form10-q.htm



SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

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

For Quarterly Period Ended July 4, 2010

Commission File Number 001-33994

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 þ    No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes o  No o

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

Large accelerated filer o
Accelerated filer þ
Non-accelerated filer o
Smaller reporting company 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

Shares outstanding of each of the registrant’s classes of common stock at August 6, 2010:

Class
 
Number of Shares
 
Class A Common Stock, $.10 par value per share
    56,844,433  
Class B Common Stock, $.10 par value per share
    6,768,552  



 
 

 
                      



INTERFACE, INC.

INDEX
 
 
 
PAGE 
PART I.
FINANCIAL INFORMATION
 
 
Item 1.
Financial Statements
3
       
   
Consolidated Condensed Balance Sheets – July 4, 2010 and
January 3, 2010
 
3
   
Consolidated Condensed Statements of Operations – Three Months and Six Months Ended July 4, 2010 and July 5, 2009
 
4
   
Consolidated Statements of Comprehensive Income (Loss) – Three Months and Six Months Ended July 4, 2010 and July 5, 2009
 
5
   
Consolidated Condensed Statements of Cash Flows – Six Months Ended July 4, 2010 and July 5, 2009
 
6
   
Notes to Consolidated Condensed Financial Statements
 
7
       
 
Item 2.
 
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
 
20
       
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
25
       
 
Item 4.
Controls and Procedures
26
     
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.
Removed and Reserved
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)
   
JULY 4, 2010
   
JANUARY 3, 2010
 
   
(UNAUDITED)
       
ASSETS
           
CURRENT ASSETS:
           
Cash and Cash Equivalents
  $ 73,168     $ 115,363  
Accounts Receivable, net
    132,034       129,833  
Inventories
    121,904       112,249  
Prepaid Expenses and Other Current Assets
    25,475       19,649  
Deferred Income Taxes
    9,560       9,379  
Assets of Business Held for Sale
    1,500       1,500  
TOTAL CURRENT ASSETS
    363,641       387,973  
                 
PROPERTY AND EQUIPMENT, less accumulated depreciation   
    154,827       162,269  
DEFERRED TAX ASSET
    45,150       44,210  
GOODWILL
    69,768       80,519  
OTHER ASSETS
    51,781       52,268  
TOTAL ASSETS
  $ 685,167     $ 727,239  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
CURRENT LIABILITIES:
               
Accounts Payable
  $ 50,301     $ 35,614  
Accrued Expenses
    94,681       101,143  
Current Portion of Long-Term Debt
    --       14,586  
TOTAL CURRENT LIABILITIES
    144,982       151,343  
                 
SENIOR NOTES
    145,812       145,184  
SENIOR SUBORDINATED NOTES
    110,000       135,000  
DEFERRED INCOME TAXES
    6,496       7,029  
OTHER
    40,334       42,502  
TOTAL LIABILITIES
    447,624       481,058  
                 
Commitments and Contingencies
               
                 
SHAREHOLDERS’ EQUITY:
               
Preferred Stock
    --       --  
Common Stock
    6,359       6,328  
Additional Paid-In Capital
    346,822       343,348  
Retained Earnings (Deficit)
    (46,624 )     (55,332 )
Accumulated Other Comprehensive Income – Foreign Currency Translation Adjustment
    (48,473 )     (24,057 )
Accumulated Other Comprehensive Income – Pension Liability
    (30,495 )     (33,186 )
TOTAL SHAREHOLDERS' EQUITY – Interface, Inc.
    227,589       237,101  
Non-controlling Interest in Subsidiary
    9,954       9,080  
TOTAL SHAREHOLDERS' EQUITY
    237,543       246,181  
    $ 685,167     $ 727,239  

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
   
SIX MONTHS ENDED
 
                         
 
 
 
JULY 4, 2010
   
JULY 5, 2009
   
JULY 4, 2010
   
JULY 5, 2009
 
                         
NET SALES
  $ 226,587     $ 211,297     $ 443,778     $ 410,605  
Cost of Sales
    146,453       142,191       290,270       278,330  
                                 
GROSS PROFIT ON SALES
    80,134       69,106       153,508       132,275  
Selling, General and Administrative Expenses
    58,668       52,263       115,156       106,634  
Income from Litigation Settlements
    --       (5,926 )     --       (5,926 )
Restructuring Charge
    --       1,903       3,131       7,627  
OPERATING INCOME
    21,466       20,866       35,221       23,940  
                                 
Interest Expense
    8,115       7,726       16,937       15,399  
Bond Retirement Expense
    --       6,096       1,085       6,096  
Other Expense (Income)
    447       650       545       (100 )
                                 
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX EXPENSE
    12,904       6,394       16,654       2,545  
Income Tax Expense
    4,896       2,595       6,540       2,119  
                                 
Income from Continuing Operations
    8,008       3,799       10,114       426  
Loss from Discontinued Operations, Net of Tax
    --       --       --       (650 )
NET INCOME (LOSS)
    8,008       3,799       10,114       (224 )
                                 
