form10-q.htm


SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

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

For Quarterly Period Ended September 30, 2007

Commission File Number 0-12016

INTERFACE, INC.
 (Exact name of registrant as specified in its charter)

GEORGIA
 
58-1451243
(State or other jurisdiction of
 
 (I.R.S. Employer
incorporation or organization)
 
 Identification No.)


2859 PACES FERRY ROAD, SUITE 2000, ATLANTA, GEORGIA 30339
 (Address of principal executive offices and zip code)

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


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


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of  “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):

Large Accelerated Filer  o
Accelerated Filer  x
Non-Accelerated Filer  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 x

Shares outstanding of each of the registrant's classes of common stock at November 2, 2007:

 
                          Class
 
Number of Shares
 
 
Class A Common Stock, $.10 par value per share
   
55,257,433
 
 
Class B Common Stock, $.10 par value per share
   
6,489,769
 




      
                                    
      
        
      
    


INTERFACE, INC.

INDEX
   
PAGE
PART I.
FINANCIAL INFORMATION
 
 
Item 1.
 
Financial Statements.............................................................................................................................................................................................................................
3
   
Consolidated Condensed Balance Sheets – September 30, 2007 and December 31, 2006.........................................................................................................
 
3
   
Consolidated Condensed Statements of Operations - Three Months and Nine Months Ended September 30, 2007 and October 1, 2006......................
 
4
   
Consolidated Statements of Comprehensive Income (Loss) – Three Months and Nine Months Ended September 30, 2007 and October 1, 2006........
 
5
   
Consolidated Condensed Statements of Cash Flows – Nine Months Ended September 30, 2007 and October 1, 2006......................................................
 
6
   
Notes to Consolidated Condensed Financial Statements..............................................................................................................................................................
 
7
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations..................................................................................................
 
21
 
Item 3.
 
Quantitative and Qualitative Disclosures about Market Risk........................................................................................................................................................
26
 
Item 4.
 
Controls and Procedures.....................................................................................................................................................................................................................
27
     
PART II.
OTHER INFORMATION
 
 
Item 1.
 
Legal Proceedings.................................................................................................................................................................................................................................
27
 
Item 1A.
 
Risk Factors...........................................................................................................................................................................................................................................
27
 
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds......................................................................................................................................................
27
 
Item 3.
 
Defaults Upon Senior Securities........................................................................................................................................................................................................
27
 
Item 4.
 
Submission of Matters to a Vote of Security Holders....................................................................................................................................................................
27
 
Item 5.
 
Other Information.................................................................................................................................................................................................................................
27
 
Item 6.
 
Exhibits..................................................................................................................................................................................................................................................
27




      
                                    
      
        
      
    

PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

INTERFACE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
 (IN THOUSANDS)
   
SEPT. 30, 2007
   
DECEMBER 31, 2006
 
   
(UNAUDITED)
       
ASSETS
           
CURRENT ASSETS:
           
Cash and Cash Equivalents
  $
77,530
    $
109,157
 
Accounts Receivable, net
   
166,254
     
143,025
 
Inventories
   
124,432
     
112,293
 
Prepaid and Other Expenses
   
17,790
     
21,805
 
Deferred Income Taxes
   
7,070
     
6,829
 
Assets of Business Held for Sale
   
2,212
     
158,322
 
TOTAL CURRENT ASSETS
   
395,288
     
551,431
 
                 
PROPERTY AND EQUIPMENT, less accumulated depreciation   
   
152,902
     
134,631
 
DEFERRED TAX ASSET
   
79,191
     
65,841
 
GOODWILL
   
140,599
     
135,610
 
OTHER ASSETS
   
55,290
     
40,827
 
TOTAL ASSETS
  $
823,270
    $
928,340
 
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
CURRENT LIABILITIES:
               
Accounts Payable
  $
60,408
    $
49,542
 
Accrued Expenses
   
106,675
     
98,702
 
Liabilities of Business Held for Sale
   
1,520
     
22,934
 
TOTAL CURRENT LIABILITIES
   
168,603
     
171,178
 
                 
LONG-TERM DEBT, less current maturities
   
7,169
     
--
 
SENIOR NOTES
   
175,000
     
276,365
 
SENIOR SUBORDINATED NOTES
   
135,000
     
135,000
 
DEFERRED INCOME TAXES
   
8,898
     
2,058
 
OTHER
   
65,709
     
63,839
 
TOTAL LIABILITIES
  $
560,379
    $
648,440
 
                 
Minority Interest
   
6,805
     
5,506
 
                 
Commitments and Contingencies
               
                 
SHAREHOLDERS' EQUITY:
               
Preferred Stock
   
--
     
--
 
Common Stock
   
6,167
     
6,066
 
Additional Paid-In Capital
   
331,827
     
323,132
 
Retained Earnings (Deficit)
    (34,172 )    
5,217
 
Accumulated Other Comprehensive Income – Foreign Currency Translation Adjustment
    (974 )     (12,847 )
Accumulated Other Comprehensive Income – Pension Liability
    (46,762 )     (47,174 )
TOTAL SHAREHOLDERS' EQUITY
   
256,086
     
274,394
 
    $
823,270
    $
928,340
 

See accompanying notes to consolidated condensed financial statements.

- 3 -

      
                                    
      
        
      
    

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

(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

   
THREE
MONTHS
ENDED
   
NINE
MONTHS
ENDED
 
                         
   
SEPT. 30,
2007
   
OCTOBER 1,
2006
   
SEPT. 30,
2007
   
OCTOBER 1,
2006
 
                         
NET SALES
  $
279,471
    $
234,221
    $
787,925
    $
655,539
 
Cost of Sales
   
181,542
     
154,309
     
514,543
     
431,995
 
                                 
GROSS PROFIT ON SALES
   
97,929
     
79,912
     
273,382
     
223,544
 
Selling, General and Administrative Expenses
   
63,179
     
54,377
     
181,558
     
153,832
 
Loss on Disposition – Specialty Products
   
--
     
--
     
1,873
     
--
 
OPERATING INCOME
   
34,750
     
25,535
     
89,951
     
69,712
 
                                 
Interest Expense
   
8,643
     
10,504
     
26,924
     
32,672
 
Other Expense
   
1,281
     
372
     
2,316
     
1,090
 
                                 
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX EXPENSE
   
24,826
     
14,659
     
60,711
     
35,950
 
Income Tax Expense
   
9,620
     
5,175
     
23,113
     
12,561
 
                                 
Income from Continuing Operations
   
15,206
     
9,484
     
37,598
     
23,389
 
Loss from Discontinued Operations, Net of Tax
    (6,650 )     (378 )     (68,660 )     (23,763 )
Loss on Disposal of Discontinued Operations, Net of Tax
   
