modular carpet
products, as well as additional sales generated by the Re:Source Americas
network, (ii) of floorcovering products (in local currency) in Continental
Europe and Asia-Pacific and (iii) in the Company's interior fabrics operations
due to increased U.S. demand for and increased market share of its fabric
products, as well as the acquisition of Camborne Holdings, Ltd. during the year.
These increases were offset somewhat by a weakening of certain key currencies
(particularly the Dutch guilder, British pound sterling and Japanese yen)
against the U.S. dollar, the Company's reporting currency.
Cost of sales as a percentage of net sales decreased to 66.6% in 1997
compared to 68.3% in 1996. Decreased manufacturing costs through the Company's
mass customization production strategy and its war-on-waste initiative, as well
as a shift to higher margin products, were the primary factors fueling the
increased manufacturing efficiencies in the Company's floorcovering operations.
The Company's interior fabrics operations also experienced decreased
manufacturing costs as a result of continued efficiencies generated from the
new, state-of-the-art yarn manufacturing facility in Guilford, Maine.
Additionally, the Company continued to experience improved pricing in its
floorcovering operations. These benefits were somewhat offset by the higher cost
of sales of the dealers comprising the Re:Source Americas network.
Selling, general and administrative expenses as a percentage of net sales
increased to 24.8% in 1997 compared to 23.8% in 1996. The increase was
attributable primarily to (i) the continued development of the Re:Source
Americas network infrastructure, (ii) consulting and development expenses
associated with the Year 2000 compliance initiative, and (iii) increased
marketing and sampling expenses in the Company's floorcovering operations
associated with the introduction of new products as the Company continues to
implement a mass customization strategy in both its domestic and international
operations. The increase was somewhat offset by the lower selling, general and
administrative ratios of the dealers comprising the Re:Source Americas network.
Other expense increased $1.3 million in 1997, due primarily to an increase
in the Company's interest expense associated with an increase in bank debt
incurred as a result of the Company's acquisitions.
The effective tax rate was 38.8% for 1997, compared to 39.2% in 1996. The
decrease in the effective rate was primarily due to the effect of an increase in
income before tax in proportion to the amortization expense of the Company's
goodwill, which is not deductible for tax purposes.
As a result of the aforementioned factors, the Company's net income
increased 42.1% to $37.5 million for fiscal 1997, compared to $26.4 million for
fiscal 1996.
FISCAL 1996 COMPARED WITH FISCAL 1995
The Company's net sales increased $200 million (24.9%) compared with 1995.
The increase was attributable primarily to increased sales volume in (i) the
Company's floorcovering operations in the United States associated in part with
the acquisitions of the commercial floorcovering dealers in the Company's
Re:Source Americas network, (ii) the Company's floorcovering operations in
Continental Europe and Australia, (iii) the Company's interior fabrics
operations associated with the acquisitions of Toltec and Intek in June and
December 1995, respectively, and (iv) the Company's specialty products division
associated with the C-Tec (now Interface Architectural Resources) acquisition in
2<PAGE>
February, 1996. These increases were offset somewhat by a weakening of certain
key currencies (particularly the British pound sterling, Dutch guilder and
Japanese yen) against the U.S. dollar, the Company's reporting currency.
Cost of sales decreased as a percentage of net sales to 68.3% in 1996
compared with 68.8% in 1995. The Company recognized a decrease in manufacturing
costs in its floorcovering operations as a result of further benefits obtained
from the Company's mass customization and war-on-waste strategies, which have
continued to provide manufacturing efficiencies and help facilitate a shift to
higher margin products. In addition, the Company achieved improved pricing in
its floorcovering operations. These benefits were somewhat offset by
the acquisitions of Toltec, Intek, C-Tec, and the commercial floorcovering
dealers comprising the Company's new distribution network, which historically
had higher cost of sales ratios than the Company.
Selling, general and administrative expenses as a percentage of net sales
increased to 23.8% in 1996 compared with 23.5% in 1995. The increase was due
primarily to (i) administrative expenses associated with building an
infrastructure to manage the Re:Source Americas network, (ii) increased
marketing and sampling expenses in the Company's floorcovering operations
associated with the introduction of new products as the Company moved to
implement the mass customization production strategy in its European and
Asia-Pacific operations, and continued to implement such strategy in its U.S.
operations, and (iii) the acquisitions of Toltec and Intek, which historically
had higher selling, general and administrative ratios than the Company. The
increase was somewhat offset by the acquisitions of the commercial floorcovering
dealers comprising the Company's new distribution and services network, which
historically had lower selling, general and administrative ratios than the
Company.
