10-K 1 t9313_10k.htm FORM 10-K Form 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended January 1, 2006

Commission File No.: 0-12016

Interface, Inc.
(Exact name of registrant as specified in its charter)

Georgia
  
58-1451243
(State of incorporation)
  
(I.R.S. Employer Identification No.)
     
2859 Paces Ferry Road, Suite 2000
    
Atlanta, Georgia
  
30339
(Address of principal executive offices)
  
(zip code)

Registrant’s telephone number, including area code:
(770) 437-6800

Securities Registered Pursuant to Section 12(b) of the Act:
None

Securities Registered Pursuant to Section 12(g) of the Act:
Class A Common Stock, $0.10 Par Value Per Share
(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES o NO þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES o NO þ

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO þ

Aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant as of July 1, 2005 (assuming conversion of Class B Common Stock into Class A Common Stock): $394,206,089 (47,210,310 shares valued at the last sales price of $8.35 on July 1, 2005). See Item 12.

Number of shares outstanding of each of the registrant’s classes of Common Stock, as of March 1, 2006:

Class
Number of Shares
   
Class A Common Stock, $0.10 par value per share
46,952,769
 
  
Class B Common Stock, $0.10 par value per share
7,067,047

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 2006 Annual Meeting of Shareholders are incorporated by reference into Part III.
 


PART I

ITEM 1.   BUSINESS

Introduction and General

We are the worldwide leader in design, production and sales of modular carpet, and we are a leading manufacturer and marketer of other products for the interiors market, with a strong presence in the broadloom carpet, panel fabrics and upholstery fabrics market segments. We market products in over 100 countries around the world under such brand names as Interface®, Heuga®, Bentley Prince Street™ and InterfaceFLOR™ in modular carpet; Bentley Prince Street and Prince Street House and Home™ in broadloom carpet; Guilford of Maine®, Chatham® and Camborne™ in interior fabrics and upholstery products; and Intersept® in antimicrobial chemicals. Our sales force is one of the largest in the global commercial floorcovering industry. Our principal geographic markets are the Americas, Europe and Asia-Pacific, where our sales were approximately 62%, 31% and 7%, respectively, of total net sales for fiscal year 2005.

Our market share, which we believe is approximately 35% of the specified carpet tile segment (which is the segment where architects and designers are heavily involved in “specifying,” or selecting, the carpet), is more than double that of our nearest competitor. In the broadloom market segment, our Bentley Prince Street brand is the leader in the high-end, designer-oriented sector, where custom design and high quality are the principal specifying and purchasing factors. Our Fabrics Group includes the leading U.S. manufacturer of panel fabrics for use in open plan office furniture systems, with a market share we believe to be approximately 50%, and the leading manufacturers of contract upholstery fabrics sold to office furniture manufacturers in the United States and the United Kingdom, with market shares we believe to be approximately 30% and 65%, respectively.

Drawing upon these strengths — especially our historical dominance in modular carpet for the corporate office segment — we are increasing our presence and market share in other commercial and institutional segments, such as government, healthcare, hospitality, education and retail space, and we have begun to develop our business in the huge residential market segment. The U.S. residential market segment for carpet is approximately $11 billion, and the combined U.S. market for carpet in the other commercial and institutional market segments is almost twice the size of the corporate office segment. The appeal and utilization of modular carpet is expanding rapidly in each of these markets, and we are using our considerable skills and experience with designing, producing and marketing modular products to support and facilitate our penetration into these new markets.

We operate in an industry that is highly correlated with economic conditions that affect corporate profits or commercial or institutional space refurbishment. As a result, our business during the years 2001 through 2003, in concert with the commercial interiors industry in general, experienced an unprecedented downturn, both in severity and duration. In comparison to the previous longest downturn, which began around 1990 and lasted for approximately 15 months, this latest downturn resulted in decreased orders year-over-year for office furniture in 31 of the 36 months ended December 2003. During this period, office furniture shipments reached their lowest levels since the early 1990s. These statistics, which the commercial interiors industry considers to be leading indicators of business conditions, are based on data compiled by the Business and Institutional Furniture Manufacturer’s Association (BIFMA). During 2004, and particularly in the second half of the year, the industry began recovering from the downturn. That recovery continued during 2005, which has contributed to our improved results. Our net sales increased to $985.8 million in 2005 from $766.5 million in 2003.

We weathered the 2001-2003 downturn in our industry, and we believe we are positioned for and experiencing a resurgence as economic conditions improve and the industry recovers, because of our modular product dominance, strong business model and several strategic restructuring initiatives we implemented beginning in 2000. These initiatives included:
 
•
reducing both our manufacturing operations and workforce (including 12 plant closings and a 36% reduction in headcount since 2000);

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implementing a comprehensive company-wide supply chain management program;

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exiting our unprofitable European broadloom business, U.S. raised/access flooring business and our Re:Source service business;
 
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repositioning our broadloom business to focus on the historically profitable high-end sector in which architects and designers are heavily involved in specifying (or selecting) the floorcovering product (which is referred to as the specified, designer-oriented sector), while also expanding our offerings of lower-priced products to reach markets such as tenant improvement; and

•
improving our capital structure by extending the maturity of substantially all of our debt and establishing an asset-based revolving credit facility with less restrictive terms than our prior credit facility.
 
At the same time, we continued to invest strategically in innovative product concepts and designs to penetrate several non-corporate office segments of the interiors market. As a result of these factors, we have reduced our exposure to economic and business cycles that affect the corporate office segment more adversely than other segments, while maintaining our historical dominance in modular products and fabrics for that segment. We are building upon our modular carpet, fabrics and high-end, specified broadloom carpet businesses to penetrate additional market segments.

  Our Strengths

We are better positioned today in several key areas because of the above fundamental elements of our business and affirmative strategic initiatives we implemented over the past several years. Our principal competitive strengths include:

Market Leader in Attractive Modular Segment. We are the world’s leading manufacturer of modular carpet, with a market share that we believe is more than twice that of our nearest competitor. Modular carpet includes carpet tile and structure-backed two-meter roll goods. Modular carpet has become more prevalent across all commercial interiors markets as designers, architects and end users become more familiar with its unique attributes. We are driving this trend with our product innovations discussed below, and we expect that it will continue. According to the 2005 Floor Focus interiors industry survey of the top 250 designers in the United States, carpet tile was the leading product specified by designers for customer projects for the seventh consecutive year. We believe that we are well positioned to lead and capitalize upon the continued shift to modular carpet.

Established Brands and Reputation for Quality, Reliability and Leadership. Our products are known in the industry for their high quality, reliability and premium positioning in the marketplace. Our established brand names in carpets and interior fabrics are leaders in the industry. In the 2005 interiors industry survey of top designers published by Floor Focus, an Interface brand ranked first in each of the five survey categories: carpet design, quality, service, performance and value. In addition, Interface companies ranked first and third in the category of “best overall business experience” for carpet companies in this survey. On the international front, Heuga is one of the well recognized 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. More generally, as the appeal and utilization of modular carpet continues to expand into new market segments such as education, hospitality and retail space, our reputation as the inventor and pioneer of modular carpet — as well as our established brands and dominant market position for modular carpet in the corporate office segment — will enhance our competitive advantage in marketing to the customers in these new markets. We are also a well-known leader in ecological sustainability, as we endeavor to cease being a net “taker” from the earth. Our sustainability efforts are increasingly recognized by customers and prospects, which is an advantage as more businesses consider “green factors” when making purchase decisions.

Innovative Product Design and Development Capabilities. Our product design and development capabilities have long given us a significant competitive advantage, and they continue to do so as modular carpet’s appeal and utilization expand across virtually every market segment and around the globe. One of our best design innovations is our i2™ modular product line, which includes our popular Entropy® product. The i2 line introduced and features random patterning designs (which allow for mergeable dye lots and permit initial installation and replacement without regard to the directional orientation of the carpet tiles), cost-efficient installation and maintenance, interactive flexibility, and recycled and recyclable materials. In 2005, the U.S. Patent Office issued a patent to us on the key elements that make the Entropy design work. Our i2 line of products now comprises more than 30% of our total U.S. modular carpet business, and Entropy has become the fastest growing product in our history. Our Proscenium™ and B&W™ collections, which are comprised of i2 products, garnered the Best of NeoCon Silver Award at the 2005 NeoCon annual trade show. Our i2 products represent a differentiated category of smart, environmentally sensitive and stylish modular carpet. Our long-standing exclusive consulting relationship with award-winning design firm David Oakey Designs, Inc. (Oakey Designs) remains vibrant and augments our internal research, development and design staff. Oakey Designs has had a pivotal role in developing our i2 product line. We introduced approximately 76 new products at the 2005 NeoCon trade show, which we believe was many more than the product introductions of any of our competitors.

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Strong Free Cash Flow Generation. Our ability to generate strong free cash flow (by which we mean, as described in detail in the next paragraph, cash available to apply towards debt service) represents a key strength for our operations. We have no significant debt amortization or debt maturity obligations with respect to our senior or senior subordinated notes until 2008, and our revolving credit facility does not mature until October 2007. Drawing upon the specified, high-end nature of our principal products and their premium positioning in the marketplace, we have structured our principal businesses to yield high contribution margins. Several of our strategic restructuring initiatives over the past several years further enhanced our ability to generate free cash flow. As a result, we have the current capacity, without significant incremental capital expenditures, to increase production levels to handle significantly higher demand for our products — which may result from either or both of (1) improved economic conditions and (2) the continued expansion of our business in non-corporate office market segments — and thus to generate higher levels of free cash flow in the future.

We calculate free cash flow as the sum of (1) cash provided by (or used in) operating activities from continuing operations, plus (2) cash provided by (or used in) investing activities, with adjustments in prior periods to account for the impact of our former accounts receivable securitization program, which was terminated in June 2003. The impact of such adjustments for 2003, 2002, and 2001, add $30.0 million, $4.0 million, and $20.0 million, respectively, of cash flow to the above baseline calculations of free cash flow (there was no impact in 2004 or 2005). As a result, we had positive free cash flow in 2005, 2004, 2003 and 2002 of $18.7 million, $20.5 million, $21.1 million and $57.9 million, respectively, reflecting a substantial improvement over our negative free cash flow position of $8.8 million in 2001, and consistent with the strategic results we have targeted. While free cash flow should not be construed as a substitute for operating income or a better indicator of liquidity than cash flow from operating activities, which are determined in accordance with GAAP, we believe our free cash flow position is useful information because it is indicative of our ability to repay our indebtedness.

Make-to-Order and Low-Cost Global Manufacturing Capabilities. The success of our modernization and restructuring of operations over the past several years gives us a distinct competitive advantage in meeting two principal requirements of the specified products markets we primarily target — that is, providing custom samples quickly and on-time delivery of customized final products. Approximately 85% of our modular carpet products in the United States and Asia-Pacific markets are now made-to-order, and we are increasing our made-to-order production in Europe as well. Our make-to-order capabilities not only enhance our marketing and sales, they significantly improve our inventory turns. Our global manufacturing capabilities in modular carpet production are an important component of this strength, and give us a particular advantage in serving the needs of multinational corporate customers that require products and services at various locations around the world. Global manufacturing locations also enable us to compete effectively with local producers in our international markets, while giving international customers more favorable delivery times and freight costs.

Experienced and Motivated Management and Sales Force. An important component of our competitive position is the quality of our management team and its commitment to developing and maintaining an engaged and accountable work force. Over the past four years, we have augmented our senior management team in several areas with experienced executives. Our team is highly skilled and dedicated to guiding our overall growth and expansion into our targeted new market segments, while maintaining our dominance in traditional markets and advancing our high contribution margins and free cash flow generation strategic initiatives. We utilize an internal marketing and predominantly commissioned sales force of approximately 720 experienced personnel, stationed at over 70 locations in over 30 countries, to market our products and services in person to our customers. We have also developed special features for our incentive compensation and our sales and marketing training programs in order to promote performance and facilitate leadership by our executives in strategic areas.

  Our Business Strategy and Principal Initiatives

Our business strategy is (1) to continue to use our dominant position in the modular carpet segment and our product design and global make-to-order capabilities as a platform from which to exploit the expanding markets for modular products across industry segments, while maintaining our leadership position in the corporate office market segment, and (2) to return to our historical profit levels in the high-end, designer-oriented sector of the broadloom carpet and interior fabrics markets. We will seek to increase revenues, free cash flow and profitability by capitalizing on the following key strategic initiatives:

Penetrate Expanding Markets for Modular Products. The popularity of modular carpet continues to increase compared with other floorcovering products across most markets, internationally as well as in the United States. While maintaining our dominance in the corporate office segment, we will continue to build upon our position as the worldwide leader for modular carpet in order to promote sales in all market segments globally. Our i2 product line and marketing campaign highlights our Entropy, Cotswold™ and Stroud™ modular carpet products, and our Proscenium™, B&W™ and Mad About Plaid™ collections of modular carpet products, that we believe are defining the standards for modular carpet today, across market segments and globally. These standards are based on the

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features that our i2 line is pioneering: random patterning, mergeable dye lots, cost-efficient installation and maintenance, interactive flexibility, and recycled and recyclable materials. As part of our focus on the approximately $11 billion U.S. residential carpet market segment, we launched our InterfaceFLOR and Prince Street House and Home product lines, which are discussed below. A principal part of our international focus — which utilizes our global marketing capabilities and sales infrastructure — is the significant opportunities in several emerging geographic markets for modular carpet. Some of these markets, such as China, India and Eastern Europe, represent large and growing economies that are essentially new markets for modular carpet products. Others, such as Germany, are established markets that are transitioning to the use of modular products from historically low levels of penetration by modular carpet. Each of these emerging markets represents a significant growth opportunity for our modular business. Our initiative to penetrate these markets will include drawing upon our internationally recognized Heuga brand. For example, we successfully introduced a mid-priced Heuga brand into Asia in 2003, and we plan similar products for other regions while also marketing products based on our new i2 line.

Increase All Product Sales in Non-Corporate Office Market Segments. In both our floorcoverings and fabrics businesses, we will continue to focus product design and marketing and sales efforts on non-corporate office market segments such as government, education, healthcare, hospitality, retail, tenant improvement and residential space. We began this initiative as part of our segment diversification strategy in 2001 primarily to reduce our exposure to the more severe economic cyclicality of the corporate office segment, and we reduced our mix of corporate office versus non-corporate office modular carpet sales in the Americas from 64% and 36% in fiscal 2001 to 46% and 54% for fiscal 2005. To implement this strategy, we have:

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introduced specialized product offerings tailored to the unique demands of these segments, including specific designs, functionalities and prices;

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created special sales teams dedicated to penetrating these segments at a high level, with a focus on specific customer accounts rather than geographic territories; and

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realigned incentives for our corporate office segment sales force generally in order to encourage their efforts, where appropriate, to assist our penetration of these other segments.

As part of this strategy for the U.S. residential market segment, we launched our InterfaceFLOR and Prince Street House and Home lines of products in 2003. These products were specifically created to bring high style modular and broadloom floorcovering to the residential market. As part of its marketing approach, InterfaceFLOR offers direct-to-consumer sales by catalog and website. In addition, a number of our residential modular products are being offered by the home-improvement retailer Lowe’s, and through the modern furnishings retailer Design Within Reach. Discussions with other retailers are ongoing.

Pay Down Debt. One of our objectives is to use the strong free cash flow generation capability of our business to repay our existing debt and to continue to enhance our financial position. Our prior initiatives have positioned us to do so. We will continue to execute programs to reduce costs further and enhance free cash flow. In addition, our existing capacity to increase production levels without significant capital expenditures will further enhance our generation of free cash flow when demand for our products rises as a result of improved economic conditions generally or the increase in revenues otherwise from our other strategic initiatives.

Advance Ecological Sustainability. Our goal and commitment to be ecologically “sustainable” by 2020 — that is, the point at which we are no longer a net “taker” from the earth and do no harm to the biosphere — is both a strategic initiative and a competitive strength. Increasingly, our customers are concerned about the environmental and broader ecological implications of their operations and the products they use in them. Our commitment to sustainability preceded the market’s interest, and it is ingrained in our culture. Our leadership, knowledge and expertise in the area, especially in the “green building” movement and the related Leadership in Energy & Environmental Design (LEED) Green Building Rating System, resonate deeply with many of our customers and prospects around the globe, and these businesses are increasingly making purchase decisions based on “green” factors. LEED is a voluntary, consensus-based national standard for developing high-performance, sustainable buildings that emphasizes state of the art strategies for sustainable site development, water savings, energy efficiency, materials selection and indoor environmental quality. Our modular carpet products historically have had inherent installation and maintenance advantages that translated into greater efficiency and waste reduction. We have further enhanced the “green” quality of our modular carpet in our highly successful i2 product line, and we are using raw materials and production technologies and processes in areas of our fabrics business that directly reduce the adverse impact of those operations on the environment. The 2005 Floor Focus survey of the top 250 designers named us the top company among the “Green Leaders” and gave our carpet tiles and GlasBac RE recycled backing the top honors for “Green Kudos.” As more customers in our target markets share our view that sustainability is good business and not just good deeds, our acknowledged leadership position should provide a differentiated advantage in competing for their business.

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Continue to Tighten Our Supply Chain and Cost Containment Generally. For 2005, our company-wide, end-to-end, supply chain management program continued to facilitate performance improvement across our businesses around the world. That program — which focuses on the three major areas of inventory performance, accounts receivable optimization, and supplier and spending management — has instituted a cultural shift within our company because of its immediate and demonstrable bottom line results. For example, our inventory turns for 2005 increased 11% over 2004 levels. Beyond that initiative, we have been steadily trimming costs from our operations for several years, through multiple and sometimes painful initiatives, which has served to make us leaner today and for the future. For example, since 2000, we have rationalized our operations by closing 12 manufacturing facilities, reduced our worldwide workforce by over 36%, trimmed annual selling, general and administrative expenses by approximately $26 million, and reduced the total number of SKUs in our broadloom business by approximately 38%. We will continue to implement prudent initiatives in these and other areas in order to further eliminate or contain costs, while remaining poised to capitalize upon market improvements.

Floorcovering Products/Services

  Products

Interface is the world’s largest manufacturer and marketer of modular carpet, with a global specified carpet tile market share that we believe is approximately 35%. Modular carpet includes carpet tile and structure-backed 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 Prince Street brand. Our broadloom operations focus on the high quality, designer-oriented sector of the U.S. broadloom carpet market.

Modular Carpet. Our modular carpet system, which is marketed under the established global brands Interface and Heuga, and more recently under the Bentley Prince Street brand, utilizes carpet tiles cut in precise, dimensionally stable squares (usually 50 square centimeters) or rectangles to produce a floorcovering that combines the appearance and texture of traditional soft floorcovering with the advantages of a modular carpet system. Our GlasBac® technology employs a 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 backing containing post-industrial and/or post-consumer recycled materials, which we market under the GlasBac RE trademark.

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 air delivery systems and 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. 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, hospitality spaces, 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. Moreover, we launched our InterfaceFLOR line of products to specifically target modular carpet sales to the residential market segment. Through our relationship with Oakey Designs, we also have created modular carpet products (some of which are part of our i2 product line) specifically designed for each of the education, hospitality and retail market segments.

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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 Price Street designs emphasize the dramatic use of color and multi-dimensional texture. In addition, we recently launched the Prince Street House and Home collection of high-style broadloom carpet and area rugs targeted at design-oriented residential consumers.

Intersept Antimicrobial. 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 another company for use in air filters.

  Services

For several years, we provided or arranged for commercial carpet installation services, primarily through our Re:Source® service provider network. The network in the United States included owned and affiliated (or “aligned”) commercial floorcovering contractors at various locations across the United States. In Australia, we offered these services through the largest single carpet distributor in that country.

During the years leading up to 2004, our owned Re:Source dealer businesses experienced decreased sales volume and intense pricing pressure, primarily due to the economic downturn in the commercial interiors industry. As a result, we decided to exit our owned Re:Source dealer businesses, and in the third quarter 2004 we began to dispose of several of our dealer subsidiaries. In 2005, we completed the exit activities related to the owned dealer businesses. The results of our owned Re:Source dealer businesses (as well as the Australian dealer business and residential fabrics business that we also decided to exit) are included in discontinued operations. In early 2006, we sold certain assets relating to our aligned (non-owned) dealer network, and are discontinuing its operations as well.

  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 corporate office segment, both new construction and renovation, we emphasize sales in other segments, including retail space, government institutions, schools, healthcare facilities, tenant improvement space, hospitality centers, residences and home office space. We began this initiative as part of our segment diversification strategy in 2001 primarily to reduce our exposure to the more severe economic cyclicality of the corporate office segment, and we reduced our mix of corporate office versus non-corporate office modular carpet sales in the Americas from 64% and 36% in fiscal 2001 to 46% and 54% for fiscal 2005. Our marketing efforts are enhanced by the established and well-known brand names of our carpet products, including the Interface and Heuga brands in modular carpet and Bentley Prince Street brand in broadloom carpet. Our recently-extended exclusive consulting agreement with the award-winning, premier design firm Oakey Designs has enabled us to introduce more than 75 new carpet designs in the United States in 2005 alone.

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 websites, we have made it easy to view and request samples of our products. We also have technology which allows us to provide digital, simulated samples of our products, which helps reduce raw material and energy consumption associated with our samples.

We primarily use our internal marketing and sales force to market our carpet products. 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, Hungary, Italy, Norway, Romania, Russia, Singapore and China. We expect to open offices in other locations around the world as necessary to capitalize on emerging marketing opportunities.

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  Manufacturing

We manufacture carpet at two locations in the United States and at facilities in the Netherlands, the United Kingdom, Canada, Australia and Thailand.

Having foreign manufacturing operations enables us to supply our customers with carpet from the location offering the most advantageous delivery times, duties and tariffs, exchange rates, 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.

We are in the process of further standardizing our worldwide modular carpet manufacturing procedures. In connection with the implementation of this plan, we are seeking to establish global standards for our tufting equipment, yarn systems and product styling. We previously had changed our standard carpet tile size from 18 square inches to 50 square centimeters, which we believe has allowed us to reduce operational waste and fossil fuel energy consumption and to offer consistent product sizing for our global customers.

We recently implemented a new, flexible-inputs backing line at our modular carpet manufacturing facility in LaGrange, Georgia. Using next generation thermoplastic technology, the custom-designed backing line will dramatically improve our ability to keep reclaimed and waste carpet in the “technical loop”, and further open us to exploring other plastics and polymers as inputs. Nicknamed “Cool Blue™”, the new process will come on line in two phases, and is expected to reach full capacity production in the second quarter of 2006.

The environmental management systems of our floorcovering manufacturing facilities in LaGrange, Georgia, West Point, Georgia, City of Industry, California, Shelf, 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 fluctuations we might otherwise experience, we also engage from time to time in hedging programs intended to further reduce those risks.

  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. We believe we are the largest manufacturer of modular carpet in the world, possessing a global market share that we believe 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 brand recognition, quality, design, service, broad product lines, product performance, marketing strategy and pricing. In the corporate 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, our relationship with Oakey Designs allows us to introduce numerous innovative and attractive floorcovering products to our customers. Additionally, we believe that our global manufacturing capabilities are an important competitive advantage in serving the needs of multinational corporate customers. We believe that the incorporation of the Intersept antimicrobial chemical agent into the backing of our modular carpet enhances our ability to compete successfully with resilient tile in the healthcare market.

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In addition, we believe that our goal and commitment to be ecologically “sustainable” by 2020 — that is, the point at which we are no longer a net “taker” from the earth and do no harm to the biosphere — is a brand-enhancing, competitive strength as well as a strategic initiative. Increasingly, our customers are concerned about the environmental and broader ecological implications of their operations and the products they use in them. Our commitment to sustainability preceded the market’s interest, and it is ingrained in our culture. Our leadership, knowledge and expertise in the area, especially in the “green building” movement and the related LEED certification program, resonate deeply with many of our customers and prospects around the globe, and these businesses are increasingly making purchase decisions based on “green” factors.


Interior Fabrics

  Products

Our Fabrics Group designs, manufactures and markets specialty fabrics for open plan office furniture systems and commercial interiors. Open plan office furniture systems are typically panel-enclosed work stations customized to particular work environments. The open plan concept offers a number of advantages over conventional office designs, including more efficient floor space utilization, reduced energy consumption and greater flexibility to redesign existing space.

Our Fabrics Group includes the leading U.S. manufacturer of panel fabrics for use in open plan office furniture systems, with a market share we believe is approximately 50%. (Sales of panel fabrics constituted 60% of the Fabrics Group’s total North American fabrics sales in fiscal 2005.) We are also the leading manufacturer of contract upholstery sold to office furniture manufacturers in the United States and United Kingdom, with market shares in those countries in fiscal 2005 that we believe are approximately 30% and 68%, respectively. In addition, we manufacture other interior fabrics products, including wall covering fabrics, fabrics used for window treatments and fabrics used for cubicle curtains.

We manufacture fabrics made of 100% polyester (largely recycled content), 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 to continuously 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. We market seating fabrics under the Terratex label as well. Over the past few years, we have continued building awareness of the Terratex brand, which enhances the Interface corporate image and reputation. The Terratex products have been well received and are gaining momentum in the market, and we plan to expand our offerings under this label.

Our 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, automotive, contract wallcoverings and window treatments.

In 2003, we placed our Fabrics Group under new senior management, with a mandate to improve the group’s operating efficiencies and financial performance. We have consolidated fabrics manufacturing facilities and eliminated underperforming product offerings, while maintaining the high level of customer awareness for our fabrics brands. In 2004, we decided to exit a small residential fabrics business, the results of which are included in discontinued operations.


8

  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 smaller office furniture manufacturers and manufacturers and distributors of wallcoverings, vertical blinds, cubicle curtains, acoustical wallboards and ceiling tiles. The Guilford of Maine, Chatham and Camborne brand names are well-known in the industry and enhance our fabric marketing efforts.

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; Elkin, North Carolina; and the United Kingdom. The Fabrics Group also has marketing and distribution facilities in Canada and Hong Kong, and sales representatives in Mexico, 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; Meltham, England; and Mirfield, 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 precision and expertise in order to achieve color consistency. The principal raw materials used by us are readily available from multiple 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. We believe we have been successful in designing fabrics that have simplified the manufacturing process, thereby reducing complexity while improving efficiency and quality.

The environmental management system of two of the Fabrics Group’s facilities located in Guilford, Maine (one of which is its largest facility there) and Newport, Maine have been granted ISO 14001 certification. Our East Douglas, Massachusetts and Meltham, England fabrics manufacturing facilities are also certified under ISO 14001.

Our TekSolutions textile processing operations (including fabric lamination, coating, warehousing and cutting) are located in Grand Rapids, Michigan, in close proximity to several large customers of the Fabrics Group. In addition, we are in the process of establishing a textile processing and finishing operation near Shanghai, China, to service OEM customers throughout Southeast Asia.

  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.

We are the largest U.S. manufacturer of contract upholstery fabrics for office furniture manufacturers. We believe our share of the U.S. contract upholstery market is nearly double that of our closest competitor.

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.

9


Specialty Products

Our small Specialty Products business segment currently is comprised of Pandel, Inc., which produces vinyl carpet tile backing and specialty mat and foam products. In addition, we produce and market Fatigue Fighter®, an impact-absorbing modular flooring system typically used where people stand for extended periods. In 2003, we sold our U.S. raised/access flooring business and our adhesives and other specialty chemicals production business, which were part of this business segment. We continue to manufacture and sell our Intercell® brand raised/access flooring product in Europe.

Through an agreement with the purchaser of our adhesive and specialty chemicals production business, we have continued to market a line of adhesives for carpet installation, as well as a line of carpet cleaning and maintenance chemicals, under the Re:Source brand.

Product Design, Research and Development

We maintain an active research, development and design staff of approximately 120 people and also draw on the research and development efforts of our suppliers, particularly in the areas of fibers, yarns and modular carpet backing materials. Our research and development costs were $9.6 million, $8.0 million and $9.7 million in 2005, 2004 and 2003, respectively.

Our research and development team provides technical support and advanced materials research and development for the entire family of Interface companies. It assisted in the development of our NexStep® backing, which employs moisture-impervious polycarbite precoating technology with a chlorine-free urethane foam secondary backing, and also helped develop a post-consumer recycled, polyvinyl chloride, or PVC, extruded sheet process that has been incorporated into our GlasBac RE modular carpet backing. Our post-consumer 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, we continue to evaluate 100% renewable polymers based on corn-derived polylactic acid (PLA) for use in our products and the development of post-consumer recycling technology for nylon face fibers.

Our research and development team also is the coordinator of our Quest and EcoSense initiatives (discussed below) and supports the dissemination, consultancies and technical communication of our global sustainability endeavors. Its laboratories also provide all biochemical and technical support to Intersept antimicrobial chemical product initiatives.

Innovation and increased customization in product design and styling are the principal focus of our product development efforts. Our carpet design and development team is recognized as the industry leader in carpet design and product engineering for the commercial and institutional markets.

Oakey Designs provides carpet design and consulting services to our floorcovering businesses pursuant to a consulting agreement with Interface, Inc. Oakey Designs’ services under the agreement include creating commercial carpet designs for use by our floorcovering businesses throughout the world, and overseeing product development, design and coloration functions for our modular carpet business in North America. The current agreement runs through April 2011. While the agreement is in effect, Oakey Designs cannot provide similar services to any other carpet company. Through our relationship with Oakey Designs, we introduced more than 75 new carpet designs in 2005 alone, and have enjoyed considerable success in winning U.S. carpet industry awards.

Oakey Designs 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, our i2 product line — which includes, among others, our patented Entropy modular carpet product and the Proscenium, B&W and Mad About Plaid collections of modular carpet products — represents an innovative breakthrough in the design of modular carpet. The i2 line introduced and features random patterning, mergeable dye lots, cost-efficient installation and maintenance, interactive flexibility and recycled and recyclable materials. Most of these products may be installed without regard to the directional orientation of the carpet tile or the dye lot in which the carpet tile was manufactured, and their features also make installation, maintenance and replacement of modular carpet easier, less expensive and less wasteful.

10

Environmental Initiatives

In the latter part of 1994, we commenced a new industrial ecology initiative called EcoSense, inspired in part by the interest of 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 and co-founder of the Rocky Mountain Institute; John Picard, President of E2 Environmental Enterprises; Jonathan Porritt, director of Forum for the Future; Bill Browning, fellow and former director of the Rocky Mountain Institute’s Green Development Services; Dr. Karl-Henrik Robert, founder of The Natural Step; Janine M. Benyus, author of Biomimicry; Walter Stahel, Swiss businessman and seminal thinker on environmentally responsible commerce; and Bob Fox, renowned architect.

