INTERFACE INC - 10-Q Quarterly Report

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No o

Shares outstanding of each of the registrant’s classes of common stock at November 7, 2003:


			PAGE

PART I.	FINANCIAL INFORMATION
	Item 1.	Financial Statements	3
		Consolidated Condensed Balance Sheets — September 28, 2003 and December 29, 2002.	3
		Consolidated Condensed Statements of Operations — Three Months and Nine Months Ended September 28, 2003 and September 29, 2002.	4
		Consolidated Statements of Comprehensive Income (Loss) – Three Months and Nine Months Ended September 28, 2003 and September 29, 2002.	5
		Consolidated Condensed Statements of Cash Flows — Nine Months Ended September 28, 2003 and September 29, 2002.	6
		Notes to Consolidated Condensed Financial Statements	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	20
	Item 4.	Controls and Procedures	22
PART II.	OTHER INFORMATION
	Item 1.	Legal Proceedings	22
	Item 2.	Changes in Securities and Use of Proceeds	22
	Item 3.	Defaults Upon Senior Securities	22
	Item 4.	Submission of Matters to a Vote of Security Holders	22
	Item 5.	Other Information	22
	Item 6.	Exhibits and Reports on Form 8-K	22

INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS)


			SEPTEMBER 28,			DECEMBER 29,
			2003			2002

			(UNAUDITED)
ASSETS
CURRENT ASSETS:
	Cash and Cash Equivalents		$	22,567		$	34,134
	Accounts Receivable			176,453			137,486
	Inventories			143,977			134,656
	Prepaid Expenses			22,477			33,042
	Deferred Income Taxes			17,772			9,911
	Assets of Business Held for Sale			—			17,492

		TOTAL CURRENT ASSETS		383,246			366,721
PROPERTY AND EQUIPMENT, less accumulated depreciation				207,225			213,059
GOODWILL				217,661			210,529
OTHER ASSETS				68,517			73,201

			$	876,649		$	863,510

LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
	Accounts Payable		$	60,200		$	55,836
	Accrued Expenses			113,521			106,143
	Liabilities of Business Held for Sale			—			6,933

		TOTAL CURRENT LIABILITIES		173,721			168,912
LONG-TERM DEBT, less current maturities				5,502			—
SENIOR NOTES				325,000			325,000
SENIOR SUBORDINATED NOTES				120,000			120,000
DEFERRED INCOME TAXES				33,447			20,520
OTHER				4,339			—

		TOTAL LIABILITIES		662,009			634,432

Minority Interest				5,360			4,907

SHAREHOLDERS’ EQUITY:
	Common Stock			5,131			5,120
	Additional Paid-In Capital			222,565			221,751
	Retained Earnings			56,765			85,976
	Accumulated Other Comprehensive Income			(49,228	)		(62,723	)
	Minimum pension liability			(25,953	)		(25,953	)

		TOTAL SHAREHOLDERS’ EQUITY		209,280			224,171

			$	876,649		$	863,510

INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)


		THREE						NINE
		MONTHS						MONTHS
		ENDED						ENDED

		SEPT. 28,			SEPT. 29,			SEPT. 28,			SEPT. 29,
		2003			2002			2003			2002

NET SALES		$	237,094		$	231,315		$	681,268		$	691,759
Cost of Sales			171,862			166,666			495,466			492,196

GROSS PROFIT ON SALES			65,232			64,649			185,802			199,563
Selling, General and Administrative Expenses			57,201			57,151			172,911			168,400
Restructuring Charge			—			—			4,555			—

OPERATING INCOME			8,031			7,498			8,336			31,163
Interest Expense			11,033			10,573			31,426			31,739
Other Expense			155			—			592			380

INCOME (LOSS) BEFORE TAXES ON INCOME			(3,157	)		(3,075	)		(23,682	)		(956	)
Income Tax Expense (Benefit)			(1,011	)		(1,293	)		(8,554	)		(534	)

Income (Loss) from Continuing Operations			(2,146	)		(1,782	)		(15,128	)		(422	)
Loss from Discontinued Operations, Net of tax			(2,417	)		(967	)		(5,201	)		(1,656	)
Loss on Disposition, Net of Tax			(8,825	)		—			(8,825	)		—

	Income (Loss) before Change in Accounting Principle		(13,388	)		(2,749	)		(29,154	)		(2,078	)
Cumulative Effect of Change, Net of Tax			—			—			—			(55,380	)

NET INCOME (LOSS)		$	(13,388	)	$	(2,749	)	$	(29,154	)	$	(57,458	)

EARNINGS (LOSS) PER SHARE – BASIC AND DILUTED
Continuing Operations		$	(0.04	)	$	(0.03	)	$	(0.30	)	$	(0.01	)
Discontinued Operations			(0.05	)		(0.02	)		(0.10	)		(0.03	)
Loss on Disposal			(0.18	)		—			(0.18	)		—
Cumulative Effect of Change in Accounting Principle			—			—			—		$	(1.11	)

Earnings (Loss) Per Share – Basic and Diluted		$	(0.27	)	$	(0.05	)	$	(0.58	)	$	(1.15	)

Common Shares Outstanding, Basic and Diluted			50,273			50,251			50,247			50,148

INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)


	THREE						NINE
	MONTHS						MONTHS
	ENDED						ENDED

	SEPT. 28,			SEPT. 29,			SEPT. 28,			SEPT. 29,
	2003			2002			2003			2002

Net Income (Loss)	$	(13,388	)	$	(2,749	)	$	(29,154	)	$	(57,458	)
Other Comprehensive Income, Foreign Currency Translation Adjustment		280			1,731			16,649			14,966

Comprehensive Income (Loss)	$	(13,108	)	$	(1,018	)	$	(12,505	)	$	(42,492	)

INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)


			NINE
			MONTHS
			ENDED

			SEPT. 28,			SEPT. 29,
			2003			2002

OPERATING ACTIVITIES:
Net loss			$	(29,153	)	$	(57,657	)
	Adjustments to reconcile net loss to cash provided by operating activities:
	Loss on disposal of discontinued operations			8,825			—
	Depreciation and amortization			27,450			27,811
	Deferred income taxes			765			210
	Other			—			150
	Cumulative effect of a change in accounting principle			—			55,380
	Working capital changes:
		Accounts receivable		(31,388	)		8,767
		Inventories		(8,901	)		11,593
		Prepaid expenses		462			(5,171	)
		Accounts payable and accrued expenses		13,254			420