Other expense increased $5.4 million in fiscal 1996, due primarily to an
increase in the Company's interest expense associated with (i) an increase in
bank debt incurred as a result of the Company's acquisitions, and (ii) higher
interest rates associated with the Company's redemption of its 8% Convertible
Subordinated Debentures in December 1995 and the issuance of $125 million in
aggregate principal amount of 9.5% Senior Subordinated Notes in November 1995.
The effective tax rate was 39.2% for fiscal 1996, compared to 35.8% in
fiscal 1995. The increase in the effective income tax rate was due primarily to
the elimination of valuation allowances associated with the Company's Dutch and
Australian operations in 1995, which did not occur in 1996. This increase was
offset somewhat by the effect of the increase in the Company's income before
taxes in proportion to the amortization of the Company's goodwill, which is not
deductible for tax purposes.
As a result of the aforementioned factors, the Company's net income before
extraordinary items increased 29.8% to $26.4 million for fiscal 1996, compared
to $20.3 million for fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash over the last three fiscal years have
been funds provided by operating activities and proceeds from additional
long-term debt. In 1997, operating activities generated $74.7 million of cash
compared with $56.5 million and $76.0 million in 1996 and 1995, respectively.
The increase in 1997 operating cash flows compared with 1996 was caused
primarily by increased levels of net income, accounts payables and accruals.
3<PAGE>
The primary uses of cash during the three fiscal years ended December 28,
1997 have been (i) additions to property and equipment at the Company's
manufacturing facilities, (ii) acquisitions of businesses, and (iii) cash
dividends. For the three years ended December 28, 1997, the aggregate additions
to property and equipment required cash outlays of $117.2 million, while
acquisitions of businesses required $92.4 million, and dividends required $19.2
million. Management believes the capital investments will result in an expanded
market presence and improved efficiency in the Company's production and
distribution.
In 1997, the Company issued 548,645 shares of Class A Common Stock or Class
B Common Stock in addition to cash as consideration for acquisitions. Also, in
January 1997, the Company issued 1,357,407 shares of Class A Common Stock in
conjunction with the conversion of $19.8 million (face value) of its Series A
Cumulative Convertible Preferred Stock.
The Company is concurrently offering to the public $150 million aggregate
principal amount of Notes and 1.5 million shares of Class A Common Stock. The
Company intends to use the net proceeds of both offerings to reduce amounts
outstanding under its $370 million Credit Facility, and for general corporate
purposes, including working capital and future acquisitions. Amounts applied to
the revolving credit portion of the Credit Facility will be available for
reborrowing.
At the end of fiscal 1997, the Company estimated capital expenditure
requirements of approximately $40 million, excluding Year 2000 requirements, and
had purchase commitments of approximately $13 million for 1998. The Company
also intends to continue to selectively acquire companies and
related product lines that complement its existing product lines and further its
ability to offer total interior solutions to its customers. Management believes
that cash provided by operations and long-term loan commitments, including the
Credit Facility, will provide adequate funds for current commitments and other
requirements in the foreseeable future.
YEAR 2000
As is the case with other companies using computers in their operations,
the Company is faced with the task of addressing the Year 2000 issue during the
next two years. The Year 2000 issue arises from the widespread use of computer
programs that rely on two-digit date codes to perform computations or decision-
making functions. The Company has done a comprehensive review of its computer
programs to identify the systems that would be affected by the Year 2000 issue,
and is in the process of reviewing the Company's Year 2000 exposure to third
party customers, distributors, suppliers, and banking institutions. The Company
has also hired an outside consulting firm to assist in this conversion process
and is beginning the process of modifying its computer program code to the four
digit fields necessary to be Year 2000 compliant.