--
     
--
     
--
      (1,723 )
NET INCOME (LOSS)
  $
8,556
    $
9,106
    $ (31,062 )   $ (2,097 )
                                 
Earnings (Loss) Per Share – Basic
                               
Continuing Operations
  $
0.25
    $
0.18
    $
0.62
    $
0.44
 
Discontinued Operations
    (0.11 )     (0.01 )     (1.13 )     (0.45 )
Loss on Disposal of Discontinued Operations
   
--
     
--
     
--
      (0.03 )
Earnings (Loss) Per Share – Basic
  $
0.14
    $
0.17
    $ (0.51 )   $ (0.04 )
                                 
Earnings (Loss) Per Share – Diluted
                               
Continuing Operations
  $
0.25
    $
0.17
    $
0.61
    $
0.43
 
Discontinued Operations
    (0.11 )    
--
      (1.11 )     (0.44 )
Loss on Disposal of Discontinued Operations
   
--
     
--
     
--
      (0.03 )
Earnings (Loss) Per Share – Diluted
  $
0.14
    $
0.17
    $ (0.50 )   $ (0.04 )
                                 
Common Shares Outstanding – Basic
   
60,711
     
53,454
     
60,448
     
53,175
 
Common Shares Outstanding – Diluted
   
61,860
     
55,070
     
61,590
     
54,750
 

See accompanying notes to consolidated condensed financial statements.

- 4 -

      
                                    
      
        
      
    


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

(IN THOUSANDS)

   
THREE MONTHS ENDED
   
NINE MONTHS ENDED
 
             
   
SEPT. 30, 2007
   
OCT. 1, 2006
   
SEPT. 30, 2007
   
OCT. 1, 2006
 
                         
Net Income (Loss)
  $
8,556
    $
9,106
    $ (31,062 )   $ (2,097 )
Other Comprehensive Income, Foreign
                               
Currency Translation Adjustment and Pension Liability Adjustment
   
5,817
     
4,104
     
12,285
     
15,575
 
Comprehensive Income (Loss)
  $
14,373
    $
13,210
    $ (18,777 )   $
13,478
 


See accompanying notes to consolidated condensed financial statements.

- 5 -

      
                                    
      
        
      
    


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

(IN THOUSANDS)

   
NINE MONTHS ENDED
 
   
SEPT. 30, 2007
   
OCT. 1, 2006
 
OPERATING ACTIVITIES:
           
Net loss
  $ (31,062 )   $ (2,097 )
Loss from discontinued operations
   
68,660
     
25,486
 
Income from continuing operations
   
37,598
     
23,389
 
Adjustments to reconcile income (loss) to cash used in operating activities:
               
Loss on disposition of assets – Specialty Products
   
1,873
     
--
 
Depreciation and amortization
   
17,089
     
15,797
 
Deferred income taxes and other
   
--
      (7,161 )
Working capital changes:
               
Accounts receivable
    (19,493 )     (21,304 )
Inventories
    (10,821 )     (23,671 )
Prepaid expenses
   
5,217
      (2,512 )
Accounts payable and accrued expenses
   
12,479
     
2,939
 
                 
Cash provided by (used in) continuing operations
   
43,942
      (12,523 )
Cash provided by (used in) discontinued operations
    (1,884 )    
3,271
 
                 
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
   
42,058
      (9,252 )
                 
INVESTING ACTIVITIES:
               
Capital expenditures
    (27,523 )     (19,676 )
Other
    (8,404 )     (4,395 )
Proceeds from sale of Fabrics businesses
   
60,732
     
28,837
 
Cash provided by investing activities of continuing operations
   
24,805
     
4,766
 
Cash used in discontinued operations
    (6,950 )     (3,343 )
                 
CASH PROVIDED BY INVESTING ACTIVITIES:
   
17,855
     
1,423
 
                 
FINANCING ACTIVITIES:
               
Net borrowing of long-term debt
   
7,169
     
21,541
 
Repurchase of senior notes
    (101,365 )     (38,490 )
Proceeds from issuance of common stock
   
3,621
     
5,957
 
Dividends paid
    (3,683 )    
--
 
Debt issuance costs
   
--
      (710 )
                 
CASH USED IN FINANCING ACTIVITIES:
    (94,258 )     (11,702 )
                 
Net cash used in operating, investing and
               
financing activities
    (34,345 )     (19,531 )
Effect of exchange rate changes on cash
   
2,718
     
1,241
 
                 
CASH AND CASH EQUIVALENTS:
               
Net change during the period
    (31,627 )     (18,290 )
Balance at beginning of period
   
109,157
     
47,275
 
                 
Balance at end of period
  $
77,530
    $
28,985
 


See accompanying notes to consolidated condensed financial statements.


- 6 -

      
                                    
      
        
      
    

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

NOTE 1 – CONDENSED FOOTNOTES

As contemplated by the Securities and Exchange Commission (the “Commission”) instructions to Form 10-Q, the following footnotes have been condensed and, therefore, do not contain all disclosures required in connection with annual financial statements. Reference should be made to the Company’s year-end financial statements and notes thereto contained in its Annual Report on Form 10-K for the fiscal year ended December 31, 2006, as filed with the Commission.

The financial information included in this report has been prepared by the Company, without audit. In the opinion of management, the financial information included in this report contains all adjustments (all of which are normal and recurring) necessary for a fair presentation of the results for the interim periods. Nevertheless, the results shown for interim periods are not necessarily indicative of results to be expected for the full year.  The December 31, 2006, consolidated condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States.

In 2004, the Company committed to a plan to exit its owned Re:Source dealer businesses (as well as a small Australian dealer business and a small residential fabrics business) and began to dispose of several of the dealer subsidiaries. In addition, as described below in Note 2, the Company has sold its Fabrics Group business segment.  The results of operations and related disposal costs, gains and losses for these businesses are classified as discontinued operations for all periods presented.

Additionally, certain prior period amounts have been reclassified to conform to the current period presentation.