	Cash provided by (used in) operating activities of continuing operations			(18,686	)		41,503
	Cash provided by (used in) operating activities of discontinued operations			8,141			(2,765	)

CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:			$	(10,545	)	$	38,738

INVESTING ACTIVITIES:
	Capital expenditures			(10,788	)		(8,510	)
	Other			2,938			(2,205	)

CASH USED IN INVESTING ACTIVITIES:				(7,850	)		(10,715	)

FINANCING ACTIVITIES:
	Net borrowing (reduction) of long-term debt			5,500			(175,406	)
	Proceeds from issuance of bonds			—			175,000
	Refinancing costs			—			(5,484	)
	Proceeds from issuance of common stock			42			1,331
	Repurchase of senior subordinated notes			—			(5,000	)
	Dividends paid			—			(2,300	)
	Other			183			—

CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES:				5,725			(11,859	)

	Net cash provided by (used in) operating, investing and financing activities			(12,670	)		16,164
	Effect of exchange rate changes on cash			1,103			673

CASH AND CASH EQUIVALENTS:
	Net change during the period			(11,567	)		16,837
	Balance at beginning of period			34,134			793

	Balance at end of period		$	22,567		$	17,630

INTERFACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

As contemplated by the Securities and Exchange Commission (the “Commission”) instructions to Form 10-Q, the following footnotes have been condensed and, therefore, do not contain all disclosures required in connection with annual financial statements. Reference should be made to the Company’s year-end financial statements and notes thereto contained in its Annual Report on Form 10-K for the fiscal year ended December 29, 2002, as filed with the Commission.

The financial information included in this report has been prepared by the Company, without audit. In the opinion of management, the financial information included in this report contains all adjustments (all of which are normal and recurring) necessary for a fair presentation of the results for the interim periods. Nevertheless, the results shown for interim periods are not necessarily indicative of results to be expected for the full year. The December 29, 2002 consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States.

In September 2003, the Company sold substantially all of the assets of its raised/access flooring business. The balances of this business have been segregated and reported as discontinued operations for all periods presented.

We adopted the new standards of accounting for goodwill and other intangible assets beginning in the first quarter of fiscal 2002. In the second quarter of 2002, we completed the transitional goodwill impairment test required by Statement of Financial Accounting Standards (“SFAS”) No. 142, entitled “Goodwill and Other Intangible Assets.” An outside consultant was used to help prepare valuations of reporting units in accordance with the new standard, 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 then-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. The effect of this accounting change (an after-tax charge of $55.4 million, or $1.11 per diluted share for the quarter ended March 31, 2002) has been recorded as the cumulative effect of a change in accounting principle effective the first quarter of fiscal 2002, as required by SFAS 142, and appears in the Company’s results for the nine-month period ended September 29, 2002. The charge had no cash effect, and, as required, is presented net of tax.

During the fourth quarter of 2002, the Company performed the annual goodwill impairment test required by SFAS 142 using a methodology similar to the transitional test. No additional impairment was indicated.

During the fourth quarter of 2002, the Company recorded a pre-tax restructuring charge of $23.4 million. The charge reflected: (i) the consolidation of three fabrics manufacturing facilities; (ii) the further rationalization of the Re:Source Americas operations; (iii) a worldwide workforce reduction of approximately 206 employees; and (iv) the consolidation of certain European facilities. In the first six months of 2003, we recognized an additional pre-tax restructuring charge related to this plan of $4.6 million, primarily related to the incurrence of facilities consolidation costs and further staff reductions.

Specific elements of the restructuring activities, the related costs and current status of the plan are discussed below.

Enduring sluggish economic conditions in 2002 caused a decline in demand for fabrics, floorcovering and related services. In order to better match our cost structure to the expected revenue base, the Company consolidated three fabrics manufacturing plants, closed vacated facilities and made other head-count reductions. In the fourth quarter of 2002, a charge of approximately $13.2 million was recorded representing the relocation of equipment, the reduction of carrying value of certain property and equipment, product rationalization and other costs to consolidate these operations. Additionally, in the fourth quarter of 2002, the Company recorded approximately $1.7 million of termination benefits associated with the facility closures and other head-count reductions. In the first six months of 2003, a charge of approximately $2.9 million was recorded representing additional costs incurred to consolidate the three fabrics manufacturing plants, and a charge of approximately $1.7 million was recorded for additional termination benefits.

The softening global economy during 2002 led management to conclude that further right-sizing of the Europe and Australia operations was necessary. As a result, the Company elected to consolidate certain production and administrative facilities throughout Europe and Australia. A charge of approximately $4.6 million was recorded in the fourth quarter of 2002 representing the reduction of carrying value of the related property and equipment and other costs to consolidate these operations. Additionally, the Company recorded approximately $4.0 million of termination benefits associated with the facility closures.

A summary of the restructuring activities from the initiation of the plan through June 29, 2003, is presented below:


		U.S.		EUROPE		AUSTRALIA		TOTAL

		(IN THOUSANDS)
Facilities consolidation		$	8,966	$	4,541	$	—	$	13,507
Workforce reduction			1,704		3,636		315		5,655
Product rationalization			1,301		—		—		1,301
Other impaired assets			2,888		—		98		2,986

	Total, December 29, 2002		14,859		8,177		413		23,449
Facilities consolidation			2,885		—		—		2,885
Workforce reduction			1,670		—		—		1,670

	Total, June 29, 2003	$	19,414	$	8,177	$	413	$	28,004

The restructuring charge was comprised of $15.2 million of cash expenditures for severance benefits and other costs, and $12.8 million of non-cash charges, primarily for the write-down of carrying value and disposal of certain assets.

The termination benefits of $7.3 million, primarily related to severance costs, are a result of aggregate reductions of 271 employees. The staff reductions as originally planned were expected to be as follows:

As a result of the restructuring, a total of 189 employees were terminated through December 29, 2002. The charge for termination benefits and other costs to exit activities incurred during 2002 was reflected as a separately stated charge against operating income. An additional 82 employees were terminated during the first nine months of 2003.