The Company currently estimates the total cost of such modifications,
excluding the cost of modifications to program logic control systems relative to
manufacturing equipment, to be at least $17 million, although it could be
significantly more. The Company and its outside consultants are currently
evaluating the costs of modifications to these program logic control systems. Of
the total project cost, approximately $10 million is attributable to the cost of
new hardware and software which will be required in connection with the global
consolidation of the Company's management and financial accounting systems. This
new equipment and upgraded technology will have a definable value lasting beyond
the Year 2000. In these instances, where Year 2000 compliance is ancillary, the
Company may capitalize and depreciate such costs. The remaining $7 million will
be expensed as incurred over the next two years. During the year ended December
28, 1997, the Company expensed approximately $0.6 million in regards to such
modifications.
4<PAGE>
There can be no guarantee that these estimates will be achieved and actual
results could differ from those anticipated. Specific factors that might cause
differences include, but are not limited to, the ability of other companies on
which the Company's systems rely to modify or convert their systems to be Year
2000 compliant, the ability to locate and correct all relevant computer codes
and similar uncertainties.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company employs the use of derivative financial instruments for the
purpose of reducing its exposure to adverse fluctuations in interest and foreign
currency exchange rates. While these hedging instruments are subject to
fluctuations in value, such fluctuations are generally offset by the
fluctuations in value of the underlying exposures being hedged. The Company does
not hold or issue derivative financial instruments for trading purposes. The
Company monitors the use of derivative financial instruments through the use of
objective measurable systems, well-defined market and credit risk limits, and
timely reports to senior management according to prescribed guidelines. The
Company has established strict counterparty credit guidelines and only enters
into transactions with financial institutions of investment grade or better. As
a result, the Company considers the risk of counterparty default to be minimal.
Management of the Company has developed and implemented a policy to
maintain the percentage of fixed and variable rate debt within certain
parameters. The Company enters into interest rate swap agreements, which
maintain the fixed/variable mix within these defined parameters. In these swaps,
the Company agrees to exchange, at specified intervals, the difference between
fixed and variable interest amounts calculated by reference to an agreed-upon
notional principal linked to LIBOR. At December 28, 1997, the Company had
utilized interest rate swap agreements to effectively convert approximately
$64.5 million of variable rate debt to fixed rate debt. The weighted average
rate on these borrowings was 6.6% at December 28, 1997. The interest rate swap
agreements have maturity dates ranging from five to twenty-four months.
The purpose of the Company's foreign currency hedging activities is to
reduce the risk that the eventual local currency inflows resulting from sales
to foreign customers will be adversely affected by changes in exchange rates.
The Company enters into forward exchange and currency swap contracts to hedge
certain firm sales commitments denominated in foreign currencies. At
December 28, 1997, the Company had approximately $14.5 million (notional
amount) of foreign currency hedge contracts outstanding. The contracts
served to hedge firmly committed Dutch guilder, German mark, Japanese yen,
French franc, British pound sterling, and other foreign currency sales. The
contracts generally have maturity dates of six to nine months.
The Company recognized a $25.1 million decrease in its foreign currency
translation adjustment account during 1997, because of the weakening of the
Dutch guilder, British pound sterling, Thai baht and Japanese yen against the
U.S. dollar. The 1997 decrease was associated primarily with the Company's
investments in certain foreign subsidiaries located in the United Kingdom,
Continental Europe and the Asia-Pacific region. The translation adjustment to
shareholders' equity was converted by the guidelines of SFAS 52.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS 131, Disclosures About Segments of an
Enterprise and Related Information, which supersedes SFAS 14, Financial
Reporting for Segments of a Business Enterprise. SFAS 131 establishes standards
for the reporting by public companies of information about operating segments in
annual financial statements and for the first time, requires reporting of
selected information about operating segments in interim financial statements
issued to the public. It also establishes standards for disclosures regarding
5<PAGE>
products and services, geographic areas and major customers. SFAS 131 defines
operating segments as components of a company about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance.
SFAS 131 is effective for financial statements for periods beginning after
December 15, 1997 and requires the restatement of comparative information for
earlier periods. Management has been evaluating the impact the new statement
will have on future financial statement disclosures and has determined that the
Company will have three reportable segments: Floorcovering Products and Related
Services, Interior Fabrics, and Chemical and Specialty Products. Historically,
the Company has not reported information concerning operating segments. The
Company's future reportable segments are strategic business units that offer
different products and services. The results of operations and financial
position will be unaffected by implementation of the standard.