NOTE 2 – SALE OF FABRICS GROUP BUSINESS SEGMENT

In the second quarter of 2007, the Company entered into an agreement to sell its Fabrics Group business segment to a third party. The sale was completed in the third quarter of 2007.  The purchase price for the business segment was $67.2 million, after working capital and certain other adjustments. Of this $67.2 million, $6.5 million represents deferred compensation which would be remitted to the Company upon the achievement of certain performance criteria by the disposed segment over the 18 months following the sale.  At this time, the Company has determined that the receipt of this deferred amount is probable. As described below in Notes 9 and 11, the Company incurred impairment charges of approximately $61.9 million during the first six months of 2007 to reduce the carrying value of the business segment to fair value as represented by the purchase price.  In the second and third quarters, the Company incurred approximately $12.4 million of direct costs to sell the business segment.  The major classes of assets and liabilities related to the business segment at disposition were accounts receivable of $15.2 million, inventory of $32.7 million, property, plant and equipment of $36.5 million, and accounts payable and accruals of $11.4 million.

In April 2006, subsequent to the end of the first quarter of 2006, the Company sold its European fabrics business for $28.8 million to an entity formed by the business’s management team.  An impairment charge of $20.7 million was recorded in the first quarter of 2006 in connection with this sale.  The major classes of assets and liabilities related to this disposal group included accounts receivable of $11.9 million, inventory of $11.4 million, property, plant and equipment of $9.5 million and accounts payable of $7.6 million.  In the second quarter of 2006, the transaction resulted in a net loss on disposal of $1.7 million.

Current and prior periods have been restated to include the results of operations and related disposal costs, gains and losses for these businesses as discontinued operations.  In addition, assets and liabilities of these businesses have been reported in assets and liabilities held for sale for all reported periods.

NOTE 3 – INVENTORIES

Inventories are summarized as follows:

     
September 30, 2007
   
December 31, 2006
 
     
(In thousands)
 
 
Finished Goods
  $
57,389
    $
66,991
 
 
Work in Process
   
15,800
     
13,537
 
 
Raw Materials
   
51,243
     
31,765
 
      $
124,432
    $
112,293
 



- 7 -

      
                                    
      
        
      
    

NOTE 4 – EARNINGS (LOSS) PER SHARE

Basic earnings (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 the period. Shares issued or reacquired during the period have been weighted for the portion of the period that they were outstanding.  Diluted earnings (loss) per share is calculated in a manner consistent with that of basic earnings (loss) per share while giving effect to all potentially dilutive common shares that were outstanding during the period. The computation of diluted earnings (loss) per share does not assume conversion or exercise of securities that would have an anti-dilutive effect on earnings (loss) per share.  For the quarters ended September 30, 2007, and October 1, 2006, outstanding options to purchase 30,000 and 45,000 shares of common stock, respectively, were not included in the computation of diluted earnings per share as their impact would be anti-dilutive.  For the nine months ended September 30, 2007 and October 1, 2006, outstanding options to purchase 50,000 and 80,000 shares of common stock, respectively, were not included in the computation of diluted earnings per share as their impact would be anti-dilutive.

For the Three-Month
Period Ended                
 
Net Income
   
Average Shares
Outstanding
   
Earnings
Per Share
 
   
(In Thousands Except Per Share Amounts)
 
September 30, 2007
  $
8,556
     
60,711
    $
0.14
 
Effect of Dilution:
                       
   Options & Restricted Stock
   
--
     
1,149
     
--
 
                         
Diluted
  $
8,556
     
61,860
    $
0.14
 
                         
October 1, 2006
  $
9,106
     
53,454
    $
0.17
 
Effect of Dilution:
                       
   Options & Restricted Stock
   
--
     
1,616
     
--
 
                         
Diluted
  $
9,106
     
55,070
    $
0.17
 
       
For the Nine-Month
Period Ended                
 
Net Income (Loss)
   
Average Shares
Outstanding
   
Earnings (Loss)
Per Share
 
   
(In Thousands Except Per Share Amounts)
 
September 30, 2007
  $ (31,062 )    
60,448
    $ (0.51 )
Effect of Dilution:
                       
   Options & Restricted Stock
   
--
     
1,142
     
0.01
 
                         
Diluted
  $ (31,062 )    
61,590
    $ (0.50 )
                         
October 1, 2006
  $ (2,097 )    
53,175
    $ (0.04 )
Effect of Dilution:
                       
   Options & Restricted Stock
   
--
     
1,575
     
--
 
                         
Diluted
  $ (2,097 )    
54,750
    $ (0.04 )


NOTE 5 – SEGMENT INFORMATION

Based on the quantitative thresholds specified in Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures about Segments of an Enterprise and Related Information,” the Company has determined that it has three reportable segments: (1) the Modular Carpet segment, which includes its InterfaceFLOR, Heuga and FLOR modular carpet businesses, as well as its Intersept antimicrobial sales and licensing program, (2) the Bentley Prince Street segment, which includes its Bentley Prince Street broadloom, modular carpet and area rug businesses, and (3) the Specialty Products segment, which includes Pandel, Inc., a producer of vinyl carpet tile backing and specialty mat and foam products.  The majority of the operations of the Specialty Products segment were sold on March 7, 2007 (see Note 12 for further information).  In June of 2007, the Company entered into an agreement to sell its former Fabrics Group business segment, and the sale was completed in the third quarter of 2007 (see Note 2 for further information).  Accordingly, the Company has included the operations of the former Fabrics Group segment in discontinued operations. 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 also reported as discontinued operations in the accompanying consolidated condensed statements of operations.

- 8 -

The accounting policies of the operating segments are the same as those described in the Summary of Significant Accounting Policies contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2006, as filed with the Commission. Segment amounts disclosed are prior to any elimination entries made in consolidation, except in the case of net sales, where intercompany sales have been eliminated. The chief operating decision maker evaluates performance of the segments based on operating income. Costs excluded from this profit measure primarily consist of allocated corporate expenses, interest/other expense and income taxes. Corporate expenses are primarily comprised of corporate overhead expenses. Thus, operating income includes only the costs that are directly attributable to the operations of the individual segment.  Assets not identifiable to any individual segment are corporate assets, which are primarily comprised of cash and cash equivalents, short-term investments, intangible assets and intercompany amounts, which are eliminated in consolidation.