The following tables display the cash activities, during the nine-month period ended September 28, 2003, related to the 2002 restructuring summarized above:

During 2001, the Company recorded a pre-tax restructuring charge of $65.1 million. The charge reflected: (i) the withdrawal from the European broadloom market; (ii) the consolidation in the Company’s raised/access flooring operations; (iii) the further rationalization of the U.S. broadloom operations; (iv) a worldwide workforce reduction of approximately 838 employees; and (v) the consolidation of certain non-strategic Re:Source Americas operations. The Company initially recorded a charge of $62.2 million during the third quarter of 2001, and in the fourth quarter of 2001 recorded an additional $2.9 million charge related to pension benefits for terminated European employees. The Company completed this restructuring plan during the first quarter of 2003.

Specific elements of the restructuring activities, the related costs and current status of the plan are discussed below.

Economic developments had caused a decline in demand for raised/access flooring, panel fabric and certain of the Company’s other products. In order to better match the cost structure to the expected revenue base, the Company closed two raised/access flooring plants and one panel fabric plant, eliminated certain product lines, consolidated certain under-performing distribution locations and made other head-count reductions. A charge of approximately $28.8 million was recorded representing the reduction of carrying value of the related property and equipment, impairment of intangible assets and other costs to close these operations. Additionally, the Company recorded approximately $5.3 million of termination benefits associated with the facility closures and other head-count reductions.

For the past several years leading up to 2001, the Company’s European broadloom operations had negative returns. The softening global economy during 2001, and the events of September 11, 2001 (which severely impacted consumers of broadloom carpet in the hospitality, leisure and airline businesses) led management to conclude that positive returns from this operation were unlikely for the near future. As a result, the Company elected to divest of this operation. The Company also elected to consolidate certain production and administrative facilities throughout Europe. A charge of approximately $19.0 million was recorded representing the reduction of carrying value of the related property and equipment, impairment of intangible assets and other costs to close or dispose of these operations. Additionally, the Company recorded approximately $12.0 million of termination benefits associated with the facility closures.

A summary of the restructuring activities, including activities relating to the discontinued raised/access flooring business, is presented below:

These amounts include restructuring charges of approximately $10.5 million related to the discontinued operations of the raised/access flooring business.

The restructuring charge was comprised of $24.0 million of cash expenditures for severance benefits and other costs and $41.1 million of non-cash charges, primarily for the write-down of carrying value and disposal of certain assets.

The termination benefits of $17.3 million, primarily related to severance costs, are a result of aggregate reductions of 847 employees. The staff reductions as originally planned were expected to be as follows:

As a result of the restructuring, a total of 847 employees were terminated through March 30, 2003 (which completed the 2001 restructuring). The charge for termination benefits and other costs to exit activities incurred during 2001 was reflected as a separately stated charge against operating income.

In the first quarter of 2003, the Company completed the activity associated with the 2001 restructuring. The following table displays the activity within the accrued restructuring liability for the three-month period ended March 30, 2003:

Basic earnings (loss) per share is computed by dividing net income (or loss) to common shareholders by the weighted average number of shares of Class A and Class B Common Stock outstanding during the period. Shares issued or reacquired during the period have been weighted for the portion of the period that they were outstanding. Basic earnings (loss) per share has been computed based upon 50,273,000 shares and 50,251,000 shares outstanding for the three-month periods ended September 28, 2003 and September 29, 2002, respectively, and based upon 50,247,000 shares and 50,148,000 shares outstanding for the nine-month periods ended September 28, 2003 and September 29, 2002, respectively. Diluted earnings (loss) per share is calculated in a manner consistent with that of basic earnings per share while giving effect to all potentially dilutive common shares that were outstanding during the period. Diluted earnings (loss) per share has been computed based upon 50,273,000 shares and 50,251,000 shares outstanding for the three-month periods ended September 28, 2003 and September 29, 2002, respectively, and based upon 50,247,000 shares and 50,148,000 shares outstanding for the nine-month periods ended September 28, 2003 and September 29, 2002, respectively. During the three-month and nine-month periods ended September 28, 2003, there were vested, unexercised, in the money stock options for 2,456,000 shares and 893,000 shares, respectively. During the three-month and nine-month periods ended September 29, 2002, there were vested, unexercised, in the money stock options for 2,040,000 shares and 2,592,000 shares, respectively. These shares were not included in the computation of the diluted per share amount because the Company was in a net loss position and, thus, any potential common shares were anti-dilutive.

The following is a reconciliation from basic earnings (loss) per share to diluted earnings (loss) per share for each of the periods presented:


		(In Thousands Except Per Share Amounts)

For the Three-Month					Average Shares		Earnings (Loss)
Period Ended		Net Income (Loss)			Outstanding		Per Share

Sept. 28, 2003		$	(13,388	)		50,273	$	(0.27	)
Effect of Dilution:
	Options		—			—		—

Diluted		$	(13,388	)		50,273	$	(0.27	)

Sept. 29, 2002		$	(2,749	)		50,251	$	(0.05	)
Effect of Dilution:
	Options		—			—		—

Diluted		$	(2,749	)		50,251	$	(0.05	)


		(In Thousands Except Per Share Amounts)

For the Nine-Month					Average Shares		Earnings (Loss)
Period Ended		Net Loss			Outstanding		Per Share

Sept. 28, 2003		$	(29,154	)		50,247	$	(0.58	)
Effect of Dilution:
	Options		—			—		—

Diluted		$	(29,154	)		50,247	$	(0.58	)

Sept. 29, 2002		$	(57,458	)		50,148	$	(1.15	)
Effect of Dilution:
	Options		—			—		—

Diluted		$	(57,458	)		50,148	$	(1.15	)

Based on the quantitative thresholds specified in SFAS No. 131, the Company has determined that it has two reportable segments: Floorcovering Products/Services and Interior Fabrics. The Floorcovering Products/Services segment manufactures, installs and services commercial modular and broadloom carpet, and the Interior Fabrics segment manufactures panel and upholstery fabrics.

The accounting policies of the operating segments are the same as those described in the Summary of Significant Accounting Policies contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2002, as filed with the Commission. Segment amounts disclosed are prior to any elimination entries made in consolidation, except in the case of Net Sales, where intercompany sales have been eliminated. The chief operating decision maker evaluates performance of the segments based on operating income. Costs excluded from this profit measure primarily consist of allocated corporate expenses, interest/other expense and income taxes. Corporate expenses are primarily comprised of corporate overhead expenses. Assets not identifiable to any individual segment are corporate assets, which are primarily comprised of cash and cash equivalents, short-term investments, intangible assets and intercompany amounts, which are eliminated in consolidation.