6<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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
<PAGE>
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
<PAGE>
INTERFACE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------
1997 1996 1995
---------- ---------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
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
<PAGE>
INTERFACE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
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
<PAGE>
INTERFACE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
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>
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>
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
<PAGE>
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
<PAGE>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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
Exhibit 21
<TABLE>
<CAPTION>
SUBSIDIARIES OF INTERFACE, INC.
Jurisdiction of
Subsidiary <F1> Organization
--------------- ---------------
<S> <C>
Bentley Mills, Inc. Delaware (USA)
Guilford (Delaware), Inc. Delaware (USA)
Interface Europe, Inc. Delaware (USA)
Interface Interior Fabrics, Inc.<F2> Delaware (USA)
Interface Securitization Corporation Delaware (USA)
Intek, Inc. Georgia (USA)
Interface Americas, Inc. Georgia (USA)
Interface Asia-Pacific, Inc.<F3> Georgia (USA)
Interface Flooring Systems, Inc. Georgia (USA)
Interface Research Corporation Georgia (USA)
Interface Yarns, Inc. Georgia (USA)
Pandel, Inc. Georgia (USA)
Prince Street Technologies, Ltd. Georgia (USA)
Re:Source Americas Enterprises, Inc.<F4> Georgia (USA)
Rockland React-Rite, Inc. Georgia (USA)
Toltec Fabrics, Inc. Georgia (USA)
Facilities Resource Group, Inc. Illinois (USA)
Interface Architectural Resources, Inc. Michigan (USA)
Interface Americas Services, Inc. Nevada (USA)
Renovisions, Inc. Pennsylvania (USA)
Interface Flooring Systems Commercial Ltda. Brazil
Interface Flooring Systems (Canada), Inc. Canada
Interface Europe B.V.<F5> Netherlands
Interface Europe, Ltd. <F6> United Kingdom
____________________________________________
<FN>
<F1> The names of certain subsidiaries which, if considered in the
aggregate as a single subsidiary, would not constitute a
"significant subsidiary", have been omitted.
<F2> Interface Interior Fabrics, Inc. (formerly Guilford of Maine,
Inc.) is the parent of nine direct or indirect subsidiaries
organized and operating in Canada and the United States
(including Toltec Fabrics, Inc. and Intek, Inc.).
<F3> Interface Asia-Pacific, Inc. is the parent of 11 subsidiaries
organized and operating in Australia, Japan, Hong Kong, Singapore,
Thailand, China and the British Virgin Islands.
<F4> Re: Source Americas Enterprises, Inc. is the parent of 19
subsidiaries organized and operating in the United States.
All of such subsidiaries are commercial floorcovering
contractors.
<F5> Interface Europe B.V. (formerly Interface Heuga B.V.) is the
parent of seven direct or indirect subsidiaries organized and
operating in the Netherlands, and 14 direct or indirect
subsidiaries organized and operating outside of the
Netherlands.
<F6> Interface Europe, Ltd. (formerly Interface Flooring Systems,
Ltd.) is the parent of 15 direct or indirect subsidiaries
organized and operating in the United Kingdom and eight
direct or indirect subsidiaries organized and operating
outside the United Kingdom.
</FN>
</TABLE>
Exhibit 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Interface, Inc.
Atlanta, Georgia
We hereby consent to the incorporation of our reports dated
February 17, 1998, relating to the consolidated financial statements
and schedule of Interface, Inc. included or incorporated by reference
in this Form 10-K, into the Company's previously filed registration
statements on Form S-8; Registration No. 33-28305, Form S-8; Registration
No. 33-28307; Form S-8, Registration No. 33-69808, Form S-8; Registration
No. 333-10377, Form S-8, Registration No. 333-10379, Form S-8, Registration
No. 333-38675, and Form S-8, Registration No. 333-38677 relating to the
Company's Key Employee Stock Option Plan, Offshore Stock Option Plan, Key
Employee Stock Option Plan (1993), Savings and Investment Plan, Omnibus
Stock Incentive Plan and Nonqualified Savings Plan, and Form S-3, Registration
No. 333-46611, as amended by Form S-3/A, including the prospectuses therein.
It should be noted that we have not audited any financial statements of the
Company subsequent to December 28, 1997 or performed any audit procedures
subsequent to the date of our report.