Segment Disclosures

Summary information by segment follows:

   
Modular Carpet
   
Bentley Prince Street
   
Specialty Products
   
Total
 
   
(In thousands)
 
Three Months Ended September 30, 2007
                       
Net sales
  $
242,889
    $
36,582
    $
--
    $
279,471
 
Depreciation and amortization
   
3,546
     
473
     
--
     
4,019
 
Operating income
   
35,187
     
1,259
     
--
     
36,446
 
                                 
Three Months Ended October 1, 2006
                               
Net sales
  $
193,640
    $
37,098
    $
3,483
    $
234,221
 
Depreciation and amortization
   
3,572
     
443
     
33
     
4,048
 
Operating income
   
24,309
     
2,239
     
87
     
26,635
 

   
Modular Carpet
   
Bentley
Prince Street
   
Specialty
Products
   
Total
 
   
(In thousands)
 
Nine Months Ended September 30, 2007
                       
   Net sales
  $
673,666
    $
112,067
    $
2,192
    $
787,925
 
   Depreciation and amortization
   
10,725
     
1,406
     
12
     
12,143
 
   Operating income (loss)
   
93,568
     
4,226
      (1,733 )    
96,061
 
                                 
Nine Months Ended October 1, 2006
                               
   Net sales
  $
545,998
    $
100,130
    $
9,411
    $
655,539
 
   Depreciation and amortization
   
10,968
     
1,354
     
70
     
12,392
 
   Operating income
   
68,618
     
4,456
     
101
     
73,175
 

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

   
Three Months Ended
   
Nine Months Ended
 
   
Sept. 30, 2007
   
October 1, 2006
   
Sept. 30, 2007
   
October 1, 2006
 
   
(In thousands)
   
(In thousands)
 
DEPRECIATION AND AMORTIZATION
                       
Total segment depreciation and amortization
  $
4,019
    $
4,048
    $
12,143
    $
12,392
 
Corporate depreciation and amortization
   
1,110
     
1,210
     
4,946
     
3,405
 
Reported depreciation and amortization
  $
5,129
    $
5,258
    $
17,089
    $
15,797
 
                                 
OPERATING INCOME
                               
Total segment operating income
  $
36,446
    $
26,635
    $
96,061
    $
73,175
 
Corporate expenses and other reconciling amounts
    (1,696 )     (1,100 )     (6,110 )     (3,463 )
Reported operating income
  $
34,750
    $
25,535
    $
89,951
    $
69,712
 

- 9 -

      
                                    
      
        
      
    


   
September 30, 2007
   
December 31, 2006
 
ASSETS
 
(In thousands)
 
Total segment assets
  $
656,416
    $
604,207
 
Discontinued operations
   
2,212
     
158,322
 
Corporate assets and eliminations
   
164,642
     
165,811
 
Reported total assets
  $
823,270
    $
928,340
 


NOTE 6 – LONG-TERM DEBT

On June 30, 2006, the Company amended and restated its domestic revolving credit facility.  Under the amended credit facility, the maximum aggregate amount of loans and letters of credit available to the Company at any one time was increased from $100 million to $125 million, subject to a borrowing base limitation.  The amended credit facility matures on June 30, 2011.  The facility includes a domestic U.S. Dollar syndicated loan and letter of credit facility up to the lesser of (1) $125 million, or (2) a borrowing base equal to the sum of specified percentages of eligible property and equipment, accounts receivable, finished goods inventory and raw materials inventory in the U.S. (the percentages and eligibility requirements for the borrowing base are specified in the credit facility), less certain reserves.  The previous facility included a multicurrency syndicated loan and letter of credit facility in British pounds, which has been removed from the amended facility.

Interest on borrowings and letters of credit under the amended credit facility is charged at varying rates computed by applying a margin (ranging from 0.0-2.25%) over a baseline rate (such as the prime interest rate or LIBOR), depending on the type of borrowing and our average excess borrowing availability during the most recently completed fiscal quarter.  In addition, the Company pays an unused line fee on the facility ranging from 0.25-0.375%, depending on our average excess borrowing availability during the most recently completed fiscal quarter.  The 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 its domestic subsidiaries and up to 65% of the stock of its first-tier material foreign subsidiaries. Those collateral documents provide that, if an event of default occurs under the facility, the lenders’ collateral agent may, upon the request of the specified percentage of lenders, exercise remedies with respect to the collateral that include foreclosing mortgages on the Company’s real estate assets, taking possession of or selling its personal property assets, collecting its accounts receivable, or exercising proxies to take control of the pledged stock of its domestic and first-tier material foreign subsidiaries.

Under the amended credit facility,our negative covenants have been relaxed in several respects, including with respect to the repayment of our other indebtedness and the payment of dividends and limiting their application to Interface, Inc. and its domestic subsidiaries. Additionally, the financial covenants have been amended to delete the senior secured debt coverage ratio and to modify the terms of the sole remaining financial covenant, a fixed charge coverage test.  The Company is currently in compliance under the facility and anticipates that it will remain in compliance with the covenants.

As of September 30, 2007, there were zero borrowings and $10.0 million in letters of credit outstanding under the amended credit facility.  As of September 30, 2007, the Company could have incurred $65.0 million of additional borrowings under the facility.

On March 9, 2007, Interface Europe B.V. (the Company’s modular carpet subsidiary based in the Netherlands) and certain of its subsidiaries entered into a Credit Agreement with ABN AMRO Bank N.V. Under the Credit Agreement, ABN AMRO provides a credit facility for borrowings and bank guarantees in varying aggregate amounts over time as follows:

- 10 -

      
                                    
      
        
      
    


 
                 Time Period                   
 
Maximum Amount 
in Euros      
 
 
 
 
(in millions)
 
 
January 1, 2007 - April 30, 2007
 
20
 
 
May 1, 2007 - September 30, 2007
 
26
 
 
October 1, 2007 - April 30, 2008
 
15
 
 
May 1, 2008 - September 30, 2008
 
21
 
 
October 1, 2008 - April 30, 2009
 
10
 
 
May 1, 2009 - September 30, 2009
 
16
 
 
From October 1, 2009
 
5
 

Interest on borrowings under this European facility is charged at varying rates computed by applying a margin of 1% over ABN AMRO’s Euro base rate (consisting of the leading refinancing rate as determined from time to time by the European Central Bank plus a debit interest surcharge), which base rate is subject to a minimum of 3.5% per annum.  Fees on bank guarantees and documentary letters of credit are charged at a rate of 1% per annum or part thereof on the maximum amount and for the maximum duration of each guarantee or documentary letter of credit issued.  An unused line fee of 0.5% per annum is payable with respect to any undrawn portion of the facility.  The facility is secured by liens on certain real, personal and intangible property of the Company’s principal European subsidiaries.  The facility also includes various financial covenants (which require the borrowers to maintain a minimum interest coverage ratio, total debt/EBITDA ratio, and tangible net worth/total assets) and affirmative and negative covenants, and other provisions that restrict the borrowers’ ability to take certain actions.  As of September 30, 2007, there were approximately €5.2 million (approximately $7.2 million) in borrowings outstanding under this facility, at an approximate rate of interest of 5.8%.