Another one of our initiatives over the past several years has been 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 chemical) and design professionals.

Our leadership, knowledge and expertise in this area, especially in the “green building” movement and the related LEED certification program, resonate deeply with many of our customers and prospects around the globe, and these businesses are increasingly making purchase decisions based on “green” factors. As more customers in our target markets share our view that sustainability is good business and not just good deeds, our acknowledged leadership position should strengthen our brands and provide a differentiated advantage in competing for business.

Backlog

Our backlog of unshipped orders (excluding discontinued operations) was approximately $106.9 million at Sunday, February 26, 2006, compared with approximately $101.8 million at Sunday, February 27, 2005. Historically, backlog is subject to significant fluctuations due to the timing of orders for individual large projects and currency fluctuations. All of the backlog of orders at February 26, 2006 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 many 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, Guilford, Guilford of Maine, Bentley, Prince Street, Intercell, Chatham, Camborne, 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.

11

Financial Information by Operating Segments and Geographic Areas

The Notes to Consolidated Financial Statements appearing in Item 8 of this Report set forth information concerning our sales, income and assets by operating segments, and our sales and long-lived assets by geographic areas. Additional information regarding sales by operating segment is set forth in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation.”

Employees

At January 1, 2006, we employed a total of approximately 4,781 employees worldwide. Of such employees, approximately 2,286 are clerical, sales, supervisory and management personnel and approximately 2,495 are manufacturing personnel. We also utilized approximately 217 temporary personnel as of January 1, 2006.

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 Interface employees, is required to be consulted by management with respect to certain matters relating to our operations in that country, such as a change in control of Interface Europe B.V. (our modular carpet subsidiary based in the Netherlands), and the approval of the Council is required for some of our actions, including changes in compensation scales or employee benefits. Our management believes that its relations with the Works Council, the unions and all of its employees are good.

Environmental Matters

Our operations are subject to 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, Shelf, England, Northern Ireland, Australia, the Netherlands, Canada and Thailand are certified under ISO 14001. The environmental management systems of the Fabrics Group’s facilities in Guilford, Maine, Newport, Maine, East Douglas, Massachusetts, and Meltham, England are also certified under ISO 14001.

Executive Officers of the Registrant

Our executive officers, their ages as of March 1, 2006 and their principal positions with us are as follows. Executive officers serve at the pleasure of the Board of Directors.

Name
Age
Principal Position(s)
Daniel T. Hendrix
51
President and Chief Executive Officer
Michael D. Bertolucci
65
Senior Vice President
John R. Wells
44
Senior Vice President
Raymond S. Willoch
47
Senior Vice President-Administration,
   
General Counsel and Secretary
Robert A. Coombs
47
Vice President
Lindsey K. Parnell
48
Vice President
Patrick C. Lynch
36
Vice President and Chief Financial Officer
Christopher J. Richard
49
Vice President
Jeffrey J. Roman
43
Vice President
 
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 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 of Interface. 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 fabrics company located in Greensboro, North Carolina.

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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 Interface 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 President of all three of our U.S. carpet mills. In November 1999, Mr. Wells was named Senior Vice President of Interface, 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.

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 United Kingdom and later for all of our European floorcovering operations. In 1996, Mr. Coombs returned to us 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 Interface. 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 us in 1997. In 1998, Mr. Parnell was promoted to Vice President, Operations for the United Kingdom, 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 became a Vice President of Interface in October 2002.

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

Mr. Richard joined us in July 2003 as President of the Interface Fabrics Group and Vice President of Interface. From August 2002 through March 2003, he was a senior vice president of Collins & Aikman, Inc. with responsibilities in its fabrics business. From January 1997 through March 2002, Mr. Richard was a senior vice president of Guilford Mills, Inc., a fabrics company, and served as president of its automotive group.

Mr. Roman joined Interface Asia-Pacific in 1995 as General Manager of Interface Modernform Company Ltd., our modular carpet joint venture in Thailand, and was promoted to Vice President of Manufacturing for Asia in 1996. In 1998, he transferred to Interface Americas, Inc. with responsibility for implementing Y2K-compliant manufacturing systems in all North American carpet operations. In 2000, Mr. Roman was named Vice President of Technical Development for Interface Americas, Inc., and, in 2001, he was named Vice President of Information Services and Business Systems for Interface Americas, Inc. In February 2004, Mr. Roman was promoted to Vice President of Interface and assumed responsibility for the creation of an information technology shared service function for the Company.

Available Information

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 1A.   RISK FACTORS

Safe Harbor Compliance Statement for Forward-Looking Statements

This report on Form 10-K contains “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. Words such as  “believes,” “anticipates,” “plans,” “expects” and similar expressions are intended to identify forward-looking statements. Forward-looking 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. 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. 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.

13


Risk Factors

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. Some of the competitors, including a number of large diversified domestic and foreign companies who manufacture modular carpet as one segment of their business, have greater financial resources than we do.

Sales of our principal products have been and may continue to be affected by adverse economic 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 has been 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 corporate office segment tend to be more pronounced than the effects upon the institutional segment. Historically, we have generated more sales in the corporate office segment than in any other market. The effects of cyclicality upon the new construction segment of the market also tend to be more pronounced than the effects upon the renovation segment. The recent adverse cycle has significantly lessened the overall demand for commercial interiors products, which has adversely affected our business during the past several years. These effects may continue and could be more pronounced if the global economy does not improve or is further weakened.

Our success depends significantly upon the efforts, abilities and continued service of our senior management executives and our principal design consultant, and our loss of any of them could affect us adversely.

We believe that our success depends 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 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. Our current agreement with Oakey Designs extends to April 2011. The loss of any of these key persons could have an adverse impact on our business.

Our substantial international operations are subject to various political, economic and other uncertainties that could adversely affect our business results, including by restrictive taxation or other government regulation and by foreign currency fluctuations.

We have substantial international operations. In fiscal 2005, approximately 43% 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 (approximately 43% of 2005 net sales), which subjects us to the risks inherent in currency translations. 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.

14

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 49% of our 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 approximately 7%.

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, continued large increases in the cost of petroleum-based raw materials could adversely affect our financial results if we are unable to pass through such price increases 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.

Invista Inc., a subsidiary of Koch Industries, Inc., currently supplies approximately 46% of our requirements for synthetic fiber (nylon), which is the principal raw material that we use in our carpet products. In addition, other of our businesses have a high degree of dependence on their third party suppliers of synthetic fiber for certain products or markets. The unanticipated termination or interruption of any of our supply arrangements with our current suppliers could have a material adverse effect on us because of the cost and delay associated with shifting more business to another supplier. We do not have a long-term supply agreement with Invista.

We have a significant amount of indebtedness which could have important negative consequences to us.

Our substantial indebtedness could have important negative consequences to us, including:

•
making it more difficult for us to satisfy our obligations with respect to such indebtedness;

 
•
increasing our vulnerability to adverse general economic and industry conditions and adverse changes in governmental regulations;

 
•
limiting our ability to obtain additional financing to fund capital expenditures, acquisitions or other growth initiatives, and other general corporate requirements;

 
•
requiring us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund capital expenditures, acquisitions or other growth initiatives, or other general corporate purposes;

 
•
limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

•
placing us at a competitive disadvantage compared to our less leveraged competitors; and

•
limiting our ability to refinance our existing indebtedness as it matures.
 
Our Rights Agreement could discourage tender offers or other transactions for our stock 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 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.

15


ITEM 1B.   UNRESOLVED STAFF COMMENTS

None.

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:
 
Location
  
     Segment          
  
Floor Space
     (Sq. Ft.)   
 
Bangkok, Thailand(1)
   Modular Carpet  
 66,072  
 
Craigavon, N. Ireland
   Modular Carpet
 80,986  
 
LaGrange, Georgia
   Modular Carpet  
 375,000  
 
LaGrange, Georgia
   Modular Carpet  
 160,545  
 
Ontario (Belleville), Canada
   Modular Carpet  
 77,000  
 
Picton, Australia
   Modular Carpet  
 96,300  
 
Scherpenzeel, the Netherlands
   Modular Carpet  
 229,734  
 
Shelf, England
   Modular Carpet  
 206,882  
 
West Point, Georgia
   Modular Carpet  
 250,000  
 
City of Industry, California(2)
   Bentley Prince Street  
 539,641  
 
East Douglas, Massachusetts
   Fabrics Group  
 306,225  
 
Elkin, North Carolina
   Fabrics Group  
 1,475,413  
 
Grand Rapids, Michigan(2)
   Fabrics Group
 118,263  
 
Guilford, Maine
   Fabrics Group  
 408,511  
 
Guilford, Maine
   Fabrics Group  
 96,490  
 
Newport, Maine
   Fabrics Group  
 173,973  
 
Nottingham, England(2)
   Fabrics Group  
 12,500  
 
Meltham, England(2)
   Fabrics Group
 168,000  
 
Mirfield, England
   Fabrics Group  
 112,000  
 
Cartersville, Georgia(2)
   Specialty Products (Specialty Mats)
 53,000  
 
 
(1) Owned by a joint venture in which we have a 70% interest.

(2) Leased.

We maintain marketing offices in over 70 locations in over 30 countries and distribution facilities in approximately 40 locations in 6 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 subject to various legal proceedings in the ordinary course of business, none of which is required to be disclosed under this Item 3.

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

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

16
 
 

PART II

ITEM 5.   MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

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 but 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 Company’s Class A Common Stock on the Nasdaq Stock Market (no dividends were paid on Common Stock for the periods indicated).

2006
    
High
    
Low
  
First Quarter (through March 1, 2006)
  
$
11.41
  
$
8.57
  
2005
              
First Quarter
  
$
9.99
  
$
6.56
  
Second Quarter
   
8.35
    
5.84
  
Third Quarter
   
10.55
    
8.11
  
Fourth Quarter
   
8.91
    
7.66
  
2004
              
First Quarter
  
$
8.48
  
$
5.83
  
Second Quarter
   
9.30
    
5.98
  
Third Quarter
   
8.40
    
6.96
  
Fourth Quarter
   
10.59
    
7.42
  

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 limitations contained in the agreement for our primary revolving credit facility, which restrict the payment of cash dividends on our common stock unless we meet a financial performance test, and in the indentures for our public indebtedness, which specify conditions as to when any dividend payments may be made. We have not paid a dividend since 2002, but we may resume our dividend payments in the future if our Board determines that a resumption of dividend payments is proper in light of the factors indicated above.

As of March 1, 2006, we had 767 holders of record of our Class A Common Stock and 69 holders of record of our Class B Common Stock. We believe that there are in excess of 4,800 beneficial holders of our Class A Common Stock.
 
 
 
 

 
17

ITEM 6.   SELECTED FINANCIAL DATA

We derived the summary consolidated financial data presented below from our audited consolidated financial statements and the notes thereto for the years indicated. You should read the summary financial data presented below together with the audited consolidated financial statements and notes thereto contained in Item 8 of this Annual Report on Form 10-K. Amounts for all periods presented have been adjusted for discontinued operations.
 
     
Selected Financial Data(1) 
  
     
2005 
    
2004 
    
2003 
    
2002 
    
2001 
  
     
(in thousands, except share data and ratios) 
  
Statement of Operations Data
                                
Net sales
  
$
985,766
  
$
881,658
  
$
766,494
  
$
745,317
  
$
875,881
  
Cost of sales
    
681,069
    
616,297
    
543,251
    
522,119
    
613,859
  
Operating income(2)
    
82,001
    
60,742
    
31,351
    
24,889
    
4,494
  
Income (loss) from continuing operations
    
17,966
    
6,440
    
(8,012
)
  
(10,605
)
  
(21,769
)
Loss from discontinued operations
    
(14,791
)
  
(58,815
)
  
(16,420
)
  
(21,679
)
  
(14,518
)
Loss on disposal of discontinued operations
    
(1,935
)
  
(3,027
)
  
(8,825
)
  
--
    
--
  
Cumulative effect of a change in accounting principle(3)
    
--
    
--
    
--
    
(55,380
)
  
--
  
Net income (loss)
    
1,240
    
(55,402
)
  
(33,257
)
  
(87,664
)
  
(36,287
)
Income (loss) from continuing operations per common share
                                
Basic
  
$
0.35
  
$
0.13
  
$
(0.16
)
$
(0.21
)
$
(0.43
)
Diluted
  
$
0.34
  
$
0.12
  
$
(0.16
)
$
(0.21
)
$
(0.43
)
Average Shares Outstanding
                                
Basic
    
51,551
    
50,682
    
50,282
    
50,194
    
50,099
  
Diluted
    
52,895
    
52,171
    
50,282
    
50,194
    
50,099
  
Cash dividends per common share
  
$
--
  
$
--
  
$
--
  
$
0.045
  
$
0.15
  
Property additions(4)
    
25,478
    
15,783
    
16,203
    
14,022
    
26,424
  
Depreciation and amortization(5)
    
31,455
    
33,336
    
34,141
    
32,684
    
40,369
  
Balance Sheet Data
                                
Working capital
  
$
209,512
  
$
228,842
  
$
247,725
  
$
275,075
  
$
291,132
  
Total assets
    
838,990
    
869,798
    
879,670
    
852,048
    
954,754
  
Total long-term debt(6)
    
458,000
    
460,000
    
445,000
    
445,000
    
448,494
  
Shareholders’ equity
    
172,076
    
194,178
    
218,733
    
224,171
    
302,475
  
Current ratio(7)
    
2.5
    
2.6
    
2.9
    
3.2
    
2.6
  
 
 
(1)
In the fourth quarter of 2002, we decided to discontinue the operations related to our U.S. raised/access flooring business. Substantially all of the assets related to these operations were sold in the third quarter of 2003. In the third quarter of 2004, we also decided to discontinue the operations related to our Re:Source dealer businesses (as well as the operations of a small Australian dealer business and a small residential fabrics business). The balances have been adjusted to reflect the discontinued operations of these businesses. For further analysis, see “Notes to Consolidated Financial Statements - Discontinued Operations” included in Item 8 of this Report.

(2)
Includes restructuring charges of $6.2 million, $22.5 million, and $54.6 million in years 2003, 2002, and 2001, respectively. We initiated three separate restructuring plans during 2002, 2001 and 2000. The 2003 charge was recognized with respect to the restructuring plan initiated in 2002. For further analysis of these restructuring plans and charges, see “Notes to Consolidated Financial Statements - Restructuring Charges” included in Item 8 of this Report.

(3)
In 2002, we recognized an impairment charge of $55.4 million (after-tax) related to our adoption of Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets.” For more information, see “Notes to Consolidated Financial Statements - Summary of Significant Accounting Policies” included in Item 8 of this Report.

(4)
Includes property and equipment obtained in acquisitions of businesses.

(5)
We ceased amortization of goodwill with the adoption of SFAS No. 142 “Goodwill and Other Intangible Assets” effective December 31, 2001.

(6)
Total long-term debt does not include debt related to receivables sold under our receivables securitization program, which was terminated in June 2003 in connection with the amendment and restatement of our revolving credit facility. As of December 30, 2001 and December 29, 2002, we had sold receivables of $34.0 million and $30.0 million, respectively.

18

(7)
For purposes of computing our current ratio: (a) current assets include assets of businesses held for sale of $5.5 million, $42.8 million, $97.7 million, $129.5 million, and $179.3 million in fiscal years 2005, 2004, 2003, 2002 and 2001, respectively, and (b) current liabilities include liabilities of businesses held for sale of $4.2 million, $5.4 million, $11.6 million, $8.0 million, and $31.3 million in fiscal years 2005, 2004, 2003, 2002 and 2001, respectively.

ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

Our revenues are derived from sales of floorcovering products (primarily modular and broadloom carpet), interior fabrics 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 and trends that affect the markets for commercial and institutional business space. The commercial interiors market is largely driven by reinvestment by corporations into their existing businesses in the form of new fixtures and furnishings for their workplaces. In significant part, the timing and amount of such reinvestments are impacted by the profitability of those corporations. As a result, macroeconomic factors such as employment rates, office vacancy rates, capital spending, productivity and efficiency gains that impact corporate profitability in general, also affect our businesses. During the past several years, we have focused more of our marketing and sales efforts on non-corporate office segments to somewhat reduce our exposure to economic cycles that affect the corporate office market segment more adversely, as well as to capture additional market share.

During the years 1999 through 2003 (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, experienced decreased demand levels. The general downturn in the domestic and international economy that characterized most of 2001, 2002 and 2003 further adversely affected the commercial interiors market, especially in the U.S. corporate office segment. These conditions significantly impaired our growth and operating profitability during those years. During 2004, and particularly in the second half of the year, the commercial interiors market began recovering from the downturn, which led to improved sales and operating profitability for us. That recovery continued at a gradual pace throughout 2005.

Repatriation of Earnings of Foreign Subsidiaries 

Pursuant to the provisions of the American Jobs Creation Act of 2004, the Company repatriated an aggregate of $35.9 million of earnings from foreign subsidiaries during 2005. This action took advantage of an opportunity to repatriate the funds at a substantially reduced tax rate, provided the transaction occurred before the end of 2005. Consequently, the Company recorded aggregate tax charges of $3.4 million, or $0.06 per diluted share, during 2005 related to the repatriation.

Discontinued Operations

Re:Source Dealer Businesses

Over the past several years, our owned Re:Source dealer businesses, which are part of a broader network comprised of both owned and aligned dealers that sell and install floorcovering products, experienced decreased sales volumes and intense pricing pressure, primarily as a result of the economic downturn in the commercial interiors industry. As a result, we decided to exit our owned Re:Source dealer businesses, and in the third quarter 2004 we began to dispose of our dealer subsidiaries. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we have reported the results of operations for the owned Re:Source dealer businesses (as well as the results of operations of a small Australia dealer business and a small residential fabrics business that we also decided to exit), for all periods reflected herein, as discontinued operations. Consequently, 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 these discontinued operations unless we indicate otherwise.

These discontinued operations represented revenues of $30.9 million, $139.0 million and $157.0 million in years 2005, 2004 and 2003, respectively (these results are included in our statements of operations as part of the “Loss from Discontinued Operations, Net of Tax”). Loss from operations of these businesses, net of tax, was $15.1 million, $12.3 million and $12.6 million in years 2005, 2004 and 2003, respectively. We recorded write-downs, net of taxes, for the impairment of assets of $3.5 million in 2005 and for the impairment of assets and goodwill of $17.5 million and $29.0 million, respectively, in 2004, to adjust the carrying value of the assets of these businesses to their net realizable value. During 2005 and 2004, we recorded losses of $1.9 million and $3.0 million, respectively, in connection with the disposal of certain of these businesses.

 
19


In the third quarter of 2005, we completed the last in a series of nine transactions by which we sold nine of our owned Re:Source dealer businesses. The nine dealer businesses sold were part of the fifteen Re:Source dealer businesses that we owned at the time our plan to exit the owned dealer businesses was announced in the third quarter of 2004. Eight of the nine businesses were sold to either the general managers of the respective businesses or an entity in which the general manager participated, and the other business was sold to our “aligned”, but not owned, dealer in the relevant geographic region. The aggregate net consideration we received in connection with the sales was $9.7 million plus the purchasers’ assumption of various liabilities and obligations. Of that dollar amount, an aggregate of $7.5 million was paid in cash at the closings, with the remainder of $2.2 million payable pursuant to promissory notes at interest rates ranging from prime to 12% and with maturities ranging from one to three years. We have terminated all ongoing operations of the other six owned dealer businesses, and in some cases we are completing their wind-down through subcontracting arrangements.

    U.S. Raised/Access Flooring Business

In the fourth quarter of 2002, we decided to discontinue our operation of our U.S. raised/access flooring business, which had experienced a significant decline in demand, primarily due to decreased spending by technology companies. We completed the sale of substantially all of its assets to a third party in September 2003. We have reported the results of operations for the U.S. 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 U.S. raised/access flooring business unless we indicate otherwise.

Our U.S. raised/access flooring business represented revenues of $13.6 million in year 2003 (these results are included in our consolidated statements of operations as part of the “Loss from Discontinued Operations, Net of Tax”). Loss from operations of that business, net of tax, was $3.9 million in year 2003. In addition, in the third quarter of 2003, we recorded an after-tax loss of $8.8 million in connection with disposition of the assets. These discontinued operations had no impact in 2005 or 2004.

Impact of Strategic Restructuring Initiatives

We incurred a pre-tax restructuring charge in 2003 of $6.2 million - as we implemented various initiatives to reduce our operating costs and strengthen our ability to generate free cash flow (which is defined and discussed above in Item 1). No restructuring charges were incurred during 2005 or 2004.

The charge reflected:

•
continuation of the consolidation and rationalization commenced in 2002 with respect to our fabrics manufacturing facilities in Aberdeen, North Carolina; East Douglas, Massachusetts; and Great Harwood, England; and

•
a reduction in force and consolidation of our corporate research and development operation.
 
The 2003 restructuring charge was comprised of $4.5 million of cash expenditures for severance benefits and other costs, and $1.7 million of non-cash charges, primarily for the write-down of the carrying value and disposal of certain assets. These initiatives are producing the strategic results we targeted, in that we have reduced our cost structure and have strengthened our cash flow position.

Further discussion about the restructuring charge appears in the Notes to Consolidated Financial Statements included in Item 8 of this Report.

Goodwill Impairment Write-Down

During the fourth quarters of each of the years 2003-2005, we performed the annual goodwill impairment tests required by SFAS No. 142, “Goodwill and Other Intangible Assets.” In effecting the impairment testing, we used an outside consultant to help prepare valuations of reporting units in accordance with the applicable 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. No impairment was indicated in our continuing operations during these years. However, an after-tax impairment charge of $29.0 million was recorded in fiscal year 2004 related to our discontinued Re:Source dealer businesses.


20



Results of Operations 

The following discussion and analyses reflect the factors and trends discussed in the preceding sections. In addition, we believe our performance during 2003 and (to some extent) 2004 reflects the unprecedented downturn experienced by the commercial interiors industry in general during that time, which we discuss elsewhere.

Our net sales that were denominated in currencies other than the U.S. dollar were approximately 43% in year 2005 and approximately 36% in each of years 2004 and 2003. Because we have such substantial international operations, we are impacted, from time to time, by 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, favorably affected our reported results in 2003 and 2004, when the euro was strengthening relative to the U.S. dollar. In 2005, however, when the euro weakened relative to the U.S. dollar, the translation of European revenues into U.S. dollars adversely affected our reported results. The following table presents the amount (in U.S. dollars) by which the exchange rates for converting euros into U.S. dollars have affected our net sales and operating income during the past three years:

   
2005
2004
2003
   
(in millions)
         
Net sales
  
$(0.3)
$18.2
$36.6
Operating income
  
  (0.1)
    1.1
    1.5

All amounts above for all periods exclude our discontinued operations, primarily comprised of our U.S. raised/access flooring business (which we sold in September 2003) and our owned Re:Source dealer businesses (which we exited during 2004-2005).

The following table presents, as a percentage of net sales, certain items included in our Consolidated Statements of Operations for the three years ended January 1, 2006:


   
Fiscal Year 
  
 
  
   2005 
  
2004 
  
2003 
  
Net sales
    
100.0
%
  
100.0
%
  
100.0
%
Cost of sales
    
69.1
    
69.9
    
70.9
  
Gross profit on sales
    
30.9
    
30.1
    
29.1
  
Selling, general and administrative expenses
    
22.6
    
23.2
    
24.2
  
Restructuring charges
    
0.0
    
0.0
    
0.8
  
Operating income
    
8.3
    
6.9
    
4.1
  
Interest/Other expense
    
4.7
    
5.7
    
5.7
  
Income (loss) from continuing operations before tax
    
3.6
    
1.2
    
(1.6
)
Income tax expense (benefit)
    
1.8
    
0.5
    
(0.6
)
Income (loss) from continuing operations
    
1.8
    
0.7
    
(1.0
)
Discontinued operations, net of tax
    
(1.5
)
  
(6.7
)
  
(2.1
)
Loss on disposal
    
(0.2
)
  
(0.3
)
  
(1.2
)
Net income (loss)
    
0.1
    
(6.3
)
  
(4.3
)

Below we provide information regarding net sales for each of our four operating segments, and analyze those results for each of the last three fiscal years. Fiscal year 2004 was a 53-week period, while fiscal years 2005 and 2003 were 52-week periods. The 53 weeks in 2004 versus the 52 weeks in 2005 and 2003 are a factor in certain of the comparisons reflected below.

Net Sales by Business Segment

We currently classify our businesses into the following four operating segments for reporting purposes:

 
•
Modular Carpet segment, which includes our Interface, Heuga and InterfaceFLOR modular carpet businesses, and also includes our Intersept antimicrobial chemical sales and licensing program;

 
21


 
•
Bentley Prince Street segment, which includes our Bentley and Prince Street broadloom, modular carpet and area rug businesses;

•
Fabrics Group segment, which includes all of our fabrics businesses worldwide; and

 
•
Specialty Products segment, which includes our subsidiary Pandel, Inc., a producer of vinyl carpet tile backing and specialty mat and foam products.

Net sales by operating segment and for our company as a whole were as follows for the three years ended January 1, 2006:  
 
     
Fiscal Year Ended 
  
 Percentage Change 
  
Net Sales By Segment
    
2005
    
2004 
    
2003
    
2005 compared
with 2004
    
2004 compared
with 2003
  
 
  
(in thousands)
              
Modular Carpet
  
$
646,213
  
$
563,397
  
$
473,724
    
14.7
%
  
18.9
%
Bentley Prince Street
    
125,167
    
119,058
    
109,940
    
5.1
%
  
8.3
%
Fabrics Group
    
198,842
    
186,408
    
173,539
    
6.7
%
  
7.4
%
Specialty Products
    
15,544
    
12,795
    
9,291
    
21.5
%
  
37.7
%
Total
  
$
985,766
  
$
881,658
  
$
766,494
    
11.8
%
  
15.0
%

Modular Carpet Segment. For 2005, net sales for the worldwide Modular Carpet segment increased $82.8 million (14.7%) versus 2004. The weighted average selling price per square yard in 2005 was up 4.6% compared with 2004, primarily due to our passing through to customers increases in our cost of petroleum-based raw materials. On a geographic basis, we experienced increases in net sales in the Americas, Europe and Asia-Pacific, which were up 18%, 6% and 21%, respectively. In the Americas, we saw significant increases in our sales into the hospitality (43% increase), retail (27% increase), and corporate office (17% increase) market segments. Sales growth in Europe is attributable primarily to our gaining market share from competitors in an otherwise down geographic market. Sales growth in Asia-Pacific is attributable in large part to a relatively good economic climate in that region.

For 2004, net sales for the Modular Carpet segment increased $89.7 million (18.9%) versus 2003. The weighted average selling price per square yard in 2004 was up 4.4% compared with 2003, primarily due to our passing through to customers increases in our cost of petroleum-based raw materials. On a geographic basis, we experienced robust increases in net sales in the Americas and Asia-Pacific. Net sales in the European portion of the business were up slightly (in local currency terms); however, the translation of European revenues into U.S. dollars favorably affected us and translated into a 10.5% increase in net sales for this portion of the business versus 2003. We believe our Modular Carpet business in North America continued to gain market share from floorcovering competition. We also saw significant increases in our sales into the retail (39% increase), institutional (37% increase) and healthcare (14% increase) market segments in North America, which we attribute to our focus on these market segments, including the growth of our i2 product line (discussed in Item 1 above). This product line comprised more than 30% of our U.S. modular carpet business in 2004. Sales improvement in Asia-Pacific is attributable in large part to a relatively good economic climate in that region and to sales of our Heuga brand modular carpet line at competitive, mid-level prices.

Bentley Prince Street Segment. For 2005, net sales in the Bentley Prince Street segment increased $6.1 million (5.1%) versus 2004. The weighted average selling price per square yard in 2005 was up 8.2% compared with 2004, primarily due to our passing through to customers increases in our cost of petroleum-based raw materials. The increase in sales occurred primarily in the improving corporate office market segment, which was up 16.3%. Growth in our non-corporate office market segments was driven by institutional (16% increase), retail (7% increase) and residential (7% increase) purchases.

 In our Bentley Prince Street segment, net sales for 2004 increased $9.1 million (8.3%) versus 2003. The weighted average selling price per square yard in 2004 was up 5.3% compared with 2003, primarily due to our passing through to customers increases in our cost of petroleum-based materials. The increase in sales was attributable primarily to the improving corporate office market, as well as the success of our market segmentation strategy, particularly in the hospitality (178% increase), retail (66% increase) and healthcare (8% increase) market segments.

Fabrics Group Segment. For 2005, net sales for our Fabrics Group segment increased $12.4 million (6.7%) versus 2004. The weighted average selling price per linear yard in 2005 was up 9.5% compared with 2004, primarily due to our passing through to customers increases in our cost of petroleum-based raw materials. The increase in sales occurred primarily in the improving corporate office market segment (7% increase). Growth in our non-corporate office market segments was driven by healthcare (9% increase) and hospitality (6% increase) purchases.

22

 

For 2004, net sales for our Fabrics Group segment increased $12.9 million (7.4%) versus 2003. The increase was attributable primarily to the improving corporate office market. The weighted average selling price per linear yard in 2004 was up 2.5% compared with 2003, primarily due to our passing through to customers increases in our cost of petroleum-based raw materials.

Specialty Products Segment. For 2005, net sales for our Specialty Products segment increased $2.7 million (11.8%) versus 2004. The weighted average selling price per square yard in 2005 was up 11.6% compared with 2004, primarily due to our passing through to customers increases in our cost of petroleum-based raw materials. The increase in sales occurred primarily in the corporate office market.

For 2004, net sales for our Specialty Products segment increased $3.5 million (37.7%) versus 2003. The increase was attributable primarily to the improving corporate office market. The weighted average selling price per square yard in 2004 was up 19.0% compared with 2003, primarily due to our passing through to customers increases in our cost of petroleum-based raw materials.