BDO SEIDMAN, LLP
Atlanta, Georgia
March 25, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from financial
statements incorporated by reference into the Company's annual report on Form
10-K for the year ended December 28, 1997, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0000715787
<NAME> INTERFACE, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-END> DEC-28-1997
<CASH> 10,212
<SECURITIES> 0
<RECEIVABLES> 185,304
<ALLOWANCES> 7,327
<INVENTORY> 157,630
<CURRENT-ASSETS> 375,240
<PP&E> 453,742
<DEPRECIATION> 224,961
<TOTAL-ASSETS> 929,563
<CURRENT-LIABILITIES> 191,837
<BONDS> 389,499
0
0
<COMMON> 2,776
<OTHER-SE> 316,578
<TOTAL-LIABILITY-AND-EQUITY> 929,563
<SALES> 1,135,290
<TOTAL-REVENUES> 1,135,290
<CGS> 755,734
<TOTAL-COSTS> 1,037,489
<OTHER-EXPENSES> 1,492
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35,038
<INCOME-PRETAX> 61,271
<INCOME-TAX> 23,757
<INCOME-CONTINUING> 37,514
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37,514
<EPS-PRIMARY> 1.58
<EPS-DILUTED> 1.53
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This restated financial data schedule contains summary financial information
extracted from financial statements incorporated by reference into the Company's
annual reports on Form 10-K for the years ended December 31, 1995 and December
29, 1996, as subsequently restated, and is qualified in its entirety by
reference to such restated financial statements.
</LEGEND>
<RESTATED>
<CIK> 0000715787
<NAME> INTERFACE, INC.
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-29-1996
<PERIOD-END> DEC-31-1995 DEC-29-1996
<CASH> 8,750 8,782
<SECURITIES> 0 0
<RECEIVABLES> 117,256 175,166
<ALLOWANCES> 5,870 7,349
<INVENTORY> 134,504 146,678
<CURRENT-ASSETS> 274,386 353,300
<PP&E> 370,486 408,956
<DEPRECIATION> 187,187 200,165
<TOTAL-ASSETS> 714,351 862,546
<CURRENT-LIABILITIES> 115,355 163,716
<BONDS> 324,022 379,353
25,000 19,750
0 0
<COMMON> 2,203 2,536
<OTHER-SE> 229,711 270,582
<TOTAL-LIABILITY-AND-EQUITY> 714,351 862,546
<SALES> 802,066 1,002,076
<TOTAL-REVENUES> 802,066 1,002,076
<CGS> 551,643 684,455
<TOTAL-COSTS> 740,523 923,387
<OTHER-EXPENSES> 3,114 2,490
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 26,753 32,772
<INCOME-PRETAX> 31,676 26,395
<INCOME-TAX> 11,336 1,678
<INCOME-CONTINUING> 20,340 24,717
<DISCONTINUED> 0 0
<EXTRAORDINARY> (3,512) 0
<CHANGES> 0 0
<NET-INCOME> 16,828 26,395
<EPS-PRIMARY> 1.02<F1> 1.23
<EPS-DILUTED> 1.00<F1> 1.20
<FN>
<F1> Before extraordinary loss on early extinguishment of debt, net of
tax, of $0.19.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This restated financial data schedule contains summary financial information
extracted from financial statements incorporated by reference into the Company's
quarterly reports on Form 10-Q for the quarters ended March 31, 1996, June 30,
1996, and September 29, 1996, as subsequently restated, and is qualified in
its entirety by reference to such restated financial statements.
</LEGEND>
<RESTATED>
<CIK> 0000715787
<NAME> INTERFACE, INC.
