Back to GetFilings.com

Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

For the Fiscal Year Ended December 29, 2002

Commission File No.: 0-12016

Interface, Inc.

Registrant’s telephone number, including area code:

Securities Registered Pursuant to Section 12(b) of the Act:

Securities Registered Pursuant to Section 12(g) of the Act:

     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 þ  NO o

     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.  o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).  YES þ  NO o

     Aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant as of June 28, 2002 (assuming conversion of Class B Common Stock into Class A Common Stock): $370,881,888 (46,129,588 shares valued at the last sales price of $8.04 on June 28, 2002). See Item 12.

     Number of shares outstanding of each of the registrant’s classes of Common Stock, as of March 17, 2003:

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Proxy Statement for the 2003 Annual Meeting of Shareholders are incorporated by reference into Part III.

Table of Contents

PART I

ITEM 1.     BUSINESS

General

      We are a global manufacturer, marketer, installer and servicer of products for the commercial, institutional and residential interiors markets with a strong presence in the following market segments:

	•	Modular carpet;
	•	Broadloom carpet;
	•	Floorcovering services;
	•	Interior panel fabrics;
	•	Upholstery fabrics; and
	•	Raised/Access flooring.

      With a market share of approximately 35%, we are the worldwide leader in the modular carpet segment. Our Bentley® and Prince Street® brands are leaders in the high quality, designer-oriented sector of the broadloom carpet segment. We provide specialized carpet replacement, installation, maintenance, and reclamation services through our Re:Source Americas service network. Our Fabrics Group includes the leading U.S. manufacturer of panel fabrics for use in open plan office furniture systems, with a market share of approximately 50%, and the leading U.S. manufacturer of contract upholstery sold to office furniture manufacturers and contract jobbers, with a U.S. contract upholstery market share of approximately 35%.

      Our specialty products operations produce antimicrobial additives, vinyl carpet tile backing, and specialty mat and foam products. We also produced adhesives and other specialty chemical compounds until February 2003, when we sold that business. In the fourth quarter of 2002, we decided to sell or otherwise create a joint venture or strategic alliance for our raised/access flooring business (for which we are the second largest U.S. manufacturer) and thus we now reflect that business as discontinued operations.

      Our complementary product and service offerings, together with an integrated marketing philosophy, enable Interface to take a “total interior solutions” approach to serving the diverse needs of our customers around the world.

      We market products in over 100 countries around the world under such established brand names as Interface®, Heuga®, Bentley and Prince Street in modular carpet; Bentley and Prince Street in broadloom carpet; Guilford of Maine®, Stevens Linen™, Toltec®, Intek®, Chatham®, Camborne™ and Glenside™ in interior fabrics and upholstery products; Intersept® in antimicrobials; and, until the disposition of our raised/access flooring business is consummated, C-Tec®, Atlantic™ and Intercell® in raised/access flooring systems. We utilize an internal marketing and sales force of over 1,000 experienced personnel stationed at over 75 locations in over 30 countries, to market our products and services in person to our customers. This sales force is one of the largest sales forces in the global commercial floorcovering industry. Our principal geographic markets are the Americas (70% of 2002 net sales), Europe (26% of 2002 net sales) and Asia-Pacific (4% of 2002 net sales).

      For 2002, we had net sales and net loss (including a $55.4 million after-tax write-down associated with our implementation of Statement of Financial Accounting Standards (SFAS) No. 142 and a pre-tax restructuring charge of approximately $23.4 million) of $924.1 million and $87.7 million, respectively. Net sales consisted of sales of floorcovering products and related services ($710.0 million), interior fabrics sales ($199.3 million) and other specialty product sales ($14.8 million), accounting for 76.8%, 21.6% and 1.6% of total net sales, respectively.

1

Table of Contents

Our Strengths

      Our dominant market positions reflect our principal strengths, which include:

      Preeminent Brand Names with Reputation for Quality and Reliability. Our products are known in the industry for their high quality and reliability. Our preeminent brand names in carpets and interior fabrics are leaders in the industry. In a 2002 survey of interior designers published in the Floor Focus industry publication, an Interface company was ranked first or second in each of the five survey categories of carpet design, quality, value, service, and performance. In addition, an Interface company ranked first and second in the category of “best overall business experience” for carpet companies in this survey. On the international front, Heuga is one of the preeminent brand names in carpet tiles for commercial, institutional and residential use worldwide. Guilford of Maine, Chatham and Camborne are leading brand names in their respective markets for interior fabrics. Interface Architectural Resources’ TecCrete® brand is a leading brand in the raised/access flooring market.

      Strong Free Cash Flow Generation. We have structured our principal businesses to yield high contribution margins. As a result of our historical investments in global manufacturing capabilities and mass customization techniques and facilities, and our sustained initiatives to reduce costs and enhance operating efficiencies throughout our supply and production chain, we are positioned to derive substantially increased cash flows from operations. We have the current capacity, without significant capital expenditures, to increase production levels to handle higher demand for our products, which may result from either or both of (i) improved economic conditions and (ii) the expansion of our business in non-corporate segments that is being driven by the increasing acceptance of modular products. The consolidation and integration of varied operating, manufacturing and administrative functions, along with the workforce reductions and other initiatives reflected in our 2000, 2001 and 2002 restructuring charges, contribute to this strength.

      Innovative Product Design and Development Capabilities. Our product design and development capabilities give us a significant competitive advantage. We have an exclusive consulting contract with the leading design firm David Oakey Designs, Inc. (Oakey Designs). This relationship augments our internal research, development and design staff. Since engaging Oakey Designs in 1994, we have introduced more than 147 new carpet designs in the U.S. and have enjoyed considerable success in winning U.S. carpet industry design awards from the International Interior Design Association (IIDA), particularly in the carpet tile division. Oakey Designs’ services have been extended to our international carpet operations, and we expect to continue to introduce more new designs to our international customers in the near future. We also have a consulting contract with the design firm Suzanne Tick, Inc., which is affiliated with award-winning carpet manufacturer Tuva Looms, Inc., to steward and design our Prince Street brand broadloom carpets and area rugs.

      Low-Cost Global Manufacturing Operations. Our global manufacturing capabilities are an important competitive advantage in serving the needs of multinational corporate customers that require products and services at various locations around the world. Global manufacturing locations enable us to compete effectively with local producers in our international markets, while also giving international customers more favorable delivery times and freight costs. Our capital investment program to consolidate and modernize the yarn manufacturing operations of our Fabrics Group has resulted in significant efficiencies and cost savings, as well as the capability to produce new products and enter new markets. In addition, these investments have allowed us to respond to a shift in demand towards lighter-weight, less expensive fabrics by original equipment manufacturer (OEM) panel fabric customers.

      Established Customer and Design Community Relationships. We focus our sales efforts at the design phase of commercial projects. Our dedicated sales and marketing personnel, who number over 1,000 in over 30 countries worldwide, cultivate relationships with the owners and users of the facilities involved in the projects as well as with architects, engineers, interior designers and contracting firms who are directly involved in specifying products and often make or significantly influence purchasing decisions. In all of our sales efforts, we emphasize our product design and styling capabilities. We also emphasize our ability to provide creative, high-value solutions to our customers’ needs. Our marketing and sales personnel are also available as a

2

Table of Contents

      Experienced and Motivated Management and Sales Force. An important component of our competitive position is the continued strengthening of our management team and its commitment to developing and maintaining an enthusiastic and accountable work force. We have a team of skilled and dedicated executives to guide our continued growth, diversification, and management of our financial position. Our executives and sales and marketing forces are also highly motivated by incentive programs designed to promote performance in strategic areas. In addition, we have made substantial investments in training and educating our approximately 5,500 employees worldwide. In both 1998 and 1999, Fortune magazine rated Interface as one of the top 100 employers in the U.S. on the strength of our commitment to our employees. Fortune also has rated Interface one of the “10 Most Admired Companies” in our industry category.

Business Strategy and Principal Initiatives

      Our corporate strategy is to continue the diversification and integration of our business, on a sustainable basis, worldwide. We have achieved diversification by both developing products internally and acquiring complementary product lines and businesses in the commercial, institutional and residential interiors field. As usages and demand for modular carpet continue to increase in all areas of the commercial market, we strive to leverage our dominant position in the modular carpet segment to increase diversification. We are continuing to integrate our business by identifying and developing additional synergies and operating efficiencies among our products and global businesses. In implementing this strategy, we are pursuing the following principal strategic initiatives:

      Expand Markets for Modular Products. Our management believes that modular carpet continues to increase in popularity compared with other floorcovering products across most markets. In response to such increased acceptance of and demand for modular products, we are leveraging our position as the worldwide leader in the modular carpet market, with a share of approximately 35%, to drive sales in all market sectors. As part of that effort, we recently introduced a new marketing campaign, referred to as i2^TM, which highlights our Entropy®, Transformation^TM, Frequency^TM and Cubic^TM modular carpet products. These products were specifically designed to be installed without regard to the directional orientation of the carpet tiles and without regard to the dye lots from which the carpet tiles were manufactured. These benefits make installation, maintenance and replacement of the products easier, less expensive and less wasteful, while also delivering a beautiful floorcovering for the customer. Another part of our effort to drive modular carpet sales is the launch of InterfaceFLOR, Inc., which is discussed below.

      Increase Sales in Less Cyclical Market Segments. In both our floorcoverings and fabrics businesses, we are focusing more of our marketing and sales efforts on non-corporate segments in order to capture attractive market share opportunities and also to reduce our future exposure to certain economic cycles that affect the corporate segment more adversely. These other segments include retail space, government institutions, schools, healthcare facilities, tenant improvement space, hospitality centers and residential space. In order to implement this strategy, we have:

	•	introduced specialized product offerings tailored to the unique demands of these segments, including specific designs, functionalities and price points;
	•	created a sales force dedicated to penetrating these segments at a high level; and
	•	realigned incentives for our corporate segment sales force generally in order to encourage their efforts to penetrate these other segments, including paying higher commissions for sales in these segments relative to the corporate segment.

      In addition, we recently launched InterfaceFLOR, Inc., a new company specifically created to bring high style modular floorcovering to the residual market segment. InterfaceFLOR offers direct-to-consumer sales by catalog and Web site. To simplify the purchasing process, InterfaceFLOR has created pre-packaged area rug and wall-to-wall options in a variety of colors, patterns and textures. The products sold by InterfaceFLOR are conveniently delivered to the customer’s doorstep in compact boxes allowing for easy installation.