Cost and Expenses

Company Consolidated. The following table presents, on a consolidated basis for our operations, our overall cost of sales and selling, general and administrative expenses for the three years ended January 1, 2006:
 
 
  
Fiscal Year Ended 
  
 Percentage Change 
  
Cost and Expenses
    
2005
    
2004 
    
2003
    
2005 compared
with 2004
    
2004 compared
with 2003
  
 
  
(in thousands)
              
Cost of Sales
  
$
681,069
  
$
616,297
  
$
543,251
    
10.5
%
  
13.4
%
Selling, General and
   Administrative Expenses
    
222,696
    
204,619
    
185,696
    
8.8
%
  
10.2
%
Total
  
$
903,765
  
$
820,916
  
$
728,947
    
10.1
%
  
12.6
%

 
For 2005, our cost of sales increased $64.8 million (10.5%) versus 2004, primarily due to increased raw material costs ($43.0 million) and labor costs ($8.4 million) associated with increased production levels during 2005. Our raw materials costs in 2005 were up an estimated 5-6% versus 2004, primarily due to increased prices for petroleum-based products. As a percentage of net sales, cost of sales decreased to 69.1% for 2005, versus 69.9% for 2004. The percentage decrease was primarily due to increased absorption of fixed manufacturing costs associated with increased production levels.

For 2004, our cost of sales increased $73.0 million (13.4%) versus 2003, primarily due to increased product ($48.2 million) and labor ($9.5 million) costs associated with increased production levels during 2004. Our raw materials costs in 2004 were up between 3-4% versus 2003, primarily due to increased prices for petroleum-based products. In addition, the translation of Euros into U.S. dollars resulted in an approximately $12.0 million increase in cost of goods sold during 2004 compared with 2003. As a percentage of net sales, cost of sales decreased to 69.9% for 2004, versus 70.9% for 2003. The percentage decrease was primarily due to the following combination of factors, the relative impact of which we are unable to quantify precisely: (1) the increased absorption of fixed manufacturing costs as a result of improved sales volume, accounting for an estimated 60% of the percentage decrease; (2) the realization of the success of our restructuring initiatives which continue to strengthen and streamline operations throughout the global organization, accounting for an estimated 15% of the percentage decrease; and (3) improved manufacturing efficiencies in our Fabrics Group.

For 2005, our selling, general and administrative expenses increased $18.1 million (8.8%) versus 2004. The primary components of this increase were (1) $9.5 million due to increased investments in global marketing campaigns across our businesses; (2) $6.7 million of performance bonuses; and (3) $6.5 million in commission payments due to the increased level of sales in 2005. These increases were partially offset by reductions in administrative costs of $4.0 million.

For 2004, our selling, general and administrative expenses increased $18.9 million (10.2%) versus 2003. The primary components of this increase were: (1) $6.2 million of performance bonuses paid in 2004 that were not paid in 2003; (2) $6.0 million in commission payments due to increased level of sales; (3) $5.1 million due to currency fluctuation (primarily the movement of the Euro); and (4) $1.0 million of extra administrative costs due to the 53-week period in 2004 versus a 52-week period in 2003. As a percentage of net sales, selling, general and administrative expenses decreased to 23.2% for 2004, versus 24.2% for 2003. The percentage decrease was primarily due to (1) the realization of the success of our restructuring initiatives which continue to strengthen and streamline operations throughout the global organization, and (2) the increased absorption of the fixed portion of administrative costs as a result of improved sales volume.


23


Cost and Expenses by Segment. The following table presents the combined cost of sales and selling, general and administrative expenses for each of our operating segments for the three years ended January 1, 2006:
 
Cost of Sales and Selling, General and
    
Fiscal Year Ended
    
Percentage Change
  
Administrative Expenses
(Combined)
    
2005 
    
 2004
    
2003
    
2005 compared
with 2004 
    
2004 compared
with 2003 
  
   
(in thousands)
              
Modular Carpet
  
$
568,862
  
$
499,509
  
$
427,896
    
13.9
%
  
16.7
%
Bentley Prince Street
    
121,673
    
118,944
    
109,518
    
2.3
%
  
8.6
%
Fabrics Group
    
194,557
    
185,584
    
179,346
    
4.8
%
  
3.5
%
Specialty Products
    
14,893
    
13,272
    
9,352
    
12.2
%
  
41.9
%
Corporate Expenses & Eliminations
    
3,780
    
3,607
 
  
2,835
    
4.8
%
  
27.2
%
Total
  
$
903,765
  
$
820,916
  
$
728,947
    
10.1
%
  
12.6
%

Interest and Other Expense

For 2005, interest expense decreased $0.5 million versus 2004. The decrease was due primarily to the lower levels of debt outstanding on a daily basis during 2005 versus 2004, and was somewhat offset by an overall increase in interest rates when compared with 2004.

For 2004, interest expense increased $3.2 million versus 2003. This increase was due primarily to (1) increased borrowings during 2004 to support increased working capital levels as a result of improved sales volume during the period, and (2) a higher overall borrowing rate of interest in 2004 versus 2003.

Tax

Our effective tax rate in 2005 was 49.4%, compared with an effective tax rate of 38.6% in 2004. The increase in rate is primarily attributable to (1) taxes associated with our repatriation of previously unremitted foreign earnings, which is discussed above, (2) a reduced state tax benefit attributable to U.S. operations as a result of lower pre-tax losses in the U.S. in 2005, and (3) our provision of a valuation allowance against state net operating loss carryforwards which we do not expect to utilize. These factors were somewhat offset by decreases in the tax rate components associated with foreign operations and non-deductible business expenses.

Our effective tax rate in 2004 was 38.6%, compared with an effective tax benefit rate of 36.5% in 2003. The change in rate is primarily attributable to an overall increase in foreign taxes from 2003 to 2004.

Liquidity and Capital Resources

General

In our business, we require cash and other liquid assets primarily to purchase raw materials and to pay other manufacturing costs, in addition to funding normal course selling, general and administrative expenses, anticipated capital expenditures, and potential special projects. We generate our cash and other liquidity requirements from our operations and from 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). We believe that our liquidity position will provide sufficient funds to meet our current commitments and other cash requirements for the foreseeable future. We also believe that we will be able to continue to enhance the generation of free cash flow (particularly in the short term because we have no significant debt maturity until April 2008) through the following initiatives:

 
•
Improve our inventory turns by continuing to implement a make-to-order model throughout our organization;

24

 
•
Reduce our average days sales outstanding through improved credit and collection practices; and

•
Limit the amount of our capital expenditures generally to those projects that have a short-term payback period.

Historically, we use more cash in the first half of the fiscal year, as we fund insurance premiums, tax payments, employee bonuses, and inventory build-up in preparation for the holiday/vacation season of our international operations. However, we believe that our liquidity position and cash provided by operations will provide sufficient funds to meet our current commitments and other cash requirements for the foreseeable future, primarily because we had over $79 million of additional borrowing capacity under our revolving credit facility as of January 1, 2006, and we have no maturities of long term debt until April 2008.

In addition, we have a high contribution margin business with low capital expenditure requirements. Contribution margin represents variable gross profit margin less the variable component of selling, general and administrative expenses, and for us is an indicator of profit on incremental sales after the fixed components of cost of goods sold and selling, general and administrative expenses have been recovered. While contribution margin should not be construed as a substitute for gross margin, which is determined in accordance with GAAP, it is included herein to provide additional information with respect to our potential for profitability. In addition, we believe that investors find contribution margin to be a useful tool for measuring our profitability on an operating basis.

Nevertheless, our ability to generate cash from operating activities is uncertain because we are subject to, and recently have experienced, fluctuations in our level of net sales. As a result, we cannot assure you that our business will generate cash flow from operations in an amount sufficient to enable us to pay the interest and principal on our debt or to fund our other liquidity needs.

At January 1, 2006, we had $51.3 million in cash. As of January 1, 2006, $5.1 million in borrowings and $15.2 million in letters of credit were outstanding under the revolving credit facility, and we could have incurred an additional $79.8 million of borrowings thereunder.

We have approximately $84.6 million in contractual cash obligations due by the end of fiscal year 2006, which includes, among other things, capital expenditure purchase commitments and interest payments on our debt. We currently estimate aggregate capital expenditures will be between $20 million and $25 million for 2006. Based on current interest rate levels, we expect our aggregate interest expense for 2006 to be between $44 million and $46 million.

In February 2004, we issued $135 million in 9.5% senior subordinated notes due 2014. Proceeds from the issuance of these notes were used to redeem in full our previously outstanding 9.5% senior subordinated notes due 2005, with the remainder of $7.5 million (after fees and expenses) used to reduce borrowings under our revolving credit facility. As a result of the redemption of the notes that were due in 2005, our revolving credit facility (discussed below) will not mature until October 2007 and we will have no other significant debt maturity obligations until 2008.

It is important for you to consider that our revolving credit facility matures in October 2007, and our outstanding senior and senior subordinated notes mature at times ranging from 2008 to 2014. We cannot assure you that we will be able to renegotiate or refinance any of our debt on commercially reasonable terms or at all. If we are unable to refinance our debt or obtain new financing, we would have to consider other options, such as selling assets to meet our debt service obligations and other liquidity needs, or using cash, if available, that would have been used for other business purposes.

Revolving Credit Facility

We have a senior revolving credit facility that provides for a maximum aggregate amount of loans and letters of credit of up to $100 million at any one time, subject to a borrowing base as described below. The key features of the revolving credit facility are as follows:

•
The revolving credit facility currently matures on October 1, 2007.

•
The revolving credit facility includes a domestic U.S. dollar syndicated loan and letter of credit facility made available to Interface, Inc. and Interface Europe B.V. (our foreign subsidiary based in Europe), as co-borrowers up to the lesser of (1) $100 million, or (2) a borrowing base equal to the sum of specified percentages of eligible accounts receivable, finished goods inventory and raw materials inventory in the United States (the percentages and eligibility requirements for the domestic borrowing base are specified in the credit facility), less certain reserves. Any advances to Interface, Inc. or Interface Europe B.V. under the domestic loan facility will reduce borrowing availability under the entire revolving credit facility.

25


•
Advances to Interface, Inc. 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 Interface, Inc.’s assets and the assets of each of its material domestic subsidiaries, which have guaranteed the revolving credit facility.

•
The revolving credit facility also includes a multicurrency syndicated loan and letter of credit facility in British pounds and euros made available to Interface Europe, Ltd. (our foreign subsidiary based in the United Kingdom), in an amount up to the lesser of (1) the equivalent of $15 million, or (2) 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 U.K. borrowing base are specified in the credit facility), less certain reserves. Any advances under the multicurrency loan facility will reduce the lending commitment available under the domestic loan facility on a dollar-equivalent basis.

•
Advances to Interface Europe, Ltd. under the multicurrency loan 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 revolving credit 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 our excess availability for domestic loans falls below $20 million (excluding a specified reserve against the domestic borrowing base). 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.

The revolving credit facility also includes various reporting, affirmative and negative covenants, and other provisions that restrict our ability to take certain actions, including the following:

•
Provisions that prohibit us from using borrowings under the revolving credit facility to repay any of our other senior or subordinated notes;

•
Provisions that restrict the payment of cash dividends on our common stock unless we meet a financial performance test specified in the revolving credit facility;

•
Provisions that restrict our ability to repay the 7.3% Senior Notes due 2008, 10.375% Senior Notes due 2010, and 9.5% Senior Subordinated Notes due 2014, except from the proceeds of a refinancing thereof or the proceeds of an offering of equity securities, provided that certain conditions are met, including a requirement that our aggregate outstanding loans and letters of credit under the revolving credit facility not exceed $10 million after giving effect to each such payment; and

•
Provisions that restrict our ability to repay other long-term indebtedness by limiting the aggregate repayments of such debt we can make unless we meet a specified minimum excess availability test and a specified financial performance test.

Interest Rates and Fees. Interest on borrowings and letters of credit under the revolving credit facility is charged at varying rates computed by applying a margin (ranging from 0.0% to 3.5%) over a baseline rate (such as the prime interest rate or LIBOR), depending on the type of borrowing and our fixed charge coverage ratio. In addition, we pay an unused line fee on the facility ranging from 0.375% to 1.0% depending on our fixed charge coverage ratio. The weighted average interest rate of our currently outstanding borrowings under the facility is 4.79%.

Prepayments. Our revolving credit facility requires prepayment from the proceeds of certain asset sales.

Covenants. The revolving credit facility also limits our ability, among other things, to:

•
incur indebtedness or contingent obligations;

26

•
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 in the revolving credit facility); and

•
enter into sale and leaseback transactions.

We are presently in compliance with all covenants under the revolving credit facility and anticipate that we will remain in compliance with the covenants for the foreseeable future.

Events of Default. If Interface, Inc. or any other borrower fails to perform or breaches any of the affirmative or negative covenants under the revolving credit facility, or if other specified events occur (such as a bankruptcy or similar event or a change of control of Interface, Inc., or if we breach or fail to perform any covenant or agreement contained in any instrument relating to any of our other indebtedness exceeding $5 million), 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,

•
declare all commitments of the lenders under the facility terminated;

•
declare all amounts outstanding or accrued thereunder immediately due and payable; and

•
exercise other rights and remedies available to them under the agreement and applicable law.

Collateral. The domestic loan facility is secured by substantially all of the assets of Interface, Inc. and its 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 multicurrency loan facility is secured by substantially all of the assets of Interface Europe, Ltd. and its material subsidiaries. If an event of default occurs under the revolving credit facility, the lenders’ collateral agent may, upon the request of a specified percentage of lenders, exercise remedies with respect to the collateral, including, in some instances, foreclosing mortgages on real estate assets, taking possession of or selling personal property assets, collecting accounts receivables, or exercising proxies to take control of the pledged stock of domestic and first-tier material foreign subsidiaries.

Senior and Senior Subordinated Notes

The indentures governing our 7.3% Senior Notes due 2008, 10.375% Senior Notes due 2010, and 9.5% Senior Subordinated Notes due 2014, on a collective basis, contain covenants that limit or restrict our ability to:

•
incur additional indebtedness;

•
make dividend payments or other restricted payments;

•
create liens on our assets;

•
sell our assets;

•
sell securities of our subsidiaries;

•
enter into transactions with shareholders and affiliates; and

•
enter into mergers, consolidations, or sales of all or substantially all of our assets.

In addition, each of the indentures governing our 10.375% Senior Notes due 2010 and 9.5% Senior Subordinated Notes due 2014 contains a covenant that requires us to make an offer to purchase the outstanding notes under such indenture in the event of a change of control of Interface (as defined in each respective indenture).

27


Each series of notes is guaranteed, jointly and severally, on an unsecured basis by each of our material U.S. subsidiaries. If we breach or fail to perform any of the affirmative or negative covenants under one of these indentures, or if other specified events occur (such as a bankruptcy or similar event), after giving effect to any applicable notice and right to cure provisions, an event of default will exist. An event of default also will exist under each indenture if we breach or fail to perform any covenant or agreement contained in any other instrument (including without limitation any other indenture) relating to any of our indebtedness exceeding $20 million (or $25 million in the case of the indenture governing our 7.3% Senior Notes due 2008) and such default or failure results in the indebtedness becoming due and payable. If an event of default exists and is continuing, the trustee of the series of notes at issue (or the holders of at least 25% of the principal amount of such notes) may declare the principal amount of the notes and accrued interest thereon immediately due and payable (except in the case of bankruptcy, in which case such amounts are immediately due and payable even in the absence of such a declaration).

In 2005, we repurchased $2.0 million of our 7.3% Senior Notes due 2008.

Analysis of Cash Flows

Our primary sources of cash during 2005 were (1) $49.3 million from continuing operations, (2) $12.0 million from discontinued operations, and (3) $3.0 million from the issuance of stock upon the exercise of employee stock options. The primary uses of cash during 2005 were (1) $25.5 million for additions to property and equipment at our manufacturing facilities, (2) $2.7 million for purchases of intellectual property, (3) $2.3 million for deposits on manufacturing equipment, and (4) $2.0 million for reduction of Senior Notes.

Our primary sources of cash during 2004 were (1) $28.3 million from continuing operations, (2) $7.5 million of net proceeds (after payment of fees, expenses and the redemption amount, including accrued interest, of our 9.5% Senior Subordinated Notes due 2005) from the issuance of our 9.5% Senior Subordinated Notes due 2014, (3) $4.4 million from the sale of a building, and (4) $4.4 million from the issuance of common stock upon the exercise of employee stock options. The primary uses of cash during 2004 were (1) $11.7 million in conjunction with discontinued operations (net of $7.0 million cash received), (2) $15.8 million for additions to property and equipment in our manufacturing facilities, (3) $4.2 million of costs associated with the issuance of our 9.5% senior subordinated notes due 2014, (4) $2.0 million primarily for deposits on manufacturing equipment, and (5) $1.4 million related to an increase in notes receivable.

Our primary sources of cash in 2003 were (1) $15.3 million from reductions in inventory and increases in accounts payable, which, as described below, were offset by the termination and payoff of our accounts receivable securitization program, and (2) $6.0 million from the sale of other assets. The primary uses of cash in 2003 were (1) $30.0 million associated with the termination and payoff of our accounts receivable securitization program, (2) $16.2 million for additions to property and equipment at our manufacturing facilities, and (3) $3.4 million of costs associated with the amendment and restatement of our revolving credit facility. 

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.

Cash flows from discontinued operations are included in operating cash flows for all years presented, as there were no investing or financing activities related to these discontinued operations. The absence of cash flows from discontinued operations is not expected to have any significant impact on future liquidity and capital resources.

Funding Obligations

We have various contractual obligations that we must fund as part of our normal operations. The following table discloses aggregate information about our contractual obligations (including the contractual obligations of our discontinued operations) and the periods in which payments are due. The amounts and time periods are measured from January 1, 2006.


28


       
Payments Due by Period 
  
   
Total
      
   
Payments
  
Less than
          
More than
  
   
Due
  
1 year
  
1-3 years
  
3-5 years 
  
5 years
  
   
(in thousands)
  
Long-Term Debt Obligations(1)
  
$
458,000
  
$
--
  
$
148,000
  
$
175,000
  
$
135,000
  
Operating Lease Obligations(2)
    
93,356
    
23,479
    
32,602
    
18,432
    
18,843
  
Expected Interest Payments(3)
    
202,116
    
41,785
    
75,468
    
45,319
    
39,544
  
Unconditional Purchase Obligations(4)
    
13,817
    
13,181
    
636
    
--
    
--
  
Pension Cash Obligations(5)
    
79,486
    
6,199
    
14,208
    
15,821
    
43,258
  
Total Contractual Cash Obligations
  
$
846,775
  
$
84,644
  
$
270,914
  
$
254,572
  
$
236,645
  
 
 
(1)
On March 5, 2004, we redeemed $120 million of 9.5% Senior Subordinated Notes due 2005 that were outstanding. In order to effect that redemption, we issued on February 4, 2004 a new series of 9.5% Senior Subordinated Notes due 2014, in the aggregate principal amount of $135 million, and used most of the net proceeds to pay the redemption price. The presentation includes the 9.5% Senior Subordinated Notes due 2014 and excludes the 9.5% Senior Subordinated Notes due 2005.

 
(2)
Our capital lease obligations are insignificant.

(3)
Expected interest payments to be made in future periods reflect anticipated interest payments related to our $175 million of 10.375% Senior Notes; our $150 million of 7.3% Senior Notes; and our $135 million of 9.5% Senior Subordinated Notes. We have also assumed in the presentation above that we will hold the Senior Notes and the Senior Subordinated Notes until maturity. We have excluded from the presentation interest payments and fees related to our revolving credit facility (discussed above), because of the variability and timing of advances and repayments thereunder.

 
(4)
Does not include unconditional purchase obligations that are included as liabilities in our Consolidated Balance Sheet. We have capital expenditure commitments of $1.7 million all of which are due in less than 1 year.

 
(5)
We have two foreign defined benefit plans and a domestic salary continuation plan. We have presented above the estimated cash obligations that will be paid under these plans over the next ten years. Such amounts are based on several estimates and assumptions and could differ materially should the underlying estimates and assumptions change. Our domestic salary continuation plan is an unfunded plan, and we do not currently have any commitments to make contributions to this plan. However, we do use insurance instruments to hedge our exposure under the salary continuation plan. Contributions to our other employee benefit plans are at our discretion.

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 our consolidated 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. A portion of our revenues is derived from long-term contracts that 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.

29

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.

Deferred Income Tax Assets and Liabilities. The carrying values of deferred income tax assets and liabilities reflect the application of our income tax accounting policies in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes” (“SFAS 109”), and are based on management’s assumptions and estimates regarding future operating results and levels of taxable income, as well as management’s judgments regarding the interpretation of the provisions of SFAS 109. The carrying values of liabilities for income taxes currently payable are based on management’s interpretation of applicable tax laws, and incorporate management’s assumptions and judgments regarding the use of tax planning strategies in various taxing jurisdictions. The use of different estimates, assumptions and judgments in connection with accounting for income taxes may result in materially different carrying values of income tax assets and liabilities and results of operations.

We record a valuation allowance to reduce our deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will expire before realization of the benefit or that future deductibility is not probable. The ultimate realization of the deferred tax assets depends on the ability to generate sufficient taxable income of the appropriate character in the future. This requires us to use estimates and make assumptions regarding significant future events such as the taxability of entities operating in the various taxing jurisdictions.

Goodwill. Pursuant to SFAS 142, we 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.

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.

We estimate our reserves for inventory obsolescence by continuously examining our inventories to determine if there are indicators that carrying values exceed net realizable values. Experience has shown that significant indicators that could require the need for additional inventory write-downs are the age of the inventory, the length of its product life cycles, anticipated demand for our products, and current economic conditions. While we believe that adequate write-downs for inventory obsolescence have been made in the consolidated financial statements, consumer tastes and preferences will continue to change and we could experience additional inventory write-downs in the future. Our inventory reserve on January 1, 2006 and January 2, 2005, was $12.0 million and $10.5 million, respectively. To the extent that actual obsolescence of our inventory differs from our estimate by 10%, our net income would be higher or lower by approximately $0.6 million, on an after-tax basis.

Pension Benefits. Net pension expense recorded is based on, among other things, assumptions about the discount rate, estimated return on plan assets and salary increases. While management believes these assumptions are reasonable, 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. The actuarial assumptions used in our salary continuation plan and our foreign defined benefit plans reporting are reviewed periodically and compared with external benchmarks to ensure that they appropriately account for our future pension benefit obligation. The expected long-term rate of return on plan assets assumption is based on weighted-average expected returns for each asset class. Expected returns reflect a combination of historical performance analysis and the forward-looking views of the financial markets, and include input from actuaries, investment service firms and investment managers. A 1% increase in the actuarial assumption for discount rate would decrease our projected benefit obligation by approximately $32.3 million. A 1% decrease in the discount rate would increase our projected benefit obligation by approximately $40.7 million.

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. Since 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 included in Item 8 hereof.) As a result, we reduced the amount of our accrual for such liabilities to $2.1 million. The reductions of the accrual were recorded as a reduction of “other expense” in 2002 and 2004. As of January 1, 2006, the accrual for these liabilities was $2.0 million.

30


Allowances for Doubtful Accounts. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. Estimating this amount requires us to analyze the financial strengths of our customers. 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. By its nature, such an estimate is highly subjective, and it is possible that the amount of accounts receivable that we are unable to collect may be different than the amount initially estimated. Our allowance for doubtful accounts on January 1, 2006 and January 2, 2005 was $6.2 million and $6.1 million, respectively. To the extent the actual collectibility of our accounts receivable differs from our estimates by 10%, our net income would be higher or lower by approximately $0.3 million, on an after-tax basis, depending on whether the actual collectibility was better or worse, respectively, than the estimated allowance.

Product Warranties. We typically provide limited warranties with respect to certain attributes of our carpet products (for example, warranties regarding excessive surface wear, edge ravel and static electricity) for periods ranging from ten to fifteen years, depending on the particular carpet product. We typically warrant that services performed will be free from defects in workmanship for a period of one year following completion. For our fabrics products, we typically provide a five year limited warranty against manufacturing defects and nonconformity to specifications. In the event of a breach of warranty, the remedy typically is limited to repair of the problem or replacement of the affected product. We record a provision related to warranty costs based on historical experience and periodically adjust these provisions to reflect changes in actual experience. Our warranty reserve on January 1, 2006 and January 2, 2005, was $2.6 million and $2.4 million, respectively. Actual warranty expense incurred could vary significantly from amounts that we estimate. To the extent the actual warranty expense differs from our estimates by 10%, our net income would be higher or lower by approximately $0.1 million, on an after-tax basis, depending on whether the actual expense is lower or higher, respectively, than the estimated provision.

Off-Balance Sheet Arrangements

Accounts Receivable Securitization Program

On June 18, 2003, we terminated our former accounts receivable securitization program with Three Pillars Funding Corporation in connection with the refinancing of our revolving credit facility discussed earlier. This securitization program had provided for up to $50 million of funding from the sale of trade accounts receivable generated by certain of our operating subsidiaries. We no longer have an accounts receivable securitization program.

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 will have the option to purchase the facilities from the partnership at fair market value.

Recent Accounting Pronouncements

In July 2005, the Financial Accounting Standards Board (“FASB”) issued a Staff Position (“FSP”) interpreting APB Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock.” Specifically, the FASB issued FSP APB No. 18-1, “Accounting by an Investor for Its Proportionate Share of Accumulated Other Comprehensive Income of an Investee Accounted for under the Equity Method in Accordance with APB Opinion No. 18 upon a Loss of Significant Influence.” This FSP provides that an investor’s proportionate share of an investee’s equity adjustments for “other comprehensive income” should be offset against the carrying value of the investment at the time significant influence is lost. At that time, an investor would reduce its investment account, to no less than zero, with any balance remaining reflected in income. The guidance in this FSP is required to be applied to the first reporting period beginning after July 12, 2005. This FSP did not have a material impact on our consolidated financial statements.

31


In June 2005, the FASB issued a FSP interpreting SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” Specifically, the FASB issued FSP FAS No. 150-5, “Issuer’s Accounting under FASB Statement No. 150 for Freestanding Warrants and Other Similar Instruments on Shares That Are Redeemable.” This FSP addresses whether freestanding warrants and other similar instruments on shares that are redeemable (puttable or mandatorily redeemable) are subject to the requirements in SFAS No. 150, regardless of the timing of the redemption feature or the redemption price. The guidance in this FSP is required to be applied to the first reporting period beginning after June 30, 2005. If the guidance in the FSP results in changes to previously reported information, a cumulative effect adjustment would be required. The adoption of this FSP did not have a material impact on our consolidated financial statements.
 
In June 2005, the FASB issued FSP No. 143-1 (“FSP FAS No. 143-1”), “Accounting for Electronic Equipment Waste Obligations.” FSP FAS No. 143-1 addresses the accounting for obligations associated with the Directive 2002/96/EC on Waste Electrical and Electronic Equipment adopted by the European Union (“EU”). FSP FAS No. 143-1 is effective upon the later of the first reporting period that ends after June 8, 2005, or the date that the EU-member country adopts the law. FSP FAS No. 143-1 did not have a material impact on our consolidated financial statements.
 
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS No. 154”). SFAS No. 154 changes the requirements for the accounting for and reporting of a change in accounting principle. This Statement applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We adopted SFAS No. 154 on January 2, 2006. The adoption of SFAS No. 154 is not expected to have a material effect on our results of operations or financial position. 

 In March 2005, the FASB issued FASB Interpretation (“FIN”) No. 47, “Accounting for Conditional Asset Retirement Obligations - An Interpretation of FASB Statement No. 143” (“FIN 47”). This Interpretation clarifies the term of conditional asset retirement obligations as used in SFAS No. 143, “Accounting for Asset Retirement Obligations.” FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. The adoption of FIN No. 47 did not have a material impact on our consolidated financial statements.

In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment.” This statement is a revision to SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” This statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, primarily focusing on the accounting for transactions in which an entity obtains employee services in share-based payment transactions. Companies will be required to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service - the requisite service period (usually the vesting period), in exchange for the award. The grant-date fair value of employee share options and similar instruments will be estimated using option-pricing models. If an equity award is modified after the grant date, incremental compensation cost will be recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification. SFAS No.123R also requires the benefits of excess tax deductions in excess of recognized compensation cost be reported as a financing cash flow rather than as operating cash flow as is currently required. As such, in the periods after adoption, this requirement of SFAS No. 123R will reduce net operating cash flows and increase net financing cash flow. SFAS No. 123R will be effective for fiscal years beginning after June 15, 2005, due to the Securities and Exchange Commission’s Rule 2005-57, which amended the effective date of SFAS No. 123R. Accordingly, we adopted SFAS No. 123R on January 2, 2006. The potential impact of adopting SFAS 123R on results of operations and earnings per share for fiscal 2006 is dependent on several factors, including the number of options granted in fiscal 2006, and the fair value of those options which will be determined at the date of grant. We are in the process of finalizing the impact of this standard on our consolidated financial statements.

In December 2004, the FASB issued FASB Staff Position No. 109-2 (“FSP FAS No. 109-2”), “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004.” FSP FAS No. 109-2 will amend the existing accounting literature that requires companies to record deferred taxes on foreign earnings, unless they intend to indefinitely reinvest those earnings outside the U.S. This pronouncement will temporarily allow companies that are evaluating whether to repatriate foreign earnings under the AJCA to delay recognizing any related taxes until that decision is made. This pronouncement will also require companies that are considering repatriating earnings to disclose the status of their evaluation and the potential amounts being considered for repatriation. The AJCA provides for a special one-time tax deduction of 85 percent of certain foreign earnings that are repatriated. During the year ended January 1, 2006, we repatriated $35.9 million of such foreign earnings. Consequently, we have recorded a provision for taxes on such foreign earnings of approximately $3.4 million in 2005 related to such repatriation.


32

 
The FASB has issued a FSP amending AICPA Statement of Position (“SOP”) No. 78-9, “Accounting for Investments in Real Estate Ventures”. Specifically, the FASB issued FSP SOP No. 78-9-1, “Interaction of AICPA Statement of Position 78-9 and EITF Issue No. 04-5.” The amendment was necessary because the consensus reached in EITF Issue No. 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights,” conflicted with certain guidance in SOP No. 78-9. This FSP eliminates the concept of “important rights” and replaces it with the concepts of “kick-out rights” and “substantive participating rights” as defined in Issue 04-5. The FSP also clarifies that the effect of the rights held by minority partners on the assessment of control, and therefore consolidation, of a general partnership should be the same as the evaluation of limited partners’ rights in a limited partnership. The FSP notes that the consensus reached by the EITF applies to all industries, not just real estate ventures. The guidance in this FSP is effective after June 29, 2005 for general partners of all new partnerships formed and for existing partnerships for which the partnership agreements are modified. The FSP applies to general partners in all other partnerships effective no later than the beginning of the first reporting period in fiscal years beginning after December 15, 2005. We do not believe that application of guidance in this FSP will have a material impact on our consolidated financial statements.
 