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-29-1996 DEC-29-1996 DEC-29-1996
<PERIOD-END> MAR-31-1996 JUN-30-1996 SEP-29-1996
<CASH> 5,228 8,826 154
<SECURITIES> 0 0 0
<RECEIVABLES> 143,579 140,681 170,736
<ALLOWANCES> 5,870 5,870 5,870
<INVENTORY> 143,335 146,734 154,579
<CURRENT-ASSETS> 310,304 313,501 346,282
<PP&E> 389,076 341,327 399,394
<DEPRECIATION> 193,226 194,593 197,141
<TOTAL-ASSETS> 781,183 794,675 844,260
<CURRENT-LIABILITIES> 137,144 140,120 151,801
<BONDS> 360,116 366,825 391,307
25,000 25,000 24,751
0 0 0
<COMMON> 2,275 2,363 2,425
<OTHER-SE> 235,635 239,277 252,058
<TOTAL-LIABILITY-AND-EQUITY> 781,183 794,675 844,260
<SALES> 205,017 442,505 717,546
<TOTAL-REVENUES> 205,017 442,505 717,546
<CGS> 142,104 304,928 492,509
<TOTAL-COSTS> 191,446 409,905 663,396
<OTHER-EXPENSES> (724) 401 81
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 8,316 16,177 25,602
<INCOME-PRETAX> 5,980 16,022 28,467
<INCOME-TAX> 2,272 6,289 11,153
<INCOME-CONTINUING> 3,708 9,733 17,314
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 3,708 9,733 17,314
<EPS-PRIMARY> 0.18 0.47 .82
<EPS-DILUTED> 0.18 0.47 .80
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This restated financial data schedule contains summary financial information
extracted from financial statements incorporated by reference into the Company's
quarterly reports on Form 10-Q for the quarters ended March 30, 1997, June 29,
1997 and September 28, 1997, as subsequently restated, and is qualified in its
entirety by reference to such restated financial statements.
</LEGEND>
<RESTATED>
<CIK> 0000715787
<NAME> INTERFACE, INC.
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-28-1997 DEC-28-1997 DEC-28-1997
<PERIOD-END> MAR-30-1997 JUN-29-1997 SEP-28-1997
<CASH> 0 9,816 9,616
<SECURITIES> 0 0 0
<RECEIVABLES> 164,911 170,469 197,917
<ALLOWANCES> 7,349 6,532 7,325
<INVENTORY> 152,956 153,383 165,655
<CURRENT-ASSETS> 343,353 359,906 401,204
<PP&E> 413,187 429,831 364,483
<DEPRECIATION> 202,223 213,766 140,468
<TOTAL-ASSETS> 854,775 880,724 951,218
<CURRENT-LIABILITIES> 155,024 154,088 189,173
<BONDS> 380,892 401,037 426,379
0 0 0
0 0 0
<COMMON> 2,698 2,715 2,762
<OTHER-SE> 292,758 298,529 303,660
<TOTAL-LIABILITY-AND-EQUITY> 854,775 880,724 951,2118
<SALES> 257,345 529,091 826,443
<TOTAL-REVENUES> 257,345 529,091 826,443
<CGS> 174,432 356,774 553,473
<TOTAL-COSTS> 237,388 486,585 757,340
<OTHER-EXPENSES> 1,154 19,149 28,393
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 8,389 17,476 26,303
<INCOME-PRETAX> 10,414 23,357 40,710
<INCOME-TAX> 4,061 9,044 15,886
<INCOME-CONTINUING> 6,353 14,313 24,824
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 6,353 14,313 24,824
<EPS-PRIMARY> 0.28 0.62 1.06
<EPS-DILUTED> 0.27 0.60 1.02
</TABLE>
Exhibit 99.1
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR COMPLIANCE STATEMENT
FOR FORWARD-LOOKING STATEMENTS
In passing the Private Securities Litigation Reform Act of
1995 (the "Reform Act"), Congress encouraged public companies to
make "forward-looking statements" by creating a safe harbor to
protect companies from securities law liability in connection
with forward-looking statements. Interface, Inc. ("Interface" or
the "Company") intends to qualify both its written and oral
forward-looking statements for protection under the Reform Act
and any other similar safe harbor provisions.
"Forward-looking statements" are defined by the Reform Act.
Generally, forward-looking statements include expressed
expectations of future events and the assumptions on which the
expressed expectations are based. All forward-looking statements
are inherently uncertain as they are based on various
expectations and assumptions concerning future events and they
are subject to numerous known and unknown risks and uncertainties
which could cause actual events or results to differ materially
from those projected. Due to those uncertainties and risks, the
investment community is urged not to place undue reliance on
written or oral forward-looking statements of Interface. The
Company undertakes no obligation to update or revise this Safe
Harbor Compliance Statement for Forward-Looking Statements (the
"Safe Harbor Statement") to reflect future developments. In
addition, Interface undertakes no obligation to update or revise
forward-looking statements to reflect changed assumptions, the
occurrence of unanticipated events or changes to future operating
results over time.