3

Table of Contents

      De-leverage Our Balance Sheet. One of our objectives is to use the strong free cash flow generation capability of our business to repay our existing debt and strengthen our financial position. Certain of our ongoing initiatives have already reduced our operating costs structure. Our existing capacity to increase production levels without significant capital expenditures will facilitate our generation of additional free cash flow when demand for our products rises as a result of improved economic conditions generally or expansions of our business from other strategic initiatives we have implemented. We will continue to search for ways to reduce costs further and enhance free cash flow.

      Tighten Our Supply Chain. In 2001, we retained a leading consulting firm to help us analyze our supply chain and identify opportunities to create greater efficiencies and savings. In early 2002, based on the results of that analysis, we implemented a Company-wide supply chain management program that focused on three major areas: (1) inventory performance; (2) accounts receivable optimization; and (3) supplier and spend management. Through that program, among other accomplishments, we have reduced our inventories and working capital, reduced the “days outstanding” on our receivables, and improved the efficiency of our purchasing processes.

      Maximize Global Marketing and Manufacturing Capabilities. We will continue to use the complementary nature of our product lines to offer “total interior solutions” to our customers worldwide to meet their diverse needs for products and services. We combine our global marketing and manufacturing capabilities to target multinational companies successfully and compete effectively in local markets worldwide. We have a global accounts team with responsibility for our largest multinational customers and prospects, and we have established a web-based communications network to serve those multinational customers better.

      Advance Sustainability Programs. In 1995, we began a worldwide war-on-waste initiative referred to internally as “QUEST”. The war on waste is part of our broader EcoSense initiative, which is our 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 — with the goal of becoming the first “restorative” company. One example of a product developed under this initiative is the line of fabrics manufactured from recycled, recyclable or compostable materials under the Terratex® brand. As another example, we have reduced our absolute greenhouse gas emissions by over 30% since our baseline years. We believe that our pursuit of our goals under this initiative provides a competitive advantage in marketing our products to an increasing number of customers.

Floorcovering Products/Services

Products

      Interface is the world’s largest manufacturer and marketer of modular carpet with a global market share of approximately 35%. Modular carpet includes carpet tile and two-meter roll goods. We also manufacture and sell broadloom carpet, which generally consists of tufted carpet sold primarily in twelve-foot rolls, under the Bentley and Prince Street brands. Our broadloom operations focus on the high quality, designer-oriented sector of the U.S. broadloom carpet market. We also offer a vinyl hard flooring product in Europe under the brand Scan-Lock™.

      Modular Carpet. Our modular carpet system, which is marketed under established leading global brands such as Interface and Heuga, and more recently under the Bentley and Prince Street brands, utilizes carpet tiles cut in precise, dimensionally stable squares (usually 50 square centimeters) or rectangles to produce a floorcovering which combines the appearance and texture of broadloom carpet with the advantages of a modular carpet system. According to a 2002 survey of 250 interior designers published in the Floor Focus industry publication, our Interface brand was rated number one among modular and broadloom carpet brands for quality, performance and service in the U.S. Our GlasBac® technology employs a unique, fiberglass-reinforced polymeric composite backing that allows tile to be installed and remain flat on the floor without the need for general application of adhesives or use of fasteners. We also make carpet tiles with a GlasBacRe™ backing containing post-industrial and/or post-consumer recycled materials.

4

Table of Contents

      Our carpet tile has become popular for a number of reasons. First, carpet tile incorporating this reinforced backing may be easily removed and replaced, permitting rearrangement of furniture without the inconvenience and expense associated with removing, replacing or repairing other soft surface flooring products, including broadloom carpeting. 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. In addition, carpet tile facilitates access to sub-floor telephone, electrical, computer and other wiring by lessening disruption of operations. It also eliminates the cumulative damage and unsightly appearance commonly associated with frequent cutting of conventional carpet as utility connections and disconnections are made. Finally, modular carpet partners well with our raised/access flooring which enables under-the-floor cable management and air delivery systems. We believe that, within the overall floorcovering market, the worldwide demand for modular carpet is increasing as more customers recognize these advantages.

      We use 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. These varieties are designed to meet both the practical and aesthetic needs of a broad spectrum of commercial interiors — particularly offices, healthcare facilities, airports, educational and other institutions, and retail facilities — and residential interiors. Our 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 we continue to manufacture and sell a substantial portion of our carpet tile in standard styles, an increasing percentage of our modular carpet sales is custom or made-to-order product designed to meet customer specifications.

      In addition to general uses of our carpet tile, we produce and sell a specially adapted version of our carpet tile for the healthcare facilities market. Our carpet tile possesses characteristics — such as the use of the Intersept antimicrobial, static-controlling nylon yarns, and thermally pigmented, colorfast yarns — which make it suitable for use in these facilities in place of hard surface flooring. Through our relationship with Oakey Designs, we also have created modular carpet products specifically designed for each of the education, hospitality, retail and residential market segments. Moreover, we recently launched InterfaceFLOR, Inc., a new business specifically targeting modular carpet sales to the residential market segment.

      We also manufacture and sell two-meter roll goods that are structure-backed and offer many of the advantages of both carpet tile and broadloom carpet. These roll goods are often used in conjunction with carpet tiles to create special design effects. Our current principal customers for these products are in the education, healthcare and government sectors.

      Broadloom Carpet. We maintain a significant share of the high-end, designer-oriented broadloom carpet segment by combining innovative product design and short production and delivery times with a marketing strategy aimed at interior designers, architects and other specifiers. Our Bentley Mills designs emphasize the dramatic use of color, while unique, multi-dimensional textured carpets with a hand-tufted look are the hallmark of Prince Street’s broadloom products. We engaged the design firm Suzanne Tick, Inc., affiliated with award-winning carpet manufacturer Tuva Looms, Inc., to advance our Prince Street brand broadloom carpets. In addition, with the design assistance of Suzanne Tick, we recently launched the Prince Street House and Home^TM collection of high-styled broadloom carpet and area rugs targeted at design-oriented residential consumers. The Prince Street and Bentley brands were rated among the top brands for carpet design in the U.S., according to a 2002 survey of interior designers published in the Floor Focus industry publication.

      Resilient Textile Flooring. In 1999, we beta-tested Solenium® resilient textile flooring, a new category of product which combines the functional and aesthetic benefits of resilient flooring and carpet. Solenium is highly stain-resistant and has carpet-like softness, but in appropriate applications is as easy to maintain as vinyl flooring. Solenium is manufactured using one-third less material and energy than carpet and is designed to be completely recyclable. We believe Solenium fills an unmet need within healthcare, retail and education markets. In 2002, we continued our development efforts with Solenium, focusing on improving the grout edge process for the product. We continue to believe Solenium has market potential, and we intend to re-launch the

5

Table of Contents

Services

      We provide commercial carpet installation services through the Re:Source® service provider network. The network in the U.S. includes owned and affiliated commercial floorcovering contractors strategically located in approximately 100 locations covering most of the major metropolitan areas of the United States. We also offer these services through the largest single carpet distributor in Australia. We have worked to strengthen our alliances with contractors in Europe so that we may also offer turnkey services to our European carpet customers. The network allows us to:

	•	monitor and enhance customer satisfaction throughout the product ownership cycle;
	•	reduce our cost of selling by bolstering efforts of sales representatives at the mill level with local contractor-level support;
	•	expand into new market segments; and
	•	improve our margins by combining product and service offerings.

      The Re:Source Americas service network also provides carpet maintenance services using our Re:Source Floor Care™ maintenance system, which includes a custom-engineered maintenance methodology and the Re:Source Technologies brand line of cleaning chemicals. In Europe, we offer the European version of the maintenance program, IMAGE™, in which we license selected independent service contractors to provide carpet maintenance services.

      The Re:Source Americas service network also provides carpet replacement services using its Renovisions® process. This 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, avoiding the inefficiency and disruption associated with unloading and dismantling these items.

      Finally, the Re:Source Americas service network provides a channel for delivery of a variety of additional services and products that we offer, including furniture moving and installation, furniture refurbishment, project management, maintenance, carpet reclamation and recycling through our Re:Entry® reclamation system, Re:Source Technologies brand adhesives, specialty products (such as mats and foam products) manufactured by Pandel, Inc. and raised/access flooring systems manufactured by Interface Architectural Resources, Inc. We have worked diligently over the past several years to increase the operating efficiencies of this network and believe that we are now able to take advantage of the contractor infrastructure to our benefit.

Marketing and Sales

      We traditionally focused our carpet marketing strategy on major accounts, seeking to build lasting relationships with national and multinational end-users, and on architects, engineers, interior designers, contracting firms, and other specifiers who often make or significantly influence purchasing decisions. While most of our sales are in the commercial office segment, both new construction and renovation, we also emphasize sales in other segments, including retail space, government institutions, schools, healthcare facilities, tenant improvement space, hospitality centers, residences and home office space. We intend to focus more on these latter segments in the future in order to achieve a higher balance of sales in those areas relative to the commercial office segment, which could lessen the effects on us from certain economic cycles. Our marketing efforts are enhanced by the well-known brand names of our carpet products, including Interface and Heuga brands in modular carpet and Bentley and Prince Street in broadloom carpet. Our exclusive consulting agreement with premier design firm Oakey Designs has enabled us to introduce more than 147 new carpet designs in the U.S. alone since 1994.

6

Table of Contents

      An important part of our 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 to meet the customer’s particular needs. Our mass customization initiative simplified our carpet manufacturing operations, which significantly improved our ability to respond quickly and efficiently to requests for samples. The turnaround time for us to produce made-to-order carpet samples to customer specifications has been reduced from an average of 30 days to less than five days, and the average number of carpet samples produced per month has increased tenfold since the mid 1990s. This sample production ability has significantly enhanced our marketing and sales efforts and has increased our volume of higher margin custom or made-to-order sales. In addition, through our website www.thesamplecenter.com, we have made it easy to view and request samples of our products.

      We primarily use our internal marketing and sales force to market our carpet products. We also rely on contractors in our Re:Source Americas service network to bolster our sales efforts. In order to implement our global marketing efforts, we have product showrooms or design studios in the United States, Canada, Mexico, Brazil, Denmark, England, Ireland, France, Germany, Spain, the Netherlands, Australia, Japan and Singapore. We expect to open offices in other locations around the world as necessary to capitalize on emerging marketing opportunities.

Manufacturing

      We manufacture carpet in two locations in the United States and at facilities in the Netherlands, the United Kingdom, Canada, Australia and Thailand. We also produce Solenium resilient textile flooring in the United States and the United Kingdom and manufacture vinyl flooring in the United Kingdom.

      Historically, we operated two U.S. broadloom manufacturing facilities to produce our Bentley and Prince Street broadloom brands. These facilities, which were located in City of Industry, California and Cartersville, Georgia, had been operating at less than full capacity. In 2000, we moved the manufacturing operations for our Prince Street brand from Cartersville, Georgia and integrated them into our City of Industry, California facility, which had produced our Bentley brand products, in order to reduce excess capacity and increase capacity utilization. The operations, as combined, now function under the corporate name Bentley Prince Street, Inc.