Income Attributable to Non-Controlling Interest in Subsidiary
    (376 )     (133 )     (612 )     (262 )
NET INCOME (LOSS) ATTRIBUTABLE TO INTERFACE, INC.
  $ 7,632     $ 3,666     $ 9,502     $ (486 )
                                 
Earnings (Loss) Per Share Attributable to Interface, Inc. Common Shareholders – Basic
                               
Continuing Operations
  $ 0.12     $ 0.06     $ 0.15     $ 0.00  
Discontinued Operations
    --       --       --       (0.01 )
Earnings (Loss) Per Share Attributable to Interface, Inc. Common Shareholders – Basic
  $ 0.12     $ 0.06     $ 0.15     $ (0.01 )
                                 
Earnings (Loss) Per Share Attributable to Interface, Inc. Common Shareholders – Diluted
                               
Continuing Operations
  $ 0.12     $ 0.06     $ 0.15     $ 0.00  
Discontinued Operations
    --       --       --       (0.01 )
Earnings (Loss) Per Share Attributable to Interface, Inc. Common Shareholders – Diluted
  $ 0.12     $ 0.06     $ 0.15     $ (0.01 )
                                 
Common Shares Outstanding – Basic
    63,515       63,201       63,423       63,199  
Common Shares Outstanding – Diluted
    64,118       63,299       63,917       63,224  

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
   
SIX MONTHS ENDED
 
             
 
 
 
JULY 4, 2010
   
JULY 5, 2009
   
JULY 4, 2010
   
JULY 5, 2009
 
                         
Net Income (Loss)
  $ 8,008     $ 3,799     $ 10,114     $ (224 )
Other Comprehensive Income (Loss), Foreign
                               
Currency Translation Adjustment and Pension Liability Adjustment
    (14,149 )     18,818       (21,462 )     11,521  
Comprehensive Income (Loss)
    (6,141 )     22,617       (11,348 )     11,297  
                                 
Comprehensive Loss (Income) Attributable to Non-Controlling Interest in Subsidiary
    (358 )     (477 )     (874 )     (386 )
Comprehensive Income (Loss) Attributable to Interface, Inc.
  $ (6,499 )   $ 22,140     $ (12,222 )   $ 10,911  


See accompanying notes to consolidated condensed financial statements.

 
- 5 -

 
                      



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

(IN THOUSANDS)

   
SIX MONTHS ENDED
 
   
JULY 4, 2010
   
JULY 5, 2009
 
OPERATING ACTIVITIES:
           
Net Income (Loss)
  $ 10,114     $ (224 )
Loss from Discontinued Operations
    --       650  
Income from Continuing Operations
    10,114       426  
Adjustments to Reconcile Income to Cash Provided by Operating Activities:
               
Premiums Paid to Repurchase Senior Notes
    792       5,264  
Depreciation and Amortization
    12,903       12,045  
Deferred Income Taxes and Other
    (929 )     (3,820 )
Working Capital Changes:
               
Accounts Receivable
    (7,077 )     27,907  
Inventories
    (14,024 )     8,869  
Prepaid Expenses
    (7,412 )     3,891  
Accounts Payable and Accrued Expenses
    18,277       (26,777 )
                 
CASH PROVIDED BY OPERATING ACTIVITIES:
    12,644       27,805  
                 
INVESTING ACTIVITIES:
               
Capital Expenditures
    (11,312 )     (7,401 )
Other
    (628 )     1,611  
                 
CASH USED IN INVESTING ACTIVITIES:
    (11,940 )     (5,790 )
                 
FINANCING ACTIVITIES:
               
Borrowing of Long-Term Debt
    --       144,452  
Repurchase of Senior Notes
    (39,586 )     (138,002 )
Debt Issuance Costs
    --       (5,787 )
Premiums Paid to Repurchase Senior Notes
    (792 )     (5,264 )
Proceeds from Issuance of Common Stock
    1,174       --  
Dividends Paid
    (794 )     (320 )
                 
CASH USED IN FINANCING ACTIVITIES:
    (39,998 )     (4,921 )
                 
Net Cash Provided by (Used in) Operating, Investing and
               
Financing Activities
    (39,294 )     17,094  
Effect of Exchange Rate Changes on Cash
    (2,901 )     1,016  
                 
CASH AND CASH EQUIVALENTS:
               
Net Change During the Period
    (42,195 )     18,110  
Balance at Beginning of Period
    115,363       71,757  
                 
Balance at End of Period
  $ 73,168     $ 89,867  


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 January 3, 2010, 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 January 3, 2010, 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.