Other non-U.S. subsidiaries of the Company have an aggregate of the equivalent of $15.7 million of lines of credit available.  No amounts were outstanding under these lines of credit as of September 30, 2007.

On September 27, 2007, the Company completed the redemption of all of its outstanding 7.3% Senior Notes.  These notes, which originally were scheduled to mature on April 1, 2008, were redeemed at a price of 101.352% of par value, plus accrued interest.  The aggregate principal amount of the notes redeemed was $72 million.  The total premium paid in connection with the redemption was approximately $1.1 million, pre-tax.

As of September 30, 2007, the estimated fair values (based on then-current market prices) of the 9.5% Senior Subordinated Notes due 2014 and the 10.375% Senior Notes due 2010 were $142.1 million and $187.3 million, respectively.


NOTE 7 – STOCK-BASED COMPENSATION
 
 Stock Option Awards

In the first quarter of fiscal 2006, the Company adopted SFAS No. 123R, “Share-Based Payments,” which revises SFAS No. 123, “Accounting for Stock-Based Compensation.”  This standard requires that the Company 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.  That cost will be recognized over the period in which the employee is required to provide the services – the requisite service period (usually the vesting period) – in exchange for the award.  The grant date fair value for options and similar instruments will be estimated using option pricing models.  Under SFAS No. 123R, the Company is required to select a valuation technique or option pricing model that meets the criteria as stated in the standard, which includes a binomial model and the Black-Scholes model. The Company has elected to use the Black-Scholes model. The adoption of SFAS No. 123R, applying the “modified prospective method,” as elected by the Company, requires the Company to value stock options prior to its adoption of SFAS No. 123R under the fair value method and expense these amounts over the remaining vesting period of the stock options. SFAS No. 123R requires that the Company estimate forfeitures for stock options and reduce compensation expense accordingly. The Company has reduced its stock compensation expense by the assumed forfeiture rate and will evaluate experience against this forfeiture rate going forward.


- 11 -

      
                                    
      
        
      
    

During the first nine months of 2007 and 2006, the Company recognized stock option compensation costs of $0.3 million in each period.  In each of the third quarters of fiscal years 2007 and 2006, the Company recognized stock option compensation costs of $0.1 million. The remaining unrecognized compensation cost related to unvested awards at September 30, 2007, approximated $0.3 million, and the weighted average period of time over which this cost will be recognized is approximately two years.
 
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants issued in the first nine months of fiscal years 2007 and 2006:

 
Nine Months Ended
 September 30, 2007
 
Nine Months Ended
 October 1, 2006
Risk free interest rate
4.73%
 
4.57%
Expected life
3.25 years
 
3.17 years
Expected volatility
60%
 
60%
Expected dividend yield
0.51%
 
0%

The weighted average grant date fair value of stock options granted during the first nine months of fiscal 2007 was $6.99 per share.

The following table summarizes stock options outstanding as of September 30, 2007, as well as activity during the nine months then ended:
 
     
Shares
   
Weighted Average
Exercise Price
 
 
Outstanding at December 31, 2006
   
1,759,000
    $
6.07
 
 
Granted
   
30,000
     
15.66
 
 
Exercised
   
649,000
     
6.15
 
 
Forfeited or canceled
   
20,000
     
10.11
 
 
Outstanding at September 30, 2007 (a)
   
1,120,000
    $
6.32
 
                   
 
Exercisable at September 30, 2007 (b)
   
1,003,000
    $
5.88
 

(a) At September 30, 2007, the weighted-average remaining contractual life of options outstanding was 3.1 years.
(b) At September 30, 2007, the weighted-average remaining contractual life of options exercisable was 2.8 years.

At September 30, 2007, the aggregate intrinsic value of options outstanding and options exercisable was $13.6 million and $12.2 million, respectively (the intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option).
  
Cash proceeds and intrinsic value related to total stock options exercised during the first nine months of fiscal years 2007 and 2006 are provided in the following table:
 
     
Nine Months Ended
 
     
September 30, 2007
   
October 1, 2006
 
     
(In thousands)
 
 
Proceeds from stock options exercised
  $
3,261
    $
6,224
 
 
Intrinsic value of stock options exercised
  $
7,038
    $
7,033
 

Restricted Stock Awards

During the nine months ended September 30, 2007, and October 1, 2006, the Company granted restricted stock awards for 327,000 and 394,000 shares, respectively, of Class B common stock.  These awards (or a portion thereof) vest with respect to each recipient over a three to five-year period from the date of grant, provided the individual remains in the employment or service 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.

- 12 -

      
                                    
      
        
      
    

Compensation expense related to restricted stock grants was $5.1 million and $2.5 million for the nine months ended September 30, 2007, and October 1, 2006, respectively.  SFAS No. 123R requires that the Company estimate forfeitures for restricted stock and reduce compensation expense accordingly.  The Company has reduced its expense by the assumed forfeiture rate and will evaluate experience against this forfeiture rate going forward.

The following table summarizes restricted stock activity as of September 30, 2007, and during the nine months then ended:

     
Shares
   
Weighted Average
Grant Date
 Fair Value
 
 
Outstanding at December 31, 2006
   
1,311,000
    $
8.00
 
 
Granted
   
327,000
     
15.32
 
 
Vested
   
775,000
     
8.71
 
 
Forfeited or canceled
   
1,500
     
8.64
 
 
Outstanding at September 30, 2007
   
861,500
    $
9.94
 

As of September 30, 2007, the unrecognized total compensation cost related to unvested restricted stock was $5.1 million.  That cost is expected to be recognized by the end of 2011.

As stated above, SFAS No. 123R requires the Company to estimate forfeitures in calculating the expense relating to stock-based compensation, as opposed to only recognizing these forfeitures and the corresponding reduction in expense as they occur. In prior years, the Company did not estimate the forfeitures of its restricted stock as the expense was recorded.  In accordance with the standard, the Company is required to record a cumulative effect of the change in accounting principle to reduce previously recognized compensation for awards not expected to vest (i.e., forfeited or canceled awards).  Upon adoption of SFAS No. 123R in the first quarter of 2006, the Company adjusted for this cumulative effect and recognized a reduction in stock-based compensation, which was recorded within the selling, general and administrative expense on the Company’s consolidated condensed statement of operations. The adjustment was not recorded as a cumulative effect adjustment, net of tax, because the amount was not material to the consolidated condensed statement of operations.