      Having foreign manufacturing operations enables us to supply our customers with carpet from the location offering the most advantageous delivery times, exchange rates, duties and tariffs, and freight expense and enhances our ability to develop a strong local presence in foreign markets. We believe 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. We will consider additional locations for manufacturing operations in other parts of the world as necessary to meet the demands of customers in international markets.

      In the mid 1990s, we implemented a manufacturing plan in which we substantially standardized our worldwide manufacturing procedures. In connection with the implementation of this plan, we adopted global standards for our tufting equipment, yarn systems and product styling and changed our standard carpet tile size from 18 square inches to 50 square centimeters. We believe that changing our standard carpet tile size has allowed us to reduce operational waste and fossil fuel energy consumption and to offer consistent product sizing for our global customers.

      The environmental management systems of our floorcovering manufacturing facilities in LaGrange, Georgia, West Point, Georgia, West Yorkshire, England, Northern Ireland, Australia, the Netherlands, Canada and Thailand are certified under International Standards Organization (ISO) Standard No. 14001.

      Our 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. We also receive a substantial portion of our revenues in currencies other than U.S. dollars, which makes us subject to the risks inherent in currency translations. Although our ability to manufacture and ship products from facilities in several foreign countries reduces the risks of foreign currency

7

Table of Contents

Competition

      We compete, on a global basis, in the sale of our floorcovering products with other carpet manufacturers and manufacturers of vinyl and other types of floorcoverings. Although the industry has experienced significant consolidation, a large number of manufacturers remain in the industry. Management believes that we are the largest manufacturer of modular carpet in the world, possessing a global market share that is approximately twice that of our nearest competitor. However, a number of domestic and foreign competitors manufacture modular carpet as one segment of their business, and some of these competitors have financial resources greater than ours. In addition, some of the competing carpet manufacturers have the ability to extrude at least some of their requirements for fiber used in carpet products, which decreases their dependence on third party suppliers of fiber.

      We believe the principal competitive factors in our primary floorcovering markets are quality, design, service, broad product lines, product performance, marketing strategy and pricing. In the commercial office market, modular carpet competes with various floorcoverings, of which broadloom carpet is the most common. The quality, service, design, better and longer average product performance, flexibility (design options, selective rotation or replacement, use in combination with roll goods) and convenience of our modular carpet are our principal competitive advantages.

      We believe we have competitive advantages in several areas. First, the Bentley Mills and Prince Street broadloom carpet lines enable us to offer one-stop shopping to commercial carpet customers and, thus, to capture some sales that would have gone to competitors. Additionally, our relationship with Oakey Designs allows us to introduce numerous innovative and attractive floorcovering products to our customers. In addition, we believe that our global manufacturing capabilities are an important competitive advantage in serving the needs of multinational corporate customers. We believe that our resilient textile flooring products, and the incorporation of the Intersept antimicrobial chemical agent into the backing of our modular carpet, enhance our ability to compete successfully with resilient tile in the healthcare market. Finally, we believe that the formation of the Re:Source service provider network, and the resulting improvement in customer service, is a differentiating factor that has further enhanced our competitive position.

Interior Fabrics

Products

      Our Fabrics Group designs, manufactures and markets specialty fabrics for open plan office furniture systems and commercial and residential interiors. Our Fabrics Group includes the leading U.S. manufacturer of panel fabrics for use in open plan office furniture systems, with a market share of approximately 50%. Sales of panel fabrics to OEMs of movable office furniture systems constituted more than 45% of the Fabrics Group’s total North American fabrics sales in fiscal 2002. With the acquisition of the furniture fabrics assets of the Chatham Manufacturing division of CMI Industries, Inc. in May 2000, we are also the leading U.S. manufacturer of contract upholstery sold to office furniture manufacturers and contract jobbers, with a U.S. market share of approximately 35% in fiscal 2002. In addition, we manufacture other interior fabrics products, including wall covering fabrics, fabrics used for window treatments and fabrics used for cubicle curtains.

      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.

      During the 1990s, we diversified and expanded significantly both our product offerings and markets for interior fabrics. Our 1993 acquisition of the Stevens Linen lines added decorative, upscale upholstery fabrics and specialty textile products to the Fabrics Group’s traditional product offerings. Our June 1995 acquisition of Toltec Fabrics, Inc., a manufacturer and marketer of fabric for the contract and home furnishings

8

Table of Contents

      Internationally, the June 1997 acquisition of Camborne Holdings, Ltd., the United Kingdom’s leading textile manufacturer for the office and contract furnishings markets, has enhanced our access to the European and Asia-Pacific markets. The Camborne acquisition also added wool upholstery fabrics specifically designed for the European market to the Fabrics Group’s product offering. In 1998, we acquired Glenside Fabrics Limited, a United Kingdom based manufacturer of upholstery fabrics for the contract furnishings and leisure markets. The Glenside acquisition further enhanced the Fabrics Group’s European presence. We have now consolidated our Glenside and Camborne manufacturing operations to achieve greater operating efficiencies.

      We manufacture fabrics made of 100% polyester, as well as wool-polyester blends and numerous other natural and man-made blends, which are either woven or knitted. Our products feature a high degree of color consistency, natural dimensional stability and fire retardancy, in addition to their overall aesthetic appeal. All of our product lines are color and texture coordinated. We seek 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.

      We market a line of fabrics manufactured from recycled, recyclable or compostable materials under the Terratex brand. The Terratex line includes both new products and traditional product offerings and includes products made from 100% post-consumer recycled polyester, 100% post-industrial recycled polyester and 100% post-consumer recycled wool. The first fabric to bear the Terratex label was Guilford of Maine’s FR-701® line of panel fabrics, and we introduced our first seating fabrics carrying the Terratex label prior to the year 2000. Over the past few years, we have continued building awareness of the Terratex brand. These products have been well-received and are gaining momentum in the market, and we plan to expand our offerings under this label.

      Our Interface TekSolutions® operations provide the services of laminating fabrics onto substrates for pre-formed panels, coating fabrics with various treatments, warehousing fabrics for third parties, and cutting fabrics and other materials. We believe that significant market opportunities exist for the provision of this and other ancillary textile sequencing and processing services to OEMs and intend to participate in these opportunities.

      We anticipate 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. Our management also believes that additional growth opportunities exist in international sales, domestic healthcare markets, contract wallcoverings and window treatments.

Marketing and Sales

      Our principal interior fabrics customers are OEMs of movable office furniture systems, and the Fabrics Group sells to essentially all of the major office furniture manufacturers. The Fabrics Group also sells to contract jobbers and to manufacturers and distributors of wallcoverings, vertical blinds, cubicle curtains, acoustical wallboards, ceiling tiles and residential furniture. The Guilford of Maine, Stevens Linen, Toltec, Intek, Chatham, Camborne and Glenside brand names are well-known in the industry and enhance our fabric marketing efforts.

9

Table of Contents

      The majority of our interior fabrics sales are made through the 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 us with marketing and design ideas that are incorporated into the development of new product offerings. The Fabrics Group maintains a design studio in Grand Rapids, Michigan which facilitates coordination between its in-house designers and the design staffs of major customers. Our interior fabrics sales offices and showrooms are located in New York City, Grand Rapids, Michigan, Elkin, North Carolina, High Point, North Carolina, Hickory, North Carolina, Greensboro, North Carolina and the United Kingdom. The Fabrics Group also has marketing and distribution facilities in Canada, Mexico and Hong Kong, and sales representatives in Japan, Hong Kong, Germany, Singapore, Malaysia, Korea, Australia, United Arab Emirates, Dubai and South Africa. We have sought increasingly, over the past several years, to expand our export business and international operations in the fabrics segment.

Manufacturing

      Our fabrics manufacturing facilities are located in Maine, Massachusetts, Michigan, North Carolina, Nottingham, England, Lancashire, England and West Yorkshire, England. The production of synthetic and wool blended fabrics is a relatively complex, multi-step process. Raw fiber and yarn are placed in pressurized vats in which dyes are forced into the fiber. Particular attention is devoted to this dyeing process, which requires a high degree of expertise in order to achieve color consistency. All raw materials used by us are readily available from a number of sources. The Fabrics Group also now uses 100% recycled fiber manufactured from PET soda bottles in some of its manufacturing processes.

      In response to a shift in the Fabrics Group’s traditional panel fabric market towards lighter-weight, less expensive products, we implemented a major capital investment program in the mid 1990s that included the construction of a new facility and the acquisition of equipment to enhance the efficiency and breadth of the Fabrics Group’s yarn manufacturing processes. The program improved the Fabrics Group’s cost effectiveness in producing lighter-weight fabrics, reduced manufacturing cycle time and enabled the Fabrics Group to reinforce its product leadership position with its OEM customers. The acquisition of Intek provided us 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. We believe that we have been successful in designing fabrics that have simplified the manufacturing process, thereby reducing complexity while improving efficiency and quality, and continue to strive to design these products.

      The environmental management system of the Fabrics Group’s largest facility, located in Guilford, Maine, has been granted ISO 14001 certification. Our Aberdeen, North Carolina, East Douglas, Maine and West Yorkshire, England fabrics manufacturing facilities are also certified under ISO 14001.

      We offer textile processing services through the Fabrics Group’s Interface TekSolutions operations in Grand Rapids, Michigan. These 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 Fabrics Group’s OEM customers), coating of fabrics with various treatments, warehousing of fabrics for third parties, and cutting of fabrics and other materials.

Competition

      We compete in the interior fabrics market on the basis of product design, quality, reliability, price and service. By historically concentrating on the open plan office furniture systems segment, the Fabrics Group has been able to specialize our manufacturing capabilities, product offerings and service functions, resulting in a leading market position. Management believes we are the largest U.S. manufacturer of panel fabric for use in open plan office furniture systems.

      With the May 2000 acquisition of the Chatham furniture fabrics assets, we became the largest U.S. manufacturer of contract upholstery fabrics for office furniture manufacturers and contract jobbers. We believe we have a U.S. contract upholstery market share nearly double that of our closest competitor.

10

Table of Contents

      Through our other strategic acquisitions, we have been successfully diversifying our product offerings for the commercial interiors market to include a variety of other fabrics, including three-dimensional knitted upholstery products, 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 us, as well as smaller, non-integrated specialty manufacturers. However, our capabilities and strong brand names in these segments should enable us to continue to compete successfully.