As described below in Note 9, the Company has sold its Fabrics Group business segment.  The results of operations and related disposal costs, gains and losses for this business 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 – INVENTORIES

Inventories are summarized as follows:

   
July 4, 2010
   
January 3, 2010
 
   
(In thousands)
 
Finished Goods
  $ 72,744     $ 65,478  
Work in Process
    15,144       15,764  
Raw Materials
    34,016       31,007  
    $ 121,904     $ 112,249  

NOTE 3 – EARNINGS (LOSS) PER SHARE

 
The Company computes basic earnings (loss) per share (“EPS”) attributable to common shareholders by dividing income from continuing operations attributable to common shareholders, income from discontinued operations attributable to common shareholders and net income attributable to Interface, Inc. common shareholders, by the weighted average common shares outstanding, including participating securities outstanding, during the period as discussed below.  Diluted EPS reflects the potential dilution beyond shares for basic EPS that could occur if securities or other contracts to issue common stock were exercised, converted into common stock or resulted in the issuance of common stock that would have shared in the Company’s earnings.  Income attributable to non-controlling interest in subsidiary is not included in the calculation of basic or diluted EPS.
 
In the first quarter of 2009, the Company adopted an accounting standard which requires the Company to include all unvested stock awards which contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, in the number of shares outstanding in basic and diluted EPS calculations when the inclusion of these shares would be dilutive.  As a result, the Company has included all of its outstanding restricted stock awards in the calculation of basic and diluted EPS for all periods presented.  This accounting standard also requires additional disclosure of EPS for common stock and unvested share-based payment awards, separately disclosing distributed and undistributed earnings. Distributed earnings represent common stock dividends and dividends earned on unvested share-based payment awards. Undistributed earnings represent earnings that were available for distribution but were not distributed.  Unvested share-based awards of restricted stock are paid dividends equally with all other shares of common stock.  The following tables show distributed and undistributed earnings:

 
- 7 -

 
                      



   
Three Months Ended
   
Six Months Ended
 
   
July 4, 2010
   
July 5, 2009
   
July 4, 2010
   
July 5, 2009
 
                         
Earnings Per Share from Continuing Operations
                       
                         
Basic Earnings Per Share Attributable to
                       
Common Shareholders:
                       
Distributed Earnings
  $ 0.01     $ 0.00     $ 0.01     $ 0.00  
Undistributed Earnings
    0.11       0.06       0.14       0.00  
Total
  $ 0.12     $ 0.06     $ 0.15     $ 0.00  
                                 
Diluted Earnings Per Share Attributable to
                               
Common Shareholders:
                               
Distributed Earnings
  $ 0.01     $ 0.00     $ 0.01     $ 0.00  
Undistributed Earnings
    0.11       0.06       0.14       0.00  
Total
  $ 0.12     $ 0.06     $ 0.15     $ 0.00  
                                 
Earnings (Loss) Per Share from Discontinued Operations
                               
                                 
Basic and Diluted Earnings (Loss) Per Share Attributable to
                               
Common Shareholders:
                               
Distributed Earnings
  $ --     $ --     $ --     $ --  
Undistributed Earnings (Loss)
     --        --        --       (0.01 )
Total
  $ --     $ --     $ --     $ (0.01 )
                                 
Basic Earnings (Loss) Per Share
  $ 0.12     $ 0.06     $ 0.15     $ (0.01 )
Diluted Earnings (Loss) Per Share
  $ 0.12     $ 0.06     $ 0.15     $ (0.01 )

The following tables present income from continuing operations and net income attributable to Interface, Inc. that was attributable to participating securities:

   
Three Months Ended
   
Six Months Ended
 
   
July 4, 2010
   
July 5, 2009
   
July 4, 2010
   
July 5, 2009
 
         
(In millions)
       
Income from Continuing Operations
  $ 0.2     $ 0.1     $ 0.2     $ 0.0  
Net Income Attributable to Interface, Inc.
  $ 0.1     $ 0.1     $ 0.2     $ 0.0  

The weighted average shares for basic and diluted EPS were as follows:

   
Three Months Ended
   
Six Months Ended
 
   
July 4, 2010
   
July 5, 2009
   
July 4, 2010
   
July 5, 2009
 
         
(In thousands)
       
Weighted Average Shares Outstanding
    62,277       61,787       62,185       61,785  
Participating Securities
    1,238       1,414       1,238       1,414  
Shares for Basic Earnings (Loss) Per Share
    63,515       63,201       63,423       63,199  
Dilutive Effect of Stock Options
    603       98       494       25  
Shares for Diluted Earnings (Loss) Per Share
    64,118       63,299       63,917       63,224  

For the quarters ended July 4, 2010, and July 5, 2009, options to purchase 205,000 and 1,330,000 shares of common stock, respectively, were not included in the computation of diluted EPS as their impact would be anti-dilutive.  For the six-month periods ended July 4, 2010, and July 5, 2009, options to purchase 245,000 and 1,504,000 shares of common stock, respectively, were not included in the computation of diluted EPS as their impact would be anti-dilutive.


 
- 8 -

 
                      


NOTE 4 – SEGMENT INFORMATION

Based on the quantitative thresholds specified by accounting standards, the Company has determined that it has two 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, and (2) the Bentley Prince Street segment, which includes its Bentley Prince Street broadloom, modular carpet and area rug businesses.  In 2007, the Company sold its former Fabrics Group business segment (see Note 9 for further information).  Accordingly, the Company has included the operations of the former Fabrics Group business segment in discontinued operations.