NOTE 8 – EMPLOYEE BENEFIT PLANS

The following tables provide the components of net periodic benefit cost for the three-month and nine-month periods ended September 30, 2007, and October 1, 2006, respectively:


   
Three Months Ended
   
Nine Months Ended
 
Defined Benefit Retirement Plan (Europe)
 
Sept. 30, 2007
   
Oct. 1, 2006
   
Sept. 30, 2007
   
Oct. 1, 2006
 
   
(In thousands)
   
(In thousands)
 
Service cost
  $
724
    $
464
    $
2,154
    $
1,368
 
Interest cost
   
3,102
     
2,448
     
9,220
     
7,220
 
Expected return on assets
    (3,290 )     (2,755 )     (9,779 )     (8,127 )
Amortization of prior service costs
   
--
     
--
     
--
     
--
 
Recognized net actuarial (gains)/losses
   
702
     
488
     
2,087
     
1,439
 
Amortization of transition obligation
   
29
     
13
     
86
     
39
 
Net periodic benefit cost
  $
1,267
    $
658
    $
3,768
    $
1,939
 

   
Three Months Ended
   
Nine Months Ended
 
Salary Continuation Plan (SCP)
 
Sept. 30, 2007
   
Oct. 1, 2006
   
Sept. 30, 2007
   
Oct. 1, 2006
 
   
(In thousands)
   
(In thousands)
 
Service cost
  $
 66
    $
 67
    $
197
    $
200
 
Interest cost
   
224
     
212
     
672
     
637
 
Amortization of transition obligation
   
55
     
55
     
164
     
165
 
Amortization of prior service cost
   
12
     
12
     
36
     
36
 
Amortization of (gain)/loss
   
72
     
80
     
215
     
240
 
Net periodic benefit cost
  $
429
    $
426
    $
1,284
    $
1,278
 


- 13 -

      
                                    
      
        
      
    

NOTE 9 – DISCONTINUED OPERATIONS

As discussed above in Note 2, in the second quarter of 2007, the Company committed to a plan to exit its Fabrics Group business segment, and in the third quarter of 2007, the Company completed the sale. Therefore, the results for the Fabrics Group business segment have been reported as discontinued operations.  In connection with this action, the Company also recorded write-downs for the impairment of assets and goodwill of $17.4 million and $44.5 million, respectively, in the first six months of 2007.  In connection with the sale, the Company recorded the aforementioned impairments to reduce the carrying value of the business segment to its fair value.  In the first nine months of 2007, the Company recorded approximately $12.4 million of direct costs to sell the business segment.

In 2004, the Company committed to a plan to exit its owned Re:Source dealer businesses and 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 also decided to exit, are reported as discontinued operations.

Summary operating results for the above-described discontinued operations are as follows:

   
Three Months Ended
   
Nine Months Ended
 
   
Sept. 30, 2007
   
Oct. 1, 2006
   
Sept. 30, 2007
   
Oct. 1, 2006
 
   
(In thousands)
   
(In thousands)
 
Net sales
  $
10,271
    $
37,195
    $
82,003
    $
125,189
 
Loss on operations before taxes on income
    (10,230 )     (582 )     (79,610 )     (27,129 )
Tax benefit
   
3,580
     
204
     
10,950
     
1,643
 
Loss on operations, net of tax
    (6,650 )     (378 )     (68,660 )     (25,486 )

Included in the above loss from discontinued operations during the 2007 periods was approximately $1.8 million of expense related to revaluations of contingencies which existed as of the discontinuation of the Company’s Re:Source dealer network.

Assets and liabilities, including reserves, related to the above-described discontinued operations that were held for sale consist of the following:

     
September 30, 2007
   
December 31, 2006
 
     
(In thousands)
 
 
Current assets
  $
198
    $
54,156
 
 
Property and equipment
   
2,007
     
54,094
 
 
Other assets
   
7
     
50,072
 
 
Current liabilities
   
1,520
     
11,181
 
 
Other liabilities
   
--
     
11,753
 

NOTE 10 – RESTRUCTURING

During the first quarter of 2006, the Company recorded a pre-tax restructuring charge of $3.3 million. The charge reflected: (i) the consolidation and closure of a fabrics manufacturing facility in East Douglas, Massachusetts; (ii) workforce reduction at this facility; and (iii) a reduction in carrying value of another fabrics facility and other assets.   These activities were expected to reduce excess capacity in the Company’s dyeing and finishing operations and improve overall manufacturing efficiency.

A summary of the restructuring activities is presented below:

     
TOTAL
 
     
(In thousands)
 
 
Facilities consolidation
  $
1,000
 
 
Workforce reduction
   
300
 
 
Other impaired assets
   
1,960
 
      $
3,260
 

Of the total restructuring charge, approximately $0.3 million related to expenditures for severance benefits and other similar costs, and $3.0 million related to non-cash charges, primarily for the write-down of carrying value and disposal of certain assets.  As of September 30, 2007, there are no significant cash payments or other activities remaining under the plan, as the plan was substantially completed by the end of 2006.
 
- 14 -

 
Because the restructuring charge is related to the Fabrics Group business segment, it has been included in discontinued operations in the consolidated condensed statement of operations for the first nine months of 2006.


NOTE 11 – IMPAIRMENT OF GOODWILL AND OTHER ASSETS

In the first quarter of 2007, the Company recorded charges for impairment of goodwill of $44.5 million and impairment of other intangible assets of $3.8 million related to its Fabrics Group business segment.  The Company was exploring possible strategic options with respect to its fabrics business, and its analyses indicated that the carrying value of the assets of the fabrics business exceeded their fair value.  When such an indication is present, the Company measures potential goodwill and other asset impairments based on an allocation of the estimated fair value of the reporting unit to its underlying assets and liabilities.  An impairment loss is recognized to the extent that the reporting unit’s recorded goodwill exceeds the implied fair value of goodwill.  In addition to the impairment of goodwill, the Company determined that the other intangible assets of the business unit were impaired as well.  As discussed above in Note 2, in the second quarter of 2007, the Company entered into an agreement to sell its fabrics business unit for approximately $67.2 million (after working capital and certain other adjustments).  As a result of this agreed-upon purchase price, the Company recorded an impairment of assets of approximately $13.6 million in the second quarter of 2007. This impairment was determined based upon the fair value of the business unit as compared to the fair value represented by the purchase price.  Given the nature of the Company’s assets and liabilities, the impairment charge was a reduction of carrying value of property, plant and equipment, as it was determined that all other assets were carried at a value approximating fair value.  These impairment charges have been included in discontinued operations in the consolidated condensed statement of operations for the first nine months of 2007.