Specialty Products

      The Interface Specialty Products Group currently is composed of: Pandel, Inc., which produces vinyl carpet tile backing and specialty mat and foam products; our Intersept antimicrobial sales and licensing program; and until its strategic disposition is consummated, Interface Architectural Resources, Inc., which produces and markets raised/access flooring systems. Prior to February 2003, the Specialty Products Group also included an adhesives and other specialty chemicals business.

      We believe that the growth in use of open plan interiors and modern office arrangements utilizing demountable, movable partitions and modular furniture systems has encouraged the use of access flooring, as well as carpet tile, because access flooring, and carpet tile, can accommodate the flexible, under-the-floor cable management and air delivery systems compatible with movable open plan offices. We expect this trend in open office spaces and the proliferation of networks in the workplace, dictating efficient cable management and delivery systems, to present opportunities for future growth in the access flooring market.

      We sell a proprietary antimicrobial chemical compound under the registered trademark Intersept. We use Intersept in all of our modular carpet products and have licensed Intersept to other companies for use in a number of products that are noncompetitive with our products, such as paint, vinyl wallcoverings, ceiling tiles and air filters. In addition, we produce and market Fatigue Fighter®, an impact-absorbing modular flooring system typically used where people stand for extended periods.

      Prior to February 2003, we manufactured a line of adhesives for carpet installation, as well as a line of carpet cleaning and maintenance chemicals. This business was sold in February 2003. However, through an agreement with the purchaser, we will continue to market those products (which the purchaser will manufacture on our behalf) under the Re:Source Technologies brand through our Re:Source Americas service network.

      Over the past few years, our raised/access flooring business has experienced a significant decline in demand, primarily due to decreased spending by technology companies. In the fourth quarter of 2002, in order to intensify our focus on strategic assets that offer more immediate opportunities for growth and profitability, we decided to sell or otherwise create a joint venture or strategic alliance for our raised/access flooring business. Because of that decision, we reflect that business as discontinued operations, even though we are still manufacturing and selling products pending its disposition. We expect to consummate such a transaction during 2003.

Product Design, Research and Development

      We maintain an active research, development and design staff of over 75 persons and also draw on the research and development efforts of our suppliers, particularly in the areas of fibers, yarns and modular carpet backing materials.

      Interface Research (“IRC”) provides technical support and advanced materials research and development for the entire family of Interface companies. IRC developed NexStep® backing, a material based on moisture-impervious polycarbite precoating technology combined with a chlorine-free urethane foam secondary backing, and ReBac^TM, a post-consumer recycled, polyvinyl chloride, or PVC, extruded sheet process that has been incorporated into our modular carpet line. Our post-consumer ReBac PVC extruded sheet exemplifies our commitment to “closing-the-loop” in recycling. With a goal of supporting sustainable product designs in both floorcoverings and interior fabrics applications, IRC is a frontrunner in evaluating for use in

11

Table of Contents

      IRC is the home of our EcoSense initiative and supports the dissemination, consultancies and technical communication of our global sustainability endeavors. In addition, IRC’s President also serves as the Chairman of the Envirosense Consortium. IRC’s laboratories provide all biochemical and technical support to Intersept antimicrobial product initiatives, which initiatives were the basis for founding the Consortium and for its focus on indoor air quality.

      Innovation and increased customization in product design and styling are the principal focus of our product development efforts at both IRC and our manufacturing locations. Our carpet design and development team is recognized as the industry leader in carpet design and product engineering for the commercial and institutional markets. In cooperation with Oakey Designs, we have introduced over 147 new carpet designs since they began providing services to us and have enjoyed considerable success in winning U.S. carpet industry awards.

      David Oakey also contributed to our implementation of the product development concept — “simple inputs, pretty outputs” — resulting in the ability to efficiently produce many products from a single yarn system. Our mass customization production approach evolved, in major part, from this concept. In addition to increasing the number and variety of product designs, which enables us 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 their related costs because of our more rapid and flexible production capabilities.

      More recently, Mr. Oakey revolutionized the design of modular carpet with the introduction of products such as Entropy, which may be installed without regard to the directional orientation of the carpet tile or the dye lot in which the carpet tile was manufactured. These products, which are the subject of our new i2 marketing campaign, make installation, maintenance and replacement of modular carpet easier, less expensive and less wasteful.

      Oakey Designs’ services have been extended from a primary focus on domestic carpet tile to our international carpet tile operations as well as our broadloom operations. We have renewed our exclusive consulting agreement through May 2006, which may be extended for five additional years. In addition, we have retained the design services of Suzanne Tick, Inc., affiliated with Tuva Looms, Inc., a manufacturer of high-end, design-forward woven carpets, to assist us with developing broadloom designs and area rugs for our Prince Street brand.

Environmental Initiatives

      In the latter part of 1994, we 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, which includes our QUEST waste reduction initiative, is directed towards the elimination of energy and raw materials waste in our 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 us:

	•	to learn to meet our raw material and energy needs through recycling of carpet and other petrochemical products and harnessing benign energy sources; and
	•	to pursue the creation of new processes to help sustain the earth’s non-renewable natural resources.

      We have engaged some of the world’s leading authorities on global ecology as environmental advisors. The list of advisors includes: Paul Hawken, author of The Ecology of Commerce: A Declaration of Sustainability and The Next Economy, and co-author with Amory Lovins and Hunter Lovins of Natural Capitalism: Creating the Next Industrial Revolution; Mr. Lovins, energy consultant, co-founder of the Rocky Mountain Institute; Ms. Lovins, President and Executive Director of the Natural Capital Institute; John Picard, President of E², American environmental consultant; Jonathan Porritt, director of Forum for the

12

Table of Contents

      Another one of our initiatives 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 Envirosense Consortium’s member organizations include interior products manufacturers (at least one of which is a licensee of our Intersept antimicrobial agent) and design professionals.

      We believe that our environmental initiatives are valued by our employees and an increasing number of important customers and provide a competitive advantage in marketing products to those customers. We also believe that the resulting long-term resource efficiency (reduction of wasted environmental resources) has produced and will continue to produce cost savings and significant marketing advantages to us.

Backlog

      Our backlog of unshipped orders (including the discontinued operations of our raised/access flooring business) was approximately $121.0 million at March 16, 2003, compared to approximately $135.9 million at March 17, 2002. 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 March 16, 2003 are expected to be shipped during the succeeding six to nine months.

Patents and Trademarks

      We own numerous patents in the United States and abroad on floorcovering and raised/access flooring products, on manufacturing processes and on the use of our 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. We consider our know-how and technology more important to our current business than patents, and, accordingly, believe that expiration of existing patents or nonissuance of patents under pending applications would not have a material adverse effect on our operations. However, we maintain an active patent and trade secret program in order to protect our proprietary technology, know-how and trade secrets.

      We also own numerous trademarks in the United States and abroad. In addition to the United States, the primary countries in which we have registered our trademarks are the United Kingdom, Germany, Italy, France, Canada, Australia, Japan, and various countries in Central and South America. Some of our more prominent registered trademarks include: Interface, Heuga, Intersept, GlasBac, Re:Source, Guilford, Guilford of Maine, Bentley, Prince Street, Intercell, Chatham, Camborne, Glenside, Terratex and FR-701. 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 Operating Segments and Geographic Areas

      The Notes to our Consolidated Financial Statements set forth information concerning our sales, income and assets by operating segments and our sales and long-lived assets by geographic areas. See Item 8.

Employees

      At December 29, 2002, we employed a total of approximately 5,500 employees worldwide. Of such employees, approximately 2,250 are clerical, sales, supervisory and management personnel and the balance are manufacturing and carpet service/installation personnel.

      Some of the service businesses within the Re:Source Americas service network have employee groups that are represented by unions. In addition, some of our production employees in Australia and the United Kingdom are represented by unions. In the Netherlands, a Works Council, the members of which are

13

Table of Contents

Environmental Matters

      Our 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. The costs of complying with environmental protection laws and regulations have not had a material adverse impact on our financial condition or results of operations in the past and are not expected to have a material adverse impact in the future. The environmental management systems of our floorcovering manufacturing facilities in LaGrange, Georgia, West Point, Georgia, West Yorkshire, England, Northern Ireland, Australia, the Netherlands, Canada and Thailand are certified under ISO 14001. The environmental management system of the Fabrics Group’s facilities in Guilford, Maine, East Douglas, Maine, Aberdeen, North Carolina, and West Yorkshire, England are also certified under ISO 14001.

Safe Harbor Compliance Statement for Forward-Looking Statements

      This report on Form 10-K contains 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 our management team, as well as the assumptions on which such statements are based. Any forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties that could cause actual results to 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 include risks and uncertainties associated with economic conditions in the commercial interiors industry as well as the risks and uncertainties discussed immediately below. We undertake 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.

We compete with a large number of manufacturers in the highly competitive commercial floorcovering products market, and some of these competitors have greater financial resources than we do.

      The commercial floorcovering industry is highly competitive. Globally, we compete for sales of floorcovering products with other carpet manufacturers and manufacturers of vinyl and other types of floorcovering. Although the industry has experienced significant consolidation, a large number of manufacturers remain in the industry. We believe that we are the largest manufacturer of modular carpet in the world. However, a number of domestic and foreign competitors manufacture modular carpet as one segment of their business, and some of these competitors have greater financial resources than we do.

Sales of our principal products may be affected by cycles in the construction and renovation of commercial and institutional buildings.

      Sales of our principal products are related to the construction and renovation of commercial and institutional buildings. This activity is cyclical and can be affected by the strength of a country’s or region’s general economy, prevailing interest rates and other factors that lead to cost control measures by businesses and other users of commercial or institutional space. The effects of cyclicality upon the commercial office sector tend to be more pronounced than the effects upon the institutional sector. Historically, we have generated more sales in the commercial office sector than in other markets. The effects of cyclicality upon the new construction sector of the market also tend to be more pronounced than the effects upon the renovation sector. Although the predominant portion of our sales are generated from the renovation sector, any adverse

14

Table of Contents

Our continued success depends significantly upon the efforts, abilities and continued service of our senior management executives and our design consultants.

      We believe that our continued success will depend to a significant extent upon the efforts and abilities of our senior management executives. In addition, we rely significantly on the leadership that David Oakey of David Oakey Designs, Inc. provides to our internal design staff. Specifically, Oakey Designs provides product design/production engineering services to us under an exclusive consulting contract that contains non-competition covenants. We have renewed our agreement with Oakey Designs for a five-year term through May 2006. The loss of any key personnel or key design consultants could have an adverse impact on our business.

Our substantial international operations are subject to various political, economic and other uncertainties.