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 January 3, 2010, 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.  The three-month and six-month periods ended July 5, 2009 include $5.9 million of income at the Corporate level from litigation settlements.  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
   
Total
 
   
(In thousands)
 
Three Months Ended July 4, 2010
                 
Net Sales
  $ 202,695     $ 23,892     $ 226,587  
Depreciation and Amortization
    4,752       563       5,315  
Operating Income (Loss)
    25,374       (1,145 )     24,229  
                         
Three Months Ended July 5, 2009
                       
Net Sales
  $ 186,568     $ 24,729     $ 211,297  
Depreciation and Amortization
    4,038       615       4,653  
Operating Income (Loss)
    17,452       (1,971 )     15,481  

   
Modular
Carpet
   
Bentley
Prince Street
   
Total
 
   
(In thousands)
 
Six Months Ended July 4, 2010
                 
Net Sales
  $ 396,702     $ 47,076     $ 443,778  
Depreciation and Amortization
    8,417       1,122       9,539  
Operating Income (Loss)
    42,554       (2,556 )     39,998  
                         
Six Months Ended July 5, 2009
                       
Net Sales
  $ 363,020     $ 47,585     $ 410,605  
Depreciation and Amortization
    8,619       1,261       9,880  
Operating Income (Loss)
    24,150       (4,957 )     19,193  


 
- 9 -

 
                      


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

   
Three Months Ended
   
Six Months Ended
 
   
July 4, 2010
   
July 5, 2009
   
July 4, 2010
   
July 5, 2009
 
   
(In thousands)
   
(In thousands)
 
DEPRECIATION AND AMORTIZATION
                       
Total segment depreciation and amortization
  $ 5,315     $ 4,653     $ 9,539     $ 9,880  
Corporate depreciation and amortization
    1,464       1,145       3,364       2,165  
Reported depreciation and amortization
  $ 6,779     $ 5,798     $ 12,903     $ 12,045  
                                 
OPERATING INCOME
                               
Total segment operating income
  $ 24,229     $ 15,481     $ 39,998     $ 19,193  
Corporate income, expenses and other reconciling amounts
    (2,763 )     5,385       (4,777 )     4,747  
Reported operating income
  $ 21,466     $ 20,866     $ 35,221     $ 23,940  

   
July 4, 2010
   
January 3, 2010
 
ASSETS
 
(In thousands)
 
Total segment assets
  $ 561,752     $ 561,948  
Discontinued operations
    1,500       1,500  
Corporate assets and eliminations
    121,915       163,791  
Reported total assets
  $ 685,167     $ 727,239  


NOTE 5 – LONG-TERM DEBT

11 3/8% Senior Secured Notes

On June 5, 2009, the Company completed an offering of $150 million aggregate principal amount of 11 3/8% Senior Secured Notes due 2013 (the “Senior Secured Notes”).  Interest on the Senior Secured Notes is payable semi-annually on May 1 and November 1.  The Senior Secured Notes are guaranteed, jointly and severally, on a senior secured basis by certain of the Company’s domestic subsidiaries.  The Senior Secured Notes are secured by a second-priority lien on substantially all of the Company’s and certain of the Company’s domestic subsidiaries’ assets that secure the Company’s domestic revolving credit facility (discussed below) on a first-priority basis.

The Senior Secured Notes were sold at a price of 96.301% of their face value, resulting in $144.5 million of gross proceeds.  The $5.5 million original issue discount is being amortized over the life of the notes through interest expense.

The Company may redeem all or a part of the Senior Secured Notes from time to time at a price equal to 100% of the principal amount plus a make-whole premium.  Prior to May 1, 2012, the Company may redeem up to 35% of the Senior Secured Notes with cash proceeds from specified equity offerings at a price equal to 111.375% of the principal amount, plus accrued and unpaid interest, if any, to the date of redemption.  As of July 4, 2010, the balance of the Senior Secured Notes outstanding, net of the remaining unamortized original issue discount, was approximately $145.8 million.  The estimated fair value of the Senior Secured Notes as of July 4, 2010, based on then current market prices, was $167.4 million.

10.375% Senior Notes

On February 1, 2010, the Company repaid the remaining balance of $14.6 million of these notes at maturity.

9.5% Senior Subordinated Notes

As of July 4, 2010, the Company had outstanding $110.0 million in 9.5% Senior Subordinated Notes due 2014.  The estimated fair value of the 9.5% Senior Subordinated Notes as of July 4, 2010, based on then current market prices, was $112.5 million.  During the first quarter of 2010, the Company redeemed $25.0 million aggregate principal amount of these notes at a price equal to 103.167% of the face value of the notes.  Accordingly, the premium paid in connection with this redemption was approximately $0.8 million.  In addition, the Company wrote off the portion of the unamortized debt issuance costs related to the redeemed bonds, an amount equal to $0.3 million.  These expenses are contained in the “Bond Retirement Expenses” line item in our consolidated condensed statements of operations.