		Floorcovering		Interior
(in thousands)		Products/Services		Fabrics			Other			Total

Three Months Ended Sept. 28, 2003
	Net Sales	$	187,282	$	47,899		$	1,913		$	237,094
	Depreciation and amortization		3,459		2,749			10			6,218
	Operating Income		10,573		(2,062	)		(28	)		8,483
Total Assets, at Sept. 28, 2003		$	669,693	$	232,003		$	16,297		$	917,993
Three Months Ended Sept. 29, 2002
	Net Sales	$	177,323	$	50,468		$	3,524		$	231,315
	Depreciation and amortization		2,999		2,843			82			5,924
	Operating Income		9,131		(868	)		478			8,741
Total Assets, at Sept. 29, 2002		$	656,272	$	245,387		$	27,483		$	929,142


		Floorcovering		Interior
(in thousands)		Products/Services		Fabrics			Other		Total

Nine Months Ended Sept. 28, 2003
	Net Sales	$	533,272	$	140,909		$	7,087	$	681,268
	Depreciation and amortization		12,770		8,480			88		21,338
	Operating Income		20,369		(9,979	)		168		10,558
Nine Months Ended Sept. 29, 2002
	Net Sales	$	525,681	$	155,122		$	10,956	$	691,759
	Depreciation and amortization		13,222		8,200			281		21,703
	Operating Income		29,197		2,687			540		32,424

A reconciliation of the Company’s total segment operating income, depreciation and amortization and assets to the corresponding consolidated amounts follows:


	Three Months Ended						Nine Months Ended

(in thousands)	Sept. 28, 2003			Sept. 29, 2002			Sept. 28, 2003			Sept. 29, 2002

DEPRECIATION AND AMORTIZATION
Total segment depreciation and amortization	$	6,218		$	5,924		$	21,338		$	21,703
Corporate depreciation and amortization		2,859			3,078			6,112			6,108

Reported depreciation and amortization	$	9,077		$	9,002		$	27,450		$	27,811

OPERATING INCOME (LOSS)
Total segment operating income	$	8,483		$	8,741		$	10,558		$	32,424
Corporate expenses and other reconciling amounts		(452	)		(1,243	)		(2,222	)		(1,261	)

Reported operating income	$	8,031		$	7,498		$	8,336		$	31,163

On January 17, 2002, the Company amended and restated its revolving credit facility. The amendment and restatement, among other things, substituted certain lenders, changed certain covenants, and reduced the maximum borrowing amount to $100 million. In connection with the amendment and restatement of the facility, the Company issued the 10.375% Senior Notes discussed below.

On January 17, 2002, the Company also completed a private offering of $175 million in 10.375% Senior Notes due 2010. Interest is payable semi-annually on February 1 and August 1 (interest payments began August 1, 2002). Proceeds from the issuance of these Notes were used to pay down the revolving credit facility. The Notes are guaranteed, jointly and severally, on an unsecured senior basis by certain of the Company’s domestic subsidiaries. At any time prior to February 1, 2005, the Company may redeem up to 35% of the aggregate principal amount of the Notes with the proceeds of one or more equity offerings at a redemption price in cash equal to 110 3/8% of the principal amount thereof, plus accrued interest at the redemption date. On June 17, 2002, the Company completed an exchange offer pursuant to which the Notes were exchanged for substantially similar notes registered under the Securities Act.

In December 2002, we further amended our revolving credit facility. The amendment, among other things: (1) eased the interest coverage ratio covenant; (2) added a fixed charge coverage ratio covenant; (3) changed the borrowing base formula; (4) enlarged the lenders’ letters of credit subcommitment from $15 million to $20 million; and (5) increased pricing on borrowings in certain circumstances.

On June 18, 2003, we again amended and restated our revolving credit facility. Under the amended and restated facility, as under its predecessor, the maximum aggregate amount of loans and letters of credit available to us at any one time is $100 million. However, the amended and restated facility differs from its predecessor in several material respects, including the following:

•

The amended and restated facility (the “Facility”) matures on May 15, 2005, but may be extended to October 1, 2007, upon the following conditions. If, on May 15, 2005, and at all times thereafter until the Company’s 9.5% Senior Subordinated Notes are paid in full, (i) the sum of our excess availability for domestic loans under the Facility plus unrestricted cash balances (each as defined in the facility) is greater than or equal to (ii) the sum of $45 million plus the outstanding principal balance of the 9.5% Senior Subordinated Notes, then the maturity date will be extended to November 15, 2005. If the maturity date is extended to November 15, 2005, as described in the preceding sentence, and if the 9.5% Senior Subordinated Notes are paid in full on or before November 15, 2005, then the maturity date will automatically be extended to October 1, 2007.

•

The Facility includes a domestic U.S. Dollar syndicated loan and letter of credit facility (the “Domestic Loan Facility”) made available to the Company and Interface Europe B.V. (a foreign subsidiary of the Company based in Europe), as co-borrowers up to the lesser of (i) $100 million, or (ii) a borrowing base equal to the sum of specified percentages of eligible accounts receivable, finished goods inventory and raw materials inventory in the U.S. (the percentages and eligibility requirements for the domestic borrowing base are specified in the credit facility) less certain reserves. Any advances to the Company or Interface Europe B.V. under the Domestic Loan Facility will reduce borrowing availability under the entire Facility.

•

Advances to the Company and Interface Europe B.V. under the Domestic Loan Facility and advances to Interface Europe, Ltd. under the Multicurrency Loan Facility (described below) are secured by a first-priority lien on substantially all of the assets of the Company and each of its material domestic subsidiaries, which subsidiaries also guaranty the Facility.

•

The Facility also includes a multicurrency syndicated loan and letter of credit facility (the “Multicurrency Loan Facility”) in British Pounds and Euros made available to Interface Europe, Ltd. (a foreign subsidiary of the Company based in the UK), in an amount up to the lesser of (i) the U.S. Dollar equivalent of $15 million, or (ii) a borrowing base equal to the sum of specified percentages of eligible accounts receivable and finished goods inventory of Interface Europe, Ltd. and certain of its subsidiaries (the percentages and eligibility requirements for the UK borrowing base are specified in the credit facility) less certain reserves. Any advances under the Multicurrency Loan Facility will reduce borrowing availability under the Domestic Loan Facility.