      We have substantial international operations. In fiscal 2002, approximately 33% of our net sales and a significant portion of our production were outside the United States, primarily in Europe but also in Asia-Pacific. Our corporate strategy includes the expansion and growth of our international business on a worldwide basis. As a result, our operations are subject to various political, economic and other uncertainties, including risks of restrictive taxation policies, changing political conditions and governmental regulations. We also make a substantial portion of our net sales in currencies other than U.S. dollars, which subjects us to the risks inherent in currency translations. Our ability to manufacture and ship products from facilities in several foreign countries reduces the risks of foreign currency fluctuations we might otherwise experience, and we also engage from time to time in hedging programs intended to reduce those risks further. Despite these precautions, the scope and volume of our global operations make it impossible to eliminate completely all foreign currency translation risks as an influence on our financial results.

Our Chairman, together with other insiders, currently has sufficient voting power to elect a majority of our Board of Directors.

      Our Chairman, Ray C. Anderson, beneficially owns approximately 47% of the Company’s outstanding Class B Common Stock. The holders of the Class B Common Stock are entitled, as a class, to elect a majority of our Board of Directors. Therefore, Mr. Anderson, together with other insiders, has sufficient voting power to elect a majority of the Board of Directors. On all other matters submitted to the shareholders for a vote, the holders of the Class B Common Stock generally vote together as a single class with the holders of the Class A Common Stock. Mr. Anderson’s beneficial ownership of the outstanding Class A and Class B Common Stock combined is less than 10%.

Large increases in the cost of petroleum-based raw materials, which we are unable to pass through to our customers, could adversely affect us.

      Petroleum-based products comprise the predominant portion of the cost of raw materials that we use in manufacturing. While we attempt to match cost increases with corresponding price increases, large increases in the cost of petroleum-based raw materials could adversely affect our financial results if we are unable to pass through price increases in raw material costs to our customers.

Unanticipated termination or interruption of any of our arrangements with our primary third-party suppliers of synthetic fiber could have a material adverse effect on us.

      E.I. DuPont de Nemours and Company currently supplies a significant percentage of our requirements for synthetic fiber (nylon), which is the principal raw material that we use in our carpet products. In addition, certain other of our businesses have a high degree of dependence on their third party suppliers of synthetic fiber for certain products or markets. While we believe that there are adequate alternative sources of supply from which we could fulfill our synthetic fiber requirements, the unanticipated termination or interruption of

15

Table of Contents

Our Rights Agreement could discourage tender offers or other transactions that could result in shareholders receiving a premium over the market price for our stock.

      Our Board of Directors has adopted a Rights Agreement pursuant to which holders of our common stock will be entitled to purchase from us a fraction of a share of our Series B Participating Cumulative Preferred Stock if a third party acquires beneficial ownership of 15% or more of our common stock without our consent. In addition, the holders of our common stock 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 could result in shareholders receiving a premium over the market price for our common stock.

Executive Officers of the Registrant

      Our executive officers, their ages as of March 15, 2003 and their principal positions with us are as follows. Executive officers serve at the pleasure of the Board of Directors.

      Mr. Hendrix joined us in 1983 after having worked previously for a national accounting firm. He was promoted to Treasurer in 1984, Chief Financial Officer in 1985, Vice President — Finance in 1986, Senior Vice President in October 1995 and Executive Vice President in October 2000. Mr. Hendrix became our President and Chief Executive Officer effective July 1, 2001. He has been a Director of the Company since October 1996, and has served on the Executive Committee of the Board since July 2001.

      Dr. Bertolucci joined us in April 1996 as President of Interface Research Corporation and Senior Vice President. Dr. Bertolucci also serves as Chairman of the Envirosense Consortium, which was founded by Interface and focuses on addressing workplace environmental issues. From October 1989 until joining us, he was Vice President of Technology for Highland Industries, an industrial fabric company located in Greensboro, North Carolina.

      Mr. DeMoura joined us in March 1994 as President and Chief Executive Officer of Guilford of Maine, Inc. (now Interface Fabrics Group, Inc.) and Senior Vice President. He is responsible for the Fabrics Group, which includes the following brands: Guilford of Maine, Stevens Linen, Toltec, Intek, Chatham, Camborne and Glenside.

      Mr. Wells joined us in February 1994 as Vice President-Sales of Interface Flooring Systems, Inc. (our principal U.S. modular carpet subsidiary) and was promoted to Senior Vice President-Sales & Marketing of IFS in October 1994. He was promoted to Vice President of the Company, and President of IFS in July 1995. In March 1998, Mr. Wells was also named President of both Prince Street Technologies, Ltd. and Bentley Mills, Inc., making him at that time President of all three of our U.S. carpet mills. In November 1999, Mr. Wells was named Senior Vice President of the Company, and President and CEO of Interface Americas Holdings, Inc. (formerly Interface Americas, Inc.), thereby assuming operations responsibility for all of our businesses in the Americas, except for the Fabrics Group.

16

Table of Contents

      Mr. Willoch, who previously practiced with an Atlanta law firm, joined us in June 1990 as Corporate Counsel. He was promoted to Assistant Secretary in 1991, Assistant Vice President in 1993, Vice President in January 1996, Secretary and General Counsel in August 1996, and Senior Vice President in February 1998. In July 2001, he was named Senior Vice President-Administration and assumed corporate responsibility for various staff functions.

      Mr. Coombs originally worked for us from 1988 to 1993 as a marketing manager for our Heuga carpet tile operations in the U.K. and later for all of our European floorcovering operations. In 1996, Mr. Coombs returned to the Company as Managing Director of our Australian operations. He was promoted in 1998 to Vice President-Sales and Marketing, Asia-Pacific, with responsibility for Australian operations and sales and marketing in Asia, which was followed by a promotion to Senior Vice President, Asia-Pacific. He was promoted to Senior Vice President, European Sales, in May 1999 and Senior Vice President, European Sales and Marketing, in April 2000. In February 2001, he was promoted to President and CEO of Interface Overseas Holdings, Inc. with responsibility for all of our floorcoverings operations in both Europe and the Asia-Pacific region, and he became a Vice President of the Company. In September 2002, Mr. Coombs relocated back to Australia, retaining responsibility for our floorcovering operations in the Asia-Pacific region while Mr. Parnell (see below) assumed responsibility for floorcovering operations in Europe.

      Mr. Parnell was the Production Director for Firth Carpets (our former European broadloom operations) at the time it was acquired by the Company in 1997. In 1998, Mr. Parnell was promoted to Vice President, Operations for the U.K., and in 1999 he was promoted to Senior Vice President, Operations for our entire European floorcovering division. In September 2002, he was promoted to President and CEO of our floorcovering operations in Europe, and he became a Vice President of the Company in October 2002.

      Mr. Lynch joined us in 1996 after having previously worked for a national accounting firm. He was promoted to Assistant Corporate Controller in 1998 and Assistant Vice President and Corporate Controller in 2000. Mr. Lynch became Vice President and Chief Financial Officer in July 2001.

Available Information

      Effective December 9, 2002, we make available free of charge on or through our Internet website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Our Internet address is http://www.interfaceinc.com.

ITEM 2.     PROPERTIES

      We maintain our corporate headquarters in Atlanta, Georgia in approximately 20,000 square feet of leased space. The following table lists our principal manufacturing facilities and other material physical locations, all of which we own except as otherwise noted:

17

Table of Contents

(1)	Owned by a joint venture in which the Company has a 70% interest.
(2)	Leased.

      We maintain marketing offices in over 75 locations in over 30 countries and distribution facilities in approximately 40 locations in six countries. Most of our marketing locations and many of our distribution facilities are leased.

      We believe that our manufacturing and distribution facilities and our marketing offices are sufficient for our present operations. We will continue, however, to consider the desirability of establishing additional facilities and offices in other locations around the world as part of our business strategy to meet expanding global market demands.

ITEM 3.     LEGAL PROCEEDINGS

      We are not aware of any material pending legal proceedings involving us, or any of our subsidiaries or any of our property. We are from time to time a party to litigation arising in the ordinary course of business.

      No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this Report.

PART II

      Our Class A Common Stock is traded on The Nasdaq Stock Market under the symbol IFSIA. Our Class B Common Stock is not publicly traded and is convertible into Class A Common Stock on a one-for-one basis. The following table sets forth for the periods indicated the high and low closing sales prices of the

18

Table of Contents

      The declaration and payment of dividends is at the discretion of our Board and depends upon, among other things, our investment policy and opportunities, results of operations, financial condition, cash requirements, future prospects, and other factors that may be considered relevant by our Board at the time of its determination. Such other factors include certain limitations in covenants contained in our primary revolving credit facility and in the indentures governing certain of our public indebtedness. As a result of restrictions resulting from the fixed charges coverage ratio contained in the indentures for two of our outstanding series of public debt, in the third quarter of 2002 we suspended dividend payments until such time as we again achieve compliance with those restrictions and our Board determines that a resumption of dividend payments is proper in light of all the factors indicated above.

      As of March 17, 2003, we had 974 holders of record of our Class A Common Stock and 52 holders of record of our Class B Common Stock. We believe that there are in excess of 5,500 beneficial holders of the Class A Common Stock. See Part III, Item 12 for information concerning our equity compensation plans.

19

Table of Contents

ITEM 6.     SELECTED FINANCIAL DATA

(1)	The balances for the current year and prior years have been adjusted to reflect the discontinued operations of our raised/access flooring business.
(2)	Includes restructuring charges of $23.4 million, $54.6 million, $21.0 million, $1.1 million and $25.3 million in years 2002, 2001, 2000, 1999 and 1998, respectively.
(3)	Includes, in 2002, the adjustment required to reflect the initial adoption of SFAS No. 142.
(4)	Includes property and equipment obtained in acquisition of business.

General

      Our revenues are derived from sales of floorcovering products (primarily modular and broadloom carpet) and related services, interior fabrics, raised/access flooring and other specialty products. Our business, as well as the commercial interiors market in general, is cyclical in nature and is impacted by economic conditions

20

Table of Contents

      Since 1999 (except for a modest rebound during the latter portion of 2000), the commercial interiors market as a whole, and the broadloom carpet market in particular, has experienced decreased demand levels. The general downturn in the domestic and international economy that characterized most of 2002 further adversely affected the commercial interiors market, especially in the U.S. corporate segment. These conditions significantly impaired our growth and profitability.

      Because we have substantial international operations, we are impacted, from time to time, by certain international developments that affect foreign currency transactions. For example, the performance of the Euro against the U.S. dollar, for purposes of the translation of European revenues into U.S. dollars, adversely affected us to varying degrees in both 2000 and 2001, when the Euro was weak relative to the U.S. dollar. In 2002, however, when the Euro strengthened relative to the U.S. dollar, the translation of European revenues into U.S. dollars favorably affected us.