 
- 10 -

 
                      



Credit Facilities

The Company maintains a domestic revolving credit agreement (the “Facility”) that provides a maximum aggregate amount of $100 million of loans and letters of credit available to us at any one time (subject to a borrowing base) with an option for us to increase that maximum aggregate amount to $150 million (upon the satisfaction of certain conditions, and subject to a borrowing base).  The Company is presently in compliance with all covenants under the Facility and anticipates that it will remain in compliance with the covenants for the foreseeable future.  As of July 4, 2010, there were zero borrowings and $8.1 million in letters of credit outstanding under the Facility.  As of July 4, 2010, the Company could have incurred $61.2 million of additional borrowings under the Facility.

Interface Europe B.V. (the Company’s modular carpet subsidiary based in the Netherlands) and certain of its subsidiaries maintain a Credit Agreement with ABN AMRO Bank N.V.  Under this Credit Agreement, ABN AMRO provides a credit facility, until further notice, for borrowings and bank guarantees in varying aggregate amounts over time.  As of July 4, 2010, there were no borrowings outstanding under this facility, and the Company could have incurred 26 million (approximately $31.7 million) of additional borrowings under the facility.

Other non-U.S. subsidiaries of the Company have an aggregate of the equivalent of $9.9 million of lines of credit available.  As of July 4, 2010, there were no borrowings outstanding under these lines of credit.


NOTE 6 – STOCK-BASED COMPENSATION
 
Stock Option Awards

In accordance with accounting standards, the Company measures 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 accounting standards, the Company is required to select a valuation technique or option pricing model.  The Company uses the Black-Scholes model.  Accounting standards require 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.

During the first six months of 2010 and 2009, the Company recognized stock option compensation costs of $0.6 million and $0.7 million, respectively.  In the second quarters of 2010 and 2009, the Company recognized stock option compensation costs of $0.3 million and $0.3 million, respectively. The remaining unrecognized compensation cost related to unvested awards at July 4, 2010, approximated $0.9 million, and the weighted average period of time over which this cost will be recognized is approximately one year.

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 six months of fiscal years 2010 and 2009:

   
Six Months Ended
July 4, 2010
   
Six Months Ended
July 5, 2009
 
Risk free interest rate
    2.3 %     1.6 %
Expected life
  5.5 years  
5.5 years
Expected volatility
    61 %     61 %
Expected dividend yield
    0.5 %     2.6 %

The weighted average grant date fair value of stock options granted during the first six months of fiscal 2010 and 2009 was $4.14 and $1.91 per share, respectively.


 
- 11 -

 
                      


The following table summarizes stock options outstanding as of July 4, 2010, as well as activity during the six months then ended:
 
   
Shares
   
Weighted Average
Exercise Price
 
Outstanding at January 3, 2010
    1,576,000     $ 5.75  
Granted
    40,000       7.78  
Exercised
    342,000       4.36  
Forfeited or canceled
    32,500       6.75  
Outstanding at July 4, 2010
    1,241,500     $ 6.10  
                 
Exercisable at July 4, 2010
    679,000     $ 7.54  


At July 4, 2010, the aggregate intrinsic value of in-the-money options outstanding and options exercisable was $6.2 million and $2.8 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 six months of fiscal years 2010 and 2009 are provided in the table below.  The Company did not recognize any significant tax benefit with regard to stock options in either period presented.

   
Six Months Ended
 
   
July 4, 2010
   
July 5, 2009
 
   
(In thousands)
 
Proceeds from stock options exercised
  $ 1,174     $ --  
Intrinsic value of stock options exercised
    2,660     $ --  

Restricted Stock Awards

During the six months ended July 4, 2010, and July 5, 2009, the Company granted restricted stock awards for 27,000 and 27,000 shares, respectively, of Class B common stock.  These awards (or a portion thereof) vest with respect to each recipient over a two-year period from the date of grant, provided the individual remains in the employment or service of the Company as of the vesting date.

Compensation expense related to outstanding restricted stock grants was $1.5 million and $1.3 million for the six months ended July 4, 2010, and July 5, 2009, respectively.  Accounting standards require 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 July 4, 2010, and during the six months then ended:

   
Shares
   
Weighted Average
Grant Date Fair Value
 
Outstanding at January 3, 2010
    1,394,000     $ 13.04  
Granted
    27,000       8.32  
Vested
    183,000       7.67  
Forfeited or canceled
    --       --  
Outstanding at July 4, 2010
    1,238,000     $ 12.04  

As of July 4, 2010, the unrecognized total compensation cost related to unvested restricted stock was $8.3 million.  That cost is expected to be recognized by the end of 2012.

For the six months ended July 4, 2010, the Company recognized a tax benefit with regard to restricted stock of $0.3 million.  There was no significant tax benefit for the comparable period in 2009.