•

Advances to Interface Europe, Ltd. under the facility are secured by a first-priority lien on, security interest in, or floating or fixed charge, as applicable, on all of the interest in and to the accounts receivable, inventory, and substantially all other property of Interface Europe, Ltd. and its material subsidiaries, which subsidiaries also guarantee the Multicurrency Loan Facility.

•

The Facility contains certain financial covenants (including a senior secured debt coverage ratio test and a fixed charge coverage ratio test) that become effective in the event that (i) our excess availability for domestic loans falls below $20 million (excluding a specified reserve against the domestic borrowing base), or (ii) our excess availability for UK loans falls below $3 million. In such event, we must comply with the financial covenants for a period commencing on the last day of the fiscal quarter immediately preceding such event (unless such event occurs on the last day of a fiscal quarter, in which case the compliance period commences on such date) and ending on the last day of the fiscal quarter immediately following the fiscal quarter in which such event occurred.

We use the intrinsic value method of accounting for employee stock options in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” as allowed under the provisions of SFAS 123, “Accounting for Stock-Based Compensation.” Compensation expense related to stock option plans was not material for the three-month or nine-month periods ended September 28, 2003 and September 29, 2002, respectively.

The following table includes disclosures required by SFAS 123, as amended by SFAS 148, “Accounting for Stock-Based Compensation — Transition and Disclosure,” and illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions of SFAS 123:


	Three Months Ended						Nine Months Ended

	Sept. 28, 2003			Sept. 29, 2002			Sept. 28, 2003			Sept. 29, 2002

	(in thousands except per share amounts)
Net income (loss) as reported	$	(13,388	)	$	(2,749	)	$	(29,154	)	$	(57,458	)
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(341)			(359	)		(962	)		(835	)

Pro forma net income (loss)	$	(13,729	)	$	(3,108	)	$	(30,116	)	$	(58,293	)

Basic and diluted income (loss) per share as reported	$	(0.27	)	$	(0.05	)	$	(0.58	)	$	(1.15	)
Basic and diluted pro forma income (loss) per share	$	(0.27	)	$	(0.06	)	$	(0.60	)	$	(1.16	)

The fair value of options at the date of grant was estimated using the Black-Scholes option pricing model.

In the fourth quarter of 2002, management approved and committed to a plan to sell or otherwise create a joint venture or strategic alliance for its raised/access flooring business. In connection with its plan, the Company 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 this business to their estimated fair values.

In September 2003, the Company sold substantially all of the assets of the raised/access flooring business. The results of these discontinued operations for the three-month and nine-month periods ended September 28, 2003 yielded after-tax losses of $2.4 million and $5.2 million, respectively. In addition, the Company recognized an after-tax loss on disposition of $8.8 million.

Additional information regarding the raised/access flooring business is as follows:


	Three Months Ended						Nine Months Ended

	Sept. 28, 2003			Sept. 29, 2002			Sept. 28, 2003			Sept. 29, 2002

	(in thousands)						(in thousands)

Net sales	$	4,223		$	4,642		$	14,336		$	19,216
Loss on operations before taxes on income		(1,425	)		(1,585	)		(5,826	)		(2,715	)
Taxes on income (benefit)		(556	)		(618	)		(2,173	)		(1,059	)
Loss on operations, net of tax		(869	)		(967	)		(3,653	)		(1,656	)
Loss on disposition, net of tax		(8,825	)		—			(8,825	)		—

The Guarantor Subsidiaries, which consist of the Company’s principal domestic subsidiaries, are guarantors of the Company’s 10.375% senior notes due 2010, its 7.3% senior notes due 2008, and its 9.5% senior subordinated notes due 2005. The Supplemental Guarantor Financial Statements are presented herein pursuant to requirements of the Commission.

CONDENSED CONSOLIDATING STATEMENT OF INCOME (LOSS)
FOR THE THREE MONTHS ENDED SEPTEMBER 28, 2003


									CONSOLIDATION
				NON-		INTERFACE, INC.			AND
	GUARANTOR			GUARANTOR		(PARENT			ELIMINATION			CONSOLIDATED
	SUBSIDIARIES			SUBSIDIARIES		CORPORATION)			ENTRIES			TOTALS

	(IN THOUSANDS)
Net sales	$	182,945		$	82,161	$	—		$	(28,012	)	$	237,094
Cost of sales		142,768			57,106		—			(28,012	)		171,862

Gross profit on sales		40,177			25,055		—			—			65,232
Selling, general and administrative expenses		33,001			18,397		5,803			—			57,201

Operating income (loss)		7,176			6,658		(5,803	)		—			8,031
Interest/Other expense		3,574			2,030		5,584			—			11,188

Income (loss) before taxes on income and equity in income of subsidiaries		3,602			4,628		(11,387	)		—			(3,157	)
Income tax (benefit) expense		6,308			1,580		(8,899	)		—			(1,011	)

Income (loss) from continuing operations		(2,706	)		3,048		(2,488	)		—			(2,146	)
Discontinued operations, net of tax		(11,242	)		—		—			—			(11,242	)
Equity in income (loss) of subsidiaries		—			—		(10,900	)		10,900			—

Net income (loss)	$	(13,948	)	$	3,048	$	(13,388	)	$	10,900		$	(13,388	)

CONDENSED CONSOLIDATING STATEMENT OF INCOME (LOSS)
FOR THE NINE MONTHS ENDED SEPTEMBER 28, 2003


									CONSOLIDATION
				NON-		INTERFACE, INC.			AND
	GUARANTOR			GUARANTOR		(PARENT			ELIMINATION			CONSOLIDATED
	SUBSIDIARIES			SUBSIDIARIES		CORPORATION)			ENTRIES			TOTALS

	(IN THOUSANDS)
Net sales	$	509,879		$	244,027	$	—		$	(72,638	)	$	681,268
Cost of sales		400,232			167,872		—			(72,638	)		495,466

Gross profit on sales		109,647			76,155		—			—			185,802
Selling, general and administrative expenses		100,076			56,386		16,449			—			172,911
Restructuring charge		4,555			—		—			—			4,555

Operating income (loss)		5,016			19,769		(16,449	)		—			8,336
Interest/Other expense		9,341			6,448		16,229			—			32,018