During the first quarter of 2006, in connection with the sale of its European fabrics business (described in more detail above in Note 2), the Company recorded a charge of $20.7 million for the impairment of goodwill related to its fabrics reporting unit and those European operations.  This charge was based on a review of the Company’s carrying value of goodwill at its fabrics facilities as compared to the potential fair value as represented by the proposed sale price.  This impairment charge has been included in discontinued operations in the consolidated condensed statement of operations for the first nine months of 2006.


NOTE 12 – SALE OF PANDEL, INC.

In the first quarter of 2007, the Company sold its subsidiary Pandel, Inc. for $1.4 million to an entity formed by the general manager of Pandel. The operations of Pandel represent the Company’s Specialty Products segment.  Pandel primarily produces vinyl carpet tile backing and specialty mat and foam products. As a result of this sale, the Company recorded a loss on disposition of $1.9 million in the first quarter of 2007.  The total assets of this business were $3.3 million, comprised primarily of inventory and accounts receivable. Total liabilities related to this business were $0.4 million. In the third quarter of 2006, Pandel had net sales of $2.8 million.  In the first nine months of 2007 and 2006, Pandel had net sales of $2.2 million and $9.4 million, respectively.  Prior to the sale, certain of Pandel’s production assets were conveyed to another subsidiary of the Company, where they will continue to be used in its carpet tile backing process.


NOTE 13 – SUPPLEMENTAL CASH FLOW INFORMATION

Cash payments for interest amounted to $38.2 million and $41.7 million for the nine months ended September 30, 2007, and October 1, 2006, respectively.  Income tax payments amounted to $11.9 million and $13.8 million for the nine months ended September 30, 2007, and October 1, 2006, respectively.


NOTE 14 – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115.”  This standard permits an entity to choose to measure certain financial assets and liabilities at fair value.  SFAS No. 159 also revises provisions of SFAS No. 115 that apply to available-for-sale and trading securities.  This statement is effective for fiscal years beginning after November 15, 2007.  The Company is currently evaluating the effect, if any, that the adoption of this pronouncement will have on its consolidated financial statements.


- 15 -

      
                                    
      
        
      
    

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.”  This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.  SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  The Company is currently evaluating the effect, if any, that the adoption of this pronouncement will have on its consolidated financial statements.

In September 2006, the Emerging Issues Task Force (“EITF”) of the FASB reached consensus on EITF Issue No. 06-04, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements” (“EITF 06-04”).  The scope of EITF 06-04 is limited to the recognition of a liability and related compensation costs for endorsement split-dollar life insurance arrangements that provide a benefit to an employee that extends to postretirement periods.  EITF 06-04 is effective for fiscal years beginning after December 15, 2007, and the Company is currently evaluating the effect of this standard on its consolidated financial statements.

In June 2006, the EITF reached a consensus on Issue No. 06-03, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation)” (“EITF 06-03”).  EITF 06-03 concludes that (a) the scope of this issue includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer, and (b) the presentation of taxes within the scope on either a gross or a net basis is an accounting policy decision that should be disclosed under Opinion 22.  Furthermore, EITF 06-03 states that for taxes reported on a gross basis, a company should disclose the amounts of those taxes in interim and annual financial statements for each period for which an income statement is presented.  The consensus, which requires only disclosure changes, is effective for periods beginning after December 15, 2006.  As the Company has historically recognized such taxes on a net basis, the adoption of this standard did not have a material effect on its results of operations or financial position.


NOTE 15 – INCOME TAXES

In July 2006, the FASB issued FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes.” In summary, FIN 48 requires that all tax positions subject to SFAS No. 109, “Accounting for Income Taxes,” be analyzed using a two-step approach. The first step requires an entity to determine if a tax position is more-likely-than-not to be sustained upon examination. In the second step, the tax benefit is measured as the largest amount of benefit, determined on a cumulative probability basis, that is more-likely-than-not to be realized upon ultimate settlement. FIN 48 was effective as of January 1, 2007, with any adjustment in a company’s tax provision being accounted for as a cumulative effect of accounting change in beginning equity.  On January 1, 2007, the Company adopted the provisions of FIN 48.  As required by FIN 48, the cumulative effect of applying the provisions of the Interpretation have been reported as an adjustment to the Company’s retained earnings balance as of January 1, 2007.  The Company recognized a $4.6 million increase in its liability for unrecognized tax benefits with a corresponding decrease to the fiscal year 2007 opening balance of retained earnings.

There have been no material changes to the Company’s unrecognized tax benefits during the nine months ended September 30, 2007.


NOTE 16 – SUPPLEMENTAL CONDENSED CONSOLIDATING GUARANTOR 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% senior notes due 2008 (which were redeemed in the third quarter of 2007), and its 9.5% senior subordinated notes due 2014.  These guarantees are full and unconditional.  The Supplemental Guarantor Financial Statements are presented herein pursuant to requirements of the Commission.

- 16 -

      
                                    
      
        
      
    


INTERFACE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2007


   
GUARANTOR SUBSIDIARIES
   
NON-GUARANTOR SUBSIDIARIES
   
INTERFACE, INC.
(PARENT CORPORATION)
   
CONSOLIDATION AND ELIMINATION ENTRIES
   
CONSOLIDATED TOTALS
 
   
(IN THOUSANDS)
 
Net sales
  $
162,165
    $
134,241
    $
--
    $ (16,935 )   $
279,471
 
Cost of sales
   
118,327
     
80,150
     
--
      (16,935 )    
181,542
 
Gross profit on sales
   
43,838
     
54,091
     
--
     
--
     
97,929
 
Selling, general and administrative expenses
   
27,955
     
29,256
     
5,968
     
--
     
63,179
 
Operating income (loss)
   