 
- 12 -

 
                      



NOTE 7 – EMPLOYEE BENEFIT PLANS

The following tables provide the components of net periodic benefit cost for the three-month and six-month periods ended July 4, 2010, and July 5, 2009, respectively:

   
Three Months Ended 
   
Six Months Ended
 
Defined Benefit Retirement Plan (Europe)
 
July 4, 2010
   
July 5, 2009
   
July 4, 2010
   
July 5, 2009
 
   
(In thousands)
   
(In thousands)
 
Service cost
  $ 86     $ 557     $ 178     $ 1,071  
Interest cost
    2,616       2,657       5,379       5,135  
Expected return on assets
    (2,670 )     (2,562 )     (5,492 )     (4,956 )
Amortization of prior service costs
    21       20       44       40  
Recognized net actuarial (gains)/losses
    397       447       813       860  
Net periodic benefit cost
  $ 450     $ 1,119     $ 922     $ 2,150  

   
Three Months Ended 
   
Six Months Ended
 
Salary Continuation Plan (SCP)
 
July 4, 2010
   
July 5, 2009
   
July 4, 2010
   
July 5, 2009
 
   
(In thousands)
   
(In thousands)
 
Service cost
  $ 86     $ 81     $ 171     $ 162  
Interest cost
    280       271       561       541  
Amortization of transition obligation
    55       55       110       110  
Amortization of prior service cost
    12       12       24       24  
Amortization of loss
    68       70       137       140  
Net periodic benefit cost
  $ 501     $ 489     $ 1,003     $ 977  


NOTE 8 – RESTRUCTURING CHARGES

2010 Restructuring Charge

In the first quarter of 2010, the Company adopted a restructuring plan primarily related to workforce reduction in its European modular carpet operations.  This reduction was in response to the continued challenging economic climate in that region.  Smaller amounts were incurred in connection with restructuring activities in the Americas.  A total of approximately 50 employees were affected by this restructuring plan.  In connection with this plan, the Company recorded a pre-tax restructuring charge of $3.1 million.  Substantially all of this charge involves cash expenditures, primarily severance expenses.  It is anticipated that this restructuring plan will generate annual savings of approximately $3.2 million.  Actions and expenses related to this plan were substantially completed in the first quarter of 2010.

A summary of these restructuring activities is presented below:

   
Total
Restructuring
Charge
   
Costs Incurred
 in 2010
   
Balance at
July 4, 2010
 
   
(In thousands)
 
Workforce reduction
  $ 3,131     $ 1,244     $ 1,887  

The table below details these restructuring activities by segment:

   
Modular
Carpet
   
Bentley
Prince Street
   
Corporate
   
Total
 
   
(In thousands)
 
                         
Total amounts expected to be incurred
  $ 2,951     $ 180     $ --     $ 3,131  
Cumulative amounts incurred to date
    1,064       180       --       1,244  
Total amounts incurred in the six-month period ended July 4, 2010
    1,064       180       --       1,244  


 
- 13 -

 
                      



2009 Restructuring Charge

In the first quarter of 2009, the Company adopted a restructuring plan, primarily comprised of a reduction in the Company’s worldwide employee base by a total of approximately 290 employees and continuing actions taken to better align fixed costs with demand for its products on a global level.  In connection with this plan, the Company recorded a pre-tax restructuring charge of $5.7 million, comprised of $4.0 million of employee severance expense and $1.7 million of other exit costs (primarily including costs to exit the Canadian manufacturing facilities, lease exit costs and other costs).  Approximately $5.2 million of the restructuring charge involves cash expenditures, primarily severance expense.  In the second quarter of 2009, the Company recorded an additional $1.9 million restructuring charge as a continuation of this plan.  The charge in the second quarter of 2009 was due to approximately 80 additional employee reductions, and related entirely to employee severance expense.

A summary of these restructuring activities is presented below:

   
Total
Restructuring
Charge
   
Costs Incurred
 in 2009
   
Costs Incurred
 in 2010
   
Balance at
July 4, 2010
 
   
(In thousands)
 
Facilities consolidation
  $ 970     $ 970     $ --     $ --  
Workforce reduction
    5,873       3,920       1,444       509  
Other charges
    784       784       --       --  
    $ 7,627     $ 5,674     $ 1,444     $ 509  

The table below details these restructuring activities by segment:

   
Modular
Carpet
   
Bentley
Prince Street
   
Corporate
   
Total
 
   
(In thousands)
 
                         
Total amounts expected to be incurred
  $ 6,865     $ 762     $ --     $ 7,627  
Cumulative amounts incurred to date
    6,356       762       --       7,118  
Total amounts incurred in the six-month period ended July 4, 2010
    1,444       --       --       1,444  


NOTE 9 – DISCONTINUED OPERATIONS

In 2007, the Company sold its Fabrics Group business segment.  All activity related to this business has been included in discontinued operations.  Assets and liabilities of this business segment have been reported in assets and liabilities held for sale for all reported periods.