Income (loss) before taxes on income and equity in income of subsidiaries		(4,325	)		13,321		(32,678	)		—			(23,682	)
Income tax (benefit) expense		7,680			4,447		(20,681	)		—			(8,554	)

Income (loss) from continuing operations		(12,005	)		8,874		(11,997	)		—			(15,128	)
Discontinued operations, net of tax		(14,026	)		—		—			—			(14,026	)
Equity in income (loss) of subsidiaries		—			—		(17,157	)		17,157			—

Net income (loss)	$	(26,031	)	$	8,874	$	(29,154	)	$	17,157		$	(29,154	)


												CONSOLIDATION
						NON-			INTERFACE, INC.			AND
			GUARANTOR			GUARANTOR			(PARENT			ELIMINATION			CONSOLIDATED
			SUBSIDIARIES			SUBSIDIARIES			CORPORATION)			ENTRIES			TOTALS

			(IN THOUSANDS)
ASSETS
Current Assets:
	Cash and cash equivalents		$	6,507		$	12,801		$	3,259		$	—		$	22,567
	Accounts receivable			105,703			67,114			3,636			—			176,453
	Inventories			95,886			48,091			—			—			143,977
	Prepaids and Deferred Income Taxes			9,519			16,746			13,984			—			40,249

		Total current assets		217,615			144,752			20,879			—			383,246
Property and equipment less accumulated depreciation				126,222			69,691			11,312			—			207,225
Investment in subsidiaries				153,880			15,719			712,842			(882,441	)		—
Goodwill				134,232			82,642			787			—			217,661
Other assets				10,053			9,682			48,782			—			68,517

			$	642,002		$	322,486		$	794,602		$	(882,441	)	$	876,649

LIABILITIES AND COMMON SHAREHOLDERS’ EQUITY
Current Liabilities:
	Accounts payable		$	34,551		$	24,225		$	1,424		$	—		$	60,200
	Accrued expenses			36,408			64,707			12,406			—			113,521

		Total current liabilities		70,959			88,932			13,830			—			173,721
Long-term debt, less current maturities				1			3			5,498			—			5,502
Senior notes and senior subordinated notes				—			—			445,000			—			445,000
Deferred income taxes				15,677			(3,537	)		21,307			—			33,447
Other				—			—			4,339			—			4,339

		Total liabilities		86,637			85,398			489,974			—			662,009

Minority interests				—			5,360			—			—			5,360

Redeemable preferred stock				57,891			—			—			(57,891	)		—
Common stock				94,145			102,199			5,131			(196,344	)		5,131
Additional paid-in capital				191,411			48,061			222,867			(239,774	)		222,565
Retained earnings				213,168			145,493			86,536			(388,432	)		56,765
Accumulated Other Comprehensive Income				(1,250	)		(38,072	)		(9,906	)		—			(49,228	)
Minimum pension liability				—			(25,953	)		—			—			(25,953	)

			$	642,002		$	322,486		$	794,602		$	(882,441	)	$	876,649

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS
ENDED SEPTEMBER 28, 2003


					NON-			INTERFACE, INC.			CONSOLIDATION
		GUARANTOR			GUARANTOR			(PARENT			AND		CONSOLIDATED
		SUBSIDIARIES			SUBSIDIARIES			CORPORATION)			ELIMINATION ENTRIES		TOTALS

								(IN THOUSANDS)
Net cash provided by (used for) operating activities		$	15,290		$	(5,768	)	$	(20,067	)	$	—	$	(10,545	)
Cash flows from investing activities:
	Purchase of plant and equipment		(9,873	)		(425	)		(490	)		—		(10,788	)
	Other assets		(1,333	)		113			4,158			—		2,938

Net cash provided by (used for) investing activities			(11,206	)		(312	)		3,668			—		(7,850	)

Cash flows from financing activities:
	Net borrowings (repayments)		(1,277	)		—			6,777			—		5,500
	Proceeds from issuance of common stock		—			—			42			—		42
	Other		183			—			—			—		183
Net cash provided by (used for) financing activities			(1,094	)		—			6,819			—		5,725

Effect of exchange rate change on cash			—			1,103			—			—		1,103

Net increase (decrease) in cash			2,990			(4,977	)		(9,580	)		—		(11,567	)
Cash at beginning of period			3,517			17,778			12,839			—		34,134

Cash at end of period		$	6,507		$	12,801		$	3,259		$	—	$	22,567

In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation (FIN) No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” FIN 46 requires a company to consolidate a variable interest entity, as defined, when the company will absorb a majority of the variable interest entity’s expected losses, receive a majority of the variable interest entity’s expected residual returns, or both. FIN 46 also requires certain disclosures relating to consolidated variable interest entities and unconsolidated variable interest entities in which a company has a significant variable interest. The issuance of FIN 46 had no effect on our consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This statement establishes standards for how an issuer classifies and measures financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability. Many of those instruments were previously classified as equity. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company adopted this new pronouncement effective the third quarter beginning June 30, 2003. The adoption of SFAS 150 did not have a material impact on our consolidated financial statements.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report 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 the Company and members of its 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 under the heading “Safe Harbor Compliance Statement for Forward-Looking Statements” included in Item 1 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2002, which discussion is hereby incorporated by reference, including but not limited to the discussion of specific risks and uncertainties under the headings “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,” “Sales of our principal products may be affected by cycles in the construction and renovation of commercial and institutional buildings,” “Our continued success depends significantly upon the efforts, abilities and continued service of our senior management executives and our design consultants,” “Our substantial international operations are subject to various political, economic and other uncertainties,” “Our

Chairman, together with other insiders, currently has sufficient voting power to elect a majority of our Board of Directors,” “Large increases in the cost of petroleum-based raw materials, which we are unable to pass through to our customers, could adversely affect us,” “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,” and “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.” The Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.

Our revenues are derived from sales of commercial and residential floorcovering products (primarily modular and broadloom carpet) and related services, interior fabrics and other specialty products. During the nine-month period ended September 28, 2003, we had net sales of $681.3 million and a net loss (after giving effect to restructuring charges) of $29.2 million, or $0.58 per share, compared with net sales of $691.8 million and a net loss of $57.5 million or $1.15 per 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, in the comparable period last year. All amounts (except for net loss) in the preceding sentence exclude our raised/access flooring business, which we are reporting as “discontinued operations” as discussed below.