Interface provides the following risk factor disclosure in
connection with its continuing effort to qualify its written and
oral forward-looking statements for the safe harbor protection of
the Reform Act and any other similar safe harbor provisions.
Important factors currently known to management that could cause
actual results to differ materially from those in forward-looking
statements include the disclosures contained in the Annual Report
on Form 10-K to which this statement is appended as an exhibit
and also include the following:
STRONG COMPETITION
The commercial floorcovering industry is highly competitive.
Globally, the Company competes for sales of its modular and
broadloom carpet with other carpet manufacturers and
manufacturers of vinyl and other types of floorcovering. Although
the industry recently has experienced significant consolidation,
a large number of manufacturers remain in the industry.
Management believes that the Company is the largest manufacturer
of modular carpet in the world, with a global market share over
two times that of its nearest competitor. However, a number of
domestic and foreign competitors manufacture modular carpet as
one segment of their business, and certain of these competitors
have financial resources in excess of the Company's.
CYCLICAL NATURE OF INDUSTRY
Sales of the Company's principal products are related to the
construction and renovation of commercial and institutional
buildings. Such activity is cyclical and can be affected by the
strength of a country's general economy, prevailing interest<PAGE>
rates and other factors that lead to cost control measures by
businesses and other users of commercial or institutional space.
The effects of such cyclicality upon the new construction sector
of the market tend to be more pronounced than its effects upon
the renovation sector. Although the predominant portion of the
Company's sales are generated from the renovation sector, any
such adverse cycle, in either sector of the market, would lessen
the overall demand for commercial interiors products, which could
impair the Company's growth.
Reliance on Key Personnel
The Company believes that its continued success will depend to
a significant extent upon the efforts and abilities of its senior
management executives, particularly Ray C. Anderson, Chairman of
the Board and Chief Executive Officer; Charles R. Eitel,
President and Chief Operating Officer; and Gordon D. Whitener,
Senior Vice President. Each of Messrs. Anderson, Eitel and
Whitener have entered into employment agreements with the Company
containing certain covenants of non-competition, and the Company
currently maintains key-man insurance on each of Messrs. Anderson
and Eitel. In addition, the Company relies significantly on the
leadership of its design staff by David Oakey of David Oakey
Designs, Inc., which provides product design/production
engineering services to the Company under an exclusive consulting
contract that contains certain covenants of non-competition. The
loss of all or some of such personnel could have an adverse
impact on the Company.
RISKS OF FOREIGN OPERATIONS
The Company has substantial international operations. In fiscal
1997, approximately 32% of the Company's net sales and a
significant portion of the Company's production were outside the
United States, primarily in Europe but also in Asia. The
Company's corporate strategy includes the expansion of its
international business on a worldwide basis. As a result, the
Company's operations are subject to various political, economic
and other uncertainties, including risks of restrictive taxation
policies, foreign exchange restrictions, changing political
conditions and governmental regulations. In addition, recent
economic events in Asia, including depreciation of certain Asian
currencies, failures of financial institutions, stock market
declines and reductions in planned capital investment at key
enterprises, may adversely impact the Company's sales in the
Asian markets. The Company also makes a substantial portion of
its net sales in currencies other than U.S. dollars, which
subjects it to the risks inherent in currency translations. The
Company's ability to manufacture and ship products from
facilities in several foreign countries reduces the risks of
foreign currency fluctuations it might otherwise experience, and
the Company also engages from time to time in hedging programs
intended to further reduce those risks. Despite this, the scope
and volume of the Company's global operations make it impossible
to eliminate completely all foreign currency translation risks as
an influence on the Company's financial results.
CONTROL OF ELECTION OF A MAJORITY OF BOARD
The Company's Chairman and Chief Executive Officer, Ray C.
Anderson, beneficially owns approximately 60% of the Company's
outstanding Class B Common Stock, and has entered into a voting
agreement, which expires in April 1998, with certain other
holders of Class B Common Stock pursuant to which such other
holders have irrevocably appointed Mr. Anderson their proxy and
attorney-in-fact to vote their shares. The holders of the Class B
Common Stock are entitled, as a class, to elect a majority of the
Board of Directors of the Company, which means that Mr. Anderson
has sufficient voting power (which voting power will be
unaffected by the expiration of the voting agreement) to elect a
majority of the Board of Directors. The holders of the Class B
Common Stock generally vote together as a single class with the
holders of the Class A Common Stock on all other matters
submitted to the shareholders for a vote, however, and Mr.