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

   
Three Months Ended
   
Six Months Ended
 
   
July 4, 2010
   
July 5, 2009
   
July 4, 2010
   
July 5, 2009
 
   
(In thousands)
   
(In thousands)
 
Net sales
  $ --     $ --     $ --     $ --  
Loss on operations before taxes on income
    --       --       --       (1,000 )
Tax benefit
    --       --       --       350  
Loss on operations, net of tax
    --       --       --       (650 )

The loss on operations in 2009 reflects charges taken to reduce the carrying value of long-lived assets to their approximate fair market value.

 
- 14 -

 
                      



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

   
July 4, 2010
   
January 3, 2010
 
   
(In thousands)
 
Current assets
  $ --     $  --  
Property and equipment
    1,500       1,500  
Other assets
    --       --  
Current liabilities
    --       --  
Other liabilities
    --       --  


NOTE 10 – SUPPLEMENTAL CASH FLOW INFORMATION

Cash payments for interest amounted to $15.7 million and $20.3 million for the six months ended July 4, 2010, and July 5, 2009, respectively.  Income tax payments amounted to $7.5 million and $10.1 million for the six months ended July 4, 2010, and July 5, 2009, respectively.


NOTE 11 – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In October 2009, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard which provides guidance for arrangements with multiple deliverables.  Specifically, the new standard requires an entity to allocate consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices.  In the absence of vendor-specific objective evidence or third party evidence of the selling prices, consideration must be allocated to the deliverables based on management’s best estimate of the selling prices.  In addition, the new standard eliminates the use of the residual method of allocation.  The standard will be effective for the Company in the first quarter of 2011.  Early adoption is permitted.  The Company is currently evaluating the impact, if any, that the adoption of this standard may have on its consolidated financial statements.

In June 2009, the FASB issued a new standard which changes the consolidation model for variable interest entities.  This standard requires companies to qualitatively assess the determination of the primary beneficiary of a variable interest entity (“VIE”) based on whether the company (1) has the power to direct matters that most significantly impact the activities of the VIE, and (2) has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the company.  The standard was effective for the Company as of January 4, 2010.  The adoption of this standard did not have any significant impact on the Company’s consolidated financial statements.


NOTE 12 – INCOME TAXES

Accounting standards require that all tax positions 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.  In the first six months of 2010, the Company decreased its liability for unrecognized tax benefits by $0.3 million.  As of July 4, 2010, the Company had accrued approximately $9.3 million for unrecognized tax benefits.


NOTE 13 – SUPPLEMENTAL CONDENSED CONSOLIDATING GUARANTOR FINANCIAL STATEMENTS

The Guarantor Subsidiaries, which consist of the Company’s principal domestic subsidiaries, are guarantors of the Company’s 11 3/8% Senior Secured Notes due 2013 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.


 
- 15 -

 
                      



INTERFACE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JULY 4, 2010


   
GUARANTOR SUBSIDIARIES
   
NON-GUARANTOR SUBSIDIARIES
   
INTERFACE, INC.
(PARENT CORPORATION)
   
CONSOLIDATION AND ELIMINATION ENTRIES
   
CONSOLIDATED TOTALS
 
   
(In thousands)
 
Net sales
  $ 142,282     $ 116,079     $ --     $ (31,774 )   $ 226,587  
Cost of sales
    106,176       72,051       --       (31,774 )     146,453  
Gross profit on sales
    36,106       44,028       --       --       80,134  
Selling, general and administrative expenses
    25,222       26,797       6,649       --       58,668  
Restructuring charge
    --       --       --        --       --  
Operating income
    10,884       17,231       (6,649 )     --       21,466  
Interest/Other expense
    6,318       2,299       (55 )      --       8,562  
Income (loss) before taxes on income and equity in income of subsidiaries
    4,566       14,932       (6,594 )     --       12,904  
Income tax expense (benefit)
    1,784       5,689       (2,577 )     --       4,896  
Equity in income (loss) of subsidiaries
    --        --       11,649        (11,649 )       --  
Income (loss) from continuing operations
    2,782       9,243       7,632       (11,649 )     8,008  
Loss on discontinued operations, net of tax
    --       --       --        --        --  
Net income (loss)
    2,782       9,243       7,632       (11,649 )     8,008  
Income attributable to non-controlling interest in subsidiary
    --       (376 )     --       --       (376 )
Net income (loss) attributable to Interface, Inc.
  $ 2,782     $ 8,867     $ 7,632     $ (11,649 )   $ 7,632  



 
- 16 -

 
                      



CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JULY 4, 2010

   
GUARANTOR
SUBSIDIARIES
   
NON-
GUARANTOR
SUBSIDIARIES
   
INTERFACE, INC.
(PARENT
CORPORATION)
   
CONSOLIDATION
AND
ELIMINATION
ENTRIES
   
CONSOLIDATED
TOTALS
 
   
(In thousands)
 