      During 2002, we had net sales of $924.1 million and a net loss of $87.7 million, or $1.75 per diluted share, after giving effect to a $55.4 million after-tax write-down associated with the implementation of Statement of Financial Accounting Standards (SFAS) No. 142 and a $23.4 million pre-tax restructuring charge, compared with net sales of $1.059 billion and a net loss of $36.3 million, or $0.72 per diluted share, during 2001 after giving effect to a $54.6 million pre-tax restructuring charge in that year. Net sales for 2002 consisted of floorcovering products (primarily modular and broadloom carpet) and related services ($710.0 million), interior fabrics sales ($199.3 million) and other specialty products sales ($14.8 million), accounting for 76.8%, 21.6% and 1.6%, respectively, of total sales. Net sales for 2001 consisted of sales of floorcovering products and related services ($833.8 million), interior fabrics sales ($209.9 million) and other specialty products sales ($15.1 million), accounting for 78.8%, 19.8% and 1.4% of total sales, respectively. All amounts (except for net income or loss) and percentages above for all periods exclude our raised/access flooring business, which we are reporting as “discontinued operations” as discussed below.

Discontinued Operations of Our Raised/Access Flooring Business

      Over the past few years, our raised/access flooring business has experienced a significant decline in demand, primarily due to decreased spending by technology companies. As a result, in the fourth quarter of 2002, we decided to discontinue our operation of our raised/access flooring business, either by an outright sale of that business to a third party or through creation of a joint venture or other strategic alliance with a third party to conduct that business. We expect to consummate a transaction under one of those approaches in 2003. As required by SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we have therefore reported the results of operations for the raised/access flooring business, for all periods reflected herein, as “discontinued operations.” As a result, our discussion of revenues or sales and other results of operations (except for net income or loss amounts), including percentages derived from or based on such amounts, excludes the results of our raised/access flooring business unless we indicate otherwise.

      The raised/access flooring business represented revenues of $22.8 million, $45.1 million and $60.1 million in years 2002, 2001 and 2000, respectively. Loss from operations of the raised/access flooring business, net of tax, was $2.5 million and $10.4 million (including pre-tax restructuring charges of $10.5 million in 2001 related to consolidation in the raised/access flooring business) in years 2002 and 2001, respectively; in 2000, income from operations of that business, net of tax, was $0.3 million. We recorded an impairment charge of $12.0 million, net of tax, during the fourth quarter of 2002 to adjust the carrying value of the assets of that business to their net realizable value.

21

Table of Contents

Impact of Strategic Restructuring Initiatives

      As indicated above, we incurred substantial pre-tax restructuring charges in 2002, 2001 and 2000 — $23.4 million, $54.6 million and $21.0 million, respectively — as we implemented various initiatives to reduce our operating costs and strengthen our ability to generate free cash flow.

      The charge in 2002 reflected:

	•	consolidation of three fabrics manufacturing facilities into other facilities;
	•	further rationalization of the Re:Source Americas operations;
	•	a reduction in force of over 200 employees; and
	•	consolidation of certain European facilities.

      The charge in 2001 reflected:

	•	the closure of our European broadloom facility;
	•	further rationalization of our U.S. broadloom operations and certain European modular operations;
	•	a reduction in force of over 800 employees; and
	•	the consolidation of certain non-strategic Re:Source Americas operations.

      The charge in 2000 reflected:

	•	the integration of our U.S. broadloom operations into a single manufacturing location;
	•	the consolidation of a division’s administrative, manufacturing, and back-office functions;
	•	a reduction of 425 employees in the U.S. and Europe;
	•	the divestiture of certain non-strategic Re:Source Americas operations; and
	•	the abandonment of manufacturing equipment utilized in the production of discontinued product lines.

      The 2002 restructuring charge was comprised of $10.6 million of cash expenditures for severance benefits and other costs, and $12.8 million of non-cash charges, primarily for the write-down of the carrying value and disposal of certain assets. We expect to incur an additional pre-tax charge of approximately $1.5 million during 2003 to complete the restructuring. The 2001 restructuring charge was comprised of $20.4 million of cash expenditures for severance benefits and other costs and $34.2 million of non-cash charges, primarily for the write-down of carrying value and disposal of assets, including goodwill. The 2001 restructuring initiatives had aspects that continued into 2002 and were completed by the end of the second quarter 2002. The 2000 restructuring charge was comprised of $12.8 million of cash expenditures for severance benefits and relocation costs and $8.2 million of non-cash charges, primarily for the write-down of impaired assets.

      These initiatives are producing the strategic results we targeted, in that we have reduced our cost structure and have strengthened our free cash flow position. We believe the 2002 restructuring initiatives alone will yield future annual cost savings of approximately $15 million, beginning with approximately $10 million in 2003, although there can be no guarantee that such savings will be achieved.

      Further discussion about the restructuring charges appears in the notes to the consolidated financial statements.

Goodwill Impairment Write-Down Under SFAS 142

      We adopted the new standards set forth in SFAS 142 for accounting for goodwill and other intangible assets effective on the first day of fiscal 2002, and in the second quarter of 2002, we completed the transitional goodwill impairment test required by SFAS 142. As a result of that testing, we determined that a portion of

22

Table of Contents

      In effecting this accounting change and the related impairment testing, we used an outside consultant to help prepare valuations of reporting units in accordance with the new standards, and those valuations were compared with the respective book values of the reporting units to determine whether any goodwill impairment existed. In preparing the valuations, past, present and future expectations of performance were considered. The test showed goodwill impairment in three overseas reporting units and five Americas reporting units. In all cases, the impairment primarily was attributable to actual and currently-forecasted revenue and profitability for the reporting unit being lower (consistent with the industry-wide decline in carpet sales and related services) than that anticipated at the time of the acquisition of the reporting unit.

Results of Operations

      The discussion and analyses of period results that follow reflect the factors and trends discussed in the preceding sections.

      The following table presents, as a percentage of net sales, certain items included in our consolidated statements of operations.

Fiscal 2002 Compared with Fiscal 2001

      Our net sales decreased $134.8 million (12.7%) compared with 2001. The decrease was attributable primarily to (1) reduced corporate profits in general as a result of poor macroeconomic conditions, which has led to decreased spending in the commercial interiors market, (2) the decline of panel fabric sales to certain original equipment manufacturer (OEM) furniture manufacturers (as a result of reduced demand in the commercial interiors market), and (3) the closure of our European broadloom carpet operations in the third quarter of 2001. The decrease was offset somewhat by progress on our market segmentation initiative, whereby we are enhancing our efforts to penetrate relatively untapped segments.

23

Table of Contents

      Cost of sales, as a percentage of net sales, increased to 71.4% in 2002, compared with 70.5% in 2001, primarily as a result of (1) the under-absorption of fixed manufacturing costs due to lower volume levels, (2) a fluctuation in our relative sales mix from products which have had traditionally higher margins to those with traditionally lower margins, and (3) other manufacturing costs associated with scaling production to meet demand levels. The 2002 percentage was favorably affected by the benefits of our 2001 restructuring activities.

      Selling, general and administrative expenses declined by $33.5 million in 2002, to $225.6 million from $259.0 million in the prior year, as a result of (1) the continuation in 2002 of successful cost-cutting initiatives and other restructuring activities, and (2) the elimination in 2002 of amortization of goodwill, which was $9.8 million in 2001. As a percentage of net sales, selling, general and administrative expenses decreased slightly to 24.4% in 2002 compared with 24.5% in 2001.

      Other expense (which is comprised primarily of interest expense) increased $6.4 million in 2002 compared with 2001, due primarily to our issuance of $175 million of 10.375% Senior Notes in 2002 (which have a higher interest rate than the debt the Senior Notes replaced) and higher interest rates on our revolving credit facility.

      The rate of the effective tax benefit recognized by the Company in 2002 was 35.8%, compared with an effective tax benefit rate of 30.8% in 2001. The increase in the tax benefit rate was due primarily to the existence in 2001 of goodwill amortization expense, which was non-deductible for tax purposes. Pursuant to SFAS 142, the amortization of goodwill was discontinued effective during the 2002 fiscal year.

      As a result of these factors, including those discussed in the preceding sections, our net loss was $87.7 million in 2002 versus a net loss of $36.3 million in 2001.

Fiscal 2001 Compared with Fiscal 2000

      Our net sales in 2001 decreased $165.0 million (13.5%) compared with 2000. The decrease was attributable primarily to (1) the decline of panel fabric sales to some OEM furniture manufacturers (as a result of reduced demand in the commercial interiors market), (2) poor macroeconomic conditions, and (3) the liquidation of our European broadloom operation.

      Cost of sales, as a percentage of net sales, increased to 70.5% in 2001, compared with 69.0% in 2000, primarily as a result of (1) the under-absorption of fixed manufacturing costs due to lower volume levels, and (2) other manufacturing costs associated with scaling production to meet demand levels.

      Selling, general and administrative expenses declined by $32.5 million in 2001, to $259.0 million from $291.5 million in the prior year, as a result of successful cost-cutting initiatives and other restructuring activities. Because of the lower level of net sales, however, selling, general and administrative expenses, as a percentage of net sales, increased to 24.5% in 2001 compared with 23.8% in 2000.

      Other expense decreased $1.1 million in 2001 compared with 2000, due primarily to lower London Interbank Offered Rate (LIBOR) interest rates.

      The rate of the effective tax benefit recognized by the Company in 2001 was 30.8%, compared to an effective tax rate of 42.0% in 2000. This change was due to the write-off of certain non-deductible amounts as part of the restructuring charge taken during 2001 that reduced the tax benefit to the Company.

      As a result of these factors, including those discussed in the preceding sections, our net loss was $36.3 million in 2001 versus net income of $17.3 million in 2000.

Liquidity and Capital Resources

General

      In our business, we require cash and other liquid assets primarily for purchases of raw materials and to pay other manufacturing costs, in addition to funding for normal course selling, general and administrative

24

Table of Contents

      At December 29, 2002, we had $34.1 million of cash and cash equivalents, and an additional $163.7 million of working capital. We also had $56.7 million of available borrowing capacity under our revolving credit facility at that date, subject to continued compliance with its covenants. The material terms of that facility, along with the material terms of the replacement facility that we are negotiating and expect to consummate in 2003, are summarized below.

      We currently estimate capital expenditures for 2003 of approximately $15 million, and we have purchase commitments of approximately $2.0 million for 2003. Based on current interest rate levels, we expect our interest expense in 2003 to be approximately $41 million.

Revolving Credit Facility

      On January 17, 2002, in conjunction with our issuance of $175 million of 10.375% Senior Notes, we amended and restated our primary revolving credit facility with a banking syndicate. Under the credit facility as amended and restated, the aggregate amount of loans and letters of credit available to us at any one time is the lesser of (i) $100 million, or (ii) a borrowing base equal to the sum of specified percentages of our eligible domestic accounts receivable at such time (excluding those transferred under our accounts receivables securitization program described below), the net book value of our eligible domestic inventory at such time, and the net book value of our eligible domestic property, plant and equipment at such time (the percentages and eligibility requirements for the borrowing base are specified in the credit facility). The aggregate amount of loans and letters of credit that we and certain of our foreign subsidiaries may obtain under the credit facility in foreign currencies is $50 million (and any such foreign currency borrowings will count against the availability under the entire $100 million facility). Interest on our borrowings is charged at varying rates based on our ability to meet certain performance criteria.

      The credit facility contains covenants that limit our ability, among other things, to:

	•	incur indebtedness or contingent obligations;
	•	make certain restricted payments, such as cash dividends and debt repayments prior to scheduled maturity;
	•	make acquisitions of or investments in businesses (in excess of certain specified amounts);
	•	sell or dispose of assets (in excess of certain specified amounts);
	•	create or incur liens on assets;
	•	purchase or redeem any of our stock (other than as permitted under the credit facility); or
	•	enter into sale and leaseback transactions.

      The credit facility also requires that we meet certain financial tests (including an interest coverage ratio test, a funded debt coverage ratio test, a minimum net worth test and a fixed charge coverage ratio test), use specified excess cash flows or proceeds from certain asset sales to repay borrowings under the credit facility, and comply with certain other reporting, affirmative and negative covenants.

      If we fail to perform or breach any of our affirmative or negative covenants under the credit facility, or if other specified events occur (such as a bankruptcy or similar event or a change of control of Interface, Inc.), after giving effect to any applicable notice and right to cure provisions, an event of default will exist. If an event of default exists and is continuing, the lenders’ co-agents may, and upon the written request of a specified percentage of the lender group, shall: (1) declare all commitments of the lenders under the amended

25

Table of Contents

      The credit facility is secured by substantially all of the assets of our domestic subsidiaries (subject to exceptions for certain immaterial subsidiaries), including all of the stock of our domestic subsidiaries and up to 65% of the stock of our first-tier material foreign subsidiaries. The collateral documents provide that, if an event of default occurs under the credit facility, the lenders’ collateral agent may, upon the request of the specified percentage of lenders, exercise remedies with respect to the collateral that include foreclosing mortgages on our real estate assets, taking possession of or reselling our personal property assets, collecting our accounts receivables, or exercising proxies to take control of the pledged stock of our domestic and first-tier material foreign subsidiaries.

      The credit facility matures on May 15, 2005, subject to a possible extension of that date to January 17, 2007 if (i) the outstanding principal balance of our 9.5% Senior Subordinated Notes on May 15, 2005 is less than or equal to $50 million and (ii) the availability under the credit facility exceeds the principal amount of the 9.5% Senior Subordinated Notes then outstanding. (In addition, there will be a reserve from the availability under the credit facility for the amount of such 9.5% Senior Subordinated Notes during such extension.)

      We currently are working with our banking syndicate to further amend and restate the credit facility. As currently contemplated, the proposed amended and restated credit facility would differ from the existing credit facility in certain respects, including the following:

	•	the amended and restated credit facility would mature on May 31, 2005 unless excess availability under the new credit facility plus unrestricted cash balances exceed a to-be-determined percentage of the outstanding balance of the 9.5% Senior Subordinated Notes outstanding from time to time, and if that is the case, the maturity date will be extended for a period not to exceed five years from the anniversary of the closing date of the new credit facility and six months prior to the maturity of the 7.3% Senior Notes due 2008.
	•	the financial covenants will include a fixed charge coverage ratio test, a funded debt coverage ratio test, and a minimum excess availability test, but these covenants would not be applicable unless and until excess availability under the credit facility is less than a to-be-determined amount;
	•	the borrowing base would be modified by (i) increasing the advance rate on eligible domestic receivables from 20% to 85%, (ii) limiting advances against each of the eligible domestic inventory and the eligible U.K. inventory to 85% of the net orderly liquidation value of such inventory, (iii) modifying the advance rate against eligible domestic plant, property and equipment (and imposing a sublimit of $22.5 million for the portion of the borrowing base attributable to such collateral), (iv) deducting from the borrowing base for advances to the domestic borrower a fixed and continuing minimum availability reserve of $10.0 million and (v) expanding the borrowing base to include, for purposes of loans made to Interface Europe Ltd. (which is a subsidiary of Interface, Inc. and a permitted foreign borrower under the proposed amended and restated credit facility), the sum of specified percentages of (1) Interface Europe Ltd.’s eligible accounts receivable arising from the sale of its inventory located in the United Kingdom and denominated in British pounds sterling or United States dollars (the “UK Accounts Receivable”), (2) Interface Europe, Ltd.’s eligible inventory located in the United Kingdom (the “UK Inventory”), valued at the lower of cost or market, and (3) subject to a sublimit, the equipment of Interface Europe Ltd. located in the United Kingdom (the “UK Equipment”);
	•	all obligations of Interface Europe Ltd. under the credit facility will be secured by the UK Accounts Receivable, the UK Inventory, and the UK Equipment.

      We anticipate consummating the proposed amendment and restatement of the credit facility during the second quarter of 2003.

26

Table of Contents

     Analysis of Cash Flows

      Operating activities and proceeds from long-term debt provided our primary sources of cash during each of the last three fiscal years. In 2002, operating activities (including the discontinued operations of our raised/access flooring business) generated $58.4 million of cash compared with $18.3 million in 2001 and $71.4 million in 2000. The decrease in cash generated from operating activities in 2001 compared with 2000 was due primarily to the decline in our results of operations. From 2001 to 2002, the increase in cash generated from operating activities was attributable primarily to working capital reductions resulting from improved receivables collections and inventory reductions.

      The primary uses of cash during the last three fiscal years have been (1) acquisitions of businesses, (2) additions to property and equipment at our manufacturing facilities, (3) cash dividends, and (4) expenditures related to our debt and equity repurchase programs. For the fiscal years ended 2002, 2001 and 2000: (i) acquisitions of businesses (net of dispositions) required $0, $2.2 million and $29.9 million, respectively; (ii) additions to property and equipment required $14.3 million, $30.0 million and $30.5 million, respectively; (iii) dividends required $2.3 million, $7.6 million and $9.2 million, respectively; and (iv) debt and equity repurchases required $5.0 million, $2.2 million and $6.8 million, respectively. In addition, in 2002, we incurred $5.8 million in debt issuance costs, primarily relating to our issuance of Senior Notes.

      Pursuant to our share repurchase program, we were authorized to repurchase up to 4,000,000 shares of Class A Common Stock in the open market. This program expired on May 19, 2002. As of that date, we had repurchased an aggregate of 3,075,113 shares of Class A Common Stock since the beginning of the program, at prices ranging from $3.41 to $16.78.

      Management believes that cash provided by operations and long-term loan commitments will provide adequate funds for current commitments and other requirements in the foreseeable future.

Funding Obligations

      We have various contractual commitments and other obligations that we must fund in 2003 (including the $2.0 million of capital expenditure commitments noted above) and future years as part of our normal operations. Summary information about these matters is set forth in the following tables.

      The following table discloses aggregate information, as of December 29, 2002, about our contractual obligations (including the contractual obligations of the discontinued operations of our raised/access flooring business) and the periods in which payments are due:

*	Represents the capital expenditure commitments noted above. In addition to this amount, we have various agreements to purchase goods or services, none of which agreements is material.

      The following table discloses aggregate information, as of December 29, 2002, about other commercial commitments (including the commercial commitments of the discontinued operations of our raised/access

27

Table of Contents

(1)	Includes $14.1 million in standby letters of credit outstanding under the revolving credit facility.
(2)	Represents 365-day facilities available under subsidiaries’ names that were not drawn upon.

Critical Accounting Policies

      High-quality financial statements require rigorous application of high-quality accounting policies. The policies discussed below are considered by management to be critical to an understanding of the financial statements because their application places the most significant demands on management’s judgment, with financial reporting results relying on estimation about the effects of matters that are inherently uncertain. Specific risks for these critical accounting policies are described in the following paragraphs. For all of these policies, management cautions that future events may not develop as forecasted, and the best estimates routinely require adjustment.

      Revenue Recognition on Long-Term Contracts. A portion of our revenues is derived from long-term contracts which are accounted for under the provisions of the American Institute of Certified Public Accountants’ Statement of Position No. 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.” Long-term fixed-price contracts are recorded on the percentage of completion basis using the ratio of costs incurred to estimated total costs at completion as the measurement basis for progress toward completion and revenue recognition. Any losses identified on contracts are recognized immediately. Contract accounting requires significant judgment relative to assessing risks, estimating contract costs and making related assumptions for schedule and technical issues. With respect to contract change orders, claims or similar items, judgment must be used in estimating related amounts and assessing the potential for realization. These amounts are only included in contract value when they can be reliably estimated and realization is probable.

      Inventories. We determine the value of inventories using the lower of cost or market. We write down inventories for the difference between the carrying value of the inventories and their estimated market value. If actual market conditions are less favorable than those projected by management, additional write-downs may be required.

      Pension Benefits. Net pension expense recorded is based on, among other things, assumptions of the discount rate, estimated return on plan assets and salary increases. Changes in these and other factors and differences between actual and assumed changes in the present value of liabilities or assets of our plans above certain thresholds could cause net annual expense to increase or decrease materially from year to year.

      Environmental Remediation. We provide for remediation costs and penalties when the responsibility to remediate is probable and the amount of associated costs is reasonably determinable. Remediation liabilities are accrued based on estimates of known environmental exposures and are discounted in certain instances. We regularly monitor the progress of environmental remediation. Should studies indicate that the cost of remediation is to be more than previously estimated, an additional accrual would be recorded in the period in which such determination is made. In 2002, certain developments transpired with respect to our estimated environmental liability associated with our Chatham fabrics operations in Elkin, North Carolina. (See the discussion of “Accrued Expenses” in the Notes to Consolidated Financial Statements in Item 8.) As a result,

28

Table of Contents

      Allowances for Doubtful Accounts. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

      Impairment of Long-Lived Assets. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If the sum of the expected future undiscounted cash flow is less than the carrying amount of the asset, an impairment is indicated. A loss is then recognized for the difference, if any, between the fair value of the asset (as estimated by management using its best judgment) and the carrying value of the asset. If actual market value is less favorable than that estimated by management, additional write-downs may be required.

      Goodwill. Pursuant to SFAS 142, we no longer amortize goodwill, but instead test goodwill for impairment at least annually. We use an outside consultant to help prepare valuations of reporting units, and those valuations are compared with the respective book values of the reporting units to determine whether any goodwill impairment exists. In preparing the valuations, past, present and expected future performance is considered. If impairment is indicated, a loss is recognized for the difference, if any, between the fair value of the goodwill associated with the reporting unit and the book value of that goodwill. If the actual fair value of the goodwill is determined to be less than that estimated, an additional write-down may be required.

Off-Balance Sheet Arrangements

Accounts Receivable Securitization Program

      In February 2003, we commenced an accounts receivable securitization program, referred to as the “Securitization Program”, that provides funding from the sale of trade accounts receivable generated by certain of our operating subsidiaries. (Prior to February 2003, we had two successive similar programs, the earliest of which began in 1995.) As of February 28, 2003, Interface Fabrics Group Marketing, Inc., Interface Teknit, Inc., Interface TekSolutions, LLC, Pandel, Inc., and Interface Americas, Inc. (who are, collectively, referred to as the “Originators”) were the only subsidiaries participating in the Securitization Program.

      Under the Securitization Program, Interface purchases, on a daily basis, accounts receivable from the Originators for a cash purchase price equal to the outstanding balance of the receivables at the time of sale (net of a discount intended to give Interface a reasonable return on its investment in the receivables after taking into account the time value of that investment based on the anticipated dates of collection of such receivables and the risk of nonpayment of such receivables) pursuant to a receivables transfer agreement. A single-purpose, wholly owned subsidiary of Interface, Interface Securitization Corporation, referred to as “ISC”, purchases on a daily basis accounts receivable from Interface for cash and a subordinate loan for a purchase price equal to the outstanding balance of the receivables at the time of sale (also net of a discount intended to give ISC a reasonable return on its investment in the receivables after taking into account the time value of that investment based on the anticipated dates of collection of such receivables and the risk of nonpayment of such receivables). Pursuant to a loan agreement among ISC, as borrower, Interface, as servicer, Three Pillars Funding Corporation, as lender, referred to as “Lender”, and SunTrust Capital Markets, Inc., as administrator, referred to as “Administrator”, the Lender has agreed to make revolving loans from time to time to ISC in an amount not to exceed at any one time the lesser of $50,000,000 or the amount of ISC’s borrowing base at such time (with ISC’s borrowing base being equal to the sum of the total unpaid balance of its receivables at such time which meet certain specified eligibility criteria multiplied by an advance rate equal to 100% minus reserves which take into account anticipated loss, dilution, financing costs and servicing costs for the Securitization Program). The Lender’s commitment to provide such loans has a 364-day term, but can be extended by the Lender for additional periods of 364-days each. Borrowings by ISC under the Securitization Program’s loan agreement bear interest at a rate equal to the Lender’s cost of funding such borrowings with its commercial paper issuances plus a specified margin, but if the Lender is not using its commercial paper to fund its loans to ISC, then such loans bear interest at the one-month London Interbank

29

Table of Contents

      As of February 28, 2003, the aggregate outstanding principal balance of loans made by the Lender to ISC under the loan agreement was $28.0 million, and the aggregate unpaid balance of the receivables securing such loans on that date was $47.2 million.

      The loan agreement specifies several events of default that would permit the Lender to cease making loans under the loan agreement and to demand immediate payment of all outstanding loans already made under the loan agreement and which also would enable the Lender and Administrator to replace Interface as the servicer of the receivables. In that event, it is expected that Interface would seek to borrow a sufficient sum under its own revolving credit facility to permit ISC to repay all amounts owing to the Lender under the Securitization Program’s loan agreement. However, the occurrence of any event of default under the Securitization Program’s loan agreement may also constitute an event of default under Interface’s revolving credit facility, which would permit Interface’s lenders to withhold future loans to Interface. If Interface were not able to borrow sufficient sums under its revolving credit facility (or otherwise obtain the funding necessary) to refinance the Lender’s loans under the Securitization Program, then control of collections on the receivables in the pool would remain with the Lender and its Administrator until the Lender’s loans are fully repaid. However, if the Lender is no longer obligated to continue to make loans under the loan agreement for the Securitization Program, the Originators are not obligated to continue to sell their receivables to Interface and Interface is not obligated to continue to sell receivables to ISC.

Partnership with ABN AMRO Bank N.V.

      In 1998, our subsidiary Interface Europe B.V. formed a partnership with ABN AMRO Bank N.V. in the Netherlands for the purpose of developing an office building and warehouse facility in Scherpenzeel. Recourse against Interface Europe is limited to the amount of its investment in the partnership, which is approximately $1.0 million. Upon completion of the office building and warehouse facility, the partnership leased those facilities to Interface Europe and Interface International B.V. (which is a subsidiary of Interface Europe). At the expiration of the lease, Interface Europe and Interface International have the option to purchase the facilities from the partnership at fair market value.

Recent Accounting Pronouncements

      In June 2001, the Financial Accounting Standards Board (FASB) approved the issuance of SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS 143 establishes accounting standards for the recognition and measurement of legal obligations associated with the retirement of tangible long-lived assets and requires recognition of a liability for an asset retirement obligation in the period in which it is incurred. The provisions of this statement are effective for financial statements issued for fiscal years beginning after June 15, 2002. We are in the process of evaluating the impact this standard will have on our financial statements.

      In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” SFAS 148 provides alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of SFAS 123 to require prominent disclosure about the effects on reported net income of an entity’s accounting policy decisions with respect to stock-based employee compensation. Finally, this Statement amends APB 28, “Interim Financial Reporting,” to require disclosure about those effects in interim financial information. The amendments to SFAS 123 that provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation are effective for financial statements for fiscal years ending after December 15, 2002. The amendment to SFAS 123 relating to disclosures and the amendment to APB 28 is effective for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002. Management does not intend to adopt the fair value accounting provisions of SFAS 123 and currently believes that the adoption of SFAS 148 will not have a material impact on our financial statements.

30

Table of Contents

      In January 2003, the FASB issued Interpretation (FIN) No. 46, “Consolidation of Variable Interest Entities.” FIN 46 is effective immediately for all enterprises with variable interests in variable interest entities created after January 31, 2003. The issuance of FIN 46 had no effect on our financial statements.

      As a result of the scope of our global operations, we are exposed to an element of market risk from changes in interest rates and foreign currency exchange rates. Our results of operations and financial condition could be impacted by this risk. We manage our exposure to market risk through our regular operating and financial activities and, to the extent appropriate, through the use of derivative financial instruments.

      We employ derivative financial instruments as risk management tools and not for speculative or trading purposes. We monitor 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. We have established strict counter-party credit guidelines and enter into transactions only with financial institutions with a rating of investment grade or better. As a result, we consider the risk of counter-party default to be minimal.

Interest Rate Market Risk Exposure

      Changes in interest rates affect the interest paid on certain of our debt. To mitigate the impact of fluctuations in interest rates, our management has developed and implemented a policy to maintain the percentage of fixed and variable rate debt within certain parameters. We maintain the fixed/variable rate mix within these parameters either by borrowing on a fixed rate basis or entering into interest rate swap transactions. In the interest rate swaps, we agree to exchange, at specified levels, the difference between fixed and variable interest amounts calculated by reference to an agreed-upon notional principal linked to LIBOR. During 2002, we utilized interest rate swap agreements to effectively convert approximately $125 million of fixed rate debt into variable rate debt. As a result, during 2002, our interest expense was approximately $3.5 million lower than it would have been in the absence of our interest rate swap agreements. If the LIBOR rate increases in the future, we may be required to pay more interest expense than we would pay in the absence of the swap agreements. We currently maintain 70% and 30% of our total long-term debt in fixed and variable interest rates, respectively.

Foreign Currency Exchange Market Risk Exposure

      A significant portion of our operations consists of manufacturing and sales activities in foreign jurisdictions. We manufacture our products in the U.S., Canada, England, Northern Ireland, the Netherlands, Australia and Thailand, and sell our products in more than 100 countries. As a result, our financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which we distribute our products. Our operating results are exposed to changes in exchange rates between the U.S. dollar and many other currencies, including the euro, British pound sterling, Canadian dollar, Australian dollar, Thai baht and Japanese yen. When the U.S. dollar strengthens against a foreign currency, the value of anticipated sales in those currencies decreases, and vice versa. Additionally, to the extent our foreign operations with functional currencies other than the U.S. dollar transact business in countries other than the U.S., exchange rate changes between two foreign currencies could ultimately impact us. Finally, because we report in U.S. dollars on a consolidated basis, foreign currency exchange fluctuations can have a translation impact on our financial position.

      At December 29, 2002, we recognized a $21.1 million increase in our foreign currency translation adjustment account compared to December 30, 2001, because of the strengthening of certain currencies against the U.S. dollar. The increase was associated primarily with certain foreign subsidiaries located within the U.K. and continental Europe.

31

Table of Contents

      For purposes of specific risk analysis, we use sensitivity analysis to measure the impact that market risk may have on the fair values of our market-sensitive instruments.

      To perform sensitivity analysis, we assess the risk of loss in fair values associated with the impact of hypothetical changes in interest rates and foreign currency exchange rates on market-sensitive instruments. The market value of instruments affected by interest rate and foreign currency exchange rate risk is computed based on the present value of future cash flows as impacted by the changes in the rates attributable to the market risk being measured. The discount rates used for the present value computations were selected based on market interest and foreign currency exchange rates in effect at December 29, 2002. The values that result from these computations are then compared with the market values of the financial instruments. The differences are the hypothetical gains or losses associated with each type of risk.

Interest Rate Risk

      Based on a hypothetical immediate 150 basis point increase in interest rates, with all other variables held constant, the fair value of our fixed rate long-term debt and interest rate swap agreement would be impacted by a net decrease of $22.7 million. Conversely, a 150 basis point decrease in interest rates would result in a net increase in the fair value of our fixed rate long-term debt of $24.5 million.

Foreign Currency Exchange Rate Risk

      As of December 29, 2002, a 10% decrease or increase in the levels of foreign currency exchange rates against the U.S. dollar, with all other variables held constant, would result in a decrease in the fair value of our financial instruments of $6.3 million or an increase in the fair value of our financial instruments of $5.1 million. As the impact of offsetting changes in the fair market value of our net foreign investments is not included in the sensitivity model, these results are not indicative of our actual exposure to foreign currency exchange risk.

32

Table of Contents

CONSOLIDATED STATEMENTS OF OPERATIONS

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

See accompanying notes to consolidated financial statements.

33

Table of Contents

CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements.

34

Table of Contents

CONSOLIDATED STATEMENTS OF CASH FLOWS