15,883
     
24,835
      (5,968 )    
--
     
34,750
 
Interest/Other expense
   
2,560
     
1,373
     
5,991
     
--
     
9,924
 
Income (loss) before taxes on income and equity in income of subsidiaries
   
13,323
     
23,462
      (11,959 )    
--
     
24,826
 
Income tax (benefit) expense
   
10,641
     
7,498
      (8,519 )    
--
     
9,620
 
Equity in income (loss) of subsidiaries
   
--
     
--
     
11,996
      (11,996 )    
--
 
Income (loss) from continuing operations
   
2,682
     
15,964
     
8,556
      (11,996 )    
15,206
 
Loss on discontinued operations, net of tax
    (6,650 )    
--
     
--
     
--
      (6,650 )
Net income (loss)
  $ (3,968 )   $
15,964
    $
8,556
    $ (11,996 )   $
8,556
 



- 17 -

      
                                    
      
        
      
    


CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007

   
GUARANTOR
SUBSIDIARIES
   
NON-
GUARANTOR
SUBSIDIARIES
   
INTERFACE, INC.
(PARENT
CORPORATION)
   
CONSOLIDATION
AND
ELIMINATION
ENTRIES
   
CONSOLIDATED
TOTALS
 
   
(IN THOUSANDS)
 
Net sales
  $
479,298
    $
389,059
    $
--
    $ (80,432 )   $
787,925
 
Cost of sales
   
349,136
     
245,839
     
--
      (80,432 )    
514,543
 
Gross profit on sales
   
130,162
     
143,220
     
--
     
--
     
273,382
 
Selling, general and administrative expenses
   
75,328
     
83,047
     
23,183
     
--
     
181,558
 
Loss on disposal – Specialty Products
   
1,873
     
--
     
--
     
--
     
1,873
 
Operating income (loss)
   
52,961
     
60,173
      (23,183 )    
--
     
89,951
 
Interest/Other expense
   
5,900
     
4,459
     
18,881
     
--
     
29,240
 
Income (loss) before taxes on income
                                       
  and equity in income of subsidiaries
   
47,061
     
55,714
      (42,064 )    
--
     
60,711
 
Income tax (benefit) expense
   
27,726
     
17,828
      (22,441 )    
--
     
23,113
 
Equity in income (loss) of subsidiaries
   
--
     
--
      (11,439 )    
11,439
     
--
 
Income (loss) from continuing operations
   
19,335
     
37,886
      (31,062 )    
11,439
     
37,598
 
Loss on discontinued operations, net of tax
    (68,660 )    
--
     
--
     
--
      (68,660 )
Net income (loss)
  $ (49,325 )   $
37,886
    $ (31,062 )   $
11,439
    $ (31,062 )


- 18 -

      
                                    
      
        
      
    

CONDENSED CONSOLIDATING BALANCE SHEET

SEPTEMBER 30, 2007

   
GUARANTOR SUBSIDIARIES
   
NON-GUARANTOR SUBSIDIARIES
   
INTERFACE, INC.
(PARENT CORPORATION)
   
CONSOLIDATION AND ELIMINATION ENTRIES
   
CONSOLIDATED TOTALS
 
   
(IN THOUSANDS)
 
ASSETS
                             
Current Assets:
                             
Cash and cash equivalents
  $
--
    $
32,706
    $
44,824
    $
--
    $
77,530
 
Accounts receivable
   
72,151
     
89,015
     
5,088
     
--
     
166,254
 
Inventories
   
60,878
     
63,554
     
--
     
--
     
124,432
 
Prepaids and deferred income taxes
   
--
     
10,713
     
14,147
     
--
     
24,860
 
Assets of business held for sale
   
--
     
--
     
2,212
     
--
     
2,212
 
Total current assets
   
133,029
     
195,988
     
66,271
     
--
     
395,288
 
Property and equipment less accumulated depreciation
   
73,251
     
74,489
     
5,162
     
--
     
152,902
 
Investment in subsidiaries
   
258,784
     
157,107
     
15,880
      (431,771 )    
--
 
Goodwill
   
68,168
     
72,431
     
--
     
--
     
140,599
 
Other assets
   
10,016
     
24,763
     
99,702
     
--
     
134,481
 
    $
543,248
    $
524,778
    $
187,015
    $ (431,771 )   $
823,270
 
                                         
LIABILITIES AND SHAREHOLDERS' EQUITY
                                       
Current Liabilities
  $
66,934
    $
86,056
    $
15,613
    $
--
    $
168,603
 
Long-term debt, less current maturities
   
--
     
7,169
     
--
     
--
     
7,169
 
Senior notes and senior subordinated notes
   
--
     
--
     
310,000
     
--
     
310,000
 
Deferred income taxes
   
1,614
     
7,097
     
187
     
--
     
8,898
 
Other
   
4,018
     
44,358
     
17,333
     
--
     
65,709
 
Total liabilities
   
72,566
     
144,680
     
343,133
     
--
     
560,379
 
                                         
Minority interests
   
--
     
6,805
     
--
     
--
     
6,805
 
                                         
Redeemable preferred stock
   
57,891
     
--
     
--
      (57,891 )    
--
 
Common stock
   
94,145
     
102,199
     
6,167
      (196,344 )    
6,167
 
Additional paid-in capital
   
191,411
     
12,525
     
331,827
      (203,936 )    
331,827
 
Retained earnings (deficit)
   
128,170
     
296,621
      (485,363 )    
26,400
      (34,172 )
Foreign currency translation adjustment
    (935 )    
5,360
      (5,399 )    
--
      (974 )
Pension liability
   
--
      (43,412 )     (3,350 )    
--
      (46,762 )
    $
543,248
    $
524,778
    $
187,015
    $ (431,771 )   $
823,270
 
                                         


- 19 -

      
                                    
      
        
      
    

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2007

   
GUARANTOR SUBSIDIARIES
   
NON-GUARANTOR SUBSIDIARIES
   
INTERFACE, INC.
(PARENT CORPORATION)
   
CONSOLIDATION AND ELIMINATION ENTRIES
   
CONSOLIDATED TOTALS
 
   
(IN THOUSANDS)
 
Net cash provided by (used for) operating activities
  $
32,578
    $
41,930
    $ (32,450 )   $
--
    $
42,058
 
Cash flows from investing activities:
                                       
Purchase of plant and equipment
    (20,814 )     (6,510 )     (199 )    
--
      (27,523 )
Investing cash flow used for discontinued operations
    (6,950 )    
--
     
--
     
--
      (6,950 )
Cash proceeds from the sale of Fabrics business segment
   
--
     
--
     
60,732
     
--
     
60,732
 
Other
   
377
     
--
      (8,781 )    
--
      (8,404 )
Net cash provided by (used for) investing activities
    (27,387 )     (6,510 )    
51,752
     
--
     
17,855
 
Cash flows from financing activities: