SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For Quarterly Period Ended July 4, 2004

Commission File Number 0-12016

INTERFACE, INC.

2859 PACES FERRY ROAD, SUITE 2000, ATLANTA, GEORGIA 30339

(770) 437-6800

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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o

Shares outstanding of each of the registrant’s classes of common stock at August 9, 2004:

INTERFACE, INC.

INDEX

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PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INTERFACE, INC. AND SUBSIDIARIES

See accompanying notes to consolidated condensed financial statements.

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INTERFACE, INC. AND SUBSIDIARIES

(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

See accompanying notes to consolidated condensed financial statements.

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INTERFACE, INC. AND SUBSIDIARIES

See accompanying notes to consolidated condensed financial statements.

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INTERFACE, INC. AND SUBSIDIARIES

See accompanying notes to consolidated condensed financial statements.

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INTERFACE, INC. AND SUBSIDIARIES

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 28, 2003, 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 28, 2003 consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States.

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

     Additionally, certain reclassifications have been made from short-term liabilities to long-term liabilities as of December 28, 2003, to conform to the current period presentation.

NOTE 2 — INVENTORIES

     Inventories are summarized as follows:

NOTE 3 — RESTRUCTURING CHARGES

2002 Restructuring

     During the fourth quarter of 2002, the Company recorded a pre-tax restructuring charge of $23.4 million. The charge reflected: (i) the consolidation of three fabrics manufacturing facilities; (ii) the further rationalization of the Re:Source Americas operations; (iii) a worldwide workforce reduction of approximately 206 employees; and (iv) the consolidation of certain European facilities. In 2003, we recognized an additional pre-tax restructuring charge related to this plan of $6.2 million ($4.6 million of which was recorded in the first half of 2003), primarily related to the incurrence of facilities consolidation costs and further staff reductions.

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

   United States

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

   Europe/Australia

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

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     A summary of the restructuring activities from the initiation of the plan through December 28, 2003, is presented below:

     The restructuring charge was comprised of $16.0 million of cash expenditures for severance benefits and other costs, and $13.6 million of non-cash charges, primarily for the write-down of carrying value and disposal of certain assets. No additional restructuring charges have been incurred during 2004.

     The termination benefits of $7.3 million, primarily related to severance costs, are a result of aggregate reductions of 271 employees through July 4, 2004. The staff reductions as originally planned were expected to be as follows:

     The following tables display the cash activities, during the six-month period ending July 4, 2004, related to the 2002 restructuring summarized above:

Termination Benefits

Other Costs To Exit Activities

NOTE 4 — LOSS PER SHARE AND DIVIDENDS

     Basic loss per share is computed by dividing net loss to common shareholders by the weighted average number of shares of Class A and Class B Common Stock outstanding during the period. Shares issued or reacquired during the period have been weighted for the portion of the period that they were outstanding. Basic loss per share has been computed based upon 50,581,000 shares and 50,275,000 shares outstanding for the three-month periods ended July 4, 2004 and June 29, 2003, respectively, and based upon 50,474,000 shares and 50,274,000 shares outstanding for the six-month periods ended July 4, 2004 and June 29, 2003, respectively. Diluted loss per share is calculated in a manner consistent with that of basic loss per share while giving effect to all potentially dilutive common shares that were outstanding during the period. Diluted loss per share has been computed based upon 50,581,000 shares and 50,275,000 shares outstanding for the three-month periods ended July 4, 2004 and June 29, 2003, respectively, and based upon 50,474,000 shares and 50,274,000 shares outstanding for the six-month periods ending July 4, 2004 and June 29, 2003, respectively. During the three-month and six-month periods ended July 4, 2004, there were vested, unexercised, in the money stock options for 3,595,000 shares and 3,555,000 shares, respectively. During the three-month and six-month periods ended June 29, 2003, there were vested, unexercised, in the money stock options for

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623,750 shares and 601,250 shares, respectively. These shares were not included in the computation of the diluted per share amount because the Company was in a net loss position and, thus, any potential common shares were anti-dilutive.

NOTE 5 — SEGMENT INFORMATION

     Effective December 28, 2003, the Company changed its method of classifying its business into segments. All prior periods have been restated to reflect this change. In the second quarter of 2004, we changed the segment name “Services” to “Re:Source Network”, and we changed the segment name “Broadloom” to “Bentley Prince Street”, to better reflect the nature of the businesses that comprise these segments.

     Based on the quantitative thresholds specified in SFAS No. 131, the Company has determined that it has five reportable segments: (1) the Modular Carpet segment, which includes our Interface, Heuga and InterfaceFLOR modular carpet businesses, (2) the Bentley Prince Street segment, which includes our Bentley and Prince Street broadloom, modular carpet and area rug businesses, (3) the Re:Source Network segment, which primarily encompasses our Re:Source dealers that provide carpet installation and maintenance services in the United States, (4) the Fabrics Group segment, which includes all of our fabrics businesses worldwide, and (5) the Specialty Products segment, which includes Pandel, Inc., a producer of vinyl carpet tile backing and specialty mat and foam products, and also includes our Intersept antimicrobial sales and licensing program.

     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 28, 2003, as filed with the Commission. Segment amounts disclosed are prior to any elimination entries made in consolidation, except in the case of Net Sales, where intercompany sales have been eliminated. The chief operating decision maker evaluates performance of the segments based on operating income. Costs excluded from this profit measure primarily consist of allocated corporate expenses, interest/other expense and income taxes. Corporate expenses are primarily comprised of corporate overhead expenses. Assets not identifiable to any individual segment are corporate assets, which are primarily comprised of cash and cash equivalents, short-term investments, intangible assets and intercompany amounts, which are eliminated in consolidation.

Segment Disclosures

     Summary information by segment follows:

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

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NOTE 6 — LONG-TERM DEBT

     On June 18, 2003, we amended and restated our senior revolving credit facility. Under the revolving credit facility, as under its predecessor, the maximum aggregate amount of loans and letters of credit available to us at any one time is $100 million, subject to a borrowing base limitation. The revolving credit facility matures on October 1, 2007. The revolving credit facility includes a domestic U.S. Dollar syndicated loan and letter of credit facility up to the lesser of (1) $100 million, or (2) a borrowing base equal to the sum of specified percentages of eligible accounts receivable, finished goods inventory and raw materials inventory in the U.S. (the percentages and eligibility requirements for the domestic borrowing base are specified in the credit facility), less certain reserves. Any advances to Interface, Inc. or Interface Europe B.V. under the domestic loan facility will reduce borrowing availability under the entire revolving credit facility. The revolving credit facility also includes a multicurrency syndicated loan and letter of credit facility in British Pounds and Euros of up to the lesser of (1) the equivalent of U.S. $15 million, or (2) a borrowing base equal to the sum of specified percentages of eligible accounts receivable and finished goods inventory of Interface Europe, Ltd. and certain of its subsidiaries (the percentages and eligibility requirements for the multicurrency borrowing base are specified in the credit facility). Any advances under the multicurrency loan facility will reduce borrowing availability under the domestic loan facility.

     Interest on borrowings and letters of credit under the revolving credit facility is charged at varying rates computed by applying a margin (ranging from 1.0-3.5%) over a baseline rate (such as the prime interest rate or LIBOR), depending on the type of borrowing and our fixed charge coverage ratio. In addition, we pay an unused line fee on the facility ranging from 0.5-1.0%, depending on our fixed charge coverage ratio. The revolving credit facility is secured by substantially all of the assets of Interface, Inc. and its domestic subsidiaries (subject to exceptions for certain immaterial subsidiaries), including all of the stock of our domestic subsidiaries and up to 65% of the stock of our first-tier material foreign subsidiaries. The multicurrency loan facility is secured by substantially all of the assets of Interface Europe, Ltd. and its material subsidiaries. Those collateral documents provide that, if an event of default occurs under the revolving credit facility, the lenders’ collateral agent may, upon the request of the specified percentage of lenders, exercise remedies with respect to the collateral that include foreclosing mortgages on our real estate assets, taking possession of or selling our personal property assets, collecting our accounts receivable, or exercising proxies to take control of the pledged stock of our domestic and first-tier material foreign subsidiaries.

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

     As of July 4, 2004, $21.4 million in borrowings (which includes $4.8 million of short-term borrowings) and $16.6 million in letters of credit were outstanding under our revolving credit facility. As of July 4, 2004, we could have incurred $52.9 million of additional borrowings under our revolving credit facility.

NOTE 7 – STOCK-BASED COMPENSATION

     We use the intrinsic value method of accounting for employee stock options in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” as allowed under the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation.” Compensation expense related to stock option plans was not material for the three-month or six-month periods ended July 4, 2004 and June 29, 2003, respectively.

     The following table includes disclosures required by SFAS 123, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure,” and illustrates the effect on net loss and loss per share as if the Company had applied the fair value recognition provisions of SFAS 123:

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

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NOTE 8 – 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, 2004, and June 29, 2003, respectively:

NOTE 9 — DISCONTINUED OPERATIONS

     In the fourth quarter of 2002, management approved and committed to a plan to sell or otherwise create a joint venture or strategic alliance for the Company’s raised/access flooring business. The Company recorded an impairment charge of $12.0 million, net of tax, during the fourth quarter of 2002 to adjust the carrying value of the assets of this business to their estimated fair values. In September 2003, the Company sold the raised/access flooring business and recorded an after-tax loss on disposition of $8.8 million.

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

NOTE 10 — 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, and its 9.5% senior subordinated notes due 2014. The Supplemental Guarantor Financial Statements are presented herein pursuant to requirements of the Commission.

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INTERFACE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF INCOME (LOSS)
FOR THE THREE MONTHS ENDED JULY 4, 2004

CONDENSED CONSOLIDATING STATEMENT OF INCOME (LOSS)
FOR THE SIX MONTHS ENDED JULY 4, 2004

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CONDENSED CONSOLIDATING BALANCE SHEET

JULY 4, 2004

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS
ENDED JULY 4, 2004

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