Net sales
  $ 274,252     $ 230,940     $ --     $ (61,414 )   $ 443,778  
Cost of sales
    204,460       147,224       --       (61,414 )     290,270  
Gross profit on sales
    69,792       83,716       --       --       153,508  
Selling, general and administrative expenses
    48,105       53,869       13,182       --       115,156  
Restructuring charges
    418       2,713       --       --       3,131  
Operating income (loss)
    21,269       27,134       (13,182 )     --       35,221  
Interest/Other expense
    11,540       4,487       1,455       --       17,482  
Bond retirement expense
    --       --       1,085       --       1,085  
Income (loss) before taxes on income and equity in income of subsidiaries
    9,729       22,647       (15,722 )     --       16,654  
Income tax expense (benefit)
    4,199       9,188       (6,847 )     --       6,540  
Equity in income (loss) of subsidiaries
    --       --       6,728       (6,728 )     --  
Income (loss) from continuing operations
    5,530       13,459       (2,147 )     (6,728 )     10,114  
Income (loss) on discontinued operations, net of tax
      --        --        --        --        --  
Net income (loss)
    5,530       13,459       (2,147 )     (6,728 )     10,114  
Income attributable to non-controlling interest in subsidiary
    --       (612 )     --       --       (612 )
Net income (loss) attributable to Interface, Inc.
  $ 5,530     $ 12,847     $ (2,147 )   $ (6,728 )   $ 9,502  


 
- 17 -

 
                      


CONDENSED CONSOLIDATING BALANCE SHEET

JULY 4, 2010

   
GUARANTOR SUBSIDIARIES
   
NON-GUARANTOR SUBSIDIARIES
   
INTERFACE, INC.
(PARENT CORPORATION)
   
CONSOLIDATION AND ELIMINATION ENTRIES
   
CONSOLIDATED TOTALS
 
   
(In thousands)
 
ASSETS
                             
Current Assets:
                             
Cash and cash equivalents
  $ 79     $ 44,902     $ 28,187     $ --     $ 73,168  
Accounts receivable
    60,450       70,992       592       --       132,034  
Inventories
    65,913       55,991       --       --       121,904  
Prepaids and deferred income taxes
    8,870       17,151       9,014       --       35,035  
Assets of business held for sale
    --        1,500       --       --        1,500  
Total current assets
    135,312       190,536       37,793       --       363,641  
Property and equipment less accumulated depreciation
    74,189       75,047       5,591       --       154,827  
Investment in subsidiaries
    278,934       201,346       36,678       (516,958 )     --  
Goodwill
    6,954       62,814       --       --       69,768  
Other assets
     8,469       12,141       76,321       --       96,931  
    $ 503,858     $ 541,884     $ 156,383     $ (516,958 )   $ 685,167  
                                         
LIABILITIES AND SHAREHOLDERS’ EQUITY
                                       
Current Liabilities:
  $ 45,392     $ 79,659     $ 19,931     $ --     $ 144,982  
Senior secured notes and senior subordinated notes
    --       --       255,812       --       255,812  
Deferred income taxes
    1,617       9,921       (5,042 )     --       6,496  
Other
    2,277       10,469       27,588       --       40,334  
Total liabilities
    49,286       100,049       298,289       --       447,624  
                                         
Common stock
    94,145       102,199       6,359       (196,344 )     6,359  
Additional paid-in capital
    249,302       12,525       346,822       (261,827 )     346,822  
Retained earnings (deficit)
    112,680       385,745       (487,370 )     (57,679 )     (46,624 )
Foreign currency translation adjustment
    (1,555 )     (41,130 )     (4,680 )     (1,108 )     (48,473 )
Pension liability
    --       (27,458 )     (3,037 )     --       (30,495 )
Non-controlling interest in subsidiary
    --       9,954        --       --       9,954  
    $ 503,858     $ 541,884     $ 156,383     $ (516,958 )   $ 685,167  
                                         


 
- 18 -

 
                      


CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS
ENDED JULY 4, 2010

   
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
  $ 6,503     $ 12,901     $ (9,276 )   $ 2,516     $ 12,644  
Cash flows from investing activities:
                                       
Purchase of plant and equipment
    (4,463 )     (5,164 )     (1,685 )     --       (11,312 )
Other
     (33 )       34       (629 )     --       (628 )
Net cash used for  investing activities
    (4,496 )     (5,130 )     (2,314 )     --       (11,940 )
Cash flows from financing activities:
                                       
Repurchase of Senior Notes
    --       --       (39,586 )     --       (39,586 )
Premiums paid to repurchase Senior Notes
    --       --       (792 )     --       (792 )
Other
    (2,473 )     (1,040 )     6,029       (2,516 )     --  
Proceeds from issuance of  common stock
    --       --       1,174       --       1,174  
Dividends paid
    --        --       (794 )     --       (794 )
Net cash provided by (used for) financing activities
    (2,473 )     (1,040 )     (33,969 )     (2,516 )     (39,998 )
Effect of exchange rate change on cash
    --        (2,901 )     --       --       (2,901 )
Net increase (decrease) in cash
    (466 )     3,830       (45,559 )     --       (42,195 )
Cash at beginning of period
    545       41,072       73,746       --       115,363  
Cash at end of period
  $ 79     $ 44,902     $ 28,187     $ --     $