  In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of Accounting Research Bulletin No. 43, Chapter 4.” SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We do not believe adoption of SFAS 151 will have a material effect on its consolidated financial statements.

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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 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. From time to time, we maintain a 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 the first part of 2003, we utilized an interest rate swap agreement to effectively convert approximately $125 million of fixed rate debt into variable rate debt. As a result, during 2003, our interest expense was approximately $2.4 million lower than it would have been in the absence of our interest rate swap agreement. This interest rate swap agreement was unwound in May 2003 and, since that time, we have not had any interest rate swap agreements in place.

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 United States, 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 United States, 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 could have a translation impact on our financial position.


33


At January 1, 2006, we recognized a $34.4 million decrease in our foreign currency translation adjustment account compared to January 2, 2005, because of the weakening of certain currencies against the U.S. dollar. The decrease was associated primarily with certain foreign subsidiaries located within the United Kingdom and continental Europe.

Sensitivity Analysis

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 January 1, 2006. 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 would be impacted by a net decrease of $23.9 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 $23.8 million.

Foreign Currency Exchange Rate Risk

As of January 1, 2006, 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 $7.7 million or an increase in the fair value of our financial instruments of $6.3 million, respectively. 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.
 
 
 

 
34

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

   
FISCAL YEAR ENDED
  
   
2005     
  
2004    
  
2003
  
   
(in thousands, except share data)
  
Net sales
  
$
985,766
  
$
881,658
  
$
766,494
  
Cost of sales
    
681,069
    
616,297
    
543,251
  
Gross profit on sales
    
304,697
    
265,361
    
223,243
  
                     
Selling, general and administrative expenses
    
222,696
    
204,619
    
185,696
  
Restructuring charges
    
--
    
--
    
6,196
  
                     
Operating income
    
82,001
    
60,742
    
31,351
  
                     
Interest expense
    
45,541
    
46,023
    
42,820
  
Bond offering cost
    
--
    
1,869
    
--
  
Other expense
   
933
    
2,366
    
1,143
  
                     
Income (loss) from continuing operations before tax expense (benefit)
    
35,527
    
10,484
    
(12,612
)
Income tax expense (benefit)
    
17,561
    
4,044
    
(4,600
)
                     
Income (loss) from continuing operations
    
17,966
    
6,440
    
(8,012
)
Loss from discontinued operations, net of tax
    
(14,791
)
  
(58,815
)
  
(16,420
)
Loss on disposal of discontinued operations, net of tax
    
(1,935
)
  
(3,027
)
  
(8,825
)
 
                    
Net income (loss)
  
$
1,240
  
$
(55,402
)
$
(33,257
)
 
                    
Income (loss) per share - basic
                    
Continuing operations
  
$
0.35
  
$
0.13
  
$
(0.16
)
Discontinued operations
    
(0.29
)
  
(1.16
)
  
(0.32
)
Loss on disposal of discontinued operations
    
(0.04
)
  
(0.06
)
  
(0.18
)
                     
Net income (loss) per share - basic
  
$
0.02
  
$
(1.09
)
$
(0.66
)
 
                    
Income (loss) per share - diluted
                    
Continuing operations
  
$
0.34
  
$
0.12
  
$
(0.16
)
Discontinued operations
    
(0.28
)
  
(1.12
)
  
(0.32
)
Loss on disposal of discontinued operations
    
(0.04
)
  
(0.06
)
  
(0.18
)
                     
Net income (loss) per share - diluted
  
$
0.02
  
$
(1.06
)
$
(0.66
)
                     
Basic weighted average shares outstanding
    
51,551
    
50,682
    
50,282
  
Diluted weighted average shares outstanding
    
52,895
    
52,171
    
50,282
  

See accompanying notes to consolidated financial statements.




35

INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
 
   
FISCAL YEAR ENDED
  
   
2005
  
2004
  
2003
  
   
(in thousands)
  
Net income (loss)
  
$
1,240
  
$
(55,402
)
$
(33,257
)
Other comprehensive income (loss)
                    
Foreign currency translation adjustment
    
(34,351
)
  
23,052
    
38,829
  
Minimum pension liability adjustment
    
5,986
    
1,289
    
(9,104
)
Unrealized gain on hedges, net of tax
    
--
    
--
    
(3,154
)
                     
Comprehensive loss
  
$
(27,125
)
$
(31,061
)
$
(6,686
)

See accompanying notes to consolidated financial statements.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
36

INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS


   
2005
  
2004
  
   
(in thousands)
  
ASSETS
              
Current
              
Cash and cash equivalents
  
$
51,312
  
$
22,164
  
Accounts receivable, net
    
141,408
    
142,228
  
Inventories
    
130,209
    
137,618
  
Prepaid expenses and other current assets
    
16,624
    
18,200
  
Deferred income taxes
    
4,540
    
4,556
  
Assets of businesses held for sale
    
5,526
    
42,788
  
 
              
Total current assets
    
349,619
    
367,554
  
Property and equipment, net
    
185,643
    
194,702
  
Deferred tax asset
    
69,043
    
67,448
  
Goodwill
    
193,705
    
205,913
  
Other assets
    
40,980
    
34,181
  
 
              
   
$
838,990
  
$
869,798
  
 
              
LIABILITIES AND SHAREHOLDERS’ EQUITY
              
Current liabilities
              
Accounts payable
  
$
50,312
  
$
46,466
  
Accrued expenses
    
85,581
    
86,856
  
Liabilities of businesses held for sale
    
4,214
    
5,390
  
               
Total current liabilities
    
140,107
    
138,712
  
Senior notes
    
323,000
    
325,000
  
Senior subordinated notes
    
135,000
    
135,000
  
Deferred income taxes
    
23,534
    
26,790
  
Other
    
40,864
    
45,987
  
               
Total liabilities
    
662,505
    
671,489
  
               
Minority interest
    
4,409
    
4,131
  
               
Commitments and contingencies
    
 
          
               
Shareholders’ equity
              
Preferred stock
    
--
    
--
  
Common stock
    
5,334
    
5,243
  
Additional paid-in capital
    
234,314
    
229,382
  
Retained deficit
    
(1,443
)
  
(2,683
)
Accumulated other comprehensive income
    
(38,347
)
  
(3,996
)
Minimum pension liability
    
(27,782
)
  
(33,768
)
               
Total shareholders’ equity
    
172,076
    
194,178
  
               
   
$
838,990
  
$
869,798
  
               
 
 
See accompanying notes to consolidated financial statements.

37

INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

   
FISCAL YEAR ENDED
  
   
2005
  
2004
  
2003
  
OPERATING ACTIVITIES
  
 (in thousands)
  
Net income (loss)
  
$
1,240
  
$
(55,402
)
$
(33,257
)
Impairment of goodwill
    
--
    
29,044
    
--
  
Impairment of assets
    
3,466
    
17,521
    
--
  
Loss on discontinued operations
    
11,325
    
12,250
    
16,420
  
Loss from disposal of discontinued operations
    
1,935
    
3,027
    
8,825
  
Income (loss) from continuing operations
    
17,966
    
6,440
    
(8,012
)
Adjustments to reconcile income (loss) to cash provided  by (used in) operating activities:
                    
Depreciation and amortization
    
31,455
    
33,336
    
34,141
  
Bad debt expense
    
2,009
    
1,421
    
1,807
  
Deferred income taxes and other
    
(6,243
)
  
(10,832
)
  
(12,403
)
Working capital changes:
                    
Accounts receivable
    
(7,742
)
  
600
    
(33,400
)
Inventories
    
2,801
    
(1,876
)
  
3,241
  
Prepaid expenses and other current assets
    
(2,716
)
  
1,027
    
(799
)
Accounts payable and accrued expenses
    
11,753
    
(1,855
)
  
12,083
  
Cash provided by (used in) continuing operations
    
49,283
    
28,261
    
(3,342
)
Cash provided by (used in) discontinued operations
    
12,018
    
(18,720
)
  
(8,444
)
Cash provided by (used in) operating activities
    
61,301
    
9,541
    
(11,786
)
 
                    
INVESTING ACTIVITIES:
                    
Capital expenditures
    
(25,478
)
  
(15,783
)
  
(16,203
)
Proceeds from sale of discontinued operations
    
551
    
7,003
    
2,749
  
Proceeds from sale of building
    
--
    
4,400
    
--
  
Other
    
(5,644
)
  
(3,393
)
  
5,960
  
Cash used in investing activities
    
(30,571
)
  
(7,773
)
  
(7,494
)
                     
FINANCING ACTIVITIES:
                    
Issuance of notes
    
--
    
135,000
    
--
  
Repurchase of senior subordinated notes
    
--
    
(120,000
)
  
--
  
Debt issuance costs
    
--
    
(4,237
)
  
(3,367
)
Borrowings on long-term debt
    
--
    
--
    
--
  
Repurchase of senior notes
    
(2,000
)
  
--
    
--
  
Proceeds from issuance of common stock
    
2,960
    
4,442
    
241
  
Other
    
--
    
--
    
182
  
Cash provided by (used in) financing activities
    
960
    
15,205
    
(2,944
)
Net cash provided by (used in) operating, investing and financing activities
    
31,690
    
16,973
    
(22,224
)
Effect of exchange rate changes on cash
    
(2,542
)
  
2,301
    
1,557
  
                     
CASH AND CASH EQUIVALENTS:
                    
Net increase (decrease)
    
29,148
    
19,274
    
(20,667
)
Balance, beginning of year
    
22,164
    
2,890
    
23,557
  
 
                    
Balance, end of year
  
$
51,312
  
$
22,164
  
$
2,890
  
 
See accompanying notes to consolidated financial statements.

38
INTERFACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

The Company is a recognized leader in the worldwide commercial interiors market, offering modular and broadloom floorcoverings, interior fabrics and specialty products. The Company manufactures modular and broadloom carpet focusing on the high quality, designer-oriented sector of the market, and provides specialized carpet replacement, installation and maintenance services. The Company also produces interior fabrics and upholstery products. Additionally, the Company offers Intersept, a proprietary antimicrobial used in a number of interior finishes, and sponsors the Envirosense Consortium in its mission to address workplace environmental issues.

In 2004, the Company committed to a plan to exit its owned Re:Source dealer businesses (as well as the results of operations of a small Australian dealer business and a small residential fabrics business), and in the third quarter 2004 the Company began to dispose of several of the dealer subsidiaries. The Company has now sold or terminated ongoing operations at each of its owned dealer businesses. In addition, in September 2003, the Company sold its U.S. raised/access flooring business. The results of operations and related disposal costs, gains and losses for these businesses were classified as discontinued operations for all periods presented.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany accounts and transactions are eliminated. Investments in which the Company does not have the ability to exercise significant influence are carried at the lower of cost or estimated realizable value. The Company monitors investments for other than temporary declines in value and makes reductions in carrying values when appropriate.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Examples include provisions for returns, bad debts, product claims reserves, rebates, estimates of costs to complete performance contracts, inventory obsolescence and the length of product life cycles, accruals associated with restructuring activities, income tax exposures and valuation allowances, environmental liabilities, carrying value of goodwill and property and equipment. Actual results could vary from these estimates.

Revenue Recognition

Revenue is recognized when the following criteria are met: persuasive evidence of an agreement exists, delivery has occurred or services have been rendered, price to the buyer is fixed and determinable, and collectibility is reasonably assured. Delivery is not considered to have occurred until the customer takes title and assumes the risks and rewards of ownership, which is generally on the date of shipment. Provisions for discounts, sales returns and allowances are estimated using historical experience, current economic trends, and the Company’s quality performance. The related provision is recorded as a reduction of sales and cost of goods sold in the same period that the revenue is recognized. Material differences may result in the amount and timing of net sales for any period if management makes different judgments or uses different estimates.

Revenues and estimated profits on performance contracts, which are cost-type or fixed-fee contracts to sell and install the Company’s flooring products, are recognized under the percentage of completion method of accounting using the cost-to-cost methodology. This method is used because management considers costs incurred to be the best available measure of progress on these contracts. Estimates are made of the costs to complete a contract and revenue is recognized based on the estimated progression to completion. Profit estimates are revised periodically based upon changes in facts. Any losses identified on contracts are recognized immediately.

Shipping and handling fees billed to customers are classified in net sales in the consolidated statements of operations. Shipping and handling costs incurred are classified in cost of sales in the consolidated statements of operations.


39
INTERFACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Research and Development

Research and development costs are expensed as incurred and are included in the selling, general and administrative expense caption in the consolidated statements of operations. Research and development expense was $9.6 million, $8.0 million, and $9.7 million for the years ended 2005, 2004 and 2003, respectively.

Cash, Cash Equivalents and Short-Term Investments

Highly liquid investments with insignificant interest rate risk and with original maturities of three months or less are classified as cash and cash equivalents. Investments with maturities greater than three months and less than one year are classified as short-term investments.

Cash payments for interest amounted to approximately $43.4 million, $42.1 million, and $43.2 million, for the years ended 2005, 2004, and 2003, respectively. Income tax payments amounted to approximately $14.3 million, $9.6 million, and $6.8 million for the years ended 2005, 2004, and 2003, respectively. During the years ended 2005, 2004, and 2003, the Company received income tax refunds of $0.1 million, $0.6 million, and $22.3 million, respectively.

Cash flows from discontinued operations are included in operating cash flows for all years presented, as there were no investing or financing activities related to these discontinued operations.

Inventories

Inventories are valued at lower of cost (standards approximating the first-in, first-out method) or market. Costs included in inventories are based on invoiced costs and/or production costs, as applicable. Included in production costs are material, direct labor and allocated overhead. The Company writes 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.

Management estimates its reserves for inventory obsolescence by continuously examining its inventories to determine if there are indicators that carrying values exceed net realizable values. Experience has shown that significant indicators that could require the need for additional inventory write-downs are the age of the inventory, the length of its product life cycles, anticipated demand for the Company’s products, and current economic conditions. While management believes that adequate write-downs for inventory obsolescence have been made in the consolidated financial statements, consumer tastes and preferences will continue to change and the Company could experience additional inventory write-downs in the future.

Rebates

The Company has agreements to receive cash consideration from certain of its vendors, including rebates and cooperative marketing reimbursements. The amounts received from its vendors are generally presumed to be a reduction of the prices the Company pays for their products and, therefore, such amounts are reflected as either a reduction of cost of sales on the accompanying consolidated statements of operations, or, if the product inventory is still on hand at the reporting date, it is reflected as a reduction of “Inventories” on the accompanying consolidated balance sheets. Vendor rebates are typically dependent upon reaching minimum purchase thresholds. The Company evaluates the likelihood of reaching purchase thresholds using past experience and current year forecasts. When rebates can be reasonably estimated, the Company records a portion of the rebate as the Company makes progress towards the purchase threshold.

When the Company receives direct reimbursements for costs incurred in marketing the vendor’s product or service, the amount received is recorded as an offset to selling, general and administrative expenses on the accompanying consolidated statements of operations.

Assets and Liabilities of Businesses Held for Sale

The Company considers businesses to be held for sale when management approves and commits to a formal plan to actively market a business for sale and the sale is considered probable. Upon designation as held for sale, the carrying value of the assets of the business are recorded at the lower of their carrying value or their estimated fair value, less costs to sell. The Company ceases to record depreciation expense at that time.

40
INTERFACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Property and Equipment and Long-Lived Assets

Property and equipment are carried at cost. Depreciation is computed using the straight-line method over the following estimated useful lives: buildings and improvements -- ten to forty years; and furniture and equipment -- three to twelve years. Interest costs for the construction/development of certain long-term assets are capitalized and amortized over the related assets’ estimated useful lives. The Company capitalized net interest costs of approximately $0.9 million, $0.6 million, and $0.3 million for the fiscal years ended 2005, 2004, and 2003, respectively. Depreciation expense amounted to approximately $27.4 million, $27.7 million, and $29.1 million for the years ended 2005, 2004, and 2003, respectively. These amounts exclude depreciation expense of approximately zero, $2.1 million, and $3.1 million for 2005, 2004 and 2003, respectively, related to the discontinued operations of the Re:Source dealer businesses and U.S. raised/access flooring business.

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected future undiscounted cash flow is less than the carrying amount of the asset, a loss is recognized for the difference between the fair value and carrying value of the asset. Repair and maintenance costs are charged to operating expense as incurred.

Goodwill and Other Intangible Assets

Goodwill is the excess of the purchase price over the fair value of net assets acquired in business combinations accounted for as purchases. Prior to the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 142 “Goodwill and Other Intangible Assets” on December 31, 2001, goodwill was amortized on a straight-line basis over the periods benefited, principally twenty-five to forty years. Accumulated amortization amounted to approximately $77.3 million at both January 1, 2006 and January 2, 2005, and cumulative impairment losses recognized were $86.2 million as of both January 1, 2006 and January 2, 2005.

In June 2001, the Financial Accounting Standards Board (“FASB”) finalized SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS No. 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS No. 141 applies to all business combinations initiated after June 30, 2001, and to purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS No. 142, that the Company reclassify the carrying amounts of intangible assets and goodwill based on the criteria in SFAS No. 141.

The Company’s previous business combinations were accounted for using the purchase method. As of January 1, 2006 and January 2, 2005 the net carrying amount of goodwill was $193.7 million and $205.9 million, respectively. Other intangible assets were $6.7 million and $4.8 million as of January 1, 2006 and January 2, 2005, respectively. Amortization expense during the years ended 2005, 2004 and 2003 was $0.6 million, $0.2 million and $0.2 million, respectively.

During the fourth quarter of 2005 and 2004, the Company performed the annual goodwill impairment test required by SFAS No. 142. In effecting the impairment testing, we used an outside consultant to help prepare valuations of reporting units in accordance with the applicable 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. No additional impairment was indicated. However, an after-tax impairment charge of $29.0 million was recorded in fiscal year 2004 related to our discontinued Re:Source dealer businesses.

41
INTERFACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The changes in the carrying amount of goodwill for the year ended January 1, 2006, by operating segment are as follows:

   
BALANCE
JANUARY 2,
2005
  
ACQUISITIONS
  
FOREIGN CURRENCY TRANSLATION
  
BALANCE
JANUARY 1,
2006
  
               
 (in thousands)
        
Modular Carpet
  
$
95,940
  
$
--
  
$
(12,208
)
$
83,732
  
Bentley Prince Street
    
60,113
    
--
    
--
    
60,113
  
Fabrics Group
    
49,860
    
--
    
--
    
49,860
  
Specialty Products
    
--
    
--
    
--
    
--
  
Total
  
$
205,913
  
$
--
  
$
(12,208
)
$
193,705
  
                           

Product Warranties

The Company typically provides limited warranties with respect to certain attributes of its carpet products (for example, warranties regarding excessive surface wear, edge ravel and static electricity) for periods ranging from ten to fifteen years, depending on the particular carpet product. The Company typically warrants that services performed will be free from defects in workmanship for a period of one year following completion. For fabrics products, the Company typically provides a five year limited warranty against manufacturing defects and nonconformity to specifications. In the event of a breach of warranty, the remedy typically is limited to repair of the problem or replacement of the affected product.

The Company records a provision related to warranty costs based on historical experience and periodically adjusts these provisions to reflect changes in actual experience. Warranty reserves amounted to $2.6 million and $2.4 million as of January 1, 2006 and January 2, 2005, respectively and are included in “Accrued Expenses” in the accompanying consolidated balance sheets.

Taxes on Income

The Company accounts for income taxes under an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. In estimating future tax consequences, the Company generally considers all expected future events other than enactments of changes in tax laws or rates. The effect on deferred tax assets and liabilities of a change in tax rates will be recognized as income or expense in the period that includes the enactment date.

The Company records a valuation allowance to reduce its deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will expire before realization of the benefit or that future deductibility is not probable. The ultimate realization of the deferred tax assets depends on the ability to generate sufficient taxable income of the appropriate character in the future. This requires us to use estimates and make assumptions regarding significant future events such as the taxability of entities operating in the various taxing jurisdictions.

Fair Values of Financial Instruments

Fair values of cash and cash equivalents, short-term investments and short-term debt approximate cost due to the short period of time to maturity. Fair values of debt are based on quoted market prices or pricing models using current market rates.

Translation of Foreign Currencies

The financial position and results of operations of the Company’s foreign subsidiaries are measured generally using local currencies as the functional currency. Assets and liabilities of these subsidiaries are translated into U.S. dollars at the exchange rate in effect at each year-end. Income and expense items are translated at average exchange rates for the year. The resulting translation adjustments are recorded in the foreign currency translation adjustment account. In the event of a divestiture of a foreign subsidiary, the related foreign currency translation results are reversed from equity to income. Foreign currency exchange gains and losses are included in the net income (loss). Foreign exchange translation gains (losses) were $(34.4) million, $23.1 million, and $38.8 million, for the years ended 2005, 2004, and 2003, respectively.

42
INTERFACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Income (Loss) Per Share

Basic income (loss) per share is computed based on the average number of common shares outstanding. Diluted income (loss) per share reflects the increase in average common shares outstanding that would result from the assumed exercise of outstanding stock options, calculated using the treasury stock method.

Stock-Based Compensation

As of the fiscal year ended January 1, 2006, the Company has stock-based employee compensation plans, which are described more fully in the “Shareholders’ Equity” footnote. Those plans are accounted for using the intrinsic value method under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees”, as allowed under the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation.” Compensation expenses related to stock option plans were not material for 2005, 2004 and 2003.
 
The following table illustrates the effect on net income and earnings per share if the fair value recognition provisions of SFAS No. 123 were applied to stock-based employee compensation:

   
FISCAL YEAR ENDED
  
   
   2005
  
2004
  
2003
  
   
(in thousands, except share data)
  
Net income (loss) as reported
  
$
1,240
  
$
(55,402
)
$
(33,257
)
Deduct: Total stock-based employee compensation
expense determined under fair value based method for
all awards, net of related tax effects
   
(526
)
  
(1,499
)
  
(1,307
)
Pro forma net income (loss)
  
$
714
  
$
(56,901
)
$
(34,564
)
                     
Income (loss) per share:
                    
Basic - as reported
  
$
0.02
  
$
(1.09
)
$
(0.66
)
Basic - pro forma
    
0.01
    
(1.12
)
  
(0.69
)
                     
Diluted - as reported
  
$
0.02
  
$
(1.06
)
$
(0.66
)
Diluted - pro forma
    
0.01
    
(1.09
)
  
(0.69
)

For the purposes of the disclosures required by SFAS No. 123, the fair value of stock options is the estimated present value at grant date using the Black-Scholes option pricing model with the following weighted average assumptions for 2005, 2004, and 2003: Dividend yield of 0.0% in 2005, 2004 and 2003; expected volatility of 60% in 2005, 57% in 2004, and 56% in 2003; a risk-free interest rate of 4.22% in 2005, 4.38% in 2004, and 4.02% in 2003; and an expected option life of 2 years in 2005, 2.3 years in 2004, and 5.2 years in 2003.

The weighted average fair values of options, calculated using the Black-Scholes option pricing model, granted during 2005, 2004, and 2003, were $2.21, $2.06, and $1.68, respectively, per share.

Derivative Financial Instruments

The Company adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, effective January 1, 2001. SFAS No. 133 requires a company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a fair value hedge, changes in the fair value of the hedged assets, liabilities or firm commitments are recognized through earnings. If the derivative is a cash flow hedge, the effective portion of changes in the fair value of the derivative are recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value is immediately recognized in earnings.

Reclassifications

Certain prior period amounts have been reclassified to conform to current year financial statement presentation.

43
INTERFACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Fiscal Year

The Company’s fiscal year is the 52 or 53 week period ending on the Sunday nearest December 31. All references herein to “2005” “2004,” and “2003,” mean the fiscal years ended January 1, 2006, January 2, 2005, and December 28, 2003, respectively. Fiscal years 2005, 2004 and 2003 comprised 52, 53, and 52 weeks, respectively.

RECENT ACCOUNTING PRONOUNCEMENTS

In July 2005, the FASB issued a FSP interpreting APB Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock.” Specifically, the FASB issued FSP APB No. 18-1, “Accounting by an Investor for Its Proportionate Share of Accumulated Other Comprehensive Income of an Investee Accounted for under the Equity Method in Accordance with APB Opinion No. 18 upon a Loss of Significant Influence.” This FSP provides that an investor’s proportionate share of an investee’s equity adjustments for “other comprehensive income” should be offset against the carrying value of the investment at the time significant influence is lost. At that time, an investor would reduce its investment account, to no less than zero, with any balance remaining reflected in income. The guidance in this FSP is required to be applied to the first reporting period beginning after July 12, 2005. This FSP did not have a material impact on the Company’s consolidated financial statements.

In June 2005, the FASB issued a FSP interpreting SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” Specifically, the FASB issued FSP FAS No. 150-5, “Issuer’s Accounting under FASB Statement No. 150 for Freestanding Warrants and Other Similar Instruments on Shares That Are Redeemable.” This FSP addresses whether freestanding warrants and other similar instruments on shares that are redeemable (puttable or mandatorily redeemable) are subject to the requirements in SFAS No. 150, regardless of the timing of the redemption feature or the redemption price. The guidance in this FSP is required to be applied to the first reporting period beginning after June 30, 2005. If the guidance in the FSP results in changes to previously reported information, a cumulative effect adjustment would be required. The adoption of this FSP did not have a material impact on the Company’s consolidated financial statements.
 
In June 2005, the FASB issued FSP No. 143-1 (“FSP FAS No. 143-1”), “Accounting for Electronic Equipment Waste Obligations.” FSP FAS No. 143-1 addresses the accounting for obligations associated with the Directive 2002/96/EC on Waste Electrical and Electronic Equipment adopted by the European Union (“EU”). FSP FAS No. 143-1 is effective upon the later of the first reporting period that ends after June 8, 2005, or the date that the EU-member country adopts the law. FSP FAS No. 143-1 did not have a material impact on the Company’s consolidated financial statements.
 
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS No. 154”). SFAS No. 154 changes the requirements for the accounting for and reporting of a change in accounting principle. This Statement applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company adopted SFAS No. 154 on January 2, 2006. The adoption of SFAS No. 154 is not expected to have a material effect on the Company’s results of operations or financial position. 

In March 2005, the FASB issued FASB Interpretation (“FIN”) No. 47, “Accounting for Conditional Asset Retirement Obligations - An Interpretation of FASB Statement No. 143” (“FIN 47”). This Interpretation clarifies the term of conditional asset retirement obligations as used in SFAS No. 143, “Accounting for Asset Retirement Obligations.” FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. The adoption of FIN No. 47 did not have a material impact on the Company’s consolidated financial statements.

In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment.” This statement is a revision to SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” This statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, primarily focusing on the accounting for transactions in which an entity obtains employee services in share-based payment transactions. Companies will be required to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service - the requisite service period (usually the vesting period), in exchange for the award. The grant-date fair value of employee share options and similar instruments will be estimated using option-pricing models. If an equity award is modified after the grant date, incremental compensation cost will be recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification. SFAS No.123R also requires the benefits of excess tax deductions in excess of recognized compensation cost be reported as a financing cash flow rather than as operating cash flow as is currently required. As such, in the periods after adoption, this requirement of SFAS No. 123R will reduce net operating cash flows and increase net financing cash flow. SFAS No. 123R will be effective for fiscal years beginning after June 15, 2005, due to the Securities and Exchange Commission’s Rule 2005-57, which amended the effective date of SFAS No. 123R. Accordingly, the Company adopted SFAS No. 123R on January 2, 2006. The potential impact of adopting SFAS 123R on results of operations and earnings per share for fiscal 2006 is dependent on several factors, including the number of options granted in fiscal 2006, and the fair value of those options which will be determined at the date of grant. The company is in the process of finalizing the impact of this standard on its consolidated financial statements.

44
INTERFACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


In December 2004, the FASB issued FASB Staff Position No. 109-2 (“FSP FAS No. 109-2”), “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004.” FSP FAS No. 109-2 will amend the existing accounting literature that requires companies to record deferred taxes on foreign earnings, unless they intend to indefinitely reinvest those earnings outside the U.S. This pronouncement will temporarily allow companies that are evaluating whether to repatriate foreign earnings under the AJCA to delay recognizing any related taxes until that decision is made. This pronouncement will also require companies that are considering repatriating earnings to disclose the status of their evaluation and the potential amounts being considered for repatriation. The AJCA provides for a special one-time tax deduction of 85 percent of certain foreign earnings that are repatriated. As described below in the footnote entitled “Taxes on Income,” during the year ended January 1, 2006, the Company repatriated $35.9 million of such foreign earnings. Consequently, the Company has recorded a provision for taxes on such foreign earnings of approximately $3.4 million in 2005 related to such repatriation.

The FASB has issued a FSP amending AICPA Statement of Position (“SOP”) No. 78-9, “Accounting for Investments in Real Estate Ventures”. Specifically, the FASB issued FSP SOP No. 78-9-1, “Interaction of AICPA Statement of Position 78-9 and EITF Issue No. 04-5.” The amendment was necessary because the consensus reached in EITF Issue No. 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights,” conflicted with certain guidance in SOP No. 78-9. This FSP eliminates the concept of “important rights” and replaces it with the concepts of “kick-out rights” and “substantive participating rights” as defined in Issue 04-5. The FSP also clarifies that the effect of the rights held by minority partners on the assessment of control, and therefore consolidation, of a general partnership should be the same as the evaluation of limited partners’ rights in a limited partnership. The FSP notes that the consensus reached by the EITF applies to all industries, not just real estate ventures. The guidance in this FSP is effective after June 29, 2005 for general partners of all new partnerships formed and for existing partnerships for which the partnership agreements are modified. The FSP applies to general partners in all other partnerships effective no later than the beginning of the first reporting period in fiscal years beginning after December 15, 2005. The Company does not believe that application of guidance in this FSP will have a material impact on its consolidated financial statements.
 
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of Accounting Research Bulletin No. 43, Chapter 4.” SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not believe adoption of SFAS 151 will have a material effect on its consolidated financial statements.

RECEIVABLES

The Company has adopted credit policies and standards intended to reduce the inherent risk associated with potential increases in its concentration of credit risk due to increasing trade receivables from sales to owners and users of commercial office facilities and with specifiers such as architects, engineers and contracting firms. Management believes that credit risks are further moderated by the diversity of its end customers and geographic sales areas. The Company performs ongoing credit evaluations of its customers’ financial condition and requires collateral as deemed necessary. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. If the financial condition of its customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. As of January 1, 2006 and January 2, 2005, the allowance for bad debts amounted to approximately $6.2 million and $6.1 million, respectively, for all accounts receivable of the Company. Reserves for sales returns and allowances amounted to $2.7 million and $2.8 million as of January 1, 2006 and January 2, 2005, respectively.
 
Balances billed but not paid by the customers under retainage provisions in the Company’s performance contracts related to the discontinued operations of the Re:Source dealer businesses amounted to $0.6 million and $4.0  million as of the years ended January 1, 2006 and January 2, 2005, respectively, and generally are paid within one year. Amounts representing the recognized sales value of performance contracts, which were not billed or billable, were $2.0 million and $2.8 million as of January 1, 2006 and January 2, 2005, respectively. These amounts exclude sales value of $0.7 million and $5.9 million as of January 1, 2006 and January 2, 2005, respectively, related to the discontinued operations of the Re:Source dealer businesses. Billings are made periodically, usually weekly or monthly, and are based on terms defined in the contracts that govern the related arrangement and are usually determined based on the extent of progress of the related job.

45
INTERFACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



The Company previously, through a wholly owned subsidiary, Interface Securitization Corporation (“ISC”), had in place an accounts receivable securitization program that provided funding from the sale of trade accounts receivable generated by certain of its operating subsidiaries. During 2003 the Company received $41.2 million from ISC. During the same time period the Company transferred $71.2 million to ISC. The amendment and restatement of the Company’s revolving credit facility in June 2003 replaced and superseded its 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 the Company’s balance sheet. Accordingly, no funds were transferred between the Company and ISC in 2004 or 2005.

INVENTORIES

Inventories are summarized as follows:
 
   
2005
  
 2004  
  
   
(in thousands)
  
Finished goods
  
$
71,893
  
$
81,962
  
Work-in-process
    
16,792
    
14,022
  
Raw materials
    
41,524
    
41,634
  
               
   
$
130,209
  
$
137,618
  
               

Reserves for inventory obsolescence amounted to $12.0 million and $10.5 million as of January 1, 2006 and January 2, 2005, respectively, and have been netted against amounts presented above.

PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:
     
2005 
    
2004 
  
   
(in thousands)
  
Land
  
$
7,111
  
$
7,392
  
Buildings
    
117,810
    
117,827
  
Equipment
    
403,269
    
406,615
  
               
     
528,190
    
531,834
  
Accumulated depreciation
    
(342,547
)
  
(337,132
)
               
   
$
185,643
  
$
194,702
  
 
 
 The estimated cost to complete construction-in-progress for which the Company was committed at January 1, 2006 was approximately $10.5 million.


46
INTERFACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ACCRUED EXPENSES

Accrued expenses are summarized as follows:

   
2005  
  
2004  
  
   
       (in thousands)
  
Compensation
  
$
34,864
  
$
28,920
  
Interest
    
16,732
    
16,331
  
Restructuring
    
271
    
2,863
  
Taxes
    
13,356
    
19,310
  
Other
    
20,358
    
19,432
  
               
   
$
85,581
  
$
86,856
  

Other non-current liabilities include minimum pension liability of $27.8 million and $33.8 million as of January 1, 2006 and January 2, 2005, respectively (see the discussion in the below footnote entitled “Employee Benefit Plans”).

BORROWINGS

Revolving Credit Facility

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, reduced the maximum borrowing amount to $100 million and increased pricing on borrowings in certain circumstances. In connection with the amendment and restatement of the facility, the Company issued the 10.375% Senior Notes discussed below.

In December 2002, the Company further amended its 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, the Company again amended and restated its revolving credit facility. Under the amended and restated facility, the maximum aggregate amount of loans and letters of credit available at any one time remains $100 million. Key features of the revolving credit facility include the following:

 
·
The amended and restated facility (the “Facility”) matures on 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 United States (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. (a foreign subsidiary of the Company based in the UK) 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 have guaranteed 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., in an amount up to the lesser of (i) the 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 U.K. borrowing base are specified in the credit facility) less certain reserves. Any advances under the multicurrency loan facility will reduce the lending commitment available under the domestic loan facility on a dollar-equivalent basis.

47
INTERFACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


 
·
Advances to Interface Europe, Ltd. under the Multicurrency Loan 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 the Company’s excess availability for domestic loans falls below $20 million (excluding a specified reserve against the domestic borrowing base). In such event, the Company 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.

Interest on borrowings and letters of credit under the Facility is charged at varying rates computed by applying a margin (ranging from 0.0-3.5%) over a baseline rate (such as the prime interest rate or LIBOR), depending on the type of borrowing and the Company’s fixed charge coverage ratio. In addition, the Company pays an unused line fee on the facility ranging from 0.375-1.0%, depending on the Company’s fixed charge coverage ratio. The Company is currently in compliance under the revolving credit facility and anticipates that it will remain in compliance with the covenants.

The June 2003 amendment and restatement, among other things, eased the applicability of financial covenants, secured advances to Interface Europe, Ltd., reduced the size of the Multicurrency Loan Facility, substituted certain lenders, and increased pricing on borrowings in certain circumstances. Prior to the amendment and restatement of its revolving credit facility in June 2003, the Company was not in compliance with certain covenants contained in its previous facility, and the Company obtained waivers from its lenders at that time.

On March 30, 2004, the Company further amended the Facility. The amendment provided that, for purposes of calculating a specified fixed charge coverage ratio, any interest payments on the Company’s 7.3% senior notes that are due and payable on April 1 or October 1 of a given fiscal year shall, when paid, be deemed to have been paid in the second fiscal quarter and the fourth fiscal quarter, respectively, of such fiscal year.

On December 29, 2004, the Company again amended the Facility. The December 2004 amendment, among other things, decreased fees and pricing on borrowings in certain circumstances, increased the domestic letters of credit subcommitment for a specified time period, increased the dollar amount threshold for a money judgment that may constitute an event of default, and waived various pledge and security requirements otherwise applicable to certain assets of the Company’s subsidiaries.

On September 30, 2005 the Company again amended the Facility to allow certain foreign subsidiaries to incur a limited amount of indebtedness and liens against property without using the general “catch-all” baskets contained in such covenants.

On February 21, 2006, the Company again amended the Facility. This amendment modified the definition of “Financial Covenant Effective Date” to remove language that caused certain financial covenants to become effective in the event excess availability for U.K. loans falls below $3 million.

As of January 1, 2006, the Company had no borrowings outstanding under the domestic portion of its facility, $5.1 million outstanding borrowings under its Multicurrency Loan Facility, which was reported in current liabilities in the accompanying consolidated financial statements, and $15.2 million outstanding in letters of credit. As of January 1, 2006 the Company could have incurred $79.8 million of additional borrowings under the Facility.

9.5% Senior Subordinated Notes

On February 4, 2004, the Company completed a private offering of $135 million in 9.5% Senior Subordinated Notes due 2014. Interest on these Notes is payable semi-annually on February 1 and August 1 beginning August 1, 2004. Proceeds from the issuance of these Notes were used to redeem in full the Company’s previously outstanding 9.5% Senior Subordinated Notes due 2005 and to reduce borrowings under the Company’s revolving credit facility.

48
INTERFACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

These notes are guaranteed, jointly and severally, on an unsecured senior subordinated basis by certain of the Company’s domestic subsidiaries. Prior to February 1, 2007, the Company may redeem up to 35% of the original aggregate principal amount of the notes at a redemption price equal to 109.5% of their principal amount, plus accrued interest, with the cash proceeds from certain kinds of equity offerings. In addition, the notes will become redeemable for cash after February 1, 2009 at the Company’s option, in whole or in part, initially at a redemption price equal to 104.75% of the principal amount, declining to 100% of the principal amount on February 1, 2012, plus accrued interest thereon to the date fixed for redemption. As of both January 1, 2006 and January 2, 2005, the Company had outstanding $135 million of 9.5% Senior Subordinated Notes due 2014. At January 1, 2006 and January 2, 2005, the estimated fair value these notes, based on then current market prices, was approximately $133.7 million and $147.5 million, respectively.

10.375% Senior Notes

On January 17, 2002, the Company 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 beginning 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. As of both January 1, 2006 and January 2, 2005, the Company had outstanding $175 million in 10.375% Senior Notes. At January 1, 2006 and January 2, 2005, the estimated fair value of these notes based on then current market prices was approximately $189.0 million and $201.3 million, respectively.

7.3% Senior Notes

As of January 1, 2006 and January 2, 2005, the Company had outstanding $148 million and $150 million in 7.3% Senior Notes due 2008, respectively. Interest is payable semi-annually on April 1 and October 1 beginning on October 1, 1998.

The notes are unsecured and are guaranteed, jointly and severally, by certain of the Company’s domestic subsidiaries. The notes are redeemable, in whole or in part, at the option of the Company, at any time or from time to time, at a redemption price equal to the greater of (i) 100% of the principal amount of the notes to be redeemed or (ii) the sum of the present value of the remaining scheduled payments, discounted on a semi-annual basis at the treasury rate plus 50 basis points, plus, in the case of each of (i) and (ii) above, accrued interest to the date of redemption. At January 1, 2006 and January 2, 2005, the estimated fair value of these notes based on then current market prices was approximately $ 151.5 million and $153.4 million, respectively.

Lines of Credit

Subsidiaries of the Company have an aggregate of $15.6 million of lines of credit available at interest rates ranging from 1.0% to 7.5%. As of January 1, 2006 and January 2, 2005, $1.5 million and zero, respectively, was outstanding under the lines of credit.

Borrowing Costs

Borrowing costs, which include underwriting, legal and other direct costs related to the issuance of debt, were $7.7 million and $10.0 million as of January 1, 2006 and January 2, 2005, respectively. The Company amortizes these costs over the life of the related debt; expense related to such costs for the years ended 2005, 2004, and 2003 amounted to $2.3 million, $3.6 million, and $2.4 million, respectively.

49
INTERFACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Future Maturities

The aggregate maturities of borrowings for each of the five years subsequent to January 1, 2006, are as follows:

FISCAL YEAR
  
AMOUNT
  
   
(in thousands)
  
2006  
 
$
6,513
  
2007  
   
--
  
2008  
   
148,000
  
2009  
   
--
  
2010
    
175,000
  
  Thereafter  
   
135,000
  
   
$
464,513
  

ENVIRONMENTAL MATTERS

During May 2000, the Company acquired certain assets and assumed certain liabilities of the Chatham Manufacturing division of CMI Industries, Inc. (“Chatham”). As part of the acquisition, the Company engaged environmental consultants to review potential environmental liabilities at all Chatham properties. Based on their review, the environmental consultants recommended certain environmental remedial actions, including groundwater monitoring, and estimated the costs thereof. The Company is currently taking steps to implement the recommended actions at Chatham.

There have been developments which have substantially reduced the estimated cost of environmental remediation associated with Chatham. In July 2002, North Carolina Department of Natural Resources (“NCDENR”) determined that the current owner of the wastewater treatment plant property was the responsible party for the groundwater contamination at that property. NCDENR subsequently entered into an agreement with CMI Industries, Inc. for the remediation of the property, including the establishment of an escrow account with the approximately $1.3 million estimated to complete the remediation.

As a contingency, the Company has submitted an application to NCDENR for a “brownfield” remediation of the property. NCDENR has indicated that the successful completion of the remedial activities by CMI Industries, Inc. should be adequate to cover any “brownfield” remediation for the property. However, Interface’s environmental consultant has estimated that should Interface take the actions necessary for the “brownfield” remediation absent the CMI Industries, Inc. remediation, it would cost approximately $0.9 million.

As a result, and based upon the cost estimates provided by the environmental consultants, the Company now believes that the estimated range of the net present value of reasonably predictable costs of groundwater monitoring and other remedial actions at Chatham and the wastewater treatment facility is between $4.0 million and $5.0 million. As of December 30, 2001, the Company had accrued approximately $9.0 million, which at that time represented the best estimate available of the net present value of the costs of remedial actions discounted at 6%. In light of the developments described above and continued remediation efforts, the accrual has been reduced to $2.0 million and $2.1 million as of Januray 1, 2006 and January 2, 2005, respectively. The reductions of the accrual recorded in 2004 were reductions of “other expense” in the Statement of Operations for the year ended January 2, 2005, as there was no goodwill associated with the Chatham acquisition.

Actual costs related to groundwater monitoring and other remedial actions at Chatham incurred during 2005, 2004 and 2003 were approximately $0.1 million, $0.1 million, and $0.1 million, respectively, with an aggregate amount of $2.4 million since the acquisition. Actual costs incurred will depend upon numerous factors, including (i) the actual method and results of the remedial actions; (ii) the outcome of negotiations with regulatory authorities and other interested parties; (iii) changes in environmental laws and regulations; (iv) technological developments and advancements; and (v) the years of remedial activity required. Based on the information currently available, the Company does not expect that any unrecorded liability related to the above matters would materially affect the consolidated financial position or results of operations of the Company. Environmental accruals are routinely reviewed as events and developments warrant and are subjected to a comprehensive annual review.

PREFERRED STOCK

The Company is authorized to designate and issue up to 5,000,000 shares of $1.00 par value Preferred Stock in one or more series and to determine the rights and preferences of each series, to the extent permitted by the Articles of Incorporation, and to fix the terms of such preferred stock without any vote or action by the shareholders. The issuance of any series of preferred stock may have an adverse effect on the rights of holders of common stock and could decrease the amount of earnings and assets available for distribution to holders of common stock. As of January 1, 2006 and January 2, 2005 there were no shares of preferred stock issued.

50
INTERFACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


In addition, any issuance of preferred stock could have the effect of delaying, deferring or preventing a change in control of the Company.

Preferred Share Purchase Rights

The Company has previously issued one purchase right (a “Right”) in respect of each outstanding share of Common Stock. Each Right entitles the registered holder of the Common Stock to purchase from the Company one two-hundredth of a share (a “Unit”) of Series B Participating Cumulative Preferred Stock (the “Series B Preferred Stock”).

The Rights may have certain anti-takeover effects. The Rights will cause substantial dilution to a person or group that acquires (without the consent of the Company’s Board of Directors) more than 15% of the outstanding shares of Common Stock or if other specified events occur without the Rights having been redeemed or in the event of an exchange of the Rights for Common Stock as permitted under the Shareholder Rights Plan.

The dividend and liquidation rights of the Series B Preferred Stock are designed so that the value of one one-hundredth of a share of Series B Preferred Stock issuable upon exercise of each Right will approximate the same economic value as one share of Common Stock, including voting rights. The exercise price per Right is $90, subject to adjustment. Shares of Series B Preferred Stock will entitle the holder to a minimum preferential dividend of $1.00 per share, but will entitle the holder to an aggregate dividend payment of 200 times the dividend declared on each share of Common Stock. In the event of liquidation, each share of Series B Preferred Stock will be entitled to a minimum preferential liquidation payment of $1.00, plus accrued and unpaid dividends and distributions thereon, but will be entitled to an aggregate payment of 200 times the payment made per share of Common Stock. In the event of any merger, consolidation or other transaction in which Common Stock is exchanged for or changed into other stock or securities, cash or other property, each share of Series B Preferred Stock will be entitled to receive 200 times the amount received per share of Common Stock. Series B Preferred Stock is not convertible into Common Stock.

Each share of Series B Preferred Stock will be entitled to 200 votes on all matters submitted to a vote of the shareholders of the Company, and shares of Series B Preferred Stock will generally vote together as one class with the Common Stock and any other voting capital stock of the Company on all matters submitted to a vote of the Company’s shareholders. While the Company’s Class B Common Stock remains outstanding, holders of Series B Preferred Stock will vote as a single class with the Class A Common Stockholders for election of directors.

Further, whenever dividends on the Series B Preferred Stock are in arrears in an amount equal to six quarterly payments, the Series B Preferred Stock, together with any other shares of preferred stock then entitled to elect directors, shall have the right, as a single class, to elect one director until the default has been cured. The Rights expire on March 15, 2008 unless extended or unless the Rights are earlier redeemed or exchanged by the Company.

SHAREHOLDERS’ EQUITY

Common Stock

The Company is authorized to issue 80 million shares of $0.10 par value Class A Common Stock and 40 million shares of $0.10 par value Class B Common Stock. Class A and Class B Common Stock have identical voting rights except for the election or removal of directors. Holders of Class B Common Stock are entitled as a class to elect a majority of the Board of Directors. Under the terms of the Class B Common Stock, its special voting rights to elect a majority of the Board members would terminate irrevocably if the total outstanding shares of Class B Common Stock ever comprises less than ten percent of the Company’s total issued and outstanding shares of Class A and Class B Common Stock. On January 1, 2006, the outstanding Class B shares constituted approximately 13.2% of the total outstanding shares of Class A and Class B Common Stock. The Company’s Class A Common Stock is traded in the over-the-counter market under the symbol IFSIA and is quoted on Nasdaq. The Company’s Class B Common Stock is not publicly traded. Class B Common Stock is convertible into Class A Common Stock on a one-for-one basis. Both classes of Common Stock share in dividends available to common shareholders. There were no dividends paid in 2005, 2004 and 2003.

The declaration and payment of dividends is at the discretion of the Company’s Board, and depends upon, among other things, the Company’s investment policy and opportunities, results of operations, financial condition, cash requirements, future prospects, and other factors that may be considered relevant by its Board at the time of the Board’s determination. Such other factors include limitations contained in the agreement for its primary revolving credit facility, which restrict the payment of cash dividends on its Common Stock unless the Company meets a financial performance test, and in the indentures for its public indebtedness, which specify conditions as to when any dividend payments may be made. The Company has not paid a dividend since 2002, but may resume its dividend payments in the future if its Board determines that a resumption of dividend payments is proper in light of the factors indicated above.

51
INTERFACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


All treasury stock is accounted for using the cost method.

The following tables show changes in common shareholders’ equity.
 
     
CLASS A
SHARES
    
CLASS A
AMOUNT
    
CLASS B
SHARES
    
CLASS B
AMOUNT
    
ADDITIONAL
PAID-IN
CAPITAL
    
RETAINED EARNINGS
    
MINIMUM
PENSION
LIABILITY
    
FOREIGN
CURRENCY
TRANSLATION
ADJUSTMENT
    
UNREALIZED
GAIN ON
FAIR VALUE
HEDGES
  
     
(in thousands) 
  
                                                         
Balance, at
December 29, 2002
    
43,721
  
$
4,372
    
7,477
  
$
748
  
$
221,751
  
$
85,976
  
$
(25,953
)
$
(65,877
)
$
3,154
  
Net loss
    
--
    
--
    
--
    
--
    
--
    
(33,257
)
  
--
    
--
    
--
  
Conversion of
common stock
    
199
    
20
    
(199
)
  
(20
)
  
--
    
--
    
--
    
--
    
--
  
Stock issuances
under employee
plans
    
55
    
6
    
--
    
--
    
235
    
--
    
--
    
--
    
--
  
Other issuances
of common stock
    
--
    
--
    
180
    
18
    
470
    
--
    
--
    
--
    
--
  
Unamortized stock
compensation
expense related
to restricted stock
awards
    
--
    
--
    
--
    
--
    
(488
)
  
--
    
--
    
--
    
--
  
Forfeitures and
compensation
expense related
to restricted stock
awards
    
85
    
8
    
(167
)
  
(17
)
  
1,016
    
--
    
--
    
--
    
--
  
Minimum pension
liability adjustment
    
--
    
--
    
--
    
--
    
--
    
--
    
(9,104
)
  
--
    
--
  
Foreign currency
translation
adjustment
    
--
    
--
    
--
    
--
    
--
    
--
    
--
    
38,829
    
--
  
Unrealized gain on
Hedges
    
--
    
--
    
--
    
--
    
--
    
--
    
--
    
--
    
(3,154
)
                                                         
Balance, at
December 28, 2003
    
44,060
  
$
4,406
    
7,291
  
$
729
  
$
222,984
  
$
52,719
  
$
(35,057
)
$
(27,048
)
$
--
  
                                                         


52
INTERFACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
 
     
CLASS A
SHARES
    
CLASS A
AMOUNT
    
CLASS B
SHARES
    
CLASS B
AMOUNT
    
ADDITIONAL
PAID-IN
CAPITAL
    
RETAINED
EARNINGS
(DEFICIT)
    
MINIMUM
PENSION
LIABILITY
    
FOREIGN
CURRENCY
TRANSLATION
ADJUSTMENT
  
                                                   
Balance, at
December 28, 2003
    
44,060
  
$
4,406
    
7,291
  
$
729
  
$
222,984
  
$
52,719
  
$
(35,057
)
$
(27,048
)
Net loss
    
--
    
--
    
--
    
--
    
--
    
(55,402
)
  
--
    
--
  
Conversion of
common stock
    
588
    
58
    
(588
)
  
(58
)
  
--
    
--
    
--
    
--
  
Stock issuances
under employee
plans
    
862
    
86
    
--
    
--
    
4,356
    
--
    
--
    
--
  
Other issuances
of common stock
    
--
    
--
    
207
    
22
    
1,123
    
--
    
--
    
--
  
Unamortized stock
compensation
expense related
to restricted stock
awards
    
--
    
--
    
--
    
--
    
(1,144
)
  
--
    
--
    
--
  
Forfeitures and
compensation
expense related
to restricted stock
awards
    
--
    
--
    
--
    
--
    
1,426
    
--
    
--
    
--
  
Tax benefit from
exercise of stock
options
    
--
    
--
    
--
    
--
    
487
    
--
    
--
    
--
  
Tax benefit from
vesting of restricted
stock
    
--
    
--
    
--
    
--
    
150
    
--
    
--
    
--
  
Minimum pension
liability adjustment
    
--
    
--
    
--
    
--
    
--
    
--
    
1,289
    
--
  
Foreign currency
translation
adjustment
    
--
    
--
    
--
    
--
    
--
    
--
    
--
    
23,052
  
Balance, at
January 2, 2005
    
45,510
  
$
4,550
    
6,910
  
$
693
  
$
229,382
  
$
(2,683
)
$
(33,768
)
$
(3,996
)
                                                   
                                                   


53
INTERFACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


 
     
CLASS A
SHARES
    
CLASS A
AMOUNT
    
CLASS B
SHARES
    
CLASS B
AMOUNT
    
ADDITIONAL
PAID-IN
CAPITAL
    
RETAINED
EARNINGS
(DEFICIT)
    
MINIMUM
PENSION
LIABILITY
    
FOREIGN
CURRENCY
TRANSLATION
ADJUSTMENT
  
                                                   
Balance, at
January 2, 2005
    
45,510
  
$
4,550
    
6,910
  
$
693
  
$
229,382
  
$
(2,683
)
$
(33,768
)
$
(3,996
)
Net income (loss)
    
--
    
--
    
--
    
--
    
--
    
1,240
    
--
    
--
  
Conversion of
common stock
    
280
    
28
    
(280
)
  
(28
)
  
--
    
--
    
--
    
--
  
Stock issuances
under employee
plans
    
541
    
53
    
--
    
--
    
2,903
    
--
    
--
    
--
  
Other issuances
of common stock
    
--
    
--
    
386
    
38
    
3,078
    
--
    
--
    
--
  
Unamortized stock
compensation
expense related
to restricted stock
awards
    
--
    
--
    
--
    
--
    
(3,114
)
  
--
    
--
    
--
  
Forfeitures and
compensation
expense related
to restricted stock
awards
    
--
    
--
    
--
    
--
    
1,747
    
--
    
--
    
--
  
Tax benefit from
exercise of stock
options
    
--
    
--
    
--
    
--
    
304
    
--
    
--
    
--
  
Tax benefit from
vesting of restricted
stock
    
--
    
--
    
--
    
--
    
14
    
--
    
--
    
--
  
Minimum pension
liability adjustment
    
--
    
--
    
--
    
--
    
--
    
--
    
5,986
    
--
  
Foreign currency
translation
adjustment
    
--
    
--
    
--
    
--
    
--
    
--
    
--
    
(34,351
)
Balance, at
January 1, 2006
    
46,331
  
$
4,631
    
7,016
  
$
703
  
$
234,314
  
$
(1,443
)
$
(27,782
)
$
(38,347
)
                                                   

Stock Options

The Company has an Omnibus Stock Incentive Plan (“Omnibus Plan”) under which a committee of independent directors is authorized to grant directors and key employees, including officers, options to purchase the Company’s Common Stock. Options are exercisable for shares of Class A or Class B Common Stock at a price not less than 100% of the fair market value on the date of grant. The options become exercisable either immediately upon the grant date or ratably over a time period ranging from one to five years from the date of the grant. The Company’s options expire at the end of time periods ranging from three to ten years from the date of the grant. Initially, an aggregate of 3,600,000 shares of Common Stock not previously authorized for issuance under any plan, plus the number of shares subject to outstanding stock options granted under certain predecessor plans minus the number of shares issued on or after the effective date pursuant to the exercise of such outstanding stock options granted under predecessor plans, were available to be issued under the Omnibus Plan. In May 2001, the shareholders approved an amendment to the Omnibus Plan which increased by 2,000,000 the number of shares of Common Stock authorized for issuance under the Omnibus Plan.


54
INTERFACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following tables summarize stock option activity under the Omnibus Plan and predecessor plans:

   
WEIGHTED AVERAGE
  
WEIGHTED AVERAGE
  
   
NUMBER OF SHARES
  
EXERCISE PRICE
  
Outstanding at December 29, 2002
    
4,160,000         
 
 
$ 6.25
    
Granted
    
684,000         
   
2.90
    
Exercised
    
(55,000)        
 
  
4.38
    
Forfeited or canceled
    
(338,000)        
 
  
6.88
    
               
Outstanding at December 28, 2003
    
4,451,000         
 
 
$ 5.71
    
Granted
    
563,000         
   
5.79
    
Exercised
    
(862,000)        
 
  
5.15
    
Forfeited or canceled
    
(636,000)        
 
  
6.40
    
               
Outstanding at January 2, 2005
    
3,516,000         
 
 
$ 5.73
    
Granted
    
35,000         
   
6.26
    
Exercised
    
(538,000)        
 
  
5.48
    
Forfeited or canceled
    
(88,000)        
 
  
5.14
    
               
Outstanding at January 1, 2006
    
2,925,000         
 
 
$ 5.81
  
               

As of January 1, 2006, the number of shares authorized for issuance under the Omnibus Plan that were not the subject of then-outstanding option grants was 807,100.

Additional information relating to the Company’s existing employee stock options is as follows:

OPTIONS EXERCISABLE
NUMBER OF SHARES
WEIGHTED AVERAGE
EXERCISE PRICE
     
January 1, 2006
2,408,000
$6.07
January 2, 2005
2,529,000
$6.12
December 28, 2003
2,615,000
$6.33

   
Options Outstanding
  
Options Exercisable
  
Range of Exercise Prices
  
Number
Outstanding at
January 1, 2006
  
Weighted Average
Remaining
Contractual Life
(years)
  
Weighted
Average
Exercise Price
  
Number
Exercisable
at January 1,
2006
  
Weighted
Average
Exercise Price
  
$ 2.64-3.92
    
432,000
  
 6.00
  
 
$2.86
    
210,000
  
 
$2.97
  
   4.00-6.00
    
1,470,000
  
 4.50
    
  5.01
    
1,256,000
    
  4.97
  
   6.02-9.00
   
830,000
  
 4.25
    
  7.79
    
749,000
    
  7.80
  
   9.31-19.13
   
193,000
  
 1.20
    
  9.86
    
193,000
    
  9.86
  
                                 
 
    
2,925,000
  
 4.43
  
 
$5.81
    
2,408,000
  
 
$6.07
  
     
Restricted Stock Awards

During fiscal years 2005, 2004, and 2003 restricted stock awards were granted for 386,000, 207,000, and 180,000 shares, respectively, of Class B Common Stock. These shares vest with respect to each employee over a five-year period from the date of grant for 2004 and 2005 awards, over a seven-year period from the date of grant for the 2002 and 2003 awards, and over a nine-year period from the date of grant for awards prior to 2002, provided the individual remains in the employment of the Company as of the vesting date. Additionally, these shares (or a portion thereof) could vest earlier upon the attainment of certain performance criteria, in the event of a change in control of the Company, or upon involuntary termination without “cause.” Compensation expense relating to these grants was approximately $1.7 million $1.4 million and $1.0 million during 2005, 2004, and 2003, respectively. During 2005, 2004 and 2003, shares were issued and, as a result, unamortized stock compensation for the value of the awards was recorded as a reduction to additional paid-in capital. As a result of the Company meeting certain share performance criteria, 13,500, 129,260, and zero shares vested in 2005, 2004, and 2003, respectively. At January 1, 2006 and January 2, 2005, restricted stock awards for 1,471,221 and 1,098,486 shares of Class B Common Stock remained outstanding, respectively.

55
INTERFACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

For the years ended January 1, 2006, January 2, 2005 and December 28, 2003, forfeitures of restricted stock were 9,000, zero, and 82,000 shares, respectively.

INCOME (LOSS) PER SHARE

Basic income (loss) per share is computed by dividing net income (loss) to common shareholders by the weighted average number of shares of Class A and Class B Common Stock outstanding during each year. Shares issued or reacquired during the year have been weighted for the portion of the year that they were outstanding. Diluted income (loss) per share is calculated in a manner consistent with that of basic income (loss) per share while giving effect to all potentially dilutive common shares that were outstanding during the year.

Basic income (loss) per share has been computed based upon 51,551,000, 50,682,000, and 50,282,000, weighted average shares outstanding for the years 2005, 2004, and 2003, respectively. Diluted income (loss) per share has been computed based upon 52,895,000, 52,171,000, and 50,282,000 shares outstanding for the years 2005, 2004, and 2003, respectively. For 2003, potentially dilutive securities (consisting of options and restricted stock awards) were not considered in the calculation of diluted loss per share, as their impact would be antidilutive.

   
FISCAL YEAR ENDED
  
   
2005
  
2004
  
2003
  
   
(in thousands, except per share data)
  
Basic and diluted income (loss) available to shareholders (numerator):
                    
Income (loss) from continuing operations
  
$
17,966
  
$
6,440
  
$
(8,012
)
Loss from discontinued operations
    
(14,791
)
  
(58,815
)
  
(16,420
)
Loss on disposal of discontinued operations
    
(1,935
)
  
(3,027
)
  
(8,825
)
                     
Net Income (loss)
  
$
1,240
  
$
(55,402
)
$
(33,257
)
                     
Shares (denominator):
                    
Weighted average shares outstanding
    
51,551
    
50,682
    
50,282
  
Dilutive securities:
                    
Options and awards
    
1,344
    
1,489
    
--
  
 
                    
Total assuming conversion
    
52,895
    
52,171
    
50,282
  
 
                    
Income (loss) per share - basic:
                    
Income (loss) from continuing operations
  
$
0.35
  
$
0.13
  
$
(0.16
)
Loss from discontinued operations
    
(0.29
)
  
(1.16
)
  
(0.32
)
Loss on sale of discontinued operations
    
(0.04
)
  
(0.06
)
  
(0.18
)
 
                    
Net Income (loss)
  
$
0.02
  
$
(1.09
)
$
(0.66
)
 
                    
Income (loss) per share - diluted:
                    
Income (loss) from continuing operations
  
$
0.34
  
$
0.12
  
$
(0.16
)
Loss from discontinued operations
    
(0.28
)
  
(1.12
)
  
(0.32
)
Loss on sale of discontinued operations
    
(0.04
)
  
(0.06
)
  
(0.18
)
Cumulative effect of accounting change
    
--
    
--
    
--
  
 
                    
Net Income (loss)
  
$
0.02
  
$
(1.06
)
$
(0.66
)


56
INTERFACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

RESTRUCTURING CHARGES

2002 Restructuring

During 2002, the Company recorded a pre-tax restructuring charge of $22.5 million. The charge reflected: (i) the consolidation of three fabrics manufacturing facilities; (ii) a worldwide workforce reduction of approximately 206 employees; and (iii) the consolidation of certain European facilities. The Company also incurred additional pre-tax charges of $6.2 million during 2003 to complete the 2002 restructuring initiatives, consisting primarily of cash expenditures for further staff reductions and facilities consolidation costs.

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

United States

Sluggish economic conditions caused a decline in demand for fabrics, floorcovering and related services. In order to better match the Company’s cost structure to the expected revenue base, the Company consolidated three fabrics manufacturing plants, closed vacated facilities and made other head-count reductions. 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, the Company recorded approximately $1.7 million of termination benefits associated with the facility closures and other head-count reductions. The Company incurred additional pre-tax charges of $6.2 million during 2003 to complete the 2002 restructuring initiatives in the United States, consisting primarily of cash expenditures for further staff reductions and facilities consolidation costs. There were no restructuring charges in 2005 or 2004.

During 2003, the Company revised its estimates related to the impairment charges incurred on certain facilities in the United States. Additionally, the Company identified additional severance and other costs related to the restructuring of its Fabrics Group segment and has reallocated its reserves to reflect its change in estimates. Such changes have been reflected in the tables presented below.

Europe/Australia

The soft global economy during 2002 led management to conclude that further right-sizing of the European and Australian operations was necessary. As a result, the Company elected to consolidate certain production and administrative facilities throughout Europe and Australia. During 2002, a charge of approximately $4.6 million was recorded 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 in 2002 associated with the facility closures.

A summary of the restructuring activities 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
  
Discontinued Re:Source dealer businesses
    
(973
)
  
-- 
   
--     
   
(973
)
                           
   
 
$13,886
  
 
$ 8,177 
 
 
$ 413     
 
 
$ 22,476
  


The restructuring charge recorded in 2002 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 carrying value and disposal of certain assets.
 

 
57
INTERFACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
The termination benefits of $5.7 million recorded in 2002, primarily related to severance costs, were a result of aggregate reductions of approximately 206 employees. The staff reductions as originally planned were expected to be as follows:
 
   
U.S.
  
EUROPE
  
AUSTRALIA
  
TOTAL
  
Manufacturing
    
99
    
10
    
  1
    
110
  
Selling and administrative
    
58
    
28
    
10
    
  96
  
                           
     
157
    
38
    
11
    
206
  
 
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 fiscal year ended December 28, 2003.

The following table displays the activity within the accrued restructuring liability for the period ended January 1, 2006:

   Termination Benefits
 
   
U.S.
  
EUROPE
  
AUSTRALIA
  
TOTAL
  
       
(in thousands)
      
Balance, at December 28, 2003
  
$
1,698
  
$
--
  
$
--
  
$
1,698
  
Cash payments
    
(1,698
)
  
--
    
--
    
(1,698
)
                           
Balance, at January 2, 2005 and
January 1, 2006
 
$
--
  
$
--
  
$
--
  
$
--
  
 
Other Costs To Exit Activities
 
   
U.S.
  
EUROPE
  
AUSTRALIA
  
TOTAL
  
Balance, at December 28, 2003
  
$
1,059
  
$
2,926
  
$
--
  
$
3,985
  
Costs incurred
    
(312
)
  
(810
)
  
--
    
(1,122
)
                           
Balance, at January 2, 2005
    
747
    
2,116
    
--
    
2,863
  
Costs incurred
    
(615
)
  
(1,977
)
  
--
    
(2,592
)
Balance at January 1, 2006
  
$
132
  
$
139
  
$
--
  
$
271
  

TAXES ON INCOME

Provisions for federal, foreign, and state income taxes in the consolidated statements of operations consisted of the following components:
 
   
FISCAL YEAR ENDED
  
   
2005
  
2004
  
2003
  
   
(IN THOUSANDS)
  
Current expense/(benefit):
                    
Federal
  
$
2,079
  
$
--
  
$
(2,431
)
Foreign
    
13,081
    
9,032
    
(2,113
)
State
    
706
    
134
    
131
  
                     
     
15,866
    
9,166
    
(4,413
)
Deferred expense/(benefit):
                    
Federal
    
(10,972
)
  
(16,147
)
  
(18,535
)
Foreign
    
4,225
    
1,833
    
9,370
  
State
    
575
    
6,519
    
(4,355
)
                     
     
(6,172
)
  
(7,795
)
  
(13,520
)
                     
   
$
9,694
  
$
1,371
  
$
(17,933
)
 

58
INTERFACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Income tax expense (benefit) is included in the accompanying consolidated statement of operations as follows:
 
   
FISCAL YEAR ENDED
  
   
2005
  
2004
  
2003
  
   
(IN THOUSANDS)
  
                     
Continuing operations
  
$
17,561
  
$
4,044
  
$
(4,600
)
Loss from discontinued
operations
    
(7,925
)
  
(4,373
)
  
(8,719
)
Loss on disposal of
discontinued operations
    
58
    
1,700
    
(4,614
)
                     
   
$
9,694
  
$
1,371
  
$
(17,933
)
 
Income (loss) from continuing operations before taxes on income consisted of the following:

   
FISCAL YEAR ENDED
  
   
2005
  
2004
  
2003
  
   
(IN THOUSANDS)
  
                     
U.S. operations
  
$
(9,259
)
$
(19,612
)
$
(32,313
)
Foreign operations
    
44,786
    
30,096
    
19,701
  
                     
   
$
35,527
  
$
10,484
  
$
(12,612
)
 
Deferred income taxes for the years ended January 1, 2006 and January 2, 2005 reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

At January 1, 2006, the Company had approximately $130 million in federal net operating loss carryforwards with expiration dates through 2025. The Company’s foreign subsidiaries have approximately $13.9 million in net operating losses available for an unlimited carryforward period. The Company expects to utilize all of its federal and foreign carryforwards prior to their expiration. The Company has approximately $121 million in state net operating loss carryforwards relating to continuing operations with expiration dates through 2025. The Company has provided a valuation allowance against $23.4 million of such losses, which the Company does not expect to utilize. In addition, the Company has approximately $172 million in state net operating loss carryforwards relating to discontinued operations for which a valuation allowance has been provided against.

The sources of the temporary differences and their effect on the net deferred tax asset are as follows:
 
     
2005 
    
2004 
  
     
ASSETS
    
LIABILITIES
    
ASSETS 
    
LIABILITIES 
  
     
(IN THOUSANDS)
  
                           
Basis differences of property and
equipment
  
$
--
  
$
14,766
  
$
--
  
$
18,589
  
Basis difference of intangible assets
    
--
    
4,420
    
--
    
4,494
  
Foreign currency loss
    
--
    
3,134
    
--
    
3,835
  
Net operating loss carryforwards, net of
valuation allowances
    
54,084
    
--
    
47,219
    
--
  
Deferred compensation
    
8,821
    
--
    
7,285
    
--
  
Nondeductible reserves and accruals
    
3,397
    
--
    
5,049
    
--
  
Pensions
    
6,179
    
--
    
9,682
    
--
  
Other differences in basis of assets and
liabilities
    
--
    
112
    
2,897
    
--
  
                           
   
$
72,481
  
$
22,432
  
$
72,132
  
$
26,918
  
 

59
INTERFACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Deferred tax assets and liabilities are included in the accompanying balance sheet as follows:
 
   
FISCAL YEAR ENDED
  
   
2005
  
2004
  
   
(IN THOUSANDS)
  
Deferred income taxes (current asset)
  
 
$     4,540 
 
 
 
$     4,556
  
Other (non-current asset)
    
    69,043 
   
      67,448 
 
Deferred income taxes (non-current liabilities)
    
   (23,534)
 
  
     (26,790)
 
   
 
$    50,049 
 
 
$   45,214
  
 
Management believes, based on the Company’s history of operating expenses and expectations for the future, that it is more likely than not that future taxable income will be sufficient to fully utilize the deferred tax assets at January 1, 2006.

The Company’s effective tax rate differs from the U.S. federal statutory rate. The following summary reconciles taxes at the U.S. federal statutory rate with the effective rates:
 
   
FISCAL YEAR ENDED
  
   
2005   
  
2004   
  
2003
  
Taxes on income (benefit) at U.S. federal statutory rate
    
35.0
%
  
35.0
%
  
(35.0
)%
Increase (decrease) in taxes resulting from:
                    
State income taxes, net of federal benefit
    
(0.7
)
  
(5.9
)
  
(8.6
)
Non-deductible business expenses
    
1.3
    
3.7
    
2.4
  
Foreign and U.S. tax effects attributable to foreign operations
    
2.6
    
4.8
    
3.0
  
America Jobs Creation Act - Repatriation, including state taxes
    
9.6
    
--
    
--
  
Valuation Allowance - State NOL
    
2.6
    
--
    
--
  
Other
    
(1.0
)
  
1.0
    
1.7
  
                     
Taxes on income (benefit) at effective rates
    
49.4
%
  
38.6
%
  
(36.5
)%
 
Undistributed earnings of the Company’s foreign subsidiaries amounted to approximately $57 million at January 1, 2006. Those earnings are considered to be indefinitely reinvested and, accordingly, no provision for U.S. federal and state income taxes has been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various foreign countries. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable because of the complexities associated with its hypothetical calculation. Withholding taxes of approximately $2.7 million would be payable upon remittance of all previously unremitted earnings at January 1, 2006.

The American Jobs Creation Act of 2004 (the “Act”) was enacted into law in October 2004. The Act provides for a one-time dividend received deduction of 85%, in excess of the base-period amount, for qualifying foreign earnings repatriated from controlled foreign corporations. In the second quarter of 2005, the Company repatriated approximately $10.5 million in previously unremitted foreign earnings and recorded a provision for taxes on such previously unremitted foreign earnings of approximately $1.6 million. During the fourth quarter of 2005, the Company repatriated approximately $25.4 million in previously unremitted foreign earnings and recorded a provision for taxes on such previously unremitted foreign earnings of approximately $1.8 million.

DISCONTINUED OPERATIONS
 
Re:Source Dealer Businesses

During 2004, the Company committed to a plan to exit its owned Re:Source dealer businesses, and in the third quarter 2004 the Company began to dispose of several of the dealer subsidiaries. Therefore, the results for the owned Re:Source dealer businesses, as well as the Company’s small Australian dealer and small residential fabrics businesses that management has also decided to exit, were reported as discontinued operations. In connection with this action, the Company also recorded write-downs for the impairment of assets of $3.5 million in 2005 and for the impairment of assets and goodwill of $17.5 million and $29.0 million, respectively, in September 2004.

60
INTERFACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

At January 1, 2006, the Company had sold nine dealer businesses (eight of which were sold to the respective general managers of those businesses) and had closed six others. The cash proceeds from the sales were $7.5 million. The Company also received promissory notes in an aggregate amount of $2.2 million at interest rates ranging from prime to 12% and with maturities ranging from one to three years. The Company recorded after tax losses of $1.9 million and $3.0 million in 2005 and 2004, respectively related to Re:Source dealer business dispositions.

Summary operating results for the Re:Source dealer businesses are as follows:
   
FISCAL YEAR ENDED
  
   
2005
  
2004
  
2003
  
   
(in thousands)
  
Net sales
  
$
30,916
  
$
138,954
  
$
157,015
  
Income (loss) on operations before taxes on income (benefit)
    
(22,304
)
  
(18,022
)
  
(16,013
)
Taxes on income (benefit)
    
(8,098
)
  
(5,772
)
  
(3,463
)
Income (loss) on operations, net of tax
    
(15,137
)
  
(12,250
)
  
(12,550
)
Impairment loss, net of tax
    
(3,466
)
  
(46,565
)
  
--
  
Loss on disposal, net of tax
    
(1,935
)
  
(3,027
)
  
--
  

Assets and liabilities, including reserves, related to Re:Source dealer businesses that were held for sale consist of the following:

   
FISCAL YEAR ENDED
 
   
2005
  
2004
  
   
(in thousands)
  
Current assets
  
 
$ 2,279
  
 
$ 37,918
  
Property and equipment
    
      898
    
     1,921
  
Other assets
    
   2,349
 
 
    2,949
 
 
 
 
          
Current liabilities
    
  4,162
    
     4,359
  
Other liabilities
    
       52
    
     1,031
  

U.S. Raised/Access Flooring Business

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 the Company’s U.S. raised/access flooring business. 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 the U.S. raised/access flooring business and received cash consideration totaling approximately $2.8 million. The Company recorded an after-tax loss on disposition of $8.8 million in 2003.

Summary operating results for the U.S. raised/access flooring business is as follows:

   
FISCAL YEAR ENDED
  
   
2005
  
2004
  
2003
  
   
(in thousands)
  
Net sales
  
$
--
  
$
--
  
$
13,631
  
Income (loss) on operations before taxes on income (benefit)
    
--
    
--
    
(6,181
)
Taxes on income (benefit)
    
--
    
--
    
(2,311
)
Income (loss) on operations, net of tax
    
--
    
--
    
(3,870
)
Impairment loss, net of tax
    
--
    
--
    
--
  
Loss on disposal, net of tax
    
--
    
--
    
(8,825
)

There were no assets or liabilities related to the U.S. raised/access flooring business as of January 1, 2006 and January 2, 2005 held for sale.

 

61
INTERFACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HEDGING TRANSACTIONS AND DERIVATIVE FINANCIAL INSTRUMENTS

The Company has used derivative financial instruments for the purpose of reducing its exposure to adverse fluctuations in interest rates. While these hedging instruments are subject to fluctuations in value, such fluctuations are offset by the fluctuations in values of the underlying exposures being hedged. The Company has not held or issued derivative financial instruments for trading purposes. The Company has historically monitored 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 counter-party credit guidelines and has entered into transactions only with financial institutions of investment grade or better. As a result, the Company has historically considered the risk of counter-party default to be minimal.

During 2005, the Company (through its wholly-owned Australian subsidiary) entered into foreign currency forward contracts to hedge future purchases of raw materials for fourteen months commencing in November 2005, with a monthly notional value of $0.5 million. These forward contracts will be outstanding for one month and will be renewed monthly for the next fourteen months. The contracts will be in Australian dollars to hedge the risk against fluctuation in U.S. dollars. The company does not use hedge accounting for these instruments. For the year ended January 1, 2006, the settlements of these instruments resulted in a gain of $0.1 million, which has been included in the consolidated statement of operations.

COMMITMENTS AND CONTINGENCIES

The Company leases certain production, distribution and marketing facilities and equipment. At January 1, 2006, aggregate minimum rent commitments under operating leases with initial or remaining terms of one year or more consisted of the following:
 

FISCAL YEAR
  
AMOUNT
  
   
(in thousands) 
  
2006
  
$
23,479
  
2007
    
18,259
  
2008
    
14,343
  
2009
    
10,059
  
2010
    
8,373
  
Thereafter
    
18,843
  
         
   
$
93,356
  
 
The totals above exclude minimum lease payments of $0.4 million, $0.3 million, $0.2 million, $0.1 million and $0.1 million in 2006, 2007, 2008, 2009 and 2010, respectively, related to the discontinued operations of the Re:Source dealer business. The totals above also exclude minimum lease payments of $0.6 million in each of years 2006-2010, related to the discontinued operations of the U.S. raised/access flooring business.

Rental expense amounted to approximately $25.0 million, $24.9 million, and $23.9 million, for the years ended 2005, 2004, and 2003, respectively. This excludes rental expenses of approximately $2.0 million, $4.6 million, and $4.7 million for 2005, 2004, and 2003, respectively, related to the discontinued operations of Re:Source dealers businesses, and excludes rental expenses of approximately $0.6 million, $0.6 million, and $0.6 million for 2005, 2004, and 2003, respectively, related to the discontinued operations of the U.S. raised/access flooring business.

The Company is from time to time a party to routine litigation incidental to its business. Management does not believe that the resolution of any or all of such litigation will have a material adverse effect on the Company’s financial condition or results of operations.

EMPLOYEE BENEFIT PLANS

The Company has a 401(k) retirement investment plan (“401(k) Plan”), which is open to all otherwise eligible U.S. employees with at least six months of service. The 401(k) Plan calls for Company matching contributions on a sliding scale based on the level of the employee’s contribution. The Company may, at its discretion, make additional contributions to the Plan based on the attainment of certain performance targets by its subsidiaries. The Company’s matching contributions are funded bi-monthly and totaled approximately $1.7 million, $1.5 million, and $1.5 million for the years ended 2005, 2004, and 2003, respectively, for continuing operations. These totals exclude $0.1 million, $0.4 million, and $0.4 million of matching contributions for the years ended 2005, 2004 and 2003, respectively, related to the discontinued Re:Source dealer businesses. No discretionary contributions were made in 2005, 2004 or 2003.

 
62
INTERFACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 
Under the Company’s nonqualified savings plans (“NSPs”), the Company provides eligible employees the opportunity to enter into agreements for the deferral of a specified percentage of their compensation, as defined in the NSPs. The obligations of the Company under such agreements to pay the deferred compensation in the future in accordance with the terms of the NSPs are unsecured general obligations of the Company. Participants have no right, interest or claim in the assets of the Company, except as unsecured general creditors. The Company has established a Rabbi Trust to hold, invest and reinvest deferrals and contributions under the NSPs. If a change in control of the Company occurs, as defined in the NSPs, the Company will contribute an amount to the Rabbi Trust sufficient to pay the obligation owed to each participant. Deferred compensation in connection with the NSPs totaled $6.4 million which was invested in cash and marketable securities at January 1, 2006.

The Company has trusteed defined benefit retirement plans (“Plans”), which cover many of its European employees. The benefits are generally based on years of service and the employee’s average monthly compensation. Pension expense was $4.8 million, $6.4 million, and $6.2 million, for the years ended 2005, 2004, and 2003, respectively. Plan assets are primarily invested in equity and fixed income securities. The Company uses a measurement date of December 31 for the Plans.

 
 
 
 
 
 

63
INTERFACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The tables presented below set forth the funded status of the Company’s significant foreign defined benefit plans and required disclosures in accordance with SFAS No. 132, as revised.
 
   
 FISCAL YEAR ENDED
  
   
2005
  
2004
  
     
(in thousands)
  
               
Change in benefit obligation
              
Benefit obligation, beginning of year
  
$
214,484
  
$
187,435
  
Service cost
    
2,540
    
2,531
  
Interest cost
    
10,089
    
10,042
  
Benefits paid
    
(6,175
)
  
(6,618
)
Actuarial loss
    
10,012
    
3,010
  
Member contributions
    
791
    
767
  
Currency translation adjustment
    
(25,079
)
  
17,317
  
               
Benefit obligation, end of year
  
$
206,662
  
$
214,484
  
               

Change in plan assets
          
Plan assets, beginning of year
  
$
169,612
  
$
137,569
  
Actual return on assets
    
23,188
    
13,804
  
Company contributions
    
10,665
    
10,299
  
Member contributions
    
542
    
1,122
  
Benefits paid
    
(6,175
)
  
(6,618
)
Currency translation adjustment
    
(20,833
)
  
13,436
  
               
Plan assets, end of year
  
$
176,999
  
$
169,612
  
               
Reconciliation to balance sheet
              
Funded status
  
$
(29,663
)
$
(44,872
)
Unrecognized actuarial loss
    
48,046
    
60,233
  
Unrecognized prior service cost
    
384
    
19
  
Unrecognized transition adjustment
    
50
    
242
  
               
Net amount recognized
  
$
18,817
  
$
15,622
  
 
Amounts recognized in the consolidated balance sheets
              
Prepaid benefit cost
  
$
18,817
  
$
15,622
  
Accrued benefit liability
    
(27,763
)
  
(33,768
)
Accumulated other comprehensive income
    
27,763
    
33,768
  
               
Net amount recognized
  
$
18,817
  
$
15,622
  
               


64
INTERFACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The projected benefit obligation for the Company’s foreign defined benefit plans exceeded the fair value of the plans’ assets at January 1, 2006 and January 2, 2005, as reflected in the table above. The accumulated benefit obligations were $203.8 million and $208.7 million as of January 1, 2006 and January 2, 2005, respectively.
 
   
FISCAL YEAR ENDED
  
   
2005
  
2004
  
2003
  
   
(in thousands)
  
Components of net periodic benefit cost
                    
Service cost
  
$
2,540
  
$
2,531
  
$
2,076
  
Interest cost
    
10,089
    
10,042
    
8,423
  
Expected return on plan assets
    
(10,457
)
  
(11,638
)
  
(5,963
)
Amortization of prior service cost
    
168
    
48
    
42
  
Recognized net actuarial (gains)/losses
    
2,499
    
5,542
    
1,824
  
Amortization of transition asset
    
--
    
(168
)
  
(153
)
                     
Net periodic benefit cost
  
$
4,839
  
$
6,357
  
$
6,249
  

 
   
FISCAL YEAR ENDED
  
   
2005
  
2004
  
2003
  
Weighted average assumptions used to determine net periodic benefit cost
                    
Discount rate
    
5.0%
 
  
5.2%
 
  
5.1%
 
Expected return on plan assets
    
6.4%
 
  
6.6%
 
  
6.6%
 
Rate of compensation
    
3.2%
 
  
2.9%
 
  
4.1%
 
                     
Weighted average assumptions used to determine benefit obligations
    
4.5%
 
  
5.1%
 
  
5.2%
 
Discount rate
    
3.1%
 
  
2.8%
 
  
3.7%
 
Rate of compensation
                    
 
The expected long-term rate of return on plan assets assumption is based on weighted-average expected returns for each asset class. Expected returns reflect a combination of historical performance analysis and the forward-looking views of the financial markets, and include input from actuaries, investment service firms and investment managers.

The Company’s foreign defined benefit plans’ accumulated benefit obligations were in excess of the fair value of the plans’ assets. The projected benefit obligations, accumulated benefit obligations and fair value of these plan assets are as follows (in thousands):
 
   
FISCAL YEAR ENDED
  
   
2005
  
2004
  
   
(in thousands)
  
Projected benefit obligation
  
 
$ 206,662
  
 
$ 214,484
  
Accumulated benefit obligations
    
   203,807
    
   208,684
  
Fair value of plan assets
    
   176,999
    
   169,612
  


65
INTERFACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company’s actual weighted average asset allocations for 2005 and 2004, and the targeted asset allocation for 2006 of the foreign defined benefit plans by asset category, are as follows:
 
 
FISCAL YEAR ENDED
 
2006
2005
2004
 
Target Allocation
Percentage of Plan Assets at Year End
       
Asset Category:
      
       
Equity Securities
  70-74%
   72%
   71%
Debt Securities
20-23
22
22
Real Estate
--
--
--
Other
3-7
6
7
       
 
100%
100%
100%

The investment objectives of the foreign defined benefit plans are to maximize the return on the investments without exceeding the limits of the prudent pension fund investment, to ensure that the assets would be sufficient to exceed minimum funding requirements and to achieve a favorable return against the performance expectation based on historic and projected rates of return over the short term. The goal is to optimize the long-term return on plan assets at a moderate level of risk, by balancing higher-returning assets such as equity securities, with less volatile assets, such as fixed income securities. The assets are managed by professional investment firms and performance is evaluated periodically against specific benchmarks. The Plans’ net assets did not include the Company’s own stock at January 1, 2006 and January 2, 2005.

During 2006, the Company expects to contribute $6.5 million to the plan trust and $5.8 million in the form of direct benefit payments for its foreign defined benefit plans. It is anticipated that future benefit payments for the foreign defined benefit plans will be as follows:

FISCAL YEAR ENDED
  
EXPECTED
PAYMENTS
  
   
(in thousands)
  
       
2006
  
$
5,856
  
2007
    
6,147
 
2008
    
6,485
 
2009
    
6,776
 
2010
    
6,983
 
2011-2015
  
$
37,515
  
 
The Company maintains a domestic nonqualified salary continuation plan (“SCP”) which is designed to induce selected officers of the Company to remain in the employ of the Company by providing them with retirement, disability and death benefits in addition to those which they may receive under the Company’s other retirement plans and benefit programs. The SCP entitles participants to (i) retirement benefits upon retirement at age 65 (or early retirement at age 55) after completing at least 15 years of service with the Company (unless otherwise provided in the SCP), payable for the remainder of their lives (or, if elected by a participant, a reduced benefit is payable for the remainder of the participant’s life and any surviving spouse’s life) and in no event less than 10 years under the death benefit feature; (ii) disability benefits payable for the period of any pre-retirement total disability; and (iii) death benefits payable to the designated beneficiary of the participant for a period of up to 10 years (or, if elected by a surviving spouse that is the designated beneficiary, a reduced benefit is payable for the remainder of such surviving spouse’s life). Benefits are determined according to one of three formulas contained in the SCP, and the SCP is administered by the Compensation Committee, which has full discretion in choosing participants and the benefit formula applicable to each. The Company’s obligations under the SCP are currently unfunded (although the Company uses insurance instruments to hedge its exposure thereunder); however, the Company is required to contribute the present value of its obligations thereunder to an irrevocable grantor trust in the event of a change in control as defined in the SCP. The Company uses a measurement date of December 31 for the domestic SCP.



66
INTERFACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The tables presented below set forth the required disclosures in accordance with SFAS No. 132, as revised, and amounts recognized in the consolidated financial statements related to the domestic SCP.

 
   
FISCAL YEAR ENDED
  
   
2005
  
2004
  
   
(in thousands)
  
Change in benefit obligation
              
Benefit obligation, beginning of year
  
$
13,909
  
$
12,953
  
Service cost
    
221
    
182
  
Interest cost
    
802
    
754
  
Benefits paid
    
(343
)
  
(566
)
Actuarial loss
    
1,027
    
586
  
               
Benefit obligation, end of year
  
$
15,616
  
$
13,909
  

The accumulated benefit obligation related to the SCP was $13.4 million and $12.1 million as of January 1, 2005 and January 2, 2005, respectively. The SCP is currently unfunded; as such, the benefit obligations disclosed are also the benefit obligations in excess of the plan assets.

               
   
2005
  
2004
  
2003
  
   
(in thousands, except for weighted average assumptions)
  
Weighted average assumptions used to determine net periodic benefit cost 
                    
Discount rate
    
5.8
%
  
6.0
%
  
6.8
%
Rate of compensation
    
4.0
%
  
4.0
%
  
4.0
%
Weighted average assumptions used to determine benefit obligations
                    
Discount rate
    
5.5
%
  
5.8
%
  
6.8
%
Rate of compensation
    
4.0
%
  
4.0
%
  
4.0
%
Components of net periodic benefit cost
                    
Service cost
  
 
$    221
  
 
$    182
  
 
$    248
  
Interest cost
    
802
    
754
    
670
  
Amortization of transition obligation
    
546
    
565
    
401
  
                     
Net periodic benefit cost
  
 
$ 1,569
  
 
$ 1,501
  
 
$ 1,319
  

During 2006, the Company expects to contribute $0.3 million in the form of direct benefit payments for its domestic SCP. It is anticipated that future benefit payments for the SCP will be as follows:

FISCAL YEAR ENDED
  
EXPECTED PAYMENTS
  
   
(in thousands)
  
2006
  
$
343
  
2007
    
545
  
2008
    
1,031
  
2009
    
1,031
  
20010
    
1,031
  
2011-2015
    
5,743
  

SEGMENT INFORMATION
 
Based on the quantitative thresholds specified in SFAS No. 131, the Company has determined that it has four reportable segments: (1) the Modular Carpet segment, which includes its Interface, Heuga, and InterfaceFLOR modular carpet businesses and includes its Intersept antimicrobial sales and licensing program, (2) the Bentley Prince Street segment, which includes its Bentley and Prince Street broadloom, modular carpet and area rug businesses, (3) the Fabrics Group segment, which includes all of its fabrics businesses worldwide, and (4) the Specialty Products segment, which includes Pandel, Inc., a producer of vinyl carpet tile backing and specialty mat and foam products. The former segment known as the Re:Source Network, which primarily encompassed the Company’s owned Re:Source dealers that provided carpet installation and maintenance services in the United States, is now reported as discontinued operations in the accompanying consolidated statements of operations.

67
INTERFACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The accounting policies of the operating segments are the same as those described in Summary of Significant Accounting Policies. 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. Intersegment sales are accounted for at fair value as if sales were to third parties. Intersegment sales are not material. 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. Thus, operating income includes only the costs that are directly attributable to the operations of the individual segment. Assets not identifiable to an 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.

SEGMENT DISCLOSURES

Summary information by segment follows:
 
   
MODULAR
CARPET
  
BENTLEY
PRINCE
STREET
  
FABRICS
GROUP
  
SPECIALTY
PRODUCTS
  
TOTAL
  
   
(in thousands)      
  
2005
                                
Net Sales
  
$
646,213
  
$
125,167
  
$
198,842
  
$
15,544
  
$
985,766
  
Depreciation and amortization
    
13,644
    
1,708
    
11,007
    
111
    
26,470
  
Operating income
   
77,351
    
3,494
    
4,285
    
651
    
85,781
  
Total assets
    
425,922
    
113,320
    
209,495
    
3,755
    
752,492
  
 
                                
2004
                                
Net sales
  
$
563,397
  
$
119,058
  
$
186,408
  
$
12,795
  
$
881,658
  
Depreciation and amortization
    
13,921
    
1,682
    
10,038
    
167
    
25,808
  
Operating income (loss)
   
63,888
    
114
    
824
    
(477
)
  
64,349
  
Total assets
    
490,908
    
112,541
    
217,554
    
4,178
    
825,181
  
 
                                
2003
                                
Net sales
  
$
473,724
  
$
109,940
  
$
173,539
  
$
9,291
  
$
766,494
  
Depreciation and amortization
    
13,600
    
2,309
    
11,218
    
105
    
27,232
  
Operating income (loss)
   
45,828
    
(2,370
)
  
(9,211
)
  
(61
)
  
34,186
  
Total assets
    
434,523
    
115,505
    
225,355
    
3,406
    
778,789
  



68
INTERFACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

   
FISCAL YEAR ENDED
  
   
2005
  
2004
  
2003
  
   
(in thousands)
  
DEPRECIATION AND AMORTIZATION
                    
Total segment depreciation and amortization
  
$
26,470
  
$
25,808
  
$
27,232
  
Corporate depreciation and amortization
    
4,985
    
7,528
    
6,909
  
                     
Reported depreciation and amortization
  
$
31,455
  
$
33,336
  
$
34,141
  
                     
OPERATING INCOME
                   
Total segment operating income
 
$
85,781
  
$
64,349
  
$
34,186
  
Corporate expenses and eliminations
    
(3,780
)
  
(3,607
)
  
(2,835
)
                     
Reported operating income
 
$
82,001
  
$
60,742
  
$
31,351
  
                     
ASSETS
                    
Total segment assets
  
$
752,492
  
$
825,181
        
Discontinued operations
    
5,526
    
42,788
        
Corporate assets and eliminations
    
80,972
    
1,829
        
                     
Reported total assets
  
$
838,990
  
$
869,798
        

ENTERPRISE-WIDE DISCLOSURES

The Company has a large and diverse customer base, which includes numerous customers located in foreign countries. No single unaffiliated customer accounted for more than 10% of total sales in any year during the three years ended January 1, 2006. Sales in foreign markets in 2005, 2004, and 2003 were 43.3%, 43.8%, and 43.6% respectively. These sales were primarily to customers in Europe, Canada, Asia, Australia and Latin America. Revenue and long-lived assets related to operations in the United States and other countries are as follows:

   
FISCAL YEAR ENDED
  
   
2005
  
2004
  
2003
  
   
(in thousands)
  
SALES TO UNAFFILIATED CUSTOMERS(1)
                    
United States
  
$
558,464
  
$
495,836
  
$
432,361
  
United Kingdom
    
163,607
    
153,936
    
130,646
  
Other foreign countries
    
263,695
    
231,886
    
203,487
  
                     
Net sales
  
$
985,766
  
$
881,658
  
$
766,494
  
                     
LONG-LIVED ASSETS(2)
                    
United States
  
$
115,089
  
$
119,118
        
United Kingdom
    
37,006
    
41,533
        
Netherlands
    
19,044
    
20,751
        
Other foreign countries
    
14,504
    
13,300
        
                     
Total long-lived assets
  
$
185,643
  
$
194,702
        
                              

(1) Revenue attributed to geographic areas is based on the location of the customer.

(2) Long-lived assets include tangible assets physically located in foreign countries.

69
INTERFACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


QUARTERLY DATA AND SHARE INFORMATION (UNAUDITED)

The following table sets forth, for the fiscal periods indicated, selected consolidated financial data and information regarding the market price per share of the Company’s Class A Common Stock. The prices represent the reported high and low closing sale prices.

   
FISCAL YEAR ENDED 2005
  
   
FIRST
QUARTER(1)
  
SECOND
QUARTER(1)
  
THIRD
QUARTER
  
FOURTH
QUARTER
  
   
(in thousands, except share data)
  
Net sales
  
$
234,715
  
$
246,545
  
$
243,898
  
$
260,608
  
Gross profit
    
71,139
    
77,228
    
76,541
    
79,789
  
Income from continuing operations
    
2,923
    
3,940
    
5,337
    
5,766
  
Loss from discontinued operation
    
(4,762
)
  
(9,763
)
  
(216
)
  
(50
)
Loss on disposal of discontinued operations
    
(337
)
  
(1,598
)
  
--
    
--
  
Net income (loss)
    
(2,176
)
  
(7,421
)
  
5,121
    
5,716
  
                           
Basic income (loss) per common share:
                          
Income from continuing operations
  
$
0.06
  
$
0.08
  
$
0.10
  
$
0.11
  
Loss from discontinued operation
    
(0.09
)
  
(0.19
)
  
--
    
--
  
Loss on disposal of discontinued operations
    
(0.01
)
  
(0.03
)
  
--
    
--
  
Net income (loss)
    
(0.04
)
  
(0.14
)
  
0.10
    
0.11
  
                           
Diluted income (loss) per common share:
                          
Income from continuing operations
  
$
0.06
  
$
0.08
  
$
0.10
  
$
0.11
  
Loss from discontinued operation
Loss on disposal of discontinued operations
    
(0.09
(0.01
)
)
  
(0.19
(0.03
)
)
  
--
--
    
--
--
  
Net income (loss)
    
(0.04
)
  
(0.14
)
  
0.10
    
0.11
  
                           
Share prices
                          
High
  
$
9.99
  
$
8.35
  
$
10.55
  
$
8.91
  
Low
    
6.56
    
5.84
    
8.11
    
7.66
  

70
INTERFACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

   
FISCAL YEAR ENDED 2004
  
   
FIRST
QUARTER
  
SECOND
QUARTER
  
THIRD
QUARTER(2)
  
FOURTH
QUARTER
  
   
(in thousands, except share data)
  
Net sales
  
$
210,033
  
$
216,213
  
$
222,822
  
$
232,590
  
Gross profit
    
64,821
    
66,858
    
65,524
    
68,158
  
Income (loss) from continuing operations
    
(286
)
  
2,504
    
2,370
    
1,852
  
Loss from discontinued operation
    
(2,743
)
  
(2,663
)
  
(50,661
)
  
(2,748
)
Gain (loss) on disposal of discontinued Operations
    
--
    
--
    
465
    
(3,492
)
Net loss
    
(3,029
)
  
(159
)
  
(47,826
)
  
(4,388
)
 
                          
Basic income (loss) per common share:
                          
Income (loss) from continuing operations
  
$
(0.01
)
$
0.05
  
$
0.05
  
$
0.04
  
Loss from discontinued operation
    
(0.05
)
  
(0.05
)
  
(1.01
)
  
(0.05
)
Gain (loss) on disposal of discontinued Operations
    
--
    
--
    
0.01
    
(0.07
)
Net loss
    
(0.06
)
  
(0.00
)
  
(0.95
)
  
(0.08
)
 
                          
Diluted income (loss) per common share:
                          
Income (loss) from continuing operations
  
$
(0.01
)
$
0.05
  
$
0.05
  
$
0.04
  
Loss from discontinued operation
    
(0.05
)
  
(0.05
)
  
(0.97
)
  
(0.05
)
Gain (loss) on disposal of discontinued operations
    
--
    
--
    
--
    
(0.07
)
Net loss
    
(0.06
)
  
(0.00
)
  
(0.92
)
  
(0.08
)
 
                          
Share prices
                          
High
  
$
8.48
  
$
9.30
  
$
8.40
  
$
10.59
  
Low
    
5.83
    
5.98
    
6.96
    
7.42
  
 

(1)
During the first and second quarters of 2005, the company recorded write-downs for the impairment of assets of $0.5 million and $3.0 million, respectively, related to the discontinued Re:Source dealer business. These amounts are included in loss from discontinued operations (see the discussion in the above footnote entitled “Discontinued Operations”).

(2)
During the third quarter of 2004, the Company recorded write-downs for the impairment of assets and goodwill of $17.5 million and $29.0 million, respectively, related to the discontinued Re:Source dealer businesses. These amounts are included in loss from discontinuing operations (see the discussion in the above footnote entitled “Discontinued Operations”).
 
 
 
 

 
71
 
 
 
 
 
SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

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% notes due 2008, and its 9.5% senior subordinated notes due 2014. The Supplemental Guarantor Financial Statements are presented herein pursuant to requirements of the commission.

STATEMENT OF OPERATIONS FOR YEAR ENDED 2005
 
   
GUARANTOR
SUBSIDIARIES
  
NONGUARANTOR
SUBSIDIARIES
  
INTERFACE, INC.
(PARENT
CORPORATION)
  
CONSOLIDATION
& ELIMINATION
ENTRIES
  
CONSOLIDATED
TOTALS
  
   
(in thousands)
  
Net sales
  
$
856,286
  
$
435,217
  
$
--
  
$
(305,737
)
$
985,766
  
Cost of sales
    
698,690
    
288,116
    
--
    
(305,737
)
  
681,069
  
                                 
Gross profit on sales
    
157,596
    
147,101
    
--
    
--
    
304,697
  
Selling, general and administrative expenses
    
107,342
    
92,578
    
22,776
    
--
    
222,696
  
                                 
Operating income (loss)
    
50,254
    
54,523
    
(22,776
)
  
--
    
82,001
  
                                 
Other expense (income)
                                
Interest expense, net
    
20,293
    
2,304
    
22,944
    
--
    
45,541
  
Other
    
9,816
    
6,286
    
(15,169
)
  
--
    
933
  
                                 
Total other expense
    
30,109
    
8,590
    
7,775
    
--
    
46,474
  
 
                                
Income (loss) before taxes on income and equity in income of subsidiaries
    
20,145
    
45,933
    
(30,551
)
  
--
    
35,527
  
Taxes on income (benefit)
    
6,647
    
16,656
    
(5,742
)
  
--
    
17,561
  
Equity in income (loss) of subsidiaries
    
--
    
--
    
26,049
    
(26,049
)
  
--
  
                                 
Income (loss) from continuing  operations
    
13,498
    
29,277
    
1,240
    
(26,049
)
  
17,966
  
 
                                
Discontinued operations, net of tax
    
(14,791
)
  
--
    
--
    
--
    
(14,791
)
Loss on disposal of discontinued  operation, net of tax
    
(1,935
)
  
--
    
--
    
--
    
(1,935
)
 
                                
Net income (loss)
  
$
(3,228
)
$
29,277
  
$
1,240
  
$
(26,049
)
$
1,240
  


72

STATEMENT OF OPERATIONS FOR YEAR ENDED 2004


   
GUARANTOR
SUBSIDIARIES
  
NONGUARANTOR
SUBSIDIARIES
  
INTERFACE, INC.
 (PARENT
CORPORATION)
  
CONSOLIDATION
& ELIMINATION
ENTRIES
  
CONSOLIDATED
TOTALS
  
   
(in thousands)
  
Net sales
  
$
808,604
  
$
386,728
  
$
--
  
$
(313,674
)
$
881,658
  
Cost of sales
    
670,307
    
259,664
    
--
    
(313,674
)
  
616,297
  
                                 
Gross profit on sales
    
138,297
    
127,064
    
--
    
--
    
265,361
  
Selling, general and administrative expenses
    
95,818
    
86,594
    
22,207
    
--
    
204,619
  
Restructuring charge
    
--
    
--
    
--
    
--
    
--
  
                                 
Operating income (loss)
    
42,479
    
40,470
    
(22,207
)
  
--
    
60,742
  
                                 
Other expense (income)
                                
Interest expense, net
    
15,931
    
3,525
    
26,567
    
--
    
46,023
  
Other
    
(44
)
  
5,371
    
(1,092
)
  
--
    
4,235
  
                                 
Total other expense
    
15,887
    
8,896
    
25,475
    
--
    
50,258
  
 
                                
Income (loss) before taxes on income  and equity in income of subsidiaries
    
26,592
    
31,574
    
(47,682
)
  
--
    
10,484
  
Taxes on income (benefit)
    
(796
)
  
11,958
    
(7,118
)
  
--
    
4,044
  
Equity in income (loss) of subsidiaries
    
--
    
--
    
(14,838
)
  
14,838
    
--
  
                                 
Income (loss) from continuing  operations
    
27,388
    
19,616
    
(55,402
)
  
14,838
    
6,440
  
                                 
Discontinued operations, net of tax
    
(57,808
)
  
(1,007
)
  
--
    
--
    
(58,815
)
Loss on disposal of discontinued  operation, net of tax
    
(3,027
)
  
--
    
--
    
--
    
(3,027
)
 
                                
Net income (loss)
  
$
(33,447
)
$
18,609
  
$
(55,402
)
$
14,838
  
$
(55,402
)



73

STATEMENT OF OPERATIONS FOR YEAR ENDED 2003

   
GUARANTOR
SUBSIDIARIES
  
NONGUARANTOR
SUBSIDIARIES
  
INTERFACE, INC.
(PARENT
CORPORATION)
  
CONSOLIDATION
& ELIMINATION ENTRIES
  
CONSOLIDATED
TOTALS
  
   
(in thousands)
  
Net sales
  
$
689,003
  
$
325,984
  
$
--
  
$
(248,493
)
$
766,494
  
Cost of sales
    
570,069
    
221,675
    
--
    
(248,493
)
  
543,251
  
                                 
Gross profit on sales
    
118,934
    
104,309
    
--
    
--
    
223,243
  
Selling, general and administrative expenses
    
89,638
    
74,684
    
21,374
    
--
    
185,696
  
Restructuring charge
    
6,196
    
--
    
--
    
--
    
6,196
  
                                 
Operating income (loss)
    
23,100
    
29,625
    
(21,374
)
  
--
    
31,351
  
                                 
Other expense (income)
                                
Interest expense, net
    
17,090
    
4,200
    
21,530
    
--
    
42,820
  
Other
    
5,006
    
4,671
    
(8,534
)
  
--
    
1,143
  
                                 
Total other expense
    
22,096
    
8,871
    
12,996
   
--
    
43,963
  
 
                                
Income (loss) before taxes on income and equity in income of subsidiaries
    
1,004
    
20,754
    
(34,370
)
  
--
    
(12,612
)
Taxes on income (benefit)
    
9,520
    
8,189
    
(22,309
)
  
--
    
(4,600
)
Equity in income (loss) of subsidiaries
    
--
    
--
    
(21,196
)
  
21,196
    
--
  
                                 
Income (loss) from continuing  operations
    
(8,516
)
  
12,565
    
(33,257
)
  
21,196
    
(8,012
)
                                 
Discontinued operations, net of tax
    
(15,451
)
  
(969
)
  
--
    
--
    
(16,420
)
Loss on disposal of discontinued operation, net of tax
    
(8,825
)
  
--
    
--
    
--
    
(8,825
)
 
                                
Net income (loss)
  
$
(32,792
)
$
11,596
  
$
(33,257
)
$
21,196
  
$
(33,257
)

 

74

BALANCE SHEET AS OF JANUARY 1, 2006

   
GUARANTOR
SUBSIDIARIES
  
NONGUARANTOR
SUBSIDIARIES
  
INTERFACE, INC.
(PARENT
CORPORATION)
  
CONSOLIDATION
& ELIMINATION
ENTRIES
  
CONSOLIDATED
TOTALS
  
   
(in thousands)
  
ASSETS
                      
Current
                                
Cash
  
$
572
  
$
29,578
  
$
21,162
  
$
--
  
$
51,312
  
Accounts receivable
    
77,086
    
63,302
    
1,020
    
--
    
141,408
  
Inventories
    
82,421
    
47,788
    
--
    
--
    
130,209
  
Other
    
7,588
    
7,905
    
5,671
    
--
    
21,164
  
Assets of business held for sale
    
4,655
    
871
    
--
    
--
    
5,526
  
                                 
Total current assets
    
172,322
    
149,444
    
27,853
    
--
    
349,619
  
Property and equipment, less accumulated depreciation
    
110,136
    
70,385
    
5,122
    
--
    
185,643
  
Investments in subsidiaries
    
194,143
    
88,459
    
159,761
    
(442,363
)
  
--
  
Other
    
16,154
    
26,163
    
67,706
    
--
    
110,023
  
Goodwill
    
108,075
    
85,630
    
--
    
--
    
193,705
  
                                 
   
$
600,830
  
$
420,081
  
$
260,442
  
$
(442,363
)
$
838,990
  
 
LIABILITIES AND
SHAREHOLDERS’ EQUITY
                                
Current liabilities
  
$
53,441
  
$
62,869
  
$
23,797
  
$
--
  
$
140,107
  
Long-term debt, less current maturities
    
--
    
--
    
458,000
    
--
    
458,000
  
Deferred income taxes
    
14,949
    
9,801
    
(1,216
)
  
--
    
23,534
  
Other long-term liabilities
    
10,303
    
27,784
    
2,777
    
--
    
40,864
  
                                 
Total liabilities
    
78,693
    
100,454
    
483,358
    
--
    
662,505
  
                                 
Minority interests
    
--
    
4,409
    
--
    
--
    
4,409
  
                                 
Shareholders’ equity
                                
Preferred stock
    
57,891
    
--
    
--
    
(57,891
)
  
--
  
Common stock
    
94,145
    
102,199
    
5,335
    
(196,345
)
  
5,334
  
Additional paid-in capital
    
191,411
    
12,525
    
234,314
    
(203,936
)
  
234,314
  
Retained earnings
    
182,137
    
258,735
    
(458,124
)
  
15,809
    
(1,443
)
Foreign currency translation adjustment
    
(3,447
)
  
(30,459
)
  
(4,441
)
  
--
    
(38,347
)
Minimum pension liability
    
--
    
(27,782
)
  
--
    
--
    
(27,782
)
                                 
Total shareholders’ equity
    
522,137
    
315,218
    
(222,916
)
  
(442,363
)
  
172,076
  
                                 
   
$
600,830
  
$
420,081
  
$
260,442
  
$
(442,363
)
$
838,990
  


75


BALANCE SHEET AS OF JANUARY 2, 2005
 
   
GUARANTOR
SUBSIDIARIES
  
NONGUARANTOR
SUBSIDIARIES
  
INTERFACE, INC.
(PARENT
CORPORATION)
  
CONSOLIDATION
& ELIMINATION ENTRIES
  
CONSOLIDATED
TOTALS
  
   
(in thousands)
  
ASSETS
                                
Current
                                
Cash
  
$
--
  
$
23,397
  
$
(1,233
)
$
--
  
$
22,164
  
Accounts receivable
    
68,850
    
70,212
    
3,166
    
--
    
142,228
  
Inventories
    
84,151
    
53,467
    
--
    
--
    
137,618
  
Other
    
7,813
    
9,257
    
5,686
    
--
    
22,756
  
Assets of business held for sale
    
38,612
    
4,176
    
--
    
--
    
42,788
  
                                 
Total current assets
    
199,426
    
160,509
    
7,619
    
--
    
367,554
  
Property and equipment, less accumulated depreciation
    
111,774
    
75,479
    
7,449
    
--
    
194,702
  
Investments in subsidiaries
    
177,868
    
60,518
    
181,295
    
(419,681
)
  
--
  
Other
    
8,438
    
33,475
    
59,716
    
--
    
101,629
  
Goodwill
    
108,075
    
97,838
    
--
    
--
    
205,913
  
                                 
   
$
605,581
  
$
427,819
  
$
256,079
  
$
(419,681
)
$
869,798
  
 
LIABILITIES AND
SHAREHOLDERS’ EQUITY
                                
Current liabilities
  
$
54,029
  
$
65,743
  
$
18,940
  
$
--
  
$
138,712
  
Long-term debt, less current maturities
    
--
    
--
    
460,000
    
--
    
460,000
  
Deferred income taxes
    
14,899
    
9,601
    
2,290
    
--
    
26,790
  
Other long-term liabilities
    
8,998
    
33,518
    
3,471
    
--
    
45,987
  
                                 
Total liabilities
    
77,926
    
108,862
    
484,701
    
--
    
671,489
  
                                 
Minority interests
    
--
    
4,131
    
--
    
--
    
4,131
  
                                 
Shareholders’ equity
                                
Preferred stock
    
57,891
    
--
    
--
    
(57,891
)
  
--
  
Common stock
    
94,145
    
102,199
    
5,243
    
(196,344
)
  
5,243
  
Additional paid-in capital
    
191,411
    
12,525
    
229,382
    
(203,936
)
  
229,382
  
Retained earnings
    
185,365
    
229,458
    
(455,996
)
  
38,490
    
(2,683
)
Foreign currency translation adjustment
    
(1,157
)
  
4,412
    
(7,251
)
  
--
    
(3,996
)
Minimum pension liability
    
--
    
(33,768
)
  
--
    
--
    
(33,768
)
                                 
Total shareholders’ equity
    
527,655
    
314,826
    
(228,622
)
  
(419,681
)
  
194,178
  
                                 
   
$
605,581
  
$
427,819
  
$
256,079
  
$
(419,681
)
$
869,798
  



76

STATEMENT OF CASH FLOWS FOR YEAR ENDED 2005

   
GUARANTOR
SUBSIDIARIES
  
NONGUARANTOR
SUBSIDIARIES
  
INTERFACE, INC.
(PARENT
CORPORATION)
  
CONSOLIDATION
& ELIMINATION
ENTRIES
  
CONSOLIDATED
TOTALS
  
   
(in thousands)
  
Cash flows from operating activities
  
$
20,515
  
$
17,489
  
$
23,297
  
$
--
  
$
61,301
  
                                 
Cash flows from investing activities:
                                
Purchase of plant and equipment
    
(17,370
)
  
(9,150
)
  
1,042
    
--
    
(25,478
)
Other
    
(2,405
)
  
--
    
(2,688
)
  
--
    
(5,093
)
                                 
Cash used in investing activities
    
(19,775
)
  
(9,150
)
  
(1,646
)
  
--
    
(30,571
)
                                 
Cash flows from financing activities:
                                
                                 
Net borrowings (repayments)
    
--
    
--
    
(2,000
)
  
--
    
(2,000
)
Issuance of senior notes
    
--
    
--
    
--
    
--
    
--
  
Repurchase of senior subordinated notes
    
--
    
--
    
--
    
--
    
--
  
Debt issuance cost
    
--
    
--
    
--
    
--
    
--
  
Proceeds from issuance of common stock
    
--
    
--
    
2,960
    
--
    
2,960
  
Other
    
478
    
(262
)
  
(216
)
  
--
    
--
  
                                 
Cash provided by (used in) financing activities
    
478
    
(262
)
  
744
    
--
    
960
  
                                 
Effect of exchange rate changes on cash
    
(646
)
  
(1,896
)
  
--
    
--
    
(2,542
)
                                 
Net increase (decrease) in cash
    
572
    
6,181
    
22,395
    
--
    
29,148
  
Cash, at beginning of year
    
--
    
23,397
    
(1,233
)
  
--
    
22,164
  
                                 
Cash, at end of year
  
$
572
  
$
29,578
  
$
21,162
  
$
--
  
$
51,312
  






77

STATEMENT OF CASH FLOWS FOR YEAR ENDED 2004

   
GUARANTOR
SUBSIDIARIES
  
NONGUARANTOR
SUBSIDIARIES
  
INTERFACE, INC.
(PARENT
CORPORATION)
  
CONSOLIDATION
& ELIMINATION
ENTRIES
  
CONSOLIDATED
TOTALS
  
   
(in thousands)
  
Cash flows from operating activities
  
$
8,967
  
$
34,465
  
$
(33,891
)
$
--
  
$
9,541
  
                                 
Cash flows from investing activities:
                                
Purchase of plant and equipment
    
(11,309
)
  
(4,574
)
  
100
    
--
    
(15,783
)
Other
    
2,547
    
340
    
5,123
    
--
    
8,010
  
                                 
Cash used in investing activities
    
(8,762
)
  
(4,234
)
  
5,223
    
--
    
(7,773
)
                                 
Cash flows from financing activities:
                                
                                 
Net borrowings (repayments)
    
(205
)
  
(21,834
)
  
22,039
    
--
    
--
  
Issuance of senior notes
    
--
    
--
    
135,000
    
--
    
135,000
  
Repurchase of senior subordinated notes
    
--
    
--
    
(120,000
)
  
--
    
(120,000
)
Debt issuance cost
    
--
    
--
    
(4,237
)
  
--
    
(4,237
)
Proceeds from issuance of common stock
    
--
    
--
    
4,442
    
--
    
4,442
  
Other
    
--
    
--
    
--
    
--
    
--
  
                                 
Cash provided by (used in) financing activities
    
(205
)
  
(21,834
)
  
37,244
    
--
    
15,205
  
                                 
Effect of exchange rate changes on cash
    
--
    
2,301
    
--
    
--
    
2,301
  
                                 
Net increase (decrease) in cash
    
--
    
10,698
    
8,576
    
--
    
19,274
  
Cash, at beginning of year
    
--
    
12,699
    
(9,809
)
  
--
    
2,890
  
 
                                
Cash, at end of year
  
$
--
  
$
23,397
  
$
(1,233
)
$
--
  
$
22,164
  


78

STATEMENT OF CASH FLOWS FOR YEAR ENDED 2003

   
GUARANTOR
SUBSIDIARIES
  
NONGUARANTOR
SUBSIDIARIES
  
INTERFACE, INC.
(PARENT
CORPORATION)
  
CONSOLIDATION
& ELIMINATION
ENTRIES
  
CONSOLIDATED
TOTALS
  
   
(in thousands)
  
Cash flows from operating activities
  
$
27,087
  
$
24,978
  
$
(63,851
)
$
--
  
$
(11,786
)
                                 
Cash flows from investing activities:
                                
Purchase of plant and equipment
    
(12,008
)
  
(3,661
)
  
(534
)
  
--
    
(16,203
)
Other
    
5,415
    
(586
)
  
3,880
    
--
    
8,709
  
                                 
Cash used in investing activities
    
(6,593
)
  
(4,247
)
  
3,346
    
--
    
(7,494
)
                                 
Cash flows from financing activities:
                                
                                 
Net borrowings (repayments)
    
(13,795
)
  
(27,006
)
  
40,801
    
--
    
--
  
Issuance of senior notes
    
--
    
--
    
--
    
--
    
--
  
Repurchase of senior subordinated notes
    
--
    
--
    
--
    
--
    
--
  
Debt issuance cost
    
--
    
--
    
(3,367
)
  
--
    
(3,367
)
Proceeds from issuance of common stock
    
--
    
--
    
241
    
--
    
241
  
Cash dividends paid
    
--
    
--
    
182
    
--
    
182
  
                                 
Cash provided by (used in) financing activities
    
(13,795
)
  
(27,006
)
  
37,857
    
--
    
(2,944
)
                                 
Effect of exchange rate changes on cash
    
--
    
1,557
    
--
    
--
    
1,557
  
                                 
Net increase (decrease) in cash
    
6,699
    
(4,718
)
  
(22,648
)
  
--
    
(20,667
)
Cash, at beginning of year
    
(6,699
)
  
17,417
    
12,839
    
--
    
23,557
  
 
                                
Cash, at end of year
  
$
--
  
$
12,699
  
$
(9,809
)
$
--
  
$
2,890
  

79

 

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
Board of Directors and Shareholders of Interface, Inc.
Atlanta, Georgia
 
We have audited the accompanying consolidated balance sheets of Interface, Inc. as of January 1, 2006 and January 2, 2005 and the related consolidated statements of income and comprehensive loss and cash flows for each of the three years in the period ended January 1, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Interface, Inc. at January 1, 2006 and January 2, 2005, and the results of its operations and its cash flows for each of the three years in the period ended January 1, 2006, in conformity with accounting principles generally accepted in the United States of America.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of January 1, 2006, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 10, 2006 expressed an unqualified opinion thereon.
 

 
/s/ BDO SEIDMAN, LLP
 
Atlanta, Georgia
March 10, 2006
 
 


80


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 
ON INTERNAL CONTROL OVER FINANCIAL REPORTING 
 
Board of Directors and Shareholders of Interface, Inc.
Atlanta, GA

 
We have audited management’s assessment, included in Management’s Annual Report on Internal Control Over Financial Reporting in Item 9A of Form 10-K, that Interface, Inc. and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of January 1, 2006, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; and (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of January 1, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 1, 2006, based on the COSO criteria.
 
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Interface, Inc. and subsidiaries as of January 1, 2006 and January 2, 2005 and the related consolidated statements of operations and comprehensive loss and cash flows for each of the three fiscal years in the period ended January 1, 2006 and our report dated March 10, 2006 expressed an unqualified opinion thereon.
 
 
 
/s/ BDO SEIDMAN, LLP
 

Atlanta, Georgia
March 10, 2006
 


81

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures. As of the end of the period covered by this Annual Report on Form 10-K, 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 as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Act”), pursuant to Rule 13a-14(c) under 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 Annual Report.

Management’s Annual Report on Internal Control over Financial Reporting. The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Our management assessed the effectiveness of our internal control over financial reporting as of January 1, 2006 based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in “Internal Control - Integrated Framework.” Based on that assessment, management believes that, as of January 1, 2006, the Company’s internal control over financial reporting was effective based on those criteria. There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Our independent auditors have issued an audit report on our assessment of the Company’s internal control over financial reporting. This report appears on page 81.

ITEM 9B.   OTHER INFORMATION

None.

PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information contained under the captions “Nomination and Election of Directors”, “Section 16(a) Beneficial Ownership Reporting Compliance”, and “Meetings and Committees of the Board of Directors” in our definitive Proxy Statement for our 2006 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of our 2005 fiscal year, is incorporated herein by reference. Pursuant to Instruction 3 to Paragraph (b) of Item 401 of Regulation S-K, information relating to our executive officers is included in Item 1 of this Report.

The Company has adopted the “Interface Code of Business Conduct and Ethics,” which applies to all employees, officers and directors of the Company, including the Chief Executive Officer and Chief Financial Officer. The Code may be viewed on the Company’s website at www.interfaceinc.com. Changes to the Code will be posted on the Company’s website. Any waiver of the Code for executive officers or directors may be made only by the Company’s Board of Directors and will be disclosed to the extent required by law or Nasdaq rules on the Company’s website or in a filing on Form 8-K.

ITEM 11.   EXECUTIVE COMPENSATION

The information contained under the caption “Executive Compensation and Related Items” in our definitive Proxy Statement for our 2006 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of our 2005 fiscal year, is incorporated herein by reference.

82

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information contained under the captions “Principal Shareholders and Management Stock Ownership” and “Equity Compensation Plan Information” in our definitive Proxy Statement for our 2006 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of our 2005 fiscal year, is incorporated herein by reference.

For purposes of determining the aggregate market value of our voting and non-voting stock held by non-affiliates, shares held of record by our directors and executive officers have been excluded. The exclusion of such shares is not intended to, and shall not, constitute a determination as to which persons or entities may be “affiliates” as that term is defined under federal securities laws.

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information contained under the caption “Executive Compensation and Related Items — Certain Relationships and Related Transactions” in our definitive Proxy Statement for our 2006 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of our 2005 fiscal year, is incorporated herein by reference.

ITEM 14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information contained under the caption “Information Concerning the Company’s Accountants” in our definitive Proxy Statement for our 2006 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of our 2005 fiscal year, is incorporated herein by reference.

PART IV

ITEM 15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

1.   Financial Statements 

The following Consolidated Financial Statements and Notes thereto of Interface, Inc. and subsidiaries and related Reports of Independent Registered Public Accounting Firm are contained in Item 8 of this Report:

Consolidated Statements of Operations and Comprehensive Income (Loss) — years ended January 1, 2006, January 2, 2005, and December 28, 2003

Consolidated Balance Sheets — January 1, 2006 and January 2, 2005

Consolidated Statements of Cash Flows — years ended January 1, 2006, January 2, 2005, and December 28, 2003

Notes to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting

2.   Financial Statement Schedule

The following Consolidated Financial Statement Schedule of Interface, Inc. and subsidiaries and related Report of Independent Registered Public Accounting Firm are included as part of this Report (see pages 89-91):

Report of Independent Registered Public Accounting Firm

Schedule II — Valuation and Qualifying Accounts and Reserves

83


3.   Exhibits

The following exhibits are included as part of this Report:

Exhibit
Number
 
 
Description of Exhibit
3.1 
—
Restated Articles of Incorporation (included as Exhibit 3.1 to the Company’s quarterly report on Form 10-Q for the quarter ended July 5, 1998 (the “1998 Second Quarter 10-Q”), previously filed with the Commission and incorporated herein by reference).
3.2 
—
Bylaws, as amended and restated (included as Exhibit 3.2 to the Company’s quarterly report on Form 10-Q for the quarter ended April 1, 2001, previously filed with the Commission and incorporated herein by reference).
4.1 
—
See Exhibits 3.1 and 3.2 for provisions in the Company’s Articles of Incorporation and Bylaws defining the rights of holders of Common Stock of the Company.
4.2 
—
Rights Agreement between the Company and Wachovia Bank, N.A., dated as of March 4, 1998, with an effective date of March 16, 1998 (included as Exhibit 10.1A to the Company’s registration  statement on Form 8-A/A dated March 12, 1998, previously filed with the Commission and incorporated herein by reference).
4.3 
—
Form of Indenture governing the Company’s 7.3% Senior Notes due 2008, among the Company, Certain U.S. subsidiaries of the Company, as Guarantors, and First Union National Bank, as Trustee (the “1998 Indenture”) (included as Exhibit 4.1 to the Company’s registration statement on Form S-3/A, File No. 333-46611, previously filed with the Commission and incorporated herein by reference); Supplement No. 1 to the 1998 Indenture, dated as of December 31, 2002 (included as Exhibit 4.4 to the Company’s annual report on Form 10-K for the year ended December 29, 2002 (the “2002 10-K”), previously filed with the Commission and incorporated herein by reference); Supplement No. 2 to the 1998 Indenture, dated as of June 18, 2003 (included as Exhibit 4.2 to the Company’s quarterly report on Form 10-Q for the quarter ended June 29, 2003 (the “2003 Second Quarter 10-Q”), previously filed with the Commission and incorporated herein by reference); and Supplement No. 3 to the 1998 Indenture, dated as of January 10, 2005 (included as Exhibit 99.1 to the Company’s current report on Form 8-K dated February 15, 2005, previously filed with the Commission and incorporated herein by reference).
4.4 
—
Indenture governing the Company’s 10.375% Senior Notes due 2010, among the Company, certain U.S. subsidiaries of the Company, as Guarantors, and First Union National Bank, as Trustee (the “2002 Indenture”) (included as Exhibit 4.5 to the Company’s annual report on Form 10-K for the year ended December 30, 2001 (the “2001 10-K”), previously filed with the Commission and incorporated herein by reference); Supplemental Indenture related to the 2002 Indenture, dated as of December 31, 2002 (included as Exhibit 4.5 to the 2002 10-K, previously filed with the Commission and incorporated herein by reference); Second Supplemental Indenture related to the 2002 Indenture, dated as of June 18, 2003 (included as Exhibit 4.3 to the 2003 Second Quarter 10-Q, previously filed with the Commission and incorporated herein by reference); and Third Supplemental Indenture related to the 2002 Indenture, dated as of January 10, 2005 (included as Exhibit 99.2 to the Company’s current report on Form 8-K dated February 15, 2005, previously filed with the Commission and incorporated herein by reference).
4.5
—
Indenture governing the Company’s 9.5% Senior Subordinated Notes due 2014, dated as of February 4, 2004, among the Company, certain U.S. subsidiaries of the Company, as guarantors, and SunTrust Bank, as Trustee (the “2004 Indenture”) (included as Exhibit 4.6 to the Company’s annual report on Form 10-K for the year ended December 28, 2003 (the “2003 10-K”), previously filed with the Commission and incorporated herein by reference); and First Supplemental Indenture related to the 2004 Indenture, dated as of January 10, 2005 (included as Exhibit 99.3 to the Company’s current report on Form 8-K dated February 15, 2005, previously filed with the Commission and incorporated herein by reference).
10.1 
—
Salary Continuation Plan, dated May 7, 1982 (included as Exhibit 10.20 to the Company’s registration statement on Form S-1, File No. 2-82188, previously filed with the Commission and incorporated herein by reference).*
10.2 
—
Form of Salary Continuation Agreement, dated as of October 1, 2002 (as used for Daniel T. Hendrix, Raymond S. Willoch and John R. Wells) (included as Exhibit 10.2 to the Company’s quarterly report on Form 10-Q for the quarter ended September 29, 2002 (the “2002 Third Quarter 10-Q”), previously filed with the Commission and incorporated herein by reference).*
10.3 
—
Salary Continuation Agreement, dated as of October 1, 2002, between the Company and Ray C. Anderson (included as Exhibit 10.3 to the 2002 Third Quarter 10-Q, previously filed with the Commission and incorporated herein by reference).*

84


10.4 
—
Interface, Inc. Omnibus Stock Incentive Plan (included as Exhibit 10.6 to the Company’s annual Report on Form 10-K for the year ended December 29, 1996, previously filed with the Commission and incorporated herein by reference; First Amendment thereto (included as Exhibit 10.34 to the Company’s annual report on Form 10-K for the year ended December 31, 2000 (the “2000 10-K”), previously filed with the Commission and incorporated herein by reference); and Forms of Restricted Stock Agreement, as used for directors, senior officers and other key employees/consultants (included as Exhibits 99.1, 99.2 and 99.3, respectively, to the Company’s current report on Form 8-K dated January 10, 2005, previously filed with the Commission and incorporated herein by reference).*
10.5 
—
Interface, Inc. Executive Bonus Plan, adopted on February 23, 1999 (included as Exhibit 10.1 to the to the Company’s quarterly report on Form 10-Q for the quarter ended July 4, 1999, previously filed with the Commission and incorporated herein by reference).*
10.6 
—
Interface, Inc. Executive Bonus Plan, adopted on February 18, 2004 (included as Exhibit 99.1 to the Company’s current report on Form 8-K dated December 15, 2004, previously filed with the Commission and incorporated herein by reference).*
10.7 
—
Description of Special Incentive Program for 2005-2006 (included as Exhibit 99.2 to the Company’s current report on Form 8-K dated December 15, 2004, previously filed with the Commission and incorporated herein by reference).*
10.8
—
Interface, Inc. Nonqualified Savings Plan (as amended and restated effective January 1, 2002) (included as Exhibit 10.4 to the 2001 10-K, previously filed with the Commission and incorporated herein by reference); First Amendment thereto, dated as of December 20, 2002 (included as Exhibit 10.2 to the 2003 Second Quarter 10-Q, previously filed with the Commission and incorporated herein by reference); Second Amendment thereto, dated as of December 30, 2002 (included as Exhibit 10.3 to the 2003 Second Quarter 10-Q, previously filed with the Commission and incorporated herein by reference); Third Amendment thereto, dated as of May 8, 2003 (included as Exhibit 10.6 to the 2003 10-K, previously filed with the Commission and incorporated herein by reference); and Fourth Amendment thereto, dated as of December 31, 2003 (included as Exhibit 10.7 to the 2003 10-K, previously filed with the Commission and incorporated herein by reference).*
10.9
—
Interface, Inc. Nonqualified Savings Plan II, dated as of January 1, 2005 (included as Exhibit 4 to the Company’s registration statement on Form S-8 dated November 29, 2004, previously filed with the Commission and incorporated herein by reference); and First Amendment thereto, dated as of December 28, 2005.*
10.10
—
Fifth Amended and Restated Credit Agreement, dated as of June 17, 2003, among the Company (and certain direct and indirect subsidiaries), the lenders listed therein, Wachovia Bank, National Association, Fleet Capital Corporation and General Electric Capital Corporation (included as Exhibit 99.1 to the Company’s report on Form 8-K dated June 18, 2003, previously filed with the Commission and incorporated herein by reference); First Amendment thereto, dated as of March 30, 2004 (included as Exhibit 10.1 to the Company’s quarterly report on Form 10-Q for the quarter ended April 4, 2004, previously filed with the Commission and incorporated herein by reference); Second Amendment thereto and Waiver, dated as of December 29, 2004 (included as Exhibit 99.1 to the Company’s current report on Form 8-K dated December 29, 2004, previously filed with the Commission and incorporated herein by reference); Third Amendment thereto, dated as of June 14, 2005 (included as Exhibit 99.1 to the Company’s current report on Form 8-K dated June 14, 2005, previously filed with the Commission and incorporated herein by reference); Fourth Amendment thereto, dated as of September 30, 2005 (included as Exhibit 99.1 to the Company’s current report on Form 8-K dated September 30, 2005, previously filed with the Commission and incorporated herein by reference); and Fifth Amendment thereto, dated as of February 21, 2006 (included as Exhibit 99.1 to the Company’s current report on Form 8-K dated February 21, 2006, previously filed with the Commission and incorporated herein by reference).
10.11
—
Employment Agreement of Ray C. Anderson dated April 1, 1997 (included as Exhibit 10.1 to the Company’s quarterly report on Form 10-Q for the quarter ended June 29, 1997 (the “1997 Second Quarter 10-Q”), previously filed with the Commission and incorporated herein by reference); Amendment thereto dated January 6, 1998 (included as Exhibit 10.1 to the Company’s quarterly report on Form 10-Q for the quarter ended April 5, 1998 (the “1998 First Quarter 10-Q”), previously filed with the Commission and incorporated herein by reference); Second Amendment thereto dated January 14, 1999 (the form of which is included as Exhibit 10.20 to the Company’s annual report on Form 10-K for the year ended January 1, 2000 (the “1999 10-K”), previously filed with the Commission and incorporated herein by reference); Third Amendment thereto dated May 7, 1999 (included as Exhibit 10.6 to the 1999 10-K, previously filed with the Commission and incorporated herein by reference); and Fourth Amendment thereto dated July 24, 2001 (included as Exhibit 10.4 to the 2001 Third Quarter 10-Q, previously filed with the Commission and incorporated herein by reference).*

85


10.12
—
Change in Control Agreement of Ray C. Anderson dated April 1, 1997 (included as Exhibit 10.2 to the 1997 Second Quarter 10-Q, previously filed with the Commission and incorporated herein by reference); Amendment thereto dated January 6, 1998 (included as Exhibit 10.2 to the 1998 First Quarter 10-Q, previously filed with the Commission and incorporated herein by reference); Second Amendment thereto dated January 14, 1999 (the form of which is included as Exhibit 10.21 to the 1999 10-K, previously filed with the Commission and incorporated herein by reference); Third Amendment thereto dated May 7, 1999 (included as Exhibit 10.7 to the 1999 10-K, previously filed with the Commission and incorporated herein by reference); and Fourth Amendment thereto dated July 24, 2001 (included as Exhibit 10.5 to the 2001 Third Quarter 10-Q, previously filed with the Commission and incorporated herein by reference).*
10.13
—
Employment Agreement of Michael D. Bertolucci dated April 1, 1997 (included as Exhibit 10.25 to the 1997 Second Quarter 10-Q, previously filed with the Commission and incorporated herein by reference); Amendment thereto dated January 6, 1998 (included as Exhibit 10.25 to the 1998 First Quarter 10-Q, previously filed with the Commission and incorporated herein by reference); and Second Amendment thereto dated January 14, 1999 (the form of which is included as Exhibit 10.20 to the 1999 10-K, previously filed with the Commission and incorporated herein by reference).*
10.14
—
Change in Control Agreement of Michael D. Bertolucci dated April 1, 1997 (included as Exhibit 10.26 to the 1997 Second Quarter 10-Q, previously filed with the Commission and incorporated herein by reference); Amendment thereto dated January 6, 1998 (included as Exhibit 10.26 to the 1998 First Quarter 10-Q, previously filed with the Commission and incorporated herein by reference); and Second Amendment thereto dated January 14, 1999 (the form of which is included as Exhibit 10.21 to the 1999 10-K, previously filed with the Commission and incorporated herein by reference).*
10.15
—
Employment Agreement of Daniel T. Hendrix dated April 1, 1997 (included as Exhibit 10.7 to the 1997 Second Quarter 10-Q, previously filed with the Commission and incorporated herein by reference); Amendment thereto dated January 6, 1998 (included as Exhibit 10.7 to the 1998 First Quarter 10-Q, previously filed with the Commission and incorporated herein by reference); Second Amendment thereto dated January 14, 1999 (the form of which is included as Exhibit 10.20 to the 1999 10-K, previously filed with the Commission and incorporated herein by reference); and Third Amendment thereto dated January 31, 2003 (included as Exhibit 10.12 to the 2002 10-K previously filed with the Commission and incorporated herein by reference).*
10.16
—
Change in Control Agreement of Daniel T. Hendrix dated April 1, 1997 (included as Exhibit 10.8 to the 1997 Second Quarter 10-Q, previously filed with the Commission and incorporated herein by reference); Amendment thereto dated January 6, 1998 (included as Exhibit 10.8 to the 1998 First Quarter 10-Q, previously filed with the Commission and incorporated herein by reference); and Second Amendment thereto dated January 14, 1999 (the form of which is included as Exhibit 10.21 to the 1999 10-K, previously filed with the Commission and incorporated herein by reference).*
10.17
—
Employment Agreement of Raymond S. Willoch dated April 1, 1997 (included as Exhibit 10.11 to the 1997 Second Quarter 10-Q, previously filed with the Commission and incorporated herein by reference); Amendment thereto dated January 6, 1998 (included as Exhibit 10.11 to the 1998 First Quarter 10-Q, previously filed with the Commission and incorporated herein by reference); Second Amendment thereto dated January 14, 1999 (the form of which is included as Exhibit 10.20 to the 1999 10-K, previously filed with the Commission and incorporated herein by reference); and Third Amendment thereto dated January 31, 2003 (included as Exhibit 10.14 to the 2002 10-K previously filed with the Commission and incorporated herein by reference).*
10.18
—
Change in Control Agreement of Raymond S. Willoch dated April 1, 1997 (included as Exhibit 10.12 to the 1997 Second Quarter 10-Q, previously filed with the Commission and incorporated herein by reference); Amendment thereto dated January 6, 1998 (included as Exhibit 10.12 to the 1998 First Quarter 10-Q, previously filed with the Commission and incorporated herein by reference); and Second Amendment thereto dated January 14, 1999 (the form of which is included as Exhibit 10.21 to the 1999 10-K, previously filed with the Commission and incorporated herein by reference).*
10.19
—
Employment Agreement of John R. Wells dated April 1, 1997 (included as Exhibit 10.23 to the 1997 Second Quarter 10-Q, previously filed with the Commission and incorporated herein by reference); Amendment thereto dated January 6, 1998 (included as Exhibit 10.23 to the 1998 First Quarter 10-Q, previously filed with the Commission and incorporated herein by reference); Second Amendment thereto dated January 14, 1999 (the form of which is included as Exhibit 10.20 to the 1999 10-K, previously filed with the Commission and incorporated herein by reference); and Third Amendment thereto dated January 31, 2003 (included as Exhibit 10.4 to the 2003 Second Quarter 10-Q, previously filed with the Commission and incorporated herein by reference).*

86


10.20
—
Change in Control Agreement of John R. Wells dated April 1, 1997 (included as Exhibit 10.24 to the 1997 Second Quarter 10-Q, previously filed with the Commission and incorporated herein by reference); Amendment thereto dated January 6, 1998 (included as Exhibit 10.24 to the 1998 First Quarter 10-Q, previously filed with the Commission and incorporated herein by reference); and Second Amendment thereto dated January 14, 1999 (the form of which is included as Exhibit 10.21 to the 1999 10-K, previously filed with the Commission and incorporated herein by reference).*
10.21
—
Form of Second Amendment to Employment Agreement, dated January 14, 1999 (amending Exhibits 10.6, 10.8, 10.10, 10.12, 10.16 and 10.18 to the 1999 10-K and included as Exhibit 10.20 to such report, previously filed with the Commission and incorporated herein by reference).*
10.22
—
Form of Second Amendment to Change in Control Agreement, dated January 14, 1999 (amending Exhibits 10.7, 10.9, 10.11, 10.13, 10.17 and 10.19 to the 1999 10-K and included as Exhibit 10.21 to such report, previously filed with the Commission and incorporated herein by reference).*
10.23
—
Split Dollar Agreement, dated May 29, 1998, between the Company, Ray C. Anderson and Mary Anne Anderson Lanier, as Trustee of the Ray C. Anderson Family Trust (included as Exhibit 10.32 to the 1998 10-K, previously filed with the Commission and incorporated herein by reference).*
10.24
—
Split Dollar Insurance Agreement, dated effective as of February 21, 1997, between the Company and Daniel T. Hendrix (included as Exhibit 10.2 to the Company’s quarterly report on Form 10-Q for the quarter ended October 4, 1998, previously filed with the Commission and incorporated herein by reference).*
10.25
—
Employment Agreement of Christopher J. Richard dated July 30, 2003 (included as Exhibit 10.1 to the Company’s quarterly report on Form 10-Q for the quarter ended September 28, 2003, previously filed with the Commission and incorporated by reference herein).*
10.26
—
Interface, Inc. Key Employee Stock Option Plan (1993) (included as Exhibit 10.7 to the Company’s annual report on Form 10-K for the year ended January 3, 1993, previously filed with the Commission and incorporated herein by reference); Amendment No. 1 thereto (included as Exhibit 10.7 to the Company’s annual report on Form 10-K for the year ended January 2, 1994, previously filed with the Commission and incorporated herein by reference); and Amendment No. 2 thereto (included as Exhibit 10.5 to the Company’s annual report on Form  10--K for the year ended December 31, 1995, previously filed with the Commission and incorporated herein by reference).*
10.27
—
Interface, Inc. Offshore Stock Option Plan (included as Exhibit 10.15 to the Company’s annual report on Form 10-K for the year ended January 1, 1989, previously filed with the Commission and incorporated herein by reference); and Amendment No. 1 thereto (included as Exhibit 10.11 to the Company’s annual report on Form 10-K for the year ended December 29, 1991, previously filed with the Commission and incorporated herein by reference).*
10.28
—
Employment Agreement of Patrick C. Lynch dated October 6, 2005 (included as Exhibit 99.1 to the Company’s current report on Form 8-K dated October 6, 2005, previously filed with the Commission and incorporated herein by reference).*
10.29
—
Change in Control Agreement of Patrick C. Lynch dated October 6, 2005 (included as Exhibit 99.2 to the Company’s current report on Form 8-K dated October 6, 2005, previously filed with the Commission and incorporated herein by reference).*
10.30
—
Form of Indemnity Agreement of Director (as used for directors of the Company) (included as Exhibit 99.1 to the Company’s current report on Form 8-K dated November 29, 2005, previously filed with the Commission and incorporated herein by reference).*
10.31
—
Form of Indemnity Agreement of Officer (as used for certain officers of the Company, including Daniel T. Hendrix, John R. Wells, Robert A. Coombs, Raymond S. Willoch and Michael D. Bertolucci) (included as Exhibit 99.2 to the Company’s current report on Form 8-K dated November 29, 2005, previously filed with the Commission and incorporated herein by reference).*
10.32
—
Description of Special Incentive Program for 2007 (included as Exhibit 99.1 to the Company’s current report on Form 8-K dated December 14, 2005, previously filed with the Commission and incorporated herein by reference).*
10.33
—
Interface, Inc. Long-Term Care Insurance Plan and related Summary Plan Description (included as Exhibit 99.2 to the Company’s current report on Form 8-K dated December 14, 2005, previously filed with the Commission and incorporated herein by reference).*
21   
—
Subsidiaries of the Company.
23   
—
Consent of BDO Seidman, LLP.
24   
—
Power of Attorney (see signature page of this Report)


87
 
31.1
—
Certification of Chief Executive Officer with respect to the Company’s Annual Report on Form 10-K for the fiscal year ended January 1, 2006.
31.2
—
Certification of Chief Financial Officer with respect to the Company’s Annual Report on Form 10-K  for the fiscal year ended January 1, 2006.
32.1
—
Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of United States Code by Chief  Executive Officer with respect to the Company’s Annual Report on Form 10-K for the fiscal year  ended January 1, 2006.
32.2
—
Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of United States Code by Chief  Financial Officer with respect to the Company’s Annual Report on Form 10-K for the fiscal year  ended January 1, 2006.

__________

* Management contract or compensatory plan or agreement required to be filed pursuant to Item 14(c) of this Report.


 
88

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Interface, Inc.
Atlanta, Georgia
 
The audits referred to in our report dated March 10, 2006 relating to the consolidated financial statements of Interface, Inc., which is contained in Item 8 of this Form 10-K included the audit of the Financial Statement Schedule II (Valuation and Qualifying Accounts and Reserves) set forth in the Form 10-K. The Financial Statement Schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the Financial Statement Schedules based upon our audits.
 
In our opinion such financial statement schedules present fairly, in all material respects, the information set forth therein. As discussed in Note D of Financial Statement Schedule II (Valuation and Qualifying Accounts and Reserves) the Company has restated certain amounts for 2004 and 2003.
 
 
/s/ BDO SEIDMAN, LLP
 
 
Atlanta, Georgia
March 10, 2006
 

89

INTERFACE, INC. AND SUBSIDIARIES

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

   
COLUMN A
  
COLUMN B
  
COLUMN C
  
COLUMN D
  
COLUMN E
  
   
BALANCE,
AT
BEGINNING
OF YEAR
  
CHARGED
TO COSTS
AND
EXPENSES
(A)
  
CHARGED
TO OTHER
ACCOUNTS
  
DEDUCTIONS
(DESCRIBE)
(B)
  
BALANCE,
AT END OF
YEAR
  
 
  
(in thousands)
  
Allowance for Doubtful Accounts:
                                
Year Ended:
                                
January 1, 2006
  
$
6,099
  
$
2,009
  
$
--
  
$
1,916
  
$
6,192
  
January 2, 2005
    
4,965
    
1,421
    
--
    
287
    
6,099
  
December 28, 2003
    
4,200
    
1,807
    
--
    
1,042
    
4,965
  
 
(A) Includes changes in foreign currency exchange rates.

(B) Write off of bad debt.

 
 
     
COLUMN A 
    
COLUMN B 
    
COLUMN C 
    
COLUMN D 
    
COLUMN E 
  
     
BALANCE,
AT
BEGINNING
OF YEAR
    
CHARGED
TO COSTS
AND
EXPENSES
(A)
    
CHARGED
TO OTHER
ACCOUNTS
(B)
    
DEDUCTIONS
(DESCRIBE)
(C) 
    
BALANCE,
AT END OF
YEAR
  
   
(in thousands)
  
Restructuring Reserve:
                                
Year ended:
                                
January 1, 2006
  
$
2,863
  
$
--
  
$
--
  
$
2,592
  
$
271
  
January 2, 2005
    
4,710
    
--
    
--
    
1,847
    
2,863
  
December 28, 2003
    
6,412
    
--
    
2,757
    
4,459
    
4,710
  
 
(A) Includes changes in foreign currency exchange rates.

(B) Includes a reallocation of reserves based on changes in the Company’s estimates.

(C) Cash payments.
 
 
90

 
   
COLUMN A
  
COLUMN B
    
COLUMN C 
    
COLUMN D 
    
COLUMN E 
  
   
BALANCE,
AT
BEGINNING
OF YEAR
  
CHARGE TO
COSTS AND
EXPENSES
(A)
    
CHARGED
TO OTHER
ACCOUNTS
    
DEDUCTION
 (DESCRIBE)
(B)
    
BALANCE,
AT END
OF YEAR
  
   
(in thousands)
  
Reserves for Sales Returns and Allowances:
                                
Year ended:
                                
January 1, 2006
  
$
2,782
  
$
3,205
  
$
--
  
$
3,274
  
$
2,713
  
January 2, 2005
    
1,994
    
3,757
    
--
    
2,969
    
2,782
  
December 28, 2003
    
1,974
    
3,748
    
--
   
3,728
    
1,994
  
 
(A)
Includes changes in foreign currency exchange rates.

(B)
Represents credits issued and adjustments to reflect actual exposure.
 
 
 
   
COLUMN A
  
COLUMN B
  
COLUMN C
  
COLUMN D
  
COLUMN E
  
   
BALANCE,
AT
BEGINNING
OF YEAR
  
CHARGE TO
COSTS AND
EXPENSES
(A)
  
CHARGED
TO OTHER
ACCOUNTS
  
DEDUCTIONS(DESCRIBE)
(B)
  
BALANCE,
AT END OF
YEAR
  
   
(in thousands)
  
Warranty Reserves :
                                
Year ended:
                                
January 1, 2006
  
$
2,409
  
$
1,445
  
$
--
  
$
1,290
  
$
2,564
  
January 2, 2005
    
2,885
    
1,357
    
--
    
1,833
    
2,409
  
December 28, 2003
    
4,159
    
235
    
--
    
1,509
    
2,885
  
 
(A)
Includes changes in foreign currency exchange rates.

(B)
Represents costs applied against reserve and adjustments to reflect actual exposure.

 
   
COLUMN A
  
COLUMN B
  
 COLUMN C 
  
COLUMN D
    
COLUMN E
  
   
BALANCE,
AT
BEGINNING
OF YEAR
  
CHARGE TO
COSTS AND
EXPENSES
(A)
  
 CHARGED
TO OTHER
ACCOUNTS
 DEDUCTIONS
(DESCRIBE)
(B)
  
BALANCE,
AT END OF
YEAR
  
   
(in thousands)
  
Inventory Reserves :
                                
Year ended:
                                
January 1, 2006
  
$
10,514
  
$
4,193
  
$
--
  
$
2,696
  
$
12,011
  
January 2, 2005
    
6,573
    
6,087
    
743
    
2,889
    
10,514
  
December 28, 2003
    
9,145
    
1,583
    
385
    
4,540
    
6,573
  
 
(A)
Includes changes in foreign currency exchange rates.

(B)
Represents costs applied against reserve and adjustments to reflect actual exposure.

(D)
Certain of the numbers in the above tables have been revised for the years ended 2004 and 2003 as a result of immaterial clerical errors.

(All other Schedules for which provision is made in the applicable accounting requirements of the Securities and Exchange Commission are omitted because they are either not applicable or the required information is shown in the Company's Consolidated Financial Statements or the Notes thereto.)

91

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

Date: March 14, 2006

 
INTERFACE, INC.
 
By:    /s/ DANIEL T. HENDRIX                      
       Daniel T. Hendrix
       President and Chief Executive Officer


POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Daniel T. Hendrix as attorney-in-fact, with power of substitution, for him or her in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature 
  
Capacity 
  
Date 
         
/s/ RAY C. ANDERSON
  
Chairman of the Board
  
March 14, 2006
Ray C. Anderson
        
         
/s/ DANIEL T. HENDRIX
  
President, Chief Executive Officer and
 
March 14, 2006
Daniel T. Hendrix
  
Director (Principal Executive Officer)
    
         
/s/ PATRICK C. LYNCH
  
Vice President and Chief Financial Officer
  
March 14, 2006
Patrick C. Lynch
  
(Principal Financial and Accounting Officer)
    
         
/s/ EDWARD C. CALLAWAY
  
Director
  
March 14, 2006
Edward C. Callaway
        
         
/s/ DIANNE DILLON-RIDGLEY
  
Director
  
March 14, 2006
Dianne Dillon-Ridgley
        
         
/s/ CARL I. GABLE
  
Director
  
March 14, 2006
Carl I. Gable
        
         
/s/ JUNE M. HENTON
  
Director
  
March 14, 2006
June M. Henton
        
         
 /s/ CHRISTOPHER G. KENNEDY
  
Director
  
March 14, 2006
Christopher G. Kennedy
        
         
/s/ J. SMITH LANIER, II
  
Director
  
March 14, 2006
J. Smith Lanier, II
        
         
/s/ JAMES B. MILLER, JR.
  
Director
  
March 14, 2006
James B. Miller, Jr.
        
         
/s/ THOMAS R. OLIVER
  
Director
  
March 14, 2006
Thomas R. Oliver
        
         
/s/ CLARINUS C.TH. VAN ANDEL
  
Director
  
March 14, 2006
Clarinus C.Th. van Andel
        

92


EXHIBIT INDEX

Exhibit
Number
  
   
10.9
First Amendment to the Interface, Inc. Nonqualified Savings Plan II, dated as of December 28, 2005.
21
Subsidiaries of the Company.
23
Consent of BDO Seidman, LLP.
24
Power of Attorney
31.1
Certification of Chief Executive Officer with respect to the Company’s Annual Report on Form 10-K for the fiscal year ended January 1, 2006.
31.2
Certification of Chief Financial Officer with respect to the Company’s Annual Report on Form 10-K for the fiscal year ended January 1, 2006.
32.1
Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of United States Code by Chief Executive Officer with respect to the Company’s Annual Report on Form 10-K for the fiscal year ended January 1, 2006.
32.2
Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of United States Code by Chief Financial Officer with respect to the Company’s Annual Report on Form 10-K for the fiscal year ended January 1, 2006.


93