During the first six months of 2003, we recorded pre-tax restructuring charges of $4.6 million in connection with our previously-announced restructuring initiative designed to rationalize manufacturing operations in our fabrics division and further reduce worldwide workforce. This charge was comprised entirely of cash expenditures for severance benefits and other rationalization costs.

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. 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.

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 our goodwill and other intangible assets had been impaired, and we wrote down their value accordingly. The effect of that write-down (an after-tax charge of $55.4 million, or $1.11 per diluted share in the quarter ended March 31, 2002) has been recorded as the cumulative effect of a change in accounting principle effective the first quarter of fiscal 2002, as required by SFAS 142. The charge had no cash effect and, as required, is presented net of tax. However, it affects significantly the comparisons of our results from period to period, both directly because of the charge itself in the first quarter of 2002, and indirectly because of the subsequent elimination of amortization of those assets.

For the three-month period ended September 28, 2003, the Company’s net sales increased slightly by $5.8 million (2.5%) compared to the same period in 2002. This increase is due primarily to currency fluctuations that negatively affected the value of the dollar year over year. For the nine-month period ended September 28, 2003, the Company’s net sales decreased $10.5 million (1.5%) compared to the same period in 2002. This decrease is primarily attributable to: (i) reduced corporate profits in general, which has led to decreased spending in commercial interior markets; (ii) the decline of panel fabrics sales to certain OEM furniture manufactures as a result of reduced demand in the interiors market; and (iii) deferred spending by corporations due to uncertainty in the face of the war in Iraq.

Cost of sales, as a percentage of net sales, increased to 72.5% for the three-month period ended September 28, 2003, compared with 72.1% in the comparable period in 2002. For the nine-month period ending September 28, 2003, cost of sales, as a percentage of net sales, increased to 72.7%, versus 71.2% in the comparable period in 2002. The percentage increases are primarily due to (i) the under-absorption of fixed manufacturing cost due to lower sales volume, (ii) a fluctuation in our relative sales mix from products which have had traditionally higher margins to those with traditionally lower margins, (iii) other manufacturing costs associated with

scaling production to meet current demand levels, and (iv) unanticipated disruptions associated with the integration and restructuring of our fabrics division.

Selling, general and administrative expenses, as a percentage of net sales, decreased to 24.1% for the three-month period ending September 28, 2003, compared with 24.7% in the comparable period in 2002. This percentage decrease is primarily a result of the Company’s restructuring initiatives over the past year. For the nine-month period ended September 28, 2003, selling, general and administrative expenses, as a percentage of net sales, increased to 25.4%, compared with 24.3% during the first nine months of 2002. The percentage increase for the nine-month period is primarily due to (i) increased marketing costs incurred in connection with the launches of InterfaceFLOR (our residential modular carpet business), the Prince Street House and Home Collection (our residential broadloom offering), and our i2 marketing campaign during the first nine months of this year, (ii) unanticipated disruptions associated with the integration and restructuring of our fabrics division, and (iii) currency fluctuations that negatively affected the value of the dollar.

For the three-month period ended September 28, 2003, interest expense increased $0.5 million, compared with the same period in 2002. The increase was due primarily to (i) the termination of our accounts receivable securitization program, which carried an overall lower borrowing rate, and (ii) the unwinding of an interest rate swap agreement, both of which were done in connection with the amendment and restatement of our revolving credit facility in June 2003. For the nine-month period ended September 28, 2003, interest expense decreased $0.3 million, compared with the same period in 2002. This decrease was due primarily to (i) our repurchase of $5 million of our Senior Subordinated Notes in the third quarter of 2002, (ii) a lower average balance on our revolving credit facility during the first nine months of 2003, as compared to the same period in 2002, and (iii) year over year decreases in average LIBOR rates, upon which certain of our borrowings were based.

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 expenses, anticipated capital expenditures, and possible special projects. We generate our cash and other liquidity requirements from our operations and borrowings or letters of credit under our revolving credit facility with a banking syndicate. Prior to June 18, 2003, we also generated liquidity through our accounts receivable securitization program (which was terminated on that date in connection with an amendment and restatement of our revolving credit facility). Our management believes that our liquidity position will provide sufficient funds to meet our current commitments and other cash requirements for the foreseeable future, and that we will be able to continue our initiative to enhance the generation of free cash flow.

At September 28, 2003, we had $22.6 million in cash, and had $55.8 million of available borrowing capacity under our revolving credit facility, subject to continued compliance with its covenants ($5.5 million in borrowings and $19.9 million in letters of credit were outstanding under the revolving credit facility as of September 28, 2003).

The Company’s primary source of cash during the nine months ended September 28, 2003 was a $13.3 million reduction in trade payables and accrued expenses. The primary uses of cash during the nine-month period ended September 28, 2003 were (i) $10.8 million for additions to property and equipment in the Company’s manufacturing facilities, (ii) $8.9 million related to an increase in inventory levels, and (iii) a $5.2 million net increase in accounts receivable associated with increasing sales volumes. 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; however, certain factors could affect the Company’s free cash flow, including, but not limited to, the following factors discussed under the heading “Safe Harbor Compliance Statement for Forward-Looking Statements” in Item 1 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2002: “Sales of our principal products may be affected by cycles in the construction and renovation of commercial and institutional buildings,” “Our substantial international operations are subject to various political, economic and other uncertainties,” “Large increases in the cost of petroleum-based raw materials, which we are unable to pass through to our customers, could adversely affect us,” and “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.”

On June 18, 2003, we amended and restated our primary revolving credit facility. Under the amended and restated facility, as under its predecessor, the maximum aggregate amount of loans and letters of credit available to us at any one time is $100 million, subject to a borrowing base as described below. However, the amended and restated facility differs from its predecessor in several material respects, including the following:

•

Notes are paid in full on or before November 15, 2005, then the maturity date will automatically be extended to October 1, 2007.

•

We previously had in place an accounts receivable securitization program that provided funding from the sale of trade accounts receivable generated by certain of our operating subsidiaries. (The accounts receivable securitization program was described in more detail in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 29, 2002.) The amendment and restatement of our revolving credit facility in June 2003 replaced and superseded our accounts receivable securitization program. Consequently, at the closing of the amendment and restatement, the balance outstanding under the securitization facility, which was $26.2 million, was paid off with borrowings under the revolving credit facility, and therefore that debt became reflected on our balance sheet.

Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements. We prepare these financial statements in conformity with accounting principles generally accepted in the United States. As such, we are required to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. We base our estimates on historical experience, available information and various other assumptions we believe to be reasonable under the circumstances. These estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes. There have been no material changes or developments in our evaluation of the accounting estimates and the underlying assumptions or methodologies that we believe to be Critical Accounting Policies and Estimates as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 29, 2002.

As a result of the scope and volume of its global operations, the Company is exposed to an element of market risk from changes in interest rates and foreign currency exchange rates. The Company’s results of operations and financial condition could be impacted by

this risk. The Company manages its exposure to market risk through its regular operating and financial activities and, to the extent appropriate, through the use of derivative financial instruments.

The Company employs derivative financial instruments as risk management tools and not for speculative or trading purposes. The Company monitors the use of derivative financial instruments through the use of objective measurable systems, well-defined market and credit risk limits, and timely reports to senior management according to prescribed guidelines. The Company has established strict counterparty credit guidelines and only enters into transactions with financial institutions with a rating of investment grade or better. As a result, the Company considers the risk of counterparty default to be minimal.

Interest Rate Market Risk Exposure. Changes in interest rates affect the interest paid on certain of the Company’s debt. To mitigate the impact of fluctuations in interest rates, management of the Company has developed and implemented a policy to maintain the percentage of fixed and variable rate debt within certain parameters. The Company maintains 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, the Company agrees to exchange, at specified intervals, the difference between fixed and variable interest amounts calculated by reference to an agreed-upon notional principal linked to LIBOR.

At September 28, 2003, the Company had no interest rate swap agreements in place. The Company does not plan to utilize swap agreements or other derivative financial instruments to convert variable rate to fixed rate debt, or vice versa, during the rest of fiscal 2003.

Foreign Currency Exchange Market Risk Exposure. A significant portion of the Company’s operations consists of manufacturing and sales activities in foreign jurisdictions. The Company manufactures its products in the U.S., Canada, England, Northern Ireland, the Netherlands, Australia and Thailand, and sells its products in more than 100 countries. As a result, the Company’s 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 the Company distributes its products. The Company’s 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 the Company’s 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 the Company. Finally, because the Company reports in U.S. dollars on a consolidated basis, foreign currency exchange fluctuations can have a translation impact on the Company’s financial position.

To mitigate the short-term effect of changes in currency exchange rates on the Company’s sales denominated in foreign currencies, the Company regularly hedges by entering into currency swap contracts to hedge certain firm sales commitments denominated in foreign currencies. In these currency swap agreements, the Company and a counterparty financial institution exchange equal initial principal amounts of two currencies at the spot exchange rate. Over the term of the swap contract, the Company and the counterparty exchange interest payments in their swapped currencies. At maturity, the principal amount is re-swapped, at the contractual exchange rate.

The Company, as of September 28, 2003, recognized a $16.6 million increase in its foreign currency translation adjustment account compared to December 29, 2002, primarily because of the weakening of the U.S. dollar against the Euro.

Sensitivity Analysis. For purposes of specific risk analysis, the Company uses sensitivity analysis to measure the impact that market risk may have on the fair values of the Company’s market sensitive instruments.

To perform sensitivity analysis, the Company assesses 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 September 28, 2003. The market values that result from these computations are compared with the market values of these financial instruments at September 28, 2003. The differences in this comparison are the hypothetical gains or losses associated with each type of risk.

As of September 28, 2003, based on a hypothetical immediate 150 basis point increase in interest rates, with all other variables held constant, the market value of the Company’s fixed rate long-term debt would be impacted by a net decrease of approximately $21.3 million. Conversely, a 150 basis point decrease in interest rates would result in a net increase in the market value of the Company’s fixed rate long-term debt of approximately $22.9 million.

As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was performed under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Vice President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-14(c) under the Securities Exchange Act of 1934 (the “Act”). Based on that evaluation, our President and Chief Executive Officer and our Vice President and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report.

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.


EXHIBIT
NUMBER		DESCRIPTION OF EXHIBIT

10.1		Employment Agreement of Christopher J. Richard dated July 30, 2003.
31.1		Section 302 Certification of Chief Executive Officer
31.2		Section 302 Certification of Chief Financial Officer
32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. § 1350.
32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. § 1350.

(b)

The following reports on Form 8-K were filed or furnished during the quarter ended September 28, 2003:


Date Filed
or Furnished	Items Reported	Financial Statements Filed

July 24, 2003	Press release reporting results for the second quarter of 2003	None
September 15, 2003	Press release announcing agreement for the purchase and sale of
	the assets of Interface Architectural Resources, Inc.	None
September 26, 2003	Closing of transaction for the purchase and sale of the assets of
	Interface Architectural Resources, Inc.	None

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


GEORGIA		58-1451243

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


Class	Number of Shares

Class A Common Stock, $.10 par value per share		43,993,626
Class B Common Stock, $.10 par value per share		7,353,956


	(In thousands)

	September 28,		December 29,
	2003		2002

Finished Goods	$	83,695	$	79,005
Work in Process		15,332		13,037
Raw Materials		44,950		42,614

	$	143,977	$	134,656


	U.S.			EUROPE			AUSTRALIA			TOTAL

	(IN THOUSANDS)
Balance, at December 29, 2002	$	310		$	1,998		$	70		$	2,378
Cash payments		(310	)		(1,641	)		(34	)		(1,985	)

Balance, at September 28, 2003	$	—		$	357		$	36		$	393


	U.S.		EUROPE		TOTAL

	(IN THOUSANDS)
Facilities consolidation	$	5,889	$	8,685	$	14,574
Workforce reduction		5,266		12,049		17,315
Product rationalization		15,735		1,070		16,805
Other impaired assets		6,997		9,394		16,391

	$	33,887	$	31,198	$	65,085


x		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934


ASSETS (in thousands)	Sept. 28, 2003			Sept. 29, 2002

Total segment assets	$	917,993		$	929,142
Discontinued operations		—			(31,218	)
Corporate assets and eliminations		(41,344	)		(3,869	)

Reported total assets	$	876,649		$	894,055


	INTERFACE, INC

Date: November 10, 2003	By:	/s/ Patrick C. Lynch

		Patrick C. Lynch Vice President (Principal Financial Officer)


	U.S.		EUROPE		TOTAL

Manufacturing		243		436		679
Selling and administrative		62		97		159

		305		533		838