Anderson's beneficial ownership of the outstanding Class A and
Class B Common Stock combined is less than 10%.
RELIANCE ON PETROLEUM-BASED RAW MATERIALS
Petroleum-based products comprise the predominant portion of
the cost of raw materials used by the Company in manufacturing.
While the Company generally attempts to match cost increases with
corresponding price increases, large increases in the cost of
such petroleum-based raw materials could adversely affect the
Company if the Company were unable to pass through to its
customers such increases in raw material costs.
RELIANCE ON THIRD PARTY FOR SUPPLY OF FIBER
E. I. DuPont de Nemours and Company ("DuPont") currently
supplies a significant percentage of the Company's requirements
for synthetic fiber, the principal raw material used in the
Company's carpet products. DuPont also competes with the
Company's Re:Source Americas network through DuPont's own
distribution channel and aligned carpet mills. While the Company
believes that there are adequate alternative sources of supply
from which it could fulfill its synthetic fiber requirements, the
unanticipated termination or interruption of the supply
arrangement with DuPont could have a material adverse effect on
the Company because of the cost and delay associated with
shifting more business to another supplier.
RESTRICTIONS DUE TO SUBSTANTIAL INDEBTEDNESS
The Company's indebtedness is substantial in relation to its
shareholders' equity. As of December 28, 1997, the Company's
long-term debt (net of current portion) totaled $389 million or
approximately 55% of its total capitalization. As a consequence
of its level of indebtedness a substantial portion of the
Company's cash flow from operations must be dedicated to debt
service requirements. The terms of the Company's outstanding
indebtedness also restrict or limit the ability of the Company
and its subsidiaries to, among other things, incur additional
indebtedness, pay dividends or make certain other restricted
payments or investments in certain situations, consummate certain
asset sales, enter into certain transactions with affiliates,
incur liens, or merge or consolidate with any other person or
sell, assign, transfer, lease, convey or otherwise dispose of all
or substantially all of their assets. They also require the
Company to meet certain financial tests and comply with certain
other reporting, affirmative and negative covenants.
YEAR 2000 RISK
The "year 2000 issue" arises from the widespread use of
computer programs that rely on two-digit date codes to perform
computations or decision-making functions. Many of these programs
may fail due to an inability to properly interpret date codes
beginning January 1, 2000. For example, such programs may
misinterpret "00" as the year 1900 rather than 2000. In addition,
some equipment, being controlled by microprocessor chips, may not
deal appropriately with the year "00". The Company is evaluating
its computer systems with the help of outside consultants to
determine which modifications and expenditures will be necessary
to make its systems compatible with year 2000 requirements. The
Company believes that its systems will be year 2000-compliant
upon implementation of such modifications.
The Company currently estimates the total cost of such
modifications, excluding the cost of modifications to program
logic control systems relating to manufacturing equipment, to be
at least $17 million, although it could be significantly more.
The Company and its outside consultants are currently evaluating
the costs of modifications to these program logic control
systems. Of the total project cost, approximately $10 million is
attributable to the cost of new hardware and software which will
be capitalized in connection with the consolidation globally of
the Company's management and financial accounting systems. The
remaining $7 million will be expensed as incurred over the next
two years. However, there can be no assurance that all necessary
modifications will be identified and corrected or that unforeseen
difficulties or costs will not arise. In addition, there can be
no assurance that the systems of other companies on which the
Company's systems rely will be modified on a timely basis, or
that the failure by another company to properly modify its
systems will not negatively impact the Company's systems or
operations.
ANTI-TAKEOVER EFFECTS OF SHAREHOLDER RIGHTS PLAN
The Board of Directors has adopted a Rights Agreement pursuant
to which holders of Common Stock will be entitled to purchase
from the Company a fraction of a share of the Company's Series B
Participating Cumulative Preferred Stock if a third party
acquires beneficial ownership of 15% or more of the Common Stock
and will be entitled to purchase the stock of an Acquiring Person
(as defined in the Rights Agreement) at a discount upon the
occurrence of certain triggering events. These provisions of the
Rights Agreement could have the effect of discouraging tender
offers or other transactions that would result in shareholders
receiving a premium over the market price for the Common